(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND III: GROWTH & INCOME PORTFOLIO
SEMIANNUAL REPORT
JUNE 30, 1997
CONTENTS
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PERFORMANCE 3 How the fund has done over time.
FUND TALK 4 The managers' review of fund performance, strategy
and outlook.
INVESTMENTS 5 A complete list of the fund's investments with their
market values.
FINANCIAL STATEMENTS 9 Statements of assets and liabilities, operations, and
changes in net assets, as well as financial highlights.
NOTES 11 Notes to the financial statements.
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THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR
THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS
PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED
BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate each
year. Average annual total returns will appear once the fund is a year old,
and the growth of a hypothetical $10,000 investment in the fund will appear
in the fund's next report six months from now.
You can compare the fund's returns to the performance of the Standard &
Poor's 500 Index - a widely recognized, unmanaged index of common stocks.
This benchmark reflects the reinvestment of dividends and capital gains, if
any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
General Electric Co. 3.5
Philip Morris Companies, Inc. 2.4
BankAmerica Corp. 2.4
Tyco International Ltd. 2.2
Citicorp 1.9
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Finance 14.7
Health 12.2
Retail & Wholesale 9.6
Industrial Machinery & Equipment 9.1
Nondurables 9.0
ASSET ALLOCATION AS OF JUNE 30, 1997*
Row: 1, Col: 1, Value: 4.8
Row: 1, Col: 2, Value: 1.8
Row: 1, Col: 3, Value: 93.40000000000001
Stocks 94.4%
Bonds 0.8%
Short-term investments 4.8%
FOREIGN INVESTMENTS 7.5%
*
% OF FUND'S
INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with
Beth Terrana, Portfolio Manager of Growth &
Income Portfolio
Q. HOW DID THE FUND PERFORM, BETH?
A. For the six months that ended June 30, 1997, the fund trailed the
Standard & Poor's 500 Index, which returned 20.61%. Going forward, the
fund's semiannual report will also quote 12-month performance.
Q. LOOKING AT THE FUND'S PERFORMANCE VERSUS THAT OF ITS INDEX, WHICH
STRATEGIES PLAYED KEY ROLES?
A. Broadly, my decision to emphasize selected stocks in the strong finance,
health and diversified industrials sectors was particularly helpful. Within
the finance and health areas, I focused on money-center banks and
pharmaceuticals, including BankAmerica and Bristol-Myers Squibb - two of
the largest contributors to fund performance for the period. General
Electric - the fund's top holding - was another notable contributor based
on its strong performance as well as its overweighting in the fund.
Additionally, a substantial underweighting of generally weak electric and
telecommunications utilities stocks proved very helpful. The largest
detractor relative to the index was the fund's underexposure to a number of
large-capitalization technology and nondurables stocks, which accounted for
a disproportionate amount of the index's return. Microsoft and Coca-Cola -
two of the largest index constituents - illustrate this point particularly
well. Together, these TWO stocks alone accounted for approximately 1.5% of
the index's 20.61% return. While in hindsight I clearly wish I'd owned more
of these stocks, fundamentals for these companies didn't appear to support
their valuations, which were at steep premiums to the overall market as
well as comparable firms.
Q. HOW DID SOME OF THE FUND'S TOP POSITIONS FARE RELATIVE TO THE INDEX?
A. Many of the fund's larger exposures did well, performing in line with my
expectations. Individual security selection will always be a main driver of
performance and the fund's top positions obviously play a key role. Over
the course of the period, six of the fund's top ten positions outperformed
the index.
Q. FOR THOSE INVESTORS WHO MAY BE UNFAMILIAR WITH YOUR MANAGEMENT STYLE,
HOW WOULD YOU CHARACTERIZE YOUR INVESTMENT PROCESS?
A. Fundamentally, I am a bottom-up investor who believes that superior
investment performance results from owning companies with improving
financial returns. Improvements in financial returns drive both sustainable
improvements in a company's secular growth rate and its earnings power. The
most important elements I look for in an investment include restructuring
potential, rising returns on invested capital, good balance sheet
management, strong free cash flow and shareholder-friendly management.
