(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND III: BALANCED PORTFOLIO
ANNUAL REPORT
DECEMBER 31, 1997
CONTENTS
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MARKET ENVIRONMENT 3 A REVIEW OF WHAT HAPPENED IN WORLD MARKETS
DURING THE LAST YEAR.
PERFORMANCE 4 HOW THE FUND HAS DONE OVER TIME.
FUND TALK 5 THE MANAGERS' REVIEW OF FUND PERFORMANCE, STRATEGY
AND OUTLOOK.
INVESTMENTS 6 A COMPLETE LIST OF THE FUND'S INVESTMENTS WITH THEIR
MARKET VALUES.
FINANCIAL STATEMENTS 16 STATEMENTS OF ASSETS AND LIABILITIES, OPERATIONS, AND
CHANGES IN NET ASSETS, AS WELL AS FINANCIAL HIGHLIGHTS.
NOTES 19 NOTES TO THE FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT ACCOUNTANTS 22 THE AUDITORS' OPINION.
DISTRIBUTIONS 23
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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.
MARKET ENVIRONMENT
Despite an infectious currency crisis that erupted in Southeast Asia
in October, most stock and bond markets around the globe posted
another year of positive returns. Sustained corporate earnings growth,
low interest-rate levels and an overall lack of inflationary concern
provided a favorable investing backdrop. The U.S. and European stock
markets continued to perform well, with U.S. stocks posting their
third consecutive year of strong results. The problems in Southeast
Asia, though, reverberated throughout the world, with investors
becoming increasingly concerned toward the end of the period regarding
the sustainability of corporate earnings. The U.S. bond market enjoyed
a nice run in 1997.
U.S. STOCK MARKETS
The U.S. stock market went through many phases during 1997. Entering
the year, the market was still being dominated by an extremely narrow
contingent of well-known, large-capitalization stocks. In fact, much
of the Standard & Poor's 500 Index 12-month gain of 33.36% came from
these bigger stocks. Stock prices soared to historic highs and the Dow
Jones Industrial Average hurtled past the 8000-point mark in August.
But, investors became increasingly concerned about the market's
ability to sustain its lofty performance levels. In mid-August,
several large multinationals - companies that derive a significant
portion of their revenues from overseas operations - justified these
concerns by announcing earnings disappointments. These announcements
triggered a slowdown among larger-cap stocks, while smaller- and
medium-sized stocks gained momentum. From August through December, the
S&P MidCap 400 Index - a measure of mid-sized stock performance -
returned 6.50%, while the S&P 500 returned 2.43%.
In late October, economic turmoil shook Southeast Asia. Since this
region accounts for a significant portion of world economic growth,
shock tremors rippled through developed markets such as those in the
U.S. and Europe, as well as emerging-market nations in Eastern Europe
and Latin America. In New York, the uncertainty was punctuated by a
554-point drop in the Dow one day and a 337-point recovery the next.
In terms of industry groups, moderate economic growth coupled with
nonexistent inflation translated into near nirvana for the finance
sector. Banks and brokerages demonstrated their ability to sustain
impressive earnings growth as borrowing demand remained high and cash
flows were healthy. Consolidation in the form of merger and
acquisition activity also brought positive results to the group. Due
to strong oil exploration and production demand, the energy service
sector also fared nicely. Demand for offshore drilling, in particular,
was very high and the industry enjoyed favorable pricing trends.
Technology stocks were a mixed bag in 1997, with the group
experiencing a decent rally through the first half of the year. The
second-half Asian crisis, however, proved particularly harmful to many
technology companies with Asian business ties. With Asia accounting
for a considerable amount of the world's technology production, the
region's economic troubles were far-reaching. Going into 1998, many
money managers - sensing an economic slowdown due to Asia - were
concentrating on stocks that were less cyclical, or economically
sensitive.
FOREIGN STOCK MARKETS
Stock markets around the world reacted differently in 1997. Europe -
bolstered by continued economic reform and a convergence in monetary
policy - posted strong overall returns as Finland, Italy, Spain,
Switzerland and the United Kingdom led the way. The Morgan Stanley
Capital International (MSCI) Europe Index returned 24.17% during the
period. In contrast, the MSCI EAFE Index, which measures the
performance of Europe, Australasia and the Far East, reflected the
problems brought on by the Asian crisis. The MSCI EAFE returned 2.01%
for the period. Japan and Hong Kong were two noteworthy laggards, as
economic recovery in Japan trudged along and Hong Kong felt the brunt
of Asia's woes. Emerging market equity performance was solid through
the first half of the period, but trailed off some in the second.
Uncertainty in Asia and South Korea made some investors question the
well-being of other pivotal emerging-market nations such as Russia,
which proved particularly vulnerable to the Asian dilemma.
U.S. BOND MARKETS
Bonds benefited from low interest rates - which in turn drove prices
upward - as well as a distinct lack of inflation indicators. The
Lehman Brothers Aggregate Bond Index - a measure of the U.S. taxable
bond market - returned 9.65% during the year. The Federal Reserve
Board's raising of a key short-term interest rate in March proved to
be one of the few obstacles to the bond market. Bonds rallied from
April through mid-September, buoyed in large part by encouraging
economic data and the Fed's reluctance to raise rates further.
Additionally, while the Asian crisis brought some equity markets to
their knees, many bond markets welcomed wary stock investors in search
of lower volatility. Interest rates reached attractive levels, with
the yield on the 30-year Treasury bond going below the 6% mark in
November. Corporate bonds performed reasonably well due to continued
economic growth and high demand for yield. Mortgage-backed bonds also
fared relatively well, in spite of increased refinancing activity due
to the lower rates.
FOREIGN BOND MARKETS
While low inflation and steady growth boosted the U.S. bond market,
results were varied on the international front. The Salomon Brothers
World Government Bond Index - a measure of government bond market
performance in developed nations - returned 0.23% for the 12 months
that ended December 31, 1997. In Europe, countries continued to make
progress in the drive toward meeting European Monetary Union
requirements. But a strong dollar relative to many currencies eroded
gains for U.S.-based investors. Japan - one of the more significant
components of the Salomon Brothers index - continued to struggle as
economic reform continued to develop slowly. The often-volatile world
of emerging-market debt also had mixed results, as Asian concerns
trickled into these regions. Brazil and Argentina performed well,
while Ecuador stumbled due to political uncertainty. Nevertheless, The
J.P. Morgan Emerging Markets Bond Index still managed to return 16.15%
during the period.
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
DECEMBER 31, 1997 YEAR FUND
VIP III: BALANCED - "INITIAL CLASS" 22.18% 15.28%
S&P 500 (REGISTERED TRADEMARK) 33.36% 31.22%
LB AGGREGATE BOND 9.65% 10.49%
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.
If Fidelity had not reimbursed certain fund expenses, the life of fund
total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
UNDERSTANDING PERFORMANCE
HOW A FUND DID YESTERDAY IS NO GUARANTEE OF HOW IT
WILL DO TOMORROW. THE STOCK MARKET, FOR EXAMPLE, HAS A
HISTORY OF LONG-TERM GROWTH AND SHORT-TERM VOLATILITY. IN
TURN, THE SHARE PRICE AND RETURN OF A FUND THAT INVESTS
IN STOCKS WILL VARY. THAT MEANS IF YOU SELL YOUR SHARES
DURING A MARKET DOWNTURN, YOU MIGHT LOSE MONEY.
BUT IF YOU CAN RIDE OUT THE MARKET'S UPS AND DOWNS,
YOU MAY HAVE A GAIN.
3
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19971231 19980121 142220 S00000000000001
VIP III Balanced S&P 500
LB Aggregate Bond
00616 SP001
LB001
1995/01/03 10000.00 10000.00
10000.00
1995/01/31 9990.00 10261.28
10213.55
1995/02/28 10190.00 10661.16
10456.38
1995/03/31 10260.00 10975.77
10520.54
1995/04/30 10390.00 11299.00
10667.49
1995/05/31 10610.00 11750.63
11080.29
1995/06/30 10740.00 12023.59
11161.53
1995/07/31 10880.00 12422.30
11136.60
1995/08/31 10920.00 12453.48
11271.01
1995/09/30 11020.00 12979.01
11380.66
1995/10/31 10890.00 12932.68
11528.66
1995/11/30 11210.00 13500.42
11701.42
1995/12/31 11391.59 13760.44
11865.63
1996/01/31 11473.17 14228.85
11944.43
1996/02/29 11319.47 14360.75
11736.80
1996/03/31 11227.28 14499.04
11655.22
1996/04/30 11258.01 14712.76
11589.67
1996/05/31 11380.93 15092.20
11566.14
1996/06/30 11452.64 15149.70
11721.46
1996/07/31 11227.28 14480.39
11753.54
1996/08/31 11298.98 14785.78
11733.84
1996/09/30 11780.44 15617.92
11938.32
1996/10/31 12098.00 16048.66
12202.78
1996/11/30 12733.12 17261.78
12411.79
1996/12/31 12528.25 16919.83
12296.39
1997/01/31 12927.76 17976.98
12334.04
1997/02/28 13144.66 18117.92
12364.72
1997/03/31 12777.20 17373.45
12227.70
1997/04/30 13260.15 18410.65
12410.75
1997/05/31 13785.10 19531.49
12528.07
1997/06/30 14289.05 20406.50
12676.77
1997/07/31 15086.97 22030.24
13018.62
1997/08/31 14383.54 20796.11
12907.57
1997/09/30 14960.98 21935.11
13097.94
1997/10/31 14646.01 21202.48
13287.95
1997/11/30 15002.98 22183.94
13349.14
1997/12/31 15317.94 22564.84
13483.54
IMATRL PRASUN SHR__CHT 19971231 19980121 142222 R00000000000039
Let's say hypothetically that $10,000 was invested in VIP III:
Balanced Portfolio on January 3, 1995, when the fund started. As the
chart shows, by December 31, 1997, the value of the investment would
have grown to $15,307 - a 53.07% 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 $22,565 - a 125.65% increase. If $10,000
was put in the bond index, it would have grown to $13,484 - a 34.84%
increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
GENERAL ELECTRIC CO. 2.8
CITICORP 2.7
PHILIP MORRIS COMPANIES, INC. 2.7
AMERICAN HOME PRODUCTS CORP. 2.3
BANKAMERICA CORP. 2.3
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
FINANCE 23.8
NONDURABLES 8.7
HEALTH 8.3
INDUSTRIAL MACHINERY & EQUIPMENT 5.5
ENERGY 5.5
ASSET ALLOCATION AS OF DECEMBER 31, 1997*
ROW: 1, COL: 1, VALUE: 11.4
ROW: 1, COL: 2, VALUE: 30.7
ROW: 1, COL: 3, VALUE: 57.9
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 57.9%
BONDS 30.5%
SHORT-TERM INVESTMENTS 11.6%
FOREIGN INVESTMENTS 7.1%
*
% OF FUND'S INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
FUND TALK: THE MANAGERS' OVERVIEW
NOTE TO SHAREHOLDERS: The following is an interview with Bettina
Doulton, who managed Balanced Portfolio during the period covered by
this report, with additional comments from John Avery, who became
manager of Balanced Portfolio on January 1, 1998.
Q. HOW DID THE FUND PERFORM COMPARED TO ITS BENCHMARK, BETTINA?
B.D. Given the structure of the fund - a blend of equities and
fixed-income investments - the fund's performance typically falls
between its two benchmark indices, the Standard & Poor's 500 Index and
the Lehman Brothers Aggregate Bond Index. For the 12 months that ended
December 31, 1997, that was indeed the case. The fund trailed the S&P
500, which returned 33.36% during the period, but topped the 9.65%
return of the Lehman Brothers index.
Q. WHAT PRIMARY FACTORS CONTRIBUTED TO PERFORMANCE?
B.D. Stock selection is typically the main performance catalyst, and
this period was no different. Within the equity portion of the fund,
several of the top 25 holdings - including General Electric and
American Express - performed well. On the other hand, disappointments
usually sprout up for two reasons. First, and perhaps most obvious, a
stock can just perform poorly. Waste Management is an example. The
company's new CEO resigned in the midst of an important reorganization
thrust, and the company's accounting practices were scrutinized. As a
result, the stock was a major detractor. Second, the fund can be
negatively affected by not owning a particular stock or by being
underweighted - relative to an index - in an industry group that
performs well. For instance, the fund's limited technology exposure
and an underweighting in telephone and electric utility stocks
relative to the S&P 500 hampered returns. Since the fund considers
yield as part of its objective, technology stocks are not always a
good fit because they focus on growth as a rule and not dividends.
With utilities, ongoing deregulation in the industry and what I felt
were lackluster business prospects concerned me. Unfortunately, as
investors became concerned about global markets, they flocked back to
these "safe havens."
Q. THE GLOBAL VOLATILITY YOU ALLUDED TO CAME ON THE HEELS OF A MAJOR
CURRENCY CRISIS IN SOUTHEAST ASIA. HOW WAS THE FUND AFFECTED AND WHAT
STRATEGIES DID YOU PURSUE?
B.D. I'd say the impact was mixed. The fund owned some pharmaceutical
and multinational companies that performed well through this turmoil,
but also had some individual positions with direct exposure to Asia.
For example, engineering and construction company Fluor was hit
particularly hard. While the Asian market turmoil peaked in late
October, initial signs of unraveling were evident back in June.
Southeast Asia suffered as economies proved unable to support the
region's overbuilt capital base. As a result, currencies weakened
relative to the dollar, causing investors to become concerned that the
stronger dollar would cut into the profits of U.S. multinational
companies. As investors became increasingly concerned about this
volatility later in the period, many began to rotate back to the
large-cap, more reliable stocks. Due to concerns that global economic
growth would be dampened by the Asian crisis, I began to reduce the
fund's economically sensitive positions such as industrials,
chemicals, and energy-related stocks.
Q. HOW WAS THE BOND PORTION OF THE FUND STRUCTURED?
B.D. Short-term corporate bonds were the main focus during the period,
particularly those with less sensitivity to economic swings.
Shorter-term bonds - those in the two- to four-year range - offered
good yield advantages relative to Treasuries. When problems in Asia
took hold in October, Treasuries regained momentum. The fund was also
underweighted in mortgage-backed bonds, which was a prudent strategy.
Many mortgages are now "in the money," or are refinanceable because of
lower rates. This increases prepayment risk - in which the bondholder
prepays principal - and is a negative trend for mortgage-backed bonds.
Q. TURNING TO YOU, JOHN, WHAT'S YOUR OUTLOOK FOR THE COMING MONTHS?
J.A. Bettina and I have very similar investment approaches, so the
transition should be relatively seamless. I'd like to keep the
allocation balance of the fund roughly the same - 60% in equities, 30%
in high-grade bonds and high-yield issues and the remainder in cash.
In terms of the Asian debacle, it's obviously a concern. I don't think
companies have had a chance to assess the impact yet, but I'll be
keeping a close eye on the situation.
FUND FACTS
GOAL: to provide income and growth of capital by
investing in a diversified portfolio of stocks and
bonds
START DATE: January 3, 1995
SIZE: as of December 31, 1997, more than $214
million
MANAGER: John Avery, since January 1998; joined
Fidelity in 1995
3
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
INVESTMENTS DECEMBER 31, 1997
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 57.0%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 2.8%
AEROSPACE & DEFENSE - 2.1%
AlliedSignal, Inc. 45,000 $ 1,752,176
Lockheed Martin Corp. 14,700 1,447,950
Sundstrand Corp. 16,900 851,338
Textron, Inc. 3,400 212,500
United Technologies Corp. 7,300 531,531
4,795,495
DEFENSE ELECTRONICS - 0.5%
Raytheon Company Class B 21,800 1,100,900
SHIP BUILDING & REPAIR - 0.2%
General Dynamics Corp. 5,800 501,338
TOTAL AEROSPACE & DEFENSE 6,397,733
BASIC INDUSTRIES - 1.1%
CHEMICALS & PLASTICS - 0.7%
Air Products & Chemicals, Inc. 8,100 666,225
Monsanto Co. 14,600 613,200
Nalco Chemical Co. 300 11,869
Praxair, Inc. 8,300 373,500
1,664,794
PAPER & FOREST PRODUCTS - 0.4%
Kimberly-Clark Corp. 15,500 764,344
TOTAL BASIC INDUSTRIES 2,429,138
CONSTRUCTION & REAL ESTATE - 0.2%
BUILDING MATERIALS - 0.2%
Masco Corp. 8,600 437,525
DURABLES - 0.5%
AUTOS, TIRES, & ACCESSORIES - 0.0%
Scania AB Class B 100 2,256
CONSUMER DURABLES - 0.5%
Minnesota Mining & Manufacturing Co. 13,400 1,099,638
TOTAL DURABLES 1,101,894
ENERGY - 5.3%
ENERGY SERVICES - 0.2%
Halliburton Co. 7,000 363,563
OIL & GAS - 5.1%
Amoco Corp. 6,700 570,338
British Petroleum PLC:
Ord. 90,479 1,192,513
ADR 22,103 1,761,333
Chevron Corp. 11,200 862,400
Mobil Corp. 6,600 476,438
Royal Dutch Petroleum Co. Ord. 2,000 109,845
Royal Dutch Petroleum Co. 53,000 2,871,938
Texaco, Inc. 48,600 2,642,625
Total SA:
Class B 1,300 141,363
sponsored ADR 2,200 122,100
USX-Marathon Group 28,500 961,875
11,712,768
TOTAL ENERGY 12,076,331
FINANCE - 17.3%
BANKS - 8.9%
Banc One Corp. 22,000 1,194,875
Bank of New York Co., Inc. 13,600 786,250
BankAmerica Corp. 70,400 5,139,200
SHARES VALUE (NOTE 1)
Chase Manhattan Corp. 26,200 $ 2,868,900
Citicorp 49,300 6,233,369
National City Corp. 2,100 138,075
NationsBank Corp. 32,800 1,994,650
U.S. Bancorp 7,800 873,113
Wells Fargo & Co. 3,500 1,188,031
20,416,463
CREDIT & OTHER FINANCE - 2.7%
American Express Co. 48,700 4,346,475
Beneficial Corp. 4,600 382,375
First Chicago NBD Corp. 14,000 1,169,000
Household International, Inc. 2,300 293,394
Transamerica Corp. 900 95,850
6,287,094
FEDERAL SPONSORED CREDIT - 2.6%
Freddie Mac 93,200 3,908,575
Fannie Mae 35,600 2,031,425
5,940,000
INSURANCE - 2.6%
Allstate Corp. 23,000 2,090,125
American International Group, Inc. 1,400 152,250
Hartford Financial Services Group, Inc. 14,100 1,319,231
Progressive Corp. 100 11,988
St. Paul Companies, Inc. (The) 4,500 369,281
Travelers Group, Inc. (The) 36,000 1,939,500
5,882,375
SAVINGS & LOANS - 0.5%
Washington Mutual, Inc. 16,580 1,058,011
TOTAL FINANCE 39,583,943
HEALTH - 8.2%
DRUGS & PHARMACEUTICALS - 7.1%
American Home Products Corp. 68,900 5,270,850
Bristol-Myers Squibb Co. 51,200 4,844,800
Glaxo PLC sponsored ADR 2,400 114,900
Merck & Co., Inc. 13,300 1,413,125
Pfizer, Inc. 7,800 581,588
Schering-Plough Corp. 42,600 2,646,525
SmithKline Beecham PLC ADR 26,900 1,383,669
16,255,457
MEDICAL EQUIPMENT & SUPPLIES - 1.1%
Allegiance Corp. 30,000 1,063,125
Baxter International, Inc. 28,800 1,452,600
2,515,725
TOTAL HEALTH 18,771,182
HOLDING COMPANIES - 0.1%
CINergy Corp. 2,900 111,106
INDUSTRIAL MACHINERY & EQUIPMENT - 4.9%
ELECTRICAL EQUIPMENT - 3.0%
Emerson Electric Co. 1,200 67,725
General Electric Co. 85,800 6,295,575
Honeywell, Inc. 8,000 548,000
6,911,300
INDUSTRIAL MACHINERY & EQUIPMENT - 1.1%
Cooper Industries, Inc. 10,698 524,202
Tyco International Ltd. 43,012 1,938,228
2,462,430
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED
POLLUTION CONTROL - 0.8%
Browning-Ferris Industries, Inc. 43,800 $ 1,620,600
Waste Management, Inc. 7,300 200,750
1,821,350
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 11,195,080
MEDIA & LEISURE - 0.4%
BROADCASTING - 0.1%
CS Wireless Systems, Inc. (a)(c) 8 -
Orion Network Systems, Inc. warrants (a):
1/15/07 50 650
1/15/07 290 3,190
Teletrac Holdings, Inc.
warrants 8/1/07 (a) 40 2,200
Time Warner, Inc. 3,300 204,600
UIH Australia/Pacific, Inc.
warrants 5/15/06 (a) 150 1,800
212,440
ENTERTAINMENT - 0.1%
Cedar Fair LP (depositary unit) 10,000 258,750
PUBLISHING - 0.2%
McGraw-Hill, Inc. 5,300 392,200
TOTAL MEDIA & LEISURE 863,390
NONDURABLES - 8.3%
BEVERAGES - 0.5%
PepsiCo, Inc. 30,000 1,093,125
FOODS - 1.7%
Flowers Industries, Inc. 14,150 290,959
Heinz (H.J.) Co. 24,200 1,229,663
Nabisco Holdings Corp. Class A 18,100 876,719
Quaker Oats Co. 400 21,100
Sara Lee Corp. 27,500 1,548,594
3,967,035
HOUSEHOLD PRODUCTS - 2.6%
Procter & Gamble Co. 26,800 2,138,975
Unilever:
PLC Ord. 53,600 460,074
NV Ord. 8,000 493,462
NV ADR 47,500 2,965,781
6,058,292
TOBACCO - 3.5%
Philip Morris Companies, Inc. 135,100 6,121,719
RJR Nabisco Holdings Corp. 47,200 1,770,000
7,891,719
TOTAL NONDURABLES 19,010,171
RETAIL & WHOLESALE - 2.4%
DRUG STORES - 0.7%
CVS Corp. 10,500 672,656
Rite Aid Corp. 13,920 816,930
1,489,586
GENERAL MERCHANDISE STORES - 1.5%
Dayton Hudson Corp. 12,000 810,000
Penney (J.C.) Co., Inc. 5,600 337,750
Wal-Mart Stores, Inc. 57,200 2,255,825
3,403,575
GROCERY STORES - 0.2%
American Stores Co. 24,000 493,500
TOTAL RETAIL & WHOLESALE 5,386,661
SHARES VALUE (NOTE 1)
SERVICES - 0.7%
LEASING & RENTAL - 0.1%
Ryder Systems, Inc. 5,900 $ 193,225
PRINTING - 0.6%
Deluxe Corp. 500 17,250
Donnelley (R.R.) & Sons Co. 39,700 1,478,825
1,496,075
TOTAL SERVICES 1,689,300
TECHNOLOGY - 1.8%
COMPUTERS & OFFICE EQUIPMENT - 1.8%
Pitney Bowes, Inc. 27,400 2,464,288
Xerox Corp. 22,600 1,668,163
4,132,451
TRANSPORTATION - 0.2%
RAILROADS - 0.2%
Union Pacific Corp. 8,000 499,500
UTILITIES - 2.8%
CELLULAR - 0.0%
McCaw International Ltd.
warrants 4/15/07 (a)(c) 260 650
Microcell Telecommunications, Inc.
warrants 6/1/06 (a)(c) 520 7,202
7,852
ELECTRIC UTILITY - 0.2%
Allegheny Energy, Inc. 1,400 45,500
CMS Energy Corp. 8,800 387,750
Edison International 5,000 135,938
569,188
GAS - 0.0%
Consolidated Natural Gas Co. 100 6,050
TELEPHONE SERVICES - 2.6%
AT&T Corp. 46,400 2,842,000
ALLTEL Corp. 2,900 119,081
Ameritech Corp. 11,300 909,650
BCE, Inc. 3,000 99,997
Frontier Corp. 3,900 93,844
GTE Corp. 9,300 485,925
Hyperion Telecommunications, Inc.
warrants 4/15/01 (a)(c) 60 3,600
RSL Communications Ltd./RSL
Communications PLC
warrants 11/15/06 (a) 40 3,680
SBC Communications, Inc. 14,700 1,076,775
Sprint Corp. 4,000 234,500
5,869,052
TOTAL UTILITIES 6,452,142
TOTAL COMMON STOCKS
(Cost $107,126,104) 130,137,547
PREFERRED STOCKS - 0.9%
SHARES VALUE (NOTE 1)
CONVERTIBLE PREFERRED STOCKS - 0.4%
DURABLES - 0.0%
AUTOS, TIRES, & ACCESSORIES - 0.0%
Republic Industries, Inc. $1.55 4,000 $ 94,000
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Loral Space & Communications Ltd.,
Series C, $3.00 (c) 4,000 246,500
MEDIA & LEISURE - 0.1%
BROADCASTING - 0.0%
Benedek Communications Corp. 15% (a) 100 12,950
LODGING & GAMING - 0.1%
Host Marriott Financial Trust
$3.375 QUIPS (c) 3,000 179,625
TOTAL MEDIA & LEISURE 192,575
RETAIL & WHOLESALE - 0.2%
APPAREL STORES - 0.2%
TJX Companies, Inc., Series E,
$7.00 1,000 380,000
TOTAL CONVERTIBLE PREFERRED STOCKS 913,075
NONCONVERTIBLE PREFERRED STOCKS - 0.5%
FINANCE - 0.0%
INSURANCE - 0.0%
American Annuity Group Capital
Trust II 8 3/4% 50 54,012
MEDIA & LEISURE - 0.3%
BROADCASTING - 0.3%
Adelphia Communications Corp. $13 300 35,550
American Radio Systems Corp.
11 3/8%, pay-in-kind 855 95,760
Cablevision Systems Corp. pay-in-kind:
11 1/8%, depositary shares 1,625 187,688
Series H, $11.75 283 33,536
Capstar Broadcasting Partners, Inc.
12%, pay-in-kind 106 11,514
Chancellor Media Corp. 12%,
pay-in-kind (c) 310 35,340
Citadel Broadcasting Co. 13 1/4%,
pay-in-kind (c) 639 73,166
Time Warner, Inc., Series M, 10 1/4%,
pay-in-kind 151 169,498
642,052
PUBLISHING - 0.0%
Primedia, Inc.:
Series B, $11.625, pay-in-kind 198 21,137
Series D, $10 600 62,700
83,837
TOTAL MEDIA & LEISURE 725,889
UTILITIES - 0.2%
CELLULAR - 0.1%
Nextel Communications, Inc., Series D,
13%, pay-in-kind 98 111,720
SHARES VALUE (NOTE 1)
TELEPHONE SERVICES - 0.1%
NEXTLINK Communications, Inc. 14%,
pay-in-kind 3,363 $ 210,188
Winstar Communications, Inc.
14 1/2% (a)(c) 100 104,500
314,688
TOTAL UTILITIES 426,408
TOTAL NONCONVERTIBLE PREFERRED STOCKS 1,206,309
TOTAL PREFERRED STOCKS
(Cost $1,722,520) 2,119,384
CORPORATE BONDS - 14.8%
MOODY'S RATINGS PRINCIPAL
(UNAUDITED) (E) AMOUNT
CONVERTIBLE BONDS - 0.4%
INDUSTRIAL MACHINERY & EQUIPMENT - 0.0%
POLLUTION CONTROL - 0.0%
WMX Technologies, Inc.
2%, 1/24/05 Baa2 $ 80,000 68,900
MEDIA & LEISURE - 0.2%
BROADCASTING - 0.2%
Time Warner, Inc. liquid yield
option notes 0%, 6/22/13 Ba1 840,000 429,450
RETAIL & WHOLESALE - 0.1%
GENERAL MERCHANDISE STORES - 0.1%
Federated Department
Stores, Inc. 5%, 10/1/03 Baa3 150,000 201,750
TECHNOLOGY - 0.1%
COMPUTERS & OFFICE EQUIPMENT - 0.1%
Unisys Corp.
8 1/4%, 3/15/06 B3 130,000 275,113
TOTAL CONVERTIBLE BONDS 975,213
NONCONVERTIBLE BONDS - 14.4%
AEROSPACE & DEFENSE - 0.4%
AEROSPACE & DEFENSE - 0.2%
Alliant Techsystems, Inc.
11 3/4%, 3/1/03 B2 13,000 14,284
Argo-Tech Corp.
8 5/8%, 10/1/07 (c) B3 10,000 10,000
Fairchild Corp. 12%, 10/15/01 Caa1 10,000 10,050
Lockheed Martin Corp.
7.20%, 5/1/36 A3 300,000 325,116
359,450
DEFENSE ELECTRONICS - 0.2%
Raytheon Co.
6.45%, 8/15/04 Baa1 500,000 502,455
Tracor, Inc.
8 1/2%, 3/1/07 B1 40,000 40,600
543,055
SHIP BUILDING & REPAIR - 0.0%
Newport News Shipbuilding, Inc.
9 1/4%, 12/1/06 B1 10,000 10,575
TOTAL AEROSPACE & DEFENSE 913,080
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (E) AMOUNT (NOTE 1)
BASIC INDUSTRIES - 0.5%
CHEMICALS & PLASTICS - 0.1%
Atlantis Group, Inc.
11%, 2/15/03 B2 $ 10,000 $ 10,263
Freedom Chemical Co.
10 5/8%, 10/15/06 B3 50,000 55,125
Huntsman Corp. 9 1/2%,
7/1/07 (c) B2 120,000 126,000
Koppers Industries, Inc.
9 7/8%, 12/1/07 (c) B2 30,000 30,863
Sterling Chemicals Holdings, Inc.:
11 3/4%, 8/15/06 B3 60,000 61,200
11 1/4%, 4/1/07 B3 40,000 40,000
323,451
IRON & STEEL - 0.1%
GS Technologies Operating, Inc.
12 1/4%, 10/1/05 B2 20,000 22,350
Republic Engineered Steels, Inc.
9 7/8%, 12/15/01 Caa1 80,000 76,800
WCI Steel, Inc. 10%, 12/1/04 B2 40,000 40,700
139,850
METALS & MINING - 0.0%
Commonwealth Aluminum Corp.
10 3/4%, 10/1/06 B2 40,000 42,300
PAPER & FOREST PRODUCTS - 0.3%
APP Finance II Mauritius Ltd.
12%, 3/15/04 B3 85,000 73,100
Ainsworth Lumber Co. Ltd.
12 1/2%, 7/15/07
pay-in-kind B3 30,000 30,150
American Pad & Paper Co., Inc.
13%, 11/15/05 B3 40,000 42,000
Doman Industries Ltd. yankee:
8 3/4%, 3/15/04 B1 110,000 106,150
9 1/4%, 11/15/07 (c) B1 30,000 29,250
Florida Coast Paper Co.
LLC/Florida Coast Paper
Finance Corp., Series B,
12 3/4%, 6/1/03 Caa1 10,000 10,600
Mail-Well Corp.
10 1/2%, 2/15/04 B 10,000 10,500
Omega Cabinets Ltd.
10 1/2%, 6/15/7 (c) B3 10,000 10,375
Pindo Deli Finance Mauritius Ltd.
10 1/4%, 10/1/02 (c) Ba3 20,000 17,050
Repap New Brusnwick, Inc.
yankee 9 7/8%, 7/15/00 B2 20,000 20,400
SD Warren Co., Series B,
12%, 12/15/04 B1 15,000 16,763
Stone Container Corp.:
12 5/8%, 7/15/98 B2 100,000 102,625
11 7/8%, 12/1/98 B2 30,000 30,975
10 3/4%, 10/1/02 B1 60,000 62,700
Tembec Finance Corp. yankee
9 7/8%, 9/30/05 B1 30,000 30,825
Tjiwi Kimia Mauritius Ltd.
10%, 8/1/04 (c) Ba3 40,000 32,400
625,863
TOTAL BASIC INDUSTRIES 1,131,464
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (E) AMOUNT (NOTE 1)
CONSTRUCTION & REAL ESTATE - 0.0%
BUILDING MATERIALS - 0.0%
American Architectural Products,
Inc. 11 3/4%, 12/1/07 (c) Caa1 $ 40,000 $ 40,400
Insiloc Corp.
10 1/4%, 8/15/07 B3 10,000 10,500
50,900
DURABLES - 0.4%
AUTOS, TIRES, & ACCESSORIES - 0.0%
Blue Bird Body Co.
10 3/4%, 11/15/06 B2 15,000 16,125
HOME FURNISHINGS - 0.0%
Guitar Center Management Co.,
Inc. 11%, 7/1/06 B1 29,000 32,190
Interlake Corp.
12 1/8%, 3/1/02 B3 50,000 51,500
Knoll, Inc. 10 7/8%, 3/15/06 B1 38,000 42,560
Sealy Mattress Co. 0%,
12/15/07 (c)(d) B3 20,000 12,100
138,350
TEXTILES & APPAREL - 0.4%
Levi Strauss & Co.
6.80%, 11/1/03 (c) Baa2 570,000 579,707
Nine West Group, Inc. (c):
8 3/8%, 8/15/05 Ba2 50,000 47,625
9%, 8/15/07 Ba3 10,000 9,525
Polymer Group, Inc.
9%, 7/1/07 B2 100,000 100,000
Synthetic Industries, Inc.
9 1/4%, 2/15/07 B2 40,000 42,200
Worldtex, Inc.
9 5/8%, 12/15/07 (c) B1 50,000 51,250
830,307
TOTAL DURABLES 984,782
ENERGY - 0.2%
COAL - 0.0%
AEI Holding, Inc.
10%, 11/15/07 (c) B2 30,000 30,900
ENERGY SERVICES - 0.0%
DI Industries, Inc.
8 7/8%, 7/1/07 B1 20,000 20,750
OIL & GAS - 0.2%
Belden & Blake Corp.
9 7/8%, 6/15/07 B3 30,000 30,300
Chesapeake Energy Corp.
9 1/8%, 4/15/06 Ba3 10,000 10,275
Cross Timbers Oil Co.:
9 1/4%, 4/1/07 B2 60,000 62,400
8 3/4%, 11/1/09 B2 30,000 30,600
Flores & Rucks, Inc.
9 3/4%, 10/1/06 B3 50,000 54,875
Ocean Energy, Inc.
8 7/8%, 7/15/07 B3 60,000 63,750
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (E) AMOUNT (NOTE 1)
ENERGY - CONTINUED
OIL & GAS - CONTINUED
Pennzoil Co.
9 5/8%, 11/15/99 Baa3 $ 60,000 $ 63,353
Plains Resources, Inc., Series B,
10 1/4%, 3/15/06 B2 30,000 32,250
Southwest Royalties, Inc.
10 1/2%, 10/15/04 (c) B3 10,000 9,900
357,703
TOTAL ENERGY 409,353
FINANCE - 6.5%
ASSET-BACKED SECURITIES - 2.6%
Airplanes Pass Through Trust
Class D 10 7/8%, 3/15/19 Ba2 100,000 111,750
Capital Equipment Receivables
Trust 6.11%, 7/15/99 Aaa 1,410,000 1,413,469
Contimortgage Home Equity
Loan Trust 6.26%, 7/15/12 Aaa 1,000,000 1,000,469
Ford Credit Auto Owner Trust
6.40%, 5/15/02 A1 610,000 612,318
Green Tree Financial Corp.
6.10%, 4/15/27 Aaa 54,083 54,049
Key Plastics, Inc.
10 1/4%, 3/15/07 A2 770,000 769,759
Key Auto Finance Trust Class C
6.65%, 10/15/03 Baa3 230,000 229,713
MBNA Master Credit Card
Trust II Class A
6.55%, 1/15/07 Aaa 1,000,000 1,018,710
Sears Credit Account Master
Trust II 6 1/2%, 10/15/03 Aaa 630,000 634,133
5,844,370
BANKS - 1.4%
ABN Amro Bank NV 6 5/8%,
10/31/01 Aa3 500,000 506,035
Banc One Corp. 6.70%,
3/24/00 Aa3 350,000 353,812
Banco Latinoamericano
Exportaciones SA euro
6.90%, 12/6/99 (c) Baa2 100,000 101,126
Capital One Bank 6.74%,
5/31/99 Baa3 260,000 262,551
Citicorp. 7.20%, 6/15/07 A1 160,000 167,531
First Chicago Institutional
Capital Class B 7 3/4%,
12/1/26 (c) A1 1,000,000 1,043,740
First USA Bank 6 1/2%,
12/23/99 Aa2 250,000 251,708
NB Capital Trust IV 8 1/4%,
4/15/27 A1 330,000 360,116
Summit Bancorp. 8 5/8%,
12/10/02 BBB 100,000 109,127
3,155,746
CREDIT & OTHER FINANCE - 2.5%
Ahmanson Capital Trust I
8.36%, 12/1/26 (c) Baa3 250,000 272,045
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (E) AMOUNT (NOTE 1)
Associates Corp. North
America 7.35%, 7/6/99 Aa3 $ 250,000 $ 255,423
BankBoston Capital Trust II
7 3/4%, 12/15/26 Baa1 500,000 510,105
CIT Group Holdings, Inc.
6 1/4%, 9/30/99 Aa3 860,000 861,883
Chase Capital I
7.67%, 12/1/26 A1 765,000 792,578
Chrysler Financial Corp.
6 3/8%, 1/28/00 A3 180,000 180,862
Cityscape Financial Corp.
12 3/4%, 6/1/04 Caa3 60,000 26,400
Delta Financial Corp.
9 1/2%, 8/1/04 B1 10,000 9,925
First Security Capital I
8.41%, 12/15/26 A3 110,000 120,277
General Electric Capital Corp.
6.49%, 4/13/09 (f) Aaa 480,000 484,944
Imperial Credit Capital Trust I
10 1/4%, 6/14/02 (c) B2 20,000 20,000
Imperial Credit Industries, Inc.
9 7/8%, 1/15/07 B2 80,000 79,200
Indah Kiat Finance Mauritius
Ltd. 10%, 7/1/07 (c) Ba3 30,000 24,825
JPM Capital Trust II
7.95%, 2/1/27 Aa2 50,000 53,226
KeyCorp Institutional Capital
Series A, 7.826%, 12/1/26 A1 1,000,000 1,037,440
MCN Investment Corp.
6.03%, 2/1/01 Baa2 180,000 179,492
Nordstrom Credit, Inc.
7 1/4%, 4/30/02 A2 200,000 208,314
Ocwen Capital Trust
10 7/8%, 8/1/27 B2 20,000 21,800
Olympic Financial Ltd.
11 1/2%, 3/15/07 B2 30,000 29,400
PNC Institutional Capital Trust
8.315%, 5/15/27 (c) A2 600,000 650,328
5,818,467
SAVINGS & LOANS - 0.0%
First Nationwide Holdings, Inc.
10 5/8%, 10/1/03 Ba3 40,000 44,700
First Nationwide Parent Holdings
Ltd. 12 1/2%, 4/15/03 B3 70,000 79,625
124,325
TOTAL FINANCE 14,942,908
HEALTH - 0.1%
MEDICAL EQUIPMENT & SUPPLIES - 0.0%
Wright Medical Technology, Inc.
11 3/4%, 7/1/00 (f) Caa3 40,000 40,400
MEDICAL FACILITIES MANAGEMENT - 0.1%
Integrated Health Services, Inc. (c):
9 1/2%, 9/15/07 B2 30,000 30,900
9 1/4%, 1/15/08 B2 79,000 80,580
Tenet Healthcare Corp.:
8%, 1/15/05 Ba1 20,000 20,350
8 5/8%, 1/15/07 Ba3 10,000 10,300
142,130
TOTAL HEALTH 182,530
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (E) AMOUNT (NOTE 1)
HOLDING COMPANIES - 0.2%
Gray Communications System,
Inc. 10 5/8%, 10/1/06 B3 $ 10,000 $ 10,850
Norfolk Southern Corp.
7.05%, 5/1/37 Baa1 340,000 359,360
370,210
INDUSTRIAL MACHINERY & EQUIPMENT - 0.5%
ELECTRICAL EQUIPMENT - 0.1%
Amphenol Corp.
9 7/8%, 5/15/07 B2 10,000 10,550
Echostar Communications Corp.
secured discount 0%,
6/1/04 (d) B2 160,000 146,400
Motors & Gears, Inc.:
10 3/4%, 11/15/06 B3 60,000 63,600
10 3/4%, 11/15/06 (c) B3 10,000 10,625
231,175
INDUSTRIAL MACHINERY & EQUIPMENT - 0.2%
Continental Global Group, Inc.
11%, 4/1/07 B2 20,000 21,300
Goss Graphic System, Inc.
12%, 10/15/06 B2 50,000 56,500
McDermott International, Inc.
9 3/8%, 3/15/02 Ba3 60,000 64,650
Tenneco, Inc.
8.075%, 10/1/02 Baa1 300,000 320,946
463,396
POLLUTION CONTROL - 0.2%
Allied Waste North America
10 1/4%, 12/1/06 B2 10,000 10,975
Envirosource, Inc.
9 3/4%, 6/15/03 B3 40,000 40,600
WMX Technologies, Inc.
7.10%, 8/1/26 Baa1 400,000 413,664
465,239
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 1,159,810
MEDIA & LEISURE - 1.9%
BROADCASTING - 1.6%
ACME Television/ACME
Financial Corp. 0%,
9/30/04 (c)(d) B3 50,000 36,813
Adelphia Communications
Corp.:
9 1/2%, 2/15/04 B3 35,238 34,566
9 7/8%, 3/1/07 B3 30,000 31,725
Ascent Entertainment
Group, Inc. 0%,
12/15/04 (c)(d) B3 70,000 40,425
Capstar Broadcasting
Partners, Inc.:
9 1/4%, 7/1/07 B2 60,000 61,725
0%, 2/1/09 (d) B3 80,000 57,800
Chancellor Radio Broadcasting
Company 8 1/8%,
12/15/07 (c) - 60,000 58,800
Chancellor Media Corp. 8 3/4%,
6/15/07 B3 20,000 20,350
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (E) AMOUNT (NOTE 1)
Continental Cablevision, Inc.:
8.30%, 5/15/06 Baa3 $ 215,000 $ 234,653
9%, 9/1/08 Baa3 520,000 600,766
CS Wireless Systems, Inc.
0%, 3/1/06 (d) Caa 30,000 8,400
Falcon Holdings Group LP
11%, 9/15/03, pay-in-kind - 136,600 141,195
FrontierVision Holdings
LP/FrontierVision Holdings
Capital Corp. 0%,
9/15/07 (d) Caa1 10,000 7,175
Granite Broadcasting Corp.:
10 3/8%, 5/15/05 B3 10,000 10,475
9 3/8%, 12/1/05 B3 10,000 10,125
Hearst-Argyle Television, Inc.
7 1/2%, 11/15/27 Baa3 250,000 253,680
International Cabletel, Inc.
0%, 2/1/06 (d) B3 110,000 85,800
Olympus Communications
LP/Olympus Capital Corp
10 5/8%, 11/15/06 B1 60,000 66,450
Orion Network Systems, Inc.:
11 1/4%, 1/15/07 B2 50,000 56,500
0%, 1/15/07 (d) B2 290,000 215,325
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 60,000 66,000
TCI Communication, Inc.
6.82%, 9/15/10 (f) Ba1 250,000 250,818
Telewest PLC 0%, 10/1/07 (d) B1 20,000 15,500
Time Warner, Inc. 8.18%,
8/15/07 Ba1 1,000,000 1,090,000
UIH Australia/Pacific, Inc. (d):
Series B, 0%, 5/15/06 B2 150,000 99,000
0%, 5/15/06 (c) B2 10,000 6,600
United International Holdings,
Inc. 0%, 11/15/99 B3 20,000 16,400
Viacom International, Inc.,
Series B 7%, 7/1/03 B1 10,000 9,550
3,586,616
ENTERTAINMENT - 0.1%
AMC Entertainment, Inc.
9 1/2%, 3/15/09 B2 70,000 72,625
AMF Group, Inc., Series B:
10 7/8%, 3/15/06 B2 30,000 32,850
0%, 3/15/06 (d) B2 12,000 9,435
Cinemark USA, Inc.
9 5/8%, 8/1/08 B2 30,000 31,050
Viacom, Inc. 8%, 7/7/06 B1 120,000 120,450
266,410
LEISURE DURABLES & TOYS - 0.0%
ICON Fitness Corp. 0%,
11/15/06 (d) Caa3 10,000 5,650
LODGING & GAMING - 0.1%
HMC Acquisition Properties,
Inc. 9%, 12/15/07 Ba3 60,000 63,000
HMH Properties, Inc.
8 7/8%, 7/15/07 Ba3 70,000 73,325
KSL Recreation Group, Inc.
10 1/4%, 5/1/07 B3 20,000 21,400
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (E) AMOUNT (NOTE 1)
MEDIA & LEISURE - CONTINUED
LODGING & GAMING - CONTINUED
Station Casinos, Inc.
9 3/4%, 4/15/07 B2 $ 20,000 $ 20,700
Sun International Hotels
Ltd./Sun International
North America, Inc.
yankee 9%, 3/15/07 Ba3 60,000 61,800
240,225
PUBLISHING - 0.1%
Big Flower Press Holdings, Inc.:
8 7/8%, 7/1/07 B2 110,000 110,688
8 7/8%, 7/1/07 (c) B2 20,000 20,100
Hollinger International
Publishing, Inc. 9 1/4%,
3/15/07 B1 40,000 42,000
ITT Publimedia BV 9 3/8%,
9/15/07 (c) B3 60,000 63,000
Perry Judds, Inc. 10 5/8%,
12/15/07 (c) B3 10,000 10,350
246,138
RESTAURANTS - 0.0%
AFC Enterprises, Inc.
10 1/4%, 5/15/07 B3 20,000 21,050
SC International Services, Inc.
9 1/4%, 9/1/07 (c) B2 50,000 51,500
72,550
TOTAL MEDIA & LEISURE 4,417,589
NONDURABLES - 0.4%
FOODS - 0.0%
Del Monte Foods Co.
0%, 12/15/07 (c) Caa2 20,000 11,450
HOUSEHOLD PRODUCTS - 0.1%
RBX Corp. 12%, 1/15/03 (c) B2 20,000 20,500
Renaissance Cosmetic, Inc.
11 3/4%, 2/15/04 B3 50,000 45,000
Revlon Consumer Products
Corp. 10 1/2%, 2/15/03 B3 105,000 110,513
176,013
TOBACCO - 0.3%
North Atlantic Trading, Inc.
11%, 6/15/04 B3 20,000 20,850
Philip Morris Companies, Inc.:
7%, 7/15/05 A2 500,000 509,680
6.95%, 6/1/06 A2 250,000 258,915
789,445
TOTAL NONDURABLES 976,908
PRECIOUS METALS - 0.0%
PRECIOUS METALS - 0.0%
Centaur Mining & Exploration
Ltd. 11%, 12/1/07 (c) B1 60,000 60,300
RETAIL & WHOLESALE - 1.0%
APPAREL STORES - 0.1%
Mothers Work, Inc.
12 5/8%, 8/1/05 B3 10,000 10,650
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (E) AMOUNT (NOTE 1)
Specialty Retailers, Inc.:
8 1/2%, 7/15/05 Ba3 $ 30,000 $ 30,600
9%, 7/15/07 B2 70,000 71,400
112,650
GENERAL MERCHANDISE STORES - 0.6%
Dayton Hudson Corp.:
6.80%, 10/1/01 Baa1 300,000 304,515
6.40%, 2/15/03 Baa1 400,000 400,168
Federated Department Stores,
Inc. 6.79%, 7/15/27 Baa2 500,000 513,385
Penney (J.C.) Co.,Inc.
6.95%, 4/1/00 A2 160,000 162,579
1,380,647
GROCERY STORES - 0.2%
American Stores Co.
7 1/2%, 5/1/37 Baa2 250,000 273,700
Di Giorgio Corp.
10%, 6/15/07 B3 30,000 29,475
Food 4 Less Holdings, Inc.
13 5/8%, 6/15/07 - 11,408 13,449
Pathmark Stores, Inc.:
11 5/8%, 6/15/02 Caa2 60,000 49,050
9 5/8%, 5/1/03 Caa1 60,000 55,275
Penn Traffic Co.:
10 1/4%, 2/15/02 B3 20,000 18,200
8 5/8%, 12/15/03 B3 30,000 25,500
Pueblo Xtra International, Inc.
9 1/2%, 8/1/03 B3 100,000 94,500
559,149
RETAIL & WHOLESALE, MISCELLANEOUS - 0.1%
Big 5 Corp. 10 7/8%,
11/15/07 (c) B2 50,000 49,750
Central Tractor Farm & Country,
Inc. 10 5/8%, 4/1/07 B2 20,000 21,100
Corporate Express, Inc.,
Series B, 9 1/8%, 3/15/04 B2 10,000 10,200
J Crew Operating Corp.
10 3/8%, 10/15/07 (c) B3 40,000 34,800
J Crew Group, Inc. 0%,
10/15/08 (c)(d) Caa2 40,000 17,400
133,250
TOTAL RETAIL & WHOLESALE 2,185,696
SERVICES - 0.1%
LEASING & RENTAL - 0.1%
Hollywood Entertainment Corp.
10 5/8%, 8/15/04 B3 80,000 78,000
PRINTING - 0.0%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa1 40,000 40,400
SERVICES - 0.0%
Iron Mountain, Inc.
8 3/4%, 9/30/09 (c) B3 30,000 30,600
Outsourcing Solutions, Inc.
11%, 11/1/06 B3 10,000 11,025
41,625
TOTAL SERVICES 160,025
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (E) AMOUNT (NOTE 1)
TECHNOLOGY - 0.2%
COMMUNICATIONS EQUIPMENT - 0.1%
Intermedia Communications, Inc.
0%, 7/15/07 (d) B2 $ 60,000 $ 42,750
Jordan Telecommunication
Products, Inc.:
9 7/8%, 8/1/07 B3 30,000 30,488
0%, 8/1/07 (d) B3 60,000 48,600
121,838
COMPUTER SERVICES & SOFTWARE - 0.0%
Concentric Network Corp.
12 3/4%, 12/15/07 unit (c) - 10,000 10,275
DecisionOne Holdings Corp.
0%, 8/1/8 unit (d) Caa1 10,000 6,400
16,675
COMPUTERS & OFFICE EQUIPMENT - 0.1%
Comdisco, Inc.
6.70%, 8/6/99 Baa1 250,000 252,675
ELECTRONIC INSTRUMENTS - 0.0%
Wavetek Corp.
10 1/8%, 6/15/07 B3 10,000 10,300
ELECTRONICS - 0.0%
Communications Instruments,
Inc. 10%, 9/15/04 (c) B3 10,000 10,200
ViaSystems, Inc.
9 3/4%, 6/1/07 B3 30,000 30,975
41,175
TOTAL TECHNOLOGY 442,663
TRANSPORTATION - 0.6%
AIR TRANSPORTATION - 0.1%
Atlas Air, Inc. pass through
trust 12 1/4%, 12/1/02 Ba3 30,000 33,450
Kitty Hawk, Inc. 9.95%,
11/15/04 (c) B1 50,000 51,500
84,950
RAILROADS - 0.5%
Burlington Northern
Santa Fe Corp.:
6 7/8%, 12/1/27 Baa2 1,000,000 1,001,850
7.29%, 6/1/36 Baa2 150,000 160,679
1,162,529
TOTAL TRANSPORTATION 1,247,479
UTILITIES - 1.4%
CELLULAR - 0.3%
McCaw International Ltd.
0%, 4/15/07 (d) CCC 260,000 150,800
Microcell Telecommunications,
Inc. 0%, 6/1/06 (d) B3 50,000 33,750
Millicom International Cellular
SA 0%, 6/1/06 (d) B3 290,000 211,700
Pagemart Nationwide, Inc.
0%, 2/1/05 (d) - 40,000 34,200
Pagemart, Inc. 0%,
11/1/03 (d) - 70,000 65,450
Rogers Communications, Inc.
8 7/8%, 7/15/07 B2 10,000 10,000
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (E) AMOUNT (NOTE 1)
Teletrac, Inc. 14%, 8/1/07 Caa2 $ 40,000 $ 38,000
Telesystem International
Wireless, Inc. (c)(d):
0%, 6/30/07 Caa1 80,000 50,000
0%, 11/1/07 Caa1 20,000 11,100
360 Degrees Communications
Co. 7 1/8%, 3/1/03 Ba1 115,000 117,445
USA Mobile Communications,
Inc. II:
9 1/2%, 2/1/04 B2 10,000 9,650
14%, 11/1/04 B2 20,000 22,100
754,195
ELECTRIC UTILITY - 0.4%
AES Corp. 8 3/8%, 8/15/07 Ba1 30,000 29,925
Israel Electric Corp. Ltd.
7 3/4%, 12/15/27 (c) A3 930,000 936,529
966,454
GAS - 0.2%
Columbia Gas System, Inc.
6.61%, 11/28/02 Baa1 379,000 382,229
TELEPHONE SERVICES - 0.5%
GST Equipment Funding, Inc.
13 1/4%, 5/1/07 - 30,000 34,200
GST Telecommunications, Inc.
12 3/4%, 11/15/07 - 60,000 62,700
GST USA, Inc. 0%,
12/15/05 (d) - 34,000 26,010
Hyperion Telecommunications, Inc.:
Series B, 0%, 4/15/03 (d) B 70,000 50,750
12 1/4%, 9/1/04 B 40,000 43,900
McLeodUSA, Inc. 0%,
3/1/07 (d) B3 80,000 57,700
Netia Holdings BV 10 1/4%,
11/1/07 (c) B3 30,000 28,800
Winstar Communications, Inc.:
0%, 10/15/05 (d) Caa1 50,000 39,250
14 1/2%, 10/15/05 Caa1 70,000 92,400
Winstar Equipment
12 1/2%, 3/15/04 B3 10,000 11,225
WorldCom, Inc.:
8 7/8%, 1/15/06 Ba1 184,000 197,969
7 3/4%, 4/1/07 Ba1 400,000 429,556
1,074,460
TOTAL UTILITIES 3,177,338
TOTAL NONCONVERTIBLE BONDS 32,813,035
TOTAL CORPORATE BONDS
(Cost $33,108,642) 33,788,248
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS - 5.5%
U.S. TREASURY OBLIGATIONS - 4.4%
6 5/8%, 6/30/01 Aaa 7,740,000 7,954,088
7%, 7/15/06 Aaa 35,000 37,778
7 1/4%, 2/15/23 Aaa 500,000 570,780
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (E) AMOUNT (NOTE 1)
U.S. TREASURY OBLIGATIONS - CONTINUED
7 5/8%, 2/15/25 Aaa $ 500,000 $ 606,795
6.375%, 8/15/27 Aaa 925,000 975,588
10,145,029
U.S. GOVERNMENT AGENCY OBLIGATIONS - 1.1%
Federal Home Loan Bank:
7.56%, 9/1/04 Aaa 310,000 336,542
7.59%, 3/10/05 Aaa 190,000 206,921
Fannie Mae:
7.59%, 2/14/00 Aaa 500,000 517,500
6.72%, 8/1/05 Aaa 720,000 749,246
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 114,066 121,169
State of Israel (guaranteed by
U.S. Government through
Agency for International
Development):
8%, 11/15/01 Aaa 220,000 235,767
5.89%, 8/15/05 Aaa 310,000 308,047
2,475,192
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $12,407,284) 12,620,221
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 8.1%
FEDERAL HOME LOAN GUARANTEED - 0.5%
7%, 6/1/99 to 7/1/01 Aaa 325,962 329,807
7 1/2%, 11/1/27 to 12/1/27 Aaa 891,887 913,346
1,243,153
FREDDIE MAC - 0.0%
7%, 6/1/01 Aaa 91,807 92,981
FANNIE MAE - 7.2%
5 1/2%, 2/1/03 to 2/1/26 Aaa 1,078,491 1,051,183
6%, 4/1/11 to 1/1/13 Aaa 3,438,832 3,385,782
6 1/2%, 1/1/28 Aaa 4,000,000 3,951,250
7%, 1/1/28 Aaa 7,900,000 7,959,250
16,347,465
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 0.4%
7%, 10/15/23 to 11/15/27 Aaa 856,425 864,380
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $18,459,771) 18,547,979
U.S. GOVERNMENT AGENCY - 0.5%
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (E) AMOUNT (NOTE 1)
Freddie Mac planned
amortization class
Series 1645 Class ZA,
5 1/2%, 4/15/05 Aaa $ 639,708 $ 631,512
Fannie Mae planned
amortization class
Series 1993-129 Class D,
6.10%, 6/25/05 Aaa 500,000 499,375
TOTAL U.S. GOVERNMENT AGENCY
(Cost $1,114,810) 1,130,887
COMMERCIAL MORTGAGE SECURITIES - 1.0%
BKB Commercial Mortgage Trust
Series 1997-C1 Class A-1,
6 7/8%, 2/25/43 (c) AAA 115,731 115,627
CS First Boston Mortgage
Securities Corp. Series
1997-C2 Class D,
7.27%, 4/17/11 Baa2 220,000 220,481
First Union-Lehman Brothers
Commercial Mortgage Trust
sequential pay Series
1997-C2 Class A3,
6.65%, 12/18/07 Aaa 1,000,000 1,008,672
General Motors Acceptance
Corp. Commercial Mortgage
Securities, Inc. Series 1997-C2
Class E, 7.624%, 4/15/11 Baa3 190,000 189,020
Thirteen Affiliates of General
Growth Properties, Inc.
sequential pay Series A-2,
6.602%, 11/15/12 (c) Aaa 500,000 501,295
Wells Fargo Capital Markets
Apartment Financing Trust
6.56%, 12/29/05 (c) Aaa 143,915 145,534
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $2,170,661) 2,180,629
FOREIGN GOVERNMENT OBLIGATIONS (G) - 0.3%
Manitoba Province yankee
6 3/8%, 10/15/99 A1 470,000 472,594
Quebec Province yankee
6.86%, 4/15/26 (f) A2 250,000 258,185
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $709,908) 730,779
SUPRANATIONAL OBLIGATIONS - 0.3%
Inter American Development Bank
yankee 6.29%, 7/16/27
(Cost $496,855) Aaa 500,000 519,400
CERTIFICATES OF DEPOSIT - 0.2%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
Canadian Imperial Bank of
Commerce NY Branch
yankee 6.20%, 8/1/00
(Cost $500,750) $ 500,000 $ 500,750
CASH EQUIVALENTS - 11.4%
SHARES
Taxable Central Cash Fund (b)
(Cost $26,064,978) 26,064,978 26,064,978
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $203,882,283) $ 228,340,802
SECURITY TYPE ABBREVIATIONS
QUIPS - Quarterly Income Preferred Securities
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield of the Taxable Central Cash
Fund was 5.69%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(c) Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions
exempt from registration, normally to qualified institutional buyers.
At the period end, the value of these securities amounted to
$6,295,345 or 2.9% of net assets.
(d) Debt obligation initially issued in zero coupon form which
converts to coupon form at a specified rate and date. The rate shown
is rate at period end.
(e) Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investors Service, Inc.
(f) Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date. The rate shown is rate at period
end.
(g) For foreign government obligations not individually rated by S&P
or Moody's, the ratings listed are assigned to securities by FMR, the
fund's investment adviser, based principally on S&P and Moody's
ratings of the sovereign credit of the issuing government.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $223,491,590 and $144,489,471, respectively, of which U.S.
government and government agency obligations aggregated $87,646,475
and $72,203,682, 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 $21,693 for the
period (See Note 4 of Notes to Financial Statements).
The composition of long-term debt holdings as a percentage of total
value of investment in securities, is as follows (ratings are
unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 22.0% AAA, AA, A 20.2%
Baa 3.9% BBB 6.0%
Ba 1.4% BB 0.5%
B 2.5% 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 Moody's or S&P amounted to 0.2%. FMR has determined that
unrated debt securities that are lower quality account for 0.2% of the
total value of investment in securities.
INCOME TAX INFORMATION
At December 31, 1997, the aggregate cost of investment securities for
income tax purposes was $203,947,353. Net unrealized appreciation
aggregated $24,393,449, of which $25,857,031 related to appreciated
investment securities and $1,463,582 related to depreciated investment
securities.
The fund hereby designates approximately $4,059,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
DECEMBER 31, 1997
ASSETS
INVESTMENT IN SECURITIES, AT VALUE $
228,340,802
(COST $203,882,283) -
SEE ACCOMPANYING SCHEDULE
CASH 3,689
RECEIVABLE FOR INVESTMENTS SOLD
111,629
RECEIVABLE FOR FUND SHARES SOLD
119,143
DIVIDENDS RECEIVABLE
316,714
INTEREST RECEIVABLE
733,483
OTHER RECEIVABLES 5,791
TOTAL ASSETS
229,631,251
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 14,875,164
PAYABLE FOR FUND SHARES REDEEMED 95,933
ACCRUED MANAGEMENT FEE 77,762
OTHER PAYABLES AND ACCRUED EXPENSES 34,277
TOTAL LIABILITIES
15,083,136
NET ASSETS $
214,548,115
NET ASSETS CONSIST OF:
PAID IN CAPITAL $
176,594,691
UNDISTRIBUTED NET INVESTMENT INCOME
5,297,948
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS
8,197,215
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS
24,458,261
AND ASSETS AND LIABILITIES IN
FOREIGN CURRENCIES
NET ASSETS $
214,548,115
</TABLE>
INITIAL CLASS: $14.58
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($214,537,817 (DIVIDED BY) 14,709,529
SHARES)
SERVICE CLASS: $14.59
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($10,298 (DIVIDED BY) 706 SHARES)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1997
INVESTMENT INCOME $ 2,085,146
DIVIDENDS
INTEREST 4,195,247
TOTAL INCOME 6,280,393
EXPENSES
MANAGEMENT FEE $ 722,612
TRANSFER AGENT FEES 111,593
DISTRIBUTION FEES - SERVICE CLASS 1
ACCOUNTING FEES AND EXPENSES 97,323
NON-INTERESTED TRUSTEES' COMPENSATION 629
CUSTODIAN FEES AND EXPENSES 19,533
REGISTRATION FEES 21
AUDIT 24,602
LEGAL 2,653
MISCELLANEOUS 2,093
TOTAL EXPENSES BEFORE REDUCTIONS 981,060
EXPENSE REDUCTIONS (14,149 966,911
)
NET INVESTMENT INCOME 5,313,482
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 8,597,232
FOREIGN CURRENCY TRANSACTIONS (223 8,597,009
)
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 16,950,025
ASSETS AND LIABILITIES IN (592 16,949,433
FOREIGN CURRENCIES )
NET GAIN (LOSS) 25,546,442
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 30,859,924
OTHER INFORMATION $ 13,497
EXPENSE REDUCTIONS
DIRECTED BROKERAGE ARRANGEMENTS
CUSTODIAN CREDITS 652
$ 14,149
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
<TABLE>
<CAPTION>
<S> <C> <C>
OPERATIONS $ 5,313,482 $ 2,701,775
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 8,597,009 (391,485)
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) 16,949,433 6,443,286
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 30,859,924 8,753,576
DISTRIBUTIONS TO SHAREHOLDERS (2,678,656) (26,804)
FROM NET INVESTMENT INCOME
FROM NET REALIZED GAIN - (192,158)
TOTAL DISTRIBUTIONS (2,678,656) (218,962)
SHARE TRANSACTIONS - NET INCREASE (DECREASE) 83,257,215 51,419,784
TOTAL INCREASE (DECREASE) IN NET ASSETS 111,438,483 59,954,398
NET ASSETS
BEGINNING OF PERIOD 103,109,632 43,155,234
END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $5,297,948 AND
$2,677,878, RESPECTIVELY) $ 214,548,115 $ 103,109,632
</TABLE>
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
SHARES DOLLARS SHARES DOLLARS
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SHARE TRANSACTIONS 7,435,394 $ 99,539,917 4,616,047 $ 51,928,218
INITIAL CLASS
SOLD
REINVESTED 215,153 2,678,656 19,533 218,962
REDEEMED (1,375,161) (18,971,358) (64,658) (727,396)
NET INCREASE (DECREASE) 6,275,386 $ 83,247,215 4,570,922 $ 51,419,784
SERVICE CLASS A 706 $ 10,000 - $ -
SOLD
REINVESTED - - - -
REDEEMED - - - -
NET INCREASE (DECREASE) 706 $ 10,000 - $ -
DISTRIBUTIONS $ 2,678,656 $ 26,804
INITIAL CLASS - NET INVESTMENT INCOME
INITIAL CLASS - NET REALIZED GAIN - 192,158
TOTAL $ 2,678,656 $ 218,962
SERVICE CLASS - NET INVESTMENT INCOME $ - $ -
SERVICE CLASS - NET REALIZED GAIN - -
TOTAL $ - $ -
$ 2,678,656 $ 218,962
1. SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
FINANCIAL HIGHLIGHTS - INITIAL CLASS
YEARS ENDED DECEMBER 31, JANUARY 3, 1995
(COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31,
SELECTED PER-SHARE DATA 1997 1996 1995
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.23 $ 11.17 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .44 D .33 .14
NET REALIZED AND UNREALIZED GAIN (LOSS) 2.22 .78 1.25
TOTAL FROM INVESTMENT OPERATIONS 2.66 1.11 1.39
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.31) (.01) F (.14)
FROM NET REALIZED GAIN - (.04) F (.08)
TOTAL DISTRIBUTIONS (.31) (.05) (.22)
NET ASSET VALUE, END OF PERIOD $ 14.58 $ 12.23 $ 11.17
TOTAL RETURN B, C 22.18% 9.98% 13.92%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 214,538 $ 103,110 $ 43,155
RATIO OF EXPENSES TO AVERAGE NET ASSETS .61% .72% 1.42% G
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS .60% H .71% H 1.42%
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 3.28% 3.63% 3.56%
PORTFOLIO TURNOVER RATE 98% 163% 248%
AVERAGE COMMISSION RATE I $ .0423 $ .0165
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEAR ENDED
DECEMBER 31,
SELECTED PER-SHARE DATA 1997 E
<TABLE>
<CAPTION>
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.16
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .08 D
NET REALIZED AND UNREALIZED GAIN (LOSS) .35
TOTAL FROM INVESTMENT OPERATIONS .43
NET ASSET VALUE, END OF PERIOD $ 14.59
TOTAL RETURN B 3.04%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 10
RATIO OF EXPENSES TO AVERAGE NET ASSETS .71%
A
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 3.43%
A
PORTFOLIO TURNOVER 98%
AVERAGE COMMISSION RATE I $ .0423
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 FOR THE PERIOD NOVEMBER 3, 1997 (COMMENCEMENT OF SALE OF
SERVICE CLASS SHARES) TO DECEMBER 31, 1997.
F THE AMOUNTS SHOWN REFLECT CERTAIN RECLASSIFICATIONS RELATED
TO BOOK TO TAX DIFFERENCES.
G FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES
DURING THE PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS'
EXPENSE RATIO WOULD HAVE BEEN HIGHER.
H FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH
THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE
CLASS' EXPENSES (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS).
I FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995,
A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE
PER SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS ARE
CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND
FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN
VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION
RATE STRUCTURES MAY DIFFER.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES.
Balanced 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
fund offers two classes of shares; the fund's original class of shares
(Initial Class shares) and Service Class shares. The fund commenced
sale of Service Class shares on November 3, 1997. Both classes of
shares have equal rights and voting privileges, except for matters
affecting a single class. Investment income, realized and unrealized
capital gains and losses, the common expenses of the fund, and
fund-level expense reductions, if any, are allocated on a pro rata
basis to each class based on the relative net assets of each class to
the total net assets of the fund. Each class of shares differs in its
respective distribution plan.
The financial statements have been prepared in conformity with
generally accepted accounting principles which 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. Equity securities for which quotations are readily
available are valued at the last sale price, or if no sale price, at
the closing bid price. Debt securities for which quotations are
readily available are valued by a pricing service at their market
values as determined by their most recent bid prices in the principal
market (sales prices if the principal market is an exchange) in which
such securities are normally traded. Securities (including restricted
securities) for which market quotations are not readily available are
valued at their fair value as determined in good faith under
consistently applied procedures under the general supervision of the
Board of Trustees. Short-term securities with remaining maturities of
sixty days or less for which quotations are not readily available are
valued at amortized cost or original cost plus accrued interest, both
of which approximate current value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. 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 foreign
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, which includes accretion of
original issue discount, is accrued as earned. Investment income is
recorded net of foreign taxes withheld where recovery of such taxes is
uncertain.
EXPENSES. Most expenses of the trust can be directly attributed to a
fund. Expenses which cannot be directly attributed are apportioned
among the funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the
ex-dividend date. Income dividends and capital gain distributions are
declared separately for each class.
Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences, which may result in
distribution reclassifications, are primarily due to differing
treatments for losses deferred due to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
Undistributed net investment income and accumulated undistributed net
realized gain (loss) on investments and foreign currency transactions
may include temporary book and tax basis differences which will
reverse in a subsequent period. Any taxable income or gain remaining
at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of
trade date. Gains and losses on securities sold are determined on the
basis of identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency
contracts to facilitate transactions in foreign-denominated
securities. Losses may arise from changes in the value of the foreign
currency or if the counterparties do not perform under the contracts'
terms. The U.S. dollar value of foreign currency contracts is
determined using contractual currency exchange rates established at
the time of each trade. 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 fund, along with
other affiliated entities of Fidelity Management & Research Company
(FMR), may transfer uninvested cash balances into one or more joint
trading accounts. These balances are invested in one or more
repurchase agreements for U.S. Treasury or Federal Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are
marked-to-market daily and maintained at a value at least equal to the
principal amount of the repurchase agreement (including accrued
interest). FMR, the fund's investment adviser, is responsible for
determining that the value of the underlying securities remains in
accordance with the market value requirements stated above.
TAXABLE CENTRAL CASH FUND. Pursuant to an Exemptive Order issued by
the SEC, the fund may invest in the Taxable Central Cash Fund (the
Cash Fund) managed by Fidelity Investments Money Management, Inc.
(formerly FMR Texas, Inc.), an affiliate of FMR. The Cash Fund is an
open-end money market fund available only to investment companies and
other accounts managed by FMR and its affiliates. The Cash Fund seeks
preservation of capital, liquidity, and current income by investing in
U.S. Treasury securities and repurchase agreements for these
securities. Income distributions from the Cash Fund are declared daily
and paid monthly from net interest income. Income distributions earned
by the fund are recorded as interest income in the accompanying
financial statements.
RESTRICTED SECURITIES. The fund is permitted to invest in securities
that are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from
registration or to the public if the securities are registered.
Disposal of these securities may involve time-consuming negotiations
and expense, and prompt sale at an acceptable price may be difficult.
At the end of the period, the fund had no investments in restricted
securities (excluding 144A issues).
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities) is included under the caption "Other
Information" at the end of the fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a
monthly fee that is calculated on the basis of a group fee rate plus a
fixed individual fund fee rate applied to the average net assets of
the fund. The group fee rate is the weighted average of a series of
rates and is based on the monthly average net assets of all the mutual
funds advised by FMR. The rates ranged from .2500% to .5200% for the
period. The annual individual fund fee rate is .15%. 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 annual rate of .45% of average net assets.
DISTRIBUTION AND SERVICE PLAN. In accordance with Rule 12b-1 of the
1940 Act, the Trustees have adopted separate distribution plans with
respect to each class of shares (collectively referred to as "the
Plans"). Under the Service Class Plan, the class pays Fidelity
Distributors Corporation (FDC), an affiliate of FMR, a distribution
and service fee (12b-1 fee). This fee is based on an annual rate of
.10% of Service Class average net assets. Initial Class shares are not
subject to a 12b-1 fee.
For the period, Service Class paid FDC $1, all of which was reallowed
to insurance companies, for the distribution of shares and providing
shareholder support services.
Under the plans, FMR or FDC may use its resources to pay
administrative and promotional expenses related to the sale of each
class of shares. Subject to the approval of the Board of Trustees, the
Plans also authorize payments to third parties that assist in the sale
of each class of shares or render shareholder support services. For
the period, FMR or FDC informed the fund that payments made to third
parties under the Plans amounted to $1,057 and $0 for the Initial
Class and Service Class, respectively.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations
Company, Inc. (FIIOC), an affiliate of FMR, is the fund's transfer,
dividend disbursing and shareholder servicing agent. FIIOC receives
account fees and asset-based fees that vary according to account size
and type of account. FIIOC pays a portion of the expenses related to
the typesetting, printing and mailing of all shareholder reports,
except proxy statements. For the period, the transfer agent fees of
the fund were equivalent to an annual rate of .07% of average net
assets.
ACCOUNTING FEES. Fidelity Service Company, Inc. (FSC), an affiliate of
FMR, maintains the fund's accounting records. The fee is based on the
level of average net assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments.
5. EXPENSE REDUCTIONS.
FMR has directed certain portfolio trades to brokers who paid a
portion of the fund's expenses.
In addition, the fund has entered into an arrangement with its
custodian whereby credits realized as a result of uninvested cash
balances were used to reduce a portion of the fund's expenses. For the
period, the reductions under this arrangement are shown under the
caption "Other Information" on the fund's Statement of Operations.
6. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were the record owners
of approximately 31% of the outstanding shares of the fund. In
addition, one unaffiliated insurance company was record owner of 10%
or more of the total outstanding shares of the fund, totaling 66%.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Variable Insurance Products Fund III and the
Shareholders of Balanced Portfolio:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments (except for Moody's and Standard
& Poor's ratings), and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in
all material respects, the financial position of Balanced Portfolio (a
fund of Variable Insurance Products Fund III) at December 31, 1997,
the results of its operations for the year then ended, and the changes
in its net assets and the financial highlights for the periods
indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the
responsibility of the Balanced Portfolio's management; our
responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation
of securities at December 31, 1997 by correspondence with the
custodian and the application of alternative auditing procedures where
securities purchased were not yet received by the custodian, provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
February 5, 1998
DISTRIBUTIONS
The Board of Trustees of VIP III: Balanced Portfolio voted to pay to
shareholders of record at the opening of business on record date, the
following distributions derived from capital gains realized from sales
of portfolio securities, and dividends derived from net investment
income:
INITIAL CLASS
Pay Date 2/6/98
Record Date 2/6/98
Dividends $.36
Short-Term
Capital Gains $.28
Long-Term
Capital Gains $.27
Long-Term
Capital Gain Breakdown:
28% rate 60.33%
20% rate 39.67%
SERVICE CLASS
Pay Date 2/6/98
Record Date 2/6/98
Dividends $.36
Short-Term
Capital Gains $.28
Long-Term
Capital Gains $.27
Long-Term
Capital Gain Breakdown:
28% rate 60.33%
20% rate 39.67%
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
Kevin E. Grant, VICE PRESIDENT
Arthur S. Loring, SECRETARY
Richard A. Silver, TREASURER
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
Ralph F. Cox *
Phyllis Burke Davis *
Robert M. Gates *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Marvin L. Mann *
William O. McCoy *
Gerald C. McDonough *
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
(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND III: GROWTH & INCOME PORTFOLIO
ANNUAL REPORT
DECEMBER 31, 1997
CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
MARKET ENVIRONMENT 3 A REVIEW OF WHAT HAPPENED IN WORLD MARKETS
DURING THE LAST YEAR.
PERFORMANCE 4 HOW THE FUND HAS DONE OVER TIME.
FUND TALK 5 THE MANAGER'S REVIEW OF FUND PERFORMANCE, STRATEGY
AND OUTLOOK.
INVESTMENTS 6 A COMPLETE LIST OF THE FUND'S INVESTMENTS WITH THEIR
MARKET VALUES.
FINANCIAL STATEMENTS 10 STATEMENTS OF ASSETS AND LIABILITIES, OPERATIONS, AND
CHANGES IN NET ASSETS, AS WELL AS FINANCIAL HIGHLIGHTS.
NOTES 13 NOTES TO THE FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT ACCOUNTANTS 15 THE AUDITORS' OPINION.
DISTRIBUTIONS 16
</TABLE>
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE
SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND.
THIS REPORT IS NOT AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED
OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED
BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE
SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
MARKET ENVIRONMENT
Despite an infectious currency crisis that erupted in Southeast Asia
in October, most stock and bond markets around the globe posted
another year of positive returns. Sustained corporate earnings growth,
low interest-rate levels and an overall lack of inflationary concern
provided a favorable investing backdrop. The U.S. and European stock
markets continued to perform well, with U.S. stocks posting their
third consecutive year of strong results. The problems in Southeast
Asia, though, reverberated throughout the world, with investors
becoming increasingly concerned toward the end of the period regarding
the sustainability of corporate earnings. The U.S. bond market enjoyed
a nice run in 1997.
U.S. STOCK MARKETS
The U.S. stock market went through many phases during 1997. Entering
the year, the market was still being dominated by an extremely narrow
contingent of well-known, large-capitalization stocks. In fact, much
of the Standard & Poor's 500 Index 12-month gain of 33.36% came from
these bigger stocks. Stock prices soared to historic highs and the Dow
Jones Industrial Average hurtled past the 8000-point mark in August.
But, investors became increasingly concerned about the market's
ability to sustain its lofty performance levels. In mid-August,
several large multinationals - companies that derive a significant
portion of their revenues from overseas operations - justified these
concerns by announcing earnings disappointments. These announcements
triggered a slowdown among larger-cap stocks, while smaller- and
medium-sized stocks gained momentum. From August through December, the
S&P MidCap 400 Index - a measure of mid-sized stock performance -
returned 6.50%, while the S&P 500 returned 2.43%.
In late October, economic turmoil shook Southeast Asia. Since this
region accounts for a significant portion of world economic growth,
shock tremors rippled through developed markets such as those in the
U.S. and Europe, as well as emerging-market nations in Eastern Europe
and Latin America. In New York, the uncertainty was punctuated by a
554-point drop in the Dow one day and a 337-point recovery the next.
In terms of industry groups, moderate economic growth coupled with
nonexistent inflation translated into near nirvana for the finance
sector. Banks and brokerages demonstrated their ability to sustain
impressive earnings growth as borrowing demand remained high and cash
flows were healthy. Consolidation in the form of merger and
acquisition activity also brought positive results to the group. Due
to strong oil exploration and production demand, the energy service
sector also fared nicely. Demand for offshore drilling, in particular,
was very high and the industry enjoyed favorable pricing trends.
Technology stocks were a mixed bag in 1997, with the group
experiencing a decent rally through the first half of the year. The
second-half Asian crisis, however, proved particularly harmful to many
technology companies with Asian business ties. With Asia accounting
for a considerable amount of the world's technology production, the
region's economic troubles were far-reaching. Going into 1998, many
money managers - sensing an economic slowdown due to Asia - were
concentrating on stocks that were less cyclical, or economically
sensitive.
FOREIGN STOCK MARKETS
Stock markets around the world reacted differently in 1997. Europe -
bolstered by continued economic reform and a convergence in monetary
policy - posted strong overall returns as Finland, Italy, Spain,
Switzerland and the United Kingdom led the way. The Morgan Stanley
Capital International (MSCI) Europe Index returned 24.17% during the
period. In contrast, the MSCI EAFE Index, which measures the
performance of Europe, Australasia and the Far East, reflected the
problems brought on by the Asian crisis. The MSCI EAFE returned 2.01%
for the period. Japan and Hong Kong were two noteworthy laggards, as
economic recovery in Japan trudged along and Hong Kong felt the brunt
of Asia's woes. Emerging market equity performance was solid through
the first half of the period, but trailed off some in the second.
Uncertainty in Asia and South Korea made some investors question the
well-being of other pivotal emerging-market nations such as Russia,
which proved particularly vulnerable to the Asian dilemma.
U.S. BOND MARKETS
Bonds benefited from low interest rates - which in turn drove prices
upward - as well as a distinct lack of inflation indicators. The
Lehman Brothers Aggregate Bond Index - a measure of the U.S. taxable
bond market - returned 9.65% during the year. The Federal Reserve
Board's raising of a key short-term interest rate in March proved to
be one of the few obstacles to the bond market. Bonds rallied from
April through mid-September, buoyed in large part by encouraging
economic data and the Fed's reluctance to raise rates further.
Additionally, while the Asian crisis brought some equity markets to
their knees, many bond markets welcomed wary stock investors in search
of lower volatility. Interest rates reached attractive levels, with
the yield on the 30-year Treasury bond going below the 6% mark in
November. Corporate bonds performed reasonably well due to continued
economic growth and high demand for yield. Mortgage-backed bonds also
fared relatively well, in spite of increased refinancing activity due
to the lower rates.
FOREIGN BOND MARKETS
While low inflation and steady growth boosted the U.S. bond market,
results were varied on the international front. The Salomon Brothers
World Government Bond Index - a measure of government bond market
performance in developed nations - returned 0.23% for the 12 months
that ended December 31, 1997. In Europe, countries continued to make
progress in the drive toward meeting European Monetary Union
requirements. But a strong dollar relative to many currencies eroded
gains for U.S.-based investors. Japan - one of the more significant
components of the Salomon Brothers index - continued to struggle as
economic reform continued to develop slowly. The often-volatile world
of emerging-market debt also had mixed results, as Asian concerns
trickled into these regions. Brazil and Argentina performed well,
while Ecuador stumbled due to political uncertainty. Nevertheless, The
J.P. Morgan Emerging Markets Bond Index still managed to return 16.15%
during the period.
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
DECEMBER 31, 1997 YEAR FUND
VIP III: GROWTH & INCOME - "INITIAL CLASS" 30.09% 28.69%
S&P 500 (REGISTERED TRADEMARK) 33.36% 30.95%
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.
3
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, December 31, 1996.
If Fidelity had not reimbursed certain fund expenses, the life of fund
total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD BE LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19971231 19980109 110819 S00000000000001
VIP III Growth & Income S&P 500
00147 SP001
1996/12/31 10000.00 10000.00
1997/01/31 10250.00 10440.61
1997/02/28 10270.00 10522.46
1997/03/31 9820.00 10090.10
1997/04/30 10350.00 10692.48
1997/05/31 10930.00 11343.43
1997/06/30 11490.00 11851.62
1997/07/31 12420.00 12794.65
1997/08/31 11790.00 12077.90
1997/09/30 12410.00 12739.40
1997/10/31 12060.00 12313.91
1997/11/30 12600.00 12883.92
1997/12/31 12879.20 13105.13
IMATRL PRASUN SHR__CHT 19971231 19980109 110821 R00000000000015
Let's say hypothetically that $10,000 was invested in VIP III: Growth
& Income Portfolio on December 31, 1996, when the fund started. As the
chart shows, by December 31, 1997, the value of the investment would
have grown to $12,879 - a 28.79% 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 $13,105 - a 31.05% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
GENERAL ELECTRIC CO. 3.3
TYCO INTERNATIONAL LTD. 3.3
BRISTOL-MYERS SQUIBB CO. 2.5
BANKAMERICA CORP. 2.3
PHILIP MORRIS COMPANIES, INC. 2.2
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
FINANCE 19.8
HEALTH 13.1
RETAIL & WHOLESALE 10.3
NONDURABLES 9.4
INDUSTRIAL MACHINERY & EQUIPMENT 9.4
ASSET ALLOCATION AS OF DECEMBER 31, 1997*
ROW: 1, COL: 1, VALUE: 7.0
ROW: 1, COL: 2, VALUE: 1.3
ROW: 1, COL: 3, VALUE: 97.7
STOCKS 91.7%
BONDS 1.3%
SHORT-TERM INVESTMENTS 7.0%
FOREIGN INVESTMENTS 6.0%
*
% 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 COMPARED TO ITS BENCHMARK, BETH?
A. The fund performed capably in an otherwise "narrow" market. For the
12 months that ended December 31, 1997, the fund trailed the Standard
& Poor's 500 Index return of 33.36%. By narrow, I mean that much of
the S&P 500's gains during 1997 were concentrated among a narrow group
of large-cap stocks.
Q. WHAT FACTORS CONTRIBUTED TO THE FUND'S PERFORMANCE?
A. The main driver behind performance - and the area where I focus
most of my attention - was stock selection. Foremost, I'd point to
retail store investments, where both stock picking and an industry
overweighting - more than double that of the S&P 500 - were positive
contributors. In the second half of the period, in fact, retailing
stocks were among the strongest industry groups in the S&P 500.
Specifically, good individual contributors included Consolidated
Stores - which owns Kay-Bee Toy stores - and Gap, Inc., which operates
several leading-edge apparel chains. The fund also benefited from
stock selection within the finance, health care and technology
sectors. Strong performers in these industries included BankAmerica,
drug-maker Bristol-Myers Squibb and personal computer-maker Compaq.
The fund underperformed the index due mainly to the narrowness
phenomenon I mentioned above.
Q. CONTINUING WITH THE RETAIL STORY, THE FUND'S EXPOSURE TO THIS
SECTOR CLIMBED TO AROUND 10% DURING THE PERIOD. WHY WERE THESE STOCKS
APPEALING?
A. I detected several positive industry trends that I felt provided a
favorable backdrop. Among these trends were a reduction in store
overcapacity - or less overall floor space - that had hurt the
industry for some time; a keener focus on the bottom line, or
earnings, by company managements; and new-found attention to returns
on invested capital. While it would be a stretch to say that all
retailers recently have mended their ways, it was clear to me that
there were a number of attractive stocks with the potential for upward
revaluations of their price-to-earnings (P/E) multiples. The story
behind big discounter Wal-Mart - the fund's largest retail investment
at the end of the period - illustrates my theory. Following the
company's rapid growth during the 1980s - which resulted in very
strong stock appreciation - Wal-Mart's returns deteriorated and its
stock dramatically underperformed the market from 1993 through 1996.
Recognizing that it had a problem, Wal-Mart committed itself to a new
financial discipline, emphasizing returns on its capital base, and
earnings growth began to accelerate. Based on these positive
developments, the stock recently began to perform well.
Q. TIME WARNER IS A RELATIVELY NEW TOP 10 HOLDING. WHAT MADE THIS
STOCK ATTRACTIVE?
A. Fundamentally, the company has a number of media franchises -
including Warner Brothers, Time Warner Cable, CNN and Time magazine -
with wide global reach. Also, the company has been focusing intently
on improving its financial returns. For example, previously high
levels of capital spending - largely related to its cable television
operations - were expected to peak and then decline, a development
that I felt could enhance the company's free-cash-flow dynamics. The
potential for this to occur - and for Time Warner to continue
expanding and enhancing its worldwide franchises as a result - made
this stock attractive during the period.
Q. WHICH OTHER STOCKS PERFORMED WELL DURING THE PERIOD? WHICH WERE
DISAPPOINTMENTS?
A. Other strong performers included General Electric, diversified-
industrial Tyco International and IBM. There weren't any major
setbacks, but several smaller positions - including Columbia/HCA
Healthcare and Waste Management - lagged the market.
Q. WHAT'S YOUR OUTLOOK FOR THE COMING MONTHS?
A. Given the economic difficulties we saw in Southeast Asia during the
last quarter of 1997 - where currency problems crippled many world
markets - global economic growth may be sluggish. If there is such a
slowdown, stocks with predictable, sustainable earnings growth likely
will outperform economically sensitive cyclical stocks and
commodities-based stocks. Of course, those companies with significant
revenue exposure to the Asian region could be particularly affected,
so I'll continue to try to limit the fund's investments in companies
whose earnings are susceptible to such a slowdown.
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 December 31, 1997, more than $345
million
MANAGER: Beth Terrana, since inception; joined
Fidelity in 1983
3
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
INVESTMENTS DECEMBER 31, 1997
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 90.9%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.7%
AEROSPACE & DEFENSE - 1.3%
AlliedSignal, Inc. 64,200 $ 2,499,763
Textron, Inc. 36,900 2,306,250
4,806,013
DEFENSE ELECTRONICS - 0.4%
Litton Industries, Inc. (a) 4,800 276,000
Raytheon Company Class B 20,200 1,020,100
1,296,100
TOTAL AEROSPACE & DEFENSE 6,102,113
BASIC INDUSTRIES - 1.2%
CHEMICALS & PLASTICS - 1.2%
Air Products & Chemicals, Inc. 10,900 896,525
Cytec Industries, Inc. (a) 7,000 328,563
Monsanto Co. 25,800 1,083,600
Praxair, Inc. 7,100 319,500
Sealed Air Corp. (a) 23,400 1,444,950
4,073,138
CONSTRUCTION & REAL ESTATE - 2.2%
BUILDING MATERIALS - 1.2%
Masco Corp. 76,300 3,881,763
Sherwin-Williams Co. 11,800 327,450
4,209,213
REAL ESTATE INVESTMENT TRUSTS - 1.0%
Captec Net Lease Realty, Inc. 9,900 170,156
Duke Realty Investors, Inc. 41,000 994,250
Equity Residential Properties Trust (SBI) 21,100 1,066,869
Public Storage, Inc. 34,600 1,016,375
Storage USA, Inc. 7,100 283,556
3,531,206
TOTAL CONSTRUCTION & REAL ESTATE 7,740,419
DURABLES - 1.9%
AUTOS, TIRES, & ACCESSORIES - 0.3%
Eaton Corp. 6,500 580,125
Navistar International Corp. (a) 18,400 456,550
1,036,675
CONSUMER DURABLES - 0.6%
Minnesota Mining & Manufacturing Co. 24,600 2,018,738
CONSUMER ELECTRONICS - 0.4%
Newell Co. 34,400 1,462,000
Philips Electronics NV 3,500 211,750
1,673,750
TEXTILES & APPAREL - 0.6%
Liz Claiborne, Inc. 18,000 752,625
VF Corp. 28,000 1,286,250
2,038,875
TOTAL DURABLES 6,768,038
ENERGY - 6.1%
ENERGY SERVICES - 0.4%
Halliburton Co. 10,500 545,344
Schlumberger Ltd. 4,700 378,350
Weatherford Enterra, Inc. (a) 9,000 393,750
1,317,444
SHARES VALUE (NOTE 1)
OIL & GAS - 5.7%
British Petroleum PLC ADR 55,460 $ 4,419,469
Burlington Resources, Inc. 10,800 483,975
Chevron Corp. 18,500 1,424,500
Exxon Corp. 18,600 1,138,088
Mobil Corp. 23,900 1,725,281
Royal Dutch Petroleum Co. 55,700 3,018,244
Texaco, Inc. 58,300 3,170,063
Tosco Corp. 26,200 990,688
Total SA sponsored ADR 24,400 1,354,200
USX-Marathon Group 63,700 2,149,875
19,874,383
TOTAL ENERGY 21,191,827
FINANCE - 19.8%
BANKS - 9.6%
Bank of New York Co., Inc. 72,000 4,162,500
BankAmerica Corp. 109,600 8,000,800
Chase Manhattan Corp. 35,000 3,832,500
Citicorp 46,900 5,929,919
Comerica, Inc. 14,700 1,326,675
Mellon Bank Corp. 16,700 1,012,438
National City Corp. 35,000 2,301,250
NationsBank Corp. 23,900 1,453,419
North Fork Bancorp., Inc. 5,800 194,663
U.S. Bancorp 34,400 3,850,650
Wells Fargo & Co. 4,900 1,663,244
33,728,058
CREDIT & OTHER FINANCE - 2.7%
American Express Co. 54,100 4,828,425
Associates First Capital Corp. 13,500 960,188
Household International, Inc. 20,300 2,589,519
Transamerica Corp. 10,700 1,139,550
9,517,682
FEDERAL SPONSORED CREDIT - 2.1%
Freddie Mac 89,000 3,732,438
Fannie Mae 65,800 3,754,713
7,487,151
INSURANCE - 3.8%
AFLAC, Inc. 24,100 1,232,113
Allstate Corp. 39,200 3,562,300
American International Group, Inc. 21,100 2,294,625
MGIC Investment Corp. 5,600 372,400
Progressive Corp. 6,200 743,225
Travelers Property Casualty Corp. Class A 41,600 1,830,400
Travelers Group, Inc. (The) 48,450 2,610,244
UNUM Corp. 10,700 581,813
13,227,120
SAVINGS & LOANS - 1.2%
Charter One Financial Corp. 9,580 604,738
Dime Bancorp., Inc. 46,700 1,412,675
Washington Mutual, Inc. 32,740 2,089,221
4,106,634
SECURITIES INDUSTRY - 0.4%
Morgan Stanley Dean Witter Discover
and Co. 21,100 1,247,538
TOTAL FINANCE 69,314,183
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
HEALTH - 12.6%
DRUGS & PHARMACEUTICALS - 8.4%
American Home Products Corp. 69,200 $ 5,293,800
Bristol-Myers Squibb Co. 91,600 8,667,650
Cytyc Corp. (a) 16,800 417,900
Merck & Co., Inc. 53,600 5,695,000
Pfizer, Inc. 35,100 2,617,144
Schering-Plough Corp. 69,200 4,299,050
SmithKline Beecham PLC ADR 45,800 2,355,838
29,346,382
MEDICAL EQUIPMENT & SUPPLIES - 3.2%
Baxter International, Inc. 40,500 2,042,719
Cardinal Health, Inc. 30,800 2,313,850
Johnson & Johnson 55,500 3,656,063
McKesson Corp. 13,400 1,449,713
Medtronic, Inc. 22,800 1,192,725
St. Jude Medical, Inc. (a) 9,300 283,650
Sofamor/Danek Group, Inc. (a) 5,800 377,363
11,316,083
MEDICAL FACILITIES MANAGEMENT - 1.0%
Columbia/HCA Healthcare Corp. 112,800 3,341,700
TOTAL HEALTH 44,004,165
INDUSTRIAL MACHINERY & EQUIPMENT - 8.9%
ELECTRICAL EQUIPMENT - 4.4%
Alcatel Alsthom Compagnie Generale
d'Electricite SA sponsored ADR 16,000 405,000
Alcatel Alsthom Compagnie Generale
d'Electricite SA 11,300 1,435,129
Emerson Electric Co. 37,700 2,127,694
General Electric Co. 156,400 11,475,850
15,443,673
INDUSTRIAL MACHINERY & EQUIPMENT - 4.5%
Illinois Tool Works, Inc. 6,700 402,838
Ingersoll-Rand Co. 25,300 1,024,650
Stanley Works 58,200 2,746,313
Tyco International Ltd. 254,160 11,453,085
15,626,886
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 31,070,559
MEDIA & LEISURE - 6.7%
BROADCASTING - 2.7%
Comcast Corp. Class A special 29,800 940,563
Tele-Communications, Inc.
(TCI Group), Series A 53,800 1,503,038
Time Warner, Inc. 108,900 6,751,800
9,195,401
ENTERTAINMENT - 1.5%
Carnival Cruise Lines, Inc. Class A 15,600 863,850
Disney (Walt) Co. 29,500 2,922,344
Viacom, Inc. Class B (non-vtg.) (a) 37,800 1,566,338
5,352,532
LEISURE DURABLES & TOYS - 0.2%
Mattel, Inc. 21,500 800,875
PUBLISHING - 2.3%
Cognizant Corp. 38,500 1,715,656
Harcourt General, Inc. 23,800 1,303,050
McGraw-Hill, Inc. 17,600 1,302,400
Pearson, PLC 57,200 745,415
SHARES VALUE (NOTE 1)
Times Mirror Co. Class A 30,500 $ 1,875,750
Tribune Co. 17,000 1,058,250
8,000,521
TOTAL MEDIA & LEISURE 23,349,329
NONDURABLES - 9.4%
BEVERAGES - 0.2%
Coca-Cola Co. (The) 12,900 859,463
FOODS - 2.7%
Campbell Soup Co. 31,600 1,836,750
Dole Food, Inc. 15,100 690,825
General Mills, Inc. 18,800 1,346,550
Heinz (H.J.) Co. 55,200 2,804,850
Kellogg Co. 16,300 808,888
Sara Lee Corp. 33,900 1,908,994
9,396,857
HOUSEHOLD PRODUCTS - 3.9%
Clorox Co. 13,600 1,075,250
Gillette Co. 19,700 1,978,619
Procter & Gamble Co. 63,800 5,092,038
Unilever:
PLC Ord. 199,500 1,712,403
NV ADR 61,600 3,846,150
13,704,460
TOBACCO - 2.6%
Philip Morris Companies, Inc. 169,800 7,694,063
RJR Nabisco Holdings Corp. 35,900 1,346,250
9,040,313
TOTAL NONDURABLES 33,001,093
PRECIOUS METALS - 0.0%
Getchell Gold Corp. (a) 6,400 153,600
RETAIL & WHOLESALE - 10.0%
APPAREL STORES - 1.6%
Gap, Inc. 15,550 551,053
Payless ShoeSource, Inc. (a) 50,900 3,416,663
TJX Companies, Inc. 45,400 1,560,625
5,528,341
DRUG STORES - 1.2%
CVS Corp. 64,377 4,124,152
GENERAL MERCHANDISE STORES - 6.6%
Carson Pirie Scott & Co. (a) 20,500 1,027,563
Consolidated Stores Corp. (a) 131,775 5,789,864
Dayton Hudson Corp. 38,100 2,571,750
Federated Department Stores, Inc. (a) 102,200 4,400,988
Meyer (Fred), Inc. (a) 17,600 640,200
Penney (J.C.) Co., Inc. 21,700 1,308,781
Proffitts, Inc. (a) 17,900 509,031
Wal-Mart Stores, Inc. 180,200 7,106,638
23,354,815
RETAIL & WHOLESALE, MISCELLANEOUS - 0.6%
Home Depot, Inc. 35,050 2,063,569
TOTAL RETAIL & WHOLESALE 35,070,877
SERVICES - 2.7%
ADVERTISING - 1.1%
Omnicom Group, Inc. 91,300 3,868,838
LEASING & RENTAL - 0.2%
Ryder Systems, Inc. 27,700 907,175
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - CONTINUED
PRINTING - 0.5%
Donnelley (R.R.) & Sons Co. 30,300 $ 1,128,675
Reynolds & Reynolds Co. Class A 24,900 459,094
1,587,769
SERVICES - 0.9%
Ecolab, Inc. 30,900 1,713,019
Service Corp. International 39,718 1,467,084
3,180,103
TOTAL SERVICES 9,543,885
TECHNOLOGY - 5.5%
COMMUNICATIONS EQUIPMENT - 0.2%
Cisco Systems, Inc. (a) 3,100 172,825
Lucent Technologies, Inc. 8,300 662,963
835,788
COMPUTER SERVICES & SOFTWARE - 1.2%
Microsoft Corp. (a) 27,600 3,567,300
Oracle Corp. (a) 25,450 567,853
4,135,153
COMPUTERS & OFFICE EQUIPMENT - 3.3%
Compaq Computer Corp. 24,950 1,408,116
Diebold, Inc. 27,150 1,374,469
EMC Corp. (a) 27,500 754,531
International Business Machines Corp. 22,900 2,394,481
Pitney Bowes, Inc. 36,900 3,318,694
Unisys Corp. (a) 6,200 86,025
Xerox Corp. 30,300 2,236,519
11,572,835
ELECTRONICS - 0.7%
Altera Corp. (a) 23,200 768,500
Intel Corp. 17,500 1,229,375
Texas Instruments, Inc. 13,300 598,500
2,596,375
PHOTOGRAPHIC EQUIPMENT - 0.1%
Polaroid Corp. 4,000 194,750
TOTAL TECHNOLOGY 19,334,901
UTILITIES - 2.2%
ELECTRIC UTILITY - 0.1%
Edison International 17,300 470,344
TELEPHONE SERVICES - 2.1%
AT&T Corp. 36,000 2,205,000
Brooks Fiber Properties, Inc. (a) 8,800 484,000
Frontier Corp. 11,400 274,313
MCI Communications Corp. 66,200 2,834,188
Telefonos de Mexico SA sponsored
ADR representing Ord. Class L shares 3,000 168,188
US WEST Media Group (a) 45,500 1,313,813
7,279,502
TOTAL UTILITIES 7,749,846
TOTAL COMMON STOCKS
(Cost $285,605,844) 318,467,973
CONVERTIBLE PREFERRED STOCKS - 0.8%
SHARES VALUE (NOTE 1)
DURABLES - 0.0%
AUTOS, TIRES, & ACCESSORIES - 0.0%
Republic Industries, Inc. $1.55 4,100 $ 96,350
ENERGY - 0.3%
OIL & GAS - 0.3%
Tosco Financing Trust $2.875
TOPRS (c) 8,700 562,786
Tosco Financing Trust $2.875 5,700 369,075
931,861
HEALTH - 0.5%
MEDICAL EQUIPMENT & SUPPLIES - 0.5%
McKesson Financing Trust $2.50
TOPRS (c) 9,400 717,925
McKesson Financing Trust $2.50 13,000 992,875
1,710,800
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $2,381,330) 2,739,011
CONVERTIBLE BONDS - 1.3%
MOODY'S RATINGS PRINCIPAL
(UNAUDITED) AMOUNT
INDUSTRIAL MACHINERY & EQUIPMENT - 0.5%
POLLUTION CONTROL - 0.5%
USA Waste Services, Inc.
4%, 2/1/02 Ba2 $ 1,192,000 1,317,160
United Waste Systems, Inc.
4 1/2%, 6/1/01 Ba3 275,000 375,375
1,692,535
RETAIL & WHOLESALE - 0.3%
GENERAL MERCHANDISE STORES - 0.1%
Federated Department Stores, Inc.
5%, 10/1/03 Baa3 294,000 395,430
RETAIL & WHOLESALE, MISCELLANEOUS - 0.2%
Home Depot, Inc.
3 1/4%, 10/1/01 A1 377,000 503,295
TOTAL RETAIL & WHOLESALE 898,725
TECHNOLOGY - 0.5%
COMPUTERS & OFFICE EQUIPMENT - 0.4%
EMC Corp.
3 1/4%, 3/15/02 Ba3 453,000 607,020
Unisys Corp.
8 1/4%, 3/15/06 B3 370,000 783,013
1,390,033
ELECTRONIC INSTRUMENTS - 0.1%
Thermo Electron Corp.
4 1/8%, 1/1/03 (c) Ba2 322,000 402,903
TOTAL TECHNOLOGY 1,792,936
TOTAL CONVERTIBLE BONDS
(Cost $4,366,327) 4,384,196
CASH EQUIVALENTS - 7.0%
SHARES VALUE (NOTE 1)
Taxable Central Cash Fund (b)
(Cost $24,658,978) 24,658,978 $ 24,658,978
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $317,012,479) $ 350,250,158
SECURITY TYPE ABBREVIATIONS
TOPRS - Trust Originated Preferred Securities
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield of the Taxable Central Cash
Fund was 5.69%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(c) Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions
exempt from registration, normally to qualified institutional buyers.
At the period end, the value of these securities amounted to
$1,683,614 or 0.5% of net assets.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $415,916,266 and $133,226,205, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $65,586 for the
period (see Note 4 of Notes to Financial Statements).
INCOME TAX INFORMATION
At December 31, 1997, the aggregate cost of investment securities for
income tax purposes was $317,159,410. Net unrealized appreciation
aggregated $33,090,748, of which $37,258,721 related to appreciated
investment securities and $4,167,973 related to depreciated investment
securities.
The fund hereby designates approximately $194,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
ASSETS
INVESTMENT IN $ 350,250,158
SECURITIES, AT
VALUE
(COST
$317,012,479)
- - SEE
ACCOMPANYING
SCHEDULE
CASH 4,316
RECEIVABLE FOR 2,359,273
INVESTMENTS
SOLD
RECEIVABLE FOR 1,046,559
FUND SHARES
SOLD
DIVIDENDS 389,805
RECEIVABLE
INTEREST 152,823
RECEIVABLE
TOTAL ASSETS 354,202,934
LIABILITIES
PAYABLE FOR $ 8,685,896
INVESTMENTS
PURCHASED
PAYABLE FOR FUND 88
SHARES
REDEEMED
ACCRUED 132,984
MANAGEMENT
FEE
OTHER PAYABLES 86,070
AND ACCRUED
EXPENSES
TOTAL 8,905,038
LIABILITIES
NET ASSETS $ 345,297,896
NET ASSETS
CONSIST OF:
PAID IN CAPITAL $ 310,123,818
ACCUMULATED 1,936,544
UNDISTRIBUTED
NET REALIZED
GAIN (LOSS) ON
INVESTMENTS
AND FOREIGN
CURRENCY
TRANSACTIONS
NET UNREALIZED 33,237,534
APPRECIATION
(DEPRECIATION)
ON
INVESTMENTS
AND ASSETS AND
LIABILITIES IN
FOREIGN
CURRENCIES
NET ASSETS $ 345,297,896
INITIAL CLASS: $12.53
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($345,287,471 (DIVIDED BY) 27,549,165
SHARES)
SERVICE CLASS: $12.53
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PRICE PER SHARE
($10,425 (DIVIDED BY) 832 SHARES)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
INVESTMENT $ 2,524,546
INCOME
DIVIDENDS
INTEREST 695,013
TOTAL INCOME 3,219,559
EXPENSES
MANAGEMENT FEE $ 862,309
TRANSFER AGENT 123,743
FEES
DISTRIBUTION FEES 1
- - SERVICE
CLASS
ACCOUNTING FEES 113,129
AND EXPENSES
NON-INTERESTED 578
TRUSTEES'
COMPENSATION
CUSTODIAN FEES 43,905
AND EXPENSES
AUDIT 22,038
LEGAL 7,938
MISCELLANEOUS 47,677
TOTAL 1,221,318
EXPENSES
BEFORE
REDUCTIONS
EXPENSE (894 1,220,424
REDUCTIONS )
NET INVESTMENT 1,999,135
INCOME
REALIZED AND
UNREALIZED
GAIN (LOSS)
NET REALIZED
GAIN (LOSS) ON:
INVESTMENT 8,707,635
SECURITIES
FOREIGN (573 8,707,062
CURRENCY )
TRANSACTIONS
CHANGE IN NET
UNREALIZED
APPRECIATION
(DEPRECIATION)
ON:
INVESTMENT 33,248,011
SECURITIES
ASSETS AND (145 33,247,866
LIABILITIES IN )
FOREIGN
CURRENCIES
NET GAIN (LOSS) 41,954,928
NET INCREASE $ 43,954,063
(DECREASE) IN
NET ASSETS
RESULTING
FROM
OPERATIONS
OTHER $ 894
INFORMATION
EXPENSE
REDUCTIONS
CUSTODIAN
CREDITS
STATEMENT OF CHANGES IN NET ASSETS
INCREASE YEAR ENDED DECEMBER 31, 1996
(DECREASE) IN DECEMBER 31, (COMMENCEMENT
NET ASSETS 1997 OF OPERATIONS)
OPERATIONS $ 1,999,135 $ 153
NET
INVESTMENT
INCOME
NET REALIZED 8,707,062 -
GAIN (LOSS)
CHANGE IN NET 33,247,866 (10,332)
UNREALIZED
APPRECIATION
(DEPRECIATION)
NET INCREASE 43,954,063 (10,179)
(DECREASE)
IN NET
ASSETS
RESULTING
FROM
OPERATIONS
DISTRIBUTIONS TO (1,998,716) -
SHAREHOLDERS
FROM NET
INVESTMENT
INCOME
FROM NET (6,771,091) -
REALIZED GAIN
TOTAL (8,769,807) -
DISTRIBUTIONS
SHARE 309,123,809 1,000,010
TRANSACTIONS
- - NET
INCREASE
(DECREASE)
TOTAL 344,308,065 989,831
INCREASE
(DECREASE) IN
NET ASSETS
NET ASSETS
BEGINNING OF 989,831 -
PERIOD
END OF PERIOD $ 345,297,896 $ 989,831
(INCLUDING
UNDISTRIBUTE
D NET
INVESTMENT
INCOME OF
$0 AND
$153,
RESPECTIVELY
)
OTHER INFORMATION:
YEAR ENDED DECEMBER 31, 1996
DECEMBER 31, 1997 (COMMENCEMENT OF
OPERATIONS)
SHARES DOLLARS SHARES DOLLARS
SHARE 29,294,015 $ 329,532,628 100,001 $ 1,000,010
TRANSACTIONS
INITIAL CLASS
SOLD
REINVESTED 718,814 8,769,531 - -
REDEEMED (2,563,665) (29,188,626) - -
NET INCREASE 27,449,164 $ 309,113,533 100,001 $ 1,000,010
(DECREASE)
SERVICE CLASS 810 $ 10,000 - $ -
A
SOLD
REINVESTED 22 276 - -
REDEEMED - - - -
NET INCREASE 832 $ 10,276 - $ -
(DECREASE)
DISTRIBUTIONS $ 1,998,653 $ -
INITIAL CLASS -
NET
INVESTMENT
INCOME
INITIAL CLASS - 6,770,878 -
NET REALIZED
GAIN
TOTAL $ 8,769,531 $ -
SERVICE CLASS $ 63 $ -
- - NET
INVESTMENT
INCOME
SERVICE CLASS 213 -
- - NET REALIZED
GAIN
TOTAL $ 276 $ -
$ 8,769,807 $ -
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1. SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
YEARS ENDED DECEMBER 31, 1996
DECEMBER 31, (COMMENCEMENT
1997 OF OPERATIONS)
SELECTED
PER-SHARE
DATA
NET ASSET VALUE, $ 9.90 $ 10.00
BEGINNING OF
PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET .13 D .00
INVESTMENT
INCOME
NET REALIZED 2.84 (.10)
AND
UNREALIZED
GAIN (LOSS)
TOTAL FROM 2.97 (.10)
INVESTMENT
OPERATIONS
LESS
DISTRIBUTIONS
FROM NET (.08) -
INVESTMENT
INCOME
FROM NET (.26) -
REALIZED GAIN
TOTAL (.34) -
DISTRIBUTIONS
NET ASSET VALUE, $ 12.53 $ 9.90
END OF PERIOD
TOTAL 30.09% (1.00)%
RETURN B, C
RATIOS AND
SUPPLEMENTAL
DATA
NET ASSETS, END $ 345,287 $ 990
OF PERIOD (000
OMITTED)
RATIO OF .70% 1.00% A,
EXPENSES TO F
AVERAGE NET
ASSETS
RATIO OF NET 1.14% 3.89% A
INVESTMENT
INCOME TO
AVERAGE NET
ASSETS
PORTFOLIO 81% 0% A
TURNOVER RATE
AVERAGE $ .0322 $ .0120
COMMISSION
RATE G
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEAR ENDED
DECEMBER 31,
SELECTED 1997 E
PER-SHARE
DATA
NET ASSET VALUE, $ 12.35
BEGINNING OF
PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET .03 D
INVESTMENT
INCOME
NET REALIZED .49
AND
UNREALIZED
GAIN (LOSS)
TOTAL FROM .52
INVESTMENT
OPERATIONS
LESS
DISTRIBUTIONS
FROM NET (.08)
INVESTMENT
INCOME
FROM NET (.26)
REALIZED GAIN
TOTAL (.34)
DISTRIBUTIONS
NET ASSET VALUE, $ 12.53
END OF PERIOD
TOTAL RETURN B 4.29%
RATIOS AND
SUPPLEMENTAL
DATA
NET ASSETS, END $ 10
OF PERIOD (000
OMITTED)
RATIO OF .80%
EXPENSES TO A
AVERAGE NET
ASSETS
RATIO OF NET 1.24%
INVESTMENT A
INCOME TO
AVERAGE NET
ASSETS
PORTFOLIO 81%
TURNOVER
AVERAGE $ .0322
COMMISSION
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.
D NET INVESTMENT INCOME PER
SHARE HAS BEEN CALCULATED
BASED ON AVERAGE SHARES
OUTSTANDING DURING THE
PERIOD.
E FOR THE PERIOD NOVEMBER 3,
1997 (COMMENCEMENT OF SALE
OF SERVICE CLASS SHARES) TO
DECEMBER 31, 1997.
F FMR AGREED TO REIMBURSE A
PORTION OF THE CLASS' EXPENSES
DURING THE PERIOD. WITHOUT
THIS REIMBURSEMENT, THE CLASS'
EXPENSE RATIO WOULD HAVE
BEEN HIGHER.
G A FUND IS REQUIRED TO DISCLOSE
ITS AVERAGE COMMISSION RATE
PER SHARE FOR SECURITY TRADES
ON WHICH COMMISSIONS ARE
CHARGED. THIS AMOUNT MAY
VARY FROM PERIOD TO PERIOD
AND FUND TO FUND DEPENDING
ON THE MIX OF TRADES EXECUTED
IN VARIOUS MARKETS WHERE
TRADING PRACTICES AND
COMMISSION RATE STRUCTURES
MAY DIFFER.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES.
Growth & 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 fund offers two classes of shares; the fund's original
class of shares (Initial Class shares) and Service Class shares. The
fund commenced sale of Service Class shares on November 3, 1997. Both
classes of shares have equal rights and voting privileges, except for
matters affecting a single class. Investment income, realized and
unrealized capital gains and losses, the common expenses of the fund,
and fund-level expense reductions, if any, are allocated on a pro rata
basis to each class based on the relative net assets of each class to
total net assets of the fund. Each class of shares differs in its
respective distribution plan.
