(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS FUND
VARIABLE INSURANCE PRODUCTS FUND II
VARIABLE INSURANCE PRODUCTS FUND III
MONEY MARKET PORTFOLIO
INVESTMENT GRADE BOND PORTFOLIO
HIGH INCOME PORTFOLIO
ASSET MANAGER PORTFOLIO
BALANCED PORTFOLIO
ASSET MANAGER: GROWTH PORTFOLIO
EQUITY-INCOME PORTFOLIO
GROWTH & INCOME PORTFOLIO
INDEX 500 PORTFOLIO
GROWTH OPPORTUNITIES PORTFOLIO
CONTRAFUND PORTFOLIO
GROWTH PORTFOLIO
OVERSEAS PORTFOLIO
SEMIANNUAL REPORT
JUNE 30, 1998
CONTENTS
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MARKET ENVIRONMENT 4 A REVIEW OF WHAT HAPPENED IN WORLD MARKETS
DURING THE PAST SIX MONTHS.
MONEY MARKET PORTFOLIO 5 PERFORMANCE
6 FUND TALK: THE MANAGER'S OVERVIEW
7 INVESTMENTS
10 FINANCIAL STATEMENTS
INVESTMENT GRADE BOND PORTFOLIO 12 PERFORMANCE AND INVESTMENT SUMMARY
13 FUND TALK: THE MANAGER'S OVERVIEW
14 INVESTMENTS
19 FINANCIAL STATEMENTS
HIGH INCOME PORTFOLIO 21 PERFORMANCE AND INVESTMENT SUMMARY
23 FUND TALK: THE MANAGER'S OVERVIEW
24 INVESTMENTS
33 FINANCIAL STATEMENTS
ASSET MANAGER PORTFOLIO 36 PERFORMANCE AND INVESTMENT SUMMARY
38 FUND TALK: THE MANAGERS' OVERVIEW
39 INVESTMENTS
52 FINANCIAL STATEMENTS
BALANCED PORTFOLIO 55 PERFORMANCE AND INVESTMENT SUMMARY
57 FUND TALK: THE MANAGERS' OVERVIEW
58 INVESTMENTS
69 FINANCIAL STATEMENTS
ASSET MANAGER: GROWTH PORTFOLIO 72 PERFORMANCE AND INVESTMENT SUMMARY
74 FUND TALK: THE MANAGERS' OVERVIEW
75 INVESTMENTS
88 FINANCIAL STATEMENTS
EQUITY-INCOME PORTFOLIO 91 PERFORMANCE AND INVESTMENT SUMMARY
93 FUND TALK: THE MANAGER'S OVERVIEW
94 INVESTMENTS
100 FINANCIAL STATEMENTS
GROWTH & INCOME PORTFOLIO 103 PERFORMANCE AND INVESTMENT SUMMARY
105 FUND TALK: THE MANAGER'S OVERVIEW
106 INVESTMENTS
108 FINANCIAL STATEMENTS
INDEX 500 PORTFOLIO 111 PERFORMANCE AND INVESTMENT SUMMARY
112 FUND TALK: THE MANAGER'S OVERVIEW
113 INVESTMENTS
120 FINANCIAL STATEMENTS
GROWTH OPPORTUNITIES PORTFOLIO 122 PERFORMANCE AND INVESTMENT SUMMARY
124 FUND TALK: THE MANAGER'S OVERVIEW
125 INVESTMENTS
129 FINANCIAL STATEMENTS
CONTRAFUND PORTFOLIO 132 PERFORMANCE AND INVESTMENT SUMMARY
134 FUND TALK: THE MANAGER'S OVERVIEW
135 INVESTMENTS
141 FINANCIAL STATEMENTS
GROWTH PORTFOLIO 144 PERFORMANCE AND INVESTMENT SUMMARY
146 FUND TALK: THE MANAGER'S OVERVIEW
147 INVESTMENTS
150 FINANCIAL STATEMENTS
OVERSEAS PORTFOLIO 153 PERFORMANCE AND INVESTMENT SUMMARY
155 FUND TALK: THE MANAGER'S OVERVIEW
156 INVESTMENTS
161 FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS 164 NOTES TO THE FINANCIAL STATEMENTS
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Each Portfolio, except Money Market, Investment Grade Bond, and Index
500, have two classes of shares. Throughout this report and the
financial statements, one class is referred to as the "initial class"
and the other class is referred to as the "Service Class." The Service
Class shares include an asset based distribution fee (12b-1 fee), and
the offering of Service Class shares took place November 3, 1997, at
which time the 12b-1 fee was imposed. Please note, there are two
Performance and Investment Summary pages for each Portfolio that offer
"initial class" shares and the Service Class shares, and the
performance may be different.
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE
SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE
FUNDS. THIS REPORT IS NOT
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUNDS
UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC,
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
NEITHER THE FUNDS NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
MARKET ENVIRONMENT
With the exception of Asia and a number of emerging market economies,
most stock and bond markets around the world performed well during the
past six months. Despite an environment of ongoing financial and
political difficulties in Asian and emerging markets, the largest
blue-chip companies of Europe and the U.S. continued to post strong
performance. Throughout the period, investors sought the relative
stability and liquidity of more defensive large-cap stocks and highly
rated bond investments of developed countries, hoping these
investments would maintain steady earnings and be easier to sell in a
possible economic slowdown.
U.S. STOCK MARKETS
The U.S. stock market continued to perform well during the first six
months of 1998. The strong showing by the Standard & Poor's 500 Index,
however, was produced by a narrow contingent of large companies. In
fact, most of the Standard & Poor's 17.71% return for the six-month
period that ended June 30, 1998, came from these large-capitalization
stocks. The "narrow" market - one where a small number of stocks
perform well, and others are flat or produce losses - was further
demonstrated by the fact that 60% of all the companies on the New York
Stock Exchange declined during this period. During the first quarter
of 1998, a stable U.S. economy and a belief that the worst in Asia
might be over helped the stock market post strong gains. The S&P 500
index turned in a solid return of 13.95% through the end of March. The
S&P 500 and other market indexes continued to rally through May,
before falling sharply in mid-June amid renewed fears that Asia's
economic crisis would inhibit the growth in earnings of American
companies. In subsequent trading days, however, investors continued to
favor large-cap stocks, boosting the returns of the S&P 500 index
higher. During the second quarter of 1998, the S&P 500 index returned
3.30%, compared with a decline of 2.14% for the Standard & Poor's
MidCap 400 Index. Investors in small-cap stocks experienced a weak
second quarter as the Russell 2000 - a measure of small company stock
performance - lost 4.66%.
The pattern of a narrow market also was displayed in certain industry
groups. Pharmaceutical stocks performed well, helped by healthy
pipelines of new products, the ability to bring products to market
more rapidly and relaxed regulations that permitted more aggressive
advertising. Stable economic growth, coupled with nonexistent
inflation, buoyed the financial sector. Banks and brokerage houses
sustained impressive earnings growth; other financial services firms
benefited from merger and acquisition activity, exemplified by the
recently announced "megamerger" of Travelers and Citicorp.
While many technology stocks turned in very strong results, the sector
also experienced some mixed results over the past six months, due
primarily to the negative impact of the Asian crisis and the effect of
a strong dollar on foreign sales. Energy stocks also experienced weak
results, with the price of crude oil dipping below $12 dollars a
barrel near the end of June.
FOREIGN STOCK MARKETS
Overseas, blue-chip investments also performed well. While the Morgan
Stanley Capital International (MSCI) EAFE Index, which measures the
performance of Europe, Australasia, and the Far East, posted a solid
return of 16.05% for the six-month period, investors in developed
markets fared much better than those investing in troubled emerging
markets. The performance of the MSCI Pacific Index, however, lost
5.87% during the same period, emphasizing the negative impact Japan
and Hong Kong had on the MSCI EAFE index. Most economies in Europe
continued to thrive amidst an environment of relatively benign
inflation and reduced interest rates as many countries prepared for
the advent of the European Monetary Union in January 1999. Many
European companies embraced U.S.-style efficiencies through
restructuring and robust merger and acquisition activity. Over the
past six months, the MSCI Europe Index returned an impressive 26.66%.
Among the strongest European economies were Portugal, Spain, Italy and
the United Kingdom.
While the Japanese market showed signs of strength toward the end of
the period, Japanese stocks continued to suffer from eroding
confidence in the economy, bankruptcies and a depreciating currency.
The TOPIX Index - a measure of the Japanese market - was down 1.46%
over the six-month period. As economic and currency turmoil continued
in Asia, emerging markets also suffered during the period. The MSCI
Far East ex-Japan Free Index dropped 25.79% and the MSCI Emerging
Markets Free Index - a market capitalization weighted index of over
850 stocks traded in 22 world markets - was down 18.87% for the first
six months of 1998.
U.S. BOND MARKETS
Bond prices continued to move higher thanks to low interest rates and
a continued lack of inflationary pressure. The Lehman Brothers
Aggregate Bond Index - a broad gauge of the U.S. taxable bond market -
returned 3.93% during this six-month period. Against a backdrop of
continued economic woes in Asia and fears that U.S. corporate profits
would slow, investors from around the globe moved assets from stocks
and riskier bonds into highly rated corporate bonds and U.S.
Treasuries. As a result, bond yields, which move in the opposite
direction of bond prices, fell to their lowest levels in decades. The
yield on the benchmark 30-year bond fell to 5.62% from 5.93% during
the period. Mortgage-backed bonds experienced some weakness toward the
end of the period amid record mortgage refinancings.
FOREIGN BOND MARKETS
While U.S. based bonds topped most foreign bonds on the continued
strength of the U.S. dollar and benign inflation, the Salomon Brothers
World Government Bond Index - a measure of government bond market
performance in developed nations - returned 2.79% during the period.
Similar to foreign equities, however, it paid to be in the safer bond
sectors of developed countries and highly rated bonds. In comparison
to the World Government Bond Index, the J.P. Morgan Emerging Markets
Bond Index lost 0.25% during the first six months of 1998. Continued
turbulence in Japan as it struggled to initiate economic reforms
trickled into emerging markets and resulted in mixed results during
the period.
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO
PERFORMANCE
To measure a money market fund's performance, you can look at either
total return or yield. Total return reflects the change in value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). Yield measures the income paid by a fund. Since
a money market fund tries to maintain a $1 share price, yield is an
important measure of performance.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JUNE 30, 1998 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
VIP: MONEY MARKET 5.57% 5.07% 5.80%
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and
show you what would have happened if the fund had achieved that return
by performing at a constant rate each year.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
If Fidelity had not reimbursed certain fund expenses, the past five
and 10 year total returns would have been lower. Yield will vary.
YIELD
ROW: 1, COL: 1, VALUE: 5.48
ROW: 1, COL: 2, VALUE: 2.39
ROW: 2, COL: 1, VALUE: 5.319999999999999
ROW: 2, COL: 2, VALUE: 2.49
ROW: 3, COL: 1, VALUE: 5.6
ROW: 3, COL: 2, VALUE: 2.65
ROW: 4, COL: 1, VALUE: 5.38
ROW: 4, COL: 2, VALUE: 2.78
ROW: 5, COL: 1, VALUE: 5.25
ROW: 5, COL: 2, VALUE: 2.78
MONEY MARKET
MMDA
6% -
5% -
4% -
3% -
2% -
1% -
0%
7/1/98 4/1/98 12/31/97 10/1/97 7/2/97
VIP: MONEY MARKET 5.42% 5.38% 5.56% 5.40% 5.37%
MMDA 2.51% 2.53% 2.60% 2.65% 2.65%
YIELD refers to the income paid by the fund over a given period.
Yields for money market funds are usually for seven-day periods,
expressed as annual percentage rates. A yield that assumes income
earned is reinvested or compounded is called an effective yield. The
chart above shows the fund's current seven-day yield at quarterly
intervals over the past year. You can compare these yields to the bank
money market deposit account (MMDA) average. The MMDA average is
supplied by BANK RATE MONITOR.TM
COMPARING PERFORMANCE
There are some important differences between a
bank money market deposit account (MMDA) and
a money market fund. First, the U.S. government
neither insures nor guarantees a money market fund.
In fact, there is no assurance that a money fund will
maintain a $1 share price. Second, a money market
fund returns to its shareholders income earned by
the fund's investments after expenses. This is in
contrast to banks, which set their MMDA rates
periodically based on current interest rates,
competitors' rates, and internal criteria.
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
Robert Duby, Portfolio Manager of Money Market Portfolio
Q. WHAT WAS THE INVESTMENT ENVIRONMENT LIKE DURING THE PAST YEAR, BOB?
A. The Federal Reserve Board's monetary policy has remained unchanged
over the past year, with the federal funds rate - the interest rate
banks charge each other for overnight loans - at 5.50%. Overall,
however, market rates were much more volatile than this steady fed
funds rate would indicate, as market sentiment fluctuated. At times
when the economy seemed especially strong and inflation appeared to be
around the corner, market participants expected an immediate
interest-rate increase by the Fed, a move that would have attempted to
slow the economy and head off inflation. At other times, many
participants expected the Fed to lower interest rates to
counterbalance the anticipated economic slowdown resulting from
problems in Asia. Indeed, minutes from the Fed's Open Market Committee
meetings indicate that the Fed's sentiment see-sawed back and forth
several times. The Fed was biased toward raising rates until its
meeting in December 1997, then maintained a neutral posture until the
end of March 1998, when it again indicated an inclination to raise
rates.
Q. WHAT WAS THE ECONOMIC BACKDROP LIKE DURING THE PERIOD?
A. Economic data continued to exceed most expectations. For example,
first-quarter 1998 real GDP - gross domestic product adjusted for
inflation - grew at a surprisingly strong rate of 5.4%. Growth at this
rate usually sparks inflationary pressures. Nevertheless, inflation
remained basically non-existent even though unemployment reached low
levels that historically have led to inflation. In his public
testimony, Fed Chairman Alan Greenspan continued to remain cautious,
indicating a willingness to wait until there is a clearer picture of
what the effects of the Asian crisis will be on the U.S. economy. He
stated in his Congressional testimony on June 10 that the economy was
still enjoying a "virtuous cycle," with growth remaining strong and
inflation dormant. In my view, the economic backdrop can't get much
better. The dampening effects of the Asian crisis to date have been
minimal, apparently offset by strong demand by consumers and producers
in the U.S. economy.
Q. GIVEN THIS VOLATILE BACKDROP, WHAT KIND OF STRATEGY DID YOU PURSUE?
A. The strategy I pursued was very similar to what I described six
months ago. The fund's average maturity fluctuated between 36 days and
70 days over the past six months, and tended to be longer than that of
its peers. That's because I felt the market was factoring more
aggressive Fed interest-rate increases than I anticipated. Overall,
the fund's maturity generally lengthened when the market was weak and
shortened when the market improved.
Q. WHAT IS YOUR OUTLOOK?
A. At this point, the key going forward will be the crisis in Asia and
the spillover effects it has on the rest of the world. This is the
wild card. The U.S. economy is expected to slow considerably during
the third quarter of 1998 from its rapid pace during the first half.
We've begun to see signs that most of the good news on inflation may
be behind us. However, with the strength in employment and the
generally strong, upbeat feeling of the general public evidenced by
strong consumer confidence numbers and positive readings from the
manufacturing sector, the fund will be managed very cautiously.
Continued strong economic growth will at some point lead the Federal
Reserve to raise rates, but a move is not expected in the immediate
future. I'll aim to position the fund accordingly.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED
ON MARKET AND OTHER CONDITIONS.
FUND FACTS
GOAL: income and share-price stability by
investing in high-quality, short-term investments
START DATE: April 1, 1982
SIZE: as of June 30, 1998, more than $1.2 billion
MANAGER: Robert Duby, since 1997; joined Fidelity
in 1982
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO
INVESTMENTS JUNE 30, 1998 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
CERTIFICATES OF DEPOSIT - 27.6%
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE
DATE TIME OF PURCHASE AMOUNT (NOTE 1)
CHICAGO BRANCH, YANKEE DOLLAR, FOREIGN BANKS - 2.7%
ABN-AMRO Bank NV
2/2/99 5.54% $ 5,000,000 $ 4,998,840
Bank of Montreal, Canada
7/8/98 5.57 10,000,000 10,000,000
7/20/98 5.57 5,000,000 5,000,000
8/6/98 5.58 10,000,000 10,000,000
10/5/98 5.62 5,000,000 4,999,164
34,998,004
NEW YORK BRANCH, YANKEE DOLLAR, FOREIGN BANKS - 18.8%
Bank of Nova Scotia
7/21/98 5.97 1,000,000 999,915
8/31/98 5.97 5,000,000 4,999,481
9/16/98 5.60 14,000,000 14,002,206
10/1/98 5.63 3,000,000 2,999,832
10/6/98 5.60 1,000,000 1,000,190
2/25/99 5.76 10,000,000 9,983,918
Barclays Bank, PLC
10/22/98 5.62 5,000,000 5,001,155
Bayerische Hypotheken-und Wechsel
7/27/98 5.56 10,000,000 10,000,000
Canadian Imperial Bank of Commerce
8/10/98 5.59 10,000,000 10,000,306
8/28/98 5.97 20,000,000 19,998,177
3/2/99 5.70 5,000,000 4,997,918
Credit Agricole Indosuez
10/19/98 5.97 5,000,000 4,998,992
2/26/99 5.70 5,000,000 4,998,740
Credit Communale de Belgique
12/21/98 5.62 10,000,000 10,000,000
Deutsche Bank, AG
8/11/98 5.90 5,000,000 4,999,731
10/20/98 5.63 8,000,000 8,000,627
National Westminster Bank, PLC
7/22/98 5.89 10,000,000 9,999,700
2/26/99 5.70 5,000,000 4,998,740
Norddeutsche Landesbank Girozentrale
10/21/98 5.97 5,000,000 4,999,230
6/7/99 5.76 25,000,000 24,984,343
Rabobank Nederland, Coop. Central
2/2/99 5.54 5,000,000 4,998,840
6/1/99 5.75 5,000,000 4,996,922
Royal Bank of Canada
2/10/99 5.60 5,000,000 4,997,939
6/11/99 5.80 10,000,000 9,993,664
Societe Generale, France
8/4/98 5.53 5,000,000 5,000,000
8/10/98 5.60 5,000,000 4,999,961
8/24/98 5.55 10,000,000 10,000,000
10/9/98 5.68 4,000,000 3,999,015
11/18/98 5.63 5,000,000 5,000,954
Swiss Bank Corp.
3/19/99 5.70 10,000,000 9,995,202
3/24/99 5.75 5,000,000 4,996,445
6/3/99 5.75 10,000,000 9,993,808
240,935,951
LONDON BRANCH, EURODOLLAR, FOREIGN BANKS - 6.1%
Abbey National Treasury Services, PLC
9/28/98 5.60 5,000,000 5,000,000
10/6/98 5.61 10,000,000 10,000,000
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE
DATE TIME OF PURCHASE AMOUNT (NOTE 1)
Australia & New Zealand Banking Group
9/30/98 5.63% $ 5,000,000 $ 5,000,192
Bank of Scotland Treasury Services
8/24/98 5.58 4,000,000 4,000,059
Barclays Bank, PLC
10/5/98 5.63 10,000,000 10,000,521
10/28/98 5.65 5,000,000 4,999,418
Bayerische Vereinsbank A.G.
9/14/98 5.60 15,000,000 15,000,426
Rabobank Nederland, Coop. Central
10/5/98 5.60 20,000,000 20,000,000
Westdeutsche Landesbank Girozentrale
7/6/98 5.53 5,000,000 5,000,000
79,000,616
TOTAL CERTIFICATES OF DEPOSIT 354,934,571
COMMERCIAL PAPER - 51.0%
American General Finance Corp.
7/28/98 5.57 5,000,000 4,979,338
Aspen Funding Corp.
7/8/98 5.58 5,000,000 4,994,604
8/24/98 5.60 5,000,000 4,958,413
Asset Securitization Coop. Corp.
9/3/98 5.61 8,000,000 7,921,067
Associates Corp. of North America
7/14/98 5.55 5,000,000 4,990,033
7/23/98 5.58 4,000,000 3,986,507
9/3/98 5.60 5,000,000 4,950,844
9/22/98 5.60 5,000,000 4,936,597
Atlantic Richfield Co.
8/31/98 5.60 10,000,000 9,906,128
9/14/98 5.62 9,000,000 8,896,125
AVCO Financial Services, Inc.
8/12/98 5.61 40,000,000 39,742,400
8/26/98 5.60 10,000,000 9,913,822
Bear Stearns Cos., Inc.
7/28/98 5.60 5,000,000 4,979,263
Beneficial Corp.
7/15/98 5.60 5,000,000 4,989,306
8/31/98 5.61 7,000,000 6,934,408
BMW US Capital Corp.
8/5/98 5.60 6,000,000 5,967,742
Caisse des Depots et Consigns
7/1/98 6.48 5,000,000 5,000,000
Citibank Credit Card Master Trust I (Dakota Certificate Program)
7/13/98 5.56 10,000,000 9,981,567
7/14/98 5.56 5,000,000 4,990,015
7/23/98 5.59 5,000,000 4,983,103
7/27/98 5.60 10,000,000 9,959,808
7/28/98 5.61 5,000,000 4,979,075
Commercial Credit Group, Inc.
8/10/98 5.58 10,000,000 9,938,667
Cregem North America, Inc.
11/17/98 5.66 10,000,000 9,787,253
Daimler-Benz North America Corp.
8/24/98 5.58 25,000,000 24,793,750
Den Danske Corp., Inc.
7/13/98 5.56 20,000,000 19,963,133
8/3/98 5.59 20,000,000 19,898,983
COMMERCIAL PAPER - CONTINUED
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE
DATE TIME OF PURCHASE AMOUNT (NOTE 1)
Diageo Capital, PLC
9/28/98 5.60% $ 5,000,000 $ 4,931,767
9/30/98 5.60 5,000,000 4,930,486
Enterprise Funding Corp.
8/6/98 5.61 8,054,000 8,009,139
8/31/98 5.61 3,034,000 3,005,468
Ford Motor Credit Co.
7/8/98 5.57 5,000,000 4,994,624
7/23/98 5.58 10,000,000 9,966,267
8/19/98 5.58 30,000,000 29,775,417
General Electric Capital Corp.
8/10/98 5.54 40,000,000 39,760,444
9/10/98 5.61 5,000,000 4,945,665
10/8/98 5.63 15,000,000 14,772,713
10/28/98 5.62 5,000,000 4,908,932
General Electric Co.
9/24/98 5.60 5,000,000 4,934,715
General Motors Acceptance Corp.
8/17/98 5.59 10,000,000 9,927,803
Goldman Sachs Group, L.P.
7/1/98 6.25 10,000,000 10,000,000
8/27/98 5.60 5,000,000 4,956,181
Kitty Hawk Funding Corp.
7/20/98 5.62 5,000,000 4,985,222
7/27/98 5.63 10,125,000 10,084,050
8/4/98 5.68 5,000,000 4,973,319
8/17/98 5.59 8,629,000 8,566,588
9/14/98 5.61 5,000,000 4,942,396
Kredietbank, NA Finance Corp.
8/3/98 5.59 5,000,000 4,974,517
Merrill Lynch & Co., Inc.
7/2/98 6.00 5,000,000 4,999,167
10/14/98 5.65 14,000,000 13,774,600
Monsanto Co.
9/29/98 5.60 6,500,000 6,410,625
Morgan Stanley, Dean Witter, Discover & Co.
8/18/98 5.60 5,000,000 4,963,133
Nationwide Building Society
10/26/98 5.61 15,000,000 14,732,363
New Center Asset Trust
7/27/98 5.60 10,000,000 9,959,989
9/21/98 5.61 5,000,000 4,937,019
9/22/98 5.62 10,000,000 9,872,272
Norfolk Southern Corp.
7/1/98 5.75 2,000,000 2,000,000
7/14/98 5.75 4,800,000 4,790,085
7/15/98 5.75 3,000,000 2,993,327
Preferred Receivables Funding Corp.
7/8/98 5.55 5,000,000 4,994,624
7/14/98 5.56 5,000,000 4,990,015
7/15/98 5.61 5,000,000 4,989,150
7/16/98 5.56 5,260,000 5,247,880
7/16/98 5.57 10,000,000 9,976,958
8/6/98 5.59 14,500,000 14,419,525
8/20/98 5.60 13,445,000 13,341,548
9/8/98 5.60 5,250,000 5,194,455
Swiss Bank Corp.
8/25/98 5.59 10,000,000 9,915,514
Textron, Inc.
7/27/98 5.76 2,000,000 1,991,738
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE
DATE TIME OF PURCHASE AMOUNT (NOTE 1)
Three Rivers Funding Corp.
7/7/98 5.56% $ 5,000,000 $ 4,995,392
7/21/98 5.60 4,000,000 3,987,622
Transamerica Finance Corp.
7/29/98 5.59 10,000,000 9,957,067
Triple A One Funding Corp.
7/7/98 5.58 20,000,000 19,981,500
7/15/98 5.60 5,779,000 5,766,482
TOTAL COMMERCIAL PAPER 654,849,714
FEDERAL AGENCIES - 2.3%
FREDDIE MAC - DISCOUNT NOTES - 2.3%
9/18/98 5.50 30,000,000 29,642,525
BANK NOTES - 5.1%
First Bank NA - Minnesota
7/15/98 5.61 (a) 5,000,000 4,999,851
First Union National Bank of North Carolina
7/1/98 5.58 (a) 5,000,000 4,999,479
Key Bank, National Association
7/1/98 5.59 (a) 3,000,000 2,999,131
7/23/98 5.61 (a) 2,000,000 1,999,638
7/24/98 5.60 (a) 4,000,000 3,999,853
7/28/98 5.61 (a) 5,000,000 4,999,459
Morgan Guaranty Trust Co., NY
8/31/98 5.85 5,000,000 5,000,387
National City Bank - Columbus
7/6/98 5.61 (a) 5,000,000 4,998,240
PNC Bank, NA
7/16/98 5.64 (a) 8,000,000 7,997,451
SouthTrust Bank, Alabama
7/13/98 5.62 (a) 2,000,000 1,999,770
US Bank, NA
7/15/98 5.60 (a) 22,000,000 21,980,050
TOTAL BANK NOTES 65,973,309
MASTER NOTES (A) - 2.8%
Goldman Sachs Group, L.P. (The) (c)
9/13/98 5.69 20,000,000 20,000,000
J.P. Morgan Securities, Inc.
7/8/98 5.63 16,000,000 16,000,000
TOTAL MASTER NOTES 36,000,000
MEDIUM-TERM NOTES (A) - 1.7%
Beneficial Corp.
7/11/98 5.61 2,000,000 1,999,944
Merrill Lynch & Co., Inc.
7/1/98 5.82 4,000,000 3,999,897
9/4/98 5.64 5,000,000 4,999,092
Morgan Stanley, Dean Witter, Discover & Co.
7/1/98 5.67 5,000,000 5,000,000
Norwest Corp.
7/22/98 5.71 6,000,000 6,000,000
TOTAL MEDIUM-TERM NOTES 21,998,933
SHORT-TERM NOTES (A) - 7.1%
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE
DATE TIME OF PURCHASE AMOUNT (NOTE 1)
Capital One Funding Corp. (1994-B)
7/8/98 5.63% $ 3,101,000 $ 3,101,000
Capital One Funding Corp. (1995-E)
7/8/98 5.63 5,551,000 5,551,000
Capital One Funding Corp. (1996-I)
7/8/98 5.63 4,400,000 4,400,000
Liquid Asset Backed Securities Trust (1996-1) (b)
7/15/98 5.64 5,000,000 5,000,000
Liquid Asset Backed Securities Trust (1996-2) (b)
7/1/98 5.63 7,000,000 7,000,000
Liquid Asset Backed Securities Trust (1997-5) (b)
7/17/98 5.63 10,000,000 10,000,000
New York Life Insurance Co.
9/23/98 5.69 5,000,000 5,000,000
SMM Trust (1997-P) (b)
7/16/98 5.66 4,000,000 4,000,000
SMM Trust (1997-X) (b)
7/13/98 5.66 10,000,000 10,000,000
SMM Trust (1998-I) (b)
7/28/98 5.66 3,000,000 3,000,000
Strategic Money Market Trust (1997-A) (b)
9/23/98 5.69 20,000,000 20,000,000
Strategic Money Market Trust (1998-B) (b)
7/6/98 5.66 11,000,000 11,000,000
Transamerica Life Insurance & Annuity Co.
7/8/98 5.70 3,000,000 3,000,000
TOTAL SHORT-TERM NOTES 91,052,000
TIME DEPOSITS - 2.0%
Canadian Imperial Bank of Commerce
7/1/98 6.25 25,000,000 25,000,000
REPURCHASE AGREEMENTS - 0.4%
MATURITY
AMOUNT
In a joint trading account
(U.S. Treasury Obligations)
dated 6/30/98 due 7/1/98
At 5.93% $ 5,112,843 5,112,000
TOTAL INVESTMENTS - 100% $ 1,284,563,052
Total Cost for Income Tax Purposes - $1,284,563,052
LEGEND
(a) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end. The due dates on these types of
securities reflects the next interest rate reset date or, when
applicable, the final maturity date.
(b) Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions
exempt from registration, normally to qualified institutional buyers.
At the period end, the value of these securities amounted to
$70,00,000 or 5.4% of net assets.
(c) Restricted securities - Investment in securities not registered
under the Securities Act of 1933 (see Note 2 of Notes to Financial
Statements).
Additional information on each holding is as follows:
ACQUISITION
SECURITY DATE COST
Goldman Sachs Group, L.P. (The)5.69%,9/13/98 3/10/98 $ 20,000,000
INCOME TAX INFORMATION
At December 31, 1997, the fund had a capital loss carryforward of
approximately $57,000 of which $29,000 and $28,000 will expire on
December 31, 2002 and 2005, respectively.
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 30, 1998 (UNAUDITED)
ASSETS
INVESTMENT IN SECURITIES, AT VALUE (INCLUDING REPURCHASE AGREEMENTS OF $5,112,000) -
SEE ACCOMPANYING SCHEDULE $ 1,284,563,052
RECEIVABLE FOR INVESTMENTS SOLD 301,000
RECEIVABLE FOR FUND SHARES SOLD 6,537,692
INTEREST RECEIVABLE 9,124,756
TOTAL ASSETS 1,300,526,500
LIABILITIES
PAYABLE TO CUSTODIAN BANK $ 70,143
PAYABLE FOR INVESTMENTS PURCHASED 4,934,715
PAYABLE FOR FUND SHARES REDEEMED 6,178,104
DISTRIBUTIONS PAYABLE 116,908
ACCRUED MANAGEMENT FEE 238,398
OTHER PAYABLES AND 130,812
ACCRUED EXPENSES
TOTAL LIABILITIES 11,669,080
NET ASSETS $ 1,288,857,420
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 1,288,920,365
ACCUMULATED NET REALIZED GAIN (LOSS) ON INVESTMENTS (62,945)
NET ASSETS, FOR 1,288,905,309 SHARES OUTSTANDING $ 1,288,857,420
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE ($1,288,857,420 (DIVIDED BY)
1,288,905,309 SHARES) $1.00
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INTEREST INCOME $ 33,826,229
EXPENSES
MANAGEMENT FEE $ 1,227,663
TRANSFER AGENT FEES 414,362
ACCOUNTING FEES AND EXPENSES 69,979
NON-INTERESTED TRUSTEES' COMPENSATION 5,706
CUSTODIAN FEES AND EXPENSES 11,564
REGISTRATION FEES 30
AUDIT 23,306
LEGAL 6,824
MISCELLANEOUS 26,059
TOTAL EXPENSES 1,785,493
NET INTEREST INCOME 32,040,736
NET REALIZED GAIN (LOSS) (4,195)
ON INVESTMENTS
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 32,036,541
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
OPERATIONS $ 32,040,736 $ 59,161,428
NET INTEREST INCOME
NET REALIZED GAIN (LOSS) (4,195) (30,044)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 32,036,541 59,131,384
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INTEREST INCOME (32,040,736) (59,161,428)
SHARE TRANSACTIONS AT NET ASSET VALUE OF $1.00 PER SHARE 1,308,514,800 1,984,694,072
PROCEEDS FROM SALES OF SHARES
REINVESTMENT OF DISTRIBUTIONS FROM NET INTEREST INCOME 32,024,807 59,126,220
COST OF SHARES REDEEMED (1,072,472,094) (2,149,151,239)
NET INCREASE (DECREASE) IN NET ASSETS AND SHARES RESULTING FROM SHARE TRANSACTIONS 268,067,513 (105,330,947)
TOTAL INCREASE (DECREASE) IN NET ASSETS 268,063,318 (105,360,991)
NET ASSETS
BEGINNING OF PERIOD 1,020,794,102 1,126,155,093
END OF PERIOD $ 1,288,857,420 $ 1,020,794,102
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1998
SELECTED PER-SHARE DATA (UNAUDITED) 1997 1996 1995 1994 1993
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
INCOME FROM INVESTMENT OPERATIONS .027 .053 .052 .057 .042 .032
NET INTEREST INCOME
LESS DISTRIBUTIONS
FROM NET INTEREST INCOME (.027) (.053) (.052) (.057) (.042) (.032)
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
TOTAL RETURN B, C 2.71% 5.51% 5.41% 5.87% 4.25% 3.23%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 1,288,857 $ 1,020,794 $ 1,126,155 $ 808,874 $ 748,606 $ 353,104
RATIO OF EXPENSES TO AVERAGE NET ASSETS .30% A .31% .30% .33% .27% .22% D
RATIO OF NET INTEREST INCOME TO AVERAGE NET ASSETS 5.41% A 5.32% 5.28% 5.72% 4.32% 3.16%
</TABLE>
A ANNUALIZED
B TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE
THE TOTAL RETURNS SHOWN. TOTAL RETURNS FOR PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD SHOWN.
D FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD
HAVE BEEN HIGHER.
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 LIFE OF
JUNE 30, 1998 YEAR YEARS FUND
VIP II: INVESTMENT GRADE BOND 10.21% 6.46% 8.27%
LB AGGREGATE BOND 10.54% 6.88% N/A
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare these figures to the Lehman Brothers Aggregate Bond
Index - a market value weighted performance benchmark for
investment-grade fixed-rate debt issues, including government,
corporate, asset-backed, and mortgage-backed securities, with
maturities of at least one year. This benchmark includes reinvested
dividends and capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of
how it will do tomorrow. Bond prices, for example,
generally move in the opposite direction of interest
rates. In turn, the share price, return and yield of a
fund that invests in bonds will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, December 5, 1988.
If Fidelity had not reimbursed certain fund expenses, the life of fund
total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
VIP II: Investment Grade LB Aggregate Bond
00155 LB001
1988/12/31 10000.00 10000.00
1989/01/31 10086.92 10144.00
1989/02/28 10109.25 10070.96
1989/03/31 10172.02 10114.27
1989/04/30 10285.31 10325.66
1989/05/31 10399.91 10597.22
1989/06/30 10600.00 10919.38
1989/07/31 10765.35 11151.96
1989/08/31 10679.56 10986.91
1989/09/30 10721.69 11042.94
1989/10/31 10887.69 11314.60
1989/11/30 10981.36 11422.09
1989/12/31 11026.21 11452.93
1990/01/31 11001.11 11316.64
1990/02/28 11063.52 11352.85
1990/03/31 11097.11 11360.80
1990/04/30 11101.82 11256.28
1990/05/31 11276.11 11589.47
1990/06/30 11364.07 11776.06
1990/07/31 11476.89 11938.57
1990/08/31 11475.79 11778.59
1990/09/30 11520.66 11876.35
1990/10/31 11521.38 12027.18
1990/11/30 11590.77 12285.77
1990/12/31 11711.43 12477.42
1991/01/31 11735.04 12632.14
1991/02/28 11853.10 12739.52
1991/03/31 12053.80 12827.42
1991/04/30 12230.89 12965.95
1991/05/31 12325.33 13041.16
1991/06/30 12348.94 13034.64
1991/07/31 12455.20 13215.82
1991/08/31 12714.93 13501.28
1991/09/30 12951.04 13775.36
1991/10/31 13092.71 13928.26
1991/11/30 13234.39 14056.40
1991/12/31 13629.42 14473.88
1992/01/31 13494.11 14277.03
1992/02/29 13567.97 14369.83
1992/03/31 13543.27 14289.36
1992/04/30 13642.04 14392.25
1992/05/31 13851.92 14664.26
1992/06/30 14012.41 14866.63
1992/07/31 14296.36 15169.91
1992/08/31 14382.78 15323.12
1992/09/30 14555.62 15505.47
1992/10/31 14370.44 15299.24
1992/11/30 14333.40 15302.30
1992/12/31 14536.36 15545.61
1993/01/31 14841.14 15844.09
1993/02/28 15093.07 16121.36
1993/03/31 15159.39 16189.07
1993/04/30 15252.23 16302.39
1993/05/31 15278.75 16323.58
1993/06/30 15570.53 16619.04
1993/07/31 15676.64 16713.77
1993/08/31 15955.15 17006.26
1993/09/30 16034.73 17052.18
1993/10/31 16114.31 17115.27
1993/11/30 16034.73 16969.79
1993/12/31 16129.93 17061.43
1994/01/31 16312.59 17291.76
1994/02/28 16045.19 16990.88
1994/03/31 15678.93 16571.21
1994/04/30 15538.06 16438.64
1994/05/31 15495.80 16436.99
1994/06/30 15453.53 16400.83
1994/07/31 15707.10 16727.21
1994/08/31 15721.19 16747.28
1994/09/30 15552.14 16501.09
1994/10/31 15566.23 16486.24
1994/11/30 15594.40 16449.97
1994/12/31 15523.97 16563.48
1995/01/31 15749.36 16891.44
1995/02/28 16053.30 17293.45
1995/03/31 16155.46 17398.94
1995/04/30 16374.37 17642.53
1995/05/31 17031.09 18325.29
1995/06/30 17162.44 18459.07
1995/07/31 17104.06 18418.46
1995/08/31 17308.38 18641.32
1995/09/30 17468.91 18822.14
1995/10/31 17702.41 19066.83
1995/11/30 17965.10 19352.83
1995/12/31 18213.20 19623.77
1996/01/31 18329.95 19753.29
1996/02/29 17995.20 19409.58
1996/03/31 17857.01 19273.71
1996/04/30 17749.53 19165.78
1996/05/31 17718.82 19127.45
1996/06/30 17933.78 19383.76
1996/07/31 17979.84 19436.09
1996/08/31 17964.49 19403.05
1996/09/30 18256.22 19740.67
1996/10/31 18655.43 20178.91
1996/11/30 18962.52 20523.97
1996/12/31 18793.62 20333.09
1997/01/31 18839.68 20396.13
1997/02/28 18864.60 20447.12
1997/03/31 18668.78 20220.15
1997/04/30 18946.20 20523.46
1997/05/31 19093.07 20718.43
1997/06/30 19321.53 20964.98
1997/07/31 19843.74 21531.03
1997/08/31 19664.23 21348.02
1997/09/30 19957.97 21663.97
1997/10/31 20219.07 21978.10
1997/11/30 20268.03 22079.20
1997/12/31 20496.49 22302.20
1998/01/31 20757.59 22587.67
1998/02/28 20743.06 22569.60
1998/03/31 20829.13 22646.33
1998/04/30 20932.42 22764.09
1998/05/31 21121.77 22980.35
1998/06/30 21293.92 23175.68
IMATRL PRASUN SHR__CHT 19980630 19980721 153646 R00000000000117
Let's say hypothetically that $10,000 was invested in Variable
Insurance Products Fund II: Investment Grade Bond Portfolio on
December 31, 1988, shortly after the fund started. By June 30, 1998,
the value of the investment would have grown to $21,294 - a 112.94%
increase on the initial investment. For comparison, look at how the
Lehman Brothers Aggregate Bond Index did over the same period. With
dividends and capital gains, if any, reinvested, the same $10,000
investment would have grown to $23,176 - a 131.76% increase.
INVESTMENT SUMMARY
QUALITY DIVERSIFICATION AS OF JUNE 30, 1998
(MOODY'S RATINGS) % OF FUND'S
INVESTMENTS
AAA 59.0
AA 3.3
A 6.9
BAA 19.7
BA 1.4
B 0.0
NOT RATED 0.0
TABLE EXCLUDES SHORT-TERM INVESTMENTS. WHERE MOODY'S RATINGS ARE NOT
AVAILABLE, WE HAVE USED S&P RATINGS.
AVERAGE YEARS TO MATURITY AS OF JUNE 30, 1998
YEARS 8.2
AVERAGE YEARS TO MATURITY IS BASED ON THE AVERAGE TIME UNTIL PRINCIPAL
PAYMENTS ARE EXPECTED FROM EACH OF THE FUND'S BONDS, WEIGHTED BY
DOLLAR AMOUNT.
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
FINANCE 13.8
UTILITIES 5.3
MEDIA & LEISURE 3.4
RETAIL & WHOLESALE 1.6
INDUSTRIAL MACHINERY & EQUIPMENT 1.5
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with Kevin Grant, Portfolio Manager of Investment Grade
Bond Portfolio
Q. HOW DID THE FUND PERFORM, KEVIN?
A. For the six- and 12-month periods that ended June 30, 1998, the
fund performed in line with the Lehman Brothers Aggregate Bond Index,
which returned 3.93% over the past six months and 10.54% over the past
12 months.
Q. WHAT WAS THE INVESTMENT ENVIRONMENT LIKE DURING THE SIX-MONTH
PERIOD?
A. The investment environment was quite good for bonds, as it was
heavily influenced by the secondary effects of the financial crisis in
Asia. The implosion of some economies in Asia caused a wave of
expectations of lower inflation. As a result, interest rates dropped
and the bond market had a strong rally. As you know, bond prices tend
to rise as interest rates fall. In addition, the yield difference
between long- and short-term maturities narrowed, with most Treasuries
yielding less than 5.5% on June 30.
Q. IN LIGHT OF THIS ENVIRONMENT, WHAT STRATEGIES HELPED CONTRIBUTE TO
PERFORMANCE?
A. My investments in mortgages helped the portfolio's performance. At
the beginning of January, I had de-emphasized mortgage securities,
which then represented about 25% of portfolio assets versus about a
30% weighting in the Lehman Brothers Aggregate Bond Index. I did so
because I had concerns about the risk of prepayments. Prepayments tend
to undermine the returns of higher-interest mortgage securities
because investors lose the income they produce as mortgages are
refinanced. When interest rates dropped abruptly in mid-January, the
bond market became more worried about prepayment risk, and the prices
of mortgage securities underperformed Treasuries in mid-January before
recovering later in the period. I took advantage of a market
over-reaction to increase the fund's emphasis on mortgages to about
34% of portfolio assets. Both the underweighting at the beginning of
January and the overweighting after prices cheapened in mid-January
helped the performance of the fund versus the Lehman Brothers index.
In hindsight, I wish I had owned fewer mortgages at the beginning of
January and bought more after mid-January, as that would have helped
performance even more. Also, throughout the six-month period, I
avoided premium mortgages because they have the highest risk of
prepayments. Premium mortgages are older securities that have risen in
price because they have higher interest rates than other mortgages.
They generate more income, but they are more vulnerable to prepayment
risk. At the close of the fiscal period, about 33% of portfolio assets
were invested in mortgage securities.
Q. WHAT HAS BEEN YOUR STRATEGY WITH CORPORATE BONDS, WHICH REPRESENTED
ABOUT 31% OF PORTFOLIO ASSETS ON JUNE 30?
A. Even though corporate bonds account for about 21% of the Lehman
index, I would say I had only a moderate overweighting in this sector.
I tended to own corporate bonds that were in the 3- to 4-year maturity
range, and I emphasized defensive bonds such as those of banks, which
tend to do well as interest rates decline. I avoided bonds from
cyclical industries, or industries that do well when economic growth
is increasing, and I particularly avoided bonds in industries
vulnerable to the Asian problems, such as energy, steel, paper and
timber products. I emphasized industries that are relatively protected
from the influence of Asia. These included media companies, such as
Time Warner, and consumer companies, such as Levi's. One bond that did
very well was TCI, the cable company that has announced a pending
merger with AT&T. Rounding out the portfolio, I had about 24% invested
in government securities, including 19% in Treasuries. In addition,
the portfolio had approximately 10% in cash equivalents. I don't
consider the cash position to be significant because short-term
securities offer almost as much yield as intermediate-term securities.
Q. WHAT IS YOUR OUTLOOK FOR THE BOND MARKET?
A. The prospects for the bond market appear good. Inflation and the
threat of rising interest rates hurt bonds, and my outlook is that
inflation won't be a problem and that interest rates may decline
further. In the corporate sector, the greatest risks are in the areas
that I have avoided - cyclicals and industries influenced by Asia.
Even though mortgage prepayments still are running high, I am not
overly concerned because these are precisely the times when
opportunities present themselves in the mortgage market.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED
ON MARKET AND OTHER CONDITIONS.
FUND FACTS
GOAL: seeks to provide a high rate of income consistent with
reasonable risk, by investing in a broad range of investment-grade,
fixed-income securities; in addition, the fund seeks to protect
capital
START DATE: December 5, 1988
SIZE: as of June 30, 1998, more than $434 million
MANAGER: Kevin Grant, since 1997; joined Fidelity in 1993
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
INVESTMENTS JUNE 30, 1998 (UNAUDITED)
SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENT IN SECURITIES
NONCONVERTIBLE BONDS - 31.4%
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
AEROSPACE & DEFENSE - 0.7%
DEFENSE ELECTRONICS - 0.7%
Raytheon Co.
6.45%, 8/15/04 Baa1 $ 3,000,000 $ 3,029,760
BASIC INDUSTRIES - 0.8%
PACKAGING & CONTAINERS - 0.8%
Owens Illinois, Inc.:
7.15%, 5/15/05 Ba1 1,200,000 1,205,026
7.35%, 5/15/08 Ba1 1,150,000 1,156,272
7.80%, 5/15/18 Ba1 1,400,000 1,432,644
3,793,942
CONSTRUCTION & REAL ESTATE - 0.4%
REAL ESTATE INVESTMENT TRUSTS - 0.4%
Centerpoint Properties Trust
6 3/4%, 4/1/05 Baa2 510,000 510,877
EOP Operating L.P.:
6 5/8%, 2/15/05 (c) Baa1 500,000 499,940
6 3/4%, 2/15/08 (c) Baa1 900,000 898,893
1,909,710
DURABLES - 0.4%
TEXTILES & APPAREL - 0.4%
Levi Strauss & Co.
7%, 11/1/06 (c) Baa2 2,000,000 2,022,500
ENERGY - 0.6%
OIL & GAS - 0.6%
Petroleum Geo-Services ASA
7 1/8%, 3/30/28 Baa3 1,600,000 1,619,264
USX-Marathon Group
6.85%, 3/1/08 Baa2 880,000 886,037
2,505,301
FINANCE - 13.8%
ASSET-BACKED SECURITIES - 3.1%
Capital Equipment Receivables
Trust 6.48%, 10/15/06 Baa2 880,000 880,185
Chevy Chase Auto Receivable
Trust 5.91%, 12/15/04 Aaa 760,000 758,936
Ford Credit Auto Owner Trust:
6.40%, 5/15/02 A1 960,000 968,621
6.20%, 12/15/02 Baa3 830,000 828,548
6.40%, 12/15/02 Baa3 480,000 479,722
Ford Credit Grantor Trust
5.90%, 10/15/00 Aaa 240,310 240,536
Green Tree Financial Corp.
6.10%, 4/15/27 Aaa 429,738 430,137
Key Auto Finance Trust
Class C 6.65%, 10/15/03 Baa3 320,000 320,550
Key Plastics, Inc.
10 1/4%, 3/15/07 A2 1,110,000 1,113,642
KeyCorp Auto Grantor Trust
5.80%, 7/15/00 A3 14,320 14,323
MBNA Master Credit Card Trust II
Class A 6.55%, 1/15/07 Aaa 3,000,000 3,100,260
PNC Student Loan Trust I
6.314%, 1/25/01 Aaa 3,100,000 3,122,010
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
Premier Auto Trust 6%, 5/6/00 Aaa $ 350,952 $ 351,278
Railcar Trust
7 3/4%, 6/1/04 Aaa 690,670 725,162
Sears Credit Account Master
Trust II 7%, 1/15/04 Aaa 1,000,000 1,012,810
Union Federal Savings Bank
Grantor Trust 8.20%, 1/10/01 Baa2 24,596 24,650
14,371,370
BANKS - 4.1%
ABN-AMRO Bank NV
6 5/8%, 10/31/01 Aa3 1,000,000 1,014,980
Banc One Corp.
6.70%, 3/24/00 Aa3 1,450,000 1,466,530
BanPonce Corp.:
5 3/4%, 3/1/99 A3 370,000 369,319
6.378%, 4/8/99 A3 430,000 430,697
Barclays Bank PLC yankee:
5 7/8%, 7/15/00 A1 2,400,000 2,396,712
5.95%, 7/15/01 A1 2,700,000 2,694,600
Capital One Bank:
6.42%, 11/12/99 Baa3 2,000,000 2,005,800
6 3/8%, 2/15/03 Baa3 1,130,000 1,128,927
First Maryland Bancorp
10 3/8%, 8/1/99 A3 500,000 522,470
Firstar Corp.
7.15%, 9/1/00 A3 640,000 641,107
Kansallis-Osake-Pankki
10%, 5/1/02 A3 260,000 293,147
KeyCorp 8.40%, 4/1/99 A2 310,000 315,481
MBNA Corp.:
6 7/8%, 11/15/02 Baa2 1,750,000 1,780,520
6.34%, 6/2/03 Baa2 350,000 350,105
NB Capital Trust IV
8 1/4%, 4/15/27 Aa3 1,990,000 2,222,532
Union Planters Corp.
6 3/4%, 11/1/05 Baa2 400,000 407,000
Union Planters National
Bank 6.81%, 8/20/01 A3 500,000 509,735
18,549,662
CREDIT & OTHER FINANCE - 4.4%
AT&T Capital Corp.:
6.41%, 8/13/99 Baa3 1,000,000 1,003,730
6.16%, 12/3/99 Baa3 500,000 500,545
Associates Corp. of North
America 6%, 4/15/03 Aa3 1,150,000 1,144,204
BCH Cayman Islands Ltd. yankee
7.70%, 7/15/06 A3 180,000 193,055
Bank of New York Co., Inc.
Capital I 7.97%, 12/31/26 A1 1,000,000 1,083,320
BankBoston Capital Trust II
7 3/4%, 12/15/26 A2 1,080,000 1,135,566
BanPonce Trust I
8.327%, 2/1/27 (c) A3 1,230,000 1,337,736
Chase Capital I
7.67%, 12/1/26 Aa3 2,020,000 2,120,636
Chrysler Financial Corp.
6 3/8%, 1/28/00 A2 1,240,000 1,248,122
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
FINANCE - CONTINUED
CREDIT & OTHER FINANCE - CONTINUED
Finova Capital Corp.
6.27%, 9/29/00 Baa1 $ 400,000 $ 401,132
First Security Capital I
8.41%, 12/15/26 A3 1,210,000 1,358,092
First Union Institutional Capital I
8.04%, 12/1/26 BBB 1,000,000 1,074,530
General Electric Capital Corp.
6.94%, 4/13/09 (b) Aaa 1,000,000 1,007,110
General Motors Acceptance Corp.
6.65%, 5/24/00 A2 2,650,000 2,683,099
JPM Capital Trust II
7.95%, 2/1/27 Aa3 1,820,000 1,967,311
KeyCorp Institutional Capital
Series A 7.826%, 12/1/26 A1 800,000 847,344
PNC Institutional Capital Trust
8.315%, 5/15/27 (c) A2 1,000,000 1,114,160
20,219,692
INSURANCE - 0.7%
Executive Risk Capital Trust
8 5/8%, 2/1/27 Baa3 1,750,000 1,897,490
Nationwide Mutual Insurance Co.
6 1/2%, 2/15/04 (c) A1 130,000 131,457
SunAmerica, Inc.
6.20%, 10/31/99 Baa1 1,000,000 1,001,970
3,030,917
SAVINGS & LOANS - 1.5%
Ahmanson (H.F.) & Co.
9 7/8%, 11/15/99 Baa2 3,000,000 3,145,350
Great West Financial Trust II
8.206%, 2/1/27 A3 2,500,000 2,730,700
Long Island Savings Bank
6.20%, 4/2/01 Baa3 750,000 750,930
6,626,980
TOTAL FINANCE 62,798,621
HOLDING COMPANIES - 0.4%
Norfolk Southern Corp.
7.05%, 5/1/37 Baa1 1,700,000 1,805,213
INDUSTRIAL MACHINERY & EQUIPMENT - 1.5%
INDUSTRIAL MACHINERY & EQUIPMENT - 0.6%
Tyco International Group SA
yankee 6 1/8%, 6/15/01 Baa1 2,500,000 2,502,050
POLLUTION CONTROL - 0.9%
WMX Technologies, Inc.:
6 1/4%, 4/1/99 Baa3 1,200,000 1,201,548
7.10%, 8/1/26 Baa3 3,000,000 3,121,800
4,323,348
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 6,825,398
MEDIA & LEISURE - 3.4%
BROADCASTING - 2.2%
Continental Cablevision, Inc.:
8.30%, 5/15/06 Baa3 110,000 122,133
9%, 9/1/08 Baa3 910,000 1,070,042
TCI Communications, Inc.:
7 3/8%, 2/15/00 Baa3 750,000 765,788
8 3/4%, 8/1/15 Baa3 3,000,000 3,611,760
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
Time Warner, Inc.:
7.95%, 2/1/00 Baa3 $ 1,170,000 $ 1,202,245
8.18%, 8/15/07 Baa3 2,000,000 2,228,580
6 7/8%, 6/15/18 Baa3 920,000 923,588
9,924,136
ENTERTAINMENT - 0.5%
Viacom, Inc.
7 3/4%, 6/1/05 Ba2 2,000,000 2,130,900
PUBLISHING - 0.7%
News America, Inc.:
6 5/8%, 1/9/08 Baa3 210,000 209,633
7 1/4%, 5/18/18 (c) Baa3 3,000,000 3,073,980
3,283,613
RESTAURANTS - 0.0%
Darden Restaurants, Inc.
6 3/8%, 2/1/06 Baa1 310,000 301,497
TOTAL MEDIA & LEISURE 15,640,146
NONDURABLES - 1.0%
FOODS - 0.3%
ConAgra, Inc.
7 1/8%, 10/1/26 Baa1 1,270,000 1,353,617
TOBACCO - 0.7%
Philip Morris Companies, Inc.
6.95%, 6/1/06 A2 3,000,000 3,107,580
TOTAL NONDURABLES 4,461,197
RETAIL & WHOLESALE - 1.6%
GENERAL MERCHANDISE STORES - 0.9%
Dayton Hudson Corp.
6.40%, 2/15/03 A3 500,000 505,450
Federated Department Stores, Inc.
8 1/2%, 6/15/03 Baa2 3,000,000 3,282,150
Sears, Roebuck & Co.
9.23%, 8/6/98 A2 450,000 451,170
4,238,770
GROCERY STORES - 0.7%
American Stores Co.
7 1/2%, 5/1/37 Baa2 1,400,000 1,536,612
Kroger Co. 6%, 7/1/00 Baa3 1,700,000 1,698,198
3,234,810
TOTAL RETAIL & WHOLESALE 7,473,580
TECHNOLOGY - 0.7%
COMPUTERS & OFFICE EQUIPMENT - 0.7%
Comdisco, Inc.
6 3/8%, 11/30/01 Baa1 3,200,000 3,213,568
TRANSPORTATION - 0.8%
AIR TRANSPORTATION - 0.1%
Delta Air Lines, Inc.
equipment trust certificate
8.54%, 1/2/07 Baa1 396,598 435,298
RAILROADS - 0.7%
Burlington Northern Santa Fe
Corp. 6.53%, 7/15/37 Baa2 3,000,000 3,066,600
TOTAL TRANSPORTATION 3,501,898
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
UTILITIES - 5.3%
CELLULAR - 0.7%
AirTouch Communications, Inc.
6.35%, 6/1/05 Baa2 $ 3,000,000 $ 3,013,440
360 Degrees Communications Co.
7 1/8%, 3/1/03 Ba1 245,000 254,121
3,267,561
ELECTRIC UTILITY - 2.2%
Avon Energy Partners Holdings:
7.05%, 12/11/07 (c) Baa2 3,000,000 3,073,110
6.46%, 3/4/08 (c) Baa2 1,500,000 1,506,645
British Columbia Hydro & Power
Authority yankee
12 1/2%, 1/15/14 Aa2 360,000 386,507
DR Investment yankee
7.10%, 5/15/02 (c) Baa1 1,500,000 1,537,313
Israel Electric Corp. Ltd.
7 3/4%, 12/15/27 (c) A3 2,400,000 2,473,680
Texas Utilities Co.
6 3/8%, 1/1/08 Baa3 990,000 979,110
9,956,365
GAS - 0.6%
Mitchell Energy & Development
Corp. 8%, 7/15/99 Baa3 1,730,000 1,759,998
Southwest Gas Corp.
9 3/4%, 6/15/02 Baa2 1,000,000 1,121,460
2,881,458
TELEPHONE SERVICES - 1.8%
Cable & Wireless
Communications PLC
6 3/8%, 3/6/03 Baa1 1,590,000 1,591,336
Teleport Communications Group,
Inc. 0%, 7/1/07 (f) Baa3 1,450,000 1,245,188
WorldCom, Inc.:
9 3/8%, 1/15/04 Baa2 1,743,000 1,830,708
7 3/4%, 4/1/07 Baa2 3,075,000 3,335,330
8,002,562
TOTAL UTILITIES 24,107,946
TOTAL NONCONVERTIBLE BONDS
(Cost $139,827,412) 143,088,780
U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS - 24.3%
U.S. TREASURY OBLIGATIONS - 19.4%
6 3/8%, 9/30/01 Aaa 14,400,000 14,746,464
5 7/8%, 11/30/01 Aaa 37,500,000 37,881,000
7%, 7/15/06 Aaa 17,200,000 18,782,916
13 7/8%, 5/15/11 (callable) Aaa 30,000 45,525
8 7/8%, 8/15/17 Aaa 995,000 1,356,464
7 5/8%, 2/15/25 Aaa 12,700,000 15,990,062
88,802,431
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
U.S. GOVERNMENT AGENCY OBLIGATIONS - 4.9%
Fannie Mae:
6.15%, 1/13/00 Aaa $ 525,000 $ 528,528
6.74%, 5/13/04 Aaa 375,000 392,284
6.72%, 8/1/05 Aaa 1,180,000 1,241,207
Federal Agricultural Mortgage
Corporation 7.01%, 2/10/05 Aaa 10,000 10,663
Federal Home Loan Bank:
7.31%, 6/16/04 Aaa 4,155,000 4,473,107
7.36%, 7/1/04 Aaa 3,100,000 3,347,039
7.38%, 8/5/04 Aaa 110,000 118,972
7.56%, 9/1/04 Aaa 310,000 338,725
7.46%, 9/9/04 Aaa 50,000 54,391
7.70%, 9/20/04 Aaa 40,000 44,000
6.46%, 12/15/04 Aaa 1,745,000 1,807,436
8.09%, 12/28/04 Aaa 10,000 11,236
7.59%, 3/10/05 Aaa 10,000 10,972
Freddie Mac:
6.77%, 9/15/02 Aaa 150,000 155,286
8%, 1/26/05 Aaa 520,000 582,239
8.115%, 1/31/05 Aaa 1,140,000 1,283,743
6.783%, 8/18/05 Aaa 1,000,000 1,055,940
Government Loan Trusts
(assets of Trust guaranteed by
U.S. Government through
Agency for International
Development)
8 1/2%, 4/1/06 Aaa 1,760,000 1,942,371
Government Trust Certificates
(assets of Trust guaranteed by
U.S. Government through
Defense Security Assistance
Agency):
Class 1-C,
9 1/4%, 11/15/01 Aaa 873,444 925,387
Class 2-E,
9.40%, 5/15/02 Aaa 738,985 781,343
Class T-3,
9 5/8%, 5/15/02 Aaa 49,909 52,771
Guaranteed Export Trust
Certificates (assets of Trust
guaranteed by U.S.
Government through
Export-Import Bank):
Series 1993-C,
5.20%, 10/15/04 Aaa 5,778 5,678
Series 1993-D,
5.23%, 5/15/05 Aaa 11,915 11,698
Series 1994-A,
7.12%, 4/15/06 Aaa 7,552 7,900
Series 1994-C,
6.61%, 9/15/99 Aaa 31,347 31,470
Guaranteed Trade Trust
Certificates (assets of Trust
guaranteed by U.S.
Government through
Export-Import Bank)
Series 1994-B,
7 1/2%, 1/26/06 Aaa 7,628 8,105
U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
U.S. GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
Israel Export Trust Certificates
(assets of Trust guaranteed
by U.S. Government through
Export-Import Bank)
Series 1994-1,
6.88%, 1/26/03 Aaa $ 11,765 $ 12,020
Overseas Private Investment Corp.
U.S. Government guaranteed
participation certificate
Series 1994-195,
6.08%, 8/15/04 (callable) Aaa 131,600 132,391
Private Export Funding Corp.:
secured 5.65%, 3/15/03 Aaa 202,500 201,682
secured 6.86%, 4/30/04 Aaa 1,375,100 1,411,636
U.S. Department of Housing and
Urban Development
Government guaranteed
participation certificates:
Series 1995-A:
8.27%, 8/1/03 Aaa 415,000 460,256
8.24%, 8/1/04 Aaa 500,000 560,925
Series 1996-A,
6.98%, 8/1/05 Aaa 180,000 192,766
22,194,167
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $109,401,478) 110,996,598
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 30.7%
FANNIE MAE - 25.9%
5 1/2%, 5/1/00 to 7/1/01 Aaa 2,185,828 2,163,634
6%, 3/1/01 to 4/1/13 Aaa 41,577,746 41,190,654
6.345%, 3/1/99 Aaa 76,480 76,456
6 1/2%, 2/1/10 to 7/1/28 Aaa 58,098,918 57,883,951
7%, 5/1/26 to 7/1/28 Aaa 14,829,760 15,039,772
8%, 8/1/28 (g) Aaa 2,074,985 2,146,428
118,500,895
FREDDIE MAC - 0.3%
7%, 5/1/01 Aaa 114,597 115,712
8 1/2%, 3/1/20 Aaa 1,064,714 1,119,972
1,235,684
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 4.5%
6%, 8/15/08 to 5/15/09 Aaa 3,979,322 3,975,597
7 1/2%, 6/15/26
to 3/15/28 Aaa 14,272,236 14,669,185
8%, 2/15/17 Aaa 284,709 297,927
10%, 7/15/13 to 11/15/24 Aaa 1,318,256 1,446,568
20,389,277
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $138,781,311) 140,125,856
COMMERCIAL MORTGAGE SECURITIES - 2.0%
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
CS First Boston Mortgage
Securities Corp.:
floater Series 1998-FL1
Class E, 6.506%,
1/10/13 (c)(d) Baa2 $ 2,650,000 $ 2,650,000
Series 1997-C2 Class D,
7.27%, 4/17/11 Baa2 1,080,000 1,107,675
Equitable Life Assurance Society
of the United States (The):
Series 1996-1 Class C1,
7.52%, 5/15/06 (c) A2 500,000 530,330
Series 174 Class B1,
7.33%, 5/15/06 (c) Aa2 500,000 527,890
Fannie Mae sequential pay
Series1996-M5 Class A1,
7.141%, 6/25/08 Aaa 168,180 172,805
GS Mortgage Securities Corp. II
Series 1998-GLII Class E,
7.19%, 4/13/31 (c)(d) Baa3 1,000,000 979,310
Nomura Asset Securities Corp.
floater Series 1994-MD-II
Class A-6, 6.921%,
7/4/03 (d) - 179,477 179,477
Oregon Commercial Mortgage,
Inc. Series 1995-1 Class A,
7.15%, 6/25/26 (c)(d) Aaa 43,939 43,821
Resolution Trust Corp.:
commercial Series
1995-C1 Class A-4B,
6.65%, 2/25/27 Aaa 281,311 280,960
floater Series 1994-C1
Class A-3, 6.2375%,
6/25/26 (d) Aaa 69,677 69,710
Structured Asset Securities Corp.
sequential pay Series 1996
Class A-2A, 7 3/4%,
2/25/28 Aaa 679,310 686,103
Thirteen Affiliates of General
Growth Properties, Inc.
sequential pay Series A-2,
6.602%, 11/15/12 (c) Aaa 1,500,000 1,536,960
Wells Fargo Capital Markets
Apartment Financing Trust
6.56%,12/29/05 (c) Aaa 431,746 438,969
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $9,056,253) 9,204,010
FOREIGN GOVERNMENT OBLIGATIONS (E) - 0.8%
Alberta Province yankee
9 1/4%, 4/1/00 Aa2 2,500,000 2,634,400
British Columbia Province
yankee 7%, 1/1/03 Aa2 500,000 519,850
Manitoba Province yankee
6 3/4%, 3/1/03 A1 500,000 515,285
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $3,783,345) 3,669,535
SUPRANATIONAL OBLIGATIONS - 0.9%
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
Inter American Development
Bank yankee 6.29%, 7/16/27
(Cost $3,974,840) Aaa $ 4,000,000 $ 4,208,840
CERTIFICATES OF DEPOSIT - 0.2%
Canadian Imperial Bank of
Commerce NY Branch
yankee 6.20%, 8/1/00
(Cost $1,001,500) Aa3 1,000,000 1,005,300
CASH EQUIVALENTS - 9.7%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations), in a joint
trading account at 5.66%, dated
6/30/98 due 7/1/98 $ 44,351,970 44,345,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $450,171,139) $ 456,643,919
LEGEND
(d)Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investors Service, Inc.
(e)Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date. The rate shown is the rate at
period end.
(f)Security exempt from registration under Rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt
from registration, normally to qualified institutional buyers. At the
period end, the value of these securities amounted to $24,376,694 or
5.6% of net assets.
(g)The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(h)For foreign government obligations not individually rated by S&P or
Moody's, the ratings listed are assigned to securities by FMR, the
fund's investment adviser, based principally on S&P and Moody's
ratings of the sovereign credit of the issuing government.
(i)Debt obligation initially issued in zero coupon form which converts
to coupon form at a specified rate and date. The rate shown is the
rate at period end.
(j)Security purchased on a delayed delivery or when-issued basis (see
Note 2 of Notes to Financial Statements).
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $539,460,059 and $426,234,567, respectively, of which
long-term U.S. government and government agency obligations aggregated
$433,604,550 and $343,589,741, respectively (see Note 3 of Notes to
Financial Statements).
The fund participated in the interfund lending program as a lender.
The maximum loan and average daily balance during the period for which
the loan was outstanding amounted to $15,148,000. The weighted average
interest rate was 5.4813%. Interest earned from the interfund lending
program amounted to $6,919 and is included in interest income on the
Statement of Operations (see Note 2 of Notes to Financial Statements).
The fund participated in the bank borrowing program. The maximum loan
and average daily balance during the period for which the loan was
outstanding amounted to $6,212,000. The weighted average interest rate
was 5.8125% (see Note 6 of Notes to Financial Statements).
The composition of long-term debt holdings as a percentage of total
value of investment in securities, is as follows:
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 69.0% AAA, AA, A 68.1%
Baa 19.5% BBB 18.4%
Ba 1.4% BB 1.3%
B 0.0% B 0.3%
Caa 0.0% CCC 0.0%
Ca, C 0.0% CC, C 0.0%
D 0.0%
For some foreign government obligations, FMR has assigned the ratings
of the sovereign credit of the issuing government. The percentage not
rated by Moody's or S&P amounted to 0.0%.
INCOME TAX INFORMATION
At June 30, 1998, the aggregate cost of investment securities for
income tax purposes was $450,244,860. Net unrealized appreciation
aggregated $6,399,059, of which $6,937,638 related to appreciated
investment securities and $538,579 related to depreciated investment
securities.
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 30, 1998 (UNAUDITED)
ASSETS
INVESTMENT IN SECURITIES, AT $ 456,643,919
VALUE (INCLUDING REPURCHASE AGREEMENTS OF $44,345,000)
(COST $450,171,139) -
SEE ACCOMPANYING SCHEDULE
CASH 6,579
RECEIVABLE FOR INVESTMENTS SOLD 2,152,566
RECEIVABLE FOR FUND SHARES SOLD 827,414
INTEREST RECEIVABLE 4,669,946
TOTAL ASSETS 464,300,424
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 26,302,829
REGULAR DELIVERY
DELAYED DELIVERY 2,150,565
PAYABLE FOR FUND SHARES REDEEMED 1,293,670
ACCRUED MANAGEMENT FEE 151,274
OTHER PAYABLES AND ACCRUED EXPENSES 63,490
TOTAL LIABILITIES 29,961,828
NET ASSETS $ 434,338,596
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 414,755,561
UNDISTRIBUTED NET INVESTMENT INCOME 11,134,647
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS 1,975,608
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 6,472,780
NET ASSETS, FOR 35,119,691 $ 434,338,596
SHARES OUTSTANDING
NET ASSET VALUE, OFFERING PRICE $12.37
AND REDEMPTION PRICE PER SHARE ($434,338,596 (DIVIDED BY) 35,119,691 SHARES)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME $ 12,346,291
INTEREST
EXPENSES
MANAGEMENT FEE $ 827,005
TRANSFER AGENT FEES 139,365
ACCOUNTING FEES AND EXPENSES 77,019
NON-INTERESTED TRUSTEES' COMPENSATION 669
CUSTODIAN FEES AND EXPENSES 8,505
REGISTRATION FEES 761
AUDIT 27,048
LEGAL 2,050
INTEREST 1,003
MISCELLANEOUS 8,907
TOTAL EXPENSES BEFORE REDUCTIONS 1,092,332
EXPENSE REDUCTIONS (1,137) 1,091,195
NET INVESTMENT INCOME 11,255,096
REALIZED AND UNREALIZED GAIN (LOSS) 2,041,865
NET REALIZED GAIN (LOSS) ON INVESTMENT SECURITIES
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENT SECURITIES 881,496
NET GAIN (LOSS) 2,923,361
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 14,178,457
OTHER INFORMATION $ 1,137
EXPENSE REDUCTIONS
CUSTODIAN CREDITS
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
OPERATIONS $ 11,255,096 $ 16,674,247
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 2,041,865 3,703,820
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) 881,496 3,255,290
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 14,178,457 23,633,357
DISTRIBUTIONS TO SHAREHOLDERS (16,958,571) (13,381,760)
FROM NET INVESTMENT INCOME
FROM NET REALIZED GAIN (2,012,034) -
TOTAL DISTRIBUTIONS (18,970,605) (13,381,760)
SHARE TRANSACTIONS 151,789,688 155,252,643
NET PROCEEDS FROM SALES OF SHARES
REINVESTMENT OF DISTRIBUTIONS 18,970,605 13,381,760
COST OF SHARES REDEEMED (56,154,532) (82,954,820)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 114,605,761 85,679,583
TOTAL INCREASE (DECREASE) IN NET ASSETS 109,813,613 95,931,180
NET ASSETS
BEGINNING OF PERIOD 324,524,983 228,593,803
END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $11,134,647 AND
$16,682,637, RESPECTIVELY) $ 434,338,596 $ 324,524,983
OTHER INFORMATION
SHARES
SOLD 12,283,606 12,893,400
ISSUED IN REINVESTMENT OF DISTRIBUTIONS 1,576,941 1,151,614
REDEEMED (4,574,603) (6,885,603)
NET INCREASE (DECREASE) 9,285,944 7,159,411
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1998
SELECTED PER-SHARE DATA (UNAUDITED) 1997 1996 1995 1994 1993
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.560 $ 12.240 $ 12.480 $ 11.020 $ 11.480 $ 10.970
INCOME FROM INVESTMENT OPERATIONS .361 C .759 C .670 .320 .733 .641
NET INVESTMENT INCOME
NET REALIZED AND UNREALIZED GAIN (LOSS) .109 .291 (.290) 1.530 (1.163) .559
TOTAL FROM INVESTMENT OPERATIONS .470 1.050 .380 1.850 (.430) 1.200
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.590) (.730) (.620) (.390) - (.628)
IN EXCESS OF NET INVESTMENT INCOME - - - - - (.002)
FROM NET REALIZED GAIN (.070) - - - (.010) (.050)
IN EXCESS OF NET REALIZED GAIN - - - - (.020) (.010)
TOTAL DISTRIBUTIONS (.660) (.730) (.620) (.390) (.030) (.690)
NET ASSET VALUE, END OF PERIOD $ 12.370 $ 12.560 $ 12.240 $ 12.480 $ 11.020 $ 11.480
TOTAL RETURN B 3.89% 9.06% 3.19% 17.32% (3.76)% 10.96%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 434,339 $ 324,525 $ 228,594 $ 181,546 $ 111,381 $ 122,376
RATIO OF EXPENSES TO AVERAGE NET ASSETS .58% A .58% .58% .59% .67% .68%
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 5.97% A 6.34% 6.49% 6.53% 6.53% 6.85%
PORTFOLIO TURNOVER RATE 246% A 191% 81% 182% 143% 70%
</TABLE>
A ANNUALIZED
B TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE
THE TOTAL RETURNS SHOWN. TOTAL RETURNS FOR PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
C NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
JUNE 30, 1998 YEAR YEARS YEARS
VIP: HIGH INCOME - "INITIAL CLASS" 14.49% 12.42% 12.42%
ML HIGH YIELD MASTER 11.40% 10.49% 11.70%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's returns to those of the Merrill Lynch High
Yield Master Index - a market capitalization weighted index of all
domestic and yankee high-yield bonds. Issues included in the index
have maturities of at least one year and have a credit rating lower
than BBB-/Baa3, but are not in default. This benchmark reflects the
reinvestment of dividends and capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of
how it will do tomorrow. Bond prices, for example,
generally move in the opposite direction of interest
rates. In turn, the share price, return and yield of a
fund that invests in bonds will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown.
If Fidelity had not reimbursed certain fund expenses, the past five
year and past 10 year total returns would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money. The fund includes high yielding, lower-rated
securities which are subject to greater price volatility and may
involve greater risk of default. The market for these securities may
be less liquid.
$10,000 OVER 10 YEARS
VIP High Income ML High Yield Master
00152 ML002
1988/06/30 10000.00 10000.00
1988/07/31 10104.10 10105.67
1988/08/31 10055.83 10138.88
1988/09/30 10136.45 10241.08
1988/10/31 10246.79 10400.63
1988/11/30 10207.67 10439.59
1988/12/31 10288.78 10483.77
1989/01/31 10536.03 10640.99
1989/02/28 10587.85 10712.50
1989/03/31 10451.80 10702.97
1989/04/30 10336.05 10734.55
1989/05/31 10527.03 10932.17
1989/06/30 10828.54 11087.06
1989/07/31 10757.25 11139.56
1989/08/31 10694.86 11194.59
1989/09/30 10320.64 11088.01
1989/10/31 9878.19 10912.63
1989/11/30 9886.51 10937.09
1989/12/31 9859.41 10927.20
1990/01/31 9641.47 10713.63
1990/02/28 9493.01 10557.61
1990/03/31 9392.85 10700.33
1990/04/30 9420.68 10754.69
1990/05/31 9614.24 10948.96
1990/06/30 9765.69 11161.08
1990/07/31 9916.53 11396.94
1990/08/31 9750.64 10960.64
1990/09/30 9519.44 10483.95
1990/10/31 9288.44 10217.16
1990/11/30 9506.31 10303.71
1990/12/31 9639.24 10452.18
1991/01/31 9843.75 10599.93
1991/02/28 10389.11 11386.69
1991/03/31 10757.23 11876.27
1991/04/30 11138.98 12299.20
1991/05/31 11302.59 12359.26
1991/06/30 11548.00 12607.89
1991/07/31 11984.29 12909.98
1991/08/31 12147.89 13181.33
1991/09/30 12420.57 13349.22
1991/10/31 12843.23 13745.89
1991/11/30 12952.30 13904.67
1991/12/31 13020.47 14066.21
1992/01/31 13715.81 14558.01
1992/02/29 14213.80 14919.56
1992/03/31 14673.26 15127.73
1992/04/30 14777.01 15237.84
1992/05/31 14954.87 15480.89
1992/06/30 15117.91 15673.24
1992/07/31 15414.34 15990.79
1992/08/31 15740.41 16202.50
1992/09/30 15903.45 16387.11
1992/10/31 15666.30 16180.14
1992/11/30 15858.98 16409.29
1992/12/31 16036.84 16620.57
1993/01/31 16466.66 17029.84
1993/02/28 16747.55 17352.19
1993/03/31 17134.03 17653.02
1993/04/30 17246.76 17779.74
1993/05/31 17504.41 18019.07
1993/06/30 17955.31 18357.61
1993/07/31 18132.44 18554.93
1993/08/31 18325.69 18731.81
1993/09/30 18390.10 18824.23
1993/10/31 18824.89 19178.83
1993/11/30 19002.03 19283.73
1993/12/31 19307.99 19476.55
1994/01/31 19952.13 19903.38
1994/02/28 19928.21 19760.24
1994/03/31 19256.87 19116.32
1994/04/30 19062.53 18892.92
1994/05/31 19097.87 18825.61
1994/06/30 19027.20 18894.90
1994/07/31 19097.87 19027.73
1994/08/31 19097.87 19159.89
1994/09/30 19239.20 19152.64
1994/10/31 19062.53 19201.31
1994/11/30 18903.53 19037.98
1994/12/31 18991.87 19249.74
1995/01/31 19203.87 19521.75
1995/02/28 19862.98 20130.85
1995/03/31 20110.31 20411.00
1995/04/30 20700.11 20888.90
1995/05/31 21232.84 21541.51
1995/06/30 21289.92 21706.05
1995/07/31 21803.61 21954.19
1995/08/31 21974.85 22087.44
1995/09/30 22336.34 22340.14
1995/10/31 22545.62 22498.50
1995/11/30 22659.78 22718.12
1995/12/31 22926.14 23082.79
1996/01/31 23458.86 23447.34
1996/02/29 23846.33 23482.64
1996/03/31 23783.68 23418.87
1996/04/30 24138.66 23429.48
1996/05/31 24472.76 23598.44
1996/06/30 24598.05 23740.20
1996/07/31 24514.53 23901.38
1996/08/31 24869.51 24148.21
1996/09/30 25600.35 24666.32
1996/10/31 25516.82 24936.64
1996/11/30 25788.28 25440.79
1996/12/31 26143.26 25636.55
1997/01/31 26498.24 25833.57
1997/02/28 26978.88 26195.96
1997/03/31 26140.74 25905.02
1997/04/30 26548.49 26199.86
1997/05/31 27658.45 26721.15
1997/06/30 28156.80 27134.79
1997/07/31 29176.15 27785.97
1997/08/31 29425.33 27723.45
1997/09/30 30467.33 28196.79
1997/10/31 30195.50 28383.92
1997/11/30 30422.03 28638.12
1997/12/31 30761.81 28924.45
1998/01/31 31464.03 29348.16
1998/02/28 31702.05 29476.37
1998/03/31 32365.70 29730.39
1998/04/30 32493.32 29871.61
1998/05/31 32263.60 30064.85
1998/06/30 32238.07 30228.55
IMATRL PRASUN SHR__CHT 19980630 19980710 105444 R00000000000123
Let's say hypothetically that $10,000 was invested in Variable
Insurance Products Fund: High Income Portfolio on June 30, 1988. As
the chart shows, by June 30, 1998, the value of the investment would
have grown to $32,238 - a 222.38% increase on the initial investment.
For comparison, look at how the Merrill Lynch High Yield Master Index
did over the same period. With dividends and capital gains, if any,
reinvested, the same $10,000 investment would have grown to $30,229 -
a 202.29% increase.
INVESTMENT SUMMARY
TOP FIVE HOLDINGS AS OF JUNE 30, 1998
(BY ISSUER, EXCLUDING CASH EQUIVALENTS) % OF FUND'S
INVESTMENTS
NEXTEL, INC. (VARIOUS ISSUES) 4.0
TIME WARNER, INC. 2.6
IXC COMMUNICATIONS, INC. 2.1
MILLICOM INTERNATIONAL CELLULAR SA 1.9
NEXTLINK COMMUNICATIONS, INC. 1.8
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
UTILITIES 25.2
MEDIA & LEISURE 21.6
SERVICES 7.0
BASIC INDUSTRIES 6.4
RETAIL & WHOLESALE 5.3
QUALITY DIVERSIFICATION AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
AAA, AA, A 0.0
BAA 0.0
BA 2.9
B 48.3
CAA, CA, C 13.8
NOT RATED 6.9
TABLE EXCLUDES SHORT-TERM INVESTMENTS. WHERE MOODY'S RATINGS ARE NOT
AVAILABLE, WE HAVE USED S&P RATINGS. UNRATED DEBT SECURITIES THAT ARE
EQUIVALENT TO BA AND BELOW AT JUNE 30, 1998, ACCOUNT FOR 6.9% OF THE
FUND'S INVESTMENTS.
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1 fee.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
JUNE 30, 1998 YEAR YEARS YEARS
VIP: HIGH INCOME - SERVICE CLASS 14.40% 12.40% 12.41%
ML HIGH YIELD MASTER 11.40% 10.49% 11.70%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's returns to those of the Merrill Lynch High
Yield Master Index - a market capitalization weighted index of all
domestic and yankee high-yield bonds. Issues included in the index
have maturities of at least one year and have a credit rating lower
than BBB-/Baa3, but are not in default. This benchmark reflects the
reinvestment of dividends and capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of
how it will do tomorrow. Bond prices, for example,
generally move in the opposite direction of interest
rates. In turn, the share price, return and yield of a
fund that invests in bonds will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money. The fund includes high yielding, lower-rated
securities which are subject to greater price volatility and may
involve greater risk of default. The market for these securities may
be less liquid.
$10,000 OVER 10 YEARS
VIP High Income - CL S ML High Yield Master
00492 ML002
1988/06/30 10000.00 10000.00
1988/07/31 10104.10 10105.67
1988/08/31 10055.83 10138.88
1988/09/30 10136.45 10241.08
1988/10/31 10246.79 10400.63
1988/11/30 10207.67 10439.59
1988/12/31 10288.78 10483.77
1989/01/31 10536.03 10640.99
1989/02/28 10587.85 10712.50
1989/03/31 10451.80 10702.97
1989/04/30 10336.05 10734.55
1989/05/31 10527.03 10932.17
1989/06/30 10828.54 11087.06
1989/07/31 10757.25 11139.56
1989/08/31 10694.86 11194.59
1989/09/30 10320.64 11088.01
1989/10/31 9878.19 10912.63
1989/11/30 9886.51 10937.09
1989/12/31 9859.41 10927.20
1990/01/31 9641.47 10713.63
1990/02/28 9493.01 10557.61
1990/03/31 9392.85 10700.33
1990/04/30 9420.68 10754.69
1990/05/31 9614.24 10948.96
1990/06/30 9765.69 11161.08
1990/07/31 9916.53 11396.94
1990/08/31 9750.64 10960.64
1990/09/30 9519.44 10483.95
1990/10/31 9288.44 10217.16
1990/11/30 9506.31 10303.71
1990/12/31 9639.24 10452.18
1991/01/31 9843.75 10599.93
1991/02/28 10389.11 11386.69
1991/03/31 10757.23 11876.27
1991/04/30 11138.98 12299.20
1991/05/31 11302.59 12359.26
1991/06/30 11548.00 12607.89
1991/07/31 11984.29 12909.98
1991/08/31 12147.89 13181.33
1991/09/30 12420.57 13349.22
1991/10/31 12843.23 13745.89
1991/11/30 12952.30 13904.67
1991/12/31 13020.47 14066.21
1992/01/31 13715.81 14558.01
1992/02/29 14213.80 14919.56
1992/03/31 14673.26 15127.73
1992/04/30 14777.01 15237.84
1992/05/31 14954.87 15480.89
1992/06/30 15117.91 15673.24
1992/07/31 15414.34 15990.79
1992/08/31 15740.41 16202.50
1992/09/30 15903.45 16387.11
1992/10/31 15666.30 16180.14
1992/11/30 15858.98 16409.29
1992/12/31 16036.84 16620.57
1993/01/31 16466.66 17029.84
1993/02/28 16747.55 17352.19
1993/03/31 17134.03 17653.02
1993/04/30 17246.76 17779.74
1993/05/31 17504.41 18019.07
1993/06/30 17955.31 18357.61
1993/07/31 18132.44 18554.93
1993/08/31 18325.69 18731.81
1993/09/30 18390.10 18824.23
1993/10/31 18824.89 19178.83
1993/11/30 19002.03 19283.73
1993/12/31 19307.99 19476.55
1994/01/31 19952.13 19903.38
1994/02/28 19928.21 19760.24
1994/03/31 19256.87 19116.32
1994/04/30 19062.53 18892.92
1994/05/31 19097.87 18825.61
1994/06/30 19027.20 18894.90
1994/07/31 19097.87 19027.73
1994/08/31 19097.87 19159.89
1994/09/30 19239.20 19152.64
1994/10/31 19062.53 19201.31
1994/11/30 18903.53 19037.98
1994/12/31 18991.87 19249.74
1995/01/31 19203.87 19521.75
1995/02/28 19862.98 20130.85
1995/03/31 20110.31 20411.00
1995/04/30 20700.11 20888.90
1995/05/31 21232.84 21541.51
1995/06/30 21289.92 21706.05
1995/07/31 21803.61 21954.19
1995/08/31 21974.85 22087.44
1995/09/30 22336.34 22340.14
1995/10/31 22545.62 22498.50
1995/11/30 22659.78 22718.12
1995/12/31 22926.14 23082.79
1996/01/31 23458.86 23447.34
1996/02/29 23846.33 23482.64
1996/03/31 23783.68 23418.87
1996/04/30 24138.66 23429.48
1996/05/31 24472.76 23598.44
1996/06/30 24598.05 23740.20
1996/07/31 24514.53 23901.38
1996/08/31 24869.51 24148.21
1996/09/30 25600.35 24666.32
1996/10/31 25516.82 24936.64
1996/11/30 25788.28 25440.79
1996/12/31 26143.26 25636.55
1997/01/31 26498.24 25833.57
1997/02/28 26978.88 26195.96
1997/03/31 26140.74 25905.02
1997/04/30 26548.49 26199.86
1997/05/31 27658.45 26721.15
1997/06/30 28156.80 27134.79
1997/07/31 29176.15 27785.97
1997/08/31 29425.33 27723.45
1997/09/30 30467.33 28196.79
1997/10/31 30195.50 28383.92
1997/11/30 30399.38 28638.12
1997/12/31 30739.16 28924.45
1998/01/31 31464.03 29348.16
1998/02/28 31676.52 29476.37
1998/03/31 32365.70 29730.39
1998/04/30 32493.32 29871.61
1998/05/31 32238.07 30064.85
1998/06/30 32212.55 30228.55
IMATRL PRASUN SHR__CHT 19980630 19980709 134444 R00000000000123
Let's say hypothetically that $10,000 was invested in Variable
Insurance Products Fund: High Income Portfolio - Service Class on June
30, 1988. As the chart shows, by June 30, 1998, the value of the
investment would have grown to $32,213 - a 222.13% increase on the
initial investment. For comparison, look at how the Merrill Lynch High
Yield Master Index did over the same period. With dividends and
capital gains, if any, reinvested, the same $10,000 investment would
have grown to $30,229 - a 202.29% increase.
INVESTMENT SUMMARY
TOP FIVE HOLDINGS AS OF JUNE 30, 1998
(BY ISSUER, EXCLUDING CASH EQUIVALENTS) % OF FUND'S
INVESTMENTS
NEXTEL, INC. (VARIOUS ISSUES) 4.0
TIME WARNER, INC. 2.6
IXC COMMUNICATIONS, INC. 2.1
MILLICOM INTERNATIONAL CELLULAR SA 1.9
NEXTLINK COMMUNICATIONS, INC. 1.8
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
UTILITIES 25.2
MEDIA & LEISURE 21.6
SERVICES 7.0
BASIC INDUSTRIES 6.4
RETAIL & WHOLESALE 5.3
QUALITY DIVERSIFICATION AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
AAA, AA, A 0.0
BAA 0.0
BA 2.9
B 48.3
CAA, CA, C 13.8
NOT RATED 6.9
TABLE EXCLUDES SHORT-TERM INVESTMENTS. WHERE MOODY'S RATINGS ARE NOT
AVAILABLE, WE HAVE USED S&P RATINGS. UNRATED DEBT SECURITIES THAT ARE
EQUIVALENT TO BA AND BELOW AT JUNE 30, 1998, ACCOUNT FOR 6.9% OF THE
FUND'S INVESTMENTS.
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with
Barry Coffman,
Portfolio Manager of
High Income Portfolio
Q. HOW DID THE FUND PERFORM, BARRY?
A. For the six-month period that ended June 30, 1998, the fund
outperformed the 4.51% return of its benchmark - the Merrill Lynch
High Yield Master Index. For the 12-month period that ended June 30,
1998, the fund outperformed the 11.40% return of the Merrill Lynch
High Yield Master Index.
Q. HOW WOULD YOU CHARACTERIZE THE HIGH-YIELD MARKET'S PERFORMANCE
DURING THE PAST SIX MONTHS?
A. While high-yield bonds performed better than any other domestic
fixed-income investments in the first quarter of 1998, they lagged in
the second quarter. In the first three or so months of this year,
conditions were favorable as inflation remained subdued, interest
rates were stable, the prospects for healthy corporate earnings seemed
good and the demand for high-yield bonds was strong. During the second
quarter, concerns that Asia's crumbling economies might negatively
impact global economic growth led to a rally in Treasury bonds at the
expense of riskier asset classes, including high-yield bonds. That,
combined with continued strong new issue supply in the face of
marginally declining demand caused the spread - which is the
difference in yields - between high-yield bonds and Treasury bonds to
widen and ultimately caused high-yield investments to underperform
Treasuries.
Q. WHAT HOLDINGS CONTRIBUTED TO THE FUND'S PERFORMANCE?
A. Many of the fund's telecommunications holdings made positive
contributions to performance. Nextel, the fund's largest holding as of
June 30, 1998, performed well. The company recently added the two
millionth subscriber to its unique cellular/dispatch/messaging
service. Another good performer - and one of the fund's 10 largest
holdings - was Millicom, an international cellular company with
licenses to build and operate cellular networks for developing
countries in Asia, Eastern Europe, Russia and South America. In
addition, high-yield bonds issued by companies with significant cable
businesses - including Cablevision, Time Warner, United International
Holdings and Adelphia - did well following reports of AT&T's
acquisition of cable giant TCI. That union signified the
long-predicted coming together of telecommunications, cable TV and
personal computers, and fueled speculation that other broadcasters
might be the next takeover target.
Q. WHAT WERE SOME OF THE OTHER BRIGHT SPOTS FOR THE FUND?
A. As a group, the fund's common stock holdings issued by high-yield
companies - at 6.1% of investments at the end of the period - also
were a plus for performance. One of the best performers there was
Viacom, which I sold recently in order to lock in some gains. The
fund's common stock positions typically are made in high-yield
companies - those deemed below investment-grade - where I already have
positions in bonds issued by the companies. Generally speaking, I keep
the fund's common stock holdings to under 10% of the fund's
investments.
Q. WERE THERE ANY DISAPPOINTMENTS?
A. The period's biggest disappointment was Renaissance Cosmetics, a
company that breathes new life into older, neglected fragrance brands
by repackaging and marketing them through mass merchants. The
combination of the passing of the company's CEO, a weak environment
for mass market fragrances and an ill-timed acquisition caused the
bonds to perform poorly. The fund's holdings in Asia Pulp & Paper
(AP&P) and its three subsidiaries - Indah Kiat, Pindo Deli and Tjiwi
Kimia - also were disappointing. Although the company is faring well
from a financial standpoint, investors have punished its bonds because
it is located in troubled Indonesia.
Q. WHAT'S YOUR OUTLOOK FOR THE HIGH-YIELD MARKET AND THE FUND?
A. While conditions remain fairly favorable, there is a potential
cloud on the horizon. On a positive note, interest rates are low,
high-yield companies are better capitalized than they were in the late
1980s and the default rate remains very low - at 1%, compared to the
long-term average of more than 3%. Furthermore, the new supply of
high-yield bonds - which hit a record $100 billion in the first half
of the year - shows some signs of tapering off. However, those
positives could be overshadowed if investors start to anticipate that
corporate earnings will dramatically slow in the second half of 1998.
As for the fund, I will likely avoid cyclical sectors such as paper
and chemical companies, because I think they may be most vulnerable to
an economic slowdown. Instead, I'll continue to look for opportunities
that I think will generate above-average returns over the long term.
That includes the telecommunications sector, where regulatory changes
and technological advances - such as the Internet and expansion of
bandwidth - should continue to create attractive investment ideas.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED
ON MARKET AND OTHER CONDITIONS.
FUND FACTS
GOAL: to seek high current income by investing in high-yielding,
lower-rated fixed-income securities
START DATE: September 19, 1985
SIZE: as of June 30, 1998, more than $2.6 billion
MANAGER: Barry Coffman, since 1990; joined Fidelity
in 1986
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
INVESTMENTS JUNE 30, 1998 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
CORPORATE BONDS - 71.9%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
CONVERTIBLE BONDS - 0.5%
RETAIL & WHOLESALE - 0.3%
RETAIL & WHOLESALE, MISCELLANEOUS - 0.3%
Corporate Express, Inc.
4 1/2%, 7/1/00 B3 $ 10,000,000 $ 9,193,740
SERVICES - 0.2%
Signature Resorts, Inc.
5 3/4%, 1/15/07 Caa 6,810,000 5,584,200
UTILITIES - 0.0%
TELEPHONE SERVICES - 0.0%
GST Telecommunications, Inc.
0%, 12/15/05 (d)(g) - 630,000 664,650
TOTAL CONVERTIBLE BONDS 15,442,590
NONCONVERTIBLE BONDS - 71.4%
AEROSPACE & DEFENSE - 0.8%
AEROSPACE & DEFENSE - 0.1%
Compass Aerospace Corp.
10 1/8%, 4/15/05 (g) Caa 2,480,000 2,529,600
DEFENSE ELECTRONICS - 0.5%
Tracor, Inc. 8 1/2%, 3/1/07 B1 12,150,000 13,213,125
SHIP BUILDING & REPAIR - 0.2%
Newport News Shipbuilding, Inc.
9 1/4%, 12/1/06 B1 4,650,000 4,952,250
TOTAL AEROSPACE & DEFENSE 20,694,975
BASIC INDUSTRIES - 6.0%
CHEMICALS & PLASTICS - 1.6%
Atlantis Group, Inc.
11%, 2/15/03 B2 8,205,000 8,369,100
Huntsman Corp.
9 1/2%, 7/1/07 (g) B2 25,930,000 26,059,650
Koppers Industry, Inc.
9 7/8%, 12/1/07 B2 4,985,000 5,159,475
Sterling Chemicals, Inc.
11 1/4%, 4/1/07 B3 3,890,000 3,831,650
43,419,875
IRON & STEEL - 1.8%
GS Technologies Operating, Inc.
12 1/4%, 10/1/05 B2 3,490,000 3,865,175
Pohang Iron & Steel Ltd. yankee
6 5/8%, 7/1/03 Ba1 5,000,000 4,100,000
Republic Engineered Steels, Inc.
9 7/8%, 12/15/01 Caa 16,265,000 16,224,338
WCI Steel, Inc. 10%, 12/1/04 B2 7,610,000 7,819,275
WHX Corp. 10 1/2%, 4/15/05 B3 15,190,000 15,379,875
47,388,663
METALS & MINING - 0.3%
Doe Run Resources Corp.:
12.00875%, 3/15/03 (e)(g) B2 3,880,000 3,918,800
11 1/4%, 3/15/05 (g) B2 3,660,000 3,696,600
7,615,400
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
PACKAGING & CONTAINERS - 0.4%
Huntsman Packaging Corp.
9 1/8%, 10/1/07 B2 $ 2,660,000 $ 2,686,600
Norampac, Inc.
9 1/2%, 2/1/08 (g) B2 7,510,000 7,622,650
10,309,250
PAPER & FOREST PRODUCTS - 1.9%
APP Finance II Mauritius Ltd.
12%, 3/15/04 Caa 11,785,000 8,072,725
Advanced Argo Public Company
Ltd. 13%, 11/15/07 (g) B2 9,250,000 9,203,750
Doman Industries Ltd. yankee
8 3/4%, 3/15/04 B1 3,730,000 3,646,075
Indah Kiat Finance Mauritius
Ltd. 10%, 7/1/07 Caa 2,320,000 1,658,800
Mail-Well Corp.
10 1/2%, 2/15/04 B 1,640,000 1,754,800
Millar Western Forest
9 7/8%, 5/15/08 (g) B3 4,315,000 4,228,700
Omega Cabinets Ltd.
10 1/2%, 6/15/07 B3 7,350,000 7,350,000
Pindo Deli Finance Mauritius
Ltd. 10 1/4%, 10/1/02 Caa 3,740,000 2,655,400
Stone Container Corp.
11 7/8%, 8/1/16 B2 1,150,000 1,282,250
Tembec Finance Corp. yankee
9 7/8%, 9/30/05 Ba3 4,865,000 5,156,900
Tjiwi Kimia Mauritius Ltd.
10%, 8/1/04 Ba3 4,500,000 3,127,500
Tjiwi Kimia International
Finance Co. 13 1/4%,
8/1/01 Caa 4,500,000 3,532,500
51,669,400
TOTAL BASIC INDUSTRIES 160,402,588
CONSTRUCTION & REAL ESTATE - 1.4%
BUILDING MATERIALS - 0.9%
AIRXCEL, Inc. 11%, 11/15/07 B3 7,350,000 7,717,500
Insiloc Corp. 10 1/4%, 8/15/07 B3 5,780,000 5,924,500
International Utility Structures, Inc.
10 3/4%, 2/1/08 (g) Caa 5,500,000 5,555,000
Schuff Steel Co. 10 1/2%,
6/1/08 (g) B3 5,000,000 4,950,000
24,147,000
REAL ESTATE - 0.5%
LNR Property Corp.
9 3/8%, 3/15/08 (g) B1 13,855,000 13,820,363
TOTAL CONSTRUCTION & REAL ESTATE 37,967,363
DURABLES - 4.4%
AUTOS, TIRES, & ACCESSORIES - 1.9%
Advance Holding Corp. 0%,
4/15/09 (d)(g) Caa 5,610,000 3,337,950
Advance Stores Co., Inc.
10 1/4%, 4/15/08 (g) Caa 9,360,000 9,687,600
Blue Bird Body Co.
10 3/4%, 11/15/06 B2 2,090,000 2,278,100
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
DURABLES - CONTINUED
AUTOS, TIRES, & ACCESSORIES - CONTINUED
Breed Technologies, Inc.
9 1/4%, 4/15/08 (g) B3 $ 24,110,000 $ 23,567,525
Morris Material Handling, Inc.
9 1/2%, 4/1/08 (g) B2 13,550,000 12,601,500
51,472,675
HOME FURNISHINGS - 1.0%
Guitar Center Management Co.,
Inc.11%, 7/1/06 B1 6,587,000 7,229,233
Interlake Corp.
12 1/8%, 3/1/02 B3 12,265,000 12,632,950
Sealy Mattress Co.:
0%, 12/15/07 (d)(g) B3 3,745,000 2,434,250 9 7/8% 12/15/07 (g)
B3 3,457,800 3,457,800
25,754,233
TEXTILES & APPAREL - 1.5%
Cluett American Corp.
10 1/8%, 5/15/08 (g) B3 4,920,000 4,883,100
Polymer Group, Inc.
9%, 7/1/07 B2 9,060,000 9,173,250
Synthetic Industries, Inc.
9 1/4%, 2/15/07 B2 11,770,000 12,123,100
WestPoint Stevens, Inc.
7 7/8%, 6/15/08 (g) Ba3 6,250,000 6,273,438
Worldtex, Inc.
9 5/8%, 12/15/07 B1 8,905,000 8,905,000
41,357,888
TOTAL DURABLES 118,584,796
ENERGY - 3.3%
COAL - 0.4%
Level 3 Communications, Inc.
9 1/4%, 5/1/08 (g) B3 5,580,000 5,426,550
P&L Coal Holdings Corp.
9 5/8%, 5/15/08 (g) B2 5,410,000 5,558,775
10,985,325
ENERGY SERVICES - 0.5%
DI Industries, Inc.
8 7/8%, 7/1/07 B1 5,415,000 5,198,400
Grey Wolf, Inc.
8 7/8%, 7/1/07 (g) B1 5,000,000 4,800,000
Ocean Rig Norway AS
10 1/4%, 6/1/08 (g) B3 2,570,000 2,435,075
12,433,475
OIL & GAS - 2.4%
Canadian Forest Oil Ltd.:
8 3/4%, 9/15/07 B2 2,250,000 2,182,500
8 3/4%, 9/15/07 (g) B2 4,860,000 4,702,050
Chesapeake Energy Corp.
9 5/8%, 5/1/05 (g) B1 13,380,000 13,413,450
Cross Timbers Oil Co.
9 1/4%, 4/1/07 B2 6,580,000 6,777,400
Gothic Production Corp.
11 1/8%, 5/1/05 (g) B3 9,715,000 9,229,250
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Great Lakes Carbon Corp.:
10 1/4%, 5/15/08 (g) B3 $ 4,950,000 $ 4,999,500
0%, 5/15/09 (d)(g) Caa 11,115,000 6,057,675
Hurricane Hydrocarbons Ltd.
11 3/4%, 11/1/04 (g) B3 4,680,000 4,539,600
Plains Resources, Inc.:
Series B,10 1/4%, 3/15/06 B2 7,470,000 7,787,475
Series D,10 1/4%, 3/15/06 B2 2,770,000 2,887,725
Seven Seas Petroleum, Inc.
12 1/2%, 5/15/05 (g) Caa 1,380,000 1,380,000
Southwest Royalties, Inc.
10 1/2%, 10/15/04 B3 1,630,000 1,393,650
65,350,275
TOTAL ENERGY 88,769,075
FINANCE - 3.2%
ASSET-BACKED SECURITIES - 0.3%
Airplanes Pass Through Trust
Class D 10 7/8%, 3/15/19 Ba2 6,710,000 7,364,225
CREDIT & OTHER FINANCE - 2.9%
Arcadia Financial Ltd.
11 1/2%, 3/15/07 B2 3,930,000 3,900,525
GST Network Funding, Inc. 0%,
5/1/08 (d)(g) - 12,000,000 7,230,000
Imperial Credit Capital Trust I
10 1/4%, 6/14/02 B2 4,870,000 4,918,700
Imperial Credit Industries, Inc.
9 7/8%, 1/15/07 B2 17,470,000 17,470,000
Iridium Operating LLC/Iridium
Capital Corp.:
11 1/4%, 7/15/05 B3 10,970,000 10,997,425
10 7/8%, 7/15/05 B3 14,000,000 13,895,000
La Petite Academy, Inc.
10%, 5/15/08 (g) B3 4,670,000 4,716,700
Ocwen Capital Trust
10 7/8%, 8/1/27 B2 6,520,000 7,106,800
Olympic Financial Ltd.
11 1/2%, 3/15/07 B2 6,250,000 6,250,000
76,485,150
SECURITIES INDUSTRY - 0.0%
ECM Corp. extendible
14%, 6/1/02 (g) - 136,434 136,093
TOTAL FINANCE 83,985,468
HEALTH - 2.7%
MEDICAL EQUIPMENT & SUPPLIES - 1.1%
CONMED Corp. 9%, 3/15/08 B3 5,510,000 5,489,338
Graham-Field Health Products,
Inc. 9 3/4%, 8/15/07 B3 4,830,000 4,347,000
Wright Medical Technology, Inc.
11 3/4%, 7/1/00 (e) Caa 18,650,000 18,090,500
27,926,838
MEDICAL FACILITIES MANAGEMENT - 1.6%
Fountain View, Inc.
11 1/4%, 4/15/08 (g) Caa 5,070,000 5,158,725
Integrated Health Services, Inc.:
9 1/2%, 9/15/07 B2 4,450,000 4,661,375
Seriess A, 9 1/4%, 1/15/08 B2 10,190,000 10,572,125
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
HEALTH - CONTINUED
MEDICAL FACILITIES MANAGEMENT - CONTINUED
Oxford Health Plans, Inc.
11%, 5/15/05 (g) Caa $ 7,300,000 $ 7,482,500
Tenet Healthcare Corp.
8 1/8%, 12/1/08 (g) Ba3 15,370,000 15,446,850
43,321,575
TOTAL HEALTH 71,248,413
INDUSTRIAL MACHINERY & EQUIPMENT - 2.7%
ELECTRICAL EQUIPMENT - 1.7%
Echostar
Communications Corp.
secured discount 0%,
6/1/04 (d) B2 6,970,000 6,787,038
Motors & Gears, Inc., Series D,
10 3/4%, 11/15/06 B3 29,690,000 31,471,400
Telex Communications, Inc.
10 1/2%, 5/1/07 B2 7,490,000 6,741,000
44,999,438
INDUSTRIAL MACHINERY & EQUIPMENT - 0.6%
Continental Global Group, Inc.
11%, 4/1/07 B2 4,000,000 4,160,000
Goss Graphic System, Inc.
12%, 10/15/06 B2 4,750,000 4,868,750
Thermadyne Holdings Corp.
0%, 6/1/08 (d)(g) Caa 8,630,000 4,789,650
Thermadyne Manufacturing LLC
9 7/8%, 6/1/08 (g) B3 2,690,000 2,710,175
16,528,575
POLLUTION CONTROL - 0.4%
Envirosource, Inc.:
9 3/4%, 6/15/03 B3 10,350,000 10,220,625
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 71,748,638
MEDIA & LEISURE - 14.3%
BROADCASTING - 9.2%
ACME Television LLC/ACME
Financial Corp. 0%,
9/30/04 (d) B3 13,470,000 11,079,075
Adelphia Communications Corp.:
9 1/2%, 2/15/04 B2 11,541,518 11,724,797
9 7/8%, 3/1/07 B2 5,380,000 5,823,850
Ascent Entertainment Group, Inc.
0%, 12/15/04 (d) B3 22,110,000 14,150,400
Diamond Cable Communications
PLC yankee:
0%, 12/15/05 (d) Caa 4,140,000 3,415,500
0%, 2/15/07 (d) Caa 4,160,000 3,068,000
Echostar Satellite Broadcasting
Corp. 0%, 3/15/04 (d) B3 10,370,000 9,514,475
Granite Broadcasting Corp.:
10 3/8%, 5/15/05 B3 2,510,000 2,660,600
9 3/8%, 12/1/05 B3 4,970,000 5,119,100
International Cabletel, Inc
0%, 2/1/06 (d) B3 20,205,000 16,416,563
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
LIN Holdings Corp. 0%,
3/1/08 (d)(g) B3 $ 12,045,000 $ 8,130,375
NTL, Inc. 0%, 4/1/08 (d)(g) B3 26,265,000 17,072,250
Olympus Communications LP/
Olympus Capital Corp
10 5/8%, 11/15/06 B1 9,320,000 10,298,600
Orion Network Systems, Inc.:
11 1/4%, 1/15/07 B2 5,405,000 5,972,525
0%, 1/15/07 (d) B2 41,220,000 31,121,100
Renaissance Media Group
0%, 4/15/08 (d)(g) B3 2,270,000 1,413,075
Rogers Cablesystems Ltd. yankee
10 1/8%, 9/1/12 Ba3 1,980,000 2,158,200
Satelites Mexicanos SA de CV :
0%, 6/30/04 (d)(g) - 10,380,000 10,276,200
10 1/8%, 11/1/04 (g) B3 20,040,000 19,338,600
Telewest PLC 0%, 10/1/07 (d) B1 9,422,000 7,784,928
UIH Australia/Pacific, Inc.:
Series B, 0%, 5/15/06 (d) B2 33,465,000 19,744,350
0%, 5/15/06 (d) B2 5,520,000 3,256,800
United International Holdings,
Inc. 0%, 2/15/08 (d) B3 26,050,000 15,890,500
Young Broadcasting, Inc.,
Series B, 8 3/4%, 6/15/07 B2 9,630,000 10,039,275
245,469,138
ENTERTAINMENT - 2.2%
AMC Entertainment, Inc.
9 1/2%, 3/15/09 B2 8,380,000 8,338,100
Cinemak USA, Inc.:
8 1/2%, 8/1/08 B2 6,750,000 6,598,125
9 5/8%, 8/1/08 B2 5,240,000 5,397,200
Premier Parks, Inc.:
9 1/4%, 4/1/06 B3 2,640,000 2,722,500
0%, 4/1/08 B3 12,660,000 8,403,075
Town Sports International, Inc.
9 3/4%, 10/15/04 B2 3,400,000 3,391,500
Viacom, Inc. 8%, 7/7/06 B1 22,800,000 23,484,000
58,334,500
LODGING & GAMING - 0.8%
Aladdin Gaming Holdings/
Aladdin Capital units
0%, 3/1/10 (d)(g) Caa 10,420,000 4,845,300
KSL Recreation Group, Inc.
10 1/4%, 5/1/07 B3 7,760,000 8,400,200
Sun International Hotels Ltd./
Sun International North
America, Inc. yankee
9%, 3/15/07 Ba3 7,560,000 7,938,000
21,183,500
PUBLISHING - 0.7%
Advanstar Communications, Inc.
9 1/4%, 5/1/08 (g) B2 2,600,000 2,619,500
Big Flower Press Holdings, Inc.
8 7/8%, 7/1/07 B2 17,010,000 17,328,938
19,948,438
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
MEDIA & LEISURE - CONTINUED
RESTAURANTS - 1.4%
AFC Enterprises, Inc.
10 1/4%, 5/15/07 B3 $ 10,600,000 $ 11,236,000
Foodmaker, Inc.
8 3/8%, 4/15/08 (g) B1 4,950,000 4,950,000
Host Marriott Travel Plazas, Inc.
9 1/2%, 5/15/05 Ba3 8,790,000 9,273,450
Planet Hollywood International,
Inc. 12%, 4/1/05 B2 5,000,000 4,500,000
SC International Services, Inc.,
Series B, 9 1/4%, 9/1/07 B2 8,300,000 8,476,375
38,435,825
TOTAL MEDIA & LEISURE 383,371,401
NONDURABLES - 1.3%
FOODS - 0.2%
Aurora Foods, Inc.
8 3/4%, 7/1/08 (g) B1 3,290,000 3,335,238
Del Monte Corp.
12 1/4%, 4/15/07 Caa 720,000 811,800
4,147,038
HOUSEHOLD PRODUCTS - 0.9%
AKI, Inc.
10 1/2%, 7/1/08 (g) B2 2,100,000 2,121,000
AKI Holding, Inc.
0%, 7/1/09 (d)(g) Caa 7,500,000 3,900,000
Renaissance Cosmetic, Inc.
11 3/4%, 2/15/04 Caa 770,000 269,500
Revlon Consumer Products Corp.
8 5/8%, 2/1/08 B3 18,750,000 18,750,000
25,040,500
TOBACCO - 0.2%
North Atlantic Trading, Inc.
11%, 6/15/04 B3 6,420,000 6,420,000
TOTAL NONDURABLES 35,607,538
PRECIOUS METALS - 0.7%
Centaur Mining & Exploration
Ltd. 11%, 12/1/07 (g) B1 9,830,000 10,051,175
Great Central Mines Ltd.
8 7/8%, 4/1/08 (g) Ba2 8,140,000 7,997,550
18,048,725
RETAIL & WHOLESALE - 4.9%
APPAREL STORES - 1.2%
Mothers Work, Inc.
12 5/8%, 8/1/05 B3 10,140,000 10,875,150
Specialty Retailers, Inc.
9%, 7/15/07 B2 20,160,000 20,916,000
31,791,150
GROCERY STORES - 0.6%
Pathmark Stores, Inc.
9 5/8%, 5/1/03 Caa 16,250,000 16,453,125
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
RETAIL & WHOLESALE, MISCELLANEOUS - 3.1%
Amazon.com, Inc.
0%, 5/1/08 (d)(g) Caa $ 40,750,000 $ 24,857,500
Big 5 Corp.
10 7/8%, 11/15/07 B2 6,255,000 6,489,563
Central Tractor Farm & Country,
Inc. 10 5/8%, 4/1/07 B2 6,820,000 7,195,100
Home Interiors & Gifts, Inc.
10 1/8%, 6/1/08 (g) B2 5,900,000 6,032,750
J Crew Operating Corp.
10 3/8%, 10/15/07 Caa 16,800,000 15,960,000
J Crew Group, Inc.
0%, 10/15/08 (d)(g) Caa 13,417,000 7,513,520
Metals USA, Inc.
8 5/8%, 2/15/08 (g) B2 5,450,000 5,272,875
U.S. Office Products Co.
9 3/4%, 6/15/08 (g) B3 9,540,000 9,444,600
82,765,908
TOTAL RETAIL & WHOLESALE 131,010,183
SERVICES - 5.3%
LEASING & RENTAL - 1.7%
Apcoa, Inc.
9 1/4%, 3/15/08 (g) Caa 14,730,000 14,619,525
AP Holdings, Inc.
0%, 3/15/08 (d)(g) Caa 6,800,000 4,046,000
Brand Scaffold Services, Inc.
10 1/4%, 2/15/08 (g) B3 3,250,000 3,298,750
GPA Holland 8.94%, 2/16/99 - 500,000 506,250
Hollywood Entertainment Corp.
10 5/8%, 8/15/04 B3 21,710,000 22,144,200
44,614,725
PRINTING - 0.8%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 21,340,000 22,460,350
SERVICES - 2.8%
Iron Mountain, Inc.
8 3/4%, 9/30/09 B3 4,115,000 4,197,300
Medaphis Corp.
9 1/2%, 2/15/05 (g) B2 16,483,000 15,988,510
Protection One Alarm
Monitoring,
Inc. 13 5/8%, 6/30/05 Caa 3,065,000 3,448,125
Signature Resorts, Inc.:
9 1/4%, 5/15/06 B2 10,980,000 10,925,100
9 3/4%, 10/1/07 B3 19,080,000 18,555,300
Spin Cycle, Inc. Unit
0%, 5/1/05 (d)(g) - 16,625,000 11,720,625
Teligent, Inc. 0%,
3/1/08 (d)(g) Caa 16,480,000 9,105,200
73,940,160
TOTAL SERVICES 141,015,235
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
TECHNOLOGY - 3.6%
COMMUNICATIONS EQUIPMENT - 0.5%
Jordan Telecommunication
Products, Inc.:
9 7/8%, 8/1/07 B3 $ 3,540,000 $ 3,610,800
0%, 8/1/07 (d) B3 10,400,000 8,528,000
12,138,800
COMPUTER SERVICES & SOFTWARE - 2.0%
Concentric Network Corp.
12 3/4%, 12/15/07 - 8,310,000 8,850,150
DecisionOne Corp.
9 3/4%, 8/1/07 B3 4,510,000 4,329,600
DecisionOne Holding Corp.
0%, 8/1/08, unit (d) Caa 12,045,000 7,227,000
ICG Services, Inc.:
0%, 2/15/08 (d)(g) - 48,660,000 29,317,650
0%, 5/1/08 (g) - 5,580,000 3,264,300
52,988,700
ELECTRONIC INSTRUMENTS - 0.6%
Fisher Scientific International, Inc.
9%, 2/1/08 B3 4,635,000 4,611,825
Telecommunications Techniques
Co. 9 3/4%, 5/15/08 (g) B3 11,980,000 12,189,650
16,801,475
ELECTRONICS - 0.5%
American Mobile Satellite Corp.
Unit 12 1/4%, 4/1/08 (g) - 4,180,000 3,887,400
Communications Instruments, Inc.
10%, 9/15/04 B3 5,360,000 5,467,200
Hadco Corp. 9 1/2%,
6/15/08 (g) B2 4,730,000 4,670,875
14,025,475
TOTAL TECHNOLOGY 95,954,450
TRANSPORTATION - 1.4%
AIR TRANSPORTATION - 0.9%
Atlas Air, Inc. 9 1/4%,
4/15/08 (g) B3 4,480,000 4,474,400
Kitty Hawk, Inc. 9.95%,
11/15/04 B1 12,770,000 13,280,800
US Air, Inc. euro pass through
trust 8 5/8%, 9/1/98 Ba2 5,000,000 5,012,500
22,767,700
SHIPPING - 0.5%
Amer Reefer Co. Ltd.
10 1/4%, 3/1/08 (g) B1 3,910,000 3,910,000
Holt Group, Inc.
9 3/4%, 1/15/06 (g) Caa 10,250,000 10,045,000
13,955,000
TOTAL TRANSPORTATION 36,722,700
UTILITIES - 15.4%
CELLULAR - 8.6%
CellNet Data Systems, Inc.
0%, 10/1/07 (d) - 30,260,000 16,189,100
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Cencall Communications Corp.
0%, 1/15/04 (d) B2 $ 1,770,000 $ 1,739,025
Iridium LLC/Iridium Capital
Corp. 13%, 7/15/05 B3 2,220,000 2,380,950
McCaw International Ltd.
0%, 4/15/07 (d) Caa 49,535,000 32,445,425
Microcell Telecommunications,
Inc. 0%, 6/1/06 (d) B3 7,660,000 5,725,850
Millicom International Cellular
SA 0%, 6/1/06 (d) B3 66,270,000 51,359,250
Nextel International, Inc.
12 1/8%, 4/15/08 (g) Caa 22,820,000 13,235,600
Nextel Communications, Inc.:
0%, 8/15/04 (d) B2 20,290,000 19,732,025
0%, 2/15/08 (d)(g) B2 30,060,000 19,313,550
PageMart Wireless, Inc.:
0%, 2/1/05 (d) B3 7,070,000 6,256,950
0%, 2/1/08 (d) Caa 44,420,000 26,652,000
Rogers Communications, Inc.
8 7/8%, 7/15/07 B2 13,360,000 13,460,200
Teletrac, Inc. 14%, 8/1/07 Caa 1,970,000 1,773,000
Telesystem International Wireless, Inc.:
0%, 6/30/07 (d) Caa 13,870,000 9,084,850
0%, 11/1/07 (d) Caa 15,260,000 9,041,550
228,389,325
ELECTRIC UTILITY - 0.1%
Niagara Mohawk Power Corp.
0%, 7/1/10 (d) Ba3 3,370,000 2,308,450
TELEPHONE SERVICES - 6.7%
Covad Communications Group
Unit 0%, 3/15/08 (d)(g) - 15,580,000 7,945,800
Dobson Wireline Co.
12 1/4%, 6/15/08 (g) - 10,910,000 10,664,525
GST Telecommunications, Inc.
12 3/4%, 11/15/07 - 11,520,000 13,334,400
GST USA, Inc. 0%,
12/15/05 (d) - 4,090,000 3,312,900
Hyperion Telecommunications, Inc.:
Series B, 0%, 4/15/03) (d) B3 31,110,000 23,099,175
12 1/4%, 9/1/04 B3 6,155,000 6,616,625
IXC Communications, Inc.
9%, 4/15/08 (g) B3 11,755,000 11,637,450
KMC Telecom Holdings, Inc.
0%, 2/15/08 units (g) - 19,870,000 11,623,950
McLeodUSA, Inc. 0%,
3/1/07 (d) B2 16,340,000 12,214,150
Netia Holdings B.V.:
10 1/4%, 11/1/07 B3 3,240,000 3,110,400
0%, 11/1/07 (d) B3 5,800,000 3,770,000
NEXTLINK Communications, Inc.
9 5/8%, 10/1/07 B3 2,610,000 2,668,725
Optel Communications Corp.
15%, 12/29/04 (h) - 12,000,000 11,240,640
Pathnet, Inc. Unit
12 1/2%, 4/15/08 (g) - 8,700,000 9,222,000
Rhythms NetConnections, Inc.
Unit 0%, 5/15/08 (d)(g) - 17,325,000 8,402,625
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
UTILITIES - CONTINUED
TELEPHONE SERVICES - CONTINUED
Winstar Communications, Inc.:
0%, 10/15/05 (d) Caa $ 6,460,000 $ 5,458,700
14 1/2%, 10/15/05 Caa 13,220,000 18,243,600
11%, 3/15/08 (g) - 15,075,000 14,999,625
177,565,290
TOTAL UTILITIES 408,263,065
TOTAL NONCONVERTIBLE BONDS 1,903,394,613
TOTAL CORPORATE BONDS
(Cost $1,910,076,005) 1,918,837,203
COMMERCIAL MORTGAGE SECURITIES - 0.0%
MOODY'S
RATINGS (C)
Meritor Mortgage Security Corp.
commercial Series 1987-1
Class B, 9.40%, 2/1/00 (b)(g)
(Cost $117,176) - 1,350,000 250,560
COMMON STOCKS - 6.1%
SHARES
AEROSPACE & DEFENSE - 0.1%
Wyman-Gordon Co. (a) 125,000 2,492,188
BASIC INDUSTRIES - 0.4%
CHEMICALS & PLASTICS - 0.0%
Sterling Chemical Holdings
warrants 8/15/08 (a) 340 8,160
IRON & STEEL - 0.0%
Republic Engineered Steels, Inc. (a) 67,500 291,094
PACKAGING & CONTAINERS - 0.1%
Gaylord Container Corp. Class A (a) 301,900 2,320,856
PAPER & FOREST PRODUCTS - 0.3%
Jefferson Smurfit Corp. (a) 494,000 7,765,063
TOTAL BASIC INDUSTRIES 10,385,173
CONSTRUCTION & REAL ESTATE - 0.4%
BUILDING MATERIALS - 0.1%
International Utility Structures, Inc.
unit 2,500 2,725,000
REAL ESTATE - 0.3%
LNR Property Corp. 283,600 7,267,250
REAL ESTATE INVESTMENT TRUSTS - 0.0%
Ocwen Asset Investment Corp. 19,200 318,000
TOTAL CONSTRUCTION & REAL ESTATE 10,310,250
DURABLES - 0.3%
TEXTILES & APPAREL - 0.3%
Arena Brands Holdings Corp. Class B (a) 48,889 1,222,225
Hat Brands, Inc. (a)(h)(f) 340,000 -
Polymer Group, Inc. (a) 503,000 5,847,378
7,069,603
SHARES VALUE (NOTE 1)
ENERGY - 0.2%
OIL & GAS - 0.2%
Harcor Energy, Inc.
warrants 7/24/00 (a) 330,000 $ -
Plains Resources, Inc. (a) 336,300 6,032,384
6,032,384
FINANCE - 0.0%
CREDIT & OTHER FINANCE - 0.0%
Olympic Financial Ltd.
warrants 3/15/07 (a) 498 5,976
SECURITIES INDUSTRY - 0.0%
ECM Corp. LP (g) 3,000 264,000
TOTAL FINANCE 269,976
HEALTH - 0.0%
MEDICAL EQUIPMENT & SUPPLIES - 0.0%
Imagyn Medical Technologies, Inc. (a) 150,000 75,000
Wright Medical Technology, Inc.
warrants 6/30/03 (a) 3,212 305,140
380,140
MEDIA & LEISURE - 0.7%
BROADCASTING - 0.5%
Benedek Communications Corp.
warrants 7/1/00 (a) 57,600 172,800
CS Wireless Systems, Inc. (a)(g) 1,024 -
Loral Orion Networks Systems, Inc.:
warrants 1/15/07 (a) 5,585 83,775
warrants 1/15/17 (a) 45,930 551,160
Teletrac Holdings, Inc.
warrants 8/1/07 (a) 3,940 39,400
UIH Australia/Pacific, Inc.
warrants 5/15/06 (a) 26,805 134,025
United International Holdings, Inc.
Class A (a) 821,200 13,139,200
14,120,360
LEISURE DURABLES & TOYS - 0.1%
IHF Capital, Inc., Series I warrants:
11/14/99 (a)(g) 5,890 176,700
11/15/04 (a)(g) 10,250 1,537,500
1,714,200
LODGING & GAMING - 0.0%
Bally Gaming International, Inc.
warrants 7/29/98 (a) 90,000 56,250
Motels of America, Inc. (a) 3,000 75,000
131,250
RESTAURANTS - 0.1%
Friendly Ice Cream Corp. 100,000 1,687,500
TOTAL MEDIA & LEISURE 17,653,310
NONDURABLES - 0.0%
HOUSEHOLD PRODUCTS - 0.0%
Renaissance Cosmetics, Inc.
warrants 8/31/06 (a)(g) 12,750 130
TOBACCO - 0.0%
North Atlantic Trading, Inc.
warrants 6/15/07 (a) 210 -
TOTAL NONDURABLES 130
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - 0.4%
APPAREL STORES - 0.1%
Lamonts Apparel, Inc.:
Class A, warrants 1/31/08 (a) 67,341 $ 16,835
Class A 108,775 40,791
Class B, warrants 1/31/08 (a) 21,602 5,401
Mothers Work (a)(f) 317,052 2,219,364
2,282,391
GROCERY STORES - 0.3%
Meyer (Fred), Inc. (a) 186,114 7,909,845
TOTAL RETAIL & WHOLESALE 10,192,236
SERVICES - 1.2%
LEASING & RENTAL - 0.2%
Hollywood Entertainment Corp. (a) 307,600 4,171,825
PRINTING - 0.2%
Big Flower Holdings, Inc. (a) 221,000 6,630,000
SERVICES - 0.8%
Sunterra Resorts, Inc. 1,242,000 20,493,000
TOTAL SERVICES 31,294,825
TECHNOLOGY - 0.4%
COMPUTER SERVICES & SOFTWARE - 0.4%
Concentric Network Corp. 100,000 3,031,250
Concentric Network Corp.
warrants 12/15/07 (a)(g) 6,100 823,500
ICG Communications, Inc. (a) 200,000 7,312,500
11,167,250
TRANSPORTATION - 0.2%
AIR TRANSPORTATION - 0.2%
Kitty Hawk, Inc. (a) 245,000 4,165,000
UTILITIES - 2.0%
CELLULAR - 0.7%
Cellnet Data Systems, Inc. (a) 42,500 411,719
CellNet Data Systems, Inc.
warrants 10/1/07 (a)(g) 18,000 540,000
McCaw International Ltd.
warrants 4/15/07 (a)(g) 42,305 211,525
Microcell Telecommunications, Inc.
warrants 6/1/06 (a)(g) 103,480 1,999,234
Pagemart Wireless, Inc. Class A (a) 1,427,000 12,932,188
Powertel, Inc. warrants 2/1/06 (a) 56,448 522,144
Telesystem International Wireless, Inc.
(sub-vtg.) (a) 72,600 1,409,709
18,026,519
TELEPHONE SERVICES - 1.3%
GST Telecommunications, Inc. (a) 947,800 13,506,150
Hyperion Telecommunications, Inc.
Class A 76,113 1,194,023
IXC Communications, Inc. 386,800 18,759,800
Optel Communications
warrants 12/29/04 (a)(h) 2,559,515 759,408
34,219,381
TOTAL UTILITIES 52,245,900
TOTAL COMMON STOCKS
(Cost $151,146,835) 163,658,365
PREFERRED STOCKS - 17.9%
SHARES VALUE (NOTE 1)
CONVERTIBLE PREFERRED STOCKS - 1.1%
ENERGY - 0.1%
OIL & GAS - 0.1%
Chesapeake Energy Corp. $3.50 (g) 63,700 $ 2,691,325
MEDIA & LEISURE - 0.2%
LODGING & GAMING - 0.2%
Host Marriott Financial Trust
$3.375 QUIPS (g) 30,500 1,601,250
Host Marriott Financial Trust $3.375 35,000 1,837,500
3,438,750
SERVICES - 0.2%
PRINTING - 0.2%
Big Flower Trust I $3.00 QUIPS (g) 87,500 5,353,906
UTILITIES - 0.6%
TELEPHONE SERVICES - 0.6%
IXC Communications, Inc. $3.375 (g) 348,900 16,594,556
TOTAL CONVERTIBLE PREFERRED STOCKS 28,078,537
NONCONVERTIBLE PREFERRED STOCKS - 16.9%
FINANCE - 0.7%
CREDIT & OTHER FINANCE - 0.3%
Fresenius Medical Care Capital Trust II
7 7/8% 8,375 8,338,359
INSURANCE - 0.4%
American Annuity Group Capital Trust II
8 3/4% 8,910 9,290,876
TOTAL FINANCE 17,629,235
INDUSTRIAL MACHINERY & EQUIPMENT - 0.6%
ELECTRICAL EQUIPMENT - 0.6%
Ampex Corp. 8% (a)(h) 1,589 1,235,114
Echostar Communications Corp.
12 1/8%, pay-in-kind 12,618 13,879,800
15,114,914
MEDIA & LEISURE - 6.4%
BROADCASTING - 6.1%
Adelphia Communications Corp. $13 43,500 5,220,000
American Radio Systems Corp.
11 3/8%, pay-in-kind 133,856 15,493,832
CSC Holdings, Inc.:
11 1/8% pay-in-kind 237,083 27,146,004
Series H, 11 3/4% pay-in-kind 183,617 21,161,859
Chancellor Media Corp., Series A,
$12.25 64,300 9,162,750
Citadel Broadcasting Co., Series B,
13 1/4% pay-in-kind 55,960 6,603,280
Granite Broadcasting Corp.
12 3/4%, pay-in-kind 8,416 9,846,720
Time Warner, Inc., Series M,
10 1/4%, pay-in-kind 61,942 68,833,048
163,467,493
PUBLISHING - 0.3%
PRIMEDIA, Inc.:
Series D, $10 5,400 567,000
8 5/8%, 4/1/10 82,500 8,085,000
8,652,000
TOTAL MEDIA & LEISURE 172,119,493
PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONCONVERTIBLE PREFERRED STOCKS - CONTINUED
NONDURABLES - 0.2%
HOUSEHOLD PRODUCTS - 0.0%
Renaissance Cosmetics, Inc.
pay-in-kind 14% 16,284 $ 24,426
TOBACCO - 0.2%
North Atlantic Trading, Inc.
12%, pay-in-kind 235,820 5,895,500
TOTAL NONDURABLES 5,919,926
SERVICES - 0.3%
LEASING & RENTAL - 0.3%
Scaffold Services, Inc.
14 1/2% (a)(g) 209,000 7,315,000
TECHNOLOGY - 1.5%
COMMUNICATIONS EQUIPMENT - 1.2%
Intermedia Communications, Inc.
13 1/2%, pay-in-kind 26,775 31,594,500
COMPUTER SERVICES & SOFTWARE - 0.3%
Concentric Network Corp.
13 1/2% (g) 9,030 9,007,425
TOTAL TECHNOLOGY 40,601,925
UTILITIES - 7.2%
CELLULAR - 2.1%
Nextel Communications, Inc.:
Series D,13% pay-in-kind 28,070 30,736,650
11 1/8% pay-in-kind (g) 24,172 24,897,160
55,633,810
TELEPHONE SERVICES - 5.1%
e.spire Communications, Inc.:
14 3/4% pay-in-kind 3,388 4,065,600
$127.50 pay-in-kind 14,368 15,194,160
Hyperion Telecommunications, Inc.
12 7/8%, pay-in-kind (Reg.) 18,015 17,879,888
ICG Holdings, Inc.:
14 1/4%, pay-in-kind 25,363 29,674,710 14%, pay-in-kind 5,600
6,496,000
IXC Communications, Inc.
12 1/2% pay-in-kind 6,903 8,007,480
NEXTLINK Communications, Inc.
14%, pay-in-kind 770,474 45,265,348
WinStar Communications, Inc.
14 1/4% 7,810 9,293,900
135,877,086
TOTAL UTILITIES 191,510,896
TOTAL NONCONVERTIBLE PREFERRED STOCKS 450,211,389
TOTAL PREFERRED STOCKS
(Cost $464,125,203) 478,289,926
CASH EQUIVALENTS - 4.1%
MATURITY VALUE
AMOUNT (NOTE 1)
Investments in repurchase agreements
(U.S. Treasury obligations), in a joint
trading account at 5.66%, dated
6/30/98 due 7/1/98 $ 108,291,023 $108,274,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $2,633,739,219) $ 2,669,310,054
SECURITY TYPE ABBREVIATIONS
QUIPS - Quarterly Income Preferred
Securities
LEGEND
(a)Non-income producing
(b)Non-income producing - issuer filed for protection under the
Federal Bankruptcy Code or is in default of interest payment.
(c)Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investors Service, Inc.
(d)Debt obligation initially issued in zero coupon form which converts
to coupon form at a specified rate and date. The rate shown is the
rate at period end.
(e)The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(f)Transactions during the period with companies which are or were
affiliates are as follows (see Note 9 of Notes to Financial
Statements):
PURCHASE SALES DIVIDEND VALUE
AFFILIATE COST COST INCOME
Hat Brands, Inc. $ - $ - $ - $ -
Mothers Work 388,699 - - 2,219,364
TOTALS $ 388,699 $ - $ - $ 2,219,364
(g)Security exempt from registration under Rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt
from registration, normally to qualified institutional buyers. At the
period end, the value of these securities amounted to $718,821,843 or
26.6% of net assets.
(h)Restricted securities - Investment in securities not registered
under the Securities Act of 1933 (see Note 2 of Notes to Financial
Statements).
Additional information on each holding is as follows:
ACQUISITION ACQUISITION
DATE COST
Ampex Corp. 8% 2/16/95 $ 834,225
Hat Brands, Inc. 2/22/94 $ 340,000
Optel Communications
15% 12/28/04 12/31/97 $ 11,240,640
Optel Communications
warrants 12/31/97 $ 759,408
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $1,620,129,492 and $1,217,153,409, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $13,334 for the
period (see Note 4 of Notes to Financial Statements).
The composition of long-term debt holdings as a percentage of total
value of investment in securities, is as follows (ratings are
unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 0.0% AAA, AA, A 0.0%
Baa 0.0% BBB 0.6%
Ba 2.9% BB 4.8%
B 48.3% B 48.6%
Caa 13.9% CCC 8.3%
Ca, C 0.0% CC, C 0.0%
D 0.0%
The percentage not rated by Moody's or S&P amounted to 6.9%. FMR has
determined that unrated debt securities that are lower quality account
for 6.9% of the total value of investment in securities.
INCOME TAX INFORMATION
At June 30, 1998, the aggregate cost of investment securities for
income tax purposes was $2,633,777,644. Net unrealized appreciation
aggregated $35,532,410, of which $2,669,430,994 related to appreciated
investment securities and $2,633,898,584 related to depreciated
investment securities.
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 30, 1998 (UNAUDITED)
ASSETS
INVESTMENT IN SECURITIES, AT $ 2,669,310,054
VALUE (INCLUDING REPURCHASE AGREEMENTS OF $108,274,000) (COST $2,633,739,219) -
SEE ACCOMPANYING SCHEDULE
CASH 881
RECEIVABLE FOR INVESTMENTS SOLD 15,658,093
RECEIVABLE FOR FUND SHARES SOLD 2,490,902
DIVIDENDS RECEIVABLE 7,182,312
INTEREST RECEIVABLE 33,981,186
OTHER RECEIVABLES 409,716
TOTAL ASSETS 2,729,033,144
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 27,135,137
PAYABLE FOR FUND SHARES REDEEMED 2,711,993
ACCRUED MANAGEMENT FEE 1,309,301
DISTRIBUTION FEES PAYABLE 5,378
OTHER PAYABLES AND 251,116
ACCRUED EXPENSES
TOTAL LIABILITIES 31,412,925
NET ASSETS $ 2,697,620,219
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 2,503,154,762
UNDISTRIBUTED NET INVESTMENT INCOME 108,867,466
ACCUMULATED UNDISTRIBUTED 50,027,156
NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 35,570,835
NET ASSETS $ 2,697,620,219
INITIAL CLASS: $12.63
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER
SHARE ($2,622,932,381 (DIVIDED BY)
207,615,971 SHARES)
SERVICE CLASS: $12.62
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($74,687,838 (DIVIDED BY) 5,915,965
SHARES)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME $ 25,333,777
DIVIDENDS
INTEREST 95,218,106
TOTAL INCOME 120,551,883
EXPENSES
MANAGEMENT FEE $ 7,580,598
TRANSFER AGENT FEES 894,432
DISTRIBUTION FEES - SERVICE CLASS 15,228
ACCOUNTING FEES AND EXPENSES 408,966
NON-INTERESTED TRUSTEES' COMPENSATION 4,674
CUSTODIAN FEES AND EXPENSES 30,372
REGISTRATION FEES 8,633
AUDIT 28,239
LEGAL 16,695
MISCELLANEOUS 49,654
TOTAL EXPENSES BEFORE REDUCTIONS 9,037,491
EXPENSE REDUCTIONS (61,436) 8,976,055
NET INVESTMENT INCOME 111,575,828
REALIZED AND UNREALIZED GAIN (LOSS) 50,821,870
NET REALIZED GAIN (LOSS) ON
INVESTMENT SECURITIES
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENT SECURITIES (44,014,060)
NET GAIN (LOSS) 6,807,810
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 118,383,638
OTHER INFORMATION $ 50,987
EXPENSE REDUCTIONS
DIRECTED BROKERAGE ARRANGEMENTS
CUSTODIAN CREDITS 10,449
$ 61,436
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
OPERATIONS $ 111,575,828 $ 172,037,074
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 50,821,870 112,724,876
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) (44,014,060) 28,621,311
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 118,383,638 313,383,261
DISTRIBUTIONS TO SHAREHOLDERS (175,797,040) (116,015,279)
FROM NET INVESTMENT INCOME
FROM NET REALIZED GAIN (110,256,336) (14,338,900)
TOTAL DISTRIBUTIONS (286,053,376) (130,354,179)
SHARE TRANSACTIONS - NET INCREASE (DECREASE) 532,855,013 560,584,056
TOTAL INCREASE (DECREASE) IN NET ASSETS 365,185,275 743,613,138
NET ASSETS
BEGINNING OF PERIOD 2,332,434,944 1,588,821,806
END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $108,867,466 AND
$171,323,283, $ 2,697,620,219 $ 2,332,434,944
RESPECTIVELY)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
OTHER INFORMATION:
SIX MONTHS ENDED JUNE 30, 1998
SHARES DOLLARS YEAR ENDED DECEMBER 31, 1997
(UNAUDITED) SHARES DOLLARS
SHARE TRANSACTIONS 50,857,223 $ 656,742,654 99,919,218 $ 1,254,908,724
INITIAL CLASS
SOLD
REINVESTED 22,841,446 282,777,102 11,056,288 130,354,179
REDEEMED (37,626,101) (479,079,051) (66,317,508) (827,580,626)
NET INCREASE (DECREASE) 36,072,568 $ 460,440,705 44,657,998 $ 557,682,277
SERVICE CLASS A 5,634,653 $ 71,596,912 215,034 $ 2,901,779
SOLD
REINVESTED 80,565 997,399 - -
REDEEMED (14,287) (180,003) - -
NET INCREASE (DECREASE) 5,700,931 $ 72,414,308 215,034 $ 2,901,779
DISTRIBUTIONS
INITIAL CLASS - NET INVESTMENT INCOME $ 175,124,770 $ 116,015,279
INITIAL CLASS - NET REALIZED GAIN 109,868,812 14,338,900
TOTAL $ 284,993,582 $ 130,354,179
SERVICE CLASS - NET INVESTMENT INCOME $ 672,270 -
SERVICE CLASS - NET REALIZED GAIN 387,524 -
TOTAL $ 1,059,794 $ -
$ 286,053,376 $ 130,354,179
1. SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1998
SELECTED PER-SHARE DATA (UNAUDITED) 1997 1996 1995 1994 1993
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.580 $ 12.520 $ 12.050 $ 10.750 $ 11.990 $ 10.820
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .551 D 1.124 D .927 .856 .770 .728
NET REALIZED AND UNREALIZED GAIN (LOSS) .069 .936 .643 1.224 (.910) 1.332
TOTAL FROM INVESTMENT OPERATIONS .620 2.060 1.570 2.080 (.140) 2.060
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.960) (.890) (.920) (.780) (.730) (.794)
IN EXCESS OF NET INVESTMENT INCOME - - - - - (.036)
FROM NET REALIZED GAIN (.610) (.110) (.180) - (.370) (.060)
TOTAL DISTRIBUTIONS (1.570) (1.000) (1.100) (.780) (1.100) (.890)
NET ASSET VALUE, END OF PERIOD $ 12.630 $ 13.580 $ 12.520 $ 12.050 $ 10.750 $ 11.990
TOTAL RETURN B, C 4.80% 17.67% 14.03% 20.72% (1.64)% 20.40%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 2,622,932 $ 2,329,516 $ 1,588,822 $ 1,040,000 $ 569,417 $ 463,931
RATIO OF EXPENSES TO AVERAGE NET ASSETS .70% A .71% .71% .71% .71% .64% F
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET
ASSETS 8.68% A 8.88% 9.09% 9.32% 8.75% 8.69%
PORTFOLIO TURNOVER RATE 100% A 118% 123% 132% 122% 155%
AVERAGE COMMISSION RATE H $ .0429 $ .0389 $ .0370
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
SELECTED PER-SHARE DATA (UNAUDITED) 1997 E
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.570 $ 13.380
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .546 D .203 D
NET REALIZED AND UNREALIZED GAIN (LOSS) .074 (.013)
TOTAL FROM INVESTMENT OPERATIONS .620 .190
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.960) -
FROM NET REALIZED GAIN (.610) -
TOTAL DISTRIBUTIONS (1.570) -
NET ASSET VALUE, END OF PERIOD $ 12.620 $ 13.570
TOTAL RETURN B, C 4.79% 1.42%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 74,688 $ 2,919
RATIO OF EXPENSES TO AVERAGE NET ASSETS .80% A .81% A
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS .80% A .80% A, G
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 8.96% A 10.75% A
PORTFOLIO TURNOVER RATE 100% A 118%
AVERAGE COMMISSION RATE H $ .0429 $ .0389
A ANNUALIZED
B TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN. TOTAL
RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED
DURING THE PERIODS SHOWN.