Increasingly, global franchises and strong brands have also become
important factors. I've generally found that companies exhibiting some or
all of these attributes tend to generate improving financial returns -
including expanding profit margins and accelerating earnings growth rates -
through time. Further, as a firm's financial returns improve, its stock is
likely to be rewarded with a higher valuation once the market finally
catches on.
Q. WHAT'S YOUR OUTLOOK FOR THE NEXT SIX MONTHS?
A. As a backdrop to the stock market, I believe it's very likely that the
supportive environment - moderate economic growth and low inflation - will
continue. Also, given that there are few signs of incipient inflation, I
don't foresee any significant action by the Federal Reserve to raise
interest rates - an event that would likely be a negative for the market,
at least over the short term. Assuming this favorable economic environment
continues, the critical factor going forward will be corporate earnings,
which at this time appear relatively sustainable overall. However, I remain
focused on those companies with the potential to deliver exceptional
numbers, particularly given the recent propensity of the market to
dramatically reduce stock prices upon earnings disappointments. Recently,
even earnings numbers that come in as expected have resulted in large stock
price declines, partly because analysts' "real" expectations were even
higher.
FUND FACTS
GOAL: seeks a high total return through a
combination of current income and capital
appreciation
START DATE: December 31, 1996
SIZE: as of June 30, 1997, more than
$179.0 million
MANAGER: Beth Terrana, since inception;
joined Fidelity in 1983
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 93.4%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 4.5%
AEROSPACE & DEFENSE - 4.1%
AlliedSignal, Inc. 26,700 $ 2,242,800
Boeing Co. 17,200 912,661
Lockheed Martin Corp. 11,600 1,201,325
Textron, Inc. 20,800 1,380,600
United Technologies Corp. 18,500 1,535,500
7,272,886
DEFENSE ELECTRONICS - 0.4%
Raytheon Co. 14,800 754,800
TOTAL AEROSPACE & DEFENSE 8,027,686
BASIC INDUSTRIES - 5.1%
CHEMICALS & PLASTICS - 3.9%
Air Products & Chemicals, Inc. 9,900 804,375
Avery Dennison Corp. 6,000 240,750
Cytec Industries, Inc. (a) 4,300 160,713
Goodrich (B.F.) Co. 12,600 545,738
Hercules, Inc. 2,300 110,113
Monsanto Co. 35,900 1,545,944
Praxair, Inc. 45,800 2,564,800
Raychem Corp. 5,700 423,938
Sealed Air Corp. (a) 14,200 674,500
7,070,871
PAPER & FOREST PRODUCTS - 1.2%
Fort Howard Corp. (a) 7,500 379,688
International Paper Co. 3,900 189,394
James River Corp. of Virginia 10,900 403,300
Kimberly-Clark Corp. 22,300 1,109,425
2,081,807
TOTAL BASIC INDUSTRIES 9,152,678
CONSTRUCTION & REAL ESTATE - 3.0%
BUILDING MATERIALS - 1.8%
American Standard Companies, Inc. (a) 19,900 890,525
Masco Corp. 39,400 1,644,950
Sherwin-Williams Co. 21,300 657,638
3,193,113
REAL ESTATE INVESTMENT TRUSTS - 1.2%
Beacon Properties Corp. 13,600 453,900
Duke Realty Investors, Inc. 9,300 376,650
Equity Residential Properties Trust (SBI) 12,400 589,000
Public Storage, Inc. 18,400 538,200
Storage USA, Inc. 5,500 210,375
2,168,125
TOTAL CONSTRUCTION & REAL ESTATE 5,361,238
DURABLES - 3.2%
AUTOS, TIRES, & ACCESSORIES - 0.4%
Eaton Corp. 5,200 454,025
Navistar International Corp. (a) 18,200 313,950
767,975
CONSUMER DURABLES - 1.7%
Corning, Inc. 13,200 734,250
Minnesota Mining & Manufacturing Co. 23,400 2,386,800
3,121,050
CONSUMER ELECTRONICS - 0.3%
Newell Co. 14,100 558,713
SHARES VALUE (NOTE 1)
TEXTILES & APPAREL - 0.8%
