<PAGE>
[LOGO OF PROVIDIAN]
Post Office Box 32830
400 West Market Street
Louisville, Kentucky 40232
August 1997
Dear Valued Customer:
Enclosed are semi-annual reports for the portfolios available in your Providian
Life and Health variable annuity contract.
Please take some time to review these reports, and if you have any questions,
call one of our customer service representatives at 1-800-866-6007, 9 a.m. to 5
p.m. Eastern time, Monday through Friday.
Providian Life and Health is proud to have you as our customer.
Sincerely,
/s/ William L. Bussler
William Bussler
President, Financial Markets Division
Providian Life and Health Insurance Company provides the variable annuity.
Securities are offered through Providian Securities Corporation, 400 West Market
Street, Louisville, KY 40202. Both are subsidiaries of Providian Corporation.
<PAGE>
Variable
Investment Fund,
Growth and Income
Portfolio
Semi-Annual
Report
June 30, 1997
<PAGE>
Dreyfus Variable Investment Fund, Growth and Income Portfolio
- --------------------------------------------------------------------------------
Letter to Shareholders
Dear Shareholder:
During the fiscal half-year period ended June 30, 1997, the total return
for the Growth and Income Portfolio of Dreyfus Variable Investment Fund was
9.23%.* This compares with a return of 20.60% for the Standard and Poor's 500
Composite Stock Price Index.** From inception on May 2, 1994 to June 30, 1997,
the total return for the Portfolio was 110.92%, and the average annual total
return was 26.64%.***
Economic Review
The striking feature of the U.S. economy has been the sustained economic
expansion for many years combined with low inflation. Low price inflation has
boosted the purchasing power of incomes and contributed to the best sense of
economic well-being in decades. In this environment, economic policy has been
benign, allowing market interest rates to sway within an eighteen-month trading
range and corporate profits to rise steadily.
Real GDP growth grew at an above-trend rate from year-end 1995 to year-end
1996, accelerating to nearly 6% in the first quarter of this year. Clear
evidence of a subsequent slowdown has emerged. The slower near term growth is
attributable to a lackluster retail sector, even though exports and capital
spending are gaining. A key issue is whether weak demand can sustain a sluggish
consumer profile and, hence, a slow growth rate for the overall economy from
here on. Factors that underpin a resumption of stronger spending are rising real
consumer purchasing power, soaring household wealth and all-time highs in
consumer confidence. Additionally, inventories remain lean, muting the prospect
of yet slower economic growth.
Alongside evidence of a slower retail sector are reports showing that
unemployment fell below 5% and industrial capacity utilization tightened towards
its 1994 highs. With these, the economy now is operating at a high level with
little slack. Yet wage inflation abated in the second quarter while price
inflation continued to decelerate. The absence of any troublesome sign of
inflation has kept market interest rates in a long-standing trading range. In
addition, corporate profits have continued to surprise on the upside.
Views on the need to tighten monetary policy are divergent. There are those
who believe that the inflation pressure points are just different than in the
past and others who believe the inflation cycle has been eliminated by global
factors and technology. However, the Fed's most recent stance was to adopt a
policy bias towards tighter future policy. Any actual Federal Reserve decisions
are likely to be triggered by the flow of news about economic strength and
inflation.
Market Overview
Common stocks performed well during the first half of 1997. When the
closing bell rang on June 30, the Standard & Poor's 500 showed a six-month gain
of 20.6%, the Dow Jones Industrial Average was up 20.12%, the Nasdaq Composite
Index had gained 11.70% and even small capitalization stocks represented by the
Russell 2000 index were up by 10.20%.**
All these major indexes set new records repeatedly during the half-year.
However, it wasn't clear sailing, and not all sectors profited equally. As
recently as April, just after the Fed voted its latest increase in interest
rates, broad stock averages were only modestly ahead for the year. Technology
and small cap stocks were lagging the larger, better-known issues.
A turnaround began in mid-April that carried all markets to new highs. The
main propellant was the expanding yet noninflationary economy. At the same time,
corporate profits, generally speaking, showed continued strength. Clearly, all
the hard work of corporate reorganization and down-sizing in recent years was
paying off. Before each scheduled meeting of the Federal Reserve, there was
apprehension that interest rates might be boosted again. Yet the
<PAGE>
underlying tone of the market was one of confidence and strength. No doubt the
steady influx of retirement money and other assets into mutual funds was an
important factor in the market's buoyancy.
The best performing industries in the past six months included financial
stocks, pharmaceuticals, semiconductor and computer shares and communications.
Laggards included casino gambling, heavy construction, precious metals and
electric utilities.
As the market averages advanced, an increasing number of warnings were
being issued to the investing public to remember that what goes up might come
down--that many stocks appeared richly priced in relation to earnings
prospects. In day-to-day stock trading, however, there was little evidence by
the end of June that the cautionary advice was affecting stock prices.
Portfolio Focus
The Growth and Income Portfolio of the Dreyfus Variable Investment Fund has
grown since inception on May 2, 1994 to $304.6 million as of June 30, 1997. With
a mix of different-sized companies included in the portfolio, the average market
capitalization of companies held in the Portfolio is less than the average of
companies in the Standard and Poor's 500 Stock Price Index. The portfolio
includes some securities for growth and others for income. There is a mix of
large capitalization stocks, mid-capitalization stocks and small capitalization
stocks.
The portfolio includes a mixture of convertible securities, real estate
investment trusts and utilities as a means of satisfying the income portion of
the Growth and Income Portfolio's joint objectives of growth and income. Both
the utility indexes and the convertible securities indexes lagged the strong
return on the Standard and Poor's 500 Stock Price Index in the first six months
of 1997. The portfolio includes investments in the convertible securities of
Thermo Electron, AirTouch Communications and Home Depot, among others.
The mix of investments in the portfolio is illustrated by the largest
common stock holdings in the Portfolio. Brascan is a major Canadian
conglomerate. Biogen is a biotech company with a new drug for multiple sclerosis
that has strongly rising sales. Thermo Instrument Systems is a scientific
instrument company selling into a number of markets. UGI is a gas utility which
also has an important investment in a propane company. Tyco International is a
U.S. conglomerate with a good record of persistent earnings growth. GTE is a
local telephone company which is able to enter the long-distance business
without the regulatory limitations that are imposed on regional Bell operating
companies. Louisiana Land and Exploration is a major oil and gas producer.
The composition of the Portfolio was part of the reason it trailed the
broader market. It has minimal investments in the supercap stocks which have
been leading the market. The first half of 1997 was not a very favorable period
for relative performance in small-cap stocks or convertible securities in which
the Portfolio has significant investments. In addition, average cash reserves in
the Portfolio were held at somewhat above industry average levels during the
fiscal half year in an effort to reduce portfolio risk. While the Portfolio
continues to have the flexibility to invest in a mix of small-cap, mid-cap, and
large-cap stocks, there may be an increase in the average market capitalization
in the Portfolio with the intention of reducing the volatility of the Portfolio
relative to the broad market averages.
The Federal Reserve actions in raising short-term interest rates early in
1997 have increased the competition for stocks from money market investments and
raised fears about a future slowdown in profits. There are three things which
usually motivate a central bank to tighten. The first is an excessively weak
currency. That's hardly the case now. The second is when inflation has already
surged to a dangerous level. That's not true either. The third is when real
growth is faster than the long-term trend, raising worries at the central bank
about a potential future rise in inflation. That's what we experienced earlier
this year. The Fed's tightening occurred prior to any dramatic upsurge in
inflation. In fact, recent inflation numbers have been quite favorable and the
pace of economic growth has cooled.
<PAGE>
The valuation of common stocks tends to be a function of the level of
inflation, the level of interest rates, and expectations about corporate
profits. So far, inflation has remained moderate. Interest rates rose earlier
this year but have since stabilized. Current corporate profitability has been
high. However, some of the forces which have helped the profitability of U.S.
corporations may prove less favorable over the next year. The dollar is not as
weak as it was before, somewhat reducing the advantage U.S. firms had in
competing with European and Japanese firms. The ability to refinance corporate
debt at lower interest rates has been reduced by the rise in interest rates. A
great deal of corporate restructuring has already occurred, to the point where
further cost reductions may be harder to achieve. Corporate profits have
benefited from an economy which has been running above trend. But the Fed seems
dedicated to bringing the period of above-trend economic growth to an end.
We believe that the good news is that U.S. corporations have been more
successful in shifting their resources from old industries to new industries
than have their counterparts in Europe and Japan. U.S. companies are well-
positioned in the new industries which will be the growth engines of the
industrialized economies in the next decade.
We appreciate the willingness of our shareholders to invest in the Growth
and Income Portfolio of the Dreyfus Variable Investment Fund. We have endeavored
to realize a favorable return for the shareholders commensurate with a
reasonable level of risk. There is likely to be an alternation of periods where
the net asset value of the Portfolio declines and periods when the net asset
value rises. Our focus has been on achieving a satisfactory return for the
shareholders over a period of time.
Very truly yours,
Richard B. Hoey
Portfolio Manager
July 18, 1997
New York, N,Y.
* Total return includes reinvestment of dividends and any capital gains paid.
The Portfolio's performance does not reflect the deduction of additional
charges imposed in connection with investing in variable insurance
contracts.
** SOURCE:LIPPER ANALYTICAL SERVICES, INC. -- Reflects the reinvestment of
income dividends and, where applicable, capital gain distributions. The
Standard & Poor's 500 Composite Stock Price Index is a widely accepted
unmanaged index of U.S. stock market performance. The Dow Jones Industrial
Average is a price-weighted average of 30 actively traded blue chip stocks.
The Nasdaq Composite Index is an unmanaged index which monitors stocks
traded over-the-counter. The Russell 2000 Index is a widely accepted
unmanaged Index of small cap stock performance.
*** Fund's share price and investment return fluctuate so you may receive more
or less than your original cost upon redemption. Past performance is no
guarantee of future results.
<PAGE>
<TABLE>
<CAPTION>
Dreyfus Variable Investment Fund, Growth and Income Portfolio
- --------------------------------------------------------------------------------------------------------------
Statement of Investments June 30, 1997 (Unaudited)
Common Stocks--73.7% Shares Value
- -------------------------------------------------------------- -------- -----------
<S> <C> <C> <C>
Basic and Process Industries--2.0% Aluminum Co. of America................ 25,000 $ 1,884,375
Georgia-Pacific........................ 50,000 4,268,750
-----------
6,153,125
-----------
Capital Goods--5.8% Deere & Co............................. 100,000 5,487,500
Ingersoll-Rand......................... 100,000 6,175,000
Thermo Instrument Systems.............. 200,000 (a) 6,125,000
-----------
17,787,500
-----------
Consumer--6.8% Borg-Warner Automotive................. 50,000 2,703,125
Hertz, Cl. A........................... 28,300 (a) 1,018,800
OfficeMax.............................. 450,000 (a) 6,496,875
Philip Morris Cos...................... 130,000 5,768,750
Polo Ralph Lauren, Cl. A............... 49,600 (a) 1,357,800
Sunglass Hut International............. 550,000 (a) 3,471,875
-----------
20,817,225
-----------
Energy--7.1% Amerada Hess........................... 50,000 2,778,125
Louisiana Land & Exploration........... 120,000 6,855,000
Santa Fe International................. 156,600 (a) 5,324,400
UGI.................................... 300,000 6,637,500
-----------
21,595,025
-----------
Financial--5.8% Chase Manhattan........................ 50,000 4,853,125
Fannie Mae............................. 100,000 4,362,500
Fleet Financial Group.................. 75,000 4,743,750
Nationwide Financial Services, Cl. A... 134,400 (a) 3,570,000
-----------
17,529,375
-----------
Health Care--9.1% ALPHARMA, Cl. A........................ 250,000 3,984,375
American Home Products................. 50,000 3,825,000
Biogen................................. 200,000 (a) 6,775,000
Mentor................................. 200,000 5,925,000
PacifiCare Health Systems, Ser. B...... 50,000 (a) 3,193,750
Varian Associates...................... 75,000 4,068,750
-----------
27,771,875
-----------
Insurance--2.9% CIGNA.................................. 30,000 5,325,000
Chubb.................................. 50,000 3,343,750
-----------
8,668,750
-----------
Media/Entertainment--7.5% Comcast, Cl. A......................... 300,000 6,412,500
Evergreen Media, Cl. A................. 40,000 (a) 1,785,000
Groupe AB, A.D.S....................... 300,000 (a) 2,550,000
International Game Technology.......... 300,000 5,325,000
</TABLE>
<PAGE>
Dreyfus Variable Investment Fund, Growth and Income Portfolio
- --------------------------------------------------------------------------------
Statement of Investments (continued) June 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Common Stocks (continued) Shares Value
- ------------------------- ------- ------------
<S> <C> <C> <C>
Media/Entertainment (continued) Viacom, Cl. B............................... 70,000 (a) $ 2,100,000
Westinghouse Electric....................... 200,000 4,625,000
------------
22,797,500
------------
Mining and Metals--2.8% Brascan, Cl. A.............................. 350,000 8,618,750
------------
Multi-Industry--4.7% Cognizant................................... 200,000 8,100,000
Tyco International.......................... 90,000 6,260,625
------------
14,360,625
------------
Other--1.4% Standard & Poor's Depository Receipts....... 50,000 4,414,063
------------
Real Estate--1.3% Rouse....................................... 130,000 3,835,000
------------
Technology--8.4% Adaptec..................................... 150,000 (a) 5,212,500
Aspect Telecommunications................... 200,000 (a) 4,450,000
First Data.................................. 140,000 6,151,250
General Motors, Cl. H....................... 50,000 2,887,500
Micron Technology........................... 75,000 2,995,312
Xerox....................................... 50,000 3,943,750
------------
25,640,312
------------
Telecommunications--6.9% GTE......................................... 150,000 6,581,250
Iridium World Communications, Cl. A......... 300,000 (a) 5,437,500
SBC Communications.......................... 50,000 3,093,750
Tele-Communications International........... 200,000 (a) 3,087,500
Viatel...................................... 425,000 (a) 2,868,750
------------
21,068,750
------------
Utilities--1.2% Duke Power.................................. 75,000 3,595,312
------------
TOTAL COMMON STOCKS
(cost $211,276,166)....................... $224,653,187
============
Convertible Preferred Stocks--6.3%
- ----------------------------------
Financial--1.4% National Australia Bank, Ser. A, Cum., 2,125 150,000 $ 4,200,000
------------
Health Care--1.2% McKesson, Ser. A, Cum., $2.50............... 60,000 (b) 3,645,000
------------
Media/Entertainment--.7% Station Casinos, 7%......................... 50,000 2,237,500
------------
</TABLE>
<PAGE>
Dreyfus Variable Investment Fund, Growth and Income Portfolio
- -------------------------------------------------------------
Statement of Investments (continued) June 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Convertible Preferred Stocks (continued) Shares Value
- ----------------------------------------------------------------------------------------- ------- ----------
<S> <C> <C> <C>
Telecommunications--3.0% AirTouch Communications, Ser. C, 4.25%............... 110,000 $ 5,280,000
WorldCom, Cum., 8%................................... 35,000 3,946,250
-----------
9,226,250
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS
(cost $16,803,681)................................. $19,308,750
===========
</TABLE>
<TABLE>
<CAPTION>
Preferred Stocks--.8%
- -----------------------------------------------------------------------------------------
Media/Entertainment; News Corp. A.D.S., Cum., $.40
(cost $3,025,372).................................. 150,000 $ 2,343,750
===========
Principal
Convertible Corporate Notes & Bonds--11.3% Amount
- ----------------------------------------------------------------------------------------- -----------
<S> <C> <C>
Business Services--1.8% Corporate Express, Sub. Notes,
4.50%, 7/1/2001..................................... $ 6,000,000 $ 5,355,000
-----------
Consumer--2.6% Home Depot, Sub. Notes,
3.25%, 10/1/2001.................................... 5,000,000 5,675,000
Pep Boys, Sub. Notes,
Zero Coupon, 9/20/2011.............................. 4,000,000 2,235,000
-----------
7,910,000
-----------
Financial--1.6% Xerox Credit, Sub. Notes,
2.875%, 7/1/2002.................................... 5,000,000 5,025,000
-----------
Insurance--.8% Penn Treaty American, Sub. Notes,
6.25%, 12/1/2003.................................... 2,000,000 2,490,000
-----------
Mining and Metals--.8% Inco, Yankee Deb.,
5.75%, 7/1/2004..................................... 2,000,000 2,370,000
-----------
Technology--1.8% Thermo Electron, Euro. Sub. Deb.,
4.25%, 1/1/2003..................................... 5,000,000 (b) 5,475,000
-----------
Telecommunications--1.9% U.S. West, Sub. Deb.,
Zero Coupon, 6/25/2011.............................. 15,000,000 5,737,500
-----------
TOTAL CONVERTIBLE CORPORATE NOTES
AND BONDS (cost $33,870,817)........................ $34,362,500
===========
U.S. Treasury Notes--1.0%
- -----------------------------------------------------------------------------------------
5.625%, 11/30/1998
(cost $2,992,747)................................... $ 3,000,000 $ 2,987,344
===========
</TABLE>
<PAGE>
Dreyfus Variable Investment Fund, Growth and Income Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Investments (continued) June 30, 1997 (Unaudited)
Principal
Short-Term Investments--10.7% Amount Value
- ------------------------------------------------------------------------------ ------------ ------------
<S> <C> <C> <C>
U.S. Treasury Bills: 5.40%, 7/24/1997.......................... $ 471,000 $ 469,676
5.08%, 8/7/1997........................... 31,000 30,840
5.07%, 8/14/1997.......................... 735,000 730,458
5.29%, 8/21/1997.......................... 4,975,000 4,939,280
5.57%, 9/18/1997.......................... 26,744,000 26,446,072
------------
TOTAL SHORT-TERM INVESTMENTS
(cost $32,625,061)...................... $ 32,616,326
============
TOTAL INVESTMENTS (cost $300,593,844)........................................ 103.8% $316,271,857
===== ============
LIABILITIES, LESS CASH AND RECEIVABLES....................................... (3.8%) $(11,657,895)
===== ============
NET ASSETS................................................................... 100.0% $304,613,962
===== ============
</TABLE>
Notes to Statement of Investments:
- --------------------------------------------------------------------------------
[FN]
(a) Non-income producing.
(b) Securities exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At June 30, 1997,
these securities amounted to $9,120,000 or approximately 3.0% net assets.
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
Dreyfus Variable Investment Fund, Growth and Income Portfolio
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
June 30, 1997 (Unaudited)
Cost Value
------------ ------------
<S> <C> <C> <C>
ASSETS: Investments in securities--See Statement of Investments........ $300,593,844 $316,271,857
Cash........................................................... 538,159
Receivable for investment securities sold...................... 1,996,433
Dividends and interest receivable.............................. 736,313
Prepaid expenses............................................... 1,011
------------
319,543,773
------------
LIABILITIES: Due to The Dreyfus Corporation and affiliates.................. 188,724
Payable for investment securities purchased.................... 13,916,937
Payable for shares of Beneficial Interest redeemed............. 793,446
Accrued expenses............................................... 30,704
------------
14,929,811
------------
NET ASSETS......................................................................... $304,613,962
============
REPRESENTED BY: Paid-in capital................................................ $280,741,274
Accumulated undistributed investment income--net............... 187,654
Accumulated net realized gain (loss) on investments............ 8,007,021
Accumulated net unrealized appreciation (depreciation)
on investments--Note 5....................................... 15,678,013
------------
NET ASSETS......................................................................... $304,613,962
============
SHARES OUTSTANDING
(unlimited number of $.001 par value shares of Beneficial Interest authorized)..... 14,538,653
NET ASSET VALUE, offering and redemption price per share........................... $ 20.95
============
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
Dreyfus Variable Investment Fund, Growth and Income Portfolio
- --------------------------------------------------------------------------------
Statement of Operations Six Months Ended June 30, 1997 (Unaudited)
INVESTMENT INCOME
<S> <C> <C> <C>
INCOME: Cash dividends (net of $17,076 foreign taxes
withheld at source)........................ $1,944,431
Interest..................................... 1,471,324
----------
Total Income............................. $ 3,415,755
EXPENSES: Investment advisory fee--Note 4(a)........... 974,473
Professional fees............................ 18,736
Registration fees............................ 17,936
Custodian fees--Note 4(a).................... 8,677
Prospectus and shareholders' reports......... 6,852
Trustees' fees and expenses--Note 4(b)....... 3,300
Loan commitment fees--Note 3................. 1,930
Shareholder servicing costs.................. 217
Miscellaneous................................ 2,834
----------
Total Expenses........................... 1,034,955
-----------
INVESTMENT INCOME--NET................................. 2,380,800
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS--
Note 5:
Net realized gain (loss) on investments:
Long transactions.......................... $8,810,134
Short sale transactions.................... 44,056
Net realized gain (loss) on forward currency
exchange contracts......................... (37,411)
----------
Net Realized Gain (Loss).............. 8,816,779
Net unrealized appreciation (depreciation)
on investments............................. 13,270,457
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS. 22,087,236
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS... $24,468,036
===========
</TABLE>
See notes to financial statements.
<PAGE>
Dreyfus Variable Investment Fund, Growth and Income Portfolio
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1997 Year Ended
(Unaudited) December 31, 1996
---------------- -----------------
<S> <C> <C>
OPERATIONS:
Investment income--net.............................................................. $ 2,380,800 $ 2,974,056
Net realized gain (loss) on investments............................................. 8,816,779 22,639,509
Net unrealized appreciation (depreciation) on investments........................... 13,270,457 (2,605,907)
------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Operations................. 24,468,036 23,007,658
------------ ------------
DIVIDENDS TO SHAREHOLDERS FROM:
Investment income--net.............................................................. (2,374,602) (2,817,457)
Net realized gain on investments.................................................... (2,603,571) (22,301,456)
------------ ------------
Total Dividends................................................................. (4,978,173) (25,118,913)
------------ ------------
BENEFICIAL INTEREST TRANSACTIONS:
Net proceeds from shares sold....................................................... 70,709,654 142,396,273
Dividends reinvested................................................................ 4,978,172 25,118,913
Cost of shares redeemed............................................................. (16,498,697) (10,630,121)
------------ ------------
Increase (Decrease) in Net Assets from Beneficial Interest Transactions 59,189,129 156,885,065
------------ ------------
Total Increase (Decrease) in Net Assets......................................... 78,678,992 154,773,810
NET ASSETS:
Beginning of Period................................................................. 225,934,970 71,161,160
------------ ------------
End of Period....................................................................... $304,613,962 $225,934,970
============ ============
Undistributed investment income--net.................................................. $ 187,654 $ 181,456
------------ ------------
Shares Shares
---------------- -----------------
CAPITAL SHARE TRANSACTIONS:
Shares sold......................................................................... 3,551,397 6,920,188
Shares issued for dividends reinvested.............................................. 255,906 1,271,395
Shares redeemed..................................................................... (824,913) (518,058)
------------ ------------
Net Increase (Decrease) in Shares Outstanding................................... 2,982,390 7,673,525
============ ============
</TABLE>
See notes to financial statements.
<PAGE>
Dreyfus Variable Investment Fund, Growth and Income Portfolio
- -------------------------------------------------------------------------------
Financial Highlights
Contained below is per share operating performance data for a share of
Beneficial Interest outstanding, total investment return, ratios to average net
assets and other supplemental data for each period indicated. This information
has been derived from the Series' financial statements.
<TABLE>
<CAPTION>
Six Months Ended Year Ended December 31,
June 30, 1997 -----------------------------
PER SHARE DATA: (Unaudited) 1996 1995 1994(1)
---------------- -------- ------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period.................... $ 19.55 $ 18.33 $ 11.98 $ 12.50
-------- -------- ------- -------
Investment Operations:
Investment income--net.................................. .17 .36 .28 .28
Net realized and unrealized gain (loss)
on investments......................................... 1.60 3.43 7.07 (.43)
-------- -------- ------- -------
Total from Investment Operations........................ 1.77 3.79 7.35 (.15)
-------- -------- ------- -------
Distributions:
Dividends from investment income--net................... (.17) (.35) (.27) (.28)
Dividends from net realized gain on investments......... (.20) (2.22) (.73) (.09)
-------- -------- ------- -------
Total Distributions..................................... (.37) (2.57) (1.00) (.37)
-------- -------- ------- -------
Net asset value, end of period.......................... $ 20.95 $ 19.55 $ 18.33 $ 11.98
======== ======== ======= =======
TOTAL INVESTMENT RETURN.................................. 9.23%(2) 20.75% 61.89% (1.22%)(2)
RATIOS/SUPPLEMENTAL DATA:
Ratio of expenses to average net assets................. .40%(2) .83% .92% .22%(2)
Ratio of net investment income to
average net assets..................................... .91%(2) 1.96% 2.21% 2.25%(2)
Decrease reflected in above expense ratios due to
undertakings by The Dreyfus Corporation................ -- -- .03% 1.28%(2)
Portfolio Turnover Rate................................. 98.55%(2) 237.44% 255.42% 237.09%(2)
Average commission rate paid(3)......................... $ .0607 $ .1904 -- --
Net Assets, end of period (000's Omitted)............... $304,614 $225,935 $71,161 $ 1,040
</TABLE>
- ------------
(1) From May 2, 1994 (commencement of operations) to December 31, 1994.
(2) Not annualized.
(3) For fiscal years beginning January 1, 1996, the Series is required to
disclose its average commission rate paid per share for purchases and sales
of investment securities.
See notes to financial statements.
<PAGE>
Dreyfus Variable Investment Fund, Growth and Income Portfolio
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATMENTS (UNAUDITED)
NOTE 1--General:
Dreyfus Variable Investment Fund (the "Fund") is registered under the
Investment Company Act of 1940 ("Act") as an open-end management investment
company, operating as a series company, currently offering thirteen series,
including the Growth and Income Portfolio (the "Series") and is intended to be a
funding vehicle for variable annuity contracts and variable life insurance
policies to be offered by the separate accounts of life insurance companies. The
Series is a non-diversified portfolio. The Series' investment objective is to
provide long-term capital growth, current income and growth of income,
consistent with reasonable investment risk. The Dreyfus Corporation ("Dreyfus")
serves as the Series' investment adviser. Dreyfus is a direct subsidiary of
Mellon Bank, N.A. ("Mellon"). Premier Mutual Fund Services, Inc. is the
distributor of the Series' shares, which are sold without a sales charge.
The Fund accounts separately for the assets, liabilities and operations of
each series. Expenses directly attributable to each series are charged to that
series' operations; expenses which are applicable to all series are allocated
among them on a pro rata basis.
The Series' financial statements are prepared in accordance with generally
accepted accounting principles which may require the use of management estimates
and assumptions. Actual results could differ from those estimates.
NOTE 2--Significant Accounting Policies:
(a) Portfolio valuation: Investments in securities (including options and
financial futures) are valued at the last sales price on the securities exchange
on which such securities are primarily traded or at the last sales price on the
national securities market. Securities not listed on an exchange or the national
securities market, or securities for which there were no transactions, are
valued at the average of the most recent bid and asked prices, except for open
short positions, where the asked price is used for valuation purposes. Bid price
is used when no asked price is available. Securities for which there are no such
valuations are valued at fair value as determined in good faith under the
direction of the Board of Trustees. Investments denominated in foreign
currencies are translated to U.S. dollars at the prevailing rates of exchange.
Forward currency exchange contracts are valued at the forward rate.
(b) Securities transactions and investment income: Securities transactions
are recorded on a trade date basis. Realized gain and loss from securities
transactions are recorded on the identified cost basis. Dividend income is
recognized on the ex-dividend date and interest income, including, where
applicable, amortization of discount on investments, is recognized on the
accrual basis.
(c) Dividends to shareholders: Dividends are recorded on the ex-dividend
date. The Series declares and pays dividends from investment income-net on a
quarterly basis. Dividends from net realized capital gain are normally declared
and paid annually, but the Series may make distributions on a more frequent
basis to comply with the distribution requirements of the Internal Revenue Code.
To the extent that net realized capital gain can be offset by capital loss
carryovers, if any, it is the policy of the Series not to distribute such gain.
(d) Federal income taxes: It is the policy of the Series to continue to
qualify as a regulated investment company, if such qualification is in the best
interests of its shareholders, by complying with the applicable provisions of
the Internal Revenue Code, and to make distributions of taxable income
sufficient to relieve it from substantially all Federal income and excise taxes.
<PAGE>
Dreyfus Variable Investment Fund, Growth and Income Portfolio
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Unaudited) (continued)
NOTE 3--Bank Line of Credit:
The Series participates with other Dreyfus-managed funds in a $600 million
redemption credit facility ("Facility") to be utilized for temporary or
emergency purposes, including the financing of redemptions. In connection
therewith, the Series has agreed to pay commitment fees on its pro rata portion
of the Facility. Interest is charged to the Series at rates based on prevailing
market rates in effect at the time of borrowings. For the period ended June 30,
1997, the Series did not borrow under the Facility.
NOTE 4--Investment Advisory Fee and Other Transactions With Affiliates:
(a) Pursuant to an Investment Advisory Agreement with Dreyfus, the
investment advisory fee is computed at the annual rate of .75 of 1% of the value
of the Series' average daily net assets and is payable monthly.
The Series compensates Dreyfus Transfer, Inc., a wholly-owned subsidiary of
Dreyfus, under a transfer agency agreement for providing personnel and
facilities to perform transfer agency services for the Series.
The Series compensates Mellon under a custody agreement to provide
custodial services for the Series. During the period ended June 30, 1997, $8,677
was charged by Mellon pursuant to the custody agreement.
(b) Each trustee who is not an "affiliated person" as defined in the Act
receives from the Fund an annual fee of $2,500 and an attendance fee of $250 per
meeting. The Chairman of the Board receives an additional 25% of such
compensation.
NOTE 5--Securities Transactions:
(a) The following summarizes the aggregate amount of purchases and sales of
investment securities and securities sold short, excluding short-term securities
and forward currency exchange contracts, during the period ended June 30, 1997:
<TABLE>
<CAPTION>
Purchases Sales
------------ ------------
<S> <C> <C>
Long transactions............. $293,352,227 $234,855,007
Short sale transactions....... 590,923 634,979
------------ ------------
Total........................ $293,943,150 $235,489,986
============ ============
</TABLE>
The Series is engaged in short-selling which obligates the Series to
replace the security borrowed by purchasing the security at current market
value. The Series would incur a loss if the price of the security increases
between the date of the short sale and the date on which the Series replaces the
borrowed security. The Series would realize a gain if the price of the security
declines between those dates. Until the Series replaces the borrowed security,
the Series will maintain daily, a segregated account with a broker and
custodian, of cash and/or U.S. Government securities sufficient to cover its
short position. At June 30, 1997, there were no securities sold short
outstanding.
The Series enters into forward currency exchange contracts in order to
hedge its exposure to changes in foreign currency exchange rates on its foreign
portfolio holdings. When executing forward currency exchange contracts, the
Series is obligated to buy or sell a foreign currency at a specified rate on a
certain date in the future. With respect to sales of forward currency exchange
contracts, the Series would incur a loss if the value of the
<PAGE>
Dreyfus Variable Investment Fund, Growth and Income Portfolio
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Unaudited) (continued)
contract increases between the date the forward contract is opened and the date
the forward contract is closed. The Series realizes a gain if the value of the
contract decreases between those dates. With respect to purchases of forward
currency exchange contracts, the Series would incur a loss if the value of the
contract decreases between the date the forward contract is opened and the date
the forward contract is closed. The Series realizes a gain if the value of the
contract increases between those dates. The Series is also exposed to credit
risk associated with counter party nonperformance on these forward currency
exchange contracts which is typically limited to the unrealized gain on each
open contract. At June 30, 1997, there were no open forward currency exchange
contracts.
(b) At June 30, 1997, accumulated net unrealized appreciation on
investments was $15,678,013, consisting of $25,100,914 gross unrealized
appreciation and $9,422,901 gross unrealized depreciation.
At June 30, 1997, the cost of investments for Federal income tax purposes
was substantially the same as the cost for financial reporting purposes (see the
Statement of Investments).
<PAGE>
Dreyfus Variable Investment Fund,
Growth and Income Portfolio
200 Park Avenue
New York, NY 10166
Investment Adviser
The Dreyfus Corporation
200 Park Avenue
New York, NY 10166
Custodian
Mellon Bank, N.A.
One Mellon Bank Center
Pittsburgh, PA 15258
Transfer Agent &
Dividend Disbursing Agent
Dreyfus Transfer, Inc.
P.O. Box 9671
Providence, RI 02940
Printed in U.S.A. 108SA976
<PAGE>
DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO
LETTER TO SHAREHOLDERS
Dear Shareholder:
We are pleased to provide you with this report on the Dreyfus Variable
Investment Fund, Quality Bond Portfolio. For its semi-annual reporting ended
June 30, 1997, the Portfolio produced a total return of 2.69% per share,
based upon net asset value,* compared to 3.05% for the Merrill Lynch Domestic
Master Index (Subindex D010).** Income dividends of $.354 per share were
declared during the period, which is equivalent to an annualized distribution
rate per share of 6.20%.***
ECONOMIC REVIEW
Despite recent moderation in the rate of new job creation, the latest
reported unemployment rate (5% in June) was the lowest since 1973. When the
unemployment rate was last at that level, the inflation rate was heading
toward double-digit territory. Now, inflation is subdued; the Consumer Price
Index rose at an annual rate of just 1.4% for the twelve-month period through
May. Producer prices have risen a minuscule 0.6% over the same time. It has
been unprecedented for the economy to have seven years of expansion, low
unemployment and low inflation at the same time.
Ever alert for signs of incipient inflation, the Federal Open Market
Committee, the policy-making arm of the Federal Reserve, has raised interest
rates just once in more than two years. That hike came in March 1997 when the
Federal Funds rate was increased by one quarter of a percentage point to
5.50%. (The Federal Funds rate is the rate of interest that banks charge one
another for overnight loans.) While there have been some signs that wages are
increasing (an area of particular concern to the Federal Reserve), there have
also been indications that the economy may be slowing from its torrid first
quarter pace when it surged at a 5.9% annual rate, the biggest advance since
the fourth quarter of 1987.
Indicating possible moderation in the rate of economic growth, retail
sales have been in decline all spring despite record levels of consumer
optimism about the economy. The latest report on retail sales through June
showed a decline at an annual rate of 5% over the previous three months. This
marked the first three-month decline since the fall of 1981. Yet, despite
their sluggish spending at checkout counters, consumers' confidence in the
economy continues to climb, heavily influenced by increased job security and
low inflation.
Throughout the seven-year economic expansion, the pattern of consumer
spending has been stop-and-go, alternating between spurts of spending and
retrenchment. The 5% decline for the three months through May was preceded by
a 15% advance over the previous three-month period. On the production side of
the economy, a survey of corporate buyers compiled by the National
Association of Purchasing Management reported that growth in factory activity
eased slightly during June. The much-observed supplier-delivery component of
the survey, a measure of how quickly orders are being satisfied and a
possible sign of production bottlenecks, also fell modestly. In further
evidence of a slowing economy during the second quarter, the Commerce
Department recently reported that factory orders fell in May.
Rising incomes, low unemployment and quiescent inflation have all
contributed to a feeling of confidence, as measured by the Conference Board's
Index of Consumer Sentiment, that has been unmatched for 28 years. Many
economists feel that the optimistic consumer sentiment indicators provide a
floor to economic growth and will spur consumer spending later in the year,
particularly if the unemployment rate remains low and job security worries
recede further. We are mindful of the potent role that consumers play in the
economy _ their spending accounts for about two thirds of economic output. So
we remain alert to signs of any strain on productive capacity caused by
increases in consumer spending that might, in turn, lead to another
tightening in monetary policy by the Federal Reserve.
MARKET ENVIRONMENT
The technical factors in the bond market are quite positive, and should
continue to push interest rates lower. A balanced budget amendment looks like
an achievable goal. U.S. interest rates are currently higher than almost all
other developed countries, making our rates attractive globally, and the dollar
continues to remain strong. Last, commodity prices have been drifting lower.
At the consumer level, the rate outlook looks positive too. Bank lending
criteria, especially in the credit card arena, are becoming more stringent.
The primary reason for that is the continued rise of consumer delinquencies.
Retail sales have been sluggish, and car sales have also turned sluggish. In
fact, some of the hottest selling vehicles last year now must offer
incentives to find buyers. These incentives include loans that carry 0%
interest for 2 years (Nissan). This shows that auto dealers are having
trouble clearing 1997 inventory, which is an indication that consumers have
turned the aggressive spending pattern down.
PORTFOLIO OVERVIEW
Currently, the maturity of the Portfolio is at a 12-year weighted average
life, which makes the effective duration 5.03. Going forward we plan on
maintaining this positioning for a declining rate environment in the
immediate foreseeable future. As for positioning on the interest rate curve,
we have avoided securities (where possible) that are spread from the 10-year
sector of the yield curve. The 10-year Treasury currently has become
expensive, due to technical reasons, versus the 5- and 30-year sectors.
We had written to you last time that both corporate and mortgage spreads
continued to tighten relative to Treasuries. As of now, this still continues
to be the case. As investors, worldwide, scramble for yield, higher yielding
investments, spreads have continued to drift tighter. The Portfolio continues
to benefit from this spread tightening (as mentioned last time we had
increased allocations to the bank sector and commercial mortgages). The major
change in portfolio holdings is the addition of high quality names in the
puttable bond arena. Merck & Co. and BellSouth Capital Funding are two
examples of puttable bonds that we have purchased. Both securities have
performed admirably well, as rates have declined since purchase.
As always, we will be monitoring these factors, as well as numerous other
indicators.
<PAGE>
Very truly yours,
[Kevin McClintock signature logo]
Kevin McClintock
Head of Taxable Fixed Income
July 16, 1997
New York, N.Y.
* Total return includes reinvestment of dividends and any capital gains paid.
The Portfolio's performance does not reflect the deduction of additional charges
imposed in connection with investing in variable annuity contracts and variable
life insurance policies.
** The Merrill Lynch Domestic Master Index is an unmanaged performance
benchmark for portfolios that include U.S. Government, mortgage and BBB or
higher-rated corporate securities with maturities greater than or equal to one
year.
*** Distribution rate per share is based upon dividends per share declared from
net investment income during the period (annualized), divided by the net asset
value per share at the end of the period.
<TABLE>
<CAPTION>
DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO
STATEMENT OF INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Principal
Bonds and Notes_102.4% Amount Value
---------- -----------
<S> <C> <C> <C>
Asset-Backed_11.8%. Morgan Stanley Capital I,
Mortgage Pass-Through Ctfs.,
Ser. 1997-HF1, Cl. E, 7.55%, 2007...... $3,839,000 (a) $ 3,829,403
The Money Store Trust,
Asset-Backed Ctfs.,
Ser. 1996-D, Cl. A-16, 7.11%, 2028..... 1,890,869 1,878,756
UCFC Loan Trust 1997-A1,
Home Equity Loan Pass-Through Ctfs.,
Cl. A6, 7.435%, 2024................... 2,600,000 2,636,563
-----------
8,344,722
-----------
Banking_4.9%.................. BNY Capital I,
Gtd. Capital Securities, Ser. B, 7.97%, 2026 1,000,000 999,987
Barnett Capital II,
Gtd. Capital Securities, 7.95%, 2026. 1,500,000 1,477,500
Colonial Capital I,
Gtd. Capital Securities, Ser. A, 8.92%, 2027 1,000,000 1,000,976
-----------
3,478,463
-----------
Commercial Mortgages_28.1% 277 Park Avenue Finance,
Commercial Mortgage Pass-Through Ctfs.,
Ser. 1997-C1, Cl. A2, 7.68%, 2007...... 2,250,000 (a) 2,323,828
Asset Securitization,
Commercial Mortgage Pass-Through Ctfs.,
Ser. 1996-MD VI, Cl. A7, 7.755%, 2026.. 2,500,000 (b) 2,516,406
CS First Boston Mortgage Securities,
Mortgage Pass-Through Ctfs.,
Ser. 1997-C1, Cl. E, 7 1/2%, 2011...... 3,000,000 (a) 2,983,125
DLJ Mortgage Acceptance,
Mortgage Pass-Through Ctfs.,
Ser. 1996-CF2, Cl. A-3, 7.38%, 2021.... 2,000,000 (a) 2,015,625
First Union-Lehman Brothers Commercial Mortgage Trust,
Mortgage Pass-Through Ctfs.,
Ser. 1997-C1, Cl. C, 7.44%, 2007....... 2,000,000 2,034,375
GMAC Commercial Mortgage Securities,
Mortgage Pass-Through Ctfs.,
Ser. 1996-C1, Cl. C, 7.43%, 2006....... 2,000,000 2,025,313
Merrill Lynch Mortgage Investors,
Mortgage Pass-Through Ctfs.,
Ser. 1995-C3, Cl. C, 7.368%, 2025...... 2,200,000 (b) 2,214,781
Resolution Trust,
Commercial Mortgage Pass-Through Ctfs.:
Ser. 1994-C2, Cl. D, 8%, 2025.......... 2,809,551 2,868,377
Ser. 1995-C2, Cl. C, 7%, 2027.......... 911,976 897,442
-----------
19,879,272
-----------
Foreign_2.8% Wharf International Finance Ltd.,
Gtd. Notes, Ser. A, 7 5/8%, 2007....... 2,000,000 (a) 2,005,764
-----------
DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO
STATEMENT OF INVESTMENTS (CONTINUED) JUNE 30, 1997 (UNAUDITED)
Principal
Bonds and Notes (continued) Amount Value
---------- -----------
<S> <C> <C> <C>
Foreign/Governmental_4.3% United Mexican States,
Floating Rate Notes, 7 7/8%, 2001...... $3,000,000 (a,b) $ 3,012,300
-----------
Health Care_2.8% Merck & Co.,
Medium-Term Notes, Ser. B, 5.76%, 1999. 2,000,000 (c) 2,008,620
-----------
Hotels & Motels_2.8% Hyatt Equities, L.L.C.,
Notes, 6.80%, 2000..................... 2,000,000 (a) 2,007,002
-----------
Industrial_.7% Eastman Kodak,
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Deb., 9.95%, 2018................................. 400,000 504,383
-----------
Insurance_0.0% SunAmerica,
Deb., 9.95%, 2012.................................. 13,000 15,478
-----------
Oil and Gas_2.8% Halliburton,
Notes, 6 3/4%, 2007................................. 2,000,000 (d) 1,984,394
-----------
Other_0.0% City of New York,
General Obligation Bonds, Ser. D, 10%, 2007........ 25,000 28,312
-----------
Publishing_2.8% A. H. Belo,
Sr. Notes, 6 7/8%,.................................. 2,000,000 2,004,038
-----------
Residential Mortgage_6.1% GE Capital Mortgage Services,
REMIC Multi-Class Pass Through Ctfs.
Ser. 1996-14, Cl. 2B1, 7 1/4%, 2011.............. 806,152 800,358
Ser. 1996-17, Cl. 2B1, 7 1/4%, 2011.............. 765,582 761,037
Norwest Asset Securities Corporation
Mortgage Pass-Through Ctfs.,
Ser. 1997-11, Cl. M, 7%, 2007.................... 2,500,000 2,418,750
PNC Mortgage Securities,
Mortgage Pass-Through Ctfs.,
Ser. 1997-3, Cl. 1B3, 7%, 2027.................. 378,679 366,491
-----------
4,346,636
-----------
Tobacco_2.8% Philip Morris,
Notes, 6.95%, 2001.............................. 2,000,000 (e) 2,020,202
-----------
Utilities/Telephone_4.2% BellSouth Capital Funding,
Deb., 6.04%, 2001............................... 2,000,000 (f) 1,974,998
Wisconsin Bell,
Deb., 6.35%, 2006.............................. 1,000,000 (g) 980,551
-----------
2,955,549
-----------
U.S. Government Agency/
Mortgage-Backed_23.4% FICO Coupon Strips,
Ser. 1, Zero Coupon, 5/11/2000.................. 95,000 79,290
Federal National Mortgage Association REMIC Trust,
Gtd. REMIC Pass-Through Ctfs.,
Ser. 1997-24, Cl IA, 7%, 1/18/2026
(Interest Only Obligation)...................... (h) 1,059,686
DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO
STATEMENT OF INVESTMENTS (CONTINUED) JUNE 30, 1997 (UNAUDITED)
Principal
Bonds and Notes (continued) Amount Value
--------- -----------
U.S. Government Agency/
Mortgage-Backed (continued) Federal Home Loan Mortgage Association REMIC Trust,
Gtd. REMIC Pass-Through Ctfs.,
Ser. 1916, Cl. PI, 7%, 12/15/2011
(Interest Only Obligation)...................... (i) $ 1,254,341
Government National Mortgage Association I:
7.33%, 10/15/2030............................... $ 2,474,345 2,460,415
8%, 9/15/2008................................... 1,028,677 1,065,967
Government National Mortgage Association II,
5 1/2%, 1/20/2027-7/20/2027..................... 4,982,069 (j) 4,938,409
Government National Mortgage Association REMIC Trust,
Gtd. REMIC Pass-Through Securities:
Ser. 1997-2, Cl. K, 7 1/2%, 1/20/2024............ 3,300,000 3,271,521
Ser. 1997-4, Cl. G, 7 1/2%, 11/16/2024........... 2,500,000 2,487,625
-----------
16,617,254
-----------
U.S. Government_2.1%.... U.S. Treasury Notes,
6 5/8%, 4/30/2002............................... 1,500,000 1,514,297
-----------
TOTAL BONDS AND NOTES
(cost $72,562,297).............................. $72,726,686
===========
Short-Term Investments_4.8%
Agency Discount Note; Federal Home Loan Banks,
6%, 7/1/1997
(cost $3,390,000)............................... $ 3,390,000 $ 3,390,000
===========
TOTAL INVESTMENTS (cost $75,952,297)..................................................... 107.2% $76,116,686
============ ===========
LIABILITIES, LESS CASH AND RECEIVABLES................................................... (7.2)% $(5,143,012)
============ ===========
NET ASSETS............................................................................... 100.0% $70,973,674
============ ===========
</TABLE>
DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO
Notes to Statement of Investments:
(a) Securities exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions
exempt from registration, normally to qualified institutional buyers. At
June 30, 1997, these securities amounted to $18,177,047 or 25.6% of net
assets.
<PAGE>
(b) Variable rate security--interest rate subject to periodic change.
(c) Reflects date security can be redeemed at holders' option; the
stated maturity date is 5/3/2037.
(d) Reflects date security can be redeemed at holders' option; the
stated maturity date is 2/1/2027.
(e) Reflects date security can be redeemed at holders' option; the
stated maturity date is 6/1/2006.
(f) Reflects date security can be redeemed at holders' option; the
stated maturity date is 11/15/2026.
(g) Reflects date security can be redeemed at holders' option; the
stated maturity date is 12/1/2026.
(h) Notional face $2,325,786.
(i) Notional face $4,807,376.
(j) Partially purchased on a forward commitment basis.
SEE NOTES TO FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1997 (UNAUDITED)
Cost Value
---------- ------------
<S> <C> <C> <C>
ASSETS: Investments in securities--See Statement of
Investments......................................... $75,952,297 $76,116,686
Cash.................................................. 3,930,040
Interest receivable................................... 594,781
Prepaid expenses and other assets..................... 6,651
-----------
80,648,158
-----------
LIABILITIES: Due to The Dreyfus Corporation and affiliates......... 40,123
Payable for investment securities purchased........... 9,600,960
Payable for Beneficial Interest redeemed.............. 12,206
Interest payable...................................... 213
Accrued expenses...................................... 20,982
-----------
9,674,484
-----------
NET ASSETS....................................................................... $70,973,674
===========
REPRESENTED BY: Paid-in capital....................................... $70,399,903
Accumulated undistributed investment income--net...... 377,231
Accumulated net realized gain (loss) on investments... 32,151
Accumulated net unrealized appreciation (depreciation)
on investments--Note 5.............................. 164,389
-----------
NET ASSETS....................................................................... $70,973,674
===========
SHARES OUTSTANDING
(unlimited number of $.001 par value shares of Beneficial Interest
authorized).................................................................... 6,163,798
NET ASSET VALUE, offering and redemption price per share......................... $11.51
===========
SEE NOTES TO FINANCIAL STATEMENTS.
DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO
STATEMENT OF OPERATIONS.......................................................... SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME
INCOME Interest Income....................................... $ 2,343,509
EXPENSES: Investment advisory fee--Note 4(a).................... $ 213,555
Interest--Note 3...................................... 13,753
Prospectus and shareholders' reports.................. 11,271
Professional fees..................................... 10,385
Custodian fees--Note 4(a)............................. 8,705
Registration fees..................................... 2,990
Trustees' fees and expenses--Note 4(b)................ 962
Shareholder servicing costs........................... 349
Miscellaneous......................................... 3,053
Total Expenses................................... 265,023
-----------
INVESTMENT INCOME--NET........................................................... 2,078,486
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS--Note 5:
Net realized gain (loss) on investments.............. $ (404,199)
Net unrealized appreciation (depreciation) on
investments........................................ 196,789
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS........................... (207,410)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................. $ 1,871,076
===========
SEE NOTES TO FINANCIAL STATEMENTS.
DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
Six Months Ended
June 30, 1997 Year Ended
(Unaudited) December 31, 1996
--------------- -----------------
OPERATIONS:
Investment income--net......................................................... $ 2,078,486 $ 2,974,487
Net realized gain (loss) on investments........................................ (404,199) 296,597
Net unrealized appreciation (depreciation) on investments...................... 196,789 (1,282,927)
---------- -----------
Net Increase (Decrease) in Net Assets Resulting from Operations......... 1,871,076 1,988,157
---------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DIVIDENDS TO SHAREHOLDERS FROM:
<S> <C> <C>
Investment income-net..................................................... (1,701,255) (2,977,385)
Net realized gain on investments.......................................... --- ---
------------ ------------
Total Dividends.......................................................... (1,701,255) (2,977,385)
----------- ------------
BENEFICIAL INTEREST TRANSACTIONS:
Net proceeds from shares sold............................................. 12,407,241 31,824,343
Dividends reinvested...................................................... 1,736,635 2,977,385
Cost of shares redeemed................................................... (4,276,045) (10,323,319)
----------- ------------
Increase (Decrease) in Net Assets from Beneficial Interest Transactions 9,867,831 24,478,409
----------- ------------
Total Increase (Decrease) in Net Assets................................. 10,037,652 23,489,181
NET ASSETS:
Beginning of Period....................................................... 60,936,022 37,446,841
----------- ------------
End of Period............................................................. $70,973,674 $ 60,936,022
=========== ============
Undistributed investment income-net........................................ $ 377,231 ---
----------- ------------
Shares Shares
----------- ------------
CAPITAL SHARE TRANSACTIONS:
Shares sold............................................................... 1,086,311 2,770,727
Shares issued for dividends reinvested.................................... 152,629 260,715
Shares redeemed........................................................... (374,588) (902,643)
----------- ------------
Net Increase (Decrease) in Shares Outstanding............................ 864,352 2,128,799
=========== ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO
FINANCIAL HIGHLIGHTS
Contained below is per share operating performance data for a share of
Beneficial Interest outstanding, total investment return, ratios to average
net assets and other supplemental data for each period indicated. This
information has been derived from the Series' financial statements.
Six Months Ended
June 30, 1997 Year Ended December 31,
-----------------------------------------------
PER SHARE DATA: (Unaudited) 1996 1995 1994 1993 1992
---------------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 11.50 $ 11.81 $ 10.53 $ 11.81 $ 10.94 $10.67
------- ------- ------- ------- ------- ------
Investment Operations:
Investment income-net................................. .35 .66 .68 .73 .76 .92
Net realized and unrealized gain (loss)
on investments....................................... (.05) (.31) 1.42 (1.27) .88 .30
------- ------- ------- ------- ------- ------
Total from Investment Operations...................... .30 .35 2.10 (.54) 1.64 1.22
------- ------- ------- ------- ------- ------
Distributions:
Dividends from investment income-net (.29) (.66) (.69) (.73) (.76) (.92)
Dividends from net realized gain
on investments....................................... -- -- (.13) (.01) (.01) (.03)
------- ------- ------- ------- ------- ------
Total Distributions................................... (.29) (.66) (.82) (.74) (.77) (.95)
------- ------- ------- ------- ------- ------
Net asset value, end of period........................ $ 11.51 $ 11.50 $ 11.81 $ 10.53 $ 11.81 $10.94
======= ======= ======= ======= ======= ======
TOTAL INVESTMENT RETURN................................ 5.42%(1) 3.13% 20.42% (4.59%) 15.33% 12.09%
RATIOS/SUPPLEMENTAL DATA:
Ratio of operating expenses to average net assets .77%(1) .79% .81% -- -- --
Ratio of interest expense to average net assets .04%(1) -- -- -- -- --
Ratio of net investment income
to average net assets................................ 6.33%(1) 5.86% 6.13% 7.03% 6.51% 8.54%
Decrease reflected in above expense ratios
due to undertakings by
The Dreyfus Corporation.............................. -- -- .04% 1.20% 3.51% 5.33%
Portfolio Turnover Rate............................... 239.75%(2) 258.36% 263.53% 64.80% 110.62% 9.39%
Net Assets, end of period (000's Omitted) $70,974 $60,936 $37,447 $13,244 $ 4,706 $ 405
(1) Annualized.
(2) Not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1-GENERAL:
Dreyfus Variable Investment Fund (the "Fund") is registered under the
Investment Company Act of 1940 ("Act") as an open-end management investment
company, operating as a series company currently offering thirteen series,
including the Quality Bond Portfolio (the "Series") and is intended to be a
funding vehicle for variable annuity contracts and variable life insurance
policies to be offered by the separate accounts of life insurance companies.
The Series is a diversified portfolio. The Series' investment objective is to
provide the maximum amount of current income to the extent consistent with
the preservation of capital and the maintenance of liquidity. The Dreyfus
<PAGE>
Corporation ("Dreyfus") serves as the Series' investment adviser. Dreyfus is
a direct subsidiary of Mellon Bank, N.A. ("Mellon"). Premier Mutual Fund
Services, Inc. is the distributor of the Series' shares, which are sold
without a sales charge.
The Fund currently functions as the funding vehicle for the Dreyfus
Series 2000 Variable Annuity Contract (the "Account") issued by Mutual
Benefit Life Insurance Company ("Mutual Benefit Life"). On July 16, 1991, the
Superior Court of New Jersey entered an Order (the "Order") appointing the
New Jersey Insurance Commissioner as Rehabilitator of Mutual Benefit Life.
The Commissioner was granted immediate exclusive possession and control of,
and title to, the business and assets of Mutual Benefit Life, including the
assets and liabilities of the Account.
The Commissioner was empowered by the Order to take such steps as he
deemed appropriate toward removing the cause and conditions that made
rehabilitation necessary. On January 15, 1993, the Commissioner filed the
First Amended Plan of Rehabilitation ("Plan") with the Court. The Plan
stipulated that the assets and liabilities of the Account would be
transferred to a separate account of MBL Life Assurance Corporation
("MBLLAC"), a wholly-owned subsidiary of Mutual Benefit Life. The Plan also
provided for the transfer of the ownership of the stock of MBLLAC to a Trust.
The Commissioner was designated as the sole Trustee of the Trust. On August
12, 1993, the Court rendered an opinion approving the Plan with certain
modifications. Two subsequent amendments to the Plan were filed and approved
by the Court. None of the modifications or amendments affected the status of
the Account. On November 10, 1993, the Court issued an Order of Confirmation
permitting the implementation of the Plan.
An order was also issued by the Court on January 28, 1994, approving the form
of the Third Amended Plan of Rehabilitation, the Election Materials and related
documents. On April 29, 1994, the Plan was implemented. Substantially all of the
assets of Mutual Benefit Life were transferred to MBLLAC which assumed and
reinsured Mutual Benefit Life's restructured insurance liabilities. The stock of
MBLLAC was assigned to the Stock Trust and the Commissioner was designated as
Trustee.
In view of the terms and conditions of both the Order and the Plan,
applications for new contracts and additional purchase payments under
existing contracts are currently not being accepted by the Account. The terms
of the Order and the Plan permit redemptions from the Account to continue as
requested.
The proceedings of the New Jersey Insurance Commissioner with respect to
Mutual Benefit Life or the Account do not apply to the separate accounts of
other life insurance companies that may use the Fund as a funding vehicle for
contracts or policies issued by them.
The Fund accounts separately for the assets, liabilities and operations
of each series. Expenses directly attributable to each series are charged to
that series' operations; expenses which are applicable to all series are
allocated among them on a pro rata basis.
The Series' financial statements are prepared in accordance with
generally accepted accounting principles which may require the use of
management estimates and assumptions. Actual results could differ from those
estimates.
DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 2_SIGNIFICANT ACCOUNTING POLICIES:
(A) PORTFOLIO VALUATION: Investments in securities (excluding short-term
investments and U.S. Government obligations) are valued each business day by
an independent pricing service ("Service") approved by the Board of Trustees.
Investments for which quoted bid prices are readily available and are
representative of the bid side of the market in the judgment of the Service
are valued at the mean between the quoted bid prices (as obtained by the
Service from dealers in such securities) and asked prices (as calculated by
the Service based upon its evaluation of the market for such securities).
Other investments (which constitute a majority of the portfolios' securities)
are carried at fair value as determined by the Service, based on methods
which include consideration of: yields or prices of securities of comparable
quality, coupon, maturity and type; indications as to values from dealers;
and general market conditions. Investments in U.S. Government obligations are
valued at the mean between quoted bid and asked prices. Short-term
investments are carried at amortized cost, which approximates value.
(B) SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities
transactions are recorded on a trade date basis. Realized gain and loss from
securities transactions are recorded on the identified cost basis. Interest
income, including, where applicable, amortization of discount on investments,
is recognized on the accrual basis.
(C) DIVIDENDS TO SHAREHOLDERS: Dividends are recorded on the ex-dividend
date. Dividends from investment income-net are declared and paid monthly.
Dividends from net realized capital gain are normally declared and paid
annually, but the Series may make distributions on a more frequent basis to
comply with the distribution requirements of the Internal Revenue Code. To
the extent that net realized capital gain can be offset by capital loss
carryovers, if any, it is the policy of the Series not to distribute such
gain.
(D) FEDERAL INCOME TAXES: It is the policy of the Series to continue to
qualify as a regulated investment company, if such qualification is in the
best interests of its shareholders, by complying with the applicable
provisions of the Internal Revenue Code, and to make distributions of taxable
income sufficient to relieve it from substantially all Federal income and
excise taxes.
NOTE 3_BANK LINE OF CREDIT:
The Series may borrow up to $10 million for leveraging purposes under a
short-term unsecured line of credit and participates with other
Dreyfus-managed funds in a $100 million unsecured line of credit primarily to
be utilized for temporary or emergency purposes, including the financing of
redemptions. Interest is charged to the Series at rates which are related to
<PAGE>
the Federal Funds rate in effect at the time of borrowings. At June 30, 1997,
there were no outstanding borrowings under either line of credit.
The average daily amount of borrowings outstanding under both
arrangements during the period ended June 30, 1997 was approximately
$490,000, with a related weighted average annualized interest rate of 5.66%.
The maximum amount borrowed at any time during the period ended June 30, 1997
was $6,316,500.
NOTE 4_INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES:
(A) Pursuant to an Investment Advisory Agreement with Dreyfus, the
investment advisory fee is computed at the annual rate of .65 of 1% of the
value of the Series' average daily net assets and is payable monthly.
The Series compensates Dreyfus Transfer, Inc. a wholly-owned subsidiary
of Dreyfus, under a transfer agency agreement for providing personnel and
facilities to perform transfer agency services for the Series.
The Series compensates Mellon under a custody agreement to provide
custodial services for the Series. During the period ended June 30, 1997,
$8,705 was charged by Mellon pursuant to the custody agreement.
DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(B) Each trustee who is not an "affiliated person" as defined in the Act
receives from the Fund an annual fee of $2,500 and an attendance fee of $250
per meeting. The Chairman of the Board receives an additional 25% of such
compensation.
NOTE 5_SECURITIES TRANSACTIONS:
The aggregate amount of purchases and sales (including paydowns) of
investment securities, excluding short-term securities, during the period
ended June 30, 1997, amounted to $161,361,155 and $158,194,324, respectively.
At June 30, 1997, accumulated net unrealized appreciation on investments
was $164,389, consisting of $417,345 gross unrealized appreciation and
$252,956 gross unrealized depreciation.
At June 30, 1997, the cost of investments for Federal income tax purposes
was substantially the same as the cost for financial reporting purposes (see
the Statement of Investments).
[Dreyfus lion "d" logo]
Registration Mark
DREYFUS VARIABLE INVESTMENT FUND,
QUALITY BOND PORTFOLIO
200 Park Avenue
New York, NY 10166
INVESTMENT ADVISER
The Dreyfus Corporation
200 Park Avenue
New York, NY 10166
CUSTODIAN
Mellon Bank, N.A.
One Mellon Bank Center
Pittsburgh, PA 15258
TRANSFER AGENT &
DIVIDEND DISBURSING AGENT
Dreyfus Transfer, Inc.
P.O. Box 9671
Providence, RI 02940
Printed in U.S.A. 120SA976
[Dreyfus logo]
Registration Mark
Variable
Investment Fund,
Quality Bond
Portfolio
Semi-Annual
Report
June 30, 1997
<PAGE>
Semiannual Report
June 30, 1997
International Stock Portfolio
Invest With Confidence(registered trademark)
T. Rowe Price
This report is authorized for distribution only to those who have received a
copy of the portfolio's prospectus. T. Rowe Price Investment Services, Inc.,
Distributor
T. Rowe Price
International Stock Portfolio
Semiannual Report
June 30, 1997
Dear Investor
European and Latin American stock markets posted robust returns in U.S. dollar
terms during the past six months. However, a strong dollar dampened returns for
U.S. investors in many regions. Despite the unfavorable currency translation,
your fund registered impressive returns during the half.
<TABLE>
<CAPTION>
Performance Comparison
<S> <C> <C>
Periods Ended 6/30/97 6 Months 12 Months
- -------------------------------------------------
International
Stock Portfolio 11.63% 17.43%
MSCI EAFE 11.36 13.16
Lipper Variable Annuity
Underlying International
Funds Average 12.13 16.75
</TABLE>
The T. Rowe Price International Stock Portfolio maintained its steady progress
during the six months ended June 30, 1997. As can be seen from the table,
results for this period were slightly ahead of the unmanaged MSCI Europe,
Australia, Far East (EAFE) index. The most important reasons for this
outperformance were the fund's underweighting in the comparatively disappointing
Japanese stock market and a significant position in the exuberant markets of
Latin America-particularly Brazil-which are not components of the EAFE index.
Fund performance slightly trailed the peer group average.
Over the 12-month period the fund's returns were well ahead of the EAFE index
and also surpassed the average for Lipper peer group funds. Again, the country
weightings compared with theirs were beneficial-particularly the underweighting
in Japan-and stock selection in most markets was also positive.
INVESTMENT REVIEW
Europe
Several European stock markets got off to a strong start this year, although
returns to the U.S. investor were moderated by the strength of the dollar. The
core continental European economies are struggling at the moment, but looser
monetary policies and weakening currencies should help them recover. In Germany
a combination of low growth and high labor costs boosted unemployment to record
levels. This in turn has raised questions as to whether the fiscal deficit can
meet the Maastricht criteria, but Germany seems as committed as ever to European
Monetary Union and a single currency. Despite the dull economy, the stock market
has been strong, led by financials such as Deutsche Bank and manufacturers such
as Volkswagen; the latter has been helped by a weaker deutschemark and the
growing focus on shareholder value.
<TABLE>
<CAPTION>
Market Performance
Six Months Local
Local Currency vs. U.S.
Ended 6/30/97 Currency U.S. Dollars Dollars
- ---------------------------------------------------------------------
<S> <C> <C> <C>
France 23.54% -11.45% 9.40%
Germany 32.27 -11.56 16.98
Hong Kong 9.94 -0.16 9.76
Italy 24.92 -10.64 11.63
Japan 7.61 1.43 9.16
Mexico 30.76 -0.58 30.00
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Netherlands 36.37 -11.72 20.39
Singapore -5.40 -2.17 -7.45
Sweden 30.11 -11.70 14.89
Switzerland 42.90 -7.90 31.61
United Kingdom 12.31 -2.75 9.22
</TABLE>
Source: FAME Information Services, Inc., using MSCI indices.
In France, an unexpected defeat for Chirac's party brought the Socialists to
power. The French economy has been subdued, with unemployment remaining
stubbornly high and consumer sentiment depressed. The government's commitment to
a single currency is now somewhat in doubt, but it will prove difficult to
stimulate the economy without breaching the Maastricht guidelines for economic
convergence. It is possible that concerns about high unemployment could lead to
a relaxation of the fiscal restraints required for EMU membership, making it
easier for other countries to join. Given these uncertainties, the stock market
has been dull, but core holdings such as the supermarket chain Carrefour and
conglomerate Eaux Cie Generale were able to make further progress.
The picture looks somewhat brighter in Italy. Improvement in the debt position
is vital for the future of this economy, and the outlook here is more
encouraging following recent legislation and public sector wage discipline. The
lira has now returned to the European exchange rate mechanism, but it is still
an open question whether Italy will be in the first round of countries to join
the single currency.
In the U.K. the most important news was the General Election on May 1, which
brought the Labour Party under Mr. Blair to power with a massive majority. Given
the strength of the economy, it was surprising to many observers that the
electorate rejected the Conservative Party so comprehensively. The explanation
lies in a deep desire for change after 17 years of Conservative rule, a sense
that Mr. Major's party was divided over Europe, and, in contrast to previous
elections, a much more professional and disciplined campaign by the Labour
Party.
The new government will at least inherit an economy in good shape with a strong
currency, falling unemployment, and inflation at low levels. The administration
has already surprised and pleased financial markets by giving more independence
to the Bank of England in setting monetary policy, and its much more positive
attitude toward Europe has been well received on the Continent.
The stock market greeted the incoming government with enthusiasm and pushed on
to new highs. International growth stocks such as SmithKline Beecham and Glaxo
Wellcome have performed well, and the conversion and public offerings of
building societies (mutually owned savings associations) stimulated interest in
financial stocks. The announced merger between the food and drinks group Grand
Metropolitan, which owns Burger King, and the leading wines and spirits company
Guinness was welcomed by investors. Both stocks were in our portfolio during the
half and each moved sharply ahead after the announcement.
Geographic Diversification
Latin Other and
Europe Japan Far East America Reserves
54% 23% 11% 8% 4%
Based on net assets as of 6/30/97.
Some of the best performance came from Europe's smaller bourses, with
Switzerland powering ahead as investors belatedly appreciated that
multinationals such as Novartis and Roche Holdings-both major pharmaceutical
groups-were well positioned following an unprecedented period of Swiss franc
weakness. In Spain, where ambition to qualify for Monetary Union is driving
widespread reforms, the market also performed well. The sharp rise in stock
prices allowed us to take profits in some of our positions, including oil
company Repsol.
Far East
Stock market performance in the Pacific region was initially dragged down by the
poor performance of Japan during the first few months of the year. However,
Japanese stocks rebounded sharply in May and June, allowing this market to post
solid returns for the first half, particularly in dollar terms. The Japanese
economy is now performing much better. Fourth quarter GDP growth of 2.9% was one
of the fastest among the leading industrialized countries. Industrial production
continued strong into the first quarter of this year with inventories declining
and shipments improving significantly. These broad statistics, however, mask a
tale of two economies: domestic consumption
<PAGE>
remains poor with the retail and service sectors depressed, but exports are
buoyant aided by the weakness of the yen, which prevailed throughout 1996.
The loan problems facing Japanese banks have not been helped by several real
estate transactions in Tokyo at prices some 80% below the peak of the bubble
years. However, there are signs that commercial property prices are stabilizing
at this level, and the stronger banks can survive provided that the valuation of
their loan collateral deteriorates no further.
Our strategy in the Tokyo market favored the export and technology sectors with
stocks such as NEC (communications and computers), Kyocera (ceramic packaging),
and Canon (cameras and office equipment) among our largest positions. In
contrast, your portfolio had no exposure to the bank stocks-the largest sector
in the index itself. Positive stock selection in this market made a major
contribution to the fund's good performance.
Elsewhere in the Pacific, many countries that have traditionally linked their
currencies to the U.S. dollar recently let them slide in value, in what amounted
to de facto devaluations. Particularly affected were the currencies of Thailand,
the Philippines, Indonesia, and Malaysia, where your fund has little or no
exposure. The stock market in Thailand was an especially poor performer in the
half. The problem here centered on a significant oversupply of commercial
property, and subsequent price declines have led to the virtual bankruptcy of
one of Thailand's largest finance companies. Export performance in the region
was also disappointing with countries such as Singapore and South Korea hurt by
the downturn in the electronic component cycle.
<TABLE>
<CAPTION>
Sector Diversification
Percent of Percent of
Net Assets Net Assets
12/31/96 6/30/97
- ----------------------------------------------------
<S> <C> <C>
Services 26.0% 25.8%
Consumer Goods 15.5 18.0
Finance 16.3 16.3
Capital Equipment 12.7 13.9
Energy 10.1 10.7
Materials 7.8 7.4
Multi-industry 3.8 3.6
Miscellaneous 0.1 0.2
Reserves 7.7 4.1
- ----------------------------------------------------
Total 100.0% 100.0%
</TABLE>
Turning from economics to politics, the major news was unquestionably the
handover of Hong Kong to China, along with the death of China's paramount leader
Deng Xiaoping. Although Deng held no official posts at the time of his death,
his influence on Chinese history has been immense. Inheriting a backward economy
at the time of his succession from Mao, Deng's policy of rapid modernization
turned the economy into a superpower. In sharp contrast to previous history, the
transfer of power has gone smoothly with Xiang Zemin, Deng's hand-picked
successor, assuming control.
Continued political stability and an open-door policy are essential for
confidence in Hong Kong now that it has reverted to Chinese sovereignty. The
Hong Kong stock market generated a return of nearly 10% during the six months
ended June 30, and we feel confident that the transition to Chinese rule will
not affect Hong Kong's position as the dynamic financial center of the region.
Latin America
As usual, Latin America provided much of the excitement during the half. Brazil
was up sharply despite fears that a deteriorating trade deficit would put
downward pressure on the currency. The government should rise to these
challenges, and investors have been impressed by its commitment to reform in
areas such as privatization and the deregulation of public sector tariffs. Our
positions in the Brazilian market are built around the telecommunications
company, Telecomunicacoes Brasileiras, which has out performed handsomely.
Although Brazil dominates our Latin American holdings, other countries in the
region have also moved along the path of reform, and their stock markets have
made a useful contribution to fund performance.
Mexico also returned approximately 30% during the past six months, both in local
currency and dollar terms, despite a fragile banking system and negative
consumer sentiment due to lower real wages. Mexico's stock market was driven by
blue chips such as telecommunications company Telefonos de Mexico and retailer
Cifra.
<PAGE>
The stock markets of Argentina and Chile have also been rewarding. Both
countries have shown a mix of strong economic recovery, inflation under much
better control, and a commitment to economic reform that has attracted the
international investor.
INVESTMENT POLICY AND OUTLOOK
We increased our allocation to Japan by three percentage points since year-end.
Our new investments were in the domestic sector, which has been neglected
recently while the exporters and technology stocks enjoyed the spotlight. Our
weighting there, however, is still relatively low, and there are signs that this
market has passed its worst. To complement this modest increase, we have been
shaving positions in better-performing markets of Southeast Asia, including Hong
Kong. Our holdings in Thailand and South Korea are negligible, but we are not
yet convinced that the problems in each country have been fully addressed.
A little more than half the portfolio is in Europe where we can find an
attractive combination of economies that are beginning to recover, a benign
interest rate environment, and an increasing focus on shareholder value. We have
been reducing holdings in the U.K. where the economic recovery is mature and the
stock market is beginning to look overextended. Valuations look more reasonable
in continental Europe where the potential for company earnings is greater.
Latin America will probably continue to provide the excitement going forward,
but it must be remembered that these are still developing economies with
volatile capital markets. There will always be room for them in an international
portfolio but prudence will govern our exposure.
Pulling all this together, the fund's portfolio is well diversified by country
and individual stock exposure. It gives the investor a reasonable balance
between the established economies overseas where we can find quality companies
at reasonable valuations, and the less developed markets where there is perhaps
more potential but at higher risk. This broad strategy has served the fund well
in the past and should continue to do so.
Respectfully submitted,
Martin G. Wade
President
July 25, 1997
Portfolio Highlights
Twenty-Five Largest Holdings
Percent of
Net Assets
6/30/97
_________________________________________________________
Royal Dutch Petroleum, Netherlands 2.3%
SmithKline Beecham, United Kingdom 2.0
Telecomunicacoes Brasileiras, Brazil 1.8
National Westminster Bank, United Kingdom 1.7
Novartis, Switzerland 1.5
Wolters Kluwer, Netherlands 1.4
Reed International, United Kingdom 1.2
Elsevier, Netherlands 1.2
Eaux Cie Generale, France 1.2
Shell Transport & Trading, United Kingdom 1.2
Roche Holdings, Switzerland 1.2
Canon, Japan 1.1
ABB, Switzerland/Sweden 1.1
ING Groep, Netherlands 1.1
Kyocera, Japan 1.0
NEC, Japan 1.0
Glaxo Wellcome, United Kingdom 1.0
Nestle, Switzerland 1.0
Astra, Sweden 1.0
Sumitomo Electric Industries, Japan 1.0
Sankyo, Japan 0.9
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Mitsubishi Heavy Industries, Japan 0.9
Norsk Hydro, Norway 0.9
Denso, Japan 0.8
Total, France 0.8
Total 30.3%
</TABLE>
Performance Comparison
This chart shows the value of a hypothetical $10,000 investment in the fund over
the past 10 fiscal year periods or since inception (for funds lacking 10-year
records). The result is compared with a broad-based average or index. The index
return does not reflect expenses, which have been deducted from the fund's
return.
Performance Comparison - International Stock Portfolio
As of 6/30/97
<TABLE>
<CAPTION>
International
Stock Portfolio MSCIEAFE
<S> <C> <C>
3/31/94 $ 10,000 $ 10,000
6/94 10,100 10,518
6/95 10,574 10,723
6/96 12,341 12,183
6/97 14,491 13,787
</TABLE>
Average Annual Compound Total Return
This table shows how the fund would have performed each year if its actual (or
cumulative) returns for the periods shown had been earned at a constant rate.
International Stock Portfolio
Periods Ended 6/30/97
<TABLE>
<CAPTION>
Since Inception
1 Year 3 Years Inception Date
- --------------------------------------------------------------
<S> <C> <C> <C>
17.43% 12.79% 12.10% 3/31/94
</TABLE>
Investment return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
Total returns do not include charges imposed by your insurance company's
separate account. If these were included, performance would have been lower.
Financial Highlights
T. Rowe Price International Stock Portfolio
(Unaudited)
<TABLE>
<CAPTION>
For a share outstanding throughout each period
- --------------------------------------------------------------
6 Months Year 3/31/94
Ended Ended to
6/30/97 12/31/96 12/31/95 12/31/94
<S> <C> <C> <C> <C>
NET ASSET
VALUE
Beginning of
period $ 12.64 $ 11.26 $ 10.18 $ 10.00
Investment
activities
Net
investment
income 0.10 0.09 0.07 0.06
Net real-
ized and
unrealized
gain (loss) 1.37 1.55 1.06 0.12
Total from
investment
activities 1.47 1.64 1.13 0.18
Distributions
Net invest-
ment income - (0.17) (0.05) -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Net realized
gain - (0.09) - -
Total distri-
butions - (0.26) (0.05) -
NET ASSET VALUE
End of period $ 14.11 $ 12.64 $ 11.26 $ 10.18
Ratios/
Supplemental Data
Total return 11.63% 14.70% 11.18% 1.80%
Ratio of
expenses to
average net
assets 1.05%! 1.05% 1.05% 1.05%!
Ratio of net
investment
income to
average
net assets 1.79%! 1.22% 1.47% 1.50%!
Portfolio
turnover rate 13.9%! 9.7% 17.4% 4.6%!
Average
commission
rate paid $ 0.0005 $ 0.0014 $ - $ -
Net assets,
end of period
(in thousands) $325,548 $210,746 $51,661 $ 9,095
</TABLE>
! Annualized.
The accompanying notes are an integral part of these financial statements.
Statement of Net Assets
T. Rowe Price International Stock Portfolio
June 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Shares/Par Value
In thousands
<S> <C> <C>
ARGENTINA 0.9%
Common Stocks 0.9%
Banco de Galicia Buenos Aires
(Class B) ADR (USD) 8,490 $ 224
Banco Frances del Rio
de la Plata ADR (USD) 9,247 300
Perez Companc (Class B) 85,378 686
Sociedad Comercial del Plata
ADR (144a) (USD) * 2,620 86
Telecom Argentina Stet
(Class B) 3,260 17
Telecom Argentina Stet
(Class B) ADR (USD) 620 32
Telefonica de Argentina
(Class B) ADR (USD) 19,570 678
Transportadora de Gas
del Sur (Class B)
ADS (USD) 1,200 15
YPF Sociedad Anonima
(Class D) ADR (USD) 23,579 725
Total Argentina (Cost $2,211) 2,763
AUSTRALIA 2.0%
Common Stocks 1.9%
Australia & New Zealand
Bank Group 40,000 299
Australian Gas Light Company 100,251 591
Boral Limited 41,000 129
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Broken Hill Proprietary 72,352 1,065
Commonwealth Bank of
Australia, Installment
Receipts, 11/14/97 48,300 425
Fosters Brewing Group 147,000 273
John Fairfax Holdings 51,000 121
Lend Lease 11,073 234
National Australia Bank 26,454 379
National Mutual Holdings 64,000 104
News Corporation 107,399 515
Publishing & Broadcasting 71,000 410
St. George Bank 35,000 233
Tabcorp Holdings 69,000 376
WMC 44,500 281
Westpac Bank 36,000 217
Woodside Petroleum 61,000 526
6,178
Preferred Stocks 0.1%
Sydney Harbour Casino
Holdings * 117,000 $ 184
184
Total Australia (Cost $5,589) 6,362
AUSTRIA 0.0%
Common Stocks 0.0%
EVN Energie Versorgung
Nieder 336 43
Flughafen Wien 870 37
Total Austria (Cost $97) 80
BELGIUM 1.1%
Common Stocks 1.1%
Dexia 2,366 254
Generale de Banque 2,013 775
Generale de Banque,
VVPR Strip 113 -
Kredietbank 5,280 2,128
UCB 173 548
Total Belgium (Cost $2,997) 3,705
BRAZIL 4.3%
Common Stocks 0.4%
Brazil Fund (USD) 1,700 52
Companhia Siderurgica
Nacional 4,224,750 139
Eletrobras 1,084,220 606
Eletrobras ADR (USD) 3,390 95
Telecomunicacoes de
Sao Paulo * 58,539 17
Usiminas ADR (USD) 22,366 252
White Martins 54,268 159
1,320
Preferred Stocks 3.9%
Banco Bradesco 52,879,646 533
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Banco Itau 376,070 211
Brahma 817,158 622
Brasmotor 320,560 72
Cia Cimento Portland
Itau 469,150 161
Cia Energetica de Sao
Paulo ADR (USD) * 440 9
Cia Energetica de Sao
Paulo ADR,
Sponsored (USD) * 830 $ 17
Cia Energetica Minas
Gerais 11,713,428 604
Cia Energetica Minas Gerais
ADR, Sponsored,
Nonvoting (USD) 11,656 600
Cia Tecidos Norte
de Minas 376,450 147
Lojas Americanas 2,292,180 31
Pao de Acucar GDS
(USD) * 13,015 296
Petrol Brasileiros 2,486,245 691
Telecomunicacoes
Brasileiras 7,974,499 1,210
Telecomunicacoes Brasileiras
ADR (USD) 31,346 4,757
Telecomunicacoes Brasileiras
ADR (144a) (USD) 17 3
Telecomunicacoes de Minas
Gerais (Class B) 1,178,000 208
Telecomunicacoes de Minas
Gerais (Class B),
Preference Receipts * 14,611 3
Telecomunicacoes de
Sao Paulo 3,106,950 1,014
Telecomunicacoes de
Sao Paulo, Preference
Receipts * 122,691 40
Telecomunicacoes do
Rio de Janeiro 1,111,000 171
Telecomunicacoes do
Rio de Janeiro,
Preference Receipts * 131,719 20
Unibanco 13,802,560 506
Usiminas 41,052 457
Usiminas ADR (USD) 18,350 206
12,589
Total Brazil (Cost $8,719) 13,909
CANADA 0.3%
Common Stocks 0.3%
Alcan Aluminium 18,780 641
Royal Bank of Canada 5,990 271
Total Canada (Cost $781) 912
CHILE 0.5%
Common Stocks and Rights 0.5%
AFP Providia ADR (USD) 141 $ 3
Chile Fund (USD) 6,629 173
Chilectra ADR (144a) (USD) 8,280 248
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Chilgener ADS (USD) 4,910 138
Chilgener ADS, Rights,
7/7/97 (USD) * 1,619 4
Compania Cervecerias
Unidas ADS (USD) 2,070 45
Compania de
Telecomunicaciones
de Chile ADR (USD) 9,918 327
Empresa Nacional de
Electricidad de Chile
ADR (USD) 11,046 249
Enersis ADS (USD) 6,846 244
Five Arrows Chile
Investment Trust (USD) 18,990 65
Genesis Chile Fund (USD) 2,120 107
Santa Isabel ADR (USD) 4,221 136
Total Chile (Cost $1,434) 1,739
CHINA 0.3%
Common Stocks 0.3%
Huaneng Power International
(Class N) ADR (USD) * 20,500 523
Shanghai Petrochemical
(Class H) (HKD) 1,177,000 282
Yizheng Chemical Fibre
(Class H) (HKD) 1,028,000 183
Total China (Cost $956) 988
CZECH REPUBLIC 0.0%
Common Stocks 0.0%
SPT Telecom * 630 66
Total Czech Republic (Cost $71) 66
DENMARK 0.2%
Common Stocks 0.2%
Den Danske Bank 4,570 445
Tele Danmark (Class B) 1,620 84
Unidanmark (Class A) 3,610 203
Total Denmark (Cost $613) 732
FINLAND 0.2%
Common Stocks 0.2%
Nokia (Class A) 10,630 $ 801
Total Finland (Cost $546) 801
FRANCE 8.0%
Common Stocks and Warrants 8.0%
AXA 10,189 634
Accor 1,745 261
Alcatel Alsthom 11,728 1,469
Assurances Generales
de France 5,475 175
Canal Plus 2,700 526
Carrefour 3,310 2,404
Chargeurs 987 57
Cie de St. Gobain 7,340 1,070
Dexia France, Bearer 1,878 183
Dexia France, Registered
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
1998 409 40
Dexia France, Registered
1999 2,820 274
Eaux Cie Generale 30,170 3,866
Eaux Cie Generale,
Warrants, 5/2/01 * 2,540 1
Elf Aquitaine 11,430 1,233
GTM Entrepose 2,040 102
Guilbert 3,028 429
Havas 1,410 102
L'Oreal 844 356
LVMH 7,313 1,966
Lapeyre 5,100 338
Legrand 1,910 336
Pathe 1,607 319
Pinault Printemps 4,363 2,097
Rexel 660 203
Sanofi 12,113 1,187
Schneider 21,292 1,133
Societe Generale 4,444 496
Sodexho 3,200 1,638
Television Francaise 6,720 600
Total (Class B) 26,048 2,633
Total France (Cost $22,819) 26,128
GERMANY 4.2%
Common Stocks and Warrants 4.0%
Allianz 6,130 $ 1,278
Bayer 36,519 1,413
Bayerische Hypotheken
und Wechsel Bank 21,492 643
Bilfinger & Berger 5,910 241
Buderus 406 223
Commerzbank 9,560 271
Deutsche Bank 18,671 1,081
Deutsche Telekom 32,396 780
Gehe 30,781 2,100
Hoechst 6,470 274
Hornbach Baumarkt 690 29
Mannesmann 1,190 530
Praktiker 1,493 27
Rhoen Klinikum 4,960 646
SAP 3,710 744
Schering 3,067 325
Siemens 5,271 313
Veba 29,140 1,637
Veba, Warrants, 4/6/98 * 160 56
Volkswagen 476 361
12,972
Preferred Stocks 0.2%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Fielmann 1,562 47
Hornbach Holdings 3,200 271
Krones 107 44
SAP 1,568 325
687
Total Germany (Cost $12,532) 13,659
HONG KONG 3.8%
Common Stocks 3.8%
Cathay Pacific Airways 248,000 514
China Light & Power 60,000 340
Dao Heng Bank Group 147,000 805
First Pacific 677,876 866
Guoco Group 198,000 1,043
Hong Kong Land
Holdings (USD) 464,127 1,235
Hutchison Whampoa 250,000 2,162
New World Development 372,311 2,220
Swire Pacific (Class A) 162,000 1,458
Wharf Holdings 365,000 $ 1,583
Total Hong Kong (Cost $10,867) 12,226
INDIA 0.2%
Common Stocks 0.2%
State Bank of India GDR
(USD) * 22,800 599
Total India (Cost $323) 599
ITALY 2.5%
Common Stocks 2.5%
Banca Commerciale Italiana 62,000 128
Banca Fideuram 135,920 444
Credito Italiano 394,601 722
ENI 230,339 1,304
Gucci Group (USD) 6,740 434
IMI 53,710 483
Industrie Natuzzi ADR
(USD) 10,060 258
Italgas 62,000 201
Mediolanum 35,259 398
Rinascente 14,000 78
Seat * 157,900 51
Seat, Savings Shares * 57,000 12
Stet 227,900 1,328
Telecom Italia 197,378 633
Telecom Italia Mobile 506,784 1,630
Telecom Italia Mobile,
Savings Shares 52,846 94
Total Italy (Cost $6,629) 8,198
JAPAN 22.5%
Common Stocks 22.5%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Advantest 5,100 392
Alps Electric 33,000 461
Amada 71,000 626
Canon 136,000 3,702
Citizen Watch 43,000 332
DDI 147 1,085
Daifuku 8,000 105
Daiichi Pharmaceutical 88,000 1,551
DaiNippon Screen
Manufacturing 67,000 631
Daiwa House 98,000 $ 1,197
Denso 115,000 2,749
East Japan Railway 258 1,324
Fanuc 18,700 718
Hitachi 142,000 1,586
Hitachi Zosen 92,000 366
Honda Motor 8,000 241
Inax 21,000 157
Ishihara Sangyo Kaisha * 23,000 68
Ito-Yokado 32,000 1,857
Kao 68,000 943
Kawada Industries 6,000 27
Kokuyo 40,000 1,082
Komatsu 107,000 868
Komori 29,000 688
Kumagai Gumi 40,000 67
Kuraray 76,000 756
Kyocera 43,000 3,414
Makita 46,000 674
Marui 87,000 1,617
Matsushita Electric
Industrial 122,000 2,459
Mitsubishi 72,000 898
Mitsubishi Heavy
Industries 383,000 2,937
Mitsubishi Paper Mills 25,000 98
Mitsui Fudosan 186,000 2,564
Mitsui Petrochemical
Industries 20,000 96
Murata Manufacturing 41,000 1,631
NEC 243,000 3,392
National House
Industrial 12,000 158
Nippon Hodo 11,000 95
Nippon Steel 517,000 1,651
Nippon Telephone &
Telecom 113 1,084
Nomura Securities 128,000 1,764
Pioneer Electronic 49,000 1,188
Sangetsu 4,000 85
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Sankyo 88,000 2,956
Sega Enterprises 9,100 302
Sekisui Chemical 128,000 1,295
Sekisui House 69,000 698
Seven Eleven Japan 10,000 $ 756
Sharp 119,000 1,640
Shin-Etsu Chemical 69,000 1,830
Shiseido 15,000 247
Sony 29,900 2,606
Sumitomo 158,000 1,503
Sumitomo Electric Industries 188,000 3,149
Sumitomo Forestry 33,000 363
TDK 30,000 2,201
Teijin 207,000 975
Tokio Marine & Fire Insurance 36,000 471
Tokyo Electronics 16,100 770
Tokyo Steel Manufacturing 29,500 329
Toppan Printing 69,000 1,084
Uny 37,000 723
Yurtec 10,000 116
Total Japan (Cost $67,345) 73,398
MALAYSIA 1.8%
Common Stocks and Rights 1.8%
Affin Holdings 141,000 335
Berjaya Sports Toto 149,000 702
Commerce Asset Holdings 138,000 364
Commerce Asset Holdings, Rights, 7/21/97 * 27,600 1
Commerce Asset Holdings, Rights To Warrants, 7/21/97 * 17,250 3
Multi-Purpose Holdings 230,000 322
Renong 585,000 765
Resorts World 90,000 271
Tanjong 177,000 610
Technology Resources Industries * 121,000 208
Time Engineering 152,000 230
United Engineers 259,000 1,868
5,679
Preferred Stocks 0.0%
Multi-Purpose Holdings, Cv. Loan Stock, 3.00%, 1/13/02 360,000 121
Renong, Cv. Loan Stock, 4.00%, 5/21/01 27,400 $ 9
130
Total Malaysia (Cost $6,580) 5,809
MEXICO 1.7%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Common Stocks 1.7%
Cemex (Class B) 82,767 403
Cemex ADS (USD) 59,024 509
Cifra (Class B) ADR (USD) 390,674 709
Fomentos Economico Mexicano (Class B) 39,149 233
Gruma (Class B) * 57,442 267
Gruma (Class B) ADS (USD) * 13,490 250
Grupo Financiero Banamex (Class B) * 86,455 222
Grupo Financiero Banamex (Class L) * 1,486 4
Grupo Financiero Bancomer (Class B) GDS (USD) * 820 8
Grupo Financiero Bancomer (Class L) * 607 -
Grupo Industrial Maseca (Class B) 153,010 167
Grupo Modelo (Class C) 46,014 319
Grupo Televisa GDR (USD) * 3,145 96
Kimberly-Clark Mexico (Class A) 95,512 385
Panamerican Beverages (Class A) (USD) 22,980 755
Telefonos de Mexico (Class L) ADR (USD) 28,246 1,349
Total Mexico (Cost $4,665) 5,676
NETHERLANDS 9.8%
Common Stocks 9.8%
ABN Amro Holdings 76,392 1,424
Ahold 19,416 1,638
Akzo Nobel 1,956 268
Baan Company * 5,132 348
Baan Company (USD) * 5,410 372
CSM 25,631 1,285
Elsevier 231,864 $ 3,875
Fortis Amev 29,310 1,305
Hagemeyer 5,464 282
ING Groep 75,825 3,496
Koninklijke PTT Nederland 8,994 353
Nutricia 4,350 687
Otra 2,750 44
Polygram 40,441 2,122
Royal Dutch Petroleum 145,960 7,592
Unilever 10,940 2,303
Wolters Kluwer 36,940 4,498
Total Netherlands (Cost $26,479) 31,892
NEW ZEALAND 0.5%
Common Stocks 0.5%
Air New Zealand (Class B) 89,545 274
Carter Holt Harvey 39,500 102
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Fletcher Challenge Building 99,150 298
Fletcher Challenge Energy 5,750 17
Fletcher Challenge Forests Division 186,897 272
Fletcher Challenge Paper 46,500 113
Telecom Corporation of New Zealand 64,000 326
Tranz Rail Holdings 17,000 97
Total New Zealand (Cost $1,389) 1,499
NORWAY 1.6%
Common Stocks 1.6%
Bergesen (Class A) 6,500 154
Norsk Hydro 52,197 2,842
Orkla (Class A) 27,220 2,009
Saga Petroleum (Class B) 10,280 180
Total Norway (Cost $4,414) 5,185
PANAMA 0.0%
Common Stocks 0.0%
Banco Latinoamericano de Exportaciones (Class E) (USD) 1,998 86
Total Panama (Cost $98) 86
PERU 0.1%
Common Stocks 0.1%
Credicorp (USD) 4,920 $ 108
Telefonica del Peru (Class B) 7,030 19
Telefonica del Peru (Class B) ADS (USD) 7,714 202
Total Peru (Cost $276) 329
PHILIPPINES 0.2%
Common Stocks 0.2%
Philippine Long Distance Telephone 11,600 376
Philippine National Bank * 58,337 396
Total Philippines (Cost $897) 772
PORTUGAL 0.4%
Common Stocks 0.4%
Jeronimo Martins 16,838 1,176
Total Portugal (Cost $588) 1,176
RUSSIA 0.0%
Common Stocks 0.0%
Rao Gazprom ADS (USD) 2,760 48
Total Russia (Cost $43) 48
SINGAPORE 1.8%
Common Stocks and Rights 1.8%
City Developments 49,000 480
DBS Land 129,000 408
Development Bank of Singapore 35,000 441
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Fraser & Neave 52,200 372
Keppel 23,000 102
Keppel (Class A), New * 5,750 25
Overseas Chinese Bank 19,200 199
Overseas Union Bank 120,000 747
Overseas Union Bank, Rights, 7/2/97 * 24,000 32
Singapore Land 63,000 286
Singapore Press 55,600 1,120
United Industrial 183,000 138
United Overseas Bank 133,480 1,372
Wing Tai Holdings 80,000 $ 231
Total Singapore (Cost $6,309) 5,953
SOUTH KOREA 0.5%
Common Stocks 0.5%
Korea Electric Power 18,400 549
Pohang Iron & Steel 2,600 261
Samsung Electronic 6,985 776
Shinhan Bank 4,630 69
Total South Korea (Cost $1,546) 1,655
SPAIN 2.2%
Common Stocks 2.2%
Aguas de Barcelona, New * 39 1
Argentaria Banca de Espana 8,695 487
Banco Bilbao Vizcaya 4,070 331
Banco Popular Espanol 3,520 862
Banco Santander * 43,614 1,344
Centros Comerciales Pryca 6,417 139
Empresa Nacional de Electricidad 9,957 836
Gas Natural 3,781 826
Iberdrola 61,950 782
Repsol 12,578 532
Telefonica de Espana 35,538 1,027
Total Spain (Cost $5,624) 7,167
SWEDEN 2.7%
Common Stocks 2.7%
ABB 39,200 550
Astra (Class B) 179,973 3,176
Atlas Copco (Class B) 27,400 715
Electrolux (Class B) 18,000 1,298
Esselte (Class B) 5,680 134
Granges * 7,430 98
Hennes and Mauritz 35,450 1,246
Nordbanken 12,710 429
Sandvik (Class A) 6,010 171
Sandvik (Class B) 31,070 882
Scribona (Class B) 2,670 31
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Total Sweden (Cost $6,804) 8,730
SWITZERLAND 5.8%
Common Stocks 5.8%
ABB 1,962 $ 2,970
Adecco 4,587 1,759
Ciba Specialty Chemicals * 3,548 328
Credit Suisse Group 4,870 625
Nestle 2,447 3,228
Novartis 3,148 5,033
Roche Holdings 416 3,763
Schweizerischer Bankverein 4,300 1,150
Total Switzerland (Cost $14,469) 18,856
THAILAND 0.1%
Common Stocks 0.1%
Advanced Information Service 9,600 84
Bangkok Bank 19,900 137
Siam Cement 8,400 145
Total Thailand (Cost $690) 366
UNITED KINGDOM 15.6%
Common Stocks 15.6%
Abbey National 105,000 1,430
Argos 123,466 1,120
Asda Group 411,000 849
BG 79,000 292
British Petroleum 85,000 1,056
Cable & Wireless 217,000 1,987
Cadbury Schweppes 132,860 1,186
Caradon 200,700 670
Centrica * 79,000 96
Coats Viyella 51,000 107
Compass Group 80,000 895
David S. Smith 93,000 290
Electrocomponents 76,000 566
GKN 15,000 258
Glaxo Wellcome 160,000 3,304
Grand Metropolitan 255,000 2,463
Guinness 218,000 2,135
Heywood Williams Group 11,000 37
Hillsdown Holdings 72,000 201
John Laing (Class A) 30,000 187
Kingfisher 224,000 $ 2,537
Ladbroke Group 90,000 354
National Westminster Bank 408,000 5,497
Rank Group 148,000 937
Reed International 414,000 4,012
Rio Tinto 93,000 1,618
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Rolls Royce 59,480 227
Safeway 175,500 1,020
Sears 39,000 44
Shell Transport & Trading 562,500 3,841
SmithKline Beecham 345,800 6,363
T & N 123,000 293
Tesco 134,000 826
Tomkins 443,500 1,935
United News & Media 175,000 2,020
Total United Kingdom (Cost $42,247) 50,653
VENEZUELA 0.1%
Common Stocks 0.1%
Compania Anonima Nacional Telefonos de Venezuela
(Class D) ADR (USD) 5,040 217
Total Venezuela (Cost $123) 217
SHORT-TERM INVESTMENTS 3.0%
Commercial Paper 3.0%
Commerzbank, 5.55%, 7/9/97 $5,000,000 4,994
Investments in Commercial Paper through a
Joint Account, 6.11%, 7/1/97 4,626,616 4,626
Total Short-Term Investments (Cost $9,620) 9,620
Total Investments in Securities 98.9% of Net Assets
(Cost $277,390) $321,954
Other Assets Less Liabilities 3,594
NET ASSETS $325,548
Net Assets Consist of:
Accumulated net investment income - net of distributions $ 2,301
Accumulated net realized gain/loss - net of distributions 3,055
Net unrealized gain (loss) 44,554
Paid-in-capital applicable to 23,069,768 shares of $0.0001
par value capital stock outstanding; 1,000,000,000
shares authorized 275,638
NET ASSETS $325,548
--------
NET ASSET VALUE PER SHARE $ 14.11
--------
</TABLE>
* Non-income producing
144a Security was purchased pursuant to Rule 144a under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers - total of such securities at period-end amounts to
0.1% of net assets.
HKD Hong Kong dollar
USD U.S. dollar
The accompanying notes are an integral part of these financial statements.
Statement of Operations
T. Rowe Price International Stock Portfolio
(Unaudited)
In thousands
6 Months
<PAGE>
<TABLE>
<CAPTION>
Ended
6/30/97
<S> <C>
Investment Income
Income
Dividend (net of foreign taxes of $445) $ 3,142
Interest 505
Total income 3,647
Expenses
Investment management and administrative 1,346
Net investment income 2,301
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 3,233
Foreign currency transactions (285)
Net realized gain (loss) 2,948
Change in net unrealized gain or loss
Securities 27,238
Other assets and liabilities
denominated in foreign currencies (10)
Change in net unrealized gain or loss 27,228
Net realized and unrealized gain (loss) 30,176
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 32,477
--------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Statement of Changes in Net Assets
T. Rowe Price International Stock Portfolio
(Unaudited)
In thousands
<TABLE>
<CAPTION>
6 Months Year
Ended Ended
6/30/97 12/31/96
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations
Net investment income $ 2,301 $ 1,604
Net realized gain (loss) 2,948 1,089
Change in net unrealized gain or loss 27,228 15,122
Increase (decrease) in net assets from operations 32,477 17,815
Distributions to shareholders
Net investment income - (1,993)
Net realized gain - (1,133)
Decrease in net assets from distributions - (3,126)
Capital share transactions*
Shares sold 95,042 153,908
Distributions reinvested - 3,126
Shares redeemed (12,717) (12,638)
Increase (decrease) in net assets from capital
share transactions 82,325 144,396
Net Assets
Increase (decrease) during period 114,802 159,085
Beginning of period 210,746 51,661
End of period $325,548 $210,746
*Share information
Shares sold 7,379 12,891
Distributions reinvested - 255
Shares redeemed (986) (1,059)
Increase (decrease) in shares outstanding 6,393 12,087
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Notes to Financial Statements
T. Rowe Price International Stock Portfolio
June 30, 1997 (Unaudited)
Note 1 - Significant Accounting Policies
T. Rowe Price International Series, Inc. (the corporation) is registered under
the Investment Company Act of 1940. The International Stock Portfolio (the
fund), a diversified, open-end management investment company, is the sole
portfolio established by the corporation and commenced operations on March 31,
1994. The shares of the fund are currently being offered only to separate
accounts of certain insurance companies as an investment medium for both
variable annuity contracts and variable life insurance policies.
Valuation Equity securities are valued at the last quoted sales price at the
time the valuations are made. A security which is listed or traded on more than
one exchange is valued at the quotation on the exchange determined to be the
primary market for such security.
Short-term debt securities are valued at amortized cost which approximates fair
value.
For purposes of determining the fund's net asset value per share, the U.S.
dollar value of all assets and liabilities initially expressed in foreign
currencies is determined by using the mean of the bid and offer prices of such
currencies against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
fund, as authorized by the Board of Directors.
Currency Translation Assets and liabilities are translated into U.S. dollars at
the prevailing exchange rate at the end of the reporting period. Purchases and
sales of securities and income and expenses are translated into U.S. dollars at
the prevailing exchange rate on the dates of such transactions. The effect of
changes in foreign exchange rates on realized and unrealized security gains and
losses is reflected as a component of such gains and losses.
Other Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses are
reported on the identified cost basis. Dividend income and distributions to
shareholders are recorded by the fund on the ex-dividend date. Income and
capital gain distributions are determined in accordance with federal income tax
regulations and may differ from those determined in accordance with generally
accepted accounting principles.
Note 2 - Investment Transactions
Consistent with its investment objective, the fund engages in the following
practices to manage exposure to certain risks or enhance performance. The
investment objective, policies, program, and risk factors of the fund are
described more fully in the fund's prospectus and Statement of Additional
Information.
Emerging Markets At June 30, 1997, the fund held investments in securities of
companies located in emerging markets. Future economic or political developments
could adversely affect the liquidity or value, or both, of such securities.
Commercial Paper Joint Account The fund, and other affiliated funds, may
transfer uninvested cash into a commercial paper joint account, the daily
aggregate balance of which is invested in high-grade commercial paper. All
securities purchased by the joint account satisfy the fund's criteria as to
quality, yield, and liquidity.
Securities Lending The fund lends its securities to approved brokers to earn
additional income and takes cash and U.S. Treasury securities as collateral to
secure the loans. Collateral is maintained at not less than 100% of the value of
loaned securities. At June 30, 1997, the value of securities on loan was
$11,684,000. Although the risk is mitigated by the collateral, the fund could
experience a delay in recovering its securities and a possible loss of income or
value if the borrower fails to return them.
Other Purchases and sales of portfolio securities, other than short-term
securities, aggregated $104,352,000 and $17,172,000, respectively, for the six
months ended June 30, 1997.
Note 3 - Federal Income Taxes
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of its
taxable income.
At June 30, 1997, the aggregate cost of investments for federal income tax and
financial reporting purposes was $277,390,000, and net unrealized gain
aggregated $44,564,000, of which $50,700,000 related to appreciated investments
and $6,136,000 to depreciated investments.
Note 4 - Related Party Transactions
The fund is managed by Rowe Price-Fleming International, Inc. (the manager),
<PAGE>
which is owned by T. Rowe Price Associates, Inc., Robert Fleming Holdings
Limited, and Jardine Fleming Holdings Limited under a joint venture agreement.
The investment management and administrative agreement between the fund and the
manager provides for an all-inclusive annual fee, of which $307,000 was payable
at June 30, 1997. The fee, computed daily and paid monthly, is equal to 1.05% of
the fund's average daily net assets. Pursuant to the agreement, investment
management, shareholder servicing, transfer agency, accounting, and custody
services are provided to the fund, and interest, taxes, brokerage commissions,
and extraordinary expenses are paid directly by the fund.
During the six months ended June 30, 1997, the fund, in the ordinary course of
business, placed security purchase and sale orders aggregating $3,820,000 with
certain affiliates of the manager and paid commissions of $12,000 related
thereto.
Invest With Confidence(registered trademark)
T. Rowe Price
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for distribution only to those who have received a
copy of the portfolio's prospectus.
T. Rowe Price Investment Services, Inc., Distributor
TRP653 (6/97)
K15-056 6/30/97
<PAGE>
T. Rowe Price
Equity Income Portfolio
Semiannual Report
June 30, 1997
Dear Investor
After a strong 1996, the equity market continued to advance sharply in the first
half of 1997. The year began slowly with the market progressing only modestly in
the first several months. April, May, and June, however, were another matter
altogether as the combination of good corporate earnings growth, generally
stable interest rates, and strong investor demand for equities fueled a sharply
rising, almost frenzied, equity market.
<TABLE>
<CAPTION>
Performance Comparison
Periods Ended 6/30/97 6 Months 12 Months
- -----------------------------------------------------------
<S> <C> <C>
Equity Income Portfolio 14.78% 27.54
%
S&P 500 20.61 34.70
Lipper Variable Annuity
Underlying Equity Income
Funds Average 16.83 29.45
</TABLE>
As shown in the performance table, your fund trailed the unmanaged Standard &
Poor's 500 Stock Index over the past six and 12 months in this environment and
slightly lagged the Lipper average of similar funds. Often in sharply rising
markets, conservative funds like Equity Income tend to advance at a moderate
pace. This certainly applied to the first half of 1997. Over the last 12 months
we were pleased by the fund's almost 28% return but frustrated that it was not
even higher! Nonetheless, given the fund's conservative investment program, we
are reasonably satisfied with our progress over the last year.
DIVIDEND DISTRIBUTION
On June 25, your Board of Directors declared a second quarter income dividend of
$0.09 per share, bringing your 1997 total income distribution to $0.18 per
share. The dividend was paid on June 27 to shareholders of record on June 25.
PORTFOLIO STRATEGY
What is a conservative, value-oriented fund to do in a market environment like
the first half of 1997? Our strategy has been to worry about risk even more than
we typically do. While we did not alter the fund's overall asset allocation, we
did reduce our investments in a number of companies that have performed well
and, consequently, no longer appear as undervalued as they once did. The Major
Portfolio Changes table following this letter highlights some of these sales. We
always distinguish between the quality of a company and the price of a company
stock. Several of our larger sales represent investments in some of the world's
great companies (Warner-Lambert, Corning, SmithKline Beecham, Eastman Kodak).
When the market fully values or even more than fully values a company's equity,
however, our valuation discipline prompts us to "recycle" these holdings into
more reasonably valued companies with attractive upside potential and relatively
low downside risk. Both good upside and low downside are equally important to us
as we contemplate which investments to make on your behalf.
Security Diversification Pie Chart 6/30/97
Stocks 86% Bonds 1% Reserves 13%
In looking at our large purchases over the past few months, the companies share
the characteristics of attractive relative valuations, high relative dividend
yields, and, in our opinion, good appreciation potential with moderate downside
risk. We added to positions in five companies, including Dow Chemical, GM, and
Duke Energy. We purchased smaller positions in a number of other electric
utilities, one of the few groups that did not participate in the market's
advance. Occasionally, we can also opportunistically capitalize on negative
market responses to specific company news. For example, bad winter weather
affecting Burlington Northern Santa Fe caused a sharp drop in the company's
stock price, which we viewed as a temporary overreaction. We also initiated a
position in Knight-Ridder, the newspaper and publishing company.
SUMMARY AND OUTLOOK
As we entered 1997, we did not fully anticipate a market advance as sharp as the
one we witnessed in the first half of the year. In the fund's 1996 annual
report, we referred to the "delinkage" that was occurring as stock prices surged
at a much faster rate than corporate earnings and dividends. This delinkage is
even
<PAGE>
more pronounced today after the market's first half rally. We will continue to
follow our conservative investment approach because there are always interesting
investment opportunities in any market environment. However, we believe the
going is likely to get tougher for stocks sometime in the second half of the
year.
As always, we appreciate your continued confidence and support.
Respectfully submitted,
Brian C. Rogers
President and
Chairman of the Investment Advisory Committee
July 18, 1997
Portfolio Highlights
Twenty-Five Largest Holdings
Percent of
Net Assets
6/30/97
__________________________________________________
Mellon Bank 1.7%
Dow Chemical 1.6
Atlantic Richfield 1.4
GE 1.3
Exxon 1.3
Chase Manhattan 1.2
DuPont 1.2
International Flavors & Fragrances 1.2
Texaco 1.1
J.C. Penney 1.0
St. Paul Companies 1.0
ALLTEL 1.0
General Mills 1.0
Witco 1.0
Georgia-Pacific 1.0
American Home Products 0.9
Union Camp 0.9
AT&T 0.9
Duke Energy 0.9
Tambrands 0.9
Simon DeBartolo Group 0.9
Chevron 0.9
Mobil 0.9
J.P. Morgan 0.9
Royal Dutch Petroleum 0.9
__________________________________________________
Total 27.0%
__________________________________________________
Portfolio Highlights
Major Portfolio Changes
Six Months Ended 6/30/97
Listed in descending order of size
LARGEST PURCHASES (10)
__________________________
Dow Chemical
Duke Energy
Mellon Bank
<PAGE>
Knight-Ridder *
GM
Burlington Northern Santa Fe *
Atlantic Richfield
UST
ALLTEL
Witco
LARGEST SALES (10)
__________________________
Warner-Lambert **
Sallie Mae **
Corning **
SmithKline Beecham **
U.S. Bancorp **
Great Western Financial
Kimberly-Clark **
Eastman Kodak **
Grand Metropolitan
Conrail **
__________________________
* Position added
** Position eliminated
Performance Comparison
This chart shows the value of a hypothetical $10,000 investment in the fund over
the past 10 fiscal year periods or since inception (for funds lacking 10-year
records). The result is compared with a broad-based average or index. The index
return does not reflect expenses, which have been deducted from the fund's
return.
Performance Comparison
as of 6/30/97
<TABLE>
<CAPTION>
T. Rowe Price
Equity Income
Portfolio S&P 500
<S> <C> <C>
3/31/94 $10,000 $10,000
6/30/95 10,170 10,042
6/30/95 12,409 12,660
6/30/96 15,536 15,952
6/30/97 19,815 21,487
</TABLE>
Average Annual Compound Total Return
This table shows how the fund would have performed each year if its actual (or
cumulative) returns for the periods shown had been earned at a constant rate.
Equity Income Portfolio
Periods Ended 6/30/97
Since Inception
1 Year 3 Years Inception Date
___________________________________________________
27.54% 24.90% 23.43% 3/31/94
Investment return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase. Total
returns do not include charges imposed by your insurance company's separate
account. If these were included, performance would have been lower.
Financial Highlights
T. Rowe Price Equity Income Portfolio
(Unaudited)
<PAGE>
<TABLE>
<CAPTION>
For a share outstanding throughout each period
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
6 Months Year 3/31/94
Ended Ended through
6/30/97 12/31/96 12/31/95 12/31/94
NET ASSET VALUE
Beginning of period $ 15.26 $ 13.21 $ 10.42 $ 10.00
Investment activities
Net investment
income 0.19 0.42 0.44 0.30
Net realized and
unrealized gain
(loss) 2.05 2.13 3.05 0.41
Total from
investment
activities 2.24 2.55 3.49 0.71
Distributions
Net investment
income (0.18) (0.42) (0.44) (0.29)
Net realized gain (0.10) (0.08) (0.26) -
Total distributions (0.28) (0.50) (0.70) (0.29)
NET ASSET VALUE
End of period $ 17.22 $ 15.26 $ 13.21 $ 10.42
-------- -------- ------- -------
Ratios/Supplemental Data
Total return 14.78% 19.56% 34.76% 7.15%
Ratio of expenses to
average net assets 0.85%! 0.85% 0.85% 0.85%!
Ratio of net investment
income to average
net assets 2.70%! 2.94% 3.61% 3.88%!
Portfolio turnover
rate 23.3%! 17.4% 10.1% 21.3%!
Average commission
rate paid $ 0.0308 $ 0.0359 - -
Net assets, end
of period
(in thousands) $213,258 $103,751 $14,658 $ 2,191
</TABLE>
! Annualized.
The accompanying notes are an integral part of these financial statements.
Statement of Net Assets
T. Rowe Price Equity Income Portfolio
June 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Shares/Par Value
In thousands
<S> <C> <C>
Common Stocks 85.9%
FINANCIAL 16.0%
Bank and Trust 9.3%
BANC ONE 35,670 $1,728
BankBoston 16,900 1,218
Bankers Trust New York 18,800 1,636
Chase Manhattan 25,904 2,514
Fleet Financial Group 23,600 1,493
Great Western Financial 6,200 333
J. P. Morgan 18,100 1,889
Mellon Bank 78,000 3,520
Mercantile Bankshares 16,900 674
National City 22,100 1,160
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
PNC Bank 20,000 832
Signet Banking 37,300 1,343
Wells Fargo 5,966 1,608
19,948
Insurance 4.1%
American General 37,300 1,781
EXEL 23,400 1,234
Hilb, Rogal and Hamilton 10,400 177
Lincoln National 14,100 908
SAFECO 27,100 1,266
St. Paul Companies 28,200 2,150
USF&G 29,400 706
Willis-Corroon ADR 41,100 460
8,682
Financial Services 2.6%
American Express 17,400 1,296
Fannie Mae 39,200 1,710
H&R Block 37,200 1,200
Travelers Group 22,233 1,402
5,608
Total Financial 34,238
UTILITIES 14.2%
Telephone Services 7.1%
ALLTEL 63,900 2,137
AT&T 57,000 1,999
BCE 38,300 1,072
Bell Atlantic 23,200 1,760
BellSouth 33,300 1,544
Frontier 44,900 895
GTE 35,600 1,562
SBC Communications 27,371 1,694
Southern New England
Telecommunications 18,800 731
Sprint 14,700 774
U S WEST Communications 23,350 880
15,048
Electric Utilities 7.1%
BGE 28,600 763
Centerior Energy 44,000 492
Central and South West 26,800 570
Dominion Resources 28,450 1,042
DQE 28,912 817
Duke Energy 41,000 1,966
Edison International 25,200 627
Entergy 28,500 780
Florida Progress 8,600 269
GPU 13,800 495
Ohio Edison 33,600 733
PacifiCorp 44,200 972
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
PECO Energy 43,800 920
PG&E 24,500 594
Public Service Enterprise 24,300 608
Southern Company 54,500 1,192
Unicom 60,600 1,348
Western Resources 29,700 963
15,151
Total Utilities 30,199
CONSUMER NONDURABLES 16.4%
Cosmetics 1.1%
International Flavors & Fragrances 48,600 2,454
2,454
Beverages 1.3%
Anheuser-Busch 39,200 1,644
Brown-Forman (Class B) 21,400 1,045
2,689
Food Processing 4.0%
General Mills 32,400 2,110
Heinz 34,100 1,573
Kellogg 13,300 1,139
McCormick 50,400 1,276
Quaker Oats 40,100 1,799
Sara Lee 17,400 724
8,621
Hospital Supplies/Hospital Management 2.4%
Abbott Laboratories 23,500 1,569
Bausch & Lomb 29,200 1,376
Baxter International 22,100 1,155
C. R. Bard 25,400 922
5,022
Pharmaceuticals 2.6%
American Home Products 26,400 2,019
Novartis (CHF) 1,067 1,706
Pharmacia & Upjohn 53,092 1,845
5,570
Miscellaneous Consumer Products 5.0%
Armstrong World 14,400 1,057
Fortune Brands 26,300 981
Gallaher Group ADR * 26,300 485
Grand Metropolitan ADR 9,900 388
Philip Morris 29,800 1,322
Tambrands 38,800 1,935
Tomkins (GBP) 228,200 996
Unilever N.V. ADR 8,300 1,810
UST 61,200 1,698
10,672
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Total Consumer Nondurables 35,028
CONSUMER SERVICES 6.5%
General Merchandisers 1.5%
J.C. Penney 41,800 2,181
May Department Stores 22,000 1,040
3,221
Specialty Merchandisers 0.2%
The Limited 23,500 476
476
Entertainment and Leisure 1.2%
ITT * 24,600 1,502
Reader's Digest (Class A) 30,600 878
Reader's Digest (Class B) 1,200 33
2,413
Media and Communications 3.6%
Dow Jones 34,800 1,398
Dun & Bradstreet 38,700 1,016
Gannett 9,100 899
Knight-Ridder 37,200 1,825
McGraw-Hill 18,900 1,112
R. R. Donnelley 39,700 1,454
7,704
Total Consumer Services 13,814
CONSUMER CYCLICALS 4.0%
Automobiles and Related 1.9%
Eaton 10,800 943
Ford Motor 15,700 593
Genuine Parts 29,750 1,008
GM 25,400 1,414
3,958
Building and Real Estate 1.5%
Rouse 14,000 413
SECURITY CAPITAL
PACIFIC TRUST
REIT 15,100 345
Simon DeBartolo Group
REIT 60,236 1,928
Weingarten Realty Investors
REIT 10,600 448
3,134
Miscellaneous Consumer Durables 0.6%
Whirlpool 24,600 1,342
1,342
Total Consumer Cyclicals 8,434
TECHNOLOGY 0.7%
Electronic Components 0.7%
AMP 36,100 1,507
Total Technology 1,507
CAPITAL EQUIPMENT 2.6%
Electrical Equipment 1.8%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
GE 43,900 2,870
Hubbell (Class B) 24,600 1,082
3,952
Machinery 0.8%
Cooper Industries 26,267 1,307
FMC * 4,800 381
1,688
Total Capital Equipment 5,640
BUSINESS SERVICES AND TRANSPORTATION 2.2%
Transportation Services 0.2%
Alexander & Baldwin 13,750 359
359
Miscellaneous Business Services 0.4%
Deluxe Corp. 17,500 597
GATX 6,000 347
944
Railroads 1.6%
Burlington Northern
Santa Fe 17,800 1,600
Union Pacific 24,600 1,734
3,334
Total Business Services and
Transportation 4,637
ENERGY 11.0%
Energy Services 1.0%
Witco 54,500 2,068
2,068
Integrated Petroleum - Domestic 3.7%
Amerada Hess 20,000 1,111
Atlantic Richfield 43,700 3,081
British Petroleum ADR 19,400 1,453
Phillips Petroleum 23,800 1,041
USX-Marathon 40,800 1,178
7,864
Integrated Petroleum - International 6.3%
Amoco 20,300 1,765
Chevron 26,050 1,926
Exxon 45,900 2,823
Mobil 27,400 1,914
Repsol ADR 22,500 955
Royal Dutch Petroleum ADR 34,000 1,849
Texaco 21,500 2,338
13,570
Total Energy 23,502
PROCESS INDUSTRIES 10.4%
Diversified Chemicals 3.1%
Dow Chemical 38,400 3,345
DuPont 39,300 2,471
Eastman Chemical 13,900 883
6,699
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Specialty Chemicals 4.0%
<S> <C> <C>
3M 12,900 1,316
Betz Laboratories 19,500 1,287
Great Lakes Chemical 33,500 1,755
Imperial Chemical ADR 20,000 1,137
Lubrizol 24,100 1,011
Nalco Chemical 25,600 989
Pall 43,400 1,009
8,504
Paper and Paper Products 1.6%
Consolidated Papers 25,300 1,366
Union Camp 40,300 2,015
3,381
Forest Products 1.7%
Georgia-Pacific 24,100 2,057
International Paper 31,400 1,525
3,582
Total Process Industries 22,166
BASIC MATERIALS 1.7%
Metals 0.7%
Reynolds Metals 21,500 1,532
1,532
Mining 1.0%
LONRHO (GBP) 277,800 587
Newmont Mining 38,249 1,492
2,079
Total Basic Materials 3,611
Miscellaneous Common Stocks 0.2% 513
Total Common Stocks (Cost $159,800) 183,289
U.S. Government Obligations/Agencies 1.5%
U.S. Treasury Bonds
6.00%, 2/15/26 $ 500,000 447
6.25%, 8/15/23 20,000 19
U.S. Treasury Notes
5.625%, 2/15/06 250,000 235
5.75%, 8/15/03 400,000 386
5.875%
11/15/99 - 2/15/04 920,000 914
6.50%, 5/31/01 700,000 704
7.00%, 7/15/06 400,000 411
7.375%, 11/15/97 20,000 20
Total U.S. Government
Obligations/Agencies (Cost $3,124) 3,136
Short-Term Investments 12.3%
Certificates of Deposit 2.8%
Svenska Handlesbanken
5.705 - 5.68%
7/7/97 - 10/1/97 6,000,000 6,000
Commercial Paper 9.5% 6,000
AC Acquisition Holding
Company, 4(2), 5.56%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
8/11/97 $3,000,000 $ 2,981
Chrysler Financial
5.60%, 7/10/97 3,000,000 2,996
General Electric Capital
5.58%, 8/15/97 2,000,000 1,986
Golden Managers Acceptance
5.56%, 7/10/97 3,000,000 2,996
Preferred Receivables Funding
5.55%, 7/29/97 2,000,000 1,992
Southern New England
Telecommunications
5.56%, 8/4/97 3,000,000 2,984
Total SA,
5.54%, 7/7/97 2,000,000 1,998
Investments in Commercial
Paper through a Joint
Account 6.05 - 6.20%
7/1/97 2,195,994 2,196
20,129
Total Short-Term Investments
(Cost $26,129) 26,129
Total Investments in Securities
99.7% of Net Assets (Cost $189,053) $212,554
Other Assets Less Liabilities 704
NET ASSETS $213,258
Net Assets Consist of:
Accumulated net investment income -
net of distributions $ 108
Accumulated net realized gain/loss -
net of distributions 4,465
Net unrealized gain (loss) 23,500
Paid-in-capital applicable to 12,386,235
shares of $0.0001 par value capital stock
outstanding; 1,000,000,000 shares of
the corporation authorized 185,185
NET ASSETS $213,258
--------
NET ASSET VALUE PER SHARE $ 17.22
--------
</TABLE>
* Non-income producing
REIT Real Estate Investment Trust
4(2) Commercial paper sold within terms of a private
placement memorandum, exempt from registration under
section 4.2 of the Securities Act of 1933, as amended,
and may be sold only to dealers in that program or other
"accredited investors."
CHF Swiss franc
GBP British sterling
The accompanying notes are an integral part of these financial
statements.
Statement of Operations
T. Rowe Price Equity Income Portfolio
(Unaudited)
In thousands
<TABLE>
<CAPTION>
6 Months
Ended
6/30/97
<S> <C>
Investment Income
Income
Dividend $ 2,074
Interest 588
Total income 2,662
Expenses
Investment management and administrative 637
Net investment income 2,025
</TABLE>
<PAGE>
Realized and Unrealized Gain (Loss)
<TABLE>
<CAPTION>
<S> <C>
Net realized gain (loss)
Securities 4,452
Foreign currency transactions (3)
Net realized gain (loss) 4,449
Change in net unrealized gain or
loss on securities 15,255
Net realized and unrealized gain (loss) 19,704
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $21,729
-------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
Statement of Changes in Net Assets
T. Rowe Price Equity Income Portfolio
(Unaudited)
In thousands
<TABLE>
<CAPTION>
6 Months Year
Ended Ended
6/30/97 12/31/96
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations
Net investment income $ 2,025 $ 1,502
Net realized gain (loss) 4,449 1,676
Change in net unrealized gain or loss 15,255 6,821
Increase (decrease) in net assets
from operations 21,729 9,999
Distributions to shareholders
Net investment income (1,917) (1,787)
Net realized gain (918) (470)
Decrease in net assets from distributions (2,835) (2,257)
Capital share transactions*
Shares sold 95,295 89,085
Distributions reinvested 2,835 2,256
Shares redeemed (7,517) (10,297)
Increase (decrease) in net assets
from capital share transactions 90,613 81,044
Net equalization - 307
Net Assets
Increase (decrease) during period 109,507 89,093
Beginning of period 103,751 14,658
End of period $213,258 $103,751
--------------------
*Share information
Shares sold 5,883 6,273
Distributions reinvested 173 153
Shares redeemed (470) (736)
Increase (decrease) in shares outstanding 5,586 5,690
</TABLE>
The accompanying notes are an integral part of these financial
statements.
Notes to Financial Statements
T. Rowe Price Equity Income Portfolio
June 30, 1997 (Unaudited)
Note 1 - Significant Accounting Policies
T. Rowe Price Equity Series, Inc. (the corporation) is
registered under the Investment Company Act of 1940. The Equity
Income Portfolio (the fund), a diversified, open-end management
investment company, is one of the portfolios established by the
corporation and commenced operations on March 31, 1994. The
shares of the fund are currently being offered only to separate
accounts of certain insurance companies as an investment medium
for both variable annuity contracts and variable life insurance
policies.
Valuation Equity securities are valued at the last quoted sales
price on the day the valuations are made. A security which is
listed or traded on more than one exchange is valued at the
quotation on the exchange determined to be the primary market
for such security. Listed securities not traded on a particular
day and securities regularly traded in the over-the-counter
<PAGE>
market are valued at the mean of the latest bid and asked prices.
Debt securities are generally traded in the over-the-counter market and are
valued at a price deemed best to reflect fair value as quoted by dealers who
make markets in these securities or by an independent pricing service. Short-
term debt securities are valued at amortized cost which, when combined with
accrued interest, approximates fair value.
For purposes of determining the fund's net asset value per share, the U.S.
dollar value of all assets and liabilities initially expressed in foreign
currencies is determined by using the mean of the bid and offer prices of such
currencies against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
fund, as authorized by the Board of Directors.
Currency Translation Assets and liabilities are translated into U.S. dollars at
the prevailing exchange rate at the end of the reporting period. Purchases and
sales of securities and income and expenses are translated into U.S. dollars at
the prevailing exchange rate on the dates of such transactions. The effect of
changes in foreign exchange rates on realized and unrealized security gains and
losses is reflected as a component of such gains and losses.
Premiums and Discounts Premiums and discounts on debt securities are amortized
for both financial reporting and tax purposes.
Other Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses are
reported on the identified cost basis. Dividend income and distributions to
shareholders are recorded by the fund on the ex-dividend date. Income and
capital gain distributions are determined in accordance with federal income tax
regulations and may differ from those determined in accordance with generally
accepted accounting principles. Effective January 1, 1997, the fund discontinued
its practice of equalization. The results of operations and net assets were not
affected by this change.
Note 2 - Investment Transactions
Commercial Paper Joint Account The fund, and other affiliated funds, may
transfer uninvested cash into a commercial paper joint account, the daily
aggregate balance of which is invested in high-grade commercial paper. All
securities purchased by the joint account satisfy the fund's criteria as to
quality, yield, and liquidity.
Other Purchases and sales of portfolio securities, other than short-term and
U.S. government securities, aggregated $89,343,000 and $15,730,000,
respectively, for the six months ended June 30, 1997.
Note 3 - Federal Income Taxes
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of its
taxable income.
