<PAGE>
PROSPECTUS May 1, 1995
Fidelity Income Plus
The Fidelity Variable Annuity Account
Individual Variable Annuity Contracts
Issued by
PFL Life Insurance Company
Administrative and Service Office:
Financial Markets Division - Variable Annuity Dept.
4333 Edgewood Road, N.E.
Cedar Rapids, IA 52499
The individual variable annuity contracts (the "Contracts") described in
this Prospectus are offered under the name "Fidelity Income Plus" by PFL Life
Insurance Company (the "Company") to individuals who desire to accumulate
capital on a long-term tax-deferred basis for retirement or other long-term
purposes. The Contracts may only be purchased on a non-tax qualified basis.
The Contracts provide for monthly annuity payments on a variable or fixed
basis, commencing at a future date selected by the owner of the Contract.
The Contract may be purchased with a minimum initial Purchase Payment of
$5,000.
After the deduction of applicable charges, payments made to purchase the
Contracts ("Purchase Payments") become assets of the Fidelity Variable
Annuity Account (the "Variable Account"), a segregated investment account of
the Company. Net Purchase Payments may be allocated to one or more of seven
sub-accounts of the Variable Account (the "Sub-accounts"). The assets of the
Sub-accounts are currently invested in shares of the Variable Insurance
Products Fund and the Variable Insurance Products Fund II (the "Funds"). The
Funds currently offer seven Portfolios that are available under the Contracts:
Money Market, High Income, Equity-Income, Growth, Overseas, Investment Grade
Bond and Asset Manager. The value of each Contract prior to the date upon
which the first annuity payment is to be made (the "Annuity Commencement
Date") and the amount of Variable Annuity Payments thereafter will depend
upon the investment performance of the assets of the Variable Account.
Following the date selected by the Contract Owner, Annuity Payments may
commence under one of the Annuity Options provided in the Contracts. Prior
to the Annuity Commencement Date, the Contracts are redeemable, in whole or
in part, at their then current value.
This Prospectus sets forth the information about the Variable Account that
a prospective investor should know before investing. Additional information
about the Variable Account has been filed with the Securities and Exchange
Commission in a Statement of Additional Information dated May 1, 1995, which
information is incorporated by reference, and is available without charge by
calling Fidelity Investments at 1-800-544-2442. The table of contents of the
Statement of Additional Information appears on page 30 of this Prospectus.
N. INC-PRO-595
1
<PAGE>
For further information please call Fidelity Investments
For Sales Information
Nationwide (toll-free): 800-544-2442
For Service and Account Information
Nationwide (toll-free): 800-634-4672
This Prospectus Must Be Accompanied Or Preceded By A Current Prospectus
For the Variable Insurance Products Fund and the Variable Insurance
Products Fund II.
THE CERTIFICATE IS NOT A DEPOSIT OR OBLIGATION OF OR GUARANTEED OR ENDORSED
BY, ANY BANK OR DEPOSITORY INSTITUTION, AND THE CERTIFICATE IS NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THIS PROSPECTUS SHOULD BE RETAINED FOR FUTURE REFERENCE.
The date of this Prospectus is May 1, 1995
This Contract is not available in all States
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESMAN, OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON.
DEFINITIONS
Accumulation Unit - An accounting unit of measure used in calculating the
Contract Value.
Administrative and Service Office - Financial Markets Division - Variable
Annuity Dept., 4333 Edgewood Road N.E., Cedar Rapids, Iowa 52499.
Annuitant - The person entitled to receive Annuity Payments after the
Annuity Commencement Date and during whose life any Annuity Payments
involving life contingencies will continue.
Annuity Commencement Date - The date, which can only be the first day of a
calendar month, upon which Annuity Payments are to commence.
Annuity Option - A method of receiving a stream of Annuity Payments.
Annuity Purchase Value - An amount equal to the Contract Value for the
Valuation Period which ends immediately preceding the Annuity Commencement
Date, reduced by any applicable premium or similar taxes.
Annuity Unit - An accounting unit of measure used in the calculation of the
amount of the second and each subsequent Variable Annuity Payment.
Beneficiary - The person who has the right to the death benefit set forth
in the Contract.
Code - The Internal Revenue Code of 1986, as amended.
Company - PFL Life Insurance Company.
Contingent Contract Owner - A person appointed by the Contract Owner to
succeed to ownership of the Contract in the event of the death of the
Contract Owner before the Annuity Commencement Date.
Contract - One of the variable annuity contracts offered by this Prospectus.
Contract Owner - The person who may exercise all rights and privileges under
the Contract. The Contract Owner during the lifetime of the Annuitant and
prior to the Annuity Commencement Date is the person designated as the
Contract Owner in the application or a Contingent Contract Owner; the
Contract Owner on and after the Annuity Commencement Date is the Annuitant;
and the Contract Owner after the death of the Annuitant is the Beneficiary.
2
<PAGE>
Contract Value - The sum of the value of all Accumulation Units credited to
a Contract for any particular Valuation Period.
Date of Issue - The date the Contract is issued, as shown on the Contract
Schedule Page.
Due Proof of Death - A certified copy of a death certificate, a certified
copy of a decree of a court of competent jurisdiction as to the finding of
death, or a written statement by the attending physician or any other proof
satisfactory to the Company will constitute Due Proof of Death.
Eligible Funds - Mutual funds, shares of which currently may be purchased
for the Variable Account.
FMR - Fidelity Management & Research Company, the investment advisor to the
Funds.
Fidelity Insurance - Fidelity Insurance Agency, Inc., through which the
Contracts are distributed.
Fidelity Brokerage - Fidelity Brokerage Services, Inc., which is the
principal underwriter for the contracts, and through which the Contracts are
distributed.
Fixed Annuity Payments - Payments made pursuant to an Annuity Option which
do not fluctuate in amount.
Formerly Eligible Funds - Mutual funds, shares of which were purchased for
the Variable Account prior to September 25, 1981.
Net Investment Factor - An index applied to measure the investment
performance of a Sub-account from one Valuation Period to the next.
Net Purchase Payment - A Purchase Payment less any applicable charges, such
as the initial administrative charge and any premium taxes.
Purchase Payment - An amount paid to the Company by the Contract Owner or on
the Contract Owner's behalf as consideration for the benefits provided by
the Contract.
Sub-account - A segregated account within the Variable Account which invests
in a portfolio of an Eligible Fund.
Valuation Period - The period of time from one determination of Accumulation
Unit and Annuity Unit values to the next subsequent determination of values.
Such determination shall be made as of the close of trading on the New York
Stock Exchange on each day that the Exchange is open for trading.
Variable Account - A separate account established by the Company and
registered as a unit investment trust under the Investment Company Act of
1940 to which Net Purchase Payments under the Contracts are allocated.
Variable Annuity - An annuity with Variable Annuity Payments which vary as
to dollar amount in relation to the investment performance of specified
Sub-accounts within the Variable Account.
Variable Annuity Payments - Payments made pursuant to an Annuity Option which
fluctuate based on the investment performance of selected Sub-accounts.
QUESTIONS AND ANSWERS ABOUT THE CONTRACT
Note: The following section contains brief questions and answers about the
Contract. Reference should be made to the body of this Prospectus for more
detailed information. "You" or "your" refers to the Contract Owner, "we,"
"us" or "our" refers to the Company.
1. What is the purpose of the Contract?
The Contract seeks to allow you to accumulate funds on a tax-deferred basis
and to receive Annuity Payments based on the investment experience of the
assets underlying the Contract. The Contract may only be purchased on a
non-tax qualified basis for use with retirement plans and other long-term
investment objectives. The Contract Owner can allocate Net Purchase Payments
to one or more Sub-accounts of the Fidelity Variable Annuity Account (the
"Variable Account"), each of which will invest in a corresponding portfolio
of the Variable Insurance Products Fund and the Variable Insurance Products
Fund II ("VIP" and "VIP II" or the "Funds"). Because Variable Annuity
Payments and Contract Values depend on the investment experience of the
selected Sub-accounts, the Contract Owner bears the entire investment risk
under this contract.
3
<PAGE>
2. What is an annuity?
An annuity provides for a stream of Annuity Payments beginning on the
Annuity Commencement Date. The Contract Owner may select from a number of
Annuity Options, including Annuity Payments for the life of an Annuitant (or
an Annuitant and another person, the "Joint Annuitant") with or without a
guaranteed number of Annuity Payments. Annuity Payments which remain the
same throughout the payment period are referred to in this Prospectus as
"Fixed Annuity Payments." Annuity Payments which vary in accordance with the
investment experience of the Sub-account selected by the Contract Owner are
referred to in this Prospectus as "Variable Annuity Payments." (See Annuity
Options," p. 22.)
3. What investments support the Contracts?
Currently, Purchase Payments made under the Contracts will be invested
through the Variable Account exclusively in shares of the Funds, which are
mutual funds advised by Fidelity Management & Research Company ("FMR"). The
Funds currently have seven Portfolios that are available under the Contracts:
Money Market, High Income, Equity-Income, Growth, Overseas, Investment
Grade Bond, and Asset Manager. Each of the seven Sub-accounts of the Variable
Account invests in the corresponding Portfolio of the Funds. The assets of
each Portfolio are held separately from other Portfolios and each has
distinct investment objectives and policies (see "The Variable Insurance
Products Fund and Variable Insurance Products Fund II," p. 13) which are
described in the accompanying Prospectuses for the Funds.
4. How do I purchase a Contract?
You may purchase a Contract by mailing in a completed signed application,
along with a check for the initial Purchase Payment to the Administrative and
Service Office. The minimum initial Purchase Payment is $5,000. Subsequent
Purchase Payments must be for $500 or more, and may be made at any time
prior to the Annuity Commencement Date as long as the Annuitant is living.
(See "Purchase of the Contracts," p.16.)
5. How are Purchase Payments allocated?
Net Purchase Payments are allocated in accordance with the Contract
Owner's instructions. Any allocation of the initial Net Purchase Payment
must be of at least $1,000 to each Sub-account selected. Allocations of
subsequent Net Purchase Payments may be made in any manner, so long as any
contribution to a Sub-account is at least $500. Allocations of subsequent
Net Purchase Payments may be changed by sending written notice to the
Administrative and Service Office or if you have previously authorized it,
by telephone. (See "Allocation and Reallocation of Net Purchase Payments,"
p. 16.)
6. Can I transfer values among the Sub-accounts?
A Contract Owner may reallocate the Contract Value allocated to a
particular Sub-account to one or more other Sub-accounts at any time either
in writing or, if you have previously authorized it, by telephone. (See
"Allocation and Reallocation of Net Purchase Payments," p. 16.)
7. How can I get to my money if I need it?
All or part of the Contract Value under the Contract may be withdrawn
before the earlier of the Annuitant's death or the Annuity Commencement
Date. The amount of the cash withdrawal payment will be equal to the Contract
Value at the end of the Valuation Period during which the election becomes
effective, or the lesser amount requested. None of the amount surrendered
will be subject to a surrender charge.
4
<PAGE>
(See "Surrenders," p. 18.) Certain withdrawals may be taxable and subject to a
penalty tax. (See "Surrenders," p. 18 and "Federal Tax Matters," p. 24.)
8. What are the charges and deductions under the Contract?
There is no sales charge under the Contract. We deduct a daily charge
equal to a percentage of the value of the net assets in the Variable Account
for the mortality risks assumed by us. The effective annual rate of this
charge is 0.8%. (See "Charges for Mortality Risk," p. 19.) WE GUARANTEE
THAT THIS CHARGE WILL NOT BE INCREASED.
The Company also deducts an annual administrative charge from the Contract
Value of each Contract to cover the costs of administering the Contract. The
annual administrative charge currently is $35. (See "Administrative Charge,"
p. 19.) This charge could increase in the future.
Premium taxes are deducted from Purchase Payments or Contract Values
depending upon when they are incurred by the Company. (See "Deductions for
Taxes" p. 20.)
The Contract Values also reflect the charges, fees and expenses of the
Fund. (See "The Variable Insurance Products Fund and Variable Insurance
Products Fund II Expenses," p. 13.) See also the Expense Data Summary on
page 7.
9. What Annuity Income Options are available under the Contract?
The Contract Owner, or the person selected by the Contract Owner (the
Annuitant), may receive Annuity Payments on a variable basis or a fixed
basis. The Contract Owner has flexibility in choosing the Annuity
Commencement Date.
Four Annuity Income Options are included in the Contract: (1) life
annuity; (2) joint and survivor annuity; (3) life annuity with 120 or 240
monthly payments guaranteed; and (4) cash or unit refund life annuity. All
of these are offered as either "Fixed Annuity Options" or "Variable Annuity
Options."
Fixed Annuity Payments will always be for the same specified amount.
However, the amount of Variable Annuity Payments will increase or decrease
according to the investment experience of the particular Sub-account(s)
selected. (See "Annuity Options," p. 22.)
10. What happens if the Annuitant dies before the Annuity Commencement
Date?
In the event that the Annuitant dies prior to the Annuity Commencement
Date, the Death Benefit is calculated and is payable, upon receipt of notice
of death, Due Proof of Death, and an election as to how the proceeds should
be paid, to the Beneficiary selected by the Contract Owner. The named
Beneficiary may be changed at any time before the Annuitant's death; the
Annuitant named in the contract, however, may not be changed. The Death
Benefit is not reduced by the application of any surrender charge. The Death
Benefit may be paid as either a lump sum cash benefit or under an Annuity
Option (See "Death Benefit," p. 21.)
11. What happens if the Contract Owner dies before the Annuity
Commencement Date?
If the Contract Owner is a different person than the Annuitant, in the
event that the Contract Owner dies prior to the Annuity Commencement Date,
his entire interest in the Contract will be distributed to the Contingent
Contract Owner if one is appointed, or to the estate of the Contract Owner.
The Contract Owner may appoint or change the Contingent Contract Owner at
any time prior to the Annuity Commencement Date. Regardless of whether the
Contract Owner is a different person than the Annuitant, upon the death of
the Contract Owner, the value of the Contract must be distributed pursuant
to rules prescribed by the Internal Revenue Code of 1986, as amended.
Special rules apply where the beneficiary of the Contract Owner's estate
is the surviving spouse of the deceased Contract Owner. (See "IRS Required
Distributions," p. 21.)
5
<PAGE>
12. Can the Contract be returned after it is delivered?
The Contract contains a provision for a Right to Return the Contract,
which permits cancellation by returning the Contract to us, along with a
written notice of revocation, at our Administrative and Service Office
within 10 days of receipt of the Contract. In the event of cancellation,
we will return all Purchase Payments made under the Contract within ten
days after we receive notice of cancellation.
13. Who do I call if I have any questions about my Contract?
Any question about procedures of your Contract will be answered by our
Administrative and Service Office. For service and account information, call
toll free, 800-634-4672. For information and assistance regarding sales
information, please call, toll free, 800-544-2442.
<TABLE>
<CAPTION>
FIDELITY VARIABLE ANNUITY ACCOUNT
SUMMARY
EXPENSE DATA
Investment
Contract Owner Money High Equity- Grade Asset
Transaction Expenses Market Income Income Growth Overseas Bond Manager
<S> <C> <C> <C> <C> <C> <C> <C>
Sales Load on Purchase
Payments 0 0 0 0 0 0 0
Deferred Sales Load 0 0 0 0 0 0 0
Surrender Fees 0 0 0 0 0 0 0
Annual Contract Fee $35 Per Contract
Transfer Fee 0 0 0 0 0 0 0
Variable Account
(as a percentage of
contract value)
Mortality and Expense
Risk Fees 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80%
Account Fees and
Expenses 0 0 0 0 0 0 0
Total Variable Account
Annual Expenses 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80%
===========================================================================
VIP AND VIP II Funds
Annual Expenses
(as a percentage of average
net assets)
Management Fee 0.20% 0.61% 0.52% 0.62% 0.77% 0.46% 0.72%
Other Expenses 0.07% 0.10% 0.06% 0.07% 0.15% 0.21% 0.08%
Total Fund Annual
Expenses 0.27% 0.71% 0.58% 0.69% 0.92% 0.67% 0.80%
===========================================================================
</TABLE>
Examples
An Owner would pay the following expenses on a $1,000 investment, assuming
a 5% annual return on assets:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Money Market Sub-account Portfolio $11 $36 $62 $137
High Income Sub-account Portfolio $16 $49 $85 $186
Equity-Income Sub-account Portfolio $15 $45 $78 $172
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Growth Sub-account Portfolio $16 $49 $84 $184
Overseas Sub-account Portfolio $18 $56 $96 $209
Investment Grade Bond Sub-account
Portfolio $16 $48 $83 $182
Asset Manager Portfolio $17 $52 $90 $197
</TABLE>
The above tables are intended to assist the Owner in understanding the costs
and expenses that will be borne, directly or indirectly. These include the
expenses of the VIP and VIP II Funds. See "Charges and Deductions," p. 19
and the VIP and VIP II prospectuses. In addition to the expenses listed
above, premium taxes may be applicable.
The Examples should not be considered a representation of past or future
expenses, and actual expenses may be greater or lesser than those shown. The
figures and data for the VIP and VIP II Funds Annual Expenses have been
provided by FMR, and while the Company does not dispute these figures, the
Company does not guaranty their accuracy.
CONDENSED FINANCIAL INFORMATION
The Accumulation Unit Values and the number of Accumulation Units
outstanding for each Sub-account:
<TABLE>
<CAPTION>
Money Market Sub-account
- --------------------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1994 $2.124046 $2.196945 65,884,206.476
1993 2.073920 2.124046 38,531,933.669
1992 2.011998 2.073920 46,920,555.357
1991 1.911406 2.011998 52,846,585.564
1990 1.783014 1.911406 61,584,581.853
1989 1.646165 1.783014 49,315,212.043
1988 1.545254 1.646165 46,119,586.661
1987 1.463177 1.545254 44,988,833.709
1986 1.382250 1.463177 44,432,625.449
1985 1.288784 1.382250 59,047,598.683
</TABLE>
<TABLE>
<CAPTION>
High Income Sub-account
- --------------------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1994 $2.485444 $2.427652 17,337,052.330
1993 2.078934 2.485444 26,114,121.248
1992 1.703009 2.078934 20,668,821.606
1991 1.269032 1.703009 9,450,159.190
1990 1.310687 1.269032 6,894,970.437
1989 1.380187 1.310687 10,504,655.711
1988 1.244613 1.380187 12,374,735.048
1987 1.239420 1.244613 10,524,351.054
1986 1.061544 1.239420 10,543,270.635
1985* 1.000000 1.061544 1,859,260.823
</TABLE>
*Period from September 11, 1985 through December 31, 1985
7
<PAGE>
<TABLE>
<CAPTION>
Equity-Income Sub-account
- --------------------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1994 $2.073414 $2.202346 74,571,142.757
1993 1.768091 2.073414 70,574,621.050
1992 1.523641 1.768091 49,654,509.443
1991 1.168338 1.523641 22,551,293.495
1990 1.390307 1.168338 15,320,204.431
1989 1.194265 1.390307 17,192,667.422
1988 0.978927 1.194265 12,203,910.523
1987 1.001137 0.978927 11,135,126.597
1986* 1.000000 1.001137 3,852,750.258
</TABLE>
*Period from October 8, 1986 through December 31, 1986
<TABLE>
<CAPTION>
Growth Sub-account
- --------------------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1994 $2.500812 $2.480539 37,916,994.644
1993 2.111765 2.500812 37,369,691.127
1992 1.947218 2.111765 37,625,493.719
1991 1.348850 1.947218 24,177,587.154
1990 1.540465 1.348850 15,340,498.596
1989 1.181690 1.540465 9,534,230.020
1988 1.028662 1.181690 6,262,868.956
1987 1.001140 1.028662 6,695,752.199
1986* 1.000000 1.001140 1,960,340.560
</TABLE>
*Period from October 8, 1986 through December 31, 1986
<TABLE>
<CAPTION>
Overseas Sub-account
- --------------------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1994 $1.591344 $1.605980 35,747,520.597
1993 1.168866 1.591344 36,890,355.495
1992 1.319600 1.168866 4,705,928.756
1991 1.229709 1.319600 4,170,995.265
1990 1.261608 1.229709 4,324,803.282
1989 1.007020 1.261608 2,450,169.365
1988 0.938767 1.007020 1,829,968.620
1987* 1.000000 0.938767 1,908,059.653
</TABLE>
*Operations commenced January 27, 1987
<TABLE>
<CAPTION>
Investment Grade Bond Sub-account
- --------------------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1994 $1.501802 $1.433937 8,539,290.351
1993 1.364252 1.501802 11,685,281.879
1992 1.289396 1.364252 7,725,407.154
1991 1.115679 1.289396 8,683,076.207
1990 1.059709 1.115679 3,887,531.807
1989* 1.000000 1.059709 1,710,458.331
</TABLE>
*Operations commenced June 5, 1989
8
<PAGE>
<TABLE>
<CAPTION>
Asset Manager Sub-account
- --------------------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1994 $1.687107 $1.571804 76,955,562.944
1993 1.404870 1.687107 90,364,012.115
1992 1.265768 1.404870 27,180,037.717
1991 1.041041 1.265768 12,676,645.581
1990* 1.000000 1.041041 989,833.209
</TABLE>
*Operations Commenced May 29, 1990.
FORMERLY ELIGIBLE SUB-ACCOUNTS - THESE SUB-ACCOUNTS ARE NO LONGER AVAILABLE
FOR INVESTMENT
<TABLE>
<CAPTION>
Fidelity Daily Income Trust Sub-account
- --------------------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1994 $2.812357 $2.921185 190,668.116
1993 2.736044 2.812357 158,275.684
1992 2.641072 2.736044 243,997.001
1991 2.495176 2.641072 268,694.048
1990 2.313482 2.495176 339,345.456
1989 2.120570 2.313482 323,342.240
1988 1.977108 2.120570 351,832.648
1987 1.860549 1.977108 411,855.441
1986 1.746040 1.860549 491,664.785
1985 1.616847 1.746040 506,030.230
</TABLE>
<TABLE>
<CAPTION>
Fidelity Cash Reserves Sub-account
- --------------------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1994 $2.822897 $2.934039 27,720.506
1993 2.742508 2.822897 29,444.337
1992 2.643311 2.742508 47,677.285
1991 2.493319 2.643311 60,818.839
1990 2.312283 2.493319 88,660.193
1989 2.122897 2.312283 102,882.970
1988 1.979215 2.122897 108,627.416
1987 1.859726 1.979215 171,381.094
1986 1.745740 1.859726 176,832.562
1985 1.618265 1.745740 219,836.298
</TABLE>
<TABLE>
<CAPTION>
Fidelity Government Securities Fund, Ltd. Sub-account
- --------------------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1994 $4.009576 $3.911039 8,076.564
1993 3.676253 4.009576 8,085.472
1992 3.404732 3.676253 8,094.201
1991 2.934545 3.404732 8,103.722
1990 2.678442 2.934545 8,114.001
1989 2.376907 2.678442 8,125.927
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Fidelity Government Securities Fund, Ltd. Sub-account
- --------------------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1988 2.236112 2.376907 8,138.994
1987 2.213017 2.236112 24,310.778
1986 1.928700 2.213017 48,786.771
1985 1.639720 1.928700 55,930.289
</TABLE>
<TABLE>
<CAPTION>
Fidelity Capital and Income Fund Sub-account
- --------------------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1994 $6.060768 $5.777672 35,622.255
1993 4.850494 6.060768 43,008.701
1992 3.785099 4.850494 70,510.002
1991 2.912437 3.785099 94,291.263
1990 3.029998 2.912437 112,223.477
1989 3.130904 3.029998 140,750.477
1988 2.782925 3.130904 175,640.223
1987 2.748078 2.782925 184,937.624
1986 2.329827 2.748078 224,558.207
1985 1.856497 2.329827 246,095.806
</TABLE>
<TABLE>
<CAPTION>
Fidelity Investment Grade Bond Fund, Inc. Sub-account
- --------------------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1994 $4.231763 $N/A -0-
1993 3.639516 4.231763 10,102.321
1992 3.359592 3.639516 10,104.223
1991 2.823384 3.359592 10,106.454
1990 2.661615 2.823384 10,108.987
1989 2.353678 2.661615 10,112.210
1988 2.182444 2.353678 25,209.160
1987 2.179695 2.182444 119,303.264
1986 1.918119 2.179695 134,744.236
1985 1.584293 1.918119 134,782.336
</TABLE>
FINANCIAL STATEMENTS
The financial statements of the Variable Account and the Company and the
independent auditors' reports thereon are in the Statement of Additional
Information.
PFL LIFE INSURANCE COMPANY AND THE FIDELITY
VARIABLE ANNUITY ACCOUNT
The Company
PFL Life Insurance Company (the "Company") is a stock life insurance
company organized under the laws of the State of Iowa on April 19, 1961. The
Company offers a complete line of life insurance, annuities, and accident
and health insurance. It is currently authorized to sell variable annuities
in the District of Columbia and Guam and in all states other than New York.
The Company is an indirect wholly-owned subsidiary of AEGON USA, Inc., 4333
Edgewood Road N.E., Cedar Rapids, Iowa 52499, which is, in turn, an indirect
wholly-owned subsidiary of AEGON N.V., Mariahoeveplein 50, P.O. Box 202,
2501 CE The Hague, The Netherlands, a holding company organized under the
laws of The Netherlands.
10
<PAGE>
The Variable Account
The Fidelity Variable Annuity Account (the "Variable Account") was
established by an affiliate (Pacific Fidelity Life Insurance Company) under
California insurance law on August 24, 1979. On March 31, 1991, the Company
acquired the assets (and liabilities) of that affiliate, including the
Variable Account. As of December 31, 1994 the Company had assets of $6.1
billion.
The Variable Account is registered with the Securities and Exchange
Commission (the "Commission") as a unit investment trust pursuant to the
provisions of the Investment Company Act of 1940 and meets the definition
of a separate account under federal securities laws. Such registration does
not involve supervision of the management of the Variable Account or the
Company by the Commission.
Under Iowa insurance law, the income, gains or losses of the Variable
Account are credited to or charged against the assets of the Variable Account
without regard to the other income, gains or losses of the Company. Although
the assets maintained in the Variable Account will not be charged with any
liabilities arising out of any other business conducted by the Company, all
obligations arising under the Contracts, including the promise to make
annuity payments, are general corporate obligations of the Company.
Currently, the Company invests the assets of the Variable Account that
support the Contracts in shares of one or more mutual funds (the "Eligible
Funds") that have been approved by the Company's Board of Directors. Shares
of the Eligible Funds will be purchased at net asset value. Currently, the
only Eligible Funds are the Variable Insurance Products Fund and the Variable
Insurance Products Fund II (the "Funds"), but other mutual funds may be added
or withdrawn as permitted by law. The Variable Account currently offers seven
sub-accounts that invest exclusively in corresponding portfolios of the
Funds: Money Market, High Income, Equity-Income, Growth, Overseas, Investment
Grade Bond and Asset Manager sub-accounts (the "Sub-accounts"). Additional
sub-accounts may be established at the Company's discretion.
The Company does not guarantee the investment performance of the
Variable Account. The Contract Value and the amount of Variable Annuity
Payments depend on the investment performance of the assets of the Fund.
Because each Contract Owner bears the full investment risk associated with
the Variable Account, there can be no assurance concerning the amount of
Variable Annuity Payments under the Contract.
Prior to September 25, 1981, the assets of certain sub-accounts of the
Variable Account were invested in mutual funds (the "Formerly Eligible
Funds") other than the Funds. Contracts funded by these sub-accounts,
which invest in the Formerly Eligible Funds, are no longer offered, and no
additional assets of the Variable Account will be invested in shares of the
Formerly Eligible Funds. The following is a list of the Formerly Eligible
Funds, which correspond to these sub-accounts of the Variable Account:
Fidelity Daily Income Trust; Fidelity Cash Reserves; Fidelity Government
Securities Fund, Ltd.; Fidelity Intermediate Bond Fund; Fidelity Investment
Grade Bond Fund, Inc.; and Fidelity Capital and Income Fund. Further
information about the Formerly Eligible Funds can be found in the Formerly
Eligible Funds' individual fund prospectuses. The remaining assets of the
Variable Account are currently invested exclusively in shares of the Funds.
THE VARIABLE INSURANCE PRODUCTS FUND AND
VARIABLE INSURANCE PRODUCTS FUND II
The available Sub-accounts of the Variable Account invest exclusively in
shares of the Funds. The Funds are diversified, open-end management
investment companies organized as Massachusetts Business Trusts. The Variable
Insurance Product Fund was established on November 13, 1981, and was formerly
known as Fidelity Cash Reserves II. The Variable Insurance Products Fund II
was established on March 21, 1988.
Certain information concerning the Funds is set forth below. More detailed
information may be found in the Funds' current prospectuses which accompany
or precede this Prospectus and the Funds' current Statements of Additional
Information. The following description is qualified in its entirety by
reference to each Fund's prospectus and Statement of Additional Information
wherein more detailed information may be found.
Fidelity Management & Research Company ("FMR") provides investment advice
and administrative services to the Funds pursuant to an agreement under which
each Portfolio pays FMR a monthly fee. FMR also provides investment advice
and
11
<PAGE>
administrative services to the Formerly Eligible Funds for a fee similar
to the ones applicable to the Portfolios of the Funds. The Variable Insurance
Products Fund currently offers five Portfolios: Money Market Portfolio; High
Income Portfolio; Equity-Income Portfolio; Growth Portfolio; and Overseas
Portfolio. The Variable Insurance Products Fund II currently offers two
portfolios that are available under the Contracts: the Investment Grade Bond
Portfolio (formerly known as the Short-Term Portfolio) and Asset Manager
Portfolio. The seven Portfolios offered by the Funds provide a range of
investment alternatives that vary according to the different investment
objectives described in the Funds' prospectuses and summarized below. The
assets of each Portfolio are separate from the others, and each Portfolio
has separate investment objectives and policies. As a result, each Portfolio
operates as a separate investment fund, and the investment performance of
one Portfolio has no effect on the investment performance of any other
Portfolio. Each of the Portfolios may not be available for investment in
every state.
Money Market Portfolio seeks to obtain as high a level of current income
as is consistent with preserving capital and liquidity. The Portfolio will
invest only in high-quality U.S. dollar dominated money market instruments
of domestic and foreign insurers. The Portfolio seeks to maintain a constant
net asset value of $1.00 per share although no assurances can be given that
such constant net asset value will be maintained. The Portfolio's shares are
neither insured nor guaranteed by the U.S. Government.
High Income Portfolio seeks to obtain a high level of current income by
investing primarily in high-yielding, lower rated, fixed-income securities.
In choosing these securities, growth of capital also will be considered. The
Portfolio may invest without limitation in lower-quality debt securities,
sometimes called "junk bonds" which carry greater risk than other debt
securities. See the Funds' prospectus for a description of these risks.
Equity-Income Portfolio seeks reasonable income by investing primarily in
income-producing equity securities. In choosing these securities, the
Portfolio will also consider the potential for capital appreciation. The
Portfolio's goal is to achieve a yield which exceeds the composite yield on
the securities comprising the Standard & Poor's Composite Index of 500
Stocks.
Growth Portfolio seeks to achieve capital appreciation through the purchase
of common stocks, although the Portfolio's investments are not restricted to
any one type of security. Capital appreciation may also be found in other
types of securities, including bonds and preferred stocks.
Overseas Portfolio seeks long-term growth of capital primarily through
investments in foreign securities. The Portfolio seeks to achieve its
investment objective by investing at least 65% of the Portfolio's assets in
securities of companies from at least three different countries outside of
North America. The Overseas Portfolio expects to invest most of its assets in
securities of companies located in developed countries in these general areas:
The Americas (other than the United States), the Far East and Pacific Basin,
Scandinavia and Western Europe. Generally, the investment in securities of
foreign companies will involve greater risks than are present in domestic
investments.
Investment Grade Bond Portfolio seeks as high a level of current income as
is consistent with the preservation of capital by investing in investment-
grade fixed income securities. Its dollar weighted average maturity will be
ten years or less. The Portfolio will not invest in securities rated below
Baa by Moody's Investor's Service, Inc. or rated below BBB by Standard &
Poor's Corporation and unrated securities judged by FMR to be of equivalent
quality.
Asset Manager Portfolio seeks high total return with reduced risk over the
long-term by allocating its assets among domestic and foreign stocks, bonds
and short-term fixed income instruments.
THERE IS NO ASSURANCE THAT ANY OF THE FUNDS' PORTFOLIOS WILL ACHIEVE ITS
INVESTMENT OBJECTIVE.
The Funds' prospectuses should be read carefully before any decision is
made concerning the allocation of Purchase Payments to a particular
Portfolio. The Funds are not limited to selling their shares to the Variable
Account and are permitted to accept investments from any separate account of
an insurance company. Since the Portfolios of the Funds are available to
registered separate accounts offering variable annuity products of the
Company, as well as variable annuity and variable
12
<PAGE>
life products of other insurance companies, there is a possibility that a
material conflict may arise between the interests of the Variable Account and
one or more of the separate accounts of another participating insurance company.
In the event of a material conflict, the affected insurance companies agree to
take any necessary steps, including removing their separate accounts from the
Funds, to resolve the matter. See the Funds' prospectuses for further details.
Additions, Deletions or Substitutions of Investments
If the shares of the Funds or the Formerly Eligible Funds should no longer
be available for investment or, if in the judgment of the Company's
management, further investment in the Eligible Funds' share should become
inappropriate in view of the purposes of the Contract, then the Company may
substitute shares of another fund for shares already purchased, or to be
purchased in the future, under the Contract. No substitution of securities
in any sub-account may take place except to the extent permitted by law.
To the extent required by the Investment Company Act of 1940, substitutions
of shares attributable to a Contract Owner's interest in a sub-account
will not be made until the Contract Owner has been notified of the change
and prior approval of the Securities and Exchange Commission is obtained.
New sub-accounts may be established when, in the sole discretion of the
Company, marketing, tax, investment or other conditions so warrant. Any
new sub-accounts will be made available to existing Contract Owners on a
basis to be determined by the Company. Each additional sub-account will
purchase shares in a Portfolio of the fund or in another mutual fund or
investment vehicle. The Company may also eliminate one or more sub-accounts
if, in its sole discretion, marketing, tax, investment or other conditions
so warrant.
In the event of any such substitution or change, the Company may, by
appropriate endorsement, make such changes in the Contracts as may be
necessary or appropriate to reflect such substitutions or change.
Furthermore, if deemed to be in the best interests of persons having voting
rights under the Contracts, the Variable Account may be operated as a
management company under the 1940 Act or any other form permitted by law,
or it may be deregistered under such Act in the event such registration
is no longer required.
THE CONTRACTS
Purchase of the Contracts
The Contracts may be purchased by mailing in a completed, signed
application to the Company, along with a check for the initial investment.
Purchase Payments are payable at the Administrative and Service Office of
the Company designated on the cover page. The initial Purchase Payment must
be at least $5,000. Subsequent Purchase Payments must be at least $500.
Except for these limitations, there are no restrictions on the amount or
frequency of Purchase Payments under a Contract.
If an application is complete upon receipt, the Contract Owner will
receive a Contract based on the price next determined after the application
and initial Purchase Payment are received. If an incomplete application is
received, the Company will notify the applicant by phone or mail to request
the information necessary to complete the application. Once the application
is completed, the Contract Owner will receive a Contract based on the price
next determined after the application was made complete. If, after five days,
the application remains incomplete, the Company will return the applicant's
initial Purchase Payment unless it obtains the applicant's permission to
retain the initial Purchase Payment pending completion of the application.
A Contract shall automatically be continued in full force during the
lifetime of the Annuitant until the Annuity Commencement Date or until the
Contract is surrendered. Unless the Contract Owner has surrendered the
Contract, Purchase Payments may be made at any time during the life of the
Annuitant and before the Annuity Commencement Date.
Allocation and Reallocation of Net Purchase Payments
Net Purchase Payments are allocated among the Sub-accounts of the Variable
Account that have been selected by the Contract Owner. The Purchase Payment,
less the administrative charge deducted upon payment, and less any deduction
for premium
13
<PAGE>
taxes, equals the Net Purchase Payment. Upon allocation to a Sub-account, Net
Purchase Payments are converted into Accumulation Units of the Sub-account. The
number of Accumulation Units to be credited is determined by dividing the dollar
amount allocated to each Sub-account by the value of a Accumulation Unit for
that Sub-account as next determined after the Purchase Payment is received at
the Administrative and Service Office, or in the case of the initial Purchase
Payment, when the Contract application is completed, whichever is later.
Contract Owners (or their designated account executive) can make transfers
and/or change the allocation of subsequent premium payments by telephone if
the "Telephone Transfer/Reallocation Authorization" box in the application
has been checked or telephone transfers have been subsequently authorized
in writing. PFL and/or the Administrative and Service Office will not be
liable for following instructions communicated by telephone that it
reasonably believes to be genuine. However, PFL and/or the Administrative
and Service Office will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. If PFL and/or the
Administrative and Service Office fails to do so, it may be liable for any
losses due to unauthorized or fraudulent instructions. All telephone
requests will be recorded on voice recorder equipment for the protection
of the Contract Owner. A Contract Owner, when making telephone requests
may be required to provide their social security number and/or other
information for identification purposes.
Telephone requests must be received at the Administrative and Service
Office no later than 3:30 p.m. Central time in order to assure same day
pricing of the transaction.
The telephone transaction privilege may be discontinued at any time as to
some or all Contracts and PFL may require written confirmation of a
transaction request.
When a reallocation is requested, the redemption of the requested amount
from out of the Sub-account and portfolio in which the amount had been
invested will always be effected as of the end of the Valuation Period in
which the request is received at our Administrative and Service Office. That
amount will generally be credited to the new Sub-account and portfolio at
the same time. However, when (1) you are making a transfer to any portfolio
that accrues dividends on a daily basis and (2) the equity portfolio from
which the transfer is being made is in an illiquid position due to
substantial redemptions or transfers that require it to sell portfolio
securities in order to make funds available, then the crediting of the
amount transferred to the new Sub-account may be delayed until the portfolio
from which the transfer is being made obtains liquidity through the earlier
of the portfolio's receipt of proceeds from sales of portfolio securities,
new contributions by contract owners, or otherwise, but no longer than seven
days. During this period, the amount transferred will be uninvested.
There are currently seven Sub-accounts, each corresponding to one of the
seven Portfolios of the Funds, each representing a different investment
alternative. (See "The Variable Insurance Products Fund and Variable
Insurance Products Fund II," p. 13.) In allocating the initial Purchase
Payment among the Sub-accounts, the Contract Owner must allocate a minimum
contribution of $1,000 to each Sub-account selected. Subsequent Net Purchase
Payments may be allocated among the Sub-accounts in any manner, so long as
any contribution to a selected Sub-account is at least $500. A Contract
Owner may subsequently reallocate the value of a designated number of
Accumulation Units of a Sub-account then credited to a Contract, into an
equal value of Accumulation Units of one or more other Sub-accounts. The
reallocation shall be based on the relative value of the Accumulation Units
of the Sub-accounts at the end of business on the day the request is
received by the Company.
On the Date of Issue of the Contract, the Contract Value equals the value
of the Net Purchase Payment. Thereafter, the Contract Value is determined
by multiplying the number of Accumulation Units of each Sub-account credited
to the Contract by the current value of an Accumulation Unit for that
Sub-account. The number of Accumulation Units is increased by any Net
Purchase Payments and decreased by the annual administrative charge, any
premium taxes deducted and any full or partial surrenders.
Value of Accumulation Units
The Accumulation Units of each Sub-account of the Variable Account are
valued separately. The value of Accumulation Units may change each Valuation
Period
14
<PAGE>
according to the investment performance of the shares purchased by each Sub-
account and the deduction of certain charges.
A Valuation Period is the period beginning at the close of trading on the
New York Stock Exchange on each Valuation Date and ends at the close of
trading on the next succeeding Valuation Date. A Valuation Date is each day
that the New York Stock Exchange is open for business.
The value of an Accumulation Unit in a Sub-account for any Valuation Period
equals the value of the Accumulation Unit as of the immediately preceding
Valuation Period, multiplied by the Net Investment Factor for that
Sub-account for the Valuation Period for which the Accumulation Unit value
is being calculated. The Net Investment Factor is a number representing the
change in the value of Sub-account assets on successive Valuation Dates due
to investment income, realized or unrealized capital gains or losses,
deductions for taxes, if any, and deductions for the Mortality Risk Charge.
Surrenders
At any time before the Annuity Commencement Date and during the lifetime
of the Annuitant, the Contract Owner may elect to surrender all or any
portion of the Contract Value in exchange for a cash withdrawal payment
from the Company. Any such election shall be in writing in such form as the
Company may require and shall specify the amount of the cash withdrawal
payment. At the Contract Owner's request, the Company will provide a form
to request a surrender and to notify the Company of the Contract Owner's
election whether to have federal income taxes withheld. Such an election
will be effective on the date that it is received by the Company at its
Administrative and Service Office.
The amount of the cash withdrawal payment will be equal to the Contract
Value at the end of the Valuation Period during which the election becomes
effective, or the lesser amount requested. The cash withdrawal payment will
result in the liquidation of Accumulation Units with an aggregated value
equal to the dollar amount of the cash withdrawal payment. Unless instructed
to the contrary, the Company will liquidate Accumulation Units of all
Sub-accounts within the Variable Account in the same proportion that the
cash withdrawal payment bears to the Contract Value.
Any cash withdrawal payment will be paid within seven (7) days from the
date the surrender request becomes effective, except as the Company may be
permitted to defer such payment in accordance with the Investment Company
Act of 1940. (See "Suspension of Payment," p.27.) Payments under the
Contract of any amounts derived from Purchase Payments made by check, may
be delayed until such time as the check has cleared your bank. If at the
time that the Contract Owner makes a partial or full surrender request, he
or she has not provided the Company with a written election not to have
federal income taxes withheld, the Company must by law withhold such taxes
from the taxable portion of any full or partial surrender and remit that
amount to the federal government. Moreover, the Internal Revenue Code
provides that a 10% penalty tax may be imposed on certain early surrenders.
(See "Federal Tax Matters," p. 24.)
Exchange Privilege
As long as the Annuitant is living, a Contract may, subject to the
Company's rules and regulations and the applicable laws or regulations of
any regulating authority, be exchanged for any other variable annuity
contract of the Company which is the same in all material respects to the
Contract except for the underlying investment. Upon such exchange, the
Contract Value shall be applied, without fee, penalty or other charge
payable to the Company, to the extent permitted by law, toward the
purchase of the new Contract.
Right to Return the Contract
The Contract Owner may cancel the Contract within ten (10) days after
it is delivered to the Contract Owner by delivering or mailing the Contract
and a written notice of revocation to the Company at its Administrative and
Service Office. In the event of cancellation, the Company will return all
Purchase Payments made under the Contract within ten (10) days after it
receives written notice of cancellation and the returned Contract.
15
<PAGE>
CONTRACT CHARGES
No deduction for sales charges is made from Purchase Payments or upon
surrender. As more fully described below, charges under the contracts are
assessed (1) against the initial Purchase Payments and annually thereafter
from the Contract Value for administrative expenses, and (2) against the
assets of the Variable Account for the assumption of mortality risk.
Premium taxes, if any, are deducted from the Purchase Payment or the
Contract Value at the time they are incurred by the Company and the
Company reserves the right to make deductions from the Variable Account
for income tax liabilities resulting from the operation of the Variable
Account.
Costs of distributing the Contracts will be paid from the Company's
general assets. These assets may include proceeds from the mortality charge
described below. The Company incurs certain costs, including the obligation
to pay certain insurance commissions in connection with the distribution of
the Contracts.
Administrative Charge
The Company performs the administrative services for the Contracts and the
Variable Account. These services include issuance of the Contracts,
maintenance of records concerning the Contracts, and valuation services. An
administrative charge to cover these expenses is deducted from the initial
Purchase Payment and annually thereafter from the Contract Value. The current
annual administrative charge is $35.00.
When the Contract Owner makes the initial investment in the Contract, a pro
rata portion of the annual charge for the current year will be deducted from
the Purchase Payments. Annually thereafter, on the last day of each year, the
annual charge for the next calendar year will be deducted. No part of the
annual charge will be refunded upon termination of a Contract. In the states
of Pennsylvania and South Carolina the annual charge will never exceed $35.00
for Contracts issued in connection with the delivery of this Prospectus.
The Company does not intend to profit from the administrative charge. PRIOR
TO THE ANNUITY COMMENCEMENT DATE, THE ADMINISTRATIVE CHARGE IS NOT GUARANTEED
AND, SUBJECT TO LIMITS IMPOSED BY STATE LAW, MAY CHANGE OVER THE YEARS THE
CONTRACT IS IN FORCE.
Charges for Mortality Risk
The mortality risk assumed by the Company arises from the contractual
obligation to continue to make annuity payments to each Annuitant regardless
of how long the Annuitant lives and regardless of how long all Annuitants as
a group live. Although Variable Annuity Payments made to Annuitants will vary
in accordance with the investment performance of the Funds (or the Formerly
Eligible Funds), they will not be affected by the mortality experience of
persons receiving such payments or of the general population. This assures
each Annuitant that neither the longevity of fellow Annuitants nor an
improvement in life expectancy generally will have an adverse effect on the
Variable Annuity Payments received under the Contracts. The Company assumes
this mortality risk by virtue of annuity payment rates incorporated in the
Contract. These rates cannot be changed. (See "Statement of Additional
Information - Annuity Payment Rates," p. 6.)
For assuming this mortality risk, the Company deducts from the daily net
asset value of the Variable Account an amount, computed on a daily basis,
which is equal to an effective annual rate of 0.8%. If this amount is
insufficient to cover the actual costs, the loss will be borne by the
Company; conversely, if the amount deducted proves more than sufficient,
the excess will be a profit to the Company. To the extent that this charge
results in a profit to the Company, such profit will be available for use
by the Company for, among other things, the payment of distribution, sales
and other expenses. The level of this charge is guaranteed and will not
change. A mortality and expense risk charge is assessed during the annuity
phase for all options including those that do not carry a life contingency.
Deductions for Taxes
16
<PAGE>
Any premium taxes or other similar taxes (herein collectively referred to
as "premium taxes") levied by any governmental entity as a result of the
existence of the Contracts will be deducted from Contract Values when
incurred. Premium taxes are generally levied at the Annuity Commencement
Date. As of the date of this prospectus, the current range of state premium
taxes is from 0.0% to 3.5%.
The Company does not expect to incur any federal income tax liability
attributable to investment income or capital gains retained as part of the
reserve under the Contracts. Based on these expectations, no charge is being
made currently to the Variable Account for corporate federal income taxes
which may be attributable to Variable Account. However, if the tax laws
change such that there is tax liability, the Company may review from time
to time the need to make a charge for any taxes attributable to the income
of the Variable Account.
Under present laws, the Company does not incur state or local taxes (other
than premium taxes), and therefore, does not charge for these taxes. If there
is a change in state or local tax laws, charges for such taxes, if any,
attributable to the Variable Account may be made.
The Variable Insurance Products Fund and Variable Insurance Products Fund II
Expenses
The value of the assets in the Variable Account will reflect the value of
the Funds' (or the Formerly Eligible Fund) shares and, therefore, the fees
and expenses paid by the Funds (or the Formerly Eligible Fund). A complete
description of the expenses and deductions from the portfolios are found in
the individual fund prospectuses.
BENEFITS UNDER THE CONTRACT
Death Benefit
In the event of the death of the Annuitant prior to the Annuity
Commencement Date, the Company, upon receipt of Due Proof of Death of the
Annuitant, will pay a death benefit to the Beneficiary designated by the
Contract Owner. If the death of the Annuitant occurs on or after the Annuity
Commencement Date, no death benefit will be payable under the contract
except as may be provided under the Annuity Option elected.
The death benefit payable in the event of the death of the Annuitant prior
to the Annuity Commencement Date is equal to the Contract Value. The
Accumulation Unit values used in determining the amount of death benefit
will be the values for the next subsequent Valuation Period following the
date all of the items listed below have been received by the Company:
written notice of death of the Annuitant; Due Proof of Death of the
Annuitant; and an election to pay the proceeds as a single cash payment or
under an Annuity Option.
If no election as to how the proceeds should be paid was made by the
Contract Owner prior to the Annuitant's death, the Beneficiary may elect one
of the Annuity Options or a lump sum cash payment within 90 days after the
Company receives notification of death. To comply with federal tax law,
however, the Beneficiary must choose an Annuity Option within 60 days after
the lump sum first became payable in order to receive favorable tax
treatment.
IRS Required Distributions
For Contracts issued on or after January 19, 1985, federal tax law requires
that if the Contract Owner or any Joint Contract Owner dies before the
Annuity Commencement Date, the entire value of the Contract must generally be
distributed within five (5) years of the date of death of the Contract Owner
or the Joint Contract Owner. Special rules may apply to spouses of the
deceased owner. See the Statement of Additional Information for a detailed
description of these rules.
ANNUITY PAYMENTS
Annuity Commencement Date
17
<PAGE>
Unless the Annuity Commencement Date is changed, Annuity Payments under a
contract will begin on the Annuity Commencement Date which is selected by
the Contract Owner at the time the Contract is applied for. The Annuity
Commencement Date may be changed from time to time by the Contract Owner by
written notice to the Company, provided that notice of each change is
received by the Company at its Administrative and Service Office at least
thirty (30) days prior to the then current Annuity Commencement Date. Except
as otherwise permitted by the Company, a new Annuity Commencement Date must
be a date which is: (1) at least thirty (30) days after the date notice of
the change is received by the Company; (2) the first day of a month; and
(3) not later than the first day of the first month following the Annuitant's
75th birthday. Currently, the Company permits the new Annuity Commencement
Date to begin as late as the first day of the first month following the
Annuitant's 85th birthday. The Annuity Commencement Date may also be
changed by the Beneficiary's election of the Annuity Option after the
Annuitant's death.
Election of Annuity Options
During the lifetime of the Annuitant and prior to the Annuity Commencement
Date, the Contract Owner may elect any one of the Annuity Options described
in this Prospectus. The Contract Owner may also change any election, but
written notice of any election or change of election must be received by the
Company at its Administrative and Service Office at least thirty (30) days
prior to the Annuity Commencement Date. If no election is in effect on the
thirtieth day prior to the Annuity Commencement Date, Annuity Option 3 for
a life annuity with 120 monthly payments guaranteed will be deemed to have
been elected on a variable basis. At such time as one of the Annuity Options
under the Contract may become operative, a supplementary agreement will be
issued by the Company setting forth the terms of the option elected.
During the lifetime of the Annuitant, the Contract Owner may elect that
all or any part of the Death Benefit be applied under any one of the Annuity
Options listed in the Contract or in any other manner agreeable to the
Company. If no election as to the Annuity Option has been selected by the
Contract Owner at the time of death of the Annuitant, such an election may
be made by the Beneficiary.
Annuity Options
Annuity payments may be made under any one of the Annuity Options described
below or in any other manner agreeable to the Company. Annuity payments will
be made on either a fixed basis or a variable basis as selected by the
Contract Owner (or the Beneficiary, after the Annuitant's death). The effect
of choosing a Fixed Annuity Option is that the amount of each payment will be
set on the Annuity Commencement Date and will not change. If a Fixed Annuity
Option is selected, the Contract Value will be transferred to the general
account of the Company, and the annuity payments will be fixed in amount and
duration by the fixed annuity provisions selected and the age and sex of the
Annuitant. For further information, contact the Company at its Administrative
and Service Office.
The Contract provides four Annuity Options which are described below;
however, the Contract Owner may not select more than one. All of these are
offered as either "Fixed Annuity Options" or "Variable Annuity Options."
Under Annuity Options 1 and 2, it would be possible for only one annuity
payment to be made if the Annuitant(s) were to die before the due date of the
second annuity payment, only two annuity payments if the Annuitant(s) were to
die before the due date of the third annuity payment, and so forth.
Therefore, under Annuity Options 1 and 2 the Contract Value may not be
returned.
Annuity Option 1 - Life Annuity: This option provides monthly payments
during the lifetime of the Annuitant ceasing with the last payment due prior
to the death of the Annuitant. This option offers the highest level of
monthly payments because no further payments are payable after the death of
the Annuitant and there is no provision for a death benefit payable to a
Beneficiary.
Annuity Option 2 - Joint and Survivor Annuity: This option provides monthly
payments during the joint lifetime of the Annuitant and designated second
person and during the lifetime of the survivor. As in the case of Annuity
Option 1, there is no guaranteed number of payments and there is no
provision for a death benefit payable to a Beneficiary under this option.
Annuity Option 3 - Life Annuity with 120 or 240 Monthly Payments Guaranteed:
This option provides monthly payments during the lifetime of the Annuitant
and in any
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event for one hundred twenty (120) or two hundred forty (240) months certain as
elected. In the event of the death of the Annuitant under this option, the
Contract provides that any guaranteed monthly payments will be paid to the
Beneficiary during the remaining months of the term selected, provided that the
Beneficiary may, at any time, elect to receive the discounted value of the
remaining payments, if any, in one sum. The discounted value for Fixed or
Variable Annuity Payments will be based on interest compounded annually at the
applicable assumed interest rate used in determining the first annuity payment.
(See "Determination of Annuity Payments," p. 23.) Upon the death of a
Beneficiary receiving annuity benefits under this option, the present value of
the guaranteed number of payments remaining after the Company receives notice of
the death of the Beneficiary, computed at the applicable assumed interest rate
shall be paid in a lump sum to the estate of the Beneficiary. Such present value
is computed as of the Valuation Period during which notice of the death of the
Beneficiary is received by the Company at its Administrative and Service Office.
Annuity Option 4 - Cash or Unit Refund Life Annuity: This option provides
monthly payments during the lifetime of the Annuitant terminating with the last
payment due prior to the death of the Annuitant. An additional payment will be
made to the Beneficiary which for a Variable Annuity will equal the Annuity Unit
value as of the date that notice of death of the Annuitant in writing is
received by the Company at its Administrative and Service Office, multiplied by
the excess, if any, of (a) over (b) where (a) is the Contract Value applied at
the Annuity Commencement Date under this option, divided by the Annuity Unit
Value as of the Annuity Commencement Date, and (b) is the product of the number
of Annuity Units represented by each Variable Annuity Payment paid to the
Annuitant and the number of Variable Annuity Payments made. For Fixed Annuity
Payments, the Annuity Unit Value shall be $1. Therefore, (a) is the Contract
Value as of the Annuity Commencement Date, while (b) is the sum of all Fixed
Annuity Payments made.