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3,1997 (COMMENCEMENT OF SALE OF SERVICE CLASS SHARES) TO
DECEMBER 31, 1997).
F FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE PERIOD. WITHOUT
THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD HAVE BEEN HIGHER .
G FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO EITHER
PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES.
H FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED TO
DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH
COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND
DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES
AND COMMISSION RATE STRUCTURES MAY DIFFER.
</TABLE>
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 LIFE OF
JUNE 30, 1998 YEAR YEARS FUND
VIP II: ASSET MANAGER - "INITIAL CLASS" 18.57% 13.05% 13.11%
FIDELITY COMPOSITE 19.70% 13.60% N/A
S&P 500 (REGISTERED TRADEMARK) 30.16% 23.08% 17.42%
LB AGGREGATE BOND 10.54% 6.88% 8.78%
LB 3 MONTH T-BILL 5.53% 5.12% N/A
VARIABLE ANNUITY FLEXIBLE PORTFOLIO FUNDS AVERAGE 18.12% 13.91% N/A
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's returns to those of the Fidelity Asset
Allocation Composite Index, a hypothetical combination of unmanaged
indices. The composite index combines the total returns of the
Standard & Poor's 500 Index, the Lehman Brothers Aggregate Bond Index
and the Lehman Brothers 3 Month Treasury Bill Index weighted according
to the fund's neutral mix.
You can also compare the fund's returns to the variable annuity
flexible portfolio funds average, which reflects the performance of
mutual funds with similar objectives tracked by Lipper Analytical
Services, Inc. The past one year average represent a peer group of 87
mutual funds. The benchmarks listed in the table above include
reinvested dividends and capital gains, if any, and exclude the effect
of sales charges.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, September 6, 1989. If Fidelity had not reimbursed
certain fund expenses, the life of fund total return would have been
lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
VIP II Asset Manager FID Composite
S&P 500 LB Aggregate Bond
00156 F0001
SP001 LB001
1989/09/30 10000.00 10000.00
10000.00 10000.00
1989/10/31 10020.02 10057.70
9768.00 10246.00
1989/11/30 10060.06 10178.69
9967.27 10343.34
1989/12/31 10091.09 10277.43
10206.48 10371.26
1990/01/31 9868.42 10029.64
9521.63 10247.85
1990/02/28 9969.64 10094.03
9644.46 10280.64
1990/03/31 10050.61 10193.35
9900.03 10287.84
1990/04/30 9919.03 10098.66
9652.53 10193.19
1990/05/31 10425.10 10529.97
10593.65 10494.91
1990/06/30 10506.07 10595.89
10521.62 10663.87
1990/07/31 10485.83 10662.11
10487.95 10811.04
1990/08/31 10141.70 10332.65
9539.84 10666.17
1990/09/30 9929.15 10241.83
9075.25 10754.70
1990/10/31 9979.76 10314.96
9036.22 10891.28
1990/11/30 10465.59 10624.61
9619.96 11125.44
1990/12/31 10769.23 10802.47
9888.36 11299.00
1991/01/31 11284.56 11009.44
10319.49 11439.11
1991/02/28 11726.26 11285.45
11057.34 11536.34
1991/03/31 11915.56 11410.72
11324.93 11615.94
1991/04/30 12094.35 11486.94
11352.11 11741.39
1991/05/31 12367.79 11669.35
11842.52 11809.49
1991/06/30 12146.94 11518.12
11300.13 11803.59
1991/07/31 12451.92 11749.63
11826.72 11967.66
1991/08/31 12704.33 11959.83
12107.01 12226.16
1991/09/30 12777.94 12018.08
11904.82 12474.35
1991/10/31 12862.08 12126.84
12064.35 12612.82
1991/11/30 12651.74 12046.56
11578.15 12728.85
1991/12/31 13198.62 12642.99
12902.69 13106.90
1992/01/31 13366.89 12504.31
12662.70 12928.65
1992/02/29 13626.47 12583.84
12827.32 13012.68
1992/03/31 13593.27 12492.10
12577.19 12939.81
1992/04/30 13792.52 12648.75
12946.96 13032.98
1992/05/31 13936.42 12772.62
13010.40 13279.30
1992/06/30 13925.35 12778.88
12816.54 13462.56
1992/07/31 14157.81 13127.82
13340.74 13737.19
1992/08/31 14113.53 13077.17
13067.25 13875.94
1992/09/30 14202.09 13224.45
13221.45 14041.06
1992/10/31 14224.22 13162.82
13267.72 13854.32
1992/11/30 14534.17 13329.99
13720.15 13857.09
1992/12/31 14744.49 13487.52
13888.91 14077.42
1993/01/31 15010.15 13656.87
14005.57 14347.70
1993/02/28 15150.92 13847.00
14196.05 14598.79
1993/03/31 15579.83 13989.68
14495.59 14660.10
1993/04/30 15672.57 13904.65
14144.79 14762.72
1993/05/31 15939.19 14053.79
14523.87 14781.91
1993/06/30 16066.70 14203.33
14565.99 15049.47
1993/07/31 16263.77 14221.73
14507.73 15135.25
1993/08/31 16739.04 14571.76
15057.57 15400.11
1993/09/30 16750.64 14557.48
14941.63 15441.70
1993/10/31 17202.73 14707.13
15250.92 15498.83
1993/11/30 17179.54 14594.03
15106.04 15367.09
1993/12/31 17875.07 14696.31
15288.82 15450.07
1994/01/31 18443.09 14985.71
15808.64 15658.65
1994/02/28 17857.33 14699.72
15380.23 15386.19
1994/03/31 17017.99 14320.11
14709.65 15006.15
1994/04/30 17030.15 14356.11
14897.93 14886.10
1994/05/31 17176.13 14452.82
15142.26 14884.61
1994/06/30 16847.69 14310.02
14771.27 14851.86
1994/07/31 17139.63 14613.05
15255.77 15147.42
1994/08/31 17541.06 14864.31
15881.26 15165.59
1994/09/30 17334.15 14646.64
15492.17 14942.66
1994/10/31 17419.36 14787.36
15840.74 14929.21
1994/11/30 17163.73 14571.08
15263.82 14896.37
1994/12/31 16786.37 14708.25
15490.18 14999.15
1995/01/31 16676.82 14984.44
15891.84 15296.13
1995/02/28 16946.97 15360.16
16511.15 15660.18
1995/03/31 17170.77 15595.91
16998.39 15755.71
1995/04/30 17444.31 15876.83
17498.99 15976.29
1995/05/31 17668.12 16403.71
18198.43 16594.57
1995/06/30 17817.32 16624.93
18621.18 16715.71
1995/07/31 18451.43 16836.80
19238.66 16678.94
1995/08/31 18675.24 16948.46
19286.95 16880.75
1995/09/30 18911.47 17314.75
20100.85 17044.50
1995/10/31 18662.80 17413.45
20029.09 17266.07
1995/11/30 19147.71 17842.83
20908.37 17525.07
1995/12/31 19632.62 18102.59
21311.07 17770.42
1996/01/31 20055.36 18411.16
22036.50 17887.70
1996/02/29 20001.35 18343.08
22240.77 17576.46
1996/03/31 20213.99 18364.54
22454.95 17453.42
1996/04/30 20426.62 18441.71
22785.94 17355.68
1996/05/31 20586.10 18636.38
23373.59 17320.97
1996/06/30 20772.16 18775.74
23462.64 17553.07
1996/07/31 20426.62 18478.56
22426.06 17600.46
1996/08/31 20466.49 18636.07
22899.03 17570.54
1996/09/30 21210.73 19195.30
24187.79 17876.27
1996/10/31 21755.62 19593.26
24854.88 18273.12
1996/11/30 22832.10 20338.11
26733.66 18585.59
1996/12/31 22499.85 20111.10
26204.07 18412.75
1997/01/31 23177.64 20773.56
27841.30 18469.83
1997/02/28 23377.96 20883.87
28059.58 18516.00
1997/03/31 22488.67 20370.86
26906.61 18310.47
1997/04/30 23257.38 21111.13
28512.93 18585.13
1997/05/31 24372.77 21845.17
30248.80 18761.69
1997/06/30 25020.90 22446.35
31603.95 18984.95
1997/07/31 26467.89 23593.69
34118.67 19497.55
1997/08/31 25744.40 22863.47
32207.35 19331.82
1997/09/30 26573.40 23635.45
33971.34 19617.93
1997/10/31 26136.29 23387.99
32836.70 19902.39
1997/11/30 26739.20 23982.39
34356.71 19993.94
1997/12/31 27146.17 24295.48
34946.61 20195.88
1998/01/31 27236.61 24565.89
35333.12 20454.39
1998/02/28 28462.90 25452.97
37881.35 20438.02
1998/03/31 29288.41 26151.27
39821.25 20507.51
1998/04/30 29254.02 26348.97
40221.85 20614.15
1998/05/31 29099.24 26234.49
39530.44 20809.99
1998/06/30 29666.77 26867.79
41136.17 20986.87
IMATRL PRASUN SHR__CHT 19980630 19980728 112308 R00000000000108
Let's say hypothetically that $10,000 was invested in Variable
Insurance Products Fund II: Asset Manager Portfolio on September 30,
1989, shortly after the fund started. By June 30, 1998, the value of
the investment would have grown to $29,667 - a 196.67% increase. With
reinvested dividends and capital gains, if any, a $10,000 investment
in the Standard & Poor's 500 Index, would have grown to $41,136 over
the same period - a 311.36% increase on the initial investment. If
$10,000 was invested in the Lehman Brothers Aggregate Bond Index, it
would have grown to $20,987 - a 109.87% increase.
You can also look at how the Fidelity Asset Allocation Composite Index
did over the same period. The composite index combines the cumulative
total returns of three unmanaged indexes - the S&P 500 (311.36%),
Lehman Brothers Aggregate Bond Index (109.87%), and the Lehman
Brothers 3-month T-Bill Total Rate of Return Index (57.35%) -
according to the fund's neutral mix,* assuming monthly rebalancing.
With reinvested dividends and capital gains, if any, a $10,000
investment in the index would have grown to $26,868 - a 168.68%
increase.
* 50% STOCKS, 40% BONDS AND 10% SHORT-TERM INSTRUMENTS EFFECTIVE
JANUARY 1, 1997; 40%, 40% AND 20%, RESPECTIVELY, BETWEEN JUNE 1, 1992
AND DECEMBER 31, 1996; 30%, 40% AND 30%, RESPECTIVELY, PRIOR TO JUNE
1, 1992.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
WAL-MART STORES, INC. 1.9
HOME DEPOT, INC. 1.4
GENERAL ELECTRIC CO. 1.3
SCHERING-PLOUGH CO. 1.3
AT&T CORP. 1.3
TOP FIVE BOND ISSUERS AS OF JUNE 30, 1998
(WITH MATURITIES MORE THAN ONE YEAR) % OF FUND'S
INVESTMENTS
FANNIE MAE 7.8
U.S. TREASURY OBLIGATIONS 4.6
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION 1.0
STATE OF ISRAEL 0.5
FORD MOTOR CREDIT CO. 0.4
ASSET ALLOCATION AS OF JUNE 30, 1998*
ROW: 1, COL: 1, VALUE: 10.3
ROW: 1, COL: 2, VALUE: 32.5
ROW: 1, COL: 3, VALUE: 57.2
STOCKS 52.6%
BONDS 39.2%
SHORT-TERM INVESTMENTS 8.2%
FOREIGN INVESTMENTS 3.8%
*
ASSET ALLOCATION IN THE PIE CHART REFLECTS THE CATEGORIZATION OF
ASSETS AS DEFINED IN
THE FUND'S PROSPECTUS. FINANCIAL STATEMENT CATEGORIZATIONS CONFORM TO
ACCOUNTING
STANDARDS AND WILL DIFFER FROM THE PIE CHART.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the class' dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1 fee.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 LIFE OF
JUNE 30, 1998 YEAR YEARS FUND
VIP II: ASSET MANAGER - SERVICE CLASS 18.24% 12.99% 13.08%
FIDELITY COMPOSITE 19.70% 13.60% N/A
S&P 500 (REGISTERED TRADEMARK) 30.16% 23.08% 17.42%
LB AGGREGATE BOND 10.54% 6.88% 8.78%
LB 3 MONTH T-BILL 5.53% 5.12% N/A
VARIABLE ANNUITY FLEXIBLE PORTFOLIO 18.12% 13.91% N/A
FUNDS AVERAGE
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's returns to those of the Fidelity Asset
Allocation Composite Index, a hypothetical combination of unmanaged
indices. The composite index combines the total returns of the
Standard & Poor's 500 Index, the Lehman Brothers Aggregate Bond Index
and the Lehman Brothers 3 Month Treasury Bill Index weighted according
to the fund's neutral mix. You can also compare the fund's returns to
the variable annuity flexible portfolio funds average, which reflects
the performance of mutual funds with similar objectives tracked by
Lipper Analytical Services, Inc. The past one year average represent a
peer group of 87 mutual funds. The benchmarks listed in the table
above include reinvested dividends and capital gains, if any, and
exclude the effect of sales charges.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, September 6, 1989. If Fidelity had not reimbursed
certain fund expenses, the life of fund total return would have been
lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
VIP II Asset Manager-CL S FID Composite
S&P 500 LB Aggregate Bond
00467 F0001
SP001 LB001
1989/09/30 10000.00 10000.00
10000.00 10000.00
1989/10/31 10020.02 10057.70
9768.00 10246.00
1989/11/30 10060.06 10178.69
9967.27 10343.34
1989/12/31 10091.09 10277.43
10206.48 10371.26
1990/01/31 9868.42 10029.64
9521.63 10247.85
1990/02/28 9969.64 10094.03
9644.46 10280.64
1990/03/31 10050.61 10193.35
9900.03 10287.84
1990/04/30 9919.03 10098.66
9652.53 10193.19
1990/05/31 10425.10 10529.97
10593.65 10494.91
1990/06/30 10506.07 10595.89
10521.62 10663.87
1990/07/31 10485.83 10662.11
10487.95 10811.04
1990/08/31 10141.70 10332.65
9539.84 10666.17
1990/09/30 9929.15 10241.83
9075.25 10754.70
1990/10/31 9979.76 10314.96
9036.22 10891.28
1990/11/30 10465.59 10624.61
9619.96 11125.44
1990/12/31 10769.23 10802.47
9888.36 11299.00
1991/01/31 11284.56 11009.44
10319.49 11439.11
1991/02/28 11726.26 11285.45
11057.34 11536.34
1991/03/31 11915.56 11410.72
11324.93 11615.94
1991/04/30 12094.35 11486.94
11352.11 11741.39
1991/05/31 12367.79 11669.35
11842.52 11809.49
1991/06/30 12146.94 11518.12
11300.13 11803.59
1991/07/31 12451.92 11749.63
11826.72 11967.66
1991/08/31 12704.33 11959.83
12107.01 12226.16
1991/09/30 12777.94 12018.08
11904.82 12474.35
1991/10/31 12862.08 12126.84
12064.35 12612.82
1991/11/30 12651.74 12046.56
11578.15 12728.85
1991/12/31 13198.62 12642.99
12902.69 13106.90
1992/01/31 13366.89 12504.31
12662.70 12928.65
1992/02/29 13626.47 12583.84
12827.32 13012.68
1992/03/31 13593.27 12492.10
12577.19 12939.81
1992/04/30 13792.52 12648.75
12946.96 13032.98
1992/05/31 13936.42 12772.62
13010.40 13279.30
1992/06/30 13925.35 12778.88
12816.54 13462.56
1992/07/31 14157.81 13127.82
13340.74 13737.19
1992/08/31 14113.53 13077.17
13067.25 13875.94
1992/09/30 14202.09 13224.45
13221.45 14041.06
1992/10/31 14224.22 13162.82
13267.72 13854.32
1992/11/30 14534.17 13329.99
13720.15 13857.09
1992/12/31 14744.49 13487.52
13888.91 14077.42
1993/01/31 15010.15 13656.87
14005.57 14347.70
1993/02/28 15150.92 13847.00
14196.05 14598.79
1993/03/31 15579.83 13989.68
14495.59 14660.10
1993/04/30 15672.57 13904.65
14144.79 14762.72
1993/05/31 15939.19 14053.79
14523.87 14781.91
1993/06/30 16066.70 14203.33
14565.99 15049.47
1993/07/31 16263.77 14221.73
14507.73 15135.25
1993/08/31 16739.04 14571.76
15057.57 15400.11
1993/09/30 16750.64 14557.48
14941.63 15441.70
1993/10/31 17202.73 14707.13
15250.92 15498.83
1993/11/30 17179.54 14594.03
15106.04 15367.09
1993/12/31 17875.07 14696.31
15288.82 15450.07
1994/01/31 18443.09 14985.71
15808.64 15658.65
1994/02/28 17857.33 14699.72
15380.23 15386.19
1994/03/31 17017.99 14320.11
14709.65 15006.15
1994/04/30 17030.15 14356.11
14897.93 14886.10
1994/05/31 17176.13 14452.82
15142.26 14884.61
1994/06/30 16847.69 14310.02
14771.27 14851.86
1994/07/31 17139.63 14613.05
15255.77 15147.42
1994/08/31 17541.06 14864.31
15881.26 15165.59
1994/09/30 17334.15 14646.64
15492.17 14942.66
1994/10/31 17419.36 14787.36
15840.74 14929.21
1994/11/30 17163.73 14571.08
15263.82 14896.37
1994/12/31 16786.37 14708.25
15490.18 14999.15
1995/01/31 16676.82 14984.44
15891.84 15296.13
1995/02/28 16946.97 15360.16
16511.15 15660.18
1995/03/31 17170.77 15595.91
16998.39 15755.71
1995/04/30 17444.31 15876.83
17498.99 15976.29
1995/05/31 17668.12 16403.71
18198.43 16594.57
1995/06/30 17817.32 16624.93
18621.18 16715.71
1995/07/31 18451.43 16836.80
19238.66 16678.94
1995/08/31 18675.24 16948.46
19286.95 16880.75
1995/09/30 18911.47 17314.75
20100.85 17044.50
1995/10/31 18662.80 17413.45
20029.09 17266.07
1995/11/30 19147.71 17842.83
20908.37 17525.07
1995/12/31 19632.62 18102.59
21311.07 17770.42
1996/01/31 20055.36 18411.16
22036.50 17887.70
1996/02/29 20001.35 18343.08
22240.77 17576.46
1996/03/31 20213.99 18364.54
22454.95 17453.42
1996/04/30 20426.62 18441.71
22785.94 17355.68
1996/05/31 20586.10 18636.38
23373.59 17320.97
1996/06/30 20772.16 18775.74
23462.64 17553.07
1996/07/31 20426.62 18478.56
22426.06 17600.46
1996/08/31 20466.49 18636.07
22899.03 17570.54
1996/09/30 21210.73 19195.30
24187.79 17876.27
1996/10/31 21755.62 19593.26
24854.88 18273.12
1996/11/30 22832.10 20338.11
26733.66 18585.59
1996/12/31 22499.85 20111.10
26204.07 18412.75
1997/01/31 23177.64 20773.56
27841.30 18469.83
1997/02/28 23377.96 20883.87
28059.58 18516.00
1997/03/31 22488.67 20370.86
26906.61 18310.47
1997/04/30 23257.38 21111.13
28512.93 18585.13
1997/05/31 24372.77 21845.17
30248.80 18761.69
1997/06/30 25020.90 22446.35
31603.95 18984.95
1997/07/31 26467.89 23593.69
34118.67 19497.55
1997/08/31 25744.40 22863.47
32207.35 19331.82
1997/09/30 26573.40 23635.45
33971.34 19617.93
1997/10/31 26136.29 23387.99
32836.70 19902.39
1997/11/30 26724.13 23982.39
34356.71 19993.94
1997/12/31 27116.03 24295.48
34946.61 20195.88
1998/01/31 27206.46 24565.89
35333.12 20454.39
1998/02/28 28415.66 25452.97
37881.35 20438.02
1998/03/31 29206.89 26151.27
39821.25 20507.51
1998/04/30 29189.69 26348.97
40221.85 20614.15
1998/05/31 29034.89 26234.49
39530.44 20809.99
1998/06/30 29585.31 26867.79
41136.17 20986.87
IMATRL PRASUN SHR__CHT 19980630 19980728 111828 R00000000000108
Let's say hypothetically that $10,000 was invested in Variable
Insurance Products Fund II: Asset Manager Portfolio - Service Class on
September 30, 1989, shortly after the fund started. By June 30, 1998,
the value of the investment would have grown to $29,585 - a 195.85%
increase. With reinvested dividends and capital gains, if any, a
$10,000 investment in the Standard & Poor's 500 Index, would have
grown to $41,136 over the same period - a 311.36% increase on the
initial investment. If $10,000 was invested in the Lehman Brothers
Aggregate Bond Index, it would have grown to $20,987 - a 109.87%
increase. You can also look at how the Fidelity Asset Allocation
Composite Index did over the same period. The composite index combines
the cumulative total returns of three unmanaged indexes - the S&P 500
(311.36%), Lehman Brothers Aggregate Bond Index (109.87%), and the
Lehman Brothers 3-month T-Bill Total Rate of Return Index (57.35%) -
according to the fund's neutral mix,* assuming monthly rebalancing.
With reinvested dividends and capital gains, if any, a $10,000
investment in the index would have grown to $26,868 - a 168.68%
increase.
* 50% STOCKS, 40% BONDS AND 10% SHORT-TERM INSTRUMENTS EFFECTIVE
JANUARY 1, 1997; 40%, 40% AND 20%, RESPECTIVELY, BETWEEN JUNE 1, 1992
AND DECEMBER 31, 1996; 30%, 40% AND 30%, RESPECTIVELY, PRIOR TO JUNE
1, 1992.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
WAL-MART STORES, INC. 1.9
HOME DEPOT, INC. 1.4
GENERAL ELECTRIC CO. 1.3
SCHERING-PLOUGH CO. 1.3
AT&T CORP. 1.3
TOP FIVE BOND ISSUERS AS OF JUNE 30, 1998
(WITH MATURITIES MORE THAN ONE YEAR) % OF FUND'S
INVESTMENTS
FANNIE MAE 7.8
U.S. TREASURY OBLIGATIONS 4.6
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION 1.0
STATE OF ISRAEL 0.5
FORD MOTOR CREDIT CO. 0.4
ASSET ALLOCATION AS OF JUNE 30, 1998*
ROW: 1, COL: 1, VALUE: 10.3
ROW: 1, COL: 2, VALUE: 32.5
ROW: 1, COL: 3, VALUE: 57.2
STOCKS 52.6%
BONDS 39.2%
SHORT-TERM INVESTMENTS 8.2%
FOREIGN INVESTMENTS 3.8%
*
ASSET ALLOCATION IN THE PIE CHART REFLECTS THE CATEGORIZATION OF
ASSETS AS DEFINED IN
THE FUND'S PROSPECTUS. FINANCIAL STATEMENT CATEGORIZATIONS CONFORM TO
ACCOUNTING
STANDARDS AND WILL DIFFER FROM THE PIE CHART.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with
Richard Habermann, Portfolio Manager of Asset Manager Portfolio
Q. HOW DID THE FUND PERFORM COMPARED TO ITS BENCHMARK, DICK?
A. For the six months that ended June 30, 1998, the fund lagged the
10.59% return of the Fidelity Asset Allocation Composite Index -
which combines the performance of three indexes - by a small amount.
The fund also slightly lagged the 19.70% return of the index for the
12 months that ended June 30, 1998.
Q. WHY DID THE FUND LAG ITS BENCHMARK INDEX?
A. While several factors influenced performance during the period,
security selection among the fund's equity investments detracted from
the fund's relative performance, albeit slightly. All in all, the
fund's equity investments performed quite well. However, the strong
performance of the stock market, as measured by such indexes as the
Standard & Poor's 500, was driven by a very narrow group of stocks.
Equity investments outside of that group generally didn't perform as
well. This narrowness contributed to a slight performance shortfall
for the fund's equity investments relative to the S&P 500. The fund's
equity specialist, Steven Snider, targeted stocks with lower
valuations but higher earnings-growth rates than the average of the
S&P 500, but the tide was against him during this most recent
six-month period. The fund's investments in Oracle within the
technology sector hurt performance, as did industrial machinery stock
Case. In the nondurables sector, tobacco stocks such as Philip Morris
were hurt by uncertainty over the future of litigation and
legislation. However, this tobacco position was reduced during the
period.
Q. WHAT KIND OF MOVES DID YOU MAKE WITH THE FUND'S ASSET ALLOCATION?
A. I gradually reduced the fund's allocations to stocks and
short-term/money market instruments, and increased its weighting in
bonds. I wanted to position the fund to take advantage of the bond
market rally we anticipated and saw during the period. Because of
ongoing concerns related to the crises in Asia, foreign investors
flocked to less-volatile bond investments in the U.S. in a "flight to
quality." Over the past 15 years or so, when major crises such as Asia
have arisen, financial assets in the U.S. have benefited. Part of that
can be attributed to the more accommodating interest-rate stance
central banks such as the Federal Reserve adopt at such times. Other
factors also contributed to the positive backdrop for bonds, including
low inflation, a strengthening dollar and a slowdown in corporate
earnings.
Q. HOW DID THE FUND'S ASSET ALLOCATION AFFECT ITS PERFORMANCE?
A. It was a net positive. Over the course of the period, the fund's
equity portion was overweighted, its bond portion increased and the
short-term/money market allocation was underweighted, relative to its
neutral mix, which calls for 50% to be invested in stocks, 40% in
bonds and 10% in short-term/money market instruments. Since equities
outperformed the other asset classes, the overweighting in stocks
helped the fund's performance. The increase in bonds helped as well,
for the reasons I mentioned earlier, and because of the capital
appreciation and additional income they offered when compared to
shorter-term alternatives. At the close of the period, the fund held
52.6% in stocks, 39.2% in bonds and 8.2% in short-term/money market
instruments.
Q. HOW DID THE FIXED-INCOME AND SHORT-TERM PORTIONS OF THE FUND
PERFORM?
A. Quite well. The investment-grade portion of the fund - which
Charlie Morrison helps me manage - performed better than the index
that measures that part of the market, the Lehman Brothers Aggregate
Bond Index, due to Charlie's decision to overweight mortgage-backed
and agency securities relative to the index. In addition, the
high-yield portion of the fund - which Fred Hoff helps me manage -
performed quite well, largely due to strong security selection in the
telecommunications, cable and supermarket industries. Finally, the
short-term/money market part of the fund outperformed its benchmark,
as John Todd, who helps me look after short-term investments, obtained
a return advantage relative to Treasuries by emphasizing high-quality
corporate and bank-backed obligations.
Q. WHICH STOCKS PERFORMED WELL DURING THE PERIOD?
A. Wal-Mart was the best contributor to performance, attracting
investors with strong management that focused on growing earnings and
revenues. Schering-Plough and Pfizer benefited, along with most
pharmaceutical firms, from the ability to bring products to market
faster because of streamlined approval processes, changes in
regulations that allow them to market prescription drugs more
aggressively and their ability to sustain earnings growth in an
unpredictable economic environment.
Q. WHAT'S YOUR OUTLOOK?
A. Corporate earnings estimates for the rest of 1998 and 1999 appear
to be generous, and the market has been severely punishing with
companies that don't meet their earnings expectations. In this
environment, security selection will continue to be critical,
especially given the pressures caused by Asia, increased wages,
tighter profit margins and already-high stock valuations. Offsetting
these pressures are low inflation, a supportive bond market and
favorable interest rates. Above and beyond making the right tactical
moves regarding asset allocation, picking the right stocks will be
crucial.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED
ON MARKET AND OTHER CONDITIONS.
FUND FACTS
GOAL: maximum total return over the long term
by allocating assets among stocks, bonds and
short-term instruments anywhere in the world.
START DATE: September 6, 1989
SIZE: as of June 30, 1998, more than $4.7 billion
MANAGER: Richard Haberman, since 1996;
joined Fidelity in 1968
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
INVESTMENTS JUNE 30, 1998 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 49.8%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.7%
AEROSPACE & DEFENSE - 1.3%
AlliedSignal, Inc. 503,700 $ 22,351,639
Sundstrand Corp. 184,600 10,568,350
United Technologies Corp. 321,700 29,757,250
62,677,239
DEFENSE ELECTRONICS - 0.4%
Litton Industries, Inc. (a) 108,100 6,377,900
Northrop Grumman Corp. 113,400 11,694,375
18,072,275
SHIP BUILDING & REPAIR - 0.0%
Avondale Industries, Inc. (a) 20,500 565,672
TOTAL AEROSPACE & DEFENSE 81,315,186
BASIC INDUSTRIES - 1.4%
CHEMICALS & PLASTICS - 1.2%
Air Products & Chemicals, Inc. 251,800 10,072,000
Dow Chemical Co. 295,800 28,600,163
Engelhard Corp. 125,900 2,549,475
FMC Corp. (a) 146,400 9,982,650
Millennium Chemicals, Inc. 269,600 9,132,700
60,336,988
IRON & STEEL - 0.1%
USX-U.S. Steel Group 100,000 3,300,000
METALS & MINING - 0.1%
Aluminum Co. of America 101,400 6,686,063
TOTAL BASIC INDUSTRIES 70,323,051
CONSTRUCTION & REAL ESTATE - 1.0%
BUILDING MATERIALS - 0.3%
Coltec Industries, Inc. (a) 259,400 5,155,575
Mark IV Industries, Inc. 173,100 3,743,288
Texas Industries, Inc. 75,500 4,001,500
Vulcan Materials Co. 25,700 2,741,869
15,642,232
CONSTRUCTION - 0.7%
Centex Corp. 151,400 5,715,350
D.R. Horton, Inc. 189,224 3,950,051
Fleetwood Enterprises, Inc. 351,981 14,079,240
Kaufman & Broad Home Corp. 260,500 8,270,875
U.S. Home Corp. (a) 19,700 812,625
32,828,141
TOTAL CONSTRUCTION & REAL ESTATE 48,470,373
DURABLES - 3.3%
AUTOS, TIRES, & ACCESSORIES - 2.9%
Chrysler Corp. 253,600 14,296,700
Dana Corp. 80,300 4,296,050
Eaton Corp. 187,300 14,562,575
Ford Motor Co. 713,600 42,102,400
General Motors Corp. 812,890 54,311,213
Lear Corp. (a) 223,800 11,483,738
Superior Industries International, Inc. 211,800 5,970,113
147,022,789
HOME FURNISHINGS - 0.2%
Ethan Allen Interiors, Inc. 94,900 4,739,069
Furniture Brands International, Inc. (a) 153,400 4,304,788
9,043,857
SHARES VALUE (NOTE 1)
TEXTILES & APPAREL - 0.2%
Arena Brands Holdings Corp. Class B (a) 8,445 $ 211,125
Burlington Industries, Inc. (a) 291,900 4,104,844
Liz Claiborne, Inc. 87,800 4,587,550
8,903,519
TOTAL DURABLES 164,970,165
ENERGY - 1.4%
ENERGY SERVICES - 0.5%
BJ Services Co. (a) 134,500 3,908,906
McDermott International, Inc. 267,000 9,194,813
Western Atlas, Inc. 135,800 11,526,025
24,629,744
OIL & GAS - 0.9%
British Petroleum PLC ADR 2,972 262,279
Coastal Corp. (The) 188,900 13,187,581
Royal Dutch Petroleum Co. Ord. 119,200 6,596,718
Sun Co., Inc. 175,000 6,792,188
Tosco Corp. 545,700 16,029,938
42,868,704
TOTAL ENERGY 67,498,448
FINANCE - 11.4%
BANKS - 4.6%
Bank of New York Co., Inc. 167,900 10,189,431
BankAmerica Corp. 669,800 57,895,838
Bankers Trust New York Corp. 300,800 34,911,600
Chase Manhattan Corp. 674,800 50,947,400
Comerica, Inc. 71,400 4,730,250
Commerce Bancshares, Inc. 35,550 1,735,284
Mellon Bank Corp. 167,900 11,690,038
National City Corp. 157,800 11,203,800
NationsBank Corp. 144,100 11,023,650
Republic New York Corp. 245,200 15,432,275
SunTrust Banks, Inc. 236,500 19,230,406
228,989,972
CLOSED END INVESTMENT COMPANY - 0.0%
First NIS Regional Fund 114,100 1,026,900
CREDIT & OTHER FINANCE - 0.3%
Associates First Capital Corp. 199,341 15,324,339
FEDERAL SPONSORED CREDIT - 1.6%
Federal Home Loan Mortgage
Corporation 509,800 23,992,463
Fannie Mae 947,390 57,553,943
81,546,406
INSURANCE - 3.7%
Allmerica Financial Corp. 87,300 5,674,500
Allstate Corp. 560,200 51,293,313
CIGNA Corp. 637,600 43,994,400
Conseco, Inc. 798,900 37,348,575
Financial Security Assurance
Holdings Ltd. 37,300 2,191,375
Hartford Financial Services Group, Inc. 118,000 13,496,250
ING Groep NV sponsored ADR 4,145 270,979
Lincoln National Corp. 73,800 6,743,475
MGIC Investment Corp. 127,400 7,269,763
Old Republic International Corp. 183,150 5,368,584
Orion Capital Corp. 40,800 2,279,700
Reliastar Financial Corp. 80,522 3,865,056
179,795,970
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
SECURITIES INDUSTRY - 1.2%
Lehman Brothers Holdings, Inc. 534,500 $ 41,457,156
Travelers Group, Inc. (The) 299,900 18,181,438
59,638,594
TOTAL FINANCE 566,322,181
HEALTH - 4.8%
DRUGS & PHARMACEUTICALS - 2.7%
Pfizer, Inc. 532,200 57,843,488
Schering-Plough Corp. 710,600 65,108,725
Warner-Lambert Co. 183,600 12,737,250
135,689,463
MEDICAL EQUIPMENT & SUPPLIES - 0.9%
Allegiance Corp. 13,180 675,475
Guidant Corp. 587,400 41,888,963
42,564,438
MEDICAL FACILITIES MANAGEMENT - 1.2%
HEALTHSOUTH Corp. (a) 253,100 6,754,606
Lincare Holdings, Inc. (a) 200,000 8,412,500
United HealthCare Corp. 518,800 32,943,800
Wellpoint Health Networks, Inc. (a) 150,000 11,100,000
59,210,906
TOTAL HEALTH 237,464,807
HOLDING COMPANIES - 0.1%
U.S. Industries, Inc. 216,300 5,353,425
INDUSTRIAL MACHINERY & EQUIPMENT - 2.9%
ELECTRICAL EQUIPMENT - 1.4%
General Electric Co. 732,700 66,675,700
General Instrument Corp. 188,900 5,135,719
71,811,419
INDUSTRIAL MACHINERY & EQUIPMENT - 1.5%
Case Corp. 258,300 12,462,975
Caterpillar, Inc. 528,000 27,918,000
Dover Corp. 299,900 10,271,575
Ingersoll-Rand Co. 463,200 20,409,750
Tyco International Ltd. 59,300 3,735,900
74,798,200
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 146,609,619
MEDIA & LEISURE - 1.4%
BROADCASTING - 0.1%
Loral Orion Networks Systems, Inc.
warrants 1/15/07 (cv ratio .6) (a) 860 12,900
Loral Orion Networks Systems, Inc.
warrants 1/15/17 (cv ratio .47) (a) 2,920 35,040
Tele-Communications, Inc. (TCI Ventures
Group), Series A, (a) 260,712 5,230,535
5,278,475
LEISURE DURABLES & TOYS - 0.1%
Brunswick Corp. 167,900 4,155,525
LODGING & GAMING - 0.0%
Bally Gaming International, Inc.
warrants 7/29/98 (a) 38,400 24,000
Fitzgeralds South, Inc.
warrants 3/15/99 (a) (g) 420 0
24,000
SHARES VALUE (NOTE 1)
PUBLISHING - 1.2%
Cognizant Corp. 84,200 $ 5,304,600
Gannett Co., Inc. 324,500 23,059,781
Knight-Ridder, Inc. 128,700 7,086,544
New York Times Co. (The) Class A 109,600 8,685,800
Tribune Co. 159,300 10,961,831
World Color Press, Inc. (a) 68,100 2,383,500
57,482,056
RESTAURANTS - 0.0%
Brinker International, Inc. (a) 93,800 1,805,650
TOTAL MEDIA & LEISURE 68,745,706
NONDURABLES - 2.9%
BEVERAGES - 0.3%
Canadaigua Wine Co. Class A (a) 51,600 2,538,075
Coors (Adolph) Co. Class B 106,800 3,631,200
PepsiCo, Inc. 159,400 6,565,288
12,734,563
FOODS - 1.3%
Dean Foods Co. 116,200 6,383,738
Flowers Industries, Inc. 170,300 3,480,506
Heinz (H.J.) Co. 600,000 33,675,000
Quaker Oats Co. 202,400 11,119,350
Smithfield Foods, Inc. (a) 145,300 4,431,650
Suiza Foods Corp. (a) 77,400 4,619,813
63,710,057
HOUSEHOLD PRODUCTS - 0.0%
Nu Skin Asia Pacific, Inc. Class A (a) 61,300 1,195,350
Premark International, Inc. 34,500 1,112,625
2,307,975
TOBACCO - 1.3%
Philip Morris Companies, Inc. 1,108,500 43,647,188
RJR Nabisco Holdings Corp. 807,630 19,181,213
Universal Corp. 68,900 2,575,138
65,403,539
TOTAL NONDURABLES 144,156,134
RETAIL & WHOLESALE - 5.5%
APPAREL STORES - 0.4%
Gap, Inc. 114,900 7,080,713
Lamonts Apparel, Inc. warrants (a):
Class A 1/31/08 86,171 21,543
Class B 1/31/08 27,387 6,847
Lamonts Apparel, Inc. Class A 138,678 52,004
TJX Companies, Inc. 520,000 12,545,000
19,706,107
GENERAL MERCHANDISE STORES - 2.3%
Federated Department Stores, Inc. (a) 311,300 16,751,831
Wal-Mart Stores, Inc. 1,559,700 94,751,775
111,503,606
GROCERY STORES - 0.3%
Safeway, Inc. (a) 408,000 16,600,500
RETAIL & WHOLESALE, MISCELLANEOUS - 2.5%
Best Buy Co., Inc. 151,100 5,458,488
Home Depot, Inc. 830,100 68,950,181
Lowe's Companies, Inc. 298,600 12,111,963
Office Depot, Inc. (a) 127,400 4,021,063
Pier 1 Imports, Inc. 358,400 8,556,800
Tandy Corp. 504,600 26,775,338
125,873,833
TOTAL RETAIL & WHOLESALE 273,684,046
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - 0.3%
ADVERTISING - 0.2%
Omnicom Group, Inc. 203,600 $ 10,154,550
PRINTING - 0.1%
Donnelley (R.R.) & Sons Co. 24,800 1,134,600
Valassis Communications, Inc. (a) 149,600 5,768,950
6,903,550
TOTAL SERVICES 17,058,100
TECHNOLOGY - 4.7%
COMMUNICATIONS EQUIPMENT - 1.3%
Globalstar Telecommunications Ltd.
warrants 2/15/04 (a)(g) 1,410 183,300
Lucent Technologies, Inc. 623,000 51,825,813
Tellabs, Inc. (a) 191,300 13,701,863
65,710,976
COMPUTER SERVICES & SOFTWARE - 1.7%
HBO & Co. 733,800 25,866,450
Microsoft Corp. (a) 195,000 21,133,125
Oracle Corp. (a) 1,559,900 38,315,044
85,314,619
COMPUTERS & OFFICE EQUIPMENT - 1.4%
Ingram Micro, Inc. Class A (a) 25,600 1,132,800
International Business Machines Corp. 309,700 35,557,431
SCI Systems, Inc. (a) 587,100 22,089,638
Xerox Corp. 101,400 10,304,775
69,084,644
ELECTRONIC INSTRUMENTS - 0.1%
Thermo Electron Corp. 169,600 5,798,200
ELECTRONICS - 0.2%
Molex, Inc. 98,625 2,305,359
Thomas & Betts Corp. 165,400 8,145,950
10,451,309
TOTAL TECHNOLOGY 236,359,748
TRANSPORTATION - 2.2%
AIR TRANSPORTATION - 1.9%
AMR Corp. (a) 647,600 53,912,700
Comair Holdings, Inc. 195,100 6,023,713
Southwest Airlines Co. 796,100 23,584,463
US Airways Group, Inc. (a) 84,500 6,696,625
Viad Corp. 131,300 3,643,575
93,861,076
TRUCKING & FREIGHT - 0.3%
Airborne Freight Corp. 335,400 11,718,038
CNF Transportation, Inc. 65,200 2,771,000
14,489,038
TOTAL TRANSPORTATION 108,350,114
UTILITIES - 4.8%
CELLULAR - 0.0%
McCaw International Ltd.
warrants 4/15/07 (a)(g) 8,150 40,750
ELECTRIC UTILITY - 1.2%
Edison International 270,500 7,996,656
Energy East Corp. 194,400 8,091,900
FPL Group, Inc. 148,100 9,330,300
FirstEnergy Corp. 212,200 6,525,150
GPU, Inc. 212,300 8,027,594
Houston Industries, Inc. 377,800 11,664,575
Public Service Enterprise Group, Inc. 170,100 5,857,819
57,493,994
SHARES VALUE (NOTE 1)
GAS - 0.1%
MarketSpan Corp. 143,176 $ 4,286,332
TELEPHONE SERVICES - 3.5%
AT&T Corp. 1,128,900 64,488,413
Ameritech Corp. 643,900 28,895,013
BellSouth Corp. 449,800 30,192,825
GTE Corp. 150,000 8,343,750
SBC Communications, Inc. 400,000 16,000,000
U.S. WEST, Inc. 544,800 25,605,600
173,525,601
TOTAL UTILITIES 235,346,677
TOTAL COMMON STOCKS
(Cost $1,965,290,035) 2,472,027,780
NONCONVERTIBLE PREFERRED STOCKS - 1.5%
CONSTRUCTION & REAL ESTATE - 0.2%
REAL ESTATE INVESTMENT TRUSTS - 0.2%
California Federal Preferred Capital Corp.
9 1/8% 231,349 6,275,342
Crown America Realty Trust,
Series A, 11% 13,858 743,135
Walden Residential Properties, Inc.
9.20% 49,000 1,237,250
8,255,727
FINANCE - 0.1%
CREDIT & OTHER FINANCE - 0.0%
Fresenius Medical Care Capital Trust II
7 7/8% 1,053 1,048,393
INSURANCE - 0.1%
American Annuity Group Capital Trust II
8 3/4% 1,490 1,553,693
SIG Capital Trust I 9 1/2% 1,564 1,668,289
3,221,982
TOTAL FINANCE 4,270,375
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Echostar Communications Corp.
12 1/8%, 12/1/04 pay-in-kind 2,062 2,268,200
MEDIA & LEISURE - 0.8%
BROADCASTING - 0.7%
Adelphia Communications Corp. $13 11,243 1,349,160
American Radio Systems Corp.
11 3/8%, pay-in-kind 27,126 3,139,835
CSC Holdings, Inc. 11 1/8% pay-in-kind 77,083 8,826,004
Chancellor Media Corp., Series A,
$12.25 11,863 1,690,478
Granite Broadcasting Corp.
12 3/4%, pay-in-kind 2,197 2,570,490
SFX Broadcasting, Inc. 12 5/8% 26,167 2,930,704
Sinclair Capital 11 5/8% 28,380 3,079,230
Time Warner, Inc., Series M,
10 1/4%, pay-in-kind 9,594 10,661,333
34,247,234
PUBLISHING - 0.1%
PRIMEDIA, Inc., Series D, $10 31,050 3,260,250
Primedia, Inc. $9.20 21,782 2,221,764
5,482,014
TOTAL MEDIA & LEISURE 39,729,248
NONCONVERTIBLE PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - 0.0%
GROCERY STORES - 0.0%
Supermarkets General Holdings Corp.
$3.52, pay-in-kind (a) 20,000 $ 615,000
TECHNOLOGY - 0.0%
COMMUNICATIONS EQUIPMENT - 0.0%
Intermedia Communications, Inc.
13 1/2%, pay-in-kind 1,646 1,942,280
UTILITIES - 0.3%
CELLULAR - 0.1%
Nextel Communications, Inc.
11 1/8% pay-in-kind (g) 8,034 8,275,020
TELEPHONE SERVICES - 0.2%
Hyperion Telecommunications, Inc.
12 7/8%, pay-in-kind (Reg.) 2,124 2,108,070
IXC Communications, Inc.
12 1/2%, pay-in-kind 1,566 1,816,560
NEXTLINK Communications, Inc.
14%, pay-in-kind 58,447 3,433,761
WinStar Communications, Inc.
14 1/4% 1,201 1,429,190
8,787,581
TOTAL UTILITIES 17,062,601
TOTAL NONCONVERTIBLE PREFERRED STOCKS
(Cost $69,356,669) 74,143,431
CORPORATE BONDS - 20.6%
MOODY'S PRINCIPAL
RATINGS (D) AMOUNT
CONVERTIBLE BONDS - 0.1%
HEALTH - 0.0%
DRUGS & PHARMACEUTICALS - 0.0%
Integrated Process Equipment Corp.
6 1/4%, 9/15/04 (g) B- $ 1,370,000 1,027,500
MEDICAL FACILITIES MANAGEMENT - 0.0%
Tenet Healthcare Corp.
6%, 12/1/05 B1 750,000 644,063
TOTAL HEALTH 1,671,563
RETAIL & WHOLESALE - 0.1%
RETAIL & WHOLESALE, MISCELLANEOUS - 0.1%
Sports Authority, Inc.
5 1/4%, 9/15/01 B1 1,310,000 1,264,150
TOTAL CONVERTIBLE BONDS 2,935,713
NONCONVERTIBLE BONDS - 20.5%
AEROSPACE & DEFENSE - 0.3%
DEFENSE ELECTRONICS - 0.2%
Raytheon Co.:
5.95%, 3/15/01 Baa 4,500,000 4,483,260
6.45%, 8/15/04 Baa 5,940,000 5,998,925
Tracor, Inc. 8 1/2%, 3/1/07 B1 1,170,000 1,272,375
11,754,560
SHIP BUILDING & REPAIR - 0.1%
Newport News Shipbuilding, Inc.
9 1/4%, 12/1/06 B1 3,830,000 4,078,950
TOTAL AEROSPACE & DEFENSE 15,833,510
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
BASIC INDUSTRIES - 0.5%
CHEMICALS & PLASTICS - 0.2%
General Chemical Corp.
9 1/4%, 8/15/03 B2 $ 1,320,000 $ 1,353,000
Huntsman Corp.
9 1/2%, 7/1/07 (g) B2 2,100,000 2,110,500
Moll Industries
10 1/2%, 7/1/08 (g) B3 270,000 275,400
PraxAir, Inc.
6 5/8%, 10/15/07 A3 3,610,000 3,691,947
7,430,847
PACKAGING & CONTAINERS - 0.3%
BWAY Corp., Series B,
10 1/4%, 4/15/07 B2 1,120,000 1,213,800
Owens Illinois, Inc.:
7.15%, 5/15/05 Ba1 8,430,000 8,465,305
7.80%, 5/15/18 Ba1 4,350,000 4,451,429
14,130,534
PAPER & FOREST PRODUCTS - 0.0%
Omega Cabinets Ltd.
10 1/2%, 6/15/07 B3 1,280,000 1,280,000
TOTAL BASIC INDUSTRIES 22,841,381
CONSTRUCTION & REAL ESTATE - 0.3%
CONSTRUCTION - 0.0%
U.S. Home Corp.
8.88%, 8/15/07 B1 1,660,000 1,697,350
REAL ESTATE - 0.1%
LNR Property Corp.
9 3/8%, 3/15/08 (g) B1 2,680,000 2,673,300
REAL ESTATE INVESTMENT TRUSTS - 0.2%
Centerpoint Properties Trust
6 3/4%, 4/1/05 Baa 1,590,000 1,592,735
EOP Operating LP (g):
6 3/8%, 2/15/03 Baa 3,600,000 3,584,700
6 3/4%, 2/15/08 Baa 1,230,000 1,228,487
Weeks Realty LP
6 7/8%, 3/15/05 Baa 2,950,000 2,931,563
9,337,485
TOTAL CONSTRUCTION & REAL ESTATE 13,708,135
DURABLES - 0.7%
AUTOS, TIRES, & ACCESSORIES - 0.2%
Blue Bird Body Co.
10 3/4%, 11/15/06 B2 1,185,000 1,291,650
Breed Technologies, Inc.
9 1/4%, 4/15/08 (g) B3 4,560,000 4,457,400
Federal-Mogul Corp.
7 7/8%, 7/1/10 Ba2 4,290,000 4,306,088
Oshkosh Truck Corp.
8 3/4%, 3/1/08 B3 2,010,000 2,030,100
12,085,238
CONSUMER DURABLES - 0.1%
Corning Consumer Products Co.
9 5/8%, 5/1/08 (g) B3 3,590,000 3,581,025
TEXTILES & APPAREL - 0.4%
Levi Strauss & Co.
7%, 11/1/06 (g) Baa 7,700,000 7,786,625
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
DURABLES - CONTINUED
TEXTILES & APPAREL - CONTINUED
Nine West Group, Inc.
9%, 8/15/07 (g) Ba3 $ 1,660,000 $ 1,626,800
Unifi, Inc. 6 1/2%, 2/1/08 A3 2,940,000 2,906,778
WestPoint Stevens, Inc.
7 7/8%, 6/15/08 (g) Ba3 2,770,000 2,780,388
Worldtex, Inc.
9 5/8%, 12/15/07 B1 3,160,000 3,160,000
18,260,591
TOTAL DURABLES 33,926,854
ENERGY - 0.5%
COAL - 0.1%
P&L Coal Holdings Corp.
9 5/8%, 5/15/08 (g) B2 2,640,000 2,712,600
ENERGY SERVICES - 0.0%
Ocean Rig Norway AS
10 1/4%, 6/1/08 (g) B3 1,770,000 1,677,075
OIL & GAS - 0.4%
Chesapeake Energy Corp.
9 5/8%, 5/1/05 (g) B1 2,240,000 2,245,600
Occidental Petroleum Corp.:
10.94%, 5/17/00 Baa 2,700,000 2,932,983
6.39%, 11/9/00 Baa 1,000,000 1,008,160
8 1/2%, 11/9/01 Baa 1,251,000 1,342,336
Oryx Energy Co.:
8%, 10/15/03 Ba1 1,670,000 1,758,744
8 3/8%, 7/15/04 Ba1 1,770,000 1,908,290
Petroleum Geo-Services ASA
7 1/8%, 3/30/28 Baa 3,900,000 3,946,956
USX-Marathon Group
6.85%, 3/1/08 Baa 3,110,000 3,131,335
18,274,404
TOTAL ENERGY 22,664,079
FINANCE - 7.2%
ASSET-BACKED SECURITIES - 2.2%
Airplanes Pass Through Trust
Class D 10 7/8%, 3/15/19 Ba2 5,040,000 5,531,400
BankAmerica Manufacturing
Housing Center Trust V
6.20%, 4/10/09 Aaa 3,730,000 3,732,331
CPS Auto Grantor Trust:
6%, 8/15/03 Aaa 5,719,476 5,714,114 6.55%, 12/15/02 Aaa
2,284,351 2,301,841
6.9%, 11/15/03 Aaa 3,325,282 3,325,802
CSXT Receivables Master Trust
6%, 7/25/04 Aaa 4,600,000 4,610,781
Capital Equipment Receivables
Trust 6.48%, 10/15/06 Baa 2,950,000 2,950,620
Chase Manhattan Auto Owner
Trust 5.85%, 5/15/03 Aaa 4,620,000 4,622,166
Chevy Chase Auto Receivable
Trust 5.91%, 12/15/04 Aaa 2,640,000 2,636,304
Contimortgage Home Equity
Loan Trust 6.26%, 7/15/12 Aaa 4,790,000 4,794,455
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
Dayton Hudson Credit Card
Master Trust
6 1/4%, 8/25/05 Aaa $ 4,800,000 $ 4,832,784
Ford Credit Auto Owner Trust:
6.40%, 5/15/02 A1 3,120,000 3,148,018
6.20%, 12/15/02 Baa 2,680,000 2,675,310
6.40%, 12/15/02 Baa 1,480,000 1,479,142
Green Tree Financial Corp.:
6 1/2%, 6/15/27 Aaa 1,760,158 1,763,449
6.80%, 6/15/27 Aaa 1,900,000 1,919,589
6.45%, 9/15/28 Aaa 3,640,000 3,667,300
6.68%, 1/15/29 AAA 6,680,000 6,773,921
Key Plastics, Inc. 10 1/4%,
3/15/07 A2 3,730,000 3,742,239
MBNA Master Credit Card Trust II
Class A 6.55%, 1/15/07 Aaa 9,440,000 9,755,485
Olympic Automobile Receivables Trust:
6.4%, , 9/15/01 Aaa 4,550,000 4,544,911
6.70%, 3/15/02 Aaa 2,150,000 2,177,465
Petroleum Enhanced Trust
Receivables Offering Petroleum
Trust 6.1875%, 2/5/03 (g) Baa 3,498,276 3,498,276
Premier Auto Trust:
6%, 5/6/00 Aaa 1,628,416 1,629,930 6.34%, 1/6/03 Aaa 7,310,000
7,376,229
UAF Auto Grantor Trust:
6.10%, 1/15/03 (g) Aaa 5,156,377 5,158,542
WFS Financial Owner Trust
6.55%, 10/20/04 Aaa 4,430,000 4,450,356
108,812,760
BANKS - 1.4%
BanPonce Financial Corp.
7.72%, 4/13/00 A3 2,000,000 2,050,820
BanPonce Corp.
6.665%, 3/5/01 A3 4,450,000 4,504,379
Barclays Bank PLC yankee
5.95%, 7/15/01 A1 9,250,000 9,231,500
Capital One Bank:
6.42%, 11/12/99 Baa 4,900,000 4,914,210
8 1/8%, 3/1/00 Baa 5,500,000 5,660,875
6 3/8%, 2/15/03 Baa 3,570,000 3,566,609
Citicorp 5 5/8%, 2/15/01 Aa3 3,050,000 3,019,561
Den Danske Bank 6.375%,
6/15/08(g) (h) A1 8,340,000 8,240,921
Fleet Credit Card LLC
6.45%, 10/30/00 A1 2,300,000 2,326,335
Fleet/Norstar Financial
Group, Inc. 9.9%, 6/15/01 A3 2,400,000 2,635,896
Huntington National Bank
5 7/8%, 1/15/01 A1 2,560,000 2,548,173
NB Capital Trust IV
8 1/4%, 4/15/27 Aa3 2,650,000 2,959,653
NationsBank NA
5.92%, 6/8/01 Aa2 6,850,000 6,847,877
Provident Bank (Cincinnati, Ohio)
6 1/8%, 12/15/00 A3 1,740,000 1,741,340
Providian National Bank
6.70%, 3/15/03 Baa 3,060,000 3,093,660
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
FINANCE - CONTINUED
BANKS - CONTINUED
Signet Banking Corp.
9 5/8%, 6/1/99 A2 $ 790,000 $ 814,285
Summit Bancorp.
8 5/8%, 12/10/02 BBB 1,730,000 1,886,115
Union Planters National Bank
6.81%, 8/20/01 A3 3,500,000 3,568,145
69,610,354
CREDIT & OTHER FINANCE - 2.7%
AT&T Capital Corp.:
6.41%, 8/13/99 Baa 7,500,000 7,527,975
6.16%, 12/3/99 Baa 2,750,000 2,752,998
6 1/4%, 5/15/01 Baa 5,200,000 5,205,928
Ahmanson Capital Trust I
8.36%, 12/1/26 (g) Baa 4,250,000 4,776,703
Associates Corp. of North
America 6%, 4/15/03 Aa3 4,000,000 3,979,840
BCH Cayman Islands Ltd.
yankee 7.70%, 7/15/06 A3 950,000 1,018,904
BankAmerica Capital II,
Series 2, 8%, 12/15/26 Aa3 2,980,000 3,238,694
Bankers Trust Co.
5.66%, 7/21/98 (h) - 11,000,000 10,997,799
BanPonce Trust I
8.327%, 2/1/27 (g) A3 6,450,000 7,014,956
Countrywide Funding Corp.
6.45%, 2/27/03 A3 3,950,000 3,981,719
U.S. Bancorp
8.09%, 11/15/26 A1 2,980,000 3,205,526
Finova Capital Corp.:
6.44%, 11/6/01 Baa 5,500,000 5,577,385
6.12%, 5/28/02 Baa 2,000,000 2,008,820
First Security Capital I
8.41%, 12/15/26 A3 1,690,000 1,896,839
Ford Motor Credit Co.:
global 7%, 9/25/01 A1 12,500,000 12,812,750
5.73%, 2/23/00 A1 3,250,000 3,240,900
5.68%, 2/15/01 A1 5,000,000 4,959,500
6.57%, 3/19/01 A1 700,000 709,296
GST Network Funding, Inc.
0%, 5/1/08 (e)(g) - 2,010,000 1,211,025
General Electric Capital Corp.
6.94%, 4/13/09 (f) Aaa 7,000,000 7,049,770
General Motors Acceptance Corp.
6 3/4%, 7/10/02 A3 7,990,000 8,150,200
Heller Financial, Inc.:
7 7/8%, 11/1/99 A3 5,050,000 5,157,919
6 1/4%, 3/1/01 A3 4,940,000 4,944,594
Iridium Operating LLC/Iridium
Capital Corp. 10 7/8%,
7/15/05 B3 3,910,000 3,880,675
KeyCorp Institutional Capital
Series A 7.826%, 12/1/26 A1 3,600,000 3,813,048
La Petite Academy, Inc.
10%, 5/15/08 (g) B3 2,850,000 2,878,500
Mellon Capital I, Series A,
7.72%, 12/1/26 A2 2,000,000 2,131,760
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
Money Store, Inc.
7.30%, 12/1/02 Ba2 $ 2,550,000 $ 2,656,781
Nordstrom Credit, Inc.
7 1/4%, 4/30/02 A2 3,500,000 3,656,415
PNC Funding Corp.
6 7/8%, 3/1/03 A3 2,020,000 2,066,844
UNICCO Service Co./UNICCO
Finance Corp. 9 7/8%,
10/15/07 B3 1,930,000 1,944,475
134,448,538
SAVINGS & LOANS - 0.4%
Chevy Chase Savings Bank FSB
9 1/4%, 12/1/08 B1 1,560,000 1,583,400
First Nationwide Parent
Holdings Ltd. 12 1/2%,
4/15/03 B3 3,530,000 4,015,375
Great West Financial Trust II
8.206%, 2/1/27 A3 3,780,000 4,128,818
Great Western Financial Corp.
8.6% 2/1/02 A3 2,000,000 2,137,920
Home Savings of America
Irwindale Calif. FSB
6 1/2%, 8/15/04 A3 2,830,000 2,854,734
Long Island Savings Bank
6.20%, 4/2/01 Baa 3,770,000 3,774,675
Long Island Savings Bank FSB
Melville NY 7%, 6/13/02 Baa 3,400,000 3,502,340
21,997,262
SECURITIES INDUSTRY - 0.5%
Amvescap PLC
6 3/8%, 5/15/03 (g) A3 2,200,000 2,206,490
Merrill Lynch & Co., Inc.
5.5984%, 7/28/98 - 10,500,000 10,500,000
Morgan Stanley, Dean Witter,
Discover & Co. 5.67%,
1/15/99 (h) A+ 10,500,000 10,500,000
23,206,490
TOTAL FINANCE 358,075,404
HEALTH - 0.4%
MEDICAL EQUIPMENT & SUPPLIES - 0.1%
Graham-Field Health Products,
Inc. 9 3/4%, 8/15/07 B3 2,410,000 2,169,000
McKesson Corp.
6.60%, 3/1/00 A3 4,570,000 4,606,469
6,775,469
MEDICAL FACILITIES MANAGEMENT - 0.3%
Fountain View, Inc.
11 1/4%, 4/15/08 (g) Caa1 1,640,000 1,668,700
Integrated Health Services, Inc.,
Series A, 9 1/4%, 1/15/08 B2 4,080,000 4,233,000
Magellan Health Services, Inc.
9%, 2/15/08 (g) B3 2,420,000 2,395,800
Tenet Healthcare Corp.:
8 5/8%, 1/15/07 Ba3 3,720,000 3,840,900
8 1/8%, 12/1/08 (g) Ba3 1,300,000 1,306,500
13,444,900
TOTAL HEALTH 20,220,369
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
HOLDING COMPANIES - 0.1%
Norfolk Southern Corp.
7.05%, 5/1/37 Baa1 $ 6,610,000 $ 7,019,093
INDUSTRIAL MACHINERY & EQUIPMENT - 0.7%
ELECTRICAL EQUIPMENT - 0.1%
Echostar Communications Corp.
secured discount 0%,
6/1/04 (e) B2 2,140,000 2,083,825
Motors & Gears, Inc., Series D,
10 3/4%, 11/15/06 B3 430,000 455,800
2,539,625
INDUSTRIAL MACHINERY & EQUIPMENT - 0.4%
Bucyrus International, Inc.
9 3/4%, 9/15/07 B1 3,600,000 3,456,000
Goss Graphic System, Inc.
12%, 10/15/06 B2 800,000 820,000
Roller Bearing Holdings, Inc.
0%, 6/15/09 (e) (g) - 3,550,000 2,236,500
Thermadyne Manufacturing LLC
9 7/8%, 6/1/08 (g) B3 1,750,000 1,763,125
Tyco International Group SA yankee:
6 1/8%, 6/15/01 Baa 6,860,000 6,865,625
6 3/8%, 6/15/05 Baa 4,570,000 4,581,608
19,722,858
POLLUTION CONTROL - 0.2%
Allied Waste North America
10 1/4%, 12/1/06 B2 1,990,000 2,184,025
Envirosource, Inc.
9 3/4%, 6/15/03 B3 870,000 859,125
WMX Technologies, Inc.:
8 1/4%, 11/15/99 Baa 1,320,000 1,353,964
6 1/4%, 10/15/00 Baa 2,100,000 2,103,192
7.10%, 8/1/26 Baa 4,610,000 4,797,166
11,297,472
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 33,559,955
MEDIA & LEISURE - 4.4%
BROADCASTING - 3.1%
ACME Television LLC/ACME
Financial Corp. 0%,
9/30/04 (e) B3 1,740,000 1,431,150
Adelphia Communications Corp.:
9 1/2%, 2/15/04 B2 6,111,175 6,208,220
9 7/8%, 3/1/07 B2 4,280,000 4,633,100
Albritton Communications Co.
8 7/8%, 2/1/08 B3 1,450,000 1,566,000
Ascent Entertainment Group, Inc.
0%, 12/15/04 (e) B3 1,990,000 1,273,600
CSC Holdings, Inc.:
9 1/4%, 11/1/05 B1 1,370,000 1,465,900
9 7/8%, 5/15/06 B1 1,140,000 1,242,600
10 1/2%, 5/15/16 B1 1,850,000 2,155,250
Century Communications Corp.:
8 3/4%, 10/1/07 Ba3 1,170,000 1,234,350
0%, 1/15/08 Ba3 10,760,000 4,882,350
Clear Channel Communications,
Inc. 6 7/8%, 6/15/18 Baa 3,450,000 3,456,555
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
Comcast UK Cable Partners Ltd.
0%, 11/15/07 B2 $ 2,420,000 $ 2,002,550
Continental Cablevision, Inc.:
8 5/8%, 8/15/03 Baa 2,790,000 3,061,969
8.30%, 5/15/06 Baa 2,145,000 2,381,594
9%, 9/1/08 Baa 3,090,000 3,633,438
Diamond Cable Communications
PLC yankee 0%,
12/15/05 (e) Caa 310,000 255,750
Echostar Satellite Broadcasting
Corp. 0%, 3/15/04 (e) B3 1,030,000 945,025
Falcon Holding Group LP/Falcon
Funding (g):
8 3/8%, 4/15/10 B2 2,540,000 2,559,050
0%, 4/15/10 (e) B2 6,300,000 4,079,250
Fox/Liberty Networks LLC/FLN
Finance, Inc. 0%,
8/15/07 (e) B1 2,220,000 1,542,900
FrontierVision Operating
Partners LP/Frontiervision
Capital Corp.:
11%, 10/15/06 B3 3,980,000 4,387,950
0%, 9/15/07 (e) Caa 3,800,000 2,935,500
Granite Broadcasting Corp.:
10 3/8%, 5/15/05 B3 860,000 911,600
9 3/8%, 12/1/05 B3 2,955,000 3,043,650
8 7/8%, 5/15/08 (g) B3 2,535,000 2,573,025
Hearst-Argyle Television, Inc.
7 1/2%, 11/15/27 Baa 3,710,000 3,952,040
Intermedia Capital Partners IV
LP/Intermedia Partners IV
Capital Corp. 11 1/4%,
8/1/06 B2 1,362,000 1,539,060
International Cabletel, Inc. 0%,
2/1/06 (e) B3 1,850,000 1,503,125
Lenfest Communications, Inc.
8 1/4%, 2/15/08 (g) B2 1,300,000 1,358,500
LIN Holdings Corp. 0%,
3/1/08 (e) (g) B3 340,000 229,500
NTL, Inc.:
10%, 2/15/07 B3 2,090,000 2,231,075
0%, 4/1/08 (e) (g) B3 8,075,000 5,248,750
Olympus Communications
LP/Olympus Capital Corp:
10 5/8%, 11/15/06 B1 1,160,000 1,281,800
Orion Network Systems, Inc.:
11 1/4%, 1/15/07 B2 680,000 751,400
0%, 1/15/07 (e) B2 1,630,000 1,230,650
Pegasus Communications Corp.,
Series B, 9 5/8%, 10/15/05 B3 945,000 970,988
Renaissance Media Group
0%, 4/15/08 (e) (g) B3 2,470,000 1,537,575
Rogers Cablesystems Ltd.
yankee 11%, 12/1/15 B2 1,800,000 2,083,500
Satelites Mexicanos SA de CV
10 1/8%, 11/1/04 (g) B3 3,380,000 3,261,700
Sinclair Broadcast Group, Inc.
8 3/4%, 12/15/07 B2 2,540,000 2,613,025
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
MEDIA & LEISURE - CONTINUED
BROADCASTING - CONTINUED
TCI Communications, Inc.:
6.46%, 3/6/00 Baa $ 6,570,000 $ 6,628,999
Financing III 9.65%, 3/31/27 Ba2 4,830,000 5,844,300
6 7/8%, 2/15/06 Baa 4,550,000 4,693,553
7 1/8%, 2/15/28 Baa 4,170,000 4,353,480
Tele Communications, Inc.
9 1/4%, 4/15/02 Baa 3,000,000 3,306,960
Telemundo Group, Inc.
7.0%, 2/15/06 (f) B1 4,170,000 4,493,175
Telewest PLC:
yankee 9 5/8%, 10/1/06 B1 560,000 586,600
0%, 10/1/07 (e) B1 6,290,000 5,197,113
Time Warner, Inc.:
7.95%, 2/1/00 Baa 3,965,000 4,074,275
7 3/4%, 6/15/05 Baa 2,150,000 2,307,509
8.18%, 8/15/07 Baa 5,250,000 5,850,023
6 7/8%, 6/15/18 Baa 4,570,000 4,587,823
UIH Australia/Pacific, Inc.,
Series B, 0%, 5/15/06 (e) B2 5,950,000 3,510,500
United International Holdings, Inc.
0%, 2/15/08 (e) B3 6,840,000 4,172,400
153,261,724
ENTERTAINMENT - 0.7%
AMC Entertainment, Inc.
9 1/2%, 3/15/09 B2 4,050,000 4,029,750
American Skiing Co.
12%, 7/15/06 B3 2,600,000 2,912,000
Bally Total Fitness Holding Corp.,
Series B, 9 7/8%, 10/15/07 B3 3,390,000 3,491,700
Cinemark USA, Inc.
8 1/2%, 8/1/08 (Reg. S) B2 2,735,000 2,673,463
Livent, Inc. 9 3/8%, 10/15/04 B1 1,780,000 1,784,450
Paramount Communications, Inc.
7 1/2%, 1/15/02 Ba2 1,785,000 1,833,213
Premier Parks, Inc. 0%, 4/1/08 B3 1,990,000 1,320,863
United Artists Theatre Co.
9 3/4%, 4/15/08 (g) Caa 4,420,000 4,408,950
Viacom, Inc.:
6 3/4%, 1/15/03 Ba2 7,485,000 7,559,775
7 3/4%, 6/1/05 Ba2 6,480,000 6,904,116
36,918,280
LODGING & GAMING - 0.1%
Aladdin Gaming Holdings/
Aladdin Capital Unit
0%, 3/1/10 (e) (g) Caa 2,620,000 1,218,300
Courtyard by Marriott II
LP/Courtyard II Finance Co.,
Series B, 10 3/4%, 2/1/08 B- 1,190,000 1,306,025
Sun International Hotels Ltd./Sun
International North America,
Inc. yankee 9%, 3/15/07 Ba3 1,810,000 1,900,500
4,424,825
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
PUBLISHING - 0.4%
Garden State Newspapers, Inc.:
Series B, 8 3/4%, 10/1/09 B1 $ 2,620,000 $ 2,659,300
8 3/4%, 10/1/09 (j) B1 2,930,000 2,959,300
News America Holdings, Inc.:
8 1/2%, 2/15/05 Baa 3,740,000 4,142,985
7.70%, 10/30/25 Baa 5,380,000 5,771,126
News America, Inc.
7 1/4%, 5/18/18 (g) Baa 3,240,000 3,319,898
18,852,609
RESTAURANTS - 0.1%
Host Marriott Travel Plazas, Inc.
9 1/2%, 5/15/05 Ba3 4,820,000 5,085,100
TOTAL MEDIA & LEISURE 218,542,538
NONDURABLES - 0.5%
FOODS - 0.1%
Chiquita Brands International, Inc.
9 5/8%, 1/15/04 B1 1,980,000 2,083,950
ConAgra, Inc.
7 1/8%, 10/1/26 Baa 4,250,000 4,529,820
Del Monte Corp.
12 1/4%, 4/15/07 Caa 140,000 157,850
Del Monte Foods Co.
0%, 12/15/07 (g) Caa 190,000 123,500
6,895,120
HOUSEHOLD PRODUCTS - 0.1%
Revlon Consumer Products Corp.
8 5/8%, 2/1/08 B3 4,990,000 4,990,000
TOBACCO - 0.3%
Philip Morris Companies, Inc.:
7 1/4%, 9/15/01 A2 4,600,000 4,718,358
7%, 7/15/05 A2 4,710,000 4,818,566
6.95%, 6/1/06 A2 4,420,000 4,578,501
14,115,425
TOTAL NONDURABLES 26,000,545
RETAIL & WHOLESALE - 1.4%
APPAREL STORES - 0.1%
AnnTaylor, Inc.
8 3/4%, 6/15/00 B3 2,630,000 2,616,850
Specialty Retailers, Inc.
8 1/2%, 7/15/05 Ba3 810,000 832,275
3,449,125
GENERAL MERCHANDISE STORES - 0.6%
Dayton Hudson Corp.:
6.80%, 10/1/01 A3 4,000,000 4,085,080
7 1/2%, 7/15/06 A3 3,500,000 3,780,910
Federated Department Stores, Inc.:
10%, 2/15/01 Baa 8,830,000 9,603,420
8 1/8%, 10/15/02 Baa 1,510,000 1,610,596
6.79%, 7/15/27 Baa 3,000,000 3,069,150
7%, 2/15/28 Baa 3,930,000 3,999,915
K mart Corp.:
12 1/2%, 3/1/05 Ba2 2,510,000 3,124,950
7 3/4%, 10/1/12 Ba2 240,000 243,000
8 1/4%, 1/1/22 Ba2 1,790,000 1,830,275
31,347,296
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
GROCERY STORES - 0.5%
Ameriserve Food Distribution, Inc.
8 7/8%, 10/15/06 B1 $ 2,350,000 $ 2,350,000
Fleming Companies, Inc.,
Series B, 10 5/8%, 7/31/07 B3 650,000 678,438
Kroger Co.:
6%, 7/1/00 Baa 5,950,000 5,943,693
8.15%, 7/15/06 Baa 2,250,000 2,487,510
Fred Meyer, Inc.
7.45%, 3/1/08 Ba2 450,000 453,375
Mrs. Fields Original Cookies, Inc.
10 1/8%, 12/1/04 B2 1,050,000 1,018,500
Pathmark Stores, Inc.:
12 5/8%, 6/15/02 Caa 4,080,000 4,125,900
9 5/8%, 5/1/03 Caa 5,060,000 5,123,250
Pueblo Xtra International, Inc.:
9 1/2%, 8/1/03 B3 2,680,000 2,586,200
9 1/2%, 8/1/03 B3 820,000 797,450
25,564,316
RETAIL & WHOLESALE, MISCELLANEOUS - 0.2%
Amazon.com, Inc. 0%,
5/1/08 (e)(g) Caa 1,510,000 921,100
Central Tractor Farm & Country,
Inc. 10 5/8%, 4/1/07 B2 1,490,000 1,571,950
J Crew Operating Corp.
10 3/8%, 10/15/07 Caa 2,420,000 2,299,000
Metals USA, Inc. 8 5/8%,
2/15/08 (g) B2 2,810,000 2,718,675
7,510,725
TOTAL RETAIL & WHOLESALE 67,871,462
SERVICES - 0.1%
PRINTING - 0.0%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 1,430,000 1,505,075
SERVICES - 0.1%
Borg-Warner Security Corp.
9 5/8%, 3/15/07 B3 960,000 1,075,200
Iron Mountain, Inc.
8 3/4%, 9/30/09 B3 1,530,000 1,560,600
Medaphis Corp. 9 1/2%,
2/15/05 (g) B2 3,080,000 2,987,600
Signature Resorts, Inc.
9 3/4%, 10/1/07 B3 1,890,000 1,838,025
7,461,425
TOTAL SERVICES 8,966,500
TECHNOLOGY - 0.4%
COMPUTER SERVICES & SOFTWARE - 0.1%
Federal Data Corp.
10 1/8%, 8/1/05 B3 3,060,000 3,105,900
ICG Services, Inc.
0%, 5/1/08 (g) - 4,450,000 2,603,250
PSINet, Inc.
10%, 2/15/05 B3 730,000 742,775
6,451,925
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
COMPUTERS & OFFICE EQUIPMENT - 0.2%
Comdisco, Inc.
6 3/8%, 11/30/01 Baa $ 8,300,000 $ 8,335,192
ELECTRONIC INSTRUMENTS - 0.0%
Telecommunications Techniques Co.
9 3/4%, 5/15/08 (g) B3 2,315,000 2,355,513
ELECTRONICS - 0.1%
Advanced Micro Devices, Inc.
11%, 8/1/03 Ba3 1,750,000 1,855,000
Fairchild Semiconductor Corp.
11.74%, 3/15/08
pay-in-kind (j) - 1,975,085 1,896,299
3,751,299
TOTAL TECHNOLOGY 20,893,929
TRANSPORTATION - 0.7%
AIR TRANSPORTATION - 0.3%
Atlas Air, Inc. 9 1/4%,
4/15/08 (g) B3 5,100,000 5,093,625
Delta Air Lines, Inc.
9 7/8%, 5/15/00 Baa 1,500,000 1,598,790
Kitty Hawk, Inc.
9.95%, 11/15/04 B1 4,805,000 4,997,200
US Air, Inc.:
10 3/8%, 3/1/13 Ba2 2,480,000 2,746,600
9 5/8%, 2/1/01 B1 1,810,000 1,886,925
16,323,140
RAILROADS - 0.2%
Burlington Northern Santa Fe
Corp. 7.29%, 6/1/36 Baa 3,000,000 3,315,270
CSX Corp. 6.46%, 6/22/05 Baa 5,120,000 5,164,902
Wisconsin Central Transport
Corp. 6 5/8%, 4/15/08 Baa 675,000 673,704
9,153,876
SHIPPING - 0.2%
Amer Reefer Co. Ltd.
10 1/4%, 3/1/08 (g) B1 1,880,000 1,880,000
Cenargo International PLC
9 3/4%, 6/15/08 (g) Ba3 4,460,000 4,393,100
Holt Group, Inc. 9 3/4%,
1/15/06 (g) Caa 1,680,000 1,646,400
7,919,500
TOTAL TRANSPORTATION 33,396,516
UTILITIES - 2.3%
CELLULAR - 0.6%
AirTouch Communications, Inc.
6.35%, 6/1/05 Baa 6,880,000 6,910,822
McCaw International Ltd.
0%, 4/15/07 (e) Caa 8,150,000 5,338,250
Nextel International, Inc.:
12 1/8%, 4/15/08 (g) Caa 5,280,000 3,062,400
0%, 9/15/07 (e) B2 1,711,000 1,154,925
0%, 10/31/07 (e) B2 8,840,000 5,768,100
0%, 2/15/08 (e) (g) B2 6,730,000 4,324,025
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
UTILITIES - CONTINUED
CELLULAR - CONTINUED
PageMart Wireless, Inc.
0%, 2/1/08 (e) Caa $ 3,870,000 $ 2,322,000
Rogers Communications, Inc.
8 7/8%, 7/15/07 B2 3,110,000 3,133,325
32,013,847
ELECTRIC UTILITY - 0.5%
Avon Energy Partners Holdings (g):
6.73%, 12/11/02 Baa 4,910,000 4,992,193
6.46%, 3/4/08 Baa 3,960,000 3,977,543
Hydro-Quebec yankee
7.40%, 3/28/25 A2 2,620,000 3,162,602
Israel Electric Corp. Ltd.(g):
7 3/4%, 12/15/27 A3 4,670,000 4,813,369
yankee 7 7/8%,
12/15/26 A3 1,960,000 2,080,207
Niagara Mohawk Power Corp.
7 3/4%, 10/1/08 Ba3 675,000 691,031
NIPSCO Capital Markets, Inc.
7.39%, 4/1/04 Baa 3,500,000 3,665,156
Texas Utilities Co. 3
6 3/8%, 1/1/08 Baa 1,930,000 1,908,770
25,290,871
TELEPHONE SERVICES - 1.2%
Cable & Wireless Communications
PLC 6 3/8%, 3/6/03 Baa 5,080,000 5,084,267
Dobson Wireline Co.
12 1/4%, 6/15/08 (g) - 4,730,000 4,623,575
GCI, Inc. 9 3/4%, 8/1/07 B2 440,000 455,400
Hyperion Telecommunications, Inc.:
Series B, 0%, 4/15/03 (e) B3 6,470,000 4,803,975
12 1/4%, 9/1/04 B3 2,390,000 2,569,250
McLeodUSA, Inc.:
0%3/1/07 (e) B2 1,165,000 870,838
9 1/4%, 7/15/07 B2 1,330,000 1,381,538
NEXTLINK Communications, Inc.
9 5/8%, 10/1/07 B3 5,290,000 5,409,025
Pathnet, Inc. Unit 12 1/2%,
4/15/08 (g) 4,710,000 4,992,600
Teleport Communications Group,
Inc. 0%, 7/1/07 (e) Baa 8,450,000 7,256,438
Winstar Communications, Inc.
11%, 3/15/08 (g) - 2,120,000 2,109,400
WorldCom, Inc.:
9 3/8%, 1/15/04 Baa 3,708,000 3,894,587
8 7/8%, 1/15/06 Baa 3,139,000 3,414,824
7 3/4%, 4/1/07 Baa 9,690,000 10,510,355
57,376,072
TOTAL UTILITIES 114,680,790
TOTAL NONCONVERTIBLE BONDS 1,018,201,060
TOTAL CORPORATE BONDS
(Cost $1,004,141,241) 1,021,136,773
U.S. GOVERNMENT AND GOVERNMENT AGENCY
OBLIGATIONS - 6.2%
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
U.S. TREASURY OBLIGATIONS - 4.6%
11 7/8%, 11/15/03 Aaa $ 2,590,000 $ 3,337,863
11 3/4%, 2/15/10 (callable) Aaa 26,045,000 34,745,593
12 3/4%, 11/15/10 (callable) Aaa 5,220,000 7,434,428
5/15/2011 (callable) Aaa 25,650,000 38,923,875
7 5/8%, 2/15/25 Aaa 35,630,000 44,860,308
5.625% 11/30/99 Aaa 1,620,000 1,622,025
6 7/8%, 3/31/00 Aaa 4,980,000 5,090,506
5% 10/31/01 Aaa 820,000 837,040
7%, 7/15/06 Aaa 84,152,000 91,896,509
228,748,147
U.S. GOVERNMENT AGENCY OBLIGATIONS - 1.6%
State of Israel (guaranteed by
U.S. Government through Agency
for International Development):
6 5/8%, 8/15/03 Aaa 7,810,000 8,138,332
6 3/4%, 8/15/04 Aaa 2,144,000 2,258,189
5 5/8%, 9/15/03 Aaa 8,540,000 8,530,691
Guaranteed Export Trust
Certificates (assets of Trust
guaranteed by U.S.
Government through
Export-Import Bank)
Series 1994-A,
7.12%, 4/15/06 Aaa 6,970,457 7,291,864
Farm Credit Systems Financial
Assistance Corporation
8.80%, 6/10/05 Aaa 2,000,000 2,337,500
Federal Farm Credit Bank
8.16% 12/07/04 Aaa 5,000,000 5,631,250
Federal Home Loan Bank:
7.31%, 6/16/04 Aaa 2,500,000 2,691,400
7.59%, 3/10/05 Aaa 3,850,000 4,224,182
8.22% 11/17/04 Aaa 4,000,000 4,492,680
Federal Home Loan Mortgage
Corporation 6 3/4%, 8/1/05 Aaa 2,500,000 2,634,775
Fannie Mae:
7.40%, 7/1/04 Aaa 7,800,000 8,434,998
6.97% 4/08/04 Aaa 6,010,000 6,364,951
U.S. Department of Housing
and Urban Development
government guaranteed
participation certificates:
Series 1995-A,
6.24%, 8/1/04 Aaa 3,260,000 3,657,231 Series 1996-A,
8.67%, 8/1/01 Aaa 9,400,000 9,610,560
Series 1996-A,
7.63%, 8/1/14 (callable) Aaa 2,825,000 3,054,192
79,352,795
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $304,739,666) 308,100,942
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 8.8%
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
FREDDIE MAC - 0.3%
5 1/2%, 1/1/03 to 6/1/03 Aaa $ 3,598,778 $ 3,531,915
7%, 4/1/01 to 8/1/01 Aaa 2,024,483 2,046,532
7 1/2% , 12/1/27 to 3/1/28 Aaa 6,952,305 6,952,305
8 1/2%, 7/1/21 to 6/1/23 Aaa 226,984 237,724
12,768,476
FANNIE MAE - 7.5%
5 1/2%, 2/1/03 to 5/1/03 Aaa 3,367,410 3,320,905
6%, 1/1/11 to 12/1/24 Aaa 93,733,259 92,599,776
6 1/2%, 3/1/13 to 7/1/28 Aaa 123,574,257 123,431,577
7%, 2/1/28 to 7/1/28 (k) Aaa 117,713,584 119,580,596
7 1/2%, 1/1/29 to 6/1/28 Aaa 34,727,562 35,618,697
374,551,551
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 1.0%
6%, 12/15/08 to 6/15/09 Aaa 3,383,878 3,381,367
6 1/2% 6/15/08 to 7/15/09 Aaa 16,869,570 17,088,200
7%, 7/15/28 (k) Aaa 28,000,000 28,778,750
8%, 5/15/25 Aaa 177,352 183,781
8 1/2%, 12/15/16 Aaa 70,563 74,972
49,507,070
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $429,059,812) 436,827,097
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.0%
PRIVATE SPONSOR - 0.0%
Credit-Based Asset Servicing and
Securitization LLC Series 1997-2
Class 2-B, 7.2891%, 12/29/25
(c)(g)(h)
(Cost $797,344) Ba3 1,500,000 723,281
COMMERCIAL MORTGAGE SECURITIES - 2.2%
Resolution Trust Corp.
Series 1991-M2 Class A-3,
7.25%, 9/25/20 (h) Ba3 446,368 383,877
LTC Commercial Mortgage
Pass Thru Certificates
Series 1998-1 Class A,
6.029%, 5/30/30 (g) AAA 3,190,142 3,131,571
Asset Securitization Corp.
Series 1997-D5 Class A-6,
7.44%, 2/14/41 BBB- 900,000 900,422
Blackrock Capital Funding LLC
Series 1996 Class C2,
7.696%, 11/16/26 (g) - 145,170 145,034
BKB Commercial Mortgage Trust
Series 1997-C1 Class D, 7.83%,
2/25/43 (g)(h) BBB 1,800,000 1,823,344
Bankers Trust Remic Trust
1988-1 Series 1998-S1A Class G
8.66%, 11/28/02 (g) Ba2 1,000,000 958,750
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
CBM Funding Corp. sequential
pay Series 1996-1:
Class A-3PI,
7.08%, 11/1/07 AA $ 3,000,000 $ 3,139,219
Class B,
7.48%, 2/1/08 A 2,320,000 2,503,425
CS First Boston Mortgage
Securities Corp.:
Series 1998 C1
Class D, 7.17%, 1/17/12 BBB 5,050,000 5,132,063
Series 1998-FL1 Class E,
6.51%, 1/10/13 (g)(h) Baa 5,490,000 5,490,000
Series 1997-C2
Class D, 7.27%, 4/17/11 Baa 5,300,000 5,435,813
DLJ Mortgage Acceptance Corp.
Series 1993-MF12 Class B-2,
10.10%, 9/18/03 (g) - 600,000 615,000
Deutsche Mortgage and Asset
Receiving Corp. Series 1998 C1
Class D, 7.231%, 7/15/12 Baa 4,260,000 4,318,908
Franchise Mortgage Acceptance
Company LLC Loan Receivables (g):
Trust Series 1997-A Class E,
8.10%, 4/15/19 (h) - 500,000 481,328
Series 1997-B Class E, 7.89%,
9/15/19 - 750,000 676,875
Berkeley Federal Bank & Trust FSB
Series 1994 Class 1-B, 7.78%,
8/1/24 (g)(h) - 1,900,000 1,484,375
First Chicago /Lennar Trust I:
Series 1997-CHL1 Class E,
8.11%, 2/28/11 (h) - 1,600,000 1,423,250
Series 1997-CHL1 Class D,
8.11%, 5/29/08 (h) - 1,100,000 1,101,547
First Union-Lehman Brothers
Commercial Mortgage Trust
sequential pay Series 1997-C2
Class B, 6.79%, 10/18/11 Aa2 11,350,000 11,628,430
Thirteen Affiliates of General
Growth Properties, Inc. (g):
sequential pay Series A-2,
6.602%, 11/15/12 Aaa 3,830,000 3,924,371
Series D-2, 6.992%,
11/15/12 Baa 4,120,000 4,133,349
Series E-2, 7.224%,
11/15/12 Baa 2,450,000 2,431,307
General Motors Acceptance
Corp. Commercial Mortgage
Securities, Inc.:
Series 1996-C1 Class F
7.86%, 11/15/06 (g) Ba3 750,000 729,900 Series 1997-C2
Class F, 6 3/4%, 4/16/29 Ba2 400,000 349,688
COMMERCIAL MORTGAGE SECURITIES - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
GS Mortgage Securities Corp. II:
Series 1997- GL Class A2-B,
6.86%, 7/13/30 Aaa $ 4,640,000 $ 4,818,594
Series 1998-GLII Class D,
7.19%, 4/13/31 (g)(h) Baa 1,470,000 1,485,009
Series 1998-GLII Class E,
7.19%, 4/13/31 (g)(h) Baa 4,930,000 4,827,998
GAFCO Franchisee Loan Trust
Series 1998-1 Class D, 14.50%,
6/1/16 (g)(h) - 1,300,000 1,031,266
Kidder Peabody Acceptance Corp.
sequential pay, Series 1993-M1
Class A-2, 7.15%, 4/25/25 Aa2 1,700,078 1,697,953
Morgan Stanley Capital One, Inc.:
Series 1996-MBL1 Class E,
8.661%, 5/25/21 (g) - 1,786,437 1,755,174
Series 1998-HF1 Class D,
7.10%, 2/15/08 (f) BBB 5,300,000 5,379,500
Nomura Depositor Trust:
Series 1998-ST1A Class B-2,
12.66%, 1/15/03 (g) - 800,000 795,125
Series 1998 - D6 Class A-4,
7.594%, 3/15/30 Baa 4,260,000 4,384,804
Penn Mutual Life Insurance Co.
(The) Series 1996-PML (g):
Class K,
7.90%, 11/15/26 - 1,473,000 1,109,493
Class L,
7.90%, 11/15/26 - 1,133,000 541,914
Structured Asset Securities Corp.:
Series 1995-C1 Class E,
7 3/8%, 9/25/24 (g) BB 1,200,000 1,167,000
Series 1993-C1 Class E,
6.60%, 10/25/24 (g) B 1,250,000 625,000
Series 1996
Class A-2A,7 3/4%,
2/25/28 AAA 1,081,670 1,092,487
commercial Series 1996-CFL
Class E, 7 3/4%, 2/25/28 BB+ 2,390,000 2,419,128
Series 1996-CFL Class G,
7 3/4%, 2/25/28 (g) - 1,000,000 949,375
Wells Fargo Capital Markets
Apartment Financing Trust
6.56%, 12/29/05 (g) Aaa 2,676,825 2,721,609
Equitable Life Assurance Society
of the United States (The) (g):
Series 174 Class B1,
7.33%, 5/15/06 Aa2 3,500,000 3,695,230
Series 1996-1 Class C1,
7.52%, 5/15/06 A2 2,300,000 2,439,518
Series 174, Class D1,
7.77%, 5/15/06 Baa1 2,200,000 2,321,088
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $104,837,337) 107,599,111
FOREIGN GOVERNMENT OBLIGATIONS (I) - 0.3%
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
Export Development Corp.
yankee 8 1/8%, 8/10/99 Aa2 $ 1,640,000 $ 1,679,114
Israeli State euro 6 3/8%,
12/19/01 A3 3,350,000 3,345,712
Manitoba Province yankee
6 3/8%, 10/15/99 A1 7,000,000 7,039,130
Newfoundland Province yankee
11 5/8%, 10/15/07 Baa1 2,000,000 2,756,880
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $14,629,170) 14,820,836
SUPRANATIONAL OBLIGATIONS - 0.1%
Inter American Development Bank
yankee 6.29%, 7/16/27
(Cost $4,720,123) Aaa 4,750,000 4,997,998
BANK NOTES - 0.2%
Key Bank N.A 5.6488%, 8/20/99
(Cost $10,485,878) Aa3 10,500,000 10,490,025
CERTIFICATES OF DEPOSIT - 2.3%
ABN-AMRO Bank N.V. yankee
(euro) 5.64%, 12/14/98 11,000,000 10,998,710
Australia & New Zealand Banking
Group yankee Ltd. 5.825%, 7/28/98 5,000,000 4,999,945
Banque Nationale de paris yankee
5 3/4%, 7/31/98 5,500,000 5,499,340
Canadian Imperial Bank of Commerce NY
Branch yankee 6.20%, 8/1/00 5,730,000 5,760,369
Canadian Imperial Bank of Commerce
5.91%, 8/28/98 10,000,000 10,000,465
Chase Manhattan Bank USA
5.54%, 7/6/98 12,000,000 11,999,886
Deutsche Bank AG yankee
5.94%, 10/26/98 5,000,000 5,001,602
Bank of Scotland Treasury Services yankee
5.64%, 12/29/98 12,000,000 11,999,357
First National Bank of Chicago, ILL
5.65%, 3/3/99 10,000,000 9,990,770
RaboBank Nederland Cooperative
Central yankee 5.68%, 6/4/99 10,600,000 10,594,940
Societe Generale France yankee
5.91%, 10/15/98 7,000,000 7,001,276
Toronto-Dominion Bank yankee
5.68%, 6/4/99 10,600,000 10,594,940
Westdeutsche Landesbank yankee
5.83%, 8/3/98 9,000,000 8,999,370
Westpac Banking Corp. yankee
5.885%, 8/27/98 2,000,000 1,999,980
TOTAL CERTIFICATES OF DEPOSIT
(Cost $115,399,923) 115,440,950
COMMERCIAL PAPER - 1.8%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
Citibank Credit Card Master
Trust I (Dakota
Cirtification Program) 5.52%, 8/5/98 $ 10,500,000 $ 10,443,038
Morgan (JP) & Co., Inc.
5 1/2%, 11/10/98 12,000,000 11,758,440
UBS Finance, Inc. yankee
5.53%, 8/5/98 2,000,000 1,989,208
Unifunding, Inc. yankee
5.52%, 7/2/98 10,500,000 10,498,348
Aspen Funding Corp. yankee
5.54%, 7/20/98 12,000,000 11,964,406
Beneficial Corp.
5.55%, 8/12/98 12,100,000 12,021,229
General Electric Capital Corp.
5.51%, 7/13/98 12,000,000 11,977,480
Kitty Hawk Funding Corp.
5.53%, 7/29/98 6,300,000 6,272,805
New Center Asset Trust
5.54%, 9/21/98 3,000,000 2,962,553
Preferred Receivables Funding Corp.
5.53%, 7/14/98 4,250,000 4,241,313
Triple A One Funding Corp.
5.54%, 7/8/98 6,800,000 6,792,555
TOTAL COMMERCIAL PAPER
(Cost $90,923,047) 90,921,375
MASTER NOTES - 0.1%
Goldman Sachs Group L.P.
5.72%, 1/27/99
(Cost $6,700,000) 6,700,000 6,700,000
CASH EQUIVALENTS - 6.1%
SHARES
Taxable Central Cash Fund (b) 301,411,157 301,411,157
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations), in a joint
trading account at 5.93%, dated
6/30/98 due 7/1/98 $ 104,017 104,000
TOTAL CASH EQUIVALENTS
(Cost $301,515,157) 301,515,157
TOTAL INVESTMENT IN SECURITIES - 100.0%
(Cost $4,422,595,402) $ 4,965,444,756
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield of the Taxable Central Cash
Fund was 5.61%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(c) Non-income producing - issuer filed for protection under the
Federal Bankruptcy Code or is in default of interest payment.
(d) Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investors Service, Inc.
(e) Debt obligation initially issued in zero coupon form which
converts to coupon form at a specified rate and date. The rate shown
is the rate at period end.
(f) Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date. The rate shown is the rate at
period end.
(g) Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions
exempt from registration, normally to qualified institutional buyers.
At the period end, the value of these securities amounted to
$232,328,365 or 4.8% of net assets.
(h) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(i) For foreign government obligations not individually rated by S&P
or Moody's the ratings listed are assigned to securities by FMR, the
fund's investment advisor, based principally on S&P and Moody's
ratings of the soveriegn credit of the issuing government.
(j) Restricted securities - Investment in securities not registered
under the Securities Act of 1933 (see Note 2 of Notes to Financial
Statements).
Additional information on each holding is as follows:
ACQUISITION ACQUISITION
SECURITY DATE COST (000S)
Fairchild Semiconductor Corp
11.74%, 3/15/08 pay-in-kind
4/3/97 to 9/15/97 $1,647,504
Garden State Newspapers Inc.,
8 3/4%, 10/1/09 2/11/98 $3,032,550
(k) Security or a portion of the security purchased on a delayed
delivery or when-issued basis (see Note 2 of Notes to Financial
Statements).
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $3,107,024,735 and $2,943,044,842, respectively, of which
long-term U.S. government and government agency obligations aggregated
$1,571,695,057 and $1,270,011,273, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $176,162 for the
period (see Note 4 of Notes to Financial Statements).
The fund participated in the bank borrowing program. The maximum loan
and average daily balances during the period for which the loan was
outstanding amounted to $7,666,000 respectively. The weighted average
interest rate was 5.79%. Interest expense includes $1,232 paid under
the bank borrowing program (see Note 6 of Notes to Financial
Statements).
The composition of long-term debt holdings as a percentage of total
value of investment in securities, is as follows:
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 21.9% AAA, AA, A 21.3%
Baa 6.7% BBB 6.9%
Ba 1.9% BB 2.1%
B 5.2% B 5.0%
Caa 0.7% CCC 0.8%
Ca, C 0.0% CC, C 0.0%
D 0.0%
For some foreign government obligations, FMR has assigned the ratings
of the sovereign credit of the issuing government. The percentage not
rated by Moody's or S&P amounted to1.4%. FMR has determined that
unrated debt securities that are lower quality account for 0.6% of the
total value of investment in securities.
INCOME TAX INFORMATION
At June 30,1998, the aggregate cost of investment securities for
income tax purposes was $4,423,662,220. Net unrealized appreciation
aggregated $541,782,536, of which $610,109,474 related to appreciated
investment securities and $68,326,938 related to depreciated
investment securities.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 30, 1998 (UNAUDITED)
ASSETS
INVESTMENT IN SECURITIES, AT VALUE (INCLUDING REPURCHASE AGREEMENTS OF $104,000)
(COST $4,422,595,402) - $ 4,965,444,756
SEE ACCOMPANYING SCHEDULE
CASH 774,587
RECEIVABLE FOR INVESTMENTS SOLD 59,508,438
RECEIVABLE FOR FUND SHARES SOLD 2,317,947
DIVIDENDS RECEIVABLE 4,361,780
INTEREST RECEIVABLE 29,668,468
OTHER RECEIVABLES 203,340
TOTAL ASSETS 5,062,279,316
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 124,458,650
REGULAR DELIVERY
DELAYED DELIVERY 138,880,682
PAYABLE FOR FUND SHARES REDEEMED 5,063,647
ACCRUED MANAGEMENT FEE 2,131,334
DISTRIBUTION FEES PAYABLE 52
OTHER PAYABLES AND ACCRUED EXPENSES 398,467
TOTAL LIABILITIES 270,932,832
NET ASSETS $ 4,791,346,484
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 3,964,816,294
UNDISTRIBUTED NET INVESTMENT INCOME 77,492,343
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY
TRANSACTIONS 206,193,492
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 542,844,355
AND ASSETS AND LIABILITIES IN
FOREIGN CURRENCIES
NET ASSETS $ 4,791,346,484
INITIAL CLASS: $17.25
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($4,790,268,471 (DIVIDED BY)
277,718,427 SHARES)
SERVICE CLASS: $17.20
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PRICE PER SHARE
($1,078,013 (DIVIDED BY) 62,675 SHARES)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME $ 20,961,032
DIVIDENDS
INTEREST 70,977,484
TOTAL INCOME 91,938,516
EXPENSES
MANAGEMENT FEE $ 12,533,744
TRANSFER AGENT FEES 1,584,042
DISTRIBUTION FEES - SERVICE CLASS 109
ACCOUNTING FEES AND EXPENSES 426,724
NON-INTERESTED TRUSTEES' COMPENSATION 10,462
CUSTODIAN FEES AND EXPENSES 19,201
REGISTRATION FEES 15,112
AUDIT 50,766
LEGAL 26,726
INTEREST 1,232
MISCELLANEOUS 97,299
TOTAL EXPENSES BEFORE REDUCTIONS 14,765,417
EXPENSE REDUCTIONS (342,623) 14,422,794
NET INVESTMENT INCOME 77,515,722
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 208,945,629
FOREIGN CURRENCY TRANSACTIONS (3,611) 208,942,018
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 121,929,390
ASSETS AND LIABILITIES IN 531 121,929,921
FOREIGN CURRENCIES
NET GAIN (LOSS) 330,871,939
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 408,387,661
OTHER INFORMATION $ 332,942
EXPENSE REDUCTIONS
DIRECTED BROKERAGE ARRANGEMENTS
CUSTODIAN CREDITS 9,681
$ 342,623
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
OPERATIONS $ 77,515,722 $ 137,893,337
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 208,942,018 422,287,524
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) 121,929,921 189,535,901
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 408,387,661 749,716,762
DISTRIBUTIONS TO SHAREHOLDERS (139,636,839) (127,145,659)
FROM NET INVESTMENT INCOME
FROM NET REALIZED GAIN (418,910,515) (317,186,364)
TOTAL DISTRIBUTIONS (558,547,354) (444,332,023)
SHARE TRANSACTIONS - NET INCREASE (DECREASE) 541,558,604 453,368,657
TOTAL INCREASE (DECREASE) IN NET ASSETS 391,398,911 758,753,396
NET ASSETS
BEGINNING OF PERIOD 4,399,947,573 3,641,194,177
END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $77,492,343 AND
$137,705,425, RESPECTIVELY) $ 4,791,346,484 $ 4,399,947,573
</TABLE>
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998
SHARES DOLLARS YEAR ENDED DECEMBER 31, 1997
(UNAUDITED) SHARES DOLLARS
SHARE TRANSACTIONS 12,711,041 $ 217,464,359 22,516,597 $ 378,800,337
INITIAL CLASS
SOLD
REINVESTED 34,542,119 558,546,057 28,796,632 444,332,023
REDEEMED (13,804,465) (235,509,477) (22,110,811) (369,773,703)
NET INCREASE (DECREASE) 33,448,695 $ 540,500,939 29,202,418 $ 453,358,657
SERVICE CLASS A 62,729 $ 1,068,315 568 $ 10,000
SOLD
REINVESTMENT 80 1,295 - -
REDEEMED (702) (11,945) - -
NET INCREASE (DECREASE) 62,107 $ 1,057,665 568 $ 10,000
DISTRIBUTIONS $ 139,636,515 $ 127,145,659
INITIAL CLASS - NET INVESTMENT INCOME
INITIAL CLASS - NET REALIZED GAIN 418,909,543 317,186,364
TOTAL $ 558,546,058 $ 444,332,023
SERVICE CLASS - NET INVESTMENT INCOME $ 324 $ -
SERVICE CLASS - NET REALIZED GAIN 972 -
TOTAL $ 1,296 $ -
$ 558,547,354 $ 444,332,023
A SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1998
SELECTED PER-SHARE DATA (UNAUDITED) 1997 1996 1995 1994 1993
NET ASSET VALUE, BEGINNING OF PERIOD $ 18.01 $ 16.93 $ 15.79 $ 13.79 $ 15.42 $ 13.32
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .28 D .57 D .63 .30 .45 .33
NET REALIZED AND UNREALIZED GAIN (LOSS) 1.24 2.58 1.55 1.99 (1.33) 2.39
TOTAL FROM INVESTMENT OPERATIONS 1.52 3.15 2.18 2.29 (.88) 2.72
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.57) (.59) (.57) (.29) (.29) (.33)
IN EXCESS OF NET INVESTMENT INCOME - - - - - (.04)
FROM NET REALIZED GAIN (1.71) (1.48) (.47) - (.46) (.25)
TOTAL DISTRIBUTIONS (2.28) (2.07) (1.04) (.29) (.75) (.62)
NET ASSET VALUE, END OF PERIOD $ 17.25 $ 18.01 $ 16.93 $ 15.79 $ 13.79 $ 15.42
TOTAL RETURN B, C 9.29% 20.65% 14.60% 16.96% (6.09)% 21.23%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 4,790,268 $ 4,399,937 $ 3,641,194 $ 3,332,844 $ 3,290,527 $ 2,422,692
RATIO OF EXPENSES TO AVERAGE NET ASSETS .65% A .65% .74% .81% .81% .88%
RATIO OF EXPENSES TO AVERAGE NET ASSETS
AFTER EXPENSE REDUCTIONS .63% A, F .64% F .73% F .79% F .80% F .88% F
RATIO OF NET INVESTMENT INCOME TO AVERAGE
NET ASSETS 3.39% A 3.43% 3.60% 3.54% 4.07% 3.64%
PORTFOLIO TURNOVER 139% A 101% 168% 256% 85% 113%
AVERAGE COMMISSION RATE G $ .0416 $ .0408 .0163
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
SELECTED PER-SHARE DATA (UNAUDITED) 1997 E
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.99 $ 17.60
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .28 D .10 D
NET REALIZED AND UNREALIZED GAIN (LOSS) 1.21 .29
TOTAL FROM INVESTMENT OPERATIONS 1.49 .39
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.57) -
FROM NET REALIZED GAIN (1.71) -
TOTAL DISTRIBUTIONS (2.28) -
NET ASSET VALUE, END OF PERIOD $ 17.20 $ 17.99
TOTAL RETURN B 9.11% 2.22%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 1,078 $ 10
RATIO OF EXPENSES TO AVERAGE NET ASSETS .75% A .75% A
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS .73% A .75% A
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 3.60% A 3.52% A
PORTFOLIO TURNOVER 139% A 101%
AVERAGE COMMISSION RATE G $ .0416 $ .0408
</TABLE>
A ANNUALIZED
B TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE
THE TOTAL RETURNS SHOWN. TOTAL RETURNS FOR PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 7 OF NOTES TO
FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON
AVERAGE SHARES OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3, 1997 (COMMENCEMENT OF SALE OF SERVICE
CLASS SHARES) TO DECEMBER 31, 1997.
F FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES
(SEE NOTE 7 OF NOTES TO FINANCIAL STATEMENTS).
G FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS
REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR
SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY
FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES
EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION
RATE STRUCTURES MAY DIFFER.
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
JUNE 30, 1998 YEAR FUND
VIP III: BALANCED - "INITIAL CLASS" 20.16% 16.75%
S&P 500 (REGISTERED TRADEMARK) 30.16% 32.30%
LB AGGREGATE BOND 10.54% 10.15%
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and
show what would have happened if the fund had performed at a constant
rate each year.
You can compare the fund's returns to the performance of the Standard
& Poor's 500 Index - a widely recognized, unmanaged index of common
stocks - and the performance of the Lehman Brothers Aggregate Bond
Index - a market value weighted performance benchmark for
investment-grade fixed-rate debt issues, including government,
corporate, asset-backed, and mortgage-backed securities, with
maturities of at least one year.
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations January 3, 1995.
If Fidelity had not reimbursed certain fund expenses, the life of fund
total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
UNDERSTANDING PERFORMANCE
HOW A FUND DID YESTERDAY IS NO GUARANTEE OF HOW
IT WILL DO TOMORROW. THE STOCK MARKET, FOR EXAMPLE,
HAS A HISTORY OF LONG-TERM GROWTH AND SHORT-TERM
VOLATILITY. IN TURN, THE SHARE PRICE AND RETURN OF A
FUND THAT INVESTS IN STOCKS WILL VARY. THAT MEANS IF
YOU SELL YOUR SHARES DURING A MARKET DOWNTURN,
YOU MIGHT LOSE MONEY. BUT IF YOU CAN RIDE OUT THE
MARKET'S UPS AND DOWNS, YOU MAY HAVE A GAIN.
(CHECKMARK)
$10,000 OVER LIFE OF FUND
VIP III Balanced S&P 500
LB Aggregate Bond
00616 SP001
LB001
1995/01/03 10000.00 10000.00
10000.00
1995/01/31 9990.00 10261.28
10213.32
1995/02/28 10190.00 10661.16
10456.40
1995/03/31 10260.00 10975.77
10520.18
1995/04/30 10390.00 11299.00
10667.46
1995/05/31 10610.00 11750.63
11080.29
1995/06/30 10740.00 12023.59
11161.18
1995/07/31 10880.00 12422.30
11136.63
1995/08/31 10920.00 12453.48
11271.38
1995/09/30 11020.00 12979.01
11380.71
1995/10/31 10890.00 12932.68
11528.66
1995/11/30 11210.00 13500.42
11701.59
1995/12/31 11391.59 13760.44
11865.41
1996/01/31 11473.17 14228.85
11943.72
1996/02/29 11319.47 14360.75
11735.90
1996/03/31 11227.28 14499.04
11653.75
1996/04/30 11258.01 14712.76
11588.49
1996/05/31 11380.93 15092.20
11565.31
1996/06/30 11452.64 15149.70
11720.29
1996/07/31 11227.28 14480.39
11751.93
1996/08/31 11298.98 14785.78
11731.96
1996/09/30 11780.44 15617.92
11936.09
1996/10/31 12098.00 16048.66
12201.07
1996/11/30 12733.12 17261.78
12409.71
1996/12/31 12528.25 16919.83
12294.30
1997/01/31 12927.76 17976.98
12332.41
1997/02/28 13144.66 18117.92
12363.24
1997/03/31 12777.20 17373.45
12226.01
1997/04/30 13260.15 18410.65
12409.40
1997/05/31 13785.10 19531.49
12527.29
1997/06/30 14289.05 20406.50
12676.37
1997/07/31 15086.97 22030.24
13018.63
1997/08/31 14383.54 20796.11
12907.97
1997/09/30 14960.98 21935.11
13099.01
1997/10/31 14646.01 21202.48
13288.94
1997/11/30 15002.98 22183.94
13350.07
1997/12/31 15307.44 22564.84
13484.91
1998/01/31 15475.43 22814.41
13657.52
1998/02/28 16051.56 24459.78
13646.59
1998/03/31 16655.17 25712.37
13692.99
1998/04/30 16789.31 25971.03
13764.19
1998/05/31 16789.31 25524.59
13894.95
1998/06/30 17169.36 26561.40
14013.06
IMATRL PRASUN SHR__CHT 19980630 19980714 113015 R00000000000045
Let's say hypothetically that $10,000 was invested in Variable
Insurance Products Fund III: Balanced Portfolio on January 3, 1995,
when the fund started. As the chart shows, by June 30, 1998, the value
of the investment would have grown to $17,169 - a 71.69% increase on
the initial investment. For comparison, look at how both the Standard
& Poor's 500 Index and Lehman Brothers Aggregate Bond Index did over
the same period. With dividends and capital gains, if any, reinvested,
the same $10,000 investment in the Standard & Poor's 500 Index would
have grown to $26,561 - a 165.61% increase. If $10,000 was put in the
Lehman Brothers Aggregate Bond Index, it would have grown to $14,013 -
a 40.13% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
GENERAL ELECTRIC CO. 2.0
AMERICAN HOME PRODUCTS CORP. 2.0
U.S. BANCORP 1.7
BRISTOL-MYERS SQUIBB CO. 1.7
UNILEVER NV ADR 1.7
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
FINANCE 23.5
HEALTH 9.1
UTILITIES 8.0
ENERGY 6.1
TECHNOLOGY 6.0
ASSET ALLOCATION AS OF JUNE 30, 1998*
ROW: 1, COL: 1, VALUE: 3.3
ROW: 1, COL: 2, VALUE: 31.6
ROW: 1, COL: 3, VALUE: 65.09999999999999
ROW: 1, COL: 1, VALUE: 45.0
ROW: 1, COL: 2, VALUE: 39.0
ROW: 1, COL: 3, VALUE: 28.0
ROW: 2, COL: 1, VALUE: 31.0
ROW: 2, COL: 2, VALUE: 40.0
ROW: 2, COL: 3, VALUE: 67.0
ROW: 3, COL: 1, VALUE: 90.0
ROW: 3, COL: 2, VALUE: 60.0
ROW: 3, COL: 3, VALUE: 46.0
STOCKS 65.1%
BONDS 31.6%
SHORT-TERM INVESTMENTS 3.3%
FOREIGN INVESTMENTS 8.0%
*
% OF FUND'S INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1 fee.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
JUNE 30, 1998 YEAR FUND
VIP III: BALANCED - SERVICE CLASS 19.93% 16.69%
S&P 500 (REGISTERED TRADEMARK) 30.16% 32.30%
LB AGGREGATE BOND 10.54% 10.15%
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and
show what would have happened if the fund had performed at a constant
rate each year.
You can compare the fund's returns to the performance of the Standard
& Poor's 500 Index - a widely recognized, unmanaged index of common
stocks - and the performance of the Lehman Brothers Aggregate Bond
Index - a market value weighted performance benchmark for
investment-grade fixed-rate debt issues, including government,
corporate, asset-backed, and mortgage-backed securities, with
maturities of at least one year.
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations January 3, 1995.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
UNDERSTANDING PERFORMANCE
HOW A FUND DID YESTERDAY IS NO GUARANTEE OF HOW
IT WILL DO TOMORROW. THE STOCK MARKET, FOR EXAMPLE,
HAS A HISTORY OF LONG-TERM GROWTH AND SHORT-TERM
VOLATILITY. IN TURN, THE SHARE PRICE AND RETURN OF A
FUND THAT INVESTS IN STOCKS WILL VARY. THAT MEANS IF
YOU SELL YOUR SHARES DURING A MARKET DOWNTURN,
YOU MIGHT LOSE MONEY. BUT IF YOU CAN RIDE OUT THE
MARKET'S UPS AND DOWNS, YOU MAY HAVE A GAIN.
(CHECKMARK)
$10,000 OVER LIFE OF FUND
VIP III Balanced - CL S S&P 500
LB Aggregate Bond
00469 SP001
LB001
1995/01/03 10000.00 10000.00
10000.00
1995/01/31 9990.00 10261.28
10213.32
1995/02/28 10190.00 10661.16
10456.40
1995/03/31 10260.00 10975.77
10520.18
1995/04/30 10390.00 11299.00
10667.46
1995/05/31 10610.00 11750.63
11080.29
1995/06/30 10740.00 12023.59
11161.18
1995/07/31 10880.00 12422.30
11136.63
1995/08/31 10920.00 12453.48
11271.38
1995/09/30 11020.00 12979.01
11380.71
1995/10/31 10890.00 12932.68
11528.66
1995/11/30 11210.00 13500.42
11701.59
1995/12/31 11391.59 13760.44
11865.41
1996/01/31 11473.17 14228.85
11943.72
1996/02/29 11319.47 14360.75
11735.90
1996/03/31 11227.28 14499.04
11653.75
1996/04/30 11258.01 14712.76
11588.49
1996/05/31 11380.93 15092.20
11565.31
1996/06/30 11452.64 15149.70
11720.29
1996/07/31 11227.28 14480.39
11751.93
1996/08/31 11298.98 14785.78
11731.96
1996/09/30 11780.44 15617.92
11936.09
1996/10/31 12098.00 16048.66
12201.07
1996/11/30 12733.12 17261.78
12409.71
1996/12/31 12528.25 16919.83
12294.30
1997/01/31 12927.76 17976.98
12332.41
1997/02/28 13144.66 18117.92
12363.24
1997/03/31 12777.20 17373.45
12226.01
1997/04/30 13260.15 18410.65
12409.40
1997/05/31 13785.10 19531.49
12527.29
1997/06/30 14289.05 20406.50
12676.37
1997/07/31 15086.97 22030.24
13018.63
1997/08/31 14383.54 20796.11
12907.97
1997/09/30 14960.98 21935.11
13099.01
1997/10/31 14646.01 21202.48
13288.94
1997/11/30 15002.98 22183.94
13350.07
1997/12/31 15317.94 22564.84
13484.91
1998/01/31 15464.93 22814.41
13657.52
1998/02/28 16029.90 24459.78
13646.59
1998/03/31 16633.54 25712.37
13692.99
1998/04/30 16756.50 25971.03
13764.19
1998/05/31 16756.50 25524.59
13894.95
1998/06/30 17136.57 26561.40
14013.06
IMATRL PRASUN SHR__CHT 19980630 19980731 155654 R00000000000045
Let's say hypothetically that $10,000 was invested in Variable
Insurance Products Fund III: Balanced Portfolio - Service Class on
January 3, 1995, when the fund started. As the chart shows, by June
30, 1998, the value of the investment would have grown to $17,137 - a
71.37% increase on the initial investment. For comparison, look at how
both the Standard & Poor's 500 Index and Lehman Brothers Aggregate
Bond Index did over the same period. With dividends and capital gains,
if any, reinvested, the same $10,000 investment in the S&P 500 would
have grown to $26,561 - a 165.61% increase. If $10,000 was put in the
Lehman Brothers Aggregate Bond Index, it would have grown to $14,013 -
a 40.13% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
GENERAL ELECTRIC CO. 2.0
AMERICAN HOME PRODUCTS CORP. 2.0
U.S. BANCORP 1.7
BRISTOL-MYERS SQUIBB CO. 1.7
UNILEVER NV ADR 1.7
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
FINANCE 23.5
HEALTH 9.1
UTILITIES 8.0
ENERGY 6.1
TECHNOLOGY 6.0
ASSET ALLOCATION AS OF JUNE 30, 1998*
ROW: 1, COL: 1, VALUE: 3.3
ROW: 1, COL: 2, VALUE: 31.6
ROW: 1, COL: 3, VALUE: 65.09999999999999
ROW: 1, COL: 1, VALUE: 45.0
ROW: 1, COL: 2, VALUE: 39.0
ROW: 1, COL: 3, VALUE: 28.0
ROW: 2, COL: 1, VALUE: 31.0
ROW: 2, COL: 2, VALUE: 40.0
ROW: 2, COL: 3, VALUE: 67.0
ROW: 3, COL: 1, VALUE: 90.0
ROW: 3, COL: 2, VALUE: 60.0
ROW: 3, COL: 3, VALUE: 46.0
STOCKS 65.1%
BONDS 31.6%
SHORT-TERM INVESTMENTS 3.3%
FOREIGN INVESTMENTS 8.0%
*
% OF FUND'S INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
FUND TALK: THE MANAGERS' OVERVIEW
An interview with John Avery (right), lead Portfolio Manager of
Balanced Portfolio, and Kevin Grant, manager for fixed-income
investments
Q. HOW DID THE FUND PERFORM, JOHN?
J.A. Given the mix of equities and fixed-income securities owned by
the fund, its returns typically fall somewhere between those of its
two benchmark indexes - the Standard & Poor's 500 Index and the Lehman
Brothers Aggregate Bond Index. That's what happened for the six months
that ended June 30, 1998, as the fund's return trailed the 17.71%
return of the S&P 500 but topped the 3.93% return of the Lehman
Brothers index. The fund's return also fell between the 30.16% return
of the S&P 500 and the 10.54% return of the Lehman Brothers index for
the 12 months that ended June 30, 1998.
Q. WHAT FACTORS CONTRIBUTED TO THE FUND'S PERFORMANCE?
J.A. The stock market in general was strong, benefiting the equity
part of the fund. In addition, two sectors in which the fund had its
highest concentration of holdings - pharmaceuticals and financial
services - did even better than the overall market. Stable interest
rates proved to be beneficial for the fixed-income sub-portfolio, with
performance there enhanced by careful management of the fund's
weightings of mortgage-backed, Treasury and corporate issues.
Q. WHAT ATTRACTED YOU TO FINANCIAL SERVICES AND PHARMACEUTICAL STOCKS?
J.A. The many positives for financial services stocks included more
productive use of excess capital, effective use of technology to
reduce costs, fee services that lessen banks' vulnerability to
economic downturns and active industry consolidation, which tends to
have a positive "halo effect" on other potential takeover candidates.
In the health care sector, pharmaceutical companies were attractive in
virtue of healthy pipelines of new products, the ability to bring
products to market more rapidly and relaxed regulations that permitted
more aggressive advertising.
Q. WHAT STOCKS PERFORMED WELL FOR THE FUND? WHICH FAILED TO PERFORM UP
TO YOUR EXPECTATIONS?
J.A. Citicorp did well, mainly because of the announced merger with
fellow financial services giant Travelers Corp. In the pharmaceutical
area, American Home Products' stock had been driven down by negative
publicity about the side effects of Fen-Phen, a weight-loss drug. The
stock subsequently recovered because of its attractive
price-to-earnings ratio and investors' optimism about the company's
promising pipeline of new products. Finally, retailer Wal-Mart did
well for the fund. The company continued to implement the constructive
strategy of increasing its number of stores while cutting costs
through better inventory management. There were two disappointing
stocks in the tobacco industry - Philip Morris and RJR Nabisco. The
settlement with the federal government - which had been expected to
incorporate specific limits regarding the industry's liability for
smoking-related death and disease - fell through. When the
negotiations broke off, investors sold tobacco stocks.
Q. TURNING TO YOU, KEVIN, WHAT DEVELOPMENTS MERIT MENTION FOR THE BOND
PORTION OF THE FUND?
K.G. The mortgage-backed sector deserves mention. At the beginning of
the year, the fund was underweighted in mortgage-backed issues
relative to the Lehman Brothers index because I felt that prices were
high given the degree of risk involved. This proved to be an accurate
analysis, as mortgage-backed securities dramatically underperformed
both Treasuries and corporates in January 1998. When mortgage-backed
issues became cheaper on a relative basis, I changed my strategy,
overweighting them relative to the index. The fund was rewarded for
this shift in February and March, when the mortgage-backed sector
finally shook off its lethargy and performed well. Looking at
corporate bonds, many of the fund's holdings were helped by the wave
of consolidation taking place in the financial sector, as the issues
of numerous acquisition targets were given credit-quality upgrades
because of the superior credit rating of the acquiring company.
Q. WHAT'S YOUR OUTLOOK, JOHN?
J.A. There could be some delayed effects from the Asian slowdown that
might affect the earnings of U.S. companies in certain industries. The
industries that have done well so far this year should continue to
perform well as long as inflation and interest rates stay roughly
where they are. The fund's strategy remains one of buying high-quality
companies and then holding onto them. That's the best way I know to
add value for the fund's shareholders.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED
ON MARKET AND OTHER CONDITIONS.
FUND FACTS
GOAL: to provide income and growth of capital by investing in a
diversified portfolio of stocks and bonds
START DATE: January 3, 1995
SIZE: as of June 30, 1998, more than $268 million
MANAGER: John Avery, since January 1998; and Kevin Grant, since 1996;
John Avery joined Fidelity in 1995; Kevin Grant joined Fidelity in
1993
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
INVESTMENTS JUNE 30, 1998 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 64.2%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 2.4%
AEROSPACE & DEFENSE - 1.4%
Harsco Corp. 18,800 $ 861,275
Lockheed Martin Corp. 9,700 1,026,965
Textron, Inc. 26,400 1,892,550
3,780,790
DEFENSE ELECTRONICS - 0.7%
Raytheon Co. Class B 31,800 1,880,175
SHIP BUILDING & REPAIR - 0.3%
General Dynamics Corp. 20,000 930,000
TOTAL AEROSPACE & DEFENSE 6,590,965
BASIC INDUSTRIES - 2.8%
CHEMICALS & PLASTICS - 2.8%
du Pont (E.I.) de Nemours & Co. 21,800 1,626,825
Hanna (M.A.) Co. 18,500 338,781
Hoechst AG Ord. 22,800 1,126,759
Monsanto Co. 48,500 2,709,938
Rohm & Haas Co. 12,200 1,268,038
Sealed Air Corp. (a) 8,000 294,000
Solutia, Inc. 7,900 226,631
7,590,972
CONSTRUCTION & REAL ESTATE - 1.5%
BUILDING MATERIALS - 0.2%
Masco Corp. 12,000 726,000
REAL ESTATE - 0.4%
Stewart Enterprises, Inc. Class A 37,800 1,006,425
REAL ESTATE INVESTMENT TRUSTS - 0.9%
Boston Properties, Inc. 13,700 472,650
Equity Residential Properties Trust (SBI) 17,200 815,925
Public Storage, Inc. 14,200 397,600
Starwood Hotels & Resorts Trust 15,100 729,519
2,415,694
TOTAL CONSTRUCTION & REAL ESTATE 4,148,119
DURABLES - 1.0%
AUTOS, TIRES, & ACCESSORIES - 0.4%
Ford Motor Co. 20,100 1,185,900
HOME FURNISHINGS - 0.6%
Leggett & Platt, Inc. 62,200 1,555,000
TOTAL DURABLES 2,740,900
ENERGY - 5.5%
OIL & GAS - 5.5%
British Petroleum PLC Ord. 246,386 3,591,248
Chevron Corp. 15,900 1,320,694
Elf Aquitaine SA sponsored ADR 18,400 1,306,400
Exxon Corp. 28,200 2,011,013
Texaco, Inc. 30,500 1,820,469
Total SA:
Class B 17,500 2,268,866
sponsored ADR 3,700 241,888
USX-Marathon Group 69,700 2,391,581
14,952,159
FINANCE - 17.4%
BANKS - 9.7%
Banc One Corp. 31,020 1,731,304
Bank of New York Co., Inc. 52,500 3,186,094
BankAmerica Corp. 36,550 3,159,291
Chase Manhattan Corp. 28,050 2,117,775
SHARES VALUE (NOTE 1)
Citicorp 29,600 $ 4,417,800
Credit Suisse Group (Reg.) 7,300 1,620,622
NationsBank Corp. 14,400 1,101,600
Norwest Corp. 46,100 1,722,988
U.S. Bancorp 109,900 4,725,700
Wells Fargo & Co. 6,400 2,361,600
26,144,774
CREDIT & OTHER FINANCE - 2.6%
American Express Co. 36,300 4,138,200
Associates First Capital Corp. Class A 28,067 2,157,651
Fleet Financial Group, Inc. 7,800 651,300
6,947,151
FEDERAL SPONSORED CREDIT - 2.3%
Freddie Mac 83,000 3,906,188
Fannie Mae 40,100 2,436,075
6,342,263
INSURANCE - 2.4%
Allstate Corp. 10,700 979,719
American International Group, Inc. 19,000 2,774,000
Aon Corp. 17,700 1,243,425
Hartford Financial Services Group, Inc. 14,200 1,624,125
6,621,269
SAVINGS & LOANS - 0.4%
Washington Mutual, Inc. 24,270 1,054,228
TOTAL FINANCE 47,109,685
HEALTH - 8.9%
DRUGS & PHARMACEUTICALS - 6.8%
American Home Products Corp. 102,500 5,304,375
Bristol-Myers Squibb Co. 39,400 4,528,538
Elan Corp. PLC ADR (a) 18,400 1,183,350
Merck & Co., Inc. 15,000 2,006,250
Pfizer, Inc. 7,800 847,763
Schering-Plough Corp. 22,200 2,034,075
Sigma Aldrich Corp. 15,000 526,875
Warner-Lambert Co. 28,600 1,984,125
18,415,351
MEDICAL EQUIPMENT & SUPPLIES - 1.7%
Allegiance Corp. 31,100 1,593,875
Baxter International, Inc. 6,900 371,306
Johnson & Johnson 14,600 1,076,750
McKesson Corp. 19,300 1,568,125
4,610,056
MEDICAL FACILITIES MANAGEMENT - 0.4%
United HealthCare Corp. 15,000 952,500
TOTAL HEALTH 23,977,907
INDUSTRIAL MACHINERY & EQUIPMENT - 4.5%
ELECTRICAL EQUIPMENT - 2.3%
General Electric Co. 59,300 5,396,300
Loral Space & Communications Ltd. (a) 29,800 841,850
6,238,150
INDUSTRIAL MACHINERY & EQUIPMENT - 1.6%
Cooper Industries, Inc. 20,198 1,109,628
Tyco International Ltd. 53,712 3,383,856
4,493,484
POLLUTION CONTROL - 0.6%
USA Waste Services, Inc. (a) 31,800 1,570,125
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 12,301,759
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - 1.1%
BROADCASTING - 0.8%
Loral Orion Networks
Systems, Inc. warrants (a):
1/15/07 50 $ 750
1/15/17 290 3,480
Teletrac Holdings, Inc.
warrants 8/1/07 (a) 20 200
Time Warner, Inc. 24,917 2,128,846
UIH Australia/Pacific, Inc.
warrants 5/15/06 (a) 150 750
2,134,026
PUBLISHING - 0.3%
McGraw-Hill Companies, Inc. 9,700 791,156
TOTAL MEDIA & LEISURE 2,925,182
NONDURABLES - 4.7%
AGRICULTURE - 0.1%
Delta & Pine Land Co. 5,100 226,950
BEVERAGES - 0.4%
PepsiCo, Inc. 31,100 1,280,931
FOODS - 1.1%
Heinz (H.J.) Co. 22,500 1,262,813
Nabisco Holdings Corp. Class A 15,100 544,544
Sara Lee Corp. 20,700 1,157,906
2,965,263
HOUSEHOLD PRODUCTS - 2.2%
Procter & Gamble Co. 14,900 1,356,831
Unilever NV ADR 57,300 4,523,119
5,879,950
TOBACCO - 0.9%
Philip Morris Companies, Inc. 60,800 2,394,000
TOTAL NONDURABLES 12,747,094
RETAIL & WHOLESALE - 2.1%
APPAREL STORES - 0.0%
Mothers Work 2 14
DRUG STORES - 0.6%
CVS Corp. 18,800 732,025
Rite Aid Corp. 22,040 827,878
1,559,903
GENERAL MERCHANDISE STORES - 1.5%
Dayton Hudson Corp. 24,900 1,207,650
Penney (J.C.) Co., Inc. 3,800 274,788
Wal-Mart Stores, Inc. 42,300 2,569,725
4,052,163
TOTAL RETAIL & WHOLESALE 5,612,080
SERVICES - 1.3%
PRINTING - 0.6%
Donnelley (R.R.) & Sons Co. 34,200 1,564,650
SERVICES - 0.7%
AccuStaff, Inc. 18,800 587,500
Service Corp. International 21,900 938,963
ServiceMaster Co. 9,000 342,563
1,869,026
TOTAL SERVICES 3,433,676
SHARES VALUE (NOTE 1)
TECHNOLOGY - 5.3%
COMPUTER SERVICES & SOFTWARE - 0.9%
Concentric Network Corp. warrants
12/15/07 (a)(c) 30 $ 4,050
First Data Corp. 28,100 936,081
Microsoft Corp. (a) 13,500 1,463,063
2,403,194
COMPUTERS & OFFICE EQUIPMENT - 3.2%
International Business Machines Corp. 21,400 2,456,988
Pitney Bowes, Inc. 86,600 4,167,625
Quantum Corp. (a) 23,200 481,400
Xerox Corp. 16,100 1,636,163
8,742,176
ELECTRONICS - 1.2%
AMP, Inc. 22,300 766,563
Motorola, Inc. 28,800 1,513,800
Texas Instruments, Inc. 16,400 956,325
3,236,688
TOTAL TECHNOLOGY 14,382,058
UTILITIES - 5.7%
CELLULAR - 0.0%
McCaw International Ltd. warrants
4/15/07 (a)(c) 290 1,450
Microcell Telecommunications, Inc.
warrants 6/1/06 (a)(c) 520 10,046
11,496
ELECTRIC UTILITY - 0.9%
CMS Energy Corp. 21,700 954,800
Duke Energy Corp. 17,200 1,019,100
PG&E Corp. 15,600 492,375
2,466,275
GAS - 0.4%
Enron Corp. 20,400 1,102,875
TELEPHONE SERVICES - 4.4%
AT&T Corp. 33,000 1,885,125
GTE Corp. 32,500 1,807,813
Hyperion Telecommunications, Inc.
Class A 363 5,695
MCI Communications Corp. 34,000 1,976,250
SBC Communications, Inc. 71,100 2,844,000
Sprint Corp. 5,500 387,750
WorldCom, Inc. (a) 58,200 2,819,063
11,725,696
TOTAL UTILITIES 15,306,342
TOTAL COMMON STOCKS
(Cost $138,918,241) 173,818,898
PREFERRED STOCKS - 0.9%
CONVERTIBLE PREFERRED STOCKS - 0.4%
DURABLES - 0.0%
AUTOS, TIRES, & ACCESSORIES - 0.0%
Republic Industries, Inc. $1.55 4,000 96,000
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Loral Space & Communications Ltd.,
Series C, $3.00 (c) 4,000 303,000
PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
CONVERTIBLE PREFERRED STOCKS - CONTINUED
MEDIA & LEISURE - 0.1%
LODGING & GAMING - 0.1%
Host Marriott Financial Trust $3.375
QUIPS (c) 3,000 $ 157,500
RETAIL & WHOLESALE - 0.2%
APPAREL STORES - 0.2%
TJX Companies, Inc., Series E,
$7.00 1,000 530,000
TOTAL CONVERTIBLE PREFERRED STOCKS 1,086,500
NONCONVERTIBLE PREFERRED STOCKS - 0.5%
FINANCE - 0.0%
CREDIT & OTHER FINANCE - 0.0%
Fresenius Medical Care Capital Trust II
7 7/8% 40 39,825
INSURANCE - 0.0%
American Annuity Group Capital Trust II
8 3/4% 50 52,137
TOTAL FINANCE 91,962
MEDIA & LEISURE - 0.3%
BROADCASTING - 0.3%
Adelphia Communications Corp. $13 300 36,000
American Radio Systems Corp. 11 3/8%,
pay-in-kind 855 98,966
CSC Holdings, Inc.:
11 1/8% pay-in-kind (a) 1,718 196,711
Series H, 11 3/4% pay-in-kind 300 34,575
Citadel Broadcasting Co., Series B,
13 1/4% pay-in-kind 254 29,972
Time Warner, Inc., Series M, 10 1/4%,
pay-in-kind 244 271,145
667,369
PUBLISHING - 0.0%
PRIMEDIA, Inc.:
Series D, $10 600 63,000
8 5/8%, 4/1/10 580 56,840
119,840
TOTAL MEDIA & LEISURE 787,209
UTILITIES - 0.2%
CELLULAR - 0.1%
Nextel Communications, Inc.:
11 1/8% pay-in-kind (c) 102 105,060
Series D 13% pay-in-kind 107 117,165
222,225
TELEPHONE SERVICES - 0.1%
NEXTLINK Communications, Inc.
14%, pay-in-kind 3,775 221,781
WinStar Communications, Inc.
14 1/4% 73 86,870
308,651
TOTAL UTILITIES 530,876
TOTAL NONCONVERTIBLE PREFERRED STOCKS 1,410,047
TOTAL PREFERRED STOCKS
(Cost $1,930,901) 2,496,547
CORPORATE BONDS - 18.0%
MOODY'S PRINCIPAL VALUE
RATINGS (E) AMOUNT (NOTE 1)
CONVERTIBLE BONDS - 0.4%
INDUSTRIAL MACHINERY & EQUIPMENT - 0.0%
POLLUTION CONTROL - 0.0%
WMX Technologies, Inc.
2%, 1/24/05 Ba1 $ 80,000 $ 79,600
RETAIL & WHOLESALE - 0.2%
GENERAL MERCHANDISE STORES - 0.1%
Federated Department Stores, Inc.
5%, 10/1/03 Baa 150,000 238,781
RETAIL & WHOLESALE, MISCELLANEOUS - 0.1%
Corporate Express, Inc.
4 1/2%, 7/1/00 B3 250,000 229,844
TOTAL RETAIL & WHOLESALE 468,625
TECHNOLOGY - 0.2%
COMPUTERS & OFFICE EQUIPMENT - 0.2%
Unisys Corp.
8 1/4%, 3/15/06 B 130,000 535,600
TOTAL CONVERTIBLE BONDS 1,083,825
NONCONVERTIBLE BONDS - 17.6%
AEROSPACE & DEFENSE - 0.3%
AEROSPACE & DEFENSE - 0.1%
Lockheed Martin Corp.
7.20%, 5/1/36 A3 300,000 327,684
DEFENSE ELECTRONICS - 0.2%
Raytheon Co.
6.45%, 8/15/04 Baa 500,000 504,960
Tracor, Inc.
8 1/2%, 3/1/07 B1 40,000 43,500
548,460
SHIP BUILDING & REPAIR - 0.0%
Newport News Shipbuilding, Inc.
9 1/4%, 12/1/06 B1 10,000 10,650
TOTAL AEROSPACE & DEFENSE 886,794
BASIC INDUSTRIES - 0.9%
CHEMICALS & PLASTICS - 0.3%
Atlantis Group, Inc.
11%, 2/15/03 B2 10,000 10,200
Huntsman Corp.
9 1/2%, 7/1/07 (c) B2 400,000 402,000
Koppers Industry, Inc.
9 7/8%, 12/1/07 B2 280,000 289,800
Sterling Chemicals, Inc.
11 1/4%, 4/1/07 B3 30,000 29,550
731,550
IRON & STEEL - 0.1%
GS Technologies Operating, Inc.
12 1/4%, 10/1/05 B2 20,000 22,150
Republic Engineered Steels, Inc.
9 7/8%, 12/15/01 Caa 80,000 79,800
WCI Steel, Inc.
10%, 12/1/04 B2 40,000 41,100
WHX Corp.
10 1/2%, 4/15/05 B3 70,000 70,875
213,925
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (E) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
BASIC INDUSTRIES - CONTINUED
METALS & MINING - 0.1%
Doe Run Resources Corp. (c):
12.00875%, 3/15/03 (h) B2 $ 20,000 $ 20,200
11 1/4%, 3/15/05 B2 290,000 292,900
313,100
PACKAGING & CONTAINERS - 0.2%
Norampac, Inc.
9 1/2%, 2/1/08 (c) B2 50,000 50,750
Owens Illinois, Inc.:
7.15%, 5/15/05 Ba1 200,000 200,838
7.35%, 5/15/08 Ba1 200,000 201,091
7.80%, 5/15/18 Ba1 250,000 255,829
708,508
PAPER & FOREST PRODUCTS - 0.2%
APP Finance II Mauritius Ltd.
12%, 3/15/04 Caa 85,000 58,225
Doman Industries Ltd. yankee
8 3/4%, 3/15/04 B1 20,000 19,550
Indah Kiat Finance Mauritius Ltd.
10%, 7/1/07 Caa 10,000 7,150
Mail-Well Corp.
10 1/2%, 2/15/04 B 10,000 10,700
Millar Western Forest
9 7/8%, 5/15/08 (c) B3 50,000 49,000
Omega Cabinets Ltd.
10 1/2%, 6/15/07 B3 260,000 260,000
Pindo Deli Finance Mauritius Ltd.
10 1/4%, 10/1/02 Caa 20,000 14,200
Stone Container Corp.
11 7/8%, 12/1/98 B2 30,000 30,675
Tembec Finance Corp. yankee
9 7/8%, 9/30/05 Ba3 30,000 31,800
Tjiwi Kimia Mauritius Ltd.
10%, 8/1/04 Ba3 20,000 13,900
495,200
TOTAL BASIC INDUSTRIES 2,462,283
CONSTRUCTION & REAL ESTATE - 0.3%
BUILDING MATERIALS - 0.1%
American Standard, Inc.
7 3/8%, 2/1/08 Ba3 100,000 97,750
Insiloc Corp. 10 1/4%,
8/15/07 B3 10,000 10,250
108,000
REAL ESTATE - 0.0%
LNR Property Corp.
9 3/8%, 3/15/08 (c) B1 70,000 69,825
REAL ESTATE INVESTMENT TRUSTS - 0.2%
Centerpoint Properties Trust
6 3/4%, 4/1/05 Baa 100,000 100,172
EOP Operating L.P. (c):
6 5/8%, 2/15/05 Baa 200,000 199,976
6 3/4%, 2/15/08 Baa 300,000 299,631
599,779
TOTAL CONSTRUCTION & REAL ESTATE 777,604
MOODY'S PRINCIPAL VALUE
RATINGS (E) AMOUNT (NOTE 1)
DURABLES - 0.8%
AUTOS, TIRES, & ACCESSORIES - 0.3%
Advance Holding Corp.
12 7/8%, 4/15/09 (c)(d) Caa $ 20,000 $ 11,900
Advance Stores Co., Inc.
10 1/4%, 4/15/08 (c) Caa 290,000 300,150
Blue Bird Body Co.
10 3/4%, 11/15/06 B2 15,000 16,350
Breed Technologies, Inc.
9 1/4%, 4/15/08 (c) B3 60,000 58,650
Morris Material Handling, Inc.
9 1/2%, 4/1/08 (c) B2 320,000 297,600
684,650
CONSUMER DURABLES - 0.0%
Corning Consumer Products Co.
9 5/8%, 5/1/08 (c) B3 70,000 69,825
HOME FURNISHINGS - 0.1%
Guitar Center Management Co.,
Inc. 11%, 7/1/06 B1 29,000 31,828
Interlake Corp.
12 1/8%, 3/1/02 B3 50,000 51,500
Sealy Mattress Co. (c):
9 7/8%, 12/15/07 B3 160,000 163,200
10 7/8%, 12/15/07 (d) B3 20,000 13,000
259,528
TEXTILES & APPAREL - 0.4%
Cluett American Corp.
10 1/8%, 5/15/08 (c) B3 30,000 29,775
Levi Strauss & Co.
6.80%, 11/1/03 (c) Baa 570,000 581,936
Polymer Group, Inc.
9%, 7/1/07 B2 350,000 354,375
Synthetic Industries, Inc.
9 1/4%, 2/15/07 B2 40,000 41,200
WestPoint Stevens, Inc.
7 7/8%, 6/15/08 (c) Ba3 90,000 90,338
Worldtex, Inc.
9 5/8%, 12/15/07 B1 60,000 60,000
1,157,624
TOTAL DURABLES 2,171,627
ENERGY - 0.6%
COAL - 0.1%
Level 3 Communications, Inc.
9 1/4%, 5/1/08 (c) B3 160,000 155,600
P&L Coal Holdings Corp.
9 5/8%, 5/15/08 (c) B2 75,000 77,063
232,663
ENERGY SERVICES - 0.0%
DI Industries, Inc.