At June 30, 1997, the aggregate cost of investments for federal income tax and
financial reporting purposes was $189,053,000, and net unrealized gain
aggregated $23,501,000, of which $24,785,000 related to appreciated investments
and $1,284,000 to depreciated investments.
Note 4 - Related Party Transactions
The investment management and administrative agreement between the fund and T.
Rowe Price Associates, Inc. (the manager) provides for an all-inclusive annual
fee, of which $126,000 was payable at June 30, 1997. The fee, computed daily and
paid monthly, is equal to 0.85% of the fund's average daily net assets. Pursuant
to the agreement, investment management, shareholder servicing, transfer agency,
accounting, and custody services are provided to the fund, and interest, taxes,
brokerage commissions, and extraordinary expenses are paid directly by the fund.
During the six months ended June 30, 1997, the fund, in the ordinary course of
business, placed security purchase and sale orders aggregating $88,000 with
certain affiliates of the manager and paid commissions of $500 related thereto.
T. Rowe Price Equity Income Portfolio
100 East Pratt Street
Baltimore, Maryland 21202
<PAGE>
This report is authorized for distribution only to those who have received a
copy of the portfolio's prospectus.
T. Rowe Price Investment Services, Inc., Distributor
TRP654 (6/97)
RPRTEIP 6/30/97
<PAGE>
T. Rowe Price
New America Growth
Portfolio
Semiannual Report
June 30, 1997
Dear Investor
Continuing a powerful surge that began in December 1994, the stock market rose
to record highs in the first half of 1997. The rally was led by large-
capitalization, blue chip companies, while the performance of small- and mid-cap
growth stocks was much more modest.
Since your fund invests across the size spectrum, it significantly lagged the
large-cap Standard & Poor's 500 Stock Index over the last year. The fund also
trailed the Lipper peer group average, whose average market cap far exceeds that
of New America Growth Portfolio.
<TABLE>
<CAPTION>
Performance Comparison
<S> <C> <C>
Periods Ended 6/30/97 6 Months 12 Months
New America
Growth Portfolio 8.94% 15.22%
S&P 500 20.61 34.70
Lipper Variable Annuity
Underlying Growth
Funds Average 13.57 23.63
</TABLE>
Market Environment
Stock market investors have been treated to exemplary returns as the backdrop
for the market has been the best in years. The economic expansion is in its
seventh year and, after growing a little too fast in the first quarter of 1997,
seems to have moderated its pace recently. Thus, we have an ideal environment
where the economy is growing fast enough to accommodate good corporate earnings
growth, yet slow enough to allay fears of an impending inflationary surge. The
U.S. inflation rate appears benign, actually declining slightly in spite of a
reasonably tight job market. In Washington, the politicians are still
squabbling, but there appears to be movement by both parties toward the middle
of the political spectrum, at least on economic issues. Both parties have agreed
on capital gains tax reduction. Meanwhile, the federal budget deficit has
declined so fast that extrapol-ating budget surpluses in the years ahead may no
longer be a fantastic notion. Globally, we are in the midst of a relatively
peaceful period in which capitalism and democracy are ascendent. Consumer
confidence is at record highs, and individual investors continue to pour money
into equity mutual funds. Despite vibrant demand for equity offerings, corporate
stock buybacks and record merger and acquisition activity are retiring stock as
fast as it is issued.
After the 69.2% cumulative gain of the S&P 500 in 1995 and 1996, its third-best
two-year return in six decades, many observers, ourselves included, believed the
market was due for a pause. While the market did correct almost 10% in March and
April, it rebounded. Large-cap companies led the way, as investors continued to
be enamored with the allure of franchise brands like Coca-Cola, Procter &
Gamble, and General Electric. Small-and mid-cap companies lagged the rally by a
significant margin. Within these sectors, value stocks outperformed growth
stocks by a considerable margin.
Portfolio Review
Our objective is to invest in a diversified group of rapidly growing companies
primarily in the service sector of the economy. The fund's relative performance
is typically correlated strongly to investor perceptions of economic growth.
When the economy is perceived to be strong, the stocks of cyclical companies
sprint ahead, whereas in periods of economic weakness, investors tend to
gravitate toward companies with steadier growth rates, like the service
companies in which we invest. In the last year, however, we believe the
underperformance of the fund relative to the S&P 500 was attributable to two
major factors. First, the fund's many smaller and mid-cap companies did not keep
pace with their larger-company counterparts. Secondly, while the largest growth
stocks performed well, we had an anomalous situation where smaller and mid-cap
growth stocks have significantly underperformed value stocks in their respective
categories.The fund's top contributor for the 6- and 12-month periods ending
June 30 was Franklin Resources, the mutual fund firm, which benefited from an
ebullient stock market, good cash inflows, and a well-timed acquisition. Three
retailers were also among the top contributors for both periods: General
Nutrition, the nation's leading retailer of vitamin and other health- related
products and a long-time fund holding,
<PAGE>
which rebounded from a temporary sales slowdown in mid-1996; Cole National, a
retailer with interests in vision and gift stores, which acquired Pearle Vision
Centers in a transaction that should boost earnings; and Costco Companies, the
leading membership warehouse club, which has reported strong sales and earnings
increases.
Unfortunately, some of these contributions were offset by disappointments. The
fund's largest detractor in the first half was Boston Chicken, the restaurant
franchisor, whose stock fell over 50% when an unanticipated sales slowdown
precipitated a reevaluation by investors of what was, in hindsight, an overly
aggressive expansion plan and a problematic financial structure. The second-
worst stock was Mercury Finance, a leader in subprime used car lending. Along
with other investors, we were victimized by management fraud and manipulation of
financial statements, and we are seeking redress through legal action.
The portfolio remains well diversified in the services sector with few major
changes since year-end.
<TABLE>
<CAPTION>
Sector Diversification
12/31/96 6/30/97
- -------------------------------------------------------
<S> <C> <C>
Financial Services 20% 19%
Consumer Services 30 31
Business Services 41 40
Reserves 9 10
- --------------------------------------------------------
Total 100% 100%
</TABLE>
Additions to the portfolio in the last several months include COREStaff and
Safeway. COREStaff is a leading provider of temporary help services, focusing on
the higher-margin, faster-growing professional services market, especially
information technology. The company is also participating in the rapid
consolidation of the staffing industry. In the last several years, new
management at Safeway, a supermarket chain, has transformed a mediocre company
into a well-operated, shareholder-oriented organization that we believe can grow
well into the future.
We continue to seek companies with exceptional growth prospects in all economic
climates, and the portfolio's growth characteristics remain strong. Rather than
pay high dividends, most portfolio companies reinvest their earnings in their
businesses to maintain or increase their earnings growth. In fact, many pay no
dividends at all in order to sustain steady earnings increases of 20% or more
annually. As shown in the table, the prospective earnings growth rate of our
portfolio companies is well above that of the market as a whole, yet the fund's
aggregate price/earnings ratio (P/E) is only modestly higher.
<TABLE>
<CAPTION>
Portfolio Characteristics
New America
As of 6/30/97 Growth Portfolio S&P 500
- -------------------------------------------------------
<S> <C> <C>
Earnings Growth Rate
Estimated Next 5 Years* 19.3% 12.4%
Profitability-Return on
Equity Latest 12 Months 15.2 20.5
Dividend Yield on Stocks 0.4 1.7
P/E Ratio (Based on Next 12
Months' Estimated Earnings) 20.7X 18.7X
</TABLE>
*Earnings forecasts are based on T. Rowe Price research and are in no way
indicative of future investment returns.
Outlook
As we mentioned, a combination of factors-moderate domestic economic growth,
low inflation and interest rates, growing corporate earnings, rapidly
declining budget deficits, and a benign global political environment-present
a very favorable backdrop for the stock market, in our opinion. It is
difficult to envisage a major stock market setback in this context. However,
stock valuations are high by historical standards using traditional
benchmarks such as P/E and price/book ratios, and dividend yields. The
Leuthold Group reports that the 15-year compound annual return for the S&P
500 as of June 30 was 18.8%, the best such period ever recorded, far above
the 10.7% 1926-to-date median.
Perhaps we have entered a "new era" of peace and prosperity. However,
students of the stock market know from experience that the most dangerous
phrase in the language is "this time it's different." After all, the stock
market reflects human emotion, which can vary greatly over long periods.
<PAGE>
It is interesting to note that small- and mid-cap stocks often lead the
market in the latter stages of bull markets, yet this is not the case today.
With blue chip stocks trading at P/Es well above their growth rates, it is
possible the sector many consider the "safest" may actually be the riskiest.
We remain optimistic about the long-term prospects for the portfolio's
companies. Their relatively noncyclical, service-oriented businesses appear
to be well positioned for the moderate economic growth environment we
anticipate. We believe your fund should be able to achieve attractive returns
over the next several years.
Respectfully submitted,
John H. Laporte
President
Brian W. H. Berghuis
Executive Vice President
July 25, 1997
<TABLE>
<CAPTION>
Contributions to the Change in Net Asset Value Per Share
6 Months Ended 6/30/97
TEN BEST CONTRIBUTORS
<S> <C>
- -------------------------------------------------------
Franklin Resources 22(cents)
General Nutrition 19
ADT 13
Cole National 13
Vencor 10
First Data 10
COREStaff* 9
Costco Companies 9
ACE Limited 8
Smith International 8
- -------------------------------------------------------
Total 121(cents)
- -------------------------------------------------------
*Position added **Position eliminated
TEN WORST CONTRIBUTORS
- -------------------------------------------------------
Boston Chicken - 21(cents)
Mercury Finance 18
Employee Solutions* 14
Scholastic** 12
Ikon Office Solutions 9
Corporate Express 8
Republic Industries 6
Paging Network** 5
Unisource Worldwide** 4
Outback Steakhouse 3
- -------------------------------------------------------
Total - 100(cents)
- -------------------------------------------------------
Twenty-Five Largest Holdings
Percent of
Net Assets
6/30/97
- -------------------------------------------------------
Franklin Resources 2.9%
First Data 2.9
CUC International 2.8
ACE Limited 2.3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
General Nutrition 2.3
Vencor 2.1
Service Corp. International 2.0
Comcast 2.0
Cardinal Health 2.0
La Quinta Inns 2.0
UNUM 2.0
HFS 2.0
USA Waste Services 1.9
Quorum Health Group 1.9
Catalina Marketing 1.8
Freddie Mac 1.8
AccuStaff 1.7
Interim Services 1.7
Cole National 1.7
BISYS Group 1.6
Household International 1.6
Norwest 1.5
Costco Companies 1.5
Smith International 1.5
COREStaff 1.5
- -------------------------------------------------------
Total 49.0%
- -------------------------------------------------------
</TABLE>
Performance Comparison
This chart shows the value of a hypothetical $10,000 investment in the fund
over the past 10 fiscal year periods or since inception (for funds lacking
10-year records). The result is compared with a broad-based average or index.
The index return does not reflect expenses, which have been deducted from the
fund's return.
Performance Comparison
as of 6/30/97
<TABLE>
<CAPTION>
Lipper Variable
T. Rowe Price Annuity Underlying
New America Growth S&P 500 Growth Funds
Portfolio Stock Index Average
<S> <C> <C> <C>
3/31/94 $10,000 $10,000 $10,000
6/94 9,670 10,042 9,758
6/95 12,504 12,660 12,044
6/96 17,326 15,952 14,865
6/97 19,964 21,487 18,574
</TABLE>
Average Annual Compound Total Return
This table shows how the fund would have performed each year if its actual
(or cumulative) returns for the periods shown had been earned at a constant
rate.
New America Growth Portfolio
Periods Ended 6/30/97
<TABLE>
<CAPTION>
Since Inception
1 Year 3 Years Inception Date
- ------------------------------------------------------
<S> <C> <C> <C>
15.22% 27.33% 23.72% 3/31/94
</TABLE>
Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original
purchase.
Total returns do not include charges imposed by your insurance company's
<PAGE>
separate account. If these were included, performance would have been lower.
Financial Highlights
T. Rowe Price New America Growth Portfolio
(Unaudited)
<TABLE>
<CAPTION>
For a share outstanding throughout each period
- ----------------------------------------------------------------------
6 Months Year 3/31/94
Ended Ended Through
6/30/97 12/31/96 12/31/95 12/31/94
<S> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 17.67 $15.23 $10.10 $10.00
Investment activities
Net investment
income 0.01 0.04 0.03 0.01
Net realized and
unrealized gain
(loss) 1.57 2.94 5.12 0.09
Total from
investment
activities 1.58 2.98 5.15 0.10
Distributions
Net investment
income - (0.04) (0.02) -
Net realized gain - (0.50) - -
Total distributions - (0.54) (0.02) -
NET ASSET VALUE
End of period $ 19.25 $17.67 $15.23 $10.10
-------- ------ ------ ------
Ratios/Supplemental Data
Total return 8.94% 20.09% 51.10% 1.00%
Ratio of expenses to
average net assets 0.85%! 0.85% 0.85% 0.85%!
Ratio of net investment
income to average
net assets 0.09%! 0.18% 0.23% 0.15%!
Portfolio turnover
rate 49.8%! 27.2% 54.5% 81.0%!
Average commission
rate paid $0.0478 $0.0524 - -
Net assets, end of
period
(in thousands) $79,996 $60,241 $12,304 $2,028
! Annualized.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
Statement of Net Assets
T. Rowe Price New America Growth Portfolio
June 30, 1997 (Unaudited)
Value
Shares/Par In thousands
<S> <C> <C>
Common Stocks 89.7%
FINANCIAL SERVICES 18.8%
Bank and Trust 1.5%
Norwest 22,000 $ 1,238
1,238
Insurance 6.4%
ACE Limited 25,000 1,847
MGIC Investment 20,000 959
PMI Group 12,000 748
UNUM 38,000 1,596
5,150
Investment Services 2.9%
Franklin Resources 31,500 2,286
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
2,286
Other Financial Services 8.0%
Fairfax Financial
(144a) (CAD) * 2,900 840
Fannie Mae 20,000 872
Freddie Mac 41,000 1,409
Green Tree Financial 33,000 1,176
Household International 11,000 1,292
Mercury Finance 47,500 116
Money Store 23,400 669
6,374
------
Total Financial Services 15,048
CONSUMER SERVICES 30.8%
Retailing/General Merchandisers 2.7%
Costco Companies * 37,000 1,217
Safeway * 20,500 946
------
2,163
Retailing/Specialty Merchandisers 9.8%
AutoZone * 35,200 829
Circuit City Stores 26,000 925
Cole National (Class A) * 30,000 1,320
General Nutrition * 65,000 1,816
Home Depot 12,500 862
Kohl's * 15,000 794
PETsMART * 65,000 746
Tommy Hilfiger * 13,000 522
------
7,814
Entertainment and Leisure 5.5%
Carnival (Class A) 29,000 1,196
Disney 14,000 1,124
Extended Stay America * 33,000 494
La Quinta Inns 73,000 1,597
------
4,411
Media/Communication Services 5.7%
AirTouch Communications * 43,000 1,177
Comcast (Class A Special) 76,000 1,622
Outdoor Systems * 25,500 972
Tribune 17,000 817
------
4,588
Restaurants/Food Distribution 2.2%
Boston Chicken * 38,800 542
Outback Steakhouse * 50,000 1,208
------
1,750
Personal Services 4.9%
CUC International * 87,500 2,259
Service Corp. International 49,500 1,627
------
3,886
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Total Consumer Services 24,612
BUSINESS SERVICES 39.5%
Health Care Services 6.2%
Apria Healthcare * 9,600 170
Columbia/HCA Healthcare 25,500 1,003
PhyCor * 19,000 654
Quorum Health Group * 42,000 1,496
Vencor * 39,500 1,669
------
4,992
Distribution Services 4.1%
Cardinal Health 28,000 1,603
Ikon Office Solutions 47,000 1,172
Patterson Dental * 13,600 465
------
3,240
Computer Services 6.6%
BISYS Group * 31,000 1,301
First Data 52,000 2,285
SABRE Group Holdings * 20,000 542
SunGard Data Systems * 24,000 1,116
------
5,244
Environmental Services 3.0%
Republic Industries * 36,000 889
USA Waste Services * 40,000 1,545
------
2,434
Energy Services 5.5%
BJ Services * 11,000 590
Camco International 17,500 958
Schlumberger 4,500 562
Smith International * 20,000 1,215
Western Atlas * 15,000 1,099
------
4,424
Other Business Services 14.1%
AccuStaff * 57,500 1,362
ADT * 23,700 782
ADVO * 38,500 626
Catalina Marketing * 30,000 1,444
COREStaff * 44,700 1,210
Corporate Express * 77,400 1,115
Employee Solutions * 28,300 157
Global DirectMail * 27,400 714
HFS * 27,500 1,595
Interim Services * 30,000 1,335
Paychex 22,500 863
Sylvan Learning Systems * 1,400 47
------
11,250
Total Business Services 31,584
------
Miscellaneous Common Stocks 0.6% 480
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Total Common Stocks (Cost $58,766) 71,724
Short-Term Investments 12.0%
Certificates of Deposit 2.5%
Deutsche Bank AG
5.78%, 8/12/97 $1,000,000 1,000
World Savings Bank
5.57%, 7/8/97 1,000,000 1,000
2,000
Commercial Paper 9.5%
AC Acquisition
Holding Company
5.56%, 8/11/97 1,000,000 994
Banque National de Paris
5.55%, 7/14/97 1,000,000 998
Corporate Asset Funding, 4(2)
5.53%, 7/21/97 1,000,000 997
National Rural Utilities
Cooperative Finance
5.55%, 9/9/97 1,000,000 989
Svenska Handelsbanken
5.75%, 11/14/97 $1,000,000 $ 978
Total SA, 5.54%, 7/7/97 1,000,000 999
Investments in Commercial
Paper through a Joint
Account, 6.05 -6.20%
7/1/97 1,647,108 1,647
7,602
Total Short-Term Investments
(Cost $9,602) 9,602
Total Investments in Securities
101.7% of Net Assets (Cost $68,368) $81,326
Other Assets Less Liabilities (1,330)
NET ASSETS $79,996
-------
Net Assets Consist of:
Accumulated net investment income -
net of distributions $ 32
Accumulated net realized gain/loss -
net of distributions 395
Net unrealized gain (loss) 12,958
Paid-in-capital applicable to 4,155,382
shares of $0.0001 par value capital stock
outstanding; 1,000,000,000 shares
authorized 66,611
NET ASSETS $79,996
-------
NET ASSET VALUE PER SHARE $ 19.25
-------
* Non-income producing
4(2) Commercial paper sold within terms of a private placement
memorandum, exempt from registration under section 4.2 of the
Securities Act of 1933, as amended, and may be sold only to
dealers in that program or other "accredited investors."
144a Security was purchased pursuant to Rule 144a under the Securities
Act of 1933 and may not be resold subject to that rule except to
qualified institutional buyers - total of such securities at
period-end amounts to 1.05% of net assets.
CAD Canadian dollar
The accompanying notes are an integral part of these financial statements.
Statement of Operations
T. Rowe Price New America Growth Portfolio
(Unaudited)
In thousands
6 Months
Ended
6/30/97
Investment Income
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Income
Interest $ 197
Dividend 121
Total income 318
Expenses
Investment management and administrative 286
Net investment income 32
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities 197
Change in net unrealized gain or loss on securities 6,321
Net realized and unrealized gain (loss) 6,518
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $6,550
------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Statement of Changes in Net Assets
T. Rowe Price New America Growth Portfolio
(Unaudited)
In thousands
<TABLE>
<CAPTION>
6 Months Year
Ended Ended
6/30/97 12/31/96
Increase (Decrease) in Net Assets
Operations
<S> <C> <C>
Net investment income $ 32 $ 65
Net realized gain (loss) 197 637
Change in net unrealized gain or loss 6,321 5,130
Increase (decrease) in net assets from
operations 6,550 5,832
Distributions to shareholders
Net investment income - (92)
Net realized gain - (765)
Decrease in net assets from distributions - (857)
Capital share transactions*
Shares sold 22,397 51,507
Distributions reinvested - 857
Shares redeemed (9,192) (9,492)
Increase (decrease) in net assets from
capital share transactions 13,205 42,872
Net equalization - 90
Net Assets
Increase (decrease) during period 19,755 47,937
Beginning of period 60,241 12,304
End of period $79,996 $60,241
--------------------
*Share information
Shares sold 1,261 3,117
Distributions reinvested - 52
Shares redeemed (515) (568)
Increase (decrease)
in shares outstanding 746 2,601
</TABLE>
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements
T. Rowe Price New America Growth Portfolio
June 30, 1997 (Unaudited)
Note 1 - Significant Accounting Policies
T. Rowe Price Equity Series, Inc. (the corporation) is registered under the
Investment Company Act of 1940. The New America Growth Portfolio (the fund),
a diversified, open-end management investment company, is one of the
portfolios established by the corporation and commenced operations on March
31, 1994. The shares of the fund are currently being offered to separate
accounts of certain insurance companies as an investment medium for both
variable annuity contracts and variable life insurance policies.
Valuation Equity securities are valued at the last quoted sales price on the
<PAGE>
day the valuations are made. A security which is listed or traded on more than
one exchange is valued at the quotation on the exchange determined to be the
primary market for such security. Listed securities not traded on a particular
day and securities regularly traded in the over-the-counter market are valued at
the mean of the latest bid and asked prices.
Short-term debt securities are valued at amortized cost which, when combined
with accrued interest, approximates fair value.
For purposes of determining the fund's net asset value per share, the U.S.
dollar value of all assets and liabilities initially expressed in foreign
currencies is determined by using the mean of the bid and offer prices of such
currencies against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
fund, as authorized by the Board of Directors.
Currency Translation Assets and liabilities are translated into U.S. dollars at
the prevailing exchange rate at the end of the reporting period. Purchases and
sales of securities and income and expenses are translated into U.S. dollars at
the prevailing exchange rate on the dates of such transactions. The effect of
changes in foreign exchange rates on realized and unrealized security gains and
losses is reflected as a component of such gains and losses.
Premiums and Discounts Premiums and discounts on debt securities are amortized
for both financial reporting and tax purposes.
Other Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses are
reported on the identified cost basis. Dividend income and distributions to
shareholders are recorded by the fund on the ex-dividend date. Income and
capital gain distributions are determined in accordance with federal income tax
regulations and may differ from those determined in accordance with generally
accepted accounting principles. Effective January 1, 1997, the fund discontinued
its practice of equalization. The results of operations and net assets were not
affected by this change.
Note 2 - Investment Transactions
Commercial Paper Joint Account The fund, and other affiliated funds, may
transfer uninvested cash into a commercial paper joint account, the daily
aggregate balance of which is invested in high-grade commercial paper. All
securities purchased by the joint account satisfy the fund's criteria as to
quality, yield, and liquidity.
Other Purchases and sales of portfolio securities, other than short-term
securities, aggregated $25,889,000 and $15,252,000, respectively, for the six
months ended June 30, 1997.
Note 3 - Federal Income Taxes
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of its
taxable income.
At June 30, 1997, the aggregate cost of investments for federal income tax and
financial reporting purposes was $68,368,000, and net unrealized gain aggregated
$12,958,000, of which $15,664,000 related to appreciated investments and
$2,706,000 to depreciated investments.
Note 4 - Related Party Transactions
The investment management and administrative agreement between the fund and T.
Rowe Price Associates, Inc. (the manager) provides for an all-inclusive annual
fee, of which $43,000 was payable at June 30, 1997. The fee, computed daily and
paid monthly, is equal to 0.85% of the fund's average daily net assets. Pursuant
to the agreement, investment management, shareholder servicing, transfer agency,
accounting, and custody services are provided to the fund, and interest, taxes,
brokerage commissions, and extraordinary expenses are paid directly by the fund.
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for distribution only to those who have received a
copy of the portfolio's prospectus.
T. Rowe Price Investment Services, Inc., Distributor
TRP652 (6/97)
K15-055 6/30/97
<PAGE> 1
OCC ACCUMULATION TRUST
MANAGED BY
LOGO
We are pleased to report on the investment activities and results of the
portfolios in the OCC Accumulation Trust for the first half of 1997, a favorable
period for investors. Stock prices rose sharply during the half while bonds
delivered moderate returns.
With its continued sharp advance in the 1997 first half, the stock market
has been exceptionally strong for the past two-and-a-half years. As measured by
the total return of the Standard & Poor's 500 Index, the U.S. stock market has
risen 104% in the 30 months from year end 1994 through the end of June 1997,
matching its steepest ascent in history -- a 104% gain achieved in a 30-month
span of 1954-56. This recent performance has been driven by a sustained economic
environment of moderate growth, low inflation and low interest rates.
Throughout this period, we have remained disciplined in our investment
approach, and have delivered favorable returns with what we believe to be below-
market risk. All the equity portfolios in the OCC Accumulation Trust ranked in
the top half of their respective mutual fund categories for the 1997 first half,
despite the inherently conservative nature of our investment philosophy, and
each has a very strong performance record over longer periods.
Simply stated, our investment philosophy is to buy good companies at
reasonable price. By doing so, we seek to preserve capital, manage risk and
generate excellent returns. Although our philosophy is relatively simple,
implementing that philosophy is complex and requires hard work and intensive in-
depth research to find companies which meet our criteria.
In today's world, when so many investors are seeking instant gratification,
we are sometimes able to acquire quality companies inexpensively when they have
a temporary misstep such as a quarterly earnings disappointment. We also try to
capitalize on changes in corporate direction and strategy which increase a
company's intrinsic value. Often, the market is slow to respond to positive
changes, creating opportunity for the astute value investor. We believe our
focus on value and our long-term perspective are a tremendous advantage in a
stock market which is often driven by transitory considerations.
The portfolios in the OCC Accumulation Trust are intended for the long-term
investor seeking to preserve capital and make it grow. Looking ahead, we remain
dedicated to preserving capital in all market conditions by being disciplined in
our value philosophy and not overpaying for securities, whether stocks or bonds.
<PAGE> 2
EQUITY PORTFOLIO
The Equity Portfolio owns a diverse group of large-capitalization and mid-
capitalization stocks. The Portfolio continued its excellent long-term record of
providing consistent returns through a variety of market conditions. The
Portfolio's total return in the first half was 13.7%, compared with a total
return of 20.6% with dividends included for the Standard & Poor's 500 Index (S&P
500), an unmanaged index of 500 of the largest corporations weighted by market
capitalization. The Portfolio's performance exceeded the 9.7% average total
return for the funds in Lipper's Variable Insurance Products Performance Service
Report capital appreciation category. The Portfolio ranked 14th among the 42
funds in this Lipper universe for the half.
One of the extraordinary aspects of the six-month period was that every
fund in the Lipper capital appreciation universe trailed the return of the S&P
500. This reflects the fact that the strong gains of the S&P 500 were driven
primarily by a limited number of very large-capitalization stocks. Broader
market indexes, which give less weight to the largest companies, generally
showed much smaller gains than the S&P 500 in the period. We believe our first-
half performance was reasonable both in terms of comparable funds and given the
risk-averse nature of our investment philosophy. We do not necessarily expect to
beat the S&P 500 when the market rises sharply over relatively short periods. We
are more concerned about delivering strong long-term results and avoiding large
losses when the market declines.
For the 12 months ended June 30, 1997, the Portfolio provided a total
return of 26.6%, surpassing the 15.1% average return for the funds in the Lipper
capital appreciation category. The Portfolio's 12-month performance was eighth
among the 42 funds in this Lipper universe. The return on the S&P 500 was 34.7%
in the 12 months.
The Portfolio has generated favorable returns over time, with what we
believe to be below-market risk. For the five years ended June 30, 1997, the
Portfolio provided an average annual total return of 19.9%*, compared with the
19.8% average annual return of the S&P 500. This performance was eighth among
the 19 funds in the Lipper capital appreciation category. Since its inception on
August 1, 1988, the Portfolio has generated an average annual total return of
17.2%*, compared with 17.6% for the S&P 500. Returns for the Portfolio take into
account expenses incurred by the Portfolio, but not separate account charges
imposed by the insurance company.
The Fund invests in companies with what we consider to have superior
business characteristics, and which are trading in the market at prices well
below what we consider to be their inherent worth. Many of the companies owned
by the Portfolio are in seemingly mundane businesses, yet their leadership
positions permit them to earn high and improving returns on capital.
Caterpillar, Inc. (earth-moving equipment and diesel engines) is a low-cost,
highest-quality producer worldwide, and its service network represents a
formidable barrier to entry by competitors. LucasVarity PLC (auto components and
small diesel engines) has strong worldwide market positions and significant
cost-cutting and marketing opportunities as a result of the recent combination
of two predecessor companies. In both of these companies, as well as in other
companies owned by the Portfolio, management has focused on maximizing cash flow
returns on capital and using that cash flow to create wealth for shareholders,
such as by investing in high-return business opportunities or repurchasing
shares.
Even when we identify a business that meets our criteria, including high,
sustainable returns on capital, we are very conscious about not paying too much
for the company's stock. Buying stocks at reasonable valuations is very
important to us, since the price we pay should be low enough to offer both
significant opportunity for investment profit and meaningful protection against
a severe price decline. We believe our focus on value and our long-term
perspective are a tremendous advantage in a stock market which is often driven
by transitory considerations.
- -----------------
* Based on results of the OCC Accumulation Trust and its predecessor. On
September 16, 1994, an investment company which had commenced operations on
August 1, 1988, called Quest for Value Accumulation Trust (the "Old Trust"), was
effectively divided into two investment funds -- the Old Trust and the present
OCC Accumulation Trust (the "Present Trust") -- at which time the Present Trust
commenced operations. The total net assets of the Equity Portfolio immediately
after the transaction were $86,789,755 in the Old Trust and $3,764,598 in the
Present Trust. For the period prior to September 16, 1994, the performance
figures for the Equity Portfolio of the Present Trust reflect the performance of
the Equity Portfolio of the Old Trust.
<PAGE> 3
In the 1997 first half, we established a new position in EG&G, Inc. and
increased the Portfolio's holdings of ACE, Ltd., Armstrong World Industries,
Inc., Canadian Pacific Ltd., General Re Corp. and Lockheed Martin Corp. We
eliminated the Portfolio's investments in Columbia/HCA Healthcare Corp., CSX
Corp., Electronic Arts, Inc., Shaw Industries and TCI Satellite Entertainment,
Inc. and reduced its positions in American International Group, Inc. and Everest
Reinsurance Holdings, Inc.
Net assets were allocated 80% to common stocks and 20% to cash and cash
equivalents at June 30, 1997. The Portfolio's above-average cash position is a
buffer against market volatility and, more importantly, provides a resource to
purchase quality stocks opportunistically as they become available at attractive
prices.
The Portfolio's five largest equity positions at June 30, 1997 were EXEL
Ltd., a strongly capitalized specialty insurance company based in Bermuda,
representing 5.1% of the Portfolio's net assets; ACE, Ltd., a Bermuda-based
provider of excess liability insurance, 4.9% of net assets; Caterpillar, Inc.,
which manufactures earth-moving equipment and diesel engines, 3.8% of net
assets; General Re Corp., a leading insurance company, 3.6% of net assets; and
Lockheed Martin Corp., a major aerospace and defense contractor, 3.3% of net
assets.
Major industry positions were in the insurance sector, 23.2% of the
Portfolio's net assets; banking, 6.4% of net assets; aerospace/defense, 5.3% of
net assets; miscellaneous financial services, 5.3% of net assets; and
manufacturing, 4.1% of net assets.
<PAGE> 4
SMALL CAP PORTFOLIO
The Small Cap Portfolio delivered excellent returns in both the six and 12
months ended June 30, 1997, significantly exceeding the Russell 2000 Index with
dividends included (Russell 2000), a widely followed benchmark which includes
smaller capitalization stocks. We achieved these results by being disciplined in
our approach of buying reasonably valued companies based on their business
fundamentals.
The Portfolio's total return in the first half of 1997 was 14.6%, outpacing
both the 10.2% return of the Russell 2000 and the 8.1% average total return for
the small company growth funds in Lipper's Variable Insurance Products
Performance Analysis Service Report. The Portfolio ranked sixth among the 53
funds in this Lipper universe.
For the 12 months ended June 30, 1997, the Portfolio's total return of
25.5% surpassed the 16.3% return of the Russell 2000 and the 14.2% average
return for the funds in the Lipper small company growth funds category. The
Portfolio's 12-month results ranked sixth among the 48 funds in this Lipper
universe.
For the five years ended June 30, 1997, the Portfolio provided an average
annual total return of 16.0%*, compared with 17.9% for the Russell 2000. The
Portfolio's five-year performance was sixth among the seven funds in the Lipper
small company growth funds category. From its inception on August 1, 1988
through June 30, 1997, the Portfolio generated an average annual total return of
15.6%*, exceeding the 13.5% average annual total return of the Russell 2000.
Returns for the Portfolio take into account expenses incurred by the Portfolio,
but not separate account charges imposed by the insurance company.
The Portfolio invests in undervalued smaller companies with strong
competitive positions, high returns on capital and shareholder-oriented
managements. Although small-cap stocks as a class have underperformed large-cap
stocks for the past three years, we have achieved favorable returns, with what
we believe to be below-market risk, by being highly selective in our
investments.
Rather than purchasing start-up companies or highly volatile speculative
issues, we concentrate on companies with proven business records, solid
financials and good growth prospects. Magellan Health Services, Inc., the
Portfolio's largest holding, exemplifies the qualities we look for in an
investment, including high returns on invested capital, a leading competitive
position to help protect those returns, significant free cash flow which is
being used to create shareholder value and a management team oriented toward
shareholder interests. Magellan is the largest behavioral health care company in
the U.S. The company recently sold its brick-and-mortar hospital business,
realizing about $400 million of cash, which it is using to make acquisitions
that complement its managed-care business. Magellan is now focused solely on
providing managed-care mental health programs for corporations and government
agencies. It is the leader in this field, which offers excellent prospects for
revenue and earnings growth. At a recent price of about $30 a share, or about 15
times anticipated fiscal 1998 earnings, and with its strong cash flow and
favorable growth characteristics, we consider the stock to be an attractive
value.
During the 1997 first half, we established new positions in the common
stocks of Ametek, Inc., Durco International, Inc., JLG Industries, Inc.,
Jostens, Inc., KCS Energy, Inc. and A. Schulman, Inc. Increased positions
included E.W. Blanch Holdings, Inc., Magellan Health Services, Inc., St. Mary
Land & Exploration Co., Wang Laboratories, Inc. and Westpoint Stevens, Inc.
(Class A).
We eliminated the Portfolio's holdings of ACE, Ltd., Alltrista Corp., Arrow
Electronics, Inc., Exabyte Corp. and Jason, Inc. Reductions included Horace Mann
Educators Corp., Katz Media Group, Inc., SpaceLabs Medical, Inc. and United
Dominion Industries, Ltd.
At June 30, 1997, the Portfolio's net assets were allocated 85% to common
stocks and securities convertible into common stocks and 15% to cash and cash
equivalents. The five largest equity positions at the
- -----------------
* Based on results of the OCC Accumulation Trust and its predecessor. On
September 16, 1994, an investment company which had commenced operations on
August 1, 1988, called Quest for Value Accumulation Trust (the "Old Trust"), was
effectively divided into two investment funds -- the Old Trust and the present
OCC Accumulation Trust (the "Present Trust") -- at which time the Present Trust
commenced operations. The total net assets of the Small Cap Portfolio
immediately after the transaction were $139,812,573 in the Old Trust and
$8,129,274 in the Present Trust. For the period prior to September 16, 1994, the
performance figures for the Small Cap Portfolio of the Present Trust reflect the
performance of the Small Cap Portfolio of the Old Trust.
<PAGE> 5
end of June were Magellan Health Services, Inc., the largest provider of
managed-care behavioral health services in the U.S., representing 3.4% of the
Portfolio's net assets; Wang Laboratories, Inc., a systems integration and
computer maintenance firm, 2.8% of net assets; St. Mary Land & Exploration Co.,
an oil and gas exploration and production company, 2.7% of net assets; E.W.
Blanch Holdings, Inc., an insurance broker, 2.6% of net assets; and A. Schulman,
Inc., which produces plastics and resins, 2.4% of net assets.
Major industry positions were in the insurance sector, representing 12.8%
of the Portfolio's net assets; manufacturing, 9.0% of net assets; printing and
publishing, 6.8% of net assets; electronics, 5.8% of net assets; and energy,
5.5% of net assets.
<PAGE> 6
MANAGED PORTFOLIO
The Managed Portfolio invests in stocks, bonds and cash equivalents, with a
bias toward stocks, which have outperformed other classes of investments for
nearly every five-year period since the Depression. The Portfolio has
consistently ranked as one of the top-performing funds in Lipper's Variable
Insurance Products Performance Analysis Service Report flexible portfolio funds
category.
In the 1997 first half, the Portfolio delivered a total return of 14.0%,
exceeding the average total return of 10.4% for the funds in the Lipper flexible
portfolio universe, although below the total return of 20.6% with dividends
included for the Standard & Poor's 500 Index (S&P 500), an unmanaged index of
500 of the largest corporations weighted by market capitalization. As these
performance numbers indicate, most fund managers have trailed the S&P 500 in
recent months. During this period, the strong gains of the S&P 500 have been
driven primarily by a limited number of very large-capitalization stocks.
Broader market indexes, which give less weight to the largest companies, have
generally shown much smaller gains than the S&P 500.
We believe our performance in the 1997 first half continued to be favorable
given the nature of the fund and the risk-averse character of our investment
philosophy. The Portfolio's first-half performance ranked seventh among the 84
funds in the Lipper flexible portfolio category.
With a total return of 28.5% for the 12 months ended June 30, 1997, the
Portfolio exceeded the 19.4% average return of the funds in the Lipper flexible
portfolio category and ranked second among the 78 funds for the period. The
return on the S&P 500 was 34.7% in the 12 months.
For the five years ended June 30, 1997, the Portfolio delivered an average
annual return of 21.0%*, compared with 19.8% for the S&P 500. The Portfolio's
five-year performance was second among the 50 funds in the Lipper flexible
portfolio category. Since its inception on August 1, 1988, the Portfolio has
provided an average annual total return of 20.6%*, exceeding the 17.6% return
for the S&P 500. Returns for the Portfolio take into account expenses incurred
by the Portfolio, but not separate account charges imposed by the insurance
company.
The Portfolio invests in businesses that are worth inherently more, in our
judgment, than their asking prices. Looked at another way, we hope to preserve
our shareholders' capital in all market conditions, including market
corrections, because we remain disciplined about not overpaying for stocks and
because the businesses in which we invest tend to generate excess cash which
they use to create long-term value for shareholders. We focus on individual
companies and try to understand where their businesses are going over the next
several years, and are less concerned about attempting to predict where the
stock market is heading in the next month.
We expect the companies owned by the Portfolio to continue to improve their
results. The pending merger of McDonnell Douglas Corp. with Boeing Co. should
enable our McDonnell Douglas holding to perform well. In the coming months, we
expect E.I. du Pont de Nemours & Co. to announce a restructuring which will spur
its business performance. While the market has mistakenly, in our view,
neglected Citicorp stock much of this year, its business, particularly the two-
thirds generated by international operations, continues to surge. Moreover,
Citicorp continues to repurchase its shares at a very aggressive pace. Share
repurchases add value by reducing the number outstanding, making the remaining
shares worth more.
Our major disappointment this year is Wells Fargo & Co., which has
encountered severe difficulties in its merger with First Interstate Bancorp,
completed in April 1996. We do not foresee a resolution of these issues before
year end. Fortunately, the company continues to repurchase its stock at a high
rate of approximately 7% to 8% per year. For many years, Wells Fargo was the
most profitable large bank in the world, a position we expect it to regain in
the next 12 to 18 months. We continue to own the stock in anticipation it will
provide superior returns over time.
- -----------------
* Based on results of the OCC Accumulation Trust and its predecessor. On
September 16, 1994, an investment company which had commenced operations on
August 1, 1988, called Quest for Value Accumulation Trust (the "Old Trust"), was
effectively divided into two investment funds -- the Old Trust and the present
OCC Accumulation Trust (the "Present Trust") -- at which time the Present Trust
commenced operations. The total net assets of the Managed Portfolio immediately
after the transaction were $682,601,380 in the Old Trust and $51,345,102 in the
Present Trust. For the period prior to September 16, 1994, the performance
figures for the Managed Portfolio of the Present Trust reflect the performance
of the Managed Portfolio of the Old Trust.
<PAGE> 7
During the first half, we established new positions in BankBoston Corp. and
Computer Associates International Inc. and increased our holdings of nine
stocks, including Caterpillar, Inc., Federal Home Loan Mortgage Corp. and
McDonnell Douglas Corp. Eliminations were Newport News Shipbuilding, Inc. and
Sprint Corp. We reduced the Portfolio's investments in Countrywide Credit
Industries, Inc., R.R. Donnelley & Sons Co., Freeport McMoRan Copper & Gold
(Class B), Union Pacific Corp. and Unitrode Corp.
At June 30, 1997, the Portfolio's net assets were allocated 78% to common
stocks and securities convertible into common stocks, 1% to Treasury notes and
bonds, and 21% to cash and equivalents. The five largest equity positions were
E.I. du Pont de Nemours & Company, a major industrial company operating in
chemicals, fibers, polymers, petroleum and diversified businesses, representing
4.7% of the Portfolio's net assets; McDonnell Douglas Corp., the nation's
largest manufacturer of military aircraft and an important competitor in
commercial aircraft, being acquired by Boeing Co., 4.6% of net assets; Federal
Home Loan Mortgage Corp. (Freddie Mac), the second largest insurer of home
mortgages in the United States, 4.3% of net assets; Tele-Communications, Inc.
(Class A), a leading operator of cable television systems, 4.2% of net assets;
and Wells Fargo & Co., a leading bank in the Western United States, 4.2% of net
assets.
Major industry positions were in the banking sector, representing 11.8% of
the Portfolio's net assets; miscellaneous financial services, 10.1% of net
assets; chemicals, 7.6% of net assets; aerospace and defense, 6.8% of net
assets; and insurance, 5.0% of net assets.
<PAGE> 8
GLOBAL EQUITY PORTFOLIO
The Global Equity Portfolio seeks long-term growth by investing worldwide
in superior businesses which trade in the stock market at reasonable values. We
believe global diversification is an effective tool for controlling risk and
maximizing long-term results by capitalizing on investment opportunity wherever
it may exist. Although the U.S. stock market as measured by the Standard &
Poor's 500 Index has outperformed most other global markets in recent months,
returns from global markets have, in fact, compared very favorably with more
broadly based U.S. market indexes during this period.
The Portfolio continues to deliver favorable results with what we believe
to be below-market risk. In the 1997 first half, the Portfolio provided a total
return of 14.0%. This compared with a return of 15.4% on Morgan Stanley Capital
International's World Index in U.S. dollars with dividends net of local taxes
included (World Index) and the average total return of 12.5% for the global
funds in Lipper's Variable Insurance Products Performance Analysis Service
Report. The Portfolio's performance was 16th among the 39 funds in this Lipper
category.
The Portfolio delivered a total return of 21.8% in the 12 months ended June
30, 1997, compared with 22.3% for the World Index and an average of 18.5% for
the funds in the Lipper global funds category. The Portfolio's 12-month results
were 16th among the 36 funds in this Lipper universe. From inception on March 1,
1995 through June 30, 1997, the Portfolio's average annual total return of 20.9%
compared with 21.7% for the World Index. Returns for the Portfolio take into
account expenses incurred by the Portfolio, but not separate account charges
imposed by the insurance company.
In comparison to the country allocations in the World Index, the Portfolio
was overweighted in Continental Europe and Latin America at the end of June,
approximately market weighted in the United States and Canada, and underweighted
in Japan, Asia outside Japan and the United Kingdom. Market allocation is a
consequence of individual stock selection, not based on any formula to invest a
given percentage of assets in any particular country. We buy the stocks of
companies with superior business characteristics, and available at reasonable
valuations, regardless of where they are located.
Our major allocation change during the first half came in May, when we
identified many undervalued stocks in Japan in the wake of that stock market's
relentless price decline. We increased the Portfolio's Japanese investments,
primarily buying companies that are domestically oriented, since we are
concerned that the appreciation of the yen could dampen Japanese exports. New
positions included Sekisui Chemical (chemicals and housing), Sho-Bond Corp.
(building materials), Showa Denko (chemicals), Minolta (photo equipment and
supplies), Mycal (junior department stores) and Ryohin Keikaku (merchandising).
Compared with 10% of assets at the end of 1996, Japanese investments increased
to more than 14% of the Portfolio's net assets as of June 30, 1997. Our decision
to add to the Portfolio's Japanese holdings paid off, as the Japanese stock
market rallied strongly in the second quarter.
Many of our investments in Europe are benefiting from the wave of corporate
restructurings taking place, including mergers, acquisitions, divestitures and
downsizings, to improve performance and increase shareholder value. Two of the
United Kingdom companies held in the Portfolio -- Amstrad and Bridon -- were
taken over during the first half at significant premiums to our average purchase
prices.
In the United States, the Portfolio owns a diverse group of undervalued
companies with high cash flow and strong niche business positions, such as
Federal Home Loan Mortgage Corp. (Freddie Mac) and E.I. du Pont de Nemours & Co.
There were relatively few buy or sell transactions in the U.S. portion of the
Portfolio during the half.
We are optimistic about global markets. Low inflation, a worldwide
phenomenon, and the trend toward free-market economies are creating significant
investment opportunities for value-oriented investors like ourselves. At June
30, 1997, net assets of the Portfolio were allocated 58% to international
stocks, 33% to U.S. stocks and 9% to foreign and domestic cash and cash
equivalents. The largest investment positions outside the United States were in
Japan, the United Kingdom, Germany and France.
<PAGE> 9
The Portfolio's largest international holdings at June 30, 1997 were ACE,
Ltd., a Bermuda-based provider of excess directors and officers liability
insurance, representing 3.9% of the Portfolio's net assets; OY Nokia, AB, a
Finnish telecommunications equipment company, 1.4% of net assets; SAP AG, a
leading German developer of software for businesses worldwide, 1.4% of net
assets; Novartis AG, a Swiss-based pharmaceutical company, 1.1% of net assets;
and Sony Corp., the Japanese electronics company, 1.1% of net assets.
The Portfolio's largest U.S. equity holdings were Wells Fargo & Co., a
leading bank in the Western United States, 3.7% of net assets; Federal Home Loan
Mortgage Corp. (Freddie Mac), the second largest insurer of home mortgages in
the United States, 3.3% of net assets; McDonnell Douglas Corp., the nation's
largest manufacturer of military aircraft and an important competitor in
commercial aircraft, being acquired by Boeing Co., 3.1% of net assets; E.I. du
Pont de Nemours & Company, a major industrial company operating in chemicals,
fibers, polymers, petroleum and diversified businesses, 2.9% of net assets; and
McDonald's Corp., a premier fast-food company with growing global markets, 2.8%
of net assets.
Major industry positions were in the banking sector, 9.0% of net assets;
drugs and medical products, 7.4% of net assets; chemicals, 7.4% of net assets;
miscellaneous financial services, 7.0% of net assets; and telecommunications,
6.0% of net assets.
<PAGE> 10
U.S. GOVERNMENT INCOME PORTFOLIO
The 1997 first half was a period of modestly positive returns for investors
in fixed income securities. The bond market started out the year on a cautious
note, with intermediate and long-term securities experiencing negative returns
in the first quarter, reflecting investor concerns about the inflation outlook
and the prospect that interest rates might be raised by the Federal Reserve.
Rates were increased on March 25, but investors took the Fed's action in stride,
with the result that the bond market rallied in the second quarter, delivering
solid returns across all maturities.
For the half, the market provided a total return of 2.8%, as measured by
the Lehman Brothers Intermediate Government Bond Index (Lehman Index). The total
return (dividends paid and change in net asset value assuming the reinvestment
of dividends) of the U.S. Government Income Portfolio was 2.2%. This compared
with an average total return of 2.7% for the U.S. Government funds in Lipper's
Variable Insurance Products Performance Analysis Service Report. The Portfolio's
performance was 30th among the 34 funds in this Lipper universe.
The Portfolio is intended for investors seeking high current income from
investments in Government securities. The Portfolio primarily invests in debt
obligations issued or guaranteed by the U.S. Government and its agencies or
intermediaries. These issues are considered to carry the least credit risk. The
Portfolio generally invests in intermediate-term securities and places a
priority on maintaining a relatively stable net asset value (NAV) per share.
For the 12 months ended June 30, 1997, the total return of the Portfolio
was 5.5%, compared with 7.0% for the Lehman Index and an average of 7.2% for the
funds in the Lipper U.S. Government fund category. The Portfolio provided an
average annual total return of 7.3% from its inception on January 3, 1995
through June 30, 1997, versus 8.4% for the Lehman Index. Returns take into
account expenses incurred by the Portfolio, but not separate account charges
imposed by the insurance company.
During the first half, we added to the Portfolio's holdings of mortgage-
backed securities to capture additional yield. In addition, we lengthened the
average maturity of the Portfolio's investments to approximately 6.7 years at
June 30, 1997 from approximately 3.8 years at December 31, 1996.
At the end of June 1997, the Portfolio's assets were allocated 49% to U.S.
Treasury securities, 29% to U.S. Government agency securities, 13% to mortgage-
related securities, 7% to corporate notes and bonds, and 2% to cash and cash
equivalents.
<PAGE> 11
MONEY MARKET PORTFOLIO
The Money Market Portfolio seeks maximum current income consistent with
stability of principal and liquidity. The seven-day compounded yield of the
Portfolio was 4.80% as of June 30, 1997. The average dollar-weighted portfolio
maturity was 30 days.
We manage the Portfolio conservatively, recognizing that shareholders of
money market funds view liquidity and safety of principal as their most
important objectives. Safety of principal is our first priority. Rather than
subjecting the Money Market Portfolio to additional risk to achieve a higher
return, we maintain a rigorous approach to analyzing and investing in quality
credits. These include the short-term securities of leading financial
institutions and industrial companies in the United States and abroad, as well
as marketable obligations of the United States Government, its agencies and
instrumentalities. At June 30, 1997, 81% of the Portfolio's assets were
allocated to short-term corporate notes, with the remaining assets invested in
U.S. Government agency securities.
Although the Money Market Portfolio seeks to maintain its share price at
$1.00, an investment in the Portfolio is not guaranteed or insured by the U.S.
Government, and there is no assurance that the Portfolio will maintain a
constant price of $1.00 per share.
<PAGE> 12
OCC ACCUMULATION TRUST
EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED)
JUNE 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- ----------
<C> <S> <C>
U.S. GOVERNMENT AGENCY NOTE - .9%
$ 240,000 Federal Home Loan Bank, 5.41%, 7/30/97 (cost - $238,954) $ 238,954
----------
SHORT-TERM CORPORATE NOTES - 18.5%
AUTOMOTIVE - 3.3%
Ford Motor Credit Co.,
$ 150,000 5.51%, 7/15/97......................................... $ 149,679
125,000 5.53%, 7/22/97......................................... 124,597
555,000 5.54%, 7/22/97......................................... 553,206
----------
827,482
----------
BANKING - 2.9%
745,000 Norwest Financial Inc., 5.53%, 7/14/97................. 743,512
----------
MACHINERY/ENGINEERING - 3.4%
Deere (John) Capital Corp.,
180,000 5.51%, 7/17/97......................................... 179,559
685,000 5.53%, 7/28/97......................................... 682,159
----------
861,718
----------
MISCELLANEOUS FINANCIAL SERVICES - 4.5%
1,150,000 American Express Credit Corp., 5.51%, 7/17/97.......... 1,147,184
----------
TECHNOLOGY - 4.4%
1,100,000 IBM Credit Corp., 5.51%, 7/15/97....................... 1,097,643
----------
Total Short-Term Corporate Notes (cost - $4,677,539)... $4,677,539
----------
SHARES
COMMON STOCKS - 80.3%
AEROSPACE/DEFENSE - 5.3%
8,000 Lockheed Martin Corp................................... $ 828,500
7,494 McDonnell Douglas Corp................................. 513,339
----------
1,341,839
----------
BANKING - 6.4%
6,556 Citicorp............................................... 790,408
3,033 Wells Fargo & Co....................................... 817,393
----------
1,607,801
----------
CHEMICALS - 3.3%
4,000 du Pont (E.I.) de Nemours & Co......................... 251,500
7,698 Hercules, Inc.......................................... 368,542
4,910 Monsanto Co............................................ 211,437
----------
831,479
----------
CONGLOMERATES - 2.6%
4,312 General Electric Co.................................... 281,897
8,500 Tenneco, Inc........................................... 384,094
----------
665,991
----------
</TABLE>
<PAGE> 13
<TABLE>
<CAPTION>
OCC ACCUMULATION TRUST
EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 1997
SHARES VALUE
----------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
CONSUMER PRODUCTS - 2.0%
3,844 Avon Products, Inc..................... $ 271,242
6,843 Mattel, Inc............................ 231,807
----------
503,049
----------
DRUGS & MEDICAL PRODUCTS - 2.8%
14,042 Becton, Dickinson & Co................. 710,876
----------
ELECTRONICS - 3.0%
4,038 Arrow Electronics, Inc.*............... 214,519
24,000 EG & G, Inc............................ 540,000
----------
754,519
----------
ENERGY - 1.1%
697 El Paso Natural Gas Co................. 38,335
4,996 Triton Energy Ltd.*.................... 228,879
----------
267,214
----------
FOOD SERVICES - 2.0%
10,500 McDonald's Corp........................ 507,281
----------
HEALTH & HOSPITALS - 3.2%
27,750 Tenet Healthcare Corp.*................ 820,359
----------
INSURANCE - 23.2%
16,700 ACE Ltd................................ 1,233,713
7,372 AFLAC, Inc............................. 348,327
1,262 American International Group, Inc...... 188,511
12,000 Everest Reinsurance Holdings, Inc...... 475,500
24,452 EXEL Ltd............................... 1,289,843
5,000 General Re Corp........................ 910,000
10,000 Mid Ocean Ltd.......................... 524,375
4,579 Progressive Corp. (Ohio)............... 398,373
13,000 RenaissanceRe Holdings Ltd............. 495,625
----------
5,864,267
----------
LEISURE - 2.3%
14,000 Carnival Corp.......................... 577,500
----------
MACHINERY/ENGINEERING - 3.8%
9,000 Caterpillar, Inc....................... 966,375
----------
MANUFACTURING - 4.1%
6,000 Armstrong World Industries, Inc........ 440,250
17,560 LucasVarity Corp. PLC ADR.............. 608,015
----------
1,048,265
----------
MISCELLANEOUS FINANCIAL SERVICES - 5.3%
19,912 Countrywide Credit Industries, Inc..... 621,006
20,620 Federal Home Loan Mortgage Corp........ 708,812
----------
1,329,818
----------
</TABLE>
<PAGE>
14
OCC ACCUMULATION TRUST
EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
- -------- -----------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
PRINTING/PUBLISHING - 1.6%
11,000 Donnelley (R.R.) & Sons Co.......................................... $ 402,875
-----------
RETAIL - 2.2%
11,888 May Department Stores Co............................................ 561,708
-----------
TELECOMMUNICATIONS - 2.7%
6,000 Sprint Corp......................................................... 315,750
25,000 Tele-Communications, Inc. (Class A)*................................ 371,875
-----------
687,625
-----------
TRANSPORTATION - 3.4%
4,300 AMR Corp.*.......................................................... 397,750
16,000 Canadian Pacific Ltd................................................ 455,000
-----------
852,750
-----------
Total Common Stocks (cost - $14,087,737)............................ $20,301,591
-----------
Total Investments (cost - $19,004,230).................... 99.7% $25,218,084
Other Assets in Excess of Liabilities..................... 0.3 74,626
----- -----------
Total Net Assets.......................................... 100.0% $25,292,710
===== ===========
</TABLE>
- -----------------
* Non-income producing security.
See accompanying notes to financial statements.
<PAGE>
15
OCC ACCUMULATION TRUST
EQUITY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
JUNE 30, 1997
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost - $19,004,230)...................................... $25,218,084
Cash............................................................................ 52,668
Dividends receivable............................................................ 20,848
Receivable from fund shares sold................................................ 14,368
Other assets.................................................................... 1,004
-----------
Total Assets.................................................................. 25,306,972
-----------
LIABILITIES
Investment advisory fee payable................................................. 1,667
Payable for fund shares redeemed................................................ 952
Other payables and accrued expenses............................................. 11,643
-----------
Total Liabilities............................................................. 14,262
-----------
Total Net Assets.............................................................. $25,292,710
===========
COMPOSITION OF NET ASSETS
Par value ($.01 per share)...................................................... $ 7,716
Paid-in-capital in excess of par................................................ 18,627,928
Accumulated undistributed net investment income................................. 139,630
Accumulated undistributed net realized gain on investments...................... 303,582
Net unrealized appreciation on investments...................................... 6,213,854
-----------
Total Net Assets.............................................................. $25,292,710
===========
Fund shares outstanding......................................................... 771,634
-----------
Net asset value per share....................................................... $ 32.78
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
16
OCC ACCUMULATION TRUST
EQUITY PORTFOLIO
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends...................................................................... $ 149,752
Interest....................................................................... 97,795
----------
Total investment income..................................................... 247,547
----------
OPERATING EXPENSES
Investment advisory fees (note 2A)............................................. 86,822
Custodian fees (note 1G)....................................................... 7,528
Transfer and dividend disbursing agent fees.................................... 4,626
Audit fees..................................................................... 4,165
Trustees' fees and expenses.................................................... 2,203
Reports and notices to shareholders............................................ 1,937
Legal fees..................................................................... 1,091
Miscellaneous.................................................................. 246
----------
Total operating expenses.................................................... 108,618
Less: Expenses offset (note 1G)............................................. (701)
----------
Net operating expenses................................................. 107,917
----------
Net investment income.................................................. 139,630
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS - NET
Net realized gain on investments............................................... 303,581
Net change in unrealized appreciation (depreciation) on investments............ 2,471,711
----------
Net realized gain and change in unrealized appreciation (depreciation) on
investments................................................................ 2,775,292
----------
Net increase in net assets resulting from operations............................. $2,914,922
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
17
OCC ACCUMULATION TRUST
EQUITY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997(1) DECEMBER 31, 1996
---------------- -----------------
<S> <C> <C>
OPERATIONS
Net investment income.................................... $ 139,630 $ 188,895
Net realized gain on investments......................... 303,581 672,433
Net change in unrealized appreciation (depreciation) on
investments............................................. 2,471,711 2,218,378
----------- -----------
Net increase in net assets resulting from
operations............................................ 2,914,922 3,079,706
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Net investment income.................................... (188,895) (111,781)
Net realized gains....................................... (672,433) (223,969)
----------- -----------
Total dividends and distributions to shareholders...... (861,328) (335,750)
----------- -----------
FUND SHARE TRANSACTIONS
Net proceeds from sales.................................. 3,388,606 9,184,397
Reinvestment of dividends and distributions.............. 861,328 335,750
Cost of shares redeemed.................................. (853,816) (1,457,087)
----------- -----------
Net increase in net assets from fund share
transactions.......................................... 3,396,118 8,063,060
----------- -----------
Total increase in net assets......................... 5,449,712 10,807,016
NET ASSETS
Beginning of period...................................... 19,842,998 9,035,982
----------- -----------
End of period (including undistributed net investment
income of $139,630 and $188,895, respectively).......... $25,292,710 $19,842,998
=========== ===========
SHARES ISSUED AND REDEEMED
Issued................................................... 111,055 339,540
Issued in reinvestment of dividends and distributions.... 28,807 13,029
Redeemed................................................. (28,038) (53,448)
----------- -----------
Net increase........................................... 111,824 299,121
=========== ===========
</TABLE>
- -----------------
(1) Unaudited.
See accompanying notes to financial statements.
<PAGE>
18
OCC ACCUMULATION TRUST
EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1997
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
OCC Accumulation Trust (the "Trust") was organized May 12, 1994 as a
Massachusetts business trust and is registered under the Investment Company Act
of 1940, as amended, as a diversified, open-end management investment company.
The Trust is authorized to issue an unlimited number of six classes of shares of
beneficial interest at $.01 par value. The Trust is comprised of six portfolios:
the Equity Portfolio (the "Portfolio"), the Small Cap Portfolio, the Global
Equity Portfolio, the Managed Portfolio, the U.S. Government Income Portfolio
and the Money Market Portfolio. OpCap Advisors (the "Adviser"), a majority-owned
(99%) subsidiary of Oppenheimer Capital, serves as the Trust's investment
adviser. The Trust is an investment vehicle for variable annuity and variable
life insurance contracts of various life insurance companies, and qualified
pension and retirement plans. The following is a summary of significant
accounting policies consistently followed by the Portfolio in the preparation of
its financial statements:
(A) VALUATION OF INVESTMENTS
Investment securities, other than debt securities, listed on a national
exchange or traded in the over-the-counter National Market System are valued
each business day at the last reported sale price; if there are no such reported
sales, the securities are valued at their last quoted bid price. Other
securities traded over-the-counter and not part of the National Market System
are valued at the last quoted bid price. Investment debt securities (other than
short-term obligations) are valued each business day by an independent pricing
service (approved by the Board of Trustees) using methods which include current
market quotations from a major market maker in the securities and
trader-reviewed "matrix" prices. Short-term debt securities having a remaining
maturity of sixty days or less are valued at amortized cost or amortized value,
which approximates market value. Any securities or other assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by the Board of Trustees. The ability of issuers of debt instruments
to meet their obligations may be affected by economic developments in a specific
industry or region.
(B) FEDERAL INCOME TAXES
It is the Portfolio's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to shareholders; accordingly,
no Federal income tax provision is required.
(C) INVESTMENT TRANSACTIONS AND OTHER INCOME
Investment transactions are accounted for on the trade date. In determining
the gain or loss from the sale of investments, the cost of investments sold has
been determined on the basis of identified cost. Dividend income is recorded on
the ex-dividend date and interest income is accrued as earned. Discounts or
premiums on debt securities purchased are accreted or amortized to interest
income over the lives of the respective securities.
(D) DIVIDENDS AND DISTRIBUTIONS
Dividends and distributions to shareholders from net investment income and
net realized capital gains, if any, are declared and paid at least annually.
The Portfolio records dividends and distributions to its shareholders on
the ex-dividend date. The amount of dividends and distributions are determined
in accordance with Federal income tax regulations, which may differ from
generally accepted accounting principles. These "book-tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their Federal income tax treatment; temporary
differences do
<PAGE>
19
OCC ACCUMULATION TRUST
EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) DIVIDENDS AND DISTRIBUTIONS (CONTINUED)
not require reclassification. To the extent dividends and/or distributions
exceed current and accumulated earnings and profits for Federal income tax
purposes, they are reported as dividends and/or distributions of paid-in-capital
or tax return of capital.
(E) ALLOCATION OF EXPENSES
Expenses specifically identifiable to a particular portfolio are borne by
that portfolio. Other expenses are allocated to each portfolio based on its net
assets in relation to the total net assets of all applicable portfolios of the
Trust or another reasonable basis.
(F) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
(G) CUSTODY OFFSETS
The Portfolio benefits from an expense offset arrangement with its
custodian bank where uninvested cash balances earn credits that reduce monthly
fees. Had these cash balances been invested in income producing securities, they
would have generated income for the Portfolio.
(2) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
(A) The investment advisory fee is accrued daily and payable monthly to the
Adviser, and is computed as a percentage of the Portfolio's net assets as of the
close of business each day at the annual rate of .80% on the first $400 million,
.75% on the next $400 million and .70% thereafter. The Adviser has voluntarily
agreed to waive that portion of the advisory fee necessary to limit total
operating expenses of the Portfolio to 1.00% (net of expenses offset) of average
net assets on an annual basis.
(B) Total brokerage commissions paid by the Portfolio for the six months ended
June 30, 1997 amounted to $4,820, of which Oppenheimer & Co., Inc., an affiliate
of the Adviser, received $1,518.
(3) PURCHASES AND SALES OF INVESTMENTS
For the six months ended June 30, 1997, purchases and sales of investment
securities, other than short-term securities, were $2,006,683 and $1,828,102,
respectively.
(4) UNREALIZED APPRECIATION (DEPRECIATION) AND COST OF INVESTMENTS FOR FEDERAL
INCOME TAX PURPOSES
Aggregate gross unrealized appreciation for securities in which there is an
excess of value over tax cost is $6,214,033, aggregate gross unrealized
depreciation for securities in which there is an excess of tax cost over value
is $179 and net unrealized appreciation for Federal income tax purposes is
$6,213,854. Federal income tax cost basis of portfolio securities is $19,004,230
at June 30, 1997.
<PAGE>
20
OCC ACCUMULATION TRUST
EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
(5) AFFILIATED TRANSACTION
On July 22, 1997, PIMCO Advisors L.P. ("PIMCO Advisors"), a registered
investment adviser with approximately $119 billion in assets under management
through various subsidiaries and its affiliate Thomson Advisory Group Inc.
("TAG"), signed an Amended and Restated Merger Agreement with Oppenheimer Group,
Inc. ("OGI"), its subsidiary Oppenheimer Financial Corp. ("Opfin") and certain
related parties pursuant to which PIMCO Advisors and TAG and its successor, will
acquire the one-third managing general partner interest in Oppenheimer Capital,
its 1.0% general partner interest in OpCap Advisors, and its 1.0% general
partner interest in Oppenheimer Capital L.P. (the "Transaction"). If the
Transaction is consummated, it will involve a change in control of Oppenheimer
Capital and its subsidiary OpCap Advisors which will constitute an assignment
and termination of the Investment Advisory Agreement with the Trust. At a
meeting held on February 28, 1997, the Trustees, including all independent
Trustees, approved and determined to submit to shareholders for approval, a new
Investment Advisory Agreement with OpCap Advisors, substantially upon the same
terms and conditions as the existing Investment Advisory Agreement. Proxy
material will be sent to shareholders concerning the new Investment Advisory
Agreement.
<PAGE> 21
OCC ACCUMULATION TRUST
EQUITY PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
SIX MONTHS ENDED SEPTEMBER 16, 1994(1)
JUNE 30, 1997(7) 1996 1995 TO DECEMBER 31, 1994
---------------- ----------- ---------- ---------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period............................. $ 30.07 $ 25.05 $ 18.12 $ 18.57
-------------- ----------- ---------- ----------
Income from investment
operations:
Net investment income................ 0.18 0.21 0.31 0.09
Net realized and unrealized
gain (loss) on
investments........................ 3.81 5.52 6.71 (0.54)
-------------- ----------- ---------- ----------
Total from investment
operations....................... 3.99 5.73 7.02 (0.45)
-------------- ----------- ---------- ----------
Dividends and distributions to
shareholders:
Dividends to shareholders from
net investment income.............. (0.28) (0.24) (0.09) --
Distributions to shareholders
from net realized gains............ (1.00) (0.47) -- --
-------------- ----------- ---------- ----------
Total dividends and
distributions to
shareholders..................... (1.28) (0.71) (0.09) --
-------------- ----------- ---------- ----------
Net asset value, end of
period............................. $ 32.78 $ 30.07 $ 25.05 $ 18.12
============== =========== ========== ==========
Total return (2)..................... 13.7% 23.4% 38.9% (2.4%)
============== =========== ========== ==========
Net assets, end of period............ $ 25,292,710 $19,842,998 $9,035,982 $4,281,256
-------------- ----------- ---------- ----------
Ratio of net operating
expenses to average net
assets (5)......................... 1.00%(3,4) 0.93%(6) 0.72%(6) 0.72%(3,6)
-------------- ----------- ---------- ----------
Ratio of net investment income
to average net assets.............. 1.29%(3,4) 1.29%(6) 1.74%(6) 1.80%(3,6)
-------------- ----------- ---------- ----------
Portfolio turnover rate.............. 10% 36% 31% 6%
-------------- ----------- ---------- ----------
Average commission rate.............. $ 0.0566 $ 0.0588 -- --
-------------- ----------- ---------- ----------
</TABLE>
- ----------------
(1) Commencement of operations.
(2) Assumes reinvestment of all dividends and distributions. Aggregate (not
annualized) total return is shown for any period shorter than one year.
(3) Annualized.
(4) Average net assets for the six months ended June 30, 1997 were $21,885,297.
(5) For fiscal periods ending after September 1, 1995, the ratios are calculated
to include expenses offset by earnings credits from a custodian bank (See
note 1G in Notes to Financial Statements).
(6) During the periods noted above, the Adviser waived a portion or all of its
fees and assumed a portion of the Portfolio's operating expenses. If such
waivers and assumptions had not been in effect, the ratios of net operating
expenses to average net assets and the ratios of net investment income to
average net assets would have been 1.05% and 1.15%, respectively, for the
year ended December 31, 1996, 1.26% and 1.20%, respectively, for the year
ended December 31, 1995 and 2.09% and 0.43%, annualized, respectively, for
the period September 16, 1994 (commencement of operations) to December 31,
1994.
(7) Unaudited.
<PAGE>
22
OCC ACCUMULATION TRUST
SMALL CAP PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED)
JUNE 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- ----------
<S> <C> <C>
U.S. GOVERNMENT AGENCY NOTE - 1.1%
$ 675,000 Federal Home Loan Mortgage Corp., 5.40%, 8/7/97 (cost - $671,254). $ 671,254
----------
SHORT-TERM CORPORATE NOTES - 14.3%
AUTOMOTIVE - 2.8%
$1,630,000 Ford Motor Credit Co., 5.53%, 7/15/97............................. $1,626,495
----------
INSURANCE - 3.1%
1,840,000 Prudential Funding Corp., 5.54%, 7/31/97.......................... 1,831,505
----------
MACHINERY/ENGINEERING - 2.9%
Deere (John) Capital Corp.,
240,000 5.40%, 7/3/97..................................................... 239,928
1,500,000 5.49%, 7/3/97..................................................... 1,499,542
----------
1,739,470
----------
MISCELLANEOUS FINANCIAL SERVICES - 1.3%
740,000 Beneficial Corp., 5.50%, 7/16/97.................................. 738,304
----------
TECHNOLOGY - 4.2%
2,500,000 IBM Credit Corp., 5.51%, 7/15/97.................................. 2,494,643
----------
Total Short-Term Corporate Notes (cost - $8,430,417)................. $8,430,417
----------
CONVERTIBLE CORPORATE BOND - .1%
REAL ESTATE - .1%
$ 49,995 Security Capital Group, Inc., 12.00%, 6/30/14 (A) (cost - $45,368).. $ 60,161
----------
SHARES
COMMON STOCKS - 84.7%
ADVERTISING - .2%
18,000 Katz Media Group, Inc.*........................................... $ 118,125
----------
AEROSPACE/DEFENSE - 1.2%
28,800 Tracor, Inc.*..................................................... 723,600
----------
AUTOMOTIVE - 1.9%
20,700 Borg-Warner Automotive, Inc....................................... 1,119,094
----------
BUILDING & CONSTRUCTION - 2.6%
29,200 Chicago Bridge & Iron Co.*........................................ 646,050
17,800 Dal-Tile International, Inc.*..................................... 330,413
42,900 JLG Industries, Inc............................................... 584,512
----------
1,560,975
----------
CHEMICALS - 4.3%
47,100 McWhorter Technologies, Inc.*..................................... 1,124,513
57,200 Schulman (A.), Inc................................................ 1,408,550
----------
2,533,063
----------
</TABLE>
<PAGE>
23
OCC ACCUMULATION TRUST
SMALL CAP PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
----------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
COMPUTER SERVICES - 4.1%
22,100 BA Merchants Services, Inc.*... $ 421,281
46,367 BancTec, Inc.*................. 1,202,644
17,500 BDM International, Inc.*....... 402,500
25,800 Reynolds & Reynolds Co......... 406,350
----------
2,432,775
----------
DRUGS & MEDICAL PRODUCTS - 4.4%
21,100 Dentsply International, Inc.... 1,033,900
44,700 SpaceLabs Medical, Inc.*....... 1,139,850
23,200 Vital Signs, Inc............... 407,450
----------
2,581,200
----------
ELECTRONICS - 5.8%
30,300 EG & G, Inc.................... 681,750
54,700 Exar Corp.*.................... 1,176,050
33,620 Oak Industries, Inc.*.......... 966,575
24,400 Watts Industries, Inc.*........ 585,600
----------
3,409,975
----------
ENERGY - 5.5%
35,400 KCS Energy, Inc................ 721,275
22,100 Nuevo Energy Co.*.............. 906,100
45,100 St. Mary Land & Exploration Co. 1,584,138
----------
3,211,513
----------
HEALTH & HOSPITALS - 3.4%
68,500 Magellan Health Services, Inc*. 2,020,750
----------
INSURANCE - 12.8%
66,600 Capsure Holdings Corp.*........ 861,637
38,000 Corvel Corp.*.................. 1,092,500
22,422 Delphi Financial Group, Inc.*.. 863,247
57,000 E.W. Blanch Holdings, Inc...... 1,521,188
46,500 Gryphon Holdings, Inc.......... 709,125
14,000 Horace Mann Educators Corp..... 686,000
23,300 RenaissanceRe Holdings Ltd..... 888,313
26,700 United Wisconsin Services, Inc. 899,456
----------
7,521,466
----------
MACHINERY/ENGINEERING - 4.8%
28,100 Ametek, Inc.................... 660,350
29,400 Durco International, Inc....... 859,950
16,900 Kaydon Corp.................... 838,663
19,200 United Dominion Industries, Ltd 471,600
----------
2,830,563
----------
</TABLE>
<PAGE>
24
OCC ACCUMULATION TRUST
SMALL CAP PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
----------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
MANUFACTURING - 9.0%
183,900 Baldwin Technology Co. (Class A)*...... $ 551,700
53,000 Easco, Inc............................. 516,750
18,800 Jostens, Inc........................... 502,900
32,700 Keystone International, Inc............ 1,134,281
44,400 Lydall, Inc.*.......................... 937,950
55,600 Omniquip International, Inc.*.......... 1,285,750
7,300 Roper Industries, Inc.................. 378,687
----------
5,308,018
----------
MEDIA/BROADCASTING - 1.7%
24,500 American Radio Systems Corp.*.......... 976,938
----------
MISCELLANEOUS FINANCIAL SERVICES - 3.6%
32,500 BISYS Group, Inc.*..................... 1,356,875
17,100 Enhance Financial Services Group, Inc.. 750,262
----------
2,107,137
----------
PAPER PRODUCTS - .7%
22,500 Rock-Tenn Co........................... 395,156
----------
PRINTING/PUBLISHING - 6.8%
24,900 Bowne & Co., Inc....................... 868,387
15,800 Harland (John. H.) Co.................. 360,437
88,100 Hollinger International, Inc........... 985,619
82,400 International Imaging Materials, Inc.*. 1,339,000
5,700 Merrill Corp........................... 207,338
92,500 Nu-Kote Holdings, Inc. (Class A)*...... 231,250
----------
3,992,031
----------
REAL ESTATE - .1%
66 Security Capital Group, Inc. (A)....... 83,073
----------
RETAIL - .8%
24,400 Ann Taylor Stores Corp.*............... 475,800
----------
TECHNOLOGY - 5.4%
132,000 Auspex Systems, Inc.*.................. 1,270,500
7,100 Cable Design Technologies*............. 209,006
78,800 Wang Laboratories, Inc.*............... 1,679,425
----------
3,158,931
----------
TELECOMMUNICATIONS - 2.4%
18,300 ACC Corp.*............................. 565,013
800 Plantronics, Inc.*..................... 40,100
22,300 TCA Cable TV, Inc...................... 839,037
----------
1,444,150
----------
</TABLE>
<PAGE>
25
OCC ACCUMULATION TRUST
SMALL CAP PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- -----------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
TEXTILES/APPAREL - 2.2%
20,200 Burlington Industries, Inc.*......................................... $ 242,400
5,000 Guilford Mills, Inc.................................................. 104,062
23,500 Westpoint Stevens, Inc. (Class A)*................................... 919,438
-----------
1,265,900
-----------
TRANSPORTATION - 1.0%
41,350 Interpool, Inc....................................................... 609,913
-----------
Total Common Stocks (cost - $42,626,469)............................. $49,880,146
-----------
Total Investments (cost - $51,773,508)....................... 100.2% $59,041,978
Liabilities in Excess of Other Assets........................ (0.2) (93,309)
----- -----------
Total Net Assets............................................. 100.0% $58,948,669
===== ===========
</TABLE>
- ----------------
* Non-income producing security.
(A) Restricted securities (the Portfolio will not bear any costs, including
those involved in registration under the Securities Act of 1933, in
connection with the disposition of these securities):
<TABLE>
<CAPTION>
DATE OF PAR AVERAGE FAIR VALUE AS OF
DESCRIPTION ACQUISITION AMOUNT SHARES COST JUNE 30, 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Security Capital Group, Inc. 12.00%, 6/30/14................ 9/16/94 $49,995 -- $ 91 $ 120
Security Capital Group, Inc. Common Stock................... 9/16/94 -- 66 949 1,259
</TABLE>
See accompanying notes to financial statements.
<PAGE>
26
OCC ACCUMULATION TRUST
SMALL CAP PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
JUNE 30, 1997
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost - $51,773,508).................................... $59,041,978
Cash.......................................................................... 7,817
Receivable from investments sold.............................................. 390,380
Receivable from fund shares sold.............................................. 103,946
Dividends receivable.......................................................... 16,266
Interest receivable........................................................... 6,795
Other assets.................................................................. 1,406
-----------
Total Assets................................................................ 59,568,588
-----------
LIABILITIES
Payable for investments purchased............................................. 589,999
Payable for fund shares redeemed.............................................. 6,101
Investment advisory fee payable............................................... 3,808
Other payables and accrued expenses........................................... 20,011
-----------
Total Liabilities........................................................... 619,919
-----------
Total Net Assets............................................................ $58,948,669
===========
COMPOSITION OF NET ASSETS
Par value ($.01 per share).................................................... $ 23,833
Paid-in-capital in excess of par.............................................. 48,759,952
Accumulated undistributed net investment income............................... 129,800
Accumulated undistributed net realized gain on investments.................... 2,766,614
Net unrealized appreciation on investments.................................... 7,268,470
-----------
Total Net Assets............................................................ $58,948,669
===========
Fund shares outstanding....................................................... 2,383,326
-----------
Net asset value per share..................................................... $ 24.73
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
27
OCC ACCUMULATION TRUST
SMALL CAP PORTFOLIO
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest..................................................................... $ 189,707
Dividends.................................................................... 153,844
----------
Total investment income..................................................... 343,551
----------
OPERATING EXPENSES
Investment advisory fees (note 2A)........................................... 172,578
Custodian fees (note 1G)..................................................... 15,699
Trustees' fees and expenses.................................................. 6,549
Transfer and dividend disbursing agent fees.................................. 4,751
Audit fees................................................................... 4,413
Reports and notices to shareholders.......................................... 4,136
Legal fees................................................................... 1,560
Miscellaneous................................................................ 4,891
----------
Total operating expenses.................................................... 214,577
Less: Expenses offset (note 1G)............................................. (826)
----------
Net operating expenses.................................................... 213,751
----------
Net investment income..................................................... 129,800
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS - NET
Net realized gain on investments............................................. 2,775,415
Net change in unrealized appreciation (depreciation) on investments.......... 4,013,251
----------
Net realized gain and change in unrealized appreciation (depreciation) on
investments............................................................... 6,788,666
----------
Net increase in net assets resulting from operations.......................... $6,918,466
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
28
OCC ACCUMULATION TRUST
SMALL CAP PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997(1) DECEMBER 31, 1996
---------------- -----------------
<S> <C> <C>
OPERATIONS
Net investment income.................................... $ 129,800 $ 226,925
Net realized gain on investments......................... 2,775,415 1,679,412
Net change in unrealized appreciation (depreciation) on
investments............................................. 4,013,251 2,142,715
----------- -----------
Net increase in net assets resulting from
operations............................................ 6,918,466 4,049,052
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Net investment income.................................... (226,925) (211,870)
Net realized gains....................................... (1,600,322) (544,700)
----------- -----------
Total dividends and distributions to shareholders...... (1,827,247) (756,570)
----------- -----------
FUND SHARE TRANSACTIONS
Net proceeds from sales.................................. 20,049,793 17,604,938
Reinvestment of dividends and distributions.............. 1,827,247 756,533
Cost of shares redeemed.................................. (2,276,261) (3,401,674)
----------- -----------
Net increase in net assets from fund share
transactions.......................................... 19,600,779 14,959,797
----------- -----------
Total increase in net assets......................... 24,691,998 18,252,279
NET ASSETS
Beginning of period...................................... 34,256,671 16,004,392
----------- -----------
End of period (including undistributed net investment
income of $129,800 and $226,925, respectively).......... $58,948,669 $34,256,671
=========== ===========
SHARES ISSUED AND REDEEMED
Issued................................................... 885,839 837,586
Issued in reinvestment of dividends and distributions.... 83,857 38,520
Redeemed................................................. (101,620) (164,530)
----------- -----------
Net increase........................................... 868,076 711,576
=========== ===========
</TABLE>
- -----------------
(1) Unaudited.
See accompanying notes to financial statements.
<PAGE>
29
OCC ACCUMULATION TRUST
SMALL CAP PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1997
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
OCC Accumulation Trust (the "Trust") was organized May 12, 1994 as a
Massachusetts business trust and is registered under the Investment Company Act
of 1940, as amended, as a diversified, open-end management investment company.
The Trust is authorized to issue an unlimited number of six classes of shares of
beneficial interest at $.01 par value. The Trust is comprised of six portfolios:
the Equity Portfolio, the Small Cap Portfolio (the "Portfolio"), the Global
Equity Portfolio, the Managed Portfolio, the U.S. Government Income Portfolio
and the Money Market Portfolio. OpCap Advisors (the "Adviser"), a majority-owned
(99%) subsidiary of Oppenheimer Capital, serves as the Trust's investment
adviser. The Trust is an investment vehicle for variable annuity and variable
life insurance contracts of various life insurance companies, and qualified
pension and retirement plans. The following is a summary of significant
accounting policies consistently followed by the Portfolio in the preparation of
its financial statements:
(A) VALUATION OF INVESTMENTS
Investment securities, other than debt securities, listed on a national
exchange or traded in the over-the-counter National Market System are valued
each business day at the last reported sale price; if there are no such reported
sales, the securities are valued at their last quoted bid price. Other
securities traded over-the-counter and not part of the National Market System
are valued at the last quoted bid price. Investment debt securities (other than
short-term obligations) are valued each business day by an independent pricing
service (approved by the Board of Trustees) using methods which include current
market quotations from a major market maker in the securities and trader-
reviewed "matrix" prices. Short-term debt securities having a remaining maturity
of sixty days or less are valued at amortized cost or amortized value, which
approximates market value. Any securities or other assets for which market
quotations are not readily available are valued at their fair value as
determined in good faith by the Board of Trustees. The ability of issuers of
debt instruments to meet their obligations may be affected by economic
developments in a specific industry or region.
(B) FEDERAL INCOME TAXES
It is the Portfolio's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to shareholders; accordingly,
no Federal income tax provision is required.
(C) INVESTMENT TRANSACTIONS AND OTHER INCOME
Investment transactions are accounted for on the trade date. In determining
the gain or loss from the sale of investments, the cost of investments sold has
been determined on the basis of identified cost. Dividend income is recorded on
the ex-dividend date and interest income is accrued as earned. Discounts or
premiums on debt securities purchased are accreted or amortized to interest
income over the lives of the respective securities.
(D) DIVIDENDS AND DISTRIBUTIONS
Dividends and distributions to shareholders from net investment income and
net realized capital gains, if any, are declared and paid at least annually.
The Portfolio records dividends and distributions to its shareholders on
the ex-dividend date. The amount of dividends and distributions are determined
in accordance with Federal income tax regulations, which may differ from
generally accepted accounting principles. These "book-tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are
<PAGE>
30
OCC ACCUMULATION TRUST
SMALL CAP PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
(D) DIVIDENDS AND DISTRIBUTIONS (CONTINUED)
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reclassified within the capital accounts based on their Federal income tax
treatment; temporary differences do not require reclassification. To the extent
dividends and/or distributions exceed current and accumulated earnings and
profits for Federal income tax purposes, they are reported as dividends and/or
distributions of paid-in-capital or tax return of capital.
(E) ALLOCATION OF EXPENSES
Expenses specifically identifiable to a particular portfolio are borne by
that portfolio. Other expenses are allocated to each portfolio based on its net
assets in relation to the total net assets of all applicable portfolios of the
Trust or another reasonable basis.
(F) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
(G) CUSTODY OFFSETS
The Portfolio benefits from an expense offset arrangement with its
custodian bank where uninvested cash balances earn credits that reduce monthly
fees. Had these cash balances been invested in income producing securities, they
would have generated income for the Portfolio.
(2) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
(A) The investment advisory fee is accrued daily and payable monthly to the
Adviser, and is computed as a percentage of the Portfolio's net assets as of the
close of business each day at the annual rate of .80% on the first $400 million,
.75% on the next $400 million and .70% thereafter. The Adviser has voluntarily
agreed to waive that portion of the advisory fee necessary to limit total
operating expenses of the Portfolio to 1.00% (net of expenses offset) of average
net assets on an annual basis.
(B) Total brokerage commissions paid by the Portfolio for the six months ended
June 30, 1997 amounted to $80,508, of which Oppenheimer & Co., Inc., an
affiliate of the Adviser, received $20,686.
(3) PURCHASES AND SALES OF SECURITIES
For the six months ended June 30, 1997, purchases and sales of investment
securities, other than short-term securities were $35,011,021 and $20,175,495,
respectively.
(4) UNREALIZED APPRECIATION (DEPRECIATION) AND COST OF INVESTMENTS FOR FEDERAL
INCOME TAX PURPOSES
Aggregate gross unrealized appreciation for securities in which there is an
excess of value over tax cost is $8,547,833, aggregate gross unrealized
depreciation for securities in which there is an excess of tax cost over value
is $1,288,163, and net unrealized appreciation for Federal income tax purposes
is $7,259,670. Federal income tax cost basis of portfolio securities is
$51,782,308 at June 30, 1997.
<PAGE>
31
OCC ACCUMULATION TRUST
SMALL CAP PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
(5) AFFILIATED TRANSACTION
On July 22, 1997, PIMCO Advisors L.P. ("PIMCO Advisors"), a registered
investment adviser with approximately $119 billion in assets under management
through various subsidiaries and its affiliate Thomson Advisory Group Inc.
("TAG"), signed an Amended and Restated Merger Agreement with Oppenheimer Group,
Inc. ("OGI"), its subsidiary Oppenheimer Financial Corp. ("Opfin") and certain
related parties pursuant to which PIMCO Advisors and TAG and its successor, will
acquire the one-third managing general partner interest in Oppenheimer Capital,
its 1.0% general partner interest in OpCap Advisors, and its 1.0% general
partner interest in Oppenheimer Capital L.P. (the "Transaction"). If the
Transaction is consummated, it will involve a change in control of Oppenheimer
Capital and its subsidiary OpCap Advisors which will constitute an assignment
and termination of the Investment Advisory Agreement with the Trust. At a
meeting held on February 28, 1997, the Trustees, including all independent
Trustees, approved and determined to submit to shareholders for approval, a new
Investment Advisory Agreement with OpCap Advisors, substantially upon the same
terms and conditions as the existing Investment Advisory Agreement. Proxy
material will be sent to shareholders concerning the new Investment Advisory
Agreement.
<PAGE>
32
OCC ACCUMULATION TRUST
SMALL CAP PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
SIX MONTHS ENDED ---------------------------- SEPTEMBER 16, 1994(1)
JUNE 30, 1997(7) 1996 1995 TO DECEMBER 31, 1994
--------------- ----------- ----------- ---------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period............................. $ 22.61 $ 19.91 $ 17.38 $ 17.49
----------- ----------- ----------- ----------
Income from investment
operations:
Net investment income............... 0.03 0.14 0.26 0.06
Net realized and unrealized
gain (loss) on
investments........................ 3.14 3.45 2.37 (0.17)
----------- ----------- ----------- ----------
Total from investment
operations........................ 3.17 3.59 2.63 (0.11)
----------- ----------- ----------- ----------
Dividends and distributions
to shareholders:
Dividends to shareholders
from net investment
income............................. (0.13) (0.25) (0.05) --
Distributions to shareholders
from net realized gains............ (0.92) (0.64) (0.05) --
----------- ----------- ----------- ----------
Total dividends and
distributions to
shareholders...................... (1.05) (0.89) (0.10) --
----------- ----------- ----------- ----------
Net asset value, end of
period............................. $ 24.73 $ 22.61 $ 19.91 $ 17.38
=========== =========== =========== ==========
Total return (2).................... 14.6% 18.7% 15.2% (0.6%)
=========== =========== =========== ==========
Net assets, end of period........... $58,948,669 $34,256,671 $16,004,392 $9,210,443
----------- ----------- ----------- ----------
Ratio of net operating
expenses to average net
assets (5)......................... 0.99%(3,4) 0.93%(6) 0.74%(6) 0.74%(3,6)
----------- ----------- ----------- ----------
Ratio of net investment
income to average net
assets............................. 0.60%(3,4) 1.03%(6) 1.75%(6) 1.22%(3,6)
----------- ----------- ----------- ----------
Portfolio turnover rate............. 54% 50% 69% 32%
----------- ----------- ----------- ----------
Average commission rate............. $ 0.0544 $ 0.0493 -- --
----------- ----------- ----------- ----------
</TABLE>
- ----------------
(1) Commencement of operations.
(2) Assumes reinvestment of all dividends and distributions. Aggregate (not
annualized) total return is shown for any period shorter than one year.
(3) Annualized.
(4) Average net assets for the six months ended June 30, 1997 were $43,502,064.
(5) For fiscal periods ending after September 1, 1995, the ratios are calculated
to include expenses offset by earnings credits from a custodian bank (See
note 1G in Notes to Financial Statements).
(6) During the periods noted above, the Adviser waived a portion or all of its
fees and assumed a portion of the Portfolio's operating expenses. If such
waivers and assumptions had not been in effect, the ratios of net operating
expenses to average net assets and the ratios of net investment income to
average net assets would have been, 1.01% and 0.92%, respectively, for the
year ended December 31, 1996, 0.99% and 1.50%, respectively, for the year
ended December 31, 1995 and 1.64% and 0.32%, annualized, respectively, for
the period September 16, 1994 (commencement of operations) to December 31,
1994.
(7) Unaudited.
<PAGE>
33
OCC ACCUMULATION TRUST
MANAGED PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED)
JUNE 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- -----------
<C> <S> <C>
U.S. GOVERNMENT AGENCY NOTES - 1.4%
Federal Home Loan Bank,
$ 525,000 5.36%, 7/1/97................................................... $ 525,000
1,245,000 5.40%, 7/24/97.................................................. 1,240,705
2,190,000 5.40%, 8/7/97................................................... 2,177,845
-----------
Total U.S. Government Agency Notes (cost - $3,943,550).......... $ 3,943,550
-----------
SHORT-TERM CORPORATE NOTES - 22.8%
AUTOMOTIVE - 1.8%
Ford Motor Credit Co.,
$4,445,000 5.53%, 7/31/97.................................................. $ 4,424,516
590,000 5.54%, 7/31/97.................................................. 587,276
-----------
5,011,792
-----------
BANKING - 4.3%
12,295,000 Norwest Financial Inc., 5.53%, 7/14/97.......................... 12,270,447
-----------
CONGLOMERATES - 4.0%
11,400,000 General Electric Capital Corp., 5.54%, 7/31/97.................. 11,347,370
-----------
MACHINERY/ENGINEERING - 2.9%
Deere (John) Capital Corp.,
4,830,000 5.45%, 7/3/97................................................... 4,828,538
2,010,000 5.49%, 7/3/97................................................... 2,009,387
1,390,000 5.53%, 7/28/97.................................................. 1,384,235
-----------
8,222,160
-----------
MISCELLANEOUS FINANCIAL SERVICES - 8.9%
10,000,000 American Express Credit Corp., 5.54%, 7/29/97................... 9,956,911
5,380,000 Household Finance Corp., 5.50%, 7/14/97......................... 5,369,315
9,940,000 Merrill Lynch & Co., Inc., 5.55%, 7/21/97....................... 9,909,352
-----------
25,235,578
-----------
TECHNOLOGY - .9%
IBM Credit Corp.,
675,000 5.50%, 7/15/97.................................................. 673,556
1,810,000 5.51%, 7/15/97.................................................. 1,806,122
-----------
2,479,678
-----------
Total Short-Term Corporate Notes (cost - $64,567,025)........... $64,567,025
-----------
U.S. TREASURY NOTES AND BONDS - .6%
$ 700,000 6.25%, 8/15/23.................................................. $ 648,046
630,000 7.875%, 4/15/98................................................. 640,237
297,500 7.875%, 8/15/01................................................. 313,538
-----------
Total U.S. Treasury Notes and Bonds (cost - $1,512,217)......... $ 1,601,821
-----------
</TABLE>
<PAGE>
34
OCC ACCUMULATION TRUST
MANAGED PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- -----------
<C> <S> <C>
CONVERTIBLE CORPORATE BOND - .2%
REAL ESTATE - .2%
$ 614,371 Security Capital Group, Inc., 12.00%, 6/30/14 (A)
(cost - $557,508)........................................... $ 739,294
-----------
SHARES
- ----------
CONVERTIBLE PREFERRED STOCK - .0%
RETAIL - .0%
2,478 Venture Stores, Inc., $3.25 Conv. Pfd. (cost - $102,527)... $ 39,029
-----------
COMMON STOCKS - 78.2%
AEROSPACE/DEFENSE - 6.8%
60,000 Lockheed Martin Corp....................................... $ 6,213,750
190,000 McDonnell Douglas Corp..................................... 13,015,000
-----------
19,228,750
-----------
BANKING - 11.8%
90,000 BankBoston Corp............................................ 6,485,625
97,000 Citicorp................................................... 11,694,562
10,400 First Empire State Corp.................................... 3,504,800
44,000 Wells Fargo & Co........................................... 11,858,000
-----------
33,542,987
-----------
CHEMICALS - 7.6%
210,000 du Pont (E.I.) de Nemours & Co............................. 13,203,750
100,000 Hercules, Inc.............................................. 4,787,500
80,000 Monsanto Co................................................ 3,445,000
-----------
21,436,250
-----------
COMPUTER SERVICES - 1.0%
50,000 Computer Associates International Inc...................... 2,784,375
-----------
CONGLOMERATES - 3.2%
200,000 Tenneco, Inc............................................... 9,037,500
-----------
CONSUMER PRODUCTS - 3.9%
325,200 Mattel, Inc................................................ 11,016,150
-----------
DRUGS & MEDICAL PRODUCTS - 2.3%
130,000 Becton, Dickinson & Co..................................... 6,581,250
-----------
ENERGY - 1.3%
70,000 Triton Energy Ltd.*........................................ 3,206,875
20,000 Union Pacific Resources Group, Inc......................... 497,500
-----------
3,704,375
-----------
FOOD SERVICES - 3.6%
210,000 McDonald's Corp............................................ 10,145,625
-----------
</TABLE>
<PAGE>
35
OCC ACCUMULATION TRUST
MANAGED PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- -----------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
INSURANCE - 5.0%
74,700 ACE Ltd......................................... $ 5,518,462
138,600 EXEL Ltd........................................ 7,311,150
15,400 Transamerica Corp............................... 1,440,863
-----------
14,270,475
-----------
MACHINERY/ENGINEERING - 4.2%
110,000 Caterpillar, Inc................................ 11,811,250
-----------
METALS & MINING - 2.0%
182,300 Freeport McMoRan Copper & Gold (Class B)........ 5,674,088
-----------
MISCELLANEOUS FINANCIAL SERVICES - 10.1%
70,000 American Express Co............................. 5,215,000
130,000 Countrywide Credit Industries, Inc.............. 4,054,375
355,000 Federal Home Loan Mortgage Corp................. 12,203,125
160,600 Federal National Mortgage Assoc................. 7,006,175
-----------
28,478,675
-----------
PAPER PRODUCTS - 2.9%
150,000 Champion International Corp..................... 8,287,500
-----------
PRINTING/PUBLISHING - .3%
25,000 Donnelley (R.R.) & Sons Co...................... 915,625
-----------
RAILROADS - 2.1%
85,000 Union Pacific Corp.............................. 5,992,500
-----------
REAL ESTATE - .4%
811 Security Capital Group, Inc. (A)................ 1,020,796
-----------
TECHNOLOGY - 5.0%
38,900 Intel Corp...................................... 5,516,506
206,400 National Semiconductor Corp.*................... 6,321,000
48,000 Unitrode Corp.*................................. 2,418,000
-----------
14,255,506
-----------
TELECOMMUNICATIONS - 4.2%
800,000 Tele-Communications, Inc. (Class A)*............ 11,900,000
-----------
</TABLE>
<PAGE>
36
OCC ACCUMULATION TRUST
MANAGED PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
- ------- ------------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
WASTE DISPOSAL - .5%
47,818 Waste Management Inc............................................. $ 1,536,153
------------
Total Common Stocks (cost - $157,878,096)........................ $221,619,830
------------
Total Investments (cost - $228,560,923)................ 103.2% $292,510,549
Liabilities in Excess of Other Assets.................. (3.2) (9,104,888)
----- ------------
Total Net Assets....................................... 100.0% $283,405,661
===== ============
</TABLE>
- ----------------
* Non-income producing security.
(A) Restricted Securities (the Portfolio will not bear any costs, including
those involved in registration under the Securities Act of 1933, in
connection with the disposition of these securities):
<TABLE>
<CAPTION>
DATE OF PAR AVERAGE FAIR VALUE AS OF
DESCRIPTION ACQUISITION AMOUNT SHARES COST JUNE 30, 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Security Capital Group, Inc. 12.00%, 6/30/14......... 9/16/94 $614,371 -- $ 91 $ 120
Security Capital Group, Inc. Common Stock............ 9/16/94 -- 811 949 1,259
</TABLE>
See accompanying notes to financial statements.
<PAGE>
37
OCC ACCUMULATION TRUST
MANAGED PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
JUNE 30, 1997
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost - $228,560,923).................................. $292,510,549
Cash......................................................................... 20,234
Receivable from fund shares sold............................................. 154,952
Interest receivable.......................................................... 119,182
Dividends receivable......................................................... 101,991
Other assets................................................................. 4,301
------------
Total Assets............................................................... 292,911,209
------------
LIABILITIES
Payable for investments purchased............................................ 9,303,187
Payable for fund shares redeemed............................................. 136,128
Investment advisory fee payable.............................................. 18,581
Other payables and accrued expenses.......................................... 47,652
------------
Total Liabilities.......................................................... 9,505,548
------------
Total Net Assets........................................................... $283,405,661
============
COMPOSITION OF NET ASSETS
Par value ($.01 per share)................................................... $ 71,753
Paid-in-capital in excess of par............................................. 213,136,971
Accumulated undistributed net investment income.............................. 1,561,847
Accumulated undistributed net realized gain on investments................... 4,685,464
Net unrealized appreciation on investments................................... 63,949,626
------------
Total Net Assets........................................................... $283,405,661
============
Fund shares outstanding...................................................... 7,175,255
------------
Net asset value per share.................................................... $ 39.50
============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
38
OCC ACCUMULATION TRUST
MANAGED PORTFOLIO
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends.................................................................... $ 1,298,226
Interest..................................................................... 1,254,905
-----------
Total investment income.................................................... 2,553,131
-----------
OPERATING EXPENSES
Investment advisory fees (note 2A)........................................... 888,578
Reports and notices to shareholders.......................................... 20,179
Custodian fees (note 1G)..................................................... 20,146
Trustees' fees and expenses.................................................. 12,767
Audit fees................................................................... 8,889
Transfer and dividend disbursing agent fees.................................. 5,782
Legal fees................................................................... 4,699
Miscellaneous................................................................ 30,941
-----------
Total operating expenses................................................... 991,981
Less: Expenses offset (note 1G)............................................ (698)
-----------
Net operating expenses................................................... 991,283
-----------
Net investment income.................................................... 1,561,848
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS - NET
Net realized gain on investments............................................. 4,685,469
Net change in unrealized appreciation (depreciation) on investments.......... 24,338,046
-----------
Net realized gain and change in unrealized appreciation (depreciation) on
investments................................................................ 29,023,515
-----------
Net increase in net assets resulting from operations......................... $30,585,363
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
39
OCC ACCUMULATION TRUST
MANAGED PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997(1) DECEMBER 31, 1996
---------------- -----------------
<S> <C> <C>
OPERATIONS
Net investment income......................................... $ 1,561,848 $ 2,161,819
Net realized gain on investments.............................. 4,685,469 6,639,637
Net change in unrealized appreciation (depreciation) on
investments.................................................. 24,338,046 18,285,659
------------ ------------
Net increase in net assets resulting from operations....... 30,585,363 27,087,115
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Net investment income......................................... (2,161,819) (1,378,070)
Net realized gains............................................ (6,639,642) (878,874)
------------ ------------
Total dividends and distributions to shareholders.......... (8,801,461) (2,256,944)
------------ ------------
FUND SHARE TRANSACTIONS
Net proceeds from sales....................................... 82,323,735 79,297,599
Reinvestment of dividends and distributions................... 8,801,461 2,256,944
Cost of shares redeemed....................................... (10,231,531) (24,844,767)
------------ ------------
Net increase in net assets from fund share
transactions.............................................. 80,893,665 56,709,776
------------ ------------
Total increase in net assets............................. 102,677,567 81,539,947
NET ASSETS
Beginning of period........................................... 180,728,094 99,188,147
------------ ------------
End of period (including undistributed net investment income
of $1,561,847 and $2,161,818, respectively).................. $283,405,661 $180,728,094
============ ============
SHARES ISSUED AND REDEEMED
Issued........................................................ 2,214,230 2,403,077
Issued in reinvestment of dividends and distributions......... 243,943 73,016
Redeemed...................................................... (274,288) (775,472)
------------ ------------
Net increase............................................... 2,183,885 1,700,621
============ ============
</TABLE>
- -----------------
(1) Unaudited.
See accompanying notes to financial statements.
<PAGE>
40
OCC ACCUMULATION TRUST
MANAGED PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1997
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
OCC Accumulation Trust (the "Trust") was organized May 12, 1994 as a
Massachusetts business trust and is registered under the Investment Company Act
of 1940, as amended, as a diversified, open-end management investment company.
The Trust is authorized to issue an unlimited number of six classes of shares of
beneficial interest at $.01 par value. The Trust is comprised of six portfolios:
the Equity Portfolio, the Small Cap Portfolio, the Global Equity Portfolio, the
Managed Portfolio (the "Portfolio"), the U.S. Government Income Portfolio and
the Money Market Portfolio. OpCap Advisors (the "Adviser"), a majority-owned
(99%) subsidiary of Oppenheimer Capital, serves as the Trust's investment
adviser. The Trust is an investment vehicle for variable annuity and variable
life insurance contracts of various life insurance companies, and qualified
pension and retirement plans. The following is a summary of significant
accounting policies consistently followed by the Portfolio in the preparation of
its financial statements:
(A) VALUATION OF INVESTMENTS
Investment securities, other than debt securities, listed on a national
exchange or traded in the over-the-counter National Market System are valued
each business day at the last reported sale price; if there are no such reported
sales, the securities are valued at their last quoted bid price. Other
securities traded over-the-counter and not part of the National Market System
are valued at the last quoted bid price. Investment debt securities (other than
short-term obligations) are valued each business day by an independent pricing
service (approved by the Board of Trustees) using methods which include current
market quotations from a major market maker in the securities and trader-
reviewed "matrix" prices. Short-term debt securities having a remaining maturity
of sixty days or less are valued at amortized cost or amortized value, which
approximates market value. Any securities or other assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by the Board of Trustees. The ability of issuers of debt instruments
to meet their obligations may be affected by economic developments in a specific
industry or region.
(B) FEDERAL INCOME TAXES
It is the Portfolio's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to shareholders; accordingly,
no Federal income tax provision is required.
(C) INVESTMENT TRANSACTIONS AND OTHER INCOME
Investment transactions are accounted for on the trade date. In determining
the gain or loss from the sale of investments, the cost of investments sold has
been determined on the basis of identified cost. Dividend income is recorded on
the ex-dividend date and interest income is accrued as earned. Discounts or
premiums on debt securities purchased are accreted or amortized to interest
income over the lives of the respective securities.
(D) DIVIDENDS AND DISTRIBUTIONS
Dividends and distributions to shareholders from net investment income and
net realized capital gains, if any, are declared and paid at least annually.
The Portfolio records dividends and distributions to its shareholders on
the ex-dividend date. The amount of dividends and distributions are determined
in accordance with Federal income tax regulations, which may differ from
generally accepted accounting principles. These "book-tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are
<PAGE>
41
OCC ACCUMULATION TRUST
MANAGED PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) DIVIDENDS AND DISTRIBUTIONS (CONTINUED)
reclassified within the capital accounts based on their Federal income tax
treatment; temporary differences do not require reclassification. To the extent
dividends and/or distributions exceed current and accumulated earnings and
profits for Federal income tax purposes, they are reported as dividends and/or
distributions of paid-in-capital or tax return of capital.
(E) ALLOCATION OF EXPENSES
Expenses specifically identifiable to a particular portfolio are borne by
that portfolio. Other expenses are allocated to each portfolio based on its net
assets in relation to the total net assets of all applicable portfolios of the
Trust or another reasonable basis.
(F) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
(G) CUSTODY OFFSETS
The Portfolio benefits from an expense offset arrangement with its
custodian bank where uninvested cash balances earn credits that reduce monthly
fees. Had these cash balances been invested in income producing securities, they
would have generated income for the Portfolio.
(2) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
(A) The investment advisory fee is accrued daily and payable monthly to the
Adviser, and is computed as a percentage of the Portfolio's net assets as of the
close of business each day at the annual rate of .80% on the first $400 million,
.75% on the next $400 million and .70% thereafter. The Adviser has voluntarily
agreed to waive that portion of the advisory fee necessary to limit total
operating expenses of the Portfolio to 1.00% (net of expenses offset) of average
net assets on an annual basis.
(B) Total brokerage commissions paid by the Portfolio for the six months
ended June 30, 1997 amounted to $64,187, of which Oppenheimer & Co., Inc., an
affiliate of the Adviser, received $24,908.
(3) PURCHASES AND SALES OF INVESTMENTS
For the six months ended June 30, 1997, purchases and sales of investment
securities, other than short-term securities, were $51,856,834 and $13,672,297,
respectively.
(4) UNREALIZED APPRECIATION (DEPRECIATION) AND COST OF INVESTMENTS FOR FEDERAL
INCOME TAX PURPOSES
Aggregate gross unrealized appreciation for securities in which there is an
excess of value over tax cost is $64,137,022, aggregate gross unrealized
depreciation for securities in which there is an excess of tax cost over value
is $187,396 and net unrealized appreciation for Federal income tax purposes is
$63,949,626. Federal income tax cost basis of portfolio securities is
$228,560,923 at June 30, 1997.
<PAGE>
42
OCC ACCUMULATION TRUST
MANAGED PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
(5) AFFILIATED TRANSACTION
On July 22, 1997, PIMCO Advisors L.P. ("PIMCO Advisors"), a registered
investment adviser with approximately $119 billion in assets under management
through various subsidiaries and its affiliate Thomson Advisory Group Inc.
("TAG"), signed an Amended and Restated Merger Agreement with Oppenheimer Group,
Inc. ("OGI"), its subsidiary Oppenheimer Financial Corp. ("Opfin") and certain
related parties pursuant to which PIMCO Advisors and TAG and its successor, will
acquire the one-third managing general partner interest in Oppenheimer Capital,
its 1.0% general partner interest in OpCap Advisors, and its 1.0% general
partner interest in Oppenheimer Capital L.P. (the "Transaction"). If the
Transaction is consummated, it will involve a change in control of Oppenheimer
Capital and its subsidiary OpCap Advisors which will constitute an assignment
and termination of the Investment Advisory Agreement with the Trust. At a
meeting held on February 28, 1997, the Trustees, including all independent
Trustees, approved and determined to submit to shareholders for approval, a new
Investment Advisory Agreement with OpCap Advisors, substantially upon the same
terms and conditions as the existing Investment Advisory Agreement. Proxy
material will be sent to shareholders concerning the new Investment Advisory
Agreement.
<PAGE>
43
OCC ACCUMULATION TRUST
MANAGED PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
SIX MONTHS ENDED ----------------------------- SEPTEMBER 16, 1994(1)
JUNE 30, 1997(7) 1996 1995 TO DECEMBER 31, 1994
---------------- ------------ ----------- ---------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period............................ $ 36.21 $ 30.14 $ 20.83 $ 21.80
------------ ------------ ----------- -----------
Income from investment
operations:
Net investment income.............. 0.18 0.43 0.42 0.14
Net realized and unrealized
gain (loss) on
investments....................... 4.73 6.31 9.02 (1.11)
------------ ------------ ----------- -----------
Total from investment
operations....................... 4.91 6.74 9.44 (0.97)
------------ ------------ ----------- -----------
Dividends and distributions
to shareholders:
Dividends to shareholders
from net investment
income............................ (0.40) (0.41) (0.13) --
Distributions to shareholders
from net realized gains........... (1.22) (0.26) -- --
------------ ------------ ----------- -----------
Total dividends and
distributions to
shareholders..................... (1.62) (0.67) (0.13) --
------------ ------------ ----------- -----------
Net asset value, end of
period............................ $ 39.50 $ 36.21 $ 30.14 $ 20.83
============ ============ =========== ============
Total return (2)................... 14.0% 22.8% 45.6% (4.4%)
============ ============ =========== ============
Net assets, end of period.......... $283,405,661 $180,728,094 $99,188,147 $54,943,371
------------ ------------ ----------- -----------
Ratio of net operating
expenses to average net
assets (5)........................ 0.89%(3,4) 0.84%(6) 0.66%(6) 0.66%(3,6)
------------ ------------ ----------- -----------
Ratio of net investment
income to average net
assets............................ 1.41%(3,4) 1.66%(6) 1.85%(6) 2.34%(3,6)
------------ ------------ ----------- -----------
Portfolio turnover rate............ 7% 27% 22% 8%
------------ ------------ ----------- -----------
Average commission rate............ $ 0.0574 $ 0.0592 -- --
------------ ------------ ----------- -----------
</TABLE>
- -----------------
(1) Commencement of operations.
(2) Assumes reinvestment of all dividends and distributions. Aggregate (not
annualized) total return is shown for any period shorter than one year.
(3) Annualized.
(4) Average net assets for the six months ended June 30, 1997 were $223,985,374.
(5) For fiscal periods ending after September 1, 1995, the ratios are calculated
to include expenses offset by earnings credits from a custodian bank (See
note 1G in Notes to Financial Statements).
(6) During the periods noted above, the Adviser waived a portion of its fees. If
such waivers had not been in effect, the ratios of net operating expenses to
average net assets and the ratios of net investment income to average net
assets would have been, 0.85% and 1.65%, respectively, for the year ended
December 31, 1996, 0.74% and 1.77%, respectively, for the year ended
December 31, 1995 and 0.96% and 2.04%, annualized, respectively, for the
period September 16, 1994 (commencement of operations) to December 31, 1994.
(7) Unaudited.
<PAGE>
44
OCC ACCUMULATION TRUST
MONEY MARKET PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED)
JUNE 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- -----------
<C> <S> <C>
U.S. GOVERNMENT AGENCY NOTES - 19.8%
$ 80,000 Federal Farm Credit Bank, 5.18%, 10/17/97........................ $ 78,757
960,000 Federal Home Loan Bank, 6.00%, 7/1/97............................ 960,000
----------
Total U.S. Government Agency Notes (amortized cost -
$1,038,757)..................................................... $1,038,757
----------
SHORT-TERM CORPORATE NOTES - 80.5%
AUTOMOTIVE - 9.1%
$ 150,000 American Honda Finance Corp., 5.58%, 7/24/97..................... $ 149,465
170,000 Ford Motor Credit Co., 5.58%, 9/8/97............................. 168,182
160,000 General Motors Acceptance Corp., 5.56%, 8/25/97.................. 158,641
----------
476,288
----------
BANKING - 8.6%
100,000 Morgan (J.P.) & Co., Inc., 5.50%, 7/23/97........................ 99,664
150,000 Svenska Handelsbanken Inc., 5.60%, 7/1/97........................ 150,000
200,000 UBS Finance Delaware, Inc., 5.52%, 7/14/97....................... 199,601
----------
449,265
----------
BROKERAGE - 5.6%
150,000 Goldman Sachs Group, L.P., 5.62%, 9/2/97......................... 148,525
150,000 Morgan Stanley Group, Inc., 5.56%, 8/11/97....................... 149,050
----------
297,575
----------
CONGLOMERATES - 6.8%
190,000 General Electric Capital Corp., 5.56%, 10/27/97.................. 186,537
175,000 Mitsubishi International, 5.60%, 7/28/97......................... 174,265
----------
360,802
----------
ENTERTAINMENT - 3.8%
200,000 Walt Disney Co., 5.48%, 7/7/97................................... 199,817
----------
INSURANCE - 5.8%
120,000 Aetna Services Inc., 5.62%, 7/7/97............................... 119,888
185,000 Prudential Funding Corp., 5.53%, 7/16/97......................... 184,574
----------
304,462
----------
MACHINERY/ENGINEERING - 5.6%
140,000 Deere (John) Capital Corp., 5.54%, 9/15/97....................... 138,363
160,000 Pitney Bowes Credit Corp., 5.65%, 10/1/97........................ 157,690
----------
296,053
----------
</TABLE>
<PAGE>
45
OCC ACCUMULATION TRUST
MONEY MARKET PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- ----------
<C> <S> <C>
SHORT-TERM CORPORATE NOTES (CONTINUED)
MISCELLANEOUS FINANCIAL SERVICES - 11.4%
$ 160,000 American Express Credit Corp., 5.56%, 7/7/97.......... $ 159,852
160,000 Associates Corp. N.A., 5.55%, 8/11/97................. 158,988
110,000 Beneficial Corp., 5.31%, 7/14/97...................... 109,789
170,000 Household Finance Corp., 5.52%, 7/18/97............... 169,557
----------
598,186
----------
SOVEREIGN - 3.4%
180,000 Eksportfinans A/S, 5.60%, 8/29/97..................... 178,348
----------
TECHNOLOGY - 6.5%
185,000 IBM Credit Corp., 5.54%, 8/18/97...................... 183,633
160,000 Motorola Credit Corp., 5.50%, 7/24/97................. 159,438
----------
343,071
----------
TELECOMMUNICATIONS - 8.2%
110,000 American Telephone & Telegraph Co., 5.52%, 7/28/97.... 109,544
120,000 Ameritech Corp., 5.50%, 7/14/97....................... 119,762
200,000 BellSouth Telecommunications Inc., 5.47%, 7/2/97...... 199,970
----------
429,276
----------
TOBACCO/BEVERAGES/FOOD PRODUCTS - 5.7%................
120,000 Coca Cola Co., 5.40%, 7/29/97......................... 119,491
180,000 PepsiCo Inc., 5.47%, 7/2/97........................... 179,973
----------
299,464
----------
Total Short-Term Corporate Notes (amortized cost -
$4,232,607)......................................... $4,232,607
----------
Total Investments (amortized cost - $5,271,364) 100.3% $5,271,364
Liabilities in Excess of Other Assets.......... (0.3) (17,639)
----- ----------
Total Net Assets............................... 100.0% $5,253,725
----- ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
46
OCC ACCUMULATION TRUST
MONEY MARKET PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
JUNE 30, 1997
<TABLE>
<S> <C>
ASSETS
Investments, at value (amortized cost - $5,271,364)................ $5,271,364
Cash............................................................... 5,443
Other assets....................................................... 585
----------
Total Assets..................................................... 5,277,392
----------
LIABILITIES
Dividends payable................................................... 7,460
Payable for fund shares redeemed.................................... 2,614
Investment advisory fee payable..................................... 173
Other payables and accrued expenses................................. 13,420
----------
Total Liabilities................................................. 23,667
----------
Total Net Assets.................................................. $5,253,725
==========
COMPOSITION OF NET ASSETS
Par value ($.01 per share).......................................... $ 52,537
Paid-in-capital in excess of par.................................... 5,201,207
Accumulated net realized loss on investments........................ (19)
----------
Total Net Assets.................................................. $5,253,725
==========
Fund shares outstanding............................................. 5,253,743
----------
Net asset value per share........................................... $ 1.00
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
47
OCC ACCUMULATION TRUST
MONEY MARKET PORTFOLIO
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest........................................................... $129,999
--------
OPERATING EXPENSES
Investment advisory fees (note 2).................................... 9,477
Custodian fees (note 1G)............................................. 4,686
Transfer and dividend disbursing agent fees.......................... 4,527
Audit fees........................................................... 3,873
Legal fees........................................................... 955
Reports and notices to shareholders.................................. 612
Miscellaneous........................................................ 2,820
--------
Total operating expenses........................................... 26,950
Less: Investment advisory fees waived (note 2)..................... (3,439)
Less: Expenses offset (note 1G).................................... (208)
--------
Net operating expenses........................................... 23,303
--------
Net investment income............................................ 106,696
--------
REALIZED LOSS ON INVESTMENTS - NET
Net realized loss on investments..................................... (6)
--------
Net increase in net assets resulting from operations................. $106,690
========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
48
OCC ACCUMULATION TRUST
MONEY MARKET PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997(1) DECEMBER 31, 1996
---------------- -----------------
<S> <C> <C>
OPERATIONS
Net investment income.................................... $ 106,696 $ 181,416
Net realized loss on investments......................... (6) (14)
----------- -----------
Net increase in net assets resulting from
operations............................................ 106,690 181,402
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Net investment income.................................... (106,696) (181,416)
Net realized gains....................................... -- (46)
----------- -----------
Total dividends and distributions to shareholders...... (106,696) (181,462)
----------- -----------
FUND SHARE TRANSACTIONS
Net proceeds from sales.................................. 2,103,920 6,146,104
Reinvestment of dividends and distributions.............. 99,926 182,704
Cost of shares redeemed.................................. (2,229,157) (5,405,790)
----------- -----------
Net increase (decrease) in net assets from fund share
transactions.......................................... (25,311) 923,018
----------- -----------
Total increase (decrease) in net assets.............. (25,317) 922,958
NET ASSETS
Beginning of period...................................... 5,279,042 4,356,084
----------- -----------
End of period (including undistributed net investment
income of $0 and $0, respectively)...................... $ 5,253,725 $ 5,279,042
=========== ===========
SHARES ISSUED AND REDEEMED
Issued................................................... 2,103,920 6,146,104
Issued in reinvestment of dividends and distributions.... 99,926 182,704
Redeemed................................................. (2,229,157) (5,405,790)
----------- -----------
Net increase (decrease)................................ (25,311) 923,018
=========== ===========
</TABLE>
- ----------------
(1) Unaudited.
See accompanying notes to financial statements.
<PAGE>
49
OCC ACCUMULATION TRUST
MONEY MARKET PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1997
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
OCC Accumulation Trust (the "Trust") was organized May 12, 1994 as a
Massachusetts business trust and is registered under the Investment Company Act
of 1940, as amended, as a diversified, open-end management investment company.
The Trust is authorized to issue an unlimited number of six classes of shares of
beneficial interest at $.01 par value. The Trust is comprised of six portfolios:
the Equity Portfolio, the Small Cap Portfolio, the Global Equity Portfolio, the
Managed Portfolio, the U.S. Government Income Portfolio and the Money Market
Portfolio ("the Portfolio"). OpCap Advisors (the "Adviser"), a majority-owned
(99%) subsidiary of Oppenheimer Capital, serves as the Trust's investment
adviser. The Trust is an investment vehicle for variable annuity and variable
life insurance contracts of various life insurance companies, and qualified
pension and retirement plans. The following is a summary of significant
accounting policies consistently followed by the Portfolio in the preparation of
its financial statements:
(A) VALUATION OF INVESTMENTS
Portfolio securities are valued at amortized cost, which approximates
market value. The amortized cost method involves valuing a security at cost on
the date of purchase and thereafter assuming a constant dollar amortization to
maturity of the difference between the principal amount due at maturity and the
initial cost of the security.
(B) FEDERAL INCOME TAXES
It is the Portfolio's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to shareholders; accordingly,
no Federal income tax provision is required. Federal income tax cost basis of
portfolio securities is the same as for financial reporting purposes.
(C) INVESTMENT TRANSACTIONS AND OTHER INCOME
Investment transactions are accounted for on the trade date. In determining
the gain or loss from the sale of investments, the cost of investments sold has
been determined on the basis of identified cost. Interest income is accrued as
earned. Discounts or premiums on debt securities purchased are accreted or
amortized to interest income over the lives of the respective securities.
(D) DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income are declared daily and paid monthly.
Distributions from net realized capital gains, if any, are declared and paid at
least annually.
(E) ALLOCATION OF EXPENSES
Expenses specifically identifiable to a particular portfolio are borne by
that portfolio. Other expenses are allocated to each portfolio based on its net
assets in relation to the total net assets of all applicable portfolios of the
Trust or another reasonable basis.
(F) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
<PAGE>
50
OCC ACCUMULATION TRUST
MONEY MARKET PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(G) CUSTODY OFFSETS
The Portfolio benefits from an expense offset arrangement with its
custodian bank where uninvested cash balances earn credits that reduce monthly
fees. Had these cash balances been invested in income producing securities, they
would have generated income for the Portfolio.
(2) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The investment advisory fee is payable monthly to the Adviser, and is
computed as a percentage of the Portfolio's net assets as of the close of
business each day at the annual rate of .40%. The Adviser has agreed to waive
that portion of the advisory fee necessary to limit total operating expenses of
the Portfolio to 1.00% (net of expenses offset) of average net assets on an
annual basis.
(3) PURCHASES AND SALES OF INVESTMENTS
For the six months ended June 30, 1997, purchases and sales/maturities of
investment securities, were $24,904,984 and $25,044,398, respectively.
(4) AFFILIATED TRANSACTION
On July 22, 1997, PIMCO Advisors L.P. ("PIMCO Advisors"), a registered
investment adviser with approximately $119 billion in assets under management
through various subsidiaries and its affiliate Thomson Advisory Group Inc.
("TAG"), signed an Amended and Restated Merger Agreement with Oppenheimer Group,
Inc. ("OGI"), its subsidiary Oppenheimer Financial Corp. ("Opfin") and certain
related parties pursuant to which PIMCO Advisors and TAG and its successor, will
acquire the one-third managing general partner interest in Oppenheimer Capital,
its 1.0% general partner interest in OpCap Advisors, and its 1.0% general
partner interest in Oppenheimer Capital L.P. (the "Transaction"). If the
Transaction is consummated, it will involve a change in control of Oppenheimer
Capital and its subsidiary OpCap Advisors which will constitute an assignment
and termination of the Investment Advisory Agreement with the Trust. At a
meeting held on February 28, 1997, the Trustees, including all independent
Trustees, approved and determined to submit to shareholders for approval, a new
Investment Advisory Agreement with OpCap Advisors, substantially upon the same
terms and conditions as the existing Investment Advisory Agreement. Proxy
material will be sent to shareholders concerning the new Investment Advisory
Agreement.
<PAGE>
51
OCC ACCUMULATION TRUST
MONEY MARKET PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
SIX MONTHS ENDED ------------------------ SEPTEMBER 16, 1994(1)
JUNE 30, 1997(7) 1996 1995 TO DECEMBER 31, 1994
---------------- ---------- ---------- ---------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period............................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- ----------
Income from investment
operations:
Net investment income.................. 0.02 0.04 0.05 0.01
Net realized gain (loss) on
investments.......................... (0.00) (0.00) 0.00 --
---------- ---------- ---------- ----------
Total from investment
operations......................... 0.02 0.04 0.05 0.01
---------- ---------- ---------- ----------
Dividends and distributions to
shareholders:
Dividends to shareholders from
net investment income................ (0.02) (0.04) (0.05) (0.01)
Distributions to shareholders
from net realized gains.............. -- (0.00) -- --
---------- ---------- ---------- ----------
Total dividends and
distributions to
shareholders....................... (0.02) (0.04) (0.05) (0.01)
---------- ---------- ---------- ----------
Net asset value, end of
period............................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ==========
Total return (2)....................... 2.3% 4.5% 5.1% 1.2%
========== ========== ========== ==========
Net assets, end of period.............. $5,253,725 $5,279,042 $4,356,084 $3,519,526
---------- ---------- ---------- ----------
Ratio of net operating expenses
to average net assets
(5,6)................................ 0.99%(3,4) 1.01% 1.00% 1.00%(3)
---------- ---------- ---------- ----------
Ratio of net investment income
to average net assets (6)............ 4.50%(3,4) 4.43% 4.94% 4.13%(3)
---------- ---------- ---------- ----------
</TABLE>
- ----------------
(1) Commencement of operations.
(2) Assumes reinvestment of all dividends and distributions. Aggregate (not
annualized) total return is shown for any period shorter than one year.
(3) Annualized.
(4) Average net assets for the six months ended June 30, 1997 were $4,777,776.
(5) For fiscal periods ending after September 1, 1995, the ratios are calculated
to include expenses offset by earnings credits from a custodian bank (See
note 1G in Notes to Financial Statements).
(6) During the periods noted above, the Adviser waived a portion or all of its
fees and assumed a portion of the Portfolio's operating expenses. If such
waivers and assumptions had not been in effect, the ratios of net operating
expenses to average net assets and the ratios of net investment income to
average net assets would have been 1.14% and 4.36%, annualized,
respectively, for the six months ended June 30, 1997, 1.30% and 4.13%,
respectively, for the year ended December 31, 1996, 1.14% and 4.80%,
respectively, for the year ended December 31, 1995 and 2.03% and 3.10%,
annualized, respectively, for the period September 16, 1994 (commencement of
operations) to December 31, 1994.
(7) Unaudited.