The financial statements have been prepared in conformity with
generally accepted accounting principles which 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 foreign
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, which includes accretion of
original issue discount, is accrued as earned. Investment income is
recorded net of foreign taxes withheld where recovery of such taxes is
uncertain.
EXPENSES. Most expenses of the trust can be directly attributed to a
fund. Expenses which cannot be directly attributed are apportioned
among the funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the
ex-dividend date. Income dividends and capital gain distributions are
declared separately for each class.
Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences, which may result in
distribution reclassifications, are primarily due to differing
treatments for foreign currency transactions and losses deferred due
to wash sales. The fund also utilized earnings and profits distributed
to shareholders on redemption of shares as a part of the dividends
paid deduction for income tax purposes.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
Accumulated undistributed net realized gain (loss) on investments and
foreign currency transactions may include temporary book and tax basis
differences which will reverse in a subsequent period. Any taxable
income or gain remaining at fiscal year end is distributed in the
following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of
trade date. Gains and losses on securities sold are determined on the
basis of identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency
contracts to facilitate transactions in foreign-denominated
securities. Losses may arise from changes in the value of the foreign
currency or if the counterparties do not perform under the contracts'
terms. The U.S. dollar value of foreign currency contracts is
determined using contractual currency exchange rates established at
the time of each trade. 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 fund, along with
other affiliated entities of Fidelity Management & Research Company
(FMR), may transfer uninvested cash balances into one or more joint
trading accounts. These balances are invested in one or more
repurchase agreements for U.S. Treasury or Federal Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are
marked-to-market daily and maintained at a value at least equal to the
principal amount of the repurchase agreement (including accrued
interest). FMR, the fund's investment adviser, is responsible for
determining that the value of the underlying securities remains in
accordance with the market value requirements stated above.
TAXABLE CENTRAL CASH FUND. Pursuant to an Exemptive Order issued by
the SEC, the fund may invest in the Taxable Central Cash Fund (the
Cash Fund) managed by Fidelity Investments Money Management, Inc.
(formerly FMR Texas, Inc.) an affiliate of FMR. The Cash Fund is an
open-end money market fund available only to investment companies and
other accounts managed by FMR and its affiliates. The Cash Fund seeks
preservation of capital, liquidity, and current income by investing in
U.S. Treasury securities and repurchase agreements for these
securities. Income distributions from the Cash Fund are declared daily
and paid monthly from net interest income. Income distributions earned
by the fund are recorded as interest income in the accompanying
financial statements.
RESTRICTED SECURITIES. The fund is permitted to invest in securities
that are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from
registration or to the public if the securities are registered.
Disposal of these securities may involve time-consuming negotiations
and expense, and prompt sale at an acceptable price may be difficult.
At the end of the period, the fund had no investments in restricted
securities (excluding 144A issues).
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities), is included under the caption "Other
Information" at the end of the fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a
monthly fee that is calculated on the basis of a group fee rate plus a
fixed individual fund fee rate applied to the average net assets of
the fund. The group fee rate is the weighted average of a series of
rates and is based on the monthly average net assets of all the mutual
funds advised by FMR. The rates ranged from .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 annual rate of .49% of average net assets.
DISTRIBUTION AND SERVICE PLAN. In accordance with Rule 12b-1 of the
1940 Act, the Trustees have adopted separate distribution plans with
respect to each class of shares (collectively referred to as "the
Plans"). Under the Service Class Plan, the class pays Fidelity
Distributors Corporation (FDC), an affiliate of FMR, a distribution
and service fee (12b-1 fee). This fee is based on an annual rate of
.10% of Service Class average net assets. Initial Class shares are not
subject to a 12b-1 fee.
For the period, Service Class paid FDC $1, all of which was reallowed
to insurance companies, for the distribution of shares and providing
shareholder support services.
Under the Plans, FMR or FDC may use its resources to pay
administrative and promotional expenses related to the sale of each
class of shares. Subject to the approval of the Board of Trustees, the
Plans also authorize payments to third parties that assist in the sale
of each class of shares or render shareholder support services. For
the period, FMR or FDC informed the fund that payments made to third
parties under the Plans amounted to $3,786 and $0 for the Initial
Class and Service Class, respectively.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations
Company, Inc. (FIIOC), an affiliate of FMR, is the fund's transfer,
dividend disbursing and shareholder servicing agent. FIIOC receives
account fees and asset-based fees that vary according to account size
and type of account. FIIOC pays a portion of the expenses related to
typesetting, printing and mailing of shareholder reports, except proxy
statements. For the period, the transfer agent fees of the fund were
equivalent to an annual rate of .07% of average net assets.
ACCOUNTING FEES. Fidelity Service Company, Inc. (FSC), an affiliate of
FMR, maintains the fund's accounting records. The fee is based on the
level of average net assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments
5. EXPENSE REDUCTIONS.
The fund has entered into an arrangement with its custodian whereby
credits realized as a result of uninvested cash balances were used to
reduce a portion of the fund's expenses. For the period, the
reductions under this arrangement are shown under the caption "Other
Information" on the fund's Statement of Operations.
6. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were the record owners
of approximately 82% of the outstanding shares of the fund.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Variable Insurance Products Fund III and the
Shareholders of Growth & Income Portfolio:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments (except for Moody's ratings),
and the related statements of operations and of changes in net assets
and the financial highlights present fairly, in all material respects,
the financial position of Growth & Income Portfolio (a fund of
Variable Insurance Products Fund III) at December 31, 1997 , the
results of its operations for the year then ended, and the changes in
its net assets and the financial highlights for the periods indicated,
in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Growth &
Income Portfolio's management; our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with
generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits, which included confirmation of securities at December
31, 1997 by correspondence with the custodian and the application of
alternative auditing procedures where securities purchased were not
yet received by the custodian, provide a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
February 5, 1998
DISTRIBUTIONS
The Board of Trustees of VIP III: Growth & Income Portfolio voted to
pay to shareholders of record at the opening of business on record
date, the following distributions derived from capital gains realized
from sales of portfolio securities, and dividends derived from net
investment income.
INITIAL CLASS
Pay Date 2/6/98
Record Date 2/6/98
Dividends -
Short-Term
Capital Gains $.07
Long-Term
Capital Gains -
Long-Term
Capital Gain Breakdown:
28% rate -
20% rate -
SERVICE CLASS
Pay Date 2/6/98
Record Date 2/6/98
Dividends -
Short-Term
Capital Gains $.07
Long-Term
Capital Gains -
Long-Term
Capital Gain Breakdown:
28% rate -
20% rate -
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
Richard A. Spillane, Jr., VICE PRESIDENT
Beth Terrana, VICE PRESIDENT
Eric D. Roiter, SECRETARY
Richard A. Silver, TREASURER
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
Ralph F. Cox *
Phyllis Burke Davis *
Robert M. Gates *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Marvin L. Mann *
William O. McCoy *
Gerald C. McDonough *
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
(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND III: GROWTH OPPORTUNITIES PORTFOLIO
ANNUAL REPORT
DECEMBER 31, 1997
CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
MARKET ENVIRONMENT 3 A REVIEW OF WHAT HAPPENED IN WORLD MARKETS
DURING THE LAST YEAR.
PERFORMANCE 4 HOW THE FUND HAS DONE OVER TIME.
FUND TALK 5 THE MANAGER'S REVIEW OF FUND PERFORMANCE, STRATEGY
AND OUTLOOK.
INVESTMENTS 6 A COMPLETE LIST OF THE FUND'S INVESTMENTS WITH THEIR
MARKET VALUES.
FINANCIAL STATEMENTS 10 STATEMENTS OF ASSETS AND LIABILITIES, OPERATIONS, AND
CHANGES IN NET ASSETS, AS WELL AS FINANCIAL HIGHLIGHTS.
NOTES 13 NOTES TO THE FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT ACCOUNTANTS 16 THE AUDITORS' OPINION.
DISTRIBUTIONS 17
</TABLE>
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE
SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND.
THIS REPORT IS NOT AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED
OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED
BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE
SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
MARKET ENVIRONMENT
Despite an infectious currency crisis that erupted in Southeast Asia
in October, most stock and bond markets around the globe posted
another year of positive returns. Sustained corporate earnings growth,
low interest-rate levels and an overall lack of inflationary concern
provided a favorable investing backdrop. The U.S. and European stock
markets continued to perform well, with U.S. stocks posting their
third consecutive year of strong results. The problems in Southeast
Asia, though, reverberated throughout the world, with investors
becoming increasingly concerned toward the end of the period regarding
the sustainability of corporate earnings. The U.S. bond market enjoyed
a nice run in 1997.
U.S. STOCK MARKETS
The U.S. stock market went through many phases during 1997. Entering
the year, the market was still being dominated by an extremely narrow
contingent of well-known, large-capitalization stocks. In fact, much
of the Standard & Poor's 500 Index 12-month gain of 33.36% came from
these bigger stocks. Stock prices soared to historic highs and the Dow
Jones Industrial Average hurtled past the 8000-point mark in August.
But, investors became increasingly concerned about the market's
ability to sustain its lofty performance levels. In mid-August,
several large multinationals - companies that derive a significant
portion of their revenues from overseas operations - justified these
concerns by announcing earnings disappointments. These announcements
triggered a slowdown among larger-cap stocks, while smaller- and
medium-sized stocks gained momentum. From August through December, the
S&P MidCap 400 Index - a measure of mid-sized stock performance -
returned 6.50%, while the S&P 500 returned 2.43%.
In late October, economic turmoil shook Southeast Asia. Since this
region accounts for a significant portion of world economic growth,
shock tremors rippled through developed markets such as those in the
U.S. and Europe, as well as emerging-market nations in Eastern Europe
and Latin America. In New York, the uncertainty was punctuated by a
554-point drop in the Dow one day and a 337-point recovery the next.
In terms of industry groups, moderate economic growth coupled with
nonexistent inflation translated into near nirvana for the finance
sector. Banks and brokerages demonstrated their ability to sustain
impressive earnings growth as borrowing demand remained high and cash
flows were healthy. Consolidation in the form of merger and
acquisition activity also brought positive results to the group. Due
to strong oil exploration and production demand, the energy service
sector also fared nicely. Demand for offshore drilling, in particular,
was very high and the industry enjoyed favorable pricing trends.
Technology stocks were a mixed bag in 1997, with the group
experiencing a decent rally through the first half of the year. The
second-half Asian crisis, however, proved particularly harmful to many
technology companies with Asian business ties. With Asia accounting
for a considerable amount of the world's technology production, the
region's economic troubles were far-reaching. Going into 1998, many
money managers - sensing an economic slowdown due to Asia - were
concentrating on stocks that were less cyclical, or economically
sensitive.
FOREIGN STOCK MARKETS
Stock markets around the world reacted differently in 1997. Europe -
bolstered by continued economic reform and a convergence in monetary
policy - posted strong overall returns as Finland, Italy, Spain,
Switzerland and the United Kingdom led the way. The Morgan Stanley
Capital International (MSCI) Europe Index returned 24.17% during the
period. In contrast, the MSCI EAFE Index, which measures the
performance of Europe, Australasia and the Far East, reflected the
problems brought on by the Asian crisis. The MSCI EAFE returned 2.01%
for the period. Japan and Hong Kong were two noteworthy laggards, as
economic recovery in Japan trudged along and Hong Kong felt the brunt
of Asia's woes. Emerging market equity performance was solid through
the first half of the period, but trailed off some in the second.
Uncertainty in Asia and South Korea made some investors question the
well-being of other pivotal emerging-market nations such as Russia,
which proved particularly vulnerable to the Asian dilemma.
U.S. BOND MARKETS
Bonds benefited from low interest rates - which in turn drove prices
upward - as well as a distinct lack of inflation indicators. The
Lehman Brothers Aggregate Bond Index - a measure of the U.S. taxable
bond market - returned 9.65% during the year. The Federal Reserve
Board's raising of a key short-term interest rate in March proved to
be one of the few obstacles to the bond market. Bonds rallied from
April through mid-September, buoyed in large part by encouraging
economic data and the Fed's reluctance to raise rates further.
Additionally, while the Asian crisis brought some equity markets to
their knees, many bond markets welcomed wary stock investors in search
of lower volatility. Interest rates reached attractive levels, with
the yield on the 30-year Treasury bond going below the 6% mark in
November. Corporate bonds performed reasonably well due to continued
economic growth and high demand for yield. Mortgage-backed bonds also
fared relatively well, in spite of increased refinancing activity due
to the lower rates.
FOREIGN BOND MARKETS
While low inflation and steady growth boosted the U.S. bond market,
results were varied on the international front. The Salomon Brothers
World Government Bond Index - a measure of government bond market
performance in developed nations - returned 0.23% for the 12 months
that ended December 31, 1997. In Europe, countries continued to make
progress in the drive toward meeting European Monetary Union
requirements. But a strong dollar relative to many currencies eroded
gains for U.S.-based investors. Japan - one of the more significant
components of the Salomon Brothers index - continued to struggle as
economic reform continued to develop slowly. The often-volatile world
of emerging-market debt also had mixed results, as Asian concerns
trickled into these regions. Brazil and Argentina performed well,
while Ecuador stumbled due to political uncertainty. Nevertheless, The
J.P. Morgan Emerging Markets Bond Index still managed to return 16.15%
during the period.
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 DECEMBER 31, 1997 PAST 1 LIFE OF
YEAR FUND
VIP III: GROWTH OPPORTUNITIES - "INITIAL CLASS" 29.95% 26.81%
S&P 500 (REGISTERED TRADEMARK) 33.36% 31.22%
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and
show you what would have happened if the fund had achieved that return
by performing at a constant rate each year.
You can compare the fund's returns to the performance of the Standard
& Poor's 500 Index - a widely recognized, unmanaged index of common
stocks.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how it
will do tomorrow. The stock market, for example, has a
history of long-term growth and short-term volatility. In
turn, the share price and return of a fund that invests in
stocks will vary. That means if you sell your shares
during a market downturn, you might lose money.
But if you can ride out the market's ups and downs,
you may have a gain.
3
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
IMAHDR PRASUN SHR__CHT 19971231 19980109 111329 S00000000000001
VIP III Growth Opp S&P 500
00617 SP001
1995/01/03 10000.00 10000.00
1995/01/31 10060.00 10261.28
1995/02/28 10370.00 10661.16
1995/03/31 10560.00 10975.77
1995/04/30 10930.00 11299.00
1995/05/31 11440.00 11750.63
1995/06/30 11790.00 12023.59
1995/07/31 12180.00 12422.30
1995/08/31 12260.00 12453.48
1995/09/30 12470.00 12979.01
1995/10/31 12560.00 12932.68
1995/11/30 12920.00 13500.42
1995/12/31 13251.81 13760.44
1996/01/31 13444.45 14228.85
1996/02/29 13434.43 14360.75
1996/03/31 13393.72 14499.04
1996/04/30 13607.45 14712.76
1996/05/31 13912.77 15092.20
1996/06/30 14024.73 15149.70
1996/07/31 13617.62 14480.39
1996/08/31 13699.05 14785.78
1996/09/30 14360.59 15617.92
1996/10/31 14950.89 16048.66
1996/11/30 16080.60 17261.78
1996/12/31 15673.50 16919.83
1997/01/31 16416.46 17976.98
1997/02/28 16573.05 18117.92
1997/03/31 15727.48 17373.45
1997/04/30 16446.21 18410.65
1997/05/31 17513.74 19531.49
1997/06/30 18095.06 20406.50
1997/07/31 19490.24 22030.24
1997/08/31 18750.37 20796.11
1997/09/30 19532.52 21935.11
1997/10/31 19141.45 21202.48
1997/11/30 19817.90 22183.94
1997/12/31 20367.51 22564.84
IMATRL PRASUN SHR__CHT 19971231 19980109 111332 R00000000000039
Let's say hypothetically that $10,000 was invested in VIP III: Growth
Opportunities Portfolio on January 3, 1995, when the fund started. As
the chart shows, by December 31, 1997, the value of the investment
would have grown to $20,368 - a 103.68% 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 $22,565 - a 125.65% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
FANNIE MAE 7.8
PHILIP MORRIS COMPANIES, INC. 6.3
FREDDIE MAC 3.0
FLEET FINANCIAL GROUP, INC. 2.7
COLUMBIA/HCA HEALTHCARE CORP. 2.6
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
FINANCE 21.8
TECHNOLOGY 9.4
RETAIL & WHOLESALE 7.9
HEALTH 7.5
NONDURABLES 7.5
ASSET ALLOCATION AS OF DECEMBER 31, 1997*
ROW: 1, COL: 1, VALUE: 6.0
ROW: 1, COL: 2, VALUE: 11.0
ROW: 1, COL: 3, VALUE: 82.90000000000001
STOCKS 82.9%
BONDS 11.0%
SHORT-TERM INVESTMENTS 6.1%
FOREIGN INVESTMENTS 7.0%
*
% OF FUND'S
INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with George Vanderheiden, Portfolio Manager of Growth
Opportunities Portfolio
Q. HOW DID THE FUND PERFORM COMPARED TO ITS BENCHMARK, GEORGE?
A. For the 12 months that ended December 31, 1997, the fund trailed
the Standard & Poor's 500 Index return of 33.36%.
Q. WHAT FACTORS CONTRIBUTED TO THE FUND'S UNDERPERFORMANCE?
A. While the fund's bond positions performed well during the last
quarter of 1997 when an economic crisis in Southeast Asia helped roil
the U.S. stock market, they hurt performance relative to the index
during the entire period. Over the past year, the allocations to bonds
and cash equivalents reduced the return of the fund by approximately
3%. Holdings in the health sector - most notably Columbia/HCA
Healthcare - were also performance detractors.
Q. WHAT CAUSED THE ECONOMIC CRISIS IN SOUTHEAST ASIA AND HOW WAS THE
FUND ITSELF AFFECTED?
A. The problems in Southeast Asia resulted from two main catalysts.
First, industry overcapacity due to excessive capital investment
spurred trouble, as banks made it quite easy to obtain loans. Many
sectors of the Asian economies are now awash in defaulted loans, a
perilous situation only made worse by looming recession. Second, an
ongoing economic battle among the region's nations to gain more
control of the export market figured into the equation. Over the past
several months, many Asian countries have tried to gain an advantage
by devaluing their currencies, a move that further destabilized the
region's economies. Against this backdrop, many U.S. investors sought
refuge over the past few months among large-cap stocks with more
market liquidity, stable revenue growth and modest earnings
expectations. These types of companies should be better able to
withstand any volatility linked to disruption in Asian economies. In
terms of the fund, I had concentrated more on sectors with less
exposure to Asia, namely finance and utilities stocks. This
repositioning took place well before the actual Asian blow-up, and the
fund was minimally affected as a result.
Q. WHY DOES THE FUND OWN BONDS?
A. I originally purchased bonds as a hedge against slowing corporate
earnings growth. Although the deceleration in earnings growth has
taken longer than I expected, the bond market has performed very well
in recent months with low interest rates and concerns over 1998
corporate earnings playing a role. In addition, deflation remains a
potential shock to the economy that could disrupt the stock market. In
a deflationary environment, the economy begins to slow and earnings
fall sharply. In this case, Treasury bonds would be among the best
financial assets to own.
Q. WHAT MARKET SECTORS HELPED THE FUND'S PERFORMANCE DURING THE
PERIOD?
A. Investments in the finance, technology and basic industries sectors
had the most positive effects on performance. Declining interest rates
fueled a strong rise in such financial stocks as Fannie Mae, Freddie
Mac and Fleet Financial Group, all top contributors during the period.
I began reducing the fund's technology weighting around mid-year, and
by the time the Asian financial crisis took hold - affecting many
technology-related stocks - the fund's underexposure proved
beneficial. During the first three quarters of 1997, accelerating
growth in personal computer sales and corporate spending on
telecommunications and networking hardware propelled many of the
fund's technology positions to strong gains. Compaq Computer was a top
contributor during this time period. The company reported strong unit
growth, a key to success given the lack of pricing power in the
industry. A notable contribution to the fund's performance also came
from consumer nondurable giant Philip Morris. Despite the stigma of
tobacco litigation, Philip Morris was the second- largest contributor
to the fund's performance. This is just the type of company that I
think should do well in the current market environment of weak pricing
power, nervousness surrounding the Asian financial crisis and the
possibility of a deceleration in corporate earnings. Philip Morris has
a high dividend, a strong product line and solid earnings growth.
Consequently, the stock has outperformed the S&P 500 since the Asian
crisis began in late October.
Q. WHAT IS YOUR OUTLOOK FOR THE STOCK MARKET?
A. I've positioned the fund to reflect an environment of anemic
pricing power and flat-to-declining corporate earnings. After many
years of strong corporate earnings growth, signs are now emerging of a
slowdown in many parts of the economy. I have positioned the fund to
take advantage of an environment of low inflation and flat corporate
earnings by focusing on four areas: (1) innovative companies in the
technology, health care and telecommunications sectors that can rely
on unit growth rather than price increases to grow earnings; (2)
companies in the financial sector that should benefit from falling
interest rates; (3) global companies that have strong proprietary
advantages and can use these advantages to grow market share
worldwide; and (4) industries in consolidation that still have strong
growth rates.
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 December 31, 1997, more than
$1.0 billion
MANAGER: George Vanderheiden, since inception;
joined Fidelity in 1971
3
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
INVESTMENTS DECEMBER 31, 1997
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 82.9%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 0.5%
AEROSPACE & DEFENSE - 0.0%
Gulfstream Aerospace Corp. (a) 10,900 $ 318,802
DEFENSE ELECTRONICS - 0.4%
Raytheon Company:
Class A 20,898 1,030,533
Class B 63,700 3,216,850
4,247,383
SHIP BUILDING & REPAIR - 0.1%
Avondale Industries, Inc. (a) 4,300 127,656
Newport News Shipbuilding, Inc. 14,500 368,844
496,500
TOTAL AEROSPACE & DEFENSE 5,062,685
BASIC INDUSTRIES - 3.8%
CHEMICALS & PLASTICS - 2.4%
Air Products & Chemicals, Inc. 17,900 1,472,275
Dow Chemical Co. 4,400 446,600
du Pont (E.I.) de Nemours & Co. 224,800 13,502,050
Raychem Corp. 149,100 6,420,619
Union Carbide Corp. 71,800 3,082,913
24,924,457
PACKAGING & CONTAINERS - 1.0%
Bemis Co., Inc. 7,200 317,250
Corning, Inc. 38,500 1,429,313
Owens-Illinois, Inc. (a) 229,100 8,691,481
10,438,044
PAPER & FOREST PRODUCTS - 0.4%
Boise Cascade Corp. 29,400 889,350
Champion International Corp. 46,100 2,088,906
International Paper Co. 5,700 245,813
Willamette Industries, Inc. 16,700 537,531
3,761,600
TOTAL BASIC INDUSTRIES 39,124,101
CONSTRUCTION & REAL ESTATE - 1.1%
CONSTRUCTION - 0.8%
Centex Corp. 17,400 1,095,113
D.R. Horton, Inc. 50,336 874,588
Fleetwood Enterprises, Inc. 97,262 4,127,556
Kaufman & Broad Home Corp. 82,700 1,855,581
U.S. Home Corp. (a) 5,600 219,800
8,172,638
ENGINEERING - 0.3%
Fluor Corp. 97,600 3,647,800
TOTAL CONSTRUCTION & REAL ESTATE 11,820,438
DURABLES - 4.0%
AUTOS, TIRES, & ACCESSORIES - 2.9%
Circuit City Stores, Inc. - CarMax Group 6,600 59,400
Cummins Engine Co., Inc. 39,500 2,332,969
Discount Auto Parts, Inc. (a) 40,500 774,563
Federal-Mogul Corp. 7,800 315,900
General Motors Corp. 327,700 19,866,813
Gentex Corp. (a) 6,100 163,938
Goodyear Tire & Rubber Co. 17,800 1,132,525
Honda Motor Co. Ltd. 13,000 476,891
Magna International, Inc. Class A 44,000 2,757,791
Superior Industries International, Inc. 56,300 1,509,544
29,390,334
SHARES VALUE (NOTE 1)
CONSUMER DURABLES - 0.1%
Minnesota Mining & Manufacturing Co. 15,200 $ 1,247,350
CONSUMER ELECTRONICS - 0.6%
Newell Co. 34,300 1,457,750
Philips Electronics NV 31,000 1,875,500
Philips Electronics NV (Bearer) 49,500 2,970,244
6,303,494
HOME FURNISHINGS - 0.0%
HON Industries, Inc. 700 41,300
TEXTILES & APPAREL - 0.4%
Burlington Industries, Inc. (a) 62,200 859,138
Liz Claiborne, Inc. 32,100 1,342,181
NIKE, Inc. Class B 41,800 1,640,650
Reebok International Ltd. (a) 7,300 210,331
4,052,300
TOTAL DURABLES 41,034,778
ENERGY - 5.4%
ENERGY SERVICES - 0.3%
McDermott International, Inc. 83,000 3,039,875
OIL & GAS - 5.1%
Amerada Hess Corp. 36,800 2,019,400
Atlantic Richfield Co. 29,500 2,363,688
British Petroleum PLC ADR 94,059 7,495,327
Burlington Resources, Inc. 200,435 8,981,993
Elf Aquitaine SA sponsored ADR 17,600 1,031,800
Enron Oil & Gas Co. 7,100 150,431
Kerr-McGee Corp. 14,600 924,363
Occidental Petroleum Corp. 253,900 7,442,444
Royal Dutch Petroleum Co. 219,100 11,872,481
Santa Fe Energy Resources, Inc. 43,600 490,500
Tosco Corp. 178,700 6,757,094
Total SA:
Class B 6,153 669,082
sponsored ADR 40,568 2,251,524
Valero Energy Corp. 15,000 471,563
52,921,690
TOTAL ENERGY 55,961,565
FINANCE - 21.8%
BANKS - 1.4%
Credit Suisse Group (Reg.) 32,700 5,054,856
NationsBank Corp. 59,000 3,587,938
Providian Financial Corp. 89,700 4,053,319
Wells Fargo & Co. 7,000 2,376,063
15,072,176
CREDIT & OTHER FINANCE - 2.9%
CIT Group, Inc. Class A 21,500 693,375
Fleet Financial Group, Inc. 369,182 27,665,576
Green Tree Financial Corp. 36,800 963,700
Money Store, Inc. (The) 15,700 329,700
29,652,351
FEDERAL SPONSORED CREDIT - 10.8%
Freddie Mac 730,200 30,622,763
Fannie Mae 1,418,000 80,914,625
111,537,388
INSURANCE - 6.3%
AFLAC, Inc. 30,250 1,546,531
Allmerica Financial Corp. 38,100 1,902,619
Allstate Corp. 212,259 19,289,037
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
American International Group, Inc. 127,200 $ 13,833,000
CIGNA Corp. 37,300 6,455,231
General Re Corp. 19,100 4,049,200
Loews Corp. 30,100 3,194,363
MGIC Investment Corp. 93,000 6,184,500
Nationwide Financial Services, Inc.
Class A 2,700 97,538
PMI Group, Inc. 41,700 3,015,431
Provident Companies, Inc. 5,000 193,125
Reliastar Financial Corp. 19,300 794,919
Torchmark Corp. 87,100 3,663,644
Travelers Property Casualty Corp. Class A 15,300 673,200
UNUM Corp. 7,200 391,500
65,283,838
SAVINGS & LOANS - 0.3%
Golden West Financial Corp. 36,500 3,570,156
SECURITIES INDUSTRY - 0.1%
United Asset Management Corp. 54,900 1,341,619
TOTAL FINANCE 226,457,528
HEALTH - 7.5%
DRUGS & PHARMACEUTICALS - 3.0%
American Home Products Corp. 90,300 6,907,950
Amgen, Inc. 49,800 2,695,425
Astra AB Class A Free shares 302,766 5,247,013
COR Therapeutics, Inc. (a) 3,000 67,500
Gilead Sciences, Inc. (a) 3,400 130,050
Ligand Pharmaceuticals, Inc. Class B (a) 1,600 20,600
Medimmune, Inc. (a) 2,200 94,325
Merck & Co., Inc. 23,800 2,528,750
Novartis AG (Reg.) 3,400 5,511,628
Schering-Plough Corp. 116,000 7,206,500
Sepracor, Inc. (a) 6,700 268,419
30,678,160
MEDICAL EQUIPMENT & SUPPLIES - 0.7%
Allegiance Corp. 3,980 141,041
Bard (C.R.), Inc. 29,500 923,719
Baxter International, Inc. 13,900 701,081
Biomet, Inc. 66,800 1,711,750
Boston Scientific Corp. 5,800 266,075
Johnson & Johnson 9,800 645,575
St. Jude Medical, Inc. (a) 93,500 2,851,750
Sofamor/Danek Group, Inc. (a) 7,800 507,488
7,748,479
MEDICAL FACILITIES MANAGEMENT - 3.8%
Columbia/HCA Healthcare Corp. 894,150 26,489,194
Humana, Inc. (a) 192,400 3,992,300
Tenet Healthcare Corp. (a) 122,700 4,064,438
United HealthCare Corp. 91,300 4,536,469
39,082,401
TOTAL HEALTH 77,509,040
HOLDING COMPANIES - 0.2%
U.S. Industries, Inc. 64,100 1,931,013
INDUSTRIAL MACHINERY & EQUIPMENT - 1.7%
ELECTRICAL EQUIPMENT - 1.3%
Alcatel Alsthom Compagnie Generale
d'Electricite SA sponsored ADR 4,500 113,906
SHARES VALUE (NOTE 1)
Alcatel Alsthom Compagnie Generale
d'Electricite SA 41,300 $ 5,245,206
Emerson Electric Co. 16,800 948,150
General Electric Co. 83,200 6,104,800
Grainger (W.W.), Inc. 6,400 622,000
Scientific-Atlanta, Inc. 38,500 644,875
13,678,937
INDUSTRIAL MACHINERY & EQUIPMENT - 0.3%
Caterpillar, Inc. 57,000 2,768,063
Ultratech Stepper, Inc. (a) 44,200 878,475
3,646,538
POLLUTION CONTROL - 0.1%
Browning-Ferris Industries, Inc. 20,900 773,300
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 18,098,775
MEDIA & LEISURE - 3.2%
BROADCASTING - 0.8%
CBS Corp. 56,500 1,663,219
Comcast Corp. Class A 6,800 216,750
Comcast Corp. Class A special 13,500 426,094
Cox Communications, Inc. Class A (a) 13,300 532,831
Tele-Communications, Inc.:
(TCI Group), Series A 28,468 795,325
(TCI Ventures Group), Series A 86,732 2,455,600
Time Warner, Inc. 36,700 2,275,400
8,365,219
ENTERTAINMENT - 0.5%
Cedar Fair LP (depositary unit) 5,800 150,075
Disney (Walt) Co. 4,600 455,688
King World Productions, Inc. 10,500 606,375
MGM Grand, Inc. (a) 1,200 43,275
Royal Caribbean Cruises Ltd. 42,000 2,239,125
Viacom, Inc. (a):
Class A 18,100 739,838
Class B (non-vtg.) 25,000 1,035,938
5,270,314
LEISURE DURABLES & TOYS - 0.2%
Nintendo Co. Ltd. Ord. 23,100 2,264,446
LODGING & GAMING - 0.7%
Circus Circus Enterprises, Inc. (a) 88,200 1,808,100
Harrah's Entertainment, Inc. (a) 14,800 279,350
Mirage Resorts, Inc. (a) 109,000 2,479,750
Rio Hotel & Casino, Inc. (a) 5,800 121,800
Sun International Hotels Ltd. Ord. (a) 59,200 2,227,400
6,916,400
PUBLISHING - 0.3%
Cognizant Corp. 25,200 1,122,975
US WEST Media Group (a) 84,900 2,451,488
3,574,463
RESTAURANTS - 0.7%
Brinker International, Inc. (a) 27,100 433,600
McDonald's Corp. 80,300 3,834,325
Papa John's International, Inc. (a) 7,000 244,125
Tricon Global Restaurants, Inc. 940 27,319
Wendy's International, Inc. 108,800 2,618,000
7,157,369
TOTAL MEDIA & LEISURE 33,548,211
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONDURABLES - 7.5%
BEVERAGES - 0.0%
PepsiCo, Inc. 9,600 $ 349,800
TOBACCO - 7.5%
Philip Morris Companies, Inc. 1,449,400 65,675,938
RJR Nabisco Holdings Corp. 277,460 10,404,750
UST, Inc. 25,300 934,519
77,015,207
TOTAL NONDURABLES 77,365,007
PRECIOUS METALS - 0.1%
Barrick Gold Corp. 7,500 139,817
Newmont Mining Corp. 28,769 845,089
984,906
RETAIL & WHOLESALE - 7.9%
APPAREL STORES - 0.4%
Gap, Inc. 32,550 1,153,491
TJX Companies, Inc. 83,700 2,877,188
4,030,679
DRUG STORES - 0.0%
CVS Corp. 2,550 163,359
GENERAL MERCHANDISE STORES - 2.6%
Federated Department Stores, Inc. (a) 92,500 3,983,281
Proffitts, Inc. (a) 28,300 804,781
Wal-Mart Stores, Inc. 547,700 21,599,919
26,387,981
GROCERY STORES - 0.3%
Safeway, Inc. (a) 54,000 3,415,500
RETAIL & WHOLESALE, MISCELLANEOUS - 4.6%
Circuit City Stores, Inc. - Circuit
City Group 249,300 8,865,731
Corporate Express, Inc. (a) 41,900 539,463
Home Depot, Inc. 305,500 17,986,313
Lowe's Companies, Inc. 241,600 11,521,300
Officemax, Inc. (a) 123,275 1,756,669
Office Depot, Inc. (a) 38,100 912,019
PEAPOD, Inc. 300 1,950
Rex Stores Corp. (a) 14,400 147,600
Staples, Inc. (a) 50,500 1,401,375
Toys "R" Us, Inc. (a) 79,500 2,499,281
U.S. Office Products Co. (a) 56,700 1,112,738
Viking Office Products, Inc. (a) 50,500 1,101,531
47,845,970
TOTAL RETAIL & WHOLESALE 81,843,489
SERVICES - 0.8%
ADVERTISING - 0.0%
Interpublic Group of Companies, Inc. 8,150 405,972
LEASING & RENTAL - 0.0%
Avis Rent A Car, Inc. (a) 2,700 86,231
PRINTING - 0.0%
Donnelley (R.R.) & Sons Co. 3,800 141,550
SERVICES - 0.8%
Cendant Corp. (a) 202,150 6,948,906
Reuters Holdings PLC ADR Class B 15,700 1,040,125
7,989,031
TOTAL SERVICES 8,622,784
SHARES VALUE (NOTE 1)
TECHNOLOGY - 9.4%
COMMUNICATIONS EQUIPMENT - 0.0%
Andrew Corp. 13,800 $ 331,200
COMPUTER SERVICES & SOFTWARE - 2.7%
Automatic Data Processing, Inc. 52,400 3,216,050
Black Box Corp. (a) 8,800 311,300
Ceridian Corp. (a) 64,200 2,941,163
CompUSA, Inc. (a) 27,600 855,600
E Trade Group, Inc. (a) 19,800 455,400
Electronic Data Systems Corp. 142,600 6,265,488
Electronics for Imaging, Inc. (a) 69,400 1,153,775
First Data Corp. 80,300 2,348,775
Microsoft Corp. (a) 36,200 4,678,850
Oracle Corp. (a) 67,625 1,508,883
Paychex, Inc. 6,100 308,813
Policy Management Systems Corp. (a) 55,600 3,867,675
27,911,772
COMPUTERS & OFFICE EQUIPMENT - 2.6%
Compaq Computer Corp. 141,450 7,983,084
Hewlett-Packard Co. 41,500 2,593,750
Ingram Micro, Inc. Class A (a) 7,600 221,350
International Business Machines Corp. 90,600 9,473,363
Quantum Corp. (a) 6,400 128,400
SCI Systems, Inc. (a) 86,500 3,768,156
Tech Data Corp. (a) 55,300 2,149,788
Western Digital Corp. (a) 17,700 284,306
26,602,197
ELECTRONIC INSTRUMENTS - 0.6%
Applied Materials, Inc. (a) 6,200 186,775
Cognex Corp. (a) 19,100 520,475
Lam Research Corp. (a) 35,000 1,023,750
Novellus Systems, Inc. (a) 34,100 1,101,856
Thermo Electron Corp. (a) 52,400 2,331,800
Varian Associates, Inc. 13,000 657,313
5,821,969
ELECTRONICS - 3.5%
Altera Corp. (a) 9,900 327,938
AMP, Inc. 103,200 4,334,400
Intel Corp. 126,000 8,851,500
Methode Electronics, Inc. Class A 114,100 1,854,125
Micron Technology, Inc. (a) 230,100 5,982,600
Molex, Inc. 32,828 943,805
Motorola, Inc. 7,800 445,088
Solectron Corp. (a) 295,900 12,298,344
Thomas & Betts Corp. 21,700 1,025,325
Uniphase Corp. (a) 3,000 124,125
36,187,250
PHOTOGRAPHIC EQUIPMENT - 0.0%
Polaroid Corp. 2,000 97,375
TOTAL TECHNOLOGY 96,951,763
TRANSPORTATION - 0.6%
AIR TRANSPORTATION - 0.0%
Northwest Airlines Corp. Class A (a) 9,900 473,963
RAILROADS - 0.4%
Bombardier, Inc. Class B 33,900 697,184
Burlington Northern Santa Fe Corp. 10,700 994,431
CSX Corp. 49,300 2,662,200
4,353,815
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TRANSPORTATION - CONTINUED
SHIPPING - 0.1%
Stolt-Nielsen SA Class B sponsored ADR 30,300 $ 662,813
Stolt-Nielsen SA 4,200 88,988
751,801
TRUCKING & FREIGHT - 0.1%
Roadway Express, Inc. 4,100 90,713
Yellow Corp. (a) 29,100 731,138
821,851
TOTAL TRANSPORTATION 6,401,430
UTILITIES - 7.4%
CELLULAR - 1.8%
AirTouch Communications, Inc. (a) 209,500 8,707,344
Century Telephone Enterprises, Inc. 8,000 398,500
Vodafone Group PLC sponsored ADR 121,080 8,778,300
Vodafone Group PLC 24,225 175,607
18,059,751
ELECTRIC UTILITY - 0.5%
American Electric Power Co., Inc. 35,300 1,822,363
Entergy Corp. 61,800 1,850,138
Houston Industries, Inc. 18,100 483,044
Niagara Mohawk Power Corp. (a) 23,300 244,650
PECO Energy Co. 8,100 196,425
PG&E Corp. 15,130 460,519
5,057,139
GAS - 0.0%
Enron Corp. 9,500 394,844
TELEPHONE SERVICES - 5.1%
AT&T Corp. 37,400 2,290,750
Ameritech Corp. 44,400 3,574,200
Bell Atlantic Corp. 56,381 5,130,671
BellSouth Corp. 87,700 4,938,606
Deutsche Telekom AG 23,400 433,001
France Telecom SA 4,000 144,966
MCI Communications Corp. 366,200 15,677,938
SBC Communications, Inc. 58,600 4,292,450
Sprint Corp. 189,300 11,097,713
Telebras sponsored ADR 31,500 3,667,781
Telefonica de Argentina SA
sponsored ADR 3,500 130,375
WorldCom, Inc. (a) 44,400 1,343,100
52,721,551
TOTAL UTILITIES 76,233,285
TOTAL COMMON STOCKS
(Cost $699,704,502) 858,950,798
U.S. TREASURY OBLIGATIONS - 11.0%
PRINCIPAL
AMOUNT
8 1/8%, 8/15/19 $ 35,740,000 44,719,675
6 1/4%, 8/15/23 40,953,000 42,181,590
stripped Principal:
0%, 2/15/19 70,450,000 19,763,339
0%, 8/15/19 10,000,000 2,725,000
0%, 8/15/20 20,000,000 5,131,800
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $103,599,938) 114,521,404
CASH EQUIVALENTS - 6.1%
SHARES VALUE (NOTE 1)
Taxable Central Cash Fund (b)
(Cost $63,168,454) 63,168,454 $ 63,168,454
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $866,472,894) $ 1,036,640,656
LEGEND
1. Non-income producing
2. At period end, the seven-day yield of the Taxable Central Cash Fund
was 5.69%. The yield refers to the income earned by investing in the
fund over the seven-day period, expressed as an annual percentage.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $618,605,202 and $175,983,050 respectively, of which U.S.
government and government agency obligations aggregated $57,394,929
and $13,963,455, 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 $100,820 for the
period. (see Note 4 of Notes to Financial Statements)
INCOME TAX INFORMATION
At December 31, 1997, the aggregate cost of investment securities for
income tax purposes was $866,542,781. Net unrealized appreciation
aggregated $170,097,875 of which $192,409,319 related to appreciated
investment securities and $22,311,444 related to depreciated
investment securities.
The fund hereby designates approximately $27,360,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
ASSETS
INVESTMENT IN $ 1,036,640,656
SECURITIES, AT
VALUE
(COST
$866,472,894)
- -
SEE
ACCOMPANYING
SCHEDULE
RECEIVABLE FOR 171,816
INVESTMENTS
SOLD
RECEIVABLE FOR 2,351,391
FUND SHARES
SOLD
DIVIDENDS 1,491,063
RECEIVABLE
INTEREST 2,319,292
RECEIVABLE
TOTAL ASSETS 1,042,974,218
LIABILITIES
PAYABLE FOR $ 13,483,010
INVESTMENTS
PURCHASED
PAYABLE FOR FUND 495,040
SHARES
REDEEMED
ACCRUED 491,409
MANAGEMENT
FEE
OTHER PAYABLES 149,109
AND ACCRUED
EXPENSES
TOTAL 14,618,568
LIABILITIES
NET ASSETS $ 1,028,355,650
NET ASSETS
CONSIST OF:
PAID IN CAPITAL $ 804,843,356
UNDISTRIBUTED 11,667,388
NET INVESTMENT
INCOME
ACCUMULATED 41,677,935
UNDISTRIBUTED
NET REALIZED
GAIN (LOSS) ON
INVESTMENTS
AND FOREIGN
CURRENCY
TRANSACTIONS
NET UNREALIZED 170,166,971
APPRECIATION
(DEPRECIATION)
ON
INVESTMENTS
AND ASSETS AND
LIABILITIES IN
FOREIGN
CURRENCIES
NET ASSETS $ 1,028,355,650
INITIAL CLASS: $19.27
NET ASSET
VALUE, OFFERING
PRICE
AND
REDEMPTION
PRICE PER SHARE
($1,025,766,3
67 (DIVIDED BY)
53,220,551
SHARES)
SERVICE CLASS: $19.27
NET ASSET
VALUE, OFFERING
PRICE AND
REDEMPTION
PRICE PER SHARE
($2,589,283 (DIVIDED BY)
134,338 SHARES)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
INVESTMENT $ 9,137,481
INCOME
DIVIDENDS
INTEREST 7,816,730
TOTAL INCOME 16,954,211
EXPENSES
MANAGEMENT FEE $ 4,186,484
TRANSFER AGENT 478,369
FEES
DISTRIBUTION FEES 100
- - SERVICE
CLASS
ACCOUNTING FEES 358,089
AND EXPENSES
NON-INTERESTED 2,648
TRUSTEES'
COMPENSATION
CUSTODIAN FEES 88,195
AND EXPENSES
REGISTRATION 21
FEES
AUDIT 25,526
LEGAL 10,600
MISCELLANEOUS 57,520
TOTAL 5,207,552
EXPENSES
BEFORE
REDUCTIONS
EXPENSE (59,893 5,147,659
REDUCTIONS )
NET INVESTMENT 11,806,552
INCOME
REALIZED AND
UNREALIZED
GAIN (LOSS)
NET REALIZED
GAIN (LOSS) ON:
INVESTMENT 41,975,678
SECURITIES
FOREIGN (3,142
CURRENCY )
TRANSACTIONS
FUTURES (39,809 41,932,727
CONTRACTS )
CHANGE IN NET
UNREALIZED
APPRECIATION
(DEPRECIATION)
ON:
INVESTMENT 124,026,551
SECURITIES
ASSETS AND (755 124,025,796
LIABILITIES IN )
FOREIGN
CURRENCIES
NET GAIN (LOSS) 165,958,523
NET INCREASE $ 177,765,075
(DECREASE) IN
NET ASSETS
RESULTING
FROM
OPERATIONS
OTHER $ 59,662
INFORMATION
EXPENSE
REDUCTIONS
DIRECTED
BROKERAGE
AGREEMENTS
CUSTODIAN 231
CREDITS
$ 59,893
STATEMENT OF CHANGES IN NET ASSETS
INCREASE YEAR ENDED YEAR ENDED
(DECREASE) IN DECEMBER 31, DECEMBER 31,
NET ASSETS 1997 1996
OPERATIONS $ 11,806,552 $ 6,366,110
NET
INVESTMENT
INCOME
NET REALIZED 41,932,727 9,088,610
GAIN (LOSS)
CHANGE IN NET 124,025,796 35,812,890
UNREALIZED
APPRECIATION
(DEPRECIATION)
NET INCREASE 177,765,075 51,267,610
(DECREASE)
IN NET
ASSETS
RESULTING
FROM
OPERATIONS
DISTRIBUTIONS TO (6,503,921) -
SHAREHOLDERS
FROM NET
INVESTMENT
INCOME
FROM NET (9,258,542) (705,098)
REALIZED GAIN
TOTAL (15,762,463) (705,098)
DISTRIBUTIONS
SHARE 483,267,618 168,220,256
TRANSACTIONS
- - NET
INCREASE
(DECREASE)
TOTAL 645,270,230 218,782,768
INCREASE
(DECREASE) IN
NET ASSETS
NET ASSETS
BEGINNING OF 383,085,420 164,302,652
PERIOD
END OF PERIOD $ 1,028,355,650 $ 383,085,420
(INCLUDING
UNDISTRIBUTE
D NET
INVESTMENT
INCOME OF
$11,667,388
AND
$6,366,110,
RESPECTIVELY
)
<TABLE>
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OTHER
INFORMATION
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
SHARES DOLLARS SHARES DOLLARS
SHARE 29,803,319 $ 508,833,566 12,499,499 $ 170,852,927
TRANSACTIONS
INITIAL CLASS
SOLD
REINVESTED 1,011,711 15,762,463 53,538 705,098
REDEEMED (2,470,247) (43,871,687) (246,129) (3,337,769)
NET INCREASE 28,344,783 $ 480,724,342 12,306,908 $ 168,220,256
(DECREASE)
SERVICE CLASS 134,338 $ 2,543,276 - $ -
A
SOLD
REINVESTED - - - -
REDEEMED - - - -
NET INCREASE 134,338 $ 2,543,276 - $ -
(DECREASE)
DISTRIBUTIONS $ 6,503,921 $ -
INITIAL CLASS -
NET
INVESTMENT
INCOME
INITIAL CLASS - 9,258,542 705,098
NET REALIZED
GAIN
TOTAL $ 15,762,463 $ 705,098
SERVICE CLASS - -
- - NET
INVESTMENT
INCOME
SERVICE CLASS - -
- - NET REALIZED
GAIN
TOTAL $ - $ -
$ 15,762,463 $ 705,098
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
A SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
YEARS ENDED DECEMBER 31, JANUARY 3, 1995
(COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31,
SELECTED 1997 1996 1995
PER-SHARE
DATA
NET ASSET VALUE, $ 15.40 $ 13.07 $ 10.00
BEGINNING OF
PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET .29 D .26 .11
INVESTMENT
INCOME
NET REALIZED 4.18 2.12 3.14
AND
UNREALIZED
GAIN (LOSS)
TOTAL FROM 4.47 2.38 3.25
INVESTMENT
OPERATIONS
LESS
DISTRIBUTIONS
FROM NET (.25) - (.11)
INVESTMENT
INCOME
FROM NET (.35) (.05) (.07)
REALIZED GAIN
TOTAL (.60) (.05) (.18)
DISTRIBUTIONS
NET ASSET VALUE, $ 19.27 $ 15.40 $ 13.07
END OF PERIOD
TOTAL RETURN B, 29.95% 18.27% 32.52%
C
RATIOS AND
SUPPLEMENTAL
DATA
NET ASSETS, END $ 1,025,766 $ 383,085 $ 164,303
OF PERIOD (000
OMITTED)
RATIO OF .74% .77% .85% G
EXPENSES TO
AVERAGE NET
ASSETS
RATIO OF .73% F .76% F .83% F
EXPENSES TO
AVERAGE NET
ASSETS AFTER
EXPENSE
REDUCTIONS
RATIO OF NET 1.68% 2.29% 2.49%
INVESTMENT
INCOME TO
AVERAGE NET
ASSETS
PORTFOLIO 26% 28% 38%
TURNOVER RATE
AVERAGE $ .0377 $ .0367
COMMISSION
RATE H
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEAR ENDED
DECEMBER 31,
SELECTED 1997 E
PER-SHARE
DATA
NET ASSET VALUE, $ 18.50
BEGINNING OF
PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET .04 D
INVESTMENT
INCOME
NET REALIZED .73
AND
UNREALIZED
GAIN (LOSS)
TOTAL FROM .77
INVESTMENT
OPERATIONS
NET ASSET VALUE, $ 19.27
END OF PERIOD
TOTAL RETURN B, 4.16%
C
RATIOS AND
SUPPLEMENTAL
DATA
NET ASSETS, END $ 2,589
OF PERIOD (000
OMITTED)
RATIO OF .84% A
EXPENSES TO
AVERAGE NET
ASSETS
RATIO OF .83% A,
EXPENSES TO F
AVERAGE NET
ASSETS AFTER
EXPENSE
REDUCTIONS
RATIO OF NET 1.72% A
INVESTMENT
INCOME TO
AVERAGE NET
ASSETS
PORTFOLIO 26%
TURNOVER
AVERAGE $ .0377
COMMISSION
RATE H
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 FOR THE PERIOD NOVEMBER 3,
1997 (COMMENCEMENT OF SALE OF
SERVICE CLASS SHARES) TO
DECEMBER 31, 1997.
F FMR OR THE FUND HAS ENTERED
INTO VARYING ARRANGEMENTS WITH
THIRD PARTIES WHO EITHER PAID OR
REDUCED A PORTION OF THE CLASS'
EXPENSES (SEE NOTE 5 OF NOTES
TO FINANCIAL STATEMENTS).
G FMR AGREED TO REIMBURSE A
PORTION OF THE CLASS' EXPENSES
DURING THE PERIOD. WITHOUT THIS
REIMBURSEMENT, THE CLASS'
EXPENSE RATIO WOULD HAVE BEEN
HIGHER.
H FOR FISCAL YEARS BEGINNING ON
OR AFTER SEPTEMBER 1, 1995, A
FUND IS REQUIRED TO DISCLOSE ITS
AVERAGE COMMISSION RATE PER
SHARE FOR SECURITY TRADES ON
WHICH COMMISSIONS ARE
CHARGED. THIS AMOUNT MAY VARY
FROM PERIOD TO PERIOD AND FUND
TO FUND DEPENDING ON THE MIX OF
TRADES EXECUTED IN VARIOUS
MARKETS WHERE TRADING
PRACTICES AND COMMISSION RATE
STRUCTURES MAY DIFFER.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES.
Growth Opportunities 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 fund offers two classes of shares; the fund's
original class of shares (Initial Class shares) and Service Class
shares. The fund commenced sale of Service Class shares on November
3,1997. Both classes of shares have equal rights and voting
privileges, except for matters affecting a single class. Investment
income, realized and unrealized capital gains and losses, the common
expenses of the fund, and fund-level expense reductions, if any, are
allocated on a pro rata basis to each class based on the relative net
assets of each class to total net assets of the fund. Each class of
shares differs in its respective distribution plan.
The financial statements have been prepared in conformity with
generally accepted accounting principles which 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 foreign
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, which includes accretion of
original issue discount, is accrued as earned. Investment income is
recorded net of foreign taxes withheld where recovery of such taxes is
uncertain.
EXPENSES. Most expenses of the trust can be directly attributed to a
fund. Expenses which cannot be directly attributed are apportioned
among the funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the
ex-dividend date. Income dividends and capital gain distributions are
declared separately for each class.
Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences, which may result in
distribution reclassifications, are primarily due to differing
treatments for market discount, foreign currency transactions and
losses deferred due to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
Undistributed net investment income and accumulated undistributed net
realized gain (loss) on investments and foreign currency transactions
may include temporary book and tax basis differences which will
reverse in a subsequent period. Any taxable income or gain remaining
at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of
trade date. Gains and losses on securities sold are determined on the
basis of identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency
contracts to facilitate transactions in foreign-denominated
securities. Losses may arise from changes in the value of the foreign
currency or if the counterparties do not perform under the contracts'
terms. The U.S. dollar value of foreign currency contracts is
determined using contractual currency exchange rates established at
the time of each trade. 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 fund, along with
other affiliated entities of Fidelity Management & Research Company
(FMR), may transfer uninvested cash balances into one or more joint
trading accounts. These balances are invested in one or more
repurchase agreements for U.S. Treasury or Federal Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are
marked-to-market daily and maintained at a value at least equal to the
principal amount of the repurchase agreement (including accrued
interest). FMR, the fund's investment adviser, is responsible for
determining that the value of the underlying securities remains in
accordance with the market value requirements stated above.
TAXABLE CENTRAL CASH FUND. Pursuant to an Exemptive Order issued by
the SEC, the fund may invest in the Taxable Central Cash Fund (the
Cash Fund) managed by Fidelity Investments Money Management, Inc.
(formerly FMR Texas, Inc.) an affiliate of FMR. The Cash Fund is an
open-end money market fund available only to investment companies and
other accounts managed by FMR and its affiliates. The Cash Fund seeks
preservation of capital, liquidity, and current income by investing in
U.S. Treasury securities and repurchase agreements for these
securities. Income distributions from the Cash Fund are declared daily
and paid monthly from net interest income. Income distributions earned
by the fund are recorded as interest income in the accompanying
financial statements.
FUTURES CONTRACTS. The fund may use futures contracts to manage its
exposure to the stock market. Buying futures tends to increase the
fund's exposure to the underlying instrument, while selling futures
tends to decrease the fund's exposure to the underlying instrument or
hedge other fund investments. Futures contracts involve, to varying
degrees, risk of loss in excess of the futures variation margin
reflected in the Statement of Assets and Liabilities. The underlying
face amount at value of any open futures contracts at period end is
shown in the schedule of investments under the caption "Futures
Contracts." This amount reflects each contract's exposure to the
underlying instrument at period end. Losses may arise from changes in
the value of the underlying instruments or if the counterparties do
not perform under the contracts' terms. Gains and losses are realized
upon the expiration or closing of the futures contracts. Futures
contracts are valued at the settlement price established each day by
the board of trade or exchange on which they are traded.
RESTRICTED SECURITIES. The fund is permitted to invest in securities
that are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from
registration or to the public if the securities are registered.
Disposal of these securities may involve time-consuming negotiations
and expense, and prompt sale at an acceptable price may be difficult.
At the end of the period, the fund had no investments in restricted
securities (excluding 144A issues).
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities), is included under the caption "Other
Information" at the end of the fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a
monthly fee that is calculated on the basis of a group fee rate plus a
fixed individual fund fee rate applied to the average net assets of
the fund. The group fee rate is the weighted average of a series of
rates and is based on the monthly average net assets of all the mutual
funds advised by FMR. The rates ranged from .2500% to .5200% for the
period. The annual individual fund fee rate is .30%. In the event that
these rates were lower than the contractual rates in effect during the
period, FMR voluntarily implemented the above rates, as they resulted
in the same or a lower management fee. For the period, the management
fee was equivalent to an annual rate of .60% of average net assets.
DISTRIBUTION AND SERVICE PLAN. In accordance with Rule 12b-1 of the
1940 Act, the Trustees have adopted separate distribution plans with
respect to each class of shares (collectively referred to as "the
Plans"). Under the Service Class Plan, the class pays Fidelity
Distributors Corporation (FDC), an affiliate of FMR, a distribution
and service fee (12b-1 fee). This fee is based on an annual rate of
.10% of Service Class average net assets. Initial Class shares are not
subject to a 12b -1 fee.
For the period, Service Class paid FDC $100, all of which was
reallowed to insurance companies, for the distribution of shares and
providing shareholder support services.
Under the Plans, FMR or FDC may use its resources to pay
administrative and promotional expenses related to the sale of each
class of shares. Subject to the approval of the Board of Trustees, the
Plans also authorize payments to third parties that assist in the sale
of each class of shares or render shareholder support services. For
the period, FMR or FDC informed the fund that payments made to third
parties under the Plans amounted to $12,129 and $183 for the Initial
Class and Service Class, respectively.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations
Company, Inc. (FIIOC), an affiliate of FMR, is the fund's transfer,
dividend disbursing and shareholder servicing agent. FIIOC receives
account fees and asset-based fees that vary according to account size
and type of account. FIIOC pays a portion of the expenses related to
the typesetting, printing and mailing of shareholder reports, except
proxy statements. For the period, the transfer agent fees of the fund
were equivalent to an annual rate of .07% of average net assets.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
ACCOUNTING FEES. Fidelity Service Company, Inc., an affiliate of FMR,
maintains the fund's accounting records. The fee is based on the level
of average net assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments.
5. EXPENSE REDUCTIONS.
FMR has directed certain portfolio trades to brokers who paid a
portion of the fund's expenses.
In addition the fund has entered into an arrangement with its
custodian whereby credits realized as a result of uninvested cash
balances were used to reduce a portion of the fund's expenses.
For the period, the reductions under these arrangements are shown
under the caption "Other Information" on the fund's Statement of
Operations.
6. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
and its subsidiaries, affiliates of FMR, were the record owners of
approximately 30% of the outstanding shares of the fund. In addition,
one unaffiliated insurance company was record owner of 10% or more of
the total outstanding shares of the fund, totaling 66%.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Variable Insurance Products Fund III and the
Shareholders of Growth Opportunities Portfolio:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments , and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
Growth Opportunities Portfolio (a fund of Variable Insurance Products
Fund III) at December 31, 1997, the results of its operations for the
year then ended, and the changes in its net assets and the financial
highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements")
are the responsibility of the Growth Opportunities Portfolio's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at December 31, 1997 by
correspondence with the custodian and the application of alternative
auditing procedures where securities purchased were not yet received
by the custodian, provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Boston, Massachusetts
February 5, 1998
DISTRIBUTIONS
The Board of Trustees of VIP III: Growth Opportunities Portfolio voted
to pay to shareholders of record at the opening of business on record
date, the following distributions derived from capital gains realized
from sales of portfolio securities, and dividends derived from net
investment income:
INITIAL CLASS
Pay Date 2/7/97 2/6/98
Record Date 2/7/97 2/6/98
Dividends $.25 $.21
Short-Term
Capital Gains $.22 $.25
Long-Term
Capital Gains $.13 $.48
Long-Term
Capital Gain Breakdown:
28% rate 100% 33.64%
20% rate - 66.36%
SERVICE CLASS
Pay Date 2/6/98
Record Date 2/6/98
Dividends $.21
Short-Term
Capital Gains $.25
Long-Term
Capital Gains $.48
Long-Term
Capital Gain Breakdown:
28% rate 33.64%
20% rate 66.36%
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Management & Research (U.K.) Inc.,
London, England
Fidelity Management & Research (Far East) Inc.,
Tokyo, Japan
OFFICERS
Edward C. Johnson 3d, PRESIDENT
Robert C. Pozen, SENIOR VICE PRESIDENT
Abigail Johnson, VICE PRESIDENT
George A. Vanderheiden, VICE PRESIDENT
Eric D. Roiter, SECRETARY
Richard A. Silver, TREASURER
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
Ralph F. Cox *
Phyllis Burke Davis *
Robert M. Gates *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Marvin L. Mann *
William O. McCoy *
Gerald C. McDonough *
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
Brown Brothers Harriman & Co.
Boston, MA
(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
ANNUAL REPORT
DECEMBER 31, 1997
CONTENTS
<TABLE>
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<S> <C> <C>
MARKET ENVIRONMENT 4 A REVIEW OF WHAT HAPPENED IN WORLD MARKETS
DURING THE LAST YEAR.
MONEY MARKET PORTFOLIO 5 PERFORMANCE
6 FUND TALK: THE MANAGER'S OVERVIEW
7 INVESTMENTS
10 FINANCIAL STATEMENTS
INVESTMENT GRADE BOND PORTFOLIO 12 PERFORMANCE AND INVESTMENT SUMMARY
13 FUND TALK: THE MANAGER'S OVERVIEW
14 INVESTMENTS
19 FINANCIAL STATEMENTS
HIGH INCOME PORTFOLIO 21 PERFORMANCE AND INVESTMENT SUMMARY
23 FUND TALK: THE MANAGER'S OVERVIEW
24 INVESTMENTS
32 FINANCIAL STATEMENTS
ASSET MANAGER PORTFOLIO 35 PERFORMANCE AND INVESTMENT SUMMARY
37 FUND TALK: THE MANAGERS' OVERVIEW
39 INVESTMENTS
52 FINANCIAL STATEMENTS
BALANCED PORTFOLIO 55 PERFORMANCE AND INVESTMENT SUMMARY
57 FUND TALK: THE MANAGERS' OVERVIEW
58 INVESTMENTS
68 FINANCIAL STATEMENTS
ASSET MANAGER: GROWTH PORTFOLIO 71 PERFORMANCE AND INVESTMENT SUMMARY
73 FUND TALK: THE MANAGERS' OVERVIEW
75 INVESTMENTS
87 FINANCIAL STATEMENTS
EQUITY-INCOME PORTFOLIO 90 PERFORMANCE AND INVESTMENT SUMMARY
92 FUND TALK: THE MANAGER'S OVERVIEW
93 INVESTMENTS
99 FINANCIAL STATEMENTS
GROWTH & INCOME PORTFOLIO 102 PERFORMANCE AND INVESTMENT SUMMARY
104 FUND TALK: THE MANAGER'S OVERVIEW
105 INVESTMENTS
109 FINANCIAL STATEMENTS
INDEX 500 PORTFOLIO 112 PERFORMANCE AND INVESTMENT SUMMARY
113 FUND TALK: THE MANAGER'S OVERVIEW
114 INVESTMENTS
120 FINANCIAL STATEMENTS
GROWTH OPPORTUNITIES PORTFOLIO 122 PERFORMANCE AND INVESTMENT SUMMARY
124 FUND TALK: THE MANAGER'S OVERVIEW
125 INVESTMENTS
129 FINANCIAL STATEMENTS
CONTRAFUND PORTFOLIO 132 PERFORMANCE AND INVESTMENT SUMMARY
134 FUND TALK: THE MANAGER'S OVERVIEW
135 INVESTMENTS
144 FINANCIAL STATEMENTS
GROWTH PORTFOLIO 147 PERFORMANCE AND INVESTMENT SUMMARY
149 FUND TALK: THE MANAGER'S OVERVIEW
150 INVESTMENTS
154 FINANCIAL STATEMENTS
OVERSEAS PORTFOLIO 157 PERFORMANCE AND INVESTMENT SUMMARY
159 FUND TALK: THE MANAGER'S OVERVIEW
160 INVESTMENTS
165 FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS 168 NOTES TO THE FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS 174 THE AUDITORS' OPINION
DISTRIBUTIONS 177
</TABLE>
Each Portfolio, except Money Market, Investment Grade Bond, and Index
500, have two classes of shares. Throughout this report and the
financial statements, one class is referred to as the "initial class"
and the other class is referred to as the "Service Class." The Service
Class shares include an asset based distribution fee (12b-1 fee), and
the offering of Service Class shares took place November 3, 1997, at
which time the 12b-1 fee was imposed. Please note, there are two
Performance and Investment Summary pages for each Portfolio that offer
"initial class" shares and the Service Class shares, and the
performance may be different.
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE
SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE
FUNDS. THIS REPORT IS NOT
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUNDS
UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC,
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
NEITHER THE FUNDS NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
MARKET ENVIRONMENT
Despite an infectious currency crisis that erupted in Southeast Asia
in October, most stock and bond markets around the globe posted
another year of positive returns. Sustained corporate earnings growth,
low interest-rate levels and an overall lack of inflationary concern
provided a favorable investing backdrop. The U.S. and European stock
markets continued to perform well, with U.S. stocks posting their
third consecutive year of strong results. The problems in Southeast
Asia, though, reverberated throughout the world, with investors
becoming increasingly concerned toward the end of the period regarding
the sustainability of corporate earnings. The U.S. bond market enjoyed
a nice run in 1997.
U.S. STOCK MARKETS
The U.S. stock market went through many phases during 1997. Entering
the year, the market was still being dominated by an extremely narrow
contingent of well-known, large-capitalization stocks. In fact, much
of the Standard & Poor's 500 Index 12-month gain of 33.36% came from
these bigger stocks. Stock prices soared to historic highs and the Dow
Jones Industrial Average hurtled past the 8000-point mark in August.
But, investors became increasingly concerned about the market's
ability to sustain its lofty performance levels. In mid-August,
several large multinationals - companies that derive a significant
portion of their revenues from overseas operations - justified these
concerns by announcing earnings disappointments. These announcements
triggered a slowdown among larger-cap stocks, while smaller- and
medium-sized stocks gained momentum. From August through December, the
S&P MidCap 400 Index - a measure of mid-sized stock performance -
returned 6.50%, while the S&P 500 returned 2.43%.
In late October, economic turmoil shook Southeast Asia. Since this
region accounts for a significant portion of world economic growth,
shock tremors rippled through developed markets such as those in the
U.S. and Europe, as well as emerging-market nations in Eastern Europe
and Latin America. In New York, the uncertainty was punctuated by a
554-point drop in the Dow one day and a 337-point recovery the next.
In terms of industry groups, moderate economic growth coupled with
nonexistent inflation translated into near nirvana for the finance
sector. Banks and brokerages demonstrated their ability to sustain
impressive earnings growth as borrowing demand remained high and cash
flows were healthy. Consolidation in the form of merger and
acquisition activity also brought positive results to the group. Due
to strong oil exploration and production demand, the energy service
sector also fared nicely. Demand for offshore drilling, in particular,
was very high and the industry enjoyed favorable pricing trends.
Technology stocks were a mixed bag in 1997, with the group
experiencing a decent rally through the first half of the year. The
second-half Asian crisis, however, proved particularly harmful to many
technology companies with Asian business ties. With Asia accounting
for a considerable amount of the world's technology production, the
region's economic troubles were far-reaching. Going into 1998, many
money managers - sensing an economic slowdown due to Asia - were
concentrating on stocks that were less cyclical, or economically
sensitive.
FOREIGN STOCK MARKETS
Stock markets around the world reacted differently in 1997. Europe -
bolstered by continued economic reform and a convergence in monetary
policy - posted strong overall returns as Finland, Italy, Spain,
Switzerland and the United Kingdom led the way. The Morgan Stanley
Capital International (MSCI) Europe Index returned 24.17% during the
period. In contrast, the MSCI EAFE Index, which measures the
performance of Europe, Australasia and the Far East, reflected the
problems brought on by the Asian crisis. The MSCI EAFE returned 2.01%
for the period. Japan and Hong Kong were two noteworthy laggards, as
economic recovery in Japan trudged along and Hong Kong felt the brunt
of Asia's woes. Emerging market equity performance was solid through
the first half of the period, but trailed off some in the second.
Uncertainty in Asia and South Korea made some investors question the
well-being of other pivotal emerging-market nations such as Russia,
which proved particularly vulnerable to the Asian dilemma.
U.S. BOND MARKETS
Bonds benefited from low interest rates - which in turn drove prices
upward - as well as a distinct lack of inflation indicators. The
Lehman Brothers Aggregate Bond Index - a measure of the U.S. taxable
bond market - returned 9.65% during the year. The Federal Reserve
Board's raising of a key short-term interest rate in March proved to
be one of the few obstacles to the bond market. Bonds rallied from
April through mid-September, buoyed in large part by encouraging
economic data and the Fed's reluctance to raise rates further.
Additionally, while the Asian crisis brought some equity markets to
their knees, many bond markets welcomed wary stock investors in search
of lower volatility. Interest rates reached attractive levels, with
the yield on the 30-year Treasury bond going below the 6% mark in
November. Corporate bonds performed reasonably well due to continued
economic growth and high demand for yield. Mortgage-backed bonds also
fared relatively well, in spite of increased refinancing activity due
to the lower rates.
FOREIGN BOND MARKETS
While low inflation and steady growth boosted the U.S. bond market,
results were varied on the international front. The Salomon Brothers
World Government Bond Index - a measure of government bond market
performance in developed nations - returned 0.23% for the 12 months
that ended December 31, 1997. In Europe, countries continued to make
progress in the drive toward meeting European Monetary Union
requirements. But a strong dollar relative to many currencies eroded
gains for U.S.-based investors. Japan - one of the more significant
components of the Salomon Brothers index - continued to struggle as
economic reform continued to develop slowly. The often-volatile world
of emerging-market debt also had mixed results, as Asian concerns
trickled into these regions. Brazil and Argentina performed well,
while Ecuador stumbled due to political uncertainty. Nevertheless, The
J.P. Morgan Emerging Markets Bond Index still managed to return 16.15%
during the period.
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO
PERFORMANCE
To measure a money market fund's performance, you can look at either
total return or yield. Total return reflects the change in value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). Yield measures the income paid by a fund. Since
a money market fund tries to maintain a $1 share price, yield is an
important measure of performance.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
DECEMBER 31, 1997 YEAR YEARS YEARS
VIP: MONEY MARKET 5.51% 4.85% 5.87%
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: 5.56
ROW: 1, COL: 2, VALUE: 2.6
ROW: 2, COL: 1, VALUE: 5.4
ROW: 2, COL: 2, VALUE: 2.65
ROW: 3, COL: 1, VALUE: 5.37
ROW: 3, COL: 2, VALUE: 2.65
ROW: 4, COL: 1, VALUE: 5.19
ROW: 4, COL: 2, VALUE: 2.63
ROW: 5, COL: 1, VALUE: 5.28
ROW: 5, COL: 2, VALUE: 2.64
MONEY MARKET
MMDA
6% -
5% -
4% -
3% -
2% -
1% -
0%
12/31/97 10/1/97 7/2/97 4/2/97 12/30/96
VIP: MONEY MARKET 5.56% 5.40% 5.37% 5.19% 5.28%
MMDA 2.60% 2.65% 2.65% 2.63% 2.64%
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.
3
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with Robert Duby, Portfolio Manager of Money Market
Portfolio
Q. BOB, WHAT WAS THE INVESTING ENVIRONMENT LIKE OVER THE PAST 12
MONTHS?
A. The investing environment was much more challenging than one would
think, considering the fact that the Federal Reserve Board changed
monetary policy only once in 1997. At the end of March, the Fed raised
the target for the federal funds rate - the rate banks charge each
other for overnight loans - to 5.50% from 5.25%. In a nutshell,
economic activity was strong, while inflation remained relatively
non-existent. Real GDP - gross domestic product adjusted for
inflation - grew at a rate of 4.9%, 3.3% and 3.1% in the first, second
and third quarters, respectively. I think this was quite a strong
performance, considering that we were in the midst of one of the
longest periods of economic expansion in recent memory. Inflation at
the consumer level remained modest, growing close to 2% during the
period.
Q. HOW DID THE MARKET REACT TO THIS PERIOD OF RELATIVELY STRONG GROWTH
AND LOW INFLATION?
A. Market activity and investor sentiment fluctuated quite wildly
throughout the period. Following the rate hike in March, most market
participants expected further rate increases as economic data remained
strong and even surpassed most estimates. After short-term rates
initially moved higher, the market settled down and short-term rates
fell to a more realistic level in the late spring - especially
following soothing comments from members of the Fed and the release of
reports that showed a slowdown in economic activity. At a July
meeting, Fed Chairman Alan Greenspan indicated that productivity
improvements allowed the economy to grow at a faster rate without the
risk of emerging inflation. In August, however, a stronger string of
economic data caused a quick reversal in sentiment and short-term
interest rates rose once again. In addition, the minutes from the
Federal Open Market Committee's July meeting, which were released in
August, reflected the committee's concern about the risks that
stronger growth might pose for the economy. Investor sentiment that
the Fed might raise rates, which was factored into the market, was
quickly reversed in October when financial problems arose in Southeast
Asia. In December, we saw short-term interest rates rise as market
participants worked to clean up their balance sheets by selling
unwanted securities at favorable prices.
Q. WHAT WAS THE FUND'S STRATEGY DURING THIS PERIOD?
A. The fund's average maturity remained in the 40- to 50-day range
throughout most of the year. The fund maintained its longest maturity
following the rate tightening in March and at year end to take
advantage of the temporary rise in short-term interest rates. In other
words, the fund's maturity generally lengthened when the market was
weak and shortened when the market improved. In June and July, the
fund maintained its shortest average maturity as the market adjusted
to slightly softer economic data.
Q. WHAT'S YOUR OUTLOOK?
A. I anticipate steady interest-rate policy over the next few months -
or at least until the financial problems in Japan and Southeast Asia
are controlled to the point that they're not affecting the economies
of other countries. Demand for U.S. exports should fall as many of
these Asian countries struggle to resolve their problems. Economic
activity in the U.S. remained strong at the end of the period, and
while wage pressures could still surface, other inflationary pressures
should remain well under control. On top of that, I think intensified
competition from abroad will counter most of the inflationary
pressures in the U.S. Toward the end of the year, more and more
forecasts were calling for unchanged Fed policy throughout all of 1998
- - sentiment that likely would cause the money markets to rally in the
near term.
FUND FACTS
GOAL: income and share price stability by
investing in high-quality, short-term investments
START DATE: April 1, 1982
SIZE: as of December 31, 1997, more than $1.0
billion
MANAGER: Robert Duby, since April 1997; joined
Fidelity in 1982
3
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO
INVESTMENTS DECEMBER 31, 1997
Showing Percentage of Total Value of Investment in Securities
BANKERS' ACCEPTANCES - 0.2%
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE
AMOUNT (NOTE 1)
NEW YORK BRANCH, YANKEE DOLLAR, FOREIGN BANKS - 0.2%
Bank of Tokyo - Mitsubishi Ltd.
2/9/98 5.75% $ 2,000,000 $ 1,987,728
CERTIFICATES OF DEPOSIT - 37.7%
DOMESTIC CERTIFICATES OF DEPOSIT - 1.1%
Chase Manhattan Bank (USA)
2/9/98 5.75 6,000,000 6,000,000
Mellon Bank, NA
3/2/98 5.80 5,000,000 5,000,000
11,000,000
NEW YORK BRANCH, YANKEE DOLLAR, FOREIGN BANKS - 26.6%
Australia & New Zealand Banking Group
4/2/98 5.70 20,000,000 20,001,450
Bank of Montreal
1/14/98 5.77 15,000,000 15,000,000
1/29/98 5.77 10,000,000 10,000,000
Bank of Nova Scotia
4/1/98 6.20 6,000,000 5,999,153
7/21/98 5.97 1,000,000 999,190
8/31/98 5.97 5,000,000 4,997,940
Bank of Tokyo - Mitsubishi Ltd.
1/22/98 5.75 2,000,000 2,000,000
Banque Nationale de Paris
2/3/98 5.65 2,000,000 2,000,000
3/2/98 5.78 10,000,000 10,000,000
Barclays Bank, PLC
2/17/98 5.75 10,000,000 10,000,000
2/20/98 5.75 5,000,000 5,000,000
3/2/98 5.80 10,000,000 10,000,000
Canadian Imperial Bank of Commerce
3/23/98 5.80 25,000,000 25,000,000
8/28/98 5.97 20,000,000 19,992,488
Credit Agicole Indosuez
3/10/98 5.80 5,000,000 5,000,000
10/19/98 5.97 5,000,000 4,997,333
Den Danske Bank A/S
3/5/98 5.81 5,000,000 5,000,000
Deutsche Bank, AG
8/11/98 5.90 5,000,000 4,998,555
National Westminster Bank, PLC
1/28/98 5.80 8,000,000 8,000,000
2/12/98 5.75 2,000,000 2,000,000
6/23/98 6.00 10,000,000 9,996,003
7/22/98 5.89 10,000,000 9,997,137
Norddeutsche Landesbank Girozentrale
10/21/98 5.97 5,000,000 4,997,996
Sanwa Bank, Ltd. Japan
1/29/98 5.79 5,000,000 5,000,036
2/6/98 5.80 2,000,000 2,000,000
Societe Generale, France
2/18/98 5.77 10,000,000 10,000,000
3/4/98 5.81 5,000,000 5,000,000
3/9/98 5.81 5,000,000 5,000,000
3/9/98 5.85 5,000,000 5,000,000
4/14/98 5.75 5,000,000 5,000,000
4/15/98 5.90 1,000,000 1,000,539
6/16/98 6.00 1,000,000 999,265
Swiss Bank Corp.
2/2/98 5.65 13,000,000 13,000,000
2/23/98 5.80 20,000,000 20,000,000
267,977,085
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE
AMOUNT (NOTE 1)
LONDON BRANCH, EURODOLLAR, FOREIGN BANKS - 10.0%
ABN-AMRO Bank NV
1/14/98 5.70% $ 5,000,000 $ 5,000,014
Abbey National, Treasury Services
3/4/98 5.87 5,000,000 5,000,000
3/11/98 5.83 15,000,000 15,000,000
Barclays Bank, PLC
4/23/98 5.80 10,000,000 10,000,000
Bayerische Hypotheken-und Wechsel
2/17/98 5.75 10,000,000 10,000,373
3/4/98 5.80 5,000,000 5,000,083
Bayerische Landesbank Girozentrale
2/23/98 5.76 3,000,000 3,000,000
Bayerische Vereinsbank AG
3/3/98 5.80 15,000,000 15,000,122
3/16/98 5.72 4,000,000 4,000,228
Credit Agricole Indosuez
2/9/98 5.66 5,000,000 4,999,833
Dresdner Bank, AG
2/19/98 5.75 2,000,000 2,000,050
Norddeutsche Landesbank Girozentrale
3/16/98 5.73 1,000,000 1,000,020
Rabobank Nederland, Coop. Central
2/25/98 5.76 2,000,000 1,999,997
Sanwa Bank, Ltd. Japan
1/30/98 5.75 3,000,000 3,000,023
Toronto-Dominion Bank
2/17/98 5.75 5,000,000 5,000,000
4/9/98 5.75 2,000,000 1,999,668
Westdeutsche Landesbank
2/2/98 5.75 5,000,000 5,000,042
Westpac Banking Corp.
3/9/98 5.81 4,000,000 4,000,126
101,000,579
TOTAL CERTIFICATES OF DEPOSIT 379,977,664
COMMERCIAL PAPER - 42.0%
ABN-AMRO North America, Inc.
3/10/98 5.81 5,000,000 4,945,930
Abbey National, North America
3/17/98 5.70 15,000,000 14,826,875
Aspen Funding Corp.
1/28/98 6.04 9,727,000 9,683,228
Asset Securitization COOP. Corp.
1/21/98 5.70 5,000,000 4,984,388
2/9/98 5.86 5,000,000 4,968,583
2/17/98 5.82 10,000,000 9,924,800
2/23/98 5.78 6,000,000 5,949,738
Associates Corp. of North America
2/5/98 5.83 6,000,000 5,966,283
2/25/98 5.78 5,000,000 4,956,458
3/20/98 5.83 5,000,000 4,937,708
A.H. Robins Company, Inc.
1/29/98 5.70 10,000,000 9,956,289
BBL North America, Inc.
2/25/98 5.80 2,000,000 1,982,537
Bank of Nova Scotia
1/26/98 5.77 10,000,000 9,960,347
Beneficial Corp.
2/11/98 5.78 5,000,000 4,967,541
COMMERCIAL PAPER - CONTINUED
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE
AMOUNT (NOTE 1)
Caisse des Depots et Consigns
1/22/98 5.89% $ 20,000,000 $ 19,931,750
CIESCO, L.P.
2/5/98 5.80 5,000,000 4,972,048
Citibank Credit Card Master Trust I (Dakota Certificate Program)
2/9/98 5.86 2,000,000 1,987,433
2/12/98 5.78 10,000,000 9,933,500
Eiger Capital Corp.
1/23/98 5.89 3,000,000 2,989,275
1/26/98 5.94 3,000,000 2,987,708
1/28/98 5.94 5,000,000 4,977,875
2/11/98 5.86 5,000,000 4,966,972
Enterprise Funding Corp.
1/26/98 5.88 5,000,000 4,979,757
1/28/98 5.81 6,065,000 6,038,844
1/30/98 5.81 3,860,000 3,842,120
1/30/98 6.09 5,164,000 5,138,832
2/4/98 5.87 4,376,000 4,351,946
3/30/98 5.87 5,000,000 4,929,355
Fina Oil and Chemical Company
2/3/98 5.90 2,000,000 1,989,275
Ford Motor Credit Corp.
3/4/98 5.80 25,000,000 24,753,722
GTE Corp.
1/8/98 6.14 2,000,000 1,997,628
1/27/98 6.39 2,000,000 1,990,828
General Electric Capital Corp.
1/21/98 5.76 12,000,000 11,961,933
2/5/98 5.77 25,000,000 24,861,458
2/11/98 5.77 10,000,000 9,935,197
General Electric Co.
2/9/98 5.77 25,000,000 24,845,895
General Motors Acceptance Corp.
1/28/98 5.73 4,000,000 3,983,050
2/11/98 5.85 13,000,000 12,914,571
3/9/98 5.76 5,000,000 4,947,982
Goldman Sachs Group, L.P. (The)
1/26/98 5.89 7,000,000 6,971,611
Grand Metropolitan Capital Corp.
1/7/98 5.70 2,000,000 1,998,150
Kitty Hawk Funding Corp.
2/12/98 5.94 2,000,000 1,986,233
Matterhorn Capital Corp. (LOC Union Bank of Switzerland)
2/13/98 5.90 5,000,000 4,965,062
Merrill Lynch & Co., Inc.
2/10/98 5.78 2,000,000 1,987,333
3/16/98 5.73 3,000,000 2,965,652
Monsanto Co.
2/25/98 5.84 3,000,000 2,973,508
Morgan Stanley, Dean Witter, Discover & Co.
2/19/98 5.78 5,000,000 4,961,208
2/23/98 5.92 17,000,000 17,000,000
Nationwide Building Society
1/23/98 5.65 7,000,000 6,976,173
3/9/98 5.81 5,000,000 4,946,679
3/10/98 5.82 7,000,000 6,924,170
New Center Asset Trust
2/17/98 5.78 5,000,000 4,962,771
2/17/98 5.80 5,000,000 4,962,661
3/19/98 5.83 5,000,000 4,938,506
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE
AMOUNT (NOTE 1)
Norfolk Southern Corp.
1/14/98 6.14% $ 2,000,000 $ 1,995,594
1/21/98 6.35 2,000,000 1,992,988
1/22/98 6.19 3,000,000 2,989,237
Preferred Receivables Funding Corp.
1/23/98 5.89 1,425,000 1,419,905
Rabobank U.S.A. Financial Corp.
4/2/98 5.70 5,000,000 4,929,980
Scotiabanc Inc.
2/11/98 5.75 10,000,000 9,935,425
Sears Roebuck Acceptance Corp.
1/27/98 5.67 2,000,000 1,991,925
2/11/98 5.91 3,000,000 2,980,012
2/13/98 5.91 3,000,000 2,979,037
Transamerica Financial Corp.
1/28/98 5.78 5,000,000 4,978,550
Unifunding, Inc.
3/9/98 5.82 3,000,000 2,968,007
TOTAL COMMERCIAL PAPER 422,900,036
FEDERAL AGENCIES - 1.0%
FANNIE MAE - AGENCY COUPONS - 1.0%
3/13/98 5.84 (a) 10,000,000 9,997,855
BANK NOTES - 3.0%
Comerica Bank
3/27/98 6.20 5,000,000 4,997,778
First Bank NA - Minnesota
1/21/98 5.92 (a) 5,000,000 4,997,929
Key Bank, NA
1/26/98 5.89 (a) 4,000,000 3,998,695
1/28/98 5.95 (a) 5,000,000 4,997,770
9/23/98 5.84 (a) 2,000,000 1,998,857
Morgan Guaranty Trust Co., NY
8/31/98 5.85 5,000,000 5,001,527
South Trust Bank
1/12/98 5.96 (a) 2,000,000 1,999,193
US Bank, NA
1/21/98 5.91 (a) 2,000,000 1,999,018
TOTAL BANK NOTES 29,990,767
MASTER NOTES (A) - 3.7%
Goldman Sachs Group, L. P. (The) (c)
3/13/98 5.91 10,000,000 10,000,000
5/4/98 5.75 2,000,000 2,000,000
J.P. Morgan Securities
1/8/98 5.75 4,000,000 4,000,000
Morgan Stanley Group, Inc.
1/8/98 5.94 14,000,000 14,000,000
Norwest Corp.
1/2/98 5.72 7,000,000 7,000,000
TOTAL MASTER NOTES 37,000,000
MEDIUM-TERM NOTES (A) - 6.7%
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE
AMOUNT (NOTE 1)
Beneficial Corp.
1/11/98 5.67% $ 2,000,000 $ 1,999,655
Capital One Funding Corp. (1994-B)
1/8/98 6.00 3,289,000 3,289,000
Capital One Funding Corp. (1995-E)
1/8/98 6.00 5,637,000 5,637,000
General Motors Acceptance Corp.
1/2/98 6.24 2,000,000 1,999,954
2/1/98 5.67 6,000,000 6,000,377
2/1/98 5.75 5,000,000 5,000,000
Liquid Asset Backed Security Trust (1996-1) (b)
1/15/98 5.96 5,000,000 5,000,000
Liquid Asset Backed Securities Trust (1996-2) (b)
1/2/98 5.95 7,000,000 7,000,000
Liquid Asset Backed Securities Trust (1997-5) (b)
1/20/98 5.94 10,000,000 10,000,000
Merrill Lynch & Co., Inc.
1/2/98 6.20 4,000,000 3,999,703
1/6/98 5.97 2,000,000 1,999,867
Morgan Stanley, Dean Witter, Discover & Co.
4/15/98 5.75 5,000,000 5,000,000
New York Life Insurance Co.
3/23/98 5.89 5,000,000 5,000,000
Norwest Corp.
1/22/98 5.83 6,000,000 6,000,000
TOTAL MEDIUM-TERM NOTES 67,925,556
SHORT-TERM NOTES (A) - 4.5%
SMM Trust 1996-P (b)
1/16/98 5.96 4,000,000 4,000,000
SMM Trust 1997-X (b)
1/12/98 6.00 10,000,000 10,000,000
SMM Trust (1997-V) (b)
1/26/98 5.97 8,000,000 8,000,000
Strategic Money Market Trust (1997-A) (b)
3/23/98 5.91 20,000,000 20,000,000
Transamerica Life Insurance and Annuity Co.
3/16/98 5.92 3,000,000 3,000,000
TOTAL SHORT-NOTES 45,000,000
TIME DEPOSITS - 0.6%
Sumitomo Bank, Ltd. Japan
2/2/98 6.38 6,000,000 6,000,000
REPURCHASE AGREEMENTS - 0.6%
MATURITY
AMOUNT
In a joint trading account
(U.S. Treasury Obligations)
dated 12/31/97 due 1/2/98
At 6.59% $ 5,976,187 5,974,000
TOTAL INVESTMENTS - 100% $1,006,753,606
Total Cost for Income Tax Purposes - $1,006,753,606
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 $64,000,000 or
6.3% 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
SECURITY DATE COST
Goldman Sachs
Group, L.P. (The)
5.91%, 3/13/98 6/11/97 $ 10,000,000
Goldman Sachs
Group, L.P. (The)
5.75%, 5/4/98 8/5/97 $ 2,000,000
INCOME TAX INFORMATION
At December 31, 1997, the fund had a capital loss carryforward of
approximately $57,000 of which $29,000 and $28,000 will expire on
December 31, 2002 and 2005, respectively.
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
ASSETS
INVESTMENT IN SECURITIES, AT VALUE $ 1,006,753,606
(INCLUDING REPURCHASE AGREEMENTS
OF $5,974,000) - SEE
ACCOMPANYING SCHEDULE
CASH 1,074
SHARE TRANSACTIONS IN PROCESS 19,184,152
INTEREST RECEIVABLE 6,211,548
TOTAL ASSETS 1,032,150,380
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 11,000,000
DISTRIBUTIONS PAYABLE 35,206
ACCRUED MANAGEMENT FEE 206,182
OTHER PAYABLES AND 114,890
ACCRUED EXPENSES
TOTAL LIABILITIES 11,356,278
NET ASSETS $ 1,020,794,102
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 1,020,852,852
ACCUMULATED NET REALIZED GAIN (58,750)
(LOSS) ON INVESTMENTS
NET ASSETS, FOR 1,020,837,796 $ 1,020,794,102
SHARES OUTSTANDING
NET ASSET VALUE, OFFERING PRICE $1.00
AND REDEMPTION PRICE PER
SHARE ($1,020,794,102 (DIVIDED BY)
1,020,837,796 SHARES)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INTEREST INCOME $ 62,581,312
EXPENSES
MANAGEMENT FEE $ 2,325,636
TRANSFER AGENT FEES 810,738
ACCOUNTING FEES AND EXPENSES 133,309
NON-INTERESTED TRUSTEES' COMPENSATION 5,882
CUSTODIAN FEES AND EXPENSES 38,590
AUDIT 23,053
LEGAL 5,116
MISCELLANEOUS 82,375
TOTAL EXPENSES BEFORE REDUCTIONS 3,424,699
EXPENSE REDUCTIONS (4,815 3,419,884
)
NET INTEREST INCOME 59,161,428
NET REALIZED GAIN (LOSS) (30,044
ON INVESTMENTS )
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 59,131,384
OTHER INFORMATION
EXPENSE REDUCTIONS
CUSTODIAN CREDITS $ 4,815
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
INCREASE (DECREASE) IN
NET ASSETS
OPERATIONS $ 59,161,428 $ 49,421,275
NET INTEREST INCOME
NET REALIZED GAIN (30,044) 49,076
(LOSS)
NET INCREASE 59,131,384 49,470,351
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
DISTRIBUTIONS TO (59,161,428) (49,421,275)
SHAREHOLDERS FROM
NET INTEREST INCOME
SHARE TRANSACTIONS AT 1,984,694,072 1,994,407,823
NET ASSET VALUE OF
$1.00 PER SHARE
PROCEEDS FROM SALES
OF SHARES
REINVESTMENT OF 59,126,220 49,421,275
DISTRIBUTIONS FROM
NET INTEREST INCOME
COST OF SHARES (2,149,151,239) (1,726,597,066)
REDEEMED
NET INCREASE (105,330,947) 317,232,032
(DECREASE) IN NET
ASSETS AND SHARES
RESULTING FROM
SHARE TRANSACTIONS
TOTAL INCREASE (105,360,991) 317,281,108
(DECREASE) IN NET
ASSETS
NET ASSETS
BEGINNING OF PERIOD 1,126,155,093 808,873,985
END OF PERIOD $ 1,020,794,102 $ 1,126,155,093
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1997 1996 1995 1994 1993
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
BEGINNING OF
PERIOD
INCOME FROM .053 .052 .057 .042 .032
INVESTMENT
OPERATIONS
NET INTEREST
INCOME
LESS
DISTRIBUTIONS
FROM NET (.053) (.052) (.057) (.042) (.032)
INTEREST
INCOME
NET ASSET VALUE, $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
END OF PERIOD
TOTAL RETURN A 5.51% 5.41% 5.87% 4.25% 3.23%
RATIOS AND
SUPPLEMENTAL
DATA
NET ASSETS, END $ 1,020,794 $ 1,126,155 $ 808,874 $ 748,606 $ 353,104
OF PERIOD (000
OMITTED)
RATIO OF .31% .30% .33% .27% .22%
EXPENSES TO B
AVERAGE NET
ASSETS
RATIO OF NET 5.32% 5.28% 5.72% 4.32% 3.16%
INTEREST
INCOME TO
AVERAGE NET
ASSETS
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
A THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN
EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN.
B 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.
</TABLE>
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 LIFE OF
DECEMBER 31, 1997 YEAR YEARS FUND
VIP II: INVESTMENT GRADE BOND 9.06% 7.11% 8.29%
LB AGGREGATE BOND 9.65% 7.48% N/A
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare these figures to the Lehman Brothers Aggregate Bond
Index - a market value weighted performance benchmark for
investment-grade fixed-rate debt issues, including government,
corporate, asset-backed, and mortgage-backed securities, with
maturities of at least one year. This benchmark includes reinvested
dividends and capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of
how it will do tomorrow. Bond prices, for example,
generally move in the opposite direction of interest
rates. In turn, the share price, return and yield of a
fund that invests in bonds will vary. That means if
you sell your shares during a market downturn, you
might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
3
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, December 5, 1988.
If Fidelity had not reimbursed certain fund expenses, the life of fund
total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19971231 19980108 182527 S00000000000001
VIP II: Investment Grade LB Aggregate Bond
00155 LB001
1988/12/31 10000.00 10000.00
1989/01/31 10086.92 10143.88
1989/02/28 10109.25 10070.36
1989/03/31 10172.02 10113.90
1989/04/30 10285.31 10325.54
1989/05/31 10399.91 10596.87
1989/06/30 10600.00 10919.52
1989/07/31 10765.35 11151.64
1989/08/31 10679.56 10986.42
1989/09/30 10721.69 11042.65
1989/10/31 10887.69 11314.55
1989/11/30 10981.36 11422.39
1989/12/31 11026.21 11452.96
1990/01/31 11001.11 11316.86
1990/02/28 11063.52 11353.48
1990/03/31 11097.11 11361.84
1990/04/30 11101.82 11257.75
1990/05/31 11276.11 11591.07
1990/06/30 11364.07 11777.05
1990/07/31 11476.89 11939.97
1990/08/31 11475.79 11780.51
1990/09/30 11520.66 11877.97
1990/10/31 11521.38 12028.78
1990/11/30 11590.77 12287.71
1990/12/31 11711.43 12479.17
1991/01/31 11735.04 12633.43
1991/02/28 11853.10 12741.27
1991/03/31 12053.80 12828.93
1991/04/30 12230.89 12967.91
1991/05/31 12325.33 13043.74
1991/06/30 12348.94 13037.11
1991/07/31 12455.20 13217.90
1991/08/31 12714.93 13503.94
1991/09/30 12951.04 13777.57
1991/10/31 13092.71 13930.97
1991/11/30 13234.39 14058.71
1991/12/31 13629.42 14476.23
1992/01/31 13494.11 14279.29
1992/02/29 13567.97 14372.13
1992/03/31 13543.27 14291.11
1992/04/30 13642.04 14394.34
1992/05/31 13851.92 14665.96
1992/06/30 14012.41 14867.80
1992/07/31 14296.36 15171.13
1992/08/31 14382.78 15324.82
1992/09/30 14555.62 15506.47
1992/10/31 14370.44 15300.89
1992/11/30 14333.40 15304.35
1992/12/31 14536.36 15547.71
1993/01/31 14841.14 15845.85
1993/02/28 15093.07 16123.24
1993/03/31 15159.39 16190.42
1993/04/30 15252.23 16303.16
1993/05/31 15278.75 16323.92
1993/06/30 15570.53 16619.76
1993/07/31 15676.64 16713.76
1993/08/31 15955.15 17006.72
1993/09/30 16034.73 17053.43
1993/10/31 16114.31 17117.15
1993/11/30 16034.73 16971.54
1993/12/31 16129.93 17063.52
1994/01/31 16312.59 17293.91
1994/02/28 16045.19 16993.45
1994/03/31 15678.93 16574.49
1994/04/30 15538.06 16442.14
1994/05/31 15495.80 16439.84
1994/06/30 15453.53 16403.51
1994/07/31 15707.10 16729.33
1994/08/31 15721.19 16750.09
1994/09/30 15552.14 16503.56
1994/10/31 15566.23 16488.86
1994/11/30 15594.40 16452.24
1994/12/31 15523.97 16565.84
1995/01/31 15749.36 16893.69
1995/02/28 16053.30 17295.35
1995/03/31 16155.46 17401.46
1995/04/30 16374.37 17644.53
1995/05/31 17031.09 18327.33
1995/06/30 17162.44 18461.69
1995/07/31 17104.06 18420.46
1995/08/31 17308.38 18642.77
1995/09/30 17468.91 18824.14
1995/10/31 17702.41 19068.94
1995/11/30 17965.10 19354.69
1995/12/31 18213.20 19626.31
1996/01/31 18329.95 19756.64
1996/02/29 17995.20 19413.22
1996/03/31 17857.01 19278.28
1996/04/30 17749.53 19169.86
1996/05/31 17718.82 19130.94
1996/06/30 17933.78 19387.85
1996/07/31 17979.84 19440.90
1996/08/31 17964.49 19408.32
1996/09/30 18256.22 19746.55
1996/10/31 18655.43 20183.96
1996/11/30 18962.52 20529.68
1996/12/31 18793.62 20338.80
1997/01/31 18839.68 20401.08
1997/02/28 18864.60 20451.83
1997/03/31 18668.78 20225.20
1997/04/30 18946.20 20527.95
1997/05/31 19093.07 20722.01
1997/06/30 19321.53 20967.97
1997/07/31 19843.74 21533.40
1997/08/31 19664.23 21349.73
1997/09/30 19957.97 21664.60
1997/10/31 20219.07 21978.89
1997/11/30 20268.03 22080.10
1997/12/31 20496.49 22302.41
IMATRL PRASUN SHR__CHT 19971231 19980108 182529 R00000000000111
Let's say hypothetically that $10,000 was invested in VIP II:
Investment Grade Bond Portfolio on December 31, 1988, shortly after
the fund started. By December 31, 1997, the value of the investment
would have grown to $20,496 - a 104.96% 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
$22,302 - a 123.02% increase.
INVESTMENT SUMMARY
QUALITY DIVERSIFICATION AS OF DECEMBER 31, 1997
(MOODY'S RATINGS) % OF FUND'S
INVESTMENTS
AAA 48.2
AA 3.2
A 9.3
BAA 13.7
BA 3.4
B 0.0
NOT RATED 0.1
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 DECEMBER 31, 1997, ACCOUNT FOR 0.0% OF
THE FUND'S INVESTMENTS.
AVERAGE YEARS TO MATURITY AS OF DECEMBER 31, 1997
YEARS 7.9
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 DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
FINANCE 15.4
UTILITIES 4.2
MEDIA & LEISURE 2.8
RETAIL & WHOLESALE 1.8
TECHNOLOGY 1.3
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with Kevin Grant, Portfolio Manager of Investment Grade
Bond Portfolio
Q. HOW DID THE FUND PERFORM COMPARED TO ITS BENCHMARK, KEVIN?
A. For the 12 months that ended December 31, 1997, the fund performed
in line with the Lehman Brothers Aggregate Bond Index, which returned
9.65% for the period.
Q. WHAT AREAS OF THE BOND MARKET HAVE YOU TARGETED?
A. During the period, the fund continued to find opportunities among
bank capital securities, putable corporate bonds and short-maturity
corporate bonds. Bank capital securities resulted from a regulatory
change created by Federal Reserve Board policy about a year ago. The
change allows banks to issue long-term bonds and deduct the interest
payments from their taxes, unlike preferred stock where dividends are
not tax-deductible. This created a new market, with many of these
bonds offering attractive yields. Put bonds are corporate issues that
give investors the option to redeem the securities at some point prior
to their actual maturities.
Q. DID THE FUND FIND ATTRACTIVE OPPORTUNITIES IN ANY OTHER AREAS OF
THE MARKET?
A. Among corporate bonds, the fund invested a fair amount of its
assets in telecommunications and cable companies. For instance,
WorldCom has been a good performer because it quickly improved its
balance sheet. Investors are starting to appreciate WorldCom's
progressive credit story, so the fund reaped the rewards from the
price appreciation of these bonds. Cable companies also benefited by
the enhanced credit quality of their balance sheets.
Q. HOW DID MORTGAGE-BACKED SECURITIES PERFORM DURING THE PERIOD?
A. Mortgage-backed securities were expensive and the fund was
underweighted in these issues relative to the index during the period.
On top of that, mortgage-backed securities haven't performed much
better than Treasuries. The fund benefited from this underweighted
mortgage position because it was able to own more corporate bonds,
which performed pretty well.
Q. WHAT ABOUT YANKEE BONDS?
A. The fund owned some yankee bonds - dollar-denominated bonds issued
in the U.S. by foreign banks, governments and corporations - during
the period. Mostly, the fund had exposure to bonds issued by large
Canadian and European banks, which performed well. The fund also had a
small position in South Korean government agencies, which suffered
from the contagious effect of currency devaluations in the Southeast
Asian region. The effect on the fund's total return was minimal,
however, since the fund sold its position in South Korean yankees by
the end of the period.
Q. WHAT'S YOUR OUTLOOK FOR THE BOND MARKET?
A. The past two years have been wonderful for investors in most
financial assets - at least until the end of October when the
Southeast Asian crisis began affecting countries around the globe.
Because of the recent turn of events and the uncertainty they have
created, I plan to maintain a fairly defensive posture. Rather than
investing aggressively in corporate bonds, I will continue to seek out
companies whose management teams have consistent track records of
maintaining their investment-grade ratings. In addition, the mortgage
market is quite precarious. Considering the yield for the 10-year
Treasury was hovering near 6% at the end of the period and interest
rates are as low as they've been in about a year and a half, I think
prepayment risk is becoming more of an issue. Prepayment risk is the
risk that mortgage holders will pay off their mortgages before the
maturity date, usually in the form of refinancing at a lower interest
rate. This forces mortgage-backed bond investors to reinvest at a
lower interest rate. These factors tell me that it's probably a time
to be defensive and hold more government bonds than over the past few
years.
FUND FACTS
GOAL: income and share price stability by
investing in high-quality, short-term investments
START DATE: April 1, 1982
SIZE: as of December 31, 1997, more than $1.0
billion
MANAGER: Robert Duby, since April 1997; joined
Fidelity in 1982
3
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
INVESTMENTS DECEMBER 31, 1997
Showing Percentage of Total Value of Investment in Securities
NONCONVERTIBLE BONDS - 30.8%
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (A) AMOUNT (NOTE 1)
AEROSPACE & DEFENSE - 0.8%
DEFENSE ELECTRONICS - 0.8%
Raytheon Co.
6.45%, 8/15/04 Baa1 $ 3,000,000 $ 3,014,730
DURABLES - 0.6%
TEXTILES & APPAREL - 0.6%
Levi Strauss & Co.
7%, 11/1/06 (c) Baa2 2,000,000 2,046,740
ENERGY - 0.1%
OIL & GAS - 0.1%
Pennzoil Co.
9 5/8%, 11/15/99 Baa3 460,000 485,709
FINANCE - 15.4%
ASSET-BACKED SECURITIES - 3.8%
Capital Equipment Receivables
Trust 6.48%, 10/15/06 Baa2 880,000 871,834
Ford Credit Auto Owner Trust
6.40%, 5/15/02 A1 960,000 963,648
Ford Credit Grantor Trust
5.90%, 10/15/00 Aaa 350,699 350,480
Green Tree Financial Corp.
6.10%, 4/15/27 Aaa 648,993 648,584
Key Auto Finance Trust Class C
6.65%, 10/15/03 Baa3 320,000 319,600
Key Plastics, Inc.
10 1/4%, 3/15/07 A2 1,110,000 1,109,653
KeyCorp Auto Grantor Trust
5.80%, 7/15/00 A3 25,029 24,936
MBNA Master Credit Card
Trust II Class A
6.55%, 1/15/07 Aaa 3,000,000 3,056,130
PNC Student Loan Trust I
6.314%, 1/25/01 Aaa 3,100,000 3,119,375
Premier Auto Trust:
4.90%, 12/15/98 Aaa 63,313 63,134
8.05%, 4/4/00 Aaa 1,354,535 1,366,599
6%, 5/6/00 Aaa 500,000 499,685
Railcar Trust 7 3/4%, 6/1/04 Aaa 735,530 771,387
Sears Credit Account Master
Trust II 7%, 1/15/04 Aaa 1,000,000 1,014,370
Standard Credit Card Master
Trust I 7.65%, 2/15/00 A2 150,000 150,234
Union Federal Savings Bank
Grantor Trust 8.20%, 1/10/01 Baa2 34,664 34,967
14,364,616
BANKS - 3.5%
ABN Amro Bank NV
6 5/8%, 10/31/01 Aa3 1,000,000 1,012,070
Banc One Corp.
6.70%, 3/24/00 Aa3 1,450,000 1,465,791
BanPonce Corp.:
5 3/4%, 3/1/99 A3 370,000 367,865
6.378%, 4/8/99 A3 430,000 430,555
Capital One Bank
6.42%, 11/12/99 Baa3 2,000,000 2,006,120
Citicorp. 7.20%, 6/15/07 A1 900,000 942,363
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (A) AMOUNT (NOTE 1)
First Fidelity Bancorp.
8 1/2%, 4/1/98 A2 $ 250,000 $ 251,408
First Maryland Bancorp.
10 3/8%, 8/1/99 A3 500,000 531,330
Firstar Corp.
7.15%, 9/1/00 A3 640,000 643,712
Hartford National Corp.
9.85%, 6/1/99 A3 1,150,000 1,204,292
Kansallis-Osake-Pankki
10%, 5/1/02 A3 260,000 295,461
KeyCorp 8.40%, 4/1/99 A2 310,000 318,544
NB Capital Trust IV
8 1/4%, 4/15/27 A1 1,990,000 2,171,607
Sovran Financial Corp.
9 3/4%, 6/15/99 A2 770,000 809,863
Union Planters Corp.
6 3/4%, 11/1/05 Baa2 400,000 402,512
Union Planters National Bank
6.81%, 8/20/01 A3 500,000 507,500
13,360,993
CREDIT & OTHER FINANCE - 5.8%
AT&T Capital Corp.:
6.41%, 8/13/99 Baa3 1,000,000 1,003,900
6.16%, 12/3/99 Baa3 500,000 499,430
Associates Corp. of North
America 6 7/8%, 2/15/00 Aa3 3,000,000 3,056,550
BCH Cayman Islands Ltd. yankee
7.70%, 7/15/06 A3 180,000 189,236
BNY Capital I, Series B
7.97%, 12/31/26 A1 1,000,000 1,064,370
BankBoston Capital Trust II
7 3/4%, 12/15/26 Baa1 1,080,000 1,101,827
BanPonce Trust I
8.327%, 2/1/27 (c) Baa1 1,230,000 1,314,993
Chase Capital I
7.67%, 12/1/26 A1 2,020,000 2,092,821
Chrysler Financial Corp.
6 3/8%, 1/28/00 A3 1,240,000 1,245,940
Finova Capital Corp.
6.27%, 9/29/00 Baa1 400,000 399,580
First Security Capital I
8.41%, 12/15/26 A3 1,210,000 1,323,050
First Union Institutional Capital I
8.04%, 12/1/26 A1 1,000,000 1,053,980
General Electric Capital Corp.
6.94%, 4/13/09 (b) Aaa 1,000,000 1,010,300
General Motors Acceptance Corp.:
6.40%, 5/17/99 A3 1,000,000 1,004,920
6.65%, 5/24/00 A3 1,650,000 1,666,946
JPM Capital Trust II
7.95%, 2/1/27 Aa2 1,820,000 1,937,408
KeyCorp Institutional Capital
Series A 7.826%, 12/1/26 A1 800,000 829,952
PNC Institutional Capital Trust
8.315%, 5/15/27 (c) A2 1,000,000 1,083,880
21,879,083
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (A) AMOUNT (NOTE 1)
FINANCE - CONTINUED
INSURANCE - 0.8%
Executive Risk Capital Trust
8 5/8%, 2/1/27 Baa3 $ 1,750,000 $ 1,897,910
Nationwide Mutual Insurance Co.
6 1/2%, 2/15/04 (c) A1 130,000 130,564
SunAmerica, Inc.
6.20%, 10/31/99 Baa1 1,000,000 1,000,330
3,028,804
SAVINGS & LOANS - 1.5%
Ahmanson (H.F.) & Co.
9 7/8%, 11/15/99 Baa2 3,000,000 3,188,700
Great West Financial Trust II
8.206%, 2/1/27 A3 2,500,000 2,651,550
5,840,250
TOTAL FINANCE 58,473,746
HOLDING COMPANIES - 0.5%
Norfolk Southern Corp.
7.05%, 5/1/37 Baa1 1,700,000 1,796,798
INDUSTRIAL MACHINERY & EQUIPMENT - 1.1%
POLLUTION CONTROL - 1.1%
WMX Technologies, Inc.:
6 1/4%, 4/1/99 Baa1 1,200,000 1,197,300
7.1%, 8/1/26 Baa1 3,000,000 3,102,480
4,299,780
MEDIA & LEISURE - 2.8%
BROADCASTING - 2.7%
Continental Cablevision, Inc.:
8.30%, 5/15/06 Baa3 320,000 349,251
9%, 9/1/08 Baa3 780,000 901,150
Hearst-Argyle Television, Inc.
7 1/2%, 11/15/27 Baa3 1,250,000 1,268,400
TCI Communication, Inc.:
7 1/4%, 6/15/99 Ba1 3,680,000 3,722,210
7 3/8%, 2/15/00 Ba1 750,000 764,475
Time Warner, Inc.:
7.95%, 2/1/00 Ba1 1,170,000 1,205,966
8.18%, 8/15/07 Ba1 2,000,000 2,180,000
10,391,452
RESTAURANTS - 0.1%
Darden Restaurants, Inc.
6 3/8%, 2/1/06 Baa1 310,000 298,307
TOTAL MEDIA & LEISURE 10,689,759
NONDURABLES - 1.2%
FOODS - 0.4%
ConAgra, Inc.
7 1/8%, 10/1/26 Baa1 1,270,000 1,348,727
TOBACCO - 0.8%
Philip Morris Companies, Inc.
6.95%, 6/1/06 A2 3,000,000 3,106,980
TOTAL NONDURABLES 4,455,707
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (A) AMOUNT (NOTE 1)
RETAIL & WHOLESALE - 1.8%
GENERAL MERCHANDISE STORES - 1.4%
Dayton Hudson Corp.
6.40%, 2/15/03 Baa1 $ 500,000 $ 500,210
Federated Department Stores, Inc.
8 1/2%, 6/15/03 Baa2 3,000,000 3,275,670
Penney (J.C.) Co., Inc.
6.95%, 4/1/00 A2 1,000,000 1,016,120
Sears, Roebuck & Co.
9.23%, 8/6/98 A2 450,000 458,316
5,250,316
GROCERY STORES - 0.4%
American Stores Co.
7 1/2%, 5/1/37 Baa2 1,400,000 1,532,720
TOTAL RETAIL & WHOLESALE 6,783,036
TECHNOLOGY - 1.3%
COMPUTERS & OFFICE EQUIPMENT - 0.8%
Comdisco, Inc.
6 3/8%, 11/30/01 Baa1 3,200,000 3,200,000
ELECTRONICS - 0.5%
Texas Instruments, Inc.
6 7/8%, 7/15/00 A3 1,692,000 1,717,600
TOTAL TECHNOLOGY 4,917,600
TRANSPORTATION - 1.0%
AIR TRANSPORTATION - 0.2%
AMR Corp. 9.55%, 3/6/98 Baa3 400,000 402,356
Delta Air Lines, Inc. equipment
trust certificate
8.54%, 1/2/07 Baa1 416,138 456,516
858,872
RAILROADS - 0.8%
Burlington Northern Santa Fe Corp.
6.53%, 7/15/37 Baa2 3,000,000 3,039,810
TOTAL TRANSPORTATION 3,898,682
UTILITIES - 4.2%
CELLULAR - 0.1%
360 Degrees Communications Co.
7 1/8%, 3/1/03 Ba1 410,000 418,717
ELECTRIC UTILITY - 2.1%
Avon Energy Partners Holdings
7.05%, 12/11/07 (c) Baa2 3,000,000 3,054,690
British Columbia Hydro & Power
Authority yankee
12 1/2%, 1/15/14 Aa2 360,000 396,497
DR Investment yankee
7.10%, 5/15/02 (c) Baa1 1,500,000 1,537,245
Israel Electric Corp. Ltd.
7 3/4%, 12/15/27 (c) A3 2,800,000 2,819,656
7,808,088
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (A) AMOUNT (NOTE 1)
UTILITIES - CONTINUED
GAS - 0.8%
Mitchell Energy & Development
Corp. 8%, 7/15/99 Baa3 $ 1,730,000 $ 1,770,742
Southwest Gas Corp.