Determination of Annuity Payments
On the Annuity Commencement Date the Contract's Annuity Purchase Value will
be applied to provide for Annuity Payments under the selected annuity option
as specified. The Annuity Purchase Value will be equal to the Contract Value
for the Valuation Period which ends immediately preceding the Annuity
Commencement Date, reduced by an applicable premium or similar taxes.
Fixed Annuity Payments are determined by the Annuity Payment rates based on
the current assumed rate of interest as determined by the Company at the
Annuity Commencement Date. The assumed interest rate may be changed upon the
Company's discretion; however, the minimum guaranteed interest rate is 3.5%.
If, at the time the annuity payments begin, the Contract Owner has not
provided the Company with a written election not to have federal income taxes
withheld, the Company must by law withhold such taxes from the taxable
portion of such annuity payments and remit that amount to the federal
government.
The dollar amount of the first Variable Annuity Payment will be determined
in accordance with the annuity payment rates based on the assumed interest
rate selected by the Annuitant. Under the Contract, the Annuitant has some
flexibility in choosing the assumed rate of interest to be used in connection
with the Variable Annuity Payments. The Annuitant may choose among interest
rates offered by the Company at the Annuity Commencement Date. Currently, the
Company offers assumed interest rates of 3.5% to 7.5%.
If the Annuitant chooses a higher assumed interest rate, as compared to
choosing the lowest rate offered, variable annuity payments would start at a
higher level but would increase more slowly and decrease more rapidly.
Therefore, election of a higher assumed rate of interest would result in a
higher first monthly Variable Annuity Payment, but would increase the
possibility of reduced future payments during the periods when net investment
performance of the Sub-account did not exceed the higher assumed rate of
interest.
All Variable Annuity Payments other than the first are calculated using
Annuity Units which are credited to the Contract. The number of Annuity Units
to be credited in respect of a particular Sub-account is determined by
dividing that portion of the first Variable Annuity Payment attributable to
that Sub-account by the Annuity Unit value of that Sub-account for the
Valuation Period which ends immediately preceding the Annuity Commencement
Date. The number of Annuity Units of each particular Sub-account credited to
the Contract then remains fixed. The dollar amount of each
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Variable Annuity Payment after the first may increase, decrease or remain
constant, and is equal to the sum of the amounts determined by multiplying the
number of Annuity Units of each particular Sub-account credited to the Contract
by the Annuity Unit value for the particular Sub-account for the Valuation
Period which ends immediately preceding the due date of each subsequent payment.
Furthermore, after the Annuity Commencement Date, the Contract Owner may
reallocate all or part of the values held in one Sub-account to one or more
other Sub-accounts. (See Statement of Additional Information - "Reallocation of
Contract Values after the Annuity Commencement Date, p. 2.)
Adjustment of Annuity Payments
If the Contract Value on the Annuity Commencement Date is less than $5,000,
the Company may pay such value in one sum in lieu of the payments otherwise
provided for. If the Contract Value is not less than $5,000, but the payments
provided for would be or become less than $50, the Company may change, at its
discretion, the frequency of payments to such intervals as will result in
payments of at least $50.
FEDERAL TAX MATTERS
Introduction
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE.
The Contracts are designed for use by individuals in retirement plans which
will not be qualified plans under the provisions of the Internal Revenue Code
of 1986, as amended (the "Code"). The ultimate effect of federal income taxes
on the Contract Value, on Variable Annuity Payments and on the economic
benefit to the Contract Owner, Annuitant or Beneficiary depends on the tax
status of both the Company and the individual concerned. The discussion
contained herein is general in nature and is not intended as tax advice. Each
person concerned should consult a competent tax adviser. No attempt is made
to consider any applicable state or other tax laws. The discussion contained
herein reflects the Company's understanding of current federal income tax
laws applicable to the Company and to variable annuity contracts used in
connection with retirement plans which are not qualified plans under the
Code. Moreover, the discussion herein is limited to a consideration of the
taxation of variable annuity contracts funded by investments in shares of
the Fund. The discussion contained herein does not attempt to discuss the
tax treatment applicable to variable annuity contracts funded by investments
in shares of the Formerly Eligible Funds which is different from the
treatment discussed herein. No representation is made regarding the
likelihood of continuation of current federal income tax laws or the current
interpretations by the Internal Revenue Service. THE COMPANY DOES NOT MAKE
ANY GUARANTEE REGARDING ANY TAX STATUS, FEDERAL, STATE OR LOCAL, OF ANY
CONTRACT OR ANY TRANSACTION INVOLVING THE CONTRACTS.
Taxation of Annuities in General
THE FOLLOWING DISCUSSION ASSUMES THAT THE CONTRACTS WILL QUALIFY AS AN
ANNUITY CONTRACT FOR FEDERAL INCOME TAX PURPOSES. THE STATEMENT OF ADDITIONAL
INFORMATION DISCUSSES SUCH QUALIFICATIONS.
An annuity Contract Owner generally is not taxed on increases in the value
of a Contract until distribution occurs, either in the form of a cash payment
received by withdrawing all or part of the cash value or as annuity payments
under the annuity option elected. For this purpose, the assignment or pledge
of, or the agreement to assign or pledge, any portion of the value of a
Contract will be treated as a distribution. The taxed portion of a
distribution (in the form of a lump sum payment or an annuity) is taxed as
ordinary income. However, the purchase payments made after February 28, 1986,
an owner of a Contract who is not a natural person (subject to limited
exceptions) generally will be taxed on any increase in the Contract's cash
value over the "investment in the contract" during the taxable year, even if
no distribution occurs. There are, however, exceptions to this rule which you
may wish to discuss with your tax counsel. The following discussion applies
to Contracts owned by natural persons.
Except as provided below, in the case of a partial withdrawal under a
Contract, amounts received are first treated as taxable income to the extent
that the Contract Value of the Contract immediately before the withdrawal
exceeds the "investment in
20
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the contract" at that time. Any additional amount withdrawn is not taxable.
However, in the case of a withdrawal under a Contract issued before August 14,
1982, and allocable to an "investment in the contract" made before that date,
amounts received are treated as taxable income only to the extent that they
exceed the "investment in the contract." Upon a full surrender of the Contract,
amounts received in excess of the "investment in the contract" will be treated
as taxable income. The "investment in the contract" generally equals the
portion, if any, of any Purchase Payment paid by or on behalf of an individual
under a Contract which is not excluded from the individual's gross income.
Although the tax consequences may vary depending on the form of annuity
selected under the Contract, the recipient of an Annuity Payment under a
Contract generally is taxed on the portion of such payment that exceeds the
"investment in the contract." For Variable Annuity Payments, the taxable
portion is determined by a formula that establishes a specific dollar amount
of each payment that is not taxed. The dollar amount is determined by
dividing the "investment in the contract" by the total number of expected
periodic payments. For Fixed Annuity Payments, in general, there is no tax
on the amount of each payment which represents the same ratio that the
"investment in the contract" bears to the total expected value of the Annuity
Payment for the term of the payment; however, the remainder of each Annuity
Payment is taxable. For individuals whose Annuity Commencement Date is after
December 31, 1986, any distribution received subsequent to the investment in
the Contract being recovered will be fully taxable.
There may be imposed a penalty tax on distributions equal to ten percent
(10%) of the amount treated as taxable income. The penalty tax is not imposed
in certain circumstances, which generally include, for distributions made in
taxable years beginning on or after January 1, 1987: (1) distributions
received on or after owner's age 591/2, death of the owner, or disability of
the owner; (2) distributions received in substantially equal installments as
a life annuity (subject to special "recapture" rules if the series of
payments is subsequently modified), and (3) distributions allocable to the
"investment in the contract" and attributable earnings thereon before
August 14, 1982.
The Company will withhold and remit to the U.S. Government a part of the
taxable portion of each distribution made under a Contract unless the
Contract Owner or Annuitant notifies the Company at or before the time of
the distribution that he or she chooses not to have any amounts withheld.
All non-qualified, deferred annuity contracts issued by the same company
(or an affiliated company) to the same owner during any calendar year shall
be treated as one annuity contract, and "aggregated" for purposes of
determining the amount includable in gross income.
In addition, the IRS may (1) require aggregation of contracts owned by
family members; (2) apply a 50% test for determining whether insurance
companies are affiliated; and (3) require aggregation of contracts issued by
unaffiliated insurance companies if purchased pursuant to a common plan.
The foregoing comments about the federal income tax consequences under
Contracts issued by the Company are not exhaustive, and special rules apply
in other situations not discussed in this Prospectus. The discussion herein
also reflects the Company's understanding of current law. No assurance can
be given that the present deferred tax treatment of variable annuity
contracts will remain unaffected by future actions of Congress. Accordingly,
a prospective purchaser should consult a qualified tax adviser.
Proposed Tax Legislation
In past years, legislation has been proposed in the U.S. Congress that
would have adversely modified the federal taxation of certain annuities. For
example, one such proposal would have changed the tax treatment of
non-qualified annuities that did not have "substantial life contingencies"
by taxing income as it is credited to the annuity. Although as of the date
of this Prospectus Congress was not actively considering any legislation
regarding the taxation of annuities, there is always the possibility that
the tax treatment of annuities could change by legislation or other means
(such as IRS regulations, revenue rulings, judicial decisions, etc.).
Moreover, it is also possible that any change could be retroactive (that
is, effective prior to the date of the change).
GENERAL PROVISIONS
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<PAGE>
Ownership of the Contract
The Contract shall belong to the Contract Owner upon issuance of the
Contract after completion of an application and delivery of the initial
Purchase Payment. Prior to the Annuity Commencement Date, the Contract
Owner shall be the person so designated in the application. A Contract
Owner may appoint another person (the "Contingent Contract Owner") to
succeed to ownership of the Contract in the event of the death of the
Contract Owner prior to the Annuity Commencement Date. The Contract Owner
may appoint or change the Contingent Contract Owner or Beneficiary at any
time prior to the Annuity Commencement Date. All Contract rights and
privileges may be exercised by the Contract Owner without the consent of
the Beneficiary or any other person. Such rights and privileges may be
exercised only during the lifetime of the Annuitant and prior to the
Annuity Commencement Date, except as otherwise provided in the Contract.
The Annuitant becomes the Contract Owner on and after the Annuity
Commencement Date. The Beneficiary becomes the Contract Owner on the death
of the Annuitant.
Assignment
During the lifetime of the Annuitant, the Contract Owner may assign any
rights or benefits provided by the Contract. An assignment will not be
binding on the Company until a copy has been filed at its Administrative
and Service Office. The rights and benefits of the Contract Owner and
Beneficiary are subject to the rights of the assignee. The Beneficiary may
not assign any payment under the Contract before the payment becomes due.
Beneficiary
The Beneficiary designation contained in the application will remain in
effect until changed. The interest of any Beneficiary is subject to the
particular Beneficiary surviving the Annuitant. The Contract Owner may change
or revoke the designation of a Beneficiary at any time while the Annuitant is
living by filing with the Company a written beneficiary designation or
revocation in such form as the Company may require. The change or revocation
will not be effective and binding upon the Company until it is received by
the company at its Administrative and Service Office. The Annuitant named in
the Contract, however, may not be changed.
Amendments
The Company reserves the right to amend the Contracts to meet the
requirements of the Investment Company Act of 1940 or other applicable
federal or state laws or regulations. No contract may be modified by the
Company without the consent of the Contract Owner except as may be required
by applicable law.
Suspension of Payment
The Company reserves the right to suspend or postpone the date of any
payment of death benefits or cash withdrawals (1) for any period during
which the New York Stock Exchange is closed (other than customary week-end
and holiday closings) or during which trading on the New York Stock Exchange
is restricted as determined by the Securities and Exchange Commission; (2)
for any period during which an emergency exists as a result of which disposal
of securities held in any separate account is not reasonably practicable, or
it is not reasonably practicable to fairly determine the value of such
assets; or (3) for such other periods as the Securities and Exchange
Commission may by order permit for the protection of security holders or as
may be permitted under the Investment Company Act of 1940.
Non-Participating
The Contracts are non-participating. No dividends are payable and the
Contracts will not share in the profits or surplus earnings of the Company.
Misstatement of Age or Sex
If the age or sex of the Annuitant or Designated Annuitant has been
misstated, the Company will change the annuity benefit payable to that which
the Purchase Payments would have purchased for the correct age or sex.
The dollar amount of any underpayment made by the Company shall be paid in
full with the next payment due
22
<PAGE>
such person or the Beneficiary. The dollar amount of any overpayment made by the
Company due to any misstatement shall be deducted from payments subsequently
accruing to such person or the Beneficiary. The age of the Annuitant or
Designated Annuitant may be established at any time by the submission of proof
satisfactory to the Company.
DISTRIBUTION OF CONTRACTS
The Contracts will be sold by licensed insurance agents in those states
where the Contracts may be lawfully sold. Such agents will be registered
representatives of broker-dealers registered under the Securities Exchange
Act of 1934 which are members of the National Association of Securities
Dealers, Inc. The Contracts will be distributed through Fidelity Brokerage
Services, Inc. ("Fidelity Brokerage") and Fidelity Insurance Agency, Inc.
("Fidelity Insurance"), which are affiliated with FMR. Fidelity Brokerage,
the principal underwriter of the Contracts, is a member of the National
Association of Securities Dealers, Inc. Fidelity Distributors Corporation
("Fidelity Distributors"), an affiliate of FMR, was incorporated under the
laws of Massachusetts on July 18, 1960, is also the distributor of funds in
the Fidelity family of Funds and other funds advised by FMR and funds
advised by other companies. The principal business address of Fidelity
Brokerage, Fidelity Insurance and Fidelity Distributors is 82 Devonshire
Street, Boston, Massachusetts 02109.
The Company has agreed to pay insurance commissions to Fidelity Insurance
for its services as an insurance general agent in distributing the Contracts
which will equal 0.55% on an annual basis of the daily net asset value of
the Variable Account. Fidelity Insurance may appoint subagents to whom it
will pay a portion of its commissions.
VOTING RIGHTS AND REPORTS
In accordance with its view of present applicable law, the Company will
vote the Funds' shares and the Formerly Eligible Fund shares held in the
Variable Account at regular and special meetings of shareholders of the
Funds and the Formerly Eligible Funds in accordance with instructions
received from persons having a voting interest in the Variable Account.
However, if the Investment Company Act of 1940 or any regulation thereunder
should be amended or if the present interpretation thereof should change,
and as a result the Company determines that it is permitted to vote such
shares in its own right, it may elect to do so.
Prior to the Annuity Commencement Date, the Contract Owner exercises the
voting rights under the Contract. After the Annuity Commencement Date, the
person having the voting interest shall be the person then entitled to
receive Variable Annuity Payments. Prior to the Annuity Commencement Date,
the number of votes which a person has the right to cast will be determined
by applying such person's percentage interest in a Sub-account to the total
number of votes attributable to the Sub-account. After the Annuity
Commencement Date, the number of votes attributable to a Contract is
determined by applying the percentage interest reflected by the reserve for
such Contract by the total number of votes attributable to the Sub-account.
After the Annuity Commencement Date the votes attributable to a Contract
decrease as such percentage interest decreases. Voting instructions will be
solicited by written communications prior to the date of the meeting at which
votes are to be cast.
Shares of the Funds and Formerly Eligible Funds held in a Sub-account as
to which no timely instructions are received or as to which Contract Owners
do not have an interest will be voted by the Company in proportion to the
voting instructions which are received with respect to all Contracts
participating in that Sub-account. Voting instructions to abstain on any item
to be voted upon will be applied on a pro rata basis to reduce the votes
eligible to be cast. Each person having a voting interest in a Sub-account
will receive proxy material, reports and other material relating to the Funds
and the Formerly Eligible Funds. In addition, every person having voting
rights will receive such reports or prospectuses concerning the Variable
Accounts as may be required by the Investment Company Act of 1940 and the
Securities Act of 1933. The Company will also send such statements reflecting
transactions involving the Contract as may be required by applicable laws,
rules and regulations.
LEGAL PROCEEDINGS
23
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No material legal proceedings are pending against the Variable Account,
the Company, its subsidiaries or Fidelity Brokerage.
24
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STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
Page
PFL Life Insurance Company...................................... 2
The Contracts................................................... 2
Reallocation of Contract Values After the Annuity...............
Commencement Date............................................... 2
Accumulation Units.............................................. 2
Illustration of Accumulation Unit Value Calculations............ 3
Reinvestment of Fund Distributions.............................. 4
Contract Charges................................................ 4
Administrative Charge........................................... 4
Charges for Mortality Risk...................................... 4
Benefits Under the Contract..................................... 4
Death Benefit................................................... 4
IRS Required Distribution....................................... 5
Annuity Payments................................................ 6
Annuity Unit Value.............................................. 6
Annuity Payment Rates........................................... 6
Illustration of Calculations for Annuity Unit Value.............
and Variable Annuity Payments................................... 7
Federal Tax Matters............................................. 8
Tax Treatment of the Company.................................... 8
Diversification Requirements.................................... 8
Owner Control................................................... 8
Distribution of the Contracts................................... 8
Custody of Assets............................................... 9
State Regulation................................................ 9
Records and Reports............................................. 9
Independent Auditors............................................ 9
Other Information............................................... 9
Financial Statements............................................ 10
25
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FIDELITY INCOME PLUS
The Fidelity Variable Annuity Account
STATEMENT OF ADDITIONAL INFORMATION FOR THE
INDIVIDUAL VARIABLE ANNUITY CONTRACT
Offered by
PFL Life Insurance Company
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499
This Statement of Additional Information supplements the information found
in the current Prospectus for the Individual Variable Annuity Contracts
("Contract") offered by PFL Life Insurance Company. You may obtain a copy of
the Prospectus dated May 1, 1995, without charge by calling Fidelity
Investments; for Sales information call toll free 800-544-2442; for Service
and Account information call toll free 800-634-4672. Terms used in the
current Prospectus for the Contract are incorporated in this Statement.
Dated May 1, 1995
STATEMENT OF INDIVIDUAL INFORMATION
TABLE OF CONTENTS
Prospectus
Page Page
PFL Life Insurance Company 2 12
The Contracts 2 16
Reallocation of Contract Values After
the Annuity Commencement Date 2
Accumulation Units 2 17
Illustration of Accumulation Unit Value
Calculations 3
Reinvestment of Fund Distributions 4
Contract Charges 4 19
Administrative Charge 4 19
Charges for Mortality Risk 4 19
Benefits Under the Contract 4 21
Death Benefit 4 21
IRS Required Distribution 5 21
Annuity Payments 6 21
Annuity Unit Value 6
Annuity Payment Rates 7 21,22 or 23
Illustration of Calculations for Annuity Unit
Value and Variable Annuity Payments 7
Federal Tax Matters 8 24
Tax Treatment of the Company 8
Diversification Requirements 8
Owner Control 8
Distribution of the Contracts 8 28
Custody of Assets 9
State Regulation 9
Records and Reports 9 28
Independent Auditors 9
Other Information 9
Financial Statements 10
N.INC-PTB-595
PFL LIFE INSURANCE COMPANY
PFL Life Insurance Company ("Company") is a stock life insurance company
incorporated under the laws of the State of Iowa on April 19, 1961 under
the name "NN Investors Life Insurance Company, Inc." On January 1, 1991,
the name was changed from NN Investors Life Insurance Company, Inc. to PFL
Life Insurance Company. All of its products, including life insurance,
annuities, and accident and health insurance, have been approved by the
various states where offered.
<PAGE>
All of the stock of the Company is indirectly owned by AEGON USA, Inc.,
an insurance holding company, which is a wholly-owned indirect subsidiary
of AEGON, N.V., a holding company organized under the laws of The Netherlands
and engaged, through subsidiaries and associated companies, mainly in the
insurance and financial services industries.
THE CONTRACTS
Reallocation of Contract Values After the Annuity Commencement Date
After the Annuity Commencement Date, the Contract Owner may reallocate the
value of a designated number of Annuity Units of a Sub-account, then credited
to a Contract, into an equal value of Annuity Units of one or more other
Sub-accounts. The reallocation shall be based on the relative value of the
Annuity Units of the Sub-accounts at the end of the Valuation Date on the
next payment date. The request must be in writing to our Administrative and
Service Office. There is no charge assessed in connection with such
reallocation. The Company reserves the right to limit the number of times a
reallocation of Contract Value may be made in any given calendar year.
Accumulation Units
Upon allocation to the selected Sub-account, Net Purchase Payments are
converted into Accumulation Units of the Sub-account. The number of
Accumulation Units to be credited is determined by dividing the dollar amount
allocated to each Sub-account by the value of an Accumulation Unit for that
Sub-account as next determined after the Purchase Payment is received at the
Administrative and Service Office or, in the case of the initial Purchase
Payment, when the Contract application is completed, whichever is later. The
value of an Accumulation Unit was arbitrarily established at $1 at the
inception of each Sub-account. Thereafter, the value of Accumulation Unit is
determined as of the close of trading on each day the New York Stock Exchange
is open for business.
An index (the "Net Investment Factor") which measures the investment
performance of a Sub-account during a Valuation Period is used to determine
the value of an Accumulation Unit for the next subsequent Valuation Period.
The Net Investment Factor may be greater or less than or equal to one;
therefore, the value of an Accumulation Unit may increase, decrease or remain
the same from one Valuation Period to the next. The Contract Owner bears this
investment risk. The Net Investment Performance of a Sub-account and deduction
of certain charges affect the Accumulation Unit Value.
The Net Investment Factor for any Sub-account for any Valuation Period is
determined by dividing (a) by (b) and subtracting (c) from the result. For
purposes of this calculation:
(a) is the net result of:
(1) the net asset value per share of the shares held in the
Sub-account determined at the end of the current Valuation Period,
plus
(2) the per share amount of any dividend or capital gain distribution
made with respect to the shares held in the Sub-account if the
ex-dividend date occurs during the current Valuation Period, plus
or minus
(3) a per share charge or credit for any taxes determined by the
Company to have resulted from the investment operations of the
Sub-account and for which it has created a reserve;
(b) is the net result of:
(1) the net asset value per share of the shares held in the
Sub-account determined as of the end of the immediately preceding
Valuation Period, plus or minus
(2) the per share charge or credit for taxes pertaining to the
immediately preceding Valuation Period for which the Company has
created a reserve; and
(c) is the charge for mortality risk during the Valuation Period equal on
an annual basis to 0.8% of the daily net asset value of the
Sub-account.
Illustration of Accumulation Unit Value Calculations
Formula and Illustration for Determining the Net Investment Factor
Net Investment Factor = A + B - C - F
---------
D - E
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Where: A= The Net Asset Value of an Underlying Fund share as of the end
of the current Valuation Period.
Assume.................................. = $11.57
B= The per share amount of any dividend or.capital gains
distribution since the end of the immediately preceding
Valuation Period.
Assume.................................. = 0
C= The per share charge or credit for any taxes reserved for at
the end of the current Valuation Period.
Assume.................................. = 0
D= The Net Asset Value of an Underlying Fund share at the end of
the immediately preceding Valuation Period.
Assume.................................. = $11.40
E= The per share amount of any taxes reserved for at the end of
the immediately preceding Valuation Period.
Assume.................................. = 0
F= The daily deduction for mortality risk, which totals 0.8% on
an annual basis.
On a daily basis........................ = 0.00002183
Then, the Net Investment Factor = 11.57 + 0 - 0
-------------
11.40 - 0
- 0.00002183 = 1.01489045
Formula and Illustration for Determining Accumulation Unit Value
Accumulation Unit Value = A x B
Where: A= The Accumulation Unit Value for the immediately preceding
Valuation Period.
Assume.................................. = $1.347125
B= The Net Investment Factor for the current Valuation Period.
Assume.................................. = 1.01489045
Then, the Accumulation Unit Value = $1.347125 x 1.01489045
= $1.367184
Reinvestment of Fund Distributions
The Fund and the Formerly Eligible Funds have as a policy the current
distribution of income and capital gains. However, under the Contracts,
there is an automatic reinvestment of such distributions in the Fund to
comply with the requirements for special taxation of annuities under Section
72 of the Internal Revenue Code of 1986, as amended (the "Code"). That
section allows the deferral of taxes on increases in the value of the
Contract until distribution occurs, either as a lump sum or as annuity
payments under the elected settlement option.
CONTRACT CHARGES
Administrative Charge
The Company performs the administrative services for the Contracts. These
services include issuance of the Contracts, maintenance of records concerning
the Contracts, and certain valuation services.
3
<PAGE>
Charges for Mortality Risk
A mortality risk charge equal to an annual charge of 0.8% of the daily net
asset value of the Variable Account is deducted daily. The Company believes
there is a reasonable likelihood that the proposed distribution-financing
agreement (i.e., the use of the Company's general assets, including amounts
derived from the mortality risk charge, to pay for any distribution expenses)
will benefit the Variable Account and the Contract Owners.
BENEFITS UNDER THE CONTRACT
Death Benefit
During the lifetime of the Annuitant and prior to the Annuity Commencement
Date, the Contract Owner may elect to have the Contract Value applied under
any one of the Annuity Options. If no election of a method of settlement of
the death benefit by the Contract Owner is in effect on the date of death of
the Annuitant, the Beneficiary may elect (a) to receive the death benefit in
the form of a cash payment; or (b) to have the Contract Value applied under
one of the Annuity Options subject to the distribution after death rules
described below in the case of Contracts issued after January 18, 1985; or
(c) continue the Contract as the new Contract Owner/Annuitant if the contract
was issued after January 18, 1985, and the Beneficiary was the surviving
spouse of the Annuitant at the time of death. If settlement of the death
benefit under an Annuity Option is elected, the Annuity Commencement Date
shall be the date specified in the election but no later than ninety (90)
days after receipt by the Company of notification of the death of the
Annuitant. Either election described above may be made by filing with the
Company a written election in such form as the Company may require. Any
election of a method of settlement of the death benefit by the Contract Owner
will become effective on the date it is received by the Company at its
Administrative and Service Office. Any election of a method of settlement of
the death benefit by the Beneficiary will become effective on the later of:
(a) the date the election is received by the Company at its Administrative
and Service Office: and (b) the date notification of death and due proof of
the death of the Annuitant is received by the Company. If an election by the
Beneficiary is not received by the Company within ninety (90) days following
the date notification of the death of the Annuitant is received by the
Company at its Administrative and Service Office, the Beneficiary will be
deemed to have elected a cash payment as of the last day of the ninety (90)
day period.
If the death benefit is to be paid in cash to the Beneficiary, payment will
be made within seven (7) days of the date the election is deemed to become
effective. If the death benefit is to be paid to the Contract Owner or the
Contract Owner's estate, payment will be made within seven (7) days of the
date Due Proof of Death is received by the Company. Payment will be made in
accordance with any applicable laws and regulations governing payment of
death benefits. Notwithstanding the foregoing, the Company may be permitted
to defer such payment in accordance with the Investment Company Act of 1940.
The taxable portion of a lump sum payment of the death benefit is subject
to tax at ordinary income rates. If the Beneficiary elects to receive the
death benefit under an Annuity Option within sixty (60) days after the death
benefit becomes payable in a lump sum, the Beneficiary will recognize such
ordinary income as payments are received. However, if the election is not
made within sixty (60) days after the lump sum first became payable, the
entire death benefit will be subject to tax in the current tax year,
irrespective of whether the death benefit is actually received as a lump sum
or as a series of payments under an Annuity Option elected.
4
<PAGE>
IRS Required Distribution
If the Contract Owner or any Joint Contract Owner of the Contract dies
before the entire interest in the Contract is distributed, the value of the
Contract must be distributed to the designated beneficiary as described in
this section so that the Contracts qualify as annuities under the Internal
Revenue Code.
For Contracts issued after January 18, 1985, if the death occurs on or
after the Annuity Commencement Date, the remaining portion of such interest
will be distributed at least as rapidly as under the method of distribution
being used as of the date of death. If the death occurs before the Annuity
Commencement Date, the Contract Value generally must be paid out to the
beneficiary within five years after the death. However, if an Annuity Option
is elected by the beneficiary, the Contract Value may be distributed as an
annuity over the lifetime of the beneficiary, as long as the distribution
does not extend beyond the life expectancy of the beneficiary and the
distribution begins within one year after the Contract Owner's (or Joint
Contract Owner's) death. If any portion of the Contract Owner's interest is
payable to (or for the benefit of) the surviving spouse of the Contract
Owner's interest is payable to (or for the benefit of) the surviving spouse
of the Contract Owner, the Contract may be continued with the surviving
spouse as the new Contract Owner. For Contracts issued before January 19,
1985, the Contract Value will be paid out in accordance with the Annuity
Option elected by the beneficiary.
ANNUITY PAYMENTS
Annuity Unit Value
The amount of Variable Annuity Payments will vary with Annuity Unit Values.
Annuity Unit Values rise if the net investment performance of the Sub-account
exceeds the assumed interest rate, which is selected by the Annuitant upon
the Annuity Commencement Date. Conversely, Annuity Unit Values fall if the
net investment performance of the Sub-account is less than the assumed rate.
The Annuity Unit Value of each Sub-account is arbitrarily established at
$1.00 for the first Valuation Period of the particular Sub-account. The
Annuity Unit Value for the particular Sub-account for any Valuation Period
is determined by multiplying the Annuity Unit Value for the particular
Sub-account for the immediately preceding Valuation Period by the Net
Investment Factor for the particular Sub-account for the current Valuation
Period, and then multiplying that product by a factor to neutralize the
assumed interest rate used to establish the annuity payment rate found in
the Contract.
Annuity Payment Rates
The Contract contains Annuity Payment Rates for each Annuity Option
described in this Prospectus. The rates show, for each $1,000 applied, the
dollar amount of the first monthly Variable Annuity Payment when this payment
is based on the minimum guaranteed interest rate of 3.5% per year. The dollar
amount of subsequent Variable Annuity Payments will depend upon changes in
applicable Annuity Unit Values.
The annuity payment rates vary according to the Annuity Option elected and
the sex and adjusted age of the Annuitant at the Annuity Commencement Date.
The Contract also contains a table for determining the adjusted age of the
Annuitant.
Illustration of Calculations for Annuity Unit Value
and Variable Annuity Payments
Formula and Illustration for Determining Annuity Unit Value
Annuity Unit Value = A x B x C
Where: A = Annuity Unit Value for the immediately preceding Valuation
Period.
Assume............................. = $1.097696
B = Net Investment Factor for the Valuation Period for which the
Annuity Unit Value is being calculated.
Assume............................. = 1.005200
C = A factor to neutralize the assumed interest rate of 31/2%
built into the Annuity Tables used.
5
<PAGE>
Daily factor equals................ = 0.999906
Then, the Annuity Unit Value is:
$1.097696 x 1.005200 x 0.999906 = $1.103300
Formula and Illustration for Determining Amount of
First Monthly Variable Annuity Payment
First Monthly Variable Annuity Payment = A x B
------
$1,000
Where: A = The Annuity Purchase Value as of the Annuity
Commencement Date.
Assume............................. = $15,000.00
B = The Annuity purchase rate per $1,000 based upon the option
selected, the sex and adjusted age of the Annuitant according
to the tables contained in the Contract.
Assume............................. = $ 6.10
Then, the first Monthly Variable Annuity Payment = $15,000 x $6.10 = $91.50
-------
$1,000
Formula and Illustration for Determining the Number of Annuity
Units Represented by Each Monthly Variable Annuity Payment
Number of Annuity Units = A
---
B
Where: A = The dollar amount of the first monthly Variable Annuity
Payment.
Assume............................. $91.50
B = The Annuity Unit Value for the Valuation Date on which the
first monthly payment is due.
Assume............................. $1.103300
Then, the number of Annuity Units = $91.50 = 82.933019
------
$1.103300
FEDERAL TAX MATTERS
Tax Treatment of the Company
The Company is taxed as a life insurance company under Subchapter L of the
Code. Since the Variable Account is not an entity separate from the Company
and its operations form a part of the Company, it will not be taxed
separately as a "regulated investment company" under Subchapter M of the
Code. Investment income and realized net capital gains on the assets of the
Variable Account are reinvested and are taken into account in determining
Contract Values. As a result, such investment income and realized net capital
gains are automatically retained as part of the reserves under the Contract.
Under existing federal income tax law, the Company believes that Variable
Account investment income and realized net capital gains should not be taxed,
to the extent that such income and gains are retained as part of the reserves
under the Contracts.
Diversification Requirements
Section 817(h) of the Code provides in substance that Section 72 of the
Code will not apply and the Company will not be treated as the owner of the
assets of the Company's segregated account unless the investments made by the
segregated account are "adequately diversified" in accordance with
regulations prescribed by the Treasury. If the segregated account is not
"adequately diversified," any increase in the value of a variable annuity
contract will be taxed to the contract owner currently.
The Variable Account, through the Funds, intends to comply with the
diversification requirements under Section 817(h) as prescribed by the
Treasury. Although the Company does not control the Funds, it believes that
FMR, as the manager of the investments of each of the Funds' Portfolios,
will comply with the
6
<PAGE>
diversification rules set forth in the Regulations. Accordingly, the Company
believes that it will be treated as the owner of the segregated account assets
invested in shares of the Funds and the Contracts issued by the Company will be
taxed as annuities under Section 72 of the Code.
Owner Control
In connection with the issuance of temporary regulations on diversification
requirements, the Treasury also announced that such regulations do not
provide guidance concerning the extent to which Owners may direct their
investments to the Subaccounts of the Variable Account. It is not clear
whether additional guidance in this regard will be provided nor whether, if
provided, it will be prospective only. It is possible that any such guidance
could treat an Owner as the owner of the assets of the Variable Account if a
Subaccount is too narrow in its investment strategy (e.g., a fund that
invests only in gold or stock of gold mining companies) or if Owners have too
many subaccount options to select, even though it technically meets the
diversification requirements. It is possible that if any guidance is
provided then the Variable Account may not be in compliance. The Company
can provide no assurances that any such guidance will not adversely affect
the tax treatment of existing Contracts. For these reasons the Company
reserves the right to modify the Contract as necessary to prevent the Owner
from being considered the owner of the assets of the Variable Account or
otherwise to qualify the Contract for favorable tax treatment.
DISTRIBUTION OF THE CONTRACTS
The Contracts are offered to the public through brokers licensed under
the federal securities laws and state insurance laws. The offering of the
Contracts is continuous and the Company does not anticipate discontinuing
the offering of the Contracts. However, the Company reserves the right to
discontinue the offering of the Contracts.
The Contracts will be distributed through Fidelity Brokerage Services,
Inc., the principle underwriter of the Contracts, and Fidelity Insurance
Agency, Inc., which are affiliated with FMR. During 1994, the amount paid
to Fidelity Insurance Agency, Inc. for its services as a general insurance
agency was $3,511,300. Amounts paid for these services in 1993 and 1992 were
$2,693,726 and $1,617,019, respectively.
CUSTODY OF ASSETS
The assets of each of the Sub-accounts are held by the Company. The assets
of the Variable Account and each of the Sub-accounts thereunder are kept
physically segregated and held separate and apart from the general account
assets of the Company. The Company maintains records of all purchases and
redemptions of shares of the Fund held by each of the Sub-accounts.
Additional protection for the assets of the Variable Account is afforded by
the Company's fidelity bond presently in the amount of $5 million covering
the acts of officers and employees of the Company.
STATE REGULATION
The Company is subject to the laws of Iowa governing insurance companies
and to regulation by the Iowa Division of Insurance. An annual statement
in a prescribed form is filed with the Division of Insurance each year
covering the operation of the Company for the preceding year and its
financial condition as of the end of such year. Regulation by the Division
of Insurance includes periodic examination to determine the Company's
contract liabilities and reserves so that the Division of Insurance may
certify the items are correct. The Company's books and accounts are subject
to review by the Division of Insurance at all times and a full examination
of its operations is conducted periodically by the National Association of
Insurance Commissioners. In addition, the Company is subject to regulation
under the insurance laws of other jurisdictions in which it may operate.
7
<PAGE>
RECORDS AND REPORTS
All records and accounts relating to the Variable Account will be
maintained by the Company. As presently required by the Investment Company
Act of 1940 and regulations promulgated thereunder, the Company will mail
to all Contract Owners at their last known address of record, at least
semi-annually, reports containing such information as may be required under
that Act or by any other applicable law or regulation. The Company will also
mail to Contract Owners confirmation of each financial transaction and
semi-annual Account Statements reflecting the Contract Value of a particular
Contract.
INDEPENDENT AUDITORS
The financial statements of PFL Life Insurance Company at December 31, 1994
and 1993, and for each of three years in the period ended December 31, 1994,
and the financial statements of The Fidelity Variable Annuity Account at
December 31, 1994 and for each of the two years in the period then ended,
included in this Statement of Additional Information have been audited by
Ernst & Young LLP, independent auditors, Des Moines, Iowa.
OTHER INFORMATION
A Registration statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933, as amended, with respect to the
Contracts discussed in this Statement of Additional Information. Not all of
the information set forth in the Registration amendments and exhibits thereto
has been included in this Statement of Additional Information. Statements
contained in this Statement of Additional Information concerning the content
of the Contracts and other legal instruments are intended to be summaries.
For a complete statement of the terms of the documents, reference should be
made to the instruments filed with the Securities and Exchange Commission.
FINANCIAL STATEMENTS
The values of the interest of Contract Owners in the Variable Account will
be affected solely by the investment results of the selected Sub-account(s).
The financial statements of the Company as contained herein should be
considered only as bearing upon the Company's ability to meet its obligations
to Contract Owners under the Contracts, and they should not be considered as
bearing on the investment performance of the Sub-accounts.
8
<PAGE>
THE FIDELITY VARIABLE ANNUITY ACCOUNT
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS:
- -------------------------------
THE BOARD OF DIRECTORS AND CONTRACT OWNERS OF THE FIDELITY VARIABLE ANNUITY
ACCOUNT, PFL LIFE INSURANCE COMPANY:
We have audited the accompanying balance sheet of The Fidelity Variable
Annuity Account (comprising, respectively, the Money Market, High Income,
Equity Income, Growth, Overseas, Investment Grade Bond, Asset Manager,
Fidelity Daily Income Trust, Fidelity Cash Reserves, Fidelity Government
Securities Fund, Ltd., Fidelity Investment Grade Bond Fund and Fidelity
Capital and Income Fund Subaccounts)as of December 31, 1994, and the related
statement of operations for the year then ended and the statements of changes
in contract owners' equity for each of the two years in the period then
ended. These financial statements are the responsibility of the Variable
Account's management. Our responsibility is to express an opinion of these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of mutual fund shares owned as of
December 31, 1994 by correspondence with the mutual funds' transfer agent. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
subaccounts constituting The Fidelity Variable Annuity Account at December
31, 1994, and the results of their operations for the year then ended and
changes in their contract owners' equity for each of the two years in the
period then ended in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Des Moines, Iowa
February 7, 1995
1
<PAGE>
THE FIDELITY VARIABLE ANNUITY ACCOUNT
- --------------------------------------------------------------------------------
BALANCE SHEET
December 31, 1994
<TABLE>
<CAPTION>
Money High Equity
Market Income Income
Total Subaccount Subaccount Subaccount
------------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash..................................................................... $ 759,153 - 127,006 211,880
Investments in mutual funds, at current market value:
Variable Insurance Products Fund - Money Market Portfolio
145,199,658.180 shares (cost $145,199,658)......................... 145,199,658 145,199,658 - -
Variable Insurance Products Fund - High Income Portfolio
3,902,144.990 shares (cost $43,582,608)............................ 41,987,080 - 41,987,080 -
Variable Insurance Products Fund - Equity Income Portfolio
10,692,289.308 shares (cost $152,425,908).......................... 164,126,641 - - 164,126,641
Variable Insurance Products Fund - Growth Portfolio
4,323,501.839 shares (cost $94,106,907)............................ 93,776,755 - - -
Variable Insurance Products Fund - Overseas Portfolio
3,668,833.043 shares (cost $59,120,170)............................ 57,490,613 - - -
Variable Insurance Products Fund II - Investment Grade Bond Portfolio
1,104,994.026 shares (cost $12,691,756)............................ 12,177,034 - - -
Variable Insurance Products Fund II - Asset Manager Portfolio
8,776,895.992 shares (cost $125,226,616)........................... 121,033,395 - - -
Fidelity Daily Income Trust -
557,335.852 shares (cost $557,336)................................. 557,336 - - -
Fidelity Cash Reserves -
81,846.280 shares (cost $81,846)................................... 81,846 - - -
Fidelity Government Securities Fund, Ltd. -
3,318.854 shares (cost $31,795).................................... 30,434 - - -
Fidelity Capital and Income Fund -
23,789.791 shares (cost $206,681).................................. 205,306 - - -
------------ ----------- ---------- -----------
Total Assets........................................................... $637,425,251 145,199,658 42,114,086 164,338,521
============ =========== ========== ===========
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Contract Terminations Payable.......................................... $ 402,296 358,976 - -
Accrued Mortality Risk (Note 4)........................................ 415,224 96,704 25,756 107,064
------------ ----------- ---------- -----------
Total Liabilities...................................................... 817,520 455,680 25,756 107,064
Contract Owners' Equity:
Deferred annuity contracts terminable by owners (Notes 2 and 5).......... 636,607,731 144,743,978 42,088,330 164,231,457
------------ ----------- ---------- -----------
$637,425,251 145,199,658 42,114,086 164,338,521
============ =========== ========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
2
<PAGE>
<TABLE>
<CAPTION>
Fidelity Fidelity Fidelity
Daily Fidelity Government Capital and
Investment Asset Income Cash Securities Income
Growth Overseas Grade Bond Manager Trust Reserves Fund, Ltd. Fund
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
335,768 - 75,928 6,908 - - 1,154 509
- - - - - - - -
- - - - - - - -
- - - - - - - -
93,776,755 - - - - - - -
- 57,490,613 - - - - - -
- - 12,177,034 - - - - -
- - - 121,033,395 - - - -
- - - - 557,336 - - -
- - - - - 81,846 - -
- - - - - - 30,434 -
- - - - - - - 205,306
---------- ---------- ---------- ----------- ------- ------ ------ -------
94,112,523 57,490,613 12,252,962 121,040,303 557,336 81,846 31,588 205,815
========== ========== ========== =========== ======= ====== ====== =======
- 42,448 - - 359 513 - -
57,939 38,363 8,158 81,240 - - - -
---------- ---------- ---------- ----------- ------- ------ ------ -------
57,939 80,811 8,158 81,240 359 513 - -
94,054,584 57,409,802 12,244,804 120,959,063 556,977 81,333 31,588 205,815
---------- ---------- ---------- ----------- ------- ------ ------ -------
94,112,523 57,490,613 12,252,962 121,040,303 557,336 81,846 31,588 205,815
========== ========== ========== =========== ======= ====== ====== =======
</TABLE>
3
<PAGE>
THE FIDELITY VARIABLE ANNUITY ACCOUNT
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Year Ended December 31, 1994
<TABLE>
<CAPTION>
Money High Equity
Market Income Income
Total Subaccount Subaccount Subaccount
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME (LOSS)
Income:
Dividends............................................................... $17,044,527 5,285,592 4,114,395 3,812,070
Expenses:
Administrative Fee (Note 4)............................................. 340,599 64,413 22,471 92,036
Mortality and expense risk charge (Note 4).............................. 5,107,341 987,046 397,926 1,242,424
----------- ----------- ---------- ----------
Net investment income (loss)............................................ 11,596,587 4,234,133 3,693,998 2,477,610
----------- ----------- ---------- ----------
NET REALIZED AND UNREALIZED CAPITAL GAIN (LOSS) FROM INVESTMENTS
Net realized capital gain (loss) from sales of investments:
Proceeds from sales..................................................... 404,071,314 121,670,069 59,788,039 34,789,414
Cost of investments sold................................................ 382,234,531 121,670,069 59,744,324 27,377,527
----------- ----------- ---------- ----------
21,836,783 - 43,715 7,411,887
Capital gain dividends.................................................. 19,428,519 - 2,085,378 7,327,321
----------- ----------- ---------- ----------
Net realized capital gain (loss)................................... 41,265,302 - 2,129,093 14,739,208
----------- ----------- ---------- ----------
Net change in unrealized appreciation (depreciation) of investments:
Beginning of the period................................................. 57,196,405 - 5,177,219 20,305,050
End of the period....................................................... 3,434,817 - (1,595,528) 11,700,733
----------- ----------- ---------- ----------
Net change in unrealized appreciation
(depreciation) of investments...................................... (53,761,588) - (6,772,747) (8,604,317)
----------- ----------- ---------- ----------
Net realized and unrealized capital gain (loss) from investments... (12,496,286) - (4,643,654) 6,134,891
----------- ----------- ---------- ----------
INCREASE (DECREASE) FROM OPERATIONS......................................... $ (899,699) 4,234,133 (949,656) 8,612,501
=========== =========== ========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
4
<PAGE>
<TABLE>
<CAPTION>
Fidelity
Fidelity Fidelity Investment Fidelity
Daily Fidelity Government Grade Capital and
Investment Asset Income Cash Securities Bond Income
Growth Overseas Grade Bond Manager Trust Reserves Fund, Ltd. Fund Fund
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
----------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
482,245 333,647 - 2,963,557 20,338 3,143 2,225 1,998 25,317
55,017 27,910 5,752 72,264 420 127 35 - 154
700,922 531,816 108,983 1,138,224 - - - - -
----------- ---------- ---------- ----------- ------- ------ ------- ------- --------
(273,694) (226,079) (114,735) 1,753,069 19,918 3,016 2,190 1,998 25,163
----------- ---------- ---------- ----------- ------- ------ ------- ------- --------
61,114,116 63,649,976 11,795,007 50,830,885 77,643 4,943 199,516 40,738 110,968
56,640,318 58,294,909 12,222,359 45,882,891 77,643 4,943 199,283 39,892 80,373
----------- ---------- ---------- ----------- ------- ------ ------- ------- --------
4,473,798 5,355,067 (427,352) 4,947,994 - - 233 846 30,595
5,103,755 - 42,627 4,868,701 - - 66 671 -
----------- ---------- ---------- ----------- ------- ------ ------- ------- --------
9,577,553 5,355,067 (384,725) 9,816,695 - - 299 1,517 30,595
----------- ---------- ---------- ----------- ------- ------ ------- ------- --------
10,180,317 3,448,859 (304,636) 18,311,341 - - 2,080 5,504 70,671
(330,152) (1,629,557) (514,722) (4,193,221) - - (1,361) - (1,375)
----------- ---------- ---------- ----------- ------- ------ ------- ------- --------
(10,510,469) (5,078,416) (210,086) (22,504,562) - - (3,441) (5,504) (72,046)
----------- ---------- ---------- ----------- ------- ------ ------- ------- --------
(932,916) 276,651 (594,811) (12,687,867) - - (3,142) (3,987) (41,451)
----------- ---------- ---------- ----------- ------- ------ ------- ------- --------
(1,206,610) 50,572 (709,546) (10,934,798) 19,918 3,016 (952) (1,989) (16,288)
=========== ========== ========== =========== ======= ====== ======= ======= ========
</TABLE>
5
<PAGE>
THE FIDELITY VARIABLE ANNUITY ACCOUNT
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
Years Ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
MONEY HIGH
MARKET INCOME
TOTAL SUBACCOUNT SUBACCOUNT
------------------------------- ---------------------------- ---------------------------
1994 1993 1994 1993 1994 1993
------------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operations
Net investment
income (loss)........... $ 11,596,587 8,397,343 4,234,133 2,034,081 3,693,998 3,027,674
Net realized capital
gain (loss)............. 41,265,302 23,820,180 - - 2,129,093 4,114,734
Net change in
unrealized
appreciation
(depreciation).......... (53,761,588) 37,440,830 - - (6,772,747) 2,879,380
------------- ----------- ----------- ---------- ---------- ----------
Increase (decrease)
from operations......... (899,699) 69,658,353 4,234,133 2,034,081 (949,656) 10,021,788
------------- ----------- ----------- ---------- ---------- ----------
Contract Transactions
Net contract
purchase
payments (Note 5)..... 62,285,269 205,399,532 9,120,437 17,940,251 3,369,795 14,778,479
Transfers between
funds................. - - 67,470,241 (27,673,332) (22,995,715) (509,396)
Contract
terminations,
withdrawals, and
other deductions...... (41,145,719) (21,905,680) (18,186,396) (7,760,730) (2,241,305) (2,354,797)
------------- ----------- ----------- ---------- ---------- ----------
Increase (decrease)
from contract
transactions.......... 21,139,550 183,493,852 58,404,282 (17,493,811) (21,867,225) 11,914,286
------------- ----------- ----------- ---------- ---------- ----------
Net increase
(decrease) in
contract owners'
equity................ 20,239,851 253,152,205 62,638,415 (15,459,730) (22,816,881) 21,936,074
Contract Owners'
Equity
Beginning of
period.................. 616,367,880 363,215,675 82,105,563 97,565,293 64,905,211 42,969,137
------------- ----------- ----------- ---------- ---------- ----------
End of period............. $ 636,607,731 616,367,880 144,743,978 82,105,563 42,088,330 64,905,211
============= =========== =========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
EQUITY
INCOME GROWTH
SUBACCOUNT SUBACCOUNT
----------------------------- ---------------------------
1994 1993 1994 1993
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Operations
Net investment
income (loss)........... 2,477,610 2,326,644 (273,694) (285,302)
Net realized capital
gain (loss)............. 14,739,208 5,293,638 9,577,553 9,695,864
Net change in
unrealized
appreciation
(depreciation).......... (8,604,317) 10,915,679 (10,510,469) 3,876,333
----------- ----------- ---------- ----------
Increase (decrease)
from operations......... 8,612,501 8,535,961 (1,206,610) 13,286,895
----------- ----------- ---------- ----------
Contract Transactions
Net contract
purchase
payments (Note 5)..... 12,038,431 44,591,441 6,686,141 20,576,076
Transfers between
funds................. 3,244,268 (595,408) (1,233,845) (17,565,537)
Contract
terminations,
withdrawals, and
other deductions...... (5,994,171) (3,995,275) (3,645,699) (2,299,059)
----------- ----------- ---------- ----------
Increase (decrease)
from contract
transactions.......... 9,288,528 40,000,758 1,806,597 711,480
----------- ----------- ---------- ----------
Net increase
(decrease) in
contract owners'
equity................ 17,901,029 58,536,719 599,987 13,998,375
Contract Owners'
Equity
Beginning of
period.................. 146,330,428 87,793,709 93,454,597 79,456,222
----------- ----------- ---------- ----------
End of period............. 164,231,457 146,330,428 94,054,584 93,454,597
=========== =========== ========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
6
<PAGE>
<TABLE>
<CAPTION>
FIDELITY
DAILY
INVESTMENT ASSET INCOME
OVERSEAS GRADE BOND MANAGER TRUST
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------------------- ------------------------- --------------------------- ---------------------
1994 1993 1994 1993 1994 1993 1994 1993
---------- ---------- ---------- ---------- ----------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(226,079) (141,434) (114,735) 835,044 1,753,069 549,357 19,918 15,257
5,355,067 2,467,950 (384,725) 536,999 9,816,695 1,683,872 - -
(5,078,416) 4,119,853 (210,086) (10,839) (22,504,562) 15,636,686 - -
---------- ---------- ---------- ---------- ----------- ----------- ------- -------
50,572 6,446,369 (709,546) 1,361,204 (10,934,798) 17,869,915 19,918 15,257
---------- ---------- ---------- ---------- ----------- ----------- ------- -------
9,930,629 18,588,457 1,399,181 7,816,192 19,629,724 81,108,636 110,931 -
(9,356,057) 28,842,183 (4,916,111) (1,555,163) (32,141,231) 19,240,958 (10,000) (47,666)
(1,920,604) (672,359) (1,077,700) (612,655) (8,048,389) (3,950,172) (9,000) (190,050)
---------- ---------- ---------- ---------- ----------- ----------- ------- -------
(1,346,032) 46,758,281 (4,594,630) 5,648,374 (20,559,896) 96,399,422 91,931 (237,716)
---------- ---------- ---------- ---------- ----------- ----------- ------- -------
(1,295,460) 53,204,650 (5,304,176) 7,009,578 (31,494,694) 114,269,337 111,849 (222,459)
58,705,262 5,500,612 17,548,980 10,539,402 152,453,757 38,184,420 445,128 667,587
---------- ---------- ---------- ---------- ----------- ----------- ------- -------
57,409,802 58,705,262 12,244,804 17,548,980 120,959,063 152,453,757 556,977 445,128
========== ========== ========== ========== =========== =========== ======= =======
</TABLE>
<TABLE>
<CAPTION>
FIDELITY
FIDELITY INVESTMENT FIDELITY
FIDELITY GOVERNMENT GRADE CAPITAL AND
CASH SECURITIES BOND INCOME
RESERVES FUND, LTD. FUND FUND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------------------- ------------------------- --------------------------- ---------------------
1994 1993 1994 1993 1994 1993 1994 1993
---------- ---------- ---------- ---------- ----------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
3,016 2,777 2,190 1,161 1,998 2,929 25,163 29,155
- - 299 897 1,517 1 30,595 26,225
- - (3,441) 605 (5,504) 3,047 (72,046) 20,086
---------- ---------- ---------- ---------- ----------- ----------- ------- -------
3,016 2,777 (952) 2,663 (1,989) 5,977 (16,288) 75,466
---------- ---------- ---------- ---------- ----------- ----------- ------- -------
- - - - - - - -
- - - - (40,730) - (20,820) (136,639)
(4,801) (50,414) 121 - (32) - (17,743) (20,169)
---------- ---------- ---------- ---------- ----------- ----------- ------- -------
(4,801) (50,414) 121 - (40,762) - (38,563) (156,808)
---------- ---------- ---------- ---------- ----------- ----------- ------- -------
(1,785) (47,637) (831) 2,663 (42,751) 5,977 (54,851) (81,342)
83,118 130,755 32,419 29,756 42,751 36,774 260,666 342,008
---------- ---------- ---------- ---------- ----------- ----------- ------- -------
81,333 83,118 31,588 32,419 - 42,751 205,815 260,666
========== ========== ========== ========== =========== =========== ======= =======
</TABLE>
7
<PAGE>
THE FIDELITY VARIABLE ANNUITY ACCOUNT
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1994
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization-The Fidelity Variable Annuity Account ("Variable Account") is a
segregated investment account of PFL Life Insurance Company ("PFL Life"), an
indirect, wholly-owned subsidiary of AEGON USA, Inc. ("AUSA"), a holding
company. AUSA is an indirect, wholly-owned subsidiary of AEGONnv, a holding
company organized under the laws of The Netherlands.
