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, 1998
(2_FIDELITY_LOGOS)(registered trademark)
CONTENTS
MARKET ENVIRONMENT 4 A REVIEW OF WHAT HAPPENED IN
WORLD MARKETS DURING THE
PAST 12 MONTHS.
MONEY MARKET PORTFOLIO 5 PERFORMANCE FUND TALK: THE
6 MANAGER'S OVERVIEW
7 INVESTMENTS FINANCIAL
11 STATEMENTS
INVESTMENT GRADE BOND PORTFOLIO 13 PERFORMANCE AND INVESTMENT
14 SUMMARY FUND TALK: THE
15 MANAGER'S OVERVIEW
22 INVESTMENTS FINANCIAL
STATEMENTS
HIGH INCOME PORTFOLIO 24 PERFORMANCE AND INVESTMENT
26 SUMMARY FUND TALK: THE
27 MANAGER'S OVERVIEW
38 INVESTMENTS FINANCIAL
STATEMENTS
ASSET MANAGER PORTFOLIO 41 PERFORMANCE AND INVESTMENT
43 SUMMARY FUND TALK: THE
44 MANAGER'S OVERVIEW
60 INVESTMENTS FINANCIAL
STATEMENTS
BALANCED PORTFOLIO 63 PERFORMANCE AND INVESTMENT
65 SUMMARY FUND TALK: THE
66 MANAGERS' OVERVIEW
79 INVESTMENTS FINANCIAL
STATEMENTS
ASSET MANAGER: GROWTH PORTFOLIO 82 PERFORMANCE AND INVESTMENT
84 SUMMARY FUND TALK: THE
85 MANAGER'S OVERVIEW
99 INVESTMENTS FINANCIAL
STATEMENTS
EQUITY-INCOME PORTFOLIO 102 PERFORMANCE AND INVESTMENT
104 SUMMARY FUND TALK: THE
105 MANAGER'S OVERVIEW
114 INVESTMENTS FINANCIAL
STATEMENTS
GROWTH & INCOME PORTFOLIO 117 PERFORMANCE AND INVESTMENT
119 SUMMARY FUND TALK: THE
120 MANAGER'S OVERVIEW
123 INVESTMENTS FINANCIAL
STATEMENTS
INDEX 500 PORTFOLIO 126 PERFORMANCE AND INVESTMENT
127 SUMMARY FUND TALK: THE
128 MANAGER'S OVERVIEW
136 INVESTMENTS FINANCIAL
STATEMENTS
GROWTH OPPORTUNITIES PORTFOLIO 138 PERFORMANCE AND INVESTMENT
140 SUMMARY FUND TALK: THE
141 MANAGER'S OVERVIEW
146 INVESTMENTS FINANCIAL
STATEMENTS
CONTRAFUND PORTFOLIO 149 PERFORMANCE AND INVESTMENT
151 SUMMARY FUND TALK: THE
152 MANAGER'S OVERVIEW
159 INVESTMENTS FINANCIAL
STATEMENTS
GROWTH PORTFOLIO 162 PERFORMANCE AND INVESTMENT
164 SUMMARY FUND TALK: THE
165 MANAGER'S OVERVIEW
169 INVESTMENTS FINANCIAL
STATEMENTS
OVERSEAS PORTFOLIO 172 PERFORMANCE AND INVESTMENT
174 SUMMARY FUND TALK: THE
175 MANAGER'S OVERVIEW
181 INVESTMENTS FINANCIAL
STATEMENTS
NOTES TO FINANCIAL STATEMENTS 184 NOTES TO THE FINANCIAL
STATEMENTS
REPORT OF INDEPENDENT 190 THE AUDITORS' OPINION
ACCOUNTANTS
DISTRIBUTIONS 193
PROXY VOTING RESULTS 194
Each Portfolio, except Money Market, Investment Grade Bond, and Index
500, has 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.
Standard & Poor's, S&P and S&P 500 are registered service marks of The
McGraw-Hill Companies, Inc. and have been licensed for use by Fidelity
Distributors Corporation.
Other third party marks appearing herein are the property of their
respective owners.
All other marks appearing herein are registered or unregistered
trademarks or service marks of FMR Corp. or an affiliated company.
(recycle logo) This report is printed on recycled paper using
soy-based inks.
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
Demonstrating erratic mood swings throughout the period, the sometimes
gloomy, sometimes exuberant, oftentimes volatile worldwide stock and
bond markets in 1998 will long be remembered for their turbulent
behavior. When all was said and done, the U.S. and European stock
markets posted impressive returns for the year. Most U.S. bond markets
experienced positive - albeit moderate - performance, with U.S.
Treasuries ending the year as the overall front-runner. Economic and
currency turmoil continued to plague stock and bond performance in
Asia and, in particular, emerging markets.
U.S. STOCK MARKETS
The Standard & Poor's 500 Index - a broad measure of U.S. stock market
performance - rose 28.58% for the 12 months that ended December 31,
1998, well above the index's long-term average annual return of about
12%. For the first time in its history, the Dow Jones Industrial
Average - an index of 30 blue-chip stocks - posted double-digit
percentage gains in four consecutive years, thanks to an 18.07%
increase for the year. Large-cap stocks - particularly in the
technology sector - led the U.S. equity market's charge, as once again
investors preferred the liquidity and the perceived safety of owning
what they know. Small-cap stocks - in comparison - took a beating. The
Russell 2000 Index - a popular measure of small stock performance -
fell -2.55% for the year.
Throughout the period, the U.S. enjoyed a strong economy. Unemployment
averaged 4.5% for the year, the lowest since 1969 and the lowest
peacetime level in 41 years. Inflation levels also were low, while
interest-rates were stable. In comparison to the economy's relative
tranquility, the U.S. stock markets were fluctuating wildly. To
illustrate, the Dow typically had fewer than five swings of 5% in each
year since 1946. In 1998 alone, the Dow experienced 10 such swings.
Much of these gyrations were due to fears about Asia's economic woes,
Russia's currency devaluation and loan defaults, and the subsequent
consequences on emerging markets. On August 31, the Dow plunged 512.61
points - a loss that erased all previous gains for the year to that
point. Faced with global economic chaos, investors began fleeing the
equity markets in droves, searching for safer, less volatile havens,
particularly U.S. Treasuries. To address the lack of confidence in
domestic and global equity markets, the U.S. Federal Reserve Board
stepped in with three separate 0.25% interest-rate cuts during the
fall. Those cuts helped boost confidence in the U.S. economy, and
stocks began to quickly ascend to their former lofty levels,
culminating in a new Dow record of 9374.27 on November 23, 1998.
On a sector-by-sector basis, technology stocks reigned supreme in
1998, thanks in large part to the skyrocketing Internet industry. For
the year, nine of the top 10 best-performing stocks in the S&P 500
were technology stocks. The health care sector was another big winner.
Pharmaceuticals helped drive the strong performance of the health care
industry, as a slew of new products was rushed to the market sooner
than normal thanks to streamlined approval regulations.
Natural resources, on the other hand, suffered tremendously.
Overproduction and poor demand caused oil's price per barrel to plunge
considerably. Gold prices also were down in 1998. The financial sector
- - a top performer for several years - found 1998 to be a challenge.
The financial crises overseas and credit concerns contributed to the
poor showing of many brokerage and investment management firms.
FOREIGN STOCK MARKETS
Foreign stock markets posted mixed results in 1998. The Morgan Stanley
Capital International (MSCI) EAFE Index - which measures stock
performance in Europe, Australasia, and the Far East - returned 20.27%
in 1998. Europe posted the most consistently strong equity markets
when compared to other regions, with the MSCI Europe Index up 28.87%
for the year. The much-maligned Japanese stock market ended the year
on a positive note, thanks in part to long-awaited government
intercession on the ailing banking sector's behalf. For the year, the
Tokyo Stock Exchange Index (TOPIX) was up 7.76%. 1998 proved to be
disastrous for emerging markets. The MSCI Emerging Markets Free Index
suffered a -25.34% loss during the period, as the Asian crisis and
Russia's currency devaluation and loan defaults played havoc with
Latin America, Brazil, Thailand and other emerging-market nations.
U.S. BOND MARKETS
In a year as volatile as 1998, it's not surprising that the
performance of the U.S bond market was mostly positive. Still, most of
the major bond indexes trailed their returns of 1997, as investors
continued to seek out the high returns found in the equity markets.
For the year, the Lehman Brothers Aggregate Bond Index - a broad
measure of the performance of the U.S. taxable bond market - posted a
total return of 8.69%. The Lehman Brothers Corporate Bond Index
returned 8.57% in 1998. General U.S. Treasury funds were the safe
haven of choice in 1998, benefiting from the flight to safety as
investors worldwide reacted to global economic concerns. As a result,
the yield on the benchmark 30-year Treasury fell to its lowest levels
in three decades, tumbling to 5.09% at the end of the period compared
to 5.92% at the start of the year.
FOREIGN BOND MARKETS
Typically, continued low inflation and economic growth in the U.S.
would help provide a positive backdrop for U.S.-based bonds relative
to most foreign bonds. But there was nothing typical about 1998. The
Salomon Brothers World Government Bond Index - a measure of government
bond market performance in developed nations - returned an impressive
15.30% for the 12 months that ended December 31, 1998. Many European
nations - particularly France, Italy and Spain - boasted strong
performance that helped drive the index's overall return. Not all was
rosy in the international bond market, however. In stark contrast to
the developed world, the often-volatile emerging debt markets
experienced a particularly difficult year, illustrated by the J.P.
Morgan Emerging Markets Bond Index return of -11.04% during the
period. Once again, the impact of financial and economic woes in Asia
and Russia was the primary contributor to the poor performance of
emerging markets.
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.
If Fidelity had not reimbursed certain fund expenses, the past 10
years total return would have been lower. Yield will vary.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
1998
VIP: MONEY MARKET 5.46% 5.30% 5.67%
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.
YIELD
12/30/98 9/30/98 7/1/98 4/1/98 12/31/97
VIP: MONEY MARKET 5.08% 5.40% 5.42% 5.38% 5.56%
MMDA 2.23% 2.51% 2.51% 2.53% 2.60%
Row: 1, Col: 1, Value: 5.18
Row: 1, Col: 2, Value: 2.23
Row: 2, Col: 1, Value: 5.44
Row: 2, Col: 2, Value: 2.51
Row: 3, Col: 1, Value: 5.48
Row: 3, Col: 2, Value: 2.51
Row: 4, Col: 1, Value: 5.3
Row: 4, Col: 2, Value: 2.58
Row: 5, Col: 1, Value: 5.56
Row: 5, Col: 2, Value: 2.7
Money Market
MMDA
6% -
5% -
4% -
3% -
2% -
1% -
0%
YIELD refers to the income paid by the fund over a given period.
Yields for money market funds are usually for seven-day periods,
expressed as annual percentage rates. A yield that assumes income
earned is reinvested or compounded is called an effective yield. The
chart above shows the fund's current seven-day yield at quarterly
intervals over the past year. You can compare these yields to the bank
money market deposit account (MMDA) average. The MMDA average is
supplied by BANK RATE MONITOR. TM
(checkmark)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.
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
(photograph of Robert Duby)
An interview with Robert Duby, Portfolio Manager of Money Market
Portfolio
Q. BOB, WHAT WAS THE INVESTMENT ENVIRONMENT LIKE IN 1998?
A. Through the first half of the year, statistics showed that positive
consumer and market sentiment were at record high levels. Economic
data exhibited robust strength, unemployment was at record-low levels
and inflation remained non-existent. This backdrop continued through
the first part of the third quarter of 1998, with the stock market
marching upward in July. Market observers expected that the Federal
Reserve Board might have to "tap the brakes" to slow the economy and
head off inflation by raising short-term interest rates. But then,
turmoil in foreign markets arose, creating a very challenging
environment in the money market area through the rest of the year,
with wide fluctuations in both money market yields and market
sentiment. The downturn began when Russia defaulted on some of its
debt in August, helping spark additional chaos in other emerging
markets. Investors around the world became "risk averse," worrying
more about getting their capital back than receiving a high yield on
their investments. The news worsened with the near-collapse of
Long-Term Capital Management, a huge hedge fund in the U.S., which
required a subsequent infusion of about $3.5 billion of private
capital in order to avoid destabilizing already-shaky markets in the
U.S. and abroad.
Q. WHAT WAS THE FED'S RESPONSE TO THESE EVENTS?
A. The Fed instituted the first of three separate 0.25 percentage
point cuts to the rate banks charge each other for overnight loans -
known as the fed funds target rate - on September 29. In lowering that
rate from 5.50% to 5.25%, the Fed announced that "the action was taken
to cushion the effects on prospective economic growth in the United
States of increasing weakness in foreign economies and of less
accommodative financial conditions domestically." The market was
disappointed that the move was only 0.25 percentage points and not
0.50, but short-term interest rates fell and prices immediately began
to reflect further decreases. The second cut, implemented on October
15 between meetings of the Fed's Open Market Committee, was unexpected
and surprising, and turned out to be the needed medicine to stabilize
a nervous market. A final so-called "insurance cut" - implemented to
reduce the downside risk remaining in global markets - occurred at the
end of November when the fed funds target rate was lowered to 4.75%.
From that point, stability returned for the most part to our market as
we ended the year. The difference between the yields offered by
Treasuries versus other securities - which had become quite wide as
nervous investors fled to the safety offered by U.S. Treasury
securities - narrowed to more appropriate levels, and market sentiment
returned to a more balanced feeling. Domestic growth continued to
exceed expectations, even with a sharp slowdown on the manufacturing
side. Consumer confidence improved from lower levels in the fourth
quarter, with the stock market's strong performance at year-end
helping to boost those feelings.
Q. WHAT KIND OF STRATEGY DID YOU PURSUE AS ALL OF THIS WAS UNFOLDING?
A. My investment strategy for the fund was similar to past strategies:
I lengthened the fund's average maturity on market weakness and
shortened it on market strength. A cautious approached was followed
during the first part of the fourth quarter as the market turmoil in
both foreign and domestic markets unfolded. The portfolio's average
maturity was held in the 50- to 60-day range, as I concentrated new
investments in the one- to three-month area. Selective purchases were
made at the end of the period in the six-month area in order to lock
in higher-yielding investments, given the expectation for an unchanged
policy from the Federal Reserve during the first part of 1999.
Q. WHAT'S YOUR OUTLOOK FOR THE BEGINNING OF 1999?
A. My current interest-rate outlook is for no change in Fed monetary
policy over the next few months. However, my bias has switched from
the possibility of an interest-rate cut to a more neutral stance. The
strength of the domestic economy continues to surprise market
participants, and members of the Fed Open Market Committee have
recently suggested that their bias could be changed to one favoring an
interest-rate increase - to slow growth and head off inflation -
should the economy continue to exceed expectations. The portfolio will
be positioned appropriately. That is, I will allow its maturity to
shorten somewhat should the strength continue, so that I can purchase
higher-yielding securities should interest rates rise. The current
thinking at the Federal Reserve is that the risk of an economic
slowdown no longer predominates and that the risk of the economy
overheating and sparking inflationary pressures deserves equal weight.
The views expressed in this report reflect those of the portfolio
manager only through the end of the period of the report as stated on
the cover. The manager's views are subject to change at any time based
on market and other conditions.
(checkmark) 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, 1998, more than
$1.5 billion
MANAGER: Robert Duby, since 1997; joined
Fidelity in 1982
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO
INVESTMENTS DECEMBER 31, 1998
Showing Percentage of Total Value of Investment in Securities
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
CERTIFICATES OF DEPOSIT - 32.0%
DUE DATE ANNUALIZED YIELD AT TIME OF PRINCIPAL AMOUNT VALUE (NOTE 1)
PURCHASE
CHICAGO BRANCH, YANKEE
DOLLAR, FOREIGN BANKS - 0.3%
ABN-AMRO Bank NV
2/2/99 5.54% $ 5,000,000 $ 4,999,828
DOMESTIC CERTIFICATES OF
DEPOSIT - 2.7%
Chase Manhattan Bank
3/22/99 4.95 13,000,000 13,000,000
Chase Manhattan Bank (USA)
3/2/99 5.50 20,000,000 20,000,000
Fleet National Bank
2/3/99 5.36 (b) 7,000,000 6,996,431
39,996,431
LONDON BRANCH, EURODOLLAR,
FOREIGN BANKS - 13.4%
Abbey National Treasury
Services PLC
3/15/99 5.15 35,000,000 35,000,000
Bank of Scotland Treasury
Services
2/26/99 5.18 5,000,000 5,000,038
3/9/99 5.16 5,000,000 5,000,092
3/31/99 5.19 5,000,000 5,000,122
Bayerische Hypo-und
Vereinsbank AG
3/10/99 5.20 50,000,000 50,000,927
Commerzbank AG
2/16/99 5.35 4,000,000 4,000,342
3/5/99 5.40 1,000,000 1,000,198
Den Danske Bank Group AS
2/10/99 5.22 5,000,000 5,000,165
3/31/99 5.13 5,000,000 5,000,122
Lloyds Bank PLC
3/18/99 5.12 5,000,000 5,000,000
Morgan Guaranty Trust Co., NY
1/26/99 5.00 7,000,000 7,000,384
Royal Bank of Scotland PLC
3/18/99 5.14 25,000,000 25,000,000
Toronto Dominion Bank
3/18/99 5.13 25,000,000 25,000,000
Westdeutsche Landesbank
Girozentrale
1/19/99 5.40 25,000,000 24,999,990
202,002,380
NEW YORK BRANCH, YANKEE
DOLLAR, FOREIGN BANKS - 15.6%
ABN-AMRO Bank NV
6/30/99 5.05 5,000,000 5,000,122
Bank of Nova Scotia
2/8/99 5.25 10,000,000 10,000,000
2/25/99 5.76 10,000,000 9,996,299
Banque Nationale de Paris
4/8/99 5.04 10,000,000 10,000,000
Canadian Imperial Bank of
Commerce
1/14/99 5.10 10,000,000 10,000,601
2/3/99 5.27 10,000,000 10,000,000
3/2/99 5.70 5,000,000 4,999,488
4/5/99 5.09 10,000,000 10,000,000
DUE DATE ANNUALIZED YIELD AT TIME OF PRINCIPAL AMOUNT VALUE (NOTE 1)
PURCHASE
Commerzbank AG
2/4/99 5.21% $ 5,000,000 $ 5,000,000
3/5/99 5.20 10,000,000 10,004,633
5/4/99 5.01 5,000,000 5,000,000
5/10/99 5.13 10,000,000 10,000,000
Credit Agricole Indosuez
2/26/99 5.70 5,000,000 4,999,706
Credit Communale de Belgique
2/3/99 5.64 5,000,000 5,000,000
Dresdner Bank AG
4/26/99 5.05 5,000,000 5,000,000
Landesbank Hessen-Thuringen
4/12/99 5.07 5,000,000 5,000,138
National Westminster Bank PLC
2/26/99 5.70 5,000,000 4,999,706
5/7/99 5.70 5,000,000 4,999,365
Norddeutsche Landesbank
Girozentrale
6/7/99 5.76 25,000,000 24,992,791
Rabobank Nederland Coop.
Central
2/2/99 5.54 5,000,000 4,999,828
3/2/99 5.50 10,000,000 10,000,000
6/1/99 5.75 5,000,000 4,998,613
Royal Bank of Canada
2/10/99 5.60 5,000,000 4,999,632
6/11/99 5.80 10,000,000 9,997,043
Royal Bank of Scotland PLC
3/10/99 5.18 4,000,000 4,000,000
Societe Generale, France
4/16/99 5.00 2,000,000 2,003,463
Swiss Bank Corp.
3/19/99 5.70 10,000,000 9,998,585
3/24/99 5.75 5,000,000 4,998,904
6/3/99 5.75 10,000,000 9,997,189
Westdeutsche Landesbank
Girozentrale
3/16/99 5.14 15,000,000 15,000,000
235,986,106
TOTAL CERTIFICATES OF DEPOSIT 482,984,745
COMMERCIAL PAPER - 48.0%
ABN-AMRO North America, Inc.
3/30/99 5.17 10,000,000 9,875,333
Anz (Delaware), Inc.
3/22/99 5.10 25,000,000 24,720,278
Aspen Funding Corp.
1/22/99 5.54 5,000,000 4,983,958
3/10/99 5.40 5,000,000 4,949,944
Asset Securitization Coop.
Corp.
2/16/99 5.43 10,000,000 9,931,639
2/18/99 5.43 5,000,000 4,964,333
3/19/99 5.17 6,000,000 5,934,550
COMMERCIAL PAPER - CONTINUED
DUE DATE ANNUALIZED YIELD AT TIME OF PRINCIPAL AMOUNT VALUE (NOTE 1)
PURCHASE
Asset Securitization Coop.
Corp. - continued
4/14/99 5.17% $ 5,000,000 $ 4,927,328
4/15/99 5.14 5,000,000 4,927,056
4/15/99 5.17 5,000,000 4,926,622
Associates Corp. of North
America
2/25/99 5.19 50,000,000 49,608,507
Associates First Capital Corp.
3/23/99 5.15 10,000,000 9,885,700
AVCO Financial Services, Inc.
2/23/99 5.32 19,000,000 18,853,426
3/29/99 5.15 30,000,000 29,632,425
Bank of Nova Scotia
3/1/99 5.21 5,000,000 4,957,856
3/8/99 5.20 5,000,000 4,952,975
BankAmerica Corp.
3/10/99 5.26 5,000,000 4,951,172
Bear Stearns Companies, Inc.
3/11/99 5.40 5,000,000 4,949,113
3/15/99 5.40 5,000,000 4,946,264
Chase Manhattan Corp.
3/11/99 5.26 5,000,000 4,950,454
CIT Group, Inc.
4/5/99 5.08 5,000,000 4,934,722
Citibank Credit Card Master
Trust I (Dakota Certificate
Program)
1/20/99 5.32 5,000,000 4,986,146
2/4/99 5.41 5,000,000 4,974,736
3/4/99 5.27 9,000,000 8,919,400
Commonwealth Bank of Australia
3/17/99 5.11 5,000,000 4,947,396
Cregem North America, Inc.
2/4/99 5.55 10,000,000 9,947,867
Den Danske Corp., Inc.
2/10/99 5.24 5,000,000 4,971,139
Deutsche Bank Financial, Inc.
2/22/99 5.30 10,000,000 9,924,456
Enterprise Funding Corp.
2/5/99 5.45 5,000,000 4,973,750
2/10/99 5.47 5,000,000 4,970,000
2/24/99 5.42 5,000,000 4,959,875
Finova Capital Corp.
2/16/99 5.64 4,000,000 3,971,633
2/18/99 5.71 2,000,000 1,985,013
Fleet Funding Corp.
1/29/99 5.44 8,000,000 7,966,400
Ford Motor Credit Co.
2/5/99 5.26 20,000,000 19,898,694
General Electric Capital Corp.
2/1/99 5.62 30,000,000 29,858,692
3/4/99 5.13 15,000,000 14,869,025
3/10/99 5.24 25,000,000 24,756,806
4/12/99 5.09 5,000,000 4,929,861
DUE DATE ANNUALIZED YIELD AT TIME OF PRINCIPAL AMOUNT VALUE (NOTE 1)
PURCHASE
General Electric Capital
Services, Inc.
3/2/99 5.14% $ 10,000,000 $ 9,915,500
General Electric Co.
4/8/99 5.09 15,000,000 14,797,917
General Motors Acceptance Corp.
1/25/99 5.50 2,300,000 2,291,597
1/26/99 5.67 5,000,000 4,980,903
1/27/99 5.15 10,000,000 9,963,311
1/28/99 5.14 10,000,000 9,962,050
2/10/99 5.16 5,000,000 4,971,778
3/17/99 5.23 30,000,000 29,678,750
Heller Financial, Inc.
1/28/99 5.83 2,000,000 1,991,375
2/23/99 5.69 2,000,000 1,983,452
Kitty Hawk Funding Corp.
2/2/99 5.34 6,000,000 5,971,733
2/4/99 5.47 4,143,000 4,121,871
2/5/99 5.34 2,793,000 2,778,608
3/1/99 5.32 3,000,000 2,974,188
3/3/99 5.31 5,000,000 4,955,606
3/10/99 5.24 5,000,000 4,951,172
3/11/99 5.22 5,000,000 4,950,646
Lehman Brothers Holdings, Inc.
1/26/99 6.55 5,000,000 4,977,431
1/28/99 6.55 5,000,000 4,975,625
MCI WorldCom, Inc.
1/29/99 5.83 4,000,000 3,982,111
2/25/99 5.69 6,000,000 5,948,483
3/26/99 5.54 4,000,000 3,949,133
Morgan (JP) & Co., Inc.
4/12/99 5.09 10,000,000 9,859,722
Morgan Stanley, Dean Witter &
Co.
1/21/99 5.22 15,000,000 14,957,083
2/11/99 5.42 15,000,000 14,908,775
New Center Asset Trust
3/8/99 5.17 5,000,000 4,953,250
3/17/99 5.24 5,000,000 4,946,354
Nordbanken, North America, Inc.
3/1/99 5.26 10,000,000 9,914,942
Norfolk Southern Corp.
1/29/99 6.09 5,000,000 4,976,589
Norwest Financial, Inc.
3/4/99 5.31 5,000,000 4,954,964
PHH Corp.
1/14/99 5.88 3,000,000 2,993,663
2/18/99 6.10 5,000,000 4,959,933
2/23/99 6.10 2,000,000 1,982,304
Preferred Receivables Funding
Corp.
2/16/99 5.46 5,000,000 4,965,500
2/18/99 5.27 15,000,000 14,895,600
2/22/99 5.36 5,000,000 4,961,722
COMMERCIAL PAPER - CONTINUED
DUE DATE ANNUALIZED YIELD AT TIME OF PRINCIPAL AMOUNT VALUE (NOTE 1)
PURCHASE
Preferred Receivables Funding
Corp. - continued
2/25/99 5.25% $ 3,000,000 $ 2,976,167
3/3/99 5.21 5,000,000 4,956,368
Salomon Smith Barney
Holdings, Inc.
2/16/99 5.40 5,000,000 4,965,979
2/22/99 5.25 5,000,000 4,962,589
3/1/99 5.25 7,000,000 6,940,803
Sears Roebuck Acceptance Corp.
3/4/99 5.31 2,000,000 1,981,917
Societe Generale North
America, Inc.
2/25/99 5.34 10,000,000 9,920,250
Textron, Inc.
1/4/99 5.25 14,000,000 13,993,875
Triple A One Funding Corp.
1/15/99 5.62 5,000,000 4,989,131
2/11/99 5.47 5,000,000 4,969,193
UBS Finance (Delaware), Inc.
3/1/99 5.05 20,000,000 19,837,455
TOTAL COMMERCIAL PAPER 724,371,912
FEDERAL AGENCIES - 3.3%
FREDDIE MAC - 3.3%
Discount Notes - 3.3%
1/25/99 5.23 25,000,000 24,914,333
2/2/99 5.27 25,000,000 24,885,111
TOTAL FEDERAL AGENCIES 49,799,444
BANK NOTES - 7.7%
Abbey National Treasury
Services PLC
2/17/99 5.34 (a)(b) 5,000,000 4,997,283
Comerica Bank, Detroit
2/9/99 5.43 (b) 2,000,000 1,999,316
First Union National Bank of
North Carolina
1/4/99 5.15 (b) 15,000,000 14,999,827
1/20/99 5.24 (b) 15,000,000 15,000,000
Fleet National Bank, Providence
2/4/99 5.32 (b) 7,000,000 6,997,056
Key Bank NA
1/4/99 5.16 (b) 3,000,000 2,999,885
1/21/99 5.51 (b) 5,000,000 4,997,935
National City Bank, Kentucky
1/5/99 5.01 (b) 5,000,000 4,999,719
NationsBank NA
4/20/99 4.90 25,000,000 25,000,000
PNC Bank NA, Pittsburgh
1/19/99 5.29 (b) 8,000,000 7,999,773
2/3/99 5.23 (b) 7,000,000 6,999,134
DUE DATE ANNUALIZED YIELD AT TIME OF PRINCIPAL AMOUNT VALUE (NOTE 1)
PURCHASE
US Bank NA
1/20/99 5.48% (b) $ 20,000,000 $ 19,989,739
TOTAL BANK NOTES 116,979,667
MASTER NOTES - 1.7%
Goldman Sachs Group L.P. (The)
3/8/99 5.30 (b) 10,000,000 10,000,000
J.P. Morgan Securities, Inc.
1/7/99 5.54 (b) 15,000,000 15,000,000
TOTAL MASTER NOTES 25,000,000
MEDIUM-TERM NOTES - 2.8%
Bishops Gate Resources
Mortgage Trust
11/22/99 5.26 (b) 4,000,000 4,000,000
Goldman Sachs Group L.P.
1/7/99 5.75 (b)(c) 7,000,000 7,000,000
Merrill Lynch & Co., Inc.
3/4/99 5.23 (b) 5,000,000 4,999,586
Morgan Guaranty Trust Co., NY
1/27/99 5.63 (b) 10,000,000 9,996,423
Morgan Stanley, Dean Witter,
Discover & Co.
1/4/99 5.24 (b) 5,000,000 5,000,000
Norwest Corp.
1/22/99 5.21 (b) 6,000,000 6,000,000
Premier Auto Trust
6/8/99 5.41 4,644,436 4,643,996
TOTAL MEDIUM-TERM NOTES 41,640,005
SHORT-TERM NOTES - 3.6%
Cap. One Fdg. Corp.
1/7/99 5.57 (b) 4,200,000 4,200,000
Capital One Funding Corp.
1/7/99 5.57 (b) 8,452,000 8,452,000
New York Life Insurance Co.
1/7/99 5.21 (b) 5,000,000 5,000,000
4/1/99 5.35 (b)(c) 4,000,000 4,000,000
Monumental Life Insurance Co.
1/3/99 5.22 (b)(c) 5,000,000 5,000,000
SMM Trust (1998-I)
1/28/99 5.62 (a)(b) 3,000,000 3,000,000
Strategic Money Market Trust
(1998-A)
3/16/99 5.32 (b) 14,000,000 14,000,000
Strategic Money Market Trust
(1998-B)
1/5/99 5.06 (a)(b) 11,000,000 11,000,000
TOTAL SHORT-TERM NOTES 54,652,000
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
REPURCHASE AGREEMENTS - 0.9%
MATURITY AMOUNT VALUE (NOTE 1)
In a joint trading account $ 14,221,858 $ 14,214,000
(U.S. Treasury Obligations)
dated 12/31/98 due 1/4/99 At
4.98% (Cost $14,214,000)
TOTAL INVESTMENTS - 100% $ 1,509,641,773
Total Cost for Income Tax Purposes $ 1,509,641,773
</TABLE>
LEGEND
(a) 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
$18,997,283 or 1.3% of net assets.
(b) 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.
(c) Restricted securities - Investment in securities not registered
under the Securities Act of 1933 (see Note 2 of Notes to Financial
Statements).
SECURITY ACQUISTION DATE COST
Goldman Sachs Group L.P. 12/7/98 $ 7,000,000
5.7455% 1/7/00
New York Life Insurance Co. 12/21/98 $ 4,000,000
5.3538% 12/22/99
Monumental Life Insurance Co. 9/17/98 $ 5,000,000
5.6866% 10/18/99
INCOME TAX INFORMATION
At December 31, 1998, the fund had a capital loss carryforward of
approximately $29,000 of which $1,000 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, 1998
ASSETS
Investment in securities, at $ 1,509,641,773
value - See accompanying
schedule
Cash 130
Receivable for investments 300,000
sold
Receivable for fund shares 4,816,698
sold
Interest receivable 9,436,100
TOTAL ASSETS 1,524,194,701
LIABILITIES
Payable for investments $ 7,070,345
purchased
Payable for fund shares 9,234,589
purchased
Accrued management fee 235,453
Other payables and accrued 164,898
expenses
TOTAL LIABILITIES 16,705,285
NET ASSETS $ 1,507,489,416
Net Assets consist of:
Paid in capital $ 1,507,518,136
Accumulated net realized gain (28,720)
(loss) on investments
NET ASSETS, for 1,507,503,080 $ 1,507,489,416
shares outstanding
NET ASSET VALUE, offering $1.00
price and redemption price
per share ($1,507,489,416
(divided by) 1,507,503,080
shares)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
INTEREST INCOME $ 77,393,265
Expenses
Management fee $ 2,767,757
Transfer agent fees 942,507
Accounting fees and expenses 154,243
Non-interested trustees' 5,094
compensation
Custodian fees and expenses 27,955
Audit 35,202
Legal 11,301
Miscellaneous 119,221
TOTAL EXPENSES 4,063,280
NET INTEREST INCOME 73,329,985
NET REALIZED GAIN (LOSS) ON 30,030
INVESTMENTS
NET INCREASE IN NET ASSETS $ 73,360,015
RESULTING FROM OPERATIONS
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
INCREASE (DECREASE) IN NET YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
ASSETS
Operations Net interest income $ 73,329,985 $ 59,161,428
Net realized gain (loss) 30,030 (30,044)
NET INCREASE (DECREASE) IN 73,360,015 59,131,384
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders (73,329,985) (59,161,428)
from net interest income
Share transactions at net 2,992,850,183 1,984,694,072
asset value of $1.00 per
share Proceeds from sales of
shares
Reinvestment of 73,314,040 59,126,220
distributions from net
interest income
Cost of shares redeemed (2,579,498,939) (2,149,151,239)
NET INCREASE (DECREASE) IN 486,665,284 (105,330,947)
NET ASSETS AND SHARES
RESULTING FROM SHARE
TRANSACTIONS
TOTAL INCREASE (DECREASE) 486,695,314 (105,360,991)
IN NET ASSETS
NET ASSETS
Beginning of period 1,020,794,102 1,126,155,093
End of period $ 1,507,489,416 $ 1,020,794,102
SEE ACCOMPANYING NOTES WHICH
ARE AN INTEGRAL PART OF THE
FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 1996 1995 1994
Net asset value, beginning of $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
period
Income from Investment .053 .053 .052 .057 .042
Operations Net interest
income
Less Distributions
From net interest income (.053) (.053) (.052) (.057) (.042)
Net asset value, end of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
TOTAL RETURN A 5.46% 5.51% 5.41% 5.87% 4.25%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 1,507,489 $ 1,020,794 $ 1,126,155 $ 808,874 $ 748,606
(000 omitted)
Ratio of expenses to average .30% .31% .30% .33% .27%
net assets
Ratio of net interest income 5.33% 5.32% 5.28% 5.72% 4.32%
to average net assets
</TABLE>
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.
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). If Fidelity had not reimbursed certain fund
expenses, the past 10 year total returns would have been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
1998
VIP II: INVESTMENT GRADE BOND 8.85% 6.70% 8.36%
LB Aggregate Bond 8.69% 7.27% 9.26%
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 index of investment-grade fixed-rate
debt issues, including government, corporate, asset-backed, and
mortgage-backed securities, with maturities of one year or more. This
benchmark includes reinvested dividends and capital gains, if any.
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.
(checkmark) 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.
$10,000 OVER 10 YEARS
VIP II: Investment Grade LB Aggregate Bond
00155 LB001
1988/12/31 10000.00 10000.00
1989/01/31 10086.92 10144.00
1989/02/28 10109.25 10070.96
1989/03/31 10172.02 10114.27
1989/04/30 10285.31 10325.66
1989/05/31 10399.91 10597.22
1989/06/30 10600.00 10919.38
1989/07/31 10765.35 11151.96
1989/08/31 10679.56 10986.91
1989/09/30 10721.69 11042.94
1989/10/31 10887.69 11314.60
1989/11/30 10981.36 11422.09
1989/12/31 11026.21 11452.93
1990/01/31 11001.11 11316.64
1990/02/28 11063.52 11352.85
1990/03/31 11097.11 11360.80
1990/04/30 11101.82 11256.28
1990/05/31 11276.11 11589.47
1990/06/30 11364.07 11776.06
1990/07/31 11476.89 11938.57
1990/08/31 11475.79 11778.59
1990/09/30 11520.66 11876.35
1990/10/31 11521.38 12027.18
1990/11/30 11590.77 12285.77
1990/12/31 11711.43 12477.42
1991/01/31 11735.04 12632.14
1991/02/28 11853.10 12739.52
1991/03/31 12053.80 12827.42
1991/04/30 12230.89 12965.95
1991/05/31 12325.33 13041.16
1991/06/30 12348.94 13034.64
1991/07/31 12455.20 13215.82
1991/08/31 12714.93 13501.28
1991/09/30 12951.04 13775.36
1991/10/31 13092.71 13928.26
1991/11/30 13234.39 14056.40
1991/12/31 13629.42 14473.88
1992/01/31 13494.11 14277.03
1992/02/29 13567.97 14369.83
1992/03/31 13543.27 14289.36
1992/04/30 13642.04 14392.25
1992/05/31 13851.92 14664.26
1992/06/30 14012.41 14866.63
1992/07/31 14296.36 15169.91
1992/08/31 14382.78 15323.12
1992/09/30 14555.62 15505.47
1992/10/31 14370.44 15299.24
1992/11/30 14333.40 15302.30
1992/12/31 14536.36 15545.61
1993/01/31 14841.14 15844.09
1993/02/28 15093.07 16121.36
1993/03/31 15159.39 16189.07
1993/04/30 15252.23 16302.39
1993/05/31 15278.75 16323.58
1993/06/30 15570.53 16619.04
1993/07/31 15676.64 16713.77
1993/08/31 15955.15 17006.26
1993/09/30 16034.73 17052.18
1993/10/31 16114.31 17115.27
1993/11/30 16034.73 16969.79
1993/12/31 16129.93 17061.43
1994/01/31 16312.59 17291.76
1994/02/28 16045.19 16990.88
1994/03/31 15678.93 16571.21
1994/04/30 15538.06 16438.64
1994/05/31 15495.80 16436.99
1994/06/30 15453.53 16400.83
1994/07/31 15707.10 16727.21
1994/08/31 15721.19 16747.28
1994/09/30 15552.14 16501.09
1994/10/31 15566.23 16486.24
1994/11/30 15594.40 16449.97
1994/12/31 15523.97 16563.48
1995/01/31 15749.36 16891.44
1995/02/28 16053.30 17293.45
1995/03/31 16155.46 17398.94
1995/04/30 16374.37 17642.53
1995/05/31 17031.09 18325.29
1995/06/30 17162.44 18459.07
1995/07/31 17104.06 18418.46
1995/08/31 17308.38 18641.32
1995/09/30 17468.91 18822.14
1995/10/31 17702.41 19066.83
1995/11/30 17965.10 19352.83
1995/12/31 18213.20 19623.77
1996/01/31 18329.95 19753.29
1996/02/29 17995.20 19409.58
1996/03/31 17857.01 19273.71
1996/04/30 17749.53 19165.78
1996/05/31 17718.82 19127.45
1996/06/30 17933.78 19383.76
1996/07/31 17979.84 19436.09
1996/08/31 17964.49 19403.05
1996/09/30 18256.22 19740.67
1996/10/31 18655.43 20178.91
1996/11/30 18962.52 20523.97
1996/12/31 18793.62 20333.09
1997/01/31 18839.68 20396.13
1997/02/28 18864.60 20447.12
1997/03/31 18668.78 20220.15
1997/04/30 18946.20 20523.46
1997/05/31 19093.07 20718.43
1997/06/30 19321.53 20964.98
1997/07/31 19843.74 21531.03
1997/08/31 19664.23 21348.02
1997/09/30 19957.97 21663.97
1997/10/31 20219.07 21978.10
1997/11/30 20268.03 22079.20
1997/12/31 20496.49 22302.20
1998/01/31 20757.59 22587.67
1998/02/28 20743.06 22569.60
1998/03/31 20829.13 22646.33
1998/04/30 20932.42 22764.09
1998/05/31 21121.77 22980.35
1998/06/30 21293.92 23175.68
1998/07/31 21345.56 23224.35
1998/08/31 21603.77 23602.91
1998/09/30 22137.41 24155.22
1998/10/31 22016.91 24027.20
1998/11/30 22206.27 24164.15
1998/12/31 22309.55 24236.64
IMATRL PRASUN SHR__CHT 19981231 19990111 115148 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund II: Investment Grade Bond
Portfolio on December 31, 1988. By December 31, 1998, the value of the
investment would have grown to $22,310 - a 123.10% 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 $24,237 - a 142.37% increase.
INVESTMENT SUMMARY
QUALITY DIVERSIFICATION AS OF DECEMBER 31, 1998
(MOODY'S RATINGS) % OF FUND'S INVESTMENTS
Aaa 45.1
Aa 2.0
A 10.5
Baa 20.0
Ba 1.5
B 0.0
Not rated 0.0
TABLE EXCLUDES SHORT-TERM INVESTMENTS. WHERE MOODY'S RATINGS ARE NOT
AVAILABLE, WE HAVE USED S&P RATINGS.
AVERAGE YEARS TO MATURITY AS OF DECEMBER 31, 1998
Years 8.1
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, 1998
% OF FUND'S INVESTMENTS
Finance 12.5
Media & Leisure 4.5
Utilities 3.1
Nondurables 1.8
Retail & Wholesale 1.7
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
(photograph of Kevin Grant)
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-month period that ended December 31, 1998, the fund
performed in line with the Lehman Brothers Aggregate Bond Index, which
returned 8.69% in that time frame.
Q. WHAT WAS THE INVESTMENT ENVIRONMENT LIKE DURING THE YEAR?
A. 1998 was an extraordinarily interesting year in the capital
markets, with dramatic changes occurring. Change can often present
opportunities for our style of management, in which we look for
relative value. Market volatility can create relative value by
changing prices of certain types of bonds. In the background, the U.S.
economy was strong throughout 1998, but the economic implosion in Asia
continued to cause concern. The Russian devaluation and bond default
in August threw the capital markets into a significant correction,
climaxing in the near-collapse of Long-Term Capital Management.
Long-Term Capital is a hedge fund that uses great amounts of borrowed
money to invest, principally in the bond markets. If it had gone
bankrupt, it would have changed the financial landscape. The Federal
Reserve intervened and encouraged major investment banks to come to
the rescue. The Federal Reserve also cut short-term interest rates
three times late in the period. As a result, the market volatility
passed without significant damage as the Fed provided the liquidity
and the confidence for a return to more balanced capital markets.
Q. WHAT WERE YOUR PRINCIPAL STRATEGIES IN THIS ENVIRONMENT?
A. We tried to take advantage of relative values created by the market
volatility to which Long-Term Capital contributed. Long-Term Capital
Management primarily invests in bonds, including the types of bonds
that we buy. The difference is the hedge fund uses borrowed money
whereas we use no leverage. When you are highly leveraged, any adverse
change in bond prices can hurt you deeply, and have a ripple effect on
the bond market. Fortunately, our portfolio was only a little
overweight in corporate bonds, principally in defensive, non-cyclical
sectors likely to be less affected by volatility. The portfolio was
hurt, but only slightly. However, when corporate bonds became
attractively priced later in the period, we were able to sell
Treasuries and buy corporates at very good prices. Prior to the market
correction in August, we had about 30% of the fund's assets invested
in corporate bonds, compared to the 21% corporate-bond position in the
Lehman Brothers Aggregate Bond Index. By the end of the period, we had
increased the fund's emphasis to about 33% in corporate bonds. The
story was similar for mortgage securities. Throughout the year, we
averaged about 25% of the fund's assets in mortgages, whereas 31% of
the index is in mortgages. By the end of the fiscal year, our
weighting in mortgage securities was about 34%. In general, as we sold
Treasuries and bought corporate or mortgage securities, we also picked
up a yield advantage. Over time, this should continue to help
performance of the fund. As is our policy, we kept interest
rate-sensitivity, or duration, consistent with our benchmark. At the
end of the year, duration was 4.6 years.
Q. WERE THERE ANY DISAPPOINTMENTS?
A. My primary disappointment was that I did not own fewer corporate
bonds before the volatility in August. Even the good bonds were hurt.
Up until August, I had dealt with the risk of corporate bonds
primarily by emphasizing defensive sectors, such as banks, telephone
utilities and cable television companies. However, even these sectors
were hurt in the capital crunch of August and September.
Q. WHAT IS YOUR OUTLOOK FOR THE BOND MARKET, KEVIN?
A. The outlook is very good for both corporate bonds and mortgages,
both of which still offer excellent relative value when compared to
Treasury bonds. We think in terms of spreads - or the differences in
yields. By historical standards, at the end of the fiscal year the
spreads were very wide between the yields of both corporate bonds and
mortgages and the yields of Treasury bonds. We didn't see the credit
risk to justify these wide spreads. The market offered attractive
relative value. In addition, I think interest rates will be stable
during 1999. This is a good environment for us, providing the
opportunity to use our expertise in credit analysis to pick bonds.
The views expressed in this report reflect those of the portfolio
manager only through the end of the period of the report as stated on
the cover. The manager's views are subject to change at any time based
on market and other conditions.
(checkmark) FUND FACTS
GOAL: seeks to provide a high rate of income consistent with
reasonable risk by investing in a broad range of investment-grade
fixed-income securities; in addition, the fund seeks to protect
capital
START DATE: December 5, 1988
SIZE: as of December 31, 1998, more than
$674 million
MANAGER: Kevin Grant, since 1997; joined Fidelity in 1993
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
INVESTMENTS DECEMBER 31, 1998
Showing Percentage of Total Value of Investment in Securities
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
NONCONVERTIBLE BONDS - 30.8%
MOODY'S RATINGS (UNAUDITED) (A) PRINCIPAL AMOUNT VALUE (NOTE 1)
AEROSPACE & DEFENSE - 0.4%
DEFENSE ELECTRONICS - 0.4%
Raytheon Co. 6.45% 8/15/02 Baa1 $ 3,000,000 $ 3,076,860
BASIC INDUSTRIES - 1.2%
CHEMICALS & PLASTICS - 0.7%
Monsanto Co. 5.75% 12/1/05 (c) A2 5,000,000 4,971,500
PACKAGING & CONTAINERS - 0.5%
Owens-Illinois, Inc.:
7.15% 5/15/05 Ba1 1,200,000 1,206,106
7.35% 5/15/08 Ba1 1,150,000 1,179,529
7.8% 5/15/18 Ba1 1,400,000 1,412,355
3,797,990
TOTAL BASIC INDUSTRIES 8,769,490
CONSTRUCTION & REAL ESTATE -
1.2%
REAL ESTATE INVESTMENT TRUSTS
- - 1.2%
CenterPoint Properties Trust. Baa2 510,000 484,429
6.75% 4/1/05
EOP Operating LP:
6.625% 2/15/05 Baa1 4,500,000 4,411,035
6.75% 2/15/08 Baa1 4,020,000 3,952,866
8,848,330
DURABLES - 0.2%
TEXTILES & APPAREL - 0.2%
Levi Strauss & Co. 7% 11/1/06 Baa3 2,000,000 1,833,000
(c)
ENERGY - 0.9%
OIL & GAS - 0.9%
Petro-Canada, Inc. 7% 11/15/28 A3 1,850,000 1,824,322
Petroleum Geo-Services ASA:
yankee 6.25% 11/19/03 (c) Baa3 3,180,000 3,149,154
7.125% 3/30/28 Baa3 1,700,000 1,588,463
6,561,939
FINANCE - 12.5%
BANKS - 4.4%
ABN-Amro Bank NV, Chicago A1 1,000,000 1,027,400
6.625% 10/31/01
BankAmerica Corp. 10% 2/1/03 Aa3 200,000 231,748
BankBoston NA 6.375% 3/25/08 A2 6,000,000 6,019,320
BanPonce Corp.:
5.75% 3/1/99 A3 370,000 370,244
6.378% 4/8/99 A3 430,000 430,989
MOODY'S RATINGS (UNAUDITED) (A) PRINCIPAL AMOUNT VALUE (NOTE 1)
Barclays Bank PLC yankee:
5.875% 7/15/00 A1 $ 2,400,000 $ 2,399,664
5.95% 7/15/01 A1 2,700,000 2,718,360
Capital One Bank:
6.375% 2/15/03 Baa3 1,130,000 1,125,955
6.42% 11/12/99 Baa3 2,000,000 1,994,880
Capital One Financial Corp. Ba1 1,290,000 1,278,932
7.125% 8/1/08
Chase Manhattan Corp. 8.5% A1 1,160,000 1,255,990
2/15/02
Citicorp 7.2% 6/15/07 A1 7,600,000 8,261,428
First Maryland Bancorp A3 500,000 514,050
10.375% 8/1/99
Kansallis-Osake-Pankki, New A3 260,000 292,292
York 10% 5/1/02
MBNA Corp.:
6.34% 6/2/03 Baa2 350,000 346,395
6.875% 11/15/02 Baa2 1,750,000 1,760,185
NB Capital Trust IV 8.25% Aa2 1,990,000 2,255,904
4/15/27
Union Planters Corp. 6.75% Baa2 400,000 418,212
11/1/05
Union Planters National Bank A3 500,000 510,250
6.81% 8/20/01
33,212,198
CREDIT & OTHER FINANCE - 7.1%
Ahmanson Capital Trust I A3 1,125,000 1,259,989
8.36% 12/1/26 (c)
Associates Corp. of North
America:
6% 4/15/03 Aa3 1,150,000 1,169,642
6% 7/15/05 Aa3 5,000,000 5,073,950
AT&T Capital Corp.:
6.41% 8/13/99 Baa3 1,000,000 1,004,550
7.5% 11/15/00 Baa3 3,020,000 3,056,965
Bank of New York Co., Inc. A1 1,000,000 1,167,790
Capital I 7.97% 12/31/26
BankBoston Capital Trust II A2 1,080,000 1,099,591
7.75% 12/15/26
BanPonce Trust I 8.327% 2/1/27 A3 1,230,000 1,319,200
Chase Capital I 7.67% 12/1/26 Aa3 2,020,000 2,173,803
Chrysler Financial Corp. A2 4,400,000 4,416,016
5.69% 11/15/01
ERP Operating LP 6.55% A3 1,150,000 1,151,162
11/15/01
Finova Capital Corp. 6.27% Baa1 400,000 400,420
9/29/00
First Security Capital I A3 1,210,000 1,334,836
8.41% 12/15/26
First Union Institutional BBB+ 6,200,000 6,828,494
Capital I 8.04% 12/1/26
Fleet Capital Trust II 7.92% A2 400,000 444,200
12/11/26
NONCONVERTIBLE BONDS -
CONTINUED
MOODY'S RATINGS (UNAUDITED) (A) PRINCIPAL AMOUNT VALUE (NOTE 1)
FINANCE - CONTINUED
CREDIT & OTHER FINANCE -
CONTINUED
Ford Motor Credit Co. 5.125% A1 $ 7,000,000 $ 6,966,400
10/15/01
General Electric Capital Aaa 1,000,000 1,003,820
Corp. 6.94% 4/13/09 (b)
GS Escrow Corp. 7.125% 8/1/05 Ba1 6,250,000 6,135,250
KeyCorp Institutional Capital A1 800,000 876,064
A 7.826% 12/1/26
Morgan (J.P.) Capital Trust A1 1,120,000 1,214,528
II 7.95% 2/1/27
PNC Institutional Capital A2 1,000,000 1,118,020
Trust 8.315% 5/15/27 (c)
Sears Credit Account Master Aaa 833,333 842,183
Trust II 7% 1/15/04
Spieker Properties LP 6.75% Baa2 2,000,000 1,960,420
1/15/08
Sprint Capital Corp. 5.7% Baa1 1,480,000 1,480,163
11/15/03
53,497,456
INSURANCE - 0.4%
Executive Risk Capital Trust Baa3 1,750,000 1,710,800
8.675% 2/1/27
Nationwide Mutual Insurance A1 130,000 133,773
Co. 6.5% 2/15/04 (c)
SunAmerica, Inc. 6.2% 10/31/99 Baa1 1,000,000 1,007,650
2,852,223
SAVINGS & LOANS - 0.5%
Great Western Finance Trust A3 2,500,000 2,820,250
II 8.206% 2/1/27
Long Island Savings Bank FSB Baa3 750,000 748,380
6.2% 4/2/01
3,568,630
SECURITIES INDUSTRY - 0.1%
Amvescap PLC yankee 6.6% A3 900,000 922,068
5/15/05
TOTAL FINANCE 94,052,575
INDUSTRIAL MACHINERY &
EQUIPMENT - 1.6%
INDUSTRIAL MACHINERY &
EQUIPMENT - 1.0%
Tyco International Group SA:
yankee 6.125% 6/15/01 Baa1 2,500,000 2,524,075
6.125% 11/1/08 (c) Baa1 5,000,000 4,906,150
7,430,225
MOODY'S RATINGS (UNAUDITED) (A) PRINCIPAL AMOUNT VALUE (NOTE 1)
POLLUTION CONTROL - 0.6%
WMX Technologies, Inc.:
6.25% 4/1/99 Baa3 $ 1,200,000 $ 1,202,040
7.1% 8/1/26 Baa3 3,000,000 3,193,800
4,395,840
TOTAL INDUSTRIAL MACHINERY & 11,826,065
EQUIPMENT
MEDIA & LEISURE - 4.5%
BROADCASTING - 2.2%
Clear Channel Communications, Baa3 6,000,000 6,004,800
Inc. 7.25% 10/15/27
Continental Cablevision, Inc.:
8.3% 5/15/06 Baa3 110,000 122,057
9% 9/1/08 Baa3 910,000 1,076,330
TCI Communications, Inc.:
8.25% 1/15/03 Baa3 90,000 98,766
9.8% 2/1/12 Baa3 1,255,000 1,675,877
8.75% 8/1/15 Baa3 2,600,000 3,229,954
Time Warner, Inc.:
6.625% 5/15/29 Baa3 1,200,000 1,220,952
6.875% 6/15/18 Baa3 920,000 963,755
8.18% 8/15/07 Baa3 2,000,000 2,317,100
16,709,591
ENTERTAINMENT - 0.9%
Viacom, Inc. 7.75% 6/1/05 Baa3 6,400,000 6,942,912
PUBLISHING - 1.4%
News America, Inc.:
6.625% 1/9/08 Baa3 210,000 215,817
7.25% 5/18/18 Baa3 3,000,000 3,065,040
Time Warner Entertainment Co. Baa2 6,000,000 7,283,880
LP 8.375% 3/15/23
10,564,737
RESTAURANTS - 0.0%
Darden Restaurants, Inc. Baa1 160,000 154,688
6.375% 2/1/06
TOTAL MEDIA & LEISURE 34,371,928
NONDURABLES - 1.8%
BEVERAGES - 1.2%
Seagram Co. Ltd.:
yankee 6.875% 9/1/23 Baa3 350,000 322,000
8.35% 1/15/22 Baa3 220,000 235,950
Seagram J E & Sons, Inc.:
6.625% 12/15/05 Baa3 5,000,000 4,970,000
7% 4/15/08 Baa3 330,000 331,238
7.6% 12/15/28 Baa3 3,000,000 3,010,500
8,869,688
NONCONVERTIBLE BONDS -
CONTINUED
MOODY'S RATINGS (UNAUDITED) (A) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONDURABLES - CONTINUED
FOODS - 0.2%
ConAgra, Inc. 7.125% 10/1/26 Baa1 $ 1,270,000 $ 1,347,026
TOBACCO - 0.4%
Philip Morris Companies, Inc. A2 3,000,000 3,194,970
6.95% 6/1/06
TOTAL NONDURABLES 13,411,684
RETAIL & WHOLESALE - 1.7%
DRUG STORES - 0.8%
Rite Aid Corp. 6% 12/15/05 (c) Baa1 6,000,000 6,000,000
GENERAL MERCHANDISE STORES -
0.5%
Dayton Hudson Corp. 6.4% A3 500,000 514,775
2/15/03
Federated Department Stores, Baa2 3,000,000 3,308,940
Inc. 8.5% 6/15/03
3,823,715
GROCERY STORES - 0.4%
American Stores Co. 7.5% Baa2 1,400,000 1,559,698
5/1/37
Kroger Co. 6% 7/1/00 Baa3 1,700,000 1,711,152
3,270,850
TOTAL RETAIL & WHOLESALE 13,094,565
TECHNOLOGY - 0.8%
COMPUTERS & OFFICE EQUIPMENT
- - 0.8%
Comdisco, Inc.:
6.375% 11/30/01 Baa1 3,200,000 3,213,856
6.45% 11/13/00 Baa1 3,000,000 3,056,670
6,270,526
TRANSPORTATION - 0.9%
AIR TRANSPORTATION - 0.2%
Delta Air Lines, Inc. Baa1 396,598 434,171
equipment trust certificate
8.54% 1/2/07
United Air Lines, Inc. 9% Baa3 1,100,000 1,210,539
12/15/03
1,644,710
RAILROADS - 0.7%
Burlington Northern Santa Fe Baa2 3,000,000 3,112,170
Corp. 6.53% 7/15/37
Norfolk Southern Corp. 7.05% Baa1 1,700,000 1,839,111
5/1/37
4,951,281
TOTAL TRANSPORTATION 6,595,991
MOODY'S RATINGS (UNAUDITED) (A) PRINCIPAL AMOUNT VALUE (NOTE 1)
UTILITIES - 3.1%
CELLULAR - 0.7%
Cable & Wireless Baa1 $ 5,540,000 $ 5,542,438
Communications PLC 6.375%
3/6/03
ELECTRIC UTILITY - 1.3%
Avon Energy Partners Holdings:
6.46% 3/4/08 (c) Baa2 1,500,000 1,521,600
7.05% 12/11/07 (c) Baa2 3,000,000 3,141,360
British Columbia Hydro & Aa2 360,000 376,484
Power Authority yankee 12.5%
1/15/14
DR Investments UK PLC yankee A2 1,500,000 1,560,150
7.1% 5/15/02 (c)
Israel Electric Corp. Ltd. A3 2,400,000 2,195,232
7.75% 12/15/27 (c)
Texas Utilities Co. 6.375% Baa3 990,000 1,001,801
1/1/08
9,796,627
GAS - 0.4%
Mitchell Energy & Development Baa3 1,730,000 1,746,919
Corp. 8% 7/15/99
Southwest Gas Corp. 9.75% Baa2 1,000,000 1,116,420
6/15/02
2,863,339
TELEPHONE SERVICES - 0.7%
MCI WorldCom, Inc.:
6.4% 8/15/05 Baa2 3,000,000 3,117,960
9.375% 1/15/04 Baa2 1,743,000 1,805,870
4,923,830
TOTAL UTILITIES 23,126,234
TOTAL NONCONVERTIBLE BONDS 231,839,187
(Cost $227,526,158)
U.S. GOVERNMENT AND
GOVERNMENT AGENCY
OBLIGATIONS - 9.5%
U.S. GOVERNMENT AGENCY
OBLIGATIONS - 2.8%
Fannie Mae:
5.75% 6/15/05 Aaa 2,250,000 2,323,125
6.15% 1/13/00 Aaa 525,000 531,400
6.74% 5/13/04 Aaa 375,000 400,770
Federal Agricultural Mortgage Aaa 10,000 10,894
Corp. 7.01% 2/10/05
Federal Home Loan Bank:
6.46% 12/15/04 Aaa 1,745,000 1,849,700
7.31% 6/16/04 Aaa 4,155,000 4,554,254
7.36% 7/1/04 Aaa 3,100,000 3,407,086
7.38% 8/5/04 Aaa 110,000 121,155
U.S. GOVERNMENT AND
GOVERNMENT AGENCY
OBLIGATIONS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (A) PRINCIPAL AMOUNT VALUE (NOTE 1)
U.S. GOVERNMENT AGENCY
OBLIGATIONS - CONTINUED
Federal Home Loan Bank: -
continued
7.46% 9/9/04 Aaa $ 50,000 $ 55,336
7.56% 9/1/04 Aaa 310,000 344,633
7.59% 3/10/05 Aaa 10,000 11,205
7.7% 9/20/04 Aaa 40,000 44,762
8.09% 12/28/04 Aaa 10,000 11,425
Freddie Mac:
6.77% 9/15/02 Aaa 150,000 159,249
8% 1/26/05 Aaa 520,000 592,556
8.115% 1/31/05 Aaa 1,140,000 1,306,007
Government Loan Trusts Aaa 1,697,539 1,897,967
(assets of Trust guaranteed
by U.S. Government through
Agency for International
Development) 8.5% 4/1/06
Government Trust Certificates
(assets of Trust guaranteed
by U.S. Government through
Defense Security Assistance
Agency):
Class 1-C, 9.25% 11/15/01 Aaa 750,494 799,014
Class 2-E 9.4% 5/15/02 Aaa 626,551 662,264
Class T-3, 9.625% 5/15/02 Aaa 41,181 43,520
Guaranteed Export Trust
Certificates (assets of
Trust guaranteed by U.S.
Government through
Export-Import Bank):
Series 1993 C, 5.2% 10/15/04 Aaa 5,333 5,338
Series 1993 D, 5.23% 5/15/05 Aaa 11,064 11,064
Series 1994 A, 7.12% 4/15/06 Aaa 7,194 7,651
Series 1994 C, 6.61% 9/15/99 Aaa 18,147 18,234
Guaranteed Trade Trust Aaa 7,257 7,821
Certificates (assets of
Trust guaranteed by U.S.
Government through
Export-Import Bank) Series
1994 B, 7.5% 1/26/06
Israel Export Trust Aaa 10,588 10,915
Certificates (assets of
Trust guaranteed by U.S.
Government through
Export-Import Bank) Series
1994 1, 6.88% 1/26/03
MOODY'S RATINGS (UNAUDITED) (A) PRINCIPAL AMOUNT VALUE (NOTE 1)
Overseas Private Investment Aaa $ 124,425 $ 128,496
Corp. U.S. Government
guaranteed participation
certificate Series 1994 195,
6.08% 8/15/04 (callable)
Private Export Funding Corp.
secured:
5.65% 3/15/03 Aaa 182,250 184,333
6.86% 4/30/04 Aaa 1,260,508 1,312,750
U.S. Department of Housing Aaa 415,000 464,717
and Urban Development
government guaranteed
participation certificates
Series 1995 A, 8.27% 8/1/03
TOTAL U.S. GOVERNMENT AGENCY 21,277,641
OBLIGATIONS
U.S. TREASURY OBLIGATIONS -
6.7%
U.S. Treasury Bond:
6.125% 11/15/27 Aaa 3,800,000 4,253,606
6.875% 8/15/25 Aaa 9,545,000 11,568,826
7.625% 2/15/25 Aaa 7,160,000 9,413,180
8.75% 5/15/17 Aaa 12,310,000 17,124,318
8.875% 8/15/17 Aaa 995,000 1,401,547
13.875% 5/15/11 (callable) Aaa 30,000 46,420
U.S. Treasury Notes 7.5% Aaa 6,120,000 6,580,897
11/15/01
TOTAL U.S. TREASURY 50,388,794
OBLIGATIONS
TOTAL U.S. GOVERNMENT AND 71,666,435
GOVERNMENT AGENCY OBLIGATIONS
(Cost $70,203,995)
U.S. GOVERNMENT AGENCY -
MORTGAGE SECURITIES - 32.5%
FANNIE MAE - 29.6%
6% 2/1/11 to 6/1/11 Aaa 3,737,964 3,748,650
6% 1/1/14 (d) Aaa 1,200,000 1,203,000
6% 2/1/14 (d) Aaa 5,700,000 5,707,125
6% 1/1/28 (d) Aaa 6,000,000 5,923,125
6% 1/1/29 (d) Aaa 4,000,000 3,948,750
6.345% 3/1/99 Aaa 42,813 42,372
6.5% 2/1/10 to 11/1/28 Aaa 122,151,593 122,958,864
6.5% 1/1/29 (d) Aaa 3,000,000 3,020,625
6.5% 2/1/29 (d) Aaa 44,000,000 44,247,522
7% 1/1/29 (d) Aaa 24,400,000 24,895,626
7.5% 3/1/28 Aaa 212,031 217,860
U.S. GOVERNMENT AGENCY -
MORTGAGE SECURITIES -
CONTINUED
MOODY'S RATINGS (UNAUDITED) (A) PRINCIPAL AMOUNT VALUE (NOTE 1)
FANNIE MAE - CONTINUED
8% 3/1/24 to 12/1/27 Aaa $ 1,774,551 $ 1,843,294
8.5% 3/1/25 to 7/1/27 Aaa 5,341,755 5,593,779
TOTAL FANNIE MAE 223,350,592
FREDDIE MAC - 0.6%
7% 5/1/01 Aaa 73,905 74,367
8.5% 3/1/20 to 1/1/28 Aaa 4,056,077 4,250,870
TOTAL FREDDIE MAC 4,325,237
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION - 2.3%
6% 8/15/08 to 5/15/09 Aaa 3,595,825 3,638,246
7.5% 3/15/06 to 10/15/28 Aaa 11,666,206 12,033,217
8% 2/15/17 Aaa 213,657 223,966
10% 7/15/13 to 11/15/24 Aaa 953,680 1,033,376
TOTAL GOVERNMENT NATIONAL 16,928,805
MORTGAGE ASSOCIATION
TOTAL U.S. GOVERNMENT AGENCY 244,604,634
- - MORTGAGE SECURITIES
(Cost $243,005,287)
ASSET-BACKED SECURITIES - 2.6%
Capital Equipment Receivables Baa2 880,000 881,426
Trust 6.48% 10/15/06
Chevy Chase Auto Receivables Aaa 648,149 651,693
Trust 5.91% 12/15/04
Ford Credit Auto Owner Trust:
6.2% 12/15/02 Baa3 830,000 834,914
6.4% 5/15/02 A1 960,000 973,171
6.4% 12/15/02 Baa3 480,000 481,920
Ford Credit Grantor Trust Aaa 145,549 145,753
5.9% 10/15/00
Green Tree Financial Corp. Aaa 210,802 210,998
6.1% 4/15/27
JCP Master Credit Card Trust Aaa 7,000,000 7,000,000
5.5% 6/15/07
Key Auto Finance Trust:
6.3% 10/15/03 A2 872,751 873,978
6.65% 10/15/03 Baa3 251,604 254,317
KeyCorp Auto Grantor Trust A3 7,240 7,241
5.8% 7/15/00
MOODY'S RATINGS (UNAUDITED) (A) PRINCIPAL AMOUNT VALUE (NOTE 1)
MBNA Master Credit Card Trust Aaa $ 3,000,000 $ 3,158,940
II 6.55% 1/15/07
PNC Student Loan Trust I Aaa 3,100,000 3,127,610
6.314% 1/25/01
Premier Auto Trust 6% 5/6/00 Aaa 104,780 104,877
Railcar Trust 7.75% 6/1/04 Aaa 643,930 683,371
UFSB Grantor Trust 8.2% Baa2 16,414 16,424
1/10/01
TOTAL ASSET-BACKED SECURITIES 19,406,633
(Cost $19,097,472)
COMMERCIAL MORTGAGE
SECURITIES - 1.4%
CS First Boston Mortgage
Securities Corp.:
Series 1997 C2 Class D, 7.27% Baa2 1,080,000 1,024,650
1/17/35
Series 1998 FLI Class E, Baa2 2,650,000 2,575,469
6.5063% 1/10/13 (c)(e)
Equitable Life Assurance
Society of the United States
(The):
Series 174 Class B1, 7.33% Aa2 500,000 530,220
5/15/06 (c)
Series 1996 1 Class C1, 7.52% A2 500,000 529,805
5/15/06 (c)
Fannie Mae ACES REMIC Aaa 163,241 169,107
sequential pay Series 1996
M5 Class A1, 7.141% 7/25/10
GS Mortgage Securities Corp. Baa3 1,000,000 905,210
II Series 1998 GLII Class E,
7.1905% 4/13/31 (c)(e)
Morgan Stanley Capital I,
Inc. Series 1998 CF1:
Class D, 7.35% 1/15/12 Baa2 1,338,000 1,294,097
Class E, 7.35% 12/15/12 Baa3 459,000 405,068
Nomura Asset Securities Corp. - 128,249 128,249
floater Series 1994 MD-II
Class A-6, 6.4845% 7/7/03 (e)
Resolution Trust Corp.:
floater Series 1994 C1 Class AAA 2,996 2,996
A-3, 5.6125% 6/25/26 (e)
Series 1995 C1 Class A-4B, Aaa 40,701 40,381
6.65% 2/25/27
Structured Asset Securities AAA 473,013 470,352
Corp. sequential pay Series
1996 Class A-2A, 7.75%
2/25/28
COMMERCIAL MORTGAGE
SECURITIES - CONTINUED
MOODY'S RATINGS (UNAUDITED) (A) PRINCIPAL AMOUNT VALUE (NOTE 1)
Thirteen Affiliates of Aaa $ 1,500,000 $ 1,558,665
General Growth Properties,
Inc. sequential pay Series A
2, 6.602% 12/15/10 (c)
Wells Fargo Capital Markets Aaa 1,122,540 1,134,742
Apartment Financing Trust
Series APT Class 1, 6.56%
12/29/05 (c)
TOTAL COMMERCIAL MORTGAGE 10,769,011
SECURITIES
(Cost $10,880,870)
FOREIGN GOVERNMENT AND
GOVERNMENT AGENCY
OBLIGATIONS - 1.6%
British Columbia Province Aa2 500,000 530,750
yankee 7% 1/15/03 (f)
Manitoba Province yankee Aa3 500,000 529,485
6.75% 3/1/03 (f)
Quebec Province:
yankee 7.125% 2/9/24 (f) A2 250,000 272,980
yankee 7.5% 7/15/23 (f) A2 8,550,000 9,732,551
7% 1/30/07 (f) A2 1,000,000 1,080,010
TOTAL FOREIGN GOVERNMENT AND 12,145,776
GOVERNMENT AGENCY OBLIGATIONS
(Cost $11,798,801)
SUPRANATIONAL OBLIGATIONS -
0.6%
Inter American Development Aaa 4,000,000 4,190,080
Bank yankee 6.29% 7/16/27
(Cost $3,974,840)
CERTIFICATES OF DEPOSIT - 0.1%
Canadian Imperial Bank of Aa3 1,000,000 1,011,200
Commerce, New York yankee
6.2% 8/1/00 (Cost $1,001,500)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
COMMERCIAL PAPER - 13.5%
ConAgra, Inc.:
6% 1/13/99 5,000,000 4,993,388
6% 1/13/99 15,000,000 14,980,163
Lehman Brothers Holdings, 26,000,000 25,884,386
Inc. 6.5% 1/27/99
Norfolk Southern Corp.:
6.25% 1/11/99 2,000,000 1,997,935
6.25% 1/14/99 16,000,000 15,976,933
6.25% 1/14/99 2,000,000 1,997,117
Texas Utilities Co. 6.25% 20,000,000 19,970,610
1/14/99
PRINCIPAL AMOUNT VALUE (NOTE 1)
Textron, Inc.:
6.15% 1/8/99 $ 12,000,000 $ 11,992,786
6.15% 1/11/99 4,000,000 3,995,792
TOTAL COMMERCIAL PAPER 101,789,110
(Cost $101,709,820)
</TABLE>
CASH EQUIVALENTS - 7.4%
MATURITY AMOUNT
Investments in repurchase 55,978,009 55,945,000
agreements (U.S. Treasury
obligations), in a joint
trading account at 5.31%,
dated 12/31/98 due 1/4/99
(Cost $55,945,000)
TOTAL INVESTMENT IN $ 753,367,066
SECURITIES - 100%
(Cost $745,143,743)
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
$39,024,039 or 5.8% of net assets.
(d) Security purchased on a delayed delivery or when-issued basis
(see Note 2 of Notes to Financial Statements).
(e) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(f) For foreign government obligations not individually rated by S&P
or Moody's, the ratings listed have been assigned 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
The composition of long-term debt holdings as a percentage of total
value of investments in securities, is as follows (ratings are
unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 57.5% AAA, AA, A 57.5%
Baa 19.1% BBB 18.7%
Ba 1.5% BB 1.7%
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
for the sovereign credit of the issuing government. The percentage not
rated by Moody's or S&P amounted to 0%.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $1,453,826,478 and $1,065,028,278, respectively, of which
long-term U.S. government and government agency obligations aggregated
$1,134,241,050 and $984,230,991, respectively (see Note 3 of Notes to
Financial Statements).
The fund participated in the interfund lending program as a lender.
The maximum loan and average daily balances during the period for
which the loan was outstanding amounted to $15,148,000. The weighted
average interest rate was 5.48%. Interest earned from the interfund
lending program amounted to $6,919 and is included in interest income
on the Statement of Operations (see Note 6 of Notes to Financial
Statements).
The fund participated in the bank borrowing program. The maximum loan
and average daily balances during the period for which the loan was
outstanding amounted to $6,212,000. The weighted average interest rate
was 5.81% (see Note 8 of Notes to Financial Statements).
INCOME TAX INFORMATION
At December 31, 1998, the aggregate cost of investment securities for
income tax purposes was $745,241,880. Net unrealized appreciation
aggregated $8,125,186, of which $10,417,882 related to appreciated
investment securities and $2,292,696 related to depreciated investment
securities.
The fund hereby designates approximately $1,292,000 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, 1998
ASSETS
Investment in securities, at $ 753,367,066
value (including repurchase
agreements of $55,945,000)
(cost $745,143,743) - See
accompanying schedule
Cash 730
Receivable for fund shares 5,662,255
sold
Interest receivable 6,067,110
TOTAL ASSETS 765,097,161
LIABILITIES
Payable for investments $ 89,203,037
purchased on a delayed
delivery basis
Payable for fund shares 723,516
redeemed
Accrued management fee 239,393
Other payables and accrued 118,437
expenses
TOTAL LIABILITIES 90,284,383
NET ASSETS $ 674,812,778
Net Assets consist of:
Paid in capital $ 629,601,921
Undistributed net investment 27,875,128
income
Accumulated undistributed net 9,112,406
realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation 8,223,323
(depreciation) on investments
NET ASSETS, for 52,078,452 $ 674,812,778
shares outstanding
NET ASSET VALUE, offering $12.96
price and redemption price
per share ($674,812,778
(divided by) 52,078,452
shares)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME $ 30,719,505
Interest
EXPENSES
Management fee $ 2,076,505
Transfer agent fees 348,100
Accounting fees and expenses 184,025
Non-interested trustees' 1,585
compensation
Custodian fees and expenses 33,045
Registration fees 761
Audit 45,171
Legal 3,841
Interest 1,003
Miscellaneous 47,494
Total expenses before 2,741,530
reductions
Expense reductions (3,846) 2,737,684
NET INVESTMENT INCOME 27,981,821
REALIZED AND UNREALIZED GAIN 9,192,419
(LOSS)
Net realized gain (loss) on
investment securities
Change in net unrealized 2,632,039
appreciation (depreciation)
on investment securities
NET GAIN (LOSS) 11,824,458
NET INCREASE (DECREASE) IN $ 39,806,279
NET ASSETS RESULTING FROM
OPERATIONS
OTHER INFORMATION
Expense reductions $ 3,846
Custodian credits
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
INCREASE (DECREASE) IN NET YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
ASSETS
Operations Net investment $ 27,981,821 $ 16,674,247
income
Net realized gain (loss) 9,192,419 3,703,820
Change in net unrealized 2,632,039 3,255,290
appreciation (depreciation)
NET INCREASE (DECREASE) IN 39,806,279 23,633,357
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders (16,958,571) (13,381,760)
From net investment income
From net realized gain (2,012,034) -
TOTAL DISTRIBUTIONS (18,970,605) (13,381,760)
Share transactions Net 501,565,840 155,252,643
proceeds from sales of shares
Reinvestment of distributions 18,970,605 13,381,760
Cost of shares redeemed (191,084,324) (82,954,820)
NET INCREASE (DECREASE) IN 329,452,121 85,679,583
NET ASSETS RESULTING FROM
SHARE TRANSACTIONS
TOTAL INCREASE (DECREASE) 350,287,795 95,931,180
IN NET ASSETS
NET ASSETS
Beginning of period 324,524,983 228,593,803
End of period (including $ 674,812,778 $ 324,524,983
undistributed net investment
income of $27,875,128 and
$16,682,637, respectively)
OTHER INFORMATION
Shares
Sold 39,825,938 12,893,400
Issued in reinvestment of 1,576,941 1,151,614
distributions
Redeemed (15,158,174) (6,885,603)
Net increase (decrease) 26,244,705 7,159,411
SEE ACCOMPANYING NOTES WHICH
ARE AN INTEGRAL PART OF THE
FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 1996 1995 1994
Net asset value, beginning of $ 12.560 $ 12.240 $ 12.480 $ 11.020 $ 11.480
period
Income from Investment .725 B .759 B .670 .320 .733
Operations Net investment
income
Net realized and unrealized .335 .291 (.290) 1.530 (1.163)
gain (loss)
Total from investment 1.060 1.050 .380 1.850 (.430)
operations
Less Distributions
From net investment income (.590) (.730) (.620) (.390) -
From net realized gain (.070) - - - (.010)
In excess of net realized - - - - (.020)
gain
Total distributions (.660) (.730) (.620) (.390) (.030)
Net asset value, end of period $ 12.960 $ 12.560 $ 12.240 $ 12.480 $ 11.020
TOTAL RETURN A 8.85% 9.06% 3.19% 17.32% (3.76)%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 674,813 $ 324,525 $ 228,594 $ 181,546 $ 111,381
(000 omitted)
Ratio of expenses to average .57% .58% .58% .59% .67%
net assets
Ratio of net investment 5.85% 6.34% 6.49% 6.53% 6.53%
income to average net assets
Portfolio turnover rate 239% 191% 81% 182% 143%
</TABLE>
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.
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). If Fidelity had not reimbursed certain fund
expenses, the past 10 year total returns would have been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
1998
VIP: HIGH INCOME - "INITIAL -4.33% 8.80% 11.08%
CLASS"
ML High Yield Master 3.66% 9.01% 11.08%
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 value-weighted index of all domestic and
yankee high-yield bonds. Issues included in the index have maturities
of one year or more 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.
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money. The fund includes high yielding, lower-rated
securities which are subject to greater price volatility and may
involve greater risk of default. The market for these securities may
be less liquid.
(checkmark) 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.
$10,000 OVER 10 YEARS
VIP High Income ML High Yield Master
00152 ML002
1988/12/31 10000.00 10000.00
1989/01/31 10240.31 10149.97
1989/02/28 10290.68 10218.17
1989/03/31 10158.45 10209.08
1989/04/30 10045.94 10239.21
1989/05/31 10231.56 10427.71
1989/06/30 10524.61 10575.45
1989/07/31 10455.32 10625.53
1989/08/31 10394.68 10678.02
1989/09/30 10030.97 10576.36
1989/10/31 9600.93 10409.07
1989/11/30 9609.02 10432.40
1989/12/31 9582.68 10422.97
1990/01/31 9370.86 10219.26
1990/02/28 9226.57 10070.44
1990/03/31 9129.22 10206.57
1990/04/30 9156.26 10258.42
1990/05/31 9344.40 10443.72
1990/06/30 9491.59 10646.06
1990/07/31 9638.20 10871.03
1990/08/31 9476.97 10454.87
1990/09/30 9252.25 10000.17
1990/10/31 9027.74 9745.69
1990/11/30 9239.49 9828.25
1990/12/31 9368.69 9969.87
1991/01/31 9567.46 10110.80
1991/02/28 10097.51 10861.26
1991/03/31 10455.30 11328.25
1991/04/30 10826.33 11731.66
1991/05/31 10985.35 11788.95
1991/06/30 11223.87 12026.11
1991/07/31 11647.92 12314.26
1991/08/31 11806.93 12573.08
1991/09/30 12071.96 12733.22
1991/10/31 12482.75 13111.60
1991/11/30 12588.76 13263.05
1991/12/31 12655.02 13417.13
1992/01/31 13330.84 13886.24
1992/02/29 13814.85 14231.11
1992/03/31 14261.42 14429.67
1992/04/30 14362.26 14534.70
1992/05/31 14535.12 14766.53
1992/06/30 14693.58 14950.00
1992/07/31 14981.69 15252.91
1992/08/31 15298.61 15454.84
1992/09/30 15457.08 15630.94
1992/10/31 15226.59 15433.52
1992/11/30 15413.86 15652.09
1992/12/31 15586.72 15853.63
1993/01/31 16004.48 16244.00
1993/02/28 16277.49 16551.48
1993/03/31 16653.12 16838.43
1993/04/30 16762.68 16959.30
1993/05/31 17013.10 17187.59
1993/06/30 17451.34 17510.51
1993/07/31 17623.51 17698.72
1993/08/31 17811.33 17867.44
1993/09/30 17873.93 17955.60
1993/10/31 18296.52 18293.84
1993/11/30 18468.69 18393.89
1993/12/31 18766.06 18577.82
1994/01/31 19392.12 18984.95
1994/02/28 19368.87 18848.42
1994/03/31 18716.38 18234.20
1994/04/30 18527.49 18021.12
1994/05/31 18561.84 17956.91
1994/06/30 18493.15 18023.01
1994/07/31 18561.84 18149.70
1994/08/31 18561.84 18275.77
1994/09/30 18699.20 18268.85
1994/10/31 18527.49 18315.28
1994/11/30 18372.96 18159.48
1994/12/31 18458.81 18361.47
1995/01/31 18664.86 18620.92
1995/02/28 19305.47 19201.92
1995/03/31 19545.87 19469.15
1995/04/30 20119.11 19924.99
1995/05/31 20636.88 20547.49
1995/06/30 20692.36 20704.43
1995/07/31 21191.64 20941.13
1995/08/31 21358.07 21068.22
1995/09/30 21709.41 21309.27
1995/10/31 21912.82 21460.32
1995/11/30 22023.77 21669.80
1995/12/31 22282.66 22017.64
1996/01/31 22800.43 22365.37
1996/02/29 23177.02 22399.05
1996/03/31 23116.13 22338.21
1996/04/30 23461.15 22348.33
1996/05/31 23785.87 22509.51
1996/06/30 23907.64 22644.72
1996/07/31 23826.46 22798.46
1996/08/31 24171.48 23033.90
1996/09/30 24881.81 23528.10
1996/10/31 24800.63 23785.95
1996/11/30 25064.46 24266.84
1996/12/31 25409.48 24453.57
1997/01/31 25754.50 24641.50
1997/02/28 26221.65 24987.16
1997/03/31 25407.04 24709.65
1997/04/30 25803.33 24990.88
1997/05/31 26882.14 25488.12
1997/06/30 27366.51 25882.67
1997/07/31 28357.25 26503.80
1997/08/31 28599.43 26444.17
1997/09/30 29612.19 26895.66
1997/10/31 29347.99 27074.16
1997/11/30 29568.15 27316.63
1997/12/31 29898.40 27589.75
1998/01/31 30580.91 27993.91
1998/02/28 30812.25 28116.20
1998/03/31 31457.27 28358.50
1998/04/30 31581.31 28493.20
1998/05/31 31358.04 28677.53
1998/06/30 31333.23 28833.67
1998/07/31 31506.89 28998.10
1998/08/31 27611.94 27746.80
1998/09/30 27339.05 27802.15
1998/10/31 26594.79 27338.36
1998/11/30 28777.94 28590.85
1998/12/31 28604.28 28600.34
IMATRL PRASUN SHR__CHT 19981231 19990111 120454 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund: High Income Portfolio on
December 31, 1988. As the chart shows, by December 31, 1998, the value
of the investment would have grown to $28,604 - a 186.04% 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 $28,600 - a 186.00% increase.
INVESTMENT SUMMARY
TOP FIVE HOLDINGS AS OF
DECEMBER 31, 1998
(BY ISSUER, EXCLUDING CASH % OF FUND'S INVESTMENTS
EQUIVALENTS)
Nextel Communications, Inc. 3.6
CSC Holdings, Inc. 2.7
Millicom International 2.5
Cellular SA
NEXTLINK Communications, Inc. 2.4
NTL, Inc. 2.2
TOP FIVE MARKET SECTORS AS OF
DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
UTILITIES 26.8
MEDIA & LEISURE 25.8
BASIC INDUSTRIES 6.3
TECHNOLOGY 5.6
RETAIL & WHOLESALE 4.8
QUALITY DIVERSIFICATION AS OF
DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
Aaa, Aa, A 0.0
Baa 0.2
Ba 6.6
B 46.5
Caa, Ca, C 15.5
Not Rated 8.2
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, 1998 ACCOUNT FOR 8.2% OF
THE FUND'S INVESTMENTS.
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1 fee. If Fidelity had not
reimbursed certain fund expenses, the past 10 year total return would
have been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
1998
VIP: HIGH INCOME - SERVICE -4.34% 8.78% 11.07%
CLASS
ML High Yield Master 3.66% 9.01% 11.08%
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 value-weighted index of all domestic and
yankee high-yield bonds. Issues included in the index have maturities
of one year or more 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.
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money. The fund includes high yielding, lower-rated
securities which are subject to greater price volatility and may
involve greater risk of default. The market for these securities may
be less liquid.
(checkmark) 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.
$10,000 OVER 10 YEARS
VIP High Income - CL S ML High Yield Master
00492 ML002
1988/12/31 10000.00 10000.00
1989/01/31 10240.31 10149.97
1989/02/28 10290.68 10218.17
1989/03/31 10158.45 10209.08
1989/04/30 10045.94 10239.21
1989/05/31 10231.56 10427.71
1989/06/30 10524.61 10575.45
1989/07/31 10455.32 10625.53
1989/08/31 10394.68 10678.02
1989/09/30 10030.97 10576.36
1989/10/31 9600.93 10409.07
1989/11/30 9609.02 10432.40
1989/12/31 9582.68 10422.97
1990/01/31 9370.86 10219.26
1990/02/28 9226.57 10070.44
1990/03/31 9129.22 10206.57
1990/04/30 9156.26 10258.42
1990/05/31 9344.40 10443.72
1990/06/30 9491.59 10646.06
1990/07/31 9638.20 10871.03
1990/08/31 9476.97 10454.87
1990/09/30 9252.25 10000.17
1990/10/31 9027.74 9745.69
1990/11/30 9239.49 9828.25
1990/12/31 9368.69 9969.87
1991/01/31 9567.46 10110.80
1991/02/28 10097.51 10861.26
1991/03/31 10455.30 11328.25
1991/04/30 10826.33 11731.66
1991/05/31 10985.35 11788.95
1991/06/30 11223.87 12026.11
1991/07/31 11647.92 12314.26
1991/08/31 11806.93 12573.08
1991/09/30 12071.96 12733.22
1991/10/31 12482.75 13111.60
1991/11/30 12588.76 13263.05
1991/12/31 12655.02 13417.13
1992/01/31 13330.84 13886.24
1992/02/29 13814.85 14231.11
1992/03/31 14261.42 14429.67
1992/04/30 14362.26 14534.70
1992/05/31 14535.12 14766.53
1992/06/30 14693.58 14950.00
1992/07/31 14981.69 15252.91
1992/08/31 15298.61 15454.84
1992/09/30 15457.08 15630.94
1992/10/31 15226.59 15433.52
1992/11/30 15413.86 15652.09
1992/12/31 15586.72 15853.63
1993/01/31 16004.48 16244.00
1993/02/28 16277.49 16551.48
1993/03/31 16653.12 16838.43
1993/04/30 16762.68 16959.30
1993/05/31 17013.10 17187.59
1993/06/30 17451.34 17510.51
1993/07/31 17623.51 17698.72
1993/08/31 17811.33 17867.44
1993/09/30 17873.93 17955.60
1993/10/31 18296.52 18293.84
1993/11/30 18468.69 18393.89
1993/12/31 18766.06 18577.82
1994/01/31 19392.12 18984.95
1994/02/28 19368.87 18848.42
1994/03/31 18716.38 18234.20
1994/04/30 18527.49 18021.12
1994/05/31 18561.84 17956.91
1994/06/30 18493.15 18023.01
1994/07/31 18561.84 18149.70
1994/08/31 18561.84 18275.77
1994/09/30 18699.20 18268.85
1994/10/31 18527.49 18315.28
1994/11/30 18372.96 18159.48
1994/12/31 18458.81 18361.47
1995/01/31 18664.86 18620.92
1995/02/28 19305.47 19201.92
1995/03/31 19545.87 19469.15
1995/04/30 20119.11 19924.99
1995/05/31 20636.88 20547.49
1995/06/30 20692.36 20704.43
1995/07/31 21191.64 20941.13
1995/08/31 21358.07 21068.22
1995/09/30 21709.41 21309.27
1995/10/31 21912.82 21460.32
1995/11/30 22023.77 21669.80
1995/12/31 22282.66 22017.64
1996/01/31 22800.43 22365.37
1996/02/29 23177.02 22399.05
1996/03/31 23116.13 22338.21
1996/04/30 23461.15 22348.33
1996/05/31 23785.87 22509.51
1996/06/30 23907.64 22644.72
1996/07/31 23826.46 22798.46
1996/08/31 24171.48 23033.90
1996/09/30 24881.81 23528.10
1996/10/31 24800.63 23785.95
1996/11/30 25064.46 24266.84
1996/12/31 25409.48 24453.57
1997/01/31 25754.50 24641.50
1997/02/28 26221.65 24987.16
1997/03/31 25407.04 24709.65
1997/04/30 25803.33 24990.88
1997/05/31 26882.14 25488.12
1997/06/30 27366.51 25882.67
1997/07/31 28357.25 26503.80
1997/08/31 28599.43 26444.17
1997/09/30 29612.19 26895.66
1997/10/31 29347.99 27074.16
1997/11/30 29546.14 27316.63
1997/12/31 29876.39 27589.75
1998/01/31 30580.91 27993.91
1998/02/28 30787.44 28116.20
1998/03/31 31457.27 28358.50
1998/04/30 31581.31 28493.20
1998/05/31 31333.23 28677.53
1998/06/30 31308.42 28833.67
1998/07/31 31482.08 28998.10
1998/08/31 27587.13 27746.80
1998/09/30 27314.24 27802.15
1998/10/31 26569.98 27338.36
1998/11/30 28728.33 28590.85
1998/12/31 28579.48 28600.34
IMATRL PRASUN SHR__CHT 19981231 19990129 132357 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund: High Income Portfolio -
Service Class on December 31, 1988. As the chart shows, by December
31, 1998, the value of the investment would have grown to $28,579 - a
185.79% 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 $28,600 - a 186.00% increase.
INVESTMENT SUMMARY
TOP FIVE HOLDINGS AS OF
DECEMBER 31, 1998
(BY ISSUER, EXCLUDING CASH % OF FUND'S INVESTMENTS
EQUIVALENTS)
Nextel Communications, Inc. 3.6
CSC Holdings, Inc. 2.7
Millicom International 2.5
Cellular SA
NEXTLINK Communications, Inc. 2.4
NTL, Inc. 2.2
TOP FIVE MARKET SECTORS AS OF
DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
UTILITIES 26.8
MEDIA & LEISURE 25.8
BASIC INDUSTRIES 6.3
TECHNOLOGY 5.6
RETAIL & WHOLESALE 4.8
QUALITY DIVERSIFICATION AS OF
DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
Aaa, Aa, A 0.0
Baa 0.2
Ba 6.6
B 46.5
Caa, Ca, C 15.5
Not Rated 8.2
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, 1998 ACCOUNT FOR 8.2% OF
THE FUND'S INVESTMENTS.
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
(photograph of Barry Coffman)
An interview with Barry Coffman, Portfolio Manager of High Income
Portfolio
Q. HOW DID THE FUND PERFORM, BARRY?
A. For the 12-month period that ended December 31, 1998, the fund
lagged the 3.66% return of its benchmark - the Merrill Lynch High
Yield Master Index.
Q. WHY DID THE FUND LAG ITS BENCHMARK?
A. The fund's lag can be attributed to two main factors. First, the
fund had a large weighting - relative to the index - in bonds that
carried a credit rating of B, which are the lower-quality securities
in the high-yield market. After outpacing their higher-quality
counterparts through July, a global flight to quality caused
lower-rated securities to underperform from August through the end of
the year. Turbulence across world markets sparked a search for the
safety and liquidity of U.S. Treasury bonds and prompted investors to
shun stocks and riskier types of bonds. The deepening investor gloom
had a disproportionately negative effect on high-yield bonds, with
lower-quality securities suffering the biggest losses. Another reason
that the fund lagged was its relatively large stake in zero coupon
bonds. These securities make no interest payments, but instead are
sold at a discount to their face value and provide returns by
gradually appreciating to that face value. For a variety of technical
and fundamental reasons - including the fact that they are not as
liquid, or easily traded - zeros lagged bonds that pay interest during
the high-yield market's downturn that began in August.
Q. HOW DID THE FUND'S TELECOMMUNICATIONS HOLDINGS - INCLUDING CELLULAR
AND TELEPHONE SERVICES COMPANIES - PERFORM AGAINST THIS BACKDROP?
A. Most of the fund's telecommunications companies themselves
continued to perform well from a fundamental perspective, although
their high-yield securities underperformed. Because many
telecommunications companies are high-growth, capital-intensive
companies, they tend to be large issuers of lower-rated securities
that do not pay current interest - including zero coupon bonds and
payment-in-kind preferred stocks, and they were hurt
disproportionately during the last half of 1998 as a result. In
addition, some market participants worried that, given the difficult
market environment, telecommunications companies would have difficulty
raising the additional capital needed to fund their future growth.
Despite the fact that the last several months of 1998 proved to be a
somewhat rocky time for them, I continued to hold onto most of the
fund's telecommunications investments such as Nextel, Millicom and
NEXTLINK. I believe that the emerging telecommunications companies
held by the fund will continue to experience healthy growth because
the demand for their services should remain healthy even with slower
economic growth. Furthermore, the majority of the fund's emerging
telecommunications companies were very aggressive in raising capital
when the market was strong, and they have raised sufficient capital to
fund their business plans well into the year 2000.
Q. WERE THERE DISAPPOINTMENTS OUTSIDE THE TELECOMMUNICATIONS SECTOR
DURING THE YEAR?
A. In the first half of the year, Renaissance Cosmetics proved to be a
disappointment, due to the combination of a weak environment for
mass-market fragrances and a badly timed acquisition. More recently,
securities issued by Cellnet Data Systems, a wireless data
communications company, declined when the company disappointed
investors with news that it wasn't adding customers as quickly as it
had originally forecast and with concerns over its ability to raise
capital.
Q. WHAT WERE SOME BRIGHT SPOTS FOR THE FUND?
A. The fund's cable company holdings performed well during the period
in large part because the value of cable companies was highlighted by
AT&T's acquisition of TCI and Microsoft's investment in Comcast.
Thanks to that development, and its own continued strong operations,
Cablevision performed quite well throughout the entire year. Our
preferred-stock holdings in Time Warner also performed well when they
were redeemed by the company at a profit to the fund. A wave of
industry consolidation also boosted many of our supermarket holdings,
most specifically Pathmark and Fred Meyer.
Q. WHAT'S YOUR OUTLOOK FOR THE HIGH-YIELD MARKET?
A. Barring a U.S. recession, which I don't foresee in the near term,
high-yield bonds could post decent performance in 1999. As a result of
the high-yield market's downturn in the last months of 1998,
high-yield bonds are priced quite attractively against a backdrop of
slow but steady economic growth. In addition, I believe that the
high-yield market could benefit from more merger and acquisition
activity next year.
The views expressed in this report reflect those of the portfolio
manager only through the end of the period of the report as stated on
the cover. The manager's views are subject to change at any time based
on market and other conditions.
(checkmark) FUND FACTS
GOAL: to seek high current income by
investing primarily in all types of
income-producing debt securities
START DATE: September 19, 1985
SIZE: as of December 31, 1998, more than
$2.4 billion
MANAGER: Barry Coffman, since 1990; joined
Fidelity in 1986
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
INVESTMENTS DECEMBER 31, 1998
Showing Percentage of Total Value of Investment in Securities
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS - 76.3%
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
CONVERTIBLE BONDS - 0.9%
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Cymer, Inc. 3.5% 8/6/04 (c) - $ 3,940,000 $ 2,890,975
MEDIA & LEISURE - 0.4%
LODGING & GAMING - 0.4%
Signature Resorts, Inc. 5.75% Caa1 13,355,000 9,682,375
1/15/07
RETAIL & WHOLESALE - 0.4%
RETAIL & WHOLESALE,
MISCELLANEOUS - 0.4%
Corporate Express, Inc. 4.5% B3 10,000,000 8,400,000
7/1/00
UTILITIES - 0.0%
TELEPHONE SERVICES - 0.0%
GST Telecommunications, Inc. - 630,000 541,800
0% 12/15/05 (b)(d)
TOTAL CONVERTIBLE BONDS 21,515,150
NONCONVERTIBLE BONDS - 75.4%
AEROSPACE & DEFENSE - 0.2%
SHIP BUILDING & REPAIR - 0.2%
Newport News Shipbuilding, B1 4,650,000 4,917,375
Inc. 9.25% 12/1/06
BASIC INDUSTRIES - 6.0%
CHEMICALS & PLASTICS - 1.7%
Huntsman Corp.:
9.5% 7/1/07 (d) B2 26,470,000 26,403,825
9.5% 7/1/07 (d) - 7,100,000 7,082,250
Koppers Industries, Inc. B2 7,745,000 7,512,650
9.875% 12/1/07
40,998,725
IRON & STEEL - 0.9%
GS Technologies Operating, B2 3,490,000 2,338,300
Inc. 12.25% 10/1/05
Neenah Corp. 11.125% 5/1/07 B3 7,490,000 7,695,975
(d)
WHX Corp. 10.5% 4/15/05 B3 13,650,000 12,421,500
22,455,775
METALS & MINING - 1.2%
Doe Run Resources Corp.:
11.25% 3/15/05 B3 1,680,000 1,360,800
11.6963% 3/15/03 (e) B3 3,880,000 3,065,200
Interlake Corp. 12.125% 3/1/02 B3 12,265,000 12,510,300
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
Kaiser Aluminum & Chemical
Corp.:
Series B 10.875% 10/15/06 B1 $ 270,000 $ 272,700
Series D 10.875% 10/15/06 B1 3,680,000 3,716,800
12.75% 2/1/03 B2 8,870,000 8,670,425
29,596,225
PAPER & FOREST PRODUCTS - 2.2%
Advance Agro PCL 13% 11/15/07 B3 1,250,000 1,012,500
(d)
Ainsworth Lumber Co. Ltd. B3 3,730,000 3,683,375
12.5% 7/15/07 pay-in-kind
APP Finance II Mauritius Ltd. Caa 11,785,000 6,128,200
12% 3/15/04
Container Corp. of America B2 1,690,000 1,711,125
gtd. 9.75% 4/1/03
Doman Industries Ltd. yankee B1 3,730,000 2,797,500
8.75% 3/15/04
Indah Kiat Finance Mauritius Caa1 8,320,000 4,492,800
Ltd. 10% 7/1/07
Indah Kiat International Caa1 1,700,000 1,122,000
Finance Co. BV 12.5% 6/15/06
Mail-Well Corp. 10.5% 2/15/04 B+ 1,640,000 1,681,000
Millar Western Forest B3 12,935,000 9,571,900
Products Ltd. 9.875% 5/15/08
Pindo Deli Finance Mauritius Caa1 3,740,000 1,870,000
Ltd. 10.25% 10/1/02
Stone Container Corp.:
10.75% 10/1/02 B1 6,965,000 7,173,950
12.58% 8/1/16 (e) B2 1,150,000 1,219,000
Tembec Finance Corp. yankee Ba3 4,865,000 5,083,925
9.875% 9/30/05
Tjiwi Kimia Finance Mauritius Caa1 4,500,000 2,385,000
Ltd. 10% 8/1/04
Tjiwi Kimia International Caa1 4,500,000 2,970,000
Finance Co. 13.25% 8/1/01
52,902,275
TOTAL BASIC INDUSTRIES 145,953,000
CONSTRUCTION & REAL ESTATE -
1.4%
BUILDING MATERIALS - 0.7%
American Standard Cos., Inc.:
7.375% 2/1/08 Ba3 3,270,000 3,278,175
7.625% 2/15/10 Ba3 1,400,000 1,403,500
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
CONSTRUCTION & REAL ESTATE -
CONTINUED
BUILDING MATERIALS - CONTINUED
International Utility Caa1 $ 7,000,000 $ 6,580,000
Structures, Inc. 10.75%
2/1/08
Schuff Steel Co. 10.5% 6/1/08 B3 5,850,000 5,089,500
16,351,175
REAL ESTATE - 0.5%
LNR Property Corp. 9.375% B1 14,395,000 13,819,200
3/15/08
REAL ESTATE INVESTMENT TRUSTS
- - 0.2%
Ocwen Asset Investment Corp. - 5,520,000 4,250,400
11.5% 7/1/05 (d)
TOTAL CONSTRUCTION & REAL 34,420,775
ESTATE
DURABLES - 2.7%
AUTOS, TIRES, & ACCESSORIES -
1.2%
Blue Bird Body Co. 10.75% B2 4,475,000 4,609,250
11/15/06
Breed Technologies, Inc. B3 9,800,000 8,575,000
9.25% 4/15/08 (d)
Federal-Mogul Corp. 7.875% Ba2 2,800,000 2,864,680
7/1/10
Morris Material Handling, B2 16,280,000 12,047,200
Inc. 9.5% 4/1/08
28,096,130
HOME FURNISHINGS - 0.2%
Omega Cabinets Ltd. 10.5% B3 5,060,000 4,971,450
6/15/07
TEXTILES & APPAREL - 1.3%
Cluett American Corp. 10.125% B3 4,210,000 3,978,450
5/15/08
Nine West Group, Inc. 8.375% Ba2 220,000 213,400
8/15/05
Polymer Group, Inc. 9% 7/1/07 B2 9,060,000 8,969,400
Synthetic Industries, Inc. B2 11,770,000 12,005,400
9.25% 2/15/07
Worldtex, Inc. 9.625% 12/15/07 B1 8,905,000 7,747,350
32,914,000
TOTAL DURABLES 65,981,580
ENERGY - 4.0%
COAL - 0.7%
P&L Coal Holdings Corp.:
8.875% 5/15/08 Ba3 2,560,000 2,611,200
9.625% 5/15/08 B2 13,290,000 13,522,575
16,133,775
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
ENERGY SERVICES - 1.0%
Bayard Drilling Technologies, B2 $ 2,490,000 $ 2,739,000
Inc. 11% 6/30/05
DI Industries, Inc. 8.875% B1 2,655,000 1,924,875
7/1/07
Grey Wolf, Inc. 8.875% 7/1/07 B1 3,000,000 2,175,000
Ocean Rig Norway AS 10.25% B3 8,100,000 6,318,000
6/1/08
Pride Petroleum Services, Ba3 7,020,000 6,528,600
Inc. 9.375% 5/1/07
R&B Falcon Corp. 9.5% Ba1 5,800,000 5,800,000
12/15/08 (d)
25,485,475
OIL & GAS - 2.3%
Belco Oil & Gas Corp. 8.875% B1 950,000 859,750
9/15/07
Canadian Forest Oil Ltd. B2 7,110,000 6,327,900
8.75% 9/15/07
Chesapeake Energy Corp. B3 9,960,000 7,470,000
9.625% 5/1/05
Cross Timbers Oil Co. 9.25% B2 530,000 490,250
4/1/07
Great Lakes Carbon Corp.:
0% 5/15/09 (b) Caa1 11,115,000 5,668,650
10.25% 5/15/08 pay-in-kind B3 4,950,000 4,987,125
HS Resources, Inc. 9.25% B2 530,000 503,500
11/15/06
Hurricane Hydrocarbons Ltd. Caa2 4,680,000 2,340,000
11.75% 11/1/04 (d)
Ocean Energy, Inc.:
8.375% 7/1/08 B1 8,450,000 7,900,750
10.375% 10/15/05 B2 1,280,000 1,321,600
Plains Resources, Inc.:
Series D, 10.25% 3/15/06 B2 2,770,000 2,797,700
10.25% 3/15/06 B2 8,140,000 8,221,400
Seven Seas Petroleum, Inc. Caa1 4,210,000 2,105,000
12.5% 5/15/05
Southwest Royalties, Inc. Caa2 1,630,000 733,500
10.5% 10/15/04
Vintage Petroleum, Inc. 9% B1 4,580,000 4,488,400
12/15/05
56,215,525
TOTAL ENERGY 97,834,775
FINANCE - 2.4%
CREDIT & OTHER FINANCE - 2.4%
Anthony Crane Rentals B3 6,290,000 6,006,950
LP/Anthony Credit Capital
Corp. 10.375% 8/1/08 (d)
Arcadia Financial Ltd. 11.5% B2 6,630,000 4,972,500
3/15/07
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
FINANCE - CONTINUED
CREDIT & OTHER FINANCE -
CONTINUED
ContiFinancial Corp. 8.125% B1 $ 2,410,000 $ 1,638,800
4/1/08
Delta Financial Corp. 9.5% B3 1,170,000 982,800
8/1/04
Imperial Credit Capital Trust B2 4,870,000 3,701,200
I 10.25% 6/14/02
Imperial Credit Industries B2 17,470,000 13,451,900
9.875% 1/15/07
Macsaver Financial Services, Ba1 630,000 453,600
Inc. 7.6% 8/1/07
Ocwen Capital Trust 10.875% B2 6,520,000 5,216,000
8/1/27
Olympic Financial Ltd. 11.5% B2 6,250,000 4,687,500
3/15/07
ORBCOMM Global LP/ORBCOMM B3 7,121,000 7,334,630
Capital Co. 14% 8/15/04
Time Warner Telecom LLC/Time B2 8,840,000 9,083,100
Warner Telecom, Inc. 9.75%
7/15/08
57,528,980
SECURITIES INDUSTRY - 0.0%
ECM Corp. LP 14% 6/10/02 (d) - 73,430 73,246
TOTAL FINANCE 57,602,226
HEALTH - 2.1%
MEDICAL EQUIPMENT & SUPPLIES
- - 0.5%
Graham-Field Health Products, Caa1 1,730,000 1,141,800
Inc. 9.75% 8/15/07
Wright Medical Technology, Caa3 18,650,000 9,791,250
Inc. 11.75% 7/1/00 (e)
10,933,050
MEDICAL FACILITIES MANAGEMENT
- - 1.6%
Fountain View, Inc. 11.25% Caa1 7,330,000 6,377,100
4/15/08
Harborside Healthcare Corp. B3 10,250,000 4,971,250
0% 8/1/08 (b)
Oxford Health Plans, Inc. 11% Caa1 11,100,000 10,434,000
5/15/05 (d)
Tenet Healthcare Corp. 8.125% Ba3 16,160,000 16,564,000
12/1/08 (d)
38,346,350
TOTAL HEALTH 49,279,400
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
INDUSTRIAL MACHINERY &
EQUIPMENT - 3.6%
ELECTRICAL EQUIPMENT - 1.7%
Advanced Lighting B2 $ 5,330,000 $ 4,823,650
Technologies, Inc. 8%
3/15/08 (d)
Motors & Gears, Inc. 10.75% B3 30,540,000 31,303,500
11/15/06
Telex Communications, Inc. B2 7,490,000 6,591,200
10.5% 5/1/07
42,718,350
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.5%
Bucyrus International, Inc. B1 170,000 141,950
9.75% 9/15/07
Continental Global Group, B2 2,320,000 1,983,600
Inc. 11% 4/1/07
Thermadyne Holdings Corp. 0% Caa1 11,470,000 5,046,800
6/1/08 (b)
Thermadyne Manufacturing LLC B3 5,460,000 4,968,600
9.875% 6/1/08
12,140,950
POLLUTION CONTROL - 1.4%
Allied Waste North America,
Inc.:
7.625% 1/1/06 (d) Ba2 6,680,000 6,763,500
7.875% 1/1/09 (d) Ba2 10,620,000 10,752,750
Envirosource, Inc. 9.75% B3 17,476,000 15,815,780
6/15/03
33,332,030
TOTAL INDUSTRIAL MACHINERY & 88,191,330
EQUIPMENT
MEDIA & LEISURE - 21.1%
BROADCASTING - 13.6%
ACME Television LLC/ACME B3 13,470,000 10,742,325
Financial Corp. 0% 9/30/04
(b)
Adelphia Communications Corp.:
9.5% 2/15/04 pay-in-kind B2 14,541,518 14,867,103
9.875% 3/1/05 B2 1,000,000 1,090,000
9.875% 3/1/07 B2 1,000,000 1,105,000
American Mobile Satellite - 4,180,000 2,591,600
Corp. 12.25% 4/1/08
Ascent Entertainment Group, B3 16,195,000 9,717,000
Inc. 0% 12/15/04 (b)
CapStar Broadcasting B3 3,200,000 2,624,000
Partners, Inc. 0% 2/1/09 (b)
Chancellor Media Corp.:
8% 11/1/08 (d) Ba2 10,990,000 11,209,800
9% 10/1/08 (d) B1 5,865,000 6,172,913
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
MEDIA & LEISURE - CONTINUED
BROADCASTING - CONTINUED
CSC Holdings, Inc.:
9.25% 11/1/05 B1 $ 1,250,000 $ 1,337,500
9.875% 5/15/06 B1 4,000,000 4,380,000
Echostar Satellite B3 2,810,000 2,810,000
Broadcasting Corp. 0%
3/15/04 (b)
International Cabletel, Inc. B3 24,365,000 19,735,650
0% 2/1/06 (b)
Iridium Operating LLC/Iridium
Capital Corp.:
10.875% 7/15/05 B3 25,100,000 21,335,000
11.25% 7/15/05 B3 13,790,000 11,859,400
Metromedia Fiber Network, B2 14,040,000 14,426,100
Inc. 10% 11/15/08 (d)
NTL, Inc.:
0% 4/1/08 (b) B3 48,485,000 29,939,488
10% 2/15/07 B3 13,370,000 13,771,100
11.5% 10/1/08 (d) B3 8,980,000 9,653,500
Olympus Communications B1 9,320,000 10,252,000
LP/Olympus Capital Corp.