9 3/4%, 6/15/02 Baa2 1,000,000 1,126,190
2,896,932
TELEPHONE SERVICES - 1.2%
WorldCom, Inc.:
9 3/8%, 1/15/04 Ba1 1,743,000 1,845,436
7 3/4%, 4/1/07 Ba1 2,700,000 2,899,503
4,744,939
TOTAL UTILITIES 15,868,676
TOTAL NONCONVERTIBLE BONDS
(Cost $103,421,694) 116,730,963
U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS - 17.1%
U.S. TREASURY OBLIGATIONS - 9.4%
6 5/8%, 6/30/01 Aaa 14,950,000 15,363,517
7%, 7/15/06 Aaa 100,000 107,937
13 7/8%, 5/15/11 (callable) Aaa 30,000 45,652
9%, 11/15/18 Aaa 1,800,000 2,431,692
7 5/8%, 2/15/25 Aaa 14,675,000 17,809,433
35,758,231
U.S. GOVERNMENT AGENCY OBLIGATIONS - 7.7%
Federal Agricultural Mortgage
Corporation
7.01%, 2/10/05 Aaa 10,000 10,545
Federal Home Loan Bank:
6 3/4%, 4/5/04 Aaa 375,000 390,176
7.31%, 6/16/04 Aaa 4,155,000 4,446,515
7.36%, 7/1/04 Aaa 3,100,000 3,327,168
7.38%, 8/5/04 Aaa 110,000 118,388
7.56%, 9/1/04 Aaa 310,000 336,542
7.46%, 9/9/04 Aaa 50,000 53,906
7.70%, 9/20/04 Aaa 40,000 43,612
6.46%, 12/15/04 Aaa 1,745,000 1,783,983
8.09%, 12/28/04 Aaa 10,000 11,155
7.59%, 3/10/05 Aaa 10,000 10,891
Freddie Mac:
6.77%, 9/15/02 Aaa 150,000 154,668
8%, 1/26/05 Aaa 520,000 577,522
8.115%, 1/31/05 Aaa 1,140,000 1,273,768
6.783%, 8/18/05 Aaa 1,000,000 1,044,530
Fannie Mae 6.72%, 8/1/05 Aaa 1,180,000 1,227,932
Financing Corp. stripped
principal 0%, 3/26/00 Aaa 512,000 450,186
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 1,941,526
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (A) AMOUNT (NOTE 1)
Government Trust Certificates
(assets of Trust guaranteed by
U.S. Government through
Defense Security Assistance
Agency):
Class 1-C,
9 1/4%, 11/15/01 Aaa $ 996,393 $ 1,060,321
Class 2-E,
9.40%, 5/15/02 Aaa 851,419 904,437
Class T-3,
9 5/8%, 5/15/02 Aaa 58,637 62,259
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 6,222 6,057
Series 1993-D,
5.23%, 5/15/05 Aaa 12,766 12,409
Series 1994-A,
7.12%, 4/15/06 Aaa 7,897 8,200
Series 1994-C,
6.61%, 9/15/99 Aaa 44,547 44,798
Guaranteed Trade Trust
Certificates (assets of Trust
guaranteed by U.S. Government
through Export-Import Bank)
Series 1994-B,
7 1/2%, 1/26/06 Aaa 7,985 8,433
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 12,942 13,180
Overseas Private Investment
Corp. U.S. Government
guaranteed participation
certificate Series 1994-1995,
6.08%, 8/15/04 (callable) Aaa 137,200 137,347
Private Export Funding Corp.:
secured 5.65%, 3/15/03 Aaa 222,750 220,959
secured 6.86%, 4/30/04 Aaa 1,489,691 1,523,936
State of Israel (guaranteed by
U.S. Government through
Agency for International
Development):
6 1/8%, 8/15/99 Aaa 770,000 773,527
7 1/8%, 8/15/99 Aaa 435,000 443,912
6 3/8%, 8/15/01 Aaa 352,000 357,016
0%, 11/15/01 Aaa 2,875,000 2,299,218
6 1/8%, 3/15/03 Aaa 70,000 70,383
6 5/8%, 2/15/04 Aaa 180,000 186,680
6 3/4%, 8/15/04 Aaa 1,000,000 1,043,490
7 5/8%, 8/15/04 Aaa 330,000 359,803
5.89%, 8/15/05 Aaa 1,175,000 1,167,598
U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (A) AMOUNT (NOTE 1)
U.S. GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
U.S. Department of Housing
and Urban Development
Government guaranteed
participation certificates:
Series 1995-A:
8.27%, 8/1/03 Aaa $ 415,000 $ 458,152
8.24%, 8/1/04 Aaa 500,000 558,230
Series 1996-A,
6.98%, 8/1/05 Aaa 180,000 190,107
29,113,465
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $63,217,559) 64,871,696
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 24.7%
FREDDIE MAC - 0.5%
7%, 5/1/01 Aaa 155,454 157,442
8 1/2%, 3/1/20 Aaa 1,507,291 1,590,132
1,747,574
FANNIE MAE - 22.5%
6.345%, 3/1/99 Aaa 77,171 77,195
5 1/2%, 5/1/00 to 7/1/01 Aaa 2,407,798 2,375,761
6%, 3/1/01 to 6/1/11 Aaa 28,350,626 27,975,035
6 1/2%, 2/1/10 to 1/1/28 Aaa 22,860,229 22,601,629
7%, 1/1/28 Aaa 29,600,000 29,822,000
8%, 12/1/24 to 1/1/28 Aaa 2,344,408 2,428,680
85,280,300
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 1.7%
6%, 8/15/08 to 5/15/09 Aaa 4,248,834 4,224,506
8%, 2/15/17 Aaa 325,890 342,367
10%, 1/15/14 to 11/15/24 Aaa 1,641,594 1,826,072
6,392,945
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $102,977,240) 93,420,819
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.0%
Fannie Mae:
Series 1994-M3 Class A,
7.71%, 4/1/06 Aaa 7,695 7,715
sequential pay
Series 1996-M5 Class A1,
7.141%, 6/25/08 Aaa 219,730 225,498
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $228,350) 233,213
COMMERCIAL MORTGAGE SECURITIES - 3.0%
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (A) AMOUNT (NOTE 1)
BKB Commercial Mortgage Trust
Series 1997-C1 Class A-1,
6 7/8%, 2/25/43 (c) Aaa $ 1,157,314 $ 1,156,271
CS First Boston Mortgage Securities
Corp. Series 1997-C2
Class D, 7.27%, 4/17/11 Baa2 1,080,000 1,082,363
Equitable Life Assurance Society
of the United States (The)
Series 1996-1 (c):
Class B1,
7.33%, 5/15/06 Aa2 500,000 528,750
Class C1,
7.52%, 5/15/06 A2 500,000 531,040
First Union-Lehman Brothers
Commercial Mortgage Trust
sequential pay Series 1997-C2
Class A3, 6.65%, 12/18/07 Aaa 3,000,000 3,026,015
General Motors Acceptance
Corp. Commercial Mortgage
Securities, Inc. Series 1997-C2
Class E, 7.624%, 4/15/11 Baa3 930,000 925,201
Meritor Mortgage Security Corp.
Series 1987-1 Class A-3,
9.40%, 6/1/99 Baa3 11,326 11,326
Nomura Asset Securities Corp.
floater Series 1994-MD-II
Class A-6,
6.9525%, 7/4/03 (d) - 179,477 179,701
Oregon Commercial Mortgage,
Inc. Series 1995-1 Class A,
7.15%, 6/25/26 (c) Aaa 107,760 107,811
Resolution Trust Corp.:
commercial Series 1995-C1
Class A-4B,
6.65%, 2/25/27 Aaa 623,893 623,113
floater Series 1993-C2
Class A-2,
6.995% 3/25/25 (d) Aaa 82,895 83,051
floater Series 1994-C1
Class A-3,
6.675%, 6/25/26 (d) Aaa 157,677 158,071
Structured Asset Securities Corp.
sequential pay:
Series1993-C1 Class A-1A,
6.60%, 10/25/24 AA+ 12,663 12,666
Series 1996 Class A-2A,
7 3/4%, 2/25/28 Aaa 931,806 942,325
Thirteen Affiliates of General
Growth Properties, Inc.
sequential pay Series A-2,
6.602%, 11/15/12 (c) Aaa 1,500,000 1,503,885
Wells Fargo Capital Markets
Apartment Financing Trust
6.56%, 12/29/05 (c) Aaa 431,746 436,603
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $11,221,442) 11,308,192
FOREIGN GOVERNMENT OBLIGATIONS (E) - 1.0%
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (A) AMOUNT (NOTE 1)
Alberta Province yankee
9 1/4%, 4/1/00 Aa2 $ 2,500,000 $ 2,659,275
British Columbia Province
7%, 1/1/03 Aa2 500,000 520,565
Manitoba Province
6 3/4%, 3/1/03 A1 500,000 512,175
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $3,783,345) 3,692,015
SUPRANATIONAL OBLIGATIONS - 1.3%
African Development Bank
7 3/4%, 12/15/01 Aa1 660,000 695,455
Inter American Development
Bank yankee
6.29%, 7/16/27 Aaa 4,000,000 4,155,200
TOTAL SUPRANATIONAL OBLIGATIONS
(Cost $4,666,639) 4,850,655
CERTIFICATES OF DEPOSIT - 0.3%
Canadian Imperial Bank of
Commerce NY Branch yankee
6.20%, 8/1/00
(Cost $1,001,500) 1,000,000 1,001,500
CASH EQUIVALENTS - 21.8%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations), in a joint
trading account at 6.40%, dated
12/31/97 due 1/2/98
(Cost $82,631,000) $ 82,660,380 82,631,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $373,148,769) $ 378,740,053
LEGEND
(a) Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investors Service, Inc.
(b) Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date. The rate shown is the rate at
period end.
(c) Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions
exempt from registration, normally to qualified institutional buyers.
At the period end, the value of these securities amounted to
$16,252,128 or 5.0% of net assets.
(d) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(e) For foreign government obligations not individually rated by S&P
or Moody's, the ratings listed are assigned to securities by FMR, the
fund's investment adviser, based principally on S&P and Moody's
ratings of the sovereign credit of the issuing government.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $565,913,377 and $478,438,405, respectively, of which U.S.
government and government agency obligations aggregated $430,016,247
and $418,610,517, respectively.
The composition of long-term debt holdings as a percentage of total
value of investment in securities, is as follows (ratings are
unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 60.1% AAA, AA, A 58.2%
Baa 13.7% BBB 17.3%
Ba 3.4% BB 0.0%
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 Moody's or S&P amounted to 0.1%.
INCOME TAX INFORMATION
At December 31, 1997, the aggregate cost of investment securities for
income tax purposes was $373,231,286. Net unrealized appreciation
aggregated $5,508,767, of which $5,915,828 related to appreciated
investment securities and $407,061 related to depreciated investment
securities.
The fund hereby designates approximately $1,291,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
INVESTMENT IN SECURITIES, AT $ 378,740,053
VALUE (INCLUDING REPURCHASE AGREEMENTS OF $82,631,000)
(COST $373,148,769) -
SEE ACCOMPANYING SCHEDULE
CASH 918
RECEIVABLE FOR INVESTMENTS SOLD 120,119
RECEIVABLE FOR FUND SHARES SOLD 3,980,916
INTEREST RECEIVABLE 3,291,068
TOTAL ASSETS 386,133,074
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 61,458,902
ACCRUED MANAGEMENT FEE 113,169
OTHER PAYABLES AND ACCRUED EXPENSES 36,020
TOTAL LIABILITIES 61,608,091
NET ASSETS $ 324,524,983
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 300,149,800
UNDISTRIBUTED NET INVESTMENT INCOME 16,682,637
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS 2,101,262
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 5,591,284
NET ASSETS, FOR 25,833,747 $ 324,524,983
SHARES OUTSTANDING
NET ASSET VALUE, OFFERING PRICE $12.56
AND REDEMPTION PRICE PER SHARE ($324,524,983 (DIVIDED BY) 25,833,747 SHARES)
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME $ 18,199,914
INTEREST
EXPENSES
MANAGEMENT FEE $ 1,154,096
TRANSFER AGENT FEES 208,835
ACCOUNTING FEES AND EXPENSES 106,949
NON-INTERESTED TRUSTEES' COMPENSATION 1,062
CUSTODIAN FEES AND EXPENSES 14,111
REGISTRATION FEES 25
AUDIT 29,384
LEGAL 1,111
MISCELLANEOUS 12,516
TOTAL EXPENSES BEFORE REDUCTIONS 1,528,089
EXPENSE REDUCTIONS (2,422 1,525,667
)
NET INVESTMENT INCOME 16,674,247
REALIZED AND UNREALIZED GAIN (LOSS) 3,703,820
NET REALIZED GAIN (LOSS) ON
INVESTMENT SECURITIES
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENT SECURITIES 3,255,290
NET GAIN (LOSS) 6,959,110
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 23,633,357
OTHER INFORMATION $ 2,422
EXPENSE REDUCTIONS
CUSTODIAN CREDITS
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
OPERATIONS $ 16,674,247 $ 13,175,925
NET INVESTMENT
INCOME
NET REALIZED GAIN 3,703,820 (1,136,463
(LOSS) )
CHANGE IN NET 3,255,290 (5,278,792
UNREALIZED )
APPRECIATION
(DEPRECIATION)
NET INCREASE 23,633,357 6,760,670
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
DISTRIBUTIONS TO (13,381,760 (9,612,980
SHAREHOLDERS FROM ) )
NET INVESTMENT
INCOME
SHARE TRANSACTIONS 155,252,643 108,335,706
NET PROCEEDS FROM
SALES OF SHARES
REINVESTMENT OF 13,381,760 9,612,980
DISTRIBUTIONS
COST OF SHARES (82,954,820 (68,048,460
REDEEMED ) )
NET INCREASE 85,679,583 49,900,226
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 95,931,180 47,047,916
(DECREASE) IN NET
ASSETS
NET ASSETS
BEGINNING OF PERIOD 228,593,803 181,545,887
END OF PERIOD $ 324,524,983 $ 228,593,803
(INCLUDING
UNDISTRIBUTED NET
INVESTMENT INCOME
OF $16,682,637 AND
$13,165,742,
RESPECTIVELY)
OTHER INFORMATION
SHARES
SOLD 12,893,400 9,066,652
ISSUED IN 1,151,614 807,813
REINVESTMENT OF
DISTRIBUTIONS
REDEEMED (6,885,603 (5,752,069
) )
NET INCREASE 7,159,411 4,122,396
(DECREASE)
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1997 1996 1995 1994 1993
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, $ 12.240 $ 12.480 $ 11.020 $ 11.480 $ 10.970
BEGINNING OF PERIOD
INCOME FROM .759 B .670 .320 .733 .641
INVESTMENT
OPERATIONS
NET INVESTMENT
INCOME
NET REALIZED AND .291 (.290) 1.530 (1.163) .559
UNREALIZED GAIN (LOSS)
TOTAL FROM 1.050 .380 1.850 (.430) 1.200
INVESTMENT
OPERATIONS
LESS DISTRIBUTIONS
FROM NET INVESTMENT (.730) (.620) (.390) - (.628)
INCOME
IN EXCESS OF NET - - - - (.002)
INVESTMENT INCOME
FROM NET REALIZED - - - (.010) (.050)
GAIN
IN EXCESS OF NET - - - (.020) (.010)
REALIZED GAIN
TOTAL DISTRIBUTIONS (.730) (.620) (.390) (.030) (.690)
NET ASSET VALUE, END OF $ 12.560 $ 12.240 $ 12.480 $ 11.020 $ 11.480
PERIOD
TOTAL RETURN A 9.06% 3.19% 17.32% (3.76)% 10.96%
RATIOS AND
SUPPLEMENTAL DATA
NET ASSETS, END OF $ 324,525 $ 228,594 $ 181,546 $ 111,381 $ 122,376
PERIOD (000 OMITTED)
RATIO OF EXPENSES TO .58% .58% .59% .67% .68%
AVERAGE NET ASSETS
RATIO OF NET INVESTMENT 6.34% 6.49% 6.53% 6.53% 6.85%
INCOME TO AVERAGE
NET ASSETS
PORTFOLIO TURNOVER RATE 191% 81% 182% 143% 70%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
A TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE
TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION
OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN.
B NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED
BASED ON AVERAGE SHARES OUTSTANDING DURING THE
PERIOD.
</TABLE>
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
DECEMBER 31, 1997 YEAR YEARS YEARS
VIP: HIGH INCOME - "INITIAL CLASS" 17.67% 13.91% 12.81%
ML HIGH YIELD MASTER 12.82% 11.72% 12.09%
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.
3
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown.
If Fidelity had not reimbursed certain fund expenses, the past five
year and past 10 year total returns would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money. The fund includes high yielding, lower-rated
securities which are subject to greater price volatility and may
involve greater risk of default. The market for these securities may
be less liquid.
$10,000 OVER 10 YEARS
IMAHDR PRASUN SHR__CHT 19971231 19980126 092646 S00000000000001
VIP High Income ML High Yield Master
00152 ML002
1987/12/31 10000.00 10000.00
1988/01/31 10328.76 10273.65
1988/02/29 10638.01 10552.42
1988/03/31 10561.58 10534.96
1988/04/30 10643.90 10565.39
1988/05/31 10628.07 10620.54
1988/06/30 10850.82 10823.60
1988/07/31 10963.78 10937.97
1988/08/31 10911.41 10973.91
1988/09/30 10998.88 11084.53
1988/10/31 11118.61 11257.23
1988/11/30 11076.16 11299.39
1988/12/31 11164.18 11347.21
1989/01/31 11432.46 11517.38
1989/02/28 11488.69 11594.77
1989/03/31 11341.07 11584.46
1989/04/30 11215.47 11618.65
1989/05/31 11422.69 11832.54
1989/06/30 11749.86 12000.18
1989/07/31 11672.50 12057.01
1989/08/31 11604.80 12116.57
1989/09/30 11198.75 12001.22
1989/10/31 10718.65 11811.39
1989/11/30 10727.68 11837.86
1989/12/31 10698.27 11827.16
1990/01/31 10461.79 11596.01
1990/02/28 10300.70 11427.13
1990/03/31 10192.02 11581.60
1990/04/30 10222.21 11640.45
1990/05/31 10432.25 11850.71
1990/06/30 10596.58 12080.30
1990/07/31 10760.25 12335.59
1990/08/31 10580.25 11863.36
1990/09/30 10329.38 11347.40
1990/10/31 10078.73 11058.64
1990/11/30 10315.13 11152.32
1990/12/31 10459.37 11313.02
1991/01/31 10681.28 11472.94
1991/02/28 11273.04 12324.50
1991/03/31 11672.48 12854.40
1991/04/30 12086.71 13312.16
1991/05/31 12264.24 13377.17
1991/06/30 12530.53 13646.27
1991/07/31 13003.94 13973.25
1991/08/31 13181.47 14266.94
1991/09/30 13477.35 14448.65
1991/10/31 13935.96 14878.00
1991/11/30 14054.31 15049.86
1991/12/31 14128.28 15224.70
1992/01/31 14882.78 15757.00
1992/02/29 15423.14 16148.33
1992/03/31 15921.70 16373.64
1992/04/30 16034.28 16492.82
1992/05/31 16227.27 16755.89
1992/06/30 16404.18 16964.08
1992/07/31 16725.83 17307.79
1992/08/31 17079.64 17536.93
1992/09/30 17256.55 17736.75
1992/10/31 16999.23 17512.73
1992/11/30 17208.30 17760.75
1992/12/31 17401.29 17989.44
1993/01/31 17867.69 18432.41
1993/02/28 18172.47 18781.31
1993/03/31 18591.84 19106.92
1993/04/30 18714.15 19244.07
1993/05/31 18993.73 19503.12
1993/06/30 19482.99 19869.54
1993/07/31 19675.20 20083.11
1993/08/31 19884.88 20274.55
1993/09/30 19954.77 20374.59
1993/10/31 20426.56 20758.40
1993/11/30 20618.77 20871.93
1993/12/31 20950.76 21080.63
1994/01/31 21649.71 21542.61
1994/02/28 21623.75 21387.69
1994/03/31 20895.29 20690.73
1994/04/30 20684.42 20448.94
1994/05/31 20722.76 20376.08
1994/06/30 20646.08 20451.08
1994/07/31 20722.76 20594.84
1994/08/31 20722.76 20737.90
1994/09/30 20876.12 20730.05
1994/10/31 20684.42 20782.72
1994/11/30 20511.89 20605.94
1994/12/31 20607.74 20835.14
1995/01/31 20837.78 21129.55
1995/02/28 21552.97 21788.82
1995/03/31 21821.35 22092.05
1995/04/30 22461.33 22609.30
1995/05/31 23039.38 23315.67
1995/06/30 23101.31 23493.75
1995/07/31 23658.72 23762.33
1995/08/31 23844.52 23906.55
1995/09/30 24236.77 24180.07
1995/10/31 24463.86 24351.47
1995/11/30 24587.73 24589.17
1995/12/31 24876.75 24983.88
1996/01/31 25454.80 25378.45
1996/02/29 25875.23 25416.66
1996/03/31 25807.26 25347.64
1996/04/30 26192.44 25359.12
1996/05/31 26554.97 25542.00
1996/06/30 26690.91 25695.43
1996/07/31 26600.28 25869.89
1996/08/31 26985.46 26137.04
1996/09/30 27778.49 26697.83
1996/10/31 27687.86 26990.42
1996/11/30 27982.41 27536.09
1996/12/31 28367.59 27747.97
1997/01/31 28752.77 27961.22
1997/02/28 29274.31 28353.46
1997/03/31 28364.86 28038.55
1997/04/30 28807.30 28357.67
1997/05/31 30011.70 28921.90
1997/06/30 30552.45 29369.60
1997/07/31 31658.53 30074.41
1997/08/31 31928.91 30006.75
1997/09/30 33059.57 30519.07
1997/10/31 32764.61 30721.61
1997/11/30 33010.41 30996.75
1997/12/31 33379.10 31306.66
IMATRL PRASUN SHR__CHT 19971231 19980126 092649 R00000000000123
Let's say hypothetically that $10,000 was invested in VIP: High Income
Portfolio on December 31, 1987. As the chart shows, by December 31,
1997, the value of the investment would have grown to $33,379 - a
233.79% 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 $31,307 - a 213.07% increase.
INVESTMENT SUMMARY
TOP FIVE HOLDINGS AS OF DECEMBER 31, 1997
(BY ISSUER, EXCLUDING CASH EQUIVALENTS) % OF FUND'S
INVESTMENTS
TIME WARNER, INC. 2.5
NEXTLINK COMMUNICATIONS, INC. 2.2
ORION NETWORK SYSTEMS, INC. 2.0
INTERMEDIA COMMUNICATIONS, INC. 1.9
CABLEVISION SYSTEMS CORP. 1.9
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
MEDIA & LEISURE 27.6
UTILITIES 17.1
BASIC INDUSTRIES 9.8
RETAIL & WHOLESALE 4.7
INDUSTRIAL MACHINERY & EQUIPMENT 4.7
QUALITY DIVERSIFICATION AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
AAA, AA, A 0.0
BAA 0.0
BA 5.5
B 51.3
CAA, CA. C 8.5
NOT RATED 4.3
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 DECEMBER 31, 1997, ACCOUNT FOR 4.3% OF
THE FUND'S INVESTMENTS.
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1fee.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
DECEMBER 31, 1997 YEAR YEARS YEARS
VIP: HIGH INCOME - SERVICE CLASS 17.58% 13.90% 12.80%
ML HIGH YIELD MASTER 12.82% 11.72% 12.09%
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.
3
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown.
If Fidelity had not reimbursed certain fund expenses, the past five
year and past 10 year total returns would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money. The fund includes high yielding, lower-rated
securities which are subject to greater price volatility and may
involve greater risk of default. The market for these securities may
be less liquid.
$10,000 OVER 10 YEARS
IMAHDR PRASUN SHR__CHT 19971231 19980126 092646 S00000000000001
VIP High Income ML High Yield Master
00152 ML002
1987/12/31 10000.00 10000.00
1988/01/31 10328.76 10273.65
1988/02/29 10638.01 10552.42
1988/03/31 10561.58 10534.96
1988/04/30 10643.90 10565.39
1988/05/31 10628.07 10620.54
1988/06/30 10850.82 10823.60
1988/07/31 10963.78 10937.97
1988/08/31 10911.41 10973.91
1988/09/30 10998.88 11084.53
1988/10/31 11118.61 11257.23
1988/11/30 11076.16 11299.39
1988/12/31 11164.18 11347.21
1989/01/31 11432.46 11517.38
1989/02/28 11488.69 11594.77
1989/03/31 11341.07 11584.46
1989/04/30 11215.47 11618.65
1989/05/31 11422.69 11832.54
1989/06/30 11749.86 12000.18
1989/07/31 11672.50 12057.01
1989/08/31 11604.80 12116.57
1989/09/30 11198.75 12001.22
1989/10/31 10718.65 11811.39
1989/11/30 10727.68 11837.86
1989/12/31 10698.27 11827.16
1990/01/31 10461.79 11596.01
1990/02/28 10300.70 11427.13
1990/03/31 10192.02 11581.60
1990/04/30 10222.21 11640.45
1990/05/31 10432.25 11850.71
1990/06/30 10596.58 12080.30
1990/07/31 10760.25 12335.59
1990/08/31 10580.25 11863.36
1990/09/30 10329.38 11347.40
1990/10/31 10078.73 11058.64
1990/11/30 10315.13 11152.32
1990/12/31 10459.37 11313.02
1991/01/31 10681.28 11472.94
1991/02/28 11273.04 12324.50
1991/03/31 11672.48 12854.40
1991/04/30 12086.71 13312.16
1991/05/31 12264.24 13377.17
1991/06/30 12530.53 13646.27
1991/07/31 13003.94 13973.25
1991/08/31 13181.47 14266.94
1991/09/30 13477.35 14448.65
1991/10/31 13935.96 14878.00
1991/11/30 14054.31 15049.86
1991/12/31 14128.28 15224.70
1992/01/31 14882.78 15757.00
1992/02/29 15423.14 16148.33
1992/03/31 15921.70 16373.64
1992/04/30 16034.28 16492.82
1992/05/31 16227.27 16755.89
1992/06/30 16404.18 16964.08
1992/07/31 16725.83 17307.79
1992/08/31 17079.64 17536.93
1992/09/30 17256.55 17736.75
1992/10/31 16999.23 17512.73
1992/11/30 17208.30 17760.75
1992/12/31 17401.29 17989.44
1993/01/31 17867.69 18432.41
1993/02/28 18172.47 18781.31
1993/03/31 18591.84 19106.92
1993/04/30 18714.15 19244.07
1993/05/31 18993.73 19503.12
1993/06/30 19482.99 19869.54
1993/07/31 19675.20 20083.11
1993/08/31 19884.88 20274.55
1993/09/30 19954.77 20374.59
1993/10/31 20426.56 20758.40
1993/11/30 20618.77 20871.93
1993/12/31 20950.76 21080.63
1994/01/31 21649.71 21542.61
1994/02/28 21623.75 21387.69
1994/03/31 20895.29 20690.73
1994/04/30 20684.42 20448.94
1994/05/31 20722.76 20376.08
1994/06/30 20646.08 20451.08
1994/07/31 20722.76 20594.84
1994/08/31 20722.76 20737.90
1994/09/30 20876.12 20730.05
1994/10/31 20684.42 20782.72
1994/11/30 20511.89 20605.94
1994/12/31 20607.74 20835.14
1995/01/31 20837.78 21129.55
1995/02/28 21552.97 21788.82
1995/03/31 21821.35 22092.05
1995/04/30 22461.33 22609.30
1995/05/31 23039.38 23315.67
1995/06/30 23101.31 23493.75
1995/07/31 23658.72 23762.33
1995/08/31 23844.52 23906.55
1995/09/30 24236.77 24180.07
1995/10/31 24463.86 24351.47
1995/11/30 24587.73 24589.17
1995/12/31 24876.75 24983.88
1996/01/31 25454.80 25378.45
1996/02/29 25875.23 25416.66
1996/03/31 25807.26 25347.64
1996/04/30 26192.44 25359.12
1996/05/31 26554.97 25542.00
1996/06/30 26690.91 25695.43
1996/07/31 26600.28 25869.89
1996/08/31 26985.46 26137.04
1996/09/30 27778.49 26697.83
1996/10/31 27687.86 26990.42
1996/11/30 27982.41 27536.09
1996/12/31 28367.59 27747.97
1997/01/31 28752.77 27961.22
1997/02/28 29274.31 28353.46
1997/03/31 28364.86 28038.55
1997/04/30 28807.30 28357.67
1997/05/31 30011.70 28921.90
1997/06/30 30552.45 29369.60
1997/07/31 31658.53 30074.41
1997/08/31 31928.91 30006.75
1997/09/30 33059.57 30519.07
1997/10/31 32764.61 30721.61
1997/11/30 33010.41 30996.75
1997/12/31 33379.10 31306.66
IMATRL PRASUN SHR__CHT 19971231 19980126 092649 R00000000000123
Let's say hypothetically that $10,000 was invested in VIP: High Income
Portfolio on December 31, 1987. As the chart shows, by December 31,
1997, the value of the investment would have grown to $33,355 - a
233.55% 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 $31,307 - a 213.07% increase.
INVESTMENT SUMMARY
TOP FIVE HOLDINGS AS OF DECEMBER 31, 1997
(BY ISSUER, EXCLUDING CASH EQUIVALENTS) % OF FUND'S
INVESTMENTS
TIME WARNER, INC. 2.5
NEXTLINK COMMUNICATIONS, INC. 2.2
ORION NETWORK SYSTEMS, INC. 2.0
INTERMEDIA COMMUNICATIONS, INC. 1.9
CABLEVISION SYSTEMS CORP. 1.9
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
MEDIA & LEISURE 27.6
UTILITIES 17.1
BASIC INDUSTRIES 9.8
RETAIL & WHOLESALE 4.7
INDUSTRIAL MACHINERY & EQUIPMENT 4.7
QUALITY DIVERSIFICATION AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
AAA, AA, A 0.0
BAA 0.0
BA 5.5
B 51.3
CAA, CA. C 8.5
NOT RATED 4.3
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 DECEMBER 31, 1997, ACCOUNT FOR 4.3% OF
THE FUND'S INVESTMENTS.
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with
Barry Coffman,
Portfolio Manager of
High Income Portfolio
Q. HOW DID THE FUND PERFORM COMPARED TO ITS BENCHMARK, BARRY?
A. Quite well. The fund significantly outperformed its benchmark, the
Merrill Lynch High Yield Master Index, which had a total return of
12.82% for the year that ended December 31, 1997.
Q. WHAT HELPED THE FUND OUTPACE THE INDEX DURING THE YEAR?
A. One of the biggest contributors to the fund's outperformance was
its large weighting - relative to the Merrill Lynch High Yield Master
Index - in telecommunications companies. A wave of merger activity -
capped by WorldCom's winning bid for MCI Communications - pushed many
telecom companies to the top of the high-yield leader board. The
emerging competitive local exchange networks (Clecs) that provide
telephone and data transmission services to small- and mid-sized
business continued to make strides by building out networks and
quickening their pace of customer growth. In addition, the expectation
of continued industry consolidation benefited the fund's holdings
including Intermedia Communications and NEXTLINK. Also within the
telecommunications sector we saw strong gains from the fund's
satellite companies including PanAmSat and Orion Network. After the
acquisition of PanAmSat by GM Hughes, PanAmSat's bonds were redeemed
at a significant profit to the fund at year end. When Orion was
acquired by Loral, its bonds were upgraded and, as a result, posted
strong gains.
Q. APART FROM TELECOMMUNICATIONS HOLDINGS, WHAT WERE SOME OF THE OTHER
BRIGHT SPOTS FOR THE FUND?
A. The fund's cable and broadcasting holdings also performed quite
well during the year. After falling out of favor earlier in the year,
cable companies staged an impressive comeback partly due to
Microsoft's investment in Comcast, which excited investors about the
industry. The cable companies are aggressively upgrading their
networks to enhance the services they provide - including pay-per-view
and cable modems. In addition, they are aggressively swapping systems
with other operators to create larger, more efficient clusters. The
fund's holdings in Cablevision Systems benefited from these trends, as
well as an investment in the company from cable giant TCI . Among
broadcasters, I focused on radio companies where a wave of merger
activity boosted prices, including holdings in American Radio Systems
and Chancellor Broadcasting. Other bright spots included common stocks
issued by high-yield companies - those with below-investment-grade
credit ratings - including Allied Waste and Viacom. Allied Waste
successfully integrated a major acquisition and sold off assets.
Viacom also sold some assets, including its radio and cable holdings,
and made progress with its Blockbuster division.
Q. WERE THERE ANY DISAPPOINTMENTS?
A. The fund's holdings in paper companies - particularly investments
in Indonesian paper company Asia Pulp & Paper (APP) and its three
subsidiaries Indah Kiat, Pindo Deli and Tjiwi Kimia - were
disappointing. Not only were paper prices unable to sustain some
mid-year gains, but APP's securities also were hurt in the fourth
quarter of 1997, when Indonesia suffered from a host of related
currency, economic, fiscal and political problems. I've held onto
those investments in part because the company continues to be one of
the lowest-cost producers of paper products, which are U.S.
dollar-denominated, easily exported commodities. The company also has
ample liquidity to execute its expansion plans and is experiencing
improving profit margins due to Indonesia's currency crisis.
Q. WHAT'S YOUR OUTLOOK?
A. I'm a little cautious because I'm concerned that a large portion of
the world's economy represented by Southeast Asia could sink into a
depression. Not that the region provides huge demand for U.S. goods,
but the threat is that cheaper Asian-based goods will undercut
domestic products, and ultimately, corporate earnings. That said, it's
important to remember that the high-yield market is comprised mainly
of companies that do business domestically and the fallout from Asia
will be indirect. The U.S. economy remains in relatively decent shape,
and I think it will continue to grow, albeit at a slower pace. If
inflation remains in check - which appears more likely now given
Asia's problems - that would likely be a positive for the high-yield
market. Of course, the effects of these countervailing forces remain
to be seen. However, given the high yields that securities in this
market can offer - which often serve as a "cushion" in difficult
market environments - I think they stand a decent chance of outpacing
U.S. stocks.
FUND FACTS
GOAL: income and share price stability by
investing in high-quality, short-term investments
START DATE: April 1, 1982
SIZE: as of December 31, 1997, more than $1.0
billion
MANAGER: Robert Duby, since April 1997; joined
Fidelity in 1982
3
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
INVESTMENTS DECEMBER 31, 1997
Showing Percentage of Total Value of Investment in Securities
CORPORATE BONDS - 69.6%
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
CONVERTIBLE BONDS - 0.0%
UTILITIES - 0.0%
TELEPHONE SERVICES - 0.0%
GST Telecommunications, Inc.
0%, 12/15/05 (c)(e) - $ 630,000 $ 604,800
NONCONVERTIBLE BONDS - 69.6%
AEROSPACE & DEFENSE - 1.3%
AEROSPACE & DEFENSE - 0.5%
Alliant Techsystems, Inc.
11 3/4%, 3/1/03 B2 1,050,000 1,153,688
Argo-Tech Corp.
8 5/8%, 10/1/07 (e) B3 5,900,000 5,900,000
Fairchild Corp.
12%, 10/15/01 Caa 1,945,000 1,954,725
RHI Holdings, Inc.
11 7/8%, 3/1/99 B2 2,357,000 2,357,000
11,365,413
DEFENSE ELECTRONICS - 0.5%
Tracor, Inc. 8 1/2%, 3/1/07 B1 12,150,000 12,332,250
SHIP BUILDING & REPAIR - 0.3%
Newport News Shipbuilding, Inc.:
8 5/8%, 12/1/06 Ba2 670,000 710,200
9 1/4%, 12/1/06 B1 4,650,000 4,917,375
5,627,575
TOTAL AEROSPACE & DEFENSE 29,325,238
BASIC INDUSTRIES - 9.6%
CHEMICALS & PLASTICS - 2.6%
Atlantis Group, Inc.
11%, 2/15/03 B2 8,205,000 8,420,381
Freedom Chemical Co.
10 5/8%, 10/15/06 B3 7,470,000 8,235,675
Huntsman Corp.
9 1/2%, 7/1/07 (e) B2 19,400,000 20,370,000
Koppers Industries, Inc.
9 7/8%, 12/1/07 (e) B2 4,985,000 5,128,319
Sovereign Specialty Chemicals,
Inc. 9 1/2%, 8/1/07 (e) B3 1,070,000 1,099,425
Sterling Chemicals Holdings,
Inc. 11 3/4%, 8/15/06 B3 15,160,000 15,463,200
58,717,000
IRON & STEEL - 1.1%
GS Technologies Operating, Inc.
12 1/4%, 10/1/05 B2 3,410,000 3,810,675
Republic Engineered Steels, Inc.
9 7/8%, 12/15/01 Caa 17,315,000 16,622,400
WCI Steel, Inc. 10%, 12/1/04 B2 5,830,000 5,932,025
26,365,100
METALS & MINING - 0.5%
Commonwealth Aluminum Corp.
10 3/4%, 10/1/06 B2 9,815,000 10,379,363
PACKAGING & CONTAINERS - 0.1%
Huntsman Packaging Corp.
9 1/8%, 10/1/07 (e) B2 2,660,000 2,739,800
PAPER & FOREST PRODUCTS - 5.3%
APP Finance II Mauritius Ltd.
12%, 3/15/04 B3 11,785,000 10,135,100
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
Advanced Argo Public
Company Ltd.
13%, 11/15/07 (e) B2 $ 11,250,000 $ 9,900,000
Ainsworth Lumber Co. Ltd.
12 1/2%, 7/15/07
pay-in-kind B3 4,930,000 4,954,650
American Pad & Paper Co.,
Inc. 13%, 11/15/05 B3 2,290,000 2,404,500
Container Corp. of America:
10 3/4%, 5/1/02 B1 50,000 54,375
gtd.:
9 3/4%, 4/1/03 B1 490,000 523,075
11 1/4%, 5/1/04 B1 150,000 163,875
Doman Industries Ltd.:
yankee 8 3/4%, 3/15/04 B1 20,180,000 19,473,700
9 1/4%, 11/15/07 (e) B1 5,000,000 4,875,000
Florida Coast Paper Co.
LLC/Florida Coast Paper
Finance Corp., Series B,
12 3/4%, 6/1/03 Caa 1,740,000 1,844,400
Indah Kiat Finance Mauritius
Ltd. 10%, 7/1/07 (e) Ba3 8,250,000 6,826,875
Mail-Well Corp.
10 1/2%, 2/15/04 B 1,640,000 1,722,000
Omega Cabinets Ltd.
10 1/2%, 6/15/07 (e) B3 6,190,000 6,422,125
Paperboard Industries
International, Inc.
8 3/8%, 9/15/07 (e) Ba3 1,490,000 1,512,350
Pindo Deli Finance Mauritius
Ltd. 10 1/4%, 10/1/02 (e) Ba3 3,740,000 3,188,350
Repap New Brusnwick, Inc.
yankee 9 7/8%, 7/15/00 B2 4,730,000 4,824,600
SD Warren Co., Series B,
12%, 12/15/04 B1 7,330,000 8,191,275
Specialty Paperboard, Inc.
9 3/8%, 10/15/06 B1 5,000,000 5,225,000
Stone Container Corp.:
12 5/8%, 7/15/98 B2 10,000,000 10,262,500
10 3/4%, 10/1/02 B1 8,140,000 8,506,300
Tjiwi Kimia Mauritius Ltd.
10%, 8/1/04 (e) Ba3 7,860,000 6,366,600
Tembec Finance Corp. yankee
9 7/8%, 9/30/05 B1 4,865,000 4,998,788
122,375,438
TOTAL BASIC INDUSTRIES 220,576,701
CONSTRUCTION & REAL ESTATE - 0.8%
BUILDING MATERIALS - 0.8%
American Architectural
Products, Inc.
11 3/4%, 12/1/07 (e) Caa 6,550,000 6,615,500
Airxcel, Inc. 11%,
11/15/07 (e) B3 7,350,000 7,570,500
Insiloc Corp.
10 1/4%, 8/15/07 B3 4,660,000 4,893,000
19,079,000
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
DURABLES - 3.0%
AUTOS, TIRES, & ACCESSORIES - 0.2%
Blue Bird Body Co.
10 3/4%, 11/15/06 B2 $ 3,180,000 $ 3,418,500
HOME FURNISHINGS - 1.3%
Guitar Center Management Co.,
Inc. 11%, 7/1/06 B1 6,587,000 7,311,570
Interlake Corp.
12 1/8%, 3/1/02 B3 12,265,000 12,632,950
Knoll, Inc.
10 7/8%, 3/15/06 B1 3,426,000 3,837,120
Sealy Mattress Co. (e):
9 7/8%, 12/15/07 B3 3,530,000 3,618,250
0%, 12/15/07 (c) B3 4,855,000 2,937,275
30,337,165
TEXTILES & APPAREL - 1.5%
Nine West Group, Inc.
8 3/8%, 8/15/05 (e) Ba2 3,300,000 3,143,250
Pillowtex Corp.
9%, 12/15/07 (e) B2 1,980,000 2,029,500
Polymer Group, Inc.
9%, 7/1/07 B2 9,060,000 9,060,000
Synthetic Industries, Inc.
9 1/4%, 2/15/07 B2 11,770,000 12,417,350
Worldtex, Inc.
9 5/8%, 12/15/07 (e) B1 7,105,000 7,282,625
33,932,725
TOTAL DURABLES 67,688,390
ENERGY - 3.6%
COAL - 0.4%
AEI Holding, Inc.
10%, 11/15/07 (e) B2 9,380,000 9,661,400
ENERGY SERVICES - 0.3%
DI Industries, Inc.
8 7/8%, 7/1/07 B1 3,905,000 4,051,438
Newpark Resources, Inc.
8 5/8%, 12/15/07 (e) B2 2,310,000 2,344,650
6,396,088
OIL & GAS - 2.9%
Belden & Blake Corp.
9 7/8%, 6/15/07 B3 4,945,000 4,994,450
Chesapeake Energy Corp.:
7 7/8%, 3/15/04 Ba3 880,000 871,200
9 1/8%, 4/15/06 Ba3 2,580,000 2,650,950
8 1/2%, 3/15/12 Ba3 610,000 606,950
Cross Timbers Oil Co.:
9 1/4%, 4/1/07 B2 8,000,000 8,320,000
8 3/4%, 11/1/09 B2 5,060,000 5,161,200
Flores & Rucks, Inc.
9 3/4%, 10/1/06 B3 10,960,000 12,028,600
Harcor Energy, Inc.
14 7/8%, 7/15/02 B3 13,060,000 14,104,800
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
Ocean Energy, Inc.
8 7/8%, 7/15/07 B3 $ 11,390,000 $ 12,101,875
Plains Resources, Inc., Series B,
10 1/4%, 3/15/06 B2 4,430,000 4,762,250
Southwest Royalties, Inc.
10 1/2%, 10/15/04 (e) B3 1,630,000 1,613,700
United Meridian Corp.
10 3/8%, 10/15/05 B2 190,000 208,050
67,424,025
TOTAL ENERGY 83,481,513
FINANCE - 3.5%
ASSET-BACKED SECURITIES - 0.3%
Airplanes Pass Through Trust
Class D 10 7/8%, 3/15/19 Ba2 6,710,000 7,498,425
CREDIT & OTHER FINANCE - 2.0%
Cityscape Financial Corp.
12 3/4%, 6/1/04 Caa 6,560,000 2,886,400
Delta Financial Corp.
9 1/2%, 8/1/04 B1 8,260,000 8,198,050
Imperial Credit Capital Trust I
10 1/4%, 6/14/02 (e) B2 4,870,000 4,870,000
Imperial Credit Industries, Inc.
9 7/8%, 1/15/07 B2 17,470,000 17,295,300
Ocwen Capital Trust
10 7/8%, 8/1/27 B2 6,190,000 6,747,100
Olympic Financial Ltd.
11 1/2%, 3/15/07 B2 5,200,000 5,096,000
45,092,850
SAVINGS & LOANS - 1.2%
First Nationwide Holdings, Inc.
10 5/8%, 10/1/03 Ba3 7,240,000 8,090,700
First Nationwide Parent
Holdings Ltd.
12 1/2%, 4/15/03 B3 16,030,000 18,234,125
26,324,825
SECURITIES INDUSTRY - 0.0%
ECM Corp. extendible
14%, 6/1/02 (e) - 235,942 235,352
TOTAL FINANCE 79,151,452
HEALTH - 2.4%
MEDICAL EQUIPMENT & SUPPLIES - 1.0%
Graham-Field Health Products,
Inc. 9 3/4%, 8/15/07 (e) B3 4,830,000 5,071,500
Wright Medical Technology, Inc.
11 3/4%, 7/1/00 (d) Caa 18,650,000 18,836,500
23,908,000
MEDICAL FACILITIES MANAGEMENT - 1.4%
Integrated Health Services, Inc.:
10 1/4%, 4/30/06 B2 4,890,000 5,183,400
9 1/2%, 9/15/07 (e) B2 6,980,000 7,189,400
9 1/4%, 1/15/08 (e) B2 7,860,000 8,017,200
Tenet Healthcare Corp.
8 5/8%, 1/15/07 Ba3 10,500,000 10,815,000
31,205,000
TOTAL HEALTH 55,113,000
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
INDUSTRIAL MACHINERY & EQUIPMENT - 4.4%
ELECTRICAL EQUIPMENT - 2.1%
Echostar Communications Corp.
secured discount
0%, 6/1/04 (c) B2 $ 19,010,000 $ 17,394,150
Motors & Gears, Inc.:
10 3/4%, 11/15/06 B3 19,550,000 20,723,000
10 3/4%, 11/15/06 (e) B3 8,180,000 8,691,250
46,808,400
INDUSTRIAL MACHINERY & EQUIPMENT - 1.6%
Calmar, Inc.
11 1/2%, 8/15/05 B3 1,570,000 1,656,350
Continental Global Group, Inc.
11%, 4/1/07 B2 4,000,000 4,260,000
Goss Graphic System, Inc.
12%, 10/15/06 B2 9,630,000 10,881,900
McDermott International, Inc.
9 3/8%, 3/15/02 Ba3 11,680,000 12,585,200
Thermadyne Holdings Corp.:
10 1/4%, 5/1/02 B1 1,484,000 1,543,360
10 3/4%, 11/1/03 B3 5,226,000 5,585,288
36,512,098
POLLUTION CONTROL - 0.7%
Allied Waste North America
10 1/4%, 12/1/06 B2 5,830,000 6,398,425
Envirosource, Inc.:
9 3/4%, 6/15/03 B3 5,750,000 5,836,250
9 3/8%, 6/15/03 (e) B3 4,600,000 4,651,750
16,886,425
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 100,206,923
MEDIA & LEISURE - 16.9%
BROADCASTING - 8.7%
ACME Television/ACME Financial
Corp. 0%, 9/30/04 (c)(e) B3 12,910,000 9,504,988
Adelphia Communications Corp.:
9 1/2%, 2/15/04 B3 6,516,518 6,392,313
9 7/8%, 3/1/07 B3 5,380,000 5,689,350
Ascent Entertainment Group,
Inc. 0%, 12/15/04 (c)(e) B3 12,100,000 6,987,750
Benedek Communications Corp.
0%, 5/15/06 (c) B3 280,000 212,800
Capstar Broadcasting Partners, Inc.:
9 1/4%, 7/1/07 B2 9,710,000 9,989,163
0%, 2/1/09 (c) B3 14,970,000 10,815,825
Chancellor Radio Broadcasting
Company 8 1/8%,
12/15/07 (e) - 12,000,000 11,760,000
Chancellor Media Corp.
8 3/4%, 6/15/07 B3 5,320,000 5,413,100
CS Wireless Systems, Inc.
0%, 3/1/06 (c) Caa 12,770,000 3,575,600
Falcon Holdings Group LP
11%, 9/15/03 pay-in-kind - 14,692,965 15,187,236
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
FrontierVision Holdings LP/
FrontierVision Holdings
Capital Corp. 0%,
9/15/07 (c) Caa $ 2,255,000 $ 1,617,963
Granite Broadcasting Corp.:
10 3/8%, 5/15/05 B3 1,560,000 1,634,100
9 3/8%, 12/1/05 B3 3,750,000 3,796,875
Intermedia Capital Partners IV
LP/Intermedia Partners IV
Capital Corp.
11 1/4%, 8/1/06 B2 590,000 655,638
International Cabletel, Inc.
0%, 2/1/06 (c) B3 20,205,000 15,759,900
Olympus Communications LP/
Olympus Capital Corp.
10 5/8%, 11/15/06 B1 9,320,000 10,321,900
Orion Network Systems, Inc.:
11 1/4%, 1/15/07 B2 5,585,000 6,311,050
0%, 1/15/07 (c) B2 45,930,000 34,103,025
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 9,275,000 10,202,500
Telewest PLC 0%, 10/1/07 (c) B1 6,290,000 4,874,750
UIH Australia/Pacific, Inc. (c):
Series B, 0%, 5/15/06 B2 27,675,000 18,265,500
0%, 5/15/06 (e) B2 1,090,000 719,400
United International Holdings,
Inc. 0%, 11/15/99 B3 4,960,000 4,067,200
Viacom International, Inc.,
Series B, 7%, 7/1/03 B1 1,560,000 1,489,800
199,347,726
ENTERTAINMENT - 2.6%
AMC Entertainment, Inc.
9 1/2%, 3/15/09 B2 10,940,000 11,350,250
Ameristar Casinos, Inc.
10 1/2%, 8/1/04 B3 8,200,000 8,282,000
AMF Group, Inc., Series B:
10 7/8%, 3/15/06 B2 1,100,000 1,204,500
0%, 3/15/06 (c) B2 5,736,000 4,509,930
Cinemark USA, Inc.
9 5/8%, 8/1/08 B2 5,240,000 5,423,400
Regal Cinemas, Inc.
8 1/2%, 10/1/07 B1 1,620,000 1,632,150
Town Sports International, Inc.
9 3/4%, 10/15/04 (e) B2 3,400,000 3,332,000
Viacom, Inc. 8%, 7/7/06 B1 24,430,000 24,521,613
60,255,843
LEISURE DURABLES & TOYS - 0.1%
ICON Fitness Corp.
0%, 11/15/06 (c) Caa 5,650,000 3,192,250
LODGING & GAMING - 2.4%
HMH Properties, Inc.:
9 1/2%, 5/15/05 Ba3 14,610,000 15,541,388
8 7/8%, 7/15/07 Ba3 12,500,000 13,093,750
KSL Recreation Group, Inc.
10 1/4%, 5/1/07 B3 7,760,000 8,303,200
Station Casinos, Inc.
9 3/4%, 4/15/07 B2 3,720,000 3,850,200
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) 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 $ 13,040,000 $ 13,431,200
54,219,738
PUBLISHING - 2.0%
Big Flower Press Holdings, Inc.:
8 7/8%, 7/1/07 B2 19,000,000 19,118,750
8 7/8%, 7/1/07 (e) B2 3,550,000 3,567,750
Hollinger International
Publishing, Inc.
9 1/4%, 3/15/07 B1 5,600,000 5,880,000
ITT Publimedia BV
9 3/8%, 9/15/07 (e) B3 13,600,000 14,280,000
Perry Judds, Inc.
10 5/8%, 12/15/07 (e) B3 1,710,000 1,769,850
Transwestern Holding LP/TWP
Capital Corp. 0%,
11/15/08 (c)(e) B3 2,300,000 1,380,000
45,996,350
RESTAURANTS - 1.1%
AFC Enterprises, Inc.
10 1/4%, 5/15/07 B3 6,840,000 7,199,100
Host Marriott Travel Plazas,
Inc. 9 1/2%, 5/15/05 Ba3 8,790,000 9,339,375
SC International Services,
Inc. 9 1/4%, 9/1/07 (e) B2 7,200,000 7,416,000
23,954,475
TOTAL MEDIA & LEISURE 386,966,382
NONDURABLES - 1.7%
FOODS - 0.1%
Del Monte Foods Co.
0%, 12/15/07 (c)(e) Caa 5,840,000 3,343,400
HOUSEHOLD PRODUCTS - 1.4%
RBX Corp. 12%, 1/15/03 (e) B2 4,150,000 4,253,750
Renaissance Cosmetic, Inc.
11 3/4%, 2/15/04 B3 10,000,000 9,000,000
Revlon Consumer Products
Corp. 10 1/2%, 2/15/03 B3 17,180,000 18,081,950
31,335,700
TOBACCO - 0.2%
North Atlantic Trading, Inc.
11%, 6/15/04 B3 3,640,000 3,794,700
TOTAL NONDURABLES 38,473,800
PRECIOUS METALS - 0.4%
Centaur Mining & Exploration
Ltd. 11%, 12/1/07 (e) B1 9,830,000 9,879,150
RETAIL & WHOLESALE - 4.5%
APPAREL STORES - 1.5%
Lamonts Apparel, Inc.
10 1/4%, 11/1/99
pay-in-kind (e)(g) - 2,201,000 82,538
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
Mothers Work, Inc.
12 5/8%, 8/1/05 B3 $ 15,140,000 $ 16,124,100
Specialty Retailers, Inc.:
8 1/2%, 7/15/05 Ba3 4,480,000 4,569,600
9%, 7/15/07 B2 13,520,000 13,790,400
34,566,638
GROCERY STORES - 1.9%
Di Giorgio Corp.
10%, 6/15/07 B3 6,760,000 6,641,700
Food 4 Less Holdings, Inc.
13 5/8%, 6/15/07 - 1,950,941 2,300,042
Pathmark Stores, Inc.:
11 5/8%, 6/15/02 Caa 11,740,000 9,597,450
9 5/8%, 5/1/03 Caa 10,950,000 10,087,688
Penn Traffic Co.:
10 1/4%, 2/15/02 B3 4,060,000 3,694,600
8 5/8%, 12/15/03 B3 3,780,000 3,213,000
Pueblo Xtra International, Inc.
9 1/2%, 8/1/03 B3 7,970,000 7,533,700
43,068,180
RETAIL & WHOLESALE, MISCELLANEOUS - 1.1%
Big 5 Corp.
10 7/8%, 11/15/07 (e) B2 8,855,000 8,810,725
Central Tractor Farm & Country,
Inc. 10 5/8%, 4/1/07 B2 3,440,000 3,629,200
Corporate Express, Inc.,
Series B, 9 1/8%, 3/15/04 B2 1,070,000 1,091,400
J Crew Operating Corp.
10 3/8%, 10/15/07 (e) B3 10,760,000 9,361,200
J Crew Group, Inc.
0%, 10/15/08 (c)(e) Caa 7,787,000 3,387,345
26,279,870
TOTAL RETAIL & WHOLESALE 103,914,688
SERVICES - 2.9%
LEASING & RENTAL - 1.0%
GPA Holland 8.94%, 2/16/99 - 500,000 510,000
Hollywood Entertainment Corp.
10 5/8%, 8/15/04 B3 21,710,000 21,167,250
21,677,250
PRINTING - 0.9%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 21,300,000 21,513,000
SERVICES - 1.0%
Iron Mountain, Inc.
8 3/4%, 9/30/09 (e) B3 4,115,000 4,197,300
Outsourcing Solutions, Inc.
11%, 11/1/06 B3 2,760,000 3,042,900
Protection One Alarm
Monitoring, Inc.
13 5/8%, 6/30/05 Caa 13,300,000 14,364,000
21,604,200
TOTAL SERVICES 64,794,450
TECHNOLOGY - 2.7%
COMMUNICATIONS EQUIPMENT - 0.9%
Intermedia Communications, Inc.
0%, 7/15/07 (c) B2 7,760,000 5,529,000
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
TECHNOLOGY - CONTINUED
COMMUNICATIONS EQUIPMENT - CONTINUED
Jordan Telecommunication
Products, Inc.:
9 7/8%, 8/1/07 B3 $ 4,720,000 $ 4,796,700
0%, 8/1/07 (c) B3 11,400,000 9,234,000
19,559,700
COMPUTER SERVICES & SOFTWARE - 0.7%
Concentric Network Corp.
12 3/4%, 12/15/07 (e) - 3,270,000 3,359,925
DecisionOne Corp.
9 3/4%, 8/1/07 B3 2,220,000 2,275,500
DecisionOne Holdings Corp.
0%, 8/1/08 (c) Caa 3,730,000 2,387,200
Federal Data Corp.
10 1/8%, 8/1/05 (e) B3 7,030,000 7,100,300
15,122,925
COMPUTERS & OFFICE EQUIPMENT - 0.4%
Dictaphone Corp.
11 3/4%, 8/1/05 Caa 6,200,000 5,952,000
Unisys Corp.
10 5/8%, 10/1/99 B1 4,080,000 4,187,100
10,139,100
ELECTRONIC INSTRUMENTS - 0.3%
Wavetek Corp.
10 1/8%, 6/15/07 B3 6,020,000 6,200,600
ELECTRONICS - 0.4%
Communications Instruments,
Inc. 10%, 9/15/04 (e) B3 2,450,000 2,499,000
ViaSystems, Inc.
9 3/4%, 6/1/07 B3 7,120,000 7,351,400
9,850,400
TOTAL TECHNOLOGY 60,872,725
TRANSPORTATION - 1.5%
AIR TRANSPORTATION - 0.8%
Amtran, Inc.
10 1/2%, 8/1/04 (e) B2 5,000,000 5,193,750
Kitty Hawk, Inc.
9.95%, 11/15/04 (e) B1 8,010,000 8,250,300
US Air, Inc. euro pass through
trust 8 5/8%, 9/1/98 B1 5,000,000 5,031,250
18,475,300
RAILROADS - 0.7%
Transtar Holdings LP/Transtar
Capital Corp. 0%,
12/15/03 (c) B- 17,941,000 15,608,670
TOTAL TRANSPORTATION 34,083,970
UTILITIES - 10.4%
CELLULAR - 5.7%
CellNet Data Systems, Inc.
0%, 10/1/07 (c)(e) - 18,000,000 8,010,000
Fonorola, Inc.
12 1/2%, 8/15/02 B2 1,020,000 1,134,750
McCaw International Ltd.
0%, 4/15/07 (c) CCC 36,915,000 21,410,700
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
Microcell Telecommunications,
Inc. 0%, 6/1/06 (c) B3 $ 8,050,000 $ 5,433,750
Millicom International Cellular
SA 0%, 6/1/06 (c) B3 54,640,000 39,887,200
Pagemart Nationwide, Inc.:
12 1/4%, 11/1/03 - 14,275,000 13,347,125
0 %, 2/1/05 (c) - 7,070,000 6,044,850
Rogers Communications, Inc.
8 7/8%, 7/15/07 B2 5,520,000 5,520,000
Teletrac, Inc. 14%, 8/1/07 Caa 9,820,000 9,329,000
Telesystem International Wireless,
Inc. (c)(e):
0%, 6/30/07 Caa 13,870,000 8,668,750
0%, 11/1/07 Caa 6,460,000 3,585,300
USA Mobile Communications,
Inc. II:
9 1/2%, 2/1/04 B2 3,970,000 3,831,050
14%, 11/1/04 B2 3,350,000 3,701,750
129,904,225
ELECTRIC UTILITY - 0.2%
AES Corp. 8 3/8%, 8/15/07 Ba1 4,375,000 4,364,063
TELEPHONE SERVICES - 4.5%
American Communications
Services, Inc. 0%, 4/1/06 (c) - 1,580,000 1,212,650
GST Equipment Funding, Inc.
13 1/4%, 5/1/07 - 4,960,000 5,654,400
GST Telecommunications, Inc.
12 3/4%, 11/15/07 - 11,240,000 11,745,800
GST USA, Inc.
0%, 12/15/05 (c) - 8,080,000 6,181,200
Hyperion Telecommunications,
Inc., Series B:
0%, 4/15/03 (c) B 14,340,000 10,396,500
12 1/4%, 9/1/04 B 7,455,000 8,181,863
McLeodUSA, Inc.
0%, 3/1/07 (c) B3 14,940,000 10,775,475
Netia Holdings BV
10 1/4%, 11/1/07 (e) B3 4,330,000 4,156,800
NEXTLINK Communications, Inc.
9 5/8%, 10/1/07 B3 7,610,000 7,838,300
Optel Communications Corp.
15%, 12/29/04 (f) - 12,000,000 11,240,624
Telegroup, Inc. 0%,
11/1/04 (c)(e) - 1,940,000 1,508,350
Winstar Communications, Inc.:
0%, 10/15/05 (c) Caa 9,080,000 7,127,800
14 1/2%, 10/15/05 Caa 13,220,000 17,450,400
Winstar Equipment
12 1/2%, 3/15/04 B3 160,000 179,600
103,649,762
TOTAL UTILITIES 237,918,050
TOTAL NONCONVERTIBLE BONDS 1,591,525,432
TOTAL CORPORATE BONDS
(Cost $1,562,354,035) 1,592,130,232
COMMERCIAL MORTGAGE SECURITIES - 0.0%
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
Meritor Mortgage Security Corp.
commercial Series 1987-1
Class B, 9.40%, 2/1/00
(Cost $130,910) (e)(g) - $ 1,350,000 $ 266,760
COMMON STOCKS - 5.9%
SHARES
AEROSPACE & DEFENSE - 0.3%
Wyman-Gordon Co. (a) 300,000 5,887,500
BASIC INDUSTRIES - 0.2%
CHEMICALS & PLASTICS - 0.0%
Sterling Chemical Holdings
warrants 8/15/08 (a) 340 10,200
IRON & STEEL - 0.0%
Republic Engineered Steels, Inc. (a) 67,500 151,875
PACKAGING & CONTAINERS - 0.2%
Gaylord Container Corp. Class A (a) 887,000 5,100,250
TOTAL BASIC INDUSTRIES 5,262,325
DURABLES - 0.2%
CONSUMER DURABLES - 0.1%
Samsonite Corp. (a) 100,000 3,162,500
TEXTILES & APPAREL - 0.1%
Arena Brands Holdings Corp. Class B (a) 48,889 1,974,630
Hat Brands, Inc. (a)(f)(h) 340,000 -
1,974,630
TOTAL DURABLES 5,137,130
ENERGY - 0.6%
OIL & GAS - 0.6%
Harcor Energy, Inc.
warrants 7/24/00 (a) 330,000 82,500
Harcor Energy, Inc. (a) 694,000 1,149,438
Ocean Energy, Inc. (a) 266,700 13,151,644
14,383,582
FINANCE - 0.0%
CREDIT & OTHER FINANCE - 0.0%
Olympic Financial Ltd.
warrants 3/15/07 (a) 498 7,470
SECURITIES INDUSTRY - 0.0%
ECM Corp. LP (e) 3,000 329,250
TOTAL FINANCE 336,720
HEALTH - 0.2%
MEDICAL EQUIPMENT & SUPPLIES - 0.0%
Imagyn Medical Technologies, Inc. 110,000 271,563
Wright Medical Technology, Inc.
warrants 6/30/03 (a) 3,212 321,200
592,763
MEDICAL FACILITIES MANAGEMENT - 0.2%
Integrated Health Services, Inc. 137,400 4,285,163
TOTAL HEALTH 4,877,926
INDUSTRIAL MACHINERY & EQUIPMENT - 0.2%
POLLUTION CONTROL - 0.2%
Allied Waste Industries, Inc. (a) 182,300 4,249,869
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - 2.4%
BROADCASTING - 0.8%
Adelphia Communications Class A (a) 88,200 $ 1,631,700
Benedek Communications Corp.
warrants 7/1/00 (a) 57,600 86,400
CS Wireless Systems, Inc. (a)(e) 3,514 -
Orion Network Systems, Inc. (a) 337,000 5,771,125
Orion Network Systems, Inc.
warrants 1/15/07 (a) 51,515 577,835
Teletrac Holdings, Inc.
warrants 8/1/07 (a) 9,820 540,100
UIH Australia/Pacific, Inc.
warrants 5/15/06 (a) 26,805 321,660
United International Holdings, Inc.
Class A (a) 806,500 9,274,750
18,203,570
ENTERTAINMENT - 1.0%
Live Entertainment, Inc. (a)(f):
$2.00 warrants 3/28/98 232,000 -
$2.72 warrants 3/28/98 221,765 -
Viacom, Inc. Class B (non-vtg.) (a) 577,800 23,942,592
23,942,592
LEISURE DURABLES & TOYS - 0.1%
IHF Capital, Inc. (a)(e):
Series I warrants 11/14/99 5,890 353,400 Series H warrants
11/15/04 10,250 1,742,500
2,095,900
LODGING & GAMING - 0.4%
Bally Gaming International, Inc.
warrants 7/29/98 (a) 90,000 67,500
Motels of America, Inc. (a) 3,000 75,000
Showboat, Inc. 337,300 9,908,188
10,050,688
RESTAURANTS - 0.1%
Friendly Ice Cream Corp. 95,000 1,104,375
TOTAL MEDIA & LEISURE 55,397,125
NONDURABLES - 0.0%
HOUSEHOLD PRODUCTS - 0.0%
Renaissance Cosmetics, Inc.
warrants 8/31/06 (a)(e) 12,750 130
TOBACCO - 0.0%
North Atlantic Trading, Inc.
warrants 6/15/07 (a) 210 -
TOTAL NONDURABLES 130
RETAIL & WHOLESALE - 0.2%
APPAREL STORES - 0.1%
Lamonts Apparel, Inc. (a) 35,870 2,243
Lamonts Apparel, Inc.
warrants 6/10/99 (a) 66,214 -
Mothers Work (a)(h) 264,100 2,079,788
2,082,031
GROCERY STORES - 0.1%
Food 4 Less Holdings, Inc.
warrants 12/31/02 (a)(f) 155,047 2,131,896
TOTAL RETAIL & WHOLESALE 4,213,927
SERVICES - 0.6%
LEASING & RENTAL - 0.1%
Hollywood Entertainment Corp. (a) 307,600 3,268,250
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - CONTINUED
PRINTING - 0.3%
Big Flower Holdings, Inc. (a) 232,300 $ 5,604,238
SERVICES - 0.2%
Protection One, Inc.
warrants 6/30/05 (a) 74,560 969,280
Protection One, Inc. 221,700 2,507,981
Vestar/LPA Investment Corp. (a) 5,177 150,133
3,627,394
TOTAL SERVICES 12,499,882
UTILITIES - 1.0%
CELLULAR - 0.6%
CellNet Data Systems, Inc.
warrants 10/1/07 (a)(e) 18,000 360,000
McCaw International Ltd.
warrants 4/15/07 (a)(e) 36,915 92,288
Microcell Telecommunications, Inc.
warrants 6/1/06 (a)(e) 103,480 1,433,198
Millicom International Cellular SA (a) 50,000 1,881,250
Pagemart Wireless, Inc. Class A (a) 1,065,900 8,393,963
Powertel, Inc. warrants 2/1/06 (a) 56,448 508,032
Telesystem International Wireless,
Inc. (sub-vtg.) (a) 72,600 1,041,097
13,709,828
TELEPHONE SERVICES - 0.4%
GST Telecommunications, Inc. (a) 200,000 2,470,000
Hyperion Telecommunications, Inc.
warrants 4/15/01 (a)(e) 12,560 753,600
MCI Communications Corp. 100,000 4,281,250
Optel Communications warrants
12/29/04 (a)(f) 2,559,515 759,408
RSL Communications Ltd./RSL
Communications PLC
warrants 11/15/06 (a) 9,700 892,400
9,156,658
TOTAL UTILITIES 22,866,486
TOTAL COMMON STOCKS
(Cost $118,483,739) 135,112,602
PREFERRED STOCKS - 17.3%
CONVERTIBLE PREFERRED STOCKS - 0.9%
MEDIA & LEISURE - 0.9%
BROADCASTING - 0.4%
Benedek Communications Corp. 15% (a) 66,928 8,667,176
LODGING & GAMING - 0.5%
Host Marriott Financial Trust
$3.375 QUIPS (e) 201,200 12,046,850
20,714,026
NONCONVERTIBLE PREFERRED STOCKS - 16.4%
ENERGY - 0.2%
OIL & GAS - 0.2%
Clark USA, Inc. 11 1/2%,
pay-in-kind (e) 4,348 4,608,880
SHARES VALUE (NOTE 1)
FINANCE - 0.5%
INSURANCE- 0.5%
American Annuity Group Capital
Trust II 8 3/4% 8,910 $ 9,625,001
SIG Capital Trust I 9 1/2% 2,460 2,588,432
12,213,433
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Ampex Corp. 8% (f) 1,589 1,235,114
MEDIA & LEISURE - 7.4%
BROADCASTING - 7.1%
Adelphia Communications Corp. $13 43,500 5,154,750
American Radio Systems Corp.
11 3/8%, pay-in-kind 133,856 14,991,872
Cablevision Systems Corp.:
11 1/8%, depositary shares pay-in-kind 210,970 24,367,035
Series H, $11.75, pay-in-kind 166,817 19,767,815
Capstar Broadcasting Partners, Inc.
12%, pay-in-kind 37,934 4,120,581
Chancellor Media Corp.:
12%, pay-in-kind (e) 73,629 8,393,706
Series A, $12.25 (a) 64,300 8,873,400
Citadel Brodcasting Co. 13 1/4%,
pay-in-kind (e) 89,503 10,248,094
Granite Broadcasting Corp. 12 3/4%,
pay-in-kind 7,912 8,782,320
SFX Broadcasting, Inc. 12 5/8% 10,583 1,211,754
Time Warner, Inc., Series M,
10 1/4%, pay-in-kind 50,316 56,479,710
162,391,037
PUBLISHING - 0.3%
Primedia, Inc.:
Series B, $11.625, pay-in-kind 69,893 7,461,078
Series D, $10 5,400 564,300
8,025,378
TOTAL MEDIA & LEISURE 170,416,415
NONDURABLES - 0.6%
HOUSEHOLD PRODUCTS - 0.3%
Renaissance Cosmetics, Inc.
14%, pay-in-kind 15,175 7,587,500
TOBACCO - 0.3%
North Atlantic Trading, Inc.
12%, pay-in-kind 222,212 6,001,668
TOTAL NONDURABLES 13,589,168
SERVICES - 0.2%
PRINTING - 0.2%
Big Flower Trust I $3.00 QUIPS (e) 72,500 3,724,688
TECHNOLOGY - 1.7%
COMMUNICATIONS EQUIPMENT - 1.7%
Intermedia Communications, Inc.
13 1/2%, pay-in-kind 31,856 39,023,600
UTILITIES - 5.7%
CELLULAR - 1.3%
Nextel Communications, Inc., Series D,
13%, pay-in-kind 25,503 29,073,420
TELEPHONE SERVICES - 4.4%
American Communications Services,
Inc. 12 3/4%, pay-in-kind (e) 13,495 13,596,213
PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONCONVERTIBLE PREFERRED STOCKS - CONTINUED
UTILITIES - CONTINUED
TELEPHONE SERVICES - CONTINUED
Hyperion Telecommunications, Inc.
12 7/8%, pay-in-kind (Reg.) 15,835 $ 15,953,763
ICG Holdings, Inc. 14 1/4%,
pay-in-kind 13,815 16,198,088
NEXTLINK Communications, Inc.
14%, pay-in-kind 693,057 43,316,063
Winstar Communications, Inc.
14 1/2% (a)(e) 11,698 12,224,410
101,288,537
TOTAL UTILITIES 130,361,957
TOTAL NONCONVERTIBLE PREFERRED STOCKS 375,173,255
TOTAL PREFERRED STOCKS
(Cost $362,843,296) 395,887,281
CASH EQUIVALENTS - 7.2%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations), in a joint
trading account at 6.40%, dated
12/31/97 due 1/2/98 $ 163,515,118 163,457,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $2,207,268,980) $ 2,286,853,875
SECURITY TYPE ABBREVIATIONS
QUIPS - Quarterly Income Preferred
Securities
LEGEND
(a) Non-income producing
(b) Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investors Service, Inc.
(c) Debt obligation initially issued in zero coupon form which
converts to coupon form at a specified rate and date.
(d) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(e) 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
$387,016,332 or 16.6% of net assets.
(f) 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
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
Hat Brands, Inc. 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
Optel Communications Corp.
15%, 12/29/04 12/31/97 $ 11,240,640
Optel Communications warrants
12/29/04 12/31/97 $ 759,408
(g) Non-income producing - issuer filed for protection under the
Federal Bankruptcy Code or is in default of interest payment.
(h) 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
Hat Brands, Inc. $ - $ - $ - $ -
Mothers Work 421,250 - - 2,079,788
Totals $ 421,250 $ - $ - $ 2,079,788
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $2,678,301,794 and $2,118,888,634, 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 $13,664 for the
period (see Note 4 of Notes to Financial Statements).
The composition of long-term debt holdings as a percentage of total
value of investment in securities, is as follows (ratings are
unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 0.0% AAA, AA, A 0.0%
Baa 0.0% BBB 0.0%
Ba 5.5% BB 7.2%
B 49.9% B 51.1%
Caa 7.6% CCC 5.7%
Ca, C 0.0% CC, C 0.0%
D 0.0%
The percentage not rated by both S&P and Moody's amounted to 4.3%. FMR
has determined that unrated debt securities that are lower quality
account for 4.3% of the total value of investment in securities.
INCOME TAX INFORMATION
At December 31, 1997, the aggregate cost of investment securities for
income tax purposes was $2,207,529,405. Net unrealized appreciation
aggregated $79,324,470, of which $126,174,483 related to appreciated
investment securities and $46,850,013 related to depreciated
investment securities.
The fund hereby designates approximately $41,373,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
INVESTMENT IN SECURITIES, AT $ 2,286,853,875
VALUE (INCLUDING REPURCHASE AGREEMENTS OF $163,457,000) (COST $2,207,268,980) -
SEE ACCOMPANYING SCHEDULE
CASH 879
RECEIVABLE FOR FUND SHARES SOLD 16,340,634
DIVIDENDS 4,751,166
INTEREST RECEIVABLE 34,636,386
OTHER RECEIVABLES 636,474
TOTAL ASSETS 2,343,219,414
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 8,360,735
PAYABLE FOR FUND SHARES REDEEMED 1,051,802
ACCRUED MANAGEMENT FEE 1,118,382
OTHER PAYABLES AND ACCRUED EXPENSES 253,551
TOTAL LIABILITIES 10,784,470
NET ASSETS $ 2,332,434,944
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 1,970,299,749
UNDISTRIBUTED NET INVESTMENT INCOME 171,323,283
ACCUMULATED UNDISTRIBUTED 111,227,017
NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 79,584,895
NET ASSETS $ 2,332,434,944
</TABLE>
INITIAL CLASS: $13.58
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($2,329,516,442 (DIVIDED BY) 171,543,403
SHARES)
SERVICE CLASS: $13.57
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PRICE PER SHARE
($2,918,502 (DIVIDED BY) 215,034
SHARES)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME $ 35,690,559
DIVIDENDS
INTEREST 150,119,840
TOTAL INCOME 185,810,399
EXPENSES
MANAGEMENT FEE $ 11,403,916
TRANSFER AGENT FEES 1,407,745
DISTRIBUTION FEES - SERVICE CLASS 147
ACCOUNTING FEES AND EXPENSES 812,930
NON-INTERESTED TRUSTEES' COMPENSATION 7,719
CUSTODIAN FEES AND EXPENSES 67,944
REGISTRATION FEES 2,989
AUDIT 47,809
LEGAL 15,404
MISCELLANEOUS 77,638
TOTAL EXPENSES BEFORE REDUCTIONS 13,844,241
EXPENSE REDUCTIONS (70,916 13,773,325
)
NET INVESTMENT INCOME 172,037,074
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 112,724,521
FOREIGN CURRENCY TRANSACTIONS 355 112,724,876
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 28,621,295
ASSETS AND LIABILITIES IN 16 28,621,311
FOREIGN CURRENCIES
NET GAIN (LOSS) 141,346,187
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 313,383,261
OTHER INFORMATION $ 57,264
EXPENSE REDUCTIONS
DIRECTED BROKERAGE ARRANGEMENTS
CUSTODIAN CREDITS 13,652
$ 70,916
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
OPERATIONS $ 172,037,074 $ 113,508,707
NET INVESTMENT
INCOME
NET REALIZED GAIN 112,724,876 15,837,127
(LOSS)
CHANGE IN NET 28,621,311 35,065,622
UNREALIZED
APPRECIATION
(DEPRECIATION)
NET INCREASE 313,383,261 164,411,456
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
DISTRIBUTIONS TO (116,015,279) (81,893,762)
SHAREHOLDERS
FROM NET INVESTMENT
INCOME
FROM NET REALIZED (14,338,900) (16,022,693)
GAIN
TOTAL DISTRIBUTIONS (130,354,179) (97,916,455)
SHARE TRANSACTIONS - 560,584,056 482,327,247
NET INCREASE
(DECREASE)
TOTAL INCREASE 743,613,138 548,822,248
(DECREASE) IN NET
ASSETS
NET ASSETS
BEGINNING OF PERIOD 1,588,821,806 1,039,999,558
END OF PERIOD $ 2,332,434,944 $ 1,588,821,806
(INCLUDING
UNDISTRIBUTED NET
INVESTMENT INCOME
OF $171,323,283
AND $113,174,121,
RESPECTIVELY)
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
SHARES DOLLARS SHARES DOLLARS
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SHARE TRANSACTIONS 99,919,218 $ 1,254,908,724 89,104,560 $ 1,058,212,273
INITIAL CLASS
SOLD
REINVESTED 11,056,288 130,354,179 8,680,536 97,916,455
REDEEMED (66,317,508) (827,580,626) (57,202,172) (673,801,481)
NET INCREASE 44,657,998 $ 557,682,277 40,582,924 $ 482,327,247
(DECREASE)
SERVICE CLASS A 215,034 $ 2,901,779 - $ -
SOLD
REINVESTED - - - -
REDEEMED - - - -
NET INCREASE 215,034 $ 2,901,779 - $ -
(DECREASE)
DISTRIBUTIONS
INITIAL CLASS - NET $ 116,015,279 $ 81,893,762
INVESTMENT INCOME
INITIAL CLASS - NET 14,338,900 16,022,693
REALIZED GAIN
TOTAL $ 130,354,179 $ 97,916,455
SERVICE CLASS - NET - -
INVESTMENT INCOME
SERVICE CLASS - NET - -
REALIZED GAIN
TOTAL $ - $ -
$ 130,354,179 $ 97,916,455
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1. SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
FINANCIAL HIGHLIGHTS - INITIAL CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1997 1996 1995 1994 1993
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.520 $ 12.050 $ 10.750 $ 11.990 $ 10.820
INCOME FROM INVESTMENT OPERATIONS 1.124 E .927 .856 .770 .728
NET INVESTMENT INCOME
NET REALIZED AND UNREALIZED GAIN (LOSS) .936 .643 1.224 (.910) 1.332
TOTAL FROM INVESTMENT OPERATIONS 2.060 1.570 2.080 (.140) 2.060
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.890) (.920) (.780) (.730) (.794)
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)
NET ASSET VALUE, END OF PERIOD $ 13.580 $ 12.520 $ 12.050 $ 10.750 $ 11.990
TOTAL RETURN B, C 17.67% 14.03% 20.72% (1.64)% 20.40%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 2,329,516 $ 1,588,822 $ 1,040,000 $ 569,417 $ 463,931
RATIO OF EXPENSES TO AVERAGE NET ASSETS .71% .71% .71% .71% .64% F
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 8.88% 9.09% 9.32% 8.75% 8.69%
PORTFOLIO TURNOVER RATE 118% 123% 132% 122% 155%
AVERAGE COMMISSION RATE G $ .0389 $ .0370
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEAR ENDED
DECEMBER 31,
SELECTED PER-SHARE DATA 1997 D
<TABLE>
<CAPTION>
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.380
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .203 E
NET REALIZED AND UNREALIZED GAIN (LOSS) (.013)
TOTAL FROM INVESTMENT OPERATIONS .190
NET ASSET VALUE, END OF PERIOD $ 13.570
TOTAL RETURN B, C 1.42%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 2,919
RATIO OF EXPENSES TO AVERAGE NET ASSETS .81% A
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER
EXPENSE REDUCTIONS .80% A,
H
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 10.75% A
PORTFOLIO TURNOVER RATE 118%
AVERAGE COMMISSION RATE G $ .0389
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 6 OF NOTES TO FINANCIAL STATEMENTS).
D FOR THE PERIOD NOVEMBER 3, 1997 (COMMENCEMENT OF SALE
OF SERVICE CLASS SHARES) TO DECEMBER 31, 1997.
E NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON
AVERAGE SHARES OUTSTANDING DURING THE PERIOD.
F FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES
DURING THE PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS'
EXPENSE RATIO WOULD HAVE BEEN HIGHER.
G 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 FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS
WITH THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION
OF THE CLASS' EXPENSES (SEE NOTE 6 OF NOTES TO FINANCIAL
STATEMENTS).
</TABLE>
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 LIFE OF
DECEMBER 31, 1997 YEAR YEARS FUND
VIP II: ASSET MANAGER - "INITIAL CLASS" 20.65% 12.98% 12.73%
S&P 500 (REGISTERED TRADEMARK) 33.36% 20.27% 16.25%
FIDELITY COMPOSITE 20.77% 12.46% N/A
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's returns to those of the 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.
3
You can also compare the fund's returns to the Fidelity Composite
Index, a hypothetical combination of unmanaged indices.
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, September 6, 1989.
If Fidelity had not reimbursed certain fund expenses, the life of fund
total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19971231 19980127 114143 S00000000000001
VIP II Asset Manager S&P 500
FID Composite
00156 SP001
F0001
1989/09/30 10000.00 10000.00
10000.00
1989/10/31 10020.02 9768.00
10056.80
1989/11/30 10060.06 9967.27
10176.58
1989/12/31 10091.09 10206.48
10276.51
1990/01/31 9868.42 9521.63
10028.74
1990/02/28 9969.64 9644.46
10092.83
1990/03/31 10050.61 9900.03
10192.14
1990/04/30 9919.03 9652.53
10098.07
1990/05/31 10425.10 10593.65
10527.54
1990/06/30 10506.07 10521.62
10593.12
1990/07/31 10485.83 10487.95
10657.74
1990/08/31 10141.70 9539.84
10328.10
1990/09/30 9929.15 9075.25
10235.77
1990/10/31 9979.76 9036.22
10309.16
1990/11/30 10465.59 9619.96
10618.33
1990/12/31 10769.23 9888.36
10792.26
1991/01/31 11284.56 10319.49
10998.06
1991/02/28 11726.26 11057.34
11273.46
1991/03/31 11915.56 11324.93
11395.89
1991/04/30 12094.35 11352.11
11470.64
1991/05/31 12367.79 11842.52
11652.80
1991/06/30 12146.94 11300.13
11501.78
1991/07/31 12451.92 11826.72
11732.96
1991/08/31 12704.33 12107.01
11941.81
1991/09/30 12777.94 11904.82
11998.53
1991/10/31 12862.08 12064.35
12105.32
1991/11/30 12651.74 11578.15
12021.91
1991/12/31 13198.62 12902.69
12614.23
1992/01/31 13366.89 12662.70
12476.36
1992/02/29 13626.47 12827.32
12556.08
1992/03/31 13593.27 12577.19
12465.30
1992/04/30 13792.52 12946.96
12618.63
1992/05/31 13936.42 13010.40
12742.54
1992/06/30 13925.35 12816.54
12748.15
1992/07/31 14157.81 13340.74
13094.39
1992/08/31 14113.53 13067.25
13044.11
1992/09/30 14202.09 13221.45
13188.37
1992/10/31 14224.22 13267.72
13135.88
1992/11/30 14534.17 13720.15
13311.12
1992/12/31 14744.49 13888.91
13474.31
1993/01/31 15010.15 14005.57
13642.74
1993/02/28 15150.92 14196.05
13832.92
1993/03/31 15579.83 14495.59
13974.84
1993/04/30 15672.57 14144.79
13889.88
1993/05/31 15939.19 14523.87
14039.05
1993/06/30 16066.70 14565.99
14188.15
1993/07/31 16263.77 14507.73
14206.31
1993/08/31 16739.04 15057.57
14555.79
1993/09/30 16750.64 14941.63
14540.94
1993/10/31 17202.73 15250.92
14690.42
1993/11/30 17179.54 15106.04
14577.30
1993/12/31 17875.07 15288.82
14678.18
1994/01/31 18443.09 15808.64
14966.46
1994/02/28 17857.33 15380.23
14682.69
1994/03/31 17017.99 14709.65
14303.29
1994/04/30 17030.15 14897.93
14340.48
1994/05/31 17176.13 15142.26
14437.14
1994/06/30 16847.69 14771.27
14292.76
1994/07/31 17139.63 15255.77
14594.63
1994/08/31 17541.06 15881.26
14845.95
1994/09/30 17334.15 15492.17
14628.31
1994/10/31 17419.36 15840.74
14768.45
1994/11/30 17163.73 15263.82
14553.89
1994/12/31 16786.37 15490.18
14689.12
1995/01/31 16676.82 15891.84
14963.69
1995/02/28 16946.97 16511.15
15337.61
1995/03/31 17170.77 16998.39
15572.33
1995/04/30 17444.31 17498.99
15852.32
1995/05/31 17668.12 18198.43
16377.48
1995/06/30 17817.32 18621.18
16596.81
1995/07/31 18451.43 19238.66
16808.32
1995/08/31 18675.24 19286.95
16918.98
1995/09/30 18911.47 20100.85
17284.77
1995/10/31 18662.80 20029.09
17383.15
1995/11/30 19147.71 20908.37
17811.48
1995/12/31 19632.62 21311.07
18066.96
1996/01/31 20055.36 22036.50
18374.75
1996/02/29 20001.35 22240.77
18307.28
1996/03/31 20213.99 22454.95
18329.47
1996/04/30 20426.62 22785.94
18405.65
1996/05/31 20586.10 23373.59
18599.57
1996/06/30 20772.16 23462.64
18738.02
1996/07/31 20426.62 22426.06
18440.99
1996/08/31 20466.49 22899.03
18597.29
1996/09/30 21210.73 24187.79
19153.95
1996/10/31 21755.62 24854.88
19550.66
1996/11/30 22832.10 26733.66
20293.51
1996/12/31 22499.85 26204.07
20066.55
1997/01/31 23177.64 27841.30
20726.94
1997/02/28 23377.96 28059.58
20837.00
1997/03/31 22488.67 26906.61
20325.55
1997/04/30 23257.38 28512.93
21062.97
1997/05/31 24372.77 30248.80
21793.43
1997/06/30 25020.90 31603.95
22394.49
1997/07/31 26467.89 34118.67
23536.95
1997/08/31 25744.40 32207.35
22807.77
1997/09/30 26573.40 33971.34
23576.97
1997/10/31 26136.29 32836.70
23330.35
1997/11/30 26739.20 34356.71
23923.06
1997/12/31 27146.17 34946.61
24235.37
IMATRL PRASUN SHR__CHT 19971231 19980127 114146 R00000000000102
Let's say hypothetically that $10,000 was invested in VIP II: Asset
Manager Portfolio on September 30, 1989, shortly after the fund
started. By December 31, 1997, the value of the investment would have
grown to $27,146 - a 171.46% increase. With reinvested dividends and
capital gains, if any, a $10,000 investment in the S&P 500, would have
grown to $34,947 over the same period - a 249.47% 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 (249.47%), Lehman Brothers
Aggregate Bond Index (101.97%), and the Salomon Brothers 3-month
T-Bill Total Rate of Return Index (51.72%) - 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 $24,235 - a 142.35% 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 DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
AT&T CORP. 1.9
FANNIE MAE 1.7
INTERNATIONAL BUSINESS MACHINES CORP. 1.5
WAL-MART STORES, INC. 1.5
AMERICAN INTERNATIONAL GROUP, INC. 1.4
TOP FIVE BOND ISSUERS AS OF DECEMBER 31, 1997
(WITH MATURITIES MORE THAN ONE YEAR) % OF FUND'S
INVESTMENTS
FANNIE MAE 4.9
U.S. TREASURY OBLIGATIONS 3.5
FORD MOTOR CREDIT CO. 0.7
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION 0.5
AT&T CAPITAL CORP. 0.4
ASSET ALLOCATION AS OF DECEMBER 31, 1997*
ROW: 1, COL: 1, VALUE: 10.3
ROW: 1, COL: 2, VALUE: 32.5
ROW: 1, COL: 3, VALUE: 57.2
STOCKS 57.2%
BONDS 32.5%
SHORT-TERM INVESTMENTS 10.3%
FOREIGN INVESTMENTS 4.7%
*
ASSET ALLOCATION IN THE PIE CHART REFLECTS THE CATEGORIZATION OF
ASSETS AS DEFINED IN THE
FUND'S PROSPECTUS. FINANCIAL STATEMENT CATEGORIZATIONS CONFORM TO
ACCOUNTING
STANDARDS AND WILL DIFFER FROM THE PIE CHART.
% OF FUND'S INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the class' dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1fee.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 LIFE OF
DECEMBER 31, 1997 YEAR YEARS FUND
VIP II: ASSET MANAGER - SERVICE CLASS 20.52% 12.96% 12.72%
S&P 500 (REGISTERED TRADEMARK) 33.36% 20.27% 16.25%
FIDELITY COMPOSITE 20.77% 12.46% N/A
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's returns to those of the 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.
3
You can also compare the fund's returns to the Fidelity Composite
Index, a hypothetical combination of unmanaged indices.
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, September 6, 1989.
If Fidelity had not reimbursed certain fund expenses, the life of fund
total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
S&P 500
VIP II: Asset Manager - Service Class Fidelity Composite
$34,947
$27,116
$24,235
$
Let's say hypothetically that $10,000 was invested in VIP II: Asset
Manager Portfolio on September 30, 1989, shortly after the fund
started. By December 31, 1997, the value of the investment would have
grown to $27,116 - a 171.16% increase. With reinvested dividends and
capital gains, if any, a $10,000 investment in the S&P 500, would have
grown to $34,947 over the same period - a 249.47% 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 (249.47%), Lehman Brothers
Aggregate Bond Index (101.97%), and the Salomon Brothers 3-month
T-Bill Total Rate of Return Index (51.72%) - 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 $24,235 - a 142.35% 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 DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
AT&T CORP. 1.9
FANNIE MAE 1.7
INTERNATIONAL BUSINESS MACHINES CORP. 1.5
WAL-MART STORES, INC. 1.5
AMERICAN INTERNATIONAL GROUP, INC. 1.4
TOP FIVE BOND ISSUERS AS OF DECEMBER 31, 1997
(WITH MATURITIES MORE THAN ONE YEAR) % OF FUND'S
INVESTMENTS
FANNIE MAE 4.9
U.S. TREASURY OBLIGATIONS 3.5
FORD MOTOR CREDIT CO. 0.7
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION 0.5
AT&T CAPITAL CORP. 0.4
ASSET ALLOCATION AS OF DECEMBER 31, 1997*
ROW: 1, COL: 1, VALUE: 10.3
ROW: 1, COL: 2, VALUE: 32.5
ROW: 1, COL: 3, VALUE: 57.2
STOCKS 57.2%
BONDS 32.5%
SHORT-TERM INVESTMENTS 10.3%
FOREIGN INVESTMENTS 4.7%
*
ASSET ALLOCATION IN THE PIE CHART REFLECTS THE CATEGORIZATION OF
ASSETS AS DEFINED IN THE
FUND'S PROSPECTUS. FINANCIAL STATEMENT CATEGORIZATIONS CONFORM TO
ACCOUNTING
STANDARDS AND WILL DIFFER FROM THE PIE CHART.
% OF FUND'S INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
FUND TALK: THE MANAGERS' OVERVIEW
An interview with Richard Habermann (top left), Portfolio Manager of
Asset Manager Portfolio; Steven Snider (top right), sub-manager for
stocks; Charles Morrison (bottom left), sub-manager for bonds; John
Todd (bottom right), sub-manager for short-term/money market
instruments; and Fred Hoff, who assisted with the fund's high-yield
investments. Steven Snider became sub-manager for stocks on October 1,
1997.
Q. HOW DID THE FUND PERFORM, DICK?
D.H. The fund allocates its assets among stocks, bonds and
short-term/money market instruments in an effort to provide
competitive returns with restrained volatility relative to funds or
indexes that invest only in stocks. The fund provided both during the
period, benefiting from the performance of its investments in equities
and high-yield bonds, as well as from its successful asset allocation
moves during certain times in the period. Accordingly, the fund
performed in line with the 20.77% return of the Fidelity Composite
Index, a combination of unmanaged indices, during the 12 months that
ended December 31, 1997. The composite index, as defined on the
previous page, reflects the fund's neutral asset allocation mix, which
comprises 50% stocks, 40% bonds and 10% short-term/money market
instruments. The fund underperformed the 33.36% return for the
Standard & Poor's 500 Index, which is made up exclusively of stocks,
because the fund is diversified into other asset classes that didn't
perform as well as equities.
Q. WHAT WAS THE FUND'S ASSET MIX AT THE END OF THE PERIOD?
D.H. At the end of 1997, the fund's equity position stood at about
57%, more aggressive than the neutral mix the fund instituted at the
beginning of the year. I pared back the equity portion from an even
more aggressive position toward the end of the third quarter,
increasing both the fund's bond and short-term/money market positions.
At the end of the period, the fund held about 33% in bonds and about
10% in short-term/money market instruments. It's important to note
that each of the fund's managers strive to manage risks within the
portfolio. The shifts made in the fund's asset allocations are subtle.
As a result, the volatility of the fund is significantly lower than it
is for equity-only funds and the S&P 500 index.
Q. WHY DID YOU REDUCE THE FUND'S STOCK INVESTMENTS?
D.H. I became more cautious in late summer as the economic crisis in
Asia started to unfold, influencing my decision to decrease the fund's
equity position and marginally increase bonds. The fund was fairly
aggressive during the first half of the year, investing as much as 65%
of the fund's assets in equities. In response to some concerns I had
related to the pace of earnings growth, I pared the equity weighting
back in September, thus dampening the portfolio impact of the
late-year weakness caused by financial problems in Southeast Asia. My
concern that the Asian turmoil would dampen the growth prospects of
many U.S. companies led me to maintain comparatively lower equity
weightings through the fourth quarter.
Q. WHAT HAPPENED IN THE BOND MARKET?
D.H. Overall, bonds had a good year. During the first half of the
year, the bond market struggled because of concerns that continued
economic growth might lead to inflation. The fears heightened just
before and after the Federal Reserve Board tried to head off inflation
by raising the fed funds rate - the rate banks charge each other for
overnight loans - from 5.25% to 5.50% at the end of March. Once the
market received signs that economic growth was moderating and
inflation continued to be almost non-existent, the bond market
rallied. As it turned out, inflation was benign throughout the rest of
the year. There were opportunities for the fund in the high-yield
segment of the bond market as a lot of cash flow was going into that
sector, and I'll ask Fred Hoff of Fidelity's High-Income Group - who
assisted me with the fund's high-yield investments - to elaborate.
F.H. The fund's high-yield investments - based on our strategy of
using intensive credit research to find companies with promising cash
flow growth - were, indeed, among the better-performing sectors of the
fixed-income market this year. The fund was helped specifically during
the period by its large holdings in the telecommunications and
broadcasting industries, which benefited from significant merger
activity as well as favorable new legislation that created growth
opportunities.
Q. TURNING TO YOU, STEVEN, HOW DID YOU MANAGE THE STOCK PORTION OF THE
FUND?
S.S. I began managing the fund in October, after the reduction in the
equity portion of the portfolio had already begun. Before that time,
George Vanderheiden managed the stock portion. George used a
fundamental, bottom-up approach to finding individual stocks. I manage
the fund quite differently because I use quantitative models to help
me pick stocks. This means that I also rely on computer models to sort
through large amounts of quantitative information on companies - such
as earnings, balance-sheet data, cash flows, liquidity, volatility and
external factors - trying to find misvaluations, or stocks that are
trading above or below their "fair value" in the marketplace. I
evaluate the portfolio, along with the information the computers
generate daily, and make an assessment about which stocks to hold,
which to buy and which to sell.
Q. WHAT ARE THE MAJOR DIFFERENCES BETWEEN YOUR STRATEGY AND A
FUNDAMENTAL APPROACH?
S.S. I think it's important to remember that both quantitative and
fundamental approaches have a common rationale. In both cases, the
portfolio manager analyzes data about a company to estimate a fair
value for the stock. A manager using a fundamental stock-picking
strategy - such as George Vanderheiden's - typically evaluates one
stock at a time, using experience to assess its prospects and
valuation. Our group's quantitative models instead allow me to monitor
a large number of stocks simultaneously - currently over 3,000 -
constantly calculating the value of each stock relative to the others.
Finally, risk control is also a very important part of the
quantitative discipline. Stock valuation is only the first part of the
process, since I consider the risk characteristics of the entire
portfolio when I review buy and sell candidates.
Q. CHARLIE, WHAT WAS YOUR STRATEGY FOR THE FUND'S BOND INVESTMENTS?
C.M. I focused on two broad strategies in the bond portion of the fund
during the year. First, I maintained an overweighted position -
relative to the Lehman Brothers Aggregate Bond Index - in the
corporate sector, focusing on securities with relatively short
maturities. Corporate bonds were trading at historically low yields
for much of the year. Owning short-maturity issues added yield to the
fund, yet exposed the fund to less total-return risk in the event that
corporate bonds began to underperform Treasury securities. My second
broad strategy focused on the mortgage market, where I maintained an
underweighted position in mortgage pass-through securities, and an
overweighted exposure to commercial mortgage-backed securities, bonds
backed by commercial real estate properties such as office buildings
and retail malls.
Q. WHAT WAS THE ENVIRONMENT IN THE MORTGAGE MARKET?
C.M. The mortgage market, in general, had a strong year. A combination
of lower issuance, relatively low interest-rate volatility and strong
investor demand allowed mortgage pass-through securities to perform
very well. The fund was underweighted in these securities during the
period - a position that modestly hurt the fund, particularly in the
first half of the year. However, as interest rates rallied for much of
the second half of 1997, the fund's underweighting in pass-throughs,
particularly in higher-coupon mortgages, helped performance. Market
concerns over increased prepayment risk - the risk that homeowners
refinance their current mortgages at lower rates - and a pick-up in
interest-rate volatility contributed to the weaker market at year-end.
Q. JOHN, WHAT WAS THE BACKDROP FOR THE SHORT-TERM AND MONEY MARKET
INSTRUMENTS LIKE DURING THE PERIOD?
J.T. The central theme was robust economic growth with no noticeable
threat posed by inflation. While real gross domestic product grew at a
rate approaching 4% in 1997 - a pace believed to be above the
economy's capacity to expand without generating inflation - the Fed
remained on the sidelines after its initial fed funds rate hike in
March. In addition, the financial difficulties that arose in Asia in
late summer could have a dampening effect on the U.S. economy because
U.S. companies export a fair amount to the region. As a result, market
participants expect the Fed to take a more balanced stance with
respect to short-term interest rates.
Q. WHAT SORT OF STRATEGY DID YOU PURSUE?
J.T. At the end of the first quarter, prices in the market reflected
the sentiment that the Fed would continue with a series of
interest-rate increases that appeared to begin in March. I felt the
market was jumping the gun and that the resulting yields offered by
longer-term securities were particularly attractive. As a result, I
extended my portion of the fund's average maturity to the low 70-day
range. Moving into the summer, the markets reversed course, with
prices and yields indicating that the Fed would hold off making any
moves for the foreseeable future. So, I let my portion of the fund's
maturity slip back to the low 60s. By the end of the year, some market
observers were actually calling for the Fed to lower rates because of
the risk of deflation from the intensifying competition posed by
cheaper Asian goods.
Q. TURNING BACK TO YOU, DICK, WHAT'S YOUR OUTLOOK?
D.H. I'm cautiously optimistic. Despite high valuations, I think
foreign investors will continue to come to the U.S. stock market
because they are attracted by the strength of the dollar. And while
it's difficult to predict short-term movements in the markets,
investors may discover that investing in U.S. companies can generate
competitive long-term returns compared to the rest of the world. I
also think we will continue to see a low-inflation environment, which
bodes well for the fixed-income markets. I expect earnings growth to
slow from its pace last year, when stock prices rose at a higher rate
than earnings in many cases. I think stock prices will keep pace with
earnings growth in 1998. Overall, I would say it won't be a great year
or a bad year - I think it will be an average year.
FUND FACTS
GOAL: income and share price stability by
investing in high-quality, short-term investments
START DATE: April 1, 1982
SIZE: as of December 31, 1997, more than $1.0
billion
MANAGER: Robert Duby, since April 1997; joined
Fidelity in 1982
3
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
INVESTMENTS DECEMBER 31, 1997
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 55.8%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 0.9%
AEROSPACE & DEFENSE - 0.4%
United Technologies Corp. 253,700 $ 18,472,531
DEFENSE ELECTRONICS - 0.5%
Litton Industries, Inc. (a) 108,100 6,215,750
Raytheon Company:
Class A 53,878 2,656,859
Class B 247,000 12,473,500
21,346,109
SHIP BUILDING & REPAIR - 0.0%
Avondale Industries, Inc. (a) 20,500 608,594
TOTAL AEROSPACE & DEFENSE 40,427,234
BASIC INDUSTRIES - 2.4%
CHEMICALS & PLASTICS - 1.7%
Dow Chemical Co. 295,800 30,023,700
Lubrizol Corp. 133,200 4,911,750
Millennium Chemicals, Inc. 379,000 8,930,188
Raychem Corp. 458,800 19,757,075
Union Carbide Corp. 223,200 9,583,650
73,206,363
METALS & MINING - 0.1%
Aluminum Co. of America 101,400 7,136,025
PACKAGING & CONTAINERS - 0.6%
Owens-Illinois, Inc. (a) 655,300 24,860,444
TOTAL BASIC INDUSTRIES 105,202,832
CONSTRUCTION & REAL ESTATE - 0.7%
BUILDING MATERIALS - 0.0%
Vulcan Materials Co. 25,700 2,624,613
CONSTRUCTION - 0.7%
Centex Corp. 75,700 4,764,369
D.R. Horton, Inc. 189,224 3,287,767
Fleetwood Enterprises, Inc. 351,981 14,937,194
Kaufman & Broad Home Corp. 260,500 5,844,969
U.S. Home Corp. (a) 19,700 773,225
29,607,524
TOTAL CONSTRUCTION & REAL ESTATE 32,232,137
DURABLES - 2.6%
AUTOS, TIRES, & ACCESSORIES - 2.4%
Cummins Engine Co., Inc. 121,200 7,158,375
Discount Auto Parts, Inc. (a) 44,600 852,975
Eaton Corp. 187,300 16,716,525
Federal-Mogul Corp. 60,200 2,438,100
Ford Motor Co. 363,900 17,717,381
General Motors Corp. 844,890 51,221,456
Goodyear Tire & Rubber Co. 59,700 3,798,413
Superior Industries International, Inc. 211,800 5,678,888
105,582,113
TEXTILES & APPAREL - 0.2%
Arena Brands Holdings Corp.
Class B (a) 8,445 341,094
Burlington Industries, Inc. (a) 291,900 4,031,869
Liz Claiborne, Inc. 87,800 3,671,138
8,044,101
TOTAL DURABLES 113,626,214
SHARES VALUE (NOTE 1)
ENERGY - 7.7%
ENERGY SERVICES - 1.1%
BJ Services Co. (a) 211,900 $ 15,243,556
ENSCO International, Inc. 339,100 11,359,850
McDermott International, Inc. 267,000 9,778,875
Tidewater, Inc. 220,400 12,149,550
48,531,831
OIL & GAS - 6.6%
Atlantic Richfield Co. 525,700 42,121,713
British Petroleum PLC ADR 2,924 233,006
Burlington Resources, Inc. 614,530 27,538,626
Chevron Corp. 641,600 49,403,200
Enron Oil & Gas Co. 31,400 665,288
Kerr-McGee Corp. 67,700 4,286,256
Mobil Corp. 739,800 53,404,313
Occidental Petroleum Corp. 519,200 15,219,050
Royal Dutch Petroleum Co. Ord. 119,200 6,546,736
Royal Dutch Petroleum Co. 604,100 32,734,669
Texaco, Inc. 724,800 39,411,000
Tosco Corp. 545,700 20,634,281
Valero Energy Corp. 53,200 1,672,475
293,870,613
TOTAL ENERGY 342,402,444
FINANCE - 15.9%
BANKS - 3.9%
BankAmerica Corp. 711,100 51,910,300
Bankers Trust New York Corp. 149,600 16,820,650
Chase Manhattan Corp. 442,400 48,442,800
Citicorp 153,900 19,458,731
First Union Corp. 387,506 19,859,683
Republic New York Corp. 122,600 13,999,388
170,491,552
CLOSED END INVESTMENT COMPANY - 0.0%
First NIS Regional Fund (a) 114,100 1,882,650
CREDIT & OTHER FINANCE - 0.3%
First of America Bank Corp. 131,500 10,141,938
Green Tree Financial Corp. 102,800 2,692,075
12,834,013
FEDERAL SPONSORED CREDIT - 2.8%
Freddie Mac 1,123,800 47,129,363
Fannie Mae 1,318,390 75,230,629
122,359,992
INSURANCE - 8.0%
Allmerica Financial Corp. 114,900 5,737,819
Allstate Corp. 663,300 60,277,388
American International Group, Inc. 574,700 62,498,625
CIGNA Corp. 210,200 36,377,738
Conseco, Inc. 797,900 36,254,581
Financial Security Assurance
Holdings Ltd. 37,300 1,799,725
General Re Corp. 60,100 12,741,200
Hartford Financial Services Group, Inc. 118,000 11,040,375
ING Groep NV sponsored ADR 4,145 175,385
Loews Corp. 89,300 9,476,963
MGIC Investment Corp. 300,800 20,003,200
Old Republic International Corp. 122,100 4,540,594
Orion Capital Corp. 40,800 1,894,650
PMI Group, Inc. 143,900 10,405,769
Provident Companies, Inc. 16,600 641,175
Reliastar Financial Corp. 79,870 3,289,646
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
Torchmark Corp. 325,200 $ 13,678,725
Travelers Property Casualty Corp. Class A 61,400 2,701,600
Travelers Group, Inc. (The) 1,099,200 59,219,400
352,754,558
SAVINGS & LOANS - 0.3%
Golden West Financial Corp. 118,800 11,620,125
SECURITIES INDUSTRY - 0.6%
Lehman Brothers Holdings, Inc. 562,400 28,682,400
TOTAL FINANCE 700,625,290
HEALTH - 3.2%
DRUGS & PHARMACEUTICALS - 2.0%
Bristol-Myers Squibb Co. 80,300 7,598,388
Merck & Co., Inc. 92,700 9,849,375
Pfizer, Inc. 292,100 21,779,706
Schering-Plough Corp. 784,300 48,724,638
87,952,107
MEDICAL EQUIPMENT & SUPPLIES - 0.4%
Allegiance Corp. 13,180 467,066
Biomet, Inc. 223,500 5,727,188
Guidant Corp. 169,000 10,520,250
16,714,504
MEDICAL FACILITIES MANAGEMENT - 0.8%
Coram Healthcare Corp. (a) 6,391 21,570
FPA Medical Management, Inc. (a) 296,200 5,516,725
Lincare Holdings, Inc. (a) 100,000 5,700,000
United HealthCare Corp. 350,100 17,395,594
Wellpoint Health Networks, Inc. (a) 150,000 6,337,500
34,971,389
TOTAL HEALTH 139,638,000
HOLDING COMPANIES - 0.1%
U.S. Industries, Inc. 216,300 6,516,038
INDUSTRIAL MACHINERY & EQUIPMENT - 1.9%
ELECTRICAL EQUIPMENT - 0.5%
General Electric Co. 255,100 18,717,963
Grainger (W.W.), Inc. 21,100 2,050,656
Scientific-Atlanta, Inc. 128,600 2,154,050
22,922,669
INDUSTRIAL MACHINERY & EQUIPMENT - 1.3%
Case Corp. 258,300 15,611,006
Caterpillar, Inc. 475,000 23,067,188
Ingersoll-Rand Co. 467,100 18,917,550
57,595,744
POLLUTION CONTROL - 0.1%
Browning-Ferris Industries, Inc. 79,500 2,941,500
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 83,459,913
MEDIA & LEISURE - 0.4%
BROADCASTING - 0.1%
Orion Network Systems, Inc.
warrants 1/15/07 (a) 860 11,180
Orion Network Systems, Inc.
warrants 1/15/07 (a) 2,920 32,120
Tele-Communications, Inc.
(TCI Ventures Group), Series A 130,356 3,690,704
3,734,004
SHARES VALUE (NOTE 1)
LODGING & GAMING - 0.0%
Bally Gaming International, Inc.
warrants 7/29/98 (a) 38,400 $ 28,800
Fitzgeralds South, Inc.
warrants 3/15/99 (a)(e) 420 -
Rio Hotel & Casino, Inc. (a) 20,600 432,600
461,400
PUBLISHING - 0.1%
Cognizant Corp. 84,200 3,752,163
US WEST Media Group (a) 33,300 961,538
4,713,701
RESTAURANTS - 0.2%
Brinker International, Inc. (a) 93,800 1,500,800
Papa John's International, Inc. (a) 23,600 823,050
Wendy's International, Inc. 218,900 5,267,281
7,591,131
TOTAL MEDIA & LEISURE 16,500,236
NONDURABLES - 2.3%
BEVERAGES - 0.1%
Coors (Adolph) Co. Class B 106,800 3,551,100
PepsiCo, Inc. 32,100 1,169,644
4,720,744
FOODS - 0.2%
Dean Foods Co. 116,200 6,913,900
HOUSEHOLD PRODUCTS - 0.0%
Premark International, Inc. 34,500 1,000,500
TOBACCO - 2.0%
Philip Morris Companies, Inc. 1,310,400 59,377,500
RJR Nabisco Holdings Corp. 807,630 30,286,125
89,663,625
TOTAL NONDURABLES 102,298,769
RETAIL & WHOLESALE - 5.2%
APPAREL STORES - 0.3%
Gap, Inc. 114,900 4,071,769
TJX Companies, Inc. 260,000 8,937,500
13,009,269
GENERAL MERCHANDISE STORES - 1.8%
Federated Department Stores, Inc. (a) 311,300 13,405,356
Wal-Mart Stores, Inc. 1,634,300 64,452,706
77,858,062
GROCERY STORES - 0.3%
Safeway, Inc. (a) 204,000 12,903,000
RETAIL & WHOLESALE, MISCELLANEOUS - 2.8%
Home Depot, Inc. 1,013,100 59,646,263
Lowe's Companies, Inc. 381,000 18,168,938
Officemax, Inc. (a) 404,500 5,764,125
Office Depot, Inc. (a) 127,400 3,049,638
Staples, Inc. (a) 169,000 4,689,750
Tandy Corp. 581,500 22,424,094
Toys "R" Us, Inc. (a) 338,600 10,644,738
124,387,546
TOTAL RETAIL & WHOLESALE 228,157,877
SERVICES - 0.4%
ADVERTISING - 0.0%
Interpublic Group of Companies, Inc. 27,250 1,357,391
PRINTING - 0.0%
Donnelley (R.R.) & Sons Co. 24,800 923,800
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - CONTINUED
SERVICES - 0.4%
Cendant Corp. (a) 513,667 $ 17,657,288
TOTAL SERVICES 19,938,479
TECHNOLOGY - 6.1%
COMMUNICATIONS EQUIPMENT - 0.6%
Globalstar Telecommunications Ltd.
warrants 2/15/04 (a) 1,410 155,100
Lucent Technologies, Inc. 320,000 25,560,000
25,715,100
COMPUTER SERVICES & SOFTWARE - 0.5%
Microsoft Corp. (a) 97,500 12,601,875
Paychex, Inc. 75,900 3,842,438
Policy Management Systems Corp. (a) 94,400 6,566,700
23,011,013
COMPUTERS & OFFICE EQUIPMENT - 3.7%
Bay Networks, Inc. (a) 84,300 2,154,919
Compaq Computer Corp. 619,000 34,934,813
Digital Equipment Corp. (a) 296,300 10,963,100
Hewlett-Packard Co. 127,300 7,956,250
Ingram Micro, Inc. Class A (a) 25,600 745,600
International Business Machines Corp. 643,000 67,233,688
Quantum Corp. (a) 30,200 605,888
SCI Systems, Inc. (a) 587,100 25,575,544
Tech Data Corp. (a) 151,500 5,889,563
Xerox Corp. 101,400 7,484,588
163,543,953
ELECTRONIC INSTRUMENTS - 0.0%
Applied Materials, Inc. (a) 39,600 1,192,950
ELECTRONICS - 1.3%
AMP, Inc. 392,400 16,480,800
Intel Corp. 180,100 12,652,025
Molex, Inc. 98,625 2,835,469
Solectron Corp. (a) 607,700 25,257,531
57,225,825
TOTAL TECHNOLOGY 270,688,841
TRANSPORTATION - 1.2%
AIR TRANSPORTATION - 1.2%
AMR Corp. (a) 352,400 45,283,400
Northwest Airlines Corp. Class A (a) 33,000 1,579,875
US Airways Group, Inc. 84,500 5,281,250
52,144,525
TRUCKING & FREIGHT - 0.0%
Roadway Express, Inc. 24,000 531,000
Yellow Corp. (a) 101,800 2,557,725
3,088,725
TOTAL TRANSPORTATION 55,233,250
UTILITIES - 4.8%
CELLULAR - 0.7%
AirTouch Communications, Inc. (a) 746,600 31,030,563
McCaw International Ltd.
warrants 4/15/07 (a)(e) 4,850 12,125
31,042,688
ELECTRIC UTILITY - 1.1%
American Electric Power Co., Inc. 72,500 3,742,813
Dominion Resources, Inc. 149,500 6,363,094
Edison International 270,500 7,354,219
SHARES VALUE (NOTE 1)
Entergy Corp. 187,600 $ 5,616,275
FPL Group, Inc. 148,100 8,765,669
GPU, Inc. 212,300 8,943,138
Long Island Lighting Co. 162,700 4,901,338
Niagara Mohawk Power Corp. (a) 79,800 837,900
46,524,446
TELEPHONE SERVICES - 3.0%
AT&T Corp. 1,358,300 83,195,875
Ameritech Corp. 227,700 18,329,850
BellSouth Corp. 280,700 15,806,919
GTE Corp. 150,000 7,837,500
U S WEST Communications Group 160,000 7,220,000
132,390,144
TOTAL UTILITIES 209,957,278
TOTAL COMMON STOCKS
(Cost $2,079,214,580) 2,466,904,832
NONCONVERTIBLE PREFERRED STOCKS - 1.4%
CONSTRUCTION & REAL ESTATE - 0.2%
REAL ESTATE INVESTMENT TRUSTS - 0.2%
California Federal Preferred
Capital Corp. 9 1/8% 167,261 4,348,786
Crown America Realty Trust, Series A, 11% 25,058 1,309,281
Walden Residential Properties, Inc.
