SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (No. 811-2614)
UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 22
Fidelity Exchange Fund
(Exact Name of Registrant as Specified in Charter)
82 Devonshire St., Boston, MA 02109
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number (617) 563-7000
Eric D. Roiter, Secretary
82 Devonshire Street,
Boston, Massachusetts 02109
(Name and Address of Agent for Service)
FIDELITY
EXCHANGE
FUND
REGISTRATION STATEMENT
FEBRUARY 24, 2000
(fidelity_logo_graphic)(registered trademark)
82 Devonshire Street, Boston, MA 02109
CONTENTS
FUND BASICS 4 INVESTMENT DETAILS
2 VALUING SHARES
SHAREHOLDER INFORMATION 3 BUYING AND SELLING SHARES
3 ACCOUNT POLICIES
3 DIVIDENDS AND CAPITAL GAINS
DISTRIBUTIONS
3 TAX CONSEQUENCES
FUND SERVICES 4 FUND MANAGEMENT
FUND BASICS
INVESTMENT DETAILS
INVESTMENT OBJECTIVE
EXCHANGE FUND seeks long-term growth of capital.
PRINCIPAL INVESTMENT STRATEGIES
Fidelity Management & Research Company (FMR) normally invests the
fund's assets in equity securities.
FMR may invest the fund's assets in securities of foreign issuers in
addition to securities of domestic issuers.
FMR manages the fund using an investment strategy that is sensitive to
the potential impact of federal income tax on shareholders' investment
returns.
In buying and selling securities for the fund, FMR invests for the
long term. When deciding whether to sell securities, FMR will consider
the negative tax impact of realized capital gains (and the positive
tax impact of realizing capital losses).
FMR may lend the fund's securities to broker-dealers or other
institutions to earn income for the fund.
FMR may use various techniques, such as buying and selling futures
contracts, to increase or decrease the fund's exposure to changing
security prices or other factors that affect security values. If FMR's
strategies do not work as intended, the fund may not achieve its
objective.
DESCRIPTION OF PRINCIPAL SECURITY TYPES
EQUITY SECURITIES represent an ownership interest, or the right to
acquire an ownership interest, in an issuer. Different types of equity
securities provide different voting and dividend rights and priority
in the event of the bankruptcy of the issuer. Equity securities
include common stocks, preferred stocks, convertible securities and
warrants.
PRINCIPAL INVESTMENT RISKS
Many factors affect the fund's performance. The fund's share price
changes daily based on changes in market conditions and interest rates
and in response to other economic, political or financial
developments. The fund's reaction to these developments will be
affected by the types of the securities in which the fund invests, the
financial condition, industry and economic sector, and geographic
location of an issuer, and the fund's level of investment in the
securities of that issuer. When you sell your shares of the fund, they
could be worth more or less than what you paid for them.
The following factors may significantly affect the fund's performance:
STOCK MARKET VOLATILITY. The value of equity securities fluctuates in
response to issuer, political, market and economic developments. In
the short term, equity prices can fluctuate dramatically in response
to these developments. Different parts of the market and different
types of equity securities can react differently to these
developments. For example, large cap stocks can react differently than
small cap stocks, and "growth" stocks can react differently than
"value" stocks. Issuer, political or economic developments can affect
a single issuer, issuers within an industry or economic sector or
geographic region, or the market as a whole.
FOREIGN EXPOSURE. Foreign securities, foreign currencies, and
securities issued by U.S. entities with substantial foreign operations
can involve additional risks relating to political, economic or
regulatory conditions in foreign countries. These risks include
fluctuations in foreign currencies; withholding or other taxes;
trading, settlement, custodial and other operational risks; and the
less stringent investor protection and disclosure standards of some
foreign markets. All of these factors can make foreign investments,
especially those in emerging markets, more volatile and potentially
less liquid than U.S. investments. In addition, foreign markets can
perform differently than the U.S. market.
ISSUER-SPECIFIC CHANGES. Changes in the financial condition of an
issuer, changes in specific economic or political conditions that
affect a particular type of security or issuer, and changes in general
economic or political conditions can affect the value of an issuer's
securities. The value of securities of smaller, less well-known
issuers can be more volatile than that of larger issuers.
FUNDAMENTAL INVESTMENT POLICIES
The policy discussed below is fundamental, that is, subject to change
only by shareholder approval.
EXCHANGE FUND seeks long-term growth of capital.
VALUING SHARES
The fund is open for business each day the New York Stock Exchange
(NYSE) is open.
The fund's net asset value per share (NAV) is the value of a single
share. Fidelity(registered trademark) normally calculates the fund's
NAV as of the close of business of the NYSE, normally 4:00 p.m.
Eastern time. However, NAV may be calculated earlier if trading on the
NYSE is restricted or as permitted by the Securities and Exchange
Commission (SEC). The fund's assets are valued as of this time for the
purpose of computing the fund's NAV.
To the extent that the fund's assets are traded in other markets on
days when the NYSE is closed, the value of the fund's assets may be
affected on days when the fund is not open for business. In addition,
trading in some of the fund's assets may not occur on days when the
fund is open for business.
The fund's assets are valued primarily on the basis of market
quotations. Certain short-term securities are valued on the basis of
amortized cost. If market quotations are not readily available for a
security or if a security's value has been materially affected by
events occurring after the close of the exchange or market on which
the security is principally traded (for example, a foreign exchange or
market), that security may be valued by another method that the Board
of Trustees believes accurately reflects fair value. A security's
valuation may differ depending on the method used for determining
value.
SHAREHOLDER INFORMATION
BUYING AND SELLING SHARES
BUYING SHARES
Shares of the fund are not currently offered to the public.
SELLING SHARES
The price to sell one share of the fund is the fund's NAV.
Your shares will be sold at the next NAV calculated after your order
is received in proper form.
Redemption requests must be in writing. A redemption request shall be
deemed received in proper form if it is accompanied by certificates
for the shares (if certificates have been issued) and a stock power
(whether or not certificates have been issued) signed by the holder(s)
of record exactly as the shares are registered, with signature(s)
guaranteed by a bank, broker, dealer, credit union (if authorized
under state law), securities exchange, or savings association. The
request shall specify the number of shares to be redeemed and identify
the investor's account number. Further documentation may be required
if the request is made by a shareholder who is not an individual or by
someone other than the holder of record.
In order to limit the realization of capital gains from the sale of
portfolio securities to meet redemptions of shares, the fund intends
to follow a policy of redeeming its shares by the distribution of one
or more portfolio securities in kind, to the extent it is practicable
to do so. For this purpose, portfolio securities distributed in kind
shall be valued in the same manner as they are valued for the purpose
of calculating the fund's NAV. To the extent it is not practicable to
redeem shares by a redemption in kind, the fund will redeem its shares
for cash. The securities which the fund will utilize in honoring
redemptions in kind will tend to be those which the fund believes are
least likely to contribute to the realization of its investment
objective and will tend to be the lowest tax cost lots of the
securities chosen.
Shareholders who wish to sell securities distributed to them will have
to make their own arrangements for sale and will incur the brokerage
or other costs involved. Neither the fund nor Fidelity Service
Company, Inc. (FSC) will arrange for the sale on behalf of a
shareholder of portfolio securities distributed in kind. The fund
will, however, arrange for the delivery of the securities to a broker
or dealer designated in advance by the redeeming shareholder.
When you place an order to sell shares, note the following:
(small solid bullet) Normally, Fidelity will process redemptions by
the next business day, but Fidelity may take up to seven days to
process redemptions if making immediate payment would adversely affect
the fund.
(small solid bullet) Redemptions may be suspended or payment dates
postponed when the NYSE is closed (other than weekends or holidays),
when trading on the NYSE is restricted, or as permitted by the SEC.
ACCOUNT POLICIES
POLICIES
The following policies apply to you as a shareholder.
STATEMENTS AND REPORTS that Fidelity sends to you include the
following:
(small solid bullet) Confirmation statements (after transactions
affecting your account balance except reinvestment of distributions in
the fund).
(small solid bullet) Monthly or quarterly account statements
(detailing account balances and all transactions completed during the
prior month or quarter).
(small solid bullet) Financial reports (every six months).
To reduce expenses, only one copy of most financial reports will be
mailed to your household, even if you have more than one account in
the fund. Call Fidelity at 1-800-544-8544 if you need additional
copies of financial reports.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The fund earns dividends, interest and other income from its
investments, and distributes this income (less expenses) to
shareholders as dividends. The fund also realizes capital gains from
its investments, and distributes these gains (less any losses) to
shareholders as capital gains distributions.
The fund will not recognize any capital gains for federal income tax
purposes upon redeeming its shares through in kind distribution of
portfolio securities.
The fund normally pays dividends in June and December and pays
capital gain distributions in February and December.
DISTRIBUTION OPTIONS
Dividend and capital gain distributions are payable in shares of the
fund computed at NAV or, at the election of each shareholder, in cash.
You will not receive interest on amounts represented by uncashed
distribution checks.
TAX CONSEQUENCES
As with any investment, your investment in the fund could have tax
consequences for you.
TAXES ON DISTRIBUTIONS. Distributions you receive from the fund are
subject to federal income tax, and may also be subject to state or
local taxes.
For federal tax purposes, the fund's dividends and distributions of
short-term capital gains are taxable to you as ordinary income. The
fund's distributions of long-term capital gains are taxable to you
generally as capital gains.
Any taxable distributions you receive from the fund will normally be
taxable to you when you receive them, regardless of your distribution
option. If you elect to receive distributions in cash, you will
receive certain December distributions in January, but those
distributions will be taxable as if you received them on December 31.
TAXES ON TRANSACTIONS. Your redemptions may result in a capital gain
or loss for federal tax purposes. A capital gain or loss on your
investment in the fund is the difference between the cost of your
shares and the price you receive when you sell them.
FUND SERVICES
FUND MANAGEMENT
Exchange Fund is a mutual fund, an investment that pools shareholders'
money and invests it toward a specified goal.
FMR is the fund's manager.
As of March 25, 1999, FMR had approximately $521.7 billion in
discretionary assets under management.
As the manager, FMR is responsible for choosing the fund's investments
and handling its business affairs.
The fund could be adversely affected if the computer systems used by
FMR and other service providers do not properly process and calculate
date-related information from and after January 1, 2000. FMR has
advised the fund that it is actively working on necessary changes to
its computer systems and expects that its systems, and those of other
major service providers, will be modified prior to January 1, 2000.
However, there can be no assurance that there will be no adverse
impact on the fund.
Tim Heffernan is manager of Exchange, which he has managed since June
1997. He also manages other Fidelity funds, as well as limited
partnerships and structured equity investments. Mr. Heffernan joined
Fidelity in 1984.
From time to time a manager, analyst or other Fidelity employee may
express views regarding a particular company, security, industry or
market sector. The views expressed by any such person are the views of
only that individual as of the time expressed and do not necessarily
represent the views of Fidelity or any other person in the Fidelity
organization. Any such views are subject to change at any time based
upon market or other conditions and Fidelity disclaims any
responsibility to update such views. These views may not be relied on
as investment advice and, because investment decisions for a Fidelity
fund are based on numerous factors, may not be relied on as an
indication of trading intent on behalf of any Fidelity fund.
Fidelity investment personnel may invest in securities for their own
investment accounts pursuant to a code of ethics that establishes
procedures for personal investing and restricts certain transactions.
The fund pays a management fee to FMR.
Pursuant to the fund's management contract, the fund pays FMR a
monthly management fee at the rate of 1/20 of 1% per month (which is
equivalent to an annual rate of 6/10 of 1%) of its average net assets
throughout the month. The contract also provides that, to the extent
that the aggregate average net assets of the funds advised by FMR
exceed $4 billion in any month, the management fee payable by the fund
for that month on its portion of that excess (determined on the basis
of the fund's portion of the aggregate average net assets) will be
reduced by 10%.
FMR pays certain of the other expenses of the fund.
The total management fee for the fiscal year ended December 31,
1999, was 0.54% of the fund's average net assets.
FMR has agreed to reimburse the fund in an amount not in excess of the
amount of the management fee payable by the fund, to the extent that
aggregate operating expenses (excluding interest, taxes, brokerage
commissions and extraordinary expenses) are in excess of an amount
equal to 1.00% of the average net assets of the fund.
FMR may, from time to time, agree to reimburse the fund for management
fees and other expenses above a specified limit. FMR retains the
ability to be repaid by the fund if expenses fall below the specified
limit prior to the end of the fiscal year. Reimbursement arrangements,
which may be terminated by FMR at any time, can decrease the fund's
expenses and boost its performance.