The Variable Account is registered with the Securities and Exchange
Commission as a Unit Investment Trust pursuant to provisions of the
Investment Company Act of 1940.
The Fidelity Investment Grade Bond Fund Subaccount was previously referred to as
the Fidelity Flexible Bond Fund Subaccount in the 1993 financial statements. As
of December 31, 1994, this subaccount had no assets or liabilities.
Investments-Net purchase payments received by the Variable Account are
invested in the portfolios of the eligible mutual funds, Variable Insurance
Products Fund and Variable Insurance Products Fund II ("VIPF II"), as
selected by the contract owner. Variable Insurance Products Fund, formerly
known as Fidelity Cash Reserves II, was established on April 1, 1982 to
comply with the Internal Revenue Service guidelines for tax-deferred variable
annuity contracts. Transfers into the portfolios of the eligible Funds are
permitted from the formerly eligible funds. Transfers into the formerly eligible
funds are permitted only on deposits made prior to 1981. Investments are stated
at the closing net asset values per share as of December 31, 1994.
Realized capital gains and losses from sale of shares in the mutual funds are
determined on the first-in, first-out basis. Investment transactions are
accounted for on the trade date (date the order to buy or sell is executed) and
dividend income is recorded on the ex-dividend date. Unrealized gains or losses
from investments in the mutual funds are credited or charged to contract owners'
equity.
Dividend Income-Dividends received from the mutual fund investments are
reinvested to purchase additional mutual fund shares.
2. CONTRACT OWNERS' EQUITY
The January 1, 1993 contract owners' equity has been restated to include the
then current value of PFL Life's initial capital contribution. In total,
contract owners' equity was increased $255,886, substantially all of which is
related to the Money Market Subaccount. At December 31, 1994, contract owners'
equity includes an amount of $271,006, which represents the current value of PFL
Life's initial capital contribution.
A summary of deferred annuity contracts terminable by owners at December 31,
1994 follows:
<TABLE>
<CAPTION>
ACCUMULATION
ACCUMULATION UNIT TOTAL
SUBACCOUNT UNITS OWNED VALUE CONTRACT VALUE
- ---------- -------------- --------- --------------
<S> <C> <C> <C>
Variable Insurance Products Fund-Money Market .............. 65,884,206.476 $2.196945 $144,743,978
Variable Insurance Products Fund-High Income ............... 17,337,052.330 2.427652 42,088,330
Variable Insurance Products Fund-Equity Income ............. 74,571,142.757 2.202346 164,231,457
Variable Insurance Products Fund-Growth .................... 37,916,994.644 2.480539 94,054,584
Variable Insurance Products Fund-Overseas .................. 35,747,520.597 1.605980 57,409,802
Variable Insurance Products Fund II-Investment Grade Bond... 8,539,290.351 1.433937 12,244,804
Variable Insurance Products Fund II-Asset Manager .......... 76,955,562.944 1.571804 120,959,063
Fidelity Daily Income Trust................................. 190,668.116 2.921185 556,977
Fidelity Cash Reserves...................................... 27,720.506 2.934039 81,333
Fidelity Government Securities Fund, Ltd.................... 8,076.564 3.911039 31,588
Fidelity Capital and Income Fund............................ 35,622.255 5.777672 205,815
------------
$636,607,731
============
</TABLE>
8
<PAGE>
THE FIDELITY VARIABLE ANNUITY ACCOUNT
- --------------------------------------------------------------------------------
A summary of changes in contract owner's account units follows:
<TABLE>
<CAPTION>
Investment
Money High Equity Grade
Market Income Income Growth Overseas Bond
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding
at 1/1/93.................... 47,043,904 20,668,832 49,654,519 37,625,504 4,705,939 7,725,407
Units purchased.................. 8,542,964 6,497,089 23,079,714 8,937,971 12,656,941 5,413,093
Units redeemed and transferred... (16,931,602) (1,051,790) (2,159,602) (9,193,774) 19,527,486 (1,453,218)
---------- ---------- ---------- ---------- ---------- ----------
Units outstanding
at 12/31/93.................. 38,655,266 26,114,131 70,574,631 37,369,701 36,890,366 11,685,282
Units purchased.................. 4,152,571 1,393,573 5,628,529 2,701,508 6,073,666 940,153
Units redeemed and transferred... 23,076,369 (10,170,652) (1,632,017) (2,154,214) (7,216,511) (4,086,145)
---------- ---------- ---------- ---------- ---------- ----------
Units outstanding
at 12/31/94.................. 65,884,206 17,337,052 74,571,143 37,916,995 35,747,521 8,539,290
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Fidelity
Fidelity Fidelity Investment Fidelity
Daily Fidelity Government Grade Capital and
Asset Income Cash Securities Bond Income
Manager Trust Reserves Fund, Ltd. Fund Fund
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding
at 1/1/93.................... 27,180,038 243,997 47,677 8,094 10,104 70,510
Units purchased.................. 53,248,545 - - - - -
Units redeemed and transferred... 9,935,429 (85,721) (18,233) (9) (2) (27,501)
----------- -------- -------- -------- -------- --------
Units outstanding
at 12/31/93.................. 90,364,012 158,276 29,444 8,085 10,102 43,009
Units purchased.................. 11,630,547 39,217 - - - -
Units redeemed and transferred... (25,038,996) (6,825) (1,723) (8) (10,102) (7,387)
----------- -------- -------- -------- -------- --------
Units outstanding
at 12/31/94.................. 76,955,563 190,668 27,721 8,077 - 35,622
=========== ======== ======== ======== ======== ========
</TABLE>
3. TAXES
Operations of the Variable Account form a part of PFL Life, which is taxed as
a life insurance company under Subchapter L of the Internal Revenue Code of
1986, as amended (the "Code"). The operations of the Variable Account are
accounted for separately from other operations of PFL Life for purposes of
federal income taxation. The Variable Account is not separately taxable as a
regulated investment company under Subchapter M of the Code and is not
otherwise taxable as an entity separate from PFL Life. Under existing federal
income tax laws, the income of the Variable Account, to the extent applied to
increase reserves under the variable annuity contracts, is not taxable to PFL
Life.
4. ADMINISTRATIVE AND MORTALITY RISK CHARGE
Administrative charges include an annual charge of $35 per contract. Charges
for administrative fees to the variable annuity contracts are an expense of
the Variable Account.
PFL Life deducts a daily charge equal to an annual rate of 0.8% of the value
of the contract owners' individual account of the eligible funds as a charge
for assuming the mortality and expense risk.
9
<PAGE>
THE FIDELITY VARIABLE ANNUITY ACCOUNT
- --------------------------------------------------------------------------------
5. NET ASSETS
At December 31, 1994 contract owners' equity was comprised of:
<TABLE>
<CAPTION>
Investment
Money High Equity Grade
Market Income Income Growth Overseas Bond
Total Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
------------ ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Unit transactions,
accumulated
net investment
income and
realized capital
gains................. $633,172,914 144,743,978 43,683,858 152,530,724 94,384,736 59,039,359 12,759,526
Adjustment for
appreciation
(depreciation) to
market value.......... 3,434,817 - (1,595,528) 11,700,733 (330,152) (1,629,557) (514,722)
------------ ----------- ---------- ----------- ---------- ---------- ----------
Total Contract
Owners' Equity........ $636,607,731 144,743,978 42,088,330 164,231,457 94,054,584 57,409,802 12,244,804
============ =========== ========== =========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Fidelity Fidelity Fidelity
Daily Fidelity Government Capital and
Asset Income Cash Securities Income
Manager Trust Reserves Fund, Ltd. Fund
Subaccount Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Unit transactions,
accumulated
net investment
income and
realized capital
gains................. 125,152,284 556,977 81,333 32,949 207,190
Adjustment for
appreciation
(depreciation) to
market value.......... (4,193,221) - - (1,361) (1,375)
----------- ------- ------ ------ -------
Total Contract
Owners' Equity........ 120,959,063 556,977 81,333 31,588 205,815
=========== ======= ====== ====== =======
</TABLE>
6. PURCHASES AND SALES OF INVESTMENT SECURITIES
The aggregate cost of purchases and proceeds from sales of investments were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1994 1993
----------------------------- ---------------------------
PURCHASES SALES PURCHASES SALES
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Variable Insurance Products Fund-Money Market Portfolio............... $ 184,706,003 $ 121,670,069 $ 56,286,041 $ 71,754,448
Variable Insurance Products Fund-High Income Portfolio................ 43,563,970 59,788,039 63,817,549 48,615,179
Variable Insurance Products Fund-Equity Income Portfolio.............. 53,686,271 34,789,414 60,250,742 17,888,886
Variable Insurance Products Fund-Growth Portfolio..................... 67,390,261 61,114,116 60,196,095 58,413,778
Variable Insurance Products Fund-Overseas Portfolio................... 62,112,924 63,649,976 73,857,941 27,172,233
Variable Insurance Products Fund II-Investment Grade Bond Portfolio... 7,045,524 11,795,007 18,750,671 12,167,295
Variable Insurance Products Fund II-Asset Manager Portfolio........... 36,879,077 50,830,885 102,102,801 4,143,677
Fidelity Daily Income Trust........................................... 189,204 77,643 15,744 238,238
Fidelity Cash Reserves................................................ 3,143 4,943 2,977 50,593
Fidelity Government Securities Fund, Ltd. ............................ 202,290 199,516 2,777 35
Fidelity Investment Grade Bond Fund................................... 2,484 40,738 2,944 8
Fidelity Capital and Income Fund...................................... 96,801 110,968 29,087 157,031
------------ ------------ ------------ ------------
$455,877,952 $404,071,314 $435,315,369 $240,601,401
============ ============ ============ ============
</TABLE>
10
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
PFL Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of PFL Life
Insurance Company as of December 31, 1994 and 1993, and the related statutory-
basis statements of operations, capital and surplus and cash flows for each of
the three years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The Company presents its financial statements in conformity with the
accounting practices prescribed or permitted by the Insurance Division of the
Commerce Department of the State of Iowa. The variances between such practices
and generally accepted accounting principles are described in Note 1. The
effects of these variances have not been determined but we believe they are
material.
In our opinion, because of the materiality of the effects of the variances
between generally accepted accounting principles and the accounting practices
referred to in the preceding paragraph, the financial statements referred to
above are not intended to and do not present fairly, in conformity with
generally accepted accounting principles, the financial position of PFL Life
Insurance Company at December 31, 1994 and 1993, or the results of its
operations or its cash flows for each of the three years in the period ended
December 31, 1994.
1
<PAGE>
[LOGO OF ERNST & YOUNG LLP APPEARS HERE]
Also, in our opinion, the financial statements referred to above present
fairly, in all material respects, the admitted assets, liabilities and capital
and surplus of PFL Life Insurance Company at December 31, 1994 and 1993, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1994 in conformity with accounting practices
prescribed or permitted by the Insurance Division of the Commerce Department of
the State of Iowa.
/s/ Ernst & Young LLP
Des Moines, Iowa
February 17, 1995
2
<PAGE>
PFL LIFE INSURANCE COMPANY
BALANCE SHEETS--STATUTORY BASIS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1994 1993
---------- ----------
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments........................ $ 34,062 $ 18,135
Bonds (Note 2)......................................... 4,094,407 3,511,009
Stocks (Note 2):
Preferred............................................ 12,667 14,002
Common (cost: 1994--$15,812; 1993--$14,653).......... 16,754 18,651
Affiliated entities (cost: 1994--$13,155; 1993--
$14,705)............................................ 26,530 48,226
Mortgage loans on real estate (Note 2)................. 527,410 415,829
Real estate, at cost less accumulated depreciation and
encumbrances ($12,318 in 1994; $12,728 in 1993):
Home office properties............................... 21,226 12,791
Properties acquired in satisfaction of debt.......... 10,381 13,222
Investment properties................................ 45,859 45,682
Policy loans........................................... 51,798 48,596
Other invested assets.................................. 4,593 5,289
---------- ----------
Total cash and invested assets......................... 4,845,687 4,151,432
Premiums deferred and uncollected........................ 18,386 18,877
Accrued investment income................................ 61,969 56,852
Receivable from affiliates............................... 31,843 31,478
Federal income taxes recoverable (Note 4)................ 10,274 --
Other assets (Note 8).................................... 29,441 32,569
Separate account assets.................................. 1,120,391 907,255
---------- ----------
Total admitted assets.................................. $6,117,991 $5,198,463
========== ==========
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1994 1993
---------- ----------
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life................................................. $ 557,624 $ 475,503
Annuity.............................................. 3,763,714 3,183,571
Accident and health.................................. 99,240 81,635
Policy and contract claim reserves:
Life................................................. 7,493 8,540
Accident and health.................................. 66,407 61,643
Other policyholders' funds............................. 5,494 3,207
Remittances and items not allocated.................... 35,415 19,238
Federal income taxes payable (Note 4).................. -- 5,824
Asset valuation reserve (Note 1)....................... 37,975 44,015
Interest maintenance reserve (Note 1).................. 22,826 36,487
Other liabilities (Note 8)............................. 73,071 56,774
Separate account liabilities........................... 1,120,391 907,255
---------- ----------
Total liabilities...................................... 5,789,650 4,883,692
Commitments and contingencies (Notes 3 and 8)
Capital and surplus (Note 6):
Common stock, $10 par value, 500 shares authorized, 266
issued and outstanding................................ 2,660 2,660
Paid-in surplus........................................ 114,129 99,129
Unassigned surplus..................................... 211,552 212,982
---------- ----------
Total capital and surplus.............................. 328,341 314,771
---------- ----------
Total liabilities and capital and surplus.............. $6,117,991 $5,198,463
========== ==========
</TABLE>
See accompanying notes.
4
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations, net of
reinsurance:
Life................................... $ 148,954 $ 98,670 $ 93,360
Annuity................................ 1,067,406 740,787 492,426
Accident and health.................... 230,889 266,789 263,540
Net investment income (Note 2)........... 343,880 322,393 315,416
Amortization of interest maintenance
reserve (Note 1)........................ 2,871 2,674 481
Commissions and expense allowances on
reinsurance ceded....................... 94,635 62,584 53,688
---------- ---------- ----------
1,888,635 1,493,897 1,218,911
Benefits and expenses:
Death, surrender and other life insurance
and annuity benefits.................... 499,120 298,457 212,371
Accident and health benefits............. 107,882 132,044 135,400
Increase in aggregate reserves for
policies and contracts:
Life................................... 82,062 26,703 29,441
Annuity................................ 580,564 254,593 375,219
Accident and health.................... 22,144 19,216 16,552
Commissions.............................. 215,635 198,251 181,644
General insurance expenses............... 52,166 53,367 51,480
Taxes, licenses and fees................. 15,368 10,781 10,606
Transfer to separate account............. 243,806 414,819 131,512
Other expenses........................... 1,014 814 2,875
---------- ---------- ----------
1,819,761 1,409,045 1,147,100
---------- ---------- ----------
Gain from operations before federal income
taxes and net realized capital losses on
investments............................... 68,874 84,852 71,811
Federal income tax expense (Note 4)........ 23,858 31,667 24,052
---------- ---------- ----------
Gain from operations before net realized
capital losses on investments............. 45,016 53,185 47,759
Net realized capital losses on investments
(net of related federal income taxes and
transfer to interest maintenance reserve)
(Note 2).................................. (3,624) (451) (1,407)
---------- ---------- ----------
Net income................................. $ 41,392 $ 52,734 $ 46,352
========== ========== ==========
</TABLE>
See accompanying notes.
5
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF CAPITAL AND SURPLUS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Common stock, at beginning and end of year....... $ 2,660 $ 2,660 $ 2,660
Paid-in surplus:
Beginning of year.............................. 99,129 99,129 99,129
Capital contribution (Note 7).................. 15,000 -- --
-------- -------- --------
End of year...................................... 114,129 99,129 99,129
Unassigned surplus:
Beginning of year.............................. 212,982 213,665 213,038
Net income..................................... 41,392 52,734 46,352
Net change in unrealized capital gains/losses.. (25,350) 1,719 254
Change in non-admitted assets.................. (248) (5) 44
Change in asset valuation reserve.............. 6,040 (10,773) (7,354)
Surplus effect of mergers (Note 1)............. -- -- 6,364
Surplus effect of sale of division (Note 1).... -- (862) --
Surplus effect of ceding commissions associated
with the sale of a division (Note 1).......... 184 -- --
Cancellation of coinsurance agreements (Note
1)............................................ -- (288) 877
Amendment of reinsurance agreement (Note 1).... 391 -- --
Dividends to stockholder (Note 6).............. (20,900) (46,000) (31,200)
Prior period adjustment (Notes 4 and 8)........ (3,444) 452 (13,791)
Change in liability for reinsurance in
unauthorized companies........................ 505 2,340 (919)
-------- -------- --------
End of year...................................... 211,552 212,982 213,665
-------- -------- --------
Total capital and surplus........................ $328,341 $314,771 $315,454
======== ======== ========
</TABLE>
See accompanying notes.
6
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1994 1993 1992
----------- ----------- ----------
<S> <C> <C> <C>
SOURCES OF CASH
Net cash provided by operations:
Premiums and other considerations, net
of reinsurance........................ $ 1,547,797 $ 1,169,096 $ 898,953
Net investment income.................. 339,856 326,480 318,076
----------- ----------- ----------
1,887,653 1,495,576 1,217,029
Life and accident and health claims.... (137,602) (159,968) (158,039)
Surrender benefits and other fund with-
drawals............................... (392,064) (217,998) (144,230)
Other benefits to policyholders........ (73,237) (50,180) (42,699)
Commissions, other expenses and other
taxes................................. (288,151) (264,124) (244,208)
Net transfers to separate accounts..... (243,806) (414,819) (131,512)
Dividends to policyholders............. (1,155) (1,200) (1,374)
Federal income taxes, excluding tax on
capital gains and IRS settlements..... (39,864) (32,548) (2,728)
Increase in policy loans............... (3,202) (677) (3,497)
----------- ----------- ----------
(1,179,081) (1,141,514) (728,287)
----------- ----------- ----------
Net cash provided by operations.......... 708,572 354,062 488,742
Proceeds from investments sold, matured
or repaid:
Bonds and preferred stocks............. 1,430,339 1,532,807 1,418,990
Common stocks.......................... 12,941 11,121 11,132
Mortgage loans on real estate.......... 43,495 47,460 25,480
Real estate............................ 9,536 8,286 1,112
Other proceeds......................... 189 1,407 2,691
----------- ----------- ----------
Total cash from investments.............. 1,496,500 1,601,081 1,459,405
Capital contribution (Note 7)............ 15,000 --
Cash received as the result of coinsur-
ance cancellations (Note 1)............. -- 114 23,471
Cash received in connection with mergers
(Note 1)................................ -- -- 675
Dividend from subsidiary (Note 7)........ 10,000 -- --
Cash received from ceding commissions as-
sociated with the sale of a division
(Note 1)................................ 284 -- --
Other cash provided...................... 45,799 12,457 30,849
----------- ----------- ----------
Total sources of cash.................... 2,276,155 1,967,714 2,003,142
</TABLE>
7
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1994 1993 1992
----------- ----------- ----------
<S> <C> <C> <C>
APPLICATIONS OF CASH
Cost of investments acquired:
Bonds and preferred stocks............. 2,043,615 1,846,839 1,697,452
Common stocks.......................... 11,228 18,832 10,471
Mortgage loans on real estate.......... 160,068 94,557 73,508
Real estate............................ 14,801 8,587 2,961
Other invested assets.................. 664 347 720
----------- ----------- ----------
Total investments acquired............... 2,230,376 1,969,162 1,785,112
Dividends to stockholder (Note 6)........ 20,900 46,000 31,200
Cash transferred as the result of sale of
division (Note 1)....................... -- 8,773 -
Other cash applied....................... 8,952 46,504 88,948
----------- ----------- ----------
Total applications of cash............... 2,260,228 2,070,439 1,905,260
----------- ----------- ----------
Net change in cash and short-term invest-
ments................................... 15,927 (102,725) 97,882
Cash and short-term investments at begin-
ning of year............................ 18,135 120,860 22,978
----------- ----------- ----------
Cash and short-term investments at end of
year.................................... $ 34,062 $ 18,135 $ 120,860
=========== =========== ==========
</TABLE>
See accompanying notes.
8
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1994
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
PFL Life Insurance Company (the Company) is a stock life insurance company
and is a wholly-owned subsidiary of First AUSA Life Insurance Company (AUSA),
which is an indirect wholly-owned subsidiary of AEGON nv, a holding company
organized under the laws of The Netherlands. The financial statements presented
herein are prepared on the statutory accounting principles basis for the
Company only; as such, the accounts of the Company's wholly-owned subsidiary,
Equity National Life Insurance Company (Equity National), are not consolidated
with those of the Company.
In connection with the sale of certain affiliated companies by AUSA, the
Company has assumed various blocks of business from these former affiliates
through mergers. In addition, the Company has cancelled or entered into several
coinsurance agreements with affiliates and non-affiliates. The following is a
description of those transactions:
. On January 1, 1994, the Company revised a reinsurance agreement with
a non-affiliate (primarily group health business). As a result, the
Company transferred $3,881 in assets and $4,080 in liabilities. The
difference between the assets and liabilities of $199, plus a tax
credit of $192, was credited directly to unassigned surplus.
. During 1993, the Company sold the Oakbrook Division (primarily group
health business). The initial transfer of risk occurred through an
indemnity reinsurance agreement. The policies will then be assumed by
the reinsurer by novation as state regulatory and policyholder
approvals are received. In addition, the Company will receive from
the third party administrator a ceding commission of one percent of
the premiums collected between January 1, 1994 and December 31, 1996.
As a result of the sale, in 1993, the Company transferred $12,094 in
assets including $8,773 in cash and short-term investments and
$10,570 in liabilities to the assuming company. The difference
between the assets and liabilities transferred, net of a tax effect
of $662, was charged directly to unassigned surplus. The income
statement for 1993 includes revenues of $53,558 and net income of
$2,839 earned by the division prior to its sale. During 1994, the
Company received $284 for ceding commissions; the commissions net of
the related tax effect of $100 was credited directly to unassigned
surplus.
9
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
. During 1993, the Company cancelled several coinsurance agreements
with affiliated and non-affiliated companies. As a result of the
cancellations with affiliates, the Company received $1,006 in assets,
and $1,051 in liabilities. As a result of the cancellations with non-
affiliates, the Company received $6,736 in assets, including $114 in
cash and short-term investments, and $7,131 in liabilities. The
difference between the assets and liabilities, net of a tax effect of
$152, was charged directly to surplus.
. During 1992, the Company cancelled several coinsurance agreements
with affiliates. As a result of the cancellations, the Company
transferred $8,199 in assets, including $358 in cash and short-term
investments, and $10,986 in liabilities to affiliates. Also in 1992,
the Company entered into a reinsurance agreement with an affiliate
and received $23,474 in assets including $23,471 in cash and short-
term investments, and $24,934 in liabilities. The net effect of these
transactions, net of the related tax effect, was credited directly to
unassigned surplus.
. In 1991, the majority of the assets, liabilities and capital and
surplus of Pacific Fidelity Life Insurance Company (PFL) and National
Old Line Insurance Company, Inc. (NOL) (affiliated companies) were
merged into the Company. In 1992, the remaining assets, liabilities
and capital and surplus of $36,984, $30,620 and $6,364, respectively,
were merged into the Company. Revenues and net income of this
remaining merged business are not significant to current or prior
years' operations.
Basis of Presentation
The accompanying statutory-basis financial statements have been prepared in
accordance with accounting practices prescribed or permitted by the Insurance
Division of the Commerce Department of the State of Iowa, which are designed
primarily to reflect the Company's ability to meet obligations to policyholders.
Statutory insurance accounting principles differ in many respects from generally
accepted accounting principles (GAAP) followed by other business enterprises in
determining financial position, and results of operations. The effects of such
variances from GAAP have not been determined. Accordingly, the accompanying
statutory-basis financial statements are not intended to present financial
position, results of operations and cash flows in conformity with GAAP. Pursuant
to statutory requirements: (a) bonds are generally carried at amortized cost
rather than segregating the portfolio into held-to-maturity (carried at
amortized cost), available-for-sale (carried at fair value), and trading
(carried at fair value) classifications; (b) premium income on life policies is
recognized over the premium paying period of the policies and premium income on
accident and health policies is recognized over the
10
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
coverage period of the policies, whereas the related acquisition costs such
as commissions and other costs related to acquiring new business are charged to
current operations as incurred; (c) aggregate policy reserves are based on
statutory mortality and interest requirements without consideration of
withdrawals, which may differ from reserves determined using estimates of
mortality, interest and withdrawals; (d) deferred federal income taxes are not
provided for timing differences between the financial statements and the tax
returns; (e) certain assets designated as "non-admitted assets" have been
excluded from the balance sheet by a charge to surplus; (f) the asset valuation
reserve (AVR), which is in the nature of a contingency reserve for possible
losses on investments, is recorded as a liability through a charge to surplus;
(g) net realized capital gains and losses attributable to changes in the level
of market interest rates are deferred and amortized over the remaining life of
the bonds and mortgage loans disposed of rather than being recognized in the
statement of operations in the year of disposition; (h) gross premiums for all
insurance products are considered revenues rather than reporting only various
policy charges and fees for certain long-duration contracts; (i) pension
expense is recorded as amounts are paid; and (j) reinsurance reserve credits
are recorded as a reduction to aggregate policy reserves rather than being
recorded as reinsurance recoverable assets. All pertinent financial statement
disclosures otherwise required under generally accepted accounting principles
are presented herein using the corresponding statutory-basis amounts.
The National Association of Insurance Commissioners (NAIC) currently is in
the process of recodifying statutory accounting practices, the result of which
is expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is expected to be completed in
1996, will likely change, to some extent, prescribed statutory accounting
practices and may result in changes to the accounting practices that the
Company uses to prepare its statutory-basis financial statements.
Fair Values of Financial Instruments
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments", requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparisons to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
11
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents, short-term investments: The carrying amounts
reported in the balance sheet for these instruments approximate their fair
values.
Investment securities: Fair values for fixed maturity securities
(including redeemable preferred stocks) are based on quoted market prices,
where available. For fixed maturity securities not actively traded, fair
values are estimated using values obtained from independent pricing
services or, in the case of private placements, are estimated by
discounting expected future cash flows using a current market rate
applicable to the yield, credit quality, and maturity of the investments.
The fair values for equity securities other than insurance subsidiaries are
based on quoted market prices and are recognized in the balance sheet. Fair
value for the Company's insurance subsidiary is the statutory net book
value of that subsidiary.
Mortgage loans and policy loans: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of the
loans. The fair value of policy loans are assumed to equal their carrying
value.
Investment contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash
flow calculations, based on interest rates currently being offered for
similar contracts with maturities consistent with those remaining for the
contracts being valued.
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure
to changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
The following sets forth a comparison of the fair values and carrying values
of the Company's financial instruments subject to the provisions of Statement
of Financial Accounting Standards No. 107:
12
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------
1994 1993
--------------------- ---------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds (Note 2).................. $4,094,407 $3,952,849 $3,511,009 $3,691,415
Preferred stocks (Note 2)....... 12,667 12,905 14,002 14,622
Common stocks................... 16,754 16,754 18,651 18,651
Affiliated common stock......... 26,530 26,530 48,226 48,226
Mortgage loans on real estate
(Note 2)....................... 527,410 499,350 415,829 432,363
Policy loans.................... 51,798 51,798 48,596 48,596
Cash and short-term investments. 34,062 34,062 18,135 18,135
Separate account assets......... 1,120,391 1,120,391 907,255 907,255
LIABILITIES
Investment contract liabilities
(including separate accounts).. 4,898,221 4,587,228 4,102,845 4,103,903
</TABLE>
Cash and Short-Term Investments
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with remaining maturity of one year or less when
purchased to be short-term investments. Short-term investments are recorded at
amortized cost, which approximates market.
Investments
Mortgage loans on real estate and policy loans are recorded at unpaid
balances. Bonds are valued primarily at amortized cost using the effective
interest method. Preferred stocks are valued primarily at cost. Common stocks,
which include shares of mutual funds (money market and other), are valued at
market with market value for the Company's investment in an insurance
subsidiary equal to the statutory net book value of the subsidiary. Realized
gains and losses on the sale of securities are recognized using the specific
identification method.
Depreciation on real estate is provided over the estimated useful lives of
the assets using the straight-line method.
13
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Aggregate Policy Reserves
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using
statutorily specified interest rates and valuation methods that will provide,
in the aggregate, reserves that are greater than or equal to the minimum
required by law.
The aggregate policy reserves for life insurance policies are based
principally upon the 1941, 1958, and 1980 Commissioners' Standard Ordinary
Mortality and American Experience Mortality Tables. The reserves are calculated
using interest rates ranging from 2.00 to 6.00 percent and are computed
principally on the Net Level Valuation and the Commissioners' Reserve Valuation
Methods. Reserves for universal life policies are based on account balances
adjusted for the Commissioners' Reserve Valuation Method.
Deferred annuity reserves are calculated according to the Commissioners'
Annuity Reserve Valuation Method including excess interest reserves to cover
situations where the future interest guarantees plus the decrease in surrender
charges are in excess of the maximum valuation rates of interest. Reserves for
immediate annuities and supplementary contracts with and without life
contingencies are equal to the present value of future payments assuming
interest rates ranging from 2.50 to 11.25 percent and mortality rates, where
appropriate, from a variety of tables.
Accident and health policy reserves are equal to the greater of the gross
unearned premiums or any required midterminal additional reserves plus net
unearned premiums and the present value of amounts not yet due on both reported
and unreported claims.
Policy and Contract Claim Reserves
Claim reserves represent the estimated accrued liability for claims reported
to the Company and claims incurred but not yet reported through the statement
date. These reserves are estimated using either individual case-basis
valuations or statistical analysis techniques. These estimates are subject to
the effects of trends in claim severity and frequency. The estimates are
continually reviewed and adjusted as necessary as experience develops or new
information becomes available.
Separate Account
Assets held in trust for purchases of variable annuity contracts and the
Company's corresponding obligation to the contract owners are shown separately
in the balance sheets. The assets in the separate account are valued at market.
Income and gains and losses with respect to the assets in the separate account
accrue to the benefit of the policyholders.
14
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Asset Valuation Reserve and Interest Maintenance Reserve
As prescribed by the NAIC, the Company is required to record an Asset
Valuation Reserve (AVR). The AVR is computed in accordance with a prescribed
formula and represents a provision for possible fluctuations in the value of
bonds, equity securities, mortgage loans, real estate, and other invested
assets. Changes to the AVR are charged or credited directly to unassigned
surplus.
Also, as prescribed by the NAIC, the Company reports an Interest Maintenance
Reserve (IMR) that represents the net accumulated unamortized realized capital
gains and losses attributable to changes in the general level of interest rates
on sales of fixed income investments, principally bonds and mortgage loans.
During 1994, 1993 and 1992, net realized capital gains (losses) of $(10,790),
$21,403 and $18,166, respectively, were credited to the IMR rather than being
recognized in the statements of operations. Such gains or losses are amortized
into income on a straight-line basis over the remaining period to maturity
based on groupings of individual securities sold in five-year bands;
amortization of these net gains aggregated $2,871, $2,674 and $481 for the
years ended December 31, 1994, 1993 and 1992, respectively.
Reclassifications
Certain reclassifications have been made to the 1993 and 1992 financial
statements to conform to the 1994 presentation.
2. INVESTMENTS
The carrying value and estimated fair value of investments in debt securities
were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
Bonds:
United States Government and
agencies..................... $ 104,798 $ 395 $ (1,958) $ 103,235
State, municipal and other
government................... 51,650 390 (2,739) 49,301
Public utilities.............. 164,975 1,860 (5,710) 161,125
Industrial and miscellaneous.. 1,891,899 27,082 (69,137) 1,849,844
Mortgage-backed securities.... 1,881,085 9,074 (100,815) 1,789,344
---------- -------- --------- ----------
4,094,407 38,801 (180,359) 3,952,849
Preferred stocks.............. 12,667 778 (540) 12,905
---------- -------- --------- ----------
$4,107,074 $ 39,579 $(180,899) $3,965,754
========== ======== ========= ==========
</TABLE>
15
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
2. INVESTMENTS (continued)
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1993
Bonds:
United States Government and
agencies..................... $ 89,357 $ 5,207 $ (347) $ 94,217
State, municipal and other
government................... 65,767 3,125 (308) 68,584
Public utilities.............. 223,954 15,903 (923) 238,934
Industrial and miscellaneous.. 1,668,026 126,858 (10,693) 1,784,191
Mortgage-backed securities.... 1,463,905 49,624 (8,040) 1,505,489
---------- -------- --------- ----------
3,511,009 200,717 (20,311) 3,691,415
Preferred stocks.............. 14,002 620 -- 14,622
---------- -------- --------- ----------
$3,525,011 $201,337 $ (20,311) $3,706,037
========== ======== ========= ==========
</TABLE>
The carrying value of bonds at December 31, 1994 and 1993 included $9,655 and
$5,876, respectively, in writedowns on certain debt securities which are valued
at estimated fair value.
The carrying value and estimated fair value of bonds at December 31, 1994, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
CARRYING ESTIMATED
VALUE FAIR VALUE
---------- ----------
<S> <C> <C>
Due in one year or less............................... $ 48,345 $ 48,022
Due after one year through five years................. 949,309 922,700
Due after five years through ten years................ 973,031 944,929
Due after ten years................................... 242,637 247,854
---------- ----------
2,213,322 2,163,505
Mortgage-backed securities............................ 1,881,085 1,789,344
---------- ----------
$4,094,407 $3,952,849
========== ==========
</TABLE>
16
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
2. INVESTMENTS (continued)
A detail of net investment income is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Interest on bonds and notes....................... $294,145 $286,013 $278,475
Dividends on equity investments................... 12,091 3,990 7,553
Interest on mortgage loans........................ 42,385 37,587 34,655
Rental income on real estate...................... 9,360 8,753 7,624
Interest on policy loans.......................... 3,182 2,943 2,813
Other investment income........................... 282 555 541
-------- -------- --------
Gross investment income........................... 361,445 339,841 331,661
Investment expenses............................... 17,565 17,448 16,245
-------- -------- --------
Net investment income............................. $343,880 $322,393 $315,416
======== ======== ========
</TABLE>
Proceeds from sales and maturities of debt securities and related gross
realized gains and losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Proceeds................................. $1,430,339 $1,532,807 $1,418,990
========== ========== ==========
Gross realized gains..................... $ 15,411 $ 42,020 $ 47,854
Gross realized losses.................... (33,044) (9,071) (17,537)
---------- ---------- ----------
Net realized gains (losses).............. $ (17,633) $ 32,949 $ 30,317
========== ========== ==========
</TABLE>
At December 31, 1994, investments with an aggregate carrying value of
$4,713,391 were on deposit with regulatory authorities or were restrictively
held in bank custodial accounts for the benefit of such regulatory authorities
as required by statute.
17
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
2. INVESTMENTS (continued)
Realized investment gains (losses) and changes in unrealized gains (losses)
for investments are summarized below:
<TABLE>
<CAPTION>
REALIZED
YEAR ENDED DECEMBER 31
----------------------------
1994 1993 1992
--------- ------- --------
<S> <C> <C> <C>
Debt securities............................... $ (17,633) $32,949 $ 30,317
Short-term investments........................ (309) 679 --
Equity securities............................. 1,322 (348) 979
Mortgage loans on real estate................. (2,186) 199 (1,705)
Real estate................................... (2,858) (41) (1,343)
Other invested assets......................... 14 33 40
--------- ------- --------
(21,650) 33,471 28,288
Tax effect.................................... 7,236 (12,519) (11,529)
Transfer to interest maintenance reserve...... 10,790 (21,403) (18,166)
--------- ------- --------
Net realized losses........................... $ (3,624) $ (451) $ (1,407)
========= ======= ========
<CAPTION>
CHANGE IN UNREALIZED
YEAR ENDED DECEMBER 31
----------------------------
1994 1993 1992
--------- ------- --------
<S> <C> <C> <C>
Debt securities............................... $(322,346) $28,210 $(48,889)
Equity securities............................. (23,202) 3,449 1,289
--------- ------- --------
Change in unrealized appreciation (deprecia-
tion)........................................ $(345,548) $31,659 $(47,600)
========= ======= ========
</TABLE>
Gross unrealized gains and gross unrealized losses on common stocks were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Unrealized gains.................................. $20,244 $42,045 $39,161
Unrealized losses................................. (5,927) (4,526) (5,091)
------- ------- -------
Net unrealized gains.............................. $14,317 $37,519 $34,070
======= ======= =======
</TABLE>
18
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
2. INVESTMENTS (continued)
The carrying values and fair values of the Company's investments in mortgage
loans are as follows at December 31:
<TABLE>
<CAPTION>
1994 1993
------------------- -------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Commercial mortgages................. $520,625 $492,292 $407,115 $422,446
Residential mortgages................ 6,785 7,058 8,714 9,917
-------- -------- -------- --------
$527,410 $499,350 $415,829 $432,363
======== ======== ======== ========
</TABLE>
During 1994, 1993 and 1992, mortgage loans of $799, $101 and $11,022,
respectively, were foreclosed and transferred to real estate. At December 31,
1994 and 1993, the Company held a mortgage loan loss reserve in the asset
valuation reserve of $5,204 and $5,375, respectively. At December 31, 1994, the
mortgage loan portfolio is diversified by geographic region and specific
collateral property type as follows:
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION
- ----------------------------
<S> <C>
South Atlantic.......... 26%
Mountain................ 16
W. South Central........ 15
Pacific................. 14
E. North Central........ 14
E. South Central........ 6
W. North Central........ 5
Middle Atlantic......... 2
New England............. 2
</TABLE>
<TABLE>
<CAPTION>
PROPERTY TYPE DISTRIBUTION
- --------------------------
<S> <C>
Retail.................. 33%
Apartment............... 23
Office.................. 20
Industrial.............. 18
Hotel/Motel............. 3
Other................... 3
</TABLE>
At December 31, 1994, the Company had the following investments (excluding U.
S. Government guaranteed or insured issues) which individually represented more
than ten percent of capital and surplus and the asset valuation reserve:
<TABLE>
<CAPTION>
CARRYING
DESCRIPTION OF SECURITY OR ISSUER VALUE
--------------------------------- --------
<S> <C>
Bonds:
Standard Credit Card Trust........................................ $60,426
G E Capital....................................................... 53,028
Residential Funding............................................... 41,609
</TABLE>
19
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
3. REINSURANCE
The Company reinsures portions of risk on certain insurance policies which
exceed its established limits, thereby providing a greater diversification of
risk and minimizing exposure on larger risks. The Company remains contingently
liable with respect to any insurance ceded, and this would become an actual
liability in the event that the assuming insurance company became unable to
meet its obligation under the reinsurance treaty.
Reinsurance assumption and cession treaties are transacted primarily with
affiliates. Premiums earned reflect the following reinsurance assumed and ceded
amounts:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Direct premiums.......................... $1,857,446 $1,472,409 $1,311,871
Reinsurance assumed...................... 1,832 3,040 23,052
Reinsurance ceded........................ (412,029) (369,203) (485,597)
---------- ---------- ----------
Net premiums earned...................... $1,447,249 $1,106,246 $ 849,326
========== ========== ==========
</TABLE>
The Company received reinsurance recoveries in the amount of $148,414,
$97,409 and $80,795 during 1994, 1993 and 1992, respectively. At December 31,
1994 and 1993, estimated amounts recoverable from reinsurers that have been
deducted from policy and contract claim reserves totaled $62,882 and $57,821,
respectively. The aggregate reserves for policies and contracts were reduced
for reserve credits for reinsurance ceded at December 31, 1994 and 1993 of
$2,977,954 and $2,857,448, respectively.
At December 31, 1994, amounts recoverable from unauthorized reinsurers of
$43,055 (1993--$55,112) and reserve credits for reinsurance ceded of $59,131
(1993--$54,481) were associated with a single reinsurer and its affiliates. The
Company holds collateral under these reinsurance agreements in the form of
trust agreements totaling $64,038 at December 31, 1994 that can be drawn on for
amounts that remain unpaid for more than 120 days.
4. INCOME TAXES
For federal income tax purposes, the Company joins in a consolidated tax
return filing with certain affiliated companies. Under the terms of a tax-
sharing agreement between the Company and its affiliates, the Company computes
federal income tax expense as if it were filing a separate income tax return,
except that tax credits and net operating loss carryforwards are determined on
the basis of the consolidated group. Additionally, the alternative minimum tax
is computed for the consolidated group and the resulting tax, if any, is
allocated back to the separate companies on the basis of the separate
companies' alternative minimum taxable income.
20
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
4. INCOME TAXES (continued)
The following is a reconciliation of the expected federal tax on income
before realized capital gains (losses), based on statutory rates, to the actual
tax expense:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax........................... $24,106 $29,698 $24,415
Tax reserve adjustment............................ 1,150 1,433 1,073
Excess tax depreciation........................... (406) (248) (273)
Deferred acquisition costs--tax basis............. 7,378 5,200 3,334
Amortization of in-force.......................... -- -- (414)
Prior year over accrual........................... (644) (330) (2,009)
Dividend received deduction....................... (3,513) (1,202) (2,304)
Charitable contribution........................... (3,935) -- --
Other items--net.................................. (278) (2,884) 230
------- ------- -------
Federal income tax expense........................ $23,858 $31,667 $24,052
======= ======= =======
</TABLE>
Prior to 1984, as provided for under the Life Insurance Company Tax Act of
1959, a portion of statutory income was not subject to current taxation but was
accumulated for income tax purposes in a memorandum account referred to as the
policyholders' surplus account. No federal income taxes have been provided for
in the financial statements on income deferred in the policyholders' surplus
account ($20,387 at December 31, 1994). To the extent dividends are paid from
the amount accumulated in the policyholders' surplus account, net earnings
would be reduced by the amount of tax required to be paid. Should the entire
amount in the policyholders' surplus account become taxable, the tax thereon
computed at current rates would amount to approximately $7,135.
The Company's federal income tax returns have been examined and closing
agreements have been executed with the Internal Revenue Service through 1986.
During 1993, there was a prior period adjustments of $452, which consisted of
an adjustment to the tax accrual. The 1992 amount consisted of an IRS
settlement of $10,882 less asset capitalization relating to the NOL merger of
$5,387. An examination is underway for years 1987 through 1992.
5. PARTICIPATING INSURANCE
Participating life insurance policies are issued by the Company which entitle
policyholders to a share in the earnings of the participating policies,
provided that a dividend distribution, which is determined annually based on
mortality and persistency experience of the participating policies, is
authorized by the Company. Participating insurance constituted approximately
1.2% and 1.3% of ordinary life insurance in force at December 31, 1994 and
1993, respectively.
21
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
6. DIVIDEND RESTRICTIONS
Generally, an insurance company's ability to pay dividends is limited to the
amount that their net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital requirements. However,
payment of such amounts as dividends may be subject to approval by regulatory
authorities.
The Company paid dividends to its parent of $20,900, $46,000 and $31,200 in
1994, 1993 and 1992, respectively.
7. RELATED PARTY TRANSACTIONS
The Company is allocated administrative and benefit expenses from the parent
for employee related costs, as all employees are considered employees of the
parent, not employees of the Company.
The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1994,
1993 and 1992, the Company paid $11,820, $11,689 and $9,566, respectively, for
these services, which approximates their costs to the affiliates.
The Company's allocated share of pension expense for 1994, 1993 and 1992, was
$1,135, $782 and $547, respectively. Total net assets available for benefits of
the pension plan exceeded the actuarial present value of accumulated plan
benefits at December 31, 1994. Amounts for the Company relating to plan assets
and actuarial liabilities are not determinable.
Payable to affiliates and intercompany borrowings bear interest at the
thirty-day commercial paper rate of 5.90% at December 31, 1994. During 1994,
1993 and 1992, the Company paid net interest of $363, $283 and $255,
respectively, to affiliates.
During 1994, the Company received a capital contribution of $15,000 in cash
from its parent and received a dividend of $10,000 from its subsidiary, Equity
National, which was included in net investment income.
22
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (continued)
(DOLLARS IN THOUSANDS)
8. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business.
Although such litigation sometimes includes substantial demands for
compensatory and punitive damages, in addition to contract liability, it is
management's opinion, after consultation with counsel and a review of available
facts, that damages arising from such demands will not be material to the
Company's financial position.
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyholders and claimants in the event of insolvency of
other insurance companies. Assessments are charged to operations when received
by the Company except where right of offset against other taxes paid is allowed
by law; amounts available for future offsets are recorded as an asset on the
Company's balance sheet. Potential future obligations for unknown insolvencies
are not determinable by the Company. The future obligation has been based on
the most recent information available from the National Organization of Life
and Health Insurance Guaranty Associations (NOLHGA). The Company has
established a reserve of $18,344 and $15,874 and an offsetting premium tax
benefit of $10,556 and $11,477 at December 31, 1994 and 1993, respectively, for
its estimated share of future guaranty fund assessments related to several
major insurer insolvencies. During 1994, 1993 and 1992, $3,444, $0 and $8,296,
respectively, were charged to surplus as prior period adjustments to provide
for this net reserve plus certain assessments paid that related to several
major insurer insolvencies prior to 1992.
23
<PAGE>
PFL LIFE INSURANCE COMPANY
SUMMARY OF INVESTMENTS--OTHER THAN
INVESTMENTS IN RELATED PARTIES
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1994
SCHEDULE I
<TABLE>
<CAPTION>
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET
------------------ ---------- ---------- ---------------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds:
United States Government and government
agencies and authorities.............. $1,509,285 $1,444,834 $1,506,080
States, municipalities and political
subdivisions.......................... 9,522 9,091 9,389
Foreign governments.................... 48,341 45,181 47,645
Public utilities....................... 166,777 161,124 164,974
All other corporate bonds.............. 2,384,012 2,292,619 2,366,319
Redeemable preferred stock............... 12,912 12,905 12,667
---------- ---------- ----------
Total fixed maturities................... 4,130,849 3,965,754 4,107,074(2)
EQUITY SECURITIES
Common stocks:
Banks, trust and insurance............. 4,252 4,027 4,027
Industrial, miscellaneous and all
other................................. 24,715 39,257 39,257
---------- ---------- ----------
Total equity securities.................. 28,967 43,284 43,284
Mortgage loans on real estate............ 527,410 527,410
Real estate.............................. 67,085 67,085
Real estate acquired in satisfaction of
debt.................................... 10,381 10,381
Policy loans............................. 51,798 51,798
Other long-term investments.............. 4,593 4,593
Cash and short-term investments.......... 34,062 34,062
---------- ----------
Total investments........................ $4,855,145 $4,845,687
========== ==========
</TABLE>
- --------
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or
accrual of discounts.
(2) Amount differs from cost as certain bonds have been adjusted to reflect
other than temporary decline in value charged to surplus, as prescribed by
the NAIC.
24
<PAGE>
PFL LIFE INSURANCE COMPANY
SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN THOUSANDS)
SCHEDULE V
<TABLE>
<CAPTION>
FUTURE POLICY POLICY AND
BENEFITS AND UNEARNED CONTRACT
EXPENSES PREMIUMS LIABILITIES
------------- -------- -----------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Individual life.............................. $ 555,841 $ -- $ 7,298
Individual health............................ 16,649 6,487 8,643
Group life and health........................ 60,207 17,680 57,959
Annuity...................................... 3,763,714 -- --
---------- ------- -------
$4,396,411 $24,167 $73,900
========== ======= =======
YEAR ENDED DECEMBER 31, 1993
Individual life.............................. $ 414,663 $ -- $ 8,424
Individual health............................ 11,714 4,623 6,494
Group life and health........................ 108,355 17,783 55,265
Annuity...................................... 3,183,571 -- --
---------- ------- -------
$3,718,303 $22,406 $70,183
========== ======= =======
YEAR ENDED DECEMBER 31, 1992
Individual life.............................. $ 447,444 $ -- $ 6,166
Individual health............................ 9,081 3,088 4,740
Group life and health........................ 36,051 15,904 64,767
Annuity...................................... 2,920,639 -- --
---------- ------- -------
$3,413,215 $18,992 $75,673
========== ======= =======
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
NET BENEFITS, CLAIMS OTHER
PREMIUM INVESTMENT LOSSES AND OPERATING PREMIUMS
REVENUE INCOME SETTLEMENT EXPENSES EXPENSES WRITTEN
------- ---------- ------------------- --------- ----------
<S> <C> <C> <C> <C>
$ 146,328 $ 43,025 $ 124,736 $ 42,309 $ --
38,811 3,983 22,323 22,707 38,797
194,704 10,531 108,400 143,645 192,034
1,067,406 286,341 1,036,313 319,328 1,067,404
- ---------- -------- ---------- -------- ----------
$1,447,249 $343,880 $1,291,772 $527,989 $1,298,235
========== ======== ========== ======== ==========
$ 95,716 $ 36,471 $ 71,638 $ 56,462 $ --
28,388 1,024 16,663 15,987 28,434
241,356 13,465 135,764 148,254 239,575
740,786 271,433 506,949 457,328 740,900
- ---------- -------- ---------- -------- ----------
$1,106,246 $322,393 $ 731,014 $678,031 $1,008,909
========== ======== ========== ======== ==========
$ 90,437 $ 40,273 $ 66,422 $ 62,486 $ --
19,550 2,091 11,303 10,684 19,693
246,913 12,635 141,575 145,629 246,234
492,426 260,417 549,683 27,806 360,323
- ---------- -------- ---------- -------- ----------
$ 849,326 $315,416 $ 768,983 $246,605 $ 626,250
========== ======== ========== ======== ==========
</TABLE>
26
<PAGE>
PFL LIFE INSURANCE COMPANY
REINSURANCE
(DOLLARS IN THOUSANDS)
SCHEDULE VI
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
---------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1994
Life insurance in force.. $4,713,817 $468,811 $112,054 $4,357,060 2.6%
========== ======== ======== ========== ===
Premiums:
Individual life........ $ 148,702 $ 3,639 $ 1,265 $ 146,328 .9%
Individual health...... 50,303 11,492 -- 38,811 --
Group life and health.. 412,200 217,496 -- 194,704 --
Annuity................ 1,246,241 179,402 567 1,067,406 .05%
---------- -------- -------- ---------- ---
$1,857,446 $412,029 $ 1,832 $1,447,249 .1%
========== ======== ======== ========== ===
YEAR ENDED DECEMBER 31,
1993
Life insurance in force.. $4,773,533 $387,843 $192,203 $4,577,893 4.2%
========== ======== ======== ========== ===
Premiums:
Individual life........ $ 95,982 $ 2,640 $ 2,373 $ 95,715 2.5%
Individual health...... 37,709 9,321 -- 28,388 --
Group life and health.. 401,906 160,550 -- 241,356 --
Annuity................ 936,812 196,692 667 740,787 .1%
---------- -------- -------- ---------- ---
$1,472,409 $369,203 $ 3,040 $1,106,246 .3%
========== ======== ======== ========== ===
YEAR ENDED DECEMBER 31,
1992
Life insurance in force.. $4,714,489 $392,343 $405,036 $4,727,182 8.6%
========== ======== ======== ========== ===
Premiums:
Individual life........ $ 88,285 $ 2,220 $ 4,372 $ 90,437 4.8%
Individual health...... 25,110 5,560 -- 19,550 --
Group life and health.. 372,315 142,944 17,542 246,913 7.1%
Annuity................ 826,161 334,873 1,138 492,426 .3%
---------- -------- -------- ---------- ---
$1,311,871 $485,597 $ 23,052 $ 849,326 3.2%
========== ======== ======== ========== ===
</TABLE>
27
Please read this prospectus before investing, and keep it on file for
future reference. It contains important information to help you decide if
the goal of one or more of the funds matches your own.
To learn more about each fund and its investments, you can obtain a
copy of the funds' most recent financial report and portfolio listing
or a copy of the Statement of Additional Information (SAI) dated April 30,
1995. The SAI has been filed with the Securities and Exchange Commission
(SEC) and is incorporated herein by reference (legally forms a part of the
prospectus). For a free copy of either document, contact your insurance
company
Shares of each fund may only be purchased by the separate accounts of
insurance companies, for the purpose of funding variable annuity and
variable life insurance contracts. Particular funds may not be available in
your state due to various insurance regulations. Please check with your
insurance company for available funds. Inclusion of a fund in this
Prospectus which is not available in your state is not to be considered a
solicitation. This Prospectus should be read in conjunction with the
prospectus of the separate account of the specific insurance product which
accompanies this Prospectus.
AN INVESTMENT IN ANY FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT, AND THERE CAN BE NO ASSURANCE THAT MONEY MARKET PORTFOLIO WILL
MAINTAIN A STABLE $1.00 SHARE PRICE.
HIGH INCOME PORTFOLIO MAY INVEST WITHOUT LIMITATION IN LOWER-QUALITY DEBT
SECURITIES, SOMETIMES CALLED "JUNK BONDS." YOU SHOULD CONSIDER THAT THESE
SECURITIES CARRY GREATER RISKS, SUCH AS THE RISK OF DEFAULT, THAN OTHER
DEBT SECURITIES. REFER TO "INVESTMENT PRINCIPLES AND RISKS" ON PAGE
FOR FURTHER INFORMATION.
VARIABLE
INSURANCE
PRODUCTS
FUNDS
Variable Insurance Products Fund and Variable Insurance Products Fund II
(the Trusts) are designed to provide investment vehicles for variable
annuity and variable life insurance contracts of various insurance
companies. The Trusts currently offer the following funds:
THESE SECURITIES
HAVE NOT BEEN
APPROVED OR
DISAPPROVED BY THE
SECURITIES AND
EXCHANGE
COMMISSION OR ANY
STATE SECURITIES
COMMISSION, NOR HAS
THE SECURITIES AND
EXCHANGE
COMMISSION OR ANY
STATE SECURITIES
COMMISSION PASSED
UPON THE ACCURACY
OR ADEQUACY OF THIS
PROSPECTUS. ANY
REPRESENTATION TO
THE CONTRARY IS A
CRIMINAL OFFENSE.
VI P -pro-0495
MONEY MARKET FUND
Money Market Portfolio
INCOME FUNDS
Investment Grade Bond Portfolio
High Income Portfolio
ASSET ALLOCATION FUNDS
Asset Manager Portfolio
Asset Manager: Growth Portfolio
GROWTH & INCOME AND GROWTH FUNDS
Equity-Income Portfolio
Index 500 Portfolio
Contrafund Portfolio
Growth Portfolio
Overseas Portfolio
PROSPECTUS
APRIL 30, 1995(FIDELITY_LOGO_GRAPHIC) 82 DEVONSHIRE STREET, BOSTON, MA
02109
CONTENTS
KEY FACTS THE FUND AT A GLANCE
FINANCIAL HIGHLIGHTS A summary
of each fund's financial data.