9.20% 49,000 1,252,999
6,911,066
FINANCE - 0.0%
INSURANCE - 0.0%
American Annuity Group Capital
Trust II 8 3/4% 1,490 1,609,568
SIG Capital Trust I 9 1/2% 500 526,104
2,135,672
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Echostar Communications Corp.
12 1/8%, pay-in-kind (e) 2,509 2,584,291
MEDIA & LEISURE - 0.9%
BROADCASTING - 0.8%
Adelphia Communications Corp. $13 11,243 1,332,296
American Radio Systems Corp.
11 3/8%, pay-in-kind 27,126 3,038,112
Cablevision System Corp. 11 1/8%,
depositary shares pay-in-kind 72,968 8,427,804
Capstar Broadcasting Partners, Inc.
12%, pay-in-kind 2,910 316,099
Chancellor Media Corp.:
12%, pay-in-kind (e) 19,323 2,202,822
Series A, $12.25 (a) 11,863 1,637,094
Granite Broadcasting Corp.
12 3/4%, pay-in-kind 2,066 2,293,260
SFX Broadcasting, Inc. 12 5/8% 25,367 2,904,522
Sinclair Capital 11 5/8% 28,380 3,107,610
Time Warner, Inc., Series M,
10 1/4%, pay-in-kind 8,301 9,317,873
34,577,492
PUBLISHING - 0.1%
Primedia, Inc. Series D, $10 31,050 3,244,725
TOTAL MEDIA & LEISURE 37,822,217
NONCONVERTIBLE PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONDURABLES - 0.0%
HOUSEHOLD PRODUCTS - 0.0%
Revlon Group, Inc., Series B, 14 7/8% 5,100 $ 515,100
RETAIL & WHOLESALE - 0.0%
GROCERY STORES - 0.0%
Supermarkets General Holdings Corp.
$3.52, pay-in-kind 20,000 240,000
TECHNOLOGY - 0.0%
COMMUNICATIONS EQUIPMENT - 0.0%
Intermedia Communications, Inc.
13 1/2%, pay-in-kind 1,490 1,825,250
UTILITIES - 0.2%
TELEPHONE SERVICES - 0.2%
Hyperion Telecommunications, Inc.
12 7/8%, pay-in-kind (Reg.) 1,919 1,933,393
IXC Communications, Inc. 12 1/2%,
pay-in-kind (e) 1,473 1,723,410
NEXTLINK Communications, Inc.
14%, pay-in-kind 48,689 3,043,063
Winstar Communications, Inc.
14 1/2% (a)(e) 3,166 3,308,470
10,008,336
TOTAL NONCONVERTIBLE PREFERRED STOCKS
(Cost $57,682,976) 62,041,932
NONCONVERTIBLE BONDS - 18.9%
MOODY'S RATINGS PRINCIPAL
(UNAUDITED)(D) AMOUNT
AEROSPACE & DEFENSE - 0.2%
AEROSPACE & DEFENSE - 0.0%
Be Aerospace, Inc.
9 7/8%, 2/1/06 B2 $ 270,000 284,850
Wyman-Gordon Co.
8%, 12/15/07 Ba2 200,000 201,500
486,350
DEFENSE ELECTRONICS - 0.1%
Raytheon Co.
6.45%, 8/15/04 Baa1 5,940,000 5,969,165
Tracor, Inc.
8 1/2%, 3/1/07 B1 1,170,000 1,187,550
7,156,715
SHIP BUILDING & REPAIR - 0.1%
Newport News Shipbuilding, Inc.
9 1/4%, 12/1/06 B1 3,830,000 4,050,225
TOTAL AEROSPACE & DEFENSE 11,693,290
BASIC INDUSTRIES - 0.2%
CHEMICALS & PLASTICS - 0.1%
Acetex Corp. yankee
9 3/4%, 10/1/03 B1 750,000 772,500
General Chemical Corp.
9 1/4%, 8/15/03 B2 1,320,000 1,366,200
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
Huntsman Corp.
9 1/2%, 7/1/07 (e) B2 $ 2,100,000 $ 2,205,000
Sterling Chemicals, Inc.
11 1/4%, 4/1/07 B3 1,800,000 1,800,000
6,143,700
PACKAGING & CONTAINERS - 0.1%
BWAY Corp. 10 1/4%,
4/15/07 (e) B2 1,120,000 1,222,200
U.S. Can Corp.
10 1/8%, 10/15/06 B2 590,000 619,500
1,841,700
PAPER & FOREST PRODUCTS - 0.0%
Omega Cabinets Ltd.
10 1/2%, 6/15/07 (e) B3 1,280,000 1,328,000
TOTAL BASIC INDUSTRIES 9,313,400
CONSTRUCTION & REAL ESTATE - 0.1%
BUILDING MATERIALS - 0.1%
Nortek, Inc.:
9 1/4%, 3/15/07 B1 790,000 805,800
9 1/8%, 9/1/07 B1 1,800,000 1,822,500
2,628,300
CONSTRUCTION - 0.0%
U.S. Home Corp.
8.88%, 8/15/07 B1 1,660,000 1,693,200
TOTAL CONSTRUCTION & REAL ESTATE 4,321,500
DURABLES - 0.5%
AUTOS, TIRES, & ACCESSORIES - 0.1%
Aftermarket Technology Corp.
12%, 8/1/04 B3 1,313,000 1,457,430
Blue Bird Body Co.
10 3/4%, 11/15/06 B2 1,545,000 1,660,875
United Auto Group, Inc.
11%, 7/15/07 (e) B3 750,000 742,500
3,860,805
HOME FURNISHINGS - 0.0%
Sealy Mattress Co. 9 7/8%,
12/15/07 (e) B3 100,000 102,500
TEXTILES & APPAREL - 0.4%
Dyersburg Corp., Series B,
9 3/4%, 9/1/07 B2 1,120,000 1,173,200
GFSI, Inc. 9 5/8%, 3/1/07 B3 1,540,000 1,586,200
Levi Strauss & Co.
7%, 11/1/06 (e) Baa2 7,700,000 7,879,949
Nine West Group, Inc.
9%, 8/15/07 (e) Ba3 4,160,000 3,962,400
Pillowtex Corp. 9%,
12/15/07 (e) B2 80,000 82,000
Worldtex, Inc. 9 5/8%,
12/15/07 (e) B1 1,960,000 2,009,000
16,692,749
TOTAL DURABLES 20,656,054
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
ENERGY - 0.4%
COAL - 0.1%
AEI Holding, Inc.
10%, 11/15/07 (e) B2 $ 1,680,000 $ 1,730,400
Anker Coal Group, Inc.
9 3/4%, 10/1/07 (e) B3 2,470,000 2,457,650
4,188,050
ENERGY SERVICES - 0.0%
Newpark Resources, Inc.
8 5/8%, 12/15/07 (e) B2 290,000 294,350
OIL & GAS - 0.3%
Belden & Blake Corp.
9 7/8%, 6/15/07 B3 560,000 565,600
Flores & Rucks, Inc.
9 3/4%, 10/1/06 B3 1,780,000 1,953,550
Occidental Petroleum Corp.:
10.94%, 5/17/00 Baa3 2,700,000 2,978,424
6.39%, 11/9/00 Baa3 1,000,000 1,004,450
8 1/2%, 11/9/01 Baa2 1,251,000 1,346,089
Ocean Energy, Inc.
8 7/8%, 7/15/07 B3 930,000 988,125
Pennzoil Co.
9 5/8%, 11/15/99 Baa3 2,260,000 2,386,311
Petsec Energy, Inc.
9 1/2%, 6/15/07 B3 480,000 492,600
11,715,149
TOTAL ENERGY 16,197,549
FINANCE - 7.5%
ASSET-BACKED SECURITIES - 1.8%
Airplanes Pass Through Trust
Class D 10 7/8%, 3/15/19 Ba2 5,040,000 5,632,200
Caterpillar Financial Asset
Trust 6.55%, 5/22/02 A3 880,000 885,638
CPS Auto Grantor Trust
6.55%, 12/15/02 Aaa 2,863,688 2,875,321
Capita Equipment Receivables
Trust 6.48%, 10/15/06 Baa2 2,950,000 2,922,624
Contimortgage Home Equity
Loan Trust 6.26%, 7/15/12 Aaa 4,790,000 4,792,245
Dayton Hudson Credit Card
Master Trust 6 1/4%,
8/25/05 Aaa 4,800,000 4,803,696
Ford Credit Auto Owner Trust
6.40%, 5/15/02 A1 3,120,000 3,131,856
Green Tree Financial Corp.:
6 1/2%, 6/15/27 Aaa 1,800,000 1,803,366
6.80%, 6/15/27 Aaa 1,900,000 1,916,017
6.45%, 9/15/28 Aaa 3,640,000 3,667,584
6.68%, 1/15/29 AAA 6,680,000 6,753,012
Key Plastics, Inc.
10 1/4%, 3/15/07 A2 3,730,000 3,728,834
MBNA Master Credit Card
Trust II 6.55%, 1/15/07 Aaa 9,440,000 9,616,622
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
Olympic Automobile Receivables
Trust:
6.40%, 9/15/01 Aaa $ 4,550,000 $ 4,530,688
6.70%, 3/15/02 Aaa 2,150,000 2,175,531
Premier Auto Trust:
8.05%, 4/4/00 Aaa 6,444,936 6,502,336
6%, 5/6/00 Aaa 2,320,000 2,318,538
6.34%, 1/6/03 Aaa 7,310,000 7,344,211
WFS Financial Owner Trust
6.55%, 10/20/04 Aaa 4,430,000 4,431,827
79,832,146
BANKS - 1.8%
ABN Amro Bank NV
6 5/8%, 10/31/01 Aa3 7,000,000 7,084,490
Banc One Corp.:
6.70%, 3/24/00 Aa3 4,500,000 4,549,005
6 1/4%, 9/1/00 Aa3 4,770,000 4,775,963
BanPonce Financial Corp.
7.72%, 4/13/00 A3 2,000,000 2,057,260
BanPonce Corp.
6.665%, 3/5/01 A3 4,450,000 4,484,265
Bankers Trust Co. 5.96%,
7/21/98 (g) A1 11,000,000 10,995,599
Capital One Bank:
6.74%, 5/31/99 Baa3 4,000,000 4,039,240
7.20%, 7/19/99 Baa3 8,000,000 8,111,040
6.42%, 11/12/99 Baa3 4,900,000 4,914,994
8 1/8%, 3/1/00 Baa3 1,500,000 1,554,810
Den Danske Bank AS 7.40%,
6/15/10 (e)(g) A1 4,580,000 4,745,155
Morgan Stanley Dean Witter
Discover & Co. 5.68%,
1/15/99 (g) A1 10,500,000 10,500,000
NB Capital Trust IV
8 1/4%, 4/15/27 A1 2,650,000 2,891,839
Provident Bank
6 1/8%, 12/15/00 A3 1,740,000 1,731,874
Signet Banking Corp.
9 5/8%, 6/1/99 A2 790,000 825,131
Summit Bancorp.
8 5/8%, 12/10/02 BBB 1,730,000 1,887,897
Union Planters National Bank
6.81%, 8/20/01 A3 3,500,000 3,552,500
78,701,062
CREDIT & OTHER FINANCE - 3.1%
AT&T Capital Corp.:
6.39%, 1/22/99 Baa3 1,520,000 1,526,536
6.26%, 2/18/99 Baa3 8,000,000 8,021,040
6.41%, 8/13/99 Baa3 7,500,000 7,529,250
6.16%, 12/3/99 Baa3 2,750,000 2,746,865
Advanced Accessory Systems
LLC/AAC Capital Corp.
9 3/4%, 10/1/07 (e) B3 1,110,000 1,093,350
Ahmanson Capital Trust I
8.36%, 12/1/26 (e) Baa3 4,250,000 4,624,765
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
FINANCE - CONTINUED
CREDIT & OTHER FINANCE - CONTINUED
BCH Cayman Islands Ltd.
yankee 7.70%, 7/15/06 A3 $ 950,000 $ 998,745
BanPonce Trust I
8.327%, 2/1/27 (e) Baa1 6,450,000 6,895,695
CIT Group Holdings, Inc.
6 1/4%, 10/4/99 Aa3 6,500,000 6,514,300
Chrysler Financial Corp.
6 3/8%, 1/28/00 A3 7,600,000 7,636,404
Finova Capital Corp.:
6.44%, 11/6/01 Baa1 5,500,000 5,547,520
6.12%, 5/28/02 Baa1 2,000,000 1,990,860
First Security Capital I
8.41%, 12/15/26 A3 1,690,000 1,847,897
Ford Motor Credit Co.:
5.73%, 2/23/00 A1 3,250,000 3,224,228
6.65%, 5/22/00 A1 9,000,000 9,098,370
5.68%, 2/15/01 A1 5,000,000 4,926,850
6.57%, 3/19/01 A1 700,000 707,168
7%, 9/25/01 A1 12,500,000 12,810,625
General Electric Capital Corp.
6.94%, 4/13/09 (h) Aaa 7,000,000 7,072,100
General Motors Acceptance Corp.
6 3/4%, 7/10/02 A3 7,990,000 8,138,614
Greenpoint Capital Trust I
9.10%, 6/1/27 Ba1 1,200,000 1,321,500
Heller Financial, Inc.
7 7/8%, 11/1/99 A2 5,050,000 5,181,805
Household Finance Corp.
5.888%, 6/4/98 (g) - 12,500,000 12,500,000
KeyCorp Institutional Capital
Series A, 7.826%, 12/1/26 A1 3,600,000 3,734,784
Nordstrom Credit, Inc.
7 1/4%, 4/30/02 A2 3,500,000 3,645,495
Unicco Services Co./
Unicco Finance Corp.
9 7/8%, 10/15/07 (e) B3 1,580,000 1,580,000
U.S. West Capital Funding,
Inc. 6.95%, 1/15/37 Baa1 3,730,000 3,842,161
134,756,927
INSURANCE - 0.2%
Reliance Group
9 3/4%, 11/15/03 B1 3,390,000 3,567,975
SunAmerica, Inc.
6.20%, 10/31/99 Baa1 5,500,000 5,501,815
9,069,790
SAVINGS & LOANS - 0.4%
Chevy Chase Savings Bank FSB:
9 1/4%, 12/1/05 B1 850,000 875,500
9 1/4%, 12/1/08 B1 1,560,000 1,606,800
First Nationwide Parent
Holdings Ltd.
12 1/2%, 4/15/03 B3 3,530,000 4,015,375
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
Great West Financial Trust II
8.206%, 2/1/27 A3 $ 3,780,000 $ 4,009,144
Great Western Financial Corp.
8.60%, 2/1/02 A3 2,000,000 2,163,740
Home Savings of America
FSB 6 1/2%, 8/15/04 A3 2,830,000 2,842,820
Long Island Savings Bank FSB
7%, 6/13/02 Baa3 2,500,000 2,537,500
18,050,879
SECURITIES INDUSTRY - 0.2%
Merrill Lynch & Co., Inc.
5.95%, 7/28/98 (g) - 10,500,000 10,500,000
TOTAL FINANCE 330,910,804
HEALTH - 0.5%
DRUGS & PHARMACEUTICALS - 0.0%
ICN Pharmaceuticals, Inc.,
Series B, 9 1/4%, 8/15/05 B1 810,000 858,600
MEDICAL EQUIPMENT & SUPPLIES - 0.2%
Graham-Field Health Products,
Inc. 9 3/4%, 8/15/07 (e) B3 2,440,000 2,562,000
McKesson Corp.
6.60%, 3/1/00 A3 4,570,000 4,616,751
7,178,751
MEDICAL FACILITIES MANAGEMENT - 0.3%
Integrated Health Services,
Inc. (e):
9 1/2%, 9/15/07 B2 2,710,000 2,791,300
9 1/4%, 1/15/08 B2 3,850,000 3,927,000
Tenet Healthcare Corp.
8 5/8%, 1/15/07 Ba3 4,240,000 4,367,200
Vencor, Inc. 8 5/8%, 7/15/07 B1 1,880,000 1,875,300
12,960,800
TOTAL HEALTH 20,998,151
HOLDING COMPANIES - 0.1%
Norfolk Southern Corp.
7.05%, 5/1/37 Baa1 6,610,000 6,986,373
INDUSTRIAL MACHINERY & EQUIPMENT - 0.4%
ELECTRICAL EQUIPMENT - 0.0%
Echostar Communications Corp.
secured discount 0%,
6/1/04 (c) B2 1,290,000 1,180,350
Motors & Gears, Inc. 10 3/4%,
11/15/06 (e) B3 430,000 456,875
1,637,225
INDUSTRIAL MACHINERY & EQUIPMENT - 0.2%
Bucyrus International, Inc.
9 3/4%, 9/15/07 B1 2,200,000 2,216,500
Continental Global Group, Inc.
11%, 4/1/07 B2 730,000 777,450
Exide Corp. 10%, 4/15/05 B1 825,000 866,250
Goss Graphic System, Inc.
12%, 10/15/06 B2 1,890,000 2,135,700
Roller Bearing Holdings, Inc.
0%, 6/15/09 (c)(e) - 3,550,000 2,165,500
8,161,400
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED
POLLUTION CONTROL - 0.2%
Allied Waste North America
10 1/4%, 12/1/06 B2 $ 1,990,000 $ 2,184,025
Envirosource, Inc. 9 3/8%,
6/15/03 (e) B3 870,000 879,788
WMX Technologies, Inc.
7.10%, 8/1/26 Baa1 4,610,000 4,767,478
7,831,291
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 17,629,916
MEDIA & LEISURE - 3.7%
BROADCASTING - 2.6%
ACME Television/ACME
Financial Corp. 0%,
9/30/04 (c)(e) B3 1,740,000 1,281,075
Adelphia Communications Corp.:
9 1/2%, 2/15/04 B3 6,111,175 5,994,696
9 7/8%, 3/1/07 B3 1,350,000 1,427,625
Ascent Entertainment Group, Inc.
0%, 12/15/04 (c)(e) B3 1,560,000 900,900
Cablevision System Corp.:
9 1/4%, 11/1/05 B1 1,370,000 1,452,200
9 7/8%, 5/15/06 B1 1,330,000 1,472,975
7 7/8%, 12/15/07 Ba2 1,610,000 1,636,163
9 7/8%, 2/15/13 B1 340,000 372,300
Capstar Broadcasting
Partners, Inc.:
9 1/4%, 7/1/07 B2 3,360,000 3,456,600
0%, 2/1/09 (c) B3 1,230,000 888,675
Century Communications Corp.
8 3/4%, 10/1/07 Ba3 2,840,000 2,896,800
Chancellor Radio Broadcasting
Company 8 1/8%,
12/15/07 (e) - 4,380,000 4,292,400
Citadel Broadcasting Co.
10 1/4%, 7/1/07 (e) B3 650,000 703,625
Comcast UK Cable Partners Ltd.
0%, 11/15/07 (c) B2 2,420,000 1,954,150
Continental Cablevision, Inc.:
8 5/8%, 8/15/03 Baa3 2,790,000 3,031,670
8.30%, 5/15/06 Baa3 2,605,000 2,843,123
9%, 9/1/08 Baa3 2,630,000 3,038,492
Echostar Satellite Broadcasting
Corp. 0%, 3/15/04 (c) B3 1,030,000 867,775
Fox Kids Worldwide, Inc.
0%, 11/1/07 (c)(e) B1 2,620,000 1,552,350
Fox/Liberty Networks LLC/FLN
Finance, Inc. 0%,
8/15/07 (c)(e) B1 1,710,000 1,094,400
Frontiervision Operating
Partners LP/Frontiervision
Capital Corp.:
11%, 10/15/06 B3 3,460,000 3,818,975
0%, 9/15/07 (c) Caa 3,020,000 2,166,850
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
Granite Broadcasting Corp.:
10 3/8%, 5/15/05 B3 $ 1,460,000 $ 1,529,350
9 3/8%, 12/1/05 B3 2,355,000 2,384,438
Hearst-Argyle Television, Inc.
7 1/2%, 11/15/27 Baa3 5,060,000 5,134,483
Intermedia Capital Partners IV
LP/Intermedia Partners IV
Capital Corp. 11 1/4%,
8/1/06 B2 1,362,000 1,513,523
International Cabletel, Inc.
0%, 2/1/06 (c) B3 1,480,000 1,154,400
Iridium LLC/Iridium Capital
Corp.:
11 1/4%, 7/15/05 (e) B3 1,350,000 1,329,750
14%, 7/15/05 B3 540,000 587,250
Lenfest Communications, Inc.
8 3/8%, 11/1/05 Ba3 2,030,000 2,093,438
NTL, Inc. 10%, 2/15/07 B3 2,480,000 2,610,200
Olympus Communications LP/
Olympus Capital Corp.
10 5/8%, 11/15/06 B1 1,160,000 1,284,700
Orion Network Systems, Inc.:
11 1/4%, 1/15/07 B2 860,000 971,800
0%, 1/15/07 (c) B2 2,050,000 1,522,125
Pegasus Communications Corp.
9 5/8%, 10/15/05 (e) B3 945,000 963,900
Rogers Cablesystems Ltd.
yankee 11%, 12/1/15 B2 1,800,000 2,079,000
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 930,000 1,023,000
Sinclair Broadcast Group, Inc.
8 3/4%, 12/15/07 B2 2,540,000 2,540,000
TCI Communications, Inc.
6.46%, 3/6/00 Ba1 6,570,000 6,550,881
TCI Communications Financing III
9.65%, 3/31/27 Ba3 5,120,000 5,907,200
Tele Communications, Inc.
9 1/4%, 4/15/02 Ba1 3,000,000 3,293,010
Telemundo Group, Inc.
7%, 2/15/06 (h) B1 4,170,000 4,378,500
Telewest PLC 0%, 10/1/07 (c) B1 4,860,000 3,766,500
Time Warner, Inc.:
7.95%, 2/1/00 Ba1 7,810,000 8,050,079
7 3/4%, 6/15/05 Ba1 2,150,000 2,267,691
8.18%, 8/15/07 Ba1 5,250,000 5,722,500
115,801,537
ENTERTAINMENT - 0.4%
AMC Entertainment, Inc.
9 1/2%, 3/15/09 B2 4,080,000 4,233,000
Ameristar Casinos, Inc.
10 1/2%, 8/1/04 B3 1,290,000 1,302,900
Bally Total Fitness Holding Corp.
9 7/8%, 10/15/07 (e) B3 2,910,000 2,953,650
Livent, Inc. 9 3/8%,
10/15/04 (e) B1 2,080,000 2,080,000
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
MEDIA & LEISURE - CONTINUED
ENTERTAINMENT - CONTINUED
Viacom, Inc.:
7 3/4%, 6/1/05 Ba2 $ 3,340,000 $ 3,431,316
8%, 7/7/06 B1 4,180,000 4,195,675
18,196,541
LODGING & GAMING - 0.3%
American Skiing Co.
12%, 7/15/06 B3 2,600,000 2,879,500
Courtyard by Marriott II LP/
Courtyard II Finance Co.,
Series B, 10 3/4%, 2/1/08 B- 1,190,000 1,309,000
HMC Acquisition Properties, Inc.
9%, 12/15/07 Ba3 4,730,000 4,966,500
HMH Properties, Inc.:
9 1/2%, 5/15/05 Ba3 1,620,000 1,723,275
8 7/8%, 7/15/07 Ba3 1,820,000 1,906,450
Sun International Hotels Ltd./
Sun International North
America, Inc. yankee
9%, 3/15/07 Ba3 1,810,000 1,864,300
14,649,025
PUBLISHING - 0.2%
Big Flower Press Holdings, Inc.
8 7/8%, 7/1/07 (e) B2 1,170,000 1,175,850
Garden State Newspapers, Inc.
8 3/4%, 10/1/09 (e) B1 2,620,000 2,629,825
News America Holdings, Inc.
8 1/2%, 2/15/05 Baa3 2,080,000 2,280,949
Sun Media Corp. yankee:
9 1/2%, 2/15/07 B3 900,000 967,500
9 1/2%, 5/15/07 B3 370,000 397,750
7,451,874
RESTAURANTS - 0.2%
Foodmaker, Inc.
9 3/4%, 6/1/02 B2 2,630,000 2,708,900
Host Marriott Travel Plazas,
Inc. 9 1/2%, 5/15/05 Ba3 5,500,000 5,843,750
8,552,650
TOTAL MEDIA & LEISURE 164,651,627
NONDURABLES - 0.6%
AGRICULTURE - 0.0%
Windy Hill Pet Food, Inc.
9 3/4%, 5/15/07 B3 1,140,000 1,185,600
FOODS - 0.2%
Chiquita Brands International,
Inc. 9 5/8%, 1/15/04 B1 1,980,000 2,098,800
ConAgra, Inc.
7 1/8%, 10/1/26 Baa1 4,250,000 4,513,458
6,612,258
HOUSEHOLD PRODUCTS - 0.1%
Playtex Products, Inc.
8 7/8%, 7/15/04 B1 1,470,000 1,488,375
Revlon Consumer Products
Corp. 10 1/2%, 2/15/03 B3 4,120,000 4,336,300
5,824,675
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
TOBACCO - 0.3%
Philip Morris Companies, Inc.:
7 1/4%, 9/15/01 A2 $ 4,600,000 $ 4,712,930
7%, 7/15/05 A2 4,710,000 4,801,186
6.95%, 6/1/06 A2 4,420,000 4,577,617
14,091,733
TOTAL NONDURABLES 27,714,266
RETAIL & WHOLESALE - 1.4%
APPAREL STORES - 0.1%
AnnTaylor, Inc.
8 3/4%, 6/15/00 B3 2,630,000 2,616,850
Lamonts Apparel, Inc.
10 1/4%, 11/1/99
pay-in-kind (e)(i) - 2,816,000 105,600
Specialty Retailers, Inc.
8 1/2%, 7/15/05 Ba3 810,000 826,200
3,548,650
GENERAL MERCHANDISE STORES - 0.8%
Dayton Hudson Corp.:
6.80%, 10/1/01 Baa1 4,000,000 4,060,200
7 1/2%, 7/15/06 Baa1 3,500,000 3,715,985
Federated Department Stores,
Inc.:
10%, 2/15/01 Baa2 8,830,000 9,699,755
8 1/8%, 10/15/02 Baa2 1,510,000 1,610,944
6.79%, 7/15/27 Baa2 3,000,000 3,080,310
K mart Corp.:
12 1/2%, 3/1/05 Ba3 2,020,000 2,469,450
7 3/4%, 10/1/12 Ba3 240,000 233,400
8 1/4%, 1/1/22 Ba3 1,790,000 1,767,625
Parisian, Inc.
9 7/8%, 7/15/03 B1 2,120,000 2,268,400
Penney (J.C.) Co., Inc.
6.95%, 4/1/00 A2 4,300,000 4,369,316
33,275,385
GROCERY STORES - 0.5%
Ameriserve Food Distribution,
Inc. 8 7/8%, 10/15/06 B1 3,290,000 3,322,900
Di Giorgio Corp.
10%, 6/15/07 B3 790,000 776,175
Fleming Companies, Inc.
10 5/8%, 7/31/07 (e) B3 1,830,000 1,930,650
Kroger Co. 8.15%, 7/15/06 Baa3 2,250,000 2,483,258
Mrs. Fields Original
Cookies, Inc. 10 1/8%,
12/1/04 (e) B2 1,420,000 1,427,100
Pathmark Stores, Inc.:
12 5/8%, 6/15/02 Caa 4,080,000 3,335,400
9 5/8%, 5/1/03 Caa 5,060,000 4,661,525
Pueblo Xtra International, Inc.
9 1/2%, 8/1/03 B3 3,100,000 2,931,150
Randalls Food Markets, Inc.
9 3/8%, 7/1/07 (e) B2 2,030,000 2,090,900
22,959,058
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
RETAIL & WHOLESALE, MISCELLANEOUS - 0.0%
J Crew Operating Corp.
10 3/8%, 10/15/07 (e) B3 $ 510,000 $ 443,700
J Crew Group, Inc. 0%,
10/15/08 (c)(e) Caa 630,000 274,050
717,750
TOTAL RETAIL & WHOLESALE 60,500,843
SERVICES - 0.4%
LEASING & RENTAL - 0.3%
PHH Corp. 5.99%, 6/11/98 (g) - 12,500,000 12,498,745
PRINTING - 0.0%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 1,410,000 1,424,100
SERVICES - 0.1%
Borg-Warner Security Corp.
9 5/8%, 3/15/07 B3 960,000 1,003,200
Iron Mountain, Inc.
8 3/4%, 9/30/09 (e) B3 1,530,000 1,560,600
2,563,800
TOTAL SERVICES 16,486,645
TECHNOLOGY - 0.4%
COMPUTER SERVICES & SOFTWARE - 0.1%
Federal Data Corp.
10 1/8%, 8/1/05 (e) B3 2,690,000 2,716,900
COMPUTERS & OFFICE EQUIPMENT - 0.2%
Comdisco, Inc.
6 3/8%, 11/30/01 Baa1 8,300,000 8,300,000
ELECTRONICS - 0.1%
Advanced Micro Devices, Inc.
11%, 8/1/03 Ba1 1,750,000 1,872,500
Communications Instruments,
Inc. 10%, 9/15/04 (e) B3 230,000 234,600
Fairchild Semiconductor Corp.:
10 1/8%, 3/15/07 B2 1,340,000 1,417,050
11.74%, 3/15/08
pay-in-kind (f) - 1,866,427 1,829,304 5,353,454
TOTAL TECHNOLOGY 16,370,354
TRANSPORTATION - 0.3%
AIR TRANSPORTATION - 0.3%
Delta Air Lines, Inc.
9 7/8%, 5/15/00 Baa3 1,500,000 1,616,130
Kitty Hawk, Inc.
9.95%, 11/15/04 (e) B1 2,455,000 2,528,650
US Air, Inc.:
9 5/8%, 2/1/01 B3 1,810,000 1,882,400
10%, 7/1/03 B3 2,200,000 2,288,000
10 3/8%, 3/1/13 B1 3,340,000 3,715,750
12,030,930
RAILROADS - 0.0%
Burlington Corp. 7.29%,
6/1/36 Baa2 3,000,000 3,213,570
TOTAL TRANSPORTATION 15,244,500
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
UTILITIES - 2.2%
CELLULAR - 0.4%
Clearnet Communications, Inc.
yankee 0%, 12/15/05 (c) B3 $ 2,440,000 $ 1,927,600
Globalstar LP/Globalstar
Capital C Corp.
11 3/8%, 2/15/04 B3 550,000 555,500
McCaw International Ltd.
0%, 4/15/07 (c) CCC 4,850,000 2,813,000
Millicom International Cellular
SA 0%, 6/1/06 (c) B3 2,250,000 1,642,500
Nextel Communications,
Inc. (c)(e):
0%, 9/15/07 B3 881,000 557,233
0%, 10/31/07 B3 8,840,000 5,359,250
Paging Network, Inc.
8.875%, 2/1/06 B2 670,000 658,275
Rogers Communications, Inc.
8 7/8%, 7/15/07 B2 2,520,000 2,520,000
360 Degrees Communications
Co. 7 1/8%, 3/1/03 Ba1 2,770,000 2,828,890
18,862,248
ELECTRIC UTILITY - 0.7%
AES Corp. 8 3/8%, 8/15/07 Ba1 1,235,000 1,231,913
Avon Energy Partners Holdings
6.73%, 12/11/02 (e) Baa2 4,910,000 4,943,879
CalEnergy, Inc.
9 1/2%, 9/15/06 Ba1 900,000 970,875
Calpine Corp. 8 3/4%,
7/15/07 (e) Ba3 3,100,000 3,162,000
Hydro-Quebec yankee
7.40%, 3/28/25 A2 2,620,000 3,185,527
Israel Electric Corp. Ltd. (e):
yankee 7 7/8%, 12/15/26 A3 1,960,000 2,044,770
7 3/4%, 12/15/27 A3 5,450,000 5,488,259
Long Island Lighting Co.
8 5/8%, 4/15/04 Ba1 6,130,000 6,350,374
NIPSCO Capital Markets, Inc.
7.39%, 4/1/04 Baa1 3,500,000 3,649,013
31,026,610
TELEPHONE SERVICES - 1.1%
Brooks Fiber Properties, Inc.
0%, 11/1/06 (c) - 5,220,000 4,176,000
GCI, Inc. 9 3/4%, 8/1/07 B2 440,000 457,600
Hyperion Telecommunications,
Inc.:
Series B, 0%, 4/15/03 (c) B 2,300,000 1,667,500
12 1/4%, 9/1/04 B 2,460,000 2,699,850
ICG Holdings, Inc. (c):
0%, 9/15/05 - 1,820,000 1,478,750
0%, 5/1/06 - 940,000 707,350
McLeodUSA, Inc.
9 1/4%, 7/15/07 (e) B3 1,330,000 1,386,525
NEXTLINK Communications, Inc.
9 5/8%, 10/1/07 B3 4,440,000 4,573,200
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
UTILITIES - CONTINUED
TELEPHONE SERVICES - CONTINUED
Netia Holdings BV 0%,
11/1/07 (c)(e) B3 $ 2,420,000 $ 1,379,400
Qwest Communications
International, Inc. 0%,
10/15/07 (c)(e) B2 6,560,000 4,460,800
Teleport Communications
Group, Inc. 0%, 7/1/07 (c) B1 3,050,000 2,501,000
Transtel SA 12 1/2%,
11/1/07 (e) B2 1,240,000 1,174,900
Winstar Equipment
12 1/2%, 3/15/04 B3 3,460,000 3,883,850
WorldCom, Inc.:
9 3/8%, 1/15/04 Ba1 3,708,000 3,925,919
8 7/8%, 1/15/06 Ba1 3,139,000 3,377,313
7 3/4%, 4/1/07 Ba1 7,540,000 8,097,131
45,947,088
TOTAL UTILITIES 95,835,946
TOTAL NONCONVERTIBLE BONDS
(Cost $798,223,075) 835,511,218
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS - 5.4%
U.S. TREASURY OBLIGATIONS - 3.5%
6 7/8%, 3/31/00 Aaa 3,580,000 3,668,390
11 7/8%, 11/15/03 Aaa 19,540,000 25,417,241
7%, 7/15/06 Aaa 4,017,000 4,335,829
11 3/4%, 2/15/10 (callable) Aaa 26,045,000 34,839,355
12 3/4%, 11/15/10 (callable)Aaa 12,000,000 17,128,080
13 7/8%, 5/15/11 (callable) Aaa 25,650,000 39,032,118
9%, 11/15/18 Aaa 8,240,000 11,131,746
7 1/4%, 2/15/23 Aaa 7,316,000 8,351,653
7 5/8%, 2/15/25 Aaa 6,390,000 7,754,840
6 1/2%, 11/15/26 Aaa 3,055,000 3,261,213
6 3/8%, 8/15/27 Aaa 1,350,000 1,423,832
156,344,297
U.S. GOVERNMENT AGENCY OBLIGATIONS - 1.9%
Farm Credit Systems Financial
Assistance Corp. 8.80%,
6/10/05 Aaa 2,000,000 2,326,240
Federal Agricultural Mortgage
Corp. 7.63%, 1/16/01 Aaa 3,321,000 3,482,899
Federal Farm Credit Bank:
8.16%, 12/7/04 Aaa 5,000,000 5,588,300
9.55%, 5/9/05 Aaa 2,500,000 3,014,450
Federal Home Loan Bank:
7.31%, 6/16/04 Aaa 2,500,000 2,675,400
8.22%, 11/17/04 Aaa 4,000,000 4,468,480
7.59%, 3/10/05 Aaa 3,850,000 4,192,881
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
Freddie Mac 6 3/4%, 8/1/05 Aaa $ 2,500,000 $ 2,605,850
Fannie Mae 6.97%, 4/8/04 Aaa 6,010,000 6,334,901
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 7,288,986 7,568,871
State of Israel (guaranteed by U.S.
Government through Agency
for International Development):
6 5/8%, 8/15/03 Aaa 7,810,000 8,079,445
5 5/8%, 9/15/03 Aaa 8,540,000 8,434,360
6 3/4%, 8/15/04 Aaa 2,144,000 2,237,243
U.S. Trade Trust Certificates
(assets of Trust guaranteed by
U.S. government through
Export-Import Bank) 6.69%,
1/15/09 (e) Aaa 5,599,795 5,747,691
U.S. Department of Housing and
Urban Development government
guaranteed participation
certificates:
Series 1995-A,
8.24%, 8/1/04 Aaa 3,260,000 3,639,660
Series 1996-A,
6.67%, 8/1/01 Aaa 9,400,000 9,592,324
Series 1996-A, 7.63%,
8/1/14 (callable) Aaa 2,825,000 3,014,388
83,003,383
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $237,063,894) 239,347,680
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 5.7%
FREDDIE MAC - 0.4%
5 1/2%, 1/1/03 to 8/1/01 Aaa 3,890,579 3,786,602
7%, 4/1/01 to 8/1/01 Aaa 2,552,505 2,585,150
7 1/2%, 6/1/25 to 12/1/27 Aaa 8,613,005 8,821,155
8 1/2%, 7/1/21 to 6/1/23 Aaa 233,268 245,612
15,438,519
FANNIE MAE - 4.8%
5 1/2%, 2/1/03 to 5/1/03 Aaa 3,713,104 3,624,398
6%, 10/1/02 to 5/1/26 Aaa 62,531,858 61,261,698
6 1/2%, 12/1/25 to 7/1/26 Aaa 84,250,411 83,636,017
7%, 1/1/28 Aaa 38,080,000 38,365,600
7 1/2%, 2/1/27 to 10/1/27 Aaa 24,815,552 25,397,813
212,285,526
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 0.5%
6%, 12/15/08 to 6/15/09 Aaa $ 3,676,577 $ 3,655,489
6 1/2%, 6/15/08 to 7/15/09 Aaa 18,387,291 18,569,889
8%, 5/15/25 Aaa 200,685 208,085
8 1/2%, 12/15/16 Aaa 120,441 128,720
22,562,183
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $258,652,237) 250,286,228
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.0%
PRIVATE SPONSOR - 0.0%
Credit-Based Asset Servicing
and Securitization LLC
Series 1997-2 Class 2B,
7.289%, 12/29/25 (e)(g)(i)
(Cost $797,344) Ba3 1,500,000 772,969
COMMERCIAL MORTGAGE SECURITIES - 1.7%
American Southwest Financial
Securities Series 1994-C2
Class B2, 11.425%,
12/25/01 (e)(g) - 750,000 762,422
Blackrock Capital Funding LLC
Series 1996 Class C2,
7.588%, 11/16/26 (e)(g) AAA 712,200 714,871
BKB Commercial Mortgage Trust
Series 1997-C1 Class D,
7.83%, 2/25/43 (e)(g) BBB 1,800,000 1,828,898
Berkeley Federal Bank & Trust
FSB Series 1994 Class 1B,
7.692%, 8/1/24 (e)(g) - 1,900,000 1,443,406
CS First Boston Mortgage
Securities Corp.:
Series 1995-AEWI
Class E, 9.656%,
11/25/27 (e)(g) - 550,000 556,359
Series 1997-C2 Class D
7.27%, 4/17/11 Baa2 5,300,000 5,311,594
DLJ Mortgage Acceptance
Corp. Series 1993-MF12
Class B-2, 10.10%,
9/18/03 (e) - 600,000 610,169
Equitable Life Assurance Society
of the United States (The) (e):
Series 1996-1 Class C1,
7.52%, 5/15/06 A2 2,300,000 2,442,784
Series 174, Class D1
7.77%, 5/15/06 Baa2 2,200,000 2,350,788
Series 174 Class B1, 7.33%,
5/15/06 Aa2 3,500,000 3,701,250
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
Franchise Mortgage Acceptance
Company LLC Loan Receivables
Trust (e)(g):
Series 1997-A Class E,
8.104%, 4/15/19 - $ 500,000 $ 471,094
Series 1997-B Class E,
7.89%, 9/15/19 - 500,000 434,844
First Chicago/Lennar Trust I
Series 1997-CHL1 (g):
Class D, 8.116%, 5/29/08 - 1,100,000 1,095,531
Class E, 8.116%, 2/28/11 - 1,600,000 1,365,000
First Union-Lehman Brothers
Commercial Mortgage Trust
sequential pay Series
1997-C2 Class B,
6.79%, 10/18/11 Aa2 11,350,000 11,461,727
General Motors Acceptance
Corp. Commercial Mortgage
Securities, Inc.:
Series 1996-C1 Class F,
7.86%, 11/15/06 (e) Ba3 750,000 720,240
Series 1997-C2 Class D,
7.192%, 1/15/08 Baa1 1,470,000 1,477,335
Series 1997-C2 Class E,
7.624%, 4/15/11 Baa3 3,120,000 3,103,901
GS Mortgage Securities Corp. II
Series 1997-GL Class A2-B,
6.86%, 7/13/30 Aaa 4,640,000 4,765,605
Kidder Peabody Acceptance
Corp. sequential pay,
Series 1993-M1 Class A2,
7.15%, 4/25/25 Aa2 1,765,346 1,772,517
Morgan Stanley Capital One, Inc.:
Series 1996-MBL1 Class E,
8.565%, 5/25/21 (e)(g) - 1,826,056 1,717,812
Series 1997-C1 Class A-1C,
7.63%, 2/15/20 Aaa 4,560,000 4,833,600
NB Commercial Mortgage
sequential pay, Series FSI
Class A, 7.187%,
10/20/23 (e) - 926,652 927,520
Penn Mutual Life Insurance Co.
(The) Series 1996-PML (e):
Class K, 7.90%, 11/15/26 - 1,473,000 1,085,395
Class L, 7.90%, 11/15/26 - 1,133,000 546,899
Resolution Trust Corp.
Series 1991-M2 Class A3,
7.542%, 9/25/20 (g) Ba3 454,838 391,160
Structured Asset Securities Corp.:
Series 1993-C1 Class E,
6.60%, 10/25/24 (e) B 1,250,000 500,000
Series 1995-C1 Class E,
7 3/8%, 9/25/24 (e) BB 1,200,000 1,144,875
sequential pay Series 1996
Class A-2A, 7 3/4%,
2/25/28 AAA 1,483,722 1,500,471
COMMERCIAL MORTGAGE SECURITIES - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
Structured Asset Securities Corp.: - continued
Series 1996-CFL Class E,
7 3/4%, 2/25/28 BB+ $ 2,390,000 $ 2,449,003
Series 1996-CFL Class G,
7 3/4%, 2/25/28 (e) - 1,000,000 919,375
Thirteen Affiliates of General
Growth Properties, Inc. (e):
Series A2, 6.602%,
11/15/07 Aaa 3,830,000 3,839,920
Series D2, 6.992%,
11/15/12 Baa2 4,120,000 4,177,762
Series E2, 7.224%,
11/15/12 Baa3 2,450,000 2,466,538
Wells Fargo Capital Markets
Apartment Financing Trust
6.56%, 12/29/05 (e) Aaa 2,676,825 2,706,940
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $73,587,968) 75,597,605
FOREIGN GOVERNMENT OBLIGATIONS (J) - 0.4%
Export Development Corp.
yankee 8 1/8%, 8/10/99 Aa2 1,640,000 1,691,086
Israeli State euro
6 3/8%, 12/19/01 A3 3,350,000 3,333,250
Manitoba Province yankee
6 3/8%, 10/15/99 A1 7,000,000 7,038,640
Mexico Value recovery rights
6/30/03 discount A - 2,000 -
Newfoundland Province yankee
11 5/8%, 10/15/07 Baa1 2,000,000 2,742,580
Quebec Province yankee
7.22%, 7/22/36 (h) A2 2,800,000 3,091,200
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $17,429,170) 17,896,756
SUPRANATIONAL OBLIGATIONS - 0.1%
Inter American Development Bank
yankee 6.29%, 7/16/27
(Cost $4,720,123) Aaa 4,750,000 4,934,300
BANK NOTES - 0.5%
Key Bank N.A.
5.836%, 8/20/99 (g) 10,500,000 10,489,920
Morgan Guaranty Trust Co.
6.155%, 3/30/98 (g) 11,000,000 10,997,909
TOTAL BANK NOTES
(Cost $21,480,400) 21,487,829
CERTIFICATES OF DEPOSIT - 2.4%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
Australia & New Zealand Banking
Group Ltd. yankee
5.825%, 7/28/98 $ 5,000,000 $ 4,999,938
Banque Nationale de Paris
yankee 5 3/4%, 7/31/98 5,500,000 5,495,915
Barclays Bank PLC yankee
5.80%, 3/2/98 8,500,000 8,501,463
Bayerische Vereinsbank AG
yankee 5.695%, 3/17/98 10,000,000 9,999,118
Canadian Imperial Bank of
Commerce:
5.91%, 8/28/98 10,000,000 9,996,147
yankee 6.20%, 8/1/00 5,730,000 5,738,595
Chase Manhattan Bank
5 3/4%, 2/9/98 5,500,000 5,499,827
Deutsche Bank AG yankee:
6.20%, 4/10/98 6,000,000 6,003,935
5.94%, 10/26/98 10,000,000 9,998,286
Landesbank Hessen-Thuringen
yankee:
5.78%, 1/27/98 6,200,000 6,198,937
5.67%, 2/11/98 3,000,000 2,998,925
PNC Bank 5.6075%,
2/2/98 (g) 5,000,000 4,964,887
Rabobank Nederland Coop
Central yankee:
5.97%, 3/20/98 3,500,000 3,500,236
6.20%, 4/10/98 5,000,000 5,003,279
Societe Generale France
yankee 5.91%, 10/15/98 7,000,000 6,996,005
Westdeutsche Landesbank
yankee 5.83%, 8/3/98 9,000,000 8,991,482
Westpac Banking Corp.
yankee 5.885%, 8/27/98 2,000,000 1,998,761
TOTAL CERTIFICATES OF DEPOSIT
(Cost $106,898,216) 106,885,736
COMMERCIAL PAPER - 1.0%
Bear Stearns Cos., Inc.
5.56%, 1/12/98 4,600,000 4,592,167
Citibank Credit Card Master Trust I
(Dakota Certificate program)
5.80%, 2/24/98 8,300,000 8,229,127
General Motors Acceptance
Corp. 5.77%, 2/11/98 11,800,000 11,723,562
Goldman Sachs Group LP
5.83%, 1/26/98 5,000,000 4,980,233
GTE Corp. 6.02%, 2/24/98 11,800,000 11,698,546
TOTAL COMMERCIAL PAPER
(Cost $41,222,358) 41,223,635
MASTER NOTES - 0.4%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
Corestates Bank NA
5.66%, 1/30/98 (g) $ 6,000,000 $ 5,999,939
First Bank National Association
5.87%, 5/15/98 (g) 5,800,000 5,796,346
Goldman Sachs Group LP (The)
5.75%, 5/4/98 (f)(g) 6,700,000 6,699,263
TOTAL MASTER NOTES
(Cost $23,493,963) 18,495,548
CASH EQUIVALENTS - 6.3%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations), in a joint
trading account at 6.84% dated
12/31/97 due 1/2/98 $ 11,406,333 11,402,000
SHARES
Taxable Central Cash Fund (b) 265,348,211 265,348,211
TOTAL CASH EQUIVALENTS
(Cost $276,750,211) 276,750,211
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $3,997,216,515) $ 4,418,136,479
LEGEND
1. Non-income producing
2. At period end, the seven-day yield of the Taxable Central Cash Fund
was 5.69%. The yield refers to the income earned by investing in the
fund over the seven-day period, expressed as an annual percentage.
3. Debt obligation initially issued in zero coupon form which converts
to coupon form at a specified rate and date. The rate shown is the
rate at period end.
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 $172,386,807 or
3.9% 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 $ 1,541,077
9/15/97 $ 106,427
Goldman Sachs Group LP (The)
5.75%, 5/4/98 8/5/97 $ 6,700,000
7. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
8. Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date. The rate shown is the rate at
period end.
9. Non-income producing - issuer filed for protection under the
Federal Bankruptcy Code or is in default of interest payment.
10. 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 $3,823,522,395 and $3,745,273,290, respectively, of which
U.S. government and government agency obligations aggregated
$772,490,801 and $1,280,593,277, 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 $539,413 for the
period (see Note 4 of Notes to Financial Statements).
The composition of long-term debt holdings as a percentage of total
value of investment in securities, is as follows (ratings are
unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 17.4% AAA, AA, A 16.9%
Baa 4.4% BBB 5.3%
Ba 2.5% BB 1.6%
B 5.2% B 4.9%
Caa 0.3% CCC 0.6%
Ca, C 0.0% CC, C 0.0%
D 0.0%
For some foreign government obligations, FMR has assigned the ratings
of the sovereign credit of the issuing government. The percentage not
rated by Moody's or S&P amounted to 1.1%. FMR has determined that
unrated debt securities that are lower quality account for 1.0% of the
total value of investment in securities.
INCOME TAX INFORMATION
At December 31, 1997, the aggregate cost of investment securities for
income tax purposes was $3,998,564,924. Net unrealized appreciation
aggregated $419,571,555, of which $491,902,520 related to appreciated
investment securities and $72,330,965 related to depreciated
investment securities.
The fund hereby designates approximately $285,641,000 as a capital
gain dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
INVESTMENT IN SECURITIES, AT VALUE (INCLUDING REPURCHASE AGREEMENTS OF $11,402,000)
(COST $3,997,216,515) - $ 4,418,136,479
SEE ACCOMPANYING SCHEDULE
CASH 525,048
RECEIVABLE FOR INVESTMENTS SOLD 11,698,866
RECEIVABLE FOR FUND SHARES SOLD 7,469,532
DIVIDENDS RECEIVABLE 4,376,743
INTEREST RECEIVABLE 25,005,795
OTHER RECEIVABLES 116,994
TOTAL ASSETS 4,467,329,457
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 61,426,889
PAYABLE FOR FUND SHARES REDEEMED 3,614,252
ACCRUED MANAGEMENT FEE 1,973,892
DISTRIBUTION FEES PAYABLE 1
OTHER PAYABLES AND 366,850
ACCRUED EXPENSES
TOTAL LIABILITIES 67,381,884
NET ASSETS $ 4,399,947,573
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 3,423,257,690
UNDISTRIBUTED NET INVESTMENT INCOME 137,705,425
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS 418,070,024
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 420,914,434
AND ASSETS AND LIABILITIES IN
FOREIGN CURRENCIES
NET ASSETS $ 4,399,947,573
</TABLE>
INITIAL CLASS: $18.01
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($4,399,937,352 (DIVIDED BY) 244,269,732
SHARES)
SERVICE CLASS: $17.99
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($10,221 (DIVIDED BY) 568 SHARES)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME $ 41,933,420
DIVIDENDS
INTEREST 121,750,422
TOTAL INCOME 163,683,842
EXPENSES
MANAGEMENT FEE $ 22,002,088
TRANSFER AGENT FEES 2,712,765
DISTRIBUTION FEES - SERVICE CLASS 2
ACCOUNTING FEES AND EXPENSES 809,468
NON-INTERESTED TRUSTEES' COMPENSATION 19,680
CUSTODIAN FEES AND EXPENSES 184,740
REGISTRATION FEES 8,446
AUDIT 154,951
LEGAL 24,813
MISCELLANEOUS 179,975
TOTAL EXPENSES BEFORE REDUCTIONS 26,096,928
EXPENSE REDUCTIONS (306,423 25,790,505
)
NET INVESTMENT INCOME 137,893,337
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 422,313,957
FOREIGN CURRENCY TRANSACTIONS (26,433 422,287,524
)
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 189,542,068
ASSETS AND LIABILITIES IN (6,167 189,535,901
FOREIGN CURRENCIES )
NET GAIN (LOSS) 611,823,425
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 749,716,762
OTHER INFORMATION $ 291,902
EXPENSE REDUCTIONS
DIRECTED BROKERAGE ARRANGEMENTS
CUSTODIAN CREDITS 14,521
$ 306,423
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
OPERATIONS $ 137,893,337 $ 123,680,897
NET
INVESTMENT
INCOME
NET REALIZED 422,287,524 331,183,089
GAIN (LOSS)
CHANGE IN NET 189,535,901 15,746,586
UNREALIZED
APPRECIATION
(DEPRECIATION)
NET INCREASE 749,716,762 470,610,572
(DECREASE)
IN NET
ASSETS
RESULTING
FROM
OPERATIONS
DISTRIBUTIONS TO (127,145,659 (119,397,539
SHAREHOLDERS ) )
FROM NET
INVESTMENT
INCOME
FROM NET (317,186,364 (98,450,602
REALIZED GAIN ) )
TOTAL (444,332,023 (217,848,141
DISTRIBUTIONS ) )
SHARE 453,368,657 55,587,437
TRANSACTIONS
- - NET
INCREASE
(DECREASE)
TOTAL 758,753,396 308,349,868
INCREASE
(DECREASE) IN
NET ASSETS
NET ASSETS
BEGINNING OF 3,641,194,177 3,332,844,309
PERIOD
END OF PERIOD $ 4,399,947,573 $ 3,641,194,177
(INCLUDING
UNDISTRIBUTE
D NET
INVESTMENT
INCOME OF
$137,705,42
5 AND
$120,488,85
1,
RESPECTIVELY
)
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
SHARES DOLLARS SHARES DOLLARS
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SHARE TRANSACTIONS 22,516,597 $ 378,800,337 17,138,645 $ 270,086,820
INITIAL CLASS
SOLD
REINVESTED 28,796,632 444,332,023 14,427,029 217,848,141
REDEEMED (22,110,811) (369,773,703) (27,544,207) (432,347,524)
NET INCREASE 29,202,418 $ 453,358,657 4,021,467 $ 55,587,437
(DECREASE)
SERVICE CLASS A 568 $ 10,000 - $ -
SOLD
REINVESTMENT - - - -
REDEEMED - - - -
NET INCREASE 568 $ 10,000 - $ -
(DECREASE)
DISTRIBUTIONS $ 127,145,659 $ 119,397,539
INITIAL CLASS - NET
INVESTMENT INCOME
INITIAL CLASS - NET 317,186,364 98,450,602
REALIZED GAIN
TOTAL $ 444,332,023 $ 217,848,141
SERVICE CLASS - NET $ - $ -
INVESTMENT INCOME
SERVICE CLASS - NET - -
REALIZED GAIN
TOTAL $ - $ -
$ 444,332,023 $ 217,848,141
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
A SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
FINANCIAL HIGHLIGHTS - INITIAL CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1997 1996 1995 1994 1993
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, $ 16.93 $ 15.79 $ 13.79 $ 15.42 $ 13.32
BEGINNING OF PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET INVESTMENT .57 D .63 .30 .45 .33
INCOME
NET REALIZED AND 2.58 1.55 1.99 (1.33) 2.39
UNREALIZED GAIN (LOSS)
TOTAL FROM 3.15 2.18 2.29 (.88) 2.72
INVESTMENT
OPERATIONS
LESS DISTRIBUTIONS
FROM NET INVESTMENT (.59) (.57) (.29) (.29) (.33)
INCOME
IN EXCESS OF NET - - - - (.04)
INVESTMENT INCOME
FROM NET REALIZED (1.48) (.47) - (.46) (.25)
GAIN
TOTAL DISTRIBUTIONS (2.07) (1.04) (.29) (.75) (.62)
NET ASSET VALUE, END OF $ 18.01 $ 16.93 $ 15.79 $ 13.79 $ 15.42
PERIOD
TOTAL RETURN B, C 20.65% 14.60% 16.96% (6.09)% 21.23%
RATIOS AND
SUPPLEMENTAL DATA
NET ASSETS, END OF $ 4,399,937 $ 3,641,194 $ 3,332,844 $ 3,290,527 $ 2,422,692
PERIOD (000 OMITTED)
RATIO OF EXPENSES TO .65% .74% .81% .81% .88%
AVERAGE NET ASSETS
RATIO OF EXPENSES TO .64% F .73% .79% .80% .88%
AVERAGE NET ASSETS F F F
AFTER EXPENSE
REDUCTIONS
RATIO OF NET INVESTMENT 3.43% 3.60% 3.54% 4.07% 3.64%
INCOME TO AVERAGE
NET ASSETS
PORTFOLIO TURNOVER RATE 101% 168% 256% 85% 113%
AVERAGE COMMISSION $ .0408 $ .0163
RATE G
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEAR ENDED
DECEMBER 31,
SELECTED PER-SHARE DATA 1997 E
NET ASSET VALUE, $ 17.60
BEGINNING OF
PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET INVESTMENT .10 D
INCOME
NET REALIZED AND .29
UNREALIZED GAIN
(LOSS)
TOTAL FROM .39
INVESTMENT
OPERATIONS
NET ASSET VALUE, END $ 17.99
OF PERIOD
TOTAL RETURN B 2.22%
RATIOS AND
SUPPLEMENTAL
DATA
NET ASSETS, END OF $ 10
PERIOD (000
OMITTED)
RATIO OF EXPENSES .75%
TO AVERAGE NET A
ASSETS
RATIO OF NET 3.52%
INVESTMENT A
INCOME TO
AVERAGE NET ASSETS
PORTFOLIO TURNOVER 101%
AVERAGE $ .0408
COMMISSION
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 6 OF
NOTES TO FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER SHARE
HAS BEEN CALCULATED BASED ON
AVERAGE SHARES OUTSTANDING
DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3,
1997 (COMMENCEMENT OF SALE OF
SERVICE CLASS SHARES) TO
DECEMBER 31, 1997.
F FMR OR THE FUND HAS ENTERED
INTO VARYING ARRANGEMENTS WITH
THIRD PARTIES WHO EITHER PAID OR
REDUCED A PORTION OF THE CLASS'
EXPENSES (SEE NOTE 6 OF NOTES TO
FINANCIAL STATEMENTS).
G FOR FISCAL YEARS BEGINNING ON OR
AFTER SEPTEMBER 1, 1995, A FUND
IS REQUIRED TO DISCLOSE ITS
AVERAGE COMMISSION RATE PER
SHARE FOR SECURITY TRADES ON
WHICH COMMISSIONS ARE CHARGED.
THIS AMOUNT MAY VARY FROM
PERIOD TO PERIOD AND FUND TO
FUND DEPENDING ON THE MIX OF
TRADES EXECUTED IN VARIOUS
MARKETS WHERE TRADING PRACTICES
AND COMMISSION RATE STRUCTURES
MAY DIFFER.
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
DECEMBER 31, 1997 YEAR FUND
VIP III: BALANCED - "INITIAL CLASS" 22.18% 15.28%
S&P 500 (REGISTERED TRADEMARK) 33.36% 31.22%
LB AGGREGATE BOND 9.65% 10.49%
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.
If Fidelity had not reimbursed certain fund expenses, the life of fund
total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
UNDERSTANDING PERFORMANCE
HOW A FUND DID YESTERDAY IS NO GUARANTEE OF HOW IT
WILL DO TOMORROW. THE STOCK MARKET, FOR EXAMPLE, HAS A
HISTORY OF LONG-TERM GROWTH AND SHORT-TERM VOLATILITY. IN
TURN, THE SHARE PRICE AND RETURN OF A FUND THAT INVESTS
IN STOCKS WILL VARY. THAT MEANS IF YOU SELL YOUR SHARES
DURING A MARKET DOWNTURN, YOU MIGHT LOSE MONEY.
BUT IF YOU CAN RIDE OUT THE MARKET'S UPS AND DOWNS,
YOU MAY HAVE A GAIN.
3
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19971231 19980121 142220 S00000000000001
VIP III Balanced S&P 500
LB Aggregate Bond
00616 SP001
LB001
1995/01/03 10000.00 10000.00
10000.00
1995/01/31 9990.00 10261.28
10213.55
1995/02/28 10190.00 10661.16
10456.38
1995/03/31 10260.00 10975.77
10520.54
1995/04/30 10390.00 11299.00
10667.49
1995/05/31 10610.00 11750.63
11080.29
1995/06/30 10740.00 12023.59
11161.53
1995/07/31 10880.00 12422.30
11136.60
1995/08/31 10920.00 12453.48
11271.01
1995/09/30 11020.00 12979.01
11380.66
1995/10/31 10890.00 12932.68
11528.66
1995/11/30 11210.00 13500.42
11701.42
1995/12/31 11391.59 13760.44
11865.63
1996/01/31 11473.17 14228.85
11944.43
1996/02/29 11319.47 14360.75
11736.80
1996/03/31 11227.28 14499.04
11655.22
1996/04/30 11258.01 14712.76
11589.67
1996/05/31 11380.93 15092.20
11566.14
1996/06/30 11452.64 15149.70
11721.46
1996/07/31 11227.28 14480.39
11753.54
1996/08/31 11298.98 14785.78
11733.84
1996/09/30 11780.44 15617.92
11938.32
1996/10/31 12098.00 16048.66
12202.78
1996/11/30 12733.12 17261.78
12411.79
1996/12/31 12528.25 16919.83
12296.39
1997/01/31 12927.76 17976.98
12334.04
1997/02/28 13144.66 18117.92
12364.72
1997/03/31 12777.20 17373.45
12227.70
1997/04/30 13260.15 18410.65
12410.75
1997/05/31 13785.10 19531.49
12528.07
1997/06/30 14289.05 20406.50
12676.77
1997/07/31 15086.97 22030.24
13018.62
1997/08/31 14383.54 20796.11
12907.57
1997/09/30 14960.98 21935.11
13097.94
1997/10/31 14646.01 21202.48
13287.95
1997/11/30 15002.98 22183.94
13349.14
1997/12/31 15317.94 22564.84
13483.54
IMATRL PRASUN SHR__CHT 19971231 19980121 142222 R00000000000039
Let's say hypothetically that $10,000 was invested in VIP III:
Balanced Portfolio on January 3, 1995, when the fund started. As the
chart shows, by December 31, 1997, the value of the investment would
have grown to $15,307 - a 53.07% 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 $22,565 - a 125.65% increase. If $10,000
was put in the bond index, it would have grown to $13,484 - a 34.84%
increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
GENERAL ELECTRIC CO. 2.8
CITICORP 2.7
PHILIP MORRIS COMPANIES, INC. 2.7
AMERICAN HOME PRODUCTS CORP. 2.3
BANKAMERICA CORP. 2.3
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
FINANCE 23.8
NONDURABLES 8.7
HEALTH 8.3
INDUSTRIAL MACHINERY & EQUIPMENT 5.5
ENERGY 5.5
ASSET ALLOCATION AS OF DECEMBER 31, 1997*
ROW: 1, COL: 1, VALUE: 11.4
ROW: 1, COL: 2, VALUE: 30.7
ROW: 1, COL: 3, VALUE: 57.9
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 57.9%
BONDS 30.5%
SHORT-TERM INVESTMENTS 11.6%
FOREIGN INVESTMENTS 7.1%
*
% OF FUND'S INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1fee.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
DECEMBER 31, 1997 YEAR FUND
VIP III: BALANCED - SERVICE CLASS 22.27% 15.30%
S&P 500 (REGISTERED TRADEMARK) 33.36% 31.22%
LB AGGREGATE BOND 9.65% 10.49%
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.
If Fidelity had not reimbursed certain fund expenses, the life of fund
total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
UNDERSTANDING PERFORMANCE
HOW A FUND DID YESTERDAY IS NO GUARANTEE OF HOW IT
WILL DO TOMORROW. THE STOCK MARKET, FOR EXAMPLE, HAS A
HISTORY OF LONG-TERM GROWTH AND SHORT-TERM VOLATILITY. IN
TURN, THE SHARE PRICE AND RETURN OF A FUND THAT INVESTS
IN STOCKS WILL VARY. THAT MEANS IF YOU SELL YOUR SHARES
DURING A MARKET DOWNTURN, YOU MIGHT LOSE MONEY.
BUT IF YOU CAN RIDE OUT THE MARKET'S UPS AND DOWNS,
YOU MAY HAVE A GAIN.
3
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19971231 19980121 142220 S00000000000001
VIP III Balanced S&P 500
LB Aggregate Bond
00616 SP001
LB001
1995/01/03 10000.00 10000.00
10000.00
1995/01/31 9990.00 10261.28
10213.55
1995/02/28 10190.00 10661.16
10456.38
1995/03/31 10260.00 10975.77
10520.54
1995/04/30 10390.00 11299.00
10667.49
1995/05/31 10610.00 11750.63
11080.29
1995/06/30 10740.00 12023.59
11161.53
1995/07/31 10880.00 12422.30
11136.60
1995/08/31 10920.00 12453.48
11271.01
1995/09/30 11020.00 12979.01
11380.66
1995/10/31 10890.00 12932.68
11528.66
1995/11/30 11210.00 13500.42
11701.42
1995/12/31 11391.59 13760.44
11865.63
1996/01/31 11473.17 14228.85
11944.43
1996/02/29 11319.47 14360.75
11736.80
1996/03/31 11227.28 14499.04
11655.22
1996/04/30 11258.01 14712.76
11589.67
1996/05/31 11380.93 15092.20
11566.14
1996/06/30 11452.64 15149.70
11721.46
1996/07/31 11227.28 14480.39
11753.54
1996/08/31 11298.98 14785.78
11733.84
1996/09/30 11780.44 15617.92
11938.32
1996/10/31 12098.00 16048.66
12202.78
1996/11/30 12733.12 17261.78
12411.79
1996/12/31 12528.25 16919.83
12296.39
1997/01/31 12927.76 17976.98
12334.04
1997/02/28 13144.66 18117.92
12364.72
1997/03/31 12777.20 17373.45
12227.70
1997/04/30 13260.15 18410.65
12410.75
1997/05/31 13785.10 19531.49
12528.07
1997/06/30 14289.05 20406.50
12676.77
1997/07/31 15086.97 22030.24
13018.62
1997/08/31 14383.54 20796.11
12907.57
1997/09/30 14960.98 21935.11
13097.94
1997/10/31 14646.01 21202.48
13287.95
1997/11/30 15002.98 22183.94
13349.14
1997/12/31 15317.94 22564.84
13483.54
IMATRL PRASUN SHR__CHT 19971231 19980121 142222 R00000000000039
Let's say hypothetically that $10,000 was invested in VIP III:
Balanced Portfolio on January 3, 1995, when the fund started. As the
chart shows, by December 31, 1997, the value of the investment would
have grown to $15,318 - a 53.18% 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 $22,565 - a 125.65% increase. If $10,000
was put in the bond index, it would have grown to $13,484 - a 34.84%
increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
GENERAL ELECTRIC CO. 2.8
CITICORP 2.7
PHILIP MORRIS COMPANIES, INC. 2.7
AMERICAN HOME PRODUCTS CORP. 2.3
BANKAMERICA CORP. 2.3
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
FINANCE 23.8
NONDURABLES 8.7
HEALTH 8.3
INDUSTRIAL MACHINERY & EQUIPMENT 5.5
ENERGY 5.5
ASSET ALLOCATION AS OF DECEMBER 31, 1997*
ROW: 1, COL: 1, VALUE: 11.6
ROW: 1, COL: 2, VALUE: 30.5
ROW: 1, COL: 3, VALUE: 57.9
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 57.9%
BONDS 30.5%
SHORT-TERM INVESTMENTS 11.6%
FOREIGN INVESTMENTS 7.1%
*
% OF FUND'S INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
FUND TALK: THE MANAGERS' OVERVIEW
NOTE TO SHAREHOLDERS: The following is an interview with Bettina
Doulton, who managed Balanced Portfolio during the period covered by
this report, with additional comments from John Avery, who became
manager of Balanced Portfolio on January 1, 1998.
Q. HOW DID THE FUND PERFORM COMPARED TO ITS BENCHMARK, BETTINA?
B.D. Given the structure of the fund - a blend of equities and
fixed-income investments - the fund's performance typically falls
between its two benchmark indices, the Standard & Poor's 500 Index and
the Lehman Brothers Aggregate Bond Index. For the 12 months that ended
December 31, 1997, that was indeed the case. The fund trailed the S&P
500, which returned 33.36% during the period, but topped the 9.65%
return of the Lehman Brothers index.
Q. WHAT PRIMARY FACTORS CONTRIBUTED TO PERFORMANCE?
B.D. Stock selection is typically the main performance catalyst, and
this period was no different. Within the equity portion of the fund,
several of the top 25 holdings - including General Electric and
American Express - performed well. On the other hand, disappointments
usually sprout up for two reasons. First, and perhaps most obvious, a
stock can just perform poorly. Waste Management is an example. The
company's new CEO resigned in the midst of an important reorganization
thrust, and the company's accounting practices were scrutinized. As a
result, the stock was a major detractor. Second, the fund can be
negatively affected by not owning a particular stock or by being
underweighted - relative to an index - in an industry group that
performs well. For instance, the fund's limited technology exposure
and an underweighting in telephone and electric utility stocks
relative to the S&P 500 hampered returns. Since the fund considers
yield as part of its objective, technology stocks are not always a
good fit because they focus on growth as a rule and not dividends.
With utilities, ongoing deregulation in the industry and what I felt
were lackluster business prospects concerned me. Unfortunately, as
investors became concerned about global markets, they flocked back to
these "safe havens."
Q. THE GLOBAL VOLATILITY YOU ALLUDED TO CAME ON THE HEELS OF A MAJOR
CURRENCY CRISIS IN SOUTHEAST ASIA. HOW WAS THE FUND AFFECTED AND WHAT
STRATEGIES DID YOU PURSUE?
B.D. I'd say the impact was mixed. The fund owned some pharmaceutical
and multinational companies that performed well through this turmoil,
but also had some individual positions with direct exposure to Asia.
For example, engineering and construction company Fluor was hit
particularly hard. While the Asian market turmoil peaked in late
October, initial signs of unraveling were evident back in June.
Southeast Asia suffered as economies proved unable to support the
region's overbuilt capital base. As a result, currencies weakened
relative to the dollar, causing investors to become concerned that the
stronger dollar would cut into the profits of U.S. multinational
companies. As investors became increasingly concerned about this
volatility later in the period, many began to rotate back to the
large-cap, more reliable stocks. Due to concerns that global economic
growth would be dampened by the Asian crisis, I began to reduce the
fund's economically sensitive positions such as industrials,
chemicals, and energy-related stocks.
Q. HOW WAS THE BOND PORTION OF THE FUND STRUCTURED?
B.D. Short-term corporate bonds were the main focus during the period,
particularly those with less sensitivity to economic swings.
Shorter-term bonds - those in the two- to four-year range - offered
good yield advantages relative to Treasuries. When problems in Asia
took hold in October, Treasuries regained momentum. The fund was also
underweighted in mortgage-backed bonds, which was a prudent strategy.
Many mortgages are now "in the money," or are refinanceable because of
lower rates. This increases prepayment risk - in which the bondholder
prepays principal - and is a negative trend for mortgage-backed bonds.
Q. TURNING TO YOU, JOHN, WHAT'S YOUR OUTLOOK FOR THE COMING MONTHS?
J.A. Bettina and I have very similar investment approaches, so the
transition should be relatively seamless. I'd like to keep the
allocation balance of the fund roughly the same - 60% in equities, 30%
in high-grade bonds and high-yield issues and the remainder in cash.
In terms of the Asian debacle, it's obviously a concern. I don't think
companies have had a chance to assess the impact yet, but I'll be
keeping a close eye on the situation.
FUND FACTS
GOAL: to provide income and growth of capital by
investing in a diversified portfolio of stocks and
bonds
START DATE: January 3, 1995
SIZE: as of December 31, 1997, more than $214
million
MANAGER: John Avery, since January 1998; joined
Fidelity in 1995
3
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
INVESTMENTS DECEMBER 31, 1997
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 57.0%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 2.8%
AEROSPACE & DEFENSE - 2.1%
AlliedSignal, Inc. 45,000 $ 1,752,176
Lockheed Martin Corp. 14,700 1,447,950
Sundstrand Corp. 16,900 851,338
Textron, Inc. 3,400 212,500
United Technologies Corp. 7,300 531,531
4,795,495
DEFENSE ELECTRONICS - 0.5%
Raytheon Company Class B 21,800 1,100,900
SHIP BUILDING & REPAIR - 0.2%
General Dynamics Corp. 5,800 501,338
TOTAL AEROSPACE & DEFENSE 6,397,733
BASIC INDUSTRIES - 1.1%
CHEMICALS & PLASTICS - 0.7%
Air Products & Chemicals, Inc. 8,100 666,225
Monsanto Co. 14,600 613,200
Nalco Chemical Co. 300 11,869
Praxair, Inc. 8,300 373,500
1,664,794
PAPER & FOREST PRODUCTS - 0.4%
Kimberly-Clark Corp. 15,500 764,344
TOTAL BASIC INDUSTRIES 2,429,138
CONSTRUCTION & REAL ESTATE - 0.2%
BUILDING MATERIALS - 0.2%
Masco Corp. 8,600 437,525
DURABLES - 0.5%
AUTOS, TIRES, & ACCESSORIES - 0.0%
Scania AB Class B 100 2,256
CONSUMER DURABLES - 0.5%
Minnesota Mining & Manufacturing Co. 13,400 1,099,638
TOTAL DURABLES 1,101,894
ENERGY - 5.3%
ENERGY SERVICES - 0.2%
Halliburton Co. 7,000 363,563
OIL & GAS - 5.1%
Amoco Corp. 6,700 570,338
British Petroleum PLC:
Ord. 90,479 1,192,513
ADR 22,103 1,761,333
Chevron Corp. 11,200 862,400
Mobil Corp. 6,600 476,438
Royal Dutch Petroleum Co. Ord. 2,000 109,845
Royal Dutch Petroleum Co. 53,000 2,871,938
Texaco, Inc. 48,600 2,642,625
Total SA:
Class B 1,300 141,363
sponsored ADR 2,200 122,100
USX-Marathon Group 28,500 961,875
11,712,768
TOTAL ENERGY 12,076,331
FINANCE - 17.3%
BANKS - 8.9%
Banc One Corp. 22,000 1,194,875
Bank of New York Co., Inc. 13,600 786,250
BankAmerica Corp. 70,400 5,139,200
SHARES VALUE (NOTE 1)
Chase Manhattan Corp. 26,200 $ 2,868,900
Citicorp 49,300 6,233,369
National City Corp. 2,100 138,075
NationsBank Corp. 32,800 1,994,650
U.S. Bancorp 7,800 873,113
Wells Fargo & Co. 3,500 1,188,031
20,416,463
CREDIT & OTHER FINANCE - 2.7%
American Express Co. 48,700 4,346,475
Beneficial Corp. 4,600 382,375
First Chicago NBD Corp. 14,000 1,169,000
Household International, Inc. 2,300 293,394
Transamerica Corp. 900 95,850
6,287,094
FEDERAL SPONSORED CREDIT - 2.6%
Freddie Mac 93,200 3,908,575
Fannie Mae 35,600 2,031,425
5,940,000
INSURANCE - 2.6%
Allstate Corp. 23,000 2,090,125
American International Group, Inc. 1,400 152,250
Hartford Financial Services Group, Inc. 14,100 1,319,231
Progressive Corp. 100 11,988
St. Paul Companies, Inc. (The) 4,500 369,281
Travelers Group, Inc. (The) 36,000 1,939,500
5,882,375
SAVINGS & LOANS - 0.5%
Washington Mutual, Inc. 16,580 1,058,011
TOTAL FINANCE 39,583,943
HEALTH - 8.2%
DRUGS & PHARMACEUTICALS - 7.1%
American Home Products Corp. 68,900 5,270,850
Bristol-Myers Squibb Co. 51,200 4,844,800
Glaxo PLC sponsored ADR 2,400 114,900
Merck & Co., Inc. 13,300 1,413,125
Pfizer, Inc. 7,800 581,588
Schering-Plough Corp. 42,600 2,646,525
SmithKline Beecham PLC ADR 26,900 1,383,669
16,255,457
MEDICAL EQUIPMENT & SUPPLIES - 1.1%
Allegiance Corp. 30,000 1,063,125
Baxter International, Inc. 28,800 1,452,600
2,515,725
TOTAL HEALTH 18,771,182
HOLDING COMPANIES - 0.1%
CINergy Corp. 2,900 111,106
INDUSTRIAL MACHINERY & EQUIPMENT - 4.9%
ELECTRICAL EQUIPMENT - 3.0%
Emerson Electric Co. 1,200 67,725
General Electric Co. 85,800 6,295,575
Honeywell, Inc. 8,000 548,000
6,911,300
INDUSTRIAL MACHINERY & EQUIPMENT - 1.1%
Cooper Industries, Inc. 10,698 524,202
Tyco International Ltd. 43,012 1,938,228
2,462,430
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED
POLLUTION CONTROL - 0.8%
Browning-Ferris Industries, Inc. 43,800 $ 1,620,600
Waste Management, Inc. 7,300 200,750
1,821,350
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 11,195,080
MEDIA & LEISURE - 0.4%
BROADCASTING - 0.1%
CS Wireless Systems, Inc. (a)(c) 8 -
Orion Network Systems, Inc. warrants (a):
1/15/07 50 650
1/15/07 290 3,190
Teletrac Holdings, Inc.
warrants 8/1/07 (a) 40 2,200
Time Warner, Inc. 3,300 204,600
UIH Australia/Pacific, Inc.
warrants 5/15/06 (a) 150 1,800
212,440
ENTERTAINMENT - 0.1%
Cedar Fair LP (depositary unit) 10,000 258,750
PUBLISHING - 0.2%
McGraw-Hill, Inc. 5,300 392,200
TOTAL MEDIA & LEISURE 863,390
NONDURABLES - 8.3%
BEVERAGES - 0.5%
PepsiCo, Inc. 30,000 1,093,125
FOODS - 1.7%
Flowers Industries, Inc. 14,150 290,959
Heinz (H.J.) Co. 24,200 1,229,663
Nabisco Holdings Corp. Class A 18,100 876,719
Quaker Oats Co. 400 21,100
Sara Lee Corp. 27,500 1,548,594
3,967,035
HOUSEHOLD PRODUCTS - 2.6%
Procter & Gamble Co. 26,800 2,138,975
Unilever:
PLC Ord. 53,600 460,074
NV Ord. 8,000 493,462
NV ADR 47,500 2,965,781
6,058,292
TOBACCO - 3.5%
Philip Morris Companies, Inc. 135,100 6,121,719
RJR Nabisco Holdings Corp. 47,200 1,770,000
7,891,719
TOTAL NONDURABLES 19,010,171
RETAIL & WHOLESALE - 2.4%
DRUG STORES - 0.7%
CVS Corp. 10,500 672,656
Rite Aid Corp. 13,920 816,930
1,489,586
GENERAL MERCHANDISE STORES - 1.5%
Dayton Hudson Corp. 12,000 810,000
Penney (J.C.) Co., Inc. 5,600 337,750
Wal-Mart Stores, Inc. 57,200 2,255,825
3,403,575
GROCERY STORES - 0.2%
American Stores Co. 24,000 493,500
TOTAL RETAIL & WHOLESALE 5,386,661
SHARES VALUE (NOTE 1)
SERVICES - 0.7%
LEASING & RENTAL - 0.1%
Ryder Systems, Inc. 5,900 $ 193,225
PRINTING - 0.6%
Deluxe Corp. 500 17,250
Donnelley (R.R.) & Sons Co. 39,700 1,478,825
1,496,075
TOTAL SERVICES 1,689,300
TECHNOLOGY - 1.8%
COMPUTERS & OFFICE EQUIPMENT - 1.8%
Pitney Bowes, Inc. 27,400 2,464,288
Xerox Corp. 22,600 1,668,163
4,132,451
TRANSPORTATION - 0.2%
RAILROADS - 0.2%
Union Pacific Corp. 8,000 499,500
UTILITIES - 2.8%
CELLULAR - 0.0%
McCaw International Ltd.
warrants 4/15/07 (a)(c) 260 650
Microcell Telecommunications, Inc.
warrants 6/1/06 (a)(c) 520 7,202
7,852
ELECTRIC UTILITY - 0.2%
Allegheny Energy, Inc. 1,400 45,500
CMS Energy Corp. 8,800 387,750
Edison International 5,000 135,938
569,188
GAS - 0.0%
Consolidated Natural Gas Co. 100 6,050
TELEPHONE SERVICES - 2.6%
AT&T Corp. 46,400 2,842,000
ALLTEL Corp. 2,900 119,081
Ameritech Corp. 11,300 909,650
BCE, Inc. 3,000 99,997
Frontier Corp. 3,900 93,844
GTE Corp. 9,300 485,925
Hyperion Telecommunications, Inc.
warrants 4/15/01 (a)(c) 60 3,600
RSL Communications Ltd./RSL
Communications PLC
warrants 11/15/06 (a) 40 3,680
SBC Communications, Inc. 14,700 1,076,775
Sprint Corp. 4,000 234,500
5,869,052
TOTAL UTILITIES 6,452,142
TOTAL COMMON STOCKS
(Cost $107,126,104) 130,137,547
PREFERRED STOCKS - 0.9%
SHARES VALUE (NOTE 1)
CONVERTIBLE PREFERRED STOCKS - 0.4%
DURABLES - 0.0%
AUTOS, TIRES, & ACCESSORIES - 0.0%
Republic Industries, Inc. $1.55 4,000 $ 94,000
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Loral Space & Communications Ltd.,
Series C, $3.00 (c) 4,000 246,500
MEDIA & LEISURE - 0.1%
BROADCASTING - 0.0%
Benedek Communications Corp. 15% (a) 100 12,950
LODGING & GAMING - 0.1%
Host Marriott Financial Trust
$3.375 QUIPS (c) 3,000 179,625
TOTAL MEDIA & LEISURE 192,575
RETAIL & WHOLESALE - 0.2%
APPAREL STORES - 0.2%
TJX Companies, Inc., Series E,
$7.00 1,000 380,000
TOTAL CONVERTIBLE PREFERRED STOCKS 913,075
NONCONVERTIBLE PREFERRED STOCKS - 0.5%
FINANCE - 0.0%
INSURANCE - 0.0%
American Annuity Group Capital
Trust II 8 3/4% 50 54,012
MEDIA & LEISURE - 0.3%
BROADCASTING - 0.3%
Adelphia Communications Corp. $13 300 35,550
American Radio Systems Corp.
11 3/8%, pay-in-kind 855 95,760
Cablevision Systems Corp. pay-in-kind:
11 1/8%, depositary shares 1,625 187,688
Series H, $11.75 283 33,536
Capstar Broadcasting Partners, Inc.
12%, pay-in-kind 106 11,514
Chancellor Media Corp. 12%,
pay-in-kind (c) 310 35,340
Citadel Broadcasting Co. 13 1/4%,
pay-in-kind (c) 639 73,166
Time Warner, Inc., Series M, 10 1/4%,
pay-in-kind 151 169,498
642,052
PUBLISHING - 0.0%
Primedia, Inc.:
Series B, $11.625, pay-in-kind 198 21,137
Series D, $10 600 62,700
83,837
TOTAL MEDIA & LEISURE 725,889
UTILITIES - 0.2%
CELLULAR - 0.1%
Nextel Communications, Inc., Series D,
13%, pay-in-kind 98 111,720
SHARES VALUE (NOTE 1)
TELEPHONE SERVICES - 0.1%
NEXTLINK Communications, Inc. 14%,
pay-in-kind 3,363 $ 210,188
Winstar Communications, Inc.
14 1/2% (a)(c) 100 104,500
314,688
TOTAL UTILITIES 426,408
TOTAL NONCONVERTIBLE PREFERRED STOCKS 1,206,309
TOTAL PREFERRED STOCKS
(Cost $1,722,520) 2,119,384
CORPORATE BONDS - 14.8%
MOODY'S RATINGS PRINCIPAL
(UNAUDITED) (E) AMOUNT
CONVERTIBLE BONDS - 0.4%
INDUSTRIAL MACHINERY & EQUIPMENT - 0.0%
POLLUTION CONTROL - 0.0%
WMX Technologies, Inc.
2%, 1/24/05 Baa2 $ 80,000 68,900
MEDIA & LEISURE - 0.2%
BROADCASTING - 0.2%
Time Warner, Inc. liquid yield
option notes 0%, 6/22/13 Ba1 840,000 429,450
RETAIL & WHOLESALE - 0.1%
GENERAL MERCHANDISE STORES - 0.1%
Federated Department
Stores, Inc. 5%, 10/1/03 Baa3 150,000 201,750
TECHNOLOGY - 0.1%
COMPUTERS & OFFICE EQUIPMENT - 0.1%
Unisys Corp.
8 1/4%, 3/15/06 B3 130,000 275,113
TOTAL CONVERTIBLE BONDS 975,213
NONCONVERTIBLE BONDS - 14.4%
AEROSPACE & DEFENSE - 0.4%
AEROSPACE & DEFENSE - 0.2%
Alliant Techsystems, Inc.
11 3/4%, 3/1/03 B2 13,000 14,284
Argo-Tech Corp.
8 5/8%, 10/1/07 (c) B3 10,000 10,000
Fairchild Corp. 12%, 10/15/01 Caa1 10,000 10,050
Lockheed Martin Corp.
7.20%, 5/1/36 A3 300,000 325,116
359,450
DEFENSE ELECTRONICS - 0.2%
Raytheon Co.
6.45%, 8/15/04 Baa1 500,000 502,455
Tracor, Inc.
8 1/2%, 3/1/07 B1 40,000 40,600
543,055
SHIP BUILDING & REPAIR - 0.0%
Newport News Shipbuilding, Inc.
9 1/4%, 12/1/06 B1 10,000 10,575
TOTAL AEROSPACE & DEFENSE 913,080
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (E) AMOUNT (NOTE 1)
BASIC INDUSTRIES - 0.5%
CHEMICALS & PLASTICS - 0.1%
Atlantis Group, Inc.
11%, 2/15/03 B2 $ 10,000 $ 10,263
Freedom Chemical Co.
10 5/8%, 10/15/06 B3 50,000 55,125
Huntsman Corp. 9 1/2%,
7/1/07 (c) B2 120,000 126,000
Koppers Industries, Inc.
9 7/8%, 12/1/07 (c) B2 30,000 30,863
Sterling Chemicals Holdings, Inc.:
11 3/4%, 8/15/06 B3 60,000 61,200
11 1/4%, 4/1/07 B3 40,000 40,000
323,451
IRON & STEEL - 0.1%
GS Technologies Operating, Inc.
12 1/4%, 10/1/05 B2 20,000 22,350
Republic Engineered Steels, Inc.
9 7/8%, 12/15/01 Caa1 80,000 76,800
WCI Steel, Inc. 10%, 12/1/04 B2 40,000 40,700
139,850
METALS & MINING - 0.0%
Commonwealth Aluminum Corp.
10 3/4%, 10/1/06 B2 40,000 42,300
PAPER & FOREST PRODUCTS - 0.3%
APP Finance II Mauritius Ltd.
12%, 3/15/04 B3 85,000 73,100
Ainsworth Lumber Co. Ltd.
12 1/2%, 7/15/07
pay-in-kind B3 30,000 30,150
American Pad & Paper Co., Inc.
13%, 11/15/05 B3 40,000 42,000
Doman Industries Ltd. yankee:
8 3/4%, 3/15/04 B1 110,000 106,150
9 1/4%, 11/15/07 (c) B1 30,000 29,250
Florida Coast Paper Co.
LLC/Florida Coast Paper
Finance Corp., Series B,
12 3/4%, 6/1/03 Caa1 10,000 10,600
Mail-Well Corp.
10 1/2%, 2/15/04 B 10,000 10,500
Omega Cabinets Ltd.
10 1/2%, 6/15/7 (c) B3 10,000 10,375
Pindo Deli Finance Mauritius Ltd.
10 1/4%, 10/1/02 (c) Ba3 20,000 17,050
Repap New Brusnwick, Inc.
yankee 9 7/8%, 7/15/00 B2 20,000 20,400
SD Warren Co., Series B,
12%, 12/15/04 B1 15,000 16,763
Stone Container Corp.:
12 5/8%, 7/15/98 B2 100,000 102,625
11 7/8%, 12/1/98 B2 30,000 30,975
10 3/4%, 10/1/02 B1 60,000 62,700
Tembec Finance Corp. yankee
9 7/8%, 9/30/05 B1 30,000 30,825
Tjiwi Kimia Mauritius Ltd.
10%, 8/1/04 (c) Ba3 40,000 32,400
625,863
TOTAL BASIC INDUSTRIES 1,131,464
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (E) AMOUNT (NOTE 1)
CONSTRUCTION & REAL ESTATE - 0.0%
BUILDING MATERIALS - 0.0%
American Architectural Products,
Inc. 11 3/4%, 12/1/07 (c) Caa1 $ 40,000 $ 40,400
Insiloc Corp.
10 1/4%, 8/15/07 B3 10,000 10,500
50,900
DURABLES - 0.4%
AUTOS, TIRES, & ACCESSORIES - 0.0%
Blue Bird Body Co.
10 3/4%, 11/15/06 B2 15,000 16,125
HOME FURNISHINGS - 0.0%
Guitar Center Management Co.,
Inc. 11%, 7/1/06 B1 29,000 32,190
Interlake Corp.
12 1/8%, 3/1/02 B3 50,000 51,500
Knoll, Inc. 10 7/8%, 3/15/06 B1 38,000 42,560
Sealy Mattress Co. 0%,
12/15/07 (c)(d) B3 20,000 12,100
138,350
TEXTILES & APPAREL - 0.4%
Levi Strauss & Co.
6.80%, 11/1/03 (c) Baa2 570,000 579,707
Nine West Group, Inc. (c):
8 3/8%, 8/15/05 Ba2 50,000 47,625
9%, 8/15/07 Ba3 10,000 9,525
Polymer Group, Inc.
9%, 7/1/07 B2 100,000 100,000
Synthetic Industries, Inc.
9 1/4%, 2/15/07 B2 40,000 42,200
Worldtex, Inc.
9 5/8%, 12/15/07 (c) B1 50,000 51,250
830,307
TOTAL DURABLES 984,782
ENERGY - 0.2%
COAL - 0.0%
AEI Holding, Inc.
10%, 11/15/07 (c) B2 30,000 30,900
ENERGY SERVICES - 0.0%
DI Industries, Inc.
8 7/8%, 7/1/07 B1 20,000 20,750
OIL & GAS - 0.2%
Belden & Blake Corp.
9 7/8%, 6/15/07 B3 30,000 30,300
Chesapeake Energy Corp.
9 1/8%, 4/15/06 Ba3 10,000 10,275
Cross Timbers Oil Co.:
9 1/4%, 4/1/07 B2 60,000 62,400
8 3/4%, 11/1/09 B2 30,000 30,600
Flores & Rucks, Inc.
9 3/4%, 10/1/06 B3 50,000 54,875
Ocean Energy, Inc.
8 7/8%, 7/15/07 B3 60,000 63,750
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (E) AMOUNT (NOTE 1)
ENERGY - CONTINUED
OIL & GAS - CONTINUED
Pennzoil Co.
9 5/8%, 11/15/99 Baa3 $ 60,000 $ 63,353
Plains Resources, Inc., Series B,
10 1/4%, 3/15/06 B2 30,000 32,250
Southwest Royalties, Inc.
10 1/2%, 10/15/04 (c) B3 10,000 9,900
357,703
TOTAL ENERGY 409,353
FINANCE - 6.5%
ASSET-BACKED SECURITIES - 2.6%
Airplanes Pass Through Trust
Class D 10 7/8%, 3/15/19 Ba2 100,000 111,750
Capital Equipment Receivables
Trust 6.11%, 7/15/99 Aaa 1,410,000 1,413,469
Contimortgage Home Equity
Loan Trust 6.26%, 7/15/12 Aaa 1,000,000 1,000,469
Ford Credit Auto Owner Trust
6.40%, 5/15/02 A1 610,000 612,318
Green Tree Financial Corp.
6.10%, 4/15/27 Aaa 54,083 54,049
Key Plastics, Inc.
10 1/4%, 3/15/07 A2 770,000 769,759
Key Auto Finance Trust Class C
6.65%, 10/15/03 Baa3 230,000 229,713
MBNA Master Credit Card
Trust II Class A
6.55%, 1/15/07 Aaa 1,000,000 1,018,710
Sears Credit Account Master
Trust II 6 1/2%, 10/15/03 Aaa 630,000 634,133
5,844,370
BANKS - 1.4%
ABN Amro Bank NV 6 5/8%,
10/31/01 Aa3 500,000 506,035
Banc One Corp. 6.70%,
3/24/00 Aa3 350,000 353,812
Banco Latinoamericano
Exportaciones SA euro
6.90%, 12/6/99 (c) Baa2 100,000 101,126
Capital One Bank 6.74%,
5/31/99 Baa3 260,000 262,551
Citicorp. 7.20%, 6/15/07 A1 160,000 167,531
First Chicago Institutional
Capital Class B 7 3/4%,
12/1/26 (c) A1 1,000,000 1,043,740
First USA Bank 6 1/2%,
12/23/99 Aa2 250,000 251,708
NB Capital Trust IV 8 1/4%,
4/15/27 A1 330,000 360,116
Summit Bancorp. 8 5/8%,
12/10/02 BBB 100,000 109,127
3,155,746
CREDIT & OTHER FINANCE - 2.5%
Ahmanson Capital Trust I
8.36%, 12/1/26 (c) Baa3 250,000 272,045
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (E) AMOUNT (NOTE 1)
Associates Corp. North
America 7.35%, 7/6/99 Aa3 $ 250,000 $ 255,423
BankBoston Capital Trust II
7 3/4%, 12/15/26 Baa1 500,000 510,105
CIT Group Holdings, Inc.
6 1/4%, 9/30/99 Aa3 860,000 861,883
Chase Capital I
7.67%, 12/1/26 A1 765,000 792,578
Chrysler Financial Corp.
6 3/8%, 1/28/00 A3 180,000 180,862
Cityscape Financial Corp.
12 3/4%, 6/1/04 Caa3 60,000 26,400
Delta Financial Corp.
9 1/2%, 8/1/04 B1 10,000 9,925
First Security Capital I
8.41%, 12/15/26 A3 110,000 120,277
General Electric Capital Corp.
6.49%, 4/13/09 (f) Aaa 480,000 484,944
Imperial Credit Capital Trust I
10 1/4%, 6/14/02 (c) B2 20,000 20,000
Imperial Credit Industries, Inc.
9 7/8%, 1/15/07 B2 80,000 79,200
Indah Kiat Finance Mauritius
Ltd. 10%, 7/1/07 (c) Ba3 30,000 24,825
JPM Capital Trust II
7.95%, 2/1/27 Aa2 50,000 53,226
KeyCorp Institutional Capital
Series A, 7.826%, 12/1/26 A1 1,000,000 1,037,440
MCN Investment Corp.
6.03%, 2/1/01 Baa2 180,000 179,492
Nordstrom Credit, Inc.
7 1/4%, 4/30/02 A2 200,000 208,314
Ocwen Capital Trust
10 7/8%, 8/1/27 B2 20,000 21,800
Olympic Financial Ltd.
11 1/2%, 3/15/07 B2 30,000 29,400
PNC Institutional Capital Trust
8.315%, 5/15/27 (c) A2 600,000 650,328
5,818,467
SAVINGS & LOANS - 0.0%
First Nationwide Holdings, Inc.
10 5/8%, 10/1/03 Ba3 40,000 44,700
First Nationwide Parent Holdings
Ltd. 12 1/2%, 4/15/03 B3 70,000 79,625
124,325
TOTAL FINANCE 14,942,908
HEALTH - 0.1%
MEDICAL EQUIPMENT & SUPPLIES - 0.0%
Wright Medical Technology, Inc.
11 3/4%, 7/1/00 (f) Caa3 40,000 40,400
MEDICAL FACILITIES MANAGEMENT - 0.1%
Integrated Health Services, Inc. (c):
9 1/2%, 9/15/07 B2 30,000 30,900
9 1/4%, 1/15/08 B2 79,000 80,580
Tenet Healthcare Corp.:
8%, 1/15/05 Ba1 20,000 20,350
8 5/8%, 1/15/07 Ba3 10,000 10,300
142,130
TOTAL HEALTH 182,530
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (E) AMOUNT (NOTE 1)
HOLDING COMPANIES - 0.2%
Gray Communications System,
Inc. 10 5/8%, 10/1/06 B3 $ 10,000 $ 10,850
Norfolk Southern Corp.
7.05%, 5/1/37 Baa1 340,000 359,360
370,210
INDUSTRIAL MACHINERY & EQUIPMENT - 0.5%
ELECTRICAL EQUIPMENT - 0.1%
Amphenol Corp.
9 7/8%, 5/15/07 B2 10,000 10,550
Echostar Communications Corp.
secured discount 0%,
6/1/04 (d) B2 160,000 146,400
Motors & Gears, Inc.:
10 3/4%, 11/15/06 B3 60,000 63,600
10 3/4%, 11/15/06 (c) B3 10,000 10,625
231,175
INDUSTRIAL MACHINERY & EQUIPMENT - 0.2%
Continental Global Group, Inc.
11%, 4/1/07 B2 20,000 21,300
Goss Graphic System, Inc.
12%, 10/15/06 B2 50,000 56,500
McDermott International, Inc.
9 3/8%, 3/15/02 Ba3 60,000 64,650
Tenneco, Inc.
8.075%, 10/1/02 Baa1 300,000 320,946
463,396
POLLUTION CONTROL - 0.2%
Allied Waste North America
10 1/4%, 12/1/06 B2 10,000 10,975
Envirosource, Inc.
9 3/4%, 6/15/03 B3 40,000 40,600
WMX Technologies, Inc.
7.10%, 8/1/26 Baa1 400,000 413,664
465,239
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 1,159,810
MEDIA & LEISURE - 1.9%
BROADCASTING - 1.6%
ACME Television/ACME
Financial Corp. 0%,
9/30/04 (c)(d) B3 50,000 36,813
Adelphia Communications
Corp.:
9 1/2%, 2/15/04 B3 35,238 34,566
9 7/8%, 3/1/07 B3 30,000 31,725
Ascent Entertainment
Group, Inc. 0%,
12/15/04 (c)(d) B3 70,000 40,425
Capstar Broadcasting
Partners, Inc.:
9 1/4%, 7/1/07 B2 60,000 61,725
0%, 2/1/09 (d) B3 80,000 57,800
Chancellor Radio Broadcasting
Company 8 1/8%,
12/15/07 (c) - 60,000 58,800
Chancellor Media Corp. 8 3/4%,
6/15/07 B3 20,000 20,350
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (E) AMOUNT (NOTE 1)
Continental Cablevision, Inc.:
8.30%, 5/15/06 Baa3 $ 215,000 $ 234,653
9%, 9/1/08 Baa3 520,000 600,766
CS Wireless Systems, Inc.
0%, 3/1/06 (d) Caa 30,000 8,400
Falcon Holdings Group LP
11%, 9/15/03, pay-in-kind - 136,600 141,195
FrontierVision Holdings
LP/FrontierVision Holdings
Capital Corp. 0%,
9/15/07 (d) Caa1 10,000 7,175
Granite Broadcasting Corp.:
10 3/8%, 5/15/05 B3 10,000 10,475
9 3/8%, 12/1/05 B3 10,000 10,125
Hearst-Argyle Television, Inc.
7 1/2%, 11/15/27 Baa3 250,000 253,680
International Cabletel, Inc.
0%, 2/1/06 (d) B3 110,000 85,800
Olympus Communications
LP/Olympus Capital Corp
10 5/8%, 11/15/06 B1 60,000 66,450
Orion Network Systems, Inc.:
11 1/4%, 1/15/07 B2 50,000 56,500
0%, 1/15/07 (d) B2 290,000 215,325
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 60,000 66,000
TCI Communication, Inc.
6.82%, 9/15/10 (f) Ba1 250,000 250,818
Telewest PLC 0%, 10/1/07 (d) B1 20,000 15,500
Time Warner, Inc. 8.18%,
8/15/07 Ba1 1,000,000 1,090,000
UIH Australia/Pacific, Inc. (d):
Series B, 0%, 5/15/06 B2 150,000 99,000
0%, 5/15/06 (c) B2 10,000 6,600
United International Holdings,
Inc. 0%, 11/15/99 B3 20,000 16,400
Viacom International, Inc.,
Series B 7%, 7/1/03 B1 10,000 9,550
3,586,616
ENTERTAINMENT - 0.1%
AMC Entertainment, Inc.
9 1/2%, 3/15/09 B2 70,000 72,625
AMF Group, Inc., Series B:
10 7/8%, 3/15/06 B2 30,000 32,850
0%, 3/15/06 (d) B2 12,000 9,435
Cinemark USA, Inc.
9 5/8%, 8/1/08 B2 30,000 31,050
Viacom, Inc. 8%, 7/7/06 B1 120,000 120,450
266,410
LEISURE DURABLES & TOYS - 0.0%
ICON Fitness Corp. 0%,
11/15/06 (d) Caa3 10,000 5,650
LODGING & GAMING - 0.1%
HMC Acquisition Properties,
Inc. 9%, 12/15/07 Ba3 60,000 63,000
HMH Properties, Inc.
8 7/8%, 7/15/07 Ba3 70,000 73,325
KSL Recreation Group, Inc.
10 1/4%, 5/1/07 B3 20,000 21,400
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (E) AMOUNT (NOTE 1)
MEDIA & LEISURE - CONTINUED
LODGING & GAMING - CONTINUED
Station Casinos, Inc.
9 3/4%, 4/15/07 B2 $ 20,000 $ 20,700
Sun International Hotels
Ltd./Sun International
North America, Inc.
yankee 9%, 3/15/07 Ba3 60,000 61,800
240,225
PUBLISHING - 0.1%
Big Flower Press Holdings, Inc.:
8 7/8%, 7/1/07 B2 110,000 110,688
8 7/8%, 7/1/07 (c) B2 20,000 20,100
Hollinger International
Publishing, Inc. 9 1/4%,
3/15/07 B1 40,000 42,000
ITT Publimedia BV 9 3/8%,
9/15/07 (c) B3 60,000 63,000
Perry Judds, Inc. 10 5/8%,
12/15/07 (c) B3 10,000 10,350
246,138
RESTAURANTS - 0.0%
AFC Enterprises, Inc.
10 1/4%, 5/15/07 B3 20,000 21,050
SC International Services, Inc.
9 1/4%, 9/1/07 (c) B2 50,000 51,500
72,550
TOTAL MEDIA & LEISURE 4,417,589
NONDURABLES - 0.4%
FOODS - 0.0%
Del Monte Foods Co.
0%, 12/15/07 (c) Caa2 20,000 11,450
HOUSEHOLD PRODUCTS - 0.1%
RBX Corp. 12%, 1/15/03 (c) B2 20,000 20,500
Renaissance Cosmetic, Inc.
11 3/4%, 2/15/04 B3 50,000 45,000
Revlon Consumer Products
Corp. 10 1/2%, 2/15/03 B3 105,000 110,513
176,013
TOBACCO - 0.3%
North Atlantic Trading, Inc.
11%, 6/15/04 B3 20,000 20,850
Philip Morris Companies, Inc.:
7%, 7/15/05 A2 500,000 509,680
6.95%, 6/1/06 A2 250,000 258,915
789,445
TOTAL NONDURABLES 976,908
PRECIOUS METALS - 0.0%
PRECIOUS METALS - 0.0%
Centaur Mining & Exploration
Ltd. 11%, 12/1/07 (c) B1 60,000 60,300
RETAIL & WHOLESALE - 1.0%
APPAREL STORES - 0.1%
Mothers Work, Inc.
12 5/8%, 8/1/05 B3 10,000 10,650
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (E) AMOUNT (NOTE 1)
Specialty Retailers, Inc.:
8 1/2%, 7/15/05 Ba3 $ 30,000 $ 30,600
9%, 7/15/07 B2 70,000 71,400
112,650
GENERAL MERCHANDISE STORES - 0.6%
Dayton Hudson Corp.:
6.80%, 10/1/01 Baa1 300,000 304,515
6.40%, 2/15/03 Baa1 400,000 400,168
Federated Department Stores,
Inc. 6.79%, 7/15/27 Baa2 500,000 513,385
Penney (J.C.) Co.,Inc.
6.95%, 4/1/00 A2 160,000 162,579
1,380,647
GROCERY STORES - 0.2%
American Stores Co.
7 1/2%, 5/1/37 Baa2 250,000 273,700
Di Giorgio Corp.
10%, 6/15/07 B3 30,000 29,475
Food 4 Less Holdings, Inc.
13 5/8%, 6/15/07 - 11,408 13,449
Pathmark Stores, Inc.:
11 5/8%, 6/15/02 Caa2 60,000 49,050
9 5/8%, 5/1/03 Caa1 60,000 55,275
Penn Traffic Co.:
10 1/4%, 2/15/02 B3 20,000 18,200
8 5/8%, 12/15/03 B3 30,000 25,500
Pueblo Xtra International, Inc.
9 1/2%, 8/1/03 B3 100,000 94,500
559,149
RETAIL & WHOLESALE, MISCELLANEOUS - 0.1%
Big 5 Corp. 10 7/8%,
11/15/07 (c) B2 50,000 49,750
Central Tractor Farm & Country,
Inc. 10 5/8%, 4/1/07 B2 20,000 21,100
Corporate Express, Inc.,
Series B, 9 1/8%, 3/15/04 B2 10,000 10,200
J Crew Operating Corp.
10 3/8%, 10/15/07 (c) B3 40,000 34,800
J Crew Group, Inc. 0%,
10/15/08 (c)(d) Caa2 40,000 17,400
133,250
TOTAL RETAIL & WHOLESALE 2,185,696
SERVICES - 0.1%
LEASING & RENTAL - 0.1%
Hollywood Entertainment Corp.
10 5/8%, 8/15/04 B3 80,000 78,000
PRINTING - 0.0%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa1 40,000 40,400
SERVICES - 0.0%
Iron Mountain, Inc.
8 3/4%, 9/30/09 (c) B3 30,000 30,600
Outsourcing Solutions, Inc.
11%, 11/1/06 B3 10,000 11,025
41,625
TOTAL SERVICES 160,025
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (E) AMOUNT (NOTE 1)
TECHNOLOGY - 0.2%
COMMUNICATIONS EQUIPMENT - 0.1%
Intermedia Communications, Inc.
0%, 7/15/07 (d) B2 $ 60,000 $ 42,750
Jordan Telecommunication
Products, Inc.:
9 7/8%, 8/1/07 B3 30,000 30,488
0%, 8/1/07 (d) B3 60,000 48,600
121,838
COMPUTER SERVICES & SOFTWARE - 0.0%
Concentric Network Corp.
12 3/4%, 12/15/07 unit (c) - 10,000 10,275
DecisionOne Holdings Corp.
0%, 8/1/8 unit (d) Caa1 10,000 6,400
16,675
COMPUTERS & OFFICE EQUIPMENT - 0.1%
Comdisco, Inc.
6.70%, 8/6/99 Baa1 250,000 252,675
ELECTRONIC INSTRUMENTS - 0.0%
Wavetek Corp.
10 1/8%, 6/15/07 B3 10,000 10,300
ELECTRONICS - 0.0%
Communications Instruments,
Inc. 10%, 9/15/04 (c) B3 10,000 10,200
ViaSystems, Inc.
9 3/4%, 6/1/07 B3 30,000 30,975
41,175
TOTAL TECHNOLOGY 442,663
TRANSPORTATION - 0.6%
AIR TRANSPORTATION - 0.1%
Atlas Air, Inc. pass through
trust 12 1/4%, 12/1/02 Ba3 30,000 33,450
Kitty Hawk, Inc. 9.95%,
11/15/04 (c) B1 50,000 51,500
84,950
RAILROADS - 0.5%
Burlington Northern
Santa Fe Corp.:
6 7/8%, 12/1/27 Baa2 1,000,000 1,001,850
7.29%, 6/1/36 Baa2 150,000 160,679
1,162,529
TOTAL TRANSPORTATION 1,247,479
UTILITIES - 1.4%
CELLULAR - 0.3%
McCaw International Ltd.
0%, 4/15/07 (d) CCC 260,000 150,800
Microcell Telecommunications,
Inc. 0%, 6/1/06 (d) B3 50,000 33,750
Millicom International Cellular
SA 0%, 6/1/06 (d) B3 290,000 211,700
Pagemart Nationwide, Inc.
0%, 2/1/05 (d) - 40,000 34,200
Pagemart, Inc. 0%,
11/1/03 (d) - 70,000 65,450
Rogers Communications, Inc.
8 7/8%, 7/15/07 B2 10,000 10,000
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (E) AMOUNT (NOTE 1)
Teletrac, Inc. 14%, 8/1/07 Caa2 $ 40,000 $ 38,000
Telesystem International
Wireless, Inc. (c)(d):
0%, 6/30/07 Caa1 80,000 50,000
0%, 11/1/07 Caa1 20,000 11,100
360 Degrees Communications
Co. 7 1/8%, 3/1/03 Ba1 115,000 117,445
USA Mobile Communications,
Inc. II:
9 1/2%, 2/1/04 B2 10,000 9,650
14%, 11/1/04 B2 20,000 22,100
754,195
ELECTRIC UTILITY - 0.4%
AES Corp. 8 3/8%, 8/15/07 Ba1 30,000 29,925
Israel Electric Corp. Ltd.
7 3/4%, 12/15/27 (c) A3 930,000 936,529
966,454
GAS - 0.2%
Columbia Gas System, Inc.
6.61%, 11/28/02 Baa1 379,000 382,229
TELEPHONE SERVICES - 0.5%
GST Equipment Funding, Inc.
13 1/4%, 5/1/07 - 30,000 34,200
GST Telecommunications, Inc.