Liz Claiborne, Inc. 20,100 $ 937,163
VF Corp. 5,200 442,650
1,379,813
TOTAL DURABLES 5,827,551
ENERGY - 7.5%
ENERGY SERVICES - 0.9%
Halliburton Co. 5,900 467,575
McDermott International, Inc. 7,400 215,988
Schlumberger Ltd. 7,800 975,000
1,658,563
OIL & GAS - 6.6%
Amoco Corp. 13,500 1,173,656
British Petroleum PLC ADR 30,064 2,251,042
Exxon Corp. 22,300 1,371,450
Mobil Corp. 14,800 1,034,150
Royal Dutch Petroleum Co. 33,200 1,805,250
Texaco, Inc. 15,300 1,663,875
Tosco Corp. 21,000 628,688
Total SA sponsored ADR 14,000 708,750
USX-Marathon Group 32,500 938,438
Unocal Corp. 5,900 228,994
11,804,293
TOTAL ENERGY 13,462,856
FINANCE - 14.7%
BANKS - 7.9%
Bank of New York Co., Inc. 35,700 1,552,950
BankBoston Corp. 7,600 547,675
BankAmerica Corp. 65,500 4,228,844
Citicorp 27,800 3,351,638
First Bank System, Inc. 18,400 1,570,900
First Union Corp. 8,200 758,500
Mellon Bank Corp. 19,800 893,475
NationsBank Corp. 15,100 973,950
Wells Fargo & Co. 1,200 323,400
14,201,332
CREDIT & OTHER FINANCE - 1.8%
American Express Co. 16,600 1,236,700
Associates First Capital Corp. 8,400 466,200
Household International, Inc. 12,800 1,503,200
3,206,100
FEDERAL SPONSORED CREDIT - 1.9%
Federal Home Loan Mortgage
Corporation 50,200 1,725,625
Federal National Mortgage Association 37,400 1,631,575
3,357,200
INSURANCE - 2.4%
AFLAC, Inc. 7,400 349,650
Allstate Corp. 23,800 1,737,400
MGIC Investment Corp. 3,400 162,988
PMI Group, Inc. 1,600 99,800
Progressive Corp. 300 26,100
Travelers Group, Inc. (The) 29,100 1,835,119
4,211,057
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
SAVINGS & LOANS - 0.7%
Ahmanson (H.F.) & Co. 4,900 $ 210,700
Charter One Financial Corp. 5,100 274,763
Great Western Financial Corp. 14,600 784,750
1,270,213
TOTAL FINANCE 26,245,902
HEALTH - 11.9%
DRUGS & PHARMACEUTICALS - 7.9%
American Home Products Corp. 27,300 2,088,450
Bristol-Myers Squibb Co. 38,300 3,102,300
Cytyc Corp. (a) 4,300 116,638
Merck & Co., Inc. 17,100 1,769,850
Pfizer, Inc. 32,400 1,935,900
Schering-Plough Corp. 37,000 1,771,375
SmithKline Beecham PLC ADR 25,500 2,336,438
Warner-Lambert Co. 8,400 1,043,700
14,164,651
MEDICAL EQUIPMENT & SUPPLIES - 3.7%
Bard (C.R.), Inc. 12,500 453,906
Baxter International, Inc. 26,900 1,405,525
Boston Scientific Corp. (a) 14,300 878,556
Johnson & Johnson 35,200 2,266,000
McKesson Corp. 10,500 813,750
Medtronic, Inc. 9,500 769,500
6,587,237
MEDICAL FACILITIES MANAGEMENT - 0.3%
Columbia/HCA Healthcare Corp. 3,000 117,938
Humana, Inc. (a) 20,900 483,313
601,251
TOTAL HEALTH 21,353,139
HOLDING COMPANIES - 0.1%
CINergy Corp. 6,300 219,319
INDUSTRIAL MACHINERY & EQUIPMENT - 8.5%
ELECTRICAL EQUIPMENT - 4.6%
Emerson Electric Co. 21,600 1,189,350
General Electric Co. 96,400 6,302,150
Harris Corp. 3,200 268,800
Westinghouse Electric Corp. 20,500 474,063
8,234,363
INDUSTRIAL MACHINERY & EQUIPMENT - 3.7%
Illinois Tool Works, Inc. 21,600 1,078,650
Ingersoll-Rand Co. 10,000 617,500
Stanley Works 22,700 908,000
Tyco International Ltd. 57,400 3,992,888
6,597,038
POLLUTION CONTROL - 0.2%
Waste Management, Inc. 12,000 385,500
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 15,216,901
MEDIA & LEISURE - 4.6%
BROADCASTING - 1.1%
Evergreen Media Corp. Class A (a) 20,400 910,350
Time Warner, Inc. 20,800 1,003,600
1,913,950
ENTERTAINMENT - 0.6%
Disney (Walt) Co. 12,600 1,011,150
SHARES VALUE (NOTE 1)
LEISURE DURABLES & TOYS - 0.5%
Mattel, Inc. 27,100 $ 918,013
LODGING & GAMING - 0.3%
Host Marriott Corp. (a) 31,200 555,750
PUBLISHING - 2.1%
Cognizant Corp. 15,400 623,700
Harcourt General, Inc. 9,200 438,150
McGraw-Hill, Inc. 12,500 735,156