FIDELITY EXCHANGE FUND
PART B OF THE REGISTRATION STATEMENT: STATEMENT OF ADDITIONAL
INFORMATION
FEBRUARY 24, 2000
This Part B: Information Required in a Statement of Additional
Information (SAI) is not a prospectus. Portions of the fund's annual
report are incorporated herein. The annual report is supplied with
this SAI.
To obtain a free additional copy of Part A of the Registration
Statement, dated February 24, 2000 , or an annual report, please
call Fidelity(registered trademark) at 1-800-544-8544.
TABLE OF CONTENTS PAGE
Investment Policies and 6
Limitations
Portfolio Transactions 11
Valuation 12
Performance 12
Additional Purchase and 16
Redemption Information
Distributions and Taxes 16
Trustees and Officers 16
Control of Investment Adviser 18
Management Contract 27
Transfer and Service Agent 19
Agreements
Description of the Fund 19
Financial Statements 20
Appendix 20
(fidelity_logo_graphic)(registered trademark)
82 Devonshire Street, Boston, MA 02109
EXC-ptb- 0200
INVESTMENT POLICIES AND LIMITATIONS
The following policies and limitations supplement those set forth in
Part A of the registration statement. Unless otherwise noted, whenever
an investment policy or limitation states a maximum percentage of the
fund's assets that may be invested in any security or other asset, or
sets forth a policy regarding quality standards, such standard or
percentage limitation will be determined immediately after and as a
result of the fund's acquisition of such security or other asset.
Accordingly, any subsequent change in values, net assets, or other
circumstances will not be considered when determining whether the
investment complies with the fund's investment policies and
limitations.
The fund's fundamental investment policies and limitations cannot be
changed without approval by a "majority of the outstanding voting
securities" (as defined in the Investment Company Act of 1940 (the
1940 Act)) of the fund. However, except for the fundamental investment
limitations listed below, the investment policies and limitations
described in this Part B of the registration statement are not
fundamental and may be changed without shareholder approval.
THE FOLLOWING ARE THE FUND'S FUNDAMENTAL INVESTMENT LIMITATIONS SET
FORTH IN THEIR ENTIRETY. THE FUND MAY NOT:
(1) purchase or otherwise acquire the securities of any issuer (other
than obligations issued or guaranteed as to principal and interest by
the government of the United States or any agency or instrumentality
thereof) if, as a result thereof, (a) more than 5% of the fund's total
assets (taken at current value) would be invested in the securities of
such issuer, or (b) the fund would own more than 10% of the
outstanding voting securities of such issuer;
(2) issue senior securities, except in connection with the insurance
program established by the fund pursuant to an exemptive order issued
by the Securities and Exchange Commission or as otherwise permitted
under the Investment Company Act of 1940;
(3) make short sales of securities, unless at all times while a short
position is open the fund owns or has the right to acquire the same
securities in an amount at least equal thereto; and provided that, for
this purpose, transactions in options and futures contracts shall not
constitute short sales of securities;
(4) purchase securities on margin, provided that payment of initial or
variation margin in connection with transactions in futures contracts
or options on futures contracts shall not constitute purchasing
securities on margin;
(5) borrow money, except that the fund may borrow money for temporary
or emergency purposes (not for leveraging or investment) in an amount
not exceeding 33 1/3% of the value of its total assets (including the
amount borrowed) less liabilities (other than borrowings). Any
borrowings that come to exceed 33 1/3% of the fund's total assets by
reason of a decline in net assets will be reduced within 3 days to the
extent necessary to comply with the 33 1/3% limitation;
(6) act as an underwriter;
(7) knowingly purchase or otherwise acquire any securities which are
subject to legal or contractual restrictions on resale; but the fund
may acquire securities for which there is no readily available market,
if, as a result thereof, no more than 10% of the fund's total assets
(taken at current value) would thereby be invested in such securities;
(8) purchase or otherwise acquire the securities of any issuer (other
than obligations issued or guaranteed as to principal and interest by
the government of the United States or any agency or instrumentality
thereof) if, as a result thereof, more than 25% of the fund's total
assets (taken at current value) would be invested in the securities of
one or more issuers having their principal business activities in the
same industry;
(9) buy or sell real estate;
(10) purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments (but this shall not
prevent the fund from purchasing or selling options and futures
contracts or from investing in securities or other instruments backed
by physical commodities);
(11) lend any security or make any other loan if, as a result, more
than 33 1/3% of the fund's total assets would be lent to other
parties, except (i) through the purchase of a portion of an issue of
debt securities in accordance with its investment objective, policies,
and limitations, or (ii) by engaging in repurchase agreements with
respect to portfolio securities;
(12) invest in the securities of other investment companies;
(13) purchase or otherwise acquire the securities of any issuer (other
than obligations issued or guaranteed as to principal and interest by
the government of the United States or any agency or instrumentality
thereof) if, as a result thereof, more than 5% of the fund's total
assets (taken at current value) would be invested in the securities of
companies which, including predecessors, have a record of less than 3
years' continuous operation;
(14) invest in oil, gas, or other mineral exploration or development
programs; or
(15) purchase or retain the securities of an issuer if the Trustees of
the fund, or the directors and officers of its Investment Adviser who
individually own more than 1/2 of 1% of such issuer's outstanding
securities, own, in the aggregate, more than 5% of such issuers
outstanding securities.
Investment limitation (5) is construed in conformity with the 1940
Act, and, accordingly, "3 days" means three days exclusive of Sundays
and holidays.
THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL AND MAY BE
CHANGED WITHOUT SHAREHOLDER APPROVAL:
(i) The fund may borrow money only (a) from a bank or from a
registered investment company or portfolio for which Fidelity
Management & Research Company (FMR) or an affiliate serves as
investment adviser or (b) by engaging in reverse repurchase agreements
with any party (reverse repurchase agreements are treated as
borrowings for purposes of fundamental investment limitation (5)).
(ii) The fund does not currently intend to lend assets other than
securities to other parties, except by (a) lending money (up to 15% of
the fund's net assets) to a registered investment company or portfolio
for which FMR or an affiliate serves as investment adviser or (b)
acquiring loans, loan participations, or other forms of direct debt
instruments and, in connection therewith, assuming any associated
unfunded commitments of the sellers. (This limitation does not apply
to purchases of debt securities or to repurchase agreements.)
With respect to limitation (7), if through a change in values, net
assets, or other circumstances, the fund were in a position where more
than 10% of its net assets was invested in illiquid securities, it
would consider appropriate steps to protect liquidity.
For the fund's limitations on futures and options transactions, see
the section entitled "Limitations on Futures and Options Transactions"
on page 14.
The following pages contain more detailed information about types of
instruments in which the fund may invest, strategies FMR may employ in
pursuit of the fund's investment objective, and a summary of related
risks. FMR may not buy all of these instruments or use all of these
techniques unless it believes that doing so will help the fund achieve
its goal.
AFFILIATED BANK TRANSACTIONS. A fund may engage in transactions with
financial institutions that are, or may be considered to be,
"affiliated persons" of the fund under the 1940 Act. These
transactions may involve repurchase agreements with custodian banks;
short-term obligations of, and repurchase agreements with, the 50
largest U.S. banks (measured by deposits); municipal securities; U.S.
Government securities with affiliated financial institutions that are
primary dealers in these securities; short-term currency transactions;
and short-term borrowings. In accordance with exemptive orders issued
by the Securities and Exchange Commission (SEC), the Board of Trustees
has established and periodically reviews procedures applicable to
transactions involving affiliated financial institutions.
BORROWING. The fund may borrow from banks or from other funds advised
by FMR or its affiliates, or through reverse repurchase agreements. If
the fund borrows money, its share price may be subject to greater
fluctuation until the borrowing is paid off. If the fund makes
additional investments while borrowings are outstanding, this may be
considered a form of leverage.
CASH MANAGEMENT. A fund can hold uninvested cash or can invest it in
cash equivalents such as money market securities, repurchase
agreements or shares of money market funds. Generally, these
securities offer less potential for gains than other types of
securities.
COMMON STOCK represents an equity or ownership interest in an issuer.
In the event an issuer is liquidated or declares bankruptcy, the
claims of owners of bonds and preferred stock take precedence over the
claims of those who own common stock.
CONVERTIBLE SECURITIES are bonds, debentures, notes, preferred stocks
or other securities that may be converted or exchanged (by the holder
or by the issuer) into shares of the underlying common stock (or cash
or securities of equivalent value) at a stated exchange ratio. A
convertible security may also be called for redemption or conversion
by the issuer after a particular date and under certain circumstances
(including a specified price) established upon issue. If a convertible
security held by a fund is called for redemption or conversion, the
fund could be required to tender it for redemption, convert it into
the underlying common stock, or sell it to a third party.
Convertible securities generally have less potential for gain or loss
than common stocks. Convertible securities generally provide yields
higher than the underlying common stocks, but generally lower than
comparable non-convertible securities. Because of this higher yield,
convertible securities generally sell at prices above their
"conversion value," which is the current market value of the stock to
be received upon conversion. The difference between this conversion
value and the price of convertible securities will vary over time
depending on changes in the value of the underlying common stocks and
interest rates. When the underlying common stocks decline in value,
convertible securities will tend not to decline to the same extent
because of the interest or dividend payments and the repayment of
principal at maturity for certain types of convertible securities.
However, securities that are convertible other than at the option of
the holder generally do not limit the potential for loss to the same
extent as securities convertible at the option of the holder. When the
underlying common stocks rise in value, the value of convertible
securities may also be expected to increase. At the same time,
however, the difference between the market value of convertible
securities and their conversion value will narrow, which means that
the value of convertible securities will generally not increase to the
same extent as the value of the underlying common stocks. Because
convertible securities may also be interest-rate sensitive, their
value may increase as interest rates fall and decrease as interest
rates rise. Convertible securities are also subject to credit risk,
and are often lower-quality securities.
DEBT SECURITIES are used by issuers to borrow money. The issuer
usually pays a fixed, variable or floating rate of interest, and must
repay the amount borrowed at the maturity of the security. Some debt
securities, such as zero coupon bonds, do not pay interest but are
sold at a deep discount from their face values. Debt securities
include corporate bonds, government securities, and mortgage and other
asset-backed securities.
EXPOSURE TO FOREIGN MARKETS. Foreign securities, foreign currencies,
and securities issued by U.S. entities with substantial foreign
operations may involve significant risks in addition to the risks
inherent in U.S. investments.
Foreign investments involve risks relating to local political,
economic, regulatory, or social instability, military action or
unrest, or adverse diplomatic developments, and may be affected by
actions of foreign governments adverse to the interests of U.S.
investors. Such actions may include expropriation or nationalization
of assets, confiscatory taxation, restrictions on U.S. investment or
on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. Additionally, governmental
issuers of foreign debt securities may be unwilling to pay interest
and repay principal when due and may require that the conditions for
payment be renegotiated. There is no assurance that FMR will be able
to anticipate these potential events or counter their effects. In
addition, the value of securities denominated in foreign currencies
and of dividends and interest paid with respect to such securities
will fluctuate based on the relative strength of the U.S. dollar.
It is anticipated that in most cases the best available market for
foreign securities will be on an exchange or in over-the-counter (OTC)
markets located outside of the United States. Foreign stock markets,
while growing in volume and sophistication, are generally not as
developed as those in the United States, and securities of some
foreign issuers may be less liquid and more volatile than securities
of comparable U.S. issuers. Foreign security trading, settlement and
custodial practices (including those involving securities settlement
where fund assets may be released prior to receipt of payment) are
often less developed than those in U.S. markets, and may result in
increased risk or substantial delays in the event of a failed trade or
the insolvency of, or breach of duty by, a foreign broker-dealer,
securities depository or foreign subcustodian. For example, many
foreign countries are less prepared than the United States to properly
process and calculate information related to dates from and after
January 1, 2000. As a result, some foreign markets, brokers, banks or
securities depositories could experience at least temporary
disruptions, which could result in difficulty buying and selling
securities in certain foreign markets and pricing foreign investments,
and foreign issuers could fail to pay timely dividends, interest or
principal. In addition, the costs associated with foreign investments,
including withholding taxes, brokerage commissions and custodial
costs, are generally higher than with U.S. investments.
Foreign markets may offer less protection to investors than U.S.
markets. Foreign issuers are generally not bound by uniform
accounting, auditing, and financial reporting requirements and
standards of practice comparable to those applicable to U.S. issuers.