12 3/4%, 11/15/07 - 60,000 62,700
GST USA, Inc. 0%,
12/15/05 (d) - 34,000 26,010
Hyperion Telecommunications, Inc.:
Series B, 0%, 4/15/03 (d) B 70,000 50,750
12 1/4%, 9/1/04 B 40,000 43,900
McLeodUSA, Inc. 0%,
3/1/07 (d) B3 80,000 57,700
Netia Holdings BV 10 1/4%,
11/1/07 (c) B3 30,000 28,800
Winstar Communications, Inc.:
0%, 10/15/05 (d) Caa1 50,000 39,250
14 1/2%, 10/15/05 Caa1 70,000 92,400
Winstar Equipment
12 1/2%, 3/15/04 B3 10,000 11,225
WorldCom, Inc.:
8 7/8%, 1/15/06 Ba1 184,000 197,969
7 3/4%, 4/1/07 Ba1 400,000 429,556
1,074,460
TOTAL UTILITIES 3,177,338
TOTAL NONCONVERTIBLE BONDS 32,813,035
TOTAL CORPORATE BONDS
(Cost $33,108,642) 33,788,248
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS - 5.5%
U.S. TREASURY OBLIGATIONS - 4.4%
6 5/8%, 6/30/01 Aaa 7,740,000 7,954,088
7%, 7/15/06 Aaa 35,000 37,778
7 1/4%, 2/15/23 Aaa 500,000 570,780
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (E) AMOUNT (NOTE 1)
U.S. TREASURY OBLIGATIONS - CONTINUED
7 5/8%, 2/15/25 Aaa $ 500,000 $ 606,795
6.375%, 8/15/27 Aaa 925,000 975,588
10,145,029
U.S. GOVERNMENT AGENCY OBLIGATIONS - 1.1%
Federal Home Loan Bank:
7.56%, 9/1/04 Aaa 310,000 336,542
7.59%, 3/10/05 Aaa 190,000 206,921
Fannie Mae:
7.59%, 2/14/00 Aaa 500,000 517,500
6.72%, 8/1/05 Aaa 720,000 749,246
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 114,066 121,169
State of Israel (guaranteed by
U.S. Government through
Agency for International
Development):
8%, 11/15/01 Aaa 220,000 235,767
5.89%, 8/15/05 Aaa 310,000 308,047
2,475,192
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $12,407,284) 12,620,221
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 8.1%
FEDERAL HOME LOAN GUARANTEED - 0.5%
7%, 6/1/99 to 7/1/01 Aaa 325,962 329,807
7 1/2%, 11/1/27 to 12/1/27 Aaa 891,887 913,346
1,243,153
FREDDIE MAC - 0.0%
7%, 6/1/01 Aaa 91,807 92,981
FANNIE MAE - 7.2%
5 1/2%, 2/1/03 to 2/1/26 Aaa 1,078,491 1,051,183
6%, 4/1/11 to 1/1/13 Aaa 3,438,832 3,385,782
6 1/2%, 1/1/28 Aaa 4,000,000 3,951,250
7%, 1/1/28 Aaa 7,900,000 7,959,250
16,347,465
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 0.4%
7%, 10/15/23 to 11/15/27 Aaa 856,425 864,380
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $18,459,771) 18,547,979
U.S. GOVERNMENT AGENCY - 0.5%
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (E) AMOUNT (NOTE 1)
Freddie Mac planned
amortization class
Series 1645 Class ZA,
5 1/2%, 4/15/05 Aaa $ 639,708 $ 631,512
Fannie Mae planned
amortization class
Series 1993-129 Class D,
6.10%, 6/25/05 Aaa 500,000 499,375
TOTAL U.S. GOVERNMENT AGENCY
(Cost $1,114,810) 1,130,887
COMMERCIAL MORTGAGE SECURITIES - 1.0%
BKB Commercial Mortgage Trust
Series 1997-C1 Class A-1,
6 7/8%, 2/25/43 (c) AAA 115,731 115,627
CS First Boston Mortgage
Securities Corp. Series
1997-C2 Class D,
7.27%, 4/17/11 Baa2 220,000 220,481
First Union-Lehman Brothers
Commercial Mortgage Trust
sequential pay Series
1997-C2 Class A3,
6.65%, 12/18/07 Aaa 1,000,000 1,008,672
General Motors Acceptance
Corp. Commercial Mortgage
Securities, Inc. Series 1997-C2
Class E, 7.624%, 4/15/11 Baa3 190,000 189,020
Thirteen Affiliates of General
Growth Properties, Inc.
sequential pay Series A-2,
6.602%, 11/15/12 (c) Aaa 500,000 501,295
Wells Fargo Capital Markets
Apartment Financing Trust
6.56%, 12/29/05 (c) Aaa 143,915 145,534
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $2,170,661) 2,180,629
FOREIGN GOVERNMENT OBLIGATIONS (G) - 0.3%
Manitoba Province yankee
6 3/8%, 10/15/99 A1 470,000 472,594
Quebec Province yankee
6.86%, 4/15/26 (f) A2 250,000 258,185
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $709,908) 730,779
SUPRANATIONAL OBLIGATIONS - 0.3%
Inter American Development Bank
yankee 6.29%, 7/16/27
(Cost $496,855) Aaa 500,000 519,400
CERTIFICATES OF DEPOSIT - 0.2%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
Canadian Imperial Bank of
Commerce NY Branch
yankee 6.20%, 8/1/00
(Cost $500,750) $ 500,000 $ 500,750
CASH EQUIVALENTS - 11.4%
SHARES
Taxable Central Cash Fund (b)
(Cost $26,064,978) 26,064,978 26,064,978
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $203,882,283) $ 228,340,802
SECURITY TYPE ABBREVIATIONS
QUIPS - Quarterly Income Preferred Securities
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield of the Taxable Central Cash
Fund was 5.69%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(c) Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions
exempt from registration, normally to qualified institutional buyers.
At the period end, the value of these securities amounted to
$6,295,345 or 2.9% of net assets.
(d) Debt obligation initially issued in zero coupon form which
converts to coupon form at a specified rate and date. The rate shown
is rate at period end.
(e) Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investors Service, Inc.
(f) Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date. The rate shown is rate at period
end.
(g) For foreign government obligations not individually rated by S&P
or Moody's, the ratings listed are assigned to securities by FMR, the
fund's investment adviser, based principally on S&P and Moody's
ratings of the sovereign credit of the issuing government.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $223,491,590 and $144,489,471, respectively, of which U.S.
government and government agency obligations aggregated $87,646,475
and $72,203,682, 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 $21,693 for the
period (See Note 4 of Notes to Financial Statements).
The composition of long-term debt holdings as a percentage of total
value of investment in securities, is as follows (ratings are
unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 22.0% AAA, AA, A 20.2%
Baa 3.9% BBB 6.0%
Ba 1.4% BB 0.5%
B 2.5% 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 Moody's or S&P amounted to 0.2%. FMR has determined that
unrated debt securities that are lower quality account for 0.2% of the
total value of investment in securities.
INCOME TAX INFORMATION
At December 31, 1997, the aggregate cost of investment securities for
income tax purposes was $203,947,353. Net unrealized appreciation
aggregated $24,393,449, of which $25,857,031 related to appreciated
investment securities and $1,463,582 related to depreciated investment
securities.
The fund hereby designates approximately $4,059,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
INVESTMENT IN SECURITIES, AT VALUE $
228,340,802
(COST $203,882,283) -
SEE ACCOMPANYING SCHEDULE
CASH 3,689
RECEIVABLE FOR INVESTMENTS SOLD
111,629
RECEIVABLE FOR FUND SHARES SOLD
119,143
DIVIDENDS RECEIVABLE
316,714
INTEREST RECEIVABLE
733,483
OTHER RECEIVABLES 5,791
TOTAL ASSETS
229,631,251
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 14,875,164
PAYABLE FOR FUND SHARES REDEEMED 95,933
ACCRUED MANAGEMENT FEE 77,762
OTHER PAYABLES AND ACCRUED EXPENSES 34,277
TOTAL LIABILITIES
15,083,136
NET ASSETS $
214,548,115
NET ASSETS CONSIST OF:
PAID IN CAPITAL $
176,594,691
UNDISTRIBUTED NET INVESTMENT INCOME
5,297,948
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS
8,197,215
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS
24,458,261
AND ASSETS AND LIABILITIES IN
FOREIGN CURRENCIES
NET ASSETS $
214,548,115
</TABLE>
INITIAL CLASS: $14.58
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($214,537,817 (DIVIDED BY) 14,709,529
SHARES)
SERVICE CLASS: $14.59
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($10,298 (DIVIDED BY) 706 SHARES)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME $ 2,085,146
DIVIDENDS
INTEREST 4,195,247
TOTAL INCOME 6,280,393
EXPENSES
MANAGEMENT FEE $ 722,612
TRANSFER AGENT FEES 111,593
DISTRIBUTION FEES - SERVICE CLASS 1
ACCOUNTING FEES AND EXPENSES 97,323
NON-INTERESTED TRUSTEES' COMPENSATION 629
CUSTODIAN FEES AND EXPENSES 19,533
REGISTRATION FEES 21
AUDIT 24,602
LEGAL 2,653
MISCELLANEOUS 2,093
TOTAL EXPENSES BEFORE REDUCTIONS 981,060
EXPENSE REDUCTIONS (14,149 966,911
)
NET INVESTMENT INCOME 5,313,482
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 8,597,232
FOREIGN CURRENCY TRANSACTIONS (223 8,597,009
)
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 16,950,025
ASSETS AND LIABILITIES IN (592 16,949,433
FOREIGN CURRENCIES )
NET GAIN (LOSS) 25,546,442
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 30,859,924
OTHER INFORMATION $ 13,497
EXPENSE REDUCTIONS
DIRECTED BROKERAGE ARRANGEMENTS
CUSTODIAN CREDITS 652
$ 14,149
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
OPERATIONS $ 5,313,482 $ 2,701,775
NET INVESTMENT
INCOME
NET REALIZED GAIN 8,597,009 (391,485)
(LOSS)
CHANGE IN NET 16,949,433 6,443,286
UNREALIZED
APPRECIATION
(DEPRECIATION)
NET INCREASE 30,859,924 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 - 83,257,215 51,419,784
NET INCREASE
(DECREASE)
TOTAL INCREASE 111,438,483 59,954,398
(DECREASE) IN NET
ASSETS
NET ASSETS
BEGINNING OF PERIOD 103,109,632 43,155,234
END OF PERIOD $ 214,548,115 $ 103,109,632
(INCLUDING
UNDISTRIBUTED NET
INVESTMENT INCOME
OF $5,297,948 AND
$2,677,878,
RESPECTIVELY)
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
SHARES DOLLARS SHARES DOLLARS
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SHARE TRANSACTIONS 7,435,394 $ 99,539,917 4,616,047 $ 51,928,218
INITIAL CLASS
SOLD
REINVESTED 215,153 2,678,656 19,533 218,962
REDEEMED (1,375,161) (18,971,358) (64,658) (727,396)
NET INCREASE 6,275,386 $ 83,247,215 4,570,922 $ 51,419,784
(DECREASE)
SERVICE CLASS A 706 $ 10,000 - $ -
SOLD
REINVESTED - - - -
REDEEMED - - - -
NET INCREASE 706 $ 10,000 - $ -
(DECREASE)
DISTRIBUTIONS $ 2,678,656 $ 26,804
INITIAL CLASS - NET
INVESTMENT INCOME
INITIAL CLASS - NET - 192,158
REALIZED GAIN
TOTAL $ 2,678,656 $ 218,962
SERVICE CLASS - NET $ - $ -
INVESTMENT INCOME
SERVICE CLASS - NET - -
REALIZED GAIN
TOTAL $ - $ -
$ 2,678,656 $ 218,962
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
A SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
FINANCIAL HIGHLIGHTS - INITIAL CLASS
YEARS ENDED DECEMBER 31, JANUARY 3, 1995
(COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31,
SELECTED PER-SHARE DATA 1997 1996 1995
NET ASSET VALUE, $ 12.23 $ 11.17 $ 10.00
BEGINNING OF
PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET .44 D .33 .14
INVESTMENT
INCOME
NET REALIZED 2.22 .78 1.25
AND
UNREALIZED
GAIN (LOSS)
TOTAL FROM 2.66 1.11 1.39
INVESTMENT
OPERATIONS
LESS
DISTRIBUTIONS
FROM NET (.31) (.01) F (.14)
INVESTMENT
INCOME
FROM NET - (.04) F (.08)
REALIZED GAIN
TOTAL (.31) (.05) (.22)
DISTRIBUTIONS
NET ASSET VALUE, $ 14.58 $ 12.23 $ 11.17
END OF PERIOD
TOTAL RETURN B, 22.18% 9.98% 13.92%
C
RATIOS AND
SUPPLEMENTAL
DATA
NET ASSETS, END $ 214,538 $ 103,110 $ 43,155
OF PERIOD (000
OMITTED)
RATIO OF .61% .72% 1.42% G
EXPENSES TO
AVERAGE NET
ASSETS
RATIO OF .60% H .71% H 1.42%
EXPENSES TO
AVERAGE NET
ASSETS AFTER
EXPENSE
REDUCTIONS
RATIO OF NET 3.28% 3.63% 3.56%
INVESTMENT
INCOME TO
AVERAGE NET
ASSETS
PORTFOLIO 98% 163% 248%
TURNOVER RATE
AVERAGE $ .0423 $ .0165
COMMISSION
RATE I
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEAR ENDED
DECEMBER 31,
SELECTED PER-SHARE DATA 1997 E
NET ASSET VALUE, $ 14.16
BEGINNING OF
PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET .08 D
INVESTMENT
INCOME
NET REALIZED .35
AND
UNREALIZED
GAIN (LOSS)
TOTAL FROM .43
INVESTMENT
OPERATIONS
NET ASSET VALUE, $ 14.59
END OF PERIOD
TOTAL RETURN B 3.04%
RATIOS AND
SUPPLEMENTAL
DATA
NET ASSETS, END $ 10
OF PERIOD (000
OMITTED)
RATIO OF .71%
EXPENSES TO A
AVERAGE NET
ASSETS
RATIO OF NET 3.43%
INVESTMENT A
INCOME TO
AVERAGE NET
ASSETS
PORTFOLIO 98%
TURNOVER
AVERAGE $ .0423
COMMISSION
RATE I
</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 6 OF NOTES TO
FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER
SHARE HAS BEEN CALCULATED
BASED ON AVERAGE SHARES
OUTSTANDING DURING THE
PERIOD.
E FOR THE PERIOD NOVEMBER 3,
1997 (COMMENCEMENT OF
SALE OF SERVICE CLASS SHARES)
TO DECEMBER 31, 1997.
F THE AMOUNTS SHOWN REFLECT
CERTAIN RECLASSIFICATIONS
RELATED TO BOOK TO TAX
DIFFERENCES.
G FMR AGREED TO REIMBURSE A
PORTION OF THE CLASS'
EXPENSES DURING THE PERIOD.
WITHOUT THIS REIMBURSEMENT,
THE CLASS' EXPENSE RATIO
WOULD HAVE BEEN HIGHER.
H FMR OR THE FUND HAS
ENTERED INTO VARYING
ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR
REDUCED A PORTION OF THE
CLASS' EXPENSES (SEE NOTE 6
OF NOTES TO FINANCIAL
STATEMENTS).
I FOR FISCAL YEARS BEGINNING
ON OR AFTER SEPTEMBER 1,
1995, A FUND IS REQUIRED TO
DISCLOSE ITS AVERAGE
COMMISSION RATE PER SHARE
FOR SECURITY TRADES ON WHICH
COMMISSIONS ARE CHARGED.
THIS AMOUNT MAY VARY FROM
PERIOD TO PERIOD AND FUND TO
FUND DEPENDING ON THE MIX
OF TRADES EXECUTED IN
VARIOUS MARKETS WHERE
TRADING PRACTICES AND
COMMISSION RATE STRUCTURES
MAY DIFFER.
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
DECEMBER 31, 1997 YEAR FUND
VIP II: ASSET MANAGER: GROWTH - "INITIAL CLASS" 25.07% 22.73%
S&P 500 (REGISTERED TRADEMARK) 33.36% 31.22%
FIDELITY AGG COMP 25.79% N/A
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's returns to those of the 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.
3
You can also compare the fund's returns to the Fidelity Aggressive
Asset Allocation Composite index, a hypothetical combination of
unmanaged indices.
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, January 3, 1995.
If Fidelity had not reimbursed certain fund expenses, the life of fund
total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURN WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19971231 19980126 092753 S00000000000001
VIP II Asset Mgr Growth S&P 500
FID Aggressive Composite
00159 SP001
F0022
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
1997/07/31 17959.09 21469.30
17985.95
1997/08/31 17395.75 20266.59
17246.29
1997/09/30 18037.95 21376.59
17974.93
1997/10/31 17609.82 20662.61
17623.79
1997/11/30 18116.82 21619.09
18218.82
1997/12/31 18432.29 21990.29
18487.71
IMATRL PRASUN SHR__CHT 19971231 19980126 092754 R00000000000038
Let's say hypothetically that $10,000 was invested in VIP II: Asset
Manager: Growth Portfolio on January 31, 1995, shortly after the fund
began. As the chart shows, by December 31, 1997, the value of the
investment would have grown to $18,432 - an 84.32% increase. With
reinvested dividends and capital gains, if any, an $10,000 investment
in the S&P 500 would have grown to $21,990 over the same period - a
119.90% increase.
You can also look at how the Fidelity Aggressive Asset Allocation
Composite Index did over the same period. The Aggressive Asset
Allocation Composite index combines the cumulative total returns of
three unmanaged indexes - the S&P 500 (119.90%), Lehman Brothers
Aggregate Bond Index (32.02%), and the Salomon Brothers 3-month T-Bill
Total Rate of Return Index (16.59%) - 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 $18,488 - an 84.88% 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 DECEMBER 31, 1997
% OF FUND'S INVESTMENTS
AT&T CORP. 2.6
FANNIE MAE 2.3
INTERNATIONAL BUSINESS MACHINES CORP. 2.1
WAL-MART STORES, INC. 2.0
AMERICAN INTERNATIONAL GROUP, INC. 2.0
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1997
(STOCKS ONLY) % OF FUND'S INVESTMENTS
FINANCE 21.7
ENERGY 10.4
TECHNOLOGY 8.1
RETAIL & WHOLESALE 7.1
UTILITIES 6.8
ASSET ALLOCATION AS OF DECEMBER 31, 1997*
ROW: 1, COL: 1, VALUE: 4.6
ROW: 1, COL: 2, VALUE: 18.3
ROW: 1, COL: 3, VALUE: 77.09999999999999
STOCK CLASS 77.1%
BOND CLASS 18.3%
SHORT-TERM CLASS 4.6%
FOREIGN INVESTMENTS 3.0%
*
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
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1fee.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
DECEMBER 31, 1997 YEAR FUND
VIP II: ASSET MANAGER: GROWTH - SERVICE CLASS 24.99% 22.71%
S&P 500 (REGISTERED TRADEMARK) 33.36% 31.22%
FIDELITY AGG COMP 25.79% N/A
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's returns to those of the 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.
3
You can also compare the fund's returns to the Fidelity Aggressive
Asset Allocation Composite index, a hypothetical combination of
unmanaged indices.
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 class expenses, the life of
fund total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURN WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
S&P 500
VIP II: Asset Mgr: Growth - Service Class Fidelity Agg Asset
$21,990
$18,488
$18,421
$
Let's say hypothetically that $10,000 was invested in VIP II: Asset
Manager: Growth Portfolio on January 31, 1995, shortly after the fund
began. As the chart shows, by December 31, 1997, the value of the
investment would have grown to $18,421 - a 84.21% increase. With
reinvested dividends and capital gains, if any, a $10,000 investment
in the S&P 500 would have grown to $21,990 over the same period - a
119.90% 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 (119.90%), Lehman Brothers Aggregate Bond Index (32.02%), and
the Salomon Brothers 3-month T-Bill Total Rate of Return Index
(16.59%) - 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 $18,488 - an
84.88% 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 DECEMBER 31, 1997
% OF FUND'S INVESTMENTS
AT&T CORP. 2.6
FANNIE MAE 2.3
INTERNATIONAL BUSINESS MACHINES CORP. 2.1
WAL-MART STORES, INC. 2.0
AMERICAN INTERNATIONAL GROUP, INC. 2.0
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1997
(STOCKS ONLY) % OF FUND'S INVESTMENTS
FINANCE 21.7
ENERGY 10.4
TECHNOLOGY 8.1
RETAIL & WHOLESALE 7.1
UTILITIES 6.8
ASSET ALLOCATION AS OF DECEMBER 31, 1997*
ROW: 1, COL: 1, VALUE: 4.6
ROW: 1, COL: 2, VALUE: 18.3
ROW: 1, COL: 3, VALUE: 77.09999999999999
STOCK CLASS 77.1%
BOND CLASS 18.3%
SHORT-TERM CLASS 4.6%
FOREIGN INVESTMENTS 3.0%
*
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 MANAGERS' OVERVIEW
An interview with Richard Habermann (top left), Portfolio Manager of
Asset Manager: Growth Portfolio; Steven Snider (top right),
sub-manager for stocks; Charles Morrison (bottom left), sub-manager
for bonds; John Todd (bottom right), sub-manager for short-term/money
market instruments; and Fred Hoff, who assisted with the fund's
high-yield investments. Steven Snider became sub-manager for stocks on
October 1, 1997.
Q. HOW DID THE FUND PERFORM, DICK?
D.H. The fund allocates its assets among stocks, bonds and
short-term/money market instruments in an effort to provide
competitive returns with restrained volatility relative to funds or
indexes that invest only in stocks. The fund provided both during the
period, benefiting from the performance of its investments in equities
and high-yield bonds, as well as from its successful asset allocation
moves during certain times in the period. Accordingly, the fund
performed in line with the 25.79% return of the Fidelity Aggressive
Asset Allocation Composite Index, a combination of unmanaged indices,
during the 12 months that ended December 31, 1997. The composite
index, as defined on the previous page, reflects the fund's neutral
asset allocation mix, which comprises 70% stocks, 25% bonds and 5%
short-term/money market instruments. The fund underperformed the
33.36% return for the Standard & Poor's 500 Index, which is made up
exclusively of stocks, because the fund is diversified into other
asset classes that didn't perform as well as stocks.
Q. WHAT WAS THE FUND'S ASSET MIX AT THE END OF THE PERIOD?
D.H. At the end of 1997, the fund's equity position stood at about
77%, more aggressive than the neutral mix the fund instituted at the
beginning of the year. When I pared back the equity portion toward the
end of the third quarter, I increased both the fund's bond and
short-term/money market positions. At the end of the period, the fund
held about 18% in bonds and about 5% in short-term/money market
instruments. It's important to note that each of the fund's managers
strive to manage risks within the portfolio. The shifts made in the
fund's asset allocations are subtle. As a result, the volatility of
the fund is significantly lower than it is for equity-only funds and
the S&P 500 index.
Q. WHY DID YOU REDUCE THE FUND'S STOCK INVESTMENTS?
D.H. I became more cautious in late summer as the economic crisis in
Asia started to unfold, influencing my decision to decrease the fund's
equity position and marginally increase bonds. The fund was fairly
aggressive during the first half of the year, investing as much as 80%
of the fund's assets in equities. In response to some concerns I had
related to the pace of earnings growth, I pared the equity weighting
back in the middle of September, thus dampening the portfolio impact
of the late-year market weakness caused by financial problems in
Southeast Asia. My concern that the Asian turmoil would dampen the
growth prospects of many U.S. companies led me to maintain
comparatively lower equity weightings through the fourth quarter.
Q. WHAT HAPPENED IN THE BOND MARKET?
D.H. Overall, bonds had a good year. During the first half of the
year, the bond market struggled because of concerns that continued
economic growth might lead to inflation. The fears heightened just
before and after the Federal Reserve Board tried to head off inflation
by raising the fed funds rate - the rate banks charge each other for
overnight loans - from 5.25% to 5.50% at the end of March. Once the
market received signs that economic growth was moderating and
inflation continued to be almost non-existent, the bond market
rallied. As it turned out, inflation was benign throughout the rest of
the year. There were opportunities for the fund in the high-yield
sector of the bond market as a lot of cash flow was going into that
segment, and I'll ask Fred Hoff of Fidelity's High-Income Group - who
assisted me with the fund's high-yield investments - to elaborate.
F.H. The fund's high-yield investments - based on our strategy of
using intensive credit research to find companies with promising cash
flow growth - were, indeed, among the better-performing sectors of the
fixed-income market this year. The fund was helped specifically during
the period by its large holdings in the telecommunications and
broadcasting industries, which benefited from significant merger
activity as well as favorable new legislation that created growth
opportunities.
Q. TURNING TO YOU, STEVEN, HOW DID YOU MANAGE THE STOCK PORTION OF THE
FUND?
S.S. I began managing the fund in October, after the reduction in the
equity portion of the portfolio had already begun. Before that time,
George Vanderheiden managed the stock portion. George used a
fundamental, bottom-up approach to finding individual stocks. I manage
the fund quite differently because I use quantitative models to help
me pick stocks. This means that I also rely on computer models to sort
through large amounts of quantitative information on companies - such
as earnings, balance-sheet data, cash flows, liquidity, volatility and
external factors - trying to find misvaluations, or stocks that are
trading above or below their "fair value" in the marketplace. I
evaluate the portfolio, along with the information the computers
generate daily, and make an assessment about which stocks to hold,
which to buy and which to sell.
Q. WHAT ARE THE MAJOR DIFFERENCES BETWEEN YOUR STRATEGY AND A
FUNDAMENTAL APPROACH?
S.S. I think it's important to remember that both quantitative and
fundamental approaches have a common rationale. In both cases, the
portfolio manager analyzes data about a company to estimate a fair
value for the stock. A manager using a fundamental stock-picking
strategy - such as George Vanderheiden's - typically evaluates one
stock at a time, using experience to assess its prospects and
valuation. Our group's quantitative models instead allow me to monitor
a large number of stocks simultaneously - currently over 3,000 -
constantly calculating the value of each stock relative to the others.
Risk control is a very important part of the quantitative discipline.
Stock valuation is only the first part of the process, since I
consider the risk characteristics of the entire portfolio when I
review buy and sell candidates.
Q. CHARLIE, WHAT WAS YOUR STRATEGY FOR THE FUND'S BOND INVESTMENTS?
C.M. I focused on two broad strategies in the bond portion of the fund
during the year. First, I maintained an overweighted position -
relative to the Lehman Brothers Aggregate Bond Index - in the
corporate sector, focusing on securities with relatively short
maturities. Corporate bonds were trading at historically low yields
for much of the year. Owning short-maturity issues added yield to the
fund, yet exposed the fund to less total-return risk in the event that
corporate bonds began to underperform Treasury securities. My second
broad strategy focused on the mortgage market, where I maintained an
underweighted position in mortgage pass-through securities, and an
overweighted exposure to commercial mortgage-backed securities, bonds
backed by commercial real estate properties such as office buildings
and retail malls.
Q. WHAT WAS THE ENVIRONMENT IN THE MORTGAGE MARKET?
C.M. The mortgage market, in general, had a strong year. A combination
of lower issuance, relatively low interest-rate volatility and strong
investor demand allowed mortgage pass-through securities to perform
very well. The fund was underweighted in these securities during the
period - a position that modestly hurt the fund, particularly in the
first half of the year. However, as interest rates rallied for much of
the second half of 1997, the fund's underweighting in pass-throughs,
particularly in higher-coupon mortgages, helped performance. Market
concerns over increased prepayment risk - the risk that homeowners
refinance their current mortgages at lower rates - and a pick-up in
interest-rate volatility contributed to the weaker market at year-end.
Q. JOHN, WHAT WAS THE BACKDROP FOR THE SHORT-TERM AND MONEY MARKETS
LIKE DURING THE PERIOD?
J.T. The central theme was robust economic growth with no noticeable
threat posed by inflation. While real gross domestic product grew at a
rate approaching 4% in 1997 - a pace believed to be above the
economy's capacity to expand without generating inflation - the Fed
remained on the sidelines after its initial fed funds rate hike in
March. In addition, the financial difficulties that arose in Asia in
late summer could have a dampening effect on the U.S. economy because
U.S. companies export a fair amount to the region. As a result, market
participants expect the Fed to take a more balanced stance with
respect to short-term interest rates.
Q. WHAT SORT OF STRATEGY DID YOU PURSUE?
J.T. At the end of the first quarter, prices in the market reflected
the sentiment that the Fed would continue with a series of
interest-rate increases that appeared to begin in March. I felt the
market was jumping the gun and that the resulting yields offered by
longer-term securities were particularly attractive. As a result, I
extended my portion of the fund's average maturity to the low 70-day
range. Moving into the summer, the markets reversed course, with
prices and yields indicating that the Fed would hold off making any
moves for the foreseeable future. So, I let my portion of the fund's
maturity slip back to the low 60s. By the end of the year, some market
observers were actually calling for the Fed to lower rates because of
the risk of deflation from the intensifying competition posed by
cheaper Asian goods.
Q. TURNING BACK TO YOU, DICK, WHAT'S YOUR OUTLOOK?
D.H. I'm cautiously optimistic. Despite high valuations, I think
foreign investors will continue to come to the U.S. stock market
because they are attracted by the strength of the dollar. And while
it's difficult to predict short-term movements in the markets, most
investors may discover that investing in U.S. companies can generate
competitive long-term returns compared to the rest of the world. I
also think we will continue to see a low-inflation environment, which
bodes well for the fixed-income markets. I expect earnings growth to
slow from its pace last year, when stock prices rose at a higher rate
than earnings in many cases. I think stock prices will keep pace with
earnings growth in 1998. Overall, I would say it won't be a great year
or a bad year - I think it will be an average year.
FUND FACTS
GOAL: to provide income and growth of capital by
investing in a diversified portfolio of stocks and
bonds
START DATE: January 3, 1995
SIZE: as of December 31, 1997, more than $214
million
MANAGER: John Avery, since January 1998; joined
Fidelity in 1995
3
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
INVESTMENTS DECEMBER 31, 1997
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 75.3%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.2%
AEROSPACE & DEFENSE - 0.6%
United Technologies Corp. 37,600 $ 2,736,488
DEFENSE ELECTRONICS - 0.6%
Litton Industries, Inc. (a) 13,800 793,500
Raytheon Company:
Class A 8,232 405,941
Class B 37,600 1,898,800
3,098,241
SHIP BUILDING & REPAIR - 0.0%
Avondale Industries, Inc. (a) 2,600 77,188
TOTAL AEROSPACE & DEFENSE 5,911,917
BASIC INDUSTRIES - 3.3%
CHEMICALS & PLASTICS - 2.3%
Dow Chemical Co. 45,100 4,577,650
Lubrizol Corp. 17,000 626,875
Millennium Chemicals, Inc. 48,600 1,145,138
Raychem Corp. 70,000 3,014,375
Union Carbide Corp. 36,500 1,567,219
10,931,257
METALS & MINING - 0.2%
Aluminum Co. of America 14,800 1,041,550
PACKAGING & CONTAINERS - 0.8%
Owens-Illinois, Inc. (a) 100,800 3,824,100
TOTAL BASIC INDUSTRIES 15,796,907
CONSTRUCTION & REAL ESTATE - 0.9%
BUILDING MATERIALS - 0.1%
Vulcan Materials Co. 3,300 337,013
CONSTRUCTION - 0.8%
Centex Corp. 9,700 610,494
D.R. Horton, Inc. 32,900 571,638
Fleetwood Enterprises, Inc. 48,833 2,072,350
Kaufman & Broad Home Corp. 34,200 767,363
U.S. Home Corp. (a) 2,600 102,050
4,123,895
TOTAL CONSTRUCTION & REAL ESTATE 4,460,908
DURABLES - 3.5%
AUTOS, TIRES, & ACCESSORIES - 3.3%
Cummins Engine Co., Inc. 15,500 915,469
Discount Auto Parts, Inc. (a) 5,700 109,013
Eaton Corp. 30,100 2,686,425
Federal-Mogul Corp. 7,700 311,850
Ford Motor Co. 57,200 2,784,925
General Motors Corp. 129,100 7,826,688
Goodyear Tire & Rubber Co. 7,600 483,550
Superior Industries International, Inc. 27,100 726,619
15,844,539
TEXTILES & APPAREL - 0.2%
Burlington Industries, Inc. (a) 37,300 515,206
Liz Claiborne, Inc. 11,300 472,481
987,687
TOTAL DURABLES 16,832,226
SHARES VALUE (NOTE 1)
ENERGY - 10.4%
ENERGY SERVICES - 1.4%
BJ Services Co. (a) 31,100 $ 2,237,256
ENSCO International, Inc. 49,700 1,664,950
McDermott International, Inc. 34,100 1,248,913
Tidewater, Inc. 32,300 1,780,538
6,931,657
OIL & GAS - 9.0%
Atlantic Richfield Co. 77,700 6,225,713
British Petroleum PLC ADR 384 30,600
Burlington Resources, Inc. 91,332 4,092,815
Chevron Corp. 98,700 7,599,900
Enron Oil & Gas Co. 4,000 84,750
Fortune Natural Resources Corp.
warrants 9/28/98 (a) 100,000 50,000
Kerr-McGee Corp. 8,500 538,156
Mobil Corp. 113,000 8,157,188
Occidental Petroleum Corp. 78,400 2,298,100
Royal Dutch Petroleum Co. Ord. 3,200 175,751
Royal Dutch Petroleum Co. 89,900 4,871,456
Texaco, Inc. 106,000 5,763,750
Tosco Corp. 88,100 3,331,281
Valero Energy Corp. 7,000 220,063
43,439,523
TOTAL ENERGY 50,371,180
FINANCE - 21.6%
BANKS - 5.5%
BankAmerica Corp. 108,200 7,898,600
Bankers Trust New York Corp. 23,600 2,653,525
Chase Manhattan Corp. 68,600 7,511,700
Citicorp 24,100 3,047,144
First Union Corp. 59,600 3,054,500
Republic New York Corp. 19,800 2,260,913
26,426,382
CLOSED END INVESTMENT COMPANY - 0.0%
First NIS Regional Fund (a) 14,400 237,600
CREDIT & OTHER FINANCE - 0.3%
First of America Bank Corp. 16,900 1,303,413
Green Tree Financial Corp. 12,700 332,581
1,635,994
FEDERAL SPONSORED CREDIT - 3.7%
Freddie Mac 163,100 6,840,006
Fannie Mae 193,300 11,030,181
17,870,187
INSURANCE - 10.8%
Allmerica Financial Corp. 14,100 704,119
Allstate Corp. 100,400 9,123,850
American International Group, Inc. 87,650 9,531,938
CIGNA Corp. 32,300 5,589,919
Conseco, Inc. 118,600 5,388,888
Financial Security Assurance
Holdings Ltd. 4,700 226,775
General Re Corp. 9,600 2,035,200
Hartford Financial Services Group, Inc. 15,000 1,403,438
ING Groep NV sponsored ADR 521 22,045
Loews Corp. 11,400 1,209,825
MGIC Investment Corp. 44,500 2,959,250
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
Old Republic International Corp. 15,500 $ 576,406
Orion Capital Corp. 5,200 241,475
PMI Group, Inc. 18,800 1,359,475
Provident Companies, Inc. 2,200 84,975
Reliastar Financial Corp. 10,200 420,113
Torchmark Corp. 50,300 2,115,744
Travelers Property Casualty Corp.
Class A 7,800 343,200
Travelers Group, Inc. (The) 167,350 9,015,981
52,352,616
SAVINGS & LOANS - 0.4%
Golden West Financial Corp. 17,500 1,711,719
SECURITIES INDUSTRY - 0.9%
Lehman Brothers Holdings, Inc. 86,400 4,406,400
TOTAL FINANCE 104,640,898
HEALTH - 4.2%
DRUGS & PHARMACEUTICALS - 2.6%
Bristol-Myers Squibb Co. 11,900 1,126,038
Merck & Co., Inc. 11,800 1,253,750
Pfizer, Inc. 42,300 3,153,994
Schering-Plough Corp. 117,200 7,281,050
12,814,832
MEDICAL EQUIPMENT & SUPPLIES - 0.5%
Allegiance Corp. 1,660 58,826
Biomet, Inc. 28,600 732,875
Guidant Corp. 25,100 1,562,475
2,354,176
MEDICAL FACILITIES MANAGEMENT - 1.1%
FPA Medical Management, Inc. (a) 42,700 795,288
Lincare Holdings, Inc. (a) 16,000 912,000
United HealthCare Corp. 51,900 2,578,781
Wellpoint Health Networks, Inc. (a) 25,000 1,056,250
5,342,319
TOTAL HEALTH 20,511,327
HOLDING COMPANIES - 0.2%
U.S. Industries, Inc. 27,600 831,452
INDUSTRIAL MACHINERY & EQUIPMENT - 2.6%
ELECTRICAL EQUIPMENT - 0.7%
General Electric Co. 39,600 2,905,650
Grainger (W.W.), Inc. 2,600 252,688
Scientific-Atlanta, Inc. 16,400 274,700
3,433,038
INDUSTRIAL MACHINERY & EQUIPMENT - 1.8%
Case Corp. 41,200 2,490,025
Caterpillar, Inc. 71,200 3,457,650
Ingersoll-Rand Co. 74,000 2,997,000
8,944,675
POLLUTION CONTROL - 0.1%
Browning-Ferris Industries, Inc. 10,200 377,400
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 12,755,113
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - 0.4%
BROADCASTING - 0.1%
Tele-Communications, Inc.
(TCI Ventures Group), Series A 16,975 $ 480,605
Orion Network Systems, Inc. warrants (a):
1/15/07 100 1,300
1/15/07 420 4,620
486,525
LODGING & GAMING - 0.0%
Rio Hotel & Casino, Inc. (a) 2,700 56,700
PUBLISHING - 0.1%
Cognizant Corp. 10,800 481,275
US WEST Media Group (a) 4,000 115,500
596,775
RESTAURANTS - 0.2%
Brinker International, Inc. (a) 12,000 192,000
Papa John's International, Inc. (a) 3,000 104,625
Wendy's International, Inc. 27,600 664,125
960,750
TOTAL MEDIA & LEISURE 2,100,750
NONDURABLES - 3.1%
BEVERAGES - 0.1%
Coors (Adolph) Co. Class B 14,700 488,775
PepsiCo, Inc. 4,100 149,394
638,169
FOODS - 0.2%
Dean Foods Co. 14,800 880,600
HOUSEHOLD PRODUCTS - 0.0%
Premark International, Inc. 4,400 127,600
TOBACCO - 2.8%
Philip Morris Companies, Inc. 195,600 8,863,125
RJR Nabisco Holdings Corp. 123,920 4,647,000
13,510,125
TOTAL NONDURABLES 15,156,494
RETAIL & WHOLESALE - 7.1%
APPAREL STORES - 0.3%
Gap, Inc. 14,700 520,931
TJX Companies, Inc. 33,200 1,141,250
1,662,181
GENERAL MERCHANDISE STORES - 2.5%
Federated Department Stores, Inc. (a) 48,400 2,084,225
Wal-Mart Stores, Inc. 248,100 9,784,444
11,868,669
GROCERY STORES - 0.4%
Safeway, Inc. (a) 32,600 2,061,950Retail & Wholesale, Miscellaneous
- - 3.9%
Home Depot, Inc. 153,700 9,049,088
Lowe's Companies, Inc. 54,900 2,618,044
Officemax, Inc. (a) 51,700 736,725
Office Depot, Inc. (a) 16,300 390,181
Staples, Inc. (a) 21,600 599,400
Tandy Corp. 94,600 3,648,013
Toys "R" Us, Inc. (a) 51,300 1,612,744
18,654,195
TOTAL RETAIL & WHOLESALE 34,246,995
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - 0.5%
ADVERTISING - 0.0%
Interpublic Group of Companies, Inc. 3,450 $ 171,853
PRINTING - 0.0%
Donnelley (R.R.) & Sons Co. 3,200 119,200
SERVICES - 0.5%
Cendant Corp. (a) 62,047 2,132,848
TOTAL SERVICES 2,423,901
TECHNOLOGY - 8.1%
COMMUNICATIONS EQUIPMENT - 0.8%
Globalstar Telecommunications Ltd.
warrants 2/15/04 (a) 180 19,800
Lucent Technologies, Inc. 50,000 3,993,750
4,013,550
COMPUTER SERVICES & SOFTWARE - 0.6%
Microsoft Corp. (a) 15,000 1,938,750
Paychex, Inc. 9,750 493,594
Policy Management Systems Corp. (a) 10,000 695,625
3,127,969
COMPUTERS & OFFICE EQUIPMENT - 5.1%
Bay Networks, Inc. (a) 10,700 273,519
Compaq Computer Corp. 93,200 5,259,975
Digital Equipment Corp. (a) 42,700 1,579,900
Hewlett-Packard Co. 16,300 1,018,750
Ingram Micro, Inc. Class A (a) 3,300 96,113
International Business Machines Corp. 99,100 10,362,144
Quantum Corp. (a) 4,000 80,250
SCI Systems, Inc. (a) 90,800 3,955,475
Tech Data Corp. (a) 19,400 754,175
Xerox Corp. 14,800 1,092,425
24,472,726
ELECTRONIC INSTRUMENTS - 0.0%
Applied Materials, Inc. (a) 5,400 162,675
ELECTRONICS - 1.6%
AMP, Inc. 50,200 2,108,400
Intel Corp. 26,400 1,854,600
Molex, Inc. 12,594 362,070
Solectron Corp. (a) 78,000 3,241,875
7,566,945
TOTAL TECHNOLOGY 39,343,865
TRANSPORTATION - 1.7%
AIR TRANSPORTATION - 1.6%
AMR Corp. (a) 54,100 6,951,850
Northwest Airlines Corp. Class A (a) 4,200 201,075
US Airways Group, Inc. 12,500 781,250
7,934,175
TRUCKING & FREIGHT - 0.1%
Roadway Express, Inc. 3,100 68,588
Yellow Corp. (a) 13,000 326,625
395,213
TOTAL TRANSPORTATION 8,329,388
UTILITIES - 6.5%
CELLULAR - 0.9%
AirTouch Communications, Inc. (a) 110,100 4,576,031
McCaw International Ltd. warrants
4/15/07 (a)(c) 770 1,925
4,577,956
SHARES VALUE (NOTE 1)
ELECTRIC UTILITY - 1.4%
American Electric Power Co., Inc. 9,200 $ 474,950
Dominion Resources, Inc. 20,600 876,788
Edison International 39,400 1,071,188
Entergy Corp. 24,000 718,500
FPL Group, Inc. 21,500 1,272,531
GPU, Inc. 30,700 1,293,238
Long Island Lighting Co. 23,600 710,950
Niagara Mohawk Power Corp. (a) 10,400 109,200
6,527,345
TELEPHONE SERVICES - 4.2%
AT&T Corp. 208,900 12,795,125
Ameritech Corp. 33,400 2,688,700
BellSouth Corp. 44,900 2,528,431
GTE Corp. 25,000 1,306,250
US WEST Communications Group 25,000 1,128,125
20,446,631
TOTAL UTILITIES 31,551,932
TOTAL COMMON STOCKS
(Cost $320,787,692) 365,265,253
NONCONVERTIBLE PREFERRED STOCKS - 1.8%
CONSTRUCTION & REAL ESTATE - 0.2%
REAL ESTATE INVESTMENT TRUSTS - 0.2%
California Federal Preferred Capital Corp.
9 1/8% 24,164 628,264
Crown America Realty Trust
Series A, 11% 3,092 161,557
Walden Residential Properties,
Inc. 9.20% 5,800 148,314
TOTAL CONSTRUCTION & REAL ESTATE 938,135
FINANCE - 0.1%
INSURANCE - 0.1%
American Annuity Group Capital
Trust II 8 3/4% 160 172,840
SIG Capital Trust I 9 1/2% 82 86,281
259,121
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Echostar Communications Corp.
12 1/8%, pay-in-kind (c) 363 373,889
MEDIA & LEISURE - 1.1%
BROADCASTING - 1.0%
Adelphia Communications Corp. $13 1,423 168,626
American Radio Systems Corp.
11 3/8%, pay-in-kind 3,025 338,800
Cablevision Systems Corp. 11 1/8%,
depositary shares, pay-in-kind 9,826 1,134,903
Capstar Broadcasting Partners, Inc.
12%, pay-in-kind 418 45,405
Chancellor Media Corp.:
12%, pay-in-kind (c) 2,599 296,286
Series A, $12.25 (a) 1,591 219,558
Granite Broadcasting Corp.
12 3/4%, pay-in-kind 269 298,590
SFX Broadcasting, Inc. 12 5/8%, 4,283 490,404
NONCONVERTIBLE PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - CONTINUED
BROADCASTING - CONTINUED
Sinclair Capital 11 5/8% 4,717 $ 516,512
Time Warner, Inc., Series M,
10 1/4%, pay-in-kind 1,221 1,370,573
4,879,657
PUBLISHING - 0.1%
Primedia, Inc., Series D, $10 3,386 353,837
TOTAL MEDIA & LEISURE 5,233,494
TECHNOLOGY - 0.0%
COMMUNICATIONS EQUIPMENT - 0.0%
Intermedia Communications, Inc.
13 1/2%, pay-in-kind 200 245,000
UTILITIES - 0.3%
TELEPHONE SERVICES - 0.3%
Hyperion Telecommunications, Inc.
12 7/8%, pay-in-kind 266 267,995
IXC Communications, Inc. 12 1/2%,
pay-in-kind (c) 206 241,020
Nextlink Communications, Inc.,
14%, pay-in-kind 9,849 615,563
Winstar Communications, Inc.
14 1/2% (a)(c) 476 497,420
TOTAL UTILITIES 1,621,998
TOTAL NONCONVERTIBLE PREFERRED STOCKS
(Cost $8,133,012) 8,671,637
NONCONVERTIBLE BONDS - 13.3%
MOODY'S RATINGS PRINCIPAL
(UNAUDITED)(D) AMOUNT
AEROSPACE & DEFENSE - 0.2%
AEROSPACE & DEFENSE - 0.0%
Be Aerospace, Inc.
9 7/8%, 2/1/06 B2 $ 10,000 10,550
Wyman-Gordon Co.
8%, 12/15/07 Ba2 40,000 40,300
50,850
DEFENSE ELECTRONICS - 0.1%
Raytheon Co.
6.45%, 8/15/04 Baa1 180,000 180,884
Tracor, Inc.
8 1/2%, 3/1/07 B1 230,000 233,450
414,334
SHIP BUILDING & REPAIR - 0.1%
Newport News Shipbuilding, Inc.
9 1/4%, 12/1/06 B1 630,000 666,225
TOTAL AEROSPACE & DEFENSE 1,131,409
BASIC INDUSTRIES - 0.3%
CHEMICALS & PLASTICS - 0.2%
Acetex Corp. yankee
9 3/4%, 10/1/03 B1 80,000 82,400
General Chemical Corp.
9 1/4%, 8/15/03 B2 150,000 155,250
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
Huntsman Corp.
9 1/2%, 7/1/07 (c) B2 $ 270,000 $ 283,500
Sterling Chemicals, Inc.
11 1/4%, 4/1/07 B3 230,000 230,000
751,150
PACKAGING & CONTAINERS - 0.1%
BWAY Corp.
10 1/4%, 4/15/07 (c) B2 140,000 152,775
U.S. Can Corp.
10 1/8%, 10/15/06 B2 80,000 84,000
236,775
PAPER & FOREST PRODUCTS - 0.0%
Omega Cabinets Ltd.
10 1/2%, 6/15/07 (c) B3 170,000 176,375
TOTAL BASIC INDUSTRIES 1,164,300
CONSTRUCTION & REAL ESTATE - 0.1%
BUILDING MATERIALS - 0.1%
Nortek, Inc.:
9 1/4%, 3/15/07 B1 90,000 91,800
9 1/8%, 9/1/07 B1 260,000 263,250
355,050
CONSTRUCTION - 0.0%
U.S. Home Corp.
8.88%, 8/15/07 B1 250,000 255,000
TOTAL CONSTRUCTION & REAL ESTATE 610,050
DURABLES - 0.5%
AUTOS, TIRES, & ACCESSORIES - 0.1%
Aftermarket Technology Corp.
12%, 8/1/04 B3 135,000 149,850
Blue Bird Body Co.
10 3/4%, 11/15/06 B2 230,000 247,250
United Auto Group, Inc.
11%, 7/15/07 (c) B3 100,000 99,000
496,100
HOME FURNISHINGS - 0.0%
Sealy Mattress Co.
9 7/8%, 12/15/07 (c) B3 20,000 20,500
TEXTILES & APPAREL - 0.4%
Dyersburg Corp., Series B
9 3/4%, 9/1/07 B2 200,000 209,500
GFSI, Inc. 9 5/8%, 3/1/07 B3 180,000 185,400
Levi Strauss & Co.
7%, 11/1/06 (c) Baa2 310,000 317,245
Nine West Group, Inc.
9%, 8/15/07 (c) Ba3 660,000 628,650
Pillowtex Corp.
9%, 12/15/07 (c) B2 20,000 20,500
Worldtex, Inc.
9 5/8%, 12/15/07 (c) B1 380,000 389,500
1,750,795
TOTAL DURABLES 2,267,395
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
ENERGY - 0.3%
COAL - 0.2%
AEI Holding, Inc.
10%, 11/15/07 (c) B2 $ 370,000 $ 381,100
Anker Coal Group, Inc.
9 3/4%, 10/1/07 (c) B3 470,000 467,650
848,750
ENERGY SERVICES - 0.0%
Newpark Resources, Inc.
8 5/8%, 12/15/07 (c) B2 60,000 60,900
OIL & GAS - 0.1%
Belden & Blake Corp.
9 7/8%, 6/15/07 B3 90,000 90,900
Flores & Rucks, Inc.
9 3/4%, 10/1/06 B3 220,000 241,450
Occidental Petroleum Corp.
9 3/4%, 6/15/01 Baa3 100,000 110,737
Ocean Energy, Inc.
8 7/8%, 7/15/07 B3 120,000 127,500
Pennzoil Co.
9 5/8%, 11/15/99 Baa3 70,000 73,912
Petsec Energy, Inc.
9 1/2%, 6/15/07 B3 80,000 82,100
726,599
TOTAL ENERGY 1,636,249
FINANCE - 2.6%
ASSET-BACKED SECURITIES - 0.6%
Airplanes Pass Through Trust
Class D 10 7/8%, 3/15/19 Ba2 700,000 782,250
Capital Equipment Receivables
Trust 6.48%, 10/15/06 Baa2 100,000 99,072
Contimortgage Home Equity Loan
Trust 6.26%, 7/15/12 Aaa 150,000 150,070
CPS Auto Grantor Trust
6.55%, 12/15/02 Aaa 92,649 93,025
Dayton Hudson Credit Card
Master Trust
6 1/4%, 8/25/05 Aaa 170,000 170,131
Ford Credit Auto Owner Trust
6.40%, 5/15/02 A1 110,000 110,418
Green Tree Financial Corp.:
6 1/2%, 6/15/27 Aaa 100,000 100,187
6.80%, 6/15/27 Aaa 100,000 100,843
6.45%, 9/15/28 Aaa 110,000 110,834
6.68%, 1/15/29 Aaa 210,000 212,295
Key Plastics, Inc.
10 1/4%, 3/15/07 A2 130,000 129,959
MBNA Master Credit Card
Trust II Class A
6.55%, 1/15/07 Aaa 290,000 295,426
Olympic Automobile Receivables
Trust:
6.40%, 9/15/01 Aaa 150,000 149,363
6.70%, 3/15/02 Aaa 70,000 70,831
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
Premier Auto Trust
6.34%, 1/6/03 Aaa $ 220,000 $ 221,030
WFS Financial Owner Trust
6.55%, 10/20/04 Aaa 140,000 140,058
2,935,792
BANKS - 0.5%
ABN Amro Bank NV
6 5/8%, 10/31/01 Aa3 250,000 253,018
Banc One Corp.:
6.70%, 3/24/00 Aa3 150,000 151,634
6 1/4%, 9/1/00 Aa3 150,000 150,188
BanPonce Corp.
6.665%, 3/5/01 A3 150,000 151,155
Capital One Bank
6.42%, 11/12/99 Baa3 500,000 501,530
Den Danske Bank AS
7.40%, 6/15/10 (c)(f) A1 140,000 145,048
Morgan Stanley Dean Witter
Discover & Co.
5.70% 1/15/99 (h) - 500,000 500,000
NB Capital Trust IV
8 1/4%, 4/15/27 A1 100,000 109,126
Nationsbank Corp.
5.67%, 2/9/01 A1 250,000 246,795
Provident Bank
6 1/8%, 12/15/00 A3 180,000 179,159
2,387,653
CREDIT & OTHER FINANCE - 1.1%
AT&T Capital Corp.:
6.39%, 1/22/99 Baa3 50,000 50,215
6.26%, 2/18/99 Baa3 350,000 350,921
6.65%, 4/30/99 Baa3 250,000 251,913
Advanced Accessory Systems
LLC/AAC Capital Corp.
19 3/4%, 10/1/07 (c) B3 170,000 167,450
Ahmanson Capital Trust I
8.36%, 12/1/26 (c) Baa3 250,000 272,045
Bankers Trust Co.
5.66%, 7/21/98 (h) - 500,000 499,800
BanPonce Trust I
8.327%, 2/1/27 (c) Baa1 230,000 245,893
CIT Group Holdings, Inc.
6 1/4%, 10/4/99 Aa3 250,000 250,550
Chrysler Financial Corp.
6 3/8%, 1/28/00 A3 230,000 231,102
First Security Capital I
8.41%, 12/15/26 A3 110,000 120,277
Ford Motor Credit Co.:
6.65%, 5/22/00 A1 400,000 404,372
7%, 9/25/01 A1 325,000 333,076
General Electric Capital Corp.
6.94%, 4/13/09 (h) Aaa 250,000 252,575
General Motors Acceptance Corp.
6 3/4%, 7/10/02 A3 260,000 264,836
Greenpoint Capital Trust I
9.10%, 6/1/27 Ba1 170,000 187,213
Heller Financial, Inc.
7 7/8%, 11/1/99 A2 180,000 184,698
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
FINANCE - CONTINUED
CREDIT & OTHER FINANCE - CONTINUED
Household Finance Corp.
5.7825%, 6/4/98 - $ 500,000 $ 500,000
KeyCorp Institutional Capital
Series A 7.826%, 12/1/26 A1 130,000 134,867
Nordstrom Credit, Inc.
7 1/4%, 4/30/02 A2 100,000 104,157
Unicco Services Co./Unicco
Finance Corp.
9 7/8%, 10/15/07 (c) B3 250,000 250,000
U.S. West Capital Funding, Inc.
6.95%, 1/15/37 Baa1 160,000 164,811
5,220,771
INSURANCE - 0.1%
Reliance Group
9 3/4%, 11/15/03 B1 270,000 284,175
SunAmerica, Inc.
6.20%, 10/31/99 Baa1 250,000 250,083
534,258
SAVINGS & LOANS - 0.2%
Chevy Chase Savings Bank:
9 1/4%, 12/1/05 B1 90,000 92,700
9 1/4%, 12/1/08 B1 170,000 175,100
First Nationwide Parent Holdings
Ltd. 12 1/2%, 4/15/03 B3 250,000 284,375
Great West Financial Trust II
8.206%, 2/1/27 A3 120,000 127,274
Home Savings of America
Irwindale Calif. FSB
6 1/2%, 8/15/04 A3 90,000 90,408
Long Island Savings Bank FSB
Melville NY 7%, 6/13/02 Baa3 250,000 253,750
1,023,607
SECURITIES INDUSTRY - 0.1%
Merrill Lynch & Co., Inc.
5.5984%, 7/28/98 - 500,000 500,000
TOTAL FINANCE 12,602,081
HEALTH - 0.6%
DRUGS & PHARMACEUTICALS - 0.0%
ICN Pharmaceuticals, Inc., Series B
9 1/4%, 8/15/05 B1 130,000 137,800
MEDICAL EQUIPMENT & SUPPLIES - 0.1%
Graham-Field Health Products, Inc.
9 3/4%, 8/15/07 (c) B3 350,000 367,500
McKesson Corp.
6.60%, 3/1/00 A3 150,000 151,535
519,035
MEDICAL FACILITIES MANAGEMENT - 0.5%
Integrated Health
Services, Inc. (c):
9 1/2%, 9/15/07 B2 430,000 442,900
9 1/4%, 1/15/08 B2 880,000 897,600
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
Tenet Healthcare Corp.
8 5/8%, 1/15/07 Ba3 $ 630,000 $ 648,900
Vencor, Inc.
8 5/8%, 7/15/07 B1 280,000 279,300
2,268,700
TOTAL HEALTH 2,925,535
HOLDING COMPANIES - 0.1%
Norfolk Southern Corp.
7.05%, 5/1/37 Baa1 220,000 232,527
INDUSTRIAL MACHINERY & EQUIPMENT - 0.4%
ELECTRICAL EQUIPMENT - 0.1%
Echostar Communications Corp.
secured discount
0%, 6/1/04 (g) B2 222,000 203,130
Motors & Gears, Inc.
10 3/4%, 11/15/06 (c) B3 90,000 95,625
298,755
INDUSTRIAL MACHINERY & EQUIPMENT - 0.2%
Bucyrus International, Inc.
9 3/4%, 9/15/07 (c) B1 310,000 312,325
Continental Global Group, Inc.
11%, 4/1/07 B2 100,000 106,500
Exide Corp. 10%, 4/15/05 B1 165,000 173,250
Goss Graphic System, Inc.
12%, 10/15/06 B2 250,000 282,500
Roller Bearing Holdings, Inc.
0%, 6/15/09 (c)(g) - 500,000 305,000
1,179,575
POLLUTION CONTROL - 0.1%
Allied Waste North America
10 1/4%, 12/1/06 B2 290,000 318,275
Envirosource, Inc.
9 3/8%, 6/15/03 (c) B3 120,000 121,350
WMX Technologies, Inc.
7.10%, 8/1/26 Baa1 140,000 144,782
584,407
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 2,062,737
MEDIA & LEISURE - 4.0%
BROADCASTING - 2.6%
ACME Television/ACME Financial
Corp. 0%, 9/30/04 (c)(g) B3 290,000 213,513
Adelphia Communications Corp.:
9 1/2%, 2/15/04 B3 971,399 952,884
9 7/8%, 3/1/07 B3 260,000 274,950
Ascent Entertainment Group, Inc.
0%, 12/15/04 (c)(g) B3 240,000 138,600
Cablevision System Corp.:
9 1/4%, 11/1/05 B1 260,000 275,600
9 7/8%, 5/15/06 B1 180,000 199,350
7 7/8%, 12/15/07 Ba2 250,000 254,063
9 7/8%, 2/15/13 B1 120,000 131,400
Capstar Broadcasting
Partners, Inc.:
9 1/4%, 7/1/07 B2 560,000 576,100
0%, 2/1/09 (g) B3 190,000 137,275
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
MEDIA & LEISURE - CONTINUED
BROADCASTING - CONTINUED
Century Communications Corp.
8 3/4%, 10/1/07 Ba3 $ 440,000 $ 448,800
Chancellor Radio Broadcasting
Company 8 1/8%,
12/15/07 (c) - 590,000 578,200
Citadel Broadcasting Co.
10 1/4%, 7/1/07 (c) B3 120,000 129,900
Comcast UK Cable Partners Ltd.
0%, 11/15/07 B2 360,000 290,700
Continental Cablevision, Inc.:
8 5/8%, 8/15/03 Baa3 130,000 141,261
8.30%, 5/15/06 Baa3 100,000 109,141
9%, 9/1/08 Baa3 100,000 115,532
Echostar Satellite Broadcasting
Corp. 0%, 3/15/04 (g) B3 110,000 92,675
Fox Kids Worldwide, Inc.
0%, 11/1/07 (c) B1 390,000 231,075
Fox/Liberty Networks LLC/FLN
Finance, Inc. 0%,
8/15/07 (c)(g) B1 240,000 153,600
Frontiervision Operating
Partners LP/ Frontiervision
Capital Corp.
11%, 10/15/06 B3 590,000 651,213
FrontierVision Holdings LP/
FrontierVision Holdings Capital
Corp. 0%, 9/15/07 (g) Caa1 460,000 330,050
Granite Broadcasting Corp.:
10 3/8%, 5/15/05 B3 160,000 167,600
9 3/8%, 12/1/05 B3 410,000 415,125
Hearst-Argyle Television, Inc.
7 1/2%, 11/15/27 Baa3 130,000 131,914
Intermedia Capital Partners IV
LP/Intermedia Partners IV
Capital Corp.
11 1/4%, 8/1/06 B2 180,000 200,025
International Cabletel, Inc.
0%, 2/1/06 (g) B3 220,000 171,600
Iridium LLC/Iridium Capital Corp.:
14%, 7/15/05 B3 180,000 195,750
11 1/4%, 7/15/05 (c) B3 200,000 197,000
Lenfest Communications, Inc.
8 3/8%, 11/1/05 Ba3 400,000 412,500
NTL, Inc. 10%, 2/15/07 B3 270,000 284,175
Olympus Communications LP/
Olympus Capital Corp
10 5/8%, 11/15/06 B1 160,000 177,200
Orion Network Systems, Inc.:
11 1/4%, 1/15/07 B2 100,000 113,000
0%, 1/15/07 (g) B2 290,000 215,325
Pegasus Communications Corp.
9 5/8%, 10/15/05 (c) B3 180,000 183,600
Rogers Cablesystems Ltd. yankee
11%, 12/1/15 B2 290,000 334,950
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 160,000 176,000
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
Sinclair Broadcast Group, Inc.
8 3/4%, 12/15/07 B2 $ 390,000 $ 390,000
TCI Communications, Inc.
6.46%, 3/6/00 Ba1 200,000 199,418
TCI Communications Financing III
9.65%, 3/31/27 Ba3 870,000 1,003,763
Tele Communications, Inc.
9 1/4%, 4/15/02 Ba1 100,000 109,767
Telemundo Group, Inc.
7%, 2/15/06 (h) B1 200,000 210,000
Telewest PLC
0%, 10/1/07 (g) B1 780,000 604,500
Time Warner, Inc.:
7.95%, 2/1/00 Ba1 190,000 195,841
8.18%, 8/15/07 Ba1 180,000 196,200
12,711,135
ENTERTAINMENT - 0.6%
AMC Entertainment, Inc.
9 1/2%, 3/15/09 B2 635,000 658,813
Ameristar Casinos, Inc.
10 1/2%, 8/1/04 B3 250,000 252,500
Bally Total Fitness Holding Corp.
9 7/8%, 10/15/07 (c) B3 518,000 525,770
Livent, Inc.
9 3/8%, 10/15/04 (c) B1 360,000 360,000
Viacom, Inc.:
7 3/4%, 6/1/05 Ba2 120,000 123,281
8%, 7/7/06 B1 680,000 682,550
2,602,914
LODGING & GAMING - 0.5%
American Skiing Co.
12%, 7/15/06 B3 370,000 409,775
Courtyard by Marriott II
LP/Courtyard II Finance Co.,
Series B,
10 3/4%, 2/1/08 B- 340,000 374,000
HMC Acquisition Properties, Inc.
9%, 12/15/07 Ba3 250,000 262,500
HMH Properties, Inc.:
9 1/2%, 5/15/05 Ba3 750,000 797,813
8 7/8%, 7/15/07 Ba3 230,000 240,925
Sun International Hotels Ltd./Sun
International North America,
Inc. yankee 9%, 3/15/07 Ba3 260,000 267,800
2,352,813
PUBLISHING - 0.2%
Big Flower Press Holdings, Inc.
8 7/8%, 7/1/07 (c) B2 180,000 180,900
Garden State Newspapers, Inc.
8 3/4%, 10/1/09 (c) B1 400,000 401,500
News America Holdings, Inc.
8 1/2%, 2/15/05 Baa3 70,000 76,763
Sun Media Corp. yankee:
9 1/2%, 2/15/07 B3 190,000 204,250
9 1/2%, 5/15/07 B3 60,000 64,500
927,913
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
MEDIA & LEISURE - CONTINUED
RESTAURANTS - 0.1%
Foodmaker, Inc.
9 3/4%, 6/1/02 B2 $ 170,000 $ 175,100
Host Marriott Travel Plazas, Inc.
9 1/2%, 5/15/05 Ba3 450,000 478,125
653,225
TOTAL MEDIA & LEISURE 19,248,000
NONDURABLES - 0.3%
AGRICULTURE - 0.0%
Windy Hill Pet Food, Inc.
9 3/4%, 5/15/07 B3 200,000 208,000
FOODS - 0.1%
Chiquita Brands International, Inc.
9 5/8%, 1/15/04 B1 140,000 148,400
ConAgra, Inc.
7 1/8%, 10/1/26 Baa1 150,000 159,299
307,699
HOUSEHOLD PRODUCTS - 0.1%
Playtex Products, Inc.
8 7/8%, 7/15/04 B1 190,000 192,375
Revlon Consumer Products Corp.
10 1/2%, 2/15/03 B3 440,000 463,100
655,475
TOBACCO - 0.1%
Philip Morris Companies, Inc.:
7 1/4%, 9/15/01 A2 150,000 153,683
7%, 7/15/05 A2 150,000 152,904
6.95%, 6/1/06 A2 140,000 144,992
451,579
TOTAL NONDURABLES 1,622,753
RETAIL & WHOLESALE - 1.2%
APPAREL STORES - 0.1%
AnnTaylor, Inc.
8 3/4%, 6/15/00 B3 440,000 437,800
Specialty Retailers, Inc.
8 1/2%, 7/15/05 Ba3 110,000 112,200
550,000
GENERAL MERCHANDISE STORES - 0.4%
Dayton Hudson Corp.:
6.80%, 10/1/01 Baa1 150,000 152,258
7 1/2%, 7/15/06 Baa1 250,000 265,428
Federated Department
Stores, Inc.:
10%, 2/15/01 Baa2 250,000 274,625
8 1/8%, 10/15/02 Baa2 50,000 53,343
6.79%, 7/15/27 Baa2 100,000 102,677
K mart Corp.:
12 1/2%, 3/1/05 Ba3 440,000 537,900
7 3/4%, 10/1/12 Ba3 40,000 38,900
8 1/4%, 1/1/22 Ba3 200,000 197,500
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
Parisian, Inc.
9 7/8%, 7/15/03 B1 $ 240,000 $ 256,800
Penney (J.C.) Co., Inc.
6.95%, 4/1/00 A2 150,000 152,418
2,031,849
GROCERY STORES - 0.7%
Ameriserve Food Distribution, Inc.
8 7/8%, 10/15/06 B1 470,000 474,700
Di Giorgio Corp.
10%, 6/15/07 B3 140,000 137,550
Fleming Companies, Inc.
10 5/8%, 7/31/07 (c) B3 280,000 295,400
Kroger Co. 8.15%, 7/15/06 Baa3 125,000 137,959
Mrs. Fields Original Cookies, Inc.
10 1/8%, 12/1/04 (c) B2 220,000 221,100
Pathmark Stores, Inc.:
12 5/8%, 6/15/02 Caa2 370,000 302,475
9 5/8%, 5/1/03 Caa1 810,000 746,213
Pueblo Xtra International, Inc.:
9 1/2%, 8/1/03 B3 430,000 406,350
9 1/2%, 8/1/03 B3 120,000 113,700
Randalls Food Markets, Inc.
9 3/8%, 7/1/07 (c) B2 300,000 309,000
3,144,447
RETAIL & WHOLESALE, MISCELLANEOUS - 0.0%
J Crew Operating Corp.
10 3/8%, 10/15/07 (c) B3 90,000 78,300
J Crew Group, Inc. 0%,
10/15/08 (c)(g) Caa2 90,000 39,150
117,450
TOTAL RETAIL & WHOLESALE 5,843,746
SERVICES - 0.2%
LEASING & RENTAL - 0.1%
PHH Corp.
5.6775%, 6/11/98 P-1 500,000 499,950
PRINTING - 0.0%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa1 200,000 202,000
SERVICES - 0.1%
Borg-Warner Security Corp.
9 5/8%, 3/15/07 B3 110,000 114,950
Iron Mountain, Inc.
8 3/4%, 9/30/09 (c) B3 330,000 336,600
451,550
TOTAL SERVICES 1,153,500
TECHNOLOGY - 0.3%
COMPUTER SERVICES & SOFTWARE - 0.0%
Federal Data Corp.
10 1/8%, 8/1/05 (c) B3 400,000 404,000
COMPUTERS & OFFICE EQUIPMENT - 0.1%
Comdisco, Inc.:
7.21%, 7/2/01 Baa1 125,000 128,966
6 3/8%, 11/30/01 Baa1 300,000 300,000
428,966
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
TECHNOLOGY - CONTINUED
ELECTRONICS - 0.2%
Advanced Micro Devices, Inc.
11%, 8/1/03 Ba1 $ 280,000 $ 299,600
Communications Instruments, Inc.
10%, 9/15/04 (c) B3 40,000 40,800
Fairchild Semiconductor Corp.:
10 1/8%, 3/15/07 B2 220,000 232,650
11.74%, 3/15/08
pay-in-kind (e) - 222,698 218,269
791,319
TOTAL TECHNOLOGY 1,624,285
TRANSPORTATION - 0.3%
AIR TRANSPORTATION - 0.3%
Kitty Hawk, Inc.
9.95%, 11/15/04 (c) B1 435,000 448,050
US Air, Inc.:
9 5/8%, 2/1/01 B3 80,000 83,200
10%, 7/1/03 B3 250,000 260,000
10 3/8%, 3/1/13 B1 480,000 534,000
TOTAL TRANSPORTATION 1,325,250
UTILITIES - 1.9%
CELLULAR - 0.6%
Clearnet Communications, Inc.
yankee 0%,
12/15/05 (g) B3 420,000 331,800
Globalstar LP/Globalstar
Capital C Corp.
11 3/8%, 2/15/04 B3 70,000 70,700
McCaw International Ltd.
0%, 4/15/07 (g) CCC 770,000 446,600
Millicom International Cellular SA
0%, 6/1/06 (g) B3 260,000 189,800
Nextel Communications, Inc. (c)(g):
0%, 9/15/07 B3 136,000 86,020
0%, 10/31/07 B3 1,310,000 794,188
Paging Network, Inc.
8.875%, 2/1/06 B2 90,000 88,425
Rogers Communications, Inc.
8 7/8%, 7/15/07 B2 440,000 440,000
360 Degrees Communications Co.
7 1/8%, 3/1/03 Ba1 113,000 115,402
2,562,935
ELECTRIC UTILITY - 0.3%
AES Corp.
8 3/8%, 8/15/07 Ba1 160,000 159,600
Avon Energy Partners Holdings
6.73%, 12/11/02 (c) Baa2 170,000 171,173
CalEnergy, Inc.
9 1/2%, 9/15/06 Ba1 100,000 107,875
Calpine Corp.
8 3/4%, 7/15/07 (c) Ba3 410,000 418,200
Hydro-Quebec yankee
7.40%, 3/28/25 A2 90,000 109,427
Israel Electric Corp. Ltd.
7 3/4%, 12/15/27 (c) A3 185,000 186,299
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
Israel Electric Corp. yankee
7 7/8%, 12/15/26 (c) A3 $ 80,000 $ 83,460
Long Island Lighting Co.
8 5/8%, 4/15/04 Ba1 210,000 217,550
NIPSCO Capital Markets, Inc.
7.39%, 4/1/04 Baa1 100,000 104,258
1,557,842
TELEPHONE SERVICES - 1.0%
Brooks Fiber Properties, Inc.
0%, 11/1/06 (g) - 170,000 136,000
GCI, Inc. 9 3/4%, 8/1/07 B2 80,000 83,200
Hyperion Telecommunications,
Inc.:
Series B, 0%, 4/15/03 (g) B 330,000 239,250
12 1/4%, 9/1/04 B 460,000 504,850
ICG Holdings, Inc. (g):
0%, 9/15/05 - 250,000 203,125
0%, 5/1/06 - 140,000 105,350
McLeodUSA, Inc.
9 1/4%, 7/15/07 (c) B3 270,000 281,475
Netia Holdings BV
0%, 11/1/07 (c) B3 410,000 233,700
NEXTLINK Communications, Inc.
9 5/8%, 10/1/07 B3 590,000 607,700
Qwest Communications
International, Inc.
0%, 10/15/07 (c)(g) B2 920,000 625,600
Teleport Communications Group,
Inc. 0%, 7/1/07 (g) B1 700,000 574,000
Transtel SA 12 1/2%,
11/1/07 (c) B2 190,000 180,025
Winstar Equipment
12 1/2%, 3/15/04 B3 510,000 572,475
WorldCom, Inc.:
9 3/8%, 1/15/04 Ba1 122,000 129,170
8 7/8%, 1/15/06 Ba1 103,000 110,820
7 3/4%, 4/1/07 Ba1 220,000 236,256
4,822,996
TOTAL UTILITIES 8,943,773
TOTAL NONCONVERTIBLE BONDS
(Cost $63,026,877) 64,393,590
U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS - 2.0%
U.S. TREASURY OBLIGATIONS - 1.7%
7 3/4%, 12/31/99 Aaa 310,000 322,062
6 7/8%, 3/31/00 Aaa 1,520,000 1,557,529
6 5/8%, 6/30/01 Aaa 395,000 405,926
7 7/8%, 8/15/01 Aaa 662,000 707,718
10 3/4%, 5/15/03 Aaa 5,000 6,137
7 7/8%, 11/15/04 Aaa 2,430,000 2,716,667
7%, 7/15/06 Aaa 238,000 256,890
12 3/4%, 11/15/10 (callable) Aaa 500,000 713,670
8 7/8%, 2/15/19 Aaa 489,000 654,189
7 1/4%, 2/15/23 Aaa 575,000 656,397
7 5/8%, 2/15/25 Aaa 15,000 18,204
U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
U.S. TREASURY OBLIGATIONS - CONTINUED
6 1/2%, 11/15/26 Aaa $ 25,000 $ 26,688
6.375%, 8/15/27 Aaa 50,000 52,735
8,094,812
U.S. GOVERNMENT AGENCY OBLIGATIONS - 0.3%
Federal Home Loan Bank:
7.31%, 6/16/04 Aaa 125,000 133,770
7.56% 9/01/04 Aaa 50,000 54,281
Freddie Mac
6.783%, 8/18/05 Aaa 440,000 459,593
Fannie Mae:
6.97%, 4/8/04 Aaa 190,000 200,271
6.44%, 6/21/05 Aaa 250,000 255,898
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 126,353 131,205
U.S. Department of Housing and
Urban Development Government
guaranteed participation certificates
Series 1995-A, 8.24%,
8/1/04 Aaa 20,000 22,329
U.S. Trade Trust Certificates
(assets of Trust guaranteed by
U.S. Government through
Export-Import Bank)
6.69%, 1/15/09 (c) Aaa 194,437 199,573
1,456,920
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $9,289,652) 9,551,732
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 1.7%
FEDERAL HOME LOAN GUARANTEED - 0.1%
7 1/2%, 8/1/27 Aaa 495,000 506,910
FANNIE MAE - 1.6%
6%, 3/1/11 to 5/1/11 Aaa 1,843,642 1,817,409
6 1/2%, 2/1/26 to 7/1/26 Aaa 2,310,907 2,287,529
7%, 4/1/26 to 1/1/28 Aaa 3,141,837 3,166,284
7 1/2%, 8/1/27 to 9/1/27 Aaa 577,531 591,062
7,862,284
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $8,179,070) 8,369,194
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.0%
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
PRIVATE SPONSOR - 0.0%
Credit-Based Asset Servicing and
Securitization LLC
Series 1997-2 Class 2-B,
7.2891%, 12/29/25 (c)(f)(j)
(Cost $132,891) Ba3 $ 250,000 $ 128,828
COMMERCIAL MORTGAGE SECURITIES - 1.1%
American Southwest Financial
Securities Series 1994-C2
Class B2, 11.4250%,
12/25/01 (c)(f) - 250,000 254,141
Blackrock Capital Funding LLC
Series 1996 Class C2,
7.5984%, 11/16/26 (c)(f) Aaa 61,046 61,275
BKB Commercial Mortgage Trust
Series 1997-C1 Class D,
7.83%, 2/25/43 (c)(f) BBB 60,000 60,963
CS First Boston Mortgage
Securities Corp.:
Series 1995-AEWI Class E,
9.6563%,
11/25/27 (c)(f) - 125,000 126,445
Series 1997-C2 Class D,
7.27%, 4/17/11 Baa2 190,000 190,416
DLJ Mortgage Acceptance
Corp. Series 1993-MF12
Class B-2, 10.10%,
9/18/03 (c) - 250,000 254,237
Franchise Mortgage Acceptance
Co. LLC Loan Receivables
Trust (c)(f):
Series 1997-A Class E,
8.1044%, 4/15/19 - 250,000 235,547
Series 1997-B Class E,
7.8912%, 9/15/19 - 100,000 86,969
First Chicago/Lennar Trust I,
Series 1997-CHL1 (f):
Class D, 8.1161%, 5/29/08 - 350,000 348,578
Class E, 8.1161%, 2/28/11 - 320,000 273,000
First Union-Lehman Brothers
Commercial Mortgage Trust
sequential pay Series 1997-C2
Class B, 6.79%, 10/18/11 Aa2 390,000 393,839
General Motors Acceptance Corp
Commercial Mortgage
Securities, Inc.:
Series 1996-C1 Class F,
7.86%, 11/15/06 (c) Ba3 250,000 240,080
Series 1997-C2 Class D,
7.192%, 1/15/08 Baa1 50,000 50,250
Series 1997-C2 Class E,
7.624%, 4/15/11 Baa3 110,000 109,432
GS Mortgage Securities
Corp. II Series 1997- GL
Class A2-B,
6.86%, 7/13/30 Aaa 140,000 143,790
COMMERCIAL MORTGAGE SECURITIES - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
Kidder Peabody Acceptance
Corp. sequential pay,
Series 1993-M1 Class A-2,
7.15%, 4/25/25 Aa2 $ 54,824 $ 55,047
LTC Commercial Mortgage
Pass-Through Certificates
Series 1996-1 Class E,
9.16%, 4/15/28 BB- 500,000 520,000
Morgan Stanley Capital One, Inc.:
sequential pay Series 1997-C1
Class A-1C, 7.63%,
2/15/20 Aaa 150,000 159,000
Series 1996-MBL1 Class E,
8.661%, 5/25/21 (c) - 92,365 87,198
Resolution Trust Corp.
Series 1991-M2 Class A-3,
7.5417%, 9/25/20 (f) Ba3 75,808 65,195
Structured Asset Securities Corp.
Series 1993-C1 Class E,
6.60%, 10/25/24 (c) B 250,000 100,000
Series 1995-C1 Class E,
7 3/8%, 9/25/24 (c) BB 1,000,000 954,063
sequential pay Series 1996
Class A-2A, 7 3/4%,
2/25/28 Aaa 71,677 72,487
commercial Series 1996-CFL
Class E, 7 3/4%, 2/25/28 BB+ 80,000 81,975Thirteen Affiliates of
General
Growth Properties, Inc. (c):
Series D-2, 6.992%,
11/15/12 Baa2 140,000 141,963
Series E-2, 7.224%
11/15/12 Baa3 100,000 100,675
sequential pay Series A-2,
6.602%, 11/15/12 Aaa 130,000 130,337
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $5,086,438) 5,296,902
FOREIGN GOVERNMENT OBLIGATIONS (I) - 0.1%
Export Development Corp. yankee
8 1/8%, 8/10/99 Aa2 50,000 51,558
Manitoba Province yankee
6 3/8%, 10/15/99 A1 125,000 125,690
Newfoundland Province yankee
11 5/8%, 10/15/07 Baa1 250,000 342,823
Quebec Province yankee
7.22%, 7/22/36 (h) A2 120,000 132,480
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $629,612) 652,551
SUPRANATIONAL OBLIGATIONS - 0.0%
Inter American Development Bank
yankee 6.29%, 7/16/27
(Cost $149,057) Aaa 150,000 155,820
BANK NOTES - 0.1%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
Key Bank N.A
5.6488%, 8/20/99
(Cost $499,328) $ 500,000 $ 499,520
CERTIFICATES OF DEPOSIT - 0.9%
Banque Nationale de Paris yankee
5 3/4%, 7/31/98 200,000 199,851
Barclays Bank PLC yankee
5.80%, 3/2/98 500,000 500,086
Canadian Imperial Bank of Commerce
NY Branch yankee
6.20%, 8/1/00 180,000 180,270
Canadian Imperial Bank of Commerce
5.91%, 8/28/98 500,000 499,807
Chase Manhattan Bank
5 3/4%, 2/9/98 200,000 199,994
Credit Agricole Indosuez yankee
5.94%, 6/23/98 500,000 500,118
Deutsche Bank AG yankee
6.20%, 4/10/98 500,000 500,328
Landesbank Hessen-Thuringen
yankee 5.78%, 1/27/98 300,000 299,949
Rabobank Nederland Coop Central
yankee:
5.97%, 3/20/98 200,000 200,013
6.20%, 4/10/98 200,000 200,131
Royal Bank of Canada yankee
5 7/8%, 3/10/98 100,000 99,987
Societe Generale France yankee
5.91%, 10/15/98 400,000 399,772
Westpac Banking Corp. yankee
5.885%, 8/27/98 500,000 499,690
TOTAL CERTIFICATES OF DEPOSIT
(Cost $4,278,893) 4,279,996
COMMERCIAL PAPER - 0.6%
Bear Stearns Cos., Inc.
5.56%, 1/12/98 500,000 499,149
Citibank Credit Card Master Trust I
(Dakota Certificate Program)
5.80%, 2/24/98 500,000 495,731
General Motors Acceptance Corp.
5.77%, 2/11/98 500,000 496,761
Goldman Sachs Group LP
5.83%, 1/26/98 200,000 199,209
GTE Corporation
6.02%, 2/24/98 500,000 495,701
Preferred Receivables Fund Corp.
5.85%, 2/4/98 500,000 497,351
TOTAL COMMERCIAL PAPER
(Cost $2,683,864) 2,683,902
MASTER NOTES - 0.2%
Corestates Bank NA Philadelphia PA
5.96%, 1/30/98 (f) 200,000 199,998
First Bank National Association
Minneapolis Minnesota
5.8709%, 5/15/98 (f) 200,000 199,874
Goldman Sachs Group LP (The)
5.7188%, 5/4/98 (e) 300,000 299,967
TOTAL SHORT-TERM NOTES
(Cost $699,839) 699,839
CASH EQUIVALENTS - 2.9%
MATURITY VALUE
AMOUNT (NOTE 1)
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 6.84%, dated
12/31/97 to 1/2/98 $ 406,154 $ 406,000
SHARES
Taxable Central Cash Fund (b) 13,796,413 13,796,413
TOTAL CASH EQUIVALENTS
(Cost $14,202,413) 14,202,413
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $437,778,638) $ 484,851,177
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield of the Taxable Central Cash
Fund was 5.69%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(c) Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions
exempt from registration, normally to qualified institutional buyers.
At the period end, the value of these securities amounted to
$19,719,463 or 4.1% of net assets.
(d) Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investors Service, Inc.
(e) Restricted securities - Investment in securities not registered
under the Securities Act of 1933 (see Note 2 of Notes to Financial
Statements).
Additional information on each holding is as follows:
ACQUISITION ACQUISITION
SECURITY DATE COST
Fairchild Semiconductor
Corp. 11.74%, 3/15/08
pay-in-kind 4/3/97 $ 184,524
9/15/97 $ 12,698
Goldman Sachs Group LP
(The) 5.7188%, 5/4/98 8/5/97 $ 300,000
(f) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(g) Debt obligation initially issued in zero coupon form which
converts to coupon form at a specified rate and date. The rate shown
is the rate at period end.
(h) Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date. The rate shown is the rate at
period end.
(i) For foreign government obligations not individually rated by S&P
or Moody's, the ratings listed are assigned to securities by FMR, the
fund's investment adviser, based principally on S&P and Moody's
ratings of the sovereign credit of the issuing government.
(j) Non-income producing - issuer filed for protection under the
Federal Bankruptcy Code or is in default of interest payment.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $507,352,140 and $327,012,912, respectively, of which U.S.
government and government agency obligations aggregated $34,101,122
and $46,087,670, 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 $69,631 for the
period (See Note 4 of Notes to Financial Statements).
The composition of long-term debt holdings as a percentage of total
value of investment in securities, is as follows (ratings are
unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 5.4% AAA, AA, A 5.3%
Baa 1.4% BBB 1.7%
Ba 2.1% BB 2.3%
B 7.1% B 6.7%
Caa 0.3% CCC 0.8%
Ca, C 0.0% CC, C 0.0%
D 0.0%
For some foreign government obligations, FMR has assigned the ratings
of the sovereign credit of the issuing government. The percentage not
rated by Moody's or S&P amounted to 0.7%. FMR has determined that
unrated debt securities that are lower quality account for 0.6% of the
total value of investment in securities.
INCOME TAX INFORMATION
At December 31, 1997, the aggregate cost of investment securities for
income tax purposes was $437,832,021. Net unrealized appreciation
aggregated $47,019,156, of which $56,754,605 related to appreciated
investment securities and $9,735,449 related to depreciated investment
securities.
The fund hereby designates approximately $25,212,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
INVESTMENT IN SECURITIES, AT VALUE (INCLUDING REPURCHASE AGREEMENTS OF $406,000)
(COST $437,778,638) - SEE $ 484,851,177
ACCOMPANYING SCHEDULE
CASH 2,859
RECEIVABLE FOR INVESTMENTS SOLD 1,239,510
RECEIVABLE FOR FUND SHARES SOLD 196,863
DIVIDENDS RECEIVABLE 615,301
INTEREST RECEIVABLE 1,746,491
TOTAL ASSETS 488,652,201
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 4,630,982
PAYABLE FOR FUND SHARES REDEEMED 423,446
ACCRUED MANAGEMENT FEE 234,321
OTHER PAYABLES AND ACCRUED EXPENSES 122,415
TOTAL LIABILITIES 5,411,164
NET ASSETS $ 483,241,037
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 381,216,260
UNDISTRIBUTED NET INVESTMENT INCOME 9,445,834
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS 45,511,500
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 47,067,443
AND ASSETS AND LIABILITIES IN
FOREIGN CURRENCIES
NET ASSETS $ 483,241,037
</TABLE>
INITIAL CLASS: $16.36
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($483,230,782 (DIVIDED BY) 29,540,429
SHARES)
SERVICE CLASS: $16.35
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($10,255 (DIVIDED BY) 627.4 SHARES)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME $ 5,197,617
DIVIDENDS
INTEREST 7,243,690
TOTAL INCOME 12,441,307
EXPENSES
MANAGEMENT FEE $ 2,323,242
TRANSFER AGENT FEES 272,231
DISTRIBUTION FEES - SERVICE CLASS 1
ACCOUNTING FEES AND EXPENSES 234,257
NON-INTERESTED TRUSTEES' COMPENSATION 1,689
CUSTODIAN FEES AND EXPENSES 62,649
REGISTRATION FEES 25
AUDIT 43,042
LEGAL 2,102
MISCELLANEOUS 55,316
TOTAL EXPENSES BEFORE REDUCTIONS 2,994,554
EXPENSE REDUCTIONS (48,470 2,946,084
)
NET INVESTMENT INCOME 9,495,223
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 45,671,930
FOREIGN CURRENCY TRANSACTIONS (1,772 45,670,158
)
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 28,900,072
ASSETS AND LIABILITIES IN (5,204 28,894,868
FOREIGN CURRENCIES )
NET GAIN (LOSS) 74,565,026
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 84,060,249
OTHER INFORMATION $ 45,371
EXPENSE REDUCTIONS
DIRECTED BROKERAGE ARRANGEMENTS
CUSTODIAN CREDITS 3,099
$ 48,470
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
OPERATIONS $ 9,495,223 $ 3,681,563
NET INVESTMENT
INCOME
NET REALIZED GAIN 45,670,158 6,740,985
(LOSS)
CHANGE IN NET 28,894,868 16,385,266
UNREALIZED
APPRECIATION
(DEPRECIATION)
NET INCREASE 84,060,249 26,807,814
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
DISTRIBUTIONS TO - (3,802,638
SHAREHOLDERS )
FROM NET INVESTMENT
INCOME
FROM NET REALIZED (447,876 (8,710,844
GAIN ) )
TOTAL DISTRIBUTIONS (447,876 (12,513,482
) )
SHARE TRANSACTIONS - 146,605,112 170,482,605
NET INCREASE
(DECREASE)
TOTAL INCREASE 230,217,485 184,776,937
(DECREASE) IN NET
ASSETS
NET ASSETS
BEGINNING OF PERIOD 253,023,552 68,246,615
END OF PERIOD $ 483,241,037 $ 253,023,552
(INCLUDING UNDER
(OVER) DISTRIBUTION
OF NET INVESTMENT
INCOME
OF $9,445,834
AND $(50,000),
RESPECTIVELY)
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
SHARES DOLLARS SHARES DOLLARS
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SHARE TRANSACTIONS 13,903,953 $ 201,184,575 14,392,956 $ 180,656,312
INITIAL CLASS
SOLD
REINVESTED 32,763 447,876 975,606 12,513,482
REDEEMED (3,709,989) (55,037,339) (1,851,290) (22,687,189)
NET INCREASE 10,226,727 $ 146,595,112 13,517,272 $ 170,482,605
(DECREASE)
SERVICE CLASS A 627 $ 10,000 - $ -
SOLD
REINVESTED - - - -
REDEEMED - - - -
NET INCREASE 627 $ 10,000 - $ -
(DECREASE)
DISTRIBUTIONS $ - $ 3,802,638
INITIAL CLASS - NET
INVESTMENT INCOME
INITIAL CLASS - NET 447,876 8,710,844
REALIZED GAIN
TOTAL $ 447,876 $ 12,513,482
SERVICE CLASS - NET $ - $ -
INVESTMENT INCOME
SERVICE CLASS - NET - -
REALIZED GAIN
TOTAL $ - $ -
$ 447,876 $ 12,513,482
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
A SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
YEARS ENDED DECEMBER 31, JANUARY 3, 1995
(COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31,
SELECTED PER-SHARE DATA 1997 1996 1995
NET ASSET VALUE, $ 13.10 $ 11.77 $ 10.00
BEGINNING OF
PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET .36 D .21 .10
INVESTMENT
INCOME
NET REALIZED 2.92 2.08 2.20
AND
UNREALIZED
GAIN (LOSS)
TOTAL FROM 3.28 2.29 2.30
INVESTMENT
OPERATIONS
LESS
DISTRIBUTIONS
FROM NET - (.21) (.11)
INVESTMENT
INCOME
FROM NET (.02) (.75) (.42)
REALIZED GAIN
TOTAL (.02) (.96) (.53)
DISTRIBUTIONS
NET ASSET VALUE, $ 16.36 $ 13.10 $ 11.77
END OF PERIOD
TOTAL RETURN B, 25.07% 20.04% 23.02%
C
RATIOS AND
SUPPLEMENTAL
DATA
NET ASSETS, END $ 483,231 $ 253,024 $ 68,247
OF PERIOD (000
OMITTED)
RATIO OF .77% .87% 1.00% F
EXPENSES TO
AVERAGE NET
ASSETS
RATIO OF .76% G .85% G 1.00%
EXPENSES TO
AVERAGE NET
ASSETS AFTER
EXPENSE
REDUCTIONS
RATIO OF NET 2.44% 2.63% 1.69%
INVESTMENT
INCOME TO
AVERAGE NET
ASSETS
PORTFOLIO 90% 120% 343%
TURNOVER RATE
AVERAGE $ .0399 $ .0211
COMMISSION
RATE H
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEAR ENDED
DECEMBER 31,
SELECTED PER-SHARE DATA 1997 E
SELECTED PER-SHARE
DATA
NET ASSET VALUE, $ 15.94
BEGINNING OF PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET INVESTMENT .07 D
INCOME
NET REALIZED AND .34
UNREALIZED GAIN (LOSS)
TOTAL FROM .41
INVESTMENT
OPERATIONS
NET ASSET VALUE, END OF $ 16.35
PERIOD
TOTAL RETURN B 2.57%
RATIOS AND
SUPPLEMENTAL DATA
NET ASSETS, END OF $ 10
PERIOD (000 OMITTED)
RATIO OF EXPENSES TO .87%
AVERAGE NET ASSETS A
RATIO OF NET INVESTMENT 2.70%
INCOME TO AVERAGE A
NET ASSETS
PORTFOLIO TURNOVER 90%
AVERAGE COMMISSION $ .0399
RATE H
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 6 OF NOTES TO
FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3, 1997 (COMMENCEMENT OF SALE OF SERVICE
CLASS SHARES) TO DECEMBER 31, 1997.
F FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD
HAVE BEEN HIGHER.
G FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES
(SEE NOTE 6 OF NOTES TO FINANCIAL STATEMENTS).
H FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS
REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR
SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY
FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES
EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION
RATE STRUCTURES MAY DIFFER.
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
DECEMBER 31, 1997 YEAR YEARS YEARS
VIP: EQUITY-INCOME - "INITIAL CLASS" 28.11% 20.16% 16.72%
S&P 500 (REGISTERED TRADEMARK) 33.36% 20.27% 18.05%
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.
3
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
IMAHDR PRASUN SHR__CHT 19971231 19980109 105649 S00000000000001
VIP Equity-Income S&P 500
00150 SP001
1987/12/31 10000.00 10000.00
1988/01/31 10711.25 10421.00
1988/02/29 11242.04 10906.62
1988/03/31 11046.33 10569.60
1988/04/30 11229.18 10686.93
1988/05/31 11379.76 10779.90
1988/06/30 12027.19 11274.70
1988/07/31 12005.40 11231.86
1988/08/31 11798.41 10849.97
1988/09/30 12148.99 11312.18
1988/10/31 12358.65 11626.66
1988/11/30 12160.03 11460.40
1988/12/31 12271.04 11660.96
1989/01/31 13028.92 12514.54
1989/02/28 12962.05 12202.93
1989/03/31 13242.80 12487.26
1989/04/30 13753.89 13135.34
1989/05/31 14162.76 13667.32
1989/06/30 14172.46 13589.42
1989/07/31 14998.71 14816.55
1989/08/31 15239.70 15106.95
1989/09/30 15068.37 15045.01
1989/10/31 14199.04 14695.97
1989/11/30 14280.18 14995.77
1989/12/31 14399.35 15355.66
1990/01/31 13426.89 14325.30
1990/02/28 13506.46 14510.09
1990/03/31 13528.73 14894.61
1990/04/30 13059.67 14522.25
1990/05/31 13923.73 15938.17
1990/06/30 13785.10 15829.79
1990/07/31 13447.96 15779.13
1990/08/31 12374.12 14352.70
1990/09/30 11414.24 13653.72
1990/10/31 11123.19 13595.01
1990/11/30 11920.41 14473.25
1990/12/31 12197.78 14877.05
1991/01/31 12851.91 15525.69
1991/02/28 13736.93 16635.78
1991/03/31 14021.89 17038.36
1991/04/30 14087.41 17079.26
1991/05/31 14860.58 17817.08
1991/06/30 14252.95 17001.06
1991/07/31 15060.97 17793.31
1991/08/31 15378.88 18215.01
1991/09/30 15273.33 17910.82
1991/10/31 15527.66 18150.82
1991/11/30 14858.37 17419.34
1991/12/31 16032.57 19412.12
1992/01/31 16249.04 19051.05
1992/02/29 16776.70 19298.72
1992/03/31 16571.12 18922.39
1992/04/30 17090.25 19478.71
1992/05/31 17226.86 19574.15
1992/06/30 17076.04 19282.50
1992/07/31 17599.34 20071.15
1992/08/31 17213.75 19659.70
1992/09/30 17392.44 19891.68
1992/10/31 17600.65 19961.30
1992/11/30 18239.16 20641.98
1992/12/31 18740.01 20895.88
1993/01/31 19299.42 21071.40
1993/02/28 19732.95 21357.97
1993/03/31 20321.01 21808.63
1993/04/30 20236.52 21280.86
1993/05/31 20602.66 21851.19
1993/06/30 20845.00 21914.55
1993/07/31 21128.60 21826.90
1993/08/31 21936.88 22654.14
1993/09/30 21853.01 22479.70
1993/10/31 22052.84 22945.03
1993/11/30 21667.45 22727.05
1993/12/31 22168.29 23002.05
1994/01/31 23144.61 23784.12
1994/02/28 22548.60 23139.57
1994/03/31 21605.28 22130.68
1994/04/30 22349.77 22413.96
1994/05/31 22562.48 22781.54
1994/06/30 22423.09 22223.40
1994/07/31 23172.05 22952.32
1994/08/31 24364.28 23893.37
1994/09/30 23965.13 23307.98
1994/10/31 24457.04 23832.41
1994/11/30 23657.69 22964.43
1994/12/31 23734.64 23305.00
1995/01/31 24105.73 23909.30
1995/02/28 25024.90 24841.04
1995/03/31 25889.00 25574.10
1995/04/30 26609.04 26327.26
1995/05/31 27410.91 27379.56
1995/06/30 27804.74 28015.58
1995/07/31 28874.79 28944.58
1995/08/31 29236.96 29017.23
1995/09/30 30207.60 30241.76
1995/10/31 29860.01 30133.80
1995/11/30 31151.07 31456.67
1995/12/31 32063.70 32062.53
1996/01/31 32995.49 33153.93
1996/02/29 33106.32 33461.27
1996/03/31 33454.81 33783.50
1996/04/30 33890.42 34281.47
1996/05/31 34256.33 35165.59
1996/06/30 33942.69 35299.57
1996/07/31 32287.38 33740.04
1996/08/31 32949.50 34451.61
1996/09/30 34360.88 36390.55
1996/10/31 34918.46 37394.20
1996/11/30 37253.33 40220.83
1996/12/31 36643.47 39424.06
1997/01/31 38072.27 41887.27
1997/02/28 38494.04 42215.67
1997/03/31 37063.32 40481.03
1997/04/30 38378.03 42897.74
1997/05/31 40756.12 45509.36
1997/06/30 42650.85 47548.18
1997/07/31 45763.63 51331.58
1997/08/31 43617.55 48455.99
1997/09/30 46014.97 51109.92
1997/10/31 44332.91 49402.85
1997/11/30 45956.97 51689.71
1997/12/31 46943.01 52577.22
IMATRL PRASUN SHR__CHT 19971231 19980109 105651 R00000000000123
Let's say hypothetically $10,000 was invested in VIP: Equity-Income
Portfolio on December 31, 1987. As the chart shows, by December 31,
1997, the value of the investment would have grown to $46,943 - a
369.43% 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 $52,577 - a 425.77% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
GENERAL ELECTRIC CO. 3.1
PHILIP MORRIS COMPANIES, INC. 2.5
FANNIE MAE 2.0
BRITISH PETROLEUM PLC ADR 1.6
VIACOM, INC. CLASS B (NON-VTG.) 1.3
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
FINANCE 23.4
ENERGY 11.7
UTILITIES 7.3
NONDURABLES 7.3
HEALTH 6.9
ASSET ALLOCATION AS OF DECEMBER 31, 1997 *
ROW: 1, COL: 1, VALUE: 5.8
ROW: 1, COL: 2, VALUE: 1.2
ROW: 1, COL: 3, VALUE: 93.0
STOCKS 93.9%
BONDS 1.6%
SHORT-TERM INVESTMENTS 4.5%
FOREIGN INVESTMENTS 9.8%
*
(% OF FUND'S INVESTMENTS)
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1fee.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
DECEMBER 31, 1997 YEAR YEARS YEARS
VIP: EQUITY-INCOME - SERVICE CLASS 28.05% 20.15% 16.72%
S&P 500 (REGISTERED TRADEMARK) 33.36% 20.27% 18.05%
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.
3
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER THE PAST 10 YEARS
VIP: Equity-Income - Service Class S&P 500
$52,577
$46,924
$
Let's say hypothetically $10,000 was invested in VIP: Equity-Income
Portfolio on December 31, 1987. As the chart shows, by December 31,
1997, the value of the investment would have grown to $46,924 - a
369.24% 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 $52,577 - a 425.77% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
GENERAL ELECTRIC CO. 3.1
PHILIP MORRIS COMPANIES, INC. 2.5
FANNIE MAE 2.0
BRITISH PETROLEUM PLC ADR 1.6
VIACOM, INC. CLASS B (NON-VTG.) 1.3
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
FINANCE 23.4
ENERGY 11.7
UTILITIES 7.3
NONDURABLES 7.3
HEALTH 6.9
ASSET ALLOCATION AS OF DECEMBER 31, 1997 *
ROW: 1, COL: 1, VALUE: 5.8
ROW: 1, COL: 2, VALUE: 1.2
ROW: 1, COL: 3, VALUE: 93.0
STOCKS 93.9%
BONDS 1.6%
SHORT-TERM INVESTMENTS 4.5%
FOREIGN INVESTMENTS 9.8%
*
(% OF FUND'S INVESTMENTS)
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with Stephen Petersen, Portfolio Manager of Equity-Income
Portfolio
Q. STEVE, HOW DID THE FUND PERFORM COMPARED TO ITS BENCHMARK OVER THE
PAST YEAR?
A. While the fund performed well, it underperformed the Standard &
Poor's 500 Index, which returned 33.36% for the 12-month period ending
December 31, 1997.
Q. WHY DID THE FUND UNDERPERFORM THE INDEX?
A. Mainly because the fund's equity-income style of management - which
favors companies that pay high dividends instead of high-growth
companies - was not as effective in the strong market of 1997 as some
other management styles. To be in line with the fund's management
style, I could not invest in some of the year's top-performing
companies because they did not pay dividends.
Q. STILL, THE FUND DID WELL OVER THE PERIOD . . .
A. That's true. Within the context of an equity-income management
style, many of the fund's top holdings did very well over the period.
One standout performer was the fund's largest holding, General
Electric. This company showed strong earnings growth and solid
underlying fundamentals. Fannie Mae, which packages and facilitates
mortgage loans, also turned in a solid performance over the period. In
addition to strong individual stock selection, the fund also benefited
from its sector weightings. It was overweighted relative to the index
in the financial sector - which outperformed the market - and
underweighted compared to the index in the utility sector - which
underperformed the market.
Q. FINANCIAL HOLDINGS MADE UP OVER 23% OF THE FUND AT THE END OF THE
PERIOD. WHY DID THIS SECTOR PERFORM SO WELL OVER THE PAST YEAR?
A. In general, financial stocks move in step with interest rates.
That is, when interest rates go down, financial stocks usually do
well, and, conversely, when rates go up, financial stocks tend to turn
in weaker performances. So it was good news for the sector that
interest rates trended downward in 1997. The sector also benefited
from a fair amount of consolidation. Some standout financial stocks
over the period were Bank of New York and Allstate Insurance.
Q. YOU FREQUENTLY MENTION YOUR EQUITY-INCOME STYLE OF INVESTING. WHAT
DO YOU LOOK FOR IN COMPANIES, AND WHAT IS A GOOD EXAMPLE OF A CLASSIC
EQUITY-INCOME HOLDING?
A. As I've noted, the fund looks for companies that pay shareholders
higher-than-average dividends. Usually, these are big, mature
companies that have recently performed poorly or were not able to grow
as fast as the rest of the market. So to compensate shareholders, they
pay high dividends when earned. The fund also looks for high-quality
stocks that are currently out of favor. A good example of a classic
equity-income stock is Philip Morris. This company has been able to
grow its earnings-per-share consistently over the past 20 years.
However, right now the market doesn't like the company because of
pending litigation, leaving investors concerned about the true
valuation of the company. So, with Philip Morris you have a company
that grew earnings as well as Coca-Cola or Gillette over the period,
but traded at a discount valuation to the rest of the market and paid
a high dividend yield.
Q. DID YOU HAVE ANY REGRETS OVER THE PERIOD?
A. Sure. I wish I had reduced the fund's exposure to cyclical stocks -
those stocks that tend to perform well when the economy is up and
poorly when the economy is weak - during the fourth quarter of 1997.
These stocks were hit hard when Southeast Asian markets plummeted.
Q. STEVE, HOW DOES THE FUND LOOK GOING FORWARD?
A. On the positive side, it looks like pretty much all of the factors
that allowed the market to perform well in 1997 still exist - little
to no inflation, low interest rates and a fairly benign political
environment. On the negative side, I expect the market declines
throughout Asia to have an impact on the earnings of a number of
companies. In addition, the U.S. dollar continues to remain stronger
than most European currencies, hurting U.S.-based multinationals when
they try to price their goods against foreign companies. Overall,
while I think that the fund will have some challenges going forward -
mostly due to factors outside the United States - the general
environment still looks pretty good.