WHO MAY WANT TO INVEST
INVESTMENT PRINCIPLES AND RISKS
Each fund's overall approach to
investing.
THE FUNDS IN DETAIL CHARTER How each fund is
organized.
SECURITIES AND INVESTMENT
PRACTICES
BREAKDOWN OF EXPENSES How
operating costs are calculated and
what they include.
PERFORMANCE
ACCOUNT POLICIES DISTRIBUTIONS AND TAXES
TRANSACTION DETAILS Share p rice
calculations and how to invest and
redeem.
APPENDIX Description of Moody's and S&P's
Corporate Bond Ratings and
additional information about the
S&P 500(registered trademark).
KEY FACTS
THE FUNDS AT A GLANCE
The funds contained in this prospectus are designed to provide investment
vehicles for variable annuity and variable life insurance contracts of
various insurance companies.
The value of each fund's investments (except Money Market Portfolio) and
the income they generate will vary from day to day, and generally reflect
market conditions, interest rates, and other company, political, or
economic news both here and abroad. In the short-term, stock prices can
fluctuate dramatically in response to these factors. Over time, however,
stocks have shown greater growth potential than other types of securities.
The prices of bonds generally move in the opposite direction from interest
rates. Investments in foreign securities may involve risks in addition to
those of U.S. investments, including increased political and economic risk,
as well as exposure to currency fluctuations. When fund shares are
redeemed, they may be worth more or less than their original cost. An
investment in any one fund is not in itself a balanced investment plan. As
with any mutual fund, there is no assurance that a fund will achieve its
goal.
MANAGEMENT: Fidelity Management & Research Company (FMR), 82 Devonshire
Street, Boston, Massachusetts, is the management arm of Fidelity
Investments, which was established in 1946 and is now America's largest
mutual fund manager. Affiliates of FMR may choose investments for some of
the funds.
MONEY MARKET FUND
MONEY MARKET PORTFOLIO
GOAL: Income while maintaining a stable $1.00 share price.
STRATEGY: Invests in high-quality, short-term money market securities of
all types.
SIZE: As of December 31, 1994, the fund had over $ 748 million in
assets.
INCOME FUNDS
INVESTMENT GRADE BOND PORTFOLIO
GOAL: High current income.
STRATEGY: Invests mainly in investment-grade debt securities while
maintaining an average portfolio maturity of ten years or less.
SIZE: As of December 31, 1994, the fund had over $111 million in
assets.
HIGH INCOME PORTFOLIO
GOAL: High current income.
STRATEGY: Invests mainly in high-yielding debt securities, with an emphasis
on lower-quality securities.
SIZE: As of December 31, 1994, the fund had over $ 569 million in
assets.
ASSET ALLOCATION FUNDS
ASSET MANAGER PORTFOLIO
GOAL: High total return with reduced risk over the long-term.
STRATEGY: The fund diversifies across stocks, bonds , and short-term
instruments, both here and abroad, to pursue its goal. The fund has a
neutral mix which represents the way the fund's investments will generally
be allocated over the long term. This mix will vary over short-term periods
as fund management gradually adjusts the fund's holdings - within defined
ranges - based on the current outlook for the different markets.
Neutral Mix
Stocks 40%
(can range
from
10-60%)
Row: 1, Col: 1, Value: 20.0
Row: 1, Col: 2, Value: 40.0
Row: 1, Col: 3, Value: 40.0
Bonds 40%
(can range
from
20-60%)
Short-term
20%
(can range
from
0-70%)
SIZE: As of December 31, 1994, the fund had over $ 3.2 billion in
assets.
ASSET MANAGER: GROWTH PORTFOLIO
GOAL: To seek maximum total return over the long term.
STRATEGY: The fund diversifies across stocks, bonds , and short-term
instruments, both here and abroad, to pursue its goal. The fund has a
neutral mix which represents the way the fund's investments will generally
be allocated over the long term. This mix will vary over short-term periods
as fund management gradually adjusts the fund's holdings - within defined
ranges - based on the current outlook for the different markets.
Neutral Mix
Stocks 65%
(can range
from
0-100%)
Row: 1, Col: 1, Value: 5.0
Row: 1, Col: 2, Value: 65.0
Row: 1, Col: 3, Value: 30.0
Bonds 30%
(can range
from
0-100%)
Short-Term
5%
(can range
from
0-100%)
GROWTH & INCOME AND GROWTH FUNDS
EQUITY-INCOME PORTFOLIO
GOAL: Reasonable income. The fund also considers the potential for capital
appreciation.
STRATEGY: Invests mainly in income-producing equity securities.
SIZE: As of December 31, 1994, the fund had over $ 2.2 billion in
assets.
INDEX 500 PORTFOLIO
GOAL: Total return that corresponds to that of the Standard & Poor's
Composite Index of 500 Stocks (S&P 500(registered trademark)).
STRATEGY: Invests in equity securities of companies that compose the S&P
500 and in other instruments that are based on the value of the index.
SIZE: As of December 31, 1994, the fund had over $ 51 million in
assets.
CONTRAFUND PORTFOLIO
GOAL: To seek capital appreciation (increase in the value of the fund's
shares).
STRATEGY: Invests mainly in equity securities of companies that are
undervalued or out-of-favor.
GROWTH PORTFOLIO
GOAL: Capital Appreciation (increase in the value of the fund's shares).
STRATEGY: Invests mainly in common stocks, although its investments are not
restricted to any one type of security.
SIZE: As of December 31, 1994, the fund had over $ 2.1 billion in
assets.
OVERSEAS PORTFOLIO
GOAL: Long-term growth of capital.
STRATEGY: Invests mainly in equity securities outside of the U.S.
SIZE: As of December 31, 1994, the fund had over $ 1.2 b illion in
assets.
FINANCIAL HIGHLIGHTS
The financial highlights tables that follow are included in the
funds ' Annual Report and have been audited by either Coopers &
Lybrand L.L.P. (Money Market, High Income, Equity-Income, Growth and
Overseas) or Price Waterhouse LLP, (Investment Grade Bond, Asset Manager
and Index 500) independent accountants. Their reports on the financial
statements and financial highlights are included in the Annual Reports.
Financial highlights for Asset Manager: Growth and Contrafund Portfolios
are not included as they did not commence operations until January 3, 1995.
The financial statements, the financial highlights, and the reports are
incorporated by reference into the funds' SAI's, which may be obtained free
of charge from your insurance company.
VIP: MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
<S>
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1.Selected Per-Share Data
and Ratios
2.Years ended
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
December 31
3.Net asset
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
value, beginning
0 0 0 0 0 0 0 0 0 0
of period
4.Income from
.078 .065 .063 .071 .087 .078 .059 .038 .032 .042
Investment
Operations
Net interest
income
5.Less
(.078) (.065) (.063) (.071) (.087) (.078) (.059) (.038) (.032) (.042)
Distributions
From net
interest
income
6.Net asset
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
value,
0 0 0 0 0 0 0 0 0 0
end of period
7.Total return
8.11% 6.70% 6.44% 7.39% 9.12% 8.04% 6.09% 3.90% 3.23% 4.25%
B
8.Net assets,
$ 82 $ 65 $ 88 $ 106 $ 143 $ 255 $ 271 $ 301 $ 353 $ 749
end of period (in
millions)
9.Ratio of
.56% .50% .54% .60% .67% .56% .38% .24% .22%A .27%
expenses to
average net
assets
10.Ratio of net
7.81% 6.52% 6.38% 7.16% 8.70% 7.76% 5.93% 3.85% 3.16% 4.32%
interest income
to average net
assets
</TABLE>
A ALL EXPENSES INCURRED IN CONNECTION WITH A SPECIAL MEETING OF
SHAREHOLDERS WERE REIMBURSED BY FMR. IF NO REIMBURSEMENT HAD BEEN MADE,
TOTAL EXPENSE WOULD HAVE BEEN .23%
BTHE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN. TOTAL RETURNS DO NOT REFLECT CHARGES
ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION OF
THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN.
VIP: HIGH INCOME PORTFOLIO
<TABLE>
<CAPTION>
<S>
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11.Selected Per-Share Data and
Ratios
12.Years ended
1985D 1986 1987 1988 1989 1990 1991 1992 1993 1994
December 31
13.Net asset value,
$ 10.0 $ 10.3 $ 10.8 $ 9.68 $ 9.66 $ 8.11 $ 7.07 $ 9.55 $ 10.8 $ 11.9
00 10 30 0 0 0 0 0 20 90
beginning of period
14.Income from
.319 1.227 1.155 1.110 1.202 .858 .890 .790 .728 .770
Investment
Operations
Net investment
income
15. Net realized
.310 .520 (1.00 (.020) (1.55 (1.04 1.590 1.290 1.332 (.910)
and unrealized 0) 0) 0)
gain (loss) on
investments
16. Total from
.629 1.747 .155 1.090 (.348) (.182) 2.480 2.080 2.060 (.140)
investment
operations
17.Less
(.319) (1.22 (1.15 (1.11 (1.20 (.858) -- (.810) (.794) (.730)
Distributions 7) 5) 0) 2)
From net
investment income
18. In excess of
- -- -- -- -- -- -- -- -- (.036) --
net investment
income
19. From net
- -- -- (.150) -- -- -- -- -- (.060) (.370)
realized gain
on investments
20. Total
(.319) (1.22 (1.30 (1.11 (1.20 (.858) -- (.810) (.890) (1.10
distributions 7) 5) 0) 2) 0)
21.Net asset value,
$ 10.3 $ 10.8 $ 9.68 $ 9.66 $ 8.11 $ 7.07 $ 9.55 $ 10.8 $ 11.9 $ 10.7
end of period
10 30 0 0 0 0 0 20 90 50
22.Total returnB,C
6.38 17.68 1.22 11.64 (4.17) (2.23) 35.08 23.17 20.40 (1.64)
% % % % % % % % % %
23.Net assets, end
$ 2 $ 13 $ 19 $ 30 $ 34 $ 30 $ 70 $ 201 $ 464 $ 569
of period
(In millions)
24.Ratio of
.78% 1.00 1.02 .99% .93% 1.00 .97% .67% .64%F .71%
expenses to
A % % %
average net
assetsE
25.Ratio of
1.50 1.50 1.29 .99% .93% 1.12 .97% .67% .66% .71%
expenses to average
%A % % %
net assets before
expense reductionsE
26.Ratio of net
12.10 11.32 11.19 11.41 12.94 11.36 12.94 10.98 8.69 8.75
investment income
%A % % % % % % % % %
to average net
assets
27.Portfolio turnover
27%A 78% 189% 139% 124% 156% 154% 160% 155% 122%
rate
</TABLE>
A ANNUALIZED
B THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN.
C TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED. TOTAL
RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION IF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS
SHOWN.
D FROM SEPTEMBER 19, 1985 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31,
1985.
E DURING THE PERIOD SEPTEMBER 19, 1985 (COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31, 1985, FMR AGREED TO VOLUNTARILY WAIVE ADVISORY AND SERVICE
FEES. IN ADDITION, FMR VOLUNTARILY AGREED TO REIMBURSE THE FUND TO EXTENT
THAT THE AGGREGATE OPERATING EXPENSES WERE IN EXCESS OF AN ANNUAL RATE OF
.78% OF AVERAGE NET ASSETS. EFFECTIVE JANUARY 1, 1986, FMR VOLUNTARILY
AGREED TO REIMBURSE THE FUND'S OPERATING EXPENSES (EXCLUDING INTEREST,
TAXES, BROKERAGE COMMISSIONS AND EXTRAORDINARY EXPENSES) ABOVE AN ANNUAL
RATE OF 1.00% OF AVERAGE NET ASSETS.
F DURING 1993, FMR REIMBURSED THE FUND FOR ALL EXPENSES IN CONNECTION WITH
A SPECIAL MEETING OF SHAREHOLDERS, INCLUDING THE PREPARATION OF THE PROXY
STATEMENT.
VIP: EQUITY-INCOME
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
28.Selected Per-Share Data
and Ratios
29.Years ended 1986D 1987 1988 1989 1990 1991 1992 1993 1994
December 31
30.Net asset value, $ 10.0 $ 10.0 $ 9.42 $ 11.0 $ 12.2 $ 9.51 $ 11.8 $ 13.4 $ 15.4
beginning of period 0 2 1 9 5 0 4
31.Income from
Investment Operations
32. Net investment .06 .45 .53 .60 .58 .50 .40 .37 .41
income
33. Net realized and (.04) (.51) 1.59 1.29 (2.38) 2.43 1.57 2.06 .64
unrealized gain
(loss) on investments
34. Total from .02 (.06) 2.12 1.89 (1.80) 2.93 1.97 2.43 1.05
investment operations
35.Less Distributions
36. From net -- (.40) (.53) (.52) (.59) (.59) (.42) (.35) (.37)
investment income
37. In excess of net -- -- -- -- -- -- -- (.04) --
investment income
38. From net realized -- (.14) -- (.09) (.39) -- -- -- (.77)
gain
39. Total distributions -- (.54) (.53) (.61) (.98) (.59) (.42) (.39) (1.14)
40.Net asset value, $ 10.0 $ 9.42 $ 11.0 $ 12.2 $ 9.51 $ 11.8 $ 13.4 $ 15.4 $ 15.3
end of period 2 1 9 5 0 4 5
41.Total return B,C .20% (1.13) 22.71 17.34 (15.29 31.44 16.89 18.29 7.07
% % % )% % % % %
42.Net assets, end of $ 4 $ 26 $ 52 $ 143 $ 154 $ 282 $ 593 $ 1,31 $ 2,28
period (in millions) 9 4
43.Ratio of expenses 1.50 1.33 1.13 .85% .78% .74% .65% .62% .58%F
to average %A % %
net assetsE
44.Ratio of expenses 4.83 1.33 1.13 .85% .78% .74% .65% .62% .60%F
to average net assets %A % %
before expense
reductionsE
45.Ratio of net 5.23 4.78 5.36 5.82 6.01% 4.83 3.52 2.87 2.83
investment income %A % % % % % % %
to average net assets
46.Portfolio turnover 7%A 133% 69% 78% 94% 107% 74% 120% 134%
rate
</TABLE>
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED. 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 RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN.
D FROM OCTOBER 9, 1986 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31,1986.
E EFFECTIVE OCTOBER 9, 1986, FMR VOLUNTARILY AGREED TO REIMBURSE THE FUND'S
OPERATING EXPENSES (EXCLUDING INTEREST, TAXES, BROKERAGE COMMISSIONS AND
EXTRAORDINARY EXPENSES) ABOVE AN ANNUAL RATE OF 1.50% OF AVERAGE NET
ASSETS.
F FMR HAS DIRECTED CERTAIN PORTFOLIO TRADES TO BROKERS WHO PAID A PORTION
OF THE FUND'S EXPENSES.
VIP: GROWTH
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
47.Selected Per-Share Data and
Ratios
48.Year ended December 1986D 1987 1988 1989 1990 1991 1992 1993 1994
31
49.Net asset value, $ 10.0 $ 10.0 $ 10.1 $ 11.7 $ 15.1 $ 12.9 $ 18.5 $ 19.7 $ 23.0
beginning of period 0 3 4 2 8 1 1 6 8
50.Income from
Investment Operations
51. Net investment .04 .10 .19 .24 .24 .09F .09 .12 .12
income
52. Net realized and (.01) .27 1.39 3.41 (1.98) 5.72 1.64 3.64 (.12)
unrealized gain (loss)
on investments
53. Total from .03 .37 1.58 3.65 (1.74) 5.81 1.73 3.76 --
investment operations
54.Less Distributions
55. From net -- (.11) -- (.19) (.21) (.21) (.05) (.11) (.12)
investment income
56. From net realized -- (.15) -- -- (.32) -- (.43) (.21) (1.27)
gain
57. In excess of net -- -- -- -- -- -- -- (.12) --
realized gain
58. Total distributions -- (.26) -- (.19) (.53) (.21) (.48) (.44) (1.39)
59.Net asset value, end $ 10.0 $ 10.1 $ 11.7 $ 15.1 $ 12.9 $ 18.5 $ 19.7 $ 23.0 $ 21.6
of period 3 4 2 8 1 1 6 8 9
60.Total returnB,C .30% 3.66 15.58 31.51 (11.73 45.51 9.32 19.37 (.02)
% % % )% % % % %
61.Net assets, end of $ 2 $ 19 $ 29 $ 77 $ 135 $ 371 $ 750 $ 1,38 $ 2,14
period (In millions) 4 2
62.Ratio of expenses to 1.50 1.50 1.24 1.02 .88% .84% .75% .71% .69%
average net assetsE %A % % % G
63.Ratio of expenses to 5.57 1.68 1.24 1.02 .88% .84% .75% .71% .70%
average net assets %A % % % G
before expense
reductionsE
64.Ratio of net 3.27 1.78 1.91 2.83 2.69% .56% .83% .72% .69%
investment income to %A % % %
average net assets
65.Portfolio turnover rate -- 37% 155% 111% 88% 261% 262% 159% 122%
</TABLE>
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED. 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 RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN.
D FROM OCTOBER 9, 1986 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31,1986.
E EFFECTIVE OCTOBER 9, 1986, FMR VOLUNTARILY AGREED TO REIMBURSE THE FUND'S
OPERATING EXPENSES (EXCLUDING INTEREST, TAXES, BROKERAGE COMMISSIONS AND
EXTRAORDINARY EXPENSES) ABOVE AN ANNUAL RATE OF 1.50% OF AVERAGE NET
ASSETS.
F NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
G FMR HAS DIRECTED CERTAIN PORTFOLIO TRADES TO BROKERS WHO PAID A PORTION
OF THE FUND'S EXPENSES.
VIP: OVERSEAS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
66.Selected Per-Share Data
and Ratios
67.Years ended 1987D 1988 1989 1990 1991 1992 1993 1994
December 31
68.Net asset value, $ 10.00 $ 9.35 $ 10.11 $ 12.67 $ 12.42 $ 13.09 $ 11.53 $ 15.48
beginning of period
69.Income from
Investment Operations
70. Net investment .05 .09 .07 .18 .24 .16 .06 .19
income
71. Net realized and (.59) .67 2.57 (.39) .74 (1.54) 4.16 .08
unrealized gain
(loss) on investments
72. Total from (.54) .76 2.64 (.21) .98 (1.38) 4.22 .27
investment operations
73.Less Distributions
74. From net (.11) -- (.08) (.04) (.17) (.18) (.18) (.08)
investment income
75. In excess of net -- -- -- -- -- -- (.04) --
investment
income
76. From net realized -- -- -- -- (.14)F -- - --
gain
77. In excess of net -- -- -- -- -- -- (.05) --
realized gain
78. Total distributions (.11) -- (.08) (.04) (.31) (.18) (.27) (.08)
79.Net asset value, $ 9.35 $ 10.11 $ 12.67 $ 12.42 $ 13.09 $ 11.53 $ 15.48 $ 15.67
end of period
80.Total return B,C (5.38) 8.13% 26.28 (1.67) 8.00% (10.72) 37.35 1.72%
% % % % %
81.Net assets, end of $ 7 $ 9 $ 26 $ 81 $ 126 $ 181 $ 778 $ 1,298
period
(In millions)
82.Ratio of expenses 1.50%A 1.50% 1.50% 1.41% 1.26% 1.14% 1.03% .92%
to average
net assetsE
83.Ratio of expenses 3.94%A 3.17% 1.98% 1.41% 1.26% 1.14% 1.03% .92%
to average net assets
before expense
reductionsE
84.Ratio of net .78%A .84% .66% 1.89% 2.33% 1.86% 1.21% 1.28%
investment income
to average net assets
85.Portfolio turnover 181%A 95% 78% 100% 168% 61% 42% 42%
rate
</TABLE>
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED. 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 RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN.
D FROM JANUARY 28, 1987 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31,1987.
E EFFECTIVE JANUARY 28, 1987, FMR VOLUNTARILY AGREED TO REIMBURSE THE
FUND'S OPERATING EXPENSES (EXCLUDING INTEREST, TAXES, BROKERAGE COMMISSIONS
AND EXTRAORDINARY EXPENSES) ABOVE AN ANNUAL RATE OF 1.50% OF AVERAGE NET
ASSETS.
F INCLUDES AMOUNTS DISTRIBUTED FROM NET REALIZED GAINS ON FOREIGN CURRENCY
RELATED TRANSACTIONS TAXABLE AS ORDINARY INCOME.
VIPII: INVESTMENT GRADE BOND PORTFOLIO
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
86.Selected Per-Share
Data
87.Years ended 1988D 1989 1990 1991 1992 1993 1994
December 31
88.Net asset value, $ 10.000 $ 10.000 $ 10.140 $ 9.920 $ 11.080 $ 10.970 $ 11.480
beginning of period
89.Income from .052 .827 .826 .455 .672 .641 .733
Investment Operations
Net investment income
90. Net realized and -- .160 (.220) 1.165 .058 .559 (1.163)
unrealized
gain (loss) on
investments
91. Total from .052 .987 .606 1.620 .730 1.200 (.430)
investment operations
92.Less Distributions (.052) (.827) (.826) (.460) (.680) (.628) --
From net investment
income
93. In excess of net -- -- -- -- -- (.002) --
investment income
94. From net realized -- (.020) -- -- (.160) (.050) (.010)
gain on investments
95. In excess of net -- -- -- -- -- (.010) (.020)
realized gain
96. Total distributions (.052) (.847) (.826) (.460) (.840) (.690) (.030)
97.Net asset value, end $ 10.000 $ 10.140 $ 9.920 $ 11.080 $ 10.970 $ 11.480 $ 11.020
of period
98.Total returnB,C .52% 10.26% 6.21% 16.38% 6.65% 10.96% (3.76)%
99.Net assets, end of $ 3 $ 6 $ 14 $ 45 $ 74 $ 122 $ 111
period (in millions)
100.Ratio of expenses to .80%A .80% .80% .80% .76% .68% .67%
average net assetsE
101.Ratio of expenses to 5.71%A 3.53% 2.20% 1.16% .76% .68% .67%
average net assets
before expense
reductionsE
102.Ratio of net 6.99%A 8.19% 8.26% 7.73% 7.11% 6.85% 6.53%
investment income to
average net assets
103.Portfolio turnover -- 67% 122% 128% 119% 70% 143%
rate
</TABLE>
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED. 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 RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN.
D FROM DECEMBER 5, 1988 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31,1988.
E EFFECTIVE DECEMBER 5, 1988, THE FUND'S INVESTMENT ADVISOR VOLUNTARILY
AGREED TO LIMIT EXPENSES TO .80% OF AVERAGE NET ASSETS.
VIPII: ASSET MANAGER
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
104.Selected Per-Share
Data and Ratios
105.Years ended 1989D 1990 1991 1992 1993 1994
December 31
106.Net asset value, $ 10.00 $ 9.97 $ 10.24 $ 12.55 $ 13.32 $ 15.42
beginning of period
107.Income from
Investment Operations
108. Net investment .09 .41 .35 .32 .33 .45
income
109. Net realized and (.01) .26 1.96 1.09 2.39 (1.33)
unrealized
gain (loss) on
investments
110. Total from .08 .67 2.31 1.41 2.72 (.88)
investment operations
111.Less Distributions
112. From net investment (.09) (.40) -- (.31) (.33) (.29)
income
113. In excess of net -- -- -- - (.04) --
investment income
114. From net realized (.02) -- -- (.33) (.25) (.46)
gain
115. Total distributions (.11) (.40) -- (.64) (.62) (.75)
116.Net asset value, end $ 9.97 $ 10.24 $ 12.55 $ 13.32 $ 15.42 $ 13.79
of period
117.Total returnB,C .81% 6.72% 22.56% 11.71% 21.23% (6.09)
%
118.Net assets, end of $ 7 $ 36 $ 194 $ 732 $ 2,423 $ 3,291
period (in millions)
119.Ratio of expenses to 2.50% 1.25% 1.08% .91% .88% .80%
average net assetsE A F
120.Ratio of expenses to 4.39% 1.54% 1.08% .91% .88% .81%
average net assets A F
before expense
reductionsE
121.Ratio of net 4.77% 5.92% 5.89% 4.89% 3.64% 4.07%
investment income to A
average net assets
122.Portfolio turnover 158% 117% 110% 92% 113% 85%
rate A
</TABLE>
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED. 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 RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN.
D FROM SEPTEMBER 6, 1989 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31,1989.
E EFFECTIVE JANUARY 1, 1990, THE FUND'S INVESTMENT ADVISOR VOLUNTARILY
AGREED TO LIMIT EXPENSES TO 1.25% OF AVERAGE NET ASSETS. FOR THE PERIOD
SEPTEMBER 6, 1989 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1989,
EXPENSES WERE VOLUNTARILY LIMITED BY THE INVESTMENT ADVISOR TO 2.50% OF
AVERAGE NET ASSETS.
F FMR HAS DIRECTED CERTAIN PORTFOLIO TRADES TO BROKERS WHO PAID A PORTION
OF THE FUND'S EXPENSES.
VIPII: INDEX 500 PORTFOLIO
<TABLE>
<CAPTION>
<S> <C> <C> <C>
123.Selected Per-Share Data
124.Years ended December 31 1992D 1993 1994
125.Net asset value, beginning of period $ 50.00 $ 52.60 $ 55.74
126.Income from Investment Operations
127. Net investment income .44 1.31 1.14
128. Net realized and unrealized gain (loss) on 2.71 3.80 (.56)
investments
129. Total from investment operations 3.15 5.11 .58
130.Less Distributions
131. From net investment income (.47) (1.28) --
132. From net realized gain (.08) (.60) (.10)
133. In excess of net realized gain -- (.09) --
134. Total distributions (.55) (1.97) (.10)
135.Net asset value, end of period $ 52.60 $ 55.74 $ 56.22
136.Total returnB,C 6.31% 9.74% 1.04%
137.Net assets, end of period (in millions) $ 18 $ 25 $ 51
138.Ratio of expenses to average net assetsE .28% .28% .28%
A
139.Ratio of expenses to average net assets before 1.77% .95% .81%
expense reductionsE A
140.Ratio of net investment income to average net 2.89% 2.65% 2.81%
assets A
141.Portfolio turnover rate -- 9% 2%
</TABLE>
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED. 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 RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN.
D FROM AUGUST 27, 1992 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31,1992.
E EFFECTIVE AUGUST 27, 1992 (COMMENCEMENT OF OPERATIONS) THE FUND'S
INVESTMENT ADVISOR VOLUNTARILY AGREED TO LIMIT EXPENSES TO .28% OF AVERAGE
NET ASSETS.
WHO MAY WANT TO INVEST
MONEY MARKET PORTFOLIO:
The fund may be appropriate for those who would like to earn income at
current money market rates while preserving the value of their investment.
The fund is managed to keep its share price stable at $1.00. The rate of
income will vary from day to day, generally reflecting short-term interest
rates.
INVESTMENT GRADE BOND PORTFOLIO:
The fund may be appropriate for investors who want high current income from
a portfolio of investment-grade debt securities. The fund's level of risk,
and potential reward, depend on the quality and maturity of its
investments. With its focus on medium- to high-quality investments and
intermediate maturity, the fund has a moderate risk level and yield
potential.
HIGH INCOME PORTFOLIO:
The fund is designed for those who want high current income with some
potential for capital growth from a portfolio of high-yielding debt
securities and income-producing equity securities. The fund may be
appropriate for long-term, aggressive investors who understand the
potential risks and rewards of investing in lower-quality securities,
including defaulted securities, and are willing to accept their greater
price movements and credit risks.
THE SPECTRUM OF
FIDELITY FUNDS
Broad categories of Fidelity
funds are presented here in
order of ascending risk.
Generally, investors seeking
to maximize return must
assume greater risk. The
funds in this prospectus fall
under one of the following
categories.
(solid bullet) MONEY MARKET Seeks
income and stability by
investing in high-quality,
short-term investments.
(solid bullet) INCOME Seeks income by
investing in bonds.
(solid bullet) ASSET ALLOCATION Seeks
high total return with reduced
risk through a mix of stocks,
bonds and short-term
instruments.
(solid bullet) GROWTH AND INCOME
Seeks long-term growth and
income by investing in stocks
and bonds.
(solid bullet) GROWTH Seeks long-term
growth by investing mainly in
stocks.
(checkmark)
ASSET MANAGER AND ASSET MANAGER: GROWTH PORTFOLIOS:
Asset allocation funds are designed for investors who want to diversify
among domestic and foreign stocks, bonds, and short-term instruments and
other types of securities, in one fund. Asset Manager Portfolio spreads its
assets among all three asset classes moderating both its risk and return
potential. On the other hand, Asset Manager: Growth, while spreading its
assets among all three asset classes, uses a more aggressive approach by
focusing on stocks for a higher potential return. However, because each
fund can invest in bonds and short-term instruments, their returns may not
be as high as a fund that invests only in stocks.
EQUITY-INCOME PORTFOLIO:
The fund may be appropriate for investors who are willing to ride out stock
market fluctuations in pursuit of potentially high long-term returns. The
fund is designed for those who want some income from equity and bond
investments, but also want to be invested in the stock market for its
long-term growth potential.
INDEX 500 PORTFOLIO:
The fund may be appropriate for investors who are willing to ride out stock
market fluctuations in pursuit of potentially high long-term returns. The
fund is designed for those who want to keep expenses low while pursuing
growth of capital and income through a portfolio of securities that broadly
represents the U.S. stock market, as measured by the S&P 500.
Because the fund seeks to track, rather than beat, the performance of the
S&P 500, it is not managed in the same manner as other mutual funds. FMR
generally does not judge the merits of any particular stock as an
investment. Therefore, you should not expect to achieve the potentially
greater results that could be obtained by a fund that aggressively seeks
growth.
CONTRAFUND PORTFOLIO:
The fund may be appropriate for investors who are willing to ride out stock
market fluctuations in pursuit of potentially high long-term returns. The
fund is designed for those who are looking for an investment approach that
follows a contrarian philosophy. This approach focuses on companies that
are currently out of public favor but show potential for capital
appreciation.
GROWTH PORTFOLIO:
The fund may be appropriate for investors who are willing to ride out stock
market fluctuations in pursuit of potentially high long-term returns. The
fund is designed for those who want to pursue growth wherever it may arise,
and who understands that this strategy often leads to investments in
smaller, less well-known companies. The fund invests for growth and does
not pursue an income strategy.
OVERSEAS PORTFOLIO:
The fund may be appropriate for investors who want to pursue their
investment goals in markets outside the United States. By including
international investments in your portfolio, you can achieve additional
diversification and participate in growth opportunities around the world.
However, it is important to note that investments in foreign securities
involve risks in addition to those of U.S. investments.
In addition to general risks, international investing involves different or
increased risks. The performance of the fund depends upon currency values,
the political and regulatory environment, and overall economic factors in
the countries in which the fund invests.
INVESTMENT PRINCIPLES AND RISKS
The value of each fund's investments varies based on many factors. Stock
values fluctuate in response to the activities of individual companies and
general market and economic conditions. Each fund spreads investment risk
by limiting its holdings in any one company or industry.
The value of bonds fluctuates based on changes in domestic and foreign
interest rates and the credit quality of the issuer, market conditions, and
other economic and political news. In general, bond prices rise when
interest rates fall, and vice versa. This effect is usually more pronounced
for longer-term securities. Lower-quality securities offer higher yields,
but also carry more risk.
Because many of the funds' investments may be denominated in foreign
currencies, changes in the value of foreign securities can significantly
affect a fund's share price. General economic and political factors in the
various world markets can also impact the value of your investment. The
value of some of the funds' investments may fluctuate based on other
factors affecting security values such as commodity prices and currency
values. FMR may use various investment techniques to hedge a fund's risks,
but there is no guarantee that these strategies will work as intended. When
fund shares are redeemed, they may be worth more or less than their
original cost.
FMR normally invests each fund's assets according to its investment
strategy. High Income, Equity-Income, Growth, Overseas, Asset Manager,
Asset Manager: Growth, Index 500 and Contrafund Portfolios also reserve the
right to invest without limitation in preferred stocks and investment-grade
debt instruments for temporary, defensive purposes. Investment Grade Bond
Portfolio reserves the right to invest without limitation in
investment-grade money market or short-term debt instruments for temporary,
defensive purposes.
MONEY MARKET PORTFOLIO
Money Market Portfolio seek s to earn a high level of current income
while maintaining a stable $1.00 share price by investing in high-quality,
short-term money market securities of different types.
The fund will invest in U.S. dollar-denominated securities of domestic and
foreign issuers, including banks and other financial institutions,
governments and their agencies or instrumentalities, and corporations.
The fund earns income at current money market rates. It stresses income,
preservation of capital, and liquidity, and does not seek the higher yields
or capital appreciation that more aggressive investments may provide. The
fund's yield will vary from day to day and generally reflects current
short-term interest rates and other market conditions.
When fund shares are redeemed, they should be worth the same amount as when
they were purchased. Of course, there is no guarantee that the fund will
maintain a stable $1.00 share price. The fund follows industry-standard
guidelines on the quality and maturity of its investments, which are
designed to help maintain a stable $1.00 share price. The fund will
purchase only high-quality securities that FMR believes present minimal
credit risks and will observe maturity restrictions on securities it buys.
In general, securities with longer maturities are more vulnerable to price
changes, although they may provide higher yields. It is possible that a
major change in interest rates or a default on the fund's investments could
cause its share prices (and the value of your investment) to change.
INVESTMENT GRADE BOND PORTFOLIO
The fund seeks high current income by investing primarily in fixed-income
obligations of all types. FMR invests at least 65% of the fund's total
assets in investment-grade, fixed-income securities such as bonds, notes
and debentures. The fund invests in domestic and foreign investment-grade
debt securities and maintains a dollar-weighted average maturity of ten
years or less. In determining a security's maturity for purposes of
calculating its average maturity, estimates of the expected time for its
principal to be paid may be used. This can be substantially shorter than
its stated final maturity. The fund may also invest in futures contracts
and other derivatives to adjust its investment exposure.
The fund's yield and share price change daily based on changes in interest
rates, market conditions, and other political and economic news, and on the
quality and maturity of its investments. BECAUSE THE FUND INVESTS IN
FIXED-INCOME SECURITIES, ITS SHARE PRICE IS RELATED TO CHANGES IN INTEREST
RATES. FMR may use various investment techniques to hedge the fund's risks,
but there is no guarantee that these strategies will work as intended.
INTEREST RATE RISK
In general, bond prices rise
when interest rates fall, and
vice versa. Funds that hold
short-term bonds are usually
less affected by changes in
interest rates than long-term
bond funds. For that reason,
long-term bond funds typically
offer higher yields and carry
more risk than short-term
bond funds.
(checkmark)
HIGH INCOME PORTFOLIO
The fund seeks high current income by investing primarily in all types of
income-producing debt securities, preferred stocks, and convertible
securities. FMR normally invests at least 65% of the fund's total assets in
these securities. The fund may also consider the potential for growth of
capital by investing up to 20% in common stocks and other equity securities
when consistent with the fund's primary objective or when acquired as part
of a unit combining fixed-income and equity securities.
Although the fund has no limits on the quality and maturity of its
investments, its strategy typically leads to longer-term, lower-quality,
fixed-income securities. These domestic and foreign investments may present
the risk of default or may be in default. If consistent with its investment
objective, however, the fund can also invest in common stocks, other equity
securities, and debt securities not currently paying interest but which are
expected to do so in the future. Because of the fund's investment strategy,
its performance is especially affected by individual company news.
In addition, the fund's yield and share price will change based on changes
in interest rates, market conditions and other political and economic news.
In general, bond prices rise when interest rates fall, and vice versa. FMR
may use various investment techniques to hedge the fund's risks, but there
is no guarantee that these strategies will work as intended.
See the section entitled "Securities and Investment Practices" for risks
associated with lower-quality debt securities.
ASSET MANAGER PORTFOLIO AND
ASSET MANAGER: GROWTH PORTFOLIO
Each fund seeks to achieve its investment objective by allocating its
assets among stocks, bonds, short-term and other instruments of U.S. and
foreign issuers. Each fund however, has a different objective and pursues
its objective by investing within different asset allocation ranges.
ASSET MANAGER seeks high total return with reduced risk over the long term.
ASSET MANAGER: GROWTH seeks to maximize total return over the long term.
Each fund allocates its assets among the following classes, or types, of
investments. The STOCK CLASS includes equity securities of all types. The
BOND CLASS includes all varieties of fixed-income instruments with
maturities of more than three years (including adjustable-rate preferred
stocks). The SHORT-TERM CLASS includes all types of short-term instruments
with remaining maturities of three years or less. Some types of
investments, such as indexed securities, can fall into more than one asset
class. The funds may also make other investments that do not fall within
these classes.
FMR has the ability to allocate each fund's assets within specified ranges.
Each fund's NEUTRAL MIX indicates the benchmark for its combination of
investments in each asset class over time. FMR may change the neutral mix
from time to time. The following chart illustrates the range and
approximate neutral mix for each asset class.
ASSET MANAGER
Range Neutral mix
STOCK CLASS 10-60% 40%
BOND CLASS 20-60% 40%
SHORT-TERM CLASS 0-70% 20%
Asset Manager's approach spreads the fund's assets among all three classes,
moderating both the risk and return potential of stocks, bonds, and
short-term instruments.
ASSET MANAGER: GROWTH
Range Neutral mix
STOCK CLASS 0-100% 65%
BOND CLASS 0-100% 30%
SHORT-TERM CLASS 0-100% 5%
Asset Manager: Growth's more aggressive approach focuses on stocks for high
potential returns. However, because the fund can invest in bonds and
short-term instruments, its return may not be as high as a fund that
invests only in stocks.
Although the funds seek to reduce their overall risk by diversifying among
different types of investments, they aggressively invest in a wide variety
of security types, including stocks and bonds issued in developed and
developing countries and derivative transactions. Since the funds are
subject to the risks of each investment type, the funds and their
performance are affected by many factors.
In pursuit of each fund's objective, FMR will not try to pinpoint the
precise moment when a major reallocation should be made. Instead, FMR
regularly reviews each fund's allocation and makes changes gradually to
favor investments that it believes will provide the most favorable outlook
for achieving each fund's objective. Under normal circumstances, a single
reallocation will not involve more than 10% of Asset Manager's total
assets, or 20% of Asset Manager: Growth's total assets. Although FMR uses
its expertise and resources in allocating assets, FMR's decisions may not
be advantageous to a fund.
Each fund diversifies across investment types more than most mutual funds
but keep in mind that no one mutual fund can provide an appropriate
balanced investment plan for all investors.
EQUITY-INCOME PORTFOLIO
The fund seeks reasonable income by investing primarily in income-producing
equity securities. FMR normally invests at least 65% of the fund's total
assets in these securities. The remainder of the fund's assets will tend to
be invested in debt obligations, many of which are expected to be
convertible into common stock (if convertible securities present favorable
investment opportunities). The fund has the flexibility, however, to invest
the balance in all types of domestic and foreign securities, including
bonds of varying quality. The fund seeks to achieve a yield that beats that
of the S&P 500. The fund does not expect to invest in debt securities of
companies that do not have proven earnings or credit. When choosing the
fund's investments, FMR also considers the potential for capital
appreciation.
INDEX 500 PORTFOLIO
The fund seeks to match the total return of the S&P 500 while keeping
expenses low. FMR normally invests at least 80% (65% if fund assets are
below $20 million) of the fund's assets in equity securities of companies
that compose the S&P 500.
The S&P 500 is made up of 500 common stocks, most of which trade on the New
York Stock Exchange. Standard & Poor's Corporation is neither an affiliate
nor a sponsor of the fund, and inclusion of a stock in the index does not
imply that it is a good investment.
It is generally acknowledged that the S&P 500 broadly represents the
performance of publicly traded common stocks in the U.S. In seeking a 98%
or better long-term correlation of the fund's total return to that of the
S&P 500, the fund utilizes a "passive" or "indexing" approach and tries to
allocate its assets similarly to those of the index. The fund's composition
may not always be identical to that of the S&P 500. FMR may choose, if
extraordinary circumstances warrant, to exclude a stock held in the S&P 500
and include a similar stock in its place if doing so will help the fund
achieve its objective. FMR monitors the correlation between the performance
of the fund and the S&P 500 on a regular basis. In the unlikely event that
the fund cannot achieve a long-term correlation of 98% or better, the
trustees will consider alternative arrangements.
Although the fund focuses on common stocks, it may also invest in other
equity securities and in other types of instruments. The fund purchases
short-debt securities for cash management purposes and uses various
investment techniques, such as futures contracts, to adjust its exposure to
the S&P 500.
Please refer to the Appendix for more information on the S&P 500.
CONTRAFUND PORTFOLIO
The fund seeks capital appreciation by investing in companies that FMR
believes to be undervalued due to an overly pessimistic appraisal by the
public. In pursuit of the fund's goal, FMR looks for companies with the
following characteristics:
(small solid bullet) unpopular, but improvements seem possible due to
developments such as a change in management, a new product line, or an
improved balance sheet,
(small solid bullet) recently popular, but temporarily out of favor due to
short-term or one-time factors, or
(small solid bullet) undervalued compared to other companies in the same
industry or relative to the company's expected earnings growth rate .
This strategy can lead to investments in domestic or foreign companies,
many of which may not be well known. The stocks of small companies often
involve more risk than those of larger companies. The fund usually invests
primarily in common stock and securities convertible into common stock, but
it has the flexibility to invest in any type of security that may produce
capital appreciation.
GROWTH PORTFOLIO
The fund seeks capital appreciation by investing primarily in common stocks
and securities convertible into common stock of companies that FMR believes
have above-average growth potential. The fund however, is not restricted to
any one type of security and may pursue capital appreciation through the
purchase of bonds and preferred stocks.
Growth may be measured by factors such as earnings or gross sales. FMR
tends to focus on smaller, lesser known companies in new and emerging areas
of the economy. However, FMR may also pursue growth in larger or
revitalized companies that hold a strong position in the market. These may
be found in mature or declining industries.
COMPANIES WITH STRONG GROWTH POTENTIAL often have new products,
technologies, distribution channels, or other opportunities. As a general
rule, these domestic and foreign companies tend to be small and mid-sized
companies that have higher than average price/earnings (P/E) ratios. A high
P/E ratio means that the stock is more expensive than average relative to
the company's earnings. The market prices of these stocks may be
particularly sensitive to economic, market, or company news.
Stock values fluctuate in response to the activities of individual
companies and general market and economic conditions. The fund spreads
investment risk by limiting its holdings in any one company or industry.
FMR may use various investment techniques to hedge the fund's risks, but
there is no guarantee that these strategies will work as FMR intends.
OVERSEAS PORTFOLIO
The fund seeks long-term growth of capital by investing primarily in
securities of issuers whose principal activities are outside of the U.S.
FMR normally invests at least 65% of the fund's total assets in securities
of issuers from at least three different countries outside of North America
(the U.S., Canada, Mexico, and Central America). The fund expects to invest
a majority of its assets in equity securities, but may also invest in debt
securities of any quality.
The fund may invest in the securities of any issuer, including companies
and other business organizations as well as governments and government
agencies. The fund, however, will tend to focus on the equity securities of
both large and small companies. The fund may invest in short-term debt
securities and money market instruments for cash management purposes.
The fund's focus on international investing involves increased or
additional risks compared to funds which invest primarily in domestic
equity securities. International funds have increased economic and
political risks as they are exposed to events and factors in the various
world markets. Also, because many of the fund's investments are denominated
in foreign currencies, changes in the value of foreign currencies can
significantly affect the fund's share price. FMR may use a variety of
techniques to either increase or decrease the fund's exposure to any
currency.
FMR may also use different investment techniques in an attempt to hedge the
fund's risks, but there is no guarantee that these strategies will work as
FMR intends.
FMR determines where an issuer or its principal business is located by
looking at such factors as its country of organization, the primary trading
market for its securities, and the location of its assets, personnel,
sales, and earnings. When allocating the fund's investments among countries
and regions, FMR considers such factors as the potential for economic
growth, expected levels of inflation, governmental policies, and the
outlook for currency relationships.
THE FUNDS IN DETAIL
CHARTER
EACH FUND IS A MUTUAL FUND: an investment that pools shareholders' money
and invests it toward a specified goal. Money Market Portfolio, High Income
Portfolio, Equity-Income Portfolio, Growth Portfolio and Overseas Portfolio
are diversified funds of Variable Insurance Products Fund (VIP) and
Investment Grade Bond Portfolio, Asset Manager Portfolio, Index 500
Portfolio, Asset Manager: Growth Portfolio and Contrafund Portfolio are
diversified funds of Variable Insurance Products Fund II (VIPII). VIP and
VIPII are open-end management investment companies organized as
Massachusetts business trusts on November 13, 1981, and March 21, 1988,
respectively. There is a remote possibility that one fund might become
liable for a misstatement in the prospectus about another fund.
EACH FUND IS GOVERNED BY A BOARD OF TRUSTEES which is responsible for
protecting the interests of shareholders. The trustees are experienced
executives who meet throughout the year to oversee the funds' activities,
review contractual arrangements with companies that provide services to the
funds, and review the funds' performance. The majority of trustees are not
otherwise affiliated with Fidelity.
THE FUNDS MAY HOLD SPECIAL MEETINGS AND MAIL PROXY MATERIALS. These
meetings may be called to elect or remove trustees, change fundamental
policies, approve a management contract, or for other purposes.
Shareholders not attending these meetings are encouraged to vote by proxy.
An insurance company issuing a variable contract that participates in the
funds will vote shares held in its separate account as required by law and
interpretations thereof, as may be amended or changed from time to time. In
accordance with current law and interpretations thereof, a participating
insurance company is required to request voting instructions from
policyowners and must vote shares in the separate account in proportion to
the voting instructions received. Your insurance company is entitled to one
vote for each share it owns. For a further discussion, please refer to your
insurance company's separate account prospectus.
FMR AND ITS AFFILIATES
Fidelity Investments is one of the largest investment management
organizations in the United States and has its principal business address
at 82 Devonshire Street, Boston, Massachusetts , 02109. It includes a
number of different subsidiaries and divisions which provide a variety of
financial services and products. The funds employ various Fidelity
companies to perform activities required for their operation.
The funds are managed by FMR which handles each fund's business affairs
and, with the assistance of affiliates for certain funds, chooses each
fund's investments.
(small solid bullet) FMR Texas Inc. (FMR Texas) in Irving, Texas,
serves as a sub-adviser for Money Market Portfolio.
(small solid bullet) Fidelity Management & Research (U.K.) Inc. (FMR U.K.),
in London, England, serves as a sub-adviser for High Income, Asset Manager,
Asset Manager: Growth, Contrafund and Overseas Portfolios.
(small solid bullet) Fidelity Management & Research (Far East) Inc.
(FMR Far East), in Tokyo, Japan, serves as a sub-adviser for High Income,
Asset Manager, Asset Manager: Growth, Contrafund and Overseas Portfolios.
(small solid bullet) Fidelity International Investment Advisors (FIIA), in
Pembroke, Bermuda, serves as a sub-adviser for Overseas Portfolio.
(small solid bullet) Fidelity International Investment Advisors (U.K.)
Limited (FIIAL U.K.), in Kent, England, serves as a sub-adviser for
Overseas Portfolio.
Barry Jay Coffman is vice president and manager of High Income Portfolio,
which he has managed since August 1990. Mr. Coffman also assists on
Fidelity Puritan Fund. Previously, he served as an assistant manager and
analyst for the high yield bond group. Before joining Fidelity in 1986, Mr.
Coffman was an analyst for Equitable Capital Management and was a senior
auditor at Arthur Anderson & Company.
Bettina Doulton is the manager of Equity-Income Portfolio, which she has
managed since July 1993. Ms. Doulton is also manager of Fidelity Advisor
Equity Portfolio Income. Previously, she managed Fidelity Select Automotive
Portfolio and assisted on Fidelity Magellan Fund and Fidelity Equity-Income
Fund. Ms. Doulton also served as an analyst following the domestic and
European automotive and tire manufacturing industry as well as the gaming
and lodging industry. She joined Fidelity in 198 6 .
Lawrence Greenberg is vice president and manager of Growth Portfolio, which
he has managed since April 1991. He also manages Emerging Growth.
Previously, Mr. Greenberg managed Select Environmental Services and Select
Medical Delivery. He also assisted on Fidelity Magellan Fund. Mr. Greenberg
joined Fidelity in 1986.
John R. Hickling is manager and vice president of Overseas
Portfolio , which he has managed since January 1993. Mr. Hickling also
manages Advisor Overseas and Fidelity Overseas. Previously, he
managed Japan, Emerging Markets, Europe, International Opportunities, and
Pacific Basin. Mr. Hickling joined Fidelity in 1982.
FIDELITY FACTS
Fidelity offers the broadest
selection of mutual funds in
the world.
(solid bullet) Number of Fidelity mutual
funds: over 210
(solid bullet) Assets in Fidelity mutual
funds: over $250 billion
(solid bullet) Number of shareholder
accounts: over 22 million
(solid bullet) Number of investment
analysts and portfolio
managers: over 200
(checkmark)
Donald Taylor is manager and vice president of Investment Grade Bond
Portfolio, which he has managed since September 1989. Mr. Taylor also
manages Advisor Short Fixed Income, Fidelity Short-Term Bond Portfolio and
Spartan Short-Term Income. In addition, Mr. Taylor manages Income Plus for
Fidelity International. Previously, he managed Corporate Trust, Qualified
Dividend, Zero Coupon Bond Fund, and Utilities Income. Mr. Taylor joined
Fidelity in 1986.
Andrew Offit is vice president and manager of Asset Manager Portfolio
and Asset Manager: Growth Portfolio, which he has managed since February
1995. Mr. Offit also manages Fidelity Canada Asset Manager. He managed
Fidelity Convertible Securities Fund from 1992 to February 1995. Mr. Offit
joined Fidelity in 1987 as a research analyst for the hospital supply,
medical technology, drug distribution and retail drug sectors. He
subsequently managed the Fidelity Select Biotechnology and Fidelity Select
Health Care Portfolios. He also was assistant fund manager for Fidelity
Growth & Income Fund and Fidelity Magellan Fund.
William Danoff is manager and vice president of Contrafund Portfolio, which
he has managed since January 1995. Mr. Danoff also manages Fidelity
Contrafund, which he has managed since October 1990. Previously, he managed
Select Retailing and assisted on Magellan. Mr. Danoff joined Fidelity in
1986 as an equity analyst.
Each fund has an investment objective similar to that of an existing
Fidelity retail fund. Money Market Portfolio is most similar to Fidelity
Cash Reserves, High Income Portfolio to Spartan High Income Fund,
Equity-Income Portfolio to Fidelity Equity-Income Fund, Growth Portfolio to
Fidelity Growth Company Fund, Overseas Portfolio to Fidelity Overseas Fund,
Investment Grade Bond Portfolio to Fidelity Investment Grade Bond
Fund, Asset Manager Portfolio to Fidelity Asset Manager, Index 500
Portfolio to Fidelity Market Index Fund, Contrafund Portfolio to Fidelity
Contrafund and Asset Manager: Growth Portfolio to Fidelity Asset Manager:
Growth. Performance of a separate account investing in these funds
is not expected to be the same as the performance of the corresponding
retail fund due in part to dissimilarities in their investments. Various
insurance related costs at the insurance company's separate account will
also affect performance.
Each fund sells its shares to separate accounts of insurance companies
which are both affiliated and unaffiliated with FMR. Each fund currently
does not foresee any disadvantages to policyowners arising out of the fact
that each fund offers its shares to separate accounts of various insurance
companies to serve as the investment medium for their variable products.
Nevertheless, the Board of Trustees intends to monitor events in order to
identify any material irreconcilable conflicts which may possibly arise,
and to determine what action, if any, should be taken in response to such
conflicts. If such a conflict were to occur, one or more insurance
companies' separate accounts might be required to withdraw its investments
in one or more funds and shares of another fund may be substituted. This
might force a fund to sell securities at disadvantageous prices. In
addition, the Board of Trustees may refuse to sell shares of any fund to
any separate account or may suspend or terminate the offering of shares of
any fund if such action is required by law or regulatory authority or is in
the best interests of the shareholders of the fund.
Fidelity investment personnel may invest in securities for their own
account pursuant to a code of ethics that establishes procedures for
personal investing and restricts certain transactions.
Fidelity Distributors Corporation (FDC) distributes and markets Fidelity's
funds and services. Fidelity Investments Institutional Operations Company
(FIIOC) performs transfer agent servicing functions for the funds.
FMR Corp. is the ultimate parent company of FMR, FMR Texas , FMR U.K., and
FMR Far East. Through ownership of voting common stock, members of the
Edward C. Johnson 3d family form a controlling group with respect to FMR
Corp. Changes may occur in the Johnson family group, through death or
disability, which would result in changes in each individual family
members' holding of stock. Such changes could result in one or more family
members becoming holders of over 25% of the stock. FMR Corp. has received
an opinion of counsel that changes in the composition of the Johnson family
group under these circumstances would not result in the termination of the
funds' management or distribution contracts and, accordingly, would not
require a shareholder vote to continue operation under those contracts.
Fidelity International Limited (FIL), is the parent company of FIIA and
FIIAL U.K. The Johnson family group also owns, directly or indirectly, more
than 25% of the voting common stock of FIL.
A broker-dealer may use a portion of the commissions paid by a fund to
reduce its custodian or transfer agent fees. FMR may use its broker-dealer
affiliates and other firms that sell fund shares to carry out a fund's
transactions, provided that the fund receives brokerage services and
commission rates comparable to those of other broker-dealers.
SECURITIES AND INVESTMENT PRACTICES
The following pages contain more detailed information about types of
instruments in which a fund may invest, and strategies FMR may employ in
pursuit of a fund's investment objective. A summary of risks and
restrictions associated with these instrument types and investment
practices is included as well. A complete listing of each fund's policies
and limitations and more detailed information about each fund's investments
is contained in the funds' SAI. Policies and limitations are considered at
the time of purchase; the sale of instruments is not required in the event
of a subsequent change in circumstances.
FMR may not buy all of these instruments or use all of these techniques to
the full extent permitted unless it believes that doing so will help a fund
achieve its goal. Current holdings and recent investment strategies are
described in the funds' financial reports, which are sent to the funds'
shareholders twice a year. For a free SAI or financial report, contact your
insurance company.