8 7/8%, 7/1/07 B1 20,000 19,200
Grey Wolf, Inc.
8 7/8%, 7/1/07 (c) B1 60,000 57,600
Ocean Rig Norway AS
10 1/4%, 6/1/08 (c) B3 10,000 9,475
Pool Energy Services Co.
8 5/8%, 4/1/08 (c) B2 60,000 57,150
143,425
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (E) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
ENERGY - CONTINUED
OIL & GAS - 0.5%
Canadian Forest Oil Ltd.:
8 3/4%, 9/15/07 B2 $ 10,000 $ 9,700
8 3/4%, 9/15/07 (c) B2 30,000 29,025
Chesapeake Energy Corp.
9 5/8%, 5/1/05 (c) B1 50,000 50,125
Cross Timbers Oil Co.
9 1/4%, 4/1/07 B2 250,000 257,500
Gothic Production Corp.
11 1/4%, 5/1/05 (c) B3 70,000 66,500
Great Lakes Carbon Corp.
10 1/4%, 5/15/08 (c) B3 50,000 50,500
Hurricane Hydrocarbons Ltd.
11 3/4%, 11/1/04 (c) B3 10,000 9,700
Petroleum Geo-Services ASA
7 1/8%, 3/30/28 Baa 300,000 303,612
Plains Resources, Inc.:
Series B, 10 1/4%, 3/15/06 B2 300,000 312,750
Series D, 10 1/4%, 3/15/06 B2 20,000 20,850
Seven Seas Petroleum, Inc.
12 1/2%, 5/15/05 (c) Caa 10,000 10,000
Southwest Royalties, Inc.
10 1/2%, 10/15/04 B3 10,000 8,550
USX-Marathon Group
6.85%, 3/1/08 Baa 150,000 151,029
1,279,841
TOTAL ENERGY 1,655,929
FINANCE - 6.1%
ASSET-BACKED SECURITIES - 2.3%
Airplanes Pass Through Trust
Class D 10 7/8%, 3/15/19 Ba2 100,000 109,750
Capital Equipment Receivables
Trust 6.11%, 7/15/99 Aaa 1,199,229 1,201,483
Chevy Chase Auto Receivable
Trust 5.91%, 12/15/04 Aaa 130,000 129,818
Contimortgage Home Equity
Loan Trust 6.26%, 7/15/12 Aaa 1,000,000 1,000,930
Ford Credit Auto Owner Trust:
6.40%, 5/15/02 A1 610,000 615,478
6.20%, 12/15/02 Baa 510,000 509,108
6.40%, 12/15/02 Baa 80,000 79,954
Green Tree Financial Corp.
6.10%, 4/15/27 Aaa 35,811 35,845
Key Plastics, Inc.
10 1/4%, 3/15/07 A2 770,000 772,527
Key Auto Finance Trust
Class C 6.65%, 10/15/03 Baa 230,000 230,395
MBNA Master Credit Card
Trust II Class A
6.55%, 1/15/07 Aaa 1,000,000 1,033,420
Sears Credit Account Master Trust II
6 1/2%, 10/15/03 Aaa 630,000 634,133
6,352,841
MOODY'S PRINCIPAL VALUE
RATINGS (E) AMOUNT (NOTE 1)
BANKS - 1.7%
ABN Amro Bank NV
6 5/8%, 10/31/01 Aa3 $ 500,000 $ 507,490
Banc One Corp.
6.70%, 3/24/00 Aa3 350,000 353,990
Banco Latinoamericano
Exportaciones SA euro
6.90%, 12/4/99 (c) Baa 100,000 101,282
Barclays Bank PLC yankee:
5 7/8%, 7/15/00 A1 350,000 349,521
5.95%, 7/15/01 A1 450,000 449,100
Capital One Bank:
6.74%, 5/31/99 Baa 260,000 261,716
6 3/8%, 2/15/03 Baa 250,000 249,763
First Chicago Institutional
Capital Class, B 7 3/4%,
12/1/26 (c) A1 1,000,000 1,082,350
First USA Bank 6 1/2%,
12/23/99 Aa2 250,000 252,013
MBNA Corp.:
6 7/8%, 11/15/02 Baa 300,000 305,232
6.34%, 6/2/03 Baa 100,000 100,030
NB Capital Trust IV
8 1/4%, 4/15/27 Aa3 330,000 368,561
Summit Bancorp.
8 5/8%, 12/10/02 BBB 100,000 109,024
4,490,072
CREDIT & OTHER FINANCE - 1.9%
Ahmanson Capital Trust I
8.36%, 12/1/26 (c) Baa 250,000 280,983
Arcadia Financial Ltd.
11 1/2%, 3/15/07 B2 20,000 19,850
BankBoston Capital Trust II
7 3/4%, 12/15/26 A2 500,000 525,725
CEX Holdings, Inc.
9 5/8%, 6/1/08 (c) B2 50,000 50,500
Chase Capital I
7.67%, 12/1/26 Aa3 765,000 803,112
Chrysler Financial Corp.
6 3/8%, 1/28/00 A2 180,000 181,179
First Security Capital I
8.41%, 12/15/26 A3 110,000 123,463
GST Network Funding, Inc.
10 1/2%, 5/1/08 (c)(d) - 60,000 36,150
General Electric Capital Corp.
6.94%, 4/13/09 (f) Aaa 480,000 483,413
Imperial Credit Capital Trust I
10 1/4%, 6/14/02 B2 20,000 20,200
Imperial Credit Industries, Inc.
9 7/8%, 1/15/07 B2 330,000 330,000
Iridium Operating LLC/Iridium
Capital Corp.:
10 7/8%, 7/15/05 B3 150,000 148,875
11 1/4%, 7/15/05 B3 50,000 50,125
JPM Capital Trust II
7.95%, 2/1/27 Aa3 50,000 54,047
KeyCorp Institutional Capital
Series A 7.826%, 12/1/26 A1 1,000,000 1,059,180
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (E) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
FINANCE - CONTINUED
CREDIT & OTHER FINANCE - CONTINUED
MCN Investment Corp.
6.03%, 2/1/01 Baa $ 180,000 $ 180,441
Nordstrom Credit, Inc.
7 1/4%, 4/30/02 A2 200,000 208,938
Ocwen Capital Trust
10 7/8%, 8/1/27 B2 20,000 21,800
Olympic Financial Ltd.
11 1/2%, 3/15/07 B2 30,000 30,000
PNC Institutional Capital
Trust 8.315%, 5/15/27 (c) A2 600,000 668,496
5,276,477
SAVINGS & LOANS - 0.2%
Long Island Savings Bank
6.20%, 4/2/01 Baa 500,000 500,620
TOTAL FINANCE 16,620,010
HEALTH - 0.2%
MEDICAL EQUIPMENT & SUPPLIES - 0.0%
Wright Medical Technology, Inc.
11 3/4%, 7/1/00 (h) Caa 40,000 38,800
MEDICAL FACILITIES MANAGEMENT - 0.2%
Fountain View, Inc.
11 1/4%, 4/15/08 (c) Caa 20,000 20,350
Integrated Health Services, Inc.,
Series A, 9 1/4%, 1/15/08 B2 280,000 290,500
Oxford Health Plans, Inc.
11%, 5/15/05 (c) Caa 10,000 10,250
Tenet Healthcare Corp.:
8%, 1/15/05 Ba1 20,000 20,550
8 1/8%, 12/1/08 (c) Ba3 230,000 231,150
572,800
TOTAL HEALTH 611,600
HOLDING COMPANIES - 0.1%
Norfolk Southern Corp.
7.05%, 5/1/37 Baa 340,000 361,043
INDUSTRIAL MACHINERY & EQUIPMENT - 0.8%
ELECTRICAL EQUIPMENT - 0.1%
Amphenol Corp.
9 7/8%, 5/15/07 B2 10,000 10,525
Echostar Communications Corp.
secured discount 0%,
6/1/04 (d) B2 75,000 73,031
Motors & Gears, Inc.,
Series D,
10 3/4%, 11/15/06 B3 80,000 84,800
Telex Communications, Inc.
10 1/2%, 5/1/07 B2 45,000 40,500
208,856
MOODY'S PRINCIPAL VALUE
RATINGS (E) AMOUNT (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - 0.5%
Continental Global Group, Inc.
11%, 4/1/07 B2 $ 20,000 $ 20,800
Goss Graphic System, Inc.
12%, 10/15/06 B2 30,000 30,750
Tenneco, Inc.
8.075%, 10/1/02 Baa 300,000 319,545
Thermadyne Holdings Corp.
0%, 6/1/08 (c)(d) Caa 70,000 38,850
Thermadyne Manufacturing
LLC 9 7/8%, 6/1/08 (c) B3 60,000 60,450
Tyco International Group SA
yankee 6 1/8%, 6/15/01 Baa 1,000,000 1,000,820
1,471,215
POLLUTION CONTROL - 0.2%
Envirosource, Inc.
9 3/4%, 6/15/03 B3 40,000 39,500
WMX Technologies, Inc.
7.10%, 8/1/26 Baa 400,000 416,240
455,740
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 2,135,811
MEDIA & LEISURE - 2.3%
BROADCASTING - 1.7%
ACME Television LLC/ACME
Financial Corp.
0%, 9/30/04 (d) B3 50,000 41,125
Adelphia Communications Corp.:
9 1/2%, 2/15/04 B2 65,238 66,274
9 7/8%, 3/1/07 B2 30,000 32,475
Albritton Communications
Co. 8 7/8%, 2/1/08 B3 250,000 270,000
Ascent Entertainment
Group, Inc.
0%, 12/15/04 (d) B3 100,000 64,000
Century Communications
Corp. 0%, 1/15/08 Ba3 90,000 40,838
Continental Cablevision, Inc.:
8.30%, 5/15/06 Baa 70,000 77,721
9%, 9/1/08 Baa 540,000 634,970
Diamond Cable Communications
PLC yankee (d):
0%, 12/15/05 Caa 10,000 8,250
0%, 2/15/07 Caa 20,000 14,750
Echostar Satellite
Broadcasting Corp.
0%, 3/15/04 (d) B3 60,000 55,050
Granite Broadcasting Corp.:
10 3/8%, 5/15/05 B3 10,000 10,600
9 3/8%, 12/1/05 B3 10,000 10,300
International Cabletel, Inc.
0%, 2/1/06 (d) B3 190,000 154,375
LIN Holdings Corp.
0%, 3/1/08 (c)(d) B3 30,000 20,250
NTL, Inc.
0%, 4/1/08 (c)(d) B3 340,000 221,000
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (E) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
MEDIA & LEISURE - CONTINUED
BROADCASTING - CONTINUED
Olympus Communications
LP/Olympus Capital Corp
10 5/8%, 11/15/06 B1 $ 60,000 $ 66,300
Orion Network Systems, Inc.:
0%, 1/15/07 (d) B2 260,000 196,300
11 1/4%, 1/15/07 B2 40,000 44,200
Renaissance Media Group
0%, 4/15/08 (c)(d) B3 10,000 6,225
Rogers Cablesystems Ltd.
yankee 10 1/8%, 9/1/12 Ba3 10,000 10,900
Satelites Mexicanos SA de CV (c):
9.39%, 6/30/04 (f) - 90,000 89,100
10 1/8%, 11/1/04 B3 70,000 67,550
TCI Communication, Inc.:
6.82%, 9/15/10 Baa 250,000 250,348
8 3/4%, 8/1/15 Baa 250,000 300,980
Telewest PLC
0%, 10/1/07 (d) B1 40,000 33,050
Time Warner, Inc.:
8.18%, 8/15/07 Baa 1,000,000 1,114,290
6 7/8%, 6/15/18 Baa 180,000 180,702
UIH Australia/Pacific, Inc. (d):
Series B, 0%, 5/15/06 B2 180,000 106,200
0%, 5/15/06 B2 30,000 17,700
United International
Holdings, Inc.
0%, 2/15/08 (d) B3 390,000 237,900
Young Broadcasting, Inc.,
Series B, 8 3/4%, 6/15/07 B2 40,000 41,700
4,485,423
ENTERTAINMENT - 0.1%
AMC Entertainment, Inc.
9 1/2%, 3/15/09 B2 60,000 59,700
Cinemark USA, Inc.:
8 1/2%, 8/1/08 (Reg. S) B2 40,000 39,100
9 5/8%, 8/1/08 B2 30,000 30,900
Premier Parks, Inc. 0%, 4/1/08 B3 60,000 39,825
Viacom, Inc. 8%, 7/7/06 B1 110,000 113,300
282,825
LODGING & GAMING - 0.1%
Aladdin Gaming Holdings/Aladdin
Capital Units
0%, 3/1/10 (c)(d) Caa 70,000 32,550
KSL Recreation Group, Inc.
10 1/4%, 5/1/07 B3 20,000 21,650
Sun International Hotels Ltd./Sun
International North America,
Inc. yankee 9%, 3/15/07 Ba3 40,000 42,000
96,200
PUBLISHING - 0.3%
Big Flower Press Holdings, Inc.
8 7/8%, 7/1/07 B2 110,000 112,063
MOODY'S PRINCIPAL VALUE
RATINGS (E) AMOUNT (NOTE 1)
News America, Inc.:
6 5/8%, 1/9/08 Baa $ 145,000 $ 144,746
7 1/4%, 5/18/18 (c) Baa 600,000 614,796
871,605
RESTAURANTS - 0.1%
AFC Enterprises, Inc.
10 1/4%, 5/15/07 B3 30,000 31,800
Foodmaker, Inc. 8 3/8%,
4/15/08 (c) B1 20,000 20,000
SC International Services, Inc.,
Series B, 9 1/4%, 9/1/07 B2 300,000 306,375
358,175
TOTAL MEDIA & LEISURE 6,094,228
NONDURABLES - 0.4%
HOUSEHOLD PRODUCTS - 0.1%
Revlon Consumer Products Corp.
8 5/8%, 2/1/08 B3 130,000 130,000
TOBACCO - 0.3%
North Atlantic Trading, Inc.
11%, 6/15/04 B3 40,000 40,000
Philip Morris Companies, Inc.:
7%, 7/15/05 A2 500,000 511,525
6.95%, 6/1/06 A2 250,000 258,965
810,490
TOTAL NONDURABLES 940,490
PRECIOUS METALS - 0.2%
Centaur Mining & Exploration
Ltd. 11%, 12/1/07 (c) B1 60,000 61,350
Great Central Mines Ltd.
8 7/8%, 4/1/08 (c) Ba2 360,000 353,700
415,050
RETAIL & WHOLESALE - 1.1%
APPAREL STORES - 0.0%
Mothers Work, Inc.
12 5/8%, 8/1/05 B3 10,000 10,725
Specialty Retailers, Inc.
9%, 7/15/07 B2 110,000 114,125
124,850
GENERAL MERCHANDISE STORES - 0.5%
Dayton Hudson Corp.:
6.80%, 10/1/01 A3 300,000 306,381
6.40%, 2/15/03 A3 400,000 404,360
Federated Department Stores, Inc.
6.79%, 7/15/27 Baa 500,000 511,525
1,222,266
GROCERY STORES - 0.2%
American Stores Co.
7 1/2%, 5/1/37 Baa 250,000 274,395
Kroger Co. 6%, 7/1/00 Baa 270,000 269,714
Pathmark Stores, Inc.
9 5/8%, 5/1/03 Caa 120,000 121,500
665,609
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (E) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
RETAIL & WHOLESALE - CONTINUED
RETAIL & WHOLESALE, MISCELLANEOUS - 0.4%
Amazon.com, Inc.
0%, 5/1/08 (c)(d) Caa $ 220,000 $ 134,200
Big 5 Corp.
10 7/8%, 11/15/07 B2 30,000 31,125
Central Tractor Farm & Country,
Inc. 10 5/8%, 4/1/07 B2 40,000 42,200
HMV Media Group PLC
10 1/4%, 5/15/08 (c) B3 50,000 50,750
Home Interiors & Gifts, Inc.
10 1/8%, 6/1/08 (c) B2 60,000 61,350
J Crew Operating Corp.
10 3/8%, 10/15/07 Caa 320,000 304,000
J Crew Group, Inc.
0%, 10/15/08 (d) Caa 80,000 44,800
Metals USA, Inc.
8 5/8%, 2/15/08 (c) B2 290,000 280,575
U.S. Office Products Co.
9 3/4%, 6/15/08 (c) B3 10,000 9,900
958,900
TOTAL RETAIL & WHOLESALE 2,971,625
SERVICES - 0.4%
LEASING & RENTAL - 0.1%
Apcoa, Inc. 9 1/4%,
3/15/08 (c) Caa 40,000 39,700
AP Holdings, Inc.
0%, 3/15/08 (c)(d) Caa 30,000 17,850
Hollywood Entertainment Corp.
10 5/8%, 8/15/04 B3 330,000 336,600
394,150
PRINTING - 0.0%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 40,000 42,100
SERVICES - 0.3%
Iron Mountain, Inc.
8 3/4%, 9/30/09 B3 280,000 285,600
Medaphis Corp.
9 1/2%, 2/15/05 (c) B2 72,000 69,840
Signature Resorts, Inc.:
9 1/4%, 5/15/06 B2 50,000 49,750
9 3/4%, 10/1/07 B3 40,000 38,900
SITEL Corp.
9 1/4%, 3/15/06 (c) B2 250,000 238,750
Teligent, Inc.
0%, 3/1/08 (c)(d) Caa 100,000 55,250
738,090
TOTAL SERVICES 1,174,340
TECHNOLOGY - 0.5%
COMMUNICATIONS EQUIPMENT - 0.1%
Jordan Telecommunication
Products, Inc.:
0%, 8/1/07 (d) B3 60,000 49,200
9 7/8%, 8/1/07 B3 30,000 30,600
79,800
MOODY'S PRINCIPAL VALUE
RATINGS (E) AMOUNT (NOTE 1)
COMPUTER SERVICES & SOFTWARE - 0.2%
Concentric Network Corp.
12 3/4%, 12/15/07 - $ 30,000 $ 31,950
DecisionOne Corp.
9 3/4%, 8/1/07 B3 250,000 240,000
DecisionOne Holdings Corp.
0%, 8/1/8 unit (d) Caa 80,000 48,000
ICG Services, Inc. (c)(d):
0%, 2/15/08 - 490,000 295,225
0%, 5/1/08 - 30,000 17,550
632,725
COMPUTERS & OFFICE EQUIPMENT - 0.1%
Comdisco, Inc.
6.10%, 6/5/01 Baa 250,000 250,650
General Binding Corp.
9 3/8%, 6/1/08 (c) B2 80,000 81,200
331,850
ELECTRONIC INSTRUMENTS - 0.1%
Fisher Scientific International,
Inc. 9%, 2/1/08 B3 30,000 29,850
Telecommunications Techniques
Co. 9 3/4%, 5/15/08 (c) B3 80,000 81,400
111,250
ELECTRONICS - 0.0%
American Mobile Satellite Corp.
Unit 12 1/4%, 4/1/08 (c) - 20,000 18,600
Communications Instruments,
Inc. 10%, 9/15/04 B3 20,000 20,400
Hadco Corp.
9 1/2%, 6/15/08 (c) B2 30,000 29,625
68,625
TOTAL TECHNOLOGY 1,224,250
TRANSPORTATION - 0.5%
AIR TRANSPORTATION - 0.1%
Atlas Air, Inc.
9 1/4%, 4/15/08 (c) B3 30,000 29,963
Atlas Air, Inc. pass through
trust 12 1/4%, 12/1/02 Ba3 30,000 33,150
Kitty Hawk, Inc.
9.95%, 11/15/04 B1 70,000 72,800
135,913
RAILROADS - 0.4%
Burlington Northern Santa Fe
Corp.:
6 7/8%, 12/1/27 Baa 1,000,000 1,016,250
7.29%, 6/1/36 Baa 150,000 165,764
1,182,014
SHIPPING - 0.0%
Holt Group, Inc. 9 3/4%,
1/15/06 (c) Caa 50,000 49,000
TOTAL TRANSPORTATION 1,366,927
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (E) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
UTILITIES - 2.1%
CELLULAR - 0.6%
CellNet Data Systems, Inc.
0%, 10/1/07 (d) - $ 80,000 $ 42,800
Cencall Communications Corp.
0%, 1/15/04 (d) B2 10,000 9,825
Iridium LLC/ Iridium Capital Corp.
13%, 7/15/05 B3 10,000 10,725
McCaw International Ltd.
0%, 4/15/07 (d) Caa 300,000 196,500
Microcell Telecommunications,
Inc. 0%, 6/1/06 (d) B3 40,000 29,900
Millicom International Cellular
SA 0%, 6/1/06 (d) B3 600,000 465,000
Nextel International, Inc.
12 1/8%, 4/15/08 (c) Caa 220,000 127,600
Nextel Communications, Inc. (d):
0%, 8/15/04 B2 180,000 175,050
0%, 2/15/08 (c) B2 240,000 154,200
PageMart Wireless, Inc.
0%, 2/1/08 (d) Caa 320,000 192,000
Pagemart Nationwide, Inc.
0%, 2/1/05 (d) B3 40,000 35,400
Rogers Communications, Inc.
8 7/8%, 7/15/07 B2 140,000 141,050
Teletrac, Inc. 14%, 8/1/07 Caa 10,000 9,000
Telesystem International
Wireless, Inc. (d):
0%, 6/30/07 Caa 80,000 52,400
0%, 11/1/07 Caa 110,000 65,175
1,706,625
ELECTRIC UTILITY - 0.5%
Avon Energy Partners Holding
6.46%, 3/4/08 (c) Baa 300,000 301,329
Israel Electric Corp. Ltd.
7 3/4%, 12/15/27 (c) A3 795,000 819,407
Niagara Mohawk Power Corp.:
7 3/4%, 10/1/08 Ba3 30,000 30,713
0%, 7/1/10 (d) Ba3 10,000 6,850
Texas Utilities Co.
6 3/8%, 1/1/08 Baa 200,000 197,800
1,356,099
GAS - 0.2%
Columbia Gas System, Inc.
6.61%, 11/28/02 Baa 379,000 383,302
TELEPHONE SERVICES - 0.8%
Cable & Wireless Communications
PLC 6 3/8%, 3/6/03 Baa 300,000 300,252
Covad Communications Group
Unit 0%, 3/15/08 (c)(d) - 60,000 30,600
Dobson Wireline Co.
12 1/4%, 6/15/08 (c) - 70,000 68,425
GST Telecommunications, Inc.
12 3/4%, 11/15/07 - 60,000 69,450
GST USA, Inc.
0%, 12/15/05 (d) - 10,000 8,100
MOODY'S PRINCIPAL VALUE
RATINGS (E) AMOUNT (NOTE 1)
Hyperion Telecommunications, Inc.:
Series B, 0%, 4/15/03 (d) B3 $ 160,000 $ 118,800
12 1/4%, 9/1/04 B3 30,000 32,250
IXC Communications, Inc.
9%, 4/15/08 (c) B3 100,000 99,000
KMC Telecom Holdings, Inc.
0%, 2/15/08 units (c) - 70,000 40,950
McLeodUSA, Inc.
0%, 3/1/07 (d) B2 340,000 254,150
Netia Holdings B.V.:
0%, 11/1/07 (d) B3 20,000 13,000
10 1/4%, 11/1/07 B3 20,000 19,200
Pathnet, Inc. Unit
12 1/2%, 4/15/08 (c) - 30,000 31,800
Rhythms NetConnections, Inc.
Unit 0%, 5/15/08 (c)(d) - 80,000 38,800
Teleport Communications Group,
Inc. 0%, 7/1/07 (d) Baa 300,000 257,625
Winstar Communications, Inc.:
0%, 10/15/05 (d) Caa 40,000 33,800
14 1/2%, 10/15/05 Caa 70,000 96,600
11%, 3/15/08 (c) - 65,000 64,675
WorldCom, Inc.:
8 7/8%, 1/15/06 Baa 184,000 200,168
7 3/4%, 4/1/07 Baa 460,000 498,944
2,276,589
TOTAL UTILITIES 5,722,615
TOTAL NONCONVERTIBLE BONDS 47,592,226
TOTAL CORPORATE BONDS
(Cost $47,650,700) 48,676,051
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS - 3.1%
U.S. TREASURY OBLIGATIONS - 2.6%
5 1/2%, 11/15/98 to
12/31/98 Aaa 3,220,000 3,221,003
5 7/8%, 11/30/01 Aaa 1,935,00 1,954,660
7%, 7/15/06 Aaa 1,580,00 1,725,407
6,901,070
U.S. GOVERNMENT AGENCY OBLIGATIONS - 0.5%
Federal Home Loan Bank:
7.59%, 3/10/05 Aaa 190,000 208,466
7.56% 9/01/04 Aaa 310,000 338,725
Fannie Mae 6.72%, 8/1/05 Aaa 720,000 757,346
Government Trust Certificates
(assets of Trust guaranteed
by U.S. Government through
Defense Security Assistance
Agency) Class 2-E,
9.40%, 5/15/02 Aaa 99,003 104,678
1,409,215
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $8,236,471) 8,310,285
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 9.1%
MOODY'S PRINCIPAL VALUE
RATINGS (E) AMOUNT (NOTE 1)
FEDERAL HOME LOAN GUARANTEED - 0.4%
7%, 6/1/99 to 7/1/01 Aaa $ 313,245 $ 316,681
7 1/2%, 12/1/27 to 4/1/28 Aaa 718,340 736,068
1,052,749
FANNIE MAE - 7.7%
5 1/2%, 2/1/03 to 2/1/26 Aaa 890,170 875,425
6%, 4/1/11 to 4/1/13 Aaa 6,159,670 6,092,669
6 1/2%, 9/1/27 to 4/1/28 Aaa 8,899,607 8,863,385
7%, 7/1/28 (i) Aaa 270,000 273,797
7%, 8/1/25 Aaa 4,682,471 4,749,759
20,855,035
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 1.0%
7%, 10/1/23 to 11/1/27 Aaa 828,338 841,959
7 1/2%, 6/1/27 to 3/1/28 Aaa 1,929,287 1,982,940
2,824,899
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $24,634,615) 24,732,683
U.S. GOVERNMENT AGENCY - 0.4%
Freddie Mac planned amortization
class Series 1645 Class ZA,
5 1/2%, 4/15/05 Aaa 657,462 652,942
Fannie Mae planned
ammortization class
Series 1993-129 Class D,
6.10%, 6/25/05 Aaa 500,000 500,078
TOTAL U.S. GOVERNMENT AGENCY
(Cost $1,132,566) 1,153,020
COMMERCIAL MORTGAGE SECURITIES - 0.7%
CS First Boston Mortgage
Securities Corp.:
Series 1997-C2 Class D,
7.27%, 4/17/11 Baa 220,000 225,638
floater Series 1998-FL1 Class E,
6.51%, 1/10/13 (c)(h) Baa 420,000 420,000
GS Mortgage Securities Corp. II
Series 1998-GLII Class E,
7.19%, 4/13/31 (c)(h) Baa 500,000 489,655
Thirteen Affiliates of General
Growth Properties, Inc.
sequential pay Series A-2,
6.602%, 11/15/12 (c) Aaa 500,000 512,320
Wells Fargo Capital Markets
Apartment Financing Trust
6.56%, 12/29/05 (c) Aaa 143,915 146,323
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $1,766,681) 1,793,936
FOREIGN GOVERNMENT OBLIGATIONS (G) - 0.1%
MOODY'S PRINCIPAL VALUE
RATINGS (E) AMOUNT (NOTE 1)
Quebec Province yankee
6.86%, 4/15/26 (f)
(Cost $240,223) A2 $ 250,000 $ 262,350
SUPRANATIONAL OBLIGATIONS - 0.2%
Inter American Development
Bank yankee 6.29%, 7/16/27
(Cost $496,855) Aaa 500,000 526,105
CERTIFICATES OF DEPOSIT - 0.2%
Canadian Imperial Bank of Commerce
NY Branch yankee 6.20%, 8/1/00
(Cost $500,750) Aa3 500,000 502,650
CASH EQUIVALENTS - 3.1%
SHARES
Taxable Central Cash Fund (b)
(Cost $8,373,587) 8,373,587 8,373,587
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $233,881,590) $ 270,646,112
SECURITY TYPE ABBREVIATIONS
QUIPS - Quarterly Income Preferred Securities
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield of the Taxable Central Cash
Fund was 5.61%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(c) Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions
exempt from registration, normally to qualified institutional buyers.
At the period end, the value of these securities amounted to
$13,127,644 or 4.9% of net assets.
(d) Debt obligation initially issued in zero coupon form which
converts to coupon form at a specified rate and date. The rate shown
is the rate at period end.
(e) Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investors Service, Inc.
(f) Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date. The rate shown is the rate at
period end.
(g) For foreign government obligations not individually rated by S&P
or Moody's, the ratings listed are assigned to securities by FMR, the
fund's investment adviser, based principally on S&P and Moody's
ratings of the sovereign credit of the issuing government.
(h) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(i) Security purchased on a delayed delivery or when-issued basis (see
Note 2 of Notes to Financial Statements).
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $173,000,105 and $139,491,548, respectively, of which
long-term U.S. government and government agency obligations aggregated
$52,321,698 and $53,949,759, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $16,249 for the
period (see Note 4 of Notes to Financial Statements).
The composition of long-term debt holdings as a percentage of total
value of investment in securities, is as follows:
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 18.9% AAA, AA, A 17.9%
Baa 6.0% BBB 6.3%
Ba 0.7% BB 0.9%
B 4.5% B 4.8%
Caa 0.0% CCC 0.5%
Ca, C 0.0% CC, C 0.0%
D 0.0%
For some foreign government obligations, FMR has assigned the ratings
of the sovereign credit of the issuing government. The percentage not
rated by Moody's or S&P amounted to 0.3%. FMR has determined that
unrated debt securities that are lower quality account for 0.3% of the
total value of investment in securities.
INCOME TAX INFORMATION
At June 30, 1998, the aggregate cost of investment securities for
income tax purposes was $233,920,316. Net unrealized appreciation
aggregated $36,725,796, of which $38,972,359 related to appreciated
investment securities and $2,246,563 related to depreciated investment
securities.
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 30, 1998 (UNAUDITED)
ASSETS
INVESTMENT IN SECURITIES, AT VALUE $ 270,646,112
(COST $233,881,590) -
SEE ACCOMPANYING SCHEDULE
CASH 31,907
RECEIVABLE FOR INVESTMENTS SOLD 723,449
RECEIVABLE FOR FUND SHARES SOLD 149,463
DIVIDENDS RECEIVABLE 233,719
INTEREST RECEIVABLE 988,341
OTHER RECEIVABLES 5,340
TOTAL ASSETS 272,778,331
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED
REGULAR DELIVERY $ 4,025,901
DELAYED DELIVERY 273,973
PAYABLE FOR FUND SHARES REDEEMED 121,395
ACCRUED MANAGEMENT FEE 95,127
DISTRIBUTION FEES PAYABLE 189
OTHER PAYABLES AND 43,511
ACCRUED EXPENSES
TOTAL LIABILITIES 4,560,096
NET ASSETS $ 268,218,235
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 216,899,921
UNDISTRIBUTED NET INVESTMENT INCOME 3,527,181
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS 11,026,609
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 36,764,524
AND ASSETS AND LIABILITIES IN
FOREIGN CURRENCIES
NET ASSETS $ 268,218,235
INITIAL CLASS: $15.36
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($265,041,966 (DIVIDED BY) 17,255,531
SHARES)
SERVICE CLASS: $15.33
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($3,176,269 (DIVIDED BY) 207,190 SHARES)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME $ 1,366,881
DIVIDENDS
INTEREST 2,968,590
TOTAL INCOME 4,335,471
EXPENSES
MANAGEMENT FEE $ 529,791
TRANSFER AGENT FEES 84,081
DISTRIBUTION FEES - SERVICE CLASS 344
ACCOUNTING FEES AND EXPENSES 72,802
NON-INTERESTED TRUSTEES' COMPENSATION 429
CUSTODIAN FEES AND EXPENSES 7,860
AUDIT 13,953
LEGAL 1,552
MISCELLANEOUS 2,773
TOTAL EXPENSES BEFORE REDUCTIONS 713,585
EXPENSE REDUCTIONS (14,001) 699,584
NET INVESTMENT INCOME 3,635,887
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 11,133,975
FOREIGN CURRENCY TRANSACTIONS 2,830 11,136,805
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 12,306,003
ASSETS AND LIABILITIES IN 260 12,306,263
FOREIGN CURRENCIES
NET GAIN (LOSS) 23,443,068
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 27,078,955
OTHER INFORMATION $ 11,810
EXPENSE REDUCTIONS
DIRECTED BROKERAGE ARRANGEMENTS
CUSTODIAN CREDITS 2,191
$ 14,001
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
OPERATIONS $ 3,635,887 $ 5,313,482
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 11,136,805 8,597,009
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) 12,306,263 16,949,433
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 27,078,955 30,859,924
DISTRIBUTIONS TO SHAREHOLDERS (5,425,338) (2,678,656)
FROM NET INVESTMENT INCOME
FROM NET REALIZED GAIN (8,288,727) -
TOTAL DISTRIBUTIONS (13,714,065) (2,678,656)
SHARE TRANSACTIONS - NET INCREASE (DECREASE) 40,305,230 83,257,215
TOTAL INCREASE (DECREASE) IN NET ASSETS 53,670,120 111,438,483
NET ASSETS
BEGINNING OF PERIOD 214,548,115 103,109,632
END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $3,527,181 AND $5,297,948,
RESPECTIVELY) $ 268,218,235 $ 214,548,115
</TABLE>
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998
SHARES DOLLARS YEAR ENDED DECEMBER 31, 1997
(UNAUDITED) SHARES DOLLARS
SHARE TRANSACTIONS 2,750,547 $ 40,845,479 7,435,394 $ 99,539,917
INITIAL CLASS
SOLD
REINVESTED 974,658 13,713,433 215,153 2,678,656
REDEEMED (1,179,203) (17,361,079) (1,375,161) (18,971,358)
NET INCREASE (DECREASE) 2,546,002 $ 37,197,833 6,275,386 $ 83,247,215
SERVICE CLASS A 208,424 $ 3,136,133 706 $ 10,000
SOLD
REINVESTED 46 642 - -
REDEEMED (1,986) (29,378) - -
NET INCREASE (DECREASE) 206,484 $ 3,107,397 706 $ 10,000
DISTRIBUTIONS $ 5,425,084 $ 2,678,656
INITIAL CLASS - NET INVESTMENT INCOME
INITIAL CLASS - NET REALIZED GAIN 8,288,339 -
TOTAL $ 13,713,423 $ 2,678,656
SERVICE CLASS - NET INVESTMENT INCOME $ 254 $ -
SERVICE CLASS - NET REALIZED GAIN 388 -
TOTAL $ 642 $ -
$ 13,714,065 $ 2,678,656
A SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1998
SELECTED PER-SHARE DATA (UNAUDITED) 1997 1996 1995
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.58 $ 12.23 $ 11.17 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .22 D .44 D .33 .14
NET REALIZED AND UNREALIZED GAIN (LOSS) 1.47 2.22 .78 1.25
TOTAL FROM INVESTMENT OPERATIONS 1.69 2.66 1.11 1.39
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.36) (.31) (.01) F (.14)
FROM NET REALIZED GAIN (.55) - (.04) F (.08)
TOTAL DISTRIBUTIONS (.91) (.31) (.05) (.22)
NET ASSET VALUE, END OF PERIOD $ 15.36 $ 14.58 $ 12.23 $ 11.17
TOTAL RETURN B, C 12.16% 22.18% 9.98% 13.92%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 265,042 $ 214,538 $ 103,110 $ 43,155
RATIO OF EXPENSES TO AVERAGE NET ASSETS .60% A .61% .72% 1.42% G
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS .59% A, H .60% H .71% H 1.42%
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 3.06% A 3.28% 3.63% 3.56%
PORTFOLIO TURNOVER 123% A 98% 163% 248%
AVERAGE COMMISSION RATE I $ .0409 $ .0423 .0165
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
SELECTED PER-SHARE DATA (UNAUDITED) 1997 E
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.59 $ 14.16
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .21 D .08 D
NET REALIZED AND UNREALIZED GAIN (LOSS) 1.44 .35
TOTAL FROM INVESTMENT OPERATIONS 1.65 .43
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.36) -
FROM NET REALIZED GAIN (.55) -
TOTAL DISTRIBUTIONS (.91) -
NET ASSET VALUE, END OF PERIOD $ 15.33 $ 14.59
TOTAL RETURN B, C 11.87% 3.04%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 3,176 $ 10
RATIO OF EXPENSES TO AVERAGE NET ASSETS .70% A .71% A
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS .69% A, H .71% A
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 3.07% A 3.43% A
PORTFOLIO TURNOVER 123% A 98%
AVERAGE COMMISSION RATE I $ .0409 $ .0423
A ANNUALIZED
B TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN.
TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED
DURING THE PERIODS SHOWN (SEE NOTE 7 OF NOTES TO FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3, 1997 (COMMENCEMENT OF SALE OF SERVICE CLASS SHARES)
TO DECEMBER 31, 1997.
F THE AMOUNTS SHOWN REFLECT CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO TAX
DIFFERENCES (SEE NOTE 1 OF NOTES TO FINANCIAL STATEMENTS).
G FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE PERIOD.
WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD HAVE BEEN HIGHER.
H FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES
WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES (SEE NOTE 7 OF NOTES
TO FINANCIAL STATEMENTS).
I FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED
TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH
COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND
DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES
AND COMMISSION RATE STRUCTURES MAY DIFFER.
</TABLE>
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
JUNE 30,1998 YEAR FUND
VIP II: ASSET MGR: GROWTH - "INITIAL CLASS" 21.80% 22.89%
FIDELITY AGGRESSIVE COMPOSITE 23.91% N/A
S&P 500 (REGISTERED TRADEMARK) 30.16% 32.30%
LB AGGREGATE BOND 10.54% 10.15%
LB 3 MONTH T-BILL 5.53% N/A
VARIABLE ANNUITY FLEXIBLE PORTFOLIO FUNDS AVERAGE 18.12% N/A
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's returns to those of the Fidelity Aggressive
Asset Allocation Composite Index, - a hypothetical combination of
unmanaged indices. The composite index combines the total returns of
the Standard & Poor's 500 Index, the Lehman Brothers Aggregate Bond
Index and the Lehman Brothers 3 Month Treasury Bill Index weighted
according to the fund's neutral mix.
You can also compare the fund's returns to the variable annuity
flexible portfolio funds average, which reflects the performance of
mutual funds with similar objectives tracked by Lipper Analytical
Services, Inc. The past one year average represent a peer group of 87
mutual funds. The benchmarks listed in the table above include
reinvested dividends and capital gains, if any, and exclude the effect
of sales charge.
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, January 3, 1995. If Fidelity had not reimbursed certain
fund expenses, the life of fund total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURN WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
UNDERSTANDING PERFORMANCE
HOW A FUND DID YESTERDAY IS NO GUARANTEE OF HOW
IT WILL DO TOMORROW. THE STOCK MARKET, FOR EXAMPLE,
HAS A HISTORY OF LONG-TERM GROWTH AND SHORT-TERM
VOLATILITY. IN TURN, THE SHARE PRICE AND RETURN OF A
FUND THAT INVESTS IN STOCKS WILL VARY. THAT MEANS IF
YOU SELL YOUR SHARES DURING A MARKET DOWNTURN,
YOU MIGHT LOSE MONEY. BUT IF YOU CAN RIDE OUT THE
MARKET'S UPS AND DOWNS, YOU MAY HAVE A GAIN.
(CHECKMARK)
$10,000 OVER LIFE OF FUND
VIP II Asset Mgr Growth FID Aggressive Composite
S&P 500 LB Aggregate Bond
00159 F0022
SP001 LB001
1995/01/31 10000.00 10000.00
10000.00 10000.00
1995/02/28 10149.70 10319.62
10389.70 10238.00
1995/03/31 10289.42 10539.71
10696.30 10300.45
1995/04/30 10558.88 10785.50
11011.31 10444.66
1995/05/31 10708.58 11199.23
11451.43 10848.87
1995/06/30 11137.72 11397.77
11717.44 10928.06
1995/07/31 11546.91 11633.53
12106.00 10904.02
1995/08/31 12065.87 11695.86
12136.38 11035.96
1995/09/30 12245.51 12052.97
12648.54 11143.01
1995/10/31 11776.45 12083.85
12603.38 11287.87
1995/11/30 11986.03 12487.56
13156.67 11457.19
1995/12/31 12277.71 12701.01
13410.07 11617.59
1996/01/31 12569.78 13008.92
13866.55 11694.26
1996/02/29 12613.39 13009.89
13995.09 11490.78
1996/03/31 12840.37 13059.96
14129.86 11410.35
1996/04/30 13143.01 13162.84
14338.14 11346.45
1996/05/31 13348.36 13380.07
14707.92 11323.76
1996/06/30 13402.41 13467.11
14763.95 11475.49
1996/07/31 13067.35 13093.05
14111.68 11506.48
1996/08/31 13164.62 13267.32
14409.30 11486.92
1996/09/30 13705.04 13821.05
15220.25 11686.79
1996/10/31 14104.95 14163.15
15640.03 11946.24
1996/11/30 15023.67 14935.59
16822.26 12150.52
1996/12/31 14737.79 14700.41
16489.01 12037.52
1997/01/31 15367.80 15358.12
17519.24 12074.83
1997/02/28 15514.22 15455.00
17656.59 12105.02
1997/03/31 14781.88 14970.83
16931.08 11970.65
1997/04/30 15401.55 15656.26
17941.87 12150.21
1997/05/31 16336.68 16364.80
19034.17 12265.64
1997/06/30 16821.15 16929.64
19886.90 12411.60
1997/07/31 17959.09 17991.36
21469.30 12746.72
1997/08/31 17395.75 17251.75
20266.59 12638.37
1997/09/30 18037.95 17980.97
21376.59 12825.42
1997/10/31 17609.82 17629.62
20662.61 13011.39
1997/11/30 18116.82 18224.94
21619.09 13071.24
1997/12/31 18432.29 18493.92
21990.29 13203.26
1998/01/31 18432.29 18700.72
22233.50 13372.26
1998/02/28 19558.44 19644.52
23836.98 13361.56
1998/03/31 20283.77 20370.04
25057.67 13406.99
1998/04/30 20220.15 20544.55
25309.75 13476.71
1998/05/31 20016.54 20350.75
24874.67 13604.74
1998/06/30 20487.37 20977.02
25885.08 13720.38
IMATRL PRASUN SHR__CHT 19980630 19980731 135748 R00000000000044
Let's say hypothetically that $10,000 was invested in Variable
Insurance Products Fund II: Asset Manager: Growth Portfolio on January
31, 1995, shortly after the fund started. As the chart shows, by June
30, 1998, the value of the investment would have grown to $20,487 - a
104.87% increase. With reinvested dividends and capital gains, if any,
a $10,000 investment in the Standard & Poor's 500 Index would have
grown to $25,885 over the same period - a 158.85% increase. If $10,000
was invested in the Lehman Brothers Aggregate Bond Index, it would
have grown to $13,720 - a 37.20% increase.
You can also look at how the Fidelity Aggressive Asset Allocation
Composite Index did over the same period. The Aggressive Asset
Allocation Composite index combines the cumulative total returns of
three unmanaged indexes - the S&P 500 (158.85%), Lehman Brothers
Aggregate Bond Index (37.20%), and the Lehman Brothers 3-month T-Bill
Total Rate of Return Index (20.54%) - according to the fund's neutral
mix*, assuming monthly rebalancing. With reinvested dividends and
capital gains, if any, a $10,000 investment in the index would have
grown to $20,977 - a 109.77% increase.
* 70% STOCKS, 25% BONDS AND 5% SHORT-TERM INSTRUMENTS EFFECTIVE
JANUARY 1, 1997; 65%, 30% AND 5%, RESPECTIVELY, PRIOR TO DECEMBER 31,
1996.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1998
% OF FUND'S INVESTMENTS
WAL-MART STORES, INC. 2.7
HOME DEPOT, INC. 1.9
GENERAL ELECTRIC CO. 1.9
SCHERING-PLOUGH CORP. 1.8
AT&T CORP. 1.8
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1998
(STOCKS ONLY) % OF FUND'S INVESTMENTS
FINANCE 16.2
RETAIL & WHOLESALE 7.7
UTILITIES 7.2
TECHNOLOGY 6.8
HEALTH 6.7
ASSET ALLOCATION AS OF JUNE 30, 1998*
ROW: 1, COL: 1, VALUE: 71.40000000000001
ROW: 1, COL: 2, VALUE: 24.0
ROW: 1, COL: 3, VALUE: 4.6
STOCK CLASS 72.4%
BOND CLASS 24.1%
SHORT-TERM CLASS 3.5%
FOREIGN INVESTMENTS 1.7%
*
ASSET ALLOCATION IN THE PIE CHART REFLECTS THE CATEGORIZATION OF
ASSETS AS DEFINED IN
THE FUND'S PROSPECTUS. FINANCIAL STATEMENT CATEGORIZATIONS CONFORM TO
ACCOUNTING
STANDARDS AND WILL DIFFER FROM THE PIE CHART.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1 fee.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
JUNE 30,1998 YEAR FUND
VIP II: ASSET MGR: GROWTH - SERVICE CLASS 21.36% 22.76%
FIDELITY AGGRESSIVE COMPOSITE 23.91% N/A
S&P 500 (REGISTERED TRADEMARK) 30.16% 32.30%
LB AGGREGATE BOND 10.54% 10.15%
LB 3 MONTH T-BILL 5.53% N/A
VARIABLE ANNUITY FLEXIBLE PORTFOLIO FUNDS AVERAGE 18.12% N/A
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's returns to those of the Fidelity Aggressive
Asset Allocation Composite Index, a hypothetical combination of
unmanaged indices. The composite index combines the total returns of
the Standard & Poor's 500 Index, the Lehman Brothers Aggregate Bond
Index and the Lehman Brothers 3 Month Treasury Bill Index weighted
according to the fund's neutral mix.
You can also compare the fund's returns to the variable annuity
flexible portfolio funds average, which reflects the performance of
mutual funds with similar objectives tracked by Lipper Analytical
Services, Inc. The past one year average represent a peer group of 87
mutual funds. The benchmarks listed in the table above include
reinvested dividends and capital gains, if any, and exclude the effect
of sales charges.
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, January 3, 1995.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURN WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
UNDERSTANDING PERFORMANCE
HOW A FUND DID YESTERDAY IS NO GUARANTEE OF HOW
IT WILL DO TOMORROW. THE STOCK MARKET, FOR EXAMPLE,
HAS A HISTORY OF LONG-TERM GROWTH AND SHORT-TERM
VOLATILITY. IN TURN, THE SHARE PRICE AND RETURN OF A
FUND THAT INVESTS IN STOCKS WILL VARY. THAT MEANS IF
YOU SELL YOUR SHARES DURING A MARKET DOWNTURN,
YOU MIGHT LOSE MONEY. BUT IF YOU CAN RIDE OUT THE
MARKET'S UPS AND DOWNS, YOU MAY HAVE A GAIN.
(CHECKMARK)
$10,000 OVER LIFE OF FUND
VIP II Asset Mgr Gro-CL S FID Aggressive Composite
S&P 500 LB Aggregate Bond
00468 F0022
SP001 LB001
1995/01/31 10000.00 10000.00
10000.00 10000.00
1995/02/28 10149.70 10319.62
10389.70 10238.00
1995/03/31 10289.42 10539.71
10696.30 10300.45
1995/04/30 10558.88 10785.50
11011.31 10444.66
1995/05/31 10708.58 11199.23
11451.43 10848.87
1995/06/30 11137.72 11397.77
11717.44 10928.06
1995/07/31 11546.91 11633.53
12106.00 10904.02
1995/08/31 12065.87 11695.86
12136.38 11035.96
1995/09/30 12245.51 12052.97
12648.54 11143.01
1995/10/31 11776.45 12083.85
12603.38 11287.87
1995/11/30 11986.03 12487.56
13156.67 11457.19
1995/12/31 12277.71 12701.01
13410.07 11617.59
1996/01/31 12569.78 13008.92
13866.55 11694.26
1996/02/29 12613.39 13009.89
13995.09 11490.78
1996/03/31 12840.37 13059.96
14129.86 11410.35
1996/04/30 13143.01 13162.84
14338.14 11346.45
1996/05/31 13348.36 13380.07
14707.92 11323.76
1996/06/30 13402.41 13467.11
14763.95 11475.49
1996/07/31 13067.35 13093.05
14111.68 11506.48
1996/08/31 13164.62 13267.32
14409.30 11486.92
1996/09/30 13705.04 13821.05
15220.25 11686.79
1996/10/31 14104.95 14163.15
15640.03 11946.24
1996/11/30 15023.67 14935.59
16822.26 12150.52
1996/12/31 14737.79 14700.41
16489.01 12037.52
1997/01/31 15367.80 15358.12
17519.24 12074.83
1997/02/28 15514.22 15455.00
17656.59 12105.02
1997/03/31 14781.88 14970.83
16931.08 11970.65
1997/04/30 15401.55 15656.26
17941.87 12150.21
1997/05/31 16336.68 16364.80
19034.17 12265.64
1997/06/30 16821.15 16929.64
19886.90 12411.60
1997/07/31 17959.09 17991.36
21469.30 12746.72
1997/08/31 17395.75 17251.75
20266.59 12638.37
1997/09/30 18037.95 17980.97
21376.59 12825.42
1997/10/31 17609.82 17629.62
20662.61 13011.39
1997/11/30 18105.55 18224.94
21619.09 13071.24
1997/12/31 18421.02 18493.92
21990.29 13203.26
1998/01/31 18409.75 18700.72
22233.50 13372.26
1998/02/28 19510.54 19644.52
23836.98 13361.56
1998/03/31 20235.98 20370.04
25057.67 13406.99
1998/04/30 20159.62 20544.55
25309.75 13476.71
1998/05/31 19955.99 20350.75
24874.67 13604.74
1998/06/30 20414.16 20977.02
25885.08 13720.38
IMATRL PRASUN SHR__CHT 19980630 19980728 112926 R00000000000044
Let's say hypothetically that $10,000 was invested in Variable
Insurance Products Fund II: Asset Manager: Growth Portfolio - Service
Class on January 31, 1995, shortly after the fund started. As the
chart shows, by June 30, 1998, the value of the investment would have
grown to $20,414 - a 104.14% increase. With reinvested dividends and
capital gains, if any, a $10,000 investment in the Standard & Poor's
500 Index would have grown to $25,885 over the same period - a 158.85%
increase. If $10,000 was invested in the Lehman Brothers Aggregate
Bond Index, it would have grown to $13,720 - a 37.20% increase. You
can also look at how the Fidelity Aggressive Asset Allocation
Composite Index, a hypothetical combination of unmanaged indices, did
over the same period. The Aggressive Asset Allocation Composite index
combines the cumulative total returns of three unmanaged indexes - the
S&P 500 (158.85%), Lehman Brothers Aggregate Bond Index (37.20%), and
the Lehman Brothers 3-month T-Bill Total Rate of Return Index (20.54%)
- - according to the fund's neutral mix*, assuming monthly rebalancing.
With reinvested dividends and capital gains, if any, a $10,000
investment in the index would have grown to $20,977 - a 109.77%
increase.
* 70% STOCKS, 25% BONDS AND 5% SHORT-TERM INSTRUMENTS EFFECTIVE
JANUARY 1, 1997; 65%, 30% AND 5%, RESPECTIVELY, PRIOR TO DECEMBER 31,
1996.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1998
% OF FUND'S INVESTMENTS
WAL-MART STORES, INC. 2.7
HOME DEPOT, INC. 1.9
GENERAL ELECTRIC CO. 1.9
SCHERING-PLOUGH CORP. 1.8
AT&T CORP. 1.8
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1998
(STOCKS ONLY) % OF FUND'S INVESTMENTS
FINANCE 16.2
RETAIL & WHOLESALE 7.7
UTILITIES 7.2
TECHNOLOGY 6.8
HEALTH 6.7
ASSET ALLOCATION AS OF JUNE 30, 1998*
ROW: 1, COL: 1, VALUE: 71.40000000000001
ROW: 1, COL: 2, VALUE: 24.0
ROW: 1, COL: 3, VALUE: 4.6
STOCK CLASS 72.4%
BOND CLASS 24.1%
SHORT-TERM CLASS 3.5%
FOREIGN INVESTMENTS 1.7%
*
ASSET ALLOCATION IN THE PIE CHART REFLECTS THE CATEGORIZATION OF
ASSETS AS DEFINED IN
THE FUND'S PROSPECTUS. FINANCIAL STATEMENT CATEGORIZATIONS CONFORM TO
ACCOUNTING
STANDARDS AND WILL DIFFER FROM THE PIE CHART.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with
Richard Habermann, Portfolio Manager of Asset Manager: Growth
Portfolio
Q. HOW DID THE FUND PERFORM COMPARED TO ITS BENCHMARK, DICK?
A. For the six months that ended June 30, 1998, the fund lagged the
13.43% return of the Fidelity Aggressive Asset Allocation Composite
Index - which combines the performance of three indexes - by a small
amount. The fund also slightly lagged the 23.91% return of the index
for the 12 months that ended June 30, 1998.
Q. WHY DID THE FUND LAG ITS BENCHMARK INDEX?
A. While several factors influenced performance during the period,
security selection among the fund's equity investments detracted from
the fund's relative performance, albeit slightly. All in all, the
fund's equity investments performed quite well. However, the strong
performance of the stock market, as measured by such indexes as the
Standard & Poor's 500, was driven by a very narrow group of stocks.
Equity investments outside of that group generally didn't perform as
well. This narrowness contributed to a slight performance shortfall
for the fund's equity investments relative to the S&P 500. The fund's
equity specialist, Steven Snider, targeted stocks with lower
valuations but higher earnings-growth rates than the average of the
S&P 500, but the tide was against him during this most recent
six-month period. The fund's investment in Oracle within the
technology sector hurt performance, as did industrial machinery stock
Case. In the nondurables sector, tobacco stocks such as Philip Morris
were hurt by uncertainty over the future of litigation and
legislation. However, this tobacco position was reduced during the
period.
Q. WHAT KIND OF MOVES DID YOU MAKE WITH THE FUND'S ASSET ALLOCATION?
A. I gradually reduced the fund's allocations to stocks and
short-term/money market instruments, and increased its weighting in
bonds. I wanted to position the fund to take advantage of the bond
market rally we anticipated and saw during the period. Because of
ongoing concerns related to the crises in Asia, foreign investors
flocked to less-volatile bond investments in the U.S. in a "flight to
quality." Over the past 15 years or so, when major crises such as Asia
have arisen, financial assets in the U.S. have benefited. Part of that
can be attributed to the more accommodating interest-rate stance
central banks such as the Federal Reserve adopt at such times. Other
factors also contributed to the positive backdrop for bonds, including
low inflation, a strengthening dollar and a slowdown in corporate
earnings.
Q. HOW DID THE FUND'S ASSET ALLOCATION AFFECT ITS PERFORMANCE?
A. It was a net positive. During the course of the period, the fund's
equity portion was overweighted, its bond portion increased and the
short-term/money market allocation was underweighted, relative to its
neutral mix, which calls for 70% to be invested in stocks, 25% in
bonds and 5% in short-term/money market instruments. Since equities
outperformed the other asset classes, the overweighting in stocks
helped the fund's performance. The increase in bonds during the period
helped as well, for the reasons I mentioned earlier, and because of
the capital appreciation and additional income they offered when
compared to shorter-term alternatives. At the close of the period, the
fund was back closer to the neutral mix, and held 72.4% in stocks,
24.1% in bonds and 3.5% in short-term/money market instruments.
Q. HOW DID THE FIXED-INCOME AND SHORT-TERM PORTIONS OF THE FUND
PERFORM?
A. Quite well. The investment-grade portion of the fund - which
Charlie Morrison helps me manage - performed better than the index
that measures that part of the market, the Lehman Brothers Aggregate
Bond Index, due to Charlie's decision to overweight mortgage-backed
and agency securities relative to the index. In addition, the
high-yield portion of the fund - which Fred Hoff helps me manage -
performed quite well, largely due to strong security selection in the
telecommunications, cable and supermarket industries. Finally, the
short-term/money market part of the fund outperformed its benchmark,
as John Todd, who helps look after short-term investments, obtained a
return advantage relative to Treasuries by emphasizing high-quality
corporate and bank-backed obligations.
Q. WHICH STOCKS PERFORMED WELL DURING THE PERIOD?
A. Wal-Mart was the best contributor to performance, attracting
investors with strong management that focused on growing earnings and
revenues. Schering-Plough and Pfizer benefited, along with most
pharmaceutical firms, from the ability to bring products to market
faster because of streamlined approval processes, changes in
regulations that allow them to market prescription drugs more
aggressively and their ability to sustain earnings growth in an
unpredictable economic environment.
Q. WHAT'S YOUR OUTLOOK?
A. Corporate earnings estimates for the rest of 1998 and 1999 appear
to be generous, and the market has been severely punishing companies
that don't meet their earnings expectations. In this environment,
security selection will continue to be critical, especially given the
pressures caused by Asia, increased wages, tighter profit margins and
already-high stock valuations. Offsetting these pressures are low
inflation, a supportive bond market and favorable interest rates.
Above and beyond making the right tactical moves regarding asset
allocation, picking the right stocks will be crucial.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED
ON MARKET AND OTHER CONDITIONS.
FUND FACTS
GOAL: maximum total return over the long term
by allocating assets among stocks, bonds and
short-term instruments anywhere in the world.
START DATE: September 6, 1989
SIZE: as of June 30, 1998, more than $4.7 billion
MANAGER: Richard Haberman, since 1996;
joined Fidelity in 1968
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
INVESTMENTS JUNE 30, 1998 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 69.2%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 2.3%
AEROSPACE & DEFENSE - 1.8%
AlliedSignal, Inc. 75,600 $ 3,354,714
Sundstrand Corp. 27,700 1,585,825
United Technologies Corp. 49,800 4,606,500
9,547,039
DEFENSE ELECTRONICS - 0.5%
Litton Industries, Inc. (a) 13,800 814,200
Northrop Grumman Corp. 17,000 1,753,125
2,567,325
SHIP BUILDING & REPAIR - 0.0%
Avondale Industries, Inc. (a) 2,600 71,744
TOTAL AEROSPACE & DEFENSE 12,186,108
BASIC INDUSTRIES - 1.9%
CHEMICALS & PLASTICS - 1.7%
Air Products & Chemicals, Inc. 37,800 1,512,000
Dow Chemical Co. 45,899 4,437,860
Engelhard Corp. 18,900 382,725
FMC Corp. (a) 20,700 1,411,481
Millennium Chemicals, Inc. 38,300 1,297,413
9,041,479
IRON & STEEL - 0.0%
USX-U.S. Steel Group 10,000 330,000
METALS & MINING - 0.2%
Aluminum Co. of America 14,800 975,875
TOTAL BASIC INDUSTRIES 10,347,354
CONSTRUCTION & REAL ESTATE - 1.3%
BUILDING MATERIALS - 0.4%
Coltec Industries, Inc. (a) 36,700 729,413
Mark IV Industries, Inc. 24,500 529,813
Texas Industries, Inc. 10,700 567,100
Vulcan Materials Co. 3,300 352,069
2,178,395
CONSTRUCTION - 0.9%
Centex Corp. 19,400 732,350
D.R. Horton, Inc. 32,900 686,788
Fleetwood Enterprises, Inc. 49,233 1,969,320
Kaufman & Broad Home Corp. 34,200 1,085,850
U.S. Home Corp. (a) 2,600 107,250
4,581,558
TOTAL CONSTRUCTION & REAL ESTATE 6,759,953
DURABLES - 4.6%
AUTOS, TIRES, & ACCESSORIES - 4.2%
Chrysler Corp. 36,900 2,080,238
Dana Corp. 11,600 620,600
Eaton Corp. 29,200 2,270,300
Ford Motor Co. 110,500 6,519,500
General Motors Corp. 122,800 8,204,575
Lear Corp. (a) 31,700 1,626,606
Superior Industries International, Inc. 27,100 763,881
22,085,700
HOME FURNISHINGS - 0.2%
Ethan Allen Interiors, Inc. 13,400 669,163
Furniture Brands International, Inc. (a) 21,700 608,956
1,278,119
SHARES VALUE (NOTE 1)
TEXTILES & APPAREL - 0.2%
Burlington Industries, Inc. (a) 37,300 $ 524,531
Liz Claiborne, Inc. 11,300 590,425
1,114,956
TOTAL DURABLES 24,478,775
ENERGY - 1.7%
ENERGY SERVICES - 0.6%
BJ Services Co. (a) 19,500 566,719
McDermott International, Inc. 34,100 1,174,319
Western Atlas, Inc. 19,200 1,629,600
3,370,638
OIL & GAS - 1.1%
British Petroleum PLC ADR 390 34,418
Coastal Corp. (The) 28,400 1,982,675
Royal Dutch Petroleum Co. Ord. 3,200 177,093
Sun Co., Inc. 23,700 919,856
Tosco Corp. 83,900 2,464,563
5,578,605
TOTAL ENERGY 8,949,243
FINANCE - 16.0%
BANKS - 6.5%
Bank of New York Co., Inc. 25,200 1,529,325
BankAmerica Corp. 101,900 8,807,981
Bankers Trust New York Corp. 45,200 5,246,025
Chase Manhattan Corp. 102,600 7,746,300
Comerica, Inc. 10,700 708,875
Commerce Bancshares, Inc. 4,950 241,622
Mellon Bank Corp. 25,200 1,754,550
National City Corp. 23,780 1,688,380
NationsBank Corp. 21,600 1,652,400
Republic New York Corp. 34,200 2,152,463
SunTrust Banks, Inc. 38,100 3,098,006
34,625,927
CLOSED END INVESTMENT COMPANY - 0.0%
First NIS Regional Fund 14,400 129,600
CREDIT & OTHER FINANCE - 0.4%
Associates First Capital Corp. Class A 29,065 2,234,372
FEDERAL SPONSORED CREDIT - 2.3%
Freddie Mac 76,500 3,600,281
Fannie Mae 141,000 8,565,750
12,166,031
INSURANCE - 5.0%
Allmerica Financial Corp. 12,400 806,000
Allstate Corp. 85,000 7,782,813
CIGNA Corp. 95,400 6,582,600
Conseco, Inc. 119,500 5,586,625
Financial Security Assurance Holdings
Ltd. 4,700 276,125
Hartford Financial Services Group, Inc. 18,000 2,058,750
ING Groep NV sponsored ADR 521 34,060
Lincoln National Corp. 10,400 950,300
MGIC Investment Corp. 18,000 1,027,125
Old Republic International Corp. 23,250 681,516
Orion Capital Corp. 5,200 290,550
Reliastar Financial Corp. 10,200 489,600
26,566,064
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
SECURITIES INDUSTRY - 1.8%
Lehman Brothers Holdings, Inc. 80,800 $ 6,267,050
Travelers Group, Inc. (The) 47,850 2,900,906
9,167,956
TOTAL FINANCE 84,889,950
HEALTH - 6.7%
DRUGS & PHARMACEUTICALS - 3.8%
Pfizer, Inc. 79,800 8,673,263
Schering-Plough Corp. 106,000 9,712,250
Warner-Lambert Co. 26,400 1,831,500
20,217,013
MEDICAL EQUIPMENT & SUPPLIES - 1.2%
Allegiance Corp. 1,660 85,075
Guidant Corp. 87,500 6,239,844
6,324,919
MEDICAL FACILITIES MANAGEMENT - 1.7%
HEALTHSOUTH Corp. (a) 37,700 1,006,119
Lincare Holdings, Inc. (a) 32,000 1,346,000
United HealthCare Corp. 78,500 4,984,750
Wellpoint Health Networks, Inc. (a) 19,700 1,457,800
8,794,669
TOTAL HEALTH 35,336,601
HOLDING COMPANIES - 0.1%
U.S. Industries, Inc. 27,600 683,100
INDUSTRIAL MACHINERY & EQUIPMENT - 4.1%
ELECTRICAL EQUIPMENT - 2.0%
General Electric Co. 108,000 9,828,000
General Instrument Corp. 28,300 769,406
10,597,406
INDUSTRIAL MACHINERY & EQUIPMENT - 2.1%
Case Corp. 35,300 1,703,225
Caterpillar, Inc. 80,200 4,240,575
Dover Corp. 45,000 1,541,250
Ingersoll-Rand Co. 69,800 3,075,563
Tyco International Ltd. 8,400 529,200
11,089,813
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 21,687,219
MEDIA & LEISURE - 1.8%
BROADCASTING - 0.1%
Loral Orion Networks Systems, Inc. warrants (a):
1/15/07 100 1,500
1/15/17 420 5,040
Tele-Communications, Inc. (TCI Ventures
Group), Series A (a) 33,950 681,122
687,662
LEISURE DURABLES & TOYS - 0.1%
Brunswick Corp. 25,200 623,700
PUBLISHING - 1.6%
Cognizant Corp. 10,800 680,400
Gannett Co., Inc. 45,900 3,261,769
Knight-Ridder, Inc. 18,900 1,040,681
New York Times Co. (The) Class A 16,400 1,299,700
Tribune Co. 24,000 1,651,500
World Color Press, Inc. (a) 9,700 339,500
8,273,550
RESTAURANTS - 0.0%
Brinker International, Inc. (a) 12,000 231,000
TOTAL MEDIA & LEISURE 9,815,912
SHARES VALUE (NOTE 1)
NONDURABLES - 4.1%
BEVERAGES - 0.3%
Canadaigua Wine Co. Class A (a) 7,300 $ 359,069
Coors (Adolph) Co. Class B 14,700 499,800
PepsiCo, Inc. 22,600 930,838
1,789,707
FOODS - 1.8%
Dean Foods Co. 14,800 813,075
Flowers Industries, Inc. 24,100 492,544
Heinz (H.J.) Co. 90,500 5,079,313
Quaker Oats Co. 30,000 1,648,125
Smithfield Foods, Inc. (a) 20,600 628,300
Suiza Foods Corp. (a) 11,000 656,563
9,317,920
HOUSEHOLD PRODUCTS - 0.1%
Nu Skin Asia Pacific, Inc. Class A (a) 8,700 169,650
Premark International, Inc. 4,400 141,900
311,550
TOBACCO - 1.9%
Philip Morris Companies, Inc. 171,900 6,768,563
RJR Nabisco Holdings Corp. 132,220 3,140,225
Universal Corp. 9,700 362,538
10,271,326
TOTAL NONDURABLES 21,690,503
RETAIL & WHOLESALE - 7.7%
APPAREL STORES - 0.5%
Gap, Inc. 14,700 905,888
TJX Companies, Inc. 66,400 1,601,900
2,507,788
GENERAL MERCHANDISE STORES - 3.2%
Federated Department Stores, Inc. (a) 48,400 2,604,525
Wal-Mart Stores, Inc. 232,300 14,112,225
16,716,750
GROCERY STORES - 0.5%
Safeway, Inc. (a) 65,100 2,648,756
RETAIL & WHOLESALE, MISCELLANEOUS - 3.5%
Best Buy Co., Inc. 22,700 820,038
Home Depot, Inc. 123,800 10,283,138
Lowe's Companies, Inc. 42,200 1,711,738
Office Depot, Inc. (a) 16,300 514,469
Pier 1 Imports, Inc. 50,800 1,212,850
Tandy Corp. 79,600 4,223,775
18,766,008
TOTAL RETAIL & WHOLESALE 40,639,302
SERVICES - 0.4%
ADVERTISING - 0.2%
Omnicom Group, Inc. 28,800 1,436,400
PRINTING - 0.2%
Donnelley (R.R.) & Sons Co. 3,200 146,400
Valassis Communications, Inc. (a) 21,100 813,669
960,069
TOTAL SERVICES 2,396,469
TECHNOLOGY - 6.8%
COMMUNICATIONS EQUIPMENT - 1.9%
Globalstar Telecommunications Ltd.
warrants 2/15/04 (a)(f) 180 23,400
Lucent Technologies, Inc. 95,300 7,927,769
Tellabs, Inc. (a) 27,200 1,948,200
9,899,369
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TECHNOLOGY - CONTINUED
COMPUTER SERVICES & SOFTWARE - 2.5%
HBO & Co. 115,400 $ 4,067,850
Microsoft Corp. (a) 29,300 3,175,388
Oracle Corp. (a) 241,000 5,919,563
13,162,801
COMPUTERS & OFFICE EQUIPMENT - 2.0%
Ingram Micro, Inc. Class A (a) 3,300 146,025
International Business Machines Corp. 46,600 5,350,263
SCI Systems, Inc. (a) 93,400 3,514,175
Xerox Corp. 14,800 1,504,050
10,514,513
ELECTRONIC INSTRUMENTS - 0.1%
Thermo Electron Corp. 23,800 813,663
ELECTRONICS - 0.3%
Molex, Inc. 12,593 294,361
Thomas & Betts Corp. 23,400 1,152,450
1,446,811
TOTAL TECHNOLOGY 35,837,157
TRANSPORTATION - 3.1%
AIR TRANSPORTATION - 2.7%
AMR Corp. (a) 97,000 8,075,250
Comair Holdings, Inc. 27,600 852,150
Southwest Airlines Co. 125,600 3,720,900
US Airways Group, Inc. (a) 12,500 990,625
Viad Corp. 18,600 516,150
14,155,075
TRUCKING & FREIGHT - 0.4%
Airborne Freight Corp. 47,500 1,659,531
CNF Transportation, Inc. 9,800 416,500
2,076,031
TOTAL TRANSPORTATION 16,231,106
UTILITIES - 6.6%
CELLULAR - 0.0%
McCaw International Ltd. warrants
4/15/07 (a)(f) 910 4,550
ELECTRIC UTILITY - 1.6%
Edison International 39,400 1,164,763
Energy East Corp. 27,500 1,144,688
FPL Group, Inc. 21,500 1,354,500
FirstEnergy Corp. 30,400 934,800
GPU, Inc. 30,700 1,160,844
Houston Industries, Inc. 56,700 1,750,613
Public Service Enterprise Group, Inc. 24,200 833,388
8,343,596
GAS - 0.1%
MarketSpan Corp. 20,768 621,742
TELEPHONE SERVICES - 4.9%
AT&T Corp. 168,500 9,625,562
Ameritech Corp. 102,000 4,577,250
BellSouth Corp. 68,800 4,618,200
GTE Corp. 19,000 1,056,875
SBC Communications, Inc. 61,400 2,456,000
U.S. WEST, Inc. 81,800 3,844,600
26,178,487
TOTAL UTILITIES 35,148,375
TOTAL COMMON STOCKS
(Cost $299,808,665) 367,077,127
NONCONVERTIBLE PREFERRED STOCKS - 2.2%
SHARES VALUE (NOTE 1)
CONSTRUCTION & REAL ESTATE - 0.2%
REAL ESTATE INVESTMENT TRUSTS - 0.2%
California Federal Preferred Capital
Corp. 9 1/8% 30,171 $ 818,388
Crown America Realty Trust, Series A,
11% 1,692 90,734
Walden Residential Properties, Inc.
9.20% 5,800 146,450
1,055,572
FINANCE - 0.2%
CREDIT & OTHER FINANCE - 0.1%
Fresenius Medical Care Capital Trust II
7 7/8% 530 527,681
INSURANCE - 0.1%
American Annuity Group Capital Trust II
8 3/4% 160 166,840
SIG Capital Trust I 9 1/2% 582 620,808
787,648
TOTAL FINANCE 1,315,329
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Echostar Communications Corp.
12 1/8% pay-in-kind 297 326,700
MEDIA & LEISURE - 1.1%
BROADCASTING - 1.0%
Adelphia Communications Corp. $13 1,423 170,760
American Radio Systems Corp. 11 3/8%
pay-in-kind 3,025 350,144
CSC Holdings, Inc. 11 1/8%
pay-in-kind 12,193 1,396,099
Chancellor Media Corp., Series A,
$12.25 Pay-in-kind 1,591 226,718
Granite Broadcasting Corp.
12 3/4%, pay-in-kind 286 334,620
SFX Broadcasting, Inc. 12 5/8% 4,418 494,816
Sinclair Capital 11 5/8% 4,717 511,795
Time Warner, Inc., Series M,
10 1/4% pay-in-kind 1,414 1,571,308
5,056,260
PUBLISHING - 0.1%
Primedia, Inc.:
Series D, $10 3,386 355,530
$9.20 2,466 251,532
607,062
TOTAL MEDIA & LEISURE 5,663,322
TECHNOLOGY - 0.0%
COMMUNICATIONS EQUIPMENT - 0.0%
Intermedia Communications, Inc.
13 1/2% pay-in-kind 221 260,780
UTILITIES - 0.6%
CELLULAR - 0.3%
Nextel Communications, Inc.
11 1/8% pay-in-kind (f) 1,437 1,480,110
TELEPHONE SERVICES - 0.3%
Hyperion Telecommunications, Inc.
12 7/8% pay-in-kind (Reg.) 296 293,780
IXC Communications, Inc.
12 1/2% pay-in-kind 219 254,040
NONCONVERTIBLE PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - CONTINUED
TELEPHONE SERVICES - CONTINUED
NEXTLINK Communications, Inc. 14%
pay-in-kind 11,569 $ 679,679
WinStar Communications, Inc. 14 1/4% 227 270,130
1,497,629
TOTAL UTILITIES 2,977,739
TOTAL NONCONVERTIBLE PREFERRED STOCKS
(Cost $11,060,970) 11,599,442
CORPORATE BONDS - 16.2%
MOODY'S PRINCIPAL
RATINGS (C) AMOUNT
CONVERTIBLE BONDS - 0.1%
HEALTH - 0.1%
DRUGS & PHARMACEUTICALS - 0.1%
Integrated Process Equipment Corp.
6 1/4%, 9/15/04 (f) B- $ 200,000 150,000
MEDICAL FACILITIES MANAGEMENT - 0.0%
Tenet Healthcare Corp.
6%, 12/1/05 B1 120,000 103,050
TOTAL HEALTH 253,050
RETAIL & WHOLESALE - 0.0%
RETAIL & WHOLESALE, MISCELLANEOUS - 0.0%
Sports Authority, Inc.
5 1/4%, 9/15/01 B1 190,000 183,350
TOTAL CONVERTIBLE BONDS 436,400
NONCONVERTIBLE BONDS - 16.1%
AEROSPACE & DEFENSE - 0.2%
DEFENSE ELECTRONICS - 0.1%
Raytheon Co.:
5.95%, 3/15/01 Baa 150,000 149,442
6.45%, 8/15/04 Baa 180,000 181,786
Tracor, Inc.
8 1/2%, 3/1/07 B1 230,000 250,125
581,353
SHIP BUILDING & REPAIR - 0.1%
Newport News Shipbuilding,
Inc. 9 1/4%, 12/1/06 B1 530,000 564,450
TOTAL AEROSPACE & DEFENSE 1,145,803
BASIC INDUSTRIES - 0.3%
CHEMICALS & PLASTICS - 0.1%
General Chemical Corp.
9 1/4%, 8/15/03 B2 150,000 153,750
Huntsman Corp.
9 1/2%, 7/1/07 (f) B2 270,000 271,350
Moll Industries
10 1/2%, 7/1/08 (f) B3 40,000 40,800
PraxAir, Inc.
6 5/8%, 10/15/07 A3 120,000 122,724
588,624
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
PACKAGING & CONTAINERS - 0.2%
BWAY Corp., Series B,
10 1/4%, 4/15/07 B2 $ 140,000 $ 151,725
Owens Illinois, Inc.:
7.15%, 5/15/05 Ba1 300,000 301,256
7.80%, 5/15/18 Ba1 150,000 153,498
606,479
PAPER & FOREST PRODUCTS - 0.0%
Omega Cabinets Ltd.
10 1/2%, 6/15/07 B3 170,000 170,000
TOTAL BASIC INDUSTRIES 1,365,103
CONSTRUCTION & REAL ESTATE - 0.2%
CONSTRUCTION - 0.0%
U.S. Home Corp.
8.88%, 8/15/07 B1 250,000 255,625
REAL ESTATE - 0.1%
LNR Property Corp.
9 3/8%, 3/15/08 (f) B1 460,000 458,850
REAL ESTATE INVESTMENT TRUSTS - 0.1%
Centerpoint Properties Trust
6 3/4%, 4/1/05 Baa 100,000 100,172
EOP Operating LP (f):
6 3/8%, 2/15/03 Baa 100,000 99,575
6 3/4%, 2/15/08 Baa 100,000 99,877
Weeks Realty LP
6 7/8%, 3/15/05 Baa 100,000 99,375
398,999
TOTAL CONSTRUCTION & REAL ESTATE 1,113,474
DURABLES - 0.9%
AUTOS, TIRES, & ACCESSORIES - 0.4%
Blue Bird Body Co.
10 3/4%, 11/15/06 B2 180,000 196,200
Breed Technologies, Inc.
9 1/4%, 4/15/08 (f) B3 790,000 772,225
Federal-Mogul Corp.
7 7/8%, 7/1/10 Ba2 730,000 732,738
Oshkosh Truck Corp.
8 3/4%, 3/1/08 B3 400,000 404,000
2,105,163
CONSUMER DURABLES - 0.1%
Corning Consumer Products Co.
9 5/8%, 5/1/08 (f) B3 600,000 598,500
TEXTILES & APPAREL - 0.4%
Levi Strauss & Co.
7%, 11/1/06 (f) Baa 310,000 313,488
Nine West Group, Inc.
9%, 8/15/07 (f) Ba3 260,000 254,800
Unifi, Inc. 6 1/2%, 2/1/08 A3 100,000 98,870
WestPoint Stevens, Inc.
7 7/8%, 6/15/08 (f) Ba3 460,000 461,725
Worldtex, Inc.
9 5/8%, 12/15/07 B1 670,000 670,000
1,798,883
TOTAL DURABLES 4,502,546
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
ENERGY - 0.3%
COAL - 0.1%
P&L Coal Holdings Corp.
9 5/8%, 5/15/08 (f) B2 $ 440,000 $ 452,100
ENERGY SERVICES - 0.1%
Ocean Rig Norway AS
10 1/4%, 6/1/08 (f) B3 300,000 284,250
OIL & GAS - 0.1%
Chesapeake Energy Corp.
9 5/8%, 5/1/05 (f) B1 210,000 210,525
Occidental Petroleum Corp.
9 3/4%, 6/15/01 Baa 100,000 109,832
Oryx Energy Co.:
8%, 10/15/03 Ba1 60,000 63,188
8 3/8%, 7/15/04 Ba1 80,000 86,250
Petroleum Geo-Services ASA
7 1/8%, 3/30/28 Baa 150,000 151,806
USX-Marathon Group
6.85%, 3/1/08 Baa 120,000 120,823
742,424
TOTAL ENERGY 1,478,774
FINANCE - 3.0%
ASSET-BACKED SECURITIES - 0.8%
Airplanes Pass Through Trust
Class D 10 7/8%, 3/15/19 Ba2 700,000 768,250
BankAmerica Manufacturing
Housing Center Trust V
6.20%, 4/10/09 Aaa 150,000 150,094
CPS Auto Grantor Trust:
6.55%, 12/15/02 Aaa 73,905 74,471
6%, 8/15/03 Aaa 192,251 192,071
6.09%, 11/15/03 Aaa 108,863 108,880
CSXT Receivables Master Trust
6%, 7/25/04 Aaa 180,000 180,422
Capital Equipment Receivables
Trust 6.48%, 10/15/06 Baa 100,000 100,021
Chase Manhattan Auto Owner
Trust 5.85%, 5/15/03 Aaa 190,000 190,089
Chevy Chase Auto Receivable
Trust 5.91%, 12/15/04 Aaa 100,000 99,860
Contimortgage Home Equity
Loan Trust 6.26%, 7/15/12 Aaa 150,000 150,140
Dayton Hudson Credit Card
Master Trust 6 1/4%,
8/25/05 Aaa 170,000 171,161
Ford Credit Auto Owner Trust:
6.40%, 5/15/02 A1 110,000 110,988
6.20%, 12/15/02 Baa 90,000 89,843
6.40%, 12/15/02 Baa 50,000 49,971
Green Tree Financial Corp.:
6 1/2%, 6/15/27 Aaa 97,787 97,969
6.80%, 6/15/27 Aaa 100,000 101,031
6.45%, 9/15/28 Aaa 110,000 110,825
6.68%, 1/15/29 Aaa 210,000 212,953
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Key Plastics, Inc.
10 1/4%, 3/15/07 A2 $ 130,000 $ 130,427
MBNA Master Credit Card
Trust II Class A
6.55%, 1/15/07 Aaa 290,000 299,692
Olympic Automobile Receivables
Trust:
6.40%, 9/15/01 Aaa 150,000 149,832
6.70%, 3/15/02 Aaa 70,000 70,894
Petroleum Enhanced Trust
Receivables Offering
Petroleum Trust
6.1875%, 2/5/03 (f) Baa 123,255 123,255
Premier Auto Trust
6.34%, 1/6/03 Aaa 220,000 221,993
UAF Auto Grantor Trust
6.10%, 1/15/03 (f) Aaa 195,317 195,399
WFS Financial Owner Trust
6.55%, 10/20/04 Aaa 140,000 140,643
4,291,174
BANKS - 0.6%
BanPonce Corp.
6.665%, 3/5/01 A3 150,000 151,833
Barclays Bank PLC yankee
5.95%, 7/15/01 A1 400,000 399,200
Capital One Bank:
6.42%, 11/12/99 Baa 500,000 501,450
6 3/8%, 2/15/03 Baa 130,000 129,877
Citicorp 5 5/8%, 2/15/01 Aa3 100,000 99,002
Den Danske Bank 6 3/8%,
6/15/08 (f)(h) A1 370,000 365,604
Fleet Credit Card LLC
6.45%, 10/30/00 A1 100,000 101,145
Fleet/Norstar Financial Group,
Inc. 9.9%, 6/15/01 A3 90,000 98,846
Huntington National Bank
5 7/8%, 1/15/01 A1 570,000 567,367
NB Capital Trust IV
8 1/4%, 4/15/27 Aa3 100,000 111,685
NationsBank NA
5.92%, 6/8/01 Aa2 250,000 249,923
Nationsbank Corp.
5.67%, 2/9/01 Aa3 250,000 248,608
Provident Bank
6 1/8%, 12/15/00 A3 180,000 180,139
Providian National Bank
6.70%, 3/15/03 Baa 100,000 101,100
3,305,779
CREDIT & OTHER FINANCE - 1.1%
A T & T Capital Corp.
6 1/4%, 5/15/01 Baa 250,000 250,285
Ahmanson Capital Trust I
8.36%, 12/1/26 (f) Baa 250,000 280,983
Associates Corp. of North
America 6%, 4/15/03 Aa3 150,000 149,244
BankAmerica Capital II,
Series 2, 8%, 12/15/26 Aa3 100,000 108,681
Bankers Trust Co.
5.66%, 7/21/98 (h) - 500,000 499,900
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
FINANCE - CONTINUED
CREDIT & OTHER FINANCE - CONTINUED
BanPonce Trust I
8.327%, 2/1/27 (f) A3 $ 230,000 $ 250,146
Countrywide Funding Corp.
6.45%, 2/27/03 A3 150,000 151,205
First Security Capital I
8.41%, 12/15/26 A3 110,000 123,463
Ford Motor Credit Co.
7%, 9/25/01 A1 325,000 333,132
GST Network Funding, Inc.
0%, 5/1/08 (d)(f) - 340,000 204,850
General Electric Capital Corp.
6.94%, 4/13/09 (e) Aaa 250,000 251,778
General Motors Acceptance Corp.
6 3/4%, 7/10/02 A3 260,000 265,213
Heller Financial, Inc.:
7 7/8%, 11/1/99 A3 180,000 183,847
6 1/4%, 3/1/01 A3 170,000 170,158
Iridium Operating LLC/Iridium
Capital Corp.
10 7/8%, 7/15/05 B3 660,000 655,050
KeyCorp Institutional Capital
Series A 7.826%, 12/1/26 A1 130,000 137,693
La Petite Academy, Inc.
10%, 5/15/08 (f) B3 530,000 535,300
Mellon Capital I, Series A,
7.72%, 12/1/26 A2 70,000 74,612
Money Store, Inc.
7.30%, 12/1/02 Ba2 100,000 104,188
Nordstrom Credit, Inc.
7 1/4%, 4/30/02 A2 100,000 104,469
PNC Funding Corp.
6 7/8%, 3/1/03 A3 570,000 583,218
U.S. Bancorp 8.09%,
11/15/26 A1 100,000 107,568
UNICCO Service Co./ UNICCO
Finance Corp.
9 7/8%, 10/15/07 B3 510,000 513,825
6,038,808
SAVINGS & LOANS - 0.3%
Chevy Chase Savings Bank FSB
9 1/4%, 12/1/08 B1 170,000 172,550
First Nationwide Parent Holdings
Ltd. 12 1/2%, 4/15/03 B3 530,000 602,875
Great West Financial Trust II
8.206%, 2/1/27 A3 120,000 131,074
Home Savings of America Irwindale
FSB 6 1/2%, 8/15/04 A3 90,000 90,787
Long Island Savings Bank FSB
Melville NY 7%, 6/13/02 Baa 280,000 288,428
1,285,714
SECURITIES INDUSTRY - 0.2%
Amvescap PLC
6 3/8%, 5/15/03 (f) A3 200,000 200,590
Merrill Lynch & Co., Inc.
5.5984%, 7/28/98 - 500,000 500,000
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Morgan Stanley, Dean Witter,
Discover & Co.
5.67%, 1/15/99 (h) A+ $ 500,000 $ 500,000
1,200,590
TOTAL FINANCE 16,122,065
HEALTH - 0.5%
MEDICAL EQUIPMENT & SUPPLIES - 0.1%
Graham-Field Health Products,
Inc. 9 3/4%, 8/15/07 B3 360,000 324,000
McKesson Corp.
6.60%, 3/1/00 A3 150,000 151,197
475,197
MEDICAL FACILITIES MANAGEMENT - 0.4%
Fountain View, Inc.
11 1/4%, 4/15/08 (f) Caa 310,000 315,425
Integrated Health Services, Inc.,
Series A, 9 1/4%, 1/15/08 B2 720,000 747,000
Magellan Health Services, Inc.
9%, 2/15/08 (f) B3 570,000 564,300
Tenet Healthcare Corp.:
8 5/8%, 1/15/07 Ba3 520,000 536,900
8 1/8%, 12/1/08 (f) Ba3 210,000 211,050
2,374,675
TOTAL HEALTH 2,849,872
HOLDING COMPANIES - 0.0%
Norfolk Southern Corp.
7.05%, 5/1/37 Baa 220,000 233,616
INDUSTRIAL MACHINERY & EQUIPMENT - 0.5%
ELECTRICAL EQUIPMENT - 0.1%
Echostar Communications Corp.
secured discount
0%, 6/1/04 (d) B2 362,000 352,498
Motors & Gears, Inc., Series D,
10 3/4%, 11/15/06 B3 90,000 95,400
447,898
INDUSTRIAL MACHINERY & EQUIPMENT - 0.3%
Bucyrus International, Inc.
9 3/4%, 9/15/07 B1 540,000 518,400
Goss Graphic System, Inc.
12%, 10/15/06 B2 110,000 112,750
Roller Bearing Holdings, Inc.
0%, 6/15/09 (d)(f) - 500,000 315,000
Thermadyne Manufacturing LLC
9 7/8%, 6/1/08 (f) B3 300,000 302,250
Tyco International Group SA
yankee:
6 1/8%, 6/15/01 Baa 270,000 270,221
6 3/8%, 6/15/05 Baa 180,000 180,457
1,699,078
POLLUTION CONTROL - 0.1%
Allied Waste North America
10 1/4%, 12/1/06 B2 290,000 318,275
Envirosource, Inc.
9 3/4%, 6/15/03 B3 120,000 118,500
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED
POLLUTION CONTROL - CONTINUED
WMX Technologies, Inc.:
8 1/4%, 11/15/99 Baa $ 40,000 $ 41,029
6 1/4%, 10/15/00 Baa 100,000 100,152
7.10%, 8/1/26 Baa 140,000 145,684
723,640
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 2,870,616
MEDIA & LEISURE - 5.0%
BROADCASTING - 3.7%
Adelphia Communications Corp.:
9 1/2%, 2/15/04 B2 971,399 986,825
9 7/8%, 3/1/07 B2 1,050,000 1,136,625
ACME Television LLC/ACME
Financial Corp.
0%, 9/30/04 (d) B3 290,000 238,525
Albritton Communications Co.
8 7/8%, 2/1/08 B3 460,000 496,800
Ascent Entertainment Group, Inc.
0%, 12/15/04 (d) B3 320,000 204,800
CSC Holdings, Inc.:
9 1/4%, 11/1/05 B1 260,000 278,200
9 7/8%, 5/15/06 B1 150,000 163,500
10 1/2%, 5/15/16 B1 280,000 326,200
Century Communications Corp.:
8 3/4%, 10/1/07 Ba3 180,000 189,900
0%, 1/15/08 Ba3 2,120,000 961,950
Clear Channel Communications, Inc.
6 7/8%, 6/15/18 Baa 150,000 150,285
Comcast UK Cable Partners Ltd.
0%, 11/15/07 B2 450,000 372,375
Continental Cablevision, Inc.:
8 5/8%, 8/15/03 Baa 130,000 142,672
8.30%, 5/15/06 Baa 40,000 44,412
9%, 9/1/08 Baa 120,000 141,104
Diamond Cable Communications
PLC yankee
0%, 12/15/05 (d) Caa 70,000 57,750
Echostar Satellite Broadcasting
Corp. 0%,
3/15/04 (d) B3 110,000 100,925
Falcon Holding Group LP/Falcon
Funding (f):
8 3/8%, 4/15/10 B2 405,000 408,038
0%, 4/15/10 (d) B2 1,105,000 715,488
Fox/Liberty Networks LLC/FLN
Finance, Inc. 0%,
8/15/07 (d) B1 340,000 236,300
FrontierVision Operating
Partners LP/Frontiervision
Capital Corp.:
11%, 10/15/06 B3 710,000 782,775
0%, 9/15/07 (d) Caa 600,000 463,500
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Granite Broadcasting Corp.:
10 3/8%, 5/15/05 B3 $ 210,000 $ 222,600
9 3/8%, 12/1/05 B3 600,000 618,000
8 7/8%, 5/15/08 (f) B3 430,000 436,450
Hearst-Argyle Television, Inc.
7 1/2%, 11/15/27 Baa 100,000 106,524
Intermedia Capital Partners IV
LP/Intermedia Partners IV
Capital Corp.
11 1/4%, 8/1/06 B2 180,000 203,400
International Cabletel, Inc.
0%, 2/1/06 (d) B3 220,000 178,750
Lenfest Communications, Inc.
8 1/4%, 2/15/08 (f) B2 570,000 595,650
LIN Holdings Corp.
0%, 3/1/08 (d)(f) B3 940,000 634,500
NTL, Inc.:
10%, 2/15/07 B3 230,000 245,525
0%, 4/1/08 (d)(f) B3 1,280,000 832,000
Olympus Communications
LP/Olympus Capital Corp
10 5/8%, 11/15/06 B1 160,000 176,800
Orion Network Systems, Inc.:
11 1/4%, 1/15/07 B2 80,000 88,400
0%, 1/15/07 (d) B2 230,000 173,650
Pegasus Communications Corp.,
Series B, 9 5/8%, 10/15/05 B3 180,000 184,950
Renaissance Media Group
0%, 4/15/08 (d)(f) B3 420,000 261,450
Rogers Cablesystems Ltd. yankee
11%, 12/1/15 B2 290,000 335,675
Satelites Mexicanos SA de CV
10 1/8%, 11/1/04 (f) B3 590,000 569,350
Sinclair Broadcast Group, Inc.
8 3/4%, 12/15/07 B2 390,000 401,213
TCI Communications, Inc.:
6.46%, 3/6/00 Baa 200,000 201,796
6 7/8%, 2/15/06 Baa 190,000 195,995
7 1/8%, 2/15/28 Baa 140,000 146,160
TCI Communications Financing III
9.65%, 3/31/27 Ba2 820,000 992,200
Tele Communications, Inc.
9 1/4%, 4/15/02 Baa 100,000 110,232
Telemundo Group, Inc.
7%, 2/15/06 (e) B1 200,000 215,500
Telewest PLC:
yankee 9 5/8%, 10/1/06 B1 90,000 94,275
0%, 10/1/07 (d) B1 940,000 776,675
Time Warner, Inc.:
7.95%, 2/1/00 Baa 95,000 97,618
8.18%, 8/15/07 Baa 180,000 200,572
6 7/8%, 6/15/18 Baa 180,000 180,702
UIH Australia/Pacific, Inc.,
Series B, 0%, 5/15/06 (d) B2 1,020,000 601,800
United International Holdings,
Inc. 0%, 2/15/08 (d) B3 1,280,000 780,800
19,458,161
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
MEDIA & LEISURE - CONTINUED
ENTERTAINMENT - 0.8%
AMC Entertainment, Inc.
9 1/2%, 3/15/09 B2 $ 645,000 $ 641,775
American Skiing Co.
12%, 7/15/06 B3 370,000 414,400
Bally Total Fitness Holding Corp.,
Series B, 9 7/8%, 10/15/07 B3 578,000 595,340
Cinemark USA, Inc.
8 1/2%, 8/1/08 (Reg. S) B2 420,000 410,550
Livent, Inc.
9 3/8%, 10/15/04 B1 420,000 421,050
Paramount Communications, Inc.
7 1/2%, 1/15/02 Ba2 110,000 112,971
Premier Parks, Inc.
0%, 4/1/08 B3 370,000 245,588
United Artists Theatre Co.
9 3/4%, 4/15/08 (f) Caa 590,000 588,525
Viacom, Inc.:
6 3/4%, 1/15/03 Ba2 365,000 368,646
7 3/4%, 6/1/05 Ba2 230,000 245,054
4,043,899
LODGING & GAMING - 0.1%
Aladdin Gaming Holdings/Aladdin
Capital Units
13 1/2%, 3/1/10 (e)(f) Caa 400,000 186,000
Courtyard by Marriott II
LP/Courtyard II Finance Co.,
Series B, 10 3/4%, 2/1/08 B- 340,000 373,150
Sun International Hotels Ltd./Sun
International North America,
Inc. yankee 9%, 3/15/07 Ba3 260,000 273,000
832,150
PUBLISHING - 0.3%
Garden State Newspapers, Inc.:
Series B, 8 3/4%, 10/1/09 B1 440,000 446,600
8 3/4%, 10/1/09 (j) B1 450,000 454,500
News America Holdings, Inc.:
8 1/2%, 2/15/05 Baa 170,000 188,318
7.70%, 10/30/25 Baa 210,000 225,267
News America, Inc.
7 1/4%, 5/18/18 (f) Baa 130,000 133,206
1,447,891
RESTAURANTS - 0.1%
Host Marriott Travel Plazas, Inc.
9 1/2%, 5/15/05 Ba3 450,000 474,750
TOTAL MEDIA & LEISURE 26,256,851
NONDURABLES - 0.3%
FOODS - 0.0%
Chiquita Brands International, Inc.
9 5/8%, 1/15/04 B1 140,000 147,350
ConAgra, Inc.
7 1/8%, 10/1/26 Baa 150,000 159,876
Del Monte Corp.
12 1/4%, 4/15/07 Caa 30,000 33,825
Del Monte Foods Co.
0%, 12/15/07 (f) Caa 40,000 26,000
367,051
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
HOUSEHOLD PRODUCTS - 0.2%
Revlon Consumer Products Corp.
8 5/8%, 2/1/08 B3 $ 900,000 $ 900,000
TOBACCO - 0.1%
Philip Morris Companies, Inc.:
7 1/4%, 9/15/01 A2 150,000 153,860
7%, 7/15/05 A2 150,000 153,458
6.95%, 6/1/06 A2 140,000 145,020
452,338
TOTAL NONDURABLES 1,719,389
RETAIL & WHOLESALE - 1.3%
APPAREL STORES - 0.1%
AnnTaylor, Inc.
8 3/4%, 6/15/00 B3 440,000 437,800
Specialty Retailers, Inc.
8 1/2%, 7/15/05 Ba3 110,000 113,025
550,825
GENERAL MERCHANDISE STORES - 0.4%
Dayton Hudson Corp.:
6.80%, 10/1/01 A3 150,000 153,191
7 1/2%, 7/15/06 A3 250,000 270,065
Federated Department Stores, Inc.:
10%, 2/15/01 Baa 250,000 271,898
8 1/8%, 10/15/02 Baa 50,000 53,331
6.79%, 7/15/27 Baa 100,000 102,305
7%, 2/15/28 Baa 140,000 142,491
K Mart Corp.:
12 1/2%, 3/1/05 Ba2 510,000 634,950
7 3/4%, 10/1/12 Ba2 40,000 40,500
8 1/4%, 1/1/22 Ba2 200,000 204,500
1,873,231
GROCERY STORES - 0.5%
Ameriserve Food Distribution, Inc.
8 7/8%, 10/15/06 B1 330,000 330,000
Fleming Companies, Inc., Series B,
10 5/8%, 7/31/07 B3 100,000 104,375
Fred Meyer, Inc.
7.45%, 3/1/08 Ba2 80,000 80,600
Kroger Co.:
6%, 7/1/00 Baa 250,000 249,735
8.15%, 7/15/06 Baa 125,000 138,195
Mrs. Fields Original Cookies, Inc.
10 1/8%, 12/1/04 B2 160,000 155,200
Pathmark Stores, Inc.:
12 5/8%, 6/15/02 Caa 370,000 374,163
9 5/8%, 5/1/03 Caa 810,000 820,125
Pueblo Xtra International, Inc.:
9 1/2%, 8/1/03 B3 670,000 648,200
2,900,593
RETAIL & WHOLESALE, MISCELLANEOUS - 0.3%
Amazon.com, Inc.
0%, 5/1/08 (d)(f) Caa 260,000 158,600
Central Tractor Farm & Country, Inc.
10 5/8%, 4/1/07 B2 230,000 242,650
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
RETAIL & WHOLESALE - CONTINUED
RETAIL & WHOLESALE, MISCELLANEOUS - CONTINUED
J Crew Operating Corp.
10 3/8%, 10/15/07 Caa $ 390,000 $ 370,500
Metals USA, Inc.
8 5/8%, 2/15/08 (f) B2 700,000 677,250
1,449,000
TOTAL RETAIL & WHOLESALE 6,773,649
SERVICES - 0.3%
PRINTING - 0.0%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 210,000 221,025
SERVICES - 0.3%
Borg-Warner Security Corp.
9 5/8%, 3/15/07 B3 110,000 123,200
Iron Mountain, Inc.
8 3/4%, 9/30/09 B3 330,000 336,600
Medaphis Corp.
9 1/2%, 2/15/05 (f) B2 820,000 795,400
Signature Resorts, Inc.
9 3/4%, 10/1/07 B3 340,000 330,650
1,585,850
TOTAL SERVICES 1,806,875
TECHNOLOGY - 0.5%
COMPUTER SERVICES & SOFTWARE - 0.2%
Federal Data Corp.
10 1/8%, 8/1/05 B3 630,000 639,450
ICG Services, Inc.
0%, 5/1/08 (f) - 750,000 438,750
PSINet, Inc. 10%, 2/15/05 B3 140,000 142,450
1,220,650
COMPUTERS & OFFICE EQUIPMENT - 0.1%
Comdisco, Inc.:
7.21%, 7/2/01 Baa 125,000 129,070
6 3/8%, 11/30/01 Baa 300,000 301,272
430,342
ELECTRONIC INSTRUMENTS - 0.1%
Telecommunications Techniques Co.
9 3/4%, 5/15/08 (f) B3 390,000 396,825
ELECTRONICS - 0.1%
Advanced Micro Devices, Inc.
11%, 8/1/03 Ba3 280,000 296,800
Fairchild Semiconductor Corp.
11.74%, 3/15/08
pay-in-kind (j) - 235,663 226,262
523,062
TOTAL TECHNOLOGY 2,570,879
TRANSPORTATION - 0.7%
AIR TRANSPORTATION - 0.4%
Atlas Air, Inc. 9 1/4%,
4/15/08 (f) B3 880,000 878,900
Kitty Hawk, Inc.
9.95%, 11/15/04 B1 945,000 982,800
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
US Air, Inc.:
9 5/8%, 2/1/01 B1 $ 80,000 $ 83,400
10 3/8%, 3/1/13 Ba2 360,000 398,700
2,343,800
RAILROADS - 0.1%
CSX Corp. 6.46%, 6/22/05 Baa 200,000 201,754
Wisconsin Central Transport Corp.
6 5/8%, 4/15/08 Baa 50,000 49,904
251,658
SHIPPING - 0.2%
Amer Reefer Co. Ltd.
10 1/4%, 3/1/08 (f) B1 140,000 140,000
Cenargo International PLC
9 3/4%, 6/15/08 (f) Ba3 740,000 728,900
Holt Group, Inc.
9 3/4%, 1/15/06 (f) Caa 290,000 284,200
1,153,100
TOTAL TRANSPORTATION 3,748,558
UTILITIES - 2.1%
CELLULAR - 0.8%
AirTouch Communications, Inc.
6.35%, 6/1/05 Baa 270,000 271,210
McCaw International Ltd.
0%, 4/15/07 (d) Caa 910,000 596,050
Nextel International, Inc.
12 1/8%, 4/15/08 (f) Caa 870,000 504,600
Nextel Communications, Inc. (d):
0%, 9/15/07 B2 266,000 179,550
0%, 10/31/07 B2 1,310,000 854,775
0%, 2/15/08 (f) B2 1,140,000 732,450
PageMart Wireless, Inc.
0%, 2/1/08 (d) Caa 530,000 318,000
Rogers Communications, Inc.
8 7/8%, 7/15/07 B2 460,000 463,450
3,920,085
ELECTRIC UTILITY - 0.2%
Avon Energy Partners Holdings (f):
6.73%, 12/11/02 Baa 170,000 172,846
6.46%, 3/4/08 Baa 130,000 130,576
Hydro-Quebec yankee
7.40%, 3/28/25 A2 90,000 108,639
Israel Electric Corp. Ltd. (f):
yankee 7 7/8%,
12/15/26 A3 80,000 84,906
7 3/4%, 12/15/27 A3 170,000 175,219
Niagara Mohawk Power Corp.
7 3/4%, 10/1/08 Ba3 110,000 112,613
NIPSCO Capital Markets, Inc.
7.39%, 4/1/04 Baa 100,000 104,719
Texas Utilities Co.
6 3/8%, 1/1/08 Baa 70,000 69,230
958,748
TELEPHONE SERVICES - 1.1%
Cable & Wireless Communications
PLC 6 3/8%, 3/6/03 Baa 170,000 170,143
Dobson Wireline Co.
12 1/4%, 6/15/08 (f) - 785,000 767,338
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
UTILITIES - CONTINUED
TELEPHONE SERVICES - CONTINUED
GCI, Inc. 9 3/4%, 8/1/07 B2 $ 80,000 $ 82,800
Hyperion Telecommunications, Inc.:
Series B, 0%, 4/15/03 (d) B3 1,100,000 816,750
12 1/4%, 9/1/04 B3 440,000 473,000
McLeodUSA, Inc.:
0%, 3/1/07 (d) B2 580,000 433,550
9 1/4%, 7/15/07 B2 270,000 280,463
NEXTLINK Communications, Inc.
9 5/8%, 10/1/07 B3 600,000 613,500
Pathnet, Inc. Unit
12 1/2%, 4/15/08 (f) - 810,000 858,600
Teleport Communications Group,
Inc. 0%, 7/1/07 (d) Baa 350,000 300,563
Winstar Communications, Inc.
11%, 3/15/08 (f) - 380,000 378,100
WorldCom, Inc.:
9 3/8%, 1/15/04 Baa 122,000 128,139
8 7/8%, 1/15/06 Baa 103,000 112,051
7 3/4%, 4/1/07 Baa 550,000 596,563
6,011,560
TOTAL UTILITIES 10,890,393
TOTAL NONCONVERTIBLE BONDS 85,448,463
TOTAL CORPORATE BONDS
(Cost $84,785,652) 85,884,863
U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS - 3.1%
U.S. TREASURY OBLIGATIONS - 2.8%
U.S. Treasury Bonds:
12 3/4%, 11/15/10
(callable) Aaa 250,000 356,055
8 7/8%, 2/15/19 Aaa 259,000 356,731
7 5/8%, 2/15/25 Aaa 1,380,000 1,737,503
U.S. Treasury Notes:
5 7/8%, 10/31/98 Aaa 110,000 110,166
5 5/8%, 11/30/99 Aaa 1,466,000 1,467,833
6 7/8%, 3/31/00 Aaa 1,275,000 1,303,292
6 5/8%, 6/30/01 Aaa 395,000 406,542
7 7/8, 11/15/04 Aaa 2,030,000 2,279,934
7%, 7/15/06 Aaa 6,380,000 6,967,151
14,985,207
U.S. GOVERNMENT AGENCY OBLIGATIONS - 0.2%
Federal Home Loan Bank:
7.31%, 6/16/04 Aaa 125,000 134,570
7.56%, 9/1/04 Aaa 50,000 54,633
Freddie Mac 6.783%,
8/18/05 Aaa 440,000 464,614
Fannie Mae:
6.97%, 4/8/04 Aaa 190,000 201,221
7.40%, 7/1/04 Aaa 170,000 183,840
6.44%, 6/21/05 Aaa 250,000 259,258
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Guaranteed Export Trust
Certificates (assets of Trust
guaranteed by U.S.
Government through
Export-Import Bank)
Series 1994-A,
7.12%, 4/15/06 Aaa $ 120,831 $ 126,403
U.S. Department of Housing and
Urban Development Government
guaranteed participation
certificates Series 1995-A,
8.24%, 8/1/04 Aaa 20,000 22,437
1,446,976
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $16,105,483) 16,432,183
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 3.3%
Freddie Mac:
7 1/2%, 3/1/28 to 4/1/28 Aaa 193,084 337,233
Fannie Mae:
6%, 3/1/11 to 4/1/13 Aaa 3,192,792 3,159,381
6 1/2%, 2/1/13 to 10/1/27 Aaa 4,022,158 4,025,460
6 1/2%, 6/1/28 Aaa 1,400,000 1,394,750
7%, 7/1/28 (g) Aaa 5,586,835 5,665,400
7 1/2%, 5/1/24 to 1/1/26 Aaa 924,860 948,850
Government National Mortgage Association:
7%, 7/15/28 (g) Aaa 1,000,000 1,015,938
7 1/2%, 7/15/28 Aaa 1,100,000 1,130,594
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $17,495,379) 17,677,606
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.0%
PRIVATE SPONSOR - 0.0%
Credit-Based Asset Servicing and
Securitization LLC Series 1997-2
Class 2-B, 7.2891%,
12/29/25 (f)(h)(k)
(Cost $132,891) Ba3 250,000 120,547
COMMERCIAL MORTGAGE SECURITIES - 1.2%
Asset Securitization Corp.
Series 1997-D5 Class A-6,
0%, 2/14/41 BBB 100,000 100,047
Blackrock Capital Funding LLC
Series 1996 Class C2,
7.6964%, 11/16/26 (f) - 12,443 12,432
BKB Commercial Mortgage Trust
Series 1997-C1 Class D,
7.83%, 2/25/43 (f)(h) BBB 60,000 60,778
COMMERCIAL MORTGAGE SECURITIES - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
CBM Funding Corp. sequential
pay:
Series 1996-1 Class A-3PI,
7.08%, 11/1/07 AA $ 100,000 $ 104,641
Series 1996-1 Class B,
7.48%, 2/1/08 A 80,000 86,325
CS First Boston Mortgage
Securities Corp.:
Series 1997-C2 Class D,
7.27%, 4/17/11 Baa 190,000 194,869
Series 1998-C1 Class D,
7.17%, 1/17/12 BBB 210,000 213,413
Series 1998-FL1 Class E,
6.5063%, 1/10/13 (f)(h) Baa 220,000 220,000
DLJ Mortgage Acceptance Corp.
Series 1993-MF12 Class B-2,
10.10%, 9/18/03 (f) - 250,000 256,250
Deutsche Mortgage and Asset
Receiving Corp.
Series 1998-C1 Class D,
7.231%, 7/15/12 Baa 140,000 141,936
Franchise Mortgage Acceptance
Company LLC Loan
Receivables Trust (f)(h):
Series 1997-A Class E, 8.1047%,
4/15/19 - 250,000 240,664
Series 1997-B Class E, 7.8912%,
9/15/19 - 100,000 90,250
First Chicago/Lennar Trust I (h):
Series 1997-CHL1 Class D,
8.1077%, 5/29/08 - 350,000 350,492
Series 1997-CHL1 Class E,
8.1077%, 2/28/11 - 320,000 284,650
First Union-Lehman Brothers
Commercial Mortgage Trust
sequential pay Series 1997-C2
Class B, 6.79%, 10/18/11 Aa2 390,000 399,567
General Motors Acceptance
Corp. Commercial Mortgage
Securities, Inc. Series 1996-C1
Class F, 7.86%,
11/15/06 (f) Ba3 250,000 243,300
GS Mortgage Securities Corp. II:
Series 1997- GL Class A2-B,
6.86%, 7/13/30 Aaa 140,000 145,389
Series 1998-GLII Class D,
7.1905%, 4/13/31 (f)(h) Baa 50,000 50,511
Series 1998-GLII Class E,
7.1905%, 4/13/31 (f)(h) Baa 180,000 176,276
Kidder Peabody Acceptance
Corp. sequential pay,
Series 1993-M1 Class A-2,
7.15%, 4/25/25 Aa2 52,797 52,731
LTC Commercial Mortgage
Pass-Through Certificates:
Series 1996-1 Class E,
9.16%, 4/15/28 BB- 500,000 517,500
Series 1998-1 Class A,
6.029%, 5/30/30 (f) Aaa 109,661 107,648
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Morgan Stanley Capital One, Inc.:
Series 1996-MBL1 Class E,
8.661%, 5/25/21 (f) - $ 90,682 $ 89,095
Series 1998-HF1 Class D,
7.10%, 2/15/08 (h) BBB 180,000 182,700
Nomura Depositor Trust
Series 1998-ST1A Class B-2,
12.6563%, 1/15/03 (f) - 125,000 124,238
Nomura Asset Securities Corp.
Series 1998-D6 Class A-4,
7.5941%, 3/15/30 (h) Baa 140,000 144,102
Resolution Trust Corp. Series 1991-M2
Class A-3, 7.2498%,
9/25/20 (h) Ba3 74,288 63,887
Structured Asset Securities Corp.:
Series 1993-C1 Class E,
6.60%, 10/25/24 (f) B 250,000 125,000
Series 1995-C1 Class E,
7 3/8%, 9/25/24 (f) BB 1,000,000 972,500
sequential pay Series 1996
Class A-2A, 7 3/4%,
2/25/28 Aaa 52,255 52,777
commercial Series 1996-CFL
Class E, 7 3/4%, 2/25/28 BB+ 80,000 80,975
Thirteen Affiliates of General
Growth Properties, Inc. (f):
Series D-2,
6.992%, 11/15/12 Baa 140,000 140,454
Series E-2,
7.224%, 11/15/12 Baa 100,000 99,237
sequential pay Series A-2,
6.602%, 11/15/12 Aaa 130,000 133,203
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $5,966,800) 6,257,837
FOREIGN GOVERNMENT OBLIGATIONS (I) - 0.1%
Export Development Corp. yankee
8 1/8%, 8/10/99 Aa2 50,000 51,193
Manitoba Province yankee
6 3/8%, 10/15/99 A1 125,000 125,699
Newfoundland Province yankee
11 5/8%, 10/15/07 Baa 250,000 344,610
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $509,612) 521,502
SUPRANATIONAL OBLIGATIONS - 0.0%
Inter American Development Bank
yankee 6.29%, 7/16/27
(Cost $149,057) Aaa 150,000 157,832
BANK NOTES - 0.1%
Key Bank N.A 5.6488%, 8/20/99
(Cost $499,330) 500,000 499,525
CERTIFICATES OF DEPOSIT - 0.6%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Banque Nationale de Paris yankee
5 3/4%, 7/31/98 $ 200,000 $ 199,976
Canadian Imperial Bank of Commerce:
NY Branch yankee 6.20%, 8/1/00 180,000 180,954
5.91%, 8/28/98 500,000 500,023
Chase Manhattan Bank USA
5.54%, 7/6/98 400,000 399,996
RaboBank Nederland Cooperative Central
yankee 5.68%, 6/4/99 400,000 399,809
Societe Generale France yankee
5.91%, 10/15/98 400,000 400,073
Toronto-Dominion Bank yankee
5.68%, 6/4/99 400,000 399,809
Westpac Banking Corp. yankee
5.885%, 8/27/98 500,000 499,995
TOTAL CERTIFICATES OF DEPOSIT
(Cost $2,979,219) 2,980,635
COMMERCIAL PAPER - 0.5%
Aspen Funding Corp. yankee
5.54%, 7/20/98 400,000 398,814
BMW US Capital Corp. yankee
5.53%, 8/5/98 252,000 250,628
Citibank Credit Card Master Trust I
(Dakota Certificate Program)
5.52%, 8/5/98 300,000 298,373
Morgan (JP) & Co., Inc.
5 1/2%, 11/10/98 400,000 391,948
New Center Asset Trust
5.54%, 9/21/98 400,000 395,007
Triple A One Funding Corp.
5.54%, 7/8/98 400,000 399,562
UBS Finance, Inc. yankee
5.53%, 8/5/98 400,000 397,842
TOTAL COMMERCIAL PAPER
(Cost $2,532,168) 2,532,174
MASTER NOTES - 0.0%
Goldman Sachs Group LP
5.72%, 1/27/99
(Cost $300,000) 300,000 300,000
CASH EQUIVALENTS - 3.5%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations), in a joint
trading account at 5.93%, dated
6/30/98 due 7/1/98 $ 625,103 625,000
SHARES
Taxable Central Cash Fund (b) 17,717,215 17,717,215
TOTAL CASH EQUIVALENTS
(Cost $18,342,215) 18,342,215
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $460,667,441) $ 530,383,488
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield of the Taxable Central Cash
Fund was 5.61%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(c) Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investors Service, Inc.
(d) Debt obligation initially issued in zero coupon form which
converts to coupon form at a specified rate and date. The rate shown
is the rate at period end.
(e) Debt obligation initially issued at one coupon which converts to
a higher coupon at a specified date. The rate shown is the rate at
period end.
(f) Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions
exempt from registration, normally to qualified institutional buyers.
At the period end, the value of these securities amounted to
$26,792,777 or 5.1% of net assets.
(g) Security purchased on a delayed delivery or when-issued basis
(see Note 2 of Notes to Financial Statements).
(h) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(i) For foreign government obligations not individually rated by S&P
or Moody's, the ratings listed are assigned to securities by FMR, the
fund's investment adviser, based principally on S&P and Moody's
ratings of the sovereign credit of the issuing government.
(j) Restricted securities - Investment in securities not registered
under the Securities Act of 1933 (see Note 2 of Notes to Financial
Statements).
Additional information on each holding is as follows:
ACQUISITION ACQUISITION
SECURITY DATE COST
Fairchild Semiconductor
Corp. 11.74%, 3/15/08
pay in kind: 4/3/97 $ 184,988
9/15/97 $ 12,698
3/15/98 $ 12,965
Garden State
Newspapers, Inc.
8 3/4%, 10/1/09 2/11/98 $ 465,750
(k) Non-income producing - issuer filed for protection under the
Federal Bankruptcy Code or is in default of interest payment.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $299,004,872 and $302,860,115, respectively, of which
long-term U.S. government and government agency obligations aggregated
$72,759,717 and $55,081,946, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $27,166 for the
period (see Note 4 of Notes to Financial Statements).
The composition of long-term debt holdings as a percentage of total
value of investment in securities, is as follows (ratings are
unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 8.6% AAA, AA, A 8.3%
Baa 2.3% BBB 2.6%
Ba 2.0% BB 2.6%
B 8.3% B 7.8%
Caa 1.0% CCC 1.0%
Ca, C 0.0% CC, C 0.0%
D 0.0%
For some foreign government obligations, FMR has assigned the ratings
of the sovereign credit of the issuing government. The percentage not
rated by Moody's or S&P amounted to 1.2%. FMR has determined that
unrated debt securities that are lower quality account for 1.2% of the
total value of investment in securities.
INCOME TAX INFORMATION
At June 30, 1998, the aggregate cost of investment securities for
income tax purposes was $460,692,241. Net unrealized appreciation
aggregated $69,691,247, of which $78,694,992 related to appreciated
investment securities and $9,003,745 related to depreciated investment
securities.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 30, 1998 (UNAUDITED)
ASSETS
INVESTMENT IN SECURITIES, AT VALUE (INCLUDING REPURCHASE AGREEMENTS OF $625,000) (COST
$460,667,441) - SEE $ 530,383,488
ACCOMPANYING SCHEDULE
RECEIVABLE FOR INVESTMENTS SOLD 2,086,273
RECEIVABLE FOR FUND SHARES SOLD 255,303
DIVIDENDS RECEIVABLE 649,483
INTEREST RECEIVABLE 2,065,736
TOTAL ASSETS 535,440,283
LIABILITIES
PAYABLE TO CUSTODIAN BANK $ 36,733
PAYABLE FOR INVESTMENTS PURCHASED 3,954,568
REGULAR DELIVERY
DELAYED DELIVERY 7,707,551
PAYABLE FOR FUND SHARES REDEEMED 862,639
ACCRUED MANAGEMENT FEE 252,968
DISTRIBUTION FEES PAYABLE 67
OTHER PAYABLES AND 83,471
ACCRUED EXPENSES
TOTAL LIABILITIES 12,897,997
NET ASSETS $ 522,542,286
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 423,363,916
UNDISTRIBUTED NET INVESTMENT INCOME 5,955,457
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS 23,507,312
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 69,715,601
AND ASSETS AND LIABILITIES IN
FOREIGN CURRENCIES
NET ASSETS $ 522,542,286
INITIAL CLASS: $16.10
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($521,474,865 (DIVIDED BY) 32,394,455
SHARES)
SERVICE CLASS: $16.04
NET ASSET VALUE AND OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($1,067,421 (DIVIDED BY) 66,531 SHARES)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME $ 3,066,987
DIVIDENDS
INTEREST 4,793,392
TOTAL INCOME 7,860,379
EXPENSES
MANAGEMENT FEE $ 1,485,555
TRANSFER AGENT FEES 173,911
DISTRIBUTION FEES - SERVICE CLASS 127
ACCOUNTING FEES AND EXPENSES 105,646
NON-INTERESTED TRUSTEES' COMPENSATION 921
CUSTODIAN FEES AND EXPENSES 12,675
AUDIT 23,776
LEGAL 2,832
TOTAL EXPENSES BEFORE REDUCTIONS 1,805,443
EXPENSE REDUCTIONS (50,059) 1,755,384
NET INVESTMENT INCOME 6,104,995
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 23,729,887
FOREIGN CURRENCY TRANSACTIONS (263) 23,729,624
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 22,643,508
ASSETS AND LIABILITIES IN 4,650 22,648,158
FOREIGN CURRENCIES
NET GAIN (LOSS) 46,377,782
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 52,482,777
OTHER INFORMATION $ 46,143
EXPENSE REDUCTIONS
DIRECTED BROKERAGE ARRANGEMENTS
CUSTODIAN CREDITS 3,916
$ 50,059
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
OPERATIONS $ 6,104,995 $ 9,495,223
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 23,729,624 45,670,158
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) 22,648,158 28,894,868
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 52,482,777 84,060,249
DISTRIBUTIONS TO SHAREHOLDERS (9,747,110) -
FROM NET INVESTMENT INCOME
FROM NET REALIZED GAIN (45,582,074) (447,876)
TOTAL DISTRIBUTIONS (55,329,184) (447,876)
SHARE TRANSACTIONS - NET INCREASE (DECREASE) 42,147,656 146,605,112
TOTAL INCREASE (DECREASE) IN NET ASSETS 39,301,249 230,217,485
NET ASSETS
BEGINNING OF PERIOD 483,241,037 253,023,552
END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $5,955,457 AND
$9,445,834, RESPECTIVELY) $ 522,542,286 $ 483,241,037
</TABLE>
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998
SHARES DOLLARS YEAR ENDED DECEMBER 31, 1997
(UNAUDITED) SHARES DOLLARS
SHARE TRANSACTIONS 3,232,190 $ 51,150,975 13,903,953 $ 201,184,575
INITIAL CLASS
SOLD
REINVESTED 3,710,796 55,327,974 32,763 447,876
REDEEMED (4,088,960) (65,374,236) (3,709,989) (55,037,339)
NET INCREASE (DECREASE) 2,854,026 $ 41,104,713 10,226,727 $ 146,595,112
SERVICE CLASS A 65,996 $ 1,044,479 627 $ 10,000
SOLD
REINVESTED 81 1,210 - -
REDEEMED (173) (2,746) - -
NET INCREASE (DECREASE) 65,904 $ 1,042,943 627 $ 10,000
DISTRIBUTIONS $ 9,746,897 $ -
INITIAL CLASS - NET INVESTMENT INCOME
INITIAL CLASS - NET REALIZED GAIN 45,581,077 447,876
TOTAL $ 55,327,974 $ 447,876
SERVICE CLASS - NET INVESTMENT INCOME $ 213 $ -
SERVICE CLASS - NET REALIZED GAIN 997 -
TOTAL $ 1,210 $ -
$ 55,329,184 $ 447,876
A SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JANUARY 3, 1995
JUNE 30, 1998 COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31,
SELECTED PER-SHARE DATA (UNAUDITED) 1997 1996 1995
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.36 $ 13.10 $ 11.77 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .19 D .36 D .21 .10
NET REALIZED AND UNREALIZED GAIN (LOSS) 1.48 2.92 2.08 2.20
TOTAL FROM INVESTMENT OPERATIONS 1.67 3.28 2.29 2.30
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.34) - (.21) (.11)
FROM NET REALIZED GAIN (1.59) (.02) (.75) (.42)
TOTAL DISTRIBUTIONS (1.93) (.02) (.96) (.53)
NET ASSET VALUE, END OF PERIOD $ 16.10 $ 16.36 $ 13.10 $ 11.77
TOTAL RETURN B, C 11.15% 25.07% 20.04% 23.02%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 521,475 $ 483,231 $ 253,024 $ 68,247
RATIO OF EXPENSES TO AVERAGE NET ASSETS .73% A .77% .87% 1.00% F
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS .71% A, G .76% G .85% G 1.00%
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 2.46% A 2.44% 2.63% 1.69%
PORTFOLIO TURNOVER 125% A 90% 120% 343%
AVERAGE COMMISSION RATE H $ .0392 $ .0399 $ .0211
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
SELECTED PER-SHARE DATA (UNAUDITED) 1997 E
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.35 $ 15.94
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .19 D .07 D
NET REALIZED AND UNREALIZED GAIN (LOSS) 1.43 .34
TOTAL FROM INVESTMENT OPERATIONS 1.62 .41
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.34) -
FROM NET REALIZED GAIN (1.59) -
TOTAL DISTRIBUTIONS (1.93) -
NET ASSET VALUE, END OF PERIOD $ 16.04 $ 16.35
TOTAL RETURN B, C 10.82% 2.57%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 1,067 $ 10
RATIO OF EXPENSES TO AVERAGE NET ASSETS .83% A .87% A
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS .81% A, G .87% A
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 2.60% A 2.70% A
PORTFOLIO TURNOVER 125% A 90%
AVERAGE COMMISSION RATE H $ .0392 $ .0399
</TABLE>
A ANNUALIZED
B TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE
THE TOTAL RETURNS SHOWN. TOTAL RETURNS FOR PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 7 OF NOTES TO
FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3,1997 (COMMENCEMENT OF SALE OF SERVICE
CLASS SHARES) TO DECEMBER 31, 1997.
F FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD
HAVE BEEN HIGHER.
G FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES
(SEE NOTE 7 OF NOTES TO FINANCIAL STATEMENTS).
H FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS
REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR
SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY
FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES
EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION
RATE STRUCTURES MAY DIFFER.
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
JUNE 30, 1998 YEAR YEARS YEARS
VIP: EQUITY-INCOME - "INITIAL CLASS" 21.65% 20.01% 15.74%
S&P 500 (REGISTERED TRADEMARK) 30.16% 23.08% 18.56%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare these figures to the performance of the Standard &
Poor's 500 Index - a widely recognized, unmanaged index of common
stocks. This benchmark reflects the reinvestment of dividends and
capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER THE PAST 10 YEARS
VIP Equity-Income S&P 500
00150 SP001
1988/06/30 10000.00 10000.00
1988/07/31 9981.88 9962.00
1988/08/31 9809.78 9623.29
1988/09/30 10101.27 10033.24
1988/10/31 10275.59 10312.17
1988/11/30 10110.45 10164.70
1988/12/31 10202.74 10342.59
1989/01/31 10832.89 11099.66
1989/02/28 10777.29 10823.28
1989/03/31 11010.72 11075.46
1989/04/30 11435.66 11650.28
1989/05/31 11775.62 12122.12
1989/06/30 11783.68 12053.02
1989/07/31 12470.67 13141.41
1989/08/31 12671.04 13398.98
1989/09/30 12528.59 13344.05
1989/10/31 11805.78 13034.46
1989/11/30 11873.25 13300.37
1989/12/31 11972.33 13619.58
1990/01/31 11163.78 12705.70
1990/02/28 11229.94 12869.61
1990/03/31 11248.46 13210.65
1990/04/30 10858.45 12880.38
1990/05/31 11576.88 14136.22
1990/06/30 11461.61 14040.10
1990/07/31 11181.30 13995.17
1990/08/31 10288.45 12730.00
1990/09/30 9490.36 12110.05
1990/10/31 9248.37 12057.98
1990/11/30 9911.22 12836.92
1990/12/31 10141.83 13195.07
1991/01/31 10685.72 13770.38
1991/02/28 11421.56 14754.96
1991/03/31 11658.49 15112.03
1991/04/30 11712.97 15148.30
1991/05/31 12355.82 15802.71
1991/06/30 11850.61 15078.94
1991/07/31 12522.44 15781.62
1991/08/31 12786.76 16155.65
1991/09/30 12699.00 15885.85
1991/10/31 12910.47 16098.72
1991/11/30 12353.98 15449.94
1991/12/31 13330.27 17217.41
1992/01/31 13510.26 16897.17
1992/02/29 13948.97 17116.83
1992/03/31 13778.05 16783.05
1992/04/30 14209.68 17276.48
1992/05/31 14323.26 17361.13
1992/06/30 14197.86 17102.45
1992/07/31 14632.96 17801.94
1992/08/31 14312.36 17437.00
1992/09/30 14460.93 17642.76
1992/10/31 14634.05 17704.51
1992/11/30 15164.94 18308.23
1992/12/31 15581.37 18533.42
1993/01/31 16046.49 18689.10
1993/02/28 16406.95 18943.27
1993/03/31 16895.89 19342.98
1993/04/30 16825.64 18874.88
1993/05/31 17130.07 19380.72
1993/06/30 17331.56 19436.93
1993/07/31 17567.36 19359.18
1993/08/31 18239.40 20092.89
1993/09/30 18169.67 19938.18
1993/10/31 18335.82 20350.90
1993/11/30 18015.39 20157.56
1993/12/31 18431.81 20401.47
1994/01/31 19243.57 21095.12
1994/02/28 18748.02 20523.44
1994/03/31 17963.70 19628.62
1994/04/30 18582.70 19879.87
1994/05/31 18759.56 20205.90
1994/06/30 18643.66 19710.85
1994/07/31 19266.39 20357.37
1994/08/31 20257.67 21192.02
1994/09/30 19925.79 20672.82
1994/10/31 20334.79 21137.95
1994/11/30 19670.17 20368.11
1994/12/31 19734.15 20670.17
1995/01/31 20042.70 21206.15
1995/02/28 20806.93 22032.55
1995/03/31 21525.39 22682.73
1995/04/30 22124.07 23350.74
1995/05/31 22790.79 24284.07
1995/06/30 23118.23 24848.19
1995/07/31 24007.92 25672.15
1995/08/31 24309.05 25736.59
1995/09/30 25116.09 26822.67
1995/10/31 24827.08 26726.92
1995/11/30 25900.54 27900.23
1995/12/31 26659.34 28437.59
1996/01/31 27434.08 29405.60
1996/02/29 27526.23 29678.19
1996/03/31 27815.98 29963.99
1996/04/30 28178.17 30405.66
1996/05/31 28482.40 31189.82
1996/06/30 28221.63 31308.66
1996/07/31 26845.32 29925.44
1996/08/31 27395.84 30556.57
1996/09/30 28569.33 32276.29
1996/10/31 29032.93 33166.47
1996/11/30 30974.25 35673.52
1996/12/31 30467.19 34966.83
1997/01/31 31655.16 37151.56
1997/02/28 32005.84 37442.83
1997/03/31 30816.27 35904.30
1997/04/30 31909.39 38047.79
1997/05/31 33886.65 40364.14
1997/06/30 35462.02 42172.45
1997/07/31 38050.14 45528.11
1997/08/31 36265.79 42977.63
1997/09/30 38259.12 45331.51
1997/10/31 36860.57 43817.44
1997/11/30 38210.89 45845.75
1997/12/31 39030.73 46632.92
1998/01/31 38934.28 47148.68
1998/02/28 41443.60 50549.04
1998/03/31 43363.24 53137.66
1998/04/30 43363.24 53672.23
1998/05/31 42660.51 52749.60
1998/06/30 43140.42 54892.29
IMATRL PRASUN SHR__CHT 19980630 19980709 112644 R00000000000123
Let's say hypothetically $10,000 was invested in Variable Insurance
Products Fund: Equity-Income Portfolio on June 30, 1988. As the chart
shows, by June 30, 1998, the value of the investment would have grown
to $43,140 - a 331.40% increase on the initial investment. For
comparison, look at how the Standard & Poor's 500 Index did over the
same period. With dividends and capital gains, if any, reinvested, the
same $10,000 investment would have grown to $54,892 - a 448.92%
increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
GENERAL ELECTRIC CO. 3.3
CITICORP 1.9
FANNIE MAE 1.8
BRITISH PETROLEUM PLC ADR 1.6
PHILIP MORRIS COMPANIES, INC. 1.6
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
FINANCE 25.6
ENERGY 11.1
UTILITIES 8.6
HEALTH 6.9
INDUSTRIAL MACHINERY & EQUIPMENT 6.8
ASSET ALLOCATION AS OF JUNE 30, 1998*
ROW: 1, COL: 1, VALUE: 96.09999999999999
ROW: 1, COL: 2, VALUE: 1.7
ROW: 1, COL: 3, VALUE: 2.2
STOCKS 96.1%
BONDS 1.7%
SHORT-TERM INVESTMENTS 2.2%
FOREIGN INVESTMENTS 10.3%
*
(% OF FUND'S INVESTMENTS)
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1 fee.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
JUNE 30, 1998 YEAR YEARS YEARS
VIP: EQUITY-INCOME - SERVICE CLASS 21.60% 20.00% 15.74%
S&P 500 (REGISTERED TRADEMARK) 30.16% 23.08% 18.56%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare these figures to the performance of the Standard &
Poor's 500 Index - a widely recognized, unmanaged index of common
stocks. This benchmark reflects the reinvestment of dividends and
capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER THE PAST 10 YEARS
VIP Equity-Income - CL S S&P 500
00471 SP001
1988/06/30 10000.00 10000.00
1988/07/31 9981.88 9962.00
1988/08/31 9809.78 9623.29
1988/09/30 10101.27 10033.24
1988/10/31 10275.59 10312.17
1988/11/30 10110.45 10164.70
1988/12/31 10202.74 10342.59
1989/01/31 10832.89 11099.66
1989/02/28 10777.29 10823.28
1989/03/31 11010.72 11075.46
1989/04/30 11435.66 11650.28
1989/05/31 11775.62 12122.12
1989/06/30 11783.68 12053.02
1989/07/31 12470.67 13141.41
1989/08/31 12671.04 13398.98
1989/09/30 12528.59 13344.05
1989/10/31 11805.78 13034.46
1989/11/30 11873.25 13300.37
1989/12/31 11972.33 13619.58
1990/01/31 11163.78 12705.70
1990/02/28 11229.94 12869.61
1990/03/31 11248.46 13210.65
1990/04/30 10858.45 12880.38
1990/05/31 11576.88 14136.22
1990/06/30 11461.61 14040.10
1990/07/31 11181.30 13995.17
1990/08/31 10288.45 12730.00
1990/09/30 9490.36 12110.05
1990/10/31 9248.37 12057.98
1990/11/30 9911.22 12836.92
1990/12/31 10141.83 13195.07
1991/01/31 10685.72 13770.38
1991/02/28 11421.56 14754.96
1991/03/31 11658.49 15112.03
1991/04/30 11712.97 15148.30
1991/05/31 12355.82 15802.71
1991/06/30 11850.61 15078.94
1991/07/31 12522.44 15781.62
1991/08/31 12786.76 16155.65
1991/09/30 12699.00 15885.85
1991/10/31 12910.47 16098.72
1991/11/30 12353.98 15449.94
1991/12/31 13330.27 17217.41
1992/01/31 13510.26 16897.17
1992/02/29 13948.97 17116.83
1992/03/31 13778.05 16783.05
1992/04/30 14209.68 17276.48
1992/05/31 14323.26 17361.13
1992/06/30 14197.86 17102.45
1992/07/31 14632.96 17801.94
1992/08/31 14312.36 17437.00
1992/09/30 14460.93 17642.76
1992/10/31 14634.05 17704.51
1992/11/30 15164.94 18308.23
1992/12/31 15581.37 18533.42
1993/01/31 16046.49 18689.10
1993/02/28 16406.95 18943.27
1993/03/31 16895.89 19342.98
1993/04/30 16825.64 18874.88
1993/05/31 17130.07 19380.72
1993/06/30 17331.56 19436.93
1993/07/31 17567.36 19359.18
1993/08/31 18239.40 20092.89
1993/09/30 18169.67 19938.18
1993/10/31 18335.82 20350.90
1993/11/30 18015.39 20157.56
1993/12/31 18431.81 20401.47
1994/01/31 19243.57 21095.12
1994/02/28 18748.02 20523.44
1994/03/31 17963.70 19628.62
1994/04/30 18582.70 19879.87
1994/05/31 18759.56 20205.90
1994/06/30 18643.66 19710.85
1994/07/31 19266.39 20357.37
1994/08/31 20257.67 21192.02
1994/09/30 19925.79 20672.82
1994/10/31 20334.79 21137.95
1994/11/30 19670.17 20368.11
1994/12/31 19734.15 20670.17
1995/01/31 20042.70 21206.15
1995/02/28 20806.93 22032.55
1995/03/31 21525.39 22682.73
1995/04/30 22124.07 23350.74
1995/05/31 22790.79 24284.07
1995/06/30 23118.23 24848.19
1995/07/31 24007.92 25672.15
1995/08/31 24309.05 25736.59
1995/09/30 25116.09 26822.67
1995/10/31 24827.08 26726.92
1995/11/30 25900.54 27900.23
1995/12/31 26659.34 28437.59
1996/01/31 27434.08 29405.60
1996/02/29 27526.23 29678.19
1996/03/31 27815.98 29963.99
1996/04/30 28178.17 30405.66
1996/05/31 28482.40 31189.82
1996/06/30 28221.63 31308.66
1996/07/31 26845.32 29925.44
1996/08/31 27395.84 30556.57
1996/09/30 28569.33 32276.29
1996/10/31 29032.93 33166.47
1996/11/30 30974.25 35673.52
1996/12/31 30467.19 34966.83
1997/01/31 31655.16 37151.56
1997/02/28 32005.84 37442.83
1997/03/31 30816.27 35904.30
1997/04/30 31909.39 38047.79
1997/05/31 33886.65 40364.14
1997/06/30 35462.02 42172.45
1997/07/31 38050.14 45528.11
1997/08/31 36265.79 42977.63
1997/09/30 38259.12 45331.51
1997/10/31 36860.57 43817.44
1997/11/30 38210.89 45845.75
1997/12/31 39014.65 46632.92
1998/01/31 38934.28 47148.68
1998/02/28 41443.60 50549.04
1998/03/31 43346.10 53137.66
1998/04/30 43363.24 53672.23
1998/05/31 42643.37 52749.60
1998/06/30 43123.28 54892.29
IMATRL PRASUN SHR__CHT 19980630 19980709 123632 R00000000000123
Let's say hypothetically $10,000 was invested in Variable Insurance
Products Fund: Equity-Income Portfolio - Service Class on June 30,
1988. As the chart shows, by June 30, 1998, the value of the
investment would have grown to $43,123 - a 331.23% increase on the
initial investment. For comparison, look at how the Standard & Poor's
500 Index did over the same period. With dividends and capital gains,
if any, reinvested, the same $10,000 investment would have grown to
$54,892 - a 448.92% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
GENERAL ELECTRIC CO. 3.3
CITICORP 1.9
FANNIE MAE 1.8
BRITISH PETROLEUM PLC ADR 1.6
PHILIP MORRIS COMPANIES, INC. 1.6
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
FINANCE 25.6
ENERGY 11.1
UTILITIES 8.6
HEALTH 6.9
INDUSTRIAL MACHINERY & EQUIPMENT 6.8
ASSET ALLOCATION AS OF JUNE 30, 1998*
ROW: 1, COL: 1, VALUE: 96.09999999999999
ROW: 1, COL: 2, VALUE: 1.7
ROW: 1, COL: 3, VALUE: 2.2
STOCKS 96.1%
BONDS 1.7%
SHORT-TERM INVESTMENTS 2.2%
FOREIGN INVESTMENTS 10.3%
*
(% OF FUND'S INVESTMENTS)
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with
Steve Petersen, Portfolio Manager of Equity-Income Portfolio
Q. STEVE, HOW DID THE FUND PERFORM OVER THE PAST YEAR?
A. It performed well compared to similar funds. However, for the six-
and 12-month periods that ended June 30, 1998, the fund underperformed
the Standard & Poor's 500 Index, which returned 17.71% for the
six-month period and 30.16% for the 12-month period.
Q. AS WE'VE DISCUSSED IN THE PAST FEW REPORTS, THE S&P 500 HAS TENDED
TO OUTPERFORM THE FUND RECENTLY BECAUSE THE INDEX IS MUCH MORE HEAVILY
WEIGHTED IN LARGE-CAPITALIZATION STOCKS THAN THE FUND. DOES THIS
CONTINUE TO EXPLAIN THE FUND'S PERFORMANCE COMPARED TO THE S&P OVER
THIS PERIOD?
A. In part, yes. Over the period, large-capitalization stocks
continued to notably outperform the rest of the market. So, given the
fund's investment style of looking for value stocks and
income-producing stocks - which can range from large- to small-cap
stocks - the fund was at a disadvantage compared to the S&P over the
past 12 months. However, as I mentioned, the fund performed well
against its peer group over the same period. This was mostly due to
strong individual stock selection and the fund's focus on earning
income from common stocks rather than bonds, which underperformed
stocks over the period.
Q. SO, IF LARGE-CAP STOCKS HAVE DONE SO WELL RECENTLY, WHY DOESN'T THE
FUND HOLD ONLY THEM?
A. If I did hold just large-cap stocks, the fund's performance
probably would have been stronger over the short run. However, as I
just mentioned, that would be inconsistent with the fund's long-term
strategy, which encourages me to own stocks of several different
capitalization sizes. In general, I feel that if I continue with the
fund's investment style, the fund will catch any short-term market
trends over the long run.
Q. GOING BACK TO THE FUND'S PERFORMANCE COMPARED TO THE S&P, YOU
IMPLIED THAT THERE WERE OTHER REASONS THE FUND UNDERPERFORMED . . .
A. That's right. What probably hurt the fund the most was that the
energy sector - the fund's second-largest sector - was negatively
affected by declining oil prices. This was largely due to reduced
demand in the worldwide oil market, mostly from Asian countries still
stinging from last fall's correction. On top of that, weather
patterns, including a relatively mild U.S. winter, had a negative
impact on oil demand. The fund's top sector, finance, also had a
fairly rough period. Banks somewhat underperformed the market as a
result of a flurry of merger and acquisition activity in the early
part of the year. Investors were concerned that their ability to earn
an adequate return on the acquisitions was lessening as bank prices
kept getting bid up. In addition, larger money-center banks like
BankAmerica were somewhat hurt by their exposure to Asia. Economically
sensitive stocks, from basic industries to manufacturing businesses,
also suffered because of reduced demand from Asia.
Q. WHAT SPECIFIC HOLDINGS HELPED THE FUND?
A. General Electric - the fund's number one holding - showed solid
earnings growth, and I consider it one of the better-managed companies
around. Another strong performer was Citicorp. After a big price
run-up when Citicorp announced its upcoming merger with Travelers, its
stock price fell to pre-merger levels as the market was unwilling to
pay for the potential of the merger. Financially, we thought it made
sense to buy the stock at this lower price because of the planned
merger and because of cost-cutting steps Citicorp had recently taken.
Fannie Mae, which buys loans from mortgage originators, packages them
and sells them to investors, benefited from strong refinancing
activity at the beginning of the year.