Scholastic Corp. (a) 6,900 241,500
Times Mirror Co. Class A 27,900 1,541,475
World Color Press, Inc. (a) 7,500 178,125
3,758,106
TOTAL MEDIA & LEISURE 8,156,969
NONDURABLES - 9.0%
BEVERAGES - 0.7%
PepsiCo, Inc. 31,600 1,186,975
FOODS - 1.6%
Campbell Soup Co. 42,500 2,125,000
Heinz (H.J.) Co. 8,700 401,288
Hershey Foods Corp. 6,800 376,125
2,902,413
HOUSEHOLD PRODUCTS - 4.2%
Avon Products, Inc. 19,400 1,368,913
Clorox Co. 6,800 897,600
Colgate-Palmolive Co. 1,300 84,825
Procter & Gamble Co. 12,200 1,723,250
Rubbermaid, Inc. 9,800 291,550
Unilever PLC Ord. 30,900 885,526
Unilever NV ADR 10,900 2,333,281
7,584,945
TOBACCO - 2.5%
Philip Morris Companies, Inc. 98,500 4,370,938
TOTAL NONDURABLES 16,045,271
PRECIOUS METALS - 0.2%
Getchell Gold Corp. (a) 12,100 426,525
RETAIL & WHOLESALE - 9.4%
APPAREL STORES - 1.4%
Gap, Inc. 29,900 1,162,363
Payless ShoeSource, Inc. (a) 24,200 1,323,438
2,485,801
DRUG STORES - 1.5%
CVS Corp. 37,977 1,946,321
Walgreen Co. 14,500 777,563
2,723,884
GENERAL MERCHANDISE STORES - 5.2%
Coles Myer Ltd. 71,500 371,324
Consolidated Stores Corp. (a) 89,975 3,126,631
Dayton Hudson Corp. 20,100 1,069,069
Federated Department Stores, Inc. (a) 71,400 2,481,150
Sears, Roebuck & Co. 21,100 1,134,125
Wal-Mart Stores, Inc. 30,900 1,044,806
9,227,105
GROCERY STORES - 0.7%
American Stores Co. 10,500 518,438
Asda Group PLC 177,400 366,194
Ahold NV 3,600 303,528
1,188,160
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
RETAIL & WHOLESALE, MISCELLANEOUS - 0.6%
Home Depot, Inc. (The) 16,300 $ 1,123,681
TOTAL RETAIL & WHOLESALE 16,748,631
SERVICES - 3.6%
ADVERTISING - 1.8%
Interpublic Group of Companies, Inc. 12,500 766,406
Omnicom Group, Inc. 28,600 1,762,475
Outdoor Systems, Inc. (a) 4,800 183,600
WPP Group PLC 127,000 519,028
3,231,509
LEASING & RENTAL - 0.3%
Hanover Compressor Co. 100 1,950
Republic Industries, Inc. (a) 5,600 139,300
Ryder Systems, Inc. 12,200 402,600
543,850
PRINTING - 0.3%
Donnelley (R.R.) & Sons Co. 15,900 582,338
SERVICES - 1.2%
ADT Ltd. (a) 19,800 653,400
Ecolab, Inc. 14,300 682,825
National Service Industries, Inc. 6,300 306,731
Service Corp. International 14,818 487,142
2,130,098
TOTAL SERVICES 6,487,795
TECHNOLOGY - 7.4%
COMMUNICATIONS EQUIPMENT - 0.6%
Alcatel Alsthom Compagnie Generale
d'Electricite SA sponsored ADR 2,400 60,600
Alcatel Alsthom Compagnie Generale
d'Electricite SA 6,600 826,094
Andrew Corp. (a) 5,100 143,438
1,030,132
COMPUTER SERVICES & SOFTWARE - 1.7%
Adobe Systems, Inc. 2,500 87,656
Automatic Data Processing, Inc. 8,500 399,500
CUC International, Inc. (a) 15,600 402,675
CompUSA, Inc. (a) 22,300 479,450
Microsoft Corp. (a) 9,600 1,213,200
Oracle Systems Corp. (a) 9,700 488,638
3,071,119
COMPUTERS & OFFICE EQUIPMENT - 3.8%
Compaq Computer Corp. (a) 14,600 1,449,050
Diebold, Inc. 12,550 489,450
International Business Machines Corp. 28,100 2,534,269
Pitney Bowes, Inc. 18,700 1,299,650
Xerox Corp. 13,600 1,072,700
6,845,119
ELECTRONICS - 1.3%
Intel Corp. 11,500 1,630,844
Texas Instruments, Inc. 8,500 714,531
2,345,375
TOTAL TECHNOLOGY 13,291,745
UTILITIES - 0.7%
ELECTRIC UTILITY - 0.3%
Edison International 22,000 547,250
SHARES VALUE (NOTE 1)
TELEPHONE SERVICES - 0.4%
WorldCom, Inc. (a) 20,200 $ 646,400
TOTAL UTILITIES 1,193,650
TOTAL COMMON STOCKS
(Cost $151,597,143) 167,217,856
CONVERTIBLE PREFERRED STOCKS - 1.0%
CONSTRUCTION & REAL ESTATE - 0.2%
REAL ESTATE INVESTMENT TRUSTS - 0.2%
Vornado Realty Trust $3.25 Series A 5,300 286,863
DURABLES - 0.1%
AUTOS, TIRES, & ACCESSORIES - 0.1%
Republic Industries, Inc. $1.55 8,600 210,700
ENERGY - 0.3%
OIL & GAS - 0.3%