10.625% 11/15/06
Orbital Imaging Corp. 11.625% - 6,895,000 6,998,425
3/1/05
Orion Network Systems, Inc.:
0% 1/15/07 (b) B2 41,220,000 25,556,400
11.25% 1/15/07 B2 4,995,000 4,870,125
Rogers Cablesystems Ltd. Ba3 1,980,000 2,187,900
yankee 10.125% 9/1/12
Satelites Mexicanos SA de CV:
9.06% 6/30/04 (d)(e) - 11,766,000 10,942,380
10.125% 11/1/04 B3 24,710,000 19,768,000
Telewest Communications PLC B1 4,960,000 5,580,000
11.25% 11/1/08 (d)
Telewest PLC:
yankee 9.625% 10/1/06 B1 1,630,000 1,695,200
0% 10/1/07 (b) B1 31,492,000 26,138,360
UIH Australia/Pacific, Inc.:
Series B 0% 5/15/06 (b) B2 25,545,000 12,389,325
Series D 0% 5/15/06 (b) B2 5,520,000 2,677,200
United International B3 24,710,000 13,343,400
Holdings, Inc. 0% 2/15/08 (b)
331,766,194
ENTERTAINMENT - 2.0%
AMC Entertainment, Inc. 9.5% B2 8,740,000 8,914,800
3/15/09
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
Cinemark USA, Inc.:
8.5% 8/1/08 B2 $ 3,370,000 $ 3,311,025
9.625% 8/1/08 B2 5,240,000 5,475,800
Harrahs Operating Co., Inc. Ba2 15,000,000 15,000,000
7.875% 12/15/05
IMAX Corp. 7.875% 12/1/05 Ba2 3,300,000 3,333,000
Premier Parks, Inc.:
0% 4/1/08 (b) B3 12,660,000 8,577,150
9.25% 4/1/06 B3 2,640,000 2,732,400
47,344,175
LODGING & GAMING - 3.3%
Aladdin Gaming Caa2 7,920,000 2,059,200
Holdings/Aladdin Capital
Corp. 0% 3/1/10 (b)
Circus Circus Enterprises,
Inc.:
6.45% 2/1/06 Baa3 1,070,000 963,000
7% 11/15/36 Baa3 3,060,000 2,769,300
7.625% 7/15/13 Ba2 4,870,000 4,285,600
9.25% 12/1/05 Ba2 7,560,000 7,673,400
HMH Properties, Inc.:
7.875% 8/1/08 Ba2 12,410,000 12,037,700
8.45% 12/1/08 Ba2 7,340,000 7,340,000
KSL Recreation Group, Inc. B3 8,640,000 8,596,800
10.25% 5/1/07
Signature Resorts, Inc.:
9.25% 5/15/06 B2 14,520,000 13,358,400
9.75% 10/1/07 B3 19,080,000 16,027,200
Sun International Hotels Ba3 4,820,000 4,964,600
Ltd./Sun International North
America, Inc. yankee 9%
3/15/07
80,075,200
PUBLISHING - 0.7%
Big Flower Press Holdings, B2 17,010,000 17,180,100
Inc. 8.875% 7/1/07
RESTAURANTS - 1.5%
AFC Enterprises, Inc. 10.25% B3 10,600,000 11,050,500
5/15/07
Dominos, Inc. 10.375% 1/15/09 B3 5,520,000 5,547,600
(d)
Host Marriott Travel Plazas, Ba3 8,560,000 8,752,600
Inc. 9.5% 5/15/05
Nebraska Restaurant, Inc. B3 7,690,000 7,766,900
10.75% 7/15/08
SC International Services, B2 4,310,000 4,326,163
Inc. Series B, 9.25% 9/1/07
37,443,763
TOTAL MEDIA & LEISURE 513,809,432
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
NONDURABLES - 0.8%
FOODS - 0.1%
Del Monte Corp. 12.25% 4/15/07 Caa1 $ 3,070,000 $ 3,423,050
HOUSEHOLD PRODUCTS - 0.7%
AKI Holding Corp. 0% 7/1/09 Caa1 9,120,000 3,556,800
(b)(d)
AKI, Inc. 10.5% 7/1/08 (d) B2 2,920,000 2,774,000
Revlon Consumer Products
Corp.:
8.625% 2/1/08 B3 6,230,000 5,669,300
9% 11/1/06 (d) B2 4,040,000 3,999,600
15,999,700
TOTAL NONDURABLES 19,422,750
PRECIOUS METALS - 0.1%
Centaur Mining & Exploration B1 3,140,000 2,857,400
Ltd. 11% 12/1/07
RETAIL & WHOLESALE - 4.2%
APPAREL STORES - 1.3%
Mothers Work, Inc. 12.625% B3 10,140,000 10,393,500
8/1/05
Specialty Retailers, Inc.:
8.5% 7/15/05 Ba3 10,190,000 8,712,450
9% 7/15/07 B2 16,350,000 13,080,000
32,185,950
GROCERY STORES - 0.3%
Pathmark Stores, Inc. 9.625% Caa1 7,550,000 7,417,875
5/1/03
RETAIL & WHOLESALE,
MISCELLANEOUS - 2.6%
Amazon.com, Inc. 0% 5/1/08 (b) Caa2 40,060,000 26,439,600
Guitar Center, Inc. 11% 7/1/06 B1 6,587,000 6,916,350
J. Crew Group, Inc. 0% Caa3 26,187,000 11,784,150
10/15/08 (b)
J. Crew Operating Corp. Caa1 9,470,000 8,191,550
10.375% 10/15/07
Metals USA, Inc. 8.625% B2 4,085,000 3,829,688
2/15/08
U.S. Office Products Co. B3 9,540,000 6,010,200
9.75% 6/15/08
63,171,538
TOTAL RETAIL & WHOLESALE 102,775,363
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
SERVICES - 3.6%
LEASING & RENTAL - 1.6%
AP Holdings, Inc. 0% 3/15/08 Caa2 $ 6,800,000 $ 3,672,000
(b)
Apcoa, Inc. 9.25% 3/15/08 Caa1 14,730,000 13,551,600
GPA Holland BV 8.94% 2/16/99 - 500,000 502,500
Hollywood Entertainment Corp. B3 14,260,000 14,402,600
10.625% 8/15/04
Renters Choice, Inc. 11% B2 7,630,000 7,668,150
8/15/08 (d)
39,796,850
PRINTING - 0.9%
Sullivan Graphics, Inc. Caa1 21,340,000 21,553,400
12.75% 8/1/05
SERVICES - 1.1%
AMRESCO, Inc. 9.875% 3/15/05 Caa3 820,000 574,000
Coach USA, Inc. 9.375% 7/1/07 B1 550,000 566,500
Iron Mountain, Inc. 8.75% B3 1,955,000 2,013,650
9/30/09
Medaphis Corp. 9.5% 2/15/05 Caa1 14,303,000 11,013,310
SITEL Corp. 9.25% 3/15/06 B2 1,400,000 1,204,000
Spin Cycle, Inc. 0% 5/1/05 (b) - 23,255,000 10,697,300
26,068,760
TOTAL SERVICES 87,419,010
TECHNOLOGY - 3.5%
COMMUNICATIONS EQUIPMENT - 0.5%
Jordan Telecommunication
Products, Inc.:
0% 8/1/07 (b) B3 10,400,000 8,008,000
9.875% 8/1/07 B3 2,990,000 2,990,000
10,998,000
COMPUTER SERVICES & SOFTWARE
- - 1.4%
Concentric Network Corp. - 9,920,000 10,118,400
12.75% 12/15/07
DecisionOne Corp. 9.75% 8/1/07 B3 6,390,000 2,939,400
DecisionOne Holdings Corp. 0% Caa1 12,045,000 2,409,000
8/1/08 unit (b)
ICG Services, Inc.:
0% 2/15/08 (b) - 27,840,000 14,755,200
0% 5/1/08 (b) - 3,030,000 1,568,025
TeleHub Communications Corp. - 6,000,000 3,180,000
0% 7/31/05 unit (b)(d)
34,970,025
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
TECHNOLOGY - CONTINUED
ELECTRONIC INSTRUMENTS - 0.5%
Telecommunications Techniques B3 $ 12,980,000 $ 12,720,400
Co. LLC 9.75% 5/15/08
ELECTRONICS - 1.1%
Communications Instruments, B3 4,460,000 4,292,750
Inc. 10% 9/15/04
Fairchild Semiconductor Corp. B2 670,000 663,300
10.125% 3/15/07
Hadco Corp. 9.5% 6/15/08 B2 13,550,000 13,346,750
Insilco Corp. 12% 8/15/07 B3 7,380,000 7,601,400
unit (d)
25,904,200
TOTAL TECHNOLOGY 84,592,625
TRANSPORTATION - 1.3%
AIR TRANSPORTATION - 0.8%
Atlas Air, Inc. 9.25% 4/15/08 B3 5,880,000 5,821,200
Kitty Hawk, Inc. 9.95% B1 13,379,000 13,178,315
11/15/04
18,999,515
SHIPPING - 0.5%
Amer Reefer Co. Ltd. 10.25% B1 3,070,000 1,934,100
3/1/08
Holt Group, Inc. 9.75% Caa1 11,100,000 7,659,000
1/15/06 (d)
Hvide Marine, Inc. 8.375% B1 820,000 656,000
2/15/08
Millenium Seacarriers, Inc. B3 3,000,000 2,400,000
12% 7/15/05 (d)
12,649,100
TOTAL TRANSPORTATION 31,648,615
UTILITIES - 18.4%
CELLULAR - 8.2%
Cellnet Data Systems, Inc. 0% - 48,500,000 10,670,000
10/1/07 (b)
Dial Call Communications, B2 4,080,000 3,998,400
Inc. 10.25% 12/15/05
Iridium LLC/Iridium Capital B3 2,220,000 2,031,300
Corp. 13% 7/15/05
McCaw International Ltd. 0% Caa1 45,205,000 24,410,700
4/15/07 (b)
Millicom International Caa1 85,300,000 59,923,244
Cellular SA 0% 6/1/06 (b)
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
Nextel Communications, Inc.:
0% 8/15/04 (b) B2 $ 6,680,000 $ 6,496,300
0% 2/15/08 (b) B2 38,320,000 22,992,000
Nextel International, Inc. 0% Caa1 19,370,000 8,716,500
4/15/08 (b)
PageMart Nationwide, Inc. 0% B3 9,140,000 8,088,900
2/1/05 (b)
PageMart Wireless, Inc. 0% Caa2 10,600,000 4,876,000
2/1/08 (b)
Rogers Communications, Inc. B2 18,780,000 19,343,400
8.875% 7/15/07
Telesystem International
Wireless, Inc.:
0% 6/30/07 (b) Caa1 17,940,000 7,624,500
0% 11/1/07 (b) Caa1 21,190,000 7,734,350
Teligent, Inc.:
0% 3/1/08 (b) Caa1 16,480,000 8,157,600
11.5% 12/1/07 Caa1 4,380,000 4,095,300
199,158,494
ELECTRIC UTILITY - 0.1%
AES Corp. 10.25% 7/15/06 Ba1 1,950,000 2,106,000
TELEPHONE SERVICES - 10.1%
Allegiance Telecom, Inc. - 9,910,000 9,612,700
12.875% 5/15/08
Covad Communications Group, - 19,980,000 10,989,000
Inc. 0% 3/15/08 (b)
Dobson Wireline Co. 12.25% - 10,910,000 9,764,450
6/15/08
DTI Holdings, Inc. 0% 3/1/08 - 11,740,000 2,876,300
(b)
Firstworld Communications, - 5,600,000 1,680,000
Inc. 0% 4/15/08 (b)
GCI, Inc. 9.75% 8/1/07 B2 2,850,000 2,807,250
Global TeleSystems Group, Caa2 7,540,000 7,012,200
Inc. 9.875% 2/15/05
GST Network Funding, Inc. 0% - 24,190,000 11,006,450
5/1/08 (b)(d)
GST Equipment Funding, Inc. - 4,870,000 5,052,625
13.25% 5/1/07
GST Telecommunications, Inc. - 15,870,000 14,441,700
12.75% 11/15/07
Hermes Europe Railtel BV B3 7,350,000 7,441,875
10.375% 1/15/09 (d)
Hyperion Telecommunications, B3 11,800,000 8,437,000
Inc. 0% 4/15/03 (b)
ICG Holdings, Inc. 0% 9/15/05 - 10,490,000 8,654,250
(b)
IXC Communications, Inc. 9% B3 14,975,000 14,825,250
4/15/08
KMC Telecom Holdings, Inc. 0% - 10,000,000 4,700,000
2/15/08 (b)
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
UTILITIES - CONTINUED
TELEPHONE SERVICES - CONTINUED
Level 3 Communications, Inc. B3 $ 17,760,000 $ 17,604,600
9.125% 5/1/08
McLeodUSA, Inc.:
0% 3/1/07 (b) B2 12,709,000 9,722,385
9.25% 7/15/07 B2 3,590,000 3,697,700
NEXTLINK Communications LLC B3 3,660,000 3,888,750
12.5% 4/15/06
NEXTLINK Communications, Inc.:
9% 3/15/08 B3 3,750,000 3,525,000
9.625% 10/1/07 B3 540,000 518,400
10.75% 11/15/08 (d) B3 10,860,000 11,077,200
Optel Communications Corp. - 12,000,000 11,240,640
15% 12/29/04 (f)
Pathnet, Inc. 12.25% 4/15/08 - 7,820,000 5,474,000
Rhythms Netconnections, Inc. - 22,385,000 10,968,650
0% 5/15/08 (b)
Viatel, Inc. 11.25% 4/15/08 Caa1 3,059,000 3,059,000
WinStar Communications, Inc.:
0% 10/15/05 (b) Caa1 7,050,000 5,005,500
0% 10/15/05 (b) Caa1 18,700,000 20,570,000
0% 3/15/08 (b) CCC 18,755,000 13,316,050
Winstar Equipment Corp. 12.5% B3 6,655,000 6,721,550
3/15/04
245,690,475
TOTAL UTILITIES 446,954,969
TOTAL NONCONVERTIBLE BONDS 1,833,660,625
TOTAL CORPORATE BONDS 1,855,175,775
(Cost $2,048,062,370)
ASSET-BACKED SECURITIES - 0.3%
Airplanes Pass Through Trust Ba2 6,710,000 7,045,500
10.875% 3/15/19 (Cost
$7,551,450)
COMMERCIAL MORTGAGE
SECURITIES - 0.4%
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
Meritor Mortgage Security - $ 1,350,000 $ 250,560
Corp. Series 1987 1 Class B,
9.4% 2/1/00 (d) (i)
Mortgage Capital Funding, Ba1 4,500,000 3,772,969
Inc. Series 1998-MC3 Class
F, 7.355% 11/18/31 (d)(e)
Nomura Depositor Trust Series - 4,000,000 3,417,500
1998-ST1A Class B1A, 8.2966%
1/15/03 (d)(e)
Structured Asset Securities - 2,000,000 1,589,688
Corp. Series 1995 C1 Class
F, 7.375% 12/25/25 (d)
TOTAL COMMERCIAL MORTGAGE 9,030,717
SECURITIES
(Cost $8,865,075)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
COMMON STOCKS - 4.7%
SHARES
BASIC INDUSTRIES - 0.3%
CHEMICALS & PLASTICS - 0.0%
Sterling Chemicals Holdings, 340 5,100
Inc. warrants 8/15/08 (a)
PAPER & FOREST PRODUCTS - 0.3%
Smurfit-Stone Container Corp. 519,000 8,206,688
(a)
TOTAL BASIC INDUSTRIES 8,211,788
CONSTRUCTION & REAL ESTATE -
1.3%
BUILDING MATERIALS - 0.1%
International Utility 2,500 2,225,000
Structures, Inc. unit (a)
REAL ESTATE - 1.1%
LNR Property Corp. 322,100 6,421,869
Sunterra Corp. (a) 1,445,600 21,684,000
28,105,869
REAL ESTATE INVESTMENT TRUSTS
- - 0.1%
Ocwen Asset Investment Corp. 368,000 1,771,000
TOTAL CONSTRUCTION & REAL 32,101,869
ESTATE
DURABLES - 0.2%
TEXTILES & APPAREL - 0.2%
Arena Brands Holdings Corp. 48,889 1,222,225
Class B
Hat Brands, Inc. (a)(f)(g) 340,000 3
Polymer Group, Inc. (a) 463,000 4,601,063
5,823,291
ENERGY - 0.3%
OIL & GAS - 0.3%
Plains Resources, Inc. (a) 522,200 7,506,625
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - 0.3%
CREDIT & OTHER FINANCE - 0.0%
Olympic Financial Ltd. 498 $ 2,490
warrants 3/15/07 (a)
SAVINGS & LOANS - 0.3%
Golden State Bancorp, Inc. 375,000 6,234,375
SECURITIES INDUSTRY - 0.0%
ECM Corp. LP (d) 3,000 264,000
TOTAL FINANCE 6,500,865
HEALTH - 0.0%
MEDICAL EQUIPMENT & SUPPLIES
- - 0.0%
Wright Medical Technology, 3,212 32
Inc. warrants 6/30/03 (a)
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.4%
ELECTRICAL EQUIPMENT - 0.0%
Ampex Corp. Class A (a) 68,129 76,645
POLLUTION CONTROL - 0.4%
Allied Waste Industries, Inc. 350,000 8,268,750
(a)
TOTAL INDUSTRIAL MACHINERY & 8,345,395
EQUIPMENT
MEDIA & LEISURE - 0.3%
BROADCASTING - 0.3%
Benedek Communications Corp. 57,600 115,200
warrants 7/1/07 (a)
CS Wireless Systems, Inc. 1,024 0
(a)(d)
Loral Orion Network Systems,
Inc.:
warrants 1/15/07 (CV ratio 45,930 367,440
.47) (a)
warrants 1/15/07 (CV ratio 5,585 58,643
.6) (a)
NTL, Inc. warrants 12/31/08 23,146 347,190
(a)
Orbital Imaging Corp. 4,815 48,150
warrants 3/1/05 (a)(d)
Teletrac Holdings, Inc. 3,940 1,970
warrants 8/1/07 (a)
UIH Australia/Pacific, Inc. 26,805 80,415
warrants 5/15/06 (a)
United International 352,500 6,785,625
Holdings, Inc. Class A (a)
7,804,633
ENTERTAINMENT - 0.0%
Alliance Gaming Corp. (a)(f) 7,101 11,717
LODGING & GAMING - 0.0%
Aladdin Gaming Enterprises, 79,200 792
Inc. warrants 3/1/10 (a)(d)
Motels of America, Inc. (a) 3,000 63,000
63,792
TOTAL MEDIA & LEISURE 7,880,142
SHARES VALUE (NOTE 1)
NONDURABLES - 0.0%
HOUSEHOLD PRODUCTS - 0.0%
Renaissance Cosmetics, Inc. 12,750 $ 128
warrants 8/31/06 (a)(d)
TOBACCO - 0.0%
North Atlantic Trading, Inc. 210 2
warrants 6/15/07 (a)
TOTAL NONDURABLES 130
RETAIL & WHOLESALE - 0.2%
APPAREL STORES - 0.2%
Mothers Work, Inc. (a)(g) 314,100 3,926,250
Mothers Work, Inc. (a)(f) 2,952 35,055
3,961,305
SERVICES - 0.3%
PRINTING - 0.3%
Big Flower Holdings, Inc. (a) 352,500 7,777,031
SERVICES - 0.0%
Spin Cycle, Inc. warrants 23,255 233
5/1/05 (a)(d)
TOTAL SERVICES 7,777,264
TECHNOLOGY - 0.3%
COMMUNICATIONS EQUIPMENT - 0.2%
Intermedia Communications, 305,000 5,261,250
Inc. (a)
COMPUTER SERVICES & SOFTWARE
- - 0.1%
Concentric Network Corp. 6,100 884,500
warrants 12/15/07 (a)(d)
TOTAL TECHNOLOGY 6,145,750
TRANSPORTATION - 0.1%
AIR TRANSPORTATION - 0.1%
Kitty Hawk, Inc. (a) 253,900 2,792,900
SHIPPING - 0.0%
Millenium Seacarriers, Inc. 3,000 18,750
warrants 7/15/05 (a)(d)
TOTAL TRANSPORTATION 2,811,650
UTILITIES - 0.7%
CELLULAR - 0.4%
American Mobile Satellite 4,180 16,218
Corp. warrants 4/1/08 (a)(d)
Cellnet Data Systems, Inc. 18,000 144,000
warrants 10/1/07 (a)(d)
McCaw International Ltd. 42,305 211,525
warrants 4/15/07 (a)(d)
Microcell Telecommunications, 103,480 1,319,370
Inc. warrants 6/1/06 (a)(d)
PageMart Wireless, Inc. Class 1,392,000 7,743,000
A (a)
Powertel, Inc. warrants 22,148 66,444
2/1/06 (a)
9,500,557
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - CONTINUED
TELEPHONE SERVICES - 0.3%
Covad Communications Group, 19,450 $ 972,500
Inc. warrants 3/15/08 (a)(d)
DTI Holdings, Inc. warrants 58,700 2,935
3/1/08 (a)(d)
Firstworld Communications, 5,600 56,000
Inc. warrants 4/15/08 (a)(d)
GST Telecommunications, Inc. 877,800 5,442,360
(a)
KMC Telecom Holdings, Inc. 12,650 31,625
warrants 4/15/08 (a)(d)
Optel Communications Corp. 2,559,515 25,595
warrants 12/29/04 (a)(f)
Pathnet, Inc. warrants 7,820 78,200
4/15/08 (a)(d)
Rhythms Netconnections, Inc. 89,560 671,700
warrants 5/15/08 (a)(d)
7,280,915
TOTAL UTILITIES 16,781,472
TOTAL COMMON STOCKS 113,847,578
(Cost $134,452,612)
PREFERRED STOCKS - 15.1%
CONVERTIBLE PREFERRED STOCKS
- - 0.7%
ENERGY - 0.0%
OIL & GAS - 0.0%
Chesapeake Energy Corp. $3.50 63,700 621,075
(d)
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.0%
ELECTRICAL EQUIPMENT - 0.0%
Ampex Corp. 8% non-cumulative 227 354,120
SERVICES - 0.2%
PRINTING - 0.2%
Big Flower Trust I $3.00 87,500 4,123,438
QUIPS (d)
UTILITIES - 0.5%
TELEPHONE SERVICES - 0.5%
IXC Communications, Inc.:
$3.375 (d) 323,900 10,729,188
$3.375 30,000 993,750
11,722,938
TOTAL CONVERTIBLE PREFERRED 16,821,571
STOCKS
NONCONVERTIBLE PREFERRED
STOCKS - 14.4%
CONSTRUCTION & REAL ESTATE -
0.0%
BUILDING MATERIALS - 0.0%
International Utility 162 140,940
Structures, Inc. 13.00%
pay-in-kind (a)(d)
SHARES VALUE (NOTE 1)
FINANCE - 1.0%
CREDIT & OTHER FINANCE - 0.6%
Fresenius Medical Care 15,424 $ 15,468,822
Capital Trust II 7.875%
INSURANCE - 0.4%
American Annuity Group 8,910 8,731,800
Capital Trust II 8.875%
TOTAL FINANCE 24,200,622
HEALTH - 0.2%
MEDICAL FACILITIES MANAGEMENT
- - 0.2%
Harborside Healthcare Corp. 4,136 3,639,680
13.50% pay-in-kind (a)
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.0%
ELECTRICAL EQUIPMENT - 0.0%
Ampex Corp. 8% non-cumulative 497 775,320
MEDIA & LEISURE - 4.0%
BROADCASTING - 3.6%
Citadel Broadcasting Co. 70,093 7,990,602
Series B, 13.25% pay-in-kind
CSC Holdings, Inc.:
11.125% pay-in-kind 313,628 34,969,522
Series H, 11.75% pay-in-kind 194,563 22,180,182
(a)
Echostar Communications Corp. 13,395 15,487,969
12.125% pay-in-kind
Granite Broadcasting Corp. 8,752 7,876,800
12.75% pay-in-kind
88,505,075
PUBLISHING - 0.4%
PRIMEDIA, Inc.:
8.625% 82,500 8,043,750
Series D, $10.00 5,400 557,550
8,601,300
TOTAL MEDIA & LEISURE 97,106,375
NONDURABLES - 0.2%
HOUSEHOLD PRODUCTS - 0.0%
Renaissance Cosmetics, Inc. 16,284 24,426
14% pay-in-kind
TOBACCO - 0.2%
North Atlantic Trading, Inc. 250,424 5,759,752
12% pay-in-kind
TOTAL NONDURABLES 5,784,178
TECHNOLOGY - 1.8%
COMMUNICATIONS EQUIPMENT - 1.3%
Intermedia Communications, 30,713 30,943,348
Inc. 13.5% pay-in-kind (a)
PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONCONVERTIBLE PREFERRED
STOCKS - CONTINUED
TECHNOLOGY - CONTINUED
COMPUTER SERVICES & SOFTWARE
- - 0.5%
Concentric Network Corp. 16,215 $ 13,863,825
13.5% pay-in-kind (a)
TOTAL TECHNOLOGY 44,807,173
UTILITIES - 7.2%
CELLULAR - 2.4%
Nextel Communications, Inc.:
11.125% pay-in-kind (a) 37,730 33,957,000
Series D, 13% pay-in-kind 25,854 25,595,460
59,552,460
TELEPHONE SERVICES - 4.8%
e.spire Communications, Inc.:
$127.50 pay-in-kind 15,914 7,797,860
14.75% pay-in-kind 3,641 2,548,700
Hyperion Telecommunication, 19,192 15,257,640
Inc. 12.875% pay-in-kind
ICG Holdings, Inc.:
14% pay-in-kind (a) 5,998 5,848,050
14.25% pay-in-kind 27,202 27,474,020
IXC Communications, Inc. 7,341 7,414,410
12.5% pay-in-kind
NEXTLINK Communications, Inc. 825,351 42,918,252
14% pay-in-kind
Viatel, Inc. 10% pay-in-kind 2,699 296,890
(a)(d)
WinStar Communications, Inc. 7,810 6,248,000
14.25%
115,803,822
TOTAL UTILITIES 175,356,282
TOTAL NONCONVERTIBLE 351,810,570
PREFERRED STOCKS
TOTAL PREFERRED STOCKS 368,632,141
(Cost $417,354,899)
CASH EQUIVALENTS - 3.2%
MATURITY AMOUNT
Investments in repurchase $ 79,118,471 79,077,000
agreements (U.S. Treasury
obligations), in a joint
trading account at 4.72%,
dated 12/31/98 due 1/4/99
(Cost $79,077,000)
TOTAL INVESTMENT IN $ 2,432,808,711
SECURITIES - 100%
(Cost $2,695,363,406)
</TABLE>
SECURITY TYPE ABBREVIATIONS
QUIPS - Quarterly Income Preferred Securities
LEGEND
(a) Non-income producing
(b) 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.
(c) 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.
(d) 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 $280,679,488 or 11.3% of net assets.
(e) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(f) Restricted securities - Investment in securities not registered
under the Securities Act of 1933 (see Note 2 of Notes to Financial
Statements).
SECURITY ACQUISTION DATE ACQUISITION COST
Alliance Gaming Corp. 7/28/98 0
Hat Brands, Inc. 2/22/94 340,000
Mothers Work, Inc. 6/18/98 26,172
Optel Communications Corp. 12/31/97 759,408
warrants 12/29/04
Optel Communications Corp. 12/31/97 11,304,419
15% 12/29/04
(g) Transactions during the period with companies which are or were
affiliates are as follows (see Note 10 of Notes to Financial
Statements):
AFFILIATE PURCHASE COST SALES DIVIDEND VALUE
COST INCOME
Hat Brands, Inc. - - - 3
Mothers Work, Inc. 388,699 - - 3,926,250
TOTALS $ 388,699 $ - $ - $ 3,926,253
(h) Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investor's Service, Inc.
(i) Non-income producing - issuer filed for protection under the
Federal Bankruptcy Code or is in default of interest payment.
OTHER INFORMATION
The composition of long-term debt holdings as a percentage of total
value of investments 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 0.2% BBB 0.2%
Ba 6.6% BB 8.1%
B 46.4% B 50.4%
Caa 14.9% CCC 9.2%
Ca, C 0.0% CC, C 0.0%
D 0.0%
The percentage not rated by Moody's or S&P amounted to 8.2%. FMR has
determined that unrated debt securities that are lower quality account
for 8.2% of the total value of investment in securities.
Purchases and sales of securities, other than short-term securities,
aggregated $2,683,860,088 and $2,181,587,327, respectively (see Note 3
of Notes to Financial Statements).
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $24,941 for the
period (see Note 4 of Notes to Financial Statements).
The fund participated in the bank borrowing program. The maximum loan
and average daily balances during the period for which the loans were
outstanding amounted to $10,377,000 and $6,237,500, respectively. The
weighted average interest rate was 5.14% (see Note 8 of Notes to
Financial Statements).
Distribution of investments by country of issue, as a percentage of
total value of investments in securities, is as follows:
United States of America 88.9%
Canada 4.4
Luxembourg 2.5
United Kingdom 1.4
Mexico 1.2
(Others individually less 1.6
than 1%)
100.0%
INCOME TAX INFORMATION
At December 31, 1998, the aggregate cost of investment securities for
income tax purposes was $2,698,903,980. Net unrealized depreciation
aggregated $266,095,269, of which $42,809,617 related to appreciated
investment securities and $308,904,886 related to depreciated
investment securities.
The fund hereby designates approximately $39,957,000 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, 1998
ASSETS
Investment in securities, at $ 2,432,808,711
value (including repurchase
agreements of $79,077,000)
(cost $2,695,363,406) - See
accompanying schedule
Cash 483,030
Receivable for investments 247,217
sold
Receivable for fund shares 25,926,462
sold
Dividends receivable 975,468
Interest receivable 37,080,342
Other receivables 395,451
TOTAL ASSETS 2,497,916,681
LIABILITIES
Payable for investments $ 16,095,239
purchased
Payable for fund shares 1,720,662
redeemed
Accrued management fee 1,206,878
Distribution fees payable 10,542
Other payables and accrued 342,008
expenses
TOTAL LIABILITIES 19,375,329
NET ASSETS $ 2,478,541,352
Net Assets consist of:
Paid in capital $ 2,505,839,312
Undistributed net investment 228,599,042
income
Accumulated undistributed 6,657,693
net realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation (262,554,695)
(depreciation) on investments
NET ASSETS $ 2,478,541,352
INITIAL CLASS: NET ASSET $11.53
VALUE, offering price and
redemption price per share
($2,348,954,152 (divided
by) 203,653,269 shares)
SERVICE CLASS: NET ASSET $11.52
VALUE, offering price and
redemption price per share
($129,587,200 (divided by)
11,253,677 shares)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME $ 47,559,628
Dividends
Interest 200,243,479
TOTAL INCOME 247,803,107
EXPENSES
Management fee $ 14,703,631
Transfer agent fees 1,728,056
Distribution fees - Service 66,393
Class
Accounting fees and expenses 811,713
Non-interested trustees' 6,038
compensation
Custodian fees and expenses 92,265
Registration fees 8,633
Audit 58,881
Legal 32,480
Interest 1,780
Miscellaneous 272,534
Total expenses before 17,782,404
reductions
Expense reductions (84,292) 17,698,112
NET INVESTMENT INCOME 230,104,995
REALIZED AND UNREALIZED GAIN
(LOSS)
Net realized gain (loss) on:
Investment securities 6,904,807
Foreign currency transactions 6,338 6,911,145
Change in net unrealized (342,139,590)
appreciation (depreciation)
on investment securities
NET GAIN (LOSS) (335,228,445)
NET INCREASE (DECREASE) IN $ (105,123,450)
NET ASSETS RESULTING FROM
OPERATIONS
OTHER INFORMATION $ 66,238
Expense reductions Directed
brokerage arrangements
Custodian credits 18,054
$ 84,292
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
INCREASE (DECREASE) IN NET YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
ASSETS
Operations Net investment $ 230,104,995 $ 172,037,074
income
Net realized gain (loss) 6,911,145 112,724,876
Change in net unrealized (342,139,590) 28,621,311
appreciation (depreciation)
NET INCREASE (DECREASE) IN (105,123,450) 313,383,261
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders (174,513,221) (116,015,279)
From net investment income
From net realized gain (109,261,101) (14,338,900)
TOTAL DISTRIBUTIONS (283,774,322) (130,354,179)
Share transactions - net 535,004,180 560,584,056
increase (decrease)
TOTAL INCREASE (DECREASE) 146,106,408 743,613,138
IN NET ASSETS
NET ASSETS
Beginning of period 2,332,434,944 1,588,821,806
End of period (including $ 2,478,541,352 $ 2,332,434,944
undistributed net investment
income of $228,599,042 and
$171,323,283, respectively)
</TABLE>
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
SHARES DOLLARS SHARES DOLLARS
Share transactions Initial 105,294,967 $ 1,274,568,026 99,919,218 $ 1,254,908,724
Class Sold
Reinvested 22,841,432 282,776,922 11,056,288 130,354,179
Redeemed (96,026,533) (1,157,142,331) (66,317,508) (827,580,626)
Net increase (decrease) 32,109,866 $ 400,202,617 44,657,998 $ 557,682,277
Service Class A Sold 11,710,091 $ 142,335,404 215,034 $ 2,901,779
Reinvested 80,565 997,399 - -
Redeemed (752,013) (8,531,240) - -
Net increase (decrease) 11,038,643 $ 134,801,563 215,034 $ 2,901,779
Distributions
From net investment income $ 173,899,848 $ 116,015,279
Initial Class
Service Class 613,373 -
Total $ 174,513,221 $ 116,015,279
From net realized gain $ 108,877,075 $ 14,338,900
Initial Class
Service Class 384,026 -
Total $ 109,261,101 $ 14,338,900
$ 283,774,322 $ 130,354,179
A SERVICE CLASS COMMENCED
SALE OF SHARES NOVEMBER 3,
1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 1996 1995 1994
Net asset value, beginning of $ 13.580 $ 12.520 $ 12.050 $ 10.750 $ 11.990
period
Income from Investment
Operations
Net investment income 1.111 D 1.124 D .927 .856 .770
Net realized and unrealized (1.591) .936 .643 1.224 (.910)
gain (loss)
Total from investment (.480) 2.060 1.570 2.080 (.140)
operations
Less Distributions
From net investment income (.970) G (.890) (.920) (.780) (.730)
From net realized gain (.600) G (.110) (.180) - (.370)
Total distributions (1.570) (1.000) (1.100) (.780) (1.100)
Net asset value, end of period $ 11.530 $ 13.580 $ 12.520 $ 12.050 $ 10.750
TOTAL RETURN B, C (4.33)% 17.67% 14.03% 20.72% (1.64)%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 2,348,954 $ 2,329,516 $ 1,588,822 $ 1,040,000 $ 569,417
(000 omitted)
Ratio of expenses to average .70% .71% .71% .71% .71%
net assets
Ratio of net investment 9.14% 8.88% 9.09% 9.32% 8.75%
income to average net assets
Portfolio turnover rate 92% 118% 123% 132% 122%
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 E
Net asset value, beginning of $ 13.570 $ 13.380
period
Income from Investment
Operations
Net investment incomeD 1.082 .203
Net realized and unrealized (1.562) (.013)
gain (loss)
Total from investment (.480) .190
operations
Less Distributions
From net investment income (.970) G -
From net realized gain (.600) G -
Total distributions (1.570) -
Net asset value, end of period $ 11.520 $ 13.570
TOTAL RETURN B, C (4.34)% 1.42%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 129,587 $ 2,919
(000 omitted)
Ratio of expenses to average .82% .81% A
net assets
Ratio of expenses to average .82% .80% A, F
net assets after expense
reductions
Ratio of net investment 9.51% 10.75% A
income to average net assets
Portfolio turnover rate 92% 118%
A ANNUALIZED
B TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE
THE TOTAL RETURNS SHOWN. TOTAL RETURNS FOR PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN.
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3, 1997 (COMMENCEMENT OF SALE OF SERVICE
CLASS SHARES) TO DECEMBER 31, 1997.
F FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES.
G THE AMOUNTS SHOWN REFLECT CERTAIN RECLASSIFICATIONS RELATED TO BOOK
TO TAX DIFFERENCES (SEE NOTE 1 OF NOTES TO FINANCIAL STATEMENTS).
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). If Fidelity had not reimbursed certain fund
expenses, the life of fund total return would have been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, PAST 1 YEAR PAST 5 YEARS LIFE OF FUND
1998
VIP II: ASSET MANAGER - 15.05% 11.81% 12.98%
"INITIAL CLASS"
Fidelity Composite 18.61% 14.42% n/a
S&P 500 (registered trademark) 28.58% 24.06% 17.51%
LB Aggregate Bond 8.69% 7.27% 8.80%
LB 3 Month T-Bill 5.31% 5.32% n/a
Variable Annuity Flexible 13.50% 13.64% n/a
Portfolio Funds Average
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's returns to those of the Fidelity Asset
Allocation Composite Index, a hypothetical combination of unmanaged
indices. The composite index combines the total returns of the
Standard & Poor's 500 Index, the Lehman Brothers Aggregate Bond Index
and the Lehman Brothers 3 Month Treasury Bill Index weighted according
to the fund's neutral mix.
You can also compare the fund's returns to the variable annuity
flexible portfolio funds average, which reflects the performance of
mutual funds with similar objectives tracked by Lipper Inc. The past
one year average represent a peer group of 84 mutual funds. The
benchmarks listed in the table above include reinvested dividends and
capital gains, if any, and exclude the effect of sales charges.
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, September 6, 1989.
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.
(checkmark)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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
$10,000 OVER LIFE OF FUND
VIP II Asset Manager FID Composite S&P 500 LB Aggregate Bond
00156 F0001 SP001 LB001
1989/09/30 10000.00 10000.00 10000.00 10000.00
1989/10/31 10020.02 10057.70 9768.00 10246.00
1989/11/30 10060.06 10178.69 9967.27 10343.34
1989/12/31 10091.09 10277.43 10206.48 10371.26
1990/01/31 9868.42 10029.64 9521.63 10247.85
1990/02/28 9969.64 10094.03 9644.46 10280.64
1990/03/31 10050.61 10193.35 9900.03 10287.84
1990/04/30 9919.03 10098.66 9652.53 10193.19
1990/05/31 10425.10 10529.97 10593.65 10494.91
1990/06/30 10506.07 10595.89 10521.62 10663.87
1990/07/31 10485.83 10662.11 10487.95 10811.04
1990/08/31 10141.70 10332.65 9539.84 10666.17
1990/09/30 9929.15 10241.83 9075.25 10754.70
1990/10/31 9979.76 10314.96 9036.22 10891.28
1990/11/30 10465.59 10624.61 9619.96 11125.44
1990/12/31 10769.23 10802.47 9888.36 11299.00
1991/01/31 11284.56 11009.44 10319.49 11439.11
1991/02/28 11726.26 11285.45 11057.34 11536.34
1991/03/31 11915.56 11410.72 11324.93 11615.94
1991/04/30 12094.35 11486.94 11352.11 11741.39
1991/05/31 12367.79 11669.35 11842.52 11809.49
1991/06/30 12146.94 11518.12 11300.13 11803.59
1991/07/31 12451.92 11749.63 11826.72 11967.66
1991/08/31 12704.33 11959.83 12107.01 12226.16
1991/09/30 12777.94 12018.08 11904.82 12474.35
1991/10/31 12862.08 12126.84 12064.35 12612.82
1991/11/30 12651.74 12046.56 11578.15 12728.85
1991/12/31 13198.62 12642.99 12902.69 13106.90
1992/01/31 13366.89 12504.31 12662.70 12928.65
1992/02/29 13626.47 12583.84 12827.32 13012.68
1992/03/31 13593.27 12492.10 12577.19 12939.81
1992/04/30 13792.52 12648.75 12946.96 13032.98
1992/05/31 13936.42 12772.62 13010.40 13279.30
1992/06/30 13925.35 12778.88 12816.54 13462.56
1992/07/31 14157.81 13127.82 13340.74 13737.19
1992/08/31 14113.53 13077.17 13067.25 13875.94
1992/09/30 14202.09 13224.45 13221.45 14041.06
1992/10/31 14224.22 13162.82 13267.72 13854.32
1992/11/30 14534.17 13329.99 13720.15 13857.09
1992/12/31 14744.49 13487.52 13888.91 14077.42
1993/01/31 15010.15 13656.87 14005.57 14347.70
1993/02/28 15150.92 13847.00 14196.05 14598.79
1993/03/31 15579.83 13989.68 14495.59 14660.10
1993/04/30 15672.57 13904.65 14144.79 14762.72
1993/05/31 15939.19 14053.79 14523.87 14781.91
1993/06/30 16066.70 14203.33 14565.99 15049.47
1993/07/31 16263.77 14221.73 14507.73 15135.25
1993/08/31 16739.04 14571.76 15057.57 15400.11
1993/09/30 16750.64 14557.48 14941.63 15441.70
1993/10/31 17202.73 14707.13 15250.92 15498.83
1993/11/30 17179.54 14594.03 15106.04 15367.09
1993/12/31 17875.07 14696.31 15288.82 15450.07
1994/01/31 18443.09 14985.71 15808.64 15658.65
1994/02/28 17857.33 14699.72 15380.23 15386.19
1994/03/31 17017.99 14320.11 14709.65 15006.15
1994/04/30 17030.15 14356.11 14897.93 14886.10
1994/05/31 17176.13 14452.82 15142.26 14884.61
1994/06/30 16847.69 14310.02 14771.27 14851.86
1994/07/31 17139.63 14613.05 15255.77 15147.42
1994/08/31 17541.06 14864.31 15881.26 15165.59
1994/09/30 17334.15 14646.64 15492.17 14942.66
1994/10/31 17419.36 14787.36 15840.74 14929.21
1994/11/30 17163.73 14571.08 15263.82 14896.37
1994/12/31 16786.37 14708.25 15490.18 14999.15
1995/01/31 16676.82 14984.44 15891.84 15296.13
1995/02/28 16946.97 15360.16 16511.15 15660.18
1995/03/31 17170.77 15595.91 16998.39 15755.71
1995/04/30 17444.31 15876.83 17498.99 15976.29
1995/05/31 17668.12 16403.71 18198.43 16594.57
1995/06/30 17817.32 16624.93 18621.18 16715.71
1995/07/31 18451.43 16836.80 19238.66 16678.94
1995/08/31 18675.24 16948.46 19286.95 16880.75
1995/09/30 18911.47 17314.75 20100.85 17044.50
1995/10/31 18662.80 17413.45 20029.09 17266.07
1995/11/30 19147.71 17842.83 20908.37 17525.07
1995/12/31 19632.62 18102.59 21311.07 17770.42
1996/01/31 20055.36 18411.16 22036.50 17887.70
1996/02/29 20001.35 18343.08 22240.77 17576.46
1996/03/31 20213.99 18364.54 22454.95 17453.42
1996/04/30 20426.62 18441.71 22785.94 17355.68
1996/05/31 20586.10 18636.38 23373.59 17320.97
1996/06/30 20772.16 18775.74 23462.64 17553.07
1996/07/31 20426.62 18478.56 22426.06 17600.46
1996/08/31 20466.49 18636.07 22899.03 17570.54
1996/09/30 21210.73 19195.30 24187.79 17876.27
1996/10/31 21755.62 19593.26 24854.88 18273.12
1996/11/30 22832.10 20338.11 26733.66 18585.59
1996/12/31 22499.85 20111.10 26204.07 18412.75
1997/01/31 23177.64 20773.56 27841.30 18469.83
1997/02/28 23377.96 20883.87 28059.58 18516.00
1997/03/31 22488.67 20370.86 26906.61 18310.47
1997/04/30 23257.38 21111.13 28512.93 18585.13
1997/05/31 24372.77 21845.17 30248.80 18761.69
1997/06/30 25020.90 22446.35 31603.95 18984.95
1997/07/31 26467.89 23593.69 34118.67 19497.55
1997/08/31 25744.40 22863.47 32207.35 19331.82
1997/09/30 26573.40 23635.45 33971.34 19617.93
1997/10/31 26136.29 23387.99 32836.70 19902.39
1997/11/30 26739.20 23982.39 34356.71 19993.94
1997/12/31 27146.17 24295.48 34946.61 20195.88
1998/01/31 27236.61 24565.89 35333.12 20454.39
1998/02/28 28462.90 25452.97 37881.35 20438.02
1998/03/31 29288.41 26151.27 39821.25 20507.51
1998/04/30 29254.02 26348.97 40221.85 20614.15
1998/05/31 29099.24 26234.49 39530.44 20809.99
1998/06/30 29666.77 26867.79 41136.17 20986.87
1998/07/31 29477.59 26759.11 40698.07 21030.94
1998/08/31 26794.69 25011.47 34813.94 21373.75
1998/09/30 27688.99 26059.95 37044.12 21873.89
1998/10/31 28892.86 27074.72 40057.29 21757.96
1998/11/30 29993.54 27966.16 42485.16 21881.98
1998/12/31 31231.80 28816.33 44933.16 21947.63
IMATRL PRASUN SHR__CHT 19981231 19990126 145630 R00000000000114
</TABLE>
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund II: Asset Manager
Portfolio on September 30, 1989, shortly after the fund started. By
December 31, 1998, the value of the investment would have grown to
$31,232 - a 212.32% increase. With reinvested dividends and capital
gains, if any, a $10,000 investment in the Standard & Poor's 500
Index, would have grown to $44,933 over the same period - a 349.33%
increase on the initial investment. If $10,000 was invested in the
Lehman Brothers Aggregate Bond Index, it would have grown to $21,948 -
a 119.48% increase.
You can also look at how the Fidelity Asset Allocation Composite Index
did over the same period. The composite index combines the cumulative
total returns of three unmanaged indexes - the S&P 500 (349.33%),
Lehman Brothers Aggregate Bond Index (119.48%), and the Lehman
Brothers 3-month T-Bill Total Rate of Return Index (61.40%) -
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 $28,816 - a 188.16%
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, 1998
% OF FUND'S INVESTMENTS
Wal-Mart Stores, Inc. 2.3
AT&T Corp. 2.2
General Electric Co. 1.5
Fannie Mae 1.4
Lucent Technologies, Inc. 1.4
TOP FIVE BOND ISSUERS AS OF DECEMBER 31, 1998
(WITH MATURITIES MORE THAN % OF FUND'S INVESTMENTS
ONE YEAR)
Fannie Mae 5.4
U.S. Treasury Bond 2.4
Government National Mortgage 1.3
Association
U.S. Treasury Notes 1.0
Federal Home Loan Bank 0.4
ASSET ALLOCATION AS OF DECEMBER 31, 1998*
Row: 1, Col: 1, Value: 12.4
Row: 1, Col: 2, Value: 30.9
Row: 1, Col: 3, Value: 56.7
Stock class 58.2%
Bond class 30.8%
Short-term class 11.0%
*FOREIGN INVESTMENTS 3.7%
ASSET ALLOCATION IN THE PIE CHART REFLECTS THE CATEGORIZATION OF
ASSETS AS DEFINED IN THE FUND'S PROSPECTUS. FINANCIAL STATEMENT
CATEGORIZATIONS CONFORM TO ACCOUNTING STANDARDS AND WILL DIFFER FROM
THE PIE CHART.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the class' dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1 fee. If Fidelity had not
reimbursed certain fund expenses, the life of fund total return would
have been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, PAST 1 YEAR PAST 5 YEARS LIFE OF FUND
1998
VIP II: ASSET MANAGER - 14.82% 11.74% 12.94%
SERVICE CLASS
Fidelity Composite 18.61% 14.42% n/a
S&P 500 (registered trademark) 28.58% 24.06% 17.51%
LB Aggregate Bond 8.69% 7.27% 8.80%
LB 3 Month T-Bill 5.31% 5.32% n/a
Variable Annuity Flexible 13.50% 13.64% n/a
Portfolio Funds Average
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's returns to those of the Fidelity Asset
Allocation Composite Index, a hypothetical combination of unmanaged
indices. The composite index combines the total returns of the
Standard & Poor's 500 Index, the Lehman Brothers Aggregate Bond Index
and the Lehman Brothers 3 Month Treasury Bill Index weighted according
to the fund's neutral mix. You can also compare the fund's returns to
the variable annuity flexible portfolio funds average, which reflects
the performance of mutual funds with similar objectives tracked by
Lipper, Inc. The past one year average represent a peer group of 84
mutual funds. The benchmarks listed in the table above include
reinvested dividends and capital gains, if any, and exclude the effect
of sales charges.
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, September 6, 1989.
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.
(checkmark)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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
$10,000 OVER LIFE OF FUND
VIP II Asset Manager-CL S FID Composite S&P 500 LB Aggregate Bond
00467 F0001 SP001 LB001
1989/09/30 10000.00 10000.00 10000.00 10000.00
1989/10/31 10020.02 10057.70 9768.00 10246.00
1989/11/30 10060.06 10178.69 9967.27 10343.34
1989/12/31 10091.09 10277.43 10206.48 10371.26
1990/01/31 9868.42 10029.64 9521.63 10247.85
1990/02/28 9969.64 10094.03 9644.46 10280.64
1990/03/31 10050.61 10193.35 9900.03 10287.84
1990/04/30 9919.03 10098.66 9652.53 10193.19
1990/05/31 10425.10 10529.97 10593.65 10494.91
1990/06/30 10506.07 10595.89 10521.62 10663.87
1990/07/31 10485.83 10662.11 10487.95 10811.04
1990/08/31 10141.70 10332.65 9539.84 10666.17
1990/09/30 9929.15 10241.83 9075.25 10754.70
1990/10/31 9979.76 10314.96 9036.22 10891.28
1990/11/30 10465.59 10624.61 9619.96 11125.44
1990/12/31 10769.23 10802.47 9888.36 11299.00
1991/01/31 11284.56 11009.44 10319.49 11439.11
1991/02/28 11726.26 11285.45 11057.34 11536.34
1991/03/31 11915.56 11410.72 11324.93 11615.94
1991/04/30 12094.35 11486.94 11352.11 11741.39
1991/05/31 12367.79 11669.35 11842.52 11809.49
1991/06/30 12146.94 11518.12 11300.13 11803.59
1991/07/31 12451.92 11749.63 11826.72 11967.66
1991/08/31 12704.33 11959.83 12107.01 12226.16
1991/09/30 12777.94 12018.08 11904.82 12474.35
1991/10/31 12862.08 12126.84 12064.35 12612.82
1991/11/30 12651.74 12046.56 11578.15 12728.85
1991/12/31 13198.62 12642.99 12902.69 13106.90
1992/01/31 13366.89 12504.31 12662.70 12928.65
1992/02/29 13626.47 12583.84 12827.32 13012.68
1992/03/31 13593.27 12492.10 12577.19 12939.81
1992/04/30 13792.52 12648.75 12946.96 13032.98
1992/05/31 13936.42 12772.62 13010.40 13279.30
1992/06/30 13925.35 12778.88 12816.54 13462.56
1992/07/31 14157.81 13127.82 13340.74 13737.19
1992/08/31 14113.53 13077.17 13067.25 13875.94
1992/09/30 14202.09 13224.45 13221.45 14041.06
1992/10/31 14224.22 13162.82 13267.72 13854.32
1992/11/30 14534.17 13329.99 13720.15 13857.09
1992/12/31 14744.49 13487.52 13888.91 14077.42
1993/01/31 15010.15 13656.87 14005.57 14347.70
1993/02/28 15150.92 13847.00 14196.05 14598.79
1993/03/31 15579.83 13989.68 14495.59 14660.10
1993/04/30 15672.57 13904.65 14144.79 14762.72
1993/05/31 15939.19 14053.79 14523.87 14781.91
1993/06/30 16066.70 14203.33 14565.99 15049.47
1993/07/31 16263.77 14221.73 14507.73 15135.25
1993/08/31 16739.04 14571.76 15057.57 15400.11
1993/09/30 16750.64 14557.48 14941.63 15441.70
1993/10/31 17202.73 14707.13 15250.92 15498.83
1993/11/30 17179.54 14594.03 15106.04 15367.09
1993/12/31 17875.07 14696.31 15288.82 15450.07
1994/01/31 18443.09 14985.71 15808.64 15658.65
1994/02/28 17857.33 14699.72 15380.23 15386.19
1994/03/31 17017.99 14320.11 14709.65 15006.15
1994/04/30 17030.15 14356.11 14897.93 14886.10
1994/05/31 17176.13 14452.82 15142.26 14884.61
1994/06/30 16847.69 14310.02 14771.27 14851.86
1994/07/31 17139.63 14613.05 15255.77 15147.42
1994/08/31 17541.06 14864.31 15881.26 15165.59
1994/09/30 17334.15 14646.64 15492.17 14942.66
1994/10/31 17419.36 14787.36 15840.74 14929.21
1994/11/30 17163.73 14571.08 15263.82 14896.37
1994/12/31 16786.37 14708.25 15490.18 14999.15
1995/01/31 16676.82 14984.44 15891.84 15296.13
1995/02/28 16946.97 15360.16 16511.15 15660.18
1995/03/31 17170.77 15595.91 16998.39 15755.71
1995/04/30 17444.31 15876.83 17498.99 15976.29
1995/05/31 17668.12 16403.71 18198.43 16594.57
1995/06/30 17817.32 16624.93 18621.18 16715.71
1995/07/31 18451.43 16836.80 19238.66 16678.94
1995/08/31 18675.24 16948.46 19286.95 16880.75
1995/09/30 18911.47 17314.75 20100.85 17044.50
1995/10/31 18662.80 17413.45 20029.09 17266.07
1995/11/30 19147.71 17842.83 20908.37 17525.07
1995/12/31 19632.62 18102.59 21311.07 17770.42
1996/01/31 20055.36 18411.16 22036.50 17887.70
1996/02/29 20001.35 18343.08 22240.77 17576.46
1996/03/31 20213.99 18364.54 22454.95 17453.42
1996/04/30 20426.62 18441.71 22785.94 17355.68
1996/05/31 20586.10 18636.38 23373.59 17320.97
1996/06/30 20772.16 18775.74 23462.64 17553.07
1996/07/31 20426.62 18478.56 22426.06 17600.46
1996/08/31 20466.49 18636.07 22899.03 17570.54
1996/09/30 21210.73 19195.30 24187.79 17876.27
1996/10/31 21755.62 19593.26 24854.88 18273.12
1996/11/30 22832.10 20338.11 26733.66 18585.59
1996/12/31 22499.85 20111.10 26204.07 18412.75
1997/01/31 23177.64 20773.56 27841.30 18469.83
1997/02/28 23377.96 20883.87 28059.58 18516.00
1997/03/31 22488.67 20370.86 26906.61 18310.47
1997/04/30 23257.38 21111.13 28512.93 18585.13
1997/05/31 24372.77 21845.17 30248.80 18761.69
1997/06/30 25020.90 22446.35 31603.95 18984.95
1997/07/31 26467.89 23593.69 34118.67 19497.55
1997/08/31 25744.40 22863.47 32207.35 19331.82
1997/09/30 26573.40 23635.45 33971.34 19617.93
1997/10/31 26136.29 23387.99 32836.70 19902.39
1997/11/30 26724.13 23982.39 34356.71 19993.94
1997/12/31 27116.03 24295.48 34946.61 20195.88
1998/01/31 27206.46 24565.89 35333.12 20454.39
1998/02/28 28415.66 25452.97 37881.35 20438.02
1998/03/31 29206.89 26151.27 39821.25 20507.51
1998/04/30 29189.69 26348.97 40221.85 20614.15
1998/05/31 29034.89 26234.49 39530.44 20809.99
1998/06/30 29585.31 26867.79 41136.17 20986.87
1998/07/31 29396.10 26759.11 40698.07 21030.94
1998/08/31 26712.78 25011.47 34813.94 21373.75
1998/09/30 27607.22 26059.95 37044.12 21873.89
1998/10/31 28811.28 27074.72 40057.29 21757.96
1998/11/30 29912.12 27966.16 42485.16 21881.98
1998/12/31 31133.38 28816.33 44933.16 21947.63
IMATRL PRASUN SHR__CHT 19981231 19990129 132913 R00000000000114
</TABLE>
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund II: Asset Manager
Portfolio - Service Class on September 30, 1989, shortly after the
fund started. By December 31, 1998, the value of the investment would
have grown to $31,133 - a 211.33% increase. With reinvested dividends
and capital gains, if any, a $10,000 investment in the Standard &
Poor's 500 Index, would have grown to $44,933 over the same period - a
349.33% increase on the initial investment. If $10,000 was invested in
the Lehman Brothers Aggregate Bond Index, it would have grown to
$21,948 - a 119.48% increase. You can also look at how the Fidelity
Asset Allocation Composite Index did over the same period. The
composite index combines the cumulative total returns of three
unmanaged indexes - the S&P 500 (349.33%), Lehman Brothers Aggregate
Bond Index (119.48%), and the Lehman Brothers 3-month T-Bill Total
Rate of Return Index (61.40%) - 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
$28,816 - a 188.16% 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, 1998
% OF FUND'S INVESTMENTS
Wal-Mart Stores, Inc. 2.3
AT&T Corp. 2.2
General Electric Co. 1.5
Fannie Mae 1.4
Lucent Technologies, Inc. 1.4
TOP FIVE BOND ISSUERS AS OF DECEMBER 31, 1998
(WITH MATURITIES MORE THAN % OF FUND'S INVESTMENTS
ONE YEAR)
Fannie Mae 5.4
U.S. Treasury Bond 2.4
Government National Mortgage 1.3
Association
U.S. Treasury Notes 1.0
Federal Home Loan Bank 0.4
ASSET ALLOCATION AS OF DECEMBER 31, 1998*
Row: 1, Col: 1, Value: 12.4
Row: 1, Col: 2, Value: 30.9
Row: 1, Col: 3, Value: 56.7
Stock class 58.2%
Bond class 30.8%
Short-term class 11.0%
*FOREIGN INVESTMENTS 3.7%
ASSET ALLOCATION IN THE PIE CHART REFLECTS THE CATEGORIZATION OF
ASSETS AS DEFINED IN THE FUND'S PROSPECTUS. FINANCIAL STATEMENT
CATEGORIZATIONS CONFORM TO ACCOUNTING STANDARDS AND WILL DIFFER FROM
THE PIE CHART.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
(photograph of Richard Habermann)
An interview with Richard Habermann, Portfolio Manager of Asset
Manager Portfolio
Q. HOW DID THE FUND PERFORM COMPARED TO ITS BENCHMARK, DICK?
A. For the year that ended December 31, 1998, the fund lagged the
18.61% return of the Fidelity Asset Allocation Composite Index - which
combines the performance of three indexes - for the same period.
Q. WHY DID THE FUND LAG ITS BENCHMARK INDEX?
A. While the fund's stocks generally performed well, they
underperformed the Standard & Poor's 500 Index, the equity index that
is included in the fund's benchmark. Specifically, the fund was
underweighted relative to the S&P in the narrow group of stocks that
drove the performance of the S&P 500. Instead, the fund's equity
specialist, Steven Snider, focused on stocks with lower valuations and
market capitalizations. In addition, the fund was hurt by its
investments in high-yield bonds. These securities are not included in
the composite index - the bond component is represented by the Lehman
Brothers Aggregate Bond Index , which comprises only investment-grade
securities - but have been a key component to our strategy and have
helped the fund's performance during the past few years.
Unfortunately, this asset class suffered from the significant flight
to quality in the third quarter of 1998.
Q. WHAT STRATEGY DID YOU PURSUE WITH THE FUND'S ASSET ALLOCATION?
A. The fund started the year overweighted in stocks, and, on average,
maintained that overweighted position throughout the year. However, I
pursued more cautious tactics in the summer, when both the stock and
bond markets experienced a great deal of turmoil. At that time, I
reduced the fund's equity allocation and increased its stake in
investment-grade bonds. When the markets started to settle down at the
tail end of the third quarter, I ramped up the fund's equity
investments again, taking profits on investment-grade issues that had
performed well. I also added to the fund's investments in high-yield
bonds. Prices in that sector reflected worst-case scenarios that we
felt were unrealistic given the underlying strength of the U.S.
economy.
Q. HOW DID THE FUND'S ASSET ALLOCATION AFFECT PERFORMANCE?
A. Overall, it had a positive effect. Stocks performed best among the
asset classes, and, as I mentioned, the fund on average maintained an
overweighted position in equities relative to its neutral mix, which
calls for 50% to be invested in stocks. Concurrently, the fund also
benefited from maintaining underweighted positions in bonds and
short-term/money market instruments, which make up 40% and 10% of its
neutral mix, respectively.
Q. HOW DID THE FIXED-INCOME AND SHORT-TERM PORTIONS OF THE FUND
PERFORM?
A. The investment-grade portion of the fund - which Charlie Morrison
helps me manage - slightly underperformed the Lehman Brothers
Aggregate Bond Index. The story there was a flight to quality.
Investors from around the globe flocked to U.S. Treasury securities
because they are perceived to be the safest haven from economic and
financial turmoil. All other sectors of the investment-grade market
posted much poorer relative performance. The fund was hurt by being
underweighted in Treasuries relative to the index. Still, the fund did
benefit from strong security selection in its non-Treasury
investments. Unfortunately, the fund's high-yield investments hurt its
relative performance. Nevertheless, the securities chosen by Fred Hoff
- - who helps me manage the high-yield portion of the fund - performed
better than the high-yield market as a whole. John Todd, who helps
look after the fund's short-term investments, obtained a return
advantage relative to the short-term component of the composite index
by emphasizing shorter-term, high-quality issues.
Q. WHICH STOCKS PERFORMED WELL DURING THE PERIOD? WHICH DISAPPOINTED?
A. On the plus side, Lucent Technologies increased its market share
and consistently beat earnings expectations. AT&T did the same, amid a
successful cost-cutting campaign. Wal-Mart and Home Depot maintained
their market dominance through, among other factors, excellent
distribution systems. On the negative side, Allstate had difficulty
rebounding from share price drops from August through October, when
companies in the financial sector generally suffered. And RJR Nabisco
was hurt because it was the dominant player in the tobacco industry in
Russia.
Q. WHAT'S YOUR OUTLOOK?
A. We continue to see the same trends that have characterized the past
few years: low inflation, a positive interest-rate environment and
decelerating corporate earnings. Further, it appears economic growth
will continue in early 1999, but stands a chance to moderate as the
year progresses. We'll probably see modest earnings growth, amid a
backdrop of continued investor interest in the markets. I believe the
U.S. will continue to be an appealing market relative to other global
alternatives.
The views expressed in this report reflect those of the portfolio
manager only through the end of the period of the report as stated on
the cover. The manager's views are subject to change at any time based
on market and other conditions.
(checkmark)FUND FACTS
GOAL: maximum total return over the long term by allocating assets
among stocks, bonds and short-term instruments anywhere in the world
START DATE: September 6, 1989
SIZE: as of December 31, 1998, more than
$4.9 billion
MANAGER: Richard Habermann, since 1996; joined
Fidelity in 1968
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
INVESTMENTS DECEMBER 31, 1998
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 55.5%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 2.0%
AEROSPACE & DEFENSE - 1.6%
AlliedSignal, Inc. 503,700 $ 22,320,206
Cordant Technologies, Inc. 142,800 5,355,000
Goodrich (B.F.) Co. 70,000 2,511,250
Sundstrand Corp. 184,600 9,576,125
United Technologies Corp. 351,700 38,247,375
78,009,956
DEFENSE ELECTRONICS - 0.4%
Litton Industries, Inc. (a) 108,100 7,053,525
Northrop Grumman Corp. 197,400 14,434,875
21,488,400
SHIP BUILDING & REPAIR - 0.0%
Avondale Industries, Inc. 20,500 594,500
TOTAL AEROSPACE & DEFENSE 100,092,856
BASIC INDUSTRIES - 0.8%
CHEMICALS & PLASTICS - 0.4%
Engelhard Corp. 125,900 2,455,051
FMC Corp. (a) 146,400 8,198,400
Millennium Chemicals, Inc. 269,600 5,358,300
Solutia, Inc. 126,300 2,825,963
18,837,714
IRON & STEEL - 0.1%
USX-U.S. Steel Group 100,000 2,300,000
PACKAGING & CONTAINERS - 0.2%
Owens-Illinois, Inc. (a) 376,000 11,515,000
PAPER & FOREST PRODUCTS - 0.1%
Louisiana-Pacific Corp. 285,000 5,219,063
TOTAL BASIC INDUSTRIES 37,871,777
CONSTRUCTION & REAL ESTATE -
1.0%
BUILDING MATERIALS - 0.3%
Fortune Brands, Inc. 160,000 5,060,000
USG Corp. 90,000 4,584,375
Vulcan Materials Co. 25,700 3,381,156
13,025,531
CONSTRUCTION - 0.6%
Centex Corp. 151,400 6,822,463
D.R. Horton, Inc. 189,224 4,352,152
Fleetwood Enterprises, Inc. 351,981 12,231,340
Kaufman & Broad Home Corp. 260,500 7,489,375
30,895,330
ENGINEERING - 0.1%
Fluor Corp. 175,000 7,448,438
TOTAL CONSTRUCTION & REAL 51,369,299
ESTATE
SHARES VALUE (NOTE 1)
DURABLES - 2.6%
AUTOS, TIRES, & ACCESSORIES -
2.1%
Dana Corp. 80,300 $ 3,282,263
Ford Motor Co. 981,600 57,607,650
General Motors Corp. 646,790 46,285,909
107,175,822
CONSUMER ELECTRONICS - 0.3%
Maytag Corp. 225,000 14,006,250
HOME FURNISHINGS - 0.2%
Ethan Allen Interiors, Inc. 94,900 3,890,900
Furniture Brands 153,400 4,180,150
International, Inc. (a)
8,071,050
TEXTILES & APPAREL - 0.0%
Arena Brands Holdings Corp. 8,445 211,125
Class B
TOTAL DURABLES 129,464,247
ENERGY - 2.1%
ENERGY SERVICES - 0.1%
McDermott International, Inc. 267,000 6,591,563
OIL & GAS - 2.0%
British Petroleum PLC ADR 3,021 286,995
Coastal Corp. (The) 377,800 13,199,388
Exxon Corp. 841,900 61,563,938
Royal Dutch Petroleum Co. 119,200 5,706,698
(Hague Registry)
Sunoco, Inc. 175,000 6,310,938
Tosco Corp. 363,800 9,413,325
96,481,282
TOTAL ENERGY 103,072,845
FINANCE - 8.7%
BANKS - 2.0%
BankBoston Corp. 361,200 14,064,225
Chase Manhattan Corp. 674,800 45,928,575
Comerica, Inc. 71,400 4,868,588
Commerce Bancshares, Inc. 1,927 81,898
Firstar Corp. 70,000 6,527,500
National City Corp. 159,003 11,527,718
SunTrust Banks, Inc. 236,500 18,092,250
101,090,754
CREDIT & OTHER FINANCE - 0.6%
Equitable Companies (The), 202,000 11,690,750
Inc.
Fleet Financial Group, Inc. 196,500 8,781,094
Providian Financial Corp. 85,950 6,446,250
26,918,094
FEDERAL SPONSORED CREDIT - 2.3%
Fannie Mae 947,390 70,106,860
Freddie Mac 509,800 32,850,238
SLM Holding Corp. 239,000 11,472,000
114,429,098
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - 3.3%
Allmerica Financial Corp. 87,300 $ 5,052,488
Allstate Corp. 1,120,400 43,275,450
CIGNA Corp. 637,600 49,294,450
Conseco, Inc. 798,900 24,416,381
Financial Security Assurance 37,300 2,023,525
Holdings Ltd.
ING Groep NV sponsored ADR 4,145 257,767
Lincoln National Corp. 73,800 6,037,763
MGIC Investment Corp. 127,400 5,072,113
Old Republic International 183,150 4,120,875
Corp.
Orion Capital Corp. 40,800 1,624,350
SunAmerica, Inc. 252,100 20,451,613
161,626,775
SECURITIES INDUSTRY - 0.5%
Crestline Capital Corp. (a) 54,590 798,379
Lehman Brothers Holdings, 534,500 23,551,406
Inc.
24,349,785
TOTAL FINANCE 428,414,506
HEALTH - 6.1%
DRUGS & PHARMACEUTICALS - 4.0%
Amgen, Inc. (a) 143,200 14,973,350
Lilly (Eli) & Co. 223,200 19,836,900
Mylan Laboratories, Inc. 260,000 8,190,000
Pfizer, Inc. 532,200 66,757,838
Schering-Plough Corp. 995,400 54,995,850
Warner-Lambert Co. 464,000 34,887,000
199,640,938
MEDICAL EQUIPMENT & SUPPLIES
- - 1.3%
Allegiance Corp. 26,360 1,229,035
Guidant Corp. 587,400 64,760,850
65,989,885
MEDICAL FACILITIES MANAGEMENT
- - 0.8%
Integrated Health Services, 168,500 2,380,063
Inc.
Lincare Holdings, Inc. (a) 200,000 8,112,500
PacifiCare Health Systems, 169,200 13,451,400
Inc. Class B (a)
Wellpoint Health Networks, 150,000 13,050,000
Inc. (a)
36,993,963
TOTAL HEALTH 302,624,786
INDUSTRIAL MACHINERY &
EQUIPMENT - 3.8%
ELECTRICAL EQUIPMENT - 2.0%
General Electric Co. 732,700 74,781,194
General Instrument Corp. (a) 188,900 6,410,794
Honeywell, Inc. 240,000 18,075,000
99,266,988
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY &
EQUIPMENT - 1.6%
Caterpillar, Inc. 528,000 $ 24,288,000
Coltec Industries, Inc. (a) 259,400 5,058,300
Ingersoll-Rand Co. 463,200 21,741,450
Mark IV Industries, Inc. 173,100 2,250,300
Tyco International Ltd. 353,100 26,636,981
79,975,031
POLLUTION CONTROL - 0.2%
Waste Management, Inc. 231,700 10,803,013
TOTAL INDUSTRIAL MACHINERY & 190,045,032
EQUIPMENT
MEDIA & LEISURE - 1.5%
BROADCASTING - 0.0%
Loral Orion Network Systems,
Inc.:
warrants 1/15/07 (CV ratio 2,920 23,360
.47) (a)
warrants 1/15/07 (CV ratio 860 9,030
.6) (a)
Nielsen Media Research, Inc. 28,066 505,188
(a)
NTL, Inc. warrants 12/31/08 3,742 56,130
(a)
593,708
ENTERTAINMENT - 0.3%
Alliance Gaming Corp. (a)(k) 3,030 5,000
Carnival Corp. 168,500 8,088,000
Tele-Communications, Inc. 260,712 6,143,026
(TCI Ventures Group) Series
A (a)
14,236,026
LEISURE DURABLES & TOYS - 0.1%
Harley-Davidson, Inc. 84,200 3,988,975
LODGING & GAMING - 0.3%
Aladdin Gaming Enterprises, 23,800 238
Inc. warrants 3/1/10 (a)(f)
Fitzgeralds South, Inc. 420 0
warrants 3/15/99 (a)(f)
Host Marriott Corp. 545,900 7,540,244
International Game Technology 251,900 6,124,319
Corp.
13,664,801
PUBLISHING - 0.8%
Gannet, Inc. 324,500 21,477,844
Knight-Ridder, Inc. 128,700 6,579,788
New York Times Co. (The) 219,200 7,603,500
Class A
World Color Press, Inc. (a) 68,100 2,072,794
37,733,926
RESTAURANTS - 0.0%
Brinker International, Inc. 93,800 2,708,475
(a)
TOTAL MEDIA & LEISURE 72,925,911
NONDURABLES - 3.5%
BEVERAGES - 0.4%
Anheuser-Busch Companies, 75,800 4,974,375
Inc.
Canandaigua Brands, Inc. 51,600 2,983,125
Class A (a)
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONDURABLES - CONTINUED
BEVERAGES - CONTINUED
Coors (Adolph) Co. Class B 106,800 $ 6,027,525
PepsiCo, Inc. 159,400 6,525,438
20,510,463
FOODS - 1.0%
Flowers Industries, Inc. 170,300 4,076,556
Heinz (H.J.) Co. 600,000 33,975,000
Quaker Oats Co. 202,400 12,042,800
50,094,356
HOUSEHOLD PRODUCTS - 0.6%
Avon Products, Inc. 131,300 5,810,025
Clorox Co. 115,000 13,433,438
Nu Skin Enterprises, Inc. 61,300 1,448,213
Class A (a)
Premark International, Inc. 34,500 1,194,563
Procter & Gamble Co. 84,100 7,679,381
29,565,620
TOBACCO - 1.5%
Philip Morris Companies, Inc. 1,139,500 60,963,250
RJR Nabisco Holdings Corp. 353,930 10,507,297
Universal Corp. 68,900 2,420,113
73,890,660
TOTAL NONDURABLES 174,061,099
RETAIL & WHOLESALE - 6.2%
APPAREL STORES - 0.6%
Gap, Inc. 172,350 9,694,688
TJX Companies, Inc. 747,700 21,683,300
31,377,988
GENERAL MERCHANDISE STORES -
2.8%
Dayton Hudson Corp. 147,500 8,001,875
Federated Department Stores, 311,300 13,561,006
Inc. (a)
Wal-Mart Stores, Inc. 1,402,400 114,207,919
135,770,800
GROCERY STORES - 0.6%
Safeway, Inc. (a) 458,000 27,909,375
RETAIL & WHOLESALE,
MISCELLANEOUS - 2.2%
Best Buy Co., Inc. (a) 248,300 15,239,413
Home Depot, Inc. 749,700 45,872,269
Lowe's Companies, Inc. 358,600 18,355,838
Office Depot, Inc. (a) 127,400 4,705,838
Pier 1 Imports, Inc. 537,600 5,208,000
Tandy Corp. 504,600 20,783,213
110,164,571
TOTAL RETAIL & WHOLESALE 305,222,734
SERVICES - 0.2%
PRINTING - 0.2%
Donnelley (R.R.) & Sons Co. 24,800 1,086,550
SHARES VALUE (NOTE 1)
United Stationers, Inc. (a) 112,000 $ 2,912,000
Valassis Communications, Inc. 149,600 7,723,100
(a)
11,721,650
TECHNOLOGY - 7.3%
COMMUNICATIONS EQUIPMENT - 1.7%
Globalstar Telecommunications 1,410 84,600
Ltd. warrants 2/15/04 (a)(f)
Lucent Technologies, Inc. 637,000 70,070,000
Tellabs, Inc. (a) 191,300 13,116,006
83,270,606
COMPUTER SERVICES & SOFTWARE
- - 2.8%
BMC Software, Inc. 336,700 15,004,194
Computer Sciences Corp. 147,400 9,498,088
HBO & Co. 733,800 21,050,888
Microsoft Corp. (a) 195,000 27,044,063
NCR Corp. (a) 16,600 693,050
Oracle Corp. (a) 1,559,900 67,270,688
140,560,971
COMPUTERS & OFFICE EQUIPMENT
- - 2.1%
International Business 105,100 19,417,225
Machines Corp.
Lexmark International Group, 287,300 28,873,650
Inc. (a)
Sun Microsystems, Inc. (a) 400,100 34,258,563
Unisys Corp. (a) 397,400 13,685,463
Xerox Corp. 78,800 9,298,400
105,533,301
ELECTRONICS - 0.4%
Intel Corp. 139,400 16,527,613
Storage Technology Corp. (a) 84,200 2,994,363
19,521,976
PHOTOGRAPHIC EQUIPMENT - 0.3%
Eastman Kodak Co. 202,200 14,558,400
TOTAL TECHNOLOGY 363,445,254
TRANSPORTATION - 2.1%
AIR TRANSPORTATION - 1.6%
AMR Corp. (a) 647,600 38,451,250
Comair Holdings, Inc. 195,100 6,584,625
Southwest Airlines Co. 1,194,150 26,793,741
US Airways Group, Inc. (a) 84,500 4,394,000
Viad Corp. 131,300 3,988,238
80,211,854
RAILROADS - 0.3%
Burlington Northern Santa Fe 300,000 10,125,000
Corp.
Trinity Industries, Inc. 87,600 3,372,600
13,497,600
TRUCKING & FREIGHT - 0.2%
Airborne Freight Corp. 335,400 12,095,363
TOTAL TRANSPORTATION 105,804,817
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - 7.6%
CELLULAR - 0.0%
McCaw International Ltd. 8,150 $ 40,750
warrants 4/15/07 (a)(f)
ELECTRIC UTILITY - 2.2%
Baltimore Gas & Electric Co. 219,500 6,777,063
Central & South West Corp. 200,000 5,487,500
Dominion Resources, Inc. 120,000 5,610,000
DTE Energy Co. 210,000 9,003,750
Edison International 270,500 7,540,188
Energy East Corp. 332,400 18,780,600
Entergy Corp. 377,900 11,762,138
FPL Group, Inc. 148,100 9,126,663
GPU, Inc. 212,300 9,381,006
Houston Industries, Inc. 377,800 12,136,825
Pinnacle West Capital Corp. 168,000 7,119,000
Public Service Enterprise 170,100 6,804,000
Group, Inc.
109,528,733
GAS - 0.1%
KeySpan Energy 143,176 4,438,456
TELEPHONE SERVICES - 5.3%
Ameritech Corp. 671,900 42,581,663
AT&T Corp. 1,480,200 111,385,050
BellSouth Corp. 899,600 44,867,550
Pathnet, Inc. warrants 5,170 51,700
4/15/08 (a)(f)
SBC Communications, Inc. 460,000 24,667,500
U.S. WEST, Inc. 590,800 38,180,450
261,733,913
TOTAL UTILITIES 375,741,852
TOTAL COMMON STOCKS 2,751,878,665
(Cost $2,050,450,469)
NONCONVERTIBLE PREFERRED
STOCKS - 1.2%
CONSTRUCTION & REAL ESTATE -
0.2%
REAL ESTATE INVESTMENT TRUSTS
- - 0.2%
California Federal Preferred 231,349 5,812,644
Capital Corp. $2.28
Crown America Realty Trust 12,358 603,997
Series A, $5.50
Walden Residential 49,000 1,065,750
Properties, Inc. $2.30
7,482,391
FINANCE - 0.1%
CREDIT & OTHER FINANCE - 0.0%
Fresenius Medical Care 1,053 1,056,060
Capital Trust II 7.875%
SHARES VALUE (NOTE 1)
INSURANCE - 0.1%
American Annuity Group 1,490 $ 1,460,200
Capital Trust II 8.875%
SIG Capital Trust I 9.5% 2,174 1,885,310
3,345,510
TOTAL FINANCE 4,401,570
MEDIA & LEISURE - 0.5%
BROADCASTING - 0.4%
Adelphia Communications Corp. 11,243 1,309,810
$13.00
CSC Holdings, Inc. 11.125% 90,476 10,088,074
pay-in-kind
Echostar Communications Corp. 2,189 2,531,031
12.125% pay-in-kind
Granite Broadcasting Corp. 2,337 2,103,300
12.75% pay-in-kind
SFX Broadcasting, Inc. 14,334 1,763,082
12.625% pay-in-kind
Sinclair Capital 11.625% 28,380 3,022,470
20,817,767
PUBLISHING - 0.1%
PRIMEDIA, Inc.:
$9.20 30,214 2,930,758
Series D, $10.00 31,050 3,205,913
6,136,671
TOTAL MEDIA & LEISURE 26,954,438
RETAIL & WHOLESALE - 0.0%
GROCERY STORES - 0.0%
Supermarkets General Holdings 20,000 420,000
Corp. $3.52 pay-in-kind (a)
TECHNOLOGY - 0.1%
COMMUNICATIONS EQUIPMENT - 0.1%
Intermedia Communications, 2,163 2,179,223
Inc. 13.5% pay-in-kind (a)
UTILITIES - 0.3%
CELLULAR - 0.2%
Nextel Communications, Inc. 10,951 9,855,900
11.125% pay-in-kind (a)
TELEPHONE SERVICES - 0.1%
Hyperion Telecommunication, 2,262 1,798,290
Inc. 12.875% pay-in-kind
NONCONVERTIBLE PREFERRED
STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - CONTINUED
TELEPHONE SERVICES - CONTINUED
IXC Communications, Inc. 1,665 $ 1,681,650
12.5% pay-in-kind
NEXTLINK Communications, Inc. 62,609 3,255,668
14% pay-in-kind
6,735,608
TOTAL UTILITIES 16,591,508
TOTAL NONCONVERTIBLE 58,029,130
PREFERRED STOCKS
(Cost $58,881,004)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS - 16.5%
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT
CONVERTIBLE BONDS - 0.1%
HEALTH - 0.1%
DRUGS & PHARMACEUTICALS - 0.0%
Integrated Process Equipment B- $ 1,370,000 991,538
Corp. 6.25% 9/15/04 (f)
MEDICAL FACILITIES MANAGEMENT
- - 0.1%
Tenet Healthcare Corp. 6% B1 2,720,000 2,339,200
12/1/05
TOTAL HEALTH 3,330,738
NONDURABLES - 0.0%
FOODS - 0.0%
Chiquita Brands B3 2,210,000 2,055,300
International, Inc. 7%
3/28/01
RETAIL & WHOLESALE - 0.0%
RETAIL & WHOLESALE,
MISCELLANEOUS - 0.0%
Sports Authority, Inc. 5.25% B2 1,490,000 997,369
9/15/01
TOTAL CONVERTIBLE BONDS 6,383,407
NONCONVERTIBLE BONDS - 16.4%
AEROSPACE & DEFENSE - 0.2%
DEFENSE ELECTRONICS - 0.1%
Raytheon Co. 5.95% 3/15/01 Baa1 4,500,000 4,539,510
SHIP BUILDING & REPAIR - 0.1%
Newport News Shipbuilding, B1 3,830,000 4,050,225
Inc. 9.25% 12/1/06
TOTAL AEROSPACE & DEFENSE 8,589,735
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
BASIC INDUSTRIES - 0.3%
CHEMICALS & PLASTICS - 0.0%
Huntsman Corp. 9.5% 7/1/07 (f) B2 $ 2,100,000 $ 2,094,750
PACKAGING & CONTAINERS - 0.3%
Owens-Illinois, Inc.:
7.15% 5/15/05 Ba1 8,430,000 8,471,543
7.8% 5/15/18 Ba1 4,350,000 4,388,389
12,859,932
TOTAL BASIC INDUSTRIES 14,954,682
CONSTRUCTION & REAL ESTATE -
0.3%
BUILDING MATERIALS - 0.0%
American Standard Cos., Inc. Ba3 1,810,000 1,828,100
7.375% 4/15/05
CONSTRUCTION - 0.0%
U.S. Home Corp. 8.88% 8/15/07 B1 600,000 612,000
REAL ESTATE - 0.1%
LNR Property Corp. 9.375% B1 2,680,000 2,572,800
3/15/08
REAL ESTATE INVESTMENT TRUSTS
- - 0.2%
CenterPoint Properties Trust Baa2 1,590,000 1,510,277
6.75% 4/1/05
EOP Operating LP:
6.375% 2/15/03 Baa1 3,600,000 3,554,064
6.75% 2/15/08 Baa1 1,590,000 1,563,447
Weeks Realty LP 6.875% 3/15/05 Baa2 2,950,000 2,733,175
9,360,963
TOTAL CONSTRUCTION & REAL 14,373,863
ESTATE
DURABLES - 0.5%
AUTOS, TIRES, & ACCESSORIES -
0.2%
Blue Bird Body Co. 10.75% B2 1,375,000 1,416,250
11/15/06
Federal-Mogul Corp. 7.875% Ba2 5,220,000 5,340,582
7/1/10
Oshkosh Truck Co. 8.75% B3 2,010,000 2,010,000
3/1/08
8,766,832
CONSUMER DURABLES - 0.0%
Corning Consumer Products Co. B3 1,830,000 1,281,000
9.625% 5/1/08
HOME FURNISHINGS - 0.0%
Omega Cabinets Ltd. 10.5% B3 1,280,000 1,257,600
6/15/07
TEXTILES & APPAREL - 0.3%
Levi Strauss & Co. 7% 11/1/06 Baa3 7,700,000 7,057,050
(f)
Unifi, Inc. 6.5% 2/1/08 A3 2,940,000 2,912,070
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
DURABLES - CONTINUED
TEXTILES & APPAREL - CONTINUED
WestPoint Stevens, Inc.:
7.875% 6/15/05 Ba3 $ 740,000 $ 750,175
7.875% 6/15/08 Ba3 1,280,000 1,296,000
Worldtex, Inc. 9.625% 12/15/07 B1 2,610,000 2,270,700
14,285,995
TOTAL DURABLES 25,591,427
ENERGY - 0.4%
COAL - 0.0%
P&L Coal Holdings Corp. B2 2,640,000 2,686,200
9.625% 5/15/08
ENERGY SERVICES - 0.0%
R&B Falcon Corp. 9.5% Ba1 1,040,000 1,040,000
12/15/08 (f)
OIL & GAS - 0.4%
Chesapeake Energy Corp. B3 1,950,000 1,462,500
9.625% 5/1/05
Gulf Canada Resources Ltd. Ba1 2,250,000 2,216,250
8.375% 11/15/05
Occidental Petroleum Corp.:
6.39% 11/9/00 Baa3 1,000,000 1,010,450
10.94% 5/17/00 Baa3 2,700,000 2,888,865
Oryx Energy Co.:
8% 10/15/03 Ba1 1,670,000 1,755,855
8.125% 10/15/05 Ba1 665,000 712,681
8.375% 7/15/04 Ba1 1,770,000 1,892,289
Petro-Canada, Inc. 7% 11/15/28 A3 2,940,000 2,899,193
Petroleum Geo-Services ASA Baa3 4,260,000 3,980,501
7.125% 3/30/28
18,818,584
TOTAL ENERGY 22,544,784
FINANCE - 4.2%
BANKS - 1.3%
BankBoston Companies 6.625% A3 1,700,000 1,735,870
2/1/04
BankBoston NA 6.375% 3/25/08 A2 1,400,000 1,404,508
BanPonce Corp. 6.665% 3/5/01 A3 4,450,000 4,488,893
BanPonce Financial Corp. A3 2,000,000 2,050,300
7.72% 4/13/00
Barclays Bank PLC yankee A1 9,250,000 9,312,900
5.95% 7/15/01
Capital One Bank:
6.375% 2/15/03 Baa3 3,570,000 3,557,219
6.42% 11/12/99 Baa3 4,900,000 4,887,456
8.125% 3/1/00 Baa3 5,500,000 5,579,915
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
Capital One Financial Corp. Ba1 $ 4,320,000 $ 4,282,934
7.125% 8/1/08
Den Danske Bank AS 6.375% A1 8,340,000 8,367,939
6/15/08 (f)(i)
Fleet/Norstar Financial A3 2,400,000 2,642,136
Group, Inc. 9.9% 6/15/01
Huntington National Bank A1 2,560,000 2,571,827
5.875% 1/15/01
NB Capital Trust IV 8.25% Aa2 2,650,000 3,004,093
4/15/27
Provident Bank 6.125% 12/15/00 A3 1,740,000 1,752,406
Providian National Bank 6.7% Baa3 3,060,000 3,094,792
3/15/03
Signet Banking Corp. 9.625% A2 790,000 803,090
6/1/99
Summit Bancorp 8.625% 12/10/02 BBB+ 1,730,000 1,916,408
Union Planters National Bank A3 3,500,000 3,571,750
6.81% 8/20/01
65,024,436
CREDIT & OTHER FINANCE - 2.3%
Ahmanson Capital Trust I A3 4,250,000 4,759,958
8.36% 12/1/26 (f)
AT&T Capital Corp.:
6.25% 5/15/01 Baa3 5,200,000 5,129,228
7.5% 11/15/00 Baa3 5,450,000 5,516,708
BankAmerica Capital II Series Aa2 2,980,000 3,287,387
2, 8% 12/15/26
BanPonce Trust I 8.327% 2/1/27 A3 6,450,000 6,917,754
Countrywide Funding Corp. A3 3,950,000 4,016,044
6.45% 2/27/03
ERP Operating LP 6.55% A3 1,500,000 1,501,515
11/15/01
Farmers Insurance Exchange A2 2,740,000 2,742,356
Capital 7.05% 7/15/28 (f)
Finova Capital Corp.:
6.12% 5/28/02 Baa1 2,000,000 1,999,700
6.44% 11/6/01 Baa1 5,500,000 5,549,060
First Security Capital I A3 1,690,000 1,864,357
8.41% 12/15/26
Ford Motor Credit Co.:
global 7% 9/25/01 A1 12,500,000 13,006,500
5.73% 2/23/00 A1 3,250,000 3,267,420
General Electric Capital Aaa 7,000,000 7,026,740
Corp. 6.94% 4/13/09 (e)
GS Escrow Corp.:
7% 8/1/03 Ba1 2,140,000 2,097,029
7.125% 8/1/05 Ba1 7,600,000 7,460,464
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
FINANCE - CONTINUED
CREDIT & OTHER FINANCE -
CONTINUED
Heller Financial, Inc.:
6.25% 3/1/01 A3 $ 4,940,000 $ 4,992,957
7.875% 11/1/99 A3 5,050,000 5,138,981
KeyCorp Institutional Capital A1 3,600,000 3,942,288
A 7.826% 12/1/26
Macsaver Financial Services,
Inc.:
7.4% 2/15/02 Ba1 1,620,000 1,328,400
7.6% 8/1/07 Ba1 4,080,000 2,937,600
7.875% 8/1/03 Ba1 70,000 56,000
Mellon Capital I 7.72% 12/1/26 A2 2,000,000 2,164,420
Money Store, Inc. 7.3% 12/1/02 A2 2,550,000 2,680,688
Nordstrom Credit, Inc. 7.25% A2 3,500,000 3,685,640
4/30/02
PNC Funding Corp. 6.875% A3 2,020,000 2,107,749
3/1/03
Premier Auto Trust 5.45% 2,270,613 2,273,451
6/8/99
U.S. Bancorp 8.09% 11/15/26 A1 2,980,000 3,268,911
UNICCO Service Co./UNICCO B3 2,390,000 2,306,350
Finance Corp. 9.875% 10/15/07
113,025,655
SAVINGS & LOANS - 0.3%
Chevy Chase Savings Bank FSB B1 1,560,000 1,560,000
9.25% 12/1/08
Great Western Finance Trust A3 3,780,000 4,264,218
II 8.206% 2/1/27
Great Western Financial Corp. A3 2,000,000 2,157,800
8.6% 2/1/02
Home Savings of America FSB A3 2,830,000 2,878,421
6.5% 8/15/04
Long Island Savings Bank FSB:
6.2% 4/2/01 Baa3 3,770,000 3,761,857
7% 6/13/02 Baa3 3,400,000 3,468,476
18,090,772
SECURITIES INDUSTRY - 0.3%
Amvescap PLC:
yankee 6.375% 5/15/03 A3 2,200,000 2,236,652
yankee 6.6% 5/15/05 A3 1,650,000 1,690,458
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
Morgan Stanley, Dean Witter, - $ 10,500,000 $ 10,500,000
Discover & Co. 4.8% 1/15/99
(i)
14,427,110
TOTAL FINANCE 210,567,973
HEALTH - 0.2%
MEDICAL EQUIPMENT & SUPPLIES
- - 0.0%
Graham-Field Health Products, Caa1 2,410,000 1,590,600
Inc. 9.75% 8/15/07
MEDICAL FACILITIES MANAGEMENT
- - 0.2%
Fountain View, Inc. 11.25% Caa1 2,330,000 2,027,100
4/15/08
Tenet Healthcare Corp.:
8.125% 12/1/08 (f) Ba3 1,300,000 1,332,500
8.625% 1/15/07 Ba3 4,320,000 4,514,400
7,874,000
TOTAL HEALTH 9,464,600
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.5%
ELECTRICAL EQUIPMENT - 0.0%
Motors & Gears, Inc. 10.75% B3 430,000 440,750
11/15/06
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.3%
Bucyrus International, Inc. B1 3,430,000 2,864,050
9.75% 9/15/07
Roller Bearing Holding, Inc. - 3,550,000 1,775,000
0% 6/15/09 (d)(f)
Thermadyne Manufacturing LLC B3 830,000 755,300
9.875% 6/1/08
Tyco International Group SA
yankee:
6.125% 6/15/01 Baa1 6,860,000 6,926,062
6.375% 6/15/05 Baa1 2,665,000 2,716,648
15,037,060
POLLUTION CONTROL - 0.2%
Allied Waste North America, Ba2 870,000 880,875
Inc. 7.625% 1/1/06 (f)
Envirosource, Inc. 9.75% B3 870,000 787,350
6/15/03
WMX Technologies, Inc.:
6.25% 10/15/00 Baa3 2,100,000 2,115,981
7.1% 8/1/26 Baa3 4,610,000 4,907,806
8.25% 11/15/99 Baa3 1,320,000 1,347,298
10,039,310
TOTAL INDUSTRIAL MACHINERY & 25,517,120
EQUIPMENT
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
MEDIA & LEISURE - 4.6%
BROADCASTING - 3.0%
ACME Television LLC/ACME B3 $ 1,740,000 $ 1,387,650
Financial Corp. 0% 9/30/04
(d)
Adelphia Communications Corp.:
9.5% 2/15/04 pay-in-kind B2 6,111,175 6,248,004
9.875% 3/1/07 B2 4,280,000 4,729,400
Ascent Entertainment Group, B3 1,990,000 1,194,000
Inc. 0% 12/15/04 (d)
Avalon Cable Michigan, B3 1,680,000 1,713,600
Inc./Avalon Cable New
England/Avalon Cable
Finance, Inc. 9.375% 12/1/08
(f)
Century Communications Corp.:
0% 1/15/08 Ba3 10,760,000 5,487,600
8.75% 10/1/07 Ba3 1,170,000 1,287,000
Chancellor Media Corp. 9% B1 3,565,000 3,752,163
10/1/08 (f)
Clear Channel Communications,
Inc.:
6.875% 6/15/18 Baa3 3,450,000 3,353,745
7.25% 10/15/27 Baa3 1,950,000 1,951,560
Comcast UK Cable Partners B2 3,360,000 2,839,200
Ltd. 0% 11/15/07 (d)
Continental Cablevision, Inc.:
8.3% 5/15/06 Baa3 2,145,000 2,380,113
8.625% 8/15/03 Baa3 2,790,000 3,058,342
CSC Holdings, Inc.:
7.875% 12/15/07 Ba2 400,000 421,040
9.25% 11/1/05 B1 1,370,000 1,465,900
9.875% 5/15/06 B1 1,600,000 1,752,000
10.5% 5/15/16 B1 1,850,000 2,173,750
Diamond Cable Communications B3 1,480,000 1,221,000
PLC yankee 0% 12/15/05 (d)
EchoStar Communications Corp. B2 890,000 910,025
0% 6/1/04 (d)
Echostar Satellite B3 1,030,000 1,030,000
Broadcasting Corp. 0%
3/15/04 (d)
Falcon Holding Group
LP/Falcon Funding Corp.:
0% 4/15/10 (d) B2 8,060,000 5,420,350
8.375% 4/15/10 B2 1,790,000 1,807,900
FrontierVision Holdings Caa1 3,520,000 2,895,200
LP/FrontierVision Holdings
Capital Corp. 0% 9/15/07 (d)
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
FrontierVision Operating B3 $ 4,740,000 $ 5,267,325
Partners LP/ FrontierVision
Capital Corp. 11% 10/15/06
Golden Sky Systems, Inc. B3 1,200,000 1,248,000
12.375% 8/1/06 (f)
Granite Broadcasting Corp.:
8.875% 5/15/08 B3 2,375,000 2,262,188
9.375% 12/1/05 B3 2,955,000 2,895,900
10.375% 5/15/05 B3 860,000 868,600
Hearst-Argyle Television, Baa3 2,590,000 2,702,328
Inc. 7.5% 11/15/27
Intermedia Capital Partners B2 1,362,000 1,532,250
IV LP / Intermedia Partners
IV Capital Corp. 11.25%
8/1/06
International Cabletel, Inc. B3 1,850,000 1,498,500
0% 2/1/06 (d)
Iridium Operating LLC/Iridium B3 4,220,000 3,629,200
Capital Corp. 11.25% 7/15/05
Lenfest Communications, Inc. B2 880,000 906,400
8.25% 2/15/08
NTL, Inc.:
0% 4/1/08 (d) B3 8,075,000 4,986,313
10% 2/15/07 B3 2,310,000 2,379,300
11.5% 10/1/08 (f) B3 3,640,000 3,913,000
Olympus Communications B1 1,160,000 1,276,000
LP/Olympus Capital Corp.
10.625% 11/15/06
Orion Network Systems, Inc. B2 1,630,000 1,010,600
0% 1/15/07 (d)
Pegasus Communications Corp. B3 1,345,000 1,331,550
9.625% 10/15/05
Renaissance Media Group B3 2,470,000 1,667,250
LLC/Renaissance Media
Capital Corp. 0% 4/15/08 (d)
Rogers Cablesystems Ltd. B2 1,800,000 2,115,000
yankee 11% 12/1/15
Satelites Mexicanos SA de CV B3 3,590,000 2,872,000
10.125% 11/1/04
TCI Communications, Inc.:
9.25% 4/15/02 Baa3 3,000,000 3,335,850
9.8% 2/1/12 Baa3 4,550,000 6,075,888
TCI Communications Financing Ba2 4,360,000 5,319,200
III 9.65% 3/31/27
TCI Communications, Inc.:
6.46% 3/6/00 Baa3 6,570,000 6,652,585
8.75% 8/1/15 Baa3 4,160,000 5,167,926
Telewest Communications PLC B1 710,000 798,750
11.25% 11/1/08 (f)
Telewest PLC:
yankee 9.625% 10/1/06 B1 680,000 707,200
0% 10/1/07 (d) B1 8,930,000 7,411,900
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
MEDIA & LEISURE - CONTINUED
BROADCASTING - CONTINUED
Time Warner, Inc.:
6.625% 5/15/29 Baa3 $ 3,410,000 $ 3,469,539
6.875% 6/15/18 Baa3 2,500,000 2,618,900
8.18% 8/15/07 Baa3 2,710,000 3,139,671
UIH Australia/Pacific, Inc. B2 1,530,000 742,050
Series B 0% 5/15/06 (d)
United International B3 6,490,000 3,504,600
Holdings, Inc. 0% 2/15/08 (d)
151,785,305
ENTERTAINMENT - 0.7%
AMC Entertainment, Inc. 9.5% B2 3,290,000 3,355,800
3/15/09
Bally Total Fitness Holding
Corp.:
9.875% 10/15/07 B3 1,960,000 1,920,800
9.875% 10/15/07 (f) B3 3,680,000 3,606,400
Cinemark USA, Inc. 8.5% 8/1/08 B2 3,255,000 3,198,038
Paramount Communications, Baa3 1,785,000 1,862,701
Inc. 7.5% 1/15/02
Premier Parks, Inc. 0% 4/1/08 B3 3,040,000 2,059,600
(d)
Regal Cinemas, Inc. 8.875% B3 5,950,000 5,890,500
12/15/10 (f)
United Artists Theatre Co. Caa1 2,150,000 2,064,000
9.75% 4/15/08
Viacom, Inc. 7.75% 6/1/05 Baa3 8,727,000 9,467,311
33,425,150
LODGING & GAMING - 0.4%
Aladdin Gaming Caa2 2,380,000 618,800
Holdings/Aladdin Capital
Corp. 0% 3/1/10 (d)
Circus Circus Enterprises,
Inc.:
7.625% 7/15/13 Ba2 1,040,000 915,200
9.25% 12/1/05 Ba2 820,000 832,300
Courtyard by Marriott II B- 1,190,000 1,228,675
LP/Courtyard II Finance Co.
10.75% 2/1/08
HMH Properties, Inc.:
7.875% 8/1/05 Ba2 2,070,000 2,023,425
7.875% 8/1/08 Ba2 9,130,000 8,856,100
8.45% 12/1/08 Ba2 520,000 520,000
Signature Resorts, Inc.:
9.25% 5/15/06 B2 1,770,000 1,628,400
9.75% 10/1/07 B3 1,890,000 1,587,600
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
Sun International Hotels Ba3 $ 1,320,000 $ 1,359,600
Ltd./Sun International North
America, Inc. yankee 9%
3/15/07
19,570,100
PUBLISHING - 0.3%
Big Flower Press Holdings, B2 1,730,000 1,730,000
Inc. 8.625% 12/1/08 (f)
Garden State Newspapers, Inc. B1 5,550,000 5,577,750
Series B, 8.75% 10/1/09
News America Holdings, Inc. Baa3 4,300,000 4,625,854
7.7% 10/30/25
News America, Inc. 7.25% Baa3 3,240,000 3,310,243
5/18/18
15,243,847
RESTAURANTS - 0.2%
Dominos, Inc. 10.375% 1/15/09 B3 2,410,000 2,422,050
(f)
Host Marriott Travel Plazas, Ba3 5,040,000 5,153,400
Inc. 9.5% 5/15/05
Nebraska Restaurant, Inc. B3 1,130,000 1,141,300
10.75% 7/15/08
8,716,750
TOTAL MEDIA & LEISURE 228,741,152
NONDURABLES - 0.6%
BEVERAGES - 0.2%
Seagram Co. Ltd.:
yankee 6.875% 9/1/23 Baa3 620,000 570,400
8.35% 1/15/22 Baa3 390,000 418,275
Seagram J E & Sons, Inc.:
6.625% 12/15/05 Baa3 2,940,000 2,922,360
7.6% 12/15/28 Baa3 2,940,000 2,950,290
6,861,325
FOODS - 0.1%
ConAgra, Inc. 7.125% 10/1/26 Baa1 4,250,000 4,507,763
HOUSEHOLD PRODUCTS - 0.1%
Revlon Consumer Products Corp.:
8.625% 2/1/08 B3 4,560,000 4,149,600
9% 11/1/06 (f) B2 2,160,000 2,138,400
6,288,000
TOBACCO - 0.2%
Philip Morris Companies, Inc.:
6.95% 6/1/06 A2 4,420,000 4,707,256
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
NONDURABLES - CONTINUED
TOBACCO - CONTINUED
Philip Morris Companies,
Inc.: - continued
7% 7/15/05 A2 $ 3,710,000 $ 3,945,177
7.25% 9/15/01 A2 1,450,000 1,513,641
10,166,074
TOTAL NONDURABLES 27,823,162
RETAIL & WHOLESALE - 0.9%
APPAREL STORES - 0.1%
AnnTaylor, Inc. 8.75% 6/15/00 B3 2,690,000 2,716,900
DRUG STORES - 0.1%
Rite Aid Corp. 6% 12/15/05 (f) Baa1 5,500,000 5,500,000
GENERAL MERCHANDISE STORES -
0.2%
Dayton Hudson Corp. 7.5% A3 3,500,000 3,852,625
7/15/06
Federated Department Stores, Baa2 3,000,000 3,091,110
Inc. 6.79% 7/15/27
K mart Corp.:
7.75% 10/1/12 Ba2 240,000 241,200
12.5% 3/1/05 Ba2 2,510,000 3,143,775
Saks Holdings, Inc. 8.25% Baa3 1,260,000 1,335,600
11/15/08
11,664,310
GROCERY STORES - 0.4%
Ameriserve Food Distribution, B1 1,030,000 952,750
Inc. 8.875% 10/15/06
Kroger Co. 6% 7/1/00 Baa3 5,950,000 5,989,032
Pathmark Stores, Inc.:
9.625% 5/1/03 Caa1 6,960,000 6,838,200
12.625% 6/15/02 Caa2 1,430,000 1,376,375
Pueblo Xtra International,
Inc.:
9.5% 8/1/03 B3 2,370,000 2,239,650
9.5% 8/1/03 B3 820,000 774,900
18,170,907
RETAIL & WHOLESALE,
MISCELLANEOUS - 0.1%
Amazon.com, Inc. 0% 5/1/08 (d) Caa2 2,680,000 1,768,800
Metals USA, Inc. 8.625% B2 2,810,000 2,634,375
2/15/08
4,403,175
TOTAL RETAIL & WHOLESALE 42,455,292
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
SERVICES - 0.2%
LEASING & RENTAL - 0.0%
Renters Choice, Inc. 11% B2 $ 320,000 $ 321,600
8/15/08 (f)
PRINTING - 0.0%
Sullivan Graphics, Inc. Caa1 1,430,000 1,444,300
12.75% 8/1/05
SERVICES - 0.2%
Borg-Warner Security Corp. B3 960,000 1,041,600
9.625% 3/15/07
Iron Mountain, Inc. 8.75% B3 1,320,000 1,359,600
9/30/09
La Petite Academy, Inc./La B3 2,850,000 2,821,500
Petite Academy Holding Co.
10% 5/15/08
Medaphis Corp. 9.5% 2/15/05 Caa1 1,850,000 1,424,500
6,647,200
TOTAL SERVICES 8,413,100
TECHNOLOGY - 0.4%
COMMUNICATIONS EQUIPMENT - 0.0%
Intermedia Communications, B2 540,000 513,000
Inc. 8.6% 6/1/08
COMPUTER SERVICES & SOFTWARE
- - 0.1%
Federal Data Corp. 10.125% B3 3,720,000 3,645,600
8/1/05
ICG Services, Inc. 0% 5/1/08 - 5,910,000 3,058,425
(d)
PSINet, Inc. 10% 2/15/05 B3 700,000 696,500
7,400,525
COMPUTERS & OFFICE EQUIPMENT
- - 0.2%
Comdisco, Inc. 6.375% 11/30/01 Baa1 8,300,000 8,335,939
ELECTRONIC INSTRUMENTS - 0.0%
Telecommunications Techniques B3 2,315,000 2,268,700
Co. LLC 9.75% 5/15/08
ELECTRONICS - 0.1%
Fairchild Semiconductor Corp. - 2,991,974 2,437,801
11.74% 3/15/08 pay-in-kind
(k)
Hadco Corp. 9.5% 6/15/08 B2 270,000 265,950
2,703,751
TOTAL TECHNOLOGY 21,221,915
TRANSPORTATION - 0.8%
AIR TRANSPORTATION - 0.3%
Atlas Air, Inc. 9.25% 4/15/08 B3 4,810,000 4,761,900
Delta Air Lines, Inc. 9.875% Baa3 1,500,000 1,574,580
5/15/00
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
TRANSPORTATION - CONTINUED
AIR TRANSPORTATION - CONTINUED
Kitty Hawk, Inc. 9.95% B1 $ 3,125,000 $ 3,078,125
11/15/04
US Air, Inc. 9.625% 2/1/01 B1 1,810,000 1,882,400
US Airways Group, Inc. Ba2 2,480,000 2,672,200
10.375% 3/1/13
13,969,205
RAILROADS - 0.4%
Burlington Northern Santa Fe Baa2 3,000,000 3,343,350
Corp. 7.29% 6/1/36
Canadian National Railway Co. Baa2 3,390,000 3,524,922
6.9% 7/15/28
CSX Corp. 6.46% 6/22/05 Baa2 5,120,000 5,194,035
Norfolk Southern Corp. 7.05% Baa1 6,610,000 7,150,896
5/1/37
Wisconsin Central Baa2 1,810,000 1,837,965
Transportation Corp. 6.625%
4/15/08
21,051,168
SHIPPING - 0.1%
Amer Reefer Co. Ltd. 10.25% B1 1,480,000 932,400
3/1/08
Cenargo International PLC Ba3 1,370,000 1,287,800
9.75% 6/15/08 (f)
Holt Group, Inc. 9.75% Caa1 1,810,000 1,248,900
1/15/06 (f)
3,469,100
TOTAL TRANSPORTATION 38,489,473
UTILITIES - 2.3%
CELLULAR - 0.8%
Cable & Wireless Baa1 5,080,000 5,082,235
Communications PLC 6.375%
3/6/03
McCaw International Ltd. 0% Caa1 8,530,000 4,606,200
4/15/07 (d)
Millicom International Caa1 2,430,000 1,707,075
Cellular SA 0% 6/1/06 (d)
Nextel Communications, Inc.:
0% 9/15/07 (d) B2 3,491,000 2,242,968
0% 10/31/07 (d) B2 11,900,000 7,259,000
0% 2/15/08 (d) B2 2,190,000 1,314,000
12% 11/1/08 (f) B2 4,450,000 4,861,625
Nextel International, Inc. 0% Caa1 3,510,000 1,579,500
4/15/08 (d)
Rogers Cantel, Inc. 8.8% B2 1,200,000 1,209,000
10/1/07
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
Rogers Communications, Inc. B2 $ 4,630,000 $ 4,768,900
8.875% 7/15/07
Teligent, Inc.:
0% 3/1/08 (d) Caa1 6,515,000 3,224,925
11.5% 12/1/07 Caa1 3,600,000 3,366,000
41,221,428
ELECTRIC UTILITY - 0.5%
Avon Energy Partners Holdings:
yankee 6.73% 12/11/02 (f) Baa2 4,910,000 5,071,097
6.46% 3/4/08 (f) Baa2 3,960,000 4,017,024
Hydro-Quebec yankee 7.4% A2 2,620,000 3,254,145
3/28/25 (e)
Israel Electric Corp. Ltd.:
yankee 7.875% 12/15/26 (f) A3 1,960,000 2,000,807
7.75% 12/15/27 (f) A3 4,670,000 4,271,556
Niagara Mohawk Power Corp. Ba2 2,175,000 2,327,250
7.75% 10/1/08
Texas Utilities Co. 6.375% Baa3 1,930,000 1,953,006
1/1/08
22,894,885
TELEPHONE SERVICES - 1.0%
Allegiance Telecom, Inc. - 300,000 291,000
12.875% 5/15/08
Call-Net Enterprises, Inc. 0% B1 890,000 511,750
8/15/08 (d)
Dobson Wireline Co. 12.25% - 4,730,000 4,233,350
6/15/08
GST Network Funding, Inc. 0% - 2,010,000 914,550
5/1/08 (d)(f)
Hyperion Telecommunications,
Inc.:
0% 4/15/03 (d) B3 2,850,000 2,037,750
12.25% 9/1/04 B3 2,990,000 3,034,850
Level 3 Communications, Inc.:
0% 12/1/08 (d)(f) B3 9,370,000 5,446,313
9.125% 5/1/08 B3 2,890,000 2,864,713
MCI WorldCom, Inc.:
8.875% 1/15/06 Baa2 3,139,000 3,430,833
9.375% 1/15/04 Baa2 3,708,000 3,841,748
McLeodUSA, Inc.:
0% 3/1/07 (d) B2 1,845,000 1,411,425
9.25% 7/15/07 B2 1,330,000 1,369,900
9.5% 11/1/08 (f) B2 3,140,000 3,328,400
NEXTLINK Communications, Inc.:
9.625% 10/1/07 B3 4,870,000 4,675,200
10.75% 11/15/08 (f) B3 2,400,000 2,448,000
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
UTILITIES - CONTINUED
TELEPHONE SERVICES - CONTINUED
Pathnet, Inc. 12.25% 4/15/08 - $ 5,170,000 $ 3,619,000
WinStar Communications, Inc. CCC 5,990,000 4,252,900
0% 3/15/08 (d)
47,711,682
TOTAL UTILITIES 111,827,995
TOTAL NONCONVERTIBLE BONDS 810,576,273
TOTAL CORPORATE BONDS 816,959,680
(Cost $821,092,121)
U.S. GOVERNMENT AND
GOVERNMENT AGENCY
OBLIGATIONS - 4.8%
U.S. GOVERNMENT AGENCY
OBLIGATIONS - 1.2%
Farm Credit Systems Financial Aaa 2,000,000 2,379,680
Assistance Corp. 8.8% 6/10/05
Federal Home Loan Bank:
5.195% 9/11/01 Aaa 9,500,000 9,534,105
7.31% 6/16/04 Aaa 2,500,000 2,740,225
7.59% 3/10/05 Aaa 3,850,000 4,313,810
Freddie Mac:
0% 2/25/99 - 6,100,000 6,057,354
0% 2/26/99 - 29,400,000 29,190,507
6.75% 8/1/05 Aaa 2,500,000 2,703,125
U.S. Department of Housing Aaa 2,825,000 3,140,270
and Urban Development
government guaranteed
participation certificates
Series 1996-A, 7.63% 8/1/14
TOTAL U.S. GOVERNMENT AGENCY 60,059,076
OBLIGATIONS
U.S. TREASURY OBLIGATIONS -
3.6%
U.S. Treasury Bills, yield at - 4,100,000 4,098,804
date of purchase 3.66 to
3.68% 1/7/99 (h)
U.S. Treasury Bond:
6.875% 8/15/25 Aaa 25,155,000 30,488,615
7.625% 2/15/25 Aaa 17,790,000 23,388,335
11.75% 2/15/10 (callable) Aaa 15,045,000 20,442,394
12.75% 11/15/10 (callable) Aaa 5,220,000 7,582,050
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
13.875% 5/15/11 (callable) Aaa $ 21,150,000 $ 32,726,241
U.S. Treasury Notes:
6% 8/15/99 Aaa 6,750,000 6,804,810
6.25% 10/31/01 Aaa 820,000 854,333
6.375% 8/15/02 Aaa 22,500,000 23,733,900
6.625% 6/30/01 Aaa 620,000 648,576
6.875% 3/31/00 Aaa 380,000 389,914
7% 7/15/06 Aaa 19,172,000 21,829,047
7.25% 8/15/04 Aaa 5,404,000 6,075,285
TOTAL U.S. TREASURY 179,062,304
OBLIGATIONS
TOTAL U.S. GOVERNMENT AND 239,121,380
GOVERNMENT AGENCY OBLIGATIONS
(Cost $236,667,380)
U.S. GOVERNMENT AGENCY -
MORTGAGE SECURITIES - 6.8%
FANNIE MAE - 5.4%
6% 1/1/11 to 12/1/28 Aaa 63,930,392 63,660,842
6% 1/1/14 (g) Aaa 200,000 200,500
6% 1/1/28 (g) Aaa 3,350,000 3,307,078
6.5% 3/1/13 to 1/1/29 Aaa 144,530,557 145,646,785
6.5% 1/1/29 (g) Aaa 2,000,000 2,013,750
7% 5/1/26 to 10/1/28 Aaa 10,634,977 10,847,695
7% 1/1/29 (g) Aaa 25,500,000 26,017,969
7% 1/1/29 (g) Aaa 6,000,000 6,121,875
7.5% 11/1/27 to 6/1/28 Aaa 7,765,070 7,976,125
TOTAL FANNIE MAE 265,792,619
FREDDIE MAC - 0.1%
7% 4/1/01 to 8/1/01 Aaa 1,381,068 1,389,686
7.5% 6/1/25 to 3/1/28 Aaa 5,445,321 5,591,651
8.5% 7/1/21 to 6/1/23 Aaa 145,950 153,232
TOTAL FREDDIE MAC 7,134,569
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION - 1.3%
6% 12/15/08 to 6/15/09 Aaa 3,063,319 3,099,837
6.5% 6/15/08 to 7/15/09 Aaa 15,188,834 15,474,510
7% 7/15/28 Aaa 20,830,482 21,312,082
7.5% 9/15/22 to 8/15/28 Aaa 24,886,424 25,671,572
U.S. GOVERNMENT AGENCY -
MORTGAGE SECURITIES -
CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION - CONTINUED
8% 5/15/25 Aaa $ 148,092 $ 153,922
8.5% 12/15/16 Aaa 69,785 74,603
TOTAL GOVERNMENT NATIONAL 65,786,526
MORTGAGE ASSOCIATION
TOTAL U.S. GOVERNMENT AGENCY 338,713,714
- - MORTGAGE SECURITIES
(Cost $332,237,472)
ASSET-BACKED SECURITIES - 1.5%
Airplanes Pass Through Trust Ba2 6,080,000 6,384,000
10.875% 3/15/19
BankAmerica Manufacturing Aaa 3,730,000 3,748,650
Housing Contract 6.2% 4/10/09
Capital Equipment Receivables Baa2 2,950,000 2,954,779
Trust 6.48% 10/15/06
Chevy Chase Auto Receivables Aaa 2,251,464 2,263,777
Trust 5.91% 12/15/04
Contimortgage Home Equity Aaa 4,790,000 4,792,970
Loan Trust 6.26% 7/15/12
CPS Auto Grantor Trust:
6.09% 11/15/03 Aaa 2,983,699 2,996,753
6.55% 8/15/02 Aaa 1,737,804 1,747,579
CPS Auto Receivables Trust 6% Aaa 4,928,798 4,942,660
8/15/03
CSXT Trade Receivables Master Aaa 4,600,000 4,676,188
Trust 6% 7/25/04
Ford Credit Auto Owner Trust:
6.2% 12/15/02 Baa3 2,680,000 2,695,866
6.4% 5/15/02 A1 3,120,000 3,162,806
6.4% 12/15/02 Baa3 1,480,000 1,485,920
Green Tree Financial Corp.:
6.5% 6/15/27 Aaa 183,092 183,148
6.68% 1/15/29 AAA 6,680,000 6,782,271
6.8% 6/15/27 Aaa 1,900,000 1,916,625
Key Auto Finance Trust 6.3% A2 2,932,758 2,936,882
10/15/03
Olympic Automobile
Receivables Trust:
6.4% 9/15/01 Aaa 4,106,448 4,103,881
6.7% 3/15/02 Aaa 2,099,496 2,113,995
Petroleum Enhanced Trust Baa2 3,024,797 3,021,016
Receivables Offering
Petroleum Trust 6.125%
2/5/03 (f)(i)
Premier Auto Trust 6% 5/6/00 Aaa 486,179 486,631
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
UAF Auto Grantor Trust 6.1% Aaa $ 4,339,360 $ 4,329,868
1/15/03 (f)
WFS Financial Owner Trust Aaa 4,430,000 4,428,616
6.55% 10/20/04
TOTAL ASSET-BACKED SECURITIES 72,154,881
(Cost $71,952,017)
COLLATERALIZED MORTGAGE
OBLIGATIONS - 0.0%
PRIVATE SPONSOR - 0.0%
Credit-Based Asset Servicing Ba3 1,305,784 461,921
and Securitization LLC
Series 1997 2 Class 2-B,
7.2141% 12/29/25 (f)(i)
(Cost $694,106)
COMMERCIAL MORTGAGE
SECURITIES - 2.3%
Bankers Trust Remic Trust Ba2 1,000,000 871,406
1988-1 Series 1998-S1A Class
G, 7.6053% 11/28/02 (f)(i)
Berkeley Federal Bank & Trust - 1,900,000 1,368,000
FSB Series 1994 Class 1-B
7.6353% 8/1/24 (f)(i)
BKB Commercial Mortgage Trust BBB 1,800,000 1,826,719
Series 1997-C1 Class D,
7.83% 2/25/43 (f)(i)
CBM Funding Corp. sequential
pay Series 1996-1:
Class A-3PI, 7.08% 11/1/07 AA 3,000,000 3,146,250
Class B, 7.48% 2/1/08 A 2,320,000 2,477,688
CS First Boston Mortgage
Securities Corp.:
Series 1997 C2 Class D, 7.27% Baa2 5,300,000 5,028,375
1/17/35
Series 1998 C1 Class D, 7.17% BBB 5,050,000 4,881,141
1/17/12
Series 1998 FLI Class E, Baa2 5,490,000 5,335,594
6.5063% 1/10/13 (f)(i)
Deutsche Mortgage & Asset Baa2 4,260,000 4,077,619
Receiving Corp. Series
1998-C1 Class D, 7.231%
7/15/12
DLJ Mortgage Acceptance Corp. - 600,000 592,313
Series 1993-MF12 Class B-2,
10.1% 9/18/03 (f)
COMMERCIAL MORTGAGE
SECURITIES - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
Equitable Life Assurance
Society of the United States
(The):
sequential pay Series 174 Aaa $ 7,180,000 $ 7,728,480
Class A1, 7.24% 5/15/06 (f)
Series 174:
Class B1, 7.33% 5/15/06 (f) Aa2 3,500,000 3,711,540
Class D1, 7.77% 5/15/06 (f) Baa2 2,200,000 2,254,428
Series 1996 1 Class C1, 7.52% A2 2,300,000 2,437,103
5/15/06 (f)
First Chicago/Lennar Trust I:
Series 1997 CHL1 Class E, - 1,600,000 1,228,000
8.1117% 4/1/39 (i)
Series 1997-CHL1 Class D, - 1,100,000 943,250
8.1117% 4/13/39 (i)
First Union-Lehman Brothers Aa2 8,640,000 8,999,100
Commercial MortgageTr
sequential pay Series
1997-C2 Class B, 6.79%
11/18/29
FMAC Loan Receivables Trust:
Series 1997-A Class E, - 500,000 402,188
8.1063% 4/15/19 (f)(i)
Series 1997-B Class E, - 750,000 565,781
7.8912% 9/15/19 (f)(i)
GAFCO Franchisee Loan Trust - 1,300,000 983,635
Series 1998-1 Class D, 14.5%
6/1/16 (f)(i)
General Motors Acceptance Ba3 750,000 612,375
Corp. Commercial Mortgage
Securities, Inc. Series
1996-C1 Class F, 7.86%
10/15/28 (f)
GS Mortgage Securities Corp.
II:
Series 1997-GL Class A2-B, Aaa 5,080,000 5,290,972
6.86% 7/13/30
Series 1998 GLII Class E, Baa3 4,930,000 4,462,685
7.1905% 4/13/31 (f)(i)
Series 1998-GLII Class D, Baa2 1,470,000 1,430,001
7.1905% 4/13/31 (f)(i)
Kidder Peabody Acceptance Aaa 643,659 641,949
Corp. I sequential pay
Series 1993-M1 Class A-2,
7.15% 4/25/25
LTC Commercial Mortgage Pass AAA 3,159,589 3,143,759
Through Certificates Series
1998-1 Class A, 6.029%
5/30/30 (f)
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
Morgan Stanley Capital I,
Inc.:
Series 1996-MBL1 Class E, - $ 1,765,551 $ 1,744,077
8.2655% 5/25/21 (f)(i)
Series 1998 CF1:
Class D, 7.35% 1/15/12 Baa2 4,189,000 4,051,548
Class E, 7.35% 12/15/12 Baa3 1,445,000 1,275,213
Series 1998-HF1 Class D, 7.1% BBB 5,790,000 5,753,813
2/15/30 (i)
Nomura Asset Securities Corp. Baa2 4,260,000 3,965,128
Series 1998-D6 Class A-4,
7.3498% 3/17/28 (i)
Nomura Depositor Trust - 800,000 693,750
floater Series 1998-ST1A
Class B-2, 9.7966% 1/15/03
(f)(i)
Penn Mutual Life Insurance
Co. (The)/Penn Insurance &
Annuity Co. Series 1996-PML:
Class K, 7.9% 11/15/26 (f) - 1,473,000 922,658
Class L, 7.9% 11/15/26 (f) - 1,133,000 589,160
Resolution Trust Corp. Series Ba3 425,324 344,512
1991 M2 Class A3, 7.2498%
9/25/20 (i)
Structured Asset Securities
Corp.:
sequential pay Series 1996 AAA 753,182 748,946
Class A-2A, 7.75% 2/25/28
Series 1993-C1 Class E, 6.6% B 1,250,000 562,500
10/25/24 (f)
Series 1995-C1 Class E, BB 1,200,000 1,130,438
7.375% 9/25/24 (f)
Series 1996 CFL Class G, B 1,000,000 910,000
7.75% 2/25/28 (f)
Series 1996-CFL Class E, BB+ 2,390,000 2,341,453
7.75% 2/25/28
Thirteen Affiliates of
General Growth Properties,
Inc.:
sequential pay Series A 2, Aaa 4,200,000 4,364,262
6.602% 12/15/10 (f)
Series D-2, 6.992% 12/15/10 Baa2 4,120,000 3,990,591
(f)
Series E-2, 7.224% 12/15/10 Baa3 2,450,000 2,220,705
(f)
Wells Fargo Capital Markets Aaa 2,676,825 2,705,922
Apartment Financing Trust
Series APT Class 1, 6.56%
12/29/05 (f)
TOTAL COMMERCIAL MORTGAGE 112,755,027
SECURITIES
(Cost $113,561,303)
FOREIGN GOVERNMENT AND
GOVERNMENT AGENCY
OBLIGATIONS (J) - 0.3%
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
Export Development Corp. Aa2 $ 1,640,000 $ 1,670,635
yankee 8.125% 8/10/99
Israeli State euro 6.375% Aaa 3,350,000 3,389,396
12/19/01
Manitoba Province yankee Aa3 7,000,000 7,070,560
6.375% 10/15/99
Newfoundland Province yankee Baa1 2,000,000 2,808,125
11.625% 10/15/07
TOTAL FOREIGN GOVERNMENT AND 14,938,716
GOVERNMENT AGENCY OBLIGATIONS
(Cost $14,629,170)
SUPRANATIONAL OBLIGATIONS -
0.1%
Inter American Development Aaa 4,750,000 4,975,720
Bank yankee 6.29% 7/16/27
(Cost $4,720,123)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
BANK NOTES - 0.3%
Key Bank NA 5.18% 8/20/99 (i) 10,500,000 10,494,750
NationsBank NA 5.05% 4/13/99 4,000,000 4,000,000
TOTAL BANK NOTES 14,494,750
(Cost $14,485,878)
CERTIFICATES OF DEPOSIT - 1.3%
Bayerische Hypotheken-und 4,200,000 4,204,893
Wechselbank AG yankee 5.7%
3/30/99
First National Bank of 10,000,000 10,007,326
Chicago 5.65% 3/3/99
Fleet National Bank 5.4616% 12,000,000 11,993,869
5/5/00 (i)
RaboBank Nederland Coop. 10,600,000 10,623,162
Central yankee 5.68% 6/4/99
Swiss Bank Corp. yankee 5.65% 8,400,000 8,408,140
3/24/99
Toronto Dominion Bank yankee 10,600,000 10,623,162
5.68% 6/4/99
Westdeutsche Landesbank 11,000,000 11,005,481
Girozentrale yankee 5.63%
2/8/99
TOTAL CERTIFICATES OF DEPOSIT 66,866,033
(Cost $66,792,450)
COMMERCIAL PAPER - 2.4%
Asset Securitization Coop. 6,700,000 6,637,076
Corp. 5.2% 3/15/99
Associates First Capital 7,900,000 7,832,258
Corp. 5.1% 3/8/99
PRINCIPAL AMOUNT VALUE (NOTE 1)
Citibank Credit Card Master $ 7,000,000 $ 6,990,258
Trust I (Dakota Certificate
Program) 5.35% 1/14/99
Commonwealth Bank of 11,000,000 10,917,182
Australia yankee 5.35% 3/1/99
Delaware Funding Corp. 5.6% 1,397,000 1,392,399
1/28/99
Den Danske Corp., Inc. yankee 12,000,000 11,863,360
5.13% 3/29/99
General Electric Capital Corp.:
5% 2/8/99 5,000,000 4,976,278
5.12% 3/19/99 5,000,000 4,950,358
General Motors Acceptance
Corp.:
5.08% 2/10/99 8,000,000 7,959,464
5.6% 1/29/99 4,000,000 3,986,222
Generale de Banque SA yankee 12,200,000 12,115,485
5.36% 2/24/99
Heller Financial, Inc. 5.75% 8,000,000 7,971,946
1/28/99
Nordbanken, North America, 12,500,000 12,374,610
Inc. yankee 5.07% 3/19/99
PHH Corp. 5.62% 2/22/99 12,100,000 12,019,464
Transamerica Finance Corp. 5,000,000 4,984,844
5.47% 1/26/99
TOTAL COMMERCIAL PAPER 116,971,204
(Cost $116,841,449)
MASTER NOTES - 0.1%
Goldman Sachs Group L.P. 6,700,000 6,700,000
(The) 5.2653% 1/27/99 (i)
(Cost $6,700,000)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CASH EQUIVALENTS - 6.9%
MATURITY AMOUNT
Investments in repurchase 578,320 578,000
agreements (U.S. Treasury
obligations), in a joint
trading account at 4.98%,
dated 12/31/98 due 1/4/99
SHARES
Taxable Central Cash Fund (c) 343,217,988 343,217,988
TOTAL CASH EQUIVALENTS 343,795,988
(Cost $343,795,988)
TOTAL INVESTMENT IN $ 4,958,816,809
SECURITIES - 100%
(Cost $4,253,500,930)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
FUTURES CONTRACTS
EXPIRATION DATE UNDERLYING FACE AMOUNT AT VALUE UNREALIZED GAIN/(LOSS)
PURCHASED
245 S&P 500 Stock Index Mar. 1999 $ 76,286,875 $ 3,226,917
Contracts
</TABLE>
THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL
INVESTMENT IN SECURITIES - 1.5%
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) At period end, the seven-day yield on the Taxable Central Cash
Fund was 4.80%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(d) Debt obligation initially issued in zero coupon form which
converts to coupon form at a specified rate and date. The rate shown
is the rate at period end.