Adequate public information on foreign issuers may not be available,
and it may be difficult to secure dividends and information regarding
corporate actions on a timely basis. In general, there is less overall
governmental supervision and regulation of securities exchanges,
brokers, and listed companies than in the United States. OTC markets
tend to be less regulated than stock exchange markets and, in certain
countries, may be totally unregulated. Regulatory enforcement may be
influenced by economic or political concerns, and investors may have
difficulty enforcing their legal rights in foreign countries.
Some foreign securities impose restrictions on transfer within the
United States or to U.S. persons. Although securities subject to such
transfer restrictions may be marketable abroad, they may be less
liquid than foreign securities of the same class that are not subject
to such restrictions.
American Depositary Receipts (ADRs) as well as other "hybrid" forms of
ADRs, including European Depositary Receipts (EDRs) and Global
Depositary Receipts (GDRs), are certificates evidencing ownership of
shares of a foreign issuer. These certificates are issued by
depository banks and generally trade on an established market in the
United States or elsewhere. The underlying shares are held in trust by
a custodian bank or similar financial institution in the issuer's home
country. The depository bank may not have physical custody of the
underlying securities at all times and may charge fees for various
services, including forwarding dividends and interest and corporate
actions. ADRs are alternatives to directly purchasing the underlying
foreign securities in their national markets and currencies. However,
ADRs continue to be subject to many of the risks associated with
investing directly in foreign securities. These risks include foreign
exchange risk as well as the political and economic risks of the
underlying issuer's country.
The risks of foreign investing may be magnified for investments in
emerging markets. Security prices in emerging markets can be
significantly more volatile than those in more developed markets,
reflecting the greater uncertainties of investing in less established
markets and economies. In particular, countries with emerging markets
may have relatively unstable governments, may present the risks of
nationalization of businesses, restrictions on foreign ownership and
prohibitions on the repatriation of assets, and may have less
protection of property rights than more developed countries. The
economies of countries with emerging markets may be based on only a
few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt
burdens or inflation rates. Local securities markets may trade a small
number of securities and may be unable to respond effectively to
increases in trading volume, potentially making prompt liquidation of
holdings difficult or impossible at times.
FOREIGN CURRENCY TRANSACTIONS. A fund may conduct foreign currency
transactions on a spot (i.e., cash) or forward basis (i.e., by
entering into forward contracts to purchase or sell foreign
currencies). Although foreign exchange dealers generally do not charge
a fee for such conversions, they do realize a profit based on the
difference between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign
currency at one rate, while offering a lesser rate of exchange should
the counterparty desire to resell that currency to the dealer. Forward
contracts are customized transactions that require a specific amount
of a currency to be delivered at a specific exchange rate on a
specific date or range of dates in the future. Forward contracts are
generally traded in an interbank market directly between currency
traders (usually large commercial banks) and their customers. The
parties to a forward contract may agree to offset or terminate the
contract before its maturity, or may hold the contract to maturity and
complete the contemplated currency exchange.
The following discussion summarizes the principal currency management
strategies involving forward contracts that could be used by a fund. A
fund may also use swap agreements, indexed securities, and options and
futures contracts relating to foreign currencies for the same
purposes.
A "settlement hedge" or "transaction hedge" is designed to protect a
fund against an adverse change in foreign currency values between the
date a security is purchased or sold and the date on which payment is
made or received. Entering into a forward contract for the purchase or
sale of the amount of foreign currency involved in an underlying
security transaction for a fixed amount of U.S. dollars "locks in" the
U.S. dollar price of the security. Forward contracts to purchase or
sell a foreign currency may also be used by a fund in anticipation of
future purchases or sales of securities denominated in foreign
currency, even if the specific investments have not yet been selected
by FMR.
A fund may also use forward contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. For
example, if a fund owned securities denominated in pounds sterling, it
could enter into a forward contract to sell pounds sterling in return
for U.S. dollars to hedge against possible declines in the pound's
value. Such a hedge, sometimes referred to as a "position hedge,"
would tend to offset both positive and negative currency fluctuations,
but would not offset changes in security values caused by other
factors. A fund could also hedge the position by selling another
currency expected to perform similarly to the pound sterling. This
type of hedge, sometimes referred to as a "proxy hedge," could offer
advantages in terms of cost, yield, or efficiency, but generally would
not hedge currency exposure as effectively as a direct hedge into U.S.
dollars. Proxy hedges may result in losses if the currency used to
hedge does not perform similarly to the currency in which the hedged
securities are denominated.
A fund may enter into forward contracts to shift its investment
exposure from one currency into another. This may include shifting
exposure from U.S. dollars to a foreign currency, or from one foreign
currency to another foreign currency. This type of strategy, sometimes
known as a "cross-hedge," will tend to reduce or eliminate exposure to
the currency that is sold, and increase exposure to the currency that
is purchased, much as if a fund had sold a security denominated in one
currency and purchased an equivalent security denominated in another.
Cross-hedges protect against losses resulting from a decline in the
hedged currency, but will cause a fund to assume the risk of
fluctuations in the value of the currency it purchases.
Successful use of currency management strategies will depend on FMR's
skill in analyzing currency values. Currency management strategies may
substantially change a fund's investment exposure to changes in
currency exchange rates and could result in losses to a fund if
currencies do not perform as FMR anticipates. For example, if a
currency's value rose at a time when FMR had hedged a fund by selling
that currency in exchange for dollars, a fund would not participate in
the currency's appreciation. If FMR hedges currency exposure through
proxy hedges, a fund could realize currency losses from both the hedge
and the security position if the two currencies do not move in tandem.
Similarly, if FMR increases a fund's exposure to a foreign currency
and that currency's value declines, a fund will realize a loss. There
is no assurance that FMR's use of currency management strategies will
be advantageous to a fund or that it will hedge at appropriate times.
FUND'S RIGHTS AS A SHAREHOLDER. The fund does not intend to direct or
administer the day-to-day operations of any company. A fund, however,
may exercise its rights as a shareholder and may communicate its views
on important matters of policy to management, the Board of Directors,
and shareholders of a company when FMR determines that such matters
could have a significant effect on the value of the fund's investment
in the company. The activities in which a fund may engage, either
individually or in conjunction with others, may include, among others,
supporting or opposing proposed changes in a company's corporate
structure or business activities; seeking changes in a company's
directors or management; seeking changes in a company's direction or
policies; seeking the sale or reorganization of the company or a
portion of its assets; or supporting or opposing third-party takeover
efforts. This area of corporate activity is increasingly prone to
litigation and it is possible that a fund could be involved in
lawsuits related to such activities. FMR will monitor such activities
with a view to mitigating, to the extent possible, the risk of
litigation against a fund and the risk of actual liability if a fund
is involved in litigation. No guarantee can be made, however, that
litigation against a fund will not be undertaken or liabilities
incurred.
FUTURES AND OPTIONS. The following paragraphs pertain to futures and
options: Combined Positions, Correlation of Price Changes, Futures
Contracts, Futures Margin Payments, Limitations on Futures and Options
Transactions, Liquidity of Options and Futures Contracts, Options and
Futures Relating to Foreign Currencies, OTC Options, Purchasing Put
and Call Options, and Writing Put and Call Options.
COMBINED POSITIONS involve purchasing and writing options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the
overall position. For example, purchasing a put option and writing a
call option on the same underlying instrument would construct a
combined position whose risk and return characteristics are similar to
selling a futures contract. Another possible combined position would
involve writing a call option at one strike price and buying a call
option at a lower price, to reduce the risk of the written call option
in the event of a substantial price increase. Because combined options
positions involve multiple trades, they result in higher transaction
costs and may be more difficult to open and close out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of
types of exchange-traded options and futures contracts, it is likely
that the standardized contracts available will not match a fund's
current or anticipated investments exactly. A fund may invest in
options and futures contracts based on securities with different
issuers, maturities, or other characteristics from the securities in
which the fund typically invests, which involves a risk that the
options or futures position will not track the performance of the
fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match a
fund's investments well. Options and futures prices are affected by
such factors as current and anticipated short-term interest rates,
changes in volatility of the underlying instrument, and the time
remaining until expiration of the contract, which may not affect
security prices the same way. Imperfect correlation may also result
from differing levels of demand in the options and futures markets and
the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. A fund may purchase or sell
options and futures contracts with a greater or lesser value than the
securities it wishes to hedge or intends to purchase in order to
attempt to compensate for differences in volatility between the
contract and the securities, although this may not be successful in
all cases. If price changes in a fund's options or futures positions
are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not
offset by gains in other investments.
FUTURES CONTRACTS. In purchasing a futures contract, the buyer agrees
to purchase a specified underlying instrument at a specified future
date. In selling a futures contract, the seller agrees to sell a
specified underlying instrument at a specified future date. The price
at which the purchase and sale will take place is fixed when the buyer
and seller enter into the contract. Some currently available futures
contracts are based on specific securities, such as U.S. Treasury
bonds or notes, and some are based on indices of securities prices,
such as the Standard & Poor's 500 Index (S&P 500). Futures can be held
until their delivery dates, or can be closed out before then if a
liquid secondary market is available.
The value of a futures contract tends to increase and decrease in
tandem with the value of its underlying instrument. Therefore,
purchasing futures contracts will tend to increase a fund's exposure
to positive and negative price fluctuations in the underlying
instrument, much as if it had purchased the underlying instrument
directly. When a fund sells a futures contract, by contrast, the value
of its futures position will tend to move in a direction contrary to
the market. Selling futures contracts, therefore, will tend to offset
both positive and negative market price changes, much as if the
underlying instrument had been sold.
FUTURES MARGIN PAYMENTS. The purchaser or seller of a futures contract
is not required to deliver or pay for the underlying instrument unless
the contract is held until the delivery date. However, both the
purchaser and seller are required to deposit "initial margin" with a
futures broker, known as a futures commission merchant (FCM), when the
contract is entered into. Initial margin deposits are typically equal
to a percentage of the contract's value. If the value of either
party's position declines, that party will be required to make
additional "variation margin" payments to settle the change in value
on a daily basis. The party that has a gain may be entitled to receive
all or a portion of this amount. Initial and variation margin payments
do not constitute purchasing securities on margin for purposes of a
fund's investment limitations. In the event of the bankruptcy of an
FCM that holds margin on behalf of a fund, the fund may be entitled to
return of margin owed to it only in proportion to the amount received
by the FCM's other customers, potentially resulting in losses to the
fund.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS. The fund has filed a
notice of eligibility for exclusion from the definition of the term
"commodity pool operator" with the Commodity Futures Trading
Commission (CFTC) and the National Futures Association, which regulate
trading in the futures markets. The fund intends to comply with Rule
4.5 under the Commodity Exchange Act, which limits the extent to which
the fund can commit assets to initial margin deposits and option
premiums.
In addition, the fund will not: (a) sell futures contracts, purchase
put options, or write call options if, as a result, more than 25% of
the fund's total assets would be hedged with futures and options under
normal conditions; (b) purchase futures contracts or write put options
if, as a result, the fund's total obligations upon settlement or
exercise of purchased futures contracts and written put options would
exceed 25% of its total assets under normal conditions; or (c)
purchase call options if, as a result, the current value of option
premiums for call options purchased by the fund would exceed 5% of the
fund's total assets. These limitations do not apply to options
attached to or acquired or traded together with their underlying
securities, and do not apply to securities that incorporate features
similar to options.
The above limitations on the fund's investments in futures contracts
and options, and the fund's policies regarding futures contracts and
options discussed elsewhere in this SAI, are not fundamental policies
and may be changed as regulatory agencies permit.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a
liquid secondary market will exist for any particular options or
futures contract at any particular time. Options may have relatively
low trading volume and liquidity if their strike prices are not close
to the underlying instrument's current price. In addition, exchanges
may establish daily price fluctuation limits for options and futures
contracts, and may halt trading if a contract's price moves upward or
downward more than the limit in a given day. On volatile trading days
when the price fluctuation limit is reached or a trading halt is
imposed, it may be impossible to enter into new positions or close out
existing positions. If the secondary market for a contract is not
liquid because of price fluctuation limits or otherwise, it could
prevent prompt liquidation of unfavorable positions, and potentially
could require a fund to continue to hold a position until delivery or
expiration regardless of changes in its value. As a result, a fund's
access to other assets held to cover its options or futures positions
could also be impaired.