MONEY MARKET SECURITIES are high-quality, short-term investments issued by
the U.S. government, corporations, financial institutions, and other
entities. These investments may carry fixed, variable, or floating interest
rates. A security's credit may be enhanced by a bank, insurance company, or
other entity. Some money market instruments employ a trust or other
similar structure to modify the maturity, price characteristics, or quality
of financial assets so that they are eligible investments for money market
funds. If the structure does not perform as intended, adverse investment
consequences may result.
Money market securities may include commercial paper, certificates of
deposit, bankers' acceptances, and time deposits .
EQUITY SECURITIES may include common stocks, preferred stocks, convertible
securities, and warrants. Common stocks, the most familiar type, represent
an equity (ownership) interest in a corporation. Although equity securities
have a history of long-term growth in value, their prices fluctuate based
on changes in a company's financial condition and on overall market and
economic conditions. Smaller companies are especially sensitive to these
factors.
RESTRICTIONS: With respect to 75% of its total assets, each fund may not
own more than 10% of the outstanding voting securities of a single issuer.
DEBT SECURITIES. Bonds and other debt instruments are used by issuers to
borrow money from investors. The issuer pays the investor a fixed or
variable rate of interest, and must repay the amount borrowed at maturity.
Some debt securities, such as zero coupon bonds, do not pay current
interest, but are purchased at a discount from their face values. Debt
securities, loans, and other direct debt have varying degrees of quality
and varying levels of sensitivity to changes in interest rates. Longer-term
bonds are generally more sensitive to interest rate changes than short-term
bonds.
Investment-grade debt securities are medium-and high-quality securities.
Some, however, may possess speculative characteristics and may be more
sensitive to economic changes and to changes in the financial condition of
issuers.
Lower-quality debt securities (sometimes called "junk bonds") are often
considered to be speculative and involve greater risk of default or price
changes due to changes in interest rates, economic conditions, and the
issuer's creditworthiness. As a result, their market prices tend to
fluctuate more than higher-quality securities. Lower-quality securities are
those rated lower than Baa by Moody's Investors Service, Inc. (Moody's) or
BBB by Standard & Poor's Corporation (S&P), and unrated debt securities
determined by FMR to be of equivalent quality.
The default rate of lower-quality debt securities is likely to be higher
when issuers have difficulty meeting projected goals or obtaining
additional financing. This could occur during economic recessions or
periods of high interest rates. If an issuer defaults, a fund may try to
protect its interests and those of other security holders if it determines
this to be in the interest of its shareholders.
Lower-quality securities may be thinly traded, making them difficult to
sell promptly at an acceptable price. If market quotations are unavailable,
lower-quality securities are valued under guidelines established by the
Board of Trustees, including the use of outside pricing services. Negative
publicity or investor perceptions may make this difficult, and could hurt a
fund's ability to dispose of these securities.
The table on the following page provide s a summary of ratings
assigned to debt holdings (not including money market instruments) in
certain of the funds' portfolios. These figures are dollar-weighted
averages of month-end portfolio holdings during fiscal 1994, and are
presented as a percentage of total security investments. These percentages
are historical and do not necessarily indicate a fund's current or future
debt holdings.
RESTRICTIONS: Purchase of a debt security is consistent with a fund's debt
quality policy if it is rated at or above the stated level by Moody's or
rated in the equivalent categories by S&P, or is unrated but judged to be
of equivalent quality by FMR. Money Market and Index 500 will not invest in
lower-quality debt securities; Investment Grade Bond currently limits its
investments in debt securities to those rated Baa-quality or above;
Equity-Income, Contrafund, Asset Manager: Growth, Overseas, and Growth
Portfolios currently limit investment in lower than Baa-quality debt
securities to 35% of each fund's assets; Asset Manager currently intends to
limit its investment in lower than Baa-quality debt securities to 35% and
currently intends to limit its investment in lower than Baa-quality debt
securities as determined by FMR, to 20% of its total assets; and High
Income has no limit on the amount of its assets that may be invested in
lower-quality debt securities.
FISCAL 1994 DEBT HOLDINGS, BY RATING
Fiscal 1994 Debt Holdings, by Rating MOODY'S STANDARD & POOR'S
INVESTORS SERVICE, INC. CORPORATION
Rating Average [A] Rating Average[A]
High Equity Asset Investment High Equity Asset Investm
ent
INVESTMENT GRADE Income Income Manager Grade Bond Income Income
Manag
er Grade Bond
Highest quality Aaa 0.00 % 1.91 % 9.81 % 36.82%
AAA 0.00 % 1.91 % 9.56 % 36.82
%
High quality Aa 0.00 % 0.11 % 1.65 % 5.37% AA
0.00 % 0.11 % 1.86 % 9.36
%
Upper-medium grade A 0.00 % 0.38 % 0.03 % 20.60% A
0.00 % 0.22 % 0.08
% 17.80%
Medium grade Baa 0.00 % 0.49 % 0.04 % 14.30% BBB
0.00 % 0.57 % 0.34 % 16.79
%
LOWER QUALITY
Moderately speculative Ba 3.39 % 0.14 % 6.56 %
3.01% BB 9.10 % 0.26 % 4.93
% 0.42%
Speculative B 45.77 % 1.93 % 7.40 % 0.00% B
37.65 % 1.77 % 4.61 % 0.00
%
Highly speculative Caa 8.50 % 0.00 % 0.15 % 0.00%
CCC 7.01 % 0.00 % 0.19 % 0.00
%
Poor quality Ca 1.48 % 0.00 % 0.01 % 0.00% CC
0.18 % 0.00 % 0.00 % 0.00
%
Lowest quality, no interest C C
In default, in arrears --- D 0.98 % 0.00 % 0.02
% 0.00%
59.14 % 4.96 % 25.65 % 80.10% 54.92 %
4.84 % 21.59 % 81.1
9%
[A] FOR SOME FOREIGN GOVERNMENT OBLIGATIONS, FMR ASSIGNS THE RATINGS OF THE
SOVEREIGN CREDIT OF THE ISSUING GOVERNMENT. THE DOLLAR-WEIGHTED AVERAGE OF
DEBT SECURITIES NOT RATED DIRECTLY OR INDIRECTLY BY MOODY'S OR S&P AMOUNTED
TO 19.69% FOR HIGH INCOME , 0.22% FOR EQUITY-INCOME, 2.77% FOR
ASSET
MANAGER AND 1.64% FOR INVESTMENT GRADE BOND . THIS MAY INCLUDE
SECURITIES RATED BY OTHER NATIONALLY RECOGNIZED RATING SERVICES, AS WELL AS
UNRATED SECURITIES. FMR HAS DETERMINED THAT UNRATED SECURITIES THAT ARE
LOWER QUALITY ACCOUNT FOR 19.69 % OF HIGH INCOME'S TOTAL
SECURITY
INVESTMENTS. REFER TO THE APPENDIX FOR A MORE COMPLETE DISCUSSION OF
THESE
RATINGS.
U.S. GOVERNMENT SECURITIES are high-quality debt securities issued or
guaranteed by the U.S. Treasury or by an agency or instrumentality of the
U.S. government. Not all U.S. government securities are backed by the full
faith and credit of the United States. For example, securities issued by
the Federal Farm Credit Bank or by the Federal National Mortgage
Association are supported by the instrumentality's right to borrow money
from the U.S. Treasury under certain circumstances. However, securities
issued by the Financing Corporation are supported only by the credit of the
entity that issued them.
STRIPPED SECURITIES are the separate income or principal components of a
debt instrument. These involve risks that are similar to those of other
debt securities, although they may be more volatile, and certain stripped
securities move in the same direction as interest rates.
VARIABLE AND FLOATING RATE SECURITIES have interest rates that
are periodically adjusted either at specific intervals or whenever a
benchmark rate changes. These interest rate adjustments are designed to
help stabilize the security's price.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS are trading practices in
which payment and delivery for the securities take place at a future date.
The market value of a security could change during this period, which could
affect the market value of a fund's assets or its yield.
FOREIGN SECURITIES and foreign currencies may involve additional risks.
These include currency fluctuations, risks relating to political or
economic conditions in the foreign country, and the potentially less
stringent investor protection and disclosure standards of foreign markets.
In addition to the political and economic factors that can affect foreign
securities, a governmental issuer may be unwilling to repay principal and
interest when due, and may require that the conditions for payment be
renegotiated. These factors could make foreign investments, especially
those in developing countries, more volatile.
Of particular importance to Money Market Portfolio, foreign obligations may
involve different risks than domestic obligations, including risks relating
to the political and economic conditions of the foreign country involved,
which could affect the payment of principal or interest. Issuers of
foreign securities include foreign governments, corporations, and
banks.
RESTRICTIONS: FMR limits the amount of High Income, Equity-Income, Growth,
Investment Grade Bond, Asset Manager and Index 500 Portfolio's net assets
that may be invested in foreign securities to 50%. However, each fund,
including Overseas, Asset Manager: Growth and Contrafund Portfolios, may
not invest more than 20% of its assets in any one country. Each fund may
have an additional 15% invested in securities of issuers located in any one
(but only one) of the following countries: Australia, Canada, France,
Japan, the United Kingdom or Germany. A fund must be diversified in at
least three different countries if it exceeds 20% in any one country. Money
Market Portfolio may not invest in foreign securities unless they are
denominated in U.S. dollars.
ASSET-BACKED AND MORTGAGE SECURITIES may include interests in pools of
lower-rated debt securities, consumer loans or mortgages, or complex
instruments such as collateralized mortgage obligations and stripped
mortgage-backed securities. The value of these securities may be
significantly affected by changes in interest rates, the market's
perception of issuers, and the creditworthiness of the parties involved.
Some securities may have a structure that makes their reaction to interest
rates and other factors difficult to predict, making their value highly
volatile. These securities may also be subject to prepayment risk.
REPURCHASE AGREEMENTS. In a repurchase agreement, a fund buys a security at
one price and simultaneously agrees to sell it back at a higher price.
Delays or losses could result if the other party to the agreement defaults
or becomes insolvent.
FOREIGN REPURCHASE AGREEMENTS may be less well secured than U.S. repurchase
agreements, and may be denominated in foreign currencies. They also may
involve greater risk of loss if the counterparty defaults. Some
counterparties in these transactions may be less creditworthy than those in
U.S. markets.
RESTRICTIONS: Money Market Portfolio may not use investment techniques
which are inconsistent with the fund's goal of maintaining a stable share
price.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a fund
temporarily transfers possession of a portfolio instrument to another party
in return for cash. This could increase the risk of fluctuation in the
fund's yield or in the market value of its assets.
REAL ESTATE-RELATED INSTRUMENTS include real estate investment trusts,
commercial and residential mortgage-backed securities, and real estate
financings. Real estate-related instruments are sensitive to factors such
as changes in real estate values and property taxes, interest rates, cash
flow of underlying real estate assets, overbuilding, and the management
skill and creditworthiness of the issuer. Real estate-related instruments
may also be affected by tax and regulatory requirements, such as those
relating to the environment.
ADJUSTING INVESTMENT EXPOSURE. A fund can use various techniques to
increase or decrease its exposure to changing security prices, interest
rates, currency exchange rates, commodity prices, or other factors that
affect security values. These techniques may involve derivative
transactions such as buying and selling options and futures contracts,
entering into currency exchange contracts or swap agreements, purchasing
indexed securities, and selling securities short.
FMR can use these practices to adjust the risk and return characteristics
of a fund's portfolio of investments. If FMR judges market conditions
incorrectly or employs a strategy that does not correlate well with a
fund's investments, these techniques could result in a loss, regardless of
whether the intent was to reduce risk or increase return. These techniques
may increase the volatility of a fund and may involve a small investment of
cash relative to the magnitude of the risk assumed. In addition, these
techniques could result in a loss if the counterparty to the transaction
does not perform as promised.
RESTRICTIONS: Money Market Portfolio may not use investment techniques
which are inconsistent with the fund's goal of maintaining a stable share
price.
DIRECT DEBT. Loans and other direct debt instruments are interests in
amounts owed to another party by a company, government, or other borrower.
They have additional risks beyond conventional debt securities because they
may entail less legal protection for a fund, or there may be a requirement
that the fund supply additional cash to a borrower on demand.
RESTRICTIONS: Money Market and Index 500 Portfolios may not use investment
techniques which are inconsistent with the funds ' objective .
ILLIQUID AND RESTRICTED SECURITIES. Some investments may be determined by
FMR, under the supervision of the Board of Trustees, to be illiquid, which
means that they may be difficult to sell promptly at an acceptable price.
The sale of some securities, including illiquid securities, may be subject
to legal restrictions. Difficulty in selling securities may result in a
loss or may be costly to a fund.
RESTRICTIONS. Equity-Income, Growth, Investment Grade Bond, Index 500,
Contrafund, Asset Manager and Asset Manager: Growth Portfolios each may not
purchase a security if, as a result, more than 10% of its net assets would
be invested in illiquid securities. High Income and Overseas Portfolios
each may not purchase a security if, as a result, more than 15% of its net
assets would be invested in illiquid securities. Money Market Portfolio
will invest less than 10% of its assets in illiquid securities.
WARRANTS are instruments which entitle the holder to buy underlying equity
securities at a specific price for a specific period of time. A warrant
tends to be more volatile than its underlying securities and ceases to have
value if it is not exercised prior to its expiration date. In addition,
changes in the value of a warrant do not necessarily correspond to changes
in the value of its underlying securities.
DIVERSIFICATION. Diversifying a fund's investment portfolio can reduce the
risks of investing. This may include limiting the amount of money invested
in any one issuer or, on a broader scale, in any one industry.
RESTRICTIONS: Money Market Portfolio may not invest more than 5% of its
total assets in the securities of any one issuer, except that the fund may
invest up to 10% of its assets in the highest quality securities of a
single issuer for up to three business days. The fund will invest more than
25% of its total assets in the financial services industry (see below).
These limitations do not apply to U.S. government securities.
With respect to 75% of total assets, High Income, Equity-Income, Growth,
Overseas, Investment Grade Bond, Index 500, Asset Manager, Asset Manager:
Growth and Contrafund Portfolios each may not invest more than 5% of its
total assets in any one issuer. Each fund also may not invest more than 25%
of its total assets in any one industry. These limitations do not apply to
U.S. government securities .
BORROWING. Each fund may borrow from banks or from other funds advised by
FMR, or through reverse repurchase agreements. If a fund borrows money, its
share price may be subject to greater fluctuation until the borrowing is
paid off. If a fund makes additional investments while borrowings are
outstanding, this may be considered a form of leverage.
RESTRICTIONS: Each fund may borrow only for temporary or emergency
purposes, or for Money Market, engage in reverse repurchase agreements,
but not in an amount exceeding 25% of its total assets.
LENDING. Lending securities to broker-dealers and institutions,
including Fidelity Brokerage Services, Inc. (FBSI) , an affiliate of
FMR, is a means of earning income. This practice could result in a loss or
a delay in recovering a fund's securities. A fund may also lend money to
other funds advised by FMR and to issuers in connection with certain direct
debt transactions.
RESTRICTIONS: Loans, in the aggregate, may not exceed 33% of a fund's total
assets.
OTHER INSTRUMENTS If consistent with its objective and policies, a fund's
investments may include depositary receipts, rights, and securities of
closed-end investment companies.
FINANCIAL SERVICES INDUSTRY. Companies in the financial services industry
are subject to various risks related to that industry, such as government
regulation, changes in interest rates, and exposure on loans, including
loans to foreign borrowers.
RESTRICTIONS: Money Market Portfolio will invest more than 25% of its total
assets in the financial services industry and its performance may be
affected by conditions affecting the industry.
FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS
Some of the policies and restrictions discussed on the preceding pages are
fundamental, that is, subject to change only by shareholder approval. The
following paragraphs restate all those that are fundamental. All policies
stated throughout this prospectus, other than those identified in the
following paragraphs, can be changed without shareholder approval.
MONEY MARKET PORTFOLIO seeks as high a level of current income as is
consistent with preservation of capital and liquidity by investing in money
market instruments. The fund will not purchase a security if, as a result,
more than 25% of its total assets would be invested in a particular
industry; except that the fund will invest more than 25% of its total
assets in the financial services industry. Loans, in the aggregate, may not
exceed 33% of the fund's total assets.
INVESTMENT GRADE BOND PORTFOLIO seeks as high a level of current income as
is consistent with the preservation of capital.
HIGH INCOME PORTFOLIO seeks a high level of current income by investing
primarily in high yielding, lower-quality, fixed-income securities, while
also considering growth of capital.
ASSET MANAGER PORTFOLIO seeks to obtain high total return with reduced risk
over the long-term by allocating its assets among stocks, bonds, and
short-term instruments.
ASSET MANAGER: GROWTH PORTFOLIO seeks to maximize total return by
allocating its assets among stocks, bonds, short-term instruments, and
other investments.
EQUITY-INCOME PORTFOLIO seeks reasonable income by investing primarily in
income-producing equity securities.
INDEX 500 PORTFOLIO seeks investment results that correspond to the total
return of common stocks publicly traded in the United States, as
represented by the S&P 500.
CONTRAFUND PORTFOLIO seeks long-term capital appreciation.
GROWTH PORTFOLIO seeks to achieve capital appreciation.
OVERSEAS PORTFOLIO seeks long-term growth of capital primarily through
investments in foreign securities.
EACH FUND (excluding Money Market Portfolio), with respect to 75% of total
assets, may not invest more than 5% of its total assets in any one issuer
and may not own more than 10% of the outstanding voting securities of a
single issuer. Each fund (excluding Money Market Portfolio) may not invest
more than 25% of its total assets in any one industry. Loans, in the
aggregate, may not exceed 33% of each fund's total assets.
INTERNAL REVENUE SERVICE (IRS) LIMITATIONS. In addition to the above, each
fund also follows certain limitations imposed by the IRS on separate
accounts of insurance companies relating to the tax-deferred status of
variable contracts. More specific information may be contained in your
insurance company's separate account prospectus.
BREAKDOWN OF EXPENSES
Like all mutual funds, the funds pay fees related to their daily
operations. Expenses paid out of a fund's assets are reflected in its share
price.
Each fund pays a MANAGEMENT FEE to FMR for managing its investments and
business affairs. FMR in turn, on behalf of Money Market, High Income,
Asset Manager, Asset Manager: Growth, Contrafund and Overseas Portfolios,
pays fees to affiliates who provide assistance with these services. Each
fund also pays OTHER EXPENSES, which are explained below .
FMR may, from time to time, agree to reimburse the funds for management
fees and other expenses above a specified limit. FMR retains the ability to
be repaid by a fund if expenses fall below the specified limit prior to the
end of the fiscal year. Reimbursement arrangements, which may be terminated
at any time without notice, can decrease a fund's expenses and boost its
performance.
MANAGEMENT FEE
EACH FUND'S MANAGEMENT FEE is calculated and paid to FMR every month. The
fee for each fund (excluding Money Market and Index 500 Portfolios) is
calculated by adding a GROUP FEE rate to an INDIVIDUAL FUND FEE rate, and
multiplying the result by each fund's average net assets.
INDEX 500 PORTFOLIO pays a monthly management fee to FMR at the annual rate
of 0.28% of the fund's average net assets.
MONEY MARKET PORTFOLIO'S management fee is calculated by multiplying the
sum of three components by the fund's average net assets. One component is
based on the average net assets of all the mutual funds advised by FMR,
another is fixed for the fund and the third is based on the fund's income.
The first component, the group fee rate, is discussed below. The second
component, the individual fund fee rate, is 0.03%. The income component is
6% of the fund's gross income in excess of a 5% yield and cannot rise above
0.24% of the fund's average net assets.
THE GROUP FEE RATE is based on the average net assets of all the mutual
funds advised by FMR. This rate cannot rise above 0.52% for Equity-Income,
Growth, Overseas, Asset Manager, Asset Manager: Growth and Contrafund
Portfolios, and 0.37% for Money Market, High Income and Investment Grade
Bond Portfolios, and it drops as total assets under management increase.
For December 31, 1994, the group fee rate was 0.3193 % for
Equity-Income, Growth, Overseas, Asset Manager, Asset Manager: Growth and
Contrafund Portfolios and 0.1563 % for Money Market, High Income and
Investment Grade Bond Portfolios.
Each fund's individual fund fee rate and total management fee for fiscal
year 1994 is outlined in the chart below.
Fund Individual Managem
fund ent
fee rate fee
Money Market Portfolio .03 .20
% %
Equity-Income Portfolio .20 .52
% %
Growth Portfolio .30 .62
% %
Contrafund Portfolio .30 .62
% % *
Investment Grade Bond Portfolio .30 .46
% %
Asset Manager Portfolio .40 .72
% %
Asset Manager: Growth Portfolio .40 .72
% % *
High Income Portfolio .45 .61
% %
Overseas Portfolio .45 .77
% %
* MANAGEMENT FEES FOR ASSET MANAGER: GROWTH AND CONTRAFUND ARE
ESTIMATED FOR 1995 AS THE FUNDS DID NOT COMMENCE OPERATIONS UNTIL
JANUARY 3, 1995.
For Overseas Portfolio, this rate was higher than that of most other mutual
funds, but not necessarily higher than those of a typical international
fund, due to the greater complexity, expense and commitment of resources
involved in international investing.
SUB-ADVISORY AGREEMENTS. On behalf of High Income, Asset Manager, Asset
Manager: Growth and Contrafund Portfolios, FMR has sub-advisory agreements
with two affiliates, FMR U.K. and FMR Far East. On behalf of Overseas
Portfolio, FMR has sub-advisory agreements with three affiliates: FMR U.K.,
FMR Far East, and FIIA. FIIA in turn has a sub-advisory agreement with
FIIAL U.K. These sub-advisers are compensated for providing FMR with
investment research and advice on issuers based outside the United States.
FMR pays FMR U.K. and FMR Far East fees equal to 110% and 105%,
respectively, of the costs of providing these services. FMR pays FIIA a fee
equal to 30% of its management fee rate associated with investments for
which the sub-adviser provided investment advice.
On behalf of High Income, Asset Manager: Growth, Contrafund and Overseas
Portfolios, the sub-advisers may also provide investment management
services. In return, FMR pays FMR U.K., FMR Far East, and FIIA a fee equal
to 50% of its management fee rate with respect to the fund's investments
that the sub-adviser manages on a discretionary basis. FIIA pays FIIAL U.K.
a fee equal to 110% of the cost of providing these services.
The following chart details the fees paid by FMR to FMR U.K. and FMR
Far East, on behalf of the funds (as a percentage of each fund's
average net assets) for fiscal 1994:
Fund Fee to Fee to
FMR FMR
U.K. Far
East
Asset Manager Portfolio .005 . 006
% %
Overseas Portfolio . 034 . 038
% %
On behalf of Money Market Portfolio, FMR has entered into a sub-advisory
agreement with FMR Texas, which has primary responsibility for providing
investment management services. FMR pays FMR Texas 50% of its management
fee (before any expense reimbursement) for these services. FMR paid FMR
Texas 0.10 % of Money Market's average net assets for fiscal 1994.
OTHER EXPENSES
While the management fee is a significant component of each fund's annual
operating costs, the funds have other expenses as well.
FIIOC, 82 Devonshire Street, Boston, Massachusetts, performs transfer
agency, dividend disbursing and shareholder servicing functions for each
fund. Fidelity Service Co . (FSC), 82 Devonshire Street, Boston,
Massachusetts, calculates the net asset value (NAV) and dividends,
maintains the general accounting records and administers the securities
lending program for each fund.
Each fund has adopted a Distribution and Service Plan. Each plan recognizes
that FMR may use its resources, including management fees, to pay expenses
associated with the sale of fund shares. This may include payments to third
parties, such as banks or broker-dealers, that provide shareholder support
services or engage in the sale of the funds' shares. The Board of Trustees
has not authorized such payments.
Each fund also pays other expenses, such as legal, audit, and custodian
fees; proxy solicitation costs; and the compensation of trustees who are
not affiliated with Fidelity.
The following chart details the fees paid to FIIOC and FSC and each fund's
total expenses (as a percentage of each fund's average net assets) for
fiscal 1994:
Fund Fee Fee Total
to to Expen
FIIO FSC ses
C
Money Market
0.02 0.02 0.27
Portfolio % % %
Index 500 Portfolio 0.23 0.12 0.81
% % % *
Equity-Income Portfolio 0.01 0.04 0.58
% % %
Growth Portfolio 0.01 0.04 0.69
% % %
Investment Grade Bond Portfolio 0.08 0.04 0.67
% % %
Asset Manager
0.01 0.02 0.80
Portfolio % % %
High Income Portfolio 0.03 0.04 0.71
% % %
Overseas Portfolio 0.02 0.04 0.92
% % %
E STIMATED EXPENSES FOR FISCAL 1995 FOR ASSET MANAGER: GROWTH AND
CONTRAFUND PORTFOLIOS ARE 0.93% AND 0.89%, RESPECTIVELY.
* FMR HAS VOLUNTARILY AGREED TO TEMPORARILY LIMIT INDEX 500 PORTFOLIO'S
TOTAL OPERATING EXPENSES TO 0.28%. THE AMOUNTS SHOWN IN THE TABLE ARE PRIOR
TO APPLYING ANY EXPENSE REIMBURSEMENTS FROM FMR.
A portion of the brokerage commissions that Equity-Income, Growth and Asset
Manager Portfolios paid was used to reduce each fund's expenses.
Without this reduction, total expenses would have been .60%, .70% and .81%,
respectively.
For fiscal 1994, each fund's portfolio turnover rate is outlined in the
table below. These rates vary from year to year. High turnover rates
increase transaction costs. FMR considers these effects when evaluating the
anticipated benefits of short-term investing.
Fund Portfolio
Turnover
Rate
Index 500 Portfolio 2%
Equity-Income Portfolio 134%
Growth Portfolio 122%
Investment Grade Bond Portfolio 143%
Asset Manager Portfolio 85%
High Income Portfolio 122%
Overseas Portfolio 42%
Contrafund Portfolio 275%
*
Asset Manager: Growth Portfolio 115%
*
* ESTIMATED FOR FIRST FISCAL PERIOD
PERFORMANCE
Each fund's total return may be quoted in advertising if accompanied by
performance of your insurance company's separate account. Performance is
based on historical results and is not intended to indicate future
performance. For additional performance information, contact your insurance
company for a free annual report.
EXPLANATION OF TERMS
TOTAL RETURN is the change in value of an investment in a fund over a given
period, assuming reinvestment of any dividends and capital gains. A
CUMULATIVE TOTAL RETURN reflects actual performance over a stated period of
time. An AVERAGE ANNUAL TOTAL RETURN is a hypothetical rate of return that,
if achieved annually, would have produced the same cumulative total return
if performance had been constant over the entire period. Average annual
total returns smooth out variations in performance; they are not the same
as actual year-by-year results.
Average annual total returns covering periods of less than one year assume
that performance will remain constant for the rest of the year.
YIELD refers to the income generated by an investment in a fund over a
given period of time, expressed as an annual percentage rate. When a yield
assumes that income is reinvested, it is called an effective yield.
Seven-day yield illustrates the income earned by an investment in a money
market fund over a recent seven-day period. Since money market funds
maintain a stable $1.00 share price, current seven-day yields are the most
common illustration of money market fund performance.
In calculating yield, High Income Portfolio may from time to time use a
security's coupon rate instead of its yield to maturity in order to reflect
the risk premium on that security. This practice will have the effect of
reducing the fund's yield.
THE CONSUMER PRICE INDEX is a widely recognized measure of inflation
calculated by the U.S. government.
A fund may quote its adjusted NAV including all distributions paid. This
value may be averaged over specified periods and may be used to calculate a
fund's moving average.
The funds' recent strategies, performance, and holdings are detailed twice
a year in financial reports, which are sent to all shareholders.
TOTAL RETURNS AND YIELDS QUOTED FOR THE FUNDS INCLUDE EACH FUND'S EXPENSES,
BUT MAY NOT INCLUDE CHARGES AND EXPENSES ATTRIBUTABLE TO ANY PARTICULAR
INSURANCE PRODUCT. SINCE SHARES OF THE FUNDS MAY ONLY BE PURCHASED THROUGH
VARIABLE ANNUITY AND VARIABLE LIFE INSURANCE CONTRACTS, YOU SHOULD
CAREFULLY REVIEW THE PROSPECTUS OF THE INSURANCE PRODUCT YOU HAVE CHOSEN
FOR INFORMATION ON RELEVANT CHARGES AND EXPENSES. Excluding these charges
from quotations of each fund's performance has the effect of increasing the
performance quoted. You should bear in mind the effect of these charges
when comparing a fund's performance to that of other mutual funds.
ACCOUNT POLICIES
DISTRIBUTIONS AND TAXES
For a discussion of the tax status of your variable insurance contract,
refer to the prospectus of your insurance company's separate account. It is
suggested you keep all statements you receive to assist in your personal
recordkeeping.
It is expected that shares of the funds will be held under the terms of
variable annuity and variable life insurance contracts. Under current tax
law, dividends or capital gain distributions from any fund are not
currently taxable when left to accumulate within a variable annuity or
variable life insurance contract. Depending on the variable contract,
withdrawals from the contracts may be subject to ordinary income tax and,
in addition to a 10% penalty tax on withdrawals before age 59.
Each fund is treated as a separate entity for federal income tax purposes.
Each fund intends to pay out all of its net investment income and net
realized capital gains for each year. Dividends from Money Market Portfolio
are declared daily and paid monthly. Equity-Income Portfolio distributes
its dividends quarterly and dividends from High Income, Investment Grade
Bond, Growth, Overseas, Asset Manager, Asset Manager: Growth, Index 500,
and Contrafund Portfolios will be distributed at least annually. Each fund
makes dividend and capital gain distributions on a per-share basis. After
distribution from a fund, the fund's share price drops by the amount of the
distribution. Because dividends and capital gain distributions are
reinvested, the total value of an account will not be affected because,
although the shares will have a lower price, there will be correspondingly
more of them. Normally, net realized capital gains, if any, are distributed
each year for each fund. Such income and capital gain distributions are
automatically reinvested in additional shares of the funds.
TRANSACTION DETAILS
THE FUNDS ARE OPEN FOR BUSINESS each day the New York Stock Exchange (NYSE)
is open. Fidelity normally calculates each fund's NAV as of the close of
business of the NYSE, normally 4 p.m. Eastern time.
EACH FUND'S NAV is the value of a single share. The NAV is computed by
adding the value of the fund's investments, cash, and other assets,
subtracting its liabilities, and then dividing the result by the number of
shares outstanding.
Money Market Portfolio values its portfolio securities on the basis of
amortized cost. This method minimizes the effect of changes in a security's
market value and helps the fund maintain a stable $1.00 share price.
Each of the other fund's assets are valued primarily on the basis of market
quotations. Foreign securities are valued on the basis of quotations from
the primary market in which they are traded, and are translated from the
local currency into U.S. dollars using current exchange rates. If
quotations are not readily available or if the values have been materially
affected by events occurring after the closing of a foreign market, assets
are valued by a method that the Board of Trustees believes accurately
reflects fair value.
EACH FUND'S OFFERING PRICE (price to buy one share) and REDEMPTION PRICE
(price to sell one share) are its NAV.
EACH FUND RESERVES THE RIGHT TO SUSPEND THE OFFERING OF SHARES for a period
of time. Each fund also reserves the right to reject any specific purchase
order. Purchase orders may be refused if, in FMR's opinion, they would
disrupt management of a fund.
INVESTMENTS AND REDEMPTIONS. Investments may be made only by separate
accounts established and maintained by insurance companies for the purpose
of funding variable insurance contracts. Please refer to the prospectus of
your insurance company's separate account for information on how to invest
and redeem from each fund.
Each p articipating insurance company receives orders from its
variable contract owners to purchase or redeem shares of the funds each
business day. That night, all orders received by that insurance company on
that business day are aggregated, and the insurance company places a net
purchase or redemption order for shares of one or more funds the morning of
the next business day. These orders are generally executed at the NAV that
was computed at the close of the previous business day in order to provide
a match between the variable contract owners' orders to the insurance
companies and the insurance companies' orders to a fund. In some cases, an
insurance company's orders for fund shares may be executed at the NAV next
computed after the order is actually transmitted to a fund.
Redemption proceeds will normally be wired to the insurance company on the
next business day after receipt of the redemption instructions by a fund
but in no event later than 7 days following receipt of instructions. Each
fund may suspend redemptions or postpone payment dates on days when the
NYSE is closed (other than weekend or holidays), when trading on the
NYSE is restricted, or as permitted by the SEC.
APPENDIX
1.DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A - Bonds rated A possess many favorable investment attributes and are to
be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered as medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA - Bonds rated Ba are judged to have speculative elements. Their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of
other terms of the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked
short-comings.
C - Bonds rated C are the lowest-rated class of bonds and issued so rated
can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS:
AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher-rated
categories.
BB - Debt rate BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
B - Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual
or implied BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial, or economic conditions, it is
not likely to have the capacity to pay interest and repay principal.
CC - Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C - The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed but
debt service payments are continued.
CI - The rating CI is reserved for income bonds on which no interest is
being paid.
D - Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The D rating will also
be used upon the filing of a bankruptcy petition if debt service payments
are jeopardized.
(INDEX 500 PORTFOLIO) S&P does not guarantee the accuracy and/or the
completeness of the S&P 500 Index or any data included therein and S&P
shall have no liability for any errors, omissions, or interruptions
therein. S&P makes no warranty, express or implied, as to results to be
obtained by licensee, owners of the product, or any other person or entity
from the use of the S&P 500 Index or any data included therein. S&P makes
no express or implied warranties, and expressly disclaims all warranties or
merchantability or fitness for a particular purpose or use with respect to
the S&P 500 Index or any data included therein. Without limiting any of the
foregoing, in no event shall S&P have any liability for any special,
punitive, indirect, or consequential damages (including lost profits), even
if notified of the possibility of such damages.
Index 500 Portfolio is not sponsored, endorsed, sold or promoted by
Standard & Poor's, a division of McGraw-Hill, Inc. ("S&P"). S&P makes no
representation or warranty, express or implied, to participants of the fund
or any member of the public regarding the advisability of investing in
securities generally or in the fund particularly or the ability of the S&P
500 Index to track general stock market performance. S&P's only
relationship to the Licensee is the licensing of certain trademarks and
trade names of S&P and of the S&P 500 Index which is determined, composed
and calculated by S&P without regard to the Licensee or the fund. S&P has
no obligation to take the needs of the Licensee or the participants of the
fund into consideration in determining, composing or calculating the S&P
500 Index. S&P is not responsible for and has not participated in the
determination of the timing of, prices at, or quantities of the fund to be
issued or in the determination or calculation of the equation by which the
fund is to be converted into cash. S&P has no obligation or liability in
connection with the administration, marketing or trading of the fund.
"Standard & Poor's(registered trademark)," "S&P(registered trademark),"
"S&P 500(registered trademark)," "Standard & Poor's 500," and "500" are
trademarks of McGraw-Hill, Inc. and have been licensed for use by Fidelity
Distributors Corporation.
This prospectus is printed on recycled paper using soy-based inks.
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO, HIGH INCOME
PORTFOLIO, EQUITY-INCOME PORTFOLIO, GROWTH PORTFOLIO, AND OVERSEAS
PORTFOLIO
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO, ASSET
MANAGER PORTFOLIO,
INDEX 500 PORTFOLIO, CONTRAFUND PORTFOLIO AND ASSET MANAGER: GROWTH
PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
APRIL 30, 1995
This Statement is not a prospectus but should be read in conjunction with
the funds' current Prospectus (dated April 30, 1995). Please retain this
document for future reference. The funds' financial statements and
financial highlights, included in the Annual Reports for the fiscal year
ended December 31, 1994, are incorporated herein by reference. To obtain an
additional copy of the Prospectus or Annual Reports, please call your
insurance company or Fidelity Distributors Corporation at 1-800-544-8888.
TABLE OF CONTENTS PAGE
Investment Policies and Limitations
Portfolio Transactions
Valuation of Portfolio Securities
Performance
Additional Purchase and Redemption Information
Taxes
FMR
Trustees and Officers
Management Contracts
Distribution and Service Plans
Contracts With Companies Affiliated With FMR
Description of the Trusts
Financial Statements
Appendix
INVESTMENT ADVISER
Fidelity Management & Research Company (FMR)
INVESTMENT SUB-ADVISERS
Money Market Portfolio:
FMR Texas Inc. (FMR Texas)
High Income, Asset Manager, Contrafund and Asset Manager: Growth
Portfolios:
Fidelity Management & Research (U.K.) Inc. (FMR U.K.)
Fidelity Management & Research (Far East) Inc. (FMR Far East)
Overseas Portfolio:
FMR U.K.
FMR Far East
Fidelity International Investment Advisors (FIIA)
Fidelity International Investment Advisors (U.K.) Limited (FIIAL U.K.)
DISTRIBUTOR
Fidelity Distributors Corporation (FDC)
TRANSFER AGENT
Fidelity Investments Institutional Operations Company (FIIOC)
VIP/VIPII-ptb-04/95
INVESTMENT POLICIES AND LIMITATIONS
The following policies and limitations supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of a fund's assets that may be
invested in any security or other asset, or sets forth a policy regarding
quality standards, such standard or percentage limitation will be
determined immediately after and as a result of the fund's acquisition of
such security or other asset. Accordingly, any subsequent change in values,
net assets, or other circumstances will not be considered when determining
whether the investment complies with the fund's investment policies and
limitations.
Each fund's fundamental investment policies and limitations cannot be
changed without approval by a "majority of the outstanding voting
securities" (as defined in the Investment Company Act of 1940) of each
fund. However, except for the fundamental investment limitations set forth
below, the investment policies and limitations described in this Statement
of Additional Information are not fundamental and may be changed without
shareholder approval.
MONEY MARKET PORTFOLIO
THE FOLLOWING ARE THE FUND'S FUNDAMENTAL INVESTMENT LIMITATIONS. THE FUND
MAY NOT:
(1) purchase the securities of any issuer (other than obligations issued or
guaranteed as to principal and interest by the United States, its agencies
or instrumentalities) if, as a result, more than 5% of its total assets
would be invested in the securities of such issuer, provided, however, that
with respect to 25% of its total assets, 10% of its assets may be invested
in the securities of any single issuer;
(2) issue senior securities, except as permitted under the Investment
Company Act of 1940;
(3) borrow money, except that the fund may (i) borrow money for temporary
or emergency purposes (not for leveraging or investment) and (ii) engage in
reverse repurchase agreements for any purpose; provided that (i) and (ii)
in combination do not exceed 33 1/3% of the fund's total assets (including
the amount borrowed) less liabilities (other than borrowings). Any
borrowings that come to exceed this amount will be reduced within three
days (not including Sundays and holidays) to the extent necessary to comply
with the 33 1/3% limitation;
(4) underwrite securities issued by others, except to the extent that the
fund may be considered an underwriter within the meaning of the Securities
Act of 1933 in the disposition of restricted securities;
(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, more than 25% of the fund's total
assets would be invested in the securities of companies whose principal
business activities are in the same industry, except that the fund will
invest more than 25% of its total assets in the financial services
industry;
(6) purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the fund
from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business);
(7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments;
(8) lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties, but this
limitation does not apply to purchases of debt securities or to repurchase
agreements; or
(9) invest in companies for the purpose of exercising control or
management.
THE FOLLOWING INVESTMENT LIMITATIONS FOR MONEY MARKET PORTFOLIO ARE NOT
FUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER NOTIFICATION.
(i) The fund does not currently intend to purchase a security (other than a
security issued or guaranteed by the U.S. government or any of its agencies
or instrumentalities) if, as a result, more than 5% of its total assets
would be invested in the securities of a single issuer; provided that the
fund may invest up to 10% of its total assets in the first tier securities
of a single issuer for up to three business days.
(ii) The fund does not currently intend to sell securities short, unless it
owns or has the right to obtain securities equivalent in kind and amount to
the securities sold short, and provided that transactions in futures
contracts and options are not deemed to constitute selling securities
short.
(iii) The fund does not currently intend to purchase securities on margin,
except that the fund may obtain such short-term credits as are necessary
for the clearance of transactions, and provided that margin payments in
connection with futures contracts and options on futures contracts shall
not constitute purchasing securities on margin.
(iv) The fund may borrow money only (a) from a bank or from a registered
investment company or portfolio for which FMR or an affiliate serves as
investment advisor or (b) by engaging in reverse repurchase agreements with
any party. The fund will not borrow money in excess of 25% of net assets so
long as this limitation is required for certification by certain state
insurance departments. The fund will not purchase any security while
borrowings (excluding reverse repurchase agreements) representing more than
5% of its total assets are outstanding. The fund will not borrow from other
funds advised by FMR or its affiliates if total outstanding borrowings
immediately after such borrowing would exceed 15% of the fund's total
assets.
(v) The fund does not currently intend to purchase any security if, as a
result, more than 10% of its net assets would be invested in securities
that are deemed to be illiquid because they are subject to legal or
contractual restrictions on resale or because they cannot be sold or
disposed of in the ordinary course of business at approximately the prices
at which they are valued.
(vi) The fund does not currently intend to purchase or sell futures
contracts or call options. This limitation does not apply to options
attached to, or acquired or traded together with, their underlying
securities, and does not apply to securities that incorporate features
similar to options or futures contracts.
(vii) The fund does not currently intend to lend assets other than
securities to other parties, except by lending money (up to 10% of the
fund's net assets) to a registered investment company or portfolio for
which FMR or an affiliate serves as investment advisor. (This limit does
not apply to purchases of debt securities or to repurchase agreements.)
(viii) The fund does not currently intend to (a) purchase securities of
other investment companies, except in the open market where no commission
except the ordinary broker's commission is paid, or (b) purchase or retain
securities issued by other open-end investment companies. Limitations (a)
and (b) do not apply to securities received as dividends, through offers of
exchange, or as a result of a reorganization, consolidation, or merger.
(ix) The fund does not currently intend to invest in oil, gas, or other
mineral exploration or development programs or leases.
QUALITY AND MATURITY. Pursuant to procedures adopted by the Board of
Trustees, the fund may purchase only high-quality securities that FMR
believes present minimal credit risks. To be considered high quality, a
security must be rated in accordance with applicable rules in one of the
two highest categories for short-term securities by at least two nationally
recognized rating services (or by one, if only one rating service has rated
the security); or, if unrated, judged to be of equivalent quality by FMR.
High-quality securities are divided into "first tier" and "second tier"
securities. First tier securities are those deemed to be in the highest
rating category (e.g., Standard & Poor's A-1), and second tier securities
are those deemed to be in the second highest rating category (e.g.,
Standard & Poor's A-2).High-quality securities are divided into "first
tier" and "second tier" securities.
The fund may not invest more than 5% of its total assets in second tier
securities. In addition, the fund may not invest more than 1% of its total
assets or $1 million (whichever is greater) in the second tier securities
of a single issuer.
The fund currently intends to limit its investments to securities with
remaining maturities of 397 days or less, and to maintain a dollar-weighted
average maturity of 90 days or less. When determining the maturity of a
security, the fund may look to an interest rate reset or demand feature.
DOMESTIC AND FOREIGN ISSUERS. Investments may be made in U.S.
dollar-denominated time deposits, certificates of deposit, and bankers'
acceptances of U.S. banks and their branches located outside of the United
States, U.S. branches and agencies of foreign banks, and foreign branches
of foreign banks. The fund may also invest in U.S. dollar-denominated
securities issued or guaranteed by other U.S. or foreign issuers, including
U.S. and foreign corporations or other business organizations, foreign
governments, foreign government agencies or instrumentalities, and U.S. and
foreign financial institutions, including savings and loan institutions,
insurance companies, mortgage bankers, and real estate investment trusts,
as well as banks.
The obligations of foreign branches of U.S. banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by governmental
regulation. Payment of interest and principal on these obligations may also
be affected by governmental action in the country of domicile of the branch
(generally referred to as sovereign risk). In addition, evidence of
ownership of portfolio securities may be held outside of the United States
and the fund may be subject to the risks associated with the holding of
such property overseas. Various provisions of federal law governing the
establishment and operation of U.S. branches do not apply to foreign
branches of U.S. banks.
Obligations of U.S. branches and agencies of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by federal and state
regulation, as well as by governmental action in the country in which the
foreign bank has its head office.
Obligations of foreign issuers involve certain additional risks. These
risks may include future unfavorable political and economic developments,
withholding taxes, seizures of foreign deposits, currency controls,
interest limitations, or other governmental restrictions that might affect
payment of principal or interest. Additionally, there may be less public
information available about foreign banks and their branches. Foreign
issuers may be subject to less governmental regulation and supervision than
U.S. issuers. Foreign issuers also generally are not bound by uniform
accounting, auditing, and financial reporting requirements comparable to
those applicable to U.S. issuers.
HIGH INCOME, EQUITY-INCOME, GROWTH, OVERSEAS, INVESTMENT GRADE BOND, ASSET
MANAGER, INDEX 500, CONTRAFUND AND ASSET MANAGER: GROWTH PORTFOLIOS
THE FOLLOWING ARE HIGH INCOME, EQUITY-INCOME, GROWTH, OVERSEAS, INVESTMENT
GRADE BOND, ASSET MANAGER, INDEX 500, CONTRAFUND AND ASSET MANAGER: GROWTH
PORTFOLIOS' FUNDAMENTAL INVESTMENT LIMITATIONS. EACH FUND MAY NOT:
(1) with respect to 75% of the fund's total assets, purchase the securities
of any issuer (other than securities issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities) if, as a result,
(a) more than 5% of the fund's total assets would be invested in the
securities of that issuer, or (b) the fund would hold more than 10% of the
outstanding voting securities of that issuer;
(2) issue senior securities, except as permitted under the Investment
Company Act of 1940;
(3) (for High Income, Equity-Income, Growth and Overseas Portfolios) borrow
money, except that the fund (i) may borrow money for temporary or emergency
purposes (not for leveraging or investment) or (ii) engage in reverse
repurchase agreements, provided that (i) and (ii) in combination
(borrowings) do not exceed 33 1/3% of its total assets (including the
amount borrowed) less liabilities (other than borrowings). Any borrowings
that come to exceed 33 1/3% of the value of the fund's total assets by
reason of a decline in net assets will be reduced within three days
(exclusive of Sundays and holidays) to the extent necessary to comply with
the 33 1/3% limitation;
(for Investment Grade Bond, Asset Manager, Index 500, Contrafund and Asset
Manager: Growth Portfolios) borrow money, except that the fund may borrow
money for temporary or emergency purposes (not for leveraging or
investment) in an amount not exceeding 33 1/3% of its total assets
(including the amount borrowed) less liabilities (other than borrowings).
Any borrowings that come to exceed this amount will be reduced within three
days (not including Sundays and holidays) to the extent necessary to comply
with the 33 1/3% limitation;
(4) underwrite securities issued by others, except to the extent that the
fund may be considered an underwriter within the meaning of the Securities
Act of 1933 in the disposition of restricted securities;
(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, more than 25% of its total assets would
be invested in the securities of companies whose principal business
activities are in the same industry;
(6) purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the fund
from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business);
(7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent
the fund from purchasing or selling options and futures contracts or from
investing in securities or other instruments backed by physical
commodities); or
(8) lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties, but this
limitation does not apply to purchases of debt securities or to repurchase
agreements.
THE FOLLOWING INVESTMENT LIMITATIONS FOR HIGH INCOME, EQUITY-INCOME,
GROWTH, OVERSEAS, INVESTMENT GRADE BOND, ASSET MANAGER, INDEX 500,
CONTRAFUND AND ASSET MANAGER: GROWTH PORTFOLIOS ARE NOT FUNDAMENTAL AND MAY
BE CHANGED WITHOUT SHAREHOLDER NOTIFICATION.
(i) Each fund does not currently intend to sell securities short, unless it
owns or has the right to obtain securities equivalent in kind and amount to
the securities sold short, and provided that transactions in futures
contracts and options are not deemed to constitute selling securities
short.
(ii) Each fund does not currently intend to purchase securities on margin,
except that the fund may obtain such short-term credits as are necessary
for the clearance of transactions, and provided that margin payments in
connection with futures contracts and options on futures contracts shall
not constitute purchasing securities on margin.
(iii) Each fund may borrow money only (a) from a bank or from a registered
investment company or portfolio for which FMR or an affiliate serves as
investment advisor or (b) by engaging in reverse repurchase agreements with
any party (reverse repurchase agreements are treated as borrowings for
purposes of fundamental investment limitation (3)). Each fund will not
borrow money in excess of 25% of net assets so long as this limitation is
required for certification by certain state insurance departments. Any
borrowings that come to exceed this amount will be reduced within seven
days (not including Sundays and holidays) to the extent necessary to comply
with the 25% limitation. Each fund will not purchase any security while
borrowings representing more than 5% of its total assets are outstanding.
Each fund will not borrow from other funds advised by FMR or its affiliates
if total outstanding borrowings immediately after such borrowing would
exceed 15% of the fund's total assets.
(iv) Each fund does not currently intend to purchase any security if, as a
result, more than 10% of Equity-Income, Growth, Investment Grade Bond,
Asset Manager, Index 500, Contrafund and Asset Manager: Growth Portfolios'
net assets and 15% of High Income and Overseas Portfolio's net assets would
be invested in securities that are deemed to be illiquid because they are
subject to legal or contractual restrictions on resale or because they
cannot be sold or disposed of in the ordinary course of business at
approximately the prices at which they are valued.
(v) Each fund does not currently intend to lend assets other than
securities to other parties, except by: (a) lending money (up to 5% of net
assets for Equity-Income, Growth, Overseas, Asset Manager, Index 500,
Contrafund and Asset Manager: Growth Portfolios and 7.5% of net assets for
High Income and Investment Grade Bond Portfolios) to a registered
investment company or portfolio for which FMR or an affiliate serves as
investment advisor or (b) acquiring loans, loan participations, or other
forms of direct debt instruments and, in connection therewith, assuming any
associated unfunded commitments of the sellers. (This limitation does not
apply to purchases of debt securities or to repurchase agreements.)
(vi) Each fund does not currently intend to (a) purchase securities of
other investment companies, except in the open market where no commission
except the ordinary broker's commission is paid, or (b) purchase or retain
securities issued by other open-end investment companies. Limitations (a)
and (b) do not apply to securities received as dividends, through offers of
exchange, or as a result of a reorganization, consolidation, or merger.
(vii) Each fund does not currently intend to invest in oil, gas, or other
mineral exploration or development programs or leases.
For each fund's limitations on futures and options transactions, see the
section entitled "Limitations on Futures and Options Transactions." For
limitations on short sales, see the section entitled "Short Sales."
For the funds' policies on foreign investments, see the section entitled
"Foreign Investments."
Higher yielding, fixed-income securities of the type in which High Income
Portfolio invests will at times be purchased at a discount from or a
premium over par value. The total return on such securities includes the
potential for a capital gain or loss. High Income Portfolio generally does
not intend to hold securities for the purpose of achieving capital gains,
however, unless current yields on these securities remain attractive.
Capital gain or loss may also be realized upon the sale of portfolio
securities.
The U.S. government has from time to time in the past imposed restrictions,
through taxation and otherwise, on foreign investments by U.S. investors
such as the funds. If such restrictions should be reinstituted, it might
become necessary for Overseas Portfolio to invest all or substantially all
of its assets in U.S. securities. In such event, the Board of Trustees
would reevaluate the fund's investment objective and policies.
In accordance with the funds' fundamental investment policies, there are no
limitations on the percentage of the funds' assets which may be invested in
any one type of instrument. Nor are there limitations (except those imposed
by certain state insurance regulations) on the percentage of the funds'
assets which may be invested in any foreign country. However, in order to
comply with diversification requirements under Section 817(h) of the
Internal Revenue Code of 1986, as amended, in connection with FMR serving
as investment advisor, each fund has agreed to certain non-fundamental
limitations. Please refer to your insurance company's separate account
prospectus for more information.
Each fund's investments must be consistent with its investment objective
and policies. Accordingly, not all of the security types and investment
techniques discussed below are eligible investments for each of the funds.
AFFILIATED BANK TRANSACTIONS. A fund may engage in transactions with
financial institutions that are, or may be considered to be, "affiliated
persons" of the fund under the Investment Company Act of 1940. These
transactions may include repurchase agreements with custodian banks;
short-term obligations of, and repurchase agreements with, the 50 largest
U.S. banks (measured by deposits); municipal securities; U.S. government
securities with affiliated financial institutions that are primary dealers
in these securities; short-term currency transactions; and short-term
borrowings. In accordance with exemptive orders issued by the Securities
and Exchange Commission (SEC), the Board of Trustees has established and
periodically reviews procedures applicable to transactions involving
affiliated financial institutions.
FUNDS' RIGHTS AS A SHAREHOLDER. The funds do not intend to direct or
administer the day-to-day operations of any company. Each fund, however,
may exercise its rights as a shareholder and may communicate its views on
important matters of policy to management, the Board of Directors, and
shareholders of a company when FMR determines that such matters could have
a significant effect on the value of the fund's investment in the company.
The activities that a fund may engage in, either individually or in
conjunction with others, may include, among others, supporting or opposing
proposed changes in a company's corporate structure or business activities;
seeking changes in a company's directors or management; seeking changes in
a company's direction or policies; seeking the sale or reorganization of
the company or a portion of its assets; or supporting or opposing third
party takeover efforts. This area of corporate activity is increasingly
prone to litigation and it is possible that a fund could be involved in
lawsuits related to such activities. FMR will monitor such activities with
a view to mitigating, to the extent possible, the risk of litigation
against a fund and the risk of actual liability if a fund is involved in
litigation. No guarantee can be made, however, that litigation against a
fund will not be undertaken or liabilities incurred.
ASSET ALLOCATION (ASSET MANAGER AND ASSET MANAGER: GROWTH). The short-term
class includes all types of domestic and foreign securities and short-term
instruments with remaining maturities of three years or less. FMR seeks to
maximize total return within this asset class by taking advantage of yield
differentials between different instruments, issuers, and currencies.
Short-term instruments may include corporate debt securities, such as
commercial paper and notes; government securities issued by U.S. or foreign
governments or their agencies or instrumentalities; bank deposits and other
financial institution obligations; repurchase agreements involving any type
of security; and other similar short-term instruments. These instruments
may be denominated in U.S. dollars or foreign currency.