<PAGE>
52
OCC ACCUMULATION TRUST
U.S. GOVERNMENT INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED)
JUNE 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- ----------
<C> <S> <C>
U.S. TREASURY NOTES - 49.1%
$ 300,000 5.75%, 8/15/03............................................... $ 289,686
480,000 5.875%, 1/31/99.............................................. 479,025
1,100,000 6.00%, 9/30/98............................................... 1,101,199
650,000 6.25%, 4/30/01............................................... 648,173
620,000 6.50%, 10/15/06.............................................. 617,384
125,000 7.25%, 5/15/04............................................... 130,293
----------
Total U.S. Treasury Notes (cost - $3,250,869)................ $3,265,760
----------
U.S. GOVERNMENT AGENCY NOTES - 28.8%
Federal Farm Credit Bank,
$ 25,000 5.41%, 7/2/97................................................ $ 24,996
75,000 8.65%, 10/1/99............................................... 78,633
Federal Home Loan Bank,
100,000 8.09%, 12/28/04.............................................. 107,937
155,000 8.60%, 8/25/99............................................... 162,265
Federal Home Loan Mortgage Corp.,
175,000 6.22%, 3/24/03............................................... 171,747
300,000 7.71%, 6/21/04............................................... 303,984
125,000 7.75%, 11/7/01............................................... 130,546
150,000 8.115%, 1/31/05.............................................. 161,788
Federal National Mortgage Assoc.,
60,000 5.375%, 6/10/98.............................................. 59,672
150,000 9.20%, 9/11/00............................................... 162,070
150,000 Private Export Funding Corp., 9.10%, 10/30/98.................. 155,601
Student Loan Marketing Assoc.,
75,000 7.00%, 3/3/98................................................ 75,563
100,000 7.20%, 11/9/00............................................... 102,328
Tennessee Valley Authority,
150,000 6.00%, 11/1/00............................................... 147,962
65,000 8.375%, 10/1/99.............................................. 67,783
----------
Total U.S. Government Agency Notes (cost - $1,906,262)......... $1,912,875
----------
</TABLE>
<PAGE>
53
OCC ACCUMULATION TRUST
U.S. GOVERNMENT INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- ----------
<C> <S> <C>
MORTGAGE-RELATED SECURITIES - 13.6%
Federal National Mortgage Assoc.,
$173,804 6.50%, 5/1/26....................................................... $ 166,363
182,890 7.00%, 1/1/10....................................................... 183,403
146,602 8.00%, 8/1/24....................................................... 150,175
115,003 8.00%, 12/1/24...................................................... 118,056
7,502 9.00%, 8/1/02....................................................... 7,778
17,538 9.50%, 12/1/06...................................................... 18,307
40,110 9.50%, 3/1/19....................................................... 43,180
72,407 9.50%, 12/1/19...................................................... 77,814
133,808 Government National Mortgage Assoc., 8.50%, 3/15/25................... 139,117
----------
Total Mortgage-Related Securities (cost - $889,581)................. $ 904,193
----------
CORPORATE NOTES - 6.9%
CONGLOMERATES - 1.6%
$100,000 General Electric Capital Corp., 8.375%, 3/1/01........................ $ 105,481
----------
MISCELLANEOUS FINANCIAL SERVICES - 5.3%
125,000 Associates Corp., N.A., 5.25%, 3/30/00................................ 120,928
125,000 International Lease Finance Corp., 6.125%, 11/1/99.................... 124,060
100,000 Lehman Brothers Holdings, Inc., 8.50%, 5/1/07......................... 107,652
----------
352,640
----------
Total Corporate Notes (cost - $451,722)............................. $ 458,121
----------
Total Investments (cost - $6,498,434)....................... 98.4% $6,540,949
Other Assets in Excess of Liabilities....................... 1.6 106,978
----- ----------
Total Net Assets............................................ 100.0% $6,647,927
===== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
54
OCC ACCUMULATION TRUST
U.S. GOVERNMENT INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
JUNE 30, 1997
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost - $6,498,434)...................................... $6,540,949
Cash........................................................................... 27,445
Interest receivable............................................................ 96,672
Receivable from fund shares sold............................................... 14,884
Other assets................................................................... 1,000
----------
Total Assets................................................................. 6,680,950
----------
LIABILITIES
Dividends payable.............................................................. 11,258
Payable for fund shares redeemed............................................... 2,573
Investment advisory fee payable................................................ 275
Other payables and accrued expenses............................................ 18,917
----------
Total Liabilities............................................................ 33,023
----------
Total Net Assets............................................................. $6,647,927
==========
COMPOSITION OF NET ASSETS
Par value ($.01 per share)..................................................... $ 6,436
Paid-in-capital in excess of par............................................... 6,622,946
Accumulated net realized loss on investments................................... (23,970)
Net unrealized appreciation on investments..................................... 42,515
----------
Total Net Assets............................................................. $6,647,927
==========
Fund shares outstanding........................................................ 643,563
----------
Net asset value per share...................................................... $ 10.33
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
55
OCC ACCUMULATION TRUST
U.S. GOVERNMENT INCOME PORTFOLIO
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest..................................................................... $161,985
--------
OPERATING EXPENSES
Investment advisory fees (note 2)............................................ 14,993
Custodian fees (note 1G)..................................................... 10,174
Transfer and dividend disbursing agent fees.................................. 6,033
Audit fees................................................................... 3,838
Reports and notices to shareholders.......................................... 1,136
Legal fees................................................................... 900
Miscellaneous................................................................ 1,238
--------
Total operating expenses.................................................. 38,312
Less: Investment advisory fees waived (note 2)............................ (13,132)
Less: Expenses offset (note 1G)........................................... (196)
--------
Net operating expenses................................................. 24,984
--------
Net investment income.................................................. 137,001
--------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS - NET
Net realized loss on investments............................................. (16,079)
Net change in unrealized appreciation (depreciation) on investments.......... 26,949
--------
Net realized loss and change in unrealized appreciation (depreciation) on
investments................................................................. 10,870
--------
Net increase in net assets resulting from operations........................... $147,871
========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
56
OCC ACCUMULATION TRUST
U.S. GOVERNMENT INCOME PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997(1) DECEMBER 31, 1996
---------------- -----------------
<S> <C> <C>
OPERATIONS
Net investment income......................................... $ 137,001 $ 130,053
Net realized loss on investments.............................. (16,079) (7,891)
Net change in unrealized appreciation (depreciation) on
investments.................................................. 26,949 (26,424)
---------- ----------
Net increase in net assets resulting from operations...... 147,871 95,738
---------- ----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Net investment income......................................... (137,001) (130,053)
Net realized gains............................................ -- --
---------- ----------
Total dividends and distributions to shareholders......... (137,001) (130,053)
---------- ----------
FUND SHARE TRANSACTIONS
Net proceeds from sales....................................... 3,495,129 2,180,216
Reinvestment of dividends and distributions................... 125,744 130,663
Cost of shares redeemed....................................... (405,814) (297,024)
---------- ----------
Net increase in net assets from fund share
transactions............................................. 3,215,059 2,013,855
---------- ----------
Total increase in net assets.......................... 3,225,929 1,979,540
NET ASSETS
Beginning of period........................................... 3,421,998 1,442,458
---------- ----------
End of period (including undistributed net investment income
of $0 and $0, respectively).................................. $6,647,927 $3,421,998
========== ==========
SHARES ISSUED AND REDEEMED
Issued........................................................ 341,129 209,939
Issued in reinvestment of dividends and distributions......... 12,193 12,589
Redeemed...................................................... (39,494) (28,592)
---------- ----------
Net increase.............................................. 313,828 193,936
========== ==========
</TABLE>
- -----------------
(1) Unaudited.
See accompanying notes to financial statements.
<PAGE>
57
OCC ACCUMULATION TRUST
U.S GOVERNMENT INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1997
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
OCC Accumulation Trust (the "Trust") was organized May 12, 1994 as a
Massachusetts business trust and is registered under the Investment Company Act
of 1940, as amended, as a diversified, open-end management investment company.
The Trust is authorized to issue an unlimited number of six classes of shares of
beneficial interest at $.01 par value. The Trust is comprised of six portfolios:
the Equity Portfolio, the Small Cap Portfolio, the Global Equity Portfolio, the
Managed Portfolio, the U.S. Government Income Portfolio (the "Portfolio") and
the Money Market Portfolio. OpCap Advisors (the "Adviser"), a majority-owned
(99%) subsidiary of Oppenheimer Capital, serves as the Trust's investment
adviser. The Trust is an investment vehicle for variable annuity and variable
life insurance contracts of various life insurance companies, and qualified
pension and retirement plans. The following is a summary of significant
accounting policies consistently followed by the Portfolio in the preparation of
its financial statements:
(A) VALUATION OF INVESTMENTS
Investment debt securities (other than short-term obligations) are valued
each business day by an independent pricing service (approved by the Board of
Trustees) using methods which include current market quotations from a major
market maker in the securities and trader-reviewed "matrix" prices. Short-term
debt securities having a remaining maturity of sixty days or less are valued at
amortized cost or amortized value which approximates market value. Any
securities or other assets for which market quotations are not readily available
are valued at their fair value as determined in good faith by the Board of
Trustees. The ability of issuers of debt instruments to meet their obligations
may be affected by economic developments in a specific industry or region.
(B) FEDERAL INCOME TAXES
It is the Portfolio's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to shareholders; accordingly,
no Federal income tax provision is required.
(C) INVESTMENT TRANSACTIONS AND OTHER INCOME
Investment transactions are accounted for on the trade date. In determining
the gain or loss from the sale of investments, the cost of investments sold has
been determined on the basis of identified cost. Interest income is accrued as
earned. Discounts or premiums on debt securities purchased are accreted or
amortized to interest income over the lives of the respective securities.
(D) DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income are declared daily and paid monthly.
Distributions from net realized capital gains, if any, are declared and paid at
least annually.
The Portfolio records dividends and distributions to its shareholders on
the ex-dividend date. The amount of dividends and distributions are determined
in accordance with Federal income tax regulations, which may differ from
generally accepted accounting principles. These "book-tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their Federal income tax treatment; temporary
differences do not require reclassification. To the extent dividends and/or
distributions exceed current and accumulated earnings and profits for Federal
income tax purposes, they are reported as dividends and/or distributions of
paid-in-capital or tax return of capital.
<PAGE>
58
OCC ACCUMULATION TRUST
U.S. GOVERNMENT INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 1997
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(E) ALLOCATION OF EXPENSES
Expenses specifically identifiable to a particular portfolio are borne by
that portfolio. Other expenses are allocated to each portfolio based on its net
assets in relation to the total net assets of all applicable portfolios or
another reasonable basis.
(F) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
(G) CUSTODY OFFSETS
The Portfolio benefits from an expense offset arrangement with its
custodian bank where uninvested cash balances earn credits that reduce monthly
fees. Had these cash balances been invested in income producing securities, they
would have generated income for the Portfolio.
(2) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The investment advisory fee is accrued daily and payable monthly to the
Adviser, and is computed as a percentage of the Portfolio's net assets as of the
close of business each day at the annual rate of .60%. The Adviser has agreed to
waive that portion of the advisory fee and to assume any necessary expenses to
limit total operating expenses of the Portfolio to 1.00% (net of expenses
offset) of average net assets on an annual basis.
(3) PURCHASES AND SALES OF SECURITIES
For the six months ended June 30, 1997 purchases and sales of investment
securities, other than short-term securities, were $6,237,713 and $3,017,417,
respectively.
(4) UNREALIZED APPRECIATION (DEPRECIATION) AND COST OF INVESTMENTS FOR FEDERAL
INCOME TAX PURPOSES
Aggregate gross unrealized appreciation for securities in which there is an
excess of value over tax cost is $69,498, aggregate gross unrealized
depreciation for securities in which there is an excess of tax cost over value
is $28,671 and net unrealized appreciation for Federal income tax purposes is
$40,827. Federal income tax cost basis of portfolio securities is $6,500,122 at
June 30, 1997.
(5) AFFILIATED TRANSACTION
On July 22, 1997, PIMCO Advisors L.P. ("PIMCO Advisors"), a registered
investment adviser with approximately $119 billion in assets under management
through various subsidiaries and its affiliate Thomson Advisory Group Inc.
("TAG") signed an Amended and Restated Merger Agreement with Oppenheimer Group,
Inc. ("OGI"), its subsidiary Oppenheimer Financial Corp. ("Opfin") and certain
related parties pursuant to which PIMCO Advisors and TAG and its successor, will
acquire the one-third managing general partner interest in Oppenheimer Capital,
its 1.0% general partner interest in OpCap Advisors, and its 1.0% general
partner interest in Oppenheimer Capital L.P. (the "Transaction"). If the
Transaction is consummated, it will involve a change in control of Oppenheimer
Capital and its subsidiary OpCap Advisors which will constitute an assignment
and termination of the Investment Advisory Agreement with the Trust. At a
meeting held on February 28, 1997, the Trustees, including all independent
Trustees, approved and determined to submit to shareholders for approval, a new
Investment Advisory Agreement with OpCap Advisors, substantially upon the same
terms and conditions as the existing Investment Advisory Agreement. Proxy
material will be sent to shareholders concerning the new Investment Advisory
Agreement.
<PAGE>
59
OCC ACCUMULATION TRUST
U.S. GOVERNMENT INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
JANUARY 3, 1995(1)
SIX MONTHS ENDED YEAR ENDED TO
JUNE 30, 1997(7) DECEMBER 31, 1996 DECEMBER 31, 1995
---------------- ----------------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period........... $ 10.38 $ 10.62 $ 10.00
---------- ---------- ----------
Income from investment operations:
Net investment income.......................... 0.28 0.55 0.60
Net realized and unrealized gain (loss)
on investments............................... (0.05) (0.24) 0.68
---------- ---------- ----------
Total from investment operations............. 0.23 0.31 1.28
---------- ---------- ----------
Dividends and distributions to shareholders:
Dividends to shareholders from net
investment income............................ (0.28) (0.55) (0.60)
Distributions to shareholders from net
realized gains............................... -- -- (0.06)
---------- ---------- ----------
Total dividends and distributions to
shareholders............................... (0.28) (0.55) (0.66)
---------- ---------- ----------
Net asset value, end of period................. $ 10.33 $ 10.38 $ 10.62
========== ========== ==========
Total return (2)............................... 2.2% 3.0% 13.1%
========== ========== ==========
Net assets, end of period...................... $6,647,927 $3,421,998 $1,442,458
---------- ---------- ----------
Ratio of net operating expenses to
average net assets (5,6)..................... 1.01%(3,4) 0.96% 0.75%(3)
---------- ---------- ----------
Ratio of net investment income to
average net assets (6)....................... 5.48%(3,4) 5.27% 5.75%(3)
---------- ---------- ----------
Portfolio turnover rate........................ 60% 31% 65%
---------- ---------- ----------
</TABLE>
- ----------------
(1) Commencement of operations.
(2) Assumes reinvestment of all dividends and distributions. Aggregate (not
annualized) total return is shown for any period shorter than one year.
(3) Annualized.
(4) Average net assets for the six months ended June 30, 1997 were $5,038,930.
(5) For fiscal periods ending after September 1, 1995, the ratios are
calculated to include expenses offset by earnings credits from a custodian
bank (See note 1G in Notes to Financial Statements).
(6) During the periods noted above, the Adviser waived a portion or all of its
fees and assumed a portion of the Portfolio's operating expenses. If such
waivers and assumptions had not been in effect, the ratios of net operating
expenses to average net assets and the ratios of net investment income to
average net assets would have been 1.53% and 4.96%, annualized,
respectively, for the six months ended June 30, 1997, and 2.34% and 3.87%,
respectively, for the year ended December 31, 1996 and 4.73% and 1.77%,
annualized, respectively, for the period January 3, 1995 (commencement of
operations) to December 31, 1995.
(7) Unaudited.
<PAGE>
60
OCC ACCUMULATION TRUST
GLOBAL EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED)
JUNE 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- ----------
<C> <S> <C>
U.S. GOVERNMENT AGENCY NOTES - 7.6%
Federal Home Loan Bank,
$ 265,000 5.40%, 7/24/97.......................................... $ 264,086
1,580,000 5.41%, 8/14/97.......................................... 1,569,553
----------
Total U.S. Government Agency Notes (cost - $1,833,639).. $1,833,639
----------
<CAPTION>
SHARES
<C> <S> <C>
COMMON STOCKS - 91.4%
AUSTRALIA - 1.0%
ENERGY - .5%
37,328 Novus Petroleum Ltd..................................... $ 128,358
----------
PAPER PRODUCTS - .5%
17,137 WMC Ltd................................................. 108,143
----------
Total Australian Common Stocks.......................... 236,501
----------
BERMUDA - 4.1%
INSURANCE - 4.1%
12,800 ACE Ltd................................................. 945,600
800 EXEL Ltd................................................ 42,200
----------
Total Bermuda Common Stocks............................. 987,800
----------
BRAZIL - 1.9%
BANKING - .5%
5,000 Bompreco Supermecados Norde* GDR........................ 121,500
----------
PAPER PRODUCTS - .3%
3,100 Aracruz Celulose SA ADR................................. 63,163
----------
TELECOMMUNICATIONS - .8%
3,200 Ericsson Telecomunicacoes SA............................ 190,237
----------
TEXTILES/APPAREL - .3%
210 Compahnia de Tecidos Norte de Minas-Conteminas.......... 81,928
----------
Total Brazilian Common Stocks........................... 456,828
----------
CANADA - 2.8%
ELECTRONICS - .4%
11,940 CAE, Inc................................................ 94,676
----------
ENERGY - 1.4%
3,000 PanCanadian Petroleum Ltd............................... 63,000
3,750 Precision Drilling Corp.*............................... 181,125
3,600 Suncor, Inc............................................. 95,413
----------
339,538
----------
</TABLE>
<PAGE>
61
OCC ACCUMULATION TRUST
GLOBAL EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
----------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
CANADA (CONTINUED)
PRINTING/PUBLISHING - .3%
3,250 Thomson Corp............................................ $ 75,664
----------
SECURITY/INVESTIGATION - .4%
4,500 Unican Security Systems Ltd............................. 90,590
----------
TRANSPORTATION - .3%
2,875 Canadian Pacific Ltd.................................... 81,298
----------
Total Canadian Common Stocks............................ 681,766
----------
CHILE - .3%
CONGLOMERATES - .3%
3,300 Quinenco SA* ADR........................................ 61,050
----------
CZECHOSLOVAKIA - .4%
TELECOMMUNICATIONS - .2%
550 SPT Telekom AS*......................................... 57,679
----------
MISCELLANEOUS FINANCIAL SERVICES - .2%
2,000 CKD Praha Holding AS*................................... 54,409
----------
Total Czechoslovakian Common Stocks..................... 112,088
----------
FINLAND - 1.6%
DRUGS & MEDICAL PRODUCTS - .2%
8,200 Oy Tamro AB............................................. 56,848
----------
TELECOMMUNICATIONS - 1.4%
4,500 Oy Nokia AB............................................. 335,372
----------
Total Finnish Common Stocks............................. 392,220
----------
FRANCE - 4.3%
ELECTRONICS - .9%
500 Le Carbone Lorraine..................................... 121,667
1,559 Schneider SA............................................ 82,981
----------
204,648
----------
ENERGY - .9%
2,116 Total SA................................................ 213,879
----------
INSURANCE - .7%
2,800 AXA*.................................................... 174,145
----------
MANUFACTURING - .4%
1,556 Michelin (CGDE)......................................... 93,439
----------
POWER/UTILITIES - .6%
2,264 Compagnie Generale des Eaux............................. 145,725
----------
</TABLE>
<PAGE>
62
OCC ACCUMULATION TRUST
GLOBAL EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
---------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
FRANCE (CONTINUED)
TECHNOLOGY - .8%
2,400 SGS-Thomson Microelectronics N.V.*.... $ 189,494
----------
Total French Common Stocks............ 1,021,330
----------
GERMANY - 4.6%
CHEMICALS - .8%
1,300 SGL Carbon AG......................... 177,994
----------
COMPUTER SERVICES - 1.4%
1,650 SAP AG................................ 331,116
----------
CONSUMER PRODUCTS - .6%
1,300 Adidas AG............................. 143,856
----------
DRUGS & MEDICAL PRODUCTS - .3%
1,150 Gehe AG............................... 78,465
----------
INSURANCE - .6%
175 Koelnische Rueckversicherungs AG...... 149,504
----------
RETAIL - .9%
2,000 Metro AG.............................. 219,139
----------
Total German Common Stocks............ 1,100,074
----------
HONG KONG - .6%
BANKING - .4%
216,000 Manhattan Credit Card Co., Ltd........ 98,279
----------
MISCELLANEOUS FINANCIAL SERVICES - .2%
70,000 Noble Group Ltd.*..................... 54,600
----------
Total Hong Kong Common Stocks......... 152,879
----------
HUNGARY - 1.1%
CONGLOMERATES - .3%
6,650 Benpres Holdings Corp.* GDR........... 49,044
3,800 Benpres Holdings Corp.* GDR Reg. S.... 26,600
----------
75,644
----------
DRUGS & MEDICAL PRODUCTS - .8%
500 Gedeon Richter Ltd., GDR.............. 45,750
500 Gedeon Richter Ltd., GDR Reg. S....... 45,688
1,050 Gedeon Richter Ltd., GDS.............. 96,600
----------
188,038
----------
Total Hungarian Common Stocks......... 263,682
----------
INDONESIA - .2%
WHOLESALE - .2%
34,000 PT Tigaraksa Satria................... 41,591
----------
</TABLE>
<PAGE>
63
OCC ACCUMULATION TRUST
GLOBAL EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
--------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
ITALY - .6%
TELECOMMUNICATIONS - .6%
32,000 Telecom Italia S.p.A.......... $ 63,357
49,000 Telecom Italia Mobile S.p.A.*. 87,646
--------
151,003
--------
JAPAN - 14.3%
AUTOMOTIVE - 1.3%
15,000 Calsonic Corp................. 95,271
5,000 Honda Motor Co., Ltd.......... 150,497
5,000 Murakami Corp................. 54,528
--------
300,296
--------
BANKING - 1.2%
20 Aeon Credit Service Co., Ltd.. 1,300
22,000 Daiwa Bank Ltd................ 104,223
48,000 Yasuda Trust & Banking........ 183,423
--------
288,946
--------
BUILDING & CONSTRUCTION - .3%
3,000 Sho-Bond Corp................. 78,259
--------
CHEMICALS - 2.1%
25,000 Dainippon Ink & Chemicals, Inc 107,747
9,000 Sekisui Chemical Co........... 91,084
6,000 Shin-Etsu Chemical Co......... 159,135
53,000 Showa Denko K.K............... 138,719
--------
496,685
--------
COMPUTER SERVICES - .6%
4,000 Konami Co., Ltd............... 149,363
--------
CONGLOMERATES - .3%
4,000 Inaba Denkisangyo Co.......... 71,541
--------
CONSUMER PRODUCTS - 1.0%
7,000 Canon, Inc.................... 190,543
10,000 Minolta Co. Ltd............... 62,642
--------
253,185
--------
DRUGS & MEDICAL PRODUCTS - .8%
7,000 Takeda Chemical Industries.... 196,650
--------
ELECTRICAL ENGINEERING - .0%
100 Kinden Corp................... 1,413
--------
</TABLE>
<PAGE>
64
OCC ACCUMULATION TRUST
GLOBAL EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
----------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
JAPAN (CONTINUED)
ELECTRONICS - 3.1%
10,000 Fujitsu Ltd............................ $ 138,719
1,000 Kyocera Corp.*......................... 79,393
8,000 Mitsubishi Electric Corp............... 44,739
3,000 Omron Corp............................. 63,602
1,000 Rohm Co................................ 102,949
8,000 Sodick Co.............................. 64,980
3,000 Sony Corp.............................. 261,473
----------
755,855
----------
INSURANCE - .2%
9,000 Fuji Fire & Marine Insurance........... 39,182
----------
METALS & MINING - .3%
5,000 Toho Titanium*......................... 76,339
----------
MISCELLANEOUS FINANCIAL SERVICES - 1.4%
50 Credit Saison Co., Ltd................. 1,221
2,000 Orix Corp.............................. 148,142
600 Shohkoh Fund........................... 181,644
----------
331,007
----------
POWER/UTILITIES - .3%
5,000 Kyushu Electric Power.................. 85,936
----------
RETAIL - 1.0%
1,200 Circle K Co. Ltd....................... 68,889
6,000 Mycal Corp............................. 86,372
1,000 Ryohin Keikaku Co. Ltd................. 78,869
----------
234,130
----------
TOBACCO/BEVERAGES/FOOD PRODUCTS - .4%
6,000 Mikuni Coca-Cola Bottling.............. 88,990
----------
Total Japanese Common Stocks........... 3,447,777
----------
LICHTENSTEIN - .3%
BANKING - .3%
130 Liechtenstein Global Trust AG.......... 79,692
----------
MEXICO - 1.2%
BUILDING/CONSTRUCTION - .6%
26,000 Corporacion GEO, S.A. de CV*........... 149,833
----------
CONGLOMERATES - .6%
20,000 Alfa S.A. de CV*....................... 136,395
----------
Total Mexican Common Stocks............ 286,228
----------
</TABLE>
<PAGE>
65
OCC ACCUMULATION TRUST
GLOBAL EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
--------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
NETHERLANDS - 1.6%
IMPORTING/EXPORTING - .3%
1,516 Hagemeyer NV........................... $ 78,314
--------
MISCELLANEOUS FINANCIAL SERVICES - .8%
3,886 ING Groep NV........................... 179,165
--------
PRINTING/PUBLISHING - .5%
5,800 Ver Ned Uitgevers...................... 128,239
--------
Total Netherlands Common Stocks........ 385,718
--------
NEW ZEALAND - .6%
BUILDING & CONSTRUCTION - .4%
28,344 Fletcher Challenge Ltd................. 84,132
--------
FOOD SERVICES - .2%
160,392 AFFCO Holdings Ltd..................... 55,563
--------
Total New Zealand Common Stocks........ 139,695
--------
NORWAY - .7%
ENERGY - .7%
8,400 Saga Petroleum ASA..................... 159,308
--------
POLAND - .1%
BANKING - .1%
2,500 Bank Handlowy W. Warszawie*............ 28,830
--------
SINGAPORE - .4%
PRINTING/PUBLISHING - .4%
5,000 Singapore Press Holdings Ltd........... 100,720
--------
SOUTH KOREA - .8%
ENERGY - .2%
1,060 Seoul City Gas Co. Ltd................. 48,225
--------
TELECOMMUNICATIONS - .3%
6,000 SK Telecom Co. Ltd.* ADR............... 60,375
--------
TOBACCO/BEVERAGES/FOOD PRODUCTS - .3%
490 Lotte Confectionery Co................. 76,149
--------
Total South Korean Common Stocks....... 184,749
--------
SPAIN - 1.0%
ENERGY - .5%
2,900 Repsol SA.............................. 122,613
--------
MANUFACTURING - .5%
2,600 Vidrala SA............................. 113,281
--------
Total Spanish Common Stocks............ 235,894
--------
</TABLE>
<PAGE>
66
OCC ACCUMULATION TRUST
GLOBAL EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
----------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
SWEDEN - 3.9%
BANKING - .4%
2,700 Nordbanken AB*.......................................... $ 91,099
----------
DRUGS & MEDICAL PRODUCTS - .6%
8,000 ASTRA AB................................................ 148,924
----------
ELECTRONICS - .5%
1,600 Electrolux AB........................................... 115,416
----------
MACHINERY/ENGINEERING - 1.8%
13,300 ABB AB.................................................. 186,549
6,900 Atlas Copco AB.......................................... 180,182
4,500 Kalmar Industries AB.................................... 77,080
----------
443,811
----------
PAPER PRODUCTS - .6%
5,100 AssiDoman AB............................................ 145,046
----------
Total Swedish Common Stocks............................. 944,296
----------
SWITZERLAND - 3.7%
BANKING - .7%
1,350 CS Holding AG........................................... 173,373
----------
BUILDING & CONSTRUCTION - .7%
170 Holderbank Financiere Glaris AG......................... 160,568
----------
DRUGS & MEDICAL PRODUCTS - 2.0%
145 Ares-Serono Group....................................... 210,051
170 Novartis AG*............................................ 271,767
----------
481,818
----------
MANUFACTURING - .3%
25 Sig Schweizerische Industrie - Gesellschaft Holding AG.. 75,771
----------
Total Swiss Common Stocks............................... 891,530
----------
THAILAND - .3%
WHOLESALE - .3%
27,000 Siam Makro Public Co., Ltd.............................. 74,001
----------
UNITED KINGDOM - 5.6%
COMPUTER SERVICES - .5%
26,000 Amstrad PLC............................................. 122,966
----------
DRUGS & MEDICAL PRODUCTS - 1.0%
12,450 SmithKline Beecham PLC.................................. 229,203
----------
ELECTRONICS - .6%
8,900 Siebe PLC............................................... 150,880
----------
</TABLE>
<PAGE>
67
OCC ACCUMULATION TRUST
GLOBAL EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
----------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
UNITED KINGDOM (CONTINUED)
MANUFACTURING - 1.1%
48,000 Bridon PLC.............................................. $ 107,112
40,263 LucasVarity PLC*........................................ 139,464
----------
245,576
----------
METALS & MINING - .6%
20,000 Antofagasta Holdings PLC................................ 153,208
----------
MISCELLANEOUS FINANCIAL SERVICES - .8%
18,317 Lloyds TSB Group PLC.................................... 188,210
----------
RETAIL - 1.0%
13,116 Dixon Group PLC......................................... 103,313
24,600 Safeway, Inc............................................ 142,358
----------
245,671
----------
Total United Kingdom Common Stocks...................... 1,336,714
----------
UNITED STATES - 33.4%
AEROSPACE/DEFENSE - 4.4%
3,000 Lockheed Martin Corp.................................... 310,687
11,000 McDonnell Douglas Corp.................................. 753,500
----------
1,064,187
----------
BANKING - 5.7%
4,000 Citicorp................................................ 482,250
3,300 Wells Fargo & Co........................................ 889,350
----------
1,371,600
----------
CHEMICALS - 4.6%
11,000 du Pont (E.I.) de Nemours & Co.......................... 691,625
4,000 Hercules, Inc........................................... 191,500
5,000 Monsanto Co............................................. 215,313
----------
1,098,438
----------
CONGLOMERATES - 1.9%
10,000 Tenneco, Inc............................................ 451,875
----------
CONSUMER PRODUCTS - 1.8%
13,000 Mattel, Inc............................................. 440,375
----------
DRUGS & MEDICAL PRODUCTS - 1.7%
8,000 Becton, Dickinson & Co.................................. 405,000
----------
FOOD SERVICES - 2.8%
14,000 McDonald's Corp......................................... 676,375
----------
MACHINERY/ENGINEERING - 1.3%
3,000 Caterpillar, Inc........................................ 322,125
----------
</TABLE>
<PAGE>
68
OCC ACCUMULATION TRUST
GLOBAL EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
- --------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
UNITED STATES (CONTINUED)
MISCELLANEOUS FINANCIAL SERVICES - 3.3%
23,000 Federal Home Loan Mortgage Corp............. $ 790,625
-----------
PAPER PRODUCTS - .7%
3,000 Champion International, Inc................. 165,750
-----------
RAILROADS - 1.2%
4,000 Union Pacific Corp.......................... 282,000
-----------
TECHNOLOGY - 1.1%
1,000 Intel Corp.................................. 141,812
4,000 National Semiconductor Corp.*............... 122,500
-----------
264,312
-----------
TELECOMMUNICATIONS - 2.9%
1,300 Loral Space & Communications Ltd.*.......... 19,500
45,000 Tele-Communications, Inc. (Class A)*........ 669,375
-----------
688,875
-----------
Total United States Common Stocks........... 8,021,537
-----------
Total Common Stocks (cost - $17,962,852).... $21,975,501
-----------
Total Investments (cost - $19,796,491)...... 99.0%
$23,809,140
Other Assets in Excess of Liabilities. 1.0 239,169
------ -----------
Total Net Assets......................100.0% $24,048,309
====== ===========
</TABLE>
- - ---------------
* Non-income producing security.
See accompanying notes to financial statements.
<PAGE>
69
OCC ACCUMULATION TRUST
GLOBAL EQUITY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
JUNE 30, 1997
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost - $19,796,491)..................................... $23,809,140
Cash........................................................................... 141,921
Foreign currencies (cost - $53,177)............................................ 52,033
Receivable from fund shares sold............................................... 42,582
Dividends receivable........................................................... 17,395
Foreign withholding taxes reclaimable.......................................... 9,131
Other assets................................................................... 889
-----------
Total Assets................................................................. 24,073,091
-----------
LIABILITIES
Payable for fund shares redeemed............................................... 3,151
Investment advisory fees payable............................................... 1,584
Foreign withholding taxes payable.............................................. 1,229
Other payables and accrued expenses............................................ 18,818
-----------
Total Liabilities............................................................ 24,782
-----------
Total Net Assets............................................................. $24,048,309
===========
COMPOSITION OF NET ASSETS
Par value ($.01 per share)..................................................... $ 15,943
Paid-in-capital in excess of par............................................... 19,851,655
Accumulated undistributed net investment income................................ 100,186
Accumulated undistributed net realized gain on investments..................... 88,939
Accumulated net realized loss on foreign currency transactions................. (19,919)
Net unrealized appreciation on investments and translation of other assets and
liabilities denominated in foreign currencies................................ 4,011,505
-----------
Total Net Assets............................................................. $24,048,309
===========
Fund shares outstanding........................................................ 1,594,305
-----------
Net asset value per share...................................................... $ 15.08
-----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
70
OCC ACCUMULATION TRUST
GLOBAL EQUITY PORTFOLIO
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends (net of foreign withholding taxes of $14,770).......... $ 161,489
Interest......................................................... 63,629
----------
Total investment income........................................ 225,118
----------
OPERATING EXPENSES
Investment advisory fees (note 2A)............................... 79,334
Custodian fees (note 1H)......................................... 29,897
Audit fees....................................................... 5,150
Transfer and dividend disbursing agent fees...................... 4,614
Reports and notices to shareholders.............................. 1,737
Legal fees....................................................... 1,080
Miscellaneous.................................................... 1,383
----------
Total operating expenses....................................... 123,195
Less: Investment advisory fees waived (note 2A)................ (2,537)
Less: Expenses offset (note 1H)................................ (685)
----------
Net operating expenses......................................... 119,973
----------
Net investment income.......................................... 105,145
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS - NET
Net realized gain on investments................................. 92,782
Net realized loss on foreign currency transactions............... (19,919)
Net change in unrealized appreciation (depreciation) on
investments and translation of other assets and liabilities
denominated in foreign currencies............................... 2,621,255
----------
Net realized gain and change in unrealized appreciation
(depreciation) on investments and translation of other assets
and liabilities denominated in foreign currencies............... 2,694,118
----------
Net increase in net assets resulting from operations............. $2,799,263
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
71
OCC ACCUMULATION TRUST
GLOBAL EQUITY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997(1) DECEMBER 31, 1996
---------------- -----------------
<S> <C> <C>
OPERATIONS
Net investment income........................................... $ 105,145 $ 73,364
Net realized gain on investments................................ 92,782 145,915
Net realized loss on foreign currency transactions.............. (19,919) (67,648)
Net change in unrealized appreciation (depreciation) on
investments and translation of other assets and
liabilities denominated in foreign currencies................. 2,621,255 1,247,855
----------- -----------
Net increase in net assets resulting from operations........ 2,799,263 1,399,486
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Net investment income........................................... (7,066) (60,776)
Net realized gains on investments............................... (3,843) (89,998)
----------- -----------
Total dividends and distributions to shareholders........... (10,909) (150,774)
----------- -----------
FUND SHARE TRANSACTIONS
Net proceeds from sales......................................... 4,606,509 16,110,547
Reinvestment of dividends and distributions..................... 10,909 150,774
Cost of shares redeemed......................................... (329,951) (3,428,866)
----------- -----------
Net increase in net assets from fund share
transactions............................................... 4,287,467 12,832,455
----------- -----------
Total increase in net assets.............................. 7,075,821 14,081,167
NET ASSETS
Beginning of period............................................. 16,972,488 2,891,321
----------- -----------
End of period (including undistributed net investment
income of $100,186 and $2,107, respectively).................. $24,048,309 $16,972,488
=========== ===========
SHARES ISSUED AND REDEEMED
Issued.......................................................... 334,220 1,304,431
Issued in reinvestment of dividends and distributions........... 804 11,415
Redeemed........................................................ (23,321) (282,190)
----------- -----------
Net increase................................................ 311,703 1,033,656
=========== ===========
</TABLE>
- ----------------
(1) Unaudited.
See accompanying notes to financial statements.
<PAGE>
72
OCC ACCUMULATION TRUST
GLOBAL EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1997
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
OCC Accumulation Trust (the "Trust") was organized May 12, 1994 as a
Massachusetts business trust and is registered under the Investment Company Act
of 1940, as amended, as a diversified, open-end management investment company.
The Trust is authorized to issue an unlimited number of six classes of shares of
beneficial interest at $.01 par value. The Trust is comprised of six portfolios:
the Equity Portfolio, the Small Cap Portfolio, the Global Equity Portfolio (the
"Portfolio"), the Managed Portfolio, the U.S. Government Income Portfolio and
the Money Market Portfolio. OpCap Advisors (the "Adviser"), a majority-owned
(99%) subsidiary of Oppenheimer Capital, serves as the Trust's investment
adviser. The Trust is an investment vehicle for variable annuity and variable
life insurance contracts of various life insurance companies, and qualified
pension and retirement plans. The following is a summary of significant
accounting policies consistently followed by the Portfolio in the preparation of
its financial statements:
(A) VALUATION OF INVESTMENTS
Investment securities, other than debt securities, listed on a national
exchange or traded in the over-the-counter National Market System are valued
each business day at the last reported sale price; if there are no such reported
sales, the securities are valued at their last quoted bid price. Other
securities traded over-the-counter and not part of the National Market System
are valued at the last quoted bid price. Investment debt securities (other than
short-term obligations) are valued each business day by an independent pricing
service (approved by the Board of Trustees) using methods which include current
market quotations from a major market maker in the securities and trader-
reviewed "matrix" prices. Short-term debt securities having a remaining maturity
of sixty days or less are valued at amortized cost or amortized value, which
approximates market value. Any securities or other assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by the Board of Trustees. The ability of issuers of debt instruments
to meet their obligations may be affected by economic developments in a specific
industry or region.
(B) FEDERAL INCOME TAXES
It is the Portfolio's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to shareholders; accordingly,
no Federal income tax provision is required.
(C) INVESTMENT TRANSACTIONS AND OTHER INCOME
Investment transactions are accounted for on the trade date. In determining
the gain or loss from the sale of investments, the cost of investments sold has
been determined on the basis of identified cost. Dividend income is recorded on
the ex-dividend date and interest income is accrued as earned. Discounts or
premiums on debt securities purchased are accreted or amortized to interest
income over the lives of the respective securities.
(D) FOREIGN CURRENCY TRANSLATION
The books and records of the Portfolio are maintained in U.S. dollars as
follows: (1) the foreign currency market value of investment securities, other
assets and liabilities stated in foreign currencies are translated at the
exchange rate at the end of the period; and (2) purchases, sales, income and
expenses are translated at the rate of exchange prevailing on the respective
dates of such transactions. The resultant exchange gains and losses are included
in the portfolio's Statement of Operations. Since the net assets of the
Portfolio are presented at the foreign exchange rates and market prices at the
close of the period, the Portfolio does not
<PAGE>
73
OCC ACCUMULATION TRUST
GLOBAL EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
(D) FOREIGN CURRENCY TRANSLATION (CONTINUED)
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) isolate that
portion of the results of operations arising as a result of changes in the
exchange rates from fluctuations arising from changes in the market price of
securities.
(E) DIVIDENDS AND DISTRIBUTIONS
Dividends and distributions to shareholders from net investment income and
net realized capital gains, if any, are declared and paid at least annually.
The Portfolio records dividends and distributions to its shareholders on
the ex-dividend date. The amount of dividends and distributions are determined
in accordance with Federal income tax regulations, which may differ from
generally accepted accounting principles. These "book-tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their Federal income tax treatment; temporary
differences do not require reclassification. To the extent dividends and/or
distributions exceed current and accumulated earnings and profits for Federal
income tax purposes, they are reported as dividends and/or distributions of
paid-in-capital or tax return of capital.
(F) ALLOCATION OF EXPENSES
Expenses specifically identifiable to a particular portfolio are borne by
that portfolio. Other expenses are allocated to each portfolio based on its net
assets in relation to the total net assets of all applicable portfolios of the
Trust or another reasonable basis.
(G) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
(H) CUSTODY OFFSETS
The Portfolio benefits from an expense offset arrangement with its
custodian bank where uninvested cash balances earn credits that reduce monthly
fees. Had these cash balances been invested in income producing securities, they
would have generated income for the Portfolio.
(2) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
(A) The investment advisory fee is accrued daily and payable monthly to the
Adviser, and is computed as a percentage of the Portfolio's net assets as of the
close of business each day at the annual rate of .80% on the first $400 million,
.75% on the next $400 million and .70% thereafter. The Adviser has voluntarily
agreed to waive that portion of the advisory fee necessary to limit total
operating expenses of the Portfolio to 1.25% (net of expenses offset) of average
net assets on an annual basis.
(B) Total brokerage commissions paid by the Portfolio for the six months ended
June 30, 1997 amounted to $21,497, of which Oppenheimer & Co., Inc., an
affiliate of the Adviser, received $880.
<PAGE>
74
OCC ACCUMULATION TRUST
GLOBAL EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
(3) PURCHASES AND SALES OF INVESTMENTS
For the six months ended June 30, 1997, purchases and sales of investment
securities, other than short-term securities, were $6,796,997 and $2,508,482,
respectively.
(4) UNREALIZED APPRECIATION (DEPRECIATION) AND COST OF INVESTMENTS FOR FEDERAL
INCOME TAX PURPOSES
Aggregate gross unrealized appreciation for securities in which there is an
excess of value over tax cost is $4,307,655, aggregate gross unrealized
depreciation for securities in which there is an excess of tax cost over value
is $295,006 and net unrealized appreciation for Federal income tax purposes is
$4,012,649. Federal income tax cost basis of portfolio securities is $19,796,491
at June 30, 1997.
(5) AFFILIATED TRANSACTION
On July 22, 1997, PIMCO Advisors L.P. ("PIMCO Advisors"), a registered
investment adviser with approximately $119 billion in assets under management
through various subsidiaries and its affiliate Thomson Advisory Group Inc.
("TAG"), signed an Amended and Restated Merger Agreement with Oppenheimer Group,
Inc. ("OGI"), its subsidiary Oppenheimer Financial Corp. ("Opfin") and certain
related parties pursuant to which PIMCO Advisors and TAG and its successor, will
acquire the one-third managing general partner interest in Oppenheimer Capital,
its 1.0% general partner interest in OpCap Advisors, and its 1.0% general
partner interest in Oppenheimer Capital L.P. (the "Transaction"). If the
Transaction is consummated, it will involve a change in control of Oppenheimer
Capital and its subsidiary OpCap Advisors which will constitute an assignment
and termination of the Investment Advisory Agreement with the Trust. At a
meeting held on February 28, 1997, the Trustees, including all independent
Trustees, approved and determined to submit to shareholders for approval, a new
Investment Advisory Agreement with OpCap Advisors, substantially upon the same
terms and conditions as the existing Investment Advisory Agreement. Proxy
material will be sent to shareholders concerning the new Investment Advisory
Agreement.
<PAGE>
75
OCC ACCUMULATION TRUST
GLOBAL EQUITY PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED MARCH 1, 1995(1) TO
JUNE 30, 1997(7) DECEMBER 31, 1996 DECEMBER 31, 1995
---------------- ----------------- -------------------
<S> <C> <C> <C>
Net asset value, beginning of
period.............................. $ 13.23 $ 11.61 $ 10.00
----------- ----------- ----------
Income from investment operations:
Net investment income................ 0.07 0.04 0.05
Net realized and unrealized gain on
investments......................... 1.79 1.70 1.83
----------- ----------- ----------
Total from investment operations... 1.86 1.74 1.88
----------- ----------- ----------
Dividends and distributions to
shareholders:
Dividends to shareholders from net
investment income................... (0.01) (0.05) (0.03)
Distributions to shareholders from
net realized gains.................. (0.00) (0.07) (0.24)
----------- ----------- ----------
Total dividends and distributions
to shareholders................... (0.01) (0.12) (0.27)
----------- ----------- ----------
Net asset value, end of period....... $ 15.08 $ 13.23 $ 11.61
=========== =========== ==========
Total return (2)..................... 14.1% 15.0% 18.9%
=========== =========== ==========
Net assets, end of period............ $24,048,309 $16,972,488 $2,891,321
----------- ----------- ----------
Ratio of net operating expenses to
average net assets (5,6)............ 1.22%(3,4) 1.42% 1.25%(3)
----------- ----------- ----------
Ratio of net investment income to
average net assets (6).............. 1.06%(3,4) 0.81% 1.02%(3)
----------- ----------- ----------
Portfolio turnover rate.............. 14% 40% 67%
----------- ----------- ----------
Average commission rate.............. $ 0.0228 $ 0.0254 --
----------- ----------- ----------
</TABLE>
- ----------------
(1) Commencement of operations.
(2) Assumes reinvestment of all dividends and distributions. Aggregate (not
annualized) total return is shown for any period shorter than one year.
(3) Annualized.
(4) Average net assets for the six months ended June 30, 1997 were $19,997,903.
(5) For fiscal periods ending after September 1, 1995, the ratios are calculated
to include expenses offset by earnings credits from a custodian bank (See
note 1H in Notes to Financial Statements).
(6) During the periods noted above, the Adviser waived a portion or all of its
fees and assumed a portion of the Portfolio's operating expenses. If such
waivers and assumptions had not been in effect, the ratios of net operating
expenses to average net assets and the ratios of net investment income to
average net assets would have been 1.24% and 1.03%, annualized,
respectively, for the six months ended June 30, 1997, 1.83% and 0.22%,
respectively, for the year ended December 31, 1996 and 3.94% and (1.67%),
annualized, respectively, for the period March 1, 1995 (commencement of
operations) to December 31, 1995.
(7) Unaudited.
<PAGE>
Dreyfus
Variable
Investment Fund,
Managed Assets
Portfolio
Semi-Annual
Report
June 30, 1997
<PAGE>
Dreyfus Variable Investment Fund, Managed Assets Portfolio
- --------------------------------------------------------------------------------
Letter to Shareholders
Dear Shareholder:
Management of Dreyfus Variable Investment Fund -- Managed Assets Portfolio
was transferred on January 1, 1997 to Timothy M. Ghriskey, who also manages a
number of other equity funds for The Dreyfus Corporation. It is a pleasure for
me to introduce Tim Ghriskey to shareholders in this Portfolio.
Tim joined the investment staff of The Dreyfus Corporation in the summer of
1995 as a Senior Equity Portfolio Manager. Before joining Dreyfus, he spent ten
years with Loomis, Sayles & Company as both an equity and a balanced portfolio
manager. At his prior firm, Tim was an Associate Managing Partner and a member
of the Investment Policy Committee and the Planning Committee. He began his
investment career as an equity analyst following a number of industries,
including beverage, tobacco, leisure, entertainment, home products, cosmetics,
metals and mining.
Tim is a graduate of Trinity College and received his M.B.A. from the
Darden School at the University of Virginia. He is a Chartered Financial
Analyst and a Chartered Investment Counselor.
We have great confidence in Tim's ability to manage your Portfolio.
Sincerely,
Stephen E. Canter
Chief Investment Officer
The Dreyfus Corporation
<PAGE>
Dreyfus Variable Investment Fund, Managed Assets Portfolio
- --------------------------------------------------------------------------------
Letter to Shareholders
Dear Shareholder:
This letter is our first to you, as Dreyfus assumed day-to-day portfolio
management of the Dreyfus Variable Investment Fund -- Managed Assets Portfolio
as of January 1, 1997.
We are pleased to provide you with this semi-annual report for the six-month
reporting period ended June 30, 1997. Over this period, your Portfolio produced
a total return of 20.47%, based upon net asset value per share,* compared to a
total return of 20.60% for the Standard & Poor's 500 Composite Stock Price over
the same period.** The Standard & Poor's 500 Index is weighted toward the
largest publicly traded companies, and these investments have experienced
significant appreciation during this period. The Portfolio did not attempt to
replicate this index, believing that there was better value elsewhere.
The Portfolio is at its heart dedicated to investment flexibility. In a
positive investment environment, the Portfolio favors value-oriented equity
securities with a contrarian emphasis. Contrarians do not follow the investment
herd, but instead attempt to identify new investment trends which others will
subsequently follow. In a negative investment environment, the Portfolio has the
flexibility to raise cash, sell stocks short, invest in fixed income securities,
own gold stocks, and use other investment techniques designed to protect
capital, and hopefully profit, even when the overall stock market may be weak.
Value Investing
While there are other investment disciplines practiced at Dreyfus, we are
passionate believers in value investing. Paying attention to the value of
securities has proven in numerous industry and academic studies historically to
have resulted in superior and more consistent long-term investment returns. Why?
Value investors are frugal. We want to buy growing companies, but we do not want
to pay much for them.
As value investors, we believe that in the investment world inexpensive is
better than expensive. By definition, securities with low valuations should have
more potential for an increase in this valuation than securities with high
valuations. In fact, securities priced at a valuation discount to the average
market valuation historically have tended to move toward higher valuations over
time and, therefore, have what we believe is a built-in advantage for long-term
price appreciation. Of course, this assumes sound business fundamentals.
Investors tend to have low expectations for securities with low valuations, and
these low expectations tend to be more easily met than for securities with high
expectations. Further, investors and analysts often extrapolate or project past
growth into the future which tends to result in excessive pessimism about low
valuation stocks. More often than not, we believe the opposite growth pattern
occurs, relative to these expectations, with low valuation stocks growing more
rapidly than expected. Finally, when a stock with a low valuation is
unfortunately greeted with bad news and its price corrects, we believe that it
is already relatively inexpensive and simply should not have far to fall in
value.
Investing in value stocks is somewhat counter to human nature, a decided
advantage. A successful value investor does not follow the herd of other
investors, does not blindly accept widely distributed recommendations from
brokerage firms, and does not just buy glamorous investment stories which almost
everyone else already knows. A successful value investor is more proactive than
reactive, and takes advantage of other investors' overreaction to events. Among
the numerous reasons that value stocks may appreciate in price are lower
expectations, more thorough analysis of actual reported data instead of
forecasts, typically higher dividends, often more stock repurchases by the
companies, and the potential for takeovers and asset restructuring. Because of
its focus on securities with low valuations, value investing should, we believe,
result in steady investment gains and not wildly volatile swings in investment
performance. In this sense, we believe it is designed to be a lower risk, more
conservative style of equity investing.
<PAGE>
Investment Process
Our approach to the selection of securities starts and ends with our
analysts, who are an integral part of our investment team. We only want to own
securities which our fine team of analysts know and follow closely through
regular management interviews and company visits.
Using the work of our analysts as a starting point, we screen the universe of
stocks by computer according to two principal methods. First, we screen for high
projected earnings yield (the inverse of the price-earnings ratio) on earnings
for the next 12 months. We look for securities with an earnings yield which is
competitive with risk-free investments, such as U.S. Treasuries. Otherwise, we
would rather own the risk-free security. Second, we apply our proprietary screen
of 21 fundamental factors which have historically affected stock returns. These
factors include the growth outlook over various time horizons, several relative
value measures, company size, earnings revision and surprise, cash flow,
financial, operating and foreign leverage, momentum measures, and a qualitative
evaluation of the potential for positive change to occur at each company.
Combining this data with our analysts' in-depth knowledge of the individual
companies, we then construct a portfolio of approximately 50 securities which we
believe is adequately diversified without overly diluting the potential impact
of good investment ideas.
Selling is also a major part of our discipline and, we believe, an often
neglected part of the investment management process. We use specific
criteria to determine when selling a security is in our shareholders' best
interest.
Economic Review
Since ending its 1995 mid-cycle slowdown, the economy has sustained an
above-trend growth trajectory, slowing only briefly in the third quarter of 1996
and again in recent months. Meanwhile, the level of economic activity is now at
the point where economic resources are near full deployment. Yet price inflation
remains quiescent, boosting the purchasing power of incomes and contributing to
the best sense of economic well-being in decades. In this environment, economic
policy has been benign, allowing market interest rates to sway within an
eighteen-month trading range and corporate profits to rise steadily. However,
even while the jury is out on the inflation risks ahead, the Federal Reserve
Board (the "Fed") has again indicated a one-way bias towards tighter future
policy.
Real Gross Domestic Product growth grew an above-trend 3.1% from year-end
1995 to year-end 1996, then accelerating to more than 4.0% in the first half of
this year. However, this year's pattern shows growth concentrated into the first
quarter, when GDP surged 5.9%, while a slowdown to near 2.5% is apparent in the
second quarter. The slower near-term growth is attributable to a lackluster
retail sector, even though exports and capital spending are gaining. A key issue
is whether the absence of pent-up demand could lead to a sluggish consumer
profile and, hence, a slow GDP growth from here on. Indeed, factors that could
underpin a resumption of stronger spending are rising: real consumer purchasing
power, soaring household wealth and all-time highs in consumer confidence.
Additionally, inventories remain lean, muting the prospect of yet slower
economic growth.
Alongside evidence of a slower retail sector in the second quarter are
reports showing that unemployment fell below 5% and industrial capacity
utilization tightened towards its 1994 highs. With these developments, the
economy now is operating at a high level with little slack. Yet wage inflation
abated in the second quarter while price inflation continued
<PAGE>
to decelerate. The absence of any troublesome sign of inflation has kept market
interest rates in a long-standing trading range. Even corporate profits
continue to surprise on the upside.
Views on the need to tighten monetary policy are divergent. There are
those who believe that inflation pressure points are just different than in
the past and others who believe the inflation cycle has been eliminated by
global factors and technology. However, by leaning towards tighter future
policy, the Fed is at least willing to err on the cautious side in the next
several months.
Market Overview
It doesn't get much better than the performance of common stocks for the
first half of 1997. When the closing bell rang on June 30, the Standard & Poor's
500 showed a six-month gain of nearly 20%, the Dow Jones Industrial Average was
up almost 19%, the Nasdaq Composite Index had gained 11.70% and even small
capitalization stocks represented by the Russell 2000 index were up by 9.31%.
All these major indexes set new records repeatedly during the half-year.
However, it wasn't clear sailing, and not all sectors profited equally. As
recently as April, just after the Fed voted its latest increase in interest
rates, broad stock averages were only modestly ahead for the year. Technology
and small cap stocks were lagging the larger, better-known issues.
A turnaround began in mid-April that carried all markets to new highs. The
main propellant was the expanding yet noninflationary economy. At the same time,
corporate profits, generally speaking, showed continued strength. Clearly, all
the hard work of corporate reorganization and down-sizing in recent years was
paying off. Before each scheduled meeting of the Federal Reserve, there was
apprehension that interest rates might be boosted again. Yet the underlying tone
of the market was one of confidence and strength. No doubt the steady influx of
retirement money and other assets into mutual funds was an important factor in
the market's buoyancy.
As the market averages advanced, an increasing number of warnings were being
issued to the investing public to remember that what goes up might come down --
that many stocks appeared richly priced in relation to earnings prospects. In
day-to-day stock trading, however, there was little evidence by the end of June
that the cautionary advice was affecting stock prices.
Recent Developments
During this semi-annual period, the Portfolio benefited from investments in
Paxson Communications, Pennzoil, Travelers Group, Watson Pharmaceuticals, Cooper
Cameron, Lone Star Industries, Stone Container, Ciba Specialty Chemicals,
Owens-Illinois, Ingersoll-Rand, Xerox, Airborne Freight, Yellow, CNF
Transportation, and Hong Kong Telecommunications. Results were penalized by
investments in Fruit of the Loom, First Brands, Cabletron Systems, Amdahl,
Aetna, and Chesapeake.
As the fiscal year ended, our primary investment themes included:
* Depressed high growth securities
* Asset restructuring potential
* Neglected or misunderstood companies
* New, unappreciated growth opportunities
* Particularly undervalued situations
<PAGE>
It is an honor to have been named as Portfolio Manager of this Portfolio. All
of the Dreyfus family will endeavor to serve you to the best of our abilities.
Sincerely,
Timothy M. Ghriskey
Portfolio Manager
July 16, 1997
New York, N.Y.
* Total return includes reinvestment of dividends and any capital gains paid.
The Portfolio's performance does not reflect the deduction of additional
charges imposed in connection with investing in variable annuity contracts
and variable life insurance policies.
** SOURCE: LIPPER ANALYTICAL SERVICES, INC. -- Reflects the reinvestment of
income dividends and, where applicable, capital gain distributions. The
Standard & Poor's 500 Composite Stock Price Index is a widely accepted
unmanaged index of U.S. stock market performance.
<PAGE>
<TABLE>
<CAPTION>
Dreyful Variable Investment Fund, Managed Assets Portfolio
- --------------------------------------------------------------------------------
Statement of Investments June 30, 1997 (Unaudited)
Common Stocks--99.0% Shares Value
- -------------------------------------------------------------------------------- ------ -----
<S> <C> <C>
Consumer Non-Durables--9.7% Cott.......................................................... 30,500 $ 324,063
Dreyer's Grand Ice Cream...................................... 10,300 406,850
First Brands.................................................. 9,900 227,081
Fruit of The Loom, Cl. A...................................(a) 17,500 542,500
Kimberly-Clark................................................ 6,700 333,325
NIKE, Cl. B................................................... 18,000 1,050,750
Philip Morris................................................. 7,500 332,812
----------
3,217,381
----------
Consumer Services--3.2% Paxson Communications, Cl.A................................(a) 81,900 1,044,225
----------
Electronic Technology--6.1% Amdahl.....................................................(a) 23,100 202,125
Cabletron Systems..........................................(a) 11,300 319,931
Intel......................................................... 2,300 326,169
International Business Machines............................... 3,600 324,675
Read-Rite..................................................(a) 28,500 594,938
Storage Technology.........................................(a) 6,000 267,000
----------
2,034,838
----------
Energy Minerals--4.7% Mobil......................................................... 6,400 447,200
Pennzoil...................................................... 6,900 529,575
Phillips Petroleum............................................ 6,300 275,625
Tosco......................................................... 10,500 314,344
----------
1,566,744
----------
Finance--13.8% Allstate...................................................... 5,800 423,400
Banc One...................................................... 10,609 513,873
Bankers Trust New York........................................ 4,700 408,900
Chase Manhattan............................................... 3,000 291,188
Equitable..................................................... 11,700 389,025
Grupo Financiero Banamex Accival, Cl.B(a)..................... 479,000 1,232,543
Nationwide Financial Services, Cl. A.......................... 5,000 132,812
Travelers..................................................... 18,500 1,166,656
----------
4,558,397
----------
Health Services--7.7% Aetna......................................................... 3,700 378,787
Allegiance.................................................... 10,100 275,225
Sierra Health Services..................................... (a) 14,200 443,750
Sun Healthcare Group....................................... (a) 70,000 1,456,875
----------
2,554,637
----------
Health Technology--5.9% Forest Laboratories........................................(a) 8,000 334,000
Genzyme-General Division...................................(a) 15,800 438,450
Watson Pharmaceuticals.....................................(a) 27,800 1,174,550
----------
1,947,000
----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Dreyfus Variable Investment Fund, Managed Assets Portfolio
- ---------------------------------------------------------------------------------------------
Statement of Investments (continued)
June 30, 1997 (Unaudited)
Common Stocks (continued) Shares Value
- --------------------------------------------------------------------------------------------- ------ -----
<S> <C> <C>
Industrial Services--1.5% Cooper Cameron....................................(a) 10,400 $ 486,200
-----------
Non-Energy Minerals--5.3% Aluminum Company of America.......................... 4,100 309,038
Georgia-Pacific...................................... 5,000 426,875
Lone Star Industries................................. 22,500 1,019,531
-----------
1,755,444
-----------
Process Industries--11.6% Chesapeake........................................... 30,000 1,012,500
Ciba Specialty Chemicals............................. 4,500 415,811
Owens-Illinois....................................(a) 12,100 375,100
Premark International................................ 12,600 337,050
Stone Container...................................... 95,000 1,359,687
Temple-Inland........................................ 6,000 324,000
-----------
3,824,148
-----------
Producer Manufacturing--11.9% Borg-Warner Automotive............................... 7,000 378,438
General Signal....................................... 6,500 283,562
Grupo Carso, Cl. A1.................................. 65,000 453,393
Ingersoll-Rand....................................... 7,000 432,250
MagneTek..........................................(a) 55,700 926,013
Raychem.............................................. 14,100 1,048,687
Xerox................................................ 5,300 418,038
-----------
3,940,381
-----------
Retail--2.9% Dominick's Supermarkets.............................. 16,000 426,000
Pier 1 Imports....................................... 17,400 461,100
Polo Ralph Lauren, Cl.A.............................. 3,000 82,125
-----------
969,225
-----------
Transportation--7.7% Airborne Freight..................................... 10,000 418,750
CNF Transportation................................... 10,500 338,625
CSX.................................................. 17,700 982,350
Hertz, Cl. A......................................... 5,600 201,600
Ryanair Holdings, A.D.R.............................. 8,700 235,988
Yellow............................................(a) 16,000 358,000
-----------
2,535,313
-----------
Utilities--7.0% Coastal.............................................. 5,700 303,169
El Paso Natural Gas.................................. 5,500 302,500
Hong Kong Telecommunications, A.D.R.................. 17,200 402,050
NorAm Energy......................................... 27,300 416,325
Tenaga Nasional...................................... 183,000 891,904
-----------
2,315,948
-----------
TOTAL COMMON STOCKS
(cost $29,586,634)................................ $32,749,881
===========
</TABLE>
<PAGE>
Dreyfus Variable Investment Fund, Managed Assets Portfolio
- --------------------------------------------------------------------------------
Statement of Investments (continued)
<TABLE>
<CAPTION>
June 30, 1997 (Unaudited)
Principal
Short-Term Investments--2.4% Amount Value
- --------------------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C> <C>
U.S. Treasury Bills: 5.16%, 7/24/97........................(b) $ 355,000 $ 354,003
5.24%, 8/14/97........................... 40,000 39,753
4.88%, 8/21/97........................... 82,000 81,411
4.90%, 9/4/97............................ 101,000 100,074
4.88%, 9/18/97........................... 212,000 209,638
-----------
TOTAL SHORT-TERM INVESTMENTS
(cost $784,842)........................ $ 784,879
===========
TOTAL INVESTMENTS (cost $30,371,476)............................................................. 101.4% $33,534,760
====== ===========
LIABILITIES, LESS CASH AND RECEIVABLES........................................................... (1.4%) $ (460,525)
====== ===========
NET ASSETS....................................................................................... 100.0% $33,074,235
====== ===========
</TABLE>
Notes to Statement of Investments:
- --------------------------------------------------------------------------------
(a) Non-income producing.
(b) Partially held by broker as collateral for open short positions.
<PAGE>
Dreyfus Variable Investment Fund, Managed Assets Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Securities Sold Short June 30, 1997 (Unaudited)
Common Stocks Shares Value
- ----------------------------------------------- ------ --------
<S> <C> <C>
Banc One
(proceeds $434,942).......................... 10,100 $489,219
====== ========
</TABLE>
See notes to financial statements.
<PAGE>
Dreyfus Variable Investment Fund, Managed Assets Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Assets and Liabilities June 30, 1997 (Unaudited)
Cost Value
----------- -----------
<C> <S> <C> <C>
ASSETS: Investments in securities--See Statement of
Investments....................................... $30,371,476 $33,534,760
Cash.............................................. 250,967
Receivable from brokers for proceeds on
securities sold short........................... 434,942
Dividends and interest receivable................. 35,414
Net unrealized appreciation on forward
currency exchange contracts--Note 5(a).......... 5,055
Prepaid expenses.................................. 185
-----------
34,261,323
-----------
LIABILITIES: Due to The Dreyfus Corporation and affiliates..... 19,478
Securities sold short, at value
(proceeds $434,942)--see statement.............. 489,219
Payable for shares of Beneficial Interest redeemed 373,912
Payable for investment securities purchased....... 279,414
Accrued expenses.................................. 25,065
-----------
1,187,088
-----------
NET ASSETS..................................................................... $33,074,235
===========
REPRESENTED BY: Paid-in capital................................... $31,873,420
Accumulated distributions in excess of investment
income--net..................................... (58,896)
Accumulated net realized gain (loss) on
investments, foreign currency transactions and
forward currency exchange contracts............. (1,854,341)
Accumulated net unrealized appreciation
(depreciation) on investments, foreign currency
transactions and forward currency
exchange contracts.............................. 3,114,052
-----------
NET ASSETS..................................................................... $33,074,235
===========
SHARES OUTSTANDING
(unlimited number of $.001 par value shares of Beneficial Interest authorized). 2,590,745
NET ASSET VALUE, offering and redemption price per share....................... $12.77
======
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
Dreyfus Variable Investment Fund, Managed Assets Portfolio
- ------------------------------------------------------------------------------------------
Statement of Operations Six Months Ended June 30, 1997 (Unaudited)
INVESTMENT INCOME
<S> <C> <C> <C>
INCOME: Cash dividends (net of $3,043 foreign taxes
withheld at source) .......................... $ 140,444
Interest ....................................... 57,514
----------
Total Income ............................... $ 197,958
EXPENSES: Investment advisory fee--Note 4(a) ............. 85,241
Auditing fees .................................. 18,782
Legal fees ..................................... 18,515
Prospectus and shareholders' reports ........... 10,510
Dividends on securities sold short ............. 7,676
Custodian fees ................................. 4,846
Registration fees .............................. 2,178
Trustees' fees and expenses--Note 4(b) ......... 423
Shareholder servicing costs .................... 255
Miscellaneous .................................. 431
----------
Total Expenses ............................. 148,857
----------
INVESTMENT INCOME--NET ....................................... 49,101
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS--Note 5:
Net realized gain (loss) on investments and
foreign currency transactions ................ $1,634,265
Net realized gain (loss) on forward currency
exchange contracts Short transactions ........ (3,208)
----------
Net Realized Gain (Loss) ................... 1,631,057
Net unrealized appreciation (depreciation) on
investments, foreign currency transactions
and forward currency exchange contracts ...... 3,106,918
----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS ....... 4,737,975
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ......... $4,787,076
==========
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
Dreyfus Variable Investment Fund, Managed Assets Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Statement of Changes in Net Assets
Six Months Ended
June 30, 1997 Year Ended
(Unaudited) December 31, 1996
---------------- -----------------
<S> <C> <C>
OPERATIONS:
Investment income--net ....................................................... $ 49,101 $ 1,016,129
Net realized gain (loss) on investments ...................................... 1,631,057 (2,021,735)
Net unrealized appreciation (depreciation) on investments .................... 3,106,918 291,402
----------- -----------
Net Increase (Decrease) in Net Assets Resulting from Operations .......... 4,787,076 (714,204)
----------- -----------
DIVIDENDS TO SHAREHOLDERS:
From investment income--net .................................................. -- (1,062,506)
In excess of investment income--net .......................................... -- (107,997)
From paid-in capital ......................................................... -- (114,865)
----------- -----------
Total Dividends .......................................................... -- (1,285,368)
----------- -----------
BENEFICIAL INTEREST TRANSACTIONS:
Net proceeds from shares sold ................................................ 10,582,130 5,860,638
Dividends reinvested ......................................................... -- 1,285,368
Cost of shares redeemed ...................................................... (3,395,650) (9,317,556)
----------- -----------
Increase (Decrease) in Net Assets from Beneficial Interest Transactions .. 7,186,480 (2,171,550)
----------- -----------
Total Increase (Decrease) in Net Assets .............................. 11,973,556 (4,171,122)
NET ASSETS:
Beginning of Period .......................................................... 21,100,679 25,271,801
----------- -----------
End of Period ................................................................ $33,074,235 $21,100,679
=========== ===========
(Distributions in excess of investment income--net) .............................. $ (58,896) $ (107,997)
----------- -----------
<CAPTION>
Shares Shares
---------------- -----------------
<S> <C> <C>
CAPITAL SHARE TRANSACTIONS:
Shares sold .................................................................. 895,802 480,990
Shares issued for dividends reinvested ....................................... -- 120,516
Shares redeemed .............................................................. (296,076) (769,628)
----------- -----------
Net Increase (Decrease) in Shares Outstanding ............................ 599,726 (168,122)
=========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
Dreyfus Variable Investment Fund, Managed Assets Portfolio
- --------------------------------------------------------------------------------
Financial Highlights
Contained below is per share operating performance data for a share of
Beneficial Interest outstanding, total investment return, ratios to average net
assets and other supplemental data for each period indicated. This information
has been derived from the Series' financial statements.
<TABLE>
<CAPTION>
Six Months Ended Year Ended December 31,
June 30, 1997 ---------------------------------------------------
PER SHARE DATA: (Unaudited) 1996 1995 1994 1993 1992
---------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....... $ 10.60 $ 11.70 $ 12.37 $ 12.92 $ 10.14 $ 10.76
------- ------- ------- ------- ------- -------
Investment Operations:
Investment income--net ..................... .03 .63 .51 .35 .20 .22
Net realized and unrealized gain (loss)
on investments ........................... 2.14 (1.05) (.54) (.56) 2.71 (.11)
------- ------- ------- ------- ------- -------
Total from Investment Operations ........... 2.17 (.42) (.03) (.21) 2.91 .11
------- ------- ------- ------- ------- -------
Distributions:
Dividends from investment income--net ...... -- (.56) (.64) (.32) (.13) (.31)
Dividends in excess of investment
income--net .............................. -- (.06) -- (.02) -- --
Dividends from net realized gain
on investments ........................... -- -- -- -- -- (.42)
Paid-in capital ............................ -- (.06) -- -- -- --
------- ------- ------- ------- ------- -------
Total Distributions ........................ -- (.68) (.64) (.34) (.13) (.73)
------- ------- ------- ------- ------- -------
Net asset value, end of period ............. $ 12.77 $ 10.60 $ 11.70 $ 12.37 $ 12.92 $ 10.14
======= ======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN ........................ 20.47%(1) (3.62%) (.26%) (1.56%) 28.59% 1.07%
RATIOS/SUPPLEMENTAL DATA:
Ratio of expenses to average net assets .60%(1) .93% .94% .25% .27% .97%
Ratio of net investment income to average
net assets ............................... .20%(1) 4.12% 3.56% 3.54% 1.87% 1.88%
Decrease reflected in above expense ratios
due to undertakings by The Dreyfus
Corporation and Comstock Partners, Inc. -- -- -- .88% 2.25% 1.70%
Portfolio Turnover Rate .................... 94.68%(1) 124.19% 53.88% 25.96% 99.08% 118.78%
Average commission rate paid(2) ............ $ .0472 $ .0250 -- -- -- --
Net Assets, end of period (000's Omitted) .. $33,074 $21,101 $25,272 $30,510 $ 7,957 $ 1,865
</TABLE>
- ----------------
(1) Not annualized.
(2) For fiscal years beginning January 1, 1996, the Series is required to
disclose its average commission rate paid per share for purchases and
sales of investment securities.
See notes to financial statements.
<PAGE>
Dreyfus Variable Investment Fund, Managed Assets Portfolio
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Unaudited)
NOTE 1--General:
Dreyfus Variable Investment Fund (the "Fund") is registered under the
Investment Company Act of 1940 ("Act") as an open-end management investment
company, operating as a series company currently offering thirteen series,
including the Managed Assets Portfolio (the "Series") and is intended to be a
funding vehicle for variable annuity contracts and variable life insurance
policies to be offered by the separate accounts of life insurance companies. The
Series is a diversified portfolio. The Series' investment objective is to
maximize total return, consisting of capital appreciation and current income.
The Dreyfus Corporation ("Dreyfus") serves as the Series' investment adviser.
Premier Mutual Fund Services, Inc. is the distributor of the Series' shares,
which are sold without a sales charge.
The Fund currently functions as the funding vehicle for the Dreyfus Series
2000 Variable Annuity Contract (the "Account") issued by Mutual Benefit Life
Insurance Company ("Mutual Benefit Life"). On July 16, 1991, the Superior Court
of New Jersey entered an Order (the "Order") appointing the New Jersey Insurance
Commissioner as Rehabilitator of Mutual Benefit Life. The Commissioner was
granted immediate exclusive possession and control of, and title to, the
business and assets of Mutual Benefit Life, including the assets and liabilities
of the Account.
The Commissioner was empowered by the Order to take such steps as he deemed
appropriate toward removing the cause and conditions that made rehabilitation
necessary. On January 15, 1993, the Commissioner filed the First Amended Plan of
Rehabilitation ("Plan") with the Court. The Plan stipulated that the assets and
liabilities of the Account would be transferred to a separate account of MBL
Life Assurance Corporation ("MBLLAC"), a wholly-owned subsidiary of Mutual
Benefit Life. The Plan also provided for the transfer of the ownership of the
stock of MBLLAC to a Trust. The Commissioner was designated as the sole Trustee
of the Trust. On August 12, 1993, the Court rendered an opinion approving the
Plan with certain modifications. Two subsequent amendments to the Plan were
filed and approved by the Court. None of the modifications or amendments
affected the status of the Account. On November 10, 1993, the Court issued an
Order of Confirmation permitting the implementation of the Plan.
An order was also issued by the Court on January 28, 1994, approving the
form of the Third Amended Plan of Rehabilitation, the Election Materials and
related documents. On April 29, 1994, the Plan was implemented. Substantially
all of the assets of Mutual Benefit Life were transferred to MBLLAC which
assumed and reinsured Mutual Benefit Life's restructured insurance liabilities.
The stock of MBLLAC was assigned to the Stock Trust and the Commissioner was
designated as Trustee.
In view of the terms and conditions of both the Order and the Plan,
applications for new contracts and additional purchase payments under existing
contracts are currently not being accepted by the Account. The terms of the
Order and the Plan permit redemptions from the Account to continue as requested.
The proceedings of the New Jersey Insurance Commissioner with respect to
Mutual Benefit Life or the Account do not apply to the separate accounts of
other life insurance companies that may use the Fund as a funding vehicle for
contracts or policies issued by them.
<PAGE>
Dreyfus Variable Investment Fund, Managed Assets Portfolio
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Unaudited) (continued)
The Fund accounts separately for the assets, liabilities and operations of
each series. Expenses directly attributable to each series are charged to that
series' operations; expenses which are applicable to all series are allocated
among them on a pro rata basis.
The Series' financial statements are prepared in accordance with generally
accepted accounting principles which may require the use of management estimates
and assumptions. Actual results could differ from those estimates.
NOTE 2--Significant Accounting Policies:
(a) Portfolio valuation: Investments in securities (including options and
financial futures) are valued at the last sales price on the securities exchange
on which such securities are primarily traded or at the last sales price on the
national securities market. Securities not listed on an exchange or the national
securities market, or securities for which there were no transactions, are
valued at the average of the most recent bid and asked prices, except for open
short positions, where the asked price is used for valuation purposes. Bid price
is used when no asked price is available. Investments denominated in foreign
currencies are translated to U.S. dollars at the prevailing rates of exchange.
Forward currency exchange contracts are valued at the forward rate.
(b) Foreign currency transactions: The Series does not isolate that portion
of the results of operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in market prices of
securities held. Such fluctuations are included with the net realized and
unrealized gain or loss from investments.
Net realized foreign exchange gains or losses arise from sales and
maturities of short-term securities, sales of foreign currencies, currency gains
or losses realized on securities transactions, the difference between the
amounts of dividends, interest and foreign withholding taxes recorded on the
Series' books, and the U.S. dollar equivalent of the amounts actually received
or paid. Net unrealized foreign exchange gains or losses arise from changes in
the value of assets and liabilities other than investments in securities,
resulting from changes in exchange rates. Such gains and losses are included
with net realized and unrealized gain or loss on investments.
(c) Securities transactions and investment income: Securities transactions
are recorded on a trade date basis. Realized gain and loss from securities
transactions are recorded on the identified cost basis. Dividend income is
recognized on the ex-dividend date and interest income, including, where
applicable, amortization of discount on investments, is recognized on the
accrual basis.
(d) Dividends to shareholders: Dividends are recorded on the ex-dividend
date. Dividends from investment income-net and dividends from net realized
capital gain are normally declared and paid annually, but the Series may make
distributions on a more frequent basis to comply with the distribution
requirements of the Internal Revenue Code. This may result in distributions that
are in excess of investment income-net on a fiscal year basis. To the extent
that the net realized capital gain can be offset by capital loss carryovers, it
is the policy of the Series not to distribute such gain.
<PAGE>
Dreyfus Variable Investment Fund, Managed Assets Portfolio
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Unaudited) (continued)
(e) Federal income taxes: It is the policy of the Series to continue to
qualify as a regulated investment company, if such qualification is in the best
interests of its shareholders, by complying with the applicable provisions of
the Internal Revenue Code, and to make distributions of taxable income
sufficient to relieve it from substantially all Federal income and excise taxes.
The Series has an unused capital loss carryover of approximately $2,511,000
available for Federal income tax purposes to be applied against future net
securities profits, if any, realized subsequent to December 31, 1996. The
carryover does not include net realized securities losses from November 1, 1996
through December 31, 1996 which are treated, for Federal income tax purposes,
as arising in fiscal 1997. If not applied, $5,500 of the carryover expires in
fiscal 2001, $364,100 expires in fiscal 2002, $1,407,400 expires in fiscal 2003
and $734,000 expires in fiscal 2004.
NOTE 3--Bank Line of Credit:
In accordance with an agreement with a bank, the Series may borrow up to $5
million under a short-term unsecured line of credit. Interest on borrowings is
charged at rates which are related to the Federal Funds rate in effect from time
to time. For the period ended June 30, 1997, the Series did not borrow under the
line of credit.
NOTE 4--Investment Advisory Fee and Other Transactions With Affiliates:
(a) Pursuant to an amended Investment Advisory Agreement with Dreyfus, the
investment advisory fee is computed at the annual rate of .75 of 1% of the value
of the Series' average daily net assets and is payable monthly.
The Series compensates Dreyfus Transfer, Inc., a wholly-owned subsidiary of
Dreyfus, under a transfer agency agreement for providing personnel and
facilities to perform transfer agency services for the Series.
(b) Each trustee who is not an "affiliated person" as defined in the Act
receives from the Fund an annual fee of $2,500 and an attendance fee of $250 per
meeting. The Chairman of the Board receives an additional 25% of such
compensation.
NOTE 5--Securities Transactions:
(a) The following summarizes the aggregate amount of purchases and sales of
investment securities and securities sold short, excluding short-term securities
and forward currency exchange contracts during the period ended June 30, 1997:
<TABLE>
<CAPTION>
Purchases Sales
----------- -----------
<S> <C> <C>
Long transactions.......................................... $46,907,459 $20,194,438
Short sale transactions.................................... -- 434,942
----------- -----------
Total..................................................... $46,907,459 $20,629,380
=========== ===========
</TABLE>
<PAGE>
Dreyfus Variable Investment Fund, Managed Assets Portfolio
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Unaudited) (continued)
The Fund is engaged in short-selling which obligates the Fund to replace
the security borrowed by purchasing the security at current market value. The
Fund would incur a loss if the price of the security increases between the date
of the short sale and the date on which the Fund replaces the borrowed security.
The Fund would realize a gain if the price of the security declines between
those dates. Until the Fund replaces the borrowed security, the Fund will
maintain daily, a segregated account with a broker and custodian, of cash and
/or liquid securities sufficient to cover its short position. Securities sold
short at June 30, 1997, and their related market values and proceeds are set
forth in the Statement of Securities Sold Short.
The following summarizes open forward currency exchange contracts at June
30, 1997:
<TABLE>
<CAPTION>
Foreign
Currency Unrealized
Forward Currency Exchange Contracts Amount Proceeds Value Appreciation
- ----------------------------------- -------- -------- ----- ------------
<S> <C> <C> <C> <C>
Sales:
- -------
Swiss Francs, expiring 9/19/97...... 607,240 $425,000 $419,945 $5,055
======
</TABLE>
The Series enters into forward currency exchange contracts in order to
hedge its exposure to changes in foreign currency exchange rates on its foreign
portfolio holdings. When executing forward currency exchange contracts, the
Series is obligated to buy or sell a foreign currency at a specified rate on a
certain date in the future. With respect to sales of forward currency exchange
contracts, the Series would incur a loss if the value of the contract increases
between the date the forward contract is opened and the date the forward
contract is closed. The Series realizes a gain if the value of the contract
decreases between those dates. With respect to purchases of forward currency
exchange contracts, the Series would incur a loss if the value of the contract
decreases between the date the forward contract is opened and the date the
forward contract is closed. The Series realizes a gain if the value of the
contract increases between those dates. The Series is also exposed to credit
risk associated with counterparty nonperformance on these forward currency
exchange contracts which is typically limited to the unrealized gain on each
open contract.
(b) At June 30, 1997, accumulated net unrealized appreciation on
investments, forward currency exchange contracts and securities sold short was
$3,114,062, consisting of $4,015,005 gross unrealized appreciation and $900,943
gross unrealized depreciation.
At June 30, 1997, the cost of investments for Federal income tax purposes
was substantially the same as the cost for financial reporting purposes (see the
Statement of Investments).
<PAGE>
Dreyfus Variable Investment Fund,
Managed Assets Portfolio
200 Park Avenue
New York, NY 10166
Investment Adviser
The Dreyfus Corporation
200 Park Avenue
New York, NY 10166
Custodian
The Bank of New York
90 Washington Street
New York, NY 10286
Transfer Agent &
Dividend Disbursing Agent
Dreyfus Transfer, Inc.
P.O. Box 9671
Providence, RI 02940
Printed in U.S.A. 118SA976
<PAGE>
THE STRONG
DISCOVERY FUND II
SEMI-ANNUAL REPORT o JUNE 30, 1997
[PIE CHART OF ASSET DIVERSIFICATION EMPHASIZING STOCKS]
[STRONG LOGO]
STRONG FUNDS
<PAGE>
THE STRONG
DISCOVERY FUND II
SEMI-ANNUAL REPORT o JUNE 30, 1997
TABLE OF CONTENTS
INVESTMENT REVIEW
The Strong Discovery Fund II ......................................2
FINANCIAL INFORMATION
Schedule of Investments in Securities .............................4
Statement of Assets and Liabilities ...............................6
Statement of Operations ...........................................7
Statement of Changes in Net Assets ................................8
Notes to Financial Statements .....................................9
FINANCIAL HIGHLIGHTS ..................................................11
<PAGE>
THE STRONG DISCOVERY FUND II
OVERALL, THE RECENT MARKET ENVIRONMENT REMINDS US OF 1990 AND 1991.
The Strong Discovery Fund II seeks to provide investors with capital growth, a
goal we pursue by investing in a diversified portfolio of small-, mid-, and
larger-cap stocks. Our investment approach combines number-crunching analysis
with direct research, including on-site visits. Through frequent discussions
with management, suppliers, customers and competitors, we believe we can
identify vital aspects of companies that aren't reflected in their historical
financial statements--or their stock prices.
<TABLE>
<CAPTION>
========================================
ASSET ALLOCATION
Based on net assets as of 6-30-97
========================================
<S> <C>
[PIE CHART]
Stocks 94.5%
Short-Term Investments 5.5%
========================================
Discovery Fund II's portfolio measures up well under the key criteria we use
when selecting stocks--good businesses, good managements and attractive
valuations. In general, we are pleased with the quality and performance of the
companies in the portfolio. With few exceptions, they have been meeting or
exceeding their profit targets. We are also pleased with the valuation of the
portfolio, especially compared with the high valuations being accorded the large
companies that dominate the S&P 500 Index. As the following table illustrates,
the Fund's average valuation--as measured by its price/earnings ratio--is
slightly below the S&P 500's. Based on our analysis of the companies in the
portfolio, we estimate the portfolio's earnings growth potential to be more than
three times that of the S&P 500. By concentrating on companies with superior
growth potential, we seek to produce superior investment results over time.
</TABLE>
<TABLE>
<CAPTION>
P/E RATIO ESTIMATED
FUND (1998 EARNINGS) EARNINGS GROWTH(1)
- --------------------------------------------------------------------------------
<S> <C> <C>
Strong Discovery Fund II 17.9x 24.3%
S&P 500 Index 18.8x 7.8%
</TABLE>
In our investment process, we make forward-looking decisions. Our job is to
position the portfolio for what we expect to happen, not to chase after the
market sectors or stocks that have recently performed best. We continue to
believe that small- and medium-size growth stocks offer the most opportunity
looking forward. In hindsight, however, our decision to emphasize this group was
premature. As a result, our 4.26% total return for the first half of 1997
trailed the 20.61% return of the S&P 500 and the 10.16% return of our peer
group, the Lipper Capital Appreciation Funds Index.*(2)
2
<PAGE>
Overall, the recent market environment reminds us of 1990 and 1991. Then, as
now, investors moved toward indexation--trying to replicate the S&P 500 without
regard for the merits of the individual companies or their prices. Eventually
this cycle came to an end, creating an opportunity for investors willing to
consider stocks outside the S&P 500's largest. We have currently positioned the
Fund to benefit from what may be a similar scenario.
Thank you for your investment in the Strong Discovery Fund II. We appreciate
your support, and are committed to earning it.
Sincerely,
/s/Richard S. Strong
- --------------------
Richard S. Strong
/s/ Chip Paquelet
- -------------------
Charles A. Paquelet
Portfolio Managers
[PHOTO OF RICHARD S. STRONG & CHARLES A. PAQUELET]
<TABLE>
<CAPTION>
================================================================================
GROWTH OF AN ASSUMED $10,000 INVESTMENT
From 5-8-92 to 6-30-97
================================================================================
<S> <C> <C> <C>
[GRAPH]
THE STRONG Lipper Capital
DISCOVERY II S & P 500 Appreciation
FUND Stock Index* Funds Index*
4-92 10,000 10,000 10,000
12-92 10,886 10,680 11,024
12-93 13,284 11,756 12,760
12-94 12,569 11,911 12,446
12-95 17,000 16,387 16,379
12-96 17,138 20,150 18,827
6-97 17,868 24,303 20,741
This graph, provided in accordance with SEC regulations, compares a $10,000
investment in the Fund, made at its inception, with a similar investment in the
Standard & Poor's 500 Stock Index ("S&P 500") and the Lipper Capital
Appreciation Funds Index. Results include the reinvestment of all dividends and
capital gains distributions. Performance is historical and does not represent
future results. Investment returns and principal value vary, and you may have a
gain or loss when you sell shares. To equalize time periods, the indexes'
performance was prorated for the month of May 1992.
</TABLE>
================================================================================
<TABLE>
<CAPTION>
=======================
AVERAGE ANNUAL
TOTAL RETURNS(2)
As of 6-30-97
=======================
<S> <C>
1-YEAR 7.58%
3-YEAR 14.56%
5-YEAR 13.25%
SINCE INCEPTION 11.94%
(on 5-8-92)
=======================
</TABLE>
- --------------------------------------------------------------------------------
* The S&P 500 is an unmanaged index generally representative of the U.S.
stock market, without regard to company size. The Lipper Capital
Appreciation Funds Index is an equally-weighted performance index of the
largest qualifying funds in this Lipper category. Source of the S&P 500
index data is Micropal. Source of the Lipper index data is Lipper
Analytical Services, Inc.
1 Earnings growth has been estimated for a projected five-year period. The
Discovery Fund II's earnings growth estimate has been generated from our
own analysis of the portfolio's individual securities as of June 30, 1997.
The earnings growth projection for the S&P 500 has been based on a
consensus of earnings estimates from six Wall Street investment firms as
shown by Bloomberg dated June 30, 1997.
2 Average annual total return and total return measure change in the value of
an investment, assuming reinvestment of all dividends and capital gains.
Average annual total return reflects annualized change, while total return
reflects aggregate change. The Fund's returns include the effect of
deducting the Fund's expenses, but do not include charges and expenses
attributable to any particular insurance product. Including such insurance
fees and expenses from the Fund's return quotations has the effect of
decreasing the performance quoted.
3
<PAGE>
SCHEDULE OF INVESTMENTS IN SECURITIES June 30, 1997 (Unaudited)
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL VALUE
AMOUNT (NOTE 2)
- ----------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 94.5%
AEROSPACE & DEFENSE 0.8%
Hexcel Corporation (b) 71,600 $1,235,100
UNC, Inc. (b) 25,000 365,625
----------
1,600,725
BANK - MONEY CENTER 2.2%
BankAmerica Corporation 16,700 1,078,194
Chase Manhattan Corporation 17,121 1,661,807
Citicorp 16,125 1,944,070
----------
4,684,071
COMMERCIAL SERVICE 7.3%
Accustaff, Inc. (b) 71,051 1,683,020
American Oncology Resources, Inc. (b) 16,600 280,125
Bacou U.S.A., Inc. (b) 46,250 751,562
Budget Group, Inc. Class A (b) 25,200 869,400
Consolidated Graphics, Inc. (b) 64,950 2,711,662
Getty Communications PLC Sponsored ADR (b) 77,700 1,146,075
Individual, Inc. (b) 68,100 272,400
Iron Mountain, Inc. (b) 7,900 237,000
Lason Holdings, Inc. (b) 1,825 51,328
Outdoor Systems, Inc. (b) 43,950 1,681,087
Pittston Company Brinks Group 42,300 1,269,000
Registry, Inc. (b) 14,300 657,800
Rollins Truck Leasing Corporation 41,300 614,338
The Sabre Group Holdings, Inc. (b) 100 2,713
Sitel Corporation (b) 76,900 1,586,063
Universal Outdoor Holdings, Inc. (b) 44,675 1,558,041
----------
15,371,614
COMPUTER - MAINFRAME 1.7%
International Business Machines Corporation 40,200 3,625,537
COMPUTER - PERIPHERAL EQUIPMENT 0.9%
MICROS Systems, Inc. (b) 20,500 861,000
Storage Technology Corporation (b) 24,900 1,108,050
----------
1,969,050
COMPUTER - PERSONAL & WORKSTATION 1.4%
Compaq Computer Corporation (b) 29,000 2,878,250
COMPUTER SERVICE 2.7%
America Online, Inc. (b) 35,900 1,996,938
Ceridian Corporation (b) 4,000 169,000
Fiserv, Inc. (b) 35,850 1,599,806
National Techteam, Inc. (b) 29,600 632,700
Sykes Enterprises, Inc. (b) 45,425 1,181,050
----------
5,579,494
COMPUTER SOFTWARE 3.8%
Ascend Communications, Inc. (b) 6,100 240,187
Computer Associates International, Inc. 29,300 1,631,644
Emulex Corporation (b) 9,800 149,450
Hummingbird Communications, Ltd. (b) 38,800 996,675
IONA Technologies PLC ADR (b) 23,600 466,100
McAfee Associates, Inc. (b) 32,550 2,054,719
Microsoft Corporation (b) 8,300 1,048,912
Sterling Commerce, Inc. (b) 43,300 1,423,488
----------
8,011,175
CONSUMER - MISCELLANEOUS 1.1%
Equity Corporation International (b) 16,200 391,838
Service Corporation International 42,950 1,411,981
Stewart Enterprises, Inc. Class A 10,000 420,000
----------
2,223,819
DIVERSIFIED OPERATIONS 0.1%
National Service Industries, Inc. 4,600 223,962
ELECTRICAL EQUIPMENT 0.7%
Berg Electronics Corporation (b) 30,200 1,085,313
Westinghouse Electric Corporation 18,000 416,250
----------
1,501,563
ELECTRONIC PARTS DISTRIBUTION 1.3%
Kent Electronics Corporation (b) 77,000 2,824,937
ELECTRONICS - SEMICONDUCTOR/COMPONENT 0.8%
General Cable Corporation (b) 11,250 288,281
Intel Corporation 6,975 989,142
Micron Technology, Inc. (b) 6,600 263,588
Uniphase Corporation (b) 2,600 151,450
----------
1,692,461
FINANCE - MISCELLANEOUS 1.9%
American Express Company 27,400 2,041,300
Checkfree Corporation (b) 43,400 764,925
PMT Services, Inc. (b) 72,300 1,102,575
Providian Financial Corporation (b) 2,500 80,313
---------
3,989,113
FOOD 0.1%
Lancaster Colony Corporation 4,400 212,850
HEALTHCARE - DRUG/DIVERSIFIED 1.4%
Halsey Drug Company, Inc. (b) 440,400 2,036,850
Ivax Corporation (b) 76,300 853,606
---------
2,890,456
HEALTHCARE - MEDICAL SUPPLY 10.1%
Becton, Dickinson & Company 14,750 746,719
Cohr, Inc. (b) 108,150 2,027,813
Covance, Inc. (b) 37,000 714,562
Dentsply International, Inc. 75,250 3,687,250
McKesson Corporation 51,250 3,971,875
NCS Healthcare, Inc. Class A (b) 26,650 809,494
Omnicare, Inc. 13,650 428,269
Steris Corporation (b) 77,100 2,881,612
Suburban Ostomy Supply Company, Inc. (b) 259,000 2,428,125
Sybron International Corporation (b) 91,775 3,659,528
---------
21,355,247
HEALTHCARE - PATIENT CARE 1.3%
United Dental Care, Inc. (b) 174,700 2,620,500
HEALTHCARE - PRODUCT 1.3%
Baxter International, Inc. 7,650 399,713
Boston Scientific Corporation (b) 19,700 1,210,319
Cytyc Corporation (b) 8,300 225,137
Sabratek Corporation (b) 35,000 980,000
---------
2,815,169
HOUSEHOLD APPLIANCES & FURNISHINGS 0.7%
Harman International Industries, Inc. 27,450 1,156,331
Newell Companies, Inc. 4,300 170,388
Sunbeam Corporation 5,200 196,300
---------
1,523,019
HOUSING RELATED 0.7%
Watsco, Inc. 59,900 1,497,500
INSURANCE - LIFE 0.4%
Conseco, Inc. 22,800 843,600
INSURANCE - MULTI-LINE 0.4%
MGIC Investment Corporation 15,400 738,237
INSURANCE - PROPERTY & CASUALTY 0.1%
Hartford Financial Services Group, Inc. 3,250 268,937
LEISURE PRODUCT 1.8%
Action Performance Companies, Inc. (b) 5,400 130,950
Harley-Davidson, Inc. 65,225 3,126,723
SCP Pool Corporation (b) 23,150 489,044
---------
3,746,717
LEISURE SERVICE 2.3%
Candlewood Hotel Company, Inc. (b) 79,000 661,625
Host Marriott Corporation (b) 23,350 415,922
International Game Technology 107,400 1,906,350
Promus Hotel Corporation (b) 19,900 771,125
Regal Cinemas, Inc. (b) 30,300 999,900
---------
4,754,922
MACHINE TOOL 1.2%
Applied Power, Inc. 47,500 2,452,188
</TABLE>
See notes to financial statements.
4
<PAGE>
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL VALUE
AMOUNT (NOTE 2)
- --------------------------------------------------------------------------------------
<S> <C> <C>
MACHINERY - MISCELLANEOUS 0.9%
Greenwich Air Services, Inc. 67,075 $ 1,949,367
MACHINERY - TRANSPORTATION EQUIPMENT
& PARTS 0.8%
Miller Industries, Inc. (b) 109,250 1,748,000
MEDIA - RADIO/TV 1.0%
Clear Channel Communications, Inc. (b) 33,100 2,035,650
NATURAL GAS DISTRIBUTION 0.1%
WICOR, Inc. 7,425 289,111
OFFICE AUTOMATION 5.1%
Danka Business Systems PLC Sponsored ADR 249,225 10,187,072
Xerox Corporation 7,300 575,787
------------
10,762,859
OIL - INTERNATIONAL INTEGRATED 0.3%
Santa Fe International Corporation (b) 17,800 605,200
OIL - NORTH AMERICAN EXPLORATION &
PRODUCTION 6.0%
Ocean Energy, Inc. (b) 211,375 9,776,094
Union Pacific Resources Group, Inc. 118,000 2,935,250
------------
12,711,344
OIL WELL EQUIPMENT & SERVICE 5.7%
Cooper Cameron Corporation (b) 20,900 977,075
ENSCO International, Inc. (b) 28,850 1,521,837
Global Marine, Inc. (b) 28,950 673,088
Marine Drilling Companies, Inc. (b) 91,250 1,790,781
Nabors Industries, Inc. (b) 55,850 1,396,250
Noble Drilling Corporation (b) 156,200 3,524,263
Rowan Companies, Inc. (b) 9,900 279,056
Schlumberger, Ltd. 14,950 1,868,750
------------
12,031,100
PERSONAL & COMMERCIAL LENDING 1.9%
Associates First Capital Corporation 55,400 3,074,700
Household International, Inc. 7,700 904,269
------------
3,978,969
POLLUTION CONTROL 0.0%
Waste Industries, Inc. (b) 4,800 84,600
RAILROAD 1.0%
Burlington Northern Santa Fe Corporation 24,100 2,165,988
REAL ESTATE 0.1%
Charles E. Smith Residential Realty, Inc. 7,450 215,119
RETAIL - DISCOUNT & VARIETY 1.5%
Consolidated Stores Corporation (b) 69,987 2,432,066
ShopKo Stores, Inc. 26,000 663,000
------------
3,095,066
RETAIL - DRUG STORE 0.5%
CVS Corporation 1 51
Rite Aid Corporation 21,400 1,067,325
------------
1,067,376
RETAIL - RESTAURANT 2.9%
Casa Ole Restaurants, Inc. (b) 72,600 671,550
Quality Dining, Inc. (b) 181,500 850,781
Rainforest Cafe, Inc. (b) 182,800 4,638,550
------------
6,160,881
RETAIL - SPECIALTY 12.2%
Borders Group, Inc. (b) 44,200 1,066,325
CUC International, Inc. (b) 84,250 2,174,703
Casey's General Stores, Inc. 16,600 357,419
Central Garden & Pet Company (b) 190,000 4,750,000
Eagle Hardware & Garden, Inc. (b) 39,100 894,413
Goody's Family Clothing, Inc. (b) 24,850 680,269
The Hertz Corporation (b) 63,450 2,284,200
Just For Feet, Inc. (b) 68,150 1,188,366
MSC Industrial Direct Company, Inc. Class A (b) 18,900 758,362
Movie Gallery, Inc. (b) 408,400 2,603,550
Regis Corporation 20,400 481,950
Renters Choice, Inc. (b) 89,000 1,768,875
Staples, Inc. (b) 66,750 1,551,937
U.S. Office Products Company (b) 18,700 571,519
Wilmar Industries, Inc. (b) 105,450 2,570,344
Zale Corporation (b) 100,500 1,991,156
------------
25,693,388
SAVINGS & LOAN 2.2%
TCF Financial Corporation 92,500 4,567,187
TELECOMMUNICATION EQUIPMENT 1.2%
Aware, Inc. (b) 16,700 246,325
Belden, Inc. 33,700 1,147,906
Communications Central, Inc. (b) 25,950 285,450
General Instrument Corporation (b) 15,300 382,500
Scientific-Atlanta, Inc. 17,800 389,375
------------
2,451,556
TOBACCO 0.7%
Philip Morris Companies, Inc. 33,400 1,482,125
TRANSPORTATION SERVICE 1.9%
Coach USA, Inc. (b) 93,900 2,494,219
Hub Group, Inc. Class A (b) 49,275 1,484,409
------------
3,978,628
------------
TOTAL COMMON STOCKS (COST $184,765,605) 198,968,627
SHORT-TERM INVESTMENTS (a) 1.7%
COMMERCIAL PAPER 0.3%
INTEREST BEARING, DUE UPON DEMAND
American Family Financial Services, Inc., 5.29% $ 378,100 378,100
Johnson Controls, Inc., 5.31% 183,900 183,900
Eli Lilly & Company, 5.09% 100 100
------------
Total Commercial Paper 562,100
REPURCHASE AGREEMENT 1.4%
Goldman, Sachs & Company (Dated 6/30/97), 5.75%
Due 7/01/97 (Repurchase proceeds $3,000,479);
Collateralized by $2,505,000 United States
Treasury Bonds, 10.75%, Due 5/15/03 (Market
Value $3,067,066) (c) 3,000,000 3,000,000
------------
TOTAL SHORT-TERM INVESTMENTS
(COST $3,562,100) 3,562,100
------------
TOTAL INVESTMENTS IN SECURITIES
(COST $188,327,705) 96.2% 202,530,727
Other Assets and Liabilities, Net 3.8% 7,931,407
------------
NET ASSETS 100.0% $210,462,134
============
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF
COUNTRY DIVERSIFICATION NET ASSETS
- -------------------------------------------------------------------
<S> <C>
United States ....................................... 90.2%
United Kingdom ...................................... 5.6
Canada .............................................. 0.4
Other Assets and Liabilities, Net ................... 3.8
------
Total 100.0%
======
</TABLE>
LEGEND
- ------
(a) Short-term investments include any security which has a maturity of less
than one year.
(b) Non-income producing security.
(c) The Fund may engage in repurchase agreements where the underlying
collateral consists of U.S. Government securities which are maintained in a
segregated account with a custodian. The market value of the collateral
must exceed the principal amount by at least two percent on a daily basis.
Percentages are stated as a percent of net assets.
5
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
- -------------------------------------------------------------------------------
June 30, 1997 (Unaudited)
<S> <C>
ASSETS:
Investments in Securities, at Value (Cost of $188,327,705) $202,530,727
Receivable from Brokers for Securities Sold 9,248,452
Dividends and Interest Receivable 121,295
Other Assets 7,754
------------
Total Assets 211,908,228
LIABILITIES:
Payable to Brokers for Securities Purchased 1,376,562
Accrued Operating Expenses and Other Liabilities 69,532
------------
Total Liabilities 1,446,094
------------
NET ASSETS $210,462,134
============
NET ASSETS CONSIST OF:
Capital (par value and paid-in surplus) 206,535,377
Undistributed Net Investment Loss (673,875)
Undistributed Net Realized Loss (9,601,229)
Net Unrealized Appreciation 14,201,861
------------
Net Assets $210,462,134
============
Capital Shares Outstanding (Unlimited Number Authorized) 18,683,469
NET ASSET VALUE PER SHARE $11.26
======
</TABLE>
6
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 1997 (Unaudited)
<S> <C>
INCOME:
Dividends $ 444,852
Interest 85,324
----------
Total Income 530,176
EXPENSES:
Investment Advisory Fees 991,844
Custodian Fees 22,657
Shareholder Servicing Costs 173,079
Other 16,471
----------
Total Expenses 1,204,051
----------
NET INVESTMENT LOSS (673,875)
REALIZED AND UNREALIZED GAIN:
Net Realized Gain on:
Investments 6,986,881
Futures Contracts 447
----------
Net Realized Gain 6,987,328
Change in Unrealized Appreciation/Depreciation on:
Investments 2,157,318
Foreign Currencies 186
----------
Net Change in Unrealized Appreciation/Depreciation 2,157,504
----------
NET GAIN 9,144,832
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $8,470,957
==========
</TABLE>
7
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
- ----------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DEC. 31, 1996
---------------- -------------
(UNAUDITED)
<S> <C> <C>
OPERATIONS:
Net Investment Loss ($ 673,875) ($ 646,262)
Net Realized Gain 6,987,328 1,976,658
Change in Unrealized Appreciation/Depreciation 2,157,504 (455,188)
------------ -------------
Increase in Net Assets Resulting from Operations 8,470,957 875,208
DISTRIBUTIONS:
In Excess of Net Investment Income -- (20,605,467)
From Net Realized Gains -- (27,075,722)
------------ -------------
Total Distributions -- (47,681,189)
CAPITAL SHARE TRANSACTIONS:
Proceeds from Shares Sold 40,515,989 99,577,424
Proceeds from Reinvestment of Dividends -- 47,654,898
Proceeds from Shares Redeemed (67,936,911) (116,060,764)
------------ -------------
Increase (Decrease) in Net Assets from Capital Share Transactions (27,420,922) 31,171,558
------------ -------------
TOTAL DECREASE IN NET ASSETS (18,949,965) (15,634,423)
NET ASSETS:
Beginning of Period 229,412,099 245,046,522
------------ -------------
End of Period $210,462,134 $ 229,412,099
============ =============
TRANSACTIONS IN SHARES OF THE FUND:
Sold 3,809,289 8,622,762
Issued in Reinvestment of Dividends -- 4,416,662
Redeemed (6,363,267) (10,034,779)
------------ -------------
Net Increase (Decrease) in Shares of the Fund (2,553,978) 3,004,645
============ =============
</TABLE>
8
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1997 (Unaudited)
1. ORGANIZATION
The Strong Discovery Fund II is a diversified series of the Strong Variable
Insurance Funds, Inc., an open-end management investment company registered
under the Investment Company Act of 1940.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements.
(A) Security Valuation -- Portfolio securities traded primarily on a
principal securities exchange are valued at the last reported sales
price or the mean between the latest bid and asked prices where no
last sales price is available. Securities traded over-the-counter are
valued at the mean of the latest bid and asked prices or the last
reported sales price. Debt securities not traded on a principal
securities exchange are valued through valuation obtained from a
commercial pricing service, otherwise sale or bid prices are used.
Securities for which market quotations are not readily available when
held by the Fund are valued at fair value as determined in good faith
under consistently applied procedures established by and under the
general supervision of the Board of Directors. Securities which are
purchased within 60 days of their stated maturity are valued at
amortized cost, which approximates current value.
The Fund may own certain investment securities which are restricted as
to resale. These securities are valued after giving due consideration
to pertinent factors, including recent private sales, market
conditions and the issuer's financial performance. The Fund generally
bears the costs, if any, associated with the disposition of restricted
securities.
(B) Federal Income and Excise Taxes and Distributions to Shareholders --
It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and
to distribute substantially all of its taxable income to its
shareholders in a manner which results in no tax cost to the Fund.
Therefore, no federal income or excise tax provision is required.
The character of distributions made during the year from net
investment income or net realized gains may differ from the
characterization for federal income tax purposes due to differences in
the recognition of income and expense items for financial statement
and tax purposes. Where appropriate, reclassifications between net
asset accounts are made for such differences that are permanent in
nature.
(C) Realized Gains and Losses on Investment Transactions -- Gains or
losses realized on investment transactions are determined by comparing
the identified cost of the security lot sold with the net sales
proceeds.
(D) Futures -- Upon entering into a futures contract, the Fund pledges to
the broker cash or other investments equal to the minimum "initial
margin" requirements of the exchange. The Fund also receives from or
pays to the broker an amount of cash equal to the daily fluctuation in
the value of the contract. Such receipts or payments are known as
"variation margin," and are recorded as unrealized gains or losses.
When the futures contract is closed, a realized gain or loss is
recorded equal to the difference between the value of the contract at
the time it was opened and the value at the time it was closed.
(E) Options -- Premiums received by the Fund upon writing put or call
options are recorded as an asset with a corresponding liability which
is subsequently adjusted to the current market value of the option.
When an option expires, is exercised, or is closed, the Fund realizes
a gain or loss, and the liability is eliminated. The Fund continues to
bear the risk of adverse movements in the price of the underlying
asset during the period of the option, although any potential loss
during the period would be reduced by the amount of the option premium
received.
(F) Foreign Currency Translation -- Investment securities and other assets
and liabilities initially expressed in foreign currencies are
converted to U.S. dollars based upon current exchange rates. Purchases
and sales of foreign investment securities and income are converted to
U.S. dollars based upon currency exchange rates prevailing on the
respective dates of such transactions. The effect of changes in
foreign exchange rates on realized and unrealized security gains or
losses is reflected as a component of such gains or losses.
(G) Forward Foreign Currency Exchange Contracts -- Forward foreign
currency exchange contracts are valued at the forward rate and are
marked-to-market daily. The change in market value is recorded as an
unrealized gain or loss. When the contract is closed, the Fund records
an exchange gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it
was closed.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
June 30, 1997 (Unaudited)
(H) Additional Investment Risk -- The use of futures contracts, options,
foreign denominated assets, forward foreign currency exchange
contracts and other similar instruments for purposes of hedging the
Fund's investment portfolio involves, to varying degrees, elements of
market risk in excess of the amount recognized in the statement of
assets and liabilities. The predominant risk with futures contracts is
an imperfect correlation between the value of the contracts and the
underlying securities. Foreign denominated assets and forward foreign
currency exchange contracts may involve greater risks than domestic
transactions, including currency, political and economic, regulatory
and market risks.
(I) Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of increases and decreases in net assets from
operations during the reporting period. Actual results could differ
from those estimates.
(J) Other -- Investment security transactions are recorded as of the trade
date. Dividend income and distributions to shareholders are recorded
on the ex-dividend date. Interest income is recorded on the accrual
basis and includes amortization of premium and discounts.
3. RELATED PARTY TRANSACTIONS
Strong Capital Management, Inc. (the "Advisor"), with whom certain officers
and directors of the Fund are affiliated, provides investment advisory
services to the Fund. Investment advisory fees, which are established by
terms of the Advisory Agreement, are based on an annualized rate of 1.00%
of the average daily net assets of the Fund. Advisory fees are subject to
reimbursement by the Advisor if the Fund's operating expenses exceed
certain levels.
The Fund may invest cash reserves in money market funds sponsored and
managed by Strong Capital Management, Inc., subject to certain limitations.
The terms of such transactions are identical to those of non-related
entities except that, to avoid duplicate investment advisory fees, the
Advisor remits to the Fund an amount equal to all fees otherwise due to it
under its investment advisory agreement for the assets invested in such
money market funds.
The amount payable to the Advisor at June 30, 1997, other shareholder
servicing expenses paid to the Advisor, and unaffiliated directors' fees
for the six months ended June 30, 1997, were $15,441, $40 and $2,044,
respectively.
4. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of long-term securities for the six
months ended June 30, 1997 were $211,485,686 and $234,914,522,
respectively.
5. INCOME TAX INFORMATION
At June 30, 1997, the cost of investments in securities for federal income
tax purposes was $189,310,050. Net unrealized appreciation of securities
was $13,220,677, consisting of gross unrealized appreciation and
depreciation of $25,694,877 and $12,474,200, respectively.
At December 31, 1996, net capital loss carryovers, expiring in varying
amounts through 2004, were $15,590,678.
10
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA (a)
-------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
--------------------------------------------------
Net Realized
Net Asset Net and Unrealized Total
Value, Investment Gains from
Beginning Income (Losses)on Investment
of Period (Loss) Investments Operations
<S> <C> <C> <C> <C>
June 30, 1997 (c) $10.80 ($0.04) $ 0.50 $ 0.46
Dec. 31, 1996 13.44 (0.05) 0.04 (0.01)
Dec. 31, 1995 10.07 (0.03) 3.58 3.55
Dec. 31, 1994 11.54 0.10 (0.71) (0.61)
Dec. 31, 1993 10.15 0.05 2.09 2.14
Dec. 31, 1992 (d) 10.00 0.04 0.78 0.82
</TABLE>
<TABLE>
<CAPTION>
LESS DISTRIBUTIONS
----------------------------------------------------------------------
In Excess From Net Asset
From Net of Net Net Value,
Investment Investment Realized Total End of
Income Income Gains Distributions Period
<S> <C> <C> <C> <C> <C>
June 30, 1997 (c) -- -- -- -- $11.26
Dec. 31, 1996 -- ($1.05) ($1.58) ($2.63) 10.80
Dec. 31, 1995 -- (0.18) -- (0.18) 13.44
Dec. 31, 1994 ($0.10) (0.43) (0.33) (0.86) 10.07
Dec. 31, 1993 (0.05) (0.70) -- (0.75) 11.54
Dec. 31, 1992 (d) (0.04) -- (0.63)(e) (0.67) 10.15
</TABLE>
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
RATIOS AND SUPPLEMENTAL DATA
----------------------------------------------------------------------------------
Net Ratio of Net
Assets, Ratio of Investment Average
End of Expenses Income Portfolio Commission
Total Period(In to Average to Average Turnover Rate
Return Millions) Net Assets Net Assets Rate Paid (b)
<S> <C> <C> <C> <C> <C> <C>
June 30, 1997 (c) +4.3% $210 1.2%* (0.7%)* 107.7% $0.0591
Dec. 31, 1996 +0.8% 229 1.2% (0.3%) 970.0% 0.0292
Dec. 31, 1995 +35.3% 245 1.3% (0.3%) 542.1%
Dec. 31, 1994 -5.4% 119 1.2% 1.1% 662.5%
Dec. 31, 1993 +22.0% 72 1.3% 0.5% 976.5%
Dec. 31, 1992 (d) +8.9% 27 1.7%* 0.5%* 1,149.6%
</TABLE>
* Calculated on an annualized basis.
(a) Information presented relates to a share of capital stock of the Fund
outstanding for the entire period.
(b) Disclosure required, effective for reporting periods beginning after
September 1, 1995.
(c) For the six months ended June 30, 1997 (Unaudited). Total return and
portfolio turnover rate are not annualized.
(d) Inception date is May 8, 1992. Total return and portfolio turnover rate are
not annualized.
(e) Ordinary income distribution for tax purposes.
11
<PAGE>
NOTES
- --------------------------------------------------------------------------------
12
<PAGE>
DIRECTORS
Richard S. Strong
John Dragisic
Willie D. Davis
Stanley Kritzik
Marvin E. Nevins
William F. Vogt
OFFICERS
Richard S. Strong, Chairman of the Board
John Dragisic, President
Lawrence A. Totsky, Vice President
Thomas P. Lemke, Vice President
John S. Weitzer, Vice President
Stephen J. Shenkenberg, Vice President and Secretary
John A. Flanagan, Treasurer
INVESTMENT ADVISOR
Strong Capital Management, Inc.
P.O. Box 2936, Milwaukee, Wisconsin 53201
CUSTODIAN
Firstar Trust Company
P.O. Box 701, Milwaukee, Wisconsin 53201
AUDITOR
Coopers & Lybrand L.L.P.
411 East Wisconsin Avenue, Milwaukee, Wisconsin 53202
LEGAL COUNSEL
Godfrey & Kahn, S.C.
780 North Water Street, Milwaukee, Wisconsin 53202
<PAGE>
[STRONG LOGO]
STRONG FUNDS DISTRIBUTORS, INC.
P.O. Box 2936 o Milwaukee, Wisconsin 53201 5516G97
<PAGE>
(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS FUND
VARIABLE INSURANCE PRODUCTS FUND II
VARIABLE INSURANCE PRODUCTS FUND III
MONEY MARKET PORTFOLIO
INVESTMENT GRADE BOND PORTFOLIO
HIGH INCOME PORTFOLIO
ASSET MANAGER PORTFOLIO
BALANCED PORTFOLIO
ASSET MANAGER: GROWTH PORTFOLIO
EQUITY-INCOME PORTFOLIO
GROWTH & INCOME PORTFOLIO
INDEX 500 PORTFOLIO
GROWTH OPPORTUNITIES PORTFOLIO
CONTRAFUND PORTFOLIO
GROWTH PORTFOLIO
OVERSEAS PORTFOLIO
SEMIANNUAL REPORT
JUNE 30, 1997
CONTENTS
MONEY MARKET PORTFOLIO 4 PERFORMANCE
5 FUND TALK: THE MANAGER'S OVERVIEW
6 INVESTMENTS
9 FINANCIAL STATEMENTS
INVESTMENT GRADE BOND PORTFOLIO 11 PERFORMANCE AND INVESTMENT SUMMARY
12 FUND TALK: THE MANAGER'S OVERVIEW
13 INVESTMENTS
18 FINANCIAL STATEMENTS
HIGH INCOME PORTFOLIO 20 PERFORMANCE AND INVESTMENT SUMMARY
21 FUND TALK: THE MANAGER'S OVERVIEW
22 INVESTMENTS
30 FINANCIAL STATEMENTS
ASSET MANAGER PORTFOLIO 32 PERFORMANCE AND INVESTMENT SUMMARY
33 FUND TALK: THE MANAGERS' OVERVIEW
35 INVESTMENTS
48 FINANCIAL STATEMENTS
BALANCED PORTFOLIO 50 PERFORMANCE AND INVESTMENT SUMMARY
51 FUND TALK: THE MANAGER'S OVERVIEW
52 INVESTMENTS
61 FINANCIAL STATEMENTS
ASSET MANAGER: GROWTH PORTFOLIO 63 PERFORMANCE AND INVESTMENT SUMMARY
64 FUND TALK: THE MANAGERS' OVERVIEW
66 INVESTMENTS
78 FINANCIAL STATEMENTS
EQUITY-INCOME PORTFOLIO 80 PERFORMANCE AND INVESTMENT SUMMARY
81 FUND TALK: THE MANAGER'S OVERVIEW
82 INVESTMENTS
87 FINANCIAL STATEMENTS
GROWTH & INCOME PORTFOLIO 89 PERFORMANCE AND INVESTMENT SUMMARY
90 FUND TALK: THE MANAGER'S OVERVIEW
91 INVESTMENTS
95 FINANCIAL STATEMENTS
INDEX 500 PORTFOLIO 97 PERFORMANCE AND INVESTMENT SUMMARY
98 FUND TALK: THE MANAGER'S OVERVIEW
99 INVESTMENTS
105 FINANCIAL STATEMENTS
GROWTH OPPORTUNITIES PORTFOLIO 107 PERFORMANCE AND INVESTMENT SUMMARY
108 FUND TALK: THE MANAGER'S OVERVIEW
109 INVESTMENTS
113 FINANCIAL STATEMENTS
CONTRAFUND PORTFOLIO 115 PERFORMANCE AND INVESTMENT SUMMARY
116 FUND TALK: THE MANAGER'S OVERVIEW
117 INVESTMENTS
126 FINANCIAL STATEMENTS
GROWTH PORTFOLIO 128 PERFORMANCE AND INVESTMENT SUMMARY
129 FUND TALK: THE MANAGER'S OVERVIEW
130 INVESTMENTS
134 FINANCIAL STATEMENTS
OVERSEAS PORTFOLIO 136 PERFORMANCE AND INVESTMENT SUMMARY
137 FUND TALK: THE MANAGER'S OVERVIEW
138 INVESTMENTS
143 FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS 145 NOTES TO THE FINANCIAL STATEMENTS
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR
THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUNDS. THIS REPORT IS
NOT
<PAGE>
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUNDS UNLESS
PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC,
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUNDS NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO
PERFORMANCE
To measure a money market fund's performance, you can look at either total
return or yield. Total return reflects the change in value of an
investment, assuming reinvestment of the fund's dividend income and capital
gains (the profits earned upon the sale of securities that have grown in
value). Yield measures the income paid by a fund. Since a money market fund
tries to maintain a $1 share price, yield is an important measure of
performance.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
JUNE 30, 1997 YEAR YEARS YEARS
MONEY MARKET 5.42% 4.64% 5.93%
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had achieved that return by performing
at a constant rate each year.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
If Fidelity had not reimbursed certain fund expenses, the past five and 10
year total returns would have been lower. Yield will vary.
YIELD
Row: 1, Col: 1, Value: 5.37
Row: 1, Col: 2, Value: 2.65
Row: 2, Col: 1, Value: 5.19
Row: 2, Col: 2, Value: 2.63
Row: 3, Col: 1, Value: 5.28
Row: 3, Col: 2, Value: 2.64
Row: 4, Col: 1, Value: 5.3
Row: 4, Col: 2, Value: 2.67
Row: 5, Col: 1, Value: 5.159999999999999
Row: 5, Col: 2, Value: 2.66
Money Market
MMDA
6% -
5% -
4% -
3% -
2% -
1% -
0%
7/2/97 4/2/97 12/30/96 10/2/96 6/26/96
MONEY MARKET 5.37% 5.19% 5.28% 5.30% 5.16%
MMDA 2.65% 2.63% 2.64% 2.67% 2.66%
YIELD refers to the income paid by the fund over a given period. Yields for
money market funds are usually for seven-day periods, expressed as annual
percentage rates. A yield that assumes income earned is reinvested or
compounded is called an effective yield. The chart above shows the fund's
current seven-day yield at quarterly intervals over the past year. You can
compare these yields to the all taxable money market funds average and the
bank money market deposit account (MMDA) average. The MMDA average is
supplied by BANK RATE MONITOR. TM
COMPARING PERFORMANCE
There are some important differences between a
bank money market deposit account (MMDA)
and a money market fund. First, the U.S.
Government neither insures nor guarantees a
money market fund. In fact, there is no assurance
that a money fund will maintain a $1 share price.
Second, a money market fund returns to its
shareholders income earned by the fund's
investments after expenses. This is in contrast to
banks, which set their MMDA rates periodically
based on current interest rates, competitors' rates,
and internal criteria.
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
NOTE TO SHAREHOLDERS: Robert Duby became
Portfolio Manager of
Money Market Portfolio
on April 1, 1997.
Q. WHAT WAS THE INVESTING ENVIRONMENT LIKE OVER THE PAST SIX MONTHS, BOB?
A. Most market observers have been surprised at the strength of the economy
over the past six months. While economic growth slowed unexpectedly in the
second quarter of 1997 from the rapid pace of the first quarter, the
<PAGE>
economy remains quite healthy. Earlier in 1997, the Federal Reserve Board
felt that we would see this economic growth translate into inflationary
pressure. Speaking before Congress in February, Fed Chairman Alan Greenspan
indicated the Fed's tendency to strike pre-emptively against inflation.
That is, he said the Fed might raise the rates banks charge each other for
overnight loans - known as the fed funds rate - even before inflation
appeared, to slow the economy down and head off potential inflation. The
Fed followed through by raising the fed funds rate by 0.25% to 5.50% at its
March meeting. Most market participants felt the Fed would raise rates
again in May, but it did not. Economic growth tailed off and there were
very few signs of inflation. That backdrop, coupled with political pressure
from many who were unhappy with the Fed's pre-emptive stance, convinced the
Fed to stand pat through the end of the period. At this point, it appears
that the Fed has shifted its stance from one that is pre-emptive to one
that is more reactive.
Q. HOW WAS THE FUND MANAGED DURING THIS PERIOD?
A. The fund was positioned more aggressively in the first quarter than in
the second. As the first quarter unfolded and interest rates rose in
anticipation of the Fed's March move to raise the fed funds rate, the fund
employed what is known as a barbell strategy - concentrating investments on
either end of the maturity spectrum - purchasing overnight to two-month
securities on the one hand and one-year bank investments on the other. Both
areas were offering attractive rates, with one-year securities at about a
6.20% annual rate and overnight securities offering a 5.25% rate. The
fund's approach became more cautious in the second quarter as the Fed's May
meeting approached and it appeared rates would rise again. As the one-year
rate fell toward 5.85% and the overnight rate stood at 5.50%, there were
less appealing yield opportunities on the longer end of the maturity
spectrum. At the end of the period, the fund's average maturity stood at 44
days, a range that reflects a more neutral interest rate outlook.
Q. WHAT'S YOUR OUTLOOK?
A. While it softened in the second quarter, overall economic growth remains
fairly strong. Consumer spending is robust and confidence is quite high. As
a result, I expect some inflationary pressures to arise as we head into the
fall. At that point, I would expect the Fed to raise interest rates
slightly if growth proves to be stronger and if some inflationary pressure
builds up. In addition, I believe that any program of rate increases by the
Fed will be gradual, where the Fed raises interest rates, then waits a
month or two to gauge the effect.
FUND FACTS
GOAL: income and share price stability by
investing in high-quality, short-term
investments
START DATE: April 1, 1982
SIZE: as of June 30, 1997, more than
$1.0 billion
MANAGER: Robert Duby, since April 1997;
joined Fidelity in 1982
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
BANKERS' ACCEPTANCES - 1.0%
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
Chase Manhattan Bank
8/22/97 5.82% $ 7,000,000 $ 6,942,569
Royal Bank of Canada
7/7/97 5.58 4,000,000 3,996,300
TOTAL BANKERS' ACCEPTANCES 10,938,869
CERTIFICATES OF DEPOSIT - 41.2%
DOMESTIC CERTIFICATES OF DEPOSIT - 2.3%
Chase Manhattan Bank (USA)
7/28/97 5.55 5,000,000 5,000,000
CoreStates Capital Corp.
7/10/97 5.66 (a) 10,000,000 9,998,668
Morgan Guaranty Trust, NY
8/12/97 5.78 4,000,000 3,999,739
8/12/97 5.80 5,000,000 4,999,599
23,998,006
CHICAGO BRANCH, YANKEE DOLLAR, FOREIGN BANKS - 0.9%
ABN-AMRO Bank
12/23/97 5.70 5,000,000 4,998,849
Bank of Montreal
7/1/97 5.55 5,000,000 5,000,000
9,998,849
NEW YORK BRANCH, YANKEE DOLLAR, FOREIGN BANKS - 31.3%
Bank of Nova Scotia
4/1/98 6.20 6,000,000 5,997,422
Bank of Tokyo - Mitsubishi Ltd.
7/10/97 5.83 4,000,000 4,000,000
8/6/97 5.85 4,000,000 4,000,000
8/13/97 5.82 2,000,000 2,000,000
8/27/97 5.75 5,000,000 5,000,000
8/29/97 5.79 2,000,000 2,000,000
9/30/97 5.76 6,000,000 6,000,000
Banque Nationale de Paris
7/21/97 5.63 2,000,000 2,000,000
<PAGE>
9/30/97 5.85 5,000,000 5,000,000
Barclays U.S. Funding Corp.
7/7/97 5.56 15,000,000 15,000,000
Bayerische Hypotheken-und Weschel
7/23/97 5.56 3,000,000 3,000,000
8/11/97 5.68 10,000,000 10,000,000
Bayerische Vereinsbank A.G.
7/14/97 5.56 5,000,000 5,000,000
Caisse Nationale de Credit Agricole
7/21/97 5.60 30,000,000 30,000,000
11/13/97 5.86 2,000,000 2,000,000
Canadian Imperial Bank of Commerce
7/21/97 5.61 5,000,000 5,000,000
Commerzbank, Germany
7/7/97 5.56 8,000,000 8,000,000
Deutsche Bank, Germany A.G.
7/9/97 5.56 20,000,000 20,000,000
Landesbank Hessen - Thuringen
9/5/97 6.20 15,000,000 15,000,259
9/11/97 6.11 14,000,000 13,999,473
National Westminster Bank, PLC
7/9/97 5.56 25,000,000 25,000,000
8/5/97 5.50 5,000,000 5,000,000
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
Royal Bank of Canada
8/13/97 5.80% $ 5,000,000 $ 4,999,589
Sanwa Bank Ltd. Japan
7/10/97 5.81 4,000,000 4,000,000
7/21/97 5.82 11,000,000 11,000,000
8/1/97 5.85 3,000,000 3,000,000
8/27/97 5.75 2,000,000 2,000,000
Societe Generale, France
7/11/97 5.70 5,000,000 5,000,000
7/28/97 5.55 17,000,000 17,000,000
8/7/97 5.52 10,000,000 10,000,000
11/12/97 5.90 5,000,000 5,000,000
Sumitomo Bank, Ltd.
7/21/97 5.79 4,000,000 4,000,000
7/29/97 5.75 2,000,000 2,000,000
8/4/97 5.75 2,000,000 2,000,000
8/4/97 5.75 2,000,000 2,000,000
8/19/97 5.75 2,000,000 2,000,000
8/25/97 5.75 3,000,000 3,000,000
Swiss Bank Corp.