(e) Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date. The rate shown is the rate at
period end.
(f) Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified
institutional buyers. At the period end, the value of these securities
amounted to $164,522,664 or 3.3% of net assets.
(g) Security purchased on a delayed delivery or when-issued basis (see
Note 2 of Notes to Financial Statements).
(h) Security or a portion of the security was pledged to cover margin
requirements for futures contracts. At the period end, the value of
securities pledged amounted to $3,748,906.
(i) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(j) For foreign government obligations not individually rated by S&P
or Moody's, the ratings listed have been assigned by FMR, the fund's
investment adviser, based principally on S&P and Moody's ratings of
the sovereign credit of the issuing government.
(k) Restricted securities - Investment in securities not registered
under the Securities Act of 1933 (see Note 2 of Notes to Financial
Statements).
SECURITY ACQUISTION DATE ACQUISITION COST
Alliance Gaming Corp. 7/28/98 259,200
Fairchild Semiconductor Corp. 4/3/97 - 11/18/98 2,597,582
11.74% 3/15/08 pay-in-kind
OTHER INFORMATION
The composition of long-term debt holdings as a percentage of total
value of investments in securities, is as follows (ratings are
unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 16.2% AAA, AA, A 15.2%
Baa 5.8% BBB 5.9%
Ba 2.1% BB 2.5%
B 5.0% B 4.7%
Caa 0.8% CCC 0.9%
Ca, C 0.0% CC, C 0.0%
D 0.0%
For some foreign government obligations, FMR has assigned the ratings
for the sovereign credit of the issuing government. The percentage not
rated by Moody's or S&P amounted to 0.5%. FMR has determined that
unrated debt securities that are lower quality account for 0.1% of the
total value of investment in securities.
Purchases and sales of securities, other than short-term securities,
aggregated $4,826,248,010 and $4,872,343,052, respectively, of which
long-term U.S. government and government agency obligations aggregated
$2,257,013,470 and $2,162,221,911, respectively (see Note 3 of
Notes to Financial Statements).
The market value of futures contracts opened and closed during the
period amounted to $225,583,432 and $150,358,527, respectively (see
Note 3 of Notes to Financial Statements).
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $281,085 for the
period (see Note 4 of Notes to Financial Statements).
The fund participated in the bank borrowing program. The maximum loan
and average daily balances during the period for which loans were
outstanding amounted to $7,666,000 and $6,484,000, respectively. The
weighted average interest rate was 5.82% (see Note 8 of Notes to
Financial Statements).
INCOME TAX INFORMATION
At December 31, 1998, the aggregate cost of investment securities for
income tax purposes was $4,255,898,557. Net unrealized appreciation
aggregated $702,918,252, of which $817,066,468 related to appreciated
investment securities and $114,148,216 related to depreciated
investment securities.
The fund hereby designates approximately $286,266,000 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, 1998
ASSETS
Investment in securities, at $ 4,958,816,809
value (including repurchase
agreements of $578,000)
(cost $4,253,500,930) - See
accompanying schedule
Cash 271,006
Receivable for investments 194,383
sold
Receivable for fund shares 2,395,094
sold
Dividends receivable 4,014,328
Interest receivable 23,876,278
Receivable for daily 208,250
variation on futures
contracts
Other receivables 113,009
TOTAL ASSETS 4,989,889,157
LIABILITIES
Payable for investments $ 2,760,908
purchased Regular delivery
Delayed delivery 68,005,015
Payable for fund shares 5,140,155
redeemed
Accrued management fee 2,139,554
Distribution fees payable 425
Other payables and accrued 574,922
expenses
TOTAL LIABILITIES 78,620,979
NET ASSETS $ 4,911,268,178
Net Assets consist of:
Paid in capital $ 3,843,286,070
Undistributed net investment 159,730,084
income
Accumulated undistributed 199,710,730
net realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation 708,541,294
(depreciation) on
investments and assets and
liabilities in foreign
currencies
NET ASSETS $ 4,911,268,178
INITIAL CLASS: NET ASSET $18.16
VALUE, offering price and
redemption price per share
($4,905,467,520 (divided by)
270,139,399 shares)
SERVICE CLASS: NET ASSET $18.10
VALUE, offering price and
redemption price per share
($5,800,658 (divided by)
320,513 shares)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME $ 43,450,997
Dividends
Interest 146,132,145
TOTAL INCOME 189,583,142
EXPENSES
Management fee $ 24,986,229
Transfer agent fees 3,118,794
Distribution fees - Service 1,632
Class
Accounting fees and expenses 857,083
Non-interested trustees' 16,287
compensation
Custodian fees and expenses 55,060
Registration fees 15,112
Audit 83,178
Legal 45,638
Interest 2,094
Miscellaneous 491,517
Total expenses before 29,672,624
reductions
Expense reductions (561,216) 29,111,408
NET INVESTMENT INCOME 160,471,734
REALIZED AND UNREALIZED GAIN
(LOSS)
Net realized gain (loss) on:
Investment securities 203,881,884
Foreign currency transactions (9,752)
Futures contracts (2,164,947) 201,707,185
Change in net unrealized
appreciation (depreciation)
on:
Investment securities 284,395,805
Assets and liabilities in 4,138
foreign currencies
Futures contracts 3,226,917 287,626,860
NET GAIN (LOSS) 489,334,045
NET INCREASE (DECREASE) IN $ 649,805,779
NET ASSETS RESULTING FROM
OPERATIONS
OTHER INFORMATION $ 542,476
Expense reductions Directed
brokerage arrangements
Custodian credits 18,740
$ 561,216
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
INCREASE (DECREASE) IN NET YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
ASSETS
Operations Net investment $ 160,471,734 $ 137,893,337
income
Net realized gain (loss) 201,707,185 422,287,524
Change in net unrealized 287,626,860 189,535,901
appreciation (depreciation)
NET INCREASE (DECREASE) IN 649,805,779 749,716,762
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders (139,636,837) (127,145,659)
From net investment income
From net realized gain (418,910,515) (317,186,364)
TOTAL DISTRIBUTIONS (558,547,352) (444,332,023)
Share transactions - net 420,062,178 453,368,657
increase (decrease)
TOTAL INCREASE (DECREASE) 511,320,605 758,753,396
IN NET ASSETS
NET ASSETS
Beginning of period 4,399,947,573 3,641,194,177
End of period (including $ 4,911,268,178 $ 4,399,947,573
undistributed net investment
income of $159,730,084 and
$137,705,425, respectively)
</TABLE>
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
SHARES DOLLARS SHARES DOLLARS
Share transactions Initial 23,406,455 $ 397,953,748 22,516,597 $ 378,800,337
Class Sold
Reinvested 34,542,119 558,546,057 28,796,632 444,332,023
Redeemed (32,078,907) (541,870,122) (22,110,811) (369,773,703)
Net increase (decrease) 25,869,667 $ 414,629,683 29,202,418 $ 453,358,657
Service Class A Sold 330,869 $ 5,609,677 568 $ 10,000
Reinvestment 80 1,295 - -
Redeemed (11,004) (178,477) - -
Net increase (decrease) 319,945 $ 5,432,495 568 $ 10,000
Distributions From net $ 139,636,513 $ 127,145,659
investment income Initial
Class
Service Class 324 -
Total $ 139,636,837 $ 127,145,659
From net realized gain $ 418,909,543 $ 317,186,364
Initial Class
Service Class 972 -
Total $ 418,910,515 $ 317,186,364
$ 558,547,352 $ 444,332,023
A SERVICE CLASS COMMENCED
SALE OF SHARES NOVEMBER 3,
1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 1996 1995 1994
Net asset value, beginning of $ 18.01 $ 16.93 $ 15.79 $ 13.79 $ 15.42
period
Income from Investment
Operations
Net investment income .59 D .57 D .63 .30 .45
Net realized and unrealized 1.84 2.58 1.55 1.99 (1.33)
gain (loss)
Total from investment 2.43 3.15 2.18 2.29 (.88)
operations
Less Distributions
From net investment income (.57) (.59) (.57) (.29) (.29)
From net realized gain (1.71) (1.48) (.47) - (.46)
Total distributions (2.28) (2.07) (1.04) (.29) (.75)
Net asset value, end of period $ 18.16 $ 18.01 $ 16.93 $ 15.79 $ 13.79
TOTAL RETURN B, C 15.05% 20.65% 14.60% 16.96% (6.09)%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 4,905,468 $ 4,399,937 $ 3,641,194 $ 3,332,844 $ 3,290,527
(000 omitted)
Ratio of expenses to average .64% .65% .74% .81% .81%
net assets
Ratio of expenses to average .63% F .64% F .73% F .79% F .80% F
net assets after expense
reductions
Ratio of net investment 3.46% 3.43% 3.60% 3.54% 4.07%
income to average net assets
Portfolio turnover 113% 101% 168% 256% 85%
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 E
Net asset value, beginning of $ 17.99 $ 17.60
period
Income from Investment
Operations
Net investment income D .57 .10
Net realized and unrealized 1.82 .29
gain (loss)
Total from investment 2.39 .39
operations
Less Distributions
From net investment income (.57) -
From net realized gain (1.71) -
Total distributions (2.28) -
Net asset value, end of period $ 18.10 $ 17.99
TOTAL RETURN B, C 14.82% 2.22%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 5,801 $ 10
(000 omitted)
Ratio of expenses to average .78% .75% A
net assets
Ratio of expenses to average .77% F .75% A
net assets after expense
reductions
Ratio of net investment 3.49% 3.52% A
income to average net assets
Portfolio turnover 113% 101%
A ANNUALIZED
B TOTAL RETURNS DO NOT
REFLECT CHARGES ATTRIBUTABLE
TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION
OF THESE CHARGES WOULD
REDUCE THE TOTAL RETURNS
SHOWN. TOTAL RETURNS FOR
PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD
HAVE BEEN LOWER HAD CERTAIN
EXPENSES NOT BEEN REDUCED
DURING THE PERIODS SHOWN
(SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER
SHARE HAS BEEN CALCULATED
BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3,
1997 (COMMENCEMENT OF SALE
OF SERVICE CLASS SHARES) TO
DECEMBER 31, 1997.
F FMR OR THE FUND HAS ENTERED
INTO VARYING ARRANGEMENTS
WITH THIRD PARTIES WHO
EITHER PAID OR REDUCED A
PORTION OF THE FUND'S
EXPENSES (SEE NOTE 5 OF
NOTES TO FINANCIAL
STATEMENTS).
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). If Fidelity had not reimbursed certain fund
expenses, the life of fund total return would have been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, PAST 1 YEAR LIFE OF FUND
1998
VIP III: BALANCED - "INITIAL 17.64% 15.86%
CLASS"
S&P 500 (registered trademark) 28.58% 30.55%
LB Aggregate Bond 8.69% 10.04%
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and
show what would have happened if the fund had performed at a constant
rate each year.
You can compare these figures to the performance of the Standard &
Poor's 500 Index - a market capitalization-weighted index of common
stocks and the Lehman Brothers Aggregate Bond Index - a market
value-weighted index of investment-grade fixed-rate debt issues,
including government, corporate, asset-backed, and mortgage-backed
securities, with maturities of one year or more. These benchmarks
reflect the reinvestment of dividends and capital gains, if any.
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations January 3, 1995.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
(checkmark) 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
$10,000 OVER LIFE OF FUND
VIP III Balanced S&P 500 LB Aggregate Bond
00616 SP001 LB001
1995/01/03 10000.00 10000.00 10000.00
1995/01/31 9990.00 10261.28 10213.32
1995/02/28 10190.00 10661.16 10456.40
1995/03/31 10260.00 10975.77 10520.18
1995/04/30 10390.00 11299.00 10667.46
1995/05/31 10610.00 11750.63 11080.29
1995/06/30 10740.00 12023.59 11161.18
1995/07/31 10880.00 12422.30 11136.63
1995/08/31 10920.00 12453.48 11271.38
1995/09/30 11020.00 12979.01 11380.71
1995/10/31 10890.00 12932.68 11528.66
1995/11/30 11210.00 13500.42 11701.59
1995/12/31 11391.59 13760.44 11865.41
1996/01/31 11473.17 14228.85 11943.72
1996/02/29 11319.47 14360.75 11735.90
1996/03/31 11227.28 14499.04 11653.75
1996/04/30 11258.01 14712.76 11588.49
1996/05/31 11380.93 15092.20 11565.31
1996/06/30 11452.64 15149.70 11720.29
1996/07/31 11227.28 14480.39 11751.93
1996/08/31 11298.98 14785.78 11731.96
1996/09/30 11780.44 15617.92 11936.09
1996/10/31 12098.00 16048.66 12201.07
1996/11/30 12733.12 17261.78 12409.71
1996/12/31 12528.25 16919.83 12294.30
1997/01/31 12927.76 17976.98 12332.41
1997/02/28 13144.66 18117.92 12363.24
1997/03/31 12777.20 17373.45 12226.01
1997/04/30 13260.15 18410.65 12409.40
1997/05/31 13785.10 19531.49 12527.29
1997/06/30 14289.05 20406.50 12676.37
1997/07/31 15086.97 22030.24 13018.63
1997/08/31 14383.54 20796.11 12907.97
1997/09/30 14960.98 21935.11 13099.01
1997/10/31 14646.01 21202.48 13288.94
1997/11/30 15002.98 22183.94 13350.07
1997/12/31 15307.44 22564.84 13484.91
1998/01/31 15475.43 22814.41 13657.52
1998/02/28 16051.56 24459.78 13646.59
1998/03/31 16655.17 25712.37 13692.99
1998/04/30 16789.31 25971.03 13764.19
1998/05/31 16789.31 25524.59 13894.95
1998/06/30 17169.36 26561.40 14013.06
1998/07/31 17158.18 26278.52 14042.49
1998/08/31 15302.64 22479.17 14271.38
1998/09/30 16174.52 23919.19 14605.33
1998/10/31 16766.95 25864.77 14527.92
1998/11/30 17392.92 27432.44 14610.73
1998/12/31 18007.71 29013.09 14654.56
IMATRL PRASUN SHR__CHT 19981231 19990129 101823 R00000000000051
</TABLE>
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund III: Balanced Portfolio
on January 3, 1995, when the fund started. As the chart shows, by
December 31, 1998, the value of the investment would have grown to
$18,008 - an 80.08% increase on the initial investment. For
comparison, look at how both the Standard & Poor's 500 Index and
Lehman Brothers Aggregate Bond Index did over the same period. With
dividends and capital gains, if any, reinvested, the same $10,000
investment in the Standard & Poor's 500 Index would have grown to
$29,013 - a 190.13% increase. If $10,000 was put in the Lehman
Brothers Aggregate Bond Index, it would have grown to $14,655 - a
46.55% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
MCI WorldCom, Inc. 2.7
General Electric Co. 2.3
Freddie Mac 2.1
Tyco International Ltd. 1.8
Pitney Bowes, Inc. 1.7
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
FINANCE 16.5
UTILITIES 11.6
HEALTH 8.2
TECHNOLOGY 8.1
INDUSTRIAL MACHINERY & 5.9
EQUIPMENT
ASSET ALLOCATION AS OF DECEMBER 31, 1998*
% OF FUND'S INVESTMENTS
Row: 1, Col: 1, Value: 64.7
Row: 1, Col: 2, Value: 27.3
Row: 1, Col: 3, Value: 8.0
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 64.7%
Bonds 27.3%
Short-term investments 8.0%
*FOREIGN INVESTMENTS 6.1%
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1 fee. If Fidelity had not
reimbursed certain fund expenses, the life of fund total returns would
have been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, PAST 1 YEAR LIFE OF FUND
1998
VIP III: BALANCED - SERVICE 17.27% 15.79%
CLASS
S&P 500 28.58% 30.55%
LB Aggregate Bond 8.69% 10.04%
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and
show what would have happened if the fund had performed at a constant
rate each year.
You can compare the fund's returns to the performance of the Standard
& Poor's 500 Index - a market-capitalization-weighted index of common
stocks - and the performance of the Lehman Brothers Aggregate Bond
Index - a market value-weighted index of investment-grade fixed-rate
debt issues, including government, corporate, asset-backed, and
mortgage-backed securities, with maturities of one year or more.
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations January 3, 1995.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
(checkmark) 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
$10,000 OVER LIFE OF FUND
VIP III Balanced - CL S S&P 500 LB Aggregate Bond
00469 SP001 LB001
1995/01/03 10000.00 10000.00 10000.00
1995/01/31 9990.00 10261.28 10213.32
1995/02/28 10190.00 10661.16 10456.40
1995/03/31 10260.00 10975.77 10520.18
1995/04/30 10390.00 11299.00 10667.46
1995/05/31 10610.00 11750.63 11080.29
1995/06/30 10740.00 12023.59 11161.18
1995/07/31 10880.00 12422.30 11136.63
1995/08/31 10920.00 12453.48 11271.38
1995/09/30 11020.00 12979.01 11380.71
1995/10/31 10890.00 12932.68 11528.66
1995/11/30 11210.00 13500.42 11701.59
1995/12/31 11391.59 13760.44 11865.41
1996/01/31 11473.17 14228.85 11943.72
1996/02/29 11319.47 14360.75 11735.90
1996/03/31 11227.28 14499.04 11653.75
1996/04/30 11258.01 14712.76 11588.49
1996/05/31 11380.93 15092.20 11565.31
1996/06/30 11452.64 15149.70 11720.29
1996/07/31 11227.28 14480.39 11751.93
1996/08/31 11298.98 14785.78 11731.96
1996/09/30 11780.44 15617.92 11936.09
1996/10/31 12098.00 16048.66 12201.07
1996/11/30 12733.12 17261.78 12409.71
1996/12/31 12528.25 16919.83 12294.30
1997/01/31 12927.76 17976.98 12332.41
1997/02/28 13144.66 18117.92 12363.24
1997/03/31 12777.20 17373.45 12226.01
1997/04/30 13260.15 18410.65 12409.40
1997/05/31 13785.10 19531.49 12527.29
1997/06/30 14289.05 20406.50 12676.37
1997/07/31 15086.97 22030.24 13018.63
1997/08/31 14383.54 20796.11 12907.97
1997/09/30 14960.98 21935.11 13099.01
1997/10/31 14646.01 21202.48 13288.94
1997/11/30 15002.98 22183.94 13350.07
1997/12/31 15317.94 22564.84 13484.91
1998/01/31 15464.93 22814.41 13657.52
1998/02/28 16029.90 24459.78 13646.59
1998/03/31 16633.54 25712.37 13692.99
1998/04/30 16756.50 25971.03 13764.19
1998/05/31 16756.50 25524.59 13894.95
1998/06/30 17136.57 26561.40 14013.06
1998/07/31 17125.39 26278.52 14042.49
1998/08/31 15280.94 22479.17 14271.38
1998/09/30 16130.51 23919.19 14605.33
1998/10/31 16734.14 25864.77 14527.92
1998/11/30 17348.96 27432.44 14610.73
1998/12/31 17963.77 29013.09 14654.56
IMATRL PRASUN SHR__CHT 19981231 19990129 133114 R00000000000051
</TABLE>
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund III: Balanced Portfolio -
Service Class on January 3, 1995, when the fund started. As the chart
shows, by December 31, 1998, the value of the investment would have
grown to $17,964 - a 79.64% increase on the initial investment. For
comparison, look at how both the Standard & Poor's 500 Index and
Lehman Brothers Aggregate Bond Index did over the same period. With
dividends and capital gains, if any, reinvested, the same $10,000
investment in the S&P 500 would have grown to $29,013 - a 190.13%
increase. If $10,000 was put in the Lehman Brothers Aggregate Bond
Index, it would have grown to $14,655 - a 46.55% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
MCI WorldCom, Inc. 2.7
General Electric Co. 2.3
Freddie Mac 2.1
Tyco International Ltd. 1.8
Pitney Bowes, Inc. 1.7
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
FINANCE 16.5
UTILITIES 11.6
HEALTH 8.2
TECHNOLOGY 8.1
INDUSTRIAL MACHINERY & 5.9
EQUIPMENT
ASSET ALLOCATION AS OF DECEMBER 31, 1998*
% OF FUND'S INVESTMENTS
Row: 1, Col: 1, Value: 64.7
Row: 1, Col: 2, Value: 27.3
Row: 1, Col: 3, Value: 8.0
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 64.7%
Bonds 27.3%
Short-term investments 8.0%
*FOREIGN INVESTMENTS 6.1%
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
FUND TALK: THE MANAGERS' OVERVIEW
(photograph of John Avery)
(photograph of Kevin Grant)
An interview with John Avery (right), lead Portfolio Manager of
Balanced Portfolio, and Kevin Grant, manager for fixed-income
investments
Q. HOW DID THE FUND PERFORM, JOHN?
J.A. Given the mix of equities and fixed-income securities owned by
the fund, its returns typically fall somewhere between those of its
two benchmark indexes - the Standard & Poor's 500 Index and the Lehman
Brothers Aggregate Bond Index. That was the case for the 12 months
that ended December 31, 1998, as the fund's return lagged the 28.58%
return of the S&P 500 but surpassed the 8.69% return of the Lehman
Brothers Index.
Q. WHAT FACTORS CONTRIBUTED TO THE FUND'S PERFORMANCE?
J.A. It was a volatile year, with resurgent concerns about the spread
of economic stagnation from Asia and Russia's devaluation of its
currency and default on much of its foreign debt roiling the markets
in the third quarter. However, when the dust settled in December,
following three cuts in short-term interest rates by the Federal
Reserve Board, equities had put in another strong showing. The fund's
emphasis on the stocks of large companies with strong management,
dominant market share and consistent earnings growth helped to shield
it somewhat during the stock market's plunge in August, and also
helped many of the fund's holdings recover quickly during the fourth
quarter, when the stock market staged a vigorous rally. On the
fixed-income side, third-quarter volatility hurt many of the fund's
holdings, but also resulted in numerous opportunities to make
acquisitions at favorable prices, which helped performance in the
fourth quarter, when the fixed-income markets recovered alongside the
equity markets.
Q. WHAT STOCKS HELPED THE FUND'S PERFORMANCE DURING THE PERIOD?
J.A. Freddie Mac was a strong performer. Lower mortgage rates
triggered a fresh wave of refinancing and aided the company's business
of buying and reselling mortgages. In addition, Freddie Mac's
U.S.-based business attracted investors looking to minimize their
exposure to emerging markets. Pitney Bowes - a manufacturer of postage
meters - also helped performance. The multi-year, nationwide
changeover now underway from mechanical to electronic postage meters
led investors to expect healthy earnings growth from the company.
Q. WHAT STOCKS DETRACTED FROM THE FUND'S PERFORMANCE?
J.A. Citicorp, a prime detractor, incurred huge trading losses from
its investments in Russia and Asia. Another lackluster performer was
Alcatel, a French telecommunications company that was hurt by its
dependence on demand from emerging markets. I sold both stocks.
Q. TURNING TO YOU, KEVIN, HOW DID THE DRAMATIC EVENTS OF THE 12-MONTH
PERIOD AFFECT THE FUND'S BOND HOLDINGS?
K.G. Russia's actions forced some large funds to sell their corporate
and mortgage securities. At the same time, investors flocked to U.S.
Treasury securities because of their reputation for safety. As a
result, the spread, or difference, between the yields of Treasuries
and other fixed-income securities widened dramatically, as Treasury
bond yields dropped to levels not seen in more than 30 years and the
prices of Treasuries soared. I took advantage of this opportunity by
upgrading the fund's holdings of corporate and mortgage issues. When
the fixed-income markets settled down in the fourth quarter, many of
those purchases did quite well, handily outperforming Treasuries.
Barring further negative surprises from the emerging markets, spreads
for corporate and mortgage issues could continue to narrow in 1999,
which would be good news for the fund's investors.
Q. WHAT'S YOUR OUTLOOK, JOHN?
J.A. Earnings growth is my prime concern at this stage of the economic
cycle. It seems clear that the United States economy, although
remarkably resilient, is slowing. If we get slower economic growth
without an actual recession, the environment for stocks could still be
favorable. With the interest-rate cuts it made in September, October
and November, the Federal Reserve Board demonstrated that it is
serious about trying to prevent a recession in the U.S. Given a
relatively benign economic environment and my confidence in the fund's
stock selection criteria, I am cautiously optimistic about the fund's
prospects for 1999.
The views expressed in this report reflect those of the portfolio
manager only through the end of the period of the report as stated on
the cover. The managers' views are subject to change at any time based
on market and other conditions.
(checkmark) FUND FACTS
GOAL: both 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, 1998, more than
$317 million
MANAGER: John Avery, since 1998, and Kevin Grant, since 1996; John
Avery joined Fidelity in 1995; Kevin Grant joined Fidelity in 1993
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
INVESTMENTS DECEMBER 31, 1998
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 64.1%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 2.0%
AEROSPACE & DEFENSE - 0.9%
Textron, Inc. 39,500 $ 2,999,531
DEFENSE ELECTRONICS - 0.6%
Raytheon Co. Class B 36,900 1,964,925
SHIP BUILDING & REPAIR - 0.5%
General Dynamics Corp. 25,300 1,483,213
TOTAL AEROSPACE & DEFENSE 6,447,669
BASIC INDUSTRIES - 2.3%
CHEMICALS & PLASTICS - 1.8%
Dow Chemical Co. 6,700 609,281
Hoechst AG 27,500 1,125,079
ICI (Imperial Chemical 69,400 606,161
Industries) PLC Class L
Lyondell Petrochemical Co. 31,400 565,200
Monsanto Co. 32,700 1,553,250
Potash Corp. of Saskatchewan 13,400 862,398
Praxair, Inc. 19,400 683,850
6,005,219
METALS & MINING - 0.5%
Alcoa, Inc. 21,000 1,565,813
TOTAL BASIC INDUSTRIES 7,571,032
CONSTRUCTION & REAL ESTATE -
0.5%
BUILDING MATERIALS - 0.3%
Masco Corp. 33,200 954,500
REAL ESTATE INVESTMENT TRUSTS
- - 0.2%
Boston Properties, Inc. 9,800 298,900
Equity Residential Properties 4,400 177,925
Trust (SBI)
Public Storage, Inc. 10,500 284,156
760,981
TOTAL CONSTRUCTION & REAL 1,715,481
ESTATE
DURABLES - 0.9%
AUTOS, TIRES, & ACCESSORIES -
0.4%
Federal-Mogul Corp. 22,100 1,314,950
HOME FURNISHINGS - 0.5%
Leggett & Platt, Inc. 67,500 1,485,000
TOTAL DURABLES 2,799,950
ENERGY - 5.3%
ENERGY SERVICES - 0.4%
Schlumberger Ltd. 28,900 1,333,013
OIL & GAS - 4.9%
British Petroleum PLC 325,117 4,856,421
Chevron Corp. 18,500 1,534,344
Elf Aquitaine SA sponsored ADR 19,600 1,109,850
Exxon Corp. 45,200 3,305,250
SHARES VALUE (NOTE 1)
Mobil Corp. 9,500 $ 827,688
Texaco, Inc. 30,500 1,612,688
Total SA Class B 11,900 1,184,050
USX-Marathon Group 52,800 1,590,600
16,020,891
TOTAL ENERGY 17,353,904
FINANCE - 13.1%
BANKS - 5.5%
Bank of New York Co., Inc. 131,000 5,272,750
Bank One Corp. 36,520 1,864,803
Chase Manhattan Corp. 16,900 1,150,256
U.S. Bancorp 137,200 4,870,600
Wells Fargo & Co. 125,300 5,004,169
18,162,578
CREDIT & OTHER FINANCE - 2.4%
American Express Co. 30,000 3,067,500
Associates First Capital 72,034 3,052,441
Corp. Class A
Citigroup, Inc. 35,450 1,754,775
7,874,716
FEDERAL SPONSORED CREDIT - 3.3%
Fannie Mae 50,300 3,722,200
Freddie Mac 108,000 6,959,250
10,681,450
INSURANCE - 1.9%
American International Group, 42,100 4,067,913
Inc.
Hartford Financial Services 38,900 2,134,638
Group, Inc.
6,202,551
TOTAL FINANCE 42,921,295
HEALTH - 8.1%
DRUGS & PHARMACEUTICALS - 6.8%
American Home Products Corp. 59,000 3,322,438
Bristol-Myers Squibb Co. 27,900 3,733,369
Elan Corp. PLC ADR (a) 23,900 1,662,544
Lilly (Eli) & Co. 24,500 2,177,438
Merck & Co., Inc. 28,100 4,150,019
Pfizer, Inc. 7,800 978,413
Schering-Plough Corp. 55,100 3,044,275
Warner-Lambert Co. 42,900 3,225,544
22,294,040
MEDICAL EQUIPMENT & SUPPLIES
- - 1.3%
Allegiance Corp. 49,500 2,307,938
Johnson & Johnson 23,000 1,929,125
4,237,063
TOTAL HEALTH 26,531,103
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY &
EQUIPMENT - 5.1%
ELECTRICAL EQUIPMENT - 2.6%
Emerson Electric Co. 18,800 $ 1,176,175
General Electric Co. 73,000 7,450,563
8,626,738
INDUSTRIAL MACHINERY &
EQUIPMENT - 2.0%
Ingersoll-Rand Co. 14,400 675,900
Tyco International Ltd. 75,512 5,696,437
6,372,337
POLLUTION CONTROL - 0.5%
Waste Management, Inc. 37,100 1,729,788
TOTAL INDUSTRIAL MACHINERY & 16,728,863
EQUIPMENT
MEDIA & LEISURE - 2.4%
BROADCASTING - 2.0%
CBS Corp. 38,600 1,264,150
Loral Orion Network Systems,
Inc.:
warrants 1/15/07 (CV ratio 290 2,320
.47) (a)
warrants 1/15/07 (CV ratio 50 525
.6) (a)
NTL, Inc. warrants 12/31/08 199 2,985
(a)
Tele-Communications, Inc. 28,200 1,559,813
(TCI Group) Series A (a)
Teletrac Holdings, Inc. 20 10
warrants 8/1/07 (a)
Time Warner, Inc. 58,634 3,638,973
UIH Australia/Pacific, Inc. 150 450
warrants 5/15/06 (a)
6,469,226
LODGING & GAMING - 0.0%
Aladdin Gaming Enterprises, 400 4
Inc. warrants 3/1/10 (a)(e)
PUBLISHING - 0.4%
McGraw-Hill Companies, Inc. 13,500 1,375,313
TOTAL MEDIA & LEISURE 7,844,543
NONDURABLES - 3.9%
BEVERAGES - 0.4%
PepsiCo, Inc. 31,100 1,273,156
FOODS - 1.1%
Heinz (H.J.) Co. 27,000 1,528,875
Nabisco Holdings Corp. Class A 15,100 626,650
Sara Lee Corp. 54,400 1,533,400
3,688,925
HOUSEHOLD PRODUCTS - 0.9%
Procter & Gamble Co. 14,100 1,287,506
Unilever NV (NY shares) 21,700 1,799,744
3,087,250
SHARES VALUE (NOTE 1)
TOBACCO - 1.5%
Philip Morris Companies, Inc. 90,200 $ 4,825,700
TOTAL NONDURABLES 12,875,031
RETAIL & WHOLESALE - 2.4%
APPAREL STORES - 0.2%
Mothers Work, Inc. (a)(h) 3 36
TJX Companies, Inc. 21,592 626,168
626,204
DRUG STORES - 0.8%
CVS Corp. 27,100 1,490,500
Rite Aid Corp. 22,240 1,102,270
2,592,770
GENERAL MERCHANDISE STORES -
1.4%
Dayton Hudson Corp. 24,900 1,350,825
Wal-Mart Stores, Inc. 40,500 3,298,219
4,649,044
TOTAL RETAIL & WHOLESALE 7,868,018
SERVICES - 0.5%
PRINTING - 0.5%
Donnelley (R.R.) & Sons Co. 38,900 1,704,306
TECHNOLOGY - 7.6%
COMPUTER SERVICES & SOFTWARE
- - 1.4%
Concentric Network Corp. 30 4,350
warrants 12/15/07 (a)(e)
Microsoft Corp. (a) 32,500 4,507,344
4,511,694
COMPUTERS & OFFICE EQUIPMENT
- - 3.7%
Compaq Computer Corp. 27,900 1,170,056
International Business 22,300 4,119,925
Machines Corp.
Pitney Bowes, Inc. 86,600 5,721,013
Xerox Corp. 9,300 1,097,400
12,108,394
ELECTRONICS - 2.5%
AMP, Inc. 24,951 1,299,011
Intel Corp. 23,000 2,726,938
Motorola, Inc. 37,800 2,308,163
Texas Instruments, Inc. 20,100 1,719,806
8,053,918
TOTAL TECHNOLOGY 24,674,006
TRANSPORTATION - 0.4%
RAILROADS - 0.3%
Union Pacific Corp. 19,300 869,706
TRUCKING & FREIGHT - 0.1%
CNF Transportation, Inc. 14,400 540,900
TOTAL TRANSPORTATION 1,410,606
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - 9.6%
CELLULAR - 0.0%
American Mobile Satellite 20 $ 78
Corp. warrants 4/1/08 (a)(e)
McCaw International Ltd. 290 1,450
warrants 4/15/07 (a)(e)
Microcell Telecommunications, 520 6,630
Inc. warrants 6/1/06 (a)(e)
8,158
ELECTRIC UTILITY - 1.2%
CMS Energy Corp. 27,800 1,346,563
Duke Energy Corp. 19,100 1,223,594
PG&E Corp. 40,900 1,288,350
3,858,507
TELEPHONE SERVICES - 8.4%
ALLTEL Corp. 45,200 2,703,525
AT&T Corp. 39,800 2,994,950
Bell Atlantic Corp. 28,200 1,602,113
BellSouth Corp. 32,900 1,640,888
Covad Communications Group, 60 3,000
Inc. warrants 3/15/08 (a)(e)
DTI Holdings, Inc. warrants 350 18
3/1/08 (a)(e)
Firstworld Communications, 30 300
Inc. warrants 4/15/08 (a)(e)
GTE Corp. 42,800 2,886,325
KMC Telecom Holdings, Inc. 70 175
warrants 4/15/08 (a)(e)
MCI WorldCom, Inc. (a) 121,226 8,697,966
Rhythms Netconnections, Inc. 400 3,000
warrants 5/15/08 (a)(e)
SBC Communications, Inc. 91,900 4,928,138
Sprint Corp. (FON Group) 24,400 2,052,650
27,513,048
TOTAL UTILITIES 31,379,713
TOTAL COMMON STOCKS 209,825,520
(Cost $159,566,283)
PREFERRED STOCKS - 0.6%
CONVERTIBLE PREFERRED STOCKS
- - 0.3%
BASIC INDUSTRIES - 0.2%
CHEMICALS & PLASTICS - 0.2%
Monsanto Co. $1.625 ACES (a) 11,200 548,800
DURABLES - 0.0%
AUTOS, TIRES, & ACCESSORIES -
0.0%
Republic Industries, Inc. 4,000 61,000
$1.55 ACES
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Loral Space & Communications 4,000 $ 212,000
Ltd. Series C, $3.00 (e)
MEDIA & LEISURE - 0.0%
LODGING & GAMING - 0.0%
Host Marriott Financial Trust 3,000 122,438
$3.375 QUIPS (e)
TOTAL CONVERTIBLE PREFERRED 944,238
STOCKS
NONCONVERTIBLE PREFERRED
STOCKS - 0.3%
FINANCE - 0.0%
CREDIT & OTHER FINANCE - 0.0%
Fresenius Medical Care 40 40,116
Capital Trust II 7.875%
INSURANCE - 0.0%
American Annuity Group 50 49,000
Capital Trust II 8.875%
TOTAL FINANCE 89,116
MEDIA & LEISURE - 0.1%
BROADCASTING - 0.1%
Adelphia Communications Corp. 300 34,950
$13.00
Citadel Broadcasting Co. 377 42,978
Series B, 13.25% pay-in-kind
CSC Holdings, Inc.:
11.125% pay-in-kind 1,814 202,261
Series H, 11.75% pay-in-kind 317 36,138
(a)
316,327
PUBLISHING - 0.0%
PRIMEDIA, Inc.:
8.625% 580 56,550
Series D, $10.00 600 61,950
118,500
TOTAL MEDIA & LEISURE 434,827
UTILITIES - 0.2%
CELLULAR - 0.1%
Nextel Communications, Inc.:
11.125% pay-in-kind (a) 106 95,400
Series D, 13% pay-in-kind 113 111,870
207,270
TELEPHONE SERVICES - 0.1%
NEXTLINK Communications, Inc. 4,043 210,236
14% pay-in-kind
PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONCONVERTIBLE PREFERRED
STOCKS - CONTINUED
UTILITIES - CONTINUED
TELEPHONE SERVICES - CONTINUED
Viatel, Inc. 10% pay-in-kind 16 $ 1,760
(a)(e)
WinStar Communications, Inc. 73 58,400
14.25%
270,396
TOTAL UTILITIES 477,666
TOTAL NONCONVERTIBLE 1,001,609
PREFERRED STOCKS
TOTAL PREFERRED STOCKS 1,945,847
(Cost $1,914,702)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS - 14.0%
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT
CONVERTIBLE BONDS - 0.3%
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.0%
POLLUTION CONTROL - 0.0%
WMX Technologies, Inc. 2% Ba1 $ 80,000 78,400
1/24/05
RETAIL & WHOLESALE - 0.1%
RETAIL & WHOLESALE,
MISCELLANEOUS - 0.1%
Corporate Express, Inc. 4.5% B3 250,000 210,000
7/1/00
TECHNOLOGY - 0.2%
COMPUTERS & OFFICE EQUIPMENT
- - 0.2%
Unisys Corp. 8.25% 3/15/06 B 130,000 645,288
TOTAL CONVERTIBLE BONDS 933,688
NONCONVERTIBLE BONDS - 13.7%
AEROSPACE & DEFENSE - 0.3%
AEROSPACE & DEFENSE - 0.1%
Lockheed Martin Corp. 7.2% A3 300,000 331,728
5/1/36
DEFENSE ELECTRONICS - 0.2%
Raytheon Co. 6.45% 8/15/02 Baa1 500,000 512,810
SHIP BUILDING & REPAIR - 0.0%
Newport News Shipbuilding, B1 10,000 10,575
Inc. 9.25% 12/1/06
TOTAL AEROSPACE & DEFENSE 855,113
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
BASIC INDUSTRIES - 0.8%
CHEMICALS & PLASTICS - 0.2%
Huntsman Corp.:
9.5% 7/1/07 (e) B2 $ 400,000 $ 399,000
9.5% 7/1/07 (e) - 50,000 49,875
Koppers Industries, Inc. B2 290,000 281,300
9.875% 12/1/07
730,175
IRON & STEEL - 0.0%
GS Technologies Operating, B2 20,000 13,400
Inc. 12.25% 10/1/05
WHX Corp. 10.5% 4/15/05 B3 60,000 54,600
68,000
METALS & MINING - 0.2%
Doe Run Resources Corp.:
11.25% 3/15/05 B3 130,000 105,300
11.6963% 3/15/03 (g) B3 20,000 15,800
Interlake Corp. 12.125% B3 50,000 51,000
3/1/02
Kaiser Aluminum & Chemical
Corp.:
Series D 10.875% 10/15/06 B1 30,000 30,300
9.875% 2/15/02 B1 300,000 300,000
12.75% 2/1/03 B2 60,000 58,650
561,050
PACKAGING & CONTAINERS - 0.2%
Owens-Illinois, Inc.:
7.15% 5/15/05 Ba1 200,000 200,986
7.35% 5/15/08 Ba1 200,000 205,135
7.8% 5/15/18 Ba1 250,000 252,206
658,327
PAPER & FOREST PRODUCTS - 0.2%
Ainsworth Lumber Co. Ltd. B3 30,000 29,625
12.5% 7/15/07 pay-in-kind
APP Finance II Mauritius Ltd. Caa 85,000 44,200
12% 3/15/04
Container Corp. of America B2 10,000 10,125
gtd. 9.75% 4/1/03
Doman Industries Ltd. yankee B1 20,000 15,000
8.75% 3/15/04
Indah Kiat Finance Mauritius Caa1 30,000 16,200
Ltd. 10% 7/1/07
Mail-Well Corp. 10.5% 2/15/04 B+ 10,000 10,250
Malette, Inc. yankee 12.25% Ba3 100,000 107,750
7/15/04
Millar Western Forest B3 110,000 81,400
Products Ltd. 9.875% 5/15/08
Pindo Deli Finance Mauritius Caa1 20,000 10,000
Ltd. 10.25% 10/1/02
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
BASIC INDUSTRIES - CONTINUED
PAPER & FOREST PRODUCTS -
CONTINUED
Stone Container Corp. 10.75% B1 $ 50,000 $ 51,500
10/1/02
Tembec Finance Corp. yankee Ba3 30,000 31,350
9.875% 9/30/05
Tjiwi Kimia Finance Mauritius Caa1 20,000 10,600
Ltd. 10% 8/1/04
418,000
TOTAL BASIC INDUSTRIES 2,435,552
CONSTRUCTION & REAL ESTATE -
0.3%
BUILDING MATERIALS - 0.0%
American Standard Cos., Inc.:
7.375% 2/1/08 Ba3 100,000 100,250
7.625% 2/15/10 Ba3 10,000 10,025
110,275
CONSTRUCTION - 0.0%
Great Lakes Dredge & Dock B3 70,000 71,050
Corp. 11.25% 8/15/08 (e)
REAL ESTATE - 0.1%
LNR Property Corp. 9.375% B1 360,000 345,600
3/15/08
REAL ESTATE INVESTMENT TRUSTS
- - 0.2%
CenterPoint Properties Trust. Baa2 100,000 94,986
6.75% 4/1/05
EOP Operating LP:
6.625% 2/15/05 Baa1 200,000 196,046
6.75% 2/15/08 Baa1 300,000 294,990
586,022
TOTAL CONSTRUCTION & REAL 1,112,947
ESTATE
DURABLES - 0.5%
AUTOS, TIRES, & ACCESSORIES -
0.1%
Blue Bird Body Co. 10.75% B2 15,000 15,450
11/15/06
Federal-Mogul Corp. 7.875% Ba2 20,000 20,462
7/1/10
Morris Material Handling, B2 340,000 251,600
Inc. 9.5% 4/1/08
287,512
CONSUMER DURABLES - 0.0%
Corning Consumer Products Co. B3 70,000 49,000
9.625% 5/1/08
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
HOME FURNISHINGS - 0.0%
Omega Cabinets Ltd. 10.5% B3 $ 110,000 $ 108,075
6/15/07
TEXTILES & APPAREL - 0.4%
Cluett American Corp. 10.125% B3 270,000 255,150
5/15/08
Levi Strauss & Co. 6.8% Baa3 570,000 539,790
11/1/03 (e)
Polymer Group, Inc. 9% 7/1/07 B2 350,000 346,500
Synthetic Industries, Inc. B2 40,000 40,800
9.25% 2/15/07
WestPoint Stevens, Inc. Ba3 90,000 91,125
7.875% 6/15/08
Worldtex, Inc. 9.625% 12/15/07 B1 60,000 52,200
1,325,565
TOTAL DURABLES 1,770,152
ENERGY - 0.5%
COAL - 0.0%
P&L Coal Holdings Corp. B2 135,000 137,363
9.625% 5/15/08
ENERGY SERVICES - 0.1%
DI Industries, Inc. 8.875% B1 10,000 7,250
7/1/07
Grey Wolf, Inc. 8.875% 7/1/07 B1 60,000 43,500
Ocean Rig Norway AS 10.25% B3 50,000 39,000
6/1/08
Pool Energy Services Co. B2 60,000 56,700
8.625% 4/1/08
Pride Petroleum Services, Ba3 50,000 46,500
Inc. 9.375% 5/1/07
R&B Falcon Corp. 9.5% Ba1 40,000 40,000
12/15/08 (e)
232,950
OIL & GAS - 0.4%
Belco Oil & Gas Corp. 8.875% B1 250,000 226,250
9/15/07
Canadian Forest Oil Ltd. B2 40,000 35,600
8.75% 9/15/07
Chesapeake Energy Corp. B3 10,000 7,500
9.625% 5/1/05
Flores & Rucks, Inc. 9.75% B1 60,000 60,900
10/1/06
Great Lakes Carbon Corp. B3 140,000 141,050
10.25% 5/15/08 pay-in-kind
Hurricane Hydrocarbons Ltd. Caa2 10,000 5,000
11.75% 11/1/04 (e)
Ocean Energy, Inc. 8.375% B1 50,000 46,750
7/1/08
Petroleum Geo-Services ASA Baa3 320,000 299,005
7.125% 3/30/28
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
ENERGY - CONTINUED
OIL & GAS - CONTINUED
Plains Resources, Inc.:
Series D, 10.25% 3/15/06 B2 $ 20,000 $ 20,200
10.25% 3/15/06 B2 300,000 303,000
Seven Seas Petroleum, Inc. Caa1 20,000 10,000
12.5% 5/15/05
Southwest Royalties, Inc. Caa2 10,000 4,500
10.5% 10/15/04
Vintage Petroleum, Inc. 9% B1 250,000 245,000
12/15/05
1,404,755
TOTAL ENERGY 1,775,068
FINANCE - 3.4%
BANKS - 1.3%
ABN-Amro Bank NV, Chicago A1 500,000 513,700
6.625% 10/31/01
Banco Latinoamericano Baa2 100,000 99,156
Exportaciones SA euro 6.9%
12/4/99 (e)
BankAmerica Corp. 10% 2/1/03 Aa3 50,000 57,937
BankBoston Companies 6.625% A3 200,000 204,220
2/1/04
Barclays Bank PLC yankee:
5.875% 7/15/00 A1 350,000 349,951
5.95% 7/15/01 A1 450,000 453,060
Capital One Bank 6.375% Baa3 250,000 249,105
2/15/03
Capital One Financial Corp. Ba1 210,000 208,198
7.125% 8/1/08
First Chicago NBD A1 1,000,000 1,085,850
Institutional Capital B
7.75% 12/1/26 (e)
MBNA Corp.:
6.34% 6/2/03 Baa2 100,000 98,970
6.875% 11/15/02 Baa2 300,000 301,746
NB Capital Trust IV 8.25% Aa2 330,000 374,095
4/15/27
Summit Bancorp 8.625% 12/10/02 BBB+ 100,000 110,775
4,106,763
CREDIT & OTHER FINANCE - 1.9%
Ahmanson Capital Trust I A3 250,000 279,998
8.36% 12/1/26 (e)
Anthony Crane Rentals B3 20,000 19,100
LP/Anthony Credit Capital
Corp. 10.375% 8/1/08 (e)
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
Arcadia Financial Ltd. 11.5% B2 $ 40,000 $ 30,000
3/15/07
Associates Corp. of North Aa3 500,000 507,395
America 6% 7/15/05
AT&T Capital Corp. 7.5% Baa3 340,000 344,162
11/15/00
BankBoston Capital Trust II A2 500,000 509,070
7.75% 12/15/26
Chase Capital I 7.67% 12/1/26 Aa3 765,000 823,247
ContiFinancial Corp. 8.125% B1 10,000 6,800
4/1/08
ERP Operating LP 6.55% A3 50,000 50,051
11/15/01
First Security Capital I A3 110,000 121,349
8.41% 12/15/26
First Union Institutional BBB+ 50,000 55,069
Capital I 8.04% 12/1/26
Fleet Capital Trust II 7.92% A2 100,000 111,050
12/11/26
General Electric Capital Aaa 480,000 481,834
Corp. 6.94% 4/13/09 (d)
GS Escrow Corp. 7.125% 8/1/05 Ba1 400,000 392,656
Imperial Credit Capital Trust B2 20,000 15,200
I 10.25% 6/14/02
Imperial Credit Industries B2 330,000 254,100
9.875% 1/15/07
KeyCorp Institutional Capital A1 1,000,000 1,095,080
A 7.826% 12/1/26
MCN Investment Corp. 6.03% Baa3 180,000 178,675
2/1/01
Nordstrom Credit, Inc. 7.25% A2 200,000 210,608
4/30/02
Ocwen Capital Trust 10.875% B2 20,000 16,000
8/1/27
Olympic Financial Ltd. 11.5% B2 30,000 22,500
3/15/07
PNC Institutional Capital A2 600,000 670,812
Trust 8.315% 5/15/27 (e)
Sprint Capital Corp. 5.7% Baa1 160,000 160,018
11/15/03
Time Warner Telecom LLC/Time B2 20,000 20,550
Warner Telecom, Inc. 9.75%
7/15/08
6,375,324
SAVINGS & LOANS - 0.2%
Long Island Savings Bank FSB Baa3 500,000 498,920
6.2% 4/2/01
TOTAL FINANCE 10,981,007
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
HEALTH - 0.1%
MEDICAL EQUIPMENT & SUPPLIES
- - 0.0%
Wright Medical Technology, Caa3 $ 40,000 $ 21,000
Inc. 11.75% 7/1/00 (g)
MEDICAL FACILITIES MANAGEMENT
- - 0.1%
Fountain View, Inc. 11.25% Caa1 20,000 17,400
4/15/08
Harborside Healthcare Corp. B3 50,000 24,250
0% 8/1/08 (c)
Oxford Health Plans, Inc. 11% Caa1 30,000 28,200
5/15/05 (e)
Tenet Healthcare Corp.:
8% 1/15/05 Ba1 20,000 20,575
8.125% 12/1/08 (e) Ba3 260,000 266,500
356,925
TOTAL HEALTH 377,925
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.7%
ELECTRICAL EQUIPMENT - 0.1%
Advanced Lighting B2 30,000 27,150
Technologies, Inc. 8%
3/15/08 (e)
Motors & Gears, Inc. 10.75% B3 100,000 102,500
11/15/06
Telex Communications, Inc. B2 45,000 39,600
10.5% 5/1/07
169,250
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.4%
Continental Global Group, B2 20,000 17,100
Inc. 11% 4/1/07
Tenneco, Inc. 8.075% 10/1/02 Baa1 300,000 312,807
Thermadyne Holdings Corp. 0% Caa1 90,000 39,600
6/1/08 (c)
Thermadyne Manufacturing LLC B3 80,000 72,800
9.875% 6/1/08
Tyco International Group SA Baa1 1,000,000 1,009,630
yankee 6.125% 6/15/01
1,451,937
POLLUTION CONTROL - 0.2%
Allied Waste North America,
Inc.:
7.625% 1/1/06 (e) Ba2 90,000 91,125
7.875% 1/1/09 (e) Ba2 100,000 101,250
Envirosource, Inc. 9.75% B3 40,000 36,200
6/15/03
WMX Technologies, Inc. 7.1% Baa3 400,000 425,840
8/1/26
654,415
TOTAL INDUSTRIAL MACHINERY & 2,275,602
EQUIPMENT
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
MEDIA & LEISURE - 2.5%
BROADCASTING - 1.6%
ACME Television LLC/ACME B3 $ 50,000 $ 39,875
Financial Corp. 0% 9/30/04
(c)
Adelphia Communications Corp.:
9.5% 2/15/04 pay-in-kind B2 65,238 66,699
9.875% 3/1/05 B2 220,000 239,800
9.875% 3/1/07 B2 30,000 33,150
American Mobile Satellite - 20,000 12,400
Corp. 12.25% 4/1/08
Ascent Entertainment Group, B3 340,000 204,000
Inc. 0% 12/15/04 (c)
CapStar Broadcasting B3 30,000 24,600
Partners, Inc. 0% 2/1/09 (c)
CBS Radio, Inc. 11.375% Ba2 85,500 99,180
1/15/09 pay-in-kind
Chancellor Media Corp.:
8% 11/1/08 (e) Ba2 80,000 81,600
9% 10/1/08 (e) B1 30,000 31,575
Continental Cablevision, Inc.:
8.3% 5/15/06 Baa3 70,000 77,673
9% 9/1/08 Baa3 540,000 638,701
International Cabletel, Inc. B3 210,000 170,100
0% 2/1/06 (c)
Iridium Operating LLC/Iridium
Capital Corp.:
10.875% 7/15/05 B3 170,000 144,500
11.25% 7/15/05 B3 60,000 51,600
Metromedia Fiber Network, B2 340,000 349,350
Inc. 10% 11/15/08 (e)
NTL, Inc.:
0% 4/1/08 (c) B3 470,000 290,225
10% 2/15/07 B3 90,000 92,700
11.5% 10/1/08 (e) B3 40,000 43,000
Olympus Communications B1 60,000 66,000
LP/Olympus Capital Corp.
10.625% 11/15/06
Orion Network Systems, Inc.:
0% 1/15/07 (c) B2 260,000 161,200
11.25% 1/15/07 B2 30,000 29,250
Renaissance Media Group B3 30,000 20,250
LLC/Renaissance Media
Capital Corp. 0% 4/15/08 (c)
Rogers Cablesystems Ltd. Ba3 10,000 11,050
yankee 10.125% 9/1/12
Satelites Mexicanos SA de CV:
9.06% 6/30/04 (e)(g) - 100,000 93,000
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
MEDIA & LEISURE - CONTINUED
BROADCASTING - CONTINUED
Satelites Mexicanos SA de CV:
- - continued
10.125% 11/1/04 B3 $ 100,000 $ 80,000
TCI Communications, Inc. Baa3 220,000 273,304
8.75% 8/1/15
Telewest PLC 0% 10/1/07 (c) B1 190,000 157,700
Time Warner, Inc.:
6.875% 6/15/18 Baa3 180,000 188,561
8.18% 8/15/07 Baa3 1,000,000 1,158,550
UIH Australia/Pacific, Inc.:
Series B 0% 5/15/06 (c) B2 140,000 67,900
Series D 0% 5/15/06 (c) B2 30,000 14,550
United International B3 320,000 172,800
Holdings, Inc. 0% 2/15/08 (c)
5,184,843
ENTERTAINMENT - 0.2%
AMC Entertainment, Inc. 9.5% B2 310,000 316,200
3/15/09
Harrahs Operating Co., Inc. Ba2 170,000 170,000
7.875% 12/15/05
Premier Parks, Inc. 0% 4/1/08 B3 320,000 216,800
(c)
Regal Cinemas, Inc. 9.5% B3 30,000 30,750
6/1/08 (e)
733,750
LODGING & GAMING - 0.3%
Aladdin Gaming Caa2 40,000 10,400
Holdings/Aladdin Capital
Corp. 0% 3/1/10 (c)
Circus Circus Enterprises,
Inc.:
7% 11/15/36 Baa3 270,000 244,350
7.625% 7/15/13 Ba2 10,000 8,800
9.25% 12/1/05 Ba2 40,000 40,600
HMH Properties, Inc.:
7.875% 8/1/05 Ba2 170,000 166,175
7.875% 8/1/08 Ba2 20,000 19,400
8.45% 12/1/08 Ba2 50,000 50,000
KSL Recreation Group, Inc. B3 20,000 19,900
10.25% 5/1/07
Signature Resorts, Inc.:
9.25% 5/15/06 B2 320,000 294,400
9.75% 10/1/07 B3 40,000 33,600
Sun International Hotels Ba3 30,000 30,900
Ltd./Sun International North
America, Inc. yankee 9%
3/15/07
918,525
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
PUBLISHING - 0.3%
Big Flower Press Holdings,
Inc.:
8.625% 12/1/08 (e) B2 $ 40,000 $ 40,000
8.875% 7/1/07 B2 130,000 131,300
News America, Inc.:
6.625% 1/9/08 Baa3 145,000 149,017
7.25% 5/18/18 Baa3 600,000 613,008
933,325
RESTAURANTS - 0.1%
AFC Enterprises, Inc. 10.25% B3 290,000 302,325
5/15/07
Dominos, Inc. 10.375% 1/15/09 B3 40,000 40,200
(e)
Host Marriott Travel Plazas, Ba3 20,000 20,450
Inc. 9.5% 5/15/05
SC International Services, B2 160,000 160,600
Inc. Series B, 9.25% 9/1/07
523,575
TOTAL MEDIA & LEISURE 8,294,018
NONDURABLES - 0.4%
BEVERAGES - 0.2%
Seagram Co. Ltd.:
yankee 6.875% 9/1/23 Baa3 40,000 36,800
8.35% 1/15/22 Baa3 20,000 21,450
Seagram J E & Sons, Inc.:
6.625% 12/15/05 Baa3 300,000 298,200
7% 4/15/08 Baa3 40,000 40,150
7.6% 12/15/28 Baa3 300,000 301,050
697,650
FOODS - 0.0%
Del Monte Corp. 12.25% 4/15/07 Caa1 20,000 22,300
HOUSEHOLD PRODUCTS - 0.1%
AKI Holding Corp. 0% 7/1/09 Caa1 20,000 7,800
(c)(e)
Revlon Consumer Products
Corp.:
8.125% 2/1/06 B2 80,000 76,000
9% 11/1/06 (e) B2 240,000 237,600
321,400
TOBACCO - 0.1%
Philip Morris Companies, Inc. A2 250,000 266,248
6.95% 6/1/06
TOTAL NONDURABLES 1,307,598
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
PRECIOUS METALS - 0.1%
Centaur Mining & Exploration B1 $ 40,000 $ 36,400
Ltd. 11% 12/1/07
Great Central Mines Ltd. Ba2 320,000 319,200
8.875% 4/1/08
TOTAL PRECIOUS METALS 355,600
RETAIL & WHOLESALE - 1.1%
APPAREL STORES - 0.0%
Mothers Work, Inc. 12.625% B3 10,000 10,250
8/1/05
Specialty Retailers, Inc.:
8.5% 7/15/05 Ba3 60,000 51,300
9% 7/15/07 B2 85,000 68,000
129,550
DRUG STORES - 0.3%
Rite Aid Corp. 6% 12/15/05 (e) Baa1 1,000,000 1,000,000
GENERAL MERCHANDISE STORES -
0.3%
Dayton Hudson Corp. 6.4% A3 400,000 411,820
2/15/03
Federated Department Stores, Baa2 500,000 515,185
Inc. 6.79% 7/15/27
927,005
GROCERY STORES - 0.2%
American Stores Co. 7.5% Baa2 250,000 278,518
5/1/37
Kroger Co. 6% 7/1/00 Baa3 270,000 271,771
550,289
RETAIL & WHOLESALE,
MISCELLANEOUS - 0.3%
Amazon.com, Inc. 0% 5/1/08 (c) Caa2 225,000 148,500
Guitar Center, Inc. 11% 7/1/06 B1 29,000 30,450
HMV Media Group PLC 10.25% B3 50,000 48,250
5/15/08
J. Crew Group, Inc. 0% Caa3 150,000 67,500
10/15/08 (c)
J. Crew Operating Corp. Caa1 280,000 242,200
10.375% 10/15/07
Metals USA, Inc. 8.625% B2 340,000 318,750
2/15/08
U.S. Office Products Co. B3 10,000 6,300
9.75% 6/15/08
861,950
TOTAL RETAIL & WHOLESALE 3,468,794
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
SERVICES - 0.2%
LEASING & RENTAL - 0.1%
AP Holdings, Inc. 0% 3/15/08 Caa2 $ 30,000 $ 16,200
(c)
Apcoa, Inc. 9.25% 3/15/08 Caa1 40,000 36,800
Hollywood Entertainment Corp. B3 170,000 171,700
10.625% 8/15/04
Renters Choice, Inc. 11% B2 50,000 50,250
8/15/08 (e)
274,950
PRINTING - 0.0%
Sullivan Graphics, Inc. Caa1 40,000 40,400
12.75% 8/1/05
SERVICES - 0.1%
Iron Mountain, Inc. 8.75% B3 110,000 113,300
9/30/09
Medaphis Corp. 9.5% 2/15/05 Caa1 72,000 55,440
SITEL Corp. 9.25% 3/15/06 B2 250,000 215,000
383,740
TOTAL SERVICES 699,090
TECHNOLOGY - 0.3%
COMMUNICATIONS EQUIPMENT - 0.0%
Intermedia Communications,
Inc.:
8.5% 1/15/08 B2 10,000 9,450
8.6% 6/1/08 B2 30,000 28,500
Jordan Telecommunication
Products, Inc.:
0% 8/1/07 (c) B3 60,000 46,200
9.875% 8/1/07 B3 30,000 30,000
114,150
COMPUTER SERVICES & SOFTWARE
- - 0.1%
Concentric Network Corp. - 30,000 30,600
12.75% 12/15/07
DecisionOne Corp. 9.75% 8/1/07 B3 250,000 115,000
DecisionOne Holdings Corp. 0% Caa1 80,000 16,000
8/1/08 unit (c)
ICG Services, Inc. 0% 2/15/08 - 220,000 116,600
(c)
278,200
COMPUTERS & OFFICE EQUIPMENT
- - 0.1%
Comdisco, Inc. 6.1% 6/5/01 Baa1 250,000 253,390
ELECTRONIC INSTRUMENTS - 0.0%
Telecommunications Techniques B3 80,000 78,400
Co. LLC 9.75% 5/15/08
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
TECHNOLOGY - CONTINUED
ELECTRONICS - 0.1%
Communications Instruments, B3 $ 10,000 $ 9,625
Inc. 10% 9/15/04
Hadco Corp. 9.5% 6/15/08 B2 90,000 88,650
Insilco Corp. 12% 8/15/07 B3 60,000 61,800
unit (e)
160,075
TOTAL TECHNOLOGY 884,215
TRANSPORTATION - 0.7%
AIR TRANSPORTATION - 0.2%
Atlas Air, Inc.:
9.25% 4/15/08 B3 30,000 29,700
9.375% 11/15/06 (e) B3 220,000 220,000
Atlas Air, Inc. Pass Through Ba3 30,000 32,100
Trust 12.25% 12/1/02
Kitty Hawk, Inc. 9.95% B1 320,000 315,200
11/15/04
597,000
RAILROADS - 0.5%
Burlington Northern Santa Fe
Corp.:
6.875% 12/1/27 Baa2 1,000,000 1,042,890
7.29% 6/1/36 Baa2 150,000 167,168
Norfolk Southern Corp. 7.05% Baa1 340,000 367,822
5/1/37
1,577,880
SHIPPING - 0.0%
Holt Group, Inc. 9.75% Caa1 140,000 96,600
1/15/06 (e)
Hvide Marine, Inc. 8.375% B1 100,000 80,000
2/15/08
176,600
TOTAL TRANSPORTATION 2,351,480
UTILITIES - 1.8%
CELLULAR - 0.6%
Cable & Wireless Baa1 300,000 300,132
Communications PLC 6.375%
3/6/03
Cellnet Data Systems, Inc. 0% - 140,000 30,800
10/1/07 (c)
Dial Call Communications, B2 30,000 29,400
Inc. 10.25% 12/15/05
Iridium LLC/Iridium Capital B3 10,000 9,150
Corp. 13% 7/15/05
McCaw International Ltd. 0% Caa1 280,000 151,200
4/15/07 (c)
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
Millicom International Caa1 $ 670,000 $ 470,675
Cellular SA 0% 6/1/06 (c)
Nextel Communications, Inc.:
0% 8/15/04 (c) B2 120,000 116,700
0% 2/15/08 (c) B2 320,000 192,000
Nextel International, Inc. Caa1 180,000 81,000
0% 4/15/08 (c)
PageMart Nationwide, Inc. 0% B3 50,000 44,250
2/1/05 (c)
PageMart Wireless, Inc. 0% Caa2 70,000 32,200
2/1/08 (c)
Rogers Communications, Inc. B2 240,000 247,200
8.875% 7/15/07
Telesystem International
Wireless, Inc.:
0% 6/30/07 (c) Caa1 120,000 51,000
0% 11/1/07 (c) Caa1 130,000 47,450
Teligent, Inc. 0% 3/1/08 (c) Caa1 100,000 49,500
1,852,657
ELECTRIC UTILITY - 0.4%
AES Corp. 10.25% 7/15/06 Ba1 140,000 151,200
Avon Energy Partners Holdings Baa2 300,000 304,320
6.46% 3/4/08 (e)
Israel Electric Corp. Ltd. A3 795,000 727,171
7.75% 12/15/27 (e)
Niagara Mohawk Power Corp. Ba2 40,000 42,800
7.75% 10/1/08
Texas Utilities Co. 6.375% Baa3 200,000 202,384
1/1/08
1,427,875
GAS - 0.1%
Columbia Gas System, Inc. A3 379,000 391,280
6.61% 11/28/02
TELEPHONE SERVICES - 0.7%
Allegiance Telecom, Inc. - 20,000 19,400
12.875% 5/15/08
Covad Communications Group, - 60,000 33,000
Inc. 0% 3/15/08 (c)
Dobson Wireline Co. 12.25% - 70,000 62,650
6/15/08
DTI Holdings, Inc. 0% 3/1/08 - 70,000 17,150
(c)
Firstworld Communications, - 30,000 9,000
Inc. 0% 4/15/08 (c)
GCI, Inc. 9.75% 8/1/07 B2 10,000 9,850
Global TeleSystems Group, Caa2 10,000 9,300
Inc. 9.875% 2/15/05
GST Network Funding, Inc. 0% - 130,000 59,150
5/1/08 (c)(e)
GST Telecommunications, Inc. - 90,000 81,900
12.75% 11/15/07
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
UTILITIES - CONTINUED
TELEPHONE SERVICES - CONTINUED
Hermes Europe Railtel BV B3 $ 60,000 $ 60,750
10.375% 1/15/09 (e)
Hyperion Telecommunications, B3 70,000 50,050
Inc. 0% 4/15/03 (c)
ICG Holdings, Inc. 0% 9/15/05 - 80,000 66,000
(c)
IXC Communications, Inc. 9% B3 90,000 89,100
4/15/08
KMC Telecom Holdings, Inc. 0% - 50,000 23,500
2/15/08 (c)
Level 3 Communications, Inc. B3 150,000 148,688
9.125% 5/1/08
MCI WorldCom, Inc.:
6.4% 8/15/05 Baa2 310,000 322,189
8.875% 1/15/06 Baa2 184,000 201,106
McLeodUSA, Inc.:
0% 3/1/07 (c) B2 350,000 267,750
9.25% 7/15/07 B2 10,000 10,300
NEXTLINK Communications LLC B3 30,000 31,875
12.5% 4/15/06
NEXTLINK Communications, Inc.:
9% 3/15/08 B3 20,000 18,800
9.625% 10/1/07 B3 20,000 19,200
10.75% 11/15/08 (e) B3 340,000 346,800
Rhythms Netconnections, Inc. - 120,000 58,800
0% 5/15/08 (c)
WinStar Communications, Inc.:
0% 10/15/05 (c) Caa1 40,000 28,400
14.5% 10/15/05 Caa1 110,000 121,000
0% 3/15/08 (c) CCC 85,000 60,350
2,226,058
TOTAL UTILITIES 5,897,870
TOTAL NONCONVERTIBLE BONDS 44,842,031
TOTAL CORPORATE BONDS 45,775,719
(Cost $46,064,142)
U.S. GOVERNMENT AND
GOVERNMENT AGENCY
OBLIGATIONS - 2.8%
U.S. GOVERNMENT AGENCY
OBLIGATIONS - 0.4%
Fannie Mae 5.75% 6/15/05 Aaa 750,000 774,375
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
Federal Home Loan Bank:
7.56% 9/1/04 Aaa $ 310,000 $ 344,633
7.59% 3/10/05 Aaa 190,000 212,889
Government Trust Certificates Aaa 83,940 88,724
(assets of Trust guaranteed
by U.S. Government through
Defense Security Assistance
Agency) Class 2-E 9.4%
5/15/02
TOTAL U.S. GOVERNMENT AGENCY 1,420,621
OBLIGATIONS
U.S. TREASURY OBLIGATIONS -
2.4%
U.S. Treasury Bond:
7.625% 2/15/25 Aaa 350,000 460,142
8.75% 5/15/17 Aaa 25,000 34,777
U.S. Treasury Notes:
5.875% 11/30/01 Aaa 2,777,000 2,870,724
7% 7/15/06 Aaa 3,775,000 4,298,177
TOTAL U.S. TREASURY 7,663,820
OBLIGATIONS
TOTAL U.S. GOVERNMENT AND 9,084,441
GOVERNMENT AGENCY OBLIGATIONS
(Cost $8,861,242)
U.S. GOVERNMENT AGENCY -
MORTGAGE SECURITIES - 8.0%
FANNIE MAE - 7.1%
5.5% 2/1/11 Aaa 195,295 192,791
6% 4/1/11 to 12/1/28 Aaa 567,481 566,034
6% 1/1/14 to 1/1/28 (f) Aaa 2,100,000 2,089,313
6.5% 11/1/25 to 12/1/28 Aaa 15,755,141 15,858,514
7% 2/1/28 to 9/1/28 Aaa 3,190,337 3,254,143
7% 1/1/29 (f) Aaa 1,240,000 1,265,188
23,225,983
FREDDIE MAC - 0.2%
7% 1/22/01 to 7/1/01 Aaa 199,788 200,823
7.5% 12/1/27 to 4/1/28 Aaa 529,172 543,391
744,214
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION - 0.7%
7% 11/15/27 to 10/15/28 Aaa 753,122 770,534
7.5% 6/15/27 to 3/15/28 Aaa 1,549,094 1,597,339
2,367,873
TOTAL U.S. GOVERNMENT AGENCY 26,338,070
- - MORTGAGE SECURITIES
(Cost $26,162,730)
ASSET-BACKED SECURITIES - 1.6%
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
Airplanes Pass Through Trust Ba2 $ 100,000 $ 105,000
10.875% 3/15/19
Capital Equipment Receivables Aaa 390,954 391,220
Trust 6.11% 7/15/99
Chevy Chase Auto Receivables Aaa 110,868 111,474
Trust 5.91% 12/15/04
Contimortgage Home Equity Aaa 1,000,000 1,000,620
Loan Trust 6.26% 7/15/12
Ford Credit Auto Owner Trust:
6.2% 12/15/02 Baa3 510,000 513,019
6.4% 5/15/02 A1 610,000 618,369
6.4% 12/15/02 Baa3 80,000 80,320
Green Tree Financial Corp. Aaa 17,567 17,583
6.1% 4/15/27
Key Auto Finance Trust:
6.3% 10/15/03 A2 605,422 606,273
6.65% 10/15/03 Baa3 180,840 182,790
MBNA Master Credit Card Trust Aaa 1,000,000 1,052,980
II 6.55% 1/15/07
Sears Credit Account Master Aaa 577,500 579,666
Trust II 6.5% 10/15/03
TOTAL ASSET-BACKED SECURITIES 5,259,314
(Cost $5,184,571)
COMMERCIAL MORTGAGE
SECURITIES - 0.6%
CS First Boston Mortgage
Securities Corp.:
Series 1997 C2 Class D, 7.27% Baa2 220,000 208,725
1/17/35
Series 1998 FLI Class E, Baa2 420,000 408,188
6.5063% 1/10/13 (e)(g)
GS Mortgage Securities Corp. Baa3 500,000 452,605
II Series 1998 GLII Class E,
7.1905% 4/13/31 (e)(g)
Morgan Stanley Capital I,
Inc. Series 1998 CF1:
Class D, 7.35% 1/15/12 Baa2 195,000 188,602
Class E, 7.35% 12/15/12 Baa3 68,000 60,010
Thirteen Affiliates of Aaa 500,000 519,555
General Growth Properties,
Inc. sequential pay Series A
2, 6.602% 12/15/10 (e)
Wells Fargo Capital Markets Aaa 143,915 145,480
Apartment Financing Trust
Series APT Class 1, 6.56%
12/29/05 (e)
TOTAL COMMERCIAL MORTGAGE 1,983,165
SECURITIES
(Cost $2,019,130)
FOREIGN GOVERNMENT AND
GOVERNMENT AGENCY
OBLIGATIONS (I) - 0.1%
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
Quebec Province yankee:
6.86% 4/15/26 (d) A2 $ 250,000 $ 274,555
7.125% 2/9/24 A2 30,000 32,758
7.5% 7/15/23 A2 30,000 34,149
TOTAL FOREIGN GOVERNMENT AND 341,462
GOVERNMENT AGENCY OBLIGATIONS
(Cost $306,897)
SUPRANATIONAL OBLIGATIONS -
0.2%
Inter American Development Aaa 500,000 523,760
Bank yankee 6.29% 7/16/27
(Cost $496,855)
CERTIFICATES OF DEPOSIT - 0.1%
Canadian Imperial Bank of 500,000 505,600
Commerce, New York yankee
6.2% 8/1/00 (Cost $500,750)
CASH EQUIVALENTS - 7.9%
SHARES
Taxable Central Cash Fund (b) 25,959,198 25,959,198
(Cost $25,959,198)
TOTAL INVESTMENT IN $ 327,542,096
SECURITIES - 100%
(Cost $277,036,500)
</TABLE>
SECURITY TYPE ABBREVIATIONS
ACES - Automatic Common
Exchange Securities
QUIPS - Quarterly Income Preferred Securities
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield on the Taxable Central Cash
Fund was 4.80%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(c) 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.
(d) 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.
(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 $9,536,603 or 3.0% of net assets.
(f) Security purchased on a delayed delivery or when-issued basis (see
Note 2 of Notes to Financial Statements).
(g) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(h) Restricted securities - Investment in securities not registered
under the Securities Act of 1933 (see Note 2 of Notes to Financial
Statements).
SECURITY ACQUISTION DATE ACQUISITION COST
Mothers Work, Inc. 6/18/98 18
(i) For foreign government obligations not individually rated by S&P
or Moody's, the ratings listed have been assigned 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) Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investors Service, Inc.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $293,141,327 and $231,679,584, respectively, of which
long-term U.S. government and government agency obligations aggregated
$80,114,862 and $80,377,699, respectively (see Note 3 of Notes to
Financial Statements).
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $30,577 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 investments in securities, is as follows (ratings are
unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 15.7% AAA, AA, A 14.9%
Baa 5.2% BBB 5.5%
Ba 1.1% BB 1.2%
B 4.2% B 4.4%
Caa 0.6% CCC 0.4%
Ca, C 0.0% CC, C 0.0%
D 0.0%
For some foreign government obligations, FMR has assigned the ratings
for 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, 1998, the aggregate cost of investment securities for
income tax purposes was $277,265,807. Net unrealized appreciation
aggregated $50,276,289, of which $54,273,023 related to appreciated
investment securities and $3,996,734 related to depreciated investment
securities.
The fund hereby designates approximately $4,070,000 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, 1998
ASSETS
Investment in securities, at $ 327,542,096
value (cost $277,036,500) -
See accompanying schedule
Cash 42,315
Receivable for investments 10,756,394
sold
Receivable for fund shares 303,958
sold
Dividends receivable 282,920
Interest receivable 1,184,921
Other receivables 37,274
TOTAL ASSETS 340,149,878
LIABILITIES
Payable for investments $ 19,242,545
purchased Regular delivery
Delayed delivery 3,357,833
Payable for fund shares 132,635
redeemed
Accrued management fee 111,140
Distribution fees payable 709
Other payables and accrued 61,477
expenses
TOTAL LIABILITIES 22,906,339
NET ASSETS $ 317,243,539
Net Assets consist of:
Paid in capital $ 250,823,566
Undistributed net investment 7,505,060
income
Accumulated undistributed net 8,401,192
realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation 50,513,721
(depreciation) on
investments and assets and
liabilities in foreign
currencies
NET ASSETS $ 317,243,539
INITIAL CLASS: NET ASSET $16.11
VALUE, offering price and
redemption price per share
($307,681,325 (divided by)
19,097,287 shares)
SERVICE CLASS: NET ASSET $16.07
VALUE, offering price and
redemption price per share
($9,562,214 (divided by)
594,951 shares)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME $ 2,746,413
Dividends
Interest 6,365,032
TOTAL INCOME 9,111,445
EXPENSES
Management fee $ 1,135,397
Transfer agent fees 177,608
Distribution fees - Service 3,228
Class
Accounting fees and expenses 156,276
Non-interested trustees' 916
compensation
Custodian fees and expenses 25,384
Audit 21,642
Legal 2,276
Miscellaneous 16,507
Total expenses before 1,539,234
reductions
Expense reductions (29,663) 1,509,571
NET INVESTMENT INCOME 7,601,874
REALIZED AND UNREALIZED GAIN
(LOSS)
Net realized gain (loss) on:
Investment securities 8,518,505
Foreign currency transactions 4,867 8,523,372
Change in net unrealized
appreciation (depreciation)
on:
Investment securities 26,047,077
Assets and liabilities in 8,383 26,055,460
foreign currencies
NET GAIN (LOSS) 34,578,832
NET INCREASE (DECREASE) IN $ 42,180,706
NET ASSETS RESULTING FROM
OPERATIONS
OTHER INFORMATION $ 25,741
Expense reductions Directed
brokerage arrangements
Custodian credits 3,922
$ 29,663
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
INCREASE (DECREASE) IN NET YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
ASSETS
Operations Net investment $ 7,601,874 $ 5,313,482
income
Net realized gain (loss) 8,523,372 8,597,009
Change in net unrealized 26,055,460 16,949,433
appreciation (depreciation)
NET INCREASE (DECREASE) IN 42,180,706 30,859,924
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders (5,425,338) (2,678,656)
From net investment income
From net realized gain (8,288,727) -
TOTAL DISTRIBUTIONS (13,714,065) (2,678,656)
Share transactions - net 74,228,783 83,257,215
increase (decrease)
TOTAL INCREASE (DECREASE) 102,695,424 111,438,483
IN NET ASSETS
NET ASSETS
Beginning of period 214,548,115 103,109,632
End of period (including $ 317,243,539 $ 214,548,115
undistributed net investment
income of $7,505,060 and
$5,297,948, respectively)
</TABLE>
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
SHARES DOLLARS SHARES DOLLARS
Share transactions Initial 6,631,328 $ 99,433,344 7,435,394 $ 99,539,917
Class Sold
Reinvested 974,658 13,713,433 215,153 2,678,656
Redeemed (3,218,228) (47,915,708) (1,375,161) (18,971,358)
Net increase (decrease) 4,387,758 $ 65,231,069 6,275,386 $ 83,247,215
Service Class A Sold 610,188 $ 9,232,622 706 $ 10,000
Reinvested 46 643 - -
Redeemed (15,989) (235,551) - -
Net increase (decrease) 594,245 $ 8,997,714 706 $ 10,000
Distributions From net $ 5,425,084 $ 2,678,656
investment income Initial
Class
Service Class 254 -
Total $ 5,425,338 $ 2,678,656
From net realized gain $ 8,288,339 $ -
Initial Class
Service Class 388 -
Total $ 8,288,727 $ -
$ 13,714,065 $ 2,678,656
A SERVICE CLASS COMMENCED
SALE OF SHARES NOVEMBER 3,
1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 1996 1995 I
Net asset value, beginning of $ 14.58 $ 12.23 $ 11.17 $ 10.00
period
Income from Investment
Operations
Net investment income .44 D .44 D .33 .14
Net realized and unrealized 2.00 2.22 .78 1.25
gain (loss)
Total from investment 2.44 2.66 1.11 1.39
operations
Less Distributions
From net investment income (.36) (.31) (.01) F (.14)
From net realized gain (.55) - (.04) F (.08)
Total distributions (.91) (.31) (.05) (.22)
Net asset value, end of period $ 16.11 $ 14.58 $ 12.23 $ 11.17
TOTAL RETURN B, C 17.64% 22.18% 9.98% 13.92%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 307,681 $ 214,538 $ 103,110 $ 43,155
(000 omitted)
Ratio of expenses to average .59% .61% .72% 1.42% G
net assets
Ratio of expenses to average .58% H .60% H .71% H 1.42%
net assets after expense
reductions
Ratio of net investment 2.94% 3.28% 3.63% 3.56%
income to average net assets
Portfolio turnover 94% 98% 163% 248%
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 E
Net asset value, beginning of $ 14.59 $ 14.16
period
Income from Investment
Operations
Net investment income D .41 .08
Net realized and unrealized 1.98 .35
gain (loss)
Total from investment 2.39 .43
operations
Less Distributions
From net investment income (.36) -
From net realized gain (.55) -
Total distributions (.91) -
Net asset value, end of period $ 16.07 $ 14.59
TOTAL RETURN B, C 17.27% 3.04%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 9,562 $ 10
(000 omitted)
Ratio of expenses to average .70% .71% A
net assets
Ratio of expenses to average .69% H .71% A
net assets after expense
reductions
Ratio of net investment 2.79% 3.43% A
income to average net assets
Portfolio turnover 94% 98%
A ANNUALIZED
B TOTAL RETURNS DO NOT
REFLECT CHARGES ATTRIBUTABLE
TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION
OF THESE CHARGES WOULD
REDUCE THE TOTAL RETURNS
SHOWN. TOTAL RETURNS FOR
PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD
HAVE BEEN LOWER HAD CERTAIN
EXPENSES NOT BEEN REDUCED
DURING THE PERIODS SHOWN
(SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER
SHARE HAS BEEN CALCULATED
BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3,
1997 (COMMENCEMENT OF SALE
OF SERVICE CLASS SHARES) TO
DECEMBER 31, 1997.
F THE AMOUNTS SHOWN REFLECT
CERTAIN RECLASSIFICATIONS
RELATED TO BOOK TO TAX
DIFFERENCES (SEE NOTE 1 OF
NOTES TO FINANCIAL
STATEMENTS).
G FMR AGREED TO REIMBURSE A
PORTION OF THE CLASS'
EXPENSES DURING THE PERIOD.
WITHOUT THIS REIMBURSEMENT,
THE CLASS' EXPENSE RATIO
WOULD HAVE BEEN HIGHER.
H FMR OR THE FUND HAS ENTERED
INTO VARYING ARRANGEMENTS
WITH THIRD PARTIES WHO
EITHER PAID OR REDUCED A
PORTION OF THE CLASS'
EXPENSES (SEE NOTE 5 OF
NOTES TO FINANCIAL
STATEMENTS).
I FOR THE PERIOD JANUARY 3,
1995 (COMMENCEMENT OF
OPERATIONS OF INITIAL CLASS
SHARES) TO DECEMBER 31, 1995.
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). If Fidelity had not reimbursed certain fund
expenses, the life of fund total return would have been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31,1998 PAST 1 YEAR LIFE OF FUND
VIP II: ASSET MGR: GROWTH - 17.57% 21.42%
"INITIAL CLASS"
Fidelity Aggressive Composite 22.74% n/a
S&P 500 (registered trademark) 28.58% 30.55%
LB Aggregate Bond 8.69% 10.04%
LB 3 Month T-Bill 5.31% n/a
Variable Annuity Flexible 13.50% n/a
Portfolio Funds Average
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's returns to those of the Fidelity Aggressive
Asset Allocation Composite Index, - a hypothetical combination of
unmanaged indices. The composite index combines the total returns of
the Standard & Poor's 500 Index, the Lehman Brothers Aggregate Bond
Index and the Lehman Brothers 3 Month Treasury Bill Index weighted
according to the fund's neutral mix.
You can also compare the fund's returns to the variable annuity
flexible portfolio funds average, which reflects the performance of
mutual funds with similar objectives tracked by Lipper Inc. The past
one year average represent a peer group of 84 mutual funds. The
benchmarks listed in the table above include reinvested dividends and
capital gains, if any, and exclude the effect of sales charge.
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, January 3, 1995.
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.
(checkmark) 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
$10,000 OVER LIFE OF FUND
VIP II Asset Mgr Growth FID Aggressive Composite S&P 500 LB Aggregate Bond
00159 F0022 SP001 LB001
1995/01/31 10000.00 10000.00 10000.00 10000.00
1995/02/28 10149.70 10319.62 10389.70 10238.00
1995/03/31 10289.42 10539.71 10696.30 10300.45
1995/04/30 10558.88 10785.50 11011.31 10444.66
1995/05/31 10708.58 11199.23 11451.43 10848.87
1995/06/30 11137.72 11397.77 11717.44 10928.06
1995/07/31 11546.91 11633.53 12106.00 10904.02
1995/08/31 12065.87 11695.86 12136.38 11035.96
1995/09/30 12245.51 12052.97 12648.54 11143.01
1995/10/31 11776.45 12083.85 12603.38 11287.87
1995/11/30 11986.03 12487.56 13156.67 11457.19
1995/12/31 12277.71 12701.01 13410.07 11617.59
1996/01/31 12569.78 13008.92 13866.55 11694.26
1996/02/29 12613.39 13009.89 13995.09 11490.78
1996/03/31 12840.37 13059.96 14129.86 11410.35
1996/04/30 13143.01 13162.84 14338.14 11346.45
1996/05/31 13348.36 13380.07 14707.92 11323.76
1996/06/30 13402.41 13467.11 14763.95 11475.49
1996/07/31 13067.35 13093.05 14111.68 11506.48
1996/08/31 13164.62 13267.32 14409.30 11486.92
1996/09/30 13705.04 13821.05 15220.25 11686.79
1996/10/31 14104.95 14163.15 15640.03 11946.24
1996/11/30 15023.67 14935.59 16822.26 12150.52
1996/12/31 14737.79 14700.41 16489.01 12037.52
1997/01/31 15367.80 15358.12 17519.24 12074.83
1997/02/28 15514.22 15455.00 17656.59 12105.02
1997/03/31 14781.88 14970.83 16931.08 11970.65
1997/04/30 15401.55 15656.26 17941.87 12150.21
1997/05/31 16336.68 16364.80 19034.17 12265.64
1997/06/30 16821.15 16929.64 19886.90 12411.60
1997/07/31 17959.09 17991.36 21469.30 12746.72
1997/08/31 17395.75 17251.75 20266.59 12638.37
1997/09/30 18037.95 17980.97 21376.59 12825.42
1997/10/31 17609.82 17629.62 20662.61 13011.39
1997/11/30 18116.82 18224.94 21619.09 13071.24
1997/12/31 18432.29 18493.92 21990.29 13203.26
1998/01/31 18432.29 18700.72 22233.50 13372.26
1998/02/28 19558.44 19644.52 23836.98 13361.56
1998/03/31 20283.77 20370.04 25057.67 13406.99
1998/04/30 20220.15 20544.55 25309.75 13476.71
1998/05/31 20016.54 20350.75 24874.67 13604.74
1998/06/30 20487.37 20977.02 25885.08 13720.38
1998/07/31 20309.22 20836.27 25609.41 13749.19
1998/08/31 17751.48 18817.21 21906.80 13973.30
1998/09/30 18413.18 19776.08 23310.15 14300.28
1998/10/31 19583.89 20879.74 25206.20 14224.48
1998/11/30 20563.72 21798.91 26733.94 14305.56
1998/12/31 21670.80 22698.75 28274.35 14348.48
IMATRL PRASUN SHR__CHT 19981231 19990126 145802 R00000000000050
</TABLE>
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund II: Asset Manager: Growth
Portfolio on January 31, 1995, shortly after the fund started. As the
chart shows, by December 31, 1998, the value of the investment would
have grown to $21,671 - a 116.71% increase. With reinvested dividends
and capital gains, if any, a $10,000 investment in the Standard &
Poor's 500 Index would have grown to $28,274 over the same period - a
182.74% increase. If $10,000 was invested in the Lehman Brothers
Aggregate Bond Index, it would have grown to $14,348 - a 43.48%
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 (182.74%), Lehman Brothers
Aggregate Bond Index (43.48%), and the Lehman Brothers 3-month T-Bill
Total Rate of Return Index (23.65%) - according to the fund's neutral
mix*, assuming monthly rebalancing. With reinvested dividends and
capital gains, if any, a $10,000 investment in the index would have
grown to $22,699 - a 126.99% 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, 1998
% OF FUND'S INVESTMENTS
Wal-Mart Stores, Inc. 3.2
AT&T Corp. 3.1
General Electric Co. 2.0
Lucent Technologies, Inc. 1.9
Fannie Mae 1.9
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1998
(STOCKS ONLY) % OF FUND'S INVESTMENTS
FINANCE 11.9
UTILITIES 10.9
TECHNOLOGY 10.1
RETAIL & WHOLESALE 8.3
HEALTH 8.3
ASSET ALLOCATION AS OF DECEMBER 31, 1998*
Row: 1, Col: 1, Value: 76.8
Row: 1, Col: 2, Value: 17.7
Row: 1, Col: 3, Value: 5.5
Stock class 78.9%
Bond class 17.6%
Short-term class 3.5%
*FOREIGN INVESTMENTS 1.5%
ASSET ALLOCATION IN THE PIE CHART REFLECTS THE CATEGORIZATION OF
ASSETS AS DEFINED IN THE FUND'S PROSPECTUS. FINANCIAL STATEMENT
CATEGORIZATIONS CONFORM TO ACCOUNTING STANDARDS AND WILL DIFFER FROM
THE PIE CHART.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1 fee. If Fidelity had not
reimbursed certain fund expenses, the life of fund total return would
have been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31,1998 PAST 1 YEAR LIFE OF FUND
VIP II: ASSET MGR: GROWTH - 17.18% 21.30%
SERVICE CLASS
Fidelity Aggressive Composite 22.74% n/a
S&P 500 28.58% 30.55%
LB Aggregate Bond 8.69% 10.04%
LB 3 Month T-Bill 5.31% n/a
Variable Annuity Flexible 13.50% n/a
Portfolio Funds Average
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's returns to those of the Fidelity Aggressive
Asset Allocation Composite Index, a hypothetical combination of
unmanaged indices. The composite index combines the total returns of
the Standard & Poor's 500 Index, the Lehman Brothers Aggregate Bond
Index and the Lehman Brothers 3 Month Treasury Bill Index weighted
according to the fund's neutral mix.
You can also compare the fund's returns to the variable annuity
flexible portfolio funds average, which reflects the performance of
mutual funds with similar objectives tracked by Lipper, Inc. The past
one year average represent a peer group of 84 mutual funds. The
benchmarks listed in the table above include reinvested dividends and
capital gains, if any, and exclude the effect of sales charges.
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, January 3, 1995.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURN WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
(checkmark)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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
$10,000 OVER LIFE OF FUND
VIP II Asset Mgr Gro-CL S FID Aggressive Composite S&P 500 LB Aggregate Bond
00468 F0022 SP001 LB001
1995/01/31 10000.00 10000.00 10000.00 10000.00
1995/02/28 10149.70 10319.62 10389.70 10238.00
1995/03/31 10289.42 10539.71 10696.30 10300.45
1995/04/30 10558.88 10785.50 11011.31 10444.66
1995/05/31 10708.58 11199.23 11451.43 10848.87
1995/06/30 11137.72 11397.77 11717.44 10928.06
1995/07/31 11546.91 11633.53 12106.00 10904.02
1995/08/31 12065.87 11695.86 12136.38 11035.96
1995/09/30 12245.51 12052.97 12648.54 11143.01
1995/10/31 11776.45 12083.85 12603.38 11287.87
1995/11/30 11986.03 12487.56 13156.67 11457.19
1995/12/31 12277.71 12701.01 13410.07 11617.59
1996/01/31 12569.78 13008.92 13866.55 11694.26
1996/02/29 12613.39 13009.89 13995.09 11490.78
1996/03/31 12840.37 13059.96 14129.86 11410.35
1996/04/30 13143.01 13162.84 14338.14 11346.45
1996/05/31 13348.36 13380.07 14707.92 11323.76
1996/06/30 13402.41 13467.11 14763.95 11475.49
1996/07/31 13067.35 13093.05 14111.68 11506.48
1996/08/31 13164.62 13267.32 14409.30 11486.92
1996/09/30 13705.04 13821.05 15220.25 11686.79
1996/10/31 14104.95 14163.15 15640.03 11946.24
1996/11/30 15023.67 14935.59 16822.26 12150.52
1996/12/31 14737.79 14700.41 16489.01 12037.52
1997/01/31 15367.80 15358.12 17519.24 12074.83
1997/02/28 15514.22 15455.00 17656.59 12105.02
1997/03/31 14781.88 14970.83 16931.08 11970.65
1997/04/30 15401.55 15656.26 17941.87 12150.21
1997/05/31 16336.68 16364.80 19034.17 12265.64
1997/06/30 16821.15 16929.64 19886.90 12411.60
1997/07/31 17959.09 17991.36 21469.30 12746.72
1997/08/31 17395.75 17251.75 20266.59 12638.37
1997/09/30 18037.95 17980.97 21376.59 12825.42
1997/10/31 17609.82 17629.62 20662.61 13011.39
1997/11/30 18105.55 18224.94 21619.09 13071.24
1997/12/31 18421.02 18493.92 21990.29 13203.26
1998/01/31 18409.75 18700.72 22233.50 13372.26
1998/02/28 19510.54 19644.52 23836.98 13361.56
1998/03/31 20235.98 20370.04 25057.67 13406.99
1998/04/30 20159.62 20544.55 25309.75 13476.71
1998/05/31 19955.99 20350.75 24874.67 13604.74
1998/06/30 20414.16 20977.02 25885.08 13720.38
1998/07/31 20248.71 20836.27 25609.41 13749.19
1998/08/31 17690.58 18817.21 21906.80 13973.30
1998/09/30 18352.38 19776.08 23310.15 14300.28
1998/10/31 19510.54 20879.74 25206.20 14224.48
1998/11/30 20490.53 21798.91 26733.94 14305.56
1998/12/31 21585.05 22698.75 28274.35 14348.48
IMATRL PRASUN SHR__CHT 19981231 19990129 133434 R00000000000050
</TABLE>
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund II: Asset Manager: Growth
Portfolio - Service Class on January 31, 1995, shortly after the fund
started. As the chart shows, by December 31, 1998, the value of the
investment would have grown to $21,585 - a 115.85% increase. With
reinvested dividends and capital gains, if any, a $10,000 investment
in the Standard & Poor's 500 Index would have grown to $28,274 over
the same period - a 182.74% increase. If $10,000 was invested in the
Lehman Brothers Aggregate Bond Index, it would have grown to $14,348 -
a 43.48% 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 (182.74%), Lehman Brothers
Aggregate Bond Index (43.48%), and the Lehman Brothers 3-month T-Bill
Total Rate of Return Index (23.65%) - according to the fund's neutral
mix*, assuming monthly rebalancing. With reinvested dividends and
capital gains, if any, a $10,000 investment in the index would have
grown to $22,699 - a 126.99% 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, 1998
% OF FUND'S INVESTMENTS
Wal-Mart Stores, Inc. 3.2
AT&T Corp. 3.1
General Electric Co. 2.0
Lucent Technologies, Inc. 1.9
Fannie Mae 1.9
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1998
(STOCKS ONLY) % OF FUND'S INVESTMENTS
FINANCE 11.9
UTILITIES 10.9
TECHNOLOGY 10.1
RETAIL & WHOLESALE 8.3
HEALTH 8.3
ASSET ALLOCATION AS OF DECEMBER 31, 1998*
Row: 1, Col: 1, Value: 76.8
Row: 1, Col: 2, Value: 17.7
Row: 1, Col: 3, Value: 5.5
Stock class 78.9%
Bond class 17.6%
Short-term class 3.5%
*FOREIGN INVESTMENTS 1.5%
ASSET ALLOCATION IN THE PIE CHART REFLECTS THE CATEGORIZATION OF
ASSETS AS DEFINED IN THE FUND'S PROSPECTUS. FINANCIAL STATEMENT
CATEGORIZATIONS CONFORM TO ACCOUNTING STANDARDS AND WILL DIFFER FROM
THE PIE CHART.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
(photograph of Richard Habermann)
An interview with
Richard Habermann, Portfolio Manager of Asset Manager: Growth
Portfolio
Q. HOW DID THE FUND PERFORM COMPARED TO ITS BENCHMARK, DICK?
A. For the year that ended December 31, 1998, the fund lagged the
22.74% return of the Fidelity Aggressive Asset Allocation Composite
Index - which combines the performance of three indexes - for the same
period.
Q. WHY DID THE FUND LAG ITS BENCHMARK INDEX?
A. While the fund's stocks generally performed well, they
underperformed the Standard & Poor's 500 Index, the equity index that
is included in the fund's benchmark. Specifically, the fund was
underweighted relative to the S&P in the narrow group of stocks that
drove the performance of the S&P 500. Instead, the fund's equity
specialist, Steven Snider, focused on stocks with lower valuations and
market capitalizations. In addition, the fund was hurt by its
investments in high-yield bonds. These securities are not included in
the composite index - the bond component is represented by the Lehman
Brothers Aggregate Bond Index , which comprises only investment-grade
securities - but have been a key component to our strategy and have
helped the fund's performance during the past few years.
Unfortunately, this asset class suffered from the significant flight
to quality in the third quarter of 1998.
Q. WHAT STRATEGY DID YOU PURSUE WITH THE FUND'S ASSET ALLOCATION?
A. The fund started the year overweighted in stocks, and, on average,
maintained that overweighted position through the year. However, I
pursued more cautious tactics in the summer, when both the stock and
bond markets experienced a great deal of turmoil. At that time, I
reduced the fund's equity allocation and increased its stake in
investment-grade bonds. When the markets started to settle down at the
tail end of the third quarter, I ramped up the fund's equity
investments again, taking profits on investment-grade issues that had
performed well. I also added significantly to the fund's investments
in high-yield bonds. Prices in that sector reflected worst-case
scenarios that we felt were unrealistic given the underlying strength
of the U.S. economy.
Q. HOW DID THE FUND'S ASSET ALLOCATION AFFECT PERFORMANCE?
A. Overall, it had a positive effect. Stocks performed best among the
asset classes, and, as I mentioned, the fund on average maintained an
overweighted position in equities relative to its neutral mix, which
calls for 70% to be invested in stocks. Concurrently, the fund also
benefited from maintaining underweighted positions in bonds and
short-term/money market instruments, which make up 25% and 5% of its
neutral mix, respectively.
Q. HOW DID THE FIXED-INCOME AND SHORT-TERM PORTIONS OF THE FUND
PERFORM?
A. The investment-grade portion of the fund - which Charlie Morrison
helps me manage - slightly underperformed the Lehman Brothers
Aggregate Index. The story there was a flight to quality. Investors
from around the globe flocked to U.S. Treasury securities because they
are perceived to be the safest haven from economic and financial
turmoil. All other sectors of the investment-grade market posted much
poorer relative performance. Being underweighted in Treasuries
relative to the index hurt the fund. Still, it did benefit from strong
security selection in its non-Treasury investments. Unfortunately, the
fund's high-yield investments hurt its relative performance.
Nevertheless, the securities chosen by Fred Hoff - who helps me manage
the high-yield portion of the fund - performed better than the
high-yield market as a whole. John Todd, who helps look after the
fund's short-term investments, obtained a return advantage relative to
the short-term component of the composite index by emphasizing
shorter-term, high-quality issues.
Q. WHICH STOCKS PERFORMED WELL DURING THE PERIOD? WHICH DISAPPOINTED?
A. On the plus side, Lucent Technologies increased its market share
and consistently beat earnings expectations. AT&T did the same, amid a
successful cost-cutting campaign. Wal-Mart and Home Depot maintained
their market dominance through excellent distribution systems, among
other factors. On the negative side, Allstate had difficulty
rebounding from share price drops from August through October, when
companies in the financial sector generally suffered. And RJR Nabisco
was hurt because it was the dominant player in the tobacco industry in
Russia.
Q. WHAT'S YOUR OUTLOOK?
A. We continue to see the same trends that have characterized the past
few years: low inflation, a positive interest-rate environment and
decelerating corporate earnings. Further, it appears economic growth
will continue in early 1999, but stands a chance to moderate as the
year progresses. We'll probably see modest earnings growth, amid a
backdrop of continued investor interest in the markets. I believe the
U.S. will continue to be an appealing market relative to other global
alternatives.
The views expressed in this report reflect those of the portfolio
manager only through the end of the period of the report as stated on
the cover. The manager's views are subject to change at any time based
on market and other conditions.
(checkmark)FUND FACTS
GOAL: maximum total return over the long term by allocating assets
among stocks, bonds and short-term instruments anywhere in the world
START DATE: Janury 3, 1995
SIZE: as of December 31, 1998, more than
$532 million
MANAGER: Richard Habermann, since 1996; joined
Fidelity in 1968
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
INVESTMENTS DECEMBER 31, 1998
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 75.0%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 2.7%
AEROSPACE & DEFENSE - 2.1%
AlliedSignal, Inc. 75,600 $ 3,350,025
Cordant Technologies, Inc. 21,300 798,750
Goodrich (B.F.) Co. 5,000 179,375
Sundstrand Corp. 27,700 1,436,938
United Technologies Corp. 51,500 5,600,625
11,365,713
DEFENSE ELECTRONICS - 0.6%
Litton Industries, Inc. (a) 13,800 900,450
Northrop Grumman Corp. 29,300 2,142,563
3,043,013
SHIP BUILDING & REPAIR - 0.0%
Avondale Industries, Inc. 2,600 75,400
TOTAL AEROSPACE & DEFENSE 14,484,126
BASIC INDUSTRIES - 1.0%
CHEMICALS & PLASTICS - 0.5%
Engelhard Corp. 18,900 368,550
FMC Corp. (a) 20,700 1,159,200
Millennium Chemicals, Inc. 38,300 761,213
Solutia, Inc. 18,200 407,225
2,696,188
IRON & STEEL - 0.1%
USX-U.S. Steel Group 10,000 230,000
PACKAGING & CONTAINERS - 0.3%
Owens-Illinois, Inc. (a) 56,700 1,736,438
PAPER & FOREST PRODUCTS - 0.1%
Louisiana-Pacific Corp. 35,000 640,938
TOTAL BASIC INDUSTRIES 5,303,564
CONSTRUCTION & REAL ESTATE -
1.4%
BUILDING MATERIALS - 0.4%
Fortune Brands, Inc. 26,000 822,250
USG Corp. 16,000 815,000
Vulcan Materials Co. 3,300 434,156
2,071,406
CONSTRUCTION - 0.8%
Centex Corp. 19,400 874,213
D.R. Horton, Inc. 32,900 756,700
Fleetwood Enterprises, Inc. 49,233 1,710,847
Kaufman & Broad Home Corp. 34,200 983,250
4,325,010
ENGINEERING - 0.2%
Fluor Corp. 26,600 1,132,163
TOTAL CONSTRUCTION & REAL 7,528,579
ESTATE
SHARES VALUE (NOTE 1)
DURABLES - 3.5%
AUTOS, TIRES, & ACCESSORIES -
2.9%
Dana Corp. 11,600 $ 474,150
Ford Motor Co. 144,800 8,497,950
General Motors Corp. 92,800 6,641,000
15,613,100
CONSUMER ELECTRONICS - 0.4%
Maytag Corp. 32,000 1,992,000
HOME FURNISHINGS - 0.2%
Ethan Allen Interiors, Inc. 13,400 549,400
Furniture Brands 21,700 591,325
International, Inc. (a)
1,140,725
TOTAL DURABLES 18,745,825
ENERGY - 2.6%
ENERGY SERVICES - 0.1%
McDermott International, Inc. 34,100 841,844
OIL & GAS - 2.5%
British Petroleum PLC ADR 396 37,620
Coastal Corp. (The) 56,800 1,984,450
Exxon Corp. 119,100 8,709,188
Royal Dutch Petroleum Co. 3,200 153,200
Sunoco, Inc. 23,700 854,681
Tosco Corp. 52,200 1,350,675
13,089,814
TOTAL ENERGY 13,931,658
FINANCE - 11.7%
BANKS - 2.8%
BankBoston Corp. 53,800 2,094,838
Chase Manhattan Corp. 97,600 6,642,900
Comerica, Inc. 10,700 729,606
Commerce Bancshares, Inc. 297 12,623
Firstar Corp. 10,000 932,500
National City Corp. 23,780 1,724,050
SunTrust Banks, Inc. 34,100 2,608,650
14,745,167
CREDIT & OTHER FINANCE - 0.7%
Equitable Companies (The), 28,000 1,620,500
Inc.
Fleet Financial Group, Inc. 28,500 1,273,594
Providian Financial Corp. 13,500 1,012,500
3,906,594
FEDERAL SPONSORED CREDIT - 3.2%
Fannie Mae 138,500 10,249,000
Freddie Mac 76,000 4,897,250
SLM Holding Corp. 35,800 1,718,400
16,864,650
INSURANCE - 4.4%
Allmerica Financial Corp. 12,400 717,650
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
Allstate Corp. 165,000 $ 6,373,125
CIGNA Corp. 93,400 7,220,988
Conseco, Inc. 117,000 3,575,813
Financial Security Assurance 4,700 254,975
Holdings Ltd.
ING Groep NV sponsored ADR 521 32,400
Lincoln National Corp. 10,400 850,850
MGIC Investment Corp. 18,000 716,625
Old Republic International 23,250 523,125
Corp.
Orion Capital Corp. 5,200 207,025
SunAmerica, Inc. 35,000 2,839,375
23,311,951
SECURITIES INDUSTRY - 0.6%
Crestline Capital Corp. (a) 8,120 118,755
Lehman Brothers Holdings, 76,800 3,384,000
Inc.
3,502,755
TOTAL FINANCE 62,331,117
HEALTH - 8.3%
DRUGS & PHARMACEUTICALS - 5.4%
Amgen, Inc. (a) 20,600 2,153,988
Lilly (Eli) & Co. 32,100 2,852,888
Mylan Laboratories, Inc. 37,500 1,181,250
Pfizer, Inc. 75,800 9,508,163
Schering-Plough Corp. 145,800 8,055,450
Warner-Lambert Co. 66,600 5,007,488
28,759,227
MEDICAL EQUIPMENT & SUPPLIES
- - 1.8%
Allegiance Corp. 3,320 154,795
Guidant Corp. 83,500 9,205,875
9,360,670
MEDICAL FACILITIES MANAGEMENT
- - 1.1%
Integrated Health Services, 24,200 341,825
Inc.
Lincare Holdings, Inc. (a) 32,000 1,298,000
PacifiCare Health Systems, 25,600 2,035,200
Inc. Class B (a)
Wellpoint Health Networks, 22,700 1,974,900
Inc. (a)
5,649,925
TOTAL HEALTH 43,769,822
INDUSTRIAL MACHINERY &
EQUIPMENT - 5.2%
ELECTRICAL EQUIPMENT - 2.7%
General Electric Co. 105,000 10,716,563
General Instrument Corp. (a) 28,300 960,431
Honeywell, Inc. 35,900 2,703,719
14,380,713
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY &
EQUIPMENT - 2.2%
Caterpillar, Inc. 73,200 $ 3,367,200
Coltec Industries, Inc. (a) 36,700 715,650
Ingersoll-Rand Co. 68,500 3,215,219
Mark IV Industries, Inc. 24,500 318,500
Tyco International Ltd. 52,200 3,937,838
11,554,407
POLLUTION CONTROL - 0.3%
Waste Management, Inc. 33,300 1,552,613
TOTAL INDUSTRIAL MACHINERY & 27,487,733
EQUIPMENT
MEDIA & LEISURE - 2.0%
BROADCASTING - 0.0%
Loral Orion Network Systems,
Inc.:
warrants 1/15/07 (CV ratio 420 3,360
.47) (a)
warrants 1/15/07 (CV ratio 100 1,050
.6) (a)
Nielsen Media Research, Inc. 3,600 64,800
(a)
NTL, Inc. warrants 12/31/08 427 6,405
(a)
75,615
ENTERTAINMENT - 0.4%
Carnival Corp. 24,200 1,161,600
Tele-Communications, Inc. 33,950 799,947
(TCI Ventures Group) Series
A (a)
1,961,547
LEISURE DURABLES & TOYS - 0.1%
Harley-Davidson, Inc. 12,100 573,238
LODGING & GAMING - 0.4%
Aladdin Gaming Enterprises, 3,600 36
Inc. warrants 3/1/10 (a)(f)
Host Marriott Corp. 81,200 1,121,575
International Game Technology 37,500 911,719
Corp.
2,033,330
PUBLISHING - 1.0%
Gannet, Inc. 45,900 3,038,006
Knight-Ridder, Inc. 18,900 966,263
New York Times Co. (The) 32,800 1,137,750
Class A
World Color Press, Inc. (a) 9,700 295,244
5,437,263
RESTAURANTS - 0.1%
Brinker International, Inc. 12,000 346,500
(a)
TOTAL MEDIA & LEISURE 10,427,493
NONDURABLES - 4.7%
BEVERAGES - 0.5%
Anheuser-Busch Companies, 10,900 715,313
Inc.
Canandaigua Brands, Inc. 7,300 422,031
Class A (a)
Coors (Adolph) Co. Class B 14,700 829,631
PepsiCo, Inc. 22,600 925,188
2,892,163
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONDURABLES - CONTINUED
FOODS - 1.4%
Flowers Industries, Inc. 24,100 $ 576,894
Heinz (H.J.) Co. 86,500 4,898,063
Quaker Oats Co. 30,000 1,785,000
7,259,957
HOUSEHOLD PRODUCTS - 0.8%
Avon Products, Inc. 18,700 827,475
Clorox Co. 17,500 2,044,219
Nu Skin Enterprises, Inc. 8,700 205,538
Class A (a)
Premark International, Inc. 4,400 152,350
Procter & Gamble Co. 12,000 1,095,750
4,325,332
TOBACCO - 2.0%
Philip Morris Companies, Inc. 161,900 8,661,650
RJR Nabisco Holdings Corp. 52,320 1,553,250
Universal Corp. 9,700 340,713
10,555,613
TOTAL NONDURABLES 25,033,065
RETAIL & WHOLESALE - 8.3%
APPAREL STORES - 0.8%
Gap, Inc. 22,050 1,240,313
TJX Companies, Inc. 107,600 3,120,400
4,360,713
GENERAL MERCHANDISE STORES -
3.8%
Dayton Hudson Corp. 21,100 1,144,675
Federated Department Stores, 49,400 2,151,988
Inc. (a)
Wal-Mart Stores, Inc. 204,300 16,637,643
19,934,306
GROCERY STORES - 0.7%
Safeway, Inc. (a) 65,100 3,967,031
RETAIL & WHOLESALE,
MISCELLANEOUS - 3.0%
Best Buy Co., Inc. (a) 35,500 2,178,813
Home Depot, Inc. 107,600 6,583,775
Lowe's Companies, Inc. 54,200 2,774,363
Office Depot, Inc. (a) 16,300 602,081
Pier 1 Imports, Inc. 76,200 738,188
Tandy Corp. 74,600 3,072,588
15,949,808
TOTAL RETAIL & WHOLESALE 44,211,858
SERVICES - 0.3%
PRINTING - 0.3%
Donnelley (R.R.) & Sons Co. 3,200 140,200
United Stationers, Inc. (a) 20,000 520,000
Valassis Communications, Inc. 21,100 1,089,288
(a)
1,749,488
SHARES VALUE (NOTE 1)
TECHNOLOGY - 10.0%
COMMUNICATIONS EQUIPMENT - 2.3%
Globalstar Telecommunications 180 $ 10,800
Ltd. warrants 2/15/04 (a)(f)
Lucent Technologies, Inc. 93,300 10,263,000
Tellabs, Inc. (a) 27,200 1,864,900
12,138,700
COMPUTER SERVICES & SOFTWARE
- - 3.9%
BMC Software, Inc. 47,700 2,125,631
Computer Sciences Corp. 21,200 1,366,075
HBO & Co. 110,400 3,167,100
Microsoft Corp. (a) 29,300 4,063,544
NCR Corp. (a) 2,300 96,025
Oracle Corp. (a) 226,000 9,746,250
20,564,625
COMPUTERS & OFFICE EQUIPMENT
- - 2.9%
International Business 15,000 2,771,250
Machines Corp.
Lexmark International Group, 41,400 4,160,700
Inc. (a)
Sun Microsystems, Inc. (a) 57,600 4,932,000
Unisys Corp. (a) 59,200 2,038,700
Xerox Corp. 11,200 1,321,600
15,224,250
ELECTRONICS - 0.5%
Intel Corp. 19,900 2,359,394
Storage Technology Corp. (a) 11,900 423,194
2,782,588
PHOTOGRAPHIC EQUIPMENT - 0.4%
Eastman Kodak Co. 29,000 2,088,000
TOTAL TECHNOLOGY 52,798,163
TRANSPORTATION - 2.9%
AIR TRANSPORTATION - 2.2%
AMR Corp. (a) 92,000 5,462,500
Comair Holdings, Inc. 27,600 931,500
Southwest Airlines Co. 173,400 3,890,663
US Airways Group, Inc. (a) 12,500 650,000
Viad Corp. 18,600 564,975
11,499,638
RAILROADS - 0.4%
Burlington Northern Santa Fe 47,000 1,586,250
Corp.
Trinity Industries, Inc. 12,400 477,400
2,063,650
TRUCKING & FREIGHT - 0.3%
Airborne Freight Corp. 47,500 1,712,969
TOTAL TRANSPORTATION 15,276,257
UTILITIES - 10.4%
CELLULAR - 0.0%
McCaw International Ltd. 910 4,550
warrants 4/15/07 (a)(f)
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - CONTINUED
ELECTRIC UTILITY - 3.1%
Baltimore Gas & Electric Co. 35,700 $ 1,102,238
Central & South West Corp. 25,000 685,938
Dominion Resources, Inc. 19,000 888,250
DTE Energy Co. 32,000 1,372,000
Edison International 39,400 1,098,275
Energy East Corp. 47,800 2,700,700
Entergy Corp. 56,200 1,749,225
FPL Group, Inc. 21,500 1,324,938
GPU, Inc. 30,700 1,356,556
Houston Industries, Inc. 56,700 1,821,488
Pinnacle West Capital Corp. 25,000 1,059,375
Public Service Enterprise 24,200 968,000
Group, Inc.