OPTIONS AND FUTURES RELATING TO FOREIGN CURRENCIES. Currency futures
contracts are similar to forward currency exchange contracts, except
that they are traded on exchanges (and have margin requirements) and
are standardized as to contract size and delivery date. Most currency
futures contracts call for payment or delivery in U.S. dollars. The
underlying instrument of a currency option may be a foreign currency,
which generally is purchased or delivered in exchange for U.S.
dollars, or may be a futures contract. The purchaser of a currency
call obtains the right to purchase the underlying currency, and the
purchaser of a currency put obtains the right to sell the underlying
currency.
The uses and risks of currency options and futures are similar to
options and futures relating to securities or indices, as discussed
above. A fund may purchase and sell currency futures and may purchase
and write currency options to increase or decrease its exposure to
different foreign currencies. Currency options may also be purchased
or written in conjunction with each other or with currency futures or
forward contracts. Currency futures and options values can be expected
to correlate with exchange rates, but may not reflect other factors
that affect the value of a fund's investments. A currency hedge, for
example, should protect a Yen-denominated security from a decline in
the Yen, but will not protect a fund against a price decline resulting
from deterioration in the issuer's creditworthiness. Because the value
of a fund's foreign-denominated investments changes in response to
many factors other than exchange rates, it may not be possible to
match the amount of currency options and futures to the value of the
fund's investments exactly over time.
OTC OPTIONS. Unlike exchange-traded options, which are standardized
with respect to the underlying instrument, expiration date, contract
size, and strike price, the terms of over-the-counter (OTC) options
(options not traded on exchanges) generally are established through
negotiation with the other party to the option contract. While this
type of arrangement allows the purchaser or writer greater flexibility
to tailor an option to its needs, OTC options generally involve
greater credit risk than exchange-traded options, which are guaranteed
by the clearing organization of the exchanges where they are traded.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the
purchaser obtains the right (but not the obligation) to sell the
option's underlying instrument at a fixed strike price. In return for
this right, the purchaser pays the current market price for the option
(known as the option premium). Options have various types of
underlying instruments, including specific securities, indices of
securities prices, and futures contracts. The purchaser may terminate
its position in a put option by allowing it to expire or by exercising
the option. If the option is allowed to expire, the purchaser will
lose the entire premium. If the option is exercised, the purchaser
completes the sale of the underlying instrument at the strike price. A
purchaser may also terminate a put option position by closing it out
in the secondary market at its current price, if a liquid secondary
market exists.
The buyer of a typical put option can expect to realize a gain if
security prices fall substantially. However, if the underlying
instrument's price does not fall enough to offset the cost of
purchasing the option, a put buyer can expect to suffer a loss
(limited to the amount of the premium, plus related transaction
costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right
to purchase, rather than sell, the underlying instrument at the
option's strike price. A call buyer typically attempts to participate
in potential price increases of the underlying instrument with risk
limited to the cost of the option if security prices fall. At the same
time, the buyer can expect to suffer a loss if security prices do not
rise sufficiently to offset the cost of the option.
WRITING PUT AND CALL OPTIONS. The writer of a put or call option takes
the opposite side of the transaction from the option's purchaser. In
return for receipt of the premium, the writer assumes the obligation
to pay the strike price for the option's underlying instrument if the
other party to the option chooses to exercise it. The writer may seek
to terminate a position in a put option before exercise by closing out
the option in the secondary market at its current price. If the
secondary market is not liquid for a put option, however, the writer
must continue to be prepared to pay the strike price while the option
is outstanding, regardless of price changes. When writing an option on
a futures contract, a fund will be required to make margin payments to
an FCM as described above for futures contracts.
If security prices rise, a put writer would generally expect to
profit, although its gain would be limited to the amount of the
premium it received. If security prices remain the same over time, it
is likely that the writer will also profit, because it should be able
to close out the option at a lower price. If security prices fall, the
put writer would expect to suffer a loss. This loss should be less
than the loss from purchasing the underlying instrument directly,
however, because the premium received for writing the option should
mitigate the effects of the decline.
Writing a call option obligates the writer to sell or deliver the
option's underlying instrument, in return for the strike price, upon
exercise of the option. The characteristics of writing call options
are similar to those of writing put options, except that writing calls
generally is a profitable strategy if prices remain the same or fall.
Through receipt of the option premium, a call writer mitigates the
effects of a price decline. At the same time, because a call writer
must be prepared to deliver the underlying instrument in return for
the strike price, even if its current value is greater, a call writer
gives up some ability to participate in security price increases.
ILLIQUID SECURITIES cannot be sold or disposed of in the ordinary
course of business at approximately the prices at which they are
valued. Difficulty in selling securities may result in a loss or may
be costly to a fund. Under the supervision of the Board of Trustees,
FMR determines the liquidity of a fund's investments and, through
reports from FMR, the Board monitors investments in illiquid
securities. In determining the liquidity of a fund's investments, FMR
may consider various factors, including (1) the frequency and volume
of trades and quotations, (2) the number of dealers and prospective
purchasers in the marketplace, (3) dealer undertakings to make a
market and (4) the nature of the security and the market in which it
trades (including any demand, put or tender features, the mechanics
and other requirements for transfer, any letters of credit or other
credit enhancement features, any ratings, the number of holders, the
method of soliciting offers, the time required to dispose of the
security, and the ability to assign or offset the rights and
obligations of the security).
INDEXED SECURITIES are instruments whose prices are indexed to the
prices of other securities, securities indices, currencies, or other
financial indicators. Indexed securities typically, but not always,
are debt securities or deposits whose value at maturity or coupon rate
is determined by reference to a specific instrument or statistic.
Currency-indexed securities typically are short-term to
intermediate-term debt securities whose maturity values or interest
rates are determined by reference to the values of one or more
specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities. Currency-indexed securities may be
positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a
security that performs similarly to a foreign-denominated instrument,
or their maturity value may decline when foreign currencies increase,
resulting in a security whose price characteristics are similar to a
put on the underlying currency. Currency-indexed securities may also
have prices that depend on the values of a number of different foreign
currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which
they are indexed, and may also be influenced by interest rate changes
in the United States and abroad. Indexed securities may be more
volatile than the underlying instruments. Indexed securities are also
subject to the credit risks associated with the issuer of the
security, and their values may decline substantially if the issuer's
creditworthiness deteriorates. Recent issuers of indexed securities
have included banks, corporations, and certain U.S. Government
agencies.
INTERFUND BORROWING AND LENDING PROGRAM. Pursuant to an exemptive
order issued by the SEC, a fund may lend money to, and borrow money
from, other funds advised by FMR or its affiliates. A fund will lend
through the program only when the returns are higher than those
available from an investment in repurchase agreements, and will borrow
through the program only when the costs are equal to or lower than the
cost of bank loans. Interfund loans and borrowings normally extend
overnight, but can have a maximum duration of seven days. Loans may be
called on one day's notice. A fund may have to borrow from a bank at a
higher interest rate if an interfund loan is called or not renewed.
Any delay in repayment to a lending fund could result in a lost
investment opportunity or additional borrowing costs.
INVESTMENT-GRADE DEBT SECURITIES. Investment-grade debt securities are
medium and high-quality securities. Some may possess speculative
characteristics and may be more sensitive to economic changes and to
changes in the financial conditions of issuers. A debt security is
considered to be investment-grade if it is rated investment-grade by
Moody's Investors Service, Standard & Poor's, Duff & Phelps Credit
Rating Co., or Fitch IBCA Inc., or is unrated but considered to be of
equivalent quality by FMR.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS. Direct debt instruments are
interests in amounts owed by a corporate, governmental, or other
borrower to lenders or lending syndicates (loans and loan
participations), to suppliers of goods or services (trade claims or
other receivables), or to other parties. Direct debt instruments
involve a risk of loss in case of default or insolvency of the
borrower and may offer less legal protection to the purchaser in the
event of fraud or misrepresentation, or there may be a requirement
that a fund supply additional cash to a borrower on demand.
Purchasers of loans and other forms of direct indebtedness depend
primarily upon the creditworthiness of the borrower for payment of
interest and repayment of principal. If scheduled interest or
principal payments are not made, the value of the instrument may be
adversely affected. Loans that are fully secured provide more
protections than an unsecured loan in the event of failure to make
scheduled interest or principal payments. However, there is no
assurance that the liquidation of collateral from a secured loan would
satisfy the borrower's obligation, or that the collateral could be
liquidated. Indebtedness of borrowers whose creditworthiness is poor
involves substantially greater risks and may be highly speculative.
Borrowers that are in bankruptcy or restructuring may never pay off
their indebtedness, or may pay only a small fraction of the amount
owed. Direct indebtedness of developing countries also involves a risk
that the governmental entities responsible for the repayment of the
debt may be unable, or unwilling, to pay interest and repay principal
when due.
Investments in loans through direct assignment of a financial
institution's interests with respect to a loan may involve additional
risks. For example, if a loan is foreclosed, the purchaser could
become part owner of any collateral, and would bear the costs and
liabilities associated with owning and disposing of the collateral. In
addition, it is conceivable that under emerging legal theories of
lender liability, a purchaser could be held liable as a co-lender.
Direct debt instruments may also involve a risk of insolvency of the
lending bank or other intermediary.
A loan is often administered by a bank or other financial institution
that acts as agent for all holders. The agent administers the terms of
the loan, as specified in the loan agreement. Unless, under the terms
of the loan or other indebtedness, the purchaser has direct recourse
against the borrower, the purchaser may have to rely on the agent to
apply appropriate credit remedies against a borrower. If assets held
by the agent for the benefit of a purchaser were determined to be
subject to the claims of the agent's general creditors, the purchaser
might incur certain costs and delays in realizing payment on the loan
or loan participation and could suffer a loss of principal or
interest.
Direct indebtedness may include letters of credit, revolving credit
facilities, or other standby financing commitments that obligate
purchasers to make additional cash payments on demand. These
commitments may have the effect of requiring a purchaser to increase
its investment in a borrower at a time when it would not otherwise
have done so, even if the borrower's condition makes it unlikely that
the amount will ever be repaid.
The fund limits the amount of total assets that it will invest in any
one issuer or in issuers within the same industry (see the fund's
investment limitations). For purposes of these limitations, a fund
generally will treat the borrower as the "issuer" of indebtedness held
by the fund. In the case of loan participations where a bank or other
lending institution serves as financial intermediary between a fund
and the borrower, if the participation does not shift to the fund the
direct debtor-creditor relationship with the borrower, SEC
interpretations require a fund, in appropriate circumstances, to treat
both the lending bank or other lending institution and the borrower as
"issuers" for these purposes. Treating a financial intermediary as an
issuer of indebtedness may restrict a fund's ability to invest in
indebtedness related to a single financial intermediary, or a group of
intermediaries engaged in the same industry, even if the underlying
borrowers represent many different companies and industries.
LOWER-QUALITY DEBT SECURITIES. Lower-quality debt securities have poor
protection with respect to the payment of interest and repayment of
principal. These securities are often considered to be speculative and
involve greater risk of loss or price changes due to changes in the
issuer's capacity to pay. The market prices of lower-quality debt
securities may fluctuate more than those of higher-quality debt
securities and may decline significantly in periods of general
economic difficulty, which may follow periods of rising interest
rates.
The market for lower-quality debt securities may be thinner and less
active than that for higher-quality debt securities, which can
adversely affect the prices at which the former are sold. Adverse
publicity and changing investor perceptions may affect the liquidity
of lower-quality debt securities and the ability of outside pricing
services to value lower-quality debt securities.
Because the risk of default is higher for lower-quality debt
securities, FMR's research and credit analysis are an especially
important part of managing securities of this type. FMR will attempt
to identify those issuers of high-yielding securities whose financial
condition is adequate to meet future obligations, has improved, or is
expected to improve in the future. FMR's analysis focuses on relative
values based on such factors as interest or dividend coverage, asset
coverage, earnings prospects, and the experience and managerial
strength of the issuer.
A fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise to exercise its rights as a security
holder to seek to protect the interests of security holders if it
determines this to be in the best interest of the fund's shareholders.
PREFERRED STOCK is a class of equity or ownership in an issuer that
pays dividends at a specified rate and that has precedence over common
stock in the payment of dividends. In the event an issuer is
liquidated or declares bankruptcy, the claims of owners of bonds take
precedence over the claims of those who own preferred and common
stock.
REAL ESTATE INVESTMENT TRUSTS. Equity real estate investment trusts
own real estate properties, while mortgage real estate investment
trusts make construction, development, and long-term mortgage loans.