7/22/97 5.53 12,000,000 12,000,000
8/4/97 5.50 12,000,000 12,000,000
12/22/97 5.99 8,000,000 8,000,000
2/23/98 5.80 20,000,000 20,000,000
Westdeutsche Landesbank
7/14/97 5.56 15,000,000 15,000,000
336,996,743
LONDON BRANCH, EURODOLLAR, FOREIGN BANKS - 6.7%
ABN-AMRO Bank
7/24/97 5.45 5,000,000 5,000,055
9/22/97 5.65 1,000,000 1,000,023
Abbey National, Treasury Services
7/22/97 5.60 10,000,000 10,000,000
7/28/97 5.72 10,000,000 10,000,000
9/24/97 5.65 18,000,000 18,000,000
3/4/98 5.87 5,000,000 5,000,000
Bank of Nova Scotia
7/23/97 5.60 4,000,000 4,000,000
11/12/97 5.86 4,000,000 4,000,000
Bayerische Landesbank Girozentrale
7/7/97 5.56 4,000,000 3,999,966
12/31/97 5.75 2,000,000 2,000,090
Bayerische Vereinsbank A.G.
9/17/97 5.65 2,000,000 1,999,946
12/29/97 5.75 5,000,000 5,000,122
National Australia Bank
9/23/97 5.65 2,000,000 2,000,000
72,000,202
TOTAL CERTIFICATES OF DEPOSIT 442,993,800
COMMERCIAL PAPER - 32.7%
Abbey National, North America
7/18/97 5.70 6,000,000 5,984,077
AC Acquisition Holding Company
7/7/97 5.60 3,000,000 2,997,220
7/11/97 5.63 4,100,000 4,093,622
8/27/97 5.62 2,000,000 1,982,393
COMMERCIAL PAPER - CONTINUED
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
American Home Products
7/16/97 5.58% $ 5,000,000 $ 4,988,438
Asset Securitization Coop. Corp.
8/21/97 5.61 6,000,000 5,952,740
Associates Corp. of North America
7/1/97 5.69 5,000,000 5,000,000
Bear Stearns Cos., Inc.
7/9/97 5.60 3,000,000 2,996,293
7/10/97 5.61 2,000,000 1,997,215
<PAGE>
Berliner Handels-und Frankfurter Bank
7/7/97 5.57 2,000,000 1,998,153
BHF Finance (Delaware), Inc.
7/11/97 5.62 1,000,000 998,444
BMW US Capital Corp.
7/9/97 5.60 2,188,000 2,185,297
7/7/97 5.63 1,000,000 999,067
7/15/97 5.60 3,000,000 2,993,502
8/5/97 5.64 2,600,000 2,585,844
8/12/97 5.61 2,000,000 1,987,003
8/25/97 5.62 1,100,000 1,090,639
Chrysler Financial Corporation
8/4/97 5.66 2,000,000 1,989,384
8/5/97 5.66 1,000,000 994,536
Citibank Credit Card Master Trust I (Dakota Certificate Program)
7/7/97 5.61 6,000,000 5,994,420
CIT Group Holdings, Inc.
7/1/97 6.30 10,000,000 10,000,000
Cregem North America, Inc.
7/11/97 5.72 2,300,000 2,296,397
9/18/97 5.65 2,000,000 1,975,554
9/23/97 5.66 1,000,000 986,980
9/24/97 5.66 1,000,000 986,825
Enterprise Funding Corp.
7/7/97 5.57 5,000,000 4,995,375
7/7/97 5.63 2,672,000 2,669,506
7/21/97 5.61 1,687,000 1,681,780
7/22/97 5.76 3,000,000 2,990,060
8/19/97 5.67 1,000,000 992,351
Fina Oil and Chemical Company
8/28/97 5.64 10,000,000 9,910,100
Ford Motor Credit Corp.
7/14/97 5.70 10,000,000 9,979,669
7/21/97 5.62 11,000,000 10,965,961
7/23/97 5.61 6,000,000 5,979,613
Generale Bank
7/30/97 5.53 5,000,000 4,978,331
General Electric Capital Corp.
7/7/97 5.50 10,000,000 9,991,000
7/28/97 5.52 10,000,000 9,959,725
9/17/97 5.64 10,000,000 9,879,533
9/22/97 5.80 6,000,000 5,921,980
9/23/97 5.80 15,000,000 14,802,600
General Electric Capital Services, Inc.
7/9/97 5.59 10,000,000 9,987,644
General Motors Acceptance Corp.
8/7/97 5.61 3,000,000 2,982,826
8/27/97 5.50 4,000,000 3,966,117
10/14/97 6.00 12,000,000 11,796,300
10/16/97 6.01 1,000,000 982,687
10/20/97 6.03 4,000,000 3,927,912
10/29/97 6.02 2,000,000 1,961,033
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
11/3/97 6.02% $ 4,000,000 $ 3,918,958
11/10/97 6.02 6,000,000 5,871,520
11/12/97 6.02 2,000,000 1,956,562
Goldman Sachs Group, L.P. (The)
11/12/97 5.87 15,000,000 14,681,750
GTE Corp.
7/21/97 5.63 2,000,000 1,993,778
Halifax PLC
7/21/97 5.60 5,000,000 4,984,583
IBM Credit Corp.
7/21/97 5.60 10,000,000 9,969,111
8/19/97 5.61 4,000,000 3,969,729
Matterhorn Capital Corp. (LOC Union Bank of Switzerland)
7/8/97 5.57 5,005,000 4,999,599
Merrill Lynch & Co., Inc.
7/9/97 5.61 1,000,000 998,760
7/28/97 5.54 15,000,000 14,939,363
7/28/97 5.61 5,000,000 4,979,113
8/18/97 5.79 3,000,000 2,977,200
Morgan Stanley Dean Witter Discover & Company
8/20/97 5.61 9,000,000 8,930,500
Morgan Stanley Group, Inc.
7/23/97 5.64 6,000,000 5,979,540
Nationwide Building Society
7/21/97 5.64 5,500,000 5,482,889
Norfolk Southern Corp.
7/8/97 5.80 2,000,000 1,997,756
7/14/97 5.78 2,000,000 1,995,847
7/16/97 5.80 1,000,000 997,596
PHH Corp.
7/8/97 5.68 5,000,000 4,994,526
7/14/97 5.63 1,000,000 997,981
Preferred Receivables Funding Corp.
7/16/97 5.58 5,000,000 4,988,438
7/30/97 5.60 2,000,000 1,991,026
8/19/97 5.67 3,000,000 2,977,052
REXAM PLC
7/16/97 5.58 5,000,000 4,988,438
Sears Roebuck Acceptance Corp.
<PAGE>
7/11/97 5.63 2,000,000 1,996,894
7/15/97 5.64 2,000,000 1,995,644
8/25/97 5.62 3,000,000 2,974,471
Toronto Dominion Holdings USA, Inc.
7/21/97 5.60 3,000,000 2,990,750
12/23/97 5.75 2,000,000 1,945,653
TOTAL COMMERCIAL PAPER 351,821,173
FEDERAL AGENCIES - 7.4%
FEDERAL HOME LOAN BANK - AGENCY COUPONS - 0.5%
9/4/97 5.71 (a) 5,000,000 4,998,140
FEDERAL NATIONAL MORTGAGE ASSOC. - AGENCY COUPONS - 4.6%
7/1/97 5.67 (a) 15,000,000 14,997,517
9/9/97 5.71 (a) 25,000,000 24,990,406
9/13/97 5.71 (a) 10,000,000 9,995,420
49,983,343
FEDERAL NATIONAL MORTGAGE ASSOC. - DISCOUNT NOTES - 2.3%
7/3/97 5.61 25,000,000 24,992,319
TOTAL FEDERAL AGENCIES 79,973,802
BANK NOTES - 2.1%
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
Comerica Bank
3/27/98 6.20% $ 5,000,000 $ 4,992,970
First Bank NA
7/16/97 5.65 (a) 5,000,000 4,995,975
Huntington National Bank
9/30/97 5.50 2,000,000 2,001,053
Key Bank of New York
7/1/97 5.66 (a) 5,000,000 4,999,713
7/1/97 5.69 (a) 1,000,000 999,913
PNC Bank, Inc.
7/11/97 5.65 (a) 5,000,000 4,998,597
TOTAL BANK NOTES 22,988,221
MASTER NOTES (A) - 3.6%
Goldman Sachs Group, L.P. (The)
8/5/97 5.82 5,000,000 5,000,000
9/16/97 5.81 (c) 10,000,000 10,000,000
J.P. Morgan Securities
7/1/97 6.38 18,000,000 18,000,000
Norwest Corp.
7/1/97 5.69 6,000,000 6,000,000
TOTAL MASTER NOTES 39,000,000
MEDIUM-TERM NOTES - 4.5%
Associates Corp. of North America
7/15/97 5.95 2,250,000 2,250,557
Capital One Funding Corp. (1994-B)
7/8/97 5.63 (a) 3,289,000 3,289,000
Capital One Funding Corp. (1995-E)
7/8/97 5.63 (a) 5,700,000 5,700,000
General Motors Acceptance Corp.
7/1/97 5.69 (a) 2,000,000 1,999,751
8/1/97 5.82 (a) 5,000,000 5,000,000
Liquid Asset Backed Securities Trust (1996-1) (b)
7/15/97 5.72 (a) 5,000,000 5,000,000
Liquid Asset Backed Securities Trust (1996-2) (b)
7/1/97 5.72 (a) 7,000,000 7,000,000
Merrill Lynch & Co., Inc.
7/7/97 5.67 (a) 2,000,000 1,999,669
7/18/97 5.69 (a) 5,000,000 4,999,867
Morgan Stanley Group, Inc.
7/1/97 5.68 (a) 5,000,000 5,000,000
Norwest Corp.
7/22/97 5.86 (a) 6,000,000 6,000,000
TOTAL MEDIUM-TERM NOTES 48,238,844
SHORT-TERM NOTES (A) - 2.8%
SMM Trust (1996-B) (b)
7/7/97 5.74 5,500,000 5,500,000
SMM Trust (1996-P) (b)
7/16/97 5.72 7,000,000 7,000,000
SMM Trust (1997-V) (b)
7/28/97 5.69 8,000,000 8,000,000
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
SMM Trust (1997-W) (b)
7/16/97 5.69% $ 7,000,000 $ 7,000,000
Transamerica Life Insurance and Annuity Co.
9/16/97 5.81 3,000,000 3,000,000
TOTAL SHORT-TERM NOTES 30,500,000
TIME DEPOSITS - 4.6%
Bank of Tokyo - Mitsubishi Ltd.
7/3/97 5.69 4,000,000 4,000,000
Canadian Imperial Bank of Commerce
7/1/97 6.25 42,000,000 42,000,000
Sumitomo Bank, Ltd.
7/9/97 5.75 3,000,000 3,000,000
TOTAL TIME DEPOSITS 49,000,000
REPURCHASE AGREEMENTS - 0.1%
MATURITY
AMOUNT
In a joint trading account
(U.S. Government Obligations)
dated 6/30/97 due 7/1/97
At 5.99% $ 1,381,230 1,381,000
<PAGE>
TOTAL INVESTMENTS - 100% $1,076,835,709
Total Cost for Income Tax Purposes - $ 1,076,835,709
LEGEND
1. The coupon rate shown on floating or adjustable rate securities represents
the rate at period end. The due dates on these types of securities reflects the
next interest rate reset date or, when applicable, the final maturity date.
2. Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers. At the period end, the value of
these securities amounted to $39,500,000 or 3.7% of net assets.
3. Restricted securities - Investment in securities not registered under the
Securities Act of 1933 (see Note 2 of Notes to Financial Statements).
Additional information on each holding is as follows:
ACQUISITION ACQUISITION
SECURITY DATE COST
Goldman Sachs
Group, L.P. (The)
5.81%, 9/16/97 6/16/97 $ 10,000,000
INCOME TAX INFORMATION
At December 31, 1996, the fund had a capital loss carryforward of approximately
$29,000 which will expire on December 31, 2002.
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<S> <C> <C>
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in securities, at value (including repurchase agreements of $1,381,000) - $1,076,835,709
See accompanying schedule
Receivable for investments sold 188,000
Interest receivable 7,287,661
TOTAL ASSETS 1,084,311,370
LIABILITIES
Payable to custodian bank $ 1,591
Payable for investments purchased 2,000,410
Share transactions in process 1,474,015
Accrued management fee 189,680
Other payables and 101,660
accrued expenses
TOTAL LIABILITIES 3,767,356
NET ASSETS $1,080,544,014
Net Assets consist of:
Paid in capital $1,080,585,466
Accumulated net realized gain (41,452)
(loss) on investments
NET ASSETS, for 1,080,585,466 shares outstanding $1,080,544,014
NET ASSET VALUE, offering price $1.00
and redemption price per
share ($1,080,544,014 (divided by) 1,080,585,466 shares)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INTEREST INCOME $ 31,913,288
EXPENSES
Management fee $ 1,183,256
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Transfer agent fees 418,988
Accounting fees and expenses 68,373
Non-interested trustees' compensation 262
Custodian fees and expenses 19,215
Audit 8,680
Legal 1,590
Miscellaneous 37,731
Total expenses before reductions 1,738,095
Expense reductions (4,815) 1,733,280
NET INTEREST INCOME 30,180,008
NET REALIZED GAIN (LOSS)
ON INVESTMENTS (27,802)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 30,152,206
OTHER INFORMATION
Expense reductions
Custodian interest credits $ 4,815
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
Operations $ 30,180,008 $ 49,421,275
Net interest income
Net realized gain (loss) (27,802) 49,076
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 30,152,206 49,470,351
Distributions to shareholders from net interest income (30,180,008) (49,421,275)
Share transactions at net asset value of $1.00 per share 1,049,791,223 1,994,407,823
Proceeds from sales of shares
Reinvestment of distributions from net interest income 30,180,006 49,421,275
Cost of shares redeemed (1,125,554,506) (1,726,597,066)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS (45,583,277) 317,232,032
TOTAL INCREASE (DECREASE) IN NET ASSETS (45,611,079) 317,281,108
NET ASSETS
Beginning of period 1,126,155,093 808,873,985
End of period $ 1,080,544,014 $ 1,126,155,093
</TABLE>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997
SELECTED PER-SHARE DATA (UNAUDITED) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Income from Investment Operations .026 .052 .057 .042 .032 .038
Net interest income
Less Distributions
From net interest income (.026) (.052) (.057) (.042) (.032) (.038)
Net asset value, end of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
TOTAL RETURN B, C 2.65% 5.41% 5.87% 4.25% 3.23% 3.90%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 1,080,544 $1,126,155 $ 808,874 $ 748,606 $ 353,104 $ 301,002
Ratio of expenses to average net assets after expense .30% A .30% .33% .27% .22% .24%
reductions D
Ratio of net interest income to average net assets 5.29% A 5.28% 5.72% 4.32% 3.16% 3.85%
</TABLE>
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED AND DO NOT
REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT.
INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN.
C THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED
DURING THE PERIOD SHOWN.
D FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE PERIOD.
WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE BEEN HIGHER.
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO PERFORMANCE
AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can look
at the total percentage change in value, the average annual percentage change or
the growth of a hypothetical $10,000 investment. Total return reflects the
change in the value of an investment, assuming reinvestment of the fund's
dividend income and capital gains (the profits earned upon the sale of
securities that have grown in value).
<TABLE>
<CAPTION>
<S> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 LIFE OF
JUNE 30, 1997 YEAR YEARS FUND
INVESTMENT GRADE BOND 7.74% 6.64% 8.05%
Lehman Brothers Aggregate Bond Index 8.15% 7.12% n/a
</TABLE>
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.
<PAGE>
If Fidelity had not reimbursed certain fund expenses, the life of fund total
return figures would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT INCLUDE
ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. IF
PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, THE
TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and investment
return will vary and you may have a gain or loss when you withdraw your money.
$10,000 OVER LIFE OF FUND
1988/12/31 10000.00 10000.00
1989/01/31 10086.92 10143.88
1989/02/28 10109.25 10070.36
1989/03/31 10172.02 10113.90
1989/04/30 10285.31 10325.54
1989/05/31 10399.91 10596.87
1989/06/30 10600.00 10919.52
1989/07/31 10765.35 11151.64
1989/08/31 10679.56 10986.42
1989/09/30 10721.69 11042.65
1989/10/31 10887.69 11314.55
1989/11/30 10981.36 11422.39
1989/12/31 11026.21 11452.96
1990/01/31 11001.11 11316.86
1990/02/28 11063.52 11353.48
1990/03/31 11097.11 11361.84
1990/04/30 11101.82 11257.75
1990/05/31 11276.11 11591.07
1990/06/30 11364.07 11777.05
1990/07/31 11476.89 11939.97
1990/08/31 11475.79 11780.51
1990/09/30 11520.66 11877.97
1990/10/31 11521.38 12028.78
1990/11/30 11590.77 12287.71
1990/12/31 11711.43 12479.17
1991/01/31 11735.04 12633.43
1991/02/28 11853.10 12741.27
1991/03/31 12053.80 12828.93
1991/04/30 12230.89 12967.91
1991/05/31 12325.33 13043.74
1991/06/30 12348.94 13037.11
1991/07/31 12455.20 13217.90
1991/08/31 12714.93 13503.94
1991/09/30 12951.04 13777.57
1991/10/31 13092.71 13930.97
1991/11/30 13234.39 14058.71
1991/12/31 13629.42 14476.23
1992/01/31 13494.11 14279.29
1992/02/29 13567.97 14372.13
1992/03/31 13543.27 14291.11
1992/04/30 13642.04 14394.34
1992/05/31 13851.92 14665.96
1992/06/30 14012.41 14867.80
1992/07/31 14296.36 15171.13
1992/08/31 14382.78 15324.82
1992/09/30 14555.62 15506.47
1992/10/31 14370.44 15300.89
1992/11/30 14333.40 15304.35
1992/12/31 14536.36 15547.71
1993/01/31 14841.14 15845.85
1993/02/28 15093.07 16123.24
1993/03/31 15159.39 16190.42
1993/04/30 15252.23 16303.16
1993/05/31 15278.75 16323.92
1993/06/30 15570.53 16619.76
1993/07/31 15676.64 16713.76
1993/08/31 15955.15 17006.72
1993/09/30 16034.73 17053.43
1993/10/31 16114.31 17117.15
1993/11/30 16034.73 16971.54
1993/12/31 16129.93 17063.52
1994/01/31 16312.59 17293.91
1994/02/28 16045.19 16993.45
1994/03/31 15678.93 16574.49
1994/04/30 15538.06 16442.14
1994/05/31 15495.80 16439.84
1994/06/30 15453.53 16403.51
1994/07/31 15707.10 16729.33
1994/08/31 15721.19 16750.09
1994/09/30 15552.14 16503.56
1994/10/31 15566.23 16488.86
1994/11/30 15594.40 16452.24
1994/12/31 15523.97 16565.84
1995/01/31 15749.36 16893.69
1995/02/28 16053.30 17295.35
1995/03/31 16155.46 17401.46
1995/04/30 16374.37 17644.53
1995/05/31 17031.09 18327.33
1995/06/30 17162.44 18461.69
1995/07/31 17104.06 18420.46
1995/08/31 17308.38 18642.77
1995/09/30 17468.91 18824.14
1995/10/31 17702.41 19068.94
1995/11/30 17965.10 19354.69
<PAGE>
1995/12/31 18213.20 19626.31
1996/01/31 18329.95 19756.64
1996/02/29 17995.20 19413.22
1996/03/31 17857.01 19278.28
1996/04/30 17749.53 19169.86
1996/05/31 17718.82 19130.94
1996/06/30 17933.78 19387.85
1996/07/31 17979.84 19440.90
1996/08/31 17964.49 19408.32
1996/09/30 18256.22 19746.55
1996/10/31 18655.43 20183.96
1996/11/30 18962.52 20529.68
1996/12/31 18793.62 20338.80
1997/01/31 18839.68 20401.08
1997/02/28 18864.60 20451.83
1997/03/31 18668.78 20225.20
1997/04/30 18946.20 20527.95
1997/05/31 19093.07 20722.01
1997/06/30 19321.53 20967.97
Let's say hypothetically that $10,000 was invested in Investment Grade Bond
Portfolio on December 31, 1988, shortly after the fund started. By June 30,
1997, the value of the investment would have grown to $19,322 - a 93.22%
increase on the initial investment. For comparison, look at how the Lehman
Brothers Aggregate Bond Index did over the same period. With dividends and
capital gains, if any, reinvested, the same $10,000 investment would have grown
to $20,968 - a 109.68% increase.
INVESTMENT SUMMARY
QUALITY DIVERSIFICATION AS OF JUNE 30, 1997
(MOODY'S RATINGS) % OF FUND'S
INVESTMENTS
Aaa 55.7
Aa 4.4
A 15.0
Baa 13.7
Ba 6.0
B 0
Not rated 0.5
TABLE EXCLUDES SHORT-TERM INVESTMENTS. WHERE MOODY'S RATINGS ARE NOT AVAILABLE,
WE HAVE USED S&P RATINGS. UNRATED DEBT SECURITIES THAT ARE EQUIVALENT TO BA AND
BELOW AT JUNE 30, 1997, ACCOUNT FOR 0.5% OF THE FUND'S INVESTMENTS.
AVERAGE YEARS TO MATURITY AS OF JUNE 30, 1997
Years 8.4
AVERAGE YEARS TO MATURITY IS BASED ON THE AVERAGE TIME UNTIL PRINCIPAL PAYMENTS
ARE EXPECTED FROM EACH OF THE FUND'S BONDS, WEIGHTED BY DOLLAR AMOUNT.
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Finance 20.7
Utilities 5.4
Retail & Wholesale 2.8
Media & Leisure 2.3
Technology 1.9
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
NOTE TO SHAREHOLDERS: Kevin Grant became Portfolio Manager of Investment Grade
Bond Portfolio on February 3, 1997.
Q. HOW DID THE FUND PERFORM, KEVIN?
A. For the six- and 12-month periods that ended June 30, 1997, the fund slightly
underperformed the Lehman Brothers Aggregate Bond Index, a broad measure of U.S.
taxable bonds, which returned 3.09% for the six-month period and 8.15% for the
12-month period.
Q. WHAT WAS THE INVESTMENT ENVIRONMENT LIKE DURING THE FIRST HALF OF 1997?
A. It's been a good environment for investors, both in the stock and bond
markets. We've had virtually no inflation and we've seen solid growth in the
economy and in corporate earnings. Companies have paid down debt; even the
airlines are paying down debt. The average corporate balance sheet is in the
best shape we've seen in probably 30 years. This has been a good investing
environment, particularly for corporate bonds and mortgage-backed securities.
Q. WHAT WAS YOUR STRATEGY FOR CORPORATE BONDS IN THIS MARKET?
A. We haven't seen companies take on a lot of new debt to do such things as
acquisitions, which makes it a very good environment for corporate bonds. In
particular, we focused on three areas of the corporate bond market. First, we
used short-maturity corporate bonds - which have two-, three- and
<PAGE>
four-year maturities - to replace Treasuries. They have marginally more risk
than Treasuries, but offer a yield advantage over them. Second, we invested in
puttable corporate bonds, which can offer attractive yields as well as favorable
price action because they can be redeemed by the fund prior to maturity in the
event interest rates rise. Third, we invested in bank capital securities, which
are long corporate bonds issued by banks. We were overweighted in those three
areas of the corporate market during the period and that helped us.
Q. HOW HAVE MORTGAGE-BACKED SECURITIES FARED IN THIS ENVIRONMENT?
A. It's been a good environment for the mortgage market. Interest rates haven't
been particularly volatile, and rates are high enough that prepayment risk was
not an issue during the period. In 1993, when interest rates dropped so low,
many mortgage holders refinanced into lower rate mortgages. Interest rates are
now quite a bit higher. During the first half of 1997, the mortgage market was a
discount market, which means there was very little prepayment risk. We would
probably need a drop in interest rates of about 50 basis points for prepayment
risk to become a real problem.
Q. AT THE END OF 1996, THE FUND OWNED A FAIR AMOUNT OF YANKEE BONDS. DID THE
FUND CONTINUE TO INVEST IN THIS TYPE OF SECURITY DURING THE FIRST HALF OF THE
YEAR?
A. Yes. We've continued to own yankee bonds, which are issued by foreign
entities and denominated in U.S. dollars. They often trade more cheaply than
domestic corporates and frequently carry better credit quality characteristics.
The nice thing about yankee bonds is that you can get the same or better yield
spread than you get in corporate bonds, but you have much less event risk. By
that I mean, you don't really have the possibility of the issuer being bought by
a junk-bond company, for example, so you don't have the possibility of the bonds
going from a single-A rating to a double-B in a week. We've focused mainly on
sovereign names, such as the Canadian provinces of Ontario and Alberta. We also
owned some Korean notes. Korea carries a single-A rating, so it's a very high-
grade country. The tension between North and South Korea has not really affected
the bonds.
Q. VALUATIONS OF CORPORATE BONDS WERE VERY EXPENSIVE AT THE END OF LAST YEAR.
DID THAT CONTINUE DURING THIS SIX-MONTH PERIOD?
A. Yes, that's still the case. This is an environment we're probably going to
have to live with for a while, with optimism built into the prices of most
bonds. The fund continues to hold corporate bonds. We're not going to own just
Treasuries. That would not make sense, because even though corporate bonds are
expensive, they still have a yield advantage over Treasuries. So, we're in a
defensive posture, but we're not betting on a blow-up in corporate America. I
think that would be foolhardy.
Q. WHAT'S YOUR OUTLOOK GOING INTO THE SECOND HALF OF 1997?
A. I think it's really going to be more of the same. We'll continue to focus on
the three areas of the corporate bond market that I mentioned earlier. The
mortgage market is very expensive right now, so we're probably going to continue
to be defensive in mortgage securities. The overall market was about 30%
invested in mortgage securities, and we were modestly underweighted in that
sector at the end of the period. Unless conditions change, I think we'll stay
underweighted in these securities.
FUND FACTS
GOAL: income and share price stability by investing in high-quality, short-term
investments
START DATE: April 1, 1982
SIZE: as of June 30, 1997, more than
$1.0 billion
MANAGER: Robert Duby, since April 1997;
joined Fidelity in 1982
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO INVESTMENTS
JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
NONCONVERTIBLE BONDS - 40.4%
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
BASIC INDUSTRIES - 0.4%
CHEMICALS & PLASTICS - 0.4%
Praxair, Inc.,
6.90% 11/1/06 A3 $ 1,000,000 $ 987,300
DURABLES - 1.0%
AUTOS, TIRES, & ACCESSORIES - 0.2%
Tennessee Gas Pipeline Co.
7%, 3/15/27 Baa3 540,000 539,671
TEXTILES & APPAREL - 0.8%
Levi Strauss & Co.
7%, 11/1/06 (c) Baa2 2,000,000 1,978,400
TOTAL DURABLES 2,518,071
ENERGY - 0.9%
ENERGY SERVICES - 0.4%
Petroliam Nasional BHD
yankee 6 7/8%, 7/1/03 (c) A1 1,040,000 1,036,402
OIL & GAS - 0.5%
Husky Oil Ltd. yankee
6 7/8%, 11/15/03 Baa3 340,000 335,192
Pennzoil Co.
9 5/8%, 11/15/99 Baa3 460,000 490,089
Ras Laffan Liquid Natural Gas
<PAGE>
Co. Ltd. yankee
7.628%, 9/15/06 (c) A3 500,000 506,405
1,331,686
TOTAL ENERGY 2,368,088
FINANCE - 20.7%
ASSET-BACKED SECURITIES - 3.4%
Discover Card Master Trust I
6.90%, 2/16/00 A2 260,000 260,242
Ford Credit Grantor Trust
5.90%, 10/15/00 Aaa 480,649 480,048
Green Tree Financial Corp.
6.10%, 4/15/27 Aaa 862,654 861,032
KeyCorp Auto Grantor Trust
5.80%, 7/15/00 A3 39,886 39,758
PNC Student Loan Trust I
6.314%, 1/25/01 Aaa 3,100,000 3,100,000
Premier Auto Trust:
4.90%, 12/15/98 Aaa 141,429 140,898
8.05%, 4/4/00 Aaa 1,430,000 1,453,238
6%, 5/6/00 Aaa 500,000 499,530
Railcar Trust 7 3/4%, 6/1/04 Aaa 761,410 789,963
Sears Credit Account Master
Trust II 7%, 1/15/04 Aaa 1,000,000 1,012,500
Standard Credit Card Master
Trust I 7.65%, 2/15/00 A2 150,000 151,359
Union Federal Savings Bank
Grantor Trust
8.20%, 1/10/01 Baa2 47,629 48,313
8,836,881
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
BANKS - 8.4%
ABN Amro Bank NV
6 5/8%, 10/31/01 Aa3 $ 1,000,000 $ 995,870
Banc One Corp.
6.70%, 3/24/00 Aa3 1,450,000 1,456,757
BankBoston Capital Trust II
7 3/4%, 12/15/26 Baa1 1,080,000 1,036,282
BanPonce Corp.:
5 3/4%, 3/1/99 A3 370,000 364,975
6.378%, 4/8/99 A3 430,000 427,725
BanPonce Trust I
8.327%, 2/1/27 (c) Baa1 1,230,000 1,243,013
Capital One Bank
6.42%, 11/12/99 Baa3 2,000,000 1,989,500
Corporacion Andina
de Fomento yankee
7.10%, 2/1/03 A3 1,000,000 1,004,820
Export-Import Bank of Korea
6 3/8%, 2/15/06 A1 1,500,000 1,405,680
First Fidelity Bancorp
8 1/2%, 4/1/98 A2 250,000 254,048
First Maryland Bancorp
10 3/8%, 8/1/99 Baa1 500,000 536,415
Firstar Corp. 7.15%, 9/1/00 A3 640,000 643,782
Hartford National Corp.
9.85%, 6/1/99 A3 1,150,000 1,219,943
Kansallis-Osake-Pankki
10%, 5/1/02 A3 260,000 291,577
KeyCorp 8.40%, 4/1/99 A2 310,000 319,883
Korea Development Bank
yankee 6 3/4%, 12/1/05 A1 2,350,000 2,276,962
Midland Bank PLC yankee
7 5/8%, 6/15/06 A1 700,000 720,895
NB Capital Trust IV
8 1/4%, 4/15/27 A1 3,000,000 3,074,220
Signet Bank 7.80%, 9/15/06 Baa1 500,000 516,240
Sovran Financial Corp.
9 3/4%, 6/15/99 A2 770,000 816,647
Union Planters Corp.
6 3/4%, 11/1/05 Baa2 400,000 387,448
Union Planters National Bank
6.81%, 8/20/01 A3 500,000 500,625
21,483,307
CREDIT & OTHER FINANCE - 5.6%
AT&T Capital Corp.:
6.02%, 12/1/98 Baa3 1,000,000 997,060
6.16%, 12/3/99 Baa3 500,000 494,605
Associates Corp. of North
America 6 7/8%, 2/15/00 Aa3 3,000,000 3,028,260
BCH Cayman Islands Ltd.
yankee 7.70%, 7/15/06 A3 500,000 510,840
Chase Capital I
7.67%, 12/1/26 A1 2,650,000 2,565,757
Chrysler Financial Corp.
6 3/8%, 1/28/00 A3 1,240,000 1,236,280
Finova Capital Corp.
6.14%, 11/2/98 Baa1 400,000 399,892
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
FINANCE - CONTINUED
CREDIT & OTHER FINANCE - CONTINUED
<PAGE>
First Security Capital I
8.41%, 12/15/26 A3 $ 210,000 $ 214,087
General Electric Capital Corp.
6.94%, 4/13/09 (b) Aaa 1,000,000 1,009,410
General Motors Acceptance Corp.:
6.40%, 5/17/99 A3 1,000,000 1,000,680
6.65%, 5/24/00 A3 1,650,000 1,651,568
KeyCorp Institutional Capital A
7.826%, 12/1/26 A1 800,000 776,968
Secured Finance, Inc. gtd.
secured 9.05%, 12/15/04 Aaa 500,000 555,295
14,440,702
INSURANCE - 1.1%
Executive Risk Capital Trust
8 5/8%, 2/1/27 Baa3 1,750,000 1,739,150
Nationwide Mutual Insurance Co.
6 1/2%, 2/15/04 (c) A1 130,000 125,562
SunAmerica, Inc.
6.20%, 10/31/99 Baa1 1,000,000 992,910
2,857,622
SAVINGS & LOANS - 2.2%
Ahmanson (H.F.) & Co.
9 7/8%, 11/15/99 Baa2 3,000,000 3,220,560
Great West Financial Trust II
8.206%, 2/1/27 Baa2 2,500,000 2,493,050
5,713,610
TOTAL FINANCE 53,332,122
HEALTH - 0.7%
MEDICAL FACILITIES MANAGEMENT - 0.7%
Columbia/HCA Healthcare Corp.:
6 1/2%, 3/15/99 A2 1,000,000 1,003,470
6 7/8%, 7/15/01 A2 750,000 753,900
1,757,370
HOLDING COMPANIES - 0.7%
Norfolk Southern Corp.
7.05%, 5/1/37 Baa1 1,700,000 1,725,398
INDUSTRIAL MACHINERY & EQUIPMENT - 1.6%
POLLUTION CONTROL - 1.6%
WMX Technologies, Inc.:
6 1/4%, 4/1/99 A3 1,200,000 1,197,300
7.10%, 8/1/26 A3 3,000,000 3,056,910
4,254,210
MEDIA & LEISURE - 2.3%
BROADCASTING - 2.2%
TCI Communication, Inc.:
7 1/4%, 6/15/99 Ba1 3,680,000 3,708,115
7 3/8%, 2/15/00 Ba1 750,000 755,700
Time Warner, Inc.
7.95%, 2/1/00 Ba1 1,170,000 1,202,865
5,666,680
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
RESTAURANTS - 0.1%
Darden Restaurants, Inc.
6 3/8%, 2/1/06 Baa1 $ 310,000 $ 286,793
TOTAL MEDIA & LEISURE 5,953,473
NONDURABLES - 1.7%
FOODS - 0.5%
ConAgra, Inc.
7 1/8%, 10/1/26 Baa1 1,270,000 1,275,639
TOBACCO - 1.2%
Philip Morris Companies, Inc.
6.95%, 6/1/06 A2 3,000,000 3,009,990
TOTAL NONDURABLES 4,285,629
RETAIL & WHOLESALE - 2.8%
GENERAL MERCHANDISE STORES - 2.0%
Dayton Hudson Corp.
6.40%, 2/15/03 Baa1 500,000 487,065
Federated Department Stores, Inc.
8 1/2%, 6/15/03 Baa2 3,000,000 3,190,050
Penney (J.C.) Co., Inc.
6.95%, 4/1/00 A2 1,000,000 1,008,420
Sears, Roebuck & Co.
9.23% 8/6/98 A2 450,000 465,120
5,150,655
GROCERY STORES - 0.8%
American Stores Co.
7 1/2%, 5/1/37 Baa2 1,400,000 1,426,558
Kroger Co. 8.15%, 7/15/06 Baa3 500,000 527,180
1,953,738
TOTAL RETAIL & WHOLESALE 7,104,393
TECHNOLOGY - 1.9%
COMPUTERS & OFFICE EQUIPMENT - 1.2%
Comdisco, Inc.
6 3/8%, 11/30/01 Baa1 3,200,000 3,132,448
ELECTRONICS - 0.7%
Texas Instruments, Inc.
6 7/8%, 7/15/00 A3 1,692,000 1,705,604
TOTAL TECHNOLOGY 4,838,052
TRANSPORTATION - 0.3%
AIR TRANSPORTATION - 0.3%
AMR Corp. 9.55%, 3/6/98 Baa3 400,000 408,564
Delta Air Lines, Inc. equipment
<PAGE>
trust certificate
8.54%, 1/2/07 Baa1 416,138 442,646
851,210
UTILITIES - 5.4%
CELLULAR - 0.9%
360 Degrees Communications Co.:
7 1/8%, 3/1/03 Ba1 1,420,000 1,412,176
7 1/2%, 3/1/06 Ba1 850,000 847,926
2,260,102
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
UTILITIES - CONTINUED
ELECTRIC UTILITY - 1.1%
British Columbia Hydro &
Power Authority yankee
12 1/2%, 1/15/14 Aa2 $ 360,000 $ 405,558
DR Investment yankee
7.10%, 5/15/02 (c) Baa1 1,500,000 1,510,860
Israel Electric Corp. Ltd. yankee
7 1/4%, 12/15/06 (c) A3 1,000,000 991,970
2,908,388
GAS - 1.2%
Florida Gas Transmission Co.
7 3/4%, 11/1/97 (c) Baa2 220,000 221,250
Mitchell Energy & Development
Corp. 8%, 7/15/99 Ba1 1,730,000 1,770,188
Southwest Gas Corp.
9 3/4%, 6/15/02 Baa2 1,000,000 1,111,370
3,102,808
TELEPHONE SERVICES - 2.2%
LCI International, Inc.
7 1/4%, 6/15/07 Ba1 950,000 940,975
MFS Communications, Inc.
0%, 1/15/04 (f) Ba3 2,000,000 1,861,600
WorldCom, Inc.
7 3/4%, 4/1/07 Ba1 2,700,000 2,761,236
5,563,811
TOTAL UTILITIES 13,835,109
TOTAL NONCONVERTIBLE BONDS
(Cost $103,327,484) 103,810,425
U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS - 35.3%
U.S. TREASURY OBLIGATIONS - 23.9%
6 5/8%, 6/30/01 Aaa 11,960,000 12,072,065
7 7/8%, 8/15/01 Aaa 510,000 537,494
10 3/4%, 5/15/03 Aaa 138,000 166,657
11 7/8%, 11/15/03 Aaa 3,000,000 3,835,770
12 3/8%, 5/15/04 Aaa 1,914,000 2,528,566
7%, 7/15/06 Aaa 21,000,000 21,603,750
12 3/4%, 11/15/10
(callable) Aaa 1,747,000 2,424,242
13 7/8%, 5/15/11 (callable) Aaa 30,000 44,367
12%, 8/15/13 (callable) Aaa 3,772,000 5,309,694
9%, 11/15/18 Aaa 7,679,000 9,499,153
8 7/8%, 2/15/19 Aaa 1,400,000 1,713,250
7 1/4%, 2/15/23 Aaa 1,680,000 1,730,400
61,465,408
U.S. GOVERNMENT AGENCY OBLIGATIONS - 11.4%
Federal Agricultural Mortgage
Corporation
7.01%, 2/10/05 Aaa 10,000 10,125
Federal Home Loan Bank:
6 3/4%, 4/5/04 Aaa 375,000 376,114
7.31%, 6/16/04 Aaa 4,155,000 4,295,231
7.36%, 7/1/04 Aaa 3,100,000 3,221,582
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
7.38%, 8/5/04 Aaa $ 110,000 $ 114,193
7.56%, 9/01/04 Aaa 310,000 324,725
7.46%, 9/9/04 Aaa 50,000 52,102
7.70%, 9/20/04 Aaa 40,000 42,225
6.46%, 12/15/04 Aaa 1,745,000 1,713,922
8.09%, 12/28/04 Aaa 10,000 10,794
7.59%, 3/10/05 Aaa 10,000 10,513
Federal Home Loan
Mortgage Corporation
6.77%, 9/15/02 Aaa 150,000 150,678
8%, 1/26/05 Aaa 520,000 556,561
8.115%, 1/31/05 Aaa 1,140,000 1,229,593
6.783%, 8/18/05 Aaa 1,000,000 999,220
planned amortization class
Series 1727 Class D,
6 1/2%, 8/15/14 Aaa 190,000 190,475
Federal National Mortgage
Association:
6.72%, 8/1/05 Aaa 1,180,000 1,174,100
sequential pay Series 1996-M5
Class A1, 7.141%,
6/25/08 Aaa 224,488 227,408
Series 1994-M3 Class A,
7.71%, 4/1/06 Aaa 14,523 14,686
Financing Corp. stripped
<PAGE>
principal 0%, 3/26/00 - 512,000 430,249
Government Loan Trusts
(assets of Trust guaranteed
by U.S. Government through
Agency for International
Development)
8 1/2%, 4/1/06 Aaa 1,760,000 1,898,002
Government Trust Certificates
(assets of Trust guaranteed by
U.S. Government through
Defense Security Assistance
Agency):
Class T-3,
9 5/8%, 5/15/02 Aaa 67,365 71,570
Class 1-C,
9 1/4%, 11/15/01 Aaa 1,119,342 1,188,484
Class 2-E,
9.40%, 5/15/02 Aaa 955,284 1,013,662
Guaranteed Export Trust
Certificates (assets of Trust
guaranteed by U.S.
Government through
Export-Import Bank):
Series 1993-C,
5.20%, 10/15/04 Aaa 6,667 6,383
Series 1993-D,
5.23%, 5/15/05 Aaa 13,617 12,991
Series 1994-A,
7.12%, 4/15/06 Aaa 8,230 8,379
Series 1994-C,
6.61%, 9/15/99 Aaa 57,747 57,987
U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
Guaranteed Trade Trust
Certificates (assets of Trust
guaranteed by U.S. Government
through Export-Import Bank)
Series 1994-B,
7 1/2%, 1/26/06 Aaa $ 8,330 $ 8,605
Israel Export Trust Certificates
(assets of Trust guaranteed
by U.S. Government through
Export-Import Bank) Series
1994-1, 6.88%, 1/26/03 Aaa 14,118 14,228
Overseas Private Investment
Corp. U.S. Government
guaranteed participation
certificate Series 1994-1995,
6.08%, 8/15/04 (callable) Aaa 140,000 136,898
Private Export Funding Corp.:
secured 5.65%, 3/15/03 Aaa 243,000 238,169
secured 6.86%, 4/30/04 Aaa 1,604,283 1,615,160
State of Israel (guaranteed by
U.S. Government through
Agency for International
Development):
6 1/8%, 8/15/99 Aaa 770,000 768,429
7 1/8%, 8/15/99 Aaa 435,000 442,527
7 3/4%, 11/15/99 Aaa 144,000 148,349
0%, 11/15/01 Aaa 2,875,000 2,176,174
6 1/4%, 8/15/02 Aaa 352,000 347,725
6 1/8%, 3/15/03 Aaa 70,000 68,178
6 5/8%, 2/15/04 Aaa 180,000 179,890
6 3/4%, 8/15/04 Aaa 1,000,000 1,004,330
7 5/8%, 8/15/04 Aaa 330,000 347,612
5.89%, 8/15/05 Aaa 1,175,000 1,113,332
U.S. Department of Housing
and Urban Development
Government guaranteed
participation certificates:
Series 1995-A:
8.27%, 8/1/03 Aaa 415,000 448,208
8.24%, 8/1/04 Aaa 500,000 540,065
Series 1996-A,
6.98%, 8/1/05 Aaa 180,000 181,903
29,181,736
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $89,688,627) 90,647,144
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES - 14.2%
FEDERAL HOME LOAN MORTGAGE CORPORATION - 0.7%
7%, 5/01/01 Aaa 172,509 173,501
8 1/2%, 3/01/20 Aaa 1,570,252 1,649,487
1,822,988
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 10.5%
6.345%, 3/01/99 Aaa $ 77,838 $ 77,546
5 1/2%, 5/01/00 to 7/01/01 Aaa 2,647,237 2,565,126
<PAGE>
6%, 3/01/01 to 6/01/11 Aaa 14,466,801 14,074,564
6 1/2%, 2/01/10 to 5/01/26 Aaa 8,192,990 7,842,304
8%, 12/01/24 to 7/01/27 Aaa 2,362,595 2,417,036
26,976,576
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 3.0%
6%, 8/15/08 to 4/15/11 Aaa 5,433,429 5,284,630
10%, 7/15/13 to 11/15/24 Aaa 1,891,746 2,081,200
8%, 2/15/17 Aaa 346,667 359,429
7,725,259
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $36,012,975) 36,524,823
COMMERCIAL MORTGAGE SECURITIES - 3.3%
BKB Commercial Mortgage Trust
Series 1997-C1 Class A-1,
6 7/8%, 2/25/43 (c) Aaa 3,072,923 3,084,446
CS First Boston Mortgage
Securities Corp.:
Series 1995-AEWI
Class A-1,
6.665%, 11/25/27 Aaa 79,465 79,365
floater Series 1994-CFB1
Class A-1,
6.2375%, 1/25/28 (d) Aaa 77,890 77,914
Equitable Life Assurance Society
of the United States (The):
Series 1996-1 (c):
Class B1,
7.33%, 5/15/06 Aa2 500,000 508,640
Class C1,
7.52%, 5/15/06 A2 500,000 512,065
Meritor Mortgage Security Corp.
Series 1987-1 Class A-3,
9.40%, 6/1/99 Baa3 26,987 26,954
Nomura Asset Securities
Corp. floater
Series 1994-MD-II Class A-6,
6.9564% 7/4/03 (d) - 179,477 180,907
Oregon Commercial Mortgage,
Inc. Series 1995-1 Class A,
7.15%, 6/25/23 (c)(d) Aaa 204,328 204,967
Resolution Trust Corp.:
floater Series 1993-C2
Class A-2,
6.62%, 3/25/25 (d) Aaa 264,647 265,061
COMMERCIAL MORTGAGE SECURITIES - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
Resolution Trust Corp.: - continued
commercial Series 1995-C1
Class A-4B, 6.65%,
2/25/27 Aaa $ 740,000 $ 738,844
floater Series 1994-C1
Class A-3,
6.30%, 6/25/26 (d) Aaa 228,240 228,240
SC Finance Corp. floater
7.2375%, 8/1/04 (c)(d) - 600,000 601,875
Structured Asset Securities
Corp. sequential pay:
Series 1993-C1 Class A-1A,
6.60%, 10/25/24 AA+ 39,274 39,139
Series 1996 Class A-2A,
7 3/4%, 2/25/28 Aaa 1,020,086 1,034,431
Wells Fargo Capital Markets
Apartment Financing Trust
6.56%, 12/29/05 (c) Aaa 750,000 739,770
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $8,267,612) 8,322,618
FOREIGN GOVERNMENT OBLIGATIONS (E) - 1.8%
Alberta Province yankee
9 1/4%, 4/1/00 Aa2 2,500,000 2,673,000
British Columbia Province
7%, 1/1/03 Aa2 500,000 507,230
Manitoba Province
6 3/4%, 3/1/03 A1 500,000 499,265
Ontario Province yankee
7 3/4%, 6/4/02 Aa3 1,000,000 1,044,870
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $4,824,375) 4,724,365
SUPRANATIONAL OBLIGATIONS - 0.3%
African Development Bank
7 3/4%, 12/15/01
(Cost $691,799) Aa1 660,000 687,166
CASH EQUIVALENTS - 4.7%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 12,192,008 12,190,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $255,002,872) $ 256,906,541
LEGEND
4. Standard & Poor's credit ratings are used in the absence of a rating by
<PAGE>
Moody's Investors Service, Inc.
5. Debt obligation initially issued at one coupon which converts to a higher
coupon at a specified date.
6. Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers. At the period end, the value of
these securities amounted to $13,265,625 or 5.1% of net assets.
7. The coupon rate shown on floating or adjustable rate securities represents
the rate at period end.
8. For foreign government obligations not individually rated by S&P or Moody's,
the ratings listed are assigned to securities by FMR, the fund's investment
adviser, based principally on S&P and Moody's ratings of the sovereign credit of
the issuing government.
9. Debt obligation initially issued in zero coupon form which converts to coupon
form at a specified rate and date.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities, aggregated
$195,928,403 and $170,908,345, respectively, of which U.S. government and
government agency obligations aggregated $120,223,036 and $137,847,077,
respectively. The composition of long-term debt holdings as a percentage of
total value of investment in securities, is as follows:
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 73.2% AAA, AA, A 70.2%
Baa 13.7% BBB 21.3%
Ba 6.0% BB 1.2%
B 0.0% B 0.0%
Caa 0.0% CCC 0.0%
Ca, C 0.0% CC, C 0.0%
D 0.0%
For some foreign government obligations, FMR has assigned the ratings of the
sovereign credit of the issuing government. The percentage not rated by both S&P
and Moody's amounted to 0.5%.
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income tax
purposes was $255,006,227. Net unrealized appreciation aggregated $1,900,314, of
which $2,956,441 related to appreciated investment securities and $1,056,127
related to depreciated investment securities. At December 31, 1996, the fund had
a capital loss carryforward of approximately $1,523,000 of which $230,000, and
$1,293,000 will expire on December 31, 2003 and 2004, respectively.
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
JUNE 30, 1997 (UNAUDITED)
ASSETS
<S> <C> <C>
Investment in securities, at $ 256,906,541
value (including repurchase agreements of $12,190,000)
(cost $255,002,872) - See accompanying schedule
Cash 299
Receivable for fund shares sold 441,929
Interest receivable 3,489,812
TOTAL ASSETS 260,838,581
LIABILITIES
Payable for investments purchased $ 2,048,469
Accrued management fee 93,494
Other payables and accrued expenses 49,401
TOTAL LIABILITIES 2,191,364
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
NET ASSETS $ 258,647,217
Net Assets consist of:
Paid in capital $ 251,000,862
Undistributed net investment income 7,603,855
Accumulated undistributed net realized gain (loss) on investments and foreign
currency transactions (1,861,169)
Net unrealized appreciation (depreciation) on investments 1,903,669
NET ASSETS, for 21,842,464 $ 258,647,217
shares outstanding
NET ASSET VALUE, offering price $ 11.84
and redemption price per share ($258,647,217 (divided by) 21,842,464 shares)
</TABLE>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME $ 8,376,565
Interest
EXPENSES
Management fee $ 527,568
Transfer agent fees 95,695
Accounting fees and expenses 48,849
Non-interested trustees' compensation 552
Custodian fees and expenses 8,018
Registration fees 25
Audit 18,627
Legal 326
Miscellaneous 7,852
Total expenses before reductions 707,512
Expense reductions (971 706,541
)
NET INVESTMENT INCOME 7,670,024
REALIZED AND UNREALIZED GAIN (LOSS) (333,170
Net realized gain (loss) on )
investment securities
Change in net unrealized appreciation (depreciation) on investment securities (432,325
)
NET GAIN (LOSS) (765,495
)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 6,904,529
OTHER INFORMATION $ 971
Expense reduction
Custodian credits
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
<S> <C> <C>
Operations
Net investment income $ 7,670,024 $ 13,175,925
Net realized gain (loss) (333,170) (1,136,463)
Change in net unrealized appreciation (depreciation) (432,325) (5,278,792)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 6,904,529 6,760,670
Distributions to shareholders from net investment income (13,381,760) (9,612,980)
Share transactions 61,651,406 108,335,706
Net proceeds from sales of shares
Reinvestment of distributions 13,381,760 9,612,980
Cost of shares redeemed (38,502,521) (68,048,460)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 36,530,645 49,900,226
TOTAL INCREASE (DECREASE) IN NET ASSETS 30,053,414 47,047,916
NET ASSETS
Beginning of period 228,593,803 181,545,887
End of period (including undistributed net investment income of $7,603,855 and $13,165,742,
respectively) $ 258,647,217 $ 228,593,803
OTHER INFORMATION
Shares
Sold 5,288,011 9,066,652
Issued in reinvestment of distributions 1,151,614 807,813
Redeemed (3,271,497) (5,752,069)
Net increase (decrease) 3,168,128 4,122,396
</TABLE>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997 1996 1995 1994 1993 E 1992
SELECTED PER-SHARE DATA (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $12.240 $12.480 $11.020 $11.480 $10.970 $11.080
Income from Investment Operations .376 D .670 .320 .733 .641 .672
Net investment income
Net realized and unrealized gain (loss) (.046) (.290) 1.530 (1.163) .559 .058
Total from investment operations .330 .380 1.850 (.430) 1.200 .730
</TABLE>
Less Distributions
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
From net investment income (.730) (.620) (.390) - (.628) (.680)
In excess of net investment income - - - - (.002) -
From net realized gain - - - (.010) (.050) (.160)
In excess of net realized gain - - - (.020) (.010) -
Total distributions (.730) (.620) (.390) (.030) (.690) (.840)
Net asset value, end of period $ 11.840 $ 12.240 $ 12.480 $ 11.020 $ 11.480 $10.970
TOTAL RETURN B, C 2.81% 3.19% 17.32% (3.76)% 10.96% 6.65%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $258,647 $228,594 $181,546 $111,381 $122,376 $73,598
Ratio of expenses to average net assets .60% A .58% .59% .67% .68% .76%
Ratio of net investment income to average
net assets 6.46% A 6.49% 6.53% 6.53% 6.85% 7.11%
Portfolio turnover rate 151% A 81% 182% 143% 70% 119%
</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.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED
DURING THE PERIODS SHOWN.
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
E EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2,
"DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME,
CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES." AS A
RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN RECLASSIFICATIONS
RELATED TO BOOK TO TAX DIFFERENCES.
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
<TABLE>
<CAPTION>
PERIODS ENDED PAST 1 PAST 5 PAST 10
JUNE 30, 1997 YEAR YEARS YEARS
<S> <C> <C> <C>
HIGH INCOME 14.47% 13.24% 11.48%
Merrill Lynch High Yield Master Index 14.30% 11.60% 11.41%
</TABLE>
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
<PAGE>
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
<TABLE>
<S> <C> <C>
1987/06/30 10000.00 10000.00
1987/07/31 10010.70 10054.41
1987/08/31 10093.62 10155.16
1987/09/30 9742.14 9921.51
1987/10/31 9276.27 9656.42
1987/11/30 9549.48 9900.62
1987/12/31 9702.32 10032.09
1988/01/31 10021.30 10306.61
1988/02/29 10321.34 10586.28
1988/03/31 10247.18 10568.77
1988/04/30 10327.05 10599.29
1988/05/31 10311.70 10654.61
1988/06/30 10527.82 10858.33
1988/07/31 10637.41 10973.07
1988/08/31 10586.60 11009.12
1988/09/30 10671.47 11120.09
1988/10/31 10787.64 11293.35
1988/11/30 10746.45 11335.65
1988/12/31 10831.84 11383.62
1989/01/31 11092.14 11554.33
1989/02/28 11146.70 11631.98
1989/03/31 11003.47 11621.63
1989/04/30 10881.61 11655.93
1989/05/31 11082.67 11870.51
1989/06/30 11400.09 12038.69
1989/07/31 11325.04 12095.70
1989/08/31 11259.35 12155.45
1989/09/30 10865.39 12039.73
1989/10/31 10399.58 11849.29
1989/11/30 10408.34 11875.85
1989/12/31 10379.81 11865.11
1990/01/31 10150.37 11633.21
1990/02/28 9994.07 11463.80
1990/03/31 9888.62 11618.76
1990/04/30 9917.92 11677.80
1990/05/31 10121.70 11888.73
1990/06/30 10281.14 12119.06
1990/07/31 10439.95 12375.17
1990/08/31 10265.30 11901.42
1990/09/30 10021.90 11383.81
1990/10/31 9778.71 11094.12
1990/11/30 10008.07 11188.11
1990/12/31 10148.02 11349.32
1991/01/31 10363.32 11509.75
1991/02/28 10937.47 12364.04
1991/03/31 11325.02 12895.64
1991/04/30 11726.92 13354.88
1991/05/31 11899.16 13420.09
1991/06/30 12157.53 13690.06
1991/07/31 12616.84 14018.08
1991/08/31 12789.09 14312.71
1991/09/30 13076.16 14495.01
1991/10/31 13521.12 14925.74
1991/11/30 13635.95 15098.15
1991/12/31 13707.72 15273.55
1992/01/31 14439.75 15807.56
1992/02/29 14964.03 16200.15
1992/03/31 15447.75 16426.18
1992/04/30 15556.98 16545.74
1992/05/31 15744.22 16809.66
1992/06/30 15915.86 17018.51
1992/07/31 16227.94 17363.32
1992/08/31 16571.22 17593.20
1992/09/30 16742.86 17793.66
1992/10/31 16493.20 17568.92
1992/11/30 16696.05 17817.74
1992/12/31 16883.30 18047.16
1993/01/31 17335.81 18491.55
1993/02/28 17631.52 18841.57
1993/03/31 18038.40 19168.23
1993/04/30 18157.08 19305.82
1993/05/31 18428.33 19565.70
1993/06/30 18903.02 19933.29
1993/07/31 19089.51 20147.55
1993/08/31 19292.95 20339.61
1993/09/30 19360.77 20439.97
1993/10/31 19818.51 20825.00
1993/11/30 20004.99 20938.90
1993/12/31 20327.11 21148.27
1994/01/31 21005.24 21611.74
1994/02/28 20980.06 21456.32
1994/03/31 20273.29 20757.12
1994/04/30 20068.69 20514.55
1994/05/31 20105.89 20441.46
1994/06/30 20031.49 20516.70
1994/07/31 20105.89 20660.93
1994/08/31 20105.89 20804.44
1994/09/30 20254.69 20796.56
1994/10/31 20068.69 20849.41
</TABLE>
<PAGE>
1994/11/30 19901.30 20672.06
1994/12/31 19994.30 20902.00
1995/01/31 20217.49 21197.35
1995/02/28 20911.39 21858.73
1995/03/31 21171.78 22162.93
1995/04/30 21792.71 22681.84
1995/05/31 22353.55 23390.48
1995/06/30 22413.64 23569.13
1995/07/31 22954.45 23838.58
1995/08/31 23134.72 23983.26
1995/09/30 23515.29 24257.65
1995/10/31 23735.63 24429.61
1995/11/30 23855.81 24668.07
1995/12/31 24136.23 25064.04
1996/01/31 24697.07 25459.88
1996/02/29 25104.99 25498.22
1996/03/31 25039.04 25428.97
1996/04/30 25412.75 25440.49
1996/05/31 25764.49 25623.96
1996/06/30 25896.39 25777.88
1996/07/31 25808.45 25952.89
1996/08/31 26182.17 26220.91
1996/09/30 26951.59 26783.49
1996/10/31 26863.65 27077.02
1996/11/30 27149.44 27624.44
1996/12/31 27523.15 27837.00
1997/01/31 27896.87 28050.93
1997/02/28 28402.88 28444.43
1997/03/31 27520.51 28128.51
1997/04/30 27949.77 28448.66
1997/05/31 29118.32 29021.99
1997/06/30 29642.97 29463.84
Let's say hypothetically that $10,000 was invested in High Income Portfolio on
June 30, 1987. As the chart shows, by June 30, 1997, the value of the investment
would have grown to $29,643 - a 196.43% increase on the initial investment. For
comparison, look at how the Merrill Lynch High Yield Master Index did over the
same period. With dividends and capital gains, if any, reinvested, the same
$10,000 investment would have grown to $29,464 - a 194.64% increase.
INVESTMENT SUMMARY
TOP FIVE HOLDINGS AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
(BY ISSUER, EXCLUDING CASH EQUIVALENTS) % OF FUND'S
INVESTMENTS
<S> <C>
PanAmSat Corp. 3.3
Time Warner, Inc. 2.8
NextLink Communications, Inc. 1.9
Millicom International Cellular SA 1.8
Intermedia Communications, Inc. 1.8
</TABLE>
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
% OF FUND'S
INVESTMENTS
<S> <C>
Media & Leisure 31.8
Utilities 12.1
Basic Industries 11.3
Finance 5.1
Services 5.0
</TABLE>
QUALITY DIVERSIFICATION AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
(MOODY'S RATINGS) % OF FUND'S
INVESTMENTS
<S> <C>
Aaa, Aa, A 0.0
Baa 0.0
Ba 5.5
B 51.5
Caa, Ca, C 8.0
Nonrated 5.2
</TABLE>
TABLE EXCLUDES SHORT-TERM INVESTMENTS. WHERE MOODY'S RATINGS ARE NOT AVAILABLE,
WE HAVE USED S&P RATINGS. UNRATED DEBT SECURITIES THAT ARE EQUIVALENT TO BA AND
BELOW AT JUNE 30, 1997, ACCOUNT FOR 5.2% OF THE FUND'S INVESTMENTS.
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with Barry Coffman, Portfolio Manager of High Income Portfolio
<PAGE>
Q. BARRY, HOW DID THE FUND PERFORM OVER THE PAST SIX MONTHS AND THE PAST
YEAR?
A. It did well, outperforming its benchmark, the Merrill Lynch High Yield Master
Index, which had a total return of 5.84% for the six months that ended June 30,
1997, and 14.30% for the 12-month period.
Q. WHY DID THE FUND BEAT ITS BENCHMARK?
A. The fund had a lighter weighting in higher-quality BB-rated securities and a
heavier weighting in lower-quality B-rated securities than its benchmark. During
the period, credit spreads narrowed, meaning there was an ever smaller gap in
yield between the B- and BB-rated securities. As spreads narrowed, B-rated
securities performed better than the higher-rated BB securities and helped the
fund outpace its benchmark. There were both fundamental and technical reasons
for the performance of B-rated securities. From a fundamental standpoint, there
was continued economic strength and the stock market's impressive rise. And from
a technical standpoint, demand for the lower-quality tiers of the high-yield
market was solid.
Q. WHICH OF THE FUND'S HOLDINGS PERFORMED PARTICULARLY WELL?
A. Many of the fund's larger media and telecommunications holdings - including
PanAmSat and Millicom International Cellular - were some of its best performers.
PanAmSat was upgraded upon the completion of its merger with GM Hughes. Millicom
not only benefited from its quickly growing cellular businesses in emerging
countries, but it also rose on the news that it is planning to undertake a
significant restructuring by selling off its Latin American business and
spinning off its Asian operations. Other strong performers included stocks
issued by high-yield companies - those with below-investment-grade credit
ratings. For example, the stock price of Allied Waste performed well over the
past six months. That rise was due, in part, to Allied's successful integration
of a recent acquisition.
Q. WERE THERE ANY DISAPPOINTMENTS?
A. Some of our paging holdings proved to be disappointing, but the industry as a
whole was plagued by a number of developments during the past six months. First,
investors became concerned that pager sales would decline in light of new
competitive products. Second, there was the bankruptcy of a high-profile paging
company and the failure of another company to successfully introduce a new
product. While the fund did not own either of those troubled pagers, it did hold
others that appeared to fall in price in sympathy, including Arch
Communications. While I reduced the fund's stake in Arch, I continued to hold
onto Pagemart because it continued to be one of the fastest-growing paging
companies and one with a strategy that I believe should distinguish it from its
competitors.
Q. IN ADDITION TO PAGING COMPANIES, THE FUND ALSO HAD SIGNIFICANT HOLDINGS IN
OTHER TELECOMMUNICATIONS-RELATED COMPANIES. WHAT IS THE ATTRACTION TO THESE
COMPANIES?
A. The growth potential for many telecommunications companies is significant
and, in my view, will be independent of the economic environment. The companies
I emphasized have fast-growing businesses in fast-growing industries. For
example, the competitive local exchange companies - including Intermedia
Communications, Nextlink, GST USA, Brooks Fiber and McLeodUSA - gained market
share in the $100 billion local telephone market at the expense of regional Bell
operating companies. Another large telecommunications holding is McCaw
International, which is a subsidiary of Nextel and owns enhanced specialized
mobile radio licenses in Latin America and Asia used for dispatch, messaging and
voice purposes.
Q. WHAT'S YOUR OUTLOOK?
A. The market is at risk to a slowing economy that likely would hurt the weakest
companies in the high-yield market. I will probably focus on improving the
overall credit quality of the fund, while concentrating the fund's aggressive
holdings in situations I believe have strong fundamental momentum and an
attractive risk/reward tradeoff.
FUND FACTS
GOAL: income and share price stability by investing in high-quality, short-term
investments
START DATE: April 1, 1982
SIZE: as of June 30, 1997, more than $1.0 billion
MANAGER: Robert Duby, since April 1997; joined Fidelity in 1982 (checkmark)
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
CORPORATE BONDS - 70.2%
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
CONVERTIBLE BONDS - 0.7%
MEDIA & LEISURE - 0.6%
RESTAURANTS - 0.6%
Boston Chicken, Inc.
4 1/2%, 2/1/04 B2 $ 14,000,000 $ 10,640,000
RETAIL & WHOLESALE - 0.1%
RETAIL & WHOLESALE, MISCELLANEOUS - 0.1%
Corporate Express, Inc.
4 1/2%, 7/1/00 B3 1,500,000 1,335,000
UTILITIES - 0.0%
TELEPHONE SERVICES - 0.0%
GST Telecommunications, Inc.
<PAGE>
0%, 12/15/05 (d)(g) - 630,000 409,500
TOTAL CONVERTIBLE BONDS 12,384,500
NONCONVERTIBLE BONDS - 69.5%
AEROSPACE & DEFENSE - 1.3%
AEROSPACE & DEFENSE - 0.5%
Alliant Techsystems, Inc.
11 3/4%, 3/1/03 B2 40,000 44,100
Fairchild Corp.
12%, 10/15/01 Caa 1,945,000 1,964,450
RHI Holdings, Inc.
11 7/8%, 3/1/99 B2 3,160,000 3,160,000
Wyman-Gordon Co.
10 3/4%, 3/15/03 Ba3 4,740,000 5,071,800
10,240,350
DEFENSE ELECTRONICS - 0.5%
Tracor, Inc.
8 1/2%, 3/1/07 B1 9,430,000 9,524,300
SHIP BUILDING & REPAIR - 0.3%
Newport News Shipbuilding, Inc.:
8 5/8%, 12/1/06 Ba2 670,000 691,775
9 1/4%, 12/1/06 B1 4,650,000 4,847,625
5,539,400
TOTAL AEROSPACE & DEFENSE 25,304,050
BASIC INDUSTRIES - 10.7%
CHEMICALS & PLASTICS - 2.6%
Atlantis Group, Inc.
11%, 2/15/03 B2 7,785,000 8,038,013
BPC Holdings Corp.
12 1/2%, 6/15/06 Caa 350,000 381,500
Foamex LP/Foamex Capital
Corp. 9 7/8%, 6/15/07 (g) B3 5,840,000 5,913,000
Freedom Chemical Co.
10 5/8%, 10/15/06 B3 6,260,000 6,385,200
Pioneer Americas Acquisition
Corp. 9 1/4%, 6/15/07 (g) B1 5,780,000 5,693,300
Plastic Specialties & Technologies,
Inc. 11 1/4%, 12/1/03 B3 5,990,000 6,409,300
Sterling Chemicals Holdings,
Inc. 11 3/4%, 8/15/06 B3 15,560,000 16,765,900
49,586,213
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
IRON & STEEL - 1.0%
GS Technologies Operating, Inc.
12 1/4%, 10/1/05 B2 $ 3,410,000 $ 3,733,950
Republic Engineered Steels, Inc.
9 7/8%, 12/15/01 Caa 7,810,000 7,282,825
WCI Steel, Inc. 10%, 12/1/04 B2 8,070,000 8,392,800
19,409,575
METALS & MINING - 0.6%
Commonwealth Aluminum Corp.
10 3/4%, 10/1/06 B2 10,110,000 10,615,500
PAPER & FOREST PRODUCTS - 6.5%
Asia Pulp & Paper Finance II
Mauritius Ltd.
12%, 3/15/04 (g) B3 11,785,000 12,079,625
American Pad & Paper Co.,
Inc. 13%, 11/15/05 B3 2,290,000 2,679,300
Container Corp. of America:
10 3/4%, 5/1/02 B1 50,000 54,688
gtd. 9 3/4%, 4/1/03 B1 490,000 518,175
gtd. 11 1/4%, 5/1/04 B1 150,000 164,250
Crown Paper Co.
11%, 9/1/05 B3 3,780,000 3,789,450
Doman Industries Ltd. yankee
8 3/4%, 3/15/04 B1 11,660,000 11,251,900
Florida Coast Paper Co.
LLC\Florida Coast Paper
Finance Corp., Series B,
12 3/4%, 6/1/03 Caa 3,110,000 3,211,075
Gaylord Container Corp.
11 1/2%, 5/15/01 B3 1,160,000 1,219,450
Indah Kiat International
Finance Co. BV
12 1/2%, 6/15/06 Ba2 2,680,000 3,041,800
Mail-Well Corp.
10 1/2%, 2/15/04 B 1,640,000 1,705,600
Malette, Inc. yankee
12 1/4%, 7/15/04 Ba3 1,340,000 1,500,800
Repap Wisconsin, Inc.:
9 1/4%, 2/1/02 B2 11,170,000 11,225,850
9 7/8%, 5/1/06 Caa 12,510,000 12,603,825
Repap New Brunswick, Inc.
yankee 10 5/8%, 4/15/05 Caa 5,110,000 4,816,175
Riverwood International
10 7/8%, 4/1/08 Caa 8,750,000 7,940,625
SD Warren Co., Series B,
12%, 12/15/04 B1 7,330,000 8,209,600
Specialty Paperboard, Inc.
9 3/8%, 10/15/06 B1 5,000,000 5,062,500
Stone Container Corp.:
12 5/8%, 7/15/98 B2 10,000,000 10,512,500
10 3/4%, 10/1/02 B1 10,510,000 11,088,050
<PAGE>
11 7/8%, 8/1/16 B2 8,400,000 9,072,000
Tembec Finance Corp. yankee
9 7/8%, 9/30/05 B1 1,365,000 1,405,950
123,153,188
TOTAL BASIC INDUSTRIES 202,764,476
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
DURABLES - 2.4%
AUTOS, TIRES, & ACCESSORIES - 0.6%
Jordan Industries, Inc.
10 3/8%, 8/1/03 B3 $ 11,895,000 $ 12,311,325
HOME FURNISHINGS - 0.9%
Guitar Center Management
Co., Inc. 11%, 7/1/06 B2 2,527,000 2,767,065
Interlake Corp.
12 1/8%, 3/1/02 B3 10,275,000 10,763,063
Knoll, Inc. 10 7/8%, 3/15/06 B1 3,426,000 3,790,013
17,320,141
TEXTILES & APPAREL - 0.9%
Dan River, Inc.
10 1/8%, 12/15/03 B3 4,700,000 4,982,000
GFSI, Inc.
9 5/8%, 3/1/07 (g) B3 1,410,000 1,424,100
Synthetic Industries, Inc.
9 1/4%, 2/15/07 (g) B2 9,610,000 9,730,125
16,136,225
TOTAL DURABLES 45,767,691
ENERGY - 3.8%
ENERGY SERVICES - 0.8%
DI Industries, Inc.
8 7/8%, 7/1/07 B1 3,875,000 3,816,875
McDermott International, Inc.
9 3/8%, 3/15/02 Ba3 11,680,000 12,246,363
16,063,238
OIL & GAS - 3.0%
Belden & Blake Corp.
9 7/8%, 6/15/07 (g) B3 5,805,000 5,746,950
Chesapeake Energy Corp.
10 1/2%, 6/1/02 Ba2 690,000 727,950
Cross Timbers Oil Co.
9 1/4%, 4/1/07 B2 8,000,000 8,260,000
Flores & Rucks, Inc.:
13 1/2%, 12/1/04 B1 390,000 468,975
9 3/4%, 10/1/06 B3 9,860,000 10,303,700
Harcor Energy, Inc.
14 7/8%, 7/15/02 B3 13,060,000 15,410,800
Ocean Energy, Inc.
8 7/8%, 7/15/07 (g) B3 10,850,000 10,850,000
United Meridian Corp.
10 3/8%, 10/15/05 B2 190,000 206,150
United Refining Co.
10 3/4%, 6/15/07 (g) B2 4,050,000 4,009,500
55,984,025
TOTAL ENERGY 72,047,263
FINANCE - 4.1%
ASSET-BACKED SECURITIES - 0.4%
Airplanes Pass Through Trust
10 7/8%, 3/15/19 Ba2 6,710,000 7,750,050
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
CREDIT & OTHER FINANCE - 1.8%
APP International Finance Co.
BV yankee
11 3/4%, 10/1/05 Ba3 $ 2,165,000 $ 2,392,325
GST Equipment Funding, Inc.
13 1/4%, 5/1/07 (g) - 10,360,000 11,085,200
Imperial Credit Capital Trust I
10 1/4%, 6/14/02 (g) B2 4,870,000 4,882,175
Imperial Credit Industries, Inc.
9 7/8%, 1/15/07 B2 11,200,000 11,088,000
PTC International Finance BV
0%, 7/1/07 (d)(g) B3 3,440,000 2,085,500
Polytama International Finance
BV 11 1/4%, 6/15/07 B2 2,750,000 2,839,375
34,372,575
INSURANCE - 0.4%
Integon Corp.:
8%, 8/15/99 B1 1,500,000 1,526,250
9 1/2%, 10/15/01 B1 5,200,000 5,603,000
7,129,250
SAVINGS & LOANS - 1.5%
First Nationwide Holdings, Inc.
10 5/8%, 10/1/03 Ba3 7,240,000 7,855,400
First Nationwide Parent Holdings
Ltd. 12 1/2%, 4/15/03 B3 18,180,000 20,270,700
28,126,100
SECURITIES INDUSTRY - 0.0%
ECM Corp. extendible
14%, 6/1/02 (g) - 235,942 259,537
TOTAL FINANCE 77,637,512
HEALTH - 2.8%
<PAGE>
DRUGS & PHARMACEUTICALS - 0.1%
Leiner Health Products, Inc.
9 5/8%, 7/1/07 (g) B3 1,150,000 1,164,375
MEDICAL EQUIPMENT & SUPPLIES - 1.1%
Wright Medical Technology, Inc.
10 3/4%, 7/1/00 B3 20,920,000 21,286,089
MEDICAL FACILITIES MANAGEMENT - 1.6%
Integrated Health Services, Inc. (g):
11%, 4/30/06 (e) B1 4,890,000 5,256,750
9 1/2%, 9/15/07 B1 3,460,000 3,537,850
Mariner Health Group, Inc.
9 1/2%, 4/1/06 B2 1,180,000 1,215,400
Tenet Healthcare Corp.
8 5/8%, 1/15/07 Ba3 20,370,000 20,675,550
30,685,550
TOTAL HEALTH 53,136,014
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
INDUSTRIAL MACHINERY & EQUIPMENT - 3.1%
ELECTRICAL EQUIPMENT - 1.1%
Amphenol Corp.
9 7/8%, 5/15/07 B2 $ 1,680,000 $ 1,730,400
Motors & Gears, Inc.
10 3/4%, 11/15/06 B3 19,030,000 19,600,900
21,331,300
INDUSTRIAL MACHINERY & EQUIPMENT - 1.7%
Calmar, Inc.
11 1/2%, 8/15/05 B3 1,570,000 1,664,200
Continental Global Group, Inc.
11%, 4/1/07 (g) B2 4,000,000 4,200,000
Goss Graphic System, Inc.
12%, 10/15/06 B2 9,630,000 10,593,000
International Knife & Saw, Inc.
11 3/8%, 11/15/06 B3 2,460,000 2,626,050
MVE, Inc. 12 1/2%, 2/15/02 B3 5,735,000 5,878,375
Thermadyne Holdings Corp.:
10 1/4%, 5/1/02 B1 1,484,000 1,537,795
10 3/4%, 11/1/03 B3 5,226,000 5,421,975
31,921,395
POLLUTION CONTROL - 0.3%
Allied Waste of North America, Inc.
10 1/4%, 12/1/06 (g) B3 4,750,000 5,082,500
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 58,335,195
MEDIA & LEISURE - 17.4%
BROADCASTING - 7.1%
Adelphia Communications Corp.:
9 1/2%, 2/15/04 B3 990,000 940,500
9 7/8%, 3/1/07 (g) B3 20,610,000 19,888,650
Benedek Communications Corp.
0%, 5/15/06 (d) - 11,830,000 7,127,575
Capstar Broadcasting Partners,
Inc. 0%, 2/1/09 (d)(g) CCC 12,830,000 8,243,275
Capstar Radio Broadcasting
Partners, Inc.
9 1/4%, 7/1/07 (g) - 9,710,000 9,394,425
Chancellor Radio Broadcasting
Co. 8 3/4%, 6/15/07 (g) B3 8,640,000 8,532,000
Citadel Broadcasting Co.
10 1/4%, 7/1/07 (g) B3 5,550,000 5,550,000
CS Wireless Systems, Inc.
0%, 3/1/06 (d) Caa 12,770,000 3,064,800
Diamond Cable Communications
PLC yankee
0%, 9/30/04 (d) B3 2,030,000 1,639,225
Echostar DBS Corp.
12 1/2%, 7/1/02 (g) Caa 7,250,000 7,186,563
Echostar Satellite Broadcasting
Corp. 0%, 3/15/04 (d) Caa 5,410,000 3,841,100
Echostar Communications Corp.
0%, 6/1/04 (d) B2 17,750,000 14,910,000
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
Intermedia Capital Partners IV
L P/Intermedia Partners IV
Capital Corp.
11 1/4%, 8/1/06 B2 $ 590,000 $ 634,988
Jacor Communications Co.:
9 3/4%, 12/15/06 B2 3,190,000 3,317,600
8 3/4%, 6/15/07 (g) B2 5,260,000 5,194,250
Lenfest Communications, Inc.:
8 3/8%, 11/1/05 Ba3 2,710,000 2,669,350
10 1/2%, 6/15/06 B2 1,660,000 1,809,400
Olympus Communications LP/
Olympus Capital Corp
10 5/8%, 11/15/06 B1 5,550,000 5,799,750
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 3,845,000 4,142,988
Telewest PLC
0%, 10/1/07 (d) B1 16,990,000 12,275,275
UIH Australia/PAC, Inc., Series B,
0%, 5/15/06 (d) B2 13,875,000 8,394,375
<PAGE>
134,556,089
ENTERTAINMENT - 2.6%
AMC Entertainment, Inc.
9 1/2%, 3/15/09 (g) B2 10,940,000 11,104,100
AMF Group, Inc.
0%, 3/15/06 (d) B2 12,280,000 8,749,500
Cinemark USA, Inc.
9 5/8%, 8/1/08 B2 8,240,000 8,363,600
Viacom, Inc. 8%, 7/7/06 B1 21,700,000 21,049,000
49,266,200
LEISURE DURABLES & TOYS - 1.7%
Coleman Escrow Corp. secured (g):
1st priority 0%, 5/15/01 B3 20,350,000 12,820,500
2nd priority 0%, 5/15/01 Caa 3,700,000 2,136,750
Icon Health And Fitness, Inc.
13%, 7/15/02 B3 12,750,000 14,311,875
Icon Fitness Corp.
0%, 11/15/06 (d) CCC+ 5,650,000 3,079,250
32,348,375
LODGING & GAMING - 4.1%
American Skiing Co.
12%, 7/15/06 B3 7,480,000 7,854,000
Casino Magic Financial Corp.
11 1/2%, 10/15/01 B1 3,760,000 3,290,000
HMH Properties, Inc.
9 1/2%, 5/15/05 Ba3 14,610,000 15,230,925
Hollywood Casino Corp.
12 3/4%, 11/1/03 B2 6,050,000 6,413,000
Horseshoe Gaming LLC
12 3/4%, 9/30/00 B1 15,220,000 17,008,350
KSL Recreation Group, Inc.
10 1/4%, 5/1/07 (g) B3 5,570,000 5,792,800
Prime Hospitality Corp.
9 3/4%, 4/1/07 - 5,190,000 5,462,475
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
MEDIA & LEISURE - CONTINUED
LODGING & GAMING - CONTINUED
Sun International Hotels Ltd./
Sun International North
America, Inc. yankee
9%, 3/15/07 Ba3 $ 15,030,000 $ 15,255,450
Wyndham Hotel Corp.
10 1/2%, 5/15/06 B2 1,920,000 2,145,600
78,452,600
PUBLISHING - 0.8%
Big Flower Press Holdings, Inc.
8 7/8%, 7/1/07 (g) - 16,300,000 16,014,750
RESTAURANTS - 1.1%
AFC Enterprises, Inc.
10 1/4%, 5/15/07 (g) B3 11,420,000 11,362,900
Host Marriott Travel Plazas, Inc.
9 1/2%, 5/15/05 B1 8,790,000 9,141,600
20,504,500
TOTAL MEDIA & LEISURE 331,142,514
NONDURABLES - 1.4%
FOODS - 0.1%
International Home Foods, Inc.
10 3/8%, 11/1/06 B2 2,830,000 2,914,900
HOUSEHOLD PRODUCTS - 1.2%
Renaissance Cosmetic, Inc.
11 3/4%, 2/15/04 B3 10,000,000 10,350,000
Revlon Consumer Products Corp.
10 1/2%, 2/15/03 B3 11,470,000 12,215,550
22,565,550
TOBACCO - 0.1%
North Atlantic Trading, Inc.
11%, 6/15/04 (g) B3 1,810,000 1,837,150
TOTAL NONDURABLES 27,317,600
RETAIL & WHOLESALE - 4.5%
APPAREL STORES - 1.5%
Lamonts Apparel, Inc.
10 1/4%, 11/1/99
pay-in-kind (b)(g) - 2,201,000 88,040
Mothers Work, Inc.
12 5/8%, 8/1/05 B3 21,970,000 22,684,025
Specialty Retailers, Inc. (g):
8 1/2%, 7/15/05 Ba3 4,480,000 4,468,800
9%, 7/15/07 B2 1,990,000 1,980,050
29,220,915
GENERAL MERCHANDISE STORES - 0.0%
K mart Corp. 8.70%, 8/1/97 Ba2 250,000 250,625
GROCERY STORES - 3.0%
Food 4 Less Holdings, Inc.
13 5/8%, 6/15/07 - 1,826,493 2,135,207
Grand Union Co.
12%, 9/1/04 Caa 7,270,000 5,379,800
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Pantry, Inc. 12%, 11/15/00 B2 $ 660,000 $ 676,500
Pathmark Stores, Inc.:
<PAGE>
11 5/8%, 6/15/02 Caa 10,760,000 10,894,500
9 5/8%, 5/1/03 B3 1,960,000 1,891,400
Penn Traffic Co.:
10 1/4%, 2/15/02 B3 7,850,000 6,751,000
8 5/8%, 12/15/03 B3 3,780,000 3,052,350
10 3/8%, 10/1/04 B3 3,860,000 3,281,000
11 1/2%, 4/15/06 B3 3,180,000 2,814,300
Pueblo Xtra International, Inc.:
9 1/2%, 8/1/03 B3 11,340,000 10,858,050
9 1/2%, 8/1/03 (g) B3 3,540,000 3,416,100
Randalls Food Markets, Inc.
9 3/8%, 7/1/07 (g) B2 5,080,000 5,060,950
56,211,157
RETAIL & WHOLESALE, MISCELLANEOUS - 0.0%
Corporate Expess, Inc., Series B,
9 1/8%, 3/15/04 B2 1,070,000 1,070,000
TOTAL RETAIL & WHOLESALE 86,752,697
SERVICES - 4.1%
LEASING & RENTAL - 0.0%
GPA Holland 8.94%, 2/16/99 - 500,000 513,750
PRINTING - 1.2%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 21,300,000 21,885,750
SERVICES - 2.9%
Orion Network Systems, Inc. unit:
11 1/4%, 1/15/07 B2 5,585,000 5,710,663
0%, 1/15/07 (d) B2 45,930,000 26,180,100
Outsourcing Solutions, Inc.
11%, 11/1/06 B3 3,960,000 4,296,600
Protection One Alarm Monitoring,
Inc. 13 5/8%, 6/30/05 Caa 18,300,000 18,757,500
54,944,863
TOTAL SERVICES 77,344,363
TECHNOLOGY - 2.9%
COMMUNICATIONS EQUIPMENT - 0.3%
Intermedia Communications,
Inc. 0%, 5/15/06 (d) B2 6,430,000 4,420,625
COMPUTER SERVICES & SOFTWARE - 0.5%
Verio, Inc. 13 1/2%, 6/15/04
unit (g) - 10,050,000 10,100,250
COMPUTERS & OFFICE EQUIPMENT - 1.6%
Dictaphone Corp.
11 3/4%, 8/1/05 B3 14,530,000 13,367,600
Exide Electronics Group, Inc.
11 1/2%, 5/15/06 B3 6,950,000 7,453,875
Unisys Corp.:
10 5/8%, 10/1/99 B1 4,080,000 4,212,600
12%, 4/15/03 B1 4,400,000 4,763,000
11 3/4%, 10/15/04 B1 1,020,000 1,101,600
30,898,675
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
TECHNOLOGY - CONTINUED
ELECTRONIC INSTRUMENTS - 0.3%
Wavetek Corp.
10 1/8%, 6/15/07 (g) B3 $ 5,270,000 $ 5,375,400
ELECTRONICS - 0.2%
Fairchild Semiconductor Corp.
10 1/8%, 3/15/07 (g) B2 470,000 495,850
Viasystems, Inc.
9 3/4%, 6/1/07 (g) B3 3,150,000 3,205,125
3,700,975
TOTAL TECHNOLOGY 54,495,925
TRANSPORTATION - 1.8%
AIR TRANSPORTATION - 0.2%
US Air Inc., pass through trust
8 5/8%, 9/1/98 B1 5,000,000 5,075,000
RAILROADS - 1.2%
TFM SA de CV (g):
10 1/4%, 6/15/07 B2 2,520,000 2,564,100
0%, 6/15/09 (d) B2 8,660,000 5,001,150
Transtar Holdings LP/Transtar
Capital Corp. 0%,
12/15/03 (d) B- 17,941,000 15,249,850
22,815,100
TRUCKING & FREIGHT - 0.4%
Greyhound Lines, Inc.
11 1/2%, 4/15/07 (g) B3 6,860,000 7,305,900
TOTAL TRANSPORTATION 35,196,000
UTILITIES - 9.2%
CELLULAR - 6.0%
Arch Communications Group,
Inc. 0%, 3/15/08 (d) B3 12,070,000 6,366,925
Clearnet Communications, Inc.
yankee 0%, 12/15/05 (d) B3 11,420,000 7,508,650
Fonorola, Inc.
12 1/2%, 8/15/02 B2 1,020,000 1,122,000
McCaw International Ltd. unit
0%, 4/15/07 (d)(g) CCC 27,110,000 13,012,800
Microcell Telecommunications,
Inc. 0%, 6/1/06 (d) B3 28,060,000 15,713,600
Millicom International Cellular
<PAGE>
SA 0%, 6/1/06 (d) B3 49,000,000 35,035,000
Mobile Telecommunications
Technologies Corp.
13 1/2%, 12/15/02 B3 10,825,000 11,420,375
Omnipoint Corp.:
11 5/8%, 8/15/06 B2 2,150,000 2,031,750
Series A, 11 5/8%, 8/15/06 B3 5,980,000 5,651,100
Pagemart, Inc.
0%, 11/1/03 (d) - 3,250,000 2,811,250
Pagemart Nationwide, Inc.
0%, 2/1/05 (d) - 7,070,000 5,267,150
Telesystem International Wireless,
Inc. 0%, 6/30/07 (d)(g) B- 7,670,000 4,084,275
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
USA Mobile Communications,
Inc. II 9 1/2%, 2/1/04 B2 $ 3,970,000 $ 3,692,100
113,716,975
ELECTRIC UTILITY - 0.3%
CMS Energy Corp.
8 1/8%, 5/15/02 Ba3 5,680,000 5,722,600
TELEPHONE SERVICES - 2.9%
Brooks Fiber Properties, Inc.
11 7/8%, 11/1/06 - 5,730,000 3,695,850
GST USA, Inc.
0%, 12/15/05 (d) - 11,110,000 6,888,200
Hyperion Telecommunications,
Inc., Series B,
0%, 4/15/03 (d) - 12,560,000 6,311,400
McLeodUSA, Inc.
0%, 3/1/07 (d)(g) B3 11,000,000 7,012,500
Nextlink Communications, Inc.
12 1/2%, 4/15/06 - 700,000 743,750
RSL Communications Ltd./
RSL Communications PLC
12 1/4%, 11/15/06 - 9,140,000 9,299,950
Shared Technologies Fairchild
Communications Corp.
0%, 3/1/06 (d) Caa 18,290,000 16,323,825
Teleport Communications
Group, Inc.:
8%, 8/1/05 B1 5,550,000 4,002,938
9 7/8%, 7/1/06 B1 310,000 330,925
54,609,338
TOTAL UTILITIES 174,048,913
TOTAL NONCONVERTIBLE BONDS 1,321,290,213
TOTAL CORPORATE BONDS
(Cost $1,309,051,600) 1,333,674,713
COMMERCIAL MORTGAGE SECURITIES - 0.0%
Lennar Central Partners LP
Series 1995-1 Class F,
11.70%, 5/15/05 (g) - 63,357 63,951
Meritor Mortgage Security Corp.
Series 1987-1 Class B,
9.40%, 2/1/00 (b)(g) - 1,350,000 267,165
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $220,926) 331,116
COMMON STOCKS - 7.9%
SHARES
AEROSPACE & DEFENSE - 0.3%
Fairchild Corp. Class A 289,000 5,202,000
BASIC INDUSTRIES - 0.5%
CHEMICALS & PLASTICS - 0.1%
Foamex International, Inc. (a) 182,800 2,399,250
Foamex-JPS Automotive LP/Foamex
JPS Capital Corp. warrants 7/1/99 (a) 530 14,840
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
BASIC INDUSTRIES - CONTINUED
CHEMICALS & PLASTICS - CONTINUED
Sterling Chemical Holdings
warrants 8/15/08 (a) 340 $ 11,900
2,425,990
PAPER & FOREST PRODUCTS - 0.4%
Gaylord Container Corp. Class A (a) 860,600 6,723,438
SDW Holdings Corp. (a):
warrants 12/15/06 7,609 38,045
Series B warrants 12/16/06 4,450 75,650
6,837,133
TOTAL BASIC INDUSTRIES 9,263,123
DURABLES - 0.1%
TEXTILES & APPAREL - 0.1%
Arena Brands Holdings Corp. Class B 48,889 1,974,630
HM/Hat Brands Trust Class I unit (a)(f) 340,000 -
1,974,630
ENERGY - 1.0%
OIL & GAS - 1.0%
Harcor Energy, Inc. (a) 469,000 2,814,000
Harcor Energy, Inc.
warrants 7/24/00 (a) 330,000 742,500
Ocean Energy, Inc. (a) 304,200 14,069,250
Snyder Oil Corp. 50,000 918,750
18,544,500
<PAGE>
FINANCE - 0.0%
SECURITIES INDUSTRY - 0.0%
ECM Corp. LP (g) 3,000 300,000
HEALTH - 0.0%
MEDICAL EQUIPMENT & SUPPLIES - 0.0%
Wright Medical Technology,
Inc. warrants 6/30/03 (a) 3,212 321,200
INDUSTRIAL MACHINERY & EQUIPMENT - 0.7%
POLLUTION CONTROL - 0.7%
Allied Waste Industries, Inc. (a) 717,300 12,463,088
MEDIA & LEISURE - 3.3%
BROADCASTING - 1.9%
American Radio Systems Corp. Class A (a) 216,900 8,648,888
Benedek Communications Corp.
warrants 7/1/00 (a) 57,600 115,200
CS Wireless Systems, Inc. (a)(g) 3,514 -
Jacor Communications, Inc. Class A (a) 310,600 11,880,450
PanAmSat Corp. (a) 342,400 9,929,600
United International Holdings, Inc.
Class A (a) 441,100 4,576,413
35,150,551
ENTERTAINMENT - 0.0%
Live Entertainment, Inc. (a)(f):
$2.00 warrants 3/28/98 232,000 11,600
$2.72 warrants 3/28/98 221,765 11,088
22,688
LEISURE DURABLES & TOYS - 0.1%
IHF Capital, Inc. (a)(g):
Series H warrants 11/15/04 10,250 1,691,250
Series I warrants 11/14/99 5,890 323,950
2,015,200
SHARES VALUE (NOTE 1)
LODGING & GAMING - 1.0%
Bally Gaming International, Inc.
warrants 7/29/98 (a) 90,000 $ 112,500
Host Marriott Corp. (a) 651,300 11,601,281
Motels of America, Inc. (a) 3,000 93,000
Showboat, Inc. 437,300 7,625,419
19,432,200
PUBLISHING - 0.3%
Big Flower Press Holdings, Inc. (a) 304,200 6,312,150
TOTAL MEDIA & LEISURE 62,932,789
NONDURABLES - 0.3%
HOUSEHOLD PRODUCTS - 0.0%
Renaissance Cosmetics, Inc.
warrants 8/31/06 (a)(g) 12,750 1,402,500
TOBACCO - 0.3%
North Atlantic Trading, Inc.
unit (a)(g) 210,000 5,302,500
TOTAL NONDURABLES 6,705,000
RETAIL & WHOLESALE - 0.2%
APPAREL STORES - 0.1%
Lamonts Apparel, Inc. (a) 35,870 3,364
Lamonts Apparel, Inc.
warrants 6/10/99 (a) 66,214 -
Mothers Work (a)(h) 209,100 1,515,975
1,519,339
GROCERY STORES - 0.1%
Food 4 Less Holdings, Inc.
warrants 12/31/02 (a)(f) 155,047 2,248,182
RETAIL & WHOLESALE, MISCELLANEOUS - 0.0%
Town & Country Jewelry Manufacturing
Corp. Class A (a) 8,374 2,094
TOTAL RETAIL & WHOLESALE 3,769,615
SERVICES - 0.6%
Orion Network Systems, Inc. (a) 358,700 3,945,700
Protection One, Inc. (a) 469,200 6,334,200
Protection One, Inc.
warrants 6/30/05 (a) 74,560 708,320
Vestar/LPA Investment Corp. (a) 5,177 103,540
11,091,760
TECHNOLOGY - 0.1%
COMPUTERS & OFFICE EQUIPMENT - 0.1%
Exide Electronics Group, Inc. (a) 117,600 1,389,150
Exide Electronics Group, Inc.
warrants 3/15/06 (a)(g) 6,770 169,250
1,558,400
UTILITIES - 0.8%
CELLULAR - 0.8%
Intercel, Inc. warrants 2/1/06 (a) 56,448 282,240
Microcell Telecommunications, Inc. (a):
warrants 6/1/06 112,240 1,403,000
conditional warrants 6/1/06 112,240 70,150
Pagemart Wireless, Inc. Class A (a) 1,446,000 12,291,000
14,046,390
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - CONTINUED
TELEPHONE SERVICES - 0.0%
Hyperion Telecommunications, Inc.
warrants 4/15/01 (a)(g) 12,560 $ 376,800
NextLink Communications, Inc.
warrants 2/1/09 (a) 663,204 6,632
<PAGE>
RSL Communications Ltd./RSL
Communications PLC
warrants 11/15/06 (a) 9,140 274,200
657,632
TOTAL UTILITIES 14,704,022
TOTAL COMMON STOCKS
(Cost $121,699,279) 148,830,127
PREFERRED STOCKS - 16.2%
CONVERTIBLE PREFERRED STOCKS - 0.9%
MEDIA & LEISURE - 0.9%
BROADCASTING - 0.2%
Benedek Communications Corp. 15% (a) 33,600 3,679,200
LODGING & GAMING - 0.7%
Host Marriott Financial Trust
$3.375 (g) 251,200 14,538,200
TOTAL MEDIA & LEISURE 18,217,400
RETAIL & WHOLESALE - 0.0%
RETAIL & WHOLESALE, MISCELLANEOUS - 0.0%
Town & Country Corp. pay-in-kind 128 64
TOTAL CONVERTIBLE PREFERRED STOCKS 18,217,464
NONCONVERTIBLE PREFERRED STOCKS - 15.3%
BASIC INDUSTRIES - 0.1%
PAPER & FOREST PRODUCTS - 0.1%
SDW Holdings Corp. 15% (g) 44,500 1,596,438
FINANCE - 1.0%
CREDIT & OTHER FINANCE - 0.5%
American Annuity Group Capital
Trust II 8 3/4% 8,910 8,865,450
SAVINGS & LOANS - 0.5%
California Federal Bank FSB:
Series B, 10 5/8% 15,610 1,713,198
11 1/2% 1,778 199,136
California Federal Preferred Capital Corp.
9 1/8% 308,750 7,873,125
9,785,459
TOTAL FINANCE 18,650,909
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Ampex Corp. 8% (a)(f) 1,589 1,235,114
MEDIA & LEISURE - 9.6%
BROADCASTING - 9.4%
American Radio Systems Corp.
11 3/8% pay-in-kind 133,856 14,255,664
Cablevision System Corp.:
11 1/8% depositary shares pay-in-kind 140,667 14,137,034
Series H, $11.75 pay-in-kind 157,433 16,294,316
SHARES VALUE (NOTE 1)
Capstar Broadcasting Partners, Inc.
12% (g) 35,630 $ 3,607,538
Chancellor Radio Broadcasting Co.:
12% pay-in-kind (g) 10,317 1,114,236
Series A, 12 1/4% 64,300 8,198,250
Citadel Broadcasting Co.
13 1/4% pay-in-kind (g) 84,000 8,400,000
PanAmSat Corp. 12 3/4% pay-in-kind 43,047 52,517,340
Sinclair Capital 11 5/8%, (g) 75,000 7,912,500
Time Warner, Inc., Series M,
10 1/4% pay-in-kind 47,834 52,856,570
179,293,448
PUBLISHING - 0.2%
K-III Communications Corp.:
Series B, $11.625 pay-in-kind 29,748 3,246,251
Series D, $10 5,400 544,050
3,790,301
TOTAL MEDIA & LEISURE 183,083,749
NONDURABLES - 0.6%
HOUSEHOLD PRODUCTS - 0.6%
Renaissance Cosmetics, Inc.
pay-in-kind 14% 14,156 12,457,280
SERVICES - 0.3%
Loewen Group Capital LP,
Series A, $2.36 200,000 5,300,000
TECHNOLOGY - 1.5%
COMMUNICATIONS EQUIPMENT - 1.5%
Intermedia Communications, Inc.
pay-in-kind 13 1/2% 27,596 28,492,870
UTILITIES - 2.1%
TELEPHONE SERVICES - 2.1%
ICG Holdings, Inc. 14 1/4% pay-in-kind 3,713 3,954,345
NextLink Communications, Inc.
pay-in-kind 14% 684,175 35,406,056
39,360,401
TOTAL NONCONVERTIBLE PREFERRED STOCKS 290,176,761
TOTAL PREFERRED STOCKS
(Cost $289,883,326) 308,394,225
CASH EQUIVALENTS - 5.7%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account dated
6/30/97 due 7/1/97:
at 5 7/8% $ 11,175,824 11,174,000
<PAGE>
at 5.93% 97,367,036 97,351,000
TOTAL CASH EQUIVALENTS 108,525,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $1,829,380,131) $ 1,899,755,181
LEGEND
1. Non-income producing
2. Non-income producing - issuer filed for protection under the Federal
Bankruptcy Code or is in default of interest payment.
3. Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
4. Debt obligation initially issued in zero coupon form which converts to coupon
form at a specified rate and date.
5. Debt obligation initially issued at one coupon which converts to a higher
coupon at a specified date.
6. Restricted securities - Investment in securities not registered under the
Securities Act of 1933 (see Note 2 of Notes to Financial Statements).
Additional information on each holding is as follows:
ACQUISITION ACQUISITION COST
SECURITY DATE (000S)
Ampex Corp. 8% 2/16/95 $ 834,225
Food 4 Less Holdings, 12/30/92 $ 229,281
Inc. warrants 12/31/02 to 5/17/93
HM/Hat Brands Trust
Class I unit 2/22/94 $ 340,000
Live Entertainment, Inc.:
$2.00 warrants 3/28/98 3/23/93 $ 220,717
$2.72 warrants 3/28/98 3/23/93 $ 131,863
7. Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers. At the period end, the value of
these securities amounted to $338,705,668 or 17.7% of net assets.
8. An affiliated company is a company in which the fund has ownership of at
least 5% of the voting securities. Transactions during the period with companies
which are or were affiliates are as follows:
PURCHASE SALES DIVIDEND VALUE
AFFILIATE COST COST INCOME
Mothers Work $ - $ - $ - $1,515,975
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities, aggregated
$1,303,270,433 and $1,021,325,332, respectively, of which U.S. government and
government agency obligations aggregated $49,578,125 and $97,601,563,
respectively.
The fund placed a portion of its portfolio transactions with brokerage firms
which are affiliates of Fidelity Management & Research Company. The commissions
paid to these affiliated firms were $2,362 for the period (see Note 4 of Notes
to Financial Statements).
The composition of long-term debt holdings as a percentage of total value of
investment in securities, is as follows:
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 0.0% AAA, AA, A 0.0%
Baa 0.0% BBB 0.0%
Ba 5.5% BB 5.9%
B 50.4% B 49.6%
Caa 6.7% CCC 5.2%
Ca, C 0.0% CC, C 0.9%
D 0.0%
The percentage not rated by both S&P and Moody's amounted to 5.2%. FMR has
determined that unrated debt securities that are lower quality account for 5.2%
of the total value of investment in securities.
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income tax
purposes was $1,829,386,624. Net unrealized appreciation aggregated $70,368,557,
of which $95,952,177 related to appreciated investment securities and
$25,583,620 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C>
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in securities, at value (including repurchase agreements of $108,525,000) (cost $1,829,380,131) - $ 1,899,755,181
See accompanying schedule
Cash 12,332,427
Receivable for investments sold 17,307,645
Dividends receivable 3,882,207
Interest receivable 26,709,841
Other receivables 13,035
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
TOTAL ASSETS 1,960,000,336
LIABILITIES
Payable for investments purchased $ 45,858,116
Payable for fund shares redeemed 1,878,115
Accrued management fee 935,372
Other payables and 206,898
accrued expenses
TOTAL LIABILITIES 48,878,501
NET ASSETS $1,911,121,835
Net Assets consist of:
Paid in capital $1,732,723,161
Undistributed net investment income 73,506,048
Accumulated undistributed net realized gain (loss) on investments and foreign currency transactions 34,517,576
Net unrealized appreciation (depreciation) on investments 70,375,050
NET ASSETS, for 153,746,684 $1,911,121,835
shares outstanding
NET ASSET VALUE, offering price $ 12.43
and redemption price per share ($1,911,121,835 (divided by)
153,746,684 shares)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $13,388,030
Dividends
Interest 67,053,640
TOTAL INCOME 80,441,670
EXPENSES
Management fee 5,086,045
Transfer agent fees 632,302
Accounting fees and expenses 405,554
Non-interested trustees' compensation 3,770
Custodian fees and expenses 27,408
Registration fees 2,989
Audit 20,017
Legal 5,001
Miscellaneous 49,506
Total expenses before reductions 6,232,592
Expense reductions (10,217) 6,222,375
NET INVESTMENT INCOME 74,219,295
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Investment securities 36,015,078
Foreign currency transactions 355 36,015,433
Change in net unrealized appreciation (depreciation) on:
Investment securities 19,411,450
Assets and liabilities in 16 19,411,466
foreign currencies
NET GAIN (LOSS) 55,426,899
</TABLE>
<PAGE>
<TABLE>
<S> <C>
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $129,646,194
OTHER INFORMATION $ 7,004
Expense reductions
Directed brokerage arrangements
Custodian credits 3,213
$ 10,217
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
Operations $ 74,219,295 $ 113,508,707
Net investment income
Net realized gain (loss) 36,015,433 15,837,127
Change in net unrealized appreciation (depreciation) 19,411,466 35,065,622
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 129,646,194 164,411,456
Distributions to shareholders (116,014,735) (81,893,762)
From net investment income
From net realized gain (14,338,900) (16,022,693)
TOTAL DISTRIBUTIONS (130,353,635) (97,916,455)
Share transactions 645,716,095 1,058,212,273
Net proceeds from sales of shares
Reinvestment of distributions 130,353,635 97,916,455
Cost of shares redeemed (453,062,260) (673,801,481)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 323,007,470 482,327,247
TOTAL INCREASE (DECREASE) IN NET ASSETS 322,300,029 548,822,248
NET ASSETS
Beginning of period 1,588,821,806 1,039,999,558
End of period (including undistributed net investment income of $73,506,048 and
$113,174,121, $ 1,911,121,835 $ 1,588,821,806
respectively)
OTHER INFORMATION
Shares
Sold 53,868,295 89,104,560
Issued in reinvestment of distributions 11,056,288 8,680,536
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Redeemed (38,063,304) (57,202,172)
Net increase (decrease) 26,861,279 40,582,924
</TABLE>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997
<TABLE>
<CAPTION>
SELECTED PER-SHARE DATA (UNAUDITED) 1996 1995 1994 1993 E 1992
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $12.520 $12.050 $10.750 $11.990 $10.820 $ 9.550
Income from Investment Operations .519 D .927 .856 .770 .728 .790
Net investment income
Net realized and unrealized gain (loss) (.391) .643 1.224 (.910) 1.332 1.290
Total from investment operations .910 1.570 2.080 (.140) 2.060 2.080
Less Distributions
From net investment income (.890) (.920) (.780) (.730) (.794) (.810)
In excess of net investment income - - - - (.036) -
From net realized gain (.110) (.180) - (.370) (.060) -
Total distributions (1.000) (1.100) (.780) (1.100) (.890) (.810)
Net asset value, end of period $12.430 $12.520 $12.050 $10.750 $11.990 $10.820
TOTAL RETURN B, C 7.70% 14.03% 20.72% (1.64)% 20.40% 23.17%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $1,911,122 $1,588,822 $1,040,000 $569,417 $463,931 $200,591
Ratio of expenses to average net assets .73% A .71% .71% .71% .64% F .67%
Ratio of net investment income to average
net assets 8.70% A 9.09% 9.32% 8.75% 8.69% 10.98%
Portfolio turnover rate 130% A 123% 132% 122% 155% 160%
Average commission rate G $ .0379 $ .370
</TABLE>
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED AND DO NOT
REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT.
INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED
DURING THE PERIODS SHOWN.
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
E EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2,
"DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME,
CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES." AS
A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN
RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES.
F FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE PERIOD.
WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE BEEN HIGHER.
G FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED
TO DISCLOSE ITS AVERAGE
<PAGE>
COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED.
THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX
OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION
RATE STRUCTURES MAY DIFFER.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO PERFORMANCE AND
INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 LIFE OF
JUNE 30, 1997 YEAR YEARS FUND
ASSET MANAGER 20.45% 12.43% 12.43%
S&P 500(registered trademark) 34.70% 19.78% 15.73%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare the fund's returns to those of the Standard & Poor's 500
Index - a widely recognized, unmanaged index of common stocks. This
benchmark reflects the reinvestment of dividends and capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how it will do tomorrow. The stock
market, for example, has a history of long-term growth and short-term
volatility. In turn, the share price and return of a fund that invests in stocks
will vary. That means if you sell your shares during a market downturn, you
might lose money. But if you can ride out the market's ups and downs, you may
have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of return and are
not the fund's year-by-year results, which fluctuated over the periods shown.
The life of fund figures are from commencement of operations, September 6, 1989.
If Fidelity had not reimbursed certain fund expenses, the life of fund total
return figure would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT INCLUDE
ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. IF
PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, THE
TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and investment
return will vary and you may have a gain or loss when you withdraw your money.
$10,000 OVER LIFE OF FUND
1989/09/30 10000.00 10000.00
10000.00
1989/10/31 10020.02 9768.00
10056.80
1989/11/30 10060.06 9967.27
10176.58
1989/12/31 10091.09 10206.48
10276.51
1990/01/31 9868.42 9521.63
10028.74
1990/02/28 9969.64 9644.46
10092.83
1990/03/31 10050.61 9900.03
10192.14
1990/04/30 9919.03 9652.53
10098.07
1990/05/31 10425.10 10593.65
10527.54
1990/06/30 10506.07 10521.62
10593.12
1990/07/31 10485.83 10487.95
10657.74
1990/08/31 10141.70 9539.84
10328.10
1990/09/30 9929.15 9075.25
10235.77
1990/10/31 9979.76 9036.22
10309.16
1990/11/30 10465.59 9619.96
10618.33
1990/12/31 10769.23 9888.36
10792.26
1991/01/31 11284.56 10319.49
10998.06
1991/02/28 11726.26 11057.34
11273.46
1991/03/31 11915.56 11324.93
<PAGE>
11395.89
1991/04/30 12094.35 11352.11
11470.64
1991/05/31 12367.79 11842.52
11652.80
1991/06/30 12146.94 11300.13
11501.78
1991/07/31 12451.92 11826.72
11732.96
1991/08/31 12704.33 12107.01
11941.81
1991/09/30 12777.94 11904.82
11998.53
1991/10/31 12862.08 12064.35
12105.32
1991/11/30 12651.74 11578.15
12021.91
1991/12/31 13198.62 12902.69
12614.23
1992/01/31 13366.89 12662.70
12476.36
1992/02/29 13626.47 12827.32
12556.08
1992/03/31 13593.27 12577.19
12465.30
1992/04/30 13792.52 12946.96
12618.63
1992/05/31 13936.42 13010.40
12742.54
1992/06/30 13925.35 12816.54
12748.15
1992/07/31 14157.81 13340.74
13094.39
1992/08/31 14113.53 13067.25
13044.11
1992/09/30 14202.09 13221.45
13188.37
1992/10/31 14224.22 13267.72
13135.88
1992/11/30 14534.17 13720.15
13311.12
1992/12/31 14744.49 13888.91
13474.31
1993/01/31 15010.15 14005.57
13642.74
1993/02/28 15150.92 14196.05
13832.92
1993/03/31 15579.83 14495.59
13974.84
1993/04/30 15672.57 14144.79
13889.88
1993/05/31 15939.19 14523.87
14039.05
1993/06/30 16066.70 14565.99
14188.15
1993/07/31 16263.77 14507.73
14206.31
1993/08/31 16739.04 15057.57
14555.79
1993/09/30 16750.64 14941.63
14540.94
1993/10/31 17202.73 15250.92
14690.42
1993/11/30 17179.54 15106.04
14577.30
1993/12/31 17875.07 15288.82
14678.18
1994/01/31 18443.09 15808.64
14966.46
1994/02/28 17857.33 15380.23
14682.69
1994/03/31 17017.99 14709.65
14303.29
1994/04/30 17030.15 14897.93
14340.48
1994/05/31 17176.13 15142.26
14437.14
1994/06/30 16847.69 14771.27
14292.76
1994/07/31 17139.63 15255.77
14594.63
1994/08/31 17541.06 15881.26
14845.95
1994/09/30 17334.15 15492.17
14628.31
1994/10/31 17419.36 15840.74
14768.45
1994/11/30 17163.73 15263.82
14553.89
1994/12/31 16786.37 15490.18
14689.12
1995/01/31 16676.82 15891.84
14963.69
1995/02/28 16946.97 16511.15
<PAGE>
15337.61
1995/03/31 17170.77 16998.39
15572.33
1995/04/30 17444.31 17498.99
15852.32
1995/05/31 17668.12 18198.43
16377.48
1995/06/30 17817.32 18621.18
16596.81
1995/07/31 18451.43 19238.66
16808.32
1995/08/31 18675.24 19286.95
16918.98
1995/09/30 18911.47 20100.85
17284.77
1995/10/31 18662.80 20029.09
17383.15
1995/11/30 19147.71 20908.37
17811.48
1995/12/31 19632.62 21311.07
18066.96
1996/01/31 20055.36 22036.50
18374.75
1996/02/29 20001.35 22240.77
18307.28
1996/03/31 20213.99 22454.95
18329.47
1996/04/30 20426.62 22785.94
18405.65
1996/05/31 20586.10 23373.59
18599.57
1996/06/30 20772.16 23462.64
18738.02
1996/07/31 20426.62 22426.06
18440.99
1996/08/31 20466.49 22899.03
18597.29
1996/09/30 21210.73 24187.79
19153.95
1996/10/31 21755.62 24854.88
19550.66
1996/11/30 22832.10 26733.66
20293.51
1996/12/31 22499.85 26204.07
20066.55
1997/01/31 23177.64 27841.30
20726.94
1997/02/28 23377.96 28059.58
20837.00
1997/03/31 22488.67 26906.61
20325.55
1997/04/30 23257.38 28512.93
21062.97
1997/05/31 24372.77 30248.80
21793.43
1997/06/30 25020.90 31603.95
22394.49
Let's say hypothetically that $10,000 was invested in Asset Manager Portfolio on
September 30, 1989, shortly after the fund started. By June 30, 1997, the value
of the investment would have grown to $25,021 - a 150.21% increase. With
reinvested dividends and capital gains, if any, a $10,000 investment in the S&P
500, would have grown to $31,604 over the same period - a 216.04% increase on
the initial investment.
You can also look at how the Fidelity Composite Index did over the same period.
The composite index combines the cumulative total returns of three unmanaged
indexes - the S&P 500 (216.04%), Lehman Brothers Aggregate Bond Index (89.88%),
and the Salomon Brothers 3-month T-Bill Total Rate of Return Index (47.88%) -
according to the fund's neutral mix,* assuming monthly rebalancing. With
reinvested dividends and capital gains, if any, a $10,000 investment in the
index would have grown to $22,394 - a 123.94% increase.
* 50% STOCKS, 40% BONDS AND 10% SHORT-TERM INSTRUMENTS EFFECTIVE JANUARY 1,
1997; 40%, 40% AND 20%, RESPECTIVELY, BETWEEN JUNE 1, 1992 AND DECEMBER 31,
1996; 30%, 40% AND 30%, RESPECTIVELY, PRIOR TO JUNE 1, 1992.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Philip Morris Companies, Inc. 5.2
Federal National Mortgage Association 4.5
Federal Home Loan Mortgage Corporation 2.1
General Motors Corp. 1.9
International Business Machines Corp. 1.8
TOP FIVE BOND ISSUERS AS OF JUNE 30, 1997
(WITH MATURITIES MORE THAN ONE YEAR) % OF FUND'S
INVESTMENTS
<PAGE>
U.S. Treasury Obligations 5.8
Federal National Mortgage Association 4.0
Government National Mortgage Association 1.1
Ford Motor Credit Co. 0.8
AT&T Capital Corp. 0.5
ASSET ALLOCATION AS OF JUNE 30, 1997*
Row: 1, Col: 1, Value: 5.9
Row: 1, Col: 2, Value: 31.7
Row: 1, Col: 3, Value: 62.2
Stock class 62.0%
Bond class 31.9%
Short-term class 6.1%
FOREIGN INVESTMENTS 11.4%
*
ASSET ALLOCATION IN THE PIE CHART REFLECTS THE CATEGORIZATION OF ASSETS AS
DEFINED
IN THE FUND'S PROSPECTUS. FINANCIAL STATEMENT CATEGORIZATIONS CONFORM TO
ACCOUNTING STANDARDS AND WILL DIFFER FROM THE PIE CHART.
% OF FUND'S INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with Richard Habermann (top left), Portfolio Manager of Asset
Manager Portfolio, George Vanderheiden (top right), sub-manager for stocks,
Charles Morrison (bottom left), sub-manager for bonds, and John Todd (bottom
right), sub-manager for short-term/money market instruments. Charles Morrison
became sub-manager for bonds on February 3, 1997, and John Todd became sub-
manager for short-term/money market instruments on December 1, 1996.
Q. HOW DID THE FUND PERFORM, DICK?
D.H. The fund's performance historically has been compared to that of the
Standard & Poor's 500 Index. However, there are some significant differences
between the make-up of the fund and the composition of the index. While the S&P
500 is made up exclusively of stocks, the fund invests in stocks, bonds and
short-term/money market instruments. The fund allocates assets among these three
categories in order to help control both volatility and risk relative to funds
or indexes that invest only in stocks. That being said, the S&P 500 posted a
strong 20.61% return during the six months that ended June 30, 1997, and 34.70%
over the 12 months ended June 30, 1997. Since the fund is diversified into other
asset classes that didn't perform as well as stocks, the fund's performance
lagged that of the S&P 500. However, the fund did benefit from the performance
of its equity investments and its small stake in high-yield bonds, while the
bond and short-term money market portions of the fund performed in line with
their respective markets.
Q. WHAT WAS THE FUND'S ASSET MIX AT THE END OF THE PERIOD?
D.H. At the end of June 1997, the fund's equity position stood at about 62%, 12%
above the new neutral mix the fund instituted on January 1, 1997. That neutral
mix comprises 50% stocks, 40% bonds and 10% short-term/money market instruments.
In order to add to the equity portion, we reduced both the fund's bond and
short-term/money market positions. At the end of the period, the fund held about
32% in bonds and approximately 6% in short-term/money market instruments.
Q. WHY DID YOU INCREASE THE FUND'S STOCK INVESTMENTS?
D.H. Because the investing environment was very favorable not only for all
financial assets, but especially for stocks. We've had limited inflation and
corporate earnings continued to be strong. Another key factor was the strength
of the dollar, although that can act as a double-edged sword. On the negative
side, a rising dollar acts as a drag on the economy by slowing exports and
suppressing corporate earnings. This especially affects large, multinational
corporations. These companies, however, generally were able to post earnings
surprises through cost cutting and to sustain their stock prices by buying back
shares. The positive side of the strong dollar is that it helps to control
inflation by keeping import prices down. In addition, investors, especially
those abroad, tend to feel more comfortable investing in U.S. markets when the
dollar is strong, helping to sustain prices for both stocks and bonds.
Q. WHAT WAS THE ENVIRONMENT LIKE FOR THE BOND MARKET?
D.H. During the latter stages of the first quarter and the beginning of the
second quarter, the bond market struggled because of concerns that continued
economic growth might lead to inflation. Employment had reached a level where
historically there should have been increased upward pressure on wages. The
Federal Reserve Board tried to anticipate and head off incipient inflation by
raising the fed funds rate - the rate banks charge each other for overnight
loans - by 0.25% to 5.50% at the end of March. This move was well-telegraphed,
so the rate increase was already priced into the market when the Fed acted. The
Fed chose to keep rates steady in May, a stance that surprised many in the
market who were anticipating another rate increase. The Fed stood pat mainly
because economic growth slowed and there were few if any signs of inflationary
pressure. From that point on, the bond market responded favorably.
Q. TURNING TO YOU, GEORGE, HOW DID YOU MANAGE THE STOCK PORTION OF THE FUND
IN A VIRTUALLY NO-INFLATION ENVIRONMENT?
G.V. I concentrated on four areas during the period. First, I looked at
innovators and unit growers because these companies use unit growth to
<PAGE>
increase earnings and don't have to rely on price increases. Technology, health
care and telecommunications fall within these areas. Second were the interest-
sensitive sectors that benefited from low interest rates, including mortgage
companies, insurance, finance and construction. Third, I looked at global
growers - companies with proprietary advantages, such as low costs or unique
distribution channels and strong brands - which are seizing market share on a
global basis. Fourth were the acquisitive companies in consolidating industries.
Certain industries have stopped growing, but certain companies have been able to
show great earnings growth by acquiring market share and paring costs.
Q. PHILIP MORRIS IS THE FUND'S LARGEST STOCK HOLDING. WHAT IS YOUR POSITION ON
TOBACCO STOCKS?
G.V. I own tobacco stocks because they operate a profitable business that
historically has offered above-average returns to shareholders over the long
term. In the past, the stocks have provided better-than-average earnings growth,
lower-than-average price-to-earnings ratios and high yields. Nothing this year
has changed that. We have determined that the tobacco stocks are selling at a
"litigation discount" in excess of any reasonable estimate of potential
liabilities. The cost of the proposed settlement is high, but should be passed
completely along to consumers.
Q. STOCK VALUATIONS WERE QUITE HIGH. WHY WAS THAT, AND WILL THEY STAY INFLATED?
G.V. We had a nearly perfect investing environment during the period -
experiencing growth without inflation. Accelerating inflation is usually the
killer of all bond and equity bull markets, but inflation just kept receding as
the economic expansion continued. During the worst bear market I ever
encountered - the 1973-1974 bear that took prices down about 50% -everything
that could go wrong did go wrong. Today is an environment where everything that
could go right has gone right - from a declining budget deficit, to falling
inflation, to surging earnings, to big flows into mutual funds and rising
consumer confidence. If any of these factors change for the worse, valuations
should deflate. My biggest concern going forward is that the low level of
inflation and pricing power in a strong economy will deteriorate to deflation in
a slowing or contracting economy, thereby leading to sizable earnings declines.
Q. CHARLIE, WHAT CHANGES HAVE YOU MADE SINCE TAKING OVER THE FUND'S BOND
INVESTMENTS?
C.M. For most of the period, I focused on positioning the bond portion of the
portfolio more aggressively by increasing its weighting in corporate and
mortgage-backed securities, while decreasing the percentage held in Treasuries.
Part of that move was accomplished with Dick's reallocation of assets away from
bonds. In reducing the fund's stake in bonds, I sold Treasuries. At the same
time, I tended to focus any new purchases on investments that offered a yield
advantage over Treasuries. Specific areas of focus included BBB-rated corporate
bonds and commercial mortgage-backed securities.
Q. WHAT KINDS OF BONDS DID YOU FOCUS ON IN THE CORPORATE MARKET?
C.M. One area of interest over the period was in the bank market. I continued to
add long-term bank paper in the form of capital securities. Last fall, the
Federal Reserve Board ruled that domestic banking companies could issue capital
securities, which offered the banks significant tax advantages, as well as the
opportunity to strengthen their balance sheets. Numerous banks took advantage of
this opportunity and inundated the market with these securities. The large
amount of supply in a relatively concentrated period of time allowed us to
purchase many capital securities at cheap levels. This market has performed well
following the initial supply.
Q. JOHN, WHAT HAS THE BACKDROP FOR THE SHORT-TERM AND MONEY MARKETS BEEN LIKE
SINCE YOU CAME ON BOARD?
J.T. As Dick pointed out, the Fed raised the fed funds rate at its March
meeting, but then chose not to continue to raise rates at its late May meeting.
For now, the Fed appears to be in a holding pattern. Some believe that the Fed
has abandoned the notion of being pre-emptive - seeking to head off inflation
before it actually appears - and instead will respond only to actual evidence of
inflation rather than trying to respond to underlying inflationary pressures.
Q. WHAT SORT OF STRATEGY DID YOU PURSUE?
J.T. Because Fed Chairman Alan Greenspan warned that the Fed might raise rates,
I reduced the short-term/money market portion's average maturity to about 50
days in the first quarter. Once the market adjusted to the new, higher rate
level and expectations of further Fed interest rate increases were built into
the yield curve, the maturity was extended. That's because many longer-maturity
instruments were attractively valued because their prices and yields reflected a
more aggressive Fed interest rate posture than I felt was likely.
Q. TURNING BACK TO YOU, DICK, WHAT'S YOUR OUTLOOK?
D.H. I believe that a lack of pricing power, among other things, makes it clear
that corporations are not operating with a very strong wind at their backs. At
the same time, U.S. companies - helped by advances in technology that help cut
costs - are operating very efficiently, leading to many positive earnings
surprises. I don't see much that would change that over the near future. Still,
the economic pattern over the past year has been like a seesaw. That is, the
economy has grown in spurts, picking up for one quarter then tailing off into
weakness during the next. If the economy shows sustained strength, interest
rates could rise and put some pressure on the markets. On the other hand, one
could argue that rates might fall because inflation is at such a low level. As
always, we'll have to wait and see what the future holds.
FUND FACTS
GOAL: maximum total return over the long term
by allocating assets among stocks, bonds and
<PAGE>
short-term instruments anywhere in the world
START DATE: September 6, 1989
SIZE: as of June 30, 1997, more than $4 billion
MANAGER: Richard Habermann, since March
1996; joined Fidelity in 1968
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 61.1%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.2%
AEROSPACE & DEFENSE - 0.9%
Boeing Co. 625,500 $ 33,190,594
Gulfstream Aerospace Corp. (a) 44,000 1,298,000
34,488,594
DEFENSE ELECTRONICS - 0.3%
Raytheon Co. 258,800 13,198,800
SHIP BUILDING & REPAIR - 0.0%
Avondale Industries, Inc. (a) 21,600 453,600
Newport News Shipbuilding, Inc. 62,300 1,210,956
1,664,556
TOTAL AEROSPACE & DEFENSE 49,351,950
BASIC INDUSTRIES - 3.0%
CHEMICALS & PLASTICS - 2.2%
Air Products & Chemicals, Inc. 74,500 6,053,125
du Pont (E.I.) de Nemours & Co. 848,100 53,324,288
Raychem Corp. 242,300 18,021,063
Union Carbide Corp. 227,800 10,720,838
88,119,314
PACKAGING & CONTAINERS - 0.2%
Owens-Illinois, Inc. (a) 227,500 7,052,500
PAPER & FOREST PRODUCTS - 0.6%
Boise Cascade Corp. 145,100 5,123,844
Champion International Corp. 216,900 11,983,725
International Paper Co. 86,200 4,186,088
Willamette Industries, Inc. 29,400 2,058,000
23,351,657
TOTAL BASIC INDUSTRIES 118,523,471
CONSTRUCTION & REAL ESTATE - 0.7%
CONSTRUCTION - 0.5%
Centex Corp. 89,800 3,648,125
D.R. Horton, Inc. 192,224 1,994,324
Fleetwood Enterprises, Inc. 364,581 10,869,071
Kaufman & Broad Home Corp. 183,700 3,226,231
U.S. Home Corp. (a) 19,700 523,281
20,261,032
ENGINEERING - 0.2%
Fluor Corp. 143,600 7,924,925
TOTAL CONSTRUCTION & REAL ESTATE 28,185,957
DURABLES - 3.4%
AUTOS, TIRES, & ACCESSORIES - 2.9%
Cummins Engine Co., Inc. 148,500 10,478,531
Dana Corp. 56,900 2,162,200
Discount Auto Parts, Inc. (a) 111,000 2,164,500
Federal-Mogul Corp. 59,500 2,082,500
General Motors Corp. 1,355,090 75,461,574
Gentex Corp. (a) 53,400 1,054,650
Goodyear Tire & Rubber Co. 62,000 3,925,375
Honda Motor Co. Ltd. 99,000 2,979,197
Magna International, Inc. Class A 165,200 9,931,264
Superior Industries International, Inc. 250,300 6,632,950
116,872,741
CONSUMER ELECTRONICS - 0.1%
Newell Co. 120,600 4,778,775
SHARES VALUE (NOTE 1)
TEXTILES & APPAREL - 0.4%
Arena Brands Holdings Corp. Class B 8,445 $ 341,094
Burlington Industries, Inc. (a) 307,100 3,685,200
Liz Claiborne, Inc. 84,700 3,949,138
NIKE, Inc. Class B 116,300 6,789,013
Reebok International Ltd. 18,600 869,550
15,633,995
TOTAL DURABLES 137,285,511
ENERGY - 5.0%
ENERGY SERVICES - 0.2%
McDermott International, Inc. 275,800 8,049,913
OIL & GAS - 4.8%
Amerada Hess Corp. 119,600 6,645,275
Anadarko Petroleum Corp. 13,100 786,000
Atlantic Richfield Co. 223,500 15,756,750
British Petroleum PLC ADR 396,568 29,693,029
Burlington Resources, Inc. 304,400 13,431,650
Canada Occidental Petroleum Ltd. 5,800 130,229
Chevron Corp. 17,600 1,301,300
Elf Aquitaine SA sponsored ADR 61,800 3,364,238
Enron Oil & Gas Co. 38,400 696,000
Kerr-McGee Corp. 58,100 3,682,088
Louisiana Land & Exploration Co. 239,200 13,664,300
Mobil Corp. 35,200 2,459,600
<PAGE>
Noble Affiliates, Inc. 22,800 882,075
Occidental Petroleum Corp. 515,100 12,909,694
Royal Dutch Petroleum Co. Ord. 119,200 6,196,385
Royal Dutch Petroleum Co. 911,600 49,568,250
Santa Fe Energy Resources, Inc. (a) 178,000 2,614,375
Sun Co., Inc. 74,400 2,306,400
Tosco Corp. 545,700 16,336,894
Total SA:
Class B 30,733 3,104,555
sponsored ADR 89,837 4,547,998
Union Pacific Resources Group, Inc. 40,600 1,009,925
191,087,010
TOTAL ENERGY 199,136,923
FINANCE - 13.0%
BANKS - 0.4%
Canadian Imperial Bank of Commerce 5,000 126,028
Credit Suisse Group (Reg.) 63,600 8,159,425
NationsBank Corp. 87,500 5,643,750
13,929,203
CLOSED END INVESTMENT COMPANY - 0.1%
First NIS Regional Fund (a) 200,000 3,700,000
CREDIT & OTHER FINANCE - 1.1%
Fleet Financial Group, Inc. 710,900 44,964,425
FEDERAL SPONSORED CREDIT - 6.6%
Federal Home Loan Mortgage
Corporation 2,427,100 83,431,563
Federal National Mortgage Association 4,189,890 182,783,951
266,215,514
INSURANCE - 4.4%
AFLAC, Inc. 96,600 4,564,350
Aegon NV (Reg.) 97,743 6,848,119
Allmerica Financial Corp. 126,900 5,060,138
Allstate Corp. 704,300 51,413,900
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
American International Group, Inc. 265,000 $ 39,584,375
CIGNA Corp. 40,500 7,188,750
Equitable of Iowa Companies 15,100 845,600
General Re Corp. 66,000 12,012,000
Loews Corp. 43,400 4,345,425
MGIC Investment Corp. 306,700 14,702,431
Nationwide Financial Services, Inc.