The bond class includes all varieties of domestic and foreign fixed-income
securities with maturities greater than three years. FMR seeks to maximize
total return within the bond class by adjusting the fund's investments in
securities with different credit qualities, maturities, and coupon or
dividend rates, and by seeking to take advantage of yield differentials
between securities. Securities in this class may include bonds, notes,
adjustable-rate preferred stocks, convertible bonds, mortgage-related and
asset-backed securities, domestic and foreign government and government
agency securities, zero coupon bonds, and other intermediate-term and
long-term securities. As with the short-term class, these securities may be
denominated in U.S. dollars or foreign currency. The fund may also invest
in lower quality, high-yielding debt securities (commonly referred to as
"junk bonds").
The stock class includes domestic and foreign equity securities of all
types (other than adjustable-rate preferred stocks which are included in
the bond class). FMR seeks to maximize total return within this asset class
by actively allocating assets to industry sectors expected to benefit from
major trends, and to individual stocks that FMR believes to have superior
investment potential. When FMR selects equity securities, it considers both
growth and anticipated dividend income. Securities in the stock class may
include common stocks, fixed-rate preferred stocks (including convertible
preferred stocks), warrants, rights, depositary receipts, securities of
closed-end investment companies, and other equity securities issued by
companies of any size, located anywhere in the world.
In making asset allocation decisions, FMR will evaluate projections of
risk, market conditions, economic conditions, volatility, yields, and
returns. FMR's management will use database systems to help analyze past
situations and trends, research specialists in each of the asset classes to
help in securities selection, portfolio management professionals to
determine asset allocation and to select individual securities, and its own
credit analysis as well as credit analyses provided by rating services.
INVESTMENT DETAILS FOR INDEX 500 PORTFOLIO. Index 500 Portfolio is not
managed according to traditional methods of "active" investment management,
which involve the buying and selling of securities based upon economic,
financial, and market analyses and investment judgment. Instead, the fund,
utilizing a "passive" or "indexing" investment approach, attempts to
duplicate the performance of the S&P 500. The fund may omit or remove an
S&P 500 stock from its portfolio if, following objective criteria, FMR
judges the stock to be insufficiently liquid or believes the merit of the
investment has been substantially impaired by extraordinary events or
financial conditions. FMR may purchase stocks that are not included in the
S&P 500 to compensate for these differences if it believes that their
prices will move together with the prices of S&P 500 stocks omitted from
the portfolio.
The ability of the fund to meet its objective depends in part on its cash
flow because investments and redemptions by shareholders generally will
require the fund to purchase or sell portfolio securities. A low level of
shareholder transactions will keep cash flow manageable and enhance the
fund's ability to track the S&P 500. FMR will make investment changes to
accommodate cash flow in an attempt to maintain the similarity of the
fund's portfolio to the composition of the S&P 500. In addition, the fund
will maintain a reasonable position in high-quality, short-term debt
securities and money market instruments to meet redemption requests.
S&P 500. The S&P 500 is a well-known stock market index that includes
common stocks of companies representing a significant portion of the market
value of all common stocks publicly traded in the United States. Stocks in
the S&P 500 are weighted according to their market capitalization (i.e. the
number of shares outstanding multiplied by the stock's current price), with
the 62 largest stocks currently comprised approximately 50% of the index's
value. The composition of the S&P 500 is determined by Standard & Poor's
Corporation and is based on such factors as the market capitalization and
trading activity of each stock and its adequacy as a representation of
stocks in a particular industry group. Standard and Poor's Corporation may
change the index's composition from time to time.
The performance of the S&P 500 is a hypothetical number which does not take
into account brokerage commissions and other costs of investing, which the
fund bears.
LOWER-QUALITY DEBT SECURITIES. While the market for high-yield corporate
debt securities has been in existence for many years and has weathered
previous economic downturns, the 1980s brought a dramatic increase in the
use of such securities to fund highly leveraged corporate acquisitions and
restructurings. Past experience may not provide an accurate indication of
the future performance of the high-yield bond market, especially during
periods of economic recession. In fact, from 1989 to 1991, the percentage
of lower-quality securities that defaulted rose significantly above prior
levels, although the default rate has since declined.
The market for lower-quality debt securities may be thinner and less active
than that for higher-quality debt securities, which can adversely affect
the prices at which the former are sold. If market quotations are not
available, lower-quality debt securities will be valued in accordance with
procedures established by the Board of Trustees, including the use of
outside pricing services. Judgment plays a greater role in valuing
high-yield corporate debt securities than is the case for securities for
which more external sources for quotations and last-sale information are
available. Adverse publicity and changing investor perceptions may affect
the ability of outside pricing services to value lower-quality debt
securities and a fund's ability to dispose of these securities.
Since the risk of default is higher for lower-quality debt securities,
FMR's research and credit analysis are an especially important part of
managing securities of this type held by a fund. In considering investments
for the fund, FMR will attempt to identify those issuers of high-yielding
securities whose financial condition is adequate to meet future
obligations, has improved, or is expected to improve in the future. FMR's
analysis focuses on relative values based on such factors as interest or
dividend coverage, asset coverage, earnings prospects, and the experience
and managerial strength of the issuer.
Each fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise to exercise its rights as a security holder
to seek to protect the interests of security holders if it determines this
to be in the best interest of the fund's shareholders.
PUT FEATURES entitle the holder to sell a security back to the issuer or a
third party at any time or at specified intervals. They are subject to the
risk that the put provider is unable to honor the put feature (purchase the
security). Put providers often support their ability to buy securities on
demand by obtaining letters of credit or other guarantees from domestic or
foreign banks. FMR may rely on its evaluation of a bank's credit in
determining whether to purchase a security supported by a letter of credit.
In evaluating a foreign bank's credit, FMR will consider whether adequate
public information about the bank is available and whether the bank may be
subject to unfavorable political or economic developments, currency
controls, or other government restrictions that might affect the bank's
ability to honor its credit commitment. Demand features, standby
commitments, and tender options are types of put features.
SWAP AGREEMENTS. Swap agreements can be individually negotiated and
structured to include exposure to a variety of different types of
investments or market factors. Depending on their structure, swap
agreements may increase or decrease a fund's exposure to long or short-term
interest rates (in the United States or abroad), foreign currency values,
mortgage securities, corporate borrowing rates, or other factors such as
security prices or inflation rates. Swap agreements can take many different
forms and are known by a variety of names. A fund is not limited to any
particular form of swap agreement if FMR determines it is consistent with
the fund's investment objective and policies.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by
the other party. For example, the buyer of an interest rate cap obtains the
right to receive payments to the extent that a specified interest rate
exceeds an agreed-upon level, while the seller of an interest rate floor is
obligated to make payments to the extent that a specified interest rate
falls below an agreed-upon level. An interest rate collar combines elements
of buying a cap and selling a floor.
The most significant factor in the performance of swap agreements is the
change in the specific interest rate, currency, or other factors that
determine the amounts of payments due to and from a fund. If a swap
agreement calls for payments by the fund, the fund must be prepared to make
such payments when due. In addition, if the counterparty's creditworthiness
declined, the value of a swap agreement would be likely to decline,
potentially resulting in losses. A fund expects to be able to eliminate its
exposure under swap agreements either by assignment or other disposition,
or by entering into an offsetting swap agreement with the same party or a
similarly creditworthy party.
A fund will maintain appropriate liquid assets in a segregated custodial
account to cover its current obligations under swap agreements. If a fund
enters into a swap agreement on a net basis, it will segregate assets with
a daily value at least equal to the excess, if any, of the fund's accrued
obligations under the swap agreement over the accrued amount the fund is
entitled to receive under the agreement. If a fund enters into a swap
agreement on other than a net basis, it will segregate assets with a value
equal to the full amount of the fund's accrued obligations under the
agreement.
VARIABLE OR FLOATING RATE OBLIGATIONS bear variable or floating interest
rates and may carry rights that permit holders to demand payment of the
unpaid principal balance plus accrued interest from the issuers or certain
financial intermediaries. Floating rate instruments have interest rates
that change whenever there is a change in a designated base rate while
variable rate instruments provide for a specified periodic adjustment in
the interest rate. These formulas are designed to result in a market value
for the instrument that approximates its par value.
A demand instrument with a conditional demand feature must have received
both a short-term and a long-term high-quality rating or, if unrated, have
been determined to be of comparable quality pursuant to procedures adopted
by the Board of Trustees. A demand instrument with an unconditional demand
feature may be acquired solely in reliance upon a short-term high-quality
rating or, if unrated, upon a finding of comparable short-term quality
pursuant to procedures adopted by the Board of Trustees.
Money Market Portfolio may invest in variable or floating rate instruments
tha t mature in more than 397 days, if the fund acquires a right to
sell the instruments that meets certain requirements set forth in Rule
2a-7. Variable rate instruments (including instruments subject to a demand
feature) that mature in 397 days or less and U.S. government securities
with a variable rate of interest adjusted no less frequently than 762 days
may be deemed to have maturities equal to the period remaining until the
next readjustment of the interest rate. Other variable rate instruments
with demand features may be deemed to have a maturity equal to the period
remaining until the next adjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand. A
floating rate instrument subject to a demand feature may be deemed to have
a maturity equal to the period remaining until the principal amount can be
recovered through demand.
INDEXED SECURITIES. A fund may purchase securities whose prices are indexed
to the prices of other securities, securities indices, currencies, precious
metals or other commodities, or other financial indicators. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. Gold-indexed securities, for example, typically
provide for a maturity value that depends on the price of gold, resulting
in a security whose price tends to rise and fall together with gold prices.
Currency-indexed securities typically are short-term to intermediate-term
debt securities whose maturity values or interest rates are determined by
reference to the values of one or more specified foreign currencies, and
may offer higher yields than U.S. dollar-denominated securities of
equivalent issuers. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose
price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values
of a number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they
are indexed, and may also be influenced by interest rate changes in the
United States and abroad. At the same time, indexed securities are subject
to the credit risks associated with the issuer of the security, and their
values may decline substantially if the issuer's creditworthiness
deteriorates. Recent issuers of indexed securities have included banks,
corporations, and certain U.S. government agencies. FMR will use its
judgment in determining whether indexed securities should be treated as
short-term instruments, bonds, stocks, or as a separate asset class for
purposes of the fund's investment allocations, depending on the individual
characteristics of the securities. Indexed securities may be more volatile
than the underlying instruments.
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of in
the ordinary course of business at approximately the prices at which they
are valued. Under the supervision of the Board of Trustees, FMR determines
the liquidity of a fund's investments and, through reports from FMR, the
Board monitors investments in illiquid instruments. In determining the
liquidity of a fund's investments, FMR may consider various factors,
including (1) the frequency of trades and quotations, (2) the number of
dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including
any demand or tender features), and (5) the nature of the marketplace for
trades (including the ability to assign or offset the fund's rights and
obligations relating to the investment) .
Investments currently considered by the funds to be illiquid include
repurchase agreements not entitling the holder to payment of principal and
interest within seven days, over-the-counter options, and non-government
stripped fixed-rate mortgage-backed securities. Also, FMR may determine
some restricted securities, government-stripped fixed-rate mortgage-backed
securities, loans and other direct debt instruments, emerging market
securities, and swap agreements to be illiquid. However, with respect to
over-the-counter options a fund writes, all or a portion of the value of
the underlying instrument may be illiquid depending on the assets held to
cover the option and the nature and terms of any agreement the fund may
have to close out the option before expiration.
In the absence of market quotations, illiquid investments are p riced
at fair value as determined in good faith by a committee appointed by the
Board of Trustees (for Money Market Portfolio, illiquid investments are
valued for purposes of monitoring amortized cost valuation). If through a
change in values, net assets, or other circumstances, each fund were in a
position where 10% or more than Money Market Portfolio's net assets and
more than 10% of Equity-Income, Growth, Investment Grade Bond, Asset
Manager, Index 500, Contrafund and Asset Manager: Growth Portfolios' net
assets and more than 15% of High Income and Overseas Portfolio's net assets
were invested in illiquid securities, each fund would seek to take
appropriate steps to protect liquidity.
RESTRICTED SECURITIES generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the
Securities Act of 1933, or in a registered public offering. Where
registration is required, a fund may be obligated to pay all or part of the
registration expense and a considerable period may elapse between the time
it decides to seek registration and the time it may be permitted to sell a
security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, a fund might obtain a
less favorable price than prevailed when it decided to seek registration of
the security. However, in general, the money market fund anticipates
holding restricted securities to maturity or selling them in an exempt
transaction.
REPURCHASE AGREEMENTS. In a repurchase agreement, a fund purchases a
security and simultaneously commits to sell that security back to the
original seller at an agreed-upon price. The resale price reflects the
purchase price plus an agreed-upon incremental amount which is unrelated to
the coupon rate or maturity of the purchased security. While it does not
presently appear possible to eliminate all risks from these transactions
(particularly the possibility that the value of the underlying security
will be less than the resale price, as well as delays and costs to a fund
in connection with bankruptcy proceedings), it is each fund's current
policy to engage in repurchase agreement transactions with parties whose
creditworthiness has been reviewed and found satisfactory by FMR.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a fund
sells a portfolio instrument to another party, such as a bank or
broker-dealer, in return for cash and agrees to repurchase the instrument
at a particular price and time. While a reverse repurchase agreement is
outstanding, the fund will maintain appropriate liquid assets in a
segregated custodial account to cover its obligation under the agreement. A
fund will enter into reverse repurchase agreements only with parties whose
creditworthiness has been found satisfactory by FMR. Such transactions may
increase fluctuations in the market value of the fund's assets and may be
viewed as a form of leverage.
SECURITIES LENDING. A fund may lend securities to parties such as
broker-dealers or institutional investors, including Fidelity Brokerage
Services, Inc. (FBSI). FBSI is a member of the New York Stock Exchange
(NYSE) and a subsidiary of FMR Corp.
Securities lending allows a fund to retain ownership of the securities
loaned and, at the same time, to earn additional income. Since there may be
delays in the recovery of loaned securities, or even a loss of rights in
collateral supplied should the borrower fail financially, loans will be
made only to parties deemed by FMR to be of good standing. Furthermore,
they will only be made if, in FMR's judgment, the consideration to be
earned from such loans would justify the risk.
FMR understands that it is the current view of the SEC Staff that a fund
may engage in loan transactions only under the following conditions: (1)
the fund must receive 100% collateral in the form of cash or cash
equivalents (e.g., U.S. Treasury bills or notes) from the borrower; (2) the
borrower must increase the collateral whenever the market value of the
securities loaned (determined on a daily basis) rises above the value of
the collateral; (3) after giving notice, the fund must be able to terminate
the loan at any time; (4) the fund must receive reasonable interest on the
loan or a flat fee from the borrower, as well as amounts equivalent to any
dividends, interest, or other distributions on the securities loaned and to
any increase in market value; (5) the fund may pay only reasonable
custodian fees in connection with the loan; and (6) the Board of Trustees
must be able to vote proxies on the securities loaned, either by
terminating the loan or by entering into an alternative arrangement with
the borrower.
Cash received through loan transactions may be invested in any security in
which a fund is authorized to invest. Investing this cash subjects that
investment, as well as the security loaned, to market forces (i.e., capital
appreciation or depreciation).
LOANS AND OTHER DIRECT DEBT INSTRUMENTS. D irect debt instruments are
interests in amounts owed by a corporate, governmental, or other borrower
to lenders or lending syndicates (loans and loan participations), to
suppliers of goods or services (trade claims or other receivables), or to
other parties. Direct debt instruments are subject to a fund's policies
regarding the quality of debt securities.
Purchasers of loans and other forms of direct indebtedness depend primarily
upon the creditworthiness of the borrower for payment of principal and
interest. Direct debt instruments may not be rated by any nationally
recognized rating service. If a fund does not receive scheduled interest or
principal payments on such indebtedness, the fund's share price and yield
could be adversely affected. Loans that are fully secured offer the fund
more protections than an unsecured loan in the event of non-payment of
scheduled interest or principal. However, there is no assurance that the
liquidation of collateral from a secured loan would satisfy the borrower's
obligation, or that the collateral could be liquidated. Indebtedness of
borrowers whose creditworthiness is poor involves substantially greater
risks and may be highly speculative. Borrowers that are in bankruptcy or
restructuring may never pay off their indebtedness, or may pay only a small
fraction of the amount owed. Direct indebtedness of developing countries
also involves a risk that the governmental entities responsible for the
repayment of the debt may be unable, or unwilling, to pay interest and
repay principal when due.
Investments in loans through direct assignment of a financial institution's
interests with respect to a loan may involve additional risks to a fund.
For example, if a loan is foreclosed, a fund could become part owner of any
collateral, and would bear the costs and liabilities associated with owning
and disposing of the collateral. In addition, it is conceivable that under
emerging legal theories of lender liability, a fund could be held liable as
a co-lender. Direct debt instruments may also involve a risk of insolvency
of the lending bank or other intermediary. Direct debt instruments that are
not in the form of securities may offer less legal protection to the fund
in the event of fraud or misrepresentation. In the absence of definitive
regulatory guidance, the fund relies on FMR's research in an attempt to
avoid situations where fraud or misrepresentation could adversely affect a
fund.
A loan is often administered by a bank or other financial institution that
acts as agent for all holders. The agent administers the terms of the loan,
as specified in the loan agreement. Unless, under the terms of the loan or
other indebtedness, a fund has direct recourse against the borrower, it may
have to rely on the agent to apply appropriate credit remedies against a
borrower. If assets held by the agent for the benefit of a fund were
determined to be subject to the claims of the agent's general creditors,
the fund might incur certain costs and delays in realizing payment on the
loan or loan participation and could suffer a loss of principal or
interest.
Direct indebtedness purchased by a fund may include letters of credit,
revolving credit facilities, or other standby financing commitments
obligating the fund to pay additional cash on demand. These commitments may
have the effect of requiring the fund to increase its investment in a
borrower at a time when it would not otherwise have done so, even if the
borrower's condition makes it unlikely that the amount will ever be repaid.
A fund will set aside appropriate liquid assets in a segregated custodial
account to cover its potential obligations under standby financing
commitments.
A fund limits the amount of total assets that it will invest in any one
issuer or in issuers within the same industry (see limitations 1 and 5).
For purposes of these limitations, a fund generally will treat the borrower
as the "issuer" of indebtedness held by the fund. In the case of loan
participations where a bank or other lending institution serves as
financial intermediary between a fund and the borrower, if the
participation does not shift to the fund the direct debtor-creditor
relationship with the borrower, SEC interpretations require a fund, in
appropriate circumstances, to treat both the lending bank or other lending
institution and the borrower as "issuers" for these purposes. Treating a
financial intermediary as an issuer of indebtedness may restrict the funds'
ability to invest in indebtedness related to a single financial
intermediary, or a group of intermediaries engaged in the same industry,
even if the underlying borrowers represent many different companies and
industries.
ASSET-BACKED SECURITIES include pools of mortgages, loans, receivables or
other assets. Payment of principal and interest may be largely dependent
upon the cash flows generated by the assets backing the securities and, in
certain cases, supported by letters of credit, surety bonds, or other
credit enhancements. The value of asset-backed securities may also be
affected by the creditworthiness of the servicing agent for the pool, the
originator of the loans or receivables, or the financial institution(s)
providing the credit support.
ZERO COUPON BONDS. Zero coupon bonds do not make interest payments;
instead, they are sold at a deep discount from their face value and are
redeemed at face value when they mature. Because zero coupon bonds do not
pay current income, their prices can be very volatile when interest rates
change. In calculating its dividends, a fund takes into account as income a
portion of the difference between a zero coupon bond's purchase price and
its face value.
A broker-dealer creates a DERIVATIVE ZERO by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury
Securities), TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury
Receipts) are examples of derivative zeros.
STRIPPED GOVERNMENT SECURITIES. Stripped securities are created by
separating the income and principal components of a debt instrument and
selling them separately. A fund may purchase U.S. Treasury STRIPS (Separate
Trading of Registered Interest and Principal of Securities), which are
created when the coupon payments and the principal payment are stripped
from an outstanding Treasury bond by the Federal Reserve Bank. Bonds issued
by the Resolution Funding Corporation can also be stripped in this fashion
and are eligible investments for the funds.
A fund can purchase privately stripped government securities, which are
created when a dealer deposits a Treasury security or federal agency
security with a custodian for safekeeping and then sells the coupon
payments and principal payment that will be generated by this security.
Proprietary receipts, such as Certificates of Accrual on Treasury
Securities (CATS), Treasury Investment Growth Receipts (TIGRS), and generic
Treasury Receipts (TRs), are stripped U.S. Treasury securities that are
separated into their component parts through trusts created by their broker
sponsors. Bonds issued by the Financing Corporation (FICO) can also be
stripped in this fashion.
Because of the SEC's views on privately stripped government securities,
Money Market Portfolio must evaluate them as it would non-government
securities pursuant to regulatory guidelines applicable to all money market
funds. Money Market Portfolio fund currently intends to purchase
only those privately stripped government securities that have either
received the highest rating from two nationally recognized rating services
(or one, if only one has rated the security) or, if unrated, been judged to
be of equivalent quality by FMR pursuant to procedures adopted by the Board
of Trustees.
STRIPPED MORTGAGE-BACKED SECURITIES are created when a U.S. government
agency or a financial institution separates the interest and principal
components of a mortgage-backed security and sells them as individual
securities. The holder of the "principal-only" security (PO) receives the
principal payments made by the underlying mortgage-backed security, while
the holder of the "interest-only" security (IO) receives interest payments
from the same underlying security.
The prices of stripped mortgage-backed securities may be particularly
affected by changes in interest rates. As interest rates fall, prepayment
rates tend to increase, which tends to reduce prices of IOs and increase
prices of POs. Rising interest rates can have the opposite effect.
MORTGAGE-BACKED SECURITIES. The funds may purchase mortgage-backed
securities issued by government and non-government entities such as banks,
mortgage lenders, or other financial institutions. A mortgage-backed
security is an obligation of the issuer backed by a mortgage or pool of
mortgages or a direct interest in an underlying pool of mortgages. Some
mortgage-backed securities, such as collateralized mortgage obligations or
CMOs, make payments of both principal and interest at a variety of
intervals; others make semiannual interest payments at a predetermined rate
and repay principal at maturity (like a typical bond). Mortgage-backed
securities are based on different types of mortgages including those on
commercial real estate or residential properties. Other types of
mortgage-backed securities will likely be developed in the future, and the
funds may invest in them if FMR determines they are consistent with the
funds' investment objective and policies.
The value of mortgage-backed securities may change due to shifts in the
market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Non-government
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment
risk. Prepayment, which occurs when unscheduled or early payments are made
on the underlying mortgages, may shorten the effective maturities of these
securities and may lower their total returns.
REAL ESTATE-RELATED INSTRUMENTS include real estate investment trusts,
commercial and residential mortgage-backed securities, and real estate
financings. Real estate-related instruments are sensitive to factors such
as real estate values and property taxes, interest rates, cash flow of
underlying real estate assets, overbuilding, and the management skill and
creditworthiness of the issuer. Real estate-related instruments may also be
affected by tax and regulatory requirements, such as those relating to the
environment.
WARRANTS. Warrants are securities that give a fund the right to purchase
equity securities from the issuer at a specific price (the strike price)
for a limited period of time. The strike price of warrants typically is
much lower than the current market price of the underlying securities, yet
they are subject to similar price fluctuations. As a result, warrants may
be more volatile investments than the underlying securities and may offer
greater potential for capital appreciation as well as capital loss.
Warrants do not entitle a holder to dividends or voting rights with respect
to the underlying securities and do not represent any rights in the assets
if the issuing company. Also, the value of the warrant does not necessarily
change with the value of the underlying securities and a warrant ceases to
have value if it is not exercised prior to expiration date. These factors
can make warrants more speculative than other types of investments.
SOVEREIGN DEBT OBLIGATIONS Overseas Portfolio may purchase sovereign debt
instruments issued or guaranteed by foreign governments or their agencies,
including debt of Latin American nations or other developing countries.
Sovereign debt may be in the form of conventional securities or other types
of debt instruments such as loans or loan participations. Sovereign debt of
developing countries may involve a high degree of risk, and may be in
default or present the risk of default. Governmental entities responsible
for repayment of the debt may be unable or unwilling to repay principal and
interest when due, and may require renegotiation or rescheduling of debt
payments. In addition, prospects for repayment of principal and interest
may depend on political as well as economic factors.
SHORT SALES "AGAINST THE BOX". A fund may sell securities short when it
owns or has the right to obtain securities equivalent in kind or amount to
the securities sold short. Short sales could be used to protect the net
asset value per share of the fund in anticipation of increased interest
rates, without sacrificing the current yield of the securities sold short.
A fund may enter into SHORT SALES with respect to stocks underlying its
convertible security holdings. For example, if FMR anticipates a decline in
the price of the stock underlying a convertible security a fund holds, it
may sell the stock short. If the stock price subsequently declines, the
proceeds of the short sale could be expected to offset all or a portion of
the effect of the stock's decline on the value of the convertible security.
Each fund currently intends to hedge no more than 15% of its total assets
with short sales on equity securities underlying its convertible security
holdings under normal circumstances.
When a fund enters into a short sale, it will be required to set aside
securities equivalent in kind and amount to those sold short (or securities
convertible or exchangeable into such securities) and will be required to
hold them aside while the short sale is outstanding. A fund will incur
transaction costs, including interest expense, in connection with opening,
maintaining, and closing short sales.
INTERFUND BORROWING PROGRAM. Each fund has received permission from the SEC
to lend money to and borrow money from other funds advised by FMR or its
affiliates. Interfund loans and borrowings normally will extend overnight,
but can have a maximum duration of seven days. Loans may be called on one
day's notice. The funds will lend through the program only when the returns
are higher than those available at the same time from other short-term
instruments (such as repurchase agreements), and will borrow through the
program only when the costs are equal to or lower than the cost of bank
loans. The funds may have to borrow from a bank at a higher interest rate
if an interfund loan is called or not renewed. Any delay in repayment to a
lending fund could result in a lost investment opportunity or additional
borrowing costs.
FOREIGN INVESTMENTS. Investing in securities issued by companies or other
issuers whose principal activities are outside the United States may
involve significant risks in addition to the risks inherent in U.S.
investments. The value of securities denominated in foreign currencies and
of dividends and interest paid with respect to such securities will
fluctuate based on the relative strength of the U.S. dollar. In addition,
there is generally less publicly available information about foreign
issuers' financial condition and operations, particularly those not subject
to the disclosure and reporting requirements of the U.S. securities laws.
Foreign issuers are generally not bound by uniform accounting, auditing,
and financial reporting requirements and standards of practice comparable
to those applicable to U.S. issuers. Further, economies of particular
countries or areas of the world may differ favorably or unfavorably from
the economy of the United States.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments
adverse to the interests of U.S. investors, including the possibility of
expropriation or nationalization of assets, confiscatory taxation,
restrictions on U.S. investment or on the ability to repatriate assets or
convert currency into U.S. dollars, or other government intervention. There
may be a greater possibility of default by foreign governments or foreign
government-sponsored enterprises. Investments in foreign countries also
involve a risk of local political, economic, or social instability,
military action or unrest, or adverse diplomatic developments. There is no
assurance that FMR will be able to anticipate these potential events or
counter their effects. The considerations noted above generally are
intensified for investments in developing countries. Developing countries
may have relatively unstable governments, economies based on only a few
industries, and securities markets that trade a small number of securities.
Foreign markets may offer less protection to investors than U.S. markets.
It is anticipated that in most cases the best available market for foreign
securities will be on exchanges or in over-the-counter markets located
outside of the United States. Foreign stock markets, while growing in
volume and sophistication, are generally not as developed as those in the
United States, and securities of some foreign issuers (particularly those
located in developing countries) may be less liquid and more volatile than
securities of comparable U.S. issuers. Foreign security trading practices,
including those involving securities settlement where fund assets may be
released prior to receipt of payment, may expose a fund to increased risk
in the event of a failed trade or the insolvency of a foreign
broker-dealer, and may involve substantial delays. In addition, the costs
of foreign investing, including withholding taxes, brokerage commissions
and custodial costs, are generally higher than for U.S. investors. In
general, there is less overall governmental supervision and regulation of
securities exchanges, brokers, and listed companies than in the United
States. It may also be difficult to enforce legal rights in foreign
countries.
A fund may invest in foreign securities that impose restrictions on
transfer within the United States or to U.S. persons. Although securities
subject to such transfer restrictions may be marketable abroad, they may be
less liquid than foreign securities of the same class that are not subject
to such restrictions.
A fund may invest in American Depository Receipts and European Depository
Receipts (ADRs and EDRs), which are certificates evidencing ownership of
shares of a foreign-based issuer held in trust by a bank or similar
financial institution. Designed for use in the U.S. and European securities
markets, respectively, ADRs and EDRs are alternatives to the purchase of
the underlying securities in their national markets and currencies.
FOREIGN CURRENCY TRANSACTIONS. (excludes Money Market Portfolio ) The
funds may conduct foreign currency transactions on a spot (i.e., cash)
basis or by entering into forward contracts to purchase or sell foreign
currencies at a future date and price. The funds will convert currency on a
spot basis from time to time, and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers generally do not
charge a fee for conversion, they do realize a profit based on the
difference between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the fund
at one rate, while offering a lesser rate of exchange should the fund
desire to resell that currency to the dealer. Forward contracts are
generally traded in an interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. The parties
to a forward contract may agree to offset or terminate the contract before
its maturity, or may hold the contract to maturity and complete the
contemplated currency exchange.
Each fund may use currency forward contracts for any purpose consistent
with its investment objective. The following discussion summarizes the
principal currency management strategies involving forward contracts that
could be used by each fund. The funds may also use swap agreements, indexed
securities, and options and futures contracts relating to foreign
currencies for the same purposes.
When a fund agrees to buy or sell a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security.
By entering into a forward contract for the purchase or sale, for a fixed
amount of U.S. dollars, of the amount of foreign currency involved in the
underlying security transaction, the fund will be able to protect itself
against an adverse change in foreign currency values between the date the
security is purchased or sold and the date on which payment is made or
received. This technique is sometimes referred to as a "settlement hedge"
or "transaction hedge." The funds may also enter into forward contracts to
purchase or sell a foreign currency in anticipation of future purchases or
sales of securities denominated in foreign currency, even if the specific
investments have not yet been selected by FMR.
The funds may also use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. For example,
if a fund owned securities denominated in pounds sterling, it could enter
into a forward contract to sell pounds sterling in return for U.S. dollars
to hedge against possible declines in the pound's value. Such a hedge,
sometimes referred to as a "position hedge," would tend to offset both
positive and negative currency fluctuations, but would not offset changes
in security values caused by other factors. A fund could also hedge the
position by selling another currency expected to perform similarly to the
pound sterling - for example, by entering into a forward contract to sell
Deutschemarks or European Currency Units in return for U.S. dollars. This
type of hedge, sometimes referred to as a "proxy hedge," could offer
advantages in terms of cost, yield, or efficiency, but generally would not
hedge currency exposure as effectively as a simple hedge into U.S. dollars.
Proxy hedges may result in losses if the currency used to hedge does not
perform similarly to the currency in which the hedged securities are
denominated.
Each fund may enter into forward contracts to shift its investment exposure
from one currency into another. This may include shifting exposure from
U.S. dollars to a foreign currency, or from one foreign currency to another
foreign currency. For example, if a fund held investments denominated in
Deutschemarks, the fund could enter into forward contracts to sell
Deutschemarks and purchase Swiss Francs. This type of strategy, sometimes
known as a "cross-hedge," will tend to reduce or eliminate exposure to the
currency that is sold, and increase exposure to the currency that is
purchased, much as if the fund had sold a security denominated in one
currency and purchased an equivalent security denominated in another.
Cross-hedges protect against losses resulting from a decline in the hedged
currency, but will cause the fund to assume the risk of fluctuations in the
value of the currency it purchases.
Under certain conditions, SEC guidelines require mutual funds to set aside
appropriate liquid assets in a segregated custodial account to cover
currency forward contracts. As required by SEC guidelines, the funds will
segregate assets to cover currency forward contracts, if any, whose purpose
is essentially speculative. The funds will not segregate assets to cover
forward contracts entered into for hedging purposes, including settlement
hedges, position hedges, and proxy hedges.
Successful use of currency management strategies will depend on FMR's skill
in analyzing and predicting currency values. Currency management strategies
may substantially change a fund's investment exposure to changes in
currency exchange rates, and could result in losses to the fund if
currencies do not perform as FMR anticipates. For example, if a currency's
value rose at a time when FMR had hedged a fund by selling that currency in
exchange for dollars, the fund would be unable to participate in the
currency's appreciation. If FMR hedges currency exposure through proxy
hedges, a fund could realize currency losses from the hedge and the
security position at the same time if the two currencies do not move in
tandem. Similarly, if FMR increases a fund's exposure to a foreign
currency, and that currency's value declines, the fund will realize a loss.
There is no assurance that FMR's use of currency management strategies will
be advantageous to the funds or that it will hedge at an appropriate time.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS. (excludes Money Market
Portfolio) Each fund has filed a notice of eligibility for exclusion from
the definition of the term "commodity pool operator" with the Commodity
Futures Trading Commission (CFTC) and the National Futures Association,
which regulate trading in the futures markets. The funds intend to comply
with Rule 4.5 under the Commodity Exchange Act, which limits the extent to
which a fund can commit assets to initial margin deposits and option
premiums.
In addition, each fund (excluding Index 500 Portfolio) will not: (a) sell
futures contracts, purchase put options, or write call options if, as a
result, more than 25% of the fund's total assets would be hedged with
futures and options under normal conditions; (b) purchase futures contracts
or write put options if, as a result, the fund's total obligations upon
settlement or exercise of purchased futures contracts and written put
options would exceed 25% of its total assets; or (c) purchase call options
if, as a result, the current value of option premiums for call options
purchased by the fund would exceed 5% of the fund's total assets. These
limitations do not apply to options attached to or acquired or traded
together with their underlying securities, and do not apply to securities
that incorporate features similar to options.
For Index 500 Portfolio, FMR also intends to follow certain other
limitations on the fund's futures and options activities. Under normal
conditions, the fund will not enter into any futures contract or option if,
as a result, the sum of (i) the current value of assets hedged in the case
of strategies involving the sale of securities, and (ii) the current value
of the indices or other instruments underlying the fund's other futures or
options positions, would exceed 35% of the fund's total assets. These
limitations do not apply to options attached to, or acquired or traded
together with their underlying securities, and do not apply to securities
that incorporate features similar to options.
The above limitations on the funds' investments in futures contracts and
options, and the funds' policies regarding futures contracts and options
discussed elsewhere in this Statement of Additional Information may be
changed as regulatory agencies permit.
FUTURES CONTRACTS. When a fund purchases a futures contract, it agrees to
purchase a specified underlying instrument at a specified future date. When
a fund sells a futures contract, it agrees to sell the underlying
instrument at a specified future date. The price at which the purchase and
sale will take place is fixed when a fund enters into the contract. Some
currently available futures contracts are based on specific securities,
such as U.S. Treasury bonds or notes, and some are based on indices of
securities prices, such as the Standard & Poor's Composite Index of 500
Stocks (S&P 500). Futures can be held until their delivery dates, or can be
closed out before then if a liquid secondary market is available.
The value of a futures contract tends to increase and decrease in tandem
with the value of its underlying instrument. Therefore, purchasing futures
contracts will tend to increase a fund's exposure to positive and negative
price fluctuations in the underlying instrument, much as if it had
purchased the underlying instrument directly. When a fund sells a futures
contract, by contrast, the value of its futures position will tend to move
in a direction contrary to the market. Selling futures contracts,
therefore, will tend to offset both positive and negative market price
changes, much as if the underlying instrument had been sold.
FUTURES MARGIN PAYMENTS. The purchaser or seller of a futures contract is
not required to deliver or pay for the underlying instrument unless the
contract is held until the delivery date. However, both the purchaser and
seller are required to deposit "initial margin" with a futures broker,
known as a futures commission merchant (FCM), when the contract is entered
into. Initial margin deposits are typically equal to a percentage of the
contract's value. If the value of either party's position declines, that
party will be required to make additional "variation margin" payments to
settle the change in value on a daily basis. The party that has a gain may
be entitled to receive all or a portion of this amount. Initial and
variation margin payments do not constitute purchasing securities on margin
for purposes of a fund's investment limitations. In the event of the
bankruptcy of an FCM that holds margin on behalf of a fund, the fund may be
entitled to return of margin owed to it only in proportion to the amount
received by the FCM's other customers, potentially resulting in losses to
the fund.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, a fund obtains
the right (but not the obligation) to sell the option's underlying
instrument at a fixed strike price. In return for this right, the fund pays
the current market price for the option (known as the option premium).
Options have various types of underlying instruments, including specific
securities, indices of securities prices, and futures contracts. The fund
may terminate its position in a put option it has purchased by allowing it
to expire or by exercising the option. If the option is allowed to expire,
the fund will lose the entire premium it paid. If the fund exercises the
option, it completes the sale of the underlying instrument at the strike
price. A fund may also terminate a put option position by closing it out in
the secondary market at its current price, if a liquid secondary market
exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price
does not fall enough to offset the cost of purchasing the option, a put
buyer can expect to suffer a loss (limited to the amount of the premium
paid, plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's
strike price. A call buyer typically attempts to participate in potential
price increases of the underlying instrument with risk limited to the cost
of the option if security prices fall. At the same time, the buyer can
expect to suffer a loss if security prices do not rise sufficiently to
offset the cost of the option.
WRITING PUT AND CALL OPTIONS. When a fund writes a put option, it takes the
opposite side of the transaction from the option's purchaser. In return for
receipt of the premium, the fund assumes the obligation to pay the strike
price for the option's underlying instrument if the other party to the
option chooses to exercise it. When writing an option on a futures
contract, the fund will be required to make margin payments to an FCM as
described above for futures contracts. A fund may seek to terminate its
position in a put option it writes before exercise by closing out the
option in the secondary market at its current price. If the secondary
market is not liquid for a put option the fund has written, however, the
fund must continue to be prepared to pay the strike price while the option
is outstanding, regardless of price changes, and must continue to set aside
assets to cover its position.
If security prices rise, a put writer would generally expect to profit,
although its gain would be limited to the amount of the premium it
received. If security prices remain the same over time, it is likely that
the writer will also profit, because it should be able to close out the
option at a lower price. If security prices fall, the put writer would
expect to suffer a loss. This loss should be less than the loss from
purchasing the underlying instrument directly, however, because the premium
received for writing the option should mitigate the effects of the decline.
Writing a call option obligates a fund to sell or deliver the option's
underlying instrument, in return for the strike price, upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the
same time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is
greater, a call writer gives up some ability to participate in security
price increases.
COMBINED POSITIONS. A fund may purchase and write options in combination
with each other, or in combination with futures or forward contracts, to
adjust the risk and return characteristics of the overall position. For
example, a fund may purchase a put option and write a call option on the
same underlying instrument, in order to construct a combined position whose
risk and return characteristics are similar to selling a futures contract.
Another possible combined position would involve writing a call option at
one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial
price increase. Because combined options positions involve multiple trades,
they result in higher transaction costs and may be more difficult to open
and close out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of types
of exchange-traded options and futures contracts, it is likely that the
standardized contracts available will not match a fund's current or
anticipated investments exactly. The funds may invest in options and
futures contracts based on securities with different issuers, maturities,
or other characteristics from the securities in which they typically
invest, which involves a risk that the options or futures position will not
track the performance of a fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match a fund's
investments well. Options and futures prices are affected by such factors
as current and anticipated short-term interest rates, changes in volatility
of the underlying instrument, and the time remaining until expiration of
the contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options
and futures markets and the securities markets, from structural differences
in how options and futures and securities are traded, or from imposition of
daily price fluctuation limits or trading halts. A fund may purchase or
sell options and futures contracts with a greater or lesser value than the
securities it wishes to hedge or intends to purchase in order to attempt to
compensate for differences in volatility between the contract and the
securities, although this may not be successful in all cases. If price
changes in a fund's options or futures positions are poorly correlated with
its other investments, the positions may fail to produce anticipated gains
or result in losses that are not offset by gains in other investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a liquid
secondary market will exist for any particular options or futures contract
at any particular time. Options may have relatively low trading volume and
liquidity if their strike prices are not close to the underlying
instrument's current price. In addition, exchanges may establish daily
price fluctuation limits for options and futures contracts, and may halt
trading if a contract's price moves upward or downward more than the limit
in a given day. On volatile trading days when the price fluctuation limit
is reached or a trading halt is imposed, it may be impossible for a fund to
enter into new positions or close out existing positions. If the secondary
market for a contract is not liquid because of price fluctuation limits or
otherwise, it could prevent prompt liquidation of unfavorable positions,
and potentially could require a fund to continue to hold a position until
delivery or expiration regardless of changes in its value. As a result, a
fund's access to other assets held to cover its options or futures
positions could also be impaired.
OTC OPTIONS. Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size, and
strike price, the terms of over-the-counter (OTC) options (options not
traded on exchanges) generally are established through negotiation with the
other party to the option contract. While this type of arrangement allows
the funds greater flexibility to tailor an option to its needs, OTC options
generally involve greater credit risk than exchange-traded options, which
are guaranteed by the clearing organization of the exchanges where they are
traded.
OPTIONS AND FUTURES RELATING TO FOREIGN CURRENCIES. Currency futures
contracts are similar to forward currency exchange contracts, except that
they are traded on exchanges (and have margin requirements) and are
standardized as to contract size and delivery date. Most currency futures
contracts call for payment or delivery in U.S. dollars. The underlying
instrument of a currency option may be a foreign currency, which generally
is purchased or delivered in exchange for U.S. dollars, or may be a futures
contract. The purchaser of a currency call obtains the right to purchase
the underlying currency, and the purchaser of a currency put obtains the
right to sell the underlying currency.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The funds will comply
with guidelines established by the SEC with respect to coverage of options
and futures strategies by mutual funds, and if the guidelines so require
will set aside appropriate liquid assets in a segregated custodial account
in the amount prescribed. Securities held in a segregated account cannot be
sold while the futures or option strategy is outstanding, unless they are
replaced with other suitable assets. As a result, there is a possibility
that segregation of a large percentage of a fund's assets could impede
portfolio management or the fund's ability to meet redemption requests or
other current obligations.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed on
behalf of each fund by FMR pursuant to authority contained in the
management contract. If FMR grants investment management authority to the
sub-advisers (see the section entitled "Management Contracts"), the
sub-advisers are authorized to place orders for the purchase and sale of
portfolio securities, and will do so in accordance with the policies
described below. FMR is also responsible for the placement of transaction
orders for other investment companies and accounts for which it or its
affiliates act as investment adviser. In selecting broker-dealers, subject
to applicable limitations of the federal securities laws, FMR considers
various relevant factors, including, but not limited to: the size and type
of the transaction; the nature and character of the markets for the
security to be purchased or sold; the execution efficiency, settlement
capability, and financial condition of the broker-dealer firm; the
broker-dealer's execution services rendered on a continuing basis; and the
reasonableness of any commissions. Commissions for foreign investments
traded on foreign exchanges generally will be higher than for U.S.
investments and may not be subject to negotiation.
Each fund may execute portfolio transactions with broker-dealers who
provide research and execution services to a fund or other accounts over
which FMR or its affiliates exercise investment discretion. Such services
may include advice concerning the value of securities; the advisability of
investing in, purchasing or selling securities; the availability of
securities or the purchasers or sellers of securities; furnishing analyses
and reports concerning issuers, industries, securities, economic factors
and trends, portfolio strategy and performance of accounts; and effecting
securities transactions and performing functions incidental thereto (such
as clearance and settlement). FMR maintains a listing of broker-dealers who
provide such services on a regular basis. However, as many transactions on
behalf of a fund's money market securities are placed with dealers
(including broker-dealers on the list) without regard to the furnishing of
such services, it is not possible to estimate the proportion of such
transactions directed to such dealers solely because such services were
provided. The selection of such broker-dealers is generally made by FMR (to
the extent possible consistent with execution considerations) in accordance
with a ranking of broker-dealers determined periodically by FMR's
investment staff based upon the quality of research and execution services
provided.
The receipt of research from broker-dealers that execute transactions on
behalf of the funds may be useful to FMR in rendering investment management
services to the funds or its other clients, and conversely, such research
provided by broker-dealers who have executed transaction orders on behalf
of other FMR clients may be useful to FMR in carrying out its obligations
to the funds. The receipt of such research has not reduced FMR's normal
independent research activities; however, it enables FMR to avoid the
additional expenses that could be incurred if FMR tried to develop
comparable information through its own efforts.
Subject to applicable limitations of the federal securities laws,
broker-dealers may receive commissions for agency transactions that are in
excess of the amount of commissions charged by other broker-dealers in
recognition of their research and execution services. In order to cause
each fund to pay such higher commissions, FMR must determine in good faith
that such commissions are reasonable in relation to the value of the
brokerage and research services provided by such executing broker-dealers,
viewed in terms of a particular transaction or FMR's overall
responsibilities to the funds and its other clients. In reaching this
determination, FMR will not attempt to place a specific dollar value on the
brokerage and research services provided, or to determine what portion of
the compensation should be related to those services.
FMR is authorized to use research services provided by and to place
portfolio transactions with brokerage firms that have provided assistance
in the distribution of shares of the funds or shares of other Fidelity
funds to the extent permitted by law. FMR may use research services
provided by and place agency transactions with Fidelity Brokerage Services,
Inc. (FBSI) and Fidelity Brokerage Services, Ltd. (FBSL), subsidiaries of
FMR Corp., if the commissions are fair, reasonable, and comparable to
commissions charged by non-affiliated, qualified brokerage firms for
similar services. Prior to September 4, 1992, FBSL operated under the name
Fidelity Portfolio Services, Ltd. (FPSL) as a wholly owned subsidiary of
Fidelity International Limited (FIL). Edward C. Johnson 3d is Chairman of
FIL. Mr. Johnson 3d, Johnson family members, and various trusts for the
benefit of the Johnson family own, directly or indirectly, more than 25% of
the voting common stock of FIL.
Section 11(a) of the Securities Exchange Act of 1934 prohibits members of
national securities exchanges from executing exchange transactions for
accounts which they or their affiliates manage, unless certain requirements
are satisfied. Pursuant to such requirements, the Board of Trustees has
authorized FBSI to execute portfolio transactions on national securities
exchanges in accordance with approved procedures and applicable SEC rules.
Each fund's Trustees periodically review FMR's performance of its
responsibilities in connection with the placement of portfolio transactions
on behalf of the funds and review the commissions paid by each fund over
representative periods of time to determine if they are reasonable in
relation to the benefits to the fund.
Because a high turnover rate increases brokerage costs, FMR carefully
weighs the added costs of short-term investment against anticipated gain.
For fiscal years ended December 31, each fund had the following turnover
rates:
HIGH EQUITY- INVESTMENT ASSET
YEAR INCOME INCOME GROWTH OVERSEAS GRADE BOND MANAGER INDEX 500
1994 122% 134% 122% 42% 143% 85% 2%
1993 155% 120% 159% 42% 70% 113% 9%
BROKERAGE COMMISSIONS. The following lists the percentage of the brokerage
commissions paid to brokerage firms which provided research services; the
total brokerage commissions paid; the commissions paid to FBSI and FBSL in
dollars and as a percentage of the dollar value of all transactions in
which brokerage commissions were paid for the fiscal periods ended December
31, 1994, 1993 and 1992 for each of the funds. No commissions were paid
by Money Market and Investment Grade Bond Portfolios. The funds pay
both commissions and spreads in connection with the placement of portfolio
transactions. The difference in the percentage of brokerage commissions
paid to, and the percentage of the dollar amount of transactions effected
through FBSI and FBSL, are mainly due to the results of the low
commission rates charged by FBSI and FBSL.
HIGH INCOME PORTFOLIO
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% Paid to % %
Firms Transactions Transactions
Period Providing To To % to through through
Ended TOTAL Research FBSI FBSL % to FBSI FBSL FBSI FBSL
</TABLE>
1994 $135,013 98% $24,140 $0 18% 0% 29% 0%
1993 25,198 99 0 0 0 0 0 0
1992 9,568 100 7 0 0 0 0 0
EQUITY-INCOME PORTFOLIO
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% Paid to % %
Firms Transactions Transactions
Period Providing To To % to % to through through
Ended TOTAL Research FBSI FBSL FBSI FBSL FBSI FBSL
</TABLE>
1994 $4,893,684 95% $1,717,630 $116,658 35% 2% 46% 1%
1993 2,658,979 68 712,270 51,049 27 2 42 0
1992 752,271 65 263,440 0 35 0 46 0
GROWTH PORTFOLIO
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% Paid to % %
Firms Transactions Transactio
ns
Period Providing To To % to through through
Ended TOTAL Research To FBSI FBSL % to FBSI FBSL FBSI FBSL
</TABLE>
1994 $3,120,411 97% $956,332 $0 31% 0% 44% 0%
1993 2,137,399 49 750,137 0 35 0 48 0
1992 2,073,624 59 599,019 0 29 0 37 0
OVERSEAS PORTFOLIO
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% Paid to % %
Firms Transactions Transactions
Period Providing To % to through through
Ended TOTAL Research To FBSI FBSL % to FBSI FBSL FBSI FBSL
</TABLE>
1994 $2,985,961 90% $1,605 $255,413 0% 9% 0% 11%
1993 1,541,385 92 3,119 13,077 0 1 1 0
1992 602,862 85 0 4,314 0 1 0 1
ASSET MANAGER PORTFOLIO
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% Paid to % %
Firms Transactions Transactions
Period Providing To To % to through through
Ended TOTAL Research FBSI FBSL % to FBSI FBSL FBSI FBSL
</TABLE>
1994 $3,316,118 92% $583,097 $107,280 18% 3% 32% 3%
1993 2,839,401 73 398,687 43,172 14 2 29 0
1992 544,613 68 100,724 179 19 0 28 0
INDEX 500 PORTFOLIO
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% Paid to % %
Firms Transactions Transactions
Period Providing To To % to through through
Ended TOTAL Research FBSI FBSL % to FBSI FBSL FBSI FBSL
</TABLE>
1994 $10,286 1% $17 $0 0% 0% 0% 0%
1993 3,870 4 123 0 3 0 3 0
1992 5,980 0 112 0 2 0 2 0
________
From time to time the Trustees will review whether the recapture for the
benefit of the funds of some portion of the brokerage commissions or
similar fees paid by the funds on portfolio transactions is legally
permissible and advisable. Each fund seeks to recapture soliciting
broker-dealer fees on the tender of portfolio securities, but at present no
other recapture arrangements are in effect. The Trustees intend to continue
to review whether recapture opportunities are available and are legally
permissible and, if so, to determine in the exercise of their business
judgment whether it would be advisable for each fund to seek such
recapture.
Although the Trustees and officers of each fund are substantially the same
as those of other funds managed by FMR, investment decisions for each fund
are made independently from those of other funds managed by FMR or accounts
managed by FMR affiliates. It sometimes happens that the same security is
held in the portfolio of more than one of these funds or accounts.
Simultaneous transactions are inevitable when several funds and accounts
are managed by the same investment adviser, particularly when the same
security is suitable for the investment objective of more than one fund or
account.
When two or more funds are simultaneously engaged in the purchase or sale
of the same security, the prices and amounts are allocated in accordance
with procedures believed to be appropriate and equitable for each fund. In
some cases this system could have a detrimental effect on the price or
value of the security as far as each fund is concerned. In other cases,
however, the ability of the funds to participate in volume transactions
will produce better executions and prices for the funds. It is the current
opinion of the Trustees that the desirability of retaining FMR as
investment adviser to each fund outweighs any disadvantages that may be
said to exist from exposure to simultaneous transactions.
VALUATION OF PORTFOLIO SECURITIES
MONEY MARKET PORTFOLIO
The fund values its investments on the basis of amortized cost. This
technique involves valuing an instrument at its cost as adjusted for
amortization of premium or accretion of discount rather than its value
based on current market quotations or appropriate substitutes which reflect
current market conditions. The amortized cost value of an instrument may be
higher or lower than the price the fund would receive if it sold the
instrument.
Valuing the fund's instruments on the basis of amortized cost and use of
the term "money market fund" are permitted by Rule 2a-7 under the 1940 Act.
The fund must adhere to certain conditions under Rule 2a-7.
The Board of Trustees of the trust oversees FMR's adherence to SEC rules
concerning money market funds, and has established procedures designed to
stabilize the fund's net asset value (NAV) at $1.00. At such intervals as
they deem appropriate, the Trustees consider the extent to which NAV
calculated by using market valuations would deviate from $1.00 per share.
If the Trustees believe that a deviation from the fund's amortized cost per
share may result in material dilution or other unfair results to
shareholders, the Trustees have agreed to take such corrective action, if
any, as they deem appropriate to eliminate or reduce, to the extent
reasonably practicable, the dilution or unfair results. Such corrective
action could include selling portfolio instruments prior to maturity to
realize capital gains or losses or to shorten average portfolio maturity;
withholding dividends; redeeming shares in kind; establishing NAV by using
available market quotations; and such other measures as the Trustees may
deem appropriate.
During periods of declining interest rates, the fund's yield based on
amortized cost may be higher than the yield based on market valuations.
Under these circumstances, a shareholder of the fund would be able to
obtain a somewhat higher yield than would result if the fund utilized
market valuations to determine its NAV. The converse would apply in a
period of rising interest rates.
INVESTMENT GRADE BOND AND HIGH INCOME PORTFOLIOS
Securities and other assets for which market quotations are readily
available are valued at market values determined by their most recent bid
prices (sales prices if the principal market is an exchange) in the
principal market in which such securities normally are traded. Securities
and other assets for which market quotations are not readily available
(including restricted securities, if any) are appraised at their fair value
as determined in good faith under consistently applied procedures under the
general supervision of the Board of Trustees.
Securities may also be valued on the basis of valuations furnished by a
pricing service that uses both dealer-supplied valuations and evaluations
based on expert analysis of market data and other factors if such
valuations are believed to reflect more accurately the fair value of such
securities. Use of a pricing service has been approved by the Board of
Trustees. There are a number of pricing services available, and the
Trustees, or officers acting on behalf of the Trustees, on the basis of
ongoing evaluation of these pricing services, may use other pricing
services or may discontinue the use of any pricing service in whole or in
part.
Securities not valued by the pricing service, and for which quotations are
readily available, are valued at market values determined on the basis of
their latest available bid prices as furnished by recognized dealers in
such securities. Futures contracts and options are valued on the basis of
market quotations, if available.