Tosco Financing Trust $2.875 (b) 8,200 462,275
HEALTH - 0.3%
MEDICAL EQUIPMENT & SUPPLIES - 0.3%
McKesson Financing Trust $2.50 (b) 9,400 571,050
MEDIA & LEISURE - 0.1%
LODGING & GAMING - 0.1%
Host Marriott Financial Trust
$3.375 (b) 4,800 277,800
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $1,729,992) 1,808,688
CONVERTIBLE BONDS - 0.8%
MOODY'S PRINCIPAL
RATINGS (C) AMOUNT
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
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JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in securities, at value (including repurchase agreements of $8,615,000) (cost $163,231,952) - See $ 178,972,374
accompanying schedule
Cash 21,799
Receivable for investments sold 505,400
Receivable for fund shares sold 841,663
Dividends receivable 160,697
Interest receivable 14,678
TOTAL ASSETS 180,516,611
LIABILITIES
Payable for investments purchased $ 1,047,870
Payable for fund shares redeemed 80
Accrued management fee 68,520
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 investment income 592,329
Accumulated undistributed net realized gain (loss) on investments and foreign currency transactions (331,075
)
Net unrealized appreciation (depreciation) on investments 15,740,418
and assets and liabilities in
foreign currencies
NET ASSETS, for 15,613,501 $ 179,363,883
shares outstanding
NET ASSET VALUE, offering price $11.49
and redemption price per share ($179,363,883 (divided by) 15,613,501 shares)
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STATEMENT OF OPERATIONS
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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 expenses 34,705
Non-interested trustees' compensation 131
Custodian fees and expenses 22,607
Audit 11,519
Legal 16
Total expenses before reductions 320,828
Expense reductions (209 320,619
)
NET INVESTMENT INCOME 592,176
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Investment securities (330,979
)
Foreign currency transactions (96 (331,075
) )
Change in net unrealized appreciation (depreciation) on:
Investment securities 15,750,754
Assets and liabilities in (4 15,750,750
foreign currencies )
NET GAIN (LOSS) 15,419,675
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 16,011,851
OTHER INFORMATION $ 209
Expense reductions
Custodian credits
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STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS DECEMBER 31,
ENDED 1996
JUNE 30, 1997 (COMMENCEMENT
(UNAUDITED) OF OPERATIONS)
<TABLE>
<CAPTION>
<S> <C> <C>
Operations $ 592,176 $ 153
Net investment income
Net realized gain (loss) (331,075) -
Change in net unrealized appreciation (depreciation) 15,750,750 (10,332
)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 16,011,851 (10,179
)
Share transactions 176,559,612 1,000,010
Net proceeds from sales of shares
Cost of shares redeemed (14,197,411) -
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 162,362,201 1,000,010
TOTAL INCREASE (DECREASE) IN NET ASSETS 178,374,052 989,831
NET ASSETS
Beginning of period 989,831 -
End of period (including undistributed net investment income of $592,329 and $153, respectively) $ 179,363,883 $ 989,831
OTHER INFORMATION
Shares
Sold 16,857,064 100,001
Redeemed (1,343,564) -
Net increase (decrease) 15,513,500 100,001
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED) (COMMENCEMENT
OF OPERATIONS)
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 9.90 $ 10.00
Income from Investment Operations
Net investment income .07 D .00
Net realized and unrealized gain (loss) 1.52 (.10)
Total from investment operations 1.59 (.10)