Q. DID YOU HAVE ANY REGRETS OVER THE PERIOD?
A. Sure. I failed to recognize how low energy prices could go. I
thought it was a temporary issue, but I should have taken much more
aggressive action.
Q. STEVE, WHAT'S YOUR OUTLOOK GOING FORWARD?
A. In general, the underlying economic conditions in the U.S. remain
good. We have low inflation, low interest rates, low unemployment and
good consumer demand. In addition, the political environment is still
relatively benign, and the lack of major activity in Congress is good
for stock prices, since change often creates uncertainty. Despite good
news at home, I need to pay close attention to what's happening in
Asia - especially Japan and China - since events in this region could
negatively affect the U.S. economy going forward.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED
ON MARKET AND OTHER CONDITIONS.
FUND FACTS
GOAL: to provide current income and increase the
value of the fund's shares over the long term
START DATE: October 9, 1986
SIZE: as of June 30, 1998, more than $11.7 billion
MANAGER: Stephen Petersen, since 1997, joined
Fidelity in 1980
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
INVESTMENTS JUNE 30, 1998 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 93.2%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 5.1%
AEROSPACE & DEFENSE - 3.0%
AlliedSignal, Inc. 1,867,500 $ 82,870,313
Gulfstream Aerospace Corp. (a) 127,400 5,924,100
Harsco Corp. 827,700 37,919,006
Lockheed Martin Corp. 673,103 71,264,780
Textron, Inc. 1,037,900 74,404,456
United Technologies Corp. 858,800 79,439,000
351,821,655
DEFENSE ELECTRONICS - 1.8%
Litton Industries, Inc. (a) 842,500 49,707,500
Northrop Grumman Corp. 725,500 74,817,188
Raytheon Co.:
Class A 19,131 1,102,424
Class B 1,551,800 91,750,175
217,377,287
SHIP BUILDING & REPAIR - 0.3%
General Dynamics Corp. 633,000 29,434,500
TOTAL AEROSPACE & DEFENSE 598,633,442
BASIC INDUSTRIES - 6.6%
CHEMICALS & PLASTICS - 3.4%
Air Products & Chemicals, Inc. 564,000 22,560,000
du Pont (E.I.) de Nemours & Co. 330,000 24,626,250
Great Lakes Chemical Corp. 766,800 30,240,675
Hanna (M.A.) Co. 684,200 12,529,413
Hercules, Inc. 772,400 31,764,950
Hoechst AG Ord. 491,100 24,269,793
IMC Global, Inc. 402,100 12,113,263
ICI (Imperial Chemical Industries)
PLC ADR Class L 261,800 16,886,100
Lawter International, Inc. 231,000 2,512,125
Millennium Chemicals, Inc. 401,400 13,597,425
Monsanto Co. 1,644,000 91,858,500
Octel Corp. 121,950 2,423,756
Olin Corp. 585,200 24,395,525
Solutia, Inc. 639,800 18,354,263
Union Carbide Corp. 856,400 45,710,350
Witco Corp. 973,400 28,471,950
402,314,338
IRON & STEEL - 0.4%
Dofasco Inc. 749,800 12,234,856
Inland Steel Industries, Inc. 862,900 24,322,994
USX-U.S. Steel Group 391,000 12,903,000
49,460,850
METALS & MINING - 1.1%
Alcan Aluminium Ltd. 1,400,000 38,630,557
Alumax, Inc. 363,125 16,839,922
Aluminum Co. of America 740,900 48,853,094
Kaiser Aluminum Corp. (a) 250,000 2,390,625
Noranda, Inc. 200,000 3,461,080
Phelps Dodge Corp. 339,200 19,398,000
129,573,278
PACKAGING & CONTAINERS - 0.1%
Corning, Inc. 98,900 3,436,775
Tupperware Corp. 89,100 2,505,938
5,942,713
PAPER & FOREST PRODUCTS - 1.6%
Boise Cascade Corp. 464,200 15,202,550
Champion International Corp. 640,500 31,504,594
SHARES VALUE (NOTE 1)
Domtar, Inc. 1,072,400 $ 7,196,825
Georgia-Pacific Corp. 556,600 32,804,613
Kimberly-Clark Corp. 1,318,200 60,472,425
Weyerhaeuser Co. 861,900 39,809,006
186,990,013
TOTAL BASIC INDUSTRIES 774,281,192
CONSTRUCTION & REAL ESTATE - 2.3%
BUILDING MATERIALS - 1.0%
American Standard Companies, Inc. (a) 579,300 25,887,469
Coltec Industries, Inc. (a) 1,371,600 27,260,550
Masco Corp. 1,045,400 63,246,700
116,394,719
ENGINEERING - 0.2%
EG & G, Inc. 389,900 11,697,000
Fluor Corp. 222,100 11,327,100
Foster Wheeler Corp. 301,800 6,469,838
29,493,938
REAL ESTATE INVESTMENT TRUSTS - 1.1%
Alexandria Real Estate Equities, Inc. 109,600 3,281,150
Crescent Real Estate Equities, Inc. 358,200 12,044,475
Duke Realty Investors, Inc. 100,200 2,373,488
Equity Office Properties Trust 416,800 11,826,700
Equity Residential Properties Trust (SBI) 300,000 14,231,250
Public Storage, Inc. 256,800 7,190,400
Starwood Hotels & Resorts Trust 1,502,681 72,598,276
Weeks Corp. 170,500 5,392,063
128,937,802
TOTAL CONSTRUCTION & REAL ESTATE 274,826,459
DURABLES - 2.9%
AUTOS, TIRES, & ACCESSORIES - 1.3%
Chrysler Corp. 142,000 8,005,250
Eaton Corp. 347,400 27,010,350
Ford Motor Co. 248,500 14,661,500
General Motors Corp. 300,000 20,043,750
Johnson Controls, Inc. 399,500 22,846,406
Meritor Automotive, Inc. 629,900 15,117,600
Navistar International Corp. 281,300 8,122,538
Snap-On Tools Corp. 32,000 1,157,517
TRW, Inc. 719,200 39,286,300
156,251,211
CONSUMER DURABLES - 0.6%
Minnesota Mining & Manufacturing Co. 821,900 67,549,906
CONSUMER ELECTRONICS - 0.4%
General Motors Corp. Class H 226,400 10,669,100
Maytag Co. 718,600 35,480,875
Sunbeam-Oster, Inc. 661,000 6,857,875
53,007,850
TEXTILES & APPAREL - 0.6%
Dexter Corp. 353,700 11,252,081
Intimate Brands, Inc. Class A 171,900 4,737,994
NIKE, Inc. Class B 484,200 23,574,488
Reebok International Ltd. (a) 687,700 19,040,694
Stride Rite Corp. 148,300 2,233,769
Unifi, Inc. 192,600 6,596,550
67,435,576
TOTAL DURABLES 344,244,543
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
ENERGY - 11.1%
ENERGY SERVICES - 0.8%
Dresser Industries, Inc. 271,700 $ 11,971,781
Halliburton Co. 650,000 28,965,625
Schlumberger Ltd. 812,000 55,469,750
96,407,156
OIL & GAS - 10.3%
Amerada Hess Corp. 709,400 38,529,288
Amoco Corp. 730,000 30,386,250
Anadarko Petroleum Corp. 195,100 13,108,281
Atlantic Richfield Co. 780,000 60,937,500
British Petroleum PLC:
Ord. 806,508 11,755,417
ADR 2,193,611 193,586,171
Burlington Resources, Inc. 795,000 34,234,688
Chevron Corp. 1,013,700 84,200,456
Coastal Corp. (The) 266,600 18,612,013
Elf Aquitaine SA sponsored ADR 319,400 22,677,400
Exxon Corp. 1,500,000 106,968,750
Kerr-McGee Corp. 164,500 9,520,438
Mobil Corp. 502,600 38,511,725
Occidental Petroleum Corp. 2,333,400 63,001,800
Pennzoil Co. 400,400 20,270,250
Phillips Petroleum Co. 645,500 31,105,031
Royal Dutch Petroleum Co. 2,267,500 124,287,344
Texaco, Inc. 1,160,000 69,237,500
Tosco Corp. 449,800 13,212,875
Total SA:
Class B 831,600 107,816,512
sponsored ADR 576,600 37,695,225
USX-Marathon Group 1,178,600 40,440,713
Ultramar Diamond Shamrock Corp. 358,800 11,324,625
Unocal Corp. 455,418 16,281,194
Valero Energy Corp. 246,700 8,202,775
1,205,904,221
TOTAL ENERGY 1,302,311,377
FINANCE - 24.0%
BANKS - 11.8%
Banc One Corp. 2,162,680 120,704,578
Bank of New York Co., Inc. 2,165,700 131,430,919
Bank of Nova Scotia 726,600 18,019,581
BankBoston Corp. 640,500 35,627,813
BankAmerica Corp. 1,733,400 149,830,763
Chase Manhattan Corp. 674,600 50,932,300
Citicorp 1,532,800 228,770,400
Comerica, Inc. 877,500 58,134,375
Credit Suisse Group (Reg.) 213,900 47,486,433
National Bank of Canada 2,211,200 43,312,553
National City Corp. 1,005,343 71,379,353
NationsBank Corp. 1,826,100 139,696,650
Norwest Corp. 1,457,800 54,485,275
Royal Bank of Canada 400,000 24,118,549
Societe Generale Class A 56,600 11,735,456
U.S. Bancorp 3,428,094 147,408,042
Wells Fargo & Co. 167,500 61,807,500
1,394,880,540
CREDIT & OTHER FINANCE - 4.3%
American Express Co. 1,255,172 143,089,608
AMP Ltd. 918,700 10,752,304
Associates First Capital Corp. Class A 769,828 59,180,532
SHARES VALUE (NOTE 1)
Beneficial Corp. 295,000 $ 45,190,313
First Chicago NBD Corp. 1,180,900 104,657,263
Fleet Financial Group, Inc. 686,800 57,347,800
Household International, Inc. 1,245,000 61,938,750
Transamerica Corp. 223,000 25,672,875
507,829,445
FEDERAL SPONSORED CREDIT - 2.0%
Freddie Mac 403,600 18,994,425
Fannie Mae 3,477,300 211,245,975
230,240,400
INSURANCE - 4.3%
Aetna, Inc. 227,800 17,341,275
Allstate Corp. 1,429,499 130,888,502
CIGNA Corp. 491,100 33,885,900
Edperbrascan Corp. Ltd., Class A (vtg.) 2,699,800 45,433,528
Fremont General Corp. 423,924 22,971,382
General Re Corp. 170,000 43,095,000
Hartford Financial Services Group, Inc. 663,300 75,864,938
Highlands Insurance Group, Inc. (a) 371,100 6,865,350
Marsh & McLennan Companies, Inc. 225,900 13,652,831
PMI Group, Inc. 198,200 14,542,925
Reliastar Financial Corp. 1,114,525 53,497,200
Torchmark Corp. 743,700 34,024,275
Travelers Property Casualty Corp. Class A 209,800 8,995,175
501,058,281
SAVINGS & LOANS - 0.8%
Washington Mutual, Inc. 2,186,985 94,997,161
SECURITIES INDUSTRY - 0.8%
First Marathon Inc. Class A (non-vtg.) 299,400 4,936,454
Lehman Brothers Holdings, Inc. 413,200 32,048,825
Travelers Group, Inc. (The) 961,749 58,306,033
95,291,312
TOTAL FINANCE 2,824,297,139
HEALTH - 6.9%
DRUGS & PHARMACEUTICALS - 4.7%
American Home Products Corp. 2,946,000 152,455,500
Barr Laboratories, Inc. (a)(d) 1,391,650 55,318,088
Bristol-Myers Squibb Co. 1,070,700 123,063,581
Merck & Co., Inc. 335,900 44,926,625
Novartis AG (Reg.) 25,200 41,838,382
Sankyo Co. Ltd. 917,000 20,857,409
Schering-Plough Corp. 1,288,200 118,031,325
556,490,910
MEDICAL EQUIPMENT & SUPPLIES - 1.0%
Allegiance Corp. 95,800 4,909,750
Bausch & Lomb, Inc. 250,000 12,531,250
Baxter International, Inc. 684,300 36,823,894
Johnson & Johnson 340,000 25,075,000
Pall Corp. 345,200 7,076,600
U.S. Surgical Corp. 740,907 33,803,882
120,220,376
MEDICAL FACILITIES MANAGEMENT - 1.2%
Beverly Enterprises, Inc. (a) 2,222,000 30,691,375
Columbia/HCA Healthcare Corp. 2,259,150 65,797,744
Humana, Inc. (a) 508,400 15,855,725
United HealthCare Corp. 476,600 30,264,100
142,608,944
TOTAL HEALTH 819,320,230
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
HOLDING COMPANIES - 0.2%
CINergy Corp. 415,000 $ 14,525,000
Cookson Group PLC 2,293,600 7,879,576
22,404,576
INDUSTRIAL MACHINERY & EQUIPMENT - 6.5%
ELECTRICAL EQUIPMENT - 3.8%
Alcatel Alsthom Compagnie Generale
d'Electricite SA 263,200 53,443,167
General Electric Co. 4,291,100 390,490,100
Loral Space & Communications Ltd. (a) 298,700 8,438,275
452,371,542
INDUSTRIAL MACHINERY & EQUIPMENT - 1.8%
Alstom SA 460,500 15,115,794
Cooper Industries, Inc. 194,300 10,674,356
Harnischfeger Industries, Inc. 397,100 11,242,894
Ingersoll-Rand Co. 665,400 29,319,188
Parker-Hannifin Corp. 375,000 14,296,875
Stewart & Stevenson Services, Inc. 514,400 9,259,200
Tyco International Ltd. 1,925,484 121,305,492
211,213,799
POLLUTION CONTROL - 0.9%
Browning-Ferris Industries, Inc. 1,037,298 36,046,106
Ogden Corp. 508,300 14,073,556
Waste Management, Inc. 1,491,100 52,188,500
102,308,162
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 765,893,503
MEDIA & LEISURE - 3.5%
BROADCASTING - 1.1%
Ascent Entertainment Group, Inc. (a) 22,964 255,475
CBS Corp. 1,421,600 45,135,800
Time Warner, Inc. 971,009 82,960,581
128,351,856
ENTERTAINMENT - 1.0%
King World Productions, Inc. (a) 409,400 10,439,700
MGM Grand, Inc. (a) 677,300 21,377,281
Viacom, Inc. Class B (non-vtg.) (a) 1,408,200 82,027,650
113,844,631
LEISURE DURABLES & TOYS - 0.1%
Brunswick Corp. 431,200 10,672,200
LODGING & GAMING - 0.1%
Circus Circus Enterprises, Inc. (a) 227,600 3,854,975
Mirage Resorts, Inc. (a) 518,400 11,048,400
14,903,375
PUBLISHING - 0.8%
ACNielsen Corp. 636,000 16,059,000
Cognizant Corp. 353,700 22,283,100
Dun & Bradstreet Corp. 368,800 13,322,900
Harcourt General, Inc. 561,700 33,421,150
Reader's Digest Association, Inc.
(The) Class A (non-vtg.) 426,700 11,574,238
96,660,388
RESTAURANTS - 0.4%
McDonald's Corp. 677,100 46,719,900
TOTAL MEDIA & LEISURE 411,152,350
SHARES VALUE (NOTE 1)
NONDURABLES - 5.9%
BEVERAGES - 0.3%
Anheuser-Busch Companies, Inc. 487,500 $ 23,003,906
Seagram Co. Ltd. 281,300 11,489,651
34,493,557
FOODS - 1.0%
Bestfoods 639,800 37,148,388
Corn Products International, Inc. (a) 401,625 13,605,047
General Mills, Inc. 384,450 26,286,769
Heinz (H.J.) Co. 393,500 22,085,188
Ralston Purina Co. 110,000 12,849,375
111,974,767
HOUSEHOLD PRODUCTS - 2.4%
Avon Products, Inc. 171,100 13,260,250
Clorox Co. 254,600 24,282,475
Dial Corp. 494,400 12,823,500
Gillette Co. 201,400 11,416,863
Premark International, Inc. 25,000 806,250
Procter & Gamble Co. 621,600 56,604,450
Rubbermaid, Inc. 941,900 31,259,306
Unilever PLC 6,821,600 72,581,319
Unilever NV:
Ord. 12,400 981,901
ADR 800,000 63,150,000
287,166,314
TOBACCO - 2.2%
Dimon, Inc. 358,200 4,029,750
Gallaher Group PLC sponsored ADR 922,600 20,181,875
Philip Morris Companies, Inc. 4,735,300 186,452,438
RJR Nabisco Holdings Corp. 1,873,700 44,500,375
UST, Inc. 211,000 5,697,000
260,861,438
TOTAL NONDURABLES 694,496,076
PRECIOUS METALS - 0.1%
Newmont Mining Corp. 685,400 16,192,575
RETAIL & WHOLESALE - 3.9%
APPAREL STORES - 0.8%
Charming Shoppes, Inc. (a) 612,800 2,910,800
Footstar, Inc. (a) 362,600 17,404,800
Limited, Inc. (The) 967,100 32,035,188
TJX Companies, Inc. 350,200 8,448,575
Venator Group, Inc. 2,061,200 39,420,450
100,219,813
GENERAL MERCHANDISE STORES - 2.8%
Consolidated Stores Corp. (a) 2,020,156 73,230,664
Dayton Hudson Corp. 280,000 13,580,000
Federated Department Stores, Inc. (a) 656,400 35,322,525
Hudson's Bay Co. Ord. 605,600 13,904,766
Hudson's Bay Co. (c) 302,500 6,945,495
Penney (J.C.) Co., Inc. 180,900 13,081,331
Wal-Mart Stores, Inc. 2,836,000 172,287,000
328,351,781
RETAIL & WHOLESALE, MISCELLANEOUS - 0.3%
School Specialty, Inc. 65,670 1,075,346
Tandy Corp. 443,200 23,517,300
Toys "R" Us, Inc. (a) 302,000 7,115,875
U.S. Office Products Co. (a) 147,759 2,881,301
34,589,822
TOTAL RETAIL & WHOLESALE 463,161,416
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - 1.0%
LEASING & RENTAL - 0.2%
Ryder Systems, Inc. 817,200 $ 25,792,875
PRINTING - 0.5%
Donnelley (R.R.) & Sons Co. 568,400 26,004,300
Harland (John H.) Co. 1,051,300 17,806,394
Wallace Computer Services, Inc. 483,700 11,487,875
Workflow Management, Inc. 78,804 635,357
55,933,926
SERVICES - 0.3%
Block (H & R), Inc. 499,600 21,045,650
Manpower, Inc. 397,300 11,397,544
Navigant International, Inc. 59,103 502,376
32,945,570
TOTAL SERVICES 114,672,371
TECHNOLOGY - 3.6%
COMPUTER SERVICES & SOFTWARE - 0.7%
Aztec Technology Partners, Inc. 118,207 901,328
Electronic Data Systems Corp. 1,326,800 53,072,000
First Data Corp. 550,200 18,328,538
NCR Corp. (a) 391,200 12,714,000
85,015,866
COMPUTERS & OFFICE EQUIPMENT - 2.1%
International Business Machines Corp. 532,300 61,117,152
Compaq Computer Corp. 124,173 3,523,409
Diebold, Inc. 267,600 7,726,950
Pitney Bowes, Inc. 1,582,000 76,133,750
Unisys Corp. (a) 3,018,317 85,267,455
Xerox Corp. 86,800 8,821,050
242,589,766
ELECTRONICS - 0.6%
AMP, Inc. 499,400 17,166,875
Motorola, Inc. 1,011,600 53,172,225
70,339,100
PHOTOGRAPHIC EQUIPMENT - 0.2%
Eastman Kodak Co. 226,400 16,541,350
Polaroid Corp. 339,300 12,066,356
28,607,706
TOTAL TECHNOLOGY 426,552,438
TRANSPORTATION - 1.3%
AIR TRANSPORTATION - 0.1%
Viad Corp. 275,800 7,653,450
RAILROADS - 1.2%
Burlington Northern Santa Fe Corp. 342,100 33,589,944
CSX Corp. 1,633,100 74,306,050
Norfolk Southern Corp. 1,158,000 34,522,875
142,418,869
TOTAL TRANSPORTATION 150,072,319
UTILITIES - 8.3%
ELECTRIC UTILITY - 2.7%
Allegheny Energy, Inc. 1,052,200 31,697,525
American Electric Power Co., Inc. 1,138,600 51,663,975
Central & South West Corp. 278,200 7,476,625
Central Maine Power Co. 602,500 11,748,750
CILCORP, Inc. 152,300 7,310,400
Consolidated Edison, Inc. 473,450 21,808,291
DPL, Inc. 955,950 17,326,594
SHARES VALUE (NOTE 1)
Duke Energy Corp. 297,200 $ 17,609,100
Entergy Corp. 1,573,800 45,246,750
FPL Group, Inc. 227,800 14,351,400
Illinova Corp. 227,100 6,813,000
Niagara Mohawk Power Corp. (a) 1,434,200 21,423,363
PG&E Corp. 1,072,878 33,862,712
PacifiCorp. 200,000 4,525,000
Pinnacle West Capital Corp. 472,600 21,267,000
314,130,485
GAS - 0.6%
MCN Energy Group, Inc. 877,800 21,835,275
Questar Corp. 1,584,300 31,091,888
Sempra Energy 429,184 11,909,856
Sonat, Inc. 345,300 13,337,213
78,174,232
TELEPHONE SERVICES - 5.0%
AT&T Corp. 2,136,000 122,019,000
ALLTEL Corp. 508,900 23,663,850
Ameritech Corp. 1,607,400 72,132,075
Bell Atlantic Corp. 2,266,640 103,415,450
BellSouth Corp. 1,136,400 76,280,850
GTE Corp. 783,000 43,554,375
MCI Communications Corp. 270,100 15,699,563
SBC Communications, Inc. 1,492,000 59,680,000
Sprint Corp. 312,500 22,031,250
WorldCom, Inc. (a) 953,800 46,199,688
584,676,101
TOTAL UTILITIES 976,980,818
TOTAL COMMON STOCKS
(Cost $8,045,181,255) 10,979,492,824
CONVERTIBLE PREFERRED STOCKS - 2.9%
CONSTRUCTION & REAL ESTATE - 0.0%
REAL ESTATE INVESTMENT TRUSTS - 0.0%
Vornado Realty Trust, Series A, $3.25 62,600 3,591,675
DURABLES - 0.0%
AUTOS, TIRES, & ACCESSORIES - 0.0%
Republic Industries, Inc. $1.55 219,200 5,260,800
FINANCE - 1.4%
CLOSED END INVESTMENT COMPANY - 0.1%
Readers Digest Association $1.93 TRACES 464,700 11,849,850
CREDIT & OTHER FINANCE - 0.3%
DECS Trust $2.01 DECS 93,000 1,278,750
Life Re Corp./ Life Re Capital Trust II $3.96 39,400 3,235,725
Union Pacific Capital Trust $3.13 TIDE (c) 384,500 17,975,375
WBK Trust $3.135 STRYPES 285,400 8,615,513
31,105,363
INSURANCE - 0.5%
Aetna, Inc. Class C 6.25%, PRIDES 760,000 57,095,000
Conseco, Inc. $3.50 PRIDES 171,800 9,105,400
66,200,400
SAVINGS & LOANS - 0.1%
Ahmanson (H.F.) & Co., Series D, $3.00 70,600 10,307,600
SECURITIES INDUSTRY - 0.4%
Salomon, Inc. $2.03 DECS 840,700 40,773,950
Salomon, Inc. $3.484 DECS 93,900 5,252,531
46,026,481
TOTAL FINANCE 165,489,694
CONVERTIBLE PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - 0.3%
ELECTRICAL EQUIPMENT - 0.2%
Loral Space & Communications Ltd.,
Series C, $3.00 (c) 183,200 $ 13,877,400
Loral Space & Communications Ltd.,
Series C, $3.00 141,700 10,733,775
24,611,175
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
Ingersoll Rand Co./Ingersoll Rand Finance Co.
$0.19 Growth PRIDES 530,100 10,535,738
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 35,146,913
MEDIA & LEISURE - 0.6%
BROADCASTING - 0.5%
Evergreen Media Corp. $3.00 (c) 187,200 19,071,000
MediaOne Group, Inc. Class D $2.25 381,900 34,347,131
53,418,131
ENTERTAINMENT - 0.1%
Premier Parks, Inc. $4.05 PIES 273,300 17,354,550
TOTAL MEDIA & LEISURE 70,772,681
RETAIL & WHOLESALE - 0.1%
GENERAL MERCHANDISE STORES - 0.1%
K mart Financing I $3.875 100,000 7,000,000
SERVICES - 0.1%
Cendant Corp. $2.91 Growth PRIDES 288,100 8,336,894
TECHNOLOGY - 0.1%
COMPUTERS & OFFICE EQUIPMENT - 0.1%
Wang Laboratories, Inc. $3.25 (c) 80,000 4,425,000
Wang Laboratories, Inc. $3.25 157,600 8,402,050
12,827,050
UTILITIES - 0.3%
ELECTRIC UTILITY - 0.2%
Houston Industries, Inc. $3.215 ACES 285,500 21,269,750
GAS - 0.0%
MCN Energy Group, Inc. $4.00 PRIDES 25,100 1,151,463
TELEPHONE SERVICES - 0.1%
Enhance Financial Services Group, Inc.
$7.625 DECS 184,800 10,695,300
TOTAL UTILITIES 33,116,513
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $272,958,629) 341,542,220
CONVERTIBLE BONDS - 1.7%
CONSTRUCTION & REAL ESTATE - 0.3%
REAL ESTATE INVESTMENT TRUSTS - 0.3%
Liberty Property exchangeable
8%, 7/1/01 Ba2 27,985,000 35,768,328
DURABLES - 0.2%
AUTOS, TIRES, & ACCESSORIES - 0.1%
Magna International, Inc.
4 7/8%, 2/15/05 (c) Baa 5,900,000 6,526,875
CONSUMER ELECTRONICS - 0.1%
Matsushita Electric Industrial Co.
Ltd. 1.3%, 3/29/02 Aa2 JPY 452,000,000 4,457,209
MOODY'S PRINCIPAL VALUE
RATINGS AMOUNT (NOTE 1)
Matsushita Electric Industrial Co.
Ltd. 1.4%, 3/31/04 Aa2 JPY 209,000,000 $ 2,076,009
Sunbeam Corp. 0%,
3/25/18 (c) Caa2 60,290,000 13,640,613
20,173,831
TOTAL DURABLES 26,700,706
ENERGY - 0.1%
OIL & GAS - 0.1%
Pennzoil Co. 4 3/4%,10/1/03 Baa3 9,820,000 13,880,570
FINANCE - 0.2%
CREDIT & OTHER FINANCE - 0.1%
Bell Atlantic Financial Services, Inc.
5 3/4%, 4/1/03 (c) A1 14,140,000 14,475,825
INSURANCE - 0.1%
Loews Corp. 3 1/8%, 9/15/07 A2 4,320,000 3,931,200
TOTAL FINANCE 18,407,025
MEDIA & LEISURE - 0.3%
BROADCASTING - 0.0%
Jacor Communications, Inc.
0%, 2/9/18 B3 3,370,000 1,470,163
LODGING & GAMING - 0.0%
Hilton Hotels Corp.
5%, 5/15/06 Baa2 1,820,000 1,892,800
PUBLISHING - 0.3%
News America Holdings, Inc.
liquid yield option notes
0%, 3/11/13 Baa3 54,900,000 36,508,500
TOTAL MEDIA & LEISURE 39,871,463
RETAIL & WHOLESALE - 0.2%
DRUG STORES - 0.1%
Rite Aid Corp. 5 1/4%,
9/15/05 (c) Baa2 11,620,000 14,292,600
RETAIL & WHOLESALE, MISCELLANEOUS - 0.1%
Home Depot, Inc.
3 1/4%, 10/1/01 A1 5,000,000 9,162,500
TOTAL RETAIL & WHOLESALE 23,455,100
TECHNOLOGY - 0.4%
COMPUTERS & OFFICE EQUIPMENT - 0.2%
Apple Computer, Inc.
6%, 6/1/01 Caa1 11,150,000 12,871,281
Quantum Corp. 7%, 8/1/04 B2 7,730,000 7,353,163
20,224,444
ELECTRONICS - 0.2%
Micron Technology, Inc.
7%, 7/1/04 B1 13,983,000 13,065,366
Motorola, Inc. liquid yield
option notes 9/27/13 A1 16,420,000 11,842,925
24,908,291
TOTAL TECHNOLOGY 45,132,735
TOTAL CONVERTIBLE BONDS
(Cost $187,458,523) 203,215,927
CASH EQUIVALENTS - 2.2%
SHARES VALUE (NOTE 1)
Taxable Central Cash Fund (b)
(Cost $252,828,605) 252,828,605 $ 252,828,605
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $8,758,427,012) $ 11,777,079,576
SECURITY TYPE ABBREVIATIONS
ACES - Automatic Common Exchange Securities
DECS - Dividend Enhanced Convertible
Stock/Debt Exchangeable for Common Stock
PIES - Premium Income Equity
Securities
PRIDES - Preferred Redeemable Increased Dividend Equity Securities
STRYPES - Structured Yield Product Exchangeable for Common Stock
TIDES - Term Income Deferred Equity Securities
TRACES - Trust Automatic Common
Exchange Securities
CURRENCY ABBREVIATIONS
JPY - Japanese yen
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield of the Taxable Central Cash
Fund was 5.61%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(c) Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions
exempt from registration, normally to qualified institutional buyers.
At the period end, the value of these securities amounted to
$111,230,183 or .9% of net assets.
(d) Transactions during the period with companies which are or were
affiliates are as follows (See Note 9 of Notes to Financial
Statements):
PURCHASE SALES DIVIDEND VALUE
AFFILIATE COST COST INCOME
Barr Laboratories Inc.. $ - $ - $ - $ 55,318,088
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $2,022,543,641 and $1,137,035,606, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of FMR. The commissions paid to these
affiliated firms were $316,780 for the period (see Note 4 of Notes to
Financial Statements).
The composition of long-term debt holdings as a percentage of total
value of investment in securities, is as follows:
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 0.4% AAA, AA, A 0.4%
Baa 0.6% BBB 0.6%
Ba 0.3% BB 0.3%
B 0.2% B 0.2%
Caa 0.2% CCC 0.1%
Ca, C 0.0% CC, C 0.0%
D 0.0%
The percentage not rated by Moody's or S&P amounted to 0.0%.
Distribution of investments by country of issue, as a percentage of
total value of investment in securities, is as follows:
United States 89.7%
United Kingdom 2.7
France 2.1
Canada 2.0
Netherlands 1.6
Others (individually less than 1%) 1.9
TOTAL 100.0%
INCOME TAX INFORMATION
At June 30, 1998, the aggregate cost of investment securities for
income tax purposes was $8,765,724,302. Net unrealized appreciation
aggregated $3,011,355,274, of which $3,290,287,130 related to
appreciated investment securities and $278,931,856 related to
depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
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JUNE 30, 1998 (UNAUDITED)
ASSETS
INVESTMENT IN SECURITIES, AT VALUE (COST $8,758,427,012) - $ 11,777,079,576
SEE ACCOMPANYING SCHEDULE
CASH 51,187
RECEIVABLE FOR INVESTMENTS SOLD 22,103,261
RECEIVABLE FOR FUND SHARES SOLD 10,322,876
DIVIDENDS RECEIVABLE 18,763,721
INTEREST RECEIVABLE 3,863,584
OTHER RECEIVABLES 537,415
TOTAL ASSETS 11,832,721,620
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 30,915,607
PAYABLE FOR FUND SHARES REDEEMED 7,119,587
ACCRUED MANAGEMENT FEE 4,719,356
DISTRIBUTION FEES PAYABLE 8,991
OTHER PAYABLES AND 840,375
ACCRUED EXPENSES
TOTAL LIABILITIES 43,603,916
NET ASSETS $ 11,789,117,704
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 8,453,792,741
UNDISTRIBUTED NET INVESTMENT INCOME 86,904,929
ACCUMULATED UNDISTRIBUTED 229,824,649
NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 3,018,595,385
AND ASSETS AND LIABILITIES IN FOREIGN CURRENCIES
NET ASSETS $ 11,789,117,704
INITIAL CLASS: $25.17
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER
SHARE ($11,665,025,976 (DIVIDED BY)
463,367,268 SHARES)
SERVICE CLASS: $25.16
NET ASSET VALUE AND OFFERING PRICE
PER SHARE ($124,091,728 (DIVIDED BY)
4,931,725 SHARES)
</TABLE>
STATEMENT OF OPERATIONS
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SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME $ 105,364,076
DIVIDENDS
INTEREST 15,727,694
TOTAL INCOME 121,091,770
EXPENSES
MANAGEMENT FEE $ 27,321,754
TRANSFER AGENT FEES 3,810,938
DISTRIBUTION FEES - SERVICE CLASS 26,530
ACCOUNTING FEES AND EXPENSES 424,175
NON-INTERESTED TRUSTEES' COMPENSATION 32,573
CUSTODIAN FEES AND EXPENSES 153,260
REGISTRATION FEES 98,096
AUDIT 79,793
LEGAL 62,982
MISCELLANEOUS 262,324
TOTAL EXPENSES BEFORE REDUCTIONS 32,272,425
EXPENSE REDUCTIONS (361,660) 31,910,765
NET INVESTMENT INCOME 89,181,005
REALIZED AND UNREALIZED
GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 240,690,852
FOREIGN CURRENCY TRANSACTIONS (480,201) 240,210,651
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 756,221,732
ASSETS AND LIABILITIES IN (40,910) 756,180,822
FOREIGN CURRENCIES
NET GAIN (LOSS) 996,391,473
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 1,085,572,478
OTHER INFORMATION $ 358,010
EXPENSE REDUCTIONS
DIRECTED BROKERAGE ARRANGEMENTS
CUSTODIAN CREDITS 3,650
$ 361,660
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STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
OPERATIONS $ 89,181,005 $ 140,172,499
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 240,210,651 516,594,647
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) 756,180,822 1,401,296,210
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,085,572,478 2,058,063,356
DISTRIBUTIONS TO SHAREHOLDERS (143,408,215) (119,523,328)
FROM NET INVESTMENT INCOME
FROM NET REALIZED GAIN (510,364,528) (602,923,285)
TOTAL DISTRIBUTIONS (653,772,743) (722,446,613)
SHARE TRANSACTIONS - NET INCREASE (DECREASE) 1,245,248,072 1,815,363,131
TOTAL INCREASE (DECREASE) IN NET ASSETS 1,677,047,807 3,150,979,874
NET ASSETS
BEGINNING OF PERIOD 10,112,069,897 6,961,090,023
END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $86,904,929 AND
$140,172,474, RESPECTIVELY) $ 11,789,117,704 $ 10,112,069,897
</TABLE>
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OTHER INFORMATION:
SIX MONTHS ENDED JUNE 30, 1998
SHARES DOLLARS YEAR ENDED DECEMBER 31, 1997
(UNAUDITED) SHARES DOLLARS
SHARE TRANSACTIONS 40,552,249 $ 1,004,072,133 81,081,134 $ 1,787,907,743
INITIAL CLASS
SOLD
REINVESTED 27,884,675 652,780,247 36,487,203 722,446,589
REDEEMED (21,327,703) (528,825,194) (32,291,523) (700,239,679)
NET INCREASE (DECREASE) 47,109,221 $ 1,128,027,186 85,276,814 $ 1,810,114,653
SERVICE CLASS A 4,676,336 116,393,684 222,682 5,321,346
SOLD
REINVESTED 42,396 992,496 - -
REDEEMED (6,500) (165,294) (3,189) (72,868)
NET INCREASE (DECREASE) 4,712,232 $ 117,220,886 219,493 $ 5,248,478
DISTRIBUTIONS $ 143,190,506 $ 119,523,328
INITIAL CLASS - NET INVESTMENT INCOME
INITIAL CLASS - NET REALIZED GAIN 509,589,741 602,923,285
TOTAL $ 652,780,247 $ 722,446,613
SERVICE CLASS - NET INVESTMENT INCOME $ 217,709 -
SERVICE CLASS - NET REALIZED GAIN 774,787 -
TOTAL $ 992,496 $ -
$ 653,772,743 $ 722,446,613
A SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1998
SELECTED PER-SHARE DATA (UNAUDITED) 1997 1996 1995 1994 1993
NET ASSET VALUE, BEGINNING OF PERIOD $ 24.28 $ 21.03 $ 19.27 $ 15.35 $ 15.44 $ 13.40
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .20 D .36 D .35 .41 .41 .37
NET REALIZED AND UNREALIZED GAIN (LOSS) 2.24 5.06 2.30 4.69 .64 2.06
TOTAL FROM INVESTMENT OPERATIONS 2.44 5.42 2.65 5.10 1.05 2.43
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.34) (.36) (.03) (.40) (.37) (.35)
IN EXCESS OF NET INVESTMENT INCOME - - - - - (.04)
FROM NET REALIZED GAIN (1.21) (1.81) (.86) (.78) (.77) -
TOTAL DISTRIBUTIONS (1.55) (2.17) (.89) (1.18) (1.14) (.39)
NET ASSET VALUE, END OF PERIOD $ 25.17 $ 24.28 $ 21.03 $ 19.27 $ 15.35 $ 15.44
TOTAL RETURN B, C 10.53% 28.11% 14.28% 35.09% 7.07% 18.29%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 11,665,026 $ 10,106,742 $ 6,961,090 $ 4,879,435 $ 2,284,412 $ 1,318,500
RATIO OF EXPENSES TO AVERAGE NET ASSETS .59% A .58% .58% .61% .60% .62%
RATIO OF EXPENSES TO AVERAGE NET ASSETS
AFTER EXPENSE REDUCTIONS .58% A, F .57% F .56% F .61% .58% F .62%
RATIO OF NET INVESTMENT INCOME TO AVERAGE
NET ASSETS 1.62% A 1.65% 1.97% 2.56% 2.83% 2.87%
PORTFOLIO TURNOVER 22% A 44% 186% 87% 134% 120%
AVERAGE COMMISSION RATE G $ .0419 $ .0440 $ .0426
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
SELECTED PER-SHARE DATA (UNAUDITED) 1997 E
NET ASSET VALUE, BEGINNING OF PERIOD $ 24.27 $ 23.44
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .19 D .05 D
NET REALIZED AND UNREALIZED GAIN (LOSS) 2.25 .78
TOTAL FROM INVESTMENT OPERATIONS 2.44 .83
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.34) -
FROM NET REALIZED GAIN (1.21) -
TOTAL DISTRIBUTIONS (1.55) -
NET ASSET VALUE, END OF PERIOD $ 25.16 $ 24.27
TOTAL RETURN B, C 10.53% 3.54%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 124,092 $ 5,328
RATIO OF EXPENSES TO AVERAGE NET ASSETS .69% A .68% A
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS .68% A, F .65% A, F
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 1.60% A 1.63% A
PORTFOLIO TURNOVER 22% A 44%
AVERAGE COMMISSION RATE G $ .0419 $ .0440
A ANNUALIZED
B TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN.
TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED
DURING THE PERIODS SHOWN (SEE NOTE 7 OF NOTES TO FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3, 1997 (COMMENCEMENT OF SALE OF SERVICE CLASS SHARES)
TO DECEMBER 31, 1997.
F FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO
EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES (SEE NOTE 7 OF NOTES TO
FINANCIAL STATEMENTS).
G A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR
SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM
PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN
VARIOUS MARKETS
WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY DIFFER.
</TABLE>
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
JUNE 30, 1998 YEAR FUND
VIP III: GROWTH & INCOME - "INITIAL CLASS" 31.05% 31.39%
S&P 500 (REGISTERED TRADEMARK) 30.16% 33.53%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's returns to the performance of the Standard
& Poor's 500 Index - a widely recognized, unmanaged index of common
stocks. This benchmark includes reinvested dividends and capital
gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, December 31, 1996.
If Fidelity had not reimbursed certain fund expenses, the life of fund
total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD BE LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
VIP III Growth & Income S&P 500
00147 SP001
1996/12/31 10000.00 10000.00
1997/01/31 10250.00 10440.61
1997/02/28 10270.00 10522.46
1997/03/31 9820.00 10090.10
1997/04/30 10350.00 10692.48
1997/05/31 10930.00 11343.43
1997/06/30 11490.00 11851.62
1997/07/31 12420.00 12794.65
1997/08/31 11790.00 12077.90
1997/09/30 12410.00 12739.40
1997/10/31 12060.00 12313.91
1997/11/30 12600.00 12883.92
1997/12/31 12879.20 13105.13
1998/01/31 12951.15 13250.08
1998/02/28 13837.79 14205.67
1998/03/31 14540.53 14933.14
1998/04/30 14540.53 15083.37
1998/05/31 14323.51 14824.09
1998/06/30 15057.25 15426.24
IMATRL PRASUN SHR__CHT 19980630 19980708 145421 R00000000000021
Let's say hypothetically that $10,000 was invested in Variable
Insurance Products Fund III: Growth & Income Portfolio on December 31,
1996, when the fund started. As the chart shows, by June 30, 1998, the
value of the investment would have grown to $15,057 - a 50.57%
increase on the initial investment. For comparison, look at how the
Standard & Poor's 500 Index did over the same period. With dividends
and capital gains, if any, reinvested, the same $10,000 investment
would have grown to $15,426 - a 54.26% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
CITICORP 4.3
MERCK & CO., INC. 3.9
ASSOCIATES FIRST CAPITAL CORP. 3.9
MICROSOFT CORP. 3.2
GENERAL ELECTRIC CO. 3.1
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
FINANCE 22.4
HEALTH 13.8
TECHNOLOGY 13.0
NONDURABLES 11.7
RETAIL & WHOLESALE 8.8
ASSET ALLOCATION AS OF JUNE 30, 1998*
ROW: 1, COL: 1, VALUE: 98.2
ROW: 1, COL: 2, VALUE: 1.8
STOCKS 98.2%
SHORT-TERM INVESTMENTS 1.8%
FOREIGN INVESTMENTS 6.1%
*
% OF FUND'S INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1 fee.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
JUNE 30, 1998 YEAR FUND
VIP III: GROWTH & INCOME - SERVICE CLASS 30.78% 31.22%
S&P 500 (REGISTERED TRADEMARK) 30.16% 33.53%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's returns to the performance of the Standard
& Poor's 500 Index - a widely recognized, unmanaged index of common
stocks. This benchmark includes reinvested dividends and capital
gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, December 31, 1996.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD BE LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
VIP III Growth & Inc-CL S S&P 500
00473 SP001
1996/12/31 10000.00 10000.00
1997/01/31 10250.00 10440.61
1997/02/28 10270.00 10522.46
1997/03/31 9820.00 10090.10
1997/04/30 10350.00 10692.48
1997/05/31 10930.00 11343.43
1997/06/30 11490.00 11851.62
1997/07/31 12420.00 12794.65
1997/08/31 11790.00 12077.90
1997/09/30 12410.00 12739.40
1997/10/31 12060.00 12313.91
1997/11/30 12590.00 12883.92
1997/12/31 12879.48 13105.13
1998/01/31 12941.16 13250.08
1998/02/28 13817.49 14205.67
1998/03/31 14520.25 14933.14
1998/04/30 14509.91 15083.37
1998/05/31 14292.88 14824.09
1998/06/30 15026.65 15426.24
IMATRL PRASUN SHR__CHT 19980630 19980708 150524 R00000000000021
Let's say hypothetically that $10,000 was invested in Variable
Insurance Products Fund III: Growth & Income Portfolio - Service Class
on December 31, 1996, when the fund started. As the chart shows, by
June 30, 1998, the value of the investment would have grown to $15,027
- - a 50.27% increase on the initial investment. For comparison, look at
how the Standard & Poor's 500 Index did over the same period. With
dividends and capital gains, if any, reinvested, the same $10,000
investment would have grown to $15,426 - a 54.26% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
CITICORP 4.3
MERCK & CO., INC. 3.9
ASSOCIATES FIRST CAPITAL CORP. 3.9
MICROSOFT CORP. 3.2
GENERAL ELECTRIC CO. 3.1
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
FINANCE 22.4
HEALTH 13.8
TECHNOLOGY 13.0
NONDURABLES 11.7
RETAIL & WHOLESALE 8.8
ASSET ALLOCATION AS OF JUNE 30, 1998*
ROW: 1, COL: 1, VALUE: 98.2
ROW: 1, COL: 2, VALUE: 1.8
STOCKS 98.2%
SHORT-TERM INVESTMENTS 1.8%
FOREIGN INVESTMENTS 6.1%
*
% OF FUND'S INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
NOTE TO SHAREHOLDERS: Steven Kaye became Portfolio Manager of Growth &
Income Portfolio on April 1, 1998.
Q. HOW DID THE FUND PERFORM RELATIVE TO ITS BENCHMARK, STEVE?
A. For the six months that ended June 30, 1998, the fund slightly
underperformed the 17.71% return of the Standard & Poor's 500 Index.
For the 12 months that ended June 30, 1998, the fund performed in line
with the 30.16% return of the S&P 500.
Q. WHAT FACTORS INFLUENCED THE FUND'S PERFORMANCE?
A. The returns of the S&P 500 have been driven by a narrow group of
the very-largest-capitalization stocks. Stocks outside of this small
group generally did not perform as well. Fortunately, the fund has had
a large-cap bias. I found that larger-cap stocks had better earnings
growth and higher returns than alternatives in the small- and mid-cap
areas. Fortunately, earnings for these companies came through, and the
stocks were rewarded.
Q. WHAT SECTORS HAVE YOU CONCENTRATED ON SINCE TAKING OVER THE FUND AT
THE BEGINNING OF APRIL?
A. I'm a bottom-up stock picker, looking at individual stocks one at a
time, choosing them based on the outlook for their business
fundamentals instead of economic factors. I generally don't follow
sector-based strategies. That being said, I overweighted the
nondurables, health care, retail and financial sectors, relative to
the S&P 500. I found that those areas of the market tended to post
better earnings-growth potential than alternatives. In addition, I
underweighted industrial materials and other cyclical sectors - those
whose performance tracks that of the economy - because their earnings
looked less promising due to production overcapacity.
Q. FINANCE WAS THE FUND'S LARGEST SECTOR WEIGHTING AT THE END OF THE
PERIOD AT 22.4% OF INVESTMENTS. WERE YOU PURSUING ANY PARTICULAR
THEMES THERE?
A. Many companies in this sector have been doing very well, with the
fairly dramatic improvement in consumer credit a big factor. As a
result, I invested in companies that stood to benefit from this trend,
including Associates First Capital, American Express, Household
International, Citicorp and Banc One. These companies have credit card
businesses or some sort of exposure to U.S. consumer credit, and thus
were appealing to me.
Q. WHICH STOCKS DID WELL? WHICH DISAPPOINTED?
A. Microsoft was the best performer for the fund during the period.
Its share price was beaten down due to concerns about antitrust action
brought on by the U.S. Justice Department, and I bought more of the
stock after its share price dropped to historically low levels. The
price rebounded when a court struck down the premise of the
investigation and allowed Microsoft to distribute its new Windows 98
software. American Express, Bristol-Myers Squibb and General Electric
all were solid performers as a result of their ability to post
consistently strong earnings growth. Merck benefited from its plans to
introduce five new drugs over the coming year. And Time Warner
profited from a sharper focus on returns, more efficient capital
spending and improved shareholder-oriented management. On the
disappointing side, Philip Morris struggled because of uncertainty
regarding pending litigation and legislation affecting the tobacco
industry.
Q. HOW WOULD YOU DESCRIBE YOUR INVESTMENT APPROACH?
A. I look for companies that have improving returns that sell at
reasonable valuation levels, with the intention of holding them over a
two- to three-year time frame. I don't try to time stocks by trading
frequently into and out of them. Instead, I try to maintain a low
turnover rate with consistent holdings over the long term. I try to
buy stocks of companies that have returns that are better than their
cost of capital, and avoid those that are accelerating their capital
spending.
Q. WHAT'S YOUR OUTLOOK?
A. I believe it will be difficult to find value in the market, because
overall stock valuations are presently quite high. On the one hand,
there are a number of stocks that are meeting or beating earnings
expectations, but they are selling at very expensive valuations. On
the other hand, there are a large number of companies that aren't
doing as well, but whose stock prices haven't been hit hard enough to
reflect these less favorable fundamentals. The main challenge will be
to find stocks with good fundamentals selling at reasonable prices.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED
ON MARKET AND OTHER CONDITIONS.
FUND FACTS
GOAL: seeks a high total return through a combination of current
income and capital appreciation
START DATE: December 31, 1996
SIZE: as of June 30, 1998, more than $619 million
MANAGER: Steven Kaye, since April 1,1998, joined
Fidelity in 1985
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
INVESTMENTS JUNE 30, 1998 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 98.2%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 0.5%
SHIP BUILDING & REPAIR - 0.5%
General Dynamics Corp. 72,300 $ 3,361,950
BASIC INDUSTRIES - 0.3%
CHEMICALS & PLASTICS - 0.3%
Sealed Air Corp. (a) 51,920 1,908,060
CONSTRUCTION & REAL ESTATE - 2.6%
BUILDING MATERIALS - 0.6%
Masco Corp. 58,500 3,539,250
REAL ESTATE INVESTMENT TRUSTS - 2.0%
Equity Office Properties Trust 102,300 2,902,763
Equity Residential Properties Trust (SBI) 69,300 3,287,419
Public Storage, Inc. 100,100 2,802,800
Starwood Hotels & Resorts Trust 75,000 3,623,429
12,616,411
TOTAL CONSTRUCTION & REAL ESTATE 16,155,661
ENERGY - 6.9%
OIL & GAS - 6.9%
British Petroleum PLC ADR 69,068 6,095,251
Chevron Corp. 40,300 3,347,419
Exxon Corp. 87,100 6,211,319
Mobil Corp. 77,200 5,915,450
Royal Dutch Petroleum Co. 110,400 6,051,300
Texaco, Inc. 96,300 5,747,906
Total SA sponsored ADR 92,400 6,040,650
USX-Marathon Group 87,400 2,998,913
42,408,208
FINANCE - 22.4%
BANKS - 9.2%
Banc One Corp. 207,000 11,553,188
Bank of New York Co., Inc. 94,600 5,741,038
Citicorp 179,800 26,835,150
Mellon Bank Corp. 49,000 3,411,625
U.S. Bancorp 152,900 6,574,700
Wells Fargo & Co. 6,900 2,546,100
56,661,801
CREDIT & OTHER FINANCE - 7.7%
American Express Co. 109,000 12,426,000
Associates First Capital Corp. Class A 310,200 23,846,625
Fleet Financial Group, Inc. 45,000 3,757,500
Household International, Inc. 149,400 7,432,650
47,462,775
FEDERAL SPONSORED CREDIT - 2.5%
Freddie Mac 128,800 6,061,650
Fannie Mae 95,000 5,771,250
SLM Holding Corp. 73,100 3,581,900
15,414,800
INSURANCE - 3.0%
Aetna, Inc. 30,000 2,283,750
Allstate Corp. 42,400 3,882,250
American International Group, Inc. 34,900 5,095,400
PMI Group, Inc. 100,700 7,388,863
18,650,263
TOTAL FINANCE 138,189,639
SHARES VALUE (NOTE 1)
HEALTH - 13.8%
DRUGS & PHARMACEUTICALS - 7.4%
American Home Products Corp. 105,400 $ 5,454,450
Bristol-Myers Squibb Co. 104,100 11,964,994
Merck & Co., Inc. 180,300 24,115,125
Pfizer, Inc. 39,900 4,336,631
45,871,200
MEDICAL EQUIPMENT & SUPPLIES - 3.1%
Bard (C.R.), Inc. 68,200 2,595,863
Baxter International, Inc. 52,500 2,825,156
Becton, Dickinson & Co. 42,000 3,260,250
Cardinal Health, Inc. 35,500 3,328,125
Johnson & Johnson 63,100 4,653,625
McKesson Corp. 30,400 2,470,000
19,133,019
MEDICAL FACILITIES MANAGEMENT - 3.3%
Humana, Inc. (a) 295,900 9,228,381
United HealthCare Corp. 170,800 10,845,800
20,074,181
TOTAL HEALTH 85,078,400
INDUSTRIAL MACHINERY & EQUIPMENT - 5.1%
ELECTRICAL EQUIPMENT - 4.2%
Alcatel Alsthom Compagnie Generale
d'Electricite SA sponsored ADR 16,000 651,000
Alcatel Alsthom Compagnie Generale
d'Electricite SA 13,300 2,700,586
Emerson Electric Co. 57,800 3,489,675
General Electric Co. 211,100 19,210,100
26,051,361
INDUSTRIAL MACHINERY & EQUIPMENT - 0.9%
Tyco International Ltd. 92,360 5,818,680
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 31,870,041
MEDIA & LEISURE - 4.9%
BROADCASTING - 0.9%
Time Warner, Inc. 67,200 5,741,400
ENTERTAINMENT - 1.7%
News Corp. Ltd. sponsored ADR (ltd. vtg.) 238,000 6,723,500
Viacom, Inc. Class B (non-vtg.) (a) 67,000 3,902,750
10,626,250
PUBLISHING - 1.9%
Central Newspapers, Inc. Class A 40,000 2,790,000
Cognizant Corp. 47,900 3,017,700
Hollinger International, Inc. Class A 180,000 3,060,000
Times Mirror Co. Class A 42,400 2,665,900
11,533,600
RESTAURANTS - 0.4%
Tricon Global Restaurants, Inc. 86,000 2,725,125
TOTAL MEDIA & LEISURE 30,626,375
NONDURABLES - 11.7%
BEVERAGES - 2.5%
Anheuser-Busch Companies, Inc. 60,000 2,831,250
Coca-Cola Co. (The) 75,700 6,472,350
PepsiCo, Inc. 145,000 5,972,188
15,275,788
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONDURABLES - CONTINUED
FOODS - 2.2%
Bestfoods 110,000 $ 6,386,875
Ralston Purina Co. 60,000 7,008,750
13,395,625
HOUSEHOLD PRODUCTS - 5.0%
Clorox Co. 73,500 7,010,063
Procter & Gamble Co. 165,100 15,034,419
Unilever:
PLC Ord. 230,900 2,456,759
NV ADR 85,000 6,709,688
31,210,929
TOBACCO - 2.0%
Philip Morris Companies, Inc. 306,060 12,051,113
TOTAL NONDURABLES 71,933,455
RETAIL & WHOLESALE - 8.8%
APPAREL STORES - 1.4%
Gap, Inc. 62,250 3,836,156
Payless ShoeSource, Inc. (a) 65,200 4,804,425
8,640,581
DRUG STORES - 1.0%
CVS Corp. 159,754 6,220,421
GENERAL MERCHANDISE STORES - 3.5%
Costco Companies, Inc. (a) 50,000 3,153,125
Dayton Hudson Corp. 86,200 4,180,700
Federated Department Stores, Inc. (a) 127,700 6,871,856
Wal-Mart Stores, Inc. 122,900 7,466,175
21,671,856
GROCERY STORES - 1.0%
Safeway, Inc. (a) 150,000 6,103,125
RETAIL & WHOLESALE, MISCELLANEOUS - 1.9%
Bed Bath & Beyond, Inc. (a) 72,000 3,730,500
Borders Group, Inc. (a) 90,000 3,330,000
Home Depot, Inc. 52,450 4,356,628
11,417,128
TOTAL RETAIL & WHOLESALE 54,053,111
SERVICES - 2.3%
ADVERTISING - 1.1%
Omnicom Group, Inc. 139,400 6,952,575
PRINTING - 0.3%
Donnelley (R.R.) & Sons Co. 47,100 2,154,825
SERVICES - 0.9%
Ecolab, Inc. 80,200 2,486,200
Service Corp. International 74,718 3,203,534
5,689,734
TOTAL SERVICES 14,797,134
TECHNOLOGY - 13.0%
COMPUTER SERVICES & SOFTWARE - 4.8%
Automatic Data Processing, Inc. 90,000 6,558,750
HNC Software, Inc. (a) 84,000 3,428,250
Microsoft Corp. (a) 180,900 19,605,038
29,592,038
SHARES VALUE (NOTE 1)
COMPUTERS & OFFICE EQUIPMENT - 5.5%
EMC Corp. (a) 158,200 $ 7,089,338
Ingram Micro, Inc. Class A 106,900 4,730,325
Lemur International Group, Inc. 51,400 3,135,400
Pitney Bowes, Inc. 211,300 10,168,813
Tech Data Corp. 103,800 4,450,425
Xerox Corp. 41,500 4,217,438
33,791,739
ELECTRONIC INSTRUMENTS - 0.6%
Variant Associates, Inc. 100,000 3,900,000
ELECTRONICS - 2.1%
Collector Corp. 71,000 2,986,438
Inter Corp. 80,000 5,930,000
Lattice Semiconductor Corp. (a) 60,000 1,704,375
Linear Technology Corp. 35,700 2,153,156
12,773,969
TOTAL TECHNOLOGY 80,057,746
UTILITIES - 5.9%
TELEPHONE SERVICES - 5.9%
AT&T Corp. 85,300 4,872,763
Bethought Corp. 85,000 5,705,625
GET Corp. 104,800 5,829,500
MCI Communications Corp. 70,700 4,109,438
SBC Communications, Inc. 198,000 7,920,000
WorldCom, Inc. (a) 158,575 7,680,977
36,118,303
TOTAL COMMON STOCKS
(Cost $531,959,895) 606,558,083
CASH EQUIVALENTS - 1.8%
Taxable Central Cash Fund (b)
(Cost $10,819,211) 10,819,211 10,819,211
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $542,779,106) $ 617,377,294
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield of the Taxable Central Cash
Fund was 5.61%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $408,438,896 and $197,979,364, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $52,596 for the
period (see Note 4 of Notes to Financial Statements).
INCOME TAX INFORMATION
At June 30, 1998, the aggregate cost of investment securities for
income tax purposes was $542,880,333. Net unrealized appreciation
aggregated $74,496,961, of which $87,690,338 related to appreciated
investment securities and $13,193,377 related to depreciated
investment securities.
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 30, 1998 (UNAUDITED)
ASSETS
INVESTMENT IN SECURITIES, AT VALUE $ 617,377,294
(COST $542,779,106) -
SEE ACCOMPANYING SCHEDULE
CASH 268,000
RECEIVABLE FOR INVESTMENTS SOLD 9,995
RECEIVABLE FOR FUND SHARES SOLD 2,242,327
DIVIDENDS RECEIVABLE 723,039
INTEREST RECEIVABLE 72,695
TOTAL ASSETS 620,693,350
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 277,800
PAYABLE FOR FUND SHARES REDEEMED 76,639
ACCRUED MANAGEMENT FEE 235,117
DISTRIBUTION FEES PAYABLE 387
OTHER PAYABLES AND 115,407
ACCRUED EXPENSES
TOTAL LIABILITIES 705,350
NET ASSETS $ 619,988,000
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 514,382,988
UNDISTRIBUTED NET INVESTMENT INCOME 2,256,339
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS 28,750,642
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 74,598,031
AND ASSETS AND LIABILITIES IN
FOREIGN CURRENCIES
NET ASSETS $ 619,988,000
INITIAL CLASS: $14.57
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($613,887,187 (DIVIDED BY) 42,135,156
SHARES)
SERVICE CLASS: $14.54
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($6,100,813 (DIVIDED BY) 419,627 SHARES)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME $ 3,051,292
DIVIDENDS
INTEREST 723,125
TOTAL INCOME 3,774,417
EXPENSES
MANAGEMENT FEE $ 1,175,844
TRANSFER AGENT FEES 169,386
DISTRIBUTION FEES - SERVICE CLASS 766
ACCOUNTING FEES AND EXPENSES 140,821
NON-INTERESTED TRUSTEES' COMPENSATION 797
CUSTODIAN FEES AND EXPENSES 17,417
AUDIT 11,624
LEGAL 2,756
MISCELLANEOUS 106
TOTAL EXPENSES BEFORE REDUCTIONS 1,519,517
EXPENSE REDUCTIONS (1,439) 1,518,078
NET INVESTMENT INCOME 2,256,339
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 29,146,862
FOREIGN CURRENCY TRANSACTIONS (1,935) 29,144,927
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 41,360,509
ASSETS AND LIABILITIES IN (12) 41,360,497
FOREIGN CURRENCIES
NET GAIN (LOSS) 70,505,424
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 72,761,763
OTHER INFORMATION
EXPENSE REDUCTIONS
CUSTODIAN CREDITS $ 1,439
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
OPERATIONS $ 2,256,339 $ 1,999,135
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 29,144,927 8,707,062
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) 41,360,497 33,247,866
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 72,761,763 43,954,063
DISTRIBUTIONS TO SHAREHOLDERS - (1,998,716)
FROM NET INVESTMENT INCOME
FROM NET REALIZED GAIN (2,137,232) (6,771,091)
TOTAL DISTRIBUTIONS (2,137,232) (8,769,807)
SHARE TRANSACTIONS - NET INCREASE (DECREASE) 204,065,573 309,123,809
TOTAL INCREASE (DECREASE) IN NET ASSETS 274,690,104 344,308,065
NET ASSETS
BEGINNING OF PERIOD 345,297,896 989,831
END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $2,256,339 AND $0,
RESPECTIVELY) $ 619,988,000 $ 345,297,896
</TABLE>
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998 YEAR ENDED DECEMBER 31, 1997
SHARES DOLLARS SHARES DOLLARS
Share transactions 16,364,443 $ 222,451,615 29,294,015 $ 329,532,628
Initial Class
Sold
Reinvested 165,544 2,137,174 718,814 8,769,531
Redeemed (1,943,996) (26,401,491) (2,563,665) (29,188,626)
Net increase (decrease) 14,585,991 $ 198,187,298 27,449,164 $ 309,113,533
Service Class A 437,001 $ 6,132,431 810 $ 10,000
Sold
Reinvested 4 58 22 276
Redeemed (18,210) (254,214) - -
Net increase (decrease) 418,795 $ 5,878,275 832 $ 10,276
Distributions $ - $ 1,998,653
Initial Class - Net investment income
Initial Class - Net realized gain 2,137,174 6,770,878
Total $ 2,137,174 $ 8,769,531
Service Class - Net investment income $ - $ 63
Service Class - Net realized gain 58 213
Total $ 58 $ 276
$ 2,137,232 $ 8,769,807
A SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, 1996
JUNE 30, 1998 DECEMBER 31, (COMMENCEMENT
(UNAUDITED) 1997 OF OPERATIONS)
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 12.53 $ 9.90 $ 10.00
Income from Investment Operations
Net investment income .06 D .13 D .00
Net realized and unrealized gain (loss) 2.05 2.84 (.10)
Total from investment operations 2.11 2.97 (.10)
Less Distributions
From net investment income - (.08) -
From net realized gain (.07) (.26) -
Total distributions (.07) (.34) -
Net asset value, end of period $ 14.57 $ 12.53 $ 9.90
TOTAL RETURN B, C 16.91% 30.09% (1.00)%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 613,887 $ 345,287 $ 990
Ratio of expenses to average net assets .64% A .70% 1.00% A, F
Ratio of net investment income to average net assets .95% A 1.14% 3.89% A
Portfolio turnover 88% A 81% 0% A
Average commission rate G $ .0423 $ .0322 $ .0120
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
SELECTED PER-SHARE DATA (UNAUDITED) 1997 E
Net asset value, beginning of period $ 12.53 $ 12.35
Income from Investment Operations
Net investment income .06 D .03 D
Net realized and unrealized gain (loss) 2.02 .49
Total from investment operations 2.08 .52
Less Distributions
From net investment income - (.08)
From net realized gain (.07) (.26)
Total distributions (.07) (.34)
Net asset value, end of period $ 14.54 $ 12.53
TOTAL RETURN B, C 16.67% 4.29%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 6,101 $ 10
Ratio of expenses to average net assets .74% A .80% A
Ratio of net investment income to average net assets .85% A 1.24% A
Portfolio turnover 88% A 81%
Average commission rate G $ .0423 $ .0322
A ANNUALIZED
B TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN.
TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED
DURING THE PERIODS SHOWN.
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3, 1997 (COMMENCEMENT OF SALE OF SERVICE CLASS SHARES) TO
DECEMBER 31, 1997.
F FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE PERIOD.
WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD HAVE BEEN HIGHER.
G A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY
TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD
AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS
WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY DIFFER.
</TABLE>
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 LIFE OF
JUNE 30, 1998 YEAR YEARS FUND
VIP II: INDEX 500 29.64% 22.69% 21.33%
S&P 500 (registered trademark) 30.16% 23.08% 21.72%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's returns to the performance of the Standard
& Poor's 500 Index - a widely recognized, unmanaged index of common
stocks. This benchmark includes reinvested dividends and capital
gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, August 27, 1992.
If Fidelity had not reimbursed certain fund expenses, the total return
figures would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD BE LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
VIP II: Index 500 S&P 500
00157 SP001
1992/08/27 10000.00 10000.00
1992/08/31 10014.00 10016.72
1992/09/30 10130.00 10134.92
1992/10/31 10152.00 10170.39
1992/11/30 10498.00 10517.20
1992/12/31 10630.67 10646.56
1993/01/31 10707.47 10735.99
1993/02/28 10856.70 10882.00
1993/03/31 11095.84 11111.61
1993/04/30 10822.25 10842.71
1993/05/31 11103.95 11133.30
1993/06/30 11132.32 11165.58
1993/07/31 11081.66 11120.92
1993/08/31 11501.17 11542.40
1993/09/30 11407.95 11453.53
1993/10/31 11641.01 11690.62
1993/11/30 11527.52 11579.55
1993/12/31 11666.06 11719.67
1994/01/31 12059.53 12118.14
1994/02/28 11732.95 11789.73
1994/03/31 11223.46 11275.70
1994/04/30 11357.65 11420.03
1994/05/31 11533.77 11607.32
1994/06/30 11252.82 11322.94
1994/07/31 11623.93 11694.33
1994/08/31 12087.29 12173.80
1994/09/30 11793.76 11875.54
1994/10/31 12055.84 12142.74
1994/11/30 11617.64 11700.50
1994/12/31 11787.47 11874.02
1995/01/31 12099.87 12181.91
1995/02/28 12563.64 12656.64
1995/03/31 12931.02 13030.14
1995/04/30 13311.22 13413.88
1995/05/31 13834.52 13950.03
1995/06/30 14148.51 14274.09
1995/07/31 14620.55 14747.42
1995/08/31 14656.86 14784.44
1995/09/30 15269.88 15408.34
1995/10/31 15218.62 15353.33
1995/11/30 15880.76 16027.34
1995/12/31 16171.25 16336.03
1996/01/31 16724.46 16892.11
1996/02/29 16880.36 17048.70
1996/03/31 17054.17 17212.88
1996/04/30 17292.62 17466.59
1996/05/31 17733.85 17917.06
1996/06/30 17809.61 17985.32
1996/07/31 17020.75 17190.73
1996/08/31 17370.61 17553.28
1996/09/30 18342.21 18541.18
1996/10/31 18848.06 19052.55
1996/11/30 20260.89 20492.73
1996/12/31 19844.17 20086.77
1997/01/31 21074.26 21341.79
1997/02/28 21231.99 21509.11
1997/03/31 20349.53 20625.30
1997/04/30 21559.17 21856.63
1997/05/31 22870.18 23187.26
1997/06/30 23874.76 24226.05
1997/07/31 25773.31 26153.72
1997/08/31 24330.96 24688.59
1997/09/30 25646.59 26040.78
1997/10/31 24798.69 25171.02
1997/11/30 25920.77 26336.19
1997/12/31 26358.54 26788.38
1998/01/31 26644.25 27084.66
1998/02/28 28537.17 29038.00
1998/03/31 29981.03 30525.04
1998/04/30 30277.94 30832.12
1998/05/31 29736.79 30302.12
1998/06/30 30950.78 31532.99
IMATRL PRASUN SHR__CHT 19980630 19980731 130419 R00000000000074
Let's say hypothetically that $10,000 was invested in Variable
Insurance Products Fund II: Index 500 Portfolio on August 27, 1992,
when the fund started. As the chart shows, by June 30, 1998, the value
of the investment would have grown to $30,951 - a 209.51% increase on
the initial investment. For comparison, look at how the Standard &
Poor's 500 Index did over the same period. With dividends and capital
gains, if any, reinvested, the same $10,000 investment would have
grown to $31,533 - a 215.33% increase.
INVESTMENT SUMMARY
TOP TEN STOCKS AS OF JUNE 30, 1998
% OF FUND'S INVESTMENTS
General Electric Co. 3.1
Microsoft Corp. 2.8
Coca-Cola Co. (The) 2.2
Exxon Corp. 1.8
Merck & Co., Inc. 1.7
Pfizer, Inc. 1.5
Wal-Mart Stores, Inc. 1.4
Intel Corp. 1.3
Procter & Gamble Co. 1.3
Royal Dutch Petroleum Co. 1.2
TOP TEN MARKET SECTORS AS OF JUNE 30, 1998
% OF FUND'S INVESTMENTS
Finance 17.0
Technology 14.0
Health 11.2
Nondurables 9.5
Utilities 9.1
Energy 6.9
Industrial Machinery & Equipment 5.3
Retail & Wholesale 5.2
Media & Leisure 4.3
Basic Industries 4.0
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with Frank Salerno,
Portfolio Manager of
Index 500 Portfolio
Q. HOW DID THE FUND PERFORM, FRANK?
A. For the six months that ended June 30, 1998, the fund performed in
line with the 17.71% return of the Standard & Poor's 500 Index. Of
course, the fund's total return was slightly lower than that of the
index due to management expenses. The fund's return for the 12 months
that ended June 30, 1998 also was in line with the S&P 500, which
returned 30.16% during that period.
Q. HOW WOULD YOU DESCRIBE MARKET CONDITIONS OVER THE PAST SIX MONTHS?
A. The stock market continued to perform well in response to favorable
economic news. Inflation remained modest, interest rates were stable,
the economy grew more vigorously than expected and corporate earnings
- - a key determinant of stock prices - were generally strong. As the
year began, the lone dark cloud on the horizon was the fear that the
slowdown gripping many Asian economies might spread to the United
States. However, prospects in Asia began to look brighter when
government officials in Japan - a key economic force in the region -
promised to pass legislation designed to stimulate the Japanese
economy. On the basis of this optimism, most Asian stock markets
rallied strongly in the first quarter, and U.S. investors, relieved
that the worst in Asia might be over, drove the S&P 500 and other
market indexes to repeated record highs from February through early
May.
Q. WHAT HAPPENED FOR THE BALANCE OF THE PERIOD?
A. Several negatives temporarily slowed the market's momentum. The
situation in Asia deteriorated once again, as the Japanese government
failed to pass the stimulative legislation promised earlier in the
year, and the president of Indonesia was forced to resign amid
widespread civil strife. Moreover, U.S. companies with Asian exposure
- - including many technology companies - began to report disappointing
earnings. The combination of these factors caused the Dow Jones
Industrial Average to decline roughly 7% between mid-May and mid-June,
while the S&P 500 retreated about 5%. However, more news indicating
stronger-than-expected growth in the economy resulted in stocks
resuming their upward path by the end of the period, with the S&P 500
again reaching new highs in late June.
Q. DID ANY SECTORS STAND OUT AS STRONG PERFORMERS?
A. Drug companies did well, buoyed by healthy pipelines of new
products, the ability to bring products to market more rapidly and
relaxed regulations that permitted more aggressive advertising.
Financial services firms continued to benefit from a trend toward
greater industry consolidation, exemplified by the recently announced
"megamerger" of Travelers and Citicorp. In addition, the generally
favorable economic climate has been particularly beneficial for banks
and other financial services firms.
Q. HOW DID TECHNOLOGY STOCKS FARE?
A. Technology was a mixed bag. For example, U.S. personal computer
(PC) makers found that they could purchase components at a much lower
cost from their Asian suppliers because of the U.S. dollar's sharply
increased value relative to many Asian currencies. However, generally
lighter demand for personal computers was an offsetting factor that
hindered the sales and earnings growth of many PC makers and
manufacturers of PC components.
Q. WHAT SECTORS WERE DISAPPOINTING?
A. Energy prices were weak during the period, with the price of crude
oil dipping below $12 dollars a barrel near the end of June. Most
stocks in that sector were weak as a result. The same problem - weak
commodity prices - kept precious metals shares in the doldrums.
Q. WHAT'S YOUR OUTLOOK, FRANK?
A. The trend of disappointing earnings reported by companies with
Asian exposure may continue into the third quarter. However, I believe
that the sectors that have been strong so far this year can continue
to do well, as long as the economy keeps growing moderately and
interest rates and inflation stay roughly where they are. Although I
don't expect the market to advance at the rapid pace it has maintained
during the past three years, the favorable economic environment gives
me reason to expect further moderate gains in share prices.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED
ON MARKET AND OTHER CONDITIONS.
FUND FACTS
GOAL: to provide returns that correspond to those of the S&P 500 Index
START DATE: August 27, 1992
SIZE: as of June 30, 1998, more than $3.0 billion
MANAGER: Frank Salerno, since December 1997
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
INVESTMENTS JUNE 30, 1998 (UNAUDITED)
Showing Percentage of Value of Investment in Securities
<TABLE>
<CAPTION>
<S> <C> <C> <C>
COMMON STOCKS - 93.8%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.8%
AEROSPACE & DEFENSE - 1.4%
AlliedSignal, Inc. 187,600 $ 8,324,750
Boeing Co. 335,968 14,971,574
Goodrich (B.F.) Co. 24,800 1,230,700
Lockheed Martin Corp. 65,293 6,912,896
Rockwell International Corp. 66,700 3,205,769
Textron, Inc. 54,700 3,921,306
United Technologies Corp. 76,700 7,094,750
45,661,745
DEFENSE ELECTRONICS - 0.3%
Northrop Grumman Corp. 22,800 2,351,250
Raytheon Co. Class B 113,300 6,698,863
9,050,113
SHIP BUILDING & REPAIR - 0.1%
General Dynamics Corp. 43,700 2,032,050
TOTAL AEROSPACE & DEFENSE 56,743,908
BASIC INDUSTRIES - 4.0%
CHEMICALS & PLASTICS - 2.3%
Air Products & Chemicals, Inc. 78,200 3,128,000
Avery Dennison Corp. 39,400 2,117,750
Dow Chemical Co. 75,100 7,261,231
du Pont (E.I.) de Nemours & Co. 375,900 28,051,538
Eastman Chemical Co. 24,675 1,536,019
Engelhard Corp. 47,000 951,750
FMC Corp. (a) 11,800 804,613
Great Lakes Chemical Corp. 19,800 780,863
Hercules, Inc. 31,700 1,303,663
Monsanto Co. 199,900 11,169,413
Morton International, Inc. 47,500 1,187,500
Nalco Chemical Co. 16,200 569,025
PPG Industries, Inc. 59,100 4,111,144
Praxair, Inc. 55,700 2,607,456
Raychem Corp. 31,500 931,219
Rohm & Haas Co. 20,200 2,099,538
Sealed Air Corp. (a) 29,360 1,078,980
Union Carbide Corp. 45,500 2,428,562
W.R. Grace & Co. 25,700 438,506
72,556,770
IRON & STEEL - 0.2%
Aeroquip-Vickers, Inc. 9,700 566,238
Allegheny Teledyne, Inc. 57,984 1,326,384
Armco, Inc. (a) 36,700 233,963
Bethlehem Steel Corp. (a) 43,400 539,788
Nucor Corp. 29,500 1,357,000
USX-U.S. Steel Group 30,200 996,600
Worthington Industries, Inc. 23,250 350,203
5,370,176
METALS & MINING - 0.3%
Alcan Aluminium Ltd. 64,657 1,784,097
Aluminum Co. of America 53,100 3,501,281
ASARCO, Inc. 18,300 407,175
Cyprus Amax Minerals Co. 42,350 561,138
Freeport-McMoRan Copper & Gold, Inc. Class B 41,500 630,281
SHARES VALUE (NOTE 1)
Inco Ltd. 46,436 $ 634,333
Phelps Dodge Corp. 20,300 1,160,906
Reynolds Metals Co. 27,300 1,527,094
10,206,305
PACKAGING & CONTAINERS - 0.3%
Ball Corp. 7,330 294,574
Bemis Co., Inc. 16,000 654,000
Corning, Inc. 77,800 2,703,550
Crown Cork & Seal Co., Inc. 42,200 2,004,500
Owens Illinois, Inc. (a) 49,500 2,215,125
Tupperware Corp. 21,300 599,063
8,470,812
PAPER & FOREST PRODUCTS - 0.9%
Boise Cascade Corp. 14,700 481,425
Champion International Corp. 32,400 1,593,675
Fort James Corp. 66,300 2,950,350
Georgia-Pacific Corp. 32,200 1,897,788
International Paper Co. 102,800 4,420,400
Kimberly-Clark Corp. 189,932 8,713,131
Louisiana Pacific Corp. 33,500 611,375
Mead Corp. 35,900 1,139,825
Potlatch Corp. 9,700 407,400
Stone Container Corp. (a) 23,700 370,313
Temple-Inland, Inc. 18,800 1,012,850
Union Camp Corp. 23,400 1,161,225
Westvaco Corp. 30,050 848,913
Weyerhaeuser Co. 66,100 3,052,994
Willamette Industries, Inc. 32,800 1,049,600
29,711,264
TOTAL BASIC INDUSTRIES 126,315,327
CONSTRUCTION & REAL ESTATE - 0.4%
BUILDING MATERIALS - 0.3%
Armstrong World Industries, Inc. 13,300 896,088
Crane Co. 15,600 757,575
Fortune Brands, Inc. 51,800 1,991,063
Masco Corp. 57,800 3,496,900
Owens-Corning 17,900 730,544
Sherwin-Williams Co. 57,800 1,914,625
9,786,795
CONSTRUCTION - 0.1%
Centex Corp. 20,600 777,650
Fleetwood Enterprises, Inc. 12,700 508,000
Kaufman & Broad Home Corp. 14,200 450,850
Pulte Corp. 15,300 457,088
2,193,588
ENGINEERING - 0.0%
EG & G, Inc. 15,800 474,000
Fluor Corp. 25,900 1,320,900
Foster Wheeler Corp. 13,700 293,694
2,088,594
TOTAL CONSTRUCTION & REAL ESTATE 14,068,977
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
DURABLES - 3.1%
AUTOS, TIRES, & ACCESSORIES - 2.2%
AutoZone, Inc. (a) 50,850 $ 1,624,022
Chrysler Corp. 215,000 12,120,625
Cooper Tire & Rubber Co. 28,800 594,000
Cummins Engine Co., Inc. 14,200 727,750
Dana Corp. 35,400 1,893,900
Eaton Corp. 23,800 1,850,450
Echlin, Inc. 23,100 1,133,344
Ford Motor Co. 380,400 22,443,600
General Motors Corp. 222,878 14,891,036
Genuine Parts Co. 56,050 1,937,228
Goodyear Tire & Rubber Co. 54,600 3,518,288
ITT Industries, Inc. 39,100 1,461,363
Johnson Controls, Inc. 26,400 1,509,750
NACCO Industries, Inc. Class A 2,400 310,200
Navistar International Corp. (a) 17,970 518,884
PACCAR, Inc. 26,090 1,363,203
Pep Boys-Manny, Moe & Jack 19,700 373,069
Snap-On, Inc. 23,100 837,375
TRW, Inc. 41,200 2,250,550
71,358,637
CONSUMER DURABLES - 0.4%
Minnesota Mining & Manufacturing Co. 136,700 11,235,031
CONSUMER ELECTRONICS - 0.2%
Black & Decker Corp. 30,700 1,872,700
Maytag Corp. 33,300 1,644,188
Newell Co., Inc. 50,500 2,515,531
Whirlpool Corp. 24,800 1,705,000
7,737,419
TEXTILES & APPAREL - 0.3%
Fruit of the Loom, Inc. Class A (a) 22,700 753,356
Liz Claiborne, Inc. 21,900 1,144,275
NIKE, Inc. Class B 63,700 3,101,394
Reebok International Ltd. (a) 15,400 426,388
Russell Corp. 12,100 365,269
Springs Industries, Inc. Class A 4,100 189,113
VF Corp. 40,300 2,075,450
8,055,245
TOTAL DURABLES 98,386,332
ENERGY - 6.9%
ENERGY SERVICES - 0.7%
Baker Hughes, Inc. 53,800 1,859,463
Dresser Industries, Inc. 59,000 2,599,688
Halliburton Co. 87,900 3,917,044
Helmerich & Payne, Inc. 20,500 456,125
McDermott International, Inc. 20,400 702,525
Rowan Companies, Inc. (a) 29,800 579,238
Schlumberger Ltd. 161,700 11,046,131
Western Atlas, Inc. 19,500 1,655,063
22,815,277
OIL & GAS - 6.2%
Amerada Hess Corp. 32,000 1,738,000
Amoco Corp. 319,900 13,315,838
SHARES VALUE (NOTE 1)
Anadarko Petroleum Corp. 20,100 $ 1,350,469
Apache Corp. 33,200 1,045,800
Ashland, Inc. 23,000 1,187,375
Atlantic Richfield Co. 108,400 8,468,750
Burlington Resources, Inc. 59,257 2,551,755
Chevron Corp. 217,900 18,099,319
Coastal Corp. (The) 36,900 2,576,081
Exxon Corp. 815,100 58,126,819
Kerr-McGee Corp. 17,600 1,018,600
Mobil Corp. 260,300 19,945,488
Occidental Petroleum Corp. 121,900 3,291,300
Oryx Energy Co. (a) 35,300 781,013
Pennzoil Co. 16,100 815,063
Phillips Petroleum Co. 84,700 4,081,481
Royal Dutch Petroleum Co. 707,200 38,763,400
Sun Co., Inc. 29,900 1,160,494
Texaco, Inc. 180,200 10,755,688
Union Pacific Resources Group, Inc. 86,912 1,526,392
Unocal Corp. 83,850 2,997,638
USX-Marathon Group 97,400 3,342,038
196,938,801
TOTAL ENERGY 219,754,078
FINANCE - 17.0%
BANKS - 7.7%
Banc One Corp. 235,948 13,168,848
Bank of New York, Inc. 130,900 7,943,994
BankAmerica Corp. 228,300 19,733,681
BankBoston Corp. 99,382 5,528,124
Bankers Trust New York Corp. 13,100 1,520,419
BB&T Corp. 41,600 2,813,200
Capital One Financial Corp. 21,800 2,707,288
Chase Manhattan Corp. 285,446 21,551,173
Citicorp 150,962 22,531,079
Comerica, Inc. 55,000 3,643,750
Fifth Third Bancorp 83,125 5,236,875
First Union Corp. 323,445 18,840,671
Huntington Bancshares, Inc. 56,690 1,899,115
KeyCorp 148,914 5,305,061
Mellon Bank Corp. 90,800 6,321,950
Mercantile Bancorp., Inc. 46,000 2,317,250
Morgan (JP) & Co., Inc. 59,400 6,957,225
National City Corp. 110,421 7,839,891
NationsBank Corp. 320,114 24,488,721
Northern Trust Corp. 40,000 3,050,000
Norwest Corp. 254,400 9,508,200
PNC Financial Corp. 100,100 5,386,631
Providian Financial Corp. 31,900 2,506,144
Republic New York Corp. 36,600 2,303,513
State Street Corp. 53,300 3,704,350
Summit Bancorp 63,000 2,992,500
SunTrust Banks, Inc. 71,300 5,797,581
Synovus Finanical Corp. 82,000 1,947,500
U.S. Bancorp 249,351 10,722,093
Wachovia Corp. 68,200 5,762,900
Wells Fargo & Co. 28,600 10,553,400
244,583,127
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
CREDIT & OTHER FINANCE - 2.0%
American Express Co. 151,179 $ 17,234,406
Associates First Capital Corp. 118,574 9,115,376
Beneficial Corp. 18,800 2,879,925
Countrywide Credit Industries, Inc. 37,300 1,892,975
First Chicago NBD Corp. 96,559 8,557,541
Fleet Financial Group, Inc. 95,974 8,013,829
Green Tree Financial Corp. 45,300 1,939,406
Household International, Inc. 110,630 5,503,843
MBNA Corp. 166,950 5,509,350
Transamerica Corp. 21,329 2,455,501
63,102,152
FEDERAL SPONSORED CREDIT - 1.1%
Fannie Mae 346,600 21,055,950
Freddie Mac 226,700 10,669,069
SLM Holding Corp. 56,300 2,758,700
34,483,719
INSURANCE - 3.8%
Aetna, Inc. 48,400 3,684,450
Allstate Corp. 139,821 12,802,360
American General Corp. 84,452 6,011,927
American International Group, Inc. 230,162 33,603,652
Aon Corp. 56,150 3,944,538
Chubb Corp. (The) 55,900 4,492,963
CIGNA Corp. 71,700 4,947,300
Cincinnati Financial Corp. 55,500 2,129,813
Conseco, Inc. 62,300 2,912,525
General Re Corp. 25,800 6,540,300
Hartford Financial Services Group, Inc. 39,800 4,552,125
Jefferson-Pilot Corp. 36,100 2,091,544
Lincoln National Corp. 33,400 3,051,925
Loews Corp. 38,000 3,310,750
Marsh & Mclennan Companies, Inc. 85,650 5,176,472
MBIA, Inc. 29,300 2,193,838
MGIC Investment Corp. 38,800 2,214,025
Progressive Corp. 24,100 3,398,100
SAFECO Corp. 47,100 2,140,106
St. Paul Companies, Inc. (The) 81,392 3,423,551
SunAmerica, Inc. 61,300 3,520,919
Torchmark Corp. 46,800 2,141,100
UNUM Corp. 49,200 2,730,600
121,014,883
SAVINGS & LOANS - 0.3%
Ahmanson (H.F.) & Co. 37,100 2,634,100
Golden West Financial Corp. 13,900 1,477,744
Washington Mutual, Inc. 138,362 6,010,099
10,121,943
SECURITIES INDUSTRY - 2.1%
Bear Stearns Companies, Inc. 38,000 2,161,250
Franklin Resources, Inc. 88,700 4,789,800
Lehman Brothers Holdings, Inc. 39,100 3,032,694
Merrill Lynch & Co., Inc. 115,200 10,627,200
Morgan Stanley Dean Witter Discover and Co. 197,056 18,005,992
SHARES VALUE (NOTE 1)
Schwab (Charles) Corp. 79,200 $ 2,574,000
Travelers Group, Inc. (The) 383,081 23,224,286
64,415,222
TOTAL FINANCE 537,721,046
HEALTH - 11.2%
DRUGS & PHARMACEUTICALS - 7.7%
Allergan, Inc. 22,400 1,038,800
ALZA Corp. Class A. 30,400 1,314,800
American Home Products Corp. 437,600 22,645,800
Amgen, Inc. (a) 85,000 5,556,875
Bristol-Myers Squibb Co. 331,800 38,136,263
Lilly (Eli) & Co. 369,192 24,389,747
Merck & Co., Inc. 398,300 53,272,625
Pfizer, Inc. 435,100 47,289,931
Pharmacia & Upjohn, Inc. 168,960 7,793,280
Schering-Plough Corp. 244,600 22,411,475
Sigma-Aldrich Corp. 33,700 1,183,713
Warner-Lambert Co. 273,300 18,960,188
243,993,497
MEDICAL EQUIPMENT & SUPPLIES - 2.9%
Abbott Laboratories 514,700 21,038,363
Bard (C.R.), Inc. 19,400 738,413
Bausch & Lomb, Inc. 18,700 937,338
Baxter International, Inc. 94,200 5,069,138
Becton, Dickinson & Co. 41,300 3,205,913
Biomet, Inc. 37,900 1,253,069
Boston Scientific Corp. (a) 65,000 4,655,625
Cardinal Health, Inc. 38,100 3,571,875
Guidant Corp. 51,100 3,644,069
Johnson & Johnson 448,400 33,069,500
Mallinckrodt, Inc. 24,900 739,219
Medtronic, Inc. 160,700 10,244,625
Millipore Corp. 14,700 400,575
Pall Corp. 41,500 850,750
St. Jude Medical, Inc. (a) 24,229 891,930
U.S. Surgical Corp. 24,400 1,113,250
91,423,652
MEDICAL FACILITIES MANAGEMENT - 0.6%
Columbia/HCA Healthcare Corp. 207,912 6,055,437
HEALTHSOUTH Corp. (a) 127,700 3,407,994
Humana, Inc. (a) 58,700 1,830,706
Manor Care, Inc. 18,500 711,094
Tenet Healthcare Corp. (a) 102,800 3,212,500
United HealthCare Corp. 64,700 4,108,450
19,326,181
TOTAL HEALTH 354,743,330
HOLDING COMPANIES - 0.1%
CINergy Corp. 46,913 1,641,955
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - 5.3%
ELECTRICAL EQUIPMENT - 3.7%
Emerson Electric Co. 152,900 $ 9,231,338
General Electric Co. 1,085,700 98,798,700
General Instrument Corp. (a) 52,100 1,416,469
General Signal Corp. 14,600 525,600
Grainger (W.W.), Inc. 30,300 1,509,319
Harris Corp. 26,700 1,193,156
Honeywell, Inc. 42,300 3,534,694
Scientific-Atlanta, Inc. 26,200 664,825
116,874,101
INDUSTRIAL MACHINERY & EQUIPMENT - 1.4%
Briggs & Stratton Corp. 8,100 303,244
Case Corp. 24,300 1,172,475
Caterpillar, Inc. 122,100 6,456,038
Cincinnati Milacron, Inc. 10,100 245,556
Cooper Industries, Inc. 40,346 2,216,508
Deere & Co. 84,900 4,489,088
Dover Corp. 74,600 2,555,050
Harnischfeger Industries, Inc. 14,400 407,700
Illinois Tool Works, Inc. 81,100 5,408,356
Ingersoll-Rand Co. 55,300 2,436,656
Parker-Hannifin Corp. 35,625 1,358,203
Stanley Works 29,300 1,217,781
Tenneco, Inc. 60,200 2,291,363
Timken Co. 17,984 554,132
Tyco International Ltd. 192,700 12,140,100
43,252,250
POLLUTION CONTROL - 0.2%
Browning-Ferris Industries, Inc. 61,300 2,130,175
Waste Management, Inc. 151,700 5,309,500
7,439,675
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 167,566,026
MEDIA & LEISURE - 4.3%
BROADCASTING - 1.5%
CBS Corp. 246,050 7,812,088
Clear Channel Communications, Inc. (a) 37,100 4,048,538
Comcast Corp. Class A special 110,950 4,503,877
MediaOne Group, Inc. 201,100 8,835,831
Tele-Communications, Inc. (TCI Group) Series A (a) 158,400 6,088,500
Time Warner, Inc. 177,920 15,201,040
46,489,874
ENTERTAINMENT - 0.9%
Disney (Walt) Co. 226,500 23,796,656
King World Productions, Inc. (a) 21,400 545,700
Viacom, Inc. Class B (non-vtg.) (a) 99,200 5,778,400
30,120,756
LEISURE DURABLES & TOYS - 0.2%
Brunswick Corp. 28,500 705,375
Hasbro, Inc. 44,650 1,755,303
Mattel, Inc. 103,576 4,382,559
6,843,237
SHARES VALUE (NOTE 1)
LODGING & GAMING - 0.1%
Harrah's Entertainment, Inc. (a) 33,600 $ 781,200
Hilton Hotels Corp. 83,700 2,385,450
Mirage Resorts, Inc. (a) 66,900 1,425,806
4,592,456
PUBLISHING - 0.9%
American Greetings Corp. Class A 24,500 1,247,969
Cognizant Corp. 58,800 3,704,400
Dow Jones & Co., Inc. 25,400 1,416,050
Dun & Bradstreet Corp. 57,300 2,069,963
Gannett, Inc. 95,300 6,772,256
Harcourt General, Inc. 17,000 1,011,500
Knight Ridder, Inc. 26,200 1,442,638
Mcgraw-Hill Companies, Inc. 34,400 2,805,750
Meredith Corp. 14,700 689,981
New York Times Co. (The) Class A 30,700 2,432,975
Times Mirror Co. Class A 23,600 1,483,850
Tribune Co. 40,500 2,786,906
27,864,238
RESTAURANTS - 0.7%
Darden Restaurants, Inc. 47,900 760,413
Marriott International, Inc. Class A 76,800 2,486,400
McDonald's Corp. 228,000 15,732,000
Tricon Global Restaurants, Inc. 51,010 1,616,379
Wendy's International, Inc. 42,800 1,005,800
21,600,992
TOTAL MEDIA & LEISURE 137,511,553
NONDURABLES - 9.5%
AGRICULTURE - 0.1%
Pioneer Hawaii-Bred International, Inc. 75,700 3,132,088
BEVERAGES - 3.3%
Anheuser-Busch Companies, Inc. 162,200 7,653,813
Brown-Forman Corp. Class B 15,800 1,015,150
Coca-Cola Co. (The) 822,500 70,323,750
Coors (Adolph) Co. Class B 12,000 408,000
PepsiCo, Inc. 498,300 20,523,731
Seagram Co. Ltd. 119,900 4,897,295
104,821,739
FOODS - 1.9%
Archer-Daniels-Midland Co. 189,981 3,680,882
Bestfoods 96,100 5,579,806
Campbell Soup Co. 151,200 8,032,500
ConAgra, Inc. 158,000 5,006,625
General Mills, Inc. 52,500 3,589,688
Heinz (H.J.) Co. 121,750 6,833,219
Hershey Foods Corp. 40,600 2,801,400
Kellogg Co. 129,300 4,856,831
Quaker Oats Co. 47,400 2,604,038
Ralston Purina Co. 36,500 4,263,656
Sara Lee Corp. 155,800 8,715,063
Sysco Corp. 113,200 2,900,750
Wrigley (Wm.) Jr. Co. 33,200 3,253,600
62,118,058
HOUSEHOLD PRODUCTS - 3.1%
Alberto-Culver Co. Class B 12,600 365,400
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONDURABLES - CONTINUED
HOUSEHOLD PRODUCTS - CONTINUED
Avon Products, Inc. 46,300 $ 3,588,250
Clorox Co. 34,800 3,319,050
Colgate-Palmolive Co. 98,800 8,694,400
Gillette Co. 374,900 21,252,144
International Flavors & Fragrances, Inc. 36,900 1,602,844
Procter & Gamble Co. 447,100 40,714,044
Rubbermaid, Inc. 46,000 1,526,625
Unilever NV (NY shares) 211,400 16,687,388
97,750,145
TOBACCO - 1.1%
Philip Morris Companies, Inc. 811,400 31,948,875
UST, Inc. 61,800 1,668,600
33,617,475
TOTAL NONDURABLES 301,439,505
PRECIOUS METALS - 0.2%
Barrick Gold Corp. 124,900 2,382,695
Battle Mountain Gold Co. 56,500 335,469
Homestake Mining Co. 70,300 729,363
Newmont Mining Corp. 50,165 1,185,148
Placer Dome, Inc. 68,200 794,563
5,427,238
RETAIL & WHOLESALE - 5.2%
APPAREL STORES - 0.4%
Abercrombie & Fitch Co. Class A (a) 80 3,520
Gap, Inc. 130,900 8,066,713
Limited, Inc. (The) 76,089 2,520,448
TJX Companies, Inc. 107,000 2,581,375
Venator Group, Inc. 45,200 864,450
14,036,506
DRUG STORES - 0.5%
CVS Corp. 122,000 4,750,375
Longs Drug Stores Corp. 13,000 375,375
Rite Aid Corp. 86,200 3,237,888
Walgreen Co. 160,800 6,643,050
15,006,688
GENERAL MERCHANDISE STORES - 2.8%
Consolidated Stores Corp. (a) 40,200 1,457,250
Costco Companies, Inc. (a) 75,739 4,776,291
Dayton Hudson Corp. 146,300 7,095,550
Dillards, Inc. Class A 35,600 1,475,175
Federated Department Stores, Inc. (a) 70,300 3,783,019
K mart Corp. (a) 163,000 3,137,750
May Department Stores Co. (The) 78,200 5,122,100
Mercantile Stores Co., Inc. 15,000 1,184,063
Nordstrom, Inc. 27,100 2,093,475
Penney (J.C.), Inc. 83,800 6,059,788
Sears, Roebuck & Co. 130,300 7,956,444
Wal-Mart Stores, Inc. 744,700 45,240,525
89,381,430
SHARES VALUE (NOTE 1)
GROCERY STORES - 0.5%
Albertson's, Inc. 82,200 $ 4,258,988
American Stores Co. 92,200 2,230,088
Giant Food, Inc. Class A 20,300 874,169
Great Atlantic & Pacific Tea, Inc. 13,300 439,731
Kroger Co. (The) (a) 87,800 3,764,425
Supervalu, Inc. 20,600 914,125
Winn-Dixie Stores, Inc. 45,800 2,344,388
14,825,914
RETAIL & WHOLESALE, MISCELLANEOUS - 1.0%
Circuit City Stores, Inc. -
33,700 1,579,688
Circuit City Group
Home Depot, Inc. 244,800 20,333,700
IKON Office Solutions, Inc. 46,000 669,875
Lowe's Companies, Inc. 113,800 4,616,013
Tandy Corp. 33,800 1,793,513
Toys R US, Inc. (a) 94,200 2,219,588
31,212,377
TOTAL RETAIL & WHOLESALE 164,462,915
SERVICES - 0.7%
ADVERTISING - 0.2%
Interpublic Group of Companies, Inc. 40,250 2,442,672
Omnicom Group, Inc. 56,900 2,837,888
5,280,560
LEASING & RENTAL - 0.0%
Ryder Systems, Inc. 36,600 1,155,188
PRINTING - 0.1%
Deluxe Corp. 34,400 1,231,950
Donnelley (R.R.) & Sons Co. 45,600 2,086,200
Moore Corp. Ltd. 21,000 278,998
3,597,148
SERVICES - 0.4%
Block (H&R), Inc. 35,000 1,474,375
Cendant Corp. (a) 276,372 5,769,266
Ecolab, Inc. 34,900 1,081,900
Jostens, Inc. 9,200 221,950
National Service Industries, Inc. 14,400 732,600
Service Corp. International, Inc. 85,300 3,657,238
12,937,329
TOTAL SERVICES 22,970,225
TECHNOLOGY - 14.0%
COMMUNICATIONS EQUIPMENT - 2.9%
3Com Corp. (a) 118,800 3,645,675
Andrew Corp. (a) 29,812 538,479
Ascend Communications, Inc. (a) 61,100 3,028,269
Cabletron Systems, Inc. (a) 48,400 650,375
Cisco Systems, Inc. (a) 345,350 31,793,784
DSC Communications Corp. (a) 41,700 1,251,000
Lucent Technologies, Inc. 437,068 36,358,594
Northern Telecom Ltd. 176,600 10,034,706
Tellabs, Inc. (a) 61,800 4,426,425
91,727,307
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TECHNOLOGY - CONTINUED
COMPUTER SERVICES & SOFTWARE - 4.3%
Adobe Systems, Inc. 22,300 $ 946,356
Autodesk, Inc. 15,800 610,275
Automatic Data Processing, Inc. 100,400 7,316,650
Ceridian Corp. (a) 22,000 1,292,500
Computer Associates International, Inc. 182,112 10,118,598
Computer Sciences Corp. 52,000 3,328,000
Equifax, Inc. 42,800 1,554,175
First Data Corp. 141,700 4,720,381
HBO & Co. 149,700 5,276,925
Microsoft Corp. (a) 817,700 88,618,238
Novell, Inc. (a) 129,700 1,653,675
Oracle Corp. (a) 331,750 8,148,609
Parametric Technolgy Corp. (a) 96,300 2,612,138
Shared Medical Systems Corp. 8,100 594,844
136,791,364
COMPUTERS & OFFICE EQUIPMENT - 4.2%
Apple Computer, Inc. (a) 49,400 1,417,163
Bay Networks, Inc. (a) 68,900 2,222,025
Compaq Computer Corp. 550,762 15,627,872
Data General Corp. (a) 16,500 246,469
Dell Computer Corp. (a) 210,900 19,574,156
EMC Corp. (a) 169,600 7,600,200
Gateway 2000, Inc. (a) 51,200 2,592,000
Hewlett-Packard Co. 343,500 20,567,063
International Business Machines Corp. 314,100 36,062,606
Pitney-Bowes, Inc. 93,400 4,494,875
Seagate Technology, Inc. (a) 88,000 2,095,500
Silicon Graphics, Inc. (a) 60,500 733,563
Sun Microsystems, Inc. (a) 126,700 5,503,531
Unisys Corp. (a) 76,900 2,172,425
Xerox Corp. 109,400 11,117,775
132,027,223
ELECTRONIC INSTRUMENTS - 0.2%
Applied Materials, Inc. (a) 121,900 3,596,050
KLA-Tencor Corp. (a) 34,200 946,913
Perkin-Elmer Corp. 16,500 1,026,094
Tektronix, Inc. 16,050 567,769
Thermo Electron Corp. (a) 49,600 1,695,700
7,832,526
ELECTRONICS - 2.1%
Advanced Micro Devices, Inc. (a) 40,900 697,856
AMP, Inc. 77,796 2,674,238
Intel Corp. 561,800 41,643,425
LSI Logic Corp. (a) 43,700 1,007,831
Micron Technology, Inc. (a) 67,400 1,672,363
Motorola, Inc. 199,000 10,459,938
National Semiconductor Corp. (a) 54,900 723,994
Texas Instruments, Inc. 127,900 7,458,169
Thomas & Betts Corp. 16,900 832,325
67,170,139
SHARES VALUE (NOTE 1)
PHOTOGRAPHIC EQUIPMENT - 0.3%
Eastman Kodak Co. 107,700 $ 7,868,831
Polaroid Corp. 15,700 558,331
8,427,162
TOTAL TECHNOLOGY 443,975,721
TRANSPORTATION - 1.0%
AIR TRANSPORTATION - 0.4%
AMR Corp. (a) 61,000 5,078,250
Delta Air Lines, Inc. 25,400 3,282,950
Southwest Airlines Co. 75,000 2,221,875
US Airways Group, Inc. (a) 29,800 2,361,650
12,944,725
RAILROADS - 0.5%
Burlington Northern Santa Fe Corp. 53,018 5,205,705
CSX Corp. 73,238 3,332,329
Norfolk Southern Corp. 126,200 3,762,338
Union Pacific Corp. 85,600 3,777,100
16,077,472
TRUCKING & FREIGHT - 0.1%
FDX Corp. (a) 52,220 3,276,805
Laidlaw, Inc. 89,900 1,087,191
4,363,996
TOTAL TRANSPORTATION 33,386,193
UTILITIES - 9.1%
CELLULAR - 0.4%
AirTouch Communications, Inc. (a) 186,300 10,886,906
Nextel Communications, Inc. Class A (a) 85,700 2,131,788
13,018,694
ELECTRIC UTILITY - 2.2%
Ameren Corp. 43,900 1,745,025
American Electric Power Co., Inc. 63,400 2,876,775
Baltimore Gas & Electric Co. 45,200 1,404,025
Carolina Power & Light Co. 40,100 1,739,338
Central & South West Corp. 81,200 2,182,250
Consolidated Edison, Inc. 80,500 3,708,031
Dominion Resources, Inc. 65,600 2,673,200
DTE Energy Co. 51,600 2,083,350
Duke Energy Corp. 120,007 7,110,415
Edison International 120,600 3,565,238
Entergy Corp. 93,900 2,699,625
Firstenergy Corp. 69,300 2,130,975
FPL Group, Inc. 61,600 3,880,800
GPU, Inc. 35,500 1,342,344
Houston Industries, Inc. 91,122 2,813,392
Niagara Mohawk Power Corp. (a) 40,900 610,944
Northern States Power Co. 34,000 973,250
PacifiCorp 99,700 2,255,713
PECO Energy Co. 78,400 2,288,300
PG&E Corp. 127,800 4,033,688
PP&L Resources, Inc. 40,500 918,844
Public Service Enterprise Group, Inc. 85,800 2,954,738
Southern Co. 234,700 6,498,256
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - CONTINUED
ELECTRIC UTILITY - CONTINUED
Texas Utilities Co. 89,000 $ 3,704,625
Unicom Corp. 81,900 2,871,619
69,064,760
GAS - 0.6%
Columbia Gas System, Inc. (The) 29,400 1,635,375
Consolidated Natural Gas Co. 33,700 1,984,088
Eastern Enterprises Co. 12,600 540,225
Enron Corp. 103,800 5,611,688
NICOR, Inc. 16,000 642,000
ONEOK, Inc. 10,806 430,889
Peoples Energy Corp. 11,900 459,638
Sempra Energy 78,656 2,182,704
Sonat, Inc. 37,000 1,429,125
Williams Companies, Inc. 141,600 4,779,000
19,694,732
TELEPHONE SERVICES - 5.9%
ALLTEL Corp. 88,200 4,101,300
Ameritech Corp. 366,900 16,464,638
AT&T Corp. 541,200 30,916,050
Bell Atlantic Corp. 517,278 23,600,809
BellSouth Corp. 330,000 22,151,250
Frontier Corp. 57,600 1,814,400
GTE Corp. 320,900 17,850,063
MCI Communications Corp. 226,500 13,165,313
SBC Communications, Inc. 612,848 24,513,920
Sprint Corp. 114,900 8,100,450
U.S. WEST, Inc. 161,492 7,590,124
Worldcom, Inc. (a) 338,800 16,410,625
186,678,942
TOTAL UTILITIES 288,457,128
TOTAL COMMON STOCKS 2,974,571,457
(Cost $2,209,837,396)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
U.S. TREASURY OBLIGATIONS - 6.2%
PRINCIPAL
AMOUNT
U.S. Treasury Bills, yields at dates
of purchase 4.6332% to 5.0541%
7/30/98 to 9/3/98 (b) $ 197,133,000 195,776,952
(Cost $195,682,886)
TOTAL INVESTMENT IN SECURITIES - 100% $ 3,170,348,409
(Cost $2,405,520,282)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
FUTURES CONTRACTS
EXPIRATION UNDERLYING FACE UNREALIZED
DATE AMOUNT AT VALUE GAIN/(LOSS)
PURCHASED
349 S&P 500 Sep. 1998 $ 99,726,750 $ 3,122,832
Futures Contracts
</TABLE>
THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL
INVESTMENTS IN
SECURITIES - 3.1%
LEGEND
(a) Non-income producing
(b) Security or a portion of the security was pledged to cover margin
requirements for futures contracts. At the period end, the value of
securities pledged amounted to $6,495,000.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $707,562,865 and $21,000,689, respectively.
The market value of futures contracts opened and closed during the
period amounted to $784,404,205 and $862,860,247, respectively.
The fund participated in the security lending program. At period end,
the value of securities loaned and the value of the collateral
amounted to $7,774,864 and $7,978,792, respectively (see Note 5 of
Notes to Financial Statements).
INCOME TAX INFORMATION
At June 30, 1998, the aggregate cost of investment securities for
income tax purposes was $2,405,520,762. Net unrealized appreciation
aggregated $764,827,647, of which $795,409,354 related to appreciated
investment securities and $30,581,707 related to depreciated
investment securities.
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 30, 1998 (UNAUDITED)
ASSETS
INVESTMENT IN SECURITIES, AT VALUE $ 3,170,348,409
(COST $2,405,520,282) -
SEE ACCOMPANYING SCHEDULE
RECEIVABLE FOR INVESTMENTS SOLD 7,834,557
RECEIVABLE FOR FUND SHARES SOLD 12,193,773
DIVIDENDS RECEIVABLE 2,947,808
OTHER RECEIVABLES 1,329
TOTAL ASSETS 3,193,325,876
LIABILITIES
PAYABLE TO CUSTODIAN BANK $ 273,438
PAYABLE FOR INVESTMENTS PURCHASED 106,128,237
PAYABLE FOR FUND SHARES REDEEMED 902,722
ACCRUED MANAGEMENT FEE AND SUB-ADVISORY FEE 469,225
PAYABLE FOR DAILY VARIATION ON 1,102,680
FUTURES CONTRACTS
OTHER PAYABLES AND 278,969
ACCRUED EXPENSES
TOTAL LIABILITIES 109,155,271
NET ASSETS $ 3,084,170,605
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 2,287,714,527
UNDISTRIBUTED NET INVESTMENT INCOME 17,566,386
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS 10,938,743
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 767,950,949
AND ASSETS AND LIABILITIES IN
FOREIGN CURRENCIES
NET ASSETS, FOR 23,859,382 $ 3,084,170,605
SHARES OUTSTANDING
NET ASSET VALUE, OFFERING PRICE $129.26
AND REDEMPTION PRICE PER SHARE ($3,084,170,605 (DIVIDED BY) 23,859,382 SHARES)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME $ 18,330,787
DIVIDENDS
INTEREST (INCLUDING INCOME ON SECURITIES LOANED OF $7,970) 2,879,715
TOTAL INCOME 21,210,502
EXPENSES
MANAGEMENT FEE AND SUB-ADVISORY FEE $ 3,109,368
TRANSFER AGENT FEES 908,642
ACCOUNTING FEES 402,088
NON-INTERESTED TRUSTEES' COMPENSATION 4,481
REGISTRATION FEES 43,245
AUDIT 30,466
LEGAL 13,674
MISCELLANEOUS 2,849
TOTAL EXPENSES BEFORE REDUCTIONS 4,514,813
EXPENSE REDUCTIONS (933,505) 3,581,308
NET INVESTMENT INCOME 17,629,194
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 2,435,852
FOREIGN CURRENCY TRANSACTIONS 980
FUTURES CONTRACTS 9,671,688 12,108,520
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 370,415,452
ASSETS AND LIABILITIES IN 78
FOREIGN CURRENCIES
FUTURES CONTRACTS 2,064,104 372,479,634
NET GAIN (LOSS) 384,588,154
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 402,217,348
OTHER INFORMATION $ 933,505
EXPENSE REDUCTIONS
FMR REIMBURSEMENT
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
OPERATIONS $ 17,629,194 $ 25,929,152
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 12,108,520 58,502,006
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) 372,479,634 301,564,970
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 402,217,348 385,996,128
DISTRIBUTIONS TO SHAREHOLDERS (26,060,180) (10,847,444)
FROM NET INVESTMENT INCOME
FROM NET REALIZED GAIN (60,359,977) (22,010,833)
TOTAL DISTRIBUTIONS (86,420,157) (32,858,277)
SHARE TRANSACTIONS 837,618,107 1,199,221,255
NET PROCEEDS FROM SALES OF SHARES
REINVESTMENT OF DISTRIBUTIONS 86,420,157 32,858,277
COST OF SHARES REDEEMED (253,706,625) (310,418,293)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 670,331,639 921,661,239
TOTAL INCREASE (DECREASE) IN NET ASSETS 986,128,830 1,274,799,090
NET ASSETS
BEGINNING OF PERIOD 2,098,041,775 823,242,685
END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $17,566,386 AND
$25,920,081, RESPECTIVELY) $ 3,084,170,605 $ 2,098,041,775
OTHER INFORMATION
SHARES
SOLD 6,839,219 11,765,227
ISSUED IN REINVESTMENT OF DISTRIBUTIONS 751,741 357,466
REDEEMED (2,071,900) (3,026,660)
NET INCREASE (DECREASE) 5,519,060 9,096,033
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1998
SELECTED PER-SHARE DATA (UNAUDITED) 1997 1996 1995 1994 1993
NET ASSET VALUE, BEGINNING OF PERIOD $ 114.40 $ 89.05 $ 75.71 $ 56.22 $ 55.74 $ 52.60
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .83 D 1.80 D 1.04 .85 1.14 1.31
NET REALIZED AND UNREALIZED GAIN (LOSS) 18.54 26.67 15.55 19.72 (.56) 3.80
TOTAL FROM INVESTMENT OPERATIONS 19.37 28.47 16.59 20.57 .58 5.11
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (1.36) (1.03) (.91) (.95) - (1.28)
FROM NET REALIZED GAIN (3.15) (2.09) (2.34) (.11) (.10) (.60)
IN EXCESS OF NET REALIZED GAIN - - - (.02) - (.09)
TOTAL DISTRIBUTIONS (4.51) (3.12) (3.25) (1.08) (.10) (1.97)
NET ASSET VALUE, END OF PERIOD $ 129.26 $ 114.40 $ 89.05 $ 75.71 $ 56.22 $ 55.74
TOTAL RETURN B, C 17.42% 32.83% 22.71% 37.19% 1.04% 9.74%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 3,084,171 $ 2,098,042 $ 823,243 $ 245,700 $ 51,301 $ 25,153
RATIO OF EXPENSES TO AVERAGE NET ASSETS .28% A, E .28% E .28% E .28% E .28% E .28% E
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET
ASSETS 1.38% A 1.74% 2.26% 2.70% 2.81% 2.65%
PORTFOLIO TURNOVER RATE 2% A 9% 14% 16% 2% 9%
AVERAGE COMMISSION RATE F $ .0232 $ .0268 $ .0315
A ANNUALIZED B TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS
SHOWN. TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED
DURING THE PERIODS SHOWN (SEE NOTE 7 OF NOTES TO FINANCIAL STATEMENTS). D NET
INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING
DURING THE PERIOD. E FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING
THE PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE BEEN
HIGHER (SEE NOTE 7 OF NOTES TO FINANCIAL STATEMENTS). F FOR FISCAL YEARS
BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE
COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED.
THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF
TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE
STRUCTURES MAY DIFFER.
</TABLE>
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
JUNE 30, 1998 YEAR FUND
VIP III: GROWTH OPPORTUNITIES - "INITIAL CLASS" 25.31% 26.44%
S&P 500 (REGISTERED TRADEMARK) 30.16% 32.30%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's return to the performance of the Standard &
Poor's 500 Index - a widely recognized, unmanaged index of common
stocks. This benchmark reflects the reinvestment of dividends and
capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations January 3, 1995.
If Fidelity had not reimbursed certain fund expenses, the life of fund
total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURN WOULD BE LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
VIP III Growth Opp S&P 500
00617 SP001
1995/01/03 10000.00 10000.00
1995/01/31 10060.00 10261.28
1995/02/28 10370.00 10661.16
1995/03/31 10560.00 10975.77
1995/04/30 10930.00 11299.00
1995/05/31 11440.00 11750.63
1995/06/30 11790.00 12023.59
1995/07/31 12180.00 12422.30
1995/08/31 12260.00 12453.48
1995/09/30 12470.00 12979.01
1995/10/31 12560.00 12932.68
1995/11/30 12920.00 13500.42
1995/12/31 13251.81 13760.44
1996/01/31 13444.45 14228.85
1996/02/29 13434.43 14360.75
1996/03/31 13393.72 14499.04
1996/04/30 13607.45 14712.76
1996/05/31 13912.77 15092.20
1996/06/30 14024.73 15149.70
1996/07/31 13617.62 14480.39
1996/08/31 13699.05 14785.78
1996/09/30 14360.59 15617.92
1996/10/31 14950.89 16048.66
1996/11/30 16080.60 17261.78
1996/12/31 15673.50 16919.83
1997/01/31 16416.46 17976.98
1997/02/28 16573.05 18117.92
1997/03/31 15727.48 17373.45
1997/04/30 16446.21 18410.65
1997/05/31 17513.74 19531.49
1997/06/30 18095.06 20406.50
1997/07/31 19490.24 22030.24
1997/08/31 18750.37 20796.11
1997/09/30 19532.52 21935.11
1997/10/31 19141.45 21202.48
1997/11/30 19817.90 22183.94
1997/12/31 20367.51 22564.84
1998/01/31 20452.07 22814.41
1998/02/28 21731.21 24459.78
1998/03/31 22407.88 25712.37
1998/04/30 22296.95 25971.03
1998/05/31 22141.65 25524.59
1998/06/30 22674.11 26561.40
IMATRL PRASUN SHR__CHT 19980630 19980709 134851 R00000000000045
Let's say hypothetically that $10,000 was invested in Variable
Insurance Products Fund III: Growth Opportunities Portfolio on January
3, 1995, when the fund started. As the chart shows, by June 30, 1998,
the value of the investment would have grown to $22,674 - a 126.74%
increase on the initial investment. For comparison, look at how the
Standard & Poor's 500 Index did over the same period. With dividends
and capital gains, if any, reinvested, the same $10,000 investment
would have grown to $26,561 - a 165.61% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
FANNIE MAE 6.4
PHILIP MORRIS COMPANIES, INC. 4.7
FLEET FINANCIAL GROUP, INC. 3.5
FREDDIE MAC 2.9
WAL-MART STORES, INC. 2.6
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
FINANCE 20.8
UTILITIES 9.6
RETAIL & WHOLESALE 9.5
TECHNOLOGY 9.3
HEALTH 8.6
ASSET ALLOCATION AS OF JUNE 30, 1998*
ROW: 1, COL: 1, VALUE: 85.3
ROW: 1, COL: 2, VALUE: 10.7
ROW: 1, COL: 3, VALUE: 4.0
STOCKS 85.3%
BONDS 10.7%
SHORT-TERM INVESTMENTS 4.0%
FOREIGN INVESTMENTS 10.8%
*
% OF FUND'S INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1 fee.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
JUNE 30, 1998 YEAR FUND
VIP III: GROWTH OPPORTUNITIES - SERVICE CLASS 25.31% 26.44%
S&P 500 (REGISTERED TRADEMARK) 30.16% 32.30%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's return to the performance of the Standard &
Poor's 500 Index - a widely recognized, unmanaged index of common
stocks. This benchmark reflects the reinvestment of dividends and
capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of the fund figures are from
commencement of operations January 3, 1995.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURN WOULD BE LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
VIP III Growth Opp - CL S S&P 500
00491 SP001
1995/01/03 10000.00 10000.00
1995/01/31 10060.00 10261.28
1995/02/28 10370.00 10661.16
1995/03/31 10560.00 10975.77
1995/04/30 10930.00 11299.00
1995/05/31 11440.00 11750.63
1995/06/30 11790.00 12023.59
1995/07/31 12180.00 12422.30
1995/08/31 12260.00 12453.48
1995/09/30 12470.00 12979.01
1995/10/31 12560.00 12932.68
1995/11/30 12920.00 13500.42
1995/12/31 13251.81 13760.44
1996/01/31 13444.45 14228.85
1996/02/29 13434.43 14360.75
1996/03/31 13393.72 14499.04
1996/04/30 13607.45 14712.76
1996/05/31 13912.77 15092.20
1996/06/30 14024.73 15149.70
1996/07/31 13617.62 14480.39
1996/08/31 13699.05 14785.78
1996/09/30 14360.59 15617.92
1996/10/31 14950.89 16048.66
1996/11/30 16080.60 17261.78
1996/12/31 15673.50 16919.83
1997/01/31 16416.46 17976.98
1997/02/28 16573.05 18117.92
1997/03/31 15727.48 17373.45
1997/04/30 16446.21 18410.65
1997/05/31 17513.74 19531.49
1997/06/30 18095.06 20406.50
1997/07/31 19490.24 22030.24
1997/08/31 18750.37 20796.11
1997/09/30 19532.52 21935.11
1997/10/31 19141.45 21202.48
1997/11/30 19828.47 22183.94
1997/12/31 20367.51 22564.84
1998/01/31 20452.07 22814.41
1998/02/28 21731.21 24459.78
1998/03/31 22407.88 25712.37
1998/04/30 22296.95 25971.03
1998/05/31 22130.56 25524.59
1998/06/30 22674.11 26561.40
IMATRL PRASUN SHR__CHT 19980630 19980709 134103 R00000000000045
Let's say hypothetically that $10,000 was invested in Variable
Insurance Products Fund III: Growth Opportunities Portfolio - Service
Class on January 3, 1995, when the fund started. As the chart shows,
by June 30, 1998, the value of the investment would have grown to
$22,674 - a 126.74% increase on the initial investment. For
comparison, look at how the Standard & Poor's 500 Index did over the
same period. With dividends and capital gains, if any, reinvested, the
same $10,000 investment would have grown to $26,561 - a 165.61%
increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
FANNIE MAE 6.4
PHILIP MORRIS COMPANIES, INC. 4.7
FLEET FINANCIAL GROUP, INC. 3.5
FREDDIE MAC 2.9
WAL-MART STORES, INC. 2.6
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
FINANCE 20.8
UTILITIES 9.6
RETAIL & WHOLESALE 9.5
TECHNOLOGY 9.3
HEALTH 8.6
ASSET ALLOCATION AS OF JUNE 30, 1998*
ROW: 1, COL: 1, VALUE: 85.3
ROW: 1, COL: 2, VALUE: 10.7
ROW: 1, COL: 3, VALUE: 4.0
STOCKS 85.3%
BONDS 10.7%
SHORT-TERM INVESTMENTS 4.0%
FOREIGN INVESTMENTS 10.8%
*
% OF FUND'S INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with George Vanderheiden, Portfolio Manager of Growth
Opportunities Portfolio
Q. HOW DID THE FUND PERFORM RELATIVE TO ITS BENCHMARK, GEORGE?
A. During the six months that ended June 30, 1998, the fund's return
trailed that of the Standard & Poor's 500 Index, which returned
17.71%. For the 12 months that ended June 30, 1998, the fund also
trailed the S&P 500, which returned 30.16%.
Q. WHY DID THE FUND LAG THE S&P 500 OVER THE PAST SIX MONTHS?
A. Stocks in the technology and nondurables sectors hurt the fund's
performance relative to the S&P 500. Several of the fund's technology
holdings declined due to stock-specific factors as well as reduced
demand caused by economic weakness in Asia. Nondurables were a
detractor primarily due to the poor performance of Philip Morris. The
failed attempt at a tobacco industry settlement and the uncertainty
surrounding future litigation and government legislation turned market
sentiment against many tobacco companies. The fund's bond and cash
holdings also hurt performance, accounting for over half of the
underperformance relative to the S&P 500.
Q. DID YOU CHANGE THE FUND'S ALLOCATION TO BOND AND CASH EQUIVALENTS?
A. The allocation to bonds and cash equivalents was reduced slightly
during the period. Bonds ended the period under 11% of the fund's
investments and cash stood at about 4%. In addition to keeping the
fund diversified across industry sectors, I invest in bonds when I
feel they are attractively priced. I originally purchased bonds as a
hedge against slowing corporate earnings growth. Although the
deceleration in earnings growth has taken longer than I expected,
deflation - price declines - remains a potential shock to the economy
that could disrupt the stock market.
Q. WHAT STRATEGIES HELPED THE FUND'S PERFORMANCE?
A. On the positive side, the fund benefited from an overweighted
position relative to the S&P 500 in the retail sector, as well as good
performance from specific retail stocks. Fund holdings Lowe's, Home
Depot and Wal-Mart Stores - all top holdings during the period -
displayed strength as investors favored retail stocks that were
positioned to perform well in a slow-growth, low-inflation
environment. Good stock selection among utilities holdings also helped
returns. Vodafone Group, a telecommunications company based in the
United Kingdom, benefited from strong earnings due to higher
subscriber growth and increased contribution from its overseas
operations.
Q. DID YOU MAKE ANY ADJUSTMENT TO THE FUND'S SECTOR POSITIONING DURING
THE PAST SIX MONTHS AS A RESULT OF THE ASIAN FINANCIAL CRISIS?
A. In many ways, the U.S. consumer has been the beneficiary of the
faltering Asian economies. Interest rates, inflation and oil prices
have all declined due to reduced demand emanating from Asia. This has
created a favorable environment for consumer spending, because prices
for many consumer goods - as well as home mortgage interest rates -
have either declined or risen only a small amount. This benign
environment has helped spur sales in the retail, apparel and housing
industries. Consequently, I increased the fund's retail positions,
maintaining investments in Home Depot, Lowe's, Circuit City and
Wal-Mart Stores. On the other hand, the economic weakness in Asia has
hurt the earnings and pricing power of many technology companies. The
reduction in earnings at many companies that had a large reliance on
Asia has caused a reduction in capital spending, which, in turn, has
decreased technology spending plans. Accordingly, orders have not yet
increased to prior levels at many semiconductor and semiconductor
capital equipment manufacturers. Therefore, I reduced the fund's
technology stake during the period.
Q. WHAT'S YOUR OUTLOOK?
A. The fund's positioning continues to reflect an environment of
anemic pricing power, flat-to-declining corporate earnings and
decreasing inflation. The fund is positioned to take advantage of this
economic outlook by focusing on four areas: (1) companies in the
financial sector that can benefit if interest rates fall; (2) global
companies with proprietary advantages that can be used to grow market
share worldwide; (3) innovative companies in the technology, health
care and telecommunications sectors that could rely on unit growth
rather than price increases to grow earnings; and (4) industries in
consolidation that still have strong growth rates.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED
ON MARKET AND OTHER CONDITIONS.
FUND FACTS
GOAL: to provide capital growth by investing
primarily in common stocks and securities
convertible into common stocks
START DATE: January 3, 1995
SIZE: as of June 30, 1998, more than
$1.4 billion
MANAGER: George Vanderheiden, since inception;
joined Fidelity in 1971
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
INVESTMENTS JUNE 30, 1998 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 85.3%
SHARES VALUE (NOTE 1)
BASIC INDUSTRIES - 2.6%
CHEMICALS & PLASTICS - 1.4%
Cabot Corp. 30,700 $ 991,994
du Pont (E.I.) de Nemours & Co. 161,500 12,051,938
Raychem Corp. 145,100 4,289,519
Union Carbide Corp. 44,700 2,385,863
19,719,314
PACKAGING & CONTAINERS - 0.9%
Corning, Inc. 7,300 253,675
Owens-Illinois, Inc. (a) 292,800 13,102,800
13,356,475
PAPER & FOREST PRODUCTS - 0.3%
Champion International Corp. 57,600 2,833,200
Georgia-Pacific Corp. 4,500 265,219
Stone Container Corp. (a) 23,200 362,500
Willamette Industries, Inc. 16,700 534,400
3,995,319
TOTAL BASIC INDUSTRIES 37,071,108
CONSTRUCTION & REAL ESTATE - 1.7%
BUILDING MATERIALS - 0.5%
Armstrong World Industries, Inc. 13,200 889,350
Owens Corning 114,800 4,685,275
Sherwin-Williams Co. 34,800 1,152,750
6,727,375
CONSTRUCTION - 0.8%
Centex Corp. 42,600 1,608,150
D.R. Horton, Inc. 86,536 1,806,439
Fleetwood Enterprises, Inc. 87,762 3,510,480
Kaufman & Broad Home Corp. 113,200 3,594,100
U.S. Home Corp. (a) 5,600 231,000
10,750,169
ENGINEERING - 0.4%
Fluor Corp. 121,400 6,191,400
TOTAL CONSTRUCTION & REAL ESTATE 23,668,944
DURABLES - 4.1%
AUTOS, TIRES, & ACCESSORIES - 2.8%
AutoZone, Inc. (a) 42,800 1,366,925
Cummins Engine Co., Inc. 69,600 3,567,000
Discount Auto Parts, Inc. (a) 66,300 1,723,800
General Motors Corp. 361,900 24,179,444
Goodyear Tire & Rubber Co. 38,000 2,448,625
Magna International, Inc. Class A 81,300 5,577,864
Republic Industries, Inc. (a) 20,500 512,500
39,376,158
CONSUMER DURABLES - 0.2%
Minnesota Mining & Manufacturing Co. 34,500 2,835,469
CONSUMER ELECTRONICS - 0.3%
Maytag Co. 22,500 1,110,938
Newell Co. 20,400 1,016,175
Whirlpool Corp. 22,900 1,574,375
3,701,488
TEXTILES & APPAREL - 0.8%
Burlington Industries, Inc. (a) 165,200 2,323,125
Jones Apparel Group, Inc. (a) 44,200 1,616,063
Liz Claiborne, Inc. 110,800 5,789,300
NIKE, Inc. Class B 27,600 1,343,775
SHARES VALUE (NOTE 1)
Shaw Industries, Inc. 31,800 $ 560,475
Warnaco Group, Inc. Class A 10,600 449,838
12,082,576
TOTAL DURABLES 57,995,691
ENERGY - 6.4%
ENERGY SERVICES - 0.2%
McDermott International, Inc. 98,800 3,402,425
Schlumberger Ltd. 5,300 362,056
3,764,481
OIL & GAS - 6.2%
Amerada Hess Corp. 201,000 10,916,813
Apache Corp. 23,400 737,100
Atlantic Richfield Co. 23,900 1,867,188
British Petroleum PLC ADR 192,687 17,004,628
Burlington Resources, Inc. 207,435 8,932,670
Chevron Corp. 36,600 3,040,088
Cooper Cameron Corp. (a) 15,300 780,300
Elf Aquitaine SA sponsored ADR 22,200 1,576,200
Occidental Petroleum Corp. 391,500 10,570,500
Royal Dutch Petroleum Co. 352,100 19,299,481
Tosco Corp. 252,400 7,414,250
Total SA:
Class B 6,153 797,733
sponsored ADR 49,468 3,233,971
USX-Marathon Group 30,300 1,039,669
Unocal Corp. 17,400 622,050
87,832,641
TOTAL ENERGY 91,597,122
FINANCE - 20.8%
BANKS - 1.9%
Banc One Corp. 40,000 2,232,500
Bank of Tokyo-Mitsubishi Ltd. 181,000 1,913,834
Credit Suisse Group (Reg.) 42,900 9,523,927
NationsBank Corp. 63,400 4,850,100
Providian Financial Corp. 104,700 8,225,494
26,745,855
CREDIT & OTHER FINANCE - 3.5%
Fleet Financial Group, Inc. 605,382 50,549,397
FEDERAL SPONSORED CREDIT - 9.3%
Freddie Mac 880,600 41,443,238
Fannie Mae 1,495,600 90,857,700
132,300,938
INSURANCE - 5.5%
AFLAC, Inc. 86,600 2,625,063
Allmerica Financial Corp. 48,600 3,159,000
Allstate Corp. 215,759 19,755,433
American International Group, Inc. 141,500 20,659,000
CIGNA Corp. 127,800 8,818,200
Loews Corp. 38,500 3,354,313
MBIA, Inc. 21,600 1,617,300
MGIC Investment Corp. 147,800 8,433,838
PMI Group, Inc. 26,700 1,959,113
Reliastar Financial Corp. 11,600 556,800
Torchmark Corp. 102,900 4,707,675
Travelers Property Casualty Corp. Class A 58,900 2,525,338
78,171,073
SAVINGS & LOANS - 0.2%
Golden West Financial Corp. 32,700 3,476,419
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
SECURITIES INDUSTRY - 0.4%
Nomura Securities Co. Ltd. 325,000 $ 3,777,981
Travelers Group, Inc. (The) 11,800 715,375
United Asset Management Corp. 45,300 1,180,631
Waddell & Reed Financial, Inc. Class A 1,900 45,481
5,719,468
TOTAL FINANCE 296,963,150
HEALTH - 8.6%
DRUGS & PHARMACEUTICALS - 3.6%
American Home Products Corp. 236,000 12,213,000
Amgen, Inc. (a) 130,700 8,544,513
Astra AB Class A Free shares 317,166 6,464,682
Merck & Co., Inc. 55,900 7,476,625
Novartis AG (Reg.) 3,100 5,146,785
Schering-Plough Corp. 128,600 11,782,975
51,628,580
MEDICAL EQUIPMENT & SUPPLIES - 1.2%
AmeriSource Health Corp. Class A (a) 68,000 4,466,750
Baxter International, Inc. 10,700 575,794
Biomet, Inc. 81,000 2,678,063
Johnson & Johnson 83,700 6,172,875
St. Jude Medical, Inc. (a) 100,902 3,714,455
17,607,937
MEDICAL FACILITIES MANAGEMENT - 3.8%
Columbia/HCA Healthcare Corp. 1,073,350 31,261,319
HEALTHSOUTH Corp. 21,300 568,444
Humana, Inc. (a) 240,800 7,509,950
Tenet Healthcare Corp. (a) 232,800 7,275,000
United HealthCare Corp. 110,600 7,023,100
53,637,813
TOTAL HEALTH 122,874,330
HOLDING COMPANIES - 0.1%
U.S. Industries, Inc. 36,100 893,475
INDUSTRIAL MACHINERY & EQUIPMENT - 4.0%
ELECTRICAL EQUIPMENT - 3.1%
Alcatel Alsthom Compagnie Generale
d'Electricite SA sponsored ADR 4,500 183,094
Alcatel Alsthom Compagnie Generale
d'Electricite SA 52,900 10,741,427
Emerson Electric Co. 90,600 5,469,975
General Electric Co. 99,600 9,063,600
Grainger (W.W.), Inc. 16,000 797,000
Philips Electronics NV 139,900 11,891,500
Philips Electronics NV (Bearer) 64,900 5,444,818
43,591,414
INDUSTRIAL MACHINERY & EQUIPMENT - 0.9%
Caterpillar, Inc. 82,300 4,351,613
Tyco International Ltd. 92,600 5,833,800
Ultratech Stepper, Inc. (a) 66,800 1,319,300
United States Filter Corp. (a) 54,200 1,520,988
13,025,701
POLLUTION CONTROL - 0.0%
Browning-Ferris Industries, Inc. 2,600 90,350
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 56,707,465
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - 3.0%
BROADCASTING - 1.1%
CBS Corp. 40,900 $ 1,298,575
Comcast Corp. Class A special 13,500 548,016
Cox Communications, Inc. Class A (a) 13,300 644,219
MediaOne Group, Inc. 100,900 4,433,294
Tele-Communications, Inc. (a):
(TCI Group), Series A 29,568 1,136,520
(TCI Ventures Group), Series A 282,664 5,670,947
Time Warner, Inc. 27,600 2,358,075
16,089,646
ENTERTAINMENT - 0.2%
Cedar Fair L.P. (depositary unit) 5,800 160,225
King World Productions, Inc. (a) 23,800 606,900
Royal Caribbean Cruises Ltd. 14,700 1,168,650
Viacom, Inc. Class A (a) 8,500 497,250
2,433,025
LODGING & GAMING - 0.8%
Circus Circus Enterprises, Inc. (a) 98,900 1,675,119
Mirage Resorts, Inc. (a) 113,300 2,414,706
Promus Hotel Corp. (a) 97,000 3,734,500
Sun International Hotels Ltd. Ord. (a) 72,800 3,312,400
11,136,725
PUBLISHING - 0.2%
Cognizant Corp. 30,400 1,915,200
Harte Hanks Communications, Inc. 6,800 175,525
2,090,725
RESTAURANTS - 0.7%
McDonald's Corp. 68,400 4,719,600
Papa John's International, Inc. (a) 8,500 335,219
Wendy's International, Inc. 226,800 5,329,800
10,384,619
TOTAL MEDIA & LEISURE 42,134,740
NONDURABLES - 4.7%
BEVERAGES - 0.0%
PepsiCo, Inc. 12,000 494,250
HOUSEHOLD PRODUCTS - 0.0%
Avon Products, Inc. 4,100 317,750
TOBACCO - 4.7%
Philip Morris Companies, Inc. 1,694,800 66,732,750
TOTAL NONDURABLES 67,544,750
PRECIOUS METALS - 0.0%
Newmont Mining Corp. 23,569 556,818
RETAIL & WHOLESALE - 9.5%
APPAREL STORES - 0.5%
Gap, Inc. 39,150 2,412,619
TJX Companies, Inc. 183,000 4,414,875
6,827,494
GENERAL MERCHANDISE STORES - 3.4%
Federated Department Stores, Inc. (a) 128,100 6,893,381
Penney (J.C.) Co., Inc. 46,000 3,326,375
Proffitts, Inc. (a) 36,100 1,457,538
Wal-Mart Stores, Inc. 604,600 36,729,450
48,406,744
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
GROCERY STORES - 0.3%
Safeway, Inc. (a) 123,200 $ 5,012,700
RETAIL & WHOLESALE, MISCELLANEOUS - 5.3%
Circuit City Stores, Inc. - Circuit
City Group 266,700 12,501,563
Home Depot, Inc. 382,700 31,788,019
Lowe's Companies, Inc. 507,200 20,573,300
Officemax, Inc. (a) 155,975 2,573,588
Office Depot, Inc. (a) 42,600 1,344,563
School Specialty, Inc. 10,055 164,651
Staples, Inc. (a) 105,450 3,051,459
Toys "R" Us, Inc. (a) 39,400 928,363
U.S. Office Products Co. (a) 21,724 423,618
Viking Office Products, Inc. (a) 62,900 1,973,488
75,322,612
TOTAL RETAIL & WHOLESALE 135,569,550
SERVICES - 0.5%
ADVERTISING - 0.0%
Interpublic Group of Companies, Inc. 8,150 494,603
PRINTING - 0.0%
Workflow Management, Inc. 11,586 93,412
SERVICES - 0.5%
AccuStaff, Inc. (a) 86,100 2,690,625
Medpartners, Inc. (a) 71,000 568,000
Navigant International, Inc. 8,689 73,857
Service Corp. International 83,600 3,584,350
6,916,832
TOTAL SERVICES 7,504,847
TECHNOLOGY - 9.3%
COMPUTER SERVICES & SOFTWARE - 2.7%
Automatic Data Processing, Inc. 65,100 4,744,163
Aztec Technology Partners, Inc. 17,379 132,515
Black Box Corp. (a) 20,400 677,025
Ceridian Corp. (a) 74,100 4,353,375
CompUSA, Inc. (a) 38,200 689,988
E Trade Group, Inc. (a) 57,500 1,318,906
Electronics for Imaging, Inc. (a) 100,600 2,125,175
First Data Corp. 118,500 3,947,531
Microsoft Corp. (a) 106,900 11,585,288
Oracle Corp. (a) 121,725 2,989,870
Policy Management Systems Corp. (a) 136,900 5,373,325
37,937,161
COMPUTERS & OFFICE EQUIPMENT - 2.1%
Compaq Computer Corp. 237,600 6,741,900
Hewlett-Packard Co. 47,000 2,814,125
Ingram Micro, Inc. Class A (a) 16,300 721,275
International Business Machines Corp. 77,100 8,852,044
SCI Systems, Inc. (a) 209,000 7,863,625
Tech Data Corp. (a) 88,500 3,794,438
30,787,407
ELECTRONIC INSTRUMENTS - 0.6%
Applied Materials, Inc. (a) 6,200 182,900
Cognex Corp. (a) 22,100 408,850
KLA-Tencor Corp. 44,100 1,221,019
Lam Research Corp. (a) 114,700 2,193,638
Novellus Systems, Inc. (a) 23,800 849,363
SHARES VALUE (NOTE 1)
Thermo Electron Corp. (a) 92,000 $ 3,145,250
Varian Associates, Inc. 15,000 585,000
8,586,020
ELECTRONICS - 3.9%
Altera Corp. (a) 32,300 954,869
Amkor Technology, Inc. 32,400 302,738
AMP, Inc. 108,400 3,726,250
Intel Corp. 84,800 6,285,800
International Rectifier Corp. (a) 42,900 364,650
Methode Electronics, Inc. Class A 115,000 1,782,500
Micrel, Inc. (a) 26,100 848,250
Microchip Technology, Inc. (a) 98,600 2,575,925
Micron Technology, Inc. (a) 313,300 7,773,756
MIPS Technologies, Inc. 1,700 23,800
Molex, Inc. 99,128 2,317,117
Motorola, Inc. 153,200 8,052,575
Solectron Corp. (a) 414,700 17,443,319
Thomas & Betts Corp. 59,300 2,920,525
Vishay Intertechnology, Inc. 15,010 269,242
55,641,316
TOTAL TECHNOLOGY 132,951,904
TRANSPORTATION - 0.4%
RAILROADS - 0.4%
Bombardier, Inc. Class B 60,900 1,659,683
CSX Corp. 79,800 3,630,900
5,290,583
SHIPPING - 0.0%
Stolt-Nielsen SA Class B sponsored ADR 10,400 180,700
Stolt-Nielsen SA 800 13,700
194,400
TOTAL TRANSPORTATION 5,484,983
UTILITIES - 9.6%
CELLULAR - 2.5%
AirTouch Communications, Inc. (a) 119,300 6,971,594
Vodafone Group PLC sponsored ADR 217,080 27,365,648
Vodafone Group PLC 24,396 309,411
34,646,653
ELECTRIC UTILITY - 0.4%
American Electric Power Co., Inc. 59,200 2,686,200
Consolidated Edison, Inc. 4,100 188,856
Duke Energy Corp. 20,100 1,190,925
Houston Industries, Inc. 22,100 682,338
Niagara Mohawk Power Corp. (a) 23,300 348,044
PG&E Corp. 23,130 730,041
5,826,404
TELEPHONE SERVICES - 6.7%
AT&T Corp. 143,100 8,174,588
Ameritech Corp. 70,300 3,154,713
Bell Atlantic Corp. 143,762 6,559,141
BellSouth Corp. 106,500 7,148,813
EXCEL Communications, Inc. (a) 12,400 284,425
MCI Communications Corp. 435,000 25,284,375
Qwest Communications International, Inc. 84,770 2,956,354
SBC Communications, Inc. 152,400 6,096,000
Sprint Corp. 221,100 15,587,550
Telecomunicacoes Brasileiras SA
sponsored ADR 163,300 17,830,319
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - CONTINUED
TELEPHONE SERVICES - CONTINUED
U.S. WEST, Inc. 2,569 $ 120,743
WorldCom, Inc. (a) 55,500 2,688,281
95,885,302
TOTAL UTILITIES 136,358,359
TOTAL COMMON STOCKS
(Cost $952,824,439) 1,215,877,236
U.S. TREASURY OBLIGATIONS - 10.7%
MOODY'S PRINCIPAL
RATINGS (C) AMOUNT
U.S. Treasury Bills, yield at date
of purchase 4.8277% to
4.9669% 7/23/98 - $ 700,000 697,920
U.S. Treasury Bonds:
8 1/8%, 8/15/19 Aaa 50,340,000 64,969,811
6 1/4%, 8/15/23 Aaa 40,953,000 43,845,101
stripped Principal:
0%, 2/15/19 Aaa 107,450,000 33,209,548
0%, 8/15/19 Aaa 12,000,000 3,601,080
0%, 8/15/20 Aaa 23,000,000 6,505,780
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $135,676,159) 152,829,240
CASH EQUIVALENTS - 4.0%
SHARES
Taxable Central Cash Fund (b)
(Cost $56,126,996) 56,126,996 56,126,996
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $1,144,627,594) $ 1,424,833,472
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield of the Taxable Central Cash
Fund was 5.61%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(c) Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investors Service, Inc.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $436,178,176 and $162,673,054 respectively, of which U.S.
government and government agency obligations aggregated $31,659,187
and $600,000, respectively.