Class A 14,400 382,500
PMI Group, Inc. 112,500 7,017,188
Provident Companies, Inc. 9,600 513,600
Providian Financial Corp. (a) 242,500 7,790,313
Reliastar Financial Corp. 42,081 3,077,173
Torchmark Corp. 142,300 10,138,875
Travelers Property Casualty Corp.
Class A 34,500 1,375,688
UNUM Corp. 25,200 1,058,400
177,918,825
SAVINGS & LOANS - 0.2%
Golden West Financial Corp. 131,400 9,198,000
SECURITIES INDUSTRY - 0.2%
United Asset Management Corp. 219,800 6,223,088
TOTAL FINANCE 522,149,055
HEALTH - 4.8%
DRUGS & PHARMACEUTICALS - 1.7%
American Home Products Corp. 10,700 818,550
Amgen, Inc. 211,800 12,310,875
Astra AB Class A Free shares 1,038,801 19,374,080
Merck & Co., Inc. 51,900 5,371,650
Novartis AG (Reg.) 9,900 15,810,195
Schering-Plough Corp. 339,100 16,234,413
69,919,763
MEDICAL EQUIPMENT & SUPPLIES - 0.6%
Allegiance Corp. 20,180 549,905
Bard (C.R.), Inc. 99,000 3,594,938
Baxter International, Inc. 42,100 2,199,725
Biomet, Inc. 235,100 4,378,738
Boston Scientific Corp. (a) 12,000 737,250
Johnson & Johnson 26,900 1,731,688
St. Jude Medical, Inc. (a) 272,000 10,608,000
23,800,244
MEDICAL FACILITIES MANAGEMENT - 2.5%
Columbia/HCA Healthcare Corp. 1,730,050 68,012,591
Health Management Associates, Inc.
Class A (a) 12,900 367,650
Humana, Inc. (a) 465,400 10,762,375
Tenet Healthcare Corp. (a) 317,600 9,389,050
United HealthCare Corp. 198,300 10,311,600
98,843,266
TOTAL HEALTH 192,563,273
HOLDING COMPANIES - 0.1%
U.S. Industries, Inc. (a) 158,900 5,660,813
INDUSTRIAL MACHINERY & EQUIPMENT - 1.2%
ELECTRICAL EQUIPMENT - 0.7%
Emerson Electric Co. 59,200 3,259,700
General Electric Co. 268,400 17,546,650
SHARES VALUE (NOTE 1)
<PAGE>
Scientific-Atlanta, Inc. 135,300 $ 2,959,688
Sensormatic Electronics Corp. 46,200 594,825
Westinghouse Electric Corp. 205,600 4,754,500
29,115,363
INDUSTRIAL MACHINERY & EQUIPMENT - 0.4%
Caterpillar, Inc. 118,700 12,745,413
JLK Direct Distribution, Inc. Class A 1,000 25,625
Ultratech Stepper, Inc. (a) 150,000 3,431,250
16,202,288
POLLUTION CONTROL - 0.1%
Browning-Ferris Industries, Inc. 143,400 4,768,050
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 50,085,701
MEDIA & LEISURE - 1.9%
BROADCASTING - 0.1%
Cox Communications, Inc. Class A (a) 35,500 852,000
HSN, Inc. (a) 27,045 845,156
TCI Group Class A 118,900 1,768,638
3,465,794
ENTERTAINMENT - 0.1%
Cedar Fair LP (depositary unit) 10,200 446,250
Royal Caribbean Cruises Ltd. 64,200 2,242,988
2,689,238
LEISURE DURABLES & TOYS - 0.4%
Nintendo Co. Ltd. Ord. 208,400 17,450,738
LODGING & GAMING - 0.7%
Bally Gaming International, Inc.
warrants 7/29/98 (a) 38,400 48,000
Circus Circus Enterprises, Inc. (a) 319,300 7,862,763
Fitzgeralds South, Inc. warrants
3/15/99 (a)(d) 420 -
HFS, Inc. (a) 56,100 3,253,800
Harrah's Entertainment, Inc. (a) 148,600 2,711,950
Mirage Resorts, Inc. (a) 317,000 8,004,250
Sun International Hotels Ltd. Ord. (a) 152,600 5,636,663
27,517,426
PUBLISHING - 0.1%
Cognizant Corp. 89,200 3,612,600
RESTAURANTS - 0.5%
Brinker International, Inc. (a) 107,000 1,524,750
Lone Star Steakhouse Saloon (a) 79,100 2,056,600
McDonald's Corp. 334,700 16,170,194
Papa John's International, Inc. (a) 29,300 1,076,775
20,828,319
TOTAL MEDIA & LEISURE 75,564,115
NONDURABLES - 6.0%
HOUSEHOLD PRODUCTS - 0.0%
Premark International, Inc. 36,300 971,025
TOBACCO - 6.0%
Philip Morris Companies, Inc. 4,715,400 209,245,875
RJR Nabisco Holdings Corp. 925,330 30,535,890
UST, Inc. 42,400 1,176,600
240,958,365
TOTAL NONDURABLES 241,929,390
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
PRECIOUS METALS - 0.1%
Barrick Gold Corp. 34,800 $ 757,426
Newmont Mining Corp. 29,905 1,166,295
1,923,721
RETAIL & WHOLESALE - 4.8%
APPAREL STORES - 0.3%
Gap, Inc. 80,600 3,133,325
TJX Companies, Inc. 273,400 7,210,925
10,344,250
DRUG STORES - 0.0%
CVS Corp. 37,500 1,921,875
GENERAL MERCHANDISE STORES - 1.6%
Federated Department Stores, Inc. (a) 229,900 7,989,025
Proffitts, Inc. (a) 7,800 342,225
Wal-Mart Stores, Inc. 1,719,300 58,133,831
66,465,081
GROCERY STORES - 0.2%
Safeway, Inc. (a) 186,900 8,620,763
RETAIL & WHOLESALE, MISCELLANEOUS - 2.7%
Circuit City Stores, Inc. -
CarMax Group 21,900 313,444
Corporate Express, Inc. 149,600 2,159,850
Home Depot, Inc. (The) 732,000 50,462,250
Lowe's Companies, Inc. 623,600 23,151,150
Officemax, Inc. (a) 425,600 6,144,600
Office Depot, Inc. (a) 66,200 1,286,763
Rex Stores Corp. (a) 51,900 525,488
Staples, Inc. (a) 177,800 4,133,850
Toys "R" Us, Inc. (a) 356,300 12,470,500
U.S. Office Products Co. (a) 122,000 3,728,625
Viking Office Products, Inc. (a) 169,300 3,216,700
107,593,220
TOTAL RETAIL & WHOLESALE 194,945,189
SERVICES - 0.0%
ADVERTISING - 0.0%
Interpublic Group of Companies, Inc. 19,100 1,171,069
LEASING & RENTAL - 0.0%
Hanover Compressor Co. 2,600 50,700
PRINTING - 0.0%
<PAGE>
Donnelley (R.R.) & Sons Co. 4,800 175,800
SERVICES - 0.0%
PEAPOD, Inc. 8,400 94,500
TOTAL SERVICES 1,492,069
TECHNOLOGY - 9.7%
COMMUNICATIONS EQUIPMENT - 0.6%
Alcatel Alsthom Compagnie Generale
d'Electricite SA sponsored ADR 15,900 401,475
Alcatel Alsthom Compagnie Generale
d'Electricite SA 130,100 16,284,072
Andrew Corp. 48,300 1,358,438
Cisco Systems, Inc. (a) 64,600 4,336,275
Nokia Corp. AB sponsored ADR 28,200 2,079,750
24,460,010
COMPUTER SERVICES & SOFTWARE - 1.8%
American Management Systems, Inc. (a) 21,000 561,750
Automatic Data Processing, Inc. 195,300 9,179,100
SHARES VALUE (NOTE 1)
CUC International, Inc. 140,500 $ 3,626,656
Ceridian Corp. (a) 125,300 5,293,925
CompUSA, Inc. (a) 82,400 1,771,600
Electronic Data Systems Corp. 341,600 14,005,600
First Data Corp. 254,300 11,173,306
Microsoft Corp. (a) 91,500 11,563,313
Netscape Communications Corp. (a) 22,100 708,581
Oracle Systems Corp. (a) 158,500 7,984,438
Paychex, Inc. 127,200 4,833,600
Policy Management Systems Corp. (a) 94,400 4,436,800
75,138,669
COMPUTERS & OFFICE EQUIPMENT - 3.3%
Bay Networks, Inc. (a) 199,300 5,293,906
Compaq Computer Corp. (a) 298,100 29,586,425
Hewlett-Packard Co. 133,900 7,498,400
Ingram Micro, Inc. Class A (a) 26,900 648,963
International Business Machines Corp. 809,700 73,024,819
SCI Systems, Inc. (a) 189,700 12,093,375
Tech Data Corp. (a) 155,200 4,879,100
133,024,988
ELECTRONIC INSTRUMENTS - 1.0%
Applied Materials, Inc. (a) 115,600 8,185,925
Cognex Corp. (a) 67,300 1,783,450
KLA Instruments Corp. (a) 24,200 1,179,750
Lam Research Corp. (a) 158,700 5,881,819
Novellus Systems, Inc. (a) 91,400 7,906,100
Teradyne, Inc. (a) 125,700 4,933,725
Thermo Electron Corp. (a) 141,300 4,804,200
Varian Associates, Inc. 80,800 4,383,400
39,058,369
ELECTRONICS - 3.0%
AMP, Inc. 458,700 19,150,725
Atmel Corp. (a) 28,700 803,600
Intel Corp. 216,500 30,702,406
Methode Electronics, Inc. Class A 129,500 2,573,813
Microchip Technology, Inc. (a) 25,350 754,163
Micron Technology, Inc. 527,300 21,059,044
Molex, Inc. 83,000 2,894,625
Motorola, Inc. 17,200 1,307,200
Solectron Corp. (a) 393,700 27,559,000
Storage Technology Corp. (a) 67,400 2,999,300
Texas Instruments, Inc. 105,100 8,834,969
Thomas & Betts Corp. 5,000 262,813
118,901,658
TOTAL TECHNOLOGY 390,583,694
TRANSPORTATION - 0.7%
AIR TRANSPORTATION - 0.1%
Continental Airlines, Inc. Class B (a) 31,300 1,093,544
Delta Air Lines, Inc. 21,200 1,738,400
Northwest Airlines Corp. Class A (a) 50,600 1,840,575
4,672,519
RAILROADS - 0.4%
Bombardier, Inc. Class B 119,200 2,702,321
Burlington Northern Santa Fe Corp. 52,600 4,727,425
CSX Corp. 164,860 9,149,730
16,579,476
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TRANSPORTATION - CONTINUED
SHIPPING - 0.1%
Stolt-Nielsen SA Class B sponsored ADR 105,500 $ 2,044,063
Stolt-Nielsen SA 31,300 590,788
2,634,851
TRUCKING & FREIGHT - 0.1%
Roadway Express, Inc. 25,200 589,050
Yellow Corp. (a) 107,300 2,400,838
2,989,888
TOTAL TRANSPORTATION 26,876,734
UTILITIES - 5.5%
CELLULAR - 1.8%
AirTouch Communications, Inc. (a) 734,100 20,095,988
360 Degrees Communications Co. (a) 35,900 614,788
Vodafone Group PLC sponsored ADR 620,800 30,070,000
Vodafone Group PLC 4,810,755 23,464,799
74,245,575
<PAGE>
ELECTRIC UTILITY - 0.2%
American Electric Power Co., Inc. 59,700 2,507,400
Entergy Corp. 181,000 4,954,875
7,462,275
GAS - 0.1%
Enron Corp. 81,200 3,313,975
TELEPHONE SERVICES - 3.4%
AT&T Corp. 215,200 7,545,450
Ameritech Corp. 196,400 13,342,925
Bell Atlantic Corp. 141,700 10,751,488
BellSouth Corp. 332,000 15,396,500
Deutsche Telekom AG 82,400 1,978,450
MCI Communications Corp. 668,600 25,594,844
NextLink Communications, Inc.
warrants 2/1/09 (a) 43,900 439
NYNEX Corp. 274,500 15,818,063
Qwest Communications
International, Inc. 5,100 138,975
SBC Communications, Inc. 267,900 16,576,313
Sprint Corp. 531,200 27,954,400
WorldCom, Inc. (a) 72,600 2,323,200
137,421,047
TOTAL UTILITIES 222,442,872
TOTAL COMMON STOCKS
(Cost $1,979,750,356) 2,458,700,438
PREFERRED STOCKS - 1.0%
CONVERTIBLE PREFERRED STOCKS - 0.0%
RETAIL & WHOLESALE - 0.0%
GROCERY STORES - 0.0%
Supermarkets General Holdings Corp.
$3.52 pay-in-kind (a) 20,000 405,000
NONCONVERTIBLE PREFERRED STOCKS - 1.0%
CONSTRUCTION & REAL ESTATE - 0.0%
REAL ESTATE INVESTMENT TRUSTS - 0.0%
Walden Residential Properties,
Inc. 9.20% 49,000 1,237,250
SHARES VALUE (NOTE 1)
FINANCE - 0.1%
CREDIT & OTHER FINANCE - 0.0%
American Annuity Group Capital
Trust II 8 3/4% 1,490 $ 1,482,550
SAVINGS & LOANS - 0.1%
California Federal Preferred Capital
Corp. 9 1/8% 156,890 4,000,695
TOTAL FINANCE 5,483,245
HEALTH - 0.1%
MEDICAL FACILITIES MANAGEMENT - 0.1%
Fresenius Medical Care Capital
Trust 9% 1,381 1,415,180
MEDIA & LEISURE - 0.7%
BROADCASTING - 0.6%
American Radio Systems Corp.
11.375% pay-in-kind 27,126 2,888,919
Cablevision System Corp. 11 1/8%
depositary shares pay-in-kind 49,472 4,971,936
PanAmSat Corp. 12 3/4% pay-in-kind 202 246,440
SFX Broadcasting, Inc. 12 5/8% 29,474 3,175,824
Sinclair Capital 11 5/8% (d) 28,380 2,994,090
Time Warner, Inc., Series M, 10 1/4%
pay-in-kind 8,770 9,690,850
23,968,059
PUBLISHING - 0.1%
K-III Communications Corp.:
Series B, $11.625 pay-in-kind 1,750 190,969
Series D, $10 31,050 3,128,288
3,319,257
TOTAL MEDIA & LEISURE 27,287,316
NONDURABLES - 0.0%
HOUSEHOLD PRODUCTS - 0.0%
Revlon Group, Inc., Series B, 14 7/8% 5,100 510,000
UTILITIES - 0.1%
TELEPHONE SERVICES - 0.1%
NextLink Communications, Inc.
14% pay-in-kind 45,453 2,352,193
TOTAL NONCONVERTIBLE PREFERRED STOCKS 38,285,184
TOTAL PREFERRED STOCKS
(Cost $37,307,667) 38,690,184
NONCONVERTIBLE CORPORATE BONDS - 17.1%
MOODY'S PRINCIPAL
RATINGS (C) AMOUNT
AEROSPACE & DEFENSE - 0.2%
AEROSPACE & DEFENSE - 0.0%
Be Aerospace, Inc. 9 7/8%,
2/1/06 B2 $ 270,000 284,175
Rohr, Inc. 11 5/8%, 5/15/03 Ba3 340,000 378,250
662,425
DEFENSE ELECTRONICS - 0.1%
Tracor, Inc. 8 1/2%, 3/1/07 B1 1,170,000 1,181,700
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
AEROSPACE & DEFENSE - CONTINUED
SHIP BUILDING & REPAIR - 0.1%
<PAGE>
Newport News Shipbuilding, Inc.:
8 5/8%, 12/1/06 Ba2 $ 920,000 $ 949,900
9 1/4%, 12/1/06 B1 3,830,000 3,992,775
4,942,675
TOTAL AEROSPACE & DEFENSE 6,786,800
BASIC INDUSTRIES - 0.7%
CHEMICALS & PLASTICS - 0.2%
Acetex Corp. yankee
9 3/4%, 10/1/03 B1 1,270,000 1,289,050
Foamex LP/Foamex Capital Corp.
9 7/8%, 6/15/07 (d) B3 320,000 324,000
General Chemical Corp.
9 1/4%, 8/15/03 B2 1,320,000 1,349,700
Pioneer Americas Acquisition
Corp. 9 1/4%, 6/15/07 (d) B1 200,000 197,000
Praxair, Inc. 6.90%, 11/1/06 A3 4,000,000 3,949,200
Sterling Chemicals Holdings,
Inc. 11 1/4%, 4/1/07 B3 1,870,000 1,982,200
9,091,150
IRON & STEEL - 0.1%
Neenah Corp. 11 1/8%,
5/1/07 (d) B3 1,690,000 1,791,400
METALS & MINING - 0.0%
Well Aluminum Corp.
10 1/8%, 6/1/05 (d) B2 80,000 82,400
PACKAGING & CONTAINERS - 0.2%
BWAY Corp. 10 1/4%,
4/15/07 (d) B2 1,490,000 1,601,750
Owens-Illinois, Inc.:
7.85%, 5/15/04 Ba1 1,180,000 1,196,225
9.95%, 10/15/04 Ba3 3,030,000 3,211,800
8.10%, 5/15/07 Ba1 940,000 952,925
Silgan Holdings, Inc.
9%, 6/1/09 (d) B1 2,060,000 2,075,450
9,038,150
PAPER & FOREST PRODUCTS - 0.2%
Asia Pulp & Paper Finance II
Mauritius Ltd. 12%,
3/15/04 (d) B3 860,000 881,500
Florida Coast Paper Co. LLC/
Florida Coast Paper Finance
Corp., Series B, 12 3/4%,
6/1/03 Caa 900,000 929,250
Gaylord Container Corp.
11 1/2%, 5/15/01 B3 220,000 231,275
Repap Wisconsin, Inc.:
9 1/4%, 2/1/02 B2 1,780,000 1,788,900
9 7/8%, 5/1/06 Caa 190,000 191,425
Repap New Brunswick, Inc.
yankee 10 5/8%, 4/15/05 Caa 690,000 650,325
Riverwood International Corp.
10 1/4%, 4/1/06 B3 1,730,000 1,704,050
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Stone Container Corp.
10 3/4%, 10/1/02 B1 $2,540,000 $2,679,700
9,056,425
TOTAL BASIC INDUSTRIES 29,059,525
CONSTRUCTION & REAL ESTATE - 0.2%
BUILDING MATERIALS - 0.1%
Building Materials Corp. of
America 0%, 7/1/04 (b) B1 3,790,000 3,448,900
Falcon Building Products, Inc.
9 1/2%, 6/15/07 (d) B3 90,000 89,325
Nortek, Inc. 9 1/4%, 3/15/07 Ba3 790,000 805,800
4,344,025
CONSTRUCTION - 0.1%
Greystone Homes, Inc.
10 3/4%, 3/1/04 Ba3 1,950,000 2,130,375
REAL ESTATE - 0.0%
Iron Mountain, Inc. 10 1/8%,
10/1/06 B3 1,050,000 1,115,625
TOTAL CONSTRUCTION & REAL ESTATE 7,590,025
DURABLES - 0.5%
AUTOS, TIRES, & ACCESSORIES - 0.1%
Aftermarket Technology Corp.
12%, 8/1/04 B3 1,313,000 1,463,995
Blue Bird Body Co. 10 3/4%,
11/15/06 B2 1,545,000 1,637,700
Delco Remy International, Inc.
10 5/8%, 8/1/06 (d) B2 390,000 413,400
Tennessee Gas Pipeline Co.
7%, 3/15/27 Baa3 2,630,000 2,628,422
6,143,517
HOME FURNISHINGS - 0.1%
Interlake Corp. 12 1/8%,
3/1/02 B3 2,470,000 2,587,325
Knoll, Inc. 10 7/8%,
3/15/06 B1 623,000 689,194
3,276,519
TEXTILES & APPAREL - 0.3%
GFSI, Inc. 9 5/8%, 3/1/07 (d) B3 2,480,000 2,504,800
Levi Strauss & Co. 7%,
<PAGE>
11/1/06 (d) Baa2 7,700,000 7,616,840
10,121,640
TOTAL DURABLES 19,541,676
ENERGY - 0.9%
ENERGY SERVICES - 0.3%
Falcon Drilling, Inc. 9 3/4%,
1/15/01 Ba3 930,000 953,250
Parker Drilling Co. 9 3/4%,
11/15/06 B1 310,000 323,950
Petroliam Nasional BHD yankee
7 1/8%, 10/18/06 (d) A1 7,000,000 7,023,870
Pride Petroleum Services, Inc.
9 3/8%, 5/1/07 Ba3 1,690,000 1,749,150
10,050,220
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
ENERGY - CONTINUED
OIL & GAS - 0.6%
Energy Corp. America 9 1/2%,
5/15/07 (d) B2 $ 2,800,000 $ 2,758,000
Flores & Rucks, Inc. 9 3/4%,
10/1/06 B3 1,780,000 1,860,100
Forcenergy, Inc. 8 1/2%,
2/15/07 B2 1,300,000 1,270,750
Gulf Canada Resources Ltd.
yankee 9 5/8%, 7/1/05 Ba2 990,000 1,060,538
Husky Oil Ltd. yankee
6 7/8%, 11/15/03 Baa3 2,680,000 2,642,105
Occidental Petroleum Corp.:
10.94%, 5/17/00 Baa3 2,700,000 2,989,575
6.39%, 11/9/00 Baa3 1,000,000 987,290
8 1/2%, 11/9/01 Baa2 1,251,000 1,325,022
Ocean Energy, Inc. 8 7/8%,
7/15/07 (d) B3 1,860,000 1,860,000
Pennzoil Co. 9 5/8%,
11/15/99 Baa3 2,260,000 2,407,827
Petsec Energy, Inc. 9 1/2%,
6/15/07 (d) B3 190,000 190,000
Ras Laffan Liquid Natural
Gas Co. Ltd. yankee
7.628%, 9/15/06 (d) A3 4,880,000 4,942,513
United Refining Co. 10 3/4%,
6/15/07 (d) B2 760,000 752,400
25,046,120
TOTAL ENERGY 35,096,340
FINANCE - 6.4%
ASSET-BACKED SECURITIES - 1.1%
Airplanes Pass Through Trust
10 7/8%, 3/15/19 Ba2 8,550,000 9,875,250
Caterpillar Financial Asset Trust
6.55%, 5/22/02 A3 880,000 881,925
CPS Auto Grantor Trust
6.55%, 12/15/02 Aaa 3,269,748 3,276,900
Green Tree Financial Corp.:
6 1/2%, 6/15/27 Aaa 1,800,000 1,803,924
6.80%, 6/15/27 Aaa 1,900,000 1,909,500
6.45%, 9/15/28 Aaa 3,640,000 3,629,763
Olympic Automobile Receivables
Trust:
6.40%, 9/15/01 Aaa 4,550,000 4,561,577
6.70%, 3/15/02 Aaa 2,150,000 2,159,407
Premier Auto Trust:
8.05%, 4/4/00 Aaa 6,804,000 6,914,565
6%, 5/6/00 Aaa 2,320,000 2,317,819
WFS Financial Owner Trust
6.55%, 10/20/04 Aaa 4,430,000 4,417,984
41,748,614
BANKS - 1.7%
ABN Amro Bank NV 6 5/8%,
10/31/01 Aa3 7,000,000 6,971,090
Banc One Corp. 6.70%,
3/24/00 Aa3 4,500,000 4,520,970
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
BanPonce Financial Corp.
7.72%, 4/13/00 A3 $ 2,000,000 $ 2,042,740
BanPonce Corp. 6.665%,
3/5/01 A3 4,450,000 4,428,952
BanPonce Trust I 8.327%,
2/1/27 (d) Baa1 6,450,000 6,518,241
Capital One Bank:
6.74%, 5/31/99 Baa3 4,000,000 4,005,080
7.20%, 7/19/99 Baa3 8,000,000 8,093,760
6.42%, 11/12/99 Baa3 4,900,000 4,874,275 8 1/8%, 3/1/00 Baa3
1,500,000 1,550,250
Den Danske Bank AS
7.40%, 6/15/10 (d)(g) A1 4,580,000 4,576,611
Korea Development Bank yankee
7 1/4%, 5/15/06 A1 5,660,000 5,614,890
Midland Bank PLC yankee
7 5/8%, 6/15/06 A1 3,000,000 3,089,550
NB Capital Trust IV 8 1/4%,
<PAGE>
4/15/27 A1 4,000,000 4,098,960
Signet Bank 7.80%, 9/15/06 Baa1 3,000,000 3,097,440
Signet Banking Corp.
9 5/8%, 6/1/99 Baa2 790,000 831,981
Summit Bancorp. 8 5/8%,
12/10/02 BBB 1,730,000 1,855,269
Union Planters National Bank
6.81%, 8/20/01 A3 3,500,000 3,504,375
69,674,434
CREDIT & OTHER FINANCE - 3.0%
AT&T Capital Corp.:
6.02%, 12/1/98 Baa3 7,500,000 7,477,950
6.39%, 1/22/99 Baa3 1,520,000 1,522,918
6.26%, 2/18/99 Baa3 8,000,000 7,983,120
6.16%, 12/3/99 Baa3 2,750,000 2,720,328
Ahmanson Capital Trust I
8.36%, 12/1/26 (d) Baa3 4,250,000 4,285,488
BCH Cayman Islands Ltd.
yankee 7.70%, 7/15/06 A3 2,600,000 2,656,368
CIT Group Holdings, Inc.
6 1/4%, 10/4/99 Aa3 6,500,000 6,483,750
Chrysler Financial Corp.
6 3/8%, 1/28/00 A3 7,600,000 7,577,200
Finova Capital Corp.:
6.44%, 11/6/01 Baa1 5,500,000 5,422,780
6.12%, 5/28/02 Baa1 2,000,000 1,936,840
First Security Capital I
8.41%, 12/15/26 A3 1,690,000 1,722,887
Ford Motor Credit Co.:
5.73%, 2/23/00 A1 3,250,000 3,185,423
6.65%, 5/22/00 A1 9,000,000 9,008,910
5.68%, 2/15/01 A1 5,000,000 4,835,000
6.57%, 3/19/01 A1 700,000 696,220
7%, 9/25/01 A1 12,500,000 12,605,500
General Electric Capital Corp.
6.94%, 4/13/09 (f) Aaa 7,000,000 7,065,870
General Motors Acceptance
Corp. 5 5/8%, 2/1/99 A3 5,000,000 4,947,250
GreenPoint Capital Trust I
9.10%, 6/1/27 (d) Ba1 1,200,000 1,207,200
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
FINANCE - CONTINUED
CREDIT & OTHER FINANCE - CONTINUED
Heller Financial, Inc.
7 7/8%, 11/1/99 A2 $ 5,050,000 $ 5,187,461
Household Finance Corp.
5.7825%, 6/4/98 (g) A2 12,500,000 12,500,000
KeyCorp Institutional Capital
Series A, 7.826%, 12/1/26 A1 3,600,000 3,496,356
Nordstrom Credit, Inc.
7 1/4%, 4/30/02 A2 3,500,000 3,558,450
TransAmerican Energy Corp.
11 1/2%, 6/15/02 (d) B3 230,000 224,250
Triton Energy Ltd./Triton Energy
Corp. 9 1/4%, 4/15/05 Ba2 930,000 984,638
119,292,157
INSURANCE - 0.2%
Reliance Group:
9%, 11/15/00 Ba3 180,000 185,400
9 3/4%, 11/15/03 B1 3,390,000 3,534,075
SunAmerica, Inc. 6.20%,
10/31/99 Baa1 5,500,000 5,461,005
9,180,480
SAVINGS & LOANS - 0.4%
Bank UTD Corp. 8 7/8%,
5/1/07 Ba3 3,760,000 3,886,900
Chevy Chase Savings Bank FSB
9 1/4%, 12/1/08 B1 2,410,000 2,416,025
First Nationwide Holdings, Inc.
10 5/8%, 10/1/03 Ba3 1,050,000 1,139,250
First Nationwide Parent Holdings
Ltd. 12 1/2%, 4/15/03 B3 3,530,000 3,935,950
Great Western Financial Corp.
8.60%, 2/1/02 Baa1 2,000,000 2,131,500
Long Island Savings Bank FSB
7%, 6/13/02 Baa3 2,500,000 2,503,125
16,012,750
TOTAL FINANCE 255,908,435
HEALTH - 0.5%
MEDICAL EQUIPMENT & SUPPLIES - 0.1%
McKesson Corp. 6.60%,
3/1/00 (d) A3 4,570,000 4,574,570
MEDICAL FACILITIES MANAGEMENT - 0.4%
Columbia/HCA Healthcare Corp.:
6 1/2%, 3/15/99 A2 4,500,000 4,515,615
6 7/8%, 7/15/01 A2 2,000,000 2,010,400
Integrated Health Services, Inc.
9 1/2%, 9/15/07 (d) B1 1,300,000 1,329,250
Tenet Healthcare Corp.:
8%, 1/15/05 Ba1 280,000 280,000
10 1/8%, 3/1/05 Ba3 3,760,000 4,098,400
8 5/8%, 1/15/07 Ba3 5,120,000 5,196,800
<PAGE>
17,430,465
TOTAL HEALTH 22,005,035
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
HOLDING COMPANIES - 0.2%
Norfolk Southern Corp.
7.05%, 5/1/37 Baa1 $ 6,610,000 $ 6,708,753
INDUSTRIAL MACHINERY & EQUIPMENT - 0.2%
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
Continental Global Group, Inc.
11%, 4/1/07 (d) B2 730,000 766,500
Exide Corp. 10%, 4/15/05 B1 825,000 853,875
Goss Graphic System, Inc.
12%, 10/15/06 B2 1,890,000 2,079,000
3,699,375
POLLUTION CONTROL - 0.1%
Allied Waste of North America,
Inc. 10 1/4%, 12/1/06 (d) B3 1,990,000 2,129,300
WMX Technologies, Inc.
7.10%, 8/1/26 A3 2,700,000 2,751,219
4,880,519
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 8,579,894
MEDIA & LEISURE - 2.8%
BROADCASTING - 1.8%
Adelphia Communications Corp.:
9 1/2%, 2/15/04 B3 4,130,000 3,923,500
9 7/8%, 3/1/07 (d) - 1,020,000 984,300
Cablevision System Corp.:
9 1/4%, 11/1/05 B2 1,370,000 1,407,675
9 7/8%, 5/15/06 B2 1,330,000 1,413,125
sr. sub. deb. 9 7/8%,
2/15/13 B2 340,000 357,850
Capstar Radio Broadcasting
Partners, Inc. (d):
9 1/4%, 7/1/07 - 2,930,000 2,834,775
0%, 2/1/09 (b) CCC 600,000 385,500
Diamond Cable Communications
PLC yankee (b):
0%, 9/30/04 B3 2,320,000 1,873,400
0%, 2/15/07 (d) - 1,930,000 1,083,213
Echostar Communications Corp.
secured discount 0%,
6/1/04 (b) B2 2,320,000 1,948,800
Echostar Satellite Broadcasting
Corp. 0%, 3/15/04 (b) Caa 1,600,000 1,136,000
Echostar DBS Corp. 12 1/2%,
7/1/02 (d) Caa 930,000 921,863
Granite Broadcasting Corp.:
10 3/8%, 5/15/05 B3 710,000 718,875
9 3/8%, 12/1/05 B3 265,000 255,063
Intermedia Capital Partners IV LP/
Intermedia Partners IV Capital
Corp. 11 1/4%, 8/1/06 B2 890,000 957,863
International Cabletel, Inc.:
0%, 2/1/06 (b) B3 1,480,000 1,021,200
10%, 2/15/07 (d) - 2,480,000 2,504,800
Jacor Communications Co.
8 3/4%, 6/15/07 (d) B2 250,000 246,875
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
MEDIA & LEISURE - CONTINUED
BROADCASTING - CONTINUED
Lenfest Communications, Inc.
8 3/8%, 11/1/05 Ba3 $ 2,500,000 $ 2,462,500
Olympus Communications LP/
Olympus Capital Corp.
10 5/8%, 11/15/06 B1 1,070,000 1,118,150
Rogers Cablesystems Ltd. yankee
11%, 12/1/15 B2 1,800,000 1,971,000
SCI Television, Inc. secured
11%, 6/30/05 Ba1 1,480,000 1,561,400
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 1,870,000 2,014,925
TCI Communication, Inc.:
7 1/4%, 6/15/99 Ba1 8,590,000 8,655,628
6.46%, 3/6/00 Ba1 6,570,000 6,462,186
TCI Communications Financing
III 9.65%, 3/31/27 Ba3 3,480,000 3,644,743
Tele Communications, Inc.
9 1/4%, 4/15/02 Ba1 3,000,000 3,219,060
Telemundo Group, Inc.
7%, 2/15/06 (f) B1 4,170,000 3,992,775
Telewest PLC 0%, 10/1/07 (b) B1 4,860,000 3,511,350
Time Warner, Inc.:
7.95%, 2/1/00 Ba1 7,810,000 8,029,383
7 3/4%, 6/15/05 Ba1 2,150,000 2,184,938
9.15%, 2/1/23 Ba1 1,020,000 1,126,580
73,929,295
ENTERTAINMENT - 0.1%
AMC Entertainment, Inc.
9 1/2%, 3/15/09 (d) B2 1,560,000 1,583,400
Cinemark USA, Inc.
<PAGE>
9 5/8%, 8/1/08 B2 340,000 345,100
Viacom, Inc. 8%, 7/7/06 B1 3,470,000 3,365,900
5,294,400
LEISURE DURABLES & TOYS - 0.1%
Coleman Escrow Corp.
secured 1st priority
0%, 5/15/01 (d) B3 3,000,000 1,890,000
LODGING & GAMING - 0.4%
American Skiing Co.
12%, 7/15/06 B3 2,600,000 2,730,000
Circus Circus Enterprises, Inc.
7%, 11/15/36 Baa2 2,125,000 2,063,906
Courtyard by Marriott II LP/
Courtyard II Finance Co.,
Series B, 10 3/4%, 2/1/08 B- 1,190,000 1,288,175
HMC Acquisition Properties, Inc.
9%, 12/15/07 Ba3 4,730,000 4,777,300
HMH Properties, Inc.
9 1/2%, 5/15/05 Ba3 1,620,000 1,688,850
Hollywood Casino Corp.
12 3/4%, 11/1/03 B2 330,000 349,800
Horseshoe Gaming LLC
9 3/8%, 6/15/07 (d) B3 480,000 483,000
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Prime Hospitality Corp.
9 3/4%, 4/1/07 - $ 1,880,000 $ 1,978,700
Sun International Hotels Ltd./Sun
International North America,
Inc. yankee 9%, 3/15/07 Ba3 1,810,000 1,837,150
Wyndham Hotel Corp.
10 1/2%, 5/15/06 B2 580,000 648,150
17,845,031
PUBLISHING - 0.2%
Golden Books Publishing, Inc.
7.65%, 9/15/02 B1 490,000 453,250
News America Holdings, Inc.
7.70%, 10/30/25 Baa3 5,310,000 5,028,145
Sun Media Corp. (d):
yankee 9 1/2%, 2/15/07 B3 1,200,000 1,212,000
9 1/2%, 5/15/07 B3 370,000 373,700
7,067,095
RESTAURANTS - 0.2%
Foodmaker, Inc. 9 3/4%,
6/1/02 B3 2,630,000 2,695,750
Host Marriott Travel Plazas, Inc.
9 1/2%, 5/15/05 B1 5,500,000 5,720,000
8,415,750
TOTAL MEDIA & LEISURE 114,441,571
NONDURABLES - 0.5%
FOODS - 0.2%
Chiquita Brands International, Inc.:
9 5/8%, 1/15/04 B1 1,980,000 2,041,875
10 1/4%, 11/1/06 B1 220,000 233,200
ConAgra, Inc. 7 1/8%,
10/1/26 Baa1 4,250,000 4,268,870
Specialty Foods Corp.
11 1/8%, 10/1/02 B3 2,760,000 2,732,400
9,276,345
HOUSEHOLD PRODUCTS - 0.1%
Revlon Consumer Products Corp.
10 1/2%, 2/15/03 B3 4,120,000 4,387,800
TOBACCO - 0.2%
Philip Morris Companies, Inc.:
7 1/4%, 9/15/01 A2 4,600,000 4,635,052
6.95%, 6/1/06 A2 4,420,000 4,434,719
9,069,771
TOTAL NONDURABLES 22,733,916
RETAIL & WHOLESALE - 1.1%
APPAREL STORES - 0.1%
AnnTaylor, Inc. 8 3/4%,
6/15/00 B3 2,810,000 2,824,050
Lamonts Apparel, Inc. 10 1/4%,
11/1/99 pay-in-kind (d)(h) - 2,816,000 112,640
Specialty Retailers, Inc. (d):
8 1/2%, 7/15/05 Ba3 810,000 807,975
9%, 7/15/07 B2 80,000 79,600
3,824,265
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
GENERAL MERCHANDISE STORES - 0.7%
Dayton Hudson Corp.:
6.80%, 10/1/01 Baa1 $ 4,000,000 $ 3,993,160
7 1/2%, 7/15/06 Baa1 3,500,000 3,569,545
Federated Department Stores, Inc.:
10%, 2/15/01 Baa2 8,830,000 9,659,755
8 1/8%, 10/15/02 Baa2 1,510,000 1,573,148
K Mart Corp.:
12 1/2%, 3/1/05 Ba3 2,020,000 2,434,100
7 3/4%, 10/1/12 Ba3 240,000 219,600
8 1/4%, 1/1/22 Ba3 1,790,000 1,628,900
<PAGE>
Michaels Stores, Inc. 10 7/8%,
6/18/06 Ba2 1,090,000 1,171,750
Parisian, Inc. 9 7/8%, 7/15/03 B1 2,120,000 2,204,800
Penney (J.C.) Co., Inc.
6.95%, 4/1/00 A2 4,300,000 4,336,206
30,790,964
GROCERY STORES - 0.3%
Kroger Co. 8.15%, 7/15/06 Baa3 2,250,000 2,372,310
Pathmark Stores, Inc.:
12 5/8%, 6/15/02 Caa 1,720,000 1,763,000
9 5/8%, 5/1/03 B3 3,760,000 3,628,400
0%, 11/1/03 (b) Caa 1,670,000 1,139,775
Penn Traffic Co.:
10 1/4%, 2/15/02 B3 1,060,000 911,600
8 5/8%, 12/15/03 B3 460,000 371,450
Pueblo Xtra International, Inc.
9 1/2%, 8/1/03 (d) B3 480,000 463,200
Randalls Food Markets, Inc.
9 3/8%, 7/1/07 (d) B2 140,000 139,475
10,789,210
TOTAL RETAIL & WHOLESALE 45,404,439
SERVICES - 0.5%
LEASING & RENTAL - 0.3%
PHH Corp. 5.6775%,
6/11/98 (g) A2 12,500,000 12,498,620
PRINTING - 0.0%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 1,410,000 1,448,775
SERVICES - 0.2%
Borg-Warner Security Corp.
9 5/8%, 3/15/07 (d) B3 960,000 964,800
Orion Network System, Inc. unit:
0%, 1/15/07 (b) B2 4,060,000 2,314,200
11 1/4%, 1/15/07 B2 2,710,000 2,770,975
6,049,975
TOTAL SERVICES 19,997,370
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
TECHNOLOGY - 0.4%
COMPUTERS & OFFICE EQUIPMENT - 0.3%
Comdisco, Inc. 6 3/8%,
11/30/01 Baa1 $ 8,300,000 $ 8,124,787
Unisys Corp.:
12%, 4/15/03 B1 2,310,000 2,500,575
11 3/4%, 10/15/04 B1 970,000 1,047,600
11,672,962
ELECTRONICS - 0.1%
Advanced Micro Devices, Inc.
11%, 8/1/03 Ba1 2,040,000 2,264,400
Fairchild Semiconductor Corp.:
10 1/8%, 3/15/07 (d) B2 1,340,000 1,413,700
11.74%, 3/15/08
pay-in-kind (e) - 1,760,000 1,696,288
Viasystems, Inc. 9 3/4%,
6/1/07 (d) B3 190,000 193,325
5,567,713
TOTAL TECHNOLOGY 17,240,675
TRANSPORTATION - 0.3%
AIR TRANSPORTATION - 0.2%
Delta Air Lines, Inc. 9 7/8%,
5/15/00 Baa3 1,500,000 1,616,640
US Air, Inc.:
9 5/8%, 2/1/01 B3 1,810,000 1,864,300
10%, 7/1/03 B3 2,200,000 2,266,000
10 3/8%, 3/1/13 B1 1,240,000 1,357,800
7,104,740
RAILROADS - 0.1%
Burlington Northern Santa Fe
Corp. 7.29%, 6/1/36 Baa2 3,000,000 3,075,360
TOTAL TRANSPORTATION 10,180,100
UTILITIES - 1.7%
CELLULAR - 0.3%
Globalstar LP/Globalstar
Capital Corp. (d):
unit 11 3/8%, 2/15/04 B3 1,410,000 1,410,000
11 1/4%, 6/15/04 B3 1,240,000 1,159,400
McCaw International Ltd.
unit 0%, 4/15/07 (b)(d) CCC 3,200,000 1,536,000
Millicom International Cellular
SA 0%, 6/1/06 (b) B3 1,550,000 1,108,250
Paging Network, Inc.
8 7/8%, 2/1/06 B2 670,000 609,700
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
UTILITIES - CONTINUED
CELLULAR - CONTINUED
Telesystem International
Wireless, Inc. 0%,
6/30/07 (b)(d) B- $ 290,000 $ 154,425
360 Degrees Communications Co.:
7 1/8%, 3/1/03 Ba1 4,310,000 4,286,252
7 1/2%, 3/1/06 Ba1 3,150,000 3,142,314
<PAGE>
13,406,341
ELECTRIC UTILITY - 0.6%
CMS Energy Corp. 8 1/8%,
5/15/02 Ba3 2,230,000 2,246,725
CalEnergy, Inc. 9 1/2%,
9/15/06 Ba2 900,000 963,000
Commonwealth Edison Co.
7 3/8%, 9/15/02 Baa2 5,170,000 5,246,568
Hydro-Quebec yankee
7.40%, 3/28/25 A2 2,620,000 2,839,687
Israel Electric Corp. yankee
7 7/8%, 12/15/26 (d) A3 2,940,000 2,960,786
Long Island Lighting Co.
8 5/8%, 4/15/04 Ba1 6,130,000 6,385,498
NIPSCO Capital Markets, Inc.
7.39%, 4/1/04 Baa1 3,500,000 3,531,710
24,173,974
TELEPHONE SERVICES - 0.8%
LCI International, Inc.
7 1/4%, 6/15/07 Ba1 3,650,000 3,615,325
MFS Communications, Inc. (b):
0%, 1/15/04 Ba3 4,255,000 3,960,554
0%, 1/15/06 Ba3 5,945,000 4,689,119
McleodUSA, Inc. 0%,
3/1/07 (b)(d) B3 1,240,000 790,500
Shared Technologies Fairchild
Communications Corp.
0%, 3/1/06 (b) Caa 1,020,000 910,350
Teleport Communications Group,
Inc. 0%, 7/1/07 (b) B1 1,940,000 1,399,225
Winstar Equipment Corp.
12 1/2%, 3/15/04 (d) CCC 1,140,000 1,114,350
WorldCom, Inc. 7 3/4%,
4/1/07 Ba1 12,750,000 13,039,170
29,518,593
TOTAL UTILITIES 67,098,908
TOTAL NONCONVERTIBLE CORPORATE BONDS
(Cost $681,642,417) 688,373,462
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS - 7.8%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
U.S. TREASURY OBLIGATIONS - 5.8%
9 1/4%, 8/15/98 Aaa $ 37,055,000 $ 38,380,828
7 3/4%, 12/31/99 Aaa 1,560,000 1,615,817
7 7/8%, 8/15/01 Aaa 315,000 331,982
11 7/8%, 11/15/03 Aaa 38,040,000 48,637,564
7%, 7/15/06 Aaa 10,507,000 10,809,076
11 3/4%, 2/15/10 (callable) Aaa 26,045,000 33,952,002
12 3/4%, 11/15/10 (callable) Aaa 12,000,000 16,651,920
13 7/8%, 5/15/11 (callable) Aaa 25,650,000 37,934,042
9%, 11/15/18 Aaa 10,240,000 12,667,187
7 1/4%, 2/ 15/23 Aaa 14,126,000 14,549,780
6 1/2%, 11/15/26 Aaa 19,365,000 18,572,197
234,102,395
U.S. GOVERNMENT AGENCY OBLIGATIONS - 2.0%
Farm Credit Systems Financial
Assistance Corp.
8.80%, 6/10/05 Aaa 2,000,000 2,244,060
Federal Agricultural Mortgage
Corp. 7.63%, 1/16/01 Aaa 3,321,000 3,442,947
Federal Farm Credit Bank:
8.16%, 12/7/04 Aaa 5,000,000 5,401,550
9.55%, 5/9/05 Aaa 2,500,000 2,914,050
Federal Home Loan Bank:
7.31%, 6/16/04 Aaa 2,500,000 2,584,375
8.22%, 11/17/04 Aaa 4,000,000 4,315,040
7.59%, 3/10/05 Aaa 3,850,000 4,047,313
Federal Home Loan Mortgage
Corporation 6 3/4%,
8/1/05 Aaa 2,500,000 2,492,975
Federal National Mortgage
Association 6.97%,
4/8/04 Aaa 6,010,000 6,103,876
Guaranteed Export Trust
Certificates (assets of Trust
guaranteed by U.S. Government
through Export-Import
Bank) Series 1994-A,
7.12%, 4/15/06 Aaa 7,596,471 7,734,157
State of Israel (guaranteed by U.S.
Government through Agency
for International Development):
6 5/8%, 8/15/03 Aaa 7,810,000 7,829,369
5 5/8%, 9/15/03 Aaa 8,540,000 8,130,849
6 3/4%, 8/15/04 Aaa 2,144,000 2,153,284
U.S. Trade Trust Certificates
(assets of Trust guaranteed
by U.S. Government
through Export-Import Bank)
6.69%, 1/15/09 (d) Aaa 5,760,000 5,725,555
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS - CONTINUED
MOODY'S PRINCIPAL VALUE
<PAGE>
RATINGS (C) AMOUNT (NOTE 1)
U.S. GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
U.S. Department of Housing
and Urban Development
Government guaranteed
participation certificates:
Series 1995-A, 8.24%,
8/1/04 Aaa $ 3,260,000 $ 3,521,224
Series 1996-A, 6.67%, 8/1/01 Aaa 9,400,000 9,436,942
Series 1996-A, 7.63%,
8/1/14 (callable) Aaa 2,825,000 2,888,421
80,965,987
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $320,604,811) 315,068,382
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 5.4%
FEDERAL HOME LOAN MORTGAGE CORPORATION - 0.4%
5 1/2%, 1/1/03 to 6/1/03 Aaa 4,030,042 3,846,916
7%, 4/1/01 to 8/1/01 Aaa 2,876,294 2,891,588
7 1/2%, 7/1/27 (j) Aaa 8,760,000 8,801,063
8 1/2%, 7/1/21 to 6/1/23 Aaa 268,153 280,424
15,819,991
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 3.9%
5 1/2%, 2/1/03 to 5/1/03 Aaa 4,018,328 3,834,971
6%, 10/1/02 to 5/1/26 Aaa 65,927,205 63,068,623
6 1/2%, 12/1/25 to 7/1/26 Aaa 73,328,857 70,194,335
7%, 5/1/26 Aaa 14,281,900 14,014,114
7 1/2%, 5/1/26 to 8/1/26 Aaa 5,646,930 5,665,761
156,777,804
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 1.1%
6%, 12/15/08 to 5/15/26 Aaa 10,839,939 10,530,343
6 1/2%, 6/15/08 to 7/15/09 Aaa 20,093,334 19,870,622
8%, 5/15/25 Aaa 226,289 231,661
8 1/2%, 12/15/16
to 10/15/26 Aaa 13,809,620 14,349,525
44,982,151
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $214,280,261) 217,579,946
COMMERCIAL MORTGAGE SECURITIES - 1.2%
American Southwest Financial
Securities Series 1994-C2
Class B2, 12.79%,
12/25/01 (d)(g) - 750,000 738,750
BKB Commercial Mortgage Trust
Series 1997-C1 Class D,
7.83%, 2/25/43 (d)(g) BBB 1,800,000 1,818,000
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Berkeley Federal Bank & Trust
FSB Series 1994 Class 1-B,
7.78%, 8/1/24 (d)(g) - $ 1,900,000 $ 1,371,563
Blackrock Capital Funding LLC
Series 1996 Class C2,
7.60%, 11/16/26 (d) Aaa 1,215,001 1,226,771
CBA Mortgage Corp. Series
1993-C1 Class E, 7.76%,
12/25/03 (d)(g) Ba2 500,000 480,625
CS First Boston Mortgage
Securities Corp. Series
1995-AEWI Class E,
9.80%, 11/25/97 (d)(g) - 1,100,000 1,106,875
DLJ Mortgage Acceptance Corp.
Series 1993-MF12 Class B-2,
10.10%, 9/18/03 (d) - 600,000 601,500
Equitable Life Assurance Society
of the United States (The) (d):
Series 174 Class B1, 7.33%,
5/15/06 Aa2 3,500,000 3,560,480
Series 174, Class D1, 7.77%,
5/15/06 Baa2 2,200,000 2,260,896
Series 1996-1 Class C1,
7.52%, 5/15/06 A2 2,300,000 2,355,499
First Chicago/Lennar Trust I
Series 1997-CHL1 (g):
Class D, 8.11%, 5/29/08 - 1,100,000 1,050,156
Class E, 8.11%, 4/1/39 - 1,600,000 1,223,000
General Motors Acceptance
Corp. Commercial Mortgage
Securities, Inc. Series
1996-C1 Class F, 7.86%,
11/15/06 (d) Ba3 750,000 702,758
Kidder Peabody Acceptance
Corp. sequential pay, Series
1993-M1 Class A-2, 7.15%,
4/25/25 Aa2 2,325,889 2,338,245
Merrill Lynch Mortgage
Investments, Inc. Series
1994 Class M1-E, 8.13%,
6/25/22 (d)(g) Ba2 5,670,000 5,549,513
Morgan Stanley Capital One, Inc.:
Series 1996-MBL1 Class E,
<PAGE>
8.661%, 5/25/21 (d) - 1,870,310 1,717,178
sequential pay Series 1997-C1
Class A-1C, 7.63%,
2/15/20 Aaa 4,560,000 4,718,175
Mortgage Capital Funding, Inc.
Series 1996-MC1 Class G,
7.15%, 7/15/28 (d) BB 1,000,000 878,050
NB Commercial Mortgage
sequential pay, Series FSI
Class A, 7.187%,
10/20/23 (d) - 1,752,227 1,755,239
Penn Mutual Life Insurance Co.
(The) Series 1996-PML (d):
Class K, 7.90%, 11/15/26 - 1,473,000 911,419
Class L, 7.90%, 11/15/26 - 1,133,000 483,678
COMMERCIAL MORTGAGE SECURITIES - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Structured Asset Securities Corp.:
Series 1995-C1 Class E,
7 3/8%, 9/25/24 (d) BB $ 1,200,000 $ 1,068,750
Series 1993-C1 Class E,
6.60%, 10/25/24 (d) B 1,250,000 437,500
sequential pay Series 1996
Class A-2A, 7 3/4%,
2/25/28 Aaa 1,624,291 1,647,133
Series 1996-CFL Class G,
7 3/4%, 2/25/28 (d) - 1,000,000 855,781
Series 1996-C3 Class E,
8.46%, 6/25/30 (d) - 500,000 472,422
Wells Fargo Capital Markets
Apartment Financing Trust
6.56%, 12/29/05 (d) Aaa 4,650,000 4,586,574
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $44,396,294) 45,916,530
FOREIGN GOVERNMENT OBLIGATIONS (I) - 0.5%
Export Development Corp. yankee
8 1/8%, 8/10/99 Aa2 1,640,000 1,697,531
Israeli State euro 6 3/8%,
12/19/01 A3 5,750,000 5,642,188
Manitoba Province yankee
6 3/8%, 10/15/99 A1 7,000,000 6,999,400
Mexico Value recovery rights
6/30/03 discount A - 2,000 -
Newfoundland Province yankee
11 5/8%, 10/15/07 Baa1 2,000,000 2,652,000
Quebec Province yankee
7.22%, 7/22/36 (f) A2 3,500,000 3,644,060
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $20,474,119) 20,635,179
CERTIFICATES OF DEPOSIT - 3.0%
ABN-Amro Bank NV yankee
5.65%, 12/23/97 8,000,000 7,990,202
Banque Nationale de Paris
yankee 5.85%, 9/30/97 4,800,000 4,801,296
Bayerische Vereinsbank AG
yankee 5.56%, 7/14/97 12,500,000 12,499,668
Caisse Nationale de Credit Agricole
yankee 5.60%, 7/21/97 12,500,000 12,499,673
Deutsche Bank AG yankee
6.20%, 4/10/98 6,000,000 6,004,704
Landesbank Hessen-Thuringen
yankee:
5.78%, 1/27/98 6,200,000 6,195,567
5.67%, 2/11/98 3,000,000 2,994,737
National Westminster Bank PLC
yankee 5 1/2%, 8/5/97 12,000,000 11,996,960
Rabobank Nederlan, Coop Central
yankee:
5.97%, 3/20/98 3,500,000 3,502,013
6.20%, 4/10/98 5,000,000 5,003,920
PRINCIPAL VALUE
AMOUNT (NOTE 1)
Sanwa Bank Ltd. yankee
5 3/4%, 8/27/97 $ 12,500,000 $ 12,500,631
Societe Generale yankee
5.55%, 7/28/97 12,000,000 11,998,172
Swiss Bank Corp. yankee
5 1/2%, 8/4/97 12,000,000 11,997,162
SunTrust Bank 5.85%, 11/25/97 11,000,000 11,003,412
TOTAL CERTIFICATES OF DEPOSIT
(Cost $120,986,009) 120,988,117
COMMERCIAL PAPER - 1.5%
ABN-Amro North America, Inc.
yankee 5.82%, 12/5/97 1,000,000 975,466
AC Acquisition Holding Co.
5.56%, 7/9/97 4,500,000 4,493,700
BMW US Capital Corp. yankee
5.57%, 8/19/97 6,600,000 6,548,850
Caisse des Depots et Consignations
yankee 5.58%, 9/18/97 250,000 246,917
Citibank Credit Card Master Trust I
(Dakota Certificate Program):
<PAGE>
5.58%, 7/7/97 2,600,000 2,597,138
5.60%, 8/22/97 1,900,000 1,884,168
Delaware Funding Corp.
5.58%, 9/16/97 2,050,000 2,025,349
Fina Oil & Chemical Co.
5.61%, 8/14/97 3,400,000 3,375,945
General Electric Capital Corp.
5.75%, 7/1/97 6,400,000 6,399,016
Goldman Sachs Group LP
5.83%, 1/26/98 5,000,000 4,836,958
Nationwide Building Society
yankee 5.32%, 8/11/97 7,000,000 6,954,593
New Center Asset Trust
5.60%, 8/15/97 1,100,000 1,092,185
Norfolk Southern Corp.
5.77%, 7/16/97 2,500,000 2,493,622
Pacific Gas & Electric Co.
5.60%, 8/28/97 1,500,000 1,486,332
Triple A One Funding Corp.
5.58%, 7/16/97 3,600,000 3,591,152
Unifunding, Inc. yankee:
5.58%, 9/15/97 4,800,000 4,742,712
5.67%, 11/12/97 8,000,000 7,832,000
TOTAL COMMERCIAL PAPER
(Cost $61,568,752) 61,576,103
BANK NOTES - 1.2%
Bank of Tokyo-Mitsubishi Ltd.
5.70%, 7/14/97 12,500,000 12,500,000
Corestates Bank NA 5.65%,
1/30/98 (g) 6,000,000 5,999,939
First Bank National Association
5.60%, 5/15/98 (g) 5,800,000 5,796,346
BANK NOTES - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
Morgan Guaranty Trust Co. 5.375%,
3/30/98 (g) $ 11,000,000 $ 10,994,720
Sumitomo Bank Ltd.
5.74%, 7/11/97 12,500,000 12,500,000
TOTAL BANK NOTES
(Cost $47,790,819) 47,791,005
CASH EQUIVALENTS - 0.2%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account dated 6/30/97
due 7/1/97:
at 5 7/8% $ 3,661,597 3,661,000
at 5.99% 250,042 250,000
at 5.93% 3,748,617 3,748,000
7,659,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $3,536,460,505) $ 4,022,978,346
LEGEND
1. Non-income producing
2. Debt obligation initially issued in zero coupon form which converts to coupon
form at a specified rate and date.
3. Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
4. Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers. At the period end, the value of
these securities amounted to $132,179,126 or 3.3% of net assets.
5. Restricted securities - Investment in securities not registered under the
Securities Act of 1933 (see Note 2 of Notes to Financial Statements). Additional
information on each holding is as follows:
ACQUISITION ACQUISITION
SECURITY DATE COST
Fairchild Semiconductor Corp.
11.74%, 3/15/08 pay-in-kind 4/3/97 $1,541,077
6. Debt obligation initially issued at one coupon which converts to a higher
coupon at a specified date.
7. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
8. Non-income producing - issuer filed for protection under the Federal
Bankruptcy Code or is in default of interest payment.
9. For foreign government obligations not individually rated by S&P or Moody's,
the ratings listed are assigned to securities by FMR, the fund's investment
adviser, based principally on S&P and Moody's ratings of the sovereign credit of
the issuing government.
10. Security purchased on a delayed delivery or when-issued basis (see Note 2 of
Notes to Financial Statements).
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities, aggregated
$1,654,154,486 and $1,477,645,288, respectively, of which U.S. government and
government agency obligations aggregated $412,461,203 and $889,699,347,
respectively.
The fund placed a portion of its portfolio transactions with brokerage firms
which are affiliates of FMR. The commissions paid to these affiliated firms were
$174,322 for the period.
The composition of long-term debt holdings as a percentage of total value of
investment in securities, is as follows:
<PAGE>
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 19.5% AAA, AA, A 18.8%
Baa 3.9% BBB 5.7%
Ba 3.6% BB 2.0%
B 3.9% B 3.8%
Caa 0.2% CCC 0.4%
Ca, C 0.0% CC, C 0.0%
D 0.0%
For some foreign government obligations, FMR has assigned the ratings of the
sovereign credit of the issuing government. The percentage not rated by both S&P
and Moody's amounted to 0.6%. FMR has determined that unrated debt securities
that are lower quality account for 0.2% of the total value of investment in
securities.
Distribution of investments by country of issue, as a percentage of total value
of investment in securities, is as follows:
United States 88.6%
United Kingdom 2.9
Netherlands 2.1
France 1.4
Canada 1.0
Others (individually less than 1%) 4.0
TOTAL 100.0%
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income tax
purposes was $3,538,260,955. Net unrealized appreciation aggregated
$484,717,391, of which $515,085,273 related to appreciated investment securities
and $30,367,882 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO FINANCIAL
STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1997 (UNAUDITED)
ASSETS
<TABLE>
<S> <C>
Investment in $4,022,978,346
securities, at value
(including
repurchase
agreements of
$7,659,000) (cost
$3,536,460,505) -
See accompanying
schedule
Cash 317,016
Receivable for 3,697,569
investments sold
Receivable for fund 1,283,409
shares sold
Dividends receivable 5,653,220
Interest receivable 21,592,771
Other receivables 59,936
TOTAL ASSETS 4,055,582,267
LIABILITIES
Payable for $ 13,833,520
investments
purchased
Regular delivery
Delayed delivery 8,800,150
Payable for fund 4,879,599
shares redeemed
Accrued management 1,828,948
fee
Other payables and 396,197
accrued expenses
TOTAL LIABILITIES 29,738,414
NET ASSETS $ 4,025,843,853
Net Assets consist of:
Paid in capital $ 3,392,224,145
Undistributed net 69,229,933
investment income
Accumulated 77,872,297
undistributed
net realized gain
</TABLE>
<PAGE>
(loss) on
investments and
foreign
currency
transactions
<TABLE>
<CAPTION>
<S> <C>
Net unrealized 486,517,478
appreciation
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $ 4,025,843,853
242,519,191
shares outstanding
NET ASSET VALUE, $16.60
offering price
and redemption
price per share
($4,025,843,853 (divided by)
242,519,191
shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 20,936,069
Dividends
Interest 60,402,478
TOTAL INCOME 81,338,547
EXPENSES
Management fee $ 10,415,204
Transfer agent fees 1,341,983
Accounting fees and 402,957
expenses
Non-interested 8,207
trustees'
compensation
Custodian fees and 105,052
expenses
Registration fees 8,446
Audit 71,538
Legal 5,834
Miscellaneous 142,608
Total expenses 12,501,829
before reductions
Expense reductions (82,260 12,419,569
)
NET INVESTMENT 68,918,978
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
Investment 82,598,838
securities
Foreign currency (10,176 82,588,662
transactions )
Change in net
unrealized
appreciation
(depreciation) on:
Investment 255,138,426
securities
Assets and 519 255,138,945
liabilities in
foreign currencies
NET GAIN (LOSS) 337,727,607
</TABLE>
<PAGE>
<TABLE>
<S> <C>
NET INCREASE $ 406,646,585
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 71,772
Expense reductions
Directed
brokerage
arrangements
Custodian credits 10,488
$ 82,260
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) SIX MONTHS YEAR ENDED
IN NET ASSETS ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
<S> <C> <C>
Operations $ 68,918,978 $ 123,680,897
Net investment
income
Net realized gain 82,588,662 331,183,089
(loss)
Change in net 255,138,945 15,746,586
unrealized
appreciation
(depreciation)
NET INCREASE 406,646,585 470,610,572
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Distributions to (126,645,359) (119,397,539)
shareholders
From net
investment income
From net realized (317,686,664) (98,450,602)
gain
TOTAL DISTRIBUTIONS (444,332,023) (217,848,141)
Share transactions 160,759,463 270,086,820
Net proceeds from
sales of shares
Reinvestment of 444,332,023 217,848,141
distributions
Cost of shares (182,756,372) (432,347,524)
redeemed
NET INCREASE 422,335,114 55,587,437
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 384,649,676 308,349,868
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 3,641,194,177 3,332,844,309
End of period $4,025,843,853 $3,641,194,177
(including
undistributed net
investment
income of
$69,229,933 and
$120,488,851,
respectively)
OTHER INFORMATION
Shares
Sold 10,083,606 17,138,645
Issued in 28,796,632 14,427,029
reinvestment of
distributions
Redeemed (11,428,361) (27,544,207)
Net increase 27,451,877 4,021,467
</TABLE>
<PAGE>
(decrease)
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997
SELECTED PER-SHARE (UNAUDITED) 1996 1995 1994 1993 E 1992
<S> <C> <C> <C> <C> <C> <C>
DATA
Net asset value, $ 16.93 $ 15.79 $ 13.79 $ 15.42 $ 13.32 $ 12.55
beginning of period
Income from
Investment
Operations
Net investment .29 D .63 .30 .45 .33 .32
income
Net realized and 1.45 1.55 1.99 (1.33) 2.39 1.09
unrealized gain
(loss)
Total from 1.74 2.18 2.29 (.88) 2.72 1.41
investment
operations
Less Distributions
From net (.59) (.57) (.29) (.29) (.33) (.31)
investment income
In excess of net - - - - (.04) -
investment income
From net realized (1.48) (.47) - (.46) (.25) (.33)
gain
Total distributions (2.07) (1.04) (.29) (.75) (.62) (.64)
Net asset value, end $ 16.60 $ 16.93 $ 15.79 $ 13.79 $ 15.42 $ 13.32
of period
TOTAL RETURN B, C 11.20% 14.60% 16.96% (6.09)% 21.23% 11.71%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $ 4,025,844 $ 3,641,194 $ 3,332,844 $ 3,290,527 $ 2,422,692 $ 731,724
period (000
omitted)
Ratio of expenses to .67% A .74% .81% .81% .88% .91%
average net assets
Ratio of expenses to .66% A, .73% F .79% F .80% F .88% .91%
average net assets F
after expense
reductions
Ratio of net 3.69% A 3.60% 3.54% 4.07% 3.64% 4.89%
investment income
to average net
assets
Portfolio turnover rate 86% A 168% 256% 85% 113% 92%
Average commission $ .0464 $ .0163
rate G
</TABLE>
<PAGE>
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE
NOT ANNUALIZED AND DO NOT REFLECT CHARGES ATTRIBUTABLE
TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE
CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN. C THE
TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES
TO FINANCIAL STATEMENTS). D NET INVESTMENT INCOME PER SHARE HAS
BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING
DURING THE PERIOD. E EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED
STATEMENT OF POSITION 93-2, "DETERMINATION, DISCLOSURE,
AND FINANCIAL STATEMENT PRESENTATION OF INCOME, CAPITAL GAIN, AND
RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT
COMPANIES." AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT
CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO TAX
DIFFERENCES. F FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS
WITH THIRD PARTIES WHO EITHER PAID OR REDUCED A
PORTION OF THE FUND'S EXPENSES (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS). G FOR FISCAL YEARS BEGINNING ON OR AFTER
SEPTEMBER 1, 1995, A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE
COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH
COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD
AND FUND TO FUND DEPENDING ON THE MIX OF TRADES
EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION
RATE STRUCTURES MAY DIFFER.
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value). If Fidelity had not
reimbursed certain fund expenses, the life of fund total return would have
been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
JUNE 30, 1997 YEAR FUND
BALANCED 24.77% 15.39%
S&P 500(registered trademark) 34.70% 33.11%
Lehman Brothers Aggregate Bond Index 8.15% 9.91%
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and show
what would have happened if the fund had achieved that return by performing
at a constant rate each year.
You can compare the fund's returns to the performance of the Standard &
Poor's 500 Index - a widely recognized, unmanaged index of common stocks -
and the performance of the Lehman Brothers Aggregate Bond Index - a market
value weighted performance benchmark for investment-grade fixed-rate debt
issues, including government, corporate, asset-backed, and mortgage-backed
securities, with maturities of at least one year.
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown. The life of fund figures are from commencement of operations
January 3, 1995.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
$10,000 OVER LIFE OF FUND
1995/01/03 10000.00 10000.00
10000.00
1995/01/31 9990.00 10258.23
10197.90
1995/02/28 10190.00 10658.00
10440.37
1995/03/31 10260.00 10972.51
<PAGE>
10504.42
1995/04/30 10390.00 11295.66
10651.15
1995/05/31 10610.00 11747.14
11063.32
1995/06/30 10740.00 12020.03
11144.43
1995/07/31 10880.00 12418.61
11119.54
1995/08/31 10920.00 12449.78
11253.74
1995/09/30 11020.00 12975.16
11363.22
1995/10/31 10890.00 12928.84
11511.00
1995/11/30 11210.00 13496.42
11683.49
1995/12/31 11391.59 13756.36
11847.46
1996/01/31 11473.17 14224.63
11926.13
1996/02/29 11319.47 14356.49
11718.83
1996/03/31 11227.28 14494.74
11637.37
1996/04/30 11258.01 14708.39
11571.92
1996/05/31 11380.93 15087.72
11548.42
1996/06/30 11452.64 15145.21
11703.51
1996/07/31 11227.28 14476.09
11735.54
1996/08/31 11298.98 14781.39
11715.87
1996/09/30 11780.44 15613.29
11920.04
1996/10/31 12098.00 16043.91
12184.08
1996/11/30 12733.12 17256.66
12392.78
1996/12/31 12528.25 16914.81
12277.55
1997/01/31 12927.76 17971.65
12315.15
1997/02/28 13144.66 18112.54
12345.78
1997/03/31 12777.20 17368.30
12208.97
1997/04/30 13260.15 18405.19
12391.74
1997/05/31 13785.10 19525.70
12508.88
1997/06/30 14289.05 20400.45
12657.35
Let's say hypothetically that $10,000 was invested in Balanced Portfolio on
January 3, 1995, when the fund started. As the chart shows, by June 30,
1997, the value of the investment would have grown to $14,289 - a 42.89%
increase on the initial investment. For comparison, look at how both the
S&P 500 and Lehman Brothers Aggregate Bond Index did over the same period.
With dividends and capital gains, if any, reinvested, the same $10,000
investment in the S&P 500 would have grown to $20,400 - a 104.00% increase.
If $10,000 was put in the bond index, it would have grown to $12,657 - a
26.57% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
General Electric Co. 2.5
Bristol-Myers Squibb Co. 2.1
Philip Morris Companies, Inc. 2.1
Citicorp 2.1
Procter & Gamble Co. 2.0
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Finance 17.2
Health 10.5
Nondurables 9.8
Aerospace & Defense 6.9
Energy 6.6
ASSET ALLOCATION AS OF JUNE 30, 1997*
<PAGE>
Row: 1, Col: 1, Value: 7.5
Row: 1, Col: 2, Value: 26.8
Row: 1, Col: 3, Value: 65.7
Row: 1, Col: 1, Value: 45.0
Row: 1, Col: 2, Value: 39.0
Row: 1, Col: 3, Value: 28.0
Row: 2, Col: 1, Value: 31.0
Row: 2, Col: 2, Value: 40.0
Row: 2, Col: 3, Value: 67.0
Row: 3, Col: 1, Value: 90.0
Row: 3, Col: 2, Value: 60.0
Row: 3, Col: 3, Value: 46.0
Stocks 65.7%
Bonds 26.8%
Short-term investments 7.5%
FOREIGN INVESTMENTS 8.4%
*
% OF FUND'S
INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with
Bettina Doulton,
Portfolio Manager of
Balanced Portfolio
Q. HOW DID THE FUND PERFORM, BETTINA?
G.V. Given the structure of the fund - a blend of equities and fixed-income
investments - the fund's performance tends to fall between its two
benchmark indices, the Standard & Poor's 500 Index and the Lehman Brothers
Aggregate Bond Index. That's exactly what happened over the six months that
ended June 30, 1997. The fund performed better than the Lehman Brothers
index, which returned 3.09% over that period, but underperformed the S&P
500, which returned a very strong 20.61%. For the 12 months that ended June
30, 1997, the Lehman Brothers index returned 8.15% and the S&P 500 returned
34.70%. Again, the fund's performance fell between that of the two indices.
Q. WHAT KEY STRATEGIES DID YOU PURSUE OVER THE PAST SIX MONTHS?
G.V. Because the asset allocation of the fund generally will approximate
60% equities and 40% fixed-income, the strategy is to add value through
security selection within each asset class. In the stock sub-portfolio, a
notable decision was my concentration on selected finance, nondurables and
pharmaceutical stocks - stocks that turned out to be among the better
performers during the period. Within these industries, diversified
financial-services company American Express and pharmaceuticals firm
Bristol-Myers Squibb were particularly strong contributors.
Q. WHAT TYPES OF EQUITY INVESTMENTS WERE MOST ATTRACTIVE TO YOU OVER THE
PERIOD?
G.V. Overall, stock selection remained company-specific, focused on firms
with competitive advantages or catalysts for positive change - including
dominant market positions, cost-structure reductions or new products - and
shareholder-friendly managements. The combination of some or all of these
attributes typically translates into solid earnings and generous free cash
flow. Of course, my decision to invest in a particular stock also is
contingent on an attractive valuation. Over the past six months, a
significant proportion of companies meeting these criteria have been
large-capitalization diversified financials and "consumer growth
companies," mainly pharmaceuticals and nondurables firms. One stock that I
found to be particularly attractive over the period was BankAmerica. This
bank is in the process of aggressively reducing its cost structure,
achieving improving returns on capital and using excess capital to
repurchase its shares. In addition, the firm has been the beneficiary of an
improving California economy.
Q. HOW DID SOME OF THE OTHER LARGER STOCK HOLDINGS PERFORM?
G.V. The fund's top five stocks performed well, including Citicorp. Its
solid business prospects shone through in the face of a rather volatile
environment for financials brought on by concerns over rising interest
rates. General Electric and Philip Morris also were positive contributors.
The upward revaluation of GE continued as investors were attracted to its
global business franchise, consistent growth prospects and stable free cash
flow. Philip Morris' underlying business prospects remained good, and the
market viewed progress on negotiations for a tobacco settlement positively.
On the negative side, the fund's aerospace and defense investments were
disappointing as they weakened early in 1997 after outperforming for most
of 1996.
Q. HOW WAS THE BOND PORTION OF THE FUND STRUCTURED?
G.V. The manager of the fund's fixed-income subportfolio, Kevin Grant,
maintained an interest rate posture in line with the overall bond market as
measured by the Lehman Brothers Aggregate Bond Index. Kevin was attracted
to corporate bonds issued by companies he felt wouldn't be affected by
shifts in the economy, including bonds issued by banks. Historically, bank
earnings were quite sensitive to interest rates. However, over the past
several years, banks have increased the fee-based portions of their
business, making them less sensitive to interest rates and loans. In the
corporate area, the fund's bonds were focused on maturities in the two- to
six-year range. These bonds offered a yield advantage over Treasuries, but
were short enough in maturity that they shouldn't markedly underperform
Treasuries if the market became nervous about credit risk.
Q. WHAT'S YOUR OUTLOOK FOR THE NEXT SIX MONTHS?
G.V. In terms of the overall U.S. economy, I believe it's likely there will
be more of the same - moderate growth and low inflation - although the
duration of the current economic expansion already has exceeded all but two
post-war expansions. Against this backdrop, corporate America is generally
<PAGE>
performing well. Earnings growth prospects remain favorable, driven by
globalization, market share gains, continuing productivity improvements and
capital redeployment. In addition, I believe merger and acquisition
activity is likely to remain robust as companies seek to bolster their
market position and exploit revenue and cost synergies. Given this
scenario, I think it's quite probable that the same stocks that have been
market leaders recently - larger-capitalization financials, pharmaceuticals
and consumer nondurables - will continue to perform well.
FUND FACTS
GOAL: maximum total return over the long term
by allocating assets among stocks, bonds and
short-term instruments anywhere in the world
START DATE: September 6, 1989
SIZE: as of June 30, 1997, more than $4 billion
MANAGER: Richard Habermann, since March
1996; joined Fidelity in 1968
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 64.6%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 6.7%
AEROSPACE & DEFENSE - 5.7%
AlliedSignal, Inc. 24,000 $ 2,016,000
Boeing Co. 50,628 2,686,448
Lockheed Martin Corp. 15,800 1,636,288
Rockwell International Corp. 2,600 153,400
Sundstrand Corp. 17,000 948,813
Textron, Inc. 3,400 225,675
United Technologies Corp. 22,000 1,826,000
9,492,624
DEFENSE ELECTRONICS - 0.7%
Raytheon Co. 23,900 1,218,900
SHIP BUILDING & REPAIR - 0.3%
General Dynamics Corp. 7,300 547,500
Newport News Shipbuilding, Inc. 780 15,161
562,661
TOTAL AEROSPACE & DEFENSE 11,274,185
BASIC INDUSTRIES - 4.2%
CHEMICALS & PLASTICS - 3.0%
Air Products & Chemicals, Inc. 10,600 861,250
du Pont (E.I.) de Nemours & Co. 10,000 628,750
Goodrich (B.F.) Co. 20,200 874,913
Monsanto Co. 35,000 1,507,188
Nalco Chemical Co. 3,000 115,875
Olin Corp. 3,400 132,813
Praxair, Inc. 15,900 890,400
5,011,189
PAPER & FOREST PRODUCTS - 1.2%
Fort Howard Corp. (a) 16,100 815,063
Kimberly-Clark Corp. 25,400 1,263,650
2,078,713
TOTAL BASIC INDUSTRIES 7,089,902
CONSTRUCTION & REAL ESTATE - 0.2%
BUILDING MATERIALS - 0.2%
Masco Corp. 6,800 283,900
DURABLES - 1.7%
AUTOS, TIRES, & ACCESSORIES - 0.0%
Johnson Controls, Inc. 100 4,106
Scania AB Class B 100 3,057
7,163
CONSUMER DURABLES - 1.7%
Corning, Inc. 4,700 261,438
Minnesota Mining & Manufacturing Co. 24,500 2,499,000
2,760,438
TOTAL DURABLES 2,767,601
ENERGY - 6.1%
ENERGY SERVICES - 0.2%
Halliburton Co. 5,000 396,250
OIL & GAS - 5.9%
Amoco Corp. 8,000 695,500
British Petroleum PLC:
ADR 14,986 1,122,077
Ord. 89,067 1,106,834
Exxon Corp. 13,000 799,500
Mobil Corp. 10,600 740,675
SHARES VALUE (NOTE 1)
Royal Dutch Petroleum Co. 56,000 $ 3,045,000
Royal Dutch Petroleum Co. Ord. 2,000 103,966
Texaco, Inc. 15,700 1,707,375
Total SA:
Class B 1,300 131,322
sponsored ADR 2,200 111,375
USX-Marathon Group 8,200 236,775
Unocal Corp. 1,800 69,863
9,870,262
<PAGE>
TOTAL ENERGY 10,266,512
FINANCE - 12.1%
BANKS - 6.1%
BankAmerica Corp. 47,400 3,060,263
Citicorp 28,500 3,436,031
NationsBank Corp. 35,200 2,270,400
Wells Fargo & Co. 5,500 1,482,250
10,248,944
CREDIT & OTHER FINANCE - 1.7%
American Express Co. 29,700 2,212,650
Associates First Capital Corp. 1,000 55,500
Beneficial Corp. 3,900 277,144
Household International, Inc. 2,300 270,106
2,815,400
FEDERAL SPONSORED CREDIT - 1.7%
Federal Home Loan Mortgage
Corporation 48,200 1,656,875
Federal National Mortgage Association 27,800 1,212,775
2,869,650
INSURANCE - 2.3%
Allstate Corp. 23,000 1,679,000
Hartford Financial Services Group, Inc. 4,900 405,475
St. Paul Companies, Inc. (The) 3,300 251,625
Travelers Group, Inc. (The) 24,000 1,513,500
3,849,600
SAVINGS & LOANS - 0.3%
Great Western Financial Corp. 8,200 440,750
TOTAL FINANCE 20,224,344
HEALTH - 10.3%
DRUGS & PHARMACEUTICALS - 7.7%
American Home Products Corp. 42,500 3,251,250
Bristol-Myers Squibb Co. 44,200 3,580,200
Merck & Co., Inc. 13,800 1,428,300
Pfizer, Inc. 10,800 645,300
Schering-Plough Corp. 47,200 2,259,700
SmithKline Beecham PLC ADR 19,400 1,777,525
12,942,275
MEDICAL EQUIPMENT & SUPPLIES - 2.6%
Allegiance Corp. 30,000 817,500
Baxter International, Inc. 35,200 1,839,200
Johnson & Johnson 27,400 1,763,875
4,420,575
TOTAL HEALTH 17,362,850
HOLDING COMPANIES - 0.1%
CINergy Corp. 2,900 100,932
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - 5.9%
ELECTRICAL EQUIPMENT - 3.8%
Emerson Electric Co. 17,600 $ 969,100
General Electric Co. 64,600 4,223,225
Grainger (W.W.), Inc. 7,400 578,588
Honeywell, Inc. 7,900 599,413
6,370,326
INDUSTRIAL MACHINERY & EQUIPMENT - 1.4%
Cooper Industries, Inc. 18,098 900,376
Harnischfeger Industries, Inc. 6,200 257,300
Tyco International Ltd. 17,200 1,196,475
2,354,151
POLLUTION CONTROL - 0.7%
Browning-Ferris Industries, Inc. 24,800 824,600
Waste Management, Inc. 10,800 346,950
1,171,550
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 9,896,027
MEDIA & LEISURE - 0.3%
BROADCASTING - 0.0%
CS Wireless Systems, Inc. (a)(c) 8 -
Time Warner, Inc. 1,200 57,900
57,900
ENTERTAINMENT - 0.1%
Cedar Fair LP (depositary unit) 5,000 218,750
PUBLISHING - 0.2%
McGraw-Hill, Inc. 5,500 323,469
TOTAL MEDIA & LEISURE 600,119
NONDURABLES - 9.6%
BEVERAGES - 1.6%
Anheuser-Busch Companies, Inc. 5,300 222,269
PepsiCo, Inc. 65,000 2,441,563
2,663,832
FOODS - 1.0%
Campbell Soup Co. 1,600 80,000
Flowers Industries, Inc. 5,850 98,353
Heinz (H.J.) Co. 16,200 747,225
Hershey Foods Corp. 500 27,656
Nabisco Holdings Corp. Class A 18,100 721,738
1,674,972
HOUSEHOLD PRODUCTS - 4.8%
Avon Products, Inc. 8,900 628,006
Clorox Co. 3,600 475,200
Procter & Gamble Co. 23,800 3,361,750
Rubbermaid, Inc. 8,800 261,800
Unilever PLC Ord. 13,400 384,015
Unilever NV:
ADR 11,400 2,440,313
<PAGE>
Ord. 2,000 420,753
7,971,837
TOBACCO - 2.2%
Philip Morris Companies, Inc. 80,100 3,554,438
RJR Nabisco Holdings Corp. 5,300 174,900
3,729,338
TOTAL NONDURABLES 16,039,979
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - 3.1%
APPAREL STORES - 0.1%
Footstar, Inc. (a) 3,022 $ 78,950
DRUG STORES - 1.0%
CVS Corp. 10,500 538,125
Rite Aid Corp. 22,920 1,143,135
1,681,260
GENERAL MERCHANDISE STORES - 1.6%
Dayton Hudson Corp. 2,000 106,375
Sears, Roebuck & Co. 18,600 999,750
Wal-Mart Stores, Inc. 47,200 1,595,950
2,702,075
GROCERY STORES - 0.4%
American Stores Co. 14,500 715,938
TOTAL RETAIL & WHOLESALE 5,178,223
SERVICES - 0.7%
LEASING & RENTAL - 0.0%
Hanover Compressor Co. 100 1,950
Ryder Systems, Inc. 400 13,200
15,150
PRINTING - 0.4%
Deluxe Corp. 11,600 395,850
Donnelley (R.R.) & Sons Co. 5,500 201,438
597,288
SERVICES - 0.3%
ADT Ltd. (a) 5,000 165,000
National Service Industries, Inc. 8,800 428,450
593,450
TOTAL SERVICES 1,205,888
TECHNOLOGY - 2.4%
COMPUTERS & OFFICE EQUIPMENT - 2.0%
Exide Electronics Group, Inc.
warrants 3/15/06 (a)(c) 10 250
Pitney Bowes, Inc. 26,400 1,834,800
Xerox Corp. 18,000 1,419,750
3,254,800
ELECTRONICS - 0.4%
Thomas & Betts Corp. 14,050 738,503
TOTAL TECHNOLOGY 3,993,303
UTILITIES - 1.2%
CELLULAR - 0.0%
Microcell Telecommunications, Inc.
6/1/06 (a):
conditional warrants 560 350 warrants 560 7,000
7,350
ELECTRIC UTILITY - 0.1%
Allegheny Power System, Inc. 1,400 37,363
Edison International 5,000 124,375
GPU, Inc. 1,000 35,875
197,613
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - CONTINUED
GAS - 0.5%
Consolidated Natural Gas Co. 300 $ 16,144
El Paso Natural Gas Co. 362 19,910
Williams Companies, Inc. 19,000 831,250
867,304
TELEPHONE SERVICES - 0.6%
ALLTEL Corp. 2,200 73,563
Ameritech Corp. 5,800 394,038
BCE, Inc. 6,000 166,878
Hyperion Telecommunications, Inc.
warrants 4/15/01 (a)(c) 60 1,800
MCI Communications Corp. 7,000 267,969
NextLink Communications, Inc.
warrants 2/1/09 (a) 3,229 32
RSL Communications Ltd./RSL
Communications PLC
warrants 11/15/06 (a) 40 1,200
905,480
TOTAL UTILITIES 1,977,747
TOTAL COMMON STOCKS
(Cost $87,743,324) 108,261,512
PREFERRED STOCKS - 1.1%
CONVERTIBLE PREFERRED STOCKS - 0.5%
DURABLES - 0.1%
AUTOS, TIRES, & ACCESSORIES - 0.1%
Republic Industries, Inc. $1.55 4,000 98,000
ENERGY - 0.0%
OIL & GAS - 0.0%
Tosco Financing Trust $2.875 (c) 1,700 95,838
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Loral Space & Communications Ltd.
<PAGE>
Series C, $3.00 (c) 4,000 199,000
MEDIA & LEISURE - 0.1%
LODGING & GAMING - 0.1%
Host Marriott Financial Trust $3.375 (c) 3,000 173,625
RETAIL & WHOLESALE - 0.2%
APPAREL STORES - 0.2%
TJX Companies, Inc., Series E, $7.00 1,000 285,000
TOTAL CONVERTIBLE PREFERRED STOCKS 851,463
NONCONVERTIBLE PREFERRED STOCKS - 0.6%
FINANCE - 0.1%
CREDIT & OTHER FINANCE - 0.0%
American Annuity Group Capital
Trust II 8 3/4% 50 49,750
SAVINGS & LOANS - 0.1%
California Federal Preferred Capital
Corp. 9 1/8% 2,800 71,400
TOTAL FINANCE 121,150
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - 0.4%
BROADCASTING - 0.3%
American Radio Systems Corp.
11 3/8% pay-in-kind 855 $ 91,058
Citadel Broadcasting Co.
13 1/4% pay-in-kind (c) 600 60,000
Cablevision System Corp. pay-in-kind:
11 1/8% depositary shares 1,244 125,022
Series H, $11.75 267 27,635
Capstar Broadcasting Partners,
Inc. 12% (c) 100 10,125
Sinclair Capital 11 5/8% (c) 800 84,400
Time Warner, Inc., Series M,
10 1/4% pay-in-kind 145 160,225
558,465
PUBLISHING - 0.1%
K-III Communications Corp.,
Series D, $10 600 60,450
TOTAL MEDIA & LEISURE 618,915
UTILITIES - 0.1%
TELEPHONE SERVICES - 0.1%
NextLink Communications, Inc.
14% pay-in-kind 3,334 172,535
TOTAL NONCONVERTIBLE PREFERRED STOCKS 912,600
TOTAL PREFERRED STOCKS
(Cost $1,598,971) 1,764,063
CORPORATE BONDS - 12.3%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
CONVERTIBLE BONDS - 0.2%
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
POLLUTION CONTROL - 0.1%
WMX Technologies, Inc.
2%, 1/24/05 Baa1 $ 80,000 73,800
MEDIA & LEISURE - 0.0%
LEISURE DURABLES & TOYS - 0.0%
Hasbro Corp. 6%, 11/15/98 A3 24,000 35,040
RETAIL & WHOLESALE - 0.1%
GENERAL MERCHANDISE STORES - 0.1%
Federated Department Stores, Inc.
5%, 10/1/03 Baa3 150,000 178,875
TOTAL CONVERTIBLE BONDS 287,715
NONCONVERTIBLE BONDS - 12.1%
AEROSPACE & DEFENSE - 0.2%
AEROSPACE & DEFENSE - 0.2%
Alliant Techsystems, Inc.
11 3/4%, 3/1/03 B2 13,000 14,333
Fairchild Corp. 12%, 10/15/01 Caa 10,000 10,100
Lockheed Martin Corp.
7.20%, 5/1/36 A3 300,000 307,746
332,179
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
AEROSPACE & DEFENSE - CONTINUED
DEFENSE ELECTRONICS - 0.0%
Tracor, Inc. 8 1/2%, 3/1/07 B1 $ 20,000 $ 20,200
SHIP BUILDING & REPAIR - 0.0%
Newport News Shipbuilding, Inc.
9 1/4%, 12/1/06 B1 10,000 10,425
TOTAL AEROSPACE & DEFENSE 362,804
BASIC INDUSTRIES - 0.7%
CHEMICALS & PLASTICS - 0.1%
Atlantis Group, Inc.
11%, 2/15/03 B2 10,000 10,325
Foamex LP/Foamex Capital Corp.
9 7/8%, 6/15/07 (c) B3 10,000 10,125
Freedom Chemical Co. 10 5/8%,
10/15/06 B3 60,000 61,200
Pioneer Americas Acquisition
Corp. 9 1/4%, 6/15/07 (c) B1 10,000 9,850
Sterling Chemicals Holdings, Inc.:
11 3/4%, 8/15/06 B3 70,000 75,425
11 1/4%, 4/1/07 B3 40,000 42,400
<PAGE>
209,325
IRON & STEEL - 0.1%
GS Technologies Operating, Inc.
12 1/4%, 10/1/05 B2 20,000 21,900
Republic Engineered Steels, Inc.
9 7/8%, 12/15/01 Caa 50,000 46,625
WCI Steel, Inc. 10%, 12/1/04 B2 40,000 41,600
110,125
METALS & MINING - 0.0%
Commonwealth Aluminum Corp.
10 3/4%, 10/1/06 B2 40,000 42,000
PAPER & FOREST PRODUCTS - 0.5%
Asia Pulp & Paper Finance II
Mauritius Ltd. 12%,
3/15/04 (c) B3 85,000 87,125
American Pad & Paper Co., Inc.
13%, 11/15/05 B3 40,000 46,800
Crown Paper Co. 11%, 9/1/05 B3 30,000 30,075
Doman Industries Ltd. yankee
8 3/4%, 3/15/04 B1 50,000 48,250
Florida Coast Paper Co. LLC/
Florida Coast Paper
Finance Corp., Series B,
12 3/4%, 6/1/03 Caa 20,000 20,650
Gaylord Container Corp.
11 1/2%, 5/15/01 B3 10,000 10,513
Indah Kiat International Finance
Co. BV 12 1/2%, 6/15/06 Ba2 20,000 22,700
Mail-Well Corp. 10 1/2%,
2/15/04 B 10,000 10,400
Malette, Inc. yankee 12 1/4%,
7/15/04 Ba3 10,000 11,200
Repap Wisconsin, Inc.:
9 1/4%, 2/1/02 B2 40,000 40,200
9 7/8%, 5/1/06 Caa 50,000 50,375
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Repap New Brunswick, Inc.
yankee 10 5/8%, 4/15/05 Caa $ 20,000 $ 18,850
Riverwood International
10 7/8%, 4/1/08 Caa 50,000 45,375
SD Warren Co., Series B,
12%, 12/15/04 B1 15,000 16,800
Stone Container Corp.:
12 5/8%, 7/15/98 B2 100,000 105,125
11 7/8%, 12/1/98 B2 30,000 31,575
10 3/4%, 10/1/02 B1 80,000 84,400
11 7/8%, 8/1/16 B2 40,000 43,200
Tembec Finance Corp. yankee
9 7/8%, 9/30/05 B1 10,000 10,300
733,913
TOTAL BASIC INDUSTRIES 1,095,363
DURABLES - 0.5%
AUTOS, TIRES, & ACCESSORIES - 0.0%
Jordan Industries, Inc.
10 3/8%, 8/1/03 B3 20,000 20,700
HOME FURNISHINGS - 0.1%
Guitar Center Management Co.,
Inc. 11%, 7/1/06 B2 6,000 6,570
Interlake Corp. 12 1/8%,
3/1/02 B3 40,000 41,900
Knoll, Inc. 10 7/8%, 3/15/06 B1 38,000 42,038
90,508
TEXTILES & APPAREL - 0.4%
Dan River, Inc. 10 1/8%,
12/15/03 B3 10,000 10,600
Levi Strauss & Co. 6.80%,
11/1/03 (c) Baa2 570,000 565,138
Polymer Group, Inc.
9%, 7/1/07 (c) - 40,000 39,356
Synthetic Industries, Inc.
9 1/4%, 2/15/07 (c) B2 40,000 40,500
655,594
TOTAL DURABLES 766,802
ENERGY - 0.5%
ENERGY SERVICES - 0.1%
DI Industries, Inc. 8 7/8%,
7/1/07 B1 25,000 24,625
McDermott International, Inc.
9 3/8%, 3/15/02 Ba3 60,000 62,909
Petroliam Nasional BHD yankee
6 7/8%, 7/1/03 (c) A1 130,000 129,550
217,084
OIL & GAS - 0.4%
Belden & Blake Corp. 9 7/8%,
6/15/07 (c) B3 40,000 39,600
Cross Timbers Oil Co.
9 1/4%, 4/1/07 B2 60,000 61,950
Flores & Rucks, Inc. 9 3/4%,
10/1/06 B3 40,000 41,800
Ocean Energy, Inc. 8 7/8%,
7/15/07 (c) B3 60,000 60,000
Pennzoil Co. 9 5/8%, 11/15/99 Baa3 60,000 63,925
<PAGE>
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
ENERGY - CONTINUED
OIL & GAS - CONTINUED
Ras Laffan Liquid Natural
Gas Co. Ltd. yankee
8.29%, 3/15/14 (c) A3 $ 300,000 $ 312,468
United Refining Co. 10 3/4%,
6/15/07 (c) B2 30,000 29,700
609,443
TOTAL ENERGY 826,527
FINANCE - 5.0%
ASSET-BACKED SECURITIES - 1.3%
Airplanes Pass Through Trust
10 7/8%, 3/15/19 Ba2 100,000 115,500
Capital Equipment Receivables
Trust 6.11%, 7/15/99 Aaa 1,410,000 1,411,763
Green Tree Financial Corp.
6.10%, 4/15/27 Aaa 71,888 71,753
Sears Credit Account Master
Trust II 6 1/2%, 10/15/03 Aaa 630,000 632,558
2,231,574
BANKS - 1.5%
ABN Amro Bank NV 6 5/8%,
10/31/01 Aa3 500,000 497,935
Banc One Corp. 6.70%,
3/24/00 Aa3 350,000 351,631
Banco Latinoamer Exportaciones
Euro 6.90%, 12/6/99 (c) Baa2 100,000 100,813
Capital One Bank 6.74%,
5/31/99 Baa3 260,000 260,330
Export-Import Bank of Korea
6 3/8%, 2/15/06 A1 600,000 562,272
First USA Bank 6 1/2%,
12/23/99 Baa3 250,000 248,785
Midland Bank PLC yankee
7 5/8%, 6/15/06 A1 250,000 257,463
Signet Bank 7.80%, 9/15/06 Baa1 250,000 258,120
Summit Bancorp. 8 5/8%,
12/10/02 BBB 100,000 107,241
2,644,590
CREDIT & OTHER FINANCE - 2.0%
APP International Finance Co. BV
yankee 11 3/4%, 10/1/05 Ba3 10,000 11,050
Ahmanson Capital Trust I
8.36%, 12/1/26 (c) Baa3 250,000 252,088
Associates Corp. of North
America 6 1/2%, 9/9/98 Aa3 250,000 250,993
CIT Group Holdings, Inc.
6 1/4%, 9/30/99 Aa3 860,000 857,859
Chrysler Financial Corp.
6 3/8%, 1/28/00 A3 180,000 179,460
First Security Capital I
8.41%, 12/15/26 A3 110,000 112,141
GST Equipment Funding, Inc.
13 1/4%, 5/1/07 (c) - 60,000 64,200
General Electric Capital Corp.
6.94%, 4/13/09 (e) Aaa 480,000 484,517
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Imperial Credit Capital Trust I
10 1/4%, 6/14/02 (c) B2 $ 20,000 $ 20,050
Imperial Credit Industries, Inc.
9 7/8%, 1/15/07 B2 50,000 49,500
MCN Investment Corp.
6.03%, 2/1/01 Baa2 180,000 175,819
Nordstrom Credit, Inc.
7 1/4%, 4/30/02 A2 200,000 203,340
PNC Institutional Capital Trust
8.315%, 5/15/27 (c) A2 600,000 606,714
Polytama International Finance
BV 11 1/4%, 6/15/07 B2 20,000 20,650
PTC International Finance BV
0%, 7/1/07 (c) B3 10,000 6,063
3,294,444
INSURANCE - 0.1%
Integon Capital I 10 3/4%,
2/15/07 (c) Ba3 100,000 121,500
SAVINGS & LOANS - 0.1%
First Nationwide Holdings, Inc.
10 5/8%, 10/1/03 Ba3 40,000 43,400
First Nationwide Parent
Holdings Ltd. 12 1/2%,
4/15/03 B3 80,000 89,200
132,600
TOTAL FINANCE 8,424,708
HEALTH - 0.2%
MEDICAL EQUIPMENT & SUPPLIES - 0.0%
Wright Medical Technology, Inc.
10 3/4%, 7/1/00 B3 40,000 40,700
MEDICAL FACILITIES MANAGEMENT - 0.2%
<PAGE>
Columbia/HCA Healthcare Corp.
6 1/2%, 3/15/99 A2 240,000 240,833
Integrated Health Services, Inc.
9 1/2%, 9/15/07 (c) B1 10,000 10,225
Tenet Healthcare Corp.:
8%, 1/15/05 Ba1 20,000 20,000
8 5/8%, 1/15/07 Ba3 10,000 10,150
281,208
TOTAL HEALTH 321,908
HOLDING COMPANIES - 0.2%
Gray Communications System,
Inc. 10 5/8%, 10/1/06 B3 20,000 21,075
Norfolk Southern Corp.
7.05%, 5/1/37 Baa1 340,000 345,080
TOTAL HOLDING COMPANIES 366,155
INDUSTRIAL MACHINERY & EQUIPMENT - 0.5%
ELECTRICAL EQUIPMENT - 0.0%
Amphenol Corp. 9 7/8%,
5/15/07 B2 10,000 10,300
Motors & Gears, Inc. 10 3/4%,
11/15/06 B3 60,000 61,800
72,100
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED
INDUSTRIAL MACHINERY & EQUIPMENT - 0.2%
Continental Global Group, Inc.
11%, 4/1/07 (c) B2 $ 20,000 $ 21,000
Goss Graphic System, Inc.
12%, 10/15/06 B2 50,000 55,000
International Knife & Saw, Inc.
11 3/8%, 11/15/06 B3 10,000 10,675
Tenneco, Inc. 8.075%, 10/1/02 Baa1 300,000 314,838
401,513
POLLUTION CONTROL - 0.3%
WMX Technologies, Inc.
7.10%, 8/1/26 A3 400,000 407,588
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 881,201
MEDIA & LEISURE - 1.2%
BROADCASTING - 0.6%
Adelphia Communications Corp.:
9 1/2%, 2/15/04 B3 10,000 9,500
9 7/8%, 3/1/07 (c) - 130,000 125,450
Benedek Communications Corp.
0%, 5/15/06 (b) - 50,000 30,125
Capstar Radio Broadcasting
Partners, Inc. (c):
9 1/4%, 7/1/07 - 60,000 58,050
0%, 2/1/09 (b) CCC 70,000 44,975
Chancellor Radio Broadcasting
Co. 8 3/4%, 6/15/07 (c) B3 60,000 59,250
Citadel Broadcasting Co.
10 1/4%, 7/1/07 (c) B3 40,000 40,000
CS Wireless Systems, Inc.
0%, 3/1/06 (b) Caa 30,000 7,200
Diamond Cable Communications
PLC yankee 0%, 9/30/04 (b) B3 10,000 8,075
Echostar DBS Corp. 12 1/2%,
7/1/02 (c) Caa 50,000 49,563
Echostar Satellite Broadcasting
Corp. 0%, 3/15/04 (b) Caa 40,000 28,400
Echostar Communications Corp.
secured discount
0%, 6/1/04 (b) B2 190,000 159,600
Jacor Communications Co.
8 3/4%, 6/15/07 (c) B2 10,000 9,875
Lenfest Communications, Inc.:
8 3/8%, 11/1/05 Ba3 10,000 9,850
10 1/2%, 6/15/06 B2 10,000 10,900
Olympus Communications LP/
Olympus Capital Corp.
10 5/8%, 11/15/06 B1 50,000 52,250
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 10,000 10,775
TCI Communication, Inc.
6.82%, 9/15/10 Ba1 250,000 249,878
Telewest PLC 0%, 10/1/07 (b) B1 60,000 43,350
UIH Australia/PAC, Inc., Series B,
0%, 5/15/06 (b) B2 90,000 54,450
1,061,516
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
ENTERTAINMENT - 0.1%
AMC Entertainment, Inc.
9 1/2%, 3/15/09 (c) B2 $ 70,000 $ 71,050
AMF Group, Inc., Series B:
10 7/8%, 3/15/06 B2 20,000 21,550
0%, 3/15/06 (b) B2 10,000 7,125
Cinemark USA, Inc.
9 5/8%, 8/1/08 B2 30,000 30,450
Viacom, Inc. 8%, 7/7/06 B1 100,000 97,000
<PAGE>
227,175
LEISURE DURABLES & TOYS - 0.1%
Coleman Escrow Corp. (c):
secured 1st priority
0%, 5/15/01 B3 140,000 88,200
secured 2nd priority
0%, 5/15/01 Caa 20,000 11,550
Icon Health and Fitness, Inc.
13%, 7/15/02 B3 50,000 56,125
Icon Fitness Corp. 0%,
11/15/06 (b) CCC+ 10,000 5,450
161,325
LODGING & GAMING - 0.3%
American Skiing Co.
12%, 7/15/06 B3 30,000 31,500
Casino Magic Financial Corp.
11 1/2%, 10/15/01 B1 20,000 17,500
Circus Circus Enterprises, Inc.
7%, 11/15/36 Baa2 150,000 145,688
HMC Acquisition Properties,
Inc. 9%, 12/15/07 Ba3 60,000 60,600
Hollywood Casino Corp.
12 3/4%, 11/1/03 B2 60,000 63,600
Horseshoe Gaming LLC
12 3/4%, 9/30/00 B1 40,000 44,700
Prime Hospitality Corp.
9 3/4%, 4/1/07 - 20,000 21,050
Sun International Hotels Ltd./Sun
International North America,
Inc. yankee 9%, 3/15/07 Ba3 70,000 71,050
455,688
PUBLISHING - 0.1%
Big Flower Press Holdings, Inc.
8 7/8%, 7/1/07 (c) - 90,000 88,425
RESTAURANTS - 0.0%
AFC Enterprises, Inc. 10 1/4%,
5/15/07 (c) B3 40,000 39,800
TOTAL MEDIA & LEISURE 2,033,929
NONDURABLES - 0.2%
FOODS - 0.0%
International Home Foods,
Inc. 10 3/8%, 11/1/06 B2 10,000 10,300
HOUSEHOLD PRODUCTS - 0.0%
Renaissance Cosmetic, Inc.
11 3/4%, 2/15/04 B3 50,000 51,750
Revlon Consumer Products
Corp. 10 1/2%, 2/15/03 B3 65,000 69,225
120,975
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
NONDURABLES - CONTINUED
TOBACCO - 0.2%
North Atlantic Trading, Inc.
11%, 6/15/04 (c) B3 $ 10,000 $ 10,150
Philip Morris Companies, Inc.
6.95%, 6/1/06 A2 250,000 250,833
260,983
TOTAL NONDURABLES 392,258
RETAIL & WHOLESALE - 0.9%
APPAREL STORES - 0.1%
Mothers Work, Inc. 12 5/8%,
8/1/05 B3 10,000 10,325
Specialty Retailers, Inc.
8 1/2%, 7/15/05 (c) Ba3 30,000 29,925
40,250
GENERAL MERCHANDISE STORES - 0.5%
Dayton Hudson Corp.:
6.80%, 10/1/01 Baa1 300,000 299,487
6.40%, 2/15/03 Baa1 400,000 389,652
Penney (J.C.) Co., Inc.
6.95%, 4/1/00 A2 160,000 161,347
850,486
GROCERY STORES - 0.3%
American Stores Co.
7 1/2%, 5/1/37 Baa2 250,000 254,743
Food 4 Less Holdings, Inc.
13 5/8%, 6/15/07 - 10,681 12,486
Grand Union Co.
12%, 9/1/04 Caa 50,000 37,000
Pantry, Inc. 12%, 11/15/00 B2 10,000 10,250
Pathmark Stores, Inc.:
11 5/8%, 6/15/02 Caa 40,000 40,500
9 5/8%, 5/1/03 B3 10,000 9,650
Penn Traffic Co.:
10 1/4%, 2/15/02 B3 40,000 34,400
8 5/8%, 12/15/03 B3 30,000 24,225
10 3/8%, 10/1/04 B3 20,000 17,000
11 1/2%, 4/15/06 B3 20,000 17,700
Pueblo Xtra International, Inc.:
9 1/2%, 8/1/03 B3 60,000 57,450
9 1/2%, 8/1/03 (c) B3 10,000 9,650
Randalls Food Markets, Inc.
<PAGE>
9 3/8%, 7/1/07 (c) B2 10,000 9,963
535,017
RETAIL & WHOLESALE, MISCELLANEOUS - 0.0%
Corporate Express, Inc., Series B,
9 1/8%, 3/15/04 B2 10,000 10,000
TOTAL RETAIL & WHOLESALE 1,435,753
SERVICES - 0.2%
PRINTING - 0.0%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 40,000 41,100
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
SERVICES - 0.2%
Orion Network System, Inc. unit:
11 1/4%, 1/15/07 B2 $ 50,000 $ 51,125
0%, 1/15/07 (b) B2 290,000 165,300
Outsourcing Solutions, Inc.
11%, 11/1/06 B3 10,000 10,850
227,275
TOTAL SERVICES 268,375
TECHNOLOGY - 0.2%
COMMUNICATIONS EQUIPMENT - 0.0%
Intermedia Communications, Inc.
0%, 5/15/06 (b) B2 80,000 55,000
COMPUTER SERVICES & SOFTWARE - 0.0%
Verio, Inc. unit 13 1/2%,
6/15/04 (c) - 50,000 50,250
COMPUTERS & OFFICE EQUIPMENT - 0.2%
Comdisco, Inc. 6.70%, 8/6/99 Baa1 250,000 250,948
Dictaphone Corp. 11 3/4%,
8/1/05 B3 10,000 9,200
Exide Electronics Group, Inc.
11 1/2%, 5/15/06 B3 10,000 10,725
Unisys Corp. 12%, 4/15/03 B1 10,000 10,825
281,698
ELECTRONIC INSTRUMENTS - 0.0%
Wavetek Corp. 10 1/8%,
6/15/07 (c) B3 10,000 10,200
ELECTRONICS - 0.0%
Fairchild Semiconductor Corp.
10 1/8%, 3/15/07 (c) B2 30,000 31,650
Viasystems, Inc. 9 3/4%,
6/1/07 (c) B3 10,000 10,175
41,825
TOTAL TECHNOLOGY 438,973
TRANSPORTATION - 0.1%
AIR TRANSPORTATION - 0.0%
Atlas Air, Inc. pass through trust
12 1/4%, 12/1/02 Ba3 30,000 33,450
RAILROADS - 0.1%
Burlington Northern Santa Fe
Corp. 7.29%, 6/1/36 Baa2 150,000 153,768
TFM SA de CV (c):
10 1/4%, 6/15/07 B2 10,000 10,175
0%, 6/15/09 (b) B2 20,000 11,550
175,493
TOTAL TRANSPORTATION 208,943
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
UTILITIES - 1.5%
CELLULAR - 0.7%
Arch Communications Group,
Inc. 0%, 3/15/08 (b) B3 $ 90,000 $ 47,475
Clearnet Communications, Inc.
yankee 0%, 12/15/05 (b) B3 50,000 32,875
McCaw International Ltd. unit
0%, 4/15/07 (b)(c) CCC 200,000 96,000
Microcell Telecommunications,
Inc. 0%, 6/1/06 (b) B3 140,000 78,400
Millicom International Cellular
SA 0%, 6/1/06 (b) B3 260,000 185,900
Mobile Telecommunications
Technologies Corp.
13 1/2%, 12/15/02 B3 20,000 21,100
Omnipoint Corp.:
11 5/8%, 8/15/06 B2 10,000 9,450
Series A, 11 5/8%, 8/15/06 B3 30,000 28,350
Pagemart, Inc. 0%, 11/1/03 (b) - 70,000 60,550
Pagemart Nationwide, Inc.
0%, 2/1/05 (b) - 40,000 29,800
RSL Communications Ltd./RSL
Communications PLC
12 1/4%, 11/15/06 - 40,000 40,700
Telesystem International Wireless,
Inc. 0%, 6/30/07 (b)(c) B- 30,000 15,975
360 Degrees Communications
Co. 7 1/8%, 3/1/03 Ba1 400,000 397,796
USA Mobile Communications,
Inc. II 9 1/2%, 2/1/04 B2 10,000 9,300
1,053,671
ELECTRIC UTILITY - 0.0%
<PAGE>
CMS Energy Corp. 8 1/8%,
5/15/02 Ba3 10,000 10,075
GAS - 0.2%
Columbia Gas System, Inc.
6.61%, 11/28/02 Baa1 379,000 374,717
TELEPHONE SERVICES - 0.6%
Brooks Fiber Properties, Inc.:
0%, 3/1/06 (b) - 10,000 6,750
11 7/8%, 11/1/06 - 20,000 12,900
GST USA, Inc. 0%, 12/15/05 (b) - 34,000 21,080
Hyperion Telecommunications,
Inc., Series B, 0%,
4/15/03 (b) - 60,000 30,150
LCI International, Inc.
7 1/4%, 6/15/07 Ba1 200,000 198,100
McleodUSA, Inc. 0%,
3/1/07 (b)(c) B3 40,000 25,500
MFS Communications, Inc.
0%, 1/15/06 (b) Ba3 250,000 197,188
Shared Technologies Fairchild
Communications Corp.
0%, 3/1/06 (b) Caa 87,000 77,648
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Teleport Communications Group,
Inc. 0%, 7/1/07 (b) B1 $ 20,000 $ 14,425
WorldCom, Inc. 7 3/4%,
4/1/07 Ba1 400,000 409,072
992,813
TOTAL UTILITIES 2,431,276
TOTAL NONCONVERTIBLE BONDS 20,254,975
TOTAL CORPORATE BONDS
(Cost $20,329,264) 20,542,690
U.S. GOVERNMENT AND GOVERNMENT AGENCY
OBLIGATIONS - 10.7%
U.S. TREASURY OBLIGATIONS - 9.6%
5 7/8%, 8/15/98 Aaa 1,000,000 999,690
6 5/8%, 6/30/01 Aaa 6,540,000 6,601,280
7%, 7/15/06 Aaa 5,286,000 5,437,973
12%, 8/15/13 (callable) Aaa 1,100,000 1,548,426
8 1/8%, 8/15/19 Aaa 825,000 941,144
7 1/4%, 2/15/23 Aaa 490,000 504,700
TOTAL U.S. TREASURY OBLIGATIONS 16,033,213
U.S. GOVERNMENT AGENCY OBLIGATIONS - 1.1%
Federal Home Loan Bank:
7.56%, 9/1/04 Aaa 310,000 324,725
7.59%, 3/10/05 Aaa 190,000 199,738
Federal National Mortgage
Association 6.72%, 8/1/05 Aaa 720,000 716,400
Government Trust Certificates
(assets of Trust guaranteed by
U.S. Government through Defense
Security Assistance Agency)
Class 2-E, 9.40%, 5/15/02 Aaa 127,981 135,802
State of Israel (guaranteed by
U.S. Government through Agency
for International Development):
8%, 11/15/01 Aaa 220,000 231,917
5.89%, 8/15/05 Aaa 310,000 293,730
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS 1,902,312
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $17,972,172) 17,935,525
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 2.4%
Federal Home Loan Mortgage
Corporation:
7%, 6/1/99 to 7/1/01 Aaa 466,372 469,127
7 1/2%, 7/1/27 (g) Aaa 970,000 974,547
Federal National Mortgage
Association:
5 1/2%, 2/1/03 to 2/1/26 Aaa 1,170,119 1,115,067
6%, 4/1/11 Aaa 461,556 446,556
Government National Mortgage
Association 7%, 10/15/23
to 8/15/27 (g) Aaa 1,111,502 1,094,199
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $4,111,968) 4,099,496
U.S. GOVERNMENT AGENCY - 0.7%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Federal Home Loan Mortgage
Corporation planned
amortization class
Series 1645 Class ZA,
5 1/2%, 4/15/05 Aaa $ 622,356 $ 606,797
Federal National Mortgage
Association planned
amortization class
Series 1993-129 Class D,
6.10%, 6/25/05 Aaa 500,000 496,250
TOTAL U.S. GOVERNMENT AGENCY
<PAGE>
(Cost $1,097,458) 1,103,047
COMMERCIAL MORTGAGE SECURITIES - 0.3%
BKB Commercial Mortgage Trust
Series 1997-C1 Class A-1,
6 7/8%, 2/25/43 (c) Aaa 307,292 308,445
Wells Fargo Capital Markets
Apartment Financing Trust
6.56%, 12/29/05 (c) Aaa 250,000 246,590
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $548,447) 555,035
FOREIGN GOVERNMENT OBLIGATIONS (F) - 0.4%
Manitoba Province yankee
6 3/8%, 10/15/99 A1 470,000 469,962
Quebec Province yankee
6.86%, 4/15/26 (e) A2 250,000 246,125
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $709,904) 716,087
CASH EQUIVALENTS - 7.5%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 12,490,057 12,488,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $146,599,508) $ 167,465,455
LEGEND
1. Non-income producing
2. Debt obligation initially issued in zero coupon form which converts to
coupon form at a specified rate and date.
3. Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $4,713,489 or 2.8% of net
assets.
4. Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
5. Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified rate and date.
6. For foreign government obligations not individually rated by S&P or
Moody's, the ratings listed are assigned to securities by FMR, the fund's
investment adviser, based principally on S&P and Moody's ratings of the
sovereign credit of the issuing government.
7. Security purchased on a delayed delivery or when-issued basis (see Note
2 of Notes to Financial Statements).
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $89,201,982 and $47,453,749, respectively, of which U.S.
government and government agency obligations aggregated $28,333,982 and $
22,737,773, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of FMR. The commissions paid to these affiliated
firms were $9,631 for the period.
The composition of long-term debt holdings as a percentage of total value
of investment in securities, is as follows:
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 19.4% AAA, AA, A 18.5%
Baa 2.8% BBB 4.4%
Ba 1.3% BB 0.4%
B 2.4% B 2.5%
Caa 0.3% CCC 0.2%
Ca, C 0.0% CC, C 0.0%
D 0.0%
For some foreign government obligations, FMR has assigned the ratings of
the sovereign credit of the issuing government. The percentage not rated by
both S&P and Moody's amounted to 0.3%. FMR has determined that unrated debt
securities that are lower quality account for 0.3% of the total value of
investment in securities.
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income
tax purposes was $146,608,960. Net unrealized appreciation aggregated
$20,856,495, of which $21,494,643 related to appreciated investment
securities and $638,148 related to depreciated investment securities.
At December 31, 1996, the fund had a capital loss carryforward of
approximately $372,000 which will expire on December 31, 2004.
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $ 167,465,455
securities, at
value (including
repurchase
agreements of
$12,488,000)
(cost $146,599,508)
- - - See
accompanying
schedule
<PAGE>
Cash 1,115,612
Receivable for 670,618
investments sold
Receivable for fund 297,225
shares sold
Dividends receivable 160,685
Interest receivable 652,510
TOTAL ASSETS 170,362,105
LIABILITIES
Payable for $ 1,451,436
investments
purchased
Regular delivery
Delayed delivery 2,094,009
Accrued management 60,531
fee
Other payables and 29,741
accrued expenses
TOTAL LIABILITIES 3,635,717
NET ASSETS $166,726,388
Net Assets consist of:
Paid in capital $141,786,400
Undistributed net 2,231,662
investment income
Accumulated 1,842,367
undistributed net
realized gain (loss)
on investments and
foreign currency
transactions
Net unrealized 20,865,959
appreciation
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $166,726,388
12,251,612 shares
outstanding
NET ASSET VALUE, $ 13.61
offering price
and redemption
price per
share
($166,726,388 (divided by)
12,251,612 shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 854,788
Dividends
Interest 1,790,207
TOTAL INCOME 2,644,995
EXPENSES
Management fee $ 294,816
Transfer agent fees 48,191
Accounting fees and 39,379
expenses
Non-interested 272
trustees'
compensation
Custodian fees and 8,008
expenses
<PAGE>
Registration fees 21
Audit 10,725
Legal 1,119
Miscellaneous 145
Total expenses 402,676
before reductions
Expense reductions (5,162 397,514
)
NET INVESTMENT 2,247,481
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
Investment 2,241,895
securities
Foreign currency (19 2,241,876
transactions )
Change in net
unrealized
appreciation
(depreciation) on:
Investment 13,357,453
securities
Assets and (322 13,357,131
liabilities in )
foreign currencies
NET GAIN (LOSS) 15,599,007
NET INCREASE $ 17,846,488
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 5,087
Expense reductions
Directed brokerage
arrangements
Custodian interest 75
credits
$ 5,162
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) SIX MONTHS YEAR ENDED
IN NET ASSETS ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
Operations $ 2,247,481 $ 2,701,775
Net investment
income
Net realized gain 2,241,876 (391,485)
(loss)
Change in net 13,357,131 6,443,286
unrealized
appreciation
(depreciation)
NET INCREASE 17,846,488 8,753,576
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Distributions to (2,678,656) (26,804)
shareholders
From net
investment income
From net realized - (192,158)
gain
TOTAL DISTRIBUTIONS (2,678,656) (218,962)
Share transactions 50,743,701 51,928,218
Net proceeds from
sales of shares
<PAGE>
Reinvestment of 2,678,656 218,962
distributions
Cost of shares (4,973,433) (727,396)
redeemed
NET INCREASE 48,448,924 51,419,784
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 63,616,756 59,954,398
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 103,109,632 43,155,234
End of period $ 166,726,388 $ 103,109,632
(including
undistributed net
investment
income of
$2,231,662 and
$2,677,878,
respectively)
OTHER INFORMATION
Shares
Sold 3,992,425 4,616,047
Issued in 215,153 19,533
reinvestment of
distributions
Redeemed (390,109) (64,658)
Net increase 3,817,469 4,570,922
(decrease)
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997
SELECTED PER-SHARE (UNAUDITED) 1996 1995
DATA
Net asset value, $ 12.23 $ 11.17 $ 10.00
beginning of period
Income from
Investment
Operations
Net investment .22 D .33 .14
income
Net realized and 1.47 .78 1.25
unrealized gain
(loss)
Total from 1.69 1.11 1.39
investment
operations
Less Distributions
From net (.31) (.01) H (.14)
investment income
From net realized - (.04) H (.08)
gain
Total distributions (.31) (.05) (.22)
Net asset value, end $ 13.61 $ 12.23 $ 11.17
of period
TOTAL RETURN B, C 14.05% 9.98% 13.92%
RATIOS AND
SUPPLEMENTAL
<PAGE>
DATA
Net assets, end of $166,726 $103,110 $43,155
period (000
omitted)
Ratio of expenses to .62% A .72% 1.42%
average net assets E
Ratio of expenses to .61% A, F .71% F 1.42%
average net assets
after expense
reductions
Ratio of net 3.47% A 3.63% 3.56%
investment income
to average net
assets
Portfolio turnover 81% A 163% 248%
rate
Average commission $ .0417 $ .0165
rate G
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT
ANNUALIZED AND DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE
TOTAL RETURNS SHOWN. C THE TOTAL
RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED
DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS). D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED
BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. E FMR AGREED TO
REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE PERIOD. WITHOUT THIS
REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE BEEN HIGHER. F FMR
OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO
EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES (SEE NOTE 5 OF
NOTES TO FINANCIAL STATEMENTS). G FOR FISCAL YEARS BEGINNING ON OR AFTER
SEPTEMBER 1, 1995, A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION
RATE PER SHARE FOR SECURITY TRADES
ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO
PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS
MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY
DIFFER. H THE AMOUNTS SHOWN REFLECT CERTAIN RECLASSIFICATIONS RELATED TO
BOOK TO TAX DIFFERENCES (SEE NOTE 1 OF NOTES TO FINANCIAL STATEMENTS).
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
JUNE 30,1997 YEAR FUND
ASSET MANAGER: GROWTH 25.51% 23.29%
S&P 500(registered trademark) 34.70% 33.11%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare the fund's return to those of the Standard & Poor's 500
Index - a widely recognized, unmanaged index of common stocks. This
benchmark reflects the reinvestment of dividends and capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown. The life of fund figures are from commencement of
operations, January 3, 1995.
If Fidelity had not reimbursed certain fund expenses, the life of fund
total return figure would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
<PAGE>
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURN WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
1995/01/31 10000.00 10000.00
10000.00
1995/02/28 10149.70 10389.70
10319.41
1995/03/31 10289.42 10696.30
10539.38
1995/04/30 10558.88 11011.31
10785.08
1995/05/31 10708.58 11451.43
11198.64
1995/06/30 11137.72 11717.44
11396.90
1995/07/31 11546.91 12106.00
11632.64
1995/08/31 12065.87 12136.38
11694.83
1995/09/30 12245.51 12648.54
12051.93
1995/10/31 11776.45 12603.38
12082.78
1995/11/30 11986.03 13156.67
12486.40
1995/12/31 12277.71 13410.07
12699.16
1996/01/31 12569.78 13866.55
13007.00
1996/02/29 12613.39 13995.09
13008.05
1996/03/31 12840.37 14129.86
13058.25
1996/04/30 13143.01 14338.14
13160.97
1996/05/31 13348.36 14707.92
13378.10
1996/06/30 13402.41 14763.95
13465.02
1996/07/31 13067.35 14111.68
13090.93
1996/08/31 13164.62 14409.30
13265.02
1996/09/30 13705.04 15220.25
13818.40
1996/10/31 14104.95 15640.03
14160.36
1996/11/30 15023.67 16822.26
14932.58
1996/12/31 14737.79 16489.01
14697.36
1997/01/31 15367.80 17519.24
15354.72
1997/02/28 15514.22 17656.59
15451.58
1997/03/31 14781.88 16931.08
14967.66
1997/04/30 15401.55 17941.87
15652.51
1997/05/31 16336.68 19034.17
16360.18
1997/06/30 16821.15 19886.90
16925.34
Let's say hypothetically that $10,000 was invested in Asset Manager: Growth
Portfolio on January 31, 1995, shortly after the fund began. As the chart
shows, by June 30, 1997, the value of the investment would have grown to
$16,821 - a 68.21% increase. With reinvested dividends and capital gains,
if any, a $10,000 investment in the S&P 500 would have grown to $19,887
over the same period - a 98.87% increase.
You can also look at how the Fidelity Aggressive Asset Allocation Composite
Index, a hypothetical combination of unmanaged indices, did over the same
period. The Aggressive Asset Allocation Composite index combines the
cumulative total returns of three unmanaged indexes - the S&P 500 (98.87%),
Lehman Brothers Aggregate Bond Index (24.12%), and the Salomon Brothers
3-month T-Bill Total Rate of Return Index (13.63%) - according to the
fund's neutral mix*, assuming monthly rebalancing. With reinvested
dividends and capital gains, if any, a $10,000 investment in the index
would have grown to $16,925 - a 69.25% increase.
* 70% STOCKS, 25% BONDS AND 5% SHORT-TERM INSTRUMENTS EFFECTIVE JANUARY 1,
1997; 65%, 30% AND 5%, RESPECTIVELY, PRIOR TO DECEMBER 31, 1996.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Philip Morris Companies, Inc. 6.4
Federal National Mortgage Association 4.7
Federal Home Loan Mortgage Corporation 2.7
<PAGE>
International Business Machines Corp. 2.3
General Motors Corp. 2.3
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
(STOCKS ONLY) % OF FUND'S
INVESTMENTS
Finance 15.1
Technology 12.9
Nondurables 7.5
Retail & Wholesale 7.0
Utilities 6.8
ASSET ALLOCATION AS OF JUNE 30, 1997*
Row: 1, Col: 1, Value: 4.2
Row: 1, Col: 2, Value: 16.5
Row: 1, Col: 3, Value: 79.3
Stock class 79.3%
Bond class 16.5%
Short-term class 4.2%
FOREIGN INVESTMENTS 10.4%
*
ASSET ALLOCATION IN THE PIE CHART REFLECTS THE CATEGORIZATION OF ASSETS AS
DEFINED
IN THE FUND'S PROSPECTUS. FINANCIAL STATEMENT CATEGORIZATIONS CONFORM TO
ACCOUNTING STANDARDS AND WILL DIFFER FROM THE PIE CHART.