Their value may be affected by changes in the value of the underlying
property of the trusts, the creditworthiness of the issuer, property
taxes, interest rates, and tax and regulatory requirements, such as
those relating to the environment. Both types of trusts are dependent
upon management skill, are not diversified, and are subject to heavy
cash flow dependency, defaults by borrowers, self-liquidation, and the
possibility of failing to qualify for tax-free status of income under
the Internal Revenue Code and failing to maintain exemption from the
1940 Act.
REPURCHASE AGREEMENTS involve an agreement to purchase a security and
to sell that security back to the original seller at an agreed-upon
price. The resale price reflects the purchase price plus an
agreed-upon incremental amount which is unrelated to the coupon rate
or maturity of the purchased security. As protection against the risk
that the original seller will not fulfill its obligation, the
securities are held in a separate account at a bank, marked-to-market
daily, and maintained at a value at least equal to the sale price plus
the accrued incremental amount. The value of the security purchased
may be more or less than the price at which the counterparty has
agreed to purchase the security. In addition, delays or losses could
result if the other party to the agreement defaults or becomes
insolvent. The fund will engage in repurchase agreement transactions
with parties whose creditworthiness has been reviewed and found
satisfactory by FMR.
RESTRICTED SECURITIES are subject to legal restrictions on their sale.
Difficulty in selling securities may result in a loss or be costly to
a fund. Restricted securities generally can be sold in privately
negotiated transactions, pursuant to an exemption from registration
under the Securities Act of 1933, or in a registered public offering.
Where registration is required, the holder of a registered security
may be obligated to pay all or part of the registration expense and a
considerable period may elapse between the time it decides to seek
registration and the time it may be permitted to sell a security under
an effective registration statement. If, during such a period, adverse
market conditions were to develop, the holder might obtain a less
favorable price than prevailed when it decided to seek registration of
the security.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a
fund sells a security to another party, such as a bank or
broker-dealer, in return for cash and agrees to repurchase that
security at an agreed-upon price and time. The fund will enter into
reverse repurchase agreements with parties whose creditworthiness has
been reviewed and found satisfactory by FMR. Such transactions may
increase fluctuations in the market value of fund assets and may be
viewed as a form of leverage.
SECURITIES LENDING. A fund may lend securities to parties such as
broker-dealers or other institutions, including Fidelity Brokerage
Services, Inc. (FBSI). FBSI is a member of the New York Stock Exchange
and a subsidiary of FMR Corp.
Securities lending allows a fund to retain ownership of the securities
loaned and, at the same time, to earn additional income. Because there
may be delays in the recovery of loaned securities, or even a loss of
rights in collateral supplied should the borrower fail financially,
loans will be made only to parties deemed by FMR to be of good
standing. Furthermore, they will only be made if, in FMR's judgment,
the consideration to be earned from such loans would justify the risk.
FMR understands that it is the current view of the SEC Staff that a
fund may engage in loan transactions only under the following
conditions: (1) the fund must receive 100% collateral in the form of
cash or cash equivalents (e.g., U.S. Treasury bills or notes) from the
borrower; (2) the borrower must increase the collateral whenever the
market value of the securities loaned (determined on a daily basis)
rises above the value of the collateral; (3) after giving notice, the
fund must be able to terminate the loan at any time; (4) the fund must
receive reasonable interest on the loan or a flat fee from the
borrower, as well as amounts equivalent to any dividends, interest, or
other distributions on the securities loaned and to any increase in
market value; (5) the fund may pay only reasonable custodian fees in
connection with the loan; and (6) the Board of Trustees must be able
to vote proxies on the securities loaned, either by terminating the
loan or by entering into an alternative arrangement with the borrower.
Cash received through loan transactions may be invested in other
eligible securities. Investing this cash subjects that investment, as
well as the security loaned, to market forces (i.e., capital
appreciation or depreciation).
SHORT SALES "AGAINST THE BOX" are short sales of securities that a
fund owns or has the right to obtain (equivalent in kind or amount to
the securities sold short). If a fund enters into a short sale against
the box, it will be required to set aside securities equivalent in
kind and amount to the securities sold short (or securities
convertible or exchangeable into such securities) and will be required
to hold such securities while the short sale is outstanding. The fund
will incur transaction costs, including interest expenses, in
connection with opening, maintaining, and closing short sales against
the box.
SWAP AGREEMENTS can be individually negotiated and structured to
include exposure to a variety of different types of investments or
market factors. Depending on their structure, swap agreements may
increase or decrease a fund's exposure to long- or short-term interest
rates (in the United States or abroad), foreign currency values,
mortgage securities, corporate borrowing rates, or other factors such
as security prices or inflation rates. Swap agreements can take many
different forms and are known by a variety of names.
In a typical cap or floor agreement, one party agrees to make payments
only under specified circumstances, usually in return for payment of a
fee by the other party. For example, the buyer of an interest rate cap
obtains the right to receive payments to the extent that a specified
interest rate exceeds an agreed-upon level, while the seller of an
interest rate floor is obligated to make payments to the extent that a
specified interest rate falls below an agreed-upon level. An interest
rate collar combines elements of buying a cap and selling a floor.
Swap agreements will tend to shift a fund's investment exposure from
one type of investment to another. For example, if the fund agreed to
exchange payments in dollars for payments in foreign currency, the
swap agreement would tend to decrease the fund's exposure to U.S.
interest rates and increase its exposure to foreign currency and
interest rates. Caps and floors have an effect similar to buying or
writing options. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of a fund's investments
and its share price.
The most significant factor in the performance of swap agreements is
the change in the specific interest rate, currency, or other factors
that determine the amounts of payments due to and from a fund. If a
swap agreement calls for payments by the fund, the fund must be
prepared to make such payments when due. In addition, if the
counterparty's creditworthiness declined, the value of a swap
agreement would be likely to decline, potentially resulting in losses.
A fund may be able to eliminate its exposure under a swap agreement
either by assignment or other disposition, or by entering into an
offsetting swap agreement with the same party or a similarly
creditworthy party.
TEMPORARY DEFENSIVE POLICIES. The fund reserves the right to invest
without limitation in preferred stocks and investment-grade debt
instruments for temporary, defensive purposes.
WARRANTS. Warrants are instruments which entitle the holder to buy an
equity security at a specific price for a specific period of time.
Changes in the value of a warrant do not necessarily correspond to
changes in the value of its underlying security. The price of a
warrant may be more volatile than the price of its underlying
security, and a warrant may offer greater potential for capital
appreciation as well as capital loss.
Warrants do not entitle a holder to dividends or voting rights with
respect to the underlying security and do not represent any rights in
the assets of the issuing company. A warrant ceases to have value if
it is not exercised prior to its expiration date. These factors can
make warrants more speculative than other types of investments.
ZERO COUPON BONDS do not make interest payments; instead, they are
sold at a discount from their face value and are redeemed at face
value when they mature. Because zero coupon bonds do not pay current
income, their prices can be more volatile than other types of
fixed-income securities when interest rates change. In calculating a
fund's dividend, a portion of the difference between a zero coupon
bond's purchase price and its face value is considered income.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed
on behalf of the fund by FMR pursuant to authority contained in the
management contract. FMR is also responsible for the placement of
transaction orders for other investment companies and investment
accounts for which it or its affiliates act as investment adviser. In
selecting broker-dealers, subject to applicable limitations of the
federal securities laws, FMR considers various relevant factors,
including, but not limited to: the size and type of the transaction;
the nature and character of the markets for the security to be
purchased or sold; the execution efficiency, settlement capability,
and financial condition of the broker-dealer firm; the broker-dealer's
execution services rendered on a continuing basis; the reasonableness
of any commissions; and, if applicable, arrangements for payment of
fund expenses.
Generally, commissions for investments traded on foreign exchanges
will be higher than for investments traded on U.S. exchanges and may
not be subject to negotiation.
The fund may execute portfolio transactions with broker-dealers who
provide research and execution services to the fund or other
investment accounts over which FMR or its affiliates exercise
investment discretion. Such services may include advice concerning the
value of securities; the advisability of investing in, purchasing, or
selling securities; and the availability of securities or the
purchasers or sellers of securities. In addition, such broker-dealers
may furnish analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and
performance of investment accounts; and effect securities transactions
and perform functions incidental thereto (such as clearance and
settlement).
The selection of such broker-dealers for transactions in equity
securities is generally made by FMR (to the extent possible consistent
with execution considerations) in accordance with a ranking of
broker-dealers determined periodically by FMR's investment staff based
upon the quality of research and execution services provided.
For transactions in fixed-income securities, FMR's selection of
broker-dealers is generally based on the availability of a security
and its price and, to a lesser extent, on the overall quality of
execution and other services, including research, provided by the
broker-dealer.
The receipt of research from broker-dealers that execute transactions
on behalf of a fund may be useful to FMR in rendering investment
management services to that fund or its other clients, and conversely,
such research provided by broker-dealers who have executed transaction
orders on behalf of other FMR clients may be useful to FMR in carrying
out its obligations to a fund. The receipt of such research has not
reduced FMR's normal independent research activities; however, it
enables FMR to avoid the additional expenses that could be incurred if
FMR tried to develop comparable information through its own efforts.
Fixed-income securities are generally purchased from an issuer or
underwriter acting as principal for the securities, on a net basis
with no brokerage commission paid. However, the dealer is compensated
by a difference between the security's original purchase price and the
selling price, the so-called "bid-asked spread." Securities may also
be purchased from underwriters at prices that include underwriting
fees.
Subject to applicable limitations of the federal securities laws, the
fund may pay a broker-dealer commissions for agency transactions that
are in excess of the amount of commissions charged by other
broker-dealers in recognition of their research and execution
services. In order to cause the fund to pay such higher commissions,
FMR must determine in good faith that such commissions are reasonable
in relation to the value of the brokerage and research services
provided by such executing broker-dealers, viewed in terms of a
particular transaction or FMR's overall responsibilities to that fund
or its other clients. In reaching this determination, FMR will not
attempt to place a specific dollar value on the brokerage and research
services provided, or to determine what portion of the compensation
should be related to those services.
To the extent permitted by applicable law, FMR is authorized to
allocate portfolio transactions in a manner that takes into account
assistance received in the distribution of shares of the funds or
other Fidelity funds and to use the research services of brokerage and
other firms that have provided such assistance. FMR may use research
services provided by and place agency transactions with National
Financial Services Corporation (NFSC) and Fidelity Brokerage Services
Japan LLC (FBSJ), indirect subsidiaries of FMR Corp., if the
commissions are fair, reasonable, and comparable to commissions
charged by non-affiliated, qualified brokerage firms for similar
services. Prior to December 9, 1997, FMR used research services
provided by and placed agency transactions with Fidelity Brokerage
Services (FBS), an indirect subsidiary of FMR Corp.
FMR may allocate brokerage transactions to broker-dealers (including
affiliates of FMR) who have entered into arrangements with FMR under
which the broker-dealer allocates a portion of the commissions paid by
a fund toward the reduction of that fund's expenses. The transaction
quality must, however, be comparable to those of other qualified
broker-dealers.
Section 11(a) of the Securities Exchange Act of 1934 prohibits members
of national securities exchanges from executing exchange transactions
for investment accounts which they or their affiliates manage, unless
certain requirements are satisfied. Pursuant to such requirements, the
Board of Trustees has authorized NFSC to execute portfolio
transactions on national securities exchanges in accordance with
approved procedures and applicable SEC rules.
The Trustees periodically review FMR's performance of its
responsibilities in connection with the placement of portfolio
transactions on behalf of the fund and review the commissions paid by
the fund over representative periods of time to determine if they are
reasonable in relation to the benefits to the fund.
For the fiscal periods ended December 31, 1999 and 1998, the
fund's portfolio turnover rates were 1 % and 0%, respectively.
The fund may pay both commissions and spreads in connection with the
placement of portfolio transactions. For the fiscal years ended
December 1999 , 1998, and 1997, the fund paid no brokerage
commissions.
During the fiscal year ended December 1999 , the fund paid no
brokerage commissions to firms that provided research services.
The Trustees of the fund have approved procedures in conformity with
Rule 10f-3 under the 1940 Act whereby a fund may purchase securities
that are offered in underwritings in which an affiliate of FMR
participates. These procedures prohibit the fund from directly or
indirectly benefiting an FMR affiliate in connection with such
underwritings. In addition, for underwritings where an FMR affiliate
participates as a principal underwriter, certain restrictions may
apply that could, among other things, limit the amount of securities
that the fund could purchase in the underwriting.