16,126,983
GAS - 0.1%
KeySpan Energy 20,768 643,808
TELEPHONE SERVICES - 7.2%
Ameritech Corp. 97,000 6,147,375
AT&T Corp. 215,500 16,216,375
BellSouth Corp. 132,200 6,593,475
Pathnet, Inc. warrants 910 9,100
4/15/08 (a)(f)
SBC Communications, Inc. 69,000 3,700,125
U.S. WEST, Inc. 84,800 5,480,200
38,146,650
TOTAL UTILITIES 54,921,991
TOTAL COMMON STOCKS 398,000,739
(Cost $302,439,480)
NONCONVERTIBLE PREFERRED
STOCKS - 1.8%
CONSTRUCTION & REAL ESTATE -
0.2%
REAL ESTATE INVESTMENT TRUSTS
- - 0.2%
California Federal Preferred 30,171 758,046
Capital Corp. $2.28
Crown America Realty Trust 992 48,484
Series A, $5.50
Walden Residential 5,800 126,150
Properties, Inc. $2.30
932,680
FINANCE - 0.2%
CREDIT & OTHER FINANCE - 0.1%
Fresenius Medical Care 586 587,703
Capital Trust II 7.875%
INSURANCE - 0.1%
American Annuity Group 160 156,800
Capital Trust II 8.875%
SIG Capital Trust I 9.5% 692 600,108
756,908
TOTAL FINANCE 1,344,611
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - 0.8%
BROADCASTING - 0.6%
Adelphia Communications Corp. 1,423 $ 165,780
$13.00
CSC Holdings, Inc. 11.125% 12,880 1,436,120
pay-in-kind
Echostar Communications Corp. 315 364,219
12.125% pay-in-kind
Granite Broadcasting Corp. 304 273,600
12.75% pay-in-kind
SFX Broadcasting, Inc. 2,420 297,660
12.625% pay-in-kind
Sinclair Capital 11.625% 4,717 502,361
3,039,740
PUBLISHING - 0.2%
PRIMEDIA, Inc.:
$9.20 3,869 375,293
Series D, $10.00 6,244 644,693
1,019,986
TOTAL MEDIA & LEISURE 4,059,726
TECHNOLOGY - 0.1%
COMMUNICATIONS EQUIPMENT - 0.1%
Intermedia Communications, 306 308,295
Inc. 13.5% pay-in-kind (a)
UTILITIES - 0.5%
CELLULAR - 0.3%
Nextel Communications, Inc. 1,719 1,547,100
11.125% pay-in-kind (a)
TELEPHONE SERVICES - 0.2%
Hyperion Telecommunication, 315 250,425
Inc. 12.875% pay-in-kind
IXC Communications, Inc. 232 234,320
12.5% pay-in-kind
NEXTLINK Communications, Inc. 12,392 644,384
14% pay-in-kind
1,129,129
TOTAL UTILITIES 2,676,229
TOTAL NONCONVERTIBLE 9,321,541
PREFERRED STOCKS
(Cost $9,580,213)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS - 13.7%
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT
CONVERTIBLE BONDS - 0.2%
HEALTH - 0.1%
DRUGS & PHARMACEUTICALS - 0.0%
Integrated Process Equipment B- $ 200,000 144,750
Corp. 6.25% 9/15/04 (f)
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
CONVERTIBLE BONDS - CONTINUED
HEALTH - CONTINUED
MEDICAL FACILITIES MANAGEMENT
- - 0.1%
Tenet Healthcare Corp. 6% B1 $ 460,000 $ 395,600
12/1/05
TOTAL HEALTH 540,350
NONDURABLES - 0.1%
FOODS - 0.1%
Chiquita Brands B3 370,000 344,100
International, Inc. 7%
3/28/01
RETAIL & WHOLESALE - 0.0%
RETAIL & WHOLESALE,
MISCELLANEOUS - 0.0%
Sports Authority, Inc. 5.25% B2 230,000 153,956
9/15/01
TOTAL CONVERTIBLE BONDS 1,038,406
NONCONVERTIBLE BONDS - 13.5%
AEROSPACE & DEFENSE - 0.1%
SHIP BUILDING & REPAIR - 0.1%
Newport News Shipbuilding, B1 530,000 560,475
Inc. 9.25% 12/1/06
BASIC INDUSTRIES - 0.1%
CHEMICALS & PLASTICS - 0.1%
Huntsman Corp. 9.5% 7/1/07 (f) B2 270,000 269,325
PACKAGING & CONTAINERS - 0.0%
Owens-Illinois, Inc.:
7.15% 5/15/05 Ba1 110,000 110,542
7.8% 5/15/18 Ba1 150,000 151,324
261,866
TOTAL BASIC INDUSTRIES 531,191
CONSTRUCTION & REAL ESTATE -
0.2%
BUILDING MATERIALS - 0.0%
American Standard Cos., Inc. Ba3 320,000 323,200
7.375% 4/15/05
CONSTRUCTION - 0.0%
U.S. Home Corp. 8.88% 8/15/07 B1 90,000 91,800
REAL ESTATE - 0.1%
LNR Property Corp. 9.375% B1 460,000 441,600
3/15/08
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
REAL ESTATE INVESTMENT TRUSTS
- - 0.1%
CenterPoint Properties Trust. Baa2 $ 100,000 $ 94,986
6.75% 4/1/05
EOP Operating LP:
6.375% 2/15/03 Baa1 100,000 98,724
6.75% 2/15/08 Baa1 100,000 98,330
Weeks Realty LP 6.875% 3/15/05 Baa2 100,000 92,650
384,690
TOTAL CONSTRUCTION & REAL 1,241,290
ESTATE
DURABLES - 0.6%
AUTOS, TIRES, & ACCESSORIES -
0.3%
Blue Bird Body Co. 10.75% B2 220,000 226,600
11/15/06
Federal-Mogul Corp. 7.875% Ba2 890,000 910,559
7/1/10
Oshkosh Truck Co. 8.75% 3/1/08 B3 400,000 400,000
1,537,159
CONSUMER DURABLES - 0.1%
Corning Consumer Products Co. B3 310,000 217,000
9.625% 5/1/08
HOME FURNISHINGS - 0.0%
Omega Cabinets Ltd. 10.5% B3 170,000 167,025
6/15/07
TEXTILES & APPAREL - 0.2%
Levi Strauss & Co. 7% 11/1/06 Baa3 210,000 192,465
(f)
Unifi, Inc. 6.5% 2/1/08 A3 100,000 99,050
WestPoint Stevens, Inc.:
7.875% 6/15/05 Ba3 130,000 131,788
7.875% 6/15/08 Ba3 210,000 212,625
Worldtex, Inc. 9.625% 12/15/07 B1 540,000 469,800
1,105,728
TOTAL DURABLES 3,026,912
ENERGY - 0.3%
COAL - 0.1%
P&L Coal Holdings Corp. B2 440,000 447,700
9.625% 5/15/08
ENERGY SERVICES - 0.0%
R&B Falcon Corp. 9.5% Ba1 180,000 180,000
12/15/08 (f)
OIL & GAS - 0.2%
Chesapeake Energy Corp. B3 180,000 135,000
9.625% 5/1/05
Gulf Canada Resources Ltd. Ba1 380,000 374,300
8.375% 11/15/05
Occidental Petroleum Corp. Baa3 100,000 108,454
9.75% 6/15/01
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
ENERGY - CONTINUED
OIL & GAS - CONTINUED
Oryx Energy Co.:
8% 10/15/03 Ba1 $ 60,000 $ 63,085
8.125% 10/15/05 Ba1 30,000 32,151
8.375% 7/15/04 Ba1 130,000 138,982
Petro-Canada, Inc. 7% 11/15/28 A3 60,000 59,167
Petroleum Geo-Services ASA Baa3 60,000 56,063
7.125% 3/30/28
967,202
TOTAL ENERGY 1,594,902
FINANCE - 1.2%
BANKS - 0.2%
BankBoston Companies 6.625% A3 60,000 61,266
2/1/04
Capital One Bank 6.375% Baa3 130,000 129,535
2/15/03
Capital One Financial Corp. Ba1 160,000 158,627
7.125% 8/1/08
Den Danske Bank AS 6.375% A1 170,000 170,570
6/15/08 (f)(h)
Fleet/Norstar Financial A3 90,000 99,080
Group, Inc. 9.9% 6/15/01
NB Capital Trust IV 8.25% Aa2 100,000 113,362
4/15/27
Providian National Bank 6.7% Baa3 100,000 101,137
3/15/03
833,577
CREDIT & OTHER FINANCE - 0.8%
Ahmanson Capital Trust I A3 125,000 139,999
8.36% 12/1/26 (f)
AT&T Capital Corp.:
6.25% 5/15/01 Baa3 250,000 246,598
7.5% 11/15/00 Baa3 130,000 131,591
BankAmerica Capital II Series Aa2 100,000 110,315
2, 8% 12/15/26
BanPonce Trust I 8.327% 2/1/27 A3 230,000 246,680
Countrywide Funding Corp. A3 150,000 152,508
6.45% 2/27/03
ERP Operating LP 6.55% A3 55,000 55,056
11/15/01
Farmers Insurance Exchange A2 110,000 110,095
Capital 7.05% 7/15/28 (f)
First Security Capital I A3 110,000 121,349
8.41% 12/15/26
General Electric Capital Aaa 250,000 250,955
Corp. 6.94% 4/13/09 (e)
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
GS Escrow Corp.:
7% 8/1/03 Ba1 $ 90,000 $ 88,193
7.125% 8/1/05 Ba1 165,000 161,971
Heller Financial, Inc. 7.875% A3 180,000 183,172
11/1/99
KeyCorp Institutional Capital A1 130,000 142,360
A 7.826% 12/1/26
Macsaver Financial Services,
Inc.:
7.4% 2/15/02 Ba1 290,000 237,800
7.6% 8/1/07 Ba1 750,000 540,000
7.875% 8/1/03 Ba1 20,000 16,000
Mellon Capital I 7.72% 12/1/26 A2 70,000 75,755
Money Store, Inc. 7.3% 12/1/02 A2 100,000 105,125
Nordstrom Credit, Inc. 7.25% A2 100,000 105,304
4/30/02
Premier Auto Trust 5.45% 206,419 206,677
6/8/99
U.S. Bancorp 8.09% 11/15/26 A1 100,000 109,695
UNICCO Service Co./UNICCO B3 510,000 492,150
Finance Corp. 9.875% 10/15/07
4,029,348
SAVINGS & LOANS - 0.1%
Chevy Chase Savings Bank FSB B1 170,000 170,000
9.25% 12/1/08
Great Western Finance Trust A3 120,000 135,372
II 8.206% 2/1/27
Home Savings of America FSB A3 90,000 91,540
6.5% 8/15/04
Long Island Savings Bank FSB Baa3 280,000 285,639
7% 6/13/02
682,551
SECURITIES INDUSTRY - 0.1%
Amvescap PLC yankee 6.375% A3 200,000 203,332
5/15/03
Morgan Stanley, Dean Witter, 500,000 500,000
Discover & Co. 4.8% 1/15/99
(h)
703,332
TOTAL FINANCE 6,248,808
HEALTH - 0.3%
MEDICAL EQUIPMENT & SUPPLIES
- - 0.1%
Graham-Field Health Products, Caa1 360,000 237,600
Inc. 9.75% 8/15/07
MEDICAL FACILITIES MANAGEMENT
- - 0.2%
Fountain View, Inc. 11.25% Caa1 460,000 400,200
4/15/08
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
HEALTH - CONTINUED
MEDICAL FACILITIES MANAGEMENT
- - CONTINUED
Tenet Healthcare Corp.:
8.125% 12/1/08 (f) Ba3 $ 210,000 $ 215,250
8.625% 1/15/07 Ba3 630,000 658,350
1,273,800
TOTAL HEALTH 1,511,400
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.3%
ELECTRICAL EQUIPMENT - 0.0%
Motors & Gears, Inc. 10.75% B3 90,000 92,250
11/15/06
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.2%
Bucyrus International, Inc. B1 520,000 434,200
9.75% 9/15/07
Roller Bearing Holding, Inc. - 500,000 250,000
0% 6/15/09 (d)(f)
Thermadyne Manufacturing LLC B3 130,000 118,300
9.875% 6/1/08
Tyco International Group SA
yankee:
6.125% 6/15/01 Baa1 90,000 90,867
6.375% 6/15/05 Baa1 105,000 107,035
1,000,402
POLLUTION CONTROL - 0.1%
Allied Waste North America, Ba2 150,000 151,875
Inc. 7.625% 1/1/06 (f)
Envirosource, Inc. 9.75% B3 120,000 108,600
6/15/03
WMX Technologies, Inc.:
6.25% 10/15/00 Baa3 100,000 100,761
7.1% 8/1/26 Baa3 140,000 149,044
8.25% 11/15/99 Baa3 40,000 40,827
551,107
TOTAL INDUSTRIAL MACHINERY & 1,643,759
EQUIPMENT
MEDIA & LEISURE - 5.4%
BROADCASTING - 3.6%
ACME Television LLC/ACME B3 290,000 231,275
Financial Corp. 0% 9/30/04
(d)
Adelphia Communications Corp.:
9.5% 2/15/04 pay-in-kind B2 971,399 993,149
9.875% 3/1/07 B2 860,000 950,300
Ascent Entertainment Group, B3 320,000 192,000
Inc. 0% 12/15/04 (d)
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE NOTE 1)
Avalon Cable Michigan, Inc./ B3 $ 330,000 $ 336,600
Avalon Cable Finance, Inc.
9.375% 12/1/08 (f)
Century Communications Corp.:
0% 1/15/08 Ba3 2,020,000 1,030,200
8.75% 10/1/07 Ba3 180,000 198,000
Chancellor Media Corp. 9% B1 620,000 652,550
10/1/08 (f)
Clear Channel Communications,
Inc.:
6.875% 6/15/18 Baa3 150,000 145,815
7.25% 10/15/27 Baa3 40,000 40,032
Comcast UK Cable Partners B2 580,000 490,100
Ltd. 0% 11/15/07 (d)
Continental Cablevision, Inc. Baa3 40,000 44,384
8.3% 5/15/06
CSC Holdings, Inc.:
7.875% 12/15/07 Ba2 70,000 73,682
9.25% 11/1/05 B1 260,000 278,200
9.875% 5/15/06 B1 240,000 262,800
10.5% 5/15/16 B1 280,000 329,000
Diamond Cable Communications B3 130,000 107,250
PLC yankee 0% 12/15/05 (d)
EchoStar Communications Corp. B2 162,000 165,645
0% 6/1/04 (d)
Echostar Satellite B3 110,000 110,000
Broadcasting Corp. 0%
3/15/04 (d)
Falcon Holding Group
LP/Falcon Funding Corp.:
0% 4/15/10 (d) B2 1,225,000 823,813
8.375% 4/15/10 B2 285,000 287,850
FrontierVision Holdings Caa1 560,000 460,600
LP/FrontierVision Holdings
Capital Corp. 0% 9/15/07 (d)
FrontierVision Operating B3 860,000 955,675
Partners LP/ FrontierVision
Capital Corp. 11% 10/15/06
Golden Sky Systems, Inc. B3 210,000 218,400
12.375% 8/1/06 (f)
Granite Broadcasting Corp.:
8.875% 5/15/08 B3 400,000 381,000
9.375% 12/1/05 B3 600,000 588,000
10.375% 5/15/05 B3 210,000 212,100
Hearst-Argyle Television, Baa3 50,000 52,169
Inc. 7.5% 11/15/27
Intermedia Capital Partners B2 180,000 202,500
IV LP / Intermedia Partners
IV Capital Corp. 11.25%
8/1/06
International Cabletel, Inc. B3 220,000 178,200
0% 2/1/06 (d)
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
MEDIA & LEISURE - CONTINUED
BROADCASTING - CONTINUED
Iridium Operating LLC/Iridium B3 $ 710,000 $ 610,600
Capital Corp. 11.25% 7/15/05
Lenfest Communications, Inc. B2 390,000 401,700
8.25% 2/15/08
NTL, Inc.:
0% 4/1/08 (d) B3 1,280,000 790,400
10% 2/15/07 B3 270,000 278,100
11.5% 10/1/08 (f) B3 600,000 645,000
Olympus Communications B1 160,000 176,000
LP/Olympus Capital Corp.
10.625% 11/15/06
Orion Network Systems, Inc. B2 230,000 142,600
0% 1/15/07 (d)
Pegasus Communications Corp. B3 250,000 247,500
9.625% 10/15/05
Renaissance Media Group B3 420,000 283,500
LLC/Renaissance Media
Capital Corp. 0% 4/15/08 (d)
Rogers Cablesystems Ltd. B2 290,000 340,750
yankee 11% 12/1/15
Satelites Mexicanos SA de CV B3 640,000 512,000
10.125% 11/1/04
TCI Communications, Inc.:
9.25% 4/15/02 Baa3 100,000 111,195
9.8% 2/1/12 Baa3 190,000 253,718
TCI Communications Financing Ba2 740,000 902,800
III 9.65% 3/31/27
Telewest Communications PLC B1 130,000 146,250
11.25% 11/1/08 (f)
Telewest PLC:
yankee 9.625% 10/1/06 B1 110,000 114,400
0% 10/1/07 (d) B1 1,380,000 1,145,400
Time Warner, Inc.:
6.875% 6/15/18 Baa3 60,000 62,854
8.18% 8/15/07 Baa3 180,000 208,539
UIH Australia/Pacific, Inc. B2 260,000 126,100
Series B 0% 5/15/06 (d)
United International B3 1,040,000 561,600
Holdings, Inc. 0% 2/15/08 (d)
19,052,295
ENTERTAINMENT - 0.7%
AMC Entertainment, Inc. 9.5% B2 525,000 535,500
3/15/09
Bally Total Fitness Holding
Corp.:
9.875% 10/15/07 B3 338,000 331,240
9.875% 10/15/07 (f) B3 610,000 597,800
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
Cinemark USA, Inc. 8.5% 8/1/08 B2 $ 510,000 $ 501,075
Paramount Communications, Baa3 110,000 114,788
Inc. 7.5% 1/15/02
Premier Parks, Inc. 0% 4/1/08 B3 570,000 386,175
(d)
Regal Cinemas, Inc. 8.875% B3 980,000 970,200
12/15/10 (f)
United Artists Theatre Co. Caa1 260,000 249,600
9.75% 4/15/08
Viacom, Inc. 7.75% 6/1/05 Baa3 165,000 178,997
3,865,375
LODGING & GAMING - 0.6%
Aladdin Gaming Caa2 360,000 93,600
Holdings/Aladdin Capital
Corp. 0% 3/1/10 (d)
Circus Circus Enterprises,
Inc.:
7.625% 7/15/13 Ba2 210,000 184,800
9.25% 12/1/05 Ba2 170,000 172,550
Courtyard by Marriott II B- 340,000 351,050
LP/Courtyard II Finance Co.
10.75% 2/1/08
HMH Properties, Inc.:
7.875% 8/1/05 Ba2 355,000 347,013
7.875% 8/1/08 Ba2 1,535,000 1,488,950
8.45% 12/1/08 Ba2 90,000 90,000
Signature Resorts, Inc.:
9.25% 5/15/06 B2 325,000 299,000
9.75% 10/1/07 B3 340,000 285,600
Sun International Hotels Ba3 120,000 123,600
Ltd./Sun International North
America, Inc. yankee 9%
3/15/07
3,436,163
PUBLISHING - 0.3%
Big Flower Press Holdings, B2 290,000 290,000
Inc. 8.625% 12/1/08 (f)
Garden State Newspapers, Inc. B1 890,000 894,450
Series B, 8.75% 10/1/09
News America Holdings, Inc. Baa3 110,000 118,336
7.7% 10/30/25
News America, Inc. 7.25% Baa3 130,000 132,818
5/18/18
1,435,604
RESTAURANTS - 0.2%
Dominos, Inc. 10.375% 1/15/09 B3 420,000 422,100
(f)
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
MEDIA & LEISURE - CONTINUED
RESTAURANTS - CONTINUED
Host Marriott Travel Plazas, Ba3 $ 450,000 $ 460,125
Inc. 9.5% 5/15/05
Nebraska Restaurant, Inc. B3 240,000 242,400
10.75% 7/15/08
1,124,625
TOTAL MEDIA & LEISURE 28,914,062
NONDURABLES - 0.3%
BEVERAGES - 0.0%
Seagram J E & Sons, Inc.:
6.625% 12/15/05 Baa3 60,000 59,640
7.6% 12/15/28 Baa3 60,000 60,210
119,850
FOODS - 0.0%
ConAgra, Inc. 7.125% 10/1/26 Baa1 150,000 159,098
HOUSEHOLD PRODUCTS - 0.2%
Revlon Consumer Products
Corp.:
8.625% 2/1/08 B3 720,000 655,200
9% 11/1/06 (f) B2 390,000 386,100
1,041,300
TOBACCO - 0.1%
Philip Morris Companies, Inc.:
6.95% 6/1/06 A2 140,000 149,099
7.25% 9/15/01 A2 50,000 52,195
201,294
TOTAL NONDURABLES 1,521,542
RETAIL & WHOLESALE - 0.8%
APPAREL STORES - 0.1%
AnnTaylor, Inc. 8.75% 6/15/00 B3 460,000 464,600
GENERAL MERCHANDISE STORES -
0.2%
Dayton Hudson Corp. 7.5% A3 125,000 137,594
7/15/06
Federated Department Stores, Baa2 100,000 103,037
Inc. 6.79% 7/15/27
K mart Corp.:
7.75% 10/1/12 Ba2 40,000 40,200
12.5% 3/1/05 Ba2 510,000 638,775
Saks Holdings, Inc. 8.25% Baa3 230,000 243,800
11/15/08
1,163,406
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
GROCERY STORES - 0.3%
Ameriserve Food Distribution, B1 $ 150,000 $ 138,750
Inc. 8.875% 10/15/06
Kroger Co. 6% 7/1/00 Baa3 150,000 150,984
Pathmark Stores, Inc.:
9.625% 5/1/03 Caa1 840,000 825,300
12.625% 6/15/02 Caa2 140,000 134,750
Pueblo Xtra International,
Inc.:
9.5% 8/1/03 B3 400,000 378,000
9.5% 8/1/03 B3 220,000 207,900
1,835,684
RETAIL & WHOLESALE,
MISCELLANEOUS - 0.2%
Amazon.com, Inc. 0% 5/1/08 (d) Caa2 470,000 310,200
Metals USA, Inc. 8.625% B2 500,000 468,750
2/15/08
778,950
TOTAL RETAIL & WHOLESALE 4,242,640
SERVICES - 0.3%
LEASING & RENTAL - 0.0%
Renters Choice, Inc. 11% B2 70,000 70,350
8/15/08 (f)
PRINTING - 0.1%
Sullivan Graphics, Inc. Caa1 210,000 212,100
12.75% 8/1/05
SERVICES - 0.2%
Borg-Warner Security Corp. B3 110,000 119,350
9.625% 3/15/07
Iron Mountain, Inc. 8.75% B3 290,000 298,700
9/30/09
La Petite Academy, Inc./La B3 530,000 524,700
Petite Academy Holding Co.
10% 5/15/08
Medaphis Corp. 9.5% 2/15/05 Caa1 270,000 207,900
1,150,650
TOTAL SERVICES 1,433,100
TECHNOLOGY - 0.4%
COMMUNICATIONS EQUIPMENT - 0.0%
Intermedia Communications, B2 100,000 95,000
Inc. 8.6% 6/1/08
COMPUTER SERVICES & SOFTWARE
- - 0.2%
Federal Data Corp. 10.125% B3 690,000 676,200
8/1/05
ICG Services, Inc. 0% 5/1/08 - 980,000 507,150
(d)
PSINet, Inc. 10% 2/15/05 B3 130,000 129,350
1,312,700
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
TECHNOLOGY - CONTINUED
COMPUTERS & OFFICE EQUIPMENT
- - 0.0%
Comdisco, Inc.:
6.375% 11/30/01 Baa1 $ 150,000 $ 150,650
7.21% 7/2/01 Baa1 125,000 129,884
280,534
ELECTRONIC INSTRUMENTS - 0.1%
Telecommunications Techniques B3 390,000 382,200
Co. LLC 9.75% 5/15/08
ELECTRONICS - 0.1%
Fairchild Semiconductor Corp. - 409,610 333,742
11.74% 3/15/08 pay-in-kind
(i)
Hadco Corp. 9.5% 6/15/08 B2 50,000 49,250
382,992
TOTAL TECHNOLOGY 2,453,426
TRANSPORTATION - 0.6%
AIR TRANSPORTATION - 0.4%
Atlas Air, Inc. 9.25% 4/15/08 B3 830,000 821,700
Kitty Hawk, Inc. 9.95% B1 625,000 615,625
11/15/04
US Air, Inc. 9.625% 2/1/01 B1 80,000 83,200
US Airways Group, Inc. Ba2 360,000 387,900
10.375% 3/1/13
1,908,425
RAILROADS - 0.1%
Canadian National Railway Co. Baa2 150,000 155,970
6.9% 7/15/28
CSX Corp. 6.46% 6/22/05 Baa2 100,000 101,446
Norfolk Southern Corp. 7.05% Baa1 220,000 238,003
5/1/37
Wisconsin Central Baa2 100,000 101,545
Transportation Corp. 6.625%
4/15/08
596,964
SHIPPING - 0.1%
Amer Reefer Co. Ltd. 10.25% B1 110,000 69,300
3/1/08
Cenargo International PLC Ba3 230,000 216,200
9.75% 6/15/08 (f)
Holt Group, Inc. 9.75% Caa1 320,000 220,800
1/15/06 (f)
506,300
TOTAL TRANSPORTATION 3,011,689
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
UTILITIES - 2.6%
CELLULAR - 1.1%
Cable & Wireless Baa1 $ 170,000 $ 170,075
Communications PLC 6.375%
3/6/03
McCaw International Ltd. 0% Caa1 1,040,000 561,600
4/15/07 (d)
Millicom International Caa1 410,000 288,025
Cellular SA 0% 6/1/06 (d)
Nextel Communications, Inc.:
0% 9/15/07 (d) B2 276,000 177,330
0% 10/31/07 (d) B2 1,840,000 1,122,400
0% 2/15/08 (d) B2 350,000 210,000
12% 11/1/08 (f) B2 740,000 808,450
Nextel International, Inc. 0% Caa1 580,000 261,000
4/15/08 (d)
Rogers Cantel, Inc. 8.8% B2 200,000 201,500
10/1/07
Rogers Communications, Inc. B2 550,000 566,500
8.875% 7/15/07
Teligent, Inc.:
0% 3/1/08 (d) Caa1 1,160,000 574,200
11.5% 12/1/07 Caa1 695,000 649,825
5,590,905
ELECTRIC UTILITY - 0.2%
Avon Energy Partners Holdings Baa2 130,000 131,872
6.46% 3/4/08 (f)
Hydro-Quebec yankee 7.4% A2 90,000 111,784
3/28/25 (e)
Israel Electric Corp. Ltd.:
yankee 7.875% 12/15/26 (f) A3 80,000 81,666
7.75% 12/15/27 (f) A3 170,000 155,496
Niagara Mohawk Power Corp. Ba2 370,000 395,900
7.75% 10/1/08
Texas Utilities Co. 6.375% Baa3 70,000 70,834
1/1/08
947,552
TELEPHONE SERVICES - 1.3%
Allegiance Telecom, Inc. - 50,000 48,500
12.875% 5/15/08
Call-Net Enterprises, Inc. 0% B1 170,000 97,750
8/15/08 (d)
Dobson Wireline Co. 12.25% - 785,000 702,575
6/15/08
GST Network Funding, Inc. 0% - 340,000 154,700
5/1/08 (d)(f)
Hyperion Telecommunications,
Inc.:
0% 4/15/03 (d) B3 420,000 300,300
12.25% 9/1/04 B3 580,000 588,700
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
UTILITIES - CONTINUED
TELEPHONE SERVICES - CONTINUED
Level 3 Communications, Inc.:
0% 12/1/08 (d)(f) B3 $ 1,490,000 $ 866,063
9.125% 5/1/08 B3 390,000 386,588
MCI WorldCom, Inc.:
8.875% 1/15/06 Baa2 103,000 112,576
9.375% 1/15/04 Baa2 122,000 126,401
McLeodUSA, Inc.:
0% 3/1/07 (d) B2 580,000 443,700
9.25% 7/15/07 B2 270,000 278,100
9.5% 11/1/08 (f) B2 570,000 604,200
NEXTLINK Communications, Inc.:
9.625% 10/1/07 B3 540,000 518,400
10.75% 11/15/08 (f) B3 430,000 438,600
Pathnet, Inc. 12.25% 4/15/08 - 910,000 637,000
WinStar Communications, Inc. CCC 1,090,000 773,900
0% 3/15/08 (d)
7,078,053
TOTAL UTILITIES 13,616,510
TOTAL NONCONVERTIBLE BONDS 71,551,706
TOTAL CORPORATE BONDS 72,590,112
(Cost $74,390,203)
U.S. GOVERNMENT AND
GOVERNMENT AGENCY
OBLIGATIONS - 0.9%
U.S. GOVERNMENT AGENCY
OBLIGATIONS - 0.2%
Federal Home Loan Bank 7.56% Aaa 50,000 55,586
9/1/04
Freddie Mac:
0% 2/25/99 - 1,050,000 1,042,659
0% 2/26/99 - 250,000 248,219
TOTAL U.S. GOVERNMENT AGENCY 1,346,464
OBLIGATIONS
U.S. TREASURY OBLIGATIONS -
0.7%
U.S. Treasury Bills, yield at - 625,000 624,818
date of purchase 3.66% to
3.68% 1/7/99 (g)
U.S. Treasury Bonds:
6.875% 8/15/25 Aaa 450,000 545,414
8.875% 2/15/19 Aaa 259,000 368,873
U.S. Treasury Notes:
5.375% 2/15/01 Aaa 405,000 411,201
6.625% 6/30/01 Aaa 20,000 20,922
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
7% 7/15/06 Aaa $ 575,000 $ 654,689
7.25% 8/15/04 Aaa 20,000 22,484
7.875% 11/15/04 Aaa 830,000 961,630
TOTAL U.S. TREASURY 3,610,031
OBLIGATIONS
TOTAL U.S. GOVERNMENT AND 4,956,495
GOVERNMENT AGENCY OBLIGATIONS
(Cost $4,844,772)
U.S. GOVERNMENT AGENCY -
MORTGAGE SECURITIES - 1.4%
FANNIE MAE - 1.0%
6% 3/1/11 to 4/1/13 Aaa 1,477,140 1,481,639
6% 1/1/28 (j) Aaa 100,000 98,719
6.5% 2/1/13 to 11/1/28 Aaa 2,013,460 2,031,680
6.5% 1/1/29 (j) Aaa 300,000 302,063
6.5% 1/1/29 (j) Aaa 100,000 100,688
7% 3/1/26 to 9/1/28 Aaa 955,855 975,214
7.5% 5/1/24 to 1/1/26 Aaa 367,297 377,393
TOTAL FANNIE MAE 5,367,396
FREDDIE MAC - 0.0%
7.5% 3/1/28 to 4/1/28 Aaa 199,700 205,066
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION - 0.4%
7% 7/15/28 Aaa 1,000,517 1,023,649
7.5% 1/15/26 to 8/15/28 Aaa 999,269 1,030,177
TOTAL GOVERNMENT NATIONAL 2,053,826
MORTGAGE ASSOCIATION
TOTAL U.S. GOVERNMENT AGENCY 7,626,288
- - MORTGAGE SECURITIES
(Cost $7,514,357)
ASSET-BACKED SECURITIES - 0.6%
Airplanes Pass Through Trust Ba2 880,000 924,000
10.875% 3/15/19
BankAmerica Manufacturing Aaa 150,000 150,750
Housing Contract 6.2% 4/10/09
Capital Equipment Receivables Baa2 100,000 100,162
Trust 6.48% 10/15/06
Chevy Chase Auto Receivables Aaa 85,283 85,749
Trust 5.91% 12/15/04
Contimortgage Home Equity Aaa 150,000 150,093
Loan Trust 6.26% 7/15/12
CPS Auto Grantor Trust:
6.09% 11/15/03 Aaa 97,681 98,108
ASSET-BACKED SECURITIES -
CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
CPS Auto Grantor Trust: -
continued
6.55% 8/15/02 Aaa $ 56,223 $ 56,539
CPS Auto Receivables Trust 6% Aaa 165,674 166,140
8/15/03
CSXT Trade Receivables Master Aaa 180,000 182,981
Trust 6% 7/25/04
Ford Credit Auto Owner Trust:
6.2% 12/15/02 Baa3 90,000 90,533
6.4% 5/15/02 A1 110,000 111,509
6.4% 12/15/02 Baa3 50,000 50,200
Green Tree Financial Corp.:
6.5% 6/15/27 Aaa 10,172 10,175
6.68% 1/15/29 AAA 210,000 213,215
6.8% 6/15/27 Aaa 100,000 100,875
Key Auto Finance Trust 6.3% A2 102,214 102,358
10/15/03
Olympic Automobile
Receivables Trust:
6.4% 9/15/01 Aaa 135,377 135,293
6.7% 3/15/02 Aaa 68,356 68,828
Petroleum Enhanced Trust Baa2 106,573 106,440
Receivables Offering
Petroleum Trust 6.125%
2/5/03 (f)(h)
UAF Auto Grantor Trust 6.1% Aaa 164,370 164,010
1/15/03 (f)
WFS Financial Owner Trust Aaa 140,000 139,956
6.55% 10/20/04
TOTAL ASSET-BACKED SECURITIES 3,207,914
(Cost $3,261,000)
COLLATERALIZED MORTGAGE
OBLIGATIONS - 0.0%
PRIVATE SPONSOR - 0.0%
Credit-Based Asset Servicing Ba3 217,631 76,987
and Securitization LLC
Series 1997 2 Class 2-B,
7.2141% 12/29/25 (f)(h)
(Cost $115,684)
COMMERCIAL MORTGAGE
SECURITIES - 1.0%
BKB Commercial Mortgage Trust BBB 60,000 60,891
Series 1997-C1 Class D,
7.83% 2/25/43 (f)(h)
CBM Funding Corp. sequential
pay Series 1996-1:
Class A-3PI, 7.08% 11/1/07 AA 100,000 104,875
Class B, 7.48% 2/1/08 A 80,000 85,438
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
CS First Boston Mortgage
Securities Corp.:
Series 1997 C2 Class D, 7.27% Baa2 $ 190,000 $ 180,263
1/17/35
Series 1998 C1 Class D, 7.17% BBB 210,000 202,978
1/17/12
Series 1998 FLI Class E, Baa2 220,000 213,813
6.5063% 1/10/13 (f)(h)
Deutsche Mortgage & Asset Baa2 140,000 134,006
Receiving Corp. Series
1998-C1 Class D, 7.231%
7/15/12
DLJ Mortgage Acceptance Corp. - 250,000 246,797
Series 1993-MF12 Class B-2,
10.1% 9/18/03 (f)
First Chicago/Lennar Trust I:
Series 1997 CHL1 Class E, - 320,000 245,600
8.1117% 4/1/39 (h)
Series 1997-CHL1 Class D, - 350,000 300,125
8.1117% 4/13/39 (h)
FMAC Loan Receivables Trust:
Series 1997-A Class E, - 250,000 201,094
8.1063% 4/15/19 (f)(h)
Series 1997-B Class E, - 100,000 75,438
7.8912% 9/15/19 (f)(h)
General Motors Acceptance Ba3 250,000 204,125
Corp. Commercial Mortgage
Securities, Inc. Series
1996-C1 Class F, 7.86%
10/15/28 (f)
GS Mortgage Securities Corp.
II:
Series 1998 GLII Class E, Baa3 180,000 162,938
7.1905% 4/13/31 (f)(h)
Series 1998-GLII Class D, Baa2 50,000 48,640
7.1905% 4/13/31 (f)(h)
Kidder Peabody Acceptance Aaa 19,989 19,936
Corp. I sequential pay
Series 1993-M1 Class A-2,
7.15% 4/25/25
LTC Commercial Mortgage Pass
Through Certificates:
Series 1996-1 Class E, 9.16% BB- 500,000 484,943
4/15/28
Series 1998-1 Class A, 6.029% AAA 108,611 108,067
5/30/30 (f)
Morgan Stanley Capital I,
Inc.:
Series 1996-MBL1 Class E, - 89,622 88,532
8.2655% 5/25/21 (f)(h)
Series 1998 CF1:
Class D, 7.35% 1/15/12 Baa2 176,000 170,225
Class E, 7.35% 12/15/12 Baa3 59,000 52,068
COMMERCIAL MORTGAGE
SECURITIES - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
Nomura Asset Securities Corp. Baa2 $ 140,000 $ 130,309
Series 1998-D6 Class A-4,
7.3498% 3/17/28 (h)
Nomura Depositor Trust - 125,000 108,398
floater Series 1998-ST1A
Class B-2, 9.7966% 1/15/03
(f)(h)
Resolution Trust Corp. Series Ba3 70,889 57,420
1991 M2 Class A3, 7.2498%
9/25/20 (h)
Structured Asset Securities
Corp.:
sequential pay Series 1996 AAA 36,386 36,181
Class A-2A, 7.75% 2/25/28
Series 1993-C1 Class E, 6.6% B 250,000 112,500
10/25/24 (f)
Series 1995-C1 Class E, BB 1,000,000 942,031
7.375% 9/25/24 (f)
Series 1996-CFL Class E, BB+ 80,000 78,375
7.75% 2/25/28
Thirteen Affiliates of
General Growth Properties,
Inc.:
Series D-2, 6.992% 12/15/10 Baa2 140,000 135,603
(f)
Series E-2, 7.224% 12/15/10 Baa3 100,000 90,641
(f)
TOTAL COMMERCIAL MORTGAGE 5,082,250
SECURITIES
(Cost $5,180,102)
FOREIGN GOVERNMENT AND
GOVERNMENT AGENCY
OBLIGATIONS - 0.0%
Export Development Corp. Aa2 50,000 50,934
yankee 8.125% 8/10/99 (Cost
$51,491)
SUPRANATIONAL OBLIGATIONS -
0.0%
Inter American Development Aaa 150,000 157,128
Bank yankee 6.29% 7/16/27
(Cost $149,057)
BANK NOTES - 0.1%
Key Bank NA 5.18% 8/20/99 (h) 500,000 499,750
(Cost $499,328)
CERTIFICATES OF DEPOSIT - 0.3%
Bayerische Hypotheken-und 200,000 200,233
Wechselbank AG yankee 5.7%
3/30/99
Fleet National Bank 5.4616% 400,000 399,796
5/5/00 (h)
PRINCIPAL AMOUNT VALUE (NOTE 1)
RaboBank Nederland Coop. $ 400,000 $ 400,874
Central yankee 5.68% 6/4/99
Swiss Bank Corp. yankee 5.65% 300,000 300,291
3/24/99
Toronto Dominion Bank yankee 400,000 400,874
5.68% 6/4/99
TOTAL CERTIFICATES OF DEPOSIT 1,702,068
(Cost $1,699,789)
COMMERCIAL PAPER - 0.6%
Citibank Credit Card Master 400,000 399,443
Trust I (Dakota Certificate
Program) 5.35% 1/14/99
Commonwealth Bank of 400,000 396,988
Australia yankee 5.35% 3/1/99
Den Danske Corp., Inc. yankee 400,000 395,445
5.13% 3/29/99
General Electric Capital 400,000 396,029
Corp. 5.12% 3/19/99
Generale de Banque SA yankee 400,000 397,229
5.36% 2/24/99
Marsh & McLennan Companies, 225,000 222,796
Inc. 5.15% 3/18/99
PHH Corp. 5.62% 2/22/99 400,000 397,338
Preferred Receivables Funding 400,000 398,083
Corp. 5.25% 2/8/99
Transamerica Finance Corp. 400,000 398,788
5.47% 1/26/99
TOTAL COMMERCIAL PAPER 3,402,139
(Cost $3,398,229)
MASTER NOTES - 0.1%
Goldman Sachs Group L.P. 300,000 300,000
(The) 5.2653% 1/27/99 (h)
(Cost $300,000)
CASH EQUIVALENTS - 4.5%
MATURITY AMOUNT
Investments in repurchase $ 4,002 4,000
agreements (U.S. Treasury
obligations), in a joint
trading account at 4.98%,
dated 12/31/98 due 1/4/99
SHARES
Taxable Central Cash Fund (c) 23,980,767 23,980,767
TOTAL CASH EQUIVALENTS 23,984,767
(Cost $23,984,767)
TOTAL INVESTMENT IN $ 530,959,112
SECURITIES - 100%
(Cost $437,408,472)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
FUTURES CONTRACTS
EXPIRATION DATE UNDERLYING FACE AMOUNT AT VALUE UNREALIZED GAIN/(LOSS)
PURCHASED
36 S&P 500 Stock Index Mar. 1999 $ 11,209,500 $ 489,830
Contracts
</TABLE>
THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL
INVESTMENTS IN SECURITIES - 2.1%
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) At period end, the seven-day yield on the Taxable Central Cash
Fund was 4.80%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(d) Debt obligation initially issued in zero coupon form which
converts to coupon form at a specified rate and date. The rate shown
is the rate at period end.
(e) Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date. The rate shown is the rate at
period end.
(f) Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified
institutional buyers. At the period end, the value of these securities
amounted to $13,409,152 or 2.5% of net assets.
(g) Security or a portion of the security was pledged to cover margin
requirements for futures contracts. At the period end, the value of
securities pledged amounted to $624,818.
(h) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(i) Restricted securities - Investment in securities not registered
under the Securities Act of 1933 (see Note 2 of Notes to Financial
Statements).
SECURITY ACQUISTION DATE ACQUISITION COST
Fairchild Semiconductor Corp. 4/3/97 - 11/18/98 $ 352,035
11.74% 3/15/08 pay-in-kind
(j) Security purchased on a delayed delivery or when-issued basis
(see Note 2 of Notes to Financial Statements).
OTHER INFORMATION
The composition of long-term debt holdings as a percentage of total
value of investments in securities, is as follows (ratings are
unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 3.1% AAA, AA, A 3.0%
Baa 1.4% BBB 1.4%
Ba 2.4% BB 3.3%
B 7.8% B 7.2%
Caa 1.1% CCC 1.3%
Ca, C 0.0% CC, C 0.0%
D 0.0%
For some foreign government obligations, FMR has assigned the ratings
for 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 0.2% of the
total value of investment in securities.
Purchases and sales of securities, other than short-term securities,
aggregated $465,427,958 and $497,937,040, respectively, of which
long-term U.S. government and government agency obligations aggregated
$94,758,115 and $102,787,683, respectively (see Note 3 of Notes to
Financial Statements).
The market value of futures contracts opened and closed during the
period amounted to $26,283,603 and $15,331,191, respectively (see Note
3 of Notes to Financial Statements).
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $44,190 for the
period (see Note 4 of Notes to Financial Statements).
INCOME TAX INFORMATION
At December 31, 1998, the aggregate cost of investment securities for
income tax purposes was $438,363,460. Net unrealized appreciation
aggregated $92,595,652, of which $108,597,921 related to appreciated
investment securities and $16,002,269 related to depreciated
investment securities.
The fund hereby designates approximately $25,228,000 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, 1998
ASSETS
Investment in securities, at $ 530,959,112
value (including repurchase
agreements of $4,000) (cost
$437,408,472) - See
accompanying schedule
Cash 5,862
Receivable for investments 119,654
sold
Receivable for fund shares 158,995
sold
Dividends receivable 576,661
Interest receivable 1,533,612
Receivable for daily 30,600
variation on futures
contracts
TOTAL ASSETS 533,384,496
LIABILITIES
Payable for investments $ 217,283
purchased Regular delivery
Delayed delivery 502,226
Payable for fund shares 268,540
redeemed
Accrued management fee 249,826
Distribution fees payable 232
Other payables and accrued 107,515
expenses
TOTAL LIABILITIES 1,345,622
NET ASSETS $ 532,038,874
Net Assets consist of:
Paid in capital $ 405,733,148
Undistributed net investment 12,651,500
income
Accumulated undistributed net 19,613,755
realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation 94,040,471
(depreciation) on
investments and assets and
liabilities in foreign
currencies
NET ASSETS $ 532,038,874
INITIAL CLASS: NET ASSET $17.03
VALUE, offering price and
redemption price per share
($528,874,135 (divided by)
31,056,345 shares)
SERVICE CLASS: NET ASSET $16.96
VALUE, offering price and
redemption price per share
($3,164,739 (divided by)
186,586 shares)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME $ 6,347,125
Dividends
Interest 10,089,861
TOTAL INCOME 16,436,986
EXPENSES
Management fee $ 2,924,293
Transfer agent fees 337,356
Distribution fees - Service 1,096
Class
Accounting fees and expenses 301,355
Non-interested trustees' 1,804
compensation
Custodian fees and expenses 26,290
Audit 40,559
Legal 4,750
Total expenses before 3,637,503
reductions
Expense reductions (87,169) 3,550,334
NET INVESTMENT INCOME 12,886,652
REALIZED AND UNREALIZED GAIN
(LOSS)
Net realized gain (loss) on:
Investment securities 19,984,263
Foreign currency transactions (1,071)
Futures contracts (232,742) 19,750,450
Change in net unrealized
appreciation (depreciation)
on:
Investment securities 46,478,101
Assets and liabilities in 5,097
foreign currencies
Futures contracts 489,830 46,973,028
NET GAIN (LOSS) 66,723,478
NET INCREASE (DECREASE) IN $ 79,610,130
NET ASSETS RESULTING FROM
OPERATIONS
OTHER INFORMATION $ 80,632
Expense reductions Directed
brokerage arrangements
Custodian credits 6,537
$ 87,169
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
INCREASE (DECREASE) IN NET YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
ASSETS
Operations Net investment $ 12,886,652 $ 9,495,223
income
Net realized gain (loss) 19,750,450 45,670,158
Change in net unrealized 46,973,028 28,894,868
appreciation (depreciation)
NET INCREASE (DECREASE) IN 79,610,130 84,060,249
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders (9,747,110) -
From net investment income
From net realized gain (45,582,074) (447,876)
TOTAL DISTRIBUTIONS (55,329,184) (447,876)
Share transactions - net 24,516,891 146,605,112
increase (decrease)
TOTAL INCREASE (DECREASE) 48,797,837 230,217,485
IN NET ASSETS
NET ASSETS
Beginning of period 483,241,037 253,023,552
End of period (including $ 532,038,874 $ 483,241,037
undistributed net investment
income of $12,651,500 and
$9,445,834, respectively)
</TABLE>
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
SHARES DOLLARS SHARES DOLLARS
Share transactions Initial 5,166,840 $ 81,527,781 13,903,953 $ 201,184,575
Class Sold
Reinvested 3,710,796 55,327,974 32,763 447,876
Redeemed (7,361,720) (115,250,981) (3,709,989) (55,037,339)
Net increase (decrease) 1,515,916 $ 21,604,774 10,226,727 $ 146,595,112
Service Class A Sold 202,513 $ 3,161,007 627 $ 10,000
Reinvested 81 1,210 - -
Redeemed (16,635) (250,100) - -
Net increase (decrease) 185,959 $ 2,912,117 627 $ 10,000
Distributions From net $ 9,746,897 $ -
investment income Initial
Class
Service Class 213 -
Total $ 9,747,110 $ -
From net realized gain $ 45,581,077 $ 447,876
Initial Class
Service Class 997 -
Total $ 45,582,074 $ 447,876
$ 55,329,184 $ 447,876
A SERVICE CLASS COMMENCED
SALE OF SHARES NOVEMBER 3,
1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 1996 1995 D
Net asset value, beginning of $ 16.36 $ 13.10 $ 11.77 $ 10.00
period
Income from Investment
Operations
Net investment income .41 C .36 C .21 .10
Net realized and unrealized 2.19 2.92 2.08 2.20
gain (loss)
Total from investment 2.60 3.28 2.29 2.30
operations
Less Distributions
From net investment income (.34) - (.21) (.11)
From net realized gain (1.59) (.02) (.75) (.42)
Total distributions (1.93) (.02) (.96) (.53)
Net asset value, end of period $ 17.03 $ 16.36 $ 13.10 $ 11.77
TOTAL RETURN B, H 17.57% 25.07% 20.04% 23.02%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 528,874 $ 483,231 $ 253,024 $ 68,247
(000 omitted)
Ratio of expenses to average .73% .77% .87% 1.00% F
net assets
Ratio of expenses to average .72% G .76% G .85% G 1.00%
net assets after expense
reductions
Ratio of net investment 2.60% 2.44% 2.63% 1.69%
income to average net assets
Portfolio turnover 98% 90% 120% 343%
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 E
Net asset value, beginning of $ 16.35 $ 15.94
period
Income from Investment
Operations
Net investment income C .40 .07
Net realized and unrealized 2.14 .34
gain (loss)
Total from investment 2.54 .41
operations
Less Distributions
From net investment income (.34) -
From net realized gain (1.59) -
Total distributions (1.93) -
Net asset value, end of period $ 16.96 $ 16.35
TOTAL RETURN B, H 17.18% 2.57%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 3,165 $ 10
(000 omitted)
Ratio of expenses to average .89% .87% A
net assets
Ratio of expenses to average .88% G .87% A
net assets after expense
reductions
Ratio of net investment 2.65% 2.70% A
income to average net assets
Portfolio turnover 98% 90%
A ANNUALIZED
B 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).
C NET INVESTMENT INCOME PER
SHARE HAS BEEN CALCULATED
BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
D FOR THE PERIOD JANUARY 3,
1995 (COMMENCEMENT OF
OPERATIONS OF INITIAL CLASS
SHARES) TO DECEMBER 31, 1995.
E FOR THE PERIOD NOVEMBER 3,
1997 (COMMENCEMENT OF SALE
OF SERVICE CLASS SHARES) TO
DECEMBER 31, 1997.
F FMR AGREED TO REIMBURSE A
PORTION OF THE CLASS'
EXPENSES DURING THE PERIOD.
WITHOUT THIS REIMBURSEMENT,
THE CLASS' EXPENSE RATIO
WOULD HAVE BEEN HIGHER.
G FMR OR THE FUND HAS ENTERED
INTO VARYING ARRANGEMENTS
WITH THIRD PARTIES WHO
EITHER PAID OR REDUCED A
PORTION OF THE CLASS'
EXPENSES (SEE NOTE 5 OF
NOTES TO FINANCIAL
STATEMENTS).
H TOTAL RETURNS DO NOT
REFLECT CHARGES ATTRIBUTABLE
TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION
OF THESE CHARGES WOULD
REDUCE THE TOTAL RETURNS
SHOWN. TOTAL RETURNS FOR
PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
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 DECEMBER 31, PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
1998
VIP: EQUITY-INCOME - "INITIAL 11.63% 18.77% 15.62%
CLASS"
S&P 500 (registered trademark) 28.58% 24.06% 19.21%
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 market capitalization-weighted index of common
stocks. This benchmark reflects the reinvestment of dividends and
capital gains, if any.
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.
(checkmark)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.
$10,000 OVER 10 YEARS
VIP Equity-Income S&P 500
00150 SP001
1988/12/31 10000.00 10000.00
1989/01/31 10617.62 10732.00
1989/02/28 10563.12 10464.77
1989/03/31 10791.92 10708.60
1989/04/30 11208.42 11264.38
1989/05/31 11541.62 11720.59
1989/06/30 11549.52 11653.78
1989/07/31 12222.85 12706.12
1989/08/31 12419.24 12955.15
1989/09/30 12279.62 12902.04
1989/10/31 11571.18 12602.71
1989/11/30 11637.30 12859.81
1989/12/31 11734.42 13168.44
1990/01/31 10941.94 12284.84
1990/02/28 11006.78 12443.31
1990/03/31 11024.93 12773.06
1990/04/30 10642.68 12453.74
1990/05/31 11346.83 13667.97
1990/06/30 11233.85 13575.03
1990/07/31 10959.11 13531.59
1990/08/31 10084.01 12308.34
1990/09/30 9301.77 11708.92
1990/10/31 9064.59 11658.57
1990/11/30 9714.27 12411.72
1990/12/31 9940.30 12758.00
1991/01/31 10473.37 13314.25
1991/02/28 11194.59 14266.22
1991/03/31 11426.82 14611.46
1991/04/30 11480.21 14646.53
1991/05/31 12110.29 15279.26
1991/06/30 11615.12 14579.47
1991/07/31 12273.60 15258.87
1991/08/31 12532.67 15620.51
1991/09/30 12446.65 15359.65
1991/10/31 12653.91 15565.47
1991/11/30 12108.49 14938.18
1991/12/31 13065.38 16647.11
1992/01/31 13241.79 16337.47
1992/02/29 13671.79 16549.86
1992/03/31 13504.25 16227.13
1992/04/30 13927.31 16704.21
1992/05/31 14038.64 16786.06
1992/06/30 13915.73 16535.95
1992/07/31 14342.18 17212.27
1992/08/31 14027.95 16859.42
1992/09/30 14173.57 17058.36
1992/10/31 14343.25 17118.06
1992/11/30 14863.59 17701.79
1992/12/31 15271.74 17919.52
1993/01/31 15727.62 18070.05
1993/02/28 16080.92 18315.80
1993/03/31 16560.14 18702.26
1993/04/30 16491.28 18249.67
1993/05/31 16789.67 18738.76
1993/06/30 16987.15 18793.10
1993/07/31 17218.27 18717.93
1993/08/31 17876.95 19427.34
1993/09/30 17808.61 19277.75
1993/10/31 17971.46 19676.80
1993/11/30 17657.39 19489.87
1993/12/31 18065.54 19725.69
1994/01/31 18861.17 20396.37
1994/02/28 18375.46 19843.63
1994/03/31 17606.73 18978.44
1994/04/30 18213.43 19221.37
1994/05/31 18386.78 19536.60
1994/06/30 18273.18 19057.95
1994/07/31 18883.53 19683.05
1994/08/31 19855.11 20490.06
1994/09/30 19529.83 19988.05
1994/10/31 19930.70 20437.78
1994/11/30 19279.29 19693.44
1994/12/31 19342.00 19985.49
1995/01/31 19644.41 20503.72
1995/02/28 20393.47 21302.75
1995/03/31 21097.64 21931.39
1995/04/30 21684.43 22577.27
1995/05/31 22337.90 23479.68
1995/06/30 22658.84 24025.12
1995/07/31 23530.85 24821.79
1995/08/31 23825.99 24884.09
1995/09/30 24616.99 25934.20
1995/10/31 24333.73 25841.62
1995/11/30 25385.85 26976.06
1995/12/31 26129.58 27495.62
1996/01/31 26888.92 28431.57
1996/02/29 26979.24 28695.13
1996/03/31 27263.23 28971.47
1996/04/30 27618.22 29398.51
1996/05/31 27916.41 30156.69
1996/06/30 27660.82 30271.59
1996/07/31 26311.86 28934.19
1996/08/31 26851.44 29544.41
1996/09/30 28001.61 31207.17
1996/10/31 28456.00 32067.87
1996/11/30 30358.74 34491.88
1996/12/31 29861.76 33808.59
1997/01/31 31026.12 35920.96
1997/02/28 31369.83 36202.58
1997/03/31 30203.90 34715.01
1997/04/30 31275.30 36787.50
1997/05/31 33213.26 39027.12
1997/06/30 34757.34 40775.54
1997/07/31 37294.02 44020.05
1997/08/31 35545.13 41554.04
1997/09/30 37498.85 43829.96
1997/10/31 36128.09 42366.04
1997/11/30 37451.58 44327.16
1997/12/31 38255.13 45088.26
1998/01/31 38160.59 45586.93
1998/02/28 40620.05 48874.66
1998/03/31 42501.54 51377.53
1998/04/30 42501.54 51894.39
1998/05/31 41812.78 51002.33
1998/06/30 42283.15 53074.04
1998/07/31 41241.61 52508.80
1998/08/31 34941.98 44917.08
1998/09/30 36991.46 47794.47
1998/10/31 39729.70 51682.07
1998/11/30 41409.60 54814.52
1998/12/31 42703.13 57972.94
IMATRL PRASUN SHR__CHT 19981231 19990111 121246 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund: Equity-Income Portfolio
on December 31, 1988. As the chart shows, by December 31, 1998, the
value of the investment would have grown to $42,703 - a 327.03%
increase on the initial investment. For comparison, look at how the
Standard & Poor's 500 Index did over the same period. With dividends
and capital gains, if any, reinvested, the same $10,000 investment
would have grown to $57,973 - a 479.73% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF
DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
General Electric Co. 4.0
Philip Morris Companies, Inc. 2.3
Fannie Mae 2.2
Citigroup, Inc. 2.1
Bank One Corp. 1.9
TOP FIVE MARKET SECTORS AS OF
DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
FINANCE 24.3
UTILITIES 12.5
ENERGY 10.7
INDUSTRIAL MACHINERY & 8.7
EQUIPMENT
BASIC INDUSTRIES 5.9
ASSET ALLOCATION AS OF DECEMBER 31, 1998*
(% OF FUND'S INVESTMENTS)
Row: 1, Col: 1, Value: 96.09999999999999
Row: 1, Col: 2, Value: 1.7
Row: 1, Col: 3, Value: 2.2
Stocks 96.0%
Bonds 1.7%
Short-term investments 2.3%
*FOREIGN INVESTMENTS 8.8%
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1 fee.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
1998
VIP: EQUITY-INCOME - SERVICE 11.54% 18.75% 15.61%
CLASS
S&P 500 28.58% 24.06% 19.21%
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 market capitalization-weighted index of common
stocks. This benchmark reflects the reinvestment of dividends and
capital gains, if any.
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.
(checkmark)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.
$10,000 OVER 10 YEARS
VIP Equity-Income - CL S S&P 500
00471 SP001
1988/12/31 10000.00 10000.00
1989/01/31 10617.62 10732.00
1989/02/28 10563.12 10464.77
1989/03/31 10791.92 10708.60
1989/04/30 11208.42 11264.38
1989/05/31 11541.62 11720.59
1989/06/30 11549.52 11653.78
1989/07/31 12222.85 12706.12
1989/08/31 12419.24 12955.15
1989/09/30 12279.62 12902.04
1989/10/31 11571.18 12602.71
1989/11/30 11637.30 12859.81
1989/12/31 11734.42 13168.44
1990/01/31 10941.94 12284.84
1990/02/28 11006.78 12443.31
1990/03/31 11024.93 12773.06
1990/04/30 10642.68 12453.74
1990/05/31 11346.83 13667.97
1990/06/30 11233.85 13575.03
1990/07/31 10959.11 13531.59
1990/08/31 10084.01 12308.34
1990/09/30 9301.77 11708.92
1990/10/31 9064.59 11658.57
1990/11/30 9714.27 12411.72
1990/12/31 9940.30 12758.00
1991/01/31 10473.37 13314.25
1991/02/28 11194.59 14266.22
1991/03/31 11426.82 14611.46
1991/04/30 11480.21 14646.53
1991/05/31 12110.29 15279.26
1991/06/30 11615.12 14579.47
1991/07/31 12273.60 15258.87
1991/08/31 12532.67 15620.51
1991/09/30 12446.65 15359.65
1991/10/31 12653.91 15565.47
1991/11/30 12108.49 14938.18
1991/12/31 13065.38 16647.11
1992/01/31 13241.79 16337.47
1992/02/29 13671.79 16549.86
1992/03/31 13504.25 16227.13
1992/04/30 13927.31 16704.21
1992/05/31 14038.64 16786.06
1992/06/30 13915.73 16535.95
1992/07/31 14342.18 17212.27
1992/08/31 14027.95 16859.42
1992/09/30 14173.57 17058.36
1992/10/31 14343.25 17118.06
1992/11/30 14863.59 17701.79
1992/12/31 15271.74 17919.52
1993/01/31 15727.62 18070.05
1993/02/28 16080.92 18315.80
1993/03/31 16560.14 18702.26
1993/04/30 16491.28 18249.67
1993/05/31 16789.67 18738.76
1993/06/30 16987.15 18793.10
1993/07/31 17218.27 18717.93
1993/08/31 17876.95 19427.34
1993/09/30 17808.61 19277.75
1993/10/31 17971.46 19676.80
1993/11/30 17657.39 19489.87
1993/12/31 18065.54 19725.69
1994/01/31 18861.17 20396.37
1994/02/28 18375.46 19843.63
1994/03/31 17606.73 18978.44
1994/04/30 18213.43 19221.37
1994/05/31 18386.78 19536.60
1994/06/30 18273.18 19057.95
1994/07/31 18883.53 19683.05
1994/08/31 19855.11 20490.06
1994/09/30 19529.83 19988.05
1994/10/31 19930.70 20437.78
1994/11/30 19279.29 19693.44
1994/12/31 19342.00 19985.49
1995/01/31 19644.41 20503.72
1995/02/28 20393.47 21302.75
1995/03/31 21097.64 21931.39
1995/04/30 21684.43 22577.27
1995/05/31 22337.90 23479.68
1995/06/30 22658.84 24025.12
1995/07/31 23530.85 24821.79
1995/08/31 23825.99 24884.09
1995/09/30 24616.99 25934.20
1995/10/31 24333.73 25841.62
1995/11/30 25385.85 26976.06
1995/12/31 26129.58 27495.62
1996/01/31 26888.92 28431.57
1996/02/29 26979.24 28695.13
1996/03/31 27263.23 28971.47
1996/04/30 27618.22 29398.51
1996/05/31 27916.41 30156.69
1996/06/30 27660.82 30271.59
1996/07/31 26311.86 28934.19
1996/08/31 26851.44 29544.41
1996/09/30 28001.61 31207.17
1996/10/31 28456.00 32067.87
1996/11/30 30358.74 34491.88
1996/12/31 29861.76 33808.59
1997/01/31 31026.12 35920.96
1997/02/28 31369.83 36202.58
1997/03/31 30203.90 34715.01
1997/04/30 31275.30 36787.50
1997/05/31 33213.26 39027.12
1997/06/30 34757.34 40775.54
1997/07/31 37294.02 44020.05
1997/08/31 35545.13 41554.04
1997/09/30 37498.85 43829.96
1997/10/31 36128.09 42366.04
1997/11/30 37451.58 44327.16
1997/12/31 38239.37 45088.26
1998/01/31 38160.59 45586.93
1998/02/28 40620.05 48874.66
1998/03/31 42484.74 51377.53
1998/04/30 42501.54 51894.39
1998/05/31 41795.98 51002.33
1998/06/30 42266.35 53074.04
1998/07/31 41224.81 52508.80
1998/08/31 34925.18 44917.08
1998/09/30 36974.66 47794.47
1998/10/31 39696.10 51682.07
1998/11/30 41359.20 54814.52
1998/12/31 42652.73 57972.94
IMATRL PRASUN SHR__CHT 19981231 19990111 121127 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically $10,000 was invested
in Variable Insurance Products Fund: Equity-Income Portfolio - Service
Class on December 31, 1988. As the chart shows, by December 31, 1998,
the value of the investment would have grown to $42,653 - a 326.53%
increase on the initial investment. For comparison, look at how the
Standard & Poor's 500 Index did over the same period. With dividends
and capital gains, if any, reinvested, the same $10,000 investment
would have grown to $57,973 - a 479.73% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF
DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
General Electric Co. 4.0
Philip Morris Companies, Inc. 2.3
Fannie Mae 2.2
Citigroup, Inc. 2.1
Bank One Corp. 1.9
TOP FIVE MARKET SECTORS AS OF
DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
FINANCE 24.3
UTILITIES 12.5
ENERGY 10.7
INDUSTRIAL MACHINERY & 8.7
EQUIPMENT
BASIC INDUSTRIES 5.9
ASSET ALLOCATION AS OF DECEMBER 31, 1998*
(% OF FUND'S INVESTMENTS)
Row: 1, Col: 1, Value: 96.09999999999999
Row: 1, Col: 2, Value: 1.7
Row: 1, Col: 3, Value: 2.2
Stocks 96.0%
Bonds 1.7%
Short-term investments 2.3%
*FOREIGN INVESTMENTS 8.8%
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
(photograph of Steve Petersen)
An interview with
Steve Petersen,
Portfolio Manager of
Equity-Income Portfolio
Q. HOW DID THE FUND PERFORM, STEVE?
A. The fund underperformed the Standard & Poor's 500 Index, which
returned 28.58% for the 12-month period ending December 31, 1998.
Q. WHAT WAS THE INVESTING ENVIRONMENT LIKE DURING THE YEAR?
A. During the first half of 1998, investors focused on larger
companies with predictable earnings growth rather than smaller or more
cyclical stocks. The market's free-fall in late August - triggered by
Russia's currency devaluation and debt defaults, problems in emerging
markets and concerns about the soundness of hedge fund management
companies - spurred investors' flight to the perceived safer haven of
the largest companies. As the Federal Reserve Board moved to lower
interest rates to add liquidity to the economy and prevent a possible
recession, the market rebounded strongly, with most of the fourth
quarter's strong performance concentrated in larger issues, as well as
in technology and Internet-related stocks.
Q. HOW DID THIS ENVIRONMENT AFFECT THE FUND'S PERFORMANCE?
A. The fund invests primarily in large-capitalization stocks, but its
holdings in medium and small companies, as well as its emphasis on
dividend-paying stocks rather than growth stocks, contributed to its
underperformance relative to the S&P 500. The fund's limited
technology stock holdings also had a negative impact, as did the
higher percentage of energy stocks in the portfolio. Technology stocks
made a significant contribution to the stock market's performance
during 1998. Energy stocks suffered as oil and gas prices dropped due
to declining demand worldwide, reflecting Asia's economic slowdown. A
warmer than usual winter in the U.S. last year and so far this year
also contributed to the slack demand. On the other hand, the fund
benefited from the strong performance of utilities stocks, in
particular from the good performance of telephone company stocks.
Q. WHAT ACCOUNTED FOR TELEPHONE COMPANIES' GOOD PERFORMANCE?
A. In general, their earnings performance was better than expected as
these companies went through the process of deregulation. Technology
pushed up consumer demand faster than anticipated as consumers added
phone lines at a surprising pace, reflecting growing demand for
Internet access and data transmission in the home. Telephone companies
also successfully cut costs during the year and branched out into
different technologies, helping their earnings growth and increasing
their attractiveness to investors. As a result, companies such as AT&T
and Bell Atlantic performed well.
Q. WHICH HOLDINGS HELPED THE FUND'S PERFORMANCE?
A. As I mentioned, AT&T, one of the fund's top holdings, performed
well. After going through a management change, its new leadership has
been building the company's competitive strength in the long distance
phone business. Also, it is improving profitability and diversifying
through acquisition activity. Schering-Plough also performed strongly
during the year. Schering-Plough produces the leading allergy drug,
Claritin, and has had steady stronger-than-expected earnings growth.
General Electric, the fund's number-one holding, continued its good
performance. The company has recently released a statement that its
outlook for earnings growth remains strong. GE also has been active in
making acquisitions internationally that have the potential to boost
earnings growth.
Q. WHICH HOLDINGS WERE DISAPPOINTMENTS?
A. As I mentioned earlier, energy companies suffered from the
significant decline in the price of oil, which dropped $5-$7 per
barrel since 1997. As a result, oil companies British Petroleum, Royal
Dutch Petroleum and Chevron all performed poorly. In addition,
companies that provide service to the oil companies, such as
Halliburton and Schlumberger, fared even worse. That's because oil
companies, which tend to spend only the cash flow that they generate,
had less business for their suppliers as their revenues declined.
Q. STEVE, WHAT'S YOUR OUTLOOK FOR THE COMING MONTHS?
A. Near term, I believe that we're in for more of the same. The U.S.
economy still looks good, with low inflation and healthy consumer
spending. However, worldwide trends do not look exceptionally strong,
and multinational corporations are still exposed to the problems in
Asia, Russia and emerging markets. In this environment, investors will
probably continue to focus on large-capitalization growth companies,
rather than small-cap and cyclical stocks. My strategy will be to
continue to look for companies with excellent underlying financials
and interesting business fundamentals, which I believe can perform
well over time.
The views expressed in this report reflect those of the portfolio
manager only through the end of the period of the report as stated on
the cover. The manager's views are subject to change at any time based
on market and other conditions.
(checkmark) FUND FACTS
GOAL: to provide current income and increase the value of the fund's
shares over the long term
START DATE: October 9, 1986
SIZE: as of December 31, 1998, more than
$11.6 billion
MANAGER: Stephen Petersen, since 1997; joined Fidelity in 1980
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
INVESTMENTS DECEMBER 31, 1998
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 92.5%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 4.0%
AEROSPACE & DEFENSE - 2.5%
AlliedSignal, Inc. 1,859,000 $ 82,376,939
Harsco Corp. 827,700 25,193,118
Textron, Inc. 1,122,400 85,232,250
United Technologies Corp. 858,800 93,394,500
286,196,807
DEFENSE ELECTRONICS - 1.2%
Litton Industries, Inc. (a) 642,500 41,923,125
Northrop Grumman Corp. 277,100 20,262,938
Raytheon Co.:
Class A 19,131 988,834
Class B 1,551,800 82,633,350
145,808,247
SHIP BUILDING & REPAIR - 0.3%
General Dynamics Corp. 633,000 37,109,625
TOTAL AEROSPACE & DEFENSE 469,114,679
BASIC INDUSTRIES - 5.7%
CHEMICALS & PLASTICS - 2.6%
du Pont (E.I.) de Nemours & 731,600 38,820,525
Co.
Great Lakes Chemical Corp. 896,200 35,848,000
Hanna (M.A.) Co. 880,200 10,837,463
Hercules, Inc. 856,100 23,435,738
Hoechst AG 491,100 20,091,863
IMC Global, Inc. 961,500 20,552,063
Lawter International, Inc. 332,300 3,862,988
Millennium Chemicals, Inc. 749,200 14,890,350
Monsanto Co. 957,200 45,467,000
Octel Corp. (a) 121,950 1,692,056
Olin Corp. 585,200 16,568,475
Solutia, Inc. 1,144,100 25,599,238
Union Carbide Corp. 646,700 27,484,750
Witco Corp. 860,100 13,707,844
298,858,353
IRON & STEEL - 0.2%
Dofasco, Inc. 749,800 9,602,143
Inland Steel Industries, Inc. 753,323 12,712,326
USX-U.S. Steel Group 282,400 6,495,200
28,809,669
METALS & MINING - 1.2%
Alcan Aluminium Ltd. 1,484,700 40,258,118
Alcoa, Inc. 1,073,779 80,063,647
Kaiser Aluminum Corp. (a) 250,000 1,218,750
Noranda, Inc. 200,000 1,992,813
Phelps Dodge Corp. 339,200 17,256,800
140,790,128
PACKAGING & CONTAINERS - 0.0%
Tupperware Corp. 311,900 5,126,856
SHARES VALUE (NOTE 1)
PAPER & FOREST PRODUCTS - 1.7%
Boise Cascade Corp. 21,900 $ 678,900
Bowater, Inc. 271,800 11,262,713
Champion International Corp. 643,200 26,049,600
Domtar, Inc. 1,072,400 6,201,072
Fort James Corp. 555,200 22,208,000
Georgia-Pacific Corp. 556,600 32,595,888
Kimberly-Clark Corp. 1,076,300 58,658,350
Nexfor, Inc. 87,200 344,698
Weyerhaeuser Co. 704,700 35,807,569
193,806,790
TOTAL BASIC INDUSTRIES 667,391,796
CONSTRUCTION & REAL ESTATE -
1.9%
BUILDING MATERIALS - 0.8%
American Standard Companies, 579,300 20,818,594
Inc. (a)
Masco Corp. 2,090,800 60,110,500
Sherwin-Williams Co. 290,500 8,533,438
89,462,532
CONSTRUCTION - 0.1%
Alstom SA 315,759 7,400,050
ENGINEERING - 0.1%
EG & G, Inc. 389,900 10,844,094
Fluor Corp. 182,000 7,746,375
18,590,469
REAL ESTATE INVESTMENT TRUSTS
- - 0.9%
Alexandria Real Estate 109,600 3,390,750
Equities, Inc.
Crescent Real Estate Equities 664,500 15,283,500
Co.
Duke Realty Investments, Inc. 175,700 4,085,025
Equity Office Properties Trust 416,800 10,003,200
Equity Residential Properties 548,700 22,188,056
Trust (SBI)
Public Storage, Inc. 256,800 6,949,650
Starwood Hotels & Resorts 1,502,681 34,092,075
Trust
Weeks Corp. 170,500 4,805,969
100,798,225
TOTAL CONSTRUCTION & REAL 216,251,276
ESTATE
DURABLES - 2.4%
AUTOS, TIRES, & ACCESSORIES -
1.6%
DaimlerChrysler AG (a) 213,237 20,484,079
Eaton Corp. 279,900 19,785,431
Ford Motor Co. 748,000 43,898,250
Meritor Automotive, Inc. 629,900 13,346,006
Navistar International Corp. 281,300 8,017,050
(a)
Pep Boys-Manny, Moe & Jack 726,400 11,395,400
Snap-On, Inc. 819,700 28,535,806
TRW, Inc. 789,000 44,331,938
189,793,960
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
DURABLES - CONTINUED
CONSUMER DURABLES - 0.2%
Minnesota Mining & 261,400 $ 18,592,075
Manufacturing Co.
CONSUMER ELECTRONICS - 0.2%
General Motors Corp. Class H 226,400 8,985,250
Maytag Corp. 86,900 5,409,525
Newell Co. 189,400 7,812,750
22,207,525
TEXTILES & APPAREL - 0.4%
Dexter Corp. 501,400 15,762,763
Liz Claiborne, Inc. 234,300 7,395,094
NIKE, Inc. Class B 484,200 19,640,363
Unifi, Inc. 192,600 3,767,738
46,565,958
TOTAL DURABLES 277,159,518
ENERGY - 10.7%
ENERGY SERVICES - 0.9%
Halliburton Co. 2,278,300 67,494,638
Schlumberger Ltd. 696,500 32,126,063
99,620,701
OIL & GAS - 9.8%
Amerada Hess Corp. 709,400 35,292,650
Amoco Corp. 1,206,200 71,165,800
Anadarko Petroleum Corp. 587,900 18,151,413
Atlantic Richfield Co. 101,200 6,603,300
British Petroleum PLC 820,293 12,253,091
British Petroleum PLC ADR 2,072,086 196,848,170
Burlington Resources, Inc. 922,100 33,022,706
Canadian Hunter Exploration 50,000 326,691
Ltd. (a)
Chevron Corp. 1,409,471 116,898,001
Coastal Corp. (The) 483,400 16,888,788
Conoco, Inc. Class A (a) 721,200 15,055,050
Elf Aquitaine SA sponsored ADR 787,300 44,580,863
Exxon Corp. 1,200,000 87,750,000
Mobil Corp. 446,100 38,866,463
Occidental Petroleum Corp. 2,333,400 39,376,125
Phillips Petroleum Co. 724,700 30,890,338
Royal Dutch Petroleum Co. (NY 2,169,200 103,850,450
Registry Gilder 1.25)
Texaco, Inc. 1,160,000 61,335,000
Tosco Corp. 449,800 11,638,575
Total SA:
Class B 831,600 82,744,196
sponsored ADR 865,100 43,038,725
Ultramar Diamond Shamrock 437,600 10,611,800
Corp.
Unocal Corp. 460,989 13,455,116
SHARES VALUE (NOTE 1)
USX-Marathon Group 1,621,100 $ 48,835,638
Valero Energy Corp. 246,700 5,242,375
1,144,721,324
TOTAL ENERGY 1,244,342,025
FINANCE - 22.8%
BANKS - 9.2%
Bank of New York Co., Inc. 4,631,400 186,413,850
Bank of Nova Scotia 726,600 16,022,705
Bank One Corp. 4,412,438 225,310,115
BankAmerica Corp. 3,173,890 190,830,136
Chase Manhattan Corp. 985,500 67,075,594
Comerica, Inc. 877,500 59,834,531
National Bank of Canada 2,211,200 35,829,964
National City Corp. 270,260 19,593,850
Royal Bank of Canada 400,000 20,006,534
U.S. Bancorp 2,928,094 103,947,337
Wells Fargo & Co. 3,767,200 150,452,550
1,075,317,166
CREDIT & OTHER FINANCE - 6.0%
American Express Co. 1,853,072 189,476,612
Associates First Capital 2,363,656 100,159,928
Corp. Class A
Citigroup, Inc. 4,884,099 241,762,901
Fleet Financial Group, Inc. 1,373,600 61,382,750
Household International, Inc. 2,559,047 101,402,237
Transamerica Corp. 2,300 265,650
694,450,078
FEDERAL SPONSORED CREDIT - 2.5%
Fannie Mae 3,477,300 257,320,200
Freddie Mac 145,300 9,362,769
SLM Holding Corp. 412,700 19,809,600
286,492,569
INSURANCE - 3.8%
Aetna, Inc. 77,300 6,077,713
Allstate Corp. 2,828,198 109,239,148
American Bankers Insurance 304,200 14,715,675
Group, Inc.
Berkshire Hathaway, Inc. 1 2,350
Class B
Berkshire Hathaway, Inc. 519 36,330,000
Class A
Chubb Corp. (The) 136,600 8,861,925
CIGNA Corp. 357,700 27,654,681
Enhance Financial Services 92,284 2,768,520
Group, Inc.
Fremont General Corp. 1,398,448 34,611,588
Hartford Financial Services 1,508,600 82,784,425
Group, Inc.
Highlands Insurance Group, 371,100 4,847,494
Inc. (a)
Marsh & McLennan Companies, 225,900 13,201,031
Inc.
PMI Group, Inc. 234,000 11,553,750
Reliastar Financial Corp. 1,032,499 47,624,016
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
Torchmark Corp. 743,700 $ 26,261,906
Travelers Property Casualty 620,000 19,220,000
Corp. Class A
445,754,222
SAVINGS & LOANS - 0.9%
Washington Mutual, Inc. 2,801,282 106,973,956
SECURITIES INDUSTRY - 0.4%
First Marathon, Inc. Class A 651,900 7,560,421
(non-vtg.)
Lehman Brothers Holdings, 449,800 19,819,313
Inc.
Nomura Securities Co. Ltd. 307,000 2,670,155
Waddell & Reed Financial, Inc.:
Class A 301,116 7,132,685
Class B 182,132 4,234,569
41,417,143
TOTAL FINANCE 2,650,405,134
HEALTH - 5.7%
DRUGS & PHARMACEUTICALS - 4.2%
American Home Products Corp. 1,830,600 103,085,663
Bristol-Myers Squibb Co. 896,200 119,922,763
Lilly (Eli) & Co. 343,500 30,528,563
Merck & Co., Inc. 592,800 87,549,150
Schering-Plough Corp. 2,576,400 142,346,100
483,432,239
MEDICAL EQUIPMENT & SUPPLIES
- - 0.8%
Baxter International, Inc. 523,100 33,641,869
Johnson & Johnson 631,800 52,992,225
Pall Corp. 417,600 10,570,500
97,204,594
MEDICAL FACILITIES MANAGEMENT
- - 0.7%
Beverly Enterprises, Inc. 1,722,000 11,623,500
Columbia/HCA Healthcare Corp. 2,259,150 55,913,963
Humana, Inc. (a) 320,500 5,708,906
United HealthCare Corp. 197,400 8,500,538
81,746,907
TOTAL HEALTH 662,383,740
HOLDING COMPANIES - 0.1%
U.S. Industries, Inc. 636,300 11,851,088
INDUSTRIAL MACHINERY &
EQUIPMENT - 8.5%
ELECTRICAL EQUIPMENT - 5.2%
Alcatel Alsthom Compagnie 263,200 32,159,751
Generale d'Electricite SA
(RFD)
Emerson Electric Co. 818,700 51,219,919
General Electric Co. 4,494,100 458,679,053
Honeywell, Inc. 199,700 15,039,906
SHARES VALUE (NOTE 1)
Loral Space & Communications 298,700 $ 5,320,594
Ltd. (a)
Siemens AG 584,300 37,787,928
600,207,151
INDUSTRIAL MACHINERY &
EQUIPMENT - 2.4%
Case Corp. 142,500 3,108,281
Coltec Industries, Inc. (a) 1,371,600 26,746,200
Cooper Industries, Inc. 194,300 9,265,681
Ingersoll-Rand Co. 646,100 30,326,319
Parker-Hannifin Corp. 525,000 17,193,750
Stewart & Stevenson Services, 247,900 2,417,025
Inc.
Tyco International Ltd. 2,489,018 187,765,285
276,822,541
POLLUTION CONTROL - 0.9%
Allied Waste Industries, Inc. 592,200 13,990,725
(a)
Browning-Ferris Industries, 988,598 28,113,256
Inc.
Ogden Corp. 508,300 12,739,269
Waste Management, Inc. 1,197,447 55,830,966
110,674,216
TOTAL INDUSTRIAL MACHINERY & 987,703,908
EQUIPMENT
MEDIA & LEISURE - 3.4%
BROADCASTING - 1.6%
CBS Corp. 1,626,900 53,280,975
Infinity Broadcasting Corp. 326,700 8,943,413
(a)
Time Warner, Inc. 1,945,845 120,764,005
182,988,393
ENTERTAINMENT - 0.8%
King World Productions, Inc. 457,000 13,452,938
(a)
Viacom, Inc. Class B 1,130,700 83,671,800
(non-vtg.) (a)
97,124,738
LEISURE DURABLES & TOYS - 0.1%
Brunswick Corp. 431,200 10,672,200
LODGING & GAMING - 0.1%
Circus Circus Enterprises, 464,400 5,311,575
Inc. (a)
Mirage Resorts, Inc. (a) 394,500 5,892,844
11,204,419
PUBLISHING - 0.4%
Harcourt General, Inc. 534,600 28,434,038
Reader's Digest Association, 548,700 13,820,381
Inc. Class A (non-vtg.)
42,254,419
RESTAURANTS - 0.4%
McDonald's Corp. 677,100 51,882,788
TOTAL MEDIA & LEISURE 396,126,957
NONDURABLES - 5.7%
AGRICULTURE - 0.3%
Edperbrascan Corp. Class A 2,699,800 37,573,172
(ltd. vtg.)
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONDURABLES - CONTINUED
BEVERAGES - 0.5%
Anheuser-Busch Companies, 440,400 $ 28,901,250
Inc.
PepsiCo, Inc. 300,500 12,301,719
Seagram Co. Ltd. 400,700 15,250,425
56,453,394
FOODS - 0.5%
Bestfoods 384,600 20,479,950
Corn Products International, 401,625 12,199,359
Inc.
Heinz (H.J.) Co. 393,500 22,281,938
54,961,247
HOUSEHOLD PRODUCTS - 2.1%
Avon Products, Inc. 342,200 15,142,350
Clorox Co. 254,600 29,740,463
Gillette Co. 549,200 26,533,225
Premark International, Inc. 25,000 865,625
Procter & Gamble Co. 307,200 28,051,200
Unilever NV 12,400 1,058,730
Unilever NV (NY shares) 800,000 66,350,000
Unilever PLC 6,821,600 76,743,521
244,485,114
TOBACCO - 2.3%
Dimon, Inc. 336,400 2,501,975
Philip Morris Companies, Inc. 4,972,600 266,034,100
RJR Nabisco Holdings Corp. 44,900 1,332,969
269,869,044
TOTAL NONDURABLES 663,341,971
PRECIOUS METALS - 0.1%
Newmont Mining Corp. 605,600 10,938,650
RETAIL & WHOLESALE - 3.1%
APPAREL STORES - 0.6%
Charming Shoppes, Inc. (a) 612,800 2,642,700
Footstar, Inc. (a) 551,800 13,795,000
Intimate Brands, Inc. Class A 171,900 5,135,513
Limited, Inc. (The) 967,100 28,166,788
Payless ShoeSource, Inc. (a) 136,000 6,443,000
TJX Companies, Inc. 350,200 10,155,800
66,338,801
GENERAL MERCHANDISE STORES -
2.5%
Consolidated Stores Corp. (a) 2,020,156 40,781,904
Dayton Hudson Corp. 920,700 49,947,975
Federated Department Stores, 656,400 28,594,425
Inc. (a)
Hudson's Bay Co. 605,600 7,656,557
Hudson's Bay Co. (d) 302,500 3,824,485
Sears, Roebuck & Co. 329,800 14,016,500
Wal-Mart Stores, Inc. 1,824,400 148,574,575
293,396,421
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE,
MISCELLANEOUS - 0.0%
Toys R Us, Inc. (a) 302,000 $ 5,096,250
TOTAL RETAIL & WHOLESALE 364,831,472
SERVICES - 0.9%
LEASING & RENTAL - 0.2%
Ryder Systems, Inc. 675,300 17,557,800
PRINTING - 0.3%
Donnelley (R.R.) & Sons Co. 568,400 24,903,025
Wallace Computer Services, 440,500 11,618,188
Inc.
36,521,213
SERVICES - 0.4%
ACNielsen Corp. (a) 636,000 17,967,000
Dun & Bradstreet Corp. 368,800 11,640,250
Manpower, Inc. 397,300 10,006,994
Modis Professional Services, 477,700 6,926,650
Inc. (a)
46,540,894
TOTAL SERVICES 100,619,907
TECHNOLOGY - 4.6%
COMPUTER SERVICES & SOFTWARE
- - 1.0%
Electronic Data Systems Corp. 1,326,800 66,671,700
First Data Corp. 550,200 17,434,463
IMS Health, Inc. 85,000 6,412,188
NCR Corp. (a) 627,700 26,206,475
116,724,826
COMPUTERS & OFFICE EQUIPMENT
- - 2.7%
Compaq Computer Corp. 124,173 5,207,505
International Business 472,600 87,312,850
Machines Corp.
Pitney Bowes, Inc. 1,582,000 104,510,875
Unisys Corp. (a) 3,018,317 103,943,292
Xerox Corp. 61,000 7,198,000
308,172,522
ELECTRONICS - 0.9%
AMP, Inc. 435,602 22,678,529
Motorola, Inc. 1,154,300 70,484,444
Texas Instruments, Inc. 174,400 14,922,100
108,085,073
TOTAL TECHNOLOGY 532,982,421
TRANSPORTATION - 1.2%
AIR TRANSPORTATION - 0.1%
Viad Corp. 275,800 8,377,425
RAILROADS - 1.1%
Burlington Northern Santa Fe 1,991,200 67,203,000
Corp.
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TRANSPORTATION - CONTINUED
RAILROADS - CONTINUED
CSX Corp. 1,199,000 $ 49,758,500
Norfolk Southern Corp. 311,200 9,861,150
126,822,650
TOTAL TRANSPORTATION 135,200,075
UTILITIES - 11.7%
ELECTRIC UTILITY - 3.2%
Allegheny Energy, Inc. 1,148,700 39,630,150
American Electric Power Co., 1,120,100 52,714,706
Inc.
Central & South West Corp. 444,000 12,182,250
CILCORP, Inc. 152,300 9,318,856
CINergy Corp. 415,000 14,265,625
CMP Group, Inc. 568,400 10,728,550
CMS Energy Corp. 145,700 7,057,344
Consolidated Edison, Inc. 473,450 25,033,669
DPL, Inc. 955,950 20,672,419
Duke Energy Corp. 390,700 25,029,219
Entergy Corp. 2,040,500 63,510,563
Illinova Corp. 52,200 1,305,000
Niagara Mohawk Power Corp. (a) 1,434,200 23,126,475
PG&E Corp. 1,216,878 38,331,657
Pinnacle West Capital Corp. 237,000 10,042,875
Washington Water & Power Co. 707,500 13,619,375
366,568,733
GAS - 0.5%
Questar Corp. 1,221,400 23,664,625
Sempra Energy 1,437,584 36,478,694
60,143,319
TELEPHONE SERVICES - 8.0%
ALLTEL Corp. 508,900 30,438,581
Ameritech Corp. 1,692,700 107,274,863
AT&T Corp. 2,935,500 220,896,375
Bell Atlantic Corp. 2,875,740 163,377,979
BellSouth Corp. 2,145,000 106,981,875
GTE Corp. 1,251,500 84,398,031
MCI WorldCom, Inc. (a) 1,289,777 92,541,500
Pathnet, Inc. warrants 520 5,200
4/15/08 (a)(d)
SBC Communications, Inc. 1,852,100 99,318,863
Sprint Corp. (FON Group) 312,500 26,289,063
931,522,330
TOTAL UTILITIES 1,358,234,382
TOTAL COMMON STOCKS 10,748,878,999
(Cost $7,950,978,933)
PREFERRED STOCKS - 3.5%
SHARES VALUE (NOTE 1)
CONVERTIBLE PREFERRED STOCKS
- - 3.5%
BASIC INDUSTRIES - 0.2%
CHEMICALS & PLASTICS - 0.2%
Monsanto Co. $1.625 ACES (a) 460,000 $ 22,540,000
DURABLES - 0.0%
AUTOS, TIRES, & ACCESSORIES -
0.0%
Republic Industries, Inc. 219,200 3,342,800
$1.55 ACES
FINANCE - 1.5%
CLOSED END INVESTMENT COMPANY
- - 0.1%
Readers Digest Automatic 464,700 11,820,806
Common Exchange Trust $1.93
TRACES
CREDIT & OTHER FINANCE - 0.4%
DECS Trust (Dimon) $2.008 93,000 871,875
Federal-Mogul Financing Trust 89,700 5,920,200
$3.50
Life Re Corp./Life Re Capital 39,400 2,964,850
Trust II $3.96
Union Pacific Capital Trust:
$3.125 TIDES (d) 384,500 17,494,750
$3.125 403,200 18,345,600
WBK Trust $3.135 STRYPES 203,800 6,432,438
52,029,713
INSURANCE - 0.6%
Aetna, Inc. Class C, $4.7578 760,000 57,807,500
PRIDES
Conseco, Inc. $3.50 PRIDES 171,800 6,689,463
64,496,963
SECURITIES INDUSTRY - 0.4%
Cincinnati Bell, Inc. $3.48 93,900 6,220,875
DECS
Financial Security Assurance 840,700 38,672,200
Holdings Ltd. $0.00 DECS
44,893,075
TOTAL FINANCE 173,240,557
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.2%
ELECTRICAL EQUIPMENT - 0.1%
Loral Space & Communications
Ltd. Series C:
$3.00 (d) 183,200 9,709,600
$3.00 141,700 7,510,100
17,219,700
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.1%
Ingersoll Rand Co./Ingersoll 530,100 10,602,000
Rand Finance $0.195 Growth
PRIDES
TOTAL INDUSTRIAL MACHINERY & 27,821,700
EQUIPMENT
MEDIA & LEISURE - 0.8%
BROADCASTING - 0.6%
Evergreen Media Corp. $3.00 187,200 17,901,000
(d)
PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
CONVERTIBLE PREFERRED STOCKS
- - CONTINUED
MEDIA & LEISURE - CONTINUED
BROADCASTING - CONTINUED
MediaOne Group, Inc.:
$3.63 PIES 249,900 $ 16,618,350
Class D $2.25 374,200 35,549,000
70,068,350
ENTERTAINMENT - 0.2%
Premier Parks, Inc. $4.05 PIES 273,300 16,193,025
PUBLISHING - 0.0%
Tribune Co. $1.75 DECS 102,300 2,544,713
TOTAL MEDIA & LEISURE 88,806,088
RETAIL & WHOLESALE - 0.1%
GENERAL MERCHANDISE STORES -
0.1%
K mart Financing I $3.875 100,000 5,793,750
TECHNOLOGY - 0.1%
COMPUTER SERVICES & SOFTWARE
- - 0.1%
Wang Laboratories, Inc.:
$3.25 (d) 80,000 4,480,000
$3.25 157,600 8,825,600
13,305,600
UTILITIES - 0.6%
ELECTRIC UTILITY - 0.4%
Houston Industries, Inc. 285,500 30,370,063
$3.216 ACES
Texas Utilities Co. $1.6575 465,200 22,179,806
52,549,869
TELEPHONE SERVICES - 0.2%
Qwest Trends Trust $2.04 393,000 19,650,000
(a)(d)
TOTAL UTILITIES 72,199,869
TOTAL CONVERTIBLE PREFERRED 407,050,364
STOCKS
NONCONVERTIBLE PREFERRED
STOCKS - 0.0%
CONSTRUCTION & REAL ESTATE -
0.0%
REAL ESTATE INVESTMENT TRUSTS
- - 0.0%
California Federal Preferred 31,590 793,699
Capital Corp. $2.28
MEDIA & LEISURE - 0.0%
BROADCASTING - 0.0%
CSC Holdings, Inc. 11.125% 20,038 2,234,237
pay-in-kind
SHARES VALUE (NOTE 1)
PUBLISHING - 0.0%
PRIMEDIA, Inc. 8.625% 5,975 $ 582,563
TOTAL MEDIA & LEISURE 2,816,800
TOTAL NONCONVERTIBLE 3,610,499
PREFERRED STOCKS
TOTAL PREFERRED STOCKS 410,660,863
(Cost $338,189,602)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS - 1.7%
MOODY'S RATINGS (UNAUDITED) (F) PRINCIPAL AMOUNT (E)
CONVERTIBLE BONDS - 1.3%
CONSTRUCTION & REAL ESTATE -
0.3%
REAL ESTATE INVESTMENT TRUSTS
- - 0.3%
Liberty Property LP 8.3% Ba2 $ 27,985,000 34,456,531
7/1/01
DURABLES - 0.2%
AUTOS, TIRES, & ACCESSORIES -
0.0%
Magna International, Inc. Baa1 2,960,000 3,041,400
4.875% 2/15/05 (d)
CONSUMER ELECTRONICS - 0.2%
Matsushita Electric
Industrial Co. Ltd.:
1.3% 3/29/02 Aa2 JPY 452,000,000 5,158,587
1.4% 3/31/04 Aa2 JPY 209,000,000 2,408,344
Sunbeam Corp. 0% 3/25/18 (d) Caa2 60,290,000 7,234,800
14,801,731
TOTAL DURABLES 17,843,131
FINANCE - 0.0%
INSURANCE - 0.0%
Loews Corp. 3.125% 9/15/07 A2 4,320,000 3,447,900
MEDIA & LEISURE - 0.3%
BROADCASTING - 0.0%
Jacor Communications, Inc. 0% B3 3,370,000 1,626,025
2/9/18
LODGING & GAMING - 0.0%
Hilton Hotels Corp. 5% 5/15/06 Baa3 1,820,000 1,660,750
PUBLISHING - 0.3%
News America Holdings, Inc. Baa3 48,470,000 27,203,788
liquid yield option notes 0%
3/11/13
TOTAL MEDIA & LEISURE 30,490,563
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (F) PRINCIPAL AMOUNT (E) VALUE (NOTE 1)
CONVERTIBLE BONDS - CONTINUED
NONDURABLES - 0.0%
FOODS - 0.0%
Chiquita Brands B3 $ 820,000 $ 762,600
International, Inc. 7%
3/28/01
RETAIL & WHOLESALE - 0.2%
DRUG STORES - 0.1%
Rite Aid Corp. 5.25% 9/15/02 Baa2 4,270,000 6,298,250
(d)
RETAIL & WHOLESALE,
MISCELLANEOUS - 0.1%
Home Depot, Inc. 3.25% 10/1/01 A1 5,000,000 13,125,000
TOTAL RETAIL & WHOLESALE 19,423,250
TECHNOLOGY - 0.3%
COMPUTER SERVICES & SOFTWARE
- - 0.0%
Softkey International, Inc. - 1,340,000 1,316,550
5.5% 11/1/00 (d)
COMPUTERS & OFFICE EQUIPMENT
- - 0.2%
Apple Computer, Inc. 6% 6/1/01 Caa1 8,100,000 11,815,875
Quantum Corp. 7% 8/1/04 B2 7,730,000 7,343,500
19,159,375
ELECTRONICS - 0.1%
Micron Technology, Inc. 7% B2 17,163,000 18,197,071
7/1/04
TOTAL TECHNOLOGY 38,672,996
TOTAL CONVERTIBLE BONDS 145,096,971
NONCONVERTIBLE BONDS - 0.4%
FINANCE - 0.0%
CREDIT & OTHER FINANCE - 0.0%
GS Escrow Corp. 7% 8/1/03 Ba1 2,000,000 1,959,840
Macsaver Financial Services, Ba1 1,000,000 800,000
Inc. 7.875% 8/1/03
2,759,840
HEALTH - 0.0%
MEDICAL FACILITIES MANAGEMENT
- - 0.0%
Tenet Healthcare Corp. 8.125% Ba3 2,670,000 2,736,750
12/1/08 (d)
MOODY'S RATINGS (UNAUDITED) (F) PRINCIPAL AMOUNT (E) VALUE (NOTE 1)
MEDIA & LEISURE - 0.2%
BROADCASTING - 0.1%
Adelphia Communications Corp. B2 $ 1,970,000 $ 2,176,850
9.875% 3/1/07
Century Communications Corp. Ba3 1,720,000 877,200
0% 1/15/08
CSC Holdings, Inc. 7.875% Ba2 600,000 610,320
2/15/18
Falcon Holding Group B2 1,340,000 901,150
LP/Falcon Funding Corp. 0%
4/15/10 (c)
FrontierVision Operating B3 320,000 355,600
Partners LP/ FrontierVision
Capital Corp. 11% 10/15/06
Iridium Operating LLC/Iridium B3 1,010,000 858,500
Capital Corp. 10.875% 7/15/05
NTL, Inc. 11.5% 10/1/08 (d) B3 7,140,000 7,675,500
Telewest PLC 0% 10/1/07 (c) B1 1,780,000 1,477,400
14,932,520
ENTERTAINMENT - 0.1%
Regal Cinemas, Inc. 8.875% B3 3,340,000 3,306,600
12/15/10 (d)
LODGING & GAMING - 0.0%
HMH Properties, Inc. 7.875% Ba2 1,070,000 1,037,900
8/1/08
RESTAURANTS - 0.0%
Dominos, Inc. 10.375% 1/15/09 B3 1,120,000 1,125,600
(d)
TOTAL MEDIA & LEISURE 20,402,620
NONDURABLES - 0.0%
HOUSEHOLD PRODUCTS - 0.0%
Revlon Consumer Products B2 1,960,000 1,940,400
Corp. 9% 11/1/06 (d)
RETAIL & WHOLESALE - 0.0%
RETAIL & WHOLESALE,
MISCELLANEOUS - 0.0%
Amazon.com, Inc. 0% 5/1/08 (c) Caa2 1,110,000 732,600
TECHNOLOGY - 0.0%
COMMUNICATIONS EQUIPMENT - 0.0%
Intermedia Communications, B2 770,000 731,500
Inc. 8.6% 6/1/08
COMPUTER SERVICES & SOFTWARE
- - 0.0%
ICG Services, Inc. 0% 5/1/08 - 1,590,000 822,825
(c)
TOTAL TECHNOLOGY 1,554,325
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (F) PRINCIPAL AMOUNT (E) VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
TRANSPORTATION - 0.0%
AIR TRANSPORTATION - 0.0%
Kitty Hawk, Inc. 9.95% B1 $ 230,000 $ 226,550
11/15/04
UTILITIES - 0.2%
CELLULAR - 0.1%
Nextel Communications, Inc.:
0% 9/15/07 (c) B2 5,010,000 3,218,925
12% 11/1/08 (d) B2 2,090,000 2,283,325
Teligent, Inc. 0% 3/1/08 (c) Caa1 2,670,000 1,321,650
6,823,900
TELEPHONE SERVICES - 0.1%
GST Network Funding, Inc. 0% - 1,270,000 577,850
5/1/08 (c)(d)
Hyperion Telecommunications, B3 270,000 274,050
Inc. 12.25% 9/1/04
Level 3 Communications, Inc.:
0% 12/1/08 (c)(d) B3 3,850,000 2,237,813
9.125% 5/1/08 B3 590,000 584,838
McLeodUSA, Inc. 9.5% 11/1/08 B2 990,000 1,049,400
(d)
NEXTLINK Communications, Inc.:
9.625% 10/1/07 B3 2,780,000 2,668,800
10.75% 11/15/08 (d) B3 2,000,000 2,040,000
Pathnet, Inc. 12.25% 4/15/08 - 520,000 364,000
Qwest Communications Ba1 1,530,000 1,591,200
International, Inc. 7.5%
11/1/08 (d)
WinStar Communications, Inc. Caa1 1,070,000 759,700
0% 10/15/05 (c)
12,147,651
TOTAL UTILITIES 18,971,551
TOTAL NONCONVERTIBLE BONDS 49,324,636
TOTAL CORPORATE BONDS 194,421,607
(Cost $185,361,868)
CASH EQUIVALENTS - 2.3%
SHARES
Taxable Central Cash Fund (b) 271,538,170 271,538,170
(Cost $271,538,170)
TOTAL INVESTMENT IN $ 11,625,499,639
SECURITIES - 100%
(Cost $8,746,068,573)
</TABLE>
SECURITY TYPE ABBREVIATIONS
ACES - Automatic Common Exchange Securities
DECS - Dividend Enhanced Convertible Stock/Debt
Exchangeable for Common Stock
PIES - Premium Income Equity Securities
PRIDES - Preferred Redeemable Increased Dividend Equity
Securities
STRYPES - Structured Yield Product Exchangeable for
Common Stock
TIDES - Term Income Deferred Equity Securities
TRACES - Trust Automatic Common Exchange Securities
CURRENCY ABBREVIATIONS
JPY - Japanese yen
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield on the Taxable Central Cash
Fund was 4.80%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(c) 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.
(d) 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
$117,520,473 or 1.0% of net assets.
(e) Principal amount is stated in United States dollars unless
otherwise noted.
(f) Standard & Poor's credit ratings are used in absence of a rating
by Moody's Investors Service, Inc.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $3,706,679,024 and $2,991,080,069, respectively (see Note 3
of Notes to Financial Statements).
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $677,840 for the
period (see Note 4 of Notes to Financial Statements).
The fund participated in the bank borrowing program. The maximum loan
and average daily balance during the period for which the loan was
outstanding amounted to $5,708,000 and $4,529,000, respectively. The
weighted average interest rate was 5.83% (see Note 8 of Notes to
Financial Statements).
Transactions during the period with companies which are or were
affiliates are as follows (see Note 10 of Notes to Financial
Statements):
PURCHASE SALES DIVIDEND VALUE
AFFILIATE COST COST INCOME
Barr Laboratories Inc. $ - $ 4,465,000 $ - $ -
INCOME TAX INFORMATION
At December 31, 1998, the aggregate cost of investment securities for
income tax purposes was $8,753,668,981. Net unrealized appreciation
aggregated $2,871,830,658, of which $3,347,376,386 related to
appreciated investment securities and $475,545,728 related to
depreciated investment securities.
The fund hereby designates approximately $223,549,000 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, 1998
ASSETS
Investment in securities, at $ 11,625,499,639
value (cost $8,746,068,573)
- - See accompanying schedule
Receivable for investments 31,224,489
sold
Receivable for fund shares 7,427,825
sold
Dividends receivable 20,619,528
Interest receivable 4,542,312
Other receivables 948,955
TOTAL ASSETS 11,690,262,748
LIABILITIES
Payable for investments $ 39,376,437
purchased
Payable for fund shares 10,216,193
redeemed
Accrued management fee 4,578,709
Distribution fees payable 17,541
Other payables and accrued 1,017,315
expenses
TOTAL LIABILITIES 55,206,195
NET ASSETS $ 11,635,056,553
Net Assets consist of:
Paid in capital $ 8,215,650,418
Undistributed net investment 172,284,861
income
Accumulated undistributed net 367,592,260
realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation 2,879,529,014
(depreciation) on
investments and assets and
liabilities in foreign
currencies
NET ASSETS $ 11,635,056,553
INITIAL CLASS: NET ASSET $25.42
VALUE, offering price and
redemption price per share
($11,409,911,604 (divided
by) 448,878,790 shares)
SERVICE CLASS: NET ASSET $25.39
VALUE, offering price, and
redemption price per share
($225,144,949 (divided by)
8,866,596 shares)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME $ 212,486,031
Dividends
Interest 26,134,351
TOTAL INCOME 238,620,382
EXPENSES
Management fee $ 54,109,035
Transfer agent fees 7,414,238
Distribution fees - Service 110,337
Class
Accounting fees and expenses 837,053
Non-interested trustees' 39,059
compensation
Custodian fees and expenses 324,994
Registration fees 98,095
Audit 60,950
Legal 127,834
Interest 2,935
Miscellaneous 1,255,071
Total expenses before 64,379,601
reductions
Expense reductions (877,451) 63,502,150
NET INVESTMENT INCOME 175,118,232
REALIZED AND UNREALIZED GAIN
(LOSS)
Net realized gain (loss) on:
Investment securities 378,025,807
(including realized gain
of $5,597,753 on sales of
investments in affiliated
issuers)
Foreign currency transactions (604,743) 377,421,064
Change in net unrealized
appreciation (depreciation)
on:
Investment securities 616,998,569
Assets and liabilities in 115,882 617,114,451
foreign currencies
NET GAIN (LOSS) 994,535,515
NET INCREASE (DECREASE) IN $ 1,169,653,747
NET ASSETS RESULTING FROM
OPERATIONS
OTHER INFORMATION $ 871,310
Expense reductions Directed
brokerage arrangements
Custodian credits 6,141
$ 877,451
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
INCREASE (DECREASE) IN NET YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
ASSETS
Operations Net investment $ 175,118,232 $ 140,172,499
income
Net realized gain (loss) 377,421,064 516,594,647
Change in net unrealized 617,114,451 1,401,296,210
appreciation (depreciation)
NET INCREASE (DECREASE) IN 1,169,653,747 2,058,063,356
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders (143,408,236) (119,523,328)
From net investment income
From net realized gain (510,364,604) (602,923,285)
TOTAL DISTRIBUTIONS (653,772,840) (722,446,613)
Share transactions - net 1,007,105,749 1,815,363,131
increase (decrease)
TOTAL INCREASE (DECREASE) 1,522,986,656 3,150,979,874
IN NET ASSETS
NET ASSETS
Beginning of period 10,112,069,897 6,961,090,023
End of period (including $ 11,635,056,553 $ 10,112,069,897
undistributed net investment
income of $172,284,861 and
$140,172,474, respectively)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
OTHER INFORMATION:
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
SHARES DOLLARS SHARES DOLLARS
Share transactions Initial 64,328,671 $ 1,568,020,907 81,081,134 $ 1,787,907,743
Class Sold
Reinvested 27,884,679 652,780,343 36,487,203 722,446,589
Redeemed (59,592,607) (1,424,580,460) (32,291,523) (700,239,679)
Net increase (decrease) 32,620,743 $ 796,220,790 85,276,814 $ 1,810,114,653
Service Class A Sold 8,703,524 212,310,778 222,682 5,321,346
Reinvested 42,396 992,496 - -
Redeemed (98,817) (2,418,315) (3,189) (72,868)
Net increase (decrease) 8,647,103 $ 210,884,959 219,493 $ 5,248,478
Distributions From net $ 143,190,527 $ 119,523,328
investment income Initial
Class
Service Class 217,709 -
Total $ 143,408,236 $ 119,523,328
From net realized gain $ 509,589,817 $ 602,923,285
Initial Class
Service Class 774,787 -
Total $ 510,364,604 $ 602,923,285
$ 653,772,840 $ 722,446,613
A SERVICE CLASS COMMENCED
SALE OF SHARES NOVEMBER 3,
1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 1996 1995 1994
Net asset value, beginning of $ 24.28 $ 21.03 $ 19.27 $ 15.35 $ 15.44
period
Income from Investment
Operations
Net investment income .38 C .36 C .35 .41 .41
Net realized and unrealized 2.31 5.06 2.30 4.69 .64
gain (loss)
Total from investment 2.69 5.42 2.65 5.10 1.05
operations
Less Distributions
From net investment income (.34) (.36) (.03) (.40) (.37)
From net realized gain (1.21) (1.81) (.86) (.78) (.77)
Total distributions (1.55) (2.17) (.89) (1.18) (1.14)
Net asset value, end of period $ 25.42 $ 24.28 $ 21.03 $ 19.27 $ 15.35
TOTAL RETURN B, F 11.63% 28.11% 14.28% 35.09% 7.07%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 11,409,912 $ 10,106,742 $ 6,961,090 $ 4,879,435 $ 2,284,412
(000 omitted)
Ratio of expenses to average .58% .58% .58% .61% .60%
net assets
Ratio of expenses to average .57% E .57% E .56% E .61% .58% E
net assets after expense
reductions
Ratio of net investment 1.58% 1.65% 1.97% 2.56% 2.83%
income to average net assets
Portfolio turnover 28% 44% 186% 87% 134%
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 D
Net asset value, beginning of $ 24.27 $ 23.44
period
Income from Investment
Operations
Net investment income C .36 .05
Net realized and unrealized 2.31 .78
gain (loss)
Total from investment 2.67 .83
operations
Less Distributions
From net investment income (.34) -
From net realized gain (1.21) -
Total distributions (1.55) -
Net asset value, end of period $ 25.39 $ 24.27
TOTAL RETURN B, F 11.54% 3.54%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 225,145 $ 5,328
(000 omitted)
Ratio of expenses to average .68% .68% A
net assets
Ratio of expenses to average .67% E .65% A, E
net assets after expense
reductions
Ratio of net investment 1.51% 1.63% A
income to average net assets
Portfolio turnover 28% 44%
A ANNUALIZED
B 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).
C NET INVESTMENT INCOME PER
SHARE HAS BEEN CALCULATED
BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
D FOR THE PERIOD NOVEMBER 3,
1997 (COMMENCEMENT OF SALE
OF SERVICE CLASS SHARES) TO
DECEMBER 31, 1997.
E 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).
F TOTAL RETURNS DO NOT
REFLECT CHARGES ATTRIBUTABLE
TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION
OF THESE CHARGES WOULD
REDUCE THE TOTAL RETURNS
SHOWN. TOTAL RETURNS FOR
PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
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). If Fidelity had not reimbursed certain fund
expenses, the life of fund total return would have been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, PAST 1 YEAR LIFE OF FUND
1998
VIP III: GROWTH & INCOME - 29.59% 29.14%
"INITIAL CLASS"
S&P 500 (registered trademark) 28.58% 29.76%
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 market capitalization-weighted index of common
stocks. This benchmark includes reinvested dividends and capital
gains, if any.
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, December 31, 1996.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD BE LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
(checkmark) 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.
$10,000 OVER LIFE OF FUND
VIP III Growth & Income S&P 500
00147 SP001
1996/12/31 10000.00 10000.00
1997/01/31 10250.00 10440.61
1997/02/28 10270.00 10522.46
1997/03/31 9820.00 10090.10
1997/04/30 10350.00 10692.48
1997/05/31 10930.00 11343.43
1997/06/30 11490.00 11851.62
1997/07/31 12420.00 12794.65
1997/08/31 11790.00 12077.90
1997/09/30 12410.00 12739.40
1997/10/31 12060.00 12313.91
1997/11/30 12600.00 12883.92
1997/12/31 12879.20 13105.13
1998/01/31 12951.15 13250.08
1998/02/28 13837.79 14205.67
1998/03/31 14540.53 14933.14
1998/04/30 14540.53 15083.37
1998/05/31 14323.51 14824.09
1998/06/30 15057.25 15426.24
1998/07/31 14953.91 15261.95
1998/08/31 12835.35 13055.38
1998/09/30 13796.45 13891.71
1998/10/31 14871.23 15021.66
1998/11/30 15822.00 15932.12
1998/12/31 16690.09 16850.13
IMATRL PRASUN SHR__CHT 19981231 19990203 151637 R00000000000027
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund III: Growth & Income
Portfolio on December 31, 1996, when the fund started. As the chart
shows, by December 31, 1998, the value of the investment would have
grown to $16,690 - a 66.90% increase on the initial investment. For
comparison, look at how the Standard & Poor's 500 Index did over the
same period. With dividends and capital gains, if any, reinvested, the
same $10,000 investment would have grown to $16,850 - a 68.50%
increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF
DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
Microsoft Corp. 4.6
Associates First Capital 4.0
Corp. Class A
Merck & Co., Inc. 4.0
Citigroup, Inc. 3.6
General Electric Co. 3.3
TOP FIVE MARKET SECTORS AS OF
DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
FINANCE 18.7
TECHNOLOGY 13.0
HEALTH 12.6
NONDURABLES 10.9
UTILITIES 9.6
ASSET ALLOCATION AS OF DECEMBER 31, 1998*
% OF FUND'S INVESTMENTS
Row: 1, Col: 1, Value: 90.90000000000001
Row: 1, Col: 2, Value: 9.1
Stocks 90.9%
Short-term investments 9.1%
*FOREIGN INVESTMENTS 2.5%
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1 fee. If Fidelity had not
reimbursed certain fund expenses, the life of the fund total would
have been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, PAST 1 YEAR LIFE OF FUND
1998
VIP III: GROWTH & INCOME - 29.27% 28.98%
SERVICE CLASS
S&P 500 28.58% 29.76%
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 market capitalization-weighted index of common
stocks. This benchmark includes reinvested dividends and capital
gains, if any.
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, December 31, 1996.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD BE LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
(checkmark) 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.
$10,000 OVER LIFE OF FUND
VIP III Growth & Inc-CL S S&P 500
00473 SP001
1996/12/31 10000.00 10000.00
1997/01/31 10250.00 10440.61
1997/02/28 10270.00 10522.46
1997/03/31 9820.00 10090.10
1997/04/30 10350.00 10692.48
1997/05/31 10930.00 11343.43
1997/06/30 11490.00 11851.62
1997/07/31 12420.00 12794.65
1997/08/31 11790.00 12077.90
1997/09/30 12410.00 12739.40
1997/10/31 12060.00 12313.91
1997/11/30 12590.00 12883.92
1997/12/31 12879.48 13105.13
1998/01/31 12941.16 13250.08
1998/02/28 13817.49 14205.67
1998/03/31 14520.25 14933.14
1998/04/30 14509.91 15083.37
1998/05/31 14292.88 14824.09
1998/06/30 15026.65 15426.24
1998/07/31 14923.30 15261.95
1998/08/31 12804.69 13055.38
1998/09/30 13765.81 13891.71
1998/10/31 14830.29 15021.66
1998/11/30 15781.08 15932.12
1998/12/31 16649.19 16850.13
IMATRL PRASUN SHR__CHT 19981231 19990111 115643 R00000000000027
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund III: Growth & Income
Portfolio - Service Class on December 31, 1996, when the fund started.
As the chart shows, by December 31, 1998, the value of the investment
would have grown to $16,649 - a 66.49% increase on the initial
investment. For comparison, look at how the Standard & Poor's 500
Index did over the same period. With dividends and capital gains, if
any, reinvested, the same $10,000 investment would have grown to
$16,850 - a 68.50% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF
DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
Microsoft Corp. 4.6
Associates First Capital 4.0
Corp. Class A
Merck & Co., Inc. 4.0
Citigroup, Inc. 3.6
General Electric Co. 3.3
TOP FIVE MARKET SECTORS AS OF
DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
FINANCE 18.7
TECHNOLOGY 13.0
HEALTH 12.6
NONDURABLES 10.9
UTILITIES 9.6
ASSET ALLOCATION AS OF DECEMBER 31, 1998*
% OF FUND'S INVESTMENTS
Row: 1, Col: 1, Value: 90.90000000000001
Row: 1, Col: 2, Value: 9.1
Stocks 90.9%
Short-term investments 9.1%
*FOREIGN INVESTMENTS 2.5%
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
(photograph of Louis Salemy)
NOTE TO SHAREHOLDERS: Louis Salemy became Portfolio Manager of Growth
& Income Portfolio on September 21, 1998.
Q. LOUIS, HOW DID THE FUND PERFORM RELATIVE TO ITS BENCHMARK DURING
1998?
A. It did very well. For the year, the fund's performance beat that of
the Standard & Poor's 500 Index, which posted a very strong return of
28.58%.
Q. WHAT HELPED THE FUND BEAT THE INDEX?
A. We avoided investing in cyclical stocks - those that rise and fall
with the economy - some of which are included in the S&P 500. I track
commodity prices, and in the process found inventories in such
products as oil to be increasing. In short, there were too many
commodities and not enough demand to absorb them. As a result,
commodity prices fell throughout the year, and those companies' share
prices suffered. In addition, the fund had no major blow-ups in its
investments, with the exception of United Healthcare. Finally, when
the market plunged from August through October, the fund had a
significant cash position because third-quarter earnings projections
and reports showed little earnings momentum in the market. During that
period, holding short-term investments instead of stocks helped, and
offered me the liquidity to invest in attractive stocks that had
fallen in value. I found the media group particularly attractive and
added to investments there.
Q. FINANCE REMAINS THE FUND'S LARGEST SECTOR WEIGHTING, AT 18.7% OF
INVESTMENTS. WHAT WAS THE CONTINUING ATTRACTION THERE?
A. The fund's finance stake is a reflection of my bottom-up
stock-picking approach; I look at individual stocks one at a time,
choosing them based on the outlook for their business fundamentals
rather than general economic trends. That being said, consumer credit
in the U.S. was improving, so many companies with significant consumer
credit operations, such as Associates First Capital, Household
International and Citigroup, were appealing.
Q. WHICH STOCKS DID WELL, AND WHICH DISAPPOINTED?
A. On the positive side, Microsoft did very well as the acquisition of
Netscape by America OnLine rendered the U.S. government's antitrust
case less threatening by demonstrating that competition still exists
in the technology sector. The company also benefited from the strong
introduction of a new product line and by consistently beating
earnings projections. Merck was rewarded by overcoming some skepticism
about whether the company would meet its 1998 earnings forecasts, and
General Electric posted steady earnings growth. On the negative side,
United Healthcare - which is no longer in the fund - suffered a
correction when conditions in the managed health care industry didn't
improve as expected. Bank One was caught in the downdraft resulting
from global financial turmoil in the second half of the year.
Q. WHAT'S YOUR INVESTMENT PHILOSOPHY?
A. Much like Steve Kaye, the previous manager, I look for companies
selling at reasonable valuations that offer improving returns. My time
frame for holding a stock is usually two or three years. I don't trade
in and out of stocks, trying to time the market. Rather, I aim to
maintain a consistent portfolio with low turnover over time. I look
for stocks that can post returns that are stronger than their cost of
capital, and shun stocks that are stepping up their capital spending.
Q. WHAT'S YOUR OUTLOOK?
A. Overall, we've had four great years in the market, and it would be
optimistic to expect another good year in 1999. Given the high
expectations already reflected in the very high valuations in the
market, I'm fairly cautious. There are many questions as we enter
1999, and a lot going on. For example, what effect will the Year 2000
computer problem have on demand for technology products? It could be
that the continued strength of the U.S. economy through the fourth
quarter of 1998 was a result of inventory building. Given the
historically high valuations in the market, it's difficult to see how
the market might sustain its current strength.
The views expressed in this report reflect those of the portfolio
manager only through the end of the period of the report as stated on
the cover. The manager's views are subject to change at any time based
on market and other conditions.
(checkmark)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, 1998, more than
$1.1 billion
MANAGER: Louis Salemy, since September 1998; manager, Fidelity Growth
& Income Portfolio II, since December 1998; Fidelity Select Industrial
Materials, 1992 1994; Fidelity Select Medical Delivery Portfolio, 1993
1994; Fidelity Select Regional Banks Portfolio, 1994 1995; Fidelity
Select Brokerage and Investment Portfolio, 1995 1997; Fidelity Select
Financial Services Portfolio, 1994 1998; Fidelity Advisor Financial
Services Fund, 1996 1998; joined Fidelity in 1992
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
INVESTMENTS DECEMBER 31, 1998
Showing Percentage of Total Value of Investment in Securities
<TABLE>
<CAPTION>
<S> <C> <C> <C>
COMMON STOCKS - 90.3%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 0.5%
SHIP BUILDING & REPAIR - 0.5%
General Dynamics Corp. 104,400 $ 6,120,450
BASIC INDUSTRIES - 0.5%
CHEMICALS & PLASTICS - 0.5%
Monsanto Co. 135,000 6,412,500
CONSTRUCTION & REAL ESTATE -
2.0%
BUILDING MATERIALS - 0.5%
Masco Corp. 205,200 5,899,500
REAL ESTATE INVESTMENT TRUSTS
- - 1.5%
Equity Office Properties Trust 244,700 5,872,800
Equity Residential Properties 147,500 5,964,531
Trust (SBI)
Public Storage, Inc. 206,800 5,596,525
17,433,856
TOTAL CONSTRUCTION & REAL 23,333,356
ESTATE
DURABLES - 0.6%
AUTOS, TIRES, & ACCESSORIES -
0.6%
Federal-Mogul Corp. 115,000 6,842,500
ENERGY - 5.4%
OIL & GAS - 5.4%
Amoco Corp. 76,700 4,525,300
British Petroleum PLC ADR 147,548 14,017,060
Chevron Corp. 72,900 6,046,144
Exxon Corp. 163,100 11,926,688
Mobil Corp. 64,600 5,628,275
Royal Dutch Petroleum Co. 140,500 6,726,438
(NY Registry Gilder 1.25)
Texaco, Inc. 122,100 6,456,038
Total SA sponsored ADR 154,300 7,676,425
63,002,368
FINANCE - 18.7%
BANKS - 2.8%
Bank of New York Co., Inc. 320,700 12,908,175
Bank One Corp. 228,600 11,672,888
U.S. Bancorp 224,600 7,973,300
32,554,363
CREDIT & OTHER FINANCE - 10.3%
American Express Co. 217,200 22,208,700
Associates First Capital 1,105,000 46,824,375
Corp. Class A
Citigroup, Inc. 829,550 41,062,725
Household International, Inc. 244,500 9,688,313
119,784,113
FEDERAL SPONSORED CREDIT - 4.1%
Fannie Mae 319,500 23,643,000
Freddie Mac 361,800 23,313,488
46,956,488
SHARES VALUE (NOTE 1)
INSURANCE - 1.5%
American International Group, 115,150 $ 11,126,369
Inc.
Hartford Financial Services 110,600 6,069,175
Group, Inc.
17,195,544
TOTAL FINANCE 216,490,508
HEALTH - 12.6%
DRUGS & PHARMACEUTICALS - 9.5%
Bristol-Myers Squibb Co. 182,700 24,447,544
Merck & Co., Inc. 312,600 46,167,113
Pfizer, Inc. 106,500 13,359,094
Warner-Lambert Co. 350,000 26,315,625
110,289,376
MEDICAL EQUIPMENT & SUPPLIES
- - 2.3%
Bard (C.R.), Inc. 165,300 8,182,350
Baxter International, Inc. 91,600 5,891,025
Becton, Dickinson & Co. 138,200 5,899,413
Johnson & Johnson 73,100 6,131,263
26,104,051
MEDICAL FACILITIES MANAGEMENT
- - 0.8%
Health Management Associates, 435,000 9,406,875
Inc. Class A (a)
TOTAL HEALTH 145,800,302
INDUSTRIAL MACHINERY &
EQUIPMENT - 4.4%
ELECTRICAL EQUIPMENT - 3.8%
Emerson Electric Co. 92,700 5,799,544
General Electric Co. 379,100 38,691,894
44,491,438
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.6%
Tyco International Ltd. 92,360 6,967,407
TOTAL INDUSTRIAL MACHINERY & 51,458,845
EQUIPMENT
MEDIA & LEISURE - 3.6%
BROADCASTING - 2.4%
CBS Corp. 475,000 15,556,250
Chancellor Media Corp. (a) 135,000 6,463,125
Time Warner, Inc. 94,583 5,870,057
27,889,432
ENTERTAINMENT - 0.3%
Scientific Games Holdings 200,000 3,775,000
Corp. (a)
PUBLISHING - 0.4%
Times Mirror Co. Class A 72,400 4,054,400
RESTAURANTS - 0.5%
Tricon Global Restaurants, 126,000 6,315,750
Inc. (a)
TOTAL MEDIA & LEISURE 42,034,582
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONDURABLES - 10.9%
BEVERAGES - 3.7%
Anheuser-Busch Companies, 153,000 $ 10,040,625
Inc.