The market value of futures contracts opened and closed during the
period amounted to $94,365,639 and $94,687,486, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $65,373 for the
period (see Note 4 of Notes to Financial Statements).
Distribution of investments by country of issue, as a percentage of
total value of investment in securities, is as follows:
United States 89.2%
United Kingdom 3.1
Netherlands 2.6
Brazil 1.3
France 1.2
Switzerland 1.0
Others (individually less than 1%) 1.6
TOTAL 100.0%
INCOME TAX INFORMATION
At June 30, 1998, the aggregate cost of investment securities for
income tax purposes was $1,144,664,129. Net unrealized appreciation
aggregated $280,169,343, of which $311,684,382 related to appreciated
investment securities and $31,515,039 related to depreciated
investment securities.
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 30, 1998 (UNAUDITED)
ASSETS
INVESTMENT IN SECURITIES, AT VALUE $ 1,424,833,472
(COST $1,144,627,594) -
SEE ACCOMPANYING SCHEDULE
CASH 293,885
RECEIVABLE FOR INVESTMENTS SOLD 2,410,542
RECEIVABLE FOR FUND SHARES SOLD 1,677,203
DIVIDENDS RECEIVABLE 1,873,599
INTEREST RECEIVABLE 2,790,983
TOTAL ASSETS 1,433,879,684
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 5,056,267
PAYABLE FOR FUND SHARES REDEEMED 1,587,775
ACCRUED MANAGEMENT FEE 679,896
OTHER PAYABLES AND 189,982
ACCRUED EXPENSES
TOTAL LIABILITIES 7,513,920
NET ASSETS $ 1,426,365,764
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 1,126,934,510
UNDISTRIBUTED NET INVESTMENT INCOME 8,339,663
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS 10,888,954
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 280,202,637
AND ASSETS AND LIABILITIES IN
FOREIGN CURRENCIES
NET ASSETS $ 1,426,365,764
INITIAL CLASS: $20.44
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($1,355,996,863 (DIVIDED BY) 66,333,540
SHARES)
SERVICE CLASS: $20.44
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($70,368,901 (DIVIDED BY) 3,443,025
SHARES)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME $ 7,362,155
DIVIDENDS
INTEREST 5,735,285
TOTAL INCOME 13,097,440
EXPENSES
MANAGEMENT FEE $ 3,703,262
TRANSFER AGENT FEES 434,795
DISTRIBUTION FEES - SERVICE CLASS 13,731
ACCOUNTING FEES AND EXPENSES 265,974
NON-INTERESTED TRUSTEES' COMPENSATION 2,187
CUSTODIAN FEES AND EXPENSES 23,445
AUDIT 16,188
LEGAL 6,714
MISCELLANEOUS 898
TOTAL EXPENSES BEFORE REDUCTIONS 4,467,194
EXPENSE REDUCTIONS (60,203) 4,406,991
NET INVESTMENT INCOME 8,690,449
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 10,674,007
FOREIGN CURRENCY TRANSACTIONS (7,372)
FUTURES CONTRACTS 321,847 10,988,482
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 110,038,116
ASSETS AND LIABILITIES IN (2,450) 110,035,666
FOREIGN CURRENCIES
NET GAIN (LOSS) 121,024,148
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 129,714,597
OTHER INFORMATION $ 59,381
EXPENSE REDUCTIONS
DIRECTED BROKERAGE ARRANGEMENTS
CUSTODIAN CREDITS 822
$ 60,203
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
OPERATIONS $ 8,690,449 $ 11,806,552
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 10,988,482 41,932,727
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) 110,035,666 124,025,796
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 129,714,597 177,765,075
DISTRIBUTIONS TO SHAREHOLDERS (12,018,174) (6,503,921)
FROM NET INVESTMENT INCOME
FROM NET REALIZED GAIN (41,777,463) (9,258,542)
TOTAL DISTRIBUTIONS (53,795,637) (15,762,463)
SHARE TRANSACTIONS - NET INCREASE (DECREASE) 322,091,154 483,267,618
TOTAL INCREASE (DECREASE) IN NET ASSETS 398,010,114 645,270,230
NET ASSETS
BEGINNING OF PERIOD 1,028,355,650 383,085,420
END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $8,339,663 AND
$11,667,388, RESPECTIVELY) $ 1,426,365,764 $ 1,028,355,650
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
OTHER INFORMATION:
SIX MONTHS ENDED JUNE 30, 1998
SHARES DOLLARS YEAR ENDED DECEMBER 31, 1997
(UNAUDITED) SHARES DOLLARS
SHARE TRANSACTIONS 13,070,692 $ 257,728,602 29,803,319 $ 508,833,566
INITIAL CLASS
SOLD
REINVESTED 2,818,502 53,495,168 1,011,711 15,762,463
REDEEMED (2,776,205) (55,296,715) (2,470,247) (43,871,687)
NET INCREASE (DECREASE) 13,112,989 $ 255,927,055 28,344,783 $ 480,724,342
SERVICE CLASS A 3,296,907 $ 65,946,012 134,338 $ 2,543,276
SOLD
REINVESTED 15,831 300,469 - -
REDEEMED (4,051) (82,382) - -
NET INCREASE (DECREASE) 3,308,687 $ 66,164,099 134,338 $ 2,543,276
DISTRIBUTIONS $ 11,951,048 $ 6,503,921
INITIAL CLASS - NET INVESTMENT INCOME
INITIAL CLASS - NET REALIZED GAIN 41,544,120 9,258,542
TOTAL $ 53,495,168 $ 15,762,463
SERVICE CLASS - NET INVESTMENT INCOME $ 67,126 $ -
SERVICE CLASS - NET REALIZED GAIN 233,343 -
TOTAL $ 300,469 $ -
$ 53,795,637 $ 15,762,463
A SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JANUARY 3, 1995
JUNE 30, 1998 (COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31,
SELECTED PER-SHARE DATA (UNAUDITED) 1997 1996 1995
NET ASSET VALUE, BEGINNING OF PERIOD $ 19.27 $ 15.40 $ 13.07 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .14 D .29 D .26 .11
NET REALIZED AND UNREALIZED GAIN (LOSS) 1.97 4.18 2.12 3.14
TOTAL FROM INVESTMENT OPERATIONS 2.11 4.47 2.38 3.25
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.21) (.25) - (.11)
FROM NET REALIZED GAIN (.73) (.35) (.05) (.07)
TOTAL DISTRIBUTIONS (.94) (.60) (.05) (.18)
NET ASSET VALUE, END OF PERIOD $ 20.44 $ 19.27 $ 15.40 $ 13.07
TOTAL RETURN B, C 11.32% 29.95% 18.27% 32.52%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 1,355,997 $ 1,025,766 $ 383,085 $ 164,303
RATIO OF EXPENSES TO AVERAGE NET ASSETS .72% A .74% .77% .85% G
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS .71% A, F .73% F .76% F .83% F
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 1.40% A 1.68% 2.29% 2.49%
PORTFOLIO TURNOVER 28% A 26% 28% 38%
AVERAGE COMMISSION RATE H $ .0414 $ .0377 $ .0367
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
SELECTED PER-SHARE DATA (UNAUDITED) 1997 E
NET ASSET VALUE, BEGINNING OF PERIOD $ 19.27 $ 18.50
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .13 D .04 D
NET REALIZED AND UNREALIZED GAIN (LOSS) 1.98 .73
TOTAL FROM INVESTMENT OPERATIONS 2.11 .77
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.21) -
FROM NET REALIZED GAIN (.73) -
TOTAL DISTRIBUTIONS (.94) -
NET ASSET VALUE, END OF PERIOD $ 20.44 $ 19.27
TOTAL RETURN B, C 11.32% 4.16%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 70,369 $ 2,589
RATIO OF EXPENSES TO AVERAGE NET ASSETS .82% A .84% A
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS .81% A, F .83% A, F
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 1.41% A 1.72% A
PORTFOLIO TURNOVER 28% A 26%
AVERAGE COMMISSION RATE H $ .0414 $ .0377
A ANNUALIZED
B TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN.
TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED
DURING THE PERIODS SHOWN (SEE NOTE 7 OF NOTES TO FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3, 1997 (COMMENCEMENT OF SALE OF SERVICE CLASS SHARES)
TO DECEMBER 31, 1997.
F FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO EITHER
PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES (SEE NOTE 7 OF NOTES TO FINANCIAL
STATEMENTS).
G FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE PERIOD.
WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD HAVE BEEN HIGHER.
H FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED TO
DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH
COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND
DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES
AND COMMISSION RATE STRUCTURES MAY DIFFER.
</TABLE>
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
JUNE 30, 1998 YEAR FUND
VIP II: CONTRAFUND - "INITIAL CLASS" 29.82% 29.34%
S&P 500 (REGISTERED TRADEMARK) 30.16% 32.30%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's return to the performance of the Standard &
Poor's 500 Index - a widely recognized, unmanaged index of common
stocks. This benchmark reflects the reinvestment of dividends and
capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of the fund figures are from
commencement of operations January 3, 1995.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURN WOULD BE LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
VIP II Contrafund S&P 500
00158 SP001
1995/01/03 10000.00 10000.00
1995/01/31 9870.00 10261.28
1995/02/28 10370.00 10661.16
1995/03/31 10890.00 10975.77
1995/04/30 11480.00 11299.00
1995/05/31 11730.00 11750.63
1995/06/30 12490.00 12023.59
1995/07/31 13470.00 12422.30
1995/08/31 13640.00 12453.48
1995/09/30 13940.00 12979.01
1995/10/31 13650.00 12932.68
1995/11/30 13900.00 13500.42
1995/12/31 13971.98 13760.44
1996/01/31 14073.30 14228.85
1996/02/29 14124.25 14360.75
1996/03/31 14584.49 14499.04
1996/04/30 15065.18 14712.76
1996/05/31 15239.05 15092.20
1996/06/30 15116.32 15149.70
1996/07/31 14410.62 14480.39
1996/08/31 14962.90 14785.78
1996/09/30 15597.01 15617.92
1996/10/31 16077.71 16048.66
1996/11/30 17039.10 17261.78
1996/12/31 16936.82 16919.83
1997/01/31 17591.38 17976.98
1997/02/28 17103.08 18117.92
1997/03/31 16660.22 17373.45
1997/04/30 17060.91 18410.65
1997/05/31 18115.35 19531.49
1997/06/30 18906.18 20406.50
1997/07/31 20530.03 22030.24
1997/08/31 19950.08 20796.11
1997/09/30 21299.77 21935.11
1997/10/31 20656.56 21202.48
1997/11/30 20646.02 22183.94
1997/12/31 21025.62 22564.84
1998/01/31 21004.53 22814.41
1998/02/28 22531.76 24459.78
1998/03/31 23627.59 25712.37
1998/04/30 23851.23 25971.03
1998/05/31 23292.13 25524.59
1998/06/30 24544.52 26561.40
IMATRL PRASUN SHR__CHT 19980630 19980710 104424 R00000000000045
Let's say hypothetically that $10,000 was invested in Variable
Insurance Products Fund II: Contrafund Portfolio on January 3, 1995,
when the fund started. As the chart shows, by June 30, 1998, the value
of the investment would have grown to $24,545 - a 145.45% increase on
the initial investment. For comparison, look at how the Standard &
Poor's 500 Index did over the same period. With dividends and capital
gains, if any, reinvested, the same $10,000 investment would have
grown to $26,561 - a 165.61% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
WORLDCOM, INC. 2.8
TIME WARNER, INC. 2.7
TYCO INTERNATIONAL LTD. 2.4
MICROSOFT CORP. 2.0
LUCENT TECHNOLOGIES, INC. 2.0
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
TECHNOLOGY 18.1
FINANCE 11.6
MEDIA & LEISURE 10.9
RETAIL & WHOLESALE 10.0
UTILITIES 9.3
ASSET ALLOCATION AS OF JUNE 30, 1998*
ROW: 1, COL: 1, VALUE: 9.1
ROW: 1, COL: 2, VALUE: 4.8
ROW: 1, COL: 3, VALUE: 86.09999999999999
STOCKS 86.1%
BONDS 4.8%
SHORT-TERM INVESTMENTS 9.1%
FOREIGN INVESTMENTS 6.3%
*
(% OF FUND'S INVESTMENTS)
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1 fee.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
JUNE 30, 1998 YEAR FUND
VIP II: CONTRAFUND - SERVICE CLASS 29.82% 29.34%
S&P 500 (REGISTERED TRADEMARK) 30.16% 32.30%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's return to the performance of the Standard &
Poor's 500 Index - a widely recognized, unmanaged index of common
stocks. This benchmark reflects the reinvestment of dividends and
capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of the fund figures are from
commencement of operations January 3, 1995.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURN WOULD BE LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
VIP II Contrafund - CL S S&P 500
00470 SP001
1995/01/03 10000.00 10000.00
1995/01/31 9870.00 10261.28
1995/02/28 10370.00 10661.16
1995/03/31 10890.00 10975.77
1995/04/30 11480.00 11299.00
1995/05/31 11730.00 11750.63
1995/06/30 12490.00 12023.59
1995/07/31 13470.00 12422.30
1995/08/31 13640.00 12453.48
1995/09/30 13940.00 12979.01
1995/10/31 13650.00 12932.68
1995/11/30 13900.00 13500.42
1995/12/31 13971.98 13760.44
1996/01/31 14073.30 14228.85
1996/02/29 14124.25 14360.75
1996/03/31 14584.49 14499.04
1996/04/30 15065.18 14712.76
1996/05/31 15239.05 15092.20
1996/06/30 15116.32 15149.70
1996/07/31 14410.62 14480.39
1996/08/31 14962.90 14785.78
1996/09/30 15597.01 15617.92
1996/10/31 16077.71 16048.66
1996/11/30 17039.10 17261.78
1996/12/31 16936.82 16919.83
1997/01/31 17591.38 17976.98
1997/02/28 17103.08 18117.92
1997/03/31 16660.22 17373.45
1997/04/30 17060.91 18410.65
1997/05/31 18115.35 19531.49
1997/06/30 18906.18 20406.50
1997/07/31 20530.03 22030.24
1997/08/31 19950.08 20796.11
1997/09/30 21299.77 21935.11
1997/10/31 20656.56 21202.48
1997/11/30 20646.02 22183.94
1997/12/31 21015.07 22564.84
1998/01/31 21004.53 22814.41
1998/02/28 22531.76 24459.78
1998/03/31 23627.59 25712.37
1998/04/30 23851.23 25971.03
1998/05/31 23292.13 25524.59
1998/06/30 24544.52 26561.40
IMATRL PRASUN SHR__CHT 19980630 19980708 152224 R00000000000045
Let's say hypothetically that $10,000 was invested in Variable
Insurance Products Fund II: Contrafund Portfolio - Service Class on
January 3, 1995, when the fund started. As the chart shows, by June
30, 1998, the value of the investment would have grown to $24,545 - a
145.45% increase on the initial investment. For comparison, look at
how the Standard & Poor's 500 Index did over the same period. With
dividends and capital gains, if any, reinvested, the same $10,000
investment would have grown to $26,561 - a 165.61% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
WORLDCOM, INC. 2.8
TIME WARNER, INC. 2.7
TYCO INTERNATIONAL LTD. 2.4
MICROSOFT CORP. 2.0
LUCENT TECHNOLOGIES, INC. 2.0
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
TECHNOLOGY 18.1
FINANCE 11.6
MEDIA & LEISURE 10.9
RETAIL & WHOLESALE 10.0
UTILITIES 9.3
ASSET ALLOCATION AS OF JUNE 30, 1998*
ROW: 1, COL: 1, VALUE: 9.1
ROW: 1, COL: 2, VALUE: 4.8
ROW: 1, COL: 3, VALUE: 86.09999999999999
STOCKS 86.1%
BONDS 4.8%
SHORT-TERM INVESTMENTS 9.1%
FOREIGN INVESTMENTS 6.3%
*
(% OF FUND'S INVESTMENTS)
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with
Will Danoff,
Portfolio Manager of
Contrafund Portfolio
Q. HOW DID THE FUND PERFORM COMPARED TO ITS BENCHMARK, WILL?
A. For the six months that ended June 30, 1998, the fund slightly
lagged the 17.71% return of the Standard & Poor's 500 Index. Looking
at performance from a 12-month perspective, the fund also trailed the
30.16% return of the S&P 500 by a small margin.
Q. CAN YOU IDENTIFY SOME OF THE FACTORS THAT HELPED THE FUND'S
PERFORMANCE DURING THE PERIOD?
A. The fund was positioned relatively well to try to capitalize on the
strong U.S. economy, while avoiding those industries that I felt were
vulnerable to the severe economic weakness in Southeast Asia. For
instance, several of the fund's cable TV stocks performed well,
including Tele-Communications, Inc. and Comcast. Cable TV stocks were
one example of my contrarian investment approach. When I bought these
stocks over a year ago, the cable TV industry was out of favor among
investors. A number of factors helped turn the industry around, and as
prospects brightened I continued to increase the fund's exposure to
cable stocks during the period. Another example of trying to minimize
the fund's exposure to Southeast Asia was the fund's weighting in the
retail sector, which jumped from around 7% six months ago to around
10% at the end of June. Retail stocks generally benefited from the
healthy domestic economy and aided fund performance. Specifically, the
fund's positions in Home Depot and the Gap performed well. Both of
these companies are leaders in their respective retailing segments and
have been able to add to the number of their stores by more than 20%
annually. On the flip side of my strategy, the fund had less exposure
to the semiconductor sector than the S&P index. This below-market
weighting turned out positively as this sector was one of the hardest
hit by the problems emanating from Southeast Asia.
Q. WHAT TYPES OF CHANGES DID YOU MAKE TO THE PORTFOLIO DURING THE
PERIOD?
A. There were a couple. First, I reduced the overall number of
positions in the fund from around 600 at the beginning of the period
to approximately 350. The fund typically receives most of its
performance boost or drag from its top holdings, and this streamlining
of positions enabled me to concentrate on my very best ideas. I felt
this change would help performance in the long run. Another change I
made was to reduce the fund's energy-related exposure considerably,
from 13% at the beginning of 1998 to under 1% at the end of the
period. Since Asia accounts for close to 20% of worldwide oil demand,
oil prices declined dramatically as demand from Asia lessened. As a
result, the energy sector suffered due to the weak pricing
environment.
Q. THE FUND'S TECHNOLOGY STAKE WAS INCREASED FROM AROUND 11% TO JUST
OVER 18% DURING THE PERIOD. WHY DID TECHNOLOGY STOCKS APPEAL TO YOU?
A. The Internet and telecommunications capital equipment continued to
be two exciting technology sub-sectors that were able to sustain
earnings growth momentum. The Internet is still in its infancy period,
but it has already changed the way people communicate, work, shop and
gather information. The fund's positions in Internet companies such as
America Online and Yahoo! were positive contributors.
Telecommunications capital equipment companies provide the electronic
infrastructure on which the Internet operates, and I felt many were
well-positioned to benefit from an increase in global data traffic .
The fund's investments in Lucent Technologies, Northern Telecom,
Alcatel and Cisco Systems performed well.
Q. WHICH INVESTMENTS FAILED TO MEET YOUR EXPECTATIONS OVER THE PAST
SIX MONTHS?
A. Most cyclical groups - those particularly vulnerable to economic
swings - performed worse than the market during the period. For
example, Sealed Air, a specialty chemicals company, proved
disappointing, as did oil refinery Tosco and Remec, a supplier to the
aerospace and defense industry. A lack of exposure to pharmaceutical
stocks, which I felt were quite expensive, also hurt. Despite high
valuations, drug companies were bolstered by strong earnings and a
record number of new product approvals. Toward the end of the period,
I had begun to increase the fund's exposure to these stocks.
Q. WHAT'S YOUR OUTLOOK FOR THE COMING MONTHS?
A. I've been surprised by the market's strength this year. Corporate
earnings growth has slowed, but stocks have continued to appreciate,
propelled by higher price-to-earnings ratios and lower interest rates.
Going forward, I'll continue to try to emphasize those companies with
exceptional growth opportunities that justify the high valuations in
today's market.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED
ON MARKET AND OTHER CONDITIONS.
FUND FACTS
GOAL: to increase the value of the fund's shares over the long term by
investing in companies where value is not fully recognized by the
public
START DATE: January 3, 1995
SIZE: as of June 30, 1998, more than
$5.1 billion
MANAGER: Will Danoff, since inception;
joined Fidelity in 1986
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
INVESTMENTS JUNE 30, 1998 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 85.4%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 0.1%
AEROSPACE & DEFENSE - 0.1%
Orbital Sciences Corp. (a) 105,200 $ 3,931,850
DEFENSE ELECTRONICS - 0.0%
Remec, Inc. (a) 282,000 3,207,750
TOTAL AEROSPACE & DEFENSE 7,139,600
BASIC INDUSTRIES - 1.5%
CHEMICALS & PLASTICS - 1.5%
Avery Dennison Corp. 104,500 5,616,875
Crompton & Knowles Corp. 271,992 6,850,799
Cytec Industries, Inc. (a) 149,100 6,597,675
du Pont (E.I.) de Nemours & Co. 59,000 4,402,875
MacDermid, Inc. 12,200 344,650
Monsanto Co. 577,800 32,284,575
Sealed Air Corp. (a) 562,225 20,661,769
76,759,218
PACKAGING & CONTAINERS - 0.0%
Silgan Holdings, Inc. (a) 60,900 1,705,200
TOTAL BASIC INDUSTRIES 78,464,418
CONSTRUCTION & REAL ESTATE - 0.6%
BUILDING MATERIALS - 0.2%
Masco Corp. 141,200 8,542,600
CONSTRUCTION - 0.0%
Ashtead Group PLC 24,700 96,802
ENGINEERING - 0.0%
Forrester Research, Inc. (a) 25,600 1,017,600
REAL ESTATE INVESTMENT TRUSTS - 0.4%
Crescent Real Estate Equities, Inc. 63,300 2,128,463
Equity Office Properties Trust 291,300 8,265,638
Glenborough Realty Trust, Inc. 213,600 5,633,700
Starwood Hotels & Resorts Trust 170,688 8,246,364
24,274,165
TOTAL CONSTRUCTION & REAL ESTATE 33,931,167
DURABLES - 1.7%
AUTOS, TIRES, & ACCESSORIES - 1.3%
AutoZone, Inc. (a) 96,700 3,088,356
Breed Technologies, Inc. 219,900 3,367,219
Danaher Corp. 523,900 19,220,581
Kroll-O'Gara Company (a) 787,400 16,830,675
SPX Corp. (a) 370,100 23,825,188
66,332,019
CONSUMER DURABLES - 0.0%
Blyth Industries, Inc. 69,000 2,294,250
CONSUMER ELECTRONICS - 0.1%
General Motors Corp. Class H 64,900 3,058,413
Gemstar International Group Ltd. (a) 117,400 4,395,163
7,453,576
TEXTILES & APPAREL - 0.3%
Jones Apparel Group, Inc. 73,000 2,669,063
Kellwood Co. 2,700 96,525
NIKE, Inc. Class B 67,400 3,281,538
Warnaco Group, Inc. Class A 169,100 7,176,181
13,223,307
TOTAL DURABLES 89,303,152
SHARES VALUE (NOTE 1)
ENERGY - 0.8%
ENERGY SERVICES - 0.2%
ENSCO International, Inc. 102,474 $ 1,780,486
Smith International, Inc. (a) 162,200 5,646,588
7,427,074
OIL & GAS - 0.6%
Anadarko Petroleum Corp. 51,500 3,460,156
British Petroleum PLC ADR 65,493 5,779,757
Burlington Resources, Inc. 120,448 5,186,792
Royal Dutch Petroleum Co. 76,200 4,176,713
Tosco Corp. 513,700 15,089,938
33,693,356
TOTAL ENERGY 41,120,430
FINANCE - 11.6%
BANKS - 2.9%
BHI Corp. (non-vtg.) (a) 68,500 2,705,750
Banc One Corp. 540,790 30,182,842
Bank of New York Co., Inc. 218,500 13,260,219
Comerica, Inc. 96,500 6,393,125
Compass Bancshares, Inc. 248,100 11,195,513
Credito Italiano Ord. 1,132,600 5,872,103
Fifth Third Bancorp 43,400 2,734,200
M&T Bank Corp. 17,490 9,689,460
North Fork Bancorp., Inc. 446,493 10,911,140
Providian Financial Corp. 68,700 5,397,244
U.S. Bancorp 963,800 41,443,400
Wells Fargo & Co. 30,100 11,106,900
150,891,896
CREDIT & OTHER FINANCE - 2.9%
American Express Co. 550,700 62,779,800
Associates First Capital Corp. Class A 739,502 56,849,216
Capital Trust Class A (a) 417,000 4,013,625
Greenpoint Financial Corp. 343,500 12,924,188
Household International, Inc. 357,300 17,775,675
154,342,504
FEDERAL SPONSORED CREDIT - 1.6%
Federal Home Loan Mortgage
Corporation 775,800 36,511,088
Fannie Mae 803,900 48,836,925
85,348,013
INSURANCE - 2.8%
AFLAC, Inc. 277,000 8,396,563
ACE Ltd. 254,900 9,941,100
Allmerica Financial Corp. 85,492 5,556,980
Allstate Corp. 341,300 31,250,281
AMBAC, Inc. 75,000 4,387,500
American International Group, Inc. 99,350 14,505,100
Aon Corp. 116,350 8,173,588
Berkshire Hathaway, Inc. Class A (a) 20 1,566,100
General Re Corp. 54,900 13,917,150
Hartford Financial Services Group, Inc. 12,000 1,372,500
Life RE Corp. 12,700 1,041,400
Mutual Risk Management Ltd. 95,200 3,468,850
Progressive Corp. 74,700 10,532,700
SunAmerica, Inc. 289,850 16,648,259
Torchmark Corp. 109,600 5,014,200
UNUM Corp. 199,000 11,044,500
Zenith National Insurance Corp. 127,700 3,599,544
150,416,315
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
SAVINGS & LOANS - 0.8%
Dime Bancorp., Inc. 307,800 $ 9,214,763
Golden State Bancorp 40,200 1,195,950
Washington Mutual, Inc. 718,225 31,197,898
41,608,611
SECURITIES INDUSTRY - 0.6%
Travelers Group, Inc. (The) 537,699 32,598,002
TOTAL FINANCE 615,205,341
HEALTH - 6.7%
DRUGS & PHARMACEUTICALS - 4.1%
American Home Products Corp. 476,900 24,679,575
Amgen, Inc. 75,800 4,955,425
Biogen, Inc. 81,700 4,003,300
Bristol-Myers Squibb Co. 290,200 33,354,863
Elan Corp. PLC ADR (a) 162,550 10,453,997
Forest Laboratories, Inc. (a) 186,200 6,656,650
Merck & Co., Inc. 165,900 22,189,125
Pfizer, Inc. 252,000 27,389,250
Quintiles Transnational Corp. (a) 47,900 2,356,081
Schering-Plough Corp. 295,400 27,066,025
Warner-Lambert Co. 765,500 53,106,563
216,210,854
MEDICAL EQUIPMENT & SUPPLIES - 1.4%
Allegiance Corp. 122,740 6,290,425
Becton, Dickinson & Co. 107,800 8,367,975
Boston Scientific Corp. 12,600 902,475
Cardinal Health, Inc. 214,200 20,081,250
Guidant Corp. 153,500 10,946,469
Omnicare, Inc. 153,400 5,848,375
Sofamor/Danek Group, Inc. (a) 114,300 9,894,094
Steris Corp. (a) 38,900 2,473,797
Sybron International Corp. (a) 195,600 4,938,900
U.S. Surgical Corp. 82,400 3,759,500
73,503,260
MEDICAL FACILITIES MANAGEMENT - 1.2%
Columbia/HCA Healthcare Corp. 410,500 11,955,813
HEALTHSOUTH Corp. (a) 292,100 7,795,419
Health Management Associates, Inc
Class A (a) 804,950 26,915,516
Oxford Health Plans, Inc. (a) 126,200 1,932,438
Trigon Healthcare, Inc. (a) 62,100 2,247,244
United HealthCare Corp. 232,200 14,744,700
65,591,130
TOTAL HEALTH 355,305,244
INDUSTRIAL MACHINERY & EQUIPMENT - 6.3%
ELECTRICAL EQUIPMENT - 2.4%
Alcatel Alsthom Compagnie Generale
d'Electricite SA 199,400 40,488,478
American Power Conversion Corp. (a) 241,500 7,245,000
General Instrument Corp. (a) 412,200 11,206,688
L-3 Communications Holdings, Inc. 64,000 2,092,000
Loral Space & Communications Ltd. (a) 1,621,920 45,819,240
Philips Electronics NV 119,600 10,166,000
Rayovac Corp. 381,500 8,655,281
Roper Industries, Inc. 139,600 3,647,050
129,319,737
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - 2.8%
Illinois Tool Works, Inc. 37,500 $ 2,500,781
Kaydon Corp. 163,500 5,773,594
Mannesmann AG Ord. 113,500 11,481,831
New Holland NV 72,100 1,414,963
Stanley Works 14,200 590,188
Tyco International Ltd. 2,003,178 126,200,214
147,961,571
POLLUTION CONTROL - 1.1%
Republic Services, Inc. Class A 460,300 11,047,200
USA Waste Services, Inc. (a) 537,945 26,561,034
Waste Management, Inc. 502,300 17,580,500
55,188,734
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 332,470,042
MEDIA & LEISURE - 10.9%
BROADCASTING - 7.0%
Citadel Communications Corp. 50,100 801,600
CBS Corp. 2,052,415 65,164,176
Comcast Corp. Class A 284,500 11,308,875
Comcast Corp. Class A special 356,700 14,479,791
Forsoft Ltd. (a)(d) 1,121,800 17,247,675
Heftel Broadcasting Corp. Class A (a) 280,000 12,530,000
Jacor Communications, Inc. Class A (a) 66,800 3,941,200
MediaOne Group, Inc. 390,400 17,153,200
Metromedia Fiber Network, Inc. Class A 2,200 102,575
NTL, Inc. (a) 127,300 6,810,550
Scandinavian Broadcasting Corp. (a) 160,500 4,845,094
Scripps E.W. Co. Class A 42,900 2,351,456
TCA Cable TV, Inc. 172,200 10,332,000
Tele-Communications, Inc. (a):
(TCI Group), Series A 1,107,313 42,562,343
(TCI Ventures Group), Series A, 616,874 12,376,035
Tele-Communications, Inc. (Liberty Media
Group), Series A 37,400 1,451,588
Time Warner, Inc. 1,696,400 144,936,175
USA Networks, Inc. (a) 115,674 2,906,309
371,300,642
ENTERTAINMENT - 1.1%
Disney (Walt) Co. 153,200 16,095,575
Premier Parks, Inc. (a) 248,400 16,549,650
Viacom, Inc. (a):
Class A 165,000 9,652,500
Class B (non-vtg.) 279,700 16,292,525
58,590,250
LEISURE DURABLES & TOYS - 0.1%
Mattel, Inc. 47,600 2,014,075
Harley-Davidson, Inc. 65,300 2,530,375
4,544,450
LODGING & GAMING - 0.1%
ResortQuest International, Inc. 192,100 3,133,631
PUBLISHING - 0.9%
ACNielsen Corp. 3,100 78,275
Cognizant Corp. 645,800 40,685,400
Dow Jones & Co., Inc. 11,400 635,550
Meredith Corp. 5,000 234,688
Thomson Corp. 12,200 354,924
Ziff-Davis, Inc. 208,600 2,894,325
44,883,162
RESTAURANTS - 1.7%
Darden Restaurants, Inc. 438,600 6,962,775
McDonald's Corp. 727,600 50,204,400
Papa John's International, Inc. (a) 177,700 7,008,044
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - CONTINUED
RESTAURANTS - CONTINUED
Pizzaexpress PLC 208,400 $ 2,995,870
ShowBiz Pizza Time, Inc. (a) 79,400 3,200,813
Starbucks Corp. (a) 347,800 18,585,563
Wendy's International, Inc. 157,200 3,694,200
92,651,665
TOTAL MEDIA & LEISURE 575,103,800
NONDURABLES - 5.2%
BEVERAGES - 1.6%
Cadbury-Schweppes PLC Ord. 725,697 11,225,021
Coca-Cola Co. (The) 629,000 53,779,500
Coca-Cola Enterprises, Inc. 143,500 5,632,375
PepsiCo, Inc. 333,500 13,736,031
84,372,927
FOODS - 1.4%
American Italian Pasta Co. Series A 197,000 7,338,250
Campbell Soup Co. 123,500 6,560,938
Earthgrains Co. 60,400 3,374,850
Flowers Industries, Inc. 228,300 4,665,881
Heinz (H.J.) Co. 11,600 651,050
Hershey Foods Corp. 124,800 8,611,200
Keebler Foods Co. (a) 348,500 9,583,750
Nestle SA (Reg.) 6,935 14,807,440
Quaker Oats Co. 131,400 7,218,788
Wrigley (Wm.) Jr. Co. 104,300 10,221,400
73,033,547
HOUSEHOLD PRODUCTS - 2.2%
Colgate-Palmolive Co. 29,000 2,552,000
Dial Corp. 252,000 6,536,250
Gillette Co. 1,264,400 71,675,675
Estee Lauder Companies, Inc. 145,500 10,139,531
Unilever NV Ord. 246,840 19,546,168
Wella AG 4,616 4,570,044
115,019,668
TOTAL NONDURABLES 272,426,142
PRECIOUS METALS - 0.2%
Euro-Nevada Mining Ltd. 299,600 4,092,645
Franco-Nevada Mining Corp. 305,700 6,071,303
10,163,948
RETAIL & WHOLESALE - 9.9%
APPAREL STORES - 1.7%
Charming Shoppes, Inc. (a) 1,479,600 7,028,100
Gap, Inc. 665,050 40,983,706
Goody's Family Clothing (a) 158,200 8,681,225
Limited, Inc. (The) 360,200 11,931,625
TJX Companies, Inc. 901,800 21,755,925
90,380,581
DRUG STORES - 1.8%
CVS Corp. 2,193,648 85,415,169
Rite Aid Corp. 231,300 8,688,206
Walgreen Co. 64,100 2,648,131
96,751,506
GENERAL MERCHANDISE STORES - 1.5%
Costco Companies, Inc. (a) 290,600 18,325,963
Dillards, Inc. Class A 90,000 3,729,375
Federated Department Stores, Inc. 177,600 9,557,100
Kohls Corp. (a) 125,400 6,505,125
SHARES VALUE (NOTE 1)
Proffitts, Inc. (a) 148,600 $ 5,999,725
Stein Mart, Inc. (a) 339,700 4,585,950
Wal-Mart Stores, Inc. 461,200 28,017,900
76,721,138
GROCERY STORES - 1.9%
Dominick's Supermarkets, Inc. (a) 209,000 9,313,563
Meyer (Fred), Inc. (a) 983,130 41,783,025
Richfood Holdings, Inc. Class A 221,500 4,582,281
Safeway, Inc. (a) 1,060,900 43,165,369
Whole Foods Market, Inc. (a) 46,000 2,783,000
101,627,238
RETAIL & WHOLESALE, MISCELLANEOUS - 3.0%
AgriBioTech, Inc. 13,700 379,319
Best Buy Co., Inc. (a) 43,500 1,571,438
Boots Co. PLC Class L (The) 241,060 3,992,017
Brylane, Inc. (a) 29,600 1,361,600
CDnow, Inc. 8,600 173,075
Circuit City Stores, Inc. - Circuit City Group 335,600 15,731,250
Home Depot, Inc. 511,600 42,494,775
Lowe's Companies, Inc. 138,200 5,605,738
N2K, Inc. 159,300 3,126,263
Office Depot, Inc. (a) 303,900 9,591,844
PETsMART, Inc. (a) 162,400 1,624,000
School Specialty, Inc. 71,130 1,164,754
Staples, Inc. (a) 880,300 25,473,681
Tandy Corp. 328,800 17,446,950
U.S.A. Floral Products, Inc. 313,400 4,936,050
U.S. Office Products Co. 200,694 3,913,533
Viking Office Products, Inc. (a) 425,200 13,340,650
Williams-Sonoma, Inc. (a) 121,900 3,877,944
155,804,881
TOTAL RETAIL & WHOLESALE 521,285,344
SERVICES - 2.1%
ADVERTISING - 0.7%
ADVO, Inc. (a) 126,300 3,560,081
CMG Information Services, Inc. (a) 68,900 4,874,675
Interpublic Group of Companies, Inc. 118,900 7,215,744
Lamar Advertising Co. Class A 39,700 1,424,238
Outdoor Systems, Inc. (a) 631,775 17,689,700
Preview Travel, Inc. 19,800 680,625
Young & Rubicam, Inc. 62,000 1,984,000
37,429,063
EDUCATIONAL SERVICES - 0.3%
Apollo Group, Inc. Class A (a) 315,050 10,416,341
Devry, Inc. (a) 128,200 2,812,388
13,228,729
LEASING & RENTAL - 0.1%
Hertz Corp. Class A 53,100 2,352,994
United Rentals, Inc. 67,500 2,835,000
5,187,994
PRINTING - 0.0%
Big Flower Holdings, Inc. (a) 45,200 1,356,000
SERVICES - 1.0%
APAC Teleservices, Inc. (a) 167,900 981,166
Consolidation Capital Corp. 140,100 3,150,061
Data Processing Resources Corp. (a) 134,700 4,184,119
CGI Group, Inc. Class A (sub-vtg.) (a) 243,600 5,211,405
Hays PLC 270,100 4,526,980
Medpartners, Inc. (a) 641,700 5,133,600
Nova Corp. 37,900 1,354,925
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - CONTINUED
SERVICES - CONTINUED
PMT Services, Inc. 52,900 $ 1,345,644
Professional Detailing, Inc. 9,500 236,313
Robert Half International, Inc. (a) 281,150 15,709,256
Service Corp. International 52,300 2,242,363
ServiceMaster Co. 225,900 8,598,319
United Road Services, Inc. 150,600 2,880,225
55,554,376
TOTAL SERVICES 112,756,162
TECHNOLOGY - 18.1%
COMMUNICATIONS EQUIPMENT - 5.5%
Advanced Fibre Communication, Inc. (a) 712,400 28,540,525
Ascend Communications, Inc. 272,300 13,495,869
Aspect Telecommunications Corp. (a) 282,300 7,727,963
Ciena Corp. (a) 208,100 14,488,963
Cisco Systems, Inc. (a) 562,900 51,821,981
Inter-Tel, Inc. 85,800 1,372,800
Intermedia Communications, Inc. (a) 124,450 5,219,122
Lucent Technologies, Inc. 1,292,100 107,486,569
Nokia Corp. AB sponsored ADR 37,800 2,742,863
Northern Telecom Ltd. 527,700 29,984,793
RELTEC Corp. (a) 33,100 1,489,500
Tellabs, Inc. (a) 368,300 26,379,488
290,750,436
COMPUTER SERVICES & SOFTWARE - 7.8%
Affiliated Computer Services, Inc.
Class A (a) 163,200 6,283,200
America Online, Inc. (a) 725,500 76,903,000
Aspect Development, Inc. (a) 37,900 2,866,188
Automatic Data Processing, Inc. 380,500 27,728,938
Axent Technologies, Inc. 17,500 535,938
Aztec Technology Partners, Inc. 43,415 331,039
BMC Software, Inc. (a) 281,700 14,630,794
BEA Systems, Inc. (a) 19,600 449,575
BroadVision, Inc. (a) 100,000 2,387,500
CBT Group PLC sponsored ADR (a) 132,300 7,078,050
CNET, Inc. (a) 78,900 5,384,925
Cambridge Technology Partners
Massachusetts, Inc. (a) 56,700 3,097,238
Cap Gemini Sogeti SA 63,079 9,884,544
Ceridian Corp. (a) 270,316 15,881,065
CheckFree Holdings Corp. (a) 94,600 2,784,788
Check Point Software Technologies Ltd (a) 100,000 3,275,000
Ciber, Inc. 32,200 1,223,600
Computer Associates International, Inc. 72,300 4,017,169
DST Systems, Inc. (a) 38,700 2,167,200
Documentum, Inc. (a) 152,200 7,305,600
ECI Telecom Ltd. 29,000 1,098,375
EarthLink Network, Inc. (a) 40,400 3,100,700
J.D. Edwards & Co. 130,900 5,620,519
Electronic Arts, Inc. (a) 130,960 7,071,840
Equifax, Inc. 17,200 624,575
Fair, Isaac & Co., Inc. 8,800 334,400
Fundtech Ltd. 19,700 371,838
HBO & Co. 296,800 10,462,200
International Network Services 600 24,600
Intuit, Inc. (a) 28,000 1,715,000
Legato Systems, Inc. 52,100 2,031,900
Lycos, Inc. (a) 189,800 14,306,175
Mercury Interactive Group Corp. 9,100 406,088
SHARES VALUE (NOTE 1)
Microsoft Corp. (a) 998,800 $ 108,244,950
Networks Associates, Inc. (a) 69,800 3,341,675
Paychex, Inc. 149,600 6,086,850
Pegasus Systems, Inc. 12,800 328,000
Policy Management Systems Corp. (a) 108,700 4,266,475
RealNetworks, Inc. 97,000 3,619,313
Sabre Group Holdings, Inc. Class A (a) 116,900 4,442,200
Sapient Corp. 32,500 1,714,375
Shared Medical Systems Corp. 11,200 822,500
Siebel Systems, Inc. (a) 21,900 706,275
SportsLine USA, Inc. 131,100 4,793,344
Technology Solutions, Inc. 11,000 348,563
ViaGrafix Corp. 161,700 1,253,175
Yahoo!, Inc. (a) 207,600 32,697,000
414,048,256
COMPUTERS & OFFICE EQUIPMENT - 2.4%
Celestica, Inc. (sub-vtg.) 185,100 3,371,458
Bay Networks, Inc. (a) 1,000 32,250
Dell Computer Corp. (a) 366,700 34,034,344
EMC Corp. (a) 569,800 25,534,163
Gateway 2000, Inc. 31,700 1,604,813
MMC Networks, Inc. 34,100 1,086,938
Symbol Technologies, Inc. 256,700 9,690,425
Unisys Corp. (a) 1,394,345 39,390,246
Xerox Corp. 100,300 10,192,988
124,937,625
ELECTRONIC INSTRUMENTS - 0.9%
JDS Fitel, Inc. (a) 248,800 4,153,023
Thermo Electron Corp. (a) 700,000 23,931,250
Thermo Instrument Systems, Inc. (a) 245,800 6,452,250
Varian Associates, Inc. 65,000 2,535,000
Waters Corp. (a) 195,100 11,498,706
48,570,229
ELECTRONICS - 1.4%
Broadcom Corp. Class A 11,400 839,325
Intel Corp. 156,400 11,593,150
Kent Electronics Corp. (a) 277,800 5,087,213
PMC-Sierra, Inc. (a) 74,400 3,487,500
Sanmina Corp. (a) 101,000 4,380,875
Texas Instruments, Inc. 326,300 19,027,369
Uniphase Corp. (a) 249,900 15,689,034
Vitesse Semiconductor Corp. (a) 527,800 16,295,825
76,400,291
PHOTOGRAPHIC EQUIPMENT - 0.1%
Eastman Kodak Co. 44,100 3,222,056
TOTAL TECHNOLOGY 957,928,893
TRANSPORTATION - 0.6%
AIR TRANSPORTATION - 0.4%
Southwest Airlines Co. 343,450 10,174,706
Viad Corp. 292,100 8,105,775
18,280,481
RAILROADS - 0.1%
Norfolk Southern Corp. 204,600 6,099,638
TRUCKING & FREIGHT - 0.1%
C.H. Robinson Worldwide, Inc. 131,800 3,278,525
Swift Transportation Co., Inc. (a) 214,100 4,241,856
7,520,381
TOTAL TRANSPORTATION 31,900,500
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - 9.1%
CELLULAR - 0.9%
AirTouch Communications, Inc. (a) 347,200 $ 20,289,500
Bell Canada International, Inc. 167,200 3,930,097
Orange PLC (a) 278,500 2,949,286
SkyTel Communications, Inc. 414,450 9,700,720
Teleglobe, Inc. 52,900 1,412,829
Vodafone Group PLC sponsored ADR 87,700 11,055,681
49,338,113
GAS - 0.5%
Enron Corp. 379,900 20,538,344
Williams Companies, Inc. 206,800 6,979,500
27,517,844
TELEPHONE SERVICES - 7.7%
AT&T Corp. 1,108,300 63,311,638
BCE, Inc. 309,100 13,130,564
E Spire Communications, Inc. (a) 201,400 4,544,088
Exodus Communications, Inc. (a) 106,000 4,743,500
Global Telesystems Group, Inc. (a) 130,400 6,357,000
ITC Deltacom, Inc. 239,500 10,234,883
MCI Communications Corp. 956,400 55,590,750
Mastech Corp. (a) 330,000 9,281,250
McLeodUSA, Inc. Class A (a) 367,400 14,282,675
NEXTLINK Communications, Inc.
Class A (a) 192,100 7,275,788
Qwest Communications International, Inc. 803,488 28,021,644
Sprint Corp. 135,000 9,517,500
Telefonica de Espana SA Ord. 428,107 19,776,379
U.S. LEC Corp. Class A 80,900 1,688,788
Winstar Communications, Inc. (a) 212,700 9,132,806
WorldCom, Inc. (a) 3,088,805 149,613,992
406,503,245
TOTAL UTILITIES 483,359,202
TOTAL COMMON STOCKS
(Cost $3,431,279,012) 4,517,863,385
PREFERRED STOCKS - 0.7%
CONVERTIBLE PREFERRED STOCKS - 0.3%
BASIC INDUSTRIES - 0.0%
CHEMICALS & PLASTICS - 0.0%
Sealed Air Corp., Series A, $2.00 64,312 2,701,104
CONSTRUCTION & REAL ESTATE - 0.2%
REAL ESTATE INVESTMENT TRUSTS - 0.2%
Vornado Realty Trust, Series A, $3.25 156,300 8,967,713
RETAIL & WHOLESALE - 0.1%
APPAREL STORES - 0.1%
TJX Companies, Inc., Series E,
$7.00 7,100 3,763,000
TOTAL CONVERTIBLE PREFERRED STOCKS 15,431,817
NONCONVERTIBLE PREFERRED STOCKS - 0.4%
NONDURABLES - 0.2%
HOUSEHOLD PRODUCTS - 0.2%
Wella AG 9,480 10,591,593
SHARES VALUE (NOTE 1)
UTILITIES - 0.2%
TELEPHONE SERVICES - 0.2%
Telecom Italia Spa 371,375 $ 1,802,481
Telecom Italia Mobile Spa de Risp 2,894,500 9,638,584
11,441,065
TOTAL NONCONVERTIBLE PREFERRED STOCKS 22,032,658
TOTAL PREFERRED STOCKS
(Cost $27,415,519) 37,464,475
CONVERTIBLE BONDS - 0.0%
MOODY'S PRINCIPAL
RATINGS (C) AMOUNT
MEDIA & LEISURE - 0.0%
BROADCASTING - 0.0%
Jacor Communications, Inc.
liquid yield option notes
0%, 6/12/11
(Cost $149,594) B3 $ 302,000 250,660
U.S. TREASURY OBLIGATIONS - 4.8%
U.S. Treasury Bill, yields at dates
of purchase 4.82 to 5.05%
7/23/98 to 10/08/98 - 1,200,000 1,191,087
7 5/8%, 2/15/25 Aaa 34,500,000 43,437,570
6 7/8%, 8/15/25 Aaa 40,500,000 46,903,860
6% 2/15/26 Aaa 32,000,000 33,289,920
6.75% 8/15/26 Aaa 37,900,000 43,389,436
6.5% 11/15/26 Aaa 38,000,000 42,197,860
6.625% 2/15/27 Aaa 38,500,000 43,474,970
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $243,408,231) 253,884,703
CASH EQUIVALENTS - 9.1%
SHARES
Taxable Central Cash Fund (b)
(Cost $479,659,783) 479,659,783 479,659,783
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $4,181,912,139) $ 5,289,123,006
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield of the Taxable Central Cash
Fund was 5.61%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(c) Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investors Service, Inc.
(d) An affiliated company is a company in which the fund has ownership
of at least 5% of the voting securities. Transactions during the
period with companies which are or were affiliates are as follows:
PURCHASE SALES DIVIDEND VALUE
AFFILIATE COST COST INCOME
Forsoft Ltd. $ - $ - $ - $ 17,247,675
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $4,957,392,661 and $4,572,792,982, respectively, of which
long-term U.S. government and government agency obligations aggregated
$231,108,756 and $176,809,009, respectively.
The market value of futures contracts opened and closed during the
period amounted to $95,959,886 and $96,262,438 respectively (see Note
3 of Notes to Financial Statements).
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $694,697 for the
period (see Note 4 of Notes to Financial Statements).
INCOME TAX INFORMATION
At June 30, 1998, the aggregate cost of investment securities for
income tax purposes was $4,187,073,165. Net unrealized appreciation
aggregated $1,102,049,841, of which $1,158,674,837 related to
appreciated investment securities and $56,624,996 related to
depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 30, 1998 (UNAUDITED)
ASSETS
INVESTMENT IN SECURITIES, AT VALUE (COST $4,181,912,139) - $ 5,289,123,006
SEE ACCOMPANYING SCHEDULE
CASH 305,236
FOREIGN CURRENCY HELD AT VALUE 6,109,972
(COST $6,097,192)
RECEIVABLE FOR INVESTMENTS SOLD 75,354,114
RECEIVABLE FOR FUND SHARES SOLD 10,864,783
DIVIDENDS RECEIVABLE 2,960,343
INTEREST RECEIVABLE 6,541,502
OTHER RECEIVABLES 173,554
TOTAL ASSETS 5,391,432,510
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 205,146,891
PAYABLE FOR FUND SHARES REDEEMED 1,160,169
ACCRUED MANAGEMENT FEE 2,404,603
DISTRIBUTION FEES PAYABLE 4,328
OTHER PAYABLES AND 383,921
ACCRUED EXPENSES
TOTAL LIABILITIES 209,099,912
NET ASSETS $ 5,182,332,598
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 3,719,883,307
UNDISTRIBUTED NET INVESTMENT INCOME 13,399,290
ACCUMULATED UNDISTRIBUTED 341,801,240
NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 1,107,248,761
AND ASSETS AND LIABILITIES IN FOREIGN CURRENCIES
NET ASSETS $ 5,182,332,598
INITIAL CLASS: $21.95
NET ASSET VALUE, OFFERING
PRICE AND REDEMPTION PRICE
PER SHARE ($5,120,186,476 (DIVIDED BY)
233,217,024 SHARES)
SERVICE CLASS: $21.95
NET ASSET VALUE, OFFERING
PRICE AND REDEMPTION PRICE
PER SHARE ($62,146,122 (DIVIDED BY)
2,831,518 SHARES)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME $ 16,523,633
DIVIDENDS
INTEREST 12,626,623
TOTAL INCOME 29,150,256
EXPENSES
MANAGEMENT FEE $ 13,539,840
TRANSFER AGENT FEES 1,569,327
DISTRIBUTION FEES - SERVICE CLASS 12,474
ACCOUNTING FEES AND EXPENSES 410,023
NON-INTERESTED TRUSTEES' COMPENSATION 8,529
CUSTODIAN FEES AND EXPENSES 213,682
REGISTRATION FEES 83,542
AUDIT 34,742
LEGAL 25,202
MISCELLANEOUS 150,822
TOTAL EXPENSES BEFORE REDUCTIONS 16,048,183
EXPENSE REDUCTIONS (851,444) 15,196,739
NET INVESTMENT INCOME 13,953,517
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 359,225,258
FOREIGN CURRENCY TRANSACTIONS 65,470
FUTURES CONTRACTS 302,552 359,593,280
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 333,613,422
ASSETS AND LIABILITIES IN 54,268 333,667,690
FOREIGN CURRENCIES
NET GAIN (LOSS) 693,260,970
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 707,214,487
OTHER INFORMATION $ 848,969
EXPENSE REDUCTIONS
DIRECTED BROKERAGE ARRANGEMENTS
CUSTODIAN CREDITS 2,475
$ 851,444
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
OPERATIONS $ 13,953,517 $ 29,698,431
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 359,593,280 204,568,956
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) 333,667,690 450,977,419
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 707,214,487 685,244,806
DISTRIBUTIONS TO SHAREHOLDERS (29,014,736) (21,846,321)
FROM NET INVESTMENT INCOME
FROM NET REALIZED GAIN (213,465,544) (57,736,705)
TOTAL DISTRIBUTIONS (242,480,280) (79,583,026)
SHARE TRANSACTIONS - NET INCREASE (DECREASE) 606,007,763 1,111,825,789
TOTAL INCREASE (DECREASE) IN NET ASSETS 1,070,741,970 1,717,487,569
NET ASSETS
BEGINNING OF PERIOD 4,111,590,628 2,394,103,059
END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $13,399,290
AND $28,707,467, RESPECTIVELY) $ 5,182,332,598 $ 4,111,590,628
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
OTHER INFORMATION:
SIX MONTHS ENDED JUNE 30, 1998
SHARES DOLLARS YEAR ENDED DECEMBER 31, 1997
(UNAUDITED) SHARES DOLLARS
SHARE TRANSACTIONS 30,171,693 $ 627,771,094 80,344,594 $ 1,456,514,379
INITIAL CLASS
SOLD
REINVESTED 12,506,721 242,005,046 4,834,935 79,583,026
REDEEMED (15,498,043) (319,026,090) (23,702,843) (427,936,465)
NET INCREASE (DECREASE) 27,180,371 $ 550,750,050 61,476,686 $ 1,108,160,940
SERVICE CLASS A 2,622,001 $ 54,819,638 186,727 $ 3,664,849
SOLD
REINVESTED 24,559 475,234 - -
REDEEMED (1,769) (37,159) - -
NET INCREASE (DECREASE) 2,644,791 $ 55,257,713 186,727 $ 3,664,849
DISTRIBUTIONS $ 28,957,870 $ 21,846,321
INITIAL CLASS - NET INVESTMENT INCOME
INITIAL CLASS - NET REALIZED GAIN 213,047,176 57,736,705
TOTAL $ 242,005,046 $ 79,583,026
SERVICE CLASS - NET INVESTMENT INCOME $ 56,866 -
SERVICE CLASS - NET REALIZED GAIN 418,368 -
TOTAL $ 475,234 $ -
$ 242,480,280 $ 79,583,026
A SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JANUARY 3, 1995
JUNE 30, 1998 (COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31,
SELECTED PER-SHARE DATA (UNAUDITED) 1997 1996 1995
NET ASSET VALUE, BEGINNING OF PERIOD $ 19.94 $ 16.56 $ 13.79 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .06 D .16 D .14 .06
NET REALIZED AND UNREALIZED GAIN (LOSS) 3.12 3.73 2.76 3.91
TOTAL FROM INVESTMENT OPERATIONS 3.18 3.89 2.90 3.97
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.14) (.14) - (.06)
FROM NET REALIZED GAIN (1.03) (.37) (.13) (.12)
TOTAL DISTRIBUTIONS (1.17) (.51) (.13) (.18)
NET ASSET VALUE, END OF PERIOD $ 21.95 $ 19.94 $ 16.56 $ 13.79
TOTAL RETURN B, C 16.74% 24.14% 21.22% 39.72%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 5,120,186 $ 4,107,868 $ 2,394,103 $ 877,000
RATIO OF EXPENSES TO AVERAGE NET ASSETS .71% A .71% .74% .72%
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS .67% A, F .68% F .71% F .72%
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS .62% A .90% 1.33% 1.07%
PORTFOLIO TURNOVER 213% A 142% 178% 132%
AVERAGE COMMISSION RATE G $ .0336 $ .0336 $ .0343
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
SELECTED PER-SHARE DATA (UNAUDITED) 1997 E
NET ASSET VALUE, BEGINNING OF PERIOD $ 19.93 $ 19.99
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .05 D .03 D
NET REALIZED AND UNREALIZED GAIN (LOSS) 3.14 (.09)
TOTAL FROM INVESTMENT OPERATIONS 3.19 (.06)
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.14) -
FROM NET REALIZED GAIN (1.03) -
TOTAL DISTRIBUTIONS (1.17) -
NET ASSET VALUE, END OF PERIOD $ 21.95 $ 19.93
TOTAL RETURN B, C 16.79% (.30)%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 62,146 $ 3,722
RATIO OF EXPENSES TO AVERAGE NET ASSETS .81% A .81% A
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS .77% A, F .78% A, F
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS .54% A 1.14% A
PORTFOLIO TURNOVER 213% A 142%
AVERAGE COMMISSION RATE G $ .0336 $ .0336
A ANNUALIZED
B TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN.
TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED
DURING THE PERIODS SHOWN (SEE NOTE 7 OF NOTES TO FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3, 1997 (COMMENCEMENT OF SALE OF SERVICE CLASS SHARES) TO
DECEMBER 31, 1997.
F FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO EITHER
PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES (SEE NOTE 7 OF NOTES TO FINANCIAL
STATEMENTS).
G FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED
TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH
COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO
FUND
DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES
AND COMMISSION RATE STRUCTURES MAY DIFFER.
</TABLE>
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
JUNE 30, 1998 YEAR YEARS YEARS
VIP: GROWTH - "INITIAL CLASS" 29.23% 19.56% 17.56%
S&P 500 (REGISTERED TRADEMARK) 30.16% 23.08% 18.56%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare these figures to the performance of the Standard &
Poor's 500 Index - a widely recognized, unmanaged index of common
stocks. This benchmark reflects the reinvestment of dividends and
capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER THE PAST 10 YEARS
VIP Growth S&P 500
00151 SP001
1988/06/30 10000.00 10000.00
1988/07/31 9948.72 9962.00
1988/08/31 9709.40 9623.29
1988/09/30 9982.91 10033.24
1988/10/31 10008.55 10312.17
1988/11/30 9914.53 10164.70
1988/12/31 10017.09 10342.59
1989/01/31 10735.04 11099.66
1989/02/28 10512.82 10823.28
1989/03/31 10830.64 11075.46
1989/04/30 11403.41 11650.28
1989/05/31 11811.30 12122.12
1989/06/30 11655.08 12053.02
1989/07/31 12696.49 13141.41
1989/08/31 12913.45 13398.98
1989/09/30 13026.27 13344.05
1989/10/31 12661.78 13034.46
1989/11/30 12870.06 13300.37
1989/12/31 13173.80 13619.58
1990/01/31 12410.10 12705.70
1990/02/28 12528.64 12869.61
1990/03/31 12681.76 13210.65
1990/04/30 12312.48 12880.38
1990/05/31 13402.32 14136.22
1990/06/30 13681.53 14040.10
1990/07/31 13465.37 13995.17
1990/08/31 12078.30 12730.00
1990/09/30 10835.34 12110.05
1990/10/31 10448.04 12057.98
1990/11/30 11294.70 12836.92
1990/12/31 11627.95 13195.07
1991/01/31 12402.55 13770.38
1991/02/28 13327.83 14754.96
1991/03/31 13730.04 15112.03
1991/04/30 13602.07 15148.30
1991/05/31 14406.49 15802.71
1991/06/30 13336.97 15078.94
1991/07/31 14607.60 15781.62
1991/08/31 15256.62 16155.65
1991/09/30 15375.46 15885.85
1991/10/31 15850.80 16098.72
1991/11/30 14945.82 15449.94
1991/12/31 16920.31 17217.41
1992/01/31 17953.27 16897.17
1992/02/29 18328.84 17116.83
1992/03/31 17205.52 16783.05
1992/04/30 16531.53 17276.48
1992/05/31 16391.12 17361.13
1992/06/30 15754.57 17102.45
1992/07/31 16363.03 17801.94
1992/08/31 15913.70 17437.00
1992/09/30 16194.53 17642.76
1992/10/31 16821.72 17704.51
1992/11/30 17945.04 18308.23
1992/12/31 18497.34 18533.42
1993/01/31 18862.42 18689.10
1993/02/28 18473.57 18943.27
1993/03/31 19210.22 19342.98
1993/04/30 19009.31 18874.88
1993/05/31 20425.21 19380.72
1993/06/30 20635.68 19436.93
1993/07/31 20578.28 19359.18
1993/08/31 21611.50 20092.89
1993/09/30 22013.30 19938.18
1993/10/31 22223.77 20350.90
1993/11/30 21324.49 20157.56
1993/12/31 22080.27 20401.47
1994/01/31 22635.15 21095.12
1994/02/28 22401.69 20523.44
1994/03/31 21383.89 19628.62
1994/04/30 21516.21 19879.87
1994/05/31 21017.49 20205.90
1994/06/30 19948.80 19710.85
1994/07/31 20640.90 20357.37
1994/08/31 21811.37 21192.02
1994/09/30 21546.74 20672.82
1994/10/31 22422.04 21137.95
1994/11/30 21526.38 20368.11
1994/12/31 22075.99 20670.17
1995/01/31 21658.70 21206.15
1995/02/28 22555.65 22032.55
1995/03/31 23374.36 22682.73
1995/04/30 24162.38 23350.74
1995/05/31 25103.90 24284.07
1995/06/30 27324.67 24848.19
1995/07/31 30026.44 25672.15
1995/08/31 30394.86 25736.59
1995/09/30 31182.87 26822.67
1995/10/31 30865.62 26726.92
1995/11/30 30845.15 27900.23
1995/12/31 29883.16 28437.59
1996/01/31 30353.92 29405.60
1996/02/29 31371.62 29678.19
1996/03/31 31492.70 29963.99
1996/04/30 32725.55 30405.66
1996/05/31 33749.25 31189.82
1996/06/30 33088.80 31308.66
1996/07/31 30557.05 29925.44
1996/08/31 31470.68 30556.57
1996/09/30 33584.14 32276.29
1996/10/31 33507.09 33166.47
1996/11/30 35367.37 35673.52
1996/12/31 34277.62 34966.83
1997/01/31 36247.97 37151.56
1997/02/28 35423.97 37442.83
1997/03/31 33438.85 35904.30
1997/04/30 35047.48 38047.79
1997/05/31 37477.53 40364.14
1997/06/30 39017.70 42172.45
1997/07/31 41949.73 45528.11
1997/08/31 40329.70 42977.63
1997/09/30 42668.48 45331.51
1997/10/31 41059.86 43817.44
1997/11/30 42234.95 45845.75
1997/12/31 42326.22 46632.92
1998/01/31 42896.65 47148.68
1998/02/28 46119.24 50549.04
1998/03/31 47737.69 53137.66
1998/04/30 48671.92 53672.23
1998/05/31 47421.90 52749.60
1998/06/30 50421.95 54892.29
IMATRL PRASUN SHR__CHT 19980630 19980708 160907 R00000000000123
Let's say hypothetically that $10,000 was invested in Variable
Insurance Products Fund: Growth Portfolio on June 30, 1988. As the
chart shows, by June 30, 1998, the value of the investment would have
grown to $50,422 - a 404.22% increase on the initial investment. For
comparison, look at how the Standard & Poor's 500 Index did over the
same period. With dividends and capital gains, if any, reinvested, the
same $10,000 investment would have grown to $54,892 - a 448.92%
increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
MERCK & CO., INC. 3.3
MICROSOFT CORP. 3.2
JOHNSON & JOHNSON 3.1
WORLDCOM, INC. 2.5
PHILIP MORRIS COMPANIES, INC. 2.3
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
TECHNOLOGY 26.4
HEALTH 18.1
RETAIL & WHOLESALE 11.4
MEDIA & LEISURE 10.2
FINANCE 10.2
ASSET ALLOCATION AS OF JUNE 30, 1998*
ROW: 1, COL: 1, VALUE: 1.7
ROW: 1, COL: 2, VALUE: 98.3
STOCKS 98.3%
SHORT-TERM INVESTMENTS 1.7%
FOREIGN INVESTMENTS 3.3%
*
(% OF FUND'S INVESTMENTS)
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1 fee.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
JUNE 30, 1998 YEAR YEARS YEARS
VIP: GROWTH - SERVICE CLASS 29.17% 19.55% 17.55%
S&P 500 (REGISTERED TRADEMARK) 30.16% 23.08% 18.56%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare these figures to the performance of the Standard &
Poor's 500 Index - a widely recognized, unmanaged index of common
stocks. This benchmark reflects the reinvestment of dividends and
capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER THE PAST 10 YEARS
VIP Growth - CL S S&P 500
00472 SP001
1988/06/30 10000.00 10000.00
1988/07/31 9948.72 9962.00
1988/08/31 9709.40 9623.29
1988/09/30 9982.91 10033.24
1988/10/31 10008.55 10312.17
1988/11/30 9914.53 10164.70
1988/12/31 10017.09 10342.59
1989/01/31 10735.04 11099.66
1989/02/28 10512.82 10823.28
1989/03/31 10830.64 11075.46
1989/04/30 11403.41 11650.28
1989/05/31 11811.30 12122.12
1989/06/30 11655.08 12053.02
1989/07/31 12696.49 13141.41
1989/08/31 12913.45 13398.98
1989/09/30 13026.27 13344.05
1989/10/31 12661.78 13034.46
1989/11/30 12870.06 13300.37
1989/12/31 13173.80 13619.58
1990/01/31 12410.10 12705.70
1990/02/28 12528.64 12869.61
1990/03/31 12681.76 13210.65
1990/04/30 12312.48 12880.38
1990/05/31 13402.32 14136.22
1990/06/30 13681.53 14040.10
1990/07/31 13465.37 13995.17
1990/08/31 12078.30 12730.00
1990/09/30 10835.34 12110.05
1990/10/31 10448.04 12057.98
1990/11/30 11294.70 12836.92
1990/12/31 11627.95 13195.07
1991/01/31 12402.55 13770.38
1991/02/28 13327.83 14754.96
1991/03/31 13730.04 15112.03
1991/04/30 13602.07 15148.30
1991/05/31 14406.49 15802.71
1991/06/30 13336.97 15078.94
1991/07/31 14607.60 15781.62
1991/08/31 15256.62 16155.65
1991/09/30 15375.46 15885.85
1991/10/31 15850.80 16098.72
1991/11/30 14945.82 15449.94
1991/12/31 16920.31 17217.41
1992/01/31 17953.27 16897.17
1992/02/29 18328.84 17116.83
1992/03/31 17205.52 16783.05
1992/04/30 16531.53 17276.48
1992/05/31 16391.12 17361.13
1992/06/30 15754.57 17102.45
1992/07/31 16363.03 17801.94
1992/08/31 15913.70 17437.00
1992/09/30 16194.53 17642.76
1992/10/31 16821.72 17704.51
1992/11/30 17945.04 18308.23
1992/12/31 18497.34 18533.42
1993/01/31 18862.42 18689.10
1993/02/28 18473.57 18943.27
1993/03/31 19210.22 19342.98
1993/04/30 19009.31 18874.88
1993/05/31 20425.21 19380.72
1993/06/30 20635.68 19436.93
1993/07/31 20578.28 19359.18
1993/08/31 21611.50 20092.89
1993/09/30 22013.30 19938.18
1993/10/31 22223.77 20350.90
1993/11/30 21324.49 20157.56
1993/12/31 22080.27 20401.47
1994/01/31 22635.15 21095.12
1994/02/28 22401.69 20523.44
1994/03/31 21383.89 19628.62
1994/04/30 21516.21 19879.87
1994/05/31 21017.49 20205.90
1994/06/30 19948.80 19710.85
1994/07/31 20640.90 20357.37
1994/08/31 21811.37 21192.02
1994/09/30 21546.74 20672.82
1994/10/31 22422.04 21137.95
1994/11/30 21526.38 20368.11
1994/12/31 22075.99 20670.17
1995/01/31 21658.70 21206.15
1995/02/28 22555.65 22032.55
1995/03/31 23374.36 22682.73
1995/04/30 24162.38 23350.74
1995/05/31 25103.90 24284.07
1995/06/30 27324.67 24848.19
1995/07/31 30026.44 25672.15
1995/08/31 30394.86 25736.59
1995/09/30 31182.87 26822.67
1995/10/31 30865.62 26726.92
1995/11/30 30845.15 27900.23
1995/12/31 29883.16 28437.59
1996/01/31 30353.92 29405.60
1996/02/29 31371.62 29678.19
1996/03/31 31492.70 29963.99
1996/04/30 32725.55 30405.66
1996/05/31 33749.25 31189.82
1996/06/30 33088.80 31308.66
1996/07/31 30557.05 29925.44
1996/08/31 31470.68 30556.57
1996/09/30 33584.14 32276.29
1996/10/31 33507.09 33166.47
1996/11/30 35367.37 35673.52
1996/12/31 34277.62 34966.83
1997/01/31 36247.97 37151.56
1997/02/28 35423.97 37442.83
1997/03/31 33438.85 35904.30
1997/04/30 35047.48 38047.79
1997/05/31 37477.53 40364.14
1997/06/30 39017.70 42172.45
1997/07/31 41949.73 45528.11
1997/08/31 40329.70 42977.63
1997/09/30 42668.48 45331.51
1997/10/31 41059.86 43817.44
1997/11/30 42223.54 45845.75
1997/12/31 42314.81 46632.92
1998/01/31 42885.24 47148.68
1998/02/28 46107.91 50549.04
1998/03/31 47726.42 53137.66
1998/04/30 48660.68 53672.23
1998/05/31 47397.45 52749.60
1998/06/30 50397.63 54892.29
IMATRL PRASUN SHR__CHT 19980630 19980713 165104 R00000000000123
Let's say hypothetically that $10,000 was invested in Variable
Insurance Products Fund: Growth Portfolio - Service Class on June 30,
1988. As the chart shows, by June 30, 1998, the value of the
investment would have grown to $50,398 - a 403.98% increase on the
initial investment. For comparison, look at how the Standard & Poor's
500 Index did over the same period. With dividends and capital gains,
if any, reinvested, the same $10,000 investment would have grown to
$54,892 - a 448.92% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
MERCK & CO., INC. 3.3
MICROSOFT CORP. 3.2
JOHNSON & JOHNSON 3.1
WORLDCOM, INC. 2.5
PHILIP MORRIS COMPANIES, INC. 2.3
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
TECHNOLOGY 26.4
HEALTH 18.1
RETAIL & WHOLESALE 11.4
MEDIA & LEISURE 10.2
FINANCE 10.2
ASSET ALLOCATION AS OF JUNE 30, 1998*
ROW: 1, COL: 1, VALUE: 1.7
ROW: 1, COL: 2, VALUE: 98.3
STOCKS 98.3%
SHORT-TERM INVESTMENTS 1.7%
FOREIGN INVESTMENTS 3.3%
*
(% OF FUND'S INVESTMENTS)
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with
Jennifer Uhrig, Portfolio Manager of Growth Portfolio
Q. HOW DID THE FUND PERFORM, JENNIFER?
A. The fund performed well over the most recent six-month period that
ended June 30, 1998, and provided a greater return than the Standard &
Poor's 500 Index, which was up 17.71% for the period. For the most
recent 12-month period that ended June 30, the fund performed in line
with the S&P, which returned 30.16% over that time.
Q. WHAT WERE THE KEY FACTORS BEHIND THE FUND'S STRONG PERFORMANCE OVER
THE PAST SIX MONTHS?
A. The fund's holdings in the retail and wholesale sector and in
technology were big positives, with Wal-Mart and Microsoft both rising
more than 50% over the past six months. My positions in health care
also made a modest contribution to performance. On the negative side,
nondurables stocks hurt performance - particularly my position in
Philip Morris - as did the fund's cash position, even though it was
less than 3% during most of the period.
Q. OVER THE PAST YEAR OR SO, YOU'VE TENDED TO CONCENTRATE MORE OF THE
FUND'S ASSETS IN ITS LARGEST HOLDINGS. DID THIS CONTINUE DURING THE
PERIOD AND, IF SO, HOW DID IT AFFECT PERFORMANCE?
A. That trend did continue, because when I'm confident about an
investment I want it to have an impact on the fund. And the strategy
worked well, with seven of the fund's top 10 positions outperforming
the S&P over the past six months, some by quite significant margins.
Q. TELL US ABOUT SOME OF THOSE HOLDINGS, IF YOU WOULD . . .
A. Wal-Mart and Microsoft, which I mentioned earlier, were both up
sharply. Microsoft has three major new products to drive its business
- - Windows 98, Windows NT 5.0 and the new release of Office due out in
1999. Its stock was up well over 60% during the period, and I added
significantly to the fund's position over the past six months. I also
added considerably to the fund's holdings in pharmaceutical companies
Merck and Warner-Lambert, and increased my holdings in General
Electric, as well. All three of these stocks topped the S&P's returns,
with Warner-Lambert up almost 70%. WorldCom, the fourth-largest
holding at the end of the period, was up about 60% over the past six
months as its acquisition of MCI appeared to be moving ahead smoothly.
Q. WHICH OF YOUR HOLDINGS DIDN'T LIVE UP TO YOUR EXPECTATIONS?
A. Philip Morris, the fifth-largest position at the end of June,
dropped about 13% during the period as concerns grew over future
litigation once the tobacco industry's tentative agreement with
Washington fell apart. Intel's stock, which was flat during the
period, was also a disappointment. It had to make larger-than-normal
price cuts as PC users failed to upgrade to its new Pentium 2
microprocessor at the rates Intel expected.
Q. THE FUND'S WEIGHTINGS BY INDUSTRY SECTOR DIDN'T CHANGE MUCH FROM
SIX MONTHS AGO . . .
A. That's true. I increased the fund's holdings in technology slightly
from about 21% six months ago to about 26% at the end of June, taking
advantage of the volatility within this sector over the first half of
the year to buy stocks at attractive prices. I kept the fund's
positions in health care and finance about the same, at about 18% and
10% of holdings, respectively, as of the end of the period. I reduced
my holdings in nondurables and in energy, because the price of oil
dropped significantly. I bumped up the weighting in the retail and
wholesale sector to about 12%, because of the strong economy and
extremely high level of consumer confidence during the period.
Q. WHAT'S YOUR OUTLOOK FOR THE NEXT SIX MONTHS, JENNIFER?
A. I feel pretty good about the technology sector, although I have to
watch its volatility carefully. As current PC inventories are cleared
out, I think prospects will improve. And while the turmoil in Asia
certainly is hurting this sector, I think it's already reflected in
most stock prices. As far as non-cyclicals - or those stocks not
particularly influenced by the strength of the economy - I'm still
down on the nondurables sector and continue to prefer the
pharmaceuticals, which, although more expensive, have better
fundamentals. I consider my investment in both of these sectors to be
defensive, reflecting my uncertainty about the economy's future.
Looking more broadly, the economy has slowed down, which should keep
interest rates low and help growth stocks. Although increased from six
months ago, the fund's average market capitalization is still only
about half of the S&P 500's, and I think the fund is well-positioned
if the market broadens.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED
ON MARKET AND OTHER CONDITIONS.
FUND FACTS
GOAL: to increase the value of the fund's shares
over the long term by investing in stocks with
above-average growth potential
START DATE: October 9, 1986
SIZE: as of June 30, 1998, more than $9.3 billion
MANAGER: Jennifer Uhrig, since January 1997;
joined Fidelity in 1987
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
INVESTMENTS JUNE 30, 1998 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 98.3%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 0.9%
AEROSPACE & DEFENSE - 0.3%
Gulfstream Aerospace Corp. (a) 586,200 $ 27,258,300
DEFENSE ELECTRONICS - 0.6%
Litton Industries, Inc. (a) 313,400 18,490,600
Raytheon Co.:
Class A 354,562 20,431,635
Class B 348,500 20,605,063
59,527,298
TOTAL AEROSPACE & DEFENSE 86,785,598
BASIC INDUSTRIES - 1.0%
CHEMICALS & PLASTICS - 0.5%
Cytec Industries, Inc. (a) 701,900 31,059,075
Monsanto Co. 241,400 13,488,225
Solutia, Inc. 13,200 378,659
44,925,959
PACKAGING & CONTAINERS - 0.5%
Owens-Illinois, Inc. (a) 1,059,100 47,394,725
TOTAL BASIC INDUSTRIES 92,320,684
CONSTRUCTION & REAL ESTATE - 0.1%
ENGINEERING - 0.1%
Stolt Comex Seaway SA Class A
sponsored ADR 192,850 3,374,875
Stolt Comex Seaway SA (a) 385,700 7,472,938
10,847,813
REAL ESTATE - 0.0%
Stewart Enterprises, Inc. Class A 79,400 2,114,025
TOTAL CONSTRUCTION & REAL ESTATE 12,961,838
DURABLES - 0.8%
TEXTILES & APPAREL - 0.8%
Fruit of the Loom, Inc. Class A (a) 1,375,900 45,662,681
NIKE, Inc. Class B 240,700 11,719,081
Reebok International Ltd. (a) 541,000 14,978,938
72,360,700
ENERGY - 1.7%
ENERGY SERVICES - 1.3%
Coflexip sponsored ADR 639,600 39,095,550
Halliburton Co. 540,900 24,103,856
Schlumberger Ltd. 270,500 18,478,531
Smith International, Inc. 282,500 9,834,531
Varco International, Inc. (a) 591,100 11,711,169
Western Atlas, Inc. 179,100 15,201,113
118,424,750
OIL & GAS - 0.4%
EVI Weatherford, Inc. (a) 305,540 11,343,173
Tosco Corp. 945,500 27,774,063
39,117,236
TOTAL ENERGY 157,541,986
FINANCE - 10.2%
BANKS - 1.1%
Bank of Ireland, Inc. 1,474,820 30,203,364
Bank of New York Co., Inc. 577,800 35,065,238
Providian Financial Corp. 455,500 35,785,219
101,053,821
SHARES VALUE (NOTE 1)
CREDIT & OTHER FINANCE - 2.9%
American Express Co. 1,522,000 $ 173,508,000
Associates First Capital Corp. 658,200 50,599,125
Beneficial Corp. 222,800 34,130,175
Household International, Inc. 180,000 8,955,000
267,192,300
FEDERAL SPONSORED CREDIT - 2.8%
Freddie Mac 1,192,600 56,126,738
Fannie Mae 2,780,500 168,915,375
SLM Holding Corp. 712,100 34,892,900
259,935,013
INSURANCE - 3.4%
Allmerica Financial Corp. 570,900 37,108,500
AMBAC, Inc. 869,200 50,848,200
American International Group, Inc. 560,050 81,767,300
MBIA, Inc. 327,200 24,499,100
Progressive Corp. 417,000 58,797,000
UNUM Corp. 1,234,900 68,536,950
321,557,050
TOTAL FINANCE 949,738,184
HEALTH - 18.1%
DRUGS & PHARMACEUTICALS - 11.2%
American Home Products Corp. 2,554,300 132,185,025
Amgen, Inc. (a) 785,600 51,358,600
Barr Laboratories, Inc. (a) 145,260 5,774,085
Bristol-Myers Squibb Co. 783,500 90,053,531
Elan Corp. PLC ADR (a) 601,100 38,658,244
Genentech, Inc. special (a) 356,900 24,224,588
Lilly (Eli) & Co. 1,722,600 113,799,263
Merck & Co., Inc. 2,281,400 305,137,250
Schering-Plough Corp. 618,800 56,697,550
Sepracor, Inc. (a) 666,500 27,659,750
Warner-Lambert Co. 2,927,500 203,095,313
1,048,643,199
MEDICAL EQUIPMENT & SUPPLIES - 5.2%
Arterial Vascular Engineering, Inc. (a) 486,900 17,406,675
Guidant Corp. 837,000 59,688,563
Johnson & Johnson 3,879,700 286,127,875
McKesson Corp. 728,100 59,158,125
Medtronic, Inc. 1,001,200 63,826,500
Sybron International Corp. (a) 114,800 2,898,700
489,106,438
MEDICAL FACILITIES MANAGEMENT - 1.7%
Columbia/HCA Healthcare Corp. 1,102,437 32,108,478
HEALTHSOUTH Corp. (a) 1,956,800 52,222,100
Health Management Associates, Inc.
Class A (a) 1,330,700 44,495,281
United HealthCare Corp. 397,600 25,247,600
154,073,459
TOTAL HEALTH 1,691,823,096
INDUSTRIAL MACHINERY & EQUIPMENT - 3.3%
ELECTRICAL EQUIPMENT - 2.7%
Alcatel Alsthom Compagnie Generale
d'Electricite SA sponsored ADR 29,900 1,216,556
Alcatel Alsthom Compagnie Generale
d'Electricite SA 269,100 54,641,171
General Electric Co. 2,084,400 189,680,400
245,538,127
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED
POLLUTION CONTROL - 0.6%
USA Waste Services, Inc. (a) 1,087,800 $ 53,710,125
Waste Management, Inc. 136,000 4,760,000
58,470,125
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 304,008,252
MEDIA & LEISURE - 10.2%
BROADCASTING - 4.6%
CBS Corp. 1,779,100 56,486,425
Comcast Corp. Class A special 1,669,000 67,750,969
Cox Communications, Inc. Class A (a) 872,600 42,266,563
MediaOne Group, Inc. 1,371,200 60,247,100
PanAmSat Corp. (a) 366,200 20,827,625
RCN Corp. 1,128,000 21,855,000
Tele-Communications, Inc. (a):
(TCI Group), Series A 2,169,800 83,401,688
(TCI Ventures Group), Series A 399,200 8,008,950
Time Warner, Inc. 824,945 70,481,238
431,325,558
ENTERTAINMENT - 1.4%
Disney (Walt) Co. 535,300 56,239,956
King World Productions, Inc. (a) 733,400 18,701,700
Viacom, Inc. Class B (non-vtg.) (a) 1,015,400 59,147,050
134,088,706
LEISURE DURABLES & TOYS - 0.4%
Harley-Davidson, Inc. 908,500 35,204,375
LODGING & GAMING - 0.4%
Mirage Resorts, Inc. (a) 735,500 15,675,344
Sun International Hotels Ltd. Ord. (a) 496,100 22,572,550
38,247,894
PUBLISHING - 0.7%
Applied Graphics Technologies, Inc. (a) 485,100 22,193,325
Times Mirror Co. Class A 332,400 20,899,650
Tribune Co. 362,300 24,930,769
68,023,744
RESTAURANTS - 2.7%
Apple South, Inc. 620,400 8,103,975
Brinker International, Inc. (a) 1,533,800 29,525,650
Darden Restaurants, Inc. 1,207,200 19,164,300
Landry's Seafood Restaurants, Inc. (a) 1,090,800 19,736,663
McDonald's Corp. 1,234,200 85,159,800
Outback Steakhouse, Inc. (a) 733,900 28,622,100
Papa John's International, Inc. (a) 277,000 10,924,188
Tricon Global Restaurants, Inc. 653,860 20,719,189
Wendy's International, Inc. 1,155,600 27,156,600
249,112,465
TOTAL MEDIA & LEISURE 956,002,742
NONDURABLES - 5.6%
AGRICULTURE - 0.3%
Delta & Pine Land Co. 209,700 9,331,650
Pioneer Hi-Bred International, Inc. 497,200 20,571,650
29,903,300
BEVERAGES - 0.9%
Anheuser-Busch Companies, Inc. 268,800 12,684,000
Coca-Cola Co. (The) 808,500 69,126,750
81,810,750
SHARES VALUE (NOTE 1)
FOODS - 0.4%
American Italian Pasta Co. Series A 280,700 $ 10,456,075
Sara Lee Corp. 535,600 29,960,125
40,416,200
HOUSEHOLD PRODUCTS - 1.6%
Avon Products, Inc. 580,100 44,957,750
Clorox Co. 370,700 35,355,513
Colgate-Palmolive Co. 35,900 3,159,200
Gillette Co. 862,600 48,898,638
International Flavors & Fragrances, Inc. 397,600 17,270,750
149,641,851
TOBACCO - 2.4%
Philip Morris Companies, Inc. 5,571,000 219,358,125
TOTAL NONDURABLES 521,130,226
RETAIL & WHOLESALE - 11.4%
APPAREL STORES - 1.2%
Gap, Inc. 539,900 33,271,338
Payless ShoeSource, Inc. (a) 508,600 37,477,463
TJX Companies, Inc. 1,793,800 43,275,425
114,024,226
DRUG STORES - 2.1%
CVS Corp. 1,819,410 70,843,277
Rite Aid Corp. 1,682,700 63,206,419
Walgreen Co. 1,548,700 63,980,669
198,030,365
GENERAL MERCHANDISE STORES - 3.6%
Costco Companies, Inc. (a) 787,700 49,674,331
Dayton Hudson Corp. 1,027,800 49,848,300
Nordstrom, Inc. 792,400 61,212,900
Wal-Mart Stores, Inc. 2,839,500 172,499,625
333,235,156
GROCERY STORES - 0.6%
Meyer (Fred), Inc. 97,900 4,160,750
Safeway, Inc. (a) 1,275,900 51,913,181
56,073,931
RETAIL & WHOLESALE, MISCELLANEOUS - 3.9%
Barnes & Noble, Inc. 283,700 10,621,019
Bed Bath & Beyond, Inc. (a) 850,300 44,056,169
Best Buy Co., Inc. (a) 1,011,000 36,522,375
Circuit City Stores, Inc. - Circuit
City Group 252,000 11,812,500
Home Depot, Inc. 1,840,950 152,913,909
Lowe's Companies, Inc. 1,107,200 44,910,800
Staples, Inc. (a) 1,706,900 49,393,419
Tandy Corp. 328,100 17,409,806
367,639,997
TOTAL RETAIL & WHOLESALE 1,069,003,675
SERVICES - 1.4%
EDUCATIONAL SERVICES - 0.3%
Apollo Group, Inc. Class A (a) 840,800 27,798,950
LEASING & RENTAL - 0.4%
Hertz Corp. Class A 766,600 33,969,963
SERVICES - 0.7%
AccuStaff, Inc. (a) 577,300 18,040,625
Corrections Corp. of America (a) 593,900 13,956,650
Service Corp. International 846,600 36,297,975
68,295,250
TOTAL SERVICES 130,064,163
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TECHNOLOGY - 26.4%
COMMUNICATIONS EQUIPMENT - 5.5%
Advanced Fibre Communication, Inc. (a) 227,800 $ 9,126,238
Ascend Communications, Inc. (a) 1,351,700 66,993,631
Aspect Telecommunications Corp. 841,400 23,033,325
Ciena Corp. (a) 629,500 43,828,938
Cisco Systems, Inc. (a) 1,740,400 160,225,575
DSC Communications Corp. 566,300 16,989,000
Intermedia Communications, Inc. 12,000 503,250
Lucent Technologies, Inc. 1,161,800 96,647,238
Nokia Corp. AB sponsored ADR 479,800 34,815,488
Northern Telecom Ltd. 1,060,400 60,253,694
512,416,377
COMPUTER SERVICES & SOFTWARE - 8.1%
America Online, Inc. (a) 182,600 19,355,600
BMC Software, Inc. (a) 839,400 43,596,338
Broderbund Software, Inc. (a) 502,200 11,456,438
CSG Systems International, Inc. (a) 419,600 19,668,750
Citrix Systems, Inc. (a) 508,350 34,758,431
CompUSA, Inc. (a) 2,075,700 37,492,331
Compuware Corp. (a) 1,034,000 52,863,250
Documentum, Inc. (a) 219,400 10,531,200
E Trade Group, Inc. 271,100 6,218,356
Electronic Arts, Inc. 326,000 17,604,000
Equifax, Inc. 485,300 17,622,456
ICG Communications, Inc. (a) 107,500 3,930,469
Intuit, Inc. (a) 197,400 12,090,750
Microsoft Corp. (a) 2,769,200 300,112,050
Oracle Corp. (a) 1,267,100 31,123,144
Policy Management Systems Corp. (a) 413,000 16,210,250
Siebel Systems, Inc. (a) 1,699,800 54,818,550
SunGard Data Systems, Inc. (a) 780,700 29,959,363
Yahoo, Inc. (a) 215,900 34,004,250
753,415,976
COMPUTERS & OFFICE EQUIPMENT - 7.0%
Apple Computer, Inc. (a) 1,583,200 45,418,050
Comverse Technology, Inc. 93,200 4,834,750
Dell Computer Corp. (a) 1,269,300 117,806,906
EMC Corp. (a) 1,184,400 53,075,925
Fore Systems, Inc. (a) 1,019,200 27,008,800
Hewlett-Packard Co. 468,900 28,075,388
Ingram Micro, Inc. Class A (a) 1,385,900 61,326,075
Pitney Bowes, Inc. 826,100 39,756,063
Quantum Corp. (a) 1,484,700 30,807,525
Seagate Technology (a) 1,805,700 42,998,231
Tech Data Corp. (a) 1,223,400 52,453,275
Xerox Corp. 1,498,100 152,244,413
655,805,401
ELECTRONIC INSTRUMENTS - 0.5%
Applied Materials, Inc. (a) 573,900 16,930,050
Lam Research Corp. (a) 55,400 1,059,525
Novellus Systems, Inc. (a) 328,500 11,723,344
Waters Corp. (a) 260,300 15,341,431
45,054,350
ELECTRONICS - 5.3%
Altera Corp. (a) 886,200 26,198,288
Intel Corp. 2,481,400 183,933,775
Lattice Semiconductor Corp. (a) 544,900 15,478,566
Linear Technology Corp. 125,700 7,581,281
Micron Technology, Inc. (a) 1,762,400 43,729,550
Motorola, Inc. 320,200 16,830,513
Sanmina Corp. (a) 1,342,600 58,235,275
SHARES VALUE (NOTE 1)
Texas Instruments, Inc. 1,747,000 $ 101,871,938
Xilinx, Inc. (a) 1,232,900 41,918,600
495,777,786
TOTAL TECHNOLOGY 2,462,469,890
TRANSPORTATION - 0.3%
RAILROADS - 0.3%
Wisconsin Central
Transportation Corp. (a) 1,488,900 32,569,688
UTILITIES - 6.9%
CELLULAR - 0.8%
AirTouch Communications, Inc. 680,400 39,760,875
Nextel Communications, Inc. Class A (a) 1,510,700 37,578,663
77,339,538
ELECTRIC UTILITY - 0.1%
PG&E Corp. 282,900 8,929,031
TELEPHONE SERVICES - 6.0%
AT&T Corp. 3,036,200 173,442,925
McLeodUSA, Inc. Class A (a) 107,000 4,159,625
Qwest Communications International, Inc. 1,201,134 41,889,548
Sprint Corp. 767,000 54,073,500
Teleport Communications Group, Inc.
Class A (a) 793,900 43,069,075
Winstar Communications, Inc. (a) 252,100 10,824,544
WorldCom, Inc. (a) 4,738,770 229,534,172
556,993,389
TOTAL UTILITIES 643,261,958
TOTAL COMMON STOCKS
(Cost $6,879,298,873) 9,182,042,680
CASH EQUIVALENTS - 1.7%
Taxable Central Cash Fund (b)
(Cost $161,856,012) 161,856,012 161,856,012
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $7,041,154,885) $ 9,343,898,692
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield of the Taxable Central Cash
Fund was 5.61%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $5,589,564,182 and $5,196,486,114, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $1,041,796 for the
period (see Note 4 of Notes to Financial Statements).
INCOME TAX INFORMATION
At June 30, 1998, the aggregate cost of investment securities for
income tax purposes was $7,049,217,277. Net unrealized appreciation
aggregated $2,294,681,415, of which $2,442,621,026 related to
appreciated investment securities and $147,939,611 related to
depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 30, 1998 (UNAUDITED)
ASSETS
INVESTMENT IN SECURITIES, AT VALUE (COST $7,041,154,885) - $ 9,343,898,692
SEE ACCOMPANYING SCHEDULE
CASH 772,397
FOREIGN CURRENCY HELD AT VALUE 470,507
(COST $470,507)
RECEIVABLE FOR INVESTMENTS SOLD 126,230,945
RECEIVABLE FOR FUND SHARES SOLD 11,958,396
DIVIDENDS RECEIVABLE 8,006,919
INTEREST RECEIVABLE 467,538
OTHER RECEIVABLES 1,053,084
TOTAL ASSETS 9,492,858,478
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 85,807,798
PAYABLE FOR FUND SHARES REDEEMED 3,322,017
ACCRUED MANAGEMENT FEE 4,370,506
DISTRIBUTION FEES PAYABLE 3,303
OTHER PAYABLES AND 596,529
ACCRUED EXPENSES
TOTAL LIABILITIES 94,100,153
NET ASSETS $ 9,398,758,325
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 6,376,107,217
UNDISTRIBUTED NET INVESTMENT INCOME 9,790,306
ACCUMULATED UNDISTRIBUTED 710,132,160
NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 2,302,728,642
AND ASSETS AND LIABILITIES IN FOREIGN CURRENCIES
NET ASSETS $ 9,398,758,325
INITIAL CLASS: $38.32
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE
PER SHARE ($9,349,834,942
(DIVIDED BY) 243,979,955 SHARES)
SERVICE CLASS: $38.30
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE
PER SHARE ($48,923,383
(DIVIDED BY) 1,277,458 SHARES)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME $ 31,120,840
DIVIDENDS
INTEREST 6,191,664
TOTAL INCOME 37,312,504
EXPENSES
MANAGEMENT FEE $ 25,078,180
TRANSFER AGENT FEES 2,820,449
DISTRIBUTION FEES - SERVICE CLASS 9,364
ACCOUNTING FEES AND EXPENSES 412,106
NON-INTERESTED TRUSTEES' COMPENSATION 18,038
CUSTODIAN FEES AND EXPENSES 109,054
REGISTRATION FEES 59,688
AUDIT 59,163
LEGAL 50,872
MISCELLANEOUS 125,832
TOTAL EXPENSES BEFORE REDUCTIONS 28,742,746
EXPENSE REDUCTIONS (966,173) 27,776,573
NET INVESTMENT INCOME 9,535,931
REALIZED AND UNREALIZED
GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 736,453,459
FOREIGN CURRENCY TRANSACTIONS 141,347 736,594,806
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 736,222,137
ASSETS AND LIABILITIES IN 6,969 736,229,106
FOREIGN CURRENCIES
NET GAIN (LOSS) 1,472,823,912
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 1,482,359,843
OTHER INFORMATION $ 964,281
EXPENSE REDUCTIONS
DIRECTED BROKERAGE ARRANGEMENTS
CUSTODIAN CREDITS 1,892
$ 966,173
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
OPERATIONS $ 9,535,931 $ 39,932,429
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 736,594,806 1,023,118,931
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) 736,229,106 361,565,945
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,482,359,843 1,424,617,305
DISTRIBUTIONS TO SHAREHOLDERS (39,552,557) (41,406,087)
FROM NET INVESTMENT INCOME
FROM NET REALIZED GAIN (1,034,611,635) (183,895,819)
TOTAL DISTRIBUTIONS (1,074,164,192) (225,301,906)
SHARE TRANSACTIONS - NET INCREASE (DECREASE) 1,261,415,723 443,407,898
TOTAL INCREASE (DECREASE) IN NET ASSETS 1,669,611,374 1,642,723,297
NET ASSETS
BEGINNING OF PERIOD 7,729,146,951 6,086,423,654
END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $9,790,306 AND
$39,932,430, RESPECTIVELY) $ 9,398,758,325 $ 7,729,146,951
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
OTHER INFORMATION:
SIX MONTHS ENDED JUNE 30, 1998
SHARES DOLLARS YEAR ENDED DECEMBER 31, 1997
(UNAUDITED) SHARES DOLLARS
SHARE TRANSACTIONS 25,045,532 $ 913,287,750 45,510,758 $ 1,540,122,332
INITIAL CLASS
SOLD
REINVESTED 31,899,317 1,073,412,015 7,138,844 225,301,906
REDEEMED (21,232,045) (769,738,654) (39,805,810) (1,324,008,293)
NET INCREASE (DECREASE) 35,712,804 $ 1,216,961,111 12,843,792 $ 441,415,945
SERVICE CLASS A 1,202,328 $ 43,760,042 55,002 $ 2,016,184
SOLD
REINVESTED 22,359 752,178 - -
REDEEMED (1,569) (57,608) (662) (24,231)
NET INCREASE (DECREASE) 1,223,118 $ 44,454,612 54,340 $ 1,991,953
DISTRIBUTIONS $ 39,524,861 $ 41,406,087
INITIAL CLASS - NET INVESTMENT INCOME
INITIAL CLASS - NET REALIZED GAIN 1,033,887,154 183,895,819
TOTAL $ 1,073,412,015 $ 225,301,906
SERVICE CLASS - NET INVESTMENT INCOME $ 27,696 -
SERVICE CLASS - NET REALIZED GAIN 724,481 -
TOTAL $ 752,177 $ -
$ 1,074,164,192 $ 225,301,906
A SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1998
SELECTED PER-SHARE DATA (UNAUDITED) 1997 1996 1995 1994 1993
NET ASSET VALUE, BEGINNING OF PERIOD $ 37.10 $ 31.14 $ 29.20 $ 21.69 $ 23.08 $ 19.76
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .04 D .20 D .22 .08 .12 .12
NET REALIZED AND UNREALIZED GAIN (LOSS) 6.34 6.91 3.82 7.55 (.12) 3.64
TOTAL FROM INVESTMENT OPERATIONS 6.38 7.11 4.04 7.63 - 3.76
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.19) (.21) (.08) (.12) (.12) (.11)
FROM NET REALIZED GAIN (4.97) (.94) (2.02) - (1.27) (.21)
IN EXCESS OF NET REALIZED GAIN - - - - - (.12)
TOTAL DISTRIBUTIONS (5.16) (1.15) (2.10) (.12) (1.39) (.44)
NET ASSET VALUE, END OF PERIOD $ 38.32 $ 37.10 $ 31.14 $ 29.20 $ 21.69 $ 23.08
TOTAL RETURN B, C 19.13% 23.48% 14.71% 35.36% (.02)% 19.37%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 9,349,835 $ 7,727,132 $ 6,086,424 $ 4,162,702 $ 2,141,869 $ 1,383,849
RATIO OF EXPENSES TO AVERAGE NET ASSETS .69% A .69% .69% .70% .70% .71%
RATIO OF EXPENSES TO AVERAGE NET ASSETS
AFTER EXPENSE REDUCTIONS .66% A, F .67% F .67% F .70% .69% F .71%
RATIO OF NET INVESTMENT INCOME TO AVERAGE
NET ASSETS .23% A .58% .81% .37% .69% .72%
PORTFOLIO TURNOVER 127% A 113% 81% 108% 122% 159%
AVERAGE COMMISSION RATE G $ .0459 $ .0428 $ .0416
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
SELECTED PER-SHARE DATA (UNAUDITED) 1997 E
NET ASSET VALUE, BEGINNING OF PERIOD $ 37.09 $ 36.92
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .03 D .03 D
NET REALIZED AND UNREALIZED GAIN (LOSS) 6.34 .14
TOTAL FROM INVESTMENT OPERATIONS 6.37 .17
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.19) -
FROM NET REALIZED GAIN (4.97) -
TOTAL DISTRIBUTIONS (5.16) -
NET ASSET VALUE, END OF PERIOD $ 38.30 $ 37.09
TOTAL RETURN B, C 19.10% .46%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 48,923 $ 2,015
RATIO OF EXPENSES TO AVERAGE NET ASSETS .79% A .79% A
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS .76% A, F .77% A, F
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS .16% A .70% A
PORTFOLIO TURNOVER 127% A 113%
AVERAGE COMMISSION RATE G $ .0459 $ .0428
A ANNUALIZED
B TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN.
TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED
DURING THE PERIODS SHOWN (SEE NOTE 7 OF NOTES TO FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3, 1997 (COMMENCEMENT OF SALE OF SERVICE CLASS SHARES)
TO DECEMBER 31, 1997.
F FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO
EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES (SEE NOTE 7 OF NOTES TO
FINANCIAL STATEMENTS).
G FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED TO
DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH
COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND
DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES
AND COMMISSION RATE STRUCTURES MAY DIFFER.
</TABLE>
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
JUNE 30, 1998 YEAR YEARS YEARS
VIP: OVERSEAS - "INITIAL CLASS" 11.10% 13.50% 11.08%
MSCI EAFE 6.33% 10.11% 6.82%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's returns to the performance of the Morgan
Stanley Capital International Europe, Australasia, Far East (EAFE)
Index - a market capitalization weighted, unmanaged index of over
1,000 foreign stocks.
UNDERSTANDING PERFORMANCE
Many markets around the globe offer the potential
for significant growth over time; however,
investing in foreign markets means assuming
greater risks than investing in the United States.
Factors like changes in a country's financial
markets, its local political and economic climate,
and the fluctuating value of its currency create
these risks. For these reasons an international
fund's performance may be more volatile than
a fund that invests exclusively in the United
States.
(checkmark)
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown.
If Fidelity had not reimbursed certain fund expenses, the fund's past
10 year total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money. Foreign investments involve greater risks and
potential rewards than U.S. investments. These risks include political
and economic uncertainties of foreign countries, as well as the risk
of currency fluctuations.
$10,000 OVER THE PAST 10 YEARS
VIP Overseas MS EAFE Index (Net)
00154 MS001
1988/06/30 10000.00 10000.00
1988/07/31 9926.32 10313.74
1988/08/31 9578.95 9643.15
1988/09/30 9989.47 10064.51
1988/10/31 10431.58 10925.65
1988/11/30 10621.05 11576.45
1988/12/31 10642.11 11641.00
1989/01/31 10957.89 11845.81
1989/02/28 11147.37 11906.70
1989/03/31 11137.33 11673.02
1989/04/30 11466.14 11781.28
1989/05/31 11041.86 11140.34
1989/06/30 10999.44 10952.81
1989/07/31 12028.31 12328.18
1989/08/31 11943.46 11773.74
1989/09/30 12685.94 12310.05
1989/10/31 11996.49 11815.47
1989/11/30 12643.52 12409.43
1989/12/31 13439.04 12867.30
1990/01/31 13258.72 12388.53
1990/02/28 12949.25 11523.87
1990/03/31 13438.71 10323.36
1990/04/30 13513.19 10241.44
1990/05/31 14396.33 11410.00
1990/06/30 14715.54 11309.50
1990/07/31 15460.37 11468.80
1990/08/31 13885.60 10355.09
1990/09/30 12566.20 8911.95
1990/10/31 13736.64 10300.61
1990/11/30 13311.02 9692.99
1990/12/31 13215.26 9850.02
1991/01/31 13342.94 10168.61
1991/02/28 13792.47 11258.68
1991/03/31 13389.05 10582.79
1991/04/30 13683.43 10686.72
1991/05/31 13716.14 10798.23
1991/06/30 12963.83 10004.76
1991/07/31 13607.11 10496.32
1991/08/31 13650.72 10283.16
1991/09/30 14206.78 10862.71
1991/10/31 14304.91 11016.69
1991/11/30 13792.47 10502.38
1991/12/31 14272.20 11044.76
1992/01/31 14446.65 10808.85
1992/02/29 14145.60 10421.98
1992/03/31 13858.27 9733.95
1992/04/30 14720.27 9780.23
1992/05/31 15361.24 10434.87
1992/06/30 15073.91 9939.92
1992/07/31 14112.45 9685.53
1992/08/31 13990.89 10293.01
1992/09/30 13427.27 10089.75
1992/10/31 12510.02 9560.50
1992/11/30 12443.71 9650.47
1992/12/31 12742.09 9700.38
1993/01/31 13106.79 9699.19
1993/02/28 13363.51 9992.17
1993/03/31 14290.59 10863.15
1993/04/30 15240.28 11894.09
1993/05/31 15568.15 12145.29
1993/06/30 15183.75 11955.80
1993/07/31 15782.96 12374.31
1993/08/31 16630.90 13042.31
1993/09/30 16540.45 12748.73
1993/10/31 17139.66 13141.62
1993/11/30 16416.09 11992.90
1993/12/31 17501.45 12858.88
1994/01/31 18643.34 13946.04
1994/02/28 18314.53 13907.41
1994/03/31 17860.07 13308.40
1994/04/30 18450.86 13873.06
1994/05/31 18223.64 13793.41
1994/06/30 18030.49 13988.34
1994/07/31 18507.67 14122.87
1994/08/31 18723.54 14457.23
1994/09/30 18235.00 14001.89
1994/10/31 18609.92 14468.15
1994/11/30 17905.52 13772.81
1994/12/31 17803.27 13859.05
1995/01/31 17064.78 13326.65
1995/02/28 17109.68 13288.40
1995/03/31 17636.48 14117.22
1995/04/30 18140.38 14648.15
1995/05/31 18392.33 14473.53
1995/06/30 18564.11 14219.71
1995/07/31 19388.68 15104.98
1995/08/31 18850.42 14528.78
1995/09/30 19125.27 14812.53
1995/10/31 18747.35 14414.36
1995/11/30 18964.94 14815.43
1995/12/31 19537.56 15412.34
1996/01/31 19904.03 15475.62
1996/02/29 19947.86 15527.93
1996/03/31 20252.95 15857.68
1996/04/30 20816.18 16318.72
1996/05/31 20827.92 16018.42
1996/06/30 20980.46 16108.58
1996/07/31 20358.56 15637.77
1996/08/31 20511.10 15672.03
1996/09/30 21109.53 16088.37
1996/10/31 20898.32 15923.74
1996/11/30 21989.59 16557.32
1996/12/31 22106.93 16344.33
1997/01/31 22106.93 15775.55
1997/02/28 22619.12 16037.42
1997/03/31 22824.63 16098.36
1997/04/30 23017.29 16186.90
1997/05/31 24455.87 17243.42
1997/06/30 25740.32 18196.98
1997/07/31 26613.75 18493.96
1997/08/31 24610.01 17115.24
1997/09/30 26421.08 18076.60
1997/10/31 24571.48 16691.75
1997/11/30 24455.87 16524.84
1997/12/31 24661.39 16672.08
1998/01/31 25470.59 17437.65
1998/02/28 26904.32 18559.77
1998/03/31 28124.73 19134.75
1998/04/30 28915.21 19289.36
1998/05/31 28873.61 19199.28
1998/06/30 28596.24 19348.07
IMATRL PRASUN SHR__CHT 19980630 19980709 104655 R00000000000123
Let's say hypothetically that $10,000 was invested in Variable
Insurance Products Fund: Overseas Portfolio on June 30, 1988. As the
chart shows, by June 30, 1998, the value of the investment would have
grown to $28,596 - a 185.96% increase on the initial investment. For
comparison, look at how the Morgan Stanley EAFE Index did over the
same period. With dividends and capital gains, if any, reinvested, the
same $10,000 investment would have grown to $19,348 over the same
period - a 93.48% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
TOTAL SA CLASS B 2.1
ALCATEL ALSTHOM COMPAGNIE GENERALE D'ELECRICITE SA 1.9
NOVARTIS AG (REG.) 1.8
PHILIPS ELECTRONICS NV (BEARER) 1.6
CREDIT SUISSE GROUP (REG.) 1.4
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
FINANCE 20.3
UTILITIES 8.7
HEALTH 8.6
ENERGY 7.4
BASIC INDUSTRIES 7.0
TOP FIVE COUNTRIES AS OF JUNE 30, 1998
(EXCLUDING CASH EQUIVALENTS) % OF FUND'S
INVESTMENTS
JAPAN 15.8
UNITED KINGDOM 13.8
FRANCE 12.9
NETHERLANDS 8.3
SWITZERLAND 6.5
TOP COUNTRIES ARE BASED ON THE LOCATION OF THE ISSUER OF EACH
SECURITY, INDICATING WHERE THE FUND IS EXPOSED TO POLITICAL AND CREDIT
RISKS. PERCENTAGES ARE ADJUSTED FOR THE EFFECT OF OPEN FUTURES
CONTRACTS, IF APPLICABLE.
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1 fee.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
JUNE 30, 1998 YEAR YEARS YEARS
VIP: OVERSEAS - SERVICE CLASS 11.04% 13.49% 11.07%
MSCI EAFE 6.33% 10.11% 6.82%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's returns to the performance of the Morgan
Stanley Capital International Europe, Australasia, Far East (EAFE)
Index - a market capitalization weighted, unmanaged index of over
1,000 foreign stocks.
UNDERSTANDING PERFORMANCE
Many markets around the globe offer the potential
for significant growth over time; however,
investing in foreign markets means assuming
greater risks than investing in the United States.
Factors like changes in a country's financial
markets, its local political and economic climate,
and the fluctuating value of its currency create
these risks. For these reasons an international
fund's performance may be more volatile than
a fund that invests exclusively in the United
States.
(checkmark)
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money. Foreign investments involve greater risks and
potential rewards than U.S. investments. These risks include political
and economic uncertainties of foreign countries, as well as the risk
of currency fluctuations.
$10,000 OVER THE PAST 10 YEARS
VIP Overseas - CL S MS EAFE Index (Net)
00495 MS001
1988/06/30 10000.00 10000.00
1988/07/31 9926.32 10313.74
1988/08/31 9578.95 9643.15
1988/09/30 9989.47 10064.51
1988/10/31 10431.58 10925.65
1988/11/30 10621.05 11576.45
1988/12/31 10642.11 11641.00
1989/01/31 10957.89 11845.81
1989/02/28 11147.37 11906.70
1989/03/31 11137.33 11673.02
1989/04/30 11466.14 11781.28
1989/05/31 11041.86 11140.34
1989/06/30 10999.44 10952.81
1989/07/31 12028.31 12328.18
1989/08/31 11943.46 11773.74
1989/09/30 12685.94 12310.05
1989/10/31 11996.49 11815.47
1989/11/30 12643.52 12409.43
1989/12/31 13439.04 12867.30
1990/01/31 13258.72 12388.53
1990/02/28 12949.25 11523.87
1990/03/31 13438.71 10323.36
1990/04/30 13513.19 10241.44
1990/05/31 14396.33 11410.00
1990/06/30 14715.54 11309.50
1990/07/31 15460.37 11468.80
1990/08/31 13885.60 10355.09
1990/09/30 12566.20 8911.95
1990/10/31 13736.64 10300.61
1990/11/30 13311.02 9692.99
1990/12/31 13215.26 9850.02
1991/01/31 13342.94 10168.61
1991/02/28 13792.47 11258.68
1991/03/31 13389.05 10582.79
1991/04/30 13683.43 10686.72
1991/05/31 13716.14 10798.23
1991/06/30 12963.83 10004.76
1991/07/31 13607.11 10496.32
1991/08/31 13650.72 10283.16
1991/09/30 14206.78 10862.71
1991/10/31 14304.91 11016.69
1991/11/30 13792.47 10502.38
1991/12/31 14272.20 11044.76
1992/01/31 14446.65 10808.85
1992/02/29 14145.60 10421.98
1992/03/31 13858.27 9733.95
1992/04/30 14720.27 9780.23
1992/05/31 15361.24 10434.87
1992/06/30 15073.91 9939.92
1992/07/31 14112.45 9685.53
1992/08/31 13990.89 10293.01
1992/09/30 13427.27 10089.75
1992/10/31 12510.02 9560.50
1992/11/30 12443.71 9650.47
1992/12/31 12742.09 9700.38
1993/01/31 13106.79 9699.19
1993/02/28 13363.51 9992.17
1993/03/31 14290.59 10863.15
1993/04/30 15240.28 11894.09
1993/05/31 15568.15 12145.29
1993/06/30 15183.75 11955.80
1993/07/31 15782.96 12374.31
1993/08/31 16630.90 13042.31
1993/09/30 16540.45 12748.73
1993/10/31 17139.66 13141.62
1993/11/30 16416.09 11992.90
1993/12/31 17501.45 12858.88
1994/01/31 18643.34 13946.04
1994/02/28 18314.53 13907.41
1994/03/31 17860.07 13308.40
1994/04/30 18450.86 13873.06
1994/05/31 18223.64 13793.41
1994/06/30 18030.49 13988.34
1994/07/31 18507.67 14122.87
1994/08/31 18723.54 14457.23
1994/09/30 18235.00 14001.89
1994/10/31 18609.92 14468.15
1994/11/30 17905.52 13772.81
1994/12/31 17803.27 13859.05
1995/01/31 17064.78 13326.65
1995/02/28 17109.68 13288.40
1995/03/31 17636.48 14117.22
1995/04/30 18140.38 14648.15
1995/05/31 18392.33 14473.53
1995/06/30 18564.11 14219.71
1995/07/31 19388.68 15104.98
1995/08/31 18850.42 14528.78
1995/09/30 19125.27 14812.53
1995/10/31 18747.35 14414.36
1995/11/30 18964.94 14815.43
1995/12/31 19537.56 15412.34
1996/01/31 19904.03 15475.62
1996/02/29 19947.86 15527.93
1996/03/31 20252.95 15857.68
1996/04/30 20816.18 16318.72
1996/05/31 20827.92 16018.42
1996/06/30 20980.46 16108.58
1996/07/31 20358.56 15637.77
1996/08/31 20511.10 15672.03
1996/09/30 21109.53 16088.37
1996/10/31 20898.32 15923.74
1996/11/30 21989.59 16557.32
1996/12/31 22106.93 16344.33
1997/01/31 22106.93 15775.55
1997/02/28 22619.12 16037.42
1997/03/31 22824.63 16098.36
1997/04/30 23017.29 16186.90
1997/05/31 24455.87 17243.42
1997/06/30 25740.32 18196.98
1997/07/31 26613.75 18493.96
1997/08/31 24610.01 17115.24
1997/09/30 26421.08 18076.60
1997/10/31 24571.48 16691.75
1997/11/30 24455.87 16524.84
1997/12/31 24661.39 16672.08
1998/01/31 25470.59 17437.65
1998/02/28 26904.32 18559.77
1998/03/31 28124.73 19134.75
1998/04/30 28901.35 19289.36
1998/05/31 28859.74 19199.28
1998/06/30 28582.38 19348.07
IMATRL PRASUN SHR__CHT 19980630 19980709 105331 R00000000000123
Let's say hypothetically that $10,000 was invested in Variable
Insurance Products Fund: Overseas Portfolio - Service Class on June
30, 1988. As the chart shows, by June 30, 1998, the value of the
investment would have grown to $28,582 - a 185.82% increase on the
initial investment. For comparison, look at how the Morgan Stanley
EAFE Index did over the same period. With dividends and capital gains,
if any, reinvested, the same $10,000 investment would have grown to
$19,348 over the same period - a 93.48% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
TOTAL SA CLASS B 2.1
ALCATEL ALSTHOM COMPAGNIE GENERALE D'ELECRICITE SA 1.9
NOVARTIS AG (REG.) 1.8
PHILIPS ELECTRONICS NV (BEARER) 1.6
CREDIT SUISSE GROUP (REG.) 1.4
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
FINANCE 20.3
UTILITIES 8.7
HEALTH 8.6
ENERGY 7.4
BASIC INDUSTRIES 7.0
TOP FIVE COUNTRIES AS OF JUNE 30, 1998
(EXCLUDING CASH EQUIVALENTS) % OF FUND'S
INVESTMENTS
JAPAN 15.8
UNITED KINGDOM 13.8
FRANCE 12.9
NETHERLANDS 8.3
SWITZERLAND 6.5
TOP COUNTRIES ARE BASED ON THE LOCATION OF THE ISSUER OF EACH
SECURITY, INDICATING WHERE THE FUND IS EXPOSED TO POLITICAL AND CREDIT
RISKS. PERCENTAGES ARE ADJUSTED FOR THE EFFECT OF OPEN FUTURES
CONTRACTS, IF APPLICABLE.
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with Richard Mace, Portfolio Manager of Overseas
Portfolio
Q. HOW DID THE FUND PERFORM RELATIVE TO ITS BENCHMARK, RICK?
A. For the six months that ended June 30, 1998, the fund performed in
line with the 16.05% return of the Morgan Stanley Capital
International EAFE Index, which tracks the performance of stocks in
Europe, Australasia and the Far East. For the 12 months that ended
June 30, 1998, the fund's performance topped that of the EAFE index,
which returned 6.33%.
Q. WHAT FACTORS HELPED THE FUND'S PERFORMANCE?
A. For the most part, stock selection was the key. European financial
positions made particularly strong contributions to performance, as
low interest rates, benign inflation, improving economies and surging
securities markets provided a favorable environment for banks and
insurers. In addition, merger and acquisition activity within this
sector continued to boost valuations. Particular standouts included
companies that were among the fund's 25 largest holdings, including
Swiss banking companies Credit Suisse and Julius Baer, as well as
French bank Societe Generale. Insurers also aided performance and
included Dutch company ING Groep. Telecommunications stocks were also
among the fund's more solid performers. In addition to recent merger
and consolidation activity, the cellular market in the United Kingdom
was particularly strong, and Vodafone Group was among the fund's best
performers.
Q. WHICH STOCKS PROVIDED THE BEST PERFORMANCE FOR THE FUND DURING THE
PAST SIX MONTHS?
A. Alcatel Alsthom was one of the top contributors to performance.
This is a French electronics equipment company with a superb
management team. The team has been concentrating on the divestiture of
peripheral businesses and non-core assets, aiming its focus instead on
its core, high-return businesses. An enormous increase in free cash
flow has resulted from this program, enabling the company to reduce
debt and thus improve its balance sheet. One of its main businesses is
in the manufacture of telecommunications equipment, a very fast
growing sector of late. As I mentioned, British cellular company
Vodafone was another major holding in the telecommunications sector
that boosted performance. Vodafone has been growing its business at a
pace that has exceeded expectations in both magnitude and
sustainability. Also among the fund's top performers for the period
was the British-based business services company Rentokil, which
provides a wide range of services to businesses worldwide, such as
cleaning, maintenance and landscaping. I owned it because it was cheap
and its businesses were growing at a very rapid rate.
Q. WHICH INVESTMENTS DIDN'T TURN OUT AS WELL AS YOU WOULD HAVE LIKED?
A. Japanese financial holdings hurt performance the most. Because the
Japanese economy remained stagnant and there were continued concerns
about asset quality, banks were especially hard hit. Securities
brokers were hurt by the equity market's poor performance, because
their fortunes are highly correlated with the level of market
activity. Similarly, real estate company holdings also suffered from
the general decline in the domestic economy, despite some signs that
real estate prices might be bottoming. Among the fund's financial
holdings most hurt by these events were Long-Term Credit Bank, Nomura
Securities and Sumitomo Realty & Development Company.
Q. WHAT'S YOUR OUTLOOK?
A. I think the European economies will continue to improve. However,
stock selection will be especially critical. Company earnings must
come through as expected in order to justify the lofty stock
valuations that the markets have placed on them. If earnings
disappoint, we run the risk of a stock correction. In Japan, I am
continuing to look for signs of an improvement in the economy and have
pinpointed a number of companies that could be early beneficiaries of
a turnaround as candidates for purchase. I will also be keeping a
close watch on the emerging markets, where we are beginning to see
some significant improvement in valuations. However, unlike my
approach to investing in the developed markets, country and regional
factors play as much of a role in my decision making as stock
selection. In general, emerging markets are more volatile than
developed markets. Accordingly, when I make an investment in a stock
in an emerging market, I expect a higher level of return to compensate
shareholders for the higher level of risk there. Up to this point,I
have not found many stocks outside of Latin America and South Africa
that meet these criteria.
FUND FACTS
GOAL: to increase the value of the fund's shares
by investing mainly in stocks in Europe, the Far East and the Pacific
Basin
START DATE: January 18, 1987
SIZE: as of June 30, 1998, more than $2.2 billion
MANAGER: Richard Mace, since 1996;
joined Fidelity in 1987
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
INVESTMENTS JUNE 30, 1998 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 86.3%
SHARES VALUE (NOTE 1)
ARGENTINA - 0.3%
Bansud SA Class B (a) 184,000 $ 1,444,602
Telecom Argentina Class B
sponsored ADR 102,500 3,055,781
YPF Sociedad Anonima sponsored ADR
representing Class D shares 95,700 2,876,981
7,377,364
AUSTRALIA - 2.2%
AMP Ltd. 93,900 1,098,989
Australia & New Zealand Banking
Group Ltd. 1,425,000 9,830,284
Brambles Industries Ltd. 100,100 1,964,366
Broken Hill Proprietary Co. Ltd. (The) 416,044 3,516,721
CSR Ltd. 248,800 717,963
Coles Myer Ltd. 700,400 2,732,453
Commonwealth Bank of Australia (c) 201,300 2,348,501
David Jones Ltd. 695,700 797,003
Fosters Brewing Group Ltd. 891,900 2,098,774
Howard Smith 44,100 259,435
National Australia Bank Ltd. 294,300 3,881,824
News Corp. Ltd. 473,470 3,864,327
News Corp. Ltd. ADR 29,200 938,050
News Corp. Ltd. sponsored ADR
(ltd. vtg.) 44,200 1,248,650
QNI Ltd. 1,054,780 427,828
Rio Tinto Ltd. 131,200 1,559,916
Western Mining Holdings Ltd. 2,076,296 6,248,727
Westpac Banking Corp. 302,500 1,845,133
Woodside Petroleum Ltd. 375,600 1,874,678
Woolworths Ltd. 1,057,800 3,438,974
50,692,596
AUSTRIA - 0.1%
OMV AG 20,500 2,741,715
BRAZIL - 1.8%
Compania Energertica Minas Gerais 185,466,014 5,853,192
Centrais Electricas Brasileiras SA 27,560,000 829,267
Petrobras PN (Pfd. Reg.) 30,358,000 5,643,482
Telecomunicacoes Brasileiras SA
sponsored ADR 227,300 24,818,319
Telesp PN (Pfd. Reg.) 6,704,000 1,576,661
Telecom de Sao Paulo rights 7/8/98 (a) 315,073 5,040
Telesp Celular SA Class B 20,793,000 1,725,933
40,451,894
CANADA - 2.3%
Abitibi-Consolidated, Inc. 88,300 1,140,034
Alcan Aluminium Ltd. 269,700 7,441,901
Alliance Forest Products, Inc. (a) 78,800 1,194,549
Alliance Forest Products, Inc. (a)(c) 83,700 1,268,830
BCE, Inc. 258,200 10,968,332
Canadian Pacific Ltd. 28,100 792,601
Canadian National Railway Co. 15,500 825,822
Canadian Natural Resources Ltd. (a) 159,900 2,745,345
Domtar, Inc. 518,800 3,481,642
Greenstone Resources Ltd. (a) 141,300 534,297
Inco Ltd. 155,000 2,117,356
National Bank of Canada 376,000 7,365,014
Noranda, Inc. 374,800 6,486,064
Rio Alto Exploration Ltd. (a) 337,400 3,735,479
St. Laurent Paperboard, Inc. (a)(c) 155,900 1,800,378
51,897,644
SHARES VALUE (NOTE 1)
DENMARK - 0.7%
Den Danske Bank Group AS 28,300 $ 3,389,787
International Service Systems AS Class B 68,300 3,966,549
Jyske Bank AS (Reg.) 6,800 800,893
Novo-Nordisk AS Class B 25,400 3,496,022
Unidanmark AS Class A 43,700 3,921,047
15,574,298
FINLAND - 2.0%
Enso OY Class R 640,600 6,912,614
Merita Ltd., Series A 137,500 905,758
Metsa-Serla Ltd. Class B 964,400 9,301,088
Nokia Corp. AB:
sponsored ADR 1,000 72,563
Series A 156,000 11,454,307
Outokumpu OY Class A 107,300 1,366,779
Pohjola Class B 78,700 3,909,652
Raisio Group PLC 92,000 1,657,386
Sampo Insurance Co. Ltd. 22,400 1,059,795
UPM-Kymmene Corp. 292,200 8,028,933
Valmet OY 95,500 1,643,975
46,312,850
FRANCE - 12.9%
Accor SA 35,300 9,851,975
Alcatel Alsthom Compagnie Generale
d'Electricite:
SA 214,150 43,483,489
SA sponsored ADR 1,500 61,031
Axa SA 103,526 11,611,988
Atos SA (a) 22,500 5,381,443
BQE National Paris Ord. 23,300 1,898,590
Cap Gemini Sogeti SA 32,500 5,092,784
Coflexip sponsored ADR 78,000 4,767,750
Compagnie de Saint Gobain 15,900 2,940,025
Compagnie Generale
de Geophysique SA 6,900 1,009,534
Credit Commercial de France Ord. 92,800 7,791,373
Elf Aquitaine SA sponsored ADR 1,000 71,000
Elf Sanofi SA 82,000 9,616,825
Eramet SA 29,862 1,180,196
Groupe Danone 32,100 8,826,507
LVMH (Moet-Hennessy Louis Vuitton)
sponsored ADR 21,000 4,191,340
Lafarge SA 46,021 4,744,433
Lagardere S.C.A. (Reg.) 146,400 6,078,166
Michelin SA (Compagnie Generale
des Etablissements) Class B 143,119 8,238,933
Nationale Elf Aquitaine 149,400 20,946,804
Pechiney SA Class A 188,584 7,574,467
Peugeot SA Ord. 18,700 4,009,897
Renault SA Ord. (a) 106,800 6,058,313
Rhone Poulenc:
SA Class A 151,572 8,525,534
Sponsored ADR representing
1/4 share 1,000 56,188
Royal Canin SA 13,500 770,474
Royal Canin SA (c) 45,000 2,568,247
Scor SA 72,200 4,567,208
Societe Generale Class A 109,200 22,641,551
Suez Lyonnaise des Eaux 18,800 3,085,526
Total SA:
Class B 376,554 48,820,032
sponsored ADR 1,000 65,375
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FRANCE - CONTINUED
Unibail 14,000 $ 1,805,856
Usinor Sacilor 350,200 5,395,246
Union Assurances Federales SA 50,399 7,922,515
Valeo SA 39,100 3,985,781
Vivendi SA 36,200 7,708,734
293,345,130
GERMANY - 4.9%
Allianz Aktiengesellschaft Holdings (Reg.) 44,800 14,681,416
BHF Bank AG 413,100 15,971,067
BASF AG 234,200 11,024,758
Bayer AG 168,100 8,656,034
(BMW) Muenchen Bayerische
Motorenwerke AG 1,700 1,709,403
Continental Gummi-Werke AG 97,000 2,982,965
Deutsche Bank AG 36,600 3,081,040
Deutsche Lufthansa AG 142,300 3,541,759
Dresdner Bank AG Ord. 120,900 6,452,235
Hoechst AG Ord. 185,600 9,172,212
Mannesmann AG Ord. 219,000 22,154,369
Philipp Holzmann AG (a) 9,500 2,309,320
Siemens AG 13,200 800,542
Veba AG Ord. 124,900 8,217,287
Wella AG 900 891,040
111,645,447
GREECE - 0.1%
STET Hellas Telecommunications
SA ADR 37,400 1,552,100
HONG KONG - 0.8%
China Telecom (Hong Kong) Ltd. 2,126,000 3,673,992
CLP Holdings Ltd. 374,000 1,704,169
Dairy Farm International Holdings Ltd. 1,376,000 1,472,320
Hong Kong & China Gas Co. Ltd. 555,000 630,438
Hutchison Whampoa Ltd. Ord. 240,000 1,267,071
JCG Holdings Ltd. 166,000 46,069
Johnson Electric Holdings Ltd. 1,167,000 4,323,338
Li & Fung Ltd. 162,000 261,392
National Mutual Asia Ltd. 1,040,000 664,515
Sun Hung Kai Properties Ltd. 272,000 1,155,131
Vtech Holdings Ltd. 563,000 2,096,624
17,295,059
IRELAND - 1.2%
Bank of Ireland, Inc. 615,219 12,599,289
Elan Corp. PLC ADR (a) 49,100 3,157,744
Independent Newspapers PLC 667,349 3,505,754
Smurfit (Jefferson) Group PLC 2,287,900 6,782,271
26,045,058
ITALY - 1.8%
Alitalia Linee Aeree Italiane Class A (a) 1,254,000 4,012,517
Assicurazioni Generali Spa 446,000 14,398,386
Cartiere (Burgo) Ord. 93,300 740,640
Credito Italiano Ord. 1,467,600 7,608,951
Eni Spa 738,900 4,801,604
Finmeccanica Spa (a) 1,781,800 1,394,843
Istituto Nazionale Delle
Assicurazioni Spa 577,600 1,641,070
Telecom Italia Spa 211,110 1,538,543
Telecom Italia Mobile Spa 867,300 5,278,750
41,415,304
SHARES VALUE (NOTE 1)
JAPAN - 15.0%
Acom Co. Ltd. 106,900 $ 5,070,690
Aiful Corp. (c) 64,200 3,128,439
Aiwa Co. Ltd. 71,700 2,244,979
Aoyama Trading Co. Ord. 3,300 81,235
Asahi Breweries Ltd. 158,000 1,990,211
Bank of Tokyo-Mitsubishi Ltd. 110,000 1,163,104
Banyu Pharmaceutical Co. Ltd. 245,000 2,645,217
Bridgestone Corp. 208,000 4,910,674
Canon, Inc. 405,000 9,182,681
Circle K Japan Co. Ltd. 14,300 497,150
Citizen Watch Co. Ltd. Ord. 472,000 3,890,016
DDI Corp. Ord. 198 688,361
Daiwa House Industry Co. Ltd. 113,000 996,365
Daiwa Securities Co. Ltd. 390,000 1,675,880
Dainippon Ink & Chemicals, Inc. 393,000 1,202,224
Denny's Japan Co. Ltd. 79,000 1,961,779
Fuji Bank Ltd. 1,096,000 4,883,207
Fuji Heavy Industries Ltd. 259,000 1,280,738
Fuji International Trust unit sponsored
ADR (c) 100 971,285
Fuji Photo Film Co. Ltd. 478,000 16,618,008
Fujitsu Ltd. 122,000 1,282,084
Fujitec Co. Ltd. 63,000 380,911
Hitachi Ltd. 488,000 3,178,867
Hitachi Maxell Ltd. 511,000 9,673,432
Honda Motor Co. Ltd. 495,000 17,600,949
Ito-Yokado Co. Ltd. 149,000 7,003,311
Jafco Co. Ltd. 46,000 1,225,077
Kao Corp. 301,000 4,636,435
Mabuchi Motor Co. 52,200 3,306,413
Matsushita Electric Industrial Co. Ltd. 785,000 12,600,230
Matsushita Communication Industrial
Co. Ltd. 122,000 3,213,992
Matsushita Electric Works Co. Ltd. 728,000 5,868,854
Matsumotokiyoshi Co. Ltd. 4,300 151,040
Meitec Corp. 55,000 1,900,237
Minebea Co. Ltd. 823,000 8,180,832
Minolta Camera Co. Ltd. 1,289,000 8,721,370
Mitsubishi Electric Co. Ord. 1,533,000 3,519,952
Mitsubishi Estate Co. Ltd. 678,000 5,953,789
Mitsubishi Trust & Banking Corp. 350,000 2,970,201
Mitsui Fudosan Co. Ltd. 303,000 2,390,326
NGK Insulators Ltd. 165,000 1,431,116
Nintendo Co. Ltd. Ord. 53,000 4,902,109
Nippon Telegraph & Telephone
Corp. Ord. 539 4,461,599
Nomura Securities Co. Ltd. 920,000 10,694,594
Nichiei Co. Ltd. 34,500 2,344,202
Nichicon Corp. 184,000 2,052,832
Omron Corp. 539,000 8,224,861
Orix Corp. 143,900 9,705,196
Osaka Gas Co. Ltd. 370,000 948,103
Paris Miki, Inc. 9,700 127,141
Rohm Co. Ltd. 99,000 10,154,394
Sakura Bank Ltd. 1,020,000 2,643,057
Sankyo Co. Ltd. 1,197,000 27,226,083
Secom Co. Ltd. 18,000 1,037,789
Sekisui House Ltd. 224,000 1,733,247
Sekisui Chemical Co. Ltd. 6,000 30,663
Sharp Corp. 477,000 3,859,123
Shin-Etsu Chemical Co. Ltd. 186,000 3,213,129
Sony Corp. 139,300 11,981,825
Shohkoh Fund & Co. Ltd. 7,000 1,718,131
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
JAPAN - CONTINUED
Sumitomo Realty & Development Co. Ltd. 959,000 $ 4,224,487
Sumitomo Special Metals Co. 51,000 1,082,919
TDK Corp. 88,000 6,492,478
Takeda Chemical Industries Ltd. 768,000 20,398,185
Takefuji Corp. 79,500 3,662,276
Takefuji Corp. (c) 57,000 2,625,783
Terumo Corp. 143,000 2,264,450
THK Co. Ltd. 548,400 6,078,860
Tokio Marine & Fire Insurance Co.
Ltd. (The) 312,000 3,202,418
Tokyo Gas Co. Ltd. 391,000 869,639
Toyota Motor Corp. 96,000 2,480,674
Tokyo Electron Ltd. 82,000 2,508,457
Tokyo Seimitsu Co. Ltd. 57,000 1,435,975
Uni Charm Corp. Ord. 80,000 2,959,764
Yamanouchi Pharmaceutical Co. Ltd. 195,000 4,056,359
341,672,463
LUXEMBOURG - 0.1%
Stolt Comex Seaway SA Class A
sponsored ADR 48,500 848,750
Stolt Comex Seaway SA (a) 97,000 1,879,375
2,728,125
MALAYSIA - 0.1%
Malayan Banking BHD 28,000 28,288
Malayan Banking BHD Class A 28,000 27,611
Oriental Holdings BHD 1,027,000 1,712,701
1,768,600
MEXICO - 0.7%
Grupo Financiero Banamex-Accival
Class B (a) 1,678,000 3,273,690
Grupo Carso SA de CV Class A-1 153,000 644,749
Grupo Financiero Bancomer Class B 19,401,000 7,245,635
Grupo Elektra SA 554,300 580,872
Grupo Financiero Inbursa SA Class B 495,000 1,269,231
Telefonos de Mexico SA sponsored
ADR representing Ord. Class L shares 66,100 3,176,931
16,191,108
NETHERLANDS - 8.3%
Ahold NV 178,891 5,731,182
AKZO Nobel NV 520,000 28,841,408
AKZO NV sponsored ADR 1,000 55,438
Beter Bed Holding NV 44,117 1,601,697
Benckiser NV Class B 91,800 5,634,333
Hagemeyer NV 127,000 5,483,135
ING Groep NV 413,756 27,039,028
Koninklijke Hoogovens NV 143,600 6,199,828
Koninklijke KPN N.V 76,700 2,946,454
Nutreco Holding NV 98,400 3,437,302
Philips Electronics NV 500 42,500
Philips Electronics NV (Bearer) 444,500 37,291,549
Royal Dutch Petroleum Co. Ord. 421,960 23,351,938
Royal Dutch Petroleum Co. 1,000 54,813
TNT Post Group N.V 76,700 1,956,777
Unilever NV:
Ord. 366,200 28,997,758
ADR 1,000 78,938
Vedior NV 117,500 3,314,731
Vendex CVA (part-exchangeable) 45,400 1,703,962
VNU Ord. 152,600 5,532,756
189,295,527
SHARES VALUE (NOTE 1)
NETHERLANDS ANTILLES - 0.1%
Schlumberger Ltd. 32,700 $ 2,233,819
NEW ZEALAND - 0.0%
Air New Zealand Ltd. Class B 552,200 592,273
NORWAY - 0.4%
NCL Holdings AS (a) 1,350,888 6,680,322
Schibsted AS, Series B 190,900 3,213,176
9,893,498
PERU - 0.1%
Compania de Minas Buenaventura SA
Class B sponsored ADR 80,200 1,052,625
PORTUGAL - 0.7%
BPI-SGPS SA (Reg.) 216,400 6,969,368
Banco Pinto & Sotto Mayor SA (Reg.) 136,300 3,376,387
Electricidade de Portugal SA 117,300 2,721,304
Portugal Telecom SA 17,000 899,184
Telecel Comunicacoes Pessoais SA 6,700 1,187,314
15,153,557
RUSSIA - 0.2%
Vimpel Communications
sponsored ADR (a) 79,900 3,575,525
SINGAPORE - 0.1%
DBS Land Ltd. 1,801,000 1,495,049
SOUTH AFRICA - 0.1%
Amalgamated Banks of South Africa Ltd. 98,200 609,120
Gencor Ltd. (Reg.) 164,160 251,813
Sasol, Ltd. 278,900 1,606,071
2,467,004
SPAIN - 2.3%
Banco Bilbao Vizcaya SA Ord. (Reg.) 230,700 11,829,613
Banco de Santander SA Ord. (Reg.) 31,800 813,233
Corporacion Mapfre Compania
Internacional de Reaseguros SA (Reg.) 44,700 1,566,888
Iberdrola SA 156,000 2,530,884
Mapfre Vida SA 39,800 1,898,202
Repsol SA Ord. 95,900 5,267,377
Telefonica de Espana SA:
Ord. 639,200 29,527,809
sponsored ADR 500 69,531
53,503,537
SWEDEN - 4.8%
ABB AB:
Series A 148,900 2,104,002
Series B 153,000 2,123,671
Assa Abloy AB Class B 7,100 278,336
Astra AB Class A Free shares 1,165,800 23,762,086
Electrolux AB 436,000 7,469,301
Ericsson (L.M.) Telephone Co.:
Class B 298,900 8,708,728
Class B ADR 2,500 71,563
ForeningsSparbanken AB, Series A 148,100 4,444,667
Granges AB (Reg.) 17,800 324,972
IBS (International Business Systems) AB
Class B Free shares (a) 128,400 2,215,731
Incentive AB Class B 48,700 889,108
Investor AB Class B Free shares 82,000 4,773,165
Nordbanken Holding AB 652,500 4,773,196
SKF AB Ord. 117,100 2,123,234
Skandia Foersaekrings AB 500,000 7,127,673
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SWEDEN - CONTINUED
Svenska Handelsbanken 244,200 $ 11,298,487
Swedish Match Co. 4,321,100 14,319,014
Volvo AB:
Class B 399,700 11,870,545
ADR Class B 2,000 59,125
108,736,604
SWITZERLAND - 6.5%
Adecco SA (Bearer) 9,300 4,184,312
Compagnie Financiere Richemont
AG Class A Unit (Bearer) 600 783,424
Credit Suisse Group (Reg.) 143,200 31,790,824
Holderbank Financiere Glarus
AG (Bearer) 1,500 1,904,292
Julius Baer Holding AG 5,903 18,424,427
Nestle SA (Reg.) 12,630 26,967,262
Novartis AG (Reg.) 25,271 41,956,260
Roche Holding AG 464 4,546,147
Union Bank of Switzerland (UBS)
AG (Reg.) 47,861 17,756,030
148,312,978
TURKEY - 0.0%
Turkiye is Bankasi AS Class C 21,438,700 865,169
UNITED KINGDOM - 13.8%
Allied Domecq PLC 6,200 58,213
Amec PLC Ord. 300 858
BAT Industries PLC Ord. 1,020,900 10,215,330
BBA Group PLC 282,372 2,128,521
Britax International PLC 270,200 732,245
Barclays PLC Ord. 390,000 11,238,964
Barratt Developments PLC 847,125 3,729,661
Bass PLC Ord. 144,300 2,702,490
Bank of Scotland 371,900 4,161,660
Billiton PLC 820,800 1,663,151
Boots Co. PLC Class L (The) 161,900 2,681,106
British Aerospace PLC 1,824,900 13,969,141
British Petroleum PLC:
Ord. 1,215,721 17,719,982
ADR 500 44,125
British Energy PLC 254,900 2,227,507
British Telecommunications PLCOrd. 761,400 9,396,422
Cable & Wireless PLC Ord. 348,900 4,235,945
CGU PLC 378,500 7,057,089
Caradon PLC 3,539,180 10,860,214
Cookson Group PLC 4,105,800 14,105,320
Courtaulds Textiles PLC 547,300 2,646,923
Devro PLC 166,100 1,394,720
Dorling Kindersley Holdings PLC,
Class L 175,400 614,281
Gallaher Group PLC 1,326,100 7,325,716
Glaxo PLC sponsored ADR 1,000 59,813
Glaxo Wellcome PLC 537,300 16,120,033
HSBC Holdings PLC 345,100 8,356,598
HSBC Holdings PLC Ord. 456,000 11,566,767
Hazlewood Foods PLC Ord. 256,200 1,021,163
Inchcape PLC Ord. 952,800 3,003,181
Johnson Matthey PLC 167,700 1,504,642
Lloyds TSB Group PLC 923,195 12,909,649
Man (E D & F) Group PLC 33,000 170,606
Mayflower Corp. 216,700 715,553
National Grid Co. PLC 529,890 3,570,138
SHARES VALUE (NOTE 1)
Nycomed Amersham PLC 309,720 $ 2,304,971
Pearson PLC 198,600 3,636,633
Peninsular & Oriental Steam
Navigation Co. 82,500 1,187,361
Pilkington PLC Ord. 1,352,200 2,491,846
Rentokil Initial PLC 1,927,700 13,855,897
Rio Tinto PLC (Reg.) 469,800 5,288,527
Royal & Sun Alliance Insurance
Group PLC 232,408 2,401,100
Saatchi & Saatchi PLC 848,200 2,348,142
Scottish & Newcastle Brewers PLC 202,900 2,869,431
Shell Transport & Trading Co.