EQUITY-INCOME, GROWTH, OVERSEAS, ASSET MANAGER, CONTRAFUND ASSET MANAGER:
GROWTH AND INDEX 500 PORTFOLIOS
Portfolio securities are valued by various methods depending on the primary
market or exchange on which they trade. Most equity securities for which
the primary market is the U.S. are valued at last sale price or, if no sale
has occurred, at the closing bid price. Most equity securities for which
the primary market is outside the U.S. are valued using the official
closing price or the last sale price in the principal market where they are
traded. If the last sale price (on the local exchange) is unavailable, the
last evaluated quote or last bid price is normally used. Short-term
securities are valued either at amortized cost or at original cost plus
accrued interest, both of which approximate current value. Convertible
securities and fixed-income securities are valued primarily by a pricing
service that uses a vendor security valuation matrix which incorporates
both dealer-supplied valuations and electronic data processing techniques.
This two-fold approach is believed to more accurately reflect fair value
because it takes into account appropriate factors such as institutional
trading in similar groups of securities, yield, quality, coupon rate,
maturity, type of issue, trading characteristics, and other market data,
without exclusive reliance upon quoted, exchange, or over-the counter
prices. Use of pricing services has been approved by the Board of Trustees.
Securities and other assets for which there is no readily available market
are valued in good faith by a committee appointed by the Board of Trustees.
The procedures set forth above need not be used to determine the value of
the securities owned by the fund if, in the opinion of a committee
appointed by the Board of Trustees, some other method (e.g., closing
over-the-counter bid prices in the case of debt instruments traded on an
exchange) would more accurately reflect the fair market value of such
securities.
Generally, the valuation of foreign and domestic equity securities, as well
as corporate bonds, U.S. government securities, money market instruments,
and repurchase agreements, is substantially completed each day at the close
of the NYSE. The values of any such securities held by the fund are
determined as of such time for the purpose of computing the fund's net
asset value. Foreign security prices are furnished by independent brokers
or quotation services which express the value of securities in their local
currency. Fidelity Service Company (FSC) gathers all exchange rates daily
at the close of the NYSE using the last quoted price on the local currency
and then translates the value of foreign securities from their local
currency into U.S. dollars. Any changes in the value of forward contracts
due to exchange rate fluctuations and days to maturity are included in the
calculation of net asset value. If an extraordinary event that is expected
to materially affect the value of a portfolio security occurs after the
close of an exchange on which that security is traded, then the security
will be valued as determined in good faith by a committee appointed by the
Board of Trustees.
PERFORMANCE
A fund may quote performance in various ways. All performance information
supplied by a fund in advertising is historical and is not intended to
indicate future returns. The funds' share price, total return (excluding
Money Market Portfolio) and yield will fluctuate in response to market
conditions and other factors, and the value of fund shares when redeemed
may be more or less than their original cost.
YIELD CALCULATION (MONEY MARKET PORTFOLIO). To compute the fund's yield for
a period, the net change in value of a hypothetical account containing one
share reflects the value of additional shares purchased with dividends from
the one original share and dividends declared on both the original share
and any additional shares. The net change is then divided by the value of
the account at the beginning of the period to obtain a base period return.
This base period return is annualized to obtain a current annualized yield.
The fund also may calculate an effective yield by compounding the base
period return over a one-year period. In addition to the current yield, the
fund may quote yields in advertising based on any historical seven-day
period. Yields for the fund are calculated on the same basis as other money
market funds, as required by applicable regulations.
YIELD CALCULATIONS (EXCLUDING MONEY MARKET PORTFOLIO). Yields for a fund
are computed by dividing the fund's interest and dividend income for a
given 30-day or one-month period, net of expenses, by the average number of
shares entitled to receive distributions during the period, dividing this
figure by the fund's net asset value (NAV) at the end of the period, and
annualizing the result (assuming compounding of income) in order to arrive
at an annual percentage rate. Income is calculated for purposes of yield
quotations in accordance with standardized methods applicable to all stock
and bond funds. Dividends from equity investments are treated as if they
were accrued on a daily basis, solely for the purposes of yield
calculations. In general, interest income is reduced with respect to bonds
trading at a premium over their par value by subtracting a portion of the
premium from income on a daily basis, and is increased with respect to
bonds trading at a discount by adding a portion of the discount to daily
income. For a fund's investments denominated in foreign currencies, income
and expenses are calculated first in their respective currencies, and are
then converted to U.S. dollars, either when they are actually converted or
at the end of the 30-day or one month period, whichever is earlier. Capital
gains and losses generally are excluded from the calculation as are gains
and losses from currency exchange rate fluctuations.
Yield information may be useful in reviewing the fund's performance and in
providing a basis for comparison with other investment alternatives.
However, a fund's yield fluctuates, unlike investments that pay a fixed
interest rate over a stated period of time. When comparing investment
alternatives, investors should also note the quality and maturity of the
portfolio securities of respective investment companies they have chosen to
consider.
Investors should recognize that in periods of declining interest rates a
fund's yield will tend to be somewhat higher than prevailing market rates,
and in periods of rising interest rates a fund's yield will tend to be
somewhat lower. Also, when interest rates are falling, the inflow of net
new money to a fund from the continuous sale of its shares will likely be
invested in instruments producing lower yields than the balance of the
fund's holdings, thereby reducing the fund's current yield. In periods of
rising interest rates, the opposite can be expected to occur.
TOTAL RETURN CALCULATIONS. Total returns quoted in advertising reflect all
aspects of a fund's return, including the effect of reinvesting dividends
and capital gain distributions, and any change in the fund's NAV over a
stated period. Average annual total returns are calculated by determining
the growth or decline in value of a hypothetical historical investment in a
fund over a stated period, and then calculating the annually compounded
percentage rate that would have produced the same result if the rate of
growth or decline in value had been constant over the period. For example,
a cumulative total return of 100% over ten years would produce an average
annual return of 7.18%, which is the steady annual rate of return that
would equal 100% growth on a compounded basis in ten years. Average annual
returns covering periods of less than one year are calculated by
determining a fund's total return for the period, extending that return for
a full year (assuming that return remains constant over the year), and
quoting the result as an annual return. While average annual returns are a
convenient means of comparing investment alternatives, investors should
realize that a fund's performance is not constant over time, but changes
from year to year, and that average annual returns represent averaged
figures as opposed to the actual year-to-year performance of the fund.
In addition to average annual total returns, a fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an
investment over a stated period. Average annual and cumulative total
returns may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments, or a series of
redemptions, over any time period. Total returns may be broken down into
their components of income and capital (including capital gains and changes
in share price) in order to illustrate the relationship of these factors
and their contributions to total return. Total returns may be quoted on a
before-tax or after-tax basis. Total returns, yields, and other performance
information may be quoted numerically or in a table, graph, or similar
illustration.
NET ASSET VALUE. Charts and graphs using a fund's net asset values,
adjusted net asset values, and benchmark indices may be used to exhibit
performance. An adjusted NAV includes any distributions paid by a fund and
reflects all elements of its return. Unless otherwise indicated, a fund's
adjusted NAVs are not adjusted for sales charges, if any.
MOVING AVERAGES. A fund may illustrate performance using moving averages. A
long-term moving average is the average of each week's adjusted closing NAV
for a specified period. A short-term moving average is the average of each
day's adjusted closing NAV for a specified period. Moving Average Activity
Indicators combine adjusted closing NAVs from the last business day of each
week with moving averages for a specified period to produce indicators
showing when an NAV has crossed, stayed above, or stayed below its moving
average. On December 30, 1994, the 13-week and 39-week long-term moving
averages were $ 15.42 and $ 15.07, for Equity-Income,
$ 21.29 and $ 20.84 for Growth, $ 15.86 and $ 16.07
for Overseas, $ 14.09 and $ 14.09 for Asset Manager and
$ 56.13 and $ 55.47 for Index 500 Portfolios, respectively.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average Annual Total Returns Cumulative Total Returns
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
AS OF 12/31/94 Yields One Five Life of One Five Life of
Year Years Fund* Year Years Fund*
Money Market Portfolio 7-day 4.25% 5.09% 6.31%* 4.25% 28.16% 84.38%*
5.62%
High Income Portfolio 30-day -1.64% 14.01% 10.88% -1.64% 92.63% 161.12%
10.28%
Equity-Income Portfolio N.A. 7.07% 10.51% 10.94% 7.07% 64.83% 135.13%
Growth Portfolio N.A. -0.02% 10.88% 12.55% -0.02% 67.57% 164.85%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Overseas Portfolio N.A. 1.72% 5.79% 7.01% 1.72% 32.47% 71.16%
Investment Grade Bond 30-day -3.76% 7.08% 7.60% -3.76% 40.79% 56.04%
Portfolio 6.96%
Asset Manager Portfolio N.A. -6.09% 10.71% 10.20% -6.09% 66.35% 67.70%
Index 500 Portfolio N.A. 1.04% N.A. 7.26% 1.04% N.A. 17.87%
</TABLE>
If FMR had not reimbursed certain fund expenses during certain of
these periods, the total returns would have been lower.
* 10-year return for Money Market Portfolio; High Income Portfolio
commenced operations September 19, 1985; Equity-Income and Growth
Portfolios commenced operations October 9, 1986; Overseas Portfolio
commenced operations January 28, 1987; Investment Grade Bond Portfolio
commenced operations December 5, 1988; Asset Manager Portfolio commenced
operations September 6, 1989; and Index 500 Portfolio commenced operations
August 27, 1992.
The following charts show the income and capital elements of each fund's
total return from the date it commenced operations through the year ended
December 31, 1994. The charts compare the funds' returns to the record of
the Standard & Poor's 500 Composite Stock Price Index (S&P), the Dow Jones
Industrial Average (DJIA), the cost of living (measured by the Consumer
Price Index, or CPI) over the same period, and (for Asset Manager
Portfolio) a benchmark "Fidelity Composite Index" (created by FMR), over
the same period. The Fidelity Composite Index is a hypothetical historical
representation which simulates Asset Manager Portfolio's neutral mix (20%
money market instruments, 40% bonds, and 40% stocks) by combining the
following indices based on their weighting in the neutral mix: the Salomon
Brothers 3-month T-Bill Total Rate of Return Index, representing the
average of T-Bill rates for each of the prior three months, adjusted to a
bond equivalent yield basis (money market); the Lehman Brothers Treasury
Bond Index, a widely utilized benchmark of bond market performance which
includes virtually all long-term public obligations of the U.S. Treasury
(bonds); and the S&P 500 (a registered trademark of Standard & Poor's
Corporation), which represents common stock prices (stocks).
The comparison to the S&P shows how the funds' total returns compared to
the record of a broad average of common stock prices, and the comparison to
the DJIA shows how the funds' total returns compared to the record of a
narrower set of stocks of major industrial companies. Each fund has the
ability to invest in securities not included in either index, and its
investment portfolio may or may not be similar in composition to the
indices. The S&P and DJIA comparisons for Money Market, Investment Grade
Bond and High Income Portfolios are provided to show how each fund's return
compared to the return of common stocks over the same period. Of course,
since Money Market, Investment Grade Bond and High Income Portfolios invest
in fixed-income securities, common stocks represent a different type of
investment from the fund. The indices do not include fixed-income
securities. In general, common stocks generally offer greater potential
growth a bond fund, but generally are more volatile in value and may offer
greater potential for loss. In addition, common stocks generally provide
lower income than a mutual fund which focuses on fixed-income securities.
The S&P, DJIA and The Fidelity Composite Index are based on the prices of
unmanaged groups of stocks and, unlike the funds' returns, their returns do
not include the effect of paying brokerage commissions and other costs of
investing.
MONEY MARKET PORTFOLIO During the ten year period ended December 31, 1994,
a hypothetical $10,000 investment in Money Market would have grown to
$ 18,438 , assuming all distributions were reinvested. This was a
period of fluctuating interest rates and the figures below should not be
considered representative of the dividend income or capital gain or loss
that could be realized from an investment in the fund today.
MONEY MARKET PORTFOLIO INDICES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Year Value of Value of Value of Total S&P 500 DJIA Cost of
Ended Initial Reinvested Reinvested Value Living
$10,000 Dividend Capital Gain
Investment Distributions Distributions
1994 $10,000 $8,438 $0 $18,438 $38,358 $44,527 $14,217
1993 $10,000 $7,687 $0 $17,687 $37,859 $42,418 $13,846
1992 $10,000 $7,133 $0 $17,133 $34,393 $36,257 $13,476
1991 $10,000 $6,490 $0 $16,490 $31,951 $33,791 $13,096
1990 $10,000 $5,543 $0 $15,543 $24,486 $27,176 $12,707
1989 $10,000 $4,387 $0 $14,387 $25,274 $27,323 $11,975
1988 $10,000 $3,185 $0 $13,185 $19,193 $20,737 $11,443
1987 $10,000 $2,278 $0 $12,278 $16,459 $17,889 $10,959
1986 $10,000 $1,535 $0 $11,535 $15,636 $16,967 $10,494
1985 $10,000 $811 $0 $10,811 $13,175 $13,356 $10,380
</TABLE>
Explanatory Notes: With an initial investment of $10,000 made on December
31, 1984, the net amount invested in fund shares was $10,000. The cost of
the initial investment ($10,000), together with the aggregate cost of
reinvested dividends for the period covered (their cash value at the time
they were reinvested), amounted to $ 18,438 . If distributions had not
been reinvested, the amount of distributions earned from the fund over time
would have been smaller, and cash payments (dividends) for the period would
have amounted to $ 6,135 . The fund did not distribute any capital
gains during the period. Tax consequences of different investments have not
been factored into the above figures.
HIGH INCOME PORTFOLIO During the period from September 19, 1985
(commencement of operations) to December 31, 1994, a hypothetical $10,000
investment in High Income Portfolio would have grown to $ 26,112 ,
assuming all distributions were reinvested. This was a period of
fluctuating interest rates and bond prices and the figures below should not
be considered representative of the dividend income or capital gain or loss
that could be realized from an investment in the fund today.
HIGH INCOME PORTFOLIO INDICES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Year Value of Value of Value of Total S&P 500 DJIA Cost of
Ended Initial Reinvested Reinvested Value Living**
$10,000 Dividend Capital Gain
Investment Distributions Distributions
1994 $10,750 $14,286 $1,076 $26,112 $34,242 $40,111 $13,823
1993 $11,990 $14,223 $333 $26,546 $33,797 $38,211 $13,463
1992 $10,820 $11,057 $172 $22,049 $30,702 $32,661 $13,102
1991 $9,550 $8,200 $152 $17,902 $28,522 $30,440 $12,733
1990 $7,070 $6,071 $112 $13,253 $21,859 $24,481 $12,355
1989 $8,110 $5,317 $129 $13,556 $22,562 $24,613 $11,644
1988 $9,660 $4,332 $154 $14,146 $17,133 $18,680 $11,127
1987 $9,680 $2,837 $154 $12,671 $14,693 $16,114 $10,656
1986 $10,830 $1,689 $0 $12,519 $13,958 $15,284 $10,203
1985* $10,310 $328 $0 $10,638 $11,761 $12,031 $10,092
</TABLE>
* From September 19, 1985 (commencement of operations).
** From month-end closest to initial investment date.
Explanatory Notes: With an initial investment of $10,000 made on September
19, 1985, the net amount invested in fund shares was $10,000. The cost of
the initial investment ($10,000), together with the aggregate cost of
reinvested dividends and capital gain distributions for the period covered
(their cash value at the time they were reinvested), amounted to
$ 23,926 . If distributions had not been reinvested, the amount of
distributions earned from the fund over time would have been smaller, and
cash payments for the period would have amounted to $ 8,240 for
dividends and $ 580 for capital gains distributions. Tax consequences
of different investments have not been factored into the above figures.
EQUITY-INCOME PORTFOLIO During the period from October 9, 1986
(commencement of operations) to December 31, 1994, a hypothetical $10,000
investment in Equity-Income Portfolio would have grown to $ 23,513 ,
assuming all distributions were reinvested. This was a period of
fluctuating interest rates, bond prices, and stock prices and the figures
below should not be considered representative of the dividend income or
capital gain or loss that could be realized from an investment in the fund
today.
EQUITY-INCOME PORTFOLIO INDICES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Year Value of Value of Value of Total S&P 500 DJIA Cost of
Ended Initial Reinvested Reinvested Value Living**
$10,000 Dividend Capital Gain
Investment Distributions Distributions
1994 $15,350 $6,059 $2,104 $23,513 $25,295 $27,809 $13,584
1993 $15,440 $5,529 $992 $21,961 $24,966 $26,491 $13,230
1992 $13,400 $4,304 $861 $18,565 $22,680 $22,644 $12,877
1991 $11,850 $3,272 $761 $15,883 $21,070 $21,104 $12,514
1990 $9,510 $1,963 $611 $12,084 $16,147 $16,972 $12,142
1989 $12,290 $1,682 $293 $14,265 $16,667 $17,064 $11,443
1988 $11,010 $979 $167 $12,156 $12,657 $12,951 $10,935
1987 $9,420 $344 $143 $9,907 $10,854 $11,172 $10,472
1986* $10,020 $0 $0 $10,020 $10,311 $10,596 $10,027
</TABLE>
* From October 9, 1986 (commencement of operations).
** From month-end closest to initial investment date.
Explanatory Notes: With an initial investment of $10,000 made on October 9,
1986, the net amount invested in fund shares was $10,000. The cost of the
initial investment ($10,000), together with the aggregate cost of
reinvested dividends and capital gain distributions for the period covered
(their cash value at the time they were reinvested), amounted to
$ 16,512 . If distributions had not been reinvested, the amount of
distributions earned from the fund over time would have been smaller, and
cash payments for the period would have amounted to $ 3,810 for
dividends and $ 1,390 for capital gains distributions. Tax
consequences of different investments have not been factored into the above
figures .
GROWTH PORTFOLIO. During the period from October 9, 1986 (commencement of
operations) to December 31, 1994, a hypothetical $10,000 investment in
Growth Portfolio would have grown to $ 26,485 , assuming all
distributions were reinvested. This was a period of fluctuating stock
prices and the figures below should not be considered representative of the
dividend income or capital gain or loss that could be realized from an
investment in the fund today.
GROWTH PORTFOLIO INDICES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Year Value of Value of Value of Total S&P 500 DJIA Cost of
Ended Initial Reinvested Reinvested Value Living**
$10,000 Dividend Capital Gain
Investment Distributions Distributions
1994 $21,690 $1,590 $3,205 $26,485 $25,295 $27,809 $13,584
1993 $23,080 $1,546 $1,864 $26,490 $24,966 $26,491 $13,230
1992 $19,760 $1,202 $1,230 $22,192 $22,680 $22,644 $12,877
1991 $18,510 $1,075 $715 $20,300 $21,070 $21,104 $12,514
1990 $12,910 $541 $499 $13,950 $16,147 $16,972 $12,142
1989 $15,180 $400 $225 $15,805 $16,667 $17,064 $11,443
1988 $11,720 $124 $174 $12,018 $12,657 $12,951 $10,935
1987 $10,140 $108 $150 $10,398 $10,854 $11,172 $10,472
1986* $10,030 $0 $0 $10,030 $10,311 $10,596 $10,027
</TABLE>
* From October 9, 1986 (commencement of operations).
** From month-end closest to initial investment date.
Explanatory Notes: With an initial investment of $10,000 made on October 9,
1986, the net amount invested in fund shares was $10,000. The cost of the
initial investment ($10,000), together with the aggregate cost of
reinvested dividends and capital gain distributions for the period covered
(their cash value at the time they were reinvested), amounted to
$ 13,850 . If distributions had not been reinvested, the amount of
distributions earned from the fund over time would have been smaller, and
cash payments for the period would have amounted to $ 1,000 for
dividends and $ 2,500 for capital gains distributions. Tax
consequences of different investments have not been factored into the above
figures.
OVERSEAS PORTFOLIO During the period from January 28, 1987 (commencement of
operations) to December 31, 1994, a hypothetical $10,000 investment in
Overseas Portfolio would have grown to $ 17,116 , assuming all
distributions were reinvested. This was a period of fluctuating stock
prices and the figures below should not be considered representative of the
dividend income or capital gain or loss that could be realized from an
investment in the fund today.
OVERSEAS PORTFOLIO INDICES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Value of Value of Value of Total S&P 500 DJIA EAFE Cost of
Ended Initial Reinvested Reinvested Value Index Living**
$10,000 Dividend Capital
Investment Distribution Gain
s Distribution
s
1994 $15,670 $1,375 $71 $17,116 $21,653 $23,089 $17,201 $13,462
1993 $15,480 $1,276 $70 $16,826 $21,371 $21,996 $15,959 $13,112
1992 $11,530 $720 $0 $12,250 $19,414 $18,801 $12,039 $12,761
1991 $13,090 $631 $0 $13,721 $18,036 $17,522 $13,708 $12,401
1990 $12,420 $285 $0 $12,705 $13,822 $14,092 $12,225 $12,032
1989 $12,670 $250 $0 $12,920 $14,267 $14,168 $15,970 $11,340
1988 $10,110 $121 $0 $10,231 $10,834 $10,753 $14,448 $10,836
1987* $9,350 $112 $0 $9,462 $9,291 $9,276 $11,263 $10,378
</TABLE>
* From January 28, 1987 (commencement of operations).
** From month-end closest to initial investment date.
Explanatory Notes: With an initial investment of $10,000 made on January
28, 1987, the net amount invested in fund shares was $10,000. The cost of
the initial investment ($10,000), together with the aggregate cost of
reinvested dividends and capital gain distributions for the period covered
(their cash value at the time they were reinvested), amounted to
$ 11,111 . If distributions had not been reinvested, the amount of
distributions earned from the fund over time would have been smaller, and
cash payments for the period would have amounted to $ 1,020 for
dividends and $ 50 for capital gains distributions. Tax consequences
of different investments have not been factored into the above figures.
INVESTMENT GRADE BOND PORTFOLIO During the period from December 5, 1988
(commencement of operations) to December 31, 1994, a hypothetical $10,000
investment in Investment Grade Bond Portfolio would have grown to
$ 15,604 , assuming all distributions were reinvested. This was a
period of fluctuating interest rates and bond prices and the figures below
should not be considered representative of the dividend income or capital
gain or loss that could be realized from an investment in the fund today.
INVESTMENT GRADE BOND PORTFOLIO INDICES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Year Value of Value of Value of Total S&P 500 DJIA Cost of
Ended Initial Reinvested Reinvested Value Living**
$10,000 Dividend Capital Gain
Investment Distributions Distributions
1994 $11,020 $4,243 $341 $15,604 $20,469 $22,314 $12,444
1993 $11,480 $4,420 $313 $16,213 $20,203 $21,257 $12,120
1992 $10,970 $3,418 $223 $14,611 $18,353 $18,170 $11,796
1991 $11,080 $2,596 $24 $13,700 $17,050 $16,934 $11,463
1990 $9,920 $1,831 $21 $11,772 $13,067 $13,619 $11,122
1989 $10,140 $921 $22 $11,083 $13,487 $13,692 $10,482
1988* $10,000 $52 $0 $10,052 $10,242 $10,392 $10,017
</TABLE>
* From December 5, 1988 (commencement of operations).
** From month-end closest to initial investment date.
Explanatory Notes: With an initial investment of $10,000 made on December
5, 1988, the net amount invested in fund shares was $10,000. The cost of
the initial investment ($10,000), together with the aggregate cost of
reinvested dividends and capital gain distributions for the period covered
(their cash value at the time they were reinvested), amounted to
$ 14,424 . If distributions had not been reinvested, the amount of
distributions earned from the fund over time would have been smaller, and
cash payments for the period would have amounted to $ 3,474 for
dividends and $ 270 for capital gains distributions. Tax consequences
of different investments have not been factored into the above figures.
ASSET MANAGER PORTFOLIO During the period from September 6, 1989
(commencement of operations) to December 31, 1994, a hypothetical $10,000
investment in Asset Manager Portfolio would have grown to $ 16,770 ,
assuming all distributions were reinvested. This was a period of
fluctuating interest rates and bond prices and the figures below should not
be considered representative of the dividend income or capital gain or loss
that could be realized from an investment in the fund today.
ASSET MANAGER PORTFOLIO INDICES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Value of Value of Value of Total S&P 500 DJIA Cost of Fidelity
Ended Initial Reinvested Reinvested Value Living** Composite
$10,000 Dividend Capital Index***
Investment Distribution Gain
s Distribution
s
1994 $13,790 $1,779 $1,201 $16,770 $15,372 $16,542 $12,014 $14,690
1993 $15,420 $1,642 $795 $17,857 $15,172 $15,758 $11,701 $14,679
1992 $13,320 $1,004 $406 $14,730 $13,783 $13,470 $11,388 $13,475
1991 $12,550 $610 $25 $13,185 $12,804 $12,554 $11,067 $12,615
1990 $10,240 $497 $21 $10,758 $9,813 $10,096 $10,738 $10,793
1989* $9,970 $91 $20 $10,081 $10,128 $10,151 $10,120 $10,277
</TABLE>
* From September 6, 1989 (commencement of operations).
** From month-end closest to initial investment date.
*** From month-end following initial investment date. The money market,
bond, and stock indices that compose the Fidelity Composite Index returned
4.24%, -3.38%, and 1.32 %, respectively, during the 1994 fiscal year.
These indices are unmanaged, include reinvestment of income and/or
dividends, and are not indicative of the fund's past or future performance.
Explanatory Notes: With an initial investment of $10,000 made on September
6, 1989, the net amount invested in fund shares was $10,000. The cost of
the initial investment ($10,000), together with the aggregate cost of
reinvested dividends and capital gain distributions for the period covered
(their cash value at the time they were reinvested), amounted to
$ 12,742 . If distributions had not been reinvested, the amount of
distributions earned from the fund over time would have been smaller, and
cash payments for the period would have amounted to $ 1,460 for
dividends and $ 1,060 for capital gains distributions. Tax
consequences of different investments have not been factored into the above
figures.
INDEX 500 PORTFOLIO During the period from August 27, 1992 (commencement of
operations) to December 31, 1994, a hypothetical $10,000 investment in
Index 500 Portfolio would have grown to $ 11,787 , assuming all
distributions were reinvested. This was a period of fluctuating stock
prices and the figures below should not be considered representative of the
dividend income or capital gain or loss that could be realized from an
investment in the fund today.
INDEX 500 PORTFOLIO INDICES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Year Value of Value of Value of Total S&P 500 DJIA Cost of
Ended Initial Reinvested Reinvested Value Living**
$10,000 Dividend Capital Gain
Investment Distributions Distributions
1994 $11,244 $363 $180 $11,787 $11,876 $12,618 $10,625
1993 $11,148 $360 $158 $11,666 $11,722 $12,021 $10,348
1992* $10,520 $95 $16 $10,631 $10,648 $10,275 $10,071
</TABLE>
* From August 27, 1992 (commencement of operations).
** From month-end closest to initial investment date.
Explanatory Notes: With an initial investment of $10,000 made on August 27,
1992, the net amount invested in fund shares was $10,000. The cost of the
initial investment ($10,000), together with the aggregate cost of
reinvested dividends and capital gain distributions for the period covered
(their cash value at the time they were reinvested), amounted to
$ 10,530 . If distributions had not been reinvested, the amount of
distributions earned from the fund over time would have been smaller, and
cash payments for the period would have amounted to $ 350 for
dividends and $ 174 for capital gains distributions. Tax consequences
of different investments have not been factored into the above figures.
A fund's performance may be compared to the performance of other mutual
funds in general, or to the performance of particular types of mutual
funds. These comparisons may be expressed as mutual fund rankings prepared
by Lipper Analytical Services, Inc. (Lipper), an independent service
located in Summit, New Jersey that monitors the performance of mutual
funds. Lipper generally ranks funds on the basis of total return, assuming
reinvestment of distributions, but does not take sales charges or
redemption fees into consideration, and is prepared without regard to tax
consequences. In addition to the mutual fund rankings, a fund's performance
may be compared to stock, bond, and money market mutual fund performance
indices prepared by Lipper or other organizations. When comparing these
indices, it is important to remember the risk and return characteristics of
each type of investment. For example, while stock mutual funds may offer
higher potential returns, they also carry the highest degree of share price
volatility. Likewise, money market funds may offer greater stability of
principal, but generally do not offer the higher potential returns from
stock mutual funds.
From time to time, a fund's performance may also be compared to other
mutual funds tracked by financial or business publications and periodicals.
For example, a fund may quote Morningstar, Inc. in its advertising
materials. Morningstar, Inc. of Chicago, Illinois, is a mutual fund rating
service that rates mutual funds on the basis of risk-adjusted performance.
Rankings that compare the performance of Fidelity funds to one another in
appropriate categories over specific periods of time may also be quoted in
advertising.
A fund may be compared in advertising to Certificates of Deposit (CDs) or
other investments issued by banks or other depository institutions. Mutual
funds differ from bank investments in several respects. For example, a fund
may offer greater liquidity or higher potential returns than CDs, a fund
does not guarantee your principal or your return, and fund shares are not
FDIC insured.
Fidelity may provide information designed to help individuals understand
their investment goals and explore various financial strategies. Such
information may include information about current economic, market, and
political conditions; materials that describe general principles of
investing, such as asset allocation, diversification, risk tolerance, and
goal setting; questionnaires designed to help create a personal financial
profile; worksheets used to project savings needs based on assumed rates of
inflation and hypothetical rates of return; and action plans offering
investment alternatives. Materials may also include discussions of
Fidelity's asset allocation funds and other Fidelity funds, products, and
services.
Ibbotson Associates of Chicago, Illinois (Ibbotson) provides historical
returns of the capital markets in the United States, including common
stocks, small capitalization stocks, long-term corporate bonds,
intermediate-term government bonds, long-term government bonds, Treasury
bills, the U.S. rate of inflation (based on the CPI), and combinations of
various capital markets. The performance of these capital markets is based
on the returns of different indices.
Fidelity funds may use the performance of these capital markets in order to
demonstrate general risk-versus-reward investment scenarios. Performance
comparisons may also include the value of a hypothetical investment in any
of these capital markets. The risks associated with the security types in
any capital market may or may not correspond directly to those of the
funds. Ibbotson calculates total returns in the same method as the funds.
The funds may also compare performance to that of other compilations or
indices that may be developed and made available in the future.
In advertising materials, Fidelity may reference or discuss its products
and services, which may include: other Fidelity funds; retirement
investing; brokerage products and services; the effects of periodic
investment plans and dollar cost averaging; saving for college or other
goals; charitable giving; and the Fidelity credit card. In addition,
Fidelity may quote or reprint financial or business publications and
periodicals, including model portfolios or allocations, as they relate to
current economic and political conditions, fund management, portfolio
composition, investment philosophy, investment techniques, the desirability
of owning a particular mutual fund, and Fidelity services and products.
Fidelity may also reprint, and use as advertising and sales literature,
articles from Fidelity Focus, a quarterly magazine provided free of charge
to Fidelity fund shareholders.
A fund may present its fund number, Quotron(trademark) number, and CUSIP
number, and discuss or quote its current portfolio manager.
VOLATILITY. A fund may quote various measures of volatility and benchmark
correlation in advertising. In addition, the fund may compare these
measures to those of other funds. Measures of volatility seek to compare
the fund's historical share price fluctuations or total returns to those of
a benchmark. Measures of benchmark correlation indicate how valid a
comparative benchmark may be. All measures of volatility and correlation
are calculated using averages of historical data. In advertising, a fund
may also discuss or illustrate examples of interest rate sensitivity.
MOMENTUM INDICATORS indicate a fund's price movements over specific periods
of time. Each point on the momentum indicator represents the fund's
percentage change in price movements over that period.
The funds may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program,
a policyowner invests a fixed dollar amount in an insurance company's
sub-account at periodic intervals which in turn invests in a fund, thereby
purchasing fewer units when prices are high and more units when prices are
low. While such a strategy does not assure a profit nor guard against loss
in a declining market, the policyowner's average cost per unit can be lower
than if fixed numbers of units had been purchased at those intervals. In
evaluating such a plan, policyowners should consider their ability to
continue purchasing units through periods of low price levels.
As of December 31, 1994, FMR advised over $25 billion in tax-free fund
assets, $55 billion in taxable money market fund assets, $165 billion in
equity fund assets, $35 billion in international fund assets, and $20
billion in Spartan fund assets. The funds may reference the growth and
variety of money market mutual funds and the adviser's innovation and
participation in the industry. The equity funds under management figure
represents the largest amount of equity fund assets under management by a
mutual fund investment adviser in the United States, making FMR America's
leading equity (stock) fund manager. FMR, its subsidiaries, and affiliates
maintain a worldwide information and communications network for the purpose
of researching and managing investments abroad.
Each fund is available only through the purchase of variable annuity and
variable life insurance contracts offering deferral of income taxes on
earnings, which may produce superior after-tax returns over time. For
example, a $1,000 investment earning a taxable return of 10% annually would
have an after-tax value of $1,949 after ten years, assuming tax was
deducted from the return each year at a 31% rate. An equivalent
tax-deferred investment would have an after-tax value of $2,100 after ten
years, assuming tax was deducted at a 31% rate from the tax-deferred
earnings at the end of the ten-year period. Individuals holding shares of a
fund through a variable annuity or variable life insurance contract may
receive additional tax benefits from the deferral of income taxes
associated with variable contracts. Individuals should consult their tax
advisors to determine the effect of holding variable contracts on their
individual tax situations.
YIELDS AND TOTAL RETURNS QUOTED FOR A FUND INCLUDE THE EFFECT OF DEDUCTING
THE FUND'S EXPENSES, BUT MAY NOT INCLUDE CHARGES AND EXPENSES ATTRIBUTABLE
TO ANY PARTICULAR INSURANCE PRODUCT. SINCE YOU CAN ONLY PURCHASE SHARES OF
EACH FUND THROUGH A VARIABLE ANNUITY AND/OR A VARIABLE LIFE INSURANCE
CONTRACT, YOU SHOULD CAREFULLY REVIEW THE PROSPECTUS OF THE INSURANCE
PRODUCT YOU HAVE CHOSEN FOR INFORMATION ON RELEVANT CHARGES AND EXPENSES.
Excluding these charges from quotations of a fund's performance has the
effect of increasing the performance quoted.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each fund is open for business and its net asset value per share (NAV) is
calculated each day the NYSE is open for trading. The NYSE has designated
the following holiday closings for 1995: New Year's Day (observed),
President's Day (observed), Good Friday, Memorial Day (observed),
Independence Day (observed), Labor Day, Thanksgiving Day, and Christmas
Day. Although FMR expects the same holiday schedule to be observed in the
future, the NYSE may modify its holiday schedule at any time.
FSC normally determines each fund's NAV as of the close of the NYSE
(normally 4:00 p.m. Eastern time). However, NAV may be calculated earlier
if trading on the NYSE is restricted or as permitted by the SEC. To the
extent that portfolio securities are traded in other markets on days when
the NYSE is closed, the fund's NAV may be affected on days when investors
do not have access to the fund to purchase or redeem shares. In addition,
trading in some of the fund's portfolio securities may not occur on days
when a fund is open for business.
If the Trustees determine that existing conditions make cash payments
undesirable, redemption payments may be made in whole or in part in
securities or other property, valued for this purpose as they are valued in
computing the fund's NAV. Shareholders receiving securities or other
property on redemption may realize a gain or loss for tax purposes, and
will incur any costs of sale, as well as the associated inconveniences.
TAXES
For a discussion of tax consequences of variable contracts, please refer to
your insurance company's separate account prospectus.
Variable contracts purchased through insurance company separate accounts
provide for the accumulation of all earnings from interest, dividends, and
capital appreciation without current federal income tax liability to the
owner. Depending on the variable contract, distributions from the contract
may be subject to ordinary income tax and a 10% penalty tax on
distributions before age 59 1/2. Only the portion of a distribution
attributable to income is subject to federal income tax. Investors should
consult with competent tax advisors for a more complete discussion of
possible tax consequences in a particular situation.
Section 817(h) of the Internal Revenue Code provides that the investments
of a separate account underlying a variable insurance contract (or the
investments of a mutual fund, the shares of which are owned by the variable
separate account) must be "adequately diversified" in order for the
contract to be treated as an annuity or life insurance for tax purposes.
The Treasury Department has issued regulations prescribing these
diversification requirements. Each fund intends to comply with these
requirements.
Each fund intends to qualify each year as a "regulated investment company"
for tax purposes, so that it will not be liable for federal tax on income
and capital gains distributed to shareholders. In order to qualify as a
regulated investment company and avoid being subject to federal income or
excise taxes, each fund intends to distribute substantially all its net
taxable income and net realized capital gains within each calendar year as
well as on a fiscal year basis. Each fund also intends to comply with other
tax rules applicable to regulated investment companies including a
requirement that gross capital gains from selling securities held less than
three months must constitute less than 30% of a fund's gross income for
each fiscal year. Income and capital gain distributions are reinvested in
additional shares of the fund. This is done to preserve the tax advantaged
status of the variable contracts. Each fund is treated as a separate entity
form the other funds of the trust it is associated with for tax
purposes. Money Market Portfolio may distribute any net realized
short-term gains once each year, or more frequently if necessary, in order
to maintain the fund's NAV at $1.00 per share and to comply with tax
regulations.
MONEY MARKET PORTFOLIO - As of December 31, 1994, the fund had a
capital loss carryforward of approximately $94,600 of which $4,100, $500,
$4,900, $4,300 and $80,800 will expire on December 31, 1995, 1996, 1997,
2000 and 2002, respectively.
HIGH INCOME PORTFOLIO - As of December 31, 1994, the fund had a
capital loss carryforward of approximately $1,407,000, all of which will
expire on December 31, 2002.
GROWTH PORTFOLIO - As of December 31, 1994, the fund had a capital
loss carryforward of approximately $68,037,000, all of which will expire on
December 31, 2002.
INVESTMENT GRADE BOND PORTFOLIO - As of December 31, 1994, the fund
had a capital loss carryforward of approximately $2,468,000, all of which
will expire on December 31, 2002.
ASSET MANAGER PORTFOLIO - As of December 31, 1994, the fund had a
capital loss carryforward of approximately $10,388,000, all of which will
expire on December 31, 2002.
EQUITY-INCOME, OVERSEAS AND INDEX 500 PORTFOLIOS - As of December
31, 1994, each fund had no capital loss carryforward.
FMR
All of the stock of FMR is owned by FMR Corp., its parent company organized
in 1972. Through ownership of voting common stock and the execution of a
shareholders' voting agreement, Edward C. Johnson 3d, Johnson family
members, and various trusts for the benefit of the Johnson family form a
controlling group with respect to FMR Corp.
At present, the principal operating activities of FMR Corp. are those
conducted by three of its divisions as follows: FSC, which is the transfer
and shareholder servicing agent for certain of the funds advised by FMR;
FIIOC, which performs shareholder servicing functions for institutional
customers and funds sold through intermediaries; and Fidelity Investments
Retail Marketing Company, which provides marketing services to various
companies within the Fidelity organization.
Fidelity investment personnel may invest in securities for their own
account pursuant to a code of ethics that sets forth all employees'
fiduciary responsibilities regarding the funds, establishes procedures for
personal investing and restricts certain transactions. For example, all
personal trades in most securities require pre-clearance, and participation
in initial public offerings is prohibited. In addition, restrictions on the
timing of personal investing in relation to trades by Fidelity funds and on
short-term trading have been adopted.
TRUSTEES AND OFFICERS
The Trustees and executive officers of each trust are listed below. Except
as indicated, each individual has held the office shown or other offices in
the same company for the last five years. All persons named as Trustees
also serve in similar capacities for other funds advised by FMR. Unless
otherwise noted, the business address of each Trustee and officer is 82
Devonshire Street, Boston, Massachusetts 02109, which is also the address
of FMR. Those Trustees who are "interested persons" (as defined in the
Investment Company Act of 1940) by virtue of their affiliation with either
the trust or FMR are indicated by an asterisk (*).
*EDWARD C. JOHNSON 3d (64) , Trustee and President, is Chairman,
Chief Executive Officer and a Director of FMR Corp.; a Director and
Chairman of the Board and of the Executive Committee of FMR; Chairman and a
Director of FMR Texas Inc. (1989), Fidelity Management & Research (U.K.)
Inc., and Fidelity Management & Research (Far East) Inc.
*J. GARY BURKHEAD (53) , Trustee and Senior Vice President, is
President of FMR; and President and a Director of FMR Texas Inc. (1989),
Fidelity Management & Research (U.K.) Inc., and Fidelity Management &
Research (Far East) Inc.
RALPH F. COX (62) , 200 Rivercrest Drive, Fort Worth, TX, Trustee
(1991), is a consultant to Western Mining Corporation (1994). Prior to
February 1994, he was President of Greenhill Petroleum Corporation
(petroleum exploration and production, 1990). Until March 1990, Mr. Cox was
President and Chief Operating Officer of Union Pacific Resources Company
(exploration and production). He is a Director of Sanifill Corporation
(non-hazardous waste, 1993) and CH2M Hill Companies (engineering). In
addition, he served on the Board of Directors of the Norton Company
(manufacturer of industrial devices, 1983-1990) and continues to serve on
the Board of Directors of the Texas State Chamber of Commerce, and is a
member of advisory boards of Texas A&M University and the University of
Texas at Austin.
PHYLLIS BURKE DAVIS ( 63) , P.O. Box 264, Bridgehampton, NY, Trustee
(1992). Prior to her retirement in September 1991, Mrs. Davis was the
Senior Vice President of Corporate Affairs of Avon Products, Inc. She is
currently a Director of BellSouth Corporation (telecommunications), Eaton
Corporation (manufacturing, 1991), and the TJX Companies, Inc. (retail
stores, 1990), and previously served as a Director of Hallmark Cards, Inc.
(1985-1991) and Nabisco Brands, Inc. In addition, she is a member of the
President's Advisory Council of The University of Vermont School of
Business Administration.
RICHARD J. FLYNN (71) , 77 Fiske Hill, Sturbridge, MA, Trustee, is a
financial consultant. Prior to September 1986, Mr. Flynn was Vice Chairman
and a Director of the Norton Company (manufacturer of industrial devices).
He is currently a Trustee of College of the Holy Cross and Old
Sturbridge Village, Inc.
E. BRADLEY JONES ( 67 ), 3881-2 Lander Road, Chagrin Falls, OH,
Trustee (1990). Prior to his retirement in 1984, Mr. Jones was Chairman and
Chief Executive Officer of LTV Steel Company. Prior to May 1990, he was
Director of National City Corporation (a bank holding company) and National
City Bank of Cleveland. He is a Director of TRW Inc. (original equipment
and replacement products), Cleveland-Cliffs Inc (mining), NACCO Industries,
Inc. (mining and marketing), Consolidated Rail Corporation, Birmingham
Steel Corporation, Hyster-Yale Materials Handling, Inc. (1989), and RPM,
Inc. (manufacturer of chemical products, 1990). In addition, he serves as a
Trustee of First Union Real Estate Investments, a Trustee and member of the
Executive Committee of the Cleveland Clinic Foundation, a Trustee and
member of the Executive Committee of University School (Cleveland), and a
Trustee of Cleveland Clinic Florida.
DONALD J. KIRK (62) , One Harborside, 680 Steamboat Road, Greenwich,
CT, Trustee, is Executive-in-Residence (1995) at Columbia University
Graduate School of Business and a financial consultant. From 1987 to
January 1995, Mr. Kirk was a Professor at Columbia University Graduate
School of Business. Prior to 1987, he was Chairman of the Financial
Accounting Standards Board. Mr. Kirk is a Director of General Re
Corporation (reinsurance) and Valuation Research Corp. (appraisals and
valuations, 1993). In addition, he serves as Vice Chairman of the Board of
Directors of the National Arts Stabilization Fund, Vice Chairman of the
Board of Trustees of the Greenwich Hospital Association, and as a Member of
the Public Oversight Board of the American Institute of Certified Public
Accountants' SEC Practice Section (1995).
*PETER S. LYNCH (52) , Trustee (1990) is Vice Chairman of FMR (1992).
Prior to his retirement on May 31, 1990, he was a Director of FMR (1989)
and Executive Vice President of FMR (a position he held until March 31,
1991); Vice President of Fidelity Magellan Fund and FMR Growth Group
Leader; and Managing Director of FMR Corp. Mr. Lynch was also Vice
President of Fidelity Investments Corporate Services (1991-1992). He is a
Director of W.R. Grace & Co. (chemicals, 1989) and Morrison Knudsen
Corporation (engineering and construction). In addition, he serves as a
Trustee of Boston College, Massachusetts Eye & Ear Infirmary, Historic
Deerfield (1989) and Society for the Preservation of New England
Antiquities, and as an Overseer of the Museum of Fine Arts of Boston
(1990).
GERALD C. McDONOUGH (65 ), 135 Aspenwood Drive, Cleveland, OH,
Trustee (1989), is Chairman of G.M. Management Group (strategic advisory
services). Prior to his retirement in July 1988, he was Chairman and Chief
Executive Officer of Leaseway Transportation Corp. (physical distribution
services). Mr. McDonough is a Director of ACME-Cleveland Corp. (metal
working, telecommunications and electronic products), Brush-Wellman Inc.
(metal refining), York International Corp. (air conditioning and
refrigeration, 1989), Commercial Intertech Corp. (water treatment
equipment, 1992), and Associated Estates Realty Corporation (a real estate
investment trust, 1993).
EDWARD H. MALONE (70) , 5601 Turtle Bay Drive #2104, Naples, FL,
Trustee. Prior to his retirement in 1985, Mr. Malone was Chairman, General
Electric Investment Corporation and a Vice President of General Electric
Company. He is a Director of Allegheny Power Systems, Inc. (electric
utility), General Re Corporation (reinsurance) and Mattel Inc. (toy
manufacturer). In addition, he serves as a Trustee of Corporate Property
Investors, the EPS Foundation at Trinity College, the Naples Philharmonic
Center for the Arts, and Rensselaer Polytechnic Institute, and he is a
member of the Advisory Boards of Butler Capital Corporation Funds and
Warburg, Pincus Partnership Funds.
MARVIN L. MANN (61) , 55 Railroad Avenue, Greenwich, CT, Trustee
(1993) is Chairman of the Board, President, and Chief Executive Officer of
Lexmark International, Inc. (office machines, 1991). Prior to 1991, he held
the positions of Vice President of International Business Machines
Corporation ("IBM") and President and General Manager of various IBM
divisions and subsidiaries. Mr. Mann is a Director of M.A. Hanna Company
(chemicals, 1993) and Infomart (marketing services, 1991), a Trammell Crow
Co. In addition, he serves as the Campaign Vice Chairman of the Tri-State
United Way (1993) and is a member of the University of Alabama President's
Cabinet (1990).
THOMAS R. WILLIAMS (66) , 21st Floor, 191 Peachtree Street, N.E.,
Atlanta, GA, Trustee, is President of The Wales Group, Inc. (management and
financial advisory services). Prior to retiring in 1987, Mr. Williams
served as Chairman of the Board of First Wachovia Corporation (bank holding
company), and Chairman and Chief Executive Officer of The First National
Bank of Atlanta and First Atlanta Corporation (bank holding company). He is
currently a Director of BellSouth Corporation (telecommunications),
ConAgra, Inc. (agricultural products), Fisher Business Systems, Inc.
(computer software), Georgia Power Company (electric utility), Gerber Alley
& Associates, Inc. (computer software), National Life Insurance Company of
Vermont, American Software, Inc. (1989), and AppleSouth, Inc. (restaurants,
1992).
WILLIAM J. HAYES (60) , Vice President (1994), is Vice President of
Fidelity's equity funds; Senior Vice President of FMR; and Managing
Director of FMR Corp.
ROBERT H. MORRISON (54 ), Manager of Security Transactions of
Fidelity's equity funds is Vice President of FMR.
ROBERT A. LAWRENCE (42) , Vice President (1994), is Vice President of
Fidelity's high income funds and Senior Vice President of FMR (1993). Prior
to joining FMR, Mr. Lawrence was Managing Director of the High Yield
Department for Citicorp (1984-1991).
FRED L. HENNING, JR. (55 ), Vice President (1994), is Vice President
of Fidelity's money market funds and Senior Vice President of FMR Texas
Inc.
ROBERT LITTERST (37) , Vice President of Money Market Portfolio
(1992). is an employee of FMR.
BARRY COFFMAN (35 ), Vice President of High Income Portfolio (1992),
is an employee of FMR.
WILLIAM DANOFF (34) , Vice President of Contrafund Portfolio (1995),
is an employee of FMR.
LAWRENCE GREENBERG (31) , Vice President of Growth Portfolio (1994),
is an employee of FMR.
JOHN R. HICKLING (35) , Vice President of Overseas Portfolio (1993),
is an employee of FMR.
DONALD TAYLOR (40) , Vice President of Investment Grade Bond
Portfolio (1992), is an employee of FMR.
ANDREW OFFIT (34 ), Vice President of Asset Manager Portfolio and
Asset Manager: Growth Portfolio (1995), is an employee of FMR.
ARTHUR S. LORING (47) , Secretary, is Senior Vice President (1993)
and General Counsel of FMR, Vice President-Legal of FMR Corp., and Vice
President and Clerk of FDC.
STEPHEN P. JONAS (42 ), Treasurer (1995), is Treasurer and Vice
President of FMR (1993). Mr. Jonas is also Treasurer of FMR Texas Inc.
(1994), Fidelity Management & Research (U.K.) Inc. (1994), and Fidelity
Management & Research (Far East) Inc. (1994). Prior to becoming Treasurer
of FMR, Mr. Jonas was Senior Vice President, Finance - Fidelity Brokerage
Services, Inc. (1991-1992) and Senior Vice President, Strategic Business
Systems - Fidelity Investments Retail Marketing Company (1989-1991).
THOMAS D. MAHER (49 ), Assistant Vice President (1990), is Assistant
Vice President of Fidelity's money market funds and Vice President and
Associate General Counsel of FMR Texas Inc. (1990). Prior to 1990, Mr.
Maher was an employee of FMR and Assistant Secretary of all the Fidelity
funds (1985-1989).
MICHAEL D. CONWAY (40) , Assistant Treasurer (1995), is Assistant
Treasurer of Fidelity's money market funds and is an employee of FMR
(1995). Before joining FMR, Mr. Conway was an employee of Waddell & Reed
Inc. (investment advisor, 1986-1994), where he served as Assistant
Treasurer (1992) and as Assistant Vice President and Director of Operations
of Waddell & Reed Asset Management Company (1994).
JOHN H. COSTELLO (48) , Assistant Treasurer, is an employee of FMR.
LEONARD M. RUSH (49) , Assistant Treasurer (1994), is an employee of
FMR (1994). Prior to becoming Assistant Treasurer of the Fidelity Funds,
Mr. Rush was Chief Compliance of Officer of FMR Corp. (1993-1994); Chief
Financial Officer of Fidelity Brokerage Services, Inc. (1990-1993); and
Vice President, Assistant Controller, and Director of the Accounting
Department - First Boston Corp. (1986-1990).
The following table sets forth information describing the compensation of
each current Trustee of each fund for his or her services as trustee for
the fiscal year ended December 31, 1994.
COMPENSATION TABLE
Aggregate Compensation
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
J. Ralph Phylli Richar Edward E. Donal Peter Gerald C. Edward Marvi Thom
Gary F. Cox s d J. C. Bradley d S. Lyn McDonou H. n L. as R.
Burkh Burke Flynn Johnso Jones J. Kirk ch+ gh Malone Mann Willia
ead+ Davis n 3d+ ms
Money $0 $281 $272 $347 $0 $277 $275 $0 $278 $286 $279 $282
Market
High Income $0 $240 $235 $297 $0 $237 $238 $0 $240 $246 $240 $243
Equity- $0 $813 $788 $1,008 $0 $803 $799 $0 $809 $831 $811 $821
Income
Growth $0 $800 $777 $990 $0 $789 $788 $0 $798 $818 $798 $809
Overseas $0 $519 $503 $643 $0 $513 $510 $0 $516 $530 $518 $524
Investment $0 $57 $55 $70 $0 $56 $56 $0 $57 $58 $57 $57
Grade Bond
Asset $0 $1,457 $1,416 $1,801 $0 $1,438 $1,436 $0 $1,454 $1,491 $1,454 $1,472
Manager
Index 500 $0 $17 $16 $21 $0 $17 $16 $0 $17 $17 $17 $17
Contrafund** $0 $35 $35 $45 $0 $35 $35 $0 $35 $35 $35 $35
Asset $0 $10 $10 $15 $0 $10 $10 $0 $10 $10 $10 $10
Manager:
Growth**
</TABLE>
Trustees Pension or Estimated Annual Total
Retirement Benefits Upon Compensation
Benefits Accrued Retirement from from the Fund
As Part of Fund the Fund Complex*
Expenses from the Complex*
Fund Complex*
J. Gary Burkhead+ $ 0 $ 0 $ 0
Ralph F. Cox 5,200 52,000 125,000
Phyllis Burke Davis 5,200 52,000 122,000
Richard J. Flynn 0 52,000 154,500
Edward C. Johnson 3d+ 0 0 0
E. Bradley Jones 5,200 49,400 123,500
Donald J. Kirk 5,200 52,000 125,000
Peter S. Lynch+ 0 0 0
Gerald C. McDonough 5,200 52,000 125,000
Edward H. Malone 5,200 44,200 128,000
Marvin L. Mann 5,200 52,000 125,000
Thomas R. Williams 5,200 52,000 126,500
* Information is as of December 31, 1994, for all the 206 funds in the
complex.
** Estimated, the fund did not commence operations until January 3, 1995.
+ Interested trustees are compensated by FMR.
Under a retirement program adopted in July 1988, Trustees, upon reaching
age 72, become eligible to participate in a retirement program under which
they receive payments during their lifetime from a fund based on their
basic trustee fees and length of service. The obligation of a fund to make
such payments are not secured or funded. Trustees become eligible if, at
the time of retirement, they have served on the Board for at least five
years. Currently, Messrs. Ralph S. Saul, William R. Spaulding, Bertram H.
Witham, and David L. Yunich, all former non-interested Trustees, receive
retirement benefits under the program
On December 31, the Trustees and officers of each fund owned, in the
aggregate, less than 1% of each fund's total outstanding shares.