Net asset value, end of period $ 11.49 $ 9.90
TOTAL RETURN B, C 16.06% (1.00)%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 179,364 $ 990
Ratio of expenses to average net assets .75% A 1.00% A,
E
Ratio of net investment income to average net assets 1.38% A 3.89% A
Portfolio turnover rate 86% A 0% A
Average commission rate F $ .0280 $ .0120
<TABLE>
<CAPTION>
<S> <C>
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED
AND DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT.
INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS).
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
E FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD
HAVE BEEN HIGHER.
F A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER
SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS
AMOUNT MAY VARY FROM PERIOD
TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED
IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE
STRUCTURES MAY DIFFER.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
For the period ended June 30, 1997 (Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES.
Growth and Income Portfolio (the fund) is a fund of Variable Insurance
Products Fund III (the trust) and is authorized to issue an unlimited
number of shares. The trust is registered under the Investment Company Act
of 1940, as amended (the 1940 Act), as an open-end management investment
company organized as a Massachusetts business trust. Shares of the fund may
only be purchased by insurance companies for the purpose of funding
variable annuity or variable life insurance contracts. The financial
statements have been prepared in conformity with generally accepted
accounting principles which permit management to make certain estimates and
assumptions at the date of the financial statements. The following
summarizes the significant accounting policies of the fund:
SECURITY VALUATION. Securities for which exchange quotations are readily
available are valued at the last sale price, or if no sale price, at the
closing bid price. Securities (including restricted securities) for which
exchange quotations are not readily available (and in certain cases debt
securities which trade on an exchange) are valued primarily using
dealer-supplied valuations or at their fair value as determined in good
faith under consistently applied procedures under the general supervision
of the Board of Trustees. Short-term securities with remaining maturities
of sixty days or less for which quotations are not readily available are
valued at amortized cost or original cost plus accrued interest, both of
which approximate current value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. 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. As a qualified regulated investment company under Subchapter
M of the Internal Revenue Code, the fund is not subject to income taxes to
the extent that it distributes substantially all of its taxable income for
its fiscal year. The schedule of investments includes information regarding
income taxes under the caption "Income Tax Information."
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend date,
except certain dividends from foreign securities where the ex-dividend date
may have passed, are recorded as soon as the fund is informed of the
ex-dividend date. Non-cash dividends included in dividend income, if any,
are recorded at the fair market value of the securities received. Interest
income is accrued as earned. Investment income is recorded net of foreign
taxes withheld where recovery of such taxes is uncertain.