PLC (Reg.) 2,497,800 17,578,752
Shell Transport & Trading Co. PLC
ADR (New) 1,500 63,563
Siebe PLC 312,800 6,244,229
SmithKline Beecham PLC:
ADR 1,000 60,500
Ord. 2,020,642 24,650,267
Somerfield PLC 638,400 4,077,647
Standard Chartered Bank PLC 80,000 908,563
Tarmac PLC 522,400 932,191
Thistle Hotels PLC 255,400 924,269
Tomkins PLC Ord. 179,800 975,270
Unilever PLC:
Ord. 621,100 6,608,458
ADR 1,500 64,969
Vodafone Group PLC 1,665,144 21,118,786
WPP Group PLC 420,900 2,756,849
Wimpey George PLC 524,700 1,010,674
314,266,622
UNITED STATES OF AMERICA - 1.9%
Aluminum Co. of America 95,400 6,290,438
Chrysler Corp. 382,000 21,535,250
DSC Communications Corp. 363,900 10,917,000
Kaiser Aluminum Corp. (a) 8,200 78,413
Newmont Mining Corp. 46,000 1,086,750
Transocean Offshore, Inc. 52,400 2,331,800
42,239,651
TOTAL COMMON STOCKS
(Cost $1,517,922,752) 1,962,390,193
PREFERRED STOCKS - 2.3%
CONVERTIBLE PREFERRED STOCKS - 0.1%
AUSTRALIA - 0.1%
WBK Trust $3.135 STRYPES 86,400 2,608,200
NONCONVERTIBLE PREFERRED STOCKS - 2.2%
AUSTRALIA - 0.1%
Star City Holdings Ltd. (a) 1,517,100 883,096
GERMANY - 1.0%
Boss (Hugo) AG 650 1,430,863
Dyckerhoff AG (non-vtg.) 4,800 1,871,681
Porsche AG 100 292,588
SAP AG (Systeme Anwendungen
Produkte) 24,600 16,599,558
Wella AG 2,635 2,943,971
23,138,661
PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONCONVERTIBLE PREFERRED STOCKS - CONTINUED
ITALY - 1.1%
Telecom Italia Mobile Spa de Risp 3,129,800 $ 10,422,159
Telecom Italia Spa 2,933,325 14,236,991
24,659,150
TOTAL NONCONVERTIBLE PREFERRED STOCKS 48,680,907
TOTAL PREFERRED STOCKS
(Cost $23,403,092) 51,289,107
CLOSED-END INVESTMENT COMPANIES - 0.4%
GERMANY - 0.3%
Emerging Germany Fund, Inc. 70,600 1,081,063
New Germany Fund, Inc. (The) 338,800 6,310,150
7,391,213
UNITED STATES OF AMERICA - 0.1%
Morgan Stanley Asia-Pacific Fund, Inc. 181,300 1,167,119
Templeton Dragon Fund, Inc. 183,500 1,536,813
2,703,932
TOTAL CLOSED-END INVESTMENT COMPANIES
(Cost $10,268,518) 10,095,145
GOVERNMENT OBLIGATIONS - 0.2%
MOODY'S PRINCIPAL
RATINGS AMOUNT
ITALY - 0.1%
Italian Republic 5%,
6/28/01 CV Aaa $ 1,940,000 3,181,600
UNITED STATES OF AMERICA - 0.1%
U.S. Treasury Bills yield at date of
purchase 4.91% 7/23/98 (d) - 1,100,000 1,096,699
TOTAL GOVERNMENT OBLIGATIONS
(Cost $4,287,729) 4,278,299
CASH EQUIVALENTS - 10.8%
SHARES
Taxable Central Cash Fund (b)
(Cost $244,944,845) 244,944,845 244,944,845
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $1,800,826,936) $ 2,272,997,589
FUTURES CONTRACTS
EXPIRATION UNDERLYING FACE UNREALIZED
DATE AMOUNT AT VALUE GAIN/(LOSS)
PURCHASED
230 Nikkei 225 Stock
Index Contracts Sep. 1998 $ 18,043,500 $ 323,499
THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL
INVESTMENT
IN SECURITIES - 0.8%
SECURITY TYPE ABBREVIATIONS
STRYPES - Structured Yield Product Exchangeable for Common Stock
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield of the Taxable Central Cash
Fund was 5.61%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(c) Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions
exempt from registration, normally to qualified institutional buyers.
At the period end, the value of these securities amounted to
$14,711,463 or .7% of net assets.
(d) Security or a portion of the security was pledged to cover margin
requirements for futures contracts. At the period end, the value of
securities pledged amounted to $1,085,000.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $645,350,636 and $680,521,628, respectively.
The market value of futures contracts opened and closed during the
period amounted to $44,734,374 and $35,675,669, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $9,984 for the
period (see Note 4 of Notes to Financial Statements).
MARKET SECTOR DIVERSIFICATION
As a Percentage of Total Value of Investment in Securities
Aerospace & Defense 0.6%
Basic Industries 7.0
Cash Equivalents 10.8
Construction & Real Estate 2.6
Durables 6.6
Energy 7.4
Finance 20.3
Government Obligations 0.2
Health 8.6
Holding Companies 1.2
Industrial Machinery & Equipment 7.0
Media & Leisure 2.1
Nondurables 5.8
Precious Metals 0.4
Retail & Wholesale 1.8
Services 2.1
Technology 6.1
Transportation 0.7
Utilities 8.7
100.0%
INCOME TAX INFORMATION
At June 30, 1998, the aggregate cost of investment securities for
income tax purposes was $1,801,715,640. Net unrealized appreciation
aggregated $471,281,949, of which $588,862,117 related to appreciated
investment securities and $117,580,168 related to depreciated
investment securities.
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
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JUNE 30, 1998 (UNAUDITED)
ASSETS
INVESTMENT IN SECURITIES, AT VALUE (COST $1,800,826,936) - $ 2,272,997,589
SEE ACCOMPANYING SCHEDULE
RECEIVABLE FOR INVESTMENTS SOLD 9,552,793
RECEIVABLE FOR FUND SHARES SOLD 4,006,522
DIVIDENDS RECEIVABLE 5,735,398
INTEREST RECEIVABLE 788,993
RECEIVABLE FOR DAILY VARIATION 269,020
ON FUTURES CONTRACTS
OTHER RECEIVABLES 64,441
TOTAL ASSETS 2,293,414,756
LIABILITIES
PAYABLE TO CUSTODIAN BANK $ 25,238
PAYABLE FOR INVESTMENTS PURCHASED 18,454,716
PAYABLE FOR FUND SHARES REDEEMED 9,028,150
ACCRUED MANAGEMENT FEE 1,367,497
DISTRIBUTION FEES PAYABLE 1,142
OTHER PAYABLES AND 474,539
ACCRUED EXPENSES
TOTAL LIABILITIES 29,351,282
NET ASSETS $ 2,264,063,474
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 1,704,514,880
UNDISTRIBUTED NET INVESTMENT INCOME 10,033,841
ACCUMULATED UNDISTRIBUTED 77,075,678
NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 472,439,075
AND ASSETS AND LIABILITIES IN FOREIGN CURRENCIES
NET ASSETS $ 2,264,063,474
INITIAL CLASS: $20.62
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE
PER SHARE ($2,248,026,185
(DIVIDED BY) 109,008,819 SHARES)
SERVICE CLASS: $20.61
NET ASSET VALUE AND OFFERING
PRICE PER SHARE ($16,037,289
(DIVIDED BY) 777,945 SHARES)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
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SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME $ 28,746,889
DIVIDENDS
INTEREST 3,917,149
32,664,038
LESS FOREIGN TAXES WITHHELD (3,409,759)
TOTAL INCOME 29,254,279
EXPENSES
MANAGEMENT FEE $ 7,929,475
TRANSFER AGENT FEES 745,042
DISTRIBUTION FEES - SERVICE CLASS 3,294
ACCOUNTING FEES AND EXPENSES 402,810
NON-INTERESTED TRUSTEES' COMPENSATION 2,315
CUSTODIAN FEES AND EXPENSES 529,361
REGISTRATION FEES 8,630
AUDIT 29,297
LEGAL 11,974
MISCELLANEOUS 93,144
TOTAL EXPENSES BEFORE REDUCTIONS 9,755,342
EXPENSE REDUCTIONS (139,173) 9,616,169
NET INVESTMENT INCOME 19,638,110
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 80,123,034
FOREIGN CURRENCY TRANSACTIONS (276,520)
FUTURES CONTRACTS (1,632,066) 78,214,448
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 207,520,512
ASSETS AND LIABILITIES IN 14,205
FOREIGN CURRENCIES
FUTURES CONTRACTS 1,252,257 208,786,974
NET GAIN (LOSS) 287,001,422
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 306,639,532
OTHER INFORMATION $ 139,173
EXPENSE REDUCTIONS
DIRECTED BROKERAGE ARRANGEMENTS
</TABLE>
<TABLE>
<CAPTION>
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STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
OPERATIONS $ 19,638,110 $ 29,647,363
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 78,214,448 117,046,383
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) 208,786,974 58,363,873
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 306,639,532 205,057,619
DISTRIBUTIONS TO SHAREHOLDERS (37,913,891) (29,012,812)
FROM NET INVESTMENT INCOME
FROM NET REALIZED GAIN (111,746,114) (115,172,073)
TOTAL DISTRIBUTIONS (149,660,005) (144,184,885)
SHARE TRANSACTIONS - NET INCREASE (DECREASE) 179,830,598 198,779,377
TOTAL INCREASE (DECREASE) IN NET ASSETS 336,810,125 259,652,111
NET ASSETS
BEGINNING OF PERIOD 1,927,253,349 1,667,601,238
END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $10,033,841 AND $ 2,264,063,474 $ 1,927,253,349
$16,641,512, RESPECTIVELY)
</TABLE>
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998
SHARES DOLLARS YEAR ENDED DECEMBER 31, 1997
(UNAUDITED) SHARES DOLLARS
SHARE TRANSACTIONS 39,640,183 $ 799,732,732 51,240,982 $ 973,125,045
INITIAL CLASS
SOLD
REINVESTED 7,943,863 149,503,507 8,319,959 144,184,885
REDEEMED (38,895,920) (784,247,705) (47,764,686) (919,455,709)
NET INCREASE (DECREASE) 8,688,126 $ 164,988,534 11,796,255 $ 197,854,221
SERVICE CLASS A 724,376 $ 14,751,265 48,794 $ 931,087
SOLD
REINVESTED 8,320 156,588 - -
REDEEMED (3,237) (65,789) (308) (5,931)
NET INCREASE (DECREASE) 729,459 $ 14,842,064 48,486 $ 925,156
DISTRIBUTIONS $ 37,874,222 $ 29,012,812
INITIAL CLASS - NET INVESTMENT INCOME
INITIAL CLASS - NET REALIZED GAIN 111,629,195 115,172,073
TOTAL $ 149,503,417 $ 144,184,885
SERVICE CLASS - NET INVESTMENT INCOME $ 39,669 $ -
SERVICE CLASS - NET REALIZED GAIN 116,919 -
TOTAL $ 156,588 $ -
$ 149,660,005 $ 144,184,885
A SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
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SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1998
SELECTED PER-SHARE DATA (UNAUDITED) 1997 1996 1995 1994 1993
NET ASSET VALUE, BEGINNING OF PERIOD $ 19.20 $ 18.84 $ 17.06 $ 15.67 $ 15.48 $ 11.53
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .18 E .30 E .32 D, E .17 .19 .06
NET REALIZED AND UNREALIZED GAIN (LOSS) 2.74 1.70 1.88 1.34 .08 4.16
TOTAL FROM INVESTMENT OPERATIONS 2.92 2.00 2.20 1.51 .27 4.22
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.38) (.33) (.20) (.06) (.08) (.18)
IN EXCESS OF NET INVESTMENT INCOME - - - - - (.04)
FROM NET REALIZED GAIN (1.12) (1.31) (.22) (.02) - -
IN EXCESS OF NET REALIZED GAIN - - - (.04) - (.05)
TOTAL DISTRIBUTIONS (1.50) (1.64) (.42) (.12) (.08) (.27)
NET ASSET VALUE, END OF PERIOD $ 20.62 $ 19.20 $ 18.84 $ 17.06 $ 15.67 $ 15.48
TOTAL RETURN B, C 15.96% 11.56% 13.15% 9.74% 1.72% 37.35%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 2,248,026 $ 1,926,322 $ 1,667,601 $ 1,343,134 $ 1,297,701 $ 777,961
RATIO OF EXPENSES TO AVERAGE NET ASSETS .92% A .92% .93% .91% .92% 1.03%
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER
EXPENSE REDUCTIONS .91% A, G .90% G .92% G .91% .92% 1.03%
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET
ASSETS 1.86% A 1.55% 1.84% 1.88% 1.28% 1.21%
PORTFOLIO TURNOVER 66% A 67% 92% 50% 42% 42%
AVERAGE COMMISSION RATE H $ .0077 $ .0092 $ .0137
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
SELECTED PER-SHARE DATA (UNAUDITED) 1997 F
NET ASSET VALUE, BEGINNING OF PERIOD $ 19.20 $ 19.36
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .22 E .01 E
NET REALIZED AND UNREALIZED GAIN (LOSS) 2.69 (.17)
TOTAL FROM INVESTMENT OPERATIONS 2.91 (.16)
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.38) -
FROM NET REALIZED GAIN (1.12) -
TOTAL DISTRIBUTIONS (1.50) -
NET ASSET VALUE, END OF PERIOD $ 20.61 $ 19.20
TOTAL RETURN B, C 15.90% (.83)%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 16,037 $ 931
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.02% A 1.02% A
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS 1.01% A, G 1.01% A, G
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 2.25% A .31% A
PORTFOLIO TURNOVER 66% A 67%
AVERAGE COMMISSION RATE H $ .0077 $ .0092
A ANNUALIZED
B TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS
SHOWN. TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED
DURING THE PERIODS SHOWN (SEE NOTE 7 OF NOTES TO FINANCIAL STATEMENTS).
D INVESTMENT INCOME PER SHARE REFLECTS A SPECIAL DIVIDEND WHICH AMOUNTED TO $.05
PER SHARE.
E NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
F FOR THE PERIOD NOVEMBER 3, 1997 (COMMENCEMENT OF SALE OF SERVICE CLASS SHARES)
TO DECEMBER 31, 1997.
G FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO
EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES (SEE NOTE 7 OF NOTES TO
FINANCIAL STATEMENTS).
H FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED TO
DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH
COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND
DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES
AND COMMISSION RATE STRUCTURES MAY DIFFER.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 1998 (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES.
The Money Market Portfolio, High Income Portfolio, Equity -Income
Portfolio, Growth Portfolio, and Overseas Portfolio (the funds) are
funds of Variable Insurance Products Fund. Investment Grade Bond
Portfolio, Asset Manager Portfolio, Asset Manager: Growth Portfolio,
Index 500 Portfolio, and Contrafund Portfolio (the funds) are funds of
Variable Insurance Products Fund II. Balanced Portfolio, Growth &
Income Portfolio, and Growth Opportunities Portfolio (the funds) are
funds of Variable Insurance Products Fund III. The Variable Insurance
Products Fund, Variable Insurance Products Fund II and Variable
Insurance Products Fund III (the trusts) are registered under the
Investment Company Act of 1940, as amended (the 1940 Act), as open-end
management investment companies organized as Massachusetts business
trusts. Each fund is authorized to issue an unlimited number of
shares. Shares of each fund may only be purchased by insurance
companies for the purpose of funding variable annuity or variable life
insurance contracts. Each fund except the Money Market Portfolio,
Index 500 Portfolio and Investment Grade Bond Portfolio offer two
classes of shares: the funds' original class of shares (Initial Class
shares) and Service Class shares. Both classes have equal rights and
voting privileges, except for matters affecting a single class.
Investment income, realized and unrealized capital gains and losses,
the common expenses of the fund, and certain fund-level expense
reductions, if any, are allocated on a pro rata basis to each class
based on the relative net assets of each class to the total net assets
of the fund. Each class of shares differs in its respective
distribution plan.
The financial statements have been prepared in conformity with
generally accepted accounting principles which require management to
make certain estimates and assumptions at the date of the financial
statements. The following summarizes the significant accounting
policies of the funds:
SECURITY VALUATION:
MONEY MARKET PORTFOLIO As permitted under Rule 2a-7 of the 1940 Act,
and certain conditions therein, securities are valued initially at
cost and thereafter assume a constant amortization to maturity of any
discount or premium.
INVESTMENT GRADE BOND PORTFOLIO. Securities are valued based upon a
computerized matrix system and/or appraisals by a pricing service,
both of which consider market transactions and dealer-supplied
valuations. Securities (including restricted securities) for which
quotations are not readily available are valued at their fair value as
determined in good faith under consistently applied procedures under
the general supervision of the Board of Trustees. Short-term
securities with remaining maturities of sixty days or less for which
quotations are not readily available are valued at amortized cost or
original cost plus accrued interest, both of which approximate current
value.
ASSET MANAGER, BALANCED, AND HIGH INCOME PORTFOLIOS. Equity securities
for which quotations are readily available are valued at the last sale
price, or if no sale price, at the closing bid price. Debt securities
for which quotations are readily available are valued by a pricing
service at their market values as determined by their most recent bid
prices in the principal market (sales prices if the principal market
is an exchange) in which such securities are normally traded.
Securities (including restricted securities) for which market
quotations are not readily available are valued at their fair value as
determined in good faith under consistently applied procedures under
the general supervision of the Board of Trustees. Short-term
securities with remaining maturities of sixty days or less for which
quotations are not readily available are valued at amortized cost or
original cost plus accrued interest, both of which approximate current
value.
ASSET MANAGER: GROWTH, EQUITY-INCOME, GROWTH & INCOME, INDEX 500,
GROWTH OPPORTUNITIES, CONTRAFUND AND GROWTH PORTFOLIOS. Securities for
which exchange quotations are readily available are valued at the last
sale price, or if no sale price, at the closing bid price. Securities
(including restricted securities) for which exchange quotations are
not readily available (and in certain cases debt securities which
trade on an exchange) are valued primarily using dealer-supplied
valuations or at their fair value as determined in good faith under
consistently applied procedures under the general supervision of the
Board of Trustees. Short-term securities with remaining maturities of
sixty days or less for which quotations are not readily available are
valued at amortized cost or original cost plus accrued interest, both
of which approximate current value.
OVERSEAS PORTFOLIO. Securities for which quotations are readily
available are valued at the last sale price, or if no sale price, at
the closing bid price in the principal market in which such securities
are normally traded. If trading or events occurring in other markets
after the close of the principal market in which securities are traded
is expected to materially affect the value of those securities, then
they are valued at their fair value taking this trading or these
events into account. Fair value is determined in good faith under
consistently applied procedures under the general supervision of the
Board of Trustees. Securities (including restricted securities) for
which quotations are not readily available are valued primarily using
dealer-supplied valuations or at their fair value as determined in
good faith under consistently applied procedures under the general
supervision of the Board of Trustees. Short-term securities with
remaining maturities of sixty days or less for which quotations are
not readily available are valued at amortized cost or original cost
plus accrued interest, both of which approximate current value.
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
FOREIGN CURRENCY TRANSLATION. The accounting records of the funds are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Purchase
and sales of securities, income receipts and expense payments are
translated into U.S. dollars at the prevailing exchange rate on the
respective dates of the transactions.
Net realized gains and losses on foreign currency transactions
represent net gains and losses from sales and maturities of foreign
currency contracts, disposition of foreign currencies, the difference
between the amount of net investment income accrued and the U.S.
dollar amount actually received, and gains and losses between trade
date and settlement on purchases and sales of securities. The effects
of changes in foreign currency exchange rates on investments in
securities are included with the net realized and unrealized gain or
loss on investment securities.
INCOME TAXES. As a qualified regulated investment company under
Subchapter M of the Internal Revenue Code, each fund is not subject to
U.S. federal income taxes to the extent that it distributes
substantially all of its taxable income for its fiscal year. Each fund
may be subject to foreign taxes on income and gains on investments
which are accrued based upon each fund's understanding of the tax
rules and regulations that exist in the markets in which they invest.
Each fund accrues such taxes as applicable. The schedules of
investments include information regarding income taxes under the
caption "Income Tax Information."
INVESTMENT INCOME:
MONEY MARKET PORTFOLIO Interest income, which includes amortization of
premium and accretion of discount, is accrued as earned.
INVESTMENT GRADE BOND, HIGH INCOME, ASSET MANAGER, BALANCED, ASSET
MANAGER: GROWTH, EQUITY-INCOME, INDEX 500, GROWTH OPPORTUNITIES,
GROWTH & INCOME, CONTRAFUND, GROWTH AND OVERSEAS PORTFOLIOS. Dividend
income is recorded on the ex-dividend date, except certain dividends
from foreign securities where the ex-dividend date may have passed,
are recorded as soon as the funds are informed of the ex-dividend
date. Non-cash dividends included in dividend income, if any, are
recorded at the fair market value of the securities received. Interest
income, which includes accretion of original issue discount, is
accrued as earned. Investment income is recorded net of foreign taxes
withheld where recovery of such taxes is uncertain.
EXPENSES. Most expenses of each trust can be directly attributed to a
fund. Expenses which cannot be directly attributed are apportioned
among the funds in the trust.
DEFERRED TRUSTEE COMPENSATION. Under a Deferred Compensation Plan (the
Plan) non-interested Trustees must defer receipt of a portion of, and
may elect to defer receipt of an additional portion of, their annual
compensation. Under the Plan, deferred amounts are treated as though
equivalent dollar amounts had been invested in shares of a
cross-section of Fidelity funds, including shares of the fund.
Deferred amounts remain in the fund until distributed in accordance
with the Plan.
DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily and paid
monthly from net interest income for the Money Market Portfolio.
Distributions are recorded on the ex-dividend date for all other
funds. Income dividends and capital gain distributions are declared
separately for each class.
Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences, which may result in
distribution reclassifications, are primarily due to differing
treatments for litigation proceeds, paydown gains/losses on certain
securities, futures transactions, foreign currency transactions,
passive foreign investment companies (PFIC), defaulted bonds, market
discount, partnerships, non-taxable dividends, capital loss
carryforwards and losses deferred due to wash sales. Certain funds
also utilized earnings and profits distributed to shareholders on
redemption of shares as a part of the dividends paid deduction for
income tax purposes.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
Undistributed net investment income and accumulated undistributed net
realized gain (loss) on investments and foreign currency transactions
may include temporary book and tax basis differences which will
reverse in a subsequent period. Any taxable income or gain remaining
at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of
trade date. Gains and losses on securities sold are determined on the
basis of identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. Certain funds use foreign currency
contracts to facilitate transactions in foreign-denominated
securities. Losses may arise from changes in the value of the foreign
currency or if the counterparties do not perform under the contracts'
terms. The U.S. dollar value of foreign currency contracts is
determined using contractual currency exchange rates established at
the time of each trade.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission (the SEC), the funds, along with
other affiliated entities of Fidelity Management & Research Company
(FMR), may transfer uninvested cash balances into one or more joint
trading accounts. These balances are invested in one or more
repurchase agreements for U.S. Treasury or Federal Agency obligations.
2. OPERATING POLICIES - CONTINUED
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
securities are transferred to an account of the funds, or to the Joint
Trading Account, at a bank custodian. The securities are
marked-to-market daily and maintained at a value at least equal to the
principal amount of the repurchase agreement (including accrued
interest). FMR, the funds' investment adviser, is responsible for
determining that the value of the underlying securities remains in
accordance with the market value requirements stated above.
TAXABLE CENTRAL CASH FUND. Pursuant to an Exemptive Order issued by
the SEC, the funds may invest in the Taxable Central Cash Fund (the
Cash Fund) managed by Fidelity Investments Money Management, Inc.,
(formerly FMR Texas, Inc.) an affiliate of FMR. The Cash Fund is an
open-end money market fund available only to investment companies and
other accounts managed by FMR and its affiliates. The Cash Fund seeks
preservation of capital, liquidity, and current income by investing in
U.S. Treasury securities and repurchase agreements for these
securities. Income distributions from the Cash Fund are declared daily
and paid monthly from net interest income. Income distributions earned
by the funds are recorded as interest income in the accompanying
financial statements.
INTERFUND LENDING PROGRAM. Pursuant to an Exemptive Order issued by
the SEC, the funds, along with other registered investment companies
having management contracts with FMR, may participate in an interfund
lending program. This program provides an alternative credit facility
allowing the funds to borrow from, or lend money to, other
participating funds. Information regarding each fund's participation
in the program is included under the caption "Other Information" at
the end of each applicable fund's schedule of investments.
DELAYED DELIVERY TRANSACTIONS. Each fund may purchase or sell
securities on a delayed delivery basis. Payment and delivery may take
place a month or more after the date of the transaction. The price of
the underlying securities and the date when the securities will be
delivered and paid for are fixed at the time the transaction is
negotiated. The market values of the securities purchased or sold on a
delayed delivery basis are identified as such in each applicable
fund's schedule of investments. Each fund may receive compensation for
interest forgone in the purchase of a delayed delivery security. With
respect to purchase commitments, each fund identifies securities as
segregated in its custodial records with a value at least equal to the
amount of the commitment. Losses may arise due to changes in the
market value of the underlying securities or if the counterparty does
not perform under the contract.
FUTURES CONTRACTS. Certain funds may use futures contracts to manage
their exposure to the stock and bond markets and to fluctuations in
interest rates and currency values. Buying futures tends to increase a
fund's exposure to the underlying instrument, while selling futures
tends to decrease a fund's exposure to the underlying instrument or
hedge other fund investments. Futures contracts involve, to varying
degrees, risk of loss in excess of the futures variation margin
reflected in each applicable fund's Statement of Assets and
Liabilities. The underlying face amount at value of any open futures
contracts at period end is shown in each applicable fund's schedule of
investments under the caption "Futures Contracts." This amount
reflects each contract's exposure to the underlying instrument at
period end. Losses may arise from changes in the value of the
underlying instruments or if the counterparties do not perform under
the contracts' terms. Gains (losses) are realized upon the expiration
or closing of the futures contracts. Futures contracts are valued at
the settlement price established each day by the board of trade or
exchange on which they are traded.
RESTRICTED SECURITIES. Each fund is permitted to invest in securities
that are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from
registration or to the public if the securities are registered.
Disposal of these securities may involve time-consuming negotiations
and expense, and prompt sale at an acceptable price may be difficult.
At the end of the period, restricted securities (excluding 144A
issues) amounted to $20,000,000, $13,235,162, $4,855,599 and $680,762
or 1.6%, 0.5%, 0.1% and 0.1% of net assets of the Money Market, High
Income, Asset Manager and Asset Manager: Growth Portfolios,
respectively.
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities), the market value of future contracts opened
and closed is included under the caption "Other Information" at the
end of each applicable fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As each fund's investment adviser, FMR receives a
monthly fee.
For the Money Market Portfolio, FMR receives a monthly fee that is
calculated on the basis of a group fee rate plus a fixed individual
fund fee rate applied to the average net assets of the fund. The group
fee rate is the weighted average of a series of rates and is based on
the monthly average net assets of all the mutual funds advised by FMR.
The rates ranged from .1100% to .3700% for the period. The annual
individual fund fee rate is .03%. In the event that these rates were
lower than the contractual rates in effect during the period, FMR
voluntarily implemented the above rates, as they resulted in the same
or a lower management fee. The income-based fee is added only when the
fund's gross yield exceeds 5%. At that time the income-based fee would
equal 6% of that portion of the fund's gross income that represents a
gross yield of more than 5% per year. The maximum income-based
component is .24% of average net assets.
4. FEES AND OTHER TRANSACTIONS WITH
AFFILIATES - CONTINUED
MANAGEMENT FEE - CONTINUED
For the Index 500 Portfolio, FMR receives a fee that is computed daily
at an annual rate of .24% of the fund's average net assets.
For all other funds, FMR receives a monthly fee that is calculated on
the basis of a group fee rate plus a fixed individual fund fee rate
applied to the average net assets of the fund. The group fee rate is
the weighted average of a series of rates and is based on the monthly
average net assets of all the mutual funds advised by FMR. The rates
ranged from .1100% to .3700% for the Investment Grade Bond and High
Income Portfolios and .2500% to .5200% for the Asset Manager,
Balanced, Asset Manager: Growth, Equity-Income, Growth & Income,
Growth Opportunities, Contrafund, Growth and Overseas Portfolios for
the period. In the event that these rates were lower than the
contractual rates in effect during the period, FMR voluntarily
implemented the above rates, as they resulted in the same or a lower
management fee. The annual individual fund fee rate is .30% for
Investment Grade Bond, Asset Manager: Growth, Growth Opportunities,
Contrafund and Growth and, .45% for High Income and Overseas, .25% for
Asset Manager, .15% for Balanced, and .20% for Equity-Income and
Growth & Income Portfolios.
For the period, each fund's management fee were equivalent to the
following annualized rates expressed as a percentage of average net
assets:
Money Market .21%
Investment Grade Bond .44%
High Income .59%
Asset Manager .55%
Balanced .45%
Asset Manager: Growth .60%
Equity-Income .50%
Growth & Income .50%
Index 500 .24%
Growth Opportunities .60%
Contrafund .60%
Growth .60%
Overseas .75%
SUB-ADVISER FEE. As the Money Market Portfolio's investment
sub-adviser, Fidelity Investments Money Management, Inc. (formerly FMR
Texas, Inc.), a wholly owned subsidiary of FMR, receives a fee from
FMR of 50% of the management fee payable to FMR. The fee is paid prior
to any voluntary expense reimbursements which may be in effect.
FMR, on behalf of the Overseas Portfolio, entered into sub-advisory
agreements with Fidelity Management & Research (U.K.) Inc., Fidelity
Management & Research (Far East) Inc., and Fidelity International
Investment Advisors (FIIA). In addition, FIIA entered into a
sub-advisory agreement with its subsidiary, Fidelity International
Investment Advisors (U.K.) Limited (FIIA(U.K.)L). Under the
sub-advisory arrangements, FMR may receive investment advice and
research services and may grant the sub-advisers investment management
authority to buy and sell securities. FMR pays its sub-advisers either
a portion of its management fee or a fee based on costs incurred for
these services. FIIA pays FIIA(U.K.)L a fee based on costs incurred
for either service.
FMR and Index 500 Portfolio entered into a sub-advisory agreement with
Bankers Trust Company (Bankers Trust). Bankers Trust receives a
sub-advisory fee for providing investment management, securities
lending and custodial services to the fund. For these services, FMR
pays Bankers Trust fees at an annual rate of .006% of the fund's
average net assets. In addition, the fund pays Bankers Trust fees
equal to 40% of net income from the fund's securities lending program.
For the period, the fund paid Bankers Trust $3,186.
DISTRIBUTION AND SERVICE PLAN. In accordance with Rule 12b-1 of the
1940 Act, the Trustees have adopted separate distribution plans with
respect to each fund's class of shares (collectively referred to as
"the Plans"). Under the Service Class Plan, the class pays Fidelity
Distributors Corporation (FDC), an affiliate of FMR, a distribution
and service fee (12b-1 fee). This fee is based on an annual rate of
.10% of Service Class average net assets. Initial Class shares are not
subject to a 12b-1 fee.
For the period, Service Class paid FDC the following amounts, all of
which were reallowed to insurance companies, for the distribution of
shares and providing shareholder support services:
HIGH INCOME $ 15,228
ASSET MANAGER 109
BALANCED 344
ASSET MANAGER: GROWTH 127
EQUITY-INCOME 26,530
GROWTH & INCOME 766
GROWTH OPPORTUNITIES 13,731
CONTRAFUND 12,474
GROWTH 9,364
OVERSEAS 3,294
Under the Plans, FMR may use its resources to pay administrative and
promotional expenses related to the sale of each fund's class of
shares. Subject to the approval of the Board of Trustees, the Plans
also authorize payments to third parties that assist in the sale of
each
4. FEES AND OTHER TRANSACTIONS WITH
AFFILIATES - CONTINUED
DISTRIBUTION AND SERVICE PLAN - CONTINUED
class' shares or render shareholder support services. For the period,
the following amounts were paid to third parties under the Plans:
INITIAL SERVICE
CLASS CLASS
MONEY MARKET $ $
8,596 N/A
INVESTMENT GRADE BOND N/A
47,331
HIGH INCOME
567,328 15,972
ASSET MANAGER
1,063,886 -
BALANCED
3,014 -
ASSET MANAGER: GROWTH
34,179 -
EQUITY-INCOME
2,494,831 29,836
GROWTH & INCOME
12,807 -
INDEX 500 N/A
9,457
GROWTH OPPORTUNITIES
39,640 12,761
CONTRAFUND
870,000 14,060
GROWTH
2,034,026 9,903
OVERSEAS
499,362 3,444
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations
Company, Inc., (FIIOC), an affiliate of FMR, is the fund's transfer,
dividend disbursing and shareholder servicing agent. FIIOC receives
account fees and asset-based fees that vary according to the account
size and type of account. FIIOC pays a portion of the expenses related
to typesetting, printing and mailing of all shareholder reports,
except for proxy statements. For the period, each fund's transfer
agent fees were equivalent to an annualized rate of .07% of average
net assets.
ACCOUNTING AND SECURITY LENDING FEES. Fidelity Service Company, Inc.,
maintains each fund's accounting records and administers the security
lending program. The security lending fee is based on the number and
duration of lending transactions. The accounting fee is based on the
level of average net assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. Certain funds placed a portion of their
portfolio transactions with brokerage firms which are affiliates of
FMR. The commissions paid to these affiliated firms are shown under
the caption "Other Information" at the end of each applicable fund's
schedule of investments
5. SECURITY LENDING.
Certain funds loaned securities to brokers who paid the funds
negotiated lenders' fees. These fees are included in interest income.
Each applicable fund receives U.S. Treasury obligations and/or cash as
collateral against the loaned securities, in an amount at least equal
to 102% of the market value of the loaned securities at the inception
of each loan. This collateral must be maintained at not less than 100%
of the market value of the loaned securities during the period of the
loan. Information regarding the value of securities loaned and the
value of collateral at period end is included under the caption "Other
Information" at the end of each applicable fund's schedule of
investments.
6. BANK BORROWINGS.
Each fund is permitted to have bank borrowings for temporary or
emergency purposes to fund shareholder redemptions. Each fund has
established borrowing arrangements with certain banks. Under the most
restrictive arrangement, each fund must pledge to the bank securities
having a market value in excess of 220% of the total bank borrowings.
The interest rate on the borrowings is the bank's base rate, as
revised from time to time. Information regarding a fund's
participation in the program is included under the caption "Other
Information" at the end of each applicable fund's schedule of
investments.
7. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse the Index 500 Portfolio's
operating expenses (excluding interest, taxes, brokerage commissions,
extraordinary expenses and sub-advisory fees paid by the fund
associated with securities) above an annual rate of .28% of average
net assets.
FMR has directed certain portfolio trades to brokers who paid a
portion of certain funds' expenses. In addition, certain funds have
entered into arrangements with their custodian whereby credits
realized on uninvested cash balances were used to offset a portion of
certain funds' expenses.
For the period, the reductions under these arrangements are shown
under the caption "Other Information" on each applicable fund's
Statement of Operations.
8. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were the record owners
of more than 5% of the outstanding shares, and certain unaffiliated
insurance companies were record owners of 10% or more of the total
outstanding shares of the following funds:
FUND FILI UNAFFILIATED INSURANCE COMPANIES
% OF OWNERSHIP # OF % OF OWNERSHIP
Money Market 46% 1 13%
Investment Grade Bond 34% 2 21%
High Income 14% 2 58%
Asset Manager 19% 3 46%
Balanced 33% 1 61%
Asset Manager: Growth 71% 1 11%
Equity-Income 17% 1 30%
Growth & Income 77% - -
Index 500 32% 1 10%
Growth Opportunities 29% 1 65%
Contrafund 30% 2 37%
Growth 13% 1 29%
Overseas 14% 1 36%
9. TRANSACTIONS WITH AFFILIATED COMPANIES.
An affiliated company is a company which the fund has ownership of at
least 5% of the voting securities. Information regarding transactions
with affiliated companies is included under the caption "Legend" at
the end of each applicable fund's schedule of investments.
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Investments Money Management, Inc. (FIMM),
Merrimack, NH
MONEY MARKET PORTFOLIO
Fidelity Management & Research (U.K.) Inc.,
London, England
HIGH INCOME, ASSET MANAGER, ASSET MANAGER: GROWTH,
CONTRAFUND, BALANCED, GROWTH OPPORTUNITIES,
GROWTH & INCOME AND OVERSEAS PORTFOLIOS
Fidelity Management & Research (Far East) Inc.,
Tokyo, Japan
HIGH INCOME, ASSET MANAGER, ASSET MANAGER: GROWTH,
CONTRAFUND, BALANCED, GROWTH OPPORTUNITIES,
GROWTH & INCOME AND OVERSEAS PORTFOLIOS
Fidelity International Investment Advisors
Pembroke, Bermuda
OVERSEAS PORTFOLIO
Fidelity International Investment Advisors (U.K.) Limited
Kent, England
OVERSEAS PORTFOLIO
Bankers Trust, New York, NY
INDEX 500 PORTFOLIO
OFFICERS
Edward C. Johnson 3d, PRESIDENT
Robert C. Pozen, SENIOR VICE PRESIDENT
Abigail Johnson, VICE PRESIDENT - GROWTH, CONTRAFUND
AND GROWTH OPPORTUNITIES PORTFOLIOS
Richard A. Spillane, Jr., VICE PRESIDENT - EQUITY-INCOME,
OVERSEAS, BALANCED AND GROWTH & INCOME PORTFOLIOS
Dwight D. Churchill, VICE PRESIDENT - HIGH INCOME AND
INVESTMENT GRADE BOND PORTFOLIOS
Fred L. Henning, Jr., VICE PRESIDENT - HIGH INCOME AND
INVESTMENT GRADE BOND PORTFOLIOS
Robert A. Lawrence, VICE PRESIDENT - INDEX 500, ASSET MANAGER, AND
ASSET MANAGER: GROWTH PORTFOLIOS
Bart A. Grenier, VICE PRESIDENT - HIGH INCOME PORTFOLIO
Barry J. Coffman, VICE PRESIDENT - HIGH INCOME PORTFOLIO
William Danoff, VICE PRESIDENT - CONTRAFUND PORTFOLIO
Robert K. Duby, VICE PRESIDENT - MONEY MARKET PORTFOLIO
Kevin E. Grant, VICE PRESIDENT - INVESTMENT GRADE BOND
AND BALANCED PORTFOLIOS
Richard C. Habermann, VICE PRESIDENT - ASSET MANAGER
AND ASSET MANAGER: GROWTH PORTFOLIOS
Steven Kaye, VICE PRESIDENT - GROWTH & INCOME PORTFOLIO
Richard M. Mace, Jr., VICE PRESIDENT - OVERSEAS PORTFOLIO
Charles S. Morrison II, VICE PRESIDENT - ASSET MANAGER AND
ASSET MANAGER: GROWTH PORTFOLIOS
Stephen R. Petersen, VICE PRESIDENT - EQUITY-INCOME
John Todd, VICE PRESIDENT - ASSET MANAGER AND
ASSET MANAGER: GROWTH PORTFOLIOS
Jennifer Uhrig, VICE PRESIDENT - GROWTH PORTFOLIO
George Vanderheiden, VICE PRESIDENT -
GROWTH OPPORTUNITIES PORTFOLIO
Steven Snider, VICE PRESIDENT - ASSET MANAGER AND
ASSET MANAGER: GROWTH PORTFOLIOS
Eric D. Roiter, SECRETARY
Richard A. Silver, TREASURER
Boyce I. Greer, VICE PRESIDENT - MONEY MARKET PORTFOLIO
Stanley N. Griffith, Assistant Vice President - HIGH INCOME AND
INVESTMENT GRADE BOND PORTFOLIOS
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
Thomas J. Simpson, ASSISTANT TREASURER -
INVESTMENT GRADE BOND PORTFOLIO
BOARD OF TRUSTEES
Robert C. Pozen **
Ralph F. Cox *
Phyllis Burke Davis *
Robert M. Gates *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Marvin L. Mann *
William O. McCoy *
Gerald C. McDonough *
Thomas R. Williams *
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER SERVICING AGENT
Fidelity Investments Institutional Operations Co., Inc.
Boston, MA
CUSTODIAN
The Bank of New York, New York, NY
MONEY MARKET, INVESTMENT GRADE BOND AND
HIGH INCOME PORTFOLIOS
The Chase Manhattan Bank, New York, NY
EQUITY-INCOME, ASSET MANAGER, ASSET MANAGER: GROWTH,
GROWTH & INCOME, BALANCED AND OVERSEAS PORTFOLIOS
Brown Brothers Harriman & Co., Boston, MA
GROWTH, GROWTH OPPORTUNITIES, AND CONTRAFUND PORTFOLIOS
Bankers Trust, New York, NY
INDEX 500 PORTFOLIO
* INDEPENDENT TRUSTEES
** BALANCED, GROWTH & INCOME AND GROWTH OPPORTUNITIES PORTFOLIOS ONLY
(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND II: ASSET MANAGER PORTFOLIO
SEMIANNUAL REPORT
JUNE 30, 1998
CONTENTS
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MARKET ENVIRONMENT 3 A REVIEW OF WHAT HAPPENED IN WORLD MARKETS DURING THE
PAST SIX MONTHS.
PERFORMANCE AND INVESTMENT SUMMARY 4 HOW THE FUND HAS DONE OVER TIME, AND AN OVERVIEW OF THE
FUND'S INVESTMENTS AT THE END OF THE PERIOD.
FUND TALK 5 THE MANAGERS' REVIEW OF FUND PERFORMANCE, STRATEGY
AND OUTLOOK.
INVESTMENTS 6 A COMPLETE LIST OF THE FUND'S INVESTMENTS WITH THEIR
MARKET VALUES.
FINANCIAL STATEMENTS 19 STATEMENTS OF ASSETS AND LIABILITIES, OPERATIONS, AND
CHANGES IN NET ASSETS, AS WELL AS FINANCIAL HIGHLIGHTS.
NOTES 22 NOTES TO THE FINANCIAL STATEMENTS.
</TABLE>
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE
SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND.
THIS REPORT IS NOT AUTHORIZED FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT
INSURED BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND
ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
MARKET ENVIRONMENT
With the exception of Asia and a number of emerging market economies,
most stock and bond markets around the world performed well during the
past six months. Despite an environment of ongoing financial and
political difficulties in Asian and emerging markets, the largest
blue-chip companies of Europe and the U.S. continued to post strong
performance. Throughout the period, investors sought the relative
stability and liquidity of more defensive large-cap stocks and highly
rated bond investments of developed countries, hoping these
investments would maintain steady earnings and be easier to sell in a
possible economic slowdown.
U.S. STOCK MARKETS
The U.S. stock market continued to perform well during the first six
months of 1998. The strong showing by the Standard & Poor's 500 Index,
however, was produced by a narrow contingent of large companies. In
fact, most of the Standard & Poor's 17.71% return for the six-month
period that ended June 30, 1998, came from these large-capitalization
stocks. The "narrow" market - one where a small number of stocks
perform well, and others are flat or produce losses - was further
demonstrated by the fact that 60% of all the companies on the New York
Stock Exchange declined during this period. During the first quarter
of 1998, a stable U.S. economy and a belief that the worst in Asia
might be over helped the stock market post strong gains. The S&P 500
index turned in a solid return of 13.95% through the end of March. The
S&P 500 and other market indexes continued to rally through May,
before falling sharply in mid-June amid renewed fears that Asia's
economic crisis would inhibit the growth in earnings of American
companies. In subsequent trading days, however, investors continued to
favor large-cap stocks, boosting the returns of the S&P 500 index
higher. During the second quarter of 1998, the S&P 500 index returned
3.30%, compared with a decline of 2.14% for the Standard & Poor's
MidCap 400 Index. Investors in small-cap stocks experienced a weak
second quarter as the Russell 2000 - a measure of small company stock
performance - lost 4.66%.
The pattern of a narrow market also was displayed in certain industry
groups. Pharmaceutical stocks performed well, helped by healthy
pipelines of new products, the ability to bring products to market
more rapidly and relaxed regulations that permitted more aggressive
advertising. Stable economic growth, coupled with nonexistent
inflation, buoyed the financial sector. Banks and brokerage houses
sustained impressive earnings growth; other financial services firms
benefited from merger and acquisition activity, exemplified by the
recently announced "megamerger" of Travelers and Citicorp.
While many technology stocks turned in very strong results, the sector
also experienced some mixed results over the past six months, due
primarily to the negative impact of the Asian crisis and the effect of
a strong dollar on foreign sales. Energy stocks also experienced weak
results, with the price of crude oil dipping below $12 dollars a
barrel near the end of June.
FOREIGN STOCK MARKETS
Overseas, blue-chip investments also performed well. While the Morgan
Stanley Capital International (MSCI) EAFE Index, which measures the
performance of Europe, Australasia, and the Far East, posted a solid
return of 16.05% for the six-month period, investors in developed
markets fared much better than those investing in troubled emerging
markets. The performance of the MSCI Pacific Index, however, lost
5.87% during the same period, emphasizing the negative impact Japan
and Hong Kong had on the MSCI EAFE index. Most economies in Europe
continued to thrive amidst an environment of relatively benign
inflation and reduced interest rates as many countries prepared for
the advent of the European Monetary Union in January 1999. Many
European companies embraced U.S.-style efficiencies through
restructuring and robust merger and acquisition activity. Over the
past six months, the MSCI Europe Index returned an impressive 26.66%.
Among the strongest European economies were Portugal, Spain, Italy and
the United Kingdom.
While the Japanese market showed signs of strength toward the end of
the period, Japanese stocks continued to suffer from eroding
confidence in the economy, bankruptcies and a depreciating currency.
The TOPIX Index - a measure of the Japanese market - was down 1.46%
over the six-month period. As economic and currency turmoil continued
in Asia, emerging markets also suffered during the period. The MSCI
Far East ex-Japan Free Index dropped 25.79% and the MSCI Emerging
Markets Free Index - a market capitalization weighted index of over
850 stocks traded in 22 world markets - was down 18.87% for the first
six months of 1998.
U.S. BOND MARKETS
Bond prices continued to move higher thanks to low interest rates and
a continued lack of inflationary pressure. The Lehman Brothers
Aggregate Bond Index - a broad gauge of the U.S. taxable bond market -
returned 3.93% during this six-month period. Against a backdrop of
continued economic woes in Asia and fears that U.S. corporate profits
would slow, investors from around the globe moved assets from stocks
and riskier bonds into highly rated corporate bonds and U.S.
Treasuries. As a result, bond yields, which move in the opposite
direction of bond prices, fell to their lowest levels in decades. The
yield on the benchmark 30-year bond fell to 5.62% from 5.93% during
the period. Mortgage-backed bonds experienced some weakness toward the
end of the period amid record mortgage refinancings.
FOREIGN BOND MARKETS
While U.S. based bonds topped most foreign bonds on the continued
strength of the U.S. dollar and benign inflation, the Salomon Brothers
World Government Bond Index - a measure of government bond market
performance in developed nations - returned 2.79% during the period.
Similar to foreign equities, however, it paid to be in the safer bond
sectors of developed countries and highly rated bonds. In comparison
to the World Government Bond Index, the J.P. Morgan Emerging Markets
Bond Index lost 0.25% during the first six months of 1998. Continued
turbulence in Japan as it struggled to initiate economic reforms
trickled into emerging markets and resulted in mixed results during
the period.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 LIFE OF
JUNE 30, 1998 YEAR YEARS FUND
VIP II: ASSET MANAGER - "INITIAL CLASS" 18.57% 13.05% 13.11%
FIDELITY COMPOSITE 19.70% 13.60% N/A
S&P 500 (REGISTERED TRADEMARK) 30.16% 23.08% 17.42%
LB AGGREGATE BOND 10.54% 6.88% 8.78%
LB 3 MONTH T-BILL 5.53% 5.12% N/A
VARIABLE ANNUITY FLEXIBLE PORTFOLIO FUNDS AVERAGE 18.12% 13.91% N/A
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's returns to those of the Fidelity Asset
Allocation Composite Index, a hypothetical combination of unmanaged
indices. The composite index combines the total returns of the
Standard & Poor's 500 Index, the Lehman Brothers Aggregate Bond Index
and the Lehman Brothers 3 Month Treasury Bill Index weighted according
to the fund's neutral mix.
You can also compare the fund's returns to the variable annuity
flexible portfolio funds average, which reflects the performance of
mutual funds with similar objectives tracked by Lipper Analytical
Services, Inc. The past one year average represent a peer group of 87
mutual funds. The benchmarks listed in the table above include
reinvested dividends and capital gains, if any, and exclude the effect
of sales charges.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, September 6, 1989. If Fidelity had not reimbursed
certain fund expenses, the life of fund total return would have been
lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
VIP II ASSET MANAGER FID COMPOSITE
S&P 500 LB AGGREGATE BOND
00156 F0001
SP001 LB001
1989/09/30 10000.00 10000.00
10000.00 10000.00
1989/10/31 10020.02 10057.70
9768.00 10246.00
1989/11/30 10060.06 10178.69
9967.27 10343.34
1989/12/31 10091.09 10277.43
10206.48 10371.26
1990/01/31 9868.42 10029.64
9521.63 10247.85
1990/02/28 9969.64 10094.03
9644.46 10280.64
1990/03/31 10050.61 10193.35
9900.03 10287.84
1990/04/30 9919.03 10098.66
9652.53 10193.19
1990/05/31 10425.10 10529.97
10593.65 10494.91
1990/06/30 10506.07 10595.89
10521.62 10663.87
1990/07/31 10485.83 10662.11
10487.95 10811.04
1990/08/31 10141.70 10332.65
9539.84 10666.17
1990/09/30 9929.15 10241.83
9075.25 10754.70
1990/10/31 9979.76 10314.96
9036.22 10891.28
1990/11/30 10465.59 10624.61
9619.96 11125.44
1990/12/31 10769.23 10802.47
9888.36 11299.00
1991/01/31 11284.56 11009.44
10319.49 11439.11
1991/02/28 11726.26 11285.45
11057.34 11536.34
1991/03/31 11915.56 11410.72
11324.93 11615.94
1991/04/30 12094.35 11486.94
11352.11 11741.39
1991/05/31 12367.79 11669.35
11842.52 11809.49
1991/06/30 12146.94 11518.12
11300.13 11803.59
1991/07/31 12451.92 11749.63
11826.72 11967.66
1991/08/31 12704.33 11959.83
12107.01 12226.16
1991/09/30 12777.94 12018.08
11904.82 12474.35
1991/10/31 12862.08 12126.84
12064.35 12612.82
1991/11/30 12651.74 12046.56
11578.15 12728.85
1991/12/31 13198.62 12642.99
12902.69 13106.90
1992/01/31 13366.89 12504.31
12662.70 12928.65
1992/02/29 13626.47 12583.84
12827.32 13012.68
1992/03/31 13593.27 12492.10
12577.19 12939.81
1992/04/30 13792.52 12648.75
12946.96 13032.98
1992/05/31 13936.42 12772.62
13010.40 13279.30
1992/06/30 13925.35 12778.88
12816.54 13462.56
1992/07/31 14157.81 13127.82
13340.74 13737.19
1992/08/31 14113.53 13077.17
13067.25 13875.94
1992/09/30 14202.09 13224.45
13221.45 14041.06
1992/10/31 14224.22 13162.82
13267.72 13854.32
1992/11/30 14534.17 13329.99
13720.15 13857.09
1992/12/31 14744.49 13487.52
13888.91 14077.42
1993/01/31 15010.15 13656.87
14005.57 14347.70
1993/02/28 15150.92 13847.00
14196.05 14598.79
1993/03/31 15579.83 13989.68
14495.59 14660.10
1993/04/30 15672.57 13904.65
14144.79 14762.72
1993/05/31 15939.19 14053.79
14523.87 14781.91
1993/06/30 16066.70 14203.33
14565.99 15049.47
1993/07/31 16263.77 14221.73
14507.73 15135.25
1993/08/31 16739.04 14571.76
15057.57 15400.11
1993/09/30 16750.64 14557.48
14941.63 15441.70
1993/10/31 17202.73 14707.13
15250.92 15498.83
1993/11/30 17179.54 14594.03
15106.04 15367.09
1993/12/31 17875.07 14696.31
15288.82 15450.07
1994/01/31 18443.09 14985.71
15808.64 15658.65
1994/02/28 17857.33 14699.72
15380.23 15386.19
1994/03/31 17017.99 14320.11
14709.65 15006.15
1994/04/30 17030.15 14356.11
14897.93 14886.10
1994/05/31 17176.13 14452.82
15142.26 14884.61
1994/06/30 16847.69 14310.02
14771.27 14851.86
1994/07/31 17139.63 14613.05
15255.77 15147.42
1994/08/31 17541.06 14864.31
15881.26 15165.59
1994/09/30 17334.15 14646.64
15492.17 14942.66
1994/10/31 17419.36 14787.36
15840.74 14929.21
1994/11/30 17163.73 14571.08
15263.82 14896.37
1994/12/31 16786.37 14708.25
15490.18 14999.15
1995/01/31 16676.82 14984.44
15891.84 15296.13
1995/02/28 16946.97 15360.16
16511.15 15660.18
1995/03/31 17170.77 15595.91
16998.39 15755.71
1995/04/30 17444.31 15876.83
17498.99 15976.29
1995/05/31 17668.12 16403.71
18198.43 16594.57
1995/06/30 17817.32 16624.93
18621.18 16715.71
1995/07/31 18451.43 16836.80
19238.66 16678.94
1995/08/31 18675.24 16948.46
19286.95 16880.75
1995/09/30 18911.47 17314.75
20100.85 17044.50
1995/10/31 18662.80 17413.45
20029.09 17266.07
1995/11/30 19147.71 17842.83
20908.37 17525.07
1995/12/31 19632.62 18102.59
21311.07 17770.42
1996/01/31 20055.36 18411.16
22036.50 17887.70
1996/02/29 20001.35 18343.08
22240.77 17576.46
1996/03/31 20213.99 18364.54
22454.95 17453.42
1996/04/30 20426.62 18441.71
22785.94 17355.68
1996/05/31 20586.10 18636.38
23373.59 17320.97
1996/06/30 20772.16 18775.74
23462.64 17553.07
1996/07/31 20426.62 18478.56
22426.06 17600.46
1996/08/31 20466.49 18636.07
22899.03 17570.54
1996/09/30 21210.73 19195.30
24187.79 17876.27
1996/10/31 21755.62 19593.26
24854.88 18273.12
1996/11/30 22832.10 20338.11
26733.66 18585.59
1996/12/31 22499.85 20111.10
26204.07 18412.75
1997/01/31 23177.64 20773.56
27841.30 18469.83
1997/02/28 23377.96 20883.87
28059.58 18516.00
1997/03/31 22488.67 20370.86
26906.61 18310.47
1997/04/30 23257.38 21111.13
28512.93 18585.13
1997/05/31 24372.77 21845.17
30248.80 18761.69
1997/06/30 25020.90 22446.35
31603.95 18984.95
1997/07/31 26467.89 23593.69
34118.67 19497.55
1997/08/31 25744.40 22863.47
32207.35 19331.82
1997/09/30 26573.40 23635.45
33971.34 19617.93
1997/10/31 26136.29 23387.99
32836.70 19902.39
1997/11/30 26739.20 23982.39
34356.71 19993.94
1997/12/31 27146.17 24295.48
34946.61 20195.88
1998/01/31 27236.61 24565.89
35333.12 20454.39
1998/02/28 28462.90 25452.97
37881.35 20438.02
1998/03/31 29288.41 26151.27
39821.25 20507.51
1998/04/30 29254.02 26348.97
40221.85 20614.15
1998/05/31 29099.24 26234.49
39530.44 20809.99
1998/06/30 29666.77 26867.79
41136.17 20986.87
IMATRL PRASUN SHR__CHT 19980630 19980728 112308 R00000000000108
Let's say hypothetically that $10,000 was invested in Variable
Insurance Products Fund II: Asset Manager Portfolio on September 30,
1989, shortly after the fund started. By June 30, 1998, the value of
the investment would have grown to $29,667 - a 196.67% increase. With
reinvested dividends and capital gains, if any, a $10,000 investment
in the Standard & Poor's 500 Index, would have grown to $41,136 over
the same period - a 311.36% increase on the initial investment. If
$10,000 was invested in the Lehman Brothers Aggregated Bond Index, it
would have grown to $20,987 - a 109.87% increase.
You can also look at how the Fidelity Asset Allocation Composite Index
did over the same period. The composite index combines the cumulative
total returns of three unmanaged indexes - the S&P 500 (311.36%),
Lehman Brothers Aggregate Bond Index (109.87%), and the Lehman
Brothers 3-month T-Bill Total Rate of Return Index (57.35%) -
according to the fund's neutral mix,* assuming monthly rebalancing.
With reinvested dividends and capital gains, if any, a $10,000
investment in the index would have grown to $26,868 - a 168.68%
increase.
* 50% STOCKS, 40% BONDS AND 10% SHORT-TERM INSTRUMENTS EFFECTIVE
JANUARY 1, 1997; 40%, 40% AND 20%, RESPECTIVELY, BETWEEN JUNE 1, 1992
AND DECEMBER 31, 1996; 30%, 40% AND 30%, RESPECTIVELY, PRIOR TO JUNE
1, 1992.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
WAL-MART STORES, INC. 1.9
HOME DEPOT, INC. 1.4
GENERAL ELECTRIC CO. 1.3
SCHERING-PLOUGH CO. 1.3
AT&T CORP. 1.3
TOP FIVE BOND ISSUERS AS OF JUNE 30, 1998
(WITH MATURITIES MORE THAN ONE YEAR) % OF FUND'S
INVESTMENTS
FANNIE MAE 7.8
U.S. TREASURY OBLIGATIONS 4.6
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION 1.0
STATE OF ISRAEL 0.5
FORD MOTOR CREDIT CO. 0.4
ASSET ALLOCATION AS OF JUNE 30, 1998*
ROW: 1, COL: 1, VALUE: 10.3
ROW: 1, COL: 2, VALUE: 32.5
ROW: 1, COL: 3, VALUE: 57.2
STOCKS 52.6%
BONDS 39.2%
SHORT-TERM INVESTMENTS 8.2%
FOREIGN INVESTMENTS 3.8%
*
ASSET ALLOCATION IN THE PIE CHART REFLECTS THE CATEGORIZATION OF
ASSETS AS DEFINED IN
THE FUND'S PROSPECTUS. FINANCIAL STATEMENT CATEGORIZATIONS CONFORM TO
ACCOUNTING
STANDARDS AND WILL DIFFER FROM THE PIE CHART.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with
Richard Habermann, Portfolio Manager of Asset Manager Portfolio
Q. HOW DID THE FUND PERFORM COMPARED TO ITS BENCHMARK, DICK?
A. For the six months that ended June 30, 1998, the fund lagged the
10.59% return of the Fidelity Asset Allocation Composite Index -
which combines the performance of three indexes - by a small amount.
The fund also slightly lagged the 19.70% return of the index for the
12 months that ended June 30, 1998.
Q. WHY DID THE FUND LAG ITS BENCHMARK INDEX?
A. While several factors influenced performance during the period,
security selection among the fund's equity investments detracted from
the fund's relative performance, albeit slightly. All in all, the
fund's equity investments performed quite well. However, the strong
performance of the stock market, as measured by such indexes as the
Standard & Poor's 500, was driven by a very narrow group of stocks.
Equity investments outside of that group generally didn't perform as
well. This narrowness contributed to a slight performance shortfall
for the fund's equity investments relative to the S&P 500. The fund's
equity specialist, Steven Snider, targeted stocks with lower
valuations but higher earnings-growth rates than the average of the
S&P 500, but the tide was against him during this most recent
six-month period. The fund's investments in Oracle within the
technology sector hurt performance, as did industrial machinery stock
Case. In the nondurables sector, tobacco stocks such as Philip Morris
were hurt by uncertainty over the future of litigation and
legislation. However, this tobacco position was reduced during the
period.
Q. WHAT KIND OF MOVES DID YOU MAKE WITH THE FUND'S ASSET ALLOCATION?
A. I gradually reduced the fund's allocations to stocks and
short-term/money market instruments, and increased its weighting in
bonds. I wanted to position the fund to take advantage of the bond
market rally we anticipated and saw during the period. Because of
ongoing concerns related to the crises in Asia, foreign investors
flocked to less-volatile bond investments in the U.S. in a "flight to
quality." Over the past 15 years or so, when major crises such as Asia
have arisen, financial assets in the U.S. have benefited. Part of that
can be attributed to the more accommodating interest-rate stance
central banks such as the Federal Reserve adopt at such times. Other
factors also contributed to the positive backdrop for bonds, including
low inflation, a strengthening dollar and a slowdown in corporate
earnings.
Q. HOW DID THE FUND'S ASSET ALLOCATION AFFECT ITS PERFORMANCE?
A. It was a net positive. Over the course of the period, the fund's
equity portion was overweighted, its bond portion increased and the
short-term/money market allocation was underweighted, relative to its
neutral mix, which calls for 50% to be invested in stocks, 40% in
bonds and 10% in short-term/money market instruments. Since equities
outperformed the other asset classes, the overweighting in stocks
helped the fund's performance. The increase in bonds helped as well,
for the reasons I mentioned earlier, and because of the capital
appreciation and additional income they offered when compared to
shorter-term alternatives. At the close of the period, the fund held
52.6% in stocks, 39.2% in bonds and 8.2% in short-term/money market
instruments.
Q. HOW DID THE FIXED-INCOME AND SHORT-TERM PORTIONS OF THE FUND
PERFORM?
A. Quite well. The investment-grade portion of the fund - which
Charlie Morrison helps me manage - performed better than the index
that measures that part of the market, the Lehman Brothers Aggregate
Bond Index, due to Charlie's decision to overweight mortgage-backed
and agency securities relative to the index. In addition, the
high-yield portion of the fund - which Fred Hoff helps me manage -
performed quite well, largely due to strong security selection in the
telecommunications, cable and supermarket industries. Finally, the
short-term/money market part of the fund outperformed its benchmark,
as John Todd, who helps me look after short-term investments, obtained
a return advantage relative to Treasuries by emphasizing high-quality
corporate and bank-backed obligations.
Q. WHICH STOCKS PERFORMED WELL DURING THE PERIOD?
A. Wal-Mart was the best contributor to performance, attracting
investors with strong management that focused on growing earnings and
revenues. Schering-Plough and Pfizer benefited, along with most
pharmaceutical firms, from the ability to bring products to market
faster because of streamlined approval processes, changes in
regulations that allow them to market prescription drugs more
aggressively and their ability to sustain earnings growth in an
unpredictable economic environment.
Q. WHAT'S YOUR OUTLOOK?
A. Corporate earnings estimates for the rest of 1998 and 1999 appear
to be generous, and the market has been severely punishing with
companies that don't meet their earnings expectations. In this
environment, security selection will continue to be critical,
especially given the pressures caused by Asia, increased wages,
tighter profit margins and already-high stock valuations. Offsetting
these pressures are low inflation, a supportive bond market and
favorable interest rates. Above and beyond making the right tactical
moves regarding asset allocation, picking the right stocks will be
crucial.
FUND FACTS
GOAL: maximum total return over the long term
by allocating assets among stocks, bonds and
short-term instruments anywhere in the world.
START DATE: September 6, 1989
SIZE: as of June 30, 1998, more than $4.7 billion
MANAGER: Richard Haberman, since 1996;
joined Fidelity in 1968
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
INVESTMENTS JUNE 30, 1998 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 49.8%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.7%
AEROSPACE & DEFENSE - 1.3%
AlliedSignal, Inc. 503,700 $ 22,351,639
Sundstrand Corp. 184,600 10,568,350
United Technologies Corp. 321,700 29,757,250
62,677,239
DEFENSE ELECTRONICS - 0.4%
Litton Industries, Inc. (a) 108,100 6,377,900
Northrop Grumman Corp. 113,400 11,694,375
18,072,275
SHIP BUILDING & REPAIR - 0.0%
Avondale Industries, Inc. (a) 20,500 565,672
TOTAL AEROSPACE & DEFENSE 81,315,186
BASIC INDUSTRIES - 1.4%
CHEMICALS & PLASTICS - 1.2%
Air Products & Chemicals, Inc. 251,800 10,072,000
Dow Chemical Co. 295,800 28,600,163
Engelhard Corp. 125,900 2,549,475
FMC Corp. (a) 146,400 9,982,650
Millennium Chemicals, Inc. 269,600 9,132,700
60,336,988
IRON & STEEL - 0.1%
USX-U.S. Steel Group 100,000 3,300,000
METALS & MINING - 0.1%
Aluminum Co. of America 101,400 6,686,063
TOTAL BASIC INDUSTRIES 70,323,051
CONSTRUCTION & REAL ESTATE - 1.0%
BUILDING MATERIALS - 0.3%
Coltec Industries, Inc. (a) 259,400 5,155,575
Mark IV Industries, Inc. 173,100 3,743,288
Texas Industries, Inc. 75,500 4,001,500
Vulcan Materials Co. 25,700 2,741,869
15,642,232
CONSTRUCTION - 0.7%
Centex Corp. 151,400 5,715,350
D.R. Horton, Inc. 189,224 3,950,051
Fleetwood Enterprises, Inc. 351,981 14,079,240
Kaufman & Broad Home Corp. 260,500 8,270,875
U.S. Home Corp. (a) 19,700 812,625
32,828,141
TOTAL CONSTRUCTION & REAL ESTATE 48,470,373
DURABLES - 3.3%
AUTOS, TIRES, & ACCESSORIES - 2.9%
Chrysler Corp. 253,600 14,296,700
Dana Corp. 80,300 4,296,050
Eaton Corp. 187,300 14,562,575
Ford Motor Co. 713,600 42,102,400
General Motors Corp. 812,890 54,311,213
Lear Corp. (a) 223,800 11,483,738
Superior Industries International, Inc. 211,800 5,970,113
147,022,789
HOME FURNISHINGS - 0.2%
Ethan Allen Interiors, Inc. 94,900 4,739,069
Furniture Brands International, Inc. (a) 153,400 4,304,788
9,043,857
SHARES VALUE (NOTE 1)
TEXTILES & APPAREL - 0.2%
Arena Brands Holdings Corp. Class B (a) 8,445 $ 211,125
Burlington Industries, Inc. (a) 291,900 4,104,844
Liz Claiborne, Inc. 87,800 4,587,550
8,903,519
TOTAL DURABLES 164,970,165
ENERGY - 1.4%
ENERGY SERVICES - 0.5%
BJ Services Co. (a) 134,500 3,908,906
McDermott International, Inc. 267,000 9,194,813
Western Atlas, Inc. 135,800 11,526,025
24,629,744
OIL & GAS - 0.9%
British Petroleum PLC ADR 2,972 262,279
Coastal Corp. (The) 188,900 13,187,581
Royal Dutch Petroleum Co. Ord. 119,200 6,596,718
Sun Co., Inc. 175,000 6,792,188
Tosco Corp. 545,700 16,029,938
42,868,704
TOTAL ENERGY 67,498,448
FINANCE - 11.4%
BANKS - 4.6%
Bank of New York Co., Inc. 167,900 10,189,431
BankAmerica Corp. 669,800 57,895,838
Bankers Trust New York Corp. 300,800 34,911,600
Chase Manhattan Corp. 674,800 50,947,400
Comerica, Inc. 71,400 4,730,250
Commerce Bancshares, Inc. 35,550 1,735,284
Mellon Bank Corp. 167,900 11,690,038
National City Corp. 157,800 11,203,800
NationsBank Corp. 144,100 11,023,650
Republic New York Corp. 245,200 15,432,275
SunTrust Banks, Inc. 236,500 19,230,406
228,989,972
CLOSED END INVESTMENT COMPANY - 0.0%
First NIS Regional Fund 114,100 1,026,900
CREDIT & OTHER FINANCE - 0.3%
Associates First Capital Corp. 199,341 15,324,339
FEDERAL SPONSORED CREDIT - 1.6%
Federal Home Loan Mortgage
Corporation 509,800 23,992,463
Fannie Mae 947,390 57,553,943
81,546,406
INSURANCE - 3.7%
Allmerica Financial Corp. 87,300 5,674,500
Allstate Corp. 560,200 51,293,313
CIGNA Corp. 637,600 43,994,400
Conseco, Inc. 798,900 37,348,575
Financial Security Assurance
Holdings Ltd. 37,300 2,191,375
Hartford Financial Services Group, Inc. 118,000 13,496,250
ING Groep NV sponsored ADR 4,145 270,979
Lincoln National Corp. 73,800 6,743,475
MGIC Investment Corp. 127,400 7,269,763
Old Republic International Corp. 183,150 5,368,584
Orion Capital Corp. 40,800 2,279,700
Reliastar Financial Corp. 80,522 3,865,056
179,795,970
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
SECURITIES INDUSTRY - 1.2%
Lehman Brothers Holdings, Inc. 534,500 $ 41,457,156
Travelers Group, Inc. (The) 299,900 18,181,438
59,638,594
TOTAL FINANCE 566,322,181
HEALTH - 4.8%
DRUGS & PHARMACEUTICALS - 2.7%
Pfizer, Inc. 532,200 57,843,488
Schering-Plough Corp. 710,600 65,108,725
Warner-Lambert Co. 183,600 12,737,250
135,689,463
MEDICAL EQUIPMENT & SUPPLIES - 0.9%
Allegiance Corp. 13,180 675,475
Guidant Corp. 587,400 41,888,963
42,564,438
MEDICAL FACILITIES MANAGEMENT - 1.2%
HEALTHSOUTH Corp. (a) 253,100 6,754,606
Lincare Holdings, Inc. (a) 200,000 8,412,500
United HealthCare Corp. 518,800 32,943,800
Wellpoint Health Networks, Inc. (a) 150,000 11,100,000
59,210,906
TOTAL HEALTH 237,464,807
HOLDING COMPANIES - 0.1%
U.S. Industries, Inc. 216,300 5,353,425
INDUSTRIAL MACHINERY & EQUIPMENT - 2.9%
ELECTRICAL EQUIPMENT - 1.4%
General Electric Co. 732,700 66,675,700
General Instrument Corp. 188,900 5,135,719
71,811,419
INDUSTRIAL MACHINERY & EQUIPMENT - 1.5%
Case Corp. 258,300 12,462,975
Caterpillar, Inc. 528,000 27,918,000
Dover Corp. 299,900 10,271,575
Ingersoll-Rand Co. 463,200 20,409,750
Tyco International Ltd. 59,300 3,735,900
74,798,200
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 146,609,619
MEDIA & LEISURE - 1.4%
BROADCASTING - 0.1%
Loral Orion Networks Systems, Inc.
warrants 1/15/07 (cv ratio .6) (a) 860 12,900
Loral Orion Networks Systems, Inc.
warrants 1/15/17 (cv ratio .47) (a) 2,920 35,040
Tele-Communications, Inc. (TCI Ventures
Group), Series A, (a) 260,712 5,230,535
5,278,475
LEISURE DURABLES & TOYS - 0.1%
Brunswick Corp. 167,900 4,155,525
LODGING & GAMING - 0.0%
Bally Gaming International, Inc.
warrants 7/29/98 (a) 38,400 24,000
Fitzgeralds South, Inc.
warrants 3/15/99 (a) (g) 420 0
24,000
SHARES VALUE (NOTE 1)
PUBLISHING - 1.2%
Cognizant Corp. 84,200 $ 5,304,600
Gannett Co., Inc. 324,500 23,059,781
Knight-Ridder, Inc. 128,700 7,086,544
New York Times Co. (The) Class A 109,600 8,685,800
Tribune Co. 159,300 10,961,831
World Color Press, Inc. (a) 68,100 2,383,500
57,482,056
RESTAURANTS - 0.0%
Brinker International, Inc. (a) 93,800 1,805,650
TOTAL MEDIA & LEISURE 68,745,706
NONDURABLES - 2.9%
BEVERAGES - 0.3%
Canadaigua Wine Co. Class A (a) 51,600 2,538,075
Coors (Adolph) Co. Class B 106,800 3,631,200
PepsiCo, Inc. 159,400 6,565,288
12,734,563
FOODS - 1.3%
Dean Foods Co. 116,200 6,383,738
Flowers Industries, Inc. 170,300 3,480,506
Heinz (H.J.) Co. 600,000 33,675,000
Quaker Oats Co. 202,400 11,119,350
Smithfield Foods, Inc. (a) 145,300 4,431,650
Suiza Foods Corp. (a) 77,400 4,619,813
63,710,057
HOUSEHOLD PRODUCTS - 0.0%
Nu Skin Asia Pacific, Inc. Class A (a) 61,300 1,195,350
Premark International, Inc. 34,500 1,112,625
2,307,975
TOBACCO - 1.3%
Philip Morris Companies, Inc. 1,108,500 43,647,188
RJR Nabisco Holdings Corp. 807,630 19,181,213
Universal Corp. 68,900 2,575,138
65,403,539
TOTAL NONDURABLES 144,156,134
RETAIL & WHOLESALE - 5.5%
APPAREL STORES - 0.4%
Gap, Inc. 114,900 7,080,713
Lamonts Apparel, Inc. warrants (a):
Class A 1/31/08 86,171 21,543
Class B 1/31/08 27,387 6,847
Lamonts Apparel, Inc. Class A 138,678 52,004
TJX Companies, Inc. 520,000 12,545,000
19,706,107
GENERAL MERCHANDISE STORES - 2.3%
Federated Department Stores, Inc. (a) 311,300 16,751,831
Wal-Mart Stores, Inc. 1,559,700 94,751,775
111,503,606
GROCERY STORES - 0.3%
Safeway, Inc. (a) 408,000 16,600,500
RETAIL & WHOLESALE, MISCELLANEOUS - 2.5%
Best Buy Co., Inc. 151,100 5,458,488
Home Depot, Inc. 830,100 68,950,181
Lowe's Companies, Inc. 298,600 12,111,963
Office Depot, Inc. (a) 127,400 4,021,063
Pier 1 Imports, Inc. 358,400 8,556,800
Tandy Corp. 504,600 26,775,338
125,873,833
TOTAL RETAIL & WHOLESALE 273,684,046
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - 0.3%
ADVERTISING - 0.2%
Omnicom Group, Inc. 203,600 $ 10,154,550
PRINTING - 0.1%
Donnelley (R.R.) & Sons Co. 24,800 1,134,600
Valassis Communications, Inc. (a) 149,600 5,768,950
6,903,550
TOTAL SERVICES 17,058,100
TECHNOLOGY - 4.7%
COMMUNICATIONS EQUIPMENT - 1.3%
Globalstar Telecommunications Ltd.
warrants 2/15/04 (a)(g) 1,410 183,300
Lucent Technologies, Inc. 623,000 51,825,813
Tellabs, Inc. (a) 191,300 13,701,863
65,710,976
COMPUTER SERVICES & SOFTWARE - 1.7%
HBO & Co. 733,800 25,866,450
Microsoft Corp. (a) 195,000 21,133,125
Oracle Corp. (a) 1,559,900 38,315,044
85,314,619
COMPUTERS & OFFICE EQUIPMENT - 1.4%
Ingram Micro, Inc. Class A (a) 25,600 1,132,800
International Business Machines Corp. 309,700 35,557,431
SCI Systems, Inc. (a) 587,100 22,089,638
Xerox Corp. 101,400 10,304,775
69,084,644
ELECTRONIC INSTRUMENTS - 0.1%
Thermo Electron Corp. 169,600 5,798,200
ELECTRONICS - 0.2%
Molex, Inc. 98,625 2,305,359
Thomas & Betts Corp. 165,400 8,145,950
10,451,309
TOTAL TECHNOLOGY 236,359,748
TRANSPORTATION - 2.2%
AIR TRANSPORTATION - 1.9%
AMR Corp. (a) 647,600 53,912,700
Comair Holdings, Inc. 195,100 6,023,713
Southwest Airlines Co. 796,100 23,584,463
US Airways Group, Inc. (a) 84,500 6,696,625
Viad Corp. 131,300 3,643,575
93,861,076
TRUCKING & FREIGHT - 0.3%
Airborne Freight Corp. 335,400 11,718,038
CNF Transportation, Inc. 65,200 2,771,000
14,489,038
TOTAL TRANSPORTATION 108,350,114
UTILITIES - 4.8%
CELLULAR - 0.0%
McCaw International Ltd.
warrants 4/15/07 (a)(g) 8,150 40,750
ELECTRIC UTILITY - 1.2%
Edison International 270,500 7,996,656
Energy East Corp. 194,400 8,091,900
FPL Group, Inc. 148,100 9,330,300
FirstEnergy Corp. 212,200 6,525,150
GPU, Inc. 212,300 8,027,594
Houston Industries, Inc. 377,800 11,664,575
Public Service Enterprise Group, Inc. 170,100 5,857,819
57,493,994
SHARES VALUE (NOTE 1)
GAS - 0.1%
MarketSpan Corp. 143,176 $ 4,286,332
TELEPHONE SERVICES - 3.5%
AT&T Corp. 1,128,900 64,488,413
Ameritech Corp. 643,900 28,895,013
BellSouth Corp. 449,800 30,192,825
GTE Corp. 150,000 8,343,750
SBC Communications, Inc. 400,000 16,000,000
U.S. WEST, Inc. 544,800 25,605,600
173,525,601
TOTAL UTILITIES 235,346,677
TOTAL COMMON STOCKS
(Cost $1,965,290,035) 2,472,027,780
NONCONVERTIBLE PREFERRED STOCKS - 1.5%
CONSTRUCTION & REAL ESTATE - 0.2%
REAL ESTATE INVESTMENT TRUSTS - 0.2%
California Federal Preferred Capital Corp.
9 1/8% 231,349 6,275,342
Crown America Realty Trust,
Series A, 11% 13,858 743,135
Walden Residential Properties, Inc.
9.20% 49,000 1,237,250
8,255,727
FINANCE - 0.1%
CREDIT & OTHER FINANCE - 0.0%
Fresenius Medical Care Capital Trust II
7 7/8% 1,053 1,048,393
INSURANCE - 0.1%
American Annuity Group Capital Trust II
8 3/4% 1,490 1,553,693
SIG Capital Trust I 9 1/2% 1,564 1,668,289
3,221,982
TOTAL FINANCE 4,270,375
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Echostar Communications Corp.
12 1/8%, 12/1/04 pay-in-kind 2,062 2,268,200
MEDIA & LEISURE - 0.8%
BROADCASTING - 0.7%
Adelphia Communications Corp. $13 11,243 1,349,160
American Radio Systems Corp.
11 3/8%, pay-in-kind 27,126 3,139,835
CSC Holdings, Inc. 11 1/8% pay-in-kind 77,083 8,826,004
Chancellor Media Corp., Series A,
$12.25 11,863 1,690,478
Granite Broadcasting Corp.
12 3/4%, pay-in-kind 2,197 2,570,490
SFX Broadcasting, Inc. 12 5/8% 26,167 2,930,704
Sinclair Capital 11 5/8% 28,380 3,079,230
Time Warner, Inc., Series M,
10 1/4%, pay-in-kind 9,594 10,661,333
34,247,234
PUBLISHING - 0.1%
PRIMEDIA, Inc., Series D, $10 31,050 3,260,250
Primedia, Inc. $9.20 21,782 2,221,764
5,482,014
TOTAL MEDIA & LEISURE 39,729,248
NONCONVERTIBLE PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - 0.0%
GROCERY STORES - 0.0%
Supermarkets General Holdings Corp.
$3.52, pay-in-kind (a) 20,000 $ 615,000
TECHNOLOGY - 0.0%
COMMUNICATIONS EQUIPMENT - 0.0%
Intermedia Communications, Inc.
13 1/2%, pay-in-kind 1,646 1,942,280
UTILITIES - 0.3%
CELLULAR - 0.1%
Nextel Communications, Inc.
11 1/8% pay-in-kind (g) 8,034 8,275,020
TELEPHONE SERVICES - 0.2%
Hyperion Telecommunications, Inc.
12 7/8%, pay-in-kind (Reg.) 2,124 2,108,070
IXC Communications, Inc.
12 1/2%, pay-in-kind 1,566 1,816,560
NEXTLINK Communications, Inc.
14%, pay-in-kind 58,447 3,433,761
WinStar Communications, Inc.
14 1/4% 1,201 1,429,190
8,787,581
TOTAL UTILITIES 17,062,601
TOTAL NONCONVERTIBLE PREFERRED STOCKS
(Cost $69,356,669) 74,143,431
CORPORATE BONDS - 20.6%
MOODY'S PRINCIPAL
RATINGS (D) AMOUNT
CONVERTIBLE BONDS - 0.1%
HEALTH - 0.0%
DRUGS & PHARMACEUTICALS - 0.0%
Integrated Process Equipment Corp.
6 1/4%, 9/15/04 (g) B- $ 1,370,000 1,027,500
MEDICAL FACILITIES MANAGEMENT - 0.0%
Tenet Healthcare Corp.
6%, 12/1/05 B1 750,000 644,063
TOTAL HEALTH 1,671,563
RETAIL & WHOLESALE - 0.1%
RETAIL & WHOLESALE, MISCELLANEOUS - 0.1%
Sports Authority, Inc.
5 1/4%, 9/15/01 B1 1,310,000 1,264,150
TOTAL CONVERTIBLE BONDS 2,935,713
NONCONVERTIBLE BONDS - 20.5%
AEROSPACE & DEFENSE - 0.3%
DEFENSE ELECTRONICS - 0.2%
Raytheon Co.:
5.95%, 3/15/01 Baa 4,500,000 4,483,260
6.45%, 8/15/04 Baa 5,940,000 5,998,925
Tracor, Inc. 8 1/2%, 3/1/07 B1 1,170,000 1,272,375
11,754,560
SHIP BUILDING & REPAIR - 0.1%
Newport News Shipbuilding, Inc.
9 1/4%, 12/1/06 B1 3,830,000 4,078,950
TOTAL AEROSPACE & DEFENSE 15,833,510
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
BASIC INDUSTRIES - 0.5%
CHEMICALS & PLASTICS - 0.2%
General Chemical Corp.
9 1/4%, 8/15/03 B2 $ 1,320,000 $ 1,353,000
Huntsman Corp.
9 1/2%, 7/1/07 (g) B2 2,100,000 2,110,500
Moll Industries
10 1/2%, 7/1/08 (g) B3 270,000 275,400
PraxAir, Inc.
6 5/8%, 10/15/07 A3 3,610,000 3,691,947
7,430,847
PACKAGING & CONTAINERS - 0.3%
BWAY Corp., Series B,
10 1/4%, 4/15/07 B2 1,120,000 1,213,800
Owens Illinois, Inc.:
7.15%, 5/15/05 Ba1 8,430,000 8,465,305
7.80%, 5/15/18 Ba1 4,350,000 4,451,429
14,130,534
PAPER & FOREST PRODUCTS - 0.0%
Omega Cabinets Ltd.
10 1/2%, 6/15/07 B3 1,280,000 1,280,000
TOTAL BASIC INDUSTRIES 22,841,381
CONSTRUCTION & REAL ESTATE - 0.3%
CONSTRUCTION - 0.0%
U.S. Home Corp.
8.88%, 8/15/07 B1 1,660,000 1,697,350
REAL ESTATE - 0.1%
LNR Property Corp.
9 3/8%, 3/15/08 (g) B1 2,680,000 2,673,300
REAL ESTATE INVESTMENT TRUSTS - 0.2%
Centerpoint Properties Trust
6 3/4%, 4/1/05 Baa 1,590,000 1,592,735
EOP Operating LP (g):
6 3/8%, 2/15/03 Baa 3,600,000 3,584,700
6 3/4%, 2/15/08 Baa 1,230,000 1,228,487
Weeks Realty LP
6 7/8%, 3/15/05 Baa 2,950,000 2,931,563
9,337,485
TOTAL CONSTRUCTION & REAL ESTATE 13,708,135
DURABLES - 0.7%
AUTOS, TIRES, & ACCESSORIES - 0.2%
Blue Bird Body Co.
10 3/4%, 11/15/06 B2 1,185,000 1,291,650
Breed Technologies, Inc.
9 1/4%, 4/15/08 (g) B3 4,560,000 4,457,400
Federal-Mogul Corp.
7 7/8%, 7/1/10 Ba2 4,290,000 4,306,088
Oshkosh Truck Corp.
8 3/4%, 3/1/08 B3 2,010,000 2,030,100
12,085,238
CONSUMER DURABLES - 0.1%
Corning Consumer Products Co.
9 5/8%, 5/1/08 (g) B3 3,590,000 3,581,025
TEXTILES & APPAREL - 0.4%
Levi Strauss & Co.
7%, 11/1/06 (g) Baa 7,700,000 7,786,625
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
DURABLES - CONTINUED
TEXTILES & APPAREL - CONTINUED
Nine West Group, Inc.
9%, 8/15/07 (g) Ba3 $ 1,660,000 $ 1,626,800
Unifi, Inc. 6 1/2%, 2/1/08 A3 2,940,000 2,906,778
WestPoint Stevens, Inc.
7 7/8%, 6/15/08 (g) Ba3 2,770,000 2,780,388
Worldtex, Inc.
9 5/8%, 12/15/07 B1 3,160,000 3,160,000
18,260,591
TOTAL DURABLES 33,926,854
ENERGY - 0.5%
COAL - 0.1%
P&L Coal Holdings Corp.
9 5/8%, 5/15/08 (g) B2 2,640,000 2,712,600
ENERGY SERVICES - 0.0%
Ocean Rig Norway AS
10 1/4%, 6/1/08 (g) B3 1,770,000 1,677,075
OIL & GAS - 0.4%
Chesapeake Energy Corp.
9 5/8%, 5/1/05 (g) B1 2,240,000 2,245,600
Occidental Petroleum Corp.:
10.94%, 5/17/00 Baa 2,700,000 2,932,983
6.39%, 11/9/00 Baa 1,000,000 1,008,160
8 1/2%, 11/9/01 Baa 1,251,000 1,342,336
Oryx Energy Co.:
8%, 10/15/03 Ba1 1,670,000 1,758,744
8 3/8%, 7/15/04 Ba1 1,770,000 1,908,290
Petroleum Geo-Services ASA
7 1/8%, 3/30/28 Baa 3,900,000 3,946,956
USX-Marathon Group
6.85%, 3/1/08 Baa 3,110,000 3,131,335
18,274,404
TOTAL ENERGY 22,664,079
FINANCE - 7.2%
ASSET-BACKED SECURITIES - 2.2%
Airplanes Pass Through Trust
Class D 10 7/8%, 3/15/19 Ba2 5,040,000 5,531,400
BankAmerica Manufacturing
Housing Center Trust V
6.20%, 4/10/09 Aaa 3,730,000 3,732,331
CPS Auto Grantor Trust:
6%, 8/15/03 Aaa 5,719,476 5,714,114 6.55%, 12/15/02 Aaa
2,284,351 2,301,841
6.9%, 11/15/03 Aaa 3,325,282 3,325,802
CSXT Receivables Master Trust
6%, 7/25/04 Aaa 4,600,000 4,610,781
Capital Equipment Receivables
Trust 6.48%, 10/15/06 Baa 2,950,000 2,950,620
Chase Manhattan Auto Owner
Trust 5.85%, 5/15/03 Aaa 4,620,000 4,622,166
Chevy Chase Auto Receivable
Trust 5.91%, 12/15/04 Aaa 2,640,000 2,636,304
Contimortgage Home Equity
Loan Trust 6.26%, 7/15/12 Aaa 4,790,000 4,794,455
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
Dayton Hudson Credit Card
Master Trust
6 1/4%, 8/25/05 Aaa $ 4,800,000 $ 4,832,784
Ford Credit Auto Owner Trust:
6.40%, 5/15/02 A1 3,120,000 3,148,018
6.20%, 12/15/02 Baa 2,680,000 2,675,310
6.40%, 12/15/02 Baa 1,480,000 1,479,142
Green Tree Financial Corp.:
6 1/2%, 6/15/27 Aaa 1,760,158 1,763,449
6.80%, 6/15/27 Aaa 1,900,000 1,919,589
6.45%, 9/15/28 Aaa 3,640,000 3,667,300
6.68%, 1/15/29 AAA 6,680,000 6,773,921
Key Plastics, Inc. 10 1/4%,
3/15/07 A2 3,730,000 3,742,239
MBNA Master Credit Card Trust II
Class A 6.55%, 1/15/07 Aaa 9,440,000 9,755,485
Olympic Automobile Receivables Trust:
6.4%, , 9/15/01 Aaa 4,550,000 4,544,911
6.70%, 3/15/02 Aaa 2,150,000 2,177,465
Petroleum Enhanced Trust
Receivables Offering Petroleum
Trust 6.1875%, 2/5/03 (g) Baa 3,498,276 3,498,276
Premier Auto Trust:
6%, 5/6/00 Aaa 1,628,416 1,629,930 6.34%, 1/6/03 Aaa 7,310,000
7,376,229
UAF Auto Grantor Trust:
6.10%, 1/15/03 (g) Aaa 5,156,377 5,158,542
WFS Financial Owner Trust
6.55%, 10/20/04 Aaa 4,430,000 4,450,356
108,812,760
BANKS - 1.4%
BanPonce Financial Corp.
7.72%, 4/13/00 A3 2,000,000 2,050,820
BanPonce Corp.
6.665%, 3/5/01 A3 4,450,000 4,504,379
Barclays Bank PLC yankee
5.95%, 7/15/01 A1 9,250,000 9,231,500
Capital One Bank:
6.42%, 11/12/99 Baa 4,900,000 4,914,210
8 1/8%, 3/1/00 Baa 5,500,000 5,660,875
6 3/8%, 2/15/03 Baa 3,570,000 3,566,609
Citicorp 5 5/8%, 2/15/01 Aa3 3,050,000 3,019,561
Den Danske Bank 6.375%,
6/15/08(g) (h) A1 8,340,000 8,240,921
Fleet Credit Card LLC
6.45%, 10/30/00 A1 2,300,000 2,326,335
Fleet/Norstar Financial
Group, Inc. 9.9%, 6/15/01 A3 2,400,000 2,635,896
Huntington National Bank
5 7/8%, 1/15/01 A1 2,560,000 2,548,173
NB Capital Trust IV
8 1/4%, 4/15/27 Aa3 2,650,000 2,959,653
NationsBank NA
5.92%, 6/8/01 Aa2 6,850,000 6,847,877
Provident Bank (Cincinnati, Ohio)
6 1/8%, 12/15/00 A3 1,740,000 1,741,340
Providian National Bank
6.70%, 3/15/03 Baa 3,060,000 3,093,660
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
FINANCE - CONTINUED
BANKS - CONTINUED
Signet Banking Corp.
9 5/8%, 6/1/99 A2 $ 790,000 $ 814,285
Summit Bancorp.
8 5/8%, 12/10/02 BBB 1,730,000 1,886,115
Union Planters National Bank
6.81%, 8/20/01 A3 3,500,000 3,568,145
69,610,354
CREDIT & OTHER FINANCE - 2.7%
AT&T Capital Corp.:
6.41%, 8/13/99 Baa 7,500,000 7,527,975
6.16%, 12/3/99 Baa 2,750,000 2,752,998
6 1/4%, 5/15/01 Baa 5,200,000 5,205,928
Ahmanson Capital Trust I
8.36%, 12/1/26 (g) Baa 4,250,000 4,776,703
Associates Corp. of North
America 6%, 4/15/03 Aa3 4,000,000 3,979,840
BCH Cayman Islands Ltd.
yankee 7.70%, 7/15/06 A3 950,000 1,018,904
BankAmerica Capital II,
Series 2, 8%, 12/15/26 Aa3 2,980,000 3,238,694
Bankers Trust Co.
5.66%, 7/21/98 (h) - 11,000,000 10,997,799
BanPonce Trust I
8.327%, 2/1/27 (g) A3 6,450,000 7,014,956
Countrywide Funding Corp.
6.45%, 2/27/03 A3 3,950,000 3,981,719
U.S. Bancorp
8.09%, 11/15/26 A1 2,980,000 3,205,526
Finova Capital Corp.:
6.44%, 11/6/01 Baa 5,500,000 5,577,385
6.12%, 5/28/02 Baa 2,000,000 2,008,820
First Security Capital I
8.41%, 12/15/26 A3 1,690,000 1,896,839
Ford Motor Credit Co.:
global 7%, 9/25/01 A1 12,500,000 12,812,750
5.73%, 2/23/00 A1 3,250,000 3,240,900
5.68%, 2/15/01 A1 5,000,000 4,959,500
6.57%, 3/19/01 A1 700,000 709,296
GST Network Funding, Inc.
0%, 5/1/08 (e)(g) - 2,010,000 1,211,025
General Electric Capital Corp.
6.94%, 4/13/09 (f) Aaa 7,000,000 7,049,770
General Motors Acceptance Corp.
6 3/4%, 7/10/02 A3 7,990,000 8,150,200
Heller Financial, Inc.:
7 7/8%, 11/1/99 A3 5,050,000 5,157,919
6 1/4%, 3/1/01 A3 4,940,000 4,944,594
Iridium Operating LLC/Iridium
Capital Corp. 10 7/8%,
7/15/05 B3 3,910,000 3,880,675
KeyCorp Institutional Capital
Series A 7.826%, 12/1/26 A1 3,600,000 3,813,048
La Petite Academy, Inc.
10%, 5/15/08 (g) B3 2,850,000 2,878,500
Mellon Capital I, Series A,
7.72%, 12/1/26 A2 2,000,000 2,131,760
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
Money Store, Inc.
7.30%, 12/1/02 Ba2 $ 2,550,000 $ 2,656,781
Nordstrom Credit, Inc.
7 1/4%, 4/30/02 A2 3,500,000 3,656,415
PNC Funding Corp.
6 7/8%, 3/1/03 A3 2,020,000 2,066,844
UNICCO Service Co./UNICCO
Finance Corp. 9 7/8%,
10/15/07 B3 1,930,000 1,944,475
134,448,538
SAVINGS & LOANS - 0.4%
Chevy Chase Savings Bank FSB
9 1/4%, 12/1/08 B1 1,560,000 1,583,400
First Nationwide Parent
Holdings Ltd. 12 1/2%,
4/15/03 B3 3,530,000 4,015,375
Great West Financial Trust II
8.206%, 2/1/27 A3 3,780,000 4,128,818
Great Western Financial Corp.
8.6% 2/1/02 A3 2,000,000 2,137,920
Home Savings of America
Irwindale Calif. FSB
6 1/2%, 8/15/04 A3 2,830,000 2,854,734
Long Island Savings Bank
6.20%, 4/2/01 Baa 3,770,000 3,774,675
Long Island Savings Bank FSB
Melville NY 7%, 6/13/02 Baa 3,400,000 3,502,340
21,997,262
SECURITIES INDUSTRY - 0.5%
Amvescap PLC
6 3/8%, 5/15/03 (g) A3 2,200,000 2,206,490
Merrill Lynch & Co., Inc.
5.5984%, 7/28/98 - 10,500,000 10,500,000
Morgan Stanley, Dean Witter,
Discover & Co. 5.67%,
1/15/99 (h) A+ 10,500,000 10,500,000
23,206,490
TOTAL FINANCE 358,075,404
HEALTH - 0.4%
MEDICAL EQUIPMENT & SUPPLIES - 0.1%
Graham-Field Health Products,
Inc. 9 3/4%, 8/15/07 B3 2,410,000 2,169,000
McKesson Corp.
6.60%, 3/1/00 A3 4,570,000 4,606,469
6,775,469
MEDICAL FACILITIES MANAGEMENT - 0.3%
Fountain View, Inc.
11 1/4%, 4/15/08 (g) Caa1 1,640,000 1,668,700
Integrated Health Services, Inc.,
Series A, 9 1/4%, 1/15/08 B2 4,080,000 4,233,000
Magellan Health Services, Inc.
9%, 2/15/08 (g) B3 2,420,000 2,395,800
Tenet Healthcare Corp.:
8 5/8%, 1/15/07 Ba3 3,720,000 3,840,900
8 1/8%, 12/1/08 (g) Ba3 1,300,000 1,306,500
13,444,900
TOTAL HEALTH 20,220,369
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
HOLDING COMPANIES - 0.1%
Norfolk Southern Corp.
7.05%, 5/1/37 Baa1 $ 6,610,000 $ 7,019,093
INDUSTRIAL MACHINERY & EQUIPMENT - 0.7%
ELECTRICAL EQUIPMENT - 0.1%
Echostar Communications Corp.
secured discount 0%,
6/1/04 (e) B2 2,140,000 2,083,825
Motors & Gears, Inc., Series D,
10 3/4%, 11/15/06 B3 430,000 455,800
2,539,625
INDUSTRIAL MACHINERY & EQUIPMENT - 0.4%
Bucyrus International, Inc.
9 3/4%, 9/15/07 B1 3,600,000 3,456,000
Goss Graphic System, Inc.
12%, 10/15/06 B2 800,000 820,000
Roller Bearing Holdings, Inc.
0%, 6/15/09 (e) (g) - 3,550,000 2,236,500
Thermadyne Manufacturing LLC
9 7/8%, 6/1/08 (g) B3 1,750,000 1,763,125
Tyco International Group SA yankee:
6 1/8%, 6/15/01 Baa 6,860,000 6,865,625
6 3/8%, 6/15/05 Baa 4,570,000 4,581,608
19,722,858
POLLUTION CONTROL - 0.2%
Allied Waste North America
10 1/4%, 12/1/06 B2 1,990,000 2,184,025
Envirosource, Inc.
9 3/4%, 6/15/03 B3 870,000 859,125
WMX Technologies, Inc.:
8 1/4%, 11/15/99 Baa 1,320,000 1,353,964
6 1/4%, 10/15/00 Baa 2,100,000 2,103,192
7.10%, 8/1/26 Baa 4,610,000 4,797,166
11,297,472
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 33,559,955
MEDIA & LEISURE - 4.4%
BROADCASTING - 3.1%
ACME Television LLC/ACME
Financial Corp. 0%,
9/30/04 (e) B3 1,740,000 1,431,150
Adelphia Communications Corp.:
9 1/2%, 2/15/04 B2 6,111,175 6,208,220
9 7/8%, 3/1/07 B2 4,280,000 4,633,100
Albritton Communications Co.
8 7/8%, 2/1/08 B3 1,450,000 1,566,000
Ascent Entertainment Group, Inc.
0%, 12/15/04 (e) B3 1,990,000 1,273,600
CSC Holdings, Inc.:
9 1/4%, 11/1/05 B1 1,370,000 1,465,900
9 7/8%, 5/15/06 B1 1,140,000 1,242,600
10 1/2%, 5/15/16 B1 1,850,000 2,155,250
Century Communications Corp.:
8 3/4%, 10/1/07 Ba3 1,170,000 1,234,350
0%, 1/15/08 Ba3 10,760,000 4,882,350
Clear Channel Communications,
Inc. 6 7/8%, 6/15/18 Baa 3,450,000 3,456,555
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
Comcast UK Cable Partners Ltd.
0%, 11/15/07 B2 $ 2,420,000 $ 2,002,550
Continental Cablevision, Inc.:
8 5/8%, 8/15/03 Baa 2,790,000 3,061,969
8.30%, 5/15/06 Baa 2,145,000 2,381,594
9%, 9/1/08 Baa 3,090,000 3,633,438
Diamond Cable Communications
PLC yankee 0%,
12/15/05 (e) Caa 310,000 255,750
Echostar Satellite Broadcasting
Corp. 0%, 3/15/04 (e) B3 1,030,000 945,025
Falcon Holding Group LP/Falcon
Funding (g):
8 3/8%, 4/15/10 B2 2,540,000 2,559,050
0%, 4/15/10 (e) B2 6,300,000 4,079,250
Fox/Liberty Networks LLC/FLN
Finance, Inc. 0%,
8/15/07 (e) B1 2,220,000 1,542,900
FrontierVision Operating
Partners LP/Frontiervision
Capital Corp.:
11%, 10/15/06 B3 3,980,000 4,387,950
0%, 9/15/07 (e) Caa 3,800,000 2,935,500
Granite Broadcasting Corp.:
10 3/8%, 5/15/05 B3 860,000 911,600
9 3/8%, 12/1/05 B3 2,955,000 3,043,650
8 7/8%, 5/15/08 (g) B3 2,535,000 2,573,025
Hearst-Argyle Television, Inc.
7 1/2%, 11/15/27 Baa 3,710,000 3,952,040
Intermedia Capital Partners IV
LP/Intermedia Partners IV
Capital Corp. 11 1/4%,
8/1/06 B2 1,362,000 1,539,060
International Cabletel, Inc. 0%,
2/1/06 (e) B3 1,850,000 1,503,125
Lenfest Communications, Inc.
8 1/4%, 2/15/08 (g) B2 1,300,000 1,358,500
LIN Holdings Corp. 0%,
3/1/08 (e) (g) B3 340,000 229,500
NTL, Inc.:
10%, 2/15/07 B3 2,090,000 2,231,075
0%, 4/1/08 (e) (g) B3 8,075,000 5,248,750
Olympus Communications
LP/Olympus Capital Corp:
10 5/8%, 11/15/06 B1 1,160,000 1,281,800
Orion Network Systems, Inc.:
11 1/4%, 1/15/07 B2 680,000 751,400
0%, 1/15/07 (e) B2 1,630,000 1,230,650
Pegasus Communications Corp.,
Series B, 9 5/8%, 10/15/05 B3 945,000 970,988
Renaissance Media Group
0%, 4/15/08 (e) (g) B3 2,470,000 1,537,575
Rogers Cablesystems Ltd.
yankee 11%, 12/1/15 B2 1,800,000 2,083,500
Satelites Mexicanos SA de CV
10 1/8%, 11/1/04 (g) B3 3,380,000 3,261,700
Sinclair Broadcast Group, Inc.
8 3/4%, 12/15/07 B2 2,540,000 2,613,025
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
MEDIA & LEISURE - CONTINUED
BROADCASTING - CONTINUED
TCI Communications, Inc.:
6.46%, 3/6/00 Baa $ 6,570,000 $ 6,628,999
Financing III 9.65%, 3/31/27 Ba2 4,830,000 5,844,300
6 7/8%, 2/15/06 Baa 4,550,000 4,693,553
7 1/8%, 2/15/28 Baa 4,170,000 4,353,480
Tele Communications, Inc.
9 1/4%, 4/15/02 Baa 3,000,000 3,306,960
Telemundo Group, Inc.
7.0%, 2/15/06 (f) B1 4,170,000 4,493,175
Telewest PLC:
yankee 9 5/8%, 10/1/06 B1 560,000 586,600
0%, 10/1/07 (e) B1 6,290,000 5,197,113
Time Warner, Inc.:
7.95%, 2/1/00 Baa 3,965,000 4,074,275
7 3/4%, 6/15/05 Baa 2,150,000 2,307,509
8.18%, 8/15/07 Baa 5,250,000 5,850,023
6 7/8%, 6/15/18 Baa 4,570,000 4,587,823
UIH Australia/Pacific, Inc.,
Series B, 0%, 5/15/06 (e) B2 5,950,000 3,510,500
United International Holdings, Inc.
0%, 2/15/08 (e) B3 6,840,000 4,172,400
153,261,724
ENTERTAINMENT - 0.7%
AMC Entertainment, Inc.
9 1/2%, 3/15/09 B2 4,050,000 4,029,750
American Skiing Co.
12%, 7/15/06 B3 2,600,000 2,912,000
Bally Total Fitness Holding Corp.,
Series B, 9 7/8%, 10/15/07 B3 3,390,000 3,491,700
Cinemark USA, Inc.
8 1/2%, 8/1/08 (Reg. S) B2 2,735,000 2,673,463
Livent, Inc. 9 3/8%, 10/15/04 B1 1,780,000 1,784,450
Paramount Communications, Inc.
7 1/2%, 1/15/02 Ba2 1,785,000 1,833,213
Premier Parks, Inc. 0%, 4/1/08 B3 1,990,000 1,320,863
United Artists Theatre Co.
9 3/4%, 4/15/08 (g) Caa 4,420,000 4,408,950
Viacom, Inc.:
6 3/4%, 1/15/03 Ba2 7,485,000 7,559,775
7 3/4%, 6/1/05 Ba2 6,480,000 6,904,116
36,918,280
LODGING & GAMING - 0.1%
Aladdin Gaming Holdings/
Aladdin Capital Unit
0%, 3/1/10 (e) (g) Caa 2,620,000 1,218,300
Courtyard by Marriott II
LP/Courtyard II Finance Co.,
Series B, 10 3/4%, 2/1/08 B- 1,190,000 1,306,025
Sun International Hotels Ltd./Sun
International North America,
Inc. yankee 9%, 3/15/07 Ba3 1,810,000 1,900,500
4,424,825
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
PUBLISHING - 0.4%
Garden State Newspapers, Inc.:
Series B, 8 3/4%, 10/1/09 B1 $ 2,620,000 $ 2,659,300
8 3/4%, 10/1/09 (j) B1 2,930,000 2,959,300
News America Holdings, Inc.:
8 1/2%, 2/15/05 Baa 3,740,000 4,142,985
7.70%, 10/30/25 Baa 5,380,000 5,771,126
News America, Inc.
7 1/4%, 5/18/18 (g) Baa 3,240,000 3,319,898
18,852,609
RESTAURANTS - 0.1%
Host Marriott Travel Plazas, Inc.
9 1/2%, 5/15/05 Ba3 4,820,000 5,085,100
TOTAL MEDIA & LEISURE 218,542,538
NONDURABLES - 0.5%
FOODS - 0.1%
Chiquita Brands International, Inc.
9 5/8%, 1/15/04 B1 1,980,000 2,083,950
ConAgra, Inc.
7 1/8%, 10/1/26 Baa 4,250,000 4,529,820
Del Monte Corp.
12 1/4%, 4/15/07 Caa 140,000 157,850
Del Monte Foods Co.
0%, 12/15/07 (g) Caa 190,000 123,500
6,895,120
HOUSEHOLD PRODUCTS - 0.1%
Revlon Consumer Products Corp.
8 5/8%, 2/1/08 B3 4,990,000 4,990,000
TOBACCO - 0.3%
Philip Morris Companies, Inc.:
7 1/4%, 9/15/01 A2 4,600,000 4,718,358
7%, 7/15/05 A2 4,710,000 4,818,566
6.95%, 6/1/06 A2 4,420,000 4,578,501
14,115,425
TOTAL NONDURABLES 26,000,545
RETAIL & WHOLESALE - 1.4%
APPAREL STORES - 0.1%
AnnTaylor, Inc.
8 3/4%, 6/15/00 B3 2,630,000 2,616,850
Specialty Retailers, Inc.
8 1/2%, 7/15/05 Ba3 810,000 832,275
3,449,125
GENERAL MERCHANDISE STORES - 0.6%
Dayton Hudson Corp.:
6.80%, 10/1/01 A3 4,000,000 4,085,080
7 1/2%, 7/15/06 A3 3,500,000 3,780,910
Federated Department Stores, Inc.:
10%, 2/15/01 Baa 8,830,000 9,603,420
8 1/8%, 10/15/02 Baa 1,510,000 1,610,596
6.79%, 7/15/27 Baa 3,000,000 3,069,150
7%, 2/15/28 Baa 3,930,000 3,999,915
K mart Corp.:
12 1/2%, 3/1/05 Ba2 2,510,000 3,124,950
7 3/4%, 10/1/12 Ba2 240,000 243,000
8 1/4%, 1/1/22 Ba2 1,790,000 1,830,275
31,347,296
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
GROCERY STORES - 0.5%
Ameriserve Food Distribution, Inc.
8 7/8%, 10/15/06 B1 $ 2,350,000 $ 2,350,000
Fleming Companies, Inc.,
Series B, 10 5/8%, 7/31/07 B3 650,000 678,438
Kroger Co.:
6%, 7/1/00 Baa 5,950,000 5,943,693
8.15%, 7/15/06 Baa 2,250,000 2,487,510
Fred Meyer, Inc.
7.45%, 3/1/08 Ba2 450,000 453,375
Mrs. Fields Original Cookies, Inc.
10 1/8%, 12/1/04 B2 1,050,000 1,018,500
Pathmark Stores, Inc.:
12 5/8%, 6/15/02 Caa 4,080,000 4,125,900
9 5/8%, 5/1/03 Caa 5,060,000 5,123,250
Pueblo Xtra International, Inc.:
9 1/2%, 8/1/03 B3 2,680,000 2,586,200
9 1/2%, 8/1/03 B3 820,000 797,450
25,564,316
RETAIL & WHOLESALE, MISCELLANEOUS - 0.2%
Amazon.com, Inc. 0%,
5/1/08 (e)(g) Caa 1,510,000 921,100
Central Tractor Farm & Country,
Inc. 10 5/8%, 4/1/07 B2 1,490,000 1,571,950
J Crew Operating Corp.
10 3/8%, 10/15/07 Caa 2,420,000 2,299,000
Metals USA, Inc. 8 5/8%,
2/15/08 (g) B2 2,810,000 2,718,675
7,510,725
TOTAL RETAIL & WHOLESALE 67,871,462
SERVICES - 0.1%
PRINTING - 0.0%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 1,430,000 1,505,075
SERVICES - 0.1%
Borg-Warner Security Corp.
9 5/8%, 3/15/07 B3 960,000 1,075,200
Iron Mountain, Inc.
8 3/4%, 9/30/09 B3 1,530,000 1,560,600
Medaphis Corp. 9 1/2%,
2/15/05 (g) B2 3,080,000 2,987,600
Signature Resorts, Inc.
9 3/4%, 10/1/07 B3 1,890,000 1,838,025
7,461,425
TOTAL SERVICES 8,966,500
TECHNOLOGY - 0.4%
COMPUTER SERVICES & SOFTWARE - 0.1%
Federal Data Corp.
10 1/8%, 8/1/05 B3 3,060,000 3,105,900
ICG Services, Inc.
0%, 5/1/08 (g) - 4,450,000 2,603,250
PSINet, Inc.
10%, 2/15/05 B3 730,000 742,775
6,451,925
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
COMPUTERS & OFFICE EQUIPMENT - 0.2%
Comdisco, Inc.
6 3/8%, 11/30/01 Baa $ 8,300,000 $ 8,335,192
ELECTRONIC INSTRUMENTS - 0.0%
Telecommunications Techniques Co.
9 3/4%, 5/15/08 (g) B3 2,315,000 2,355,513
ELECTRONICS - 0.1%
Advanced Micro Devices, Inc.
11%, 8/1/03 Ba3 1,750,000 1,855,000
Fairchild Semiconductor Corp.
11.74%, 3/15/08
pay-in-kind (j) - 1,975,085 1,896,299
3,751,299
TOTAL TECHNOLOGY 20,893,929
TRANSPORTATION - 0.7%
AIR TRANSPORTATION - 0.3%
Atlas Air, Inc. 9 1/4%,
4/15/08 (g) B3 5,100,000 5,093,625
Delta Air Lines, Inc.
9 7/8%, 5/15/00 Baa 1,500,000 1,598,790
Kitty Hawk, Inc.
9.95%, 11/15/04 B1 4,805,000 4,997,200
US Air, Inc.:
10 3/8%, 3/1/13 Ba2 2,480,000 2,746,600
9 5/8%, 2/1/01 B1 1,810,000 1,886,925
16,323,140
RAILROADS - 0.2%
Burlington Northern Santa Fe
Corp. 7.29%, 6/1/36 Baa 3,000,000 3,315,270
CSX Corp. 6.46%, 6/22/05 Baa 5,120,000 5,164,902
Wisconsin Central Transport
Corp. 6 5/8%, 4/15/08 Baa 675,000 673,704
9,153,876
SHIPPING - 0.2%
Amer Reefer Co. Ltd.
10 1/4%, 3/1/08 (g) B1 1,880,000 1,880,000
Cenargo International PLC
9 3/4%, 6/15/08 (g) Ba3 4,460,000 4,393,100
Holt Group, Inc. 9 3/4%,
1/15/06 (g) Caa 1,680,000 1,646,400
7,919,500
TOTAL TRANSPORTATION 33,396,516
UTILITIES - 2.3%
CELLULAR - 0.6%
AirTouch Communications, Inc.
6.35%, 6/1/05 Baa 6,880,000 6,910,822
McCaw International Ltd.
0%, 4/15/07 (e) Caa 8,150,000 5,338,250
Nextel International, Inc.:
12 1/8%, 4/15/08 (g) Caa 5,280,000 3,062,400
0%, 9/15/07 (e) B2 1,711,000 1,154,925
0%, 10/31/07 (e) B2 8,840,000 5,768,100
0%, 2/15/08 (e) (g) B2 6,730,000 4,324,025
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
UTILITIES - CONTINUED
CELLULAR - CONTINUED
PageMart Wireless, Inc.
0%, 2/1/08 (e) Caa $ 3,870,000 $ 2,322,000
Rogers Communications, Inc.
8 7/8%, 7/15/07 B2 3,110,000 3,133,325
32,013,847
ELECTRIC UTILITY - 0.5%
Avon Energy Partners Holdings (g):
6.73%, 12/11/02 Baa 4,910,000 4,992,193
6.46%, 3/4/08 Baa 3,960,000 3,977,543
Hydro-Quebec yankee
7.40%, 3/28/25 A2 2,620,000 3,162,602
Israel Electric Corp. Ltd.(g):
7 3/4%, 12/15/27 A3 4,670,000 4,813,369
yankee 7 7/8%,
12/15/26 A3 1,960,000 2,080,207
Niagara Mohawk Power Corp.
7 3/4%, 10/1/08 Ba3 675,000 691,031
NIPSCO Capital Markets, Inc.
7.39%, 4/1/04 Baa 3,500,000 3,665,156
Texas Utilities Co. 3
6 3/8%, 1/1/08 Baa 1,930,000 1,908,770
25,290,871
TELEPHONE SERVICES - 1.2%
Cable & Wireless Communications
PLC 6 3/8%, 3/6/03 Baa 5,080,000 5,084,267
Dobson Wireline Co.
12 1/4%, 6/15/08 (g) - 4,730,000 4,623,575
GCI, Inc. 9 3/4%, 8/1/07 B2 440,000 455,400
Hyperion Telecommunications, Inc.:
Series B, 0%, 4/15/03 (e) B3 6,470,000 4,803,975
12 1/4%, 9/1/04 B3 2,390,000 2,569,250
McLeodUSA, Inc.:
0%3/1/07 (e) B2 1,165,000 870,838
9 1/4%, 7/15/07 B2 1,330,000 1,381,538
NEXTLINK Communications, Inc.
9 5/8%, 10/1/07 B3 5,290,000 5,409,025
Pathnet, Inc. Unit 12 1/2%,
4/15/08 (g) 4,710,000 4,992,600
Teleport Communications Group,
Inc. 0%, 7/1/07 (e) Baa 8,450,000 7,256,438
Winstar Communications, Inc.
11%, 3/15/08 (g) - 2,120,000 2,109,400
WorldCom, Inc.:
9 3/8%, 1/15/04 Baa 3,708,000 3,894,587
8 7/8%, 1/15/06 Baa 3,139,000 3,414,824
7 3/4%, 4/1/07 Baa 9,690,000 10,510,355
57,376,072
TOTAL UTILITIES 114,680,790
TOTAL NONCONVERTIBLE BONDS 1,018,201,060
TOTAL CORPORATE BONDS
(Cost $1,004,141,241) 1,021,136,773
U.S. GOVERNMENT AND GOVERNMENT AGENCY
OBLIGATIONS - 6.2%
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
U.S. TREASURY OBLIGATIONS - 4.6%
11 7/8%, 11/15/03 Aaa $ 2,590,000 $ 3,337,863
11 3/4%, 2/15/10 (callable) Aaa 26,045,000 34,745,593
12 3/4%, 11/15/10 (callable) Aaa 5,220,000 7,434,428
5/15/2011 (callable) Aaa 25,650,000 38,923,875
7 5/8%, 2/15/25 Aaa 35,630,000 44,860,308
5.625% 11/30/99 Aaa 1,620,000 1,622,025
6 7/8%, 3/31/00 Aaa 4,980,000 5,090,506
5% 10/31/01 Aaa 820,000 837,040
7%, 7/15/06 Aaa 84,152,000 91,896,509
228,748,147
U.S. GOVERNMENT AGENCY OBLIGATIONS - 1.6%
State of Israel (guaranteed by
U.S. Government through Agency
for International Development):
6 5/8%, 8/15/03 Aaa 7,810,000 8,138,332
6 3/4%, 8/15/04 Aaa 2,144,000 2,258,189
5 5/8%, 9/15/03 Aaa 8,540,000 8,530,691
Guaranteed Export Trust
Certificates (assets of Trust
guaranteed by U.S.
Government through
Export-Import Bank)
Series 1994-A,
7.12%, 4/15/06 Aaa 6,970,457 7,291,864
Farm Credit Systems Financial
Assistance Corporation
8.80%, 6/10/05 Aaa 2,000,000 2,337,500
Federal Farm Credit Bank
8.16% 12/07/04 Aaa 5,000,000 5,631,250
Federal Home Loan Bank:
7.31%, 6/16/04 Aaa 2,500,000 2,691,400
7.59%, 3/10/05 Aaa 3,850,000 4,224,182
8.22% 11/17/04 Aaa 4,000,000 4,492,680
Federal Home Loan Mortgage
Corporation 6 3/4%, 8/1/05 Aaa 2,500,000 2,634,775
Fannie Mae:
7.40%, 7/1/04 Aaa 7,800,000 8,434,998
6.97% 4/08/04 Aaa 6,010,000 6,364,951
U.S. Department of Housing
and Urban Development
government guaranteed
participation certificates:
Series 1995-A,
6.24%, 8/1/04 Aaa 3,260,000 3,657,231 Series 1996-A,
8.67%, 8/1/01 Aaa 9,400,000 9,610,560
Series 1996-A,
7.63%, 8/1/14 (callable) Aaa 2,825,000 3,054,192
79,352,795
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $304,739,666) 308,100,942
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 8.8%
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
FREDDIE MAC - 0.3%
5 1/2%, 1/1/03 to 6/1/03 Aaa $ 3,598,778 $ 3,531,915
7%, 4/1/01 to 8/1/01 Aaa 2,024,483 2,046,532
7 1/2% , 12/1/27 to 3/1/28 Aaa 6,952,305 6,952,305
8 1/2%, 7/1/21 to 6/1/23 Aaa 226,984 237,724
12,768,476
FANNIE MAE - 7.5%
5 1/2%, 2/1/03 to 5/1/03 Aaa 3,367,410 3,320,905
6%, 1/1/11 to 12/1/24 Aaa 93,733,259 92,599,776
6 1/2%, 3/1/13 to 7/1/28 Aaa 123,574,257 123,431,577
7%, 2/1/28 to 7/1/28 (k) Aaa 117,713,584 119,580,596
7 1/2%, 1/1/29 to 6/1/28 Aaa 34,727,562 35,618,697
374,551,551
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 1.0%
6%, 12/15/08 to 6/15/09 Aaa 3,383,878 3,381,367
6 1/2% 6/15/08 to 7/15/09 Aaa 16,869,570 17,088,200
7%, 7/15/28 (k) Aaa 28,000,000 28,778,750
8%, 5/15/25 Aaa 177,352 183,781
8 1/2%, 12/15/16 Aaa 70,563 74,972
49,507,070
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $429,059,812) 436,827,097
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.0%
PRIVATE SPONSOR - 0.0%
Credit-Based Asset Servicing and
Securitization LLC Series 1997-2
Class 2-B, 7.2891%, 12/29/25
(c)(g)(h)
(Cost $797,344) Ba3 1,500,000 723,281
COMMERCIAL MORTGAGE SECURITIES - 2.2%
Resolution Trust Corp.
Series 1991-M2 Class A-3,
7.25%, 9/25/20 (h) Ba3 446,368 383,877
LTC Commercial Mortgage
Pass Thru Certificates
Series 1998-1 Class A,
6.029%, 5/30/30 (g) AAA 3,190,142 3,131,571
Asset Securitization Corp.
Series 1997-D5 Class A-6,
7.44%, 2/14/41 BBB- 900,000 900,422
Blackrock Capital Funding LLC
Series 1996 Class C2,
7.696%, 11/16/26 (g) - 145,170 145,034
BKB Commercial Mortgage Trust
Series 1997-C1 Class D, 7.83%,
2/25/43 (g)(h) BBB 1,800,000 1,823,344
Bankers Trust Remic Trust
1988-1 Series 1998-S1A Class G
8.66%, 11/28/02 (g) Ba2 1,000,000 958,750
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
CBM Funding Corp. sequential
pay Series 1996-1:
Class A-3PI,
7.08%, 11/1/07 AA $ 3,000,000 $ 3,139,219
Class B,
7.48%, 2/1/08 A 2,320,000 2,503,425
CS First Boston Mortgage
Securities Corp.:
Series 1998 C1
Class D, 7.17%, 1/17/12 BBB 5,050,000 5,132,063
Series 1998-FL1 Class E,
6.51%, 1/10/13 (g)(h) Baa 5,490,000 5,490,000
Series 1997-C2
Class D, 7.27%, 4/17/11 Baa 5,300,000 5,435,813
DLJ Mortgage Acceptance Corp.
Series 1993-MF12 Class B-2,
10.10%, 9/18/03 (g) - 600,000 615,000
Deutsche Mortgage and Asset
Receiving Corp. Series 1998 C1
Class D, 7.231%, 7/15/12 Baa 4,260,000 4,318,908
Franchise Mortgage Acceptance
Company LLC Loan Receivables (g):
Trust Series 1997-A Class E,
8.10%, 4/15/19 (h) - 500,000 481,328
Series 1997-B Class E, 7.89%,
9/15/19 - 750,000 676,875
Berkeley Federal Bank & Trust FSB
Series 1994 Class 1-B, 7.78%,
8/1/24 (g)(h) - 1,900,000 1,484,375
First Chicago /Lennar Trust I:
Series 1997-CHL1 Class E,
8.11%, 2/28/11 (h) - 1,600,000 1,423,250
Series 1997-CHL1 Class D,
8.11%, 5/29/08 (h) - 1,100,000 1,101,547
First Union-Lehman Brothers
Commercial Mortgage Trust
sequential pay Series 1997-C2
Class B, 6.79%, 10/18/11 Aa2 11,350,000 11,628,430
Thirteen Affiliates of General
Growth Properties, Inc. (g):
sequential pay Series A-2,
6.602%, 11/15/12 Aaa 3,830,000 3,924,371
Series D-2, 6.992%,
11/15/12 Baa 4,120,000 4,133,349
Series E-2, 7.224%,
11/15/12 Baa 2,450,000 2,431,307
General Motors Acceptance
Corp. Commercial Mortgage
Securities, Inc.:
Series 1996-C1 Class F
7.86%, 11/15/06 (g) Ba3 750,000 729,900 Series 1997-C2
Class F, 6 3/4%, 4/16/29 Ba2 400,000 349,688
COMMERCIAL MORTGAGE SECURITIES - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
GS Mortgage Securities Corp. II:
Series 1997- GL Class A2-B,
6.86%, 7/13/30 Aaa $ 4,640,000 $ 4,818,594
Series 1998-GLII Class D,
7.19%, 4/13/31 (g)(h) Baa 1,470,000 1,485,009
Series 1998-GLII Class E,
7.19%, 4/13/31 (g)(h) Baa 4,930,000 4,827,998
GAFCO Franchisee Loan Trust
Series 1998-1 Class D, 14.50%,
6/1/16 (g)(h) - 1,300,000 1,031,266
Kidder Peabody Acceptance Corp.
sequential pay, Series 1993-M1
Class A-2, 7.15%, 4/25/25 Aa2 1,700,078 1,697,953
Morgan Stanley Capital One, Inc.:
Series 1996-MBL1 Class E,
8.661%, 5/25/21 (g) - 1,786,437 1,755,174
Series 1998-HF1 Class D,
7.10%, 2/15/08 (f) BBB 5,300,000 5,379,500
Nomura Depositor Trust:
Series 1998-ST1A Class B-2,
12.66%, 1/15/03 (g) - 800,000 795,125
Series 1998 - D6 Class A-4,
7.594%, 3/15/30 Baa 4,260,000 4,384,804
Penn Mutual Life Insurance Co.
(The) Series 1996-PML (g):
Class K,
7.90%, 11/15/26 - 1,473,000 1,109,493
Class L,
7.90%, 11/15/26 - 1,133,000 541,914
Structured Asset Securities Corp.:
Series 1995-C1 Class E,
7 3/8%, 9/25/24 (g) BB 1,200,000 1,167,000
Series 1993-C1 Class E,
6.60%, 10/25/24 (g) B 1,250,000 625,000
Series 1996
Class A-2A,7 3/4%,
2/25/28 AAA 1,081,670 1,092,487
commercial Series 1996-CFL
Class E, 7 3/4%, 2/25/28 BB+ 2,390,000 2,419,128
Series 1996-CFL Class G,
7 3/4%, 2/25/28 (g) - 1,000,000 949,375
Wells Fargo Capital Markets
Apartment Financing Trust
6.56%, 12/29/05 (g) Aaa 2,676,825 2,721,609
Equitable Life Assurance Society
of the United States (The) (g):
Series 174 Class B1,
7.33%, 5/15/06 Aa2 3,500,000 3,695,230
Series 1996-1 Class C1,
7.52%, 5/15/06 A2 2,300,000 2,439,518
Series 174, Class D1,
7.77%, 5/15/06 Baa1 2,200,000 2,321,088
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $104,837,337) 107,599,111
FOREIGN GOVERNMENT OBLIGATIONS (I) - 0.3%
MOODY'S PRINCIPAL VALUE
RATINGS (D) AMOUNT (NOTE 1)
Export Development Corp.
yankee 8 1/8%, 8/10/99 Aa2 $ 1,640,000 $ 1,679,114
Israeli State euro 6 3/8%,
12/19/01 A3 3,350,000 3,345,712
Manitoba Province yankee
6 3/8%, 10/15/99 A1 7,000,000 7,039,130
Newfoundland Province yankee
11 5/8%, 10/15/07 Baa1 2,000,000 2,756,880
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $14,629,170) 14,820,836
SUPRANATIONAL OBLIGATIONS - 0.1%
Inter American Development Bank
yankee 6.29%, 7/16/27
(Cost $4,720,123) Aaa 4,750,000 4,997,998
BANK NOTES - 0.2%
Key Bank N.A 5.6488%, 8/20/99
(Cost $10,485,878) Aa3 10,500,000 10,490,025
CERTIFICATES OF DEPOSIT - 2.3%
ABN-AMRO Bank N.V. yankee
(euro) 5.64%, 12/14/98 11,000,000 10,998,710
Australia & New Zealand Banking
Group yankee Ltd. 5.825%, 7/28/98 5,000,000 4,999,945
Banque Nationale de paris yankee
5 3/4%, 7/31/98 5,500,000 5,499,340
Canadian Imperial Bank of Commerce NY
Branch yankee 6.20%, 8/1/00 5,730,000 5,760,369
Canadian Imperial Bank of Commerce
5.91%, 8/28/98 10,000,000 10,000,465
Chase Manhattan Bank USA
5.54%, 7/6/98 12,000,000 11,999,886
Deutsche Bank AG yankee
5.94%, 10/26/98 5,000,000 5,001,602
Bank of Scotland Treasury Services yankee
5.64%, 12/29/98 12,000,000 11,999,357
First National Bank of Chicago, ILL
5.65%, 3/3/99 10,000,000 9,990,770
RaboBank Nederland Cooperative
Central yankee 5.68%, 6/4/99 10,600,000 10,594,940
Societe Generale France yankee
5.91%, 10/15/98 7,000,000 7,001,276
Toronto-Dominion Bank yankee
5.68%, 6/4/99 10,600,000 10,594,940
Westdeutsche Landesbank yankee
5.83%, 8/3/98 9,000,000 8,999,370
Westpac Banking Corp. yankee
5.885%, 8/27/98 2,000,000 1,999,980
TOTAL CERTIFICATES OF DEPOSIT
(Cost $115,399,923) 115,440,950
COMMERCIAL PAPER - 1.8%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
Citibank Credit Card Master
Trust I (Dakota
Cirtification Program) 5.52%, 8/5/98 $ 10,500,000 $ 10,443,038
Morgan (JP) & Co., Inc.
5 1/2%, 11/10/98 12,000,000 11,758,440
UBS Finance, Inc. yankee
5.53%, 8/5/98 2,000,000 1,989,208
Unifunding, Inc. yankee
5.52%, 7/2/98 10,500,000 10,498,348
Aspen Funding Corp. yankee
5.54%, 7/20/98 12,000,000 11,964,406
Beneficial Corp.
5.55%, 8/12/98 12,100,000 12,021,229
General Electric Capital Corp.
5.51%, 7/13/98 12,000,000 11,977,480
Kitty Hawk Funding Corp.
5.53%, 7/29/98 6,300,000 6,272,805
New Center Asset Trust
5.54%, 9/21/98 3,000,000 2,962,553
Preferred Receivables Funding Corp.
5.53%, 7/14/98 4,250,000 4,241,313
Triple A One Funding Corp.
5.54%, 7/8/98 6,800,000 6,792,555
TOTAL COMMERCIAL PAPER
(Cost $90,923,047) 90,921,375
MASTER NOTES - 0.1%
Goldman Sachs Group L.P.
5.72%, 1/27/99
(Cost $6,700,000) 6,700,000 6,700,000
CASH EQUIVALENTS - 6.1%
SHARES
Taxable Central Cash Fund (b) 301,411,157 301,411,157
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations), in a joint
trading account at 5.93%, dated
6/30/98 due 7/1/98 $ 104,017 104,000
TOTAL CASH EQUIVALENTS
(Cost $301,515,157) 301,515,157
TOTAL INVESTMENT IN SECURITIES - 100.0%
(Cost $4,422,595,402) $ 4,965,444,756
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield of the Taxable Central Cash
Fund was 5.61%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(c) Non-income producing - issuer filed for protection under the
Federal Bankruptcy Code or is in default of interest payment.
(d) Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investors Service, Inc.
(e) Debt obligation initially issued in zero coupon form which
converts to coupon form at a specified rate and date. The rate shown
is the rate at period end.
(f) Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date. The rate shown is the rate at
period end.
(g) Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions
exempt from registration, normally to qualified institutional buyers.
At the period end, the value of these securities amounted to
$232,328,365 or 4.8% of net assets.
(h) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(i) For foreign government obligations not individually rated by S&P
or Moody's the ratings listed are assigned to securities by FMR, the
fund's investment advisor, based principally on S&P and Moody's
ratings of the soveriegn credit of the issuing government.
(j) Restricted securities - Investment in securities not registered
under the Securities Act of 1933 (see Note 2 of Notes to Financial
Statements).
Additional information on each holding is as follows:
ACQUISITION ACQUISITION
SECURITY DATE COST (000S)
Fairchild Semiconductor Corp
11.74%, 3/15/08 pay-in-kind
4/3/97 to 9/15/97 $1,647,504
Garden State Newspapers Inc.,
8 3/4%, 10/1/09 2/11/98 $3,032,550
(k) Security or a portion of the security purchased on a delayed
delivery or when-issued basis (see Note 2 of Notes to Financial
Statements).
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $3,107,024,735 and $2,943,044,842, respectively, of which
long-term U.S. government and government agency obligations aggregated
$1,571,695,057 and $1,270,011,273, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $176,162 for the
period (see Note 4 of Notes to Financial Statements).
The fund participated in the bank borrowing program. The maximum loan
and average daily balances during the period for which the loan was
outstanding amounted to $7,666,000 respectively. The weighted average
interest rate was 5.79%. Interest expense includes $1,232 paid under
the bank borrowing program (see Note 5 of Notes to Financial
Statements).
The composition of long-term debt holdings as a percentage of total
value of investment in securities, is as follows:
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 21.9% AAA, AA, A 21.3%
Baa 6.7% BBB 6.9%
Ba 1.9% BB 2.1%
B 5.2% B 5.0%
Caa 0.7% CCC 0.8%
Ca, C 0.0% CC, C 0.0%
D 0.0%
For some foreign government obligations, FMR has assigned the ratings
of the sovereign credit of the issuing government. The percentage not
rated by Moody's or S&P amounted to1.4%. FMR has determined that
unrated debt securities that are lower quality account for 0.6% of the
total value of investment in securities.
INCOME TAX INFORMATION
At June 30,1998, the aggregate cost of investment securities for
income tax purposes was $4,423,662,220. Net unrealized appreciation
aggregated $541,782,536, of which $610,109,474 related to appreciated
investment securities and $68,326,938 related to depreciated
investment securities.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)
ASSETS
INVESTMENT IN SECURITIES, AT VALUE (INCLUDING REPURCHASE
AGREEMENTS OF $104,000) (COST $4,422,595,402) - $ 4,965,444,756
SEE ACCOMPANYING SCHEDULE
CASH 774,587
RECEIVABLE FOR INVESTMENTS SOLD 59,508,438
RECEIVABLE FOR FUND SHARES SOLD 2,317,947
DIVIDENDS RECEIVABLE 4,361,780
INTEREST RECEIVABLE 29,668,468
OTHER RECEIVABLES 203,340
TOTAL ASSETS 5,062,279,316
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 124,458,650
REGULAR DELIVERY
DELAYED DELIVERY 138,880,682
PAYABLE FOR FUND SHARES REDEEMED 5,063,647
ACCRUED MANAGEMENT FEE 2,131,334
DISTRIBUTION FEES PAYABLE 52
OTHER PAYABLES AND ACCRUED EXPENSES 398,467
TOTAL LIABILITIES 270,932,832
NET ASSETS $ 4,791,346,484
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 3,964,816,294
UNDISTRIBUTED NET INVESTMENT INCOME 77,492,343
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS 206,193,492
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 542,844,355
AND ASSETS AND LIABILITIES IN
FOREIGN CURRENCIES
NET ASSETS $ 4,791,346,484
</TABLE>
INITIAL CLASS: $17.25
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($4,790,268,471 (DIVIDED BY)
277,718,427 SHARES)
SERVICE CLASS: $17.20
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PRICE PER SHARE
($1,078,013 (DIVIDED BY) 62,675 SHARES)
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME $ 20,961,032
DIVIDENDS
INTEREST 70,977,484
TOTAL INCOME 91,938,516
EXPENSES
MANAGEMENT FEE $ 12,533,744
TRANSFER AGENT FEES 1,584,042
DISTRIBUTION FEES - SERVICE CLASS 109
ACCOUNTING FEES AND EXPENSES 426,724
NON-INTERESTED TRUSTEES' COMPENSATION 10,462
CUSTODIAN FEES AND EXPENSES 19,201
REGISTRATION FEES 15,112
AUDIT 50,766
LEGAL 26,726
INTEREST 1,232
MISCELLANEOUS 97,299
TOTAL EXPENSES BEFORE REDUCTIONS 14,765,417
EXPENSE REDUCTIONS (342,623) 14,422,794
NET INVESTMENT INCOME 77,515,722
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 208,945,629
FOREIGN CURRENCY TRANSACTIONS (3,611) 208,942,018
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 121,929,390
ASSETS AND LIABILITIES IN 531 121,929,921
FOREIGN CURRENCIES
NET GAIN (LOSS) 330,871,939
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 408,387,661
OTHER INFORMATION $ 332,942
EXPENSE REDUCTIONS
DIRECTED BROKERAGE ARRANGEMENTS
CUSTODIAN CREDITS 9,681
$ 342,623
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
OPERATIONS $ 77,515,722 $ 137,893,337
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 208,942,018 422,287,524
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) 121,929,921 189,535,901
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 408,387,661 749,716,762
DISTRIBUTIONS TO SHAREHOLDERS (139,636,839) (127,145,659)
FROM NET INVESTMENT INCOME
FROM NET REALIZED GAIN (418,910,515) (317,186,364)
TOTAL DISTRIBUTIONS (558,547,354) (444,332,023)
SHARE TRANSACTIONS - NET INCREASE (DECREASE) 541,558,604 453,368,657
TOTAL INCREASE (DECREASE) IN NET ASSETS 391,398,911 758,753,396
NET ASSETS
BEGINNING OF PERIOD 4,399,947,573 3,641,194,177
END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT
INCOME OF $77,492,343 AND $137,705,425, RESPECTIVELY) $ 4,791,346,484 $ 4,399,947,573
</TABLE>
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998
SHARES DOLLARS YEAR ENDED DECEMBER 31, 1997
(UNAUDITED) SHARES DOLLARS
SHARE TRANSACTIONS 12,711,041 $ 217,464,359 22,516,597 $ 378,800,337
INITIAL CLASS
SOLD
REINVESTED 34,542,119 558,546,057 28,796,632 444,332,023
REDEEMED (13,804,465) (235,509,477) (22,110,811) (369,773,703)
NET INCREASE (DECREASE) 33,448,695 $ 540,500,939 29,202,418 $ 453,358,657
SERVICE CLASS A 62,729 $ 1,068,315 568 $ 10,000
SOLD
REINVESTMENT 80 1,295 - -
REDEEMED (702) (11,945) - -
NET INCREASE (DECREASE) 62,107 $ 1,057,665 568 $ 10,000
DISTRIBUTIONS $ 139,636,515 $ 127,145,659
INITIAL CLASS - NET INVESTMENT INCOME
INITIAL CLASS - NET REALIZED GAIN 418,909,543 317,186,364
TOTAL $ 558,546,058 $ 444,332,023
SERVICE CLASS - NET INVESTMENT INCOME $ 324 $ -
SERVICE CLASS - NET REALIZED GAIN 972 -
TOTAL $ 1,296 $ -
$ 558,547,354 $ 444,332,023
A SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
</TABLE>
<TABLE>
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FINANCIAL HIGHLIGHTS - INITIAL CLASS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1998
SELECTED PER-SHARE DATA (UNAUDITED) 1997 1996 1995 1994 1993
NET ASSET VALUE, BEGINNING OF PERIOD $18.01 $16.93 $15.79 $13.79 $15.42 $13.32
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .28 D .57 D .63 .30 .45 .33
NET REALIZED AND UNREALIZED GAIN (LOSS) 1.24 2.58 1.55 1.99 (1.33) 2.39
TOTAL FROM INVESTMENT OPERATIONS 1.52 3.15 2.18 2.29 (.88) 2.72
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.57) (.59) (.57) (.29) (.29) (.33)
IN EXCESS OF NET INVESTMENT INCOME - - - - - (.04)
FROM NET REALIZED GAIN (1.71) (1.48) (.47) - (.46) (.25)
TOTAL DISTRIBUTIONS (2.28) (2.07) (1.04) (.29) (.75) (.62)
NET ASSET VALUE, END OF PERIOD $17.25 $18.01 $16.93 $15.79 $13.79 $15.42
TOTAL RETURN B, C 9.29% 20.65% 14.60% 16.96% (6.09)% 21.23%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $4,790,268 $4,399,937 $3,641,194 $3,332,844 $3,290,527 $2,422,692
RATIO OF EXPENSES TO AVERAGE NET ASSETS .65% A .65% .74% .81% .81% .88%
RATIO OF EXPENSES TO AVERAGE NET ASSETS
AFTER EXPENSE REDUCTIONS .63% A, F .64% F .73% F .79% F .80% F .88% F
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 3.39% A 3.43% 3.60% 3.54% 4.07% 3.64%
PORTFOLIO TURNOVER 139% A 101% 168% 256% 85% 113%
AVERAGE COMMISSION RATE G $ .0416 $ .0408 .0163
</TABLE>
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FINANCIAL HIGHLIGHTS - SERVICE CLASS
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
SELECTED PER-SHARE DATA (UNAUDITED) 1997 E
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.99 $ 17.60
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .28 D .10 D
NET REALIZED AND UNREALIZED GAIN (LOSS) 1.21 .29
TOTAL FROM INVESTMENT OPERATIONS 1.49 .39
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.57) -
FROM NET REALIZED GAIN (1.71) -
TOTAL DISTRIBUTIONS (2.28) -
NET ASSET VALUE, END OF PERIOD $ 17.20 $ 17.99
TOTAL RETURN B 9.11% 2.22%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 1,078 $ 10
RATIO OF EXPENSES TO AVERAGE NET ASSETS .75% A .75% A
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS .73% A .75% A
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 3.60% A 3.52% A
PORTFOLIO TURNOVER 139% A 101%
AVERAGE COMMISSION RATE G $ .0416 $ .0408
</TABLE>
A ANNUALIZED
B TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE
THE TOTAL RETURNS SHOWN. TOTAL RETURNS FOR PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 6 OF NOTES TO
FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON
AVERAGE SHARES OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3, 1997 (COMMENCEMENT OF SALE OF SERVICE
CLASS SHARES) TO DECEMBER 31, 1997.
F FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES
(SEE NOTE 6 OF NOTES TO FINANCIAL STATEMENTS).
G FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS
REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR
SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY
FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES
EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION
RATE STRUCTURES MAY DIFFER.
NOTES TO FINANCIAL STATEMENTS
For the period ended June 30, 1998 (Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES.