Coca-Cola Co. (The) 102,700 6,868,063
Coors (Adolph) Co. Class B 122,900 6,936,169
PepsiCo, Inc. 293,700 12,023,344
Whitman Corp. 260,000 6,597,500
42,465,701
FOODS - 1.4%
Bestfoods 146,400 7,795,800
Ralston Purina Co. 273,100 8,841,613
16,637,413
HOUSEHOLD PRODUCTS - 2.6%
Clorox Co. 51,600 6,027,525
Procter & Gamble Co. 261,200 23,850,825
29,878,350
TOBACCO - 3.2%
Philip Morris Companies, Inc. 700,260 37,463,910
TOTAL NONDURABLES 126,445,374
RETAIL & WHOLESALE - 6.0%
APPAREL STORES - 0.6%
Gap, Inc. 128,175 7,209,844
DRUG STORES - 0.5%
CVS Corp. 110,000 6,050,000
GENERAL MERCHANDISE STORES -
3.1%
Costco Companies, Inc. (a) 94,600 6,828,938
Dayton Hudson Corp. 126,700 6,873,475
Federated Department Stores, 178,900 7,793,331
Inc. (a)
Wal-Mart Stores, Inc. 172,700 14,064,256
35,560,000
GROCERY STORES - 0.6%
Safeway, Inc. (a) 114,100 6,952,969
RETAIL & WHOLESALE,
MISCELLANEOUS - 1.2%
Bed Bath & Beyond, Inc. (a) 209,100 7,135,538
Home Depot, Inc. 104,900 6,418,569
13,554,107
TOTAL RETAIL & WHOLESALE 69,326,920
SERVICES - 2.5%
ADVERTISING - 2.5%
Omnicom Group, Inc. 385,300 22,347,400
Outdoor Systems, Inc. (a) 228,100 6,843,000
29,190,400
TECHNOLOGY - 13.0%
COMPUTER SERVICES & SOFTWARE
- - 7.9%
Automatic Data Processing, 157,500 12,629,531
Inc.
Equifax, Inc. 185,000 6,324,688
SHARES VALUE (NOTE 1)
Galileo International, Inc. 276,900 $ 12,045,150
IMS Health, Inc. 97,900 7,385,331
Microsoft Corp. (a) 382,700 53,075,699
91,460,399
COMPUTERS & OFFICE EQUIPMENT
- - 2.9%
EMC Corp. (a) 75,100 6,383,500
Lexmark International Group, 63,800 6,411,900
Inc. (a)
Pitney Bowes, Inc. 211,300 13,959,006
Xerox Corp. 60,500 7,139,000
33,893,406
ELECTRONICS - 2.2%
Intel Corp. 150,000 17,784,375
Solectron Corp. (a) 84,400 7,843,925
25,628,300
TOTAL TECHNOLOGY 150,982,105
UTILITIES - 9.6%
ELECTRIC UTILITY - 1.1%
Duke Energy Corp. 96,700 6,194,844
IPALCO Enterprises, Inc. 112,000 6,209,000
12,403,844
TELEPHONE SERVICES - 8.5%
ALLTEL Corp. 125,000 7,476,563
AT&T Corp. 380,300 28,617,575
BellSouth Corp. 142,000 7,082,250
GTE Corp. 166,800 11,248,575
MCI WorldCom, Inc. (a) 348,955 25,037,521
Qwest Communications 125,600 6,280,000
International, Inc. (a)
SBC Communications, Inc. 238,000 12,762,750
98,505,234
TOTAL UTILITIES 110,909,078
TOTAL COMMON STOCKS 1,048,349,288
(Cost $856,604,786)
CONVERTIBLE PREFERRED STOCKS
- - 0.6%
MEDIA & LEISURE - 0.6%
LODGING & GAMING - 0.6%
Station Casinos, Inc. $3.50 159,000 6,320,250
(Cost $5,417,174)
CASH EQUIVALENTS - 9.1%
Taxable Central Cash Fund (b) 105,855,085 105,855,085
(Cost $105,855,085)
TOTAL INVESTMENT IN $ 1,160,524,623
SECURITIES - 100%
(Cost $967,877,045)
</TABLE>
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield on the Taxable Central Cash
Fund was 4.80%. 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 $981,265,510 and $423,512,917, respectively
(see Note 3 of Notes to Financial Statements).
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $123,700 for the
period (see Note 4 of Notes to Financial Statements).
The fund participated in the interfund lending program as a lender.
The maximum loan and average daily balances during the period for
which the loans were outstanding amounted to $33,770,000 and
$24,425,500, respectively. The weighted average interest rate was
5.67%. Interest earned from the interfund lending program amounted to
$7,706 and is included in interest income on the Statement of
Operations (see Note 6 of Notes to Financial Statements).
INCOME TAX INFORMATION
At December 31, 1998, the aggregate cost of investment securities for
income tax purposes was $970,871,018. Net unrealized appreciation
aggregated $189,653,605, of which $208,490,719 related to appreciated
investment securities and $18,837,114 related to depreciated
investment securities.
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
ASSETS
Investment in securities, at $ 1,160,524,623
value (cost $967,877,045) -
See accompanying schedule
Receivable for investments 5,530,471
sold
Receivable for fund shares 3,584,183
sold
Dividends receivable 1,373,135
Interest receivable 437,234
Other receivables 481
TOTAL ASSETS 1,171,450,127
LIABILITIES
Payable for investments $ 10,707,035
purchased
Payable for fund shares 221
redeemed
Accrued management fee 442,776
Distribution fees payable 1,372
Other payables and accrued 117,241
expenses
TOTAL LIABILITIES 11,268,645
NET ASSETS $ 1,160,181,482
Net Assets consist of:
Paid in capital $ 948,360,542
Undistributed net investment 7,652,325
income
Accumulated undistributed 11,519,952
net realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation 192,648,663
(depreciation) on
investments and assets and
liabilities in foreign
currencies
NET ASSETS $ 1,160,181,482
INITIAL CLASS: NET ASSET $16.15
VALUE, offering price and
redemption price per share
($1,141,806,297 (divided by)
70,692,130 shares)
SERVICE CLASS: NET ASSET $16.11
VALUE, offering price
and redemption price per
share ($18,375,185
(divided by) 1,140,485
shares)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME $ 8,840,686
Dividends
Interest 3,074,388
TOTAL INCOME 11,915,074
EXPENSES
Management fee $ 3,437,849
Transfer agent fees 483,377
Distribution fees - Service 6,375
Class
Accounting fees and expenses 355,446
Non-interested trustees' 2,325
compensation
Custodian fees and expenses 22,935
Audit 21,188
Legal 4,845
Total expenses before 4,334,340
reductions
Expense reductions (72,164) 4,262,176
NET INVESTMENT INCOME 7,652,898
REALIZED AND UNREALIZED GAIN
(LOSS)
Net realized gain (loss) on:
Investment securities 11,915,866
Foreign currency transactions (2,202) 11,913,664
Change in net unrealized
appreciation (depreciation)
on:
Investment securities 159,409,899
Assets and liabilities in 1,230 159,411,129
foreign currencies
NET GAIN (LOSS) 171,324,793
NET INCREASE (DECREASE) IN $ 178,977,691
NET ASSETS RESULTING FROM
OPERATIONS
OTHER INFORMATION $ 70,025
Expense reductions Directed
brokerage arrangements
Custodian credits 2,139
$ 72,164
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
INCREASE (DECREASE) IN NET YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
ASSETS
Operations Net investment $ 7,652,898 $ 1,999,135
income
Net realized gain (loss) 11,913,664 8,707,062
Change in net unrealized 159,411,129 33,247,866
appreciation (depreciation)
NET INCREASE (DECREASE) IN 178,977,691 43,954,063
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders - (1,998,716)
From net investment income
From net realized gain (2,137,232) (6,771,091)
TOTAL DISTRIBUTIONS (2,137,232) (8,769,807)
Share transactions - net 638,043,127 309,123,809
increase (decrease)
TOTAL INCREASE (DECREASE) 814,883,586 344,308,065
IN NET ASSETS
NET ASSETS
Beginning of period 345,297,896 989,831
End of period (including $ 1,160,181,482 $ 345,297,896
undistributed net investment
income of $7,652,325 and $0,
respectively)
</TABLE>
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
SHARES DOLLARS SHARES DOLLARS
Share transactions Initial 49,641,298 $ 710,748,814 29,294,015 $ 329,532,628
Class Sold
Reinvested 165,544 2,137,174 718,814 8,769,531
Redeemed (6,663,877) (91,124,370) (2,563,665) (29,188,626)
Net increase (decrease) 43,142,965 $ 621,761,618 27,449,164 $ 309,113,533
Service Class A Sold 1,196,585 $ 17,082,667 810 $ 10,000
Reinvested 4 58 22 276
Redeemed (56,936) (801,216) - -
Net increase (decrease) 1,139,653 $ 16,281,509 832 $ 10,276
Distributions From net $ - $ 1,998,653
investment income
Initial Class
Service Class - 63
Total $ - $ 1,998,716
From net realized gain $ 2,137,174 $ 6,770,878
Initial Class
Service Class 58 213
Total $ 2,137,232 $ 6,771,091
$ 2,137,232 $ 8,769,807
A SERVICE CLASS COMMENCED
SALE OF SHARES NOVEMBER 3,
1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 1996 H
Net asset value, beginning of $ 12.53 $ 9.90 $ 10.00
period
Income from Investment
Operations
Net investment income .15 D .13 D .00
Net realized and unrealized 3.54 2.84 (.10)
gain (loss)
Total from investment 3.69 2.97 (.10)
operations
Less Distributions
From net investment income - (.08) -
From net realized gain (.07) (.26) -
Total distributions (.07) (.34) -
Net asset value, end of period $ 16.15 $ 12.53 $ 9.90
TOTAL RETURN B, C 29.59% 30.09% (1.00)%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 1,141,806 $ 345,287 $ 990
(000 omitted)
Ratio of expenses to average .61% .70% 1.00% A, F
net assets
Ratio of expenses to average .60% G .70% 1.00% A
net assets after expense
reductions
Ratio of net investment 1.08% 1.14% 3.89% A
income to average net assets
Portfolio turnover 66% 81% 0% A
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 E
Net asset value, beginning of $ 12.53 $ 12.35
period
Income from Investment
Operations
Net investment income D .15 .03
Net realized and unrealized 3.50 .49
gain (loss)
Total from investment 3.65 .52
operations
Less Distributions
From net investment income - (.08)
From net realized gain (.07) (.26)
Total distributions (.07) (.34)
Net asset value, end of period $ 16.11 $ 12.53
TOTAL RETURN B, C 29.27% 4.29%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 18,375 $ 10
(000 omitted)
Ratio of expenses to average .71% .80% A
net assets
Ratio of expenses to average .70% G .80% A
net assets after expense
reductions
Ratio of net investment 1.05% 1.24% A
income to average net assets
Portfolio turnover 66% 81%
A ANNUALIZED
B TOTAL RETURNS DO NOT
REFLECT CHARGES ATTRIBUTABLE
TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION
OF THESE CHARGES WOULD
REDUCE THE TOTAL RETURNS
SHOWN. TOTAL RETURNS FOR
PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD
HAVE BEEN LOWER HAD CERTAIN
EXPENSES NOT BEEN REDUCED
DURING THE PERIODS SHOWN
(SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER
SHARE HAS BEEN CALCULATED
BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3,
1997 (COMMENCEMENT OF SALE
OF SERVICE CLASS SHARES) TO
DECEMBER 31, 1997.
F FMR AGREED TO REIMBURSE A
PORTION OF THE FUND'S
EXPENSES DURING THE PERIOD.
WITHOUT THIS REIMBURSEMENT,
THE FUND'S EXPENSE RATIO
WOULD HAVE BEEN HIGHER.
G FMR OR THE FUND HAS ENTERED
INTO VARYING ARRANGEMENTS
WITH THIRD PARTIES WHO
EITHER PAID OR REDUCED A
PORTION OF THE CLASS'
EXPENSES (SEE NOTE 5 OF
NOTES TO FINANCIAL
STATEMENTS).
H FOR THE PERIOD DECEMBER 31,
1996 (COMMENCEMENT OF
OPERATIONS OF INITIAL CLASS
SHARES).
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). If Fidelity had not reimbursed certain fund
expenses, the total return figures would have been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, PAST 1 YEAR PAST 5 YEARS LIFE OF FUND
1998
VIP II: INDEX 500 28.31% 23.72% 21.16%
S&P 500 (registered trademark) 28.58% 24.06% 21.51%
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 market capitalization-weighted index of common
stocks. This benchmark includes reinvested dividends and capital
gains, if any.
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.
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.
(checkmark) 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.
$10,000 OVER LIFE OF FUND
VIP II: Index 500 S&P 500
00157 SP001
1992/08/27 10000.00 10000.00
1992/08/31 10014.00 10016.72
1992/09/30 10130.00 10134.92
1992/10/31 10152.00 10170.39
1992/11/30 10498.00 10517.20
1992/12/31 10630.67 10646.56
1993/01/31 10707.47 10735.99
1993/02/28 10856.70 10882.00
1993/03/31 11095.84 11111.61
1993/04/30 10822.25 10842.71
1993/05/31 11103.95 11133.30
1993/06/30 11132.32 11165.58
1993/07/31 11081.66 11120.92
1993/08/31 11501.17 11542.40
1993/09/30 11407.95 11453.53
1993/10/31 11641.01 11690.62
1993/11/30 11527.52 11579.55
1993/12/31 11666.06 11719.67
1994/01/31 12059.53 12118.14
1994/02/28 11732.95 11789.73
1994/03/31 11223.46 11275.70
1994/04/30 11357.65 11420.03
1994/05/31 11533.77 11607.32
1994/06/30 11252.82 11322.94
1994/07/31 11623.93 11694.33
1994/08/31 12087.29 12173.80
1994/09/30 11793.76 11875.54
1994/10/31 12055.84 12142.74
1994/11/30 11617.64 11700.50
1994/12/31 11787.47 11874.02
1995/01/31 12099.87 12181.91
1995/02/28 12563.64 12656.64
1995/03/31 12931.02 13030.14
1995/04/30 13311.22 13413.88
1995/05/31 13834.52 13950.03
1995/06/30 14148.51 14274.09
1995/07/31 14620.55 14747.42
1995/08/31 14656.86 14784.44
1995/09/30 15269.88 15408.34
1995/10/31 15218.62 15353.33
1995/11/30 15880.76 16027.34
1995/12/31 16171.25 16336.03
1996/01/31 16724.46 16892.11
1996/02/29 16880.36 17048.70
1996/03/31 17054.17 17212.88
1996/04/30 17292.62 17466.59
1996/05/31 17733.85 17917.06
1996/06/30 17809.61 17985.32
1996/07/31 17020.75 17190.73
1996/08/31 17370.61 17553.28
1996/09/30 18342.21 18541.18
1996/10/31 18848.06 19052.55
1996/11/30 20260.89 20492.73
1996/12/31 19844.17 20086.77
1997/01/31 21074.26 21341.79
1997/02/28 21231.99 21509.11
1997/03/31 20349.53 20625.30
1997/04/30 21559.17 21856.63
1997/05/31 22870.18 23187.26
1997/06/30 23874.76 24226.05
1997/07/31 25773.31 26153.72
1997/08/31 24330.96 24688.59
1997/09/30 25646.59 26040.78
1997/10/31 24798.69 25171.02
1997/11/30 25920.77 26336.19
1997/12/31 26358.54 26788.38
1998/01/31 26644.25 27084.66
1998/02/28 28537.17 29038.00
1998/03/31 29981.03 30525.04
1998/04/30 30277.94 30832.12
1998/05/31 29736.79 30302.12
1998/06/30 30950.78 31532.99
1998/07/31 30613.17 31197.16
1998/08/31 26183.42 26686.68
1998/09/30 27866.72 28396.22
1998/10/31 30129.49 30705.97
1998/11/30 31944.49 32567.06
1998/12/31 33821.74 34443.58
IMATRL PRASUN SHR__CHT 19981231 19990111 115030 R00000000000080
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund II: Index 500 Portfolio
on August 27, 1992, when the fund started. As the chart shows, by
December 31, 1998, the value of the investment would have grown to
$33,819 - a 238.19% increase on the initial investment. For
comparison, look at how the Standard & Poor's 500 Index did over the
same period. With dividends and capital gains, if any, reinvested, the
same $10,000 investment would have grown to $34,444 - a 244.44%
increase.
INVESTMENT SUMMARY
TOP TEN STOCKS AS OF DECEMBER
31, 1998
% OF FUND'S INVESTMENTS
Microsoft Corp. 3.3
General Electric Co. 3.2
Intel Corp. 1.9
Wal-Mart Stores, Inc. 1.8
Exxon Corp. 1.7
Merck & Co., Inc. 1.7
International Business 1.6
Machines Corp.
Coca-Cola Co. (The) 1.6
Pfizer, Inc. 1.6
Cisco Systems, Inc. 1.4
TOP TEN MARKET SECTORS AS OF
DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
TECHNOLOGY 18.9
FINANCE 15.2
HEALTH 11.7
UTILITIES 11.0
NONDURABLES 8.8
RETAIL & WHOLESALE 6.3
ENERGY 5.5
INDUSTRIAL MACHINERY & 5.3
EQUIPMENT
MEDIA & LEISURE 4.3
BASIC INDUSTRIES 3.3
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
(photograph of Frank Salerno)
An interview with
Frank Salerno,
Portfolio Manager
of Index 500 Portfolio
Q. HOW DID THE FUND PERFORM, FRANK?
A. The fund's return was slightly lower than the Standard & Poor's 500
Index's return of 28.58% for the 12-month period ending December 31,
1998, primarily due to management fees.
Q. 1998 WAS ONE OF THE MOST VOLATILE YEARS FOR THE MARKET IN RECENT
HISTORY. WHAT WAS BEHIND ALL THE UNCERTAINTY?
A. As the U.S. market rallied early in the year, market forecasters
raised concerns about the possibility of inflation leading to higher
interest rates. Nevertheless, large-cap growth stocks continued to
drive performance and produce impressive gains for the S&P 500 index.
Despite the overall market strength, investors worried about a wide
range of economic and market troubles that caused extreme market
turbulence worldwide. For instance, investors were concerned that the
difficulties in Asia could have an impact on U.S. earnings. We
witnessed emerging markets perform more like submerging markets as
Russia effectively defaulted on its debt and devalued the ruble. In
addition, Brazil's financial worries helped drive U.S. stock prices
lower during the period. Then, during the summer as markets plummeted
worldwide, pundits talked about the possibility of deflation and
recession. Adding to all the financial concerns, it was a turbulent
year for politics as well.
Q. TECHNOLOGY WAS THE LARGEST SECTOR IN THE S&P 500 INDEX. HOW DID
THESE STOCKS PERFORM?
A. The sector got off to a choppy start as Intel and Compaq warned of
excess inventories. The crisis in Asia and in emerging markets fanned
the flames of investor concerns resulting in poor stock performance
for many technology issues during August and September. However, by
year-end, many of these problems seemed to disappear and the sector
was once again led by the large-cap growth stocks such as Microsoft,
Intel, Cisco Systems and Lucent Technology. While each of these
companies provided strong gains for the index and the fund, the sector
received an additional boost from investors' extreme bullishness
regarding the future of the Internet.
Q. IT WAS ALSO A VOLATILE PERIOD FOR FINANCIAL STOCKS, WHICH REPRESENT
THE SECOND-LARGEST SECTOR IN THE S&P 500 INDEX. HOW DID THESE HOLDINGS
FARE?
A. Early in the year, financial stocks were buoyed by takeover
speculation amid a number of megamergers, including Travelers Group
with Citicorp, NationsBank with BankAmerica, and Norwest with Wells
Fargo. On July 17, when the Dow Jones Industrial Average hit a
precorrection peak, the Philadelphia Stock Exchange's bank index was
up 23% year to date. Then came news of the collapse of Russia's
economy and the troubled hedge fund, Long-Term Capital Management.
Following these announcements, investors fled financial stocks in
droves in the third quarter, fearing a potential global market
meltdown. The Federal Reserve came to the rescue in the fourth
quarter, causing many investors to believe the sell-off was overdone.
Financial stocks were one of the primary beneficiaries.
Q. WHAT AREAS OF THE MARKET WERE DISAPPOINTMENTS?
A. Basic industries such as chemicals, steel, metals and mining, and
paper all experienced weakness during the period. Just when I thought
these stocks couldn't get any cheaper, they did. Essentially, due to
weak demand, the call of deflation echoed in from Asia causing
commodity prices to drop even further. Despite some major mergers such
as British Petroleum's agreement to acquire Amoco and Exxon's
agreement to acquire Mobil, most energy stocks also performed poorly.
As demand for oil dried up in Asia, the price of a barrel dropped to a
12-year low.
Q. WHAT'S YOUR OUTLOOK, FRANK?
A. After four straight years of double-digit gains, the big question
is whether this bull market can continue. Of course, it's impossible
to predict what's ahead for 1999; however, an argument can be made to
say that it is time for stock prices to cool off a bit. The
price-to-earnings ratio of the S&P 500 is at historically high levels
and corporate earnings for many companies have yet to justify these
high price multiples. As a result, it is very possible that the market
volatility we experienced in 1998 may continue. At the same time, a
strong argument also can be made to say the market will continue on
its upward path due to the pos- itive economic backdrop in the U.S.,
characterized by strong consumer spending, low interest rates and
nonexistent inflationary pressures.
The views expressed in this report reflect those of the portfolio
manager only through the end of the period of the report as stated on
the cover. The manager's views are subject to change at any time based
on market and other conditions.
(checkmark) FUND FACTS
GOAL: to provide returns that correspond to those of the S&P 500 index
START DATE: August 27, 1992
SIZE: as of December 31, 1998, more than
$3.7 billion
MANAGER: Frank Salerno, since 1997
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
INVESTMENTS DECEMBER 31, 1998
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 96.4%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.5%
AEROSPACE & DEFENSE - 1.2%
AlliedSignal, Inc. 211,700 $ 9,380,956
Boeing Co. 376,268 12,275,744
Goodrich (B.F.) Co. 24,800 889,700
Lockheed Martin Corp. 71,193 6,033,607
Rockwell International Corp. 72,800 3,535,350
Textron, Inc. 55,800 4,237,313
United Technologies Corp. 79,300 8,623,875
44,976,545
DEFENSE ELECTRONICS - 0.2%
Northrop Grumman Corp. 22,800 1,667,250
Raytheon Co. Class B 128,100 6,821,325
8,488,575
SHIP BUILDING & REPAIR - 0.1%
General Dynamics Corp. 46,500 2,726,063
TOTAL AEROSPACE & DEFENSE 56,191,183
BASIC INDUSTRIES - 3.3%
CHEMICALS & PLASTICS - 1.8%
Air Products & Chemicals, 79,700 3,188,000
Inc.
Ashland, Inc. 23,200 1,122,300
Avery Dennison Corp. 47,700 2,149,481
Dow Chemical Co. 84,000 7,638,750
du Pont (E.I.) de Nemours & 412,800 21,904,200
Co.
Eastman Chemical Co. 27,175 1,216,081
Engelhard Corp. 48,000 936,000
FMC Corp. (a) 11,800 660,800
Great Lakes Chemical Corp. 20,200 808,000
Hercules, Inc. 36,900 1,010,138
Monsanto Co. 227,800 10,820,500
Morton International, Inc. 48,500 1,188,250
Nalco Chemical Co. 23,100 716,100
PPG Industries, Inc. 63,800 3,716,350
Praxair, Inc. 57,700 2,033,925
Raychem Corp. 31,500 1,017,844
Rohm & Haas Co. 61,500 1,852,688
Sealed Air Corp. (a) 31,960 1,631,958
Union Carbide Corp. 54,700 2,324,750
W.R. Grace & Co. 26,200 411,013
66,347,128
IRON & STEEL - 0.1%
Aeroquip-Vickers, Inc. 9,700 290,394
Allegheny Teledyne, Inc. 63,084 1,289,279
Bethlehem Steel Corp. (a) 44,200 370,175
Nucor Corp. 34,200 1,479,150
USX-U.S. Steel Group 41,500 954,500
Worthington Industries, Inc. 23,750 296,875
4,680,373
SHARES VALUE (NOTE 1)
METALS & MINING - 0.3%
Alcan Aluminium Ltd. 78,957 $ 2,140,944
Aluminum Co. of America 71,700 5,346,131
ASARCO, Inc. 18,600 280,163
Cyprus Amax Minerals Co. 43,050 430,500
Freeport-McMoRan Copper & 45,600 475,950
Gold, Inc. Class B
Inco Ltd. 47,336 501,041
Phelps Dodge Corp. 20,700 1,053,113
Reynolds Metals Co. 25,800 1,359,338
11,587,180
PACKAGING & CONTAINERS - 0.2%
Ball Corp. 7,430 339,923
Bemis Co., Inc. 16,300 618,381
Corning, Inc. 88,600 3,987,000
Crown Cork & Seal Co., Inc. 47,900 1,475,919
Owens-Illinois, Inc. (a) 55,900 1,711,938
Tupperware Corp. 21,700 356,694
8,489,855
PAPER & FOREST PRODUCTS - 0.9%
Boise Cascade Corp. 14,900 461,900
Champion International Corp. 38,600 1,563,300
Fort James Corp. 77,900 3,116,000
Georgia-Pacific Corp. 35,000 2,049,688
International Paper Co. 106,300 4,763,569
Kimberly-Clark Corp. 199,132 10,852,694
Louisiana-Pacific Corp. 48,900 895,481
Mead Corp. 45,700 1,339,581
Potlatch Corp. 9,900 365,063
Temple-Inland, Inc. 19,000 1,126,938
Union Camp Corp. 28,700 1,937,250
Westvaco Corp. 34,950 937,097
Weyerhaeuser Co. 72,700 3,694,069
Willamette Industries, Inc. 33,500 1,122,250
34,224,880
TOTAL BASIC INDUSTRIES 125,329,416
CONSTRUCTION & REAL ESTATE -
0.4%
BUILDING MATERIALS - 0.3%
Armstrong World Industries, 13,300 802,156
Inc.
Crane Co. 24,600 742,612
Fortune Brands, Inc. 61,600 1,948,100
Masco Corp. 129,900 3,734,625
Owens-Corning 18,200 644,963
Sherwin-Williams Co. 70,800 2,079,750
9,952,206
CONSTRUCTION - 0.1%
Centex Corp. 21,000 946,313
Fleetwood Enterprises, Inc. 13,000 451,750
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
CONSTRUCTION & REAL ESTATE -
CONTINUED
CONSTRUCTION - CONTINUED
Kaufman & Broad Home Corp. 14,500 $ 416,875
Pulte Corp. 15,600 433,875
2,248,813
ENGINEERING - 0.0%
EG & G, Inc. 17,900 497,844
Fluor Corp. 25,900 1,102,369
Foster Wheeler Corp. 14,100 185,944
1,786,157
TOTAL CONSTRUCTION & REAL 13,987,176
ESTATE
DURABLES - 2.4%
AUTOS, TIRES, & ACCESSORIES -
1.7%
AutoZone, Inc. (a) 51,550 1,697,928
Cooper Tire & Rubber Co. 27,300 557,944
Cummins Engine Co., Inc. 14,200 504,100
Dana Corp. 64,866 2,651,398
Danaher Corp. 48,000 2,607,000
Eaton Corp. 28,300 2,000,456
Ford Motor Co. 418,600 24,566,588
General Motors Corp. 240,478 17,209,207
Genuine Parts Co. 64,550 2,158,391
Goodyear Tire & Rubber Co. 57,200 2,885,025
ITT Industries, Inc. 39,500 1,570,125
Johnson Controls, Inc. 26,400 1,557,600
NACCO Industries, Inc. Class A 2,400 220,800
Navistar International Corp. 18,270 520,695
(a)
PACCAR, Inc. 26,590 1,093,514
Pep Boys-Manny, Moe & Jack 19,700 309,044
Snap-On, Inc. 25,200 877,275
TRW, Inc. 48,500 2,725,094
65,712,184
CONSUMER DURABLES - 0.3%
Minnesota Mining & 150,400 10,697,200
Manufacturing Co.
CONSUMER ELECTRONICS - 0.2%
Black & Decker Corp. 37,500 2,102,344
Maytag Corp. 33,300 2,072,925
Newell Co. 66,800 2,755,500
Whirlpool Corp. 29,100 1,611,413
8,542,182
TEXTILES & APPAREL - 0.2%
Fruit of the Loom, Inc. Class 22,700 313,544
A (a)
Liz Claiborne, Inc. 21,900 691,219
NIKE, Inc. Class B 71,800 2,912,388
Reebok International Ltd. (a) 15,700 233,538
Russell Corp. 12,400 251,875
SHARES VALUE (NOTE 1)
Springs Industries, Inc. 4,200 $ 174,038
Class A
VF Corp. 41,400 1,940,625
6,517,227
TOTAL DURABLES 91,468,793
ENERGY - 5.5%
ENERGY SERVICES - 0.5%
Baker Hughes, Inc. 111,130 1,965,612
Halliburton Co. 168,600 4,994,775
Helmerich & Payne, Inc. 20,800 403,000
McDermott International, Inc. 20,800 513,500
Rowan Companies, Inc. (a) 30,400 304,000
Schlumberger Ltd. 202,600 9,344,925
17,525,812
OIL & GAS - 5.0%
Amerada Hess Corp. 32,700 1,626,825
Amoco Corp. 8,400 495,600
Anadarko Petroleum Corp. 41,000 1,265,875
Apache Corp. 33,900 858,094
Atlantic Richfield Co. 119,100 7,771,275
Burlington Resources, Inc. 68,057 2,437,291
Chevron Corp. 237,700 19,714,244
Coastal Corp. (The) 73,800 2,578,388
Exxon Corp. 885,900 64,781,438
Kerr-McGee Corp. 17,900 684,675
Mobil Corp. 289,300 25,205,263
Occidental Petroleum Corp. 123,300 2,080,688
Oryx Energy Co. (a) 36,000 483,750
Phillips Petroleum Co. 85,700 3,652,963
Royal Dutch Petroleum Co. (NY 794,275 38,025,916
Registry Gilder 1.25)
Sunoco, Inc. 30,200 1,089,088
Texaco, Inc. 202,700 10,717,763
Union Pacific Resources 88,412 801,234
Group, Inc.
Unocal Corp. 88,650 2,587,472
USX-Marathon Group 105,900 3,190,238
190,048,080
TOTAL ENERGY 207,573,892
FINANCE - 15.2%
BANKS - 6.7%
Bank of New York Co., Inc. 287,400 11,567,850
Bank One Corp. 430,299 21,972,143
BankAmerica Corp. 644,440 38,746,955
BankBoston Corp. 113,382 4,414,812
Bankers Trust Corp. 13,100 1,119,231
BB&T Corp. 95,900 3,865,969
Capital One Financial Corp. 25,600 2,944,000
Chase Manhattan Corp. 310,746 21,150,150
Comerica, Inc. 56,100 3,825,319
Fifth Third Bancorp 102,225 7,289,920
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
BANKS - CONTINUED
First Union Corp. 371,045 $ 22,564,174
Firstar Corp. 62,100 5,790,725
Huntington Bancshares, Inc. 63,159 1,898,717
KeyCorp 148,914 4,765,248
Mellon Bank Corp. 97,300 6,689,375
Mercantile Bancorp., Inc. 46,000 2,121,750
Morgan (JP) & Co., Inc. 67,200 7,060,200
National City Corp. 128,421 9,310,523
Northern Trust Corp. 43,000 3,754,438
PNC Financial Corp. 117,000 6,332,625
Regions Financial Corp. 72,000 2,902,500
Republic of New York Corp. 37,300 1,699,481
State Street Corp. 55,300 3,846,806
Summit Bancorp 73,600 3,215,400
SunTrust Banks, Inc. 120,200 9,195,300
Synovus Finanical Corp. 83,700 2,040,188
U.S. Bancorp 276,551 9,817,561
Union Planters Corp. 53,400 2,419,688
Wachovia Corp. 69,700 6,094,394
Wells Fargo & Co. 605,200 24,170,175
252,585,617
CREDIT & OTHER FINANCE - 2.7%
American Express Co. 164,079 16,777,078
Associates First Capital 252,948 10,718,672
Corp. Class A
Citigroup, Inc. 830,486 41,109,057
Countrywide Credit 46,300 2,323,681
Industries, Inc.
Fleet Financial Group, Inc. 218,748 9,775,301
Household International, Inc. 181,382 7,187,262
MBNA Corp. 266,725 6,651,455
Providian Financial Corp. 54,900 4,117,500
Transamerica Corp. 21,629 2,498,150
101,158,156
FEDERAL SPONSORED CREDIT - 1.2%
Fannie Mae 368,700 27,283,800
Freddie Mac 252,800 16,289,800
SLM Holding Corp. 60,800 2,918,400
46,492,000
INSURANCE - 3.3%
Aetna, Inc. 52,200 4,104,225
Allstate Corp. 301,442 11,643,197
American General Corp. 91,552 7,141,056
American International Group, 380,343 36,750,642
Inc.
Aon Corp. 62,350 3,452,631
Chubb Corp. (The) 62,200 4,035,225
CIGNA Corp. 77,700 6,007,181
Cincinnati Financial Corp. 56,600 2,072,975
Conseco, Inc. 120,016 3,667,989
General Re Corp. 1,400 343,000
Hartford Financial Services 86,600 4,752,175
Group, Inc.
Jefferson-Pilot Corp. 36,800 2,760,000
SHARES VALUE (NOTE 1)
Lincoln National Corp. 40,900 $ 3,346,131
Loews Corp. 38,800 3,812,100
Marsh & McLennan Companies, 96,050 5,612,922
Inc.
MBIA, Inc. 33,800 2,216,013
MGIC Investment Corp. 40,500 1,612,406
Progressive Corp. 26,700 4,522,313
Provident Companies, Inc. 46,100 1,913,150
SAFECO Corp. 51,100 2,194,106
St. Paul Companies, Inc. (The) 92,392 3,210,622
SunAmerica, Inc. 76,500 6,206,063
Torchmark Corp. 47,400 1,673,813
UNUM Corp. 55,600 3,245,650
126,295,585
SAVINGS & LOANS - 0.3%
Golden West Financial Corp. 16,500 1,512,844
Washington Mutual, Inc. 222,162 8,483,811
9,996,655
SECURITIES INDUSTRY - 1.0%
Bear Stearns Companies, Inc. 43,800 1,637,025
Franklin Resources, Inc. 96,900 3,100,800
Lehman Brothers Holdings, 44,400 1,956,375
Inc.
Merrill Lynch & Co., Inc. 126,000 8,410,500
Morgan Stanley, Dean Witter & 215,156 15,276,076
Co.
Schwab (Charles) Corp. 152,050 8,543,309
38,924,085
TOTAL FINANCE 575,452,098
HEALTH - 11.7%
DRUGS & PHARMACEUTICALS - 8.3%
Allergan, Inc. 27,400 1,774,150
ALZA Corp. Class A. (a) 35,300 1,844,425
American Home Products Corp. 489,800 27,581,863
Amgen, Inc. (a) 95,100 9,943,894
Bristol-Myers Squibb Co. 367,600 49,189,475
Lilly (Eli) & Co. 398,992 35,460,414
Merck & Co., Inc. 433,900 64,081,606
Pfizer, Inc. 472,400 59,256,675
Pharmacia & Upjohn, Inc. 190,260 10,773,473
Schering-Plough Corp. 531,900 29,387,475
Sigma-Aldrich Corp. 34,400 1,010,500
Warner-Lambert Co. 302,100 22,714,144
313,018,094
MEDICAL EQUIPMENT & SUPPLIES
- - 3.0%
Abbott Laboratories 545,900 26,749,100
Bard (C.R.), Inc. 19,800 980,100
Bausch & Lomb, Inc. 18,700 1,122,000
Baxter International, Inc. 106,800 6,868,575
Becton, Dickinson & Co. 96,300 4,110,806
Biomet, Inc. 47,400 1,907,850
Boston Scientific Corp. (a) 131,400 3,523,163
Cardinal Health, Inc. 77,550 5,884,106
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
HEALTH - CONTINUED
MEDICAL EQUIPMENT & SUPPLIES
- - CONTINUED
Guidant Corp. 54,400 $ 5,997,600
Johnson & Johnson 490,400 41,132,300
Mallinckrodt, Inc. 24,900 767,231
Medtronic, Inc. 165,500 12,288,375
Millipore Corp. 15,000 426,563
Pall Corp. 43,700 1,106,156
St. Jude Medical, Inc. (a) 24,829 687,453
U.S. Surgical Corp. rights 2 0
6/30/00 (a)
113,551,378
MEDICAL FACILITIES MANAGEMENT
- - 0.4%
Columbia/HCA Healthcare Corp. 231,712 5,734,872
HCR Manor Care, Inc. (a) 37,500 1,101,563
HEALTHSOUTH Corp. (a) 166,500 2,570,344
Humana, Inc. (a) 58,700 1,045,594
Tenet Healthcare Corp. (a) 107,600 2,824,500
United HealthCare Corp. 73,000 3,143,563
16,420,436
TOTAL HEALTH 442,989,908
INDUSTRIAL MACHINERY &
EQUIPMENT - 5.3%
ELECTRICAL EQUIPMENT - 3.7%
Emerson Electric Co. 166,200 10,397,888
General Electric Co. 1,195,500 122,015,719
General Instrument Corp. (a) 56,700 1,924,256
Grainger (W.W.), Inc. 33,900 1,411,088
Harris Corp. 27,000 988,875
Honeywell, Inc. 45,400 3,419,188
Scientific-Atlanta, Inc. 26,700 609,094
140,766,108
INDUSTRIAL MACHINERY &
EQUIPMENT - 1.3%
Briggs & Stratton Corp. 8,300 413,963
Case Corp. 33,600 732,900
Caterpillar, Inc. 138,200 6,357,200
Cooper Industries, Inc. 46,846 2,233,969
Deere & Co. 96,200 3,186,625
Dover Corp. 79,100 2,897,038
Harnischfeger Industries, 14,700 149,756
Inc.
Illinois Tool Works, Inc. 91,700 5,318,600
Ingersoll-Rand Co. 60,800 2,853,800
Milacron, Inc. 10,400 200,200
Parker-Hannifin Corp. 36,025 1,179,819
Stanley Works 29,900 829,725
Tenneco, Inc. 62,500 2,128,906
Timken Co. 17,984 339,448
Tyco International Ltd. 240,859 18,169,801
46,991,750
SHARES VALUE (NOTE 1)
POLLUTION CONTROL - 0.3%
Browning-Ferris Industries, 59,600 $ 1,694,875
Inc.
Waste Management, Inc. 212,709 9,917,557
11,612,432
TOTAL INDUSTRIAL MACHINERY & 199,370,290
EQUIPMENT
MEDIA & LEISURE - 4.3%
BROADCASTING - 1.7%
CBS Corp. 263,750 8,637,813
Clear Channel Communications, 92,600 5,046,700
Inc. (a)
Comcast Corp. Class A 124,250 7,291,922
(special)
MediaOne Group, Inc. 225,100 10,579,700
Tele-Communications, Inc. 168,700 9,331,219
(TCI Group) Series A (a)
Time Warner, Inc. 398,440 24,728,182
65,615,536
ENTERTAINMENT - 1.1%
Carnival Corp. 209,600 10,060,800
Disney (Walt) Co. 754,300 22,629,000
King World Productions, Inc. 21,900 644,681
(a)
Viacom, Inc. Class B 105,300 7,792,200
(non-vtg.) (a)
41,126,681
LEISURE DURABLES & TOYS - 0.1%
Brunswick Corp. 28,500 705,375
Hasbro, Inc. 48,050 1,735,806
Mattel, Inc. 110,076 2,511,109
4,952,290
LODGING & GAMING - 0.1%
Harrah's Entertainment, Inc. 33,600 527,100
(a)
Hilton Hotels Corp. 102,900 1,967,963
Mirage Resorts, Inc. (a) 67,200 1,003,800
3,498,863
PUBLISHING - 0.6%
American Greetings Corp. 25,000 1,026,563
Class A
Dow Jones & Co., Inc. 25,900 1,246,438
Gannet, Inc. 107,400 7,108,538
Harcourt General, Inc. 18,700 994,606
Knight-Ridder, Inc. 26,400 1,349,700
McGraw-Hill Companies, Inc. 39,200 3,993,500
Meredith Corp. 15,000 568,125
New York Times Co. (The) 62,700 2,174,906
Class A
Times Mirror Co. Class A 23,600 1,321,600
Tribune Co. 41,300 2,725,800
22,509,776
RESTAURANTS - 0.7%
Darden Restaurants, Inc. 47,900 862,200
Marriott International, Inc. 78,400 2,273,600
Class A
McDonald's Corp. 252,100 19,317,163
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - CONTINUED
RESTAURANTS - CONTINUED
Tricon Global Restaurants, 58,810 $ 2,947,851
Inc. (a)
Wendy's International, Inc. 43,700 953,206
26,354,020
TOTAL MEDIA & LEISURE 164,057,166
NONDURABLES - 8.8%
AGRICULTURE - 0.1%
Pioneer Hi-Bred 71,300 1,925,100
International, Inc.
BEVERAGES - 2.8%
Anheuser-Busch Companies, 175,900 11,543,438
Inc.
Brown-Forman Corp. Class B 16,100 1,218,569
Coca-Cola Co. (The) 895,300 59,873,188
Coca-Cola Enterprises, Inc. 148,700 5,316,025
Coors (Adolph) Co. Class B 12,300 694,181
PepsiCo, Inc. 542,900 22,224,969
Seagram Co. Ltd. 136,000 5,176,086
106,046,456
FOODS - 1.7%
Archer-Daniels-Midland Co. 217,170 3,732,609
Bestfoods 105,000 5,591,250
Campbell Soup Co. 169,200 9,306,000
ConAgra, Inc. 177,100 5,578,650
General Mills, Inc. 60,600 4,711,650
Heinz (H.J.) Co. 132,950 7,528,294
Hershey Foods Corp. 41,400 2,574,563
Kellogg Co. 136,500 4,658,063
Quaker Oats Co. 51,200 3,046,400
Ralston Purina Co. 109,600 3,548,300
Sara Lee Corp. 341,000 9,611,938
Sysco Corp. 121,900 3,344,631
Wrigley (Wm.) Jr. Co. 31,900 2,857,044
66,089,392
HOUSEHOLD PRODUCTS - 2.8%
Alberto-Culver Co. Class B 12,800 341,600
Avon Products, Inc. 101,900 4,509,075
Clorox Co. 37,700 4,403,831
Colgate-Palmolive Co. 102,500 9,519,688
Gillette Co. 415,300 20,064,181
International Flavors & 43,200 1,908,900
Fragrances, Inc.
Procter & Gamble Co. 481,000 43,921,313
Rubbermaid, Inc. 62,300 1,958,556
Unilever NV (NY shares) 231,000 19,158,563
105,785,707
TOBACCO - 1.4%
Philip Morris Companies, Inc. 892,500 47,748,750
SHARES VALUE (NOTE 1)
RJR Nabisco Holdings Corp. 128,500 $ 3,814,844
UST, Inc. 63,100 2,200,613
53,764,207
TOTAL NONDURABLES 333,610,862
PRECIOUS METALS - 0.2%
Barrick Gold Corp. 154,000 2,998,497
Battle Mountain Gold Co. 58,000 239,250
Homestake Mining Co. 71,800 659,663
Newmont Mining Corp. 73,865 1,334,187
Placer Dome, Inc. 69,700 796,962
6,028,559
RETAIL & WHOLESALE - 6.3%
APPAREL STORES - 0.5%
Gap, Inc. 210,450 11,837,813
Limited, Inc. (The) 85,289 2,484,042
TJX Companies, Inc. 118,300 3,430,700
17,752,555
DRUG STORES - 0.6%
CVS Corp. 143,100 7,870,500
Longs Drug Stores Corp. 13,300 498,750
Rite Aid Corp. 99,800 4,946,338
Walgreen Co. 177,100 10,371,419
23,687,007
GENERAL MERCHANDISE STORES -
3.0%
Consolidated Stores Corp. (a) 39,900 805,481
Costco Companies, Inc. (a) 84,039 6,066,565
Dayton Hudson Corp. 167,500 9,086,875
Dillards, Inc. Class A 35,900 1,018,663
Dollar General Corp. 82,975 1,960,284
Federated Department Stores, 71,200 3,101,650
Inc. (a)
K mart Corp. (a) 164,300 2,515,844
Kohls Corp. (a) 59,800 3,673,963
May Department Stores Co. 82,100 4,956,788
(The)
Nordstrom, Inc. 59,900 2,077,781
Penney (J.C.) Co., Inc. 97,900 4,589,063
Sears, Roebuck & Co. 132,100 5,614,250
Wal-Mart Stores, Inc. 821,400 66,892,763
112,359,970
GROCERY STORES - 0.9%
Albertson's, Inc. 93,300 5,942,044
American Stores Co. 95,100 3,512,756
Great Atlantic & Pacific Tea, 13,300 394,013
Inc.
Kroger Co. (a) 99,700 6,031,850
Meyer (Fred), Inc. (a) 58,700 3,536,675
Safeway, Inc. (a) 180,800 11,017,500
Supervalu, Inc. 42,000 1,176,000
Winn-Dixie Stores, Inc. 46,700 2,095,663
33,706,501
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
RETAIL & WHOLESALE,
MISCELLANEOUS - 1.3%
Circuit City Stores, Inc. - 33,800 $ 1,687,888
Circuit City Group
Home Depot, Inc. 532,900 32,606,819
IKON Office Solutions, Inc. 46,900 401,581
Lowe's Companies, Inc. 133,200 6,818,175
Staples, Inc. (a) 120,700 5,273,081
Tandy Corp. 36,300 1,495,106
Toys R Us, Inc. (a) 99,000 1,670,625
49,953,275
TOTAL RETAIL & WHOLESALE 237,459,308
SERVICES - 0.7%
ADVERTISING - 0.2%
Interpublic Group of 44,550 3,552,863
Companies, Inc.
Omnicom Group, Inc. 57,400 3,329,200
6,882,063
LEASING & RENTAL - 0.0%
Ryder Systems, Inc. 33,600 873,600
PRINTING - 0.1%
Deluxe Corp. 34,200 1,250,438
Donnelley (R.R.) & Sons Co. 45,800 2,006,613
Moore Corp. Ltd. 21,500 235,299
3,492,350
SERVICES - 0.4%
Block (H&R), Inc. 38,500 1,732,500
Cendant Corp. (a) 315,772 6,019,404
Dun & Bradstreet Corp. 58,500 1,846,406
Ecolab, Inc. 35,600 1,288,275
Jostens, Inc. 9,400 246,163
National Service Industries, 15,200 577,600
Inc.
Service Corp. International 102,800 3,912,825
15,623,173
TOTAL SERVICES 26,871,186
TECHNOLOGY - 18.9%
COMMUNICATIONS EQUIPMENT - 3.6%
3Com Corp. (a) 127,900 5,731,519
Andrew Corp. (a) 30,412 501,798
Ascend Communications, Inc. 75,800 4,983,850
(a)
Cabletron Systems, Inc. (a) 48,900 409,538
Cisco Systems, Inc. (a) 577,675 53,615,461
Lucent Technologies, Inc. 480,268 52,829,480
Northern Telecom Ltd. 243,220 12,172,919
Tellabs, Inc. (a) 74,000 5,073,625
135,318,190
COMPUTER SERVICES & SOFTWARE
- - 6.3%
Adobe Systems, Inc. 27,200 1,271,600
America Online, Inc. 170,900 27,344,000
SHARES VALUE (NOTE 1)
Autodesk, Inc. 22,400 $ 956,200
Automatic Data Processing, 107,500 8,620,156
Inc.
BMC Software, Inc. 80,400 3,582,825
Ceridian Corp. (a) 22,400 1,563,800
Computer Associates 200,212 8,534,037
International, Inc.
Computer Sciences Corp. 59,100 3,808,256
Compuware Corp. (a) 68,400 5,343,750
Electronic Data Systems Corp. 173,000 8,693,250
Equifax, Inc. 47,100 1,610,231
First Data Corp. 163,100 5,168,231
HBO & Co. 179,800 5,158,013
IMS Health, Inc. 62,600 4,722,388
Microsoft Corp. (a) 911,100 126,358,181
Novell, Inc. (a) 140,200 2,541,125
Oracle Corp. (a) 359,350 15,496,969
Parametric Technology Corp. 107,200 1,755,400
(a)
Paychex, Inc. 61,800 3,178,838
PeopleSoft, Inc. (a) 87,300 1,653,244
Shared Medical Systems Corp. 8,300 413,963
237,774,457
COMPUTERS & OFFICE EQUIPMENT
- - 5.5%
Apple Computer, Inc. (a) 50,100 2,050,969
Compaq Computer Corp. 628,062 26,339,350
Data General Corp. (a) 16,800 276,150
Dell Computer Corp. (a) 463,800 33,944,363
EMC Corp. (a) 185,000 15,725,000
Gateway 2000, Inc. (a) 52,200 2,671,988
Hewlett-Packard Co. 385,400 26,327,638
International Business 336,000 62,076,000
Machines Corp.
Pitney Bowes, Inc. 102,100 6,744,981
Seagate Technology, Inc. (a) 89,700 2,713,425
Silicon Graphics, Inc. (a) 78,100 1,005,538
Sun Microsystems, Inc. (a) 143,000 12,244,375
Unisys Corp. (a) 82,700 2,847,981
Xerox Corp. 122,400 14,443,200
209,410,958
ELECTRONIC INSTRUMENTS - 0.3%
Applied Materials, Inc. (a) 128,900 5,502,419
KLA-Tencor Corp. (a) 34,200 1,483,425
Perkin-Elmer Corp. 20,500 2,000,031
Tektronix, Inc. 16,250 488,516
Thermo Electron Corp. (a) 50,700 858,731
10,333,122
ELECTRONICS - 3.0%
Advanced Micro Devices, Inc. 48,000 1,389,000
(a)
AMP, Inc. 85,158 4,433,538
Intel Corp. 608,300 72,121,569
LSI Logic Corp. (a) 43,700 704,663
Micron Technology, Inc. (a) 83,900 4,242,194
Motorola, Inc. 220,400 13,458,175
National Semiconductor Corp. 68,100 919,350
(a)
Solectron Corp. (a) 44,800 4,163,600
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TECHNOLOGY - CONTINUED
ELECTRONICS - CONTINUED
Texas Instruments, Inc. 141,200 $ 12,081,425
Thomas & Betts Corp. 17,300 749,306
114,262,820
PHOTOGRAPHIC EQUIPMENT - 0.2%
Eastman Kodak Co. 118,400 8,524,800
Polaroid Corp. 15,400 287,788
8,812,588
TOTAL TECHNOLOGY 715,912,135
TRANSPORTATION - 0.9%
AIR TRANSPORTATION - 0.3%
AMR Corp. (a) 67,000 3,978,125
Delta Air Lines, Inc. 51,400 2,672,800
Southwest Airlines Co. 114,750 2,574,703
US Airways Group, Inc. (a) 30,400 1,580,800
10,806,428
RAILROADS - 0.5%
Burlington Northern Santa Fe 182,354 6,154,448
Corp.
CSX Corp. 84,938 3,524,927
Norfolk Southern Corp. 127,900 4,052,831
Union Pacific Corp. 89,200 4,019,575
17,751,781
TRUCKING & FREIGHT - 0.1%
FDX Corp. (a) 58,620 5,217,180
Laidlaw, Inc. 108,500 1,095,279
6,312,459
TOTAL TRANSPORTATION 34,870,668
UTILITIES - 11.0%
CELLULAR - 0.4%
AirTouch Communications, Inc. 203,500 14,677,438
(a)
Nextel Communications, Inc. 101,300 2,393,213
Class A (a)
17,070,651
ELECTRIC UTILITY - 2.4%
AES Corp. (a) 67,500 3,197,813
Ameren Corp. 44,400 1,895,325
American Electric Power Co., 76,700 3,609,694
Inc.
Baltimore Gas & Electric Co. 45,200 1,395,550
Carolina Power & Light Co. 43,600 2,051,925
Central & South West Corp. 81,262 2,229,626
CINergy Corp. 47,413 1,629,822
Consolidated Edison, Inc. 82,100 4,341,038
Dominion Resources, Inc. 80,400 3,758,700
DTE Energy Co. 52,600 2,255,225
Duke Energy Corp. 140,907 9,026,855
Edison International 123,100 3,431,413
Entergy Corp. 101,500 3,159,188
FirstEnergy Corp. 75,800 2,468,238
SHARES VALUE (NOTE 1)
FPL Group, Inc. 74,100 $ 4,566,413
GPU, Inc. 36,000 1,590,750
Houston Industries, Inc. 92,922 2,985,119
New Century Energies, Inc. 39,000 1,901,250
Niagara Mohawk Power Corp. (a) 41,900 675,638
Northern States Power Co. 34,000 943,500
PacifiCorp 132,400 2,788,675
PECO Energy Co. 87,800 3,654,675
PG&E Corp. 148,200 4,668,300
PP&L Resources, Inc. 38,940 1,085,453
Public Service Enterprise 85,800 3,432,000
Group, Inc.
Southern Co. 261,500 7,599,844
Texas Utilities Co. 114,000 5,322,375
Unicom Corp. 86,500 3,335,656
89,000,060
GAS - 0.6%
Columbia Gas System, Inc. 29,700 1,715,175
Consolidated Natural Gas Co. 34,500 1,863,000
Eastern Enterprises Co. 11,200 490,000
Enron Corp. 127,700 7,286,881
NICOR, Inc. 17,400 735,150
ONEOK, Inc. 11,006 397,592
Peoples Energy Corp. 12,200 486,475
Sempra Energy 80,256 2,036,496
Sonat, Inc. 37,700 1,020,256
Williams Companies, Inc. 162,700 5,074,206
21,105,231
TELEPHONE SERVICES - 7.6%
ALLTEL Corp. 107,700 6,441,806
Ameritech Corp. 402,000 25,476,750
AT&T Corp. 644,400 48,491,100
Bell Atlantic Corp. 568,178 32,279,613
BellSouth Corp. 718,800 35,850,150
Frontier Corp. 63,000 2,142,000
GTE Corp. 361,300 24,365,169
MCI WorldCom, Inc. (a) 667,670 47,905,323
SBC Communications, Inc. 710,948 38,124,587
Sprint Corp.:
(FON Group) 122,700 10,322,138
Series 1 (PCS Group) (a) 174,150 4,027,219
U.S. WEST, Inc. 191,692 12,388,096
287,813,951
TOTAL UTILITIES 414,989,893
TOTAL COMMON STOCKS 3,646,162,533
(Cost $2,595,598,765)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
U.S. TREASURY OBLIGATIONS -
3.6%
PRINCIPAL AMOUNT VALUE (NOTE 1)
U.S. Treasury Bills, yield at $ 137,720,000 $ 137,081,948
date of purchase 4.33% to
4.62% 1/14/99 to 4/1/99 (b)
(Cost $137,005,951)
TOTAL INVESTMENT IN $ 3,783,244,481
SECURITIES - 100%
(Cost $2,732,604,716)
FUTURES CONTRACTS
EXPIRATION DATE UNDERLYING FACE AMOUNT UNREALIZED GAIN/(LOSS)
PURCHASED
358 S&P 500 Stock Index Mar. 1999 $ 111,472,250 $ 6,109,787
Contracts
</TABLE>
THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL
INVESTMENT IN SECURITIES - 2.9%
LEGEND
(a) Non-income producing
(b) Security or a portion of the security was pledged to cover margin
requirements for futures contracts. At the period end, the value of
securities pledged amounted to $6,778,450.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $1,171,261,429 and $100,210,531, respectively (see Note 3
of Notes to Financial Statements).
The market value of futures contracts opened and closed during the
period amounted to $1,461,156,016 and $1,533,508,700, respectively
(see Note 3 of Notes to Financial Statements).
The fund participated in the security lending program. At period end,
the value of the securities loaned amounted to $77,907,447. The fund
received cash collateral of $79,929,339. The cash collateral was
invested in the Bankers Trust Institutional Daily Asset Fund (see Note
7 of Notes to Financial Statements).
The fund participated in the bank borrowing program. The maximum loan
and average daily balances during the period for which the loan was
outstanding amounted to $5,448,000. The weighted average interest rate
was 5.85% (see Note 8 of Notes to Financial Statements).
INCOME TAX INFORMATION
At December 31, 1998, the aggregate cost of investment securities for
income tax purposes was $2,738,674,618. Net unrealized appreciation
aggregated $1,044,569,863, of which $1,150,039,794 related to
appreciated investment securities and $105,469,931 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, 1998
ASSETS
Investment in securities, at $ 3,783,244,481
value (cost $2,732,604,716)
- - See accompanying schedule
Cash 317,915
Receivable for investments 20,957,001
sold
Receivable for fund shares 12,598,128
sold
Dividends receivable 3,804,725
Interest receivable 37,722
Receivable for daily 232,360
variation on futures
contracts
Investment of cash collateral 79,929,339
received for securities
loaned
TOTAL ASSETS 3,901,121,671
LIABILITIES
Payable for investments $ 45,463,312
purchased
Payable for fund shares 2,744,275
redeemed
Accrued management fee and 553,087
sub-advisory fee
Other payables and accrued 364,137
expenses
Collateral on securities 79,929,339
loaned, at value
TOTAL LIABILITIES 129,054,150
NET ASSETS $ 3,772,067,521
Net Assets consist of:
Paid in capital $ 2,662,044,544
Undistributed net investment 38,272,966
income
Accumulated undistributed net 15,000,394
realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation 1,056,749,617
(depreciation) on
investments and assets and
liabilities in foreign
currencies
NET ASSETS, for 26,706,048 $ 3,772,067,521
shares outstanding
NET ASSET VALUE, offering $141.24
price and redemption price
per share ($3,772,067,521
(divided by) 26,706,048
shares)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME $ 41,090,633
Dividends
Interest (including income on 5,249,233
securities loaned of
$105,078)
TOTAL INCOME 46,339,866
EXPENSES
Management fee and $ 6,919,949
sub-advisory fee
Transfer agent fees 1,966,403
Accounting fees 806,724
Non-interested trustees' 9,973
compensation
Registration fees 43,245
Audit 23,906
Legal 24,909
Interest 885
Miscellaneous 219,338
Total expenses before 10,015,332
reductions
Expense reductions (2,010,500) 8,004,832
NET INVESTMENT INCOME 38,335,034
REALIZED AND UNREALIZED GAIN
(LOSS)
Net realized gain (loss) on:
Investment securities 3,843,101
Foreign currency transactions 793
Futures contracts 12,326,875 16,170,769
Change in net unrealized
appreciation (depreciation)
on:
Investment securities 656,227,090
Assets and liabilities in 153
foreign currencies
Futures contracts 5,051,059 661,278,302
NET GAIN (LOSS) 677,449,071
NET INCREASE (DECREASE) IN $ 715,784,105
NET ASSETS RESULTING FROM
OPERATIONS
OTHER INFORMATION $ 1,923,547
Expense reductions FMR
reimbursement
Custodian credits 86,953
$ 2,010,500
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
INCREASE (DECREASE) IN NET YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
ASSETS
Operations Net investment $ 38,335,034 $ 25,929,152
income
Net realized gain (loss) 16,170,769 58,502,006
Change in net unrealized 661,278,302 301,564,970
appreciation (depreciation)
NET INCREASE (DECREASE) IN 715,784,105 385,996,128
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders (26,060,180) (10,847,444)
From net investment income
From net realized gain (60,359,977) (22,010,833)
TOTAL DISTRIBUTIONS (86,420,157) (32,858,277)
Share transactions Net 1,653,376,843 1,199,221,255
proceeds from sales of shares
Reinvestment of distributions 86,420,157 32,858,277
Cost of shares redeemed (695,135,202) (310,418,293)
NET INCREASE (DECREASE) IN 1,044,661,798 921,661,239
NET ASSETS RESULTING FROM
SHARE TRANSACTIONS
TOTAL INCREASE (DECREASE) 1,674,025,746 1,274,799,090
IN NET ASSETS
NET ASSETS
Beginning of period 2,098,041,775 823,242,685
End of period (including $ 3,772,067,521 $ 2,098,041,775
undistributed net investment
income of $38,272,966 and
$25,920,081, respectively)
OTHER INFORMATION
Shares
Sold 13,244,133 11,765,227
Issued in reinvestment of 751,741 357,466
distributions
Redeemed (5,630,148) (3,026,660)
Net increase (decrease) 8,365,726 9,096,033
SEE ACCOMPANYING NOTES WHICH
ARE AN INTEGRAL PART OF THE
FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 1996 1995 1994
Net asset value, beginning of $ 114.40 $ 89.05 $ 75.71 $ 56.22 $ 55.74
period
Income from Investment
Operations
Net investment income 1.65 C 1.80 C 1.04 .85 1.14
Net realized and unrealized 29.70 26.67 15.55 19.72 (.56)
gain (loss)
Total from investment 31.35 28.47 16.59 20.57 .58
operations
Less Distributions
From net investment income (1.36) (1.03) (.91) (.95) -
From net realized gain (3.15) (2.09) (2.34) (.11) (.10)
In excess of net realized - - - (.02) -
gain
Total distributions (4.51) (3.12) (3.25) (1.08) (.10)
Net asset value, end of period $ 141.24 $ 114.40 $ 89.05 $ 75.71 $ 56.22
TOTAL RETURN A, B 28.31% 32.83% 22.71% 37.19% 1.04%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 3,772,068 $ 2,098,042 $ 823,243 $ 245,700 $ 51,301
(000 omitted)
Ratio of expenses to average .28% D .28% D .28% D .28% D .28% D
net assets
Ratio of net investment 1.33% 1.74% 2.26% 2.70% 2.81%
income to average net assets
Portfolio turnover rate 4% 9% 14% 16% 2%
</TABLE>
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 5 OF NOTES TO
FINANCIAL STATEMENTS).
C NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
D FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD
HAVE BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
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). If Fidelity had not reimbursed certain fund
expenses, the life of fund total return would have been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, PAST 1 YEAR LIFE OF FUND
1998
VIP III: GROWTH OPPORTUNITIES 24.61% 26.26%
- - "INITIAL CLASS"
S&P 500 (registered trademark) 28.58% 30.55%
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 market capitalization-weighted index of common
stocks. This benchmark reflects the reinvestment of dividends and
capital gains, if any.
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations January 3, 1995.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURN WOULD 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.
(checkmark)UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
$10,000 OVER LIFE OF FUND
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund III: Growth Opportunities
Portfolio on January 3, 1995, when the fund started. As the chart
shows, by December 31, 1998, the value of the investment would have
grown to $25,381 - a 153.81% increase on the initial investment. For
comparison, look at how the Standard & Poor's 500 Index did over the
same period. With dividends and capital gains, if any, reinvested, the
same $10,000 investment would have grown to $29,013 - a 190.13%
increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
Fannie Mae 6.1
Philip Morris Companies, Inc. 5.9
Freddie Mac 3.6
Fleet Financial Group, Inc. 3.6
Home Depot, Inc. 2.5
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
FINANCE 20.0
TECHNOLOGY 13.2
RETAIL & WHOLESALE 9.5
UTILITIES 9.4
HEALTH 8.6
ASSET ALLOCATION AS OF DECEMBER 31, 1998*
% OF FUND'S INVESTMENTS
Row: 1, Col: 1, Value: 87.59999999999999
Row: 1, Col: 2, Value: 8.199999999999999
Row: 1, Col: 3, Value: 4.2
Stocks and
equity futures 87.6%
Bonds 8.2%
Short-term investments 4.2%
*FOREIGN INVESTMENTS 7.8%
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1 fee. If Fidelity had not
reimbursed certain fund expenses, the life of fund total return would
have been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, PAST 1 YEAR LIFE OF FUND
1998
VIP III: GROWTH OPPORTUNITIES 24.51% 26.23%
- - SERVICE CLASS
S&P 500 28.58% 30.55%
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 market capitalization-weighted index of common
stocks. This benchmark reflects the reinvestment of dividends and
capital gains, if any.
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.
(checkmark) 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.
$10,000 OVER LIFE OF FUND
VIP III Growth Opp - CL S S&P 500
00491 SP001
1995/01/03 10000.00 10000.00
1995/01/31 10060.00 10261.28
1995/02/28 10370.00 10661.16
1995/03/31 10560.00 10975.77
1995/04/30 10930.00 11299.00
1995/05/31 11440.00 11750.63
1995/06/30 11790.00 12023.59
1995/07/31 12180.00 12422.30
1995/08/31 12260.00 12453.48
1995/09/30 12470.00 12979.01
1995/10/31 12560.00 12932.68
1995/11/30 12920.00 13500.42
1995/12/31 13251.81 13760.44
1996/01/31 13444.45 14228.85
1996/02/29 13434.43 14360.75
1996/03/31 13393.72 14499.04
1996/04/30 13607.45 14712.76
1996/05/31 13912.77 15092.20
1996/06/30 14024.73 15149.70
1996/07/31 13617.62 14480.39
1996/08/31 13699.05 14785.78
1996/09/30 14360.59 15617.92
1996/10/31 14950.89 16048.66
1996/11/30 16080.60 17261.78
1996/12/31 15673.50 16919.83
1997/01/31 16416.46 17976.98
1997/02/28 16573.05 18117.92
1997/03/31 15727.48 17373.45
1997/04/30 16446.21 18410.65
1997/05/31 17513.74 19531.49
1997/06/30 18095.06 20406.50
1997/07/31 19490.24 22030.24
1997/08/31 18750.37 20796.11
1997/09/30 19532.52 21935.11
1997/10/31 19141.45 21202.48
1997/11/30 19828.47 22183.94
1997/12/31 20367.51 22564.84
1998/01/31 20452.07 22814.41
1998/02/28 21731.21 24459.78
1998/03/31 22407.88 25712.37
1998/04/30 22296.95 25971.03
1998/05/31 22130.56 25524.59
1998/06/30 22674.11 26561.40
1998/07/31 22740.67 26278.52
1998/08/31 19789.93 22479.17
1998/09/30 21010.16 23919.19
1998/10/31 22618.65 25864.77
1998/11/30 24071.83 27432.44
1998/12/31 25358.62 29013.09
IMATRL PRASUN SHR__CHT 19981231 19990114 102219 R00000000000051
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund III: Growth Opportunities
Portfolio - Service Class on January 3, 1995, when the fund started.
As the chart shows, by December 31, 1998, the value of the investment
would have grown to $25,359 - a 153.59% increase on the initial
investment. For comparison, look at how the Standard & Poor's 500
Index did over the same period. With dividends and capital gains, if
any, reinvested, the same $10,000 investment would have grown to
$29,013 - a 190.13% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
Fannie Mae 6.1
Philip Morris Companies, Inc. 5.9
Freddie Mac 3.6
Fleet Financial Group, Inc. 3.6
Home Depot, Inc. 2.5
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
FINANCE 20.0
TECHNOLOGY 13.2
RETAIL & WHOLESALE 9.5
UTILITIES 9.4
HEALTH 8.6
ASSET ALLOCATION AS OF DECEMBER 31, 1998*
% OF FUND'S INVESTMENTS
Row: 1, Col: 1, Value: 87.59999999999999
Row: 1, Col: 2, Value: 8.199999999999999
Row: 1, Col: 3, Value: 4.2
Stocks and
equity futures 87.6%
Bonds 8.2%
Short-term investments 4.2%
*FOREIGN INVESTMENTS 7.8%
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
(photograph of George Vanderheiden)
An interview with
George Vanderheiden, Portfolio Manager of Growth Opportunities
Portfolio
Q. HOW DID THE FUND PERFORM, GEORGE?
A. For the 12-month period that ended December 31, 1998, the fund
performed well, but trailed the Standard & Poor's 500 Index return of
28.58%.
Q. WHAT MARKET SECTORS HELPED FUND PERFORMANCE?
A. The fund's stock selection in the retail, finance and utilities
sectors helped performance relative to the S&P 500. Retailers,
including Wal-Mart, Home Depot and Lowe's, were overweighted in the
fund relative to the S&P 500, and outperformed the index due to better
earnings performance. Declining interest rates and an increase in home
financing activity fueled a strong price increase in fund holdings
Fannie Mae and Freddie Mac, both top contributors to performance over
the period. Utilities holding Vodafone Group, a telecommunications
company based in the United Kingdom, benefited from robust earnings
growth. Other notable contributors included nondurables holding Philip
Morris. Despite concerns over government litigation against the
tobacco industry, the stock performed solidly during the past year.
Fund performance was also helped by underexposure to economically
sensitive areas such basic industries, energy, and aerospace and
defense.
Q. WHAT SECTORS HURT FUND PERFORMANCE?
A. Disappointing returns among holdings from the health, technology
and durables sectors hurt performance. Throughout much of the year I
believed the ongoing economic problems in Asia posed formidable
investment risks - particularly in the technology sector.
Consequently, the fund remained underweighted in that sector, a stance
that hurt performance as technology more than doubled the return of
the S&P 500 during the period. The weak return from the fund's health
holdings was largely due to Columbia/HCA Healthcare's stock price
decline. Market sentiment turned against the company due to the
uncertainty surrounding resolution of the government's investigation
of Columbia's billing practices and its weaker-than-expected operating
results. The fund's bond holdings also detracted from performance
relative to the S&P 500. Through September, the bond position helped
fund performance as the decline in interest rates and concerns about
deceleration in corporate earnings growth propelled bonds to strong
gains. However, aggressive easing of monetary policy by the Federal
Reserve Bank in October and November pushed the equity market to new
highs and the fund's bond holdings became a drag on performance.
Q. HOW DID THE FUND WEATHER THE MARKET VOLATILITY OVER THE PAST YEAR?
A. For much of the year, I positioned the fund for an environment of
economic weakness. I focused stock selection on companies I believed
were less sensitive to downturns in the domestic economy and to
disruption in foreign markets. Fannie Mae, Freddie Mac, Wal-Mart
Stores and Home Depot are all examples of holdings that, despite the
emergence of a global financial crisis and increased market
volatility, met or exceeded earnings growth expectations over the past
year. Fannie Mae was the top individual contributor during the year.
The company has proven capable of performing well in both economic
booms and busts and the market has consistently rewarded them for it.
I also maintained an allocation of bonds to hedge against (1) a
deceleration in corporate earnings growth, (2) a downturn in the stock
market and (3) a financial crisis outside of the U.S. This defensive
strategy worked well during the market correction that began in
earnest over the summer.
Q. WHAT'S YOUR OUTLOOK?
A. The fund's positioning reflects an environment of anemic pricing
power, flat-to-declining corporate earnings and decreasing inflation.
Over the past year consumer spending was robust, retail sales were
strong, gross domestic product (GDP) growth was healthy and many
companies reported strong top line revenue growth. Nevertheless, U.S.
corporate earnings growth has decelerated and, in many cases, turned
negative. A lack of pricing power - or the ability to raise prices -
across a broad number of industries, wage inflation and a decrease in
exports have contributed to this weakness in earnings growth. Based
upon their underlying fundamentals, the values of many stocks remain
overextended, many economic forecasts are downcast and turmoil rolls
on in many economies around the world. Despite the euphoria many
investors feel towards Internet stocks, I believe we are already in an
earnings recession. The question remains if this will evolve into an
economic recession as well.
The views expressed in this report reflect those of the portfolio
manager only through the end of the period of the report as stated on
the cover. The manager's views are subject to change at any time based
on market and other conditions.
(checkmark) 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, 1998,
more than $1.7 billion
MANAGER: George Vanderheiden, since inception;
joined Fidelity in 1971
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
INVESTMENTS DECEMBER 31, 1998
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 87.3%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 0.3%
Boeing Co. 147,500 $ 4,812,188
BASIC INDUSTRIES - 1.7%
CHEMICALS & PLASTICS - 1.0%
Cabot Corp. 71,700 2,003,119
du Pont (E.I.) de Nemours & 158,700 8,421,019
Co.
Raychem Corp. 131,500 4,249,094
Union Carbide Corp. 38,600 1,640,500
16,313,732
IRON & STEEL - 0.0%
Aeroquip-Vickers, Inc. 13,900 416,131
PACKAGING & CONTAINERS - 0.7%
Owens-Illinois, Inc. (a) 415,100 12,712,438
PAPER & FOREST PRODUCTS - 0.0%
Willamette Industries, Inc. 12,700 425,450
TOTAL BASIC INDUSTRIES 29,867,751
CONSTRUCTION & REAL ESTATE -
1.4%
BUILDING MATERIALS - 0.4%
Armstrong World Industries, 24,400 1,471,625
Inc.
Owens-Corning 132,200 4,684,838
Sherwin-Williams Co. 41,900 1,230,813
7,387,276
CONSTRUCTION - 0.8%
Centex Corp. 60,100 2,708,256
D.R. Horton, Inc. 91,136 2,096,128
Fleetwood Enterprises, Inc. 82,962 2,882,930
Kaufman & Broad Home Corp. 150,400 4,324,000
Lennar Corp. 23,900 603,475
12,614,789
ENGINEERING - 0.2%
Fluor Corp. 91,400 3,890,213
TOTAL CONSTRUCTION & REAL 23,892,278
ESTATE
DURABLES - 4.4%
AUTOS, TIRES, & ACCESSORIES -
3.0%
AutoZone, Inc. (a) 68,100 2,243,044
Cummins Engine Co., Inc. 106,500 3,780,750
Dana Corp. 37,300 1,524,638
Discount Auto Parts, Inc. (a) 66,300 1,454,456
Eaton Corp. 13,100 926,006
General Motors Corp. 399,100 28,560,594
Goodyear Tire & Rubber Co. 52,500 2,647,969
Lear Corp. (a) 26,500 1,020,250
Magna International, Inc. 86,300 5,379,301
Class A
Republic Industries, Inc. (a) 242,700 3,579,825
51,116,833
CONSUMER DURABLES - 0.2%
Minnesota Mining & 38,700 2,752,538
Manufacturing Co.
SHARES VALUE (NOTE 1)
CONSUMER ELECTRONICS - 0.3%
Newell Co. 119,200 $ 4,917,000
Whirlpool Corp. 22,900 1,268,088
6,185,088
TEXTILES & APPAREL - 0.9%
Burlington Industries, Inc. 296,400 3,260,400
(a)
Jones Apparel Group, Inc. (a) 76,800 1,694,400
Liz Claiborne, Inc. 163,200 5,151,000
NIKE, Inc. Class B 30,100 1,220,931
Polo Ralph Lauren Corp. Class 24,100 462,419
A (a)
Shaw Industries, Inc. 27,500 666,875
Warnaco Group, Inc. Class A 95,700 2,416,425
14,872,450
TOTAL DURABLES 74,926,909
ENERGY - 6.1%
ENERGY SERVICES - 0.6%
Baker Hughes, Inc. 28,500 504,094
Halliburton Co. 142,000 4,206,750
McDermott International, Inc. 97,900 2,416,906
Schlumberger Ltd. 69,500 3,205,688
10,333,438
OIL & GAS - 5.5%
Amerada Hess Corp. 207,000 10,298,250
Amoco Corp. 50,800 2,997,200
Apache Corp. 23,400 592,313
Atlantic Richfield Co. 23,900 1,559,475
British Petroleum PLC ADR 215,500 20,472,500
Burlington Resources, Inc. 178,835 6,404,528
Chevron Corp. 40,400 3,350,675
Cooper Cameron Corp. (a) 72,300 1,771,350
Elf Aquitaine SA sponsored ADR 22,200 1,257,075
Exxon Corp. 157,900 11,546,438
Occidental Petroleum Corp. 431,700 7,284,938
Royal Dutch Petroleum Co. (NY 248,900 11,916,088
Registry Gilder 1.25)
Tosco Corp. 374,100 9,679,838
Total SA:
Class B 6,153 612,223
sponsored ADR 53,468 2,660,033
Unocal Corp. 14,300 417,381
USX-Marathon Group 30,300 912,788
93,733,093
TOTAL ENERGY 104,066,531
FINANCE - 20.0%
BANKS - 0.9%
Bank of Tokyo-Mitsubishi Ltd. 218,000 2,252,185
Bank One Corp. 140,610 7,179,898
Wells Fargo & Co. 159,000 6,350,063
15,782,146
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
CREDIT & OTHER FINANCE - 4.0%
Associates First Capital 9,000 $ 381,375
Corp. Class A
Citigroup, Inc. 11,800 584,100
Fleet Financial Group, Inc. 1,391,364 62,176,579
Household International, Inc. 26,600 1,054,025
Providian Financial Corp. 67,200 5,040,000
69,236,079
FEDERAL SPONSORED CREDIT - 9.7%
Fannie Mae 1,408,600 104,236,373
Freddie Mac 966,000 62,246,625
166,482,998
INSURANCE - 4.6%
AFLAC, Inc. 63,500 2,794,000
Allmerica Financial Corp. 52,100 3,015,288
Allstate Corp. 431,918 16,682,833
American International Group, 236,450 22,846,981
Inc.
CIGNA Corp. 126,300 9,764,569
Loews Corp. 42,200 4,146,150
MGIC Investment Corp. 347,900 13,850,769
PMI Group, Inc. 16,500 814,688
Torchmark Corp. 111,700 3,944,406
Travelers Property Casualty 58,900 1,825,900
Corp. Class A
79,685,584
SAVINGS & LOANS - 0.2%
Golden West Financial Corp. 26,400 2,420,550
SECURITIES INDUSTRY - 0.6%
Merrill Lynch & Co., Inc. 50,400 3,364,200
Morgan Stanley, Dean Witter & 41,400 2,939,400
Co.
Nomura Securities Co. Ltd. 374,000 3,252,892
United Asset Management Corp. 3,900 101,400
Waddell & Reed Financial, Inc.:
Class A 2,255 53,415
Class B 25,200 585,900
10,297,207
TOTAL FINANCE 343,904,564
HEALTH - 8.6%
DRUGS & PHARMACEUTICALS - 3.9%
American Home Products Corp. 273,400 15,395,838
Amgen, Inc. (a) 181,000 18,925,813
Astra AB Class A 313,266 6,480,692
Merck & Co., Inc. 61,800 9,127,088
Novartis AG (Reg.) 800 1,572,052
Schering-Plough Corp. 275,800 15,237,950
66,739,433
MEDICAL EQUIPMENT & SUPPLIES
- - 1.7%
AmeriSource Health Corp. 69,100 4,491,500
Class A (a)
Baxter International, Inc. 10,700 688,144
SHARES VALUE (NOTE 1)
Biomet, Inc. 44,300 $ 1,783,075
Boston Scientific Corp. (a) 42,700 1,144,894
Johnson & Johnson 224,500 18,829,938
St. Jude Medical, Inc. (a) 111,402 3,084,443
30,021,994
MEDICAL FACILITIES MANAGEMENT
- - 3.0%
Columbia/HCA Healthcare Corp. 1,311,850 32,468,288
Humana, Inc. (a) 279,500 4,978,594
Tenet Healthcare Corp. (a) 309,600 8,127,000
United HealthCare Corp. 126,000 5,425,875
50,999,757
TOTAL HEALTH 147,761,184
HOLDING COMPANIES - 0.0%
U.S. Industries, Inc. 36,100 672,363
INDUSTRIAL MACHINERY &
EQUIPMENT - 3.4%
ELECTRICAL EQUIPMENT - 2.5%
Alcatel Alsthom Compagnie 32,700 3,995,531
Generale d'Electricite SA
(RFD)
Emerson Electric Co. 154,800 9,684,675
General Electric Co. 111,400 11,369,763
Grainger (W.W.), Inc. 64,400 2,680,650
Philips Electronics NV:
(Bearer) 74,300 5,029,183
(NY shares) 164,200 11,114,288
43,874,090
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.9%
Caterpillar, Inc. 102,300 4,705,800
Tyco International Ltd. 98,000 7,392,875
Ultratech Stepper, Inc. (a) 66,800 1,068,800
United States Filter Corp. (a) 84,800 1,939,800
15,107,275
TOTAL INDUSTRIAL MACHINERY & 58,981,365
EQUIPMENT
MEDIA & LEISURE - 2.3%
BROADCASTING - 0.5%
Comcast Corp. Class A 14,400 845,100
(special)
Cox Communications, Inc. 19,400 1,341,025
Class A (a)
Infinity Broadcasting Corp. 43,800 1,199,025
(a)
MediaOne Group, Inc. 90,200 4,239,400
Tele-Communications, Inc. 21,768 1,204,043
(TCI Group) Series A (a)
8,828,593
ENTERTAINMENT - 0.7%
Cedar Fair LP (depository 5,800 150,800
unit)
Fox Entertainment Group, Inc. 37,700 949,569
(a)
King World Productions, Inc. 23,800 700,613
(a)
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - CONTINUED
ENTERTAINMENT - CONTINUED
Royal Carribean Cruises Ltd. 25,900 $ 958,300
Tele-Communications, Inc. 357,464 8,422,746
(TCI Ventures Group) Series
A (a)
11,182,028
LODGING & GAMING - 0.6%
Mirage Resorts, Inc. (a) 132,800 1,983,700
Promus Hotel Corp. (a) 171,500 5,552,313
Sun International Hotels Ltd. 72,800 3,307,850
(a)
10,843,863
RESTAURANTS - 0.5%
McDonald's Corp. 45,500 3,486,438
Papa John's International, 8,500 375,063
Inc. (a)
Wendy's International, Inc. 247,700 5,402,956
9,264,457
TOTAL MEDIA & LEISURE 40,118,941
NONDURABLES - 6.2%
BEVERAGES - 0.1%
PepsiCo, Inc. 35,900 1,469,656
HOUSEHOLD PRODUCTS - 0.2%
Revlon, Inc. Class A (a) 48,300 793,931
Rubbermaid, Inc. 71,300 2,241,494
3,035,425
TOBACCO - 5.9%
Philip Morris Companies, Inc. 1,892,200 101,232,700
TOTAL NONDURABLES 105,737,781
PRECIOUS METALS - 0.0%
Newmont Mining Corp. 23,569 425,715
RETAIL & WHOLESALE - 9.5%
APPAREL STORES - 0.6%
Gap, Inc. 63,825 3,590,156
Ross Stores, Inc. 19,900 783,563
TJX Companies, Inc. 227,700 6,603,300
10,977,019
GENERAL MERCHANDISE STORES -
3.1%
Federated Department Stores, 169,400 7,379,488
Inc. (a)
Saks Holdings, Inc. (a) 203,106 6,410,533
Wal-Mart Stores, Inc. 475,300 38,707,244
52,497,265
GROCERY STORES - 0.5%
Safeway, Inc. (a) 130,400 7,946,250
RETAIL & WHOLESALE,
MISCELLANEOUS - 5.3%
Circuit City Stores, Inc. - 254,700 12,719,081
Circuit City Group
Home Depot, Inc. 700,000 42,831,250
Lowe's Companies, Inc. 476,800 24,406,200
SHARES VALUE (NOTE 1)
Office Depot, Inc. (a) 127,700 $ 4,716,919
Officemax, Inc. (a) 155,975 1,891,197
Staples, Inc. (a) 110,550 4,829,653
91,394,300
TOTAL RETAIL & WHOLESALE 162,814,834
SERVICES - 0.5%
ADVERTISING - 0.1%
Interpublic Group of 17,350 1,383,663
Companies, Inc.
Omnicom Group, Inc. 13,700 794,600
2,178,263
SERVICES - 0.4%
Modis Professional Services, 73,600 1,067,200
Inc. (a)
Service Corp. International 164,700 6,268,894
7,336,094
TOTAL SERVICES 9,514,357
TECHNOLOGY - 13.2%
COMMUNICATIONS EQUIPMENT - 0.0%
Cisco Systems, Inc. (a) 3,450 320,203
COMPUTER SERVICES & SOFTWARE
- - 3.1%
Automatic Data Processing, 68,900 5,524,919
Inc.
Black Box Corp. (a) 20,400 772,650
Ceridian Corp. (a) 45,000 3,141,563
CompUSA, Inc. 77,800 1,016,263
E Trade Group, Inc. (a) 41,900 1,960,134
Electronics for Imaging, Inc. 92,600 3,704,000
(a)
First Data Corp. 139,800 4,429,913
IMS Health, Inc. 35,300 2,662,944
Microsoft Corp. (a) 125,200 17,363,675
Oracle Corp. (a) 137,725 5,939,391
Policy Management Systems 119,000 6,009,500
Corp. (a)
52,524,952
COMPUTERS & OFFICE EQUIPMENT
- - 3.1%
Compaq Computer Corp. 263,900 11,067,306
Hewlett-Packard Co. 49,200 3,360,975
Ingram Micro, Inc. Class A (a) 21,300 742,838
International Business 86,900 16,054,775
Machines Corp.
SCI Systems, Inc. (a) 279,800 16,158,450
Tech Data Corp. (a) 159,200 6,407,800
53,792,144
ELECTRONIC INSTRUMENTS - 1.0%
Applied Materials, Inc. (a) 106,100 4,529,144
Cognex Corp. (a) 22,100 442,000
KLA-Tencor Corp. (a) 104,100 4,515,338
LAM Research Corp. (a) 114,700 2,043,094
Novellus Systems, Inc. (a) 23,800 1,178,100
Teradyne, Inc. (a) 15,600 661,050
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TECHNOLOGY - CONTINUED
ELECTRONIC INSTRUMENTS -
CONTINUED
Thermo Electron Corp. (a) 177,500 $ 3,006,406
Varian Associates, Inc. 24,200 916,575
17,291,707
ELECTRONICS - 6.0%
Altera Corp. (a) 38,700 2,355,863
AMP, Inc. 83,727 4,359,037
Analog Devices, Inc. (a) 23,700 743,588
Conexant Systems, Inc. (a) 33,200 556,100
Etec Systems, Inc. (a) 23,400 936,000
Intel Corp. 75,300 8,927,756
International Rectifier Corp. 52,100 507,975
(a)
Methode Electronics, Inc. 195,900 3,060,938
Class A
Micrel, Inc. (a) 28,400 1,562,000
Microchip Technology, Inc. (a) 109,700 4,058,900
Micron Technology, Inc. (a) 313,300 15,841,231
Molex, Inc. Class A 113,828 3,628,267
Motorola, Inc. 171,900 10,496,644
Solectron Corp. (a) 436,400 40,557,925
Speedfam International, Inc. 23,100 395,588
(a)
Thomas & Betts Corp. 99,200 4,296,600
Vishay Intertechnology, Inc. 24,210 351,045
102,635,457
TOTAL TECHNOLOGY 226,564,463
TRANSPORTATION - 0.3%
RAILROADS - 0.2%
CSX Corp. 70,600 2,929,900
TRUCKING & FREIGHT - 0.1%
Airborne Freight Corp. 42,700 1,539,869
TOTAL TRANSPORTATION 4,469,769
UTILITIES - 9.4%
CELLULAR - 2.8%
AirTouch Communications, Inc. 65,400 4,716,975
(a)
Tele Celular Sul 17,510 305,331
Participacoes SA ADR
Tele Centro Oeste Celular 58,366 171,450
Participacoes SA ADR
Tele Leste Celular 3,502 99,369
Participacoes SA ADR
Tele Nordeste Celular 8,755 161,968
Participacoes SA ADR
Tele Norte Celular 3,502 79,014
Participacoes SA ADR
Tele Sudeste Celular 35,020 724,476
Participacoes SA ADR
Teleglobe, Inc. 21,425 769,928
Telemig Celular Participacoes 8,755 186,044
SA ADR
Telesp Celular Participacoes 70,040 1,225,700
SA ADR
SHARES VALUE (NOTE 1)
Vodafone Group PLC 24,396 $ 393,082
Vodafone Group PLC sponsored 241,780 38,956,803
ADR
47,790,140
ELECTRIC UTILITY - 0.3%
American Electric Power Co., 48,800 2,296,650
Inc.
Duke Energy Corp. 15,800 1,012,188
Houston Industries, Inc. 22,100 709,963
Niagara Mohawk Power Corp. (a) 19,700 317,663
PG&E Corp. 20,130 634,095
4,970,559
TELEPHONE SERVICES - 6.3%
Ameritech Corp. 76,100 4,822,838
AT&T Corp. 145,700 10,963,925
Bell Atlantic Corp. 145,462 8,264,060
BellSouth Corp. 189,400 9,446,325
Embratel Participacoes SA ADR 175,100 2,440,456
MCI WorldCom, Inc. (a) 458,928 32,928,084
Qwest Communications 93,470 4,673,500
International, Inc. (a)
SBC Communications, Inc. 174,400 9,352,200
Sprint Corp.:
(FON Group) 183,200 15,411,700
Series 1 (PCS Group) (a) 115,200 2,664,000
Tele Centro Sul Participacoes 35,020 1,464,274
SA ADR
Tele Norte Leste 175,100 2,177,806
Participacoes SA ADR
Telebras sponsored ADR 107,600 11,769
Telesp Participacoes SA ADR 175,100 3,874,088
108,495,025
TOTAL UTILITIES 161,255,724
TOTAL COMMON STOCKS 1,499,786,717
(Cost $1,085,650,365)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
U.S. TREASURY OBLIGATIONS -
8.2%
MOODY'S RATINGS (UNAUDITED) (D) PRINCIPAL AMOUNT
U.S. Treasury Bills, yield at $ 800,000 798,869
date of purchase 3.66% to
4.04% 1/7/99 to 1/21/99 (c)
U.S. Treasury Bonds:
stripped principal 0% 2/15/19 Aaa 47,450,000 15,546,993
6.25% 8/15/23 Aaa 40,953,000 45,771,530
8.125% 8/15/19 Aaa 58,840,000 78,579,055
TOTAL U.S. TREASURY OBLIGATIONS 140,696,447
(Cost $123,033,785)
CASH EQUIVALENTS - 4.5%
SHARES VALUE (NOTE 1)
Taxable Central Cash Fund (b) 77,217,463 $ 77,217,463
(Cost $77,217,463)
TOTAL INVESTMENT IN $ 1,717,700,627
SECURITIES - 100%
(Cost $1,285,901,613)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
FUTURES CONTRACTS
EXPIRATION DATE UNDERLYING FACE AMOUNT AT VALUE UNREALIZED GAIN/(LOSS)
PURCHASED
17 S&P 500 Stock Index Mar. 1999 $ 5,293,375 $ 26,196
Contracts
THE FACE VALUE OF FUTURES
PURCHASED AS A PERCENTAGE OF
TOTAL INVESTMENTS IN
SECURITIES - 0.3%
</TABLE>
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield on the Taxable Central Cash
Fund was 4.80%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(c) Security or a portion of the security was pledged to cover margin
requirements for futures contracts. At the period end, the value of
securities pledged amounted to $475,000.
(d) Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investor Service, Inc.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $747,207,373 and $372,728,087, respectively, of which
long-term U.S. government and government agency obligations aggregated
$43,464,188 and $32,068,838, respectively (see Note 3 of Notes to
Financial Statements).
The market value of futures contracts opened and closed during the
period amounted to $177,173,203 and $178,482,924, respectively (see
Note 3 of Notes to Financial Statements).
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $118,698 for the
period (see Note 4 of Notes to Financial Statements).
The fund participated in the interfund lending program as a lender.
The maximum loan and average daily balances during the period for
which the loan was outstanding amounted to $66,000,000. The weighted
average interest rate was 5.55%. Interest earned from the interfund
lending program amounted to $40,086 and is included in interest income
on the Statement of Operations (see Note 6 of Notes to Financial
Statements).
INCOME TAX INFORMATION
At December 31, 1998, the aggregate cost of investment securities for
income tax purposes was $1,288,940,047. Net unrealized appreciation
aggregated $428,760,580, of which $488,608,626 related to appreciated
investment securities and $59,848,046 related to depreciated
investment securities.
The fund hereby designates approximately $27,471,000 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, 1998
ASSETS
Investment in securities, at $ 1,717,700,627
value (cost $1,285,901,613)
- - See accompanying schedule
Receivable for investments 7,885,948
sold
Receivable for fund shares 3,600,545
sold
Dividends receivable 2,288,000
Interest receivable 3,064,487
Receivable for daily 14,450
variation on futures
contracts
TOTAL ASSETS 1,734,554,057
LIABILITIES
Payable to custodian bank $ 2,230
Payable for investments 12,793,552
purchased
Payable for fund shares 1,239,701
redeemed
Accrued management fee 800,001
Distribution fees payable 10,056
Other payables and accrued 201,446
expenses
TOTAL LIABILITIES 15,046,986
NET ASSETS $ 1,719,507,071
Net Assets consist of:
Paid in capital $ 1,241,471,370
Undistributed net investment 17,079,948
income
Accumulated undistributed net 29,118,441
realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation 431,837,312
(depreciation) on
investments and assets and
liabilities in foreign
currencies
NET ASSETS $ 1,719,507,071
INITIAL CLASS: NET ASSET $22.88
VALUE, offering price and
redemption price per share
($1,570,011,353 (divided by)
68,621,624 shares)
SERVICE CLASS: NET ASSET $22.86
VALUE, offering price and
redemption price per share
($149,495,718 (divided by)
6,538,863 shares)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME $ 14,933,696
Dividends
Interest 11,929,733
TOTAL INCOME 26,863,429
EXPENSES
Management fee $ 8,011,214
Transfer agent fees 924,113
Distribution fees - Service 65,577
Class
Accounting fees and expenses 563,938
Non-interested trustees' 4,762
compensation
Custodian fees and expenses 58,570
Audit 24,934
Legal 10,354
Miscellaneous 31,179
Total expenses before 9,694,641
reductions
Expense reductions (79,805) 9,614,836
NET INVESTMENT INCOME 17,248,593
REALIZED AND UNREALIZED GAIN
(LOSS)
Net realized gain (loss) on:
Investment securities 28,096,730
Foreign currency transactions (6,386)
Futures contracts 1,309,721 29,400,065
Change in net unrealized
appreciation (depreciation)
on:
Investment securities 261,631,252
Assets and liabilities in 12,893
foreign currencies
Futures contracts 26,196 261,670,341
NET GAIN (LOSS) 291,070,406
NET INCREASE (DECREASE) IN $ 308,318,999
NET ASSETS RESULTING FROM
OPERATIONS
OTHER INFORMATION $ 77,769
Expense reductions Directed
brokerage arrangements
Custodian credits 2,036
$ 79,805
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
INCREASE (DECREASE) IN NET YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
ASSETS
Operations Net investment $ 17,248,593 $ 11,806,552
income
Net realized gain (loss) 29,400,065 41,932,727
Change in net unrealized 261,670,341 124,025,796
appreciation (depreciation)
NET INCREASE (DECREASE) IN 308,318,999 177,765,075
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders (12,018,174) (6,503,921)
From net investment income
From net realized gain (41,777,463) (9,258,542)
TOTAL DISTRIBUTIONS (53,795,637) (15,762,463)
Share transactions - net 436,628,059 483,267,618
increase (decrease)
TOTAL INCREASE (DECREASE) 691,151,421 645,270,230
IN NET ASSETS
NET ASSETS
Beginning of period 1,028,355,650 383,085,420
End of period (including $ 1,719,507,071 $ 1,028,355,650
undistributed net investment
income of $17,079,948 and
$11,667,388, respectively)
</TABLE>
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
SHARES DOLLARS SHARES DOLLARS
Share transactions Initial 21,572,358 $ 432,066,063 29,803,319 $ 508,833,566
Class Sold
Reinvested 2,818,502 53,495,168 1,011,711 15,762,463
Redeemed (8,989,787) (178,498,316) (2,470,247) (43,871,687)
Net increase (decrease) 15,401,073 $ 307,062,915 28,344,783 $ 480,724,342
Service Class A Sold 6,428,938 $ 130,061,772 134,338 $ 2,543,276
Reinvested 15,831 300,469 - -
Redeemed (40,244) (797,097) - -
Net increase (decrease) 6,404,525 $ 129,565,144 134,338 $ 2,543,276
Distributions From net $ 11,951,048 $ 6,503,921
investment income Initial
Class
Service Class 67,126 -
Total $ 12,018,174 $ 6,503,921
From net realized gain $ 41,544,120 $ 9,258,542
Initial Class
Service Class 233,343 -
Total $ 41,777,463 $ 9,258,542
$ 53,795,637 $ 15,762,463
A SERVICE CLASS COMMENCED
SALE OF SHARES NOVEMBER 3,
1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 1996 1995 D
Net asset value, beginning of $ 19.27 $ 15.40 $ 13.07 $ 10.00
period
Income from Investment
Operations
Net investment income .26 C .29 C .26 .11
Net realized and unrealized 4.29 4.18 2.12 3.14
gain (loss)
Total from investment 4.55 4.47 2.38 3.25
operations
Less Distributions
From net investment income (.21) (.25) - (.11)
From net realized gain (.73) (.35) (.05) (.07)
Total distributions (.94) (.60) (.05) (.18)
Net asset value, end of period $ 22.88 $ 19.27 $ 15.40 $ 13.07
TOTAL RETURN B, H 24.61% 29.95% 18.27% 32.52%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 1,570,011 $ 1,025,766 $ 383,085 $ 164,303
(000 omitted)
Ratio of expenses to average .71% .74% .77% .85% F
net assets
Ratio of expenses to average .70% G .73% G .76% G .83% G
net assets after expense
reductions
Ratio of net investment 1.27% 1.68% 2.29% 2.49%
income to average net assets
Portfolio turnover 29% 26% 28% 38%
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 E
Net asset value, beginning of $ 19.27 $ 18.50
period
Income from Investment
Operations
Net investment income C .23 .04
Net realized and unrealized 4.30 .73
gain (loss)
Total from investment 4.53 .77
operations
Less Distributions
From net investment income (.21) -
From net realized gain (.73) -
Total distributions (.94) -
Net asset value, end of period $ 22.86 $ 19.27
TOTAL RETURN B, H 24.51% 4.16%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 149,496 $ 2,589
(000 omitted)
Ratio of expenses to average .80% .84% A
net assets
Ratio of expenses to average .79% G .83% A, G
net assets after expense
reductions
Ratio of net investment 1.16% 1.72% A
income to average net assets
Portfolio turnover 29% 26%
A ANNUALIZED
B 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).
C NET INVESTMENT INCOME PER
SHARE HAS BEEN CALCULATED
BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
D FOR THE PERIOD JANUARY 3,
1995 (COMMENCEMENT OF
OPERATIONS OF INITIAL CLASS
SHARES) TO DECEMBER 31, 1995.
E FOR THE PERIOD NOVEMBER 3,
1997 (COMMENCEMENT OF SALE
OF SERVICE CLASS SHARES) TO
DECEMBER 31, 1997.
F FMR AGREED TO REIMBURSE A
PORTION OF THE CLASS'
EXPENSES DURING THE PERIOD.
WITHOUT THIS REIMBURSEMENT,
THE CLASS' EXPENSE RATIO
WOULD HAVE BEEN HIGHER.
G FMR OR THE FUND HAS ENTERED
INTO VARYING ARRANGEMENTS
WITH THIRD PARTIES WHO
EITHER PAID OR REDUCED A
PORTION OF THE CLASS'
EXPENSES (SEE NOTE 5 OF
NOTES TO FINANCIAL
STATEMENTS).
H TOTAL RETURNS DO NOT
REFLECT CHARGES ATTRIBUTABLE
TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION
OF THESE CHARGES WOULD
REDUCE THE TOTAL RETURNS
SHOWN. TOTAL RETURNS FOR
PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
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 DECEMBER 31, PAST 1 YEAR LIFE OF FUND
1998
VIP II: CONTRAFUND - "INITIAL 29.98% 28.62%
CLASS"
S&P 500 (registered trademark) 28.58% 30.55%
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 market capitalization-weighted index of common
stocks. This benchmark reflects the reinvestment of dividends and
capital gains, if any.
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.
(checkmark) 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.
$10,000 OVER LIFE OF FUND
VIP II Contrafund S&P 500
00158 SP001
1995/01/03 10000.00 10000.00
1995/01/31 9870.00 10261.28
1995/02/28 10370.00 10661.16
1995/03/31 10890.00 10975.77
1995/04/30 11480.00 11299.00
1995/05/31 11730.00 11750.63
1995/06/30 12490.00 12023.59
1995/07/31 13470.00 12422.30
1995/08/31 13640.00 12453.48
1995/09/30 13940.00 12979.01
1995/10/31 13650.00 12932.68
1995/11/30 13900.00 13500.42
1995/12/31 13971.98 13760.44
1996/01/31 14073.30 14228.85
1996/02/29 14124.25 14360.75
1996/03/31 14584.49 14499.04
1996/04/30 15065.18 14712.76
1996/05/31 15239.05 15092.20
1996/06/30 15116.32 15149.70
1996/07/31 14410.62 14480.39
1996/08/31 14962.90 14785.78
1996/09/30 15597.01 15617.92
1996/10/31 16077.71 16048.66
1996/11/30 17039.10 17261.78
1996/12/31 16936.82 16919.83
1997/01/31 17591.38 17976.98
1997/02/28 17103.08 18117.92
1997/03/31 16660.22 17373.45
1997/04/30 17060.91 18410.65
1997/05/31 18115.35 19531.49
1997/06/30 18906.18 20406.50
1997/07/31 20530.03 22030.24
1997/08/31 19950.08 20796.11
1997/09/30 21299.77 21935.11
1997/10/31 20656.56 21202.48
1997/11/30 20646.02 22183.94
1997/12/31 21025.62 22564.84
1998/01/31 21004.53 22814.41
1998/02/28 22531.76 24459.78
1998/03/31 23627.59 25712.37
1998/04/30 23851.23 25971.03
1998/05/31 23292.13 25524.59
1998/06/30 24544.52 26561.40
1998/07/31 24578.06 26278.52
1998/08/31 20899.18 22479.17
1998/09/30 22118.02 23919.19
1998/10/31 22844.85 25864.77
1998/11/30 24365.61 27432.44
1998/12/31 27328.84 29013.09
IMATRL PRASUN SHR__CHT 19981231 19990111 114720 R00000000000051
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund II: Contrafund Portfolio
on January 3, 1995, when the fund started. As the chart shows, by
December 31, 1998, the value of the investment would have grown to
$27,329 - a 173.29% increase on the initial investment. For
comparison, look at how the Standard & Poor's 500 Index did over the
same period. With dividends and capital gains, if any, reinvested, the
same $10,000 investment would have grown to $29,013 - a 190.13%
increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
MCI WorldCom, Inc. 5.4
Time Warner, Inc. 4.1
Microsoft Corp. 3.1
Tyco International Ltd. 2.9
CVS Corp. 2.7
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
TECHNOLOGY 24.5
UTILITIES 13.9
MEDIA & LEISURE 13.4
RETAIL & WHOLESALE 9.5
HEALTH 7.8
ASSET ALLOCATION AS OF DECEMBER 31, 1998*
(% OF FUND'S INVESTMENTS)
Row: 1, Col: 1, Value: 90.7
Row: 1, Col: 2, Value: 2.4
Row: 1, Col: 3, Value: 6.9
Stocks and
equity futures 90.9%
Bonds 2.4%
Short-term investments 6.7%
*FOREIGN INVESTMENTS 2.6%
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1 fee.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, PAST 1 YEAR LIFE OF FUND
1998
VIP II: CONTRAFUND - SERVICE 29.94% 28.59%
CLASS
S&P 500 28.58% 30.55%
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 market capitalization-weighted index of common
stocks. This benchmark reflects the reinvestment of dividends and
capital gains, if any.
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.
(checkmark)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.
$10,000 OVER LIFE OF FUND
VIP II Contrafund - CL S S&P 500
00470 SP001
1995/01/03 10000.00 10000.00
1995/01/31 9870.00 10261.28
1995/02/28 10370.00 10661.16
1995/03/31 10890.00 10975.77
1995/04/30 11480.00 11299.00
1995/05/31 11730.00 11750.63
1995/06/30 12490.00 12023.59
1995/07/31 13470.00 12422.30
1995/08/31 13640.00 12453.48
1995/09/30 13940.00 12979.01
1995/10/31 13650.00 12932.68
1995/11/30 13900.00 13500.42
1995/12/31 13971.98 13760.44
1996/01/31 14073.30 14228.85
1996/02/29 14124.25 14360.75
1996/03/31 14584.49 14499.04
1996/04/30 15065.18 14712.76
1996/05/31 15239.05 15092.20
1996/06/30 15116.32 15149.70
1996/07/31 14410.62 14480.39
1996/08/31 14962.90 14785.78
1996/09/30 15597.01 15617.92
1996/10/31 16077.71 16048.66
1996/11/30 17039.10 17261.78
1996/12/31 16936.82 16919.83
1997/01/31 17591.38 17976.98
1997/02/28 17103.08 18117.92
1997/03/31 16660.22 17373.45
1997/04/30 17060.91 18410.65
1997/05/31 18115.35 19531.49
1997/06/30 18906.18 20406.50
1997/07/31 20530.03 22030.24
1997/08/31 19950.08 20796.11
1997/09/30 21299.77 21935.11
1997/10/31 20656.56 21202.48
1997/11/30 20646.02 22183.94
1997/12/31 21015.07 22564.84
1998/01/31 21004.53 22814.41
1998/02/28 22531.76 24459.78
1998/03/31 23627.59 25712.37
1998/04/30 23851.23 25971.03
1998/05/31 23292.13 25524.59
1998/06/30 24544.52 26561.40
1998/07/31 24566.88 26278.52
1998/08/31 20899.18 22479.17
1998/09/30 22106.84 23919.19
1998/10/31 22833.67 25864.77
1998/11/30 24354.42 27432.44
1998/12/31 27306.48 29013.09
IMATRL PRASUN SHR__CHT 19981231 19990111 114842 R00000000000051
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund II: Contrafund Portfolio
- - Service Class on January 3, 1995, when the fund started. As the
chart shows, by December 31, 1998, the value of the investment would
have grown to $27,306 - a 173.06% increase on the initial investment.
For comparison, look at how the Standard & Poor's 500 Index did over
the same period. With dividends and capital gains, if any, reinvested,
the same $10,000 investment would have grown to $29,013 - a 190.13%
increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
MCI WorldCom, Inc. 5.4
Time Warner, Inc. 4.1
Microsoft Corp. 3.1
Tyco International Ltd. 2.9
CVS Corp. 2.7
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
TECHNOLOGY 24.5
UTILITIES 13.9
MEDIA & LEISURE 13.4
RETAIL & WHOLESALE 9.5
HEALTH 7.8
ASSET ALLOCATION AS OF DECEMBER 31, 1998*
(% OF FUND'S INVESTMENTS)
Row: 1, Col: 1, Value: 90.7
Row: 1, Col: 2, Value: 2.4
Row: 1, Col: 3, Value: 6.9
Stocks and
equity futures 90.9%
Bonds 2.4%
Short-term investments 6.7%
*FOREIGN INVESTMENTS 2.6%
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
(photograph of Will Danoff)
An interview with
Will Danoff,
Portfolio Manager of
Contrafund Portfolio
Q. HOW DID THE FUND PERFORM COMPARED TO ITS BENCHMARK, WILL?
A. Very well. For the 12 months that ended December 31, 1998, the fund
topped the Standard & Poor's 500 Index, which returned 28.58% during
the same period.
Q. WHAT FACTORS CONTRIBUTED POSITIVELY TO THE FUND'S PERFORMANCE?
A. The fund's considerable holdings in large-capitalization growth
stocks was beneficial. The market environment we've witnessed over the
past year has obviously been very volatile and, in times of
uncertainty, investors tend to buy stocks of larger, more well-known
companies. Large-cap growth stocks accounted for much of the market's
gains in 1998 and the fund's stakes in companies such as Microsoft and
Tyco International benefited appropriately. For the period, several of
the fund's large-cap growth investments in the retail and cable TV
areas also turned in strong performances. Retail drugstore chain CVS
was a strong contributor, as was Viacom, the media company that
operates movie rental chain Blockbuster as well as several popular
cable channels.
Q. TECHNOLOGY STOCKS ACCOUNTED FOR ALMOST 25% OF THE FUND'S TOTAL
INVESTMENTS AT THE CLOSE OF THE PERIOD. WHY DID THESE STOCKS APPEAL TO
YOU?
A. Regardless of the external business climate, the technology sector
typically contains companies that are growing their earnings rapidly.
The outlook for the technology sector turned more positive during the
last few months of the year as the Internet emerged as a huge trend
for both businesses and consumers. The Internet explosion has
stimulated sales of personal computers, networking equipment and
servers, and fundamental components such as semiconductors. Technology
positions that helped the fund's performance during the period
included America Online, Intel and Texas Instruments.
Q. DID YOU FIND OPPORTUNITIES IN ANY COMPANIES OR SECTORS THAT YOU
FELT WERE OVERLOOKED OR UNDERVALUED BY THE MARKET DURING THE PERIOD?
A. One relatively overlooked area in the market was mid-sized growth
companies. Through the second half of 1998, stocks of larger,
well-known companies led the market. Names such as IBM, GE and Lucent
Technologies, for example, reached new price highs while the broader
market of small- and medium-sized companies languished. In many cases,
the share prices of these bigger stocks appreciated much faster than
their earnings grew. I tried to take advantage of what I felt was the
market's overly pessimistic view of mid-cap stocks by buying or adding
to positions in companies in this area. Examples included Unisys,
which specializes in information management, and Outdoor Systems, a
leader in outdoor advertising. These mid-sized companies were growing
faster than their larger brethren, were not as widely held by
investors and had lower price-to-earnings ratios. In addition, I felt
these companies had good long-term growth potential because of their
smaller size.
Q. WHICH OTHER INDIVIDUAL STOCKS PERFORMED WELL? WHICH
PROVED DISAPPOINTING?
A. Time Warner - the fund's second-largest individual holding at the
end of the period - continued to reap the benefits of its strong media
properties, the successful testing of its cable systems for new
businesses such as Internet access and telephony service and
management's revitalized concentration on improving returns.
Disappointments included Gillette - which suffered from sales declines
in several emerging markets despite the introduction of a new razor -
and France-based telecommunications company Alcatel.
Q. WHAT'S YOUR OUTLOOK?
A. The U.S. economy appears stable, but we'll need to watch global
developments carefully. The embattled Japanese economy is still weak
and Europe - which was fairly strong in 1998 - may weaken in 1999. As
such, I'll try to emphasize companies with good growth prospects and
limited exposure to the weakening world markets. I also will look
within the small- and medium-cap stock universes for overlooked growth
companies. In particular, I'll keep an eye on companies that - either
through internal cost-cutting programs or a new product launch - are
expecting improving fundamentals.
The views expressed in this report reflect those of the portfolio
manager only through the end of the period of the report as stated on
the cover. The manager's views are subject to change at any time based
on market and other conditions.
(checkmark)FUND FACTS
GOAL: to increase the value of the fund's shares over the long term by
investing in companies where value is not fully recognized by the
public
START DATE: January 3, 1995
SIZE: as of December 31, 1998,
more than $6.5 billion
MANAGER: Will Danoff, since inception; joined Fidelity in 1986
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
INVESTMENTS DECEMBER 31, 1998
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 90.7%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 0.1%
AEROSPACE & DEFENSE - 0.1%
Alliant Techsystems, Inc. (a) 74,300 $ 6,125,106
Orbital Sciences Corp. (a) 23,800 1,053,150
7,178,256
DEFENSE ELECTRONICS - 0.0%
REMEC, Inc. (a) 81,900 1,474,200
TOTAL AEROSPACE & DEFENSE 8,652,456
BASIC INDUSTRIES - 0.4%
CHEMICALS & PLASTICS - 0.3%
Crompton & Knowles Corp. 329,692 6,820,503
Great Lakes Chemical Corp. 78,100 3,124,000
MacDermid, Inc. 80,300 3,141,738
Sealed Air Corp. (a) 170,425 8,702,327
21,788,568
METALS & MINING - 0.1%
Martin Marietta Materials, 51,000 3,171,563
Inc.
TOTAL BASIC INDUSTRIES 24,960,131
CONSTRUCTION & REAL ESTATE -
0.2%
CONSTRUCTION - 0.1%
Ashtead Group PLC 24,700 55,982
Centex Corp. 14,600 657,913
Jacobs Engineering Group, 82,700 3,370,025
Inc. (a)
Lennar Corp. 66,400 1,676,600
5,760,520
ENGINEERING - 0.0%
URS Corp. (a) 27,700 647,488
REAL ESTATE - 0.0%
ResortQuest International, 192,100 2,809,463
Inc. (a)
REAL ESTATE INVESTMENT TRUSTS
- - 0.1%
Equity Office Properties Trust 118,300 2,839,200
Glenborough Realty Trust, 213,600 4,352,100
Inc.
7,191,300
TOTAL CONSTRUCTION & REAL 16,408,771
ESTATE
DURABLES - 2.1%
AUTOS, TIRES, & ACCESSORIES -
1.8%
Arvin Industries, Inc. 112,000 4,669,000
Copart, Inc. (a) 3,100 100,363
Danaher Corp. 497,900 27,042,194
Kroll-O'Gara Co. (a) 652,400 25,729,025
LucasVarity PLC sponsored ADR 148,900 4,988,150
SPX Corp. 738,541 49,482,247
TRW, Inc. 32,700 1,837,331
113,848,310
CONSUMER DURABLES - 0.0%
Blyth Industries, Inc. (a) 69,000 2,156,250
SHARES VALUE (NOTE 1)
CONSUMER ELECTRONICS - 0.1%
Maytag Corp. 68,800 $ 4,282,800
Newell Co. 91,900 3,790,875
8,073,675
HOME FURNISHINGS - 0.0%
Bombay Co., Inc. (The) (a) 159,700 888,331
Miller (Herman), Inc. 24,100 647,688
1,536,019
TEXTILES & APPAREL - 0.2%
Delta Woodside Industries 88,700 532,200
Quiksilver, Inc. (a) 14,100 423,000
Shaw Industries, Inc. 211,500 5,128,875
Stride Rite Corp. 151,100 1,322,125
Vans, Inc. (a) 124,500 855,938
Warnaco Group, Inc. Class A 166,600 4,206,650
12,468,788
TOTAL DURABLES 138,083,042
ENERGY - 1.7%
ENERGY SERVICES - 0.0%
Halliburton Co. 73,000 2,162,625
OIL & GAS - 1.7%
Amoco Corp. 259,000 15,281,000
British Petroleum PLC ADR 330,777 31,423,815
Chevron Corp. 150,300 12,465,506
Conoco, Inc. Class A (a) 69,400 1,448,725
Exxon Corp. 393,000 28,738,125
Mobil Corp. 220,000 19,167,500
Tosco Corp. 146,700 3,795,863
112,320,534
TOTAL ENERGY 114,483,159
FINANCE - 7.7%
BANKS - 2.0%
Allied Irish Banks PLC 91,500 1,638,459
AmSouth Bancorp. 83,400 3,805,125
Bank of Ireland, Inc. 63,400 1,381,346
Bank of New York Co., Inc. 594,500 23,928,625
Bank One Corp. 422,400 21,568,800
BB&T Corp. 13,800 556,313
BHI Corp. (non-vtg.) (a) 68,500 2,106,375
Chase Manhattan Corp. 43,000 2,926,688
Comerica, Inc. 15,800 1,077,363
Fifth Third Bancorp 40,500 2,888,156
Firstar Corp. 259,588 24,206,581
North Fork Bancorp, Inc. 177,193 4,241,557
U.S. Bancorp 876,300 31,108,650
Wells Fargo & Co. 192,300 7,679,981
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
BANKS - CONTINUED
Westamerica Bancorp. 14,900 $ 547,575
Zions Bancorp 22,800 1,422,150
131,083,744
CREDIT & OTHER FINANCE - 2.5%
American Express Co. 211,000 21,574,750
Associates First Capital 2,136,404 90,530,120
Corp. Class A
Fleet Financial Group, Inc. 14,300 639,031
Fortis Amev NV 72,000 5,959,783
Greenpoint Financial Corp. 379,700 13,336,963
Household International, Inc. 138,400 5,484,100
MBNA Corp. 266,300 6,640,856
Providian Financial Corp. 274,750 20,606,250
164,771,853
FEDERAL SPONSORED CREDIT - 2.3%
Fannie Mae 1,258,500 93,129,000
Freddie Mac 849,500 54,739,656
147,868,656
INSURANCE - 0.7%
ACE Ltd. 38,600 1,329,288
AFLAC, Inc. 380,900 16,759,600
Allstate Corp. 83,900 3,240,638
American International Group, 39,525 3,819,103
Inc.
Medical Assurance, Inc. 16,390 541,894
Mutual Risk Management Ltd. 258,400 10,109,900
Progressive Corp. 57,700 9,772,938
Zenith National Insurance 127,700 2,953,063
Corp.