From time to time the Trustees will review whether the recapture for
the benefit of the fund of some portion of the brokerage commissions
or similar fees paid by the fund on portfolio transactions is legally
permissible and advisable. The fund seeks to recapture soliciting
broker-dealer fees on the tender of portfolio securities, but at
present no other recapture arrangements are in effect. The Trustees
intend to continue to review whether recapture opportunities are
available and are legally permissible and, if so, to determine in the
exercise of their business judgment whether it would be advisable for
the fund to seek such recapture.
Although the Trustees and officers of the fund are substantially the
same as those of other funds managed by FMR or its affiliates,
investment decisions for the fund are made independently from those of
other funds managed by FMR or investment accounts managed by FMR
affiliates. It sometimes happens that the same security is held in the
portfolio of more than one of these funds or investment accounts.
Simultaneous transactions are inevitable when several funds and
investment accounts are managed by the same investment adviser,
particularly when the same security is suitable for the investment
objective of more than one fund or investment account.
When two or more funds are simultaneously engaged in the purchase or
sale of the same security, the prices and amounts are allocated in
accordance with procedures believed to be appropriate and equitable
for each fund. In some cases this system could have a detrimental
effect on the price or value of the security as far as the fund is
concerned. In other cases, however, the ability of the fund to
participate in volume transactions will produce better executions and
prices for the fund. It is the current opinion of the Trustees that
the desirability of retaining FMR as investment adviser to the fund
outweighs any disadvantages that may be said to exist from exposure to
simultaneous transactions.
VALUATION
The fund's net asset value per share (NAV) is the value of a single
share. The NAV of the fund is computed by adding the value of the
fund's investments, cash, and other assets, subtracting its
liabilities, and dividing the result by the number of shares
outstanding.
Portfolio securities are valued by various methods depending on the
primary market or exchange on which they trade. Most equity securities
for which the primary market is the United States are valued at last
sale price or, if no sale has occurred, at the closing bid price. Most
equity securities for which the primary market is outside the United
States are valued using the official closing price or the last sale
price in the principal market in which they are traded. If the last
sale price (on the local exchange) is unavailable, the last evaluated
quote or closing bid price normally is used.
Fixed-income securities and other assets for which market quotations
are readily available may be valued at market values determined by
such securities' most recent bid prices (sales prices if the principal
market is an exchange) in the principal market in which they normally
are traded, as furnished by recognized dealers in such securities or
assets. Or, fixed-income securities and convertible securities may be
valued on the basis of information furnished by a pricing service that
uses a valuation matrix which incorporates both dealer-supplied
valuations and electronic data processing techniques. Use of pricing
services has been approved by the Board of Trustees. A number of
pricing services are available, and the fund may use various pricing
services or discontinue the use of any pricing service.
Futures contracts and options are valued on the basis of market
quotations, if available.
Independent brokers or quotation services provide prices of foreign
securities in their local currency. Fidelity Service Company, Inc.
(FSC) gathers all exchange rates daily at the close of the NYSE using
the last quoted price on the local currency and then translates the
value of foreign securities from their local currencies into U.S.
dollars. Any changes in the value of forward contracts due to exchange
rate fluctuations and days to maturity are included in the calculation
of NAV. If an event that is expected to materially affect the value of
a portfolio security occurs after the close of an exchange or market
on which that security is traded, then that security will be valued in
good faith by a committee appointed by the Board of Trustees.
Short-term securities with remaining maturities of sixty days or less
for which market quotations and information furnished by a pricing
service are not readily available are valued either at amortized cost
or at original cost plus accrued interest, both of which approximate
current value.
The procedures set forth above need not be used to determine the value
of the securities owned by the fund if, in the opinion of a committee
appointed by the Board of Trustees, some other method would more
accurately reflect the fair value of such securities. For example,
securities and other assets for which there is no readily available
market value may be valued in good faith by a committee appointed by
the Board of Trustees. In making a good faith determination of the
value of a security, the committee may review price movements in
futures contracts and ADRs, market and trading trends, the bid/ask
quotes of brokers and off-exchange institutional trading.
PERFORMANCE
The fund may quote performance in various ways. All performance
information supplied by the fund in advertising is historical and is
not intended to indicate future returns. The fund's share price and
return fluctuate in response to market conditions and other factors,
and the value of fund shares when redeemed may be more or less than
their original cost.
RETURN CALCULATIONS. Returns quoted in advertising reflect all aspects
of the fund's return, including the effect of reinvesting dividends
and capital gain distributions, and any change in the fund's NAV over
a stated period. A cumulative return reflects actual performance over
a stated period of time. Average annual returns are calculated by
determining the growth or decline in value of a hypothetical
historical investment in the fund over a stated period, and then
calculating the annually compounded percentage rate that would have
produced the same result if the rate of growth or decline in value had
been constant over the period. For example, a cumulative return of
100% over ten years would produce an average annual return of 7.18%,
which is the steady annual rate of return that would equal 100% growth
on a compounded basis in ten years. While average annual returns are a
convenient means of comparing investment alternatives, investors
should realize that the fund's performance is not constant over time,
but changes from year to year, and that average annual returns
represent averaged figures as opposed to the actual year-to-year
performance of the fund.
In addition to average annual returns, the fund may quote unaveraged
or cumulative returns reflecting the simple change in value of an
investment over a stated period. Average annual and cumulative returns
may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments, or a
series of redemptions, over any time period. Returns may be broken
down into their components of income and capital (including capital
gains and changes in share price) in order to illustrate the
relationship of these factors and their contributions to return.
Returns may be quoted on a before-tax or after-tax basis. Returns and
other performance information may be quoted numerically or in a table,
graph, or similar illustration.
NET ASSET VALUE. Charts and graphs using the fund's NAVs, adjusted
NAVs, and benchmark indexes may be used to exhibit performance. An
adjusted NAV includes any distributions paid by the fund and reflects
all elements of its return. Unless otherwise indicated, the fund's
adjusted NAVs are not adjusted for sales charges, if any.
MOVING AVERAGES. A fund may illustrate performance using moving
averages. A long-term moving average is the average of each week's
adjusted closing NAV for a specified period. A short-term moving
average is the average of each day's adjusted closing NAV for a
specified period. Moving Average Activity Indicators combine adjusted
closing NAVs from the last business day of each week with moving
averages for a specified period to produce indicators showing when an
NAV has crossed, stayed above, or stayed below its moving average. On
December 31, 1999 , the 13-week and 39-week long-term moving
averages were $ 264.65 and $ 264.13 , respectively, for
Exchange Fund.
CALCULATING HISTORICAL FUND RESULTS. The following table shows
performance for the fund.
HISTORICAL FUND RESULTS. The following table shows the fund's return
for the fiscal period ended December 31, 199 9 .
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Average Annual Returns Cumulative Returns
One Year Five Years Ten Years One Year Five Years Ten Years
Exchange Fund 10.41% 23.67% 16.01% 10.41% 189.33% 341.65%
</TABLE>
Note: If FMR had not reimbursed certain fund expenses during these
periods, the fund's returns would have been lower.
The following table shows the income and capital elements of the
fund's cumulative return. The table compares the fund's return to the
record of the Standard & Poor's 500 Index (S&P 500), the Dow Jones
Industrial Average (DJIA), and the cost of living, as measured by the
Consumer Price Index (CPI), over the same period. The CPI information
is as of the month-end closest to the initial investment date for the
fund. The S&P 500 and DJIA comparisons are provided to show how the
fund's return compared to the record of a broad unmanaged index of
common stocks and a narrower set of stocks of major industrial
companies, respectively, over the same period. The fund has the
ability to invest in securities not included in either index, and its
investment portfolio may or may not be similar in composition to the
indexes. The S&P 500 and DJIA returns are based on the prices of
unmanaged groups of stocks and, unlike the fund's returns, do not
include the effect of brokerage commissions or other costs of
investing.
During the 10-year period ended December 31, 199 9 , a
hypothetical $10,000 investment in Exchange Fund would have grown to
$ 44,165 , assuming all distributions were reinvested. Returns
are based on past results and are not an indication of future
performance. Tax consequences of different investments have not been
factored into the figures below.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
EXCHANGE FUND INDEXES
Fiscal Year
Ended Value of Initial $10,000 Value of Reinvested Dividend Value of Reinvested Capital Total Value S&P 500
Investment Distributions Gain Distributions
1999 $33,927 $7,363 $2,875 $44,165 $53,289
1998 $30,992 $6,384 $2,626 $40,002 $44,024
1997 $26,365 $5,089 $2,234 $33,688 $34,240
1996 $19,869 $3,525 $1,684 $25,078 $ 25,674
1995 $16,778 $2,625 $1,322 $20,725 $20,880
1994 $12,805 $1,701 $ 759 $15,265 $15,177
1993 $12,740 $1,329 $ 516 $14,585 $14,980
1992 $12,331 $ 965 $ 394 $13,690 $13,608
1991 $12,152 $ 649 $ 276 $13,077 $12,642
1990 $ 9,469 $ 267 $ 215 $ 9,951 $ 9,688
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
EXCHANGE FUND
Fiscal Year Ended DJIA Cost of Living
1999 $53,747 $13,347
1998 $42,276 $12,998
1997 $35,805 $12,791
1996 $28,677 $12,577
1995 $22,281 $12,173
1994 $16,297 $11,872
1993 $15,525 $11,562
1992 $13,270 $11,253
1991 $12,367 $10,936
1990 $ 9,946 $10,611
</TABLE>
Explanatory Notes: With an initial investment of $10,000 in the fund
on January 1, 19 90 , the net amount invested in fund shares was
$10,000. The cost of the initial investment ($10,000) together with
the aggregate cost of reinvested dividends and capital gain
distributions for the period covered (their cash value at the time
they were reinvested) amounted to $ 14,507 . If distributions had
not been reinvested, the amount of distributions earned from the fund
over time would have been smaller, and cash payments for the period
would have amounted to $ 2,938 for dividends and $ 932 for
capital gain distributions.
PERFORMANCE COMPARISONS. The fund's performance may be compared to the
performance of other mutual funds in general, or to the performance of
particular types of mutual funds. These comparisons may be expressed
as mutual fund rankings prepared by Lipper Analytical Services, Inc.
(Lipper), an independent service located in Summit, New Jersey that
monitors the performance of mutual funds. Generally, Lipper rankings
are based on return, assume reinvestment of distributions, do not take
sales charges or trading fees into consideration, and are prepared
without regard to tax consequences. In addition to the mutual fund
rankings, the fund's performance may be compared to stock, bond, and
money market mutual fund performance indexes prepared by Lipper or
other organizations. When comparing these indexes, it is important to
remember the risk and return characteristics of each type of
investment. For example, while stock mutual funds may offer higher
potential returns, they also carry the highest degree of share price
volatility. Likewise, money market funds may offer greater stability
of principal, but generally do not offer the higher potential returns
available from stock mutual funds.
From time to time, the fund's performance may also be compared to
other mutual funds tracked by financial or business publications and
periodicals. For example, the fund may quote Morningstar, Inc. in its
advertising materials. Morningstar, Inc. is a mutual fund rating
service that rates mutual funds on the basis of risk-adjusted
performance. Rankings that compare the performance of Fidelity funds
to one another in appropriate categories over specific periods of time
may also be quoted in advertising.
The fund's performance may also be compared to that of the benchmark
index representing the universe of securities in which the fund may
invest. The return of the index reflects reinvestment of all dividends
and capital gains paid by securities included in the index. Unlike the
fund's returns, however, the index's returns do not reflect brokerage
commissions, transaction fees, or other costs of investing directly in
the securities included in the index.
The fund may compare its performance to that of the Standard & Poor's
500 Index, a market capitalization-weighted index of common stocks.
The fund may be compared in advertising to Certificates of Deposit
(CDs) or other investments issued by banks or other depository
institutions. Mutual funds differ from bank investments in several
respects. For example, the fund may offer greater liquidity or higher
potential returns than CDs, the fund does not guarantee your principal
or your return, and fund shares are not FDIC insured.
Fidelity may provide information designed to help individuals
understand their investment goals and explore various financial
strategies. Such information may include information about current
economic, market, and political conditions; materials that describe
general principles of investing, such as asset allocation,
diversification, risk tolerance, and goal setting; questionnaires
designed to help create a personal financial profile; worksheets used
to project savings needs based on assumed rates of inflation and
hypothetical rates of return; and action plans offering investment
alternatives. Materials may also include discussions of Fidelity's
asset allocation funds and other Fidelity funds, products, and
services.