Asset Manager Portfolio (the fund) is a fund of Variable Insurance
Products Fund II(the trust) and is authorized to issue an unlimited
number of shares. The trust is registered under the Investment Company
Act of 1940, as amended (the 1940 Act), as an open-end management
investment company organized as a Massachusetts business trust. Shares
of the fund may only be purchased by insurance companies for the
purpose of funding variable annuity or variable life insurance
contracts. The fund offers two classes of shares: the funds' original
class of shares (Initial Class shares) and Service Class shares. Both
classes have equal rights and voting privileges, except for matters
affecting a single class. Investment income, realized and unrealized
capital gains and losses, the common expenses of the fund, and certain
fund-level expense reductions, if any, are allocated on a pro rata
basis to each class based on the relative net assets of each class to
the total net assets of the fund. Each class of shares differs in its
respective distribution plan.
The financial statements have been prepared in conformity with
generally accepted accounting principles which require management to
make certain estimates and assumptions at the date of the financial
statements. The following summarizes the significant accounting
policies of the fund:
SECURITY VALUATION. Equity securities for which quotations are readily
available are valued at the last sale price, or if no sale price, at
the closing bid price. Debt securities for which quotations are
readily available are valued by a pricing service at their market
values as determined by their most recent bid prices in the principal
market (sales prices if the principal market is an exchange) in which
such securities are normally traded. Securities (including restricted
securities) for which market quotations are not readily available are
valued at their fair value as determined in good faith under
consistently applied procedures under the general supervision of the
Board of Trustees. Short-term securities with remaining maturities of
sixty days or less for which quotations are not readily available are
valued at amortized cost or original cost plus accrued interest, both
of which approximate current value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Purchases
and sales of securities, income receipts and expense payments are
translated into U.S. dollars at the prevailing exchange rate on the
respective dates of the transactions.
Net realized gains and losses on foreign currency transactions
represent net gains and losses from sales and maturities of foreign
currency contracts disposition of foreign currencies, the difference
between the amount of net investment income accrued and the U.S.
dollar amount actually received, and gains and losses between trade
date and settlement on purchases and sales of securities. The effects
of changes in foreign currency exchange rates on investments in
securities are included with the net realized and unrealized gain or
loss on investment securities.
INCOME TAXES. As a qualified regulated investment company under
Subchapter M of the Internal Revenue Code, the fund is not subject to
U.S. federal income taxes to the extent that it distributes
substantially all of its taxable income for its fiscal year. The
schedule of investments includes information regarding income taxes
under the caption "Income Tax Information."
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend date
, except certain dividends from foreign securities where the
ex-dividend date may have passed, are recorded as soon as the fund is
informed of the ex-dividend date. Non-cash dividends included in
dividend income, if any, are recorded at the fair market value of the
securities received. Interest income, which includes accretion of
original issue discount, is accrued as earned. Investment income is
recorded net of foreign taxes withheld where recovery of such taxes is
uncertain.
EXPENSES. Most expenses of trust can be directly attributed to a fund.
Expenses which cannot be directly attributed are apportioned among the
funds in the trust.
DEFERRED TRUSTEE COMPENSATION. Under a Deferred Compensation Plan (the
Plan) non-interested Trustees must defer receipt of a portion of, and
may elect to defer receipt of an additional portion of, their annual
compensation. Under the Plan, deferred amounts are treated as though
equivalent dollar amounts had been invested in shares of a
cross-section of Fidelity funds, including shares of the fund.
Deferred amounts remain in the fund until distributed in accordance
with the Plan.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the
ex-dividend date. Income dividends and capital gain distributions are
declared separately for each class.
Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences, which may result in
distribution reclassifications, are primarily due to differing
treatments for litigation proceeds, paydown gains/losses on certain
securities, foreign currency transactions, passive foreign investment
companies (PFIC), market discount partnerships and losses deferred due
to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
Undistributed net investment income and accumulated undistributed net
realized gain (loss) on investments and foreign currency transactions
may include temporary book and tax basis differences which will
reverse in a subsequent period. Any taxable income or gain remaining
at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of
trade date. Gains and losses on securities sold are determined on the
basis of identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency
contracts to facilitate transactions in foreign-denominated
securities. Losses may arise from changes in the value of the foreign
currency or if the counterparties do not perform under the contracts'
2. OPERATING POLICIES - CONTINUED
FOREIGN CURRENCY CONTRACTS - CONTINUED
terms. The U.S. dollar value of foreign currency contracts is
determined using contractual currency exchange rates established at
the time of each trade.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission (the SEC), the fund, along with
other affiliated entities of Fidelity Management & Research Company
(FMR), may transfer uninvested cash balances into one or more joint
trading accounts. These balances are invested in one or more
repurchase agreements for U.S. Treasury or Federal Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are
marked-to-market daily and maintained at a value at least equal to the
principal amount of the repurchase agreement (including accrued
interest). FMR, the fund's investment adviser, is responsible for
determining that the value of the underlying securities remains in
accordance with the market value requirements stated above.
TAXABLE CENTRAL CASH FUND. Pursuant to an Exemptive Order issued by
the SEC, the fund may invest in the Taxable Central Cash Fund (the
Cash Fund) managed by Fidelity Investments Money Management, Inc.,
(formerly FMR Texas, Inc.) an affiliate of FMR. The Cash Fund is an
open-end money market fund available only to investment companies and
other accounts managed by FMR and its affiliates. The Cash Fund seeks
preservation of capital, liquidity, and current income by investing in
U.S. Treasury securities and repurchase agreements for these
securities. Income distributions from the Cash Fund are declared daily
and paid monthly from net interest income. Income distributions earned
by the fund are recorded as interest income in the accompanying
financial statements.
DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell
securities on a delayed delivery basis. Payment and delivery may take
place a month or more after the date of the transaction. The price of
the underlying securities and the date when the securities will be
delivered and paid for are fixed at the time the transaction is
negotiated. The market values of the securities purchased or sold on
a delayed delivery basis are identified as such in the fund's schedule
of investments. The fund may receive compensation for interest
forgone in the purchase of a delayed delivery security. With respect
to purchase commitments, the fund identifies securities as segregated
in its custodial records with a value at least equal to the amount of
the commitment. Losses may arise due to changes in the market value of
the underlying securities or if the counterparty does not perform
under the contract.
RESTRICTED SECURITIES. The fund is permitted to invest in securities
that are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from
registration or to the public if the securities are registered.
Disposal of these securities may involve time-consuming negotiations
and expense, and prompt sale at an acceptable price may be difficult.
At the end of the period, restricted securities (excluding 144A
issues) amounted to $4,855,599 or .10% of net assets.
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities), is included under the caption "Other
Information" at the end of the fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a
monthly fee that is calculated on the basis of a group fee rate plus a
fixed individual fund fee rate applied to the average net assets of
the fund. The group fee rate is the weighted average of a series of
rates and is based on the monthly average net assets of all the mutual
funds advised by FMR. The rates ranged from .2500% to .5200% for the
period. The annual individual fund fee rate is .25%. In the event that
these rates were lower than the contractual rates in effect during the
period, FMR voluntarily implemented the above rates, as they resulted
in the same or a lower management fee. For the period, the management
fee was equivalent to an annualized rate of .55% of average net
assets.
DISTRIBUTION AND SERVICE PLAN. In accordance with Rule 12b-1 of the
1940 Act, the Trustees have adopted separate distribution plans with
respect to each class of shares (collectively referred to as "the
Plans"). Under the Service Class Plan, the class pays Fidelity
Distributors Corporation (FDC), an affiliate of FMR, a distribution
and service fee (12b-1 fee). This fee is based on an annual rate of
.10% of Service Class average net assets. Initial Class shares are not
subject to a 12b-1 fee.
For the period, Service Class paid FDC $109, all of which was
reallowed to insurance companies, for the distribution of shares and
providing shareholder support services.
Under the Plans, FMR may use its resources to pay administrative and
promotional expenses related to the sale of each class of shares.
Subject to the approval of the Board of Trustees, the Plans also
authorize payments to third parties that assist in the sale of each
class of shares or render shareholder support services. For the
period, payments made to third parties under the Plans amounted to
$1,063,886 for the Initial Class .
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations
Company, Inc. (FIIOC), an affiliate of FMR, is the fund's transfer,
dividend disbursing and shareholder servicing agent. FIIOC receives
account fees and asset-based fees that vary according to account size
and type of account. FIIOC pays a portion of the expenses related to
the typesetting, printing and mailing of all shareholder reports,
except proxy statements. For the period, the transfer agent fees were
equivalent to an annualized rate of .07% of average net assets.
ACCOUNTING FEES. Fidelity Service Company, Inc. (FSC), an affiliate of
FMR, maintains the fund's accounting records. The fee is based on the
level of average net assets for the month plus out-of-pocket expenses.
4. FEES AND OTHER TRANSACTIONS WITH
AFFILIATES - CONTINUED
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments
5. BANK BORROWINGS.
The fund is permitted to have bank borrowings for temporary or
emergency purposes to fund shareholder redemptions. The fund has
established borrowing arrangements with certain banks. Under the most
restrictive arrangement, each fund must pledge to the bank securities
having a market value in excess of 220% of the total bank borrowings.
The interest rate on the borrowings is the bank's base rate, as
revised from time to time. Information regarding the fund's
participation in the program is included under the caption "Other
Information" at the end of the fund's schedule of investments.
6. EXPENSE REDUCTIONS.
FMR has directed certain portfolio trades to brokers who paid a
portion of the fund's expenses.
In addition, the fund has entered into an arrangement with its
custodian whereby credits realized as a result of uninvested cash
balances were used to reduce a portion of the fund's expenses.
For the period, the reductions under these arrangements are shown
under the caption "Other Information" on the fund's Statement of
Operations.
7. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were the record owners
of approximately 19% of the outstanding shares of the fund. In
addition, three unaffiliated insurance companies were record owners
of 46% of the total outstanding shares of the fund.
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Management & Research (U.K.) Inc.,
London, England
Fidelity Management & Research (Far East) Inc.,
Tokyo, Japan
OFFICERS
Edward C. Johnson 3d, PRESIDENT
Robert C. Pozen, SENIOR VICE PRESIDENT
Robert A. Lawrence, VICE PRESIDENT
Richard C. Habermann, VICE PRESIDENT
Charles S. Morrison II, VICE PRESIDENT
John Todd, VICE PRESIDENT
Steven Snider, VICE PRESIDENT
Eric D. Roiter, SECRETARY
Richard A. Silver, TREASURER
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
Ralph F. Cox *
Phyllis Burke Davis *
Robert M. Gates *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Marvin L. Mann *
William O. McCoy *
Gerald C. McDonough *
Thomas R. Williams *
* INDEPENDENT TRUSTEES
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER SERVICING AGENT
Fidelity Investments Institutional Operations Co., Inc.
Boston, MA
CUSTODIAN
The Chase Manhattan Bank
New York, NY
(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND II: CONTRAFUND PORTFOLIO
SEMIANNUAL REPORT
JUNE 30, 1998
CONTENTS
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MARKET ENVIRONMENT 3 A REVIEW OF WHAT HAPPENED IN WORLD MARKETS DURING THE
PAST SIX MONTHS.
PERFORMANCE AND INVESTMENT SUMMARY 4 HOW THE FUND HAS DONE OVER TIME, AND AN OVERVIEW OF THE
FUND'S INVESTMENTS AT THE END OF THE PERIOD.
FUND TALK 5 THE MANAGER'S REVIEW OF FUND PERFORMANCE, STRATEGY
AND OUTLOOK.
INVESTMENTS 6 A COMPLETE LIST OF THE FUND'S INVESTMENTS WITH THEIR
MARKET VALUES.
FINANCIAL STATEMENTS 12 STATEMENTS OF ASSETS AND LIABILITIES, OPERATIONS, AND
CHANGES IN NET ASSETS, AS WELL AS FINANCIAL HIGHLIGHTS.
NOTES 15 NOTES TO THE FINANCIAL STATEMENTS.
</TABLE>
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE
SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND.
THIS REPORT IS NOT AUTHORIZED FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT
INSURED BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND
ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
MARKET ENVIRONMENT
With the exception of Asia and a number of emerging market economies,
most stock and bond markets around the world performed well during the
past six months. Despite an environment of ongoing financial and
political difficulties in Asian and emerging markets, the largest
blue-chip companies of Europe and the U.S. continued to post strong
performance. Throughout the period, investors sought the relative
stability and liquidity of more defensive large-cap stocks and highly
rated bond investments of developed countries, hoping these
investments would maintain steady earnings and be easier to sell in a
possible economic slowdown.
U.S. STOCK MARKETS
The U.S. stock market continued to perform well during the first six
months of 1998. The strong showing by the Standard & Poor's 500 Index,
however, was produced by a narrow contingent of large companies. In
fact, most of the Standard & Poor's 17.71% return for the six-month
period that ended June 30, 1998, came from these large-capitalization
stocks. The "narrow" market - one where a small number of stocks
perform well, and others are flat or produce losses - was further
demonstrated by the fact that 60% of all the companies on the New York
Stock Exchange declined during this period. During the first quarter
of 1998, a stable U.S. economy and a belief that the worst in Asia
might be over helped the stock market post strong gains. The S&P 500
index turned in a solid return of 13.95% through the end of March. The
S&P 500 and other market indexes continued to rally through May,
before falling sharply in mid-June amid renewed fears that Asia's
economic crisis would inhibit the growth in earnings of American
companies. In subsequent trading days, however, investors continued to
favor large-cap stocks, boosting the returns of the S&P 500 index
higher. During the second quarter of 1998, the S&P 500 index returned
3.30%, compared with a decline of 2.14% for the Standard & Poor's
MidCap 400 Index. Investors in small-cap stocks experienced a weak
second quarter as the Russell 2000 - a measure of small company stock
performance - lost 4.66%.
The pattern of a narrow market also was displayed in certain industry
groups. Pharmaceutical stocks performed well, helped by healthy
pipelines of new products, the ability to bring products to market
more rapidly and relaxed regulations that permitted more aggressive
advertising. Stable economic growth, coupled with nonexistent
inflation, buoyed the financial sector. Banks and brokerage houses
sustained impressive earnings growth; other financial services firms
benefited from merger and acquisition activity, exemplified by the
recently announced "megamerger" of Travelers and Citicorp.
While many technology stocks turned in very strong results, the sector
also experienced some mixed results over the past six months, due
primarily to the negative impact of the Asian crisis and the effect of
a strong dollar on foreign sales. Energy stocks also experienced weak
results, with the price of crude oil dipping below $12 dollars a
barrel near the end of June.
FOREIGN STOCK MARKETS
Overseas, blue-chip investments also performed well. While the Morgan
Stanley Capital International (MSCI) EAFE Index, which measures the
performance of Europe, Australasia, and the Far East, posted a solid
return of 16.05% for the six-month period, investors in developed
markets fared much better than those investing in troubled emerging
markets. The performance of the MSCI Pacific Index, however, lost
5.87% during the same period, emphasizing the negative impact Japan
and Hong Kong had on the MSCI EAFE index. Most economies in Europe
continued to thrive amidst an environment of relatively benign
inflation and reduced interest rates as many countries prepared for
the advent of the European Monetary Union in January 1999. Many
European companies embraced U.S.-style efficiencies through
restructuring and robust merger and acquisition activity. Over the
past six months, the MSCI Europe Index returned an impressive 26.66%.
Among the strongest European economies were Portugal, Spain, Italy and
the United Kingdom.
While the Japanese market showed signs of strength toward the end of
the period, Japanese stocks continued to suffer from eroding
confidence in the economy, bankruptcies and a depreciating currency.
The TOPIX Index - a measure of the Japanese market - was down 1.46%
over the six-month period. As economic and currency turmoil continued
in Asia, emerging markets also suffered during the period. The MSCI
Far East ex-Japan Free Index dropped 25.79% and the MSCI Emerging
Markets Free Index - a market capitalization weighted index of over
850 stocks traded in 22 world markets - was down 18.87% for the first
six months of 1998.
U.S. BOND MARKETS
Bond prices continued to move higher thanks to low interest rates and
a continued lack of inflationary pressure. The Lehman Brothers
Aggregate Bond Index - a broad gauge of the U.S. taxable bond market -
returned 3.93% during this six-month period. Against a backdrop of
continued economic woes in Asia and fears that U.S. corporate profits
would slow, investors from around the globe moved assets from stocks
and riskier bonds into highly rated corporate bonds and U.S.
Treasuries. As a result, bond yields, which move in the opposite
direction of bond prices, fell to their lowest levels in decades. The
yield on the benchmark 30-year bond fell to 5.62% from 5.93% during
the period. Mortgage-backed bonds experienced some weakness toward the
end of the period amid record mortgage refinancings.
FOREIGN BOND MARKETS
While U.S. based bonds topped most foreign bonds on the continued
strength of the U.S. dollar and benign inflation, the Salomon Brothers
World Government Bond Index - a measure of government bond market
performance in developed nations - returned 2.79% during the period.
Similar to foreign equities, however, it paid to be in the safer bond
sectors of developed countries and highly rated bonds. In comparison
to the World Government Bond Index, the J.P. Morgan Emerging Markets
Bond Index lost 0.25% during the first six months of 1998. Continued
turbulence in Japan as it struggled to initiate economic reforms
trickled into emerging markets and resulted in mixed results during
the period.
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
JUNE 30, 1998 YEAR FUND
VIP II: CONTRAFUND - "INITIAL CLASS" 29.82% 29.34%
S&P 500 (REGISTERED TRADEMARK) 30.16% 32.30%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's return to the performance of the Standard &
Poor's 500 Index - a widely recognized, unmanaged index of common
stocks. This benchmark reflects the reinvestment of dividends and
capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of the fund figures are from
commencement of operations January 3, 1995.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURN WOULD BE LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
VIP II CONTRAFUND S&P 500
00158 SP001
1995/01/03 10000.00 10000.00
1995/01/31 9870.00 10261.28
1995/02/28 10370.00 10661.16
1995/03/31 10890.00 10975.77
1995/04/30 11480.00 11299.00
1995/05/31 11730.00 11750.63
1995/06/30 12490.00 12023.59
1995/07/31 13470.00 12422.30
1995/08/31 13640.00 12453.48
1995/09/30 13940.00 12979.01
1995/10/31 13650.00 12932.68
1995/11/30 13900.00 13500.42
1995/12/31 13971.98 13760.44
1996/01/31 14073.30 14228.85
1996/02/29 14124.25 14360.75
1996/03/31 14584.49 14499.04
1996/04/30 15065.18 14712.76
1996/05/31 15239.05 15092.20
1996/06/30 15116.32 15149.70
1996/07/31 14410.62 14480.39
1996/08/31 14962.90 14785.78
1996/09/30 15597.01 15617.92
1996/10/31 16077.71 16048.66
1996/11/30 17039.10 17261.78
1996/12/31 16936.82 16919.83
1997/01/31 17591.38 17976.98
1997/02/28 17103.08 18117.92
1997/03/31 16660.22 17373.45
1997/04/30 17060.91 18410.65
1997/05/31 18115.35 19531.49
1997/06/30 18906.18 20406.50
1997/07/31 20530.03 22030.24
1997/08/31 19950.08 20796.11
1997/09/30 21299.77 21935.11
1997/10/31 20656.56 21202.48
1997/11/30 20646.02 22183.94
1997/12/31 21025.62 22564.84
1998/01/31 21004.53 22814.41
1998/02/28 22531.76 24459.78
1998/03/31 23627.59 25712.37
1998/04/30 23851.23 25971.03
1998/05/31 23292.13 25524.59
1998/06/30 24544.52 26561.40
IMATRL PRASUN SHR__CHT 19980630 19980710 104424 R00000000000045
Let's say hypothetically that $10,000 was invested in Variable
Insurance Products Fund II: Contrafund Portfolio on January 3, 1995,
when the fund started. As the chart shows, by June 30, 1998, the value
of the investment would have grown to $24,545 - a 145.45% increase on
the initial investment. For comparison, look at how the Standard &
Poor's 500 Index did over the same period. With dividends and capital
gains, if any, reinvested, the same $10,000 investment would have
grown to $26,561 - a 165.61% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
WORLDCOM, INC. 2.8
TIME WARNER, INC. 2.7
TYCO INTERNATIONAL LTD. 2.4
MICROSOFT CORP. 2.0
LUCENT TECHNOLOGIES, INC. 2.0
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
TECHNOLOGY 18.1
FINANCE 11.6
MEDIA & LEISURE 10.9
RETAIL & WHOLESALE 10.0
UTILITIES 9.3
ASSET ALLOCATION AS OF JUNE 30, 1998*
ROW: 1, COL: 1, VALUE: 9.1
ROW: 1, COL: 2, VALUE: 4.8
ROW: 1, COL: 3, VALUE: 86.09999999999999
STOCKS 86.1%
BONDS 4.8%
SHORT-TERM INVESTMENTS 9.1%
FOREIGN INVESTMENTS 6.3%
*
(% OF FUND'S INVESTMENTS)
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with
Will Danoff,
Portfolio Manager of
Contrafund Portfolio
Q. HOW DID THE FUND PERFORM COMPARED TO ITS BENCHMARK, WILL?
A. For the six months that ended June 30, 1998, the fund slightly
lagged the 17.71% return of the Standard & Poor's 500 Index. Looking
at performance from a 12-month perspective, the fund also trailed the
30.16% return of the S&P 500 by a small margin.
Q. CAN YOU IDENTIFY SOME OF THE FACTORS THAT HELPED THE FUND'S
PERFORMANCE DURING THE PERIOD?
A. The fund was positioned relatively well to try to capitalize on the
strong U.S. economy, while avoiding those industries that I felt were
vulnerable to the severe economic weakness in Southeast Asia. For
instance, several of the fund's cable TV stocks performed well,
including Tele-Communications, Inc. and Comcast. Cable TV stocks were
one example of my contrarian investment approach. When I bought these
stocks over a year ago, the cable TV industry was out of favor among
investors. A number of factors helped turn the industry around, and as
prospects brightened I continued to increase the fund's exposure to
cable stocks during the period. Another example of trying to minimize
the fund's exposure to Southeast Asia was the fund's weighting in the
retail sector, which jumped from around 7% six months ago to around
10% at the end of June. Retail stocks generally benefited from the
healthy domestic economy and aided fund performance. Specifically, the
fund's positions in Home Depot and the Gap performed well. Both of
these companies are leaders in their respective retailing segments and
have been able to add to the number of their stores by more than 20%
annually. On the flip side of my strategy, the fund had less exposure
to the semiconductor sector than the S&P index. This below-market
weighting turned out positively as this sector was one of the hardest
hit by the problems emanating from Southeast Asia.
Q. WHAT TYPES OF CHANGES DID YOU MAKE TO THE PORTFOLIO DURING THE
PERIOD?
A. There were a couple. First, I reduced the overall number of
positions in the fund from around 600 at the beginning of the period
to approximately 350. The fund typically receives most of its
performance boost or drag from its top holdings, and this streamlining
of positions enabled me to concentrate on my very best ideas. I felt
this change would help performance in the long run. Another change I
made was to reduce the fund's energy-related exposure considerably,
from 13% at the beginning of 1998 to under 1% at the end of the
period. Since Asia accounts for close to 20% of worldwide oil demand,
oil prices declined dramatically as demand from Asia lessened. As a
result, the energy sector suffered due to the weak pricing
environment.
Q. THE FUND'S TECHNOLOGY STAKE WAS INCREASED FROM AROUND 11% TO JUST
OVER 18% DURING THE PERIOD. WHY DID TECHNOLOGY STOCKS APPEAL TO YOU?
A. The Internet and telecommunications capital equipment continued to
be two exciting technology sub-sectors that were able to sustain
earnings growth momentum. The Internet is still in its infancy period,
but it has already changed the way people communicate, work, shop and
gather information. The fund's positions in Internet companies such as
America Online and Yahoo! were positive contributors.
Telecommunications capital equipment companies provide the electronic
infrastructure on which the Internet operates, and I felt many were
well-positioned to benefit from an increase in global data traffic .
The fund's investments in Lucent Technologies, Northern Telecom,
Alcatel and Cisco Systems performed well.
Q. WHICH INVESTMENTS FAILED TO MEET YOUR EXPECTATIONS OVER THE PAST
SIX MONTHS?
A. Most cyclical groups - those particularly vulnerable to economic
swings - performed worse than the market during the period. For
example, Sealed Air, a specialty chemicals company, proved
disappointing, as did oil refinery Tosco and Remec, a supplier to the
aerospace and defense industry. A lack of exposure to pharmaceutical
stocks, which I felt were quite expensive, also hurt. Despite high
valuations, drug companies were bolstered by strong earnings and a
record number of new product approvals. Toward the end of the period,
I had begun to increase the fund's exposure to these stocks.
Q. WHAT'S YOUR OUTLOOK FOR THE COMING MONTHS?
A. I've been surprised by the market's strength this year. Corporate
earnings growth has slowed, but stocks have continued to appreciate,
propelled by higher price-to-earnings ratios and lower interest rates.
Going forward, I'll continue to try to emphasize those companies with
exceptional growth opportunities that justify the high valuations in
today's market.
FUND FACTS
GOAL: TO INCREASE THE VALUE OF THE FUND'S SHARES
OVER THE LONG TERM BY INVESTING IN COMPANIES
WHERE VALUE IS NOT FULLY RECOGNIZED BY THE PUBLIC
START DATE: JANUARY 3, 1995
SIZE: AS OF JUNE 30, 1998, MORE THAN
$5.1 BILLION
MANAGER: WILL DANOFF, SINCE INCEPTION; JOINED
FIDELITY IN 1986
(CHECKMARK)
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Management & Research (U.K.) Inc.,
London, England
Fidelity Management & Research (Far East) Inc.,
Tokyo, Japan
OFFICERS
Edward C. Johnson 3d, PRESIDENT
Robert C. Pozen, SENIOR VICE PRESIDENT
Abigail Johnson, VICE PRESIDENT
William Danoff, VICE PRESIDENT
Eric D. Roiter, SECRETARY
Richard A. Silver, TREASURER
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
Ralph F. Cox *
Phyllis Burke Davis *
Robert M. Gates *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Marvin L. Mann *
William O. McCoy *
Gerald C. McDonough *
Thomas R. Williams *
* INDEPENDENT TRUSTEES
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER SERVICING AGENT
Fidelity Investments Institutional Operations Co.
Boston, MA
CUSTODIAN
Brown Brothers Harriman & Co.
Boston, MA
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
INVESTMENTS JUNE 30, 1998 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 85.4%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 0.1%
AEROSPACE & DEFENSE - 0.1%
Orbital Sciences Corp. (a) 105,200 $ 3,931,850
DEFENSE ELECTRONICS - 0.0%
Remec, Inc. (a) 282,000 3,207,750
TOTAL AEROSPACE & DEFENSE 7,139,600
BASIC INDUSTRIES - 1.5%
CHEMICALS & PLASTICS - 1.5%
Avery Dennison Corp. 104,500 5,616,875
Crompton & Knowles Corp. 271,992 6,850,799
Cytec Industries, Inc. (a) 149,100 6,597,675
du Pont (E.I.) de Nemours & Co. 59,000 4,402,875
MacDermid, Inc. 12,200 344,650
Monsanto Co. 577,800 32,284,575
Sealed Air Corp. (a) 562,225 20,661,769
76,759,218
PACKAGING & CONTAINERS - 0.0%
Silgan Holdings, Inc. (a) 60,900 1,705,200
TOTAL BASIC INDUSTRIES 78,464,418
CONSTRUCTION & REAL ESTATE - 0.6%
BUILDING MATERIALS - 0.2%
Masco Corp. 141,200 8,542,600
CONSTRUCTION - 0.0%
Ashtead Group PLC 24,700 96,802
ENGINEERING - 0.0%
Forrester Research, Inc. (a) 25,600 1,017,600
REAL ESTATE INVESTMENT TRUSTS - 0.4%
Crescent Real Estate Equities, Inc. 63,300 2,128,463
Equity Office Properties Trust 291,300 8,265,638
Glenborough Realty Trust, Inc. 213,600 5,633,700
Starwood Hotels & Resorts Trust 170,688 8,246,364
24,274,165
TOTAL CONSTRUCTION & REAL ESTATE 33,931,167
DURABLES - 1.7%
AUTOS, TIRES, & ACCESSORIES - 1.3%
AutoZone, Inc. (a) 96,700 3,088,356
Breed Technologies, Inc. 219,900 3,367,219
Danaher Corp. 523,900 19,220,581
Kroll-O'Gara Company (a) 787,400 16,830,675
SPX Corp. (a) 370,100 23,825,188
66,332,019
CONSUMER DURABLES - 0.0%
Blyth Industries, Inc. 69,000 2,294,250
CONSUMER ELECTRONICS - 0.1%
General Motors Corp. Class H 64,900 3,058,413
Gemstar International Group Ltd. (a) 117,400 4,395,163
7,453,576
TEXTILES & APPAREL - 0.3%
Jones Apparel Group, Inc. 73,000 2,669,063
Kellwood Co. 2,700 96,525
NIKE, Inc. Class B 67,400 3,281,538
Warnaco Group, Inc. Class A 169,100 7,176,181
13,223,307
TOTAL DURABLES 89,303,152
SHARES VALUE (NOTE 1)
ENERGY - 0.8%
ENERGY SERVICES - 0.2%
ENSCO International, Inc. 102,474 $ 1,780,486
Smith International, Inc. (a) 162,200 5,646,588
7,427,074
OIL & GAS - 0.6%
Anadarko Petroleum Corp. 51,500 3,460,156
British Petroleum PLC ADR 65,493 5,779,757
Burlington Resources, Inc. 120,448 5,186,792
Royal Dutch Petroleum Co. 76,200 4,176,713
Tosco Corp. 513,700 15,089,938
33,693,356
TOTAL ENERGY 41,120,430
FINANCE - 11.6%
BANKS - 2.9%
BHI Corp. (non-vtg.) (a) 68,500 2,705,750
Banc One Corp. 540,790 30,182,842
Bank of New York Co., Inc. 218,500 13,260,219
Comerica, Inc. 96,500 6,393,125
Compass Bancshares, Inc. 248,100 11,195,513
Credito Italiano Ord. 1,132,600 5,872,103
Fifth Third Bancorp 43,400 2,734,200
M&T Bank Corp. 17,490 9,689,460
North Fork Bancorp., Inc. 446,493 10,911,140
Providian Financial Corp. 68,700 5,397,244
U.S. Bancorp 963,800 41,443,400
Wells Fargo & Co. 30,100 11,106,900
150,891,896
CREDIT & OTHER FINANCE - 2.9%
American Express Co. 550,700 62,779,800
Associates First Capital Corp. Class A 739,502 56,849,216
Capital Trust Class A (a) 417,000 4,013,625
Greenpoint Financial Corp. 343,500 12,924,188
Household International, Inc. 357,300 17,775,675
154,342,504
FEDERAL SPONSORED CREDIT - 1.6%
Federal Home Loan Mortgage
Corporation 775,800 36,511,088
Fannie Mae 803,900 48,836,925
85,348,013
INSURANCE - 2.8%
AFLAC, Inc. 277,000 8,396,563
ACE Ltd. 254,900 9,941,100
Allmerica Financial Corp. 85,492 5,556,980
Allstate Corp. 341,300 31,250,281
AMBAC, Inc. 75,000 4,387,500
American International Group, Inc. 99,350 14,505,100
Aon Corp. 116,350 8,173,588
Berkshire Hathaway, Inc. Class A (a) 20 1,566,100
General Re Corp. 54,900 13,917,150
Hartford Financial Services Group, Inc. 12,000 1,372,500
Life RE Corp. 12,700 1,041,400
Mutual Risk Management Ltd. 95,200 3,468,850
Progressive Corp. 74,700 10,532,700
SunAmerica, Inc. 289,850 16,648,259
Torchmark Corp. 109,600 5,014,200
UNUM Corp. 199,000 11,044,500
Zenith National Insurance Corp. 127,700 3,599,544
150,416,315
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
SAVINGS & LOANS - 0.8%
Dime Bancorp., Inc. 307,800 $ 9,214,763
Golden State Bancorp 40,200 1,195,950
Washington Mutual, Inc. 718,225 31,197,898
41,608,611
SECURITIES INDUSTRY - 0.6%
Travelers Group, Inc. (The) 537,699 32,598,002
TOTAL FINANCE 615,205,341
HEALTH - 6.7%
DRUGS & PHARMACEUTICALS - 4.1%
American Home Products Corp. 476,900 24,679,575
Amgen, Inc. 75,800 4,955,425
Biogen, Inc. 81,700 4,003,300
Bristol-Myers Squibb Co. 290,200 33,354,863
Elan Corp. PLC ADR (a) 162,550 10,453,997
Forest Laboratories, Inc. (a) 186,200 6,656,650
Merck & Co., Inc. 165,900 22,189,125
Pfizer, Inc. 252,000 27,389,250
Quintiles Transnational Corp. (a) 47,900 2,356,081
Schering-Plough Corp. 295,400 27,066,025
Warner-Lambert Co. 765,500 53,106,563
216,210,854
MEDICAL EQUIPMENT & SUPPLIES - 1.4%
Allegiance Corp. 122,740 6,290,425
Becton, Dickinson & Co. 107,800 8,367,975
Boston Scientific Corp. 12,600 902,475
Cardinal Health, Inc. 214,200 20,081,250
Guidant Corp. 153,500 10,946,469
Omnicare, Inc. 153,400 5,848,375
Sofamor/Danek Group, Inc. (a) 114,300 9,894,094
Steris Corp. (a) 38,900 2,473,797
Sybron International Corp. (a) 195,600 4,938,900
U.S. Surgical Corp. 82,400 3,759,500
73,503,260
MEDICAL FACILITIES MANAGEMENT - 1.2%
Columbia/HCA Healthcare Corp. 410,500 11,955,813
HEALTHSOUTH Corp. (a) 292,100 7,795,419
Health Management Associates, Inc
Class A (a) 804,950 26,915,516
Oxford Health Plans, Inc. (a) 126,200 1,932,438
Trigon Healthcare, Inc. (a) 62,100 2,247,244
United HealthCare Corp. 232,200 14,744,700
65,591,130
TOTAL HEALTH 355,305,244
INDUSTRIAL MACHINERY & EQUIPMENT - 6.3%
ELECTRICAL EQUIPMENT - 2.4%
Alcatel Alsthom Compagnie Generale
d'Electricite SA 199,400 40,488,478
American Power Conversion Corp. (a) 241,500 7,245,000
General Instrument Corp. (a) 412,200 11,206,688
L-3 Communications Holdings, Inc. 64,000 2,092,000
Loral Space & Communications Ltd. (a) 1,621,920 45,819,240
Philips Electronics NV 119,600 10,166,000
Rayovac Corp. 381,500 8,655,281
Roper Industries, Inc. 139,600 3,647,050
129,319,737
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - 2.8%
Illinois Tool Works, Inc. 37,500 $ 2,500,781
Kaydon Corp. 163,500 5,773,594
Mannesmann AG Ord. 113,500 11,481,831
New Holland NV 72,100 1,414,963
Stanley Works 14,200 590,188
Tyco International Ltd. 2,003,178 126,200,214
147,961,571
POLLUTION CONTROL - 1.1%
Republic Services, Inc. Class A 460,300 11,047,200
USA Waste Services, Inc. (a) 537,945 26,561,034
Waste Management, Inc. 502,300 17,580,500
55,188,734
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 332,470,042
MEDIA & LEISURE - 10.9%
BROADCASTING - 7.0%
Citadel Communications Corp. 50,100 801,600
CBS Corp. 2,052,415 65,164,176
Comcast Corp. Class A 284,500 11,308,875
Comcast Corp. Class A special 356,700 14,479,791
Forsoft Ltd. (a)(d) 1,121,800 17,247,675
Heftel Broadcasting Corp. Class A (a) 280,000 12,530,000
Jacor Communications, Inc. Class A (a) 66,800 3,941,200
MediaOne Group, Inc. 390,400 17,153,200
Metromedia Fiber Network, Inc. Class A 2,200 102,575
NTL, Inc. (a) 127,300 6,810,550
Scandinavian Broadcasting Corp. (a) 160,500 4,845,094
Scripps E.W. Co. Class A 42,900 2,351,456
TCA Cable TV, Inc. 172,200 10,332,000
Tele-Communications, Inc. (a):
(TCI Group), Series A 1,107,313 42,562,343
(TCI Ventures Group), Series A, 616,874 12,376,035
Tele-Communications, Inc. (Liberty Media
Group), Series A 37,400 1,451,588
Time Warner, Inc. 1,696,400 144,936,175
USA Networks, Inc. (a) 115,674 2,906,309
371,300,642
ENTERTAINMENT - 1.1%
Disney (Walt) Co. 153,200 16,095,575
Premier Parks, Inc. (a) 248,400 16,549,650
Viacom, Inc. (a):
Class A 165,000 9,652,500
Class B (non-vtg.) 279,700 16,292,525
58,590,250
LEISURE DURABLES & TOYS - 0.1%
Mattel, Inc. 47,600 2,014,075
Harley-Davidson, Inc. 65,300 2,530,375
4,544,450
LODGING & GAMING - 0.1%
ResortQuest International, Inc. 192,100 3,133,631
PUBLISHING - 0.9%
ACNielsen Corp. 3,100 78,275
Cognizant Corp. 645,800 40,685,400
Dow Jones & Co., Inc. 11,400 635,550
Meredith Corp. 5,000 234,688
Thomson Corp. 12,200 354,924
Ziff-Davis, Inc. 208,600 2,894,325
44,883,162
RESTAURANTS - 1.7%
Darden Restaurants, Inc. 438,600 6,962,775
McDonald's Corp. 727,600 50,204,400
Papa John's International, Inc. (a) 177,700 7,008,044
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - CONTINUED
RESTAURANTS - CONTINUED
Pizzaexpress PLC 208,400 $ 2,995,870
ShowBiz Pizza Time, Inc. (a) 79,400 3,200,813
Starbucks Corp. (a) 347,800 18,585,563
Wendy's International, Inc. 157,200 3,694,200
92,651,665
TOTAL MEDIA & LEISURE 575,103,800
NONDURABLES - 5.2%
BEVERAGES - 1.6%
Cadbury-Schweppes PLC Ord. 725,697 11,225,021
Coca-Cola Co. (The) 629,000 53,779,500
Coca-Cola Enterprises, Inc. 143,500 5,632,375
PepsiCo, Inc. 333,500 13,736,031
84,372,927
FOODS - 1.4%
American Italian Pasta Co. Series A 197,000 7,338,250
Campbell Soup Co. 123,500 6,560,938
Earthgrains Co. 60,400 3,374,850
Flowers Industries, Inc. 228,300 4,665,881
Heinz (H.J.) Co. 11,600 651,050
Hershey Foods Corp. 124,800 8,611,200
Keebler Foods Co. (a) 348,500 9,583,750
Nestle SA (Reg.) 6,935 14,807,440
Quaker Oats Co. 131,400 7,218,788
Wrigley (Wm.) Jr. Co. 104,300 10,221,400
73,033,547
HOUSEHOLD PRODUCTS - 2.2%
Colgate-Palmolive Co. 29,000 2,552,000
Dial Corp. 252,000 6,536,250
Gillette Co. 1,264,400 71,675,675
Estee Lauder Companies, Inc. 145,500 10,139,531
Unilever NV Ord. 246,840 19,546,168
Wella AG 4,616 4,570,044
115,019,668
TOTAL NONDURABLES 272,426,142
PRECIOUS METALS - 0.2%
Euro-Nevada Mining Ltd. 299,600 4,092,645
Franco-Nevada Mining Corp. 305,700 6,071,303
10,163,948
RETAIL & WHOLESALE - 9.9%
APPAREL STORES - 1.7%
Charming Shoppes, Inc. (a) 1,479,600 7,028,100
Gap, Inc. 665,050 40,983,706
Goody's Family Clothing (a) 158,200 8,681,225
Limited, Inc. (The) 360,200 11,931,625
TJX Companies, Inc. 901,800 21,755,925
90,380,581
DRUG STORES - 1.8%
CVS Corp. 2,193,648 85,415,169
Rite Aid Corp. 231,300 8,688,206
Walgreen Co. 64,100 2,648,131
96,751,506
GENERAL MERCHANDISE STORES - 1.5%
Costco Companies, Inc. (a) 290,600 18,325,963
Dillards, Inc. Class A 90,000 3,729,375
Federated Department Stores, Inc. 177,600 9,557,100
Kohls Corp. (a) 125,400 6,505,125
SHARES VALUE (NOTE 1)
Proffitts, Inc. (a) 148,600 $ 5,999,725
Stein Mart, Inc. (a) 339,700 4,585,950
Wal-Mart Stores, Inc. 461,200 28,017,900
76,721,138
GROCERY STORES - 1.9%
Dominick's Supermarkets, Inc. (a) 209,000 9,313,563
Meyer (Fred), Inc. (a) 983,130 41,783,025
Richfood Holdings, Inc. Class A 221,500 4,582,281
Safeway, Inc. (a) 1,060,900 43,165,369
Whole Foods Market, Inc. (a) 46,000 2,783,000
101,627,238
RETAIL & WHOLESALE, MISCELLANEOUS - 3.0%
AgriBioTech, Inc. 13,700 379,319
Best Buy Co., Inc. (a) 43,500 1,571,438
Boots Co. PLC Class L (The) 241,060 3,992,017
Brylane, Inc. (a) 29,600 1,361,600
CDnow, Inc. 8,600 173,075
Circuit City Stores, Inc. - Circuit City Group 335,600 15,731,250
Home Depot, Inc. 511,600 42,494,775
Lowe's Companies, Inc. 138,200 5,605,738
N2K, Inc. 159,300 3,126,263
Office Depot, Inc. (a) 303,900 9,591,844
PETsMART, Inc. (a) 162,400 1,624,000
School Specialty, Inc. 71,130 1,164,754
Staples, Inc. (a) 880,300 25,473,681
Tandy Corp. 328,800 17,446,950
U.S.A. Floral Products, Inc. 313,400 4,936,050
U.S. Office Products Co. 200,694 3,913,533
Viking Office Products, Inc. (a) 425,200 13,340,650
Williams-Sonoma, Inc. (a) 121,900 3,877,944
155,804,881
TOTAL RETAIL & WHOLESALE 521,285,344
SERVICES - 2.1%
ADVERTISING - 0.7%
ADVO, Inc. (a) 126,300 3,560,081
CMG Information Services, Inc. (a) 68,900 4,874,675
Interpublic Group of Companies, Inc. 118,900 7,215,744
Lamar Advertising Co. Class A 39,700 1,424,238
Outdoor Systems, Inc. (a) 631,775 17,689,700
Preview Travel, Inc. 19,800 680,625
Young & Rubicam, Inc. 62,000 1,984,000
37,429,063
EDUCATIONAL SERVICES - 0.3%
Apollo Group, Inc. Class A (a) 315,050 10,416,341
Devry, Inc. (a) 128,200 2,812,388
13,228,729
LEASING & RENTAL - 0.1%
Hertz Corp. Class A 53,100 2,352,994
United Rentals, Inc. 67,500 2,835,000
5,187,994
PRINTING - 0.0%
Big Flower Holdings, Inc. (a) 45,200 1,356,000
SERVICES - 1.0%
APAC Teleservices, Inc. (a) 167,900 981,166
Consolidation Capital Corp. 140,100 3,150,061
Data Processing Resources Corp. (a) 134,700 4,184,119
CGI Group, Inc. Class A (sub-vtg.) (a) 243,600 5,211,405
Hays PLC 270,100 4,526,980
Medpartners, Inc. (a) 641,700 5,133,600
Nova Corp. 37,900 1,354,925
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - CONTINUED
SERVICES - CONTINUED
PMT Services, Inc. 52,900 $ 1,345,644
Professional Detailing, Inc. 9,500 236,313
Robert Half International, Inc. (a) 281,150 15,709,256
Service Corp. International 52,300 2,242,363
ServiceMaster Co. 225,900 8,598,319
United Road Services, Inc. 150,600 2,880,225
55,554,376
TOTAL SERVICES 112,756,162
TECHNOLOGY - 18.1%
COMMUNICATIONS EQUIPMENT - 5.5%
Advanced Fibre Communication, Inc. (a) 712,400 28,540,525
Ascend Communications, Inc. 272,300 13,495,869
Aspect Telecommunications Corp. (a) 282,300 7,727,963
Ciena Corp. (a) 208,100 14,488,963
Cisco Systems, Inc. (a) 562,900 51,821,981
Inter-Tel, Inc. 85,800 1,372,800
Intermedia Communications, Inc. (a) 124,450 5,219,122
Lucent Technologies, Inc. 1,292,100 107,486,569
Nokia Corp. AB sponsored ADR 37,800 2,742,863
Northern Telecom Ltd. 527,700 29,984,793
RELTEC Corp. (a) 33,100 1,489,500
Tellabs, Inc. (a) 368,300 26,379,488
290,750,436
COMPUTER SERVICES & SOFTWARE - 7.8%
Affiliated Computer Services, Inc.
Class A (a) 163,200 6,283,200
America Online, Inc. (a) 725,500 76,903,000
Aspect Development, Inc. (a) 37,900 2,866,188
Automatic Data Processing, Inc. 380,500 27,728,938
Axent Technologies, Inc. 17,500 535,938
Aztec Technology Partners, Inc. 43,415 331,039
BMC Software, Inc. (a) 281,700 14,630,794
BEA Systems, Inc. (a) 19,600 449,575
BroadVision, Inc. (a) 100,000 2,387,500
CBT Group PLC sponsored ADR (a) 132,300 7,078,050
CNET, Inc. (a) 78,900 5,384,925
Cambridge Technology Partners
Massachusetts, Inc. (a) 56,700 3,097,238
Cap Gemini Sogeti SA 63,079 9,884,544
Ceridian Corp. (a) 270,316 15,881,065
CheckFree Holdings Corp. (a) 94,600 2,784,788
Check Point Software Technologies Ltd (a) 100,000 3,275,000
Ciber, Inc. 32,200 1,223,600
Computer Associates International, Inc. 72,300 4,017,169
DST Systems, Inc. (a) 38,700 2,167,200
Documentum, Inc. (a) 152,200 7,305,600
ECI Telecom Ltd. 29,000 1,098,375
EarthLink Network, Inc. (a) 40,400 3,100,700
J.D. Edwards & Co. 130,900 5,620,519
Electronic Arts, Inc. (a) 130,960 7,071,840
Equifax, Inc. 17,200 624,575
Fair, Isaac & Co., Inc. 8,800 334,400
Fundtech Ltd. 19,700 371,838
HBO & Co. 296,800 10,462,200
International Network Services 600 24,600
Intuit, Inc. (a) 28,000 1,715,000
Legato Systems, Inc. 52,100 2,031,900
Lycos, Inc. (a) 189,800 14,306,175
Mercury Interactive Group Corp. 9,100 406,088
SHARES VALUE (NOTE 1)
Microsoft Corp. (a) 998,800 $ 108,244,950
Networks Associates, Inc. (a) 69,800 3,341,675
Paychex, Inc. 149,600 6,086,850
Pegasus Systems, Inc. 12,800 328,000
Policy Management Systems Corp. (a) 108,700 4,266,475
RealNetworks, Inc. 97,000 3,619,313
Sabre Group Holdings, Inc. Class A (a) 116,900 4,442,200
Sapient Corp. 32,500 1,714,375
Shared Medical Systems Corp. 11,200 822,500
Siebel Systems, Inc. (a) 21,900 706,275
SportsLine USA, Inc. 131,100 4,793,344
Technology Solutions, Inc. 11,000 348,563
ViaGrafix Corp. 161,700 1,253,175
Yahoo!, Inc. (a) 207,600 32,697,000
414,048,256
COMPUTERS & OFFICE EQUIPMENT - 2.4%
Celestica, Inc. (sub-vtg.) 185,100 3,371,458
Bay Networks, Inc. (a) 1,000 32,250
Dell Computer Corp. (a) 366,700 34,034,344
EMC Corp. (a) 569,800 25,534,163
Gateway 2000, Inc. 31,700 1,604,813
MMC Networks, Inc. 34,100 1,086,938
Symbol Technologies, Inc. 256,700 9,690,425
Unisys Corp. (a) 1,394,345 39,390,246
Xerox Corp. 100,300 10,192,988
124,937,625
ELECTRONIC INSTRUMENTS - 0.9%
JDS Fitel, Inc. (a) 248,800 4,153,023
Thermo Electron Corp. (a) 700,000 23,931,250
Thermo Instrument Systems, Inc. (a) 245,800 6,452,250
Varian Associates, Inc. 65,000 2,535,000
Waters Corp. (a) 195,100 11,498,706
48,570,229
ELECTRONICS - 1.4%
Broadcom Corp. Class A 11,400 839,325
Intel Corp. 156,400 11,593,150
Kent Electronics Corp. (a) 277,800 5,087,213
PMC-Sierra, Inc. (a) 74,400 3,487,500
Sanmina Corp. (a) 101,000 4,380,875
Texas Instruments, Inc. 326,300 19,027,369
Uniphase Corp. (a) 249,900 15,689,034
Vitesse Semiconductor Corp. (a) 527,800 16,295,825
76,400,291
PHOTOGRAPHIC EQUIPMENT - 0.1%
Eastman Kodak Co. 44,100 3,222,056
TOTAL TECHNOLOGY 957,928,893
TRANSPORTATION - 0.6%
AIR TRANSPORTATION - 0.4%
Southwest Airlines Co. 343,450 10,174,706
Viad Corp. 292,100 8,105,775
18,280,481
RAILROADS - 0.1%
Norfolk Southern Corp. 204,600 6,099,638
TRUCKING & FREIGHT - 0.1%
C.H. Robinson Worldwide, Inc. 131,800 3,278,525
Swift Transportation Co., Inc. (a) 214,100 4,241,856
7,520,381
TOTAL TRANSPORTATION 31,900,500
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - 9.1%
CELLULAR - 0.9%
AirTouch Communications, Inc. (a) 347,200 $ 20,289,500
Bell Canada International, Inc. 167,200 3,930,097
Orange PLC (a) 278,500 2,949,286
SkyTel Communications, Inc. 414,450 9,700,720
Teleglobe, Inc. 52,900 1,412,829
Vodafone Group PLC sponsored ADR 87,700 11,055,681
49,338,113
GAS - 0.5%
Enron Corp. 379,900 20,538,344
Williams Companies, Inc. 206,800 6,979,500
27,517,844
TELEPHONE SERVICES - 7.7%
AT&T Corp. 1,108,300 63,311,638
BCE, Inc. 309,100 13,130,564
E Spire Communications, Inc. (a) 201,400 4,544,088
Exodus Communications, Inc. (a) 106,000 4,743,500
Global Telesystems Group, Inc. (a) 130,400 6,357,000
ITC Deltacom, Inc. 239,500 10,234,883
MCI Communications Corp. 956,400 55,590,750
Mastech Corp. (a) 330,000 9,281,250
McLeodUSA, Inc. Class A (a) 367,400 14,282,675
NEXTLINK Communications, Inc.
Class A (a) 192,100 7,275,788
Qwest Communications International, Inc. 803,488 28,021,644
Sprint Corp. 135,000 9,517,500
Telefonica de Espana SA Ord. 428,107 19,776,379
U.S. LEC Corp. Class A 80,900 1,688,788
Winstar Communications, Inc. (a) 212,700 9,132,806
WorldCom, Inc. (a) 3,088,805 149,613,992
406,503,245
TOTAL UTILITIES 483,359,202
TOTAL COMMON STOCKS
(Cost $3,431,279,012) 4,517,863,385
PREFERRED STOCKS - 0.7%
CONVERTIBLE PREFERRED STOCKS - 0.3%
BASIC INDUSTRIES - 0.0%
CHEMICALS & PLASTICS - 0.0%
Sealed Air Corp., Series A, $2.00 64,312 2,701,104
CONSTRUCTION & REAL ESTATE - 0.2%
REAL ESTATE INVESTMENT TRUSTS - 0.2%
Vornado Realty Trust, Series A, $3.25 156,300 8,967,713
RETAIL & WHOLESALE - 0.1%
APPAREL STORES - 0.1%
TJX Companies, Inc., Series E,
$7.00 7,100 3,763,000
TOTAL CONVERTIBLE PREFERRED STOCKS 15,431,817
NONCONVERTIBLE PREFERRED STOCKS - 0.4%
NONDURABLES - 0.2%
HOUSEHOLD PRODUCTS - 0.2%
Wella AG 9,480 10,591,593
SHARES VALUE (NOTE 1)
UTILITIES - 0.2%
TELEPHONE SERVICES - 0.2%
Telecom Italia Spa 371,375 $ 1,802,481
Telecom Italia Mobile Spa de Risp 2,894,500 9,638,584
11,441,065
TOTAL NONCONVERTIBLE PREFERRED STOCKS 22,032,658
TOTAL PREFERRED STOCKS
(Cost $27,415,519) 37,464,475
CONVERTIBLE BONDS - 0.0%
MOODY'S PRINCIPAL
RATINGS (C) AMOUNT
MEDIA & LEISURE - 0.0%
BROADCASTING - 0.0%
Jacor Communications, Inc.
liquid yield option notes
0%, 6/12/11
(Cost $149,594) B3 $ 302,000 250,660
U.S. TREASURY OBLIGATIONS - 4.8%
U.S. Treasury Bill, yields at dates
of purchase 4.82 to 5.05%
7/23/98 to 10/08/98 - 1,200,000 1,191,087
7 5/8%, 2/15/25 Aaa 34,500,000 43,437,570
6 7/8%, 8/15/25 Aaa 40,500,000 46,903,860
6% 2/15/26 Aaa 32,000,000 33,289,920
6.75% 8/15/26 Aaa 37,900,000 43,389,436
6.5% 11/15/26 Aaa 38,000,000 42,197,860
6.625% 2/15/27 Aaa 38,500,000 43,474,970
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $243,408,231) 253,884,703
CASH EQUIVALENTS - 9.1%
SHARES
Taxable Central Cash Fund (b)
(Cost $479,659,783) 479,659,783 479,659,783
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $4,181,912,139) $ 5,289,123,006
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield of the Taxable Central Cash
Fund was 5.61%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(c) Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investors Service, Inc.
(d) An affiliated company is a company in which the fund has ownership
of at least 5% of the voting securities. Transactions during the
period with companies which are or were affiliates are as follows:
PURCHASE SALES DIVIDEND VALUE
AFFILIATE COST COST INCOME
Forsoft Ltd. $ - $ - $ - $ 17,247,675
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $4,957,392,661 and $4,572,792,982, respectively, of which
long-term U.S. government and government agency obligations aggregated
$231,108,756 and $176,809,009, respectively.
The market value of futures contracts opened and closed during the
period amounted to $95,959,886 and $96,262,438 respectively (see Note
3 of Notes to Financial Statements).
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $694,697 for the
period (see Note 4 of Notes to Financial Statements).
INCOME TAX INFORMATION
At June 30, 1998, the aggregate cost of investment securities for
income tax purposes was $4,187,073,165. Net unrealized appreciation
aggregated $1,102,049,841, of which $1,158,674,837 related to
appreciated investment securities and $56,624,996 related to
depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)
ASSETS
INVESTMENT IN SECURITIES, AT VALUE (COST $4,181,912,139) - $ 5,289,123,006
SEE ACCOMPANYING SCHEDULE
CASH 305,236
FOREIGN CURRENCY HELD AT VALUE 6,109,972
(COST $6,097,192)
RECEIVABLE FOR INVESTMENTS SOLD 75,354,114
RECEIVABLE FOR FUND SHARES SOLD 10,864,783
DIVIDENDS RECEIVABLE 2,960,343
INTEREST RECEIVABLE 6,541,502
OTHER RECEIVABLES 173,554
TOTAL ASSETS 5,391,432,510
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 205,146,891
PAYABLE FOR FUND SHARES REDEEMED 1,160,169
ACCRUED MANAGEMENT FEE 2,404,603
DISTRIBUTION FEES PAYABLE 4,328
OTHER PAYABLES AND 383,921
ACCRUED EXPENSES
TOTAL LIABILITIES 209,099,912
NET ASSETS $ 5,182,332,598
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 3,719,883,307
UNDISTRIBUTED NET INVESTMENT INCOME 13,399,290
ACCUMULATED UNDISTRIBUTED 341,801,240
NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 1,107,248,761
AND ASSETS AND LIABILITIES IN FOREIGN CURRENCIES
NET ASSETS $ 5,182,332,598
INITIAL CLASS: $21.95
NET ASSET VALUE, OFFERING
PRICE AND REDEMPTION PRICE
PER SHARE ($5,120,186,476 (DIVIDED BY)
233,217,024 SHARES)
SERVICE CLASS: $21.95
NET ASSET VALUE, OFFERING
PRICE AND REDEMPTION PRICE
PER SHARE ($62,146,122 (DIVIDED BY)
2,831,518 SHARES)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME $ 16,523,633
DIVIDENDS
INTEREST 12,626,623
TOTAL INCOME 29,150,256
EXPENSES
MANAGEMENT FEE $ 13,539,840
TRANSFER AGENT FEES 1,569,327
DISTRIBUTION FEES - SERVICE CLASS 12,474
ACCOUNTING FEES AND EXPENSES 410,023
NON-INTERESTED TRUSTEES' COMPENSATION 8,529
CUSTODIAN FEES AND EXPENSES 213,682
REGISTRATION FEES 83,542
AUDIT 34,742
LEGAL 25,202
MISCELLANEOUS 150,822
TOTAL EXPENSES BEFORE REDUCTIONS 16,048,183
EXPENSE REDUCTIONS (851,444) 15,196,739
NET INVESTMENT INCOME 13,953,517
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 359,225,258
FOREIGN CURRENCY TRANSACTIONS 65,470
FUTURES CONTRACTS 302,552 359,593,280
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 333,613,422
ASSETS AND LIABILITIES IN 54,268 333,667,690
FOREIGN CURRENCIES
NET GAIN (LOSS) 693,260,970
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 707,214,487
OTHER INFORMATION $ 848,969
EXPENSE REDUCTIONS
DIRECTED BROKERAGE ARRANGEMENTS
CUSTODIAN CREDITS 2,475
$ 851,444
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
OPERATIONS $ 13,953,517 $ 29,698,431
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 359,593,280 204,568,956
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) 333,667,690 450,977,419
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 707,214,487 685,244,806
DISTRIBUTIONS TO SHAREHOLDERS (29,014,736) (21,846,321)
FROM NET INVESTMENT INCOME
FROM NET REALIZED GAIN (213,465,544) (57,736,705)
TOTAL DISTRIBUTIONS (242,480,280) (79,583,026)
SHARE TRANSACTIONS - NET INCREASE (DECREASE) 606,007,763 1,111,825,789
TOTAL INCREASE (DECREASE) IN NET ASSETS 1,070,741,970 1,717,487,569
NET ASSETS
BEGINNING OF PERIOD 4,111,590,628 2,394,103,059
END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT
INCOME OF $13,399,290 AND $28,707,467, RESPECTIVELY) $ 5,182,332,598 $ 4,111,590,628
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
OTHER INFORMATION:
SIX MONTHS ENDED JUNE 30, 1998
SHARES DOLLARS YEAR ENDED DECEMBER 31, 1997
(UNAUDITED) SHARES DOLLARS
SHARE TRANSACTIONS 30,171,693 $ 627,771,094 80,344,594 $ 1,456,514,379
INITIAL CLASS
SOLD
REINVESTED 12,506,721 242,005,046 4,834,935 79,583,026
REDEEMED (15,498,043) (319,026,090) (23,702,843) (427,936,465)
NET INCREASE (DECREASE) 27,180,371 $ 550,750,050 61,476,686 $ 1,108,160,940
SERVICE CLASS A 2,622,001 $ 54,819,638 186,727 $ 3,664,849
SOLD
REINVESTED 24,559 475,234 - -
REDEEMED (1,769) (37,159) - -
NET INCREASE (DECREASE) 2,644,791 $ 55,257,713 186,727 $ 3,664,849
DISTRIBUTIONS $ 28,957,870 $ 21,846,321
INITIAL CLASS - NET INVESTMENT INCOME
INITIAL CLASS - NET REALIZED GAIN 213,047,176 57,736,705
TOTAL $ 242,005,046 $ 79,583,026
SERVICE CLASS - NET INVESTMENT INCOME $ 56,866 -
SERVICE CLASS - NET REALIZED GAIN 418,368 -
TOTAL $ 475,234 $ -
$ 242,480,280 $ 79,583,026
1. SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JANUARY 3, 1995
JUNE 30, 1998 (COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31,
SELECTED PER-SHARE DATA (UNAUDITED) 1997 1996 1995
NET ASSET VALUE, BEGINNING OF PERIOD $ 19.94 $ 16.56 $ 13.79 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .06 D .16 D .14 .06
NET REALIZED AND UNREALIZED GAIN (LOSS) 3.12 3.73 2.76 3.91
TOTAL FROM INVESTMENT OPERATIONS 3.18 3.89 2.90 3.97
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.14) (.14) - (.06)
FROM NET REALIZED GAIN (1.03) (.37) (.13) (.12)
TOTAL DISTRIBUTIONS (1.17) (.51) (.13) (.18)
NET ASSET VALUE, END OF PERIOD $ 21.95 $ 19.94 $ 16.56 $ 13.79
TOTAL RETURN B, C 16.74% 24.14% 21.22% 39.72%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 5,120,186 $ 4,107,868 $ 2,394,103 $ 877,000
RATIO OF EXPENSES TO AVERAGE NET ASSETS .71% A .71% .74% .72%
RATIO OF EXPENSES TO AVERAGE NET ASSETS
AFTER EXPENSE REDUCTIONS .67% A, F .68% F .71% F .72%
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS .62% A .90% 1.33% 1.07%
PORTFOLIO TURNOVER 213% A 142% 178% 132%
AVERAGE COMMISSION RATE G $ .0336 $ .0336 $ .0343
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
SELECTED PER-SHARE DATA (UNAUDITED) 1997 E
NET ASSET VALUE, BEGINNING OF PERIOD $ 19.93 $ 19.99
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .05 D .03 D
NET REALIZED AND UNREALIZED GAIN (LOSS) 3.14 (.09)
TOTAL FROM INVESTMENT OPERATIONS 3.19 (.06)
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.14) -
FROM NET REALIZED GAIN (1.03) -
TOTAL DISTRIBUTIONS (1.17) -
NET ASSET VALUE, END OF PERIOD $ 21.95 $ 19.93
TOTAL RETURN B, C 16.79% (.30)%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 62,146 $ 3,722
RATIO OF EXPENSES TO AVERAGE NET ASSETS .81% A .81% A
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS .77% A, F .78% A, F
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS .54% A 1.14% A
PORTFOLIO TURNOVER 213% A 142%
AVERAGE COMMISSION RATE G $ .0336 $ .0336
A ANNUALIZED
B TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR
INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE
CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN. TOTAL RETURNS
FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES
NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF
NOTES TO FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED
ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3, 1997 (COMMENCEMENT OF SALE OF
SERVICE CLASS SHARES) TO DECEMBER 31, 1997.
F FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH
THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE
FUND'S EXPENSES (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
G FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A
FUND IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER
SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED.
THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND
DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS
WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY
DIFFER.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 1998 (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES.
Contrafund Portfolio (the fund) is a fund of Variable Insurance
Products Fund II (the trust) and is authorized to issue an unlimited
number of shares. The trust is registered under the Investment Company
Act of 1940, as amended (the 1940 Act), as an open-end management
investment company organized as a Massachusetts business trust. Shares
of the fund may only be purchased by insurance companies for the
purpose of funding variable annuity or variable life insurance
contracts. The fund offers two classes of shares: the funds' original
class of shares (Initial Class shares) and Service Class shares. Both
classes have equal rights and voting privileges, except for matters
affecting a single class. Investment income, realized and unrealized
capital gains and losses, the common expenses of the fund, and certain
fund-level expense reductions, if any, are allocated on a pro rata
basis to each class based on the relative net assets of each class to
the total net assets of the fund. Each class of shares differs in its
respective distribution plan.
The financial statements have been prepared in conformity with
generally accepted accounting principles which require management to
make certain estimates and assumptions at the date of the financial
statements. The following summarizes the significant accounting
policies of the fund:
SECURITY VALUATION. Securities for which exchange quotations are
readily available are valued at the last sale price, or if no sale
price, at the closing bid price. Securities (including restricted
securities) for which exchange quotations are not readily available
(and in certain cases debt securities which trade on an exchange) are
valued primarily using dealer-supplied valuations or at their fair
value as determined in good faith under consistently applied
procedures under the general supervision of the Board of Trustees.
Short-term securities with remaining maturities of sixty days or less
for which quotations are not readily available are valued at amortized
cost or original cost plus accrued interest, both of which approximate
current value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Purchases
and sales of securities, income receipts and expense payments are
translated into U.S. dollars at the prevailing exchange rate on the
respective dates of the transactions.
Net realized gains and losses on foreign currency transactions
represent net gains and losses from sales and maturities of foreign
currency contracts, disposition of foreign currencies, the difference
between the amount of net investment income accrued and the U.S.
dollar amount actually received, and gains and losses between trade
date and settlement on purchases and sales of securities. The effects
of changes in foreign currency exchange rates on investments in
securities are included with the net realized and unrealized gain or
loss on investment securities.
INCOME TAXES. As a qualified regulated investment company under
Subchapter M of the Internal Revenue Code, the fund is not subject to
income taxes to the extent that it distributes substantially all of
its taxable income for its fiscal year. The schedule of investments
includes information regarding income taxes under the caption "Income
Tax Information."
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend
date, except certain dividends from foreign securities where the
ex-dividend date may have passed, are recorded as soon as the funds
are informed of the ex-dividend date. Non-cash dividends included in
dividend income, if any, are recorded at the fair market value of the
securities received. Interest income, which includes accretion of
original issue discount, is accrued as earned. Investment income is
recorded net of foreign taxes withheld where recovery of such taxes is
uncertain.
EXPENSES. Most expenses of the trust can be directly attributed to a
fund. Expenses which cannot be directly attributed are apportioned
among the funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the
ex-dividend date. Income dividends and capital gain distributions are
declared separately for each class.
Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences, which may result in
distribution reclassifications, are primarily due to differing
treatments for futures transactions, market discount, non-taxable
dividends and losses deferred due to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
Undistributed net investment income and accumulated undistributed net
realized gain (loss) on investments and foreign currency transactions
may include temporary book and tax basis differences which will
reverse in a subsequent period. Any taxable income or gain remaining
at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of
trade date. Gains and losses on securities sold are determined on the
basis of identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency
contracts to facilitate transactions in foreign-denominated
securities. Losses may arise from changes in the value of the foreign
currency or if the counterparties do not perform under the contracts'
terms. The U.S. dollar value of foreign currency contracts is
determined using contractual currency exchange rates established at
the time of each trade.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission (the SEC), the fund, along with
other affiliated entities of Fidelity Management & Research Company
(FMR), may transfer uninvested cash balances
2. OPERATING POLICIES - CONTINUED
JOINT TRADING ACCOUNT - CONTINUED
into one or more joint trading accounts. These balances are invested
in one or more repurchase agreements for U.S. Treasury or Federal
Agency obligations.
TAXABLE CENTRAL CASH FUND. Pursuant to an Exemptive Order issued by
the SEC, the fund may invest in the Taxable Central Cash Fund (the
Cash Fund) managed by Fidelity Investments Money Management, Inc.,
(formerly FMR Texas, Inc.) an affiliate of FMR. The Cash Fund is an
open-end money market fund available only to investment companies and
other accounts managed by FMR and its affiliates. The Cash Fund seeks
preservation of capital, liquidity, and current income by investing in
U.S. Treasury securities and repurchase agreements for these
securities. Income distributions from the Cash Fund are declared daily
and paid monthly from net interest income. Income distributions earned
by the fund are recorded as interest income in the accompanying
financial statements.
INTERFUND LENDING PROGRAM. Pursuant to an Exemptive Order issued by
the SEC, the funds, along with other registered investment companies
having management contracts with FMR, may participate in an interfund
lending program. This program provides an alternative credit facility
allowing the funds to borrow from, or lend money to, other
participating funds. Information regarding each fund's participation
in the program is included under the caption "Other Information" at
the end of each applicable fund's schedule of investments.
FUTURES CONTRACTS. The fund may use futures contracts to manage its
exposure to the stock market. Buying futures tends to increase the
fund's exposure to the underlying instrument, while selling futures
tends to decrease the fund's exposure to the underlying instrument or
hedge other fund investments. Losses may arise from changes in the
value of the underlying instruments or if the counterparties do not
perform under the contracts' terms. Gains (losses) are realized upon
the expiration or closing of the futures contracts. Futures contracts
are valued at the settlement price established each day by the board
of trade or exchange on which they are traded.
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities), the market value of future contracts opened
and closed, is included under the caption "Other Information" at the
end of the fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, Fidelity Management
& Research Company (FMR) receives a monthly fee that is calculated on
the basis of a group fee rate plus a fixed individual fund fee rate
applied to the average net assets of the fund. The group fee rate is
the weighted average of a series of rates and is based on the monthly
average net assets of all the mutual funds advised by FMR. The rates
ranged from .2500% to .5200% for the period. The annual individual
fund fee rate is .30%. In the event that these rates were lower than
the contractual rates in effect during the period, FMR voluntarily
implemented the above rates, as they resulted in the same or a lower
management fee. For the period, the management fee was equivalent to
an annualized rate of .60% of average net assets.
DISTRIBUTION AND SERVICE PLAN. In accordance with Rule 12b-1 of the
1940 Act, the Trustees have adopted separate distribution plans with
respect to each class of shares (collectively referred to as "the
Plans"). Under the Service Class Plan, the class pays Fidelity
Distributors Corporation (FDC), an affiliate of FMR, a distribution
and service fee (12b-1 fee). This fee is based on an annual rate of
.10% of Service Class average net assets. Initial Class shares are not
subject to a 12b-1 fee.
For the period, Service Class paid FDC $12,474, all of which was
reallowed to insurance companies, for the distribution of shares and
providing shareholder support services.
Under the Plans, FMR may use its resources to pay administrative and
promotional expenses related to the sale of each class of shares.
Subject to the approval of the Board of Trustees, the Plans also
authorize payments to third parties that assist in the sale of each
class of shares or render shareholder support services. For the
period, payments made to third parties under the Plans amounted to
$870,000 and $14,060 for the Initial Class and Service Class,
respectively.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations
Company, Inc. (FIIOC), an affiliate of FMR, is the fund's transfer,
dividend disbursing and shareholder servicing agent. FIIOC receives
account fees and asset-based fees that vary according to account size
and type of account. FIIOC pays a portion of the expenses related to
the typesetting, printing and mailing of all shareholder reports,
except proxy statements. For the period, the transfer agent fees were
equivalent to an annualized rate of .07% of average net assets.
ACCOUNTING FEES. Fidelity Service Company, Inc. (FSC), an affiliate of
FMR, maintains the fund's accounting records. The fee is based on the
level of average net assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments
5. EXPENSE REDUCTIONS.
FMR has directed certain portfolio trades to brokers who paid a
portion of the funds' expenses.
In addition, the fund has entered into an arrangement with its
custodian whereby credits realized on uninvested cash balances were
used to offset a portion of the funds' expenses.
5. EXPENSE REDUCTIONS - CONTINUED
For the period, the reductions under this arrangement are shown under
the caption "Other Information" on the fund's Statement of Operations.
6. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were the record owners
of approximately 30% of the outstanding shares of the fund. In
addition, two unaffiliated insurance companies were record owners of
37% of the total outstanding shares of the fund.
7. TRANSACTIONS WITH AFFILIATED COMPANIES.
An affiliated company is a company in which the fund has ownership of
at least 5% of the voting securities. Information regarding
transactions with affiliated companies is included under the caption
"Legend" at the end of the fund's schedule of investments.
(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND II: ASSET MANAGER: GROWTH PORTFOLIO
SEMIANNUAL REPORT
JUNE 30, 1998
CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
MARKET ENVIRONMENT 3 A REVIEW OF WHAT HAPPENED IN WORLD MARKETS DURING THE
PAST SIX MONTHS.
PERFORMANCE AND INVESTMENT SUMMARY 4 HOW THE FUND HAS DONE OVER TIME, AND AN OVERVIEW OF THE
FUND'S INVESTMENTS AT THE END OF THE PERIOD.
FUND TALK 5 THE MANAGER'S REVIEW OF FUND PERFORMANCE, STRATEGY
AND OUTLOOK.
INVESTMENTS 6 A COMPLETE LIST OF THE FUND'S INVESTMENTS WITH THEIR
MARKET VALUES.
FINANCIAL STATEMENTS 19 STATEMENTS OF ASSETS AND LIABILITIES, OPERATIONS, AND
CHANGES IN NET ASSETS, AS WELL AS FINANCIAL HIGHLIGHTS.
NOTES 22 NOTES TO THE FINANCIAL STATEMENTS.
</TABLE>
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE
SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND.
THIS REPORT IS NOT AUTHORIZED FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT
INSURED BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND
ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
MARKET ENVIRONMENT
With the exception of Asia and a number of emerging market economies,
most stock and bond markets around the world performed well during the
past six months. Despite an environment of ongoing financial and
political difficulties in Asian and emerging markets, the largest
blue-chip companies of Europe and the U.S. continued to post strong
performance. Throughout the period, investors sought the relative
stability and liquidity of more defensive large-cap stocks and highly
rated bond investments of developed countries, hoping these
investments would maintain steady earnings and be easier to sell in a
possible economic slowdown.
U.S. STOCK MARKETS
The U.S. stock market continued to perform well during the first six
months of 1998. The strong showing by the Standard & Poor's 500 Index,
however, was produced by a narrow contingent of large companies. In
fact, most of the Standard & Poor's 17.71% return for the six-month
period that ended June 30, 1998, came from these large-capitalization
stocks. The "narrow" market - one where a small number of stocks
perform well, and others are flat or produce losses - was further
demonstrated by the fact that 60% of all the companies on the New York
Stock Exchange declined during this period. During the first quarter
of 1998, a stable U.S. economy and a belief that the worst in Asia
might be over helped the stock market post strong gains. The S&P 500
index turned in a solid return of 13.95% through the end of March. The
S&P 500 and other market indexes continued to rally through May,
before falling sharply in mid-June amid renewed fears that Asia's
economic crisis would inhibit the growth in earnings of American
companies. In subsequent trading days, however, investors continued to
favor large-cap stocks, boosting the returns of the S&P 500 index
higher. During the second quarter of 1998, the S&P 500 index returned
3.30%, compared with a decline of 2.14% for the Standard & Poor's
MidCap 400 Index. Investors in small-cap stocks experienced a weak
second quarter as the Russell 2000 - a measure of small company stock
performance - lost 4.66%.
The pattern of a narrow market also was displayed in certain industry
groups. Pharmaceutical stocks performed well, helped by healthy
pipelines of new products, the ability to bring products to market
more rapidly and relaxed regulations that permitted more aggressive
advertising. Stable economic growth, coupled with nonexistent
inflation, buoyed the financial sector. Banks and brokerage houses
sustained impressive earnings growth; other financial services firms
benefited from merger and acquisition activity, exemplified by the
recently announced "megamerger" of Travelers and Citicorp.
While many technology stocks turned in very strong results, the sector
also experienced some mixed results over the past six months, due
primarily to the negative impact of the Asian crisis and the effect of
a strong dollar on foreign sales. Energy stocks also experienced weak
results, with the price of crude oil dipping below $12 dollars a
barrel near the end of June.
FOREIGN STOCK MARKETS
Overseas, blue-chip investments also performed well. While the Morgan
Stanley Capital International (MSCI) EAFE Index, which measures the
performance of Europe, Australasia, and the Far East, posted a solid
return of 16.05% for the six-month period, investors in developed
markets fared much better than those investing in troubled emerging
markets. The performance of the MSCI Pacific Index, however, lost
5.87% during the same period, emphasizing the negative impact Japan
and Hong Kong had on the MSCI EAFE index. Most economies in Europe
continued to thrive amidst an environment of relatively benign
inflation and reduced interest rates as many countries prepared for
the advent of the European Monetary Union in January 1999. Many
European companies embraced U.S.-style efficiencies through
restructuring and robust merger and acquisition activity. Over the
past six months, the MSCI Europe Index returned an impressive 26.66%.
Among the strongest European economies were Portugal, Spain, Italy and
the United Kingdom.
While the Japanese market showed signs of strength toward the end of
the period, Japanese stocks continued to suffer from eroding
confidence in the economy, bankruptcies and a depreciating currency.
The TOPIX Index - a measure of the Japanese market - was down 1.46%
over the six-month period. As economic and currency turmoil continued
in Asia, emerging markets also suffered during the period. The MSCI
Far East ex-Japan Free Index dropped 25.79% and the MSCI Emerging
Markets Free Index - a market capitalization weighted index of over
850 stocks traded in 22 world markets - was down 18.87% for the first
six months of 1998.
U.S. BOND MARKETS
Bond prices continued to move higher thanks to low interest rates and
a continued lack of inflationary pressure. The Lehman Brothers
Aggregate Bond Index - a broad gauge of the U.S. taxable bond market -
returned 3.93% during this six-month period. Against a backdrop of
continued economic woes in Asia and fears that U.S. corporate profits
would slow, investors from around the globe moved assets from stocks
and riskier bonds into highly rated corporate bonds and U.S.
Treasuries. As a result, bond yields, which move in the opposite
direction of bond prices, fell to their lowest levels in decades. The
yield on the benchmark 30-year bond fell to 5.62% from 5.93% during
the period. Mortgage-backed bonds experienced some weakness toward the
end of the period amid record mortgage refinancings.
FOREIGN BOND MARKETS
While U.S. based bonds topped most foreign bonds on the continued
strength of the U.S. dollar and benign inflation, the Salomon Brothers
World Government Bond Index - a measure of government bond market
performance in developed nations - returned 2.79% during the period.
Similar to foreign equities, however, it paid to be in the safer bond
sectors of developed countries and highly rated bonds. In comparison
to the World Government Bond Index, the J.P. Morgan Emerging Markets
Bond Index lost 0.25% during the first six months of 1998. Continued
turbulence in Japan as it struggled to initiate economic reforms
trickled into emerging markets and resulted in mixed results during
the period.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
JUNE 30,1998 YEAR FUND
VIP II: ASSET MGR: GROWTH - "INITIAL CLASS" 21.80% 22.89%
FIDELITY AGGRESSIVE COMPOSITE 23.91% N/A
S&P 500 (REGISTERED TRADEMARK) 30.16% 32.30%
LB AGGREGATE BOND 10.54% 10.15%
LB 3 MONTH T-BILL 5.53% N/A
VARIABLE ANNUITY FLEXIBLE PORTFOLIO FUNDS AVERAGE 18.12% N/A
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's returns to those of the Fidelity Aggressive
Asset Allocation Composite Index, - a hypothetical combination of
unmanaged indices. The composite index combines the total returns of
the Standard & Poor's 500 Index, the Lehman Brothers Aggregate Bond
Index and the Lehman Brothers 3 Month Treasury Bill Index weighted
according to the fund's neutral mix.
You can also compare the fund's returns to the variable annuity
flexible portfolio funds average, which reflects the performance of
mutual funds with similar objectives tracked by Lipper Analytical
Services, Inc. The past one year average represent a peer group of 87
mutual funds. The benchmarks listed in the table above include
reinvested dividends and capital gains, if any, and exclude the effect
of sales charge.
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, January 3, 1995. If Fidelity had not reimbursed certain
fund expenses, the life of fund total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURN WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
UNDERSTANDING PERFORMANCE
HOW A FUND DID YESTERDAY IS NO GUARANTEE OF HOW
IT WILL DO TOMORROW. THE STOCK MARKET, FOR EXAMPLE,
HAS A HISTORY OF LONG-TERM GROWTH AND SHORT-TERM
VOLATILITY. IN TURN, THE SHARE PRICE AND RETURN OF A
FUND THAT INVESTS IN STOCKS WILL VARY. THAT MEANS IF
YOU SELL YOUR SHARES DURING A MARKET DOWNTURN,
YOU MIGHT LOSE MONEY. BUT IF YOU CAN RIDE OUT THE
MARKET'S UPS AND DOWNS, YOU MAY HAVE A GAIN.
(CHECKMARK)
$10,000 OVER LIFE OF FUND
VIP II ASSET MGR GROWTH FID AGGRESSIVE COMPOSITE
S&P 500 LB AGGREGATE BOND
00159 F0022
SP001 LB001
1995/01/31 10000.00 10000.00
10000.00 10000.00
1995/02/28 10149.70 10319.62
10389.70 10238.00
1995/03/31 10289.42 10539.71
10696.30 10300.45
1995/04/30 10558.88 10785.50
11011.31 10444.66
1995/05/31 10708.58 11199.23
11451.43 10848.87
1995/06/30 11137.72 11397.77
11717.44 10928.06
1995/07/31 11546.91 11633.53
12106.00 10904.02
1995/08/31 12065.87 11695.86
12136.38 11035.96
1995/09/30 12245.51 12052.97
12648.54 11143.01
1995/10/31 11776.45 12083.85
12603.38 11287.87
1995/11/30 11986.03 12487.56
13156.67 11457.19
1995/12/31 12277.71 12701.01
13410.07 11617.59
1996/01/31 12569.78 13008.92
13866.55 11694.26
1996/02/29 12613.39 13009.89
13995.09 11490.78
1996/03/31 12840.37 13059.96
14129.86 11410.35
1996/04/30 13143.01 13162.84
14338.14 11346.45
1996/05/31 13348.36 13380.07
14707.92 11323.76
1996/06/30 13402.41 13467.11
14763.95 11475.49
1996/07/31 13067.35 13093.05
14111.68 11506.48
1996/08/31 13164.62 13267.32
14409.30 11486.92
1996/09/30 13705.04 13821.05
15220.25 11686.79
1996/10/31 14104.95 14163.15
15640.03 11946.24
1996/11/30 15023.67 14935.59
16822.26 12150.52
1996/12/31 14737.79 14700.41
16489.01 12037.52
1997/01/31 15367.80 15358.12
17519.24 12074.83
1997/02/28 15514.22 15455.00
17656.59 12105.02
1997/03/31 14781.88 14970.83
16931.08 11970.65
1997/04/30 15401.55 15656.26
17941.87 12150.21
1997/05/31 16336.68 16364.80
19034.17 12265.64
1997/06/30 16821.15 16929.64
19886.90 12411.60
1997/07/31 17959.09 17991.36
21469.30 12746.72
1997/08/31 17395.75 17251.75
20266.59 12638.37
1997/09/30 18037.95 17980.97
21376.59 12825.42
1997/10/31 17609.82 17629.62
20662.61 13011.39
1997/11/30 18116.82 18224.94
21619.09 13071.24
1997/12/31 18432.29 18493.92
21990.29 13203.26
1998/01/31 18432.29 18700.72
22233.50 13372.26
1998/02/28 19558.44 19644.52
23836.98 13361.56
1998/03/31 20283.77 20370.04
25057.67 13406.99
1998/04/30 20220.15 20544.55
25309.75 13476.71
1998/05/31 20016.54 20350.75
24874.67 13604.74
1998/06/30 20487.37 20977.02
25885.08 13720.38
IMATRL PRASUN SHR__CHT 19980630 19980731 135748 R00000000000044
Let's say hypothetically that $10,000 was invested in Variable
Insurance Products Fund II: Asset Manager: Growth Portfolio on January
31, 1995, shortly after the fund started. As the chart shows, by June
30, 1998, the value of the investment would have grown to $20,487 - a
104.87% increase. With reinvested dividends and capital gains, if any,
a $10,000 investment in the Standard & Poor's 500 Index would have
grown to $25,885 over the same period - a 158.85% increase. If $10,000
was invested in the Lehman Brothers Aggregate Bond Index, it would
have grown to $13,720 - a 37.20% increase.
You can also look at how the Fidelity Aggressive Asset Allocation
Composite Index did over the same period. The Aggressive Asset
Allocation Composite index combines the cumulative total returns of
three unmanaged indexes - the S&P 500 (158.85%), Lehman Brothers
Aggregate Bond Index (37.20%), and the Lehman Brothers 3-month T-Bill
Total Rate of Return Index (20.54%) - according to the fund's neutral
mix*, assuming monthly rebalancing. With reinvested dividends and
capital gains, if any, a $10,000 investment in the index would have
grown to $20,977 - a 109.77% increase.
* 70% STOCKS, 25% BONDS AND 5% SHORT-TERM INSTRUMENTS EFFECTIVE
JANUARY 1, 1997; 65%, 30% AND 5%, RESPECTIVELY, PRIOR TO DECEMBER 31,
1996.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1998
% OF FUND'S INVESTMENTS
WAL-MART STORES, INC. 2.7
HOME DEPOT, INC. 1.9
GENERAL ELECTRIC CO. 1.9
SCHERING-PLOUGH CORP. 1.8
AT&T CORP. 1.8
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1998
(STOCKS ONLY) % OF FUND'S INVESTMENTS
FINANCE 16.2
RETAIL & WHOLESALE 7.7
UTILITIES 7.2
TECHNOLOGY 6.8
HEALTH 6.7
ASSET ALLOCATION AS OF JUNE 30, 1998*
ROW: 1, COL: 1, VALUE: 71.40000000000001
ROW: 1, COL: 2, VALUE: 24.0
ROW: 1, COL: 3, VALUE: 4.6
STOCK CLASS 72.4%
BOND CLASS 24.1%
SHORT-TERM CLASS 3.5%
FOREIGN INVESTMENTS 1.7%
*
ASSET ALLOCATION IN THE PIE CHART REFLECTS THE CATEGORIZATION OF
ASSETS AS DEFINED IN
THE FUND'S PROSPECTUS. FINANCIAL STATEMENT CATEGORIZATIONS CONFORM TO
ACCOUNTING
STANDARDS AND WILL DIFFER FROM THE PIE CHART.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with
Richard Habermann, Portfolio Manager of Asset Manager: Growth
Portfolio
Q. HOW DID THE FUND PERFORM COMPARED TO ITS BENCHMARK, DICK?
A. For the six months that ended June 30, 1998, the fund lagged the
13.43% return of the Fidelity Aggressive Asset Allocation Composite
Index - which combines the performance of three indexes - by a small
amount. The fund also slightly lagged the 23.91% return of the index
for the 12 months that ended June 30, 1998.
Q. WHY DID THE FUND LAG ITS BENCHMARK INDEX?
A. While several factors influenced performance during the period,
security selection among the fund's equity investments detracted from
the fund's relative performance, albeit slightly. All in all, the
fund's equity investments performed quite well. However, the strong
performance of the stock market, as measured by such indexes as the
Standard & Poor's 500, was driven by a very narrow group of stocks.
Equity investments outside of that group generally didn't perform as
well. This narrowness contributed to a slight performance shortfall
for the fund's equity investments relative to the S&P 500. The fund's
equity specialist, Steven Snider, targeted stocks with lower
valuations but higher earnings-growth rates than the average of the
S&P 500, but the tide was against him during this most recent
six-month period. The fund's investment in Oracle within the
technology sector hurt performance, as did industrial machinery stock
Case. In the nondurables sector, tobacco stocks such as Philip Morris
were hurt by uncertainty over the future of litigation and
legislation. However, this tobacco position was reduced during the
period.
Q. WHAT KIND OF MOVES DID YOU MAKE WITH THE FUND'S ASSET ALLOCATION?
A. I gradually reduced the fund's allocations to stocks and
short-term/money market instruments, and increased its weighting in
bonds. I wanted to position the fund to take advantage of the bond
market rally we anticipated and saw during the period. Because of
ongoing concerns related to the crises in Asia, foreign investors
flocked to less-volatile bond investments in the U.S. in a "flight to
quality." Over the past 15 years or so, when major crises such as Asia
have arisen, financial assets in the U.S. have benefited. Part of that
can be attributed to the more accommodating interest-rate stance
central banks such as the Federal Reserve adopt at such times. Other
factors also contributed to the positive backdrop for bonds, including
low inflation, a strengthening dollar and a slowdown in corporate
earnings.
Q. HOW DID THE FUND'S ASSET ALLOCATION AFFECT ITS PERFORMANCE?
A. It was a net positive. During the course of the period, the fund's
equity portion was overweighted, its bond portion increased and the
short-term/money market allocation was underweighted, relative to its
neutral mix, which calls for 70% to be invested in stocks, 25% in
bonds and 5% in short-term/money market instruments. Since equities
outperformed the other asset classes, the overweighting in stocks
helped the fund's performance. The increase in bonds during the period
helped as well, for the reasons I mentioned earlier, and because of
the capital appreciation and additional income they offered when
compared to shorter-term alternatives. At the close of the period, the
fund was back closer to the neutral mix, and held 72.4% in stocks,
24.1% in bonds and 3.5% in short-term/money market instruments.
Q. HOW DID THE FIXED-INCOME AND SHORT-TERM PORTIONS OF THE FUND
PERFORM?
A. Quite well. The investment-grade portion of the fund - which
Charlie Morrison helps me manage - performed better than the index
that measures that part of the market, the Lehman Brothers Aggregate
Bond Index, due to Charlie's decision to overweight mortgage-backed
and agency securities relative to the index. In addition, the
high-yield portion of the fund - which Fred Hoff helps me manage -
performed quite well, largely due to strong security selection in the
telecommunications, cable and supermarket industries. Finally, the
short-term/money market part of the fund outperformed its benchmark,
as John Todd, who helps look after short-term investments, obtained a
return advantage relative to Treasuries by emphasizing high-quality
corporate and bank-backed obligations.
Q. WHICH STOCKS PERFORMED WELL DURING THE PERIOD?
A. Wal-Mart was the best contributor to performance, attracting
investors with strong management that focused on growing earnings and
revenues. Schering-Plough and Pfizer benefited, along with most
pharmaceutical firms, from the ability to bring products to market
faster because of streamlined approval processes, changes in
regulations that allow them to market prescription drugs more
aggressively and their ability to sustain earnings growth in an
unpredictable economic environment.
Q. WHAT'S YOUR OUTLOOK?
A. Corporate earnings estimates for the rest of 1998 and 1999 appear
to be generous, and the market has been severely punishing companies
that don't meet their earnings expectations. In this environment,
security selection will continue to be critical, especially given the
pressures caused by Asia, increased wages, tighter profit margins and
already-high stock valuations. Offsetting these pressures are low
inflation, a supportive bond market and favorable interest rates.
Above and beyond making the right tactical moves regarding asset
allocation, picking the right stocks will be crucial.
FUND FACTS
GOAL: maximum total return over the long term
by allocating assets among stocks, bonds and
short-term instruments anywhere in the world.
START DATE: January 3, 1995
SIZE: as of June 30, 1998, more than $522 million
MANAGER: Richard Habermann, since 1996;
joined Fidelity in 1968
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
INVESTMENTS JUNE 30, 1998 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 69.2%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 2.3%
AEROSPACE & DEFENSE - 1.8%
AlliedSignal, Inc. 75,600 $ 3,354,714
Sundstrand Corp. 27,700 1,585,825
United Technologies Corp. 49,800 4,606,500
9,547,039
DEFENSE ELECTRONICS - 0.5%
Litton Industries, Inc. (a) 13,800 814,200
Northrop Grumman Corp. 17,000 1,753,125
2,567,325
SHIP BUILDING & REPAIR - 0.0%
Avondale Industries, Inc. (a) 2,600 71,744
TOTAL AEROSPACE & DEFENSE 12,186,108
BASIC INDUSTRIES - 1.9%
CHEMICALS & PLASTICS - 1.7%
Air Products & Chemicals, Inc. 37,800 1,512,000
Dow Chemical Co. 45,899 4,437,860
Engelhard Corp. 18,900 382,725
FMC Corp. (a) 20,700 1,411,481
Millennium Chemicals, Inc. 38,300 1,297,413
9,041,479
IRON & STEEL - 0.0%
USX-U.S. Steel Group 10,000 330,000
METALS & MINING - 0.2%
Aluminum Co. of America 14,800 975,875
TOTAL BASIC INDUSTRIES 10,347,354
CONSTRUCTION & REAL ESTATE - 1.3%
BUILDING MATERIALS - 0.4%
Coltec Industries, Inc. (a) 36,700 729,413
Mark IV Industries, Inc. 24,500 529,813
Texas Industries, Inc. 10,700 567,100
Vulcan Materials Co. 3,300 352,069
2,178,395
CONSTRUCTION - 0.9%
Centex Corp. 19,400 732,350
D.R. Horton, Inc. 32,900 686,788
Fleetwood Enterprises, Inc. 49,233 1,969,320
Kaufman & Broad Home Corp. 34,200 1,085,850
U.S. Home Corp. (a) 2,600 107,250
4,581,558
TOTAL CONSTRUCTION & REAL ESTATE 6,759,953
DURABLES - 4.6%
AUTOS, TIRES, & ACCESSORIES - 4.2%
Chrysler Corp. 36,900 2,080,238
Dana Corp. 11,600 620,600
Eaton Corp. 29,200 2,270,300
Ford Motor Co. 110,500 6,519,500
General Motors Corp. 122,800 8,204,575
Lear Corp. (a) 31,700 1,626,606
Superior Industries International, Inc. 27,100 763,881
22,085,700
HOME FURNISHINGS - 0.2%
Ethan Allen Interiors, Inc. 13,400 669,163
Furniture Brands International, Inc. (a) 21,700 608,956
1,278,119
SHARES VALUE (NOTE 1)
TEXTILES & APPAREL - 0.2%
Burlington Industries, Inc. (a) 37,300 $ 524,531
Liz Claiborne, Inc. 11,300 590,425
1,114,956
TOTAL DURABLES 24,478,775
ENERGY - 1.7%
ENERGY SERVICES - 0.6%
BJ Services Co. (a) 19,500 566,719
McDermott International, Inc. 34,100 1,174,319
Western Atlas, Inc. 19,200 1,629,600
3,370,638
OIL & GAS - 1.1%
British Petroleum PLC ADR 390 34,418
Coastal Corp. (The) 28,400 1,982,675
Royal Dutch Petroleum Co. Ord. 3,200 177,093
Sun Co., Inc. 23,700 919,856
Tosco Corp. 83,900 2,464,563
5,578,605
TOTAL ENERGY 8,949,243
FINANCE - 16.0%
BANKS - 6.5%
Bank of New York Co., Inc. 25,200 1,529,325
BankAmerica Corp. 101,900 8,807,981
Bankers Trust New York Corp. 45,200 5,246,025
Chase Manhattan Corp. 102,600 7,746,300
Comerica, Inc. 10,700 708,875
Commerce Bancshares, Inc. 4,950 241,622
Mellon Bank Corp. 25,200 1,754,550
National City Corp. 23,780 1,688,380
NationsBank Corp. 21,600 1,652,400
Republic New York Corp. 34,200 2,152,463
SunTrust Banks, Inc. 38,100 3,098,006
34,625,927
CLOSED END INVESTMENT COMPANY - 0.0%
First NIS Regional Fund 14,400 129,600
CREDIT & OTHER FINANCE - 0.4%
Associates First Capital Corp. Class A 29,065 2,234,372
FEDERAL SPONSORED CREDIT - 2.3%
Freddie Mac 76,500 3,600,281
Fannie Mae 141,000 8,565,750
12,166,031
INSURANCE - 5.0%
Allmerica Financial Corp. 12,400 806,000
Allstate Corp. 85,000 7,782,813
CIGNA Corp. 95,400 6,582,600
Conseco, Inc. 119,500 5,586,625
Financial Security Assurance Holdings
Ltd. 4,700 276,125
Hartford Financial Services Group, Inc. 18,000 2,058,750
ING Groep NV sponsored ADR 521 34,060
Lincoln National Corp. 10,400 950,300
MGIC Investment Corp. 18,000 1,027,125
Old Republic International Corp. 23,250 681,516
Orion Capital Corp. 5,200 290,550
Reliastar Financial Corp. 10,200 489,600
26,566,064
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
SECURITIES INDUSTRY - 1.8%
Lehman Brothers Holdings, Inc. 80,800 $ 6,267,050
Travelers Group, Inc. (The) 47,850 2,900,906
9,167,956
TOTAL FINANCE 84,889,950
HEALTH - 6.7%
DRUGS & PHARMACEUTICALS - 3.8%
Pfizer, Inc. 79,800 8,673,263
Schering-Plough Corp. 106,000 9,712,250
Warner-Lambert Co. 26,400 1,831,500
20,217,013
MEDICAL EQUIPMENT & SUPPLIES - 1.2%
Allegiance Corp. 1,660 85,075
Guidant Corp. 87,500 6,239,844
6,324,919
MEDICAL FACILITIES MANAGEMENT - 1.7%
HEALTHSOUTH Corp. (a) 37,700 1,006,119
Lincare Holdings, Inc. (a) 32,000 1,346,000
United HealthCare Corp. 78,500 4,984,750
Wellpoint Health Networks, Inc. (a) 19,700 1,457,800
8,794,669
TOTAL HEALTH 35,336,601
HOLDING COMPANIES - 0.1%
U.S. Industries, Inc. 27,600 683,100
INDUSTRIAL MACHINERY & EQUIPMENT - 4.1%
ELECTRICAL EQUIPMENT - 2.0%
General Electric Co. 108,000 9,828,000
General Instrument Corp. 28,300 769,406
10,597,406
INDUSTRIAL MACHINERY & EQUIPMENT - 2.1%
Case Corp. 35,300 1,703,225
Caterpillar, Inc. 80,200 4,240,575
Dover Corp. 45,000 1,541,250
Ingersoll-Rand Co. 69,800 3,075,563
Tyco International Ltd. 8,400 529,200
11,089,813
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 21,687,219
MEDIA & LEISURE - 1.8%
BROADCASTING - 0.1%
Loral Orion Networks Systems, Inc. warrants (a):
1/15/07 100 1,500
1/15/17 420 5,040
Tele-Communications, Inc. (TCI Ventures
Group), Series A (a) 33,950 681,122
687,662
LEISURE DURABLES & TOYS - 0.1%
Brunswick Corp. 25,200 623,700
PUBLISHING - 1.6%
Cognizant Corp. 10,800 680,400
Gannett Co., Inc. 45,900 3,261,769
Knight-Ridder, Inc. 18,900 1,040,681
New York Times Co. (The) Class A 16,400 1,299,700
Tribune Co. 24,000 1,651,500
World Color Press, Inc. (a) 9,700 339,500
8,273,550
RESTAURANTS - 0.0%
Brinker International, Inc. (a) 12,000 231,000
TOTAL MEDIA & LEISURE 9,815,912
SHARES VALUE (NOTE 1)
NONDURABLES - 4.1%
BEVERAGES - 0.3%
Canadaigua Wine Co. Class A (a) 7,300 $ 359,069
Coors (Adolph) Co. Class B 14,700 499,800
PepsiCo, Inc. 22,600 930,838
1,789,707
FOODS - 1.8%
Dean Foods Co. 14,800 813,075
Flowers Industries, Inc. 24,100 492,544
Heinz (H.J.) Co. 90,500 5,079,313
Quaker Oats Co. 30,000 1,648,125
Smithfield Foods, Inc. (a) 20,600 628,300
Suiza Foods Corp. (a) 11,000 656,563
9,317,920
HOUSEHOLD PRODUCTS - 0.1%
Nu Skin Asia Pacific, Inc. Class A (a) 8,700 169,650
Premark International, Inc. 4,400 141,900
311,550
TOBACCO - 1.9%
Philip Morris Companies, Inc. 171,900 6,768,563
RJR Nabisco Holdings Corp. 132,220 3,140,225
Universal Corp. 9,700 362,538
10,271,326
TOTAL NONDURABLES 21,690,503
RETAIL & WHOLESALE - 7.7%
APPAREL STORES - 0.5%
Gap, Inc. 14,700 905,888
TJX Companies, Inc. 66,400 1,601,900
2,507,788
GENERAL MERCHANDISE STORES - 3.2%
Federated Department Stores, Inc. (a) 48,400 2,604,525
Wal-Mart Stores, Inc. 232,300 14,112,225
16,716,750
GROCERY STORES - 0.5%
Safeway, Inc. (a) 65,100 2,648,756
RETAIL & WHOLESALE, MISCELLANEOUS - 3.5%
Best Buy Co., Inc. 22,700 820,038
Home Depot, Inc. 123,800 10,283,138
Lowe's Companies, Inc. 42,200 1,711,738
Office Depot, Inc. (a) 16,300 514,469
Pier 1 Imports, Inc. 50,800 1,212,850
Tandy Corp. 79,600 4,223,775
18,766,008
TOTAL RETAIL & WHOLESALE 40,639,302
SERVICES - 0.4%
ADVERTISING - 0.2%
Omnicom Group, Inc. 28,800 1,436,400
PRINTING - 0.2%
Donnelley (R.R.) & Sons Co. 3,200 146,400
Valassis Communications, Inc. (a) 21,100 813,669
960,069
TOTAL SERVICES 2,396,469
TECHNOLOGY - 6.8%
COMMUNICATIONS EQUIPMENT - 1.9%
Globalstar Telecommunications Ltd.
warrants 2/15/04 (a)(f) 180 23,400
Lucent Technologies, Inc. 95,300 7,927,769
Tellabs, Inc. (a) 27,200 1,948,200
9,899,369
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TECHNOLOGY - CONTINUED
COMPUTER SERVICES & SOFTWARE - 2.5%
HBO & Co. 115,400 $ 4,067,850
Microsoft Corp. (a) 29,300 3,175,388
Oracle Corp. (a) 241,000 5,919,563
13,162,801
COMPUTERS & OFFICE EQUIPMENT - 2.0%
Ingram Micro, Inc. Class A (a) 3,300 146,025
International Business Machines Corp. 46,600 5,350,263
SCI Systems, Inc. (a) 93,400 3,514,175
Xerox Corp. 14,800 1,504,050
10,514,513
ELECTRONIC INSTRUMENTS - 0.1%
Thermo Electron Corp. 23,800 813,663
ELECTRONICS - 0.3%
Molex, Inc. 12,593 294,361
Thomas & Betts Corp. 23,400 1,152,450
1,446,811
TOTAL TECHNOLOGY 35,837,157
TRANSPORTATION - 3.1%
AIR TRANSPORTATION - 2.7%
AMR Corp. (a) 97,000 8,075,250
Comair Holdings, Inc. 27,600 852,150
Southwest Airlines Co. 125,600 3,720,900
US Airways Group, Inc. (a) 12,500 990,625
Viad Corp. 18,600 516,150
14,155,075
TRUCKING & FREIGHT - 0.4%
Airborne Freight Corp. 47,500 1,659,531
CNF Transportation, Inc. 9,800 416,500
2,076,031
TOTAL TRANSPORTATION 16,231,106
UTILITIES - 6.6%
CELLULAR - 0.0%
McCaw International Ltd. warrants
4/15/07 (a)(f) 910 4,550
ELECTRIC UTILITY - 1.6%
Edison International 39,400 1,164,763
Energy East Corp. 27,500 1,144,688
FPL Group, Inc. 21,500 1,354,500
FirstEnergy Corp. 30,400 934,800
GPU, Inc. 30,700 1,160,844
Houston Industries, Inc. 56,700 1,750,613
Public Service Enterprise Group, Inc. 24,200 833,388
8,343,596
GAS - 0.1%
MarketSpan Corp. 20,768 621,742
TELEPHONE SERVICES - 4.9%
AT&T Corp. 168,500 9,625,562
Ameritech Corp. 102,000 4,577,250
BellSouth Corp. 68,800 4,618,200
GTE Corp. 19,000 1,056,875
SBC Communications, Inc. 61,400 2,456,000
U.S. WEST, Inc. 81,800 3,844,600
26,178,487
TOTAL UTILITIES 35,148,375
TOTAL COMMON STOCKS
(Cost $299,808,665) 367,077,127
NONCONVERTIBLE PREFERRED STOCKS - 2.2%
SHARES VALUE (NOTE 1)
CONSTRUCTION & REAL ESTATE - 0.2%
REAL ESTATE INVESTMENT TRUSTS - 0.2%
California Federal Preferred Capital
Corp. 9 1/8% 30,171 $ 818,388
Crown America Realty Trust, Series A,
11% 1,692 90,734
Walden Residential Properties, Inc.
9.20% 5,800 146,450
1,055,572
FINANCE - 0.2%
CREDIT & OTHER FINANCE - 0.1%
Fresenius Medical Care Capital Trust II
7 7/8% 530 527,681
INSURANCE - 0.1%
American Annuity Group Capital Trust II
8 3/4% 160 166,840
SIG Capital Trust I 9 1/2% 582 620,808
787,648
TOTAL FINANCE 1,315,329
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Echostar Communications Corp.
12 1/8% pay-in-kind 297 326,700
MEDIA & LEISURE - 1.1%
BROADCASTING - 1.0%
Adelphia Communications Corp. $13 1,423 170,760
American Radio Systems Corp. 11 3/8%
pay-in-kind 3,025 350,144
CSC Holdings, Inc. 11 1/8%
pay-in-kind 12,193 1,396,099
Chancellor Media Corp., Series A,
$12.25 Pay-in-kind 1,591 226,718
Granite Broadcasting Corp.
12 3/4%, pay-in-kind 286 334,620
SFX Broadcasting, Inc. 12 5/8% 4,418 494,816
Sinclair Capital 11 5/8% 4,717 511,795
Time Warner, Inc., Series M,
10 1/4% pay-in-kind 1,414 1,571,308
5,056,260
PUBLISHING - 0.1%
Primedia, Inc.:
Series D, $10 3,386 355,530
$9.20 2,466 251,532
607,062
TOTAL MEDIA & LEISURE 5,663,322
TECHNOLOGY - 0.0%
COMMUNICATIONS EQUIPMENT - 0.0%
Intermedia Communications, Inc.
13 1/2% pay-in-kind 221 260,780
UTILITIES - 0.6%
CELLULAR - 0.3%
Nextel Communications, Inc.
11 1/8% pay-in-kind (f) 1,437 1,480,110
TELEPHONE SERVICES - 0.3%
Hyperion Telecommunications, Inc.
12 7/8% pay-in-kind (Reg.) 296 293,780
IXC Communications, Inc.
12 1/2% pay-in-kind 219 254,040
NONCONVERTIBLE PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - CONTINUED
TELEPHONE SERVICES - CONTINUED
NEXTLINK Communications, Inc. 14%
pay-in-kind 11,569 $ 679,679
WinStar Communications, Inc. 14 1/4% 227 270,130
1,497,629
TOTAL UTILITIES 2,977,739
TOTAL NONCONVERTIBLE PREFERRED STOCKS
(Cost $11,060,970) 11,599,442
CORPORATE BONDS - 16.2%
MOODY'S PRINCIPAL
RATINGS (C) AMOUNT
CONVERTIBLE BONDS - 0.1%
HEALTH - 0.1%
DRUGS & PHARMACEUTICALS - 0.1%
Integrated Process Equipment Corp.
6 1/4%, 9/15/04 (f) B- $ 200,000 150,000
MEDICAL FACILITIES MANAGEMENT - 0.0%
Tenet Healthcare Corp.
6%, 12/1/05 B1 120,000 103,050
TOTAL HEALTH 253,050
RETAIL & WHOLESALE - 0.0%
RETAIL & WHOLESALE, MISCELLANEOUS - 0.0%
Sports Authority, Inc.
5 1/4%, 9/15/01 B1 190,000 183,350
TOTAL CONVERTIBLE BONDS 436,400
NONCONVERTIBLE BONDS - 16.1%
AEROSPACE & DEFENSE - 0.2%
DEFENSE ELECTRONICS - 0.1%
Raytheon Co.:
5.95%, 3/15/01 Baa 150,000 149,442
6.45%, 8/15/04 Baa 180,000 181,786
Tracor, Inc.
8 1/2%, 3/1/07 B1 230,000 250,125
581,353
SHIP BUILDING & REPAIR - 0.1%
Newport News Shipbuilding,
Inc. 9 1/4%, 12/1/06 B1 530,000 564,450
TOTAL AEROSPACE & DEFENSE 1,145,803
BASIC INDUSTRIES - 0.3%
CHEMICALS & PLASTICS - 0.1%
General Chemical Corp.
9 1/4%, 8/15/03 B2 150,000 153,750
Huntsman Corp.
9 1/2%, 7/1/07 (f) B2 270,000 271,350
Moll Industries
10 1/2%, 7/1/08 (f) B3 40,000 40,800
PraxAir, Inc.
6 5/8%, 10/15/07 A3 120,000 122,724
588,624
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
PACKAGING & CONTAINERS - 0.2%
BWAY Corp., Series B,
10 1/4%, 4/15/07 B2 $ 140,000 $ 151,725
Owens Illinois, Inc.:
7.15%, 5/15/05 Ba1 300,000 301,256
7.80%, 5/15/18 Ba1 150,000 153,498
606,479
PAPER & FOREST PRODUCTS - 0.0%
Omega Cabinets Ltd.
10 1/2%, 6/15/07 B3 170,000 170,000
TOTAL BASIC INDUSTRIES 1,365,103
CONSTRUCTION & REAL ESTATE - 0.2%
CONSTRUCTION - 0.0%
U.S. Home Corp.
8.88%, 8/15/07 B1 250,000 255,625
REAL ESTATE - 0.1%
LNR Property Corp.
9 3/8%, 3/15/08 (f) B1 460,000 458,850
REAL ESTATE INVESTMENT TRUSTS - 0.1%
Centerpoint Properties Trust
6 3/4%, 4/1/05 Baa 100,000 100,172
EOP Operating LP (f):
6 3/8%, 2/15/03 Baa 100,000 99,575
6 3/4%, 2/15/08 Baa 100,000 99,877
Weeks Realty LP
6 7/8%, 3/15/05 Baa 100,000 99,375
398,999
TOTAL CONSTRUCTION & REAL ESTATE 1,113,474
DURABLES - 0.9%
AUTOS, TIRES, & ACCESSORIES - 0.4%
Blue Bird Body Co.
10 3/4%, 11/15/06 B2 180,000 196,200
Breed Technologies, Inc.
9 1/4%, 4/15/08 (f) B3 790,000 772,225
Federal-Mogul Corp.
7 7/8%, 7/1/10 Ba2 730,000 732,738
Oshkosh Truck Corp.
8 3/4%, 3/1/08 B3 400,000 404,000
2,105,163
CONSUMER DURABLES - 0.1%
Corning Consumer Products Co.
9 5/8%, 5/1/08 (f) B3 600,000 598,500
TEXTILES & APPAREL - 0.4%
Levi Strauss & Co.
7%, 11/1/06 (f) Baa 310,000 313,488
Nine West Group, Inc.
9%, 8/15/07 (f) Ba3 260,000 254,800
Unifi, Inc. 6 1/2%, 2/1/08 A3 100,000 98,870
WestPoint Stevens, Inc.
7 7/8%, 6/15/08 (f) Ba3 460,000 461,725
Worldtex, Inc.
9 5/8%, 12/15/07 B1 670,000 670,000
1,798,883
TOTAL DURABLES 4,502,546
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
ENERGY - 0.3%
COAL - 0.1%
P&L Coal Holdings Corp.
9 5/8%, 5/15/08 (f) B2 $ 440,000 $ 452,100
ENERGY SERVICES - 0.1%
Ocean Rig Norway AS
10 1/4%, 6/1/08 (f) B3 300,000 284,250
OIL & GAS - 0.1%
Chesapeake Energy Corp.
9 5/8%, 5/1/05 (f) B1 210,000 210,525
Occidental Petroleum Corp.
9 3/4%, 6/15/01 Baa 100,000 109,832
Oryx Energy Co.:
8%, 10/15/03 Ba1 60,000 63,188
8 3/8%, 7/15/04 Ba1 80,000 86,250
Petroleum Geo-Services ASA
7 1/8%, 3/30/28 Baa 150,000 151,806
USX-Marathon Group
6.85%, 3/1/08 Baa 120,000 120,823
742,424
TOTAL ENERGY 1,478,774
FINANCE - 3.0%
ASSET-BACKED SECURITIES - 0.8%
Airplanes Pass Through Trust
Class D 10 7/8%, 3/15/19 Ba2 700,000 768,250
BankAmerica Manufacturing
Housing Center Trust V
6.20%, 4/10/09 Aaa 150,000 150,094
CPS Auto Grantor Trust:
6.55%, 12/15/02 Aaa 73,905 74,471
6%, 8/15/03 Aaa 192,251 192,071
6.09%, 11/15/03 Aaa 108,863 108,880
CSXT Receivables Master Trust
6%, 7/25/04 Aaa 180,000 180,422
Capital Equipment Receivables
Trust 6.48%, 10/15/06 Baa 100,000 100,021
Chase Manhattan Auto Owner
Trust 5.85%, 5/15/03 Aaa 190,000 190,089
Chevy Chase Auto Receivable
Trust 5.91%, 12/15/04 Aaa 100,000 99,860
Contimortgage Home Equity
Loan Trust 6.26%, 7/15/12 Aaa 150,000 150,140
Dayton Hudson Credit Card
Master Trust 6 1/4%,
8/25/05 Aaa 170,000 171,161
Ford Credit Auto Owner Trust:
6.40%, 5/15/02 A1 110,000 110,988
6.20%, 12/15/02 Baa 90,000 89,843
6.40%, 12/15/02 Baa 50,000 49,971
Green Tree Financial Corp.:
6 1/2%, 6/15/27 Aaa 97,787 97,969
6.80%, 6/15/27 Aaa 100,000 101,031
6.45%, 9/15/28 Aaa 110,000 110,825
6.68%, 1/15/29 Aaa 210,000 212,953
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Key Plastics, Inc.
10 1/4%, 3/15/07 A2 $ 130,000 $ 130,427
MBNA Master Credit Card
Trust II Class A
6.55%, 1/15/07 Aaa 290,000 299,692
Olympic Automobile Receivables
Trust:
6.40%, 9/15/01 Aaa 150,000 149,832
6.70%, 3/15/02 Aaa 70,000 70,894
Petroleum Enhanced Trust
Receivables Offering
Petroleum Trust
6.1875%, 2/5/03 (f) Baa 123,255 123,255
Premier Auto Trust
6.34%, 1/6/03 Aaa 220,000 221,993
UAF Auto Grantor Trust
6.10%, 1/15/03 (f) Aaa 195,317 195,399
WFS Financial Owner Trust
6.55%, 10/20/04 Aaa 140,000 140,643
4,291,174
BANKS - 0.6%
BanPonce Corp.
6.665%, 3/5/01 A3 150,000 151,833
Barclays Bank PLC yankee
5.95%, 7/15/01 A1 400,000 399,200
Capital One Bank:
6.42%, 11/12/99 Baa 500,000 501,450
6 3/8%, 2/15/03 Baa 130,000 129,877
Citicorp 5 5/8%, 2/15/01 Aa3 100,000 99,002
Den Danske Bank 6 3/8%,
6/15/08 (f)(h) A1 370,000 365,604
Fleet Credit Card LLC
6.45%, 10/30/00 A1 100,000 101,145
Fleet/Norstar Financial Group,
Inc. 9.9%, 6/15/01 A3 90,000 98,846
Huntington National Bank
5 7/8%, 1/15/01 A1 570,000 567,367
NB Capital Trust IV
8 1/4%, 4/15/27 Aa3 100,000 111,685
NationsBank NA
5.92%, 6/8/01 Aa2 250,000 249,923
Nationsbank Corp.
5.67%, 2/9/01 Aa3 250,000 248,608
Provident Bank
6 1/8%, 12/15/00 A3 180,000 180,139
Providian National Bank
6.70%, 3/15/03 Baa 100,000 101,100
3,305,779
CREDIT & OTHER FINANCE - 1.1%
A T & T Capital Corp.
6 1/4%, 5/15/01 Baa 250,000 250,285
Ahmanson Capital Trust I
8.36%, 12/1/26 (f) Baa 250,000 280,983
Associates Corp. of North
America 6%, 4/15/03 Aa3 150,000 149,244
BankAmerica Capital II,
Series 2, 8%, 12/15/26 Aa3 100,000 108,681
Bankers Trust Co.
5.66%, 7/21/98 (h) - 500,000 499,900
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
FINANCE - CONTINUED
CREDIT & OTHER FINANCE - CONTINUED
BanPonce Trust I
8.327%, 2/1/27 (f) A3 $ 230,000 $ 250,146
Countrywide Funding Corp.
6.45%, 2/27/03 A3 150,000 151,205
First Security Capital I
8.41%, 12/15/26 A3 110,000 123,463
Ford Motor Credit Co.
7%, 9/25/01 A1 325,000 333,132
GST Network Funding, Inc.
0%, 5/1/08 (d)(f) - 340,000 204,850
General Electric Capital Corp.
6.94%, 4/13/09 (e) Aaa 250,000 251,778
General Motors Acceptance Corp.
6 3/4%, 7/10/02 A3 260,000 265,213
Heller Financial, Inc.:
7 7/8%, 11/1/99 A3 180,000 183,847
6 1/4%, 3/1/01 A3 170,000 170,158
Iridium Operating LLC/Iridium
Capital Corp.
10 7/8%, 7/15/05 B3 660,000 655,050
KeyCorp Institutional Capital
Series A 7.826%, 12/1/26 A1 130,000 137,693
La Petite Academy, Inc.
10%, 5/15/08 (f) B3 530,000 535,300
Mellon Capital I, Series A,
7.72%, 12/1/26 A2 70,000 74,612
Money Store, Inc.
7.30%, 12/1/02 Ba2 100,000 104,188
Nordstrom Credit, Inc.
7 1/4%, 4/30/02 A2 100,000 104,469
PNC Funding Corp.
6 7/8%, 3/1/03 A3 570,000 583,218
U.S. Bancorp 8.09%,
11/15/26 A1 100,000 107,568
UNICCO Service Co./ UNICCO
Finance Corp.
9 7/8%, 10/15/07 B3 510,000 513,825
6,038,808
SAVINGS & LOANS - 0.3%
Chevy Chase Savings Bank FSB
9 1/4%, 12/1/08 B1 170,000 172,550
First Nationwide Parent Holdings
Ltd. 12 1/2%, 4/15/03 B3 530,000 602,875
Great West Financial Trust II
8.206%, 2/1/27 A3 120,000 131,074
Home Savings of America Irwindale
FSB 6 1/2%, 8/15/04 A3 90,000 90,787
Long Island Savings Bank FSB
Melville NY 7%, 6/13/02 Baa 280,000 288,428
1,285,714
SECURITIES INDUSTRY - 0.2%
Amvescap PLC
6 3/8%, 5/15/03 (f) A3 200,000 200,590
Merrill Lynch & Co., Inc.
5.5984%, 7/28/98 - 500,000 500,000
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Morgan Stanley, Dean Witter,
Discover & Co.
5.67%, 1/15/99 (h) A+ $ 500,000 $ 500,000
1,200,590
TOTAL FINANCE 16,122,065
HEALTH - 0.5%
MEDICAL EQUIPMENT & SUPPLIES - 0.1%
Graham-Field Health Products,
Inc. 9 3/4%, 8/15/07 B3 360,000 324,000
McKesson Corp.
6.60%, 3/1/00 A3 150,000 151,197
475,197
MEDICAL FACILITIES MANAGEMENT - 0.4%
Fountain View, Inc.
11 1/4%, 4/15/08 (f) Caa 310,000 315,425
Integrated Health Services, Inc.,
Series A, 9 1/4%, 1/15/08 B2 720,000 747,000
Magellan Health Services, Inc.
9%, 2/15/08 (f) B3 570,000 564,300
Tenet Healthcare Corp.:
8 5/8%, 1/15/07 Ba3 520,000 536,900
8 1/8%, 12/1/08 (f) Ba3 210,000 211,050
2,374,675
TOTAL HEALTH 2,849,872
HOLDING COMPANIES - 0.0%
Norfolk Southern Corp.
7.05%, 5/1/37 Baa 220,000 233,616
INDUSTRIAL MACHINERY & EQUIPMENT - 0.5%
ELECTRICAL EQUIPMENT - 0.1%
Echostar Communications Corp.
secured discount
0%, 6/1/04 (d) B2 362,000 352,498
Motors & Gears, Inc., Series D,
10 3/4%, 11/15/06 B3 90,000 95,400
447,898
INDUSTRIAL MACHINERY & EQUIPMENT - 0.3%
Bucyrus International, Inc.
9 3/4%, 9/15/07 B1 540,000 518,400
Goss Graphic System, Inc.
12%, 10/15/06 B2 110,000 112,750
Roller Bearing Holdings, Inc.
0%, 6/15/09 (d)(f) - 500,000 315,000
Thermadyne Manufacturing LLC
9 7/8%, 6/1/08 (f) B3 300,000 302,250
Tyco International Group SA
yankee:
6 1/8%, 6/15/01 Baa 270,000 270,221
6 3/8%, 6/15/05 Baa 180,000 180,457
1,699,078
POLLUTION CONTROL - 0.1%
Allied Waste North America
10 1/4%, 12/1/06 B2 290,000 318,275
Envirosource, Inc.
9 3/4%, 6/15/03 B3 120,000 118,500
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED
POLLUTION CONTROL - CONTINUED
WMX Technologies, Inc.:
8 1/4%, 11/15/99 Baa $ 40,000 $ 41,029
6 1/4%, 10/15/00 Baa 100,000 100,152
7.10%, 8/1/26 Baa 140,000 145,684
723,640
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 2,870,616
MEDIA & LEISURE - 5.0%
BROADCASTING - 3.7%
Adelphia Communications Corp.:
9 1/2%, 2/15/04 B2 971,399 986,825
9 7/8%, 3/1/07 B2 1,050,000 1,136,625
ACME Television LLC/ACME
Financial Corp.
0%, 9/30/04 (d) B3 290,000 238,525
Albritton Communications Co.
8 7/8%, 2/1/08 B3 460,000 496,800
Ascent Entertainment Group, Inc.
0%, 12/15/04 (d) B3 320,000 204,800
CSC Holdings, Inc.:
9 1/4%, 11/1/05 B1 260,000 278,200
9 7/8%, 5/15/06 B1 150,000 163,500
10 1/2%, 5/15/16 B1 280,000 326,200
Century Communications Corp.:
8 3/4%, 10/1/07 Ba3 180,000 189,900
0%, 1/15/08 Ba3 2,120,000 961,950
Clear Channel Communications, Inc.
6 7/8%, 6/15/18 Baa 150,000 150,285
Comcast UK Cable Partners Ltd.
0%, 11/15/07 B2 450,000 372,375
Continental Cablevision, Inc.:
8 5/8%, 8/15/03 Baa 130,000 142,672
8.30%, 5/15/06 Baa 40,000 44,412
9%, 9/1/08 Baa 120,000 141,104
Diamond Cable Communications
PLC yankee
0%, 12/15/05 (d) Caa 70,000 57,750
Echostar Satellite Broadcasting
Corp. 0%,
3/15/04 (d) B3 110,000 100,925
Falcon Holding Group LP/Falcon
Funding (f):
8 3/8%, 4/15/10 B2 405,000 408,038
0%, 4/15/10 (d) B2 1,105,000 715,488
Fox/Liberty Networks LLC/FLN
Finance, Inc. 0%,
8/15/07 (d) B1 340,000 236,300
FrontierVision Operating
Partners LP/Frontiervision
Capital Corp.:
11%, 10/15/06 B3 710,000 782,775
0%, 9/15/07 (d) Caa 600,000 463,500
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Granite Broadcasting Corp.:
10 3/8%, 5/15/05 B3 $ 210,000 $ 222,600
9 3/8%, 12/1/05 B3 600,000 618,000
8 7/8%, 5/15/08 (f) B3 430,000 436,450
Hearst-Argyle Television, Inc.
7 1/2%, 11/15/27 Baa 100,000 106,524
Intermedia Capital Partners IV
LP/Intermedia Partners IV
Capital Corp.
11 1/4%, 8/1/06 B2 180,000 203,400
International Cabletel, Inc.
0%, 2/1/06 (d) B3 220,000 178,750
Lenfest Communications, Inc.
8 1/4%, 2/15/08 (f) B2 570,000 595,650
LIN Holdings Corp.
0%, 3/1/08 (d)(f) B3 940,000 634,500
NTL, Inc.:
10%, 2/15/07 B3 230,000 245,525
0%, 4/1/08 (d)(f) B3 1,280,000 832,000
Olympus Communications
LP/Olympus Capital Corp
10 5/8%, 11/15/06 B1 160,000 176,800
Orion Network Systems, Inc.:
11 1/4%, 1/15/07 B2 80,000 88,400
0%, 1/15/07 (d) B2 230,000 173,650
Pegasus Communications Corp.,
Series B, 9 5/8%, 10/15/05 B3 180,000 184,950
Renaissance Media Group
0%, 4/15/08 (d)(f) B3 420,000 261,450
Rogers Cablesystems Ltd. yankee
11%, 12/1/15 B2 290,000 335,675
Satelites Mexicanos SA de CV
10 1/8%, 11/1/04 (f) B3 590,000 569,350
Sinclair Broadcast Group, Inc.
8 3/4%, 12/15/07 B2 390,000 401,213
TCI Communications, Inc.:
6.46%, 3/6/00 Baa 200,000 201,796
6 7/8%, 2/15/06 Baa 190,000 195,995
7 1/8%, 2/15/28 Baa 140,000 146,160
TCI Communications Financing III
9.65%, 3/31/27 Ba2 820,000 992,200
Tele Communications, Inc.
9 1/4%, 4/15/02 Baa 100,000 110,232
Telemundo Group, Inc.
7%, 2/15/06 (e) B1 200,000 215,500
Telewest PLC:
yankee 9 5/8%, 10/1/06 B1 90,000 94,275
0%, 10/1/07 (d) B1 940,000 776,675
Time Warner, Inc.:
7.95%, 2/1/00 Baa 95,000 97,618
8.18%, 8/15/07 Baa 180,000 200,572
6 7/8%, 6/15/18 Baa 180,000 180,702
UIH Australia/Pacific, Inc.,
Series B, 0%, 5/15/06 (d) B2 1,020,000 601,800
United International Holdings,
Inc. 0%, 2/15/08 (d) B3 1,280,000 780,800
19,458,161
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
MEDIA & LEISURE - CONTINUED
ENTERTAINMENT - 0.8%
AMC Entertainment, Inc.
9 1/2%, 3/15/09 B2 $ 645,000 $ 641,775
American Skiing Co.
12%, 7/15/06 B3 370,000 414,400
Bally Total Fitness Holding Corp.,
Series B, 9 7/8%, 10/15/07 B3 578,000 595,340
Cinemark USA, Inc.
8 1/2%, 8/1/08 (Reg. S) B2 420,000 410,550
Livent, Inc.
9 3/8%, 10/15/04 B1 420,000 421,050
Paramount Communications, Inc.
7 1/2%, 1/15/02 Ba2 110,000 112,971
Premier Parks, Inc.
0%, 4/1/08 B3 370,000 245,588
United Artists Theatre Co.
9 3/4%, 4/15/08 (f) Caa 590,000 588,525
Viacom, Inc.:
6 3/4%, 1/15/03 Ba2 365,000 368,646
7 3/4%, 6/1/05 Ba2 230,000 245,054
4,043,899
LODGING & GAMING - 0.1%
Aladdin Gaming Holdings/Aladdin
Capital Units
13 1/2%, 3/1/10 (e)(f) Caa 400,000 186,000
Courtyard by Marriott II
LP/Courtyard II Finance Co.,
Series B, 10 3/4%, 2/1/08 B- 340,000 373,150
Sun International Hotels Ltd./Sun
International North America,
Inc. yankee 9%, 3/15/07 Ba3 260,000 273,000
832,150
PUBLISHING - 0.3%
Garden State Newspapers, Inc.:
Series B, 8 3/4%, 10/1/09 B1 440,000 446,600
8 3/4%, 10/1/09 (j) B1 450,000 454,500
News America Holdings, Inc.:
8 1/2%, 2/15/05 Baa 170,000 188,318
7.70%, 10/30/25 Baa 210,000 225,267
News America, Inc.
7 1/4%, 5/18/18 (f) Baa 130,000 133,206
1,447,891
RESTAURANTS - 0.1%
Host Marriott Travel Plazas, Inc.
9 1/2%, 5/15/05 Ba3 450,000 474,750
TOTAL MEDIA & LEISURE 26,256,851
NONDURABLES - 0.3%
FOODS - 0.0%
Chiquita Brands International, Inc.
9 5/8%, 1/15/04 B1 140,000 147,350
ConAgra, Inc.
7 1/8%, 10/1/26 Baa 150,000 159,876
Del Monte Corp.
12 1/4%, 4/15/07 Caa 30,000 33,825
Del Monte Foods Co.
0%, 12/15/07 (f) Caa 40,000 26,000
367,051
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
HOUSEHOLD PRODUCTS - 0.2%
Revlon Consumer Products Corp.
8 5/8%, 2/1/08 B3 $ 900,000 $ 900,000
TOBACCO - 0.1%
Philip Morris Companies, Inc.:
7 1/4%, 9/15/01 A2 150,000 153,860
7%, 7/15/05 A2 150,000 153,458
6.95%, 6/1/06 A2 140,000 145,020
452,338
TOTAL NONDURABLES 1,719,389
RETAIL & WHOLESALE - 1.3%
APPAREL STORES - 0.1%
AnnTaylor, Inc.
8 3/4%, 6/15/00 B3 440,000 437,800
Specialty Retailers, Inc.
8 1/2%, 7/15/05 Ba3 110,000 113,025
550,825
GENERAL MERCHANDISE STORES - 0.4%
Dayton Hudson Corp.:
6.80%, 10/1/01 A3 150,000 153,191
7 1/2%, 7/15/06 A3 250,000 270,065
Federated Department Stores, Inc.:
10%, 2/15/01 Baa 250,000 271,898
8 1/8%, 10/15/02 Baa 50,000 53,331
6.79%, 7/15/27 Baa 100,000 102,305
7%, 2/15/28 Baa 140,000 142,491
K Mart Corp.:
12 1/2%, 3/1/05 Ba2 510,000 634,950
7 3/4%, 10/1/12 Ba2 40,000 40,500
8 1/4%, 1/1/22 Ba2 200,000 204,500
1,873,231
GROCERY STORES - 0.5%
Ameriserve Food Distribution, Inc.
8 7/8%, 10/15/06 B1 330,000 330,000
Fleming Companies, Inc., Series B,
10 5/8%, 7/31/07 B3 100,000 104,375
Fred Meyer, Inc.
7.45%, 3/1/08 Ba2 80,000 80,600
Kroger Co.:
6%, 7/1/00 Baa 250,000 249,735
8.15%, 7/15/06 Baa 125,000 138,195
Mrs. Fields Original Cookies, Inc.
10 1/8%, 12/1/04 B2 160,000 155,200
Pathmark Stores, Inc.:
12 5/8%, 6/15/02 Caa 370,000 374,163
9 5/8%, 5/1/03 Caa 810,000 820,125
Pueblo Xtra International, Inc.:
9 1/2%, 8/1/03 B3 670,000 648,200
2,900,593
RETAIL & WHOLESALE, MISCELLANEOUS - 0.3%
Amazon.com, Inc.
0%, 5/1/08 (d)(f) Caa 260,000 158,600
Central Tractor Farm & Country, Inc.
10 5/8%, 4/1/07 B2 230,000 242,650
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
RETAIL & WHOLESALE - CONTINUED
RETAIL & WHOLESALE, MISCELLANEOUS - CONTINUED
J Crew Operating Corp.
10 3/8%, 10/15/07 Caa $ 390,000 $ 370,500
Metals USA, Inc.
8 5/8%, 2/15/08 (f) B2 700,000 677,250
1,449,000
TOTAL RETAIL & WHOLESALE 6,773,649
SERVICES - 0.3%
PRINTING - 0.0%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 210,000 221,025
SERVICES - 0.3%
Borg-Warner Security Corp.
9 5/8%, 3/15/07 B3 110,000 123,200
Iron Mountain, Inc.
8 3/4%, 9/30/09 B3 330,000 336,600
Medaphis Corp.
9 1/2%, 2/15/05 (f) B2 820,000 795,400
Signature Resorts, Inc.
9 3/4%, 10/1/07 B3 340,000 330,650
1,585,850
TOTAL SERVICES 1,806,875
TECHNOLOGY - 0.5%
COMPUTER SERVICES & SOFTWARE - 0.2%
Federal Data Corp.
10 1/8%, 8/1/05 B3 630,000 639,450
ICG Services, Inc.
0%, 5/1/08 (f) - 750,000 438,750
PSINet, Inc. 10%, 2/15/05 B3 140,000 142,450
1,220,650
COMPUTERS & OFFICE EQUIPMENT - 0.1%
Comdisco, Inc.:
7.21%, 7/2/01 Baa 125,000 129,070
6 3/8%, 11/30/01 Baa 300,000 301,272
430,342
ELECTRONIC INSTRUMENTS - 0.1%
Telecommunications Techniques Co.
9 3/4%, 5/15/08 (f) B3 390,000 396,825
ELECTRONICS - 0.1%
Advanced Micro Devices, Inc.
11%, 8/1/03 Ba3 280,000 296,800
Fairchild Semiconductor Corp.
11.74%, 3/15/08
pay-in-kind (j) - 235,663 226,262
523,062
TOTAL TECHNOLOGY 2,570,879
TRANSPORTATION - 0.7%
AIR TRANSPORTATION - 0.4%
Atlas Air, Inc. 9 1/4%,
4/15/08 (f) B3 880,000 878,900
Kitty Hawk, Inc.
9.95%, 11/15/04 B1 945,000 982,800
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
US Air, Inc.:
9 5/8%, 2/1/01 B1 $ 80,000 $ 83,400
10 3/8%, 3/1/13 Ba2 360,000 398,700
2,343,800
RAILROADS - 0.1%
CSX Corp. 6.46%, 6/22/05 Baa 200,000 201,754
Wisconsin Central Transport Corp.
6 5/8%, 4/15/08 Baa 50,000 49,904
251,658
SHIPPING - 0.2%
Amer Reefer Co. Ltd.
10 1/4%, 3/1/08 (f) B1 140,000 140,000
Cenargo International PLC
9 3/4%, 6/15/08 (f) Ba3 740,000 728,900
Holt Group, Inc.
9 3/4%, 1/15/06 (f) Caa 290,000 284,200
1,153,100
TOTAL TRANSPORTATION 3,748,558
UTILITIES - 2.1%
CELLULAR - 0.8%
AirTouch Communications, Inc.
6.35%, 6/1/05 Baa 270,000 271,210
McCaw International Ltd.
0%, 4/15/07 (d) Caa 910,000 596,050
Nextel International, Inc.
12 1/8%, 4/15/08 (f) Caa 870,000 504,600
Nextel Communications, Inc. (d):
0%, 9/15/07 B2 266,000 179,550
0%, 10/31/07 B2 1,310,000 854,775
0%, 2/15/08 (f) B2 1,140,000 732,450
PageMart Wireless, Inc.
0%, 2/1/08 (d) Caa 530,000 318,000
Rogers Communications, Inc.
8 7/8%, 7/15/07 B2 460,000 463,450
3,920,085
ELECTRIC UTILITY - 0.2%
Avon Energy Partners Holdings (f):
6.73%, 12/11/02 Baa 170,000 172,846
6.46%, 3/4/08 Baa 130,000 130,576
Hydro-Quebec yankee
7.40%, 3/28/25 A2 90,000 108,639
Israel Electric Corp. Ltd. (f):
yankee 7 7/8%,
12/15/26 A3 80,000 84,906
7 3/4%, 12/15/27 A3 170,000 175,219
Niagara Mohawk Power Corp.
7 3/4%, 10/1/08 Ba3 110,000 112,613
NIPSCO Capital Markets, Inc.
7.39%, 4/1/04 Baa 100,000 104,719
Texas Utilities Co.
6 3/8%, 1/1/08 Baa 70,000 69,230
958,748
TELEPHONE SERVICES - 1.1%
Cable & Wireless Communications
PLC 6 3/8%, 3/6/03 Baa 170,000 170,143
Dobson Wireline Co.
12 1/4%, 6/15/08 (f) - 785,000 767,338
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
UTILITIES - CONTINUED
TELEPHONE SERVICES - CONTINUED
GCI, Inc. 9 3/4%, 8/1/07 B2 $ 80,000 $ 82,800
Hyperion Telecommunications, Inc.:
Series B, 0%, 4/15/03 (d) B3 1,100,000 816,750
12 1/4%, 9/1/04 B3 440,000 473,000
McLeodUSA, Inc.:
0%, 3/1/07 (d) B2 580,000 433,550
9 1/4%, 7/15/07 B2 270,000 280,463
NEXTLINK Communications, Inc.
9 5/8%, 10/1/07 B3 600,000 613,500
Pathnet, Inc. Unit
12 1/2%, 4/15/08 (f) - 810,000 858,600
Teleport Communications Group,
Inc. 0%, 7/1/07 (d) Baa 350,000 300,563
Winstar Communications, Inc.
11%, 3/15/08 (f) - 380,000 378,100
WorldCom, Inc.:
9 3/8%, 1/15/04 Baa 122,000 128,139
8 7/8%, 1/15/06 Baa 103,000 112,051
7 3/4%, 4/1/07 Baa 550,000 596,563
6,011,560
TOTAL UTILITIES 10,890,393
TOTAL NONCONVERTIBLE BONDS 85,448,463
TOTAL CORPORATE BONDS
(Cost $84,785,652) 85,884,863
U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS - 3.1%
U.S. TREASURY OBLIGATIONS - 2.8%
U.S. Treasury Bonds:
12 3/4%, 11/15/10
(callable) Aaa 250,000 356,055
8 7/8%, 2/15/19 Aaa 259,000 356,731
7 5/8%, 2/15/25 Aaa 1,380,000 1,737,503
U.S. Treasury Notes:
5 7/8%, 10/31/98 Aaa 110,000 110,166
5 5/8%, 11/30/99 Aaa 1,466,000 1,467,833
6 7/8%, 3/31/00 Aaa 1,275,000 1,303,292
6 5/8%, 6/30/01 Aaa 395,000 406,542
7 7/8, 11/15/04 Aaa 2,030,000 2,279,934
7%, 7/15/06 Aaa 6,380,000 6,967,151
14,985,207
U.S. GOVERNMENT AGENCY OBLIGATIONS - 0.2%
Federal Home Loan Bank:
7.31%, 6/16/04 Aaa 125,000 134,570
7.56%, 9/1/04 Aaa 50,000 54,633
Freddie Mac 6.783%,
8/18/05 Aaa 440,000 464,614
Fannie Mae:
6.97%, 4/8/04 Aaa 190,000 201,221
7.40%, 7/1/04 Aaa 170,000 183,840
6.44%, 6/21/05 Aaa 250,000 259,258
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Guaranteed Export Trust
Certificates (assets of Trust
guaranteed by U.S.
Government through
Export-Import Bank)
Series 1994-A,
7.12%, 4/15/06 Aaa $ 120,831 $ 126,403
U.S. Department of Housing and
Urban Development Government
guaranteed participation
certificates Series 1995-A,
8.24%, 8/1/04 Aaa 20,000 22,437
1,446,976
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $16,105,483) 16,432,183
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 3.3%
Freddie Mac:
7 1/2%, 3/1/28 to 4/1/28 Aaa 193,084 337,233
Fannie Mae:
6%, 3/1/11 to 4/1/13 Aaa 3,192,792 3,159,381
6 1/2%, 2/1/13 to 10/1/27 Aaa 4,022,158 4,025,460
6 1/2%, 6/1/28 Aaa 1,400,000 1,394,750
7%, 7/1/28 (g) Aaa 5,586,835 5,665,400
7 1/2%, 5/1/24 to 1/1/26 Aaa 924,860 948,850
Government National Mortgage Association:
7%, 7/15/28 (g) Aaa 1,000,000 1,015,938
7 1/2%, 7/15/28 Aaa 1,100,000 1,130,594
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $17,495,379) 17,677,606
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.0%
PRIVATE SPONSOR - 0.0%
Credit-Based Asset Servicing and
Securitization LLC Series 1997-2
Class 2-B, 7.2891%,
12/29/25 (f)(h)(k)
(Cost $132,891) Ba3 250,000 120,547
COMMERCIAL MORTGAGE SECURITIES - 1.2%
Asset Securitization Corp.
Series 1997-D5 Class A-6,
0%, 2/14/41 BBB 100,000 100,047
Blackrock Capital Funding LLC
Series 1996 Class C2,
7.6964%, 11/16/26 (f) - 12,443 12,432
BKB Commercial Mortgage Trust
Series 1997-C1 Class D,
7.83%, 2/25/43 (f)(h) BBB 60,000 60,778
COMMERCIAL MORTGAGE SECURITIES - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
CBM Funding Corp. sequential
pay:
Series 1996-1 Class A-3PI,
7.08%, 11/1/07 AA $ 100,000 $ 104,641
Series 1996-1 Class B,
7.48%, 2/1/08 A 80,000 86,325
CS First Boston Mortgage
Securities Corp.:
Series 1997-C2 Class D,
7.27%, 4/17/11 Baa 190,000 194,869
Series 1998-C1 Class D,
7.17%, 1/17/12 BBB 210,000 213,413
Series 1998-FL1 Class E,
6.5063%, 1/10/13 (f)(h) Baa 220,000 220,000
DLJ Mortgage Acceptance Corp.
Series 1993-MF12 Class B-2,
10.10%, 9/18/03 (f) - 250,000 256,250
Deutsche Mortgage and Asset
Receiving Corp.