48,526,424
SAVINGS & LOANS - 0.2%
Astoria Financial Corp. 79,400 3,632,550
Washington Mutual, Inc. 157,925 6,030,761
9,663,311
TOTAL FINANCE 501,913,988
HEALTH - 7.8%
DRUGS & PHARMACEUTICALS - 5.0%
Allergan, Inc. 211,400 13,688,150
Alpharma, Inc. Class A 60,200 2,125,813
Amgen, Inc. (a) 142,000 14,847,875
Andrx Corp. (a) 1,400 71,750
Biogen, Inc. (a) 191,600 15,902,800
Chiron Corp. (a) 216,900 5,680,069
Forest Laboratories, Inc. (a) 281,000 14,945,688
Genentech, Inc. (special) (a) 123,600 9,849,375
Glaxo Wellcome PLC sponsored 70,600 4,906,700
ADR
ICOS Corp. (a) 58,400 1,737,400
Immunex Corp. (a) 7,500 943,594
Lilly (Eli) & Co. 582,300 51,751,913
Merck & Co., Inc. 151,900 22,433,731
Pfizer, Inc. 288,200 36,151,088
SHARES VALUE (NOTE 1)
Schering-Plough Corp. 1,078,300 $ 59,576,075
Sepracor, Inc. (a) 52,700 4,644,188
Ventana Medical Systems, Inc. 117,000 2,530,125
(a)
Warner-Lambert Co. 895,900 67,360,481
329,146,815
MEDICAL EQUIPMENT & SUPPLIES
- - 2.4%
Allegiance Corp. 139,680 6,512,580
Arterial Vascular 14,200 745,500
Engineering, Inc. (a)
Bard (C.R.), Inc. 309,900 15,340,050
Bausch & Lomb, Inc. 49,000 2,940,000
Baxter International, Inc. 23,700 1,524,206
Becton, Dickinson & Co. 616,500 26,316,844
Biomet, Inc. 95,200 3,831,800
Cardinal Health, Inc. 733,200 55,631,550
Guidant Corp. 146,000 16,096,500
Haemonetics Corp. (a) 122,200 2,780,050
Medtronic, Inc. 57,000 4,232,250
Sofamor/Danek Group, Inc. (a) 149,300 18,177,275
Steris Corp. (a) 15,400 437,938
Techne Corp. (a) 7,200 152,100
154,718,643
MEDICAL FACILITIES MANAGEMENT
- - 0.4%
Hanger Orthopedic Group, Inc. 22,800 513,000
(a)
Health Management Associates, 1,064,513 23,020,094
Inc. Class A (a)
23,533,094
TOTAL HEALTH 507,398,552
INDUSTRIAL MACHINERY &
EQUIPMENT - 5.0%
ELECTRICAL EQUIPMENT - 1.5%
American Power Conversion 475,400 23,027,188
Corp. (a)
Anixter International, Inc. 3,300 67,031
(a)
General Instrument Corp. (a) 118,800 4,031,775
L-3 Communications Holdings, 521,000 24,259,063
Inc. (a)
Loral Space & Communications 1,174,333 20,917,807
Ltd. (a)
Philips Electronics NV (NY 149,200 10,098,975
shares)
Rayovac Corp. (a) 583,800 15,580,163
97,982,002
INDUSTRIAL MACHINERY &
EQUIPMENT - 3.2%
Kaydon Corp. 40,400 1,618,525
Mannesmann AG 152,500 17,681,956
Mettler-Toledo International, 16,300 457,419
Inc. (a)
Tyco International Ltd. 2,548,778 192,273,440
212,031,340
POLLUTION CONTROL - 0.3%
Republic Services, Inc. Class 461,600 8,510,750
A (a)
Waste Management, Inc. 221,194 10,313,170
18,823,920
TOTAL INDUSTRIAL MACHINERY & 328,837,262
EQUIPMENT
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - 13.4%
BROADCASTING - 8.5%
Cablevision Systems Corp. 73,500 $ 3,688,781
Class A (a)
CBS Corp. 1,570,515 51,434,366
Chancellor Media Corp. (a) 73,000 3,494,875
Clear Channel Communications, 198,700 10,829,150
Inc. (a)
Comcast Corp.:
Class A (special) 767,900 45,066,131
Class A 549,500 31,561,906
Cox Communications, Inc. 204,900 14,163,713
Class A (a)
MediaOne Group, Inc. 433,500 20,374,500
Metromedia Fiber Network, 156,600 5,246,100
Inc. Class A (a)
Scandinavian Broadcasting 181,600 4,903,200
Corp. (a)
TCA Cable TV, Inc. 229,700 8,197,419
Tele-Communications, Inc. 1,511,513 83,605,563
(TCI Group) Series A (a)
Time Warner, Inc. 4,366,960 271,024,455
USA Networks, Inc. (a) 31,500 1,043,438
554,633,597
ENTERTAINMENT - 2.0%
Premier Parks, Inc. (a) 914,200 27,654,550
Tele-Communications, Inc.:
(Liberty Media Group) Series 103,900 4,785,894
A (a)
(TCI Ventures Group) Series A 660,274 15,557,706
(a)
Viacom, Inc.:
Class A (a) 353,500 26,004,344
Class B (non-vtg.) (a) 782,400 57,897,600
131,900,094
LEISURE DURABLES & TOYS - 0.1%
Champion Enterprises, Inc. (a) 46,600 1,275,675
Harley-Davidson, Inc. 86,300 4,088,463
Mattel, Inc. 153,300 3,497,156
8,861,294
PUBLISHING - 0.2%
Harte Hanks Communications, 130,800 3,727,800
Inc.
McGraw-Hill Companies, Inc. 33,300 3,392,438
Reader's Digest Association, 308,400 7,767,825
Inc. Class A (non-vtg.)
14,888,063
RESTAURANTS - 2.6%
Brinker International, Inc. 238,200 6,878,025
(a)
Darden Restaurants, Inc. 567,500 10,215,000
McDonald's Corp. 1,510,100 115,711,413
Papa John's International, 177,700 7,841,013
Inc. (a)
Pizzaexpress PLC 250,800 3,327,586
Ruby Tuesday, Inc. 65,000 1,381,250
Sodexho Marriott Services, 21,900 606,356
Inc. (a)
SHARES VALUE (NOTE 1)
Starbucks Corp. (a) 97,300 $ 5,460,963
Tricon Global Restaurants, 301,900 15,132,738
Inc. (a)
166,554,344
TOTAL MEDIA & LEISURE 876,837,392
NONDURABLES - 2.0%
AGRICULTURE - 0.0%
Fresh Del Monte Produce Inc. 51,100 1,108,231
(a)
BEVERAGES - 0.0%
Coca-Cola Co. (The) 18,900 1,263,938
FOODS - 1.1%
Earthgrains Co. 353,400 10,933,313
Flowers Industries, Inc. 300,600 7,195,612
Heinz (H.J.) Co. 257,300 14,569,613
Keebler Foods Co. (a) 450,800 16,961,350
Quaker Oats Co. 297,500 17,701,250
67,361,138
HOUSEHOLD PRODUCTS - 0.9%
Avon Products, Inc. 42,600 1,885,050
Clorox Co. 59,800 6,985,388
Dial Corp. 290,900 8,399,738
First Brands Corp. 153,000 6,033,938
Gillette Co. 491,600 23,750,425
Rubbermaid, Inc. 388,000 12,197,750
59,252,289
TOTAL NONDURABLES 128,985,596
PRECIOUS METALS - 0.0%
Franco Nevada Mining Corp. 57,600 1,104,580
Ltd.
RETAIL & WHOLESALE - 9.5%
APPAREL STORES - 1.4%
Abercrombie & Fitch Co. Class 194,200 13,739,650
A (a)
AnnTaylor Stores Corp. (a) 115,000 4,535,313
Charming Shoppes, Inc. (a) 1,479,600 6,380,775
Gap, Inc. 892,825 50,221,406
TJX Companies, Inc. 541,900 15,715,100
Urban Outfitters, Inc. (a) 18,900 318,938
90,911,182
DRUG STORES - 3.0%
CVS Corp. 3,270,002 179,850,110
Walgreen Co. 326,700 19,132,369
198,982,479
GENERAL MERCHANDISE STORES -
0.6%
Costco Companies, Inc. (a) 226,800 16,372,125
Kohls Corp. (a) 103,500 6,358,781
Stein Mart, Inc. (a) 184,100 1,282,947
Wal-Mart Stores, Inc. 154,700 12,598,381
36,612,234
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
GROCERY STORES - 2.8%
Albertson's, Inc. 309,200 $ 19,692,175
American Stores Co. 14,200 524,513
Fleming Companies, Inc. 177,100 1,837,413
Kroger Co. (a) 350,400 21,199,200
Loblaw Companies Ltd. 59,800 1,461,300
Meyer (Fred), Inc. (a) 625,050 37,659,263
Richfood Holdings, Inc. Class 198,200 4,112,650
A
Safeway, Inc. (a) 1,526,500 93,021,094
U.S. Foodservice (a) 74,200 3,635,800
183,143,408
RETAIL & WHOLESALE,
MISCELLANEOUS - 1.7%
Action Performance Companies, 40,000 1,415,000
Inc. (a)
Bed Bath & Beyond, Inc. (a) 106,600 3,637,725
Circuit City Stores, Inc. - 71,100 3,550,556
Circuit City Group
Home Depot, Inc. 1,113,600 68,138,400
InterTAN, Inc. (a) 109,600 637,050
Office Depot, Inc. (a) 338,800 12,514,425
Staples, Inc. (a) 482,600 21,083,588
U.S. Office Products Co. 239,894 929,589
111,906,333
TOTAL RETAIL & WHOLESALE 621,555,636
SERVICES - 1.5%
ADVERTISING - 1.3%
CMGI, Inc. (a) 1,600 170,400
Interpublic Group of 250,900 20,009,275
Companies, Inc.
Lamar Advertising Co. Class A 414,500 15,440,125
(a)
Omnicom Group, Inc. 25,200 1,461,600
Outdoor Systems, Inc. (a) 1,152,488 34,574,640
Young & Rubicam, Inc. (a) 375,100 12,143,863
83,799,903
SERVICES - 0.2%
Abacus Direct Corp. (a) 12,000 546,000
ACNielsen Corp. (a) 151,300 4,274,225
APAC Teleservices, Inc. (a) 21,300 80,541
Forrester Research, Inc. (a) 25,600 1,120,000
Professional Detailing, Inc. 9,500 268,375
RCM Technologies, Inc. (a) 2,900 76,850
Robert Half International, 209,650 9,368,734
Inc. (a)
Securitas AB Class B 49,600 770,889
Telespectrum Worldwide, Inc. 121,400 1,191,238
(a)
17,696,852
TOTAL SERVICES 101,496,755
TECHNOLOGY - 24.5%
COMMUNICATIONS EQUIPMENT - 4.1%
3Com Corp. (a) 134,200 6,013,838
SHARES VALUE (NOTE 1)
ADC Telecommunications, Inc. 149,400 $ 5,191,650
(a)
Ascend Communications, Inc. 275,200 18,094,400
(a)
Cisco Systems, Inc. (a) 1,054,200 97,842,938
InterVoice, Inc. (a) 112,600 3,884,700
Level One Communications, 203,000 7,206,500
Inc. (a)
Lucent Technologies, Inc. 894,100 98,351,000
Newbridge Networks Corp. (a) 14,100 429,311
OY Nokia AB sponsored ADR 180,300 21,714,881
Plantronics, Inc. (a) 50,900 4,377,400
Tellabs, Inc. (a) 70,000 4,799,375
267,905,993
COMPUTER SERVICES & SOFTWARE
- - 10.1%
Acxiom Corp. (a) 73,500 2,278,500
America Online, Inc. 728,900 116,624,000
American Management Systems, 32,300 1,292,000
Inc. (a)
Aspect Development, Inc. (a) 73,500 3,256,969
At Home Corp. Series A (a) 10,700 794,475
Automatic Data Processing, 504,700 40,470,631
Inc.
Bisys Group, Inc. (The) (a) 47,200 2,436,700
BMC Software, Inc. 54,700 2,437,569
Cadence Design Systems, Inc. 85,100 2,531,725
(a)
CBT Group PLC sponsored ADR 212,500 3,160,938
(a)
Ceridian Corp. (a) 548,616 38,300,255
Check Point Software 100,000 4,581,250
Technologies Ltd. (a)
Citrix Systems, Inc. (a) 70,800 6,872,025
Clarify, Inc. (a) 85,300 2,084,519
Computer Sciences Corp. 42,800 2,757,925
Compuware Corp. (a) 297,200 23,218,750
Convergys Corp. (a) 30,200 675,725
Dendrite International, Inc. 19,400 484,394
(a)
DST Systems, Inc. (a) 83,850 4,784,691
E Trade Group, Inc. (a) 7,200 336,825
ECI Telecom Ltd. 68,600 2,443,875
Electronics for Imaging, Inc. 127,900 5,116,000
(a)
Engineering Animation, Inc. 5,300 286,200
(a)
Equant NV (Reg.) (a) 33,700 2,285,281
Exodus Communications, Inc. 54,500 3,501,625
(a)
Fiserv, Inc. (a) 30,100 1,548,269
Forsoft Ltd. (a) (e) 831,800 8,629,925
Gerber Scientific, Inc. 19,500 464,344
IMR Global Corp. (a) 14,300 420,956
IMS Health, Inc. 612,500 46,205,469
Informix Corp. (a) 297,100 2,933,863
International Integration, 347,400 5,905,800
Inc. (a)
International Network 27,800 1,848,700
Services (a)
Intuit, Inc. (a) 43,700 3,168,250
Iona Technologies PLC ADR (a) 3,600 136,800
Learning Co., Inc. (The) (a) 183,200 4,751,750
Legato Systems, Inc. (a) 96,100 6,336,594
Lycos, Inc. (a) 145,100 8,062,119
Microsoft Corp. (a) 1,451,300 201,277,169
National Computer Systems, 35,000 1,295,000
Inc.
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TECHNOLOGY - CONTINUED
COMPUTER SERVICES & SOFTWARE
- - CONTINUED
NCR Corp. (a) 100,800 $ 4,208,400
Networks Associates, Inc. (a) 167,600 11,103,500
Novell, Inc. (a) 427,900 7,755,688
Oracle Corp. (a) 336,400 14,507,250
Paychex, Inc. 3,500 180,031
Pegasus Systems, Inc. (a) 12,800 460,800
Policy Management Systems 14,200 717,100
Corp. (a)
Polycom, Inc. (a) 133,100 2,961,475
Progress Software Corp. (a) 68,000 2,295,000
RealNetworks, Inc. (a) 58,200 2,087,925
Sabre Group Holdings, Inc. 159,100 7,079,950
Class A (a)
Siebel Systems, Inc. (a) 124,000 4,208,250
SunGard Data Systems, Inc. (a) 3,600 142,875
Synopsys, Inc. (a) 184,400 10,003,700
Transaction Systems 23,500 1,175,000
Architects, Inc. Class A (a)
VeriSign, Inc. (a) 79,700 4,712,263
Veritas Software Corp. (a) 3,500 209,781
Visual Networks, Inc. (a) 47,000 1,762,500
Wall Data, Inc. (a) 3,300 79,200
Whittman-Hart, Inc. (a) 36,400 1,005,550
Wind River Systems, Inc. (a) 21,800 1,024,600
Yahoo!, Inc. (a) 57,200 13,552,825
657,231,518
COMPUTERS & OFFICE EQUIPMENT
- - 4.3%
Apple Computer, Inc. (a) 162,600 6,656,438
Bell & Howell Co. (a) 300 11,344
CDW Computer Centers, Inc. (a) 12,800 1,228,000
Dell Computer Corp. (a) 576,200 42,170,638
EMC Corp. (a) 729,400 61,999,000
Fore Systems, Inc. (a) 92,600 1,695,738
International Business 112,800 20,839,800
Machines Corp.
Lexmark International Group, 80,500 8,090,250
Inc. (a)
Network Appliance, Inc. 136,800 6,156,000
Psion PLC 31,974 307,856
Seagate Technology, Inc. (a) 495,600 14,991,900
Silicon Graphics, Inc. (a) 138,000 1,776,750
Sun Microsystems, Inc. (a) 216,300 18,520,688
Symbol Technologies, Inc. 360,000 23,017,500
Unisys Corp. (a) 1,742,010 59,990,469
Xerox Corp. 135,700 16,012,600
283,464,971
ELECTRONIC INSTRUMENTS - 1.3%
Applied Materials, Inc. (a) 345,400 14,744,263
Perkin-Elmer Corp. 197,300 19,249,081
Teradyne, Inc. (a) 175,800 7,449,525
Thermo Electron Corp. (a) 684,900 11,600,494
Thermo Instrument Systems, 162,100 2,441,631
Inc. (a)
SHARES VALUE (NOTE 1)
Varian Associates, Inc. 107,000 $ 4,052,625
Waters Corp. (a) 314,800 27,466,300
87,003,919
ELECTRONICS - 4.7%
Altera Corp. (a) 76,900 4,681,288
AMP, Inc. 56,300 2,931,119
Analog Devices, Inc. (a) 63,100 1,979,763
Applied Micro Circuits Corp. 18,800 638,613
(a)
C-Cube Microsystems, Inc. (a) 100,700 2,731,488
Celestica, Inc. (sub-vtg.) (a) 102,100 2,521,647
Genesis Microchip, Inc. (a) 14,700 356,475
Intel Corp. 998,000 118,325,375
International Rectifier Corp. 137,400 1,339,650
(a)
Kent Electronics Corp. (a) 197,100 2,513,025
Linear Technology Corp. 150,000 13,434,375
Maxim Integrated Products, 153,600 6,710,400
Inc. (a)
Micron Technology, Inc. (a) 10,100 510,681
Motorola, Inc. 332,800 20,321,600
NeoMagic Corp. (a) 50,200 1,110,675
PMC-Sierra, Inc. (a) 29,100 1,836,938
QLogic Corp. (a) 7,100 929,213
Rambus, Inc. (a) 100,900 9,711,625
Sanmina Corp. (a) 26,500 1,656,250
Solectron Corp. (a) 10,200 947,963
STMicroelectronics NV (a) 70,500 5,503,406
Texas Instruments, Inc. 741,100 63,410,369
Uniphase Corp. (a) 124,200 8,616,375
Vitesse Semiconductor Corp. 701,100 31,987,688
(a)
Xilinx, Inc. (a) 28,800 1,875,600
306,581,601
TOTAL TECHNOLOGY 1,602,188,002
TRANSPORTATION - 0.9%
AIR TRANSPORTATION - 0.5%
Southwest Airlines Co. 748,525 16,795,030
Viad Corp. 574,100 17,438,288
34,233,318
RAILROADS - 0.1%
Burlington Northern Santa Fe 157,000 5,298,750
Corp.
TRUCKING & FREIGHT - 0.3%
C.H. Robinson Worldwide, Inc. 193,000 5,005,938
Swift Transportation Co., 398,800 11,178,862
Inc. (a)
16,184,800
TOTAL TRANSPORTATION 55,716,868
UTILITIES - 13.9%
CELLULAR - 1.3%
AirTouch Communications, Inc. 775,500 55,932,938
(a)
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - CONTINUED
CELLULAR - CONTINUED
SkyTel Communications, Inc. 488,850 $ 10,815,806
(a)
Vodafone Group PLC sponsored 100,100 16,128,613
ADR
82,877,357
ELECTRIC UTILITY - 0.5%
CMS Energy Corp. 94,300 4,567,656
Entergy Corp. 250,700 7,803,038
IPALCO Enterprises, Inc. 97,400 5,399,613
PG&E Corp. 229,500 7,229,250
Unicom Corp. 216,700 8,356,494
33,356,051
TELEPHONE SERVICES - 12.1%
ALLTEL Corp. 685,600 41,007,450
Ameritech Corp. 396,100 25,102,838
AT&T Corp. 1,421,100 106,937,775
Bell Atlantic Corp. 669,400 38,030,288
BellSouth Corp. 769,600 38,383,800
Esprit Telecom Group PLC 55,900 2,613,325
sponsored ADR
Global Crossing Ltd. (a) 91,100 4,110,888
Global TeleSystems Group, 103,900 5,792,425
Inc. (a)
GTE Corp. 571,600 38,547,275
MCI WorldCom, Inc. (a) 4,903,746 351,843,741
McLeodUSA, Inc. Class A (a) 115,100 3,596,875
NEXTLINK Communications, Inc. 38,400 1,089,600
Class A (a)
Qwest Communications 1,113,502 55,675,100
International, Inc. (a)
SBC Communications, Inc. 713,690 38,271,626
Sprint Corp. (FON Group) 334,000 28,097,750
Telefonica de Espana SA 20,500 911,368
Telefonica de Espana SA 20,500 18,198
rights 12/31/99 (a)
U.S. WEST, Inc. 166,000 10,727,750
790,758,072
TOTAL UTILITIES 906,991,480
TOTAL COMMON STOCKS 5,935,613,670
(Cost $4,018,826,900)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CONVERTIBLE BONDS - 0.0%
MOODY'S RATINGS (UNAUDITED) (C) PRINCIPAL AMOUNT VALUE (NOTE 1)
MEDIA & LEISURE - 0.0%
BROADCASTING - 0.0%
Jacor Communications, Inc. B3 $ 302,000 $ 268,025
liquid yield option notes
0%, 6/12/11 (Cost $153,710)
U.S. TREASURY OBLIGATIONS -
2.4%
U.S. Treasury Bills, yield at - 2,200,000 2,195,408
date of purchase 4.4% to
4.54% 1/21/99 (d)
U.S. Treasury Bonds:
6.125% 11/15/27 Aaa 1,000,000 1,119,370
6.5% 11/15/26 Aaa 39,000,000 45,349,590
6.75% 8/15/26 Aaa 36,900,000 44,205,093
6.875% 8/15/25 Aaa 36,500,000 44,239,095
7.625% 2/15/25 Aaa 15,500,000 20,377,695
TOTAL U.S. TREASURY OBLIGATIONS 157,486,251
(Cost $142,460,526)
CASH EQUIVALENTS - 6.9%
SHARES
Taxable Central Cash Fund (b) 451,467,287 451,467,287
(Cost $451,467,287)
TOTAL INVESTMENT IN $ 6,544,835,233
SECURITIES - 100%
(Cost $4,612,908,423)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
FUTURES CONTRACTS
EXPIRATION DATE UNDERLYING FACE AMOUNT AT VALUE UNREALIZED GAIN/(LOSS)
PURCHASED
39 S&P 500 Stock Index Mar. 1999 $ 12,143,625 $ 56,143
Contracts
</TABLE>
THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL
INVESTMENTS IN SECURITIES - 0.2%
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield on the Taxable Central Cash
Fund was 4.80%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(c) Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investors Service, Inc.
(d) Security or a portion of the security was pledged to cover margin
requirements for futures contracts. At the period end, the value of
securities pledged amounted to $997,913.
(e) Transactions during the period with companies which are or were
affiliates are as follows: (see Note 10 of Notes to Financial
Statements)
PURCHASE SALES DIVIDEND VALUE
AFFILIATE COST COST INCOME
Forsoft Ltd. $ - $ 5,437,500 $ - $ 8,629,925
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $10,336,562,924 and $9,312,066,796, respectively, of which
long-term U.S. government and government agency obligations aggregated
$419,162,101 and $479,323,141, respectively (see Note 3 of Notes to
Financial Statements).
The market value of futures contracts opened and closed during the
period amounted to $450,154,040 and $437,277,478, respectively (see
Note 3 of Notes to Financial Statements).
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $1,493,029 for the
period (see Note 4 of Notes to Financial Statements).
INCOME TAX INFORMATION
At December 31, 1998, the aggregate cost of investment securities for
income tax purposes was $4,699,706,961. Net unrealized appreciation
aggregated $1,845,128,272, of which $1,893,495,733 related to
appreciated investment securities and $48,367,461 related to
depreciated investment securities.
The fund hereby designates approximately $93,262,000 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, 1998
ASSETS
Investment in securities, at $ 6,544,835,233
value (cost $4,612,908,423)
- - See accompanying schedule
Cash 344,405
Foreign currency held at 372,063
value (cost $371,552)
Receivable for investments 14,050,249
sold
Receivable for fund shares 3,654,053
sold
Dividends receivable 3,257,304
Interest receivable 4,499,775
Receivable for daily 33,150
variation on futures
contracts
Other receivables 423,282
TOTAL ASSETS 6,571,469,514
LIABILITIES
Payable for investments $ 17,014,328
purchased
Payable for fund shares 9,908,071
redeemed
Accrued management fee 2,966,694
Distribution fees payable 11,335
Other payables and accrued 423,406
expenses
TOTAL LIABILITIES 30,323,834
NET ASSETS $ 6,541,145,680
Net Assets consist of:
Paid in capital $ 4,419,510,321
Undistributed net investment 30,790,900
income
Accumulated undistributed net 158,840,397
realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation 1,932,004,062
(depreciation) on
investments and assets and
liabilities in foreign
currencies
NET ASSETS $ 6,541,145,680
INITIAL CLASS: NET ASSET $24.44
VALUE, offering price and
redemption price per share
($6,388,592,487 (divided by)
261,430,915 shares)
SERVICE CLASS: NET ASSET $24.42
VALUE, offering price and
redemption price per share
($152,553,193 (divided by)
6,247,657 shares)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME $ 28,607,949
Dividends
Interest 35,660,587
TOTAL INCOME 64,268,536
EXPENSES
Management fee $ 29,603,506
Transfer agent fees 3,379,452
Distribution fees - Service 60,572
Class
Accounting fees and expenses 822,681
Non-interested trustees' 17,749
compensation
Custodian fees and expenses 430,401
Registration fees 83,542
Audit 51,754
Legal 45,787
Miscellaneous 567,803
Total expenses before 35,063,247
reductions
Expense reductions (1,873,382) 33,189,865
NET INVESTMENT INCOME 31,078,671
REALIZED AND UNREALIZED GAIN
(LOSS)
Net realized loss on:
Investment securities 177,510,014
(including realized gain
(loss) of ($2,456,447) on
sales of investments in
affiliated issuers)
Foreign currency transactions 171,443
Futures contracts (789,079) 176,892,378
Change in net unrealized
appreciation (depreciation)
on:
Investment securities 1,158,329,365
Assets and liabilities in 37,483
foreign currencies
Futures contracts 56,143 1,158,422,991
NET GAIN (LOSS) 1,335,315,369
NET INCREASE (DECREASE) IN $ 1,366,394,040
NET ASSETS RESULTING FROM
OPERATIONS
OTHER INFORMATION $ 1,857,964
Expense reductions Directed
brokerage arrangements
Custodian credits 15,418
$ 1,873,382
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
INCREASE (DECREASE) IN NET YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
ASSETS
Operations Net investment $ 31,078,671 $ 29,698,431
income
Net realized gain (loss) 176,892,378 204,568,956
Change in net unrealized 1,158,422,991 450,977,419
appreciation (depreciation)
NET INCREASE (DECREASE) IN 1,366,394,040 685,244,806
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders (29,014,734) (21,846,321)
From net investment income
From net realized gain (213,465,544) (57,736,705)
TOTAL DISTRIBUTIONS (242,480,278) (79,583,026)
Share transactions - net 1,305,641,290 1,111,825,789
increase (decrease)
TOTAL INCREASE (DECREASE) 2,429,555,052 1,717,487,569
IN NET ASSETS
NET ASSETS
Beginning of period 4,111,590,628 2,394,103,059
End of period (including $ 6,541,145,680 $ 4,111,590,628
undistributed net investment
income of $30,790,900 and
$28,707,467, respectively)
</TABLE>
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
SHARES DOLLARS SHARES DOLLARS
Share transactions Initial 78,130,341 $ 1,666,803,775 80,344,594 $ 1,456,514,379
Class Sold
Reinvested 12,506,721 242,005,046 4,834,935 79,583,026
Redeemed (35,242,800) (730,882,335) (23,702,843) (427,936,465)
Net increase (decrease) 55,394,262 $ 1,177,926,486 61,476,686 $ 1,108,160,940
Service Class A Sold 6,109,863 $ 128,808,187 186,727 $ 3,664,849
Reinvested 24,559 475,234 - -
Redeemed (73,492) (1,568,617) - -
Net increase (decrease) 6,060,930 $ 127,714,804 186,727 $ 3,664,849
Distributions From net $ 28,957,869 $ 21,846,321
investment income Initial
Class
Service Class 56,865 -
Total $ 29,014,734 $ 21,846,321
From net realized gain $ 213,047,177 $ 57,736,705
Initial Class
Service Class 418,367 -
Total $ 213,465,544 $ 57,736,705
$ 242,480,278 $ 79,583,026
A SERVICE CLASS COMMENCED
SALE OF SHARES NOVEMBER 3,
1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 1996 1995 F
Net asset value, beginning of $ 19.94 $ 16.56 $ 13.79 $ 10.00
period
Income from Investment
Operations
Net investment income .13 D .16 D .14 .06
Net realized and unrealized 5.54 3.73 2.76 3.91
gain (loss)
Total from investment 5.67 3.89 2.90 3.97
operations
Less Distributions
From net investment income (.14) (.14) - (.06)
From net realized gain (1.03) (.37) (.13) (.12)
Total distributions (1.17) (.51) (.13) (.18)
Net asset value, end of period $ 24.44 $ 19.94 $ 16.56 $ 13.79
TOTAL RETURN B, C 29.98% 24.14% 21.22% 39.72%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 6,388,592 $ 4,107,868 $ 2,394,103 $ 877,000
(000 omitted)
Ratio of expenses to average .70% .71% .74% .72%
net assets
Ratio of expenses to average .66% G .68% G .71% G .72%
net assets after expense
reductions
Ratio of net investment .62% .90% 1.33% 1.07%
income to average net assets
Portfolio turnover 201% 142% 178% 132%
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 E
Net asset value, beginning of $ 19.93 $ 19.99
period
Income from Investment
Operations
Net investment income D .11 .03
Net realized and unrealized 5.55 (.09)
gain (loss)
Total from investment 5.66 (.06)
operations
Less Distributions
From net investment income (.14) -
From net realized gain (1.03) -
Total distributions (1.17) -
Net asset value, end of period $ 24.42 $ 19.93
TOTAL RETURN B, C 29.94% (.30)%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 152,553 $ 3,722
(000 omitted)
Ratio of expenses to average .80% .81% A
net assets
Ratio of expenses to average .75% G .78% A, G
net assets after expense
reductions
Ratio of net investment .53% 1.14% A
income to average net assets
Portfolio turnover 201% 142%
A ANNUALIZED
B TOTAL RETURNS DO NOT
REFLECT CHARGES ATTRIBUTABLE
TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION
OF THESE CHARGES WOULD
REDUCE THE TOTAL RETURNS
SHOWN. Total returns for
periods of less than one
year are not annualized.
C THE TOTAL RETURNS WOULD
HAVE BEEN LOWER HAD CERTAIN
EXPENSES NOT BEEN REDUCED
DURING THE PERIODS SHOWN
(SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER
SHARE HAS BEEN CALCULATED
BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3,
1997 (COMMENCEMENT OF SALE
OF SERVICE CLASS SHARES) TO
DECEMBER 31, 1997.
F FOR THE PERIOD JANUARY 3,
1995 (COMMENCEMENT OF
OPERATIONS OF INITIAL CLASS
SHARES) TO DECEMBER 31, 1995.
G FMR OR THE FUND HAS ENTERED
INTO VARYING ARRANGEMENTS
WITH THIRD PARTIES WHO
EITHER PAID OR REDUCED A
PORTION OF THE FUND'S
EXPENSES (SEE NOTE 5 OF
NOTES TO FINANCIAL
STATEMENTS).
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 DECEMBER 31, PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
1998
VIP: GROWTH - "INITIAL CLASS" 39.49% 21.74% 19.41%
S&P 500(registered trademark) 28.58% 24.06% 19.21%
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 market capitalization-weighted index of common
stocks. This benchmark reflects the reinvestment of dividends and
capital gains, if any.
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.
(checkmark)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.
$10,000 OVER 10 YEARS
VIP Growth S&P 500
00151 SP001
1988/12/31 10000.00 10000.00
1989/01/31 10716.72 10732.00
1989/02/28 10494.88 10464.77
1989/03/31 10812.15 10708.60
1989/04/30 11383.95 11264.38
1989/05/31 11791.14 11720.59
1989/06/30 11635.19 11653.78
1989/07/31 12674.82 12706.12
1989/08/31 12891.41 12955.15
1989/09/30 13004.04 12902.04
1989/10/31 12640.17 12602.71
1989/11/30 12848.10 12859.81
1989/12/31 13151.32 13168.44
1990/01/31 12388.93 12284.84
1990/02/28 12507.27 12443.31
1990/03/31 12660.12 12773.06
1990/04/30 12291.47 12453.74
1990/05/31 13379.45 13667.97
1990/06/30 13658.19 13575.03
1990/07/31 13442.39 13531.59
1990/08/31 12057.69 12308.34
1990/09/30 10816.85 11708.92
1990/10/31 10430.21 11658.57
1990/11/30 11275.42 12411.72
1990/12/31 11608.11 12758.00
1991/01/31 12381.38 13314.25
1991/02/28 13305.09 14266.22
1991/03/31 13706.61 14611.46
1991/04/30 13578.86 14646.53
1991/05/31 14381.91 15279.26
1991/06/30 13314.21 14579.47
1991/07/31 14582.67 15258.87
1991/08/31 15230.59 15620.51
1991/09/30 15349.22 15359.65
1991/10/31 15823.75 15565.47
1991/11/30 14920.32 14938.18
1991/12/31 16891.44 16647.11
1992/01/31 17922.63 16337.47
1992/02/29 18297.57 16549.86
1992/03/31 17176.16 16227.13
1992/04/30 16503.32 16704.21
1992/05/31 16363.14 16786.06
1992/06/30 15727.68 16535.95
1992/07/31 16335.11 17212.27
1992/08/31 15886.55 16859.42
1992/09/30 16166.90 17058.36
1992/10/31 16793.02 17118.06
1992/11/30 17914.42 17701.79
1992/12/31 18465.78 17919.52
1993/01/31 18830.23 18070.05
1993/02/28 18442.05 18315.80
1993/03/31 19177.44 18702.26
1993/04/30 18976.88 18249.67
1993/05/31 20390.35 18738.76
1993/06/30 20600.46 18793.10
1993/07/31 20543.16 18717.93
1993/08/31 21574.62 19427.34
1993/09/30 21975.74 19277.75
1993/10/31 22185.85 19676.80
1993/11/30 21288.10 19489.87
1993/12/31 22042.59 19725.69
1994/01/31 22596.52 20396.37
1994/02/28 22363.46 19843.63
1994/03/31 21347.40 18978.44
1994/04/30 21479.49 19221.37
1994/05/31 20981.62 19536.60
1994/06/30 19914.76 19057.95
1994/07/31 20605.68 19683.05
1994/08/31 21774.15 20490.06
1994/09/30 21509.97 19988.05
1994/10/31 22383.78 20437.78
1994/11/30 21489.65 19693.44
1994/12/31 22038.32 19985.49
1995/01/31 21621.74 20503.72
1995/02/28 22517.15 21302.75
1995/03/31 23334.47 21931.39
1995/04/30 24121.14 22577.27
1995/05/31 25061.06 23479.68
1995/06/30 27278.04 24025.12
1995/07/31 29975.20 24821.79
1995/08/31 30342.99 24884.09
1995/09/30 31129.66 25934.20
1995/10/31 30812.95 25841.62
1995/11/30 30792.52 26976.06
1995/12/31 29832.16 27495.62
1996/01/31 30302.12 28431.57
1996/02/29 31318.08 28695.13
1996/03/31 31438.96 28971.47
1996/04/30 32669.70 29398.51
1996/05/31 33691.66 30156.69
1996/06/30 33032.33 30271.59
1996/07/31 30504.91 28934.19
1996/08/31 31416.98 29544.41
1996/09/30 33526.83 31207.17
1996/10/31 33449.91 32067.87
1996/11/30 35307.01 34491.88
1996/12/31 34219.12 33808.59
1997/01/31 36186.12 35920.96
1997/02/28 35363.51 36202.58
1997/03/31 33381.79 34715.01
1997/04/30 34987.67 36787.50
1997/05/31 37413.57 39027.12
1997/06/30 38951.12 40775.54
1997/07/31 41878.15 44020.05
1997/08/31 40260.88 41554.04
1997/09/30 42595.67 43829.96
1997/10/31 40989.79 42366.04
1997/11/30 42162.88 44327.16
1997/12/31 42253.99 45088.26
1998/01/31 42823.45 45586.93
1998/02/28 46040.54 48874.66
1998/03/31 47656.23 51377.53
1998/04/30 48588.86 51894.39
1998/05/31 47340.97 51002.33
1998/06/30 50335.91 53074.04
1998/07/31 51360.49 52508.80
1998/08/31 42979.93 44917.08
1998/09/30 47419.79 47794.47
1998/10/31 50769.38 51682.07
1998/11/30 54302.88 54814.52
1998/12/31 58939.77 57972.94
IMATRL PRASUN SHR__CHT 19981231 19990126 140641 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund: Growth Portfolio on
December 31, 1988. As the chart shows, by December 31, 1998, the value
of the investment would have grown to $58,940 - a 489.40% increase on
the initial investment. For comparison, look at how the Standard &
Poor's 500 Index did over the same period. With dividends and capital
gains, if any, reinvested, the same $10,000 investment would have
grown to $57,973 - a 479.73% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF
DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
Microsoft Corp. 4.6
Philip Morris Companies, Inc. 3.4
Merck & Co., Inc. 3.1
Lilly (Eli) & Co. 2.6
Pfizer, Inc. 2.3
TOP FIVE MARKET SECTORS AS OF
DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
TECHNOLOGY 29.3
HEALTH 17.9
RETAIL & WHOLESALE 8.4
MEDIA & LEISURE 8.3
FINANCE 6.7
ASSET ALLOCATION AS OF DECEMBER 31, 1998*
(% OF FUND'S INVESTMENTS)
Row: 1, Col: 1, Value: 8.5
Row: 1, Col: 2, Value: 91.5
Stocks 91.5%
Short-term investments 8.5%
*FOREIGN INVESTMENTS 3.7%
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1 fee.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
1998
VIP: GROWTH - SERVICE CLASS 39.38% 21.71% 19.40%
S&P 500 28.58% 24.06% 19.21%
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 market capitalization-weighted index of common
stocks. This benchmark reflects the reinvestment of dividends and
capital gains, if any.
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.
(checkmark) 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.
$10,000 OVER 10 YEARS
VIP Growth - CL S S&P 500
00472 SP001
1988/12/31 10000.00 10000.00
1989/01/31 10716.72 10732.00
1989/02/28 10494.88 10464.77
1989/03/31 10812.15 10708.60
1989/04/30 11383.95 11264.38
1989/05/31 11791.14 11720.59
1989/06/30 11635.19 11653.78
1989/07/31 12674.82 12706.12
1989/08/31 12891.41 12955.15
1989/09/30 13004.04 12902.04
1989/10/31 12640.17 12602.71
1989/11/30 12848.10 12859.81
1989/12/31 13151.32 13168.44
1990/01/31 12388.93 12284.84
1990/02/28 12507.27 12443.31
1990/03/31 12660.12 12773.06
1990/04/30 12291.47 12453.74
1990/05/31 13379.45 13667.97
1990/06/30 13658.19 13575.03
1990/07/31 13442.39 13531.59
1990/08/31 12057.69 12308.34
1990/09/30 10816.85 11708.92
1990/10/31 10430.21 11658.57
1990/11/30 11275.42 12411.72
1990/12/31 11608.11 12758.00
1991/01/31 12381.38 13314.25
1991/02/28 13305.09 14266.22
1991/03/31 13706.61 14611.46
1991/04/30 13578.86 14646.53
1991/05/31 14381.91 15279.26
1991/06/30 13314.21 14579.47
1991/07/31 14582.67 15258.87
1991/08/31 15230.59 15620.51
1991/09/30 15349.22 15359.65
1991/10/31 15823.75 15565.47
1991/11/30 14920.32 14938.18
1991/12/31 16891.44 16647.11
1992/01/31 17922.63 16337.47
1992/02/29 18297.57 16549.86
1992/03/31 17176.16 16227.13
1992/04/30 16503.32 16704.21
1992/05/31 16363.14 16786.06
1992/06/30 15727.68 16535.95
1992/07/31 16335.11 17212.27
1992/08/31 15886.55 16859.42
1992/09/30 16166.90 17058.36
1992/10/31 16793.02 17118.06
1992/11/30 17914.42 17701.79
1992/12/31 18465.78 17919.52
1993/01/31 18830.23 18070.05
1993/02/28 18442.05 18315.80
1993/03/31 19177.44 18702.26
1993/04/30 18976.88 18249.67
1993/05/31 20390.35 18738.76
1993/06/30 20600.46 18793.10
1993/07/31 20543.16 18717.93
1993/08/31 21574.62 19427.34
1993/09/30 21975.74 19277.75
1993/10/31 22185.85 19676.80
1993/11/30 21288.10 19489.87
1993/12/31 22042.59 19725.69
1994/01/31 22596.52 20396.37
1994/02/28 22363.46 19843.63
1994/03/31 21347.40 18978.44
1994/04/30 21479.49 19221.37
1994/05/31 20981.62 19536.60
1994/06/30 19914.76 19057.95
1994/07/31 20605.68 19683.05
1994/08/31 21774.15 20490.06
1994/09/30 21509.97 19988.05
1994/10/31 22383.78 20437.78
1994/11/30 21489.65 19693.44
1994/12/31 22038.32 19985.49
1995/01/31 21621.74 20503.72
1995/02/28 22517.15 21302.75
1995/03/31 23334.47 21931.39
1995/04/30 24121.14 22577.27
1995/05/31 25061.06 23479.68
1995/06/30 27278.04 24025.12
1995/07/31 29975.20 24821.79
1995/08/31 30342.99 24884.09
1995/09/30 31129.66 25934.20
1995/10/31 30812.95 25841.62
1995/11/30 30792.52 26976.06
1995/12/31 29832.16 27495.62
1996/01/31 30302.12 28431.57
1996/02/29 31318.08 28695.13
1996/03/31 31438.96 28971.47
1996/04/30 32669.70 29398.51
1996/05/31 33691.66 30156.69
1996/06/30 33032.33 30271.59
1996/07/31 30504.91 28934.19
1996/08/31 31416.98 29544.41
1996/09/30 33526.83 31207.17
1996/10/31 33449.91 32067.87
1996/11/30 35307.01 34491.88
1996/12/31 34219.12 33808.59
1997/01/31 36186.12 35920.96
1997/02/28 35363.51 36202.58
1997/03/31 33381.79 34715.01
1997/04/30 34987.67 36787.50
1997/05/31 37413.57 39027.12
1997/06/30 38951.12 40775.54
1997/07/31 41878.15 44020.05
1997/08/31 40260.88 41554.04
1997/09/30 42595.67 43829.96
1997/10/31 40989.79 42366.04
1997/11/30 42151.49 44327.16
1997/12/31 42242.60 45088.26
1998/01/31 42812.06 45586.93
1998/02/28 46029.22 48874.66
1998/03/31 47644.98 51377.53
1998/04/30 48577.65 51894.39
1998/05/31 47316.57 51002.33
1998/06/30 50311.62 53074.04
1998/07/31 51323.11 52508.80
1998/08/31 42942.22 44917.08
1998/09/30 47382.25 47794.47
1998/10/31 50718.85 51682.07
1998/11/30 54252.48 54814.52
1998/12/31 58876.42 57972.94
IMATRL PRASUN SHR__CHT 19981231 19990129 134414 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund: Growth Portfolio -
Service Class on December 31, 1988. As the chart shows, by December
31, 1998, the value of the investment would have grown to $58,876 - a
488.76% increase on the initial investment. For comparison, look at
how the Standard & Poor's 500 Index did over the same period. With
dividends and capital gains, if any, reinvested, the same $10,000
investment would have grown to $57,973 - a 479.73% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF
DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
Microsoft Corp. 4.6
Philip Morris Companies, Inc. 3.4
Merck & Co., Inc. 3.1
Lilly (Eli) & Co. 2.6
Pfizer, Inc. 2.3
TOP FIVE MARKET SECTORS AS OF
DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
TECHNOLOGY 29.3
HEALTH 17.9
RETAIL & WHOLESALE 8.4
MEDIA & LEISURE 8.3
FINANCE 6.7
ASSET ALLOCATION AS OF DECEMBER 31, 1998*
(% OF FUND'S INVESTMENTS)
Row: 1, Col: 1, Value: 8.5
Row: 1, Col: 2, Value: 91.5
Stocks 91.5%
Short-term investments 8.5%
*FOREIGN INVESTMENTS 3.7%
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
(photograph of Jennifer Uhrig)
An interview with
Jennifer Uhrig,
Portfolio Manager of Growth Portfolio
Q. HOW DID THE FUND PERFORM, JENNIFER?
A. Very well. For the 12 months that ended December 31, 1998, the fund
provided a higher return than the Standard & Poor's 500 Index, which
returned 28.58% during that time.
Q. WHAT FACTORS CONTRIBUTED TO THE FUND'S STRONG SHOWING?
A. My focus on three of the market's primary growth areas -
technology, retail and health care - was quite beneficial. These
industries in general - and specifically the fund's investments in
several of the larger, more well-known companies within them -
registered impressive performances during the period. Other positive
factors included not owning much in the way of consumer nondurable
stocks, such as Procter & Gamble and Coca-Cola, as well as the fund's
minor exposure - relative to the S&P 500 - to finance and cyclical
stocks, which struggled during the period.
Q. CAN YOU ISOLATE SOME OF THE FUND'S LARGE-COMPANY INVESTMENTS IN THE
TECHNOLOGY, RETAIL AND HEALTH CARE GROUPS THAT PERFORMED WELL?
A. Sure. In the technology field, Microsoft continued to be a stalwart
due to its strong product lineup and its pricing power. Cisco Systems,
a company that specializes in communications networking, and Dell
Computers - which has mastered the process of selling PCs directly to
consumers - were positive contributors. Retail-related investments
such as Home Depot and Wal-Mart, meanwhile, benefited from good
management execution and solid consumer spending trends. Lastly,
several of the fund's health care positions - most notably in the
pharmaceuticals area - performed exceptionally well. The fund's stakes
in Merck and Warner-Lambert, to name just two, prospered due to strong
product introductions, more generous medical plans for U.S. employees
- - and thus more access to prescription drugs - and the overall aging
of the U.S. population.
Q. DID ANY TRENDS EMERGE AS BYPRODUCTS OF THE UP-AND-DOWN INVESTING
CLIMATE WE SAW DURING THE PERIOD?
A. There was a wide disparity between the stock price valuations of
smaller companies and those of larger companies. Large-cap stocks did
very well, thanks in large part to the backdrop of global and domestic
economic uncertainty. When investors are concerned about the economy,
they tend to favor the stocks of larger companies because larger
companies typically have the resources in place to weather a potential
business slowdown. At the same time, investors stayed away from small
companies and other companies that were viewed as being more
vulnerable to a weakening economy.
Q. ASIDE FROM SOME OF THE NAMES YOU'VE MENTIONED, WHICH OTHER STOCKS
PERFORMED WELL? WHICH PROVED DISAPPOINTING?
A. WorldCom - now known as MCI WorldCom - and Yahoo! were good stocks
for the fund. WorldCom benefited from its merger with MCI and the
potential to grow its earnings rapidly through cost reductions. Yahoo!
was boosted by the continued popularity of the Internet. Energy
services stocks, on the other hand, slumped as oil prices fell
sharply. Warm weather trends and the inability of OPEC to cut enough
supply to support prices hurt the fund's positions in both
Schlumberger and Halliburton. These companies make their money by
selling equipment for oil drilling, and the low price of oil
discouraged additional drilling projects. I'm sticking with these
types of stocks, though, because oil is at unusually low price levels
and some company profiles look good to me over the long term.
Q. WHAT'S YOUR OUTLOOK?
A. The disparity in performance between large and small stocks as well
as between growth and cyclicals has been extreme. Many cyclicals are
selling at prices that fully discount a recession; in fact, many are
at all-time lows. In contrast, many high-quality growth stocks are at
historically high valuations. The Federal Reserve Board's three
interest-rate cuts during the period seem to underscore that economic
policy is now more concerned about recession than inflation. This may
give some investors the courage to invest in some of these more
economically sensitive areas, especially given the values they offer.
In light of this possibility, the fund may add to small- and
medium-cap stocks where the business prospects are favorable. In
addition, the fund may add to stocks within the traditional growth
areas that may have cyclical characteristics. An example of this in
the technology area is semiconductor capital equipment, while one in
the retail group would be department stores.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED
ON MARKET AND OTHER CONDITIONS.
(checkmark)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, 1998, more than
$11.3 billion
MANAGER: Jennifer Uhrig, since 1997; joined
Fidelity in 1987
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
INVESTMENTS DECEMBER 31, 1998
Showing Percentage of Total Value of Investment in Securities
<TABLE>
<CAPTION>
<S> <C> <C> <C>
COMMON STOCKS - 91.5%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 0.2%
Boeing Co. 881,100 $ 28,745,888
BASIC INDUSTRIES - 2.6%
CHEMICALS & PLASTICS - 1.2%
Cytec Industries, Inc. (a) 1,215,200 25,823,000
Great Lakes Chemical Corp. 1,372,700 54,908,000
Monsanto Co. 800,700 38,033,250
Solutia, Inc. 939,500 21,021,313
139,785,563
METALS & MINING - 0.3%
Alcoa, Inc. 467,100 34,828,144
PACKAGING & CONTAINERS - 0.3%
Owens-Illinois, Inc. (a) 889,000 27,225,625
PAPER & FOREST PRODUCTS - 0.8%
Champion International Corp. 824,100 33,376,050
Georgia-Pacific Corp. 484,800 28,391,100
Weyerhaeuser Co. 660,900 33,581,981
95,349,131
TOTAL BASIC INDUSTRIES 297,188,463
CONSTRUCTION & REAL ESTATE -
0.0%
ENGINEERING - 0.0%
Stolt Comex Seaway SA 567,000 3,827,250
Stolt Comex Seaway SA 192,850 1,084,781
sponsored ADR Class A
4,912,031
DURABLES - 0.7%
AUTOS, TIRES, & ACCESSORIES -
0.3%
TRW, Inc. 508,500 28,571,344
TEXTILES & APPAREL - 0.4%
Fruit of the Loom, Inc. Class 1,058,800 14,624,675
A (a)
NIKE, Inc. Class B 831,300 33,719,606
48,344,281
TOTAL DURABLES 76,915,625
ENERGY - 4.5%
ENERGY SERVICES - 1.6%
Baker Hughes, Inc. 1,364,270 24,130,526
BJ Services Co. (a) 1,012,300 15,817,188
Coflexip SA sponsored ADR 767,400 24,652,725
Halliburton Co. 1,597,200 47,317,050
Schlumberger Ltd. 1,183,200 54,575,100
Smith International, Inc. 806,000 20,301,125
186,793,714
OIL & GAS - 2.9%
Amerada Hess Corp. 439,400 21,860,150
Exxon Corp. 1,495,600 109,365,750
Newfield Exploration Co. (a) 1,057,400 22,073,225
Noble Affiliates, Inc. 947,200 23,324,800
SHARES VALUE (NOTE 1)
Oryx Energy Co. (a) 551,200 $ 7,406,750
Tosco Corp. 2,182,600 56,474,775
Total SA sponsored ADR 558,000 27,760,500
USX-Marathon Group 888,200 26,757,025
Vastar Resources, Inc. 294,600 12,723,038
Weatherford International, 1,223,740 23,709,963
Inc. (a)
331,455,976
TOTAL ENERGY 518,249,690
FINANCE - 6.7%
BANKS - 0.5%
Bank of Ireland, Inc. 1,778,520 38,750,019
U.S. Bancorp 699,200 24,821,600
63,571,619
CREDIT & OTHER FINANCE - 1.3%
American Express Co. 912,500 93,303,125
Household International, Inc. 1,322,538 52,405,568
145,708,693
FEDERAL SPONSORED CREDIT - 2.3%
Fannie Mae 2,211,700 163,665,800
Freddie Mac 1,580,900 101,869,244
265,535,044
INSURANCE - 2.1%
Allmerica Financial Corp. 650,110 37,625,116
Ambac Financial Group, Inc. 542,800 32,669,775
American International Group, 623,875 60,281,922
Inc.
Progressive Corp. 401,100 67,936,313
UNUM Corp. 728,500 42,526,188
241,039,314
SAVINGS & LOANS - 0.4%
Washington Mutual, Inc. 1,157,700 44,209,669
SECURITIES INDUSTRY - 0.1%
Schwab (Charles) Corp. 243,400 13,676,038
TOTAL FINANCE 773,740,377
HEALTH - 17.9%
DRUGS & PHARMACEUTICALS - 15.2%
American Home Products Corp. 1,102,400 62,078,900
Amgen, Inc. (a) 971,700 101,603,381
Biogen, Inc. (a) 539,300 44,761,900
Bristol-Myers Squibb Co. 912,900 122,157,431
Elan Corp. PLC ADR (a) 904,100 62,891,456
Lilly (Eli) & Co. 3,294,100 292,763,138
Medimmune, Inc. (a) 121,500 12,081,656
Merck & Co., Inc. 2,401,500 354,671,531
Pfizer, Inc. 2,139,500 268,373,531
Schering-Plough Corp. 2,653,300 146,594,825
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
HEALTH - CONTINUED
DRUGS & PHARMACEUTICALS -
CONTINUED
Sepracor, Inc. (a) 510,500 $ 44,987,813
Warner-Lambert Co. 3,059,700 230,051,194
1,743,016,756
MEDICAL EQUIPMENT & SUPPLIES
- - 2.3%
Guidant Corp. 820,900 90,504,225
Johnson & Johnson 1,626,200 136,397,525
Medtronic, Inc. 526,000 39,055,500
265,957,250
MEDICAL FACILITIES MANAGEMENT
- - 0.4%
Health Management Associates, 1,843,550 39,866,769
Inc. Class A (a)
TOTAL HEALTH 2,048,840,775
INDUSTRIAL MACHINERY &
EQUIPMENT - 1.7%
ELECTRICAL EQUIPMENT - 1.2%
Alcatel Alsthom Compagnie 163,900 20,026,532
Generale d'Electricite SA
(RFD)
Alcatel Alsthom Compagnie 384,434 9,394,606
Generale d'Electricite SA
sponsored ADR
General Electric Co. 1,054,500 107,624,906
VWR Scientific Products Corp. 148,700 2,583,663
(a)
139,629,707
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.5%
ASM Lithography Holding NV (a) 1,635,500 49,882,750
TOTAL INDUSTRIAL MACHINERY & 189,512,457
EQUIPMENT
MEDIA & LEISURE - 8.3%
BROADCASTING - 5.3%
Cablevision Systems Corp. 632,800 31,758,650
Class A (a)
CBS Corp. 2,148,600 70,366,650
Comcast Corp. Class A 1,508,000 88,500,750
(special)
Cox Communications, Inc. 1,059,600 73,244,850
Class A (a)
MediaOne Group, Inc. 1,465,300 68,869,100
Metromedia Fiber Network, 883,200 29,587,200
Inc. Class A (a)
NTL, Inc. (a) 512,200 28,907,288
Tele-Communications, Inc. 2,422,200 133,977,938
(TCI Group) Series A (a)
Time Warner, Inc. 1,310,923 81,359,159
606,571,585
ENTERTAINMENT - 0.3%
King World Productions, Inc. 875,800 25,781,363
(a)
Tele-Communications, Inc. 399,200 9,406,150
(TCI Ventures Group) Series
A (a)
35,187,513
SHARES VALUE (NOTE 1)
LEISURE DURABLES & TOYS - 0.2%
Harley-Davidson, Inc. 354,200 $ 16,780,225
RESTAURANTS - 2.5%
Brinker International, Inc. 1,483,700 42,841,838
(a)
Darden Restaurants, Inc. 1,774,700 31,944,600
McDonald's Corp. 1,550,800 118,830,050
Outback Steakhouse, Inc. (a) 856,800 34,164,900
Papa John's International, 277,000 12,222,625
Inc. (a)
Tricon Global Restaurants, 965,060 48,373,633
Inc. (a)
288,377,646
TOTAL MEDIA & LEISURE 946,916,969
NONDURABLES - 5.9%
AGRICULTURE - 0.1%
Delta & Pine Land Co. 209,700 7,758,900
FOODS - 0.1%
American Italian Pasta Co. 621,700 16,397,338
Class A (a)
HOUSEHOLD PRODUCTS - 2.3%
Avon Products, Inc. 1,097,200 48,551,100
Gillette Co. 2,313,900 111,790,294
Procter & Gamble Co. 1,145,900 104,634,994
264,976,388
TOBACCO - 3.4%
Philip Morris Companies, Inc. 7,247,700 387,751,950
TOTAL NONDURABLES 676,884,576
RETAIL & WHOLESALE - 8.4%
APPAREL STORES - 1.0%
Abercrombie & Fitch Co. Class 594,240 42,042,480
A (a)
Payless ShoeSource, Inc. (a) 266,700 12,634,913
TJX Companies, Inc. 2,050,000 59,450,000
114,127,393
DRUG STORES - 1.6%
CVS Corp. 1,635,610 89,958,550
Walgreen Co. 1,548,700 90,695,744
180,654,294
GENERAL MERCHANDISE STORES -
3.0%
Consolidated Stores Corp. (a) 547,200 11,046,600
Dayton Hudson Corp. 962,300 52,204,775
Federated Department Stores, 1,811,000 78,891,688
Inc. (a)
Nordstrom, Inc. 2,372,200 82,285,688
Saks Holdings, Inc. (a) 872,689 27,544,247
Wal-Mart Stores, Inc. 1,189,200 96,845,475
348,818,473
GROCERY STORES - 0.5%
Safeway, Inc. (a) 853,600 52,016,250
RETAIL & WHOLESALE,
MISCELLANEOUS - 2.3%
Barnes & Noble, Inc. (a) 780,600 33,175,500
Best Buy Co., Inc. (a) 817,800 50,192,475
Borders Group, Inc. (a) 304,200 7,585,988
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
RETAIL & WHOLESALE,
MISCELLANEOUS - CONTINUED
Home Depot, Inc. 1,630,200 $ 99,747,863
Lowe's Companies, Inc. 1,147,400 58,732,538
Staples, Inc. (a) 361,700 15,801,769
265,236,133
TOTAL RETAIL & WHOLESALE 960,852,543
TECHNOLOGY - 29.3%
COMMUNICATIONS EQUIPMENT - 3.6%
Ascend Communications, Inc. 1,467,500 96,488,125
(a)
Cisco Systems, Inc. (a) 1,831,925 170,025,539
Lucent Technologies, Inc. 814,600 89,606,000
OY Nokia AB sponsored ADR 478,400 57,617,300
413,736,964
COMPUTER SERVICES & SOFTWARE
- - 10.0%
America Online, Inc. 226,100 36,176,000
At Home Corp. Series A (a) 852,800 63,320,400
Cadence Design Systems, Inc. 1,959,400 58,292,150
(a)
Citrix Systems, Inc. (a) 489,550 47,516,947
Compuware Corp. (a) 904,500 70,664,063
CSG Systems International, 413,000 32,627,000
Inc. (a)
E Trade Group, Inc. (a) 349,600 16,354,725
Electronic Arts, Inc. (a) 479,000 26,883,875
Electronics for Imaging, Inc. 1,008,200 40,328,000
(a)
Legato Systems, Inc. (a) 175,900 11,598,406
Microsoft Corp. (a) 3,823,700 530,299,374
Oracle Corp. (a) 1,271,300 54,824,813
Policy Management Systems 310,600 15,685,300
Corp. (a)
SAP AG (Systeme Anwendungen 387,800 13,985,038
Produkte) sponsored ADR
Siebel Systems, Inc. (a) 1,932,100 65,570,644
Veritas Software Corp. (a) 465,300 27,888,919
Yahoo!, Inc. (a) 162,200 38,431,263
1,150,446,917
COMPUTERS & OFFICE EQUIPMENT
- - 6.5%
CDW Computer Centers, Inc. (a) 22,000 2,110,625
Compaq Computer Corp. 1,792,700 75,181,356
Dell Computer Corp. (a) 816,200 59,735,638
EMC Corp. (a) 882,700 75,029,500
Ingram Micro, Inc. Class A (a) 1,039,900 36,266,513
International Business 692,200 127,883,950
Machines Corp.
Lexmark International Group, 656,100 65,938,050
Inc. (a)
Maxtor Corp. (a) 1,060,700 14,849,800
Micron Electronics, Inc. (a) 724,500 12,542,906
Pitney Bowes, Inc. 826,100 54,574,231
Quantum Corp. (a) 1,844,400 39,193,500
Sun Microsystems, Inc. (a) 479,200 41,031,500
SHARES VALUE (NOTE 1)
Tech Data Corp. (a) 743,300 $ 29,917,825
Xerox Corp. 925,300 109,185,400
743,440,794
ELECTRONIC INSTRUMENTS - 2.5%
Applied Materials, Inc. (a) 1,785,500 76,218,531
JDS Fitel, Inc. (a) 750,500 18,633,780
KLA-Tencor Corp. (a) 1,459,300 63,297,138
Novellus Systems, Inc. (a) 423,300 20,953,350
Perkin-Elmer Corp. 173,300 16,907,581
Tektronix, Inc. 62,800 1,887,925
Teradyne, Inc. (a) 1,513,300 64,126,088
Waters Corp. (a) 260,300 22,711,175
284,735,568
ELECTRONICS - 6.7%
Altera Corp. (a) 889,700 54,160,488
Intel Corp. 2,105,100 249,585,919
Linear Technology Corp. 391,200 35,036,850
Micron Technology, Inc. (a) 1,501,900 75,939,819
Motorola, Inc. 1,840,400 112,379,425
PMC-Sierra, Inc. (a) 216,900 13,691,813
Taiwan Semiconductor 2,998,200 42,536,963
Manufacturing Co. Ltd. ADR
(a)
Texas Instruments, Inc. 1,185,500 101,434,344
Vitesse Semiconductor Corp. 535,400 24,427,625
(a)
Xilinx, Inc. (a) 944,400 61,504,050
770,697,296
TOTAL TECHNOLOGY 3,363,057,539
TRANSPORTATION - 0.2%
RAILROADS - 0.2%
Wisconsin Central 1,232,200 21,178,438
Transportation Corp. (a)
UTILITIES - 5.1%
CELLULAR - 0.5%
Nextel Communications, Inc. 2,364,000 55,849,500
Class A (a)
TELEPHONE SERVICES - 4.6%
AT&T Corp. 2,006,147 150,962,562
Global TeleSystems Group, 802,900 44,761,675
Inc. (a)
MCI WorldCom, Inc. (a) 3,570,370 256,174,048
McLeodUSA, Inc. Class A (a) 1,056,000 33,000,000
NEXTLINK Communications, Inc. 191,300 5,428,138
Class A (a)
RCN Corp. (a) 505,800 8,946,338
WinStar Communications, Inc. 795,300 31,016,700
(a)
530,289,461
TOTAL UTILITIES 586,138,961
TOTAL COMMON STOCKS 10,493,134,332
(Cost $7,096,614,966)
CASH EQUIVALENTS - 8.5%
SHARES VALUE (NOTE 1)
Taxable Central Cash Fund (b) 979,065,830 $ 979,065,830
(Cost $979,065,830)
TOTAL INVESTMENT IN $ 11,472,200,162
SECURITIES - 100%
(Cost $8,075,680,796)
</TABLE>
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield on the Taxable Central Cash
Fund was 4.80%. 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 $10,779,838,080 and $10,692,640,907, respectively (See Note
3 of Notes to Financial Statements).
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $2,062,975 for the
period (see Note 4 of Notes to Financial Statements).
The fund participated in the bank borrowing program. The maximum loan
and average daily balances during the period for which the loan was
outstanding amounted to $17,399,000. The weighted average interest
rate was 5.88% (see Note 8 of Notes to Financial Statements).
INCOME TAX INFORMATION
At December 31, 1998, the aggregate cost of investment securities for
income tax purposes was $8,151,703,450. Net unrealized appreciation
aggregated $3,320,496,712, of which $3,495,363,209 related to
appreciated investment securities and $174,866,497 related to
depreciated investment securities.
The fund hereby designates approximately $709,865,000 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, 1998
ASSETS
Investment in securities, at $ 11,472,200,162
value (cost $8,075,680,796)
- - See accompanying schedule
Receivable for investments 27,136,792
sold
Receivable for fund shares 5,136,002
sold
Dividends receivable 8,001,298
Interest receivable 3,529,297
Other receivables 1,506,250
TOTAL ASSETS 11,517,509,801
LIABILITIES
Payable for investments $ 97,812,412
purchased
Payable for fund shares 33,604,739
redeemed
Accrued management fee 5,279,108
Distribution fees payable 10,056
Other payables and accrued 837,803
expenses
TOTAL LIABILITIES 137,544,118
NET ASSETS $ 11,379,965,683
Net Assets consist of:
Paid in capital $ 6,730,837,386
Undistributed net investment 18,972,632
income
Accumulated undistributed 1,233,604,360
net realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation 3,396,551,305
(depreciation) on
investments and assets and
liabilities in foreign
currencies
NET ASSETS $ 11,379,965,683
INITIAL CLASS: NET ASSET $44.87
VALUE, offering price and
redemption price per share
($11,243,823,987 (divided
by) 250,571,227 shares)
SERVICE CLASS: NET ASSET $44.82
VALUE, offering price and
redemption price per share
($136,141,696 (divided by)
3,037,455 shares)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME $ 61,124,829
Dividends
Interest 17,424,592
TOTAL INCOME 78,549,421
EXPENSES
Management fee $ 53,412,717
Transfer agent fees 6,023,177
Distribution fees - Service 49,981
Class
Accounting fees and expenses 821,826
Non-interested trustees' 32,810
compensation
Custodian fees and expenses 205,815
Registration fees 59,688
Audit 47,928
Legal 106,522
Interest 2,839
Miscellaneous 865,253
Total expenses before 61,628,556
reductions
Expense reductions (2,051,198) 59,577,358
NET INVESTMENT INCOME 18,972,063
REALIZED AND UNREALIZED GAIN
(LOSS)
Net realized gain (loss) on:
Investment securities 1,259,650,447
Foreign currency transactions 162,826 1,259,813,273
Change in net unrealized
appreciation (depreciation)
on:
Investment securities 1,829,997,696
Assets and liabilities in 54,073 1,830,051,769
foreign currencies
NET GAIN (LOSS) 3,089,865,042
NET INCREASE (DECREASE) IN $ 3,108,837,105
NET ASSETS RESULTING FROM
OPERATIONS
OTHER INFORMATION $ 2,043,287
Expense reductions Directed
brokerage arrangements
Custodian credits 7,911
$ 2,051,198
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
INCREASE (DECREASE) IN NET YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
ASSETS
Operations Net investment $ 18,972,063 $ 39,932,429
income
Net realized gain (loss) 1,259,813,273 1,023,118,931
Change in net unrealized 1,830,051,769 361,565,945
appreciation (depreciation)
NET INCREASE (DECREASE) IN 3,108,837,105 1,424,617,305
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders (39,552,560) (41,406,087)
From net investment income
From net realized gain (1,034,611,705) (183,895,819)
TOTAL DISTRIBUTIONS (1,074,164,265) (225,301,906)
Share transactions - net 1,616,145,892 443,407,898
increase (decrease)
TOTAL INCREASE (DECREASE) 3,650,818,732 1,642,723,297
IN NET ASSETS
NET ASSETS
Beginning of period 7,729,146,951 6,086,423,654
End of period (including $ 11,379,965,683 $ 7,729,146,951
undistributed net investment
income of $18,972,632 and
$39,932,430, respectively)
</TABLE>
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
SHARES DOLLARS SHARES DOLLARS
Share transactions Initial 59,666,196 $ 2,260,308,481 45,510,758 $ 1,540,122,332
Class Sold
Reinvested 31,899,319 1,073,412,088 7,138,844 225,301,906
Redeemed (49,261,439) (1,831,294,638) (39,805,810) (1,324,008,293)
Net increase (decrease) 42,304,076 $ 1,502,425,931 12,843,792 $ 441,415,945
Service Class A Sold 3,032,492 $ 115,566,215 55,002 $ 2,016,184
Reinvested 22,360 752,178 - -
Redeemed (71,737) (2,598,432) (662) (24,231)
Net increase (decrease) 2,983,115 $ 113,719,961 54,340 $ 1,991,953
Distributions From net $ 39,524,864 $ 41,406,087
investment income Initial
Class
Service Class 27,696 -
Total $ 39,552,560 $ 41,406,087
From net realized gain $ 1,033,887,224 $ 183,895,819
Initial Class
Service Class 724,481 -
Total $ 1,034,611,705 $ 183,895,819
$ 1,074,164,265 $ 225,301,906
A SERVICE CLASS COMMENCED
SALE OF SHARES NOVEMBER 3,
1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 1996 1995 1994
Net asset value, beginning of $ 37.10 $ 31.14 $ 29.20 $ 21.69 $ 23.08
period
Income from Investment
Operations
Net investment income .08 D .20 D .22 .08 .12
Net realized and unrealized 12.85 6.91 3.82 7.55 (.12)
gain (loss)
Total from investment 12.93 7.11 4.04 7.63 -
operations
Less Distributions
From net investment income (.19) (.21) (.08) (.12) (.12)
From net realized gain (4.97) (.94) (2.02) - (1.27)
Total distributions (5.16) (1.15) (2.10) (.12) (1.39)
Net asset value, end of period $ 44.87 $ 37.10 $ 31.14 $ 29.20 $ 21.69
TOTAL RETURN B, C 39.49% 23.48% 14.71% 35.36% (.02)%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 11,243,824 $ 7,727,132 $ 6,086,424 $ 4,162,702 $ 2,141,869
(000 omitted)
Ratio of expenses to average .68% .69% .69% .70% .70%
net assets
Ratio of expenses to average .66% F .67% F .67% F .70% .69% F
net assets after expense
reductions
Ratio of net investment .21% .58% .81% .37% .69%
income to average net assets
Portfolio turnover 123% 113% 81% 108% 122%
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 E
Net asset value, beginning of $ 37.09 $ 36.92
period
Income from Investment
Operations
Net investment income D .06 .03
Net realized and unrealized 12.83 .14
gain (loss)
Total from investment 12.89 .17
operations
Less Distributions
From net investment income (.19) -
From net realized gain (4.97) -
Total distributions (5.16) -
Net asset value, end of period $ 44.82 $ 37.09
TOTAL RETURN B, C 39.38% .46%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 136,142 $ 2,015
(000 omitted)
Ratio of expenses to average .80% .79% A
net assets
Ratio of expenses to average .75% F .77% A, F
net assets after expense
reductions
Ratio of net investment .15% .70% A
income to average net assets
Portfolio turnover 123% 113%
A ANNUALIZED
B TOTAL RETURNS DO NOT
REFLECT CHARGES ATTRIBUTABLE
TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION
OF THESE CHARGES WOULD
REDUCE THE TOTAL RETURNS
SHOWN. TOTAL RETURNS FOR
PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD
HAVE BEEN LOWER HAD CERTAIN
EXPENSES NOT BEEN REDUCED
DURING THE PERIODS SHOWN
(SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER
SHARE HAS BEEN CALCULATED
BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3,
1997 (COMMENCEMENT OF SALE
OF SERVICE CLASS SHARES) TO
DECEMBER 31, 1997.
F FMR OR THE FUND HAS ENTERED
INTO VARYING ARRANGEMENTS
WITH THIRD PARTIES WHO
EITHER PAID OR REDUCED A
PORTION OF THE CLASS'
EXPENSES (SEE NOTE 5 OF
NOTES TO FINANCIAL
STATEMENTS).
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). If Fidelity had not reimbursed certain fund
expenses, the fund's past 10 year total return would have been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
1998
VIP: OVERSEAS - "INITIAL CLASS" 12.81% 9.71% 10.09%
MSCI EAFE 20.27% 9.29% 5.59%
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.
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money. Foreign investments involve greater risks and
potential rewards than U.S. investments. These risks include political
and economic uncertainties of foreign countries, as well as the risk
of currency fluctuations.
(checkmark) 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.
$10,000 OVER 10 YEARS
VIP Equity-Income S&P 500
00150 SP001
1988/12/31 10000.00 10000.00
1989/01/31 10617.62 10732.00
1989/02/28 10563.12 10464.77
1989/03/31 10791.92 10708.60
1989/04/30 11208.42 11264.38
1989/05/31 11541.62 11720.59
1989/06/30 11549.52 11653.78
1989/07/31 12222.85 12706.12
1989/08/31 12419.24 12955.15
1989/09/30 12279.62 12902.04
1989/10/31 11571.18 12602.71
1989/11/30 11637.30 12859.81
1989/12/31 11734.42 13168.44
1990/01/31 10941.94 12284.84
1990/02/28 11006.78 12443.31
1990/03/31 11024.93 12773.06
1990/04/30 10642.68 12453.74
1990/05/31 11346.83 13667.97
1990/06/30 11233.85 13575.03
1990/07/31 10959.11 13531.59
1990/08/31 10084.01 12308.34
1990/09/30 9301.77 11708.92
1990/10/31 9064.59 11658.57
1990/11/30 9714.27 12411.72
1990/12/31 9940.30 12758.00
1991/01/31 10473.37 13314.25
1991/02/28 11194.59 14266.22
1991/03/31 11426.82 14611.46
1991/04/30 11480.21 14646.53
1991/05/31 12110.29 15279.26
1991/06/30 11615.12 14579.47
1991/07/31 12273.60 15258.87
1991/08/31 12532.67 15620.51
1991/09/30 12446.65 15359.65
1991/10/31 12653.91 15565.47
1991/11/30 12108.49 14938.18
1991/12/31 13065.38 16647.11
1992/01/31 13241.79 16337.47
1992/02/29 13671.79 16549.86
1992/03/31 13504.25 16227.13
1992/04/30 13927.31 16704.21
1992/05/31 14038.64 16786.06
1992/06/30 13915.73 16535.95
1992/07/31 14342.18 17212.27
1992/08/31 14027.95 16859.42
1992/09/30 14173.57 17058.36
1992/10/31 14343.25 17118.06
1992/11/30 14863.59 17701.79
1992/12/31 15271.74 17919.52
1993/01/31 15727.62 18070.05
1993/02/28 16080.92 18315.80
1993/03/31 16560.14 18702.26
1993/04/30 16491.28 18249.67
1993/05/31 16789.67 18738.76
1993/06/30 16987.15 18793.10
1993/07/31 17218.27 18717.93
1993/08/31 17876.95 19427.34
1993/09/30 17808.61 19277.75
1993/10/31 17971.46 19676.80
1993/11/30 17657.39 19489.87
1993/12/31 18065.54 19725.69
1994/01/31 18861.17 20396.37
1994/02/28 18375.46 19843.63
1994/03/31 17606.73 18978.44
1994/04/30 18213.43 19221.37
1994/05/31 18386.78 19536.60
1994/06/30 18273.18 19057.95
1994/07/31 18883.53 19683.05
1994/08/31 19855.11 20490.06
1994/09/30 19529.83 19988.05
1994/10/31 19930.70 20437.78
1994/11/30 19279.29 19693.44
1994/12/31 19342.00 19985.49
1995/01/31 19644.41 20503.72
1995/02/28 20393.47 21302.75
1995/03/31 21097.64 21931.39
1995/04/30 21684.43 22577.27
1995/05/31 22337.90 23479.68
1995/06/30 22658.84 24025.12
1995/07/31 23530.85 24821.79
1995/08/31 23825.99 24884.09
1995/09/30 24616.99 25934.20
1995/10/31 24333.73 25841.62
1995/11/30 25385.85 26976.06
1995/12/31 26129.58 27495.62
1996/01/31 26888.92 28431.57
1996/02/29 26979.24 28695.13
1996/03/31 27263.23 28971.47
1996/04/30 27618.22 29398.51
1996/05/31 27916.41 30156.69
1996/06/30 27660.82 30271.59
1996/07/31 26311.86 28934.19
1996/08/31 26851.44 29544.41
1996/09/30 28001.61 31207.17
1996/10/31 28456.00 32067.87
1996/11/30 30358.74 34491.88
1996/12/31 29861.76 33808.59
1997/01/31 31026.12 35920.96
1997/02/28 31369.83 36202.58
1997/03/31 30203.90 34715.01
1997/04/30 31275.30 36787.50
1997/05/31 33213.26 39027.12
1997/06/30 34757.34 40775.54
1997/07/31 37294.02 44020.05
1997/08/31 35545.13 41554.04
1997/09/30 37498.85 43829.96
1997/10/31 36128.09 42366.04
1997/11/30 37451.58 44327.16
1997/12/31 38255.13 45088.26
1998/01/31 38160.59 45586.93
1998/02/28 40620.05 48874.66
1998/03/31 42501.54 51377.53
1998/04/30 42501.54 51894.39
1998/05/31 41812.78 51002.33
1998/06/30 42283.15 53074.04
1998/07/31 41241.61 52508.80
1998/08/31 34941.98 44917.08
1998/09/30 36991.46 47794.47
1998/10/31 39729.70 51682.07
1998/11/30 41409.60 54814.52
1998/12/31 42703.13 57972.94
IMATRL PRASUN SHR__CHT 19981231 19990111 121246 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund: Overseas Portfolio on
December 31, 1988. As the chart shows, by December 31, 1998, the value
of the investment would have grown to $26,141 - a 161.41% 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
$17,224 over the same period - a 72.24% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
Novartis AG (Reg.) 1.7
(Switzerland)
Amoco Corp. (United States of 1.7
America)
Elf Aquitaine (France) 1.5
Glaxo Wellcome PLC (United 1.4
Kingdom)
SmithKline Beecham PLC 1.4
(United Kingdom)
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
FINANCE 21.7
UTILITIES 13.4
HEALTH 9.4
ENERGY 7.4
NONDURABLES 5.2
TOP FIVE COUNTRIES AS OF DECEMBER 31, 1998
(EXCLUDING CASH EQUIVALENTS) % OF FUND'S INVESTMENTS
United Kingdom 17.9
France 14.4
Japan 14.1
Germany 8.3
Netherlands 7.0
TOP COUNTRIES ARE BASED ON THE LOCATION OF THE ISSUER OF EACH
SECURITY, INDICATING WHERE THE FUND IS EXPOSED TO POLITICAL AND CREDIT
RISKS. PERCENTAGES ARE ADJUSTED FOR THE EFFECT OF OPEN FUTURES
CONTRACTS, IF APPLICABLE.
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). The offering of Service Class shares took place
on November 3, 1997. Performance for Service Class shares reflect an
asset based distribution fee (12b-1 fee), and returns prior to
November 3, 1997 are those of the Initial Class and do not include the
effects of the Service Class' 12b-1 fee. If Fidelity had not
reimbursed certain fund expenses, the past 10 year total return would
have been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
1998
VIP: OVERSEAS - SERVICE CLASS 12.69% 9.69% 10.08%
MSCI EAFE 20.27% 9.29% 5.59%
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.
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money. Foreign investments involve greater risks and
potential rewards than U.S. investments. These risks include political
and economic uncertainties of foreign countries, as well as the risk
of currency fluctuations.
(checkmark) 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.
$10,000 OVER 10 YEARS
VIP Overseas - CL S MS EAFE Index (Net)
00495 MS001
1988/12/31 10000.00 10000.00
1989/01/31 10296.74 10175.94
1989/02/28 10474.78 10228.25
1989/03/31 10465.34 10027.51
1989/04/30 10774.32 10120.51
1989/05/31 10375.64 9569.92
1989/06/30 10335.77 9408.82
1989/07/31 11302.57 10590.32
1989/08/31 11222.83 10114.03
1989/09/30 11920.52 10574.74
1989/10/31 11272.67 10149.88
1989/11/30 11880.65 10660.11
1989/12/31 12628.18 11053.43
1990/01/31 12458.74 10642.15
1990/02/28 12167.94 9899.39
1990/03/31 12627.86 8868.11
1990/04/30 12697.85 8797.73
1990/05/31 13527.71 9801.56
1990/06/30 13827.66 9715.24
1990/07/31 14527.54 9852.08
1990/08/31 13047.79 8895.36
1990/09/30 11808.00 7655.66
1990/10/31 12907.82 8848.56
1990/11/30 12507.89 8326.60
1990/12/31 12417.90 8461.49
1991/01/31 12537.88 8735.18
1991/02/28 12960.28 9671.58
1991/03/31 12581.20 9090.97
1991/04/30 12857.83 9180.24
1991/05/31 12888.56 9276.03
1991/06/30 12181.64 8594.42
1991/07/31 12786.11 9016.68
1991/08/31 12827.09 8833.57
1991/09/30 13349.60 9331.42
1991/10/31 13441.81 9463.70
1991/11/30 12960.28 9021.89
1991/12/31 13411.07 9487.81
1992/01/31 13575.00 9285.16
1992/02/29 13292.11 8952.82
1992/03/31 13022.11 8361.79
1992/04/30 13832.10 8401.54
1992/05/31 14434.40 8963.90
1992/06/30 14164.40 8538.72
1992/07/31 13260.96 8320.19
1992/08/31 13146.73 8842.04
1992/09/30 12617.12 8667.43
1992/10/31 11755.21 8212.79
1992/11/30 11692.90 8290.07
1992/12/31 11973.28 8332.95
1993/01/31 12315.97 8331.92
1993/02/28 12557.21 8583.60
1993/03/31 13428.35 9331.80
1993/04/30 14320.74 10217.41
1993/05/31 14628.83 10433.20
1993/06/30 14267.62 10270.42
1993/07/31 14830.68 10629.94
1993/08/31 15627.45 11203.77
1993/09/30 15542.46 10951.58
1993/10/31 16105.52 11289.09
1993/11/30 15425.60 10302.30
1993/12/31 16445.48 11046.20
1994/01/31 17518.47 11980.11
1994/02/28 17209.50 11946.92
1994/03/31 16782.46 11432.35
1994/04/30 17337.61 11917.42
1994/05/31 17124.09 11849.00
1994/06/30 16942.60 12016.45
1994/07/31 17390.99 12132.01
1994/08/31 17593.83 12419.24
1994/09/30 17134.77 12028.09
1994/10/31 17487.07 12428.62
1994/11/30 16825.17 11831.30
1994/12/31 16729.08 11905.38
1995/01/31 16035.15 11448.03
1995/02/28 16077.34 11415.18
1995/03/31 16572.36 12127.15
1995/04/30 17045.86 12583.24
1995/05/31 17282.60 12433.24
1995/06/30 17444.02 12215.20
1995/07/31 18218.84 12975.67
1995/08/31 17713.06 12480.70
1995/09/30 17971.33 12724.45
1995/10/31 17616.20 12382.41
1995/11/30 17820.67 12726.94
1995/12/31 18358.73 13239.71
1996/01/31 18703.09 13294.06
1996/02/29 18744.28 13339.01
1996/03/31 19030.96 13622.27
1996/04/30 19560.21 14018.32
1996/05/31 19571.24 13760.35
1996/06/30 19714.58 13837.80
1996/07/31 19130.20 13433.36
1996/08/31 19273.53 13462.79
1996/09/30 19835.86 13820.44
1996/10/31 19637.39 13679.02
1996/11/30 20662.82 14223.28
1996/12/31 20773.08 14040.32
1997/01/31 20773.08 13551.71
1997/02/28 21254.36 13776.67
1997/03/31 21447.47 13829.02
1997/04/30 21628.52 13905.08
1997/05/31 22980.30 14812.67
1997/06/30 24187.25 15631.81
1997/07/31 25007.97 15886.92
1997/08/31 23125.13 14702.55
1997/09/30 24826.93 15528.40
1997/10/31 23088.92 14338.77
1997/11/30 22980.30 14195.38
1997/12/31 23173.41 14321.86
1998/01/31 23933.79 14979.52
1998/02/28 25281.02 15943.45
1998/03/31 26427.78 16437.38
1998/04/30 27157.55 16570.19
1998/05/31 27118.45 16492.81
1998/06/30 26857.82 16620.63
1998/07/31 27066.33 16792.15
1998/08/31 22140.44 14714.80
1998/09/30 22114.37 14266.88
1998/10/31 24134.25 15757.34
1998/11/30 25541.65 16567.74
1998/12/31 26115.03 17224.48
IMATRL PRASUN SHR__CHT 19981231 19990129 134655 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund: Overseas Portfolio -
Service Class on December 31, 1988. As the chart shows, by December
31, 1998, the value of the investment would have grown to $26,115 - a
161.15% 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 $17,224 over the same period - a 72.24%
increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
Novartis AG (Reg.) 1.7
(Switzerland)
Amoco Corp. (United States of 1.7
America)
Elf Aquitaine (France) 1.5
Glaxo Wellcome PLC (United 1.4
Kingdom)
SmithKline Beecham PLC 1.4
(United Kingdom)
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
FINANCE 21.7
UTILITIES 13.4
HEALTH 9.4
ENERGY 7.4
NONDURABLES 5.2
TOP FIVE COUNTRIES AS OF DECEMBER 31, 1998
(EXCLUDING CASH EQUIVALENTS) % OF FUND'S INVESTMENTS
United Kingdom 17.9
France 14.4
Japan 14.1
Germany 8.3
Netherlands 7.0
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
(photograph of Richard Mace)
An interview with
Richard Mace,
Portfolio Manager
of Overseas Portfolio
Q. HOW DID THE FUND PERFORM, RICK?
A. For the 12 months that ended December 31, 1998, the fund's return
trailed the 20.27% return of the Morgan Stanley Capital International
EAFE Index. The EAFE index tracks the performance of stocks in Europe,
Australasia and the Far East.
Q. WHY DID THE FUND UNDERPERFORM THE INDEX?
A. A major reason was the fund's exposure both to investments in
emerging-market countries as well as to companies whose businesses
were negatively affected by emerging-market disruptions. The fund's
exposure to emerging-market securities averaged slightly less than
3.5% of the fund's investments during the period, but several of the
fund's commodities and banking-related positions performed weakly.
Declining demand led to lower commodity prices in general, while banks
reported an increase in problematic loans stemming from stagnant
economic growth. Commodity holdings that were hurt during the period
included energy-related stocks Elf Aquitaine, based in France, as well
as Brazil-based Petrobras and Royal Dutch Petroleum, which is based in
the Netherlands. Banking positions that were negatively affected
included Mexican holdings Grupo Financiero Bancomer and BANACCI.
Q. YOU INCREASED THE FUND'S EXPOSURE TO UTILITIES STOCKS DURING THE
PERIOD. WHAT WAS YOUR APPEAL?
A. The utilities sector - particularly the telephone utility segment -
provided a number of opportunities over the past year. Companies have
had to cope with a rapidly changing competitive environment as
industry deregulation opened up new opportunities for expansion into
new markets. I found a number of telecommunications companies in
Europe and Japan that I felt were attractively valued, particularly
among cellular providers. These included United Kingdom-based Vodafone
- - which the fund has had a stake in for some time - Germany's
Mannesmann and Spain's Telefonica. Each of these positions contributed
positively to the fund's performance.
Q. WHICH OTHER STOCKS PERFORMED WELL? WHICH PROVED DISAPPOINTING?
A. European business services providers such as Britain's Rentokil and
Securicor got a boost from improved business conditions, as did
computer systems and software providers such as France's Cap Gemini
and Atos, and Denmark's International Service Systems. In terms of
disappointments, paper stocks were another commodities area hit hard
by falling prices. The fund's positions in Canadian paper companies
Domtar and St. Laurent Paperboard, and Ireland's Jefferson Smurfit
Group, for example, were notable detractors.
Q. SHAREHOLDERS MAY NOTICE THAT THE FUND HOLDS SEVERAL
POSITIONS IN FUTURES CONTRACTS. WHAT ROLE DO THESE INVESTMENTS PLAY IN
THE PORTFOLIO?
A. While there are many different uses for futures contracts, I use
them in the fund to be as fully invested in equities as possible.
During periods of inconsistent cash flows, volatile financial markets
or if the fund experiences a temporary cash buildup due to my selling
of a few stocks, the use of futures can provide a low-cost, liquid way
for the fund to remain substantially invested in a diversified group
of stocks.
Q. WHAT'S YOUR OUTLOOK?
A. I'm optimistic that Europe's economies will continue to improve. As
the latter months of this past period proved, though, corporate
earnings must be watched carefully and a determination must be made as
to whether those earnings support prevailing valuations. If earnings
disappoint, more stock market corrections could become reality. It's
becoming an old story, but as far as the situation in Japan goes, I'll
continue to look for signs of economic improvement. Towards the end of
the period, we began to see Japanese companies adopt a more
shareholder-friendly focus. Lastly, the emerging markets still appear
to be in turmoil at this point. Continuing economic and currency
concerns, combined with social unrest, provide a less-than-promising
outlook for a fast recovery. Regardless, I'll keep an eye on a number
of companies that have shown valuation improvements over the past few
months.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED
ON MARKET AND OTHER CONDITIONS.
(checkmark) FUND FACTS
GOAL: to increase the value of the fund's
shares by investing mainly in stocks in Europe, the Far East and the
Pacific Basin
START DATE: January 28, 1987
SIZE: as of December 31, 1998, more than
$2.1 billion
MANAGER: Richard Mace, since 1996; joined Fidelity in 1987
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
INVESTMENTS DECEMBER 31, 1998
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 83.8%
SHARES VALUE (NOTE 1)
ARGENTINA - 0.0%
Bansud SA Class B (a) 191,800 $ 823,592
AUSTRALIA - 2.6%
AMP Ltd. 222,400 2,816,349
Australia & New Zealand 1,186,142 7,759,148
Banking Group Ltd.
Brambles Industries Ltd. 50,600 1,231,952
Broken Hill Proprietary Co. 373,254 2,747,761
Ltd. (The)
Cable & Wireless Optus Ltd. 1,277,200 2,683,238
(a)
Coles Myer Ltd. 752,726 3,941,932
Commonwealth Bank of 363,400 5,155,678
Australia (e)
CSR Ltd. 248,800 608,036
David Jones Ltd. 726,300 800,746
Fosters Brewing Group Ltd. 930,400 2,518,825
National Australia Bank Ltd. 411,700 6,203,290
News Corp. Ltd. 504,482 3,330,969
News Corp. Ltd. ADR 144,300 3,814,931
News Corp. Ltd. sponsored ADR 44,200 1,091,188
(ltd. vtg.)
Rio Tinto Ltd. 235,600 2,793,023
Smith (Howard) Ltd. 44,100 291,613
WMC Ltd. 1,840,896 5,547,540
Woodside Petroleum Ltd. 399,400 1,785,817
55,122,036
BELGIUM - 0.2%
Fortis AG 14,300 5,173,857
BRAZIL - 0.7%
Centrais Electricas 55,249,000 1,060,854
Brasileiras SA
Compania Energertica Minas 71,470,014 1,360,489
Gerais
Embratel Participacoes SA ADR 85,700 1,194,444
Tele Centro Sul Participacoes 21,300 890,606
SA ADR
Tele Norte Leste 64,300 799,731
Participacoes SA ADR
Telebras sponsored ADR 136,700 9,936,381
PFD-Holdr
15,242,505
CANADA - 0.8%
BCE, Inc. 268,800 10,160,131
Canadian Hunter Exploration 99,675 651,258
Ltd. (a)
Canadian Natural Resources 188,100 2,826,723
Ltd. (a)
Nexfor, Inc. 173,833 687,154
Noranda, Inc. 398,700 3,972,672
18,297,938
DENMARK - 0.6%
Den Danske Bank Group AS 30,400 4,067,287
International Service Systems 35,700 2,312,777
AS Class B
Unidanmark AS Class A 71,200 6,406,384
12,786,448
FINLAND - 2.1%
Merita Ltd. Series A 144,200 910,627
OY Nokia AB:
Series A 214,500 25,833,844
sponsored ADR 1,000 120,438
SHARES VALUE (NOTE 1)
Sampo Insurance Co. Ltd. 159,900 $ 6,068,043
Sonera Group PLC (a)(e) 74,500 1,314,977
Stora Enso Oyj 315,900 2,825,099
Teito Corp. Class B 46,900 2,087,940
UPM-Kymmene Corp. 200,800 5,592,053
44,753,021
FRANCE - 13.9%
Accor SA 38,100 8,247,417
Alcatel Alsthom Compagnie 141,250 17,258,985
Generale d'Electricite SA
(RFD)
Alcatel Alsthom Compagnie 1,500 36,656
Generale d'Electricite SA
sponsored ADR
Atos SA (a) 17,900 4,278,259
Axa SA 136,726 19,812,704
Banque Nationale de Paris 200,800 16,531,716
Cap Gemini SA 55,600 8,922,259
Castorama Dubois 22,900 5,223,400
Investissements SA
Coflexip SA sponsored ADR 83,400 2,679,225
Compagnie de St. Gobain 25,900 3,655,816
Compagnie Financiere de 42,800 3,718,943
Paribas Class A (Reg.)
Credit Commercial de France 35,000 3,249,698
Elf Aquitaine 292,937 33,175,116
Elf Aquitaine SA sponsored ADR 1,000 56,625
France Telecom SA 75,000 5,957,333
Groupe Danone 47,700 13,653,562
Lafarge SA 29,821 2,832,855
Lagardere S.C.A. (Reg.) 117,500 4,992,397
LVMH Moet Hennessy Louis 6,300 1,246,532
Vuitton
Michelin SA (Compagnie 76,019 3,039,536
Generale des Etablissements)
Class B
Pechiney SA Class A 78,096 2,549,760
Peugeot SA 12,400 1,918,869
Pinault Printemps SA 17,000 3,248,088
Renault SA 113,000 5,074,109
Rhone-Poulenc SA:
Class A 236,972 11,907,841
sponsored ADR Class A 1,400 70,350
Sanofi SA 66,242 10,902,570
Scor SA 115,100 7,608,471
Seita 9,900 619,885
Societe Generale, France 124,300 20,124,603
Suez Lyonnaise des Eaux 59,700 12,260,942
Television Francaise 1 SA 20,500 3,649,090
(T.F.1)
Total SA:
Class B 262,554 26,124,122
sponsored ADR 1,000 49,750
Unibail 7,300 1,064,359
Union Assurances Federales SA 53,399 7,088,342
Valeo SA 43,600 3,435,116
Vivendi SA 93,100 24,150,454
300,415,755
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
GERMANY - 6.7%
Adidas-Salomon AG 8,600 $ 960,980
Allianz AG (Reg.) 38,800 14,428,644
BASF AG 258,200 9,849,929
Bayer AG 182,200 7,677,455
Bayerische Hypo-und 139,600 10,898,453
Vereinsbank AG
Bayerische Motoren Werke 1,400 1,058,905
(BMW) AG
BHF Bank AG 79,600 3,204,945
Continental Gummi-Werke AG 36,600 1,000,451
DaimlerChrysler AG (a) 211,811 20,347,094
Deutsche Lufthansa AG (Reg.) 214,600 4,748,261
Deutsche Telekom AG 513,600 16,933,326
Hoechst AG 120,500 4,929,891
Holzmann (Phillip) AG (a) 2,100 334,325
Mannesmann AG 198,700 23,038,719
Munich Reinsurance AG (Reg.) 3,100 1,501,066
RWE AG 101,200 5,623,742
Schering AG 20,300 2,556,174
Siemens AG 82,500 5,335,451
Veba AG 71,900 4,319,054
Viag AG 11,800 7,018,113
145,764,978
GREECE - 0.1%
Panafon Hellenic Telecom Co. 63,900 1,709,775
SA (a)(e)
HONG KONG - 0.1%
Johnson Electric Holdings 1,080,000 2,774,199
Ltd.
Sun Hung Kai Properties Ltd. 1,530 11,158
2,785,357
IRELAND - 1.3%
Bank of Ireland, Inc. 514,319 11,205,874
CRH PLC 162,900 2,812,729
Elan Corp. PLC ADR (a) 93,600 6,511,050
Irish Life PLC 437,003 4,106,390
Smurfit (Jefferson) Group PLC 1,659,000 2,963,306
27,599,349
ITALY - 3.0%
Assicurazioni Generali Spa 471,300 19,689,363
Banca Commerciale Italiana Spa 585,500 4,060,286
Banca di Roma (a) 2,556,050 4,331,565
Eni Spa sponsored ADR 720,900 4,734,752
Finmeccanica Spa (a) 1,856,900 1,899,974
San Paolo-IMI Spa 631,300 11,167,573
Telecom Italia Mobile Spa 978,100 7,226,407
Telecom Italia Spa 214,410 1,826,337
Unicredito Italiano Spa 1,489,700 8,803,709
Unione Immobiliare Spa (a) 961,400 501,414
64,241,380
JAPAN - 12.2%
Acom Co. Ltd. 103,700 6,647,788
SHARES VALUE (NOTE 1)
Advantest Corp. 99,800 $ 6,309,651
Aeon Credit Service Ltd. 21,000 1,446,358
Aiful Corp. (e) 54,400 3,295,223
Bank of Tokyo-Mitsubishi Ltd. 103,000 1,064,106
Banyu Pharmaceutical Co. Ltd. 125,000 2,317,881
Bridgestone Corp. 90,000 2,038,411
Canon, Inc. 224,000 4,816,000
Daiwa House Industry Co. Ltd. 190,000 2,018,278
DDI Corp. 1,974 7,320,795
Fuji Bank Ltd. 566,000 2,079,082
Fuji Heavy Industries Ltd. 1,244,000 6,206,269
Fuji Photo Film Co. Ltd. 274,000 10,161,589
Hitachi Maxell Ltd. 166,000 2,638,411
Honda Motor Co. Ltd. 441,000 14,446,887
Hoya Corp. 51,000 2,476,821
Ito-Yokado Co. Ltd. 176,000 12,277,263
Kao Corp. 242,000 5,449,007
Matsushita Electric 445,000 7,765,250
Industrial Co. Ltd.
Minebea Co. Ltd. 449,000 5,130,296
Minolta Co. Ltd. 871,000 4,283,859
Mitsubishi Electric Corp. 1,456,000 4,564,062
Mitsubishi Estate Co. Ltd. 646,000 5,778,349
Mitsubishi Trust & Banking 335,000 2,150,508
Corp.
Mitsui Fudosan Co. Ltd. 288,000 2,174,305
NGK Insulators Ltd. 159,000 2,045,589
Nichicon Corp. 87,000 1,083,179
Nikko Securities Co. Ltd. 497,000 1,382,384
Nippon Telegraph & Telephone 440 3,387,903
Corp.
Nomura Securities Co. Ltd. 916,000 7,966,976
NTT Mobile Communication 103 4,229,139
Network, Inc. (a)
NTT Mobile Communication 260 10,675,497
Network, Inc. (a)(e)
Omron Corp. 715,000 9,773,245
Orix Corp. (a) 129,800 9,673,395
Paris Miki, Inc. 8,900 204,327
Sankyo Co. Ltd. 42,000 916,026
Secom Ltd. 45,000 3,719,205
Sekisui Chemical Co. Ltd. 5,000 33,554
Sekisui House Ltd. 279,000 2,943,974
Sharp Corp. 704,000 6,334,446
Shimano, Inc. 43,000 1,106,799
Shin-Etsu Chemical Co. Ltd. 141,000 3,386,490
Shohkoh Fund & Co. Ltd. 6,600 2,121,324
Sony Corp. 88,500 6,349,875
Sumitomo Realty & Development 474,000 1,536,053
Co. Ltd.
Takeda Chemical Industries 674,000 25,888,742
Ltd.
Takefuji Corp. 73,100 5,325,166
Takefuji Corp. (e) 53,400 3,890,066
Terumo Corp. 189,000 4,439,205
THK Co. Ltd. 369,200 4,140,256
Tokyo Electron Ltd. 164,000 6,212,450
Toyota Motor Corp. 94,000 2,548,168
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
JAPAN - CONTINUED
Unified-Charm Corp. 74,100 $ 3,467,815
Yamanouchi Pharmaceutical Co. 141,000 4,531,920
Ltd.
264,169,617
LUXEMBOURG - 0.0%
Stolt Comex Seaway SA 103,100 695,925
MALAYSIA - 0.1%
Malayan Banking BHD 56,000 90,779
Oriental Holdings BHD 1,116,000 1,374,442
1,465,221
MEXICO - 0.6%
BANACCI SA de CV Class B (a) 1,236,000 1,622,211
Elektra SA de CV Unit 584,000 299,517
Grupo Financiero Bancomer SA 20,317,000 4,348,515
de CV Class B
Telefonos de Mexico SA 136,000 6,621,500
sponsored ADR representing
Class L shares
12,891,743
NETHERLANDS - 6.9%
ABN AMRO Holding NV 215,400 4,526,173
Aegon NV 20,400 2,502,522
Ahrend NV 49,300 1,125,104
Akzo Nobel NV 410,200 18,657,357
Akzo Nobel NV ADR 1,000 44,625
Fortis Amev NV 78,000 6,456,432
Heineken NV 54,400 3,270,135
ING Groep NV 367,760 22,400,532
Koninklijke Ahold NV 304,656 11,247,540
Koninklijke KPN NV 139,500 6,975,742
Nutreco Holding NV 69,433 2,733,292
Philips Electronics NV 405,500 27,447,289
(Bearer)
Royal Dutch Petroleum Co.:
(Hague Registry) 80,980 3,876,916
(NY Registry Gilder 1.25) 1,400 67,025
Samas Groep NV 49,000 875,838
STMicroelectronics NV (a) 38,500 3,005,406
TNT Post Group NV 81,500 2,623,018
Unilever NV 214,700 18,331,392
Unilever NV (NY shares) 1,000 82,938
Vedior NV 196,825 3,874,096
Vendex NV CVA 48,100 1,166,805
VNU NV 210,600 7,931,950
Wolters Kluwer NV 1,500 320,619
149,542,746
NETHERLANDS ANTILLES - 0.1%
Schlumberger Ltd. 34,900 1,609,763
SHARES VALUE (NOTE 1)
NORWAY - 0.2%
NCL Holdings AS (a) 1,694,388 $ 3,995,936
PORTUGAL - 0.4%
Banco Pinto & Sotto Mayor SA 95,880 1,818,501
Electricidade de Portugal SA 149,600 3,294,934
Portugal Telecom SA 17,900 821,007
Telecel Comunicacoes Pessoais 10,200 2,085,780
SA
8,020,222
RUSSIA - 0.0%
Vimpel Communications 13,400 173,363
sponsored ADR (a)
SPAIN - 2.4%
Banco Bilbao Vizcaya SA (Reg.) 336,900 5,340,649
Banco Central 228,600 2,713,855
Hispanoamericano SA
Banco Santander SA 241,764 4,803,428
Corporacion Mapfre Compania 3,300 89,513
Internacional de Reaseguros
SA (Reg.)
Endesa SA 194,000 5,139,254
Iberdrola SA 225,800 4,223,758
Mapfre Vida SA 42,600 1,596,731
Repsol SA 24,700 1,317,357
Telefonica de Espana SA 585,100 26,011,775
Telefonica de Espana SA:
rights 12/31/99 (a) 585,100 519,411
sponsored ADR 510 69,041
51,824,772
SWEDEN - 2.5%
ABB AB Series A 78,900 841,847
Astra AB Class A 533,900 11,045,059
Electrolux AB 236,400 4,067,818
Ericsson (L.M.) Telefon AB:
ADR Class B 2,500 59,844
Class B 352,200 8,430,787
Nordbanken Holding AB 697,200 4,471,987
Skandia Foersaekrings AB 264,400 4,044,110
Svenska Handelsbanken 144,500 6,095,843
Swedish Match Co. 3,063,100 11,146,102
Volvo AB Class B 137,600 3,207,799
53,411,196
SWITZERLAND - 6.8%
Adecco SA (Bearer) 3,257 1,486,273
Credit Suisse Group (Reg.) 64,154 10,038,654
Julius Baer Holding AG 3,155 10,482,223
Nestle SA (Reg.) 13,835 30,106,732
Novartis AG (Reg.) 18,540 36,432,308
Roche Holding AG 1,290 15,735,371
participation certificates
Swiss Reinsurance Co. (Reg.) 4,500 11,728,166
Swisscom AG (a) 23,200 9,708,879
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SWITZERLAND - CONTINUED
UBS AG (a) 63,534 $ 19,513,354
Zurich Allied AG (Reg.) (a) 1,650 1,221,288
146,453,248
TAIWAN - 0.4%
Taiwan Semiconductor 1,174,000 2,587,027
Manufacturing Co. Ltd. (a)
Taiwan Semiconductor 433,800 6,154,538
Manufacturing Co. Ltd. ADR
(a)
8,741,565
UNITED KINGDOM - 17.0%
Allied Domecq PLC 323,200 2,975,527
Allied Zurich PLC 869,400 13,009,350
Amec PLC 300 881
Asda Group PLC 475,100 1,269,360
Bank of Scotland 463,200 5,517,323
Barratt Developments PLC 30,625 117,035
Bass PLC 151,600 2,184,463
BBA Group PLC 394,233 2,432,704
Boots Co. PLC 230,700 3,927,266
British Aerospace PLC 698,383 5,927,048
British American Tobacco PLC 421,700 3,697,489
British Petroleum PLC 1,159,136 17,314,544
British Petroleum PLC ADR 807 76,665
British Telecommunications PLC 1,356,300 20,573,356
BTP PLC 57,200 369,052
Cadbury Schweppes PLC 390,500 6,654,044
Caradon PLC 3,662,980 6,241,647
CGU PLC 378,300 5,845,351
Cookson Group PLC 2,174,338 4,712,222
Courtaulds Textiles PLC 552,200 1,479,922
Devro PLC 11,700 33,486
Diageo PLC 556,000 6,139,789
Dixons Group PLC 82,200 1,155,894
Glaxo Wellcome PLC 896,300 31,146,383
Glaxo Wellcome PLC sponsored 1,400 97,300
ADR
Hays PLC 156,400 1,371,324
HSBC Holdings PLC Ord. 124,900 3,425,897
Kingfisher PLC 629,700 6,792,172
Ladbroke Group PLC 648,900 2,597,889
Lloyds TSB Group PLC 1,666,500 23,627,270
Marks & Spencer PLC 123,100 843,113
Misys PLC 284,200 2,078,135
National Grid Group PLC 476,790 3,794,020
National Westminster Bank PLC 248,900 4,797,094
Orange PLC (a) 478,700 5,543,561
Pearson PLC 269,800 5,342,108
Pilkington PLC 1,416,200 1,405,734
Prudential Corp. PLC 622,200 9,469,896
Rentokil Initial PLC 2,192,500 16,503,589
Reuters Group PLC 120,700 1,267,968
SHARES VALUE (NOTE 1)
Rio Tinto PLC (Reg.) 401,600 $ 4,650,709
RMC Industries, Inc. 88,700 1,207,677
Royal & Sun Alliance 249,408 2,024,874
Insurance Group PLC
Saatchi & Saatchi PLC 2,191,500 4,930,691
Schroders PLC 119,900 2,179,939
Scottish & Newcastle PLC 136,400 1,579,573
Shell Transport & Trading Co.
PLC:
(Reg.) 4,293,900 26,612,977
ADR 1,500 55,781
Siebe PLC 870,700 3,406,647
SmithKline Beecham PLC 2,175,042 30,233,115
SmithKline Beecham PLC ADR 1,400 97,300
Somerfield PLC 479,600 3,189,574
Standard Chartered PLC 323,500 3,719,516
Tarmac PLC 1,560,761 2,904,801
Tomkins PLC 396,800 1,877,436
Unilever PLC 621,100 6,987,422
Unilever PLC ADR 1,500 67,500
Vodafone Group PLC 1,517,844 24,456,325
Wimpey George PLC 550,500 994,961
WPP Group PLC 1,113,400 6,723,129
Zeneca Group PLC 173,600 7,530,257
367,188,075
UNITED STATES OF AMERICA - 2.1%
Amoco Corp. 608,600 35,907,400
Global TeleSystems Group, 111,100 6,193,825
Inc. (a)
Kaiser Aluminum Corp. (a) 8,200 39,975
Newmont Mining Corp. 46,900 847,131
Transocean Offshore, Inc. 55,100 1,477,369
44,465,700
TOTAL COMMON STOCKS 1,809,365,083
(Cost $1,396,986,245)
PREFERRED STOCKS - 2.5%
CONVERTIBLE PREFERRED STOCKS
- - 0.2%
AUSTRALIA - 0.2%
WBK Trust $3.135 STRYPES 174,300 5,501,344
NONCONVERTIBLE PREFERRED
STOCKS - 2.3%
GERMANY - 0.7%
Dyckerhoff AG 7,000 1,951,278
SAP AG (Systeme Anwendungen 25,800 12,415,247
Produkte)
14,366,525
PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONCONVERTIBLE PREFERRED
STOCKS - CONTINUED
ITALY - 1.6%
Telecom Italia Mobile Spa 3,248,200 $ 15,245,058
Telecom Italia Spa Risp 3,149,725 19,761,990
35,007,048
TOTAL NONCONVERTIBLE 49,373,573
PREFERRED STOCKS
TOTAL PREFERRED STOCKS 54,874,917
(Cost $24,424,659)
CLOSED-END FUNDS - 0.8%
EMERGING MARKETS - 0.3%
Asia Tigers Fund, Inc. 142,400 934,500
Emerging Markets 90,600 656,850
Infrastructure Fund, Inc.
Emerging Markets 73,300 655,119
Telecommunication Fund, Inc.
Morgan Stanley Emerging 109,900 892,938
Markets Fund, Inc.
Templeton Dragon Fund, Inc. 296,000 2,183,000
5,322,407
GERMANY - 0.3%
Emerging Germany Fund, Inc. 75,000 951,563
New Germany Fund, Inc. (The) 370,600 4,794,638
5,746,201
HONG KONG - 0.0%
Asia Pacific Fund, Inc. 133,200 899,100
MULTI-NATIONAL - 0.2%
European Warrant Fund, Inc. 118,700 2,040,156
Morgan Stanley Asia-Pacific 190,900 1,336,300
Fund, Inc.
3,376,456
PORTUGAL - 0.0%
Portugal Fund, Inc. 29,000 453,125
TAIWAN - 0.0%
Taiwan Fund, Inc. 80,100 1,001,250
TOTAL CLOSED-END FUNDS 16,798,539
(Cost $19,798,067)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CONVERTIBLE BONDS - 0.9%
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT (D)
FRANCE - 0.3%
Groupe Danone 3% 1/1/02 A1 FRF 10,000 2,864,171
Suez Lyonnaise des Eaux 4% A+ FRF 15,000 3,110,157
1/1/06
5,974,328
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT (D) VALUE (NOTE 1)
NETHERLANDS - 0.1%
Koninklijke Ahold NV 3% Baa1 NLG 4,750,000 $ 3,000,652
9/30/03
UNITED STATES OF AMERICA - 0.5%
Nestle Holdings, Inc. 3% - 5,480,000 7,850,100
6/17/02
Roche Holdings, Inc. liquid - 3,160,000 2,054,000
yield option note 0% 4/20/10
(e)
9,904,100
TOTAL CONVERTIBLE BONDS 18,879,080
(Cost $18,502,077)
GOVERNMENT OBLIGATIONS - 1.6%
FRANCE - 0.2%
French Government OAT 5.5% Aaa FRF 28,000,000 5,514,093
4/25/04
GERMANY - 0.4%
German Federal Republic Aaa DEM 11,300,000 8,138,878
7.375% 1/3/05
ITALY - 0.4%
Italian Republic:
5% 6/28/01 Aa3 1,940,000 3,618,100
6.75% 2/1/07 Aa3 ITL 6,000,000,000 4,302,535
7,920,635
SPAIN - 0.2%
Spanish Kingdom 4.5% 7/30/04 Aa2 ESP 700,000,000 5,064,502
UNITED STATES OF AMERICA - 0.4%
U.S. Treasury Bills, yield at - 8,550,000 8,544,813
date of purchase 3.66% to
4.4% 1/7/99 to 1/21/99 (f)
TOTAL GOVERNMENT OBLIGATIONS 35,182,921
(Cost $35,002,749)
CASH EQUIVALENTS - 10.4%
SHARES
Taxable Central Cash Fund (c) 224,039,018 224,039,018
(Cost $224,039,018)
TOTAL INVESTMENT IN $ 2,159,139,558
SECURITIES - 100%
(Cost $1,718,752,815)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
FUTURES CONTRACTS
EXPIRATION DATE UNDERLYING FACE AMOUNT AT VALUE UNREALIZED GAIN/(LOSS)
PURCHASED
10 DAX 30 Index Contracts Mar. 1999 $ 3,056,682 $ 141,975
(Germany)
199 FTSE 100 Index Contracts Mar. 1999 19,318,374 523,541
(United Kingdom)
609 Nikkei 225 Index Mar. 1999 41,716,500 (3,219,154)
Contracts (Japan)
$ 64,091,556 $ (2,553,638)
</TABLE>
THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL
INVESTMENT IN SECURITIES - 3.0%
CURRENCY ABBREVIATIONS
DEM - German deutsche mark
ESP - Spanish peseta
FRF - French franc
ITL - Italian lira
NLG - Dutch guilder
SECURITY TYPE ABBREVIATIONS
STRYPES - Structured Yield Product
Exchangeable for Common Stock
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) At period end, the seven-day yield on the Taxable Central Cash
Fund was 4.80%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(d) Principal amount is stated in United States dollars unless
otherwise noted.
(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 $28,095,216 or 1.3% of net assets.
(f) Security or a portion of the security was pledged to cover margin
requirements for futures contracts. At the period end, the value of
securities pledged amounted to $4,848,585.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $1,610,330,492 and $1,675,842,088, respectively (see Note
3 of Notes to Financial Statements).
The market value of futures contracts opened and closed during the
period amounted to $240,570,958 and $187,291,312, respectively (see
Note 3 of Notes to Financial Statements).
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $12,752 for the
period (see Note 4 of Notes to Financial Statements).
MARKET SECTOR DIVERSIFICATION (UNAUDITED)
As a Percentage of Total Value of Investment in Securities
AEROSPACE & DEFENSE 0.3%
BASIC INDUSTRIES 3.5
CASH EQUIVALENTS 10.4
CLOSED-END FUNDS 0.8
CONSTRUCTION & REAL ESTATE 1.8
DURABLES 5.0
ENERGY 7.4
FINANCE 21.7
GOVERNMENT OBLIGATIONS 1.6
HEALTH 9.4
HOLDING COMPANIES 0.5
INDUSTRIAL MACHINERY & 5.1
EQUIPMENT
MEDIA & LEISURE 2.1
NONDURABLES 5.2
PRECIOUS METALS 0.3
RETAIL & WHOLESALE 2.8
SERVICES 3.3
TECHNOLOGY 5.0
TRANSPORTATION 0.4
UTILITIES 13.4
100.0%
INCOME TAX INFORMATION
At December 31, 1998, the aggregate cost of investment securities for
income tax purposes was $1,728,360,896. Net unrealized appreciation
aggregated $430,778,662, of which $517,005,303 related to appreciated
investment securities and $86,226,641 related to depreciated
investment securities.
The fund hereby designates approximately $78,821,000 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, 1998
ASSETS
Investment in securities, at $ 2,159,139,558
value (cost $1,718,752,815)
- - See accompanying schedule
Cash 353,134
Receivable for investments 628,251
sold
Receivable for fund shares 1,447,434
sold
Dividends receivable 4,824,348
Interest receivable 1,623,961
Other receivables 52,926
TOTAL ASSETS 2,168,069,612
LIABILITIES
Payable for investments $ 43,686,671
purchased
Payable for fund shares 12,911,171
redeemed
Accrued management fee 1,259,312
Distribution fees payable 2,689
Payable for daily variation 373,737
on futures contracts
Other payables and accrued 273,312
expenses
TOTAL LIABILITIES 58,506,892
NET ASSETS $ 2,109,562,720
Net Assets consist of:
Paid in capital $ 1,611,431,999
Undistributed net investment 15,374,087
income
Accumulated undistributed 45,094,273
net realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation 437,662,361
(depreciation) on
investments and assets and
liabilities in foreign
currencies
NET ASSETS $ 2,109,562,720
INITIAL CLASS: NET ASSET $20.06
VALUE, offering price and
redemption price per share
($2,074,842,526 (divided
by) 103,446,104 shares)
SERVICE CLASS: NET ASSET $20.04
VALUE, offering price and
redemption price per share
($34,720,194 (divided by)
1,732,675 shares)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME $ 38,881,426
Dividends
Interest 8,754,187
47,635,613
Less foreign taxes withheld (4,287,574)
TOTAL INCOME 43,348,039
EXPENSES
Management fee $ 15,441,406
Transfer agent fees 1,422,530
Distribution fees - Service 15,712
Class
Accounting fees and expenses 804,948
Non-interested trustees' 8,101
compensation
Custodian fees and expenses 1,032,876
Registration fees 8,630
Audit 48,190
Legal 23,611
Miscellaneous 310,018
Total expenses before 19,116,022
reductions
Expense reductions (589,286) 18,526,736
NET INVESTMENT INCOME 24,821,303
REALIZED AND UNREALIZED GAIN
(LOSS)
Net realized gain (loss) on:
Investment securities 43,711,713
Foreign currency transactions (303,771)
Futures contracts 3,062,445 46,470,387
Change in net unrealized
appreciation (depreciation)
on:
Investment securities 175,736,602
Assets and liabilities in (102,692)
foreign currencies
Futures contracts (1,623,650) 174,010,260
NET GAIN (LOSS) 220,480,647
NET INCREASE (DECREASE) IN $ 245,301,950
NET ASSETS RESULTING FROM
OPERATIONS
OTHER INFORMATION $ 588,910
Expense reductions Directed
brokerage arrangements
Custodian credits 376
$ 589,286
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
INCREASE (DECREASE) IN NET YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
ASSETS
Operations Net investment $ 24,821,303 $ 29,647,363
income
Net realized gain (loss) 46,470,387 117,046,383
Change in net unrealized 174,010,260 58,363,873
appreciation (depreciation)
NET INCREASE (DECREASE) IN 245,301,950 205,057,619
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders (37,913,851) (29,012,812)
From net investment income
From net realized gain (111,746,087) (115,172,073)
TOTAL DISTRIBUTIONS (149,659,938) (144,184,885)
Share transactions - net 86,667,359 198,779,377
increase (decrease)
TOTAL INCREASE (DECREASE) 182,309,371 259,652,111
IN NET ASSETS
NET ASSETS
Beginning of period 1,927,253,349 1,667,601,238
End of period (including $ 2,109,562,720 $ 1,927,253,349
undistributed net investment
income of $15,374,087 and
$16,641,512, respectively)
</TABLE>
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
SHARES DOLLARS SHARES DOLLARS
Share transactions Initial 83,667,719 $ 1,630,270,593 51,240,982 $ 973,125,045
Class Sold
Reinvested 7,943,861 149,503,507 8,319,959 144,184,885
Redeemed (88,486,169) (1,726,300,500) (47,764,686) (919,455,709)
Net increase (decrease) 3,125,411 $ 53,473,600 11,796,255 $ 197,854,221
Service Class A Sold 1,950,594 $ 38,211,430 48,794 $ 931,087
Reinvested 8,320 156,588 - -
Redeemed (274,725) (5,174,259) (308) (5,931)
Net increase (decrease) 1,684,189 $ 33,193,759 48,486 $ 925,156
Distributions From net $ 37,874,182 $ 29,012,812
investment income Initial
Class
Service Class 39,669 -
Total $ 37,913,851 $ 29,012,812
From net realized gain $ 111,629,169 $ 115,172,073
Initial Class
Service Class 116,918 -
Total $ 111,746,087 $ 115,172,073
$ 149,659,938 $ 144,184,885
A SERVICE CLASS COMMENCED
SALE OF SHARES NOVEMBER 3,
1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 1996 1995 1994
Net asset value, beginning of $ 19.20 $ 18.84 $ 17.06 $ 15.67 $ 15.48
period
Income from Investment
Operations
Net investment income .23 E .30 E .32 D, E .17 .19
Net realized and unrealized 2.13 1.70 1.88 1.34 .08
gain (loss)
Total from investment 2.36 2.00 2.20 1.51 .27
operations
Less Distributions
From net investment income (.38) (.33) (.20) (.06) (.08)
From net realized gain (1.12) (1.31) (.22) (.02) -
In excess of net realized - - - (.04) -
gain
Total distributions (1.50) (1.64) (.42) (.12) (.08)
Net asset value, end of period $ 20.06 $ 19.20 $ 18.84 $ 17.06 $ 15.67
TOTAL RETURN B, C 12.81% 11.56% 13.15% 9.74% 1.72%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 2,074,843 $ 1,926,322 $ 1,667,601 $ 1,343,134 $ 1,297,701
(000 omitted)
Ratio of expenses to average .91% .92% .93% .91% .92%
net assets
Ratio of expenses to average .89% G .90% G .92% G .91% .92%
net assets after expense
reductions
Ratio of net investment 1.19% 1.55% 1.84% 1.88% 1.28%
income to average net assets
Portfolio turnover 84% 67% 92% 50% 42%
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 F
Net asset value, beginning of $ 19.20 $ 19.36
period
Income from Investment
Operations
Net investment income E .15 .01
Net realized and unrealized 2.19 (.17)
gain (loss)
Total from investment 2.34 (.16)
operations
Less Distributions
From net investment income (.38) -
From net realized gain (1.12) -
Total distributions (1.50) -
Net asset value, end of period $ 20.04 $ 19.20
TOTAL RETURN B, C 12.69% (.83)%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 34,720 $ 931
(000 omitted)
Ratio of expenses to average 1.01% 1.02% A
net assets
Ratio of expenses to average .97% G 1.01% A, G
net assets after expense
reductions
Ratio of net investment .80% .31% A
income to average net assets
Portfolio turnover 84% 67%
A ANNUALIZED
B TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE
THE TOTAL RETURNS SHOWN. TOTAL RETURNS FOR PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
D 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 5 OF NOTES TO FINANCIAL STATEMENTS).
NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES.
The Money Market Portfolio, High Income Portfolio, Equity-Income
Portfolio, Growth Portfolio, and Overseas Portfolio (the funds) are
funds of Variable Insurance Products Fund. Investment Grade Bond
Portfolio, Asset Manager Portfolio, Asset Manager: Growth Portfolio,
Index 500 Portfolio, and Contrafund Portfolio (the funds) are funds of
Variable Insurance Products Fund II. Balanced Portfolio, Growth &
Income Portfolio, and Growth Opportunities Portfolio (the funds) are
funds of Variable Insurance Products Fund III. The Variable Insurance
Products Fund, Variable Insurance Products Fund II and Variable
Insurance Products Fund III (the trusts) are registered under the
Investment Company Act of 1940, as amended (the 1940 Act), as open-end
management investment companies organized as Massachusetts business
trusts. Each fund is authorized to issue an unlimited number of
shares. Shares of each fund may only be purchased by insurance
companies for the purpose of funding variable annuity or variable life
insurance contracts. Each fund except the Money Market Portfolio,
Index 500 Portfolio and Investment Grade Bond Portfolio offer two
classes of shares: the funds' original class of shares (Initial Class
shares) and Service Class shares. Both classes have equal rights and
voting privileges, except for matters affecting a single class.
Investment income, realized and unrealized capital gains and losses,
the common expenses of the fund, and certain fund-level expense
reductions, if any, are allocated on a pro rata basis to each class
based on the relative net assets of each class to the total net assets
of the fund. Each class of shares differs in its respective
distribution plan.
The financial statements have been prepared in conformity with
generally accepted accounting principles which require management to
make certain estimates and assumptions at the date of the financial
statements. The following summarizes the significant accounting
policies of the funds:
SECURITY VALUATION:
MONEY MARKET PORTFOLIO As permitted under Rule 2a-7 of the 1940 Act,
and certain conditions therein, securities are valued initially at
cost and thereafter assume a constant amortization to maturity of any
discount or premium.
INVESTMENT GRADE BOND PORTFOLIO. Securities are valued based upon a
computerized matrix system and/or appraisals by a pricing service,
both of which consider market transactions and dealer-supplied
valuations. Securities (including restricted securities) for which
quotations are not readily available are valued at their fair value as
determined in good faith under consistently applied procedures under
the general supervision of the Board of Trustees. Short-term
securities with remaining maturities of sixty days or less for which
quotations are not readily available are valued at amortized cost or
original cost plus accrued interest, both of which approximate current
value.
ASSET MANAGER, BALANCED AND HIGH INCOME PORTFOLIOS. Equity securities
for which quotations are readily available are valued at the last sale
price, or if no sale price, at the closing bid price. Debt securities
for which quotations are readily available are valued by a pricing
service at their market values as determined by their most recent bid
prices in the principal market (sales prices if the principal market
is an exchange) in which such securities are normally traded.
Securities (including restricted securities) for which market
quotations are not readily available are valued at their fair value as
determined in good faith under consistently applied procedures under
the general supervision of the Board of Trustees. Short-term
securities with remaining maturities of sixty days or less for which
quotations are not readily available are valued at amortized cost or
original cost plus accrued interest, both of which approximate current
value.
ASSET MANAGER: GROWTH, EQUITY-INCOME, GROWTH & INCOME, INDEX 500,
GROWTH OPPORTUNITIES, CONTRAFUND AND GROWTH PORTFOLIOS. Securities for
which exchange quotations are readily available are valued at the last
sale price, or if no sale price, at the closing bid price. Securities
(including restricted securities) for which exchange quotations are
not readily available (and in certain cases debt securities which
trade on an exchange) are valued primarily using dealer-supplied
valuations or at their fair value as determined in good faith under
consistently applied procedures under the general supervision of the
Board of Trustees. Short-term securities with remaining maturities of
sixty days or less for which quotations are not readily available are
valued at amortized cost or original cost plus accrued interest, both
of which approximate current value.
OVERSEAS PORTFOLIO. Securities for which quotations are readily
available are valued at the last sale price, or if no sale price, at
the closing bid price in the principal market in which such securities
are normally traded. If trading or events occurring in other markets
after the close of the principal market in which securities are traded
is expected to materially affect the value of those securities, then
they are valued at their fair value taking this trading or these
events into account. Fair value is determined in good faith under
consistently applied procedures under the general supervision of the
Board of Trustees. Securities (including restricted securities) for
which quotations are not readily available are valued primarily using
dealer-supplied valuations or at their fair value. Short-term
securities with remaining maturities of sixty days or less for which
quotations are not readily available are valued at amortized cost or
original cost plus accrued interest, both of which approximate current
value.
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
FOREIGN CURRENCY TRANSLATION. The accounting records of the funds are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Purchase
and sales of securities, income receipts and expense payments are
translated into U.S. dollars at the prevailing exchange rate on the
respective dates of the transactions.
Net realized gains and losses on foreign currency transactions
represent net gains and losses from sales and maturities of foreign
currency contracts, disposition of foreign currencies, the difference
between the amount of net investment income accrued and the U.S.
dollar amount actually received, and gains and losses between trade
and settlement date on purchases and sales of securities. The effects
of changes in foreign currency exchange rates on investments in
securities are included with the net realized and unrealized gain or
loss on investment securities.
INCOME TAXES. As a qualified regulated investment company under
Subchapter M of the Internal Revenue Code, each fund is not subject to
U.S. federal income taxes to the extent that it distributes
substantially all of its taxable income for its fiscal year. Each fund
may be subject to foreign taxes on income and gains on investments
which are accrued based upon each fund's understanding of the tax
rules and regulations that exist in the markets in which they invest.
Each fund accrues such taxes as applicable. The schedules of
investments include information regarding income taxes under the
caption "Income Tax Information."
INVESTMENT INCOME:
MONEY MARKET PORTFOLIO Interest income, which includes amortization of
premium and accretion of discount, is accrued as earned.
INVESTMENT GRADE BOND, HIGH INCOME, ASSET MANAGER, BALANCED, ASSET
MANAGER: GROWTH, EQUITY-INCOME, INDEX 500, GROWTH OPPORTUNITIES,
GROWTH & INCOME, CONTRAFUND, GROWTH AND OVERSEAS PORTFOLIOS. Dividend
income is recorded on the ex-dividend date, except certain dividends
from foreign securities where the ex-dividend date may have passed,
are recorded as soon as the funds are informed of the ex-dividend
date. Non-cash dividends included in dividend income, if any, are
recorded at the fair market value of the securities received. Interest
income, which includes accretion of original issue discount, is
accrued as earned. Investment income is recorded net of foreign taxes
withheld where recovery of such taxes is uncertain.
EXPENSES. Most expenses of each trust can be directly attributed to a
fund. Expenses which cannot be directly attributed are apportioned
among the funds in the trust.
DEFERRED TRUSTEE COMPENSATION. Under a Deferred Compensation Plan (the
Plan) non-interested Trustees must defer receipt of a portion of, and
may elect to defer receipt of an additional portion of, their annual
compensation. Deferred amounts are treated as though equivalent dollar
amounts had been invested in shares of the fund or are invested in a
cross-section of other Fidelity funds. Deferred amounts remain in the
fund until distributed in accordance with the Plan.
DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily and paid
monthly from net interest income for the Money Market Portfolio.
Distributions are recorded on the ex-dividend date for all other
funds. Income dividends and capital gain distributions are declared
separately for each class.
Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences, which may result in
distribution reclassifications, are primarily due to differing
treatments for litigation proceeds, paydown gains/losses on certain
securities, futures transactions, foreign currency transactions,
passive foreign investment companies (PFIC), market discount,
partnerships, non-taxable dividends and losses deferred due to wash
sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
Undistributed net investment income and accumulated undistributed net
realized gain (loss) on investments and foreign currency transactions
may include temporary book and tax basis differences which will
reverse in a subsequent period. Any taxable income or gain remaining
at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of
trade date. Gains and losses on securities sold are determined on the
basis of identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. Certain funds use foreign currency
contracts to facilitate transactions in foreign-denominated
securities. Losses may arise from changes in the value of the foreign
currency or if the counterparties do not perform under the contracts'
terms. The U.S. dollar value of foreign currency contracts is
determined using contractual currency exchange rates established at
the time of each trade.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission (the SEC), the funds, along with
other affiliated entities of Fidelity Management & Research Company
(FMR), may transfer uninvested cash balances into one or more joint
trading accounts. These balances are invested in one or more
repurchase agreements for U.S. Treasury or Federal Agency obligations.
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.
2. OPERATING POLICIES - CONTINUED
REPURCHASE AGREEMENTS - CONTINUED
The securities are marked-to-market daily and maintained at a value at
least equal to the principal amount of the repurchase agreement
(including accrued interest). FMR, the funds' investment adviser, is
responsible for determining that the value of the underlying
securities remains in accordance with the market value requirements
stated above.
TAXABLE CENTRAL CASH FUND. Pursuant to an Exemptive Order issued by
the SEC, the funds may invest in the Taxable Central Cash Fund (the
Cash Fund) managed by Fidelity Investments Money Management, Inc., 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.
DELAYED DELIVERY TRANSACTIONS. Each fund may purchase or sell
securities on a delayed delivery basis. Payment and delivery may take
place a month or more after the date of the transaction. The price of
the underlying securities and the date when the securities will be
delivered and paid for are fixed at the time the transaction is
negotiated. The market values of the securities purchased or sold on a
delayed delivery basis are identified as such in each applicable
fund's schedule of investments. Each fund may receive compensation for
interest forgone in the purchase of a delayed delivery security. With
respect to purchase commitments, each fund identifies securities as
segregated in its custodial records with a value at least equal to the
amount of the commitment. Losses may arise due to changes in the
market value of the underlying securities or if the counterparty does
not perform under the contract.
FUTURES CONTRACTS. Certain funds may use futures contracts to manage
their exposure to the stock market and to fluctuations in currency
values. Buying futures tends to increase a fund's exposure to the
underlying instrument, while selling futures tends to decrease a
fund's exposure to the underlying instrument or hedge other fund
investments. Futures contracts involve, to varying degrees, risk of
loss in excess of the futures variation margin reflected in each
applicable fund's Statement of Assets and Liabilities. The underlying
face amount at value of any open futures contracts at period end is
shown in each applicable fund's schedule of investments under the
caption "Futures Contracts." This amount reflects each contract's
exposure to the underlying instrument at period end. Losses may arise
from changes in the value of the underlying instruments or if the
counterparties do not perform under the contracts' terms. Gains
(losses) are realized upon the expiration or closing of the futures
contracts. Futures contracts are valued at the settlement price
established each day by the board of trade or exchange on which they
are traded.
RESTRICTED SECURITIES. Certain funds are 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 $16,000,000, $11,313,010,
$2,442,800, $333,742 and $36 or 1.1%, 0.5%, 0.1%, 0.1% and 0.0% of net
assets of the Money Market, High Income, Asset Manager, Asset Manager:
Growth and Balanced Portfolios, respectively.
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities) and the market value of futures contracts
opened and closed is included under the caption "Other Information" at
the end of each applicable fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As each fund's investment adviser, FMR receives a
monthly fee.
For the Money Market Portfolio, FMR receives a monthly fee that is
calculated on the basis of a group fee rate plus a fixed individual
fund fee rate applied to the average net assets of the fund and an
income-based fee. The group fee rate is the weighted average of a
series of rates and is based on the monthly average net assets of all
the mutual funds advised by FMR. The rates ranged from .1100% to
.3700% for the period. The annual individual fund fee rate is .03%. In
the event that these rates were lower than the contractual rates in
effect during the period, FMR voluntarily implemented the above rates,
as they resulted in the same or a lower management fee. The
income-based fee is added only when the fund's gross yield exceeds 5%.
At that time the income-based fee would equal 6% of that portion of
the fund's gross income that represents a gross yield of more than 5%
per year. The maximum income-based component is .24% of average net
assets. For the period, the management fee was equivalent to an annual
rate of .20% of average net assets. The income-based portion of this
fee was equal to $527,196, or an annual rate of .04%.
For the Index 500 Portfolio, FMR receives a fee that is computed daily
at an annual rate of .24% of the fund's average net assets.
For all other funds, FMR receives a monthly fee that is calculated on
the basis of a group fee rate plus a fixed individual fund fee rate
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
MANAGEMENT FEE - CONTINUED
applied to the average net assets of the fund. The group fee rate is
the weighted average of a series of rates and is based on the monthly
average net assets of all the mutual funds advised by FMR. The rates
ranged from .1100% to .3700% for the period for the Investment Grade
Bond and High Income Portfolios and .2500% to .5200% for the period
for the Asset Manager, Balanced, Asset Manager: Growth, Equity-Income,
Growth & Income, Growth Opportunities, Contrafund, Growth and Overseas
Portfolios for the period. The annual individual fund fee rate is .30%
for Investment Grade Bond, Asset Manager: Growth, Growth
Opportunities, Contrafund and Growth, .45% for High Income and
Overseas, .25% for Asset Manager, .15% for Balanced, and .20% for
Equity-Income and Growth & Income Portfolios. 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, each fund's management fee was equivalent to the
following annual rates expressed as a percentage of average net
assets:
Money Market .20%
Investment Grade Bond .43%
High Income .58%
Asset Manager .54%
Balanced .44%
Asset Manager: Growth .59%
Equity-Income .49%
Growth & Income .49%
Index 500 .24%
Growth Opportunities .59%
Contrafund .59%
Growth .59%
Overseas .74%
SUB-ADVISER FEE. As the Money Market Portfolio's investment
sub-adviser, Fidelity Investments Money Management, Inc., a wholly
owned subsidiary of FMR, receives a fee from FMR of 50% of the
management fee payable to FMR. The fee is paid prior to any voluntary
expense reimbursements which may be in effect.
FMR, on behalf of the Overseas Portfolio, entered into sub-advisory
agreements with Fidelity Management & Research (U.K.) Inc., Fidelity
Management & Research (Far East) Inc., and Fidelity International
Investment Advisors (FIIA). In addition, FIIA entered into a
sub-advisory agreement with its subsidiary, Fidelity International
Investment Advisors (U.K.) Limited (FIIA(U.K.)L). Under the
sub-advisory arrangements, FMR may receive investment advice and
research services and may grant the sub-advisers investment management
authority to buy and sell securities. FMR pays its sub-advisers either
a portion of its management fee or a fee based on costs incurred for
these services. FIIA pays FIIA(U.K.)L a fee based on costs incurred
for either service.
FMR and Index 500 Portfolio entered into a sub-advisory agreement with
Bankers Trust Company (Bankers Trust). Bankers Trust receives a
sub-advisory fee for providing investment management, securities
lending and custodial services to the fund. For these services, FMR
pays Bankers Trust fees at an annual rate of .006% of the fund's
average net assets. In addition, the fund pays Bankers Trust fees
equal to 40% of net income from the fund's securities lending program.
For the period, the fund paid Bankers Trust $42,017. This fee is
included in the caption "Management fee and sub-advisory fee" on the
Statement of Operations.
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 $ 66,393
ASSET MANAGER 1,632
BALANCED 3,228
ASSET MANAGER: GROWTH 1,096
EQUITY-INCOME 110,337
GROWTH & INCOME 6,375
GROWTH OPPORTUNITIES 65,577
CONTRAFUND 60,572
GROWTH 49,981
OVERSEAS 15,712
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
DISTRIBUTION AND SERVICE PLAN - CONTINUED
Under the Plans, FMR may use its resources to pay administrative and
promotional expenses related to the sale of each fund's class of
shares. Subject to the approval of the Board of Trustees, the Plans
also authorize payments to third parties that assist in the sale of
each class' shares or render shareholder support services. For the
period, the following amounts were paid to third parties under the
Plans:
INITIAL CLASS SERVICE CLASS
MONEY MARKET $ 8,596 $ N/A
INVESTMENT GRADE BOND 111,684 N/A
HIGH INCOME 1,173,849 84,699
ASSET MANAGER 2,258,617 -
BALANCED 7,695 -
ASSET MANAGER: GROWTH 72,448 -
EQUITY-INCOME 5,762,460 155,833
GROWTH & INCOME 98,323 -
INDEX 500 9,457 N/A
GROWTH OPPORTUNITIES 120,384 72,484
CONTRAFUND 2,270,373 85,744
GROWTH 4,892,485 68,062
OVERSEAS 1,036,756 20,043
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations
Company, Inc., (FIIOC), an affiliate of FMR, is the fund's transfer,
dividend disbursing and shareholder servicing agent. FIIOC receives
account fees and asset-based fees that vary according to the account
size and type of account. FIIOC pays a portion of the expenses related
to typesetting, printing and mailing of all shareholder reports,
except for proxy statements. For the period, each fund's transfer
agent fees were equivalent to an annual rate of .07% of average net
assets.
ACCOUNTING AND SECURITY LENDING FEES. Fidelity Service Company, Inc.,
maintains each fund's accounting records and administers the security
lending program. The security lending fee is based on the number and
duration of lending transactions. The accounting fee is based on the
level of average net assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. Certain funds placed a portion of their
portfolio transactions with brokerage firms which are affiliates of
FMR. The commissions paid to these affiliated firms are shown under
the caption "Other Information" at the end of each applicable fund's
schedule of investments.
5. 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 directed certain portfolio trades to brokers who paid a
portion of certain funds' expenses.
In addition, certain funds, or FMR on behalf of certain funds, have
entered into arrangements with their custodian whereby credits
realized on uninvested cash balances were used to offset a portion of
certain funds' expenses.
For the period, the reductions under these arrangements are shown
under the caption "Other Information" on each applicable fund's
Statement of Operations.
6. INTERFUND LENDING.
Information regarding the interfund lending program is included under
the caption "Other Information" at the end of each applicable fund's
schedule of investments.
7. SECURITY LENDING.
Certain funds loaned securities to brokers who paid the funds
negotiated lenders' fees. These fees are included in interest income.
Each applicable fund receives U.S. Treasury obligations and/or cash as
collateral against the loaned securities, in an amount at least equal
to 102% of the market value of the loaned securities at the inception
of each loan. This collateral must be maintained at not less than 100%
of the market value of the loaned securities during the period of the
loan. Information regarding the value of securities loaned and the
value of collateral at period end is included under the caption "Other
Information" at the end of each applicable fund's schedule of
investments.
8. BANK BORROWINGS.
Each fund is permitted to have bank borrowings for temporary or
emergency purposes to fund shareholder redemptions. Each fund has
established borrowing arrangements with certain banks. Under the most
restrictive arrangement, each fund must pledge to the bank securities
having a market value in excess of 220% of the total bank borrowings.
The interest rate on the borrowings is the bank's base rate, as
revised from time to time. Information regarding a fund's
participation in the program is included under the caption "Other
Information" at the end of each applicable fund's schedule of
investments.
9. 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 53% - -
Investment Grade Bond 40% 1 11%
High Income 12% 2 59%
Asset Manager 19% 3 46%
Balanced 38% 1 55%
Asset Manager: Growth 68% 1 11%
Equity-Income 15% 1 30%
Growth & Income 56% 1 24%
Index 500 31% 1 10%
Growth Opportunities 27% 1 60%
Contrafund 26% 2 37%
Growth 13% 1 29%
Overseas 13% 1 36%
10. TRANSACTIONS WITH AFFILIATED COMPANIES.
An affiliated company is a company which the fund has ownership of at
least 5% of the voting securities. Information regarding transactions
with affiliated companies is included at the end of each applicable
fund's schedule of investments.
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:
In our opinion, the accompanying statements of assets and liabilities,
including the schedules 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
Money Market Portfolio, High Income Portfolio, Equity-Income
Portfolio, Growth Portfolio and Overseas Portfolio (funds of Variable
Insurance Products Fund) at December 31, 1998, and the results of
their operations, the changes in 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 Variable Insurance Products Fund'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, 1998 by
correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 12, 1999
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, 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, 1998,
and the results of their operations, the changes in 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 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, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 12, 1999
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Variable Insurance Products Fund III and the
Shareholders of Balanced Portfolio, Growth Opportunities Portfolio,
and Growth & Income Portfolio:
In our opinion, the accompanying statements of assets and liabilities,
including the schedules 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
Balanced Portfolio, Growth Opportunities Portfolio, and Growth &
Income Portfolio (funds of Variable Insurance Products Fund III) at
December 31, 1998, and the results of their operations, the changes in
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 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, 1998 by
correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 12, 1999
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:
PAY DATE RECORD DATE DIVIDENDS CAPITAL GAINS
Investment Grade Bond 2/5/99 2/5/99 $0.51 $0.16
High Income:
Initial Class 2/5/99 2/5/99 $1.07 $0.04
Service Class 2/5/99 2/5/99 $1.07 $0.04
Asset Manager:
Initial Class 2/5/99 2/5/99 $0.60 $0.76
Service Class 2/5/99 2/5/99 $0.60 $0.76
Balanced:
Initial Class 2/5/99 2/5/99 $0.37 $0.43
Service Class 2/5/99 2/5/99 $0.37 $0.43
Asset Manager: Growth:
Initial Class 2/5/99 2/5/99 $0.41 $0.68
Service Class 2/5/99 2/5/99 $0.41 $0.68
Equity-Income:
Initial Class 2/5/99 2/5/99 $0.38 $0.84
Service Class 2/5/99 2/5/99 $0.38 $0.84
Growth & Income:
Initial Class 2/5/99 2/5/99 $0.10 $0.20
Service Class 2/5/99 2/5/99 $0.10 $0.20
Index 500 2/5/99 2/5/99 $1.40 $0.95
Growth Opportunities:
Initial Class 2/5/99 2/5/99 $0.23 $0.43
Service Class 2/5/99 2/5/99 $0.22 $0.43
Contrafund:
Initial Class 2/5/99 2/5/99 $0.12 $0.88
Service Class 2/5/99 2/5/99 $0.12 $0.88
Growth:
Initial Class 2/5/99 2/5/99 $0.08 $5.03
Service Class 2/5/99 2/5/99 $0.08 $5.03
Overseas:
Initial Class 2/5/99 2/5/99 $0.31 $0.50
Service Class 2/5/99 2/5/99 $0.31 $0.50
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 $.38 and $.04,
respectively, for the dividend paid February 6, 1998.
The Overseas Portfolio has notified shareholders in January 1999 of
the applicable percentage for use in preparing 1998 income tax
returns.
The funds hereby designate 100% of the long-term capital gain
dividends distributed during the fiscal year as 20%-rate capital gain
dividends.
PROXY VOTING RESULTS
VARIABLE INSURANCE PRODUCTS FUND
A special meeting of the Variable Insurance Products Fund
shareholders was held on September 16, 1998. The results of votes
taken among shareholders on proposals before them are reported below.
Each vote reported represents a single share held on the record date
for the meeting.
PROPOSAL 1
To elect the twelve nominees specified below as Trustees.
# OF % OF
SHARES VOTED SHARES VOTED
RALPH F. COX
Affirmative 1,896,971,522.436 97.599
Against
Withheld 46,670,303.283 2.401
Abstain
TOTAL 1,943,641,825.719 100.000
PHYLLIS BURKE DAVIS
Affirmative 1,895,868,615.286 97.542
Against
Withheld 47,773,210.433 2.458
Abstain
TOTAL 1,943,641,825.719 100.000
ROBERT M. GATES
Affirmative 1,895,537,713.144 97.525
Against
Withheld 48,104,112.575 2.475
Abstain
TOTAL 1,943,641,825.719 100.000
EDWARD C. JOHNSON 3D
Affirmative 1,895,796,576.928 97.538
Against
Withheld 47,845,248.791 2.462
Abstain
TOTAL 1,943,641,825.719 100.000
E. BRADLEY JONES
Affirmative 1,894,480,831.209 97.471
Against
Withheld 49,160,994.510 2.529
Abstain
TOTAL 1,943,641,825.719 100.000
DONALD J. KIRK
Affirmative 1,896,774,241.696 97.589
Against
Withheld 46,867,584.023 2.411
Abstain
TOTAL 1,943,641,825.719 100.000
# OF % OF
SHARES VOTED SHARES VOTED
PETER S. LYNCH
Affirmative 1,897,981,903.316 97.651
Against
Withheld 45,659,922.403 2.349
Abstain
TOTAL 1,943,641,825.719 100.000
WILLIAM O. MCCOY
Affirmative 1,896,739,388.053 97.587
Against
Withheld 46,902,437.666 2.413
Abstain
TOTAL 1,943,641,825.719 100.000
GERALD C. MCDONOUGH
Affirmative 1,894,362,094.554 97.465
Against
Withheld 49,279,731.165 2.535
Abstain
TOTAL 1,943,641,825.719 100.000
MARVIN L. MANN
Affirmative 1,897,410,594.870 97.621
Against
Withheld 46,231,230.849 2.379
Abstain
TOTAL 1,943,641,825.719 100.000
ROBERT C. POZEN
Affirmative 1,896,064,168.143 97.552
Against
Withheld 47,577,657.576 2.448
Abstain
TOTAL 1,943,641,825.719 100.000
THOMAS R. WILLIAMS
Affirmative 1,894,848,261.068 97.490
Against
Withheld 48,793,564.651 2.510
Abstain
TOTAL 1,943,641,825.719 100.000
PROPOSAL 2
To ratify the selection of PricewaterhouseCoopers LLP as independent
accountants of the funds.
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 1,847,736,661.973 95.066
Against 17,341,905.046 .892
Withheld
Abstain 78,563,258.700 4.042
TOTAL 1,943,641,825.719 100.000
PROPOSAL 3
To authorize the Trustees to adopt an Amended and Restated Declaration
of Trust.
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 1,790,891,433.146 92.141
Against 45,247,037.340 2.328
Withheld
Abstain 107,503,355.233 5.531
TOTAL 1,943,641,825.719 100.000
EQUITY-INCOME
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 381,226,321.852 93.142
Against 8,458,731.723 2.066
Withheld
Abstain 19,612,398.661 4.792
TOTAL 409,297,452.236 100.000
GROWTH
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 199,879,657.427 92.290
Against 5,686,033.779 2.625
Withheld
Abstain 11,013,176.748 5.085
TOTAL 216,578,867.954 100.000
OVERSEAS
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 86,389,278.226 91.784
Against 1,995,385.215 2.120
Withheld
Abstain 5,737,279.360 6.096
TOTAL 94,121,942.801 100.000
HIGH INCOME
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 194,160,338.084 91.332
Against 4,193,160.186 1.972
Withheld
Abstain 14,234,424.488 6.696
TOTAL 212,587,922.758 100.000
MONEY MARKET
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 929,235,837.557 91.907
Against 24,913,726.437 2.465
Withheld
Abstain 56,906,075.976 5.628
TOTAL 1,011,055,639.970 100.000
PROPOSAL 4
To approve an amended management contract for the fund.
EQUITY-INCOME
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 379,191,394.743 92.644
Against 8,488,959.227 2.074
Withheld
Abstain 21,617,098.266 5.282
TOTAL 409,297,452.236 100.000
GROWTH
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 199,389,007.034 92.063
Against 5,390,074.264 2.489
Withheld
Abstain 11,799,786.656 5.448
TOTAL 216,578,867.954 100.000
OVERSEAS
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 86,686,667.302 92.100
Against 1,602,876.648 1.703
Withheld
Abstain 5,832,398.851 6.197
TOTAL 94,121,942.801 100.000
PROPOSAL 5
To approve an amended management contract for the fund.
HIGH INCOME
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 193,940,841.545 91.229
Against 3,613,474.208 1.699
Withheld
Abstain 15,033,607.005 7.072
TOTAL 212,587,922.758 100.000
PROPOSAL 6
To approve an amended management contract for the fund.
MONEY MARKET
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 927,909,831.156 91.776
Against 25,959,332.926 2.568
Withheld
Abstain 57,186,475.888 5.656
TOTAL 1,011,055,639.970 100.000
PROPOSAL 7
To amend the fundamental investment limitation concerning
diversification for the fund.
EQUITY-INCOME
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 376,766,469.944 92.052
Against 8,933,449.348 2.183
Withheld
Abstain 23,597,532.944 5.765
TOTAL 409,297,452.236 100.000
GROWTH
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 198,410,136.064 91.611
Against 5,601,034.983 2.586
Withheld
Abstain 12,567,696.907 5.803
TOTAL 216,578,867.954 100.000
OVERSEAS
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 86,565,590.658 91.972
Against 1,932,016.500 2.052
Withheld
Abstain 5,624,335.643 5.976
TOTAL 94,121,942.801 100.000
HIGH INCOME
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 195,398,115.685 91.914
Against 3,609,073.262 1.698
Withheld
Abstain 13,580,733.811 6.388
TOTAL 212,587,922.758 100.000
PROPOSAL 8
To amend the fundamental investment limitation concerning
diversification for the fund.
MONEY MARKET
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 917,249,526.068 90.722
Against 31,465,402.336 3.112
Withheld
Abstain 62,340,711.566 6.166
TOTAL 1,011,055,639.970 100.000
PROXY VOTING RESULTS
VARIABLE INSURANCE PRODUCTS FUND II
A special meeting of the Variable Insurance Products Fund II
shareholders was held on September 16, 1998. The results of votes
taken among shareholders on proposals before them are reported below.
Each vote reported represents a single share held on the record date
for the meeting.
PROPOSAL 1
To elect the twelve nominees specified below as Trustees.
# OF % OF
SHARES VOTED SHARES VOTED
RALPH F. COX
Affirmative 551,625,239.269 97.807
Against
Withheld 12,368,622.483 2.193
Abstain
TOTAL 563,993,861.752 100.000
PHYLLIS BURKE DAVIS
Affirmative 551,480,513.054 97.781
Against
Withheld 12,513,348.698 2.219
Abstain
TOTAL 563,993,861.752 100.000
ROBERT M. GATES
Affirmative 551,173,726.834 97.727
Against
Withheld 12,820,134.918 2.273
Abstain
TOTAL 563,993,861.752 100.000
EDWARD C. JOHNSON 3D
Affirmative 551,819,828.138 97.841
Against
Withheld 12,174,033.614 2.159
Abstain
TOTAL 563,993,861.752 100.000
E. BRADLEY JONES
Affirmative 551,167,626.855 97.726
Against
Withheld 12,826,234.897 2.274
Abstain
TOTAL 563,993,861.752 100.000
DONALD J. KIRK
Affirmative 551,955,949.572 97.866
Against
Withheld 12,037,912.180 2.134
Abstain
TOTAL 563,993,861.752 100.000
# OF % OF
SHARES VOTED SHARES VOTED
PETER S. LYNCH
Affirmative 552,039,617.262 97.880
Against
Withheld 11,954,244.490 2.120
Abstain
TOTAL 563,993,861.752 100.000
WILLIAM O. MCCOY
Affirmative 551,916,344.610 97.859
Against
Withheld 12,077,517.142 2.141
Abstain
TOTAL 563,993,861.752 100.000
GERALD C. MCDONOUGH
Affirmative 551,471,358.784 97.780
Against
Withheld 12,522,502.968 2.220
Abstain
TOTAL 563,993,861.752 100.000
MARVIN L. MANN
Affirmative 551,612,667.642 97.805
Against
Withheld 12,381,194.110 2.195
Abstain
TOTAL 563,993,861.752 100.000
ROBERT C. POZEN
Affirmative 551,951,817.987 97.865
Against
Withheld 12,042,043.765 2.135
Abstain
TOTAL 563,993,861.752 100.000
THOMAS R. WILLIAMS
Affirmative 551,275,524.082 97.745
Against
Withheld 12,718,337.670 2.255
Abstain
TOTAL 563,993,861.752 100.000
PROPOSAL 2
To ratify the selection of PricewaterhouseCoopers LLP as independent
accountants of the funds.
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 536,087,048.787 95.052
Against 4,641,806.642 .823
Withheld
Abstain 23,265,006.323 4.125
TOTAL 563,993,861.752 100.000
PROPOSAL 3
To authorize the Trustees to adopt an Amended and Restated Declaration
of Trust.
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 521,591,541.185 92.482
Against 11,256,526.944 1.996
Withheld
Abstain 31,145,793.623 5.522
TOTAL 563,993,861.752 100.000
ASSET MANAGER
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 240,285,178.438 93.226
Against 4,348,970.517 1.687
Withheld
Abstain 13,110,552.564 5.087
TOTAL 257,744,701.519 100.000
ASSET MANAGER: GROWTH
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 29,558,410.315 92.918
Against 554,871.665 1.744
Withheld
Abstain 1,698,087.098 5.338
TOTAL 31,811,369.078 100.000
CONTRAFUND
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 203,009,691.196 91.354
Against 5,313,971.650 2.391
Withheld
Abstain 13,899,524.948 6.255
TOTAL 222,223,187.794 100.000
INDEX 500
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 20,774,469.848 92.957
Against 510,180.433 2.283
Withheld
Abstain 1,063,798.746 4.760
TOTAL 22,348,449.027 100.000
INVESTMENT GRADE BOND
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 27,963,791.388 93.630
Against 528,532.679 1.770
Withheld
Abstain 1,373,830.267 4.600
TOTAL 29,866,154.334 100.000
PROPOSAL 4
To approve an amended management contract for the fund.
ASSET MANAGER: GROWTH
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 29,664,267.576 93.251
Against 399,439.024 1.255
Withheld
Abstain 1,747,662.478 5.494
TOTAL 31,811,369.078 100.000
CONTRAFUND
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 203,578,852.721 91.610
Against 3,911,421.764 1.760
Withheld
Abstain 14,732,913.309 6.630
TOTAL 222,223,187.794 100.000
PROPOSAL 5
To approve an amended management contract for the fund.
ASSET MANAGER
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 238,417,855.725 92.502
Against 3,561,649.042 1.381
Withheld
Abstain 15,765,196.752 6.117
TOTAL 257,744,701.519 100.000
PROPOSAL 6
To approve an amended management contract for the fund.
INVESTMENT GRADE BOND
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 28,007,134.439 93.775
Against 413,287.552 1.384
Withheld
Abstain 1,445,732.343 4.841
TOTAL 29,866,154.334 100.000
PROPOSAL 7
To approve a new sub-advisory agreement with FMR U.K.
ASSET MANAGER
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 234,854,888.818 91.119
Against 5,039,678.454 1.955
Withheld
Abstain 17,850,134.247 6.926
TOTAL 257,744,701.519 100.000
PROPOSAL 8
To approve a new sub-advisory agreement with FMR Far East.
ASSET MANAGER
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 232,908,923.697 90.364
Against 6,212,774.195 2.411
Withheld
Abstain 18,623,003.627 7.225
TOTAL 257,744,701.519 100.000
PROPOSAL 9
To amend the fundamental investment limitation concerning
diversification for the fund.
ASSET MANAGER
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 236,682,192.450 91.828
Against 4,357,625.078 1.691
Withheld
Abstain 16,704,883.991 6.481
TOTAL 257,744,701.519 100.000
ASSET MANAGER: GROWTH
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 29,161,342.211 91.670
Against 541,072.537 1.700
Withheld
Abstain 2,108,954.330 6.63
TOTAL 31,811,369.078 100.000
CONTRAFUND
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 200,869,349.594 90.391
Against 4,950,646.930 2.228
Withheld
Abstain 16,403,191.270 7.381
TOTAL 222,223,187.794 100.000
INVESTMENT GRADE BOND
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 27,607,914.831 92.439
Against 581,424.802 1.947
Withheld
Abstain 1,676,814.701 5.614
TOTAL 29,866,154.334 100.000
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Investments Money Management, Inc. (FIMM),
Merrimack, NH
MONEY MARKET PORTFOLIO, ASSET MANAGER PORTFOLIO, BALANCED
PORTFOLIO, INVESTMENT GRADE BOND PORTFOLIO AND ASSET
MANAGER: GROWTH 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 P. Johnson, VICE PRESIDENT - GROWTH, CONTRAFUND
AND GROWTH OPPORTUNITIES PORTFOLIOS
Richard A. Spillane, Jr., VICE PRESIDENT - EQUITY-INCOME,
OVERSEAS, BALANCED AND GROWTH & INCOME PORTFOLIOS
Dwight D. Churchill, VICE PRESIDENT - HIGH INCOME AND
INVESTMENT GRADE BOND PORTFOLIOS
Fred L. Henning, Jr., VICE PRESIDENT - HIGH INCOME AND
INVESTMENT GRADE BOND PORTFOLIOS
Robert A. Lawrence, VICE PRESIDENT - INDEX 500, ASSET MANAGER, AND
ASSET MANAGER: GROWTH PORTFOLIOS
Bart A. Grenier, VICE PRESIDENT - HIGH INCOME PORTFOLIO
Barry J. Coffman, VICE PRESIDENT - HIGH INCOME PORTFOLIO
William Danoff, VICE PRESIDENT - CONTRAFUND PORTFOLIO
Robert K. Duby, VICE PRESIDENT - MONEY MARKET PORTFOLIO
Kevin E. Grant, VICE PRESIDENT - INVESTMENT GRADE BOND
AND BALANCED PORTFOLIOS
Richard C. Habermann, VICE PRESIDENT - ASSET MANAGER
AND ASSET MANAGER: GROWTH PORTFOLIOS
Richard R. Mace, Jr., VICE PRESIDENT - OVERSEAS PORTFOLIO
Charles S. Morrison II, VICE PRESIDENT - ASSET MANAGER AND
ASSET MANAGER: GROWTH PORTFOLIOS
Stephen R. Petersen, VICE PRESIDENT - EQUITY-INCOME PORTFOLIO
John J. Todd, VICE PRESIDENT - ASSET MANAGER AND
ASSET MANAGER: GROWTH PORTFOLIOS
Jennifer Uhrig, VICE PRESIDENT - GROWTH PORTFOLIO
George A. Vanderheiden, VICE PRESIDENT -
GROWTH OPPORTUNITIES PORTFOLIO
Steven J. Snider, VICE PRESIDENT - ASSET MANAGER AND
ASSET MANAGER: GROWTH PORTFOLIOS
Eric D. Roiter, SECRETARY
Richard A. Silver, TREASURER
Matthew N. Karstetter, DEPUTY TREASURER
Boyce I. Greer, VICE PRESIDENT - MONEY MARKET PORTFOLIO
Stanley N. Griffith, Assistant Vice President - HIGH INCOME AND
INVESTMENT GRADE BOND PORTFOLIOS
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
Thomas J. Simpson, ASSISTANT TREASURER - HIGH INCOME
AND INVESTMENT GRADE BOND PORTFOLIO
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
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
VARIABLE INSURANCE PRODUCTS
FUND III: GROWTH & INCOME PORTFOLIO
(2_FIDELITY_LOGOS) (registered trademark)
ANNUAL REPORT
DECEMBER 31, 1998
CONTENTS
MARKET ENVIRONMENT 3 A review of what happened in
world markets during the
past 12 months.
PERFORMANCE AND INVESTMENT 4 How the fund has done over
SUMMARY time, and an overview of the
fund's investment at the end
of the period.
FUND TALK 5 The manager's review of fund
performance, strategy and
outlook.
INVESTMENTS 6 A complete list of the fund's
investments with their
market values.
FINANCIAL STATEMENTS 9 Statements of assets and
liabilities, operations, and
changes in net assets, as
well as financial highlights.
NOTES 12 Notes to the financial
statements.
REPORT OF INDEPENDENT 15 The auditors' opinion.
ACCOUNTANTS
DISTRIBUTIONS 16
Standard & Poor's, S&P and S&P 500 are registered service marks of The
McGraw-Hill Companies, Inc. and have been licensed for use by Fidelity
Distributors Corporation.
Other third party marks appearing herein are the property of their
respective owners.
All other marks appearing herein are registered or unregistered
trademarks or service marks of FMR Corp. or an affiliated company.
(recycle logo)This report is printed on recycled paper using soy-based
inks.
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
Demonstrating erratic mood swings throughout the period, the sometimes
gloomy, sometimes exuberant, oftentimes volatile worldwide stock and
bond markets in 1998 will long be remembered for their turbulent
behavior. When all was said and done, the U.S. and European stock
markets posted impressive returns for the year. Most U.S. bond markets
experienced positive - albeit moderate - performance, with U.S.
Treasuries ending the year as the overall front-runner. Economic and
currency turmoil continued to plague stock and bond performance in
Asia and, in particular, emerging markets.
U.S. STOCK MARKETS
The Standard & Poor's 500 Index - a broad measure of U.S. stock market
performance - rose 28.58% for the 12 months that ended December 31,
1998, well above the index's long-term average annual return of about
12%. For the first time in its history, the Dow Jones Industrial
Average - an index of 30 blue-chip stocks - posted double-digit
percentage gains in four consecutive years, thanks to an 18.07%
increase for the year. Large-cap stocks - particularly in the
technology sector - led the U.S. equity market's charge, as once again
investors preferred the liquidity and the perceived safety of owning
what they know. Small-cap stocks - in comparison - took a beating. The
Russell 2000 Index - a popular measure of small stock performance -
fell -2.55% for the year.
Throughout the period, the U.S. enjoyed a strong economy. Unemployment
averaged 4.5% for the year, the lowest since 1969 and the lowest
peacetime level in 41 years. Inflation levels also were low, while
interest-rates were stable. In comparison to the economy's relative
tranquility, the U.S. stock markets were fluctuating wildly. To
illustrate, the Dow typically had fewer than five swings of 5% in each
year since 1946. In 1998 alone, the Dow experienced 10 such swings.
Much of these gyrations were due to fears about Asia's economic woes,
Russia's currency devaluation and loan defaults, and the subsequent
consequences on emerging markets. On August 31, the Dow plunged 512.61
points - a loss that erased all previous gains for the year to that
point. Faced with global economic chaos, investors began fleeing the
equity markets in droves, searching for safer, less volatile havens,
particularly U.S. Treasuries. To address the lack of confidence in
domestic and global equity markets, the U.S. Federal Reserve Board
stepped in with three separate 0.25% interest-rate cuts during the
fall. Those cuts helped boost confidence in the U.S. economy, and
stocks began to quickly ascend to their former lofty levels,
culminating in a new Dow record of 9374.27 on November 23, 1998.
On a sector-by-sector basis, technology stocks reigned supreme in
1998, thanks in large part to the skyrocketing Internet industry. For
the year, nine of the top 10 best-performing stocks in the S&P 500
were technology stocks. The health care sector was another big winner.
Pharmaceuticals helped drive the strong performance of the health care
industry, as a slew of new products was rushed to the market sooner
than normal thanks to streamlined approval regulations.
Natural resources, on the other hand, suffered tremendously.
Overproduction and poor demand caused oil's price per barrel to plunge
considerably. Gold prices also were down in 1998. The financial sector
- - a top performer for several years - found 1998 to be a challenge.
The financial crises overseas and credit concerns contributed to the
poor showing of many brokerage and investment management firms.
FOREIGN STOCK MARKETS
Foreign stock markets posted mixed results in 1998. The Morgan Stanley
Capital International (MSCI) EAFE Index - which measures stock
performance in Europe, Australasia, and the Far East - returned 20.27%
in 1998. Europe posted the most consistently strong equity markets
when compared to other regions, with the MSCI Europe Index up 28.87%
for the year. The much-maligned Japanese stock market ended the year
on a positive note, thanks in part to long-awaited government
intercession on the ailing banking sector's behalf. For the year, the
Tokyo Stock Exchange Index (TOPIX) was up 7.76%. 1998 proved to be
disastrous for emerging markets. The MSCI Emerging Markets Free Index
suffered a -25.34% loss during the period, as the Asian crisis and
Russia's currency devaluation and loan defaults played havoc with
Latin America, Brazil, Thailand and other emerging-market nations.
U.S. BOND MARKETS
In a year as volatile as 1998, it's not surprising that the
performance of the U.S bond market was mostly positive. Still, most of
the major bond indexes trailed their returns of 1997, as investors
continued to seek out the high returns found in the equity markets.
For the year, the Lehman Brothers Aggregate Bond Index - a broad
measure of the performance of the U.S. taxable bond market - posted a
total return of 8.69%. The Lehman Brothers Corporate Bond Index
returned 8.57% in 1998. General U.S. Treasury funds were the safe
haven of choice in 1998, benefiting from the flight to safety as
investors worldwide reacted to global economic concerns. As a result,
the yield on the benchmark 30-year Treasury fell to its lowest levels
in three decades, tumbling to 5.09% at the end of the period compared
to 5.92% at the start of the year.
FOREIGN BOND MARKETS
Typically, continued low inflation and economic growth in the U.S.
would help provide a positive backdrop for U.S.-based bonds relative
to most foreign bonds. But there was nothing typical about 1998. The
Salomon Brothers World Government Bond Index - a measure of government
bond market performance in developed nations - returned an impressive
15.30% for the 12 months that ended December 31, 1998. Many European
nations - particularly France, Italy and Spain - boasted strong
performance that helped drive the index's overall return. Not all was
rosy in the international bond market, however. In stark contrast to
the developed world, the often-volatile emerging debt markets
experienced a particularly difficult year, illustrated by the J.P.
Morgan Emerging Markets Bond Index return of -11.04% during the
period. Once again, the impact of financial and economic woes in Asia
and Russia was the primary contributor to the poor performance of
emerging markets.
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). If Fidelity had not reimbursed certain fund
expenses, the life of fund total return would have been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, PAST 1 YEAR LIFE OF FUND
1998
VIP III: GROWTH & INCOME - 29.59% 29.14%
"INITIAL CLASS"
S&P 500 (registered trademark) 28.58% 29.76%
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 market capitalization-weighted index of common
stocks. This benchmark includes reinvested dividends and capital
gains, if any.
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations, December 31, 1996.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD BE LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
(checkmark)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.
$10,000 OVER LIFE OF FUND
VIP III Growth & Income S&P 500
00147 SP001
1996/12/31 10000.00 10000.00
1997/01/31 10250.00 10440.61
1997/02/28 10270.00 10522.46
1997/03/31 9820.00 10090.10
1997/04/30 10350.00 10692.48
1997/05/31 10930.00 11343.43
1997/06/30 11490.00 11851.62
1997/07/31 12420.00 12794.65
1997/08/31 11790.00 12077.90
1997/09/30 12410.00 12739.40
1997/10/31 12060.00 12313.91
1997/11/30 12600.00 12883.92
1997/12/31 12879.20 13105.13
1998/01/31 12951.15 13250.08
1998/02/28 13837.79 14205.67
1998/03/31 14540.53 14933.14
1998/04/30 14540.53 15083.37
1998/05/31 14323.51 14824.09
1998/06/30 15057.25 15426.24
1998/07/31 14953.91 15261.95
1998/08/31 12835.35 13055.38
1998/09/30 13796.45 13891.71
1998/10/31 14871.23 15021.66
1998/11/30 15822.00 15932.12
1998/12/31 16690.09 16850.13
IMATRL PRASUN SHR__CHT 19981231 19990203 151637 R00000000000027
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund III: Growth & Income
Portfolio on December 31, 1996, when the fund started. As the chart
shows, by December 31, 1998, the value of the investment would have
grown to $16,690 - a 66.90% increase on the initial investment. For
comparison, look at how the Standard & Poor's 500 Index did over the
same period. With dividends and capital gains, if any, reinvested, the
same $10,000 investment would have grown to $16,850 - a 68.50%
increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF
DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
Microsoft Corp. 4.6
Associates First Capital 4.0
Corp. Class A
Merck & Co., Inc. 4.0
Citigroup, Inc. 3.6
General Electric Co. 3.3
TOP FIVE MARKET SECTORS AS OF
DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
FINANCE 18.7
TECHNOLOGY 13.0
HEALTH 12.6
NONDURABLES 10.9
UTILITIES 9.6
ASSET ALLOCATION AS OF DECEMBER 31, 1998*
% OF FUND'S INVESTMENTS
Row: 1, Col: 1, Value: 90.90000000000001
Row: 1, Col: 2, Value: 9.1
Stocks 90.9%
Short-term investments 9.1%
*FOREIGN INVESTMENTS 2.5%
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
(photograph of Louis Salemy)
NOTE TO SHAREHOLDERS: Louis Salemy became Portfolio Manager of Growth
& Income Portfolio on September 21, 1998.
Q. LOUIS, HOW DID THE FUND PERFORM RELATIVE TO ITS BENCHMARK DURING
1998?
A. It did very well. For the year, the fund's performance beat that of
the Standard & Poor's 500 Index, which posted a very strong return of
28.58%.
Q. WHAT HELPED THE FUND BEAT THE INDEX?
A. We avoided investing in cyclical stocks - those that rise and fall
with the economy - some of which are included in the S&P 500. I track
commodity prices, and in the process found inventories in such
products as oil to be increasing. In short, there were too many
commodities and not enough demand to absorb them. As a result,
commodity prices fell throughout the year, and those companies' share
prices suffered. In addition, the fund had no major blow-ups in its
investments, with the exception of United Healthcare. Finally, when
the market plunged from August through October, the fund had a
significant cash position because third-quarter earnings projections
and reports showed little earnings momentum in the market. During that
period, holding short-term investments instead of stocks helped, and
offered me the liquidity to invest in attractive stocks that had
fallen in value. I found the media group particularly attractive and
added to investments there.
Q. FINANCE REMAINS THE FUND'S LARGEST SECTOR WEIGHTING, AT 18.7% OF
INVESTMENTS. WHAT WAS THE CONTINUING ATTRACTION THERE?
A. The fund's finance stake is a reflection of my bottom-up
stock-picking approach; I look at individual stocks one at a time,
choosing them based on the outlook for their business fundamentals
rather than general economic trends. That being said, consumer credit
in the U.S. was improving, so many companies with significant consumer
credit operations, such as Associates First Capital, Household
International and Citigroup, were appealing.
Q. WHICH STOCKS DID WELL, AND WHICH DISAPPOINTED?
A. On the positive side, Microsoft did very well as the acquisition of
Netscape by America OnLine rendered the U.S. government's antitrust
case less threatening by demonstrating that competition still exists
in the technology sector. The company also benefited from the strong
introduction of a new product line and by consistently beating
earnings projections. Merck was rewarded by overcoming some skepticism
about whether the company would meet its 1998 earnings forecasts, and
General Electric posted steady earnings growth. On the negative side,
United Healthcare - which is no longer in the fund - suffered a
correction when conditions in the managed health care industry didn't
improve as expected. Bank One was caught in the downdraft resulting
from global financial turmoil in the second half of the year.
Q. WHAT'S YOUR INVESTMENT PHILOSOPHY?
A. Much like Steve Kaye, the previous manager, I look for companies
selling at reasonable valuations that offer improving returns. My time
frame for holding a stock is usually two or three years. I don't trade
in and out of stocks, trying to time the market. Rather, I aim to
maintain a consistent portfolio with low turnover over time. I look
for stocks that can post returns that are stronger than their cost of
capital, and shun stocks that are stepping up their capital spending.
Q. WHAT'S YOUR OUTLOOK?
A. Overall, we've had four great years in the market, and it would be
optimistic to expect another good year in 1999. Given the high
expectations already reflected in the very high valuations in the
market, I'm fairly cautious. There are many questions as we enter
1999, and a lot going on. For example, what effect will the Year 2000
computer problem have on demand for technology products? It could be
that the continued strength of the U.S. economy through the fourth
quarter of 1998 was a result of inventory building. Given the
historically high valuations in the market, it's difficult to see how
the market might sustain its current strength.
The views expressed in this report reflect those of the portfolio
manager only through the end of the period of the report as stated on
the cover. The manager's views are subject to change at any time based
on market and other conditions.
(checkmark)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, 1998, more than
$1.1 billion
MANAGER: Louis Salemy, since September
1998; manager, Fidelity Growth & Income
Portfolio II, since December 1998; Fidelity
Select Industrial Materials, 1992-1994;
Fidelity Select Medical Delivery Portfolio,
1993-1994; Fidelity Select Regional Banks
Portfolio, 1994-1995; Fidelity Select
Brokerage and Investment Portfolio, 1995-
1997; Fidelity Select Financial Services
Portfolio, 1994-1998; Fidelity Advisor
Financial Services Fund, 1996-1998; joined
Fidelity in 1992
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
INVESTMENTS DECEMBER 31, 1998
Showing Percentage of Total Value of Investment in Securities
<TABLE>
<CAPTION>
<S> <C> <C> <C>
COMMON STOCKS - 90.3%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 0.5%
SHIP BUILDING & REPAIR - 0.5%
General Dynamics Corp. 104,400 $ 6,120,450
BASIC INDUSTRIES - 0.5%
CHEMICALS & PLASTICS - 0.5%
Monsanto Co. 135,000 6,412,500
CONSTRUCTION & REAL ESTATE -
2.0%
BUILDING MATERIALS - 0.5%
Masco Corp. 205,200 5,899,500
REAL ESTATE INVESTMENT TRUSTS
- - 1.5%
Equity Office Properties Trust 244,700 5,872,800
Equity Residential Properties 147,500 5,964,531
Trust (SBI)
Public Storage, Inc. 206,800 5,596,525
17,433,856
TOTAL CONSTRUCTION & REAL 23,333,356
ESTATE
DURABLES - 0.6%
AUTOS, TIRES, & ACCESSORIES -
0.6%
Federal-Mogul Corp. 115,000 6,842,500
ENERGY - 5.4%
OIL & GAS - 5.4%
Amoco Corp. 76,700 4,525,300
British Petroleum PLC ADR 147,548 14,017,060
Chevron Corp. 72,900 6,046,144
Exxon Corp. 163,100 11,926,688
Mobil Corp. 64,600 5,628,275
Royal Dutch Petroleum Co. 140,500 6,726,438
(NY Registry Gilder 1.25)
Texaco, Inc. 122,100 6,456,038
Total SA sponsored ADR 154,300 7,676,425
63,002,368
FINANCE - 18.7%
BANKS - 2.8%
Bank of New York Co., Inc. 320,700 12,908,175
Bank One Corp. 228,600 11,672,888
U.S. Bancorp 224,600 7,973,300
32,554,363
CREDIT & OTHER FINANCE - 10.3%
American Express Co. 217,200 22,208,700
Associates First Capital 1,105,000 46,824,375
Corp. Class A
Citigroup, Inc. 829,550 41,062,725
Household International, Inc. 244,500 9,688,313
119,784,113
FEDERAL SPONSORED CREDIT - 4.1%
Fannie Mae 319,500 23,643,000
Freddie Mac 361,800 23,313,488
46,956,488
SHARES VALUE (NOTE 1)
INSURANCE - 1.5%
American International Group, 115,150 $ 11,126,369
Inc.
Hartford Financial Services 110,600 6,069,175
Group, Inc.
17,195,544
TOTAL FINANCE 216,490,508
HEALTH - 12.6%
DRUGS & PHARMACEUTICALS - 9.5%
Bristol-Myers Squibb Co. 182,700 24,447,544
Merck & Co., Inc. 312,600 46,167,113
Pfizer, Inc. 106,500 13,359,094
Warner-Lambert Co. 350,000 26,315,625
110,289,376
MEDICAL EQUIPMENT & SUPPLIES
- - 2.3%
Bard (C.R.), Inc. 165,300 8,182,350
Baxter International, Inc. 91,600 5,891,025
Becton, Dickinson & Co. 138,200 5,899,413
Johnson & Johnson 73,100 6,131,263
26,104,051
MEDICAL FACILITIES MANAGEMENT
- - 0.8%
Health Management Associates, 435,000 9,406,875
Inc. Class A (a)
TOTAL HEALTH 145,800,302
INDUSTRIAL MACHINERY &
EQUIPMENT - 4.4%
ELECTRICAL EQUIPMENT - 3.8%
Emerson Electric Co. 92,700 5,799,544
General Electric Co. 379,100 38,691,894
44,491,438
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.6%
Tyco International Ltd. 92,360 6,967,407
TOTAL INDUSTRIAL MACHINERY & 51,458,845
EQUIPMENT
MEDIA & LEISURE - 3.6%
BROADCASTING - 2.4%
CBS Corp. 475,000 15,556,250
Chancellor Media Corp. (a) 135,000 6,463,125
Time Warner, Inc. 94,583 5,870,057
27,889,432
ENTERTAINMENT - 0.3%
Scientific Games Holdings 200,000 3,775,000
Corp. (a)
PUBLISHING - 0.4%
Times Mirror Co. Class A 72,400 4,054,400
RESTAURANTS - 0.5%
Tricon Global Restaurants, 126,000 6,315,750
Inc. (a)
TOTAL MEDIA & LEISURE 42,034,582
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONDURABLES - 10.9%
BEVERAGES - 3.7%
Anheuser-Busch Companies, 153,000 $ 10,040,625
Inc.
Coca-Cola Co. (The) 102,700 6,868,063
Coors (Adolph) Co. Class B 122,900 6,936,169
PepsiCo, Inc. 293,700 12,023,344
Whitman Corp. 260,000 6,597,500
42,465,701
FOODS - 1.4%
Bestfoods 146,400 7,795,800
Ralston Purina Co. 273,100 8,841,613
16,637,413
HOUSEHOLD PRODUCTS - 2.6%
Clorox Co. 51,600 6,027,525
Procter & Gamble Co. 261,200 23,850,825
29,878,350
TOBACCO - 3.2%
Philip Morris Companies, Inc. 700,260 37,463,910
TOTAL NONDURABLES 126,445,374
RETAIL & WHOLESALE - 6.0%
APPAREL STORES - 0.6%
Gap, Inc. 128,175 7,209,844
DRUG STORES - 0.5%
CVS Corp. 110,000 6,050,000
GENERAL MERCHANDISE STORES -
3.1%
Costco Companies, Inc. (a) 94,600 6,828,938
Dayton Hudson Corp. 126,700 6,873,475
Federated Department Stores, 178,900 7,793,331
Inc. (a)
Wal-Mart Stores, Inc. 172,700 14,064,256
35,560,000
GROCERY STORES - 0.6%
Safeway, Inc. (a) 114,100 6,952,969
RETAIL & WHOLESALE,
MISCELLANEOUS - 1.2%
Bed Bath & Beyond, Inc. (a) 209,100 7,135,538
Home Depot, Inc. 104,900 6,418,569
13,554,107
TOTAL RETAIL & WHOLESALE 69,326,920
SERVICES - 2.5%
ADVERTISING - 2.5%
Omnicom Group, Inc. 385,300 22,347,400
Outdoor Systems, Inc. (a) 228,100 6,843,000
29,190,400
TECHNOLOGY - 13.0%
COMPUTER SERVICES & SOFTWARE
- - 7.9%
Automatic Data Processing, 157,500 12,629,531
Inc.
Equifax, Inc. 185,000 6,324,688
SHARES VALUE (NOTE 1)
Galileo International, Inc. 276,900 $ 12,045,150
IMS Health, Inc. 97,900 7,385,331
Microsoft Corp. (a) 382,700 53,075,699
91,460,399
COMPUTERS & OFFICE EQUIPMENT
- - 2.9%
EMC Corp. (a) 75,100 6,383,500
Lexmark International Group, 63,800 6,411,900
Inc. (a)
Pitney Bowes, Inc. 211,300 13,959,006
Xerox Corp. 60,500 7,139,000
33,893,406
ELECTRONICS - 2.2%
Intel Corp. 150,000 17,784,375
Solectron Corp. (a) 84,400 7,843,925
25,628,300
TOTAL TECHNOLOGY 150,982,105
UTILITIES - 9.6%
ELECTRIC UTILITY - 1.1%
Duke Energy Corp. 96,700 6,194,844
IPALCO Enterprises, Inc. 112,000 6,209,000
12,403,844
TELEPHONE SERVICES - 8.5%
ALLTEL Corp. 125,000 7,476,563
AT&T Corp. 380,300 28,617,575
BellSouth Corp. 142,000 7,082,250
GTE Corp. 166,800 11,248,575
MCI WorldCom, Inc. (a) 348,955 25,037,521
Qwest Communications 125,600 6,280,000
International, Inc. (a)
SBC Communications, Inc. 238,000 12,762,750
98,505,234
TOTAL UTILITIES 110,909,078
TOTAL COMMON STOCKS 1,048,349,288
(Cost $856,604,786)
CONVERTIBLE PREFERRED STOCKS
- - 0.6%
MEDIA & LEISURE - 0.6%
LODGING & GAMING - 0.6%
Station Casinos, Inc. $3.50 159,000 6,320,250
(Cost $5,417,174)
CASH EQUIVALENTS - 9.1%
Taxable Central Cash Fund (b) 105,855,085 105,855,085
(Cost $105,855,085)
TOTAL INVESTMENT IN $ 1,160,524,623
SECURITIES - 100%
(Cost $967,877,045)
</TABLE>
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield on the Taxable Central Cash
Fund was 4.80%. 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 $981,265,510 and $423,512,917, respectively
(see Note 3 of Notes to Financial Statements).
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $123,700 for the
period (see Note 4 of Notes to Financial Statements).
The fund participated in the interfund lending program as a lender.
The maximum loan and average daily balances during the period for
which the loans were outstanding amounted to $33,770,000 and
$24,425,500, respectively. The weighted average interest rate was
5.67%. Interest earned from the interfund lending program amounted to
$7,706 and is included in interest income on the Statement of
Operations (see Note 6 of Notes to Financial Statements).
INCOME TAX INFORMATION
At December 31, 1998, the aggregate cost of investment securities for
income tax purposes was $970,871,018. Net unrealized appreciation
aggregated $189,653,605, of which $208,490,719 related to appreciated
investment securities and $18,837,114 related to depreciated
investment securities.
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
ASSETS
Investment in securities, at $ 1,160,524,623
value (cost $967,877,045) -
See accompanying schedule
Receivable for investments 5,530,471
sold
Receivable for fund shares 3,584,183
sold
Dividends receivable 1,373,135
Interest receivable 437,234
Other receivables 481
TOTAL ASSETS 1,171,450,127
LIABILITIES
Payable for investments $ 10,707,035
purchased
Payable for fund shares 221
redeemed
Accrued management fee 442,776
Distribution fees payable 1,372
Other payables and accrued 117,241
expenses
TOTAL LIABILITIES 11,268,645
NET ASSETS $ 1,160,181,482
Net Assets consist of:
Paid in capital $ 948,360,542
Undistributed net investment 7,652,325
income
Accumulated undistributed 11,519,952
net realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation 192,648,663
(depreciation) on
investments and assets and
liabilities in foreign
currencies
NET ASSETS $ 1,160,181,482
INITIAL CLASS: NET ASSET $16.15
VALUE, offering price and
redemption price per share
($1,141,806,297 (divided by)
70,692,130 shares)
SERVICE CLASS: NET ASSET $16.11
VALUE, offering price
and redemption price per
share ($18,375,185
(divided by) 1,140,485
shares)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME $ 8,840,686
Dividends
Interest 3,074,388
TOTAL INCOME 11,915,074
EXPENSES
Management fee $ 3,437,849
Transfer agent fees 483,377
Distribution fees - Service 6,375
Class
Accounting fees and expenses 355,446
Non-interested trustees' 2,325
compensation
Custodian fees and expenses 22,935
Audit 21,188
Legal 4,845
Total expenses before 4,334,340
reductions
Expense reductions (72,164) 4,262,176
NET INVESTMENT INCOME 7,652,898
REALIZED AND UNREALIZED GAIN
(LOSS)
Net realized gain (loss) on:
Investment securities 11,915,866
Foreign currency transactions (2,202) 11,913,664
Change in net unrealized
appreciation (depreciation)
on:
Investment securities 159,409,899
Assets and liabilities in 1,230 159,411,129
foreign currencies
NET GAIN (LOSS) 171,324,793
NET INCREASE (DECREASE) IN $ 178,977,691
NET ASSETS RESULTING FROM
OPERATIONS
OTHER INFORMATION $ 70,025
Expense reductions Directed
brokerage arrangements
Custodian credits 2,139
$ 72,164
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
INCREASE (DECREASE) IN NET YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
ASSETS
Operations Net investment $ 7,652,898 $ 1,999,135
income
Net realized gain (loss) 11,913,664 8,707,062
Change in net unrealized 159,411,129 33,247,866
appreciation (depreciation)
NET INCREASE (DECREASE) IN 178,977,691 43,954,063
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders - (1,998,716)
From net investment income
From net realized gain (2,137,232) (6,771,091)
TOTAL DISTRIBUTIONS (2,137,232) (8,769,807)
Share transactions - net 638,043,127 309,123,809
increase (decrease)
TOTAL INCREASE (DECREASE) 814,883,586 344,308,065
IN NET ASSETS
NET ASSETS
Beginning of period 345,297,896 989,831
End of period (including $ 1,160,181,482 $ 345,297,896
undistributed net investment
income of $7,652,325 and $0,
respectively)
</TABLE>
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
SHARES DOLLARS SHARES DOLLARS
Share transactions Initial 49,641,298 $ 710,748,814 29,294,015 $ 329,532,628
Class Sold
Reinvested 165,544 2,137,174 718,814 8,769,531
Redeemed (6,663,877) (91,124,370) (2,563,665) (29,188,626)
Net increase (decrease) 43,142,965 $ 621,761,618 27,449,164 $ 309,113,533
Service Class A Sold 1,196,585 $ 17,082,667 810 $ 10,000
Reinvested 4 58 22 276
Redeemed (56,936) (801,216) - -
Net increase (decrease) 1,139,653 $ 16,281,509 832 $ 10,276
Distributions From net $ - $ 1,998,653
investment income
Initial Class
Service Class - 63
Total $ - $ 1,998,716
From net realized gain $ 2,137,174 $ 6,770,878
Initial Class
Service Class 58 213
Total $ 2,137,232 $ 6,771,091
$ 2,137,232 $ 8,769,807
A SERVICE CLASS COMMENCED
SALE OF SHARES NOVEMBER 3,
1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 1996 H
Net asset value, beginning of $ 12.53 $ 9.90 $ 10.00
period
Income from Investment
Operations
Net investment income .15 D .13 D .00
Net realized and unrealized 3.54 2.84 (.10)
gain (loss)
Total from investment 3.69 2.97 (.10)
operations
Less Distributions
From net investment income - (.08) -
From net realized gain (.07) (.26) -
Total distributions (.07) (.34) -
Net asset value, end of period $ 16.15 $ 12.53 $ 9.90
TOTAL RETURN B, C 29.59% 30.09% (1.00)%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 1,141,806 $ 345,287 $ 990
(000 omitted)
Ratio of expenses to average .61% .70% 1.00% A, F
net assets
Ratio of expenses to average .60% G .70% 1.00% A
net assets after expense
reductions
Ratio of net investment 1.08% 1.14% 3.89% A
income to average net assets
Portfolio turnover 66% 81% 0% A
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 E
Net asset value, beginning of $ 12.53 $ 12.35
period
Income from Investment
Operations
Net investment income D .15 .03
Net realized and unrealized 3.50 .49
gain (loss)
Total from investment 3.65 .52
operations
Less Distributions
From net investment income - (.08)
From net realized gain (.07) (.26)
Total distributions (.07) (.34)
Net asset value, end of period $ 16.11 $ 12.53
TOTAL RETURN B, C 29.27% 4.29%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 18,375 $ 10
(000 omitted)
Ratio of expenses to average .71% .80% A
net assets
Ratio of expenses to average .70% G .80% A
net assets after expense
reductions
Ratio of net investment 1.05% 1.24% A
income to average net assets
Portfolio turnover 66% 81%
A ANNUALIZED
B TOTAL RETURNS DO NOT
REFLECT CHARGES ATTRIBUTABLE
TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION
OF THESE CHARGES WOULD
REDUCE THE TOTAL RETURNS
SHOWN. TOTAL RETURNS FOR
PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD
HAVE BEEN LOWER HAD CERTAIN
EXPENSES NOT BEEN REDUCED
DURING THE PERIODS SHOWN
(SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER
SHARE HAS BEEN CALCULATED
BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3,
1997 (COMMENCEMENT OF SALE
OF SERVICE CLASS SHARES) TO
DECEMBER 31, 1997.
F FMR AGREED TO REIMBURSE A
PORTION OF THE FUND'S
EXPENSES DURING THE PERIOD.
WITHOUT THIS REIMBURSEMENT,
THE FUND'S EXPENSE RATIO
WOULD HAVE BEEN HIGHER.
G FMR OR THE FUND HAS ENTERED
INTO VARYING ARRANGEMENTS
WITH THIRD PARTIES WHO
EITHER PAID OR REDUCED A
PORTION OF THE CLASS'
EXPENSES (SEE NOTE 5 OF
NOTES TO FINANCIAL
STATEMENTS).
H FOR THE PERIOD DECEMBER 31,
1996 (COMMENCEMENT OF
OPERATIONS OF INITIAL CLASS
SHARES).
NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1998
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. Both
classes have equal rights and voting privileges, except for matters
affecting a single class. Investment income, realized and unrealized
capital gains and losses, the common expenses of the fund, and certain
fund-level expense reductions, if any, are allocated on a pro rata
basis to each class based on the relative net assets of each class to
the total net assets of the fund. Each class of shares differs in its
respective distribution plan.
The financial statements have been prepared in conformity with
generally accepted accounting principles which require management to
make certain estimates and assumptions at the date of the financial
statements. The following summarizes the significant accounting
policies of the fund:
SECURITY VALUATION. Securities for which exchange quotations are
readily available are valued at the last sale price, or if no sale
price, at the closing bid price. Securities (including restricted
securities) for which exchange quotations are not readily available
(and in certain cases debt securities which trade on an exchange) are
valued primarily using dealer-supplied valuations or at their fair
value as determined in good faith under consistently applied
procedures under the general supervision of the Board of Trustees.
Short-term securities with remaining maturities of sixty days or less
for which quotations are not readily available are valued at amortized
cost or original cost plus accrued interest, both of which approximate
current value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Purchases
and sales of securities, income receipts and expense payments are
translated into U.S. dollars at the prevailing exchange rate on the
respective dates of the transactions.
Net realized gains and losses on foreign currency transactions
represent net gains and losses from sales and maturities of foreign
currency contracts, disposition of foreign currencies, the difference
between the amount of net investment income accrued and the U.S.
dollar amount actually received, and gains and losses between trade
and settlement date on purchases and sales of securities. The effects
of changes in foreign currency exchange rates on investments in
securities are included with the net realized and unrealized gain or
loss on investment securities.
INCOME TAXES. As a qualified regulated investment company under
Subchapter M of the Internal Revenue Code, the fund is not subject to
income taxes to the extent that it distributes substantially all of
its taxable income for its fiscal year. The schedule of investments
includes information regarding income taxes under the caption "Income
Tax Information."
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend
date, except certain dividends from foreign securities where the
ex-dividend date may have passed, are recorded as soon as the fund is
informed of the ex-dividend date. Non-cash dividends included in
dividend income, if any, are recorded at the fair market value of the
securities received. Interest income 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, market discount,
non-taxable dividends and losses deferred due to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
Undistributed net investment income and accumulated undistributed net
realized gain (loss) on investments and foreign currency transactions
may include temporary book and tax basis differences which will
reverse in a subsequent period. Any taxable income or gain remaining
at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of
trade date. Gains and losses on securities sold are determined on the
basis of identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency
contracts to facilitate transactions in foreign-denominated
securities. Losses may arise from changes in the value of the foreign
currency or if the counterparties do not perform under the contracts'
terms. The U.S. dollar value of foreign currency contracts is
determined using contractual currency exchange rates established at
the time of each trade.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission (the SEC), the fund, along with
other affiliated entities of Fidelity Management & Research Company
(FMR), may transfer uninvested cash balances
2. OPERATING POLICIES - CONTINUED
JOINT TRADING ACCOUNT - CONTINUED
into one or more joint trading accounts. These balances are invested
in one or more repurchase agreements for U.S. Treasury or Federal
Agency obligations.
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., an
affiliate of FMR. The Cash Fund is an open-end money market fund
available only to investment companies and other accounts managed by
FMR and its affiliates. The Cash Fund seeks preservation of capital,
liquidity, and current income by investing in U.S. Treasury securities
and repurchase agreements for these securities. Income distributions
from the Cash Fund are declared daily and paid monthly from net
interest income. Income distributions earned by the fund are recorded
as interest income in the accompanying financial statements.
INTERFUND LENDING PROGRAM. Pursuant to an Exemptive Order issued by
the SEC, the fund, along with other registered investment companies
having management contracts with FMR, may participate in an interfund
lending program. This program provides an alternative credit facility
allowing the fund to borrow from, or lend money to, other
participating funds.
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.
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 $6,375, all of which was
reallowed to insurance companies, for the distribution of shares and
providing shareholder support services.
Under the Plans, FMR may use its resources to pay administrative and
promotional expenses related to the sale of each class of shares.
Subject to the approval of the Board of Trustees, the Plans also
authorize payments to third parties that assist in the sale of each
class of shares or render shareholder support services. For the
period, payments made to third parties under the Plans amounted to
$98,323 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 on uninvested cash balances were
used to offset a portion of the fund's expenses.
5. EXPENSE REDUCTIONS - CONTINUED
For the period, the reductions under these arrangements are shown
under the caption "Other Information" on the fund's Statement of
Operations.
6. INTERFUND LENDING PROGRAM
Information regarding the interfund lending program is included under
the caption "Other Information" at the end of the fund's schedule of
investments.
7. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were the record owners
of approximately 56% of the outstanding shares of the fund. In
addition, one unaffiliated insurance company was record owner of 24%
of the total 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, 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, 1998, and the results of its operations, 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, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 12, 1999
DISTRIBUTIONS
The Board of Trustees of 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:
PAY DATE RECORD DATE DIVIDENDS CAPITAL GAINS
Initial Class 2/5/99 2/5/99 $0.10 $0.20
Service Class 2/5/99 2/5/99 $0.10 $0.20
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
Eric D. Roiter, SECRETARY
Richard A. Silver, TREASURER
Matthew N. Karstetter, DEPUTY 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 *
* INDEPENDENT TRUSTEES
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER SERVICING AGENT
Fidelity Investments Institutional Operations Co., Inc.
Boston, MA
CUSTODIAN
The Chase Manhattan Bank
New York, NY
VARIABLE INSURANCE PRODUCTS
FUND III: MID CAP PORTFOLIO
(2_FIDELITY_LOGOS)(registered trademark)
ANNUAL REPORT
DECEMBER 31, 1998
CONTENTS
MARKET ENVIRONMENT 3 A review of what happened in
world markets during the
past 12 months.
PERFORMANCE AND INVESTMENT 4 How the fund has done over
SUMMARY time, and an overview of the
fund's investments at the
end of the period.
FUND TALK 5 The managers' review of fund
performance, strategy and
outlook.
INVESTMENTS 6 A complete list of the fund's
investments with their
market values.
FINANCIAL STATEMENTS 9 Statements of assets and
liabilities, operations, and
changes in net assets, as
well as financial highlights.
NOTES 12 Notes to the financial
statements.
REPORT OF INDEPENDENT 14 The auditors' opinion.
ACCOUNTANTS
Standard & Poor's, S&P and S&P 500 are registered service marks of The
McGraw-Hill Companies, Inc. and have been licensed for use by Fidelity
Distributors Corporation.
Other third party marks appearing herein are the property of their
respective owners.
All other marks appearing herein are registered or unregistered
trademarks or service marks of FMR Corp. or an affiliated company.
(recycle logo)This report is printed on recycled paper using soy-based
inks.
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
Demonstrating erratic mood swings throughout the period, the sometimes
gloomy, sometimes exuberant, oftentimes volatile worldwide stock and
bond markets in 1998 will long be remembered for their turbulent
behavior. When all was said and done, the U.S. and European stock
markets posted impressive returns for the year. Most U.S. bond markets
experienced positive - albeit moderate - performance, with U.S.
Treasuries ending the year as the overall front-runner. Economic and
currency turmoil continued to plague stock and bond performance in
Asia and, in particular, emerging markets.
U.S. STOCK MARKETS
The Standard & Poor's 500 Index - a broad measure of U.S. stock market
performance - rose 28.58% for the 12 months that ended December 31,
1998, well above the index's long-term average annual return of about
12%. For the first time in its history, the Dow Jones Industrial
Average - an index of 30 blue-chip stocks - posted double-digit
percentage gains in four consecutive years, thanks to an 18.07%
increase for the year. Large-cap stocks - particularly in the
technology sector - led the U.S. equity market's charge, as once again
investors preferred the liquidity and the perceived safety of owning
what they know. Small-cap stocks - in comparison - took a beating. The
Russell 2000 Index - a popular measure of small stock performance -
fell -2.55% for the year.
Throughout the period, the U.S. enjoyed a strong economy. Unemployment
averaged 4.5% for the year, the lowest since 1969 and the lowest
peacetime level in 41 years. Inflation levels also were low, while
interest-rates were stable. In comparison to the economy's relative
tranquility, the U.S. stock markets were fluctuating wildly. To
illustrate, the Dow typically had fewer than five swings of 5% in each
year since 1946. In 1998 alone, the Dow experienced 10 such swings.
Much of these gyrations were due to fears about Asia's economic woes,
Russia's currency devaluation and loan defaults, and the subsequent
consequences on emerging markets. On August 31, the Dow plunged 512.61
points - a loss that erased all previous gains for the year to that
point. Faced with global economic chaos, investors began fleeing the
equity markets in droves, searching for safer, less volatile havens,
particularly U.S. Treasuries. To address the lack of confidence in
domestic and global equity markets, the U.S. Federal Reserve Board
stepped in with three separate 0.25% interest-rate cuts during the
fall. Those cuts helped boost confidence in the U.S. economy, and
stocks began to quickly ascend to their former lofty levels,
culminating in a new Dow record of 9374.27 on November 23, 1998.
On a sector-by-sector basis, technology stocks reigned supreme in
1998, thanks in large part to the skyrocketing Internet industry. For
the year, nine of the top 10 best-performing stocks in the S&P 500
were technology stocks. The health care sector was another big winner.
Pharmaceuticals helped drive the strong performance of the health care
industry, as a slew of new products was rushed to the market sooner
than normal thanks to streamlined approval regulations.
Natural resources, on the other hand, suffered tremendously.
Overproduction and poor demand caused oil's price per barrel to plunge
considerably. Gold prices also were down in 1998. The financial sector
- - a top performer for several years - found 1998 to be a challenge.
The financial crises overseas and credit concerns contributed to the
poor showing of many brokerage and investment management firms.
FOREIGN STOCK MARKETS
Foreign stock markets posted mixed results in 1998. The Morgan Stanley
Capital International (MSCI) EAFE Index - which measures stock
performance in Europe, Australasia, and the Far East - returned 20.27%
in 1998. Europe posted the most consistently strong equity markets
when compared to other regions, with the MSCI Europe Index up 28.87%
for the year. The much-maligned Japanese stock market ended the year
on a positive note, thanks in part to long-awaited government
intercession on the ailing banking sector's behalf. For the year, the
Tokyo Stock Exchange Index (TOPIX) was up 7.76%. 1998 proved to be
disastrous for emerging markets. The MSCI Emerging Markets Free Index
suffered a -25.34% loss during the period, as the Asian crisis and
Russia's currency devaluation and loan defaults played havoc with
Latin America, Brazil, Thailand and other emerging-market nations.
U.S. BOND MARKETS
In a year as volatile as 1998, it's not surprising that the
performance of the U.S bond market was mostly positive. Still, most of
the major bond indexes trailed their returns of 1997, as investors
continued to seek out the high returns found in the equity markets.
For the year, the Lehman Brothers Aggregate Bond Index - a broad
measure of the performance of the U.S. taxable bond market - posted a
total return of 8.69%. The Lehman Brothers Corporate Bond Index
returned 8.57% in 1998. General U.S. Treasury funds were the safe
haven of choice in 1998, benefiting from the flight to safety as
investors worldwide reacted to global economic concerns. As a result,
the yield on the benchmark 30-year Treasury fell to its lowest levels
in three decades, tumbling to 5.09% at the end of the period compared
to 5.92% at the start of the year.
FOREIGN BOND MARKETS
Typically, continued low inflation and economic growth in the U.S.
would help provide a positive backdrop for U.S.-based bonds relative
to most foreign bonds. But there was nothing typical about 1998. The
Salomon Brothers World Government Bond Index - a measure of government
bond market performance in developed nations - returned an impressive
15.30% for the 12 months that ended December 31, 1998. Many European
nations - particularly France, Italy and Spain - boasted strong
performance that helped drive the index's overall return. Not all was
rosy in the international bond market, however. In stark contrast to
the developed world, the often-volatile emerging debt markets
experienced a particularly difficult year, illustrated by the J.P.
Morgan Emerging Markets Bond Index return of -11.04% during the
period. Once again, the impact of financial and economic woes in Asia
and Russia was the primary contributor to the poor performance of
emerging markets.
VARIABLE INSURANCE PRODUCTS FUND III: MID CAP 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 RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year. Average annual total returns for Initial Class and Service
Class shares will appear once the fund is a year old, and the growth
of a hypothetical $10,000 investment in the fund will appear in the
fund's next report six months from now.
(checkmark)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.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
Medtronic, Inc. 2.4
Westwood One, Inc. 2.0
Teradyne, Inc. 1.8
USA Networks, Inc. 1.7
Safeway, Inc. 1.7
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
TECHNOLOGY 18.3
MEDIA & LEISURE 13.3
FINANCE 11.0
HEALTH 10.2
RETAIL & WHOLESALE 8.2
ASSET ALLOCATION AS OF DECEMBER 31, 1998*
% OF FUND'S INVESTMENTS
Row: 1, Col: 1, Value: 100.0
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 100.0%
*FOREIGN INVESTMENTS 0.8%
VARIABLE INSURANCE PRODUCTS FUND III: MID CAP PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
(photograph of Katherine Collins)
An interview with
Katherine Collins,
Portfolio Manager of Mid Cap Portfolio
Q. HOW DID THE FUND PERFORM, KATHERINE?
A. The fund only had three days of investment operations before the
end of the fiscal year on December 31, 1998. During those three days,
performance slightly lagged the Standard & Poor's MidCap 400 Index,
which had a total return of 5.46%.
Q. WHAT IS THE FUND'S OBJECTIVE?
A. The fund seeks long-term growth through investments in mid-cap, or
medium-sized companies. In terms of size, we define mid-cap the same
way as in the Standard & Poor's MidCap 400 Index. The median market
capitalization - the total value of all the stock being traded - of
companies in the index and in the fund is between $3 billion and $4
billion. Most companies in the fund tend to be in the $1 billion-to-$5
billion range. I sometimes invest in companies below $1 billion in
market capitalization when I see an outstanding opportunity. I also
keep companies that have grown above $5 billion if I still like their
growth prospects.
Q. HOW WOULD YOU DESCRIBE YOUR INVESTMENT STRATEGY AND STYLE?
A. My investment style is consistent with the objective of the fund. I
look for the best growth opportunities among mid-cap companies. In
analyzing opportunities, I look for catalysts that have the potential
to improve the performance of the stock. A catalyst might be new
management, a new product or significant changes in the industry such
as supply/demand relationships. A catalyst could even be a dip in a
company's stock price, which could create a disparity between the
fundamental worth of a company and the current price of the stock. I
also pay attention to cash flows in addition to reported earnings.
Q. WHAT TYPES OF COMPANIES HAVE YOU EMPHASIZED IN BUILDING THE
PORTFOLIO?
A. The largest area of concentration is in technology. This sector
accounted for about 18% of investments on December 31. In technology,
I have looked for companies that either had attractive valuations or
had records of recurring revenues. I also emphasized the media and
leisure sector. On December 31, it accounted for about 13% of
investments. This is a diverse group that includes a number of
broadcasters and cable television companies, but also other
leisure-related companies like Harley-Davidson. I like this group
because it is domestically oriented and is closely linked to consumer
spending, which continues to be strong. Another area of emphasis is
health, at about 10% of investments. I tended to emphasize health care
products rather than services. In relation to the S&P midcap index, my
biggest under-weighting is in utilities. I have de-emphasized this
area because the growth prospects are low and deregulation presents
significant challenges to the industry. I also have intentionally
under weighted financial services companies because I believe their
stock valuations are relatively high and the U.S. economy is late in
the business cycle, which increases risk.
Q. MID-CAP STOCKS HAVE NOT PERFORMED AS WELL AS LARGE-CAP STOCKS FOR
SEVERAL YEARS. WHY DO YOU SEE OPPORTUNITIES IN THE MID-CAP AREA?
A. In recent years, we have seen a large divergence in the performance
of large-, mid- and small-cap stocks. In general, large-cap stocks
have done significantly better. The continuing gap has pushed mid-cap
companies to their lowest valuation levels relative to large-cap
companies in 20 years. The disparity is even more remarkable because
small- and mid-cap companies have shown better earnings performance
for the last 18 months. I am encouraged both by the relatively low
valuations of mid-cap stocks and by the continuation of the strong
earnings trends at many mid-cap companies. These companies also have
more domestic business than large multi-national corporations, so they
are somewhat insulated from international turmoil. Finally, I continue
to find exciting companies generating earnings growth at decent
valuations, which should translate into opportunities, no matter what
the mid-cap market does.
Q. WHAT IS YOUR OUTLOOK?
A. I think there are still some great investment opportunities within
the mid-cap market, although I am a little less bullish about the
overall domestic economy than I was six months ago. However, I do
think there are companies that will be able to weather the economic
conditions and do well. Mid-cap stock values, in relation to large-cap
values, are cheap on a historical basis. That is a good backdrop for
investing.
The views expressed in this report reflect those of the portfolio
manager only through the end of the period of the report as stated on
the cover. The manager's views are subject to change at any time based
on market and other conditions.
(checkmark)FUND FACTS
GOAL: long-term growth of capital by investing
primarily in common stocks of companies with
medium-sized market capitalizations
START DATE: December 28, 1998
SIZE: as of December 31, 1998, more than
$1 million
MANAGER: Katherine Collins, since inception,
joined Fidelity in 1990
VARIABLE INSURANCE PRODUCTS FUND III: MID CAP PORTFOLIO
INVESTMENTS DECEMBER 31, 1998
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 100.0%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 0.9%
SHIP BUILDING & REPAIR - 0.9%
General Dynamics Corp. 160 $ 9,380
BASIC INDUSTRIES - 2.3%
CHEMICALS & PLASTICS - 1.6%
Cytec Industries, Inc. (a) 220 4,675
IMC Global, Inc. 220 4,703
Ivex Packaging Corp. (a) 300 6,975
16,353
IRON & STEEL - 0.4%
Nucor Corp. 100 4,325
PACKAGING & CONTAINERS - 0.3%
Owens-Illinois, Inc. (a) 100 3,063
TOTAL BASIC INDUSTRIES 23,741
CONSTRUCTION & REAL ESTATE -
4.9%
BUILDING MATERIALS - 3.6%
Armstrong World Industries, 90 5,428
Inc.
Carlisle Companies, Inc. 220 11,358
Dayton Superior Corp. Class A 170 3,273
(a)
Elcor Corp. 280 9,048
Sherwin-Williams Co. 260 7,638
36,745
CONSTRUCTION - 1.3%
Centex Corp. 130 5,858
Jacobs Engineering Group, 170 6,928
Inc. (a)
12,786
TOTAL CONSTRUCTION & REAL 49,531
ESTATE
DURABLES - 7.1%
AUTOS, TIRES, & ACCESSORIES -
2.8%
Casey's General Stores, Inc. 270 3,518
Danaher Corp. 270 14,664
Pep Boys-Manny, Moe & Jack 240 3,765
SPX Corp. 100 6,700
28,647
CONSUMER ELECTRONICS - 0.6%
Newell Co. 150 6,188
HOME FURNISHINGS - 1.5%
Knoll, Inc. (a) 210 6,221
Miller (Herman), Inc. 340 9,138
15,359
TEXTILES & APPAREL - 2.2%
Liz Claiborne, Inc. 120 3,788
SHARES VALUE (NOTE 1)
Mohawk Industries, Inc. (a) 200 $ 8,413
WestPoint Stevens, Inc. Class 300 9,469
A (a)
21,670
TOTAL DURABLES 71,864
ENERGY - 3.6%
ENERGY SERVICES - 0.4%
Halliburton Co. 140 4,148
OIL & GAS - 3.2%
Apache Corp. 160 4,050
Coastal Corp. (The) 110 3,843
Tosco Corp. 370 9,574
Ultramar Diamond Shamrock 220 5,335
Corp.
USX-Marathon Group 150 4,519
Vastar Resources, Inc. 110 4,751
32,072
TOTAL ENERGY 36,220
FINANCE - 11.0%
BANKS - 4.0%
AmSouth Bancorp. 220 10,038
Comerica, Inc. 130 8,864
Marshall & Ilsley Corp. 120 7,013
U.S. Bancorp 140 4,970
Westamerica Bancorp. 150 5,513
Zions Bancorp 70 4,366
40,764
CREDIT & OTHER FINANCE - 2.6%
Associates First Capital 280 11,865
Corp. Class A
Household International, Inc. 90 3,566
Providian Financial Corp. 140 10,500
25,931
INSURANCE - 4.4%
AFLAC, Inc. 170 7,480
Allmerica Financial Corp. 200 11,575
Ambac Financial Group, Inc. 90 5,417
American Bankers Insurance 100 4,838
Group, Inc.
Progressive Corp. 20 3,388
Protective Life Corp. 150 5,972
Reliastar Financial Corp. 120 5,535
44,205
TOTAL FINANCE 110,900
HEALTH - 10.2%
MEDICAL EQUIPMENT & SUPPLIES
- - 9.3%
Arterial Vascular 160 8,400
Engineering, Inc. (a)
Becton, Dickinson & Co. 220 9,391
Cardinal Health, Inc. 200 15,175
Guidant Corp. 40 4,410
Medtronic, Inc. 330 24,483
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
HEALTH - CONTINUED
MEDICAL EQUIPMENT & SUPPLIES
- - CONTINUED
Millipore Corp. 230 $ 6,541
Pall Corp. 300 7,594
Sofamor/Danek Group, Inc. (a) 50 6,088
Sybron International, Inc. (a) 430 11,691
93,773
MEDICAL FACILITIES MANAGEMENT
- - 0.9%
Health Management Associates, 430 9,299
Inc. Class A (a)
TOTAL HEALTH 103,072
INDUSTRIAL MACHINERY &
EQUIPMENT - 6.2%
ELECTRICAL EQUIPMENT - 2.4%
American Power Conversion 140 6,781
Corp. (a)
Emerson Electric Co. 90 5,631
General Electric Co. 50 5,103
VWR Scientific Products Corp. 400 6,950
(a)
24,465
INDUSTRIAL MACHINERY &
EQUIPMENT - 2.9%
ASM Lithography Holding NV (a) 150 4,575
Illinois Tool Works, Inc. 120 6,960
Kaydon Corp. 100 4,006
Kuhlman Corp. 140 5,303
PRI Automation, Inc. 340 8,840
29,684
POLLUTION CONTROL - 0.9%
Eastern Environmental 180 5,333
Services, Inc. (a)
Waste Management, Inc. 70 3,264
8,597
TOTAL INDUSTRIAL MACHINERY & 62,746
EQUIPMENT
MEDIA & LEISURE - 13.3%
BROADCASTING - 7.8%
Clear Channel Communications, 130 7,085
Inc. (a)
Cox Communications, Inc. 60 4,148
Class A (a)
Heftel Broadcasting Corp. 200 9,850
Class A (a)
Jacor Communications, Inc. 210 13,519
Class A (a)
Univision Communications, 200 7,238
Inc. Class A (a)
USA Networks, Inc. (a) 510 16,894
Westwood One, Inc. (a) 650 19,825
78,559
ENTERTAINMENT - 1.5%
Cinar Films, Inc. Class B 180 4,410
(sub. vtg.) (a)
Fox Entertainment Group, Inc. 210 5,289
(a)
Pixar (a) 160 5,600
15,299
SHARES VALUE (NOTE 1)
LEISURE DURABLES & TOYS - 2.3%
Harley-Davidson, Inc. 330 $ 15,634
Mattel, Inc. 330 7,528
23,162
RESTAURANTS - 1.7%
CKE Restaurants, Inc. 310 9,126
Starbucks Corp. (a) 140 7,858
16,984
TOTAL MEDIA & LEISURE 134,004
NONDURABLES - 5.9%
AGRICULTURE - 0.4%
Michael Foods, Inc. 150 4,500
BEVERAGES - 1.1%
Coors (Adolph) Co. Class B 60 3,386
Whitman Corp. 290 7,359
10,745
FOODS - 3.5%
Dean Foods Co. 210 8,571
Earthgrains Co. 120 3,713
Flowers Industries, Inc. 150 3,591
Interstate Bakeries Corp. 200 5,288
Suiza Foods Corp. (a) 90 4,584
Tootsie Roll Industries, Inc. 100 3,913
Wrigley (Wm.) Jr. Co. 60 5,374
35,034
HOUSEHOLD PRODUCTS - 0.6%
Clorox Co. 50 5,841
TOBACCO - 0.3%
RJR Nabisco Holdings Corp. 110 3,266
TOTAL NONDURABLES 59,386
RETAIL & WHOLESALE - 8.2%
APPAREL STORES - 1.4%
Abercrombie & Fitch Co. Class 60 4,245
A (a)
TJX Companies, Inc. 350 10,150
14,395
DRUG STORES - 1.4%
CVS Corp. 150 8,250
Walgreen Co. 100 5,856
14,106
GENERAL MERCHANDISE STORES -
1.3%
Dollar Tree Stores, Inc. (a) 190 8,301
Nordstrom, Inc. 150 5,203
13,504
GROCERY STORES - 3.5%
Meyer (Fred), Inc. (a) 150 9,038
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
GROCERY STORES - CONTINUED
Safeway, Inc. (a) 270 $ 16,453
U.S. Foodservice (a) 190 9,310
34,801
RETAIL & WHOLESALE,
MISCELLANEOUS - 0.6%
Action Performance Companies, 180 6,368
Inc. (a)
TOTAL RETAIL & WHOLESALE 83,174
SERVICES - 5.0%
ADVERTISING - 2.5%
ADVO, Inc. (a) 170 4,484
Interpublic Group of 60 4,785
Companies, Inc.
Lamar Advertising Co. Class A 150 5,588
(a)
Omnicom Group, Inc. 100 5,800
Outdoor Systems, Inc. (a) 160 4,800
25,457
SERVICES - 2.5%
Borg-Warner Security Corp. 500 9,375
Service Corp. International 410 15,606
24,981
TOTAL SERVICES 50,438
TECHNOLOGY - 18.3%
COMMUNICATIONS EQUIPMENT - 1.3%
Ascend Communications, Inc. 200 13,150
(a)
COMPUTER SERVICES & SOFTWARE
- - 8.3%
America Online, Inc. 100 16,000
Cadence Design Systems, Inc. 290 8,628
(a)
CNET, Inc. (a) 60 3,289
Compuware Corp. (a) 50 3,906
Electronics for Imaging, Inc. 150 6,000
(a)
Intuit, Inc. (a) 70 5,075
Keane, Inc. (a) 270 10,783
Legato Systems, Inc. (a) 140 9,231
Networks Associates, Inc. (a) 80 5,300
Siebel Systems, Inc. (a) 260 8,824
Veritas Software Corp. (a) 110 6,593
83,629
COMPUTERS & OFFICE EQUIPMENT
- - 2.4%
Comverse Technology, Inc. (a) 100 7,100
Ingram Micro, Inc. Class A (a) 90 3,139
Lexmark International Group, 70 7,035
Inc. (a)
Quantum Corp. (a) 330 7,013
24,287
ELECTRONIC INSTRUMENTS - 4.8%
Applied Materials, Inc. (a) 270 11,526
KLA-Tencor Corp. (a) 220 9,543
Teradyne, Inc. (a) 430 18,221
SHARES VALUE (NOTE 1)
Varian Associates, Inc. 160 $ 6,060
Waters Corp. (a) 40 3,490
48,840
ELECTRONICS - 1.5%
Linear Technology Corp. 170 15,226
TOTAL TECHNOLOGY 185,132
UTILITIES - 3.1%
CELLULAR - 0.4%
SkyTel Communications, Inc. 170 3,761
(a)
ELECTRIC UTILITY - 2.2%
AES Corp. (a) 90 4,264
Duke Energy Corp. 80 5,125
Entergy Corp. 100 3,113
IPALCO Enterprises, Inc. 90 4,989
PG&E Corp. 150 4,725
22,216
GAS - 0.5%
Enron Corp. 90 5,136
TOTAL UTILITIES 31,113
TOTAL INVESTMENT IN $ 1,010,701
SECURITIES - 100%
(Cost $978,492)
LEGEND
(a) Non-income producing
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $994,219 and $15,023, respectively (see Note 3 of Notes to
Financial Statements).
INCOME TAX INFORMATION
At December 31, 1998, the aggregate cost of investment securities for
income tax purposes was $978,492. Net unrealized appreciation
aggregated $32,209, of which $36,854 related to appreciated investment
securities and $4,645 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND III: MID CAP PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
ASSETS
Investment in securities, at $ 1,010,701
value (cost $978,492) -
See accompanying schedule
Cash 32,309
Receivable for investments 15,023
sold
Dividends receivable 88
Receivable from investment 13,746
adviser for expense
reductions
TOTAL ASSETS 1,071,867
LIABILITIES
Payable for investments $ 26,507
purchased
Accrued management fee 67
Distribution fees payable 6
Other payables and accrued 13,799
expenses
TOTAL LIABILITIES 40,379
NET ASSETS $ 1,031,488
Net Assets consist of:
Paid in capital $ 999,983
Accumulated undistributed net (704)
realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation 32,209
(depreciation) on investments
NET ASSETS $ 1,031,488
INITIAL CLASS: NET ASSET $10.31
VALUE, offering price and
redemption price per share
($515,746 (divided by)
50,001 shares)
SERVICE CLASS: NET ASSET $10.31
VALUE, offering price and
redemption price per share
($515,742 (divided by)
50,001 shares)
STATEMENT OF OPERATIONS
DECEMBER 28, 1998
(COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1998
INVESTMENT INCOME $ 88
Dividends
EXPENSES
Management fee $ 67
Transfer agent fees 54
Distribution fees - Service 6
Class
Accounting fees and expenses 682
Custodian fees and expenses 612
Audit 12,450
Total expenses before 13,871
reductions
Expense reductions (13,746) 125
NET INVESTMENT INCOME (LOSS) (37)
REALIZED AND UNREALIZED GAIN (704)
(LOSS)
Net realized gain (loss) on
investment securities
Change in net unrealized 32,209
appreciation (depreciation)
on investment securities
NET GAIN (LOSS) 31,505
NET INCREASE (DECREASE) IN $ 31,468
NET ASSETS RESULTING FROM
OPERATIONS
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET DECEMBER 28, 1998
ASSETS (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1998
Operations Net investment $ (37)
income (loss)
Net realized gain (loss) (704)
Change in net unrealized 32,209
appreciation (depreciation)
NET INCREASE (DECREASE) IN 31,468
NET ASSETS RESULTING FROM
OPERATIONS
Share transactions - net 1,000,020
increase (decrease)
TOTAL INCREASE (DECREASE) 1,031,488
IN NET ASSETS
NET ASSETS
Beginning of period -
End of period $ 1,031,488
OTHER INFORMATION:
YEAR ENDED DECEMBER 31, 1998
SHARES DOLLARS
Share transactions Initial 50,001 $ 500,010
Class A Sold
Reinvested - -
Redeemed - -
Net increase (decrease) 50,001 $ 500,010
Service Class B Sold 50,001 $ 500,010
Reinvested - -
Redeemed - -
Net increase (decrease) 50,001 $ 500,010
A INITIAL CLASS COMMENCED
SALE OF SHARES DECEMBER 28,
1998.
B SERVICE CLASS COMMENCED
SALE OF SHARES DECEMBER 28,
1998.
FINANCIAL HIGHLIGHTS - INITIAL CLASS
YEAR ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 C
Net asset value, beginning of $ 10.00
period
Income from Investment
Operations
Net realized and unrealized .31
gain (loss)
Total from investment .31
operations
Net asset value, end of period $ 10.31
TOTAL RETURN B, F 3.10%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 516
(000 omitted)
Ratio of expenses to average 1.00% A, E
net assets
Ratio of net investment (.27)% A
income (loss) to average net
assets
Portfolio turnover 125% A
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 D
Net asset value, beginning of $ 10.00
period
Income from Investment
Operations
Net realized and unrealized .31
gain (loss)
Total from investment .31
operations
Net asset value, end of period $ 10.31
TOTAL RETURN B, F 3.10%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 516
(000 omitted)
Ratio of expenses to average 1.10% A, E
net assets
Ratio of net investment (.35)% A
income (loss) to average net
assets
Portfolio turnover 125% A
A ANNUALIZED
B TOTAL RETURNS WOULD HAVE
BEEN LOWER HAD CERTAIN
EXPENSES NOT BEEN REDUCED
DURING THE PERIODS SHOWN
(SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
C FOR THE PERIOD DECEMBER 28,
1998 (COMMENCEMENT OF SALE
OF INITIAL CLASS SHARES) TO
DECEMBER 31,1998.
D FOR THE PERIOD DECEMBER 28,
1998 (COMMENCEMENT OF SALE
OF SERVICE CLASS SHARES) TO
DECEMBER 31, 1998.
E FMR AGREED TO REIMBURSE A
PORTION OF THE CLASS'
EXPENSES DURING THE PERIOD.
WITHOUT THIS REIMBURSEMENT,
THE CLASS' EXPENSE RATIO
WOULD HAVE BEEN HIGHER (SEE
NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS).
F TOTAL RETURNS DO NOT
REFLECT CHARGES ATTRIBUTABLE
TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION
OF THESE CHARGES WOULD
REDUCE THE TOTAL RETURNS
SHOWN. TOTAL RETURNS FOR
PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES.
Mid Cap 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 funds' Initial Class shares and
Service Class shares. Both classes have equal rights and voting
privileges, except for matters affecting a single class. Investment
income, realized and unrealized capital gains and losses, the common
expenses of the fund, and certain fund-level expense reductions, if
any, are allocated on a pro rata basis to each class based on the
relative net assets of each class to the total net assets of the fund.
Each class of shares differs in its respective distribution plan.
The financial statements have been prepared in conformity with
generally accepted accounting principles which require management to
make certain estimates and assumptions at the date of the financial
statements. The following summarizes the significant accounting
policies of the fund:
SECURITY VALUATION. Securities for which exchange quotations are
readily available are valued at the last sale price, or if no sale
price, at the closing bid price. Securities for which exchange
quotations are not readily available (and in certain cases debt
securities which trade on an exchange) are valued primarily using
dealer-supplied valuations or at their fair value as determined in
good faith under consistently applied procedures under the general
supervision of the Board of Trustees. Short-term securities with
remaining maturities of sixty days or less for which quotations are
not readily available are valued at amortized cost or original cost
plus accrued interest, both of which approximate current value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Purchases
and sales of securities, income receipts and expense payments are
translated into U.S. dollars at the prevailing exchange rate on the
respective dates of the transactions.
Net realized gains and losses on foreign currency transactions
represent net gains and losses from sales and maturities of foreign
currency contracts, disposition of foreign currencies, the difference
between the amount of net investment income accrued and the U.S.
dollar amount actually received, and gains and losses between trade
and settlement date on purchases and sales of securities. The effects
of changes in foreign currency exchange rates on investments in
securities are included with the net realized and unrealized gain or
loss on investment securities.
INCOME TAXES. The fund intends to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code. By so
qualifying, the fund will be not subject to income taxes to the extent
that it distributes substantially all of its taxable income for its
fiscal year. The schedules of investments includes information
regarding income taxes under the caption "Income Tax Information."
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend
date, except certain dividends from foreign securities where the
ex-dividend date may have passed, are recorded as soon as the fund is
informed of the ex-dividend date. Non-cash dividends included in
dividend income, if any, are recorded at the fair market value of the
securities received. Interest income is accrued as earned. Investment
income is recorded net of foreign taxes withheld where recovery of
such taxes is uncertain.
EXPENSES. Most expenses of the trust can be directly attributed to a
fund. Expenses which cannot be directly attributed are apportioned
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 reclasses, are primarily due to differing treatments for
net operating losses and capital loss carryforwards.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
Accumulated net investment loss and accumulated net realized gain
(loss) on investments and foreign currency transactions may include
temporary book and tax differences that 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.
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, Fidelity Management
& Research Company (FMR), receives a monthly fee that is calculated
on the basis of a group fee rate plus a fixed individual fund fee rate
applied to the average net assets of the fund. The group fee rate is
the weighted average of a series of rates and is based on the monthly
average net assets of all the mutual funds advised by FMR. The rates
ranged from .2500% to .5200% for the period. The annual individual
fund fee rate is .30%. In the event that these rates were lower than
the contractual rates in effect during the period, FMR voluntarily
implemented the above rates, as they resulted in the same or a lower
management fee. For the period, the management fee was equivalent to
an annualized rate of .56% 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 $6, all of which was reallowed
to insurance companies, for the distribution of shares and providing
shareholder support services.
Under the Plans, FMR may use its resources to pay administrative and
promotional expenses related to the sale of each class of shares.
Subject to the approval of the Board of Trustees, the Plans also
authorize payments to third parties that assist in the sale of each
class of shares or render shareholder support services. For the
period, there were no payments made to third parties under the Plans
for the Initial Class and Service Class.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations
Company, Inc. (FIIOC), an affiliate of FMR, is the fund's transfer,
dividend disbursing and shareholder servicing agent. FIIOC receives
account fees and asset-based fees that vary according to account size
and type of account. FIIOC pays a portion of the expenses related to
the typesetting, printing and mailing of all shareholder reports,
except proxy statements. For the period, the transfer agent fees of
the fund were equivalent to an annualized rate of .45% of average net
assets.
ACCOUNTING FEES. Fidelity Service Company, Inc. (FSC), an affiliate of
FMR, maintains the fund's accounting records. The fee is based on the
level of average net assets for the month plus out-of-pocket expenses.
5. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse operating expenses (excluding
interest, taxes, brokerage commissions and extraordinary expenses)
above the following annual rates or range of annual rates of average
net assets for each of the following classes:
FMR EXPENSE LIMITATIONS REIMBURSEMENT
INITIAL CLASS 1.00% $ 6,873
SERVICE CLASS 1.10% 6,873
$ 13,746
6. BENEFICIAL INTEREST.
At the end of the period, FMR was the record owner of 100% of the
outstanding shares of the fund.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Variable Insurance Products Fund III and the
Shareholders of Mid Cap 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
Mid Cap Portfolio (a fund of Variable Insurance Products III) at
December 31, 1998 and the results of its operations, 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 Mid Cap
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, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 12, 1999
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
Katherine Collins, VICE PRESIDENT
Eric D. Roiter, SECRETARY
Richard A. Silver, TREASURER
Matthew N. Karstetter, DEPUTY 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 *
* INDEPENDENT TRUSTEES
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER SERVICING AGENT
Fidelity Investments Institutional Operations Co., Inc.
Boston, MA
CUSTODIAN
The Chase Manhattan Bank
New York, NY
VARIABLE INSURANCE PRODUCTS
FUND III: BALANCED PORTFOLIO
(2_FIDELITY_LOGOS) (registered trademark)
ANNUAL REPORT
DECEMBER 31, 1998
CONTENTS
MARKET ENVIRONMENT 3 A review of what happened in
world markets during the
past 12 months.
PERFORMANCE AND INVESTMENT 4 How the fund has done over
SUMMARY time, and an overview of the
fund's investments at the
end of the period.
FUND TALK 5 The managers' review of fund
performance, strategy and
outlook.
INVESTMENTS 6 A complete list of the fund's
investments with their
market values.
FINANCIAL STATEMENTS 19 Statements of assets and
liabilities, operations, and
changes in net assets, as
well as financial highlights.
NOTES 22 Notes to the financial
statements.
REPORT OF INDEPENDENT 25 The auditors' opinion.
ACCOUNTANTS
DISTRIBUTIONS 26
Standard & Poor's, S&P and S&P 500 are registered service marks of The
McGraw-Hill Companies, Inc. and have been licensed for use by Fidelity
Distributors Corporation.
Other third party marks appearing herein are the property of their
respective owners.
All other marks appearing herein are registered or unregistered
trademarks or service marks of FMR Corp. or an affiliated company.
(recycle logo)This report is printed on recycled paper using soy-based
inks.
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
Demonstrating erratic mood swings throughout the period, the sometimes
gloomy, sometimes exuberant, oftentimes volatile worldwide stock and
bond markets in 1998 will long be remembered for their turbulent
behavior. When all was said and done, the U.S. and European stock
markets posted impressive returns for the year. Most U.S. bond markets
experienced positive - albeit moderate - performance, with U.S.
Treasuries ending the year as the overall front-runner. Economic and
currency turmoil continued to plague stock and bond performance in
Asia and, in particular, emerging markets.
U.S. STOCK MARKETS
The Standard & Poor's 500 Index - a broad measure of U.S. stock market
performance - rose 28.58% for the 12 months that ended December 31,
1998, well above the index's long-term average annual return of about
12%. For the first time in its history, the Dow Jones Industrial
Average - an index of 30 blue-chip stocks - posted double-digit
percentage gains in four consecutive years, thanks to an 18.07%
increase for the year. Large-cap stocks - particularly in the
technology sector - led the U.S. equity market's charge, as once again
investors preferred the liquidity and the perceived safety of owning
what they know. Small-cap stocks - in comparison - took a beating. The
Russell 2000 Index - a popular measure of small stock performance -
fell -2.55% for the year.
Throughout the period, the U.S. enjoyed a strong economy. Unemployment
averaged 4.5% for the year, the lowest since 1969 and the lowest
peacetime level in 41 years. Inflation levels also were low, while
interest-rates were stable. In comparison to the economy's relative
tranquility, the U.S. stock markets were fluctuating wildly. To
illustrate, the Dow typically had fewer than five swings of 5% in each
year since 1946. In 1998 alone, the Dow experienced 10 such swings.
Much of these gyrations were due to fears about Asia's economic woes,
Russia's currency devaluation and loan defaults, and the subsequent
consequences on emerging markets. On August 31, the Dow plunged 512.61
points - a loss that erased all previous gains for the year to that
point. Faced with global economic chaos, investors began fleeing the
equity markets in droves, searching for safer, less volatile havens,
particularly U.S. Treasuries. To address the lack of confidence in
domestic and global equity markets, the U.S. Federal Reserve Board
stepped in with three separate 0.25% interest-rate cuts during the
fall. Those cuts helped boost confidence in the U.S. economy, and
stocks began to quickly ascend to their former lofty levels,
culminating in a new Dow record of 9374.27 on November 23, 1998.
On a sector-by-sector basis, technology stocks reigned supreme in
1998, thanks in large part to the skyrocketing Internet industry. For
the year, nine of the top 10 best-performing stocks in the S&P 500
were technology stocks. The health care sector was another big winner.
Pharmaceuticals helped drive the strong performance of the health care
industry, as a slew of new products was rushed to the market sooner
than normal thanks to streamlined approval regulations.
Natural resources, on the other hand, suffered tremendously.
Overproduction and poor demand caused oil's price per barrel to plunge
considerably. Gold prices also were down in 1998. The financial sector
- - a top performer for several years - found 1998 to be a challenge.
The financial crises overseas and credit concerns contributed to the
poor showing of many brokerage and investment management firms.
FOREIGN STOCK MARKETS
Foreign stock markets posted mixed results in 1998. The Morgan Stanley
Capital International (MSCI) EAFE Index - which measures stock
performance in Europe, Australasia, and the Far East - returned 20.27%
in 1998. Europe posted the most consistently strong equity markets
when compared to other regions, with the MSCI Europe Index up 28.87%
for the year. The much-maligned Japanese stock market ended the year
on a positive note, thanks in part to long-awaited government
intercession on the ailing banking sector's behalf. For the year, the
Tokyo Stock Exchange Index (TOPIX) was up 7.76%. 1998 proved to be
disastrous for emerging markets. The MSCI Emerging Markets Free Index
suffered a -25.34% loss during the period, as the Asian crisis and
Russia's currency devaluation and loan defaults played havoc with
Latin America, Brazil, Thailand and other emerging-market nations.
U.S. BOND MARKETS
In a year as volatile as 1998, it's not surprising that the
performance of the U.S bond market was mostly positive. Still, most of
the major bond indexes trailed their returns of 1997, as investors
continued to seek out the high returns found in the equity markets.
For the year, the Lehman Brothers Aggregate Bond Index - a broad
measure of the performance of the U.S. taxable bond market - posted a
total return of 8.69%. The Lehman Brothers Corporate Bond Index
returned 8.57% in 1998. General U.S. Treasury funds were the safe
haven of choice in 1998, benefiting from the flight to safety as
investors worldwide reacted to global economic concerns. As a result,
the yield on the benchmark 30-year Treasury fell to its lowest levels
in three decades, tumbling to 5.09% at the end of the period compared
to 5.92% at the start of the year.
FOREIGN BOND MARKETS
Typically, continued low inflation and economic growth in the U.S.
would help provide a positive backdrop for U.S.-based bonds relative
to most foreign bonds. But there was nothing typical about 1998. The
Salomon Brothers World Government Bond Index - a measure of government
bond market performance in developed nations - returned an impressive
15.30% for the 12 months that ended December 31, 1998. Many European
nations - particularly France, Italy and Spain - boasted strong
performance that helped drive the index's overall return. Not all was
rosy in the international bond market, however. In stark contrast to
the developed world, the often-volatile emerging debt markets
experienced a particularly difficult year, illustrated by the J.P.
Morgan Emerging Markets Bond Index return of -11.04% during the
period. Once again, the impact of financial and economic woes in Asia
and Russia was the primary contributor to the poor performance of
emerging markets.
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). If Fidelity had not reimbursed certain fund
expenses, the life of fund total return would have been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, PAST 1 YEAR LIFE OF FUND
1998
VIP III: BALANCED - "INITIAL 17.64% 15.86%
CLASS"
S&P 500 (registered trademark) 28.58% 30.55%
LB Aggregate Bond 8.69% 10.04%
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and
show what would have happened if the fund had performed at a constant
rate each year.
You can compare these figures to the performance of the Standard &
Poor's 500 Index - a market capitalization-weighted index of common
stocks and the Lehman Brothers Aggregate Bond Index - a market
value-weighted index of investment-grade fixed-rate debt issues,
including government, corporate, asset-backed, and mortgage-backed
securities, with maturities of one year or more. These benchmarks
reflect the reinvestment of dividends and capital gains, if any.
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations January 3, 1995.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
(checkmark)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.
$10,000 OVER LIFE OF FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C>
VIP III Balanced S&P 500 LB Aggregate Bond
00616 SP001 LB001
1995/01/03 10000.00 10000.00 10000.00
1995/01/31 9990.00 10261.28 10213.32
1995/02/28 10190.00 10661.16 10456.40
1995/03/31 10260.00 10975.77 10520.18
1995/04/30 10390.00 11299.00 10667.46
1995/05/31 10610.00 11750.63 11080.29
1995/06/30 10740.00 12023.59 11161.18
1995/07/31 10880.00 12422.30 11136.63
1995/08/31 10920.00 12453.48 11271.38
1995/09/30 11020.00 12979.01 11380.71
1995/10/31 10890.00 12932.68 11528.66
1995/11/30 11210.00 13500.42 11701.59
1995/12/31 11391.59 13760.44 11865.41
1996/01/31 11473.17 14228.85 11943.72
1996/02/29 11319.47 14360.75 11735.90
1996/03/31 11227.28 14499.04 11653.75
1996/04/30 11258.01 14712.76 11588.49
1996/05/31 11380.93 15092.20 11565.31
1996/06/30 11452.64 15149.70 11720.29
1996/07/31 11227.28 14480.39 11751.93
1996/08/31 11298.98 14785.78 11731.96
1996/09/30 11780.44 15617.92 11936.09
1996/10/31 12098.00 16048.66 12201.07
1996/11/30 12733.12 17261.78 12409.71
1996/12/31 12528.25 16919.83 12294.30
1997/01/31 12927.76 17976.98 12332.41
1997/02/28 13144.66 18117.92 12363.24
1997/03/31 12777.20 17373.45 12226.01
1997/04/30 13260.15 18410.65 12409.40
1997/05/31 13785.10 19531.49 12527.29
1997/06/30 14289.05 20406.50 12676.37
1997/07/31 15086.97 22030.24 13018.63
1997/08/31 14383.54 20796.11 12907.97
1997/09/30 14960.98 21935.11 13099.01
1997/10/31 14646.01 21202.48 13288.94
1997/11/30 15002.98 22183.94 13350.07
1997/12/31 15307.44 22564.84 13484.91
1998/01/31 15475.43 22814.41 13657.52
1998/02/28 16051.56 24459.78 13646.59
1998/03/31 16655.17 25712.37 13692.99
1998/04/30 16789.31 25971.03 13764.19
1998/05/31 16789.31 25524.59 13894.95
1998/06/30 17169.36 26561.40 14013.06
1998/07/31 17158.18 26278.52 14042.49
1998/08/31 15302.64 22479.17 14271.38
1998/09/30 16174.52 23919.19 14605.33
1998/10/31 16766.95 25864.77 14527.92
1998/11/30 17392.92 27432.44 14610.73
1998/12/31 18007.71 29013.09 14654.56
IMATRL PRASUN SHR__CHT 19981231 19990129 101823 R00000000000051
</TABLE>
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund III: Balanced Portfolio
on January 3, 1995, when the fund started. As the chart shows, by
December 31, 1998, the value of the investment would have grown to
$18,008 - an 80.08% increase on the initial investment. For
comparison, look at how both the Standard & Poor's 500 Index and
Lehman Brothers Aggregate Bond Index did over the same period. With
dividends and capital gains, if any, reinvested, the same $10,000
investment in the Standard & Poor's 500 Index would have grown to
$29,013 - a 190.13% increase. If $10,000 was put in the Lehman
Brothers Aggregate Bond Index, it would have grown to $14,655 - a
46.55% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
MCI WorldCom, Inc. 2.7
General Electric Co. 2.3
Freddie Mac 2.1
Tyco International Ltd. 1.8
Pitney Bowes, Inc. 1.7
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
FINANCE 16.5
UTILITIES 11.6
HEALTH 8.2
TECHNOLOGY 8.1
INDUSTRIAL MACHINERY & 5.9
EQUIPMENT
ASSET ALLOCATION AS OF DECEMBER 31, 1998*
% OF FUND'S INVESTMENTS
Row: 1, Col: 1, Value: 64.7
Row: 1, Col: 2, Value: 27.3
Row: 1, Col: 3, Value: 8.0
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 64.7%
Bonds 27.3%
Short-term investments 8.0%
*FOREIGN INVESTMENTS 6.1%
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
FUND TALK: THE MANAGERS' OVERVIEW
(photograph of John Avery)
(Photograph of Kevin Grant)
An interview with John Avery (right), lead Portfolio Manager of
Balanced Portfolio, and Kevin Grant, manager for fixed-income
investments
Q. HOW DID THE FUND PERFORM, JOHN?
J.A. Given the mix of equities and fixed-income securities owned by
the fund, its returns typically fall somewhere between those of its
two benchmark indexes - the Standard & Poor's 500 Index and the Lehman
Brothers Aggregate Bond Index. That was the case for the 12 months
that ended December 31, 1998, as the fund's return lagged the 28.58%
return of the S&P 500 but surpassed the 8.69% return of the Lehman
Brothers Index.