EXPENSES. Most expenses of the trust can be directly attributed to a fund.
Expenses which cannot be directly attributed are apportioned between the
funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the
ex-dividend date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles.
SECURITY TRANSACTIONS. Security transactions are accounted for as of trade
date. Gains and losses on securities sold are determined on the basis of
identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency
contracts to facilitate transactions in foreign-denominated securities.
Losses may arise from changes in the value of the foreign currency or if
the counterparties do not perform under the contracts' terms. The U.S.
dollar value of foreign currency contracts is determined using contractual
currency exchange rates established at the time of each trade. The cost of
the foreign currency contracts is included in the cost basis of the
associated investment.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission(the SEC), the fund, along with other
affiliated entities of Fidelity Management & Research Company (FMR), may
transfer uninvested cash balances into one or more joint trading accounts.
These balances are invested in one or more repurchase agreements for U.S.
Treasury or Federal Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are marked-to-market
daily and maintained at a value at least equal to the principal amount of
the repurchase agreement (including accrued interest). FMR, the fund's
investment adviser, is responsible for determining that the value of the
underlying securities remains in accordance with the market value
requirements stated above.
2. OPERATING POLICIES - CONTINUED
RESTRICTED SECURITIES. The fund is permitted to invest in securities that
are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from registration
or to the public if the securities are registered. Disposal of these
securities may involve time-consuming negotiations and expense, and prompt
sale at an acceptable price may be difficult. At the end of the period, the
fund had no investments in restricted securities (excluding 144A issues).
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities), is included under the caption "Other Information"
at the end of each applicable fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a monthly
fee that is calculated on the basis of a group fee rate plus a fixed
individual fund fee rate applied to the average net assets of the fund. The
group fee rate is the weighted average of a series of rates and is based on
the monthly average net assets of all the mutual funds advised by FMR. The
rates ranged from .2500% to .5200% for the period. The annual individual
fund fee rate is .20%. In the event that these rates were lower than the
contractual rates in effect during the period, FMR voluntarily implemented
the above rates, as they resulted in the same or a lower management fee.
For the period, the management fee was equivalent to an annualized rate of
.50% of average net assets.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations Company,
Inc. (FIIOC), an affiliate of FMR, is the fund's transfer, dividend
disbursing and shareholder servicing agent. FIIOC receives account fees and
asset-based fees that vary according to account size and type of account.
FIIOC pays a portion of the expenses related to the typesetting, printing,
and mailing of shareholder reports, except proxy statements. For the
period, the transfer agent fees were equivalent to an annualized rate of
.08% of average net assets.
ACCOUNTING FEES. Fidelity Service Company, Inc. (FSC), an affiliate of FMR,
maintains the fund's accounting records. The fee is based on the level of
average net assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of each applicable fund's schedule of
investments.
5. EXPENSE REDUCTIONS.
The fund has entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances were used to reduce a
portion of the fund's expenses. For the period, the reduction under these
arrangements is shown under the caption "Other Information" on the fund's
Statement of Operations.
6. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were the record owners of
approximately 90% of the outstanding shares of the fund.
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Management & Research (U.K.) Inc.,
London, England
Fidelity Management & Research (Far East) Inc.,
Tokyo, Japan
OFFICERS
Edward C. Johnson 3d, PRESIDENT
Robert C. Pozen, SENIOR VICE PRESIDENT
William J. Hayes, VICE PRESIDENT
Richard A. Spillane, Jr., VICE PRESIDENT
Beth Terrana, VICE PRESIDENT
Arthur S. Loring, SECRETARY
Richard A. Silver, TREASURER
Robert H. Morrison, MANAGER, SECURITY TRANSACTIONS
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
Ralph F. Cox *
Phyllis Burke Davis *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Marvin L. Mann *
William O. McCoy *
Gerald C. McDonough *
Robert C. Pozen
Thomas R. Williams *
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
* INDEPENDENT TRUSTEES
TRANSFER AND SHAREHOLDER SERVICING AGENT
Fidelity Investments Institutional Operations Co., Inc.
Boston, MA
CUSTODIAN
The Chase Manhattan Bank
New York, NY