% OF FUND'S INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with Richard Habermann (top left), Portfolio Manager of Asset
Manager: Growth Portfolio, George Vanderheiden (top right), sub-manager for
stocks, Charles Morrison (bottom left), sub-manager for bonds, and John
Todd (bottom right), sub-manager for short-term/money market instruments.
Charles Morrison became sub-manager for bonds on February 3, 1997, and John
Todd became sub-manager for short-term/money market instruments on December
1, 1996.
Q. HOW DID THE FUND PERFORM, DICK?
D.H. The fund's performance historically has been compared to that of the
Standard & Poor's 500 Index. However, there are some significant
differences between the make-up of the fund and the composition of the
index. While the S&P 500 is made up exclusively of stocks, the fund invests
in stocks, bonds and short-term/money market instruments. The fund
allocates assets among these three categories in order to help control both
volatility and risk relative to funds or indexes that invest only in
stocks. That being said, the S&P 500 posted a strong 20.61% return during
the six months that ended June 30, 1997, and 34.70% over the 12 months
ended June 30, 1997. Since the fund is diversified into other asset classes
that didn't perform as well as stocks, the fund's performance lagged that
of the S&P 500. However, the fund did benefit from the performance of its
equity investments and its small stake in high-yield bonds, while the bond
and short-term money market portions of the fund performed in line with
their respective markets.
Q. WHAT WAS THE FUND'S ASSET MIX AT THE END OF THE PERIOD?
D.H. At the end of June 1997, the fund's equity position stood at about
79%, 9% above the new neutral mix the fund instituted on January 1, 1997.
That neutral mix comprises 70% stocks, 25% bonds and 5% short-term/money
market instruments. In order to add to the equity portion, we reduced both
the fund's bond and short-term/money market positions. At the end of the
period, the fund held about 17% in bonds and approximately 4% in
short-term/money market instruments.
Q. WHY DID YOU INCREASE THE FUND'S STOCK INVESTMENTS?
D.H. Because the investing environment was very favorable not only for all
financial assets, but especially for stocks. We've had limited inflation
and corporate earnings continued to be strong. Another key factor was the
strength of the dollar, although that can act as a double-edged sword. On
the negative side, a rising dollar acts as a drag on the economy by slowing
exports and suppressing corporate earnings. This especially affects large,
multinational corporations. These companies, however, generally were able
to post earnings surprises through cost cutting and sustain their stock
prices by buying back shares. The positive side of the strong dollar is
that it helps to control inflation by keeping import prices down. In
addition, investors, especially those abroad, tend to feel more comfortable
investing in U.S. markets when the dollar is strong, helping to sustain
prices for both stocks and bonds.
Q. WHAT WAS THE ENVIRONMENT LIKE FOR THE BOND MARKET?
D.H. During the latter stages of the first quarter and the beginning of the
second quarter, the bond market struggled because of concerns that
continued economic growth might lead to inflation. Employment had reached a
level where historically there should have been increased upward pressure
on wages. The Federal Reserve Board tried to anticipate and head off
incipient inflation by raising the fed funds rate - the rate banks charge
each other for overnight loans - by 0.25% to 5.50% at the end of March.
This move was well-telegraphed, so the rate increase was already priced
into the market when the Fed acted. The Fed chose to keep rates steady in
May, a stance that surprised many in the market who were anticipating
<PAGE>
another rate increase. The Fed stood pat mainly because economic growth
slowed and there were few if any signs of inflationary pressure. From that
point on, the bond market responded favorably.
Q. TURNING TO YOU, GEORGE, HOW DID YOU MANAGE THE STOCK PORTION OF THE FUND
IN A VIRTUALLY NO-INFLATION ENVIRONMENT?
G.V. I concentrated on four areas during the period. First, I looked at
innovators and unit growers because these companies use unit growth to
increase earnings and don't have to rely on price increases. Technology,
health care and telecommunications fall within these areas. Second were the
interest sensitive sectors that benefited from low interest rates,
including mortgage companies, insurance, finance and construction. Third, I
looked at global growers - companies with proprietary advantages, such as
low costs, unique distribution channels or strong brands - which are
seizing market share on a global basis. Fourth were the acquisitive
companies in consolidating industries. Certain industries have stopped
growing, but certain companies have been able to show earnings growth by
acquiring market share and paring costs.
Q. PHILIP MORRIS IS THE FUND'S LARGEST STOCK HOLDING. WHAT IS YOUR POSITION
ON TOBACCO STOCKS?
G.V. I own tobacco stocks because they operate a profitable business that
historically has offered above-average returns to shareholders over the
long term. In the past, the stocks have provided better-than-average
earnings growth, lower-than-average price-to-earnings ratios and high
yields. Nothing this year has changed that. We have determined that the
tobacco stocks are selling at a "litigation discount" in excess of any
reasonable estimate of potential liabilities. The cost of the proposed
settlement is high, but should be passed completely along to consumers.
Q. STOCK VALUATIONS WERE QUITE HIGH. WHY WAS THAT, AND WILL THEY STAY
INFLATED?
G.V. We had a nearly perfect investing environment during the period -
experiencing growth without inflation. Accelerating inflation is usually
the killer of all bond and equity bull markets, but inflation just kept
receding as the economic expansion continued. During the worst bear market
I ever encountered - the 1973-1974 bear that took prices down about 50% -
everything that could go wrong did go wrong. Today is an environment where
everything that could go right has gone right - from a declining budget
deficit, to falling inflation, to surging earnings, to big flows into
mutual funds and rising consumer confidence. If any of these factors change
for the worse, valuations should deflate. My biggest concern going forward
is that the low level of inflation and pricing power in a strong economy
will deteriorate to deflation in a slowing or contracting economy, thereby
leading to sizable earnings declines.
Q. CHARLIE, WHAT CHANGES HAVE YOU MADE SINCE TAKING OVER THE FUND'S BOND
INVESTMENTS?
C.M. For most of the period, I focused on positioning the bond portion of
the portfolio more aggressively by increasing its weighting in securities
that offer a yield advantage over Treasuries, such as corporate securities,
while decreasing the percentage held in Treasuries. Part of that move was
accomplished with Dick's reallocation of assets away from bonds. In
reducing the fund's stake in bonds, I sold Treasuries. At the same time, I
tended to focus any new purchases on investments that offered a yield
advantage over Treasuries. Specific areas of focus included BBB-rated
corporate bonds and commercial mortgage-backed securities.
Q. WHAT KINDS OF BONDS DID YOU FOCUS ON IN THE CORPORATE MARKET?
C.M. One area of interest over the period was in the bank market. I
continued to add long-term bank paper in the form of capital securities.
Last fall, the Federal Reserve Board ruled that domestic banking companies
could issue capital securities, which offered the banks significant tax
advantages, as well as the opportunity to strengthen their balance sheets.
Numerous banks took advantage of this opportunity and inundated the market
with these securities. The large amount of supply in a relatively
concentrated period of time allowed us to purchase many capital securities
at cheap levels. This market has performed well following the initial
supply.
Q. JOHN, WHAT HAS THE BACKDROP FOR THE SHORT-TERM AND MONEY MARKETS BEEN
LIKE SINCE YOU CAME ON BOARD?
J.T. As Dick pointed out, the Fed raised the fed funds rate at its March
meeting, but then chose not to continue to raise rates at its late May
meeting. For now, the Fed appears to be in a holding pattern. Some believe
that the Fed has abandoned the notion of being pre-emptive - seeking to
head off inflation before it actually appears - and instead will respond
only to actual evidence of inflation rather than trying to respond to
underlying inflationary pressures.
Q. WHAT SORT OF STRATEGY DID YOU PURSUE?
J.T. Because Fed Chairman Alan Greenspan warned that the Fed might raise
rates, I reduced the short-term/money market portion's average maturity to
about 50 days in the first quarter. Once the market adjusted to the new,
higher rate level and expectations of further Fed interest rate increases
were built into the yield curve, the maturity was extended. That's because
many longer-maturity instruments were attractively valued because their
prices and yields reflected a more aggressive Fed interest rate posture
than I felt was likely.
Q. TURNING BACK TO YOU, DICK, WHAT'S YOUR OUTLOOK?
D.H. I believe that a lack of pricing power, among other things, makes it
clear that corporations are not operating with a very strong wind at their
backs. At the same time, U.S. companies - helped by advances in technology
that help cut costs - are operating very efficiently, leading to many
positive earnings surprises. I don't see much that would change that over
the near future. Still, the economic pattern over the past year has been
like a seesaw. That is, the economy has grown in spurts, picking up for one
quarter then tailing off into weakness during the next. If the economy
shows sustained strength, interest rates could rise and put some pressure
on the markets. On the other hand, one could argue that rates might fall
because inflation is at such a low level. As always, we'll have to wait and
<PAGE>
see what the future holds.
FUND FACTS
GOAL: maximum total return over the long term
by allocating assets among stocks, bonds and
short-term instruments anywhere in the world
START DATE: September 6, 1989
SIZE: as of June 30, 1997, more than $4 billion
MANAGER: Richard Habermann, since March
1996; joined Fidelity in 1968
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 78.2%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.6%
AEROSPACE & DEFENSE - 1.1%
Boeing Co. 80,600 $ 4,276,838
Gulfstream Aerospace Corp. (a) 5,800 171,100
4,447,938
DEFENSE ELECTRONICS - 0.4%
Raytheon Co. 34,000 1,734,000
SHIP BUILDING & REPAIR - 0.1%
Avondale Industries, Inc. (a) 2,800 58,800
Newport News Shipbuilding, Inc. 8,200 159,388
218,188
TOTAL AEROSPACE & DEFENSE 6,400,126
BASIC INDUSTRIES - 4.4%
CHEMICALS & PLASTICS - 2.8%
Air Products & Chemicals, Inc. 9,800 796,250
du Pont (E.I.) de Nemours & Co. 108,100 6,796,788
Raychem Corp. 31,900 2,372,563
Union Carbide Corp. 30,000 1,411,875
11,377,476
PACKAGING & CONTAINERS - 0.8%
Owens-Illinois, Inc. (a) 95,100 2,948,100
PAPER & FOREST PRODUCTS - 0.8%
Boise Cascade Corp. 19,400 685,063
Champion International Corp. 29,000 1,602,250
International Paper Co. 11,500 558,469
Willamette Industries, Inc. 3,900 273,000
3,118,782
TOTAL BASIC INDUSTRIES 17,444,358
CONSTRUCTION & REAL ESTATE - 0.9%
CONSTRUCTION - 0.7%
Centex Corp. 11,800 479,375
D.R. Horton, Inc. 32,900 341,338
Fleetwood Enterprises, Inc. 48,733 1,452,853
Kaufman & Broad Home Corp. 24,200 425,013
U.S. Home Corp. (a) 2,600 69,063
2,767,642
ENGINEERING - 0.2%
Fluor Corp. 18,900 1,043,044
TOTAL CONSTRUCTION & REAL ESTATE 3,810,686
DURABLES - 4.3%
AUTOS, TIRES, & ACCESSORIES - 3.6%
Circuit City Stores, Inc. -
CarMax Group 2,500 35,781
Cummins Engine Co., Inc. 19,500 1,375,969
Dana Corp. 7,500 285,000
Discount Auto Parts, Inc. (a) 12,500 243,750
Federal-Mogul Corp. 8,300 290,500
General Motors Corp. 163,100 9,081,631
Gentex Corp. (a) 7,000 138,250
Goodyear Tire & Rubber Co. 8,100 512,831
Honda Motor Co. Ltd. 13,000 391,208
Magna International, Inc. Class A 21,200 1,274,472
Superior Industries International, Inc. 32,900 871,850
14,501,242
CONSUMER ELECTRONICS - 0.2%
Newell Co. 15,900 630,038
SHARES VALUE (NOTE 1)
TEXTILES & APPAREL - 0.5%
Burlington Industries, Inc. (a) 40,400 $ 484,800
Liz Claiborne, Inc. 10,900 508,213
NIKE, Inc. Class B 15,000 875,625
Reebok International Ltd. 2,400 112,200
1,980,838
TOTAL DURABLES 17,112,118
ENERGY - 6.5%
ENERGY SERVICES - 0.3%
McDermott International, Inc. 37,600 1,097,450
OIL & GAS - 6.2%
Amerada Hess Corp. 15,700 872,331
Anadarko Petroleum Corp. 1,700 102,000
Atlantic Richfield Co. 28,700 2,023,350
British Petroleum PLC ADR 52,146 3,904,432
<PAGE>
Burlington Resources, Inc. 40,100 1,769,413
Canada Occidental Petroleum Ltd. 700 15,717
Chevron Corp. 2,300 170,056
Elf Aquitaine SA sponsored ADR 8,100 440,944
Enron Oil & Gas Co. 5,100 92,438
Fortune Petroleum Corp. warrants
9/28/98 (a) 100,000 75,000
Kerr-McGee Corp. 7,600 481,650
Louisiana Land & Exploration Co. 31,500 1,799,438
Mobil Corp. 4,600 321,425
Noble Affiliates, Inc. 3,000 116,063
Occidental Petroleum Corp. 67,800 1,699,238
Royal Dutch Petroleum Co. Ord. 3,200 166,346
Royal Dutch Petroleum Co. 129,600 7,047,000
Santa Fe Energy Resources, Inc. (a) 23,400 343,688
Sun Co., Inc. 9,500 294,500
Tosco Corp. 68,100 2,038,744
Total SA:
Class B 2,420 244,461
sponsored ADR 15,065 762,666
Union Pacific Resources Group, Inc. 5,300 131,838
24,912,738
TOTAL ENERGY 26,010,188
FINANCE - 14.9%
BANKS - 0.4%
Canadian Imperial Bank of Commerce 200 5,041
Credit Suisse Group (Reg.) 8,400 1,077,660
NationsBank Corp. 11,500 741,750
1,824,451
CLOSED END INVESTMENT COMPANY - 0.1%
First NIS Regional Fund (a) 25,000 462,500
CREDIT & OTHER FINANCE - 0.9%
Fleet Financial Group, Inc. 55,200 3,491,400
FEDERAL SPONSORED CREDIT - 7.4%
Federal Home Loan Mortgage
Corporation 319,400 10,979,375
Federal National Mortgage Association 428,200 18,680,225
29,659,600
INSURANCE - 5.6%
AFLAC, Inc. 12,700 600,075
Aegon NV (Reg.) 12,898 903,666
Allmerica Financial Corp. 14,100 562,238
Allstate Corp. 83,100 6,066,300
American International Group, Inc. 33,900 5,063,813
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
CIGNA Corp. 5,300 $ 940,750
Equitable of Iowa Companies 2,000 112,000
General Re Corp. 8,700 1,583,400
Loews Corp. 5,700 570,713
MGIC Investment Corp. 40,400 1,936,675
PMI Group, Inc. 14,700 916,913
Provident Companies, Inc. 1,200 64,200
Providian Financial Corp. (a) 31,200 1,002,300
Reliastar Financial Corp. 5,700 416,813
Torchmark Corp. 18,700 1,332,375
Travelers Property Casualty Corp.
Class A 4,500 179,438
UNUM Corp. 3,300 138,600
22,390,269
SAVINGS & LOANS - 0.3%
Golden West Financial Corp. 17,300 1,211,000
SECURITIES INDUSTRY - 0.2%
United Asset Management Corp. 28,300 801,244
TOTAL FINANCE 59,840,464
HEALTH - 6.3%
DRUGS & PHARMACEUTICALS - 2.3%
American Home Products Corp. 1,400 107,100
Amgen, Inc. 27,300 1,586,813
Astra AB Class A Free shares 136,700 2,549,515
Merck & Co., Inc. 6,800 703,800
Novartis AG (Reg.) 1,296 2,069,698
Schering-Plough Corp. 44,600 2,135,225
9,152,151
MEDICAL EQUIPMENT & SUPPLIES - 0.8%
Allegiance Corp. 2,660 72,485
Bard (C.R.), Inc. 13,000 472,063
Baxter International, Inc. 5,400 282,150
Biomet, Inc. 30,900 575,513
Boston Scientific Corp. (a) 1,600 98,300
Johnson & Johnson 3,500 225,313
St. Jude Medical, Inc. (a) 35,800 1,396,200
3,122,024
MEDICAL FACILITIES MANAGEMENT - 3.2%
Columbia/HCA Healthcare Corp. 222,750 8,756,859
Health Management Associates, Inc.
Class A (a) 1,500 42,750
Humana, Inc. (a) 59,700 1,380,563
Tenet Healthcare Corp. (a) 41,800 1,235,713
United HealthCare Corp. 26,100 1,357,200
12,773,085
TOTAL HEALTH 25,047,260
<PAGE>
HOLDING COMPANIES - 0.2%
U.S. Industries, Inc. (a) 20,900 744,563
INDUSTRIAL MACHINERY & EQUIPMENT - 1.6%
ELECTRICAL EQUIPMENT - 0.9%
Emerson Electric Co. 7,800 429,488
General Electric Co. 35,300 2,307,738
Scientific-Atlanta, Inc. 17,800 389,375
Sensormatic Electronics Corp. 6,200 79,825
Westinghouse Electric Corp. 26,500 612,813
3,819,239
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - 0.5%
Caterpillar, Inc. 15,600 $ 1,675,050
JLK Direct Distribution, Inc. Class A 100 2,563
Ultratech Stepper, Inc. (a) 19,000 434,625
2,112,238
POLLUTION CONTROL - 0.2%
Browning-Ferris Industries, Inc. 18,800 625,100
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 6,556,577
MEDIA & LEISURE - 2.4%
BROADCASTING - 0.1%
Cox Communications, Inc. Class A (a) 4,600 110,400
HSN, Inc. (a) 3,350 104,688
TCI Group Class A (a) 15,600 232,050
447,138
ENTERTAINMENT - 0.0%
Cedar Fair LP (depositary unit) 1,300 56,875
Royal Caribbean Cruises Ltd. 3,100 108,306
165,181
LEISURE DURABLES & TOYS - 0.6%
Nintendo Co. Ltd. Ord. 27,300 2,286,013
LODGING & GAMING - 0.9%
Circus Circus Enterprises, Inc. (a) 42,000 1,034,250
HFS, Inc. (a) 7,200 417,600
Harrah's Entertainment, Inc. (a) 19,500 355,875
Mirage Resorts, Inc. (a) 42,200 1,065,550
Sun International Hotels Ltd. Ord. (a) 19,400 716,588
3,589,863
PUBLISHING - 0.1%
Cognizant Corp. 11,500 465,750
RESTAURANTS - 0.7%
Brinker International, Inc. (a) 14,100 200,925
Lone Star Steakhouse Saloon (a) 10,300 267,800
McDonald's Corp. 43,100 2,082,269
Papa John's International, Inc. (a) 3,800 139,650
2,690,644
TOTAL MEDIA & LEISURE 9,644,589
NONDURABLES - 7.5%
HOUSEHOLD PRODUCTS - 0.1%
Premark International, Inc. 4,800 128,400
TOBACCO - 7.4%
Philip Morris Companies, Inc. 576,300 25,573,313
RJR Nabisco Holdings Corp. 121,820 4,020,060
UST, Inc. 5,400 149,850
29,743,223
TOTAL NONDURABLES 29,871,623
PRECIOUS METALS - 0.1%
Barrick Gold Corp. 4,600 100,120
Newmont Mining Corp. 3,886 151,554
251,674
RETAIL & WHOLESALE - 7.0%
APPAREL STORES - 0.3%
Gap, Inc. 10,600 412,075
TJX Companies, Inc. 35,200 928,400
1,340,475
DRUG STORES - 0.0%
CVS Corp. 3,900 199,875
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
GENERAL MERCHANDISE STORES - 2.2%
Federated Department Stores, Inc. (a) 30,300 $ 1,052,925
Proffitts, Inc. (a) 1,100 48,263
Wal-Mart Stores, Inc. 226,300 7,651,769
8,752,957
GROCERY STORES - 0.3%
Safeway, Inc. (a) 24,500 1,130,063
RETAIL & WHOLESALE, MISCELLANEOUS - 4.2%
Circuit City Stores, Inc. - Circuit
City Group 77,500 2,756,094
Corporate Express, Inc. 20,400 294,525
Home Depot, Inc. (The) 96,100 6,624,894
Lowe's Companies, Inc. 80,400 2,984,850
Officemax, Inc. (a) 56,000 808,500
Office Depot, Inc. (a) 8,700 169,106
Rex Stores Corp. (a) 6,800 68,850
Staples, Inc. (a) 23,400 544,050
Toys "R" Us, Inc. (a) 46,900 1,641,500
U.S. Office Products Co. (a) 15,900 485,944
Viking Office Products, Inc. (a) 21,200 402,800
16,781,113
TOTAL RETAIL & WHOLESALE 28,204,483
SERVICES - 0.0%
<PAGE>
ADVERTISING - 0.0%
Interpublic Group of Companies, Inc. 2,500 153,281
LEASING & RENTAL - 0.0%
Hanover Compressor Co. 300 5,850
PRINTING - 0.0%
Donnelley (R.R.) & Sons Co. 600 22,058
SERVICES - 0.0%
PEAPOD, Inc. 1,100 12,375
TOTAL SERVICES 193,564
TECHNOLOGY - 12.9%
COMMUNICATIONS EQUIPMENT - 0.8%
Alcatel Alsthom Compagnie Generale
d'Electricite SA sponsored ADR 2,100 53,025
Alcatel Alsthom Compagnie Generale
d'Electricite SA 17,100 2,140,335
Andrew Corp. (a) 6,300 177,188
Cisco Systems, Inc. (a) 8,500 570,563
Nokia Corp. AB sponsored ADR 3,700 272,875
3,213,986
COMPUTER SERVICES & SOFTWARE - 2.4%
American Management Systems, Inc. (a) 2,800 74,900
Automatic Data Processing, Inc. 25,700 1,207,900
CUC International, Inc. (a) 18,200 469,788
Ceridian Corp. (a) 16,500 697,125
CompUSA, Inc. (a) 10,400 223,600
Electronic Data Systems Corp. 44,100 1,808,100
First Data Corp. 33,500 1,471,906
Microsoft Corp. (a) 12,000 1,516,500
Netscape Communications Corp. (a) 2,900 92,981
Oracle Systems Corp. (a) 20,900 1,052,838
Paychex, Inc. 16,350 621,300
Policy Management Systems Corp. (a) 10,000 470,000
9,706,938
SHARES VALUE (NOTE 1)
COMPUTERS & OFFICE EQUIPMENT - 4.6%
Bay Networks, Inc. (a) 25,300 $ 672,031
Compaq Computer Corp. (a) 40,300 3,999,775
Hewlett-Packard Co. 17,600 985,600
Ingram Micro, Inc. Class A (a) 3,500 84,438
International Business Machines Corp. 103,500 9,334,406
SCI Systems, Inc. (a) 42,200 2,690,250
Tech Data Corp. (a) 21,200 666,475
18,432,975
ELECTRONIC INSTRUMENTS - 1.3%
Applied Materials, Inc. (a) 14,500 1,026,781
Cognex Corp. (a) 8,900 235,850
KLA Instruments Corp. (a) 3,200 156,000
Lam Research Corp. (a) 20,400 756,075
Novellus Systems, Inc. (a) 12,200 1,055,300
Teradyne, Inc. (a) 16,500 647,625
Thermo Electron Corp. (a) 18,600 632,400
Varian Associates, Inc. 10,600 575,050
5,085,081
ELECTRONICS - 3.8%
AMP, Inc. 59,000 2,463,250
Atmel Corp. (a) 3,900 109,200
Intel Corp. 28,900 4,098,381
Methode Electronics, Inc. Class A 10,200 202,725
Microchip Technology, Inc. (a) 3,350 99,663
Micron Technology, Inc. 67,900 2,711,756
Molex, Inc. 10,875 379,266
Motorola, Inc. 2,300 174,800
Solectron Corp. (a) 49,100 3,437,000
Storage Technology Corp. (a) 8,600 382,700
Texas Instruments, Inc. 13,800 1,160,063
Thomas & Betts Corp. 700 36,794
15,255,598
TOTAL TECHNOLOGY 51,694,578
TRANSPORTATION - 0.9%
AIR TRANSPORTATION - 0.2%
Continental Airlines, Inc. Class B (a) 4,100 143,244
Delta Air Lines, Inc. 2,800 229,600
Northwest Airlines Corp. Class A (a) 6,800 247,350
620,194
RAILROADS - 0.5%
Bombardier, Inc. Class B 15,700 355,927
Burlington Northern Santa Fe Corp. 7,000 629,125
CSX Corp. 21,700 1,204,350
2,189,402
SHIPPING - 0.1%
Stolt-Nielsen SA Class B sponsored ADR 16,500 319,688
Stolt-Nielsen SA 1,700 32,088
351,776
TRUCKING & FREIGHT - 0.1%
Roadway Express, Inc. 3,300 77,138
Yellow Corp. (a) 13,800 308,775
385,913
TOTAL TRANSPORTATION 3,547,285
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - 6.7%
CELLULAR - 1.9%
AirTouch Communications, Inc. (a) 94,700 $ 2,592,413
<PAGE>
360 Degrees Communications Co. (a) 4,700 80,488
Vodafone Group PLC sponsored ADR 83,700 4,054,219
Vodafone Group PLC 172,641 842,069
7,569,189
ELECTRIC UTILITY - 0.2%
American Electric Power Co., Inc. 7,900 331,800
Entergy Corp. 23,800 651,525
983,325
GAS - 0.1%
Enron Corp. 10,300 420,369
TELEPHONE SERVICES - 4.5%
AT&T Corp. 28,300 992,269
Ameritech Corp. 25,900 1,759,581
Bell Atlantic Corp. 18,700 1,418,863
BellSouth Corp. 43,700 2,026,588
Deutsche Telekom AG 10,800 259,311
MCI Communications Corp. 88,000 3,368,750
NextLink Communications, Inc.
warrants 2/1/09 (a) 5,940 59
NYNEX Corp. 36,700 2,114,838
Qwest Communications
International, Inc. 700 19,075
SBC Communications, Inc. 35,800 2,215,125
Sprint Corp. 67,700 3,562,713
WorldCom, Inc. (a) 9,600 307,200
18,044,372
TOTAL UTILITIES 27,017,255
TOTAL COMMON STOCKS
(Cost $264,403,573) 313,391,391
NONCONVERTIBLE PREFERRED STOCKS - 1.1%
CONSTRUCTION & REAL ESTATE - 0.0%
REAL ESTATE INVESTMENT TRUSTS - 0.0%
Walden Residential Properties, Inc.
9.20% 5,800 146,450
FINANCE - 0.2%
CREDIT & OTHER FINANCE - 0.1%
American Annuity Group Capital Trust II
8 3/4% 160 159,200
SAVINGS & LOANS - 0.1%
California Federal Preferred Capital
Corp. 9 1/8% 20,560 524,280
TOTAL FINANCE 683,480
HEALTH - 0.1%
MEDICAL FACILITIES MANAGEMENT - 0.1%
Fresenius Medical Care Capital
Trust 9% 166 170,109
MEDIA & LEISURE - 0.7%
BROADCASTING - 0.6%
American Radio Systems Corp. 11 3/8%
pay-in-kind 3,025 322,163
Cablevision System Corp. 11 1/8%
depositary shares pay-in-kind 4,910 493,455
SHARES VALUE (NOTE 1)
PanAmSat Corp. 12 3/4% pay-in-kind 24 $ 29,280
SFX Broadcasting, Inc. 12 5/8% 3,143 338,658
Sinclair Capital 11 5/8% (e) 3,100 327,050
Time Warner, Inc., Series M,
10 1/4% pay-in-kind 964 1,065,220
2,575,826
PUBLISHING - 0.1%
K-III Communications Corp.:
Series B, $11.625 pay-in-kind 206 22,480
Series D, $10 3,386 341,140
363,620
TOTAL MEDIA & LEISURE 2,939,446
UTILITIES - 0.1%
TELEPHONE SERVICES - 0.1%
NextLink Communications, Inc.
14% pay-in-kind 6,150 318,263
TOTAL NONCONVERTIBLE PREFERRED STOCKS
(Cost $4,110,913) 4,257,748
NONCONVERTIBLE CORPORATE BONDS - 11.1%
MOODY'S PRINCIPAL
RATINGS (D) AMOUNT
AEROSPACE & DEFENSE - 0.3%
AEROSPACE & DEFENSE - 0.1%
BE Aerospace, Inc.:
9 3/4%, 3/1/03 Ba3 $ 400,000 417,000
9 7/8%, 2/1/06 B2 10,000 10,525
Rohr, Inc. 11 5/8%, 5/15/03 Ba3 50,000 55,625
483,150
DEFENSE ELECTRONICS - 0.0%
Tracor, Inc. 8 1/2%, 3/1/07 B1 130,000 131,300
SHIP BUILDING & REPAIR - 0.2%
Newport News Shipbuilding, Inc.:
8 5/8%, 12/1/06 Ba2 155,000 160,038
9 1/4%, 12/1/06 B1 540,000 562,950
722,988
TOTAL AEROSPACE & DEFENSE 1,337,438
BASIC INDUSTRIES - 0.8%
CHEMICALS & PLASTICS - 0.1%
Acetex Corp. yankee
9 3/4%, 10/1/03 B1 120,000 121,800
<PAGE>
Foamex LP/Foamex Capital Corp.
9 7/8%, 6/15/07 (e) B3 60,000 60,750
General Chemical Corp.
9 1/4%, 8/15/03 B2 150,000 153,375
Pioneer Americas Acquisition
Corp. 9 1/4%, 6/15/07 (e) B1 40,000 39,400
Sterling Chemicals Holdings, Inc.
11 1/4%, 4/1/07 B3 240,000 254,400
629,725
IRON & STEEL - 0.1%
Neenah Corp. 11 1/8%,
5/1/07 (e) B3 210,000 222,600
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
BASIC INDUSTRIES - CONTINUED
METALS & MINING - 0.0%
Well Aluminum Corp. 10 1/8%,
6/1/05 (e) B2 $ 20,000 $ 20,600
PACKAGING & CONTAINERS - 0.3%
BWAY Corp. 10 1/4%,
4/15/07 (e) B2 190,000 204,250
Owens Illinois, Inc.:
7.85%, 5/15/04 Ba1 150,000 152,063
9.95%, 10/15/04 Ba3 210,000 222,600
8.10%, 5/15/07 Ba1 210,000 212,888
Silgan Holdings, Inc.
9%, 6/1/09 (e) B1 260,000 261,950
1,053,751
PAPER & FOREST PRODUCTS - 0.3%
Asia Pulp & Paper Finance II
Mauritius Ltd. 12%,
3/15/04 (e) B3 110,000 112,750
Florida Coast Paper Co.
LLC/Florida Coast Paper
Finance Corp., Series B,
12 3/4%, 6/1/03 Caa 100,000 103,250
Gaylord Container Corp.
11 1/2%, 5/15/01 B3 40,000 42,050
Repap Wisconsin, Inc.:
9 1/4%, 2/1/02 B2 230,000 231,150
9 7/8%, 5/1/06 Caa 30,000 30,225
Repap New Brunswick, Inc.
yankee 10 5/8%, 4/15/05 Caa 90,000 84,825
Riverwood International Corp.
10 1/4%, 4/1/06 B3 220,000 216,700
Stone Container Corp.
10 3/4%, 10/1/02 B1 300,000 316,500
1,137,450
TOTAL BASIC INDUSTRIES 3,064,126
CONSTRUCTION & REAL ESTATE - 0.2%
BUILDING MATERIALS - 0.1%
Building Materials Corp. of
America 0%, 7/1/04 (b) B1 420,000 382,200
Falcon Building Products, Inc.
9 1/2%, 6/15/07 (e) B3 20,000 19,850
Nortek, Inc. 9 1/4%,
3/15/07 Ba3 90,000 91,800
493,850
CONSTRUCTION - 0.1%
Greystone Homes, Inc.
10 3/4%, 3/1/04 Ba3 200,000 218,500
REAL ESTATE - 0.0%
Iron Mountain, Inc. 10 1/8%,
10/1/06 B3 100,000 106,250
TOTAL CONSTRUCTION & REAL ESTATE 818,600
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
DURABLES - 0.4%
AUTOS, TIRES, & ACCESSORIES - 0.1%
Aftermarket Technology Corp.
12%, 8/1/04 B3 $ 135,000 $ 150,525
Blue Bird Body Co. 10 3/4%,
11/15/06 B2 230,000 243,800
Delco Remy International, Inc.
10 5/8%, 8/1/06 (e) B2 50,000 53,000
Tennessee Gas Pipeline Co.
7%, 3/15/27 Baa3 90,000 89,946
537,271
HOME FURNISHINGS - 0.1%
Interlake Corp. 12 1/8%,
3/1/02 B3 240,000 251,400
Knoll, Inc. 10 7/8%, 3/15/06 B1 26,000 28,763
280,163
TEXTILES & APPAREL - 0.2%
GFSI, Inc. 9 5/8%, 3/1/07 (e) B3 290,000 292,900
Levi Strauss & Co. 7%,
11/1/06 (e) Baa2 310,000 306,652
599,552
TOTAL DURABLES 1,416,986
ENERGY - 0.5%
ENERGY SERVICES - 0.1%
Falcon Drilling, Inc. 9 3/4%,
<PAGE>
1/15/01 Ba3 120,000 123,000
Parker Drilling Co. 9 3/4%,
11/15/06 B1 30,000 31,350
Pride Petroleum Services, Inc.
9 3/8%, 5/1/07 Ba3 210,000 217,350
371,700
OIL & GAS - 0.4%
Energy Corp. America
9 1/2%, 5/15/07 (e) B2 350,000 344,750
Flores & Rucks, Inc. 9 3/4%,
10/1/06 B3 220,000 229,900
Forcenergy, Inc. 8 1/2%,
2/15/07 B2 150,000 146,625
Gulf Canada Resources Ltd.
yankee 9 5/8%, 7/1/05 Ba2 130,000 139,263
Husky Oil Ltd. yankee
6 7/8%, 11/15/03 Baa3 85,000 83,798
Occidental Petroleum Corp.
9 3/4%, 6/15/01 Baa3 100,000 109,823
Ocean Energy, Inc. 8 7/8%,
7/15/07 (e) B3 240,000 240,000
Pennzoil Co. 9 5/8%,
11/15/99 Baa3 70,000 74,579
Petsec Energy, Inc. 9 1/2%,
6/15/07 (e) B3 30,000 30,000
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
ENERGY - CONTINUED
OIL & GAS - CONTINUED
Ras Laffan Liquid Natural Gas
Co. Ltd. yankee 7.628%,
9/15/06 (e) A3 $ 70,000 $ 70,897
United Refining Co. 10 3/4%,
6/15/07 (e) B2 100,000 99,000
1,568,635
TOTAL ENERGY 1,940,335
FINANCE - 2.5%
ASSET-BACKED SECURITIES - 0.5%
Airplanes Pass Through Trust
10 7/8%, 3/15/19 Ba2 1,100,000 1,271,065
CPS Auto Grantor Trust
6.55%, 12/15/02 Aaa 105,786 106,017
Green Tree Financial Corp.:
6 1/2%, 6/15/27 Aaa 100,000 100,218
6.80%, 6/15/27 Aaa 100,000 100,500
6.45%, 9/15/28 Aaa 110,000 109,691
Olympic Automobile
Receivables Trust:
6.40%, 9/15/01 Aaa 150,000 150,382
6.70%, 3/15/02 Aaa 70,000 70,306
WFS Financial Owner Trust
6.55%, 10/20/04 Aaa 140,000 139,620
2,047,799
BANKS - 0.5%
ABN Amro Bank NV 6 5/8%,
10/31/01 Aa3 250,000 248,968
Banc One Corp. 6.70%,
3/24/00 Aa3 150,000 150,699
BanPonce Corp. 6.665%,
3/5/01 A3 150,000 149,291
BanPonce Trust I 8.327%,
2/1/27 (e) Baa1 230,000 232,433
Capital One Bank 6.42%,
11/12/99 Baa3 500,000 497,375
Den Danske Bank AS
7.40%, 6/15/10 (e)(g) A1 140,000 139,896
Korea Development Bank
yankee 7 1/4%, 5/15/06 A1 180,000 178,565
Midland Bank PLC yankee
7 5/8%, 6/15/06 A1 125,000 128,731
NB Capital Trust IV 8 1/4%,
4/15/27 A1 150,000 153,711
Nationsbank Corp.
5.67%, 2/9/01 A1 250,000 241,323
2,120,992
CREDIT & OTHER FINANCE - 0.9%
AT&T Capital Corp.:
6.39%, 1/22/99 Baa3 50,000 50,096
6.26%, 2/18/99 Baa3 350,000 349,262
6.65%, 4/30/99 Baa3 250,000 250,700
Ahmanson Capital Trust I
8.36%, 12/1/26 (e) Baa3 250,000 252,088
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
CIT Group Holdings, Inc.
6 1/4%, 10/4/99 Aa3 $ 250,000 $ 249,375
Chrysler Financial Corp.
6 3/8%, 1/28/00 A3 230,000 229,310
First Security Capital I
8.41%, 12/15/26 A3 110,000 112,141
Ford Motor Credit Co.:
6.65%, 5/22/00 A1 400,000 400,396 7%, 9/25/01 A1 325,000 327,743
<PAGE>
General Electric Capital Corp.
6.94%, 4/13/09 (c) Aaa 250,000 252,353
GreenPoint Capital Trust I
9.10%, 6/1/27 (e) Ba1 170,000 171,020
Heller Financial, Inc.
7 7/8%, 11/1/99 A2 180,000 184,900
Household Finance Corp.
5.7825%, 6/4/98 (g) A2 500,000 500,000
KeyCorp Institutional Capital
Series A, 7.826%, 12/1/26 A1 130,000 126,257
Nordstrom Credit, Inc.
7 1/4%, 4/30/02 A2 100,000 101,670
TransAmerican Energy Corp.
11 1/2%, 6/15/02 (e) B3 40,000 39,000
Triton Energy Ltd./Triton Energy
Corp. 9 1/4%, 4/15/05 Ba2 110,000 116,463
3,712,774
INSURANCE - 0.2%
Reliance Group:
9%, 11/15/00 Ba3 360,000 370,800
9 3/4%, 11/15/03 B1 270,000 281,475
SunAmerica, Inc. 6.20%,
10/31/99 Baa1 250,000 248,228
900,503
SAVINGS & LOANS - 0.4%
Bank UTD Corp. 8 7/8%,
5/1/07 Ba3 450,000 465,188
Chevy Chase Savings Bank
FSB 9 1/4%, 12/1/08 B1 260,000 260,650
First Nationwide Holdings, Inc.
10 5/8%, 10/1/03 Ba3 160,000 173,600
First Nationwide Parent
Holdings Ltd. 12 1/2%,
4/15/03 B3 250,000 278,750
Long Island Savings Bank FSB
7%, 6/13/02 Baa3 250,000 250,313
1,428,501
TOTAL FINANCE 10,210,569
HEALTH - 0.4%
MEDICAL EQUIPMENT & SUPPLIES - 0.0%
McKesson Corp. 6.60%,
3/1/00 (e) A3 150,000 150,150
MEDICAL FACILITIES MANAGEMENT - 0.4%
Columbia/HCA Healthcare
Corp.:
6 1/2%, 3/15/99 A2 125,000 125,434
6 7/8%, 7/15/01 A2 125,000 125,650
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
HEALTH - CONTINUED
MEDICAL FACILITIES MANAGEMENT - CONTINUED
Integrated Health Services, Inc.
9 1/2%, 9/15/07 (e) B1 $ 210,000 $ 214,725
Tenet Healthcare Corp.:
8%, 1/15/05 Ba1 30,000 30,000
10 1/8%, 3/1/05 Ba3 240,000 261,600
8 5/8%, 1/15/07 Ba3 760,000 771,400
1,528,809
TOTAL HEALTH 1,678,959
HOLDING COMPANIES - 0.1%
Norfolk Southern Corp.
7.05%, 5/1/37 Baa1 220,000 223,287
INDUSTRIAL MACHINERY & EQUIPMENT - 0.2%
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
Continental Global Group, Inc.
11%, 4/1/07 (e) B2 100,000 105,000
Exide Corp. 10%, 4/15/05 B1 165,000 170,775
Goss Graphic System, Inc.
12%, 10/15/06 B2 250,000 275,000
550,775
POLLUTION CONTROL - 0.1%
Allied Waste of North America,
Inc. 10 1/4%, 12/1/06 (e) B3 290,000 310,300
WMX Technologies, Inc.
7.10%, 8/1/26 A3 80,000 81,518
391,818
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 942,593
MEDIA & LEISURE - 2.6%
BROADCASTING - 1.6%
Adelphia Communications Corp.:
9 1/2%, 2/15/04 B3 520,000 494,000
9 7/8%, 3/1/07 (e) - 120,000 115,800
Cablevision System Corp.:
9 1/4%, 11/1/05 B2 260,000 267,150
9 7/8%, 5/15/06 B2 180,000 191,250
9 7/8%, 2/15/13 B2 120,000 126,300
Capstar Broadcasting Partners,
Inc. 0%, 2/1/09 (b)(e) CCC 80,000 51,400
Capstar Radio Broadcasting
Partners, Inc. 9 1/4%,
7/1/07 (e) - 410,000 396,675
Diamond Cable Communications
PLC yankee (b):
<PAGE>
0%, 9/30/04 B3 270,000 218,025
0%, 2/15/07 (e) - 190,000 106,638
Echostar DBS Corp. 12 1/2%,
7/1/02 (e) Caa 120,000 118,950
Echostar Satellite Broadcasting
Corp. 0%, 3/15/04 (b) Caa 220,000 156,200
Echostar Communications Corp.
secured discount 0%,
6/1/04 (b) B2 322,000 270,480
Granite Broadcasting Corp.:
10 3/8%, 5/15/05 B3 30,000 30,375
9 3/8%, 12/1/05 B3 40,000 38,800
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Intermedia Capital Partners IV
LP/Intermedia Partners IV
Capital Corp. 11 1/4%,
8/1/06 B2 $ 100,000 $ 107,625
International Cabletel, Inc.
0%, 2/1/06 (b) B3 130,000 89,700
Jacor Communications Co.
8 3/4%, 6/15/07 (e) B2 50,000 49,375
Lenfest Communications, Inc.
8 3/8%, 11/1/05 Ba3 550,000 541,750
NTL, Inc. 10%, 2/15/07 - 270,000 270,625
Olympus Communications LP/
Olympus Capital Corp.
10 5/8%, 11/15/06 B1 140,000 146,300
Rogers Cablesystems Ltd.
yankee 11%, 12/1/15 B2 190,000 208,050
SCI Television, Inc. secured
11%, 6/30/05 Ba1 150,000 158,250
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 320,000 344,800
TCI Communication, Inc.:
7 1/4%, 6/15/99 Ba1 330,000 332,521
6.46%, 3/6/00 Ba1 200,000 196,718
TCI Communications Financing III
9.65%, 3/31/27 Ba3 440,000 460,830
Tele Communications, Inc.
9 1/4%, 4/15/02 Ba1 100,000 107,302
Telemundo Group, Inc.
7%, 2/15/06 (c) B1 200,000 191,500
Telewest PLC 0%, 10/1/07 (b) B1 680,000 491,300
Time Warner, Inc. 7.95%,
2/1/00 Ba1 190,000 195,337
6,474,026
ENTERTAINMENT - 0.2%
AMC Entertainment, Inc.
9 1/2%, 3/15/09 (e) B2 180,000 182,700
Cinemark USA, Inc.
9 5/8%, 8/1/08 B2 140,000 142,100
Viacom, Inc. 8%, 7/7/06 B1 470,000 455,900
780,700
LEISURE DURABLES & TOYS - 0.1%
Coleman Escrow Corp. secured
1st priority 0%, 5/15/01 (e) B3 380,000 239,400
LODGING & GAMING - 0.5%
American Skiing Co.
12%, 7/15/06 B3 370,000 388,500
Courtyard by Marriott II LP/
Courtyard II Finance Co.,
Series B, 10 3/4%, 2/1/08 B- 150,000 162,375
HMC Acquisition Properties, Inc.
9%, 12/15/07 Ba3 250,000 252,500
HMH Properties, Inc.
9 1/2%, 5/15/05 Ba3 550,000 573,375
Hollywood Casino Corp.
12 3/4%, 11/1/03 B2 50,000 53,000
Horseshoe Gaming LLC
9 3/8%, 6/15/07 (e) B3 70,000 70,438
Prime Hospitality Corp.
9 3/4%, 4/1/07 - 220,000 231,550
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
MEDIA & LEISURE - CONTINUED
LODGING & GAMING - CONTINUED
Sun International Hotels Ltd./
Sun International North
America, Inc. yankee
9%, 3/15/07 Ba3 $ 260,000 $ 263,900
Wyndham Hotel Corp.
10 1/2%, 5/15/06 B2 50,000 55,875
2,051,513
PUBLISHING - 0.1%
Golden Books Publishing, Inc.
7.65%, 9/15/02 B1 40,000 37,000
News America Holdings, Inc.
7.70%, 10/30/25 Baa3 200,000 189,384
Sun Media Corp. (e):
yankee 9 1/2%, 2/15/07 B3 150,000 151,500
9 1/2%, 5/15/07 B3 60,000 60,600
<PAGE>
438,484
RESTAURANTS - 0.1%
Foodmaker, Inc. 9 3/4%,
6/1/02 B3 170,000 174,250
Host Marriott Travel Plazas, Inc.
9 1/2%, 5/15/05 B1 450,000 468,000
642,250
TOTAL MEDIA & LEISURE 10,626,373
NONDURABLES - 0.4%
FOODS - 0.2%
Chiquita Brands International, Inc.:
9 5/8%, 1/15/04 B1 140,000 144,375
10 1/4%, 11/1/06 B1 220,000 233,200
ConAgra, Inc. 7 1/8%,
10/1/26 Baa1 150,000 150,666
Specialty Foods Corp. 11 1/8%,
10/1/02 B3 180,000 178,200
706,441
HOUSEHOLD PRODUCTS - 0.1%
Revlon Consumer Products
Corp. 10 1/2%, 2/15/03 B3 440,000 468,600
TOBACCO - 0.1%
Philip Morris Companies, Inc.:
7 1/4%, 9/15/01 A2 150,000 151,143
6.95%, 6/1/06 A2 140,000 140,466
291,609
TOTAL NONDURABLES 1,466,650
RETAIL & WHOLESALE - 0.9%
APPAREL STORES - 0.1%
AnnTaylor, Inc. 8 3/4%,
6/15/00 B3 370,000 371,850
Specialty Retailers, Inc. (e):
8 1/2%, 7/15/05 Ba3 110,000 109,725
9%, 7/15/07 B2 20,000 19,900
501,475
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
GENERAL MERCHANDISE STORES - 0.5%
Dayton Hudson Corp.:
6.80%, 10/1/01 Baa1 $ 150,000 $ 149,744
7 1/2%, 7/15/06 Baa1 250,000 254,968
Federated Department
Stores, Inc.:
10%, 2/15/01 Baa2 250,000 273,493
8 1/8%, 10/15/02 Baa2 50,000 52,091
K mart Corp.:
12 1/2%, 3/1/05 Ba3 440,000 530,200
7 3/4%, 10/1/12 Ba3 40,000 36,600
8 1/4%, 1/1/22 Ba3 200,000 182,000
Michaels Stores, Inc. 10 7/8%,
6/18/06 Ba2 70,000 75,250
Parisian, Inc. 9 7/8%, 7/15/03 B1 240,000 249,600
Penney (J.C.) Co., Inc. 6.95%,
4/1/00 A2 150,000 151,263
1,955,209
GROCERY STORES - 0.3%
Kroger Co. 8.15%, 7/15/06 Baa3 125,000 131,795
Pathmark Stores, Inc.:
12 5/8%, 6/15/02 Caa 40,000 41,000
9 5/8%, 5/1/03 B3 620,000 598,300
0%, 11/1/03 (b) Caa 110,000 75,075
Penn Traffic Co.:
10 1/4%, 2/15/02 B3 180,000 154,800
8 5/8%, 12/15/03 B3 70,000 56,525
Pueblo Xtra International, Inc.
9 1/2%, 8/1/03 (e) B3 90,000 86,850
Randalls Food Markets, Inc.
9 3/8%, 7/1/07 (e) B2 30,000 29,888
1,174,233
TOTAL RETAIL & WHOLESALE 3,630,917
SERVICES - 0.4%
LEASING & RENTAL - 0.1%
PHH Corp. 5.6775%,
6/11/98 (g) A2 500,000 499,945
PRINTING - 0.1%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 200,000 205,500
SERVICES - 0.2%
Borg-Warner Security Corp.
9 5/8%, 3/15/07 (e) B3 110,000 110,550
Orion Network Systems, Inc. unit:
11 1/4%, 1/15/07 B2 310,000 316,975
0%, 1/15/07 (b) B2 490,000 279,300
706,825
TOTAL SERVICES 1,412,270
TECHNOLOGY - 0.4%
COMPUTERS & OFFICE EQUIPMENT - 0.2%
Comdisco, Inc.:
7.21%, 7/2/01 Baa1 125,000 126,895
6 3/8%, 11/30/01 Baa1 300,000 293,667
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
<PAGE>
TECHNOLOGY - CONTINUED
COMPUTERS & OFFICE EQUIPMENT - CONTINUED
Unisys Corp.:
12%, 4/15/03 B1 $ 260,000 $ 281,450
11 3/4%, 10/15/04 B1 70,000 75,600
777,612
ELECTRONICS - 0.2%
Advanced Micro Devices, Inc.
11%, 8/1/03 Ba1 330,000 366,300
Fairchild Semiconductor Corp.:
10 1/8%, 3/15/07 (e) B2 220,000 232,100
11.74%, 3/15/08 pay-in-
kind (f) - 210,000 202,398
Viasystems, Inc. 9 3/4%,
6/1/07 (e) B3 30,000 30,525
831,323
TOTAL TECHNOLOGY 1,608,935
TRANSPORTATION - 0.1%
AIR TRANSPORTATION - 0.1%
US Air, Inc.:
10 3/8%, 3/1/13 B1 170,000 186,150
pass through trust:
9 5/8%, 2/1/01 B3 80,000 82,400
10%, 7/1/03 B3 250,000 257,500
526,050
UTILITIES - 0.9%
CELLULAR - 0.2%
Globalstar LP/Globalstar
Capital Corp. (e):
unit 11 3/8%, 2/15/04 B3 180,000 180,000
11 1/4%, 6/15/04 B3 160,000 149,600
McCaw International Ltd. unit
0%, 4/15/07 (b)(e) CCC 380,000 182,400
Millicom International Cellular
SA 0%, 6/1/06 (b) B3 160,000 114,400
Paging Network, Inc.
8 7/8%, 2/1/06 B2 90,000 81,900
Telesystem International Wireless,
Inc. 0%, 6/30/07 (b)(e) B- 50,000 26,625
360 Degrees Communications
Co. 7 1/8%, 3/1/03 Ba1 180,000 179,008
913,933
ELECTRIC UTILITY - 0.3%
CMS Energy Corp. 8 1/8%,
5/15/02 Ba3 290,000 292,175
CalEnergy, Inc. 9 1/2%,
9/15/06 Ba2 100,000 107,000
Cleveland Electric Illuminating
Co./Toledo Edison Co.
7.67%, 7/1/04 (e) Ba2 90,000 90,563
Commonwealth Edison Co.
7 3/8%, 9/15/02 Baa2 170,000 172,518
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Hydro-Quebec yankee
7.40%, 3/28/25 A2 $ 90,000 $ 97,547
Israel Electric Corp. yankee
7 7/8%, 12/15/26 (e) A3 120,000 120,848
Long Island Lighting Co.
8 5/8%, 4/15/04 Ba1 210,000 218,753
NIPSCO Capital Markets, Inc.
7.39%, 4/1/04 Baa1 100,000 100,906
1,200,310
TELEPHONE SERVICES - 0.4%
LCI International, Inc.
7 1/4%, 6/15/07 Ba1 150,000 148,575
MFS Communications, Inc. (b):
0%, 1/15/04 Ba3 140,000 130,312
0%, 1/15/06 Ba3 330,000 260,288
McLeodUSA, Inc. 0%, 3/1/07
(b)(e) B3 160,000 102,000
Shared Technologies Fairchild
Communications Corp.
0%, 3/1/06 (b) Caa 90,000 80,325
Teleport Communications Group,
Inc. 0%, 7/1/07 (b) B1 290,000 209,163
Winstar Equipment Corp.
12 1/2%, 3/15/04 (e) CCC+ 130,000 127,075
WorldCom, Inc. 7 3/4%,
4/1/07 Ba1 400,000 409,072
1,466,810
TOTAL UTILITIES 3,581,053
TOTAL NONCONVERTIBLE CORPORATE BONDS
(Cost $43,790,129) 44,485,141
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS - 2.7%
U.S. TREASURY OBLIGATIONS - 2.3%
9 1/4%, 8/15/98 Aaa 50,000 51,789
8%, 8/15/99 Aaa 50,000 51,844
7 3/4%, 12/31/99 Aaa 450,000 466,101
6 5/8%, 6/30/01 Aaa 1,350,000 1,362,650
7 7/8%, 8/15/01 Aaa 2,102,000 2,215,319
10 3/4%, 5/15/03 Aaa 125,000 150,958
<PAGE>
7 7/8%, 11/15/04 Aaa 2,550,000 2,752,011
7%, 7/15/06 Aaa 473,000 486,599
12 3/4%, 11/15/10 (callable) Aaa 500,000 693,830
8 7/8%, 2/15/19 Aaa 489,000 598,414
7 1/4%, 2/ 15/23 Aaa 395,000 406,850
6 1/2%, 11/15/26 Aaa 155,000 148,654
9,385,019
U.S. GOVERNMENT AGENCY OBLIGATIONS - 0.4%
Federal Home Loan Bank:
7.31%, 6/16/04 Aaa 125,000 129,219
7.56%, 9/1/04 Aaa 50,000 52,375
Federal Home Loan Mortgage
Corporation 6.783%,
8/18/05 Aaa 440,000 439,657
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
U.S. GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
Federal National Mortgage
Association:
6.97%, 4/8/04 Aaa $ 190,000 $ 192,968
6.44%, 6/21/05 Aaa 250,000 244,960
Guaranteed Export Trust
Certificates (assets of Trust
guaranteed by U.S.
Government through
Export-Import Bank)
Series 1994-A,
7.12%, 4/15/06 Aaa 131,683 134,070
U.S. Department of Housing
and Urban Development
Government guaranteed
participation certificates
Series 1995-A, 8.24%,
8/1/04 Aaa 20,000 21,603
U.S. Trade Trust Certificates
(assets of Trust guaranteed
by U.S. government through
Export-Import Bank) 6.69%,
1/15/09 (e) Aaa 200,000 198,804
1,413,656
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $10,787,191) 10,798,675
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 1.6%
FEDERAL HOME LOAN MORTGAGE CORPORATION - 0.1%
7 1/2%, 7/1/27 Aaa 500,000 502,344
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 1.2%
6%, 3/1/11 to 5/1/11 Aaa 1,962,585 1,898,801
6 1/2%, 2/1/26 to 7/1/26 Aaa 2,421,240 2,319,686
7%, 4/1/26 to 5/1/26 Aaa 494,067 484,804
4,703,291
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 0.3%
6%, 5/15/11 to 7/15/11 Aaa 904,957 887,509
8 1/2%, 10/15/26 Aaa 490,919 510,094
1,397,603
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $6,527,820) 6,603,238
COMMERCIAL MORTGAGE SECURITIES - 0.9%
American Southwest Financial
Securities Series 1994-C2
Class B2, 12.79%,
12/25/01 (e)(g) - 250,000 246,250
Blackrock Capital Funding LLC
Series 1996 Class C2,
7.6035%, 11/16/26 (e)(g) Aaa 104,143 105,152
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
BKB Commercial Mortgage Trust
Series 1997-C1 Class D,
7.83%, 2/25/43 (e)(g) BBB $ 60,000 $ 60,600
CBA Mortgage Corp. Series
1993-C1 Class E, 7.76%,
12/25/03 (e)(g) Ba2 250,000 240,313
CS First Boston Mortgage
Securities Corp. Series 1995-
AEWI Class E, 9.7975%,
11/25/97 (e)(g) - 250,000 251,563
DLJ Mortgage Acceptance Corp.
Series 1993-MF12 Class B-2,
10.10%, 9/18/03 (e) - 250,000 250,625
First Chicago/Lennar Trust I,
Series 1997-CHL1 (g):
Class D, 8.106%, 5/29/08 - 350,000 334,141
Class E, 8.106%, 4/1/39 - 320,000 244,600
General Motors Acceptance Corp.
Commercial Mortgage
Securities, Inc. Series
1996-C1 Class F, 7.86%,
11/15/06 (e) Ba3 250,000 234,253
<PAGE>
Kidder Peabody Acceptance
Corp. sequential pay, Series
1993-M1 Class A-2,
7.15%, 4/25/25 Aa2 72,233 72,616
Morgan Stanley Capital One, Inc.:
sequential pay Series 1997-C1
Class A-1C, 7.63%,
2/15/20 Aaa 150,000 155,203
Series 1996-MBL1 Class E,
8.661%, 5/25/21 (e)(g) - 94,940 87,166
Mortgage Capital Funding, Inc.
Series 1996-MC1 Class G,
7.15%, 7/15/28 (e) BB 100,000 87,805
Structured Asset Securities Corp.:
Series 1993-C1 Class E,
6.60%, 10/25/24 (e) B 250,000 87,500
Series 1995-C1 Class E,
7 3/8%, 9/25/24 (e) BB 1,000,000 890,625
sequential pay Series 1996
Class A-2A, 7 3/4%,
2/25/28 AAA 78,468 79,572
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $3,340,993) 3,427,984
FOREIGN GOVERNMENT OBLIGATIONS (H) - 0.2%
Export Development Corp.
yankee 8 1/8%, 8/10/99 Aa2 50,000 51,754
Israeli State euro 6 3/8%,
12/19/01 A3 210,000 206,063
Manitoba Province yankee
6 3/8%, 10/15/99 A1 125,000 124,990
FOREIGN GOVERNMENT OBLIGATIONS (H) - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Newfoundland Province yankee
11 5/8%, 10/15/07 Baa1 $ 250,000 $ 331,500
Quebec Province yankee
7.22%, 7/22/36 (c) A2 150,000 156,174
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $865,051) 870,481
CERTIFICATES OF DEPOSIT - 1.2%
Banque Nationale de Paris yankee
5.85%, 9/30/97 200,000 200,054
Bayerische Vereinsbank AG
yankee 5.56%, 7/14/97 500,000 499,987
Caisse Nationale de Credit Agricole
yankee 5.60%, 7/21/97 500,000 499,987
Deutsche Bank AG yankee
6.20%, 4/10/98 500,000 500,392
Landesbank Hessen-Thuringen
yankee 5.78%, 1/27/98 300,000 299,786
National Westminster Bank PLC
yankee 5 1/2%, 8/5/97 400,000 399,899
Rabobank Nederlan Coop
Central yankee:
5.97%, 3/20/98 200,000 200,115
6.20%, 4/10/98 200,000 200,157
Royal Bank of Canada yankee
5.58%, 12/11/97 400,000 399,432
Sanwa Bank Ltd. yankee
5 3/4%, 8/27/97 500,000 500,025
Societe Generale yankee
5.55%, 7/28/97 500,000 499,924
SunTrust Bank 5.85%, 11/25/97 500,000 500,155
TOTAL CERTIFICATES OF DEPOSIT
(Cost $4,699,379) 4,699,913
COMMERCIAL PAPER - 0.8%
AC Acquisition Holding Co.
5.56%, 7/9/97 275,000 274,615
American General Finance
Corp. 5.60%, 8/5/97 100,000 99,447
BMW US Capital Corp.
yankee:
5.57%, 7/7/97 100,000 99,892
5.57%, 8/19/97 300,000 297,675
Citibank Credit Card Master Trust I
(Dakota Certificate Program)
5.60%, 7/21/97 275,000 274,092
Fina Oil & Chemical Co.
5.61%, 8/14/97 100,000 99,293
Goldman Sachs Group LP
5.83%, 1/26/98 200,000 193,478
Merrill Lynch & Co., Inc.
5.62%, 7/8/97 435,000 434,465
Nationwide Building Society
yankee 5.32%, 8/11/97 500,000 496,757
New Center Asset Trust
5.65%, 7/21/97 100,000 99,676
PRINCIPAL VALUE
AMOUNT (NOTE 1)
Unifunding, Inc. yankee:
5.58%, 9/15/97 $200,000 $ 197,613
5.67%, 11/12/97 300,000 293,700
Westpac Capital Corp. yankee
<PAGE>
5.30%, 8/29/97 165,000 163,479
TOTAL COMMERCIAL PAPER
(Cost $3,024,500) 3,024,182
BANK NOTES - 0.3%
Bank of Tokyo-Mitsubishi Ltd.
5.70%, 7/14/97 500,000 500,000
Corestates Bank NA 5.6475%,
1/30/98 (g) 200,000 199,998
First Bank National Association
5.5975%, 5/15/98 (g) 200,000 199,874
Sumitomo Bank Ltd. 5.74%,
7/11/97 500,000 500,000
TOTAL BANK NOTES
(Cost $1,399,873) 1,399,872
CASH EQUIVALENTS - 1.9%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account dated 6/30/97
due 7/1/97:
at 5.99% $ 13,002 13,000
at 5.93% 7,727,273 7,726,000
TOTAL CASH EQUIVALENTS 7,739,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $350,688,422) $ 400,697,625
LEGEND
1. Non-income producing
2. Debt obligation initially issued in zero coupon form which converts to coupon
form at a specified rate and date.
3. Debt obligation initially issued at one coupon which converts to a higher
coupon at a specified date.
4. Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
5. Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers. At the period end, the value of
these securities amounted to $10,203,792 or 2.5% of net assets.
6. Restricted securities - Investment in securities not registered under the
Securities Act of 1933 (see Note 2 of Notes to Financial Statements).
Additional information on each holding is as follows:
ACQUISITION ACQUISITION
SECURITY DATE COST
Fairchild Semiconductor
Corp. 11.74%, 3/15/08
pay-in-kind 4/3/97 $ 183,878
7. The coupon rate shown on floating or adjustable rate securities represents
the rate at period end.
8. For foreign government obligations not individually rated by S&P or Moody's,
the ratings listed are assigned to securities by FMR, the fund's investment
adviser, based principally on S&P and Moody's ratings of the sovereign credit of
the issuing government.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities, aggregated
$194,622,823 and $ 86,184,600, respectively, of which U.S. government and
government agency obligations aggregated $16,194,987 and $31,811,662,
respectively.
The fund placed a portion of its portfolio transactions with brokerage firms
which are affiliates of FMR. The commissions paid to these affiliated firms were
$22,480 for the period.
The composition of long-term debt holdings as a percentage of total value of
investment in securities, is as follows:
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 6.1% AAA, AA, A 6.1%
Baa 1.3% BBB 1.9%
Ba 3.1% BB 2.6%
B 4.7% B 4.7%
Caa 0.2% CCC 0.4%
Ca, C 0.0% CC, C 0.0%
D 0.0%
For some foreign government obligations, FMR has assigned the ratings of the
sovereign credit of the issuing government. The percentage not rated by both S&P
and Moody's amounted to 0.7%. FMR has determined that unrated debt securities
that are lower quality account for 0.7% of the total value of investment in
securities.
Distribution of investments by country of issue, as a percentage of total value
of investment in securities, is as follows:
United States 89.6%
United Kingdom 2.7
Netherlands 2.2
France 1.2
Others (individually less than 1%) 4.3
TOTAL 100.0%
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income tax
purposes was $350,712,855. Net unrealized appreciation aggregated $49,984,770,
of which $53,389,318 related to appreciated investment securities and $3,404,548
related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<PAGE>
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $ 400,697,625
securities, at
value (including
repurchase
agreements of
$7,739,000)
(cost $350,688,422)
- - - See
accompanying
schedule
Cash 50,675
Receivable for 265,717
investments sold
Receivable for fund 912,902
shares sold
Dividends receivable 650,045
Interest receivable 1,124,108
TOTAL ASSETS 403,701,072
LIABILITIES
Payable for $ 2,277,300
investments
purchased
Payable for fund 2,636
shares redeemed
Accrued management 195,789
fee
Other payables and 94,137
accrued expenses
TOTAL LIABILITIES 2,569,862
NET ASSETS $401,131,210
Net Assets consist of:
Paid in capital $338,818,399
Undistributed net 4,197,523
investment income
Accumulated 8,105,402
undistributed net
realized gain (loss)
on investments and
foreign currency
transactions
Net unrealized 50,009,886
appreciation
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $401,131,210
26,873,048
shares outstanding
NET ASSET VALUE, $14.93
offering price
and redemption
price per share
($401,131,210 (divided by)
26,873,048 shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 2,430,378
Dividends
Interest 3,085,128
TOTAL INCOME 5,515,506
EXPENSES
Management fee $ 996,258
<PAGE>
Transfer agent fees 125,480
Accounting fees and 99,808
expenses
Non-interested 844
trustees'
compensation
Custodian fees and 39,036
expenses
Audit 20,860
Legal 295
Miscellaneous 3,741
Total expenses 1,286,322
before reductions
Expense reductions (18,339) 1,267,983
NET INVESTMENT 4,247,523
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
Investment 8,243,632
securities
Foreign currency (1,344) 8,242,288
transactions
Change in net
unrealized
appreciation
(depreciation) on:
Investment 31,836,736
securities
Assets and 575 31,837,311
liabilities in
foreign currencies
NET GAIN (LOSS) 40,079,599
NET INCREASE $ 44,327,122
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 15,565
Expense reductions
Directed
brokerage
arrangements
Custodian credits 2,774
$ 18,339
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
Operations $ 4,247,523 $ 3,681,563
Net investment
income
Net realized gain 8,242,288 6,740,985
(loss)
Change in net 31,837,311 16,385,266
unrealized
appreciation
(depreciation)
NET INCREASE 44,327,122 26,807,814
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Distributions to - (3,802,638)
shareholders
<PAGE>
From net
investment income
From net realized (447,876) (8,710,844
gain )
TOTAL DISTRIBUTIONS (447,876) (12,513,482
)
Share transactions 127,046,008 180,656,312
Net proceeds from
sales of shares
Reinvestment of 447,876 12,513,482
distributions
Cost of shares (23,265,472) (22,687,189
redeemed )
NET INCREASE 104,228,412 170,482,605
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 148,107,658 184,776,937
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 253,023,552 68,246,615
End of period $401,131,210 $253,023,552
(including under
(over) distribution
of net investment
income of
$4,197,523 and
$(50,000),
respectively)
OTHER INFORMATION
Shares
Sold 9,228,522 14,392,956
Issued in 32,763 975,606
reinvestment of
distributions
Redeemed (1,701,939) (1,851,290)
Net increase 7,559,346 13,517,272
(decrease)
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEAR ENDED JANUARY 3, 1995
JUNE 30, 1997 DECEMBER 31, (COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31,
SELECTED PER-SHARE (UNAUDITED) 1996 1995
DATA
Net asset value, $ 13.10 $ 11.77 $ 10.00
beginning of period
Income from
Investment
Operations
Net investment .18 D .21 .10
income
Net realized and 1.67 2.08 2.20
unrealized gain
(loss)
Total from 1.85 2.29 2.30
investment
operations
<PAGE>
Less Distributions
From net - (.21) (.11)
investment income
From net realized (.02) (.75) (.42)
gain
Total distributions (.02) (.96) (.53)
Net asset value, end $ 14.93 $ 13.10 $ 11.77
of period
TOTAL RETURN B, C 14.14% 20.04% 23.02%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $401,131 $253,024 $68,247
period (000
omitted)
Ratio of expenses to .78% A .87% 1.00%
average net assets
Ratio of expenses to .77% A, F .85% F 1.00%
average net assets
after expense
reductions
Ratio of net 2.59% A 2.63% 1.69%
investment income
to average net
assets
Portfolio turnover rate 56% A 120% 343%
Average commission $ .0402 $ .0211
rate G
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT
ANNUALIZED AND DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS
SHOWN.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED
DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
E FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE PERIOD.
WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE BEEN HIGHER.
F FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO
EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
G FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED
TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH
COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO
FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING
PRACTICES AND COMMISSION RATE STRUCTURES MAY DIFFER.
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO PERFORMANCE AND
INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can look
at the total percentage change in value, the average annual percentage change or
the growth of a hypothetical $10,000 investment. Total return reflects the
change in the value of an investment, assuming reinvestment of the fund's
dividend income and capital gains (the profits earned upon the sale of
securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
JUNE 30, 1997 YEAR YEARS YEARS
EQUITY-INCOME 25.66% 20.09% 13.66%
S&P 500(registered trademark) 34.70% 19.78% 14.64%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what would
have happened if the fund had performed at a constant rate each year. You can
compare these figures to the performance of the Standard & Poor's 500 Index - a
widely recognized, unmanaged index of common stocks. This benchmark reflects the
reinvestment of dividends and capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how it will do tomorrow. The stock
market, for example, has a history of long-term growth and
<PAGE>
short-term volatility. In turn, the share price and return of a fund that
invests in stocks will vary. That means if you sell your shares during a market
downturn, you might lose money. But if you can ride out the market's ups and
downs, you may have a gain.(checkmark)
Figures for more than one year assume a steady compounded rate of return and are
not the fund's year-by-year results, which fluctuated over the periods shown.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT INCLUDE
ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. IF
PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, THE
TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and investment
return will vary and you may have a gain or loss when you withdraw your money.
$10,000 OVER THE PAST 10 YEARS
1987/06/30 10000.00 10000.00
1987/07/31 10380.95 10507.00
1987/08/31 10666.67 10898.91
1987/09/30 10442.79 10660.22
1987/10/31 8404.96 8364.01
1987/11/30 8028.88 7674.82
1987/12/31 8439.31 8258.87
1988/01/31 9039.55 8606.57
1988/02/29 9487.50 9007.64
1988/03/31 9322.33 8729.30
1988/04/30 9476.65 8826.20
1988/05/31 9603.73 8902.98
1988/06/30 10150.11 9311.63
1988/07/31 10131.73 9276.25
1988/08/31 9957.04 8960.85
1988/09/30 10252.91 9342.59
1988/10/31 10429.84 9602.31
1988/11/30 10262.22 9465.00
1988/12/31 10355.90 9630.63
1989/01/31 10995.50 10335.60
1989/02/28 10939.07 10078.24
1989/03/31 11176.01 10313.06
1989/04/30 11607.33 10848.31
1989/05/31 11952.38 11287.67
1989/06/30 11960.57 11223.33
1989/07/31 12657.87 12236.79
1989/08/31 12861.25 12476.64
1989/09/30 12716.66 12425.48
1989/10/31 11983.01 12137.21
1989/11/30 12051.48 12384.81
1989/12/31 12152.05 12682.05
1990/01/31 11331.37 11831.08
1990/02/28 11398.51 11983.70
1990/03/31 11417.31 12301.27
1990/04/30 11021.46 11993.74
1990/05/31 11750.66 13163.13
1990/06/30 11633.66 13073.62
1990/07/31 11349.14 13031.78
1990/08/31 10442.90 11853.71
1990/09/30 9632.82 11276.43
1990/10/31 9387.20 11227.94
1990/11/30 10060.00 11953.27
1990/12/31 10294.08 12286.77
1991/01/31 10846.12 12822.47
1991/02/28 11593.01 13739.28
1991/03/31 11833.50 14071.77
1991/04/30 11888.80 14105.54
1991/05/31 12541.30 14714.90
1991/06/30 12028.50 14040.96
1991/07/31 12710.42 14695.26
1991/08/31 12978.71 15043.54
1991/09/30 12889.63 14792.31
1991/10/31 13104.27 14990.53
1991/11/30 12539.43 14386.41
1991/12/31 13530.38 16032.22
1992/01/31 13713.06 15734.02
1992/02/29 14158.37 15938.56
1992/03/31 13984.88 15627.76
1992/04/30 14422.98 16087.22
1992/05/31 14538.27 16166.04
1992/06/30 14410.99 15925.17
1992/07/31 14852.62 16576.51
1992/08/31 14527.21 16236.69
1992/09/30 14678.01 16428.28
1992/10/31 14853.73 16485.78
1992/11/30 15392.59 17047.95
1992/12/31 15815.27 17257.64
1993/01/31 16287.37 17402.60
1993/02/28 16653.24 17639.28
1993/03/31 17149.52 18011.46
1993/04/30 17078.21 17575.59
1993/05/31 17387.21 18046.61
1993/06/30 17591.73 18098.95
1993/07/31 17831.07 18026.55
1993/08/31 18513.20 18709.76
1993/09/30 18442.42 18565.69
<PAGE>
<TABLE>
<S> <C> <C>
1993/10/31 18611.07 18950.00
1993/11/30 18285.82 18769.98
1993/12/31 18708.50 18997.10
1994/01/31 19532.45 19643.00
1994/02/28 19029.45 19110.67
1994/03/31 18233.36 18277.45
1994/04/30 18861.65 18511.40
1994/05/31 19041.17 18814.98
1994/06/30 18923.53 18354.02
1994/07/31 19555.60 18956.03
1994/08/31 20561.76 19733.23
1994/09/30 20224.91 19249.76
1994/10/31 20640.04 19682.88
1994/11/30 19965.45 18966.03
1994/12/31 20030.39 19247.30
1995/01/31 20343.57 19746.38
1995/02/28 21119.27 20515.90
1995/03/31 21848.51 21121.32
1995/04/30 22456.18 21743.34
1995/05/31 23132.91 22612.42
1995/06/30 23465.27 23137.71
1995/07/31 24368.32 23904.96
1995/08/31 24673.96 23964.96
1995/09/30 25493.12 24976.28
1995/10/31 25199.77 24887.12
1995/11/30 26289.34 25979.66
1995/12/31 27059.54 26480.03
1996/01/31 27845.91 27381.41
1996/02/29 27939.44 27635.23
1996/03/31 28233.54 27901.36
1996/04/30 28601.16 28312.63
1996/05/31 28909.97 29042.81
1996/06/30 28645.28 29153.46
1996/07/31 27248.30 27865.46
1996/08/31 27807.09 28453.15
1996/09/30 28998.20 30054.49
1996/10/31 29468.75 30883.39
1996/11/30 31439.22 33217.87
1996/12/31 30924.55 32559.82
1997/01/31 32130.35 34594.16
1997/02/28 32486.30 34865.38
1997/03/31 31278.87 33432.76
1997/04/30 32388.40 35428.69
1997/05/31 34395.33 37585.59
1997/06/30 35994.36 39269.43
</TABLE>
Let's say hypothetically $10,000 was invested in Equity-Income Portfolio on
June 30, 1987. As the chart shows, by June 30, 1997, the value of the
investment would have grown to $35,994 - a 259.94% increase on the initial
investment. For comparison, look at how the S&P 500 did over the same
period. With dividends and capital gains, if any, reinvested, the same
$10,000 investment would have grown to $39,269 - a 292.69% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
% OF FUND'S
INVESTMENTS
<S> <C>
General Electric Co. 3.2
Philip Morris Companies, Inc. 2.7
British Petroleum PLC ADR 1.9
Federal National Mortgage Association 1.6
Royal Dutch Petroleum Co. 1.6
</TABLE>
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
% OF FUND'S
INVESTMENTS
<S> <C>
Finance 19.9
Energy 12.9
Nondurables 7.4
Health 7.1
Aerospace & Defense 6.8
</TABLE>
ASSET ALLOCATION AS OF JUNE 30, 1997 *
Row: 1, Col: 1, Value: 5.8
Row: 1, Col: 2, Value: 1.2
Row: 1, Col: 3, Value: 93.0
Stocks 93.0%
Bonds 1.2%
Short-term investments 5.8%
FOREIGN INVESTMENTS 10.2%
*
(% OF FUND'S INVESTMENTS)
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
<PAGE>
An interview with Stephen Petersen, Portfolio Manager of Equity-Income
Portfolio
Q. STEVE, HOW DID THE FUND PERFORM?
A. For the six- and 12-month periods ending June 30, 1997, the fund
underperformed the Standard & Poor's 500 index, which returned 20.61% for
the six-month period and 34.70% for the 12-month period.
Q. WHY DID THE FUND UNDERPERFORM THE S&P 500 INDEX, ESPECIALLY OVER THE
PAST SIX MONTHS?
A. In general, when you compare the performance of most actively managed
diversified funds, like this one, against the S&P 500 index's performance
over the period, very few beat the index. In fact, in the first quarter of
1997, less than 9% of all fund managers did so. That's because the index
was heavily weighted in a small number of very large-capitalization stocks,
and those stocks were the top performers over the period. Diversified
funds, by definition, own stocks of several different cap sizes, not just
large-cap stocks. In addition, many of the top stocks that contributed to
the S&P 500 index's performance, such as technology giant Microsoft, don't
pay dividends, and are therefore not the kind of stocks this fund tends to
own.
Q. SINCE YOU TOOK OVER THE FUND IN EARLY JANUARY, HAVE YOU CHANGED ITS
POSITIONING?
A. Somewhat. In general, I looked for stocks with good dividend yields and
attractive valuation characteristics, such as the price-to-earnings ratio.
Over the period, I restructured the portfolio so it owned more of those
kinds of stocks. Going forward, my universe will be large-capitalization,
income-producing common stocks, as well as stocks that are down and out but
have great upside potential.
Q. WHAT WERE SOME OF THE FUND'S POSITIVE PERFORMERS DURING THE PERIOD?
A. General Electric, the fund's largest holding, showed consistently strong
earnings growth and performed better than initial expectations. Philip
Morris, another top five holding, continued to look strong. Over the
period, much of its earnings came from its food business and its tobacco
business outside the U.S. So, Philip Morris' major growth was outside of
the areas of the company affected by the litigation against the tobacco
industry.
Q. FINANCIAL STOCKS - WHICH MADE UP ABOUT 20% OF THE FUND AT THE END OF THE
PERIOD - GENERALLY DID WELL OVER THE PERIOD. WHY IS THAT AND HOW DID YOU
TAKE ADVANTAGE OF THIS TREND?
A. Basically, financial stocks, which tend to do well when interest rates
are low, benefited from the interest rate environment over the period. Over
the past six months, many banks generated more capital than they needed to
run their businesses, and they invested it by buying back their own stock.
In addition, both acquiring and acquired financial companies benefited from
recent mergers.
Q. WHAT WAS YOUR TOP-WEIGHTED FINANCIAL STOCK?
A. Financial service company Fannie Mae - the Federal National Mortgage
Association - which buys mortgages, packages them, creates securities and
then sells them back to the marketplace, was the fund's top financial
stock. It did well during the period.
Q. DID YOU EXPERIENCE ANY DISAPPOINTMENTS OVER THE PERIOD?
A. Sure. I expected to see a significant lift in the performance of
cyclical stocks and positioned the fund accordingly. Unfortunately,
cyclicals - those stocks whose performance is closely associated with the
strength of the economy - didn't perform well relative to growth-oriented
stocks over the period.
Q. STEVE, HOW DOES THE FUND LOOK GOING FORWARD?
A. Generally, I will be sticking with what I call the winners in the
portfolio - large-cap, steady earnings-growth companies with attractive
fundamentals and valuations. In addition, I will continue to look for
attractive, overlooked or oversold types of companies, which I believe show
some interesting possibilities going forward.
FUND FACTS
GOAL: seeks reasonable income by investing
primarily in income producing equity securities
to provide current income and increase the
value of the fund's shares
START DATE: October 9,1986
SIZE: as of June 30, 1997, more than $8.5
billion
MANAGER: Stephen Petersen, since January
1997; joined Fidelity in 1980
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 91.3%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 6.8%
AEROSPACE & DEFENSE - 3.8%
AlliedSignal, Inc. 1,055,100 $ 88,628,379
Boeing Co. 1,668,000 88,508,250
GenCorp, Inc. 200,000 4,625,000
Gulfstream Aerospace Corp. (a) 246,200 7,262,900
Lockheed Martin Corp. 850,603 88,090,573
Textron, Inc. 60,000 3,982,500
Thiokol Corp. 376,700 26,369,000
<PAGE>
United Technologies Corp. 258,800 21,480,400
328,947,002
DEFENSE ELECTRONICS - 2.1%
Litton Industries, Inc. (a) 842,500 40,703,281
Northrop Grumman Corp. 874,500 76,792,031
Raytheon Co. 1,276,000 65,076,000
182,571,312
SHIP BUILDING & REPAIR - 0.9%
General Dynamics Corp. 991,500 74,362,500
Newport News Shipbuilding, Inc. 60,000 1,166,250
75,528,750
TOTAL AEROSPACE & DEFENSE 587,047,064
BASIC INDUSTRIES - 6.7%
CHEMICALS & PLASTICS - 2.6%
Air Products & Chemicals, Inc. 184,600 14,998,750
du Pont (E.I.) de Nemours & Co. 330,000 20,748,750
Goodrich (B.F.) Co. 91,300 3,954,431
Great Lakes Chemical Corp. 336,400 17,618,950
Hercules, Inc. 228,600 10,944,225
Millennium Chemicals, Inc. 500,000 11,375,000
Monsanto Co. 1,644,000 70,794,750
Olin Corp. 243,300 9,503,906
Union Carbide Corp. 960,000 45,180,000
Witco Corp. 403,700 15,315,369
220,434,131
IRON & STEEL - 0.4%
Aeroquip Vickers, Inc. 48,700 2,301,075
Allegheny Teledyne, Inc. 300,700 8,118,900
Inland Steel Industries, Inc. 631,300 16,492,713
Quanex Corp. 61,000 1,871,938
USX-U.S. Steel Group 124,100 4,351,256
33,135,882
METALS & MINING - 2.0%
Alcan Aluminium Ltd. 1,400,000 47,760,113
Alumax, Inc. (a) 835,000 31,677,813
Aluminum Co. of America 740,900 55,845,338
Harsco Corp. 264,700 10,720,350
Inco Ltd. 551,093 16,465,133
Kaiser Aluminum Corp. (a) 250,000 3,062,500
Metallgesellschaft AG Ord. (a) 222,500 4,629,734
Noranda, Inc. 200,000 4,309,564
174,470,545
PACKAGING & CONTAINERS - 0.0%
Owens-Illinois, Inc. (a) 108,600 3,366,600
PAPER & FOREST PRODUCTS - 1.7%
Boise Cascade Corp. 385,400 13,609,438
Champion International Corp. 485,000 26,796,250
Domtar, Inc. 627,300 5,543,085
SHARES VALUE (NOTE 1)
Georgia-Pacific Corp. 191,800 $ 16,374,925
Kimberly-Clark Corp. 656,300 32,650,925
Weyerhaeuser Co. 933,500 48,542,000
143,516,623
TOTAL BASIC INDUSTRIES 574,923,781
CONSTRUCTION & REAL ESTATE - 1.2%
BUILDING MATERIALS - 0.8%
American Standard Companies, Inc. 45,100 2,018,225
Coltec Industries, Inc. (a) 1,371,600 26,746,200
Masco Corp. 1,045,400 43,645,450
72,409,875
ENGINEERING - 0.2%
EG & G, Inc. 389,900 8,772,750
Fluor Corp. 120,500 6,650,094
15,422,844
REAL ESTATE - 0.0%
Boston Properties, Inc. 78,500 2,158,750
REAL ESTATE INVESTMENT TRUSTS - 0.2%
Equity Residential Properties Trust (SBI) 300,000 14,250,000
Weeks Corp. 170,500 5,328,125
19,578,125
TOTAL CONSTRUCTION & REAL ESTATE 109,569,594
DURABLES - 3.0%
AUTOS, TIRES, & ACCESSORIES - 1.0%
Chrysler Corp. 142,000 4,659,375
Cummins Engine Co., Inc. 138,000 9,737,625
Eaton Corp. 347,400 30,332,363
General Motors Corp. 300,000 16,706,250
Johnson Controls, Inc. 55,000 2,258,438
Modine Manufacturing Co. 98,100 2,918,475
Snap-on Tools Corp. 455,150 17,921,531
Standard Products Co. 76,700 1,936,675
TRW, Inc. 34,700 1,971,394
88,442,126
CONSUMER DURABLES - 0.6%
Minnesota Mining &
Manufacturing Co. 504,000 51,408,000
CONSUMER ELECTRONICS - 0.9%
Maytag Co. 688,900 17,997,513
Sunbeam-Oster, Inc. 1,168,400 44,107,100
Whirlpool Corp. 225,000 12,276,563
74,381,176
TEXTILES & APPAREL - 0.5%
Dexter Corp. 353,700 11,318,400
<PAGE>
Reebok International Ltd. 687,700 32,149,975
Stride Rite Corp. 191,700 2,468,138
45,936,513
TOTAL DURABLES 260,167,815
ENERGY - 12.6%
ENERGY SERVICES - 1.2%
Halliburton Co. 25,000 1,981,250
Dresser Industries, Inc. 271,700 10,120,825
Schlumberger Ltd. 696,100 87,012,500
99,114,575
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
ENERGY - CONTINUED
OIL & GAS - 11.4%
Amerada Hess Corp. 464,500 $ 25,808,781
Amoco Corp. 365,000 31,732,188
Atlantic Richfield Co. 630,000 44,415,000
British Petroleum PLC ADR 2,181,180 163,315,853
Burlington Resources, Inc. 566,700 25,005,638
Chevron Corp. 929,600 68,732,300
Exxon Corp. 1,500,000 92,250,000
Mobil Corp. 302,600 21,144,175
Occidental Petroleum Corp. 1,665,200 41,734,075
Pennzoil Co. 850,400 65,268,200
Phillips Petroleum Co. 412,500 18,046,875
Royal Dutch Petroleum Co. 2,498,000 135,828,750
Texaco, Inc. 580,000 63,075,000
Tosco Corp. 649,800 19,453,388
Total SA:
Class B 831,600 84,005,714
sponsored ADR 200,800 10,165,500
USX-Marathon Group 1,178,600 34,032,075
Unocal Corp. 1,116,517 43,334,816
987,348,328
TOTAL ENERGY 1,086,462,903
FINANCE - 18.8%
BANKS - 9.1%
Bank of New York Co., Inc. 1,715,700 74,632,950
Bank of Nova Scotia Halifax 195,400 8,562,416
BankBoston Corp. 801,100 57,729,269
BankAmerica Corp. 1,562,000 100,846,625
Chase Manhattan Corp. 385,700 37,437,006
Citicorp 974,400 117,476,100
Comerica, Inc. 505,000 34,340,000
Credit Suisse Group (Reg.) 150,400 19,295,245
First Bank System, Inc. 592,530 50,587,249
National Bank of Canada 500,000 6,265,165
National City Corp. 976,335 51,257,588
NationsBank Corp. 1,426,800 92,028,600
Norwest Corp. 579,000 32,568,750
Royal Bank of Canada 400,000 18,121,899
U.S. Bancorp 728,700 46,727,888
Wells Fargo & Co. 144,900 39,050,550
786,927,300
CREDIT & OTHER FINANCE - 2.8%
American Express Co. 955,172 71,160,314
Beneficial Corp. 304,700 21,652,744
Edper Group Ltd. (The)
Class A (ltd. vtg.) 400,000 6,678,014
First Chicago NBD Corp. 1,384,100 83,738,050
Household International, Inc. 345,000 40,515,938
Transamerica Corp. 169,100 15,821,419
239,566,479
FEDERAL SPONSORED CREDIT - 1.7%
Federal Home Loan Mortgage
Corporation 403,600 13,873,750
Federal National Mortgage
Association 3,115,300 135,904,963
149,778,713
INSURANCE - 4.0%
Aetna, Inc. 282,700 28,941,413
Allstate Corp. 1,154,999 84,314,927
Brascan Ltd. Class A 1,000,000 24,734,726
CIGNA Corp. 20,000 3,550,000
SHARES VALUE (NOTE 1)
Fremont General Corp. 423,924 $ 17,062,941
General Re Corp. 110,000 20,020,000
Hartford Financial Services Group, Inc. 663,300 54,888,075
Marsh & McLennan Companies, Inc. 150,600 10,749,075
Norwich Union PLC (a) 844,900 4,493,784
Provident Companies, Inc. 241,600 12,925,600
Providian Financial Corp. (a) 150,000 4,818,750
Reliastar Financial Corp. 509,621 37,266,036
Travelers Group, Inc. (The) 711,667 44,879,479
348,644,806
SAVINGS & LOANS - 0.9%
Ahmanson (H.F.) & Co. 109,900 4,725,700
Great Western Financial Corp. 934,100 50,207,875
TCF Financial Corp. 25,600 1,264,000
Washington Mutual, Inc. 273,800 16,359,550
72,557,125
SECURITIES INDUSTRY - 0.3%
Bear Stearns Companies, Inc. 210,000 7,179,375
<PAGE>
First Marathon Inc. Class A (non-vtg.) 299,400 4,228,660
Lehman Brothers Holdings, Inc. 440,200 17,828,100
29,236,135
TOTAL FINANCE 1,626,710,558
HEALTH - 7.1%
DRUGS & PHARMACEUTICALS - 4.3%
American Home Products Corp. 1,473,000 112,684,500
Barr Laboratories, Inc. (a)(d) 1,391,650 61,232,600
Bristol-Myers Squibb Co. 1,350,800 109,414,800
Merck & Co., Inc. 37,000 3,829,500
Novartis AG (Reg.) 13,300 21,239,959
Pharmacia & Upjohn, Inc. 427,100 14,841,725
Schering-Plough Corp. 1,020,000 48,832,500
372,075,584
MEDICAL EQUIPMENT & SUPPLIES - 1.1%
Allegiance Corp. 393,500 10,722,875
Bausch & Lomb, Inc. 250,000 11,781,250
Cardiac Control Systems, Inc. (a) 79,800 64,838
Cardinal Health, Inc. 618,500 35,409,125
Johnson & Johnson 40,000 2,575,000
U.S. Surgical Corp. 909,608 33,882,879
94,435,967
MEDICAL FACILITIES MANAGEMENT - 1.7%
Beverly Enterprises, Inc. (a)(d) 5,222,000 84,857,500
Columbia/HCA Healthcare Corp. 1,522,350 59,847,384
144,704,884
TOTAL HEALTH 611,216,435
HOLDING COMPANIES - 0.5%
CINergy Corp. 415,000 14,447,188
Norfolk Southern Corp. 283,400 28,552,550
42,999,738
INDUSTRIAL MACHINERY & EQUIPMENT - 6.7%
ELECTRICAL EQUIPMENT - 3.6%
General Electric Co. 4,191,100 273,993,163
Westinghouse Electric Corp. 1,489,900 34,453,938
308,447,101
INDUSTRIAL MACHINERY & EQUIPMENT - 1.8%
Cooper Industries, Inc. 60,000 2,985,000
Caterpillar, Inc. 309,500 33,232,563
Harnischfeger Industries, Inc. 279,600 11,603,400
Ingersoll-Rand Co. 430,000 26,552,500
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED
INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED
Parker-Hannifin Corp. 50,000 $ 3,034,375
Stewart & Stevenson Services, Inc. 283,500 7,371,000
Tyco International Ltd. 962,742 66,970,740
151,749,578
POLLUTION CONTROL - 1.3%
Browning-Ferris Industries, Inc. 958,700 31,876,775
Safety Kleen Corp. 313,200 5,285,250
Waste Management, Inc. 2,405,200 77,267,050
114,429,075
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 574,625,754
MEDIA & LEISURE - 3.3%
BROADCASTING - 0.0%
Ascent Entertainment Group, Inc. 119,365 1,089,205
ENTERTAINMENT - 1.3%
All American Communications, Inc. (a) 260,534 3,940,577
MGM Grand, Inc. (a) 266,400 9,856,800
Viacom, Inc. Class B (non-vtg.) (a) 3,148,500 94,455,000
108,252,377
LEISURE DURABLES & TOYS - 0.6%
Brunswick Corp. 375,400 11,731,250
Hasbro, Inc. 1,559,450 44,249,394
55,980,644
LODGING & GAMING - 0.4%
ITT Corp. (a) 520,000 31,752,500
Mirage Resorts, Inc. (a) 157,400 3,974,350
35,726,850
PUBLISHING - 1.0%
ACNielsen Corp. (a) 336,000 6,594,000
Cognizant Corp. 353,700 14,324,850
Harcourt General, Inc. 449,500 21,407,438
Hollinger International, Inc. Class A 1,894,400 21,193,600
Houghton Mifflin Co. 1,600 106,800
McGraw-Hill, Inc. 324,800 19,102,300
82,728,988
TOTAL MEDIA & LEISURE 283,778,064
NONDURABLES - 7.4%
BEVERAGES - 0.5%
Anheuser-Busch Companies, Inc. 902,400 37,844,400
PepsiCo, Inc. 150,000 5,634,375
43,478,775
FOODS - 0.9%
General Mills, Inc. 819,450 53,366,681
Heinz (H.J.) Co. 176,100 8,122,613
Kellogg Co. 124,800 10,686,000
Ralston Purina Co. 110,000 9,040,625
81,215,919
HOUSEHOLD PRODUCTS - 2.5%
Avon Products, Inc. 86,100 6,075,431
Dial Corp. 517,300 8,082,813
<PAGE>
Gillette Co. 200,700 19,016,325
Premark International, Inc. 25,000 668,750
Procter & Gamble Co. 410,800 58,025,500
Rubbermaid, Inc. 1,010,400 30,059,400
SHARES VALUE (NOTE 1)
Tambrands, Inc. 100,000 $ 4,987,500
Unilever PLC Ord. 1,705,400 48,873,030
Unilever NV:
Ord. 3,100 652,166
ADR 200,000 42,812,500
219,253,415
TOBACCO - 3.5%
BAT Industries PLC Ord. 1,349,500 12,075,005
Gallaher Group PLC sponsored ADR (a) 365,700 6,742,594
Philip Morris Companies, Inc. 5,220,100 231,641,938
RJR Nabisco Holdings Corp. 1,333,400 44,002,200
Universal Corp. 182,600 5,797,550
300,259,287
TOTAL NONDURABLES 644,207,396
PRECIOUS METALS - 0.3%
Newmont Mining Corp. 567,200 22,120,800
RETAIL & WHOLESALE - 5.2%
APPAREL STORES - 0.3%
Charming Shoppes, Inc. (a) 290,100 1,513,959
Footstar, Inc. (a) 362,600 9,472,925
Limited, Inc. (The) 909,900 18,425,475
29,412,359
DRUG STORES - 0.2%
Rite Aid Corp. 337,100 16,812,863
GENERAL MERCHANDISE STORES - 2.9%
Coles Myer Ltd. 1,252,000 6,502,059
Consolidated Stores Corp. (a) 2,270,156 78,887,930
Dayton Hudson Corp. 140,000 7,446,250
Federated Department Stores, Inc. (a) 656,400 22,809,900
Sears, Roebuck & Co. 390,000 20,962,500
Wal-Mart Stores, Inc. 1,929,000 65,224,313
Woolworth Corp. (a) 2,061,200 49,468,800
251,301,752
GROCERY STORES - 0.1%
American Stores Co. 147,200 7,268,000
RETAIL & WHOLESALE, MISCELLANEOUS - 1.7%
Staples, Inc. (a) 1,845,700 42,912,525
Tandy Corp. 852,500 47,740,000
Toys "R" Us, Inc. (a) 1,180,000 41,300,000
U.S. Office Products Co. (a) 513,300 15,687,731
147,640,256
TOTAL RETAIL & WHOLESALE 452,435,230
SERVICES - 0.8%
LEASING & RENTAL - 0.0%
Hanover Compressor Co. 6,300 122,850
PRINTING - 0.7%
Deluxe Corp. 486,600 16,605,225
Donnelley (R.R.) & Sons Co. 568,400 20,817,650
Ennis Business Forms, Inc. 196,700 1,893,238
Harland (John H.) Co. 1,051,300 23,982,781
63,298,894
SERVICES - 0.1%
Dun & Bradstreet Corp. 368,800 9,681,000
TOTAL SERVICES 73,102,744
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TECHNOLOGY - 3.8%
COMMUNICATIONS EQUIPMENT - 0.4%
Alcatel Alsthom Compagnie
Generale d'Electricite SA 263,200 $ 32,943,641
COMPUTER SERVICES & SOFTWARE - 0.2%
Electronic Data Systems Corp. 262,800 10,774,800
Sabre Group Holdings, Inc. Class A (a) 178,800 4,849,950
15,624,750
COMPUTERS & OFFICE EQUIPMENT - 1.5%
International Business Machines Corp. 700,000 63,131,250
Pitney Bowes, Inc. 791,000 54,974,500
Silicon Graphics, Inc. (a) 344,200 5,163,000
Xerox Corp. 100,000 7,887,500
131,156,250
ELECTRONICS - 1.0%
AMP, Inc. 499,400 20,849,950
Intel Corp. 359,000 50,910,688
Thomas & Betts Corp. 214,800 11,290,425
83,051,063
PHOTOGRAPHIC EQUIPMENT - 0.7%
Eastman Kodak Co. 708,500 54,377,375
Polaroid Corp. 200,000 11,100,000
65,477,375
TOTAL TECHNOLOGY 328,253,079
TRANSPORTATION - 1.1%
AIR TRANSPORTATION - 0.7%
Northwest Airlines Corp. Class A (a) 1,523,500 55,417,313
Viad Corp. 275,800 5,309,150
60,726,463
RAILROADS - 0.4%
CSX Corp. 635,200 35,253,600
TOTAL TRANSPORTATION 95,980,063
<PAGE>
UTILITIES - 6.0%
ELECTRIC UTILITY - 2.2%
Allegheny Power System, Inc. 975,000 26,020,313
American Electric Power Co., Inc. 967,700 40,643,400
Central Maine Power Co. 602,500 7,455,938
CILCORP, Inc. 76,300 3,142,606
Consolidated Edison Co. of
New York, Inc. 279,100 8,216,006
DPL, Inc. 637,300 15,693,513
Duke Power Co. 50,000 2,396,875
Entergy Corp. 1,439,500 39,406,313
Illinova Corp. 250,000 5,500,000
Niagara Mohawk Power Corp. (a) 1,006,700 8,619,869
PG&E Corp. 648,400 15,723,700
PacifiCorp. 200,000 4,400,000
Pinnacle West Capital Corp. 338,600 10,179,163
187,397,696
GAS - 0.6%
MCN Corp. 400,000 12,250,000
Nova Corp. 650,000 5,555,354
Pacific Enterprises 285,400 9,596,575
Questar Corp. 713,700 28,815,638
56,217,567
SHARES VALUE (NOTE 1)
TELEPHONE SERVICES - 3.2%
Ameritech Corp. 643,700 $ 43,731,369
AT&T Corp. 113,500 3,979,594
ALLTEL Corp. 508,900 17,016,344
BCE, Inc. 700,000 19,469,091
Bell Atlantic Corp. 365,000 27,694,375
BellSouth Corp. 525,000 24,346,875
Comsat Corp., Series 1 244,200 5,815,013
Frontier Corp. 200,000 3,987,500
MCI Communications Corp. 270,100 10,339,766
Manitoba Telecom Services, Inc. 250,000 2,661,790
NYNEX Corp. 740,000 42,642,500
SBC Communications, Inc. 195,000 12,065,625
Sprint Corp. 312,500 16,445,313
Telus Corp. 450,000 8,262,413
WorldCom, Inc. (a) 1,103,800 35,321,600
273,779,168
TOTAL UTILITIES 517,394,431
TOTAL COMMON STOCKS
(Cost $6,217,569,762) 7,890,995,449
CONVERTIBLE PREFERRED STOCKS - 1.7%
CONSTRUCTION & REAL ESTATE - 0.1%
REAL ESTATE INVESTMENT TRUSTS - 0.1%
Vornado Realty Trust $3.25, Series A 127,600 6,906,350
DURABLES - 0.1%
AUTOS, TIRES, & ACCESSORIES - 0.1%
Republic Industries, Inc. $1.55 219,200 5,370,400
ENERGY - 0.1%
OIL & GAS - 0.1%
Unocal Capital Trust $3.125 100,000 5,637,500
FINANCE - 1.1%
INSURANCE - 0.8%
Aetna, Inc. Class C 6 1/4% 760,000 71,250,000
SECURITIES INDUSTRY - 0.3%
Salomon, Inc. $2.03 840,700 28,899,063
TOTAL FINANCE 100,149,063
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Loral Space & Communications Ltd.
$3.00, Series C (b) 183,200 9,114,200
MEDIA & LEISURE - 0.1%
BROADCASTING - 0.1%
Evergreen Media Corp. $3.00 (b) 187,200 10,202,400
TECHNOLOGY - 0.1%
COMPUTERS & OFFICE EQUIPMENT - 0.1%
Wang Labs, Inc. $3.25 (b) 80,000 4,040,000
Wang Labs, Inc. $3.25 157,600 7,958,800
11,998,800
UTILITIES - 0.0%
GAS - 0.0%
MCN Corp. $4.00 25,100 1,364,813
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $122,619,633) 150,743,526
CONVERTIBLE BONDS - 1.2%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
CONSTRUCTION & REAL ESTATE - 0.4%
REAL ESTATE INVESTMENT TRUSTS - 0.4%
Liberty Property 8%, 7/1/01 Ba2 $ 27,985,000 $ 34,701,400
DURABLES - 0.1%
CONSUMER ELECTRONICS - 0.1%
Matsushita Electric Industrial Co. Ltd.:
1.30%, 3/29/02 Aa2 JPY 410,000,000 5,114,048
1.40%, 3/31/04 Aa2 JPY 190,000,000 2,369,925
7,483,973
ENERGY - 0.2%
OIL & GAS - 0.2%
Pennzoil Co.
4 3/4%, 10/1/03 Baa3 9,820,000 12,532,775
<PAGE>
MEDIA & LEISURE - 0.0%
LODGING & GAMING - 0.0%
Hilton Hotels Corp.
5%, 5/15/06 Baa2 3,670,000 3,899,375
RETAIL & WHOLESALE - 0.2%
RETAIL & WHOLESALE, MISCELLANEOUS - 0.2%
Home Depot, Inc.
3 1/4%, 10/1/01 A1 5,000,000 5,687,500
U.S. Office Products Co.
5 1/2%, 2/1/01 B3 10,000,000 12,250,000
17,937,500
TECHNOLOGY - 0.3%
COMPUTERS & OFFICE EQUIPMENT - 0.3%
Unisys Corp.
8 1/4%, 3/15/06 B3 17,981,000 23,734,920
TOTAL CONVERTIBLE BONDS
(Cost $93,124,832) 100,289,943
CASH EQUIVALENTS - 5.8%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 498,485,098 498,403,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $6,931,717,227) $ 8,640,431,918
CURRENCY ABBREVIATIONS
JPY - Japanese yen
LEGEND
(a) Non-income producing
(b) Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $23,356,600 or 0.3% of net
assets.
(c) Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
(d) An affiliated company is a company in which the fund has ownership of
companies which are or were affiliates are as follows:
PURCHASE SALES DIVIDEND VALUE
AFFILIATE COST COST INCOME
Barr Laboratories, Inc. $ - $ 5,029,783 $ - $ 61,232,600
Beverly Enterprises, Inc. - 3,388,955 - 84,857,500
Integramed America,
Inc. - 166,375 - -
Synetic, Inc. - 40,768,344 - -
TOTALS $- $ 49,353,457 $ - $146,090,100
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $2,976,701,733 and $2,433,124,647, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of FMR. The commissions paid to these affiliated
firms were $623,898 for the period (see Note 4 of Notes to Financial
Statements).
The composition of long-term debt holdings as a percentage of total value
of investment in securities, is as follows:
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 0.2% AAA, AA, A 0.1%
Baa 0.2% BBB 0.2%
Ba 0.4% BB 0.0%
B 0.4% B 0.4%
Caa 0.0% CCC 0.0%
Ca, C 0.0% CC, C 0.0%
D 0.0%
Distribution of investments by country of issue, as a percentage of total
value of investment in securities, is as follows:
United States 89.8%
United Kingdom 2.7
Netherlands 2.1
Canada 2.1
France 1.5
Netherland Antilles 1.0
Others (individually less than 1%) 0.8
TOTAL 100.0%
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income
tax purposes was $6,939,210,994. Net unrealized appreciation aggregated
$1,701,220,924, of which $1,768,591,981 related to appreciated investment
securities and $67,371,057 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $8,640,431,918
securities, at
value (including
repurchase
agreements of
<PAGE>
$498,403,000) (cost
$6,931,717,227) -
See accompanying
schedule
Cash 63,975
Receivable for 59,449,914
investments sold
Receivable for fund 7,030,723
shares sold
Dividends receivable 12,137,083
Interest receivable 1,916,557
Other receivables 115,759
TOTAL ASSETS 8,721,145,929
LIABILITIES
Payable for $ 126,839,504
investments
purchased
Payable for fund 1,307,053
shares redeemed
Accrued management 3,492,405
fee
Other payables and 559,932
accrued expenses
TOTAL LIABILITIES 132,198,894
NET ASSETS $8,588,947,035
Net Assets consist of:
Paid in capital $6,566,052,739
Undistributed net 64,214,928
investment income
Accumulated 249,987,580
undistributed net
realized gain (loss)
on investments and
foreign
currency
transactions
Net unrealized 1,708,691,788
appreciation
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $8,588,947,035
389,282,331
shares outstanding
NET ASSET VALUE, $22.06
offering price
and redemption
price per
share
($8,588,947,035 (divided by)
389,282,331
shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $74,933,797
Dividends
Interest 11,519,913
TOTAL INCOME 86,453,710
EXPENSES
Management fee $ 18,948,541
Transfer agent fees 2,670,034
Accounting fees and 405,779
expenses
<PAGE>
Non-interested 18,445
trustees'
compensation
Custodian fees and 92,149
expenses
Registration fees 48,392
Audit 35,310
Legal 10,069
Miscellaneous 238,137
Total expenses 22,466,856
before reductions
Expense reductions (557,661 21,909,195
)
NET INVESTMENT 64,544,515
INCOME
REALIZED AND
UNREALIZED
GAIN (LOSS)
Net realized gain
(loss) on:
Investment 265,331,361
securities (including
realized gain of
$12,689,716
on sales of
investments in
affiliated issuers)
Foreign currency (16,911 265,314,450
transactions )
Change in net
unrealized
appreciation
(depreciation) on:
Investment 847,590,904
securities
Assets and (17,469 847,573,435
liabilities in )
foreign currencies
NET GAIN (LOSS) 1,112,887,885
NET INCREASE $1,177,432,400
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 553,138
Expense reductions
Directed
brokerage
arrangements
Custodian credits 4,523
$ 557,661
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
Operations $ 64,544,515 $ 117,458,579
Net investment
income
Net realized gain 265,314,450 597,117,485
(loss)
Change in net 847,573,435 90,992,918
unrealized
appreciation
(depreciation)
NET INCREASE 1,177,432,400 805,568,982
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
<PAGE>
Distributions to (119,852,890) (7,876,787)
shareholders
From net
investment income
From net realized (602,593,699) (225,801,230)
gain
TOTAL DISTRIBUTIONS (722,446,589) (233,678,017)
Share transactions 822,950,455 1,829,128,598
Net proceeds from
sales of shares
Reinvestment of 722,446,589 233,678,017
distributions
Cost of shares (372,525,843) (553,042,238)
redeemed
NET INCREASE 1,172,871,201 1,509,764,377
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 1,627,857,012 2,081,655,342
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 6,961,090,023 4,879,434,681
End of period $ 8,588,947,035 $ 6,961,090,023
(including
undistributed net
investment
income of
$64,214,928 and
$117,454,549,
respectively)
OTHER INFORMATION
Shares
Sold 40,075,873 93,794,843
Issued in 36,487,203 12,390,139
reinvestment of
distributions
Redeemed (18,261,978) (28,467,146)
Net increase 58,301,098 77,717,836
(decrease)
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997
SELECTED PER-SHARE (UNAUDITED) 1996 1995 1994 1993 E 1992
DATA
<S> <C> <C> <C> <C> <C> <C>
Net asset
value, $ 21.03 $ 19.27 $ 15.35 $ 15.44 $ 13.40 $ 11.85
beginning
of period
Income from
Investment
Operations
Net investment .18 D .35 .41 .41 .37 .40
income
Net realized and 3.02 2.30 4.69 .64 2.06 1.57
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
unrealized gain
(loss)
Total from 3.20 2.65 5.10 1.05 2.43 1.97
investment
operations
Less Distributions
From net (.36) (.03) (.40) (.37) (.35) (.42)
investment income
In excess of net - - - - (.04) -
investment income
From net realized (1.81) (.86) (.78) (.77) - -
gain
Total distributions (2.17) (.89) (1.18) (1.14) (.39) (.42)
Net asset value, end $ 22.06 $ 21.03 $ 19.27 $ 15.35 $ 15.44 $ 13.40
of period
TOTAL RETURN B, C 16.39% 14.28% 35.09% 7.07% 18.29% 16.89%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $8,588,947 $6,961,090 $4,879,435 $2,284,412 $1,318,500 $592,880
period (000
omitted)
Ratio of expenses to .60% A .58% .61% .60% .62% .65%
average net assets
Ratio of expenses to .59% A, .56% .61% .58% .62% .65%
average net assets F F F
after
expense reductions
Ratio of net 1.72% A 1.97% 2.56% 2.83% 2.87% 3.52%
investment income
to average net
assets
Portfolio turnover rate 68% A 186% 87% 134% 120% 74%
Average commission $ .0438 $ .0426
rate G
</TABLE>
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT
ANNUALIZED AND DO NOT REFLECT CHARGES ATTRIBUTED TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS
SHOWN. C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD. E EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED
STATEMENT OF POSITION 93-2, "DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT
PRESENTATION OF INCOME, CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY
INVESTMENT COMPANIES." AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT
CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES. F FMR OR THE FUND
HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO EITHER PAID OR
REDUCED A PORTION OF THE FUND'S EXPENSES (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS). G FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND
IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY
TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO
PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS
MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY DIFFER.
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO PERFORMANCE AND
INVESTMENT SUMMARY
<PAGE>
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can look
at the total percentage change in value, the average annual percentage change or
the growth of a hypothetical $10,000 investment. Total return reflects the
change in the value of an investment, assuming reinvestment of the fund's
dividend income and capital gains (the profits earned upon the sale of
securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
Average annual total returns will appear once the fund is a year old, and the
growth of a hypothetical $10,000 investment in the fund will appear in the
fund's next report six months from now.
You can compare the fund's returns to the performance of the Standard & Poor's
500 Index - a widely recognized, unmanaged index of common stocks. This
benchmark reflects the reinvestment of dividends and capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how it will do tomorrow. The stock
market, for example, has a history of long-term growth and short-term
volatility. In turn, the share price and return of a fund that invests in stocks
will vary. That means if you sell your shares during a market downturn, you
might lose money. But if you can ride out the market's ups and downs, you may
have a gain. (checkmark)
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT INCLUDE
ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. IF
PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, THE
TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and investment
return will vary and you may have a gain or loss when you withdraw your money.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
General Electric Co. 3.5
Philip Morris Companies, Inc. 2.4
BankAmerica Corp. 2.4
Tyco International Ltd. 2.2
Citicorp 1.9
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Finance 14.7
Health 12.2
Retail & Wholesale 9.6
Industrial Machinery & Equipment 9.1
Nondurables 9.0
ASSET ALLOCATION AS OF JUNE 30, 1997*
Row: 1, Col: 1, Value: 4.8
Row: 1, Col: 2, Value: 1.8
Row: 1, Col: 3, Value: 93.40000000000001
Stocks 94.4%
Bonds 0.8%
Short-term investments 4.8%
FOREIGN INVESTMENTS 7.5%
*
% OF FUND'S
INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO FUND TALK: THE
MANAGER'S OVERVIEW
An interview with Beth Terrana, Portfolio Manager of Growth & Income Portfolio
Q. HOW DID THE FUND PERFORM, BETH?
A. For the six months that ended June 30, 1997, the fund trailed the Standard &
Poor's 500 Index, which returned 20.61%. Going forward, the fund's semiannual
report will also quote 12-month performance.
Q. LOOKING AT THE FUND'S PERFORMANCE VERSUS THAT OF ITS INDEX, WHICH STRATEGIES
PLAYED KEY ROLES?
A. Broadly, my decision to emphasize selected stocks in the strong finance,
health and diversified industrials sectors was particularly helpful. Within the
finance and health areas, I focused on money-center banks and pharmaceuticals,
including BankAmerica and Bristol-Myers Squibb - two of
<PAGE>
the largest contributors to fund performance for the period. General Electric -
the fund's top holding - was another notable contributor based on its strong
performance as well as its overweighting in the fund. Additionally, a
substantial underweighting of generally weak electric and telecommunications
utilities stocks proved very helpful. The largest detractor relative to the
index was the fund's underexposure to a number of large-capitalization
technology and nondurables stocks, which accounted for a disproportionate amount
of the index's return. Microsoft and Coca-Cola -two of the largest index
constituents - illustrate this point particularly well. Together, these TWO
stocks alone accounted for approximately 1.5% of the index's 20.61% return.
While in hindsight I clearly wish I'd owned more of these stocks, fundamentals
for these companies didn't appear to support their valuations, which were at
steep premiums to the overall market as well as comparable firms.
Q. HOW DID SOME OF THE FUND'S TOP POSITIONS FARE RELATIVE TO THE INDEX?
A. Many of the fund's larger exposures did well, performing in line with my
expectations. Individual security selection will always be a main driver of
performance and the fund's top positions obviously play a key role. Over the
course of the period, six of the fund's top ten positions outperformed the
index.
Q. FOR THOSE INVESTORS WHO MAY BE UNFAMILIAR WITH YOUR MANAGEMENT STYLE, HOW
WOULD YOU CHARACTERIZE YOUR INVESTMENT PROCESS?
A. Fundamentally, I am a bottom-up investor who believes that superior
investment performance results from owning companies with improving financial
returns. Improvements in financial returns drive both sustainable improvements
in a company's secular growth rate and its earnings power. The most important
elements I look for in an investment include restructuring potential, rising
returns on invested capital, good balance sheet management, strong free cash
flow and shareholder-friendly management. Increasingly, global franchises and
strong brands have also become important factors. I've generally found that
companies exhibiting some or all of these attributes tend to generate improving
financial returns -including expanding profit margins and accelerating earnings
growth rates -through time. Further, as a firm's financial returns improve, its
stock is likely to be rewarded with a higher valuation once the market finally
catches on.
Q. WHAT'S YOUR OUTLOOK FOR THE NEXT SIX MONTHS?
A. As a backdrop to the stock market, I believe it's very likely that the
supportive environment - moderate economic growth and low inflation - will
continue. Also, given that there are few signs of incipient inflation, I don't
foresee any significant action by the Federal Reserve to raise interest rates -
an event that would likely be a negative for the market, at least over the short
term. Assuming this favorable economic environment continues, the critical
factor going forward will be corporate earnings, which at this time appear
relatively sustainable overall. However, I remain focused on those companies
with the potential to deliver exceptional numbers, particularly given the recent
propensity of the market to dramatically reduce stock prices upon earnings
disappointments. Recently, even earnings numbers that come in as expected have
resulted in large stock price declines, partly because analysts' "real"
expectations were even higher.
FUND FACTS
GOAL: seeks reasonable income by investing primarily in income producing equity
securities to provide current income and increase the value of the fund's shares
START DATE: October 9,1986
SIZE: as of June 30, 1997, more than $8.5 billion
MANAGER: Stephen Petersen, since January 1997; joined Fidelity in 1980
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO INVESTMENTS JUNE
30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 93.4%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 4.5%
AEROSPACE & DEFENSE - 4.1%
AlliedSignal, Inc. 26,700 $ 2,242,800
Boeing Co. 17,200 912,661
Lockheed Martin Corp. 11,600 1,201,325
Textron, Inc. 20,800 1,380,600
United Technologies Corp. 18,500 1,535,500
7,272,886
DEFENSE ELECTRONICS - 0.4%
Raytheon Co. 14,800 754,800
TOTAL AEROSPACE & DEFENSE 8,027,686
BASIC INDUSTRIES - 5.1%
CHEMICALS & PLASTICS - 3.9%
Air Products & Chemicals, Inc. 9,900 804,375
Avery Dennison Corp. 6,000 240,750
Cytec Industries, Inc. (a) 4,300 160,713
Goodrich (B.F.) Co. 12,600 545,738
Hercules, Inc. 2,300 110,113
Monsanto Co. 35,900 1,545,944
Praxair, Inc. 45,800 2,564,800
Raychem Corp. 5,700 423,938
<PAGE>
Sealed Air Corp. (a) 14,200 674,500
7,070,871
PAPER & FOREST PRODUCTS - 1.2%
Fort Howard Corp. (a) 7,500 379,688
International Paper Co. 3,900 189,394
James River Corp. of Virginia 10,900 403,300
Kimberly-Clark Corp. 22,300 1,109,425
2,081,807
TOTAL BASIC INDUSTRIES 9,152,678
CONSTRUCTION & REAL ESTATE - 3.0%
BUILDING MATERIALS - 1.8%
American Standard Companies, Inc. (a) 19,900 890,525
Masco Corp. 39,400 1,644,950
Sherwin-Williams Co. 21,300 657,638
3,193,113
REAL ESTATE INVESTMENT TRUSTS - 1.2%
Beacon Properties Corp. 13,600 453,900
Duke Realty Investors, Inc. 9,300 376,650
Equity Residential Properties Trust (SBI) 12,400 589,000
Public Storage, Inc. 18,400 538,200
Storage USA, Inc. 5,500 210,375
2,168,125
TOTAL CONSTRUCTION & REAL ESTATE 5,361,238
DURABLES - 3.2%
AUTOS, TIRES, & ACCESSORIES - 0.4%
Eaton Corp. 5,200 454,025
Navistar International Corp. (a) 18,200 313,950
767,975
CONSUMER DURABLES - 1.7%
Corning, Inc. 13,200 734,250
Minnesota Mining & Manufacturing Co. 23,400 2,386,800
3,121,050
CONSUMER ELECTRONICS - 0.3%
Newell Co. 14,100 558,713
SHARES VALUE (NOTE 1)
TEXTILES & APPAREL - 0.8%
Liz Claiborne, Inc. 20,100 $ 937,163
VF Corp. 5,200 442,650
1,379,813
TOTAL DURABLES 5,827,551
ENERGY - 7.5%
ENERGY SERVICES - 0.9%
Halliburton Co. 5,900 467,575
McDermott International, Inc. 7,400 215,988
Schlumberger Ltd. 7,800 975,000
1,658,563
OIL & GAS - 6.6%
Amoco Corp. 13,500 1,173,656
British Petroleum PLC ADR 30,064 2,251,042
Exxon Corp. 22,300 1,371,450
Mobil Corp. 14,800 1,034,150
Royal Dutch Petroleum Co. 33,200 1,805,250
Texaco, Inc. 15,300 1,663,875
Tosco Corp. 21,000 628,688
Total SA sponsored ADR 14,000 708,750
USX-Marathon Group 32,500 938,438
Unocal Corp. 5,900 228,994
11,804,293
TOTAL ENERGY 13,462,856
FINANCE - 14.7%
BANKS - 7.9%
Bank of New York Co., Inc. 35,700 1,552,950
BankBoston Corp. 7,600 547,675
BankAmerica Corp. 65,500 4,228,844
Citicorp 27,800 3,351,638
First Bank System, Inc. 18,400 1,570,900
First Union Corp. 8,200 758,500
Mellon Bank Corp. 19,800 893,475
NationsBank Corp. 15,100 973,950
Wells Fargo & Co. 1,200 323,400
14,201,332
CREDIT & OTHER FINANCE - 1.8%
American Express Co. 16,600 1,236,700
Associates First Capital Corp. 8,400 466,200
Household International, Inc. 12,800 1,503,200
3,206,100
FEDERAL SPONSORED CREDIT - 1.9%
Federal Home Loan Mortgage
Corporation 50,200 1,725,625
Federal National Mortgage Association 37,400 1,631,575
3,357,200
INSURANCE - 2.4%
AFLAC, Inc. 7,400 349,650
Allstate Corp. 23,800 1,737,400
MGIC Investment Corp. 3,400 162,988
PMI Group, Inc. 1,600 99,800
Progressive Corp. 300 26,100
Travelers Group, Inc. (The) 29,100 1,835,119
4,211,057
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
SAVINGS & LOANS - 0.7%
<PAGE>
Ahmanson (H.F.) & Co. 4,900 $ 210,700
Charter One Financial Corp. 5,100 274,763
Great Western Financial Corp. 14,600 784,750
1,270,213
TOTAL FINANCE 26,245,902
HEALTH - 11.9%
DRUGS & PHARMACEUTICALS - 7.9%
American Home Products Corp. 27,300 2,088,450
Bristol-Myers Squibb Co. 38,300 3,102,300
Cytyc Corp. (a) 4,300 116,638
Merck & Co., Inc. 17,100 1,769,850
Pfizer, Inc. 32,400 1,935,900
Schering-Plough Corp. 37,000 1,771,375
SmithKline Beecham PLC ADR 25,500 2,336,438
Warner-Lambert Co. 8,400 1,043,700
14,164,651
MEDICAL EQUIPMENT & SUPPLIES - 3.7%
Bard (C.R.), Inc. 12,500 453,906
Baxter International, Inc. 26,900 1,405,525
Boston Scientific Corp. (a) 14,300 878,556
Johnson & Johnson 35,200 2,266,000
McKesson Corp. 10,500 813,750
Medtronic, Inc. 9,500 769,500
6,587,237
MEDICAL FACILITIES MANAGEMENT - 0.3%
Columbia/HCA Healthcare Corp. 3,000 117,938
Humana, Inc. (a) 20,900 483,313
601,251
TOTAL HEALTH 21,353,139
HOLDING COMPANIES - 0.1%
CINergy Corp. 6,300 219,319
INDUSTRIAL MACHINERY & EQUIPMENT - 8.5%
ELECTRICAL EQUIPMENT - 4.6%
Emerson Electric Co. 21,600 1,189,350
General Electric Co. 96,400 6,302,150
Harris Corp. 3,200 268,800
Westinghouse Electric Corp. 20,500 474,063
8,234,363
INDUSTRIAL MACHINERY & EQUIPMENT - 3.7%
Illinois Tool Works, Inc. 21,600 1,078,650
Ingersoll-Rand Co. 10,000 617,500
Stanley Works 22,700 908,000
Tyco International Ltd. 57,400 3,992,888
6,597,038
POLLUTION CONTROL - 0.2%
Waste Management, Inc. 12,000 385,500
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 15,216,901
MEDIA & LEISURE - 4.6%
BROADCASTING - 1.1%
Evergreen Media Corp. Class A (a) 20,400 910,350
Time Warner, Inc. 20,800 1,003,600
1,913,950
ENTERTAINMENT - 0.6%
Disney (Walt) Co. 12,600 1,011,150
SHARES VALUE (NOTE 1)
LEISURE DURABLES & TOYS - 0.5%
Mattel, Inc. 27,100 $ 918,013
LODGING & GAMING - 0.3%
Host Marriott Corp. (a) 31,200 555,750
PUBLISHING - 2.1%
Cognizant Corp. 15,400 623,700
Harcourt General, Inc. 9,200 438,150
McGraw-Hill, Inc. 12,500 735,156
Scholastic Corp. (a) 6,900 241,500
Times Mirror Co. Class A 27,900 1,541,475
World Color Press, Inc. (a) 7,500 178,125
3,758,106
TOTAL MEDIA & LEISURE 8,156,969
NONDURABLES - 9.0%
BEVERAGES - 0.7%
PepsiCo, Inc. 31,600 1,186,975
FOODS - 1.6%
Campbell Soup Co. 42,500 2,125,000
Heinz (H.J.) Co. 8,700 401,288
Hershey Foods Corp. 6,800 376,125
2,902,413
HOUSEHOLD PRODUCTS - 4.2%
Avon Products, Inc. 19,400 1,368,913
Clorox Co. 6,800 897,600
Colgate-Palmolive Co. 1,300 84,825
Procter & Gamble Co. 12,200 1,723,250
Rubbermaid, Inc. 9,800 291,550
Unilever PLC Ord. 30,900 885,526
Unilever NV ADR 10,900 2,333,281
7,584,945
TOBACCO - 2.5%
Philip Morris Companies, Inc. 98,500 4,370,938
TOTAL NONDURABLES 16,045,271
PRECIOUS METALS - 0.2%
Getchell Gold Corp. (a) 12,100 426,525
RETAIL & WHOLESALE - 9.4%
APPAREL STORES - 1.4%
Gap, Inc. 29,900 1,162,363
<PAGE>
Payless ShoeSource, Inc. (a) 24,200 1,323,438
2,485,801
DRUG STORES - 1.5%
CVS Corp. 37,977 1,946,321
Walgreen Co. 14,500 777,563
2,723,884
GENERAL MERCHANDISE STORES - 5.2%
Coles Myer Ltd. 71,500 371,324
Consolidated Stores Corp. (a) 89,975 3,126,631
Dayton Hudson Corp. 20,100 1,069,069
Federated Department Stores, Inc. (a) 71,400 2,481,150
Sears, Roebuck & Co. 21,100 1,134,125
Wal-Mart Stores, Inc. 30,900 1,044,806
9,227,105
GROCERY STORES - 0.7%
American Stores Co. 10,500 518,438
Asda Group PLC 177,400 366,194
Ahold NV 3,600 303,528
1,188,160
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
RETAIL & WHOLESALE, MISCELLANEOUS - 0.6%
Home Depot, Inc. (The) 16,300 $ 1,123,681
TOTAL RETAIL & WHOLESALE 16,748,631
SERVICES - 3.6%
ADVERTISING - 1.8%
Interpublic Group of Companies, Inc. 12,500 766,406
Omnicom Group, Inc. 28,600 1,762,475
Outdoor Systems, Inc. (a) 4,800 183,600
WPP Group PLC 127,000 519,028
3,231,509
LEASING & RENTAL - 0.3%
Hanover Compressor Co. 100 1,950
Republic Industries, Inc. (a) 5,600 139,300
Ryder Systems, Inc. 12,200 402,600
543,850
PRINTING - 0.3%
Donnelley (R.R.) & Sons Co. 15,900 582,338
SERVICES - 1.2%
ADT Ltd. (a) 19,800 653,400
Ecolab, Inc. 14,300 682,825
National Service Industries, Inc. 6,300 306,731
Service Corp. International 14,818 487,142
2,130,098
TOTAL SERVICES 6,487,795
TECHNOLOGY - 7.4%
COMMUNICATIONS EQUIPMENT - 0.6%
Alcatel Alsthom Compagnie Generale
d'Electricite SA sponsored ADR 2,400 60,600
Alcatel Alsthom Compagnie Generale
d'Electricite SA 6,600 826,094
Andrew Corp. (a) 5,100 143,438
1,030,132
COMPUTER SERVICES & SOFTWARE - 1.7%
Adobe Systems, Inc. 2,500 87,656
Automatic Data Processing, Inc. 8,500 399,500
CUC International, Inc. (a) 15,600 402,675
CompUSA, Inc. (a) 22,300 479,450
Microsoft Corp. (a) 9,600 1,213,200
Oracle Systems Corp. (a) 9,700 488,638
3,071,119
COMPUTERS & OFFICE EQUIPMENT - 3.8%
Compaq Computer Corp. (a) 14,600 1,449,050
Diebold, Inc. 12,550 489,450
International Business Machines Corp. 28,100 2,534,269
Pitney Bowes, Inc. 18,700 1,299,650
Xerox Corp. 13,600 1,072,700
6,845,119
ELECTRONICS - 1.3%
Intel Corp. 11,500 1,630,844
Texas Instruments, Inc. 8,500 714,531
2,345,375
TOTAL TECHNOLOGY 13,291,745
UTILITIES - 0.7%
ELECTRIC UTILITY - 0.3%
Edison International 22,000 547,250
SHARES VALUE (NOTE 1)
TELEPHONE SERVICES - 0.4%
WorldCom, Inc. (a) 20,200 $ 646,400
TOTAL UTILITIES 1,193,650
TOTAL COMMON STOCKS
(Cost $151,597,143) 167,217,856
CONVERTIBLE PREFERRED STOCKS - 1.0%
CONSTRUCTION & REAL ESTATE - 0.2%
REAL ESTATE INVESTMENT TRUSTS - 0.2%
Vornado Realty Trust $3.25 Series A 5,300 286,863
DURABLES - 0.1%
AUTOS, TIRES, & ACCESSORIES - 0.1%
Republic Industries, Inc. $1.55 8,600 210,700
ENERGY - 0.3%
OIL & GAS - 0.3%
Tosco Financing Trust $2.875 (b) 8,200 462,275
<PAGE>
HEALTH - 0.3%
MEDICAL EQUIPMENT & SUPPLIES - 0.3%
McKesson Financing Trust $2.50 (b) 9,400 571,050
MEDIA & LEISURE - 0.1%
LODGING & GAMING - 0.1%
Host Marriott Financial Trust
$3.375 (b) 4,800 277,800
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $1,729,992) 1,808,688
CONVERTIBLE BONDS - 0.8%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - 0.6%
POLLUTION CONTROL - 0.6%
USA Waste Services, Inc.