Ibbotson Associates of Chicago, Illinois (Ibbotson) provides
historical returns of the capital markets in the United States,
including common stocks, small capitalization stocks, long-term
corporate bonds, intermediate-term government bonds, long-term
government bonds, Treasury bills, the U.S. rate of inflation (based on
the CPI), and combinations of various capital markets. The performance
of these capital markets is based on the returns of different indexes.
Fidelity funds may use the performance of these capital markets in
order to demonstrate general risk-versus-reward investment scenarios.
Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. The risks associated with
the security types in any capital market may or may not correspond
directly to those of the funds. Ibbotson calculates returns in the
same method as the funds. The funds may also compare performance to
that of other compilations or indexes that may be developed and made
available in the future.
In advertising materials, Fidelity may reference or discuss its
products and services, which may include other Fidelity funds;
retirement investing; brokerage products and services; model
portfolios or allocations; saving for college or other goals; and
charitable giving. In addition, Fidelity may quote or reprint
financial or business publications and periodicals as they relate to
current economic and political conditions, fund management, portfolio
composition, investment philosophy, investment techniques, the
desirability of owning a particular mutual fund, and Fidelity services
and products. Fidelity may also reprint, and use as advertising and
sales literature, articles from Fidelity Focus(Registered trademark),
a quarterly magazine provided free of charge to Fidelity fund
shareholders.
The fund may present its fund number, Quotron(trademark) number, and
CUSIP number, and discuss or quote its current portfolio manager.
VOLATILITY. The fund may quote various measures of volatility and
benchmark correlation in advertising. In addition, the fund may
compare these measures to those of other funds. Measures of volatility
seek to compare the fund's historical share price fluctuations or
returns to those of a benchmark. Measures of benchmark correlation
indicate how valid a comparative benchmark may be. All measures of
volatility and correlation are calculated using averages of historical
data.
MOMENTUM INDICATORS indicate the fund's price movements over specific
periods of time. Each point on the momentum indicator represents the
fund's percentage change in price movements over that period.
The fund may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a
program, an investor invests a fixed dollar amount in a fund at
periodic intervals, thereby purchasing fewer shares when prices are
high and more shares when prices are low. While such a strategy does
not assure a profit or guard against loss in a declining market, the
investor's average cost per share can be lower than if fixed numbers
of shares are purchased at the same intervals. In evaluating such a
plan, investors should consider their ability to continue purchasing
shares during periods of low price levels.
As of December 31, 199 9 , FMR advised over $ 35 billion in
municipal fund assets, $ 143 billion in taxable fixed-income
fund assets, $ 149 billion in money market fund assets,
$ 630 billion in equity fund assets, $ 22 billion in
international fund assets, and $ 41 billion in Spartan fund
assets. The fund may reference the growth and variety of money market
mutual funds and the adviser's innovation and participation in the
industry. The equity funds under management figure represents the
largest amount of equity fund assets under management by a mutual fund
investment adviser in the United States, making FMR America's leading
equity (stock) fund manager. FMR, its subsidiaries, and affiliates
maintain a worldwide information and communications network for the
purpose of researching and managing investments abroad.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the fund are not currently offered to the public.
DISTRIBUTIONS AND TAXES
DIVIDENDS. A portion of the fund's income may qualify for the
dividends-received deduction available to corporate shareholders to
the extent that the fund's income is derived from qualifying
dividends. Because the fund may earn other types of income, such as
interest, short-term capital gains, and non-qualifying dividends, the
percentage of dividends from the fund that qualifies for the deduction
generally will be less than 100%. A portion of the fund's dividends
derived from certain U.S. Government securities and securities of
certain other investment companies may be exempt from state and local
taxation.
CAPITAL GAINS DISTRIBUTIONS. The fund's long-term capital gains
distributions are federally taxable to shareholders generally as
capital gains.
As of December 31, 1999, the fund had a capital loss carryforward
aggregating approximately $20,000. This loss carryforward, all of
which will expire on December 31, 2007, is available to offset future
capital gains.
RETURNS OF CAPITAL. If the fund's distributions exceed its taxable
income and capital gains realized during a taxable year, all or a
portion of the distributions made in the same taxable year may be
recharacterized as a return of capital to shareholders. A return of
capital distribution will generally not be taxable, but will reduce
each shareholder's cost basis in the fund and result in a higher
reported capital gain or lower reported capital loss when those shares
on which the distribution was received are sold.
FOREIGN TAX CREDIT OR DEDUCTION. Foreign governments may withhold
taxes on dividends and interest earned by the fund with respect to
foreign securities. Foreign governments may also impose taxes on other
payments or gains with respect to foreign securities. Because the fund
does not currently anticipate that securities of foreign issuers will
constitute more than 50% of its total assets at the end of its fiscal
year, shareholders should not expect to be eligible to claim a foreign
tax credit or deduction on their federal income tax returns with
respect to foreign taxes withheld.
TAX STATUS OF THE FUND. The fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal
Revenue Code so that it will not be liable for federal tax on income
and capital gains distributed to shareholders. In order to qualify as
a regulated investment company, and avoid being subject to federal
income or excise taxes at the fund level, the fund intends to
distribute substantially all of its net investment income and net
realized capital gains within each calendar year as well as on a
fiscal year basis, and intends to comply with other tax rules
applicable to regulated investment companies.
OTHER TAX INFORMATION. The information above is only a summary of some
of the tax consequences generally affecting the fund and its
shareholders, and no attempt has been made to discuss individual tax
consequences. It is up to you or your tax preparer to determine
whether the sale of shares of the fund resulted in a capital gain or
loss or other tax consequence to you. In addition to federal income
taxes, shareholders may be subject to state and local taxes on fund
distributions, and shares may be subject to state and local personal
property taxes. Investors should consult their tax advisers to
determine whether a fund is suitable to their particular tax
situation.
TRUSTEES AND OFFICERS
The Trustees, Member of the Advisory Board, and executive officers of
the trust are listed below. The Board of Trustees governs the fund and
is responsible for protecting the interests of shareholders. The
Trustees are experienced executives who meet periodically throughout
the year to oversee the fund's activities, review contractual
arrangements with companies that provide services to the fund, and
review the fund's performance. Except as indicated, each individual
has held the office shown or other offices in the same company for the
last five years. All persons named as Trustees and Members of the
Advisory Board also serve in similar capacities for other funds
advised by FMR or its affiliates. The business address of each
Trustee, Member of the Advisory Board, and officer who is an
"interested person" (as defined in the 1940 Act) is 82 Devonshire
Street, Boston, Massachusetts 02109, which is also the address of FMR.
The business address of all the other Trustees is Fidelity
Investments(Registered trademark), P.O. Box 9235, Boston,
Massachusetts 02205-9235. Those Trustees who are "interested persons"
by virtue of their affiliation with either the trust or FMR are
indicated by an asterisk (*).
*EDWARD C. JOHNSON 3d ( 69 ), Trustee and President, is Chairman,
Chief Executive Officer and a Director of FMR Corp.; a Director and
Chairman of the Board and of the Executive Committee of FMR; Chairman
and a Director of Fidelity Investments Money Management, Inc. (1998),
Fidelity Management & Research (U.K.) Inc., and Fidelity Management &
Research (Far East) Inc.; and a Director of FDC. Abigail Johnson,
Member of the Advisory Board of Fidelity Exchange Fund, is Mr.
Johnson's daughter.
ABIGAIL P. JOHNSON (3 8 ), Member of the Advisory Board of
Fidelity Exchange Fund (1999), is Vice President of certain Equity
Funds (1997), and is a Director of FMR Corp. (1994). Before assuming
her current responsibilities, Ms. Johnson managed a number of Fidelity
funds. Edward C. Johnson 3d, Trustee and President of the Funds, is
Ms. Johnson's father.
RALPH F. COX ( 67 ), Trustee, is President of RABAR Enterprises
(management consulting-engineering industry, 1994). Prior to February
1994, he was President of Greenhill Petroleum Corporation (petroleum
exploration and production). Until March 1990, Mr. Cox was President
and Chief Operating Officer of Union Pacific Resources Company
(exploration and production). He is a Director of Waste Management
Inc. (non-hazardous waste, 1993), CH2M Hill Companies (engineering),
and Bonneville Pacific (independent power and petroleum
production) . In addition, he is a member of advisory boards of
Texas A&M University and the University of Texas at Austin.
PHYLLIS BURKE DAVIS ( 68 ), Trustee. Mrs. Davis is retired
from Avon Products, Inc. where she held various positions including
Senior Vice President of Corporate Affairs and Group Vice President of
U.S. sales, distribution, and manufacturing. She is currently a
Director of BellSouth Corporation (telecommunications), Eaton
Corporation ( manufacturing ), and the TJX Companies, Inc.
(retail stores), and previously served as a Director of Hallmark
Cards, Inc., Nabisco Brands, Inc. , and Standard Brands,
Inc. In addition, she is a member of the Board of Directors of the
Southampton Hospital in Southampton, N.Y. (1998).
ROBERT M. GATES ( 56 ), Trustee (1997), is a consultant, author,
and lecturer (1993). Mr. Gates was Director of the Central
Intelligence Agency (CIA) from 1991-1993. From 1989 to 1991, Mr. Gates
served as Assistant to the President of the United States and Deputy
National Security Advisor. Mr. Gates is a Director of Charles
Stark Draper Laboratory (non-profit), NACCO Industries, Inc. (mining
and manufacturing), and TRW Inc. ( automotive, space, defense, and
information technology ). Mr. Gates previously served as a Director
of LucasVarity PLC (automotive components and diesel engines). He
is currently serving as Dean of the George Bush School of Government
and Public Service at Texas A & M University (1999-2000). Mr.
Gates also is a Trustee of the Forum for International Policy and of
the Endowment Association of the College of William and Mary. In
addition, he is a member of the National Executive Board of the Boy
Scouts of America.
DONALD J. KIRK ( 67 ), Trustee, is Executive-in-Residence (1995)
at Columbia University Graduate School of Business. From 1987
to January 1995, Mr. Kirk was a Professor at Columbia University
Graduate School of Business. Prior to 1987, he was Chairman of the
Financial Accounting Standards Board. Mr. Kirk previously served as a
Director of General Re Corporation (reinsurance, 1987-1998) and as
a Director of Valuation Research Corp. (appraisals and valuations,
1993-1995). He serves as Chairman of the Board of Directors of
National Arts Stabilization Inc., Chairman of the Board of Trustees of
the Greenwich Hospital Association, Director of the Yale-New Haven
Health Services Corp. (1998), Vice Chairman of the Public Oversight
Board of the American Institute of Certified Public Accountants' SEC
Practice Section (1995), and as a Public Governor of the National
Association of Securities Dealers, Inc. (1996).
NED C. LAUTENBACH (55), Trustee (2000), has been a partner of
Clayton, Dubilier & Rice, Inc. (private equity investment firm) since
September 1998. Mr. Lautenbach was Senior Vice President of IBM
Corporation from 1992 until his retirement in July 1998. From 1993 to
1995 he was Chairman of IBM World Trade Corporation. He also was a
member of IBM's Corporate Executive Committee from 1994 to July 1998.
He is a Director of PPG Industries Inc. (glass, coating and chemical
manufacturer), Dynatech Corporation (global communications equipment),
Eaton Corporation (global manufacturer of highly engineered products)
and ChoicePoint Inc. (data identification, retrieval, storage, and
analysis).
*PETER S. LYNCH ( 57 ), Trustee, is Vice Chairman and Director of
FMR. Prior to May 31, 1990, he was a Director of FMR and Executive
Vice President of FMR (a position he held until March 31, 1991); Vice
President of Fidelity Magellan Fund and FMR Growth Group Leader; and
Managing Director of FMR Corp. Mr. Lynch was also Vice President of
Fidelity Investments Corporate Services (1991-1992). In addition, he
serves as a Trustee of Boston College, Massachusetts Eye & Ear
Infirmary, Historic Deerfield (1989) and Society for the Preservation
of New England Antiquities, and as an Overseer of the Museum of Fine
Arts of Boston.
WILLIAM O. McCOY ( 66 ), Trustee (1997), is the Interim
Chancellor for the University of North Carolina at Chapel
Hill . Previously he had served from 1995 through 1998 as
Vice President of Finance for the University of North Carolina
(16-school system). Prior to his retirement in December 1994, Mr.