Series 1998-C1 Class D,
7.231%, 7/15/12 Baa 140,000 141,936
Franchise Mortgage Acceptance
Company LLC Loan
Receivables Trust (f)(h):
Series 1997-A Class E, 8.1047%,
4/15/19 - 250,000 240,664
Series 1997-B Class E, 7.8912%,
9/15/19 - 100,000 90,250
First Chicago/Lennar Trust I (h):
Series 1997-CHL1 Class D,
8.1077%, 5/29/08 - 350,000 350,492
Series 1997-CHL1 Class E,
8.1077%, 2/28/11 - 320,000 284,650
First Union-Lehman Brothers
Commercial Mortgage Trust
sequential pay Series 1997-C2
Class B, 6.79%, 10/18/11 Aa2 390,000 399,567
General Motors Acceptance
Corp. Commercial Mortgage
Securities, Inc. Series 1996-C1
Class F, 7.86%,
11/15/06 (f) Ba3 250,000 243,300
GS Mortgage Securities Corp. II:
Series 1997- GL Class A2-B,
6.86%, 7/13/30 Aaa 140,000 145,389
Series 1998-GLII Class D,
7.1905%, 4/13/31 (f)(h) Baa 50,000 50,511
Series 1998-GLII Class E,
7.1905%, 4/13/31 (f)(h) Baa 180,000 176,276
Kidder Peabody Acceptance
Corp. sequential pay,
Series 1993-M1 Class A-2,
7.15%, 4/25/25 Aa2 52,797 52,731
LTC Commercial Mortgage
Pass-Through Certificates:
Series 1996-1 Class E,
9.16%, 4/15/28 BB- 500,000 517,500
Series 1998-1 Class A,
6.029%, 5/30/30 (f) Aaa 109,661 107,648
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Morgan Stanley Capital One, Inc.:
Series 1996-MBL1 Class E,
8.661%, 5/25/21 (f) - $ 90,682 $ 89,095
Series 1998-HF1 Class D,
7.10%, 2/15/08 (h) BBB 180,000 182,700
Nomura Depositor Trust
Series 1998-ST1A Class B-2,
12.6563%, 1/15/03 (f) - 125,000 124,238
Nomura Asset Securities Corp.
Series 1998-D6 Class A-4,
7.5941%, 3/15/30 (h) Baa 140,000 144,102
Resolution Trust Corp. Series 1991-M2
Class A-3, 7.2498%,
9/25/20 (h) Ba3 74,288 63,887
Structured Asset Securities Corp.:
Series 1993-C1 Class E,
6.60%, 10/25/24 (f) B 250,000 125,000
Series 1995-C1 Class E,
7 3/8%, 9/25/24 (f) BB 1,000,000 972,500
sequential pay Series 1996
Class A-2A, 7 3/4%,
2/25/28 Aaa 52,255 52,777
commercial Series 1996-CFL
Class E, 7 3/4%, 2/25/28 BB+ 80,000 80,975
Thirteen Affiliates of General
Growth Properties, Inc. (f):
Series D-2,
6.992%, 11/15/12 Baa 140,000 140,454
Series E-2,
7.224%, 11/15/12 Baa 100,000 99,237
sequential pay Series A-2,
6.602%, 11/15/12 Aaa 130,000 133,203
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $5,966,800) 6,257,837
FOREIGN GOVERNMENT OBLIGATIONS (I) - 0.1%
Export Development Corp. yankee
8 1/8%, 8/10/99 Aa2 50,000 51,193
Manitoba Province yankee
6 3/8%, 10/15/99 A1 125,000 125,699
Newfoundland Province yankee
11 5/8%, 10/15/07 Baa 250,000 344,610
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $509,612) 521,502
SUPRANATIONAL OBLIGATIONS - 0.0%
Inter American Development Bank
yankee 6.29%, 7/16/27
(Cost $149,057) Aaa 150,000 157,832
BANK NOTES - 0.1%
Key Bank N.A 5.6488%, 8/20/99
(Cost $499,330) 500,000 499,525
CERTIFICATES OF DEPOSIT - 0.6%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Banque Nationale de Paris yankee
5 3/4%, 7/31/98 $ 200,000 $ 199,976
Canadian Imperial Bank of Commerce:
NY Branch yankee 6.20%, 8/1/00 180,000 180,954
5.91%, 8/28/98 500,000 500,023
Chase Manhattan Bank USA
5.54%, 7/6/98 400,000 399,996
RaboBank Nederland Cooperative Central
yankee 5.68%, 6/4/99 400,000 399,809
Societe Generale France yankee
5.91%, 10/15/98 400,000 400,073
Toronto-Dominion Bank yankee
5.68%, 6/4/99 400,000 399,809
Westpac Banking Corp. yankee
5.885%, 8/27/98 500,000 499,995
TOTAL CERTIFICATES OF DEPOSIT
(Cost $2,979,219) 2,980,635
COMMERCIAL PAPER - 0.5%
Aspen Funding Corp. yankee
5.54%, 7/20/98 400,000 398,814
BMW US Capital Corp. yankee
5.53%, 8/5/98 252,000 250,628
Citibank Credit Card Master Trust I
(Dakota Certificate Program)
5.52%, 8/5/98 300,000 298,373
Morgan (JP) & Co., Inc.
5 1/2%, 11/10/98 400,000 391,948
New Center Asset Trust
5.54%, 9/21/98 400,000 395,007
Triple A One Funding Corp.
5.54%, 7/8/98 400,000 399,562
UBS Finance, Inc. yankee
5.53%, 8/5/98 400,000 397,842
TOTAL COMMERCIAL PAPER
(Cost $2,532,168) 2,532,174
MASTER NOTES - 0.0%
Goldman Sachs Group LP
5.72%, 1/27/99
(Cost $300,000) 300,000 300,000
CASH EQUIVALENTS - 3.5%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations), in a joint
trading account at 5.93%, dated
6/30/98 due 7/1/98 $ 625,103 625,000
SHARES
Taxable Central Cash Fund (b) 17,717,215 17,717,215
TOTAL CASH EQUIVALENTS
(Cost $18,342,215) 18,342,215
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $460,667,441) $ 530,383,488
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield of the Taxable Central Cash
Fund was 5.61%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(c) Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investors Service, Inc.
(d) Debt obligation initially issued in zero coupon form which
converts to coupon form at a specified rate and date. The rate shown
is the rate at period end.
(e) Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date. The rate shown is the rate at
period end.
(f) Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions
exempt from registration, normally to qualified institutional buyers.
At the period end, the value of these securities amounted to
$26,792,777 or 5.1% of net assets.
(g) Security purchased on a delayed delivery or when-issued basis (see
Note 2 of Notes to Financial Statements).
(h) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(i) For foreign government obligations not individually rated by S&P
or Moody's, the ratings listed are assigned to securities by FMR, the
fund's investment adviser, based principally on S&P and Moody's
ratings of the sovereign credit of the issuing government.
(j) Restricted securities - Investment in securities not registered
under the Securities Act of 1933 (see Note 2 of Notes to Financial
Statements).
Additional information on each holding is as follows:
ACQUISITION ACQUISITION
SECURITY DATE COST
Fairchild Semiconductor
Corp. 11.74%, 3/15/08
pay in kind: 4/3/97 $ 184,988
9/15/97 $ 12,698
3/15/98 $ 12,965
Garden State
Newspapers, Inc.
8 3/4%, 10/1/09 2/11/98 $ 465,750
(k) Non-income producing - issuer filed for protection under the
Federal Bankruptcy Code or is in default of interest payment.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $299,004,872 and $302,860,115, respectively, of which
long-term U.S. government and government agency obligations aggregated
$72,759,717 and $55,081,946, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $27,166 for the
period (see Note 4 of Notes to Financial Statements).
The composition of long-term debt holdings as a percentage of total
value of investment in securities, is as follows (ratings are
unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 8.6% AAA, AA, A 8.3%
Baa 2.3% BBB 2.6%
Ba 2.0% BB 2.6%
B 8.3% B 7.8%
Caa 1.0% CCC 1.0%
Ca, C 0.0% CC, C 0.0%
D 0.0%
For some foreign government obligations, FMR has assigned the ratings
of the sovereign credit of the issuing government. The percentage not
rated by Moody's or S&P amounted to 1.2%. FMR has determined that
unrated debt securities that are lower quality account for 1.2% of the
total value of investment in securities.
INCOME TAX INFORMATION
At June 30, 1998, the aggregate cost of investment securities for
income tax purposes was $460,692,241. Net unrealized appreciation
aggregated $69,691,247, of which $78,694,992 related to appreciated
investment securities and $9,003,745 related to depreciated investment
securities.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
FINANCIAL STATEMENTS
<ERROR: WIDE TABLE>
ERROR: THE FOLLOWING TABLE: "ASSETS" IS TOO WIDE!
TABLE WIDTH IS 136 CHARACTERS.
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)
ASSETS
INVESTMENT IN SECURITIES, AT VALUE (INCLUDING REPURCHASE
AGREEMENTS OF $625,000) (COST $460,667,441) - SEE $ 530,383,488
ACCOMPANYING SCHEDULE
RECEIVABLE FOR INVESTMENTS SOLD 2,086,273
RECEIVABLE FOR FUND SHARES SOLD 255,303
DIVIDENDS RECEIVABLE 649,483
INTEREST RECEIVABLE 2,065,736
TOTAL ASSETS 535,440,283
LIABILITIES
PAYABLE TO CUSTODIAN BANK $ 36,733
PAYABLE FOR INVESTMENTS PURCHASED 3,954,568
REGULAR DELIVERY
DELAYED DELIVERY 7,707,551
PAYABLE FOR FUND SHARES REDEEMED 862,639
ACCRUED MANAGEMENT FEE 252,968
DISTRIBUTION FEES PAYABLE 67
OTHER PAYABLES AND 83,471
ACCRUED EXPENSES
TOTAL LIABILITIES 12,897,997
NET ASSETS $ 522,542,286
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 423,363,916
UNDISTRIBUTED NET INVESTMENT INCOME 5,955,457
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN
(LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS 23,507,312
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 69,715,601
AND ASSETS AND LIABILITIES IN
FOREIGN CURRENCIES
NET ASSETS $ 522,542,286
</TABLE>
INITIAL CLASS: $16.10
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($521,474,865 (DIVIDED BY) 32,394,455
SHARES)
SERVICE CLASS: $16.04
NET ASSET VALUE AND OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($1,067,421 (DIVIDED BY) 66,531 SHARES)
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME $ 3,066,987
DIVIDENDS
INTEREST 4,793,392
TOTAL INCOME 7,860,379
EXPENSES
MANAGEMENT FEE $ 1,485,555
TRANSFER AGENT FEES 173,911
DISTRIBUTION FEES - SERVICE CLASS 127
ACCOUNTING FEES AND EXPENSES 105,646
NON-INTERESTED TRUSTEES' COMPENSATION 921
CUSTODIAN FEES AND EXPENSES 12,675
AUDIT 23,776
LEGAL 2,832
TOTAL EXPENSES BEFORE REDUCTIONS 1,805,443
EXPENSE REDUCTIONS (50,059) 1,755,384
NET INVESTMENT INCOME 6,104,995
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 23,729,887
FOREIGN CURRENCY TRANSACTIONS (263) 23,729,624
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 22,643,508
ASSETS AND LIABILITIES IN 4,650 22,648,158
FOREIGN CURRENCIES
NET GAIN (LOSS) 46,377,782
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 52,482,777
OTHER INFORMATION $ 46,143
EXPENSE REDUCTIONS
DIRECTED BROKERAGE ARRANGEMENTS
CUSTODIAN CREDITS 3,916
$ 50,059
</TABLE>
<ERROR: WIDE TABLE>
ERROR: THE FOLLOWING TABLE: "ASSETS" IS TOO WIDE!
TABLE WIDTH IS 138 CHARACTERS.
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
OPERATIONS $ 6,104,995 $ 9,495,223
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 23,729,624 45,670,158
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) 22,648,158 28,894,868
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 52,482,777 84,060,249
DISTRIBUTIONS TO SHAREHOLDERS (9,747,110) -
FROM NET INVESTMENT INCOME
FROM NET REALIZED GAIN (45,582,074) (447,876)
TOTAL DISTRIBUTIONS (55,329,184) (447,876)
SHARE TRANSACTIONS - NET INCREASE (DECREASE) 42,147,656 146,605,112
TOTAL INCREASE (DECREASE) IN NET ASSETS 39,301,249 230,217,485
NET ASSETS
BEGINNING OF PERIOD 483,241,037 253,023,552
END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT
INCOME OF $5,955,457 AND $9,445,834, RESPECTIVELY) $ 522,542,286 $ 483,241,037
</TABLE>
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998
SHARES DOLLARS YEAR ENDED DECEMBER 31, 1997
(UNAUDITED) SHARES DOLLARS
SHARE TRANSACTIONS 3,232,190 $ 51,150,975 13,903,953 $ 201,184,575
INITIAL CLASS
SOLD
REINVESTED 3,710,796 55,327,974 32,763 447,876
REDEEMED (4,088,960) (65,374,236) (3,709,989) (55,037,339)
NET INCREASE (DECREASE) 2,854,026 $ 41,104,713 10,226,727 $ 146,595,112
SERVICE CLASS A 65,996 $ 1,044,479 627 $ 10,000
SOLD
REINVESTED 81 1,210 - -
REDEEMED (173) (2,746) - -
NET INCREASE (DECREASE) 65,904 $ 1,042,943 627 $ 10,000
DISTRIBUTIONS $ 9,746,897 $ -
INITIAL CLASS - NET INVESTMENT INCOME
INITIAL CLASS - NET REALIZED GAIN 45,581,077 447,876
TOTAL $ 55,327,974 $ 447,876
SERVICE CLASS - NET INVESTMENT INCOME $ 213 $ -
SERVICE CLASS - NET REALIZED GAIN 997 -
TOTAL $ 1,210 $ -
$ 55,329,184 $ 447,876
A SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JANUARY 3, 1995
JUNE 30, 1998 (COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31,
SELECTED PER-SHARE DATA (UNAUDITED) 1997 1996 1995
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.36 $ 13.10 $ 11.77 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .19 D .36 D .21 .10
NET REALIZED AND UNREALIZED GAIN (LOSS) 1.48 2.92 2.08 2.20
TOTAL FROM INVESTMENT OPERATIONS 1.67 3.28 2.29 2.30
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.34) - (.21) (.11)
FROM NET REALIZED GAIN (1.59) (.02) (.75) (.42)
TOTAL DISTRIBUTIONS (1.93) (.02) (.96) (.53)
NET ASSET VALUE, END OF PERIOD $ 16.10 $ 16.36 $ 13.10 $ 11.77
TOTAL RETURN B, C 11.15% 25.07% 20.04% 23.02%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 521,475 $ 483,231 $ 253,024 $ 68,247
RATIO OF EXPENSES TO AVERAGE NET ASSETS .73% A .77% .87% 1.00% F
RATIO OF EXPENSES TO AVERAGE NET ASSETS
AFTER EXPENSE REDUCTIONS .71% A, G .76% G .85% G 1.00%
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 2.46% A 2.44% 2.63% 1.69%
PORTFOLIO TURNOVER 125% A 90% 120% 343%
AVERAGE COMMISSION RATE H $ .0392 $ .0399 $ .0211
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
SELECTED PER-SHARE DATA (UNAUDITED) 1997 E
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.35 $ 15.94
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .19 D .07 D
NET REALIZED AND UNREALIZED GAIN (LOSS) 1.43 .34
TOTAL FROM INVESTMENT OPERATIONS 1.62 .41
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.34) -
FROM NET REALIZED GAIN (1.59) -
TOTAL DISTRIBUTIONS (1.93) -
NET ASSET VALUE, END OF PERIOD $ 16.04 $ 16.35
TOTAL RETURN B, C 10.82% 2.57%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 1,067 $ 10
RATIO OF EXPENSES TO AVERAGE NET ASSETS .83% A .87% A
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER
EXPENSE REDUCTIONS .81% A, G .87% A
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 2.60% A 2.70% A
PORTFOLIO TURNOVER 125% A 90%
AVERAGE COMMISSION RATE H $ .0392 $ .0399
</TABLE>
A ANNUALIZED
B TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE
THE TOTAL RETURNS SHOWN. TOTAL RETURNS FOR PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3,1997 (COMMENCEMENT OF SALE OF SERVICE
CLASS SHARES) TO DECEMBER 31, 1997.
F FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD
HAVE BEEN HIGHER.
G FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES
(SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
H FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS
REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR
SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY
FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES
EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION
RATE STRUCTURES MAY DIFFER.
NOTES TO FINANCIAL STATEMENTS
For the period ended June 30, 1998 (Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES.
Asset Manager: Growth Portfolio (the fund) is a fund of Variable
Insurance Products Fund II (the trust) and is authorized to issue an
unlimited number of shares. The trust is registered under the
Investment Company Act of 1940, as amended (the 1940 Act), as an
open-end management investment company organized as a Massachusetts
business trust. Shares of the fund may only be purchased by insurance
companies for the purpose of funding variable annuity or variable life
insurance contracts. The fund offers two classes of shares: the funds'
original class of shares (Initial Class shares) and Service Class
shares. Both classes have equal rights and voting privileges, except
for matters affecting a single class. Investment income, realized and
unrealized capital gains and losses, the common expenses of the fund,
and certain fund-level expense reductions, if any, are allocated on a
pro rata basis to each class based on the relative net assets of each
class to the total net assets of the fund. Each class of shares
differs in its respective distribution plan.
The financial statements have been prepared in conformity with
generally accepted accounting principles which require management to
make certain estimates and assumptions at the date of the financial
statements. The following summarizes the significant accounting
policies of the fund:
SECURITY VALUATION. Securities for which exchange quotations are
readily available are valued at the last sale price, or if no sale
price, at the closing bid price. Securities (including restricted
securities) for which exchange quotations are not readily available
(and in certain cases debt securities which trade on an exchange) are
valued primarily using dealer-supplied valuations or at their fair
value as determined in good faith under consistently applied
procedures under the general supervision of the Board of Trustees.
Short-term securities with remaining maturities of sixty days or less
for which quotations are not readily available are valued at amortized
cost or original cost plus accrued interest, both of which approximate
current value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Purchases
and sales of securities, income receipts and expense payments are
translated into U.S. dollars at the prevailing exchange rate on the
respective dates of the transactions. Net realized gains and losses on
foreign currency transactions represent net gains and losses from
sales and maturities of foreign currency contracts, disposition of
foreign currencies, the difference between the amount of net
investment income accrued and the U.S. dollar amount actually
received, and gains and losses between trade date and settlement on
purchases and sales of securities. The effects of changes in foreign
currency exchange rates on investments in securities are included with
the net realized and unrealized gain or loss on investment securities.
INCOME TAXES. As a qualified regulated investment company under
Subchapter M of the Internal Revenue Code, the fund is not subject to
income taxes to the extent that it distributes substantially all of
its taxable income for its fiscal year. The schedule of investments
includes information regarding income taxes under the caption "Income
Tax Information."
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend
date, except certain dividends from foreign securities where the
ex-dividend date may have passed, are recorded as soon as the fund is
informed of the ex-dividend date. Non-cash dividends included in
dividend income, if any, are recorded at the fair market value of the
securities received. Interest income, which includes accretion of
original issue discount, is accrued as earned. Investment income is
recorded net of foreign taxes withheld where recovery of such taxes is
uncertain.
EXPENSES. Most expenses of the trust can be directly attributed to a
fund. Expenses which cannot be directly attributed are apportioned
among the funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the
ex-dividend date. Income dividends and capital gain distributions are
declared separately for each class.
Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences, which may result in
distribution reclassifications, are primarily due to differing
treatments for paydown gains/losses on certain securities, foreign
currency transactions, passive foreign investment companies (PFIC),
market discount, partnerships and losses deferred due to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
Undistributed net investment income and accumulated undistributed net
realized gain (loss) on investments and foreign currency transactions
may include temporary book and tax basis differences which will
reverse in a subsequent period. Any taxable income or gain remaining
at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of
trade date. Gains and losses on securities sold are determined on the
basis of identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency
contracts to facilitate transactions in foreign-denominated
securities. Losses may arise from changes in the value of the foreign
currency or if the counterparties do not perform under the contracts'
terms. The U.S. dollar value of foreign currency contracts is
determined using contractual currency exchange rates established at
the time of each trade.
2. OPERATING POLICIES - CONTINUED
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission (the SEC), the fund, along with
other affiliated entities of Fidelity Management & Research Company
(FMR), may transfer uninvested cash balances into one or more joint
trading accounts. These balances are invested in one or more
repurchase agreements for U.S. Treasury or Federal Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are
marked-to-market daily and maintained at a value at least equal to the
principal amount of the repurchase agreement (including accrued
interest). FMR, the fund's investment adviser, is responsible for
determining that the value of the underlying securities remains in
accordance with the market value requirements stated above.
TAXABLE CENTRAL CASH FUND. Pursuant to an Exemptive Order issued by
the SEC, the fund may invest in the Taxable Central Cash Fund (the
Cash Fund) managed by Fidelity Investments Money Management, Inc.,
(formerly FMR Texas, Inc.) an affiliate of FMR. The Cash Fund is an
open-end money market fund available only to investment companies and
other accounts managed by FMR and its affiliates. The Cash Fund seeks
preservation of capital, liquidity, and current income by investing in
U.S. Treasury securities and repurchase agreements for these
securities. Income distributions from the Cash Fund are declared daily
and paid monthly from net interest income. Income distributions earned
by the fund are recorded as interest income in the accompanying
financial statements.
DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell
securities on a delayed delivery basis. Payment and delivery may take
place a month or more after the date of the transaction. The price of
the underlying securities and the date when the securities will be
delivered and paid for are fixed at the time the transaction is
negotiated. The market values of the securities purchased or sold on a
delayed delivery basis are identified as such in the fund's schedule
of investments. The fund may receive compensation for interest forgone
in the purchase of a delayed delivery security. With respect to
purchase commitments, the fund identifies securities as segregated in
its custodial records with a value at least equal to the amount of the
commitment. Losses may arise due to changes in the market value of the
underlying securities or if the counterparty does not perform under
the contract.
RESTRICTED SECURITIES. The fund is permitted to invest in securities
that are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from
registration or to the public if the securities are registered.
Disposal of these securities may involve time-consuming negotiations
and expense, and prompt sale at an acceptable price may be difficult.
At the end of the period, restricted securities (excluding 144A
issues) amounted to $680,762 or 0.1% of net assets.
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities), is included under the caption "Other
Information" at the end of the fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a
monthly fee that is calculated on the basis of a group fee rate plus a
fixed individual fund fee rate applied to the average net assets of
the fund. The group fee rate is the weighted average of a series of
rates and is based on the monthly average net assets of all the mutual
funds advised by FMR. The rates ranged from .2500% to .5200% for the
period. The annual individual fund fee rate is .30%. In the event that
these rates were lower than the contractual rates in effect during the
period, FMR voluntarily implemented the above rates, as they resulted
in the same or a lower management fee. For the period, the management
fee was equivalent to an annualized rate of .60% of average net
assets.
DISTRIBUTION AND SERVICE PLAN. In accordance with Rule 12b-1 of the
1940 Act, the Trustees have adopted separate distribution plans with
respect to each class of shares (collectively referred to as "the
Plans"). Under the Service Class Plan, the class pays Fidelity
Distributors Corporation (FDC), an affiliate of FMR, a distribution
and service fee (12b-1 fee). This fee is based on an annual rate of
.10% of Service Class average net assets. Initial Class shares are not
subject to a 12b-1 fee.
For the period, Service Class paid FDC $127, all of which was
reallowed to insurance companies, for the distribution of shares and
providing shareholder support services.
Under the Plans, FMR may use its resources to pay administrative and
promotional expenses related to the sale of each class of shares.
Subject to the approval of the Board of Trustees, the Plans also
authorize payments to third parties that assist in the sale of each
class of shares or render shareholder support services. For the
period, payments made to third parties under the Plans amounted to
$34,179. for the Initial Class.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations
Company, Inc. (FIIOC), an affiliate of FMR, is the fund's transfer,
dividend disbursing and shareholder servicing agent. FIIOC receives
account fees and asset-based fees that vary according to account size
and type of account. FIIOC pays a portion of the expenses related to
the typesetting, printing and mailing of all shareholder reports,
except for proxy statements. For the period, the transfer agent fees
were equivalent to an annualized rate of .07% of average net assets.
ACCOUNTING FEES. Fidelity Service Company, Inc., an affiliate of FMR,
maintains the fund's accounting records. The fee is based on the level
of average net assets for the month plus out-of-pocket expenses.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments
5. EXPENSE REDUCTIONS.
FMR has directed certain portfolio trades to brokers who paid a
portion of the fund's expenses.
In addition, the fund has entered into an arrangement with its
custodian whereby credits realized on uninvested cash balances were
used to offset a portion of the fund's expenses.
For the period, the reductions under these arrangements are shown
under the caption "Other Information" on the fund's Statement of
Operations.
6. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were the record owners
of approximately 71% of the outstanding shares of the fund. In
addition, one unaffiliated insurance company was record owner of 11%
of the total outstanding shares of the fund.
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Management & Research (U.K.) Inc.,
London, England
Fidelity Management & Research (Far East) Inc.,
Tokyo, Japan
OFFICERS
Edward C. Johnson 3d, PRESIDENT
Robert C. Pozen, SENIOR VICE PRESIDENT
Robert A. Lawrence, VICE PRESIDENT
Richard C. Habermann, VICE PRESIDENT
Charles S. Morrison II, VICE PRESIDENT
John Todd, VICE PRESIDENT
Steven Snider, VICE PRESIDENT
Eric D. Roiter, SECRETARY
Richard A. Silver, TREASURER
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
Ralph F. Cox *
Phyllis Burke Davis *
Robert M. Gates *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Marvin L. Mann *
William O. McCoy *
Gerald C. McDonough *
Thomas R. Williams *
* INDEPENDENT TRUSTEES
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER SERVICING AGENT
Fidelity Investments Institutional Operations Co., Inc.
Boston, MA
CUSTODIAN
The Chase Manhattan Bank
New York, NY
(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND II: INDEX 500 PORTFOLIO
SEMIANNUAL REPORT
JUNE 30, 1998
CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
MARKET ENVIRONMENT 3 A review of what happened in world markets during the
past six months.
PERFORMANCE AND INVESTMENT SUMMARY 4 How the fund has done over time, and an overview of the
fund's investments at the end of the period.
FUND TALK 5 The manager's review of fund performance, strategy
and outlook.
INVESTMENTS 6 A complete list of the fund's investments with their
market values.
FINANCIAL STATEMENTS 13 Statements of assets and liabilities, operations, and changes
in net assets, as well as financial highlights.
NOTES 15 Notes to the financial statements.
</TABLE>
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE
SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND.
THIS REPORT IS NOT AUTHORIZED FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT
INSURED BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND
ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
MARKET ENVIRONMENT
With the exception of Asia and a number of emerging market economies,
most stock and bond markets around the world performed well during the
past six months. Despite an environment of ongoing financial and
political difficulties in Asian and emerging markets, the largest
blue-chip companies of Europe and the U.S. continued to post strong
performance. Throughout the period, investors sought the relative
stability and liquidity of more defensive large-cap stocks and highly
rated bond investments of developed countries, hoping these
investments would maintain steady earnings and be easier to sell in a
possible economic slowdown.
U.S. STOCK MARKETS
The U.S. stock market continued to perform well during the first six
months of 1998. The strong showing by the Standard & Poor's 500 Index,
however, was produced by a narrow contingent of large companies. In
fact, most of the Standard & Poor's 17.71% return for the six-month
period that ended June 30, 1998, came from these large-capitalization
stocks. The "narrow" market - one where a small number of stocks
perform well, and others are flat or produce losses - was further
demonstrated by the fact that 60% of all the companies on the New York
Stock Exchange declined during this period. During the first quarter
of 1998, a stable U.S. economy and a belief that the worst in Asia
might be over helped the stock market post strong gains. The S&P 500
index turned in a solid return of 13.95% through the end of March. The
S&P 500 and other market indexes continued to rally through May,
before falling sharply in mid-June amid renewed fears that Asia's
economic crisis would inhibit the growth in earnings of American
companies. In subsequent trading days, however, investors continued to
favor large-cap stocks, boosting the returns of the S&P 500 index
higher. During the second quarter of 1998, the S&P 500 index returned
3.30%, compared with a decline of 2.14% for the Standard & Poor's
MidCap 400 Index. Investors in small-cap stocks experienced a weak
second quarter as the Russell 2000 - a measure of small company stock
performance - lost 4.66%.
The pattern of a narrow market also was displayed in certain industry
groups. Pharmaceutical stocks performed well, helped by healthy
pipelines of new products, the ability to bring products to market
more rapidly and relaxed regulations that permitted more aggressive
advertising. Stable economic growth, coupled with nonexistent
inflation, buoyed the financial sector. Banks and brokerage houses
sustained impressive earnings growth; other financial services firms
benefited from merger and acquisition activity, exemplified by the
recently announced "megamerger" of Travelers and Citicorp.
While many technology stocks turned in very strong results, the sector
also experienced some mixed results over the past six months, due
primarily to the negative impact of the Asian crisis and the effect of
a strong dollar on foreign sales. Energy stocks also experienced weak
results, with the price of crude oil dipping below $12 dollars a
barrel near the end of June.
FOREIGN STOCK MARKETS
Overseas, blue-chip investments also performed well. While the Morgan
Stanley Capital International (MSCI) EAFE Index, which measures the
performance of Europe, Australasia, and the Far East, posted a solid
return of 16.05% for the six-month period, investors in developed
markets fared much better than those investing in troubled emerging
markets. The performance of the MSCI Pacific Index, however, lost
5.87% during the same period, emphasizing the negative impact Japan
and Hong Kong had on the MSCI EAFE index. Most economies in Europe
continued to thrive amidst an environment of relatively benign
inflation and reduced interest rates as many countries prepared for
the advent of the European Monetary Union in January 1999. Many
European companies embraced U.S.-style efficiencies through
restructuring and robust merger and acquisition activity. Over the
past six months, the MSCI Europe Index returned an impressive 26.66%.
Among the strongest European economies were Portugal, Spain, Italy and
the United Kingdom.
While the Japanese market showed signs of strength toward the end of
the period, Japanese stocks continued to suffer from eroding
confidence in the economy, bankruptcies and a depreciating currency.
The TOPIX Index - a measure of the Japanese market - was down 1.46%
over the six-month period. As economic and currency turmoil continued
in Asia, emerging markets also suffered during the period. The MSCI
Far East ex-Japan Free Index dropped 25.79% and the MSCI Emerging
Markets Free Index - a market capitalization weighted index of over
850 stocks traded in 22 world markets - was down 18.87% for the first
six months of 1998.
U.S. BOND MARKETS
Bond prices continued to move higher thanks to low interest rates and
a continued lack of inflationary pressure. The Lehman Brothers
Aggregate Bond Index - a broad gauge of the U.S. taxable bond market -
returned 3.93% during this six-month period. Against a backdrop of
continued economic woes in Asia and fears that U.S. corporate profits
would slow, investors from around the globe moved assets from stocks
and riskier bonds into highly rated corporate bonds and U.S.
Treasuries. As a result, bond yields, which move in the opposite
direction of bond prices, fell to their lowest levels in decades. The
yield on the benchmark 30-year bond fell to 5.62% from 5.93% during
the period. Mortgage-backed bonds experienced some weakness toward the
end of the period amid record mortgage refinancings.
FOREIGN BOND MARKETS
While U.S. based bonds topped most foreign bonds on the continued
strength of the U.S. dollar and benign inflation, the Salomon Brothers
World Government Bond Index - a measure of government bond market
performance in developed nations - returned 2.79% during the period.
Similar to foreign equities, however, it paid to be in the safer bond
sectors of developed countries and highly rated bonds. In comparison
to the World Government Bond Index, the J.P. Morgan Emerging Markets
Bond Index lost 0.25% during the first six months of 1998. Continued
turbulence in Japan as it struggled to initiate economic reforms
trickled into emerging markets and resulted in mixed results during
the period.
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 LIFE OF
JUNE 30, 1998 YEAR YEARS FUND
VIP II: INDEX 500 29.64% 22.69% 21.33%
S&P 500 (registered trademark) 30.16% 23.08% 21.72%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's returns to the performance of the Standard
& Poor's 500 Index - a widely recognized, unmanaged index of common
stocks. This benchmark includes reinvested dividends and capital
gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, August 27, 1992.
If Fidelity had not reimbursed certain fund expenses, the total return
figures would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD BE LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
VIP II: Index 500 S&P 500
00157 SP001
1992/08/27 10000.00 10000.00
1992/08/31 10014.00 10016.72
1992/09/30 10130.00 10134.92
1992/10/31 10152.00 10170.39
1992/11/30 10498.00 10517.20
1992/12/31 10630.67 10646.56
1993/01/31 10707.47 10735.99
1993/02/28 10856.70 10882.00
1993/03/31 11095.84 11111.61
1993/04/30 10822.25 10842.71
1993/05/31 11103.95 11133.30
1993/06/30 11132.32 11165.58
1993/07/31 11081.66 11120.92
1993/08/31 11501.17 11542.40
1993/09/30 11407.95 11453.53
1993/10/31 11641.01 11690.62
1993/11/30 11527.52 11579.55
1993/12/31 11666.06 11719.67
1994/01/31 12059.53 12118.14
1994/02/28 11732.95 11789.73
1994/03/31 11223.46 11275.70
1994/04/30 11357.65 11420.03
1994/05/31 11533.77 11607.32
1994/06/30 11252.82 11322.94
1994/07/31 11623.93 11694.33
1994/08/31 12087.29 12173.80
1994/09/30 11793.76 11875.54
1994/10/31 12055.84 12142.74
1994/11/30 11617.64 11700.50
1994/12/31 11787.47 11874.02
1995/01/31 12099.87 12181.91
1995/02/28 12563.64 12656.64
1995/03/31 12931.02 13030.14
1995/04/30 13311.22 13413.88
1995/05/31 13834.52 13950.03
1995/06/30 14148.51 14274.09
1995/07/31 14620.55 14747.42
1995/08/31 14656.86 14784.44
1995/09/30 15269.88 15408.34
1995/10/31 15218.62 15353.33
1995/11/30 15880.76 16027.34
1995/12/31 16171.25 16336.03
1996/01/31 16724.46 16892.11
1996/02/29 16880.36 17048.70
1996/03/31 17054.17 17212.88
1996/04/30 17292.62 17466.59
1996/05/31 17733.85 17917.06
1996/06/30 17809.61 17985.32
1996/07/31 17020.75 17190.73
1996/08/31 17370.61 17553.28
1996/09/30 18342.21 18541.18
1996/10/31 18848.06 19052.55
1996/11/30 20260.89 20492.73
1996/12/31 19844.17 20086.77
1997/01/31 21074.26 21341.79
1997/02/28 21231.99 21509.11
1997/03/31 20349.53 20625.30
1997/04/30 21559.17 21856.63
1997/05/31 22870.18 23187.26
1997/06/30 23874.76 24226.05
1997/07/31 25773.31 26153.72
1997/08/31 24330.96 24688.59
1997/09/30 25646.59 26040.78
1997/10/31 24798.69 25171.02
1997/11/30 25920.77 26336.19
1997/12/31 26358.54 26788.38
1998/01/31 26644.25 27084.66
1998/02/28 28537.17 29038.00
1998/03/31 29981.03 30525.04
1998/04/30 30277.94 30832.12
1998/05/31 29736.79 30302.12
1998/06/30 30950.78 31532.99
IMATRL PRASUN SHR__CHT 19980630 19980731 130419 R00000000000074
Let's say hypothetically that $10,000 was invested in Variable
Insurance Products Fund II: Index 500 Portfolio on August 27, 1992,
when the fund started. As the chart shows, by June 30, 1998, the value
of the investment would have grown to $30,951 - a 209.51% increase on
the initial investment. For comparison, look at how the Standard &
Poor's 500 Index did over the same period. With dividends and capital
gains, if any, reinvested, the same $10,000 investment would have
grown to $31,533 - a 215.33% increase.
INVESTMENT SUMMARY
TOP TEN STOCKS AS OF JUNE 30, 1998
% OF FUND'S INVESTMENTS
General Electric Co. 3.1
Microsoft Corp. 2.8
Coca-Cola Co. (The) 2.2
Exxon Corp. 1.8
Merck & Co., Inc. 1.7
Pfizer, Inc. 1.5
Wal-Mart Stores, Inc. 1.4
Intel Corp. 1.3
Procter & Gamble Co. 1.3
Royal Dutch Petroleum Co. 1.2
TOP TEN MARKET SECTORS AS OF JUNE 30, 1998
% OF FUND'S INVESTMENTS
Finance 17.0
Technology 14.0
Health 11.2
Nondurables 9.5
Utilities 9.1
Energy 6.9
Industrial Machinery & Equipment 5.3
Retail & Wholesale 5.2
Media & Leisure 4.3
Basic Industries 4.0
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with Frank Salerno,
Portfolio Manager of
Index 500 Portfolio
Q. HOW DID THE FUND PERFORM, FRANK?
A. For the six months that ended June 30, 1998, the fund performed in
line with the 17.71% return of the Standard & Poor's 500 Index. Of
course, the fund's total return was slightly lower than that of the
index due to management expenses. The fund's return for the 12 months
that ended June 30, 1998 also was in line with the S&P 500, which
returned 30.16% during that period.
Q. HOW WOULD YOU DESCRIBE MARKET CONDITIONS OVER THE PAST SIX MONTHS?
A. The stock market continued to perform well in response to favorable
economic news. Inflation remained modest, interest rates were stable,
the economy grew more vigorously than expected and corporate earnings
- - a key determinant of stock prices - were generally strong. As the
year began, the lone dark cloud on the horizon was the fear that the
slowdown gripping many Asian economies might spread to the United
States. However, prospects in Asia began to look brighter when
government officials in Japan - a key economic force in the region -
promised to pass legislation designed to stimulate the Japanese
economy. On the basis of this optimism, most Asian stock markets
rallied strongly in the first quarter, and U.S. investors, relieved
that the worst in Asia might be over, drove the S&P 500 and other
market indexes to repeated record highs from February through early
May.
Q. WHAT HAPPENED FOR THE BALANCE OF THE PERIOD?
A. Several negatives temporarily slowed the market's momentum. The
situation in Asia deteriorated once again, as the Japanese government
failed to pass the stimulative legislation promised earlier in the
year, and the president of Indonesia was forced to resign amid
widespread civil strife. Moreover, U.S. companies with Asian exposure
- - including many technology companies - began to report disappointing
earnings. The combination of these factors caused the Dow Jones
Industrial Average to decline roughly 7% between mid-May and mid-June,
while the S&P 500 retreated about 5%. However, more news indicating
stronger-than-expected growth in the economy resulted in stocks
resuming their upward path by the end of the period, with the S&P 500
again reaching new highs in late June.
Q. DID ANY SECTORS STAND OUT AS STRONG PERFORMERS?
A. Drug companies did well, buoyed by healthy pipelines of new
products, the ability to bring products to market more rapidly and
relaxed regulations that permitted more aggressive advertising.
Financial services firms continued to benefit from a trend toward
greater industry consolidation, exemplified by the recently announced
"megamerger" of Travelers and Citicorp. In addition, the generally
favorable economic climate has been particularly beneficial for banks
and other financial services firms.
Q. HOW DID TECHNOLOGY STOCKS FARE?
A. Technology was a mixed bag. For example, U.S. personal computer
(PC) makers found that they could purchase components at a much lower
cost from their Asian suppliers because of the U.S. dollar's sharply
increased value relative to many Asian currencies. However, generally
lighter demand for personal computers was an offsetting factor that
hindered the sales and earnings growth of many PC makers and
manufacturers of PC components.
Q. WHAT SECTORS WERE DISAPPOINTING?
A. Energy prices were weak during the period, with the price of crude
oil dipping below $12 dollars a barrel near the end of June. Most
stocks in that sector were weak as a result. The same problem - weak
commodity prices - kept precious metals shares in the doldrums.
Q. WHAT'S YOUR OUTLOOK, FRANK?
A. The trend of disappointing earnings reported by companies with
Asian exposure may continue into the third quarter. However, I believe
that the sectors that have been strong so far this year can continue
to do well, as long as the economy keeps growing moderately and
interest rates and inflation stay roughly where they are. Although I
don't expect the market to advance at the rapid pace it has maintained
during the past three years, the favorable economic environment gives
me reason to expect further moderate gains in share prices.
FUND FACTS
GOAL: to provide returns that correspond to
those of the S&P 500 Index
START DATE: August 27, 1992
SIZE: as of June 30, 1998, more than $3.0 billion
MANAGER: Frank Salerno, since December 1997
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
INVESTMENTS JUNE 30, 1998 (UNAUDITED)
Showing Percentage of Value of Investment in Securities
<TABLE>
<CAPTION>
<S> <C> <C> <C>
COMMON STOCKS - 93.8%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.8%
AEROSPACE & DEFENSE - 1.4%
AlliedSignal, Inc. 187,600 $ 8,324,750
Boeing Co. 335,968 14,971,574
Goodrich (B.F.) Co. 24,800 1,230,700
Lockheed Martin Corp. 65,293 6,912,896
Rockwell International Corp. 66,700 3,205,769
Textron, Inc. 54,700 3,921,306
United Technologies Corp. 76,700 7,094,750
45,661,745
DEFENSE ELECTRONICS - 0.3%
Northrop Grumman Corp. 22,800 2,351,250
Raytheon Co. Class B 113,300 6,698,863
9,050,113
SHIP BUILDING & REPAIR - 0.1%
General Dynamics Corp. 43,700 2,032,050
TOTAL AEROSPACE & DEFENSE 56,743,908
BASIC INDUSTRIES - 4.0%
CHEMICALS & PLASTICS - 2.3%
Air Products & Chemicals, Inc. 78,200 3,128,000
Avery Dennison Corp. 39,400 2,117,750
Dow Chemical Co. 75,100 7,261,231
du Pont (E.I.) de Nemours & Co. 375,900 28,051,538
Eastman Chemical Co. 24,675 1,536,019
Engelhard Corp. 47,000 951,750
FMC Corp. (a) 11,800 804,613
Great Lakes Chemical Corp. 19,800 780,863
Hercules, Inc. 31,700 1,303,663
Monsanto Co. 199,900 11,169,413
Morton International, Inc. 47,500 1,187,500
Nalco Chemical Co. 16,200 569,025
PPG Industries, Inc. 59,100 4,111,144
Praxair, Inc. 55,700 2,607,456
Raychem Corp. 31,500 931,219
Rohm & Haas Co. 20,200 2,099,538
Sealed Air Corp. (a) 29,360 1,078,980
Union Carbide Corp. 45,500 2,428,562
W.R. Grace & Co. 25,700 438,506
72,556,770
IRON & STEEL - 0.2%
Aeroquip-Vickers, Inc. 9,700 566,238
Allegheny Teledyne, Inc. 57,984 1,326,384
Armco, Inc. (a) 36,700 233,963
Bethlehem Steel Corp. (a) 43,400 539,788
Nucor Corp. 29,500 1,357,000
USX-U.S. Steel Group 30,200 996,600
Worthington Industries, Inc. 23,250 350,203
5,370,176
METALS & MINING - 0.3%
Alcan Aluminium Ltd. 64,657 1,784,097
Aluminum Co. of America 53,100 3,501,281
ASARCO, Inc. 18,300 407,175
Cyprus Amax Minerals Co. 42,350 561,138
Freeport-McMoRan Copper & Gold, Inc. Class B 41,500 630,281
SHARES VALUE (NOTE 1)
Inco Ltd. 46,436 $ 634,333
Phelps Dodge Corp. 20,300 1,160,906
Reynolds Metals Co. 27,300 1,527,094
10,206,305
PACKAGING & CONTAINERS - 0.3%
Ball Corp. 7,330 294,574
Bemis Co., Inc. 16,000 654,000
Corning, Inc. 77,800 2,703,550
Crown Cork & Seal Co., Inc. 42,200 2,004,500
Owens Illinois, Inc. (a) 49,500 2,215,125
Tupperware Corp. 21,300 599,063
8,470,812
PAPER & FOREST PRODUCTS - 0.9%
Boise Cascade Corp. 14,700 481,425
Champion International Corp. 32,400 1,593,675
Fort James Corp. 66,300 2,950,350
Georgia-Pacific Corp. 32,200 1,897,788
International Paper Co. 102,800 4,420,400
Kimberly-Clark Corp. 189,932 8,713,131
Louisiana Pacific Corp. 33,500 611,375
Mead Corp. 35,900 1,139,825
Potlatch Corp. 9,700 407,400
Stone Container Corp. (a) 23,700 370,313
Temple-Inland, Inc. 18,800 1,012,850
Union Camp Corp. 23,400 1,161,225
Westvaco Corp. 30,050 848,913
Weyerhaeuser Co. 66,100 3,052,994
Willamette Industries, Inc. 32,800 1,049,600
29,711,264
TOTAL BASIC INDUSTRIES 126,315,327
CONSTRUCTION & REAL ESTATE - 0.4%
BUILDING MATERIALS - 0.3%
Armstrong World Industries, Inc. 13,300 896,088
Crane Co. 15,600 757,575
Fortune Brands, Inc. 51,800 1,991,063
Masco Corp. 57,800 3,496,900
Owens-Corning 17,900 730,544
Sherwin-Williams Co. 57,800 1,914,625
9,786,795
CONSTRUCTION - 0.1%
Centex Corp. 20,600 777,650
Fleetwood Enterprises, Inc. 12,700 508,000
Kaufman & Broad Home Corp. 14,200 450,850
Pulte Corp. 15,300 457,088
2,193,588
ENGINEERING - 0.0%
EG & G, Inc. 15,800 474,000
Fluor Corp. 25,900 1,320,900
Foster Wheeler Corp. 13,700 293,694
2,088,594
TOTAL CONSTRUCTION & REAL ESTATE 14,068,977
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
DURABLES - 3.1%
AUTOS, TIRES, & ACCESSORIES - 2.2%
AutoZone, Inc. (a) 50,850 $ 1,624,022
Chrysler Corp. 215,000 12,120,625
Cooper Tire & Rubber Co. 28,800 594,000
Cummins Engine Co., Inc. 14,200 727,750
Dana Corp. 35,400 1,893,900
Eaton Corp. 23,800 1,850,450
Echlin, Inc. 23,100 1,133,344
Ford Motor Co. 380,400 22,443,600
General Motors Corp. 222,878 14,891,036
Genuine Parts Co. 56,050 1,937,228
Goodyear Tire & Rubber Co. 54,600 3,518,288
ITT Industries, Inc. 39,100 1,461,363
Johnson Controls, Inc. 26,400 1,509,750
NACCO Industries, Inc. Class A 2,400 310,200
Navistar International Corp. (a) 17,970 518,884
PACCAR, Inc. 26,090 1,363,203
Pep Boys-Manny, Moe & Jack 19,700 373,069
Snap-On, Inc. 23,100 837,375
TRW, Inc. 41,200 2,250,550
71,358,637
CONSUMER DURABLES - 0.4%
Minnesota Mining & Manufacturing Co. 136,700 11,235,031
CONSUMER ELECTRONICS - 0.2%
Black & Decker Corp. 30,700 1,872,700
Maytag Corp. 33,300 1,644,188
Newell Co., Inc. 50,500 2,515,531
Whirlpool Corp. 24,800 1,705,000
7,737,419
TEXTILES & APPAREL - 0.3%
Fruit of the Loom, Inc. Class A (a) 22,700 753,356
Liz Claiborne, Inc. 21,900 1,144,275
NIKE, Inc. Class B 63,700 3,101,394
Reebok International Ltd. (a) 15,400 426,388
Russell Corp. 12,100 365,269
Springs Industries, Inc. Class A 4,100 189,113
VF Corp. 40,300 2,075,450
8,055,245
TOTAL DURABLES 98,386,332
ENERGY - 6.9%
ENERGY SERVICES - 0.7%
Baker Hughes, Inc. 53,800 1,859,463
Dresser Industries, Inc. 59,000 2,599,688
Halliburton Co. 87,900 3,917,044
Helmerich & Payne, Inc. 20,500 456,125
McDermott International, Inc. 20,400 702,525
Rowan Companies, Inc. (a) 29,800 579,238
Schlumberger Ltd. 161,700 11,046,131
Western Atlas, Inc. 19,500 1,655,063
22,815,277
OIL & GAS - 6.2%
Amerada Hess Corp. 32,000 1,738,000
Amoco Corp. 319,900 13,315,838
SHARES VALUE (NOTE 1)
Anadarko Petroleum Corp. 20,100 $ 1,350,469
Apache Corp. 33,200 1,045,800
Ashland, Inc. 23,000 1,187,375
Atlantic Richfield Co. 108,400 8,468,750
Burlington Resources, Inc. 59,257 2,551,755
Chevron Corp. 217,900 18,099,319
Coastal Corp. (The) 36,900 2,576,081
Exxon Corp. 815,100 58,126,819
Kerr-McGee Corp. 17,600 1,018,600
Mobil Corp. 260,300 19,945,488
Occidental Petroleum Corp. 121,900 3,291,300
Oryx Energy Co. (a) 35,300 781,013
Pennzoil Co. 16,100 815,063
Phillips Petroleum Co. 84,700 4,081,481
Royal Dutch Petroleum Co. 707,200 38,763,400
Sun Co., Inc. 29,900 1,160,494
Texaco, Inc. 180,200 10,755,688
Union Pacific Resources Group, Inc. 86,912 1,526,392
Unocal Corp. 83,850 2,997,638
USX-Marathon Group 97,400 3,342,038
196,938,801
TOTAL ENERGY 219,754,078
FINANCE - 17.0%
BANKS - 7.7%
Banc One Corp. 235,948 13,168,848
Bank of New York, Inc. 130,900 7,943,994
BankAmerica Corp. 228,300 19,733,681
BankBoston Corp. 99,382 5,528,124
Bankers Trust New York Corp. 13,100 1,520,419
BB&T Corp. 41,600 2,813,200
Capital One Financial Corp. 21,800 2,707,288
Chase Manhattan Corp. 285,446 21,551,173
Citicorp 150,962 22,531,079
Comerica, Inc. 55,000 3,643,750
Fifth Third Bancorp 83,125 5,236,875
First Union Corp. 323,445 18,840,671
Huntington Bancshares, Inc. 56,690 1,899,115
KeyCorp 148,914 5,305,061
Mellon Bank Corp. 90,800 6,321,950
Mercantile Bancorp., Inc. 46,000 2,317,250
Morgan (JP) & Co., Inc. 59,400 6,957,225
National City Corp. 110,421 7,839,891
NationsBank Corp. 320,114 24,488,721
Northern Trust Corp. 40,000 3,050,000
Norwest Corp. 254,400 9,508,200
PNC Financial Corp. 100,100 5,386,631
Providian Financial Corp. 31,900 2,506,144
Republic New York Corp. 36,600 2,303,513
State Street Corp. 53,300 3,704,350
Summit Bancorp 63,000 2,992,500
SunTrust Banks, Inc. 71,300 5,797,581
Synovus Finanical Corp. 82,000 1,947,500
U.S. Bancorp 249,351 10,722,093
Wachovia Corp. 68,200 5,762,900
Wells Fargo & Co. 28,600 10,553,400
244,583,127
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
CREDIT & OTHER FINANCE - 2.0%
American Express Co. 151,179 $ 17,234,406
Associates First Capital Corp. 118,574 9,115,376
Beneficial Corp. 18,800 2,879,925
Countrywide Credit Industries, Inc. 37,300 1,892,975
First Chicago NBD Corp. 96,559 8,557,541
Fleet Financial Group, Inc. 95,974 8,013,829
Green Tree Financial Corp. 45,300 1,939,406
Household International, Inc. 110,630 5,503,843
MBNA Corp. 166,950 5,509,350
Transamerica Corp. 21,329 2,455,501
63,102,152
FEDERAL SPONSORED CREDIT - 1.1%
Fannie Mae 346,600 21,055,950
Freddie Mac 226,700 10,669,069
SLM Holding Corp. 56,300 2,758,700
34,483,719
INSURANCE - 3.8%
Aetna, Inc. 48,400 3,684,450
Allstate Corp. 139,821 12,802,360
American General Corp. 84,452 6,011,927
American International Group, Inc. 230,162 33,603,652
Aon Corp. 56,150 3,944,538
Chubb Corp. (The) 55,900 4,492,963
CIGNA Corp. 71,700 4,947,300
Cincinnati Financial Corp. 55,500 2,129,813
Conseco, Inc. 62,300 2,912,525
General Re Corp. 25,800 6,540,300
Hartford Financial Services Group, Inc. 39,800 4,552,125
Jefferson-Pilot Corp. 36,100 2,091,544
Lincoln National Corp. 33,400 3,051,925
Loews Corp. 38,000 3,310,750
Marsh & Mclennan Companies, Inc. 85,650 5,176,472
MBIA, Inc. 29,300 2,193,838
MGIC Investment Corp. 38,800 2,214,025
Progressive Corp. 24,100 3,398,100
SAFECO Corp. 47,100 2,140,106
St. Paul Companies, Inc. (The) 81,392 3,423,551
SunAmerica, Inc. 61,300 3,520,919
Torchmark Corp. 46,800 2,141,100
UNUM Corp. 49,200 2,730,600
121,014,883
SAVINGS & LOANS - 0.3%
Ahmanson (H.F.) & Co. 37,100 2,634,100
Golden West Financial Corp. 13,900 1,477,744
Washington Mutual, Inc. 138,362 6,010,099
10,121,943
SECURITIES INDUSTRY - 2.1%
Bear Stearns Companies, Inc. 38,000 2,161,250
Franklin Resources, Inc. 88,700 4,789,800
Lehman Brothers Holdings, Inc. 39,100 3,032,694
Merrill Lynch & Co., Inc. 115,200 10,627,200
Morgan Stanley Dean Witter Discover and Co. 197,056 18,005,992
SHARES VALUE (NOTE 1)
Schwab (Charles) Corp. 79,200 $ 2,574,000
Travelers Group, Inc. (The) 383,081 23,224,286
64,415,222
TOTAL FINANCE 537,721,046
HEALTH - 11.2%
DRUGS & PHARMACEUTICALS - 7.7%
Allergan, Inc. 22,400 1,038,800
ALZA Corp. Class A. 30,400 1,314,800
American Home Products Corp. 437,600 22,645,800
Amgen, Inc. (a) 85,000 5,556,875
Bristol-Myers Squibb Co. 331,800 38,136,263
Lilly (Eli) & Co. 369,192 24,389,747
Merck & Co., Inc. 398,300 53,272,625
Pfizer, Inc. 435,100 47,289,931
Pharmacia & Upjohn, Inc. 168,960 7,793,280
Schering-Plough Corp. 244,600 22,411,475
Sigma-Aldrich Corp. 33,700 1,183,713
Warner-Lambert Co. 273,300 18,960,188
243,993,497
MEDICAL EQUIPMENT & SUPPLIES - 2.9%
Abbott Laboratories 514,700 21,038,363
Bard (C.R.), Inc. 19,400 738,413
Bausch & Lomb, Inc. 18,700 937,338
Baxter International, Inc. 94,200 5,069,138
Becton, Dickinson & Co. 41,300 3,205,913
Biomet, Inc. 37,900 1,253,069
Boston Scientific Corp. (a) 65,000 4,655,625
Cardinal Health, Inc. 38,100 3,571,875
Guidant Corp. 51,100 3,644,069
Johnson & Johnson 448,400 33,069,500
Mallinckrodt, Inc. 24,900 739,219
Medtronic, Inc. 160,700 10,244,625
Millipore Corp. 14,700 400,575
Pall Corp. 41,500 850,750
St. Jude Medical, Inc. (a) 24,229 891,930
U.S. Surgical Corp. 24,400 1,113,250
91,423,652
MEDICAL FACILITIES MANAGEMENT - 0.6%
Columbia/HCA Healthcare Corp. 207,912 6,055,437
HEALTHSOUTH Corp. (a) 127,700 3,407,994
Humana, Inc. (a) 58,700 1,830,706
Manor Care, Inc. 18,500 711,094
Tenet Healthcare Corp. (a) 102,800 3,212,500
United HealthCare Corp. 64,700 4,108,450
19,326,181
TOTAL HEALTH 354,743,330
HOLDING COMPANIES - 0.1%
CINergy Corp. 46,913 1,641,955
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - 5.3%
ELECTRICAL EQUIPMENT - 3.7%
Emerson Electric Co. 152,900 $ 9,231,338
General Electric Co. 1,085,700 98,798,700
General Instrument Corp. (a) 52,100 1,416,469
General Signal Corp. 14,600 525,600
Grainger (W.W.), Inc. 30,300 1,509,319
Harris Corp. 26,700 1,193,156
Honeywell, Inc. 42,300 3,534,694
Scientific-Atlanta, Inc. 26,200 664,825
116,874,101
INDUSTRIAL MACHINERY & EQUIPMENT - 1.4%
Briggs & Stratton Corp. 8,100 303,244
Case Corp. 24,300 1,172,475
Caterpillar, Inc. 122,100 6,456,038
Cincinnati Milacron, Inc. 10,100 245,556
Cooper Industries, Inc. 40,346 2,216,508
Deere & Co. 84,900 4,489,088
Dover Corp. 74,600 2,555,050
Harnischfeger Industries, Inc. 14,400 407,700
Illinois Tool Works, Inc. 81,100 5,408,356
Ingersoll-Rand Co. 55,300 2,436,656
Parker-Hannifin Corp. 35,625 1,358,203
Stanley Works 29,300 1,217,781
Tenneco, Inc. 60,200 2,291,363
Timken Co. 17,984 554,132
Tyco International Ltd. 192,700 12,140,100
43,252,250
POLLUTION CONTROL - 0.2%
Browning-Ferris Industries, Inc. 61,300 2,130,175
Waste Management, Inc. 151,700 5,309,500
7,439,675
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 167,566,026
MEDIA & LEISURE - 4.3%
BROADCASTING - 1.5%
CBS Corp. 246,050 7,812,088
Clear Channel Communications, Inc. (a) 37,100 4,048,538
Comcast Corp. Class A special 110,950 4,503,877
MediaOne Group, Inc. 201,100 8,835,831
Tele-Communications, Inc. (TCI Group) Series A (a) 158,400 6,088,500
Time Warner, Inc. 177,920 15,201,040
46,489,874
ENTERTAINMENT - 0.9%
Disney (Walt) Co. 226,500 23,796,656
King World Productions, Inc. (a) 21,400 545,700
Viacom, Inc. Class B (non-vtg.) (a) 99,200 5,778,400
30,120,756
LEISURE DURABLES & TOYS - 0.2%
Brunswick Corp. 28,500 705,375
Hasbro, Inc. 44,650 1,755,303
Mattel, Inc. 103,576 4,382,559
6,843,237
SHARES VALUE (NOTE 1)
LODGING & GAMING - 0.1%
Harrah's Entertainment, Inc. (a) 33,600 $ 781,200
Hilton Hotels Corp. 83,700 2,385,450
Mirage Resorts, Inc. (a) 66,900 1,425,806
4,592,456
PUBLISHING - 0.9%
American Greetings Corp. Class A 24,500 1,247,969
Cognizant Corp. 58,800 3,704,400
Dow Jones & Co., Inc. 25,400 1,416,050
Dun & Bradstreet Corp. 57,300 2,069,963
Gannett, Inc. 95,300 6,772,256
Harcourt General, Inc. 17,000 1,011,500
Knight Ridder, Inc. 26,200 1,442,638
Mcgraw-Hill Companies, Inc. 34,400 2,805,750
Meredith Corp. 14,700 689,981
New York Times Co. (The) Class A 30,700 2,432,975
Times Mirror Co. Class A 23,600 1,483,850
Tribune Co. 40,500 2,786,906
27,864,238
RESTAURANTS - 0.7%
Darden Restaurants, Inc. 47,900 760,413
Marriott International, Inc. Class A 76,800 2,486,400
McDonald's Corp. 228,000 15,732,000
Tricon Global Restaurants, Inc. 51,010 1,616,379
Wendy's International, Inc. 42,800 1,005,800
21,600,992
TOTAL MEDIA & LEISURE 137,511,553
NONDURABLES - 9.5%
AGRICULTURE - 0.1%
Pioneer Hawaii-Bred International, Inc. 75,700 3,132,088
BEVERAGES - 3.3%
Anheuser-Busch Companies, Inc. 162,200 7,653,813
Brown-Forman Corp. Class B 15,800 1,015,150
Coca-Cola Co. (The) 822,500 70,323,750
Coors (Adolph) Co. Class B 12,000 408,000
PepsiCo, Inc. 498,300 20,523,731
Seagram Co. Ltd. 119,900 4,897,295
104,821,739
FOODS - 1.9%
Archer-Daniels-Midland Co. 189,981 3,680,882
Bestfoods 96,100 5,579,806
Campbell Soup Co. 151,200 8,032,500
ConAgra, Inc. 158,000 5,006,625
General Mills, Inc. 52,500 3,589,688
Heinz (H.J.) Co. 121,750 6,833,219
Hershey Foods Corp. 40,600 2,801,400
Kellogg Co. 129,300 4,856,831
Quaker Oats Co. 47,400 2,604,038
Ralston Purina Co. 36,500 4,263,656
Sara Lee Corp. 155,800 8,715,063
Sysco Corp. 113,200 2,900,750
Wrigley (Wm.) Jr. Co. 33,200 3,253,600
62,118,058
HOUSEHOLD PRODUCTS - 3.1%
Alberto-Culver Co. Class B 12,600 365,400
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONDURABLES - CONTINUED
HOUSEHOLD PRODUCTS - CONTINUED
Avon Products, Inc. 46,300 $ 3,588,250
Clorox Co. 34,800 3,319,050
Colgate-Palmolive Co. 98,800 8,694,400
Gillette Co. 374,900 21,252,144
International Flavors & Fragrances, Inc. 36,900 1,602,844
Procter & Gamble Co. 447,100 40,714,044
Rubbermaid, Inc. 46,000 1,526,625
Unilever NV (NY shares) 211,400 16,687,388
97,750,145
TOBACCO - 1.1%
Philip Morris Companies, Inc. 811,400 31,948,875
UST, Inc. 61,800 1,668,600
33,617,475
TOTAL NONDURABLES 301,439,505
PRECIOUS METALS - 0.2%
Barrick Gold Corp. 124,900 2,382,695
Battle Mountain Gold Co. 56,500 335,469
Homestake Mining Co. 70,300 729,363
Newmont Mining Corp. 50,165 1,185,148
Placer Dome, Inc. 68,200 794,563
5,427,238
RETAIL & WHOLESALE - 5.2%
APPAREL STORES - 0.4%
Abercrombie & Fitch Co. Class A (a) 80 3,520
Gap, Inc. 130,900 8,066,713
Limited, Inc. (The) 76,089 2,520,448
TJX Companies, Inc. 107,000 2,581,375
Venator Group, Inc. 45,200 864,450
14,036,506
DRUG STORES - 0.5%
CVS Corp. 122,000 4,750,375
Longs Drug Stores Corp. 13,000 375,375
Rite Aid Corp. 86,200 3,237,888
Walgreen Co. 160,800 6,643,050
15,006,688
GENERAL MERCHANDISE STORES - 2.8%
Consolidated Stores Corp. (a) 40,200 1,457,250
Costco Companies, Inc. (a) 75,739 4,776,291
Dayton Hudson Corp. 146,300 7,095,550
Dillards, Inc. Class A 35,600 1,475,175
Federated Department Stores, Inc. (a) 70,300 3,783,019
K mart Corp. (a) 163,000 3,137,750
May Department Stores Co. (The) 78,200 5,122,100
Mercantile Stores Co., Inc. 15,000 1,184,063
Nordstrom, Inc. 27,100 2,093,475
Penney (J.C.), Inc. 83,800 6,059,788
Sears, Roebuck & Co. 130,300 7,956,444
Wal-Mart Stores, Inc. 744,700 45,240,525
89,381,430
SHARES VALUE (NOTE 1)
GROCERY STORES - 0.5%
Albertson's, Inc. 82,200 $ 4,258,988
American Stores Co. 92,200 2,230,088
Giant Food, Inc. Class A 20,300 874,169
Great Atlantic & Pacific Tea, Inc. 13,300 439,731
Kroger Co. (The) (a) 87,800 3,764,425
Supervalu, Inc. 20,600 914,125
Winn-Dixie Stores, Inc. 45,800 2,344,388
14,825,914
RETAIL & WHOLESALE, MISCELLANEOUS - 1.0%
Circuit City Stores, Inc. -
33,700 1,579,688
Circuit City Group
Home Depot, Inc. 244,800 20,333,700
IKON Office Solutions, Inc. 46,000 669,875
Lowe's Companies, Inc. 113,800 4,616,013
Tandy Corp. 33,800 1,793,513
Toys R US, Inc. (a) 94,200 2,219,588
31,212,377
TOTAL RETAIL & WHOLESALE 164,462,915
SERVICES - 0.7%
ADVERTISING - 0.2%
Interpublic Group of Companies, Inc. 40,250 2,442,672
Omnicom Group, Inc. 56,900 2,837,888
5,280,560
LEASING & RENTAL - 0.0%
Ryder Systems, Inc. 36,600 1,155,188
PRINTING - 0.1%
Deluxe Corp. 34,400 1,231,950
Donnelley (R.R.) & Sons Co. 45,600 2,086,200
Moore Corp. Ltd. 21,000 278,998
3,597,148
SERVICES - 0.4%
Block (H&R), Inc. 35,000 1,474,375
Cendant Corp. (a) 276,372 5,769,266
Ecolab, Inc. 34,900 1,081,900
Jostens, Inc. 9,200 221,950
National Service Industries, Inc. 14,400 732,600
Service Corp. International, Inc. 85,300 3,657,238
12,937,329
TOTAL SERVICES 22,970,225
TECHNOLOGY - 14.0%
COMMUNICATIONS EQUIPMENT - 2.9%
3Com Corp. (a) 118,800 3,645,675
Andrew Corp. (a) 29,812 538,479
Ascend Communications, Inc. (a) 61,100 3,028,269
Cabletron Systems, Inc. (a) 48,400 650,375
Cisco Systems, Inc. (a) 345,350 31,793,784
DSC Communications Corp. (a) 41,700 1,251,000
Lucent Technologies, Inc. 437,068 36,358,594
Northern Telecom Ltd. 176,600 10,034,706
Tellabs, Inc. (a) 61,800 4,426,425
91,727,307
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TECHNOLOGY - CONTINUED
COMPUTER SERVICES & SOFTWARE - 4.3%
Adobe Systems, Inc. 22,300 $ 946,356
Autodesk, Inc. 15,800 610,275
Automatic Data Processing, Inc. 100,400 7,316,650
Ceridian Corp. (a) 22,000 1,292,500
Computer Associates International, Inc. 182,112 10,118,598
Computer Sciences Corp. 52,000 3,328,000
Equifax, Inc. 42,800 1,554,175
First Data Corp. 141,700 4,720,381
HBO & Co. 149,700 5,276,925
Microsoft Corp. (a) 817,700 88,618,238
Novell, Inc. (a) 129,700 1,653,675
Oracle Corp. (a) 331,750 8,148,609
Parametric Technolgy Corp. (a) 96,300 2,612,138
Shared Medical Systems Corp. 8,100 594,844
136,791,364
COMPUTERS & OFFICE EQUIPMENT - 4.2%
Apple Computer, Inc. (a) 49,400 1,417,163
Bay Networks, Inc. (a) 68,900 2,222,025
Compaq Computer Corp. 550,762 15,627,872
Data General Corp. (a) 16,500 246,469
Dell Computer Corp. (a) 210,900 19,574,156
EMC Corp. (a) 169,600 7,600,200
Gateway 2000, Inc. (a) 51,200 2,592,000
Hewlett-Packard Co. 343,500 20,567,063
International Business Machines Corp. 314,100 36,062,606
Pitney-Bowes, Inc. 93,400 4,494,875
Seagate Technology, Inc. (a) 88,000 2,095,500
Silicon Graphics, Inc. (a) 60,500 733,563
Sun Microsystems, Inc. (a) 126,700 5,503,531
Unisys Corp. (a) 76,900 2,172,425
Xerox Corp. 109,400 11,117,775
132,027,223
ELECTRONIC INSTRUMENTS - 0.2%
Applied Materials, Inc. (a) 121,900 3,596,050
KLA-Tencor Corp. (a) 34,200 946,913
Perkin-Elmer Corp. 16,500 1,026,094
Tektronix, Inc. 16,050 567,769
Thermo Electron Corp. (a) 49,600 1,695,700
7,832,526
ELECTRONICS - 2.1%
Advanced Micro Devices, Inc. (a) 40,900 697,856
AMP, Inc. 77,796 2,674,238
Intel Corp. 561,800 41,643,425
LSI Logic Corp. (a) 43,700 1,007,831
Micron Technology, Inc. (a) 67,400 1,672,363
Motorola, Inc. 199,000 10,459,938
National Semiconductor Corp. (a) 54,900 723,994
Texas Instruments, Inc. 127,900 7,458,169
Thomas & Betts Corp. 16,900 832,325
67,170,139
SHARES VALUE (NOTE 1)
PHOTOGRAPHIC EQUIPMENT - 0.3%
Eastman Kodak Co. 107,700 $ 7,868,831
Polaroid Corp. 15,700 558,331
8,427,162
TOTAL TECHNOLOGY 443,975,721
TRANSPORTATION - 1.0%
AIR TRANSPORTATION - 0.4%
AMR Corp. (a) 61,000 5,078,250
Delta Air Lines, Inc. 25,400 3,282,950
Southwest Airlines Co. 75,000 2,221,875
US Airways Group, Inc. (a) 29,800 2,361,650
12,944,725
RAILROADS - 0.5%
Burlington Northern Santa Fe Corp. 53,018 5,205,705
CSX Corp. 73,238 3,332,329
Norfolk Southern Corp. 126,200 3,762,338
Union Pacific Corp. 85,600 3,777,100
16,077,472
TRUCKING & FREIGHT - 0.1%
FDX Corp. (a) 52,220 3,276,805
Laidlaw, Inc. 89,900 1,087,191
4,363,996
TOTAL TRANSPORTATION 33,386,193
UTILITIES - 9.1%
CELLULAR - 0.4%
AirTouch Communications, Inc. (a) 186,300 10,886,906
Nextel Communications, Inc. Class A (a) 85,700 2,131,788
13,018,694
ELECTRIC UTILITY - 2.2%
Ameren Corp. 43,900 1,745,025
American Electric Power Co., Inc. 63,400 2,876,775
Baltimore Gas & Electric Co. 45,200 1,404,025
Carolina Power & Light Co. 40,100 1,739,338
Central & South West Corp. 81,200 2,182,250
Consolidated Edison, Inc. 80,500 3,708,031
Dominion Resources, Inc. 65,600 2,673,200
DTE Energy Co. 51,600 2,083,350
Duke Energy Corp. 120,007 7,110,415
Edison International 120,600 3,565,238
Entergy Corp. 93,900 2,699,625
Firstenergy Corp. 69,300 2,130,975
FPL Group, Inc. 61,600 3,880,800
GPU, Inc. 35,500 1,342,344
Houston Industries, Inc. 91,122 2,813,392
Niagara Mohawk Power Corp. (a) 40,900 610,944
Northern States Power Co. 34,000 973,250
PacifiCorp 99,700 2,255,713
PECO Energy Co. 78,400 2,288,300
PG&E Corp. 127,800 4,033,688
PP&L Resources, Inc. 40,500 918,844
Public Service Enterprise Group, Inc. 85,800 2,954,738
Southern Co. 234,700 6,498,256
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - CONTINUED
ELECTRIC UTILITY - CONTINUED
Texas Utilities Co. 89,000 $ 3,704,625
Unicom Corp. 81,900 2,871,619
69,064,760
GAS - 0.6%
Columbia Gas System, Inc. (The) 29,400 1,635,375
Consolidated Natural Gas Co. 33,700 1,984,088
Eastern Enterprises Co. 12,600 540,225
Enron Corp. 103,800 5,611,688
NICOR, Inc. 16,000 642,000
ONEOK, Inc. 10,806 430,889
Peoples Energy Corp. 11,900 459,638
Sempra Energy 78,656 2,182,704
Sonat, Inc. 37,000 1,429,125
Williams Companies, Inc. 141,600 4,779,000
19,694,732
TELEPHONE SERVICES - 5.9%
ALLTEL Corp. 88,200 4,101,300
Ameritech Corp. 366,900 16,464,638
AT&T Corp. 541,200 30,916,050
Bell Atlantic Corp. 517,278 23,600,809
BellSouth Corp. 330,000 22,151,250
Frontier Corp. 57,600 1,814,400
GTE Corp. 320,900 17,850,063
MCI Communications Corp. 226,500 13,165,313
SBC Communications, Inc. 612,848 24,513,920
Sprint Corp. 114,900 8,100,450
U.S. WEST, Inc. 161,492 7,590,124
Worldcom, Inc. (a) 338,800 16,410,625
186,678,942
TOTAL UTILITIES 288,457,128
TOTAL COMMON STOCKS 2,974,571,457
(Cost $2,209,837,396)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
U.S. TREASURY OBLIGATIONS - 6.2%
PRINCIPAL
AMOUNT
U.S. Treasury Bills, yields at dates of
purchase 4.6332% to 5.0541% 7/30/98 to 9/3/98 (b) $ 197,133,000 195,776,952
(Cost $195,682,886)
TOTAL INVESTMENT IN SECURITIES - 100% $ 3,170,348,409
(Cost $2,405,520,282)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
FUTURES CONTRACTS
EXPIRATION UNDERLYING FACE UNREALIZED
DATE AMOUNT AT VALUE GAIN/(LOSS)
PURCHASED
349 S&P 500 Sep. 1998 $ 99,726,750 $ 3,122,832
Futures Contracts
</TABLE>
THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL
INVESTMENTS IN
SECURITIES - 3.1%
LEGEND
(a) Non-income producing
(b) Security or a portion of the security was pledged to cover margin
requirements for futures contracts. At the period end, the value of
securities pledged amounted to $6,495,000.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $707,562,865 and $21,000,689, respectively.
The market value of futures contracts opened and closed during the
period amounted to $784,404,205 and $862,860,247, respectively.
The fund participated in the security lending program. At period end,
the value of securities loaned and the value of the collateral
amounted to $7,774,864 and $7,978,792, respectively (see Note 5 of
Notes to Financial Statements).
INCOME TAX INFORMATION
At June 30, 1998, the aggregate cost of investment securities for
income tax purposes was $2,405,520,762. Net unrealized appreciation
aggregated $764,827,647, of which $795,409,354 related to appreciated
investment securities and $30,581,707 related to depreciated
investment securities.
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 30, 1998 (UNAUDITED)
ASSETS
INVESTMENT IN SECURITIES, AT VALUE $ 3,170,348,409
(COST $2,405,520,282) -
SEE ACCOMPANYING SCHEDULE
RECEIVABLE FOR INVESTMENTS SOLD 7,834,557
RECEIVABLE FOR FUND SHARES SOLD 12,193,773
DIVIDENDS RECEIVABLE 2,947,808
OTHER RECEIVABLES 1,329
TOTAL ASSETS 3,193,325,876
LIABILITIES
PAYABLE TO CUSTODIAN BANK $ 273,438
PAYABLE FOR INVESTMENTS PURCHASED 106,128,237
PAYABLE FOR FUND SHARES REDEEMED 902,722
ACCRUED MANAGEMENT FEE AND SUB-ADVISORY FEE 469,225
PAYABLE FOR DAILY VARIATION ON 1,102,680
FUTURES CONTRACTS
OTHER PAYABLES AND 278,969
ACCRUED EXPENSES
TOTAL LIABILITIES 109,155,271
NET ASSETS $ 3,084,170,605
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 2,287,714,527
UNDISTRIBUTED NET INVESTMENT INCOME 17,566,386
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS 10,938,743
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 767,950,949
AND ASSETS AND LIABILITIES IN
FOREIGN CURRENCIES
NET ASSETS, FOR 23,859,382 $ 3,084,170,605
SHARES OUTSTANDING
NET ASSET VALUE, OFFERING PRICE $129.26
AND REDEMPTION PRICE PER SHARE ($3,084,170,605 (DIVIDED BY) 23,859,382 SHARES)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME $ 18,330,787
DIVIDENDS
INTEREST (INCLUDING INCOME ON SECURITIES LOANED OF $7,970) 2,879,715
TOTAL INCOME 21,210,502
EXPENSES
MANAGEMENT FEE AND SUB-ADVISORY FEE $ 3,109,368
TRANSFER AGENT FEES 908,642
ACCOUNTING FEES 402,088
NON-INTERESTED TRUSTEES' COMPENSATION 4,481
REGISTRATION FEES 43,245
AUDIT 30,466
LEGAL 13,674
MISCELLANEOUS 2,849
TOTAL EXPENSES BEFORE REDUCTIONS 4,514,813
EXPENSE REDUCTIONS (933,505) 3,581,308
NET INVESTMENT INCOME 17,629,194
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 2,435,852
FOREIGN CURRENCY TRANSACTIONS 980
FUTURES CONTRACTS 9,671,688 12,108,520
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 370,415,452
ASSETS AND LIABILITIES IN 78
FOREIGN CURRENCIES
FUTURES CONTRACTS 2,064,104 372,479,634
NET GAIN (LOSS) 384,588,154
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 402,217,348
OTHER INFORMATION $ 933,505
EXPENSE REDUCTIONS
FMR REIMBURSEMENT
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
OPERATIONS $ 17,629,194 $ 25,929,152
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 12,108,520 58,502,006
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) 372,479,634 301,564,970
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 402,217,348 385,996,128
DISTRIBUTIONS TO SHAREHOLDERS (26,060,180) (10,847,444)
FROM NET INVESTMENT INCOME
FROM NET REALIZED GAIN (60,359,977) (22,010,833)
TOTAL DISTRIBUTIONS (86,420,157) (32,858,277)
SHARE TRANSACTIONS 837,618,107 1,199,221,255
NET PROCEEDS FROM SALES OF SHARES
REINVESTMENT OF DISTRIBUTIONS 86,420,157 32,858,277
COST OF SHARES REDEEMED (253,706,625) (310,418,293)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 670,331,639 921,661,239
TOTAL INCREASE (DECREASE) IN NET ASSETS 986,128,830 1,274,799,090
NET ASSETS
BEGINNING OF PERIOD 2,098,041,775 823,242,685
END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $17,566,386 AND
$25,920,081, RESPECTIVELY) $ 3,084,170,605 $ 2,098,041,775
OTHER INFORMATION
SHARES
SOLD 6,839,219 11,765,227
ISSUED IN REINVESTMENT OF DISTRIBUTIONS 751,741 357,466
REDEEMED (2,071,900) (3,026,660)
NET INCREASE (DECREASE) 5,519,060 9,096,033
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1998
SELECTED PER-SHARE DATA (UNAUDITED) 1997 1996 1995 1994 1993
NET ASSET VALUE, BEGINNING OF PERIOD $ 114.40 $ 89.05 $ 75.71 $ 56.22 $ 55.74 $ 52.60
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .83 D 1.80 D 1.04 .85 1.14 1.31
NET REALIZED AND UNREALIZED GAIN (LOSS) 18.54 26.67 15.55 19.72 (.56) 3.80
TOTAL FROM INVESTMENT OPERATIONS 19.37 28.47 16.59 20.57 .58 5.11
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (1.36) (1.03) (.91) (.95) - (1.28)
FROM NET REALIZED GAIN (3.15) (2.09) (2.34) (.11) (.10) (.60)
IN EXCESS OF NET REALIZED GAIN - - - (.02) - (.09)
TOTAL DISTRIBUTIONS (4.51) (3.12) (3.25) (1.08) (.10) (1.97)
NET ASSET VALUE, END OF PERIOD $ 129.26 $ 114.40 $ 89.05 $ 75.71 $ 56.22 $ 55.74
TOTAL RETURN B, C 17.42% 32.83% 22.71% 37.19% 1.04% 9.74%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 3,084,171 $ 2,098,042 $ 823,243 $ 245,700 $ 51,301 $ 25,153
RATIO OF EXPENSES TO AVERAGE NET ASSETS .28% A, E .28% E .28% E .28% E .28% E .28% E
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 1.38% A 1.74% 2.26% 2.70% 2.81% 2.65%
PORTFOLIO TURNOVER RATE 2% A 9% 14% 16% 2% 9%
AVERAGE COMMISSION RATE F $ .0232 $ .0268 $ .0315
A ANNUALIZED B TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN. TOTAL RETURNS
FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING
THE PERIODS SHOWN (SEE NOTE 6 OF NOTES TO FINANCIAL STATEMENTS). D NET INVESTMENT INCOME
PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING
DURING THE PERIOD. E FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE BEEN HIGHER
(SEE NOTE 6 OF NOTES TO FINANCIAL STATEMENTS). F FOR FISCAL YEARS
BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE
COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS
AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF
TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE
STRUCTURES MAY DIFFER.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 1998 (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES.
Index 500 Portfolio (the fund) is a fund of Variable Insurance
Products Fund II (the trust) and is authorized to issue an unlimited
number of shares. The trust is registered under the Investment Company
Act of 1940, as amended (the 1940 Act), as an open-end management
investment company organized as a Massachusetts business trust. Shares
of the fund may only be purchased by insurance companies for the
purpose of funding variable annuity or life insurance contracts. The
financial statements have been prepared in conformity with generally
accepted accounting principles which require management to make
certain estimates and assumptions at the date of the financial
statements. The following summarizes the significant accounting
policies of the fund:
SECURITY VALUATION. Securities for which exchange quotations are
readily available are valued at the last sale price, or if no sale
price, at the closing bid price. Securities for which exchange
quotations are not readily available (and in certain cases debt
securities which trade on an exchange) are valued primarily using
dealer-supplied valuations or at their fair value as determined in
good faith under consistently applied procedures under the general
supervision of the Board of Trustees. Short-term securities with
remaining maturities of sixty days or less for which quotations are
not readily available are valued at amortized cost or original cost
plus accrued interest, both of which approximate current value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Purchases
and sales of securities, income receipts and expense payments are
translated into U.S. dollars at the prevailing exchange rate on the
respective dates of the transactions.
Net realized gains and losses on foreign currency transactions
represent net gains and losses from sales and maturities of foreign
currency contracts, disposition of foreign currencies, the difference
between the amount of net investment income accrued and the U.S.
dollar amount actually received, and gains and losses between trade
date and settlement on purchases and sales of securities. The effects
of changes in foreign currency exchange rates on investments in
securities are included with the net realized and unrealized gain or
loss on investment securities.
INCOME TAXES. As a qualified regulated investment company under
Subchapter M of the Internal Revenue Code, each fund is not subject to
income taxes to the extent that it distributes substantially all of
its taxable income for the fiscal year. The schedules of investments
include information regarding income taxes under the caption "Income
Tax Information."
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend
date, except certain dividends from foreign securities where the
ex-dividend date may have passed, are recorded as soon as the fund is
informed of the ex-dividend date. Non-cash dividends included in
dividend income, if any, are recorded at the fair market value of the
securities received. Interest income, which includes accretion of
original issue discount, is accrued as earned. Investment income is
recorded net of foreign taxes withheld where recovery of such taxes is
uncertain.
EXPENSES. Most expenses of trust can be directly attributed to a fund.
Expenses which cannot be directly attributed are apportioned among the
funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the
ex-dividend date.
Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences, which may result in
distribution reclassifications, are primarily due to differing
treatments for futures transactions.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
Undistributed net investment income and accumulated undistributed net
realized gain (loss) on investments and foreign currency transactions
may include temporary book and tax basis differences which will
reverse in a subsequent period. Any taxable income or gain remaining
at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of
trade date. Gains and losses on securities sold are determined on the
basis of identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency
contracts to facilitate transactions in foreign-denominated
securities. Losses may arise from changes in the value of the foreign
currency or if the counterparties do not perform under the contracts'
terms. The U.S. dollar value of foreign currency contracts is
determined using contractual currency exchange rates established at
the time of each trade.
FUTURES CONTRACTS. The fund may use futures contracts to manage its
exposure to the stock market . Buying futures tends to increase the
fund's exposure to the underlying instrument, while selling futures
tends to decrease the fund's exposure to the underlying instrument or
hedge other fund investments. Futures contracts involve, to varying
degrees, risk of loss in excess of the futures variation margin
reflected in the Statement of Assets and Liabilities. The underlying
face amount at value of any open futures contracts at period end is
shown in the schedule of investments under the caption "Futures
Contracts." This amount reflects each contract's exposure to the
underlying instrument at period end. Losses may arise from changes in
the value of the underlying instruments or if the counterparties do
not perform under the contracts' terms. Gains (losses) are realized
upon the expiration or closing of the futures contracts. Futures
contracts are valued at the settlement price established each day by
the board of trade or exchange on which they are traded.
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities), the market value of future contracts opened
and closed, is included under the caption "Other Information" at the
end of each applicable fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a fee
that is computed daily at an annual rate of .24% of the fund's average
net assets. For the period, management fee was equivalent to an
annualized rate of .24% of average net assets.
SUB-ADVISER FEE. FMR and the fund have entered into a sub-advisory
agreement with Bankers Trust Company (Bankers Trust). Bankers Trust
receives a sub-advisory fee for providing investment management,
securities lending and custodial services to the fund. For these
services, FMR pays Bankers Trust fees at an annual rate of 0.006% of
the fund's average net assets. In addition, the fund pays Bankers
Trust fees equal to 40% of net income from the fund's securities
lending program. For the period, the fund paid Bankers Trust $3,186.
DISTRIBUTION AND SERVICE PLAN. In accordance with Rule 12b-1 of the
1940 Act, the Trustees have adopted a Distribution and Service Plan
(the Plan) on behalf of the fund. Under the Plan, FMR may use its
resources to pay administrative and promotional expenses related to
the sale of the fund's shares. Subject to the approval of the Board of
Trustees, the Plan also authorizes payments to third parties that
assist in the sale of fund shares or render shareholder support
services. For the period, payments made to third parties under the
Plan amounted to $9,457.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations
Company, Inc. (FIIOC), an affiliate of FMR, is the fund's transfer,
dividend disbursing and shareholder servicing agent. FIIOC receives
account fees and asset-based fees that vary according to account size
and type of account. FIIOC pays a portion of the expenses related to
typesetting, printing and mailing of all shareholder reports, except
proxy statements. For the period, the transfer agent fees were
equivalent to an annualized rate of .07% of average net assets.
ACCOUNTING FEES. Fidelity Service Company, Inc. (FSC), an affiliate of
FMR, maintains the fund's accounting records. The fee is based on the
level of average net assets for the month plus out-of-pocket expenses.
5. SECURITY LENDING.
The fund loaned securities to brokers who paid the fund negotiated
lenders' fees. These fees are included in interest income. The fund
receives U.S. Treasury obligations and/or cash as collateral against
the loaned securities, in an amount at least equal to 102% of the
market value of the loaned securities at the inception of each loan.
This collateral must be maintained at not less than 100% of the market
value of the loaned securities during the period of the loan.
Information regarding the value of securities loaned and the value of
collateral at period end is included under the caption "Other
Information" at the end of the fund's schedule of investments.
6. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse the fund's operating expenses
(excluding interest, taxes, brokerage commissions, extraordinary
expenses and sub-advisory fees paid by the fund associated with
securities lending) above an annual rate of .28% of average net
assets.
For the period, the reductions under this arrangement is shown under
the caption "Other Information" on the fund's Statement of Operations.
7. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were the record owners
of approximately 32% of the outstanding shares of the fund. In
addition, one unaffiliated insurance company was record owner of 10%
of the total outstanding shares of the fund.
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISER
Bankers Trust Company
New York, NY
OFFICERS
Edward C. Johnson 3d, PRESIDENT
Robert C. Pozen, SENIOR VICE PRESIDENT
Robert Lawrence, VICE PRESIDENT
Eric D. Roiter, SECRETARY
Richard A. Silver, TREASURER
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
Ralph F. Cox *
Phyllis Burke Davis *
Robert M. Gates *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Marvin L. Mann *
William O. McCoy *
Gerald C. McDonough *
Thomas R. Williams *
* INDEPENDENT TRUSTEES
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER SERVICING AGENT
Fidelity Investments Institutional Operations Co., Inc.
Boston, MA
CUSTODIAN
Bankers Trust Company
New York, NY
(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND II: INVESTMENT GRADE BOND PORTFOLIO
SEMIANNUAL REPORT
JUNE 30, 1998
CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
MARKET ENVIRONMENT 3 A REVIEW OF WHAT HAPPENED IN WORLD MARKETS DURING THE
PAST SIX MONTHS.
PERFORMANCE AND INVESTMENT SUMMARY 4 HOW THE FUND HAS DONE OVER TIME, AND AN OVERVIEW OF THE
FUND'S INVESTMENTS AT THE END OF THE PERIOD.
FUND TALK 5 THE MANAGER'S REVIEW OF FUND PERFORMANCE, STRATEGY
AND OUTLOOK.
INVESTMENTS 6 A COMPLETE LIST OF THE FUND'S INVESTMENTS WITH THEIR
MARKET VALUES.
FINANCIAL STATEMENTS 11 STATEMENTS OF ASSETS AND LIABILITIES, OPERATIONS, AND
CHANGES IN NET ASSETS, AS WELL AS FINANCIAL HIGHLIGHTS.
NOTES 13 NOTES TO THE FINANCIAL STATEMENTS.
</TABLE>
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE
SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND.
THIS REPORT IS NOT AUTHORIZED FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT
INSURED BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND
ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
MARKET ENVIRONMENT
With the exception of Asia and a number of emerging market economies,
most stock and bond markets around the world performed well during the
past six months. Despite an environment of ongoing financial and
political difficulties in Asian and emerging markets, the largest
blue-chip companies of Europe and the U.S. continued to post strong
performance. Throughout the period, investors sought the relative
stability and liquidity of more defensive large-cap stocks and highly
rated bond investments of developed countries, hoping these
investments would maintain steady earnings and be easier to sell in a
possible economic slowdown.
U.S. STOCK MARKETS
The U.S. stock market continued to perform well during the first six
months of 1998. The strong showing by the Standard & Poor's 500 Index,
however, was produced by a narrow contingent of large companies. In
fact, most of the Standard & Poor's 17.71% return for the six-month
period that ended June 30, 1998, came from these large-capitalization
stocks. The "narrow" market - one where a small number of stocks
perform well, and others are flat or produce losses - was further
demonstrated by the fact that 60% of all the companies on the New York
Stock Exchange declined during this period. During the first quarter
of 1998, a stable U.S. economy and a belief that the worst in Asia
might be over helped the stock market post strong gains. The S&P 500
index turned in a solid return of 13.95% through the end of March. The
S&P 500 and other market indexes continued to rally through May,
before falling sharply in mid-June amid renewed fears that Asia's
economic crisis would inhibit the growth in earnings of American
companies. In subsequent trading days, however, investors continued to
favor large-cap stocks, boosting the returns of the S&P 500 index
higher. During the second quarter of 1998, the S&P 500 index returned
3.30%, compared with a decline of 2.14% for the Standard & Poor's
MidCap 400 Index. Investors in small-cap stocks experienced a weak
second quarter as the Russell 2000 - a measure of small company stock
performance - lost 4.66%.
The pattern of a narrow market also was displayed in certain industry
groups. Pharmaceutical stocks performed well, helped by healthy
pipelines of new products, the ability to bring products to market
more rapidly and relaxed regulations that permitted more aggressive
advertising. Stable economic growth, coupled with nonexistent
inflation, buoyed the financial sector. Banks and brokerage houses
sustained impressive earnings growth; other financial services firms
benefited from merger and acquisition activity, exemplified by the
recently announced "megamerger" of Travelers and Citicorp.
While many technology stocks turned in very strong results, the sector
also experienced some mixed results over the past six months, due
primarily to the negative impact of the Asian crisis and the effect of
a strong dollar on foreign sales. Energy stocks also experienced weak
results, with the price of crude oil dipping below $12 dollars a
barrel near the end of June.
FOREIGN STOCK MARKETS
Overseas, blue-chip investments also performed well. While the Morgan
Stanley Capital International (MSCI) EAFE Index, which measures the
performance of Europe, Australasia, and the Far East, posted a solid
return of 16.05% for the six-month period, investors in developed
markets fared much better than those investing in troubled emerging
markets. The performance of the MSCI Pacific Index, however, lost
5.87% during the same period, emphasizing the negative impact Japan
and Hong Kong had on the MSCI EAFE index. Most economies in Europe
continued to thrive amidst an environment of relatively benign
inflation and reduced interest rates as many countries prepared for
the advent of the European Monetary Union in January 1999. Many
European companies embraced U.S.-style efficiencies through
restructuring and robust merger and acquisition activity. Over the
past six months, the MSCI Europe Index returned an impressive 26.66%.
Among the strongest European economies were Portugal, Spain, Italy and
the United Kingdom.
While the Japanese market showed signs of strength toward the end of
the period, Japanese stocks continued to suffer from eroding
confidence in the economy, bankruptcies and a depreciating currency.
The TOPIX Index - a measure of the Japanese market - was down 1.46%
over the six-month period. As economic and currency turmoil continued
in Asia, emerging markets also suffered during the period. The MSCI
Far East ex-Japan Free Index dropped 25.79% and the MSCI Emerging
Markets Free Index - a market capitalization weighted index of over
850 stocks traded in 22 world markets - was down 18.87% for the first
six months of 1998.
U.S. BOND MARKETS
Bond prices continued to move higher thanks to low interest rates and
a continued lack of inflationary pressure. The Lehman Brothers
Aggregate Bond Index - a broad gauge of the U.S. taxable bond market -
returned 3.93% during this six-month period. Against a backdrop of
continued economic woes in Asia and fears that U.S. corporate profits
would slow, investors from around the globe moved assets from stocks
and riskier bonds into highly rated corporate bonds and U.S.
Treasuries. As a result, bond yields, which move in the opposite
direction of bond prices, fell to their lowest levels in decades. The
yield on the benchmark 30-year bond fell to 5.62% from 5.93% during
the period. Mortgage-backed bonds experienced some weakness toward the
end of the period amid record mortgage refinancings.
FOREIGN BOND MARKETS
While U.S. based bonds topped most foreign bonds on the continued
strength of the U.S. dollar and benign inflation, the Salomon Brothers
World Government Bond Index - a measure of government bond market
performance in developed nations - returned 2.79% during the period.
Similar to foreign equities, however, it paid to be in the safer bond
sectors of developed countries and highly rated bonds. In comparison
to the World Government Bond Index, the J.P. Morgan Emerging Markets
Bond Index lost 0.25% during the first six months of 1998. Continued
turbulence in Japan as it struggled to initiate economic reforms
trickled into emerging markets and resulted in mixed results during
the period.
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 LIFE OF
JUNE 30, 1998 YEAR YEARS FUND
VIP II: INVESTMENT GRADE BOND 10.21% 6.46% 8.27%
LB AGGREGATE BOND 10.54% 6.88% N/A
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare these figures to the Lehman Brothers Aggregate Bond
Index - a market value weighted performance benchmark for
investment-grade fixed-rate debt issues, including government,
corporate, asset-backed, and mortgage-backed securities, with
maturities of at least one year. This benchmark includes reinvested
dividends and capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of
how it will do tomorrow. Bond prices, for example,
generally move in the opposite direction of interest
rates. In turn, the share price, return and yield of a
fund that invests in bonds will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, December 5, 1988.
If Fidelity had not reimbursed certain fund expenses, the life of fund
total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
VIP II: Investment Grade LB Aggregate Bond
00155 LB001
1988/12/31 10000.00 10000.00
1989/01/31 10086.92 10144.00
1989/02/28 10109.25 10070.96
1989/03/31 10172.02 10114.27
1989/04/30 10285.31 10325.66
1989/05/31 10399.91 10597.22
1989/06/30 10600.00 10919.38
1989/07/31 10765.35 11151.96
1989/08/31 10679.56 10986.91
1989/09/30 10721.69 11042.94
1989/10/31 10887.69 11314.60
1989/11/30 10981.36 11422.09
1989/12/31 11026.21 11452.93
1990/01/31 11001.11 11316.64
1990/02/28 11063.52 11352.85
1990/03/31 11097.11 11360.80
1990/04/30 11101.82 11256.28
1990/05/31 11276.11 11589.47
1990/06/30 11364.07 11776.06
1990/07/31 11476.89 11938.57
1990/08/31 11475.79 11778.59
1990/09/30 11520.66 11876.35
1990/10/31 11521.38 12027.18
1990/11/30 11590.77 12285.77
1990/12/31 11711.43 12477.42
1991/01/31 11735.04 12632.14
1991/02/28 11853.10 12739.52
1991/03/31 12053.80 12827.42
1991/04/30 12230.89 12965.95
1991/05/31 12325.33 13041.16
1991/06/30 12348.94 13034.64
1991/07/31 12455.20 13215.82
1991/08/31 12714.93 13501.28
1991/09/30 12951.04 13775.36
1991/10/31 13092.71 13928.26
1991/11/30 13234.39 14056.40
1991/12/31 13629.42 14473.88
1992/01/31 13494.11 14277.03
1992/02/29 13567.97 14369.83
1992/03/31 13543.27 14289.36
1992/04/30 13642.04 14392.25
1992/05/31 13851.92 14664.26
1992/06/30 14012.41 14866.63
1992/07/31 14296.36 15169.91
1992/08/31 14382.78 15323.12
1992/09/30 14555.62 15505.47
1992/10/31 14370.44 15299.24
1992/11/30 14333.40 15302.30
1992/12/31 14536.36 15545.61
1993/01/31 14841.14 15844.09
1993/02/28 15093.07 16121.36
1993/03/31 15159.39 16189.07
1993/04/30 15252.23 16302.39
1993/05/31 15278.75 16323.58
1993/06/30 15570.53 16619.04
1993/07/31 15676.64 16713.77
1993/08/31 15955.15 17006.26
1993/09/30 16034.73 17052.18
1993/10/31 16114.31 17115.27
1993/11/30 16034.73 16969.79
1993/12/31 16129.93 17061.43
1994/01/31 16312.59 17291.76
1994/02/28 16045.19 16990.88
1994/03/31 15678.93 16571.21
1994/04/30 15538.06 16438.64
1994/05/31 15495.80 16436.99
1994/06/30 15453.53 16400.83
1994/07/31 15707.10 16727.21
1994/08/31 15721.19 16747.28
1994/09/30 15552.14 16501.09
1994/10/31 15566.23 16486.24
1994/11/30 15594.40 16449.97
1994/12/31 15523.97 16563.48
1995/01/31 15749.36 16891.44
1995/02/28 16053.30 17293.45
1995/03/31 16155.46 17398.94
1995/04/30 16374.37 17642.53
1995/05/31 17031.09 18325.29
1995/06/30 17162.44 18459.07
1995/07/31 17104.06 18418.46
1995/08/31 17308.38 18641.32
1995/09/30 17468.91 18822.14
1995/10/31 17702.41 19066.83
1995/11/30 17965.10 19352.83
1995/12/31 18213.20 19623.77
1996/01/31 18329.95 19753.29
1996/02/29 17995.20 19409.58
1996/03/31 17857.01 19273.71
1996/04/30 17749.53 19165.78
1996/05/31 17718.82 19127.45
1996/06/30 17933.78 19383.76
1996/07/31 17979.84 19436.09
1996/08/31 17964.49 19403.05
1996/09/30 18256.22 19740.67
1996/10/31 18655.43 20178.91
1996/11/30 18962.52 20523.97
1996/12/31 18793.62 20333.09
1997/01/31 18839.68 20396.13
1997/02/28 18864.60 20447.12
1997/03/31 18668.78 20220.15
1997/04/30 18946.20 20523.46
1997/05/31 19093.07 20718.43
1997/06/30 19321.53 20964.98
1997/07/31 19843.74 21531.03
1997/08/31 19664.23 21348.02
1997/09/30 19957.97 21663.97
1997/10/31 20219.07 21978.10
1997/11/30 20268.03 22079.20
1997/12/31 20496.49 22302.20
1998/01/31 20757.59 22587.67
1998/02/28 20743.06 22569.60
1998/03/31 20829.13 22646.33
1998/04/30 20932.42 22764.09
1998/05/31 21121.77 22980.35
1998/06/30 21293.92 23175.68
IMATRL PRASUN SHR__CHT 19980630 19980721 153646 R00000000000117
Let's say hypothetically that $10,000 was invested in Variable
Insurance Products Fund II: Investment Grade Bond Portfolio on
December 31, 1988, shortly after the fund started. By June 30, 1998,
the value of the investment would have grown to $21,294 - a 112.94%
increase on the initial investment. For comparison, look at how the
Lehman Brothers Aggregate Bond Index did over the same period. With
dividends and capital gains, if any, reinvested, the same $10,000
investment would have grown to $23,176 - a 131.76% increase.
INVESTMENT SUMMARY
QUALITY DIVERSIFICATION AS OF JUNE 30, 1998
(MOODY'S RATINGS) % OF FUND'S
INVESTMENTS
AAA 59.0
AA 3.3
A 6.9
BAA 19.7
BA 1.4
B 0.0
NOT RATED 0.0
TABLE EXCLUDES SHORT-TERM INVESTMENTS. WHERE MOODY'S RATINGS ARE NOT
AVAILABLE, WE HAVE USED S&P RATINGS.
AVERAGE YEARS TO MATURITY AS OF JUNE 30, 1998
YEARS 8.2
AVERAGE YEARS TO MATURITY IS BASED ON THE AVERAGE TIME UNTIL PRINCIPAL
PAYMENTS ARE EXPECTED FROM EACH OF THE FUND'S BONDS, WEIGHTED BY
DOLLAR AMOUNT.
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1998
% OF FUND'S
INVESTMENTS
FINANCE 13.8
UTILITIES 5.3
MEDIA & LEISURE 3.4
RETAIL & WHOLESALE 1.6
INDUSTRIAL MACHINERY & EQUIPMENT 1.5
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with Kevin Grant, Portfolio Manager of Investment Grade
Bond Portfolio
Q. HOW DID THE FUND PERFORM, KEVIN?
A. For the six- and 12-month periods that ended June 30, 1998, the
fund performed in line with the Lehman Brothers Aggregate Bond Index,
which returned 3.93% over the past six months and 10.54% over the past
12 months.
Q. WHAT WAS THE INVESTMENT ENVIRONMENT LIKE DURING THE SIX-MONTH
PERIOD?
A. The investment environment was quite good for bonds, as it was
heavily influenced by the secondary effects of the financial crisis in
Asia. The implosion of some economies in Asia caused a wave of
expectations of lower inflation. As a result, interest rates dropped
and the bond market had a strong rally. As you know, bond prices tend
to rise as interest rates fall. In addition, the yield difference
between long- and short-term maturities narrowed, with most Treasuries
yielding less than 5.5% on June 30.
Q. IN LIGHT OF THIS ENVIRONMENT, WHAT STRATEGIES HELPED CONTRIBUTE TO
PERFORMANCE?
A. My investments in mortgages helped the portfolio's performance. At
the beginning of January, I had de-emphasized mortgage securities,
which then represented about 25% of portfolio assets versus about a
30% weighting in the Lehman Brothers Aggregate Bond Index. I did so
because I had concerns about the risk of prepayments. Prepayments tend
to undermine the returns of higher-interest mortgage securities
because investors lose the income they produce as mortgages are
refinanced. When interest rates dropped abruptly in mid-January, the
bond market became more worried about prepayment risk, and the prices
of mortgage securities underperformed Treasuries in mid-January before
recovering later in the period. I took advantage of a market
over-reaction to increase the fund's emphasis on mortgages to about
34% of portfolio assets. Both the underweighting at the beginning of
January and the overweighting after prices cheapened in mid-January
helped the performance of the fund versus the Lehman Brothers index.
In hindsight, I wish I had owned fewer mortgages at the beginning of
January and bought more after mid-January, as that would have helped
performance even more. Also, throughout the six-month period, I
avoided premium mortgages because they have the highest risk of
prepayments. Premium mortgages are older securities that have risen in
price because they have higher interest rates than other mortgages.
They generate more income, but they are more vulnerable to prepayment
risk. At the close of the fiscal period, about 33% of portfolio assets
were invested in mortgage securities.
Q. WHAT HAS BEEN YOUR STRATEGY WITH CORPORATE BONDS, WHICH REPRESENTED
ABOUT 31% OF PORTFOLIO ASSETS ON JUNE 30?
A. Even though corporate bonds account for about 21% of the Lehman
index, I would say I had only a moderate overweighting in this sector.
I tended to own corporate bonds that were in the 3- to 4-year maturity
range, and I emphasized defensive bonds such as those of banks, which
tend to do well as interest rates decline. I avoided bonds from
cyclical industries, or industries that do well when economic growth
is increasing, and I particularly avoided bonds in industries
vulnerable to the Asian problems, such as energy, steel, paper and
timber products. I emphasized industries that are relatively protected
from the influence of Asia. These included media companies, such as
Time Warner, and consumer companies, such as Levi's. One bond that did
very well was TCI, the cable company that has announced a pending
merger with AT&T. Rounding out the portfolio, I had about 24% invested
in government securities, including 19% in Treasuries. In addition,
the portfolio had approximately 10% in cash equivalents. I don't
consider the cash position to be significant because short-term
securities offer almost as much yield as intermediate-term securities.
Q. WHAT IS YOUR OUTLOOK FOR THE BOND MARKET?
A. The prospects for the bond market appear good. Inflation and the
threat of rising interest rates hurt bonds, and my outlook is that
inflation won't be a problem and that interest rates may decline
further. In the corporate sector, the greatest risks are in the areas
that I have avoided - cyclicals and industries influenced by Asia.
Even though mortgage prepayments still are running high, I am not
overly concerned because these are precisely the times when
opportunities present themselves in the mortgage market.
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
INVESTMENTS JUNE 30, 1998 (UNAUDITED)
SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENT IN SECURITIES
NONCONVERTIBLE BONDS - 31.4%
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
AEROSPACE & DEFENSE - 0.7%
DEFENSE ELECTRONICS - 0.7%
Raytheon Co.
6.45%, 8/15/04 Baa1 $ 3,000,000 $ 3,029,760
BASIC INDUSTRIES - 0.8%
PACKAGING & CONTAINERS - 0.8%
Owens Illinois, Inc.:
7.15%, 5/15/05 Ba1 1,200,000 1,205,026
7.35%, 5/15/08 Ba1 1,150,000 1,156,272
7.80%, 5/15/18 Ba1 1,400,000 1,432,644
3,793,942
CONSTRUCTION & REAL ESTATE - 0.4%
REAL ESTATE INVESTMENT TRUSTS - 0.4%
Centerpoint Properties Trust
6 3/4%, 4/1/05 Baa2 510,000 510,877
EOP Operating L.P.:
6 5/8%, 2/15/05 (c) Baa1 500,000 499,940
6 3/4%, 2/15/08 (c) Baa1 900,000 898,893
1,909,710
DURABLES - 0.4%
TEXTILES & APPAREL - 0.4%
Levi Strauss & Co.
7%, 11/1/06 (c) Baa2 2,000,000 2,022,500
ENERGY - 0.6%
OIL & GAS - 0.6%
Petroleum Geo-Services ASA
7 1/8%, 3/30/28 Baa3 1,600,000 1,619,264
USX-Marathon Group
6.85%, 3/1/08 Baa2 880,000 886,037
2,505,301
FINANCE - 13.8%
ASSET-BACKED SECURITIES - 3.1%
Capital Equipment Receivables
Trust 6.48%, 10/15/06 Baa2 880,000 880,185
Chevy Chase Auto Receivable
Trust 5.91%, 12/15/04 Aaa 760,000 758,936
Ford Credit Auto Owner Trust:
6.40%, 5/15/02 A1 960,000 968,621
6.20%, 12/15/02 Baa3 830,000 828,548
6.40%, 12/15/02 Baa3 480,000 479,722
Ford Credit Grantor Trust
5.90%, 10/15/00 Aaa 240,310 240,536
Green Tree Financial Corp.
6.10%, 4/15/27 Aaa 429,738 430,137
Key Auto Finance Trust
Class C 6.65%, 10/15/03 Baa3 320,000 320,550
Key Plastics, Inc.
10 1/4%, 3/15/07 A2 1,110,000 1,113,642
KeyCorp Auto Grantor Trust
5.80%, 7/15/00 A3 14,320 14,323
MBNA Master Credit Card Trust II
Class A 6.55%, 1/15/07 Aaa 3,000,000 3,100,260
PNC Student Loan Trust I
6.314%, 1/25/01 Aaa 3,100,000 3,122,010
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
Premier Auto Trust 6%, 5/6/00 Aaa $ 350,952 $ 351,278
Railcar Trust
7 3/4%, 6/1/04 Aaa 690,670 725,162
Sears Credit Account Master
Trust II 7%, 1/15/04 Aaa 1,000,000 1,012,810
Union Federal Savings Bank
Grantor Trust 8.20%, 1/10/01 Baa2 24,596 24,650
14,371,370
BANKS - 4.1%
ABN-AMRO Bank NV
6 5/8%, 10/31/01 Aa3 1,000,000 1,014,980
Banc One Corp.
6.70%, 3/24/00 Aa3 1,450,000 1,466,530
BanPonce Corp.:
5 3/4%, 3/1/99 A3 370,000 369,319
6.378%, 4/8/99 A3 430,000 430,697
Barclays Bank PLC yankee:
5 7/8%, 7/15/00 A1 2,400,000 2,396,712
5.95%, 7/15/01 A1 2,700,000 2,694,600
Capital One Bank:
6.42%, 11/12/99 Baa3 2,000,000 2,005,800
6 3/8%, 2/15/03 Baa3 1,130,000 1,128,927
First Maryland Bancorp
10 3/8%, 8/1/99 A3 500,000 522,470
Firstar Corp.
7.15%, 9/1/00 A3 640,000 641,107
Kansallis-Osake-Pankki
10%, 5/1/02 A3 260,000 293,147
KeyCorp 8.40%, 4/1/99 A2 310,000 315,481
MBNA Corp.:
6 7/8%, 11/15/02 Baa2 1,750,000 1,780,520
6.34%, 6/2/03 Baa2 350,000 350,105
NB Capital Trust IV
8 1/4%, 4/15/27 Aa3 1,990,000 2,222,532
Union Planters Corp.
6 3/4%, 11/1/05 Baa2 400,000 407,000
Union Planters National
Bank 6.81%, 8/20/01 A3 500,000 509,735
18,549,662
CREDIT & OTHER FINANCE - 4.4%
AT&T Capital Corp.:
6.41%, 8/13/99 Baa3 1,000,000 1,003,730
6.16%, 12/3/99 Baa3 500,000 500,545
Associates Corp. of North
America 6%, 4/15/03 Aa3 1,150,000 1,144,204
BCH Cayman Islands Ltd. yankee
7.70%, 7/15/06 A3 180,000 193,055
Bank of New York Co., Inc.
Capital I 7.97%, 12/31/26 A1 1,000,000 1,083,320
BankBoston Capital Trust II
7 3/4%, 12/15/26 A2 1,080,000 1,135,566
BanPonce Trust I
8.327%, 2/1/27 (c) A3 1,230,000 1,337,736
Chase Capital I
7.67%, 12/1/26 Aa3 2,020,000 2,120,636
Chrysler Financial Corp.
6 3/8%, 1/28/00 A2 1,240,000 1,248,122
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
FINANCE - CONTINUED
CREDIT & OTHER FINANCE - CONTINUED
Finova Capital Corp.
6.27%, 9/29/00 Baa1 $ 400,000 $ 401,132
First Security Capital I
8.41%, 12/15/26 A3 1,210,000 1,358,092
First Union Institutional Capital I
8.04%, 12/1/26 BBB 1,000,000 1,074,530
General Electric Capital Corp.
6.94%, 4/13/09 (b) Aaa 1,000,000 1,007,110
General Motors Acceptance Corp.
6.65%, 5/24/00 A2 2,650,000 2,683,099
JPM Capital Trust II
7.95%, 2/1/27 Aa3 1,820,000 1,967,311
KeyCorp Institutional Capital
Series A 7.826%, 12/1/26 A1 800,000 847,344
PNC Institutional Capital Trust
8.315%, 5/15/27 (c) A2 1,000,000 1,114,160
20,219,692
INSURANCE - 0.7%
Executive Risk Capital Trust
8 5/8%, 2/1/27 Baa3 1,750,000 1,897,490
Nationwide Mutual Insurance Co.
6 1/2%, 2/15/04 (c) A1 130,000 131,457
SunAmerica, Inc.
6.20%, 10/31/99 Baa1 1,000,000 1,001,970
3,030,917
SAVINGS & LOANS - 1.5%
Ahmanson (H.F.) & Co.
9 7/8%, 11/15/99 Baa2 3,000,000 3,145,350
Great West Financial Trust II
8.206%, 2/1/27 A3 2,500,000 2,730,700
Long Island Savings Bank
6.20%, 4/2/01 Baa3 750,000 750,930
6,626,980
TOTAL FINANCE 62,798,621
HOLDING COMPANIES - 0.4%
Norfolk Southern Corp.
7.05%, 5/1/37 Baa1 1,700,000 1,805,213
INDUSTRIAL MACHINERY & EQUIPMENT - 1.5%
INDUSTRIAL MACHINERY & EQUIPMENT - 0.6%
Tyco International Group SA
yankee 6 1/8%, 6/15/01 Baa1 2,500,000 2,502,050
POLLUTION CONTROL - 0.9%
WMX Technologies, Inc.:
6 1/4%, 4/1/99 Baa3 1,200,000 1,201,548
7.10%, 8/1/26 Baa3 3,000,000 3,121,800
4,323,348
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 6,825,398
MEDIA & LEISURE - 3.4%
BROADCASTING - 2.2%
Continental Cablevision, Inc.:
8.30%, 5/15/06 Baa3 110,000 122,133
9%, 9/1/08 Baa3 910,000 1,070,042
TCI Communications, Inc.:
7 3/8%, 2/15/00 Baa3 750,000 765,788
8 3/4%, 8/1/15 Baa3 3,000,000 3,611,760
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
Time Warner, Inc.:
7.95%, 2/1/00 Baa3 $ 1,170,000 $ 1,202,245
8.18%, 8/15/07 Baa3 2,000,000 2,228,580
6 7/8%, 6/15/18 Baa3 920,000 923,588
9,924,136
ENTERTAINMENT - 0.5%
Viacom, Inc.
7 3/4%, 6/1/05 Ba2 2,000,000 2,130,900
PUBLISHING - 0.7%
News America, Inc.:
6 5/8%, 1/9/08 Baa3 210,000 209,633
7 1/4%, 5/18/18 (c) Baa3 3,000,000 3,073,980
3,283,613
RESTAURANTS - 0.0%
Darden Restaurants, Inc.
6 3/8%, 2/1/06 Baa1 310,000 301,497
TOTAL MEDIA & LEISURE 15,640,146
NONDURABLES - 1.0%
FOODS - 0.3%
ConAgra, Inc.
7 1/8%, 10/1/26 Baa1 1,270,000 1,353,617
TOBACCO - 0.7%
Philip Morris Companies, Inc.
6.95%, 6/1/06 A2 3,000,000 3,107,580
TOTAL NONDURABLES 4,461,197
RETAIL & WHOLESALE - 1.6%
GENERAL MERCHANDISE STORES - 0.9%
Dayton Hudson Corp.
6.40%, 2/15/03 A3 500,000 505,450
Federated Department Stores, Inc.
8 1/2%, 6/15/03 Baa2 3,000,000 3,282,150
Sears, Roebuck & Co.
9.23%, 8/6/98 A2 450,000 451,170
4,238,770
GROCERY STORES - 0.7%
American Stores Co.
7 1/2%, 5/1/37 Baa2 1,400,000 1,536,612
Kroger Co. 6%, 7/1/00 Baa3 1,700,000 1,698,198
3,234,810
TOTAL RETAIL & WHOLESALE 7,473,580
TECHNOLOGY - 0.7%
COMPUTERS & OFFICE EQUIPMENT - 0.7%
Comdisco, Inc.
6 3/8%, 11/30/01 Baa1 3,200,000 3,213,568
TRANSPORTATION - 0.8%
AIR TRANSPORTATION - 0.1%
Delta Air Lines, Inc.
equipment trust certificate
8.54%, 1/2/07 Baa1 396,598 435,298
RAILROADS - 0.7%
Burlington Northern Santa Fe
Corp. 6.53%, 7/15/37 Baa2 3,000,000 3,066,600
TOTAL TRANSPORTATION 3,501,898
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
UTILITIES - 5.3%
CELLULAR - 0.7%
AirTouch Communications, Inc.
6.35%, 6/1/05 Baa2 $ 3,000,000 $ 3,013,440
360 Degrees Communications Co.
7 1/8%, 3/1/03 Ba1 245,000 254,121
3,267,561
ELECTRIC UTILITY - 2.2%
Avon Energy Partners Holdings:
7.05%, 12/11/07 (c) Baa2 3,000,000 3,073,110
6.46%, 3/4/08 (c) Baa2 1,500,000 1,506,645
British Columbia Hydro & Power
Authority yankee
12 1/2%, 1/15/14 Aa2 360,000 386,507
DR Investment yankee
7.10%, 5/15/02 (c) Baa1 1,500,000 1,537,313
Israel Electric Corp. Ltd.
7 3/4%, 12/15/27 (c) A3 2,400,000 2,473,680
Texas Utilities Co.
6 3/8%, 1/1/08 Baa3 990,000 979,110
9,956,365
GAS - 0.6%
Mitchell Energy & Development
Corp. 8%, 7/15/99 Baa3 1,730,000 1,759,998
Southwest Gas Corp.
9 3/4%, 6/15/02 Baa2 1,000,000 1,121,460
2,881,458
TELEPHONE SERVICES - 1.8%
Cable & Wireless
Communications PLC
6 3/8%, 3/6/03 Baa1 1,590,000 1,591,336
Teleport Communications Group,
Inc. 0%, 7/1/07 (f) Baa3 1,450,000 1,245,188
WorldCom, Inc.:
9 3/8%, 1/15/04 Baa2 1,743,000 1,830,708
7 3/4%, 4/1/07 Baa2 3,075,000 3,335,330
8,002,562
TOTAL UTILITIES 24,107,946
TOTAL NONCONVERTIBLE BONDS
(Cost $139,827,412) 143,088,780
U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS - 24.3%
U.S. TREASURY OBLIGATIONS - 19.4%
6 3/8%, 9/30/01 Aaa 14,400,000 14,746,464
5 7/8%, 11/30/01 Aaa 37,500,000 37,881,000
7%, 7/15/06 Aaa 17,200,000 18,782,916
13 7/8%, 5/15/11 (callable) Aaa 30,000 45,525
8 7/8%, 8/15/17 Aaa 995,000 1,356,464
7 5/8%, 2/15/25 Aaa 12,700,000 15,990,062
88,802,431
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
U.S. GOVERNMENT AGENCY OBLIGATIONS - 4.9%
Fannie Mae:
6.15%, 1/13/00 Aaa $ 525,000 $ 528,528
6.74%, 5/13/04 Aaa 375,000 392,284
6.72%, 8/1/05 Aaa 1,180,000 1,241,207
Federal Agricultural Mortgage
Corporation 7.01%, 2/10/05 Aaa 10,000 10,663
Federal Home Loan Bank:
7.31%, 6/16/04 Aaa 4,155,000 4,473,107
7.36%, 7/1/04 Aaa 3,100,000 3,347,039
7.38%, 8/5/04 Aaa 110,000 118,972
7.56%, 9/1/04 Aaa 310,000 338,725
7.46%, 9/9/04 Aaa 50,000 54,391
7.70%, 9/20/04 Aaa 40,000 44,000
6.46%, 12/15/04 Aaa 1,745,000 1,807,436
8.09%, 12/28/04 Aaa 10,000 11,236
7.59%, 3/10/05 Aaa 10,000 10,972
Freddie Mac:
6.77%, 9/15/02 Aaa 150,000 155,286
8%, 1/26/05 Aaa 520,000 582,239
8.115%, 1/31/05 Aaa 1,140,000 1,283,743
6.783%, 8/18/05 Aaa 1,000,000 1,055,940
Government Loan Trusts
(assets of Trust guaranteed by
U.S. Government through
Agency for International
Development)
8 1/2%, 4/1/06 Aaa 1,760,000 1,942,371
Government Trust Certificates
(assets of Trust guaranteed by
U.S. Government through
Defense Security Assistance
Agency):
Class 1-C,
9 1/4%, 11/15/01 Aaa 873,444 925,387
Class 2-E,
9.40%, 5/15/02 Aaa 738,985 781,343
Class T-3,
9 5/8%, 5/15/02 Aaa 49,909 52,771
Guaranteed Export Trust
Certificates (assets of Trust
guaranteed by U.S.
Government through
Export-Import Bank):
Series 1993-C,
5.20%, 10/15/04 Aaa 5,778 5,678
Series 1993-D,
5.23%, 5/15/05 Aaa 11,915 11,698
Series 1994-A,
7.12%, 4/15/06 Aaa 7,552 7,900
Series 1994-C,
6.61%, 9/15/99 Aaa 31,347 31,470
Guaranteed Trade Trust
Certificates (assets of Trust
guaranteed by U.S.
Government through
Export-Import Bank)
Series 1994-B,
7 1/2%, 1/26/06 Aaa 7,628 8,105
U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
U.S. GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
Israel Export Trust Certificates
(assets of Trust guaranteed
by U.S. Government through
Export-Import Bank)
Series 1994-1,
6.88%, 1/26/03 Aaa $ 11,765 $ 12,020
Overseas Private Investment Corp.
U.S. Government guaranteed
participation certificate
Series 1994-195,
6.08%, 8/15/04 (callable) Aaa 131,600 132,391
Private Export Funding Corp.:
secured 5.65%, 3/15/03 Aaa 202,500 201,682
secured 6.86%, 4/30/04 Aaa 1,375,100 1,411,636
U.S. Department of Housing and
Urban Development
Government guaranteed
participation certificates:
Series 1995-A:
8.27%, 8/1/03 Aaa 415,000 460,256
8.24%, 8/1/04 Aaa 500,000 560,925
Series 1996-A,
6.98%, 8/1/05 Aaa 180,000 192,766
22,194,167
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $109,401,478) 110,996,598
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 30.7%
FANNIE MAE - 25.9%
5 1/2%, 5/1/00 to 7/1/01 Aaa 2,185,828 2,163,634
6%, 3/1/01 to 4/1/13 Aaa 41,577,746 41,190,654
6.345%, 3/1/99 Aaa 76,480 76,456
6 1/2%, 2/1/10 to 7/1/28 Aaa 58,098,918 57,883,951
7%, 5/1/26 to 7/1/28 Aaa 14,829,760 15,039,772
8%, 8/1/28 (g) Aaa 2,074,985 2,146,428
118,500,895
FREDDIE MAC - 0.3%
7%, 5/1/01 Aaa 114,597 115,712
8 1/2%, 3/1/20 Aaa 1,064,714 1,119,972
1,235,684
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 4.5%
6%, 8/15/08 to 5/15/09 Aaa 3,979,322 3,975,597
7 1/2%, 6/15/26
to 3/15/28 Aaa 14,272,236 14,669,185
8%, 2/15/17 Aaa 284,709 297,927
10%, 7/15/13 to 11/15/24 Aaa 1,318,256 1,446,568
20,389,277
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $138,781,311) 140,125,856
COMMERCIAL MORTGAGE SECURITIES - 2.0%
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
CS First Boston Mortgage
Securities Corp.:
floater Series 1998-FL1
Class E, 6.506%,
1/10/13 (c)(d) Baa2 $ 2,650,000 $ 2,650,000
Series 1997-C2 Class D,
7.27%, 4/17/11 Baa2 1,080,000 1,107,675
Equitable Life Assurance Society
of the United States (The):
Series 1996-1 Class C1,
7.52%, 5/15/06 (c) A2 500,000 530,330
Series 174 Class B1,
7.33%, 5/15/06 (c) Aa2 500,000 527,890
Fannie Mae sequential pay
Series1996-M5 Class A1,
7.141%, 6/25/08 Aaa 168,180 172,805
GS Mortgage Securities Corp. II
Series 1998-GLII Class E,
7.19%, 4/13/31 (c)(d) Baa3 1,000,000 979,310
Nomura Asset Securities Corp.
floater Series 1994-MD-II
Class A-6, 6.921%,
7/4/03 (d) - 179,477 179,477
Oregon Commercial Mortgage,
Inc. Series 1995-1 Class A,
7.15%, 6/25/26 (c)(d) Aaa 43,939 43,821
Resolution Trust Corp.:
commercial Series
1995-C1 Class A-4B,
6.65%, 2/25/27 Aaa 281,311 280,960
floater Series 1994-C1
Class A-3, 6.2375%,
6/25/26 (d) Aaa 69,677 69,710
Structured Asset Securities Corp.
sequential pay Series 1996
Class A-2A, 7 3/4%,
2/25/28 Aaa 679,310 686,103
Thirteen Affiliates of General
Growth Properties, Inc.
sequential pay Series A-2,
6.602%, 11/15/12 (c) Aaa 1,500,000 1,536,960
Wells Fargo Capital Markets
Apartment Financing Trust
6.56%,12/29/05 (c) Aaa 431,746 438,969
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $9,056,253) 9,204,010
FOREIGN GOVERNMENT OBLIGATIONS (E) - 0.8%
Alberta Province yankee
9 1/4%, 4/1/00 Aa2 2,500,000 2,634,400
British Columbia Province
yankee 7%, 1/1/03 Aa2 500,000 519,850
Manitoba Province yankee
6 3/4%, 3/1/03 A1 500,000 515,285
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $3,783,345) 3,669,535
SUPRANATIONAL OBLIGATIONS - 0.9%
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
Inter American Development
Bank yankee 6.29%, 7/16/27
(Cost $3,974,840) Aaa $ 4,000,000 $ 4,208,840
CERTIFICATES OF DEPOSIT - 0.2%
Canadian Imperial Bank of
Commerce NY Branch
yankee 6.20%, 8/1/00
(Cost $1,001,500) Aa3 1,000,000 1,005,300
CASH EQUIVALENTS - 9.7%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations), in a joint
trading account at 5.66%, dated
6/30/98 due 7/1/98 $ 44,351,970 44,345,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $450,171,139) $ 456,643,919
LEGEND
(a) Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investors Service, Inc.
(b) Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date. The rate shown is the rate at
period end.
(c) Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions
exempt from registration, normally to qualified institutional buyers.
At the period end, the value of these securities amounted to
$24,376,694 or 5.6% of net assets.
(d) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(e) For foreign government obligations not individually rated by S&P
or Moody's, the ratings listed are assigned to securities by FMR, the
fund's investment adviser, based principally on S&P and Moody's
ratings of the sovereign credit of the issuing government.
(f) Debt obligation initially issued in zero coupon form which
converts to coupon form at a specified rate and date. The rate shown
is the rate at period end.
(g) Security purchased on a delayed delivery or when-issued basis (see
Note 2 of Notes to Financial Statements).
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $539,460,059 and $426,234,567, respectively, of which
long-term U.S. government and government agency obligations aggregated
$433,604,550 and $343,589,741, respectively (see Note 3 of Notes to
Financial Statements).
The fund participated in the interfund lending program as a lender.
The maximum loan and average daily balance during the period for which
the loan was outstanding amounted to $15,148,000. The weighted average
interest rate was 5.4813%. Interest earned from the interfund lending
program amounted to $6,919 and is included in interest income on the
Statement of Operations (see Note 2 of Notes to Financial Statements).
The fund participated in the bank borrowing program. The maximum loan
and average daily balance during the period for which the loan was
outstanding amounted to $6,212,000. The weighted average interest rate
was 5.8125% (see Note 5 of Notes to Financial Statements).
The composition of long-term debt holdings as a percentage of total
value of investment in securities, is as follows:
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 69.0% AAA, AA, A 68.1%
Baa 19.5% BBB 18.4%
Ba 1.4% BB 1.3%
B 0.0% B 0.3%
Caa 0.0% CCC 0.0%
Ca, C 0.0% CC, C 0.0%
D 0.0%
For some foreign government obligations, FMR has assigned the ratings
of the sovereign credit of the issuing government. The percentage not
rated by Moody's or S&P amounted to 0.0%.
INCOME TAX INFORMATION
At June 30, 1998, the aggregate cost of investment securities for
income tax purposes was $450,244,860. Net unrealized appreciation
aggregated $6,399,059, of which $6,937,638 related to appreciated
investment securities and $538,579 related to depreciated investment
securities.
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 30, 1998 (UNAUDITED)
ASSETS
INVESTMENT IN SECURITIES, AT $ 456,643,919
VALUE (INCLUDING REPURCHASE AGREEMENTS OF $44,345,000)
(COST $450,171,139) -
SEE ACCOMPANYING SCHEDULE
CASH 6,579
RECEIVABLE FOR INVESTMENTS SOLD 2,152,566
RECEIVABLE FOR FUND SHARES SOLD 827,414
INTEREST RECEIVABLE 4,669,946
TOTAL ASSETS 464,300,424
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 26,302,829
REGULAR DELIVERY
DELAYED DELIVERY 2,150,565
PAYABLE FOR FUND SHARES REDEEMED 1,293,670
ACCRUED MANAGEMENT FEE 151,274
OTHER PAYABLES AND ACCRUED EXPENSES 63,490
TOTAL LIABILITIES 29,961,828
NET ASSETS $ 434,338,596
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 414,755,561
UNDISTRIBUTED NET INVESTMENT INCOME 11,134,647
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS 1,975,608
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 6,472,780
NET ASSETS, FOR 35,119,691 $ 434,338,596
SHARES OUTSTANDING
NET ASSET VALUE, OFFERING PRICE $12.37
AND REDEMPTION PRICE PER SHARE ($434,338,596 (DIVIDED BY) 35,119,691 SHARES)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME $ 12,346,291
INTEREST
EXPENSES
MANAGEMENT FEE $ 827,005
TRANSFER AGENT FEES 139,365
ACCOUNTING FEES AND EXPENSES 77,019
NON-INTERESTED TRUSTEES' COMPENSATION 669
CUSTODIAN FEES AND EXPENSES 8,505
REGISTRATION FEES 761
AUDIT 27,048
LEGAL 2,050
INTEREST 1,003
MISCELLANEOUS 8,907
TOTAL EXPENSES BEFORE REDUCTIONS 1,092,332
EXPENSE REDUCTIONS (1,137) 1,091,195
NET INVESTMENT INCOME 11,255,096
REALIZED AND UNREALIZED GAIN (LOSS) 2,041,865
NET REALIZED GAIN (LOSS) ON INVESTMENT SECURITIES
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENT SECURITIES 881,496
NET GAIN (LOSS) 2,923,361
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 14,178,457
OTHER INFORMATION $ 1,137
EXPENSE REDUCTIONS
CUSTODIAN CREDITS
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
<C>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
OPERATIONS $ 11,255,096 $ 16,674,247
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 2,041,865 3,703,820
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) 881,496 3,255,290
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 14,178,457 23,633,357
DISTRIBUTIONS TO SHAREHOLDERS (16,958,571) (13,381,760)
FROM NET INVESTMENT INCOME
FROM NET REALIZED GAIN (2,012,034) -
TOTAL DISTRIBUTIONS (18,970,605) (13,381,760)
SHARE TRANSACTIONS 151,789,688 155,252,643
NET PROCEEDS FROM SALES OF SHARES
REINVESTMENT OF DISTRIBUTIONS 18,970,605 13,381,760
COST OF SHARES REDEEMED (56,154,532) (82,954,820)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 114,605,761 85,679,583
TOTAL INCREASE (DECREASE) IN NET ASSETS 109,813,613 95,931,180
NET ASSETS
BEGINNING OF PERIOD 324,524,983 228,593,803
END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $11,134,647 AND
$16,682,637, RESPECTIVELY) $ 434,338,596 $ 324,524,983
OTHER INFORMATION
SHARES
SOLD 12,283,606 12,893,400
ISSUED IN REINVESTMENT OF DISTRIBUTIONS 1,576,941 1,151,614
REDEEMED (4,574,603) (6,885,603)
NET INCREASE (DECREASE) 9,285,944 7,159,411
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1998
SELECTED PER-SHARE DATA (UNAUDITED) 1997 1996 1995 1994 1993
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.560 $ 12.240 $ 12.480 $ 11.020 $ 11.480 $ 10.970
INCOME FROM INVESTMENT OPERATIONS .361 C .759 C .670 .320 .733 .641
NET INVESTMENT INCOME
NET REALIZED AND UNREALIZED GAIN (LOSS) .109 .291 (.290) 1.530 (1.163) .559
TOTAL FROM INVESTMENT OPERATIONS .470 1.050 .380 1.850 (.430) 1.200
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.590) (.730) (.620) (.390) - (.628)
IN EXCESS OF NET INVESTMENT INCOME - - - - - (.002)
FROM NET REALIZED GAIN (.070) - - - (.010) (.050)
IN EXCESS OF NET REALIZED GAIN - - - - (.020) (.010)
TOTAL DISTRIBUTIONS (.660) (.730) (.620) (.390) (.030) (.690)
NET ASSET VALUE, END OF PERIOD $ 12.370 $ 12.560 $ 12.240 $ 12.480 $ 11.020 $ 11.480
TOTAL RETURN B 3.89% 9.06% 3.19% 17.32% (3.76)% 10.96%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 434,339 $ 324,525 $ 228,594 $ 181,546 $ 111,381 $ 122,376
RATIO OF EXPENSES TO AVERAGE NET ASSETS .58% A .58% .58% .59% .67% .68%
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 5.97% A 6.34% 6.49% 6.53% 6.53% 6.85%
PORTFOLIO TURNOVER RATE 246% A 191% 81% 182% 143% 70%
</TABLE>
A ANNUALIZED
B TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE
THE TOTAL RETURNS SHOWN. TOTAL RETURNS FOR PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
C NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
NOTES TO FINANCIAL STATEMENTS
For the period ended June 30, 1998 (Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES.
Investment Grade Bond Portfolio (the fund) is a fund of Variable
Insurance Products Fund II (the trust) and is authorized to issue an
unlimited number of shares. The trust is registered under the
Investment Company Act of 1940, as amended (the 1940 Act), as an
open-end management investment company organized as a Massachusetts
business trust. Shares of the fund may only be purchased by insurance
companies for the purpose of funding variable annuity or variable life
insurance contracts. The financial statements have been prepared in
conformity with generally accepted accounting principles which require
management to make certain estimates and assumptions at the date of
the financial statements. The following summarizes the significant
accounting policies of the fund:
SECURITY VALUATION. Securities are valued based upon a computerized
matrix system and/or appraisals by a pricing service, both of which
consider market transactions and dealer-supplied valuations.
Securities (including restricted securities) for which market
quotations are not readily available are valued at their fair value as
determined in good faith under consistently applied procedures under
the general supervision of the Board of Trustees. Short-term
securities with remaining maturities of sixty days or less for which
quotations are not readily available are valued at amortized cost or
original cost plus accrued interest, both of which approximate current
value.
INCOME TAXES. As a qualified regulated investment company under
Subchapter M of the Internal Revenue Code, the fund is not subject to
income taxes to the extent that it distributes substantially all of
its taxable income for its fiscal year. The schedule of investments
includes information regarding income taxes under the caption "Income
Tax Information."
INVESTMENT INCOME. Interest income, which includes accretion of
original issue discount, is accrued as earned.
EXPENSES. Most expenses of the trust can be directly attributed to a
fund. Expenses which cannot be directly attributed are apportioned
among the funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the
ex-dividend date.
Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences, which may result in
distribution reclassifications, are primarily due to differing
treatments for paydown gains/losses on certain securities, market
discount, capital loss carryforwards and losses deferred due to wash
sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
Undistributed net investment income and accumulated undistributed net
realized gain (loss) on investments may include temporary book and tax
basis differences which will reverse in a subsequent period. Any
taxable income or gain remaining at fiscal year end is distributed in
the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of
trade date. Gains and losses on securities sold are determined on the
basis of identified cost.
2. OPERATING POLICIES.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission (the SEC), the fund, along with
other affiliated entities of Fidelity Management & Research Company
(FMR), may transfer uninvested cash balances into one or more joint
trading accounts. These balances are invested in one or more
repurchase agreements for U.S. Treasury or Federal Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are
marked-to-market daily and maintained at a value at least equal to the
principal amount of the repurchase agreement (including accrued
interest). FMR, the fund's investment adviser, is responsible for
determining that the value of the underlying securities remains in
accordance with the market value requirements stated above.
INTERFUND LENDING PROGRAM. Pursuant to an Exemptive Order issued by
the SEC, the fund, along with other registered investment companies
having management contracts with FMR, may participate in an interfund
lending program. This program provides an alternative credit facility
allowing the fund to borrow from, or lend money to, other
participating funds. Information regarding the fund's participation in
the program is included under the caption "Other Information" at the
end of the fund's schedule of investments.
DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell
securities on a delayed delivery basis. Payment and delivery may take
place a month or more after the date of the transaction. The price of
the underlying securities and the date when the securities will be
delivered and paid for are fixed at the time the transaction is
negotiated. The market values of the securities purchased or sold on a
delayed delivery basis are identified as such in the fund's schedule
of investments. The fund may receive compensation for interest forgone
in the purchase of a delayed delivery security. With respect to
purchase commitments, the fund identifies securities as segregated in
its custodial records with a value at least equal to the amount of the
commitment. Losses may arise due to changes in the market value of the
underlying securities or if the counterparty does not perform under
the contract.
RESTRICTED SECURITIES. The fund is permitted to invest in securities
that are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from
registration or to the public if the securities are registered.
Disposal of these securities may involve time-consuming negotiations
and expense, and prompt sale at an acceptable price may be difficult.
At the end of the period, the fund had no investments in restricted
securities (excluding 144A issues).
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities), is included under the caption "Other
Information" at the end of the fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a
monthly fee that is calculated on the basis of a group fee rate plus a
fixed individual fund fee rate applied to the average net assets of
the fund. The group fee rate is the weighted average of a series of
rates and is based on the monthly average net assets of all the mutual
funds advised by FMR. The rates ranged from .1100% to .3700% for the
period. The annual individual fund fee rate is .30%. In the event that
these rates were lower than the contractual rates in effect during the
period, FMR voluntarily implemented the above rates, as they resulted
in the same or a lower management fee. For the period, the management
fee was equivalent to an annualized rate of .44% of average net
assets.
DISTRIBUTION AND SERVICE PLAN. In accordance with Rule 12b-1 of the
1940 Act, the Trustees have adopted a Distribution and Service Plan
(the Plan) on behalf of the fund. Under the Plan, FMR may use its
resources to pay administrative and promotional expenses related to
the sale of the fund's shares. Subject to the approval of the Board of
Trustees, the Plan also authorizes payments to third parties that
assist in the sale of fund shares or render shareholder support
services. For the period, payments made to third parties under the
Plan amounted to $47,331.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations
Company, Inc. (FIIOC), an affiliate of FMR, is the fund's transfer,
dividend disbursing and shareholder servicing agent. FIIOC receives
account fees and asset-based fees that vary according to account size
and type of account. FIIOC pays a portion of the expenses related to
the typesetting, printing and mailing of all shareholder reports,
except proxy statements. For the period, the transfer agent fees were
equivalent to an annualized rate of .07% of average net assets.
ACCOUNTING FEES. Fidelity Service Company, Inc., an affiliate of FMR,
maintains the fund's accounting records. The fee is based on the level
of average net assets for the month plus out-of-pocket expenses.
5. BANK BORROWINGS.
The fund is permitted to have bank borrowings for temporary or
emergency purposes to fund shareholder redemptions. The fund has
established borrowing arrangements with certain banks. Under the most
restrictive arrangement, the fund must pledge to the bank securities
having a market value in excess of 220% of the total bank borrowings.
The interest rate on the borrowings is the bank's base rate, as
revised from time to time. Information regarding the fund's
participation in the program is included under the caption "Other
Information" at the end of the fund's schedule of investments.
6. EXPENSE REDUCTIONS.
The fund has entered into an arrangement with its custodian whereby
credits realized on uninvested cash balances were used to offset a
portion of the fund's expenses.
For the period, the reductions under this arrangement are shown under
the caption "Other Information" on the fund's Statement of Operations.
7. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were the record owners
of approximately 34% of the outstanding shares of the fund. In
addition, two unaffiliated insurance companies were record owner of
21% of the total outstanding shares of the fund.
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
OFFICERS
Edward C. Johnson 3d, PRESIDENT
Robert C. Pozen, SENIOR VICE PRESIDENT
Fred L. Henning, Jr., VICE PRESIDENT
Dwight D. Churchill, VICE PRESIDENT
Kevin E. Grant, VICE PRESIDENT
Eric D. Roiter, SECRETARY
Richard A. Silver, TREASURER
Stanley N. Griffith, ASSISTANT VICE PRESIDENT
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
Thomas J. Simpson, ASSISTANT TREASURER
BOARD OF TRUSTEES
Ralph F. Cox *
Phyllis Burke Davis *
Robert M. Gates *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Marvin L. Mann *
William O. McCoy *
Gerald C. McDonough *
Thomas R. Williams *
* INDEPENDENT TRUSTEES
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER SERVICING AGENT
Fidelity Investments Institutional Operations Co., Inc.
Boston, MA
CUSTODIAN
The Bank of New York
New York, NY