4%, 2/1/02 Ba2 $ 642,000 683,730
United Waste Systems, Inc.
4 1/2%, 6/1/01 B1 198,000 271,755
955,485
RETAIL & WHOLESALE - 0.2%
GENERAL MERCHANDISE STORES - 0.1%
Federated Department Stores, Inc.
5%, 10/1/03 Baa3 220,000 262,350
RETAIL & WHOLESALE, MISCELLANEOUS - 0.1%
Staples, Inc.
4 1/2%, 10/1/00 (b) Ba2 93,000 112,995
TOTAL RETAIL & WHOLESALE 375,345
TOTAL CONVERTIBLE BONDS
(Cost $1,289,817) 1,330,830
CASH EQUIVALENTS - 4.8%
MATURITY VALUE
AMOUNT (NOTE 1)
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 8,616,419 $ 8,615,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $163,231,952) $ 178,972,374
LEGEND
(a) Non-income producing
(b) Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $1,424,120 or 0.8% of net
assets.
(c) Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $189,250,835 and $35,258,709, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company. The
commissions paid to these affiliated firms were $22,730 for the period (see
Note 4 of Notes to Financial Statements).
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income
tax purposes was $163,231,952. Net unrealized appreciation aggregated
$15,740,422, of which $16,585,242 related to appreciated investment
securities and $844,820 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $178,972,374
securities, at value
(including
repurchase
agreements of
$8,615,000) (cost
$163,231,952) -
See accompanying
schedule
Cash 21,799
Receivable for 505,400
investments sold
Receivable for fund 841,663
shares sold
Dividends receivable 160,697
Interest receivable 14,678
TOTAL ASSETS 180,516,611
LIABILITIES
<PAGE>
Payable for $ 1,047,870
investments
purchased
Payable for fund 80
shares redeemed
Accrued management 68,520
fee
Other payables and 36,258
accrued expenses
TOTAL LIABILITIES 1,152,728
NET ASSETS $179,363,883
Net Assets consist of:
Paid in capital $163,362,211
Undistributed net 592,329
investment income
Accumulated (331,075
undistributed net )
realized gain (loss)
on investments and
foreign currency
transactions
Net unrealized 15,740,418
appreciation
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $ 179,363,883
15,613,501
shares outstanding
NET ASSET VALUE, $11.49
offering price
and redemption
price per share
($179,363,883 (divided by)
15,613,501 shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 692,052
Dividends
Interest 220,743
TOTAL INCOME 912,795
EXPENSES
Management fee $ 216,567
Transfer agent fees 35,283
Accounting fees and 34,705
expenses
Non-interested 131
trustees'
compensation
Custodian fees and 22,607
expenses
Audit 11,519
Legal 16
Total expenses 320,828
before reductions
Expense reductions (209 320,619
)
NET INVESTMENT 592,176
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
<PAGE>
Investment (330,979
)
securities
Foreign currency (96 (331,075
) )
transactions
Change in net
unrealized
appreciation
(depreciation) on:
Investment 15,750,754
securities
Assets and (4) 15,750,750
liabilities in
foreign currencies
NET GAIN (LOSS) 15,419,675
NET INCREASE $ 16,011,851
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 209
Expense reductions
Custodian credits
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) SIX MONTHS DECEMBER 31,
IN NET ASSETS ENDED 1996
JUNE 30, 1997 (COMMENCEMENT
(UNAUDITED) OF OPERATIONS)
Operations $ 592,176 $ 153
Net investment
income
Net realized gain (331,075) -
(loss)
Change in net 15,750,750 (10,332)
unrealized
appreciation
(depreciation)
NET INCREASE 16,011,851 (10,179)
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Share transactions 176,559,612 1,000,010
Net proceeds from
sales of shares
Cost of shares (14,197,411) -
redeemed
NET INCREASE 162,362,201 1,000,010
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 178,374,052 989,831
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 989,831 -
End of period $179,363,883 $ 989,831
(including
undistributed net
investment
income of
$592,329 and
$153,
respectively)
OTHER INFORMATION
Shares
Sold 16,857,064 100,001
Redeemed (1,343,564) -
Net increase 15,513,500 100,001
(decrease)
<PAGE>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED) (COMMENCEMENT
OF OPERATIONS)
<S> <C> <C>
SELECTED PER-SHARE
DATA
Net asset value, $ 9.90 $ 10.00
beginning of period
Income from
Investment
Operations
Net investment .07 D .00
income
Net realized and 1.52 (.10)
unrealized gain
(loss)
Total from 1.59 (.10)
investment
operations
Net asset value, end $ 11.49 $ 9.90
of period
TOTAL RETURN B, C 16.06% (1.00)%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $179,364 $ 990
period (000
omitted)
Ratio of expenses to .75% A 1.00% A,
average net assets E
Ratio of net 1.38% A 3.89% A
investment income
to average net
assets
Portfolio turnover rate 86% A 0% A
Average commission $ .0280 $ .0120
rate F
</TABLE>
ANNUALIZED TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED
AND DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN. THE
TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING
THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD. FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S
EXPENSES DURING THE PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO
WOULD HAVE BEEN HIGHER.
A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR
SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM
PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN
VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY
DIFFER.
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO PERFORMANCE AND
INVESTMENT SUMMARY
<PAGE>
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).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
JUNE 30, 1997 YEAR FUND
<S> <C> <C>
INDEX 500 34.06% 19.67%
S&P 500(registered trademark) 34.70% 20.03%
</TABLE>
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what would
have happened if the fund had performed at a constant rate each year. You can
compare the fund's returns to the performance of the Standard & Poor's 500
Index - a widely recognized, unmanaged index of common stocks. This benchmark
includes reinvested dividends and capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how it will do tomorrow. The stock
market, for example, has a history of long-term growth and short-term
volatility. In turn, the share price and return of a fund that invests in stocks
will vary. That means if you sell your shares during a market downturn, you
might lose money. But if you can ride out the market's ups and downs, you may
have a gain. (checkmark)
Figures for more than one year assume a steady compounded rate of return and are
not the fund's year-by-year results, which fluctuated over the periods shown.
The life of fund figures are from commencement of operations, August 27, 1992.
If Fidelity had not reimbursed certain fund expenses, the past one year and life
of fund return figures would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT INCLUDE
ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. IF
PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, THE
TOTAL RETURNS WOULD BE LOWER.
Past performance is no guarantee of future results. Principal and investment
return will vary and you may have a gain or loss when you withdraw your money.
<TABLE>
<CAPTION>
$10,000 OVER LIFE OF FUND
<S> <C> <C>
1992/08/27 10000.00 10000.00
1992/08/31 10014.00 10018.36
1992/09/30 10130.00 10136.58
1992/10/31 10152.00 10172.06
1992/11/30 10498.00 10518.92
1992/12/31 10630.67 10648.31
1993/01/31 10707.47 10737.75
1993/02/28 10856.70 10883.79
1993/03/31 11095.84 11113.43
1993/04/30 10822.25 10844.49
1993/05/31 11103.95 11135.12
1993/06/30 11132.32 11167.41
1993/07/31 11081.66 11122.74
1993/08/31 11501.17 11544.30
1993/09/30 11407.95 11455.40
1993/10/31 11641.01 11692.53
1993/11/30 11527.52 11581.45
1993/12/31 11666.06 11721.59
1994/01/31 12059.53 12120.12
1994/02/28 11732.95 11791.67
1994/03/31 11223.46 11277.55
1994/04/30 11357.65 11421.90
1994/05/31 11533.77 11609.22
1994/06/30 11252.82 11324.80
1994/07/31 11623.93 11696.25
1994/08/31 12087.29 12175.80
1994/09/30 11793.76 11877.49
1994/10/31 12055.84 12144.73
1994/11/30 11617.64 11702.42
1994/12/31 11787.47 11875.97
1995/01/31 12099.87 12183.91
1995/02/28 12563.64 12658.72
1995/03/31 12931.02 13032.28
1995/04/30 13311.22 13416.08
1995/05/31 13834.52 13952.32
1995/06/30 14148.51 14276.43
1995/07/31 14620.55 14749.84
1995/08/31 14656.86 14786.86
1995/09/30 15269.88 15410.86
1995/10/31 15218.62 15355.85
1995/11/30 15880.76 16029.97
1995/12/31 16171.25 16338.71
1996/01/31 16724.46 16894.88
1996/02/29 16880.36 17051.49
1996/03/31 17054.17 17215.70
1996/04/30 17292.62 17469.46
1996/05/31 17733.85 17919.99
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
1996/06/30 17809.61 17988.27
1996/07/31 17020.75 17193.55
1996/08/31 17370.61 17556.16
1996/09/30 18342.21 18544.22
1996/10/31 18848.06 19055.67
1996/11/30 20260.89 20496.09
1996/12/31 19844.17 20090.06
1997/01/31 21074.26 21345.29
1997/02/28 21231.99 21512.63
1997/03/31 20349.53 20628.68
1997/04/30 21559.17 21860.21
1997/05/31 22870.18 23191.06
1997/06/30 23874.76 24230.02
</TABLE>
Let's say hypothetically that $10,000 was invested in Index 500 Portfolio on
August 27, 1992, when the fund started. As the chart shows, by June 30, 1997,
the value of the investment would have grown to $23,875 - a 138.75% increase on
the initial investment. For comparison, look at how the S&P 500 did over the
same period. With dividends and capital gains, if any, reinvested, the same
$10,000 investment would have grown to $24,230 - a 142.30% increase.
<TABLE>
<CAPTION>
INVESTMENT SUMMARY
TOP TEN STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
<S> <C>
General Electric Co. 2.9
Coca-Cola Co. (The) 2.3
Exxon Corp. 2.1
Microsoft Corp. 2.1
Merck & Co., Inc. 1.7
Royal Dutch Petroleum Co. 1.6
Intel Corp. 1.6
Philip Morris Companies, Inc. 1.5
Procter & Gamble Co. 1.3
International Business Machines Corp. 1.3
</TABLE>
<TABLE>
<CAPTION>
TOP TEN MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
<S> <C>
Finance 14.3
Technology 13.3
Nondurables 10.8
Health 10.7
Utilities 8.5
Energy 8.3
Industrial Machinery & Equipment 5.6
Basic Industries 5.0
Retail & Wholesale 4.4
Durables 3.8
</TABLE>
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with Jennifer Farrelly, Portfolio Manager of Index 500 Portfolio
Q. HOW DID THE FUND PERFORM, JEN?
A. For the six months that ended June 30, 1997, the fund performed in line with
the 20.61% return of the Standard & Poor's 500 Index. Of course, the fund's
total return is slightly lower than the index due to management expenses. The
S&P 500 returned 34.70% for the 12 months ended June 30, 1997.
Q. HOW WOULD YOU CHARACTERIZE THE MARKET OVER THE PAST SIX MONTHS?
A. The U.S. stock market continued to be strong, led by large-capitalization
companies. There were a number of factors that contributed to the positive
investing environment. Most importantly, corporate earnings were healthy, helped
by a steadily growing economy that has shown no signs of emerging inflation.
Interest rates remained relatively low, helping to sustain economic growth, keep
corporate borrowing costs under control and make investment alternatives to
stocks less attractive. Economic growth remained moderate enough to discourage
the Federal Reserve Board from aggressively raising interest rates to cool an
overheated economy and head off potential inflation.
Q. AT THE SAME TIME, THE FED DID RAISE RATES BACK IN MARCH . . .
<PAGE>
A. That's right. In February, Fed Chairman Alan Greenspan indicated in his
semiannual Congressional testimony that the Fed was inclined to raise short-term
rates in the first half of 1997, as a pre-emptive strike against possible
inflation caused by a tight labor market. As the Fed's March 25 Open Market
Committee meeting approached and data emerged showing the economy picking up
speed, the market experienced a sharp sell-off. Investors became convinced that
the Fed would raise rates. The Fed did so, increasing a key short-term rate by
0.25% at its March meeting. However, when statistics emerged in the second
quarter showing the economy slowing and no significant increase in inflation,
the market recovered from its late March and early April correction and
continued its steady upward climb through the end of the period.
Q. WHY DID THE STOCKS OF THE LARGEST COMPANIES CONTINUE TO PERFORM WELL?
A. Because they tended to provide reliable earnings, and earnings are one of the
main drivers of stock prices. With the economy showing strength, the stock
market broadened somewhat with the prices of small- and mid-capitalization
stocks also starting to show improvement. At the same time, cost cutting and
sustained international sales helped large-cap stocks maintain their status as
market leaders.
Q. WERE THERE ANY PARTICULAR SECTORS OF THE MARKET THAT PROVED TO BE MARKET
LEADERS?
A. Not really. No one sector stood out above the rest, although many financial
services stocks did well. In the past, the uncertain interest-rate environment
probably would have adversely affected these stocks. However, interest rates
remain at a relatively low level and many financial services companies have
emphasized steadier fee-based businesses that tend to insulate them from the
negative influence that monetary policy might exert. In addition, many financial
services firms benefited from the strong stock market and the positive impact of
significant inflows of capital, especially through mutual funds. Positive merger
and acquisition activity also bolstered stocks in the sector.
Q. WHAT SECTORS LAGGED DURING THE PERIOD?
A. Precious metals was one area that lagged the market. Although we continue to
use more gold than we mine, its price continues to plummet. That's because many
central banks have sold their gold reserves off recently because the metal has
been such a poor performing asset. For example, Australia recently sold off a
fair amount of its reserves to buy U.S. government bonds, among other
investments. In addition, gold often is seen as a hedge against inflation, and
with such positive news on that front recently, the precious metal has lost its
luster.
Q. WHAT'S YOUR OUTLOOK FOR THE REST OF 1997?
A. Even though investors have seen valuations well above historical levels,
earnings growth and earnings surprises have supported stock prices and driven
them higher. Nevertheless, investors should understand that this situation leads
to a great deal of uncertainty looking forward. While the large-cap stocks that
make up the S&P 500 have rallied to post annual returns in the 20% to 30% range
for more than two years, the index's historical average annual return is
approximately 11%. Investors should set their expectations accordingly.
FUND FACTS
GOAL: seeks reasonable income by investing
primarily in income producing equity securities
to provide current income and increase the
value of the fund's shares
START DATE: October 9,1986
SIZE: as of June 30, 1997, more than $8.5
billion
MANAGER: Stephen Petersen, since January
1997; joined Fidelity in 1980
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 93.0%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 2.2%
AEROSPACE & DEFENSE - 1.9%
AlliedSignal, Inc. 59,100 $ 4,964,223
Boeing Co. 149,918 7,955,024
Lockheed Martin Corp. 40,393 4,183,200
McDonnell Douglas Corp. 44,500 3,048,250
Rockwell International Corp. 45,900 2,708,100
Textron, Inc. 34,700 2,303,213
United Technologies Corp. 49,600 4,116,800
29,278,810
DEFENSE ELECTRONICS - 0.2%
Northrop Grumman Corp. 12,000 1,053,750
Raytheon Co. 49,300 2,514,300
3,568,050
SHIP BUILDING & REPAIR - 0.1%
General Dynamics Corp. 13,200 990,000
TOTAL AEROSPACE & DEFENSE 33,836,860
BASIC INDUSTRIES - 5.0%
CHEMICALS & PLASTICS - 2.7%
Air Products & Chemicals, Inc. 23,300 1,893,125
Avery Dennison Corp. 21,900 878,738
Dow Chemical Co. 50,800 4,425,950
du Pont (E.I.) de Nemours & Co. 235,800 14,825,925
<PAGE>
Eastman Chemical Co. 16,175 1,027,113
Engelhard Corp. 30,200 632,313
FMC Corp. (a) 7,700 611,669
Goodrich (B.F.) Co. 11,300 489,431
Great Lakes Chemical Corp. 12,500 654,688
Hercules, Inc. 21,500 1,029,313
Monsanto Co. 123,000 5,296,688
Morton International, Inc. 29,700 896,569
Nalco Chemical Co. 14,000 540,750
PPG Industries, Inc. 38,300 2,226,188
Praxair, Inc. 32,800 1,836,800
Raychem Corp. 9,400 699,125
Rohm & Haas Co. 13,300 1,197,831
Union Carbide Corp. 26,600 1,251,863
W.R. Grace & Co. 15,100 832,388
41,246,467
IRON & STEEL - 0.2%
Aeroquip Vickers, Inc. 5,800 274,050
Allegheny Teledyne, Inc. 36,384 982,368
Armco, Inc. (a) 22,400 86,800
Bethlehem Steel Corp. (a) 23,300 243,194
Inland Steel Industries, Inc. 10,200 266,475
Nucor Corp. 18,300 1,033,950
USX-U.S. Steel Group 17,800 624,113
Worthington Industries, Inc. 20,150 368,997
3,879,947
METALS & MINING - 0.6%
ASARCO, Inc. 9,000 275,625
Alcan Aluminium Ltd. 47,257 1,612,143
Aluminum Co. of America 36,200 2,728,575
Cyprus Amax Minerals Co. 19,450 476,525
Freeport-McMoRan Copper & Gold, Inc.
Class B 40,500 1,260,563
Inco Ltd. 35,136 1,049,766
Phelps Dodge Corp. 13,500 1,150,031
Reynolds Metals Co. 15,300 1,090,125
9,643,353
SHARES VALUE (NOTE 1)
PACKAGING & CONTAINERS - 0.2%
Ball Corp. 6,498 $ 195,346
Bemis Co., Inc. 10,900 471,425
Crown Cork & Seal Co., Inc. 26,800 1,432,125
Tupperware Corp. 13,100 478,150
2,577,046
PAPER & FOREST PRODUCTS - 1.3%
Boise Cascade Corp. 10,200 360,188
Champion International Corp. 19,900 1,099,475
Georgia-Pacific Corp. 19,200 1,639,200
International Paper Co. 62,900 3,054,581
James River Corp. of Virginia 18,100 669,700
Kimberly-Clark Corp. 118,332 5,887,017
Louisiana-Pacific Corp. 22,700 479,538
Mead Corp. 11,000 684,750
Potlatch Corp. 6,100 276,025
Stone Container Corp. 20,800 297,700
Temple-Inland, Inc. 11,500 621,000
Union Camp Corp. 14,500 725,000
Westvaco Corp. 21,250 668,047
Weyerhaeuser Co. 41,600 2,163,200
Willamette Industries, Inc. 11,500 805,000
19,430,421
TOTAL BASIC INDUSTRIES 76,777,234
CONSTRUCTION & REAL ESTATE - 0.4%
BUILDING MATERIALS - 0.3%
Armstrong World Industries, Inc. 8,700 638,363
Crane Co. 9,700 405,581
Masco Corp. 33,500 1,398,625
Owens-Corning 10,800 465,750
Sherwin-Williams Co. 36,000 1,111,500
4,019,819
CONSTRUCTION - 0.0%
Centex Corp. 6,100 247,813
Fleetwood Enterprises, Inc. 7,500 223,594
Kaufman & Broad Home Corp. 8,200 144,013
Pulte Corp. 4,300 148,619
764,039
ENGINEERING - 0.1%
EG & G, Inc. 10,000 225,000
Fluor Corp. 17,500 965,781
Foster Wheeler Corp. 8,600 348,300
1,539,081
TOTAL CONSTRUCTION & REAL ESTATE 6,322,939
DURABLES - 3.8%
AUTOS, TIRES, & ACCESSORIES - 2.3%
AutoZone, Inc. (a) 31,550 743,397
Chrysler Corp. 147,100 4,826,719
Cooper Tire & Rubber Co. 16,500 363,000
Cummins Engine Co., Inc. 8,200 578,613
Dana Corp. 21,400 813,200
Eaton Corp. 16,200 1,414,463
Echlin, Inc. 13,000 468,000
Ford Motor Co. 248,000 9,362,000
General Motors Corp. 158,278 8,814,106
<PAGE>
Genuine Parts Co. 37,850 1,282,169
Goodyear Tire & Rubber Co. 32,600 2,063,988
ITT Industries, Inc. 24,800 638,600
Johnson Controls, Inc. 17,500 718,594
NACCO Industries, Inc. Class A 1,800 101,588
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
DURABLES - CONTINUED
AUTOS, TIRES, & ACCESSORIES - CONTINUED
Navistar International Corp. (a) 15,270 $ 263,408
PACCAR, Inc. 16,190 751,823
Pep Boys-Manny, Moe & Jack 12,600 429,188
Snap-On Tools Corp. 12,800 504,000
TRW, Inc. 26,500 1,505,531
35,642,387
CONSUMER DURABLES - 0.8%
Corning, Inc. 47,900 2,664,438
Minnesota Mining & Manufacturing Co. 87,400 8,914,800
11,579,238
CONSUMER ELECTRONICS - 0.2%
Black & Decker Corp. 19,800 736,313
Maytag Co. 20,900 546,013
Newell Co. 33,300 1,319,513
Whirlpool Corp. 15,500 845,719
3,447,558
TEXTILES & APPAREL - 0.5%
Fruit of the Loom, Inc. Class A (a) 16,000 496,000
Liz Claiborne, Inc. 14,900 694,713
NIKE, Inc. Class B 60,300 3,520,013
Reebok International Ltd. 11,600 542,300
Russell Corp. 8,100 239,963
Springs Industries, Inc. Class A 4,300 226,825
Stride Rite Corp. 10,300 132,613
VF Corp. 13,400 1,140,675
6,993,102
TOTAL DURABLES 57,662,285
ENERGY - 8.3%
ENERGY SERVICES - 0.8%
Baker Hughes, Inc. 30,500 1,179,969
Dresser Industries, Inc. 36,700 1,367,075
Halliburton Co. 26,300 2,084,275
Helmerich & Payne, Inc. 5,300 305,413
McDermott International, Inc. 11,400 332,738
Rowan Companies, Inc. (a) 18,000 507,375
Schlumberger Ltd. 51,600 6,450,000
Western Atlas, Inc. (a) 11,300 827,725
13,054,570
OIL & GAS - 7.5%
Amerada Hess Corp. 19,400 1,077,913
Amoco Corp. 104,000 9,041,500
Ashland, Inc. 15,600 723,450
Atlantic Richfield Co. 67,600 4,765,800
Burlington Resources, Inc. 26,200 1,156,075
Chevron Corp. 136,600 10,099,863
Coastal Corp. (The) 22,100 1,175,444
Exxon Corp. 519,700 31,961,550
Kerr-McGee Corp. 10,200 646,425
Louisiana Land & Exploration Co. 7,200 411,300
Mobil Corp. 165,000 11,529,375
Occidental Petroleum Corp. 68,900 1,726,806
Oryx Energy Co. (a) 22,000 464,750
Pennzoil Co. 9,800 752,150
Phillips Petroleum Co. 55,000 2,406,250
Royal Dutch Petroleum Co. 448,400 24,381,750
Santa Fe Energy Resources, Inc. (a) 20,800 305,500
Sun Co., Inc. 15,200 471,200
Texaco, Inc. 55,400 6,024,750
SHARES VALUE (NOTE 1)
USX-Marathon Group 60,100 $ 1,735,388
Union Pacific Resources Group, Inc. 52,212 1,298,774
Unocal Corp. 52,488 2,037,191
114,193,204
TOTAL ENERGY 127,247,774
FINANCE - 14.3%
BANKS - 6.6%
Banc One Corp. 114,726 5,557,041
Bank of New York Co., Inc. 82,000 3,567,000
BankBoston Corp. 32,091 2,312,558
BankAmerica Corp. 150,000 9,684,375
Bankers Trust New York Corp. 17,200 1,496,400
Barnett Banks, Inc. 43,600 2,289,000
Chase Manhattan Corp. 91,773 8,907,717
Citicorp 96,862 11,677,925
Comerica, Inc. 22,400 1,523,200
CoreStates Financial Corp. 46,700 2,510,125
Fifth Third Bancorp 22,100 1,813,581
First Bank System, Inc. 28,200 2,407,575
First Union Corp. 59,781 5,529,743
KeyCorp 47,107 2,632,104
Mellon Bank Corp. 54,100 2,441,263
Morgan (J.P.) & Co., Inc. 38,700 4,039,313
National City Corp. 46,780 2,455,950
NationsBank Corp. 152,946 9,865,017
<PAGE>
Norwest Corp. 77,600 4,365,000
PNC Financial Corp. 70,300 2,926,238
Republic New York Corp. 11,500 1,236,250
SunTrust Banks, Inc. 46,600 2,565,913
U.S. Bancorp 31,700 2,032,763
Wachovia Corp. 34,500 2,011,781
Wells Fargo & Co. 19,300 5,201,350
101,049,182
CREDIT & OTHER FINANCE - 1.5%
American Express Co. 99,079 7,381,386
Beneficial Corp. 11,400 810,113
Countrywide Credit Industries, Inc. 20,400 636,225
First Chicago NBD Corp. 66,659 4,032,870
Fleet Financial Group, Inc. 50,874 3,217,781
Green Tree Financial Corp. 28,700 1,022,438
Household International, Inc. 20,210 2,373,412
MBNA Corp. 70,000 2,563,750
Transamerica Corp. 13,929 1,303,232
23,341,207
FEDERAL SPONSORED CREDIT - 1.0%
Federal Home Loan
Mortgage Corporation 149,600 5,142,500
Federal National
Mortgage Association 228,600 9,972,675
15,115,175
INSURANCE - 4.2%
Aegon NV (Reg.) 7,906 553,914
Aetna, Inc. 31,500 3,224,813
Allstate Corp. 93,121 6,797,833
American General Corp. 50,552 2,413,858
American International Group, Inc. 98,175 14,664,891
Aon Corp. 34,050 1,762,088
CIGNA Corp. 15,800 2,804,500
Chubb Corp. (The) 36,500 2,440,938
Conseco, Inc. 40,000 1,480,000
General Re Corp. 17,300 3,148,600
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
Hartford Financial Services
Group, Inc. 24,500 $ 2,027,375
Jefferson Pilot Corp. 14,900 1,041,138
Lincoln National Corp. 21,900 1,409,813
Loews Corp. 24,000 2,403,000
MBIA, Inc. 2,800 315,875
MGIC Investment Corp. 24,600 1,179,263
Marsh & McLennan Companies, Inc. 30,200 2,155,525
Providian Financial Corp. (a) 19,700 632,863
SAFECO Corp. 26,300 1,227,881
St. Paul Companies, Inc. (The) 17,300 1,319,125
Torchmark Corp. 14,800 1,054,500
Travelers Group, Inc. (The) 133,800 8,437,763
UNUM Corp. 30,700 1,289,400
USF&G Corp. 24,300 583,200
64,368,156
SAVINGS & LOANS - 0.2%
Ahmanson (H.F.) & Co. 22,000 946,000
Golden West Financial Corp. 11,900 833,000
Great Western Financial Corp. 28,750 1,545,313
3,324,313
SECURITIES INDUSTRY - 0.8%
Merrill Lynch & Co., Inc. 69,000 4,114,125
Morgan Stanley Dean Witter Discover
and Co. 119,856 5,161,299
Salomon, Inc. 22,900 1,273,813
Schwab (Charles) Corp. 36,600 1,489,163
12,038,400
TOTAL FINANCE 219,236,433
HEALTH - 10.7%
DRUGS & PHARMACEUTICALS - 6.9%
ALZA Corp. Class A (a) 17,600 510,400
Allergan, Inc. 13,700 435,831
American Home Products Corp. 133,700 10,228,050
Amgen, Inc. 55,400 3,220,125
Bristol-Myers Squibb Co. 209,700 16,985,700
Lilly (Eli) & Co. 115,396 12,614,225
Merck & Co., Inc. 252,200 26,102,700
Pfizer, Inc. 135,000 16,132,500
Pharmacia & Upjohn, Inc. 106,260 3,692,535
Schering-Plough Corp. 154,700 7,406,263
Sigma Aldrich Corp. 21,000 736,313
Warner-Lambert Co. 56,700 7,044,975
105,109,617
MEDICAL EQUIPMENT & SUPPLIES - 3.0%
Abbott Laboratories 162,500 10,846,875
Bard (C.R.), Inc. 12,000 435,750
Bausch & Lomb, Inc. 11,700 551,363
Baxter International, Inc. 57,200 2,988,700
Becton, Dickinson & Co. 25,800 1,306,125
Biomet, Inc. 24,000 447,000
Boston Scientific Corp. (a) 40,500 2,488,219
Cardinal Health, Inc. 22,700 1,299,575
Guidant Corp. 15,600 1,326,000
<PAGE>
Johnson & Johnson 278,800 17,947,750
Mallinckrodt, Inc. 15,400 585,200
Medtronic, Inc. 50,300 4,074,300
Millipore Corp. 9,000 396,000
SHARES VALUE (NOTE 1)
Pall Corp. 26,400 $ 613,800
St. Jude Medical, Inc. (a) 19,050 742,950
U.S. Surgical Corp. 14,600 543,850
46,593,457
MEDICAL FACILITIES MANAGEMENT - 0.8%
Beverly Enterprises, Inc. (a) 20,700 336,375
Columbia/HCA Healthcare Corp. 140,412 5,519,947
HEALTHSOUTH Rehabilitation Corp. (a) 66,000 1,645,875
Humana, Inc. (a) 34,100 788,563
Manor Care, Inc. 13,200 430,650
Tenet Healthcare Corp. (a) 63,100 1,865,394
United HealthCare Corp. 38,600 2,007,200
12,594,004
TOTAL HEALTH 164,297,078
HOLDING COMPANIES - 0.2%
CINergy Corp. 32,913 1,145,784
Norfolk Southern Corp. 26,100 2,629,575
3,775,359
INDUSTRIAL MACHINERY & EQUIPMENT - 5.6%
ELECTRICAL EQUIPMENT - 3.8%
Emerson Electric Co. 93,500 5,148,344
General Electric Co. 689,200 45,056,450
General Instrument Corp. (a) 28,600 715,000
General Signal Corp. 10,500 458,063
Grainger (W.W.), Inc. 11,200 875,700
Harris Corp. 8,100 680,400
Honeywell, Inc. 26,600 2,018,275
Scientific-Atlanta, Inc. 16,100 352,188
Westinghouse Electric Corp. 132,950 3,074,469
58,378,889
INDUSTRIAL MACHINERY & EQUIPMENT - 1.5%
Briggs & Stratton Corp. 5,400 270,000
Case Corp. 15,300 1,053,788
Caterpillar, Inc. 40,000 4,295,000
Cincinnati Milacron, Inc. 8,400 217,875
Cooper Industries, Inc. 24,646 1,226,139
Deere & Co. 53,500 2,935,813
Dover Corp. 23,600 1,451,400
Giddings & Lewis, Inc. 7,000 146,125
Harnischfeger Industries, Inc. 10,200 423,300
Illinois Tool Works, Inc. 51,900 2,591,756
Ingersoll-Rand Co. 23,000 1,420,250
Parker-Hannifin Corp. 15,650 949,759
Stanley Works 15,600 624,000
Tenneco, Inc. 35,800 1,617,713
Timken Co. 13,222 470,207
Tyco International Ltd. 34,800 2,420,775
22,113,900
POLLUTION CONTROL - 0.3%
Browning-Ferris Industries, Inc. 44,500 1,479,625
Safety Kleen Corp. 12,100 204,188
Waste Management, Inc. 94,900 3,048,663
4,732,476
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 85,225,265
MEDIA & LEISURE - 3.6%
BROADCASTING - 0.5%
TCI Group Class A (a) 138,900 2,066,138
Time Warner, Inc. 119,102 5,746,672
7,812,810
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - CONTINUED
ENTERTAINMENT - 0.9%
Disney (Walt) Co. 141,200 $ 11,331,300
King World Productions, Inc. 7,900 276,500
Viacom, Inc. Class B (non-vtg.) (a) 74,100 2,223,000
13,830,800
LEISURE DURABLES & TOYS - 0.2%
Brunswick Corp. 20,500 640,625
Hasbro, Inc. 27,150 770,381
Mattel, Inc. 60,376 2,045,237
3,456,243
LODGING & GAMING - 0.5%
HFS, Inc. (a) 32,900 1,908,200
Harrah's Entertainment, Inc. (a) 21,600 394,200
Hilton Hotels Corp. 51,800 1,375,938
ITT Corp. (a) 24,300 1,483,819
Marriott International, Inc. 26,700 1,638,713
6,800,870
PUBLISHING - 1.0%
American Greetings Corp. Class A 15,600 579,150
Cognizant Corp. 35,700 1,445,850
Dow Jones & Co., Inc. 20,300 815,806
Gannett Co., Inc. 29,400 2,903,250
Harcourt General, Inc. 14,800 704,850
Knight-Ridder, Inc. 19,700 966,531
McGraw-Hill, Inc. 20,900 1,229,181
Meredith Corp. 11,300 327,700
<PAGE>
New York Times Co. (The) Class A 20,300 1,004,850
Times Mirror Co. Class A 19,500 1,077,375
Tribune Co. 25,700 1,235,206
U.S. West Media Group (a) 130,800 2,648,700
14,938,449
RESTAURANTS - 0.5%
Darden Restaurants, Inc. 33,400 302,688
McDonald's Corp. 146,100 7,058,456
Wendy's International, Inc. 27,000 700,313
8,061,457
TOTAL MEDIA & LEISURE 54,900,629
NONDURABLES - 10.8%
AGRICULTURE - 0.1%
Pioneer Hi-Bred International, Inc. 17,300 1,384,000
BEVERAGES - 3.7%
Anheuser-Busch Companies, Inc. 104,400 4,378,275
Brown-Forman Corp. Class B 14,500 707,781
Coca-Cola Co. (The) 520,800 35,154,000
Coors (Adolph) Co. Class B 8,000 213,000
PepsiCo, Inc. 325,200 12,215,325
Seagram Co. Ltd. 77,500 3,115,380
Whitman Corp. 21,800 551,813
56,335,574
FOODS - 2.3%
Archer-Daniels-Midland Co. 113,754 2,673,219
CPC International, Inc. 30,000 2,769,375
Campbell Soup Co. 97,700 4,885,000
ConAgra, Inc. 50,300 3,225,488
General Mills, Inc. 33,700 2,194,713
Heinz (H.J.) Co. 77,150 3,558,544
Hershey Foods Corp. 32,200 1,781,063
Kellogg Co. 44,200 3,784,625
Quaker Oats Co. 28,500 1,278,938
SHARES VALUE (NOTE 1)
Ralston Purina Co. 22,200 $ 1,824,563
Sara Lee Corp. 100,600 4,187,475
Sysco Corp. 36,900 1,346,850
Wrigley (Wm.) Jr. Co. 24,400 1,634,800
35,144,653
HOUSEHOLD PRODUCTS - 3.1%
Alberto Culver Co. Class B 11,600 324,800
Avon Products, Inc. 27,900 1,968,694
Clorox Co. 10,900 1,438,800
Colgate-Palmolive Co. 61,400 4,006,350
Gillette Co. 116,200 11,009,950
International Flavors & Fragrances, Inc. 23,000 1,161,500
Procter & Gamble Co. 142,100 20,071,625
Rubbermaid, Inc. 31,400 934,150
Unilever NV ADR 33,400 7,149,688
48,065,557
TOBACCO - 1.6%
Fortune Brands, Inc. 35,700 1,332,056
Philip Morris Companies, Inc. 511,400 22,693,375
UST, Inc. 38,900 1,079,475
25,104,906
TOTAL NONDURABLES 166,034,690
PRECIOUS METALS - 0.3%
Barrick Gold Corp. 74,800 1,628,030
Battle Mountain Gold Co. 47,100 267,881
Echo Bay Mines Ltd. 29,200 162,851
Homestake Mining Co. 30,600 399,713
Newmont Mining Corp. 32,565 1,270,035
Placer Dome, Inc. 50,200 814,457
4,542,967
RETAIL & WHOLESALE - 4.4%
APPAREL STORES - 0.3%
Charming Shoppes, Inc. (a) 22,000 114,813
Gap, Inc. 58,500 2,274,188
Limited, Inc. (The) 56,819 1,150,585
TJX Companies, Inc. 32,400 854,550
4,394,136
DRUG STORES - 0.4%
CVS Corp. 34,800 1,783,500
Long Drug Stores, Inc. 8,100 212,119
Rite Aid Corp. 25,700 1,281,788
Walgreen Co. 51,600 2,767,050
6,044,457
GENERAL MERCHANDISE STORES - 2.3%
Costco Companies, Inc. (a) 43,839 1,441,207
Dayton Hudson Corp. 45,300 2,409,394
Dillards, Inc. Class A 23,700 820,613
Federated Department Stores, Inc. (a) 43,600 1,515,100
K mart Corp. (a) 101,300 1,240,925
May Department Stores Co. (The) 51,200 2,419,200
Mercantile Stores Co., Inc. 7,800 490,913
Nordstrom, Inc. 16,700 819,344
Penney J C Co., Inc. 51,600 2,692,875
Sears, Roebuck & Co. 82,000 4,407,500
Wal-Mart Stores, Inc. 480,000 16,230,000
Woolworth Corp. (a) 28,100 674,400
35,161,471
GROCERY STORES - 0.5%
Albertson's, Inc. 52,600 1,919,900
<PAGE>
American Stores Co. 30,600 1,510,875
Fleming Companies, Inc. 7,988 143,784
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
GROCERY STORES - CONTINUED
Giant Food, Inc. Class A 12,600 $ 407,925
Great Atlantic & Pacific Tea Co., Inc. 7,900 214,781
Kroger Co. (The) (a) 52,700 1,528,300
Supervalu, Inc. 14,100 486,450
Winn-Dixie Stores, Inc. 31,500 1,173,375
7,385,390
RETAIL & WHOLESALE, MISCELLANEOUS - 0.9%
Circuit City Stores, Inc. -
Circuit City Group 16,600 590,338
Comcast Corp. Class A special 68,250 1,458,844
Home Depot, Inc. (The) 100,600 6,935,113
IKON Office Solutions, Inc. 28,100 700,744
Lowe's Companies, Inc. 36,300 1,347,638
Tandy Corp. 12,100 677,600
Toys "R" Us, Inc. (a) 60,700 2,124,500
13,834,777
TOTAL RETAIL & WHOLESALE 66,820,231
SERVICES - 0.5%
ADVERTISING - 0.1%
Interpublic Group of Companies, Inc. 16,900 1,036,181
LEASING & RENTAL - 0.0%
Ryder Systems, Inc. 15,800 521,400
PRINTING - 0.1%
Deluxe Corp. 17,300 590,363
Donnelley (R.R.) & Sons Co. 31,500 1,153,688
Harland (John H.) Co. 6,400 146,000
Moore Corporation Ltd. 18,400 362,496
2,252,547
SERVICES - 0.3%
Block (H&R), Inc. 21,700 699,825
Dun & Bradstreet Corp. 35,700 937,125
Ecolab, Inc. 13,600 649,400
Jostens, Inc. 8,000 211,000
National Service Industries, Inc. 9,400 457,663
Service Corp. International 49,400 1,624,025
4,579,038
TOTAL SERVICES 8,389,166
TECHNOLOGY - 13.3%
COMMUNICATIONS EQUIPMENT - 2.0%
Andrew Corp. (a) 19,112 537,525
Cabletron Systems, Inc. (a) 32,700 925,819
Cisco Systems, Inc. (a) 137,500 9,229,688
DSC Communications Corp. (a) 24,600 547,350
Lucent Technologies, Inc. 133,484 9,619,191
Northern Telecom Ltd. 54,000 4,867,490
Tellabs, Inc. (a) 37,600 2,100,900
3Com Corp. (a) 66,800 3,006,000
30,833,963
COMPUTER SERVICES & SOFTWARE - 3.8%
Adobe Systems, Inc. 15,100 529,444
Autodesk, Inc. 9,900 379,294
Automatic Data Processing, Inc. 61,200 2,876,400
CUC International, Inc. (a) 83,075 2,144,373
Ceridian Corp. (a) 16,900 714,025
Computer Associates International, Inc. 76,075 4,236,427
Computer Sciences Corp. (a) 16,100 1,161,213
Equifax, Inc. 31,600 1,175,125
First Data Corp. 93,600 4,112,550
SHARES VALUE (NOTE 1)
Microsoft Corp. (a) 251,700 $ 31,808,588
Novell, Inc. (a) 72,500 502,969
Oracle Systems Corp. (a) 141,400 7,123,025
Parametric Technology Corp. (a) 26,600 1,132,163
Shared Medical Systems Corp. 5,000 270,000
58,165,596
COMPUTERS & OFFICE EQUIPMENT - 3.9%
Amdahl Corp. (a) 25,300 221,375
Apple Computer, Inc. (a) 26,000 370,500
Bay Networks, Inc. (a) 41,200 1,094,375
Compaq Computer Corp. (a) 56,600 5,617,550
Data General Corp. (a) 8,300 215,800
Dell Computer Corp. (a) 36,700 4,309,956
Digital Equipment Corp. (a) 33,000 1,169,438
EMC Corp. (a) 51,500 2,008,500
Hewlett-Packard Co. 212,300 11,888,800
Intergraph Corp. (a) 10,000 85,000
International Business Machines Corp. 216,700 19,543,631
Pitney Bowes, Inc. 31,000 2,154,500
Seagate Technology (a) 51,800 1,822,713
Silicon Graphics, Inc. (a) 37,000 555,000
Sun Microsystems, Inc. (a) 77,100 2,869,566
Tandem Computers, Inc. (a) 24,800 502,200
Unisys Corp. (a) 36,500 278,313
Xerox Corp. 68,000 5,363,500
60,070,717
ELECTRONIC INSTRUMENTS - 0.3%
Applied Materials, Inc. (a) 37,800 2,676,713
<PAGE>
Perkin-Elmer Corp. 9,200 731,975
Tektronix, Inc. 7,000 420,000
Thermo Electron Corp. (a) 31,300 1,064,200
4,892,888
ELECTRONICS - 2.9%
AMP, Inc. 45,896 1,916,158
Advanced Micro Devices, Inc. (a) 28,500 1,026,000
Intel Corp. 171,800 24,363,388
LSI Logic Corp. (a) 29,300 937,600
Micron Technology, Inc. 43,900 1,753,256
Motorola, Inc. 124,000 9,424,000
National Semiconductor Corp. (a) 29,300 897,313
Texas Instruments, Inc. 39,900 3,354,094
Thomas & Betts Corp. 11,200 588,700
44,260,509
PHOTOGRAPHIC EQUIPMENT - 0.4%
Eastman Kodak Co. 69,800 5,357,150
Polaroid Corp. 9,600 532,800
5,889,950
TOTAL TECHNOLOGY 204,113,623
TRANSPORTATION - 1.1%
AIR TRANSPORTATION - 0.3%
AMR Corp. (a) 19,100 1,766,750
Delta Air Lines, Inc. 15,400 1,262,800
Southwest Airlines Co. 30,300 784,013
US Airways Group, Inc. (a) 16,400 574,000
4,387,563
RAILROADS - 0.6%
Burlington Northern Santa Fe Corp. 31,918 2,868,630
CSX Corp. 45,338 2,516,259
Union Pacific Corp. 51,300 3,616,650
9,001,539
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TRANSPORTATION - CONTINUED
TRUCKING & FREIGHT - 0.2%
Caliber System, Inc. 8,100 $ 301,725
Federal Express Corp. (a) 23,800 1,374,450
Laidlaw, Inc. Class B 65,800 907,898
2,584,073
TOTAL TRANSPORTATION 15,973,175
UTILITIES - 8.5%
CELLULAR - 0.2%
AirTouch Communications, Inc. (a) 105,000 2,874,375
ELECTRIC UTILITY - 2.2%
American Electric Power Co., Inc. 39,300 1,650,600
Baltimore Gas & Electric Co. 30,800 821,975
Carolina Power & Light Co. 31,600 1,133,650
Central & South West Corp. 44,200 939,250
Consolidated Edison Co. of
New York, Inc. 49,100 1,445,381
DTE Energy Co. 30,300 837,038
Dominion Resources, Inc. 37,800 1,384,425
Duke Power Co. 75,207 3,605,236
Edison International 90,600 2,253,675
Entergy Corp. 48,400 1,324,950
FPL Group, Inc. 38,200 1,759,588
GPU, Inc. 25,300 907,638
Houston Industries, Inc. 49,000 1,050,438
Niagara Mohawk Power Corp. (a) 30,300 259,444
Northern States Power Co. 14,400 745,200
Ohio Edison Co. 32,000 698,000
PECO Energy Co. 46,500 976,500
PG&E Corp. 86,200 2,090,350
PP&L Resources, Inc. 33,900 675,881
PacifiCorp. 61,600 1,355,200
Public Service Enterprise Group, Inc. 50,000 1,250,000
Southern Co. 140,900 3,082,188
Texas Utilities Co. 47,100 1,622,006
Unicom Corp. 45,200 1,005,700
Union Electric Co. 21,300 802,744
33,677,057
GAS - 0.6%
Columbia Gas System, Inc. (The) 11,500 750,375
Consolidated Natural Gas Co. 19,900 1,070,869
ENSERCH Corp. 14,500 322,625
Eastern Enterprises Co. 4,200 145,688
Enron Corp. 53,200 2,171,225
NICOR, Inc. 10,500 376,688
Noram Energy Corp. 28,679 437,355
ONEOK, Inc. 5,789 186,333
Pacific Enterprises 17,700 595,163
Peoples Energy Corp. 7,400 277,038
Sonat, Inc. 18,100 927,625
Williams Companies, Inc. 32,950 1,441,563
8,702,547
TELEPHONE SERVICES - 5.5%
ALLTEL Corp. 39,100 1,307,406
AT&T Corp. 339,000 11,886,188
Ameritech Corp. 114,900 7,806,019
Bell Atlantic Corp. 91,700 6,957,738
BellSouth Corp. 207,500 9,622,813
Frontier Corp. 34,300 683,856
GTE Corp. 201,200 8,827,650
<PAGE>
MCI Communications Corp. 143,400 5,489,531
NYNEX Corp. 92,000 5,301,500
SHARES VALUE (NOTE 1)
SBC Communications, Inc. 191,824 $ 11,869,110
Sprint Corp. 90,000 4,736,250
U.S. West Communications Group 100,400 3,783,825
WorldCom, Inc. (a) 181,100 5,795,200
84,067,086
TOTAL UTILITIES 129,321,065
TOTAL COMMON STOCKS
(Cost $1,138,887,654) 1,424,476,773
U.S. TREASURY OBLIGATIONS - 0.3%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
U.S. Treasury Bills, yields at dates
of purchase 5.11% to 5.28%,
8/07/97 to 1/08/98 (b)
(Cost $3,973,818) $ 4,050,000 3,973,818
CASH EQUIVALENTS - 6.7%
MATURITY VALUE
AMOUNT (NOTE 1)
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 103,083,977 103,067,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $1,245,928,472) $ 1,531,517,591
FUTURES CONTRACTS
EXPIRATION UNDERLYING FACE UNREALIZED
DATE AMOUNT AT VALUE GAIN/(LOSS)
PURCHASED
239 S&P 500 Index Contracts Sept. 1997 $106,384,623 $(54,809)
THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL INVESTMENTS -
6.9%
LEGEND
(a) Non-income producing
(b) Security was pledged to cover margin requirements for futures contracts. At
the period end, the value of securities pledged amounted to $3,973,818.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities, aggregated
$494,675,041 and $5,220,911, respectively.
The market value of futures contracts opened and closed during the period
amounted to $543,582,086 and $529,220,148 respectively.
The fund placed a portion of its portfolio transactions with brokerage firms
which are affiliates of Fidelity Management & Research Company. The commissions
paid to these affiliated firms were $63 for the period (see Note 4 of Notes to
Financial Statements).
INCOME TAX INFORMATION
At June 30, 1997 the aggregate cost of investment securities for income tax
purposes was $1,245,928,472. Net unrealized appreciation aggregated
$285,589,119, of which $300,312,750 related to appreciated investment securities
and $14,723,631 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $ 1,531,517,591
securities, at value
(including
repurchase
agreements of
$103,067,000) (cost
$1,245,928,472) -
See accompanying
schedule
Cash 105
Receivable for fund 5,931,316
shares sold
Dividends receivable 1,629,782
Other receivables 3,346
TOTAL ASSETS 1,539,082,140
LIABILITIES
Payable for $ 1,257,374
investments
purchased
Payable for fund 979,674
shares redeemed
Accrued management 188,667
<PAGE>
fee
Payable for daily 792,556
variation on
futures contracts
Other payables and 172,255
accrued expenses
TOTAL LIABILITIES 3,390,526
NET ASSETS $1,535,691,614
Net Assets consist of:
Paid in capital $1,226,167,647
Undistributed net 10,647,945
investment income
Accumulated 13,341,727
undistributed net
realized gain (loss)
on investments and
foreign currency
transactions
Net unrealized 285,534,295
appreciation
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $1,535,691,614
14,820,532
shares outstanding
NET ASSET VALUE, $ 103.62
offering price
and redemption
price per share
($1,535,691,614 (divided by)
14,820,532 shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 9,963,719
Dividends
Interest 2,280,379
TOTAL INCOME 12,244,098
EXPENSES
Management fee $ 1,607,543
Transfer agent fees 426,756
Accounting fees and 247,982
expenses
Non-interested 2,305
trustees'
compensation
Custodian fees and 25,316
expenses
Registration fees 8,223
Audit 26,892
Legal 1,004
Miscellaneous 13,097
Total expenses 2,359,118
before reductions
Expense reductions (771,246) 1,587,872
NET INVESTMENT 10,656,226
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
<PAGE>
Investment 1,026,442
securities
Foreign currency (17)
transactions
Futures contracts 11,550,416 12,576,841
Change in net
unrealized
appreciation
(depreciation) on:
Investment 190,817,156
securities
Assets and 25
liabilities in
foreign currencies
Futures contracts 810,769 191,627,950
NET GAIN (LOSS) 204,204,791
NET INCREASE $214,861,017
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 23,179
Expense reductions
Directed
brokerage
arrangements
Custodian credits 629
FMR 747,438
reimbursement
$ 771,246
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) SIX MONTHS YEAR ENDED
IN NET ASSETS ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
Operations $ 10,656,226 $ 10,838,949
Net investment
income
Net realized gain 12,576,841 22,654,377
(loss)
Change in net 191,627,950 68,025,688
unrealized
appreciation
(depreciation)
NET INCREASE 214,861,017 101,519,014
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Distributions to (10,847,444) (3,387,922)
shareholders
From net
investment income
From net realized (22,010,833) (8,711,800)
gain
TOTAL DISTRIBUTIONS (32,858,277) (12,099,722)
Share transactions 621,256,178 568,794,744
Net proceeds from
sales of shares
Reinvestment of 32,858,277 12,099,722
distributions
Cost of shares (123,668,266) (92,770,768)
redeemed
NET INCREASE 530,446,189 488,123,698
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 712,448,929 577,542,990
<PAGE>
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 823,242,685 245,699,695
End of period $1,535,691,614 $823,242,685
(including
undistributed net
investment
income of
$10,647,945 and
$10,839,163,
respectively)
OTHER INFORMATION
Shares
Sold 6,545,398 6,984,700
Issued in 357,466 161,200
reinvestment of
distributions
Redeemed (1,326,621) (1,146,896)
Net increase 5,576,243 5,999,004
(decrease)
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, AUGUST 27, 1992
JUNE 30, 1997 (COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31,
SELECTED PER-SHARE (UNAUDITED) 1996 1995 1994 1993 E 1992
DATA
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net asset value, $ 89.05 $ 75.71 $ 56.22 $ 55.74 $ 52.60 $ 50.00
beginning of period
Income from
Investment
Operations
Net investment .87 D 1.04 .85 1.14 1.31 .44
income
Net realized and 16.82 15.55 19.72 (.56) 3.80 2.71
unrealized gain
(loss)
Total from 17.69 16.59 20.57 .58 5.11 3.15
investment
operations
Less Distributions
From net (1.03) (.91) (.95) - (1.28) (.47)
investment income
From net realized (2.09) (2.34) (.11) (.10) (.60) (.08)
gain
In excess of net - - (.02) - (.09) -
realized gain
Total distributions (3.12) (3.25) (1.08) (.10) (1.97) (.55)
Net asset value, end $103.62 $ 89.05 $ 75.71 $ 56.22 $ 55.74 $ 52.60
of period
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
TOTAL RETURN B, C 20.31% 22.71% 37.19% 1.04% 9.74% 6.31%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $1,535,692 $823,243 $245,700 $51,301 $25,153 $17,961
period (000
omitted)
Ratio of expenses to .28% A, .28% F .28% F .28% F .28% F .28% A,
average net assets F F
Ratio of net 1.88% A 2.26% 2.70% 2.81% 2.65% 2.89% A
investment income
to average net
assets
Portfolio turnover rate 1% A 14% 16% 2% 9% 0%
Average commission $ .0322 $ .0315
rate G
</TABLE>
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT
ANNUALIZED AND DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS
SHOWN. C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD. E EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED
STATEMENT OF POSITION 93-2, "DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT
PRESENTATION OF INCOME, CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY
INVESTMENT COMPANIES." AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT
CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES. F FMR AGREED TO
REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE PERIOD. WITHOUT THIS
REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE BEEN HIGHER (SEE NOTE 5 OF
NOTES TO FINANCIAL STATEMENTS). G FOR FISCAL YEARS BEGINNING ON OR AFTER
SEPTEMBER 1, 1995, A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE
PER SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY
VARY FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES
EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE
STRUCTURES MAY DIFFER.
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO PERFORMANCE
AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can look
at the total percentage change in value, the average annual percentage change or
the growth of a hypothetical $10,000 investment. Total return reflects the
change in the value of an investment, assuming reinvestment of the fund's
dividend income and capital gains (the profits earned upon the sale of
securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JUNE 30, 1997 PAST 1 LIFE OF
YEAR FUND
GROWTH OPPORTUNITIES 29.02% 26.86%
S&P 500(registered trademark) 34.70% 33.11%
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had achieved that return by performing at a
constant rate each year.
You can compare the fund's returns to the performance of the Standard & Poor's
500 Index - a widely recognized, unmanaged index of common stocks.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how it will do tomorrow. The stock
market, for example, has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
<PAGE>
fund that invests in stocks will vary. That means if you sell your shares during
a market downturn, you might lose money. But if you can ride out the market's
ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of return and are
not the fund's year-by-year results, which fluctuated over the periods shown.
The life of fund figures are from commencement of operations January 3, 1995.
If Fidelity had not reimbursed certain fund expenses, the life of fund total
return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT INCLUDE
ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. IF
PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, THE
TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and investment
return will vary and you may have a gain or loss when you withdraw your money.
$10,000 OVER LIFE OF FUND
1987/06/30 10000.00 10000.00
1987/07/31 10400.00 10507.00
1987/08/31 10710.20 10898.91
1987/09/30 10587.76 10660.22
1987/10/31 8261.22 8364.01
1987/11/30 7681.63 7674.82
1987/12/31 8473.47 8258.87
1988/01/31 8657.31 8606.57
1988/02/29 9359.26 9007.64
1988/03/31 9275.69 8729.30
1988/04/30 9392.68 8826.20
1988/05/31 9309.12 8902.98
1988/06/30 9777.08 9311.63
1988/07/31 9726.94 9276.25
1988/08/31 9492.96 8960.85
1988/09/30 9760.37 9342.59
1988/10/31 9785.44 9602.31
1988/11/30 9693.52 9465.00
1988/12/31 9793.79 9630.63
1989/01/31 10495.74 10335.60
1989/02/28 10278.47 10078.24
1989/03/31 10589.20 10313.06
1989/04/30 11149.21 10848.31
1989/05/31 11548.00 11287.67
1989/06/30 11395.27 11223.33
1989/07/31 12413.46 12236.79
1989/08/31 12625.58 12476.64
1989/09/30 12735.89 12425.48
1989/10/31 12379.52 12137.21
1989/11/30 12583.16 12384.81
1989/12/31 12880.13 12682.05
1990/01/31 12133.46 11831.08
1990/02/28 12249.36 11983.70
1990/03/31 12399.06 12301.27
1990/04/30 12038.01 11993.74
1990/05/31 13103.55 13163.13
1990/06/30 13376.54 13073.62
1990/07/31 13165.20 13031.78
1990/08/31 11809.05 11853.71
1990/09/30 10593.80 11276.43
1990/10/31 10215.14 11227.94
1990/11/30 11042.91 11953.27
1990/12/31 11368.74 12286.77
1991/01/31 12126.07 12822.47
1991/02/28 13030.73 13739.28
1991/03/31 13423.97 14071.77
1991/04/30 13298.85 14105.54
1991/05/31 14085.34 14714.90
1991/06/30 13039.67 14040.96
1991/07/31 14281.96 14695.26
1991/08/31 14916.52 15043.54
1991/09/30 15032.71 14792.31
1991/10/31 15497.45 14990.53
1991/11/30 14612.65 14386.41
1991/12/31 16543.13 16032.22
1992/01/31 17553.05 15734.02
1992/02/29 17920.26 15938.56
1992/03/31 16821.98 15627.76
1992/04/30 16163.01 16087.22
1992/05/31 16025.73 16166.04
1992/06/30 15403.37 15925.17
1992/07/31 15998.27 16576.51
1992/08/31 15558.96 16236.69
1992/09/30 15833.53 16428.28
1992/10/31 16446.73 16485.78
1992/11/30 17545.01 17047.95
1992/12/31 18085.00 17257.64
1993/01/31 18441.94 17402.60
1993/02/28 18061.76 17639.28
1993/03/31 18781.98 18011.46
1993/04/30 18585.56 17575.59
1993/05/31 19969.89 18046.61
1993/06/30 20175.67 18098.95
1993/07/31 20119.55 18026.55
1993/08/31 21129.73 18709.76
<PAGE>
1993/09/30 21522.58 18565.69
1993/10/31 21728.36 18950.00
1993/11/30 20849.13 18769.98
1993/12/31 21588.06 18997.10
1994/01/31 22130.57 19643.00
1994/02/28 21902.31 19110.67
1994/03/31 20907.20 18277.45
1994/04/30 21036.57 18511.40
1994/05/31 20548.96 18814.98
1994/06/30 19504.10 18354.02
1994/07/31 20180.77 18956.03
1994/08/31 21325.15 19733.23
1994/09/30 21066.42 19249.76
1994/10/31 21922.21 19682.88
1994/11/30 21046.52 18966.03
1994/12/31 21583.88 19247.30
1995/01/31 21175.88 19746.38
1995/02/28 22052.83 20515.90
1995/03/31 22853.30 21121.32
1995/04/30 23623.75 21743.34
1995/05/31 24544.28 22612.42
1995/06/30 26715.55 23137.71
1995/07/31 29357.09 23904.96
1995/08/31 29717.30 23964.96
1995/09/30 30487.74 24976.28
1995/10/31 30177.56 24887.12
1995/11/30 30157.55 25979.66
1995/12/31 29217.00 26480.03
1996/01/31 29677.27 27381.41
1996/02/29 30672.28 27635.23
1996/03/31 30790.66 27901.36
1996/04/30 31996.03 28312.63
1996/05/31 32996.92 29042.81
1996/06/30 32351.18 29153.46
1996/07/31 29875.88 27865.46
1996/08/31 30769.14 28453.15
1996/09/30 32835.48 30054.49
1996/10/31 32760.15 30883.39
1996/11/30 34578.96 33217.87
1996/12/31 33513.50 32559.82
1997/01/31 35439.94 34594.16
1997/02/28 34634.29 34865.38
1997/03/31 32693.44 33432.76
1997/04/30 34266.20 35428.69
1997/05/31 36642.08 37585.59
1997/06/30 38147.92 39269.43
Let's say hypothetically that $10,000 was invested in Growth Opportunities
Portfolio on January 3, 1995, when the fund started. As the chart shows, by June
30, 1997, the value of the investment would have grown to $18,095 - a 80.95%
increase on the initial investment. For comparison, look at how the S&P 500 did
over the same period. With dividends and capital gains, if any, reinvested, the
same $10,000 investment would have grown to $20,400 - a 104.00% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Philip Morris Companies, Inc. 5.9
Federal National Mortgage Association 4.6
Federal Home Loan Mortgage Corporation 2.9
International Business Machines Corp. 2.4
General Motors Corp. 2.4
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Finance 16.5
Technology 13.8
Retail & Wholesale 7.1
Nondurables 7.0
Energy 6.8
ASSET ALLOCATION AS OF JUNE 30, 1997*
Row: 1, Col: 1, Value: 6.0
Row: 1, Col: 2, Value: 12.0
Row: 1, Col: 3, Value: 82.0
Stocks 82.0%
Bonds 12.0%
Short-term investments 6.0%
FOREIGN INVESTMENTS 8.0%
*
% OF FUND'S
INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
<PAGE>
FUND TALK: THE MANAGER'S OVERVIEW
An interview with George Vanderheiden, Portfolio Manager of Growth Opportunities
Portfolio
Q. HOW DID THE FUND PERFORM, GEORGE?
A. For the six- and 12-month periods that ended June 30, 1997, the fund
underperformed the Standard & Poor's 500 Index, which rose 20.61% for the six-
month period and 34.70% for the 12-month period.
Q. WHY DID THE FUND'S RETURN TRAIL THE S&P 500 DURING THE PERIOD?
A. Much of the fund's underperformance relative to the S&P 500 can be traced to
asset allocation. Over the six-month period, the fund had an average of 13% of
assets in Treasury bonds and 4% of assets in cash. This total of 17% of assets
appreciated only about 1% during the period. Conversely, the other 83% in stocks
was up about 18%, close to the S&P 500 gain.
Q. THE ECONOMY STRENGTHENED IN THE FIRST HALF OF 1997 AND YOU STILL OWNED
BONDS. WHY?
A. Bonds were purchased originally as a short-term tactical move to hedge
against slowing corporate earnings growth in 1996. Earnings growth did slow as I
expected in 1996, but the stock market did not correct as it has done in the
past. However, with Treasury bond yields at 3.5-times the yield on the S&P 500,
I considered bonds a good safety cushion in an expensive market.
Q. WHAT IS YOUR POSITION ON TOBACCO STOCKS?
A. I own the tobacco stocks because they operate a profitable business that
historically has offered above-average returns to shareholders over the long
term. In the past, the stocks have provided better-than-average earnings growth,
lower-than-average price-to-earnings ratios and high yields. Nothing this year
has changed that. We have determined that the tobacco stocks are selling at a
"litigation discount" far in excess of any reasonable estimate of potential
liabilities. The cost of the proposed settlement is high, but should be
completely passed along to consumers.
Q. WHY ARE STOCK VALUATIONS SO HIGH AND DO YOU THINK THEY WILL STAY INFLATED?
A. We had a near perfect investing environment during the period -experiencing
growth without inflation. Accelerating inflation is usually a killer of all bond
and equity bull markets, but inflation just keeps receding as the economic
expansion continues. During the worst bear market I ever encountered - the 1973-
1974 bear that took prices down about 50% -everything that could go wrong did go
wrong. Today is an environment where everything that could go right has gone
right - from a declining budget deficit, to falling inflation, to surging
earnings, to big flows into mutual funds and rising consumer confidence. If any
of these factors change for the worse, valuations will deflate. My biggest
concern going forward is that the low level of inflation and pricing power in a
strong economy will deteriorate to deflation in a slowing or contracting
economy, thereby leading to sizable earnings declines.
Q. HOW DID YOU MANAGE IN A LOW-INFLATION ENVIRONMENT?
A. I concentrated on four areas during the period. First, I looked at innovators
and unit growers because these companies use unit growth to grow earnings and
don't need price increases. Technology, health care and telecommunications
companies fall within these areas. Second were the interest-sensitive sectors
that benefited from low interest rates, including mortgage companies, insurance,
finance and construction. Third were global growers - companies with proprietary
advantages such as low costs or unique distribution channels and strong brands -
which are seizing market share on a global basis. Fourth were the acquisitive
companies in consolidating industries. Certain industries have stopped growing,
but certain companies have been able to show great earnings growth by acquiring
market share and paring costs.
Q. WHAT'S YOUR OUTLOOK?
A. With the market continuing to advance sharply over the past six months and
Fed policy becoming restrictive in the spring, the investing climate has become
more precarious. Investors with short-term orientations should be prepared for
some downside risk. Risks to the market include rising inflation and/or falling
earnings. However, whatever the shorter term holds, remember that since 1945 the
stock market has risen 70% of the time, so chances are if one year is down, the
next two could very well be up.
FUND FACTS
GOAL: to provide capital growth by investing primarily in common stocks and
securities convertible into common stocks
START DATE: January 3, 1995
SIZE: as of June 30, 1997, more than $706 million
MANAGER: George Vanderheiden, since
inception; joined Fidelity in 1971
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO INVESTMENTS
JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 82.0%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.7%
AEROSPACE & DEFENSE - 1.2%
Boeing Co. 151,700 $ 8,049,408
<PAGE>
Gulfstream Aerospace Corp. (a) 10,700 315,650
8,365,058
DEFENSE ELECTRONICS - 0.4%
Raytheon Co. 62,800 3,202,800
SHIP BUILDING & REPAIR - 0.1%
Avondale Industries, Inc. (a) 5,300 111,300
Newport News Shipbuilding, Inc. 15,200 295,450
406,750
TOTAL AEROSPACE & DEFENSE 11,974,608
BASIC INDUSTRIES - 4.6%
CHEMICALS & PLASTICS - 3.0%
Air Products & Chemicals, Inc. 18,200 1,478,750
du Pont (E.I.) de Nemours & Co. 201,700 12,681,888
Raychem Corp. 59,200 4,403,000
Union Carbide Corp. 55,700 2,621,381
21,185,019
PACKAGING & CONTAINERS - 0.8%
Owens-Illinois, Inc. (a) 176,700 5,477,700
PAPER & FOREST PRODUCTS - 0.8%
Boise Cascade Corp. 36,000 1,271,250
Champion International Corp. 53,800 2,972,450
International Paper Co. 21,400 1,039,238
Willamette Industries, Inc. 7,200 504,000
5,786,938
TOTAL BASIC INDUSTRIES 32,449,657
CONSTRUCTION & REAL ESTATE - 1.0%
CONSTRUCTION - 0.7%
Centex Corp. 22,000 893,750
D.R. Horton, Inc. 48,636 504,599
Fleetwood Enterprises, Inc. 90,562 2,699,880
Kaufman & Broad Home Corp. 44,900 788,556
U.S. Home Corp. (a) 4,800 127,500
5,014,285
ENGINEERING - 0.3%
Fluor Corp. 35,100 1,937,081
TOTAL CONSTRUCTION & REAL ESTATE 6,951,366
DURABLES - 4.5%
AUTOS, TIRES, & ACCESSORIES - 3.8%
Circuit City Stores, Inc. - CarMax Group 4,200 60,113
Cummins Engine Co., Inc. 36,300 2,561,419
Dana Corp. 13,600 516,800
Discount Auto Parts, Inc. (a) 29,400 573,300
Federal-Mogul Corp. 13,300 465,500
General Motors Corp. 309,600 17,240,850
Gentex Corp. (a) 13,100 258,725
Goodyear Tire & Rubber Co. 14,700 930,694
Honda Motor Co. Ltd. 24,000 722,229
Magna International, Inc. Class A 39,300 2,362,583
Superior Industries International, Inc. 59,600 1,579,400
27,271,613
CONSUMER ELECTRONICS - 0.2%
Newell Co. 29,500 1,168,938
SHARES VALUE (NOTE 1)
TEXTILES & APPAREL - 0.5%
Burlington Industries, Inc. (a) 75,100 $ 901,200
Liz Claiborne, Inc. 19,800 923,175
NIKE, Inc. Class B 28,300 1,652,013
Reebok International Ltd. 4,400 205,700
3,682,088
TOTAL DURABLES 32,122,639
ENERGY - 6.8%
ENERGY SERVICES - 0.3%
McDermott International, Inc. 69,800 2,037,288
OIL & GAS - 6.5%
Amerada Hess Corp. 29,200 1,622,425
Anadarko Petroleum Corp. 3,200 192,000
Atlantic Richfield Co. 54,600 3,849,300
British Petroleum PLC ADR 94,528 7,077,784
Burlington Resources, Inc. 74,400 3,282,900
Canada Occidental Petroleum Ltd. 1,300 29,189
Chevron Corp. 4,300 317,931
Elf Aquitaine SA sponsored ADR 14,700 800,231
Enron Oil & Gas Co. 9,400 170,375
Kerr-McGee Corp. 14,200 899,925
Louisiana Land & Exploration Co. 58,500 3,341,813
Mobil Corp. 8,600 600,925
Noble Affiliates, Inc. 5,600 216,650
Occidental Petroleum Corp. 125,900 3,155,369
Royal Dutch Petroleum Co. 239,600 13,028,250
Santa Fe Energy Resources, Inc. (a) 43,500 638,906
Sun Co., Inc. 18,800 582,800
Tosco Corp. 137,700 4,122,394
Total SA:
Class B 3,853 389,218
sponsored ADR 28,368 1,436,130
Union Pacific Resources Group, Inc. 9,700 241,288
45,995,803
TOTAL ENERGY 48,033,091
FINANCE - 16.5%
BANKS - 0.5%
Credit Suisse Group (Reg.) 15,100 1,937,222
NationsBank Corp. 21,400 1,380,300
3,317,522
<PAGE>
CREDIT & OTHER FINANCE - 2.1%
Fleet Financial Group, Inc. 235,282 14,881,587
FEDERAL SPONSORED CREDIT - 7.4%
Federal Home Loan Mortgage
Corporation 593,300 20,394,688
Federal National Mortgage Association 741,700 32,356,663
52,751,351
INSURANCE - 6.0%
AFLAC, Inc. 23,650 1,117,463
Aegon NV (Reg.) 23,341 1,635,329
Allmerica Financial Corp. 23,400 933,075
Allstate Corp. 167,859 12,253,707
American International Group, Inc. 64,800 9,679,500
CIGNA Corp. 9,900 1,757,250
Equitable of Iowa Companies 3,700 207,200
General Re Corp. 16,100 2,930,200
Loews Corp. 10,600 1,061,325
MGIC Investment Corp. 75,000 3,595,313
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
Nationwide Financial Services, Inc.
Class A 3,500 $ 92,969
PMI Group, Inc. 26,700 1,665,413
Provident Companies, Inc. 2,400 128,400
Providian Financial Corp. (a) 57,700 1,853,613
Reliastar Financial Corp. 10,700 782,438
Torchmark Corp. 34,800 2,479,500
Travelers Property Casualty Corp.
Class A 8,400 334,950
UNUM Corp. 6,200 260,400
42,768,045
SAVINGS & LOANS - 0.3%
Golden West Financial Corp. 32,100 2,247,000
SECURITIES INDUSTRY - 0.2%
United Asset Management Corp. 51,800 1,466,588
TOTAL FINANCE 117,432,093
HEALTH - 6.5%
DRUGS & PHARMACEUTICALS - 2.4%
American Home Products Corp. 2,600 198,900
Amgen, Inc. 50,400 2,929,500
Astra AB Class A Free shares 247,566 4,617,213
Merck & Co., Inc. 12,600 1,304,100
Novartis AG (Reg.) 2,300 3,673,076
Schering-Plough Corp. 82,900 3,968,838
16,691,627
MEDICAL EQUIPMENT & SUPPLIES - 0.8%
Allegiance Corp. 4,880 132,980
Bard (C.R.), Inc. 24,200 878,763
Baxter International, Inc. 10,300 538,175
Biomet, Inc. 57,500 1,070,938
Boston Scientific Corp. (a) 2,900 178,169
Johnson & Johnson 6,600 424,875
St. Jude Medical, Inc. (a) 66,500 2,593,500
5,817,400
MEDICAL FACILITIES MANAGEMENT - 3.3%
Columbia/HCA Healthcare Corp. 411,550 16,179,059
Health Management Associates, Inc.
Class A (a) 2,900 82,650
Humana, Inc. (a) 113,700 2,629,313
Tenet Healthcare Corp. (a) 77,600 2,294,050
United HealthCare Corp. 48,400 2,516,800
23,701,872
TOTAL HEALTH 46,210,899
HOLDING COMPANIES - 0.2%
U.S. Industries, Inc. (a) 38,800 1,382,250
INDUSTRIAL MACHINERY & EQUIPMENT - 1.7%
ELECTRICAL EQUIPMENT - 1.0%
Emerson Electric Co. 14,500 798,406
General Electric Co. 65,600 4,288,600
Scientific-Atlanta, Inc. 33,100 724,063
Sensormatic Electronics Corp. 11,000 141,625
Westinghouse Electric Corp. 50,300 1,163,188
7,115,882
INDUSTRIAL MACHINERY & EQUIPMENT - 0.5%
Caterpillar, Inc. 29,000 3,113,875
JLK Direct Distribution, Inc. Class A 200 5,125
Ultratech Stepper, Inc. (a) 34,400 786,900
3,905,900
SHARES VALUE (NOTE 1)
POLLUTION CONTROL - 0.2%
Browning-Ferris Industries, Inc. 35,700 $ 1,187,025
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 12,208,807
MEDIA & LEISURE - 2.7%
BROADCASTING - 0.1%
Cox Communications, Inc. Class A (a) 8,600 206,400
HSN, Inc. (a) 6,440 201,250
TCI Group Class A (a) 29,100 432,863
840,513
ENTERTAINMENT - 0.3%
Cedar Fair LP (depositary unit) 2,500 109,375
Royal Carribean Cruises Ltd. 50,100 1,750,369
<PAGE>
1,859,744
LEISURE DURABLES & TOYS - 0.6%
Nintendo Co. Ltd. Ord. 49,100 4,111,474
LODGING & GAMING - 0.9%
Circus Circus Enterprises, Inc. (a) 78,100 1,923,213
HFS, Inc. (a) 13,700 794,600
Harrah's Entertainment, Inc. (a) 36,300 662,475
Mirage Resorts, Inc. (a) 80,300 2,027,575
Sun International Hotels Ltd. Ord. (a) 33,200 1,226,325
6,634,188
PUBLISHING - 0.1%
Cognizant Corp. 21,600 874,800
RESTAURANTS - 0.7%
Brinker International, Inc. (a) 26,200 373,350
Lone Star Steakhouse Saloon (a) 19,300 501,800
McDonald's Corp. 81,800 3,951,963
Papa John's International, Inc. (a) 7,200 264,600
5,091,713
TOTAL MEDIA & LEISURE 19,412,432
NONDURABLES - 7.0%
HOUSEHOLD PRODUCTS - 0.0%
Premark International, Inc. 8,900 238,075
TOBACCO - 7.0%
Philip Morris Companies, Inc. 939,000 41,668,125
RJR Nabisco Holdings Corp. 226,260 7,466,580
UST, Inc. 10,100 280,275
49,414,980
TOTAL NONDURABLES 49,653,055
PRECIOUS METALS - 0.1%
Barrick Gold Corp. 8,300 180,650
Newmont Mining Corp. 7,269 283,491
464,141
RETAIL & WHOLESALE - 7.1%
APPAREL STORES - 0.4%
Gap, Inc. 19,700 765,838
TJX Companies, Inc. 66,800 1,761,850
2,527,688
DRUG STORES - 0.0%
CVS Corp. 6,800 348,500
GENERAL MERCHANDISE STORES - 2.3%
Federated Department Stores, Inc. (a) 56,200 1,952,950
Proffitts, Inc. (a) 1,900 83,363
Wal-Mart Stores, Inc. 420,300 14,211,394
16,247,707
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
GROCERY STORES - 0.3%
Safeway, Inc. (a) 45,500 $ 2,098,688
RETAIL & WHOLESALE, MISCELLANEOUS - 4.1%
Circuit City Stores, Inc. -
Circuit City Group 91,900 3,268,194
Corporate Express, Inc. 37,900 547,181
Home Depot, Inc. (The) 178,600 12,312,238
Lowe's Companies, Inc. 147,400 5,472,225
Officemax, Inc. (a) 104,075 1,502,583
Office Depot, Inc. (a) 16,200 314,888
Rex Stores Corp. (a) 12,700 128,588
Staples, Inc. (a) 43,500 1,011,375
Toys "R" Us, Inc. (a) 87,100 3,048,500
U.S. Office Products Co. (a) 28,800 880,200
Viking Office Products, Inc. (a) 43,400 824,600
29,310,572
TOTAL RETAIL & WHOLESALE 50,533,155
SERVICES - 0.1%
ADVERTISING - 0.1%
Interpublic Group of Companies, Inc. 4,700 288,169
LEASING & RENTAL - 0.0%
Hanover Compressor Co. 600 11,700
PRINTING - 0.0%
Donnelley (R.R.) & Sons Co. 1,100 40,439
SERVICES - 0.0%
PEAPOD, Inc. 2,000 22,500
TOTAL SERVICES 362,808
TECHNOLOGY - 13.8%
COMMUNICATIONS EQUIPMENT - 0.8%
Alcatel Alsthom Compagnie Generale
d'Electricite SA sponsored ADR 3,800 95,950
Alcatel Alsthom Compagnie Generale
d'Electricite SA 31,000 3,880,140
Andrew Corp. (a) 11,300 317,813
Cisco Systems, Inc. (a) 15,800 1,060,575
Nokia Corp. AB sponsored ADR 6,700 494,125
5,848,603
COMPUTER SERVICES & SOFTWARE - 2.7%
American Management Systems, Inc. (a) 5,100 136,425
Automatic Data Processing, Inc. 47,700 2,241,900
CUC International, Inc. (a) 33,200 856,975
Ceridian Corp. (a) 30,600 1,292,850
CompUSA, Inc. (a) 20,300 436,450
Electronic Data Systems Corp. 83,400 3,419,400
First Data Corp. 62,200 2,732,913
Microsoft Corp. (a) 22,400 2,830,800
Netscape Communications Corp. (a) 5,500 176,344
<PAGE>
Oracle Systems Corp. (a) 38,750 1,952,031
Paychex, Inc. 30,200 1,147,600
Policy Management Systems Corp. (a) 40,200 1,889,400
19,113,088
COMPUTERS & OFFICE EQUIPMENT - 4.5%
Bay Networks, Inc. (a) 48,000 1,275,000
Compaq Computer Corp. (a) 74,600 7,404,050
Hewlett-Packard Co. 32,700 1,831,200
Ingram Micro, Inc. Class A (a) 6,600 159,225
International Business Machines Corp. 191,700 17,288,944
SCI Systems, Inc. (a) 44,000 2,805,000
Tech Data Corp. (a) 39,300 1,235,494
31,998,913
SHARES VALUE (NOTE 1)
ELECTRONIC INSTRUMENTS - 1.3%
Applied Materials, Inc. (a) 27,000 $ 1,911,938
Cognex Corp. (a) 16,500 437,250
KLA Instruments Corp. (a) 5,900 287,625
Lam Research Corp. (a) 35,000 1,297,188
Novellus Systems, Inc. (a) 22,100 1,911,650
Teradyne, Inc. (a) 30,700 1,204,975
Thermo Electron Corp. (a) 34,500 1,173,000
Varian Associates, Inc. 19,800 1,074,150
9,297,776
ELECTRONICS - 4.5%
AMP, Inc. 109,100 4,554,925
Atmel Corp. (a) 7,000 196,000
Intel Corp. 57,900 8,210,944
Methode Electronics, Inc. Class A 114,100 2,267,738
Microchip Technology, Inc. (a) 6,250 185,938
Micron Technology, Inc. 128,600 5,135,963
Molex, Inc. 20,243 705,975
Motorola, Inc. 4,200 319,200
Solectron Corp. (a) 103,500 7,245,000
Storage Technology Corp. (a) 16,000 712,000
Texas Instruments, Inc. 25,700 2,160,406
Thomas & Betts Corp. 1,200 63,075
31,757,164
TOTAL TECHNOLOGY 98,015,544
TRANSPORTATION - 0.9%
AIR TRANSPORTATION - 0.1%
Continental Airlines, Inc. Class B (a) 7,400 258,538
Delta Air Lines, Inc. 5,200 426,400
Northwest Airlines Corp. Class A (a) 12,600 458,325
1,143,263
RAILROADS - 0.6%
Bombardier, Inc. Class B 28,400 643,842
Burlington Northern Santa Fe Corp. 13,000 1,168,375
CSX Corp. 40,300 2,236,650
4,048,867
SHIPPING - 0.1%
Stolt-Nielsen SA Class B sponsored ADR 29,400 569,625
Stolt-Nielsen SA 4,300 81,163
650,788
TRUCKING & FREIGHT - 0.1%
Roadway Express, Inc. 6,200 144,925
Yellow Corp. (a) 26,200 586,225
731,150
TOTAL TRANSPORTATION 6,574,068
UTILITIES - 6.8%
CELLULAR - 1.7%
AirTouch Communications, Inc. (a) 174,200 4,768,725
360 Degrees Communications Co. (a) 8,706 149,090
Vodafone Group PLC sponsored ADR 142,380 6,896,531
Vodafone Group PLC 24,023 117,174
11,931,520
ELECTRIC UTILITY - 0.3%
American Electric Power Co., Inc. 14,600 613,200
Entergy Corp. 44,200 1,209,975
1,823,175
GAS - 0.1%
Enron Corp. 19,600 799,925
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - CONTINUED
TELEPHONE SERVICES - 4.7%
AT&T Corp. 52,600 $ 1,844,288
Ameritech Corp. 46,700 3,172,681
Bell Atlantic Corp. 34,600 2,625,275
BellSouth Corp. 81,200 3,765,650
Deutsche Telekom AG 19,600 470,602
MCI Communications Corp. 163,500 6,258,984
NYNEX Corp. 68,100 3,924,263
Qwest Communications
International, Inc. 1,200 32,700
SBC Communications, Inc. 66,500 4,114,688
Sprint Corp. 125,700 6,614,963
WorldCom, Inc. (a) 17,700 566,400
33,390,494
TOTAL UTILITIES 47,945,114
TOTAL COMMON STOCKS
(Cost $476,697,141) 581,725,727
U.S. TREASURY OBLIGATIONS - 12.0%
<PAGE>
PRINCIPAL
AMOUNT
8 1/8%, 8/15/19 $ 21,640,000 24,686,479
7 5/8%, 11/15/22 2,000,000 2,178,440
6 1/4%, 8/15/23 45,953,000 42,542,368
stripped principal:
0%, 2/15/19 43,750,000 9,819,688
0%, 8/15/19 10,000,000 2,170,600
0%, 8/15/20 20,000,000 4,047,200
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $85,961,758) 85,444,775
CASH EQUIVALENTS - 6.0%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 42,594,015 42,587,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $605,245,899) $ 709,757,502
LEGEND
1. Non-income producing
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities, aggregated
$298,528,669 and $68,291,517, respectively, of which U.S. government and
government agency obligations aggregated $33,871,823 and $6,563,299,
respectively.
The market value of futures contracts opened and closed during the period
amounted to $9,619,242 and $9,579,433, respectively.
The fund placed a portion of its portfolio transactions with brokerage firms
which are affiliates of Fidelity Management & Research. The commissions paid to
these affiliated firms were $45,612 for the period. (see Note 4 of Notes to
Financial Statements)
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income tax
purposes was $605,271,604. Net unrealized appreciation aggregated $104,485,898,
of which $110,709,066 related to appreciated investment securities and
$6,223,168 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
Investment in $ 709,757,502
securities, at
value (including
repurchase
agreements of
$42,587,000)
(cost $605,245,899)
- - - See
accompanying
schedule
Cash 808
Receivable for 491,197
investments sold
Receivable for fund 2,101,658
shares sold
Dividends receivable 1,086,338
Interest receivable 1,745,837
TOTAL ASSETS 715,183,340
LIABILITIES
Payable for $ 8,490,520
investments
purchased
Payable for fund 152
shares redeemed
Accrued management 337,600
fee
Other payables and 106,664
accrued expenses
TOTAL LIABILITIES 8,934,936
NET ASSETS $706,248,404
Net Assets consist of:
Paid in capital $582,572,383
<PAGE>
Undistributed net 4,997,998
investment income
Accumulated 14,166,109
undistributed net
realized gain (loss)
on investments and
foreign currency
transactions
Net unrealized 104,511,914
appreciation
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $706,248,404
41,242,299
shares outstanding
NET ASSET VALUE, $17.12
offering price
and redemption
price per
share
($706,248,404 (divided by)
41,242,299 shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 3,981,833
Dividends
Interest 3,195,610
TOTAL INCOME 7,177,443
EXPENSES
Management fee $ 1,583,318
Transfer agent fees 191,171
Accounting fees and 150,696
expenses
Non-interested 1,358
trustees'
compensation
Custodian fees and 50,475
expenses
Registration fees 21
Audit 14,906
Legal 4,232
Miscellaneous 356
Total expenses 1,996,533
before reductions
Expense reductions (20,025 1,976,508
)
NET INVESTMENT 5,200,935
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
Investment 14,399,104
securities
Foreign currency (2,166
transactions )
Futures contracts (39,809 14,357,129
)
Change in net
unrealized
appreciation
(depreciation) on:
<PAGE>
Investment 58,370,392
securities
Assets and 347 58,370,739
liabilities in
foreign currencies
NET GAIN (LOSS) 72,727,868
NET INCREASE $77,928,803
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 19,204
Expense reductions
Directed brokerage
arrangements
Custodian credits 821
$ 20,025
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
Operations $ 5,200,935 $ 6,366,110
Net investment
income
Net realized gain 14,357,129 9,088,610
(loss)
Change in net 58,370,739 35,812,890
unrealized
appreciation
(depreciation)
NET INCREASE 77,928,803 51,267,610
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Distributions to (6,567,693) -
shareholders
From net
investment income
From net realized (9,194,770) (705,098
gain )
TOTAL DISTRIBUTIONS (15,762,463) (705,098
)
Share transactions 253,984,326 170,852,927
Net proceeds from
sales of shares
Reinvestment of 15,762,463 705,098
distributions
Cost of shares (8,750,145) (3,337,769
redeemed )
NET INCREASE 260,996,644 168,220,256
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 323,162,984 218,782,768
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 383,085,420 164,302,652
End of period $706,248,404 $383,085,420
(including
undistributed net
investment
income of
$4,997,998 and
$6,366,110,
respectively)
OTHER INFORMATION
Shares
Sold 15,911,548 12,499,499
<PAGE>
Issued in 1,011,711 53,538
reinvestment of
distributions
Redeemed (556,728) (246,129
)
Net increase 16,366,531 12,306,908
(decrease)
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997
SELECTED PER-SHARE DATA (UNAUDITED) 1996 1995
Net asset value, $ 15.40 $ 13.07 $ 10.00
beginning of period
Income from
Investment
Operations
Net investment .16 D .26 .11
income
Net realized and 2.16 2.12 3.14
unrealized gain
(loss)
Total from 2.32 2.38 3.25
investment
operations
Less Distributions
From net (.25) - (.11)
investment income
From net realized (.35) (.05) (.07)
gain
Total distributions (.60) (.05) (.18)
Net asset value, end $ 17.12 $ 15.40 $ 13.07
of period
TOTAL RETURN B, C 15.45% 18.27% 32.52%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $706,248 $383,085 $164,303
period (000
omitted)
Ratio of expenses to .77% A .77% .85%
average net assets E
Ratio of expenses to .76% A, F .76% .83%
average net assets F F
after expense
reductions
Ratio of net 1.99% A 2.29% 2.49%
investment income
to average net
assets
Portfolio turnover rate 27% A 28% 38%
Average commission $ .0364 $ .0367
rate G
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED AND DO NOT
REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT.
INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD
CERTAIN EXPENSES NOT BEEN REDUCED DURING
THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
<PAGE>
FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
E FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE PERIOD.
WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE BEEN HIGHER.
F FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO
EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
G FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED
TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH
COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO
FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING
PRACTICES AND COMMISSION RATE STRUCTURES MAY DIFFER.
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO PERFORMANCE AND
INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can look
at the total percentage change in value, the average annual percentage change or
the growth of a hypothetical $10,000 investment. Total return reflects the
change in the value of an investment, assuming reinvestment of the fund's
dividend income and capital gains (the profits earned upon the sale of
securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
JUNE 30, 1997 YEAR FUND
CONTRAFUND 25.07% 29.11%
S&P 500(registered trademark) 34.70% 33.11%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what would
have happened if the fund had performed at a constant rate each year. You can
compare the fund's return to the performance of the Standard & Poor's 500
Index -a widely recognized, unmanaged index of common stocks. This benchmark
reflects the reinvestment of dividends and capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how it will do tomorrow. The stock
market, for example, has a history of long-term growth and short-term
volatility. In turn, the share price and return of a fund that invests in stocks
will vary. That means if you sell your shares during a market downturn, you
might lose money. But if you can ride out the market's ups and downs, you may
have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of return and are
not the fund's year-by-year results, which fluctuated over the periods shown.
The life of the fund figures are from commencement of operations January 3,
1995.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT INCLUDE
ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. IF
PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, THE
TOTAL RETURN WOULD BE LOWER.
Past performance is no guarantee of future results. Principal and investment
return will vary and you may have a gain or loss when you withdraw your money.
$10,000 OVER LIFE OF FUND
1995/01/03 10000.00 10000.00
1995/01/31 9870.00 10258.23
1995/02/28 10370.00 10658.00
1995/03/31 10890.00 10972.51
1995/04/30 11480.00 11295.66
1995/05/31 11730.00 11747.14
1995/06/30 12490.00 12020.03
1995/07/31 13470.00 12418.61
1995/08/31 13640.00 12449.78
1995/09/30 13940.00 12975.16
1995/10/31 13650.00 12928.84
1995/11/30 13900.00 13496.42
1995/12/31 13971.98 13756.36
1996/01/31 14073.30 14224.63
1996/02/29 14124.25 14356.49
1996/03/31 14584.49 14494.74
1996/04/30 15065.18 14708.39
1996/05/31 15239.05 15087.72
1996/06/30 15116.32 15145.21
1996/07/31 14410.62 14476.09
1996/08/31 14962.90 14781.39
1996/09/30 15597.01 15613.29
1996/10/31 16077.71 16043.91
<PAGE>
1996/11/30 17039.10 17256.66
1996/12/31 16936.82 16914.81
1997/01/31 17591.38 17971.65
1997/02/28 17103.08 18112.54
1997/03/31 16660.22 17368.30
1997/04/30 17060.91 18405.19
1997/05/31 18115.35 19525.70
1997/06/30 18906.18 20400.45
Let's say hypothetically that $10,000 was invested in Contrafund Portfolio on
January 3, 1995, when the fund started. As the chart shows, by June 30, 1997,
the value of the investment would have grown to $18,906 - a 89.06% increase on
the initial investment. For comparison, look at how the S&P 500 did over the
same period. With dividends and capital gains, if any, reinvested, the same
$10,000 investment would have grown to $20,400 - a 104.00% increase.
INVESTMENT SUMMARY
TOP TEN STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Schlumberger Ltd. 1.6
Microsoft Corp. 1.2
Lucent Technologies, Inc. 1.1
Home Depot, Inc. (The) 1.1
American International Group, Inc. 1.1
Royal Dutch Petroleum Co. 1.0
Alcatel Alsthom Compagnie Generale d'Electricite SA 1.0
Texas Instruments, Inc. 1.0
Tyco International Ltd. 1.0
Westinghouse Electric Corp. 1.0
TOP TEN MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Technology 14.8
Finance 13.5
Energy 12.8
Retail & Wholesale 7.5
Industrial Machinery & Equipment 6.2
Media & Leisure 6.2
Durables 4.8
Basic Industries 4.8
Health 4.7
Nondurables 3.8
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO FUND TALK: THE
MANAGER'S OVERVIEW
An interview with
Will Danoff, Portfolio Manager of
Contrafund Portfolio
Q. HOW DID THE FUND PERFORM, WILL?
A. Results were disappointing. For the six months that ended June 30, 1997, the
fund trailed the 20.61% return of the Standard & Poor's 500 Index. From a 12-
month perspective, the fund also lagged the S&P 500, which had a return of
34.70%. I consider this performance to be unsatisfactory and I'm working as hard
as ever with Fidelity's research staff to find stocks that can help boost
second-half performance.
Q. WHAT FACTORS WERE BEHIND THE FUND'S UNDERPERFORMANCE RELATIVE TO THE S&P 500?
A. A primary reason was the narrowness of the market. By that I mean that the
market's advance was concentrated chiefly among stocks of the largest companies
in the index. To illustrate, shares of the 100 largest S&P 500 stocks
appreciated approximately 25% over the past six months, while the 100 smallest
stocks in the index rose only around 15%. This phenomenon hurt the fund, which
tends to emphasize small- and mid-sized companies.
Q. WERE THERE ANY OTHER SPECIFIC FACTORS THAT HAD A NEGATIVE IMPACT ON THE
FUND'S RETURN?
A. The fund's underweighting in health care stocks relative to the index -health
care stocks make up around 11% of the index, while they comprised almost 5% of
the fund - hurt performance. With governments throughout the world attempting to
limit health care expenditure growth and U.S. health maintenance organizations
(HMOs) trying to contain industry costs, I
<PAGE>
thought the industry would suffer a slowdown. Unfortunately, many health care
stocks - particularly pharmaceuticals -continued to perform well, rising about
23% during the period. Thus, my strategy of underweighting these stocks hurt the
fund's return.
Q. ASIDE FROM HEALTH STOCKS, HOW DID OTHER SECTORS PERFORM DURING THE PERIOD?
A. The finance sector, which accounted for around 14% of the fund's investments
at the end of the period, rose approximately 23%. This strong showing was due
largely to falling interest rates, good expense control and continuing industry
consolidation. Some financial stocks held by the fund included American
International Group, a leading insurer with operations in Asia; Washington
Mutual, a rapidly growing West Coast thrift; and First Bank Systems, a
Minneapolis bank with one of the lowest expense ratios in the industry and a
recent acquirer of another stock in Contrafund's portfolio, U.S. Bancorp. On the
other hand, the fund's energy exploration and production positions were hurt by
falling oil and natural gas prices. As of period end, the fund's exposure to
these stocks had fallen from about 23% six months ago to approximately 13%. Low
capital investment in the energy sector has resulted in a tight supply of oil
service equipment. Examples of fund positions that benefited from this positive
trend included Schlumberger, Halliburton, ENSCO International and Smith
International, all top 25 positions within the portfolio.
Q. DID YOU PLAY ANY OTHER PARTICULAR THEMES DURING THE PERIOD?
A. One area of optimism is the Internet and certain stocks that could benefit
from the Internet's popularity. The cable television industry is an example.
These stocks have had a tough four-year stretch, as government regulation
limited companies' ability to raise prices, and subscriber growth slowed. As a
result, the market still holds a pessimistic view on cable TV stocks. However,
with the Internet's popularity, these companies have a huge opportunity to
reaccelerate their earnings growth. Many cable TV companies are offering access
to the Internet at dramatically faster speeds than is currently available over
telephone wires. This could help turn the cable TV industry's fortunes around.
Along the same lines, the technology and telecommunications industries could
also benefit from the Internet demand. Two of the fund's top positions - Lucent
Technologies and Alcatel - are leading providers of the equipment being used to
improve the Internet's operating efficiency.
Q. WHAT'S YOUR OUTLOOK?
A. As I mentioned, the biggest stocks in the S&P 500 are quite expensive, a
trend that could continue for several years. If it does, I'll continue my
contrarian approach of looking for undervalued companies that are growing their
earnings rapidly and therefore have the capability to produce good share price
appreciation.
FUND FACTS
GOAL: to provide capital growth by investing primarily in common stocks and
securities convertible into common stocks
START DATE: January 3, 1995
SIZE: as of June 30, 1997, more than $706 million
MANAGER: George Vanderheiden, since inception; joined Fidelity in 1971
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 93.0%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 2.3%
AEROSPACE & DEFENSE - 2.2%
AlliedSignal, Inc. 115,900 $ 9,736,589
Boeing Co. 178,500 9,471,656
GenCorp, Inc. 96,700 2,236,188
General Motors Corp. Class H 10,600 612,150
Gulfstream Aerospace Corp. (a) 125,000 3,687,500
Kellstrom Industries, Inc. (a) 189,100 2,978,325
Lockheed Martin Corp. 116,000 12,013,250
Sundstrand Corp. 99,300 5,542,181
Textron, Inc. 104,700 6,949,463
United Technologies Corp. 205,400 17,048,200
70,275,502
DEFENSE ELECTRONICS - 0.0%
Datum, Inc. (a) 8,000 248,000
Raytheon Co. 11,900 606,900
854,900
SHIP BUILDING & REPAIR - 0.1%
General Dynamics Corp. 23,600 1,770,000
TOTAL AEROSPACE & DEFENSE 72,900,402
BASIC INDUSTRIES - 4.8%
CHEMICALS & PLASTICS - 2.5%
Air Products & Chemicals, Inc. 27,100 2,201,875
Avery Dennison Corp. 6,200 248,775
Cambrex Corp. 90,800 3,609,300
Crompton & Knowles Corp. 332,292 7,393,497
Cytec Industries, Inc. (a) 170,100 6,357,488
du Pont (E.I.) de Nemours & Co. 65,400 4,112,025
Engelhard Corp. 1,000 20,938
FMC Corp. (a) 1,800 142,988
<PAGE>
Ferro Corp. 24,000 889,500
Fuller (H.B.) Co. 53,900 2,964,500
Goodrich (B.F.) Co. 47,600 2,061,675
International Specialty Products, Inc. (a) 75,500 1,061,719
Monsanto Co. 337,500 14,533,594
Morton International, Inc. 150,900 4,555,294
Nalco Chemical Co. 46,100 1,780,613
Praxair, Inc. 138,500 7,756,000
Raychem Corp. 22,600 1,680,875
Sealed Air Corp. (a) 242,100 11,499,750
Union Carbide Corp. 42,600 2,004,863
W.R. Grace & Co. 62,900 3,467,363
Witco Corp. 53,000 2,010,688
80,353,320
IRON & STEEL - 0.1%
Aeroquip Vickers, Inc. 9,700 458,325
Nucor Corp. 51,000 2,881,500
Steel Dynamics, Inc. (a) 42,100 1,052,500
4,392,325
METALS & MINING - 0.7%
Alcan Aluminium Ltd. 44,300 1,511,266
Aluminum Co. of America 103,600 7,808,850
Falconbridge Ltd. 79,200 1,554,572
Reynolds Metals Co. 62,600 4,460,250
Rio Tinto PLC (Reg.) 309,900 5,398,794
20,733,732
PACKAGING & CONTAINERS - 0.5%
Crown Cork & Seal Co., Inc. 48,800 2,607,750
Owens-Illinois, Inc. (a) 397,900 12,334,900
SHARES VALUE (NOTE 1)
Peak International, Ltd. 38,900 $ 466,800
Silgan Holdings, Inc. 37,100 1,437,625
16,847,075
PAPER & FOREST PRODUCTS - 1.0%
Abitibi-Consolidated, Inc. 28,300 505,266
American Pad & Paper Co. (a) 90,100 1,520,438
Bowater, Inc. 23,900 1,105,375
Champion International Corp. 39,900 2,204,475
Deltic Timber Corp. 16,557 485,327
Fort Howard Corp. (a) 12,400 627,750
Georgia-Pacific Corp. 12,500 1,067,188
International Paper Co. 29,300 1,422,881
James River Corp. of Virginia 271,600 10,049,200
Kimberly-Clark Corp. 181,100 9,009,725
Mail-Well, Inc. (a) 83,500 2,379,750
Temple-Inland, Inc. 33,000 1,782,000
32,159,375
TOTAL BASIC INDUSTRIES 154,485,827
CONSTRUCTION & REAL ESTATE - 3.3%
BUILDING MATERIALS - 0.9%
American Residential Services, Inc. (a) 42,100 978,825
American Standard Companies,
Inc. (a) 9,400 420,650
Coltec Industries, Inc. (a) 166,900 3,254,550
Lilly Industrial Coatings, Inc. Class A 66,400 1,336,300
Mark IV Industries, Inc. 25,000 600,000
Masco Corp. 168,600 7,039,050
Medusa Corp. 20,200 775,175
Nortek, Inc. (a) 29,200 704,450
Sherwin-Williams Co. 140,500 4,337,938
Southdown, Inc. 73,600 3,210,800
USG Corp. (a) 155,400 5,672,100
York International Corp. 2,100 96,600
28,426,438
CONSTRUCTION - 0.1%
Centex Corp. 31,500 1,279,688
Lennar Corp. 33,300 1,063,519
Morrison Knudsen Corp. (a) 56,700 772,538
Walter Industries, Inc. (a) 3,600 60,300
3,176,045
ENGINEERING - 0.0%
DSP Group, Inc. (a) 13,900 208,283
Stone & Webster, Inc. 1,300 55,494
263,777
REAL ESTATE - 0.2%
Boston Properties, Inc. 67,200 1,848,000
Catellus Development Corp. (a) 18,700 338,938
Crescent Operating, Inc. 27,790 333,480
Rouse Co. (The) 185,723 5,478,829
Stewart Enterprises, Inc. Class A 2,100 88,200
8,087,447
REAL ESTATE INVESTMENT TRUSTS - 2.1%
Arden Realty Group, Inc. 74,300 1,931,800
BRE Properties, Inc. Class A 3,600 90,450
Bay Apartment Communities, Inc. 40,200 1,487,400
Bedford Property Investors, Inc. 72,900 1,467,113
Bradley Real Estate Trust (SBI) 33,200 639,100
Cali Realty Corp. 49,300 1,676,200
Crescent Real Estate Equities, Inc. 277,900 8,823,325
Duke Realty Investors, Inc. 22,400 907,200
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
CONSTRUCTION & REAL ESTATE - CONTINUED
<PAGE>
REAL ESTATE INVESTMENT TRUSTS - CONTINUED
Equity Residential Properties Trust (SBI) 121,000 $ 5,747,500
Essex Property Trust, Inc. 13,300 427,263
Felcor Suite Hotels, Inc. 132,700 4,943,075
First Industrial Realty Trust, Inc. 80,200 2,345,850
Glenborough Realty Trust, Inc. 53,000 1,338,250
Golf Trust of America, Inc. 89,600 2,492,000
Home Properties of NY, Inc. 8,900 200,250
Irvine Apartment Communities, Inc. 3,600 106,200
Kilroy Realty Corp. 11,800 297,950
Kimco Realty Corp. 70,100 2,225,675
LTC Properties, Inc. 51,700 937,063
Macerich Co. 60,400 1,676,100
Pacific Gulf Properties, Inc. 2,600 57,200
Patriot American Hospitality, Inc. 147,800 3,768,900
Public Storage, Inc. 40,700 1,190,475
Reckson Associates Realty Corp. 124,500 2,863,500
Speiker Properties, Inc. 72,200 2,540,538
Starwood Lodging Trust combined
certificate (SBI) 270,000 11,525,625
Sunstone Hotel Investors, Inc. 32,600 472,700
Urban Shopping Centers, Inc. 5,100 162,563
Vornado Realty Trust 32,900 2,372,913
Weeks Corp. 31,300 978,125
65,692,303
TOTAL CONSTRUCTION & REAL ESTATE 105,646,010
DURABLES - 4.8%
AUTOS, TIRES, & ACCESSORIES - 2.1%
Chrysler Corp. 212,200 6,962,813
Circuit City Stores, Inc. - CarMax Group 88,400 1,265,225
Cross-Continent Auto Retailers, Inc. (a) 43,900 463,694
Danaher Corp. 227,100 11,539,519
Eaton Corp. 28,400 2,479,675
Echlin, Inc. 49,400 1,778,400
Federal-Mogul Corp. 40,700 1,424,500
Ford Motor Co. 293,000 11,060,750
General Motors Corp. 103,200 5,746,950
Lear Corp. (a) 131,000 5,813,125
Navistar International Corp. (a) 203,600 3,512,100
O'Gara Co. (a) 297,400 3,048,350
OmniQuip International, Inc. 24,400 564,250
SPX Corp. 102,400 6,636,800
Superior Industries International, Inc. 1,700 45,050
TRW, Inc. 9,600 545,400
Tower Automotive, Inc. (a) 41,500 1,784,500
Toyota Motor Corp. 66,000 1,945,833
United Auto Group, Inc. (a) 50,300 996,569
67,613,503
CONSUMER DURABLES - 1.2%
Blyth Industries, Inc. (a) 14,100 475,875
Corning, Inc. 249,700 13,889,563
Minnesota Mining & Manufacturing Co. 203,200 20,726,400
Samsonite Corp. (a) 50,300 2,219,488
37,311,326
CONSUMER ELECTRONICS - 0.5%
Electrolux AB 7,100 513,120
Gemstar International Group Ltd. (a) 46,900 861,788
Maytag Co. 48,400 1,264,450
Philips Electronics NV 165,000 11,859,375
SHARES VALUE (NOTE 1)
Philips Electronics NV (Bearer) 36,350 $ 2,602,113
Sunbeam-Oster, Inc. 12,500 471,875
17,572,721
HOME FURNISHINGS - 0.3%
Carpetright PLC 347,500 2,903,986
Furniture Brands International, Inc. 12,500 242,188
Leggett & Platt, Inc. 61,500 2,644,500
Linens'n Things, Inc. 91,800 2,719,575
Miller (Herman), Inc. 4,000 144,000
8,654,249
TEXTILES & APPAREL - 0.7%
Cutter & Buck, Inc. (a) 144,200 2,343,250
Dexter Corp. 50,200 1,606,400
House of Fraser PLC Class L 673,400 1,788,009
Intimate Brands, Inc. Class A 41,500 871,500
Kellwood Co. 6,400 177,600
Liz Claiborne, Inc. 117,900 5,497,088
Mohawk Industries, Inc. (a) 2,100 47,775
Oxford Industries, Inc. 33,100 939,213
Polo Ralph Lauren Corp. Class A 9,100 249,113
Reebok International Ltd. 154,000 7,199,500
Stride Rite Corp. 41,100 529,163
Unifi, Inc. 22,300 833,463
Warnaco Group, Inc. Class A 45,000 1,434,375
23,516,449
TOTAL DURABLES 154,668,248
ENERGY - 12.8%
ENERGY SERVICES - 6.3%
BJ Services Co. (a) 172,700 9,261,038
Baker Hughes, Inc. 120,300 4,654,106
Diamond Offshore Drilling, Inc. (a) 208,500 16,236,938
Dresser Industries, Inc. 190,300 7,088,675
ENSCO International, Inc. (a) 475,387 25,076,664
<PAGE>
Falcon Drilling, Inc. (a) 75,800 4,367,975
Global Marine, Inc. (a) 217,000 5,045,250
Halliburton Co. 305,900 24,242,575
Marine Drilling Companies, Inc. (a) 287,300 5,638,263
McDermott International, Inc. 195,700 5,711,994
Nabors Industries, Inc. (a) 311,300 7,782,500
Noble Drilling Corp. (a) 260,100 5,868,506
Reading & Bates Corp. (a) 29,300 783,775
Smedvig AS, Series B 55,200 1,356,136
Santa Fe International Corp. 7,200 244,800
Schlumberger Ltd. 402,200 50,275,000
Smith International, Inc. (a) 361,600 21,967,200
Varco International, Inc. (a) 63,300 2,041,425
Weatherford Enterra, Inc. (a) 81,100 3,122,350
Western Atlas, Inc. (a) 8,800 644,600
201,409,770
OIL & GAS - 6.5%
Amoco Corp. 120,500 10,475,969
Anadarko Petroleum Corp. 5,000 300,000
Atlantic Richfield Co. 12,400 874,200
Barrett Resources Corp. (a) 600 17,963
British Petroleum PLC ADR 292,284 21,884,765
Burlington Resources, Inc. 220,000 9,707,500
Camco International, Inc. 168,600 9,230,850
Canadian Natural Resources Ltd. (a) 186,400 4,840,068
Chesapeake Energy Corp. (a) 10,700 104,994
Coastal Corp. (The) 109,900 5,845,306
Cooper Cameron Corp. (a) 167,140 7,813,795
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
ENERGY - CONTINUED
OIL & GAS - CONTINUED
Enron Oil & Gas Co. 7,000 $ 126,875
Forcenergy Gas Exploration, Inc. (a) 107,900 3,277,463
Mesa, Inc. (a) 160,600 923,450
Mobil Corp. 130,700 9,132,663
Murphy Oil Corp. 153,900 7,502,625
Newfield Exploration Co. (a) 214,300 4,286,000
Norcen Energy Resources Ltd. 17,800 424,163
Ocean Energy, Inc. (a) 9,800 453,250
Oryx Energy Co. (a) 46,400 980,200
Parker & Parsley Petroleum Co. 53,100 1,878,413
Penn West Petroleum Ltd. (a) 38,600 493,456
Penn West Petroleum Ltd. (a)(b) 68,600 876,971
Petsec Energy Ltd. sponsored ADR 73,000 1,660,750
Phillips Petroleum Co. 85,900 3,758,125
Pogo Producing Co. 133,000 5,145,438
Renaissance Energy Ltd. (a) 238,800 6,641,741
Rio Alto Exploration Ltd. (a) 32,200 269,373
Royal Dutch Petroleum Co. 598,000 32,516,250
Santa Fe Energy Resources, Inc. (a) 217,700 3,197,469
Swift Energy Co. (a) 127,300 3,039,288
Texaco, Inc. 102,500 11,146,875
Tosco Corp. 379,900 11,373,256
Total SA Class B 123,633 12,489,031
United Meridian Corp. (a) 138,300 4,149,000
Unocal Corp. 287,400 11,154,713
Vastar Resources, Inc. 4,000 140,250
Vintage Petroleum, Inc. 11,000 338,250
YPF Sociedad Anonima sponsored ADR 2,600 79,950
YPF Sociedad Anonima D shares 4,200 129,379
208,680,077
TOTAL ENERGY 410,089,847
FINANCE - 13.5%
BANKS - 3.9%
Bank of New York Co., Inc. 229,300 9,974,550
Bank of Nova Scotia Halifax 2,600 114,314
BankBoston Corp. 500 36,031
BankAmerica Corp. 331,900 21,428,294
Citicorp 24,200 2,917,613
Comerica, Inc. 71,300 4,848,400
Credit Suisse Group (Reg.) 87,200 11,187,137
Credito Italiano Ord. 1,584,000 2,897,378
Fifth Third Bancorp 23,200 1,903,850
First Bank System, Inc. 224,500 19,166,688
First Union Corp. 29,400 2,719,500
HSBC Holdings PLC 226,655 6,716,164
Imperial Bancorp 6,200 179,025
Lloyds TSB Group PLC 198,900 2,039,630
Mellon Bank Corp. 28,500 1,286,063
National City Corp. 98,100 5,150,250
North Fork Bancorp., Inc. 186,500 3,986,438
Norwest Corp. 43,000 2,418,750
Royal Bank of Canada 6,200 280,889
Standard Chartered Bank PLC 278,000 4,239,125
Star Banc Corp. 1,900 80,275
Texas Regional Bancshares, Inc.
Class A (vtg.) 116,300 4,884,600
U.S. Bancorp 168,700 10,817,888
SHARES VALUE (NOTE 1)
Wells Fargo & Co. 11,500 $ 3,099,250
Zions Bancorp 83,200 3,130,400
125,502,502
<PAGE>
CLOSED-END INVESTMENT COMPANIES - 0.1%
Morgan Stanley Emerging Markets
Fund, Inc. 23,900 427,213
Morgan Stanley Asia-Pacific Fund, Inc. 82,100 862,050
Templeton Dragon Fund, Inc. 43,400 705,250
1,994,513
CREDIT & OTHER FINANCE - 1.9%
American Express Co. 263,900 19,660,550
Associates First Capital Corp. 23,200 1,287,600
Finova Group, Inc. 32,800 2,509,200
Fleet Financial Group, Inc. 240,300 15,198,975
Greenpoint Financial Corp. 159,200 10,596,750
Homeside, Inc. 2,100 45,319
Household International, Inc. 83,900 9,853,006
59,151,400
FEDERAL SPONSORED CREDIT - 1.3%
Federal Home Loan Mortgage
Corporation 487,400 16,754,375
Federal National Mortgage Association 582,400 25,407,200
42,161,575
INSURANCE - 4.6%
AFLAC, Inc. 39,400 1,861,650
ARM Financial Group, Inc. Class A 2,300 46,000
ACE Ltd. 31,700 2,341,838
Aetna, Inc. 68,800 7,043,400
Allmerica Financial Corp. 79,400 3,166,075
Allstate Corp. 296,700 21,659,100
AMBAC, Inc. 12,000 916,500
American General Corp. 28,400 1,356,100
American International Group, Inc. 225,800 33,728,875
Aon Corp. 61,350 3,174,863
Berkshire Hathaway, Inc. (a) 60 2,832,000
Brascan Ltd. Class A 13,600 336,392
CIGNA Corp. 38,900 6,904,750
Chubb Corp. (The) 8,800 588,500
Exel Ltd. 6,200 327,050
Hartford Financial Services Group, Inc. 78,100 6,462,775
MGIC Investment Corp. 31,500 1,510,031
Mid Ocean Ltd. 4,900 256,944
Old Republic International Corp. 9,500 287,969
Progressive Corp. 51,400 4,471,800
Provident Companies, Inc. 19,100 1,021,850
Providian Financial Corp. (a) 13,000 417,625
Reinsurance Group of America, Inc. 4,000 230,000
Reliastar Financial Corp. 24,600 1,798,875
St. Paul Companies, Inc. (The) 24,000 1,830,000
Security-Connecticut Corp. 70,800 3,898,425
SunAmerica, Inc. 77,900 3,797,625
Torchmark Corp. 65,200 4,645,500
Travelers Property Casualty Corp.
Class A 90,800 3,620,650
Travelers Group, Inc. (The) 305,766 19,282,368
UNUM Corp. 124,200 5,216,400
USF&G Corp. 152,200 3,652,800
148,684,730
SAVINGS & LOANS - 1.6%
Ahmanson (H.F.) & Co. 90,400 3,887,200
Charter One Financial Corp. 25,185 1,356,842
Dime Bancorp., Inc. 117,400 2,054,500
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
SAVINGS & LOANS - CONTINUED
Glendale Federal Bank FSB (a) 247,900 $ 6,476,388
Golden West Financial Corp. 71,080 4,975,600
Great Western Financial Corp. 182,200 9,793,250
Ocwen Financial Corp. 10,000 326,250
TCF Financial Corp. 50,300 2,483,563
Washington Mutual, Inc. 323,900 19,353,025
50,706,618
SECURITIES INDUSTRY - 0.1%
Guoco Group Ltd. 450,000 2,369,950
Morgan Stanley Dean Witter Discover
and Co. 18,900 813,881
3,183,831
TOTAL FINANCE 431,385,169
HEALTH - 4.6%
DRUGS & PHARMACEUTICALS - 2.1%
Andrx Corp. 78,600 3,006,450
Barr Laboratories, Inc. (a) 207,700 9,138,800
Bristol-Myers Squibb Co. 118,400 9,590,400
Elan Corp. PLC ADR (a) 55,400 2,506,850
Glaxo PLC sponsored ADR 12,500 522,656
Immunex Corp. 1,000 36,250
Interneuron Pharmaceuticals, Inc. 3,600 72,450
Merck & Co., Inc. 11,400 1,179,900
Novartis AG (Reg.) 15,111 24,132,107
Pfizer, Inc. 58,400 3,489,400
Schering-Plough Corp. 156,000 7,468,500
Sepracor, Inc. (a) 23,400 604,013
Warner-Lambert Co. 55,800 6,933,150
68,680,926
MEDICAL EQUIPMENT & SUPPLIES - 0.6%
Bausch & Lomb, Inc. 56,700 2,671,988
<PAGE>
Baxter International, Inc. 38,700 2,022,075
Boston Scientific Corp. (a) 2,300 141,306
Cardinal Health, Inc. 22,500 1,288,125
McKesson Corp. 12,500 968,750
Medtronic, Inc. 51,200 4,147,200
Nitinol Medical Technologies, Inc. 1,000 15,125
St. Jude Medical, Inc. (a) 102,400 3,993,600
Sybron International Corp. (a) 36,800 1,467,400
Ventana Medical Systems, Inc. 65,000 804,375
17,519,944
MEDICAL FACILITIES MANAGEMENT - 1.9%
Beverly Enterprises, Inc. (a) 75,400 1,225,250
Carematrix Corp. (a) 53,200 1,313,375
Columbia/HCA Healthcare Corp. 7,800 306,638
Coventry Corp. (a) 102,600 1,551,825
FPA Medical Management, Inc. 11,500 272,406
HEALTHSOUTH Rehabilitation Corp. (a) 617,500 15,398,906
Health Management Associates, Inc.
Class A (a) 316,200 9,011,700
Humana, Inc. (a) 46,900 1,084,563
Integrated Health Services, Inc. 194,100 7,472,850
NovaCare, Inc. (a) 48,600 674,325
Oxford Health Plans, Inc. (a) 64,600 4,635,050
Quorum Health Group, Inc. (a) 9,300 332,475
Safeguard Health Enterprises, Inc. (a) 63,700 676,813
Sunrise Assisted Living, Inc. (a) 119,300 4,175,500
Tenet Healthcare Corp. (a) 196,400 5,806,075
SHARES VALUE (NOTE 1)
Trigon Healthcare, Inc. 131,000 $ 3,176,750
United HealthCare Corp. 36,500 1,898,000
Vencor, Inc. (a) 31,500 1,330,875
60,343,376
TOTAL HEALTH 146,544,246
HOLDING COMPANIES - 0.5%
Norfolk Southern Corp. 161,500 16,271,125
PartnerRe Ltd. 16,000 610,000
Triarc Companies, Inc. Class A (a) 24,000 489,000
17,370,125
INDUSTRIAL MACHINERY & EQUIPMENT - 6.2%
ELECTRICAL EQUIPMENT - 1.9%
AMETEK, Inc. 67,000 1,574,500
Common Development International
Ltd. (a)(b) 41,200 753,486
Computer Products, Inc. (a) 2,100 52,500
General Electric Co. 85,400 5,583,025
General Instrument Corp. (a) 86,800 2,170,000
Honeywell, Inc. 43,000 3,262,625
Kuhlman Corp. 9,900 319,275
Loral Space & Communications Ltd. (a) 864,600 12,969,000
Roper Industries, Inc. 8,700 451,313
Scientific-Atlanta, Inc. 166,900 3,650,938
Spectrain Corp. 3,100 114,313
Viasat, Inc. 6,800 98,600
Westinghouse Electric Corp. 1,348,615 31,186,722
62,186,297
INDUSTRIAL MACHINERY & EQUIPMENT - 3.2%
AGCO Corp. 10,200 366,563
Case Corp. 204,100 14,057,388
Caterpillar, Inc. 84,000 9,019,500
Cooper Industries, Inc. 26,800 1,333,300
Dover Corp. 34,600 2,127,900
Harnischfeger Industries, Inc. 80,200 3,328,300
Illinois Tool Works, Inc. 209,900 10,481,881
Ingersoll-Rand Co. 121,000 7,471,750
Kaydon Corp. 117,800 5,845,825
Keystone International, Inc. 98,700 3,423,656
New Holland NV 324,100 8,872,238
Parker-Hannifin Corp. 16,000 971,000
Stanley Works 63,300 2,532,000
Tyco International Ltd. 453,714 31,560,506
Thermo Fibergen, Inc.
rights 12/31/01 (a) 13,700 36,819
101,428,626
POLLUTION CONTROL - 1.1%
Allied Waste Industries, Inc. (a) 17,300 300,588
Browning-Ferris Industries, Inc. 32,800 1,090,600
Thermo Instrument Systems, Inc. (a) 68,800 2,107,000
USA Waste Services, Inc. (a) 573,780 22,162,253
United Waste Systems, Inc. (a) 186,200 7,634,200
Waste Management, Inc. 2,800 89,950
33,384,591
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 196,999,514
MEDIA & LEISURE - 6.2%
BROADCASTING - 1.6%
APT Satellite Holdings Ltd.
sponsored ADR 263,500 3,326,688
American Radio Systems Corp.
Class A (a) 32,700 1,303,913
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - CONTINUED
BROADCASTING - CONTINUED
Asia Satellite Telecommunications
<PAGE>
Holdings Ltd. 255,000 $ 781,754
Canal Plus SA 2,200 428,013
Clear Channel Communications, Inc. (a) 41,400 2,548,688
Cox Communications, Inc. Class A (a) 56,300 1,351,200
Evergreen Media Corp. Class A (a) 5,600 249,900
HSN, Inc. (a) 8,300 259,375
Jacor Communications, Inc. Class A (a) 110,100 4,211,325
Metro Networks, Inc. (a) 40,500 982,125
Smartalk Teleservices, Inc. (a) 46,900 726,950
TCA Cable TV, Inc. 9,300 349,913
TCI Group Class A (a) 269,100 4,002,863
Telemundo Group, Inc. Class A (a) 136,400 3,273,600
Time Warner, Inc. 488,100 23,550,825
Univision Communications, Inc.
Class A (a) 9,900 387,338
Westwood One, Inc. (a) 50,000 1,612,500
49,346,970
ENTERTAINMENT - 0.8%
Airtours PLC 29,600 572,577
Disney (Walt) Co. 237,800 19,083,450
Family Golf Centers, Inc. (a) 12,200 280,600
Premier Parks, Inc. (a) 93,300 3,440,438
Regal Cinemas, Inc. (a) 19,600 646,800
Viacom, Inc. (a):
Class A 39,900 1,184,531
Class B (non-vtg.) 49,800 1,494,000
26,702,396
LEISURE DURABLES & TOYS - 1.0%
Brunswick Corp. 200,500 6,265,625
Callaway Golf Co. 67,700 2,403,350
Champion Enterprises, Inc. (a) 36,600 549,000
Harley-Davidson, Inc. 35,200 1,687,400
Hasbro, Inc. 466,025 13,223,459
Mattel, Inc. 142,550 4,828,881
Nintendo Co. Ltd. Ord. 33,300 2,788,434
31,746,149
LODGING & GAMING - 1.0%
Bristol Hotel Co. (a) 7,200 277,200
Doubletree Corp. (a) 39,000 1,603,875
Four Seasons Hotels, Inc. 125,800 3,735,777
HFS, Inc. (a) 260,600 15,114,800
Hilton Hotels Corp. 3,600 95,625
Host Marriott Corp. (a) 102,900 1,832,906
ITT Corp. 6,300 384,117
La Quinta Motor Inns, Inc. 132,700 2,902,813
Marriott International, Inc. 3,000 184,125
Patriot American Hospitality, Inc. 76,700 3,458,217
WMS Industries, Inc. 105,300 2,639,081
32,228,536
PUBLISHING - 0.8%
Big Flower Press Holdings, Inc. (a) 194,600 4,037,950
Dow Jones & Co., Inc. 32,500 1,306,094
Harte Hanks Communications, Inc. 7,700 227,150
Meredith Corp. 51,500 1,493,500
New York Times Co. (The) Class A 99,900 4,945,050
Pearson, PLC 215,600 2,498,009
Playboy Enterprises, Inc. Class B (a) 30,400 351,500
SHARES VALUE (NOTE 1)
Times Mirror Co. Class A 158,900 $ 8,779,225
Tribune Co. 61,500 2,955,844
26,594,322
RESTAURANTS - 1.0%
Boston Chicken, Inc. (a) 88,100 1,233,400
Chart House Enterprises, Inc. 4,800 35,976
Compass Group PLC Ord. 46,600 522,468
Cracker Barrel Old Country Store, Inc. 10,800 286,200
Fine Host Corp. (a) 31,500 992,250
Foodmaker, Inc. (a) 58,600 959,575
Landry's Seafood Restaurants, Inc. (a) 96,000 2,208,000
Logan's Roadhouse, Inc. (a) 24,900 591,375
Lone Star Steakhouse Saloon 2,600 67,600
McDonald's Corp. 246,700 11,918,694
Morton's Restaurant Group, Inc. (a) 316,900 6,298,388
Papa John's International, Inc. (a) 14,400 529,200
Rainforest Cafe, Inc. (a) 11,100 281,663
ShowBiz Pizza Time, Inc. (a) 77,700 2,049,338
Starbucks Corp. (a) 17,600 685,300
30,124,896
TOTAL MEDIA & LEISURE 196,743,269
NONDURABLES - 3.8%
AGRICULTURE - 0.1%
Pioneer Hi-Bred International, Inc. 17,900 1,432,000
BEVERAGES - 0.7%
Cadbury-Schweppes PLC Ord. 1,103,597 9,847,166
Coors (Adolph) Co. Class B 25,000 665,625
COTT Corp. 6,200 66,012
PepsiCo, Inc. 343,600 12,906,475
23,485,278
FOODS - 1.5%
CPC International, Inc. 2,100 193,856
Campbell Soup Co. 133,400 6,670,000
Dean Foods Co. 103,100 4,162,663
<PAGE>
Dole Food, Inc. 30,000 1,282,500
Earthgrains Co. 6,200 406,488
Flowers Industries, Inc. 30,000 504,375
Hershey Foods Corp. 83,500 4,618,594
Interstate Bakeries Corp. 7,800 462,638
Nabisco Holdings Corp. Class A 182,500 7,277,188
Nestle SA (Reg.) 6,735 8,875,546
Ralston Purina Co. 83,600 6,870,875
Sara Lee Corp. 87,100 3,625,538
Tasty Baking Co. 500 8,750
Tootsie Roll Industries, Inc. 23,455 1,043,748
Tyson Foods, Inc. 88,400 1,690,650
47,693,409
HOUSEHOLD PRODUCTS - 1.3%
Church & Dwight Co., Inc. 24,200 647,350
Dial Corp. 249,800 3,903,125
Estee Lauder Companies, Inc. 12,100 608,025
Gillette Co. 163,100 15,453,725
Premark International, Inc. 69,500 1,859,125
Stanhome, Inc. 5,500 180,813
Unilever NV:
Ord. 74,810 15,738,248
ADR 21,430 4,587,359
42,977,770
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONDURABLES - CONTINUED
TOBACCO - 0.2%
Consolidated Cigar Holdings, Inc.