As of December 31, 1994, significant shares of the funds were held by the
following companies with the figures beneath each fund representing that
company's holdings as a percentage of each fund's total outstanding shares.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investme
Money High Equity-In nt Grade Asset Index
Market Income come Growth Overseas Manager 500
American United Life -- -- -- -- -- -- -- 14%
Insurance Company
(Indianapolis, IN)
Ameritas Variable Life 10% -- -- -- -- 14% -- --
Insurance Company
(Lincoln, NE)
Empire Fidelity -- -- -- -- -- -- -- 5%
Investments Life Insurance
Company
(New York, NY)
Fidelity Investments Life 46% 17% 28% 19% 19% 43% 28% 48%
Insurance Company
(Boston, MA)
Integrity Life Insurance -- -- -- -- -- 6% -- --
Company
(Louisville, KY)
The Life Insurance 9% -- 5% 5% 6% -- 13% --
Company of Virginia
(Richmond, VA)
Northwestern National -- -- -- -- -- 11% -- 7%
Life Insurance Company
(Minneapolis, MN)
PFL Life Insurance 19% 7% 7% -- -- 11% -- --
Company
(Cedar Rapids, IA)
Provident Mutual Life -- -- -- -- -- -- -- 5%
Insurance Company
(Philadelphia, PA)
Nationwide Life Insurance -- 42% 29% 30% 39% -- 24% --
Company
(Columbus, OH)
The New England Life -- -- -- -- 8% -- -- --
Insurance Company
(Boston, MA)
State Mutual Life -- 8% 9% 8% 7% -- -- --
Assurance Company
(Worcester, MA)
The Travelers Insurance -- 6% -- 10% -- -- 10% --
Company
(Hartford, CT)
</TABLE>
MANAGEMENT CONTRACTS
The funds employ FMR to furnish investment advisory and other services.
Under its management contract with each fund, FMR acts as investment
adviser and, subject to the supervision of the Board of Trustees, directs
the investments of each fund in accordance with its investment objective,
policies, and limitations. FMR also provides each fund with all necessary
office facilities and personnel for servicing the funds' investments,
compensates all officers of the funds and all Trustees who are "interested
persons" of the trusts or of FMR, and all personnel of the funds or FMR
performing services relating to research, statistical, and investment
activities.
In addition, FMR or its affiliates, subject to the supervision of the Board
of Trustees, provide the management and administrative services necessary
for the operation of each fund. These services include providing facilities
for maintaining the funds' organization; supervising relations with
custodians, transfer and pricing agents, accountants, underwriters, and
other persons dealing with each fund; preparing all general shareholder
communications and conducting shareholder relations; maintaining the funds'
records and the registration of the funds' shares under federal and state
laws; developing management and shareholder services for the funds; and
furnishing reports, evaluations, and analyses on a variety of subjects to
the Trustees.
In addition to the management fee payable to FMR and the fees payable to
FSC and FIIOC, the fund pays all of its expenses, without limitation, that
are not assumed by those parties. The fund pays for typesetting, printing,
and mailing proxy material to shareholders, legal expenses, and the fees of
the custodian, auditor, and non-interested Trustees. Although the fund's
current management contract provides that it will pay for typesetting,
printing, and mailing prospectuses, statements of additional information,
notices, and reports to existing shareholders, the trust on behalf of the
has entered into a revised transfer agent agreement with FIIOC, pursuant to
which FIIOC bears the cost of providing these services to existing
shareholders. Other expenses paid by the fund include interest, taxes,
brokerage commissions, the proportionate share of insurance premiums and
Investment Company Institute dues, and the costs of registering shares
under federal and state securities laws. The fund is also liable for such
nonrecurring expenses as may arise, including costs of any litigation to
which the fund may be a party, and any obligation it may have to indemnify
its officers and Trustees with respect to litigation.
FMR is each fund's manager pursuant to management contracts dated as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investme Asset
nt Grade Asset Manager
Money High Equity-I Overseas Bond Manager Index Contrafu : Growth
Market Income ncome Growth 500 nd
Contract January January January January January January January January Novemb Novemb
Dated 1, 1994 1, 1994 1, 1993 1, 1993 1, 1993 1, 1993 1, 1993 1, 1993 er 1, er 1,
1994 1994
Date Decembe Decembe Decembe Decembe Decembe Decembe Decembe Decembe Novemb Novemb
Approved r 15, r 15, r 16, r 16, r 16, r 16, r 16, r 16, er 9, er 9,
by 1993 1993 1992 1992 1992 1992 1992 1992 1994 1994
Sharehold
ers
</TABLE>
The management fee paid to FMR by Index 500 Portfolio is reduced by an
amount equal to the fees and expenses of the non-interested Trustees.
MONEY MARKET PORTFOLIO: For the services of FMR under the contract, the
fund pays FMR a monthly management fee composed of a group fee rate and an
individual fund fee rate (.03%), and an income-based component of 6% of the
fund's gross income in excess of a 5% yield. The maximum income-based
component is .24% of average net assets.
The group fee rate is based on the monthly average net assets of all of the
registered investment companies with which FMR has management contracts and
is calculated on a cumulative basis pursuant to the graduated fee rate
schedule shown on the left. The schedule below on the right shows the
effective annual group fee rate at various asset levels, which is the
result of cumulatively applying the annualized rates on the left. For
example, the effective annual fee rate at $272 billion of group net assets
- - their approximate level for December 1994 - was . 1563 %, which is
the weighted average of the respective fee rates for each level of group
net assets up to $ 272 billion.
GROUP FEE RATE SCHEDULE EFFECTIVE ANNUAL FEE RATES
Average Group Annualized Group Net Effective Annual
Assets Rate Assets Fee Rate
$ 0 - 3 billion .3700% $ 0.5 billion .3700%
3 - 6 .3400 25 .2664
6 - 9 .3100 50 .2188
9 - 12 .2800 75 .1986
12 - 15 .2500 100 .1869
15 - 18 .2200 125 .1793
18 - 21 .2000 150 .1736
21 - 24 .1900 175 .1695
24 - 30 .1800 200 .1658
30 - 36 .1750 225 .1629
36 - 42 .1700 250 .1604
42 - 48 .1650 275 .1583
48 - 66 .1600 300 .1565
66 - 84 .1550 325 .1548
84 - 120 .1500 350 .1533
120 - 174 .1450 400 .1507
174 - 228 .1400
228 - 282 .1375
282 - 336 .1350
Over 336 .1325
On August 1, 1994, FMR voluntarily revised the group fee rate schedule by
adding new breakpoints. The revised group fee rate schedule provides for
lower management fee rates as FMR's assets under management increase. The
revised group fee rate schedule is identical to the above schedule for
average group assets under $156 billion. For average group assets in excess
of $156 billion, the group fee rate schedule voluntarily adopted by FMR is
as follows:
GROUP FEE RATE SCHEDULE EFFECTIVE ANNUAL FEE RATES
Average Group Annualized Group Net Effective Annual
Assets Fee Rate Assets Fee Rate
$ 120 - 156 billion .1450% $150 billion .1736%
156 - 192 .1400 175 .1690
192 - 228 .1350 200 .1652
228 - 264 .1300 225 .1618
264 - 300 .1275 250 .1587
300 - 336 .1250 275 .1560
336 - 372 .1225 300 .1536
Over 372 .1200 325 .1514
350 .1494
375 .1476
400 .1459
The individual fund fee rate is .03%.
One twelfth of the sum of the group fee rate and the individual fund fee
rate is applied to the fund's average net assets for the current month,
giving a dollar amount which is the fee for that month.
If the fund's monthly gross yield is 5% or less, the total management fee
is the sum of the group fee and the individual fund fee. If the fund's
monthly gross yield is greater than 5%, the management fee that FMR
receives includes an income-based component. The income-based component
equals 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
.24% (annualized) of average net assets, at a fund gross yield of 9%. Gross
income for this purpose, includes interest accrued and/or discount earned
(including both original issue discount and market discount) on portfolio
obligations, less amortization of premium. Realized and unrealized gains
and losses, if any, are not included in gross income.
For the fiscal years ended December 31, 1994, 1993, and 1992, FMR received
$ 1,178,543 , $415,213, and $487,024, respectively for its services as
investment adviser. These fees were equivalent to .20 %, .14%, and
.17%, respectively, of the fund's average net assets for each of those
years.
Prior to January 1, 1994, for the services of FMR under the contract, the
fund paid FMR a monthly management fee computed on the basis of the fund's
gross income. To the extent that the monthly gross income of the fund was
equivalent to an annualized yield of 5% or less, FMR received 4% of that
amount of the fund's gross income. In addition, to the extent that the
fund's monthly income exceeded an annualized yield of 5%, FMR received 6%
of that excess. For this purpose, gross income included interest accrued or
discount earned (including both original issue and market discount), less
amortization of premium. The amount of discount or premium on portfolio
instruments was fixed at the time of purchase. Realized and unrealized
gains and losses, if any, were not included in gross income.
Pursuant to the terms of the contract, limitations were imposed on the
compensation FMR could receive under the above formula. These limitations
were based on the fund's average monthly net assets as follows:
AVERAGE MONTHLY NET ASSETS ANNUALIZED RATE
On the first $1.5 billion .50%
On the portion in excess of $1.5 to $3.0 billion .45%
On the portion in excess of $3.0 billion to $4.5 billion .43%
On the portion in excess of $4.5 billion to $6.0 billion .41%
On the portion in excess of $6.0 billion .40%
HIGH INCOME AND INVESTMENT GRADE BOND PORTFOLIOS. For the services of FMR
under the contracts, each fund pays FMR a monthly management fee composed
of the sum of two elements: a group fee rate and an individual fund fee
rate.
The group fee rate is based on the monthly average net assets of all of the
registered investment companies with which FMR has management contracts and
is calculated on a cumulative basis pursuant to the graduated fee rate
schedule shown below on the left. The schedule below on the right shows the
effective annual group fee rate at various asset levels, which is the
result of cumulatively applying the annualized rates on the left. For
example, the effective annual fee rate at $272 billion of group net assets
- - the approximate level for December 1994 was .1563%, which is the
weighted average of the respective fee rates for each level of group net
assets up to $272 billion.
GROUP FEE RATE SCHEDULE EFFECTIVE ANNUAL FEE RATES
Average Group Annualized Group Net Effective Annual
Assets Rate Assets Fee Rate
$ 0 - 3 billion .3700% $ 0.5 billion .3700%
3 - 6 .3400 25 .2664
6 - 9 .3100 50 .2188
9 - 12 .2800 75 .1986
12 - 15 .2500 100 .1869
15 - 18 .2200 125 .1793
18 - 21 .2000 150 .1736
21 - 24 .1900 175 .1695
24 - 30 .1800 200 .1658
30 - 36 .1750 225 .1629
36 - 42 .1700 250 .1604
42 - 48 .1650 275 .1583
48 - 66 .1600 300 .1565
66 - 84 .1550 325 .1548
84 - 120 .1500 350 .1533
120 - 174 .1450 400 .1507
174 - 228 .1400
228 - 282 .1375
282 - 336 .1350
Over 336 .1325
Under Investment Grade Bond's current management contract with FMR, the
group fee rate is based on a schedule with breakpoints ending at .1400% for
average group assets in excess of $174 billion. Prior to January 1, 1993,
the group fee rate breakpoints shown above for average group assets in
excess of $120 billion and under $228 billion were voluntarily adopted by
FMR, and went into effect on January 1, 1992. The additional breakpoints
shown above for average group assets in excess of $228 billion were
voluntarily adopted by FMR on November 1, 1993.
On August 1, 1994, FMR voluntarily revised the prior extensions to the
group fee rate schedule, and added new breakpoints for each fund. The
revised group fee rate schedule provides for lower management fee rates as
FMR's assets under management increase. The revised group fee rate schedule
is identical to the above schedule for average group assets under $156
billion. For average group assets in excess of $156 billion, the group fee
rate schedule voluntarily adopted by FMR is as follows:
GROUP FEE RATE SCHEDULE EFFECTIVE ANNUAL FEE RATES
Average Group Annualized Group Net Effective Annual
Assets Fee Rate Assets Fee Rate
$ 120 - 156 billion .1450% $150 billion .1736%
156 - 192 .1400 175 .1690
192 - 228 .1350 200 .1652
228 - 264 .1300 225 .1618
264 - 300 .1275 250 .1587
300 - 336 .1250 275 .1560
336 - 372 .1225 300 .1536
Over 372 .1200 325 .1514
350 .1494
375 .1476
400 .1459
The individual fund fee rate for Investment Grade Bond Portfolio is .30%
and the individual fund fee rate for High Income Portfolio is .45%. Based
on the average group net assets of the funds advised by FMR for December
1994, the annual management fee rate for each fund would be calculated as
follows:
INVESTMENT GRADE BOND PORTFOLIO
Group Fee Rate Individual Fund Fee Rate Management Fee Rate
.1563% + .30% = .4563%
HIGH INCOME PORTFOLIO
Group Fee Rate Individual Fund Fee Rate Management Fee Rate
.1563% + .45% = .6063%
One-twelfth of this annual management fee rate is applied to each fund's
net assets averaged for the most recent month, giving a dollar amount,
which is the fee for that month.
During the fiscal years ended December 31, 1994, 1993 and 1992, FMR
received $ 520,469 , $460,983 and $272,562, respectively, for its
services as investment adviser to INVESTMENT GRADE BOND PORTFOLIO. These
fees were equivalent to . 46 %, .47%, and .47%, respectively, of the
average net assets of the fund for each of those years.
During the fiscal years ended December 31, 1994, 1993 and 1992, FMR
received $ 2,999,205 , $1,764,257 and $784,904, respectively, for its
services as investment adviser to HIGH INCOME PORTFOLIO. These fees were
equivalent to . 61 %, .51%, and .52%, respectively, of the average net
assets of the fund for those years. On December 15, 1993, shareholders
voted to increase the fund's individual fund fee rate from 0.35% to 0.45%.
EQUITY-INCOME, GROWTH, OVERSEAS, ASSET MANAGER, CONTRAFUND AND ASSET
MANAGER: GROWTH PORTFOLIOS. For the services of FMR under the contract,
each fund pays FMR a monthly management fee composed of the sum of two
elements: a group fee rate and an individual fund fee rate.
The group fee rate is based on the monthly average net assets of all of the
registered investment companies with which FMR has management contracts and
is calculated on a cumulative basis pursuant to the graduated fee rate
schedule shown below on the left. The schedule below on the right shows the
effective annual group fee rate at various asset levels, which is the
result of cumulatively applying the annualized rates on the left. For
example, the effective annual fee rate at $272 billion of group net assets
- - the approximate level for December 1994 - was .3193%, which is the
weighted average of the respective fee rates for each level of group net
assets up to $272 billion.
GROUP FEE RATE SCHEDULE EFFECTIVE ANNUAL FEE RATES
Average Group Annualized Group Net Effective Annual
Assets Rate Assets Fee Rate
$ 0 - 3 billion .5200% $ 0.5 billion .5200%
3 - 6 .4900 25 .4238
6 - 9 .4600 50 .3823
9 - 12 .4300 75 .3626
12 - 15 .4000 100 .3512
15 - 18 .3850 125 .3430
18 - 21 .3700 150 .3371
21 - 24 .3600 175 .3325
24 - 30 .3500 200 .3284
30 - 36 .3450 225 .3253
36 - 42 .3400 250 .3223
42 - 48 .3350 275 .3198
48 - 66 .3250 300 .3175
66 - 84 .3200 325 .3153
84 - 102 .3150 350 .3133
102 - 138 .3100
138 - 174 .3050
174 - 228 .3000
228 - 282 .2950
282 - 336 .2900
Over 336 .2850
Under Equity-Income, Growth, Overseas and Asset Manager Portfolios' current
management contract with FMR, the group fee rate is based on a schedule
with breakpoints ending at .3000% for average group assets in excess of
$174 billion. Prior to January 1, 1993, the group fee rate breakpoints
shown above for average group assets in excess of $138 billion and under
$228 billion were voluntarily adopted by FMR, and went into effect on
January 1, 1992. The additional breakpoints shown above for average group
assets in excess of $228 billion were voluntarily adopted by FMR on
November 1, 1993.
On August 1, 1994, FMR voluntarily revised the prior extensions to the
group fee rate schedule, and added new breakpoints (Asset Manager: Growth
and Contrafund Portfolios' management contracts are each dated November 1,
1994 and therefore, include the following additional breakpoint schedules
in their fee schedules). The revised group fee rate schedule provides for
lower management fee rates as FMR's assets under management increase. The
revised group fee rate schedule is identical to the above schedule for
average group assets under $210 billion. For average group assets in excess
of $210 billion, the group fee rate schedule voluntarily adopted by FMR is
as follows:
GROUP FEE RATE SCHEDULE EFFECTIVE ANNUAL FEE RATES
Average Group Annualized Group Net Effective Annual
Assets Rate Assets Fee Rate
$ 138 - 174 billion .3050% $150 billion .3371%
174 - 210 .3000 175 .3325
210 - 246 .2950 200 .3284
246 - 282 .2900 225 .3249
282 - 318 .2850 250 .3219
318 - 354 .2800 275 .3190
354 - 390 .2750 300 .3163
Over 390 .2700 325 .3137
350 .3113
375 .3090
400 .3067
The individual fund fee rate for the funds are as follows: .20% for
Equity-Income Portfolio; .30% for Growth and Contrafund Portfolios; .40%
for Asset Manager and Asset Manager: Growth Portfolios; and .45% for
Overseas Portfolio. Based on the average group net assets of the funds
advised by FMR for December 1994, the annual management fee rate for each
fund would be calculated as follows:
EQUITY-INCOME PORTFOLIO
Group Fee Rate Individual Fund Fee Rate Management Fee Rate
.3193% + .20% = .5193%
GROWTH AND CONTRAFUND PORTFOLIOS
Group Fee Rate Individual Fund Fee Rate Management Fee Rate
.3193% + .30% = .6193%
ASSET MANAGER AND ASSET MANAGER: GROWTH PORTFOLIOS
Group Fee Rate Individual Fund Fee Rate Management Fee Rate
.3193% + .40% = .7193%
OVERSEAS PORTFOLIO
Group Fee Rate Individual Fund Fee Rate Management Fee Rate
.3193% + .45% = .7693%
One-twelfth of the annual management fee rate is applied to each fund's net
assets averaged for the most recent month, giving a dollar amount, which is
the fee for that month.
During the fiscal years ended December 31, 1994, 1993 and 1992, FMR
received $ 9,165,293 , $5,004,191 and $2,179,187, respectively, for
its services as investment adviser to EQUITY-INCOME PORTFOLIO. These fees
were equivalent to .52 %, .53%, and .53%, respectively, of the
average net assets of the fund for each of those years.
During the fiscal years ended December 31, 1994, 1993 and 1992, FMR
received $ 10,585,482 , $6,358,701 and $3,305,050, respectively, for
its services as investment adviser to GROWTH PORTFOLIO. These fees were
equivalent to . 62 %, .63%, and .63%, respectively, of the average net
assets of the fund for each of those years.
During the fiscal years ended December 31, 1994, 1993 and 1992, FMR
received $ 8,646,616, $3,078,432 and $1,231,227, respectively, for
its services as investment adviser to OVERSEAS PORTFOLIO. These fees were
equivalent to .77 %, .77%, and .78%, respectively, of the average net
assets of the fund for each of those years.
During the fiscal years ended December 31, 1994, 1993 and 1992, FMR
received $ 22,080,801 , $10,365,454 and $3,065,065, respectively, for
its services as investment adviser to ASSET MANAGER PORTFOLIO. These fees
were equivalent to .72 %, .72%, and .73%, respectively, of the
average net assets of the fund for each of those years.
INDEX 500 PORTFOLIO. FMR is the fund's manager pursuant to a management
contract dated January 1, 1993, which was approved by shareholders on
December 16, 1992. For the services of FMR under the contract, Index 500
pays FMR a monthly management fee at the annual rate of .28% of the average
net assets of the fund throughout the month. For the fiscal years ended
December 31, 1994, 1993 and 1992, FMR received $ 103,136 , $58,243,
and $11,715, respectively, before any reimbursement of expenses by FMR.
FMR may, from time to time, voluntarily reimburse all or a portion of a
fund's operating expenses (exclusive of interest, taxes, brokerage
commissions, and extraordinary expenses). FMR retains the ability to be
repaid for these expense reimbursements in the amount that expenses fall
below the limit prior to the end of the fiscal year. Expense reimbursements
by FMR will increase the fund's total returns and yield and repayment of
the reimbursement by the fund will lower its total returns and yield.
FMR has voluntarily agreed, subject to revision or termination, to
reimburse the funds if and to the extent that its aggregate operating
expenses, including management fees, were in excess of a specified annual
rate for the funds. The following provides the expense and the date the cap
was imposed: September 19, 1985 (1.00%) for High Income Portfolio; October
9, 1986 (1.50%) for Equity-Income and Growth Portfolios; January 28, 1987
(1.50%) for Overseas Portfolio; December 5, 1988 (.80%) for Investment
Grade Bond Portfolio; January 1, 1990 (1.25%) for Asset Manager Portfolio;
August 27, 1992 (.28%) for Index 500 Portfolio; and January 3, 1995 (1.00%)
for Asset Manager: Growth and Contrafund Portfolios. Under this
arrangement, FMR reimbursed Index 500 $195,500, $138,597 and $63,623,
respectively for fiscal years ended December 31, 1994, 1993 and 1992.
SUB-ADVISERS. On behalf of High Income and Asset Manager, Contrafund and
Asset Manager: Growth Portfolios, FMR, has entered into sub-advisory
agreements with FMR U.K. and FMR Far East. On behalf of Overseas Portfolio,
FMR has entered into sub-advisory agreements with FMR U.K., FMR Far East,
and FIIA. FIIA, in turn, has entered into a sub-advisory agreement with
FIIAL U.K. Pursuant to the sub-advisory agreements, FMR may receive
investment advice and research services outside the United States from the
sub-advisers. On behalf of High Income, Contrafund, Asset Manager: Growth
and Overseas Portfolios, FMR may also grant the sub-advisers investment
management authority as well as the authority to buy and sell securities if
FMR believes it would be beneficial to a fund.
Currently, FMR U.K. and FMR Far East each focus on issuers in countries
other than the United States such as those in Europe, Asia, and the Pacific
Basin.
Currently, FMR U.K., FMR Far East, FIIA, and FIIAL U.K. each focus on
issuers in countries other than the United States such as those in Europe,
Asia, and the Pacific Basin.
FMR U.K. and FMR Far East, which were organized in 1986, are wholly owned
subsidiaries of FMR. FIIA is a wholly owned subsidiary of Fidelity
International Limited (FIL), a Bermuda company formed in 1968 which
primarily provides investment advisory services to non-U.S. investment
companies and institutional investors investing in securities throughout
the world. Edward C. Johnson 3d, Johnson family members, and various trusts
for the benefit of the Johnson family owns, directly or indirectly, more
than 25% of the voting common stock of FIL. FIIA was organized in Bermuda
in 1983. FIIAL U.K. was organized in the United Kingdom in 1984, and is a
wholly owned subsidiary of Fidelity International Management Holdings
Limited, an indirect wholly owned subsidiary of FIL.
Under the sub-advisory agreements FMR pays the fees of FMR U.K., FMR Far
East, and FIIA. FIIA, in turn, pays the fees of FIIAL U.K. For providing
non-discretionary investment advice and research services the sub-advisers
are compensated as follows:
(small solid bullet) FMR pays FMR U.K. and FMR Far East fees equal to 110%
and 105%, respectively, of FMR U.K.'s and FMR Far East's costs incurred in
connection with providing investment advice and research services.
(small solid bullet) FMR pays FIIA a fee equal to 30% of FMR's monthly
management fee with respect to the average net assets held by the fund for
which FIIA has provided FMR with investment advice and research services.
(small solid bullet) FIIA pays FIIAL U.K. a fee equal to 110% of FIIAL
U.K.'s costs incurred in connection with providing investment advice and
research services.
For providing discretionary investment management and executing portfolio
transactions, the sub-advisers are compensated as follows:
(small solid bullet) FMR pays FMR U.K., FMR Far East, and FIIA a fee equal
to 50% of its monthly management fee with respect to the fund's average net
assets managed by the sub-adviser on a discretionary basis.
(small solid bullet) FIIA pays FIIAL U.K. a fee equal to 110% of FIIAL
U.K.'s costs incurred in connection with providing discretionary investment
management services.
For providing investment advice and research services, the fees paid to the
sub-advisers for fiscal 1994, 1993, and 1992 were as follows:
Asset Manager Portfolio
Fiscal Year FMR U.K. FMR Far East
1994 $147,227 $190,254
1993 $139,893 $227,112
1992 $40,978 $52,009
Overseas Portfolio
Fiscal Year FMR U.K. FMR Far East FIIA FIIAL U.K.
1994 $387,086 $425,049 - - - -
1993 $94,517 $138,059 - - - -
1992 $41,512 $34,267 - - - -
For providing discretionary investment management and executing portfolio
transactions, FMR, on behalf of Overseas Portfolio paid FMR U.K. fees
totaling $376,357 for fiscal 1992. For providing discretionary investment
management and executing portfolio transactions, no fees were paid by FMR
on behalf of Overseas Portfolio to the sub-advisors during fiscal years
ended 1993 and 1994.
FMR entered into the sub-advisory agreements described above as follows:
April 1, 1992 for Overseas; January 1, 1994 for High Income; and November
1, 1994 for Contrafund and Asset Manager: Growth Portfolios. The agreements
were approved by shareholders as follows: March 25, 1992 for Overseas,
December 15, 1993 for High Income; and November 9, 1994 for Contrafund and
Asset Manager: Growth.
On behalf of MONEY MARKET PORTFOLIO, FMR has entered into a sub-advisory
agreement with FMR Texas pursuant to which FMR Texas has primary
responsibility for providing portfolio investment management services to
the fund.
Under the sub-advisory agreement, FMR pays FMR Texas fees equal to 50% of
the management fee payable to FMR under its management contract with the
fund. The fee paid to FMR Texas are not reduced by any voluntary or
mandatory expense reimbursements that may be in effect from time to time.
For the fiscal years ended December 31, 1994, 1993 and 1992, FMR paid FMR
Texas management fees of $ 589,272 , $207,606, and $243,512,
respectively.
DISTRIBUTION AND SERVICE PLANS
The Trustees have approved Distribution and Service Plans on behalf of the
funds (the Plans) pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the Rule). The Rule provides in substance that a mutual fund may
not engage directly or indirectly in financing any activity that is
primarily intended to result in the sale of shares of a fund except
pursuant to a plan approved on behalf of the fund under the Rule. The
Plans, as approved by the Trustees, allow the funds and FMR to incur
certain expenses that might be considered to constitute indirect payment by
the funds of distribution expenses.
Under each Plan, if the payment of management fees by the funds to FMR is
deemed to be indirect financing by the funds of the distribution of their
shares, such payment is authorized by the Plans. Each Plan also
specifically recognizes that FMR, either directly or through FDC, may use
its management fee revenue, past profits, or other resources, without
limitation, to pay promotional and administrative expenses in connection
with the offer and sale of shares of each fund. In addition, each Plan
provides that FMR may use its resources, including its management fee
revenues, to make payments to third parties that assist in selling
shares of each fund, or to third parties, including banks, that render
shareholder support services. The Trustees have not authorized such
payments to date.
Prior to approving each Plan, the Trustees carefully considered all
pertinent factors relating to the implementation of each Plan, and have
determined that there is a reasonable likelihood that the Plan will benefit
each fund and its shareholders. In particular, the Trustees noted that each
Plan does not authorize payments by each fund other than those made to FMR
under its management contract with the fund. To the extent that each Plan
gives FMR and FDC greater flexibility in connection with the distribution
of shares of each fund, additional sales of fund shares may result.
Furthermore, certain shareholder support services may be provided more
effectively under the Plans by local entities with whom shareholders have
other relationships. Money Market, High Income, Equity-Income and Growth
Portfolios' Plans were approved by shareholders of their respective fund on
December 11, 1986. Overseas Portfolio's Plan was approved by shareholders
on November 18, 1987. The Plans for Investment Grade Bond Portfolio and
Asset Manager Portfolio were approved by the funds' shareholders on
December 13, 1989. Index 500 Portfolio's Plan was approved by the
Portfolio's shareholders on December 16, 1992. Contrafund and Asset
Manager: Growth Portfolios' Plans were approved by the fund sole
shareholder on November 9, 1994.
Each fund may execute portfolio transactions with, and purchase
securities issued by, depository institutions that receive payments under
the Plans. No preference for the instruments of such depository
institutions will be shown in the selection of investments.
CONTRACTS WITH COMPANIES AFFILIATED WITH FMR
Each fund has an agreement with FSC, an affiliate of FMR Corp., under which
FSC determines the NAV per share and dividends of each fund and maintains
the portfolio and general accounting records of each fund. Prior to July 1,
1991, the annual fee for these pricing and bookkeeping services was based
on two schedules, one pertaining to each fund's average net assets, and one
pertaining to the type and number of transactions each fund made. The fee
rates in effect as of July 1, 1991, are based on each fund's average net
assets as follows: for Money Market Portfolio, .0175% for the first $500
million of average net assets and .0075% for average net assets in excess
of $500 million. The fee is limited to a minimum of $20,000 and a maximum
of $750,000 per year; for High Income and Investment Grade Bond Portfolios,
.04% for the first $500 million of average net assets and .02% for average
net assets in excess of $500 million. For Equity-Income, Growth, Overseas,
Asset Manager, Contrafund, Asset Manager: Growth and Index 500 Portfolios,
.06% for the first $500 million of average net assets and .03% for average
net assets in excess of $500 million. The fee for High Income, Equity
Income, Growth, Overseas, Asset Manager, Investment Grade Bond, Index 500,
Contrafund and Asset Manager: Growth Portfolios is limited to a minimum of
$45,000 and a maximum of $750,000 per year.
The following are the fees paid by each fund to FSC for the last three
fiscal years:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Money High Equity- Investment Asset
Market Income Income Growth Overseas Grade Manager Index 500
Bond
1994 $92,003 $197,109 $669,962 $664,914 $491,242 $46,617 $751,546 $45,097
1993 $53,769 $138,642 $439,891 $456,795 $230,456 $46,426 $583,404 $45,074
1992 $52,389 $62,305 $242,745 $303,007 $109,649 $46,187 $243,598 $15,547
</TABLE>
Each fund utilizes FIIOC, an affiliate of FMR Corp., to maintain the master
accounts of the participating insurance companies. Under the contract, each
fund pays a fee of $95 per shareholder account per year and a fee of $20
for each monetary transaction. In addition to providing transfer agent and
shareholder servicing functions, FIIOC pays all transfer agent
out-of-pocket expenses and also pays for typesetting, printing and mailing
Prospectuses, Statements of Additional Information, reports, notices and
statements to shareholders allocable to the master account of participating
insurance companies.
The following are the fees paid by each fund to FIIOC (including
reimbursement for out-of-pocket expenses) for the last three fiscal years:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Money High Equity- Investment Asset
Market Income Income Growth Overseas Grade Manager Index 500
Bond
1994 $115,837 $163,055 $0 $ 7,612 $173,157 $90,382 $ 50,231 $84,940
1993 $87,208 $108,432 $ 51,596 $ 51,825 $143,222 $71,119 $ 62,281 $33,911
1992 $59,118 $61,198 $68,260 $79,504 $65,240 $39,809 $63,976 $1,205
</TABLE>
If a portion of each applicable fund's brokerage commissions had not been
allocated toward payment of these fees, the transfer agent fees for the
last three fiscal years would have been as follows (not applicable for
Money Market, High Income, Overseas, Index 500 and Investment Grade
Bond Portfolios):
Equity- Asset
Income Growth Manager
Portfolio Portfolio Portfolio
1994 $192,500 $212,064 $181,816
1993 111,756 140,122 $115,600
1992 68,260 79,504 63,976
FSC also receives fees for administering each fund's securities lending
program. Securities lending fees are based on the number and duration of
individual securities loans. For 1994, no lending fees were paid to FSC by
any of the funds for the last three fiscal years.
Each fund has a distribution agreement with FDC, a Massachusetts
corporation organized on July 18, 1960. FDC is a broker-dealer registered
under the Securities Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc. The distribution agreements call
for FDC to use all reasonable efforts, consistent with its other business,
to secure purchasers for shares of each fund, which are continuously
offered at net asset value. Promotional and administrative expenses in
connection with the offer and sale of shares are paid by FMR.
DESCRIPTION OF THE TRUSTS
TRUST ORGANIZATION. Money Market Portfolio,High Income Portfolio, and
Equity-Income Portfolio are funds of Variable Insurance Products Fund, an
open-end management investment company organized as a Massachusetts
business trust. In July 1985, pursuant to shareholder approval, the
Declaration of Trust was amended to change the name of the Trust from
Fidelity Cash Reserves II to Variable Insurance Products Fund. The
Declaration of Trust permits the Trustees to create additional funds.
Investment Grade Bond Portfolio, Asset Manager Portfolio, Index 500
Portfolio, Contrafund Portfolio and Asset Manager: Growth Portfolio are
funds of Variable Insurance Products Fund II, an open-end management
investment company organized as a Massachusetts business trust on March 21,
1988. The Declaration of Trust permits the Trustees to create additional
funds.
Investments in each trust may be made only by the separate accounts of
insurance companies for the purpose of funding variable annuity and
variable life insurance contracts issued by insurance companies.
In the event that FMR ceases to be the investment adviser to a trust or a
fund, the right of the trust or fund to use the identifying name "Fidelity"
may be withdrawn. There is a remote possibility that one fund might become
liable for any misstatement in its prospectus or statement of additional
information about another fund.
The assets of each trust received for the issue or sale of shares of each
fund and all income, earnings, profits, and proceeds thereof, subject only
to the rights of creditors, are especially allocated to such fund, and
constitute the underlying assets of such fund. The underlying assets of
each fund are segregated on the books of account, and are to be charged
with the liabilities with respect to such fund and with a share of the
general expenses of the trust. Expenses with respect to the trust are to be
allocated in proportion to the asset value of the respective funds, except
where allocations of direct expense can otherwise be fairly made. The
officers of the trust, subject to the general supervision of the Board of
Trustees, have the power to determine which expenses are allocable to a
given fund, or which are general or allocable to all of the funds. In the
event of the dissolution or liquidation of the trust, shareholders of each
fund are entitled to receive as a class the underlying assets of such fund
available for distribution.
SHAREHOLDER AND TRUSTEE LIABILITY. Each trust is an entity of the type
commonly known as "Massachusetts business trust." Under Massachusetts law,
shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. Each Declaration of
Trust provides that the trust shall not have any claim against shareholders
except for the payment of the purchase price of shares and requires that
each agreement, obligation, or instrument entered into or executed by the
trust or the Trustees shall include a provision limiting the obligations
created thereby to the trust and its assets. Each Declaration of Trust
provides for indemnification out of each fund's property of any
shareholders held personally liable for the obligations of the fund. Each
Declaration of Trust also provides that each fund shall, upon request,
assume the defense of any claim made against any shareholder for any act or
obligation of the fund and satisfy any judgment thereon. Thus, the risk of
a shareholder incurring financial loss on account of shareholder liability
is limited to circumstances in which the fund itself would be unable to
meet its obligations. FMR believes that, in view of the above, the risk of
personal liability to shareholders is remote.
Each Declaration of Trust further provides that the Trustees, if they have
exercised reasonable care, will not be liable for any neglect or
wrongdoing, but nothing in the Declaration of Trust protects Trustees
against any liability to which they would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of their office.
VOTING RIGHTS. Each fund's capital consists of shares of beneficial
interest. The shares have no preemptive or conversion rights; the voting
and dividend rights, the right of redemption, and the privilege of exchange
are described in the Prospectus. Shares are fully paid and nonassessable,
except as set forth under the heading "Shareholder and Trustee Liability"
above. Shareholders representing 10% or more of the trust or a fund may, as
set forth in the Declaration of Trust, call meetings of the trust or a fund
for any purpose related to the trust or fund, as the case may be,
including, in the case of a meeting of the entire trust, the purpose of
voting on removal of one or more Trustees. The trust or any fund may be
terminated upon the sale of its assets to another open-end management
investment company, or upon liquidation and distribution of its assets, if
approved by vote of the holders of a majority of the outstanding shares of
the trust or the fund. If not so terminated, the trust and its funds will
continue indefinitely.
CUSTODIAN. Morgan Guaranty Trust Company, 60 Wall Street, New York, New
York is custodian of Money Market Portfolio's assets; The Bank of New York,
110 Washington Street, New York New York, is custodian of High Income and
Investment Grade Bond Portfolios' assets; The Chase Manhattan Bank, N.A.,
1211 Avenue of the Americas, New York, New York 10036, is custodian of
Equity-Income, Overseas, Asset Manager: Growth, and Asset Manager
Portfolios' assets; and Brown Brothers Harriman & Co., 40 Water Street,
Boston, Massachusetts, is custodian of Growth, Contrafund, and Index 500
Portfolios' assets. The custodians take no part in determining the
investment policies of the funds or in deciding which securities are
purchased or sold by the funds. The funds, however, may invest in
obligations of the custodians and may purchase or sell securities from or
to the custodians. Investors should understand that the expense ratio for
the Overseas Portfolio may be higher than that of investment companies
which invest exclusively in domestic securities since the cost of
maintaining the custody of foreign securities is higher.
FMR, its officers and directors and its affiliated companies from time to
time have transactions with various banks, including the custodian banks
for certain of the funds advised by FMR. The Boston branch of Brown
Brothers Harriman & Co. leases its office space from an affiliate of FMR at
a lease payment which, when entered into, was consistent with prevailing
market rates. Other transactions that have occurred to date include
mortgages and personal and general business loans. In the judgment of FMR,
the terms and conditions of those transactions were not influenced by
existing or potential custodial or other fund relationships.
AUDITOR. Coopers & Lybrand, L.L.P. One Post Office Square, Boston,
Massachusetts ( 1999 Bryan Street, Dallas Texas, for Money Market
Portfolio) , serves as the independent accountant for Variable Insurance
Products Fund and Price Waterhouse LLP, 160 Federal Street, Boston,
Massachusetts serves as the independent accountant of Variable Insurance
Products Fund II, each providing audit services including (1) audits of
annual financial statements, (2) assistance and consultation in connection
with SEC filings and (3) review of the annual federal income tax returns
filed on behalf of each fund.
FINANCIAL STATEMENTS
Each fund's financial statements and financial highlights for the fiscal
year ended December 31, 1994 are included in the funds' Annual Reports,
which are separate reports supplied with this Statement of Additional
Information. Each fund's financial statements and financial highlights are
incorporated herein by reference.
APPENDIX
DOLLAR-WEIGHTED AVERAGE MATURITY is derived by multiplying the value of
each investment by the number of days remaining to its maturity, adding
these calculations, and then dividing the total by the value of the fund's
portfolio. An obligation's maturity is typically determined on a stated
final maturity basis, although there are some exceptions to this rule.
For example, if it is probable that the issuer of an instrument will take
advantage of a maturity-shortening device, such as a call, refunding, or
redemption provision, the date on which the instrument will probably be
called, refunded, or redeemed may be considered to be its maturity date.
Also, the maturities of mortgage-backed securities and some asset-backed
securities, such as collateralized mortgage obligations, are determined on
a weighted average life basis, which is the average time for principal to
be repaid. For a mortgage security, this average time is calculated based
on estimates of the date principal will be paid in advance of its stated
maturity. The weighted average life of these securities is likely to be
substantially shorter than their stated final maturity.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S COMMERCIAL PAPER RATINGS:
Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following
characteristics:
Leading market positions in well established industries.
High rates of return on funds employed.
Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
Broad margins in earning coverage of fixed financial charges and with high
internal cash generation.
Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earning trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S COMMERCIAL PAPER RATINGS:
A - Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with
the numbers 1 and 2 to indicate the relative degree of safety.
A-1 - This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+)
sign designation.
A-2 - Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S CORPORATE BOND RATINGS:
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
Moody's applies numerical modifiers, 1, 2, and 3, in its Aa generic rating
classification in its corporate bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S CORPORATE BOND RATINGS:
AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
The AA rating may be modified by the addition of a plus or minus to show
relative standing within its major rating category.
DESCRIPTION OF FITCH INVESTOR'S SERVICE, INC.'S COMMERCIAL PAPER RATINGS:
FITCH-1 - (Highest Grade) Commercial paper assigned this rating is regarded
as having the strongest degree of assurance for timely payment.
FITCH-2 - (Very Good Grade) Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than the strongest
issues.
DESCRIPTION OF FITCH INVESTOR'S SERVICE, INC.'S CORPORATE BOND RATINGS:
AAA - Bonds of this rating are regarded as strictly high grade, broadly
marketable, suitable for investment by trustees and fiduciary institutions,
and liable to but slight market fluctuation other than through changes in
the money rate. The factor last named is of importance, varying with the
length of maturity. Such bonds are mainly senior issues of strong
companies, and are most numerous in the railway and public utility fields,
though some industrial obligations have this rating. The prime feature of
an AAA bond is of showing of earnings several times or many times interest
requirements with such stability of applicable earnings that safety is
beyond reasonable question whatever changes occur in conditions. Other
features may enter, such as a wide margin of protection through collateral
security or direct lien on specific property as in the case of high-class
equipment certificates or bonds that are first mortgages on valuable real
estate. Sinking funds or voluntary reduction of the debt, by call or
purchase are often factors, while guarantee or assumption by parties other
than the original debtor may influence the rating.
AA - Bonds in this group are of safety virtually beyond question, and as a
class are readily saleable while many are highly active. Their merits are
not greatly unlike those of the "AAA" class, but a bond so rated may be of
junior though strong lien - in many cases directly following an AAA bond -
or the margin of safety is strikingly broad. The issue may be the
obligation of a small company, strongly secured but influenced as to rating
by the lesser financial power of the enterprise and more local type of
market.
DESCRIPTION OF DUFF & PHELPS INC.'S COMMERCIAL PAPER RATINGS:
DUFF 1 - High certainty of timely payment. Liquidity factors are excellent
and supported by strong fundamental protection factors. Risk factors are
minor.
DUFF 2 - Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing internal funding needs may enlarge
total financing requirements, access to capital markets is good. Risk
factors are small.
DESCRIPTION OF DUFF & PHELPS INC.'S CORPORATE BOND RATINGS:
DUFF 1 - Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
DUFF 2 - High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
(INDEX 500 PORTFOLIO) The S&P 500 Composite Stock Price Index (S&P 500) is
a well-known stock market index that includes common stocks of companies
representing a significant portion of the market value of all common stocks
publicly traded in the United States. FMR believes that the performance of
the S&P 500 is representative of the performance of publicly traded common
stocks in general. The composition of the S&P 500 is determined by Standard
& Poor's Corporation, and is based on such factors as the market
capitalization and trading activity of each stock and its adequacy as
representative of stocks in a particular industry group; Standard & Poor's
may change the composition of the Index from time to time. Stocks in the
S&P 500 Index are weighted according to their market capitalization (i.e.,
the number of shares outstanding multiplied by the stock's current price),
with the 59 largest stocks currently composing 50% of the S&P 500's value.
Although Standard & Poor's obtains information for inclusion in or for use
in the calculation of the S&P 500 from sources which considers reliable,
Standard & Poor's does not guarantee the accuracy or the completeness of
the S&P 500 or any data included therein. Standard & Poor's makes no
warranty, express or implied, as to results to be obtained by the licensee,
owners of the fund, or any other person or entity from the use of the S&P
500 or any data included therein in connection with the rights licensed
hereunder or for any other use. Standard & Poor's makes no express or
implied warranties, and hereby expressly disclaims all warranties of
merchantability or fitness for a particular purpose with respect to the S&P
500 any data included therein.
THE 500 STOCKS IN THE S&P 500 INDEX. The following is a list of the 500
Stocks in the S&P 500 Index as of December 30, 1994.
Abbott Labs
Advanced Micro Devices
Aetna Life & Casualty
Ahmanson (H.F.) & Co.
Air Products & Chemicals
AirTouch Communications
Alberto-Culver
Albertson's
Alcan Aluminum Ltd.
Alco Standard
Alexander & Alexander
Allergan, Inc.
AlliedSignal
ALLTEL Corp.
Aluminum Co. of America
ALZA Corp. CI.A
Amdahl Corp.
Amerada Hess
American Barrick Res.
American Brands Inc.
American Electric Power
American Express
American General
American Greetings CI A
American Home Products
American Int'l. Group
American Stores
Ameritech
Amgen
Amoco
AMP Inc.
AMR Corp.
Andrew Corp.
Anheuser-Busch
Apple Computer
Archer-Daniels-Midland
Armco Inc.
Armstrong World
ASARCO Inc.
Ashland Oil
AT&T Corp.
Atlantic Richfield
Autodesk, Inc.
Automatic Data Processing Inc.
Avery Dennison Corp.
Avon Products
Baker Hughes
Ball Corp.
Bally Entertainment Corp.
Baltimore Gas & Electric
Banc One Corp.
Bank of Boston
BankAmerica Corp.
Bankers Trust N.Y.
Bard (C.R.) Inc.
Barnett Banks Inc.
Bassett Furniture
Bausch & Lomb
Baxter International Inc.
Becton, Dickinson
Bell Atlantic
BellSouth
Bemis Company
Beneficial Corp.
Bethlehem Steel
Beverly Enterprises
Biomet, Inc.
Black & Decker Corp.
Block H&R
Boatmen's Bancshares
Boeing Company
Boise Cascade
Briggs & Stratton
Bristol-Myers Squibb
Brown Group
Browning-Ferris Ind.
Brown-Forman Corp.
Bruno's Inc.
Brunswick Corp.
Burlington Northern
Burlington Resources
Campbell Soup
Capital Cities/ABC
Carolina Power & Light
Caterpillar Inc.
CBS Inc.
Centex Corp.
Central & South West
Ceridian Corp.
Champion International
Charming Shoppes
Chase Manhattan
Chemical Banking Corp.
Chevron Corp.
Chrysler Corp.
Chubb Corp.
CIGNA Corp.
Cincinnati Milacron
Cinergy Corp.
Circuity City Stores
cicso Systems
Citicorp
Clark Equipment
Clorox Co.
Coastal Corp.
Coca Cola Co.
Colgate-Palmolive
Columbia Gas System
Columbia/HCA Healthcare Corp.
Comcast Class A Special
Community Psych Centers
COMPAQ Computer
Computer Associates Intl.
Computer Sciences Corp.
ConAgra Inc.
Consolidated Edison
Consolidated Freightways
Consolidated Natural Gas
Conrail Inc.
Continental Corp.
Cooper Industries
Cooper Tire & Rubber
Coors (Adolph)
CoreStates Financial
Corning Inc.
CPC International
Crane Company
Cray Research
Crown Cork & Seal
CSX Corp.
Cummins Engine Co., Inc.
Cyprus Amax Minerals Co.
Dana Corp.
Data General
Dayton Hudson
Dean Witter, Discover & Co.
Deere & Co.
Delta Air Lines
Deluxe Corp.
Detroit Edison
Dial Corp.
Digital Equipment
Dillard Department Stores
Dominion Resources
Donnelley (R.R.) & Sons
Dover Corp.
Dow Chemical
Dow Jones & Co.
Dresser Industries
DSC Communications
Du Pont (E.I.)
Duke Power
Dun & Bradstreet
E G & G Inc.
E-Systems
Eastern Enterprises
Eastman Chemical
Eastman Kodak
Eaton Corp.
Echlin Inc.
Echo Bay Mines Ltd.
Ecolab Inc.
Emerson Electric
Engelhard Corp.
Enron Corp.
ENSERCH Corp.
Entergy Corp.
Exxon Corp.
Federal Express
Federal Home Loan Mtg.
Federal Natl. Mtge.
Federal Paper Board
First Chicago Corp.
First Data
First Fidelity Bancorp
First Interstate Bancorp
First Mississippi Corp.
First Union Corp.
Fleet Financial Group
Fleetwood Enterprises
Fleming Cos. Inc.
Fluor Corp.
FMC Corp.
Ford Motor
Foster Wheeler
FPL Group
Gannett Co.
Gap (The)
General Dynamics
General Electric
General Mills
General Motors
General Re Corp.
General Signal
Genuine Parts
Georgia-Pacific
Giant Food CI. A
Giddings & Lewis
Gillette Co.
Golden West Financial
Goodrich (B.F.)
Goodyear Tire & Rubber
Grace (W.R.) & Co.
Grainger (W.W.) Inc.
Great A & P
Great Lakes Chemical
Great Western Financial
GTE Corp.
Halliburton Co.
Handleman Co.
Harcourt General Inc.
Harland (J.H.)
Harnischfeger Indus.
Harris Corp.
Hartmarx Corp.
Hasbro Inc.
Heinz (H.J.)
Helmerich & Payne
Hercules, Inc.
Hershey Foods
Hewlett-Packard
Hilton Hotels
Home Depot
Homestake Mining
Honeywell
Household International
Houston Industries
Illinois Tool Works
Inco, Ltd.
Ingersoll-Rand
Inland Steel Ind. Inc.
Intel Corp.
Intergraph Corp.
International Bus. Machines
International Flav/Frag
International Paper
Interpublic Group
ITT Corp.
James River
Jefferson-Pilot
Johnson Controls
Johnson & Johnson
Jostens Inc.
K Mart
Kaufman & Broad Home Corp.
Kellogg Co.
Kerr-McGee
KeyCorp
Kimberly-Clark
King World Productions
Knight-Ridder Inc.
Kroger Co.
Lilly (Eli) & Co.
Limited, The
Lincoln National
Liz Claiborne, Inc.
Lockheed Corp.
Longs Drug Stores
Loral Corp.
Lotus Development
Louisiana Land & Exploration
Louisiana Pacific
Lowe's Cos.
Luby's Cafeterias
M/A-Com, Inc.
Maillinckrodt Group Inc.
Manor Care
Marriott Int'l
Marsh & McLennan
Martin Marietta
Masco Corp.
Mattel, Inc.
Maxus Energy
May Dept. Stores
Maytag Corp.
MBNA Corp.
McDermott International
McDonald's Corp.
McDonnell Douglas
McGraw-Hill
MCI Communications
Mead Corp.
Medtronic Inc.
Mellon Bank Corp.
Melville Corp.
Mercantile Stores
Merck & Co.
Meredith Corp.
Merrill Lynch
Micron Technology
Microsoft Corp.
Millipore Corp.
Minn. Mining & Mfg.
Mobil Corp.
Monsanto Company
Moore Corp. Ltd.
Morgan (J.P.) & Co.
Morrison Knudsen
Morton International
Motorola Inc.
NACCO Ind. CI. A
Nalco Chemical
National City Corp.
National Education
National Medical Enterprise
National Semiconductor
National Service Ind.
NationsBank
Navistar International Corp.
NBD Bancorp Inc.
New York Times CI. A
Newell Co.
Newmont Mining
Niagara Mohawk Power
NICOR Inc.
NIKE Inc.
NorAm Energy Corp.
Nordstrom
Norfolk Southern Corp.
Northern States Power
Northern Telecom
Northrop Grumman Corp.
Norwest Corp.
Novell Inc.
Nucor Corp.
Nynex
Occidental Petroleum
Ogden Corp.
Ohio Edison
ONEOK Inc.
Oracle Systems
Oryx Energy Co.
Oshkosh B'Gosh
Outboard Marine
Owens-Corning Fiberglas
PACCAR Inc.
Pacific Enterprises
Pacific Gas & Electric
Pacific Telesis
PacifiCorp
Pall Corp.
Panhandle Eastern
Parker-Hannifin
PECO Energy Co.
Penney (J.C.)
Pennzoil Co.
Peoples Energy
Pep Boys
PepsiCo Inc.
Perkin-Elmer
Pet Inc.
Pfizer, Inc.
Phelps Dodge
Philip Morris
Phillips Petroleum
Pioneer Hi-Bred Int'l
Pitney-Bowes
Pittston Services Group
Placer Dome Inc.
PNC Bank Corp.
Polaroid Corp.
Potlatch Corp.
PPG Industries
Praxair, Inc.
Premark International
Price/Costco Inc.
Procter & Gamble
Promus Inc.
Providian Corp.
Public Serv. Enterprise Inc.
Pulte Corp.
Quaker Oats
Ralston-Ralston Purina Gp
Raychem Corp.
Raytheon Co.
Reebok International
Reynolds Metals
Rite Aid
Roadway Services
Rockwell International
Rohm & Haas
Rollins Environmental
Rowan Cos.
Royal Dutch Petroleum
Rubbermaid Inc.
Russell Corp.
Ryan's Family Steak House
Ryder System
SAFECO Corp.
Safety-Kleen
Salomon Inc.
Santa Fe Energy Resources
Santa Fe Pacific Gold Corp.
Santa Fe Pacific Corp.
Sara Lee Corp.
SBC Communications Inc.
SCEcorp.
Schering-Plough
Schlumberger Ltd.
Scientific-Atlanta
Scott Paper
Seagram Co. Ltd.
Sears, Roebuck & Co.
Service Corp. International
Shared Medical Systems
Shawmut National
Sherwin-Williams
Shoney's Inc.
Sigma-Aldrich
Skyline Corp.
Snap-On Tools
Sonat Inc.
Southern Co.
Southwest Airlines
Springs Industries Inc.
Sprint Corp.
SPX Corp.
St. Jude Medical
St. Paul Cos.
Stanley Works
Stone Container
Stride Rite
Sun Co., Inc.
Sun Microsystems
SunTrust Banks
Supervalu Inc.
Sysco Corp.
Tandem Computers Inc.
Tandy Corp.
Tektronix Inc.
Teledyne Inc.
Tele-Communications
Temple-Inland
Tenneco Inc.
Texaco Inc.
Texas Instruments
Texas Utilities
Textron Inc.
Thomas & Betts
Time Warner Inc.
Times Mirror
Timken Co.
TJX Companies Inc.
Torchmark Corp.
Toys R Us
Transamerica Corp.
Transco Energy
Travelers Inc.
Tribune Co.
Trinova Corp.
TRW Inc.
Tyco International
Unicom Corp.
Unilever N.V.
Union Camp
Union Carbide
Union Electric Co.
Union Pacific
Unisys Corp.
United Healthcare Corp.
United Technologies
Unocal Corp.
UNUM Corp.
Upjohn Co.
US West Inc.
USAir Group
USF&G Corp.
USLIFE Corp.
UST Inc.
USX-Marathon Group
USX-U.S. Steel Group
U.S. Bancorp
U.S. Healthcare Inc.
U.S. Surgical
Varity Corp.
V.F. Corp.
Viacom Inc.
Wachovia Corp.
Wal-Mart Stores
Walgreen Co.
Walt Disney Co.
Warner-Lambert
WMX Technologies
Wells Fargo & Co.
Wendy's International
Western Atlas
Westinghouse Electric
Westvaco Corp.
Weyerhaeuser Corp.
Whirlpool Corp.
Whitman Corp.
Williams Cos.
Winn-Dixie
Woolworth Corp.
Worthington Ind.
Wrigley (Wm) Jr.
Xerox Corp.
Yellow Corp.
Zenith Electronics
Zurn Industries