FUND FACTS
GOAL: to provide income and growth of capital by
investing in a diversified portfolio of stocks and
bonds
START DATE: January 3, 1995
SIZE: as of December 31, 1997, more than $214
million
MANAGER: John Avery, since January 1998; joined
Fidelity in 1995
3
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
INVESTMENTS DECEMBER 31, 1997
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 91.5%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 5.8%
AEROSPACE & DEFENSE - 3.1%
AlliedSignal, Inc. 2,110,200 $ 82,165,892
Boeing Co. 352,200 17,235,788
GenCorp, Inc. 555,100 13,877,500
Gulfstream Aerospace Corp. (a) 246,200 7,201,350
Harsco Corp. 531,100 22,903,688
Lockheed Martin Corp. 850,303 83,754,846
Textron, Inc. 560,000 35,000,000
Thiokol Corp. 133,000 10,806,250
United Technologies Corp. 558,800 40,687,625
313,632,939
DEFENSE ELECTRONICS - 2.1%
Litton Industries, Inc. (a) 842,500 48,443,750
Northrop Grumman Corp. 874,500 100,567,500
Raytheon Company:
Class A 19,131 943,397
Class B 1,276,000 64,438,000
214,392,647
SHIP BUILDING & REPAIR - 0.6%
General Dynamics Corp. 716,500 61,932,469
Newport News Shipbuilding, Inc. 58,400 1,485,550
63,418,019
TOTAL AEROSPACE & DEFENSE 591,443,605
BASIC INDUSTRIES - 6.6%
CHEMICALS & PLASTICS - 3.1%
Air Products & Chemicals, Inc. 276,300 22,725,675
du Pont (E.I.) de Nemours & Co. 330,000 19,820,625
Goodrich (B.F.) Co. 480,400 19,906,575
Great Lakes Chemical Corp. 487,800 21,890,025
Hercules, Inc. 668,500 33,466,781
Hoechst AG Ord. 365,000 12,785,655
Millennium Chemicals, Inc. 500,000 11,781,250
Monsanto Co. 1,644,000 69,048,000
Olin Corp. 585,200 27,431,250
Solutia, Inc. 639,800 17,074,663
Union Carbide Corp. 946,300 40,631,756
Witco Corp. 445,000 18,161,563
314,723,818
IRON & STEEL - 0.4%
Dofasco Inc. 749,800 12,063,516
Inland Steel Industries, Inc. 768,000 13,152,000
Quanex Corp. 21,300 599,063
USX-U.S. Steel Group 448,600 14,018,750
39,833,329
METALS & MINING - 1.4%
Alcan Aluminium Ltd. 1,400,000 38,585,569
Alumax, Inc. (a) 835,000 28,390,000
Aluminum Co. of America 740,900 52,140,838
Inco Ltd. 279,693 4,754,321
Kaiser Aluminum Corp. (a) 250,000 2,203,125
Noranda, Inc. 200,000 3,441,642
Phelps Dodge Corp. 127,100 7,911,975
137,427,470
PACKAGING & CONTAINERS - 0.1%
Corning, Inc. 151,900 5,639,288
PAPER & FOREST PRODUCTS - 1.6%
Boise Cascade Corp. 385,400 11,658,350
Champion International Corp. 485,000 21,976,563
Domtar, Inc. 994,500 6,921,951
Georgia-Pacific Corp. 191,800 11,651,850
SHARES VALUE (NOTE 1)
Georgia Pacific Corp. (Timber Group) (a) 191,800 $ 4,351,463
Kimberly-Clark Corp. 1,340,500 66,103,406
Weyerhaeuser Co. 861,900 42,286,969
164,950,552
TOTAL BASIC INDUSTRIES 662,574,457
CONSTRUCTION & REAL ESTATE - 1.6%
BUILDING MATERIALS - 1.1%
American Standard Companies, Inc. (a) 579,300 22,194,431
Coltec Industries, Inc. (a) 1,371,600 31,803,975
Masco Corp. 1,045,400 53,184,725
107,183,131
ENGINEERING - 0.2%
EG & G, Inc. 389,900 8,114,794
Fluor Corp. 274,900 10,274,388
Foster Wheeler Corp. 164,400 4,449,075
22,838,257
REAL ESTATE INVESTMENT TRUSTS - 0.3%
Alexandria Real Estate Equities, Inc. 109,600 3,459,250
Boston Properties, Inc. 78,500 2,595,406
Equity Residential Properties Trust (SBI) 300,000 15,168,750
Weeks Corp. 170,500 5,456,000
26,679,406
TOTAL CONSTRUCTION & REAL ESTATE 156,700,794
DURABLES - 2.7%
AUTOS, TIRES, & ACCESSORIES - 1.1%
Chrysler Corp. 142,000 4,996,625
Cummins Engine Co., Inc. 113,500 6,703,594
Eaton Corp. 347,400 31,005,450
General Motors Corp. 300,000 18,187,500
Johnson Controls, Inc. 399,500 19,076,125
Meritor Automotive, Inc. 513,200 10,809,275
Modine Manufacturing Co. 98,100 3,347,663
Snap-On Tools Corp. 59,050 2,576,056
TRW, Inc. 194,300 10,370,763
107,073,051
CONSUMER DURABLES - 0.7%
Minnesota Mining & Manufacturing Co. 912,100 74,849,206
CONSUMER ELECTRONICS - 0.4%
Maytag Co. 788,900 29,435,831
Sunbeam-Oster, Inc. 155,000 6,529,375
Whirlpool Corp. 139,500 7,672,500
43,637,706
TEXTILES & APPAREL - 0.5%
Dexter Corp. 353,700 15,275,419
Reebok International Ltd. (a) 687,700 19,814,356
Stride Rite Corp. 191,700 2,300,400
Unifi, Inc. 192,600 7,836,413
45,226,588
TOTAL DURABLES 270,786,551
ENERGY - 11.5%
ENERGY SERVICES - 1.1%
Dresser Industries, Inc. 271,700 11,394,419
Eni Spa 51,400 293,515
Halliburton Co. 450,000 23,371,875
Schlumberger Ltd. 942,400 75,863,200
110,923,009
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
ENERGY - CONTINUED
OIL & GAS - 10.4%
Amerada Hess Corp. 464,500 $ 25,489,438
Amoco Corp. 365,000 31,070,625
Atlantic Richfield Co. 780,000 62,497,500
British Petroleum PLC:
Ord. 800,000 10,544,000
ADR 2,040,141 162,573,736
Burlington Resources, Inc. 566,700 25,395,244
Chevron Corp. 929,600 71,579,200
Coastal Corp. (The) 244,400 15,137,525
Exxon Corp. 1,500,000 91,781,250
Kerr-McGee Corp. 164,500 10,414,906
Mobil Corp. 502,600 36,281,438
Occidental Petroleum Corp. 1,665,200 48,811,175
Pennzoil Co. 500,400 33,432,975
Phillips Petroleum Co. 537,100 26,116,488
Royal Dutch Petroleum Co. 2,267,500 122,870,156
Texaco, Inc. 1,160,000 63,075,000
Tosco Corp. 449,800 17,008,063
Total SA:
Class B 831,600 90,428,821
sponsored ADR 576,600 32,001,300
USX-Marathon Group 1,178,600 39,777,750
Ultramar Diamond Shamrock Corp. 226,700 7,226,063
Unocal Corp. 426,884 16,568,435
Valero Energy Corp. 246,700 7,755,631
1,047,836,719
TOTAL ENERGY 1,158,759,728
FINANCE - 22.1%
BANKS - 11.0%
Banc One Corp. 1,512,700 82,158,519
Bank of New York Co., Inc. 2,115,700 122,313,906
Bank of Nova Scotia 332,500 15,664,982
BankBoston Corp. 801,100 75,253,331
BankAmerica Corp. 1,633,400 119,238,200
Chase Manhattan Corp. 337,300 36,934,350
Citicorp 974,400 123,200,700
Comerica, Inc. 505,000 45,576,250
Credit Suisse Group (Reg.) 150,400 23,249,248
National Bank of Canada 1,547,300 25,543,898
National City Corp. 990,975 65,156,606
NationsBank Corp. 1,861,800 113,220,713
Norwest Corp. 1,158,000 44,727,750
Royal Bank of Canada 400,000 21,153,510
Societe Generale Class A 56,600 7,705,155
U.S. Bancorp 1,142,698 127,910,757
Wells Fargo & Co. 167,500 56,855,781
1,105,863,656
CREDIT & OTHER FINANCE - 3.4%
American Express Co. 1,255,172 112,024,101
Beneficial Corp. 367,300 30,531,813
First Chicago NBD Corp. 1,322,100 110,395,350
Fleet Financial Group, Inc. 299,800 22,466,263
Household International, Inc. 345,000 44,009,063
Transamerica Corp. 223,000 23,749,500
343,176,090
FEDERAL SPONSORED CREDIT - 2.1%
Freddie Mac 403,600 16,925,975
Fannie Mae 3,477,300 198,423,431
215,349,406
SHARES VALUE (NOTE 1)
INSURANCE - 4.3%
Aetna, Inc. 227,800 $ 16,074,138
Allstate Corp. 1,429,499 129,905,722
CIGNA Corp. 93,700 16,215,956
Edperbrascan Corp. Ltd., Class A (vtg.) 2,699,800 49,102,725
Fremont General Corp. 423,924 23,209,839
General Re Corp. 110,000 23,320,000
Hartford Financial Services Group, Inc. 663,300 62,060,006
Highlands Insurance Group, Inc. (a) 163,600 4,642,150
Marsh & McLennan Companies, Inc. 150,600 11,229,113
Reliastar Financial Corp. 1,157,588 47,678,156
SAFECO Corp. 37,200 1,813,500
Travelers Group, Inc. (The) 961,749 51,814,227
437,065,532
SAVINGS & LOANS - 0.9%
Washington Mutual, Inc. 1,457,990 93,037,987
SECURITIES INDUSTRY - 0.4%
Bear Stearns Companies, Inc. 178,300 8,469,250
First Marathon Inc. Class A (non-vtg.) 299,400 4,282,977
Lehman Brothers Holdings, Inc. 426,700 21,761,700
34,513,927
TOTAL FINANCE 2,229,006,598
HEALTH - 6.9%
DRUGS & PHARMACEUTICALS - 4.5%
American Home Products Corp. 1,473,000 112,684,500
Barr Laboratories, Inc. (a)(d) 1,391,650 47,490,056
Bristol-Myers Squibb Co. 1,350,800 127,819,450
Merck & Co., Inc. 335,900 35,689,375
Novartis AG (Reg.) 25,200 40,850,889
Pharmacia & Upjohn, Inc. 427,100 15,642,538
Schering-Plough Corp. 1,197,800 74,413,325
454,590,133
MEDICAL EQUIPMENT & SUPPLIES - 1.1%
Allegiance Corp. 393,500 13,944,656
Bausch & Lomb, Inc. 250,000 9,906,250
Baxter International, Inc. 786,100 39,648,919
Johnson & Johnson 40,000 2,635,000
PharMerica, Inc. (a) 2,062,757 21,401,104
U.S. Surgical Corp. 740,908 21,717,851
109,253,780
MEDICAL FACILITIES MANAGEMENT - 1.3%
Beverly Enterprises, Inc. 4,972,000 64,636,000
Columbia/HCA Healthcare Corp. 2,259,150 66,927,319
131,563,319
TOTAL HEALTH 695,407,232
HOLDING COMPANIES - 0.5%
CINergy Corp. 415,000 15,899,688
Norfolk Southern Corp. 1,159,200 35,717,850
51,617,538
INDUSTRIAL MACHINERY & EQUIPMENT - 6.1%
ELECTRICAL EQUIPMENT - 3.5%
Alcatel Alsthom Compagnie Generale
d'Electricite SA 263,200 33,427,077
General Electric Co. 4,291,100 314,859,463
Loral Space & Communications Ltd. (a) 70,300 1,507,056
349,793,596
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED
INDUSTRIAL MACHINERY & EQUIPMENT - 1.7%
Caterpillar, Inc. 290,000 $ 14,083,125
Cooper Industries, Inc. 194,300 9,520,700
Harnischfeger Industries, Inc. 279,600 9,873,375
Ingersoll-Rand Co. 665,400 26,948,700
Parker-Hannifin Corp. 375,000 17,203,125
Stewart & Stevenson Services, Inc. 514,400 13,117,200
Tyco International Ltd. 1,925,484 86,767,123
177,513,348
POLLUTION CONTROL - 0.9%
Browning-Ferris Industries, Inc. 1,061,198 39,264,326
Ogden Corp. 181,900 5,127,306
Safety Kleen Corp. 313,200 8,593,425
Waste Management, Inc. 1,383,000 38,032,500
91,017,557
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 618,324,501
MEDIA & LEISURE - 4.0%
BROADCASTING - 0.6%
Ascent Entertainment Group, Inc. (a) 44,564 462,352
CBS Corp. 1,889,900 55,633,931
56,096,283
ENTERTAINMENT - 1.4%
MGM Grand, Inc. (a) 370,700 13,368,369
Viacom, Inc. Class B (non-vtg.) (a) 3,148,500 130,465,969
143,834,338
LEISURE DURABLES & TOYS - 0.3%
Brunswick Corp. 431,200 13,070,750
Hasbro, Inc. 596,700 18,796,050
31,866,800
LODGING & GAMING - 0.6%
Circus Circus Enterprises, Inc. (a) 674,000 13,817,000
ITT Corp. (a) 520,000 43,095,000
Mirage Resorts, Inc. (a) 283,400 6,447,350
63,359,350
PUBLISHING - 1.1%
ACNielsen Corp. (a) 636,000 15,502,500
Cognizant Corp. 353,700 15,761,756
Dun & Bradstreet Corp. 368,800 11,409,750
Harcourt General, Inc. 561,700 30,753,075
Hollinger International, Inc. Class A 1,444,400 20,221,600
McGraw-Hill, Inc. 269,500 19,943,000
113,591,681
RESTAURANTS - 0.0%
Tricon Global Restaurants, Inc. 15,000 435,938
TOTAL MEDIA & LEISURE 409,184,390
NONDURABLES - 7.3%
BEVERAGES - 0.4%
Anheuser-Busch Companies, Inc. 352,500 15,510,000
PepsiCo, Inc. 143,200 5,217,850
Seagram Co. Ltd. 607,600 19,657,585
40,385,435
FOODS - 1.0%
CPC International, Inc. 286,100 30,827,275
General Mills, Inc. 555,950 39,819,919
Heinz (H.J.) Co. 393,500 19,994,719
Ralston Purina Co. 110,000 10,223,125
100,865,038
SHARES VALUE (NOTE 1)
HOUSEHOLD PRODUCTS - 2.2%
Avon Products, Inc. 60,900 $ 3,737,738
Dial Corp. 517,300 10,766,306
Gillette Co. 100,700 10,114,056
Premark International, Inc. 25,000 725,000
Procter & Gamble Co. 821,600 65,573,950
Rubbermaid, Inc. 1,010,400 25,260,000
Unilever:
PLC Ord. 6,821,600 58,553,033
NV Ord. 12,400 764,866
NV ADR 800,000 49,950,000
225,444,949
TOBACCO - 3.7%
BAT Industries PLC Ord. 993,646 9,069,156
Dimon, Inc. 14,200 372,750
Gallaher Group PLC sponsored ADR 922,600 19,720,575
Philip Morris Companies, Inc. 5,548,800 251,430,000
RJR Nabisco Holdings Corp. 1,873,700 70,263,750
UST, Inc. 230,600 8,517,788
Universal Corp. 182,600 7,509,425
366,883,444
TOTAL NONDURABLES 733,578,866
PRECIOUS METALS - 0.2%
Newmont Mining Corp. 685,400 20,133,625
RETAIL & WHOLESALE - 4.0%
APPAREL STORES - 0.4%
Charming Shoppes, Inc. (a) 418,100 1,959,844
Footstar, Inc. (a) 362,600 9,744,875
Limited, Inc. (The) 967,100 24,661,050
TJX Companies, Inc. 175,100 6,019,063
42,384,832
DRUG STORES - 0.2%
CVS Corp. 211,400 13,542,813
Rite Aid Corp. 87,100 5,111,681
18,654,494
GENERAL MERCHANDISE STORES - 2.8%
Consolidated Stores Corp. (a) 2,020,156 88,760,615
Dayton Hudson Corp. 140,000 9,450,000
Federated Department Stores, Inc. (a) 656,400 28,266,225
Hudson's Bay Co. Ord. 377,500 8,410,601
Wal-Mart Stores, Inc. 2,684,300 105,862,081
Woolworth Corp. (a) 2,061,200 41,996,950
282,746,472
GROCERY STORES - 0.0%
American Stores Co. 294,400 6,053,600
RETAIL & WHOLESALE, MISCELLANEOUS - 0.6%
Staples, Inc. (a) 345,700 9,593,175
Tandy Corp. 530,400 20,453,550
Toys "R" Us, Inc. (a) 369,700 11,622,444
U.S. Office Products Co. (a) 769,950 15,110,269
56,779,438
TOTAL RETAIL & WHOLESALE 406,618,836
SERVICES - 1.0%
LEASING & RENTAL - 0.1%
Ryder Systems, Inc. 459,200 15,038,800
PRINTING - 0.7%
Deluxe Corp. 668,500 23,063,250
Donnelley (R.R.) & Sons Co. 568,400 21,172,900
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - CONTINUED
PRINTING - CONTINUED
Ennis Business Forms, Inc. 196,700 $ 1,819,475
Harland (John H.) Co. 1,051,300 22,077,300
68,132,925
SERVICES - 0.2%
Block (H&R), Inc. 499,600 22,388,325
Manpower, Inc. 24,300 856,575
23,244,900
TOTAL SERVICES 106,416,625
TECHNOLOGY - 3.4%
COMPUTER SERVICES & SOFTWARE - 0.8%
Electronic Data Systems Corp. 1,326,800 58,296,275
First Data Corp. 386,100 11,293,425
NCR Corp. (a) 328,500 9,136,406
Sabre Group Holdings, Inc. Class A (a) 178,800 5,162,850
83,888,956
COMPUTERS & OFFICE EQUIPMENT - 1.9%
Digital Equipment Corp. (a) 131,400 4,861,800
International Business Machines Corp. 600,400 62,779,325
Pitney Bowes, Inc. 791,000 71,140,563
Silicon Graphics, Inc. (a) 144,200 1,793,488
Unisys Corp. (a) 3,018,317 41,879,148
Xerox Corp. 86,800 6,406,925
188,861,249
ELECTRONICS - 0.3%
AMP, Inc. 499,400 20,974,800
Thomas & Betts Corp. 214,800 10,149,300
31,124,100
PHOTOGRAPHIC EQUIPMENT - 0.4%
Eastman Kodak Co. 358,400 21,795,200
Polaroid Corp. 339,300 16,519,669
38,314,869
TOTAL TECHNOLOGY 342,189,174
TRANSPORTATION - 1.0%
AIR TRANSPORTATION - 0.4%
Northwest Airlines Corp. Class A (a) 648,500 31,046,938
Viad Corp. 275,800 5,326,388
36,373,326
RAILROADS - 0.6%
CSX Corp. 1,168,100 63,077,400
TOTAL TRANSPORTATION 99,450,726
UTILITIES - 6.8%
ELECTRIC UTILITY - 2.6%
Allegheny Energy, Inc. 1,052,200 34,196,500
American Electric Power Co., Inc. 967,700 49,957,513
Central Maine Power Co. 602,500 9,188,125
CILCORP, Inc. 152,300 7,443,663
Consolidated Edison Co. of
New York, Inc. 473,450 19,411,450
DPL, Inc. 637,300 18,322,375
Duke Energy Corp. 297,200 16,457,450
Entergy Corp. 1,439,500 43,095,031
Illinova Corp. 250,000 6,734,375
Niagara Mohawk Power Corp. (a) 1,006,700 10,570,350
PG&E Corp. 687,678 20,931,199
SHARES VALUE (NOTE 1)
PacifiCorp. 200,000 $ 5,462,500
Pinnacle West Capital Corp. 472,600 20,026,425
261,796,956
GAS - 0.7%
MCN Corp. 400,000 16,150,000
Nova Corp. 650,000 6,183,764
Pacific Enterprises 285,400 10,738,175
Questar Corp. 813,700 36,311,363
69,383,302
TELEPHONE SERVICES - 3.5%
AT&T Corp. 331,600 20,310,500
ALLTEL Corp. 508,900 20,896,706
Ameritech Corp. 803,700 64,697,850
BCE, Inc. 480,100 16,002,774
Bell Atlantic Corp. 1,133,320 103,132,120
BellSouth Corp. 525,000 29,564,063
Comsat Corp., Series 1 294,600 7,144,050
France Telecom SA 40,000 1,449,656
MCI Communications Corp. 270,100 11,563,656
SBC Communications, Inc. 410,000 30,032,500
Sprint Corp. 312,500 18,320,313
WorldCom, Inc. (a) 953,800 28,852,450
351,966,638
TOTAL UTILITIES 683,146,896
TOTAL COMMON STOCKS
(Cost $7,022,135,101) 9,235,340,142
CONVERTIBLE PREFERRED STOCKS - 2.4%
CONSTRUCTION & REAL ESTATE - 0.1%
REAL ESTATE INVESTMENT TRUSTS - 0.1%
Vornado Realty Trust Series A, $3.25 127,600 8,421,600
DURABLES - 0.0%
AUTOS, TIRES, & ACCESSORIES - 0.0%
Republic Industries, Inc. $1.55 219,200 5,151,200
ENERGY - 0.1%
OIL & GAS - 0.1%
Unocal Capital Trust $3.125 100,000 5,612,500
FINANCE - 1.2%
CREDIT & OTHER FINANCE - 0.1%
DECS Trust $2.01 DECS 93,000 2,394,750
WBK Trust $3.135 STRYPES 285,400 9,543,063
11,937,813
INSURANCE - 0.6%
Aetna, Inc. Class C 6.25%, PRIDES 760,000 54,340,000
Conseco, Inc. $3.50 PRIDES 171,800 8,794,013
63,134,013
SAVINGS & LOANS - 0.1%
Ahmanson (H.F.) & Co., Series D, $3.00 70,600 9,707,500
SECURITIES INDUSTRY - 0.4%
Salomon, Inc. $2.03 DECS 840,700 34,468,700
Salomon, Inc. $3.484 DECS 93,900 5,563,575
40,032,275
TOTAL FINANCE 124,811,601
CONVERTIBLE PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - 0.2%
ELECTRICAL EQUIPMENT - 0.2%
Loral Space & Communications Ltd.,
Series C, $3.00 (b) 183,200 $ 11,289,700
Loral Space & Communications Ltd.,
Series C, $3 76,300 4,711,525
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 16,001,225
MEDIA & LEISURE - 0.1%
BROADCASTING - 0.1%
Evergreen Media Corp. $3.00 (b) 187,200 14,718,600
RETAIL & WHOLESALE - 0.1%
GENERAL MERCHANDISE STORES - 0.1%
K mart Financing I $3.875 100,000 5,162,500
TECHNOLOGY - 0.1%
COMPUTERS & OFFICE EQUIPMENT - 0.1%
Wang Laboratories, Inc. $3.25 (b) 80,000 4,070,000
Wang Laboratories, Inc. $3.25 157,600 8,077,000
TOTAL TECHNOLOGY 12,147,000
UTILITIES - 0.5%
ELECTRIC UTILITY - 0.2%
Houston Industries, Inc. $3.215 ACES 285,500 16,291,344
GAS - 0.0%
MCN Corp. $4.00 25,100 1,556,200
TELEPHONE SERVICES - 0.3%
Enhance Financial Services Group, Inc.
$7.625 DECS 184,800 9,609,600
US West, Inc., Series D $2.25 381,900 23,558,456
33,168,056
TOTAL UTILITIES 51,015,600
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $205,646,957) 243,041,826
CONVERTIBLE BONDS - 1.6%
MOODY'S RATINGS PRINCIPAL
(UNAUDITED) AMOUNT
CONSTRUCTION & REAL ESTATE - 0.4%
REAL ESTATE INVESTMENT TRUSTS - 0.4%
Liberty Property exchangeable
8%, 7/1/01 Ba2 $ 27,985,000 40,088,513
DURABLES - 0.1%
CONSUMER ELECTRONICS - 0.1%
Matsushita Electric Industrial
Co. Ltd. 1.3%, 3/29/02 Aa2 JPY 452,000,000 4,309,707
Matsushita Electric Industrial
Co. Ltd. 1.4%, 3/31/04 Aa2 JPY 209,000,000 1,992,763
6,302,470
ENERGY - 0.1%
OIL & GAS - 0.1%
Pennzoil Co. 4 3/4%,10/1/03 Baa3 9,820,000 13,281,550
FINANCE - 0.1%
INSURANCE - 0.1%
Loews Corp. 3 1/8%, 9/15/07 A2 4,320,000 4,320,000
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
MEDIA & LEISURE - 0.5%
BROADCASTING - 0.3%
Time Warner, Inc. liquid yield
option notes 0%, 6/22/13 Ba1 $ 58,550,000 $ 29,933,688
LODGING & GAMING - 0.0%
Hilton Hotels Corp.
5%, 5/15/06 Baa2 3,670,000 4,000,300
PUBLISHING - 0.2%
News America Holdings, Inc.
liquid yield option notes
0%, 3/11/13 Baa3 35,920,000 16,972,200
TOTAL MEDIA & LEISURE 50,906,188
RETAIL & WHOLESALE - 0.3%
DRUG STORES - 0.1%
Rite Aid Corp. 5 1/4%,
9/15/05 (b) Baa2 11,620,000 12,622,225
RETAIL & WHOLESALE, MISCELLANEOUS - 0.2%
Home Depot, Inc.
3 1/4%, 10/1/01 A1 5,000,000 6,675,000
U.S. Office Products Co.
5 1/2%, 2/1/01 B3 10,000,000 11,700,000
18,375,000
TOTAL RETAIL & WHOLESALE 30,997,225
TECHNOLOGY - 0.1%
COMPUTERS & OFFICE EQUIPMENT - 0.0%
Quantum Corp. 7%, 8/1/04 B2 4,280,000 4,108,800
ELECTRONICS - 0.1%
Micron Technology, Inc.
7%, 7/1/04 B1 12,840,000 11,925,150
TOTAL TECHNOLOGY 16,033,950
TOTAL CONVERTIBLE BONDS
(Cost $150,094,993) 161,929,896
CASH EQUIVALENTS - 4.5%
SHARES
Taxable Central Cash Fund (c)
(Cost $458,376,604) 458,376,604 458,376,604
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $7,836,253,655) $ 10,098,688,468
SECURITY TYPE ABBREVIATIONS
ACES - Automatic Common Exchange Securities
DECS - Dividend Enhanced Convertible Stock/Debt Exch.
for Common
PRIDES - Preferred Redeemable Increased Dividend Equity Securities
STRYPES - Structured Yield Product Exchangeable for Common Stock
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
$42,700,525 or .4% of net assets.
(c) At period end, the seven-day yield of the Taxable Central Cash
Fund was 5.69%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(d) An affiliated company is a company in which the fund has ownership
of at least 5% of the voting securities. Transactions during the
period with companies which are or were affiliates are as follows:
PURCHASE SALES DIVIDEND VALUE
AFFILIATE COST COST INCOME
Barr Laboratories, Inc. $ - $ 5,029,783 $ - $ 47,490,056
Beverly Enterprises, Inc. - 6,467,030 - -
Cardiac Control
Systems, Inc.. - 380,488 - -
Integramed America,
Inc. - 1,610,125 - -
Synetic, Inc. - 38,641,532 - -
TOTALS $ - $ 52,128,958 $ - $ 47,490,056
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $4,830,022,045 and $3,593,546,065, 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 $850,201 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 0.5% BBB 0.8%
Ba 0.7% BB 0.4%
B 0.3% B 0.3%
Caa 0.0% CCC 0.0%
Ca, C 0.0% CC, C 0.0%
D 0.0%
The percentage not rated by Moody's or S&P amounted to 0.0%. FMR has
determined that unrated debt securities that are lower quality account
for 0.0% of the total value of investment in securities.
INCOME TAX INFORMATION
At December 31, 1997, the aggregate cost of investment securities for
income tax purposes was $7,845,905,101. Net unrealized appreciation
aggregated $2,252,783,367, of which $2,386,782,461 related to
appreciated investment securities and $133,999,094 related to
depreciated investment securities.
The fund hereby designates approximately $225,002,000 as a capital
gain dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
INVESTMENT IN SECURITIES, AT VALUE $ 10,098,688,468
(COST $7,836,253,655) - SEE ACCOMPANYING SCHEDULE
RECEIVABLE FOR INVESTMENTS SOLD 15,785,858
RECEIVABLE FOR FUND SHARES SOLD 10,327,412
DIVIDENDS RECEIVABLE 15,891,959
INTEREST RECEIVABLE 4,432,709
OTHER RECEIVABLES 52,063
TOTAL ASSETS 10,145,178,469
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 26,357,641
PAYABLE FOR FUND SHARES REDEEMED 2,018,549
ACCRUED MANAGEMENT FEE 4,072,569
OTHER PAYABLES AND 659,813
ACCRUED EXPENSES
TOTAL LIABILITIES 33,108,572
NET ASSETS $ 10,112,069,897
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 7,208,544,669
UNDISTRIBUTED NET INVESTMENT INCOME 140,172,474
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN 500,938,191
CURRENCY TRANSACTIONS
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 2,262,414,563
AND ASSETS AND LIABILITIES IN
FOREIGN CURRENCIES
NET ASSETS $ 10,112,069,897
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
INITIAL CLASS : $24.28
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER
SHARE ($10,106,742,355 (DIVIDED BY) 416,258,047 SHARES)
SERVICE CLASS : $24.27
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE ($5,327,542 (DIVIDED BY) 219,493 SHARES)
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME $ 162,618,935
DIVIDENDS
INTEREST 26,175,230
TOTAL INCOME 188,794,165
EXPENSES
MANAGEMENT FEE $ 42,199,618
TRANSFER AGENT FEES 5,689,149
DISTRIBUTION FEES - SERVICE CLASS 226
ACCOUNTING FEES AND EXPENSES 819,525
NON-INTERESTED TRUSTEES' COMPENSATION 32,639
CUSTODIAN FEES AND EXPENSES 230,735
REGISTRATION FEES 48,392
AUDIT 78,670
LEGAL 48,842
MISCELLANEOUS 349,519
TOTAL EXPENSES BEFORE REDUCTIONS 49,497,315
EXPENSE REDUCTIONS (875,649 48,621,666
)
NET INVESTMENT INCOME 140,172,499
REALIZED AND UNREALIZED
GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES (INCLUDING 516,651,001
REALIZED GAIN OF $12,866,742
ON SALES OF INVESTMENTS IN
AFFILIATED ISSUERS)
FOREIGN CURRENCY TRANSACTIONS (56,354 516,594,647
)
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 1,401,311,026
ASSETS AND LIABILITIES IN (14,816 1,401,296,210
FOREIGN CURRENCIES )
NET GAIN (LOSS) 1,917,890,857
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 2,058,063,356
OTHER INFORMATION $ 867,177
EXPENSE REDUCTIONS
DIRECTED BROKERAGE ARRANGEMENTS
CUSTODIAN CREDITS 8,472
$ 875,649
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
OPERATIONS $ 140,172,499 $ 117,458,579
NET INVESTMENT
INCOME
NET REALIZED GAIN 516,594,647 597,117,485
(LOSS)
CHANGE IN NET 1,401,296,210 90,992,918
UNREALIZED
APPRECIATION
(DEPRECIATION)
NET INCREASE 2,058,063,356 805,568,982
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
DISTRIBUTIONS TO (119,523,328) (7,876,787)
SHAREHOLDERS
FROM NET INVESTMENT
INCOME
FROM NET REALIZED (602,923,285) (225,801,230)
GAIN
TOTAL DISTRIBUTIONS (722,446,613) (233,678,017)
SHARE TRANSACTIONS - 1,815,363,131 1,509,764,377
NET INCREASE
(DECREASE)
TOTAL INCREASE 3,150,979,874 2,081,655,342
(DECREASE) IN NET
ASSETS
NET ASSETS
BEGINNING OF PERIOD 6,961,090,023 4,879,434,681
END OF PERIOD $ 10,112,069,897 $ 6,961,090,023
(INCLUDING
UNDISTRIBUTED NET
INVESTMENT INCOME
OF $140,172,474
AND $117,454,549,
RESPECTIVELY)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
OTHER INFORMATION:
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
SHARES DOLLARS SHARES DOLLARS
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SHARE TRANSACTIONS 81,081,134 $ 1,787,907,743 93,794,843 $ 1,829,128,598
INITIAL CLASS
SOLD
REINVESTED 36,487,203 722,446,589 12,390,139 233,678,017
REDEEMED (32,291,523) (700,239,679) (28,467,146) (553,042,238)
NET INCREASE 85,276,814 $ 1,810,114,653 77,717,836 $ 1,509,764,377
(DECREASE)
SERVICE CLASS A 222,682 5,321,346 - -
SOLD
REINVESTED - - - -
REDEEMED (3,189) (72,868) - -
NET INCREASE 219,493 $ 5,248,478 - $ -
(DECREASE)
DISTRIBUTIONS $ 119,523,328 $ 7,876,787
INITIAL CLASS - NET
INVESTMENT INCOME
INITIAL CLASS - NET 602,923,285 225,801,230
REALIZED GAIN
TOTAL $ 722,446,613 $ 233,678,017
SERVICE CLASS - NET - -
INVESTMENT INCOME
SERVICE CLASS - NET - -
REALIZED GAIN
TOTAL $ - $ -
$ 722,446,613 $ 233,678,017
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
A SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
FINANCIAL HIGHLIGHTS - INITIAL CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1997 1996 1995 1994 1993
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, $ 21.03 $ 19.27 $ 15.35 $ 15.44 $ 13.40
BEGINNING OF PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET INVESTMENT .36 D .35 .41 .41 .37
INCOME
NET REALIZED AND 5.06 2.30 4.69 .64 2.06
UNREALIZED GAIN (LOSS)
TOTAL FROM 5.42 2.65 5.10 1.05 2.43
INVESTMENT
OPERATIONS
LESS DISTRIBUTIONS
FROM NET INVESTMENT (.36) (.03) (.40) (.37) (.35)
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)
NET ASSET VALUE, END OF $ 24.28 $ 21.03 $ 19.27 $ 15.35 $ 15.44
PERIOD
TOTAL RETURN B, C 28.11% 14.28% 35.09% 7.07% 18.29%
RATIOS AND
SUPPLEMENTAL DATA
NET ASSETS, END OF $ 10,106,742 $ 6,961,090 $ 4,879,435 $ 2,284,412 $ 1,318,500
PERIOD (000 OMITTED)
RATIO OF EXPENSES TO .58% .58% .61% .60% .62%
AVERAGE NET ASSETS
RATIO OF EXPENSES TO .57% F .56% .61% .58% .62%
AVERAGE NET ASSETS F F
AFTER
EXPENSE REDUCTIONS
RATIO OF NET INVESTMENT 1.65% 1.97% 2.56% 2.83% 2.87%
INCOME TO AVERAGE
NET ASSETS
PORTFOLIO TURNOVER RATE 44% 186% 87% 134% 120%
AVERAGE COMMISSION $ .0440 $ .0426
RATE G
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEAR ENDED
DECEMBER 31,
SELECTED PER-SHARE DATA 1997 E
NET ASSET VALUE, $ 23.44
BEGINNING OF PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET INVESTMENT .05 D
INCOME
NET REALIZED AND .78
UNREALIZED GAIN (LOSS)
TOTAL FROM .83
INVESTMENT
OPERATIONS
LESS DISTRIBUTIONS
NET ASSET VALUE, END OF $ 24.27
PERIOD
TOTAL RETURN B, C 3.54%
RATIOS AND
SUPPLEMENTAL DATA
NET ASSETS, END OF $ 5,328
PERIOD (000 OMITTED)
RATIO OF EXPENSES TO .68% A
AVERAGE NET ASSETS
RATIO OF EXPENSES TO .65% A,
AVERAGE NET ASSETS F
AFTER EXPENSE
REDUCTIONS
RATIO OF NET INVESTMENT 1.63% A
INCOME TO AVERAGE
NET ASSETS
PORTFOLIO TURNOVER 44%
AVERAGE COMMISSION $ .0440
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 6 OF NOTES TO FINANCIAL
STATEMENTS).
D NET INVESTMENT INCOME PER SHARE HAS
BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE
PERIOD.
E FOR THE PERIOD NOVEMBER 3, 1997
(COMMENCEMENT OF SALE OF SERVICE
CLASS SHARES) TO DECEMBER 31,
1997.
F FMR OR THE FUND HAS ENTERED INTO
VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A
PORTION OF THE CLASS' EXPENSES (SEE
NOTE 6 OF NOTES TO FINANCIAL
STATEMENTS).
G 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
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
DECEMBER 31, 1997 YEAR FUND
VIP III: GROWTH & INCOME - "INITIAL CLASS" 30.09% 28.69%
S&P 500 (REGISTERED TRADEMARK) 33.36% 30.95%
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.
3
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, December 31, 1996.
If Fidelity had not reimbursed certain fund expenses, the life of fund
total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD BE LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19971231 19980109 110819 S00000000000001
VIP III Growth & Income S&P 500
00147 SP001
1996/12/31 10000.00 10000.00
1997/01/31 10250.00 10440.61
1997/02/28 10270.00 10522.46
1997/03/31 9820.00 10090.10
1997/04/30 10350.00 10692.48
1997/05/31 10930.00 11343.43
1997/06/30 11490.00 11851.62
1997/07/31 12420.00 12794.65
1997/08/31 11790.00 12077.90
1997/09/30 12410.00 12739.40
1997/10/31 12060.00 12313.91
1997/11/30 12600.00 12883.92
1997/12/31 12879.20 13105.13
IMATRL PRASUN SHR__CHT 19971231 19980109 110821 R00000000000015
Let's say hypothetically that $10,000 was invested in VIP III: Growth
& Income Portfolio on December 31, 1996, when the fund started. As the
chart shows, by December 31, 1997, the value of the investment would
have grown to $12,879 - a 28.79% 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 $13,105 - a 31.05% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
GENERAL ELECTRIC CO. 3.3
TYCO INTERNATIONAL LTD. 3.3
BRISTOL-MYERS SQUIBB CO. 2.5
BANKAMERICA CORP. 2.3
PHILIP MORRIS COMPANIES, INC. 2.2
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
FINANCE 19.8
HEALTH 13.1
RETAIL & WHOLESALE 10.3
NONDURABLES 9.4
INDUSTRIAL MACHINERY & EQUIPMENT 9.4
ASSET ALLOCATION AS OF DECEMBER 31, 1997*
ROW: 1, COL: 1, VALUE: 7.0
ROW: 1, COL: 2, VALUE: 1.3
ROW: 1, COL: 3, VALUE: 97.7
STOCKS 91.7%
BONDS 1.3%
SHORT-TERM INVESTMENTS 7.0%
FOREIGN INVESTMENTS 6.0%
*
% OF FUND'S
INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1fee.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
DECEMBER 31, 1997 YEAR FUND
VIP III: GROWTH & INCOME - SERVICE CLASS 30.10% 28.70%
S&P 500 (REGISTERED TRADEMARK) 33.36% 30.95%
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.
3
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, December 31, 1996.
If Fidelity had not reimbursed certain fund expenses, the life of fund
total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD BE LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19971231 19980109 110819 S00000000000001
VIP III Growth & Income S&P 500
00147 SP001
1996/12/31 10000.00 10000.00
1997/01/31 10250.00 10440.61
1997/02/28 10270.00 10522.46
1997/03/31 9820.00 10090.10
1997/04/30 10350.00 10692.48
1997/05/31 10930.00 11343.43
1997/06/30 11490.00 11851.62
1997/07/31 12420.00 12794.65
1997/08/31 11790.00 12077.90
1997/09/30 12410.00 12739.40
1997/10/31 12060.00 12313.91
1997/11/30 12600.00 12883.92
1997/12/31 12879.20 13105.13
IMATRL PRASUN SHR__CHT 19971231 19980109 110821 R00000000000015
Let's say hypothetically that $10,000 was invested in VIP III: Growth
& Income Portfolio on December 31, 1996, when the fund started. As the
chart shows, by December 31, 1997, the value of the investment would
have grown to $12,879 - a 28.79% 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 $13,105 - a 31.05% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
GENERAL ELECTRIC CO. 3.3
TYCO INTERNATIONAL LTD. 3.3
BRISTOL-MYERS SQUIBB CO. 2.5
BANKAMERICA CORP. 2.3
PHILIP MORRIS COMPANIES, INC. 2.2
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
FINANCE 19.8
HEALTH 13.1
RETAIL & WHOLESALE 10.3
NONDURABLES 9.4
INDUSTRIAL MACHINERY & EQUIPMENT 9.4
ASSET ALLOCATION AS OF DECEMBER 31, 1997*
ROW: 1, COL: 1, VALUE: 7.0
ROW: 1, COL: 2, VALUE: 1.3
ROW: 1, COL: 3, VALUE: 97.7
STOCKS 91.7%
BONDS 1.3%
SHORT-TERM INVESTMENTS 7.0%
FOREIGN INVESTMENTS 6.0%
*
% 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 COMPARED TO ITS BENCHMARK, BETH?
A. The fund performed capably in an otherwise "narrow" market. For the
12 months that ended December 31, 1997, the fund trailed the Standard
& Poor's 500 Index return of 33.36%. By narrow, I mean that much of
the S&P 500's gains during 1997 were concentrated among a narrow group
of large-cap stocks.
Q. WHAT FACTORS CONTRIBUTED TO THE FUND'S PERFORMANCE?
A. The main driver behind performance - and the area where I focus
most of my attention - was stock selection. Foremost, I'd point to
retail store investments, where both stock picking and an industry
overweighting - more than double that of the S&P 500 - were positive
contributors. In the second half of the period, in fact, retailing
stocks were among the strongest industry groups in the S&P 500.
Specifically, good individual contributors included Consolidated
Stores - which owns Kay-Bee Toy stores - and Gap, Inc., which operates
several leading-edge apparel chains. The fund also benefited from
stock selection within the finance, health care and technology
sectors. Strong performers in these industries included BankAmerica,
drug-maker Bristol-Myers Squibb and personal computer-maker Compaq.
The fund underperformed the index due mainly to the narrowness
phenomenon I mentioned above.
Q. CONTINUING WITH THE RETAIL STORY, THE FUND'S EXPOSURE TO THIS
SECTOR CLIMBED TO AROUND 10% DURING THE PERIOD. WHY WERE THESE STOCKS
APPEALING?
A. I detected several positive industry trends that I felt provided a
favorable backdrop. Among these trends were a reduction in store
overcapacity - or less overall floor space - that had hurt the
industry for some time; a keener focus on the bottom line, or
earnings, by company managements; and new-found attention to returns
on invested capital. While it would be a stretch to say that all
retailers recently have mended their ways, it was clear to me that
there were a number of attractive stocks with the potential for upward
revaluations of their price-to-earnings (P/E) multiples. The story
behind big discounter Wal-Mart - the fund's largest retail investment
at the end of the period - illustrates my theory. Following the
company's rapid growth during the 1980s - which resulted in very
strong stock appreciation - Wal-Mart's returns deteriorated and its
stock dramatically underperformed the market from 1993 through 1996.
Recognizing that it had a problem, Wal-Mart committed itself to a new
financial discipline, emphasizing returns on its capital base, and
earnings growth began to accelerate. Based on these positive
developments, the stock recently began to perform well.
Q. TIME WARNER IS A RELATIVELY NEW TOP 10 HOLDING. WHAT MADE THIS
STOCK ATTRACTIVE?
A. Fundamentally, the company has a number of media franchises -
including Warner Brothers, Time Warner Cable, CNN and Time magazine -
with wide global reach. Also, the company has been focusing intently
on improving its financial returns. For example, previously high
levels of capital spending - largely related to its cable television
operations - were expected to peak and then decline, a development
that I felt could enhance the company's free-cash-flow dynamics. The
potential for this to occur - and for Time Warner to continue
expanding and enhancing its worldwide franchises as a result - made
this stock attractive during the period.
Q. WHICH OTHER STOCKS PERFORMED WELL DURING THE PERIOD? WHICH WERE
DISAPPOINTMENTS?
A. Other strong performers included General Electric, diversified-
industrial Tyco International and IBM. There weren't any major
setbacks, but several smaller positions - including Columbia/HCA
Healthcare and Waste Management - lagged the market.
Q. WHAT'S YOUR OUTLOOK FOR THE COMING MONTHS?
A. Given the economic difficulties we saw in Southeast Asia during the
last quarter of 1997 - where currency problems crippled many world
markets - global economic growth may be sluggish. If there is such a
slowdown, stocks with predictable, sustainable earnings growth likely
will outperform economically sensitive cyclical stocks and
commodities-based stocks. Of course, those companies with significant
revenue exposure to the Asian region could be particularly affected,
so I'll continue to try to limit the fund's investments in companies
whose earnings are susceptible to such a slowdown.
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 December 31, 1997, more than $345
million
MANAGER: Beth Terrana, since inception; joined
Fidelity in 1983
3
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
INVESTMENTS DECEMBER 31, 1997
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 90.9%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.7%
AEROSPACE & DEFENSE - 1.3%
AlliedSignal, Inc. 64,200 $ 2,499,763
Textron, Inc. 36,900 2,306,250
4,806,013
DEFENSE ELECTRONICS - 0.4%
Litton Industries, Inc. (a) 4,800 276,000
Raytheon Company Class B 20,200 1,020,100
1,296,100
TOTAL AEROSPACE & DEFENSE 6,102,113
BASIC INDUSTRIES - 1.2%
CHEMICALS & PLASTICS - 1.2%
Air Products & Chemicals, Inc. 10,900 896,525
Cytec Industries, Inc. (a) 7,000 328,563
Monsanto Co. 25,800 1,083,600
Praxair, Inc. 7,100 319,500
Sealed Air Corp. (a) 23,400 1,444,950
4,073,138
CONSTRUCTION & REAL ESTATE - 2.2%
BUILDING MATERIALS - 1.2%
Masco Corp. 76,300 3,881,763
Sherwin-Williams Co. 11,800 327,450
4,209,213
REAL ESTATE INVESTMENT TRUSTS - 1.0%
Captec Net Lease Realty, Inc. 9,900 170,156
Duke Realty Investors, Inc. 41,000 994,250
Equity Residential Properties Trust (SBI) 21,100 1,066,869
Public Storage, Inc. 34,600 1,016,375
Storage USA, Inc. 7,100 283,556
3,531,206
TOTAL CONSTRUCTION & REAL ESTATE 7,740,419
DURABLES - 1.9%
AUTOS, TIRES, & ACCESSORIES - 0.3%
Eaton Corp. 6,500 580,125
Navistar International Corp. (a) 18,400 456,550
1,036,675
CONSUMER DURABLES - 0.6%
Minnesota Mining & Manufacturing Co. 24,600 2,018,738
CONSUMER ELECTRONICS - 0.4%
Newell Co. 34,400 1,462,000
Philips Electronics NV 3,500 211,750
1,673,750
TEXTILES & APPAREL - 0.6%
Liz Claiborne, Inc. 18,000 752,625
VF Corp. 28,000 1,286,250
2,038,875
TOTAL DURABLES 6,768,038
ENERGY - 6.1%
ENERGY SERVICES - 0.4%
Halliburton Co. 10,500 545,344
Schlumberger Ltd. 4,700 378,350
Weatherford Enterra, Inc. (a) 9,000 393,750
1,317,444
SHARES VALUE (NOTE 1)
OIL & GAS - 5.7%
British Petroleum PLC ADR 55,460 $ 4,419,469
Burlington Resources, Inc. 10,800 483,975
Chevron Corp. 18,500 1,424,500
Exxon Corp. 18,600 1,138,088
Mobil Corp. 23,900 1,725,281
Royal Dutch Petroleum Co. 55,700 3,018,244
Texaco, Inc. 58,300 3,170,063
Tosco Corp. 26,200 990,688
Total SA sponsored ADR 24,400 1,354,200
USX-Marathon Group 63,700 2,149,875
19,874,383
TOTAL ENERGY 21,191,827
FINANCE - 19.8%
BANKS - 9.6%
Bank of New York Co., Inc. 72,000 4,162,500
BankAmerica Corp. 109,600 8,000,800
Chase Manhattan Corp. 35,000 3,832,500
Citicorp 46,900 5,929,919
Comerica, Inc. 14,700 1,326,675
Mellon Bank Corp. 16,700 1,012,438
National City Corp. 35,000 2,301,250
NationsBank Corp. 23,900 1,453,419
North Fork Bancorp., Inc. 5,800 194,663
U.S. Bancorp 34,400 3,850,650
Wells Fargo & Co. 4,900 1,663,244
33,728,058
CREDIT & OTHER FINANCE - 2.7%
American Express Co. 54,100 4,828,425
Associates First Capital Corp. 13,500 960,188
Household International, Inc. 20,300 2,589,519
Transamerica Corp. 10,700 1,139,550
9,517,682
FEDERAL SPONSORED CREDIT - 2.1%
Freddie Mac 89,000 3,732,438
Fannie Mae 65,800 3,754,713
7,487,151
INSURANCE - 3.8%
AFLAC, Inc. 24,100 1,232,113
Allstate Corp. 39,200 3,562,300
American International Group, Inc. 21,100 2,294,625
MGIC Investment Corp. 5,600 372,400
Progressive Corp. 6,200 743,225
Travelers Property Casualty Corp. Class A 41,600 1,830,400
Travelers Group, Inc. (The) 48,450 2,610,244
UNUM Corp. 10,700 581,813
13,227,120
SAVINGS & LOANS - 1.2%
Charter One Financial Corp. 9,580 604,738
Dime Bancorp., Inc. 46,700 1,412,675
Washington Mutual, Inc. 32,740 2,089,221
4,106,634
SECURITIES INDUSTRY - 0.4%
Morgan Stanley Dean Witter Discover
and Co. 21,100 1,247,538
TOTAL FINANCE 69,314,183
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
HEALTH - 12.6%
DRUGS & PHARMACEUTICALS - 8.4%
American Home Products Corp. 69,200 $ 5,293,800
Bristol-Myers Squibb Co. 91,600 8,667,650
Cytyc Corp. (a) 16,800 417,900
Merck & Co., Inc. 53,600 5,695,000
Pfizer, Inc. 35,100 2,617,144
Schering-Plough Corp. 69,200 4,299,050
SmithKline Beecham PLC ADR 45,800 2,355,838
29,346,382
MEDICAL EQUIPMENT & SUPPLIES - 3.2%
Baxter International, Inc. 40,500 2,042,719
Cardinal Health, Inc. 30,800 2,313,850
Johnson & Johnson 55,500 3,656,063
McKesson Corp. 13,400 1,449,713
Medtronic, Inc. 22,800 1,192,725
St. Jude Medical, Inc. (a) 9,300 283,650
Sofamor/Danek Group, Inc. (a) 5,800 377,363
11,316,083
MEDICAL FACILITIES MANAGEMENT - 1.0%
Columbia/HCA Healthcare Corp. 112,800 3,341,700
TOTAL HEALTH 44,004,165
INDUSTRIAL MACHINERY & EQUIPMENT - 8.9%
ELECTRICAL EQUIPMENT - 4.4%
Alcatel Alsthom Compagnie Generale
d'Electricite SA sponsored ADR 16,000 405,000
Alcatel Alsthom Compagnie Generale
d'Electricite SA 11,300 1,435,129
Emerson Electric Co. 37,700 2,127,694
General Electric Co. 156,400 11,475,850
15,443,673
INDUSTRIAL MACHINERY & EQUIPMENT - 4.5%
Illinois Tool Works, Inc. 6,700 402,838
Ingersoll-Rand Co. 25,300 1,024,650
Stanley Works 58,200 2,746,313
Tyco International Ltd. 254,160 11,453,085
15,626,886
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 31,070,559
MEDIA & LEISURE - 6.7%
BROADCASTING - 2.7%
Comcast Corp. Class A special 29,800 940,563
Tele-Communications, Inc.
(TCI Group), Series A 53,800 1,503,038
Time Warner, Inc. 108,900 6,751,800
9,195,401
ENTERTAINMENT - 1.5%
Carnival Cruise Lines, Inc. Class A 15,600 863,850
Disney (Walt) Co. 29,500 2,922,344
Viacom, Inc. Class B (non-vtg.) (a) 37,800 1,566,338
5,352,532
LEISURE DURABLES & TOYS - 0.2%
Mattel, Inc. 21,500 800,875
PUBLISHING - 2.3%
Cognizant Corp. 38,500 1,715,656
Harcourt General, Inc. 23,800 1,303,050
McGraw-Hill, Inc. 17,600 1,302,400
Pearson, PLC 57,200 745,415
SHARES VALUE (NOTE 1)
Times Mirror Co. Class A 30,500 $ 1,875,750
Tribune Co. 17,000 1,058,250
8,000,521
TOTAL MEDIA & LEISURE 23,349,329
NONDURABLES - 9.4%
BEVERAGES - 0.2%
Coca-Cola Co. (The) 12,900 859,463
FOODS - 2.7%
Campbell Soup Co. 31,600 1,836,750
Dole Food, Inc. 15,100 690,825
General Mills, Inc. 18,800 1,346,550
Heinz (H.J.) Co. 55,200 2,804,850
Kellogg Co. 16,300 808,888
Sara Lee Corp. 33,900 1,908,994
9,396,857
HOUSEHOLD PRODUCTS - 3.9%
Clorox Co. 13,600 1,075,250
Gillette Co. 19,700 1,978,619
Procter & Gamble Co. 63,800 5,092,038
Unilever:
PLC Ord. 199,500 1,712,403
NV ADR 61,600 3,846,150
13,704,460
TOBACCO - 2.6%
Philip Morris Companies, Inc. 169,800 7,694,063
RJR Nabisco Holdings Corp. 35,900 1,346,250
9,040,313
TOTAL NONDURABLES 33,001,093
PRECIOUS METALS - 0.0%
Getchell Gold Corp. (a) 6,400 153,600
RETAIL & WHOLESALE - 10.0%
APPAREL STORES - 1.6%
Gap, Inc. 15,550 551,053
Payless ShoeSource, Inc. (a) 50,900 3,416,663
TJX Companies, Inc. 45,400 1,560,625
5,528,341
DRUG STORES - 1.2%
CVS Corp. 64,377 4,124,152
GENERAL MERCHANDISE STORES - 6.6%
Carson Pirie Scott & Co. (a) 20,500 1,027,563
Consolidated Stores Corp. (a) 131,775 5,789,864
Dayton Hudson Corp. 38,100 2,571,750
Federated Department Stores, Inc. (a) 102,200 4,400,988
Meyer (Fred), Inc. (a) 17,600 640,200
Penney (J.C.) Co., Inc. 21,700 1,308,781
Proffitts, Inc. (a) 17,900 509,031
Wal-Mart Stores, Inc. 180,200 7,106,638
23,354,815
RETAIL & WHOLESALE, MISCELLANEOUS - 0.6%
Home Depot, Inc. 35,050 2,063,569
TOTAL RETAIL & WHOLESALE 35,070,877
SERVICES - 2.7%
ADVERTISING - 1.1%
Omnicom Group, Inc. 91,300 3,868,838
LEASING & RENTAL - 0.2%
Ryder Systems, Inc. 27,700 907,175
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - CONTINUED
PRINTING - 0.5%
Donnelley (R.R.) & Sons Co. 30,300 $ 1,128,675
Reynolds & Reynolds Co. Class A 24,900 459,094
1,587,769
SERVICES - 0.9%
Ecolab, Inc. 30,900 1,713,019
Service Corp. International 39,718 1,467,084
3,180,103
TOTAL SERVICES 9,543,885
TECHNOLOGY - 5.5%
COMMUNICATIONS EQUIPMENT - 0.2%
Cisco Systems, Inc. (a) 3,100 172,825
Lucent Technologies, Inc. 8,300 662,963
835,788
COMPUTER SERVICES & SOFTWARE - 1.2%
Microsoft Corp. (a) 27,600 3,567,300
Oracle Corp. (a) 25,450 567,853
4,135,153
COMPUTERS & OFFICE EQUIPMENT - 3.3%
Compaq Computer Corp. 24,950 1,408,116
Diebold, Inc. 27,150 1,374,469
EMC Corp. (a) 27,500 754,531
International Business Machines Corp. 22,900 2,394,481
Pitney Bowes, Inc. 36,900 3,318,694
Unisys Corp. (a) 6,200 86,025
Xerox Corp. 30,300 2,236,519
11,572,835
ELECTRONICS - 0.7%
Altera Corp. (a) 23,200 768,500
Intel Corp. 17,500 1,229,375
Texas Instruments, Inc. 13,300 598,500
2,596,375
PHOTOGRAPHIC EQUIPMENT - 0.1%
Polaroid Corp. 4,000 194,750
TOTAL TECHNOLOGY 19,334,901
UTILITIES - 2.2%
ELECTRIC UTILITY - 0.1%
Edison International 17,300 470,344
TELEPHONE SERVICES - 2.1%
AT&T Corp. 36,000 2,205,000
Brooks Fiber Properties, Inc. (a) 8,800 484,000
Frontier Corp. 11,400 274,313
MCI Communications Corp. 66,200 2,834,188
Telefonos de Mexico SA sponsored
ADR representing Ord. Class L shares 3,000 168,188
US WEST Media Group (a) 45,500 1,313,813
7,279,502
TOTAL UTILITIES 7,749,846
TOTAL COMMON STOCKS
(Cost $285,605,844) 318,467,973
CONVERTIBLE PREFERRED STOCKS - 0.8%
SHARES VALUE (NOTE 1)
DURABLES - 0.0%
AUTOS, TIRES, & ACCESSORIES - 0.0%
Republic Industries, Inc. $1.55 4,100 $ 96,350
ENERGY - 0.3%
OIL & GAS - 0.3%
Tosco Financing Trust $2.875
TOPRS (c) 8,700 562,786
Tosco Financing Trust $2.875 5,700 369,075
931,861
HEALTH - 0.5%
MEDICAL EQUIPMENT & SUPPLIES - 0.5%
McKesson Financing Trust $2.50
TOPRS (c) 9,400 717,925
McKesson Financing Trust $2.50 13,000 992,875
1,710,800
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $2,381,330) 2,739,011
CONVERTIBLE BONDS - 1.3%
MOODY'S RATINGS PRINCIPAL
(UNAUDITED) AMOUNT
INDUSTRIAL MACHINERY & EQUIPMENT - 0.5%
POLLUTION CONTROL - 0.5%
USA Waste Services, Inc.
4%, 2/1/02 Ba2 $ 1,192,000 1,317,160
United Waste Systems, Inc.
4 1/2%, 6/1/01 Ba3 275,000 375,375
1,692,535
RETAIL & WHOLESALE - 0.3%
GENERAL MERCHANDISE STORES - 0.1%
Federated Department Stores, Inc.
5%, 10/1/03 Baa3 294,000 395,430
RETAIL & WHOLESALE, MISCELLANEOUS - 0.2%
Home Depot, Inc.
3 1/4%, 10/1/01 A1 377,000 503,295
TOTAL RETAIL & WHOLESALE 898,725
TECHNOLOGY - 0.5%
COMPUTERS & OFFICE EQUIPMENT - 0.4%
EMC Corp.
3 1/4%, 3/15/02 Ba3 453,000 607,020
Unisys Corp.
8 1/4%, 3/15/06 B3 370,000 783,013
1,390,033
ELECTRONIC INSTRUMENTS - 0.1%
Thermo Electron Corp.
4 1/8%, 1/1/03 (c) Ba2 322,000 402,903
TOTAL TECHNOLOGY 1,792,936
TOTAL CONVERTIBLE BONDS
(Cost $4,366,327) 4,384,196
CASH EQUIVALENTS - 7.0%
SHARES VALUE (NOTE 1)
Taxable Central Cash Fund (b)
(Cost $24,658,978) 24,658,978 $ 24,658,978
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $317,012,479) $ 350,250,158
SECURITY TYPE ABBREVIATIONS
TOPRS - Trust Originated Preferred Securities
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield of the Taxable Central Cash
Fund was 5.69%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(c) Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions
exempt from registration, normally to qualified institutional buyers.
At the period end, the value of these securities amounted to
$1,683,614 or 0.5% of net assets.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $415,916,266 and $133,226,205, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $65,586 for the
period (see Note 4 of Notes to Financial Statements).
INCOME TAX INFORMATION
At December 31, 1997, the aggregate cost of investment securities for
income tax purposes was $317,159,410. Net unrealized appreciation
aggregated $33,090,748, of which $37,258,721 related to appreciated
investment securities and $4,167,973 related to depreciated investment
securities.
The fund hereby designates approximately $194,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
INVESTMENT IN SECURITIES, AT VALUE $
350,250,158
(COST $317,012,479) - SEE ACCOMPANYING SCHEDULE
CASH 4,316
RECEIVABLE FOR INVESTMENTS SOLD
2,359,273
RECEIVABLE FOR FUND SHARES SOLD
1,046,559
DIVIDENDS RECEIVABLE
389,805
INTEREST RECEIVABLE
152,823
TOTAL ASSETS
354,202,934
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 8,685,896
PAYABLE FOR FUND SHARES REDEEMED 88
ACCRUED MANAGEMENT FEE 132,984
OTHER PAYABLES AND ACCRUED EXPENSES 86,070
TOTAL LIABILITIES
8,905,038
NET ASSETS $
345,297,896
NET ASSETS CONSIST OF:
PAID IN CAPITAL $
310,123,818
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS
1,936,544
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS
33,237,534
AND ASSETS AND LIABILITIES IN
FOREIGN CURRENCIES
NET ASSETS $
345,297,896
</TABLE>
INITIAL CLASS: $12.53
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($345,287,471 (DIVIDED BY) 27,549,165
SHARES)
SERVICE CLASS: $12.53
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PRICE PER SHARE
($10,425 (DIVIDED BY) 832 SHARES)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME $ 2,524,546
DIVIDENDS
INTEREST 695,013
TOTAL INCOME 3,219,559
EXPENSES
MANAGEMENT FEE $ 862,309
TRANSFER AGENT FEES 123,743
DISTRIBUTION FEES - SERVICE CLASS 1
ACCOUNTING FEES AND EXPENSES 113,129
NON-INTERESTED TRUSTEES' COMPENSATION 578
CUSTODIAN FEES AND EXPENSES 43,905
AUDIT 22,038
LEGAL 7,938
MISCELLANEOUS 47,677
TOTAL EXPENSES BEFORE REDUCTIONS 1,221,318
EXPENSE REDUCTIONS (894 1,220,424
)
NET INVESTMENT INCOME 1,999,135
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 8,707,635
FOREIGN CURRENCY TRANSACTIONS (573 8,707,062
)
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 33,248,011
ASSETS AND LIABILITIES IN (145 33,247,866
FOREIGN CURRENCIES )
NET GAIN (LOSS) 41,954,928
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 43,954,063
OTHER INFORMATION $ 894
EXPENSE REDUCTIONS
CUSTODIAN CREDITS
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED DECEMBER 31, 1996
DECEMBER 31, (COMMENCEMENT
1997 OF OPERATIONS)
OPERATIONS $ 1,999,135 $ 153
NET
INVESTMENT
INCOME
NET REALIZED 8,707,062 -
GAIN (LOSS)
CHANGE IN NET 33,247,866 (10,332)
UNREALIZED
APPRECIATION
(DEPRECIATION)
NET INCREASE 43,954,063 (10,179)
(DECREASE)
IN NET
ASSETS
RESULTING
FROM
OPERATIONS
DISTRIBUTIONS TO (1,998,716) -
SHAREHOLDERS
FROM NET
INVESTMENT
INCOME
FROM NET (6,771,091) -
REALIZED GAIN
TOTAL (8,769,807) -
DISTRIBUTIONS
SHARE 309,123,809 1,000,010
TRANSACTIONS
- - NET
INCREASE
(DECREASE)
TOTAL 344,308,065 989,831
INCREASE
(DECREASE) IN
NET ASSETS
NET ASSETS
BEGINNING OF 989,831 -
PERIOD
END OF PERIOD $ 345,297,896 $ 989,831
(INCLUDING
UNDISTRIBUTE
D NET
INVESTMENT
INCOME OF
$0 AND
$153,
RESPECTIVELY
)
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996
(COMMENCEMENT OF OPERATIONS)
SHARES DOLLARS SHARES DOLLARS
</TABLE>
SHARE TRANSACTIONS 29,294,015 $ 329,532,628 100,001 $ 1,000,010
INITIAL CLASS
SOLD
REINVESTED 718,814 8,769,531 - -
REDEEMED (2,563,665) (29,188,626) - -
NET INCREASE 27,449,164 $ 309,113,533 100,001 $ 1,000,010
(DECREASE)
SERVICE CLASS A 810 $ 10,000 - $ -
SOLD
REINVESTED 22 276 - -
REDEEMED - - - -
NET INCREASE 832 $ 10,276 - $ -
(DECREASE)
DISTRIBUTIONS $ 1,998,653 $ -
INITIAL CLASS - NET
INVESTMENT INCOME
INITIAL CLASS - NET 6,770,878 -
REALIZED GAIN
TOTAL $ 8,769,531 $ -
SERVICE CLASS - NET $ 63 $ -
INVESTMENT INCOME
SERVICE CLASS - NET 213 -
REALIZED GAIN
TOTAL $ 276 $ -
$ 8,769,807 $ -
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1. SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
YEARS ENDED DECEMBER 31, 1996
DECEMBER 31, (COMMENCEMENT
1997 OF OPERATIONS)
SELECTED PER-SHARE DATA
NET ASSET VALUE, $ 9.90 $ 10.00
BEGINNING OF PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET INVESTMENT .13 D .00
INCOME
NET REALIZED AND 2.84 (.10)
UNREALIZED GAIN (LOSS)
TOTAL FROM 2.97 (.10)
INVESTMENT
OPERATIONS
LESS DISTRIBUTIONS
FROM NET INVESTMENT (.08) -
INCOME
FROM NET REALIZED (.26) -
GAIN
TOTAL DISTRIBUTIONS (.34) -
NET ASSET VALUE, END OF $ 12.53 $ 9.90
PERIOD
TOTAL RETURN B, C 30.09% (1.00)%
RATIOS AND
SUPPLEMENTAL DATA
NET ASSETS, END OF $ 345,287 $ 990
PERIOD (000 OMITTED)
RATIO OF EXPENSES TO .70% 1.00% A,
AVERAGE NET ASSETS F
RATIO OF NET INVESTMENT 1.14% 3.89% A
INCOME TO AVERAGE
NET ASSETS
PORTFOLIO TURNOVER RATE 81% 0% A
AVERAGE COMMISSION $ .0322 $ .0120
RATE G
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEAR ENDED
DECEMBER 31,
SELECTED PER-SHARE DATA 1997 E
NET ASSET VALUE, $ 12.35
BEGINNING OF PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET INVESTMENT .03 D
INCOME
NET REALIZED AND .49
UNREALIZED GAIN (LOSS)
TOTAL FROM .52
INVESTMENT
OPERATIONS
LESS DISTRIBUTIONS
FROM NET INVESTMENT (.08)
INCOME
FROM NET REALIZED (.26)
GAIN
TOTAL DISTRIBUTIONS (.34)
NET ASSET VALUE, END OF $ 12.53
PERIOD
TOTAL RETURN B 4.29%
RATIOS AND
SUPPLEMENTAL DATA
NET ASSETS, END OF $ 10
PERIOD (000 OMITTED)
RATIO OF EXPENSES TO .80%
AVERAGE NET ASSETS A
RATIO OF NET INVESTMENT 1.24%
INCOME TO AVERAGE A
NET ASSETS
PORTFOLIO TURNOVER 81%
AVERAGE COMMISSION $ .0322
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.
D NET INVESTMENT INCOME PER SHARE HAS
BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3, 1997
(COMMENCEMENT OF SALE OF SERVICE
CLASS SHARES) TO DECEMBER 31, 1997.
F FMR AGREED TO REIMBURSE A PORTION
OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT,
THE CLASS' EXPENSE RATIO WOULD HAVE
BEEN HIGHER.
G A FUND IS REQUIRED TO DISCLOSE ITS
AVERAGE COMMISSION RATE PER SHARE
FOR SECURITY TRADES ON WHICH
COMMISSIONS ARE CHARGED. THIS
AMOUNT MAY VARY FROM PERIOD TO
PERIOD AND FUND TO FUND DEPENDING ON
THE MIX OF TRADES EXECUTED IN VARIOUS
MARKETS WHERE TRADING PRACTICES AND
COMMISSION RATE STRUCTURES MAY DIFFER.
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 LIFE OF
DECEMBER 31, 1997 YEAR YEARS FUND
VIP II: INDEX 500 32.83% 19.91% 19.87%
S&P 500 (REGISTERED TRADEMARK) 33.36% 20.27% 20.23%
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.
3
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, August 27, 1992.
If Fidelity had not reimbursed certain fund expenses, the total return
figures would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD BE LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19971231 19980109 105649 S00000000000001
VIP Equity-Income S&P 500
00150 SP001
1987/12/31 10000.00 10000.00
1988/01/31 10711.25 10421.00
1988/02/29 11242.04 10906.62
1988/03/31 11046.33 10569.60
1988/04/30 11229.18 10686.93
1988/05/31 11379.76 10779.90
1988/06/30 12027.19 11274.70
1988/07/31 12005.40 11231.86
1988/08/31 11798.41 10849.97
1988/09/30 12148.99 11312.18
1988/10/31 12358.65 11626.66
1988/11/30 12160.03 11460.40
1988/12/31 12271.04 11660.96
1989/01/31 13028.92 12514.54
1989/02/28 12962.05 12202.93
1989/03/31 13242.80 12487.26
1989/04/30 13753.89 13135.34
1989/05/31 14162.76 13667.32
1989/06/30 14172.46 13589.42
1989/07/31 14998.71 14816.55
1989/08/31 15239.70 15106.95
1989/09/30 15068.37 15045.01
1989/10/31 14199.04 14695.97
1989/11/30 14280.18 14995.77
1989/12/31 14399.35 15355.66
1990/01/31 13426.89 14325.30
1990/02/28 13506.46 14510.09
1990/03/31 13528.73 14894.61
1990/04/30 13059.67 14522.25
1990/05/31 13923.73 15938.17
1990/06/30 13785.10 15829.79
1990/07/31 13447.96 15779.13
1990/08/31 12374.12 14352.70
1990/09/30 11414.24 13653.72
1990/10/31 11123.19 13595.01
1990/11/30 11920.41 14473.25
1990/12/31 12197.78 14877.05
1991/01/31 12851.91 15525.69
1991/02/28 13736.93 16635.78
1991/03/31 14021.89 17038.36
1991/04/30 14087.41 17079.26
1991/05/31 14860.58 17817.08
1991/06/30 14252.95 17001.06
1991/07/31 15060.97 17793.31
1991/08/31 15378.88 18215.01
1991/09/30 15273.33 17910.82
1991/10/31 15527.66 18150.82
1991/11/30 14858.37 17419.34
1991/12/31 16032.57 19412.12
1992/01/31 16249.04 19051.05
1992/02/29 16776.70 19298.72
1992/03/31 16571.12 18922.39
1992/04/30 17090.25 19478.71
1992/05/31 17226.86 19574.15
1992/06/30 17076.04 19282.50
1992/07/31 17599.34 20071.15
1992/08/31 17213.75 19659.70
1992/09/30 17392.44 19891.68
1992/10/31 17600.65 19961.30
1992/11/30 18239.16 20641.98
1992/12/31 18740.01 20895.88
1993/01/31 19299.42 21071.40
1993/02/28 19732.95 21357.97
1993/03/31 20321.01 21808.63
1993/04/30 20236.52 21280.86
1993/05/31 20602.66 21851.19
1993/06/30 20845.00 21914.55
1993/07/31 21128.60 21826.90
1993/08/31 21936.88 22654.14
1993/09/30 21853.01 22479.70
1993/10/31 22052.84 22945.03
1993/11/30 21667.45 22727.05
1993/12/31 22168.29 23002.05
1994/01/31 23144.61 23784.12
1994/02/28 22548.60 23139.57
1994/03/31 21605.28 22130.68
1994/04/30 22349.77 22413.96
1994/05/31 22562.48 22781.54
1994/06/30 22423.09 22223.40
1994/07/31 23172.05 22952.32
1994/08/31 24364.28 23893.37
1994/09/30 23965.13 23307.98
1994/10/31 24457.04 23832.41
1994/11/30 23657.69 22964.43
1994/12/31 23734.64 23305.00
1995/01/31 24105.73 23909.30
1995/02/28 25024.90 24841.04
1995/03/31 25889.00 25574.10
1995/04/30 26609.04 26327.26
1995/05/31 27410.91 27379.56
1995/06/30 27804.74 28015.58
1995/07/31 28874.79 28944.58
1995/08/31 29236.96 29017.23
1995/09/30 30207.60 30241.76
1995/10/31 29860.01 30133.80
1995/11/30 31151.07 31456.67
1995/12/31 32063.70 32062.53
1996/01/31 32995.49 33153.93
1996/02/29 33106.32 33461.27
1996/03/31 33454.81 33783.50
1996/04/30 33890.42 34281.47
1996/05/31 34256.33 35165.59
1996/06/30 33942.69 35299.57
1996/07/31 32287.38 33740.04
1996/08/31 32949.50 34451.61
1996/09/30 34360.88 36390.55
1996/10/31 34918.46 37394.20
1996/11/30 37253.33 40220.83
1996/12/31 36643.47 39424.06
1997/01/31 38072.27 41887.27
1997/02/28 38494.04 42215.67
1997/03/31 37063.32 40481.03
1997/04/30 38378.03 42897.74
1997/05/31 40756.12 45509.36
1997/06/30 42650.85 47548.18
1997/07/31 45763.63 51331.58
1997/08/31 43617.55 48455.99
1997/09/30 46014.97 51109.92
1997/10/31 44332.91 49402.85
1997/11/30 45956.97 51689.71
1997/12/31 46943.01 52577.22
IMATRL PRASUN SHR__CHT 19971231 19980109 105651 R00000000000123
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 December 31, 1997, the value of the investment would have
grown to $26,359 - a 163.59% 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 $26,788 - a 167.88% increase.
INVESTMENT SUMMARY
TOP TEN STOCKS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
GENERAL ELECTRIC CO. 2.9
COCA-COLA CO. (THE) 2.0
MICROSOFT CORP. 1.9
EXXON CORP. 1.8
MERCK & CO., INC. 1.6
ROYAL DUTCH PETROLEUM CO. 1.4
INTEL CORP. 1.4
PHILIP MORRIS COMPANIES, INC. 1.4
PROCTER & GAMBLE CO. 1.3
INTERNATIONAL BUSINESS MACHINES CORP. 1.3
TOP TEN MARKET SECTORS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
FINANCE 15.9
TECHNOLOGY 12.4
HEALTH 10.5
NONDURABLES 10.2
UTILITIES 9.4
ENERGY 7.9
INDUSTRIAL MACHINERY & EQUIPMENT 5.3
BASIC INDUSTRIES 4.5
RETAIL & WHOLESALE 4.4
MEDIA & LEISURE 4.2
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
NOTE TO SHAREHOLDERS: Frank Salerno became Portfolio Manager of Index
500 Portfolio in December when Bankers Trust was appointed sub-adviser
of the fund.
Q. HOW DID THE FUND PERFORM COMPARED TO ITS BENCHMARK, FRANK?
A. For the 12 months that ended December 31, 1997, the fund performed
in line with the 33.36% return of the Standard & Poor's 500 Index. Of
course, the fund's return is slightly lower than the index due to
management expenses.
Q. WHAT WAS THE MARKET LIKE DURING 1997?
A. The stock market took investors on quite a roller coaster ride in
1997. The economy grew rapidly in the first quarter and the stock
market chugged along with it. As a matter of fact, first-quarter real
gross domestic product - meaning GDP adjusted for inflation - grew at
a rate of 4.9%. However, investors in the stock market became wary
that a rise in inflation would cause a subsequent hike in interest
rates, causing the market to drop in March and April. At the end of
March, the Federal Reserve Board did in fact raise the federal funds
rate - the rate banks charge each other for overnight loans - by 0.25
percentage points to 5.50%. However, economic indicators showed the
economy cooling off a bit in the second quarter, causing the market to
rally all the way through July. Large-capitalization stocks were the
main drivers of the upswing during the first half of the year. From
August through October, though, momentum veered away from large-cap
stocks as investors started buying mid- and small-cap stocks that
hadn't yet reached peak valuations relative to their earnings growth.
Q. WHAT HAPPENED TO THE MARKET AT THE END OF THE YEAR?
A. The market began losing steam at the beginning of October after Fed
Chairman Alan Greenspan said that economic growth was on an
"unsustainable track." Greenspan pointed to the low jobless rate,
saying it could lead to wage increases and inflationary pressures. On
top of that sentiment, Southeast Asian economies began a freefall
after several countries in the region experienced currency
difficulties. On October 27, a steep drop in the Hong Kong market
triggered a 554-point drop in the Dow Jones Industrial Average - the
biggest daily point drop in the Dow's history. The market rebounded
337 points the next day, reflecting investor sentiment that the U.S.
economy was still strong despite the troubles in Southeast Asia.
However, continued turmoil in Asia kept the Fed at bay and reined in
the explosive growth that we saw in the stock market earlier in the
year.
Q. FINANCE WAS THE LARGEST SECTOR IN THE INDEX AT THE END OF THE
PERIOD. HOW DID THESE STOCKS PERFORM?
A. Most banks and brokerage stocks performed well during the period as
a result of low interest rates, additional fee-based revenues,
increased merger and acquisition activity and robust capital markets.
However, most finance stocks, especially those with sizeable exposures
to international markets, fell with the rest of the market at the end
of October.
Q. TECHNOLOGY HAS BEEN A STRONG DRIVER OF THE MARKET'S RETURNS OVER
THE PAST FEW YEARS. HOW DID THAT SECTOR FARE?
A. Personal computer manufacturers such as Compaq and Hewlett-Packard
enjoyed the strongest growth as falling PC prices helped spur demand
in both the consumer and commercial markets. Semiconductor
manufacturers reported solid growth through much of the period, but
were hurt in the fourth quarter after Intel reported disappointing
third-quarter earnings. After a strong start, technology stocks
suffered a blow toward the end of the period because much of their
business is tied to Southeast Asia.
Q. WERE THERE ANY SECTORS OF THE MARKET THAT PROVED TO BE
DISAPPOINTING?
A. Large-cap health care stocks suffered a large correction during the
market drop in late March and early April, specifically because many
of them were considered to be highly overvalued. In the third quarter,
nondurables staggered, particularly after Gillette and Coca-Cola
warned of disappointing earnings. Shares of large multinational
companies suffered the most at the end of the year because the dollar
strengthened versus major currencies, causing analysts to become
concerned about the future profits of firms that operate globally.
Q. WHAT'S YOUR OUTLOOK?
A. I expect volatility to continue in the market for a while. I think
the turmoil in many Asian countries will continue to spill over into
U.S. markets. That uncertainty should give the Fed enough reasons not
to raise interest rates in the next several months. Overall, the U.S.
economy continues to grow at a moderate rate, which bodes well for
long-term gains in the market.
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 December 31, 1997, more than $345
million
MANAGER: Beth Terrana, since inception; joined
Fidelity in 1983
3
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
INVESTMENTS DECEMBER 31, 1997
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 92.4%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 2.0%
AEROSPACE & DEFENSE - 1.6%
AlliedSignal, Inc. 148,500 $ 5,782,155
Boeing Co. 251,868 12,325,790
Lockheed Martin Corp. 50,493 4,973,561
Rockwell International Corp. 57,500 3,004,375
Textron, Inc. 39,400 2,462,500
United Technologies Corp. 62,200 4,528,938
33,077,319
DEFENSE ELECTRONICS - 0.3%
Northrop Grumman Corp. 17,600 2,024,000
Raytheon Company:
Class A 11,751 579,471
Class B 73,400 3,706,700
6,310,171
SHIP BUILDING & REPAIR - 0.1%
General Dynamics Corp. 14,900 1,287,919
TOTAL AEROSPACE & DEFENSE 40,675,409
BASIC INDUSTRIES - 4.5%
CHEMICALS & PLASTICS - 2.4%
Air Products & Chemicals, Inc. 33,200 2,730,700
Avery Dennison Corp. 24,700 1,105,325
Dow Chemical Co. 60,000 6,090,000
du Pont (E.I.) de Nemours & Co. 287,400 17,261,963
Eastman Chemical Co. 18,675 1,112,330
Engelhard Corp. 34,600 601,175
FMC Corp. (a) 9,000 605,813
Goodrich (B.F.) Co. 13,000 538,688
Great Lakes Chemical Corp. 14,400 646,200
Hercules, Inc. 24,000 1,201,500
Monsanto Co. 147,400 6,190,800
Morton International, Inc. 33,600 1,155,000
Nalco Chemical Co. 15,900 629,044
PPG Industries, Inc. 43,100 2,462,088
Praxair, Inc. 44,000 1,980,000
Raychem Corp. 21,000 904,313
Rohm & Haas Co. 14,800 1,417,100
Union Carbide Corp. 35,000 1,502,813
W.R. Grace & Co. 17,300 1,391,569
49,526,421
IRON & STEEL - 0.2%
Aeroquip Vickers, Inc. 6,600 323,813
Allegheny Teledyne, Inc. 42,184 1,091,511
Armco, Inc. (a) 25,700 126,894
Bethlehem Steel Corp. (a) 26,800 231,150
Inland Steel Industries, Inc. 11,800 202,075
Nucor Corp. 21,100 1,019,394
USX-U.S. Steel Group 26,400 825,000
Worthington Industries, Inc. 23,050 380,325
4,200,162
METALS & MINING - 0.4%
Alcan Aluminium Ltd. 54,457 1,500,896
Aluminum Co. of America 47,100 3,314,663
ASARCO, Inc. 10,200 228,863
Cyprus Amax Minerals Co. 22,450 345,169
Freeport-McMoRan Copper &
Gold, Inc. Class B 48,100 757,575
Inco Ltd. 39,936 678,846
Phelps Dodge Corp. 14,900 927,525
Reynolds Metals Co. 17,500 1,050,000
8,803,537
SHARES VALUE (NOTE 1)
PACKAGING & CONTAINERS - 0.3%
Ball Corp. 7,330 $ 258,841
Bemis Co., Inc. 12,600 555,188
Corning, Inc. 62,100 2,305,463
Crown Cork & Seal Co., Inc. 35,700 1,789,463
Owens-Illinois, Inc. (a) 33,100 1,255,731
Tupperware Corp. 14,700 409,763
6,574,449
PAPER & FOREST PRODUCTS - 1.2%
Boise Cascade Corp. 11,700 353,925
Champion International Corp. 23,000 1,042,188
Fort James Corp. 52,200 1,996,650
Georgia-Pacific Corp. 25,400 1,543,050
Georgia-Pacific Corp. (Timber Group) (a) 25,400 576,263
International Paper Co. 79,700 3,437,063
Kimberly-Clark Corp. 144,032 7,102,578
Louisiana-Pacific Corp. 26,100 495,900
Mead Corp. 25,200 705,600
Potlatch Corp. 7,000 301,000
Stone Container Corp. 23,700 247,369
Temple-Inland, Inc. 13,200 690,525
Union Camp Corp. 21,200 1,138,175
Westvaco Corp. 24,350 765,503
Weyerhaeuser Co. 47,400 2,325,563
Willamette Industries, Inc. 26,400 849,750
23,571,102
TOTAL BASIC INDUSTRIES 92,675,671
CONSTRUCTION & REAL ESTATE - 0.3%
BUILDING MATERIALS - 0.2%
Armstrong World Industries, Inc. 9,700 725,075
Crane Co. 10,900 472,788
Masco Corp. 45,900 2,335,163
Owens-Corning 12,700 433,388
Sherwin-Williams Co. 41,200 1,143,300
5,109,714
CONSTRUCTION - 0.0%
Centex Corp. 7,000 440,563
Fleetwood Enterprises, Inc. 8,600 364,963
Kaufman & Broad Home Corp. 9,300 208,669
Pulte Corp. 5,100 213,244
1,227,439
ENGINEERING - 0.1%
EG & G, Inc. 11,100 231,019
Fluor Corp. 23,300 870,838
Foster Wheeler Corp. 9,800 265,213
1,367,070
TOTAL CONSTRUCTION & REAL ESTATE 7,704,223
DURABLES - 3.2%
AUTOS, TIRES, & ACCESSORIES - 2.3%
AutoZone, Inc. (a) 36,050 1,045,450
Chrysler Corp. 174,600 6,143,738
Cooper Tire & Rubber Co. 18,900 460,688
Cummins Engine Co., Inc. 9,100 537,469
Dana Corp. 24,800 1,178,000
Eaton Corp. 21,700 1,936,725
Echlin, Inc. 15,000 542,813
Ford Motor Co. 285,000 13,875,938
General Motors Corp. 184,278 11,171,854
Genuine Parts Co. 43,050 1,461,009
Goodyear Tire & Rubber Co. 40,000 2,545,000
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
DURABLES - CONTINUED
AUTOS, TIRES, & ACCESSORIES - CONTINUED
ITT Industries, Inc. 28,300 $ 887,913
Johnson Controls, Inc. 20,000 955,000
NACCO Industries, Inc. Class A 1,900 203,656
Navistar International Corp. (a) 17,670 438,437
PACCAR, Inc. 18,690 981,225
Pep Boys-Manny, Moe & Jack 14,500 346,188
Snap-On Tools Corp. 14,500 632,563
TRW, Inc. 30,000 1,601,250
46,944,916
CONSUMER DURABLES - 0.4%
Minnesota Mining & Manufacturing Co. 106,600 8,747,863
CONSUMER ELECTRONICS - 0.2%
Black & Decker Corp. 22,700 886,719
Maytag Co. 23,300 869,381
Newell Co. 38,000 1,615,000
Whirlpool Corp. 20,100 1,105,500
4,476,600
TEXTILES & APPAREL - 0.3%
Fruit of the Loom, Inc. Class A (a) 18,200 466,375
Liz Claiborne, Inc. 17,000 710,813
NIKE, Inc. Class B 69,100 2,712,175
Reebok International Ltd. (a) 11,600 334,225
Russell Corp. 8,800 233,750
Springs Industries, Inc. Class A 4,900 254,800
VF Corp. 30,800 1,414,875
6,127,013
TOTAL DURABLES 66,296,392
ENERGY - 7.9%
ENERGY SERVICES - 1.0%
Baker Hughes, Inc. 47,100 2,054,738
Dresser Industries, Inc. 49,500 2,075,906
Halliburton Co. 67,100 3,485,006
Helmerich & Payne, Inc. 11,800 400,463
McDermott International, Inc. 13,200 483,450
Rowan Companies, Inc. (a) 20,600 628,300
Schlumberger Ltd. 123,900 9,973,950
Western Atlas, Inc. 12,800 947,200
20,049,013
OIL & GAS - 6.9%
Amerada Hess Corp. 22,300 1,223,713
Amoco Corp. 127,100 10,819,388
Anadarko Petroleum Corp. 14,200 861,763
Apache Corp. 21,700 760,856
Ashland, Inc. 17,700 950,269
Atlantic Richfield Co. 84,700 6,786,588
Burlington Resources, Inc. 41,257 1,848,829
Chevron Corp. 166,000 12,782,000
Coastal Corp. (The) 25,400 1,573,213
Exxon Corp. 624,600 38,217,713
Kerr-McGee Corp. 11,400 721,763
Mobil Corp. 196,300 14,170,406
Occidental Petroleum Corp. 93,000 2,726,063
Oryx Energy Co. (a) 25,300 645,150
Pennzoil Co. 14,900 995,506
Phillips Petroleum Co. 66,300 3,223,838
Royal Dutch Petroleum Co. 542,800 29,412,975
Sun Co., Inc. 21,600 908,550
Texaco, Inc. 144,500 7,857,188
SHARES VALUE (NOTE 1)
USX-Marathon Group 78,400 $ 2,646,000
Union Pacific Resources Group, Inc. 60,712 1,472,266
Unocal Corp. 68,850 2,672,241
143,276,278
TOTAL ENERGY 163,325,291
FINANCE - 15.9%
BANKS - 7.4%
BB&T Corp. 31,300 2,005,156
Banc One Corp. 153,826 8,354,675
Bank of New York Co., Inc. 100,100 5,787,031
BankBoston Corp. 39,491 3,709,686
BankAmerica Corp. 174,100 12,709,300
Bankers Trust New York Corp. 23,300 2,619,794
Barnett Banks, Inc. 51,700 3,715,938
Chase Manhattan Corp. 105,173 11,516,444
Citicorp 115,062 14,548,152
Comerica, Inc. 25,300 2,283,325
CoreStates Financial Corp. 53,100 4,251,319
Fifth Third Bancorp 37,950 3,102,413
First Union Corp. 165,231 8,468,089
Huntington Bancshares, Inc. 43,990 1,583,640
KeyCorp. 55,607 3,937,671
Mellon Bank Corp. 68,400 4,146,750
Morgan (J.P.) & Co., Inc. 47,500 5,361,563
National City Corp. 58,421 3,841,181
NationsBank Corp. 177,546 10,797,016
Norwest Corp. 198,800 7,678,650
PNC Financial Corp. 77,000 4,393,813
Providian Financial Corp. 22,400 1,012,200
Republic New York Corp. 13,100 1,495,856
State Street Corp. 38,800 2,257,675
SunTrust Banks, Inc. 52,900 3,775,738
Synovus Financial Corp. 42,000 1,375,500
U.S. Bancorp 64,917 7,266,647
Wachovia Corp. 48,900 3,967,013
Wells Fargo & Co. 22,400 7,603,400
153,565,635
CREDIT & OTHER FINANCE - 1.6%
American Express Co. 116,479 10,395,751
Beneficial Corp. 12,800 1,064,000
Countrywide Credit Industries,Inc. 25,100 1,076,163
First Chicago NBD Corp. 77,059 6,434,427
Fleet Financial Group, Inc. 59,774 4,479,314
Green Tree Financial Corp. 40,000 1,047,500
Household International, Inc. 28,710 3,662,319
MBNA Corp. 132,950 3,631,197
Transamerica Corp. 15,929 1,696,439
33,487,110
FEDERAL SPONSORED CREDIT - 1.1%
Freddie Mac 182,300 7,645,206
Fannie Mae 266,000 15,178,625
22,823,831
INSURANCE - 4.6%
Aetna, Inc. 36,200 2,554,363
Allstate Corp. 111,821 10,161,733
American General Corp. 57,752 3,122,218
American International Group, Inc. 181,362 19,723,118
Aon Corp. 39,950 2,342,069
CIGNA Corp. 20,200 3,495,863
Chubb Corp. (The) 41,800 3,161,125
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
Cincinnati Financial Corp. 7,600 $ 1,069,700
Conseco, Inc. 50,900 2,312,769
General Re Corp. 19,300 4,091,600
Hartford Financial Services Group, Inc. 33,200 3,106,275
Jefferson Pilot Corp. 17,000 1,323,875
Lincoln National Corp. 24,800 1,937,500
Loews Corp. 27,600 2,929,050
MBIA, Inc. 20,600 1,376,338
MGIC Investment Corp. 31,300 2,081,450
Marsh & McLennan Companies, Inc. 39,800 2,967,588
Progressive Corp. 17,200 2,061,850
SAFECO Corp. 40,100 1,954,875
St. Paul Companies, Inc. (The) 20,100 1,649,456
SunAmerica, Inc. 47,000 2,009,250
Torchmark Corp. 33,400 1,404,888
Travelers Group, Inc. (The) 288,781 15,558,076
UNUM Corp. 33,500 1,821,563
USF&G Corp. 26,500 584,656
94,801,248
SAVINGS & LOANS - 0.3%
Ahmanson (H.F.) & Co. 24,000 1,606,500
Golden West Financial Corp. 13,800 1,349,813
Washington Mutual, Inc. 66,075 4,216,411
7,172,724
SECURITIES INDUSTRY - 0.9%
Merrill Lynch & Co., Inc. 86,500 6,309,094
Morgan Stanley Dean Witter Discover
and Co. 152,156 8,996,224
Schwab (Charles) Corp. 70,500 2,956,594
18,261,912
TOTAL FINANCE 330,112,460
HEALTH - 10.5%
DRUGS & PHARMACEUTICALS - 7.0%
Allergan, Inc. 15,600 523,575
ALZA Corp. Class A 20,400 648,975
American Home Products Corp. 168,700 12,905,550
Amgen, Inc. 69,600 3,767,100
Bristol-Myers Squibb Co. 255,700 24,195,613
Lilly (Eli) & Co. 280,392 19,522,293
Merck & Co., Inc. 304,400 32,342,500
Pfizer, Inc. 327,500 24,419,219
Pharmacia & Upjohn, Inc. 128,960 4,723,160
Schering-Plough Corp. 189,600 11,778,900
Sigma Aldrich Corp. 23,900 950,025
Warner-Lambert Co. 71,000 8,804,000
144,580,910
MEDICAL EQUIPMENT & SUPPLIES - 2.8%
Abbott Laboratories 198,500 13,014,156
Bard (C.R.), Inc. 13,600 425,850
Bausch & Lomb, Inc. 13,200 523,050
Baxter International, Inc. 75,200 3,792,900
Becton, Dickinson & Co. 31,200 1,560,000
Biomet, Inc. 26,700 684,188
Boston Scientific Corp. (a) 52,100 2,390,088
Cardinal Health, Inc. 25,900 1,945,738
Guidant Corp. 39,600 2,465,100
Johnson & Johnson 339,100 22,338,213
Mallinckrodt, Inc. 17,500 665,000
SHARES VALUE (NOTE 1)
Medtronic, Inc. 122,900 $ 6,429,206
Millipore Corp. 10,500 356,344
Pall Corp. 30,200 624,763
PharMerica, Inc. (a) 12,014 124,645
St. Jude Medical, Inc. (a) 21,950 669,475
U.S. Surgical Corp. 17,600 515,900
58,524,616
MEDICAL FACILITIES MANAGEMENT - 0.7%
Beverly Enterprises, Inc. 26,400 343,200
Columbia/HCA Healthcare Corp. 160,012 4,740,356
HEALTHSOUTH Corp. (a) 92,700 2,572,425
Humana, Inc. (a) 39,100 811,325
Manor Care, Inc. 15,100 528,500
Tenet Healthcare Corp. (a) 72,300 2,394,938
United HealthCare Corp. 44,700 2,221,031
13,611,775
TOTAL HEALTH 216,717,301
HOLDING COMPANIES - 0.2%
CINergy Corp. 37,713 1,444,879
Norfolk Southern Corp. 90,300 2,782,369
4,227,248
INDUSTRIAL MACHINERY & EQUIPMENT - 5.3%
ELECTRICAL EQUIPMENT - 3.5%
Emerson Electric Co. 117,100 6,608,831
General Electric Co. 831,200 60,989,300
General Signal Corp. 12,100 510,469
Grainger (W.W.), Inc. 12,300 1,195,406
Harris Corp. 19,200 880,800
Honeywell, Inc. 35,300 2,418,050
Nextlevel Systems, Inc. (a) 35,000 625,625
Scientific-Atlanta, Inc. 18,500 309,875
73,538,356
INDUSTRIAL MACHINERY & EQUIPMENT - 1.5%
Briggs & Stratton Corp. 6,000 291,375
Case Corp. 21,500 1,299,406
Caterpillar, Inc. 98,100 4,763,981
Cincinnati Milacron, Inc. 9,600 249,000
Cooper Industries, Inc. 28,246 1,384,054
Deere & Co. 67,300 3,924,431
Dover Corp. 53,600 1,936,300
Harnischfeger Industries, Inc. 11,900 420,219
Illinois Tool Works, Inc. 59,600 3,583,450
Ingersoll-Rand Co. 45,900 1,858,950
Parker-Hannifin Corp. 31,425 1,441,622
Stanley Works 19,300 910,719
Tenneco, Inc. 41,100 1,623,450
Timken Co. 15,084 518,513
Tyco International Ltd. 131,900 5,943,744
30,149,214
POLLUTION CONTROL - 0.3%
Browning-Ferris Industries, Inc. 50,800 1,879,600
Safety Kleen Corp. 20,500 562,469
Waste Management, Inc. 113,900 3,132,250
5,574,319
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 109,261,889
MEDIA & LEISURE - 4.2%
BROADCASTING - 1.0%
CBS Corp. 176,550 5,197,191
Clear Channel Communications, Inc. (a) 21,400 1,699,963
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - CONTINUED
BROADCASTING - CONTINUED
Comcast Corp. Class A special 83,950 $ 2,649,672
Tele-Communications, Inc.
(TCI Group), Series A 122,500 3,422,344
Time Warner, Inc. 134,020 8,309,240
21,278,410
ENTERTAINMENT - 1.0%
Disney (Walt) Co. 171,000 16,939,688
King World Productions, Inc. 8,900 513,975
Viacom, Inc. Class B (non-vtg.) (a) 84,500 3,501,469
20,955,132
LEISURE DURABLES & TOYS - 0.2%
Brunswick Corp. 23,800 721,438
Hasbro, Inc. 30,750 968,625
Mattel, Inc. 78,076 2,908,331
4,598,394
LODGING & GAMING - 0.4%
Harrah's Entertainment, Inc. (a) 24,700 466,213
Hilton Hotels Corp. 68,300 2,031,925
ITT Corp. (a) 28,100 2,328,788
Marriott International, Inc. 30,400 2,105,200
Mirage Resorts, Inc. (a) 42,400 964,600
7,896,726
PUBLISHING - 1.1%
American Greetings Corp. Class A 17,900 700,338
Cognizant Corp. 40,200 1,791,413
Dow Jones & Co., Inc. 23,000 1,234,813
Dun & Bradstreet Corp. 40,900 1,265,344
Gannett Co., Inc. 68,000 4,203,250
Harcourt General, Inc. 17,000 930,750
Knight-Ridder, Inc. 21,900 1,138,800
McGraw-Hill, Inc. 23,900 1,768,600
Meredith Corp. 12,900 460,369
New York Times Co. (The) Class A 23,000 1,520,875
Times Mirror Co. Class A 23,000 1,414,500
Tribune Co. 29,300 1,823,925
US WEST Media Group (a) 149,500 4,316,813
22,569,790
RESTAURANTS - 0.5%
Darden Restaurants, Inc. 36,700 458,750
McDonald's Corp. 177,000 8,451,750
Tricon Global Restaurants, Inc. 42,710 1,241,259
Wendy's International, Inc. 31,500 757,969
10,909,728
TOTAL MEDIA & LEISURE 88,208,180
NONDURABLES - 10.2%
AGRICULTURE - 0.1%
Pioneer Hi-Bred International, Inc. 18,300 1,962,675
BEVERAGES - 3.2%
Anheuser-Busch Companies, Inc. 122,000 5,368,000
Brown-Forman Corp. Class B 16,600 917,150
Coca-Cola Co. (The) 634,500 42,273,563
Coors (Adolph) Co. Class B 8,900 295,925
PepsiCo, Inc. 382,900 13,951,919
Seagram Co. Ltd. 88,900 2,876,167
Whitman Corp. 24,400 635,925
66,318,649
SHARES VALUE (NOTE 1)
FOODS - 2.3%
Archer-Daniels-Midland Co. 134,081 $ 2,907,882
CPC International, Inc. 34,400 3,706,600
Campbell Soup Co. 113,400 6,591,375
ConAgra, Inc. 114,200 3,747,188
General Mills, Inc. 43,800 3,137,175
Heinz (H.J.) Co. 96,650 4,911,028
Hershey Foods Corp. 34,600 2,143,038
Kellogg Co. 99,600 4,942,650
Quaker Oats Co. 32,600 1,719,650
Ralston Purina Co. 25,400 2,360,613
Sara Lee Corp. 118,700 6,684,294
Sysco Corp. 41,700 1,899,956
Wrigley (Wm.) Jr. Co. 27,900 2,219,794 46,971,243
HOUSEHOLD PRODUCTS - 3.1%
Alberto Culver Co. Class B 13,500 432,844
Avon Products, Inc. 33,600 2,062,200
Clorox Co. 29,000 2,292,813
Colgate-Palmolive Co. 78,200 5,747,700
Gillette Co. 141,400 14,201,863
International Flavors & Fragrances, Inc. 26,200 1,349,300
Procter & Gamble Co. 339,800 27,120,288
Rubbermaid, Inc. 36,000 900,000
Unilever NV ADR 159,900 9,983,756
64,090,764
TOBACCO - 1.5%
Fortune Brands, Inc. 41,100 1,523,269
Philip Morris Companies, Inc. 619,200 28,057,500
UST, Inc. 43,900 1,621,556
31,202,325
TOTAL NONDURABLES 210,545,656
PRECIOUS METALS - 0.2%
Barrick Gold Corp. 89,200 1,662,887
Battle Mountain Gold Co. 55,100 323,713
Echo Bay Mines Ltd. 33,400 84,110
Homestake Mining Co. 35,100 311,513
Newmont Mining Corp. 37,465 1,100,534
Placer Dome, Inc. 57,300 721,486
4,204,243
RETAIL & WHOLESALE - 4.4%
APPAREL STORES - 0.3%
Charming Shoppes, Inc. (a) 25,200 118,125
Gap, Inc. 106,500 3,774,094
Limited, Inc. (The) 65,019 1,657,985
TJX Companies, Inc. 45,200 1,553,750
7,103,954
DRUG STORES - 0.4%
CVS Corp. 40,100 2,568,906
Long Drug Stores, Inc. 9,400 301,975
Rite Aid Corp. 34,600 2,030,588
Walgreen Co. 118,000 3,702,250
8,603,719
GENERAL MERCHANDISE STORES - 2.3%
Costco Companies, Inc. (a) 57,739 2,576,603
Dayton Hudson Corp. 57,800 3,901,500
Dillards, Inc. Class A 27,300 962,325
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
GENERAL MERCHANDISE STORES - CONTINUED
Federated Department Stores, Inc. (a) 49,900 $ 2,148,819
K mart Corp. (a) 116,100 1,342,406
May Department Stores Co. (The) 56,700 2,987,381
Mercantile Stores Co., Inc. 8,900 541,788
Nordstrom, Inc. 22,000 1,328,250
Penney (J.C.) Co., Inc. 66,800 4,028,875
Sears, Roebuck & Co. 96,300 4,357,575
Wal-Mart Stores, Inc. 570,300 22,491,206
Woolworth Corp. (a) 32,200 656,075
47,322,803
GROCERY STORES - 0.5%
Albertson's, Inc. 67,500 3,197,813
American Stores Co. 78,600 1,616,213
Giant Food, Inc. Class A 14,400 485,100
Great Atlantic & Pacific Tea Co., Inc. 9,100 270,156
Kroger Co. (The) (a) 60,900 2,249,494
Supervalu, Inc. 14,300 598,813
Winn-Dixie Stores, Inc. 35,600 1,555,275
9,972,864
RETAIL & WHOLESALE, MISCELLANEOUS - 0.9%
Circuit City Stores, Inc. -
Circuit City Group 22,200 789,488
Home Depot, Inc. 187,600 11,044,950
IKON Office Solutions, Inc. 31,800 894,375
Lowe's Companies, Inc. 47,600 2,269,925
Tandy Corp. 29,300 1,129,881
Toys "R" Us, Inc. (a) 68,500 2,153,469
18,282,088
TOTAL RETAIL & WHOLESALE 91,285,428
SERVICES - 0.8%
ADVERTISING - 0.1%
Interpublic Group of Companies, Inc. 29,550 1,471,959
Omnicom Group, Inc. 17,800 754,275
2,226,234
LEASING & RENTAL - 0.0%
Ryder Systems, Inc. 18,200 596,050
PRINTING - 0.1%
Deluxe Corp. 19,600 676,200
Donnelley (R.R.) & Sons Co. 35,100 1,307,475
Harland (John H.) Co. 7,500 157,500
Moore Corporation Ltd. 21,000 315,834
2,457,009
SERVICES - 0.6%
Block (H & R), Inc. 25,000 1,120,313
Cendant Corp. (a) 216,072 7,427,475
Ecolab, Inc. 15,600 864,825
Jostens, Inc. 9,200 212,175
National Service Industries, Inc. 10,900 540,231
Service Corp. International 57,400 2,120,213
12,285,232
TOTAL SERVICES 17,564,525
TECHNOLOGY - 12.4%
COMMUNICATIONS EQUIPMENT - 2.0%
Andrew Corp. 21,912 525,888
Cabletron Systems, Inc. (a) 48,400 726,000
Cisco Systems, Inc. (a) 259,650 14,475,488
DSC Communications Corp. (a) 33,900 813,600
SHARES VALUE (NOTE 1)
Lucent Technologies, Inc. 161,584 $ 12,906,522
Northern Telecom Ltd. 68,400 6,083,775
Tellabs, Inc. (a) 48,400 2,559,150
3Com Corp. (a) 85,500 2,987,156
41,077,579
COMPUTER SERVICES & SOFTWARE - 3.4%
Adobe Systems, Inc. 17,200 709,500
Autodesk, Inc. 14,900 551,300
Automatic Data Processing, Inc. 78,700 4,830,213
Ceridian Corp. (a) 19,300 884,181
Computer Associates International, Inc. 137,012 7,244,510
Computer Sciences Corp. (a) 21,900 1,828,650
Equifax, Inc. 36,100 1,279,294
First Data Corp. 114,800 3,357,900
HBO & Co. 53,900 2,587,200
Microsoft Corp. (a) 306,400 39,602,200
Novell, Inc. (a) 83,000 622,500
Oracle Corp. (a) 254,750 5,684,109
Parametric Technology Corp. (a) 35,400 1,677,075
Shared Medical Systems Corp. 5,900 389,400
Siebel Systems, Inc. (a) 57 2,383
71,250,415
COMPUTERS & OFFICE EQUIPMENT - 4.0%
Apple Computer, Inc. (a) 30,200 396,375
Bay Networks, Inc. (a) 47,700 1,219,331
Compaq Computer Corp. 191,252 10,793,785
Data General Corp. (a) 11,200 195,300
Dell Computer Corp. (a) 83,400 7,005,600
Digital Equipment Corp. (a) 36,700 1,357,900
EMC Corp. (a) 130,300 3,575,106
Hewlett-Packard Co. 269,600 16,850,000
International Business Machines Corp. 249,000 26,036,063
Pitney Bowes, Inc. 38,800 3,489,575
Seagate Technology (a) 58,800 1,131,900
Silicon Graphics, Inc. (a) 42,300 526,106
Sun Microsystems, Inc. (a) 98,400 3,923,700
Unisys Corp. (a) 41,800 579,975
Xerox Corp. 85,700 6,325,731
83,406,447
ELECTRONIC INSTRUMENTS - 0.3%
Applied Materials, Inc. (a) 91,300 2,750,413
KLA-Tencor Corp. (a) 24,000 927,000
Perkin-Elmer Corp. 13,400 952,238
Tektronix, Inc. 11,850 470,297
Thermo Electron Corp. (a) 35,900 1,597,550
6,697,498
ELECTRONICS - 2.4%
Advanced Micro Devices, Inc. (a) 33,700 604,494
AMP, Inc. 59,596 2,503,032
Intel Corp. 414,700 29,132,675
LSI Logic Corp. (a) 33,900 669,525
Micron Technology, Inc. (a) 47,400 1,232,400
Motorola, Inc. 150,100 8,565,081
National Semiconductor Corp. (a) 37,700 977,844
Texas Instruments, Inc. 96,900 4,360,500
Thomas & Betts Corp. 13,000 614,250
48,659,801
PHOTOGRAPHIC EQUIPMENT - 0.3%
Eastman Kodak Co. 84,200 5,120,413
Polaroid Corp. 10,700 520,956
5,641,369
TOTAL TECHNOLOGY 256,733,109
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TRANSPORTATION - 1.0%
AIR TRANSPORTATION - 0.4%
AMR Corp. (a) 21,900 $ 2,814,150
Delta Air Lines, Inc. 20,800 2,475,200
Southwest Airlines Co. 52,200 1,285,425
US Airways Group, Inc. (a) 24,600 1,537,500
8,112,275
RAILROADS - 0.5%
Burlington Northern Santa Fe Corp. 40,618 3,774,935
CSX Corp. 52,038 2,810,052
Union Pacific Corp. 66,800 4,170,825
10,755,812
TRUCKING & FREIGHT - 0.1%
Caliber System, Inc. 9,400 457,663
Federal Express Corp. (a) 27,500 1,679,219
Laidlaw, Inc. 78,800 1,074,884
3,211,766
TOTAL TRANSPORTATION 22,079,853
UTILITIES - 9.4%
CELLULAR - 0.3%
AirTouch Communications, Inc. (a) 132,900 5,523,656
ELECTRIC UTILITY - 2.4%
American Electric Power Co., Inc. 45,100 2,328,288
Baltimore Gas & Electric Co. 35,300 1,202,406
Carolina Power & Light Co. 36,100 1,531,994
Central & South West Corp. 50,900 1,377,481
Consolidated Edison Co. of
New York, Inc. 56,200 2,304,200
DTE Energy Co. 34,700 1,203,656
Dominion Resources, Inc. 44,100 1,877,006
Duke Energy Corp. 97,007 5,371,763
Edison International 98,300 2,672,531
Entergy Corp. 72,500 2,170,469
FPL Group, Inc. 48,400 2,864,675
FirstEnergy Corp. 68,500 1,986,500
GPU, Inc. 28,900 1,217,413
Houston Industries, Inc. 66,522 1,775,306
Niagara Mohawk Power Corp. (a) 32,700 343,350
Northern States Power Co. 16,600 966,950
PECO Energy Co. 53,400 1,294,950
PG&E Corp. 105,100 3,198,981
PP&L Resources, Inc. 39,400 943,138
PacifiCorp. 70,900 1,936,456
Public Service Enterprise Group, Inc. 55,600 1,761,825
Southern Co. 163,200 4,222,800
Texas Utilities Co. 67,400 2,801,313
Unicom Corp. 62,900 1,934,175
Union Electric Co. 24,400 1,055,300
50,342,926
GAS - 0.6%
Columbia Gas System, Inc. (The) 13,200 1,037,025
Consolidated Natural Gas Co. 22,700 1,373,350
Eastern Enterprises Co. 4,800 216,000
Enron Corp. 80,200 3,333,313
NICOR, Inc. 11,800 497,813
Oneok, Inc. 6,806 274,792
Pacific Enterprises 19,900 748,738
Peoples Energy Corp. 8,300 326,813
Sonat, Inc. 25,800 1,180,350
Williams Companies, Inc. 88,900 2,522,538
11,510,732
SHARES VALUE (NOTE 1)
TELEPHONE SERVICES - 6.1%
AT&T Corp. 410,800 $ 25,161,500
ALLTEL Corp. 44,600 1,831,388
Ameritech Corp. 136,800 11,012,400
Bell Atlantic Corp. 196,239 17,857,749
BellSouth Corp. 248,200 13,976,763
Frontier Corp. 39,400 948,063
GTE Corp. 249,700 13,046,825
MCI Communications Corp. 171,400 7,338,063
SBC Communications, Inc. 230,124 16,856,583
Sprint Corp. 103,200 6,050,100
U.S. WEST Communications Group 129,400 5,839,175
WorldCom, Inc. (a) 226,100 6,839,525
126,758,134
TOTAL UTILITIES 194,135,448
TOTAL COMMON STOCKS
(Cost $1,521,614,700) 1,915,752,326
U.S. TREASURY OBLIGATIONS - 7.6%
PRINCIPAL
AMOUNT
U.S. Treasury Bills, yields at dates
of purchase 5.04% to 5.36%,
1/8/98 to 6/11/98 (b)
(Cost $156,368,058) $ 159,784,000 156,643,107
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $1,677,982,758) $ 2,072,395,433
FUTURES CONTRACTS
EXPIRATION UNDERLYING FACE UNREALIZED
PURCHASED DATE AMOUNT AT VALUE GAIN/(LOSS)
680 S&P 500 Contracts Mar. 1998 $ 166,447,000 $ 1,058,728
THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL
INVESTMENT IN
SECURITIES - 8.0%
LEGEND
(a) Non-income producing
(b) 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 $8,858,750.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $954,085,949 and $118,869,136, respectively.
The market value of futures contracts opened and closed during the
period amounted to $1,130,596,745 and $1,066,249,230, 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 $399 for the
period (see Note 4 of Notes to Financial Statements).
At period end, the value of the securities loaned and the value of
collateral amounted to $698,132 and $704,695, respectively.
INCOME TAX INFORMATION
At December 31, 1997 the aggregate cost of investment securities for
income tax purposes was $1,677,983,238. Net unrealized appreciation
aggregated $394,412,195 of which $432,802,967 related to appreciated
investment securities and $38,390,772 related to depreciated
investment securities.
The fund hereby designates approximately $32,767,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
INVESTMENT IN SECURITIES, AT VALUE $
2,072,395,433
(COST $1,677,982,758) -
SEE ACCOMPANYING SCHEDULE
CASH
7,293,372
RECEIVABLE FOR FUND SHARES SOLD
17,181,692
DIVIDENDS RECEIVABLE
2,590,210
OTHER RECEIVABLES 5,765
TOTAL ASSETS
2,099,466,472
LIABILITIES
PAYABLE FOR FUND SHARES REDEEMED $ 860,341
ACCRUED MANAGEMENT AND SUB-ADVISORY FEE 289,916
PAYABLE FOR DAILY VARIATION ON 38,425
FUTURES CONTRACTS
OTHER PAYABLES AND 236,015
ACCRUED EXPENSES
TOTAL LIABILITIES
1,424,697
NET ASSETS $
2,098,041,775
NET ASSETS CONSIST OF:
PAID IN CAPITAL $
1,617,382,888
UNDISTRIBUTED NET INVESTMENT INCOME
25,920,081
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS
59,267,491
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS
395,471,315
AND ASSETS AND LIABILITIES IN
FOREIGN CURRENCIES
NET ASSETS, FOR 18,340,322 SHARES OUTSTANDING $
2,098,041,775
NET ASSET VALUE, OFFERING PRICE $114.40
AND REDEMPTION PRICE PER SHARE ($2,098,041,775 (DIVIDED BY) 18,340,322 SHARES)
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME $ 24,517,806
DIVIDENDS
INTEREST (INCLUDING INCOME ON SECURITIES LOANED OF $134) 5,563,528
TOTAL INCOME 30,081,334
EXPENSES
MANAGEMENT AND SUB-ADVISORY FEE $ 4,102,533
TRANSFER AGENT FEES 1,031,192
ACCOUNTING FEES AND EXPENSES 599,917
NON-INTERESTED TRUSTEES' COMPENSATION 5,656
CUSTODIAN FEES AND EXPENSES 43,222
REGISTRATION FEES 8,223
AUDIT 49,447
LEGAL 7,730
REPORTS TO SHAREHOLDERS 98,699
MISCELLANEOUS 33,028
TOTAL EXPENSES BEFORE REDUCTIONS 5,979,647
EXPENSE REDUCTIONS (1,827,465 4,152,182
)
NET INVESTMENT INCOME 25,929,152
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 37,988,463
FOREIGN CURRENCY TRANSACTIONS 116
FUTURES CONTRACTS 20,513,427 58,502,006
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 299,640,712
ASSETS AND LIABILITIES IN (48
FOREIGN CURRENCIES )
FUTURES CONTRACTS 1,924,306 301,564,970
NET GAIN (LOSS) 360,066,976
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 385,996,128
OTHER INFORMATION $ 1,799,172
EXPENSE REDUCTIONS 26,792
FMR REIMBURSEMENT
DIRECTED BROKERAGE ARRANGEMENTS
CUSTODIAN CREDITS 1,501
$ 1,827,465
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
OPERATIONS $ 25,929,152 $ 10,838,949
NET
INVESTMENT
INCOME
NET REALIZED 58,502,006 22,654,377
GAIN (LOSS)
CHANGE IN NET 301,564,970 68,025,688
UNREALIZED
APPRECIATION
(DEPRECIATION)
NET INCREASE 385,996,128 101,519,014
(DECREASE)
IN NET
ASSETS
RESULTING
FROM
OPERATIONS
DISTRIBUTIONS TO (10,847,444 (3,387,922
SHAREHOLDERS ) )
FROM NET
INVESTMENT
INCOME
FROM NET (22,010,833 (8,711,800
REALIZED GAIN ) )
TOTAL (32,858,277 (12,099,722
DISTRIBUTIONS ) )
SHARE 1,199,221,255 568,794,744
TRANSACTIONS
NET PROCEEDS
FROM SALES OF
SHARES
REINVESTMENT 32,858,277 12,099,722
OF
DISTRIBUTIONS
COST OF SHARES (310,418,293 (92,770,768
REDEEMED ) )
NET INCREASE 921,661,239 488,123,698
(DECREASE)
IN NET
ASSETS
RESULTING
FROM SHARE
TRANSACTION
S
TOTAL 1,274,799,090 577,542,990
INCREASE
(DECREASE) IN
NET ASSETS
NET ASSETS
BEGINNING OF 823,242,685 245,699,695
PERIOD
END OF PERIOD $ 2,098,041,775 $ 823,242,685
(INCLUDING
UNDISTRIBUTE
D NET
INVESTMENT
INCOME OF
$25,920,081
AND
$10,839,163
,
RESPECTIVELY
)
OTHER
INFORMATION
SHARES
SOLD 11,765,227 6,984,700
ISSUED IN 357,466 161,200
REINVESTMENT
OF
DISTRIBUTIONS
REDEEMED (3,026,660 (1,146,896
) )
NET INCREASE 9,096,033 5,999,004
(DECREASE)
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1997 1996 1995 1994 1993
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, $ 89.05 $ 75.71 $ 56.22 $ 55.74 $ 52.60
BEGINNING OF PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET INVESTMENT 1.80 E 1.04 .85 1.14 1.31
INCOME
NET REALIZED AND 26.67 15.55 19.72 (.56) 3.80
UNREALIZED GAIN (LOSS)
TOTAL FROM 28.47 16.59 20.57 .58 5.11
INVESTMENT
OPERATIONS
LESS DISTRIBUTIONS
FROM NET INVESTMENT (1.03) (.91) (.95) - (1.28)
INCOME
FROM NET REALIZED (2.09) (2.34) (.11) (.10) (.60)
GAIN
IN EXCESS OF NET - - (.02) - (.09)
REALIZED GAIN
TOTAL DISTRIBUTIONS (3.12) (3.25) (1.08) (.10) (1.97)
NET ASSET VALUE, END OF $ 114.40 $ 89.05 $ 75.71 $ 56.22 $ 55.74
PERIOD
TOTAL RETURN A, B 32.83% 22.71% 37.19% 1.04% 9.74%
RATIOS AND
SUPPLEMENTAL DATA
NET ASSETS, END OF $ 2,098,042 $ 823,243 $ 245,700 $ 51,301 $ 25,153
PERIOD (000 OMITTED)
RATIO OF EXPENSES TO .28% C .28% C .28% C .28% C .28% C
AVERAGE NET ASSETS
RATIO OF NET INVESTMENT 1.74% 2.26% 2.70% 2.81% 2.65%
INCOME TO AVERAGE
NET ASSETS
PORTFOLIO TURNOVER RATE 9% 14% 16% 2% 9%
AVERAGE COMMISSION $ .0268 $ .0315
RATE D
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
A TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR
INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION OF
THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN. B THE
TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN
EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE
NOTE 6 OF NOTES TO FINANCIAL STATEMENTS). C FMR
AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES
DURING THE PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S
EXPENSE RATIO WOULD HAVE BEEN HIGHER (SEE NOTE 6 OF
NOTES TO FINANCIAL STATEMENTS). D 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. E NET INVESTMENT INCOME PER
SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
</TABLE>
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1997 PAST 1 LIFE OF
YEAR FUND
VIP III: GROWTH OPPORTUNITIES - "INITIAL CLASS" 29.95% 26.81%
S&P 500 (REGISTERED TRADEMARK) 33.36% 31.22%
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and
show you what would have happened if the fund had achieved that return
by performing at a constant rate each year.
You can compare the fund's returns to the performance of the Standard
& Poor's 500 Index - a widely recognized, unmanaged index of common
stocks.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how it
will do tomorrow. The stock market, for example, has a
history of long-term growth and short-term volatility. In
turn, the share price and return of a fund that invests in
stocks will vary. That means if you sell your shares
during a market downturn, you might lose money.
But if you can ride out the market's ups and downs,
you may have a gain.