Q. WHAT FACTORS CONTRIBUTED TO THE FUND'S PERFORMANCE?
J.A. It was a volatile year, with resurgent concerns about the spread
of economic stagnation from Asia and Russia's devaluation of its
currency and default on much of its foreign debt roiling the markets
in the third quarter. However, when the dust settled in December,
following three cuts in short-term interest rates by the Federal
Reserve Board, equities had put in another strong showing. The fund's
emphasis on the stocks of large companies with strong management,
dominant market share and consistent earnings growth helped to shield
it somewhat during the stock market's plunge in August, and also
helped many of the fund's holdings recover quickly during the fourth
quarter, when the stock market staged a vigorous rally. On the
fixed-income side, third-quarter volatility hurt many of the fund's
holdings, but also resulted in numerous opportunities to make
acquisitions at favorable prices, which helped performance in the
fourth quarter, when the fixed-income markets recovered alongside the
equity markets.
Q. WHAT STOCKS HELPED THE FUND'S PERFORMANCE DURING THE PERIOD?
J.A. Freddie Mac was a strong performer. Lower mortgage rates
triggered a fresh wave of refinancing and aided the company's business
of buying and reselling mortgages. In addition, Freddie Mac's
U.S.-based business attracted investors looking to minimize their
exposure to emerging markets. Pitney Bowes - a manufacturer of postage
meters - also helped performance. The multi-year, nationwide
changeover now underway from mechanical to electronic postage meters
led investors to expect healthy earnings growth from the company.
Q. WHAT STOCKS DETRACTED FROM THE FUND'S PERFORMANCE?
J.A. Citicorp, a prime detractor, incurred huge trading losses from
its investments in Russia and Asia. Another lackluster performer was
Alcatel, a French telecommunications company that was hurt by its
dependence on demand from emerging markets. I sold both stocks.
Q. TURNING TO YOU, KEVIN, HOW DID THE DRAMATIC EVENTS OF THE 12-MONTH
PERIOD AFFECT THE FUND'S BOND HOLDINGS?
K.G. Russia's actions forced some large funds to sell their corporate
and mortgage securities. At the same time, investors flocked to U.S.
Treasury securities because of their reputation for safety. As a
result, the spread, or difference, between the yields of Treasuries
and other fixed-income securities widened dramatically, as Treasury
bond yields dropped to levels not seen in more than 30 years and the
prices of Treasuries soared. I took advantage of this opportunity by
upgrading the fund's holdings of corporate and mortgage issues. When
the fixed-income markets settled down in the fourth quarter, many of
those purchases did quite well, handily outperforming Treasuries.
Barring further negative surprises from the emerging markets, spreads
for corporate and mortgage issues could continue to narrow in 1999,
which would be good news for the fund's investors.
Q. WHAT'S YOUR OUTLOOK, JOHN?
J.A. Earnings growth is my prime concern at this stage of the economic
cycle. It seems clear that the United States economy, although
remarkably resilient, is slowing. If we get slower economic growth
without an actual recession, the environment for stocks could still be
favorable. With the interest-rate cuts it made in September, October
and November, the Federal Reserve Board demonstrated that it is
serious about trying to prevent a recession in the U.S. Given a
relatively benign economic environment and my confidence in the fund's
stock selection criteria, I am cautiously optimistic about the fund's
prospects for 1999.
The views expressed in this report reflect those of the portfolio
managers only through the end of the period of the report as stated on
the cover. The managers' vies are subject to change at any time based
on market and other conditions
(checkmark)FUND FACTS
GOAL: both 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, 1998, more than
$317 million
MANAGER: John Avery, since 1998, and Kevin
Grant, since 1996; John Avery joined Fidelity
in 1995; Kevin Grant joined Fidelity in 1993
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
INVESTMENTS DECEMBER 31, 1998
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 64.1%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 2.0%
AEROSPACE & DEFENSE - 0.9%
Textron, Inc. 39,500 $ 2,999,531
DEFENSE ELECTRONICS - 0.6%
Raytheon Co. Class B 36,900 1,964,925
SHIP BUILDING & REPAIR - 0.5%
General Dynamics Corp. 25,300 1,483,213
TOTAL AEROSPACE & DEFENSE 6,447,669
BASIC INDUSTRIES - 2.3%
CHEMICALS & PLASTICS - 1.8%
Dow Chemical Co. 6,700 609,281
Hoechst AG 27,500 1,125,079
ICI (Imperial Chemical 69,400 606,161
Industries) PLC Class L
Lyondell Petrochemical Co. 31,400 565,200
Monsanto Co. 32,700 1,553,250
Potash Corp. of Saskatchewan 13,400 862,398
Praxair, Inc. 19,400 683,850
6,005,219
METALS & MINING - 0.5%
Alcoa, Inc. 21,000 1,565,813
TOTAL BASIC INDUSTRIES 7,571,032
CONSTRUCTION & REAL ESTATE -
0.5%
BUILDING MATERIALS - 0.3%
Masco Corp. 33,200 954,500
REAL ESTATE INVESTMENT TRUSTS
- - 0.2%
Boston Properties, Inc. 9,800 298,900
Equity Residential Properties 4,400 177,925
Trust (SBI)
Public Storage, Inc. 10,500 284,156
760,981
TOTAL CONSTRUCTION & REAL 1,715,481
ESTATE
DURABLES - 0.9%
AUTOS, TIRES, & ACCESSORIES -
0.4%
Federal-Mogul Corp. 22,100 1,314,950
HOME FURNISHINGS - 0.5%
Leggett & Platt, Inc. 67,500 1,485,000
TOTAL DURABLES 2,799,950
ENERGY - 5.3%
ENERGY SERVICES - 0.4%
Schlumberger Ltd. 28,900 1,333,013
OIL & GAS - 4.9%
British Petroleum PLC 325,117 4,856,421
Chevron Corp. 18,500 1,534,344
Elf Aquitaine SA sponsored ADR 19,600 1,109,850
Exxon Corp. 45,200 3,305,250
SHARES VALUE (NOTE 1)
Mobil Corp. 9,500 $ 827,688
Texaco, Inc. 30,500 1,612,688
Total SA Class B 11,900 1,184,050
USX-Marathon Group 52,800 1,590,600
16,020,891
TOTAL ENERGY 17,353,904
FINANCE - 13.1%
BANKS - 5.5%
Bank of New York Co., Inc. 131,000 5,272,750
Bank One Corp. 36,520 1,864,803
Chase Manhattan Corp. 16,900 1,150,256
U.S. Bancorp 137,200 4,870,600
Wells Fargo & Co. 125,300 5,004,169
18,162,578
CREDIT & OTHER FINANCE - 2.4%
American Express Co. 30,000 3,067,500
Associates First Capital 72,034 3,052,441
Corp. Class A
Citigroup, Inc. 35,450 1,754,775
7,874,716
FEDERAL SPONSORED CREDIT - 3.3%
Fannie Mae 50,300 3,722,200
Freddie Mac 108,000 6,959,250
10,681,450
INSURANCE - 1.9%
American International Group, 42,100 4,067,913
Inc.
Hartford Financial Services 38,900 2,134,638
Group, Inc.
6,202,551
TOTAL FINANCE 42,921,295
HEALTH - 8.1%
DRUGS & PHARMACEUTICALS - 6.8%
American Home Products Corp. 59,000 3,322,438
Bristol-Myers Squibb Co. 27,900 3,733,369
Elan Corp. PLC ADR (a) 23,900 1,662,544
Lilly (Eli) & Co. 24,500 2,177,438
Merck & Co., Inc. 28,100 4,150,019
Pfizer, Inc. 7,800 978,413
Schering-Plough Corp. 55,100 3,044,275
Warner-Lambert Co. 42,900 3,225,544
22,294,040
MEDICAL EQUIPMENT & SUPPLIES
- - 1.3%
Allegiance Corp. 49,500 2,307,938
Johnson & Johnson 23,000 1,929,125
4,237,063
TOTAL HEALTH 26,531,103
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY &
EQUIPMENT - 5.1%
ELECTRICAL EQUIPMENT - 2.6%
Emerson Electric Co. 18,800 $ 1,176,175
General Electric Co. 73,000 7,450,563
8,626,738
INDUSTRIAL MACHINERY &
EQUIPMENT - 2.0%
Ingersoll-Rand Co. 14,400 675,900
Tyco International Ltd. 75,512 5,696,437
6,372,337
POLLUTION CONTROL - 0.5%
Waste Management, Inc. 37,100 1,729,788
TOTAL INDUSTRIAL MACHINERY & 16,728,863
EQUIPMENT
MEDIA & LEISURE - 2.4%
BROADCASTING - 2.0%
CBS Corp. 38,600 1,264,150
Loral Orion Network Systems,
Inc.:
warrants 1/15/07 (CV ratio 290 2,320
.47) (a)
warrants 1/15/07 (CV ratio 50 525
.6) (a)
NTL, Inc. warrants 12/31/08 199 2,985
(a)
Tele-Communications, Inc. 28,200 1,559,813
(TCI Group) Series A (a)
Teletrac Holdings, Inc. 20 10
warrants 8/1/07 (a)
Time Warner, Inc. 58,634 3,638,973
UIH Australia/Pacific, Inc. 150 450
warrants 5/15/06 (a)
6,469,226
LODGING & GAMING - 0.0%
Aladdin Gaming Enterprises, 400 4
Inc. warrants 3/1/10 (a)(e)
PUBLISHING - 0.4%
McGraw-Hill Companies, Inc. 13,500 1,375,313
TOTAL MEDIA & LEISURE 7,844,543
NONDURABLES - 3.9%
BEVERAGES - 0.4%
PepsiCo, Inc. 31,100 1,273,156
FOODS - 1.1%
Heinz (H.J.) Co. 27,000 1,528,875
Nabisco Holdings Corp. Class A 15,100 626,650
Sara Lee Corp. 54,400 1,533,400
3,688,925
HOUSEHOLD PRODUCTS - 0.9%
Procter & Gamble Co. 14,100 1,287,506
Unilever NV (NY shares) 21,700 1,799,744
3,087,250
SHARES VALUE (NOTE 1)
TOBACCO - 1.5%
Philip Morris Companies, Inc. 90,200 $ 4,825,700
TOTAL NONDURABLES 12,875,031
RETAIL & WHOLESALE - 2.4%
APPAREL STORES - 0.2%
Mothers Work, Inc. (a)(h) 3 36
TJX Companies, Inc. 21,592 626,168
626,204
DRUG STORES - 0.8%
CVS Corp. 27,100 1,490,500
Rite Aid Corp. 22,240 1,102,270
2,592,770
GENERAL MERCHANDISE STORES -
1.4%
Dayton Hudson Corp. 24,900 1,350,825
Wal-Mart Stores, Inc. 40,500 3,298,219
4,649,044
TOTAL RETAIL & WHOLESALE 7,868,018
SERVICES - 0.5%
PRINTING - 0.5%
Donnelley (R.R.) & Sons Co. 38,900 1,704,306
TECHNOLOGY - 7.6%
COMPUTER SERVICES & SOFTWARE
- - 1.4%
Concentric Network Corp. 30 4,350
warrants 12/15/07 (a)(e)
Microsoft Corp. (a) 32,500 4,507,344
4,511,694
COMPUTERS & OFFICE EQUIPMENT
- - 3.7%
Compaq Computer Corp. 27,900 1,170,056
International Business 22,300 4,119,925
Machines Corp.
Pitney Bowes, Inc. 86,600 5,721,013
Xerox Corp. 9,300 1,097,400
12,108,394
ELECTRONICS - 2.5%
AMP, Inc. 24,951 1,299,011
Intel Corp. 23,000 2,726,938
Motorola, Inc. 37,800 2,308,163
Texas Instruments, Inc. 20,100 1,719,806
8,053,918
TOTAL TECHNOLOGY 24,674,006
TRANSPORTATION - 0.4%
RAILROADS - 0.3%
Union Pacific Corp. 19,300 869,706
TRUCKING & FREIGHT - 0.1%
CNF Transportation, Inc. 14,400 540,900
TOTAL TRANSPORTATION 1,410,606
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - 9.6%
CELLULAR - 0.0%
American Mobile Satellite 20 $ 78
Corp. warrants 4/1/08 (a)(e)
McCaw International Ltd. 290 1,450
warrants 4/15/07 (a)(e)
Microcell Telecommunications, 520 6,630
Inc. warrants 6/1/06 (a)(e)
8,158
ELECTRIC UTILITY - 1.2%
CMS Energy Corp. 27,800 1,346,563
Duke Energy Corp. 19,100 1,223,594
PG&E Corp. 40,900 1,288,350
3,858,507
TELEPHONE SERVICES - 8.4%
ALLTEL Corp. 45,200 2,703,525
AT&T Corp. 39,800 2,994,950
Bell Atlantic Corp. 28,200 1,602,113
BellSouth Corp. 32,900 1,640,888
Covad Communications Group, 60 3,000
Inc. warrants 3/15/08 (a)(e)
DTI Holdings, Inc. warrants 350 18
3/1/08 (a)(e)
Firstworld Communications, 30 300
Inc. warrants 4/15/08 (a)(e)
GTE Corp. 42,800 2,886,325
KMC Telecom Holdings, Inc. 70 175
warrants 4/15/08 (a)(e)
MCI WorldCom, Inc. (a) 121,226 8,697,966
Rhythms Netconnections, Inc. 400 3,000
warrants 5/15/08 (a)(e)
SBC Communications, Inc. 91,900 4,928,138
Sprint Corp. (FON Group) 24,400 2,052,650
27,513,048
TOTAL UTILITIES 31,379,713
TOTAL COMMON STOCKS 209,825,520
(Cost $159,566,283)
PREFERRED STOCKS - 0.6%
CONVERTIBLE PREFERRED STOCKS
- - 0.3%
BASIC INDUSTRIES - 0.2%
CHEMICALS & PLASTICS - 0.2%
Monsanto Co. $1.625 ACES (a) 11,200 548,800
DURABLES - 0.0%
AUTOS, TIRES, & ACCESSORIES -
0.0%
Republic Industries, Inc. 4,000 61,000
$1.55 ACES
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Loral Space & Communications 4,000 $ 212,000
Ltd. Series C, $3.00 (e)
MEDIA & LEISURE - 0.0%
LODGING & GAMING - 0.0%
Host Marriott Financial Trust 3,000 122,438
$3.375 QUIPS (e)
TOTAL CONVERTIBLE PREFERRED 944,238
STOCKS
NONCONVERTIBLE PREFERRED
STOCKS - 0.3%
FINANCE - 0.0%
CREDIT & OTHER FINANCE - 0.0%
Fresenius Medical Care 40 40,116
Capital Trust II 7.875%
INSURANCE - 0.0%
American Annuity Group 50 49,000
Capital Trust II 8.875%
TOTAL FINANCE 89,116
MEDIA & LEISURE - 0.1%
BROADCASTING - 0.1%
Adelphia Communications Corp. 300 34,950
$13.00
Citadel Broadcasting Co. 377 42,978
Series B, 13.25% pay-in-kind
CSC Holdings, Inc.:
11.125% pay-in-kind 1,814 202,261
Series H, 11.75% pay-in-kind 317 36,138
(a)
316,327
PUBLISHING - 0.0%
PRIMEDIA, Inc.:
8.625% 580 56,550
Series D, $10.00 600 61,950
118,500
TOTAL MEDIA & LEISURE 434,827
UTILITIES - 0.2%
CELLULAR - 0.1%
Nextel Communications, Inc.:
11.125% pay-in-kind (a) 106 95,400
Series D, 13% pay-in-kind 113 111,870
207,270
TELEPHONE SERVICES - 0.1%
NEXTLINK Communications, Inc. 4,043 210,236
14% pay-in-kind
PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONCONVERTIBLE PREFERRED
STOCKS - CONTINUED
UTILITIES - CONTINUED
TELEPHONE SERVICES - CONTINUED
Viatel, Inc. 10% pay-in-kind 16 $ 1,760
(a)(e)
WinStar Communications, Inc. 73 58,400
14.25%
270,396
TOTAL UTILITIES 477,666
TOTAL NONCONVERTIBLE 1,001,609
PREFERRED STOCKS
TOTAL PREFERRED STOCKS 1,945,847
(Cost $1,914,702)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS - 14.0%
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT
CONVERTIBLE BONDS - 0.3%
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.0%
POLLUTION CONTROL - 0.0%
WMX Technologies, Inc. 2% Ba1 $ 80,000 78,400
1/24/05
RETAIL & WHOLESALE - 0.1%
RETAIL & WHOLESALE,
MISCELLANEOUS - 0.1%
Corporate Express, Inc. 4.5% B3 250,000 210,000
7/1/00
TECHNOLOGY - 0.2%
COMPUTERS & OFFICE EQUIPMENT
- - 0.2%
Unisys Corp. 8.25% 3/15/06 B 130,000 645,288
TOTAL CONVERTIBLE BONDS 933,688
NONCONVERTIBLE BONDS - 13.7%
AEROSPACE & DEFENSE - 0.3%
AEROSPACE & DEFENSE - 0.1%
Lockheed Martin Corp. 7.2% A3 300,000 331,728
5/1/36
DEFENSE ELECTRONICS - 0.2%
Raytheon Co. 6.45% 8/15/02 Baa1 500,000 512,810
SHIP BUILDING & REPAIR - 0.0%
Newport News Shipbuilding, B1 10,000 10,575
Inc. 9.25% 12/1/06
TOTAL AEROSPACE & DEFENSE 855,113
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
BASIC INDUSTRIES - 0.8%
CHEMICALS & PLASTICS - 0.2%
Huntsman Corp.:
9.5% 7/1/07 (e) B2 $ 400,000 $ 399,000
9.5% 7/1/07 (e) - 50,000 49,875
Koppers Industries, Inc. B2 290,000 281,300
9.875% 12/1/07
730,175
IRON & STEEL - 0.0%
GS Technologies Operating, B2 20,000 13,400
Inc. 12.25% 10/1/05
WHX Corp. 10.5% 4/15/05 B3 60,000 54,600
68,000
METALS & MINING - 0.2%
Doe Run Resources Corp.:
11.25% 3/15/05 B3 130,000 105,300
11.6963% 3/15/03 (g) B3 20,000 15,800
Interlake Corp. 12.125% B3 50,000 51,000
3/1/02
Kaiser Aluminum & Chemical
Corp.:
Series D 10.875% 10/15/06 B1 30,000 30,300
9.875% 2/15/02 B1 300,000 300,000
12.75% 2/1/03 B2 60,000 58,650
561,050
PACKAGING & CONTAINERS - 0.2%
Owens-Illinois, Inc.:
7.15% 5/15/05 Ba1 200,000 200,986
7.35% 5/15/08 Ba1 200,000 205,135
7.8% 5/15/18 Ba1 250,000 252,206
658,327
PAPER & FOREST PRODUCTS - 0.2%
Ainsworth Lumber Co. Ltd. B3 30,000 29,625
12.5% 7/15/07 pay-in-kind
APP Finance II Mauritius Ltd. Caa 85,000 44,200
12% 3/15/04
Container Corp. of America B2 10,000 10,125
gtd. 9.75% 4/1/03
Doman Industries Ltd. yankee B1 20,000 15,000
8.75% 3/15/04
Indah Kiat Finance Mauritius Caa1 30,000 16,200
Ltd. 10% 7/1/07
Mail-Well Corp. 10.5% 2/15/04 B+ 10,000 10,250
Malette, Inc. yankee 12.25% Ba3 100,000 107,750
7/15/04
Millar Western Forest B3 110,000 81,400
Products Ltd. 9.875% 5/15/08
Pindo Deli Finance Mauritius Caa1 20,000 10,000
Ltd. 10.25% 10/1/02
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
BASIC INDUSTRIES - CONTINUED
PAPER & FOREST PRODUCTS -
CONTINUED
Stone Container Corp. 10.75% B1 $ 50,000 $ 51,500
10/1/02
Tembec Finance Corp. yankee Ba3 30,000 31,350
9.875% 9/30/05
Tjiwi Kimia Finance Mauritius Caa1 20,000 10,600
Ltd. 10% 8/1/04
418,000
TOTAL BASIC INDUSTRIES 2,435,552
CONSTRUCTION & REAL ESTATE -
0.3%
BUILDING MATERIALS - 0.0%
American Standard Cos., Inc.:
7.375% 2/1/08 Ba3 100,000 100,250
7.625% 2/15/10 Ba3 10,000 10,025
110,275
CONSTRUCTION - 0.0%
Great Lakes Dredge & Dock B3 70,000 71,050
Corp. 11.25% 8/15/08 (e)
REAL ESTATE - 0.1%
LNR Property Corp. 9.375% B1 360,000 345,600
3/15/08
REAL ESTATE INVESTMENT TRUSTS
- - 0.2%
CenterPoint Properties Trust. Baa2 100,000 94,986
6.75% 4/1/05
EOP Operating LP:
6.625% 2/15/05 Baa1 200,000 196,046
6.75% 2/15/08 Baa1 300,000 294,990
586,022
TOTAL CONSTRUCTION & REAL 1,112,947
ESTATE
DURABLES - 0.5%
AUTOS, TIRES, & ACCESSORIES -
0.1%
Blue Bird Body Co. 10.75% B2 15,000 15,450
11/15/06
Federal-Mogul Corp. 7.875% Ba2 20,000 20,462
7/1/10
Morris Material Handling, B2 340,000 251,600
Inc. 9.5% 4/1/08
287,512
CONSUMER DURABLES - 0.0%
Corning Consumer Products Co. B3 70,000 49,000
9.625% 5/1/08
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
HOME FURNISHINGS - 0.0%
Omega Cabinets Ltd. 10.5% B3 $ 110,000 $ 108,075
6/15/07
TEXTILES & APPAREL - 0.4%
Cluett American Corp. 10.125% B3 270,000 255,150
5/15/08
Levi Strauss & Co. 6.8% Baa3 570,000 539,790
11/1/03 (e)
Polymer Group, Inc. 9% 7/1/07 B2 350,000 346,500
Synthetic Industries, Inc. B2 40,000 40,800
9.25% 2/15/07
WestPoint Stevens, Inc. Ba3 90,000 91,125
7.875% 6/15/08
Worldtex, Inc. 9.625% 12/15/07 B1 60,000 52,200
1,325,565
TOTAL DURABLES 1,770,152
ENERGY - 0.5%
COAL - 0.0%
P&L Coal Holdings Corp. B2 135,000 137,363
9.625% 5/15/08
ENERGY SERVICES - 0.1%
DI Industries, Inc. 8.875% B1 10,000 7,250
7/1/07
Grey Wolf, Inc. 8.875% 7/1/07 B1 60,000 43,500
Ocean Rig Norway AS 10.25% B3 50,000 39,000
6/1/08
Pool Energy Services Co. B2 60,000 56,700
8.625% 4/1/08
Pride Petroleum Services, Ba3 50,000 46,500
Inc. 9.375% 5/1/07
R&B Falcon Corp. 9.5% Ba1 40,000 40,000
12/15/08 (e)
232,950
OIL & GAS - 0.4%
Belco Oil & Gas Corp. 8.875% B1 250,000 226,250
9/15/07
Canadian Forest Oil Ltd. B2 40,000 35,600
8.75% 9/15/07
Chesapeake Energy Corp. B3 10,000 7,500
9.625% 5/1/05
Flores & Rucks, Inc. 9.75% B1 60,000 60,900
10/1/06
Great Lakes Carbon Corp. B3 140,000 141,050
10.25% 5/15/08 pay-in-kind
Hurricane Hydrocarbons Ltd. Caa2 10,000 5,000
11.75% 11/1/04 (e)
Ocean Energy, Inc. 8.375% B1 50,000 46,750
7/1/08
Petroleum Geo-Services ASA Baa3 320,000 299,005
7.125% 3/30/28
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
ENERGY - CONTINUED
OIL & GAS - CONTINUED
Plains Resources, Inc.:
Series D, 10.25% 3/15/06 B2 $ 20,000 $ 20,200
10.25% 3/15/06 B2 300,000 303,000
Seven Seas Petroleum, Inc. Caa1 20,000 10,000
12.5% 5/15/05
Southwest Royalties, Inc. Caa2 10,000 4,500
10.5% 10/15/04
Vintage Petroleum, Inc. 9% B1 250,000 245,000
12/15/05
1,404,755
TOTAL ENERGY 1,775,068
FINANCE - 3.4%
BANKS - 1.3%
ABN-Amro Bank NV, Chicago A1 500,000 513,700
6.625% 10/31/01
Banco Latinoamericano Baa2 100,000 99,156
Exportaciones SA euro 6.9%
12/4/99 (e)
BankAmerica Corp. 10% 2/1/03 Aa3 50,000 57,937
BankBoston Companies 6.625% A3 200,000 204,220
2/1/04
Barclays Bank PLC yankee:
5.875% 7/15/00 A1 350,000 349,951
5.95% 7/15/01 A1 450,000 453,060
Capital One Bank 6.375% Baa3 250,000 249,105
2/15/03
Capital One Financial Corp. Ba1 210,000 208,198
7.125% 8/1/08
First Chicago NBD A1 1,000,000 1,085,850
Institutional Capital B
7.75% 12/1/26 (e)
MBNA Corp.:
6.34% 6/2/03 Baa2 100,000 98,970
6.875% 11/15/02 Baa2 300,000 301,746
NB Capital Trust IV 8.25% Aa2 330,000 374,095
4/15/27
Summit Bancorp 8.625% 12/10/02 BBB+ 100,000 110,775
4,106,763
CREDIT & OTHER FINANCE - 1.9%
Ahmanson Capital Trust I A3 250,000 279,998
8.36% 12/1/26 (e)
Anthony Crane Rentals B3 20,000 19,100
LP/Anthony Credit Capital
Corp. 10.375% 8/1/08 (e)
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
Arcadia Financial Ltd. 11.5% B2 $ 40,000 $ 30,000
3/15/07
Associates Corp. of North Aa3 500,000 507,395
America 6% 7/15/05
AT&T Capital Corp. 7.5% Baa3 340,000 344,162
11/15/00
BankBoston Capital Trust II A2 500,000 509,070
7.75% 12/15/26
Chase Capital I 7.67% 12/1/26 Aa3 765,000 823,247
ContiFinancial Corp. 8.125% B1 10,000 6,800
4/1/08
ERP Operating LP 6.55% A3 50,000 50,051
11/15/01
First Security Capital I A3 110,000 121,349
8.41% 12/15/26
First Union Institutional BBB+ 50,000 55,069
Capital I 8.04% 12/1/26
Fleet Capital Trust II 7.92% A2 100,000 111,050
12/11/26
General Electric Capital Aaa 480,000 481,834
Corp. 6.94% 4/13/09 (d)
GS Escrow Corp. 7.125% 8/1/05 Ba1 400,000 392,656
Imperial Credit Capital Trust B2 20,000 15,200
I 10.25% 6/14/02
Imperial Credit Industries B2 330,000 254,100
9.875% 1/15/07
KeyCorp Institutional Capital A1 1,000,000 1,095,080
A 7.826% 12/1/26
MCN Investment Corp. 6.03% Baa3 180,000 178,675
2/1/01
Nordstrom Credit, Inc. 7.25% A2 200,000 210,608
4/30/02
Ocwen Capital Trust 10.875% B2 20,000 16,000
8/1/27
Olympic Financial Ltd. 11.5% B2 30,000 22,500
3/15/07
PNC Institutional Capital A2 600,000 670,812
Trust 8.315% 5/15/27 (e)
Sprint Capital Corp. 5.7% Baa1 160,000 160,018
11/15/03
Time Warner Telecom LLC/Time B2 20,000 20,550
Warner Telecom, Inc. 9.75%
7/15/08
6,375,324
SAVINGS & LOANS - 0.2%
Long Island Savings Bank FSB Baa3 500,000 498,920
6.2% 4/2/01
TOTAL FINANCE 10,981,007
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
HEALTH - 0.1%
MEDICAL EQUIPMENT & SUPPLIES
- - 0.0%
Wright Medical Technology, Caa3 $ 40,000 $ 21,000
Inc. 11.75% 7/1/00 (g)
MEDICAL FACILITIES MANAGEMENT
- - 0.1%
Fountain View, Inc. 11.25% Caa1 20,000 17,400
4/15/08
Harborside Healthcare Corp. B3 50,000 24,250
0% 8/1/08 (c)
Oxford Health Plans, Inc. 11% Caa1 30,000 28,200
5/15/05 (e)
Tenet Healthcare Corp.:
8% 1/15/05 Ba1 20,000 20,575
8.125% 12/1/08 (e) Ba3 260,000 266,500
356,925
TOTAL HEALTH 377,925
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.7%
ELECTRICAL EQUIPMENT - 0.1%
Advanced Lighting B2 30,000 27,150
Technologies, Inc. 8%
3/15/08 (e)
Motors & Gears, Inc. 10.75% B3 100,000 102,500
11/15/06
Telex Communications, Inc. B2 45,000 39,600
10.5% 5/1/07
169,250
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.4%
Continental Global Group, B2 20,000 17,100
Inc. 11% 4/1/07
Tenneco, Inc. 8.075% 10/1/02 Baa1 300,000 312,807
Thermadyne Holdings Corp. 0% Caa1 90,000 39,600
6/1/08 (c)
Thermadyne Manufacturing LLC B3 80,000 72,800
9.875% 6/1/08
Tyco International Group SA Baa1 1,000,000 1,009,630
yankee 6.125% 6/15/01
1,451,937
POLLUTION CONTROL - 0.2%
Allied Waste North America,
Inc.:
7.625% 1/1/06 (e) Ba2 90,000 91,125
7.875% 1/1/09 (e) Ba2 100,000 101,250
Envirosource, Inc. 9.75% B3 40,000 36,200
6/15/03
WMX Technologies, Inc. 7.1% Baa3 400,000 425,840
8/1/26
654,415
TOTAL INDUSTRIAL MACHINERY & 2,275,602
EQUIPMENT
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
MEDIA & LEISURE - 2.5%
BROADCASTING - 1.6%
ACME Television LLC/ACME B3 $ 50,000 $ 39,875
Financial Corp. 0% 9/30/04
(c)
Adelphia Communications Corp.:
9.5% 2/15/04 pay-in-kind B2 65,238 66,699
9.875% 3/1/05 B2 220,000 239,800
9.875% 3/1/07 B2 30,000 33,150
American Mobile Satellite - 20,000 12,400
Corp. 12.25% 4/1/08
Ascent Entertainment Group, B3 340,000 204,000
Inc. 0% 12/15/04 (c)
CapStar Broadcasting B3 30,000 24,600
Partners, Inc. 0% 2/1/09 (c)
CBS Radio, Inc. 11.375% Ba2 85,500 99,180
1/15/09 pay-in-kind
Chancellor Media Corp.:
8% 11/1/08 (e) Ba2 80,000 81,600
9% 10/1/08 (e) B1 30,000 31,575
Continental Cablevision, Inc.:
8.3% 5/15/06 Baa3 70,000 77,673
9% 9/1/08 Baa3 540,000 638,701
International Cabletel, Inc. B3 210,000 170,100
0% 2/1/06 (c)
Iridium Operating LLC/Iridium
Capital Corp.:
10.875% 7/15/05 B3 170,000 144,500
11.25% 7/15/05 B3 60,000 51,600
Metromedia Fiber Network, B2 340,000 349,350
Inc. 10% 11/15/08 (e)
NTL, Inc.:
0% 4/1/08 (c) B3 470,000 290,225
10% 2/15/07 B3 90,000 92,700
11.5% 10/1/08 (e) B3 40,000 43,000
Olympus Communications B1 60,000 66,000
LP/Olympus Capital Corp.
10.625% 11/15/06
Orion Network Systems, Inc.:
0% 1/15/07 (c) B2 260,000 161,200
11.25% 1/15/07 B2 30,000 29,250
Renaissance Media Group B3 30,000 20,250
LLC/Renaissance Media
Capital Corp. 0% 4/15/08 (c)
Rogers Cablesystems Ltd. Ba3 10,000 11,050
yankee 10.125% 9/1/12
Satelites Mexicanos SA de CV:
9.06% 6/30/04 (e)(g) - 100,000 93,000
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
MEDIA & LEISURE - CONTINUED
BROADCASTING - CONTINUED
Satelites Mexicanos SA de CV:
- - continued
10.125% 11/1/04 B3 $ 100,000 $ 80,000
TCI Communications, Inc. Baa3 220,000 273,304
8.75% 8/1/15
Telewest PLC 0% 10/1/07 (c) B1 190,000 157,700
Time Warner, Inc.:
6.875% 6/15/18 Baa3 180,000 188,561
8.18% 8/15/07 Baa3 1,000,000 1,158,550
UIH Australia/Pacific, Inc.:
Series B 0% 5/15/06 (c) B2 140,000 67,900
Series D 0% 5/15/06 (c) B2 30,000 14,550
United International B3 320,000 172,800
Holdings, Inc. 0% 2/15/08 (c)
5,184,843
ENTERTAINMENT - 0.2%
AMC Entertainment, Inc. 9.5% B2 310,000 316,200
3/15/09
Harrahs Operating Co., Inc. Ba2 170,000 170,000
7.875% 12/15/05
Premier Parks, Inc. 0% 4/1/08 B3 320,000 216,800
(c)
Regal Cinemas, Inc. 9.5% B3 30,000 30,750
6/1/08 (e)
733,750
LODGING & GAMING - 0.3%
Aladdin Gaming Caa2 40,000 10,400
Holdings/Aladdin Capital
Corp. 0% 3/1/10 (c)
Circus Circus Enterprises,
Inc.:
7% 11/15/36 Baa3 270,000 244,350
7.625% 7/15/13 Ba2 10,000 8,800
9.25% 12/1/05 Ba2 40,000 40,600
HMH Properties, Inc.:
7.875% 8/1/05 Ba2 170,000 166,175
7.875% 8/1/08 Ba2 20,000 19,400
8.45% 12/1/08 Ba2 50,000 50,000
KSL Recreation Group, Inc. B3 20,000 19,900
10.25% 5/1/07
Signature Resorts, Inc.:
9.25% 5/15/06 B2 320,000 294,400
9.75% 10/1/07 B3 40,000 33,600
Sun International Hotels Ba3 30,000 30,900
Ltd./Sun International North
America, Inc. yankee 9%
3/15/07
918,525
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
PUBLISHING - 0.3%
Big Flower Press Holdings,
Inc.:
8.625% 12/1/08 (e) B2 $ 40,000 $ 40,000
8.875% 7/1/07 B2 130,000 131,300
News America, Inc.:
6.625% 1/9/08 Baa3 145,000 149,017
7.25% 5/18/18 Baa3 600,000 613,008
933,325
RESTAURANTS - 0.1%
AFC Enterprises, Inc. 10.25% B3 290,000 302,325
5/15/07
Dominos, Inc. 10.375% 1/15/09 B3 40,000 40,200
(e)
Host Marriott Travel Plazas, Ba3 20,000 20,450
Inc. 9.5% 5/15/05
SC International Services, B2 160,000 160,600
Inc. Series B, 9.25% 9/1/07
523,575
TOTAL MEDIA & LEISURE 8,294,018
NONDURABLES - 0.4%
BEVERAGES - 0.2%
Seagram Co. Ltd.:
yankee 6.875% 9/1/23 Baa3 40,000 36,800
8.35% 1/15/22 Baa3 20,000 21,450
Seagram J E & Sons, Inc.:
6.625% 12/15/05 Baa3 300,000 298,200
7% 4/15/08 Baa3 40,000 40,150
7.6% 12/15/28 Baa3 300,000 301,050
697,650
FOODS - 0.0%
Del Monte Corp. 12.25% 4/15/07 Caa1 20,000 22,300
HOUSEHOLD PRODUCTS - 0.1%
AKI Holding Corp. 0% 7/1/09 Caa1 20,000 7,800
(c)(e)
Revlon Consumer Products
Corp.:
8.125% 2/1/06 B2 80,000 76,000
9% 11/1/06 (e) B2 240,000 237,600
321,400
TOBACCO - 0.1%
Philip Morris Companies, Inc. A2 250,000 266,248
6.95% 6/1/06
TOTAL NONDURABLES 1,307,598
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
PRECIOUS METALS - 0.1%
Centaur Mining & Exploration B1 $ 40,000 $ 36,400
Ltd. 11% 12/1/07
Great Central Mines Ltd. Ba2 320,000 319,200
8.875% 4/1/08
TOTAL PRECIOUS METALS 355,600
RETAIL & WHOLESALE - 1.1%
APPAREL STORES - 0.0%
Mothers Work, Inc. 12.625% B3 10,000 10,250
8/1/05
Specialty Retailers, Inc.:
8.5% 7/15/05 Ba3 60,000 51,300
9% 7/15/07 B2 85,000 68,000
129,550
DRUG STORES - 0.3%
Rite Aid Corp. 6% 12/15/05 (e) Baa1 1,000,000 1,000,000
GENERAL MERCHANDISE STORES -
0.3%
Dayton Hudson Corp. 6.4% A3 400,000 411,820
2/15/03
Federated Department Stores, Baa2 500,000 515,185
Inc. 6.79% 7/15/27
927,005
GROCERY STORES - 0.2%
American Stores Co. 7.5% Baa2 250,000 278,518
5/1/37
Kroger Co. 6% 7/1/00 Baa3 270,000 271,771
550,289
RETAIL & WHOLESALE,
MISCELLANEOUS - 0.3%
Amazon.com, Inc. 0% 5/1/08 (c) Caa2 225,000 148,500
Guitar Center, Inc. 11% 7/1/06 B1 29,000 30,450
HMV Media Group PLC 10.25% B3 50,000 48,250
5/15/08
J. Crew Group, Inc. 0% Caa3 150,000 67,500
10/15/08 (c)
J. Crew Operating Corp. Caa1 280,000 242,200
10.375% 10/15/07
Metals USA, Inc. 8.625% B2 340,000 318,750
2/15/08
U.S. Office Products Co. B3 10,000 6,300
9.75% 6/15/08
861,950
TOTAL RETAIL & WHOLESALE 3,468,794
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
SERVICES - 0.2%
LEASING & RENTAL - 0.1%
AP Holdings, Inc. 0% 3/15/08 Caa2 $ 30,000 $ 16,200
(c)
Apcoa, Inc. 9.25% 3/15/08 Caa1 40,000 36,800
Hollywood Entertainment Corp. B3 170,000 171,700
10.625% 8/15/04
Renters Choice, Inc. 11% B2 50,000 50,250
8/15/08 (e)
274,950
PRINTING - 0.0%
Sullivan Graphics, Inc. Caa1 40,000 40,400
12.75% 8/1/05
SERVICES - 0.1%
Iron Mountain, Inc. 8.75% B3 110,000 113,300
9/30/09
Medaphis Corp. 9.5% 2/15/05 Caa1 72,000 55,440
SITEL Corp. 9.25% 3/15/06 B2 250,000 215,000
383,740
TOTAL SERVICES 699,090
TECHNOLOGY - 0.3%
COMMUNICATIONS EQUIPMENT - 0.0%
Intermedia Communications,
Inc.:
8.5% 1/15/08 B2 10,000 9,450
8.6% 6/1/08 B2 30,000 28,500
Jordan Telecommunication
Products, Inc.:
0% 8/1/07 (c) B3 60,000 46,200
9.875% 8/1/07 B3 30,000 30,000
114,150
COMPUTER SERVICES & SOFTWARE
- - 0.1%
Concentric Network Corp. - 30,000 30,600
12.75% 12/15/07
DecisionOne Corp. 9.75% 8/1/07 B3 250,000 115,000
DecisionOne Holdings Corp. 0% Caa1 80,000 16,000
8/1/08 unit (c)
ICG Services, Inc. 0% 2/15/08 - 220,000 116,600
(c)
278,200
COMPUTERS & OFFICE EQUIPMENT
- - 0.1%
Comdisco, Inc. 6.1% 6/5/01 Baa1 250,000 253,390
ELECTRONIC INSTRUMENTS - 0.0%
Telecommunications Techniques B3 80,000 78,400
Co. LLC 9.75% 5/15/08
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
TECHNOLOGY - CONTINUED
ELECTRONICS - 0.1%
Communications Instruments, B3 $ 10,000 $ 9,625
Inc. 10% 9/15/04
Hadco Corp. 9.5% 6/15/08 B2 90,000 88,650
Insilco Corp. 12% 8/15/07 B3 60,000 61,800
unit (e)
160,075
TOTAL TECHNOLOGY 884,215
TRANSPORTATION - 0.7%
AIR TRANSPORTATION - 0.2%
Atlas Air, Inc.:
9.25% 4/15/08 B3 30,000 29,700
9.375% 11/15/06 (e) B3 220,000 220,000
Atlas Air, Inc. Pass Through Ba3 30,000 32,100
Trust 12.25% 12/1/02
Kitty Hawk, Inc. 9.95% B1 320,000 315,200
11/15/04
597,000
RAILROADS - 0.5%
Burlington Northern Santa Fe
Corp.:
6.875% 12/1/27 Baa2 1,000,000 1,042,890
7.29% 6/1/36 Baa2 150,000 167,168
Norfolk Southern Corp. 7.05% Baa1 340,000 367,822
5/1/37
1,577,880
SHIPPING - 0.0%
Holt Group, Inc. 9.75% Caa1 140,000 96,600
1/15/06 (e)
Hvide Marine, Inc. 8.375% B1 100,000 80,000
2/15/08
176,600
TOTAL TRANSPORTATION 2,351,480
UTILITIES - 1.8%
CELLULAR - 0.6%
Cable & Wireless Baa1 300,000 300,132
Communications PLC 6.375%
3/6/03
Cellnet Data Systems, Inc. 0% - 140,000 30,800
10/1/07 (c)
Dial Call Communications, B2 30,000 29,400
Inc. 10.25% 12/15/05
Iridium LLC/Iridium Capital B3 10,000 9,150
Corp. 13% 7/15/05
McCaw International Ltd. 0% Caa1 280,000 151,200
4/15/07 (c)
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
Millicom International Caa1 $ 670,000 $ 470,675
Cellular SA 0% 6/1/06 (c)
Nextel Communications, Inc.:
0% 8/15/04 (c) B2 120,000 116,700
0% 2/15/08 (c) B2 320,000 192,000
Nextel International, Inc. Caa1 180,000 81,000
0% 4/15/08 (c)
PageMart Nationwide, Inc. 0% B3 50,000 44,250
2/1/05 (c)
PageMart Wireless, Inc. 0% Caa2 70,000 32,200
2/1/08 (c)
Rogers Communications, Inc. B2 240,000 247,200
8.875% 7/15/07
Telesystem International
Wireless, Inc.:
0% 6/30/07 (c) Caa1 120,000 51,000
0% 11/1/07 (c) Caa1 130,000 47,450
Teligent, Inc. 0% 3/1/08 (c) Caa1 100,000 49,500
1,852,657
ELECTRIC UTILITY - 0.4%
AES Corp. 10.25% 7/15/06 Ba1 140,000 151,200
Avon Energy Partners Holdings Baa2 300,000 304,320
6.46% 3/4/08 (e)
Israel Electric Corp. Ltd. A3 795,000 727,171
7.75% 12/15/27 (e)
Niagara Mohawk Power Corp. Ba2 40,000 42,800
7.75% 10/1/08
Texas Utilities Co. 6.375% Baa3 200,000 202,384
1/1/08
1,427,875
GAS - 0.1%
Columbia Gas System, Inc. A3 379,000 391,280
6.61% 11/28/02
TELEPHONE SERVICES - 0.7%
Allegiance Telecom, Inc. - 20,000 19,400
12.875% 5/15/08
Covad Communications Group, - 60,000 33,000
Inc. 0% 3/15/08 (c)
Dobson Wireline Co. 12.25% - 70,000 62,650
6/15/08
DTI Holdings, Inc. 0% 3/1/08 - 70,000 17,150
(c)
Firstworld Communications, - 30,000 9,000
Inc. 0% 4/15/08 (c)
GCI, Inc. 9.75% 8/1/07 B2 10,000 9,850
Global TeleSystems Group, Caa2 10,000 9,300
Inc. 9.875% 2/15/05
GST Network Funding, Inc. 0% - 130,000 59,150
5/1/08 (c)(e)
GST Telecommunications, Inc. - 90,000 81,900
12.75% 11/15/07
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
UTILITIES - CONTINUED
TELEPHONE SERVICES - CONTINUED
Hermes Europe Railtel BV B3 $ 60,000 $ 60,750
10.375% 1/15/09 (e)
Hyperion Telecommunications, B3 70,000 50,050
Inc. 0% 4/15/03 (c)
ICG Holdings, Inc. 0% 9/15/05 - 80,000 66,000
(c)
IXC Communications, Inc. 9% B3 90,000 89,100
4/15/08
KMC Telecom Holdings, Inc. 0% - 50,000 23,500
2/15/08 (c)
Level 3 Communications, Inc. B3 150,000 148,688
9.125% 5/1/08
MCI WorldCom, Inc.:
6.4% 8/15/05 Baa2 310,000 322,189
8.875% 1/15/06 Baa2 184,000 201,106
McLeodUSA, Inc.:
0% 3/1/07 (c) B2 350,000 267,750
9.25% 7/15/07 B2 10,000 10,300
NEXTLINK Communications LLC B3 30,000 31,875
12.5% 4/15/06
NEXTLINK Communications, Inc.:
9% 3/15/08 B3 20,000 18,800
9.625% 10/1/07 B3 20,000 19,200
10.75% 11/15/08 (e) B3 340,000 346,800
Rhythms Netconnections, Inc. - 120,000 58,800
0% 5/15/08 (c)
WinStar Communications, Inc.:
0% 10/15/05 (c) Caa1 40,000 28,400
14.5% 10/15/05 Caa1 110,000 121,000
0% 3/15/08 (c) CCC 85,000 60,350
2,226,058
TOTAL UTILITIES 5,897,870
TOTAL NONCONVERTIBLE BONDS 44,842,031
TOTAL CORPORATE BONDS 45,775,719
(Cost $46,064,142)
U.S. GOVERNMENT AND
GOVERNMENT AGENCY
OBLIGATIONS - 2.8%
U.S. GOVERNMENT AGENCY
OBLIGATIONS - 0.4%
Fannie Mae 5.75% 6/15/05 Aaa 750,000 774,375
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
Federal Home Loan Bank:
7.56% 9/1/04 Aaa $ 310,000 $ 344,633
7.59% 3/10/05 Aaa 190,000 212,889
Government Trust Certificates Aaa 83,940 88,724
(assets of Trust guaranteed
by U.S. Government through
Defense Security Assistance
Agency) Class 2-E 9.4%
5/15/02
TOTAL U.S. GOVERNMENT AGENCY 1,420,621
OBLIGATIONS
U.S. TREASURY OBLIGATIONS -
2.4%
U.S. Treasury Bond:
7.625% 2/15/25 Aaa 350,000 460,142
8.75% 5/15/17 Aaa 25,000 34,777
U.S. Treasury Notes:
5.875% 11/30/01 Aaa 2,777,000 2,870,724
7% 7/15/06 Aaa 3,775,000 4,298,177
TOTAL U.S. TREASURY 7,663,820
OBLIGATIONS
TOTAL U.S. GOVERNMENT AND 9,084,441
GOVERNMENT AGENCY OBLIGATIONS
(Cost $8,861,242)
U.S. GOVERNMENT AGENCY -
MORTGAGE SECURITIES - 8.0%
FANNIE MAE - 7.1%
5.5% 2/1/11 Aaa 195,295 192,791
6% 4/1/11 to 12/1/28 Aaa 567,481 566,034
6% 1/1/14 to 1/1/28 (f) Aaa 2,100,000 2,089,313
6.5% 11/1/25 to 12/1/28 Aaa 15,755,141 15,858,514
7% 2/1/28 to 9/1/28 Aaa 3,190,337 3,254,143
7% 1/1/29 (f) Aaa 1,240,000 1,265,188
23,225,983
FREDDIE MAC - 0.2%
7% 1/22/01 to 7/1/01 Aaa 199,788 200,823
7.5% 12/1/27 to 4/1/28 Aaa 529,172 543,391
744,214
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION - 0.7%
7% 11/15/27 to 10/15/28 Aaa 753,122 770,534
7.5% 6/15/27 to 3/15/28 Aaa 1,549,094 1,597,339
2,367,873
TOTAL U.S. GOVERNMENT AGENCY 26,338,070
- - MORTGAGE SECURITIES
(Cost $26,162,730)
ASSET-BACKED SECURITIES - 1.6%
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
Airplanes Pass Through Trust Ba2 $ 100,000 $ 105,000
10.875% 3/15/19
Capital Equipment Receivables Aaa 390,954 391,220
Trust 6.11% 7/15/99
Chevy Chase Auto Receivables Aaa 110,868 111,474
Trust 5.91% 12/15/04
Contimortgage Home Equity Aaa 1,000,000 1,000,620
Loan Trust 6.26% 7/15/12
Ford Credit Auto Owner Trust:
6.2% 12/15/02 Baa3 510,000 513,019
6.4% 5/15/02 A1 610,000 618,369
6.4% 12/15/02 Baa3 80,000 80,320
Green Tree Financial Corp. Aaa 17,567 17,583
6.1% 4/15/27
Key Auto Finance Trust:
6.3% 10/15/03 A2 605,422 606,273
6.65% 10/15/03 Baa3 180,840 182,790
MBNA Master Credit Card Trust Aaa 1,000,000 1,052,980
II 6.55% 1/15/07
Sears Credit Account Master Aaa 577,500 579,666
Trust II 6.5% 10/15/03
TOTAL ASSET-BACKED SECURITIES 5,259,314
(Cost $5,184,571)
COMMERCIAL MORTGAGE
SECURITIES - 0.6%
CS First Boston Mortgage
Securities Corp.:
Series 1997 C2 Class D, 7.27% Baa2 220,000 208,725
1/17/35
Series 1998 FLI Class E, Baa2 420,000 408,188
6.5063% 1/10/13 (e)(g)
GS Mortgage Securities Corp. Baa3 500,000 452,605
II Series 1998 GLII Class E,
7.1905% 4/13/31 (e)(g)
Morgan Stanley Capital I,
Inc. Series 1998 CF1:
Class D, 7.35% 1/15/12 Baa2 195,000 188,602
Class E, 7.35% 12/15/12 Baa3 68,000 60,010
Thirteen Affiliates of Aaa 500,000 519,555
General Growth Properties,
Inc. sequential pay Series A
2, 6.602% 12/15/10 (e)
Wells Fargo Capital Markets Aaa 143,915 145,480
Apartment Financing Trust
Series APT Class 1, 6.56%
12/29/05 (e)
TOTAL COMMERCIAL MORTGAGE 1,983,165
SECURITIES
(Cost $2,019,130)
FOREIGN GOVERNMENT AND
GOVERNMENT AGENCY
OBLIGATIONS (I) - 0.1%
MOODY'S RATINGS (UNAUDITED) (J) PRINCIPAL AMOUNT VALUE (NOTE 1)
Quebec Province yankee:
6.86% 4/15/26 (d) A2 $ 250,000 $ 274,555
7.125% 2/9/24 A2 30,000 32,758
7.5% 7/15/23 A2 30,000 34,149
TOTAL FOREIGN GOVERNMENT AND 341,462
GOVERNMENT AGENCY OBLIGATIONS
(Cost $306,897)
SUPRANATIONAL OBLIGATIONS -
0.2%
Inter American Development Aaa 500,000 523,760
Bank yankee 6.29% 7/16/27
(Cost $496,855)
CERTIFICATES OF DEPOSIT - 0.1%
Canadian Imperial Bank of 500,000 505,600
Commerce, New York yankee
6.2% 8/1/00 (Cost $500,750)
CASH EQUIVALENTS - 7.9%
SHARES
Taxable Central Cash Fund (b) 25,959,198 25,959,198
(Cost $25,959,198)
TOTAL INVESTMENT IN $ 327,542,096
SECURITIES - 100%
(Cost $277,036,500)
</TABLE>
SECURITY TYPE ABBREVIATIONS
ACES - Automatic Common
Exchange Securities
QUIPS - Quarterly Income Preferred Securities
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield on the Taxable Central Cash
Fund was 4.80%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(c) 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.
(d) 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.
(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 $9,536,603 or 3.0% of net assets.
(f) Security purchased on a delayed delivery or when-issued basis (see
Note 2 of Notes to Financial Statements).
(g) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(h) Restricted securities - Investment in securities not registered
under the Securities Act of 1933 (see Note 2 of Notes to Financial
Statements).
SECURITY ACQUISTION DATE ACQUISITION COST
Mothers Work, Inc. 6/18/98 $ 18
(i) For foreign government obligations not individually rated by S&P
or Moody's, the ratings listed have been assigned 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) Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investors Service, Inc.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $293,141,327 and $231,679,584, respectively, of which
long-term U.S. government and government agency obligations aggregated
$80,114,862 and $80,377,699, respectively (see Note 3 of Notes to
Financial Statements).
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $30,577 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 investments in securities, is as follows (ratings are
unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 15.7% AAA, AA, A 14.9%
Baa 5.2% BBB 5.5%
Ba 1.1% BB 1.2%
B 4.2% B 4.4%
Caa 0.6% CCC 0.4%
Ca, C 0.0% CC, C 0.0%
D 0.0%
For some foreign government obligations, FMR has assigned the ratings
for 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, 1998, the aggregate cost of investment securities for
income tax purposes was $277,265,807. Net unrealized appreciation
aggregated $50,276,289, of which $54,273,023 related to appreciated
investment securities and $3,996,734 related to depreciated investment
securities.
The fund hereby designates approximately $4,070,000 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, 1998
ASSETS
Investment in securities, at $ 327,542,096
value (cost $277,036,500) -
See accompanying schedule
Cash 42,315
Receivable for investments 10,756,394
sold
Receivable for fund shares 303,958
sold
Dividends receivable 282,920
Interest receivable 1,184,921
Other receivables 37,274
TOTAL ASSETS 340,149,878
LIABILITIES
Payable for investments $ 19,242,545
purchased Regular delivery
Delayed delivery 3,357,833
Payable for fund shares 132,635
redeemed
Accrued management fee 111,140
Distribution fees payable 709
Other payables and accrued 61,477
expenses
TOTAL LIABILITIES 22,906,339
NET ASSETS $ 317,243,539
Net Assets consist of:
Paid in capital $ 250,823,566
Undistributed net investment 7,505,060
income
Accumulated undistributed net 8,401,192
realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation 50,513,721
(depreciation) on
investments and assets and
liabilities in foreign
currencies
NET ASSETS $ 317,243,539
INITIAL CLASS: NET ASSET $16.11
VALUE, offering price and
redemption price per share
($307,681,325 (divided by)
19,097,287 shares)
SERVICE CLASS: NET ASSET $16.07
VALUE, offering price and
redemption price per share
($9,562,214 (divided by)
594,951 shares)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME $ 2,746,413
Dividends
Interest 6,365,032
TOTAL INCOME 9,111,445
EXPENSES
Management fee $ 1,135,397
Transfer agent fees 177,608
Distribution fees - Service 3,228
Class
Accounting fees and expenses 156,276
Non-interested trustees' 916
compensation
Custodian fees and expenses 25,384
Audit 21,642
Legal 2,276
Miscellaneous 16,507
Total expenses before 1,539,234
reductions
Expense reductions (29,663) 1,509,571
NET INVESTMENT INCOME 7,601,874
REALIZED AND UNREALIZED GAIN
(LOSS)
Net realized gain (loss) on:
Investment securities 8,518,505
Foreign currency transactions 4,867 8,523,372
Change in net unrealized
appreciation (depreciation)
on:
Investment securities 26,047,077
Assets and liabilities in 8,383 26,055,460
foreign currencies
NET GAIN (LOSS) 34,578,832
NET INCREASE (DECREASE) IN $ 42,180,706
NET ASSETS RESULTING FROM
OPERATIONS
OTHER INFORMATION $ 25,741
Expense reductions Directed
brokerage arrangements
Custodian credits 3,922
$ 29,663
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
INCREASE (DECREASE) IN NET YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
ASSETS
Operations Net investment $ 7,601,874 $ 5,313,482
income
Net realized gain (loss) 8,523,372 8,597,009
Change in net unrealized 26,055,460 16,949,433
appreciation (depreciation)
NET INCREASE (DECREASE) IN 42,180,706 30,859,924
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders (5,425,338) (2,678,656)
From net investment income
From net realized gain (8,288,727) -
TOTAL DISTRIBUTIONS (13,714,065) (2,678,656)
Share transactions - net 74,228,783 83,257,215
increase (decrease)
TOTAL INCREASE (DECREASE) 102,695,424 111,438,483
IN NET ASSETS
NET ASSETS
Beginning of period 214,548,115 103,109,632
End of period (including $ 317,243,539 $ 214,548,115
undistributed net investment
income of $7,505,060 and
$5,297,948, respectively)
</TABLE>
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
SHARES DOLLARS SHARES DOLLARS
Share transactions Initial 6,631,328 $ 99,433,344 7,435,394 $ 99,539,917
Class Sold
Reinvested 974,658 13,713,433 215,153 2,678,656
Redeemed (3,218,228) (47,915,708) (1,375,161) (18,971,358)
Net increase (decrease) 4,387,758 $ 65,231,069 6,275,386 $ 83,247,215
Service Class A Sold 610,188 $ 9,232,622 706 $ 10,000
Reinvested 46 643 - -
Redeemed (15,989) (235,551) - -
Net increase (decrease) 594,245 $ 8,997,714 706 $ 10,000
Distributions From net $ 5,425,084 $ 2,678,656
investment income Initial
Class
Service Class 254 -
Total $ 5,425,338 $ 2,678,656
From net realized gain $ 8,288,339 $ -
Initial Class
Service Class 388 -
Total $ 8,288,727 $ -
$ 13,714,065 $ 2,678,656
A SERVICE CLASS COMMENCED
SALE OF SHARES NOVEMBER 3,
1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 1996 1995 I
Net asset value, beginning of $ 14.58 $ 12.23 $ 11.17 $ 10.00
period
Income from Investment
Operations
Net investment income .44 D .44 D .33 .14
Net realized and unrealized 2.00 2.22 .78 1.25
gain (loss)
Total from investment 2.44 2.66 1.11 1.39
operations
Less Distributions
From net investment income (.36) (.31) (.01) F (.14)
From net realized gain (.55) - (.04) F (.08)
Total distributions (.91) (.31) (.05) (.22)
Net asset value, end of period $ 16.11 $ 14.58 $ 12.23 $ 11.17
TOTAL RETURN B, C 17.64% 22.18% 9.98% 13.92%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 307,681 $ 214,538 $ 103,110 $ 43,155
(000 omitted)
Ratio of expenses to average .59% .61% .72% 1.42% G
net assets
Ratio of expenses to average .58% H .60% H .71% H 1.42%
net assets after expense
reductions
Ratio of net investment 2.94% 3.28% 3.63% 3.56%
income to average net assets
Portfolio turnover 94% 98% 163% 248%
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 E
Net asset value, beginning of $ 14.59 $ 14.16
period
Income from Investment
Operations
Net investment income D .41 .08
Net realized and unrealized 1.98 .35
gain (loss)
Total from investment 2.39 .43
operations
Less Distributions
From net investment income (.36) -
From net realized gain (.55) -
Total distributions (.91) -
Net asset value, end of period $ 16.07 $ 14.59
TOTAL RETURN B, C 17.27% 3.04%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 9,562 $ 10
(000 omitted)
Ratio of expenses to average .70% .71% A
net assets
Ratio of expenses to average .69% H .71% A
net assets after expense
reductions
Ratio of net investment 2.79% 3.43% A
income to average net assets
Portfolio turnover 94% 98%
A ANNUALIZED
B TOTAL RETURNS DO NOT
REFLECT CHARGES ATTRIBUTABLE
TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION
OF THESE CHARGES WOULD
REDUCE THE TOTAL RETURNS
SHOWN. TOTAL RETURNS FOR
PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD
HAVE BEEN LOWER HAD CERTAIN
EXPENSES NOT BEEN REDUCED
DURING THE PERIODS SHOWN
(SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER
SHARE HAS BEEN CALCULATED
BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3,
1997 (COMMENCEMENT OF SALE
OF SERVICE CLASS SHARES) TO
DECEMBER 31, 1997.
F THE AMOUNTS SHOWN REFLECT
CERTAIN RECLASSIFICATIONS
RELATED TO BOOK TO TAX
DIFFERENCES (SEE NOTE 1 OF
NOTES TO FINANCIAL
STATEMENTS).
G FMR AGREED TO REIMBURSE A
PORTION OF THE CLASS'
EXPENSES DURING THE PERIOD.
WITHOUT THIS REIMBURSEMENT,
THE CLASS' EXPENSE RATIO
WOULD HAVE BEEN HIGHER.
H FMR OR THE FUND HAS ENTERED
INTO VARYING ARRANGEMENTS
WITH THIRD PARTIES WHO
EITHER PAID OR REDUCED A
PORTION OF THE CLASS'
EXPENSES (SEE NOTE 5 OF
NOTES TO FINANCIAL
STATEMENTS).
I FOR THE PERIOD JANUARY 3,
1995 (COMMENCEMENT OF
OPERATIONS OF INITIAL CLASS
SHARES) TO DECEMBER 31, 1995.
NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1998
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 funds' original class of shares
(Initial Class shares) and Service Class shares. Both classes have
equal rights and voting privileges, except for matters affecting a
single class. Investment income, realized and unrealized capital gains
and losses, the common expenses of the fund, and certain fund-level
expense reductions, if any, are allocated on a pro rata basis to each
class based on the relative net assets of each class to the total net
assets of the fund. Each class of shares differs in its respective
distribution plan.
The financial statements have been prepared in conformity with
generally accepted accounting principles which require management to
make certain estimates and assumptions at the date of the financial
statements. The following summarizes the significant accounting
policies of the fund:
SECURITY VALUATION. Equity securities for which quotations are readily
available are valued at the last sale price, or if no sale price, at
the closing bid price. Debt securities for which quotations are
readily available are valued by a pricing service at their market
values as determined by their most recent bid prices in the principal
market (sales prices if the principal market is an exchange) in which
such securities are normally traded. Securities (including restricted
securities) for which market quotations are not readily available are
valued at their fair value as determined in good faith under
consistently applied procedures under the general supervision of the
Board of Trustees. Short-term securities with remaining maturities of
sixty days or less for which quotations are not readily available are
valued at amortized cost or original cost plus accrued interest, both
of which approximate current value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Purchases
and sales of securities, income receipts and expense payments are
translated into U.S. dollars at the prevailing exchange rate on the
respective dates of the transactions.
Net realized gains and losses on foreign currency transactions
represent net gains and losses from sales and maturities of foreign
currency contracts, disposition of foreign currencies, the difference
between the amount of net investment income accrued and the U.S.
dollar amount actually received, and gains and losses between trade
and settlement date on purchases and sales of securities. The effects
of changes in foreign currency exchange rates on investments in
securities are included with the net realized and unrealized gain or
loss on investment securities.
INCOME TAXES. As a qualified regulated investment company under
Subchapter M of the Internal Revenue Code, the fund is not subject to
income taxes to the extent that it distributes substantially all of
its taxable income for its fiscal year. The schedule of investments
includes information regarding income taxes under the caption "Income
Tax Information."
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend
date, except certain dividends from foreign securities where the
ex-dividend date may have passed, are recorded as soon as the fund is
informed of the ex-dividend date. Non-cash dividends included in
dividend income, if any, are recorded at the fair market value of the
securities received. Interest income, which includes accretion of
original issue discount, is accrued as earned. Investment income is
recorded net of foreign taxes withheld where recovery of such taxes is
uncertain.
EXPENSES. Most expenses of the trust can be directly attributed to a
fund. Expenses which cannot be directly attributed are apportioned
among the funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the
ex-dividend date. Income dividends and capital gain distributions are
declared separately for each class.
Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences, which may result in
distribution reclassifications, are primarily due to differing
treatments for paydown gains/losses on certain securities, foreign
currency transactions, passive foreign investment companies (PFIC),
market discount, partnerships and losses deferred due to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
Undistributed net investment income and accumulated undistributed net
realized gain (loss) on investments and foreign currency transactions
may include temporary book and tax basis differences which will
reverse in a subsequent period. Any taxable income or gain remaining
at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of
trade date. Gains and losses on securities sold are determined on the
basis of identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency
contracts to facilitate transactions in foreign-denominated
securities. Losses may arise from changes in the value of the foreign
currency or if the counterparties do not perform under the contracts'
terms. The U.S. dollar value of foreign currency contracts is
determined using contractual currency exchange rates established at
the time of each trade.
2. OPERATING POLICIES - CONTINUED
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission (the SEC), the fund, along with
other affiliated entities of Fidelity Management & Research Company
(FMR), may transfer uninvested cash balances into one or more joint
trading accounts. These balances are invested in one or more
repurchase agreements for U.S. Treasury or Federal Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are
marked-to-market daily and maintained at a value at least equal to the
principal amount of the repurchase agreement (including accrued
interest). FMR, the fund's investment adviser, is responsible for
determining that the value of the underlying securities remains in
accordance with the market value requirements stated above.
TAXABLE CENTRAL CASH FUND. Pursuant to an Exemptive Order issued by
the SEC, the fund may invest in the Taxable Central Cash Fund (the
Cash Fund) managed by Fidelity Investments Money Management, Inc., an
affiliate of FMR. The Cash Fund is an open-end money market fund
available only to investment companies and other accounts managed by
FMR and its affiliates. The Cash Fund seeks preservation of capital,
liquidity, and current income by investing in U.S. Treasury securities
and repurchase agreements for these securities. Income distributions
from the Cash Fund are declared daily and paid monthly from net
interest income. Income distributions earned by the fund are recorded
as interest income in the accompanying financial statements.
DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell
securities on a delayed delivery basis. Payment and delivery may take
place a month or more after the date of the transaction. The price of
the underlying securities and the date when the securities will be
delivered and paid for are fixed at the time the transaction is
negotiated. The market values of the securities purchased or sold on a
delayed delivery basis are identified as such in the fund's schedule
of investments. The fund may receive compensation for interest forgone
in the purchase of a delayed delivery security. With respect to
purchase commitments, the fund identifies securities as segregated in
its custodial records with a value at least equal to the amount of the
commitment. Losses may arise due to changes in the market value of the
underlying securities or if the counterparty does not perform under
the contract.
RESTRICTED SECURITIES. The fund is permitted to invest in securities
that are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from
registration or to the public if the securities are registered.
Disposal of these securities may involve time-consuming negotiations
and expense, and prompt sale at an acceptable price may be difficult.
At the end of the period, restricted securities (excluding 144A
issues) amounted to $36 or 0% of net assets.
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities), is included under the caption "Other
Information" at the end of the fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a
monthly fee that is calculated on the basis of a group fee rate plus a
fixed individual fund fee rate applied to the average net assets of
the fund. The group fee rate is the weighted average of a series of
rates and is based on the monthly average net assets of all the mutual
funds advised by FMR. The rates ranged from .2500% to .5200% for the
period. The annual individual fund fee rate is .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 .44% 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 $3,228, all of which was
reallowed to insurance companies, for the distribution of shares and
providing shareholder support services.
Under the Plans, FMR may use its resources to pay administrative and
promotional expenses related to the sale of each class of shares.
Subject to the approval of the Board of Trustees, the Plans also
authorize payments to third parties that assist in the sale of each
class of shares or render shareholder support services. For the
period, payments made to third parties under the Plans amounted to
$7,695 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.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments.
5. EXPENSE REDUCTIONS.
FMR has directed certain portfolio trades to brokers who paid a
portion of the fund's expenses.
In addition, the fund has entered into an arrangement with it's
custodian whereby credits realized on uninvested cash balances were
used to offset a portion of the fund's expenses.
For the period, the reductions under these arrangements are shown
under the caption "Other Information" on the fund's Statement of
Operations.
6. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were the record owners
of approximately 38% of the outstanding shares of the fund. In
addition, one unaffiliated insurance company was record owner of 55%
of the total outstanding shares of the fund.
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, 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, 1998, and the results of its operations, 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, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 12, 1999
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:
PAY DATE RECORD DATE DIVIDENDS CAPITAL GAINS
Initial Class 2/5/99 2/5/99 $.37 $.43
Service Class 2/5/99 2/5/99 $.37 $.43
The fund hereby designates 100% of the long-term capital gain
dividends distributed during the fiscal year as 20%-rate capital gain
dividends.
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
Kevin E. Grant, VICE PRESIDENT
Eric D. Roiter, SECRETARY
Richard A. Silver, TREASURER
Matthew N. Karstetter, DEPUTY 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 *
* INDEPENDENT TRUSTEES
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER SERVICING AGENT
Fidelity Investments Institutional Operations Co., Inc.
Boston, MA
CUSTODIAN
The Chase Manhattan Bank
New York, NY
VARIABLE INSURANCE PRODUCTS
FUND III: GROWTH OPPORTUNITIES PORTFOLIO
(2_FIDELITY_LOGOS)(registered trademark)
ANNUAL REPORT
DECEMBER 31, 1998
CONTENTS
MARKET ENVIRONMENT 3 A review of what happened in
world markets during the
past 12 months.
PERFORMANCE AND INVESTMENT 4 How the fund has done over
SUMMARY time, and an overview of the
fund's investments at the
end of the period.
FUND TALK 5 The manager's review of fund
performance, strategy and
outlook.
INVESTMENTS 6 A complete list of the fund's
investments with their
market values.
FINANCIAL STATEMENTS 11 Statements of assets and
liabilities, operations, and
changes in net assets, as
well as financial highlights.
NOTES 14 Notes to the financial
statements.
REPORT OF INDEPENDENT 17 The auditors' opinion.
ACCOUNTANTS
DISTRIBUTIONS 18
Standard & Poor's, S&P and S&P 500 are registered service marks of The
McGraw-Hill Companies, Inc. and have been licensed for use by Fidelity
Distributors Corporation.
Other third party marks appearing herein are the property of their
respective owners.
All other marks appearing herein are registered or unregistered
trademarks or service marks of FMR Corp. or an affiliated company.
This report is printed on recycled paper using soy-based inks.
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
Demonstrating erratic mood swings throughout the period, the sometimes
gloomy, sometimes exuberant, oftentimes volatile worldwide stock and
bond markets in 1998 will long be remembered for their turbulent
behavior. When all was said and done, the U.S. and European stock
markets posted impressive returns for the year. Most U.S. bond markets
experienced positive - albeit moderate - performance, with U.S.
Treasuries ending the year as the overall front-runner. Economic and
currency turmoil continued to plague stock and bond performance in
Asia and, in particular, emerging markets.
U.S. STOCK MARKETS
The Standard & Poor's 500 Index - a broad measure of U.S. stock market
performance - rose 28.58% for the 12 months that ended December 31,
1998, well above the index's long-term average annual return of about
12%. For the first time in its history, the Dow Jones Industrial
Average - an index of 30 blue-chip stocks - posted double-digit
percentage gains in four consecutive years, thanks to an 18.07%
increase for the year. Large-cap stocks - particularly in the
technology sector - led the U.S. equity market's charge, as once again
investors preferred the liquidity and the perceived safety of owning
what they know. Small-cap stocks - in comparison - took a beating. The
Russell 2000 Index - a popular measure of small stock performance -
fell -2.55% for the year.
Throughout the period, the U.S. enjoyed a strong economy. Unemployment
averaged 4.5% for the year, the lowest since 1969 and the lowest
peacetime level in 41 years. Inflation levels also were low, while
interest-rates were stable. In comparison to the economy's relative
tranquility, the U.S. stock markets were fluctuating wildly. To
illustrate, the Dow typically had fewer than five swings of 5% in each
year since 1946. In 1998 alone, the Dow experienced 10 such swings.
Much of these gyrations were due to fears about Asia's economic woes,
Russia's currency devaluation and loan defaults, and the subsequent
consequences on emerging markets. On August 31, the Dow plunged 512.61
points - a loss that erased all previous gains for the year to that
point. Faced with global economic chaos, investors began fleeing the
equity markets in droves, searching for safer, less volatile havens,
particularly U.S. Treasuries. To address the lack of confidence in
domestic and global equity markets, the U.S. Federal Reserve Board
stepped in with three separate 0.25% interest-rate cuts during the
fall. Those cuts helped boost confidence in the U.S. economy, and
stocks began to quickly ascend to their former lofty levels,
culminating in a new Dow record of 9374.27 on November 23, 1998.
On a sector-by-sector basis, technology stocks reigned supreme in
1998, thanks in large part to the skyrocketing Internet industry. For
the year, nine of the top 10 best-performing stocks in the S&P 500
were technology stocks. The health care sector was another big winner.
Pharmaceuticals helped drive the strong performance of the health care
industry, as a slew of new products was rushed to the market sooner
than normal thanks to streamlined approval regulations.
Natural resources, on the other hand, suffered tremendously.
Overproduction and poor demand caused oil's price per barrel to plunge
considerably. Gold prices also were down in 1998. The financial sector
- - a top performer for several years - found 1998 to be a challenge.
The financial crises overseas and credit concerns contributed to the
poor showing of many brokerage and investment management firms.
FOREIGN STOCK MARKETS
Foreign stock markets posted mixed results in 1998. The Morgan Stanley
Capital International (MSCI) EAFE Index - which measures stock
performance in Europe, Australasia, and the Far East - returned 20.27%
in 1998. Europe posted the most consistently strong equity markets
when compared to other regions, with the MSCI Europe Index up 28.87%
for the year. The much-maligned Japanese stock market ended the year
on a positive note, thanks in part to long-awaited government
intercession on the ailing banking sector's behalf. For the year, the
Tokyo Stock Exchange Index (TOPIX) was up 7.76%. 1998 proved to be
disastrous for emerging markets. The MSCI Emerging Markets Free Index
suffered a -25.34% loss during the period, as the Asian crisis and
Russia's currency devaluation and loan defaults played havoc with
Latin America, Brazil, Thailand and other emerging-market nations.
U.S. BOND MARKETS
In a year as volatile as 1998, it's not surprising that the
performance of the U.S bond market was mostly positive. Still, most of
the major bond indexes trailed their returns of 1997, as investors
continued to seek out the high returns found in the equity markets.
For the year, the Lehman Brothers Aggregate Bond Index - a broad
measure of the performance of the U.S. taxable bond market - posted a
total return of 8.69%. The Lehman Brothers Corporate Bond Index
returned 8.57% in 1998. General U.S. Treasury funds were the safe
haven of choice in 1998, benefiting from the flight to safety as
investors worldwide reacted to global economic concerns. As a result,
the yield on the benchmark 30-year Treasury fell to its lowest levels
in three decades, tumbling to 5.09% at the end of the period compared
to 5.92% at the start of the year.
FOREIGN BOND MARKETS
Typically, continued low inflation and economic growth in the U.S.
would help provide a positive backdrop for U.S.-based bonds relative
to most foreign bonds. But there was nothing typical about 1998. The
Salomon Brothers World Government Bond Index - a measure of government
bond market performance in developed nations - returned an impressive
15.30% for the 12 months that ended December 31, 1998. Many European
nations - particularly France, Italy and Spain - boasted strong
performance that helped drive the index's overall return. Not all was
rosy in the international bond market, however. In stark contrast to
the developed world, the often-volatile emerging debt markets
experienced a particularly difficult year, illustrated by the J.P.
Morgan Emerging Markets Bond Index return of -11.04% during the
period. Once again, the impact of financial and economic woes in Asia
and Russia was the primary contributor to the poor performance of
emerging markets.
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). If Fidelity had not reimbursed certain fund
expenses, the life of fund total return would have been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, PAST 1 YEAR LIFE OF FUND
1998
VIP III: GROWTH OPPORTUNITIES 24.61% 26.26%
- - "INITIAL CLASS"
S&P 500 (registered trademark) 28.58% 30.55%
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 market capitalization-weighted index of common
stocks. This benchmark reflects the reinvestment of dividends and
capital gains, if any.
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown. The life of fund figures are from commencement
of operations January 3, 1995.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURN WOULD 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.
(checkmark)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.
$10,000 OVER LIFE OF FUND
VIP III Growth Opp S&P 500
00617 SP001
1995/01/03 10000.00 10000.00
1995/01/31 10060.00 10261.28
1995/02/28 10370.00 10661.16
1995/03/31 10560.00 10975.77
1995/04/30 10930.00 11299.00
1995/05/31 11440.00 11750.63
1995/06/30 11790.00 12023.59
1995/07/31 12180.00 12422.30
1995/08/31 12260.00 12453.48
1995/09/30 12470.00 12979.01
1995/10/31 12560.00 12932.68
1995/11/30 12920.00 13500.42
1995/12/31 13251.81 13760.44
1996/01/31 13444.45 14228.85
1996/02/29 13434.43 14360.75
1996/03/31 13393.72 14499.04
1996/04/30 13607.45 14712.76
1996/05/31 13912.77 15092.20
1996/06/30 14024.73 15149.70
1996/07/31 13617.62 14480.39
1996/08/31 13699.05 14785.78
1996/09/30 14360.59 15617.92
1996/10/31 14950.89 16048.66
1996/11/30 16080.60 17261.78
1996/12/31 15673.50 16919.83
1997/01/31 16416.46 17976.98
1997/02/28 16573.05 18117.92
1997/03/31 15727.48 17373.45
1997/04/30 16446.21 18410.65
1997/05/31 17513.74 19531.49
1997/06/30 18095.06 20406.50
1997/07/31 19490.24 22030.24
1997/08/31 18750.37 20796.11
1997/09/30 19532.52 21935.11
1997/10/31 19141.45 21202.48
1997/11/30 19817.90 22183.94
1997/12/31 20367.51 22564.84
1998/01/31 20452.07 22814.41
1998/02/28 21731.21 24459.78
1998/03/31 22407.88 25712.37
1998/04/30 22296.95 25971.03
1998/05/31 22141.65 25524.59
1998/06/30 22674.11 26561.40
1998/07/31 22751.76 26278.52
1998/08/31 19801.02 22479.17
1998/09/30 21021.26 23919.19
1998/10/31 22629.74 25864.77
1998/11/30 24082.93 27432.44
1998/12/31 25380.81 29013.09
IMATRL PRASUN SHR__CHT 19981231 19990114 102117 R00000000000051
VIP III: Growth Opportunities - "initial class" S&P 500
$29,013
$25,381
$
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund III: Growth Opportunities
Portfolio on January 3, 1995, when the fund started. As the chart
shows, by December 31, 1998, the value of the investment would have
grown to $25,381 - a 153.81% increase on the initial investment. For
comparison, look at how the Standard & Poor's 500 Index did over the
same period. With dividends and capital gains, if any, reinvested, the
same $10,000 investment would have grown to $29,013 - a 190.13%
increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
Fannie Mae 6.1
Philip Morris Companies, Inc. 5.9
Freddie Mac 3.6
Fleet Financial Group, Inc. 3.6
Home Depot, Inc. 2.5
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
FINANCE 20.0
TECHNOLOGY 13.2
RETAIL & WHOLESALE 9.5
UTILITIES 9.4
HEALTH 8.6
ASSET ALLOCATION AS OF DECEMBER 31, 1998*
% OF FUND'S INVESTMENTS
Row: 1, Col: 1, Value: 87.59999999999999
Row: 1, Col: 2, Value: 8.199999999999999
Row: 1, Col: 3, Value: 4.2
Stocks and
equity futures 87.6%
Bonds 8.2%
Short-term investments 4.2%
*FOREIGN INVESTMENTS 7.8%
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
(photograph of George Vanderheiden)
An interview with
George Vanderheiden, Portfolio Manager of Growth Opportunities
Portfolio
Q. HOW DID THE FUND PERFORM, GEORGE?
A. For the 12-month period that ended December 31, 1998, the fund
performed well, but trailed the Standard & Poor's 500 Index return of
28.58%.
Q. WHAT MARKET SECTORS HELPED FUND PERFORMANCE?
A. The fund's stock selection in the retail, finance and utilities
sectors helped performance relative to the S&P 500. Retailers,
including Wal-Mart, Home Depot and Lowe's, were overweighted in the
fund relative to the S&P 500, and outperformed the index due to better
earnings performance. Declining interest rates and an increase in home
financing activity fueled a strong price increase in fund holdings
Fannie Mae and Freddie Mac, both top contributors to performance over
the period. Utilities holding Vodafone Group, a telecommunications
company based in the United Kingdom, benefited from robust earnings
growth. Other notable contributors included nondurables holding Philip
Morris. Despite concerns over government litigation against the
tobacco industry, the stock performed solidly during the past year.
Fund performance was also helped by underexposure to economically
sensitive areas such basic industries, energy, and aerospace and
defense.
Q. WHAT SECTORS HURT FUND PERFORMANCE?
A. Disappointing returns among holdings from the health, technology
and durables sectors hurt performance. Throughout much of the year I
believed the ongoing economic problems in Asia posed formidable
investment risks - particularly in the technology sector.
Consequently, the fund remained underweighted in that sector, a stance
that hurt performance as technology more than doubled the return of
the S&P 500 during the period. The weak return from the fund's health
holdings was largely due to Columbia/HCA Healthcare's stock price
decline. Market sentiment turned against the company due to the
uncertainty surrounding resolution of the government's investigation
of Columbia's billing practices and its weaker-than-expected operating
results. The fund's bond holdings also detracted from performance
relative to the S&P 500. Through September, the bond position helped
fund performance as the decline in interest rates and concerns about
deceleration in corporate earnings growth propelled bonds to strong
gains. However, aggressive easing of monetary policy by the Federal
Reserve Bank in October and November pushed the equity market to new
highs and the fund's bond holdings became a drag on performance.
Q. HOW DID THE FUND WEATHER THE MARKET VOLATILITY OVER THE PAST YEAR?
A. For much of the year, I positioned the fund for an environment of
economic weakness. I focused stock selection on companies I believed
were less sensitive to downturns in the domestic economy and to
disruption in foreign markets. Fannie Mae, Freddie Mac, Wal-Mart
Stores and Home Depot are all examples of holdings that, despite the
emergence of a global financial crisis and increased market
volatility, met or exceeded earnings growth expectations over the past
year. Fannie Mae was the top individual contributor during the year.
The company has proven capable of performing well in both economic
booms and busts and the market has consistently rewarded them for it.
I also maintained an allocation of bonds to hedge against (1) a
deceleration in corporate earnings growth, (2) a downturn in the stock
market and (3) a financial crisis outside of the U.S. This defensive
strategy worked well during the market correction that began in
earnest over the summer.
Q. WHAT'S YOUR OUTLOOK?
A. The fund's positioning reflects an environment of anemic pricing
power, flat-to-declining corporate earnings and decreasing inflation.
Over the past year consumer spending was robust, retail sales were
strong, gross domestic product (GDP) growth was healthy and many
companies reported strong top line revenue growth. Nevertheless, U.S.
corporate earnings growth has decelerated and, in many cases, turned
negative. A lack of pricing power - or the ability to raise prices -
across a broad number of industries, wage inflation and a decrease in
exports have contributed to this weakness in earnings growth. Based
upon their underlying fundamentals, the values of many stocks remain
overextended, many economic forecasts are downcast and turmoil rolls
on in many economies around the world. Despite the euphoria many
investors feel towards Internet stocks, I believe we are already in an
earnings recession. The question remains if this will evolve into an
economic recession as well.
The views expressed in this report reflect those of the Portfolio
manager only through the end of the period of the report as stated on
the cover. The manager's views are subject to change at any time based
on market and other conditions
(checkmark)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, 1998,
more than $1.7 billion
MANAGER: George Vanderheiden, since inception;
joined Fidelity in 1971
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
INVESTMENTS DECEMBER 31, 1998
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 87.3%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 0.3%
Boeing Co. 147,500 $ 4,812,188
BASIC INDUSTRIES - 1.7%
CHEMICALS & PLASTICS - 1.0%
Cabot Corp. 71,700 2,003,119
du Pont (E.I.) de Nemours & 158,700 8,421,019
Co.
Raychem Corp. 131,500 4,249,094
Union Carbide Corp. 38,600 1,640,500
16,313,732
IRON & STEEL - 0.0%
Aeroquip-Vickers, Inc. 13,900 416,131
PACKAGING & CONTAINERS - 0.7%
Owens-Illinois, Inc. (a) 415,100 12,712,438
PAPER & FOREST PRODUCTS - 0.0%
Willamette Industries, Inc. 12,700 425,450
TOTAL BASIC INDUSTRIES 29,867,751
CONSTRUCTION & REAL ESTATE -
1.4%
BUILDING MATERIALS - 0.4%
Armstrong World Industries, 24,400 1,471,625
Inc.
Owens-Corning 132,200 4,684,838
Sherwin-Williams Co. 41,900 1,230,813
7,387,276
CONSTRUCTION - 0.8%
Centex Corp. 60,100 2,708,256
D.R. Horton, Inc. 91,136 2,096,128
Fleetwood Enterprises, Inc. 82,962 2,882,930
Kaufman & Broad Home Corp. 150,400 4,324,000
Lennar Corp. 23,900 603,475
12,614,789
ENGINEERING - 0.2%
Fluor Corp. 91,400 3,890,213
TOTAL CONSTRUCTION & REAL 23,892,278
ESTATE
DURABLES - 4.4%
AUTOS, TIRES, & ACCESSORIES -
3.0%
AutoZone, Inc. (a) 68,100 2,243,044
Cummins Engine Co., Inc. 106,500 3,780,750
Dana Corp. 37,300 1,524,638
Discount Auto Parts, Inc. (a) 66,300 1,454,456
Eaton Corp. 13,100 926,006
General Motors Corp. 399,100 28,560,594
Goodyear Tire & Rubber Co. 52,500 2,647,969
Lear Corp. (a) 26,500 1,020,250
Magna International, Inc. 86,300 5,379,301
Class A
Republic Industries, Inc. (a) 242,700 3,579,825
51,116,833
CONSUMER DURABLES - 0.2%
Minnesota Mining & 38,700 2,752,538
Manufacturing Co.
SHARES VALUE (NOTE 1)
CONSUMER ELECTRONICS - 0.3%
Newell Co. 119,200 $ 4,917,000
Whirlpool Corp. 22,900 1,268,088
6,185,088
TEXTILES & APPAREL - 0.9%
Burlington Industries, Inc. 296,400 3,260,400
(a)
Jones Apparel Group, Inc. (a) 76,800 1,694,400
Liz Claiborne, Inc. 163,200 5,151,000
NIKE, Inc. Class B 30,100 1,220,931
Polo Ralph Lauren Corp. Class 24,100 462,419
A (a)
Shaw Industries, Inc. 27,500 666,875
Warnaco Group, Inc. Class A 95,700 2,416,425
14,872,450
TOTAL DURABLES 74,926,909
ENERGY - 6.1%
ENERGY SERVICES - 0.6%
Baker Hughes, Inc. 28,500 504,094
Halliburton Co. 142,000 4,206,750
McDermott International, Inc. 97,900 2,416,906
Schlumberger Ltd. 69,500 3,205,688
10,333,438
OIL & GAS - 5.5%
Amerada Hess Corp. 207,000 10,298,250
Amoco Corp. 50,800 2,997,200
Apache Corp. 23,400 592,313
Atlantic Richfield Co. 23,900 1,559,475
British Petroleum PLC ADR 215,500 20,472,500
Burlington Resources, Inc. 178,835 6,404,528
Chevron Corp. 40,400 3,350,675
Cooper Cameron Corp. (a) 72,300 1,771,350
Elf Aquitaine SA sponsored ADR 22,200 1,257,075
Exxon Corp. 157,900 11,546,438
Occidental Petroleum Corp. 431,700 7,284,938
Royal Dutch Petroleum Co. (NY 248,900 11,916,088
Registry Gilder 1.25)
Tosco Corp. 374,100 9,679,838
Total SA:
Class B 6,153 612,223
sponsored ADR 53,468 2,660,033
Unocal Corp. 14,300 417,381
USX-Marathon Group 30,300 912,788
93,733,093
TOTAL ENERGY 104,066,531
FINANCE - 20.0%
BANKS - 0.9%
Bank of Tokyo-Mitsubishi Ltd. 218,000 2,252,185
Bank One Corp. 140,610 7,179,898
Wells Fargo & Co. 159,000 6,350,063
15,782,146
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
CREDIT & OTHER FINANCE - 4.0%
Associates First Capital 9,000 $ 381,375
Corp. Class A
Citigroup, Inc. 11,800 584,100
Fleet Financial Group, Inc. 1,391,364 62,176,579
Household International, Inc. 26,600 1,054,025
Providian Financial Corp. 67,200 5,040,000
69,236,079
FEDERAL SPONSORED CREDIT - 9.7%
Fannie Mae 1,408,600 104,236,373
Freddie Mac 966,000 62,246,625
166,482,998
INSURANCE - 4.6%
AFLAC, Inc. 63,500 2,794,000
Allmerica Financial Corp. 52,100 3,015,288
Allstate Corp. 431,918 16,682,833
American International Group, 236,450 22,846,981
Inc.
CIGNA Corp. 126,300 9,764,569
Loews Corp. 42,200 4,146,150
MGIC Investment Corp. 347,900 13,850,769
PMI Group, Inc. 16,500 814,688
Torchmark Corp. 111,700 3,944,406
Travelers Property Casualty 58,900 1,825,900
Corp. Class A
79,685,584
SAVINGS & LOANS - 0.2%
Golden West Financial Corp. 26,400 2,420,550
SECURITIES INDUSTRY - 0.6%
Merrill Lynch & Co., Inc. 50,400 3,364,200
Morgan Stanley, Dean Witter & 41,400 2,939,400
Co.
Nomura Securities Co. Ltd. 374,000 3,252,892
United Asset Management Corp. 3,900 101,400
Waddell & Reed Financial, Inc.:
Class A 2,255 53,415
Class B 25,200 585,900
10,297,207
TOTAL FINANCE 343,904,564
HEALTH - 8.6%
DRUGS & PHARMACEUTICALS - 3.9%
American Home Products Corp. 273,400 15,395,838
Amgen, Inc. (a) 181,000 18,925,813
Astra AB Class A 313,266 6,480,692
Merck & Co., Inc. 61,800 9,127,088
Novartis AG (Reg.) 800 1,572,052
Schering-Plough Corp. 275,800 15,237,950
66,739,433
MEDICAL EQUIPMENT & SUPPLIES
- - 1.7%
AmeriSource Health Corp. 69,100 4,491,500
Class A (a)
Baxter International, Inc. 10,700 688,144
SHARES VALUE (NOTE 1)
Biomet, Inc. 44,300 $ 1,783,075
Boston Scientific Corp. (a) 42,700 1,144,894
Johnson & Johnson 224,500 18,829,938
St. Jude Medical, Inc. (a) 111,402 3,084,443
30,021,994
MEDICAL FACILITIES MANAGEMENT
- - 3.0%
Columbia/HCA Healthcare Corp. 1,311,850 32,468,288
Humana, Inc. (a) 279,500 4,978,594
Tenet Healthcare Corp. (a) 309,600 8,127,000
United HealthCare Corp. 126,000 5,425,875
50,999,757
TOTAL HEALTH 147,761,184
HOLDING COMPANIES - 0.0%
U.S. Industries, Inc. 36,100 672,363
INDUSTRIAL MACHINERY &
EQUIPMENT - 3.4%
ELECTRICAL EQUIPMENT - 2.5%
Alcatel Alsthom Compagnie 32,700 3,995,531
Generale d'Electricite SA
(RFD)
Emerson Electric Co. 154,800 9,684,675
General Electric Co. 111,400 11,369,763
Grainger (W.W.), Inc. 64,400 2,680,650
Philips Electronics NV:
(Bearer) 74,300 5,029,183
(NY shares) 164,200 11,114,288
43,874,090
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.9%
Caterpillar, Inc. 102,300 4,705,800
Tyco International Ltd. 98,000 7,392,875
Ultratech Stepper, Inc. (a) 66,800 1,068,800
United States Filter Corp. (a) 84,800 1,939,800
15,107,275
TOTAL INDUSTRIAL MACHINERY & 58,981,365
EQUIPMENT
MEDIA & LEISURE - 2.3%
BROADCASTING - 0.5%
Comcast Corp. Class A 14,400 845,100
(special)
Cox Communications, Inc. 19,400 1,341,025
Class A (a)
Infinity Broadcasting Corp. 43,800 1,199,025
(a)
MediaOne Group, Inc. 90,200 4,239,400
Tele-Communications, Inc. 21,768 1,204,043
(TCI Group) Series A (a)
8,828,593
ENTERTAINMENT - 0.7%
Cedar Fair LP (depository 5,800 150,800
unit)
Fox Entertainment Group, Inc. 37,700 949,569
(a)
King World Productions, Inc. 23,800 700,613
(a)
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - CONTINUED
ENTERTAINMENT - CONTINUED
Royal Carribean Cruises Ltd. 25,900 $ 958,300
Tele-Communications, Inc. 357,464 8,422,746
(TCI Ventures Group) Series
A (a)
11,182,028
LODGING & GAMING - 0.6%
Mirage Resorts, Inc. (a) 132,800 1,983,700
Promus Hotel Corp. (a) 171,500 5,552,313
Sun International Hotels Ltd. 72,800 3,307,850
(a)
10,843,863
RESTAURANTS - 0.5%
McDonald's Corp. 45,500 3,486,438
Papa John's International, 8,500 375,063
Inc. (a)
Wendy's International, Inc. 247,700 5,402,956
9,264,457
TOTAL MEDIA & LEISURE 40,118,941
NONDURABLES - 6.2%
BEVERAGES - 0.1%
PepsiCo, Inc. 35,900 1,469,656
HOUSEHOLD PRODUCTS - 0.2%
Revlon, Inc. Class A (a) 48,300 793,931
Rubbermaid, Inc. 71,300 2,241,494
3,035,425
TOBACCO - 5.9%
Philip Morris Companies, Inc. 1,892,200 101,232,700
TOTAL NONDURABLES 105,737,781
PRECIOUS METALS - 0.0%
Newmont Mining Corp. 23,569 425,715
RETAIL & WHOLESALE - 9.5%
APPAREL STORES - 0.6%
Gap, Inc. 63,825 3,590,156
Ross Stores, Inc. 19,900 783,563
TJX Companies, Inc. 227,700 6,603,300
10,977,019
GENERAL MERCHANDISE STORES -
3.1%
Federated Department Stores, 169,400 7,379,488
Inc. (a)
Saks Holdings, Inc. (a) 203,106 6,410,533
Wal-Mart Stores, Inc. 475,300 38,707,244
52,497,265
GROCERY STORES - 0.5%
Safeway, Inc. (a) 130,400 7,946,250
RETAIL & WHOLESALE,
MISCELLANEOUS - 5.3%
Circuit City Stores, Inc. - 254,700 12,719,081
Circuit City Group
Home Depot, Inc. 700,000 42,831,250
Lowe's Companies, Inc. 476,800 24,406,200
SHARES VALUE (NOTE 1)
Office Depot, Inc. (a) 127,700 $ 4,716,919
Officemax, Inc. (a) 155,975 1,891,197
Staples, Inc. (a) 110,550 4,829,653
91,394,300
TOTAL RETAIL & WHOLESALE 162,814,834
SERVICES - 0.5%
ADVERTISING - 0.1%
Interpublic Group of 17,350 1,383,663
Companies, Inc.
Omnicom Group, Inc. 13,700 794,600
2,178,263
SERVICES - 0.4%
Modis Professional Services, 73,600 1,067,200
Inc. (a)
Service Corp. International 164,700 6,268,894
7,336,094
TOTAL SERVICES 9,514,357
TECHNOLOGY - 13.2%
COMMUNICATIONS EQUIPMENT - 0.0%
Cisco Systems, Inc. (a) 3,450 320,203
COMPUTER SERVICES & SOFTWARE
- - 3.1%
Automatic Data Processing, 68,900 5,524,919
Inc.
Black Box Corp. (a) 20,400 772,650
Ceridian Corp. (a) 45,000 3,141,563
CompUSA, Inc. 77,800 1,016,263
E Trade Group, Inc. (a) 41,900 1,960,134
Electronics for Imaging, Inc. 92,600 3,704,000
(a)
First Data Corp. 139,800 4,429,913
IMS Health, Inc. 35,300 2,662,944
Microsoft Corp. (a) 125,200 17,363,675
Oracle Corp. (a) 137,725 5,939,391
Policy Management Systems 119,000 6,009,500
Corp. (a)
52,524,952
COMPUTERS & OFFICE EQUIPMENT
- - 3.1%
Compaq Computer Corp. 263,900 11,067,306
Hewlett-Packard Co. 49,200 3,360,975
Ingram Micro, Inc. Class A (a) 21,300 742,838
International Business 86,900 16,054,775
Machines Corp.
SCI Systems, Inc. (a) 279,800 16,158,450
Tech Data Corp. (a) 159,200 6,407,800
53,792,144
ELECTRONIC INSTRUMENTS - 1.0%
Applied Materials, Inc. (a) 106,100 4,529,144
Cognex Corp. (a) 22,100 442,000
KLA-Tencor Corp. (a) 104,100 4,515,338
LAM Research Corp. (a) 114,700 2,043,094
Novellus Systems, Inc. (a) 23,800 1,178,100
Teradyne, Inc. (a) 15,600 661,050
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TECHNOLOGY - CONTINUED
ELECTRONIC INSTRUMENTS -
CONTINUED
Thermo Electron Corp. (a) 177,500 $ 3,006,406
Varian Associates, Inc. 24,200 916,575
17,291,707
ELECTRONICS - 6.0%
Altera Corp. (a) 38,700 2,355,863
AMP, Inc. 83,727 4,359,037
Analog Devices, Inc. (a) 23,700 743,588
Conexant Systems, Inc. (a) 33,200 556,100
Etec Systems, Inc. (a) 23,400 936,000
Intel Corp. 75,300 8,927,756
International Rectifier Corp. 52,100 507,975
(a)
Methode Electronics, Inc. 195,900 3,060,938
Class A
Micrel, Inc. (a) 28,400 1,562,000
Microchip Technology, Inc. (a) 109,700 4,058,900
Micron Technology, Inc. (a) 313,300 15,841,231
Molex, Inc. Class A 113,828 3,628,267
Motorola, Inc. 171,900 10,496,644
Solectron Corp. (a) 436,400 40,557,925
Speedfam International, Inc. 23,100 395,588
(a)
Thomas & Betts Corp. 99,200 4,296,600
Vishay Intertechnology, Inc. 24,210 351,045
102,635,457
TOTAL TECHNOLOGY 226,564,463
TRANSPORTATION - 0.3%
RAILROADS - 0.2%
CSX Corp. 70,600 2,929,900
TRUCKING & FREIGHT - 0.1%
Airborne Freight Corp. 42,700 1,539,869
TOTAL TRANSPORTATION 4,469,769
UTILITIES - 9.4%
CELLULAR - 2.8%
AirTouch Communications, Inc. 65,400 4,716,975
(a)
Tele Celular Sul 17,510 305,331
Participacoes SA ADR
Tele Centro Oeste Celular 58,366 171,450
Participacoes SA ADR
Tele Leste Celular 3,502 99,369
Participacoes SA ADR
Tele Nordeste Celular 8,755 161,968
Participacoes SA ADR
Tele Norte Celular 3,502 79,014
Participacoes SA ADR
Tele Sudeste Celular 35,020 724,476
Participacoes SA ADR
Teleglobe, Inc. 21,425 769,928
Telemig Celular Participacoes 8,755 186,044
SA ADR
Telesp Celular Participacoes 70,040 1,225,700
SA ADR
SHARES VALUE (NOTE 1)
Vodafone Group PLC 24,396 $ 393,082
Vodafone Group PLC sponsored 241,780 38,956,803
ADR
47,790,140
ELECTRIC UTILITY - 0.3%
American Electric Power Co., 48,800 2,296,650
Inc.
Duke Energy Corp. 15,800 1,012,188
Houston Industries, Inc. 22,100 709,963
Niagara Mohawk Power Corp. (a) 19,700 317,663
PG&E Corp. 20,130 634,095
4,970,559
TELEPHONE SERVICES - 6.3%
Ameritech Corp. 76,100 4,822,838
AT&T Corp. 145,700 10,963,925
Bell Atlantic Corp. 145,462 8,264,060
BellSouth Corp. 189,400 9,446,325
Embratel Participacoes SA ADR 175,100 2,440,456
MCI WorldCom, Inc. (a) 458,928 32,928,084
Qwest Communications 93,470 4,673,500
International, Inc. (a)
SBC Communications, Inc. 174,400 9,352,200
Sprint Corp.:
(FON Group) 183,200 15,411,700
Series 1 (PCS Group) (a) 115,200 2,664,000
Tele Centro Sul Participacoes 35,020 1,464,274
SA ADR
Tele Norte Leste 175,100 2,177,806
Participacoes SA ADR
Telebras sponsored ADR 107,600 11,769
Telesp Participacoes SA ADR 175,100 3,874,088
108,495,025
TOTAL UTILITIES 161,255,724
TOTAL COMMON STOCKS 1,499,786,717
(Cost $1,085,650,365)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
U.S. TREASURY OBLIGATIONS -
8.2%
MOODY'S RATINGS (UNAUDITED) (D) PRINCIPAL AMOUNT
U.S. Treasury Bills, yield at $ 800,000 798,869
date of purchase 3.66% to
4.04% 1/7/99 to 1/21/99 (c)
U.S. Treasury Bonds:
stripped principal 0% 2/15/19 Aaa 47,450,000 15,546,993
6.25% 8/15/23 Aaa 40,953,000 45,771,530
8.125% 8/15/19 Aaa 58,840,000 78,579,055
TOTAL U.S. TREASURY OBLIGATIONS 140,696,447
(Cost $123,033,785)
CASH EQUIVALENTS - 4.5%
SHARES VALUE (NOTE 1)
Taxable Central Cash Fund (b) 77,217,463 $ 77,217,463
(Cost $77,217,463)
TOTAL INVESTMENT IN $ 1,717,700,627
SECURITIES - 100%
(Cost $1,285,901,613)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
FUTURES CONTRACTS
EXPIRATION DATE UNDERLYING FACE AMOUNT AT VALUE UNREALIZED GAIN/(LOSS)
PURCHASED
17 S&P 500 Stock Index Mar. 1999 $ 5,293,375 $ 26,196
Contracts
THE FACE VALUE OF FUTURES
PURCHASED AS A PERCENTAGE OF
TOTAL INVESTMENTS IN
SECURITIES - 0.3%
</TABLE>
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield on the Taxable Central Cash
Fund was 4.80%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(c) Security or a portion of the security was pledged to cover margin
requirements for futures contracts. At the period end, the value of
securities pledged amounted to $475,000.
(d) Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investor Service, Inc.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $747,207,373 and $372,728,087, respectively, of which
long-term U.S. government and government agency obligations aggregated
$43,464,188 and $32,068,838, respectively (see Note 3 of Notes to
Financial Statements).
The market value of futures contracts opened and closed during the
period amounted to $177,173,203 and $178,482,924, respectively (see
Note 3 of Notes to Financial Statements).
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company.
The commissions paid to these affiliated firms were $118,698 for the
period (see Note 4 of Notes to Financial Statements).
The fund participated in the interfund lending program as a lender.
The maximum loan and average daily balances during the period for
which the loan was outstanding amounted to $66,000,000. The weighted
average interest rate was 5.55%. Interest earned from the interfund
lending program amounted to $40,086 and is included in interest income
on the Statement of Operations (see Note 6 of Notes to Financial
Statements).
INCOME TAX INFORMATION
At December 31, 1998, the aggregate cost of investment securities for
income tax purposes was $1,288,940,047. Net unrealized appreciation
aggregated $428,760,580, of which $488,608,626 related to appreciated
investment securities and $59,848,046 related to depreciated
investment securities.
The fund hereby designates approximately $27,471,000 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, 1998
ASSETS
Investment in securities, at $ 1,717,700,627
value (cost $1,285,901,613)
- - See accompanying schedule
Receivable for investments 7,885,948
sold
Receivable for fund shares 3,600,545
sold
Dividends receivable 2,288,000
Interest receivable 3,064,487
Receivable for daily 14,450
variation on futures
contracts
TOTAL ASSETS 1,734,554,057
LIABILITIES
Payable to custodian bank $ 2,230
Payable for investments 12,793,552
purchased
Payable for fund shares 1,239,701
redeemed
Accrued management fee 800,001
Distribution fees payable 10,056
Other payables and accrued 201,446
expenses
TOTAL LIABILITIES 15,046,986
NET ASSETS $ 1,719,507,071
Net Assets consist of:
Paid in capital $ 1,241,471,370
Undistributed net investment 17,079,948
income
Accumulated undistributed net 29,118,441
realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation 431,837,312
(depreciation) on
investments and assets and
liabilities in foreign
currencies
NET ASSETS $ 1,719,507,071
INITIAL CLASS: NET ASSET $22.88
VALUE, offering price and
redemption price per share
($1,570,011,353 (divided by)
68,621,624 shares)
SERVICE CLASS: NET ASSET $22.86
VALUE, offering price and
redemption price per share
($149,495,718 (divided by)
6,538,863 shares)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME $ 14,933,696
Dividends
Interest 11,929,733
TOTAL INCOME 26,863,429
EXPENSES
Management fee $ 8,011,214
Transfer agent fees 924,113
Distribution fees - Service 65,577
Class
Accounting fees and expenses 563,938
Non-interested trustees' 4,762
compensation
Custodian fees and expenses 58,570
Audit 24,934
Legal 10,354
Miscellaneous 31,179
Total expenses before 9,694,641
reductions
Expense reductions (79,805) 9,614,836
NET INVESTMENT INCOME 17,248,593
REALIZED AND UNREALIZED GAIN
(LOSS)
Net realized gain (loss) on:
Investment securities 28,096,730
Foreign currency transactions (6,386)
Futures contracts 1,309,721 29,400,065
Change in net unrealized
appreciation (depreciation)
on:
Investment securities 261,631,252
Assets and liabilities in 12,893
foreign currencies
Futures contracts 26,196 261,670,341
NET GAIN (LOSS) 291,070,406
NET INCREASE (DECREASE) IN $ 308,318,999
NET ASSETS RESULTING FROM
OPERATIONS
OTHER INFORMATION $ 77,769
Expense reductions Directed
brokerage arrangements
Custodian credits 2,036
$ 79,805
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
INCREASE (DECREASE) IN NET YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
ASSETS
Operations Net investment $ 17,248,593 $ 11,806,552
income
Net realized gain (loss) 29,400,065 41,932,727
Change in net unrealized 261,670,341 124,025,796
appreciation (depreciation)
NET INCREASE (DECREASE) IN 308,318,999 177,765,075
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders (12,018,174) (6,503,921)
From net investment income
From net realized gain (41,777,463) (9,258,542)
TOTAL DISTRIBUTIONS (53,795,637) (15,762,463)
Share transactions - net 436,628,059 483,267,618
increase (decrease)
TOTAL INCREASE (DECREASE) 691,151,421 645,270,230
IN NET ASSETS
NET ASSETS
Beginning of period 1,028,355,650 383,085,420
End of period (including $ 1,719,507,071 $ 1,028,355,650
undistributed net investment
income of $17,079,948 and
$11,667,388, respectively)
</TABLE>
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
SHARES DOLLARS SHARES DOLLARS
Share transactions Initial 21,572,358 $ 432,066,063 29,803,319 $ 508,833,566
Class Sold
Reinvested 2,818,502 53,495,168 1,011,711 15,762,463
Redeemed (8,989,787) (178,498,316) (2,470,247) (43,871,687)
Net increase (decrease) 15,401,073 $ 307,062,915 28,344,783 $ 480,724,342
Service Class A Sold 6,428,938 $ 130,061,772 134,338 $ 2,543,276
Reinvested 15,831 300,469 - -
Redeemed (40,244) (797,097) - -
Net increase (decrease) 6,404,525 $ 129,565,144 134,338 $ 2,543,276
Distributions From net $ 11,951,048 $ 6,503,921
investment income Initial
Class
Service Class 67,126 -
Total $ 12,018,174 $ 6,503,921
From net realized gain $ 41,544,120 $ 9,258,542
Initial Class
Service Class 233,343 -
Total $ 41,777,463 $ 9,258,542
$ 53,795,637 $ 15,762,463
A SERVICE CLASS COMMENCED
SALE OF SHARES NOVEMBER 3,
1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 1996 1995 D
Net asset value, beginning of $ 19.27 $ 15.40 $ 13.07 $ 10.00
period
Income from Investment
Operations
Net investment income .26 C .29 C .26 .11
Net realized and unrealized 4.29 4.18 2.12 3.14
gain (loss)
Total from investment 4.55 4.47 2.38 3.25
operations
Less Distributions
From net investment income (.21) (.25) - (.11)
From net realized gain (.73) (.35) (.05) (.07)
Total distributions (.94) (.60) (.05) (.18)
Net asset value, end of period $ 22.88 $ 19.27 $ 15.40 $ 13.07
TOTAL RETURN B, H 24.61% 29.95% 18.27% 32.52%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 1,570,011 $ 1,025,766 $ 383,085 $ 164,303
(000 omitted)
Ratio of expenses to average .71% .74% .77% .85% F
net assets
Ratio of expenses to average .70% G .73% G .76% G .83% G
net assets after expense
reductions
Ratio of net investment 1.27% 1.68% 2.29% 2.49%
income to average net assets
Portfolio turnover 29% 26% 28% 38%
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 E
Net asset value, beginning of $ 19.27 $ 18.50
period
Income from Investment
Operations
Net investment income C .23 .04
Net realized and unrealized 4.30 .73
gain (loss)
Total from investment 4.53 .77
operations
Less Distributions
From net investment income (.21) -
From net realized gain (.73) -
Total distributions (.94) -
Net asset value, end of period $ 22.86 $ 19.27
TOTAL RETURN B, H 24.51% 4.16%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 149,496 $ 2,589
(000 omitted)
Ratio of expenses to average .80% .84% A
net assets
Ratio of expenses to average .79% G .83% A, G
net assets after expense
reductions
Ratio of net investment 1.16% 1.72% A
income to average net assets
Portfolio turnover 29% 26%
A ANNUALIZED
B 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).
C NET INVESTMENT INCOME PER
SHARE HAS BEEN CALCULATED
BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
D FOR THE PERIOD JANUARY 3,
1995 (COMMENCEMENT OF
OPERATIONS OF INITIAL CLASS
SHARES) TO DECEMBER 31, 1995.
E FOR THE PERIOD NOVEMBER 3,
1997 (COMMENCEMENT OF SALE
OF SERVICE CLASS SHARES) TO
DECEMBER 31, 1997.
F FMR AGREED TO REIMBURSE A
PORTION OF THE CLASS'
EXPENSES DURING THE PERIOD.
WITHOUT THIS REIMBURSEMENT,
THE CLASS' EXPENSE RATIO
WOULD HAVE BEEN HIGHER.
G FMR OR THE FUND HAS ENTERED
INTO VARYING ARRANGEMENTS
WITH THIRD PARTIES WHO
EITHER PAID OR REDUCED A
PORTION OF THE CLASS'
EXPENSES (SEE NOTE 5 OF
NOTES TO FINANCIAL
STATEMENTS).
H TOTAL RETURNS DO NOT
REFLECT CHARGES ATTRIBUTABLE
TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION
OF THESE CHARGES WOULD
REDUCE THE TOTAL RETURNS
SHOWN. TOTAL RETURNS FOR
PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1998
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 funds'
original class of shares (Initial Class shares) and Service Class
shares. Both classes have equal rights and voting privileges, except
for matters affecting a single class. Investment income, realized and
unrealized capital gains and losses, the common expenses of the fund,
and certain fund-level expense reductions, if any, are allocated on a
pro rata basis to each class based on the relative net assets of each
class to the total net assets of the fund. Each class of shares
differs in its respective distribution plan.
The financial statements have been prepared in conformity with
generally accepted accounting principles which require management to
make certain estimates and assumptions at the date of the financial
statements. The following summarizes the significant accounting
policies of the fund:
SECURITY VALUATION. Securities for which exchange quotations are
readily available are valued at the last sale price, or if no sale
price, at the closing bid price. Securities for which exchange
quotations are not readily available (and in certain cases debt
securities which trade on an exchange) are valued primarily using
dealer-supplied valuations or at their fair value as determined in
good faith under consistently applied procedures under the general
supervision of the Board of Trustees. Short-term securities with
remaining maturities of sixty days or less for which quotations are
not readily available are valued at amortized cost or original cost
plus accrued interest, both of which approximate current value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Purchases
and sales of securities, income receipts and expense payments are
translated into U.S. dollars at the prevailing exchange rate on the
respective dates of the transactions.
Net realized gains and losses on foreign currency transactions
represent net gains and losses from sales and maturities of foreign
currency contracts, disposition of foreign currencies, the difference
between the amount of net investment income accrued and the U.S.
dollar amount actually received, and gains and losses between trade
and settlement date on purchases and sales of securities. The effects
of changes in foreign currency exchange rates on investments in
securities are included with the net realized and unrealized gain or
loss on investment securities.
INCOME TAXES. As a qualified regulated investment company under
Subchapter M of the Internal Revenue Code, the fund is not subject to
income taxes to the extent that it distributes substantially all of
its taxable income for the 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 futures transactions, 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.
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
2. OPERATING POLICIES - CONTINUED
JOINT TRADING ACCOUNT - CONTINUED
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., an
affiliate of FMR. The Cash Fund is an open-end money market fund
available only to investment companies and other accounts managed by
FMR and its affiliates. The Cash Fund seeks preservation of capital,
liquidity, and current income by investing in U.S. Treasury securities
and repurchase agreements for these securities. Income distributions
from the Cash Fund are declared daily and paid monthly from net
interest income. Income distributions earned by the fund are recorded
as interest income in the accompanying financial statements.
INTERFUND LENDING PROGRAM. Pursuant to an Exemptive Order issued by
the SEC, the fund, along with other registered investment companies
having management contracts with FMR, may participate in an interfund
lending program. This program provides an alternative credit facility
allowing the fund to borrow from, or lend money to, other
participating funds.
FUTURES CONTRACTS. The fund may use futures contracts to manage its
exposure to the stock market. Buying futures tends to increase the
fund's exposure to the underlying instrument, while selling futures
tends to decrease the fund's exposure to the underlying instrument or
hedge other fund investments. Futures contracts involve, to varying
degrees, risk of loss in excess of the futures variation margin
reflected in the Statement of Assets and Liabilities. The underlying
face amount at value of any open futures contracts at period end is
shown in the schedule of investments under the caption "Futures
Contracts." This amount reflects each contract's exposure to the
underlying instrument at period end. Losses may arise from changes in
the value of the underlying instruments or if the counterparties do
not perform under the contracts' terms. Gains (losses) are realized
upon the expiration or closing of the futures contracts. Futures
contracts are valued at the settlement price established each day by
the board of trade or exchange on which they are traded.
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities) and the market value of futures contracts
opened and closed, is included under the caption "Other Information"
at the end of the fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, 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 .59% 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 $65,577, all of which was
reallowed to insurance companies, for the distribution of shares and
providing shareholder support services.
Under the Plans, FMR may use its resources to pay administrative and
promotional expenses related to the sale of each class of shares.
Subject to the approval of the Board of Trustees, the Plans also
authorize payments to third parties that assist in the sale of each
class of shares or render shareholder support services. For the
period, payments made to third parties under the Plans amounted to
$120,384 and $72,484 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.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments
5. EXPENSE REDUCTIONS.
FMR has directed certain portfolio trades to brokers who paid a
portion of the fund's expenses.
In addition, the fund has entered into an arrangement with its
custodian whereby credits realized on uninvested cash balances were
used to offset a portion of the fund's expenses.
For the period, the reductions under these arrangements are shown
under the caption "Other Information" on the fund's Statement of
Operations.
6. INTERFUND LENDING PROGRAM
Information regarding the interfund lending program is included under
the caption "Other Information" at the end of the fund's schedule of
investments.
7. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were the record owners
of approximately 27% of the outstanding shares of the fund. In
addition, one unaffiliated insurance company was record owner of 60%
of the total outstanding shares of the fund.
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, 1998, and the results of its operations, 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, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 12, 1999
DISTRIBUTIONS
The Board of Trustees of 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:
PAY DATE RECORD DATE DIVIDENDS CAPITAL GAINS
Initial Class 2/5/99 2/5/99 $0.23 $0.43
Service Class 2/5/99 2/5/99 $0.22 $0.43
The fund hereby designates 100% of the long-term capital gain
dividends distributed during the fiscal year as 20%-rate capital gain
dividends.
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
Matthew N. Karstetter, DEPUTY TREASURER
John 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 *
* INDEPENDENT TRUSTEES
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER SERVICING AGENT
Fidelity Investments Institutional Operations Co., Inc.
Boston, MA
CUSTODIAN
Brown Brothers Harriman & Co.
Boston, MA