Class A (a) 93,000 $ 2,580,750
Culbro Corp. (a) 2,200 306,213
Dimon, Inc. 7,200 190,800
Gallaher Group PLC sponsored ADR (a) 79,700 1,469,469
General Cigar Holdings, Inc. Class A 10,700 314,981
Swisher International Group, Inc.
Class A 60,100 1,036,725
Universal Corp. 8,200 260,350
6,159,288
TOTAL NONDURABLES 121,747,745
PRECIOUS METALS - 0.7%
Euro-Nevada Mining Ltd. 177,700 5,470,068
Franco-Nevada Mining Corp. 228,900 11,481,060
Getchell Gold Corp. (a) 43,300 1,526,325
Indochina Goldfields Ltd. (a) 133,900 630,391
Indochina Goldfields Ltd. (a)(b) 75,600 355,919
Newmont Mining Corp. 48,000 1,872,000
21,335,763
RETAIL & WHOLESALE - 7.4%
APPAREL STORES - 0.8%
AnnTaylor Stores Corp. (a) 53,600 1,045,200
Charming Shoppes, Inc. (a) 1,202,800 6,277,113
Footstar, Inc. (a) 17,500 457,188
Gap, Inc. 113,000 4,392,875
Goody's Family Clothing (a) 161,900 4,432,013
Payless ShoeSource, Inc. (a) 34,488 1,886,063
Ross Stores, Inc. 9,800 320,338
TJX Companies, Inc. 219,000 5,776,125
24,586,915
DRUG STORES - 0.9%
CVS Corp. 524,061 26,858,126
General Nutrition Companies, Inc. (a) 12,400 347,200
27,205,326
GENERAL MERCHANDISE STORES - 2.2%
Coles Myer Ltd. 261,700 1,359,096
Costco Companies, Inc. (a) 227,400 7,475,775
Dayton Hudson Corp. 176,400 9,382,275
Dollar Tree Stores (a) 20,000 1,007,500
Federated Department Stores, Inc. (a) 41,800 1,452,550
Hudson's Bay Co. Ord. 7,000 157,172
K mart Corp. (a) 319,200 3,910,200
Kohls Corp. (a) 54,600 2,890,388
Meyer (Fred), Inc. (a) 38,900 2,010,644
Michaels Stores, Inc. (a) 3,600 76,275
99 Cents Only Stores (a) 50,000 1,506,250
Nordstrom, Inc. 72,500 3,557,031
Stein Mart, Inc. (a) 99,200 2,976,000
Wal-Mart Stores, Inc. 685,200 23,168,325
Woolworth Corp. (a) 347,200 8,332,800
Woolworths Ltd. 440,700 1,444,973
70,707,254
GROCERY STORES - 1.1%
Ahold NV 23,645 1,993,591
American Stores Co. 9,600 474,000
Asda Group PLC 866,100 1,787,828
Dominick's Supermarkets, Inc. (a) 161,000 4,286,625
SHARES VALUE (NOTE 1)
Fleming Companies, Inc. 28,500 $ 513,000
Loblaw Companies Ltd. 37,600 517,437
Quality Food Centers, Inc. (a) 142,200 5,403,600
Richfood Holdings, Inc. Class A 313,100 8,140,600
Safeway, Inc. (a) 289,600 13,357,800
36,474,481
RETAIL & WHOLESALE, MISCELLANEOUS - 2.4%
<PAGE>
Barnes & Noble, Inc. (a) 2,200 94,600
Bed Bath & Beyond, Inc. 1,000 30,375
Circuit City Stores, Inc. - Circuit City
Group 223,900 7,962,444
Comcast Corp.:
Class A 109,000 2,282,188
Class A special 123,800 2,646,225
Fabri-Centers of America, Inc.
Class A (a) 3,500 95,375
Fingerhut Companies, Inc. 23,100 402,806
Hancock Fabrics, Inc. 79,400 1,091,750
Home Depot, Inc. (The) 493,800 34,041,338
Pier 1 Imports, Inc. 7,200 190,800
Staples, Inc. (a) 307,100 7,140,075
Tiffany & Co., Inc. 39,700 1,833,644
Toys "R" Us, Inc. (a) 253,507 8,872,745
U.S. Office Products Co. (a) 291,600 8,912,025
Viking Office Products, Inc. (a) 16,300 309,700
Williams-Sonoma, Inc. 1,000 42,750
75,948,840
TOTAL RETAIL & WHOLESALE 234,922,816
SERVICES - 3.4%
ADVERTISING - 0.4%
Interpublic Group of Companies, Inc. 75,400 4,622,963
Lycos, Inc. (a) 5,200 66,300
Omnicom Group, Inc. 64,400 3,968,650
Outdoor Systems, Inc. (a) 88,200 3,373,650
12,031,563
EDUCATIONAL SERVICES - 0.0%
Apollo Group, Inc. Class A (a) 700 24,675
LEASING & RENTAL - 0.6%
Alrenco, Inc. (a) 150,000 1,987,500
Budget Group, Inc. Class A (a) 106,600 3,677,700
Danka Business Systems PLC
sponsored ADR 21,300 870,638
Hanover Compressor Co. 2,400 46,800
Hertz Corp. Class A 185,700 6,685,200
Rent-Way, Inc. (a) 37,800 557,550
Republic Industries, Inc. (a) 162,400 4,039,700
Ryder Systems, Inc. 48,300 1,593,900
19,458,988
PRINTING - 0.2%
ASM Lithography Holding NV (a) 56,800 3,322,800
Standard Register Co. 72,300 2,214,188
Valassis Communications, Inc. (a) 35,400 849,600
6,386,588
SERVICES - 2.2%
ADT Ltd. (a) 465,900 15,374,700
APAC Teleservices, Inc. (a) 695,000 13,509,063
AccuStaff, Inc. (a) 186,400 4,415,350
Assisted Living Concepts, Inc. (a) 8,100 223,763
Borg Warner Security Corp. (a) 37,400 668,525
Corestaff, Inc. 3,100 83,700
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - CONTINUED
SERVICES - CONTINUED
Corrections Corp. of America (a) 29,700 $ 1,180,575
Dun & Bradstreet Corp. 48,300 1,267,875
Ecolab, Inc. 237,400 11,335,850
Hays PLC 271,800 2,579,053
International Service Systems AS,
Series B (a) 22,100 791,948
Learning Tree International, Inc. (a) 12,200 541,375
National Service Industries, Inc. 48,300 2,351,606
Norrell Corp. GA 7,100 234,300
Personnel Group of America, Inc. (a) 6,900 198,806
Pierce Leahy Corp. 8,600 154,800
Pittston Co. (Brinks Group) 7,600 228,000
Premier Technologies, Inc. (a) 11,700 304,200
Registry, Inc. 1,200 55,200
Rentokil Group PLC 741,244 2,598,696
Robert Half International, Inc. (a) 64,600 3,040,238
Securicor Group PLC 528,800 2,508,836
Securitas AB Class B 83,800 2,366,067
Service Corp. International 8,300 272,863
Snyder Communications, Inc. (a) 15,200 409,450
Staffmark, Inc. (a) 17,300 387,088
SGS Societe Generale de Surveillance
Holdings SA:
(Bearer) 900 1,921,314
(Reg.) 1,340 527,198
Telespectrum Worldwide, Inc. (a) 135,700 954,141
Wackenhut Corp. 2,600 62,400
Wackenhut Corrections Corp. (a) 27,900 812,588
71,359,568
TOTAL SERVICES 109,261,382
TECHNOLOGY - 14.7%
COMMUNICATIONS EQUIPMENT - 4.2%
Alcatel Alsthom Compagnie Generale
d'Electricite SA 258,660 32,375,388
ADC Telecommunications, Inc. 11,300 377,138
Advanced Fibre Communication, Inc. 93,900 5,669,213
Boston Technology, Inc. (a) 27,600 815,925
<PAGE>
Ciena Corp. 84,800 3,996,200
Cisco Systems, Inc. (a) 49,900 3,349,538
DSC Communications Corp. (a) 66,700 1,484,075
Davox Corp. (a) 23,650 845,488
Dynatech Corp. (a) 31,300 1,118,975
Ericsson (L.M.) Telephone Co.:
Class B 5,800 228,740
Class B ADR 116,800 4,599,000
Lucent Technologies, Inc. 482,600 34,777,363
Newbridge Networks Corp. (a) 212,000 9,222,000
Nokia Corp. AB sponsored ADR 111,900 8,252,625
Northern Telecom Ltd. 184,200 16,603,549
Tekelec (a) 9,800 346,675
Tellabs, Inc. (a) 156,300 8,733,263
132,795,155
COMPUTER SERVICES & SOFTWARE - 3.6%
Acxiom Corp. (a) 2,100 43,050
Advanced Communication Systems, Inc. 275,100 2,097,638
Alphanet Solutions, Inc. (a) 29,900 441,025
Aspen Technology, Inc. (a) 2,500 94,063
Automatic Data Processing, Inc. 280,300 13,174,100
Broderbund Software, Inc. (a) 49,300 1,217,094
Baan Co. NV (a) 23,100 1,591,013
SHARES VALUE (NOTE 1)
CBT Group PLC sponsored ADR (a) 20,000 $ 1,262,500
CUC International, Inc. (a) 321,300 8,293,556
Ceridian Corp. (a) 252,216 10,656,126
Citrix Systems, Inc. (a) 61,300 2,689,538
Computer Learning Centers, Inc. 2,000 84,000
Computer Sciences Corp. (a) 17,600 1,269,400
DST Systems, Inc. 94,000 3,131,375
ECI Telecom Ltd. 51,600 1,535,100
Electronic Arts, Inc. (a) 11,700 393,413
Electronics for Imaging, Inc. 4,000 189,000
Engineering Animation, Inc. (a) 36,900 1,245,375
Equifax, Inc. 145,300 5,403,344
First Data Corp. 172,000 7,557,250
GT Interactive Software, Inc. (a) 94,000 1,116,250
HBO & Co. 11,900 819,613
Intersolv, Inc. (a) 22,600 211,875
Keane, Inc. (a) 67,400 3,504,800
Maxis, Inc. (a) 32,000 384,000
McAfee Associates, Inc. (a) 37,900 2,392,438
Metro Information Services, Inc. 3,100 61,225
Microsoft Corp. (a) 302,300 38,203,163
Netscape Communications Corp. (a) 12,400 397,575
New Era of Networks, Inc. 27,800 458,700
Ontrack Data International, Inc. 3,600 82,800
Open Market, Inc. (a) 48,000 636,000
Oracle Systems Corp. (a) 4,400 221,650
Paychex, Inc. 11,250 427,500
RWD Technologies, Inc. 500 8,625
Radiant Systems, Inc. 4,400 91,850
Saville Systems Ireland PLC
sponsored ADR (a) 19,000 988,000
Scopus Technology, Inc. (a) 46,500 1,040,438
Simulation Sciences, Inc. 7,700 117,425
Symantec Corp. (a) 6,300 122,850
USCS International, Inc. (a) 23,000 753,250
Visio Corp. (a) 8,600 606,300
115,014,287
COMPUTERS & OFFICE EQUIPMENT - 2.3%
Apex PC Solutions, Inc. 2,600 51,350
Bay Networks, Inc. (a) 5,200 138,125
Bell & Howell Co. (a) 13,700 422,131
Compaq Computer Corp. (a) 147,000 14,589,750
Comverse Technology, Inc. (a) 14,700 764,400
Creative Technology Corp. Ltd. (a) 36,700 623,900
Data General Corp. (a) 53,900 1,401,400
Dell Computer Corp. (a) 117,100 13,751,931
Diebold, Inc. 10,575 412,425
EMC Corp. (a) 455,600 17,768,400
International Business Machines Corp. 48,000 4,329,000
Kronos, Inc. (a) 58,800 1,617,000
Overland Data, Inc. 6,300 33,863
Pitney Bowes, Inc. 97,600 6,783,200
Procom Technology, Inc. 44,900 482,675
Quantum Corp. (a) 136,200 2,766,563
Seagate Technology (a) 500 17,594
Stratus Computer, Inc. (a) 27,900 1,395,000
Sun Microsystems, Inc. (a) 38,500 1,432,922
Symbol Technologies, Inc. 132,300 4,448,588
73,230,217
ELECTRONIC INSTRUMENTS - 1.1%
Applied Materials, Inc. (a) 104,200 7,378,663
KLA Instruments Corp. (a) 31,400 1,530,750
Laser Power Corp. 100,000 587,500
Perkin-Elmer Corp. 142,100 11,305,831
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TECHNOLOGY - CONTINUED
ELECTRONIC INSTRUMENTS - CONTINUED
Tektronix, Inc. 28,000 $ 1,680,000
<PAGE>
Teradyne, Inc. (a) 51,100 2,005,675
Thermo Electron Corp. (a) 219,800 7,473,200
Thermoquest Corp. (a) 5,100 79,050
Waters Corp. (a) 113,100 4,057,463
36,098,132
ELECTRONICS - 3.3%
Altera Corp. (a) 92,300 4,661,150
Analog Devices, Inc. (a) 15,200 403,750
DII Group, Inc. 9,300 409,200
Etec Systems, Inc. (a) 4,900 210,088
Griffon Corp. (a) 118,300 1,619,231
Intel Corp. 111,700 14,167,069
KEMET Corp. (a) 15,700 390,538
Kent Electronics Corp. (a) 7,400 271,488
Lattice Semiconductor Corp. (a) 49,100 2,774,150
Linear Technology Corp. 35,400 1,831,950
MRV Communications, Inc. (a) 12,400 365,800
Maxim Integrated Products, Inc. (a) 53,700 3,054,188
Micro Linear Corp. (a) 17,000 178,500
Microchip Technology, Inc. (a) 29,300 871,675
Micron Technology, Inc. 259,700 10,371,769
Motorola, Inc. 120,900 9,188,400
National Semiconductor Corp. (a) 206,000 6,308,750
PMC-Sierra, Inc. (a) 34,700 910,875
Photronics, Inc. (a) 8,100 386,775
SGS Thomson Microelectronics NV (a) 7,400 592,000
Sanmina Corp. (a) 5,950 377,825
Semtech Corp. (a) 52,400 1,912,600
Solectron Corp. (a) 25,500 1,785,000
Sterling Commerce, Inc. 9,400 309,025
Storage Technology Corp. (a) 75,500 3,359,750
Texas Instruments, Inc. 381,900 32,103,469
Unitrode Corp. (a) 102,600 5,168,475
Vishay Intertechnology, Inc. 115 3,328
Vitesse Semiconductor Corp. (a) 33,000 1,078,688
Zero Corp. 74,400 1,953,000
107,018,506
PHOTOGRAPHIC EQUIPMENT - 0.2%
Polaroid Corp. 125,500 6,965,250
TOTAL TECHNOLOGY 471,121,547
TRANSPORTATION - 1.1%
AIR TRANSPORTATION - 0.3%
Comair Holdings, Inc. 13,600 376,550
Continental Airlines, Inc. Class B (a) 169,400 5,918,413
Delta Air Lines, Inc. 33,900 2,779,800
Ryanair Holdings PLC sponsored ADR 13,100 355,338
Viad Corp. 43,700 841,225
10,271,326
RAILROADS - 0.3%
Bombardier, Inc. Class B 73,600 1,668,547
CSX Corp. 25,100 1,393,050
Canadian Pacific Ltd. 2,300 65,469
Canadian National Railway Co. 17,600 767,407
Wisconsin Central Transportation
Corp. (a) 158,200 5,892,950
9,787,423
SHARES VALUE (NOTE 1)
TRUCKING & FREIGHT - 0.5%
Air Express International Corp. 7,700 $ 306,075
Airborne Freight Corp. 1,500 62,813
CNF Transportation, Inc. 168,700 5,440,575
Expeditors International of
Washington, Inc. 84,800 2,406,200
Roadway Express, Inc. 21,300 497,888
Swift Transportation Co., Inc. (a) 43,400 1,280,300
USFreightways Corp. 98,200 2,540,925
Werner Enterprises, Inc. 3,400 65,875
XTRA Corp. 4,600 202,113
Yellow Corp. (a) 124,100 2,776,738
15,579,502
TOTAL TRANSPORTATION 35,638,251
UTILITIES - 2.9%
CELLULAR - 0.3%
Mobile Telecommunications Technologies,
Inc. (a) 138,900 1,988,006
Vodafone Group PLC sponsored ADR 128,100 6,204,844
8,192,850
ELECTRIC UTILITY - 0.5%
Edison International 333,200 8,288,350
National Grid Co. PLC 1,637,600 5,983,817
Ogden Corp. 9,300 202,275
14,474,442
GAS - 0.2%
El Paso Natural Gas Co. 81,400 4,477,000
Enron Corp. 39,300 1,603,931
Sonat, Inc. 28,800 1,476,000
7,556,931
TELEPHONE SERVICES - 1.9%
Brooks Fiber Properties, Inc. (a) 122,500 4,134,375
Cable & Wireless PLC Ord. 666,900 6,106,036
Cincinnati Bell, Inc. 27,000 850,500
Excel Communication, Inc. 20,300 583,625
MCI Communications Corp. 192,000 7,350,000
<PAGE>
McLeodUSA, Inc. 132,600 4,475,250
Qwest Communications
International, Inc. 45,000 1,226,250
Sprint Corp. 5,600 294,700
STAR Telecommunications, Inc. 49,400 654,550
Tel-Save Holdings, Inc. (a) 2,600 39,650
Telco Communications Group, Inc. 40,000 1,300,000
Teleport Communications Group, Inc.
Class A (a) 101,000 3,446,625
US WEST Media Group (a) 108,400 2,195,100
WorldCom, Inc. (a) 909,390 29,100,480
61,757,141
TOTAL UTILITIES 91,981,364
TOTAL COMMON STOCKS
(Cost $2,418,784,303) 2,972,841,525
PREFERRED STOCKS - 0.8%
CONVERTIBLE PREFERRED STOCKS - 0.3%
CONSTRUCTION & REAL ESTATE - 0.2%
REAL ESTATE INVESTMENT TRUSTS - 0.2%
Vornado Realty Trust $3.25, Series A 120,800 6,538,300
PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
CONVERTIBLE PREFERRED STOCKS - CONTINUED
RETAIL & WHOLESALE - 0.1%
APPAREL STORES - 0.1%
TJX Companies, Inc.,
Series E, $7.00 8,400 $ 2,394,000
TOTAL CONVERTIBLE PREFERRED STOCKS 8,932,300
NONCONVERTIBLE PREFERRED STOCKS - 0.5%
TECHNOLOGY - 0.1%
COMPUTER SERVICES & SOFTWARE - 0.1%
SAP AG 27,900 5,754,225
UTILITIES - 0.4%
TELEPHONE SERVICES - 0.4%
Stet (Societa Finanziaria
Telefonica) Spa 1,396,200 4,838,120
Telecom Italia Mobile Spa de Risp 4,234,800 7,516,731
12,354,851
TOTAL NONCONVERTIBLE PREFERRED STOCKS 18,109,076
TOTAL PREFERRED STOCKS
(Cost $25,279,293) 27,041,376
CONVERTIBLE BONDS - 0.1%
MOODY'S PRINCIPAL
RATINGS (C) AMOUNT
HEALTH - 0.1%
MEDICAL FACILITIES MANAGEMENT - 0.1%
NovaCare, Inc.
5 1/2%, 1/15/00 B1 $ 1,624,000 1,526,560
MEDIA & LEISURE - 0.0%
BROADCASTING - 0.0%
Home Shopping Network, Inc.
5 7/8%, 3/1/06 (b) B- 445,000 570,713
Home Shopping Network, Inc.
5 7/8%, 3/1/06 B3 29,000 37,193
Jacor Communications, Inc.
liquid yield option notes
0%, 6/12/11 B3 302,000 169,498
777,404
TECHNOLOGY - 0.0%
ELECTRONICS - 0.0%
National Semiconductor Corp.
6 1/2%, 10/1/02 (b) Ba2 1,355,000 1,397,344
TOTAL CONVERTIBLE BONDS
(Cost $3,298,523) 3,701,308
U.S. TREASURY OBLIGATIONS - 1.2%
7 5/8%, 2/15/25 Aaa $ 30,000,000 32,850,000
6 3/4%, 8/15/26 Aaa 5,000,000 4,948,450
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $38,564,727) 37,798,450
CASH EQUIVALENTS - 4.9%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 157,004,858 $ 156,979,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $2,642,905,846) $ 3,198,361,659
LEGEND
1. Non-income producing
2. Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers. At the period end, the value of
these securities amounted to $3,954,433 or 0.1% of net assets.
3. Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
4. Transactions during the period with companies which are or were affiliates
are as follows:
PURCHASE SALES DIVIDEND VALUE
AFFILIATE COST COST INCOME
Cutter & Buck, Inc. $ - $ 130,000 $ - $ -
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
<PAGE>
aggregated $2,581,519,143 and $2,067,054,575, respectively, of which U.S.
government and government agency obligations aggregated $12,330,855 and
$83,163,081, respectively.
The market value of futures contracts opened and closed during the period
amounted to $191,296,108 and $192,542,878, respectively.
The fund placed a portion of its portfolio transactions with brokerage firms
which are affiliates of FMR. The commissions paid to these affiliated firms were
$736,024 for the period.
Distribution of investments by country of issue, as a percentage of total value
of investment in securities, is as follows:
United States 85.1%
Netherlands 2.6
United Kingdom 2.6
Canada 2.2
Netherland Antilles 1.6
Switzerland 1.4
France 1.4
Bermuda 1.1
Others (individually less than 1%) 2.0
TOTAL 100.0%
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income tax
purposes was $2,644,690,371. Net unrealized appreciation aggregated
$553,671,288, of which $586,693,869 related to appreciated investment securities
and $33,022,581 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
<S> <C>
Investment in $ 3,198,361,659
securities, at
value (including
repurchase
agreements of
$156,979,000) (cost
$2,642,905,846) -
See accompanying
schedule
Receivable for 59,459,081
investments sold
Receivable for fund 6,523,051
shares sold
Dividends receivable 2,975,377
Interest receivable 1,050,854
TOTAL ASSETS 3,268,370,022
LIABILITIES
Payable to custodian $ 9,448
bank
Payable for 42,551,506
investments
purchased
Payable for fund 751,649
shares redeemed
Accrued management 1,562,871
fee
Other payables and 294,808
accrued expenses
TOTAL LIABILITIES 45,170,282
NET ASSETS $ 3,223,199,740
Net Assets consist of:
Paid in capital $ 2,591,680,584
Undistributed net 14,872,629
investment income
Accumulated 61,194,489
undistributed net
realized gain (loss)
on investments and
foreign currency
transactions
Net unrealized 555,452,038
</TABLE>
<PAGE>
<TABLE>
<S> <C>
appreciation
(depreciation) on
investments
and assets and
liabilities in foreign
currencies
NET ASSETS, for $3,223,199,740
179,793,883 shares
outstanding
NET ASSET VALUE, $17.93
offering price
and redemption
price per share
($3,223,199,740 (divided by)
179,793,883
shares)
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME $ 16,173,638
Dividends
Interest 9,201,324
TOTAL INCOME 25,374,962
EXPENSES
Management fee $ 8,331,378
Transfer agent fees 997,003
Accounting fees and 401,998
expenses
Non-interested 5,810
trustees'
compensation
Custodian fees and 207,894
expenses
Registration fees 13,357
Audit 20,419
Legal 2,911
Miscellaneous 46,997
Total expenses 10,027,767
before reductions
Expense reductions (513,563 9,514,204
)
NET INVESTMENT 15,860,758
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
Investment 69,106,380
securities (including
realized gain of
$2,496 on sales of
investments in
affiliated issuers)
Foreign currency (13,416
transactions )
Futures contracts 1,246,770 70,339,734
Change in net
unrealized
appreciation
(depreciation) on:
Investment 232,852,484
securities
Assets and (4,098 232,848,386
liabilities in )
foreign currencies
NET GAIN (LOSS) 303,188,120
</TABLE>
<PAGE>
<TABLE>
<S> <C>
NET INCREASE $319,048,878
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 506,300
Expense reductions
Directed
brokerage
arrangements
Custodian interest 7,263
credits
$ 513,563
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
<S> <C> <C>
Operations $ 15,860,758 $ 20,976,837
Net investment
income
Net realized gain 70,339,734 49,001,422
(loss)
Change in net 232,848,386 254,150,553
unrealized
appreciation
(depreciation)
NET INCREASE 319,048,878 324,128,812
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Distributions to (21,846,321) -
shareholders
From net
investment income
From net realized (57,736,705) (9,296,351)
gain
TOTAL DISTRIBUTIONS (79,583,026) (9,296,351)
Share transactions 704,874,447 1,380,209,873
Net proceeds from
sales of shares
Reinvestment of 79,583,026 9,296,351
distributions
Cost of shares (194,826,644) (187,235,370)
redeemed
NET INCREASE 589,630,829 1,202,270,854
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 829,096,681 1,517,103,315
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 2,394,103,059 876,999,744
End of period $ 3,223,199,740 $ 2,394,103,059
(including
undistributed net
investment
income of
$14,872,629 and
$20,976,837,
respectively)
OTHER INFORMATION
Shares
Sold 42,121,561 92,660,951
Issued in 4,834,935 674,626
reinvestment of
distributions
Redeemed (11,722,580) (12,369,121)
</TABLE>
<PAGE>
Net increase 35,233,916 80,966,456
(decrease)
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
SIX MONTHS YEARS ENDED JANUARY 3, 1995
ENDED DECEMBER 31, (COMMENCEMENT
JUNE 30, 1997 OF OPERATIONS) TO
DECEMBER 31,
SELECTED PER-SHARE DATA (UNAUDITED) 1996 1995
<S> <C> <C> <C>
Net asset value, $ 16.56 $ 13.79 $ 10.00
beginning of period
Income from
Investment
Operations
Net investment .10 D .14 .06
income
Net realized and 1.78 2.76 3.91
unrealized gain
(loss)
Total from 1.88 2.90 3.97
investment
operations
Less Distributions
From net (.14) - (.06)
investment income
From net realized (.37) (.13) (.12)
gain
Total distributions (.51) (.13) (.18)
Net asset value, end $ 17.93 $ 16.56 $ 13.79
of period
TOTAL RETURN B, C 11.63% 21.22% 39.72%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $3,223,200 $2,394,103 $ 877,000
period (000
omitted)
Ratio of expenses to .73% A .74% .72%
average net assets
Ratio of expenses to .69% A, E .71% E .72%
average net assets
after expense
reductions
Ratio of net 1.16% A 1.33% 1.07%
investment income
to average net
assets
Portfolio turnover rate 163% A 178% 132%
Average commission $ .0365 $ .0343
rate F
</TABLE>
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED AND DO NOT
REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT.
INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED
DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
E FMR OR THE FUND HAS ENTERED INTO VARYING
<PAGE>
ARRANGEMENTS WITH THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE
FUND'S EXPENSES (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). F FOR FISCAL
YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED TO DISCLOSE
ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS
ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND
DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING
PRACTICES AND COMMISSION RATE STRUCTURES MAY DIFFER.
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
JUNE 30, 1997 YEAR YEARS YEARS
GROWTH 17.92% 19.89% 14.33%
S&P 500 (registered trademark) 34.70% 19.78% 14.64%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare these figures to the performance of the Standard & Poor's
500 Index - a widely recognized, unmanaged index of common stocks. This
benchmark reflects the reinvestment of dividends and capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how it will do tomorrow. The stock
market, for example, has a history of long-term growth and short-term
volatility. In turn, the share price and return of a fund that invests in stocks
will vary. That means if you sell your shares during a market downturn, you
might lose money. But if you can ride out the market's ups and downs, you may
have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown.
If Fidelity had not reimbursed certain fund expenses, the past 10 years total
return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and investment
return will vary and you may have a gain or loss when you withdraw your money.
$10,000 OVER THE PAST 10 YEARS
1995/01/03 10000.00 10000.00
1995/01/31 10060.00 10258.23
1995/02/28 10370.00 10658.00
1995/03/31 10560.00 10972.51
1995/04/30 10930.00 11295.66
1995/05/31 11440.00 11747.14
1995/06/30 11790.00 12020.03
1995/07/31 12180.00 12418.61
1995/08/31 12260.00 12449.78
1995/09/30 12470.00 12975.16
1995/10/31 12560.00 12928.84
1995/11/30 12920.00 13496.42
1995/12/31 13251.81 13756.36
1996/01/31 13444.45 14224.63
1996/02/29 13434.43 14356.49
1996/03/31 13393.72 14494.74
1996/04/30 13607.45 14708.39
1996/05/31 13912.77 15087.72
1996/06/30 14024.73 15145.21
1996/07/31 13617.62 14476.09
1996/08/31 13699.05 14781.39
1996/09/30 14360.59 15613.29
1996/10/31 14950.89 16043.91
1996/11/30 16080.60 17256.66
1996/12/31 15673.50 16914.81
1997/01/31 16416.46 17971.65
1997/02/28 16573.05 18112.54
1997/03/31 15727.48 17368.30
1997/04/30 16446.21 18405.19
1997/05/31 17513.74 19525.70
1997/06/30 18095.06 20400.45
Let's say hypothetically that $10,000 was invested in Growth Portfolio on
June 30, 1987. As the chart shows, by June 30, 1997, the value of the
<PAGE>
investment would have grown to $38,148 - a 281.48% increase on the initial
investment. For comparison, look at how the S&P 500 did over the same period.
With dividends and capital gains, if any, reinvested, the same $10,000
investment would have grown to $39,269 - a 292.69% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Philip Morris Companies, Inc. 4.3
Microsoft Corp. 3.3
Merck & Co., Inc. 3.1
Wal-Mart Stores, Inc. 2.3
Boeing Co. 2.2
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Technology 20.1
Health 16.7
Nondurables 9.2
Retail & Wholesale 8.5
Finance 7.8
ASSET ALLOCATION AS OF JUNE 30, 1997 *
Row: 1, Col: 1, Value: 8.4
Row: 1, Col: 2, Value: 91.59999999999999
Stocks 91.6%
Short-term investments 8.4%
FOREIGN INVESTMENTS 6.8%
*
(% OF FUND'S INVESTMENTS)
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with
Jennifer Uhrig,
Portfolio Manager of Growth Portfolio
Q. HOW DID THE FUND PERFORM, JENNIFER?
A. The performance was disappointing. For the six months that ended June
30, 1997, the fund underperformed the Standard & Poor's 500 Index, which
had a six-month return of 20.61%. For the 12-month period that ended June
30, 1997, the fund trailed the S&P 500's return of 34.70%.
Q. WHAT FACTORS INFLUENCED THE FUND'S PERFORMANCE?
A. A distinct lack of market breadth during the period affected the
performance of many diversified stock funds, as much of the market's gain
throughout the period was concentrated among a select group of
household-name, large-cap stocks. Many of these "mega-cap" stocks comprised
the top tier of the S&P 500. The fund participated in this rally to some
extent - I increased the fund's weightings in the market's 50 largest
stocks to around 35% of total investments - but I wasn't overweighted in
enough of them to fully capitalize on the large-cap rally. Additionally, a
technology stock correction in early 1997 had a negative impact on
performance.
Q. WHAT SORTS OF CHANGES HAVE YOU MADE SINCE TAKING OVER THE FUND IN
JANUARY?
A. First off, I've reduced the number of individual positions within the
portfolio. Rather than having an abundance of smaller positions, none of
which are particularly meaningful to performance, I've concentrated on the
stocks in which I'm most confident. A by-product of this strategy is that
the concentration among the fund's top positions has increased. At the
beginning of the period, the fund's top 10 positions comprised
approximately 18% of the fund's investments; at the end of the period, that
percentage had jumped to approximately 25%. In addition, I also raised the
fund's average market capitalization weighting. At the beginning of the
period, the fund's weighted market cap was around $13 billion. This figure
rose to around $23 billion by period's end, but still was well below the
S&P 500's average market cap of $33 billion.
Q. WHICH STOCKS PERFORMED WELL? WHERE DID THE DISAPPOINTMENTS LIE?
A. Health care stocks did well, with some of the larger pharmaceutical
companies leading the way. The fund owned large-cap health care names such
as Bristol-Myers Squibb and Schering-Plough, both of which performed well.
Other stocks that contributed positively included WorldCom, a
telecommunications services company, CompUSA and Philip Morris. Retail
stocks, on the other hand, turned in a subpar performance as the fund's
positions in PETsMART, Viking Office Products and Just for Feet had
negative effects on performance.
Q. PHILIP MORRIS IS THE FUND'S LARGEST SINGLE POSITION AT AROUND 4.3%. CAN
YOU EXPLAIN HOW THIS STOCK WILL BE AFFECTED BY THE RECENT TOBACCO
LITIGATION SETTLEMENT?
A. I think the settlement will eventually benefit everyone involved.
Cigarette prices will likely rise, as tobacco companies search for ways to
fund their liabilities. From a public health perspective, a price increase
<PAGE>
would almost certainly reduce the number of smokers. So that's positive.
From a shareholder perspective, Philip Morris' earnings may be affected by
lower sales volumes, but any decline may be offset by the potential for the
stock's price-to-earnings ratio to rise. This is because the valuation of
the stock was penalized during litigation due to certain risks. As a final
note, I would add that the settlement still needs to go to Congress to
become law. So while the settlement appears logical from all sides, it
still may get bogged down in the political arena.
Q. WHAT'S YOUR OUTLOOK?
A. Over the past year or so, stocks in general have benefited from
favorable investment conditions. Economic growth has remained strong and,
with no signs of inflation, interest rate levels have remained low. I don't
know how long this backdrop can continue, but I'm optimistic about the
outlook for growth stocks. High interest rates, even more so than weak
earnings, have a negative influence on growth stocks. I think higher rates,
as a result of an acceleration in the economy and higher inflation, are
unlikely given the Federal Reserve Board's recent action to reign in the
economy before it overheats.
FUND FACTS
GOAL: to provide capital growth by investing
primarily in common stocks and securities
convertible into common stocks
START DATE: January 3, 1995
SIZE: as of June 30, 1997, more than
$706 million
MANAGER: George Vanderheiden, since
inception; joined Fidelity in 1971
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 91.6%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 3.8%
AEROSPACE & DEFENSE - 3.3%
Boeing Co. 2,843,000 $ 150,856,688
Gulfstream Aerospace Corp. (a) 514,300 15,171,850
Lockheed Martin Corp. 323,800 33,533,538
United Technologies Corp. 301,000 24,983,000
Wyman-Gordon Co. (a) 184,200 4,973,400
229,518,476
DEFENSE ELECTRONICS - 0.5%
Raytheon Co. 619,000 31,569,000
TOTAL AEROSPACE & DEFENSE 261,087,476
BASIC INDUSTRIES - 3.1%
CHEMICALS & PLASTICS - 1.0%
Air Products & Chemicals, Inc. 158,300 12,861,875
Cytec Industries, Inc. (a) 443,300 16,568,338
Monsanto Co. 782,700 33,705,019
Praxair, Inc. 178,300 9,984,800
73,120,032
IRON & STEEL - 0.7%
Inland Steel Industries, Inc. 557,000 14,551,625
Nucor Corp. 555,500 31,385,750
45,937,375
PACKAGING & CONTAINERS - 0.5%
Owens-Illinois, Inc. 1,050,100 32,553,100
PAPER & FOREST PRODUCTS - 0.9%
Kimberly-Clark Corp. 1,024,700 50,978,825
Stone Container Corp. 595,000 8,515,938
59,494,763
TOTAL BASIC INDUSTRIES 211,105,270
DURABLES - 1.9%
AUTOS, TIRES, & ACCESSORIES - 0.2%
AutoZone, Inc. (a) 357,900 8,433,019
Circuit City Stores, Inc. - CarMax Group 324,500 4,644,406
13,077,425
CONSUMER DURABLES - 0.8%
Corning, Inc. 491,300 27,328,563
Minnesota Mining & Manufacturing Co. 255,400 26,050,800
53,379,363
TEXTILES & APPAREL - 0.9%
Liz Claiborne, Inc. 322,500 15,036,563
Reebok International Ltd. 399,900 18,695,325
Timberland Co. Class A (a)(b) 481,700 31,310,500
65,042,388
TOTAL DURABLES 131,499,176
ENERGY - 6.1%
ENERGY SERVICES - 3.7%
Dresser Industries, Inc. 657,100 24,476,975
Falcon Drilling, Inc. (a) 445,000 25,643,125
Halliburton Co. 800,200 63,415,850
Schlumberger Ltd. 769,600 96,200,000
Transocean Offshore, Inc. 132,400 9,615,550
Varco International, Inc. (a) 292,000 9,417,000
Western Atlas, Inc. (a) 337,500 24,721,875
253,490,375
<PAGE>
SHARES VALUE (NOTE 1)
OIL & GAS - 2.4%
British Petroleum PLC ADR 376,326 $ 28,177,409
Burlington Resources, Inc. 168,300 7,426,238
Chesapeake Energy Corp. (a) 372,000 3,650,250
EVI, Inc. (a) 154,000 6,468,000
Royal Dutch Petroleum Co. 706,800 38,432,250
Tosco Corp. 1,099,600 32,919,275
Total SA:
Class B 310,400 31,355,668
sponsored ADR 179,800 9,102,375
Union Pacific Resources Group, Inc. 247,441 6,155,095
Vintage Petroleum, Inc. 209,200 6,432,900
170,119,460
TOTAL ENERGY 423,609,835
FINANCE - 7.8%
BANKS - 0.9%
Bank of New York Co., Inc. 533,900 23,224,650
NationsBank Corp. 642,500 41,441,250
64,665,900
CREDIT & OTHER FINANCE - 1.7%
American Express Co. 645,600 48,097,200
Associates First Capital Corp. 271,600 15,073,800
Beneficial Corp. 266,900 18,966,581
Household International, Inc. 268,108 31,485,933
113,623,514
FEDERAL SPONSORED CREDIT - 2.5%
Federal Home Loan Mortgage
Corporation 1,883,600 64,748,750
Federal National Mortgage Association 1,760,500 76,801,813
Student Loan Marketing Association 262,300 33,312,100
174,862,663
INSURANCE - 2.7%
Allmerica Financial Corp. 313,100 12,484,863
Allstate Corp. 503,600 36,762,800
AMBAC, Inc. 424,200 32,398,275
American International Group, Inc. 300,000 44,812,500
MBIA, Inc. 92,000 10,378,750
UNUM Corp. 1,165,600 48,955,200
185,792,388
TOTAL FINANCE 538,944,465
HEALTH - 16.7%
DRUGS & PHARMACEUTICALS - 9.0%
American Home Products Corp. 1,048,500 80,210,250
Barr Laboratories, Inc. (a) 52,400 2,305,600
Bristol-Myers Squibb Co. 1,834,600 148,602,600
Elan Corp. PLC ADR (a) 456,900 20,674,725
Genentech, Inc. (a) 356,900 21,034,794
Merck & Co., Inc. 2,084,900 215,787,150
Novartis sponsored ADR 485,400 38,832,000
Schering-Plough Corp. 1,198,000 57,354,250
SmithKline Beecham PLC ADR 429,400 39,343,775
624,145,144
MEDICAL EQUIPMENT & SUPPLIES - 4.9%
Abbott Laboratories 1,103,400 73,651,950
Boston Scientific Corp. (a) 569,000 34,957,938
Cardinal Health, Inc. 210,100 12,028,225
Johnson & Johnson 2,193,300 141,193,688
Medtronic, Inc. 275,600 22,323,600
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
HEALTH - CONTINUED
MEDICAL EQUIPMENT & SUPPLIES - CONTINUED
St. Jude Medical, Inc. (a) 777,700 $ 30,330,300
Sofamor/Danek Group, Inc. (a) 346,300 15,843,225
Sybron International Corp. (a) 259,100 10,331,613
340,660,539
MEDICAL FACILITIES MANAGEMENT - 2.8%
Carematrix Corp. (a) 205,300 5,068,344
Columbia/HCA Healthcare Corp. 621,837 24,445,967
HEALTHSOUTH Rehabilitation
Corp. (a) 1,907,800 47,575,763
Health Management Associates, Inc.
Class A (a) 672,800 19,174,800
Humana, Inc. (a) 518,900 11,999,563
Oxford Health Plans, Inc. (a) 448,700 32,194,225
Tenet Healthcare Corp. (a) 741,800 21,929,463
United HealthCare Corp. 632,500 32,890,000
195,278,125
TOTAL HEALTH 1,160,083,808
HOLDING COMPANIES - 0.4%
Norfolk Southern Corp. 289,500 29,167,125
INDUSTRIAL MACHINERY & EQUIPMENT - 2.3%
ELECTRICAL EQUIPMENT - 1.5%
General Electric Co. 876,300 57,288,113
Harris Corp. 277,900 23,343,600
Westinghouse Electric Corp. 1,159,700 26,818,063
107,449,776
INDUSTRIAL MACHINERY & EQUIPMENT - 0.2%
Tyco International Ltd. 169,500 11,790,844
POLLUTION CONTROL - 0.6%
USA Waste Services, Inc. (a) 918,700 35,484,788
Zurn Industries, Inc. 146,500 4,211,875
39,696,663
<PAGE>
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 158,937,283
MEDIA & LEISURE - 5.3%
BROADCASTING - 0.2%
Clear Channel Communications,
Inc. (a) 168,800 10,391,750
ENTERTAINMENT - 1.6%
Disney (Walt) Co. 1,398,200 112,205,550
LEISURE DURABLES & TOYS - 0.2%
Harley-Davidson, Inc. 240,000 11,505,000
Nintendo Co. Ltd. Ord. 64,000 5,359,152
16,864,152
LODGING & GAMING - 1.7%
Circus Circus Enterprises, Inc. (a) 635,100 15,639,338
HFS, Inc. (a) 891,500 51,707,000
Mirage Resorts, Inc. (a) 1,314,800 33,198,700
Sun International Hotels Ltd. Ord. (a) 487,900 18,021,806
118,566,844
PUBLISHING - 0.5%
New York Times Co. (The) Class A 72,000 3,564,000
Times Mirror Co. Class A 534,700 29,542,175
33,106,175
SHARES VALUE (NOTE 1)
RESTAURANTS - 1.1%
Landry's Seafood Restaurants, Inc. (a) 324,100 $ 7,454,300
McDonald's Corp. 475,500 22,972,594
Starbucks Corp. (a) 1,093,300 42,570,369
72,997,263
TOTAL MEDIA & LEISURE 364,131,734
NONDURABLES - 9.2%
BEVERAGES - 2.2%
Coca-Cola Enterprises, Inc. 805,400 18,524,200
PepsiCo, Inc. 3,600,600 135,247,538
153,771,738
FOODS - 0.7%
Campbell Soup Co. 499,900 24,995,000
Hershey Foods Corp. 391,600 21,660,375
46,655,375
HOUSEHOLD PRODUCTS - 1.4%
Clorox Co. 301,300 39,771,600
Procter & Gamble Co. 416,100 58,774,125
98,545,725
TOBACCO - 4.9%
Philip Morris Companies, Inc. 6,685,600 296,673,500
RJR Nabisco Holdings Corp. 1,286,100 42,441,300
339,114,800
TOTAL NONDURABLES 638,087,638
PRECIOUS METALS - 0.4%
Barrick Gold Corp. 415,000 9,032,521
Getchell Gold Corp. (a) 270,753 9,544,043
Newmont Mining Corp. 295,000 11,505,000
30,081,564
RETAIL & WHOLESALE - 8.5%
APPAREL STORES - 1.1%
Just for Feet, Inc. (a) 1,110,500 19,364,344
Ross Stores, Inc. 550,100 17,981,394
TJX Companies, Inc. 1,065,200 28,094,650
Talbots, Inc. 264,700 8,999,800
74,440,188
DRUG STORES - 1.0%
CVS Corp. 917,805 47,037,506
Rite Aid Corp. 497,600 24,817,800
71,855,306
GENERAL MERCHANDISE STORES - 3.0%
Consolidated Stores Corp. (a) 667,812 23,206,467
Costco Companies, Inc. (a) 694,900 22,844,838
Wal-Mart Stores, Inc. 4,798,800 162,259,425
208,310,730
GROCERY STORES - 0.1%
Safeway, Inc. (a) 200,500 9,248,063
RETAIL & WHOLESALE, MISCELLANEOUS - 3.3%
Bed Bath & Beyond, Inc. (a) 461,400 14,015,025
Corporate Express, Inc. 1,244,900 17,973,244
Home Depot, Inc. (The) 1,117,500 77,037,656
Lowe's Companies, Inc. 992,300 36,839,138
Officemax, Inc. (a) 490,600 7,083,038
Staples, Inc. (a) 386,400 8,983,800
Toys "R" Us, Inc. (a) 1,266,900 44,341,500
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
RETAIL & WHOLESALE, MISCELLANEOUS - CONTINUED
U.S. Office Products Co. (a) 243,300 $ 7,435,856
Viking Office Products, Inc. (a) 621,600 11,810,400
225,519,657
TOTAL RETAIL & WHOLESALE 589,373,944
SERVICES - 1.7%
ADVERTISING - 0.1%
Omnicom Group, Inc. 82,900 5,108,713
EDUCATIONAL SERVICES - 0.2%
Apollo Group, Inc. Class A (a) 334,300 11,784,075
LEASING & RENTAL - 0.2%
Hanover Compressor Co. 5,100 99,450
Hertz Corp. Class A 328,100 11,811,600
<PAGE>
11,911,050
SERVICES - 1.2%
ADT Ltd. (a) 706,800 23,324,400
AccuStaff, Inc. (a) 1,002,500 23,746,719
Gartner Group, Inc. Class A (a) 837,000 30,079,688
Sitel Corp. (a) 497,900 10,269,188
87,419,995
TOTAL SERVICES 116,223,833
TECHNOLOGY - 20.1%
COMMUNICATIONS EQUIPMENT - 3.6%
ADC Telecommunications, Inc. (a) 754,400 25,178,100
Alcatel Alsthom Compagnie Generale
d'Electricite SA sponsored ADR 16,000 404,000
Alcatel Alsthom Compagnie Generale
d'Electricite SA 599,900 75,086,970
Aspect Telecommunications Corp. (a) 822,000 18,289,500
Cisco Systems, Inc. (a) 94,900 6,370,163
Lucent Technologies, Inc. 835,900 60,237,044
Nokia Corp. AB sponsored ADR 458,300 33,799,625
Tellabs, Inc. (a) 583,700 32,614,238
251,979,640
COMPUTER SERVICES & SOFTWARE - 7.8%
Broderbund Software, Inc. (a) 659,900 16,291,281
CUC International, Inc. (a) 1,482,600 38,269,613
Cadence Design Systems, Inc. (a) 573,300 19,205,550
CompUSA, Inc. (a) 2,059,700 44,283,550
Electronics for Imaging, Inc. (a) 345,900 16,343,775
Equifax, Inc. 420,500 15,637,344
Henry (Jack) & Associates, Inc. 165,600 4,015,800
Keane, Inc. (a) 344,100 17,893,200
Microsoft Corp. (a) 1,799,700 227,437,088
Oracle Systems Corp. (a) 810,800 40,844,050
Parametric Technology Corp. (a) 437,700 18,629,606
PeopleSoft, Inc. (a) 699,100 36,877,525
Policy Management Systems Corp. (a) 206,500 9,705,500
Sabre Group Holdings, Inc. Class A (a) 376,600 10,215,275
SunGard Data Systems, Inc. (a) 393,600 18,302,400
Yahoo, Inc. (a) 204,800 7,219,200
541,170,757
COMPUTERS & OFFICE EQUIPMENT - 2.5%
Adaptec, Inc. (a) 692,400 24,060,900
Compaq Computer Corp. (a) 677,100 67,202,175
Fore Systems, Inc. (a) 1,457,200 19,854,350
SHARES VALUE (NOTE 1)
Ingram Micro, Inc. Class A (a) 162,200 $ 3,913,075
Pitney Bowes, Inc. 379,500 26,375,250
Quantum Corp. (a) 560,400 11,383,125
SCI Systems, Inc. (a) 100,200 6,387,750
Tech Data Corp. (a) 539,400 16,957,388
176,134,013
ELECTRONIC INSTRUMENTS - 0.4%
Applied Materials, Inc. (a) 210,600 14,913,113
Novellus Systems, Inc. (a) 33,600 2,906,400
Waters Corp. (a) 217,800 7,813,575
25,633,088
ELECTRONICS - 5.8%
Altera Corp. (a) 393,100 19,851,550
Intel Corp. 359,900 51,038,319
Linear Technology Corp. 375,400 19,426,950
Maxim Integrated Products, Inc. (a) 273,700 15,566,688
Micron Technology, Inc. 950,600 37,964,588
Motorola, Inc. 716,600 54,461,600
Sanmina Corp. (a) 501,600 31,851,600
Solectron Corp. (a) 204,500 14,315,000
Texas Instruments, Inc. 1,315,400 110,575,813
Uniphase Corp. (a) 380,800 22,181,600
Xilinx, Inc. (a) 429,000 21,047,813
398,281,521
TOTAL TECHNOLOGY 1,393,199,019
TRANSPORTATION - 0.5%
RAILROADS - 0.5%
Wisconsin Central Transportation
Corp. (a) 919,800 34,262,550
UTILITIES - 3.8%
CELLULAR - 0.9%
AirTouch Communications, Inc. (a) 1,227,800 33,611,025
Nextel Communications, Inc.
Class A (a) 659,800 12,494,963
Vanguard Cellular Systems, Inc.
Class A (a) 1,146,700 15,623,788
61,729,776
TELEPHONE SERVICES - 2.9%
Cincinnati Bell, Inc. 657,800 20,720,700
MCI Communications Corp. 260,300 9,964,609
Sprint Corp. 893,300 47,009,913
WorldCom, Inc. (a) 3,860,170 123,525,420
201,220,642
TOTAL UTILITIES 262,950,418
TOTAL COMMON STOCKS
(Cost $4,948,655,239) 6,342,745,138
CASH EQUIVALENTS - 8.4%
MATURITY
AMOUNT
<PAGE>
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 584,241,222 584,145,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $5,532,800,239) $ 6,926,890,138
LEGEND
1. Non-income producing
2. An affiliated company is a company in which the fund has ownership of at
least 5% of the voting securities. Transactions during the period with companies
which are or were affiliates are as follows:
PURCHASE SALES DIVIDEND VALUE
AFFILIATE COST COST INCOME
Timberland Co. Class A $ 3,474,754 $ 1,222,255 $ - $ 31,310,500
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities, aggregated
$4,244,176,604 and $4,238,684,327, respectively.
The fund placed a portion of its portfolio transactions with brokerage firms
which are affiliates of Fidelity Management & Research Company. The commissions
paid to these affiliated firms were $1,377,437 for the period (see Note 4 of
Notes to Financial Statements).
INCOME TAX INFORMATION
At June 30, 1996, the aggregate cost of investment securities for income tax
purposes was $5,537,054,914. Net unrealized appreciation aggregated
$1,389,835,224, of which $1,460,271,254 related to appreciated investment
securities and $70,436,030 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $ 6,926,890,138
securities, at
value (including
repurchase
agreements of
$584,145,000) (cost
$5,532,800,239) -
See accompanying
schedule
Cash 251
Receivable for 18,347,400
investments sold
Receivable for fund 3,541,061
shares sold
Dividends receivable 7,495,963
Other receivables 728,658
TOTAL ASSETS 6,957,003,471
LIABILITIES
Payable for $ 15,738,603
investments
purchased
Payable for fund 1,935,837
shares redeemed
Accrued management 3,400,703
fee
Other payables and 509,241
accrued expenses
TOTAL LIABILITIES 21,584,384
NET ASSETS $6,935,419,087
Net Assets consist of:
Paid in capital $4,909,839,898
Undistributed net 20,298,488
investment income
Accumulated 611,204,466
undistributed net
realized gain (loss)
on investments and
foreign currency
transactions
Net unrealized 1,394,076,235
appreciation
<PAGE>
<TABLE>
<S> <C> <C>
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $6,935,419,087
202,783,458 shares
outstanding
NET ASSET VALUE, $34.20
offering price
and redemption
price per
share
($6,935,419,087 (divided by)
202,783,458
shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 31,247,401
Dividends
Interest 10,168,233
TOTAL INCOME 41,415,634
EXPENSES
Management fee $ 19,103,779
Transfer agent fees 2,231,258
Accounting fees and 404,942
expenses
Non-interested 13,729
trustees'
compensation
Custodian fees and 106,069
expenses
Registration fees 60,637
Audit 25,840
Legal 10,909
Miscellaneous 211,034
Total expenses 22,168,197
before reductions
Expense reductions (787,052) 21,381,145
NET INVESTMENT 20,034,489
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
Investment 626,563,617
securities (including
realized gain of
$281,124 on sales of
investments in
affiliated issuers)
Foreign currency 288 626,563,905
transactions
Change in net
unrealized
appreciation
(depreciation) on:
Investment 189,156,287
securities
Assets and (13,643) 189,142,644
liabilities in
foreign currencies
NET GAIN (LOSS) 815,706,549
NET INCREASE $835,741,038
(DECREASE) IN NET
</TABLE>
<PAGE>
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 781,353
Expense reductions
Directed brokerage
arrangements
Custodian interest 5,699
credits
$ 787,052
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
Operations $ 20,034,489 $ 42,344,647
Net investment
income
Net realized gain 626,563,905 186,713,569
(loss)
Change in net 189,142,644 451,420,339
unrealized
appreciation
(depreciation)
NET INCREASE 835,741,038 680,478,555
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Distributions to (41,142,087) (11,769,237)
shareholders
From net
investment income
From net realized (184,159,819) (297,173,230)
gain
TOTAL DISTRIBUTIONS (225,301,906) (308,942,467)
Share transactions 805,853,592 2,599,782,601
Net proceeds from
sales of shares
Reinvestment of 225,301,906 308,942,467
distributions
Cost of shares (792,599,197) (1,356,539,313)
redeemed
NET INCREASE 238,556,301 1,552,185,755
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 848,995,433 1,923,721,843
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 6,086,423,654 4,162,701,811
End of period $6,935,419,087 $ 6,086,423,654
(including
undistributed net
investment
income of
$20,298,488 and
$41,404,557,
respectively)
OTHER INFORMATION
Shares
Sold 25,455,810 87,784,118
Issued in 7,138,844 11,121,040
reinvestment of
distributions
Redeemed (25,234,555) (46,058,296)
Net increase 7,360,099 52,846,862
(decrease)
</TABLE>
<PAGE>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997
SELECTED PER-SHARE DATA (UNAUDITED) 1996 1995 1994 1993 D 1992
<S> <C> <C> <C> <C> <C> <C>
Net asset value, $ 31.14 $ 29.20 $ 21.69 $ 23.08 $ 19.76 $ 18.51
beginning of period
Income from
Investment
Operations
Net investment .10 G .22 .08 .12 .12 .09
income
Net realized and 4.11 3.82 7.55 (.12) 3.64 1.64
unrealized gain
(loss)
Total from 4.21 4.04 7.63 - 3.76 1.73
investment
operations
Less Distributions
From net (.21) (.08) (.12) (.12) (.11) (.05)
investment income
From net realized (.94) (2.02) - (1.27) (.21) (.43)
gain
In excess of net - - - - (.12) -
realized gain
Total distributions (1.15) (2.10) (.12) (1.39) (.44) (.48)
Net asset value, end $ 34.20 $ 31.14 $ 29.20 $ 21.69 $ 23.08 $ 19.76
of period
TOTAL RETURN B, C 13.83% 14.71% 35.36% (.02)% 19.37% 9.32%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $6,935,419 $6,086,424 $4,162,702 $2,141,869 $1,383,849 $749,837
period (000
omitted)
Ratio of expenses to .71% A .69% .70% .70% .71% .75%
average net assets
Ratio of expenses to .68% A, .67% .70% .69% .71% .75%
average net assets E E E
after expense
reductions
Ratio of net .64% A .81% .37% .69% .72% .83%
investment income
to average net
assets
Portfolio turnover rate 144% A 81% 108% 122% 159% 262%
Average commission $ .0428 $ .0416
rate F
</TABLE>
<PAGE>
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT
ANNUALIZED AND DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS
SHOWN. C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
D EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2,
"DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME,
CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES." AS A
RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN RECLASSIFICATIONS
RELATED TO BOOK TO TAX DIFFERENCES. E FMR OR THE FUND HAS ENTERED INTO VARYING
ARRANGEMENTS WITH THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE
FUND'S EXPENSES (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). F FOR FISCAL
YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED TO DISCLOSE
ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS
ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND
DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING
PRACTICES AND COMMISSION RATE STRUCTURES MAY DIFFER. G NET INVESTMENT INCOME PER
SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD.
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO PERFORMANCE AND INVESTMENT
SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can look
at the total percentage change in value, the average annual percentage change or
the growth of a hypothetical $10,000 investment. Total return reflects the
change in the value of an investment, assuming reinvestment of the fund's
dividend income and capital gains (the profits earned upon the sale of
securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
JUNE 30, 1997 YEAR YEARS YEARS
OVERSEAS 22.69% 11.30% 8.93%
Morgan Stanley EAFE Index 12.88% 12.84% 6.58%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what would
have happened if the fund had performed at a constant rate each year. You can
compare the fund's figures to the performance of the Morgan Stanley Capital
International Europe, Australasia, Far East (EAFE) Index - a market
capitalization weighted, unmanaged index of over 1,000 foreign stocks.
UNDERSTANDING PERFORMANCE
Many markets around the globe offer the potential for significant growth over
time; however, investing in foreign markets means assuming greater risks than
investing in the United States. Factors like changes in a country's financial
markets, its local political and economic climate, and the fluctuating value of
its currency create these risks. For these reasons an international fund's
performance may be more volatile than a fund that invests exclusively in the
United States. (checkmark) Figures for more than one year assume a steady
compounded rate of return and are not the fund's year-by-year results, which
fluctuated over the periods shown. If Fidelity had not reimbursed certain fund
expenses, the fund's life of fund total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT INCLUDE
ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. IF
PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, THE
TOTAL RETURNS WOULD HAVE BEEN LOWER. Past performance is no guarantee of future
results. Principal and investment return will vary and you may have a gain or
loss when you withdraw your money. Foreign investments involve greater risks and
potential rewards than U.S. investments. These risks include political and
economic uncertainties of foreign countries, as well as the risk of currency
fluctuations.
$10,000 OVER LIFE OF FUND
1987/06/30 10000.00 10000.00
1987/07/31 9885.93 9982.53
1987/08/31 10760.46 10731.04
1987/09/30 10522.81 10562.10
1987/10/31 8327.00 9082.16
1987/11/30 8403.04 9171.60
<PAGE>
1987/12/31 8994.45 9443.94
1988/01/31 8686.62 9612.55
1988/02/29 8917.49 10253.29
1988/03/31 9321.52 10883.72
1988/04/30 9475.43 11041.88
1988/05/31 9302.28 10687.92
1988/06/30 9138.74 10406.21
1988/07/31 9071.41 10732.69
1988/08/31 8753.95 10034.87
1988/09/30 9129.12 10473.34
1988/10/31 9533.15 11369.46
1988/11/30 9706.31 12046.70
1988/12/31 9725.55 12113.86
1989/01/31 10014.14 12327.00
1989/02/28 10187.29 12390.36
1989/03/31 10178.12 12147.18
1989/04/30 10478.61 12259.84
1989/05/31 10090.88 11592.87
1989/06/30 10052.10 11397.72
1989/07/31 10992.37 12828.97
1989/08/31 10914.82 12252.00
1989/09/30 11593.36 12810.10
1989/10/31 10963.29 12295.42
1989/11/30 11554.59 12913.51
1989/12/31 12281.59 13389.98
1990/01/31 12116.81 12891.76
1990/02/28 11833.99 11991.98
1990/03/31 12281.29 10742.71
1990/04/30 12349.36 10657.45
1990/05/31 13156.44 11873.48
1990/06/30 13448.16 11768.90
1990/07/31 14128.83 11934.67
1990/08/31 12689.69 10775.72
1990/09/30 11483.93 9273.97
1990/10/31 12553.56 10719.02
1990/11/30 12164.60 10086.73
1990/12/31 12077.09 10250.13
1991/01/31 12193.77 10581.67
1991/02/28 12604.58 11716.01
1991/03/31 12235.91 11012.68
1991/04/30 12504.94 11120.82
1991/05/31 12534.83 11236.86
1991/06/30 11847.31 10411.17
1991/07/31 12435.19 10922.69
1991/08/31 12475.05 10700.87
1991/09/30 12983.22 11303.96
1991/10/31 13072.89 11464.20
1991/11/30 12604.58 10929.00
1991/12/31 13043.00 11493.41
1992/01/31 13202.43 11247.91
1992/02/29 12927.30 10845.33
1992/03/31 12664.72 10129.36
1992/04/30 13452.48 10177.51
1992/05/31 14038.24 10858.75
1992/06/30 13775.66 10343.69
1992/07/31 12897.01 10078.96
1992/08/31 12785.91 10711.12
1992/09/30 12270.84 10499.61
1992/10/31 11432.59 9948.86
1992/11/30 11371.99 10042.48
1992/12/31 11644.67 10094.42
1993/01/31 11977.96 10093.18
1993/02/28 12212.57 10398.06
1993/03/31 13059.80 11304.42
1993/04/30 13927.70 12377.23
1993/05/31 14227.33 12638.64
1993/06/30 13876.04 12441.45
1993/07/31 14423.64 12876.96
1993/08/31 15198.55 13572.10
1993/09/30 15115.90 13266.60
1993/10/31 15663.50 13675.44
1993/11/30 15002.24 12480.07
1993/12/31 15994.13 13381.22
1994/01/31 17037.67 14512.54
1994/02/28 16737.18 14472.34
1994/03/31 16321.86 13849.00
1994/04/30 16861.77 14436.60
1994/05/31 16654.11 14353.71
1994/06/30 16477.61 14556.56
1994/07/31 16913.69 14696.55
1994/08/31 17110.96 15044.49
1994/09/30 16664.50 14570.66
1994/10/31 17007.13 15055.86
1994/11/30 16363.39 14332.27
1994/12/31 16269.95 14422.02
1995/01/31 15595.06 13867.99
1995/02/28 15636.10 13828.19
1995/03/31 16117.53 14690.67
1995/04/30 16578.03 15243.17
1995/05/31 16808.28 15061.46
1995/06/30 16965.27 14797.33
1995/07/31 17718.81 15718.56
1995/08/31 17226.92 15118.95
1995/09/30 17478.10 15414.22
<PAGE>
1995/10/31 17132.72 14999.89
1995/11/30 17331.58 15417.24
1995/12/31 17854.87 16038.41
1996/01/31 18189.78 16104.25
1996/02/29 18229.84 16158.69
1996/03/31 18508.65 16501.84
1996/04/30 19023.38 16981.60
1996/05/31 19034.10 16669.11
1996/06/30 19173.51 16762.92
1996/07/31 18605.16 16272.99
1996/08/31 18744.57 16308.64
1996/09/30 19291.46 16741.89
1996/10/31 19098.44 16570.58
1996/11/30 20095.72 17229.89
1996/12/31 20202.96 17008.25
1997/01/31 20202.96 16413.00
1997/02/28 20671.03 16681.45
1997/03/31 20858.84 16741.86
1997/04/30 21034.92 16830.69
1997/05/31 22349.60 17929.23
1997/06/30 23523.42 18921.25
Let's say hypothetically that $10,000 was invested in Overseas Portfolio on June
30, 1987. As the chart shows, by June 30, 1997, the value of the investment
would have grown to $23,523 - a 135.23% increase on the initial investment. For
comparison, look at how the Morgan Stanley EAFE Index did over the same period.
With dividends and capital gains, if any, reinvested, the same $10,000
investment would have grown to $18,921 over the same period - a 89.21% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Alcatel Alsthom Compagnie Generale d'Electricite SA 2.1
Novartis AG (Reg.) 1.9
Total SA Class B 1.8
Philips Electronics NV (Bearer) 1.8
Takeda Chemical Industries Ltd. 1.5
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Finance 15.1
Technology 10.1
Durables 9.8
Basic Industries 9.7
Health 8.8
TOP FIVE COUNTRIES AS OF JUNE 30, 1997
(EXCLUDING CASH EQUIVALENTS) % OF FUND'S
INVESTMENTS
Japan 25.4
United Kingdom 13.5
France 9.5
Netherlands 7.9
Sweden 5.3
TOP COUNTRIES ARE BASED ON THE LOCATION OF THE ISSUER OF EACH SECURITY,
INDICATING WHERE THE FUND IS EXPOSED TO POLITICAL AND CREDIT RISKS. PERCENTAGES
ARE ADJUSTED FOR THE EFFECT OF OPEN FUTURES CONTRACTS, IF APPLICABLE. VARIABLE
INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO FUND TALK: THE MANAGER'S OVERVIEW
An interview with Richard Mace, Portfolio Manager of Overseas Portfolio
Q. HOW HAS THE FUND PERFORMED, RICK?
A. Pretty well. For the six months that ended June 30, 1997, the fund topped the
11.25% return registered by the Morgan Stanley Capital International EAFE Index.
For the 12-month period that ended June 30, 1997, the fund again topped the EAFE
index, which returned 12.88%.
Q. WHAT FACTORS CONTRIBUTED TO THE FUND'S STRONG SHOWING?
A. Individual stock selection had the biggest influence on the fund's return, as
several of the fund's larger positions posted positive results. Market
selection -specifically, the fund's underweighting in Japan relative to the
index - also played a key role. While the EAFE index had an approximate Japanese
weighting of 30% during the period, I kept the fund at around 23% on average. As
Japan's well-documented economic woes continued
<PAGE>
to hamper the overall performance of Japanese securities, my strategy of
underweighting Japanese securities worked in the fund's favor. I would add,
however, that while market selection is important, I place more emphasis on
analyzing the specific pluses and minuses of a stock than I do on the country
where a stock is issued.
Q. HOW DID THE EUROPEAN PORTION OF THE PORTFOLIO PERFORM?
A. The across-the-board decline in European interest rates had favorable
implications for Europe's stock markets. This rate environment, which may have
been related to continuing optimism on proposed economic unity throughout
Europe, led to strong performances in countries such as Spain, Italy and Sweden.
In Europe, I basically continued my strategy of looking for companies based on
three themes: those that would benefit from a rising dollar, those that would
gain from the overall improvement of world economies and those companies that
were engaging in restructurings designed to improve the return on capital
employed in their businesses.
Q. DID YOUR STRATEGIES LEAD YOU TO ANY OTHER REGIONS OF THE WORLD?
A. One area that came into play was Canada. I've previously mentioned my
strategy of looking for stocks than can benefit from improving economies, and
Canada's many natural resource-related stocks fit that bill. Stocks such as
Inco, a nickel producer; Alcan, an aluminum producer; and Noranda, a paper and
forest products company, reflected this strategy.
Q. FOLLOWING THE LEAD OF MANY AMERICAN COMPANIES, SOME INTERNATIONAL FIRMS HAVE
BEEN IMPLEMENTING VARIOUS COST-CUTTING AND RESTRUCTURING STRATEGIES. WHY IS THIS
A POSITIVE TREND? HOW HAS IT AFFECTED THE FUND?
A. Worldwide, I think company managements have gotten smarter about how they run
their businesses. In order to earn returns above their cost of capital,
companies have had to reduce expenses, either by cutting personnel,
restructuring their balance sheets or upgrading their technology. As they strive
to become more shareholder-friendly, international companies also are coming up
with new ways to utilize their existing assets. In terms of the fund, several
individual holdings are good illustrations of this trend. For example, Volvo,
one of the fund's larger stakes and a strong performer during the period,
divested many of its non-core businesses and announced plans to implement a
share redemption program in which the company will buy back one of every 20
outstanding shares.
Q. WHICH INDIVIDUAL STOCK POSITIONS BENEFITED THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
A. As I mentioned earlier, individual stock selection was a real key to
performance. Aside from the strong performances of Volvo and Telebras, a
Brazilian telecommunications company, the fund's stake in Total, a French-based
oil company, and Alcatel, which specializes in telecommunications and electrical
equipment, turned in favorable results. Disappointments included the poor
performance of several Japanese brokerage companies, including Nomura Securities
and Nikko Securities.
Q. WHAT'S YOUR OUTLOOK?
A. More and more, individual stock selection is outdistancing country selection
in terms of performance influence. I think this trend will most likely continue
and will place even more emphasis on thorough research and analysis of
individual stocks. With this in mind, I'll continue to use my three-pronged
approach of looking for stocks that can benefit from a rising dollar, stronger
economies and increased corporate efficiencies.
FUND FACTS
GOAL: to increase the value of the fund's
shares by investing mainly in stocks in
Europe, the Far East and the Pacific Basin
START DATE: January 28, 1987
SIZE: as of June 30, 1997, more than $2.0 billion
MANAGER: Richard Mace, since 1996; joined
Fidelity in 1987
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 88.0%
SHARES VALUE (NOTE 1)
ARGENTINA - 0.2%
Perez Companc Class B 481,414 $ 3,866,315
AUSTRALIA - 1.8%
Aberfoyle Ltd. 22,800 63,586
Australia & New Zealand Banking
Group Ltd. 376,800 2,811,729
Brambles Industries Ltd. 200,200 3,952,242
Broken Hill Proprietary Co. Ltd. (The) 226,800 3,330,629
CSR Ltd. 882,500 3,412,396
Coles Myer Ltd. 877,000 4,554,557
Colonial Ltd. (a) 682,200 1,738,024
National Australia Bank Ltd. 182,300 2,606,642
Pasminco Ltd. 476,800 966,754
QNI Ltd. 871,880 1,570,659
Tabcorp Holdings Ltd. 162,800 883,516
Western Mining Holdings Ltd. 953,939 6,003,913
Westpac Banking Corp. 143,800 863,862
Woolworths Ltd. 1,211,500 3,972,281
36,730,790
AUSTRIA - 0.1%
Voest-Alpine Stahl AG 21,900 992,005
BELGIUM - 0.2%
<PAGE>
BBL (Banque Bruxelles Lambert) 6,700 1,693,329
Credit Communal Holding/Dexia (b) 13,500 1,449,133
3,142,462
BERMUDA - 0.1%
Fuji International Trust unit sponsored
ADR (b) 100 2,698,015
BRAZIL - 1.0%
Centrais Electricas Brasileiras SA 2,080,000 1,240,464
Compania Energertica Minas Gerais 87,262,000 4,498,880
Multicanal Participacoes SA
sponsored ADR 92,800 1,264,400
Telebras sponsored ADR 95,000 14,416,250
21,419,994
CANADA - 2.8%
Alcan Aluminium Ltd. 269,700 9,200,645
Alliance Forest Products (a)(b) 83,700 2,043,016
BCE, Inc. 233,000 6,480,426
Bro-X Minerals Ltd. 42,700 -
Canadian Imperial Bank of Commerce 34,800 877,152
Canadian Natural Resources Ltd. (a) 159,900 4,151,968
Cominco Ltd. (a) 245,900 6,545,341
Domtar, Inc. 312,700 2,763,148
Greenstone Resources Ltd. (a) 141,300 1,238,352
Inco Ltd. 310,100 9,264,930
National Bank of Canada 361,200 4,525,955
Noranda, Inc. 373,200 8,041,647
Renaissance Energy Ltd. (a) 66,900 1,860,689
St Laurent Paperboard, Inc. (a)(b) 155,900 2,427,733
59,421,002
CHINA (PEOPLES REPUBLIC) - 0.0%
First Tractor Co. Ltd. Class H (a) 416,000 273,861
DENMARK - 0.8%
Den Danske Bank Group AS 55,900 5,437,154
International Service Systems AS,
Series B (a) 128,800 4,615,514
Novo-Nordisk AS Class B 30,900 3,368,405
Sophus Berendsen AS, Series B 6,300 910,624
Unidanmark AS Class A 34,500 1,937,560
16,269,257
SHARES VALUE (NOTE 1)
EMERGING MARKETS - 0.3%
GT Global Developing Markets Fund 249,700 $ 3,511,406
TCW/DW Emerging Markets
Opportunities Trust (SBI) 82,500 1,227,188
Templeton Dragon Fund, Inc. 52,300 849,875
5,588,469
FINLAND - 1.9%
Cultor OY, Series 1 57,600 3,046,271
Huhtamaki Ord. 190,700 8,196,748
Metsa-Serla Ltd. Class B 575,100 4,678,397
Nokia Corp. AB, Series A 130,300 9,720,253
Outokumpu OY Class A 135,300 2,680,084
Pohjola Class B 124,900 3,699,104
Rauma OY 2,317 53,026
UPM-Kymmene Corp. 83,200 1,920,074
Valmet OY 344,400 5,947,752
39,941,709
FRANCE - 9.5%
Alcatel Alsthom Compagnie Generale
d'Electricite SA 356,650 44,640,386
Axa SA 114,726 7,131,110
Axime SA Ex Segin (a) 2,100 248,206
Canal Plus SA 5,189 1,009,526
Cap Gemini Sogeti SA 28,700 1,513,044
Carrefour Supermarche SA 2,400 1,741,982
Compagnie de Saint Gobain 15,900 2,317,319
Credit Commercial de France Ord. 56,700 2,400,990
Eramet SA 98,162 4,523,979
Generale des Eaux, Cie 18,950 2,426,678
Generale des Eaux warrants
5/2/01 (a) 18,950 11,344
Groupe Danone 30,800 5,086,017
Lafarge Coppee SA 62,520 3,886,103
Lagardere S.C.A. (Reg.) 77,700 2,255,602
Michelin SA (Compagnie Generale
des Etablissements) Class B 163,000 9,782,439
Nationale Elf Aquitaine 127,700 13,768,545
Pechiney SA Class A 384,164 15,124,310
Paribas SA (Cie Financiere) Class A 46,200 3,189,892
Rhone Poulenc SA Class A 653,400 26,668,480
Societe Generale Class A 65,500 7,307,234
Total SA Class B 378,614 38,246,440
Unibail 8,100 757,627
Usinor Sacilor 242,100 4,364,239
Valeo SA 15,900 986,956
199,388,448
GERMANY - 3.8%
Allianz Aktiengesellschaft Holdings (Reg.) 12,500 2,604,555
Altana AG 7,000 739,903
Beta Systems Software AG 3,000 171,999
BASF AG 136,400 4,962,131
Bayer AG 269,300 10,414,065
Buderus AG 8,300 4,564,881
<PAGE>
Continental Gummi-Werke AG 134,300 3,335,380
Daimler-Benz AG Ord. 77,900 6,274,844
Dresdner Bank AG Ord. 30,000 1,034,145
Emerging Germany Fund, Inc. 70,600 732,475
Hoechst AG Ord. 84,000 3,556,345
Lufthansa 117,300 2,210,925
Mannesmann AG Ord. 11,300 4,999,708
Metallgesellschaft AG Ord. 276,300 5,749,193
New Germany Fund, Inc. (The) 231,800 3,650,850
Thyssen AG Ord. 4,300 1,022,343
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
GERMANY - CONTINUED
Veba AG Ord. 113,500 $ 6,320,367
Volkswagen AG 23,965 18,150,518
80,494,627
HONG KONG - 1.6%
Great Eagle Holdings Ltd. 546,000 1,800,736
HSBC Holdings PLC 745,100 22,078,550
Hong Kong & China Gas Co. Ltd. 1,708,800 3,418,923
Hutchison Whampoa Ltd. Ord. 240,000 2,075,642
Peregrine Investments Holdings Ltd. 1,200,000 2,470,634
Wharf Holdings Ltd. 206,000 893,456
32,737,941
INDONESIA - 0.4%
Matahari Putra Prima PT (For. Reg.) 2,301,000 4,636,058
PT Multipolar (For. Reg.) 2,383,000 808,377
PT Multipolar Corp. rights 12/31/97
(For. Reg.) 13,106,500 1,751,485
Putra Surya Multidana PT (For. Reg.) (a) 880,000 1,402,137
8,598,057
IRELAND - 0.8%
Bank of Ireland, Inc. 968,400 10,639,830
CRH PLC 145,000 1,511,364
Independent Newspapers PLC 889,749 5,035,962
17,187,156
ITALY - 1.2%
Credito Italiano Ord. 3,572,700 6,535,015
Eni Spa 2,128,800 12,042,644
Mondadori Arnoldo Editore Spa 1,700 9,925
Telecom Italia:
Mobile Spa 1,942,000 6,250,390 Spa 380,000 1,220,358
26,058,332
JAPAN - 23.6%
Acom Co. Ltd. 100,900 4,858,197
Amway Japan Ltd. 171,200 5,794,025
Aoyama Trading Co. Ord. 3,300 105,927
Asahi Chemical Industry Co. Ltd. 271,000 1,619,216
Asahi Breweries Ltd. 50,000 745,780
Bank of Tokyo-Mitsubishi Ltd. 327,000 6,560,251
Canon, Inc. 355,000 9,661,127
Circle K Japan Co. Ltd. 13,000 746,129
Citizen Watch Co. Ltd. Ord. 472,000 3,639,478
Dai-Ichi Kangyo Bank 124,000 1,687,295
DDI Corp. Ord. 913 6,737,302
Dai-Tokyo Fire & Marine Insurance Ord. 354,000 2,050,294
Daiichi Pharmaceutical Co. Ltd. 99,000 1,744,341
Daiwa House Industry Co. Ltd. 227,000 2,772,035
Daiwa Securities Co. Ltd. 774,000 6,103,153
Denso Corp. 212,000 5,066,771
Denny's Japan Co. Ltd. 79,000 2,377,339
Daito Trust Construction Co. 340,700 4,011,906
Fuji Bank Ltd. 498,000 7,471,411
Fuji Photo Film Co. Ltd. 719,000 28,911,770
Fujitsu Ltd. 1,086,000 15,061,624
Hitachi Ltd. 2,232,000 24,920,056
Hitachi Maxell Ltd. 385,000 9,537,267
Honda Motor Co. Ltd. 425,000 12,789,480
Hoya Corp. 22,000 978,673
Ibiden Co. Ltd. 200,000 2,878,451
Ito-Yokado Co. Ltd. 152,000 8,816,782
Japan Associated Finance Co. 46,000 3,611,147
Jusco Co. Ltd. 111,000 3,746,958
SHARES VALUE (NOTE 1)
Kao Corp. 301,000 $ 4,174,539
Kobe Steel Ltd. Ord. (a) 847,000 1,617,977
Komatsu Ltd. Ord. 1,001,000 8,120,109
Kyocera Corp. 58,000 4,603,777
Long Term Credit Bank of Japan Ltd. (The) 413,000 1,783,200
Matsushita Electric Industrial Co. Ltd. 1,300,000 26,193,902
Matsushita Communication Industrial
Co. Ltd. 185,000 6,244,930
Matsushita Electric Works Co. Ltd. 293,000 3,322,430
Minebea Co. Ltd. 273,000 2,905,142
Minolta Camera Co. Ltd. 711,000 4,452,859
Mitsubishi Estate Co. Ltd. 282,000 4,083,213
Mitsubishi Heavy Industries Ltd. 625,000 4,791,966
Mitsubishi Trust & Banking Corp. 100,000 1,578,787
Mitsui Fudosan (Re Devel) Co. 60,000 826,900
Murata Manufacturing Co. Ltd. 31,000 1,233,024
NKK Corp. 775,000 1,662,960
NEC Corp. 313,000 4,368,267
Nikko Securities Co. Ltd. 570,000 3,505,168
<PAGE>
Nintendo Co. Ltd. Ord. 182,000 15,240,088
Nippon Telegraph & Telephone
Corp. Ord. 1,744 16,733,394
Nitto Denko Corp. 27,000 525,186
Nomura Securities Co. Ltd. 805,000 11,094,247
Nichiei Co. Ltd. 31,400 3,642,723
Onward Kashiyama & Co. Ltd. 233,000 3,861,485
Omron Corp. 176,000 3,730,472
Orix Corp. 198,100 14,670,234
Ricoh Co. Ltd. Ord. 493,000 6,450,346
Rohm Co. Ltd. 93,000 9,572,157
Sakura Bank Ltd. 2,191,000 16,779,606
Sankyo Co. Ltd. 345,000 11,585,764
Sekisui Chemical Co. Ltd. 6,000 60,709
Shin-Etsu Chemical Co. Ltd. 113,000 2,996,380
Sony Corp. 214,200 18,665,078
Sumitomo Sitix Corp. 39,000 833,442Sony Music Entertainment Japan, Inc.
32,500 1,522,308Shohkoh Fund & Co. Ltd. 3,600 1,089,624
Shinko Electric Industries Co. Ltd. 44,600 1,630,023
TDK Corp. 102,000 7,482,402
Takeda Chemical Industries Ltd. 1,128,000 31,681,799
Takefuji Corp. 16,000 873,653
Terumo Corp. 125,000 2,387,806
THK Co. Ltd. 184,600 3,155,968
Toyota Motor Corp. 665,000 19,605,739
Toyo Trust & Banking Co. Ltd. 33,000 277,770
Tokyo Electron Ltd. 107,800 5,152,811
Uni Charm Corp. Ord. 80,000 2,847,049
Uny Co. Ltd. 310,000 6,056,958
World Co. Ltd. 35,300 1,548,772
Xebio Co. Ltd. 37,200 915,033
Yamanouchi Pharmaceutical Co. Ltd. 79,000 2,122,378
Yasuda Trust & Banking 212,000 809,944
496,074,683
KOREA (SOUTH) - 0.3%
Korea Electric Power Corp. 204,960 6,116,486
MALAYSIA - 0.3%
Arab Malaysian Corp. BHD 668,000 2,487,304
Magnum Corp. BHD 397,000 597,584
Oriental Holdings BHD 178,000 1,339,671
Rothmans of Pall Mall Malaysia BHD 79,000 776,074
5,200,633
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEXICO - 0.4%
Cifra SA de CV:
Series A 227,993 $ 421,927
Series C 1,864,100 2,984,440
Gruma SA Class B sponsored
ADR (a)(b) 91,596 1,671,627
Grupo Financiero Bancomer Class B (a) 2,228,000 1,072,923
Grupo Financiero Inbursa SA Class B 237,000 1,009,846
Tubos De Acero De Mexico ADR (a) 78,200 1,441,813
8,602,576
MULTI-NATIONAL - 0.0%
Morgan Stanley Asia-Pacific Fund, Inc. 82,900 870,450
NETHERLANDS - 7.9%
AKZO Nobel NV 145,500 19,927,448
Ahold NV 36,600 3,085,871
Chicago Bridge & Iron Co. NV 94,000 2,079,750
DSM NV 71,700 7,129,479
ING Groep NV 377,422 17,390,505
KBB NV Ord. 37,200 2,600,458
KLM Royal Dutch Air Lines NV 39,506 1,216,900
Koninklijke Hoogovens NV 121,600 6,773,097
Koninklijke KNP BT NV 288,800 6,572,659
Koninklijke Pakhoed NV 24,600 866,718
New Holland NV 248,000 6,789,000
Philips Electronics NV (Bearer) 521,700 37,345,868
Royal Dutch Petroleum Co. Ord. 456,160 23,712,609
Unilever NV Ord. 101,900 21,437,340
VNU Ord. 33,300 735,818
Vendex International NV (b) 121,600 6,655,466
Vedior NV BDR (a)(b) 66,800 1,765,144
166,084,130
NETHERLANDS ANTILLES - 0.2%
Schlumberger Ltd. 32,700 4,087,500
NEW ZEALAND - 0.2%
Air New Zealand Ltd. Class B 552,200 1,689,359
Lion Nathan Ltd. 572,000 1,450,501
Lion Nathan Ltd. (Australia) (a) 59,200 151,715
3,291,575
NORWAY - 0.6%
Den Norske Bank AS Class A Free shares 682,500 2,673,475
Elkem ASA 275,400 5,393,956
NCL Holdings AS (a) 460,300 1,451,258
Orkla AS Class B (non-vtg.) 15,600 1,058,212
Saga Petroleum AS Class B 126,300 2,206,505
12,783,406
PERU - 0.1%
Compania de Minas Buenaventura SA
Class B sponsored ADR 80,200 1,578,938
PORTUGAL - 0.2%
Electricidade de Portugal SA (a) 234,300 4,295,057
<PAGE>
RUSSIA - 0.0%
Vimpel Communications sponsored ADR 12,800 486,400
SINGAPORE - 0.2%
Creative Technology Corp. Ltd. (a) 109,000 1,853,000
Kim Engineering Holdings Ltd. 2,683,000 2,251,941
4,104,941
SOUTH AFRICA - 0.3%
Gencor Ltd. (Reg.) 820,800 3,782,739
JCI Ltd. 187,500 1,442,944
5,225,683
SHARES VALUE (NOTE 1)
SPAIN - 2.1%
Acerinox SA (Reg.) 29,750 $ 5,567,853
Asturiana del Zinc SA (a)(b) 259,900 5,496,614
Banco Bilbao Vizcaya SA Ord. (Reg.) 74,600 6,052,954
Banco de Santander SA Ord. (Reg.) 127,800 3,932,974
Banco Intercontinental Espanol 10,500 1,850,534
Tabacalera SA, Series A 126,300 6,771,957
Telefonica de Espana SA Ord. 511,500 14,770,310
44,443,196
SWEDEN - 5.3%
ABB AB:
Series A 297,900 4,186,265
Series B 153,000 2,140,137
Astra AB Class A Free shares 1,216,000 22,678,928
Assi Doman AB Free shares 63,600 1,812,200
Electrolux AB 87,200 6,301,982
Ericsson (L.M.) Telephone Co.:
Class B 154,400 6,089,211
Class B ADR 49,400 1,945,125
Esselte AB Class B Free shares 90,900 2,142,702
Graenges AB (Reg.) (a) 48,600 645,188
Investor AB Class B Free shares 82,000 4,327,807
Nordbanken AB 156,900 5,303,834
SKF AB Ord. 34,100 883,305
Scania AB Class B 211,700 6,470,820
Skandia Foersaekrings AB 249,800 9,220,697
Svenska Cellulosa AB (SCA) Class B Ord. 101,900 2,138,039
Svenska Handelsbanken 160,200 5,104,157
Swedish Match Co. 4,500,200 15,154,151
Volvo AB Class B 582,600 15,619,505
112,164,053
SWITZERLAND - 4.8%
ABB AG (Bearer) 650 982,894
Credit Suisse Group (Reg.) 190,477 24,436,837
Danzas Holdings AG (Reg.) 1,160 226,206
Julius Baer Holding AG 5,313 8,124,909
Nestle SA (Reg.) 9,030 11,899,952
Novartis AG (Reg.) 25,000 39,924,735
Roche Holding AG participation
certificates 1,250 11,294,047
Sulzer AG (Reg.) 2,500 2,138,214
SGS Societe Generale de Surveillance
Holding SA (Bearer) 800 1,707,834
100,735,628
UNITED KINGDOM - 13.5%
Allied Domecq PLC 6,200 44,587
Asda Group PLC 2,705,400 5,584,562
BAT Industries PLC Ord. 1,709,800 15,298,884
BOC Group PLC 49,900 868,066
Barclays PLC Ord. 227,500 4,514,333
Barratt Developments PLC 847,125 3,469,114
Bass PLC Ord. 242,300 2,956,605
Blue Circle Industries PLC 430,400 3,073,729
Boots Co. PLC Class L (The) 323,900 3,793,246
British Aerospace PLC 257,400 5,726,819
British Petroleum PLC:
ADR 47,800 3,579,025
Ord. 998,909 12,413,428
British Land Co. PLC, (The) Ord. 176,200 1,663,125
British Steel PLC Ord. 1,230,000 3,061,134
British Telecommunications PLC Ord. 850,300 6,313,105
Cable & Wireless PLC Ord. 348,900 3,194,476
Caradon PLC 2,419,380 8,095,359
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UNITED KINGDOM - CONTINUED
Cookson Group PLC 4,377,200 $ 15,411,423
Dixons Group PLC 333,400 2,625,202
DR Solomons Group PLC sponsored
ADR 13,400 340,025
English China Clay PLC 352,200 1,196,067
Glaxo Holdings PLC 538,800 11,122,060
Granada Group PLC 811,000 10,665,566
Grand Metropolitan PLC 1,492,491 14,360,698
Guinness PLC Ord. 221,100 2,164,223
HSBC Holdings PLC Ord. 57,600 1,772,465
Hays PLC 94,200 893,844
ICI (Imperial Chemical Industries) PLC
Class L 133,900 1,859,014
Inchcape PLC Ord. 739,600 3,484,330
Ladbroke Group PLC Ord. 1,328,800 5,220,446
Lloyds TSB Group PLC 1,896,498 19,447,737
<PAGE>
LucasVarity PLC 2,165,700 7,498,901
Mercury Asset Management Group PLC 77,400 1,591,270
National Grid Co. PLC 1,566,100 5,722,555
Norwich Union PLC (a) 194,300 1,033,427
Pearson, PLC 68,300 791,345
Perpetual PLC 19,600 874,434
Prudential Corp. PLC 428,318 4,146,217
Reckitt & Colman Ltd. Ord. 91,800 1,370,791
Redland PLC Ord. 458,900 2,597,365
Rentokil Group PLC 5,403,900 18,945,307
Rio Tinto PLC (Reg.) 53,900 938,997
Rolls Royce PLC Ord. 765,355 2,917,658
Rugby Group PLC 795,600 1,589,322Somerfield PLC 866,000 2,609,351
Shell Transport & Trading Co. PLC (Reg.) 2,313,300 15,769,642
SmithKline Beecham PLC Ord. 947,218 17,431,898
Tarmac 128,200 264,634
Thames Water PLC Ord. 144,800 1,663,235
Tomkins PLC Ord. 179,800 778,214
Unigate PLC 333,200 2,679,095
Unilever PLC Ord. 276,800 7,932,482
Vodafone Group PLC 1,865,929 9,101,201
WPP Group PLC 252,900 1,033,561
283,493,599
UNITED STATES OF AMERICA - 1.5%
Alumax, Inc. (a) 222,700 8,448,681
Aluminum Co. of America 139,600 10,522,350
D.R. Horton, Inc. 161,600 1,676,600
Hanover Compressor Co. 1,500 29,250
Jefferson Smurfit Corp. 34,400 550,400
Kaiser Aluminum Corp. (a) 8,200 100,450
MCI Communications Corp. 213,800 8,184,531
Newmont Mining Corp. 46,000 1,794,000
Silgan Holdings, Inc. 2,600 100,750
31,407,012
TOTAL COMMON STOCKS
(Cost $1,450,354,067) 1,845,854,386
PREFERRED STOCKS - 1.0%
SHARES VALUE (NOTE 1)
CONVERTIBLE PREFERRED STOCKS - 0.1%
JAPAN - 0.1%
AJL participating trust 73,000 $ 1,272,938
NONCONVERTIBLE PREFERRED STOCKS - 0.9%
ITALY - 0.9%
Stet (Societa Finanziaria Telefonica) Spa 3,435,100 11,903,329
Telecom Italia:
Mobile Spa de Risp 3,961,100 7,030,916 Ord. 435,400 871,518
TOTAL NONCONVERTIBLE PREFERRED STOCKS 19,805,763
TOTAL PREFERRED STOCKS
(Cost $12,443,054) 21,078,701
CORPORATE BONDS - 0.8%
MOODY'S PRINCIPAL
RATINGS (D) AMOUNT
BERMUDA - 0.2%
MBL International Finance of
Bermuda 3%, 11/30/02 Aa2 $ 4,472,000 4,896,840
JAPAN - 0.6%
Asahi Breweries Ltd
6.40%, 10/16/98 - JPY 501,000,000 6,817,218
Matsushita Electric Industrial
Co. Ltd.:
1.30%, 3/29/02 Aa2 JPY 186,000,000 2,320,031
1.40%, 3/31/04 Aa2 JPY 174,000,000 2,170,352
11,307,601
TOTAL CORPORATE BONDS
(Cost $15,280,034) 16,204,441
GOVERNMENT OBLIGATIONS - 0.0%
U.S. Treasury Bills, yields at dates of purchase
4.85%, to 5.28%, 8/7/97 to 1/8/98 (c)
(Cost $886,510) $900,000 886,492
CASH EQUIVALENTS - 10.2%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 214,820,380 214,785,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $1,693,748,665) $ 2,098,809,020
FUTURES CONTRACTS
EXPIRATION UNDERLYING FACE UNREALIZED
DATE AMOUNT AT VALUE GAIN/(LOSS)
PURCHASED
232 Nikkei 225 Stock
Index Contracts Sept. 1997 $ 23,890,200 $ 40,693
THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL INVESTMENT IN
SECURITIES - 1.1%
CURRENCY ABBREVIATIONS
JPY - Japanese yen
LEGEND
(a) Non-income producing
(b) Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $24,206,748 or 1.2% of net
<PAGE>
assets.
(c) A portion of the security was pledged to cover margin requirements for
futures contracts. At the period end, the value of securities pledged
amounted to $788,676.
(d) Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $712,738,103 and $575,228,156, respectively.
The market value of futures contracts opened and closed during the period
amounted to $49,056,147 and $39,254,194, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company. The
commissions paid to these affiliated firms were $127,548 for the period
(see Note 4 of Notes to Financial Statements).
MARKET SECTOR DIVERSIFICATION
As a Percentage of Total Value of Investments
Aerospace & Defense 0.4%
Basic Industries 9.7
Cash Equivalents 10.2
Construction & Real Estate 2.9
Durables 9.8
Energy 6.5
Finance 15.1
Government Obligations 0.0
Health 8.8
Holding Companies 1.3
Industrial Machinery & Equipment 2.5
Media & Leisure 2.2
Nondurables 6.6
Precious Metals 0.5
Retail & Wholesale 3.7
Services 2.1
Technology 10.1
Transportation 0.5
Utilities 7.1
100.0%
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income
tax purposes was $1,694,697,195. Net unrealized appreciation aggregated
$404,111,825, of which $447,629,963 related to appreciated investment
securities and $43,518,138 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $2,098,809,020
securities, at
value (including
repurchase
agreements of
$214,785,000) (cost
$1,693,748,665) -
See accompanying
schedule
Cash 2,443
Receivable for 3,065,615
investments sold
Receivable for fund 1,404,647
shares sold
Dividends receivable 7,012,340
Interest receivable 149,101
Other receivables 27,542
TOTAL ASSETS 2,110,470,708
LIABILITIES
Payable for $ 16,404,484
investments
purchased
Payable for fund 2,602,874
shares redeemed
Accrued management 1,275,223
fee
Payable for daily 34,800
variation on
futures contracts
Other payables and 342,806
accrued expenses
<PAGE>
accrued expenses
TOTAL LIABILITIES 20,660,187
NET ASSETS $2,089,810,521
Net Assets consist of:
Paid in capital $1,603,802,130
Undistributed net 14,431,091
investment income
Accumulated 66,527,361
undistributed net
realized gain (loss)
on investments and
foreign currency
transactions
Net unrealized 405,049,939
appreciation
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $2,089,810,521
104,279,605
shares outstanding
NET ASSET VALUE, $20.04
offering price
and redemption
price per share
($2,089,810,521 (divided by)
104,279,605
shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME 26,148,620
Dividends
Interest $ 5,052,251
31,200,871
Less foreign taxes (3,188,198)
withheld
TOTAL INCOME 28,012,673
EXPENSES
Management fee $ 6,739,466
Transfer agent fees 648,554
Accounting fees and 400,724
expenses
Non-interested 3,852
trustees'
compensation
Custodian fees and 422,619
expenses
Registration fees 4,483
Audit 14,836
Legal 2,287
Miscellaneous 71,824
Total expenses 8,308,645
before reductions
Expense reductions (71,550) 8,237,095
NET INVESTMENT 19,775,578
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
<PAGE>
Investment 69,225,765
securities
Foreign currency (83,526)
transactions
Futures contracts (182,586) 68,959,653
Change in net
unrealized
appreciation
(depreciation) on:
Investment 199,312,047
securities
Assets and (61,369)
liabilities in
foreign currencies
Futures contracts 511,033 199,761,711
NET GAIN (LOSS) 268,721,364
NET INCREASE $288,496,942
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 70,664
Expense reductions
Directed brokerage
arrangements
Custodian credits 886
$ 71,550
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
Operations $ 19,775,578 $ 28,360,200
Net investment
income
Net realized gain 68,959,653 114,395,097
(loss)
Change in net 199,761,711 46,672,077
unrealized
appreciation
(depreciation)
NET INCREASE 288,496,942 189,427,374
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Distributions to (29,012,812) (16,689,141)
shareholders
From net
investment income
From net realized (115,172,073) (18,358,055)
gain
TOTAL DISTRIBUTIONS (144,184,885) (35,047,196)
Share transactions 478,306,941 649,592,564
Net proceeds from
sales of shares
Reinvestment of 144,184,885 35,047,196
distributions
Cost of shares (344,594,600) (514,552,645)
redeemed
NET INCREASE 277,897,226 170,087,115
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 422,209,283 324,467,293
(DECREASE) IN NET
ASSETS
NET ASSETS
<PAGE>
Beginning of period 1,667,601,238 1,343,133,945
End of period $2,089,810,521 $1,667,601,238
(including
undistributed net
investment
income of
$14,431,091 and
$22,748,929,
respectively)
OTHER INFORMATION
Shares
Sold 26,141,924 37,069,614
Issued in 8,319,959 2,053,145
reinvestment of
distributions
Redeemed (18,706,716) (29,349,715)
Net increase 15,755,167 9,773,044
(decrease)
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997
SELECTED PER-SHARE DATA (UNAUDITED) 1996 1995 1994 1993 F 1992
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net asset value, $ 18.84 $ 17.06 $ 15.67 $ 15.48 $ 11.53 $ 13.09
beginning of period
Income from
Investment
Operations
Net investment .20 D .32 D, .17 .19 .06 .16
income E
Net realized and 2.64 1.88 1.34 .08 4.16 (1.54)
unrealized gain
(loss)
Total from 2.84 2.20 1.51 .27 4.22 (1.38)
investment
operations
Less Distributions
From net (.33) (.20) (.06) (.08) (.18) (.18)
investment income
In excess of net - - - - (.04) -
investment income
From net realized (1.31) (.22) (.02) - - -
gain
In excess of net - - (.04) - (.05) -
realized gain
Total distributions (1.64) (.42) (.12) (.08) (.27) (.18)
Net asset value, end $ 20.04 $ 18.84 $ 17.06 $ 15.67 $ 15.48 $ 11.53
of period
TOTAL RETURN B, C 16.44% 13.15% 9.74% 1.72% 37.35% (10.72)%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $ 2,089,811 $ 1,667,601 $ 1,343,134 $ 1,297,701 $ 777,961 $ 180,837
period (000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
omitted)
Ratio of expenses to .94% A .93% .91% .92% 1.03% 1.14%
average net assets
Ratio of expenses to .93% A, G .92% .91% .92% 1.03% 1.14%
average net assets G
after expense
reductions
Ratio of net 2.23% A 1.84% 1.88% 1.28% 1.21% 1.86%
investment income
to average net
assets
Portfolio turnover rate 72% A 92% 50% 42% 42% 61%
Average commission $ .0115 $ .0137
rate H
</TABLE>
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR
ARE NOT ANNUALIZED AND DO NOT
REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION OF THESE
CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN. C THE TOTAL
RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN
(SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). D NET INVESTMENT
INCOME PER SHARE HAS BEEN
CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE
PERIOD. E INVESTMENT INCOME PER
SHARE REFLECTS A SPECIAL DIVIDEND WHICH AMOUNTED TO $.05 PER
SHARE. F EFFECTIVE JANUARY 1,
1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2, "DETERMINATION,
DISCLOSURE, AND FINANCIAL
STATEMENT PRESENTATION OF INCOME, CAPITAL GAIN, AND RETURN OF
CAPITAL DISTRIBUTIONS BY
INVESTMENT COMPANIES." AS A RESULT, NET INVESTMENT INCOME PER
SHARE MAY REFLECT CERTAIN
RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES. G FMR OR
THE FUND HAS ENTERED INTO VARYING
ARRANGEMENTS WITH THIRD PARTIES WHO EITHER PAID OR REDUCED A
PORTION OF THE FUND'S EXPENSES (SEE
NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). H FOR FISCAL YEARS
BEGINNING ON OR AFTER SEPTEMBER 1,
1995, A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE
PER SHARE FOR SECURITY TRADES ON
WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO
PERIOD AND FUND TO FUND
DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE
TRADING PRACTICES AND
COMMISSION RATE STRUCTURES MAY DIFFER.
NOTES TO FINANCIAL STATEMENTS
For the period ended June 30, 1997 (Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES.
The Money Market Portfolio, High Income Portfolio, Equity-Income Portfolio,
Growth Portfolio and Overseas Portfolio (the funds) are funds of Variable
Insurance Products Fund. Investment Grade Bond Portfolio, Asset Manager
Portfolio, Asset Manager: Growth Portfolio, Index 500 Portfolio and Contrafund
Portfolio (the funds) are funds of Variable Insurance Products Fund II. Balanced
Portfolio, Growth & Income Portfolio and Growth Opportunities Portfolio (the
funds) are funds of Variable Insurance Products Fund III. The Variable Insurance
Products Fund, Variable Insurance Products Fund II and Variable Insurance
Products Fund III (the trusts) are registered under the Investment Company Act
of 1940, as amended (the 1940 Act), as open-end management investment companies
organized as Massachusetts business trusts. Each fund is authorized to issue an
unlimited number of shares. Shares of each fund may only be purchased by
insurance companies for the purpose of funding variable annuity or variable life
insurance contracts. On July 17, 1997, the Board of Trustees approved the
creation of Service Class, a new class of shares of each fund. The Service Class
shares of High Income Portfolio, Equity-Income Portfolio, Growth Portfolio,
Overseas Portfolio, Asset Manager Portfolio, Asset Manager: Growth Portfolio,
Contrafund Portfolio, Balanced Portfolio, Growth & Income Portfolio and Growth
Opportunities Portfolio will be subject to an annual distribution and service
fee of .10% of each class' average net assets. Service Class shares of the Money
Market Portfolio, Index 500 Portfolio and Investment Grade Portfolio will be
available without a 12b-1 fee. Service Class shares of each fund are expected to
be available on or about October 31, 1997. The financial statements have been
prepared in conformity with generally accepted accounting principles which
permit
<PAGE>
management to make certain estimates and assumptions at the date of the
financial statements. The following summarizes the significant accounting
policies of the funds:
SECURITY VALUATION:
MONEY MARKET PORTFOLIO. As permitted under Rule 2a-7 of the 1940 Act, and
certain conditions therein, securities are valued initially at cost and
thereafter assume a constant amortization to maturity of any discount or
premium.
INVESTMENT GRADE BOND PORTFOLIO. Securities are valued based upon a computerized
matrix system and/or appraisals by a pricing service, both of which consider
market transactions and dealer-supplied valuations. Securities (including
restricted securities) for which market quotations are not readily available are
valued at their fair value as determined in good faith under consistently
applied procedures under the general supervision of the Board of Trustees.
Short-term securities with remaining maturities of sixty days or less for which
quotations are not readily available are valued at amortized cost or original
cost plus accrued interest, both of which approximate current value. HIGH INCOME
PORTFOLIO. Securities for which quotations are readily available are valued by a
pricing service at their market values as determined by their most recent bid
prices in the principal market (sales prices if the principal market is an
exchange) in which such securities are normally traded. Securities (including
restricted securities) for which market quotations are not readily available are
valued at their fair value as determined in good faith under consistently
applied procedures under the general supervision of the Board of Trustees.
Short-term securities with remaining maturities of sixty days or less for which
quotations are not readily available are valued at amortized cost or original
cost plus accrued interest, both of which approximate current value.
ASSET MANAGER, BALANCED AND ASSET MANAGER: GROWTH PORTFOLIOS. Equity securities
for which quotations are readily available are valued at the last sale price, or
if no sale price, at the closing bid price. Debt securities for which quotations
are readily available are valued by a pricing service at their market values as
determined by their most recent bid prices in the principal market (sales prices
if the principal market is an exchange) in which such securities are normally
traded. Securities (including restricted securities) for which market quotations
are not readily available are valued at their fair value as determined in good
faith under consistently applied procedures under the general supervision of the
Board of Trustees. Short-term securities with remaining maturities of sixty days
or less for which quotations are not readily available are valued at amortized
cost or original cost plus accrued interest, both of which approximate current
value.
EQUITY-INCOME, GROWTH & INCOME, INDEX 500, GROWTH OPPORTUNITIES, CONTRAFUND
AND GROWTH PORTFOLIOS. Securities for which exchange quotations are readily
available are valued at the last sale price, or if no sale price, at the closing
bid price. Securities (including restricted securities) for which exchange
quotations are not readily available (and in certain cases debt securities which
trade on an exchange) are valued primarily using dealer-supplied valuations or
at their fair value as determined in good faith under consistently applied
procedures under the general supervision of the Board of Trustees. Short-term
securities with remaining maturities of sixty days or less for which quotations
are not readily available are valued at amortized cost or original cost plus
accrued interest, both of which approximate current value.
OVERSEAS PORTFOLIO. Securities for which quotations are readily available are
valued at the last sale price, or if no sale price, at the closing bid price in
the principal market in which such securities are normally traded. Securities
(including restricted securities) for which quotations are not readily available
are valued primarily using dealer-supplied valuations
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
OVERSEAS PORTFOLIO - CONTINUED
or at their fair value as determined in good faith under consistently applied
procedures under the general supervision of the Board of Trustees. Short-term
securities with remaining maturities of sixty days or less for which quotations
are not readily available are valued at amortized cost or original cost plus
accrued interest, both of which approximate current value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the funds are maintained
in U.S. dollars. Investment securities and other assets and liabilities
denominated in a foreign currency are translated into U.S. dollars at the
prevailing rates of exchange at period end. Income receipts and expense payments
are translated into U.S. dollars at the prevailing exchange rate on the
respective dates of the transactions. Purchases and sales of securities are
translated into U.S. dollars at the contractual currency exchange rates
established at the time of each trade. Net realized gains and losses on foreign
currency transactions represent net gains and losses from sales and maturities
of forward currency contracts, disposition of foreign currencies, and the
difference between the amount of net investment income accrued and the U.S.
dollar amount actually received. The effects of changes in foreign currency
exchange rates on investments in securities are included with the net realized
and unrealized gain or loss on investment securities.
INCOME TAXES. Growth & Income intends to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code. As qualified regulated
investment companies under Subchapter M of the Internal Revenue Code, each fund
is not subject to U.S. federal income taxes to the extent that it distributes
substantially all of its taxable income for the fiscal year. Each fund may be
subject to foreign taxes on income and gains on investments which are accrued
based upon each fund's understanding of the tax rules and regulations that exist
in the markets in which they invest. Each fund accrues such taxes as applicable.
The schedules of investments include information regarding income taxes under
the caption "Income Tax Information."
<PAGE>
INVESTMENT INCOME:
MONEY MARKET PORTFOLIO. Interest income, which includes amortization of premium
and accretion of discount, is accrued as earned.
INVESTMENT GRADE BOND, HIGH INCOME, ASSET MANAGER, BALANCED, ASSET MANAGER:
GROWTH, EQUITY-INCOME, INDEX 500, GROWTH OPPORTUNITIES, GROWTH & INCOME,
CONTRAFUND, GROWTH AND OVERSEAS PORTFOLIOS. Dividend income is recorded on the
ex-dividend date, except certain dividends from foreign securities where the ex-
dividend date may have passed, are recorded as soon as the funds are informed of
the ex-dividend date. Non-cash dividends included in dividend income, if any,
are recorded at the fair market value of the securities received. Interest
income, which includes accretion of original issue discount, is accrued as
earned. Investment income is recorded net of foreign taxes withheld where
recovery of such taxes is uncertain. EXPENSES. Most expenses of each trust can
be directly attributed to a fund. Expenses which cannot be directly attributed
are apportioned between the funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily and paid monthly
from net interest income for the Money Market Portfolio. Distributions are
recorded on the ex-dividend date for all other funds. Certain foreign currency
gains (losses), if applicable, are taxable as ordinary income and, therefore,
increase (decrease) taxable ordinary income available for distributions.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
These differences, which may result in distribution reclassifications, are
primarily due to differing treatments for litigation proceeds, paydown
gains/losses on certain securities, futures and options transactions, defaulted
bonds, foreign currency transactions, passive foreign investment companies
(PFIC), market discount, partnerships, non-taxable dividends, capital loss
carryforwards, losses deferred due to wash sales and excise tax regulations.
Permanent book and tax basis differences relating to shareholder distributions
will result in reclassifications to paid in capital. Undistributed net
investment income and accumulated undistributed net realized gain (loss) on
investments and foreign currency transactions may include temporary book and tax
basis differences which will reverse in a subsequent period. Any taxable income
or gain remaining at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of trade date.
Gains and losses on securities sold are determined on the basis of identified
cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. Certain funds generally use foreign currency
contracts to facilitate transactions in foreign-denominated securities. Losses
may arise from changes in the value of the foreign currency or if the
counterparties do not perform under the contracts' terms. The U.S. dollar value
of foreign currency contracts is determined using contractual currency exchange
rates established at the time of each trade. The cost of the foreign currency
contracts is included in the cost basis of the associated investment.
2. OPERATING POLICIES - CONTINUED
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the Securities
and Exchange Commission (the SEC), the funds, along with other affiliated
entities of Fidelity Management & Research Company (FMR), may transfer
uninvested cash balances into one or more joint trading accounts. These balances
are invested in one or more repurchase agreements for U.S. Treasury or Federal
Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency Securities
are transferred to an account of the funds, or to the Joint Trading Account, at
a bank custodian. The securities are marked-to-market daily and maintained at a
value at least equal to the principal amount of the repurchase agreement
(including accrued interest). FMR, the funds' investment adviser, is responsible
for determining that the value of the underlying securities remains in
accordance with the market value requirements stated above.
DELAYED DELIVERY TRANSACTIONS. Each fund may purchase or sell securities on a
delayed delivery basis. Payment and delivery may take place a month or more
after the date of the transaction. The price of the underlying securities and
the date when the securities will be delivered and paid for are fixed at the
time the transaction is negotiated. The market values of the securities
purchased or sold on a delayed delivery basis are identified as such in each
applicable fund's schedule of investments. Each fund may receive compensation
for interest forgone in the purchase of a delayed delivery security. With
respect to purchase commitments, the fund identifies securities as segregated in
its custodial records with a value at least equal to the amount of the
commitment. Losses may arise due to changes in the market value of the
underlying securities or if the counterparty does not perform under the
contract.
INTERFUND LENDING PROGRAM. Pursuant to an Exemptive Order issued by the SEC, the
funds, along with other registered investment companies having management
contracts with FMR, may participate in an interfund lending program. This
program provides an alternative credit facility allowing the funds to borrow
from, or lend money to, other participating funds.
FUTURES CONTRACTS. Certain funds may use futures contracts to manage their
exposure to the stock and bond markets and to fluctuations in interest rates and
currency values. Buying futures tends to increase a fund's exposure to the
underlying instrument, while selling futures tends to decrease a fund's exposure
to the underlying instrument or hedge other fund investments. Futures contracts
involve, to varying degrees, risk of loss in excess of the futures variation
margin reflected in each applicable fund's Statement of Assets and Liabilities.
The underlying face amount at value of any open futures contracts at period end
is shown in each applicable fund's schedule of investments under the caption
"Futures Contracts." This amount
<PAGE>
reflects each contract's exposure to the underlying instrument at period end.
Losses may arise from changes in the value of the underlying instruments, if
there is an illiquid secondary market for the contracts, or if the
counterparties do not perform under the contracts' terms. Futures contracts are
valued at the settlement price established each day by the board of trade or
exchange on which they are traded.
RESTRICTED SECURITIES. Each fund is permitted to invest in securities that are
subject to legal or contractual restrictions on resale. These securities
generally may be resold in transactions exempt from registration or to the
public if the securities are registered. Disposal of these securities may
involve time-consuming negotiations and expense, and prompt sale at an
acceptable price may be difficult. At the end of the period, restricted
securities (excluding 144A issues) amounted to $10,000,000, $3,505,987,
$1,696,288 and $202,398 or 0.9%, 0.2%, 0.0% and 0.1% of net assets of the Money
Market, High Income, Asset Manager and Asset Manager: Growth Portfolios,
respectively.
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than short-term
securities) and the market value of future contracts opened and closed is
included under the caption "Other Information" at the end of each applicable
fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As each fund's investment adviser, FMR receives a monthly fee.
For the Money Market Portfolio, FMR receives a monthly fee that is calculated on
the basis of a basic fund fee rate of .03% of the fund's average net assets,
plus a fixed income group fee rate and an income-based fee. The group fee rate
is the weighted average of a series of rates ranging from .1100% to .3700% and
is based on the monthly average net assets of all the mutual funds advised by
FMR. In the event that these rates were lower than the contractual rates in
effect during the period, FMR voluntarily implemented the above rates, as they
resulted in the same or a lower management fee. The income-based fee is added
only when the fund's gross yield exceeds 5%. At that time the income-based fee
would equal 6% of that portion of the fund's gross income that represents a
gross yield of more than 5% per year. The maximum income-based component is
0.24% of average net assets.
For the Index 500 Portfolio, FMR receives a fee that is computed at an annual
rate of .28% of the fund's average net assets. For all other funds, FMR receives
a monthly fee that is calculated on the basis of a group fee rate plus a fixed
individual fund fee rate applied to the average net assets of the fund. The
group fee rate is the weighted average of a series of rates and is based on the
monthly average net assets of all the mutual funds advised by FMR. The rates
ranged from .1100% to .3700% for the Investment Grade Bond and High Income
Portfolios and .2500% to .5200% for
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED MANAGEMENT FEE -
CONTINUED the Asset Manager, Balanced, Asset Manager: Growth, Equity-Income,
Growth & Income, Growth Opportunities, Contrafund, Growth and Overseas
Portfolios for the period. In the event that these rates were lower than the
contractual rates in effect during the period, FMR voluntarily implemented the
above rates, as they resulted in the same or a lower management fee.
The annual individual fund fee rates are .30% for Investment Grade Bond, Asset
Manager: Growth, Growth Opportunities, Contrafund and Growth and, .45% for High
Income and Overseas, .25% for Asset Manager, .15% for Balanced, and .20% for
Equity-Income and Growth & Income Portfolios. For the period, each funds'
management fee was equivalent to the following annualized rates expressed as a
percentage of average net assets:
Money Market .21%
Investment Grade Bond .44%
High Income .60%
Asset Manager .56%
Balanced .46%
Asset Manager: Growth, Growth Opportunities,
Contrafund, Growth .61%
Equity-Income .51%
Growth & Income .50%
Index 500 .28%
Overseas .76%
SUB-ADVISER FEE. As the Money Market Portfolio's investment sub-adviser, FMR
Texas Inc., a wholly owned subsidiary of FMR, receives a fee from FMR of 50% of
the management fee payable to FMR. The fee is paid prior to any voluntary
expense reimbursements which may be in effect. FMR, on behalf of the High
Income, Asset Manager, Balanced, Asset Manager: Growth, Growth & Income, Growth
Opportunities, Contrafund and Overseas Portfolios, entered into sub-advisory
agreements with Fidelity Management & Research (U.K.) Inc., Fidelity Management
& Research (Far East) Inc., and with respect only to Overseas Portfolio,
Fidelity International Investment Advisors (FIIA). In addition, FIIA entered
into a sub-advisory agreement with its subsidiary, Fidelity International
Investment Advisors (U.K.) Limited (FIIAL U.K.). Under the sub-advisory
arrangements, FMR may receive investment advice and research services and may
grant the sub-advisers investment management authority to buy and sell
securities. FMR pays its sub-advisers either a portion of its management fee or
a fee based on costs incurred for these services. FIIA pays FIIAL U.K. a fee
based on costs incurred for either service.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations Company
(FIIOC), an affiliate of FMR, is the funds' transfer, dividend disbursing and
shareholder servicing agent. FIIOC receives account fees and asset-based fees
that vary according to account size and type of account. FIIOC pays a portion of
the expenses related to the typesetting, printing and mailing of shareholder
reports, except proxy statements.
<PAGE>
For the period, each funds' transfer agent fees was equivalent to the following
annualized rates expressed as a percentage of average net assets: Money Market,
High Income, .07 Asset Manager, Balanced, Equity-Income, %
Growth Opportunities, Contrafund,
Growth and Overseas
Investment Grade Bond, Asset Manager: .08 Growth,
Growth & Income and Index 500 %
ACCOUNTING FEES. Fidelity Service Company Inc., an affiliate of FMR, maintains
the funds' accounting records. The fee is based on the level of average net
assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. Certain funds placed a portion of their portfolio
transactions with brokerage firms which are affiliates of FMR. The commissions
paid to these affiliated firms are shown under the caption "Other Information"
at the end of each applicable fund's schedule of investments.
5. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse the Index 500 fund's operating expenses
(excluding interest, taxes, brokerage commissions and extraordinary expenses)
above an annual rate of .28% of average net assets. FMR has directed certain
portfolio trades to brokers who paid a portion of certain funds' expenses. In
addition, certain funds have entered into arrangements with their custodian and
transfer agent whereby credits realized on uninvested cash balances were used to
offset a portion of certain funds' expenses. For the period, the reductions
under these arrangements are shown under the caption "Other Information" on each
applicable fund's Statement of Operations.
6. INTERFUND LENDING PROGRAM.
Contrafund Portfolio participated in the interfund lending program as a lender.
The maximum loan and the average daily loan balances during the period for which
loans were outstanding amounted to $36,999,000 and $17,934,833, respectively.
The weighted average interest rate was 5.42%. Interest earned from the interfund
lending program amounted to $16,203 and is included in interest income on the
Statement of Operations.
7. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company and its
subsidiaries, affiliates of FMR, were the record owners of more than 5% of the
outstanding shares and certain unaffiliated insurance companies were record
owners of 10% or more of the total outstanding shares of the following funds:
FILI UNAFFILIATED INSURANCE COMPANIES FUND % OF OWNERSHIP # OF % OF OWNERSHIP
Money Market 50 1 11
Investment Grade Bond 35 1 11
High Income 14 2 57
Asset Manager 20 3 49
Balanced 23 1 76
Asset Manager: Growth 76 - -
Equity-Income 20 1 29
Growth & Income 90 - -
Index 500 44 1 10
Growth Opportunities 28 1 71
Contrafund 37 2 35
Growth 15 1 28
Overseas 15 1 36
8. TRANSACTIONS WITH AFFILIATED COMPANIES.
An affiliated company is a company in which the fund has ownership of at least
5% of the voting securities. Information regarding transactions with affiliated
companies is included in the "Legend" at the end of each applicable fund's
schedule of investments.
9. ASSET TRANSFER INFORMATION.
In September 1996, the Board of Trustees approved a proposal to liquidate Money
Market Fund, Government Investment Fund, High Yield Fund, and Overseas Fund of
the Fidelity Advisor Annuity Fund trust, and to transfer the assets of those
funds to Money Market Portfolio, Investment Grade Bond Portfolio, High Income
Portfolio, and Overseas Portfolio, respectively. The liquidation and transfer of
assets was completed on March 14, 1997.
VALUE OF FUND ASSETS TRANSFERRED SHARES EACH SHARE
Money Market Fund $27,320,971 27,320,971 $ 1.00
Investment Grade Portfolio $19,784,453 1,717,566 $ 11.52
High Income Portfolio $91,391,383 7,733,642 $ 11.82
Overseas Portfolio $46,754,098 2,644,463 $ 17.68
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
FMR Texas Inc., Irving, TX
MONEY MARKET PORTFOLIO
Fidelity Management & Research (U.K.) Inc.,
London, England
HIGH INCOME, ASSET MANAGER, ASSET MANAGER: GROWTH,
CONTRAFUND, BALANCED, GROWTH OPPORTUNITIES,
GROWTH & INCOME AND OVERSEAS PORTFOLIOS
Fidelity Management & Research (Far East) Inc.,
<PAGE>
Tokyo, Japan
HIGH INCOME, ASSET MANAGER, ASSET MANAGER: GROWTH,
CONTRAFUND, BALANCED, GROWTH OPPORTUNITIES,
GROWTH & INCOME AND OVERSEAS PORTFOLIOS
Fidelity International Investment Advisors
Pembroke, Bermuda
OVERSEAS PORTFOLIO
Fidelity International Investment Advisors (U.K.) Limited
Kent, England
OVERSEAS PORTFOLIO
OFFICERS
Edward C. Johnson 3d, PRESIDENT
Robert C. Pozen, SENIOR VICE PRESIDENT
Abigail Johnson, VICE PRESIDENT - GROWTH, CONTRAFUND
AND GROWTH OPPORTUNITIES PORTFOLIOS
Richard A. Spillane, Jr., VICE PRESIDENT - EQUITY INCOME,
OVERSEAS, BALANCED AND GROWTH & INCOME PORTFOLIOS
William J. Hayes, VICE PRESIDENT
Fred L. Henning, Jr., VICE PRESIDENT - HIGH INCOME,
INVESTMENT GRADE BOND, ASSET MANAGER AND
ASSET MANAGER: GROWTH PORTFOLIOS
Robert A. Lawrence, VICE PRESIDENT - INVESTMENT GRADE BOND,
INDEX 500, ASSET MANAGER, ASSET MANAGER: GROWTH AND
HIGH INCOME PORTFOLIOS
Barry J. Coffman, VICE PRESIDENT - HIGH INCOME PORTFOLIO
William Danoff, VICE PRESIDENT - CONTRAFUND PORTFOLIO
Bettina Doulton, VICE PRESIDENT - BALANCED PORTFOLIO
Jennifer Farrelly, VICE PRESIDENT - INDEX 500 PORTFOLIO
Kevin E. Grant, VICE PRESIDENT - INVESTMENT GRADE BOND
AND BALANCED PORTFOLIOS
Richard C. Habermann, VICE PRESIDENT - ASSET MANAGER
AND ASSET MANAGER: GROWTH PORTFOLIOS
Robert K. Duby, VICE PRESIDENT - MONEY MARKET PORTFOLIO
Richard M. Mace, Jr., VICE PRESIDENT - OVERSEAS PORTFOLIO
Charles S. Morrison, VICE PRESIDENT - ASSET MANAGER AND
ASSET MANAGER: GROWTH PORTFOLIOS
Stephen Petersen, VICE PRESIDENT - EQUITY INCOME
Beth Terrana, VICE PRESIDENT - GROWTH & INCOME PORTFOLIO
John Todd, VICE PRESIDENT - ASSET MANAGER AND
ASSET MANAGER: GROWTH PORTFOLIOS
Jennifer Uhrig, VICE PRESIDENT - GROWTH OPPORTUNITIES PORTFOLIO
George Vanderheiden, VICE PRESIDENT -
ASSET MANAGER, ASSET MANAGER: GROWTH AND
GROWTH OPPORTUNITIES PORTFOLIOS
Sarah H. Zenoble, VICE PRESIDENT - MONEY MARKET PORTFOLIOS
Thomas D. Maher, ASSISTANT VICE PRESIDENT -
MONEY MARKET PORTFOLIO
Arthur S. Loring, SECRETARY
Richard A. Silver, TREASURER
Boyce Greer, VICE PRESIDENT - MONEY MARKET PORTFOLIO
Robert H. Morrison, MANAGER, SECURITY TRANSACTIONS
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
Thomas J. Simpson, ASSISTANT TREASURER -
MONEY MARKET PORTFOLIO
BOARD OF TRUSTEES
Robert C. Pozen **
Ralph F. Cox *
Phyllis Burke Davis *
Robert M. Gates **
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Marvin L. Mann *
William O. McCoy *
Gerald C. McDonough *
Thomas R. Williams *
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER SERVICING AGENT
Fidelity Investments Institutional Operations Co., Inc.
Boston, MA
CUSTODIAN
The Bank of New York, New York, NY
MONEY MARKET, INVESTMENT GRADE BOND AND
HIGH INCOME PORTFOLIOS
The Chase Manhattan Bank, New York, NY
EQUITY-INCOME, ASSET MANAGER, ASSET MANAGER: GROWTH,
GROWTH & INCOME, BALANCED AND OVERSEAS PORTFOLIOS
Brown Brothers Harriman & Co., Boston, MA
GROWTH, GROWTH OPPORTUNITIES, CONTRAFUND AND
INDEX 500 PORTFOLIOS
* INDEPENDENT TRUSTEES
** BALANCED, GROWTH & INCOME AND GROWTH OPPORTUNITIES PORTFOLIOS ONLY