3
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
IMAHDR PRASUN SHR__CHT 19971231 19980109 111329 S00000000000001
VIP III Growth Opp S&P 500
00617 SP001
1995/01/03 10000.00 10000.00
1995/01/31 10060.00 10261.28
1995/02/28 10370.00 10661.16
1995/03/31 10560.00 10975.77
1995/04/30 10930.00 11299.00
1995/05/31 11440.00 11750.63
1995/06/30 11790.00 12023.59
1995/07/31 12180.00 12422.30
1995/08/31 12260.00 12453.48
1995/09/30 12470.00 12979.01
1995/10/31 12560.00 12932.68
1995/11/30 12920.00 13500.42
1995/12/31 13251.81 13760.44
1996/01/31 13444.45 14228.85
1996/02/29 13434.43 14360.75
1996/03/31 13393.72 14499.04
1996/04/30 13607.45 14712.76
1996/05/31 13912.77 15092.20
1996/06/30 14024.73 15149.70
1996/07/31 13617.62 14480.39
1996/08/31 13699.05 14785.78
1996/09/30 14360.59 15617.92
1996/10/31 14950.89 16048.66
1996/11/30 16080.60 17261.78
1996/12/31 15673.50 16919.83
1997/01/31 16416.46 17976.98
1997/02/28 16573.05 18117.92
1997/03/31 15727.48 17373.45
1997/04/30 16446.21 18410.65
1997/05/31 17513.74 19531.49
1997/06/30 18095.06 20406.50
1997/07/31 19490.24 22030.24
1997/08/31 18750.37 20796.11
1997/09/30 19532.52 21935.11
1997/10/31 19141.45 21202.48
1997/11/30 19817.90 22183.94
1997/12/31 20367.51 22564.84
IMATRL PRASUN SHR__CHT 19971231 19980109 111332 R00000000000039
Let's say hypothetically that $10,000 was invested in VIP III: Growth
Opportunities Portfolio on January 3, 1995, when the fund started. As
the chart shows, by December 31, 1997, the value of the investment
would have grown to $20,368 - a 103.68% 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 $22,565 - a 125.65% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
FANNIE MAE 7.8
PHILIP MORRIS COMPANIES, INC. 6.3
FREDDIE MAC 3.0
FLEET FINANCIAL GROUP, INC. 2.7
COLUMBIA/HCA HEALTHCARE CORP. 2.6
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
FINANCE 21.8
TECHNOLOGY 9.4
RETAIL & WHOLESALE 7.9
HEALTH 7.5
NONDURABLES 7.5
ASSET ALLOCATION AS OF DECEMBER 31, 1997*
ROW: 1, COL: 1, VALUE: 6.0
ROW: 1, COL: 2, VALUE: 11.0
ROW: 1, COL: 3, VALUE: 82.90000000000001
STOCKS 82.9%
BONDS 11.0%
SHORT-TERM INVESTMENTS 6.1%
FOREIGN INVESTMENTS 7.0%
*
% OF FUND'S
INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1fee.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1997 PAST 1 LIFE OF
YEAR FUND
VIP III: GROWTH OPPORTUNITIES - SERVICE CLASS 29.95% 26.81%
S&P 500 (REGISTERED TRADEMARK) 33.36% 31.22%
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and
show you what would have happened if the fund had achieved that return
by performing at a constant rate each year.
You can compare the fund's returns to the performance of the Standard
& Poor's 500 Index - a widely recognized, unmanaged index of common
stocks.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how it
will do tomorrow. The stock market, for example, has a
history of long-term growth and short-term volatility. In
turn, the share price and return of a fund that invests in
stocks will vary. That means if you sell your shares
during a market downturn, you might lose money.
But if you can ride out the market's ups and downs,
you may have a gain.
3
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
IMAHDR PRASUN SHR__CHT 19971231 19980109 105514 S00000000000001
VIP Growth S&P 500
00151 SP001
1987/12/31 10000.00 10000.00
1988/01/31 10216.96 10421.00
1988/02/29 11045.36 10906.62
1988/03/31 10946.75 10569.60
1988/04/30 11084.81 10686.93
1988/05/31 10986.19 10779.90
1988/06/30 11538.46 11274.70
1988/07/31 11479.29 11231.86
1988/08/31 11203.16 10849.97
1988/09/30 11518.74 11312.18
1988/10/31 11548.32 11626.66
1988/11/30 11439.84 11460.40
1988/12/31 11558.19 11660.96
1989/01/31 12386.59 12514.54
1989/02/28 12130.18 12202.93
1989/03/31 12496.89 12487.26
1989/04/30 13157.78 13135.34
1989/05/31 13628.42 13667.32
1989/06/30 13448.17 13589.42
1989/07/31 14649.80 14816.55
1989/08/31 14900.14 15106.95
1989/09/30 15030.31 15045.01
1989/10/31 14609.74 14695.97
1989/11/30 14850.07 14995.77
1989/12/31 15200.54 15355.66
1990/01/31 14319.35 14325.30
1990/02/28 14456.13 14510.09
1990/03/31 14632.80 14894.61
1990/04/30 14206.71 14522.25
1990/05/31 15464.21 15938.17
1990/06/30 15786.38 15829.79
1990/07/31 15536.96 15779.13
1990/08/31 13936.50 14352.70
1990/09/30 12502.32 13653.72
1990/10/31 12055.43 13595.01
1990/11/30 13032.34 14473.25
1990/12/31 13416.87 14877.05
1991/01/31 14310.63 15525.69
1991/02/28 15378.27 16635.78
1991/03/31 15842.36 17038.36
1991/04/30 15694.69 17079.26
1991/05/31 16622.87 17817.08
1991/06/30 15388.82 17001.06
1991/07/31 16854.92 17793.31
1991/08/31 17603.79 18215.01
1991/09/30 17740.91 17910.82
1991/10/31 18289.38 18150.82
1991/11/30 17245.18 17419.34
1991/12/31 19523.44 19412.12
1992/01/31 20715.31 19051.05
1992/02/29 21148.67 19298.72
1992/03/31 19852.53 18922.39
1992/04/30 19074.84 19478.71
1992/05/31 18912.83 19574.15
1992/06/30 18178.35 19282.50
1992/07/31 18880.42 20071.15
1992/08/31 18361.97 19659.70
1992/09/30 18686.00 19891.68
1992/10/31 19409.68 19961.30
1992/11/30 20705.82 20641.98
1992/12/31 21343.09 20895.88
1993/01/31 21764.33 21071.40
1993/02/28 21315.66 21357.97
1993/03/31 22165.64 21808.63
1993/04/30 21933.82 21280.86
1993/05/31 23567.55 21851.19
1993/06/30 23810.40 21914.55
1993/07/31 23744.17 21826.90
1993/08/31 24936.34 22654.14
1993/09/30 25399.97 22479.70
1993/10/31 25642.82 22945.03
1993/11/30 24605.18 22727.05
1993/12/31 25477.24 23002.05
1994/01/31 26117.48 23784.12
1994/02/28 25848.10 23139.57
1994/03/31 24673.72 22130.68
1994/04/30 24826.39 22413.96
1994/05/31 24250.94 22781.54
1994/06/30 23017.85 22223.40
1994/07/31 23816.42 22952.32
1994/08/31 25166.96 23893.37
1994/09/30 24861.62 23307.98
1994/10/31 25871.59 23832.41
1994/11/30 24838.13 22964.43
1994/12/31 25472.30 23305.00
1995/01/31 24990.80 23909.30
1995/02/28 26025.74 24841.04
1995/03/31 26970.42 25574.10
1995/04/30 27879.67 26327.26
1995/05/31 28966.04 27379.56
1995/06/30 31528.47 28015.58
1995/07/31 34645.89 28944.58
1995/08/31 35070.99 29017.23
1995/09/30 35980.24 30241.76
1995/10/31 35614.18 30133.80
1995/11/30 35590.56 31456.67
1995/12/31 34480.57 32062.53
1996/01/31 35023.76 33153.93
1996/02/29 36198.02 33461.27
1996/03/31 36337.73 33783.50
1996/04/30 37760.25 34281.47
1996/05/31 38941.45 35165.59
1996/06/30 38179.38 35299.57
1996/07/31 35258.14 33740.04
1996/08/31 36312.33 34451.61
1996/09/30 38750.93 36390.55
1996/10/31 38662.02 37394.20
1996/11/30 40808.50 40220.83
1996/12/31 39551.10 39424.06
1997/01/31 41824.59 41887.27
1997/02/28 40873.81 42215.67
1997/03/31 38583.29 40481.03
1997/04/30 40439.40 42897.74
1997/05/31 43243.30 45509.36
1997/06/30 45020.42 47548.18
1997/07/31 48403.54 51331.58
1997/08/31 46534.27 48455.99
1997/09/30 49232.86 51109.92
1997/10/31 47376.76 49402.85
1997/11/30 48732.63 51689.71
1997/12/31 48837.95 52577.22
IMATRL PRASUN SHR__CHT 19971231 19980109 105518 R00000000000123
Let's say hypothetically that $10,000 was invested in VIP III: Growth
Opportunities Portfolio on January 3, 1995, when the fund started. As
the chart shows, by December 31, 1997, the value of the investment
would have grown to $20,368 - a 103.68% 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 $22,565 - a 125.65% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
FANNIE MAE 7.8
PHILIP MORRIS COMPANIES, INC. 6.3
FREDDIE MAC 3.0
FLEET FINANCIAL GROUP, INC. 2.7
COLUMBIA/HCA HEALTHCARE CORP. 2.6
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
FINANCE 21.8
TECHNOLOGY 9.4
RETAIL & WHOLESALE 7.9
HEALTH 7.5
NONDURABLES 7.5
ASSET ALLOCATION AS OF DECEMBER 31, 1997*
ROW: 1, COL: 1, VALUE: 6.0
ROW: 1, COL: 2, VALUE: 11.0
ROW: 1, COL: 3, VALUE: 82.90000000000001
STOCKS 82.9%
BONDS 11.0%
SHORT-TERM INVESTMENTS 6.1%
FOREIGN INVESTMENTS 7.0%
*
% OF FUND'S
INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with George Vanderheiden, Portfolio Manager of Growth
Opportunities Portfolio
Q. HOW DID THE FUND PERFORM COMPARED TO ITS BENCHMARK, GEORGE?
A. For the 12 months that ended December 31, 1997, the fund trailed
the Standard & Poor's 500 Index return of 33.36%.
Q. WHAT FACTORS CONTRIBUTED TO THE FUND'S UNDERPERFORMANCE?
A. While the fund's bond positions performed well during the last
quarter of 1997 when an economic crisis in Southeast Asia helped roil
the U.S. stock market, they hurt performance relative to the index
during the entire period. Over the past year, the allocations to bonds
and cash equivalents reduced the return of the fund by approximately
3%. Holdings in the health sector - most notably Columbia/HCA
Healthcare - were also performance detractors.
Q. WHAT CAUSED THE ECONOMIC CRISIS IN SOUTHEAST ASIA AND HOW WAS THE
FUND ITSELF AFFECTED?
A. The problems in Southeast Asia resulted from two main catalysts.
First, industry overcapacity due to excessive capital investment
spurred trouble, as banks made it quite easy to obtain loans. Many
sectors of the Asian economies are now awash in defaulted loans, a
perilous situation only made worse by looming recession. Second, an
ongoing economic battle among the region's nations to gain more
control of the export market figured into the equation. Over the past
several months, many Asian countries have tried to gain an advantage
by devaluing their currencies, a move that further destabilized the
region's economies. Against this backdrop, many U.S. investors sought
refuge over the past few months among large-cap stocks with more
market liquidity, stable revenue growth and modest earnings
expectations. These types of companies should be better able to
withstand any volatility linked to disruption in Asian economies. In
terms of the fund, I had concentrated more on sectors with less
exposure to Asia, namely finance and utilities stocks. This
repositioning took place well before the actual Asian blow-up, and the
fund was minimally affected as a result.
Q. WHY DOES THE FUND OWN BONDS?
A. I originally purchased bonds as a hedge against slowing corporate
earnings growth. Although the deceleration in earnings growth has
taken longer than I expected, the bond market has performed very well
in recent months with low interest rates and concerns over 1998
corporate earnings playing a role. In addition, deflation remains a
potential shock to the economy that could disrupt the stock market. In
a deflationary environment, the economy begins to slow and earnings
fall sharply. In this case, Treasury bonds would be among the best
financial assets to own.
Q. WHAT MARKET SECTORS HELPED THE FUND'S PERFORMANCE DURING THE
PERIOD?
A. Investments in the finance, technology and basic industries sectors
had the most positive effects on performance. Declining interest rates
fueled a strong rise in such financial stocks as Fannie Mae, Freddie
Mac and Fleet Financial Group, all top contributors during the period.
I began reducing the fund's technology weighting around mid-year, and
by the time the Asian financial crisis took hold - affecting many
technology-related stocks - the fund's underexposure proved
beneficial. During the first three quarters of 1997, accelerating
growth in personal computer sales and corporate spending on
telecommunications and networking hardware propelled many of the
fund's technology positions to strong gains. Compaq Computer was a top
contributor during this time period. The company reported strong unit
growth, a key to success given the lack of pricing power in the
industry. A notable contribution to the fund's performance also came
from consumer nondurable giant Philip Morris. Despite the stigma of
tobacco litigation, Philip Morris was the second- largest contributor
to the fund's performance. This is just the type of company that I
think should do well in the current market environment of weak pricing
power, nervousness surrounding the Asian financial crisis and the
possibility of a deceleration in corporate earnings. Philip Morris has
a high dividend, a strong product line and solid earnings growth.
Consequently, the stock has outperformed the S&P 500 since the Asian
crisis began in late October.
Q. WHAT IS YOUR OUTLOOK FOR THE STOCK MARKET?
A. I've positioned the fund to reflect an environment of anemic
pricing power and flat-to-declining corporate earnings. After many
years of strong corporate earnings growth, signs are now emerging of a
slowdown in many parts of the economy. I have positioned the fund to
take advantage of an environment of low inflation and flat corporate
earnings by focusing on four areas: (1) innovative companies in the
technology, health care and telecommunications sectors that can rely
on unit growth rather than price increases to grow earnings; (2)
companies in the financial sector that should benefit from falling
interest rates; (3) global companies that have strong proprietary
advantages and can use these advantages to grow market share
worldwide; and (4) industries in consolidation that still have strong
growth rates.
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 December 31, 1997, more than $345
million
MANAGER: Beth Terrana, since inception; joined
Fidelity in 1983
3
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
INVESTMENTS DECEMBER 31, 1997
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 82.9%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 0.5%
AEROSPACE & DEFENSE - 0.0%
Gulfstream Aerospace Corp. (a) 10,900 $ 318,802
DEFENSE ELECTRONICS - 0.4%
Raytheon Company:
Class A 20,898 1,030,533
Class B 63,700 3,216,850
4,247,383
SHIP BUILDING & REPAIR - 0.1%
Avondale Industries, Inc. (a) 4,300 127,656
Newport News Shipbuilding, Inc. 14,500 368,844
496,500
TOTAL AEROSPACE & DEFENSE 5,062,685
BASIC INDUSTRIES - 3.8%
CHEMICALS & PLASTICS - 2.4%
Air Products & Chemicals, Inc. 17,900 1,472,275
Dow Chemical Co. 4,400 446,600
du Pont (E.I.) de Nemours & Co. 224,800 13,502,050
Raychem Corp. 149,100 6,420,619
Union Carbide Corp. 71,800 3,082,913
24,924,457
PACKAGING & CONTAINERS - 1.0%
Bemis Co., Inc. 7,200 317,250
Corning, Inc. 38,500 1,429,313
Owens-Illinois, Inc. (a) 229,100 8,691,481
10,438,044
PAPER & FOREST PRODUCTS - 0.4%
Boise Cascade Corp. 29,400 889,350
Champion International Corp. 46,100 2,088,906
International Paper Co. 5,700 245,813
Willamette Industries, Inc. 16,700 537,531
3,761,600
TOTAL BASIC INDUSTRIES 39,124,101
CONSTRUCTION & REAL ESTATE - 1.1%
CONSTRUCTION - 0.8%
Centex Corp. 17,400 1,095,113
D.R. Horton, Inc. 50,336 874,588
Fleetwood Enterprises, Inc. 97,262 4,127,556
Kaufman & Broad Home Corp. 82,700 1,855,581
U.S. Home Corp. (a) 5,600 219,800
8,172,638
ENGINEERING - 0.3%
Fluor Corp. 97,600 3,647,800
TOTAL CONSTRUCTION & REAL ESTATE 11,820,438
DURABLES - 4.0%
AUTOS, TIRES, & ACCESSORIES - 2.9%
Circuit City Stores, Inc. - CarMax Group 6,600 59,400
Cummins Engine Co., Inc. 39,500 2,332,969
Discount Auto Parts, Inc. (a) 40,500 774,563
Federal-Mogul Corp. 7,800 315,900
General Motors Corp. 327,700 19,866,813
Gentex Corp. (a) 6,100 163,938
Goodyear Tire & Rubber Co. 17,800 1,132,525
Honda Motor Co. Ltd. 13,000 476,891
Magna International, Inc. Class A 44,000 2,757,791
Superior Industries International, Inc. 56,300 1,509,544
29,390,334
SHARES VALUE (NOTE 1)
CONSUMER DURABLES - 0.1%
Minnesota Mining & Manufacturing Co. 15,200 $ 1,247,350
CONSUMER ELECTRONICS - 0.6%
Newell Co. 34,300 1,457,750
Philips Electronics NV 31,000 1,875,500
Philips Electronics NV (Bearer) 49,500 2,970,244
6,303,494
HOME FURNISHINGS - 0.0%
HON Industries, Inc. 700 41,300
TEXTILES & APPAREL - 0.4%
Burlington Industries, Inc. (a) 62,200 859,138
Liz Claiborne, Inc. 32,100 1,342,181
NIKE, Inc. Class B 41,800 1,640,650
Reebok International Ltd. (a) 7,300 210,331
4,052,300
TOTAL DURABLES 41,034,778
ENERGY - 5.4%
ENERGY SERVICES - 0.3%
McDermott International, Inc. 83,000 3,039,875
OIL & GAS - 5.1%
Amerada Hess Corp. 36,800 2,019,400
Atlantic Richfield Co. 29,500 2,363,688
British Petroleum PLC ADR 94,059 7,495,327
Burlington Resources, Inc. 200,435 8,981,993
Elf Aquitaine SA sponsored ADR 17,600 1,031,800
Enron Oil & Gas Co. 7,100 150,431
Kerr-McGee Corp. 14,600 924,363
Occidental Petroleum Corp. 253,900 7,442,444
Royal Dutch Petroleum Co. 219,100 11,872,481
Santa Fe Energy Resources, Inc. 43,600 490,500
Tosco Corp. 178,700 6,757,094
Total SA:
Class B 6,153 669,082
sponsored ADR 40,568 2,251,524
Valero Energy Corp. 15,000 471,563
52,921,690
TOTAL ENERGY 55,961,565
FINANCE - 21.8%
BANKS - 1.4%
Credit Suisse Group (Reg.) 32,700 5,054,856
NationsBank Corp. 59,000 3,587,938
Providian Financial Corp. 89,700 4,053,319
Wells Fargo & Co. 7,000 2,376,063
15,072,176
CREDIT & OTHER FINANCE - 2.9%
CIT Group, Inc. Class A 21,500 693,375
Fleet Financial Group, Inc. 369,182 27,665,576
Green Tree Financial Corp. 36,800 963,700
Money Store, Inc. (The) 15,700 329,700
29,652,351
FEDERAL SPONSORED CREDIT - 10.8%
Freddie Mac 730,200 30,622,763
Fannie Mae 1,418,000 80,914,625
111,537,388
INSURANCE - 6.3%
AFLAC, Inc. 30,250 1,546,531
Allmerica Financial Corp. 38,100 1,902,619
Allstate Corp. 212,259 19,289,037
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
American International Group, Inc. 127,200 $ 13,833,000
CIGNA Corp. 37,300 6,455,231
General Re Corp. 19,100 4,049,200
Loews Corp. 30,100 3,194,363
MGIC Investment Corp. 93,000 6,184,500
Nationwide Financial Services, Inc.
Class A 2,700 97,538
PMI Group, Inc. 41,700 3,015,431
Provident Companies, Inc. 5,000 193,125
Reliastar Financial Corp. 19,300 794,919
Torchmark Corp. 87,100 3,663,644
Travelers Property Casualty Corp. Class A 15,300 673,200
UNUM Corp. 7,200 391,500
65,283,838
SAVINGS & LOANS - 0.3%
Golden West Financial Corp. 36,500 3,570,156
SECURITIES INDUSTRY - 0.1%
United Asset Management Corp. 54,900 1,341,619
TOTAL FINANCE 226,457,528
HEALTH - 7.5%
DRUGS & PHARMACEUTICALS - 3.0%
American Home Products Corp. 90,300 6,907,950
Amgen, Inc. 49,800 2,695,425
Astra AB Class A Free shares 302,766 5,247,013
COR Therapeutics, Inc. (a) 3,000 67,500
Gilead Sciences, Inc. (a) 3,400 130,050
Ligand Pharmaceuticals, Inc. Class B (a) 1,600 20,600
Medimmune, Inc. (a) 2,200 94,325
Merck & Co., Inc. 23,800 2,528,750
Novartis AG (Reg.) 3,400 5,511,628
Schering-Plough Corp. 116,000 7,206,500
Sepracor, Inc. (a) 6,700 268,419
30,678,160
MEDICAL EQUIPMENT & SUPPLIES - 0.7%
Allegiance Corp. 3,980 141,041
Bard (C.R.), Inc. 29,500 923,719
Baxter International, Inc. 13,900 701,081
Biomet, Inc. 66,800 1,711,750
Boston Scientific Corp. 5,800 266,075
Johnson & Johnson 9,800 645,575
St. Jude Medical, Inc. (a) 93,500 2,851,750
Sofamor/Danek Group, Inc. (a) 7,800 507,488
7,748,479
MEDICAL FACILITIES MANAGEMENT - 3.8%
Columbia/HCA Healthcare Corp. 894,150 26,489,194
Humana, Inc. (a) 192,400 3,992,300
Tenet Healthcare Corp. (a) 122,700 4,064,438
United HealthCare Corp. 91,300 4,536,469
39,082,401
TOTAL HEALTH 77,509,040
HOLDING COMPANIES - 0.2%
U.S. Industries, Inc. 64,100 1,931,013
INDUSTRIAL MACHINERY & EQUIPMENT - 1.7%
ELECTRICAL EQUIPMENT - 1.3%
Alcatel Alsthom Compagnie Generale
d'Electricite SA sponsored ADR 4,500 113,906
SHARES VALUE (NOTE 1)
Alcatel Alsthom Compagnie Generale
d'Electricite SA 41,300 $ 5,245,206
Emerson Electric Co. 16,800 948,150
General Electric Co. 83,200 6,104,800
Grainger (W.W.), Inc. 6,400 622,000
Scientific-Atlanta, Inc. 38,500 644,875
13,678,937
INDUSTRIAL MACHINERY & EQUIPMENT - 0.3%
Caterpillar, Inc. 57,000 2,768,063
Ultratech Stepper, Inc. (a) 44,200 878,475
3,646,538
POLLUTION CONTROL - 0.1%
Browning-Ferris Industries, Inc. 20,900 773,300
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 18,098,775
MEDIA & LEISURE - 3.2%
BROADCASTING - 0.8%
CBS Corp. 56,500 1,663,219
Comcast Corp. Class A 6,800 216,750
Comcast Corp. Class A special 13,500 426,094
Cox Communications, Inc. Class A (a) 13,300 532,831
Tele-Communications, Inc.:
(TCI Group), Series A 28,468 795,325
(TCI Ventures Group), Series A 86,732 2,455,600
Time Warner, Inc. 36,700 2,275,400
8,365,219
ENTERTAINMENT - 0.5%
Cedar Fair LP (depositary unit) 5,800 150,075
Disney (Walt) Co. 4,600 455,688
King World Productions, Inc. 10,500 606,375
MGM Grand, Inc. (a) 1,200 43,275
Royal Caribbean Cruises Ltd. 42,000 2,239,125
Viacom, Inc. (a):
Class A 18,100 739,838
Class B (non-vtg.) 25,000 1,035,938
5,270,314
LEISURE DURABLES & TOYS - 0.2%
Nintendo Co. Ltd. Ord. 23,100 2,264,446
LODGING & GAMING - 0.7%
Circus Circus Enterprises, Inc. (a) 88,200 1,808,100
Harrah's Entertainment, Inc. (a) 14,800 279,350
Mirage Resorts, Inc. (a) 109,000 2,479,750
Rio Hotel & Casino, Inc. (a) 5,800 121,800
Sun International Hotels Ltd. Ord. (a) 59,200 2,227,400
6,916,400
PUBLISHING - 0.3%
Cognizant Corp. 25,200 1,122,975
US WEST Media Group (a) 84,900 2,451,488
3,574,463
RESTAURANTS - 0.7%
Brinker International, Inc. (a) 27,100 433,600
McDonald's Corp. 80,300 3,834,325
Papa John's International, Inc. (a) 7,000 244,125
Tricon Global Restaurants, Inc. 940 27,319
Wendy's International, Inc. 108,800 2,618,000
7,157,369
TOTAL MEDIA & LEISURE 33,548,211
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONDURABLES - 7.5%
BEVERAGES - 0.0%
PepsiCo, Inc. 9,600 $ 349,800
TOBACCO - 7.5%
Philip Morris Companies, Inc. 1,449,400 65,675,938
RJR Nabisco Holdings Corp. 277,460 10,404,750
UST, Inc. 25,300 934,519
77,015,207
TOTAL NONDURABLES 77,365,007
PRECIOUS METALS - 0.1%
Barrick Gold Corp. 7,500 139,817
Newmont Mining Corp. 28,769 845,089
984,906
RETAIL & WHOLESALE - 7.9%
APPAREL STORES - 0.4%
Gap, Inc. 32,550 1,153,491
TJX Companies, Inc. 83,700 2,877,188
4,030,679
DRUG STORES - 0.0%
CVS Corp. 2,550 163,359
GENERAL MERCHANDISE STORES - 2.6%
Federated Department Stores, Inc. (a) 92,500 3,983,281
Proffitts, Inc. (a) 28,300 804,781
Wal-Mart Stores, Inc. 547,700 21,599,919
26,387,981
GROCERY STORES - 0.3%
Safeway, Inc. (a) 54,000 3,415,500
RETAIL & WHOLESALE, MISCELLANEOUS - 4.6%
Circuit City Stores, Inc. - Circuit
City Group 249,300 8,865,731
Corporate Express, Inc. (a) 41,900 539,463
Home Depot, Inc. 305,500 17,986,313
Lowe's Companies, Inc. 241,600 11,521,300
Officemax, Inc. (a) 123,275 1,756,669
Office Depot, Inc. (a) 38,100 912,019
PEAPOD, Inc. 300 1,950
Rex Stores Corp. (a) 14,400 147,600
Staples, Inc. (a) 50,500 1,401,375
Toys "R" Us, Inc. (a) 79,500 2,499,281
U.S. Office Products Co. (a) 56,700 1,112,738
Viking Office Products, Inc. (a) 50,500 1,101,531
47,845,970
TOTAL RETAIL & WHOLESALE 81,843,489
SERVICES - 0.8%
ADVERTISING - 0.0%
Interpublic Group of Companies, Inc. 8,150 405,972
LEASING & RENTAL - 0.0%
Avis Rent A Car, Inc. (a) 2,700 86,231
PRINTING - 0.0%
Donnelley (R.R.) & Sons Co. 3,800 141,550
SERVICES - 0.8%
Cendant Corp. (a) 202,150 6,948,906
Reuters Holdings PLC ADR Class B 15,700 1,040,125
7,989,031
TOTAL SERVICES 8,622,784
SHARES VALUE (NOTE 1)
TECHNOLOGY - 9.4%
COMMUNICATIONS EQUIPMENT - 0.0%
Andrew Corp. 13,800 $ 331,200
COMPUTER SERVICES & SOFTWARE - 2.7%
Automatic Data Processing, Inc. 52,400 3,216,050
Black Box Corp. (a) 8,800 311,300
Ceridian Corp. (a) 64,200 2,941,163
CompUSA, Inc. (a) 27,600 855,600
E Trade Group, Inc. (a) 19,800 455,400
Electronic Data Systems Corp. 142,600 6,265,488
Electronics for Imaging, Inc. (a) 69,400 1,153,775
First Data Corp. 80,300 2,348,775
Microsoft Corp. (a) 36,200 4,678,850
Oracle Corp. (a) 67,625 1,508,883
Paychex, Inc. 6,100 308,813
Policy Management Systems Corp. (a) 55,600 3,867,675
27,911,772
COMPUTERS & OFFICE EQUIPMENT - 2.6%
Compaq Computer Corp. 141,450 7,983,084
Hewlett-Packard Co. 41,500 2,593,750
Ingram Micro, Inc. Class A (a) 7,600 221,350
International Business Machines Corp. 90,600 9,473,363
Quantum Corp. (a) 6,400 128,400
SCI Systems, Inc. (a) 86,500 3,768,156
Tech Data Corp. (a) 55,300 2,149,788
Western Digital Corp. (a) 17,700 284,306
26,602,197
ELECTRONIC INSTRUMENTS - 0.6%
Applied Materials, Inc. (a) 6,200 186,775
Cognex Corp. (a) 19,100 520,475
Lam Research Corp. (a) 35,000 1,023,750
Novellus Systems, Inc. (a) 34,100 1,101,856
Thermo Electron Corp. (a) 52,400 2,331,800
Varian Associates, Inc. 13,000 657,313
5,821,969
ELECTRONICS - 3.5%
Altera Corp. (a) 9,900 327,938
AMP, Inc. 103,200 4,334,400
Intel Corp. 126,000 8,851,500
Methode Electronics, Inc. Class A 114,100 1,854,125
Micron Technology, Inc. (a) 230,100 5,982,600
Molex, Inc. 32,828 943,805
Motorola, Inc. 7,800 445,088
Solectron Corp. (a) 295,900 12,298,344
Thomas & Betts Corp. 21,700 1,025,325
Uniphase Corp. (a) 3,000 124,125
36,187,250
PHOTOGRAPHIC EQUIPMENT - 0.0%
Polaroid Corp. 2,000 97,375
TOTAL TECHNOLOGY 96,951,763
TRANSPORTATION - 0.6%
AIR TRANSPORTATION - 0.0%
Northwest Airlines Corp. Class A (a) 9,900 473,963
RAILROADS - 0.4%
Bombardier, Inc. Class B 33,900 697,184
Burlington Northern Santa Fe Corp. 10,700 994,431
CSX Corp. 49,300 2,662,200
4,353,815
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TRANSPORTATION - CONTINUED
SHIPPING - 0.1%
Stolt-Nielsen SA Class B sponsored ADR 30,300 $ 662,813
Stolt-Nielsen SA 4,200 88,988
751,801
TRUCKING & FREIGHT - 0.1%
Roadway Express, Inc. 4,100 90,713
Yellow Corp. (a) 29,100 731,138
821,851
TOTAL TRANSPORTATION 6,401,430
UTILITIES - 7.4%
CELLULAR - 1.8%
AirTouch Communications, Inc. (a) 209,500 8,707,344
Century Telephone Enterprises, Inc. 8,000 398,500
Vodafone Group PLC sponsored ADR 121,080 8,778,300
Vodafone Group PLC 24,225 175,607
18,059,751
ELECTRIC UTILITY - 0.5%
American Electric Power Co., Inc. 35,300 1,822,363
Entergy Corp. 61,800 1,850,138
Houston Industries, Inc. 18,100 483,044
Niagara Mohawk Power Corp. (a) 23,300 244,650
PECO Energy Co. 8,100 196,425
PG&E Corp. 15,130 460,519
5,057,139
GAS - 0.0%
Enron Corp. 9,500 394,844
TELEPHONE SERVICES - 5.1%
AT&T Corp. 37,400 2,290,750
Ameritech Corp. 44,400 3,574,200
Bell Atlantic Corp. 56,381 5,130,671
BellSouth Corp. 87,700 4,938,606
Deutsche Telekom AG 23,400 433,001
France Telecom SA 4,000 144,966
MCI Communications Corp. 366,200 15,677,938
SBC Communications, Inc. 58,600 4,292,450
Sprint Corp. 189,300 11,097,713
Telebras sponsored ADR 31,500 3,667,781
Telefonica de Argentina SA
sponsored ADR 3,500 130,375
WorldCom, Inc. (a) 44,400 1,343,100
52,721,551
TOTAL UTILITIES 76,233,285
TOTAL COMMON STOCKS
(Cost $699,704,502) 858,950,798
U.S. TREASURY OBLIGATIONS - 11.0%
PRINCIPAL
AMOUNT
8 1/8%, 8/15/19 $ 35,740,000 44,719,675
6 1/4%, 8/15/23 40,953,000 42,181,590
stripped Principal:
0%, 2/15/19 70,450,000 19,763,339
0%, 8/15/19 10,000,000 2,725,000
0%, 8/15/20 20,000,000 5,131,800
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $103,599,938) 114,521,404
CASH EQUIVALENTS - 6.1%
SHARES VALUE (NOTE 1)
Taxable Central Cash Fund (b)
(Cost $63,168,454) 63,168,454 $ 63,168,454
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $866,472,894) $ 1,036,640,656
LEGEND
1. Non-income producing
2. At period end, the seven-day yield of the Taxable Central Cash Fund
was 5.69%. The yield refers to the income earned by investing in the
fund over the seven-day period, expressed as an annual percentage.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $618,605,202 and $175,983,050 respectively, of which U.S.
government and government agency obligations aggregated $57,394,929
and $13,963,455, 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 $100,820 for the
period. (see Note 4 of Notes to Financial Statements)
INCOME TAX INFORMATION
At December 31, 1997, the aggregate cost of investment securities for
income tax purposes was $866,542,781. Net unrealized appreciation
aggregated $170,097,875 of which $192,409,319 related to appreciated
investment securities and $22,311,444 related to depreciated
investment securities.
The fund hereby designates approximately $27,360,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
INVESTMENT IN SECURITIES, AT VALUE $ 1,036,640,656
(COST $866,472,894) -
SEE ACCOMPANYING SCHEDULE
RECEIVABLE FOR INVESTMENTS SOLD 171,816
RECEIVABLE FOR FUND SHARES SOLD 2,351,391
DIVIDENDS RECEIVABLE 1,491,063
INTEREST RECEIVABLE 2,319,292
TOTAL ASSETS 1,042,974,218
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 13,483,010
PAYABLE FOR FUND SHARES REDEEMED 495,040
ACCRUED MANAGEMENT FEE 491,409
OTHER PAYABLES AND ACCRUED EXPENSES 149,109
TOTAL LIABILITIES 14,618,568
NET ASSETS $ 1,028,355,650
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 804,843,356
UNDISTRIBUTED NET INVESTMENT INCOME 11,667,388
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS 41,677,935
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 170,166,971
AND ASSETS AND LIABILITIES IN
FOREIGN CURRENCIES
NET ASSETS $ 1,028,355,650
</TABLE>
INITIAL CLASS: $19.27
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($1,025,766,367 (DIVIDED BY) 53,220,551
SHARES)
SERVICE CLASS: $19.27
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PRICE PER SHARE
($2,589,283 (DIVIDED BY) 134,338 SHARES)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME $ 9,137,481
DIVIDENDS
INTEREST 7,816,730
TOTAL INCOME 16,954,211
EXPENSES
MANAGEMENT FEE $ 4,186,484
TRANSFER AGENT FEES 478,369
DISTRIBUTION FEES - SERVICE CLASS 100
ACCOUNTING FEES AND EXPENSES 358,089
NON-INTERESTED TRUSTEES' COMPENSATION 2,648
CUSTODIAN FEES AND EXPENSES 88,195
REGISTRATION FEES 21
AUDIT 25,526
LEGAL 10,600
MISCELLANEOUS 57,520
TOTAL EXPENSES BEFORE REDUCTIONS 5,207,552
EXPENSE REDUCTIONS (59,893 5,147,659
)
NET INVESTMENT INCOME 11,806,552
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 41,975,678
FOREIGN CURRENCY TRANSACTIONS (3,142
)
FUTURES CONTRACTS (39,809 41,932,727
)
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 124,026,551
ASSETS AND LIABILITIES IN (755 124,025,796
FOREIGN CURRENCIES )
NET GAIN (LOSS) 165,958,523
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 177,765,075
OTHER INFORMATION $ 59,662
EXPENSE REDUCTIONS
DIRECTED BROKERAGE AGREEMENTS
CUSTODIAN CREDITS 231
$ 59,893
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
OPERATIONS $ 11,806,552 $ 6,366,110
NET INVESTMENT
INCOME
NET REALIZED GAIN 41,932,727 9,088,610
(LOSS)
CHANGE IN NET 124,025,796 35,812,890
UNREALIZED
APPRECIATION
(DEPRECIATION)
NET INCREASE 177,765,075 51,267,610
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
DISTRIBUTIONS TO (6,503,921) -
SHAREHOLDERS
FROM NET INVESTMENT
INCOME
FROM NET REALIZED (9,258,542) (705,098)
GAIN
TOTAL DISTRIBUTIONS (15,762,463) (705,098)
SHARE TRANSACTIONS - 483,267,618 168,220,256
NET INCREASE
(DECREASE)
TOTAL INCREASE 645,270,230 218,782,768
(DECREASE) IN NET
ASSETS
NET ASSETS
BEGINNING OF PERIOD 383,085,420 164,302,652
END OF PERIOD $ 1,028,355,650 $ 383,085,420
(INCLUDING
UNDISTRIBUTED NET
INVESTMENT INCOME
OF $11,667,388 AND
$6,366,110,
RESPECTIVELY)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
OTHER INFORMATION
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
SHARES DOLLARS SHARES DOLLARS
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SHARE TRANSACTIONS 29,803,319 $ 508,833,566 12,499,499 $ 170,852,927
INITIAL CLASS
SOLD
REINVESTED 1,011,711 15,762,463 53,538 705,098
REDEEMED (2,470,247) (43,871,687) (246,129) (3,337,769)
NET INCREASE 28,344,783 $ 480,724,342 12,306,908 $ 168,220,256
(DECREASE)
SERVICE CLASS A 134,338 $ 2,543,276 - -
SOLD
REINVESTED - - - -
REDEEMED - - - -
NET INCREASE 134,338 $ 2,543,276 - $ -
(DECREASE)
DISTRIBUTIONS $ 6,503,921 $ -
INITIAL CLASS - NET
INVESTMENT INCOME
INITIAL CLASS - NET 9,258,542 705,098
REALIZED GAIN
TOTAL $ 15,762,463 $ 705,098
SERVICE CLASS - NET - -
INVESTMENT INCOME
SERVICE CLASS - NET - -
REALIZED GAIN
TOTAL $ - $ -
$ 15,762,463 $ 705,098
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
2. SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
YEARS ENDED DECEMBER 31, JANUARY 3, 1995
(COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31,
SELECTED PER-SHARE DATA 1997 1996 1995
NET ASSET VALUE, $ 15.40 $ 13.07 $ 10.00
BEGINNING OF PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET INVESTMENT .29 D .26 .11
INCOME
NET REALIZED AND 4.18 2.12 3.14
UNREALIZED GAIN (LOSS)
TOTAL FROM 4.47 2.38 3.25
INVESTMENT
OPERATIONS
LESS DISTRIBUTIONS
FROM NET INVESTMENT (.25) - (.11)
INCOME
FROM NET REALIZED (.35) (.05) (.07)
GAIN
TOTAL DISTRIBUTIONS (.60) (.05) (.18)
NET ASSET VALUE, END OF $ 19.27 $ 15.40 $ 13.07
PERIOD
TOTAL RETURN B, C 29.95% 18.27% 32.52%
RATIOS AND
SUPPLEMENTAL DATA
NET ASSETS, END OF $ 1,025,766 $ 383,085 $ 164,303
PERIOD (000 OMITTED)
RATIO OF EXPENSES TO .74% .77% .85% G
AVERAGE NET ASSETS
RATIO OF EXPENSES TO .73% F .76% F .83% F
AVERAGE NET ASSETS
AFTER EXPENSE
REDUCTIONS
RATIO OF NET INVESTMENT 1.68% 2.29% 2.49%
INCOME TO AVERAGE
NET ASSETS
PORTFOLIO TURNOVER RATE 26% 28% 38%
AVERAGE COMMISSION $ .0377 $ .0367
RATE H
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEAR ENDED
DECEMBER 31,
SELECTED PER-SHARE DATA 1997 E
NET ASSET VALUE, $ 18.50
BEGINNING OF PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET INVESTMENT .04 D
INCOME
NET REALIZED AND .73
UNREALIZED GAIN (LOSS)
TOTAL FROM .77
INVESTMENT
OPERATIONS
NET ASSET VALUE, END OF $ 19.27
PERIOD
TOTAL RETURN B, C 4.16%
RATIOS AND
SUPPLEMENTAL DATA
NET ASSETS, END OF $ 2,589
PERIOD (000 OMITTED)
RATIO OF EXPENSES TO .84% A
AVERAGE NET ASSETS
RATIO OF EXPENSES TO .83% A,
AVERAGE NET ASSETS F
AFTER EXPENSE
REDUCTIONS
RATIO OF NET INVESTMENT 1.72% A
INCOME TO AVERAGE
NET ASSETS
PORTFOLIO TURNOVER 26%
AVERAGE COMMISSION $ .0377
RATE H
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 6 OF NOTES TO FINANCIAL
STATEMENTS).
D NET INVESTMENT INCOME PER SHARE HAS
BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3, 1997
(COMMENCEMENT OF SALE OF SERVICE
CLASS SHARES) TO DECEMBER 31, 1997.
F FMR OR THE FUND HAS ENTERED INTO
VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A
PORTION OF THE CLASS' EXPENSES (SEE NOTE
6 OF NOTES TO FINANCIAL STATEMENTS).
G FMR AGREED TO REIMBURSE A PORTION OF
THE CLASS' EXPENSES DURING THE PERIOD.
WITHOUT THIS REIMBURSEMENT, THE CLASS'
EXPENSE RATIO WOULD HAVE BEEN HIGHER.
H FOR FISCAL YEARS BEGINNING ON OR AFTER
SEPTEMBER 1, 1995, A FUND IS REQUIRED
TO DISCLOSE ITS AVERAGE COMMISSION RATE
PER SHARE FOR SECURITY TRADES ON WHICH
COMMISSIONS ARE CHARGED. THIS AMOUNT
MAY VARY FROM PERIOD TO PERIOD AND
FUND TO FUND DEPENDING ON THE MIX OF
TRADES EXECUTED IN VARIOUS MARKETS
WHERE TRADING PRACTICES AND
COMMISSION RATE STRUCTURES MAY DIFFER.
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
DECEMBER 31, 1997 YEAR FUND
VIP II: CONTRAFUND - "INITIAL CLASS" 24.14% 28.16%
S&P 500 (REGISTERED TRADEMARK) 33.36% 31.22%
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.
3
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
IMAHDR PRASUN SHR__CHT 19971231 19980109 100539 S00000000000001
VIP II Contrafund S&P 500
00158 SP001
1995/01/03 10000.00 10000.00
1995/01/31 9870.00 10261.28
1995/02/28 10370.00 10661.16
1995/03/31 10890.00 10975.77
1995/04/30 11480.00 11299.00
1995/05/31 11730.00 11750.63
1995/06/30 12490.00 12023.59
1995/07/31 13470.00 12422.30
1995/08/31 13640.00 12453.48
1995/09/30 13940.00 12979.01
1995/10/31 13650.00 12932.68
1995/11/30 13900.00 13500.42
1995/12/31 13971.98 13760.44
1996/01/31 14073.30 14228.85
1996/02/29 14124.25 14360.75
1996/03/31 14584.49 14499.04
1996/04/30 15065.18 14712.76
1996/05/31 15239.05 15092.20
1996/06/30 15116.32 15149.70
1996/07/31 14410.62 14480.39
1996/08/31 14962.90 14785.78
1996/09/30 15597.01 15617.92
1996/10/31 16077.71 16048.66
1996/11/30 17039.10 17261.78
1996/12/31 16936.82 16919.83
1997/01/31 17591.38 17976.98
1997/02/28 17103.08 18117.92
1997/03/31 16660.22 17373.45
1997/04/30 17060.91 18410.65
1997/05/31 18115.35 19531.49
1997/06/30 18906.18 20406.50
1997/07/31 20530.03 22030.24
1997/08/31 19950.08 20796.11
1997/09/30 21299.77 21935.11
1997/10/31 20656.56 21202.48
1997/11/30 20646.02 22183.94
1997/12/31 21025.62 22564.84
IMATRL PRASUN SHR__CHT 19971231 19980109 100541 R00000000000039
Let's say hypothetically that $10,000 was invested in VIP II:
Contrafund Portfolio on January 3, 1995, when the fund started. As the
chart shows, by December 31, 1997, the value of the investment would
have grown to $21,026 - a 110.26% 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 $22,565 - a 125.65% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
TYCO INTERNATIONAL LTD. 1.7
SCHLUMBERGER LTD. 1.5
TIME WARNER, INC. 1.4
CBS CORP. 1.4
MICROSOFT CORP. 1.4
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
ENERGY 13.1
FINANCE 12.3
TECHNOLOGY 11.5
MEDIA & LEISURE 8.7
RETAIL & WHOLESALE 7.2
ASSET ALLOCATION AS OF DECEMBER 31, 1997 *
ROW: 1, COL: 1, VALUE: 9.0
ROW: 1, COL: 2, VALUE: 4.8
ROW: 1, COL: 3, VALUE: 86.2
STOCKS 86.2%
BONDS 4.8%
SHORT-TERM INVESTMENTS 9.0%
FOREIGN INVESTMENTS 13.4%
*
(% OF FUND'S INVESTMENTS)
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1fee.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
DECEMBER 31, 1997 YEAR FUND
VIP II: CONTRAFUND - SERVICE CLASS 24.08% 28.14%
S&P 500 (REGISTERED TRADEMARK) 33.36% 31.22%
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.
3
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of the fund figures are from
commencement of operations January 3, 1995.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURN WOULD BE LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
VIP II: Contrafund - Service Class S&P 500
$22,565
$21,015
$
Let's say hypothetically that $10,000 was invested in VIP II:
Contrafund Portfolio on January 3, 1995, when the fund started. As the
chart shows, by December 31, 1997, the value of the investment would
have grown to $21,015 - a 110.15% 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 $22,565 - a 125.65% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
TYCO INTERNATIONAL LTD. 1.7
SCHLUMBERGER LTD. 1.5
TIME WARNER, INC. 1.4
CBS CORP. 1.4
MICROSOFT CORP. 1.4
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
ENERGY 13.1
FINANCE 12.3
TECHNOLOGY 11.5
MEDIA & LEISURE 8.7
RETAIL & WHOLESALE 7.2
ASSET ALLOCATION AS OF DECEMBER 31, 1997*
ROW: 1, COL: 1, VALUE: 9.0
ROW: 1, COL: 2, VALUE: 4.8
ROW: 1, COL: 3, VALUE: 86.2
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 86.2%
BONDS 4.8%
SHORT-TERM INVESTMENTS 9.0%
FOREIGN INVESTMENTS 13.4%
*
% OF FUND'S INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with Will Danoff, Portfolio Manager of Contrafund
Portfolio
Q. HOW DID THE FUND PERFORM COMPARED TO ITS BENCHMARK, WILL?
A. It was a disappointing period. For the 12 months that ended
December 31, 1997, the fund trailed the 33.36% return of the Standard
& Poor's 500 Index. I consider this performance unsatisfactory and am
working harder than ever with Fidelity's research team to find the
best stocks to strengthen the fund's future returns.
Q. WHY DID THE FUND UNDERPERFORM?
A. For a number of reasons. Relative to the index, a major factor was
the "narrowness" of the stock market. By that, I mean that the
market's gains were concentrated among a relatively small number of
large-capitalization stocks. This narrowness hurt funds like
Contrafund, which tend to emphasize smaller- and medium-sized
companies. In terms of the portfolio itself, a larger exposure to
finance-related stocks would have helped. Due to declining interest
rates and strong business prospects, finance stocks produced some of
the market's best gains during the period. My argument in not adding
more of these stocks to the portfolio was that the sector had
performed splendidly in 1996, and that most stocks were trading at
expensive prices relative to their projected growth rates. But that
proved to be wrong, as many finance stocks continued to rise. At the
end of the period, the fund nevertheless had around 12% of its assets
in finance stocks, including high-quality names such as U.S. Bancorp
and Fannie Mae, both of which generated good returns and were among
the fund's larger positions.
Q. WERE THERE ANY MARKET SEGMENTS THAT CAUGHT YOUR EYE?
A. The Internet was a fertile area. By some estimates, traffic over
the Internet grew almost tenfold in 1997 and showed no signs of
slowing down. I tried to capitalize on this growth by buying companies
that provide access to the Internet, such as WorldCom and AT&T, as
well as companies that supply equipment to facilitate access to the
Internet, including Alcatel and Lucent Technologies. I felt these
companies were well-positioned for the surging demand for Internet
service, as well as the deregulation in the telecommunications
industry in both the U.S. and Europe. Each was among the fund's top 15
holdings at the end of the period. Cable television service providers
also appealed to me, because they had an opportunity to re-accelerate
their growth rates by offering faster Internet access over their
existing cable infrastructure. Examples of positions the fund held
included Tele-Communications, Inc., and Comcast, both of which were
solid contributors during the second half of the period.
Q. THE FUND'S BOND INVESTMENTS INCREASED DURING THE PERIOD. WHAT WAS
BEHIND THIS STRATEGY?
A. Inflation was extremely low in the U.S., and bonds benefit from low
or falling inflation. The buoyant stock market also enabled many
companies to finance capacity expansions, which should prevent
inflationary pressure from bubbling up. In addition, the strong dollar
made foreign imports cheaper and hindered the ability of U.S.
companies to raise prices. The country's shrinking annual budget
deficit also contributed to the attractiveness of bonds. Because of
the solid economy and well-contained government spending, the annual
deficit could be eliminated in the near future. For the same reasons,
many state and local governments operated with budget surpluses as
well. Budget surpluses reduce the supply of new government bonds and
thus put upward pressure on the prices of existing bonds.
Q. WHAT'S YOUR OUTLOOK?
A. All indications are that economic growth will slow and inflation
will remain low. Earnings growth should also slow for the large-cap
stocks I mentioned earlier, and this could swing the pendulum toward
the smaller- and medium-sized stocks most prominent within the fund.
The strong dollar, weak Asian demand and intensified global
competition should also contain revenue growth and further profit
margin expansion. Thus, corporate profits may grow modestly - if at
all - in the coming year. Given these views, I began to position the
fund more defensively in the second half of 1997 by buying bonds and
increasing its cash level. Going forward, I may continue to reduce the
fund's exposure to the technology, industrial machinery and basic
industries sectors, each of which is particularly sensitive to
recessionary conditions. As opportunities present themselves, the fund
should be well-positioned to increase its holdings in companies that
have the ability to grow profits rapidly in a slow-to no-growth
environment.
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 December 31, 1997, more than $345
million
MANAGER: Beth Terrana, since inception; joined
Fidelity in 1983
3
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
INVESTMENTS DECEMBER 31, 1997
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 84.6%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 0.5%
AEROSPACE & DEFENSE - 0.2%
Kellstrom Industries, Inc. (a) 186,600 $ 4,618,353
Lockheed Martin Corp. 16,000 1,576,000
Orbital Sciences Corp. (a) 67,700 2,014,075
8,208,428
DEFENSE ELECTRONICS - 0.3%
Anaren Microwave, Inc. (a) 46,600 739,775
Raytheon Company Class A 150,948 7,443,623
Remec, Inc. (a) 88,900 2,000,250
10,183,648
SHIP BUILDING & REPAIR - 0.0%
Fred Olsen Energy ASA (a) 46,900 973,240
TOTAL AEROSPACE & DEFENSE 19,365,316
BASIC INDUSTRIES - 2.8%
CHEMICALS & PLASTICS - 1.9%
AKZO Nobel NV 3,200 552,045
Avery Dennison Corp. 7,000 313,250
Cambrex Corp. 48,900 2,249,400
Crompton & Knowles Corp. 285,092 7,554,938
Cytec Industries, Inc. (a) 194,100 9,110,569
ICI (Imperial Chemical Industries)
PLC Class L 513,600 8,046,944
International Specialty Products, Inc. (a) 75,500 1,127,781
Ivex Packaging Corp. 75,200 1,804,800
Millennium Chemicals, Inc. 33,400 786,988
Monsanto Co. 208,500 8,757,000
Morton International, Inc. 23,200 797,500
Nalco Chemical Co. 40,100 1,586,456
Potash Corp. of Saskatchewan 63,400 5,279,822
Sealed Air Corp. (a) 244,600 15,104,050
Solutia, Inc. 5,900 157,456
Tredegar Industries, Inc. 500 32,938
W.R. Grace & Co. 122,900 9,885,769
Witco Corp. 78,600 3,207,863
76,355,569
IRON & STEEL - 0.0%
Steel Dynamics, Inc. (a) 129,000 2,064,000
METALS & MINING - 0.0%
Commscope, Inc. 63,965 859,530
PACKAGING & CONTAINERS - 0.3%
Ball Corp. 7,600 268,375
Owens-Illinois, Inc. (a) 292,300 11,089,131
Silgan Holdings, Inc. 40,300 1,309,750
12,667,256
PAPER & FOREST PRODUCTS - 0.6%
Champion International Corp. 19,000 860,938
Fort James Corp. 575,425 22,010,006
Mail-Well, Inc. (a) 10,850 439,425
23,310,369
TOTAL BASIC INDUSTRIES 115,256,724
CONSTRUCTION & REAL ESTATE - 3.8%
BUILDING MATERIALS - 0.6%
Coflexip sponsored ADR 27,600 1,531,800
Coltec Industries, Inc. (a) 133,100 3,086,256
Elcor Corp. 800 19,200
Lilly Industrial Coatings, Inc. Class A 18,400 379,500
Mark IV Industries, Inc. 25,000 546,875
Masco Corp. 208,900 10,627,788
SHARES VALUE (NOTE 1)
Nortek, Inc. (a) 29,200 $ 775,625
Sherwin-Williams Co. 25,100 696,525
Southdown, Inc. 39,600 2,336,400
USG Corp. (a) 121,100 5,933,900
25,933,869
CONSTRUCTION - 0.2%
Centex Corp. 57,300 3,606,319
Fleetwood Enterprises, Inc. 13,800 585,638
Lennar Corp. 73,900 1,593,469
Oakwood Homes Corp. 25,800 856,238
Willbros Group, Inc. (a) 45,400 681,000
7,322,664
ENGINEERING - 0.1%
Stolt Comex Seaway SA (a) 53,300 2,665,000
REAL ESTATE - 0.1%
LNR Property Corp. 47,700 1,126,913
Rouse Co. (The) 70,923 2,322,728
Trizec Hahn Corp. (sub-vtg.) 95,500 2,231,262
5,680,903
REAL ESTATE INVESTMENT TRUSTS - 2.8%
Avalon Properties, Inc. 5,300 163,969
Bay Apartment Communities, Inc. 46,000 1,794,000
Bedford Property Investors, Inc. 147,400 3,224,375
Boston Properties, Inc. 66,900 2,211,881
CCA Prison Realty Trust 37,600 1,677,900
Crescent Real Estate Equities, Inc. 545,100 21,463,313
Duke Realty Investors, Inc. 40,800 989,400
Equity Office Properties Trust 608,100 19,193,156
Equity Residential Properties Trust (SBI) 155,000 7,837,188
Felcor Suite Hotels, Inc. 109,700 3,894,350
Glenborough Realty Trust, Inc. 161,200 4,775,550
Golf Trust of America, Inc. 33,100 959,900
Irvine Apartment Communities, Inc. 9,200 292,675
Kimco Realty Corp. 32,500 1,145,625
LTC Properties, Inc. 36,000 747,000
Macerich Co. 26,100 743,850
Patriot American Hospitality, Inc. 88,765 2,557,542
Public Storage, Inc. 72,600 2,132,625
Reckson Associates Realty Corp. 130,400 3,308,900
Spieker Properties, Inc. 137,700 5,903,888
Starwood Lodging Trust combined
certificate (SBI) 274,100 15,863,538
Vornado Realty Trust 266,100 12,490,069
113,370,694
TOTAL CONSTRUCTION & REAL ESTATE 154,973,130
DURABLES - 3.3%
AUTOS, TIRES, & ACCESSORIES - 1.8%
BBA Group PLC 536,400 3,587,899
Breed Technologies, Inc. 253,100 4,619,075
Circuit City Stores, Inc. - CarMax Group 83,200 748,800
Danaher Corp. 255,800 16,147,375
Federal-Mogul Corp. 26,400 1,069,200
Ford Motor Co. 355,500 17,308,406
Kroll-O'Gara Company 297,400 5,241,675
Lear Corp. (a) 153,100 7,272,250
Navistar International Corp. (a) 283,500 7,034,344
SPX Corp. 112,700 7,776,300
Tower Automotive, Inc. (a) 48,100 2,023,206
72,828,530
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
DURABLES - CONTINUED
CONSUMER DURABLES - 0.0%
Minnesota Mining & Manufacturing Co. 5,300 $ 434,931
CONSUMER ELECTRONICS - 0.7%
Electrolux AB 29,500 2,048,689
Gemstar International Group Ltd. (a) 36,500 889,688
General Motors Corp. Class H 274,200 10,128,263
Maytag Co. 29,700 1,108,181
Philips Electronics NV 166,900 10,097,450
Philips Electronics NV (Bearer) 87,450 5,247,432
29,519,703
HOME FURNISHINGS - 0.2%
Carpetright PLC 347,500 2,633,529
Leggett & Platt, Inc. 42,100 1,762,938
Linens'n Things, Inc. (a) 37,200 1,622,850
Miller (Herman), Inc. 17,500 954,844 6,974,161
TEXTILES & APPAREL - 0.6%
Adidas AG 31,500 4,063,386
Courtaulds Textiles PLC 19,900 117,043
Dexter Corp. 75,700 3,269,294
House of Fraser PLC Class L 1,341,400 4,442,013
Intimate Brands, Inc. Class A 45,200 1,087,625
Jones Apparel Group, Inc. (a) 62,500 2,687,500
Kellwood Co. 19,200 576,000
Liz Claiborne, Inc. 39,500 1,651,594
Oxford Industries, Inc. 33,100 1,075,750
Polo Ralph Lauren Corp. Class A 77,200 1,876,925
Unifi, Inc. 41,400 1,684,463
Warnaco Group, Inc. Class A 74,500 2,337,438
24,869,031
TOTAL DURABLES 134,626,356
ENERGY - 13.1%
ENERGY SERVICES - 7.1%
Atwood Oceanics, Inc. (a) 26,200 1,241,225
BJ Services Co. (a) 200,500 14,423,469
Cliffs Drilling Co. (a) 32,500 1,620,938
Daniel Industries, Inc. 71,800 1,382,150
Diamond Offshore Drilling, Inc. 500,600 24,091,375
Dresser Industries, Inc. 51,100 2,143,006
ENSCO International, Inc. 1,063,274 35,619,679
Falcon Drilling, Inc. (a) 473,500 16,602,094
Global Marine, Inc. 331,600 8,124,200
Halliburton Co. 554,800 28,814,925
Marine Drilling Companies, Inc. (a) 205,300 4,259,975
McDermott International, Inc. 257,200 9,419,950
Nabors Industries, Inc. (a) 119,600 3,759,925
Noble Drilling Corp. (a) 401,200 12,286,750
Pride International, Inc. (a) 40,700 1,027,675
Reading & Bates Corp. (a) 232,200 9,723,375
Smedvig AS, Series B 55,200 1,160,450
Santa Fe International Corp. 74,800 3,043,425
Schlumberger Ltd. 783,700 63,087,850
Smith International, Inc. (a) 407,200 24,991,900
Transocean Offshore, Inc. 121,300 5,845,144
Varco International, Inc. (a) 150,500 3,226,344
Weatherford Enterra, Inc. (a) 266,100 11,641,875
Western Atlas, Inc. 43,200 3,196,800
290,734,499
OIL & GAS - 6.0%
Amerada Hess Corp. 10,300 565,213
Anadarko Petroleum Corp. 74,700 4,533,356
SHARES VALUE (NOTE 1)
British Petroleum PLC ADR 438,944 $ 34,978,350
Burlington Resources, Inc. 429,448 19,244,639
Camco International, Inc. 197,600 12,584,650
Canadian Natural Resources Ltd. (a) 117,100 2,506,565
Coastal Corp. (The) 149,500 9,259,656
Cooper Cameron Corp. (a) 206,040 12,568,440
EVI, Inc. (a) 26,200 1,355,850
Murphy Oil Corp. 183,800 9,959,663
National-Oilwell, Inc. (a) 54,800 1,873,475
Newfield Exploration Co. (a) 205,000 4,779,063
Occidental Petroleum Corp. 239,200 7,011,550
Ocean Energy, Inc. (a) 45,000 2,219,063
Oryx Energy Co. (a) 38,100 971,550
Penn West Petroleum Ltd. (a)(c) 16,300 176,164
Petrobras PN (Pfd. Reg.) 40,881,000 9,560,451
Phillips Petroleum Co. 95,300 4,633,963
Pioneer Natural Resources Co. 211,828 6,129,773
Pogo Producing Co. 151,000 4,454,500
Renaissance Energy Ltd. (a) 190,700 3,935,259
Royal Dutch Petroleum Co. 656,800 35,590,350
Santa Fe Energy Resources, Inc. 245,600 2,763,000
Tosco Corp. 583,400 22,059,813
Total SA Class B 151,233 16,445,192
USX-Marathon Group 74,100 2,500,875
United Meridian Corp. (a) 35,900 1,009,688
Unocal Corp. 116,300 4,513,894
Valero Energy Corp. 45,100 1,417,831
Vastar Resources, Inc. 18,700 668,525
YPF Sociedad Anonima Class D 216,600 7,300,807
247,571,168
TOTAL ENERGY 538,305,667
FINANCE - 12.3%
BANKS - 4.4%
BB&T Corp. 20,300 1,300,469
BHI Corp. (non-vtg.) 19,400 596,550
Banc One Corp. 183,800 9,982,638
Bank of New York Co., Inc. 208,000 12,025,000
BankBoston Corp. 12,500 1,174,219
BankAmerica Corp. 359,400 26,236,200
Comerica, Inc. 116,200 10,487,050
Credit Suisse Group (Reg.) 20,500 3,168,947
Credito Italiano Ord. 1,639,600 5,071,586
Cullen Frost Bankers, Inc. 1,100 66,756
Fifth Third Bancorp 26,950 2,203,163
First Empire State Corp. 1,100 511,500
First Tennessee National Corp. 6,300 420,525
Firstar Corp. 4,600 195,213
Mellon Bank Corp. 99,300 6,020,063
Mercantile Bancorp., Inc. 17,550 1,079,325
National City Corp. 142,800 9,389,100
North Fork Bancorp., Inc. 193,300 6,487,631
Norwest Corp. 119,600 4,619,550
Peoples Heritage Financial Group, Inc. 1,100 50,600
Royal Bank of Canada 19,700 1,041,810
Southwest Bancorp. Texas, Inc. 8,700 270,788
Standard Chartered Bank PLC 190,500 2,040,017
Sterling Bancshares, Inc. 3,500 70,875
Summit Bancorp 17,350 923,888
Texas Regional Bancshares, Inc.
Class A 174,450 5,320,725
U.S. Bancorp 419,700 46,980,169
Wells Fargo & Co. 59,900 20,332,306
Zions Bancorp 85,500 3,879,563
181,946,226
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
CREDIT & OTHER FINANCE - 1.3%
American Express Co. 299,500 $ 26,730,375
Associates First Capital Corp. 56,900 4,047,013
Beneficial Corp. 28,800 2,394,000
Capital Trust Class A (a) 98,100 1,103,625
Finova Group, Inc. 2,800 139,125
Fleet Financial Group, Inc. 37,200 2,787,675
Greenpoint Financial Corp. 154,100 11,181,881
Household International, Inc. 24,100 3,074,256
51,457,950
FEDERAL SPONSORED CREDIT - 1.5%
Fannie Mae 643,400 36,714,013
Freddie Mac 554,800 23,266,925
59,980,938
INSURANCE - 3.3%
AFLAC, Inc. 31,400 1,605,325
ARM Financial Group, Inc. Class A 23,000 606,625
ACE Ltd. 39,200 3,782,800
Allmerica Financial Corp. 93,292 4,658,769
Allstate Corp. 315,300 28,652,888
AMBAC, Inc. 7,300 335,800
American General Corp. 62,300 3,368,094
American International Group, Inc. 310,900 33,810,375
Aon Corp. 39,850 2,336,206
Hartford Financial Services Group, Inc. 48,300 4,519,069
Hartford Life, Inc. Class A 3,500 158,594
MGIC Investment Corp. 25,100 1,669,150
Nationwide Financial Services, Inc.
Class A 3,500 126,438
Progressive Corp. (Ohio) 17,900 2,145,763
Provident Companies, Inc. 15,800 610,275
Reliastar Financial Corp. 126,416 5,206,759
St. Paul Companies, Inc. (The) 22,900 1,879,231
SunAmerica, Inc. 193,250 8,261,438
Torchmark Corp. 115,200 4,845,600
Travelers Group, Inc. (The) 324,199 17,466,221
20th Century Industries 27,600 717,600
UNUM Corp. 195,500 10,630,313
137,393,333
SAVINGS & LOANS - 1.8%
Ahmanson (H.F.) & Co. 159,500 10,676,531
Astoria Financial Corp. 8,000 446,000
Bank United Corp. Class A 21,500 1,052,156
CenFed Financial Corp. 5,400 243,000
Charter One Financial Corp. 26,880 1,696,800
Coast Savings Financial, Inc. (a) 16,800 1,151,850
Dime Bancorp., Inc. 200,000 6,050,000
Downey Financial Corp. 2,200 62,563
FirstFed Financial Corp. (a) 1,800 69,750
Golden State Bancorp (a) 271,100 10,132,363
Golden West Financial Corp. 54,580 5,338,606
ML Bancorp, Inc. 23,600 708,000
New York Bancorp., Inc. 12,900 511,969
Ocwen Financial Corp. (a) 8,200 208,588
Sovereign Bancorp., Inc. 120,400 2,498,300
TCF Financial Corp. 122,800 4,167,525
Washington Mutual, Inc. 471,350 30,078,022
75,092,023
SECURITIES INDUSTRY - 0.0%
Guoco Group Ltd. 516,000 1,262,061
TOTAL FINANCE 507,132,531
SHARES VALUE (NOTE 1)
HEALTH - 3.3%
DRUGS & PHARMACEUTICALS - 1.7%
American Home Products Corp. 11,700 $ 895,050
Andrx Corp. (a) 78,600 2,692,050
Barr Laboratories, Inc. (a) 210,100 7,169,663
Bristol-Myers Squibb Co. 34,700 3,283,488
Elf Sanofi SA 5,800 645,140
Glaxo Wellcome PLC 15,300 362,977
Lilly (Eli) & Co. 270,400 18,826,600
Medimmune, Inc. (a) 34,200 1,466,325
Merck & Co., Inc. 5,900 626,875
NBTY, Inc. (a) 1,200 40,050
Novartis AG (Reg.) 9,111 14,769,542
Parexel International Corp. (a) 27,000 999,000
Pfizer, Inc. 5,900 439,919
Rhone Poulenc SA Class A 2,500 111,895
Sangstat Medical Corp. (a) 5,200 210,600
Schering-Plough Corp. 190,700 11,847,238
Warner-Lambert Co. 52,500 6,510,000
Watson Pharmaceuticals, Inc. (a) 21,600 700,650
71,597,062
MEDICAL EQUIPMENT & SUPPLIES - 0.5%
Arterial Vascular Engineering, Inc. (a) 5,900 383,500
Cardinal Health, Inc. 107,100 8,045,888
Guidant Corp. 9,600 597,600
McKesson Corp. 5,900 638,306
Medtronic, Inc. 90,800 4,749,975
Omnicare, Inc. 4,100 127,100
Sofamor/Danek Group, Inc. (a) 2,900 188,681
Stryker Corp. 3,500 130,375
Sybron International Corp. (a) 62,700 2,942,981
Ventana Medical Systems, Inc. (a) 65,000 991,250
18,795,656
MEDICAL FACILITIES MANAGEMENT - 1.1%
Beverly Enterprises, Inc. 17,400 226,200
Carematrix Corp. (a) 43,300 1,244,875
HEALTHSOUTH Corp. (a) 618,500 17,163,375
Health Management Associates, Inc.
Class A (a) 493,150 12,452,038
Safeguard Health Enterprises, Inc. (a) 63,700 859,950
Sunrise Assisted Living, Inc. (a) 86,800 3,743,250
Syncor International Corp. (a) 300 4,838
Tenet Healthcare Corp. (a) 242,900 8,046,063
Trigon Healthcare, Inc. 38,300 1,000,588
44,741,177
TOTAL HEALTH 135,133,895
HOLDING COMPANIES - 0.5%
Consolidation Capital Corp. 162,300 3,296,719
Norfolk Southern Corp. 490,800 15,122,775
PartnerRe Ltd. 19,100 885,763
19,305,257
INDUSTRIAL MACHINERY & EQUIPMENT - 6.2%
ELECTRICAL EQUIPMENT - 2.4%
Adtran, Inc. (a) 11,500 316,250
Alcatel Alsthom Compagnie Generale
d'Electricite SA 420,940 53,460,463
AMETEK, Inc. 79,600 2,149,200
Antec Corp. (a) 1,500 23,438
C&D Technologies, Inc. 19,100 921,575
Common Development
International Ltd. (a) 5,300 113,078
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED
ELECTRICAL EQUIPMENT - CONTINUED
Common Development
International Ltd. (a)(c) 26,400 $ 563,254
ECC International Corp. (a) 363,300 1,112,606
General Electric Co. 16,300 1,196,013
Gilat Satellite Networks Ltd. (a) 40,600 1,162,175
Globecomm Systems, Inc. 48,600 552,825
Leitch Technology Corp. (a) 600 18,048
Loral Space & Communications Ltd. (a) 1,201,400 25,755,013
Omnipoint Corp. (a) 10,800 251,100
Roper Industries, Inc. 53,800 1,519,850
Scientific-Atlanta, Inc. 178,600 2,991,550
Siemens AG 49,580 2,935,930
Titan Corp. (a) 694,400 4,340,000
99,382,368
INDUSTRIAL MACHINERY & EQUIPMENT - 2.9%
Case Corp. 107,800 6,515,163
Illinois Tool Works, Inc. 138,300 8,315,288
Ingersoll-Rand Co. 207,900 8,419,950
Kaydon Corp. 240,400 7,843,050
Kennametal, Inc. 15,400 797,913
MSC Industrial Direct, Inc. (a) 58,600 2,483,175
Mettler-Toledo International, Inc. 6,100 105,225
New Holland NV 354,500 9,372,094
Stanley Works 58,400 2,755,750
Tyco International Ltd. 1,569,378 70,720,096
117,327,704
POLLUTION CONTROL - 0.9%
Allied Waste Industries, Inc. (a) 12,300 286,744
Ogden Corp. 67,200 1,894,200
Thermo Instrument Systems, Inc. (a) 138,100 4,755,819
USA Waste Services, Inc. (a) 756,745 29,702,241
36,639,004
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 253,349,076
MEDIA & LEISURE - 8.7%
BROADCASTING - 5.2%
APT Satellite Holdings Ltd.
sponsored ADR 201,000 2,361,750
Advanced Communication Systems, Inc. 275,100 2,561,869
American Radio Systems Corp. Class A 89,300 4,760,806
CBS Corp. 1,944,815 57,250,492
CD Radio, Inc. (a) 28,000 474,250
Cablevision Systems Corp. Class A (a) 6,100 584,075
Canal Plus SA 2,200 408,699
Chancellor Media Corp. (a) 16,700 1,246,238
Clear Channel Communications, Inc. (a) 76,000 6,037,250
Comcast Corp. Class A 282,200 8,995,125
Comcast Corp. Class A special 331,600 10,466,125
Cox Communications, Inc. Class A (a) 172,200 6,898,763
Cox Radio, Inc. Class A (a) 900 36,225
Jacor Communications, Inc. Class A (a) 233,800 12,420,625
Metro Networks, Inc. (a) 40,500 1,326,375
Orion Network Systems, Inc. (a) 113,900 1,950,538
PanAmSat Corp. (a) 9,700 418,313
RCN Corp. 49,900 1,709,075
Scandinavian Broadcasting Corp. (a) 33,600 823,200
Smartalk Teleservices, Inc. (a) 35,600 809,900
TCA Cable TV, Inc. 12,400 570,400
Tele-Communications, Inc. (TCI Group),
Series A 431,013 12,041,426
SHARES VALUE (NOTE 1)
Tele-Communications, Inc. (TCI
Ventures Group), Series A 297,587 $ 8,425,432
Telemundo Group, Inc. Class A (a) 136,400 5,575,350
Time Warner, Inc. 940,000 58,280,000
Univision Communications, Inc. Class A (a) 21,200 1,480,025
Westwood One, Inc. (a) 50,000 1,856,250
209,768,576
ENTERTAINMENT - 1.0%
AMF Bowling, Inc. 34,200 855,000
Bally Total Fitness Holding Corp. (a) 162,800 3,561,250
Cedar Fair LP (depositary unit) 2,600 67,275
Disney (Walt) Co. 293,200 29,045,125
King World Productions, Inc. 16,800 970,200
News Corp. Ltd. ADR 11,700 261,056
Premier Parks, Inc. (a) 92,600 3,750,300
Viacom, Inc.:
Class A (a) 37,100 1,516,463
Class B (non-vtg.) (a) 22,700 940,631
40,967,300
LEISURE DURABLES & TOYS - 0.5%
Authentic Fitness Corp. 11,300 208,344
Callaway Golf Co. 55,600 1,588,075
Champion Enterprises, Inc. (a) 38,700 795,769
Harley-Davidson, Inc. 48,700 1,333,163
Hasbro, Inc. 261,625 8,241,188
Mattel, Inc. 196,550 7,321,488
19,488,027
LODGING & GAMING - 0.3%
Anchor Gaming (a) 55,500 3,094,125
Four Seasons Hotels, Inc. 155,500 4,894,897
ITT Corp. (a) 57,000 4,723,875
International Game Technology Corp. 25,200 636,300
La Quinta Motor Inns, Inc. 15,100 291,619
Mirage Resorts, Inc. (a) 39,200 891,800
WMS Industries, Inc. 12,900 272,513
14,805,129
PUBLISHING - 1.3%
ACNielsen Corp. (a) 20,200 492,375
Applied Graphics Technologies, Inc. (a) 34,000 1,810,500
Belo (A.H.) Corp. Class A 15,600 875,550
Central Newspapers, Inc. Class A 3,500 258,781
Cognizant Corp. 71,600 3,190,675
Dow Jones & Co., Inc. 114,300 6,136,481
Dun & Bradstreet Corp. 140,200 4,337,438
Gannett Co., Inc. 9,300 574,856
Harcourt General, Inc. 10,600 580,350
Harte Hanks Communications, Inc. 8,700 322,988
Hollinger International, Inc. Class A 31,300 438,200
Meredith Corp. 53,000 1,891,438
New York Times Co. (The) Class A 24,000 1,587,000
Pearson PLC 709,000 9,239,493
Playboy Enterprises, Inc. Class B (a) 30,400 476,900
Scholastic Corp. (a) 4,500 168,750
Times Mirror Co. Class A 106,800 6,568,200
Tribune Co. 113,400 7,059,150
US WEST Media Group (a) 167,400 4,833,675
Wolters Kluwer NV 12,200 1,576,699
52,419,499
RESTAURANTS - 0.4%
CKE Restaurants, Inc. 57,800 2,434,825
Chart House Enterprises, Inc. (a) 55,800 352,238
Famous Daves America, Inc. (a) 16,100 143,894
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - CONTINUED
RESTAURANTS - CONTINUED
Fine Host Corp. (a) 15,300 $ 93,713
Morton's Restaurant Group, Inc. (a) 288,100 5,834,025
O Charleys, Inc. (a) 33,600 588,000
Papa John's International, Inc. (a) 19,400 676,575
Star Buffet, Inc. 6,000 69,000
Starbucks Corp. (a) 85,300 3,273,388
Wendy's International, Inc. 169,400 4,076,188
17,541,846
TOTAL MEDIA & LEISURE 354,990,377
NONDURABLES - 3.0%
AGRICULTURE - 0.1%
Delta & Pine Land Co. 1,700 51,850
Pioneer Hi-Bred International, Inc. 46,100 4,944,225
4,996,075
BEVERAGES - 0.4%
Cadbury-Schweppes PLC Ord. 1,103,097 11,149,456
Canadaigua Wine Co. Class A (a) 3,200 177,200
Celestial Seasonings, Inc. (a) 1,200 37,800
PepsiCo, Inc. 100,600 3,665,613
15,030,069
FOODS - 1.4%
CPC International, Inc. 48,100 5,182,775
Campbell Soup Co. 51,700 3,005,063
Dole Food, Inc. 50,400 2,305,800
Flowers Industries, Inc. 44,800 921,200
General Mills, Inc. 3,500 250,688
Hershey Foods Corp. 59,500 3,685,281
Interstate Bakeries Corp. 55,200 2,063,100
Nabisco Holdings Corp. Class A 27,800 1,346,563
Nestle SA (Reg.) 6,535 9,784,620
Quaker Oats Co. 103,700 5,470,175
Ralston Purina Co. 18,800 1,747,225
Sara Lee Corp. 221,100 12,450,694
Suiza Foods Corp. (a) 76,100 4,532,706
Tomkins PLC Ord. 752,226 3,569,162
Tootsie Roll Industries, Inc. 17,355 1,084,688
Universal Foods Corp. 3,300 139,425
57,539,165
HOUSEHOLD PRODUCTS - 1.1%
Dial Corp. 188,100 3,914,831
Gillette Co. 189,400 19,022,863
Estee Lauder Companies, Inc. 7,600 390,925
Procter & Gamble Co. 1,200 95,775
Unilever NV:
Ord. 308,840 19,050,086
ADR 41,800 2,609,888 45,084,368
TOBACCO - 0.0%
Consolidated Cigar Holdings, Inc.
Class A (a) 52,300 1,441,519
Swisher International Group, Inc.
Class A 47,600 809,200
2,250,719
TOTAL NONDURABLES 124,900,396
PRECIOUS METALS - 0.4%
Barrick Gold Corp. 56,400 1,051,422
Euro-Nevada Mining Ltd. 391,000 5,292,470
Franco-Nevada Mining Corp. 465,300 9,146,186
SHARES VALUE (NOTE 1)
Franco-Nevada Mining Corp. (c) 28,300 $ 556,280
Indochina Goldfields Ltd. (a) 185,300 377,198
Indochina Goldfields Ltd. (a)(c) 75,600 153,892
16,577,448
RETAIL & WHOLESALE - 7.1%
APPAREL STORES - 0.8%
Abercrombie & Fitch Co. (a) 11,200 350,000
Charming Shoppes, Inc. (a) 1,315,300 6,165,469
Footstar, Inc. (a) 17,500 470,313
Gap, Inc. 329,750 11,685,516
Goody's Family Clothing (a) 86,800 2,359,875
Limited, Inc. (The) 150,800 3,845,400
Payless ShoeSource, Inc. (a) 2,888 193,857
Ross Stores, Inc. 5,400 196,425
TJX Companies, Inc. 278,900 9,587,188
34,854,043
DRUG STORES - 1.2%
CVS Corp. 730,961 46,827,189
General Nutrition Companies, Inc. (a) 20,800 707,200
47,534,389
GENERAL MERCHANDISE STORES - 1.6%
Costco Companies, Inc. (a) 190,600 8,505,525
Dayton Hudson Corp. 105,700 7,134,750
Federated Department Stores, Inc. (a) 102,000 4,392,375
Meyer (Fred), Inc. (a) 166,200 6,045,525
99 Cents Only Stores (a) 62,500 1,843,750
Nordstrom, Inc. 26,700 1,612,013
Proffitts, Inc. (a) 65,400 1,859,813
Stein Mart, Inc. (a) 179,800 4,809,650
Wal-Mart Stores, Inc. 787,000 31,037,313
Woolworth Corp. (a) 7,100 144,663
67,385,377
GROCERY STORES - 1.3%
Albertson's, Inc. 3,500 165,813
Asda Group PLC 890,800 2,604,978
Dominick's Supermarkets, Inc. (a) 166,900 6,091,850
Loblaw Companies Ltd. 41,800 757,315
Quality Food Centers, Inc. (a) 146,400 9,808,800
Richfood Holdings, Inc. Class A 269,800 7,621,850
Safeway, Inc. (a) 347,100 21,954,075
Whole Foods Market, Inc. (a) 53,200 2,719,850
51,724,531
RETAIL & WHOLESALE, MISCELLANEOUS - 2.2%
Boots Co. PLC Class L (The) 222,460 3,212,397
Brylane, Inc. 93,500 4,604,875
Circuit City Stores, Inc. -
Circuit City Group 222,500 7,912,656
Hancock Fabrics, Inc. 92,700 1,344,150
Home Depot, Inc. 593,100 34,918,763
Lowe's Companies, Inc. 142,300 6,785,931
Staples, Inc. (a) 423,900 11,763,225
Tandy Corp. 34,900 1,345,831
Tele-Communications Liberty Media
Group, Series A (a) 11,700 424,125
Toys "R" Us, Inc. (a) 69,007 2,169,408
U.S.A. Floral Products, Inc. 83,800 1,319,850
U.S. Office Products Co. (a) 674,150 13,230,194
Williams-Sonoma, Inc. (a) 48,000 2,010,000
91,041,405
TOTAL RETAIL & WHOLESALE 292,539,745
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - 2.7%
ADVERTISING - 0.3%
CMG Information Services, Inc. (a) 5,100 $ 154,275
Interpublic Group of Companies, Inc. 57,300 2,854,256
Lamar Advertising Co. Class A (a) 16,500 655,875
Omnicom Group, Inc. 59,800 2,534,025
Outdoor Systems, Inc. (a) 284,850 7,287,412
13,485,843
EDUCATIONAL SERVICES - 0.1%
Apollo Group, Inc. Class A (a) 53,600 2,532,600
LEASING & RENTAL - 0.3%
Budget Group, Inc. Class A (a) 72,800 2,516,150
Central Parking Corp. 8,550 387,422
Hertz Corp. Class A 152,700 6,146,175
Rental Service Corp. (a) 5,000 122,813
Ryder Systems, Inc. 66,000 2,161,500
U.S. Rentals, Inc. 1,200 28,200
United Rentals, Inc. 50,000 965,625
12,327,885
PRINTING - 0.2%
Big Flower Holdings, Inc. (a) 195,900 4,726,088
Standard Register Co. 72,300 2,512,425
United Stationers, Inc. (a) 4,100 197,313
Valassis Communications, Inc. (a) 40,900 1,513,300
Wallace Computer Services, Inc. 5,200 202,150
9,151,276
SERVICES - 1.8%
APAC Teleservices, Inc. (a) 477,900 6,451,650
AccuStaff, Inc. (a) 98,800 2,272,400
Block (H & R), Inc. 96,700 4,333,369
Borg Warner Security Corp. (a) 43,700 770,213
Cendant Corp. (a) 917,787 31,548,928
Coach USA, Inc. (a) 5,100 170,850
Devry, Inc. (a) 4,000 127,500
Ecolab, Inc. 211,800 11,741,663
Hays PLC 283,000 3,785,889
Medialink Worldwide, Inc. 14,000 189,000
NCO Group, Inc. (a) 65,950 1,698,213
Rentokil Initial PLC 564,344 2,463,855
Robert Half International, Inc. (a) 57,050 2,282,000
Securitas AB Class B 64,500 1,951,072
ServiceMaster Co. 34,300 1,003,275
Snyder Communications, Inc. (a) 90,200 3,292,300
74,082,177
TOTAL SERVICES 111,579,781
TECHNOLOGY - 11.2%
COMMUNICATIONS EQUIPMENT - 3.4%
ADC Telecommunications, Inc. (a) 69,800 2,914,150
Advanced Fibre Communication, Inc. (a) 556,200 16,199,325
Applied Signal Technology, Inc. (a) 2,500 34,375
Aspect Telecommunications Corp. (a) 14,300 298,513
Ciena Corp. 389,000 23,777,625
Cisco Systems, Inc. (a) 97,200 5,418,900
Comdial Corp. (a) 5,000 46,250
Davox Corp. (a) 70,650 2,304,956
Ericsson (L.M.) Telephone Co.
Class B ADR 8,300 309,694
Inter-Tel, Inc. 118,500 2,295,938
Intermedia Communications, Inc. (a) 120,525 7,321,894
Lucent Technologies, Inc. 608,300 48,587,963
Newbridge Networks Corp. (a) 140,700 4,906,913
SHARES VALUE (NOTE 1)
Northern Telecom Ltd. 185,300 $ 16,481,337
Tellabs, Inc. (a) 140,800 7,444,800
Teledata Communications Ltd. (a) 61,700 1,126,025
139,468,658
COMPUTER SERVICES & SOFTWARE - 4.1%
America Online, Inc. (a) 32,800 2,925,350
At Home Corp., Series A 7,400 185,925
Automatic Data Processing, Inc. 257,700 15,816,338
Avant Corp. (a) 50,000 837,500
BMC Software, Inc. (a) 5,300 347,813
Broderbund Software, Inc. (a) 101,200 2,593,250
CBT Group PLC sponsored ADR (a) 16,800 1,379,700
CSG Systems International, Inc. (a) 2,500 100,000
Cambridge Technology Partners
Massachusetts, Inc. (a) 6,300 262,238
Cap Gemini Sogeti SA 71,266 5,838,760
Ceridian Corp. (a) 222,916 10,212,339
Checkfree Corp. (a) 15,300 413,100
Ciber, Inc. (a) 14,800 858,400
Citrix Systems, Inc. (a) 70,500 5,358,000
CompuServe Corp. (a) 47,900 580,788
Computer Sciences Corp. (a) 10,500 876,750
Cybermedia, Inc. (a) 26,500 399,156
DST Systems, Inc. (a) 35,000 1,494,063
DR Solomons Group PLC
sponsored ADR (a) 6,900 222,525
Electronic Arts, Inc. (a) 145,160 5,488,863
Electronic Data Systems Corp. 97,200 4,270,725
Engineering Animation, Inc. (a) 46,700 2,148,200
Equifax, Inc. 134,300 4,759,256
HBO & Co. 123,400 5,923,200
ICG Communications, Inc. (a) 47,800 1,302,550
Industrial-Matematik International Corp. (a) 84,600 2,495,700
International Telecommunications Data
Systems, Inc. (a) 500 16,000
Intersolv, Inc. (a) 22,600 457,650
Keane, Inc. (a) 56,600 2,299,375
Lycos, Inc. (a) 140,700 5,821,463
Micro Focus Group (a) 6,600 259,333
Micro Focus Group PLC, ADR (a) 6,300 254,363
Microsoft Corp. (a) 438,000 56,611,500
Misys PLC Ord. 35,363 1,071,994
Networks Associates, Inc. (a) 39,300 2,077,988
New Era of Networks, Inc. 26,900 302,625
Open Market, Inc. (a) 48,900 470,663
PRT Group, Inc. 15,800 179,725
Parametric Technology Corp. (a) 20,000 947,500
Pegasus Systems, Inc. 4,600 68,425
PeopleSoft, Inc. (a) 95,700 3,732,300
Quadramed Corp. (a) 4,100 112,750
Saville Systems Ireland PLC
sponsored ADR (a) 56,300 2,336,450
Shared Medical Systems Corp. 10,100 666,600
SportsLine USA, Inc. 23,800 255,850
Veritas Software Corp. (a) 4,050 206,550
Visio Corp. (a) 35,700 1,369,988
Yahoo, Inc. (a) 150,200 10,401,350
167,010,931
COMPUTERS & OFFICE EQUIPMENT - 1.4%
Applied Magnetics Corp. (a) 35,000 389,375
Compaq Computer Corp. 28,400 1,602,825
Dell Computer Corp. (a) 34,300 2,881,200
Diebold, Inc. 26,175 1,325,109
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TECHNOLOGY - CONTINUED
COMPUTERS & OFFICE EQUIPMENT - CONTINUED
EMC Corp. (a) 1,081,500 $ 29,673,656
International Business Machines Corp. 1,500 156,844
Kronos, Inc. (a) 50,700 1,562,194
Overland Data, Inc. 6,300 34,650
Pitney Bowes, Inc. 44,600 4,011,213
SCI Systems, Inc. (a) 11,200 487,900
Sequent Computer Systems, Inc. (a) 61,200 1,224,000
Symbol Technologies, Inc. 149,400 5,639,850
Unisys Corp. (a) 614,800 8,530,350
Western Digital Corp. (a) 50,000 803,125
58,322,291
ELECTRONIC INSTRUMENTS - 0.7%
JDS Fitel, Inc. (a) 36,700 2,183,439
JDS Fitel, Inc. (a)(c) 23,000 1,368,368
KLA-Tencor Corp. 1,400 54,075
Lam Research Corp. (a) 26,600 778,050
Laser Power Corp. 100,000 887,500
Perkin-Elmer Corp. 33,900 2,409,019
Tektronix, Inc. 29,600 1,174,750
Teradyne, Inc. (a) 700 22,400
Thermo Electron Corp. (a) 337,400 15,014,300
Thermo Optek Corp. 7,800 119,925
Thermo Vision Corp. 1,092 8,873
Thermoquest Corp. (a) 23,900 433,188
Waters Corp. (a) 160,300 6,031,288
30,485,175
ELECTRONICS - 1.6%
Celeritek, Inc. (a) 28,600 400,400
DII Group, Inc. (a) 43,500 1,185,375
Etec Systems, Inc. (a) 1,900 88,350
Griffon Corp. (a) 118,300 1,730,138
Intel Corp. 198,000 13,909,500
International Rectifier Corp. (a) 3,800 44,888
Maxim Integrated Products, Inc. (a) 111,100 3,832,950
Maxwell Technologies, Inc. (a) 11,800 274,350
Micro Linear Corp. (a) 17,000 133,875
National Semiconductor Corp. (a) 178,600 4,632,438
Power Intergrations, Inc. 41,400 382,950
Semtech Corp. (a) 23,900 935,088
Solectron Corp. (a) 2,000 83,125
Storage Technology Corp. (a) 12,400 768,025
Texas Instruments, Inc. 477,400 21,483,000
Uniphase Corp. (a) 125,600 5,196,700
Vitesse Semiconductor Corp. (a) 94,700 3,574,925
Xilinx, Inc. (a) 75,000 2,629,688
Zero Corp. 71,300 2,112,263
63,398,028
PHOTOGRAPHIC EQUIPMENT - 0.0%
Polaroid Corp. 5,800 282,388
TOTAL TECHNOLOGY 458,967,471
TRANSPORTATION - 1.1%
AIR TRANSPORTATION - 0.6%
AMR Corp. (a) 7,800 1,002,300
ASA Holdings, Inc. 8,100 230,344
Comair Holdings, Inc. 9,450 227,981
Continental Airlines, Inc. Class B (a) 144,500 6,954,063
Delta Air Lines, Inc. 53,500 6,366,500
Southwest Airlines Co. 175,550 4,322,919
US Airways Group, Inc. (a) 51,200 3,200,000
SHARES VALUE (NOTE 1)
Viad Corp. 141,200 $ 2,726,925
Virgin Express Holdings PLC
sponsored ADR 34,700 720,025
25,751,057
RAILROADS - 0.1%
Bombardier, Inc. Class B 37,900 779,448
Canadian National Railway Co. 19,600 922,724
Wisconsin Central Transportation Corp. (a) 54,400 1,271,600
2,973,772
SHIPPING - 0.0%
OMI Corp. (a) 16,200 148,838
TRUCKING & FREIGHT - 0.4%
C.H. Robinson Worldwide, Inc. 80,300 1,796,713
CNF Transportation, Inc. 93,300 3,580,388
Swift Transportation Co., Inc. (a) 119,200 3,859,100
USFreightways Corp. 135,100 4,390,750
Yellow Corp. (a) 78,800 1,979,850 15,606,801
TOTAL TRANSPORTATION 44,480,468
UTILITIES - 4.6%
CELLULAR - 0.9%
AirTouch Communications, Inc. (a) 292,900 12,173,656
Mobile Telecommunications
Technologies, Inc. (a) 320,800 7,057,600
Orange PLC (a) 1,012,449 4,403,546
Vodafone Group PLC sponsored ADR 182,600 13,238,500
36,873,302
ELECTRIC UTILITY - 0.3%
American Electric Power Co., Inc. 6,500 335,563
Edison International 99,300 2,699,719
GPU, Inc. 6,500 273,813
National Grid Co. PLC 1,865,600 8,882,635
12,191,730
GAS - 0.0%
El Paso Natural Gas Co. 10,900 724,850
TELEPHONE SERVICES - 3.4%
ACC Corp. (a) 12,200 616,100
AT&T Corp. 679,000 41,588,750
American Communication Services, Inc. 6,000 76,875
Brooks Fiber Properties, Inc. (a) 165,600 9,108,000
Energis PLC (a) 788,200 3,311,327
EXCEL Communications, Inc. (a) 45,386 658,097
GST Telecommunications, Inc. (a) 11,700 144,495
GTE Corp. 17,600 919,600
LCI International, Inc. (a) 31,700 974,775
MCI Communications Corp. 99,000 4,238,438
McLeodUSA, Inc. Class A (a) 199,700 6,390,400
Metromedia Fiber Network, Inc. Class A (a) 114,900 1,910,213
NEXTLINK Communications, Inc. Class A 190,200 4,053,638
Qwest Communications
International, Inc. 44,300 2,635,850
Startec Global Communications Corp. 8,500 190,188
Tel-Save Holdings, Inc. (a) 80,200 1,593,975
Teleport Communications Group, Inc.
Class A (a) 266,900 14,646,138
WorldCom, Inc. (a) 1,584,490 47,930,823
140,987,682
TOTAL UTILITIES 190,777,564
TOTAL COMMON STOCKS
(Cost $2,719,654,731) 3,472,261,202
PREFERRED STOCKS - 1.6%
SHARES VALUE (NOTE 1)
CONVERTIBLE PREFERRED STOCKS - 1.0%
CONSTRUCTION & REAL ESTATE - 0.9%
REAL ESTATE INVESTMENT TRUSTS - 0.9%
Vornado Realty Trust, Series A, $3.25 569,000 $ 37,554,000
RETAIL & WHOLESALE - 0.1%
APPAREL STORES - 0.1%
TJX Companies, Inc., Series E,
$7.00 9,600 3,648,000
TOTAL CONVERTIBLE PREFERRED STOCKS 41,202,000
NONCONVERTIBLE PREFERRED STOCKS - 0.6%
TECHNOLOGY - 0.2%
COMPUTER SERVICES & SOFTWARE - 0.2%
SAP AG (Systeme Anwendungen
Produkte) 23,100 7,346,789
UTILITIES - 0.4%
TELEPHONE SERVICES - 0.4%
Telecom Italia Spa 1,258,100 5,527,944
Telecom Italia Mobile Spa de Risp 3,911,600 11,066,704
16,594,648
TOTAL NONCONVERTIBLE PREFERRED STOCKS 23,941,437
TOTAL PREFERRED STOCKS
(Cost $49,646,507) 65,143,437
CONVERTIBLE BONDS - 0.1%
MOODY'S RATINGS PRINCIPAL
(UNAUDITED) (D) AMOUNT
MEDIA & LEISURE - 0.0%
BROADCASTING - 0.0%
Home Shopping Network, Inc.
5 7/8%, 3/1/06 B3 $ 29,000 55,825
Jacor Communications, Inc.
liquid yield option notes
0%, 6/12/11 B3 302,000 223,480
279,305
TECHNOLOGY - 0.1%
ELECTRONICS - 0.1%
Kent Electronics Corp.
4 1/2%, 9/1/04 B 1,036,000 844,340
National Semiconductor Corp.
6 1/2%, 10/1/02 (c) Ba2 863,000 854,370 1,698,710
TOTAL CONVERTIBLE BONDS
(Cost $1,970,383) 1,978,015
U.S. TREASURY OBLIGATIONS - 4.7%
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (D) AMOUNT (NOTE 1)
U.S. Treasury Bill, yield at date
of purchase 5.17% to 5.30%,
1/8/98 - $ 1,400,000 $ 1,398,799
7 5/8%, 2/15/25 Aaa 32,500,000 39,441,675
6 7/8%, 8/15/25 Aaa 35,500,000 39,582,500
6%, 2/15/26 Aaa 36,650,000 36,604,188
6.75%, 8/15/26 Aaa 31,900,000 35,119,986
6 1/2%, 11/15/26 Aaa 32,000,000 34,160,000
6.625%, 2/15/27 Aaa 6,000,000 6,513,720
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $187,334,456) 192,820,868
CASH EQUIVALENTS - 9.0%
SHARES
Taxable Central Cash Fund (b)
(Cost $370,108,195) 370,108,195 370,108,195
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $3,328,714,272) $ 4,102,311,717
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield of the Taxable Central Cash
Fund was 5.69%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(c) Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions
exempt from registration, normally to qualified institutional buyers.
At the period end, the value of these securities amounted to
$3,672,328 or 0.1% of net assets.
(d) Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investors Service, Inc.
Transactions during the period with companies which are or were
affiliates are as follows:
PURCHASE SALES DIVIDEND VALUE
AFFILIATE COST COST INCOME
Cutter & Buck, Inc. $ - $ 130,000 $ - $ -
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $5,112,205,447 and $4,260,071,379, respectively, of which
U.S. government and government agency obligations aggregated
$177,970,617 and $101,337,300, respectively.
The market value of futures contracts opened and closed during the
period amounted to $428,556,420 and $433,499,363, respectively.
The fund participated in the interfund lending program as a lender.
The maximum loan and average daily balances during the period for
which loans were outstanding amounted to $36,999,000 and $15,594,143,
respectively. The weighted average interest rate was 5.42%. Interest
earned from the interfund lending program amounted to $16,435 and is
included in interest income on the Statement of Operations (see Note 2
of Notes to Financial Statements).
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $1,393,069 for the
period (See Note 4 of Notes to Financial Statements).
Distribution of investments by country of issue, as a percentage of
total value of investment in securities, is as follows:
United States 86.6%
United Kingdom 3.0
Netherlands 2.0
France 2.0
Canada 1.6
Netherland Antilles 1.5
Others (individually less than 1%) 3.3
TOTAL 100.0%
INCOME TAX INFORMATION
At December 31, 1997, the aggregate cost of investment securities for
income tax purposes was $3,343,898,030. Net unrealized appreciation
aggregated $758,413,687, of which $827,033,531 related to appreciated
investment securities and $68,619,844 related to depreciated
investment securities.
The fund hereby designates approximately $93,685,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
INVESTMENT IN SECURITIES, AT VALUE (COST $3,328,714,272) - $ 4,102,311,717
SEE ACCOMPANYING SCHEDULE
RECEIVABLE FOR INVESTMENTS SOLD 34,916,320
RECEIVABLE FOR FUND SHARES SOLD 3,882,934
DIVIDENDS RECEIVABLE 3,274,119
INTEREST RECEIVABLE 5,708,799
OTHER RECEIVABLES 4,360
TOTAL ASSETS 4,150,098,249
LIABILITIES
PAYABLE TO CUSTODIAN BANK $ 338,891
PAYABLE FOR INVESTMENTS PURCHASED 33,485,815
PAYABLE FOR FUND SHARES REDEEMED 2,420,806
ACCRUED MANAGEMENT FEE 1,997,883
DISTRIBUTION FEES PAYABLE 176
OTHER PAYABLES AND 264,050
ACCRUED EXPENSES
TOTAL LIABILITIES 38,507,621
NET ASSETS $ 4,111,590,628
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 3,113,875,544
UNDISTRIBUTED NET INVESTMENT INCOME 28,707,467
ACCUMULATED UNDISTRIBUTED 195,426,546
NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 773,581,071
AND ASSETS AND LIABILITIES IN FOREIGN CURRENCIES
</TABLE>
NET ASSETS $ 4,111,590,628
INITIAL CLASS: $19.94
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($4,107,868,394 (DIVIDED BY) 206,036,653
SHARES)
SERVICE CLASS: $19.93
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($3,722,234 (DIVIDED BY) 186,727 SHARES)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME $ 32,015,420
DIVIDENDS
INTEREST 20,167,606
TOTAL INCOME 52,183,026
EXPENSES
MANAGEMENT FEE $ 19,646,719
TRANSFER AGENT FEES 2,233,719
DISTRIBUTION FEES - SERVICE CLASS 214
ACCOUNTING FEES AND EXPENSES 807,242
NON-INTERESTED TRUSTEES' COMPENSATION 12,885
CUSTODIAN FEES AND EXPENSES 456,296
REGISTRATION FEES 13,357
AUDIT 35,542
LEGAL 17,862
MISCELLANEOUS 153,919
TOTAL EXPENSES BEFORE REDUCTIONS 23,377,755
EXPENSE REDUCTIONS (893,160 22,484,595
)
NET INVESTMENT INCOME 29,698,431
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES (INCLUDING 202,977,032
REALIZED GAIN (LOSS) OF $2,496
ON SALES OF INVESTMENTS IN
AFFILIATED ISSUERS)
FOREIGN CURRENCY TRANSACTIONS (33,502
)
FUTURES CONTRACTS 1,625,426 204,568,956
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 450,994,116
ASSETS AND LIABILITIES IN (16,697 450,977,419
FOREIGN CURRENCIES )
NET GAIN (LOSS) 655,546,375
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 685,244,806
OTHER INFORMATION $ 875,045
EXPENSE REDUCTIONS
DIRECTED BROKERAGE ARRANGEMENTS
CUSTODIAN CREDITS 18,115
$ 893,160
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
OPERATIONS $ 29,698,431 $ 20,976,837
NET INVESTMENT
INCOME
NET REALIZED GAIN 204,568,956 49,001,422
(LOSS)
CHANGE IN NET 450,977,419 254,150,553
UNREALIZED
APPRECIATION
(DEPRECIATION)
NET INCREASE 685,244,806 324,128,812
(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 - 1,111,825,789 1,202,270,854
NET INCREASE
(DECREASE)
TOTAL INCREASE 1,717,487,569 1,517,103,315
(DECREASE) IN NET
ASSETS
NET ASSETS
BEGINNING OF PERIOD 2,394,103,059 876,999,744
END OF PERIOD $ 4,111,590,628 $ 2,394,103,059
(INCLUDING
UNDISTRIBUTED NET
INVESTMENT INCOME
OF $28,707,467 AND
$20,976,837,
RESPECTIVELY)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
OTHER INFORMATION
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
SHARES DOLLARS SHARES DOLLARS
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SHARE TRANSACTIONS 80,344,594 $ 1,456,514,379 92,660,951 $ 1,380,209,873
INITIAL CLASS
SOLD
REINVESTED 4,834,935 79,583,026 674,626 9,296,351
REDEEMED (23,702,843) (427,936,465) (12,369,121) (187,235,370)
NET INCREASE 61,476,686 $ 1,108,160,940 80,966,456 $ 1,202,270,854
(DECREASE)
SERVICE CLASS A 186,727 $ 3,664,849 - $ -
SOLD
REINVESTED - - - -
REDEEMED - - - -
NET INCREASE 186,727 $ 3,664,849 - $ -
(DECREASE)
DISTRIBUTIONS $ 21,846,321 $ -
INITIAL CLASS - NET
INVESTMENT INCOME
INITIAL CLASS - NET 57,736,705 9,296,351
REALIZED GAIN
TOTAL $ 79,583,026 $ 9,296,351
SERVICE CLASS - NET - -
INVESTMENT INCOME
SERVICE CLASS - NET - -
REALIZED GAIN
TOTAL $ - $ -
$ 79,583,026 $ 9,296,351
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1. SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
YEARS ENDED DECEMBER 31, JANUARY 3, 1995
(COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31,
SELECTED PER-SHARE DATA 1997 1996 1995
NET ASSET VALUE, $ 16.56 $ 13.79 $ 10.00
BEGINNING OF PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET INVESTMENT .16 D .14 .06
INCOME
NET REALIZED AND 3.73 2.76 3.91
UNREALIZED GAIN (LOSS)
TOTAL FROM 3.89 2.90 3.97
INVESTMENT
OPERATIONS
LESS DISTRIBUTIONS
FROM NET INVESTMENT (.14) - (.06)
INCOME
FROM NET REALIZED (.37) (.13) (.12)
GAIN
TOTAL DISTRIBUTIONS (.51) (.13) (.18)
NET ASSET VALUE, END OF $ 19.94 $ 16.56 $ 13.79
PERIOD
TOTAL RETURN B, C 24.14% 21.22% 39.72%
RATIOS AND
SUPPLEMENTAL DATA
NET ASSETS, END OF $ 4,107,868 $ 2,394,103 $ 877,000
PERIOD (000 OMITTED)
RATIO OF EXPENSES TO .71% .74% .72%
AVERAGE NET ASSETS
RATIO OF EXPENSES TO .68% F .71% F .72%
AVERAGE NET ASSETS
AFTER EXPENSE
REDUCTIONS
RATIO OF NET INVESTMENT .90% 1.33% 1.07%
INCOME TO AVERAGE
NET ASSETS
PORTFOLIO TURNOVER RATE 142% 178% 132%
AVERAGE COMMISSION $ .0336 $ .0343
RATE G
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEAR ENDED
DECEMBER 31,
SELECTED PER-SHARE DATA 1997 E
NET ASSET VALUE, $ 19.99
BEGINNING OF PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET INVESTMENT .03 D
INCOME
NET REALIZED AND (.09)
UNREALIZED GAIN (LOSS)
TOTAL FROM (.06)
INVESTMENT
OPERATIONS
NET ASSET VALUE, END OF $ 19.93
PERIOD
TOTAL RETURN B, C (.30)%
RATIOS AND
SUPPLEMENTAL DATA
NET ASSETS, END OF $ 3,722
PERIOD (000 OMITTED)
RATIO OF EXPENSES TO .81% A
AVERAGE NET ASSETS
RATIO OF EXPENSES TO .78% A,
AVERAGE NET ASSETS F
AFTER EXPENSE
REDUCTIONS
RATIO OF NET INVESTMENT 1.14% A
INCOME TO AVERAGE
NET ASSETS
PORTFOLIO TURNOVER 142%
AVERAGE COMMISSION $ .0336
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 6 OF NOTES TO FINANCIAL
STATEMENTS).
D NET INVESTMENT INCOME PER SHARE HAS
BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3, 1997
(COMMENCEMENT OF SALE OF SERVICE
CLASS SHARES) TO DECEMBER 31, 1997.
F FMR OR THE FUND HAS ENTERED INTO
VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A
PORTION OF THE CLASS' EXPENSES (SEE NOTE
6 OF NOTES TO FINANCIAL STATEMENTS).
G FOR FISCAL YEARS BEGINNING ON OR AFTER
SEPTEMBER 1, 1995, A FUND IS REQUIRED
TO DISCLOSE ITS AVERAGE COMMISSION RATE
PER SHARE FOR SECURITY TRADES ON WHICH
COMMISSIONS ARE CHARGED. THIS AMOUNT
MAY VARY FROM PERIOD TO PERIOD AND
FUND TO FUND DEPENDING ON THE MIX OF
TRADES EXECUTED IN VARIOUS MARKETS
WHERE TRADING PRACTICES AND
COMMISSION RATE STRUCTURES MAY DIFFER.
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
DECEMBER 31, 1997 YEAR YEARS YEARS
VIP: GROWTH - "INITIAL CLASS" 23.48% 18.00% 17.19%
S&P 500 (REGISTERED TRADEMARK) 33.36% 20.27% 18.05%
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.
3
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
IMAHDR PRASUN SHR__CHT 19971231 19980109 105514 S00000000000001
VIP Growth S&P 500
00151 SP001
1987/12/31 10000.00 10000.00
1988/01/31 10216.96 10421.00
1988/02/29 11045.36 10906.62
1988/03/31 10946.75 10569.60
1988/04/30 11084.81 10686.93
1988/05/31 10986.19 10779.90
1988/06/30 11538.46 11274.70
1988/07/31 11479.29 11231.86
1988/08/31 11203.16 10849.97
1988/09/30 11518.74 11312.18
1988/10/31 11548.32 11626.66
1988/11/30 11439.84 11460.40
1988/12/31 11558.19 11660.96
1989/01/31 12386.59 12514.54
1989/02/28 12130.18 12202.93
1989/03/31 12496.89 12487.26
1989/04/30 13157.78 13135.34
1989/05/31 13628.42 13667.32
1989/06/30 13448.17 13589.42
1989/07/31 14649.80 14816.55
1989/08/31 14900.14 15106.95
1989/09/30 15030.31 15045.01
1989/10/31 14609.74 14695.97
1989/11/30 14850.07 14995.77
1989/12/31 15200.54 15355.66
1990/01/31 14319.35 14325.30
1990/02/28 14456.13 14510.09
1990/03/31 14632.80 14894.61
1990/04/30 14206.71 14522.25
1990/05/31 15464.21 15938.17
1990/06/30 15786.38 15829.79
1990/07/31 15536.96 15779.13
1990/08/31 13936.50 14352.70
1990/09/30 12502.32 13653.72
1990/10/31 12055.43 13595.01
1990/11/30 13032.34 14473.25
1990/12/31 13416.87 14877.05
1991/01/31 14310.63 15525.69
1991/02/28 15378.27 16635.78
1991/03/31 15842.36 17038.36
1991/04/30 15694.69 17079.26
1991/05/31 16622.87 17817.08
1991/06/30 15388.82 17001.06
1991/07/31 16854.92 17793.31
1991/08/31 17603.79 18215.01
1991/09/30 17740.91 17910.82
1991/10/31 18289.38 18150.82
1991/11/30 17245.18 17419.34
1991/12/31 19523.44 19412.12
1992/01/31 20715.31 19051.05
1992/02/29 21148.67 19298.72
1992/03/31 19852.53 18922.39
1992/04/30 19074.84 19478.71
1992/05/31 18912.83 19574.15
1992/06/30 18178.35 19282.50
1992/07/31 18880.42 20071.15
1992/08/31 18361.97 19659.70
1992/09/30 18686.00 19891.68
1992/10/31 19409.68 19961.30
1992/11/30 20705.82 20641.98
1992/12/31 21343.09 20895.88
1993/01/31 21764.33 21071.40
1993/02/28 21315.66 21357.97
1993/03/31 22165.64 21808.63
1993/04/30 21933.82 21280.86
1993/05/31 23567.55 21851.19
1993/06/30 23810.40 21914.55
1993/07/31 23744.17 21826.90
1993/08/31 24936.34 22654.14
1993/09/30 25399.97 22479.70
1993/10/31 25642.82 22945.03
1993/11/30 24605.18 22727.05
1993/12/31 25477.24 23002.05
1994/01/31 26117.48 23784.12
1994/02/28 25848.10 23139.57
1994/03/31 24673.72 22130.68
1994/04/30 24826.39 22413.96
1994/05/31 24250.94 22781.54
1994/06/30 23017.85 22223.40
1994/07/31 23816.42 22952.32
1994/08/31 25166.96 23893.37
1994/09/30 24861.62 23307.98
1994/10/31 25871.59 23832.41
1994/11/30 24838.13 22964.43
1994/12/31 25472.30 23305.00
1995/01/31 24990.80 23909.30
1995/02/28 26025.74 24841.04
1995/03/31 26970.42 25574.10
1995/04/30 27879.67 26327.26
1995/05/31 28966.04 27379.56
1995/06/30 31528.47 28015.58
1995/07/31 34645.89 28944.58
1995/08/31 35070.99 29017.23
1995/09/30 35980.24 30241.76
1995/10/31 35614.18 30133.80
1995/11/30 35590.56 31456.67
1995/12/31 34480.57 32062.53
1996/01/31 35023.76 33153.93
1996/02/29 36198.02 33461.27
1996/03/31 36337.73 33783.50
1996/04/30 37760.25 34281.47
1996/05/31 38941.45 35165.59
1996/06/30 38179.38 35299.57
1996/07/31 35258.14 33740.04
1996/08/31 36312.33 34451.61
1996/09/30 38750.93 36390.55
1996/10/31 38662.02 37394.20
1996/11/30 40808.50 40220.83
1996/12/31 39551.10 39424.06
1997/01/31 41824.59 41887.27
1997/02/28 40873.81 42215.67
1997/03/31 38583.29 40481.03
1997/04/30 40439.40 42897.74
1997/05/31 43243.30 45509.36
1997/06/30 45020.42 47548.18
1997/07/31 48403.54 51331.58
1997/08/31 46534.27 48455.99
1997/09/30 49232.86 51109.92
1997/10/31 47376.76 49402.85
1997/11/30 48732.63 51689.71
1997/12/31 48837.95 52577.22
IMATRL PRASUN SHR__CHT 19971231 19980109 105518 R00000000000123
Let's say hypothetically that $10,000 was invested in VIP: Growth
Portfolio on December 31, 1987. As the chart shows, by December 31,
1997, the value of the investment would have grown to $48,838 - a
388.38% 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 $52,577 - a 425.77% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
PHILIP MORRIS COMPANIES, INC. 4.8
WAL-MART STORES, INC. 2.6
AMERICAN HOME PRODUCTS CORP. 2.5
MICROSOFT CORP. 2.4
FANNIE MAE 2.1
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
TECHNOLOGY 21.3
HEALTH 16.5
FINANCE 10.2
NONDURABLES 9.3
RETAIL & WHOLESALE 8.9
ASSET ALLOCATION AS OF DECEMBER 31, 1997 *
ROW: 1, COL: 1, VALUE: 4.5
ROW: 1, COL: 2, VALUE: 95.5
STOCKS 95.5%
SHORT-TERM INVESTMENTS 4.5%
FOREIGN INVESTMENTS 6.0%
*
(% OF FUND'S INVESTMENTS)
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1fee.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
DECEMBER 31, 1997 YEAR YEARS YEARS
VIP: GROWTH - SERVICE CLASS 23.45% 18.00% 17.18%
S&P 500 (REGISTERED TRADEMARK) 33.36% 20.27% 18.05%
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.
3
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER THE PAST 10 YEARS
VIP: Growth - Service Class S&P 500
$52,577
$48,825
$
Let's say hypothetically that $10,000 was invested in VIP: Growth
Portfolio on December 31, 1987. As the chart shows, by December 31,
1997, the value of the investment would have grown to $48,825 - a
388.25% 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 $52,577 - a 425.77% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
PHILIP MORRIS COMPANIES, INC. 4.8
WAL-MART STORES, INC. 2.6
AMERICAN HOME PRODUCTS CORP. 2.5
MICROSOFT CORP. 2.4
FANNIE MAE 2.1
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
TECHNOLOGY 21.3
HEALTH 16.5
FINANCE 10.2
NONDURABLES 9.3
RETAIL & WHOLESALE 8.9
ASSET ALLOCATION AS OF DECEMBER 31, 1997 *
ROW: 1, COL: 1, VALUE: 4.5
ROW: 1, COL: 2, VALUE: 95.5
STOCKS 95.5%
SHORT-TERM INVESTMENTS 4.5%
FOREIGN INVESTMENTS 6.0%
*
(% 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 COMPARED TO ITS BENCHMARK, JENNIFER?
A. Performance was disappointing. For the 12 months that ended
December 31, 1997, the fund trailed the Standard & Poor's 500 Index
return of 33.36%.
Q. WHAT FACTORS CONTRIBUTED TO THE FUND'S PERFORMANCE?
A. The fund was hurt by its large weighting in technology and poor
stock selection within that sector. While the fund underperformed
slightly, the average mid-cap and small-cap technology stock
underperformed the market considerably. Not concentrating technology
holdings exclusively in large-cap stocks hurt the fund. Additionally,
not owning enough financial services stocks also detracted from
performance. I decided not to overweight this sector because financial
services typically is not a growth area, and thus is not a standard
focus for a growth fund such as this. I also believed that it was
quite late in the business cycle to be overly exposed to such a highly
cyclical - or economically sensitive - group. In hindsight, this was a
mistake because finance stocks continued to perform well.
Q. SIX MONTHS AGO YOU DETAILED SOME OF THE CHANGES YOU HAD MADE TO THE
PORTFOLIO SINCE YOU TOOK OVER IN JANUARY. NAMELY, YOU HAD ASSEMBLED A
MORE CONCENTRATED LIST OF STOCKS AND HAD BEGUN TO LOOK AT LARGER-SIZED
COMPANIES. DID THESE STRATEGIES CONTINUE?
A. They did. I prefer to concentrate my holdings on stocks that
represent my best ideas rather than having a lot of smaller positions
that will have minimal impact. At the beginning of the period, the
fund's top 10 positions accounted for nearly 18% of the fund's total
investments; at the end of the period, that number had increased to
around 23%. I also continued to raise the fund's average market
capitalization by focusing on stocks of bigger companies. While less
than that of the index, the fund's weighted market capitalization as
of December 31, 1997 was approximately $21.8 billion. At the beginning
of the period, this figure was around $13 billion.
Q. AT THE END OF THE PERIOD, TECHNOLOGY WAS THE FUND'S LARGEST
INDUSTRY EXPOSURE. HOW DID THE RECENT TURMOIL IN SOUTHEAST ASIA AFFECT
THESE STOCKS?
A. Because Southeast Asia has been a high-growth region for personal
computers and other electronic products, the prospect of slower demand
caused quite a bit of volatility in the technology sector. Looking at
the situation from a longer-term perspective, though, there may be
some positives for U.S. tech companies. First, many U.S. companies buy
components from Southeast Asia and those components may now become
cheaper. A second bright spot concerns capacity additions. In the
past, high capacity in Southeast Asia has placed pressure on U.S.
technology stocks. Going forward, this region may not be able to
continue adding capacity.
Q. CAN YOU HIGHLIGHT A FEW STOCKS THAT PERFORMED WELL? WHERE DID THE
DISAPPOINTMENTS LIE?
A. Microsoft - the fund's fourth-largest position at the end of the
period - was a very strong contributor to performance. The company had
a terrific first half of the year, with earnings exceeding
expectations due to better-than-expected sales. While the stock has
treaded water more recently, Microsoft - at this juncture - appears
well-positioned to benefit from new products in 1998. On a negative
note, Boeing was disappointing because the company was unable to
increase production profitably. The fund no longer owned this position
as of the end of the period.
Q. WHAT'S YOUR OUTLOOK?
A. In the months ahead, I expect to continue to concentrate on those
sectors of the economy that typically offer the most growth
opportunities - technology, retail and health care. I also plan to
concentrate on those subsectors of these larger groups that offer the
best earnings outlook. Also, I'll supplement this basic focus by
trying to find stocks outside of these areas that offer special
situations or superior earnings potential. Finally, I'll look to
invest in growth stocks within cyclical industries when the business
cycle is appropriate.
FUND FACTS
GOAL: to increase the value of the fund's shares
over the long term by investing in stocks with
above-average growth potential
START DATE: October 9, 1986
SIZE: as of December 31, 1997, more than $7.7
billion
MANAGER: Jennifer Uhrig, since January 1997;
joined Fidelity in 1987
3
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
INVESTMENTS DECEMBER 31, 1997
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 95.5%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.5%
AEROSPACE & DEFENSE - 0.7%
Gulfstream Aerospace Corp. (a) 793,000 $ 23,195,250
Lockheed Martin Corp. 311,500 30,682,750
53,878,000
DEFENSE ELECTRONICS - 0.8%
Northrop Grumman Corp. 234,500 26,967,500
Raytheon Company:
Class A 172,825 8,522,433
Class B 472,600 23,866,300
59,356,233
TOTAL AEROSPACE & DEFENSE 113,234,233
BASIC INDUSTRIES - 1.5%
CHEMICALS & PLASTICS - 0.3%
Cytec Industries, Inc. (a) 443,300 20,807,394
IRON & STEEL - 0.2%
Nucor Corp. 252,500 12,198,906
PACKAGING & CONTAINERS - 0.8%
Corning, Inc. 622,800 23,121,450
Owens-Illinois, Inc. (a) 1,069,200 40,562,775
63,684,225
PAPER & FOREST PRODUCTS - 0.2%
Kimberly-Clark Corp. 328,000 16,174,500
TOTAL BASIC INDUSTRIES 112,865,025
CONSTRUCTION & REAL ESTATE - 0.3%
BUILDING MATERIALS - 0.3%
Coflexip sponsored ADR 347,000 19,258,500
ENGINEERING - 0.0%
Stolt Comex Seaway SA (a) 78,700 3,935,000
TOTAL CONSTRUCTION & REAL ESTATE 23,193,500
DURABLES - 0.9%
AUTOS, TIRES, & ACCESSORIES - 0.2%
AutoZone, Inc. (a) 407,400 11,814,600
Circuit City Stores, Inc. - CarMax Group 325,700 2,931,300
14,745,900
CONSUMER ELECTRONICS - 0.1%
General Motors Corp. Class H 307,300 11,350,894
TEXTILES & APPAREL - 0.6%
Liz Claiborne, Inc. 363,800 15,211,388
Reebok International Ltd. (a) 684,200 19,713,513
Timberland Co. Class A (a) 201,300 11,687,981
46,612,882
TOTAL DURABLES 72,709,676
ENERGY - 7.3%
ENERGY SERVICES - 4.9%
Dresser Industries, Inc. 847,300 35,533,644
Falcon Drilling, Inc. (a) 1,082,100 37,941,131
Halliburton Co. 1,522,400 79,069,650
Noble Drilling Corp. (a) 736,000 22,540,000
Reading & Bates Corp. (a) 604,000 25,292,500
Schlumberger Ltd. 1,009,900 81,296,950
Transocean Offshore, Inc. 532,400 25,655,025
Varco International, Inc. (a) 837,800 17,960,338
Weatherford Enterra, Inc. (a) 487,600 21,332,500
Western Atlas, Inc. 390,900 28,926,600
375,548,338
SHARES VALUE (NOTE 1)
OIL & GAS - 2.4%
British Petroleum PLC ADR 434,895 $ 34,655,695
Burlington Resources, Inc. 168,300 7,541,944
Cooper Cameron Corp. (a) 510,800 31,158,800
EVI, Inc. (a) 500,000 25,875,000
Tosco Corp. 970,000 36,678,125
Total SA:
Class B 331,300 36,025,816
sponsored ADR 187,300 10,395,150
182,330,530
TOTAL ENERGY 557,878,868
FINANCE - 10.2%
BANKS - 0.7%
Bank of New York Co., Inc. 592,800 34,271,250
Mellon Bank Corp. 259,000 15,701,875
49,973,125
CREDIT & OTHER FINANCE - 2.4%
American Express Co. 1,561,500 139,363,875
Associates First Capital Corp. 315,200 22,418,600
Beneficial Corp. 296,800 24,671,500
186,453,975
FEDERAL SPONSORED CREDIT - 4.0%
Freddie Mac 3,345,300 140,293,519
Fannie Mae 2,845,300 162,359,931
302,653,450
INSURANCE - 3.1%
Allmerica Financial Corp. 313,100 15,635,431
Allstate Corp. 517,300 47,009,638
AMBAC, Inc. 859,200 39,523,200
American International Group, Inc. 216,950 23,593,313
MBIA, Inc. 260,000 17,371,250
Progressive Corp. 230,000 27,571,250
UNUM Corp. 1,266,900 68,887,688
239,591,770
TOTAL FINANCE 778,672,320
HEALTH - 16.5%
DRUGS & PHARMACEUTICALS - 10.7%
American Home Products Corp. 2,454,700 187,784,550
Amgen, Inc. 553,600 29,963,600
Barr Laboratories, Inc. (a) 110,800 3,781,050
Bristol-Myers Squibb Co. 1,152,900 109,093,163
Elan Corp. PLC ADR (a) 588,100 30,103,369
Genentech, Inc. special (a) 356,900 21,637,063
Gilead Sciences, Inc. (a) 244,700 9,359,775
Glaxo PLC sponsored ADR 410,000 19,628,750
Lilly (Eli) & Co. 1,192,500 83,027,813
Medimmune, Inc. (a) 186,400 7,991,900
Merck & Co., Inc. 1,044,400 110,967,500
Pfizer, Inc. 465,800 34,731,213
Schering-Plough Corp. 1,028,800 63,914,200
Sepracor, Inc. (a) 251,500 10,075,719
SmithKline Beecham PLC ADR 1,891,200 97,278,600
Warner-Lambert Co. 29,900 3,707,600
823,045,865
MEDICAL EQUIPMENT & SUPPLIES - 3.5%
Abbott Laboratories 1,113,700 73,016,956
Johnson & Johnson 2,221,300 146,328,138
Medtronic, Inc. 723,700 37,858,556
Sybron International Corp. (a) 266,000 12,485,375
269,689,025
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
HEALTH - CONTINUED
MEDICAL FACILITIES MANAGEMENT - 2.3%
Carematrix Corp. (a) 213,900 $ 6,149,625
Columbia/HCA Healthcare Corp. 2,713,437 80,385,571
HEALTHSOUTH Corp. (a) 1,956,600 54,295,650
Health Management Associates, Inc.
Class A (a) 1,285,300 32,453,825
173,284,671
TOTAL HEALTH 1,266,019,561
HOLDING COMPANIES - 0.4%
Norfolk Southern Corp. 891,600 27,472,425
INDUSTRIAL MACHINERY & EQUIPMENT - 2.4%
ELECTRICAL EQUIPMENT - 1.8%
Alcatel Alsthom Compagnie Generale
d'Electricite SA 634,500 80,583,133
General Electric Co. 802,000 58,846,750
139,429,883
POLLUTION CONTROL - 0.6%
Thermo Instrument Systems, Inc. (a) 134,875 4,644,758
USA Waste Services, Inc. (a) 973,500 38,209,875
Zurn Industries, Inc. 55,600 1,747,925
44,602,558
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 184,032,441
MEDIA & LEISURE - 8.3%
BROADCASTING - 2.1%
CBS Corp. 1,391,900 40,974,056
Chancellor Media Corp. (a) 81,300 6,067,013
Comcast Corp. Class A special 1,389,800 43,865,563
Cox Communications, Inc. Class A (a) 333,500 13,360,844
TCI Group Class A 653,600 18,259,950
Time Warner, Inc. 622,400 38,588,800
161,116,226
ENTERTAINMENT - 1.7%
Disney (Walt) Co. 1,284,000 127,196,250
LEISURE DURABLES & TOYS - 0.2%
Harley-Davidson, Inc. 492,800 13,490,400
Nintendo Co. Ltd. Ord. 32,100 3,146,697
16,637,097
LODGING & GAMING - 0.9%
Circus Circus Enterprises, Inc. (a) 618,600 12,681,300
Mirage Resorts, Inc. (a) 1,557,300 35,428,575
Sun International Hotels Ltd. Ord. (a) 487,900 18,357,238
66,467,113
PUBLISHING - 1.2%
Times Mirror Co. Class A 457,500 28,136,250
Tribune Co. 485,000 30,191,250
US WEST Media Group (a) 1,204,900 34,791,488
93,118,988
RESTAURANTS - 2.2%
Applebee's International, Inc. 118,800 2,145,825
Brinker International, Inc. (a) 1,208,300 19,332,800
Landry's Seafood Restaurants, Inc. (a) 1,033,300 24,799,200
McDonald's Corp. 571,100 27,270,025
Outback Steakhouse, Inc. (a) 178,300 5,126,125
Papa John's International, Inc. (a) 229,700 8,010,788
SHARES VALUE (NOTE 1)
Starbucks Corp. (a) 601,800 $ 23,094,075
Tricon Global Restaurants, Inc. 1,408,760 40,942,088
Wendy's International, Inc. 894,200 21,516,688
172,237,614
TOTAL MEDIA & LEISURE 636,773,288
NONDURABLES - 9.3%
BEVERAGES - 0.4%
PepsiCo, Inc. 757,000 27,583,188
FOODS - 1.3%
American Italian Pasta Co. Series A 280,700 7,017,500
Campbell Soup Co. 454,200 26,400,375
General Mills, Inc. 459,900 32,940,338
Sara Lee Corp. 587,000 33,055,438
99,413,651
HOUSEHOLD PRODUCTS - 2.2%
Avon Products, Inc. 493,600 30,294,700
Colgate-Palmolive Co. 370,900 27,261,150
Gillette Co. 420,000 42,183,750
Procter & Gamble Co. 891,700 71,168,806
170,908,406
TOBACCO - 5.4%
Philip Morris Companies, Inc. 8,050,400 364,783,750
RJR Nabisco Holdings Corp. 867,600 32,535,000
UST, Inc. 411,300 15,192,394
412,511,144
TOTAL NONDURABLES 710,416,389
PRECIOUS METALS - 0.2%
Barrick Gold Corp. 449,500 8,379,682
Getchell Gold Corp. (a) 219,053 5,257,272
13,636,954
RETAIL & WHOLESALE - 8.9%
APPAREL STORES - 0.8%
Just for Feet, Inc. (a) 533,600 7,003,500
Ross Stores, Inc. 344,900 12,545,738
TJX Companies, Inc. 1,227,700 42,202,188
61,751,426
DRUG STORES - 0.9%
CVS Corp. 565,505 36,227,664
Rite Aid Corp. 609,400 35,764,163
71,991,827
GENERAL MERCHANDISE STORES - 4.0%
Consolidated Stores Corp. (a) 626,812 27,540,552
Costco Companies, Inc. (a) 599,200 26,739,300
Dayton Hudson Corp. 754,000 50,895,000
Wal-Mart Stores, Inc. 5,144,100 202,870,444
308,045,296
GROCERY STORES - 0.5%
Safeway, Inc. (a) 633,400 40,062,550
RETAIL & WHOLESALE, MISCELLANEOUS - 2.7%
Bed Bath & Beyond, Inc. (a) 494,200 19,026,700
Corporate Express, Inc. (a) 1,331,300 17,140,488
Home Depot, Inc. 1,326,850 78,118,294
Lowe's Companies, Inc. 941,600 44,902,550
Staples, Inc. (a) 1,021,800 28,354,950
Toys "R" Us, Inc. (a) 87,100 2,738,206
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
RETAIL & WHOLESALE, MISCELLANEOUS - CONTINUED
U.S. Office Products Co. (a) 364,950 $ 7,162,144
Viking Office Products, Inc. (a) 261,900 5,712,694
203,156,026
TOTAL RETAIL & WHOLESALE 685,007,125
SERVICES - 2.0%
EDUCATIONAL SERVICES - 0.2%
Apollo Group, Inc. Class A (a) 343,600 16,235,100
LEASING & RENTAL - 0.2%
Hertz Corp. Class A 328,100 13,206,025
SERVICES - 1.6%
AccuStaff, Inc. (a) 897,700 20,647,100
Cendant Corp. (a) 1,350,400 46,420,000
Corrections Corp. of America (a) 659,600 24,446,425
Gartner Group, Inc. Class A (a) 953,700 35,525,325
127,038,850
TOTAL SERVICES 156,479,975
TECHNOLOGY - 21.3%
COMMUNICATIONS EQUIPMENT - 2.4%
ADC Telecommunications, Inc. (a) 922,200 38,501,850
Advanced Fibre Communication, Inc. (a) 541,100 15,759,538
Aspect Telecommunications Corp. (a) 822,000 17,159,250
DSC Communications Corp. (a) 816,900 19,605,600
Lucent Technologies, Inc. 858,100 68,540,738
Tellabs, Inc. (a) 498,700 26,368,763
185,935,739
COMPUTER SERVICES & SOFTWARE - 8.1%
America Online, Inc. (a) 498,400 44,451,050
BMC Software, Inc. (a) 412,800 27,090,000
Broderbund Software, Inc. (a) 605,000 15,503,125
Cadence Design Systems, Inc. (a) 754,900 18,495,050
Citrix Systems, Inc. (a) 408,100 31,015,600
CompUSA, Inc. (a) 2,059,700 63,850,700
Compuware Corp. (a) 313,400 10,028,800
Electronic Data Systems Corp. 1,104,800 48,542,150
Electronics for Imaging, Inc. (a) 451,900 7,512,838
Equifax, Inc. 446,000 15,805,125
Henry (Jack) & Associates, Inc. 170,000 4,632,500
ICG Communications, Inc. (a) 155,900 4,248,275
Keane, Inc. (a) 717,400 29,144,375
Microsoft Corp. (a) 1,448,800 187,257,400
Oracle Corp. (a) 883,950 19,723,134
Parametric Technology Corp. (a) 332,800 15,766,400
PeopleSoft, Inc. (a) 340,500 13,279,500
Policy Management Systems Corp. (a) 206,500 14,364,656
Sabre Group Holdings, Inc. Class A (a) 574,300 16,582,913
Siebel Systems, Inc. (a) 269,600 11,272,650
SunGard Data Systems, Inc. (a) 787,200 24,403,200
622,969,441
COMPUTERS & OFFICE EQUIPMENT - 4.2%
Adaptec, Inc. (a) 515,200 19,126,800
Compaq Computer Corp. 1,042,550 58,838,916
Dell Computer Corp. (a) 558,400 46,905,600
EMC Corp. (a) 1,228,000 33,693,250
Fore Systems, Inc. (a) 1,393,300 21,247,825
Ingram Micro, Inc. Class A (a) 399,900 11,647,088
Iomega Corp. (a) 1,813,600 22,556,650
SHARES VALUE (NOTE 1)
Pitney Bowes, Inc. 404,500 $ 36,379,719
Quantum Corp. (a) 1,761,700 35,344,106
SCI Systems, Inc. (a) 205,000 8,930,313
Tech Data Corp. (a) 632,300 24,580,663
319,250,930
ELECTRONIC INSTRUMENTS - 0.4%
Applied Materials, Inc. 118,800 3,578,850
Novellus Systems, Inc. (a) 419,600 13,558,325
Waters Corp. (a) 294,800 11,091,850
28,229,025
ELECTRONICS - 6.1%
Altera Corp. (a) 674,400 22,339,500
Intel Corp. 1,195,800 84,004,950
Linear Technology Corp. 254,000 14,636,750
Maxim Integrated Products, Inc. (a) 708,800 24,453,600
Micron Technology, Inc. (a) 1,147,300 29,829,800
Motorola, Inc. 616,800 35,196,150
Sanmina Corp. (a) 476,100 32,255,775
Solectron Corp. (a) 409,000 16,999,063
Taiwan Semiconductor Manufacturing Co.
sponsored ADR 849,400 15,448,463
Texas Instruments, Inc. 3,514,500 158,152,500
Uniphase Corp. (a) 464,000 19,198,000
Xilinx, Inc. (a) 466,000 16,339,125
468,853,676
PHOTOGRAPHIC EQUIPMENT - 0.1%
Polaroid Corp. 162,300 7,901,981
TOTAL TECHNOLOGY 1,633,140,792
TRANSPORTATION - 0.4%
RAILROADS - 0.4%
Wisconsin Central Transportation
Corp. (a) 1,466,900 34,288,788
UTILITIES - 4.1%
CELLULAR - 0.2%
Vanguard Cellular Systems, Inc.
Class A (a) 816,000 10,404,000
TELEPHONE SERVICES - 3.9%
AT&T Corp. 938,100 57,458,625
Cincinnati Bell, Inc. 617,400 19,139,400
MCI Communications Corp. 941,800 40,320,813
McLeodUSA, Inc. Class A (a) 107,000 3,424,000
NEXTLINK Communications, Inc. Class A 27,900 594,619
Sprint Corp. 910,600 53,383,906
WorldCom, Inc. (a) 4,156,770 125,742,293
300,063,656
TOTAL UTILITIES 310,467,656
TOTAL COMMON STOCKS
(Cost $5,749,767,346) 7,316,289,016
CASH EQUIVALENTS - 4.5%
Taxable Central Cash Fund (b)
(Cost $345,474,099) 345,474,099 345,474,099
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $6,095,241,445) $7,661,763,115
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield of the Taxable Central Cash
Fund was 5.69%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
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 $ 3,329,917 $ 3,552,674 $ - $ -
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $7,741,220,965 and $7,331,178,925, 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 $2,343,264 for the
period (see Note 4 of Notes to Financial Statements).
INCOME TAX INFORMATION
At December 31, 1997, the aggregate cost of investment securities for
income tax purposes was $6,112,463,480. Net unrealized appreciation
aggregated $1,549,299,635, of which $1,721,688,647 related to
appreciated investment securities and $172,389,012 related to
depreciated investment securities.
The fund hereby designates approximately $710,603,000 as a capital
gain dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
INVESTMENT IN SECURITIES, AT VALUE $ 7,661,763,115
(COST $6,095,241,445) -
SEE ACCOMPANYING SCHEDULE
RECEIVABLE FOR INVESTMENTS SOLD 88,323,025
RECEIVABLE FOR FUND SHARES SOLD 7,898,632
DIVIDENDS RECEIVABLE 8,590,626
INTEREST RECEIVABLE 1,143,292
OTHER RECEIVABLES 438,366
TOTAL ASSETS 7,768,157,056
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 24,513,653
PAYABLE FOR FUND SHARES REDEEMED 10,148,622
ACCRUED MANAGEMENT FEE 3,773,719
DISTRIBUTION FEES PAYABLE 79
OTHER PAYABLES AND ACCRUED EXPENSES 574,032
TOTAL LIABILITIES 39,010,105
NET ASSETS $ 7,729,146,951
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 5,114,691,494
UNDISTRIBUTED NET INVESTMENT INCOME 39,932,430
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS 1,008,023,491
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 1,566,499,536
AND ASSETS AND LIABILITIES IN
FOREIGN CURRENCIES
NET ASSETS $ 7,729,146,951
</TABLE>
INITIAL CLASS: $37.10
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($7,727,131,632 (DIVIDED BY) 208,267,151
SHARES)
SERVICE CLASS: $37.09
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($2,015,319 (DIVIDED BY) 54,340 SHARES)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME $ 63,776,856
DIVIDENDS
INTEREST 22,368,055
TOTAL INCOME 86,144,911
EXPENSES
MANAGEMENT FEE $ 41,416,431
TRANSFER AGENT FEES 4,712,209
DISTRIBUTION FEES - SERVICE CLASS 86
ACCOUNTING FEES AND EXPENSES 816,139
NON-INTERESTED TRUSTEES' COMPENSATION 31,017
CUSTODIAN FEES AND EXPENSES 193,779
REGISTRATION FEES 60,637
AUDIT 72,777
LEGAL 46,575
MISCELLANEOUS 304,122
TOTAL EXPENSES BEFORE REDUCTIONS 47,653,772
EXPENSE REDUCTIONS (1,441,290 46,212,482
)
NET INVESTMENT INCOME 39,932,429
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES (INCLUDING 1,023,125,961
REALIZED GAIN (LOSS) OF
$1,464,164 ON SALES OF
INVESTMENTS IN AFFILIATED ISSUERS)
FOREIGN CURRENCY TRANSACTIONS (7,030 1,023,118,931
)
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 361,588,058
ASSETS AND LIABILITIES IN (22,113 361,565,945
FOREIGN CURRENCIES )
NET GAIN (LOSS) 1,384,684,876
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 1,424,617,305
OTHER INFORMATION $ 1,434,528
EXPENSE REDUCTIONS
DIRECTED BROKERAGE ARRANGEMENTS
CUSTODIAN CREDITS 6,762
$ 1,441,290
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
OPERATIONS $ 39,932,429 $ 42,344,647
NET INVESTMENT
INCOME
NET REALIZED GAIN 1,023,118,931 186,713,569
(LOSS)
CHANGE IN NET 361,565,945 451,420,339
UNREALIZED
APPRECIATION
(DEPRECIATION)
NET INCREASE 1,424,617,305 680,478,555
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
DISTRIBUTIONS TO (41,406,087 (11,769,237
SHAREHOLDERS ) )
FROM NET INVESTMENT
INCOME
FROM NET REALIZED (183,895,819 (297,173,230
GAIN ) )
TOTAL DISTRIBUTIONS (225,301,906 (308,942,467
) )
SHARE TRANSACTIONS - 443,407,898 1,552,185,755
NET INCREASE
(DECREASE)
TOTAL INCREASE 1,642,723,297 1,923,721,843
(DECREASE) IN NET
ASSETS
NET ASSETS
BEGINNING OF PERIOD 6,086,423,654 4,162,701,811
END OF PERIOD $ 7,729,146,951 $ 6,086,423,654
(INCLUDING
UNDISTRIBUTED NET
INVESTMENT INCOME
OF $39,932,430 AND
$41,404,557,
RESPECTIVELY)
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
SHARES DOLLARS SHARES DOLLARS
SHARE TRANSACTIONS 45,510,758 $ 1,540,122,332 87,784,118 $ 2,599,782,601
INITIAL CLASS
SOLD
REINVESTED 7,138,844 225,301,906 11,121,040 308,942,467
REDEEMED (39,805,810) (1,324,008,293) (46,058,296) (1,356,539,313)
NET INCREASE 12,843,792 $ 441,415,945 52,846,862 $ 1,552,185,755
(DECREASE)
SERVICE CLASS A 55,002 $ 2,016,184 - $ -
SOLD
REINVESTED - - - -
REDEEMED (662) (24,231) - -
NET INCREASE 54,340 $ 1,991,953 - $ -
(DECREASE)
DISTRIBUTIONS $ 41,406,087 $ 11,769,237
INITIAL CLASS - NET
INVESTMENT INCOME
INITIAL CLASS - NET 183,895,819 297,173,230
REALIZED GAIN
TOTAL $ 225,301,906 $ 308,942,467
SERVICE CLASS - NET - -
INVESTMENT INCOME
SERVICE CLASS - NET - -
REALIZED GAIN
TOTAL $ - $ -
$ 225,301,906 $ 308,942,467
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
A SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
FINANCIAL HIGHLIGHTS - INITIAL CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1997 1996 1995 1994 1993
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, $ 31.14 $ 29.20 $ 21.69 $ 23.08 $ 19.76
BEGINNING OF PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET INVESTMENT .20 D .22 .08 .12 .12
INCOME
NET REALIZED AND 6.91 3.82 7.55 (.12) 3.64
UNREALIZED GAIN (LOSS)
TOTAL FROM 7.11 4.04 7.63 - 3.76
INVESTMENT
OPERATIONS
LESS DISTRIBUTIONS
FROM NET INVESTMENT (.21) (.08) (.12) (.12) (.11)
INCOME
FROM NET REALIZED (.94) (2.02) - (1.27) (.21)
GAIN
IN EXCESS OF NET - - - - (.12)
REALIZED GAIN
TOTAL DISTRIBUTIONS (1.15) (2.10) (.12) (1.39) (.44)
NET ASSET VALUE, END OF $ 37.10 $ 31.14 $ 29.20 $ 21.69 $ 23.08
PERIOD
TOTAL RETURN B, C 23.48% 14.71% 35.36% (.02)% 19.37%
RATIOS AND
SUPPLEMENTAL DATA
NET ASSETS, END OF $ 7,727,132 $ 6,086,424 $ 4,162,702 $ 2,141,869 $ 1,383,849
PERIOD (000 OMITTED)
RATIO OF EXPENSES TO .69% .69% .70% .70% .71%
AVERAGE NET ASSETS
RATIO OF EXPENSES TO .67% F .67% F .70% .69% F .71%
AVERAGE NET ASSETS
AFTER EXPENSE
REDUCTIONS
RATIO OF NET INVESTMENT .58% .81% .37% .69% .72%
INCOME TO AVERAGE
NET ASSETS
PORTFOLIO TURNOVER RATE 113% 81% 108% 122% 159%
AVERAGE COMMISSION $ .0428 $ .0416
RATE G
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEAR ENDED
DECEMBER 31,
SELECTED PER-SHARE DATA 1997 E
NET ASSET VALUE, $ 36.92
BEGINNING OF PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET INVESTMENT .03 D
INCOME
NET REALIZED AND .14
UNREALIZED GAIN (LOSS)
TOTAL FROM .17
INVESTMENT
OPERATIONS
NET ASSET VALUE, END OF $ 37.09
PERIOD
TOTAL RETURNS B, C .46%
RATIOS AND
SUPPLEMENTAL DATA
NET ASSETS, END OF $ 2,015
PERIOD (000 OMITTED)
RATIO OF EXPENSES TO .79% A
AVERAGE NET ASSETS
RATIO OF EXPENSES TO .77% A,
AVERAGE NET ASSETS F
AFTER EXPENSE
REDUCTIONS
RATIO OF NET INVESTMENT .70% A
INCOME TO AVERAGE
NET ASSETS
PORTFOLIO TURNOVER 113%
AVERAGE COMMISSION $ .0428
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 6 OF NOTES TO FINANCIAL
STATEMENTS).
D NET INVESTMENT INCOME PER SHARE HAS
BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3, 1997
(COMMENCEMENT OF SALE OF SERVICE
CLASS SHARES) TO DECEMBER 31, 1997.
F FMR OR THE FUND HAS ENTERED INTO
VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A
PORTION OF THE CLASS' EXPENSES (SEE NOTE
6 OF NOTES TO FINANCIAL STATEMENTS).
G FOR FISCAL YEARS BEGINNING ON OR AFTER
SEPTEMBER 1, 1995, A FUND IS REQUIRED
TO DISCLOSE ITS AVERAGE COMMISSION RATE
PER SHARE FOR SECURITY TRADES ON WHICH
COMMISSIONS ARE CHARGED. THIS AMOUNT
MAY VARY FROM PERIOD TO PERIOD AND
FUND TO FUND DEPENDING ON THE MIX OF
TRADES EXECUTED IN VARIOUS MARKETS
WHERE TRADING PRACTICES AND
COMMISSION RATE STRUCTURES MAY DIFFER.
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
DECEMBER 31, 1997 YEAR YEARS YEARS
VIP: OVERSEAS - "INITIAL CLASS" 11.56% 14.12% 9.62%
MSCI EAFE 2.01% 11.44% 6.27%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's returns to the performance of the Morgan
Stanley Capital International Europe, Australasia, Far East (EAFE)
Index - a market capitalization weighted, unmanaged index of over
1,000 foreign stocks.
UNDERSTANDING PERFORMANCE
Many markets around the globe offer the potential for
significant growth over time; however, investing in
foreign markets means assuming greater risks than
investing in the United States. Factors like changes in
a country's financial markets, its local political and
economic climate, and the fluctuating value of its
currency create these risks. For these reasons an
international fund's performance may be more
volatile than a fund that invests exclusively in the
United States.
3
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown.
If Fidelity had not reimbursed certain fund expenses, the fund's past
10 year total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money. Foreign investments involve greater risks and
potential rewards than U.S. investments. These risks include political
and economic uncertainties of foreign countries, as well as the risk
of currency fluctuations.
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19971231 19980109 104657 S00000000000001
VIP Overseas MS EAFE Index (Net)
00154 MS001
1987/12/31 10000.00 10000.00
1988/01/31 9657.75 10178.54
1988/02/29 9914.44 10857.01
1988/03/31 10363.64 11524.56
1988/04/30 10534.76 11692.04
1988/05/31 10342.25 11317.23
1988/06/30 10160.43 11018.93
1988/07/31 10085.56 11364.64
1988/08/31 9732.62 10625.73
1988/09/30 10149.73 11090.01
1988/10/31 10598.93 12038.90
1988/11/30 10791.44 12756.01
1988/12/31 10812.83 12827.14
1989/01/31 11133.69 13052.82
1989/02/28 11326.20 13119.91
1989/03/31 11316.00 12862.42
1989/04/30 11650.09 12981.71
1989/05/31 11219.01 12275.47
1989/06/30 11175.90 12068.82
1989/07/31 12221.28 13584.34
1989/08/31 12135.06 12973.40
1989/09/30 12889.46 13564.37
1989/10/31 12188.95 13019.38
1989/11/30 12846.35 13673.86
1989/12/31 13654.64 14178.39
1990/01/31 13471.43 13650.84
1990/02/28 13156.99 12698.08
1990/03/31 13654.30 11375.24
1990/04/30 13729.98 11284.97
1990/05/31 14627.29 12572.60
1990/06/30 14951.62 12461.86
1990/07/31 15708.39 12637.39
1990/08/31 14108.36 11410.20
1990/09/30 12767.80 9820.02
1990/10/31 13957.01 11350.17
1990/11/30 13524.57 10680.64
1990/12/31 13427.27 10853.67
1991/01/31 13557.00 11204.73
1991/02/28 14013.73 12405.86
1991/03/31 13603.85 11661.11
1991/04/30 13902.95 11775.62
1991/05/31 13936.19 11898.49
1991/06/30 13171.80 11024.18
1991/07/31 13825.41 11565.82
1991/08/31 13869.72 11330.94
1991/09/30 14434.70 11969.54
1991/10/31 14534.40 12139.22
1991/11/30 14013.73 11572.51
1991/12/31 14501.17 12170.15
1992/01/31 14678.42 11910.20
1992/02/29 14372.54 11483.91
1992/03/31 14080.60 10725.78
1992/04/30 14956.42 10776.77
1992/05/31 15607.68 11498.12
1992/06/30 15315.74 10952.73
1992/07/31 14338.85 10672.42
1992/08/31 14215.34 11341.80
1992/09/30 13642.68 11117.83
1992/10/31 12710.71 10534.65
1992/11/30 12643.34 10633.78
1992/12/31 12946.51 10688.78
1993/01/31 13317.05 10687.47
1993/02/28 13577.90 11010.31
1993/03/31 14519.85 11970.03
1993/04/30 15484.78 13106.01
1993/05/31 15817.91 13382.81
1993/06/30 15427.34 13174.01
1993/07/31 16036.16 13635.16
1993/08/31 16897.71 14371.23
1993/09/30 16805.81 14047.74
1993/10/31 17414.63 14480.66
1993/11/30 16679.45 13214.90
1993/12/31 17782.22 14169.11
1994/01/31 18942.43 15367.04
1994/02/28 18608.34 15324.48
1994/03/31 18146.60 14664.43
1994/04/30 18746.87 15286.63
1994/05/31 18515.99 15198.87
1994/06/30 18319.75 15413.66
1994/07/31 18804.58 15561.89
1994/08/31 19023.91 15930.32
1994/09/30 18527.54 15428.59
1994/10/31 18908.48 15942.36
1994/11/30 18192.77 15176.17
1994/12/31 18088.88 15271.20
1995/01/31 17338.54 14684.55
1995/02/28 17384.16 14642.40
1995/03/31 17919.42 15555.66
1995/04/30 18431.40 16140.69
1995/05/31 18687.39 15948.29
1995/06/30 18861.93 15668.61
1995/07/31 19699.72 16644.07
1995/08/31 19152.83 16009.16
1995/09/30 19432.10 16321.82
1995/10/31 19048.11 15883.09
1995/11/30 19269.19 16325.02
1995/12/31 19850.99 16982.76
1996/01/31 20223.34 17052.48
1996/02/29 20267.88 17110.12
1996/03/31 20577.86 17473.47
1996/04/30 21150.13 17981.49
1996/05/31 21162.06 17650.59
1996/06/30 21317.05 17749.94
1996/07/31 20685.16 17231.15
1996/08/31 20840.15 17268.91
1996/09/30 21448.19 17727.67
1996/10/31 21233.59 17546.26
1996/11/30 22342.36 18244.40
1996/12/31 22461.58 18009.70
1997/01/31 22461.58 17382.97
1997/02/28 22981.99 17671.52
1997/03/31 23190.80 17738.68
1997/04/30 23386.56 17836.24
1997/05/31 24848.22 19000.41
1997/06/30 26153.27 20051.13
1997/07/31 27040.70 20378.37
1997/08/31 25004.82 18859.17
1997/09/30 26844.95 19918.49
1997/10/31 24965.67 18392.53
1997/11/30 24848.22 18208.61
1997/12/31 25057.02 18370.85
IMATRL PRASUN SHR__CHT 19971231 19980109 104700 R00000000000123
Let's say hypothetically that $10,000 was invested in VIP: Overseas
Portfolio on December 31, 1987. As the chart shows, by December 31,
1997, the value of the investment would have grown to $25,057 - a
150.57% 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 $18,371 over the same period - a 83.71%
increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
ALCATEL ALSTHOM COMPAGNIE GENERALE D'ELECTRICITE SA 2.3
TOTAL SA CLASS B 2.2
RHONE POULENC SA CLASS A 2.1
NOVARTIS AG (REG.) 2.1
VOLVO AB CLASS B 1.7
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
FINANCE 18.2
HEALTH 10.0
DURABLES 9.1
BASIC INDUSTRIES 8.4
UTILITIES 8.2
TOP FIVE COUNTRIES AS OF DECEMBER 31, 1997
(EXCLUDING CASH EQUIVALENTS) % OF FUND'S
INVESTMENTS
JAPAN 18.0
UNITED KINGDOM 16.3
FRANCE 12.5
NETHERLANDS 8.1
SWEDEN 6.3
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
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1fee.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
DECEMBER 31, 1997 YEAR YEARS YEARS
VIP: OVERSEAS - SERVICE CLASS 11.56% 14.12% 9.62%
MSCI EAFE 2.01% 11.44% 6.27%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's returns to the performance of the Morgan
Stanley Capital International Europe, Australasia, Far East (EAFE)
Index - a market capitalization weighted, unmanaged index of over
1,000 foreign stocks.
UNDERSTANDING PERFORMANCE
Many markets around the globe offer the potential for
significant growth over time; however, investing in
foreign markets means assuming greater risks than
investing in the United States. Factors like changes in
a country's financial markets, its local political and
economic climate, and the fluctuating value of its
currency create these risks. For these reasons an
international fund's performance may be more
volatile than a fund that invests exclusively in the
United States.
3
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 10
year total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money. Foreign investments involve greater risks and
potential rewards than U.S. investments. These risks include political
and economic uncertainties of foreign countries, as well as the risk
of currency fluctuations.
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19971231 19980109 104657 S00000000000001
VIP Overseas MS EAFE Index (Net)
00154 MS001
1987/12/31 10000.00 10000.00
1988/01/31 9657.75 10178.54
1988/02/29 9914.44 10857.01
1988/03/31 10363.64 11524.56
1988/04/30 10534.76 11692.04
1988/05/31 10342.25 11317.23
1988/06/30 10160.43 11018.93
1988/07/31 10085.56 11364.64
1988/08/31 9732.62 10625.73
1988/09/30 10149.73 11090.01
1988/10/31 10598.93 12038.90
1988/11/30 10791.44 12756.01
1988/12/31 10812.83 12827.14
1989/01/31 11133.69 13052.82
1989/02/28 11326.20 13119.91
1989/03/31 11316.00 12862.42
1989/04/30 11650.09 12981.71
1989/05/31 11219.01 12275.47
1989/06/30 11175.90 12068.82
1989/07/31 12221.28 13584.34
1989/08/31 12135.06 12973.40
1989/09/30 12889.46 13564.37
1989/10/31 12188.95 13019.38
1989/11/30 12846.35 13673.86
1989/12/31 13654.64 14178.39
1990/01/31 13471.43 13650.84
1990/02/28 13156.99 12698.08
1990/03/31 13654.30 11375.24
1990/04/30 13729.98 11284.97
1990/05/31 14627.29 12572.60
1990/06/30 14951.62 12461.86
1990/07/31 15708.39 12637.39
1990/08/31 14108.36 11410.20
1990/09/30 12767.80 9820.02
1990/10/31 13957.01 11350.17
1990/11/30 13524.57 10680.64
1990/12/31 13427.27 10853.67
1991/01/31 13557.00 11204.73
1991/02/28 14013.73 12405.86
1991/03/31 13603.85 11661.11
1991/04/30 13902.95 11775.62
1991/05/31 13936.19 11898.49
1991/06/30 13171.80 11024.18
1991/07/31 13825.41 11565.82
1991/08/31 13869.72 11330.94
1991/09/30 14434.70 11969.54
1991/10/31 14534.40 12139.22
1991/11/30 14013.73 11572.51
1991/12/31 14501.17 12170.15
1992/01/31 14678.42 11910.20
1992/02/29 14372.54 11483.91
1992/03/31 14080.60 10725.78
1992/04/30 14956.42 10776.77
1992/05/31 15607.68 11498.12
1992/06/30 15315.74 10952.73
1992/07/31 14338.85 10672.42
1992/08/31 14215.34 11341.80
1992/09/30 13642.68 11117.83
1992/10/31 12710.71 10534.65
1992/11/30 12643.34 10633.78
1992/12/31 12946.51 10688.78
1993/01/31 13317.05 10687.47
1993/02/28 13577.90 11010.31
1993/03/31 14519.85 11970.03
1993/04/30 15484.78 13106.01
1993/05/31 15817.91 13382.81
1993/06/30 15427.34 13174.01
1993/07/31 16036.16 13635.16
1993/08/31 16897.71 14371.23
1993/09/30 16805.81 14047.74
1993/10/31 17414.63 14480.66
1993/11/30 16679.45 13214.90
1993/12/31 17782.22 14169.11
1994/01/31 18942.43 15367.04
1994/02/28 18608.34 15324.48
1994/03/31 18146.60 14664.43
1994/04/30 18746.87 15286.63
1994/05/31 18515.99 15198.87
1994/06/30 18319.75 15413.66
1994/07/31 18804.58 15561.89
1994/08/31 19023.91 15930.32
1994/09/30 18527.54 15428.59
1994/10/31 18908.48 15942.36
1994/11/30 18192.77 15176.17
1994/12/31 18088.88 15271.20
1995/01/31 17338.54 14684.55
1995/02/28 17384.16 14642.40
1995/03/31 17919.42 15555.66
1995/04/30 18431.40 16140.69
1995/05/31 18687.39 15948.29
1995/06/30 18861.93 15668.61
1995/07/31 19699.72 16644.07
1995/08/31 19152.83 16009.16
1995/09/30 19432.10 16321.82
1995/10/31 19048.11 15883.09
1995/11/30 19269.19 16325.02
1995/12/31 19850.99 16982.76
1996/01/31 20223.34 17052.48
1996/02/29 20267.88 17110.12
1996/03/31 20577.86 17473.47
1996/04/30 21150.13 17981.49
1996/05/31 21162.06 17650.59
1996/06/30 21317.05 17749.94
1996/07/31 20685.16 17231.15
1996/08/31 20840.15 17268.91
1996/09/30 21448.19 17727.67
1996/10/31 21233.59 17546.26
1996/11/30 22342.36 18244.40
1996/12/31 22461.58 18009.70
1997/01/31 22461.58 17382.97
1997/02/28 22981.99 17671.52
1997/03/31 23190.80 17738.68
1997/04/30 23386.56 17836.24
1997/05/31 24848.22 19000.41
1997/06/30 26153.27 20051.13
1997/07/31 27040.70 20378.37
1997/08/31 25004.82 18859.17
1997/09/30 26844.95 19918.49
1997/10/31 24965.67 18392.53
1997/11/30 24848.22 18208.61
1997/12/31 25057.02 18370.85
IMATRL PRASUN SHR__CHT 19971231 19980109 104700 R00000000000123
Let's say hypothetically that $10,000 was invested in VIP: Overseas
Portfolio on December 31, 1987. As the chart shows, by December 31,
1997, the value of the investment would have grown to $25,057 - a
150.57% 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 $18,371 over the same period - a 83.71%
increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
ALCATEL ALSTHOM COMPAGNIE GENERALE D'ELECTRICITE SA 2.3
TOTAL SA CLASS B 2.2
RHONE POULENC SA CLASS A 2.1
NOVARTIS AG (REG.) 2.1
VOLVO AB CLASS B 1.7
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
FINANCE 18.2
HEALTH 10.0
DURABLES 9.1
BASIC INDUSTRIES 8.4
UTILITIES 8.2
TOP FIVE COUNTRIES AS OF DECEMBER 31, 1997
(EXCLUDING CASH EQUIVALENTS) % OF FUND'S
INVESTMENTS
JAPAN 18.0
UNITED KINGDOM 16.3
FRANCE 12.5
NETHERLANDS 8.1
SWEDEN 6.3
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 DID THE FUND PERFORM RELATIVE TO ITS BENCHMARK, RICK?
A. Quite well. For the 12 months that ended December 31, 1997, the
fund topped the 2.01% return of the Morgan Stanley Capital
International Europe, Australasia, Far East (EAFE) Index.
Q. WHAT FACTORS CONTRIBUTED MOST TO THE FUND'S PERFORMANCE?
A. The fund's European financial-related stocks performed very well.
Additionally, substantial exposure to the technology, energy and
health care sectors helped, as these groups registered strong
performances. Another plus was the fund's minimal exposure - relative
to the EAFE - to the poorly performing Japanese market, combined with
better-than-market average returns from export-oriented Japanese auto
and technology positions. All that being said, individual stock
picking continued to have the biggest influence on performance. In
general, the fund's largest 20 positions performed well.
Q. YOU MENTIONED FINANCE-RELATED STOCKS AS BEING POSITIVE CONTRIBUTORS
TO PERFORMANCE. WHAT DROVE THIS GROUP?
A. While I don't spend a lot of time analyzing interest rates,
inflation levels or economic conditions, low interest rates throughout
Europe were beneficial to many of the fund's top finance stocks. More
importantly, though, many of these companies fit the profile I was
looking for - management was focused on delivering results to
shareholders; the company was generating strong earnings growth; and
each had healthy balance sheets. Examples included Switzerland's
Credit Suisse and Lloyds Bank in the United Kingdom. Both of these top
positions performed quite well.
Q. YOU MENTIONED HEALTH CARE AND TECHNOLOGY STOCKS AS WELL . . .
A. In terms of the health care group, the fund's
pharmaceutical-related positions performed well. Because of strong
product development, many drug companies generated good cash flows,
enabling some to pay dividends. Two of the fund's top five positions
at the end of the period - Novartis and Rhone Poulenc - were examples.
Novartis, a company that was created by the merger of two substantial
Swiss drug firms, implemented favorable cost-cutting measures during
the period, while French-based Rhone Poulenc engaged in a major
restructuring effort designed to focus on aspects of its business with
the most growth potential. For the most part, the fund's technology
exposure also helped performance. Top positions such as Philips
Electronics and Alcatel both enjoyed solid sales and earnings growth.
Some of the fund's Japanese tech stocks - such as Sony and Canon -
also performed well, as they benefited from strong product development
in the areas of camcorders, cameras, TVs and VCRs.
Q. ASIDE FROM SOME OF THE POSITIONS YOU'VE MENTIONED, WHICH ONES
PERFORMED WELL? WHICH WERE DISAPPOINTMENTS?
A. Some of the fund's oil-related positions performed well, notably
Total and Nationale Elf Aquitaine. Each company thrived due to
shareholder-friendly management, healthy cash flows and reduced costs.
In terms of disappointments, Volkswagen underwent a significant
capital-raising exercise that didn't seem to correlate with the best
interests of its shareholders. Another area of discomfort was the
Japanese finance sector. Many Japanese brokerage firms performed
poorly, mostly due to the weak local market and low trading volumes.
Q. WHAT'S YOUR TAKE ON THE RECENT VOLATILITY WE'VE SEEN, PARTICULARLY
THE LATE-OCTOBER CORRECTION IN SOUTHEAST ASIA?
A. Strange as it may sound, I actually enjoy volatility. Market
fluctuations can be a bit frustrating on a day-to-day basis, but
volatility can present great buying opportunities for investors like
myself who follow a value-oriented discipline. When I see that stocks
are down, I generally look to see whether a buying opportunity is
present. On the other hand, when stocks are up significantly, it
creates an opportunity to sell some of the fund's more expensive
holdings and to buy stocks that may be less in favor but may offer
potential. So, while the fund's share price fluctuation may be
frustrating for shareholders to watch, I think it helps overall
performance to be able to find cheap stocks.
Q. WHAT'S YOUR OUTLOOK?
A. I can't emphasize enough how important researching individual
stocks is to the fund's performance, and Fidelity has an abundance of
talent and resources in place to try to uncover opportunities. My job
going forward will be the same as it always is: To find the best
possible investments for the fund's shareholders.
FUND FACTS
GOAL: to increase the value of the fund's shares
over the long term by investing in stocks with
above-average growth potential
START DATE: October 9, 1986
SIZE: as of December 31, 1997, more than $7.7
billion
MANAGER: Jennifer Uhrig, since January 1997;
joined Fidelity in 1987
3
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
INVESTMENTS DECEMBER 31, 1997
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 89.5%
SHARES VALUE (NOTE 1)
ARGENTINA - 0.4%
Telecom Argentina Class B
sponsored ADR 102,500 $ 3,664,375
Telefonica de Argentina SA
sponsored ADR 36,600 1,363,350
YPF Sociedad Anonima sponsored
ADR representing Class D shares 95,700 3,271,744
8,299,469
AUSTRALIA - 2.4%
Australia & New Zealand
Banking Group Ltd. 1,246,100 8,225,681
Brambles Industries Ltd. 200,200 3,968,555
Broken Hill Proprietary Co. Ltd. (The) 318,100 2,950,934
CSR Ltd. 497,600 1,684,476
Coles Myer Ltd. 700,400 3,360,428
Colonial Ltd. 682,200 1,945,211
Colonial Ltd. warrants 2/2/98 (a) 682,200 31,976
Commonwealth Bank of Australia (c) 201,300 2,306,415
Leighton Holdings Ltd. 405,800 1,415,982
National Australia Bank Ltd. 294,300 4,105,759
National Mutual Holdings Ltd. 969,807 1,839,737
News Corp. Ltd. 346,500 1,910,591
QNI Ltd. 1,054,780 700,395
Western Mining Holdings Ltd. 1,550,939 5,401,688
Westpac Banking Corp. 143,800 918,913
Woodside Petroleum Ltd. 242,000 1,704,604
Woolworths Ltd. 1,211,500 4,045,962
46,517,307
AUSTRIA - 0.1%
OMV AG 7,600 1,051,176
Voest-Alpine Stahl AG 39,000 1,501,126
2,552,302
BRAZIL - 1.5%
Centrais Electricas Brasileiras SA 70,550,000 3,603,200
Compania Energertica Minas Gerais 168,444,000 7,318,538
Petrobras PN (Pfd. Reg.) 30,358,000 7,099,537
Telebras sponsored ADR 79,600 9,268,425
Telesp PN (Pfd. Reg.) 4,499,000 1,197,220
28,486,920
CANADA - 3.2%
Abitibi-Consolidated, Inc. 88,300 1,232,265
Alcan Aluminium Ltd. 269,700 7,433,234
Alliance Forest Products, Inc. (a) 78,800 1,295,373
Alliance Forest Products, Inc. (a)(c) 83,700 1,375,922
BCE, Inc. 258,200 8,606,366
Bro-X Minerals Ltd. (a) 42,700 -
Canadian Pacific Ltd. 28,100 756,777
Canadian National Railway Co. 15,500 729,705
Canadian Natural Resources Ltd. (a) 159,900 3,422,713
Cinar Films, Inc. Class B (sub-vtg.) (a) 23,400 913,378
Cominco Ltd. 305,800 4,674,009
Domtar, Inc. 518,800 3,610,968
Greenstone Resources Ltd. (a) 141,300 672,128
Hudson's Bay Co. Ord. 73,600 1,639,789
Inco Ltd. 155,000 2,634,745
Leitch Technology Corp. (a) 68,000 2,045,399
National Bank of Canada 376,000 6,207,268
Noranda, Inc. 320,600 5,516,953
Renaissance Energy Ltd. (a) 153,600 3,169,669
Rio Alto Exploration Ltd. (a) 137,900 1,157,567
St Laurent Paperboard, Inc. (a)(c) 155,900 2,006,617
Seagram Co. Ltd. 57,300 1,853,818
Teleglobe, Inc. 25,000 760,729
61,715,392
SHARES VALUE (NOTE 1)
DENMARK - 1.0%
Den Danske Bank Group AS 55,900 $ 7,450,722
International Service Systems AS,
Series B (a) 96,600 3,553,804
Jyske Bank AS (Reg.) 6,800 828,917
Novo-Nordisk AS Class B 30,900 4,420,794
Sophus Berendsen AS, Series B 11,400 1,880,611
Unidanmark AS Class A 21,400 1,571,439
19,706,287
FINLAND - 2.2%
Cultor OY, Series 1 57,600 3,129,688
Enso OY Class R 614,800 4,762,480
Huhtamaki Ord. 144,500 5,968,115
Metsa-Serla Ltd. Class B 738,500 5,761,376
Nokia Corp. AB, Series A 52,000 3,694,036
Outokumpu OY Class A 156,800 1,914,055
Pohjola Class B 124,900 4,631,276
UPM-Kymmene Corp. 351,300 7,028,966
Valmet OY 382,300 5,277,266
42,167,258
FRANCE - 12.5%
Accor SA 9,900 1,839,147
Alcatel Alsthom Compagnie Generale
d'Electricite SA 342,250 43,466,631
Axa SA 114,726 8,869,909
Axime SA Ex Segin (a) 45,100 5,810,177
Cap Gemini Sogeti SA 98,500 8,070,017
Carrefour Supermarche SA 7,800 4,066,075
Coflexip sponsored ADR 5,000 279,688
Compagnie de Saint Gobain 15,900 2,256,910
Credit Commercial de France Ord. 81,800 5,601,810
Eramet SA 98,162 3,715,603
Elf Sanofi SA 52,900 5,884,121
GAN (Groupe Des Assur Natl.) (a) 130,000 3,179,049
Lafarge SA 40,020 2,623,707
Lagardere S.C.A. (Reg.) 104,100 3,439,180
Michelin SA (Compagnie Generale
des Etablissements) Class B 125,919 6,334,101
Nationale Elf Aquitaine 133,800 15,549,099
Pechiney SA Class A 310,284 12,239,309
Rhone Poulenc SA Class A 906,172 40,558,475
Scor SA 37,400 1,786,954
Societe Generale Class A 50,000 6,806,674
Total SA Class B 384,114 41,768,850
Usinor Sacilor 503,000 7,256,695
Union Assurancesfederale SA 32,500 4,262,472
Valeo SA 74,700 5,062,263
240,726,916
GERMANY - 3.2%
Allianz Aktiengesellschaft Holdings (Reg.) 30,200 7,791,382
BASF AG 114,400 4,026,422
Bayer AG 168,100 6,224,887
(BMW) Muenchen Bayerische
Motorenwerke AG 2,200 1,639,144
BHF Bank (Bank Berlin Hand) 233,900 6,762,747
Continental Gummi-Werke AG 134,300 2,987,680
Daimler-Benz AG Ord. 151,100 10,585,822
Hoechst AG Ord. 112,100 3,926,772
Lufthansa Deutsche AG (Reg.) 158,900 3,034,871
Mannesmann AG Ord. 16,300 8,292,744
Veba AG Ord. 98,100 6,676,364
61,948,835
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
HONG KONG - 0.6%
China Light & Power Co. Ltd. 374,000 $ 2,075,686
China Telecom (Hong Kong) Ltd. 2,126,000 3,649,526
Great Eagle Holdings Ltd. 546,000 764,617
Great Eagle Holdings Ltd.
warrants 11/30/98 (a) 109,200 14,094
Hutchison Whampoa Ltd. Ord. 240,000 1,505,460
National Mutual Asia Ltd. 1,040,000 1,033,584
Peregrine Investments Holdings Ltd. 1,200,000 851,855
Vtech Holdings Ltd. 346,000 1,020,432
10,915,254
INDIA - 0.1%
Mahindra & Mahindra Ltd. GDR 66,500 665,000
State Bank of India GDR (Reg.) 38,000 674,500
1,339,500
IRELAND - 1.4%
Bank of Ireland, Inc. 813,900 12,497,190
CRH PLC 145,682 1,705,568
Elan Corp. PLC ADR (a) 16,000 819,000
Independent Newspapers PLC 889,749 4,690,757
Smurfit (Jefferson) Group PLC 2,287,900 6,461,611
26,174,126
ITALY - 1.3%
Credito Italiano Ord. 1,078,700 3,336,618
Eni Spa 1,638,600 9,357,075
Istituto Nazionale Delle
Assicurazioni Spa 1,084,100 2,198,779
Telecom Italia Mobile Spa 1,942,000 8,959,950
Telecom Italia Spa 211,110 1,350,397
25,202,819
JAPAN - 17.5%
Acom Co. Ltd. 106,900 5,894,543
Amway Japan Ltd. 171,200 3,277,810
Aoyama Trading Co. Ord. 3,300 58,886
Asahi Breweries Ltd. 50,000 727,551
Bridgestone Corp. 168,000 3,641,126
Canon, Inc. 326,000 7,589,814
Circle K Japan Co. Ltd. 13,000 622,248
Citizen Watch Co. Ltd. Ord. 472,000 3,162,933
Dai-Ichi Kangyo Bank 124,000 731,227
Daiwa House Industry Co. Ltd. 113,000 597,128
Daiwa Securities Co. Ltd. 774,000 2,667,433
Denso Corp. 106,000 1,907,716
Denny's Japan Co. Ltd. 79,000 1,742,447
Daito Trust Construction Co. 79,500 485,250
Fuji Bank Ltd. 498,000 2,013,739
Fuji International Trust unit
sponsored ADR (c) 100 863,365
Fuji Machine Manufacturing Co.
Ltd. Ord. 30,000 723,722
Fuji Photo Film Co. Ltd. 488,000 18,686,579
Fujitsu Ltd. 339,000 3,634,693
Hitachi Maxell Ltd. 326,000 5,742,294
Honda Motor Co. Ltd. 442,000 16,214,283
Ibiden Co. Ltd. 157,000 1,899,751
Ito-Yokado Co. Ltd. 103,000 5,245,644
Jafco Co. Ltd. 46,000 1,638,139
Jusco Co. Ltd. 119,000 1,676,891
Kao Corp. 301,000 4,333,755
Komatsu Ltd. Ord. 988,000 4,956,079
Kyocera Corp. 58,000 2,629,600
Long Term Credit Bank of Japan Ltd. (The) 2,009,000 3,215,631
SHARES VALUE (NOTE 1)
Matsushita Electric Industrial Co. Ltd. 1,023,000 $ 14,964,044
Matsushita Communication
Industrial Co. Ltd. 92,000 2,451,924
Matsushita Electric Works Co. Ltd. 331,000 2,864,484
Minebea Co. Ltd. 899,000 9,638,905
Minolta Camera Co. Ltd. 868,000 4,872,633
Mitsubishi Electric Co. Ord. 586,000 1,498,939
Mitsubishi Estate Co. Ltd. 580,000 6,307,486
Mitsubishi Heavy Industries Ltd. 379,000 1,578,985
Mitsubishi Trust & Banking Corp. 100,000 1,003,255
Mitsui Fudosan Co. Ltd. 380,000 3,666,858
Nichiei Co. Ltd. 31,400 3,342,600
Nikko Securities Co. Ltd. 570,000 1,510,396
Nintendo Co. Ltd. Ord. 174,000 17,056,864
Nippon Telegraph &
Telephone Corp. Ord. 997 8,551,714
Nitto Denko Corp. 69,000 1,188,972
Nomura Securities Co. Ltd. 805,000 10,727,169
Omron Corp. 539,000 8,420,908
Orix Corp. 143,900 10,028,643
Onward Kashiyama & Co. Ltd. 233,000 2,694,467
Ricoh Co. Ltd. Ord. 219,000 2,717,059
Rohm Co. Ltd. 106,000 10,796,860
Sakura Bank Ltd. 2,796,000 7,987,042
Sankyo Co. Ltd. 345,000 7,794,371
Sekisui House Ltd. 107,000 687,521
Sekisui Chemical Co. Ltd. 6,000 30,465
Shinko Electric Industries Co. Ltd. 44,600 1,492,644
Shin-Etsu Chemical Co. Ltd. 150,000 2,860,425
Sony Corp. 182,600 16,221,789
Shohkoh Fund & Co. Ltd. 3,600 1,097,300
Sony Music Entertainment Japan, Inc. 103,300 3,797,358
Sumitomo Realty & Development Co. Ltd. 959,000 5,508,329
TDK Corp. 102,000 7,686,617
Takeda Chemical Industries Ltd. 949,000 27,036,416
Takefuji Corp. 55,500 2,546,008
Terumo Corp. 125,000 1,838,024
THK Co. Ltd. 455,800 4,433,207
Tokio Marine & Fire Insurance Co.
Ltd. (The) 312,000 3,536,358
Toyota Motor Corp. 96,000 2,749,684
Toyo Trust & Banking Co. Ltd. 33,000 194,601
Tokyo Electron Ltd. 53,000 1,696,649
Uni Charm Corp. Ord. 80,000 2,830,557
Uny Co. Ltd. 105,000 1,439,403
World Co. Ltd. 35,300 783,994
Xebio Co. Ltd. 37,200 296,289
Yasuda Trust & Banking 652,000 649,129
337,657,622
MALAYSIA - 0.1%
Malayan Banking BHD 28,000 81,452
Oriental Holdings BHD 1,027,000 1,258,468
1,339,920
MEXICO - 1.3%
BANACCI SA de CV Class B (a) 616,000 1,843,420
DESC (Sociedad de Fomento
Industrial SA) Class B 188,000 1,796,134
Grupo Carso SA de CV Class A-1 153,000 1,023,792
Grupo Financiero Bancomer Class B (a) 13,455,000 8,669,888
Grupo Financiero Inbursa SA Class B 237,000 969,145
Grupo Mexico SA Class L 80,000 252,788
Industrias Penoles SA 54,000 244,238
Telefonos de Mexico SA sponsored ADR
representing Ord. Class L shares 161,600 9,059,700
Tubos De Acero De Mexico ADR (a) 91,700 1,983,013
25,842,118
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NETHERLANDS - 8.1%
Ahold NV 355,484 $ 9,279,597
AKZO Nobel NV 139,900 24,134,735
Beter Bed Holding NV 87,200 1,682,467
Benckiser NV Class B 96,600 3,999,378
ING Groep NV 367,617 15,491,977
KLM Royal Dutch Air Lines NV 66,706 2,468,764
Koninklijke Hoogovens NV 143,600 5,888,557
Koninklijke KNP BT NV 96,300 2,219,201
Nutreco Holding NV (a) 111,500 2,541,969
Philips Electronics NV (Bearer) 454,100 27,248,241
Royal Dutch Petroleum Co. Ord. 445,360 24,460,187
Unilever NV Ord. 366,200 22,588,206
Vendex International NV (c) 121,600 6,714,552
VNU Ord. 251,500 7,098,840
155,816,671
NETHERLANDS ANTILLES - 0.1%
Schlumberger Ltd. 32,700 2,632,350
NEW ZEALAND - 0.2%
Air New Zealand Ltd. Class B 552,200 1,106,953
Lion Nathan Ltd. 572,000 1,282,912
Lion Nathan Ltd. (Astl) 59,200 134,887
Sky Network Television Ltd. (a) 375,600 565,248
3,090,000
NORWAY - 0.5%
Den Norske Bank AS
Class A Free shares 894,400 4,221,500
Elkem ASA 122,100 1,622,921
NCL Holdings AS (a) 1,215,800 4,353,332
NCL Holdings AS rights 12/23/97 (a) 1,215,800 7,328
10,205,081
PERU - 0.1%
Compania de Minas Buenaventura SA
Class B sponsored ADR 80,200 1,283,200
PORTUGAL - 0.3%
BPI-SGPS SA (Reg.) 161,100 3,918,057
Electricidade de Portugal SA 117,300 2,221,688
6,139,745
RUSSIA - 0.1%
Vimpel Communications
sponsored ADR (a) 49,300 1,756,313
SINGAPORE - 0.1%
Kim Engineering Holdings Ltd. 2,683,000 877,058
Singapore International Airlines Ltd. 98,000 640,713
1,517,771
SOUTH AFRICA - 0.3%
Gencor Ltd. (Reg.) 164,160 271,548
JCI Ltd. 187,500 838,000
Sasol Ltd. 557,800 5,845,639
6,955,187
SPAIN - 1.5%
Acerinox SA (Reg.) 14,900 2,199,442
Banco Bilbao Vizcaya SA Ord. (Reg.) 344,400 11,139,197
Mapfre Vida SA 26,000 914,286
Telefonica de Espana SA Ord. 511,500 15,526,144
29,779,069
SHARES VALUE (NOTE 1)
SWEDEN - 6.3%
ABB AB:
Series A 297,900 $ 3,529,398
Series B 153,000 1,803,040
Astra AB Class A Free shares 1,160,900 20,118,697
Assi Doman AB Free shares 63,600 1,611,222
Electrolux AB 87,200 6,055,785
Ericsson (L.M.) Telephone Co. Class B 75,000 2,821,681
Esselte AB Class B Free shares 90,900 1,844,557
Granges AB (Reg.) 48,600 762,620
IBS (International Business Systems) AB
Class B Free shares (a) 256,800 2,977,729
Investor AB Class B Free shares 82,000 3,999,698
Nordbanken Holding AB 1,749,300 9,899,493
SKF AB Ord. 117,100 2,494,284
Skandia Foersaekrings AB 168,700 7,962,863
Svenska Handelsbanken 171,100 5,919,632
Swedish Match Co. 4,756,500 15,886,774
Volvo AB Class B 1,221,200 32,784,512
120,471,985
SWITZERLAND - 5.3%
Ciba Specialty Chemicals AG 18,400 2,189,877
Credit Suisse Group (Reg.) 151,700 23,450,205
Julius Baer Holding AG 5,603 10,385,862
Nestle SA (Reg.) 9,730 14,568,379
Novartis AG (Reg.) 25,000 40,526,676
Sulzer AG (Reg.) 3,469 2,197,192
SGS Societe Generale de Surveillance
Holding SA (Bearer) 800 1,532,148
Swiss Bank Corp. (Reg.) 5,400 1,676,881
Union Bank of Switzeland Ord. (Bearer) 3,500 5,056,088
101,583,308
TURKEY - 0.1%
Tupras-Turkiye Petrol Rafinerileri AS (a) 19,623,000 2,222,236
UNITED KINGDOM - 16.3%
Allied Domecq PLC 6,200 53,524
BAT Industries PLC Ord. 1,217,300 11,110,480
BBA Group PLC 282,372 1,888,744
Barclays PLC Ord. 582,100 15,516,778
Barratt Developments PLC 847,125 3,237,881
Billiton PLC 820,800 2,109,538
Boots Co. PLC Class L (The) 161,900 2,337,891
British Aerospace PLC 317,625 9,079,033
British Petroleum PLC Ord. 981,356 12,934,272
British Land Co. PLC (The) Ord. 176,200 1,930,425
British Telecommunications PLC Ord. 850,300 6,703,159
Cable & Wireless PLC Ord. 348,900 3,075,248
Caradon PLC 3,680,180 10,731,681
Cookson Group PLC 3,846,100 12,482,806
Courtaulds Textiles PLC 237,900 1,399,227
Devro PLC 118,100 733,528
Diageo PLC 916,791 8,413,001
Dorling Kindersley Holdings PLC Class L 175,400 621,289
DR Solomons Group PLC
sponsored ADR (a) 147,000 4,740,750
English China Clay PLC 191,400 845,088
Gallaher Group PLC 1,449,000 7,722,681
Glaxo Wellcome PLC 786,600 18,661,298
Granada Group PLC 268,000 4,106,229
HSBC Holdings PLC 345,100 8,539,655
HSBC Holdings PLC Ord. 56,500 1,452,107
Hays PLC 94,200 1,260,179
Inchcape PLC Ord. 952,800 2,558,673
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UNITED KINGDOM - CONTINUED
Ladbroke Group PLC Ord. 1,328,800 $ 5,779,483
Lloyds TSB Group PLC 1,896,495 24,589,622
National Grid Co. PLC 790,400 3,763,312
National Westminster Bank PLC Ord. 125,000 2,084,088
Pearson PLC 397,300 5,177,504
Perpetual PLC 19,600 904,148
Pilkington PLC Ord. 729,300 1,531,940
Rentokil Initial PLC 5,387,000 23,518,969
Royal & Sun Alliance Insurance
Group PLC 464,908 4,695,187
Scholl PLC 354,800 1,508,095
Securicor Group PLC 1,138,100 5,353,181
Shell Transport & Trading Co. PLC (Reg.) 2,177,300 15,783,248
Siebe PLC 102,300 2,014,044
SmithKline Beecham PLC Ord. 2,463,742 25,287,663
SIG PLC 38,800 162,364
Somerfield PLC 1,044,600 3,614,055
Tarmac 554,200 1,040,871
Thames Water PLC Ord. 144,800 2,162,528
Tomkins PLC Ord. 179,800 853,115
Unigate PLC 333,200 3,299,171
Unilever PLC Ord. 1,107,200 9,503,624
Vodafone Group PLC 2,109,244 15,289,910
WPP Group PLC 252,900 1,129,129
313,290,416
UNITED STATES OF AMERICA - 1.4%
Alumax, Inc. (a) 117,900 4,008,600
Aluminum Co. of America 95,400 6,713,775
Continental Homes Holding Corp. 49,600 1,996,400
D.R. Horton, Inc. 319,200 5,546,100
Kaiser Aluminum Corp. (a) 8,200 72,263
MCI Communications Corp. 154,300 6,605,969
Newmont Mining Corp. 46,000 1,351,250
26,294,357
TOTAL COMMON STOCKS
(Cost $1,474,140,020) 1,723,629,734
PREFERRED STOCKS - 2.3%
CONVERTIBLE PREFERRED STOCKS - 0.4%
AUSTRALIA - 0.2%
National Australia Bank Ltd. 7.875% 111,700 3,176,469
JAPAN - 0.0%
AJL participating trust $1.44 73,000 803,000
UNITED STATES OF AMERICA - 0.2%
WBK Trust $3.135 STRYPES 86,400 2,889,000
TOTAL CONVERTIBLE PREFERRED STOCKS 6,868,469
NONCONVERTIBLE PREFERRED STOCKS - 1.9%
AUSTRALIA - 0.1%
Sydney Harbour Casino Holdings Ltd. (a) 1,517,100 1,437,005
GERMANY - 0.5%
Boss (Hugo) AG 650 831,248
SAP AG (Systeme
Anwendungen Produkte) 21,700 6,899,440
Wella AG 2,635 2,008,666
9,739,354
PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
ITALY - 1.3%
Telecom Italia Mobile Spa de Risp 3,961,100 $ 11,206,750
Telecom Italia Spa 3,272,325 14,378,212
25,584,962
TOTAL NONCONVERTIBLE PREFERRED STOCKS 36,761,321
TOTAL PREFERRED STOCKS
(Cost $27,030,220) 43,629,790
CLOSED-END INVESTMENT COMPANIES - 0.5%
EMERGING MARKETS - 0.2%
TCW/DW Emerging Markets
Opportunities Trust (SBI) 82,500 1,087,969
Templeton Dragon Fund, Inc. 183,500 1,972,625
3,060,594
GERMANY - 0.3%
Emerging Germany Fund, Inc. 70,600 794,250
New Germany Fund, Inc. (The) 338,800 4,573,800
5,368,050
MULTI-NATIONAL - 0.0%
Morgan Stanley Asia-Pacific Fund, Inc. 82,900 616,569
TOTAL CLOSED-END INVESTMENT COMPANIES
(Cost $10,484,356) 9,045,213
GOVERNMENT OBLIGATIONS - 0.0%
PRINCIPAL
AMOUNT
U.S. Treasury Bills, yields at date of
purchase 5.18% to 5.14%,
1/8/98 (d) (Cost $899,226) $ 900,000 899,226
CASH EQUIVALENTS - 7.7%
SHARES
Taxable Central Cash Fund (b)
(Cost $147,575,915) 147,575,915 147,575,915
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $1,660,129,737) $ 1,924,779,878
FUTURES CONTRACTS
EXPIRATION UNDERLYING FACE UNREALIZED
DATE AMOUNT AT VALUE GAIN/(LOSS)
PURCHASED
123 Nikkei 225 Stock Index
Contracts Mar. 1998 $ 9,363,375 $ (929,988)
THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL
INVESTMENT
IN SECURITIES - 0.5%
SECURITY TYPE ABBREVIATIONS
STRYPES - Structured Yield Product Exchangeable
for Common Stock
LEGEND
1. Non-income producing
2. At period end, the seven-day yield of the Taxable Central Cash Fund
was 5.69%. The yield refers to the income earned by investing in the
fund over the seven-day period, expressed as an annual percentage.
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 $13,266,871 or
0.7% of net assets.
4. 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 $580,000.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $1,273,107,159 and $1,153,696,427, respectively.
The market value of futures contracts opened and closed during the
period amounted to $72,126,834 and $72,521,418, 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 $294,845 for the
period (see Note 4 of Notes to Financial Statements).
MARKET SECTOR DIVERSIFICATION
As a Percentage of Total Value of Investments
Aerospace & Defense 0.5%
Basic Industries 8.4
Cash Equivalents 7.7
Construction & Real Estate 3.2
Durables 9.1
Energy 7.6
Finance 18.2
Government Obligations 0.0
Health 10.0
Holding Companies 1.3
Industrial Machinery & Equipment 4.8
Media & Leisure 3.2
Nondurables 5.6
Precious Metals 0.5
Retail & Wholesale 2.7
Services 2.3
Technology 6.0
Transportation 0.7
Utilities 8.2
100.0%
INCOME TAX INFORMATION
At December 31, 1997, the aggregate cost of investment securities for
income tax purposes was $1,661,721,342. Net unrealized appreciation
aggregated $263,058,536, of which $407,371,007 related to appreciated
investment securities and $144,312,471 related to depreciated
investment securities.
The fund hereby designates approximately $78,646,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
INVESTMENT IN SECURITIES, AT VALUE $
1,924,779,878
(COST $1,660,129,737) - SEE ACCOMPANYING SCHEDULE
RECEIVABLE FOR INVESTMENTS SOLD
6,519,325
RECEIVABLE FOR FUND SHARES SOLD
2,144,375
DIVIDENDS RECEIVABLE
4,115,885
INTEREST RECEIVABLE 722,953
RECEIVABLE FOR DAILY VARIATION ON FUTURES CONTRACTS 24,600
OTHER RECEIVABLES 68,255
TOTAL ASSETS
1,938,375,271
LIABILITIES
PAYABLE TO CUSTODIAN BANK $ 16,012
PAYABLE FOR INVESTMENTS PURCHASED 4,375,455
PAYABLE FOR FUND SHARES REDEEMED 5,099,912
ACCRUED MANAGEMENT FEE 1,183,740
DISTRIBUTION FEES PAYABLE 36
OTHER PAYABLES AND ACCRUED EXPENSES 446,767
TOTAL LIABILITIES
11,121,922
NET ASSETS $
1,927,253,349
NET ASSETS CONSIST OF:
PAID IN CAPITAL $
1,524,828,498
UNDISTRIBUTED NET INVESTMENT INCOME
16,641,512
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS
122,131,238
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS
263,652,101
AND ASSETS AND LIABILITIES IN
FOREIGN CURRENCIES
NET ASSETS $
1,927,253,349
</TABLE>
INITIAL CLASS: $19.20
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($1,926,322,380 (DIVIDED BY) 100,320,693
SHARES)
SERVICE CLASS: $19.20
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($930,969 (DIVIDED BY) 48,486 SHARES)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME $ 41,192,284
DIVIDENDS
INTEREST 10,126,931
51,319,215
LESS FOREIGN TAXES WITHHELD (4,339,379
)
TOTAL INCOME 46,979,836
EXPENSES
MANAGEMENT FEE $ 14,309,058
TRANSFER AGENT FEES 1,302,648
DISTRIBUTION FEES - SERVICE CLASS 41
ACCOUNTING FEES AND EXPENSES 803,038
NON-INTERESTED TRUSTEES' COMPENSATION 6,136
CUSTODIAN FEES AND EXPENSES 945,179
REGISTRATION FEES 4,483
AUDIT 47,109
LEGAL 11,069
MISCELLANEOUS 129,020
TOTAL EXPENSES BEFORE REDUCTIONS 17,557,781
EXPENSE REDUCTIONS (225,308 17,332,473
)
NET INVESTMENT INCOME 29,647,363
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 121,016,257
FOREIGN CURRENCY TRANSACTIONS (427,681
)
FUTURES CONTRACTS (3,542,193 117,046,383
)
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 58,901,833
ASSETS AND LIABILITIES IN (79,542
FOREIGN CURRENCIES )
FUTURES CONTRACTS (458,418 58,363,873
)
NET GAIN (LOSS) 175,410,256
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 205,057,619
OTHER INFORMATION $ 223,816
EXPENSE REDUCTIONS
DIRECTED BROKERAGE ARRANGEMENTS
CUSTODIAN CREDITS 1,492
$ 225,308
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
OPERATIONS $ 29,647,363 $ 28,360,200
NET INVESTMENT
INCOME
NET REALIZED GAIN 117,046,383 114,395,097
(LOSS)
CHANGE IN NET 58,363,873 46,672,077
UNREALIZED
APPRECIATION
(DEPRECIATION)
NET INCREASE 205,057,619 189,427,374
(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 - 198,779,377 170,087,115
NET INCREASE
(DECREASE)
TOTAL INCREASE 259,652,111 324,467,293
(DECREASE) IN NET
ASSETS
NET ASSETS
BEGINNING OF PERIOD 1,667,601,238 1,343,133,945
END OF PERIOD $ 1,927,253,349 $ 1,667,601,238
(INCLUDING
UNDISTRIBUTED NET
INVESTMENT INCOME
OF $16,641,512 AND
$22,748,929,
RESPECTIVELY)
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
SHARES DOLLARS SHARES DOLLARS
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SHARE TRANSACTIONS 51,240,982 $ 973,125,045 37,069,614 $ 649,592,564
INITIAL CLASS
SOLD
REINVESTED 8,319,959 144,184,885 2,053,145 35,047,196
REDEEMED (47,764,686) (919,455,709) (29,349,715) (514,552,645)
NET INCREASE 11,796,255 $ 197,854,221 9,773,044 $ 170,087,115
(DECREASE)
SERVICE CLASS A 48,794 $ 931,087 - $ -
SOLD
REINVESTED - - - -
REDEEMED (308) (5,931) - -
NET INCREASE 48,486 $ 925,156 - $ -
(DECREASE)
DISTRIBUTIONS $ 29,012,812 $ 16,689,141
INITIAL CLASS - NET
INVESTMENT INCOME
INITIAL CLASS - NET 115,172,073 18,358,055
REALIZED GAIN
TOTAL $ 144,184,885 $ 35,047,196
SERVICE CLASS - NET $ - $ -
INVESTMENT INCOME
SERVICE CLASS - NET - -
REALIZED GAIN
TOTAL $ - $ -
$ 144,184,885 $ 35,047,196
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
A SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
FINANCIAL HIGHLIGHTS - INITIAL CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1997 1996 1995 1994 1993
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, $ 18.84 $ 17.06 $ 15.67 $ 15.48 $ 11.53
BEGINNING OF
PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET .30 E .32 D, E .17 .19 .06
INVESTMENT
INCOME
NET REALIZED 1.70 1.88 1.34 .08 4.16
AND
UNREALIZED
GAIN (LOSS)
TOTAL FROM 2.00 2.20 1.51 .27 4.22
INVESTMENT
OPERATIONS
LESS
DISTRIBUTIONS
FROM NET (.33) (.20) (.06) (.08) (.18)
INVESTMENT
INCOME
IN EXCESS OF - - - - (.04)
NET INVESTMENT
INCOME
FROM NET (1.31) (.22) (.02) - -
REALIZED GAIN
IN EXCESS OF - - (.04) - (.05)
NET REALIZED
GAIN
TOTAL (1.64) (.42) (.12) (.08) (.27)
DISTRIBUTIONS
NET ASSET VALUE, $ 19.20 $ 18.84 $ 17.06 $ 15.67 $ 15.48
END OF PERIOD
TOTAL 11.56% 13.15% 9.74% 1.72% 37.35%
RETURN B, C
RATIOS AND
SUPPLEMENTAL
DATA
NET ASSETS, END $ 1,926,322 $ 1,667,601 $ 1,343,134 $ 1,297,701 $ 777,961
OF PERIOD (000
OMITTED)
RATIO OF .92% .93% .91% .92% 1.03%
EXPENSES TO
AVERAGE NET
ASSETS
RATIO OF .90% G .92% G .91% .92% 1.03%
EXPENSES TO
AVERAGE NET
ASSETS AFTER
EXPENSE
REDUCTIONS
RATIO OF NET 1.55% 1.84% 1.88% 1.28% 1.21%
INVESTMENT
INCOME TO
AVERAGE NET
ASSETS
PORTFOLIO 67% 92% 50% 42% 42%
TURNOVER RATE
AVERAGE $ .0092 $ .0137
COMMISSION
RATE H
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEAR ENDED
DECEMBER 31,
SELECTED PER-SHARE DATA 1997 F
NET ASSET VALUE, $ 19.36
BEGINNING OF
PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET .01 E
INVESTMENT
INCOME
NET REALIZED (.17)
AND
UNREALIZED
GAIN (LOSS)
TOTAL FROM (.16)
INVESTMENT
OPERATIONS
NET ASSET VALUE, $ 19.20
END OF PERIOD
TOTAL (.83)%
RETURN B, C
RATIOS AND
SUPPLEMENTAL
DATA
NET ASSETS, END $ 931
OF PERIOD (000
OMITTED)
RATIO OF 1.02% A
EXPENSES TO
AVERAGE NET
ASSETS
RATIO OF 1.01% A,
EXPENSES TO G
AVERAGE NET
ASSETS AFTER
EXPENSE
REDUCTIONS
RATIO OF NET .31% A
INVESTMENT
INCOME TO
AVERAGE NET
ASSETS
PORTFOLIO 67%
TURNOVER
AVERAGE $ .0092
COMMISSION
RATE H
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 (SEE NOTE 6 OF NOTES TO FINANCIAL
STATEMENTS).
D INVESTMENT INCOME PER SHARE REFLECTS A SPECIAL DIVIDEND WHICH
AMOUNTED TO $.05 PER SHARE.
E NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
F FOR THE PERIOD NOVEMBER 3, 1997 (COMMENCEMENT OF SALE OF SERVICE
CLASS SHARES) TO DECEMBER 31, 1997.
G FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES
(SEE NOTE 6 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 December 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES.
The Money Market Portfolio, High Income Portfolio, Equity-Income
Portfolio, Growth Portfolio and Overseas Portfolio (the funds) are
funds of Variable Insurance Products Fund. Investment Grade Bond
Portfolio, Asset Manager Portfolio, Asset Manager: Growth Portfolio,
Index 500 Portfolio and Contrafund Portfolio (the funds) are funds of
Variable Insurance Products Fund II. Balanced Portfolio, Growth &
Income Portfolio and Growth Opportunities Portfolio (the funds) are
funds of Variable Insurance Products Fund III. The Variable Insurance
Products Fund, Variable Insurance Products Fund II and Variable
Insurance Products Fund III (the trusts) are registered under the
Investment Company Act of 1940, as amended (the 1940 Act), as open-end
management investment companies organized as Massachusetts business
trusts. Each fund is authorized to issue an unlimited number of
shares. Shares of each fund may only be purchased by insurance
companies for the purpose of funding variable annuity or variable life
insurance contracts. Each fund except the Money Market Portfolio,
Index 500 Portfolio and Investment Grade Portfolio offer two classes
of shares; the funds' original class of shares (Initial Class shares)
and Service Class shares. Offering of the Service Class shares
commenced on November 3, 1997. Both classes have equal rights and
voting privileges, except for matters affecting a single class.
Investment income, realized and unrealized capital gains and losses,
the common expenses of the fund, and certain fund-level expense
reductions, if any, are allocated on a pro rata basis to each class
based on the relative net assets of each class to the total net assets
of the fund. Each class of shares differs in its respective
distribution plan.
The financial statements have been prepared in conformity with
generally accepted accounting principles which permit management to
make certain estimates and assumptions at the date of the financial
statements. The following summarizes the significant accounting
policies of the funds:
SECURITY VALUATION:
MONEY MARKET PORTFOLIO. As permitted under Rule 2a-7 of the 1940 Act,
and certain conditions therein, securities are valued initially at
cost and thereafter assume a constant amortization to maturity of any
discount or premium.
INVESTMENT GRADE BOND PORTFOLIO. Securities are valued based upon a
computerized matrix system and/or appraisals by a pricing service,
both of which consider market transactions and dealer-supplied
valuations. Securities (including restricted securities) for which
market quotations are not readily available are valued at their fair
value as determined in good faith under consistently applied
procedures under the general supervision of the Board of Trustees.
Short-term securities with remaining maturities of sixty days or less
for which quotations are not readily available are valued at amortized
cost or original cost plus accrued interest, both of which approximate
current value.
ASSET MANAGER, BALANCED, AND HIGH INCOME PORTFOLIOS. Equity securities
for which quotations are readily available are valued at the last sale
price, or if no sale price, at the closing bid price. Debt securities
for which quotations are readily available are valued by a pricing
service at their market values as determined by their most recent bid
prices in the principal market (sales prices if the principal market
is an exchange) in which such securities are normally traded.
Securities (including restricted securities) for which market
quotations are not readily available are valued 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.
ASSET MANAGER: GROWTH, EQUITY-INCOME, GROWTH & INCOME, INDEX 500,
GROWTH OPPORTUNITIES, CONTRAFUND AND GROWTH PORTFOLIOS. Securities for
which exchange quotations are readily available are valued at the last
sale price, or if no sale price, at the closing bid price. Securities
(including restricted securities) for which exchange quotations are
not readily available (and in certain cases debt securities which
trade on an exchange) are valued primarily using dealer-supplied
valuations or at their fair value as determined in good faith under
consistently applied procedures under the general supervision of the
Board of Trustees. Short-term securities with remaining maturities of
sixty days or less for which quotations are not readily available are
valued at amortized cost or original cost plus accrued interest, both
of which approximate current value.
OVERSEAS PORTFOLIO. Securities for which quotations are readily
available are valued at the last sale price, or if no sale price, at
the closing bid price in the principal market in which such securities
are normally traded. If events which are expected to materially affect
the value of securities occur after the close of a principal market in
which those securities are traded, then those securities are valued at
their fair value as determined in good faith under consistently
applied procedures under the general supervision of the Board of
Trustees (" fair value"). Securities (including restricted securities)
for which quotations are not readily available are valued primarily
using dealer-supplied valuations or at their fair value. Short-term
securities with remaining maturities of sixty days or less for which
quotations are not readily available are valued at amortized cost or
original cost plus accrued interest, both of which approximate current
value.
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
FOREIGN CURRENCY TRANSLATION. The accounting records of the funds are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. 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 qualified regulated investment companies under
Subchapter M of the Internal Revenue Code, each fund is not subject to
U.S. federal income taxes to the extent that it distributes
substantially all of its taxable income for the fiscal year. Each fund
may be subject to foreign taxes on income and gains on investments
which are accrued based upon each fund's understanding of the tax
rules and regulations that exist in the markets in which they invest.
Each fund accrues such taxes as applicable. The schedules of
investments include information regarding income taxes under the
caption "Income Tax Information."
INVESTMENT INCOME:
MONEY MARKET PORTFOLIO. Interest income, which includes amortization
of premium and accretion of discount, is accrued as earned.
INVESTMENT GRADE BOND, HIGH INCOME, ASSET MANAGER,
BALANCED, ASSET MANAGER: GROWTH, EQUITY-INCOME, INDEX 500, GROWTH
OPPORTUNITIES, GROWTH & INCOME, CONTRAFUND, GROWTH AND OVERSEAS
PORTFOLIOS. Dividend income is recorded on the ex-dividend date,
except certain dividends from foreign securities where the ex-dividend
date may have passed, are recorded as soon as the funds are informed
of the ex-dividend date. Non-cash dividends included in dividend
income, if any, are recorded at the fair market value of the
securities received. Interest income, which includes accretion of
original issue discount, is accrued as earned. Investment income is
recorded net of foreign taxes withheld where recovery of such taxes is
uncertain.
EXPENSES. Most expenses of each trust can be directly attributed to a
fund. Expenses which cannot be directly attributed are apportioned
among 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 dividends and
capital gain distributions are declared separately for each class.
Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences, which may result in
distribution reclassifications, are primarily due to differing
treatments for litigation proceeds, paydown gains/losses on certain
securities, futures and options transactions, defaulted bonds, foreign
currency transactions, passive foreign investment companies (PFIC),
market discount, partnerships, non-taxable dividends, capital loss
carryforwards and losses deferred due to wash sales. Certain funds
also utilized earnings and profits distributed to shareholders on
redemption of shares as a part of the dividends paid deduction for
income tax purposes.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
Undistributed net investment income and accumulated undistributed net
realized gain (loss) on investments and foreign currency transactions
may include temporary book and tax basis differences which will
reverse in a subsequent period. Any taxable income or gain remaining
at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of
trade date. Gains and losses on securities sold are determined on the
basis of identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. Certain funds 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.
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
2. OPERATING POLICIES - CONTINUED
REPURCHASE AGREEMENTS - CONTINUED
at least equal to the principal amount of the repurchase agreement
(including accrued interest). FMR, the funds' investment adviser, is
responsible for determining that the value of the underlying
securities remains in accordance with the market value requirements
stated above.
TAXABLE CENTRAL CASH FUND. Pursuant to an Exemptive Order issued by
the SEC, the funds may invest in the Taxable Central Cash Fund (the
Cash Fund) managed by Fidelity Investments Money Management, Inc.
(formerly FMR Texas, Inc.) an affiliate of FMR. The Cash Fund is an
open-end money market fund available only to investment companies and
other accounts managed by FMR and its affiliates. The Cash Fund seeks
preservation of capital, liquidity, and current income by investing in
U.S. Treasury securities and repurchase agreements for these
securities. Income distributions from the Cash Fund are declared daily
and paid monthly from net interest income. Income distributions earned
by the funds are recorded as interest income in the accompanying
financial statements.
INTERFUND LENDING PROGRAM. Pursuant to an Exemptive Order issued by
the SEC, the funds, along with other registered investment companies
having management contracts with FMR, may participate in an interfund
lending program. This program provides an alternative credit facility
allowing the funds to borrow from, or lend money to, other
participating funds. Information regarding interfund lending is
included under the caption "Other Information" at the end of each
applicable fund's schedule of investments.
FUTURES CONTRACTS. Certain funds may use futures contracts to manage
their exposure to the stock and bond markets and to fluctuations in
interest rates and currency values. Buying futures tends to increase a
fund's exposure to the underlying instrument, while selling futures
tends to decrease a fund's exposure to the underlying instrument or
hedge other fund investments. Futures contracts involve, to varying
degrees, risk of loss in excess of the futures variation margin
reflected in each applicable fund's Statement of Assets and
Liabilities. The underlying face amount at value of any open futures
contracts at period end is shown in each applicable fund's schedule of
investments under the caption "Futures Contracts." This amount
reflects each contract's exposure to the underlying instrument at
period end. Losses may arise from changes in the value of the
underlying instruments, if there is an illiquid secondary market for
the contracts, or if the counterparties do not perform under the
contracts' terms. Futures contracts are valued at the settlement price
established each day by the board of trade or exchange on which they
are traded.
RESTRICTED SECURITIES. Each fund is permitted to invest in securities
that are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from
registration or to the public if the securities are registered.
Disposal of these securities may involve time-consuming negotiations
and expense, and prompt sale at an acceptable price may be difficult.
At the end of the period, restricted securities (excluding 144A
issues) amounted to $12,000,000, $15,367,042, $8,528,567 and $518,236
or 1.2%, 0.7%, 0.2% and 0.1% of net assets of the Money Market, High
Income, Asset Manager and Asset Manager: Growth Portfolios,
respectively.
3. JOINT TRADING ACCOUNT.
At the end of the period, the Investment Grade Bond Portfolio had 20%
or more of its total investments in repurchase agreements through a
joint trading account. These repurchase agreements were with entities
whose creditworthiness has been reviewed and found satisfactory by
FMR. The maturity values of the joint trading account investments were
$82,660,380 at 6.40%. The investments in repurchase agreements through
the joint trading account are summarized as follows:
SUMMARY OF JOINT TRADING
DATED 12/31/97, DUE 1/2/98
Number of dealers or banks 17
Maximum amount with one dealer or bank 18.2%
Aggregate principal amount of agreements $19,912,697,000
Aggregate maturity amount of agreements $19,919,779,774
Aggregate market value of transferred assets $20,338,548,423
Coupon rates of transferred assets 0.0% to 15.75%
Maturity dates of transferred assets 1/2/98 to 11/15/27
4. 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.
5. 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.
5. FEES AND OTHER TRANSACTIONS WITH
AFFILIATES - CONTINUED
MANAGEMENT FEE - CONTINUED
For the Index 500 Portfolio, FMR receives a fee that is computed at an
annual rate of .24% of the fund's average net assets. Effective
December 1, 1997, FMR reduced the management fee rate from .28% to
.24%.
For all other funds, FMR receives a monthly fee that is calculated on
the basis of a group fee rate plus a fixed individual fund fee rate
applied to the average net assets of the fund. The group fee rate is
the weighted average of a series of rates and is based on the monthly
average net assets of all the mutual funds advised by FMR. The rates
ranged from .1100% to .3700% for the Investment Grade Bond and High
Income Portfolios and .2500% to .5200% for the Asset Manager,
Balanced, Asset Manager: Growth, Equity-Income, Growth & Income,
Growth Opportunities, Contrafund, Growth and Overseas Portfolios for
the period. In the event that these rates were lower than the
contractual rates in effect during the period, FMR voluntarily
implemented the above rates, as they resulted in the same or a lower
management fee. The annual individual fund fee 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 annual rates expressed as a percentage of average net
assets:
Money Market .21%
Investment Grade Bond .44%
High Income .59%
Asset Manager .55%
Balanced .45%
Asset Manager: Growth, Growth Opportunities,
Contrafund, Growth .60%
Equity-Income .50%
Growth & Income .49%
Index 500 .27%
Overseas .75%
SUB-ADVISER FEE. As the Money Market Portfolio's investment
sub-adviser, Fidelity Investments Money Management, Inc. (FIMM)
(formerly FMR Texas, Inc.), a wholly owned subsidiary of FMR, receives
a fee from FMR of 50% of the management fee payable to FMR. The fee is
paid prior to any voluntary expense reimbursements which may be in
effect.
FMR, on behalf of the Overseas Portfolio, entered into sub-advisory
agreements with Fidelity Management & Research (U.K.) Inc., Fidelity
Management & Research (Far East) Inc., and Fidelity International
Investment Advisors (FIIA). In addition, FIIA entered into a
sub-advisory agreement with its subsidiary, Fidelity International
Investment Advisors (U.K.) Limited (FIIA(U.K.)L). Under the
sub-advisory arrangements, FMR may receive investment advice and
research services and may grant the sub-advisers investment management
authority to buy and sell securities. FMR pays its sub-advisers either
a portion of its management fee or a fee based on costs incurred for
these services. FIIA pays FIIA(U.K.)L a fee based on costs incurred
for either service.
Effective December 1, 1997 FMR and the Index 500 Portfolio entered
into a sub-advisory agreement with Bankers Trust Company (Bankers
Trust). Bankers Trust receives a sub-advisory fee for providing
investment management, securities lending and custodial services to
the fund. For these services, FMR pays Bankers Trust fees at an annual
rate of 0.006% of the fund's average net assets. In addition, the fund
pays Bankers Trust fees equal to 40% of net income from the fund's
securities lending program. For the period, the fund paid Bankers
Trust $54.
DISTRIBUTION AND SERVICE PLAN. In accordance with Rule 12b-1 of the
1940 Act, the Trustees have adopted separate distribution plans with
respect to each fund's class of shares (collectively referred to as
"the Plans"). Under the Service Class Plan, the class pays Fidelity
Distributors Corporation (FDC), an affiliate of FMR, a distribution
and service fee (12b-1 fee). This fee is based on an annual rate of
.10% of Service Class average net assets. Initial Class shares are not
subject to a 12b-1 fee.
For the period, Service Class paid FDC the following amounts, all of
which were reallowed to insurance companies, for the distribution of
shares and providing shareholder support services.
HIGH INCOME $ 147
ASSET MANAGER 2
BALANCED 1
ASSET MANAGER: GROWTH 1
EQUITY-INCOME 226
GROWTH & INCOME 1
GROWTH OPPORTUNITIES 100
CONTRAFUND 214
GROWTH 86
OVERSEAS 41
5. FEES AND OTHER TRANSACTIONS WITH
AFFILIATES - CONTINUED
DISTRIBUTION AND SERVICE PLAN - CONTINUED
Under the Plans, FMR or FDC may use its resources to pay
administrative and promotional expenses related to the sale of each
fund's class of shares. Subject to the approval of the Board of
Trustees, the Plans also authorize payments to third parties that
assist in the sale of each class of shares or render shareholder
support services. For the period, FMR or FDC informed the fund that
payments made to third parties under the Plans amounted to:
INITIAL SERVICE
CLASS CLASS
INVESTMENT GRADE BOND $ 63,184 N/A
HIGH INCOME 854,029 $ 253
ASSET MANAGER 1,779,647 -
BALANCED 1,057 -
ASSET MANAGER: GROWTH 31,102 -
EQUITY-INCOME 3,693,878 414
GROWTH & INCOME 3,786 -
INDEX 500 3,550 N/A
GROWTH OPPORTUNITIES 12,129 183
CONTRAFUND 1,131,705 374
GROWTH 3,207,118 154
OVERSEAS 854,467 70
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations
Company (FIIOC), an affiliate of FMR, is the funds' transfer, dividend
disbursing and shareholder servicing agent. FIIOC receives account
fees and asset-based fees that vary according to account size and type
of account. FIIOC pays a portion of the expenses related to the
typesetting, printing and mailing of shareholder reports, except proxy
statements.
For the period, each funds' transfer agent fees were equivalent to the
following annual rates expressed as a percentage of average net
assets:
MONEY MARKET, HIGH INCOME, ASSET .07%
MANAGER,
BALANCED, ASSET MANAGER: GROWTH,
EQUITY-INCOME, GROWTH & INCOME, INDEX
500, GROWTH OPPORTUNITIES, CONTRAFUND,
GROWTH AND OVERSEAS
INVESTMENT GRADE BOND .08%
ACCOUNTING AND SECURITY LENDING FEES. Fidelity Service Company Inc.,
an affiliate of FMR, maintains the funds' accounting records and
administers the security lending program. The security lending fee is
based on the number and duration of lending transactions. The
accounting fee is based on the level of average net assets for the
month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. Certain funds placed a portion of their
portfolio transactions with brokerage firms which are affiliates of
FMR. The commissions paid to these affiliated firms are shown under
the caption "Other Information" at the end of each applicable fund's
schedule of investments.
6. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse the Index 500 Portfolio's
operating expenses (excluding interest, taxes, brokerage commissions,
extraordinary expenses, and sub-advisory fees paid by the fund
associated with securities lending) above an annual rate of .28% of
average net assets.
FMR has also directed certain portfolio trades to brokers who paid a
portion of certain funds' expenses. In addition, certain funds have
entered into arrangements with their custodian whereby credits
realized on uninvested cash balances were used to reduce 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.
7. SECURITY LENDING
Certain funds loaned securities to brokers who paid the fund
negotiated lenders' fees. These fees are included in interest income.
Each applicable fund receives U.S. Treasury obligations and/or cash as
collateral against the loaned securities, in an amount at least equal
to 102% of the market value of the loaned securities at the inception
of each loan. This collateral must be maintained at not less than 100%
of the market value of the loaned securities during the period of the
loan. Information regarding the value of the securities loaned and the
value of collateral at period end is included under the caption "Other
Information" at the end of each applicable fund's schedule of
investments.
8. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance
Company(FILI) and its subsidiaries, affiliates of FMR, were the record
owners of more than 5% of the outstanding shares and certain
unaffiliated insurance companies were record owners of 10% or more of
the total outstanding shares of the following funds:
FILI UNAFFILIATED INSURANCE COMPANIES
FUND % OF OWNERSHIP # OF % OF OWNERSHIP
Money Market 45% 1 11%
Investment Grade Bond 37% 1 11%
High Income 15% 2 58%
Asset Manager 20% 3 47%
Balanced 31% 1 66%
Asset Manager: Growth 74% - -
Equity-Income 18% 1 28%
Growth & Income 82% - -
Index 500 39% 1 10%
Growth Opportunities 30% 1 66%
Contrafund 33% 2 38%
Growth 14% 1 28%
Overseas 14% 1 36%
9. 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.
10. SHAREHOLDER TRANSACTIONS.
On March 14, 1997, the following funds accepted assets from Nationwide
Life Insurance Co. in exchange for shares as follows:
VALUE OF SHARES VALUE PER
FUND ASSETS RECEIVED ISSUED SHARE
Money Market Fund $27,320,971 27,320,971 $ 1.00
High Income Portfolio $91,391,383 7,733,642 $ 11.82
Overseas Portfolio $46,754,098 2,644,463 $ 17.68
Investment Grade
Bond Portfolio $19,784,453 1,717,566 $ 11.52
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Variable Insurance Products Fund and the
Shareholders of Money Market Portfolio, High Income Portfolio,
Equity-Income Portfolio, Growth Portfolio and Overseas Portfolio:
We have audited the accompanying statements of assets and liabilities
of Variable Insurance Products Fund: Money Market Portfolio, High
Income Portfolio, Equity-Income Portfolio, Growth Portfolio and
Overseas Portfolio, including the schedules of portfolio investments,
as of December 31, 1997, and the related statements of operations for
the year then ended, the statements of changes in net assets for each
of the two years in the period then ended and the financial highlights
of the Money Market Portfolio and the Initial Class and Service Class
for each of the periods indicated therein. These financial statements
and financial highlights are the responsibility of the fund's
management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1997 by
correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Variable Insurance Products Fund: Money Market
Portfolio, High Income Portfolio, Equity-Income Portfolio, Growth
Portfolio and Overseas Portfolio as of December 31, 1997, the results
of their operations for the year then ended, the changes in their net
assets for each of the two years in the period then ended, and the
financial highlights of the Money Market Portfolio and the Initial
Class and Service Class for each of the periods indicated therein, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 5, 1998 except for the financial statements and financial
highlights of the Money Market Portfolio as to which the date is
February 3, 1998.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Variable Insurance Products Fund II and the
Shareholders of Investment Grade Bond Portfolio, Asset Manager
Portfolio, Index 500 Portfolio, Asset Manager: Growth Portfolio and
Contrafund Portfolio:
In our opinion, the accompanying statements of assets and liabilities,
including the schedules of investments (except for Moody's and
Standard & Poor's ratings), and the related statements of operations
and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Investment
Grade Bond Portfolio, Asset Manager Portfolio, Index 500 Portfolio,
Asset Manager: Growth Portfolio and Contrafund Portfolio (funds of
Variable Insurance Products Fund II) at December 31, 1997, the results
of their operations for the year then ended, and the changes in each
of their net assets and the financial highlights for the periods
indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the
responsibility of the Fidelity Variable Insurance Products Fund II's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at December 31, 1997 by
correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were
not received, provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Boston, Massachusetts
February 10, 1998
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Fidelity Variable Insurance Products Fund III and
the Shareholders of Balanced Portfolio, Growth Opportunites Portfolio,
and Growth & Income Portfolio:
In our opinion, the accompanying statements of assets and liabilities,
including the schedules of investments (except for Moody's and
Standard & Poor's ratings), and the related statements of operations
and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Balanced
Portfolio, Growth Opportunities Portfolio, and Growth & Income
Portfolio (funds of Variable Insurance Products Fund III) at December
31, 1997, the results of their operations for the year then ended, and
the changes in each of their net assets and the financial highlights
for the periods indicated, in conformity with generally accepted
accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of Fidelity Variable Insurance Products Fund III's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at December 31, 1997 by
correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were
not received, provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Boston, Massachusetts
February 5, 1998
DISTRIBUTIONS
The Board of Trustees of the following funds voted to pay to
shareholders of record at the opening of business on record date, the
following distributions derived from capital gains realized from sales
of portfolio securities, and dividends derived from net investment
income:
LONG TERM
SHORT TERM LONG TERM CAPITAL GAIN BREAK DOWN
PAY DATE RECORD DATE DIVIDENDS CAPITAL GAINS CAPITAL GAINS 28% RATE
20% RATE
Investment Grade Bond 2/6/98 2/6/98 $0.59 $0.03 $0.04 13.53% 86.47%
High Income:
Initial Class 2/7/97 2/7/97 $0.89 $0.06 $0.05 100.00% -
Initial Class 2/6/98 2/6/98 $0.96 $0.39 $0.22 34.18% 65.82%
Service Class 2/6/98 2/6/98 $0.96 $0.39 $0.22 34.18% 65.82%
Asset Manager:
Initial Class 2/7/97 2/7/97 $0.59 $1.12 $0.36 100.00% -
Initial Class 2/6/98 2/6/98 $0.57 $0.54 $1.17 61.85% 38.15%
Service Class 2/6/98 2/6/98 $0.57 $0.54 $1.17 61.85% 38.15%
Balanced:
Initial Class 2/6/98 2/6/98 $0.36 $0.28 $0.27 60.33% 39.67%
Service Class 2/6/98 2/6/98 $0.36 $0.28 $0.27 60.33% 39.67%
Asset Manager: Growth:
Initial Class 2/7/97 2/7/97 - $0.01 $0.01 100.00% -
Initial Class 2/6/98 2/6/98 $0.34 $0.71 $0.88 70.05% 29.95%
Service Class 2/6/98 2/6/98 $0.34 $0.71 $0.88 70.05% 29.95%
Equity Income:
Initial Class 2/7/97 2/7/97 $0.36 $0.47 $1.34 100.00% -
Initial Class 2/6/98 2/6/98 $0.34 $0.68 $0.53 53.78% 46.22%
Service Class 2/6/98 2/6/98 $0.34 $0.68 $0.53 53.78% 46.22%
Index 500 2/7/97 2/7/97 $1.03 $0.76 $1.33 100.00% -
2/6/98 2/6/98 $1.36 $1.44 $1.71 26.76% 73.24%
Growth Opportunities:
Initial Class 2/7/97 2/7/97 $0.25 $0.22 $0.13 100.00% -
Initial Class 2/6/98 2/6/98 $0.21 $0.25 $0.48 33.64% 66.36%
Service Class 2/6/98 2/6/98 $0.21 $0.25 $0.48 33.64% 66.36%
Contrafund:
Initial Class 2/7/97 2/7/97 $0.14 $0.28 $0.09 100.00% -
Initial Class 2/6/98 2/6/98 $0.14 $0.58 $0.45 41.60% 58.40%
Service Class 2/6/98 2/6/98 $0.14 $0.58 $0.45 41.60% 58.40%
Overseas:
Initial Class 2/7/97 2/7/97 $0.33 $0.28 $1.03 100.00% -
Initial Class 2/6/98 2/6/98 $0.38 $0.33 $0.79 49.64% 50.36%
Service Class 2/6/98 2/6/98 $0.38 $0.33 $0.79 49.64% 50.36%
Growth:
Initial Class 2/7/97 2/7/97 $0.21 - $0.94 100.00% -
Initial Class 2/6/98 2/6/98 $0.19 $1.56 $3.41 45.19% 54.81%
Service Class 2/6/98 2/6/98 $0.19 $1.56 $3.41 45.19% 54.81%
LONG TERM
SHORT TERM LONG TERM CAPITAL GAIN BREAK DOWN
PAY DATE RECORD DATE DIVIDENDS CAPITAL GAINS CAPITAL GAINS 28% RATE
20% RATE
Growth & Income:
Initial Class 2/6/98 2/6/98 - $0.07 - - -
Service Class 2/6/98 2/6/98 - $0.07 - - -
For the Overseas Portfolio, the amounts per share which represent
income derived from sources within, and taxes paid to foreign
countries or possessions of the United States are $.40 and $.05,
respectively, for the dividend paid February 7, 1997.
The Overseas Portfolio has notified shareholders in January 1998 of
the applicable percentage for use in preparing 1997 income tax
returns.
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Investments Money Management, Inc. (FIMM),
Merrimack, NH
MONEY MARKET PORTFOLIO
Fidelity Management & Research (U.K.) Inc.,
London, England
HIGH INCOME, ASSET MANAGER, ASSET MANAGER: GROWTH,
CONTRAFUND, BALANCED, GROWTH OPPORTUNITIES,
GROWTH & INCOME AND OVERSEAS PORTFOLIOS
Fidelity Management & Research (Far East) Inc.,
Tokyo, Japan
HIGH INCOME, ASSET MANAGER, ASSET MANAGER: GROWTH,
CONTRAFUND, BALANCED, GROWTH OPPORTUNITIES,
GROWTH & INCOME AND OVERSEAS PORTFOLIOS
Fidelity International Investment Advisors
Pembroke, Bermuda
OVERSEAS PORTFOLIO
Fidelity International Investment Advisors (U.K.) Limited
Kent, England
OVERSEAS PORTFOLIO
Bankers Trust, New York, NY
INDEX 500 PORTFOLIO
OFFICERS
Edward C. Johnson 3d, PRESIDENT
Robert C. Pozen, SENIOR VICE PRESIDENT
Abigail Johnson, VICE PRESIDENT - GROWTH, CONTRAFUND
AND GROWTH OPPORTUNITIES PORTFOLIOS
Richard A. Spillane, Jr., VICE PRESIDENT - EQUITY INCOME,
OVERSEAS, BALANCED AND GROWTH & INCOME PORTFOLIOS
Fred L. Henning, Jr., VICE PRESIDENT - INVESTMENT GRADE BOND
Robert A. Lawrence, VICE PRESIDENT - INVESTMENT GRADE BOND,
INDEX 500, ASSET MANAGER, ASSET MANAGER: GROWTH AND
HIGH INCOME PORTFOLIOS
Bart A. Grenier, VICE PRESIDENT - HIGH INCOME PORTFOLIO
Barry J. Coffman, VICE PRESIDENT - HIGH INCOME PORTFOLIO
William Danoff, VICE PRESIDENT - CONTRAFUND 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 PORTFOLIO
George Vanderheiden, VICE PRESIDENT -
GROWTH OPPORTUNITIES PORTFOLIO
Thomas D. Maher, ASSISTANT VICE PRESIDENT -
MONEY MARKET PORTFOLIO
Eric D. Roiter, SECRETARY
Richard A. Silver, TREASURER
Boyce Greer, VICE PRESIDENT - MONEY MARKET PORTFOLIO
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, AND CONTRAFUND PORTFOLIOS
Bankers Trust, New York, NY
INDEX 500 PORTFOLIO
* INDEPENDENT TRUSTEES
** BALANCED, GROWTH & INCOME AND GROWTH OPPORTUNITIES PORTFOLIOS ONLY