McCoy was Vice Chairman of the Board of BellSouth Corporation
(telecommunications, 1984) and President of BellSouth Enterprises
(1986). He is currently a Director of Liberty Corporation (holding
company, 1984), Duke-Weeks Realty Corporation (real estate,
1994), Carolina Power and Light Company (electric utility, 1996), the
Kenan Transport Company ( trucking , 1996), and Dynatech
Corporation (electronics, 1999) . Previously, he was a Director of
First American Corporation (bank holding company, 1979-1996). In
addition, Mr. McCoy served as a member of the Board of Visitors for
the University of North Carolina at Chapel Hill (1994 -1998 )
and currently serves on the Board of Visitors of the
Kenan-Flager Business School (University of North Carolina at Chapel
Hill, 1988).
GERALD C. McDONOUGH ( 71 ), Trustee and Chairman of the
non-interested Trustees, is Chairman of G.M. Management Group
(strategic advisory services). Mr. McDonough is a Director and
Chairman of the Board of York International Corp. (air
conditioning and refrigeration), Commercial Intertech Corp. (hydraulic
systems, building systems, and metal products, 1992), CUNO, Inc.
(liquid and gas filtration products, 1996), and Associated Estates
Realty Corporation (a real estate investment trust, 1993). Mr.
McDonough served as a Director of ACME-Cleveland Corp. (metal working,
telecommunications, and electronic products) from 1987-1996 and
Brush-Wellman Inc. (metal refining) from 1983-1997.
MARVIN L. MANN ( 66 ), Trustee (1993), is Chairman
Emeritus , of Lexmark International, Inc. (office machines,
1991) where he still remains a member of the Board. Prior to
1991, he held the positions of Vice President of International
Business Machines Corporation ("IBM") and President and General
Manager of various IBM divisions and subsidiaries. Mr. Mann is a
Director of M.A. Hanna Company (chemicals, 1993), Imation Corp.
(imaging and information storage, 1997). He is a Board member of
Dynatech Corporation (electronics, 1999).
*ROBERT C. POZEN ( 53 ), Trustee (1997) and Senior Vice
President, is also President and a Director of FMR (1997); and
President and a Director of Fidelity Investments Money Management,
Inc. (1998), Fidelity Management & Research (U.K.) Inc. (1997), and
Fidelity Management & Research (Far East) Inc. (1997). Previously, Mr.
Pozen served as General Counsel, Managing Director, and Senior Vice
President of FMR Corp.
THOMAS R. WILLIAMS ( 71 ), Trustee, is President of The Wales
Group, Inc. (management and financial advisory services). Prior to
retiring in 1987, Mr. Williams served as Chairman of the Board of
First Wachovia Corporation (bank holding company), and Chairman and
Chief Executive Officer of The First National Bank of Atlanta and
First Atlanta Corporation (bank holding company). He is currently a
Director of National Life Insurance Company of Vermont and American
Software, Inc. Mr. Williams was previously a Director of ConAgra, Inc.
(agricultural products), Georgia Power Company (electric utility), and
Avado, Inc. (restaurants).
ROBERT A. LAWRENCE ( 47 ), is Vice President of certain Equity
Funds (1997), Vice President of Fidelity Real Estate High Income Fund
(1995) and Fidelity Real Estate High Income Fund II (1996), and Senior
Vice President of FMR (1993).
ERIC D. ROITER ( 51 ), Secretary (1998), is Vice President (1998)
and General Counsel of FMR (1998) and Vice President and Clerk of FDC
(1998). Prior to joining Fidelity, Mr. Roiter was with the law firm of
Debevoise & Plimpton, as an associate (1981-1984) and as a partner
(1985-1997), and served as an Assistant General Counsel of the U.S.
Securities and Exchange Commission (1979-1981). Mr. Roiter was an
Adjunct Member, Faculty of Law, at Columbia University Law School
(1996-1997).
ROBERT A. DWIGHT (41),Treasurer (2000), is Treasurer of the
Fidelity funds and is an employee of FMR. Prior to becoming Treasurer
of the Fidelity funds, he served as President of Fidelity Accounting
and Custody Services (FACS). Before joining Fidelity, Mr. Dwight was
Senior Vice President of fund accounting operations for The Boston
Company.
MARIA F. DWYER (41), Deputy Treasurer (2000), is Deputy Treasurer
of the Fidelity funds and is a Vice President (1999) and an employee
(1996) of FMR. Prior to joining Fidelity, Ms. Dwyer served as Director
of Compliance for MFS Investment Management.
MATTHEW N. KARSTETTER ( 38 ), Deputy Treasurer (1998), is Deputy
Treasurer of the Fidelity funds and is an employee of FMR (1998).
Before joining FMR, Mr. Karstetter served as Vice President of
Investment Accounting and Treasurer of IDS Mutual Funds at American
Express Financial Advisors (1996-1998). Prior to 1996, Mr. Karstetter
was Vice President, Mutual Fund Services at State Street Bank & Trust
(1991-1996).
JOHN H. COSTELLO ( 53 ), Assistant Treasurer, is an employee of
FMR.
The following table sets forth information describing the compensation
of each Trustee and Member of the Advisory Board of the fund for his
or her services for the fiscal year ended December 31, 199 9 .
COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C>
Trustees and Member of the Aggregate Compensation from Total Compensation from the
Advisory Board Exchange Fund B Fund Complex* A
Edward C. Johnson 3d ** $ 0 $ 0
Abigail P. Johnson ** $ 0 $ 0
Ralph F. Cox $ 103 $ 217,500
Phyllis Burke Davis $ 100 $ 211,500
Robert M. Gates $ 103 $217,500
E. Bradley Jones **** $ 103 $ 217,500
Donald J. Kirk $ 103 $ 217,500
Ned C. Lautenbach *** $ 23 $ 54,000
Peter S. Lynch ** $ 0 $ 0
William O. McCoy $ 101 $ 214,500
Gerald C. McDonough $ 127 $ 269,000
Marvin L. Mann $ 103 $ 217,500
Robert C. Pozen** $ 0 $ 0
Thomas R. Williams $ 100 $213,000
</TABLE>
* Information is for the calendar year ended December 31, 199 9
for 236 funds in the complex.
** Interested Trustees of the fund and Ms. Johnson are compensated
by FMR.
*** During the period from October 14, 1999 through December 31,
1999, Mr. Lautenbach served as a Member of the Advisory Board.
Effective January 1, 2000, Mr. Lautenbach serves as a Member of the
Board of Trustees.
**** Mr. Jones served on the Board of Trustees through December 31,
1999.
A Compensation figures include cash, amounts required to be
deferred, and may include amounts deferred at the election of
Trustees. For the calendar year ended December 31, 1999, the Trustees
accrued required deferred compensation from the funds as follows:
Ralph F. Cox, $75,000; Phyllis Burke Davis, $75,000; Robert M. Gates,
$75,000; E. Bradley Jones, $75,000; Donald J. Kirk, $75,000; William
O. McCoy, $75,000; Gerald C. McDonough, $87,500; Marvin L. Mann,
$75,000; and Thomas R. Williams, $75,000. Certain of the
non-interested Trustees elected voluntarily to defer a portion of
their compensation as follows: Ralph F. Cox, $53,735; William O.
McCoy, $53,735; and Thomas R. Williams, $62,319.
B Compensation figures include cash.
Under a deferred compensation plan adopted in September 1995 and
amended in November 1996 (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 fees. Amounts deferred under the
Plan are subject to vesting and are treated as though equivalent
dollar amounts had been invested in shares of a cross-section of
Fidelity funds including funds in each major investment discipline and
representing a majority of Fidelity's assets under management (the
Reference Funds). The amounts ultimately received by the Trustees
under the Plan will be directly linked to the investment performance
of the Reference Funds. Deferral of fees in accordance with the Plan
will have a negligible effect on a fund's assets, liabilities, and net
income per share, and will not obligate a fund to retain the services
of any Trustee or to pay any particular level of compensation to the
Trustee. A fund may invest in the Reference Funds under the Plan
without shareholder approval.
As of December 31, 199 9 , the Trustees, Members of the Advisory
Board, and officers of the fund owned, in the aggregate, less than 1%
of the fund's total outstanding shares.
CONTROL OF INVESTMENT ADVISER
FMR Corp., organized in 1972, is the ultimate parent company of FMR.
The voting common stock of FMR Corp. is divided into two classes.
Class B is held predominantly by members of the Edward C. Johnson 3d
family and is entitled to 49% of the vote on any matter acted upon by
the voting common stock. Class A is held predominantly by non-Johnson
family member employees of FMR Corp. and its affiliates and is
entitled to 51% of the vote on any such matter. The Johnson family
group and all other Class B shareholders have entered into a
shareholders' voting agreement under which all Class B shares will be
voted in accordance with the majority vote of Class B shares. Under
the 1940 Act, control of a company is presumed where one individual or
group of individuals owns more than 25% of the voting stock of that
company. Therefore, through their ownership of voting common stock and
the execution of the shareholders' voting agreement, members of the
Johnson family may be deemed, under the 1940 Act, to form a
controlling group with respect to FMR Corp.
At present, the principal operating activities of FMR Corp. are those
conducted by its division, Fidelity Investments Retail Marketing
Company, which provides marketing services to various companies within
the Fidelity organization.
Fidelity investment personnel may invest in securities for their own
investment accounts pursuant to a code of ethics that sets forth all
employees' fiduciary responsibilities regarding the funds, establishes
procedures for personal investing and restricts certain transactions.
For example, all personal trades in most securities require
pre-clearance, and participation in initial public offerings is
prohibited. In addition, restrictions on the timing of personal
investing in relation to trades by Fidelity funds and on short-term
trading have been adopted.
MANAGEMENT CONTRACT
The fund has entered into a management contract with FMR, pursuant to
which FMR furnishes investment advisory and other services.
MANAGEMENT SERVICES. Under the terms of its management contract with
the fund, FMR acts as investment adviser and, subject to the
supervision of the Board of Trustees, directs the investments of the
fund in accordance with its investment objective, policies and
limitations. FMR also provides the fund with all necessary office
facilities and personnel for servicing the fund's investments,
compensates all officers of the fund and all Trustees who are
"interested persons" of the trust or of FMR, and all personnel of the
fund or FMR performing services relating to research, statistical and
investment activities.
In addition, FMR or its affiliates, subject to the supervision of the
Board of Trustees, provide the management and administrative services
necessary for the operation of the fund. These services include
providing facilities for maintaining the fund's organization;
supervising relations with custodians, transfer and pricing agents,
accountants, underwriters and other persons dealing with the fund;
preparing all general shareholder communications and conducting
shareholder relations; maintaining the fund's records and the
registration of the fund's shares under federal securities laws and
making necessary filings under state securities laws; developing
management and shareholder services for the fund; and furnishing
reports, evaluations and analyses on a variety of subjects to the
Trustees.
MANAGEMENT-RELATED EXPENSES. In addition to the management fee payable
to FMR and the fees payable to the transfer, dividend disbursing, and
shareholder servicing agent, the fund pays all of its expenses that
are not assumed by those parties. The fund pays for the typesetting,
printing, and mailing of its proxy materials to shareholders, legal
expenses, and the fees of the custodian, auditor and non-interested
Trustees. The fund's management contract further provides that the
fund will pay for typesetting, printing, and mailing prospectuses,
statements of additional information, notices, and reports to
shareholders; however, under the terms of the fund's transfer agent
agreement, the transfer agent bears the costs of providing these
services to existing shareholders. Other expenses paid by the fund
include interest, taxes, brokerage commissions, the fund's
proportionate share of insurance premiums and Investment Company
Institute dues, and the costs of registering shares under federal
securities laws and making necessary filings under state securities
laws. The fund is also liable for such non-recurring expenses as may
arise, including costs of any litigation to which the fund may be a
party, and any obligation it may have to indemnify its officers and
Trustees with respect to litigation.
The fund's management contract provides that FMR will pay all fees
associated with pricing and bookkeeping and administration of the
fund's security lending program.
MANAGEMENT FEE. For the services of FMR under the management contract,
the fund pays FMR a monthly management fee at the annual rate of 1/20
of 1% per month which is equivalent to an annual rate of 6/10 of 1% of
the fund's average net assets throughout the month. The contract also
provides that, to the extent that the aggregate average net assets of
the funds advised by FMR exceed $4 billion in any month, the
management fee payable by the fund for that month on its portion of
that excess (determined on the basis of the fund's portion of the
aggregate average net assets) will be reduced by 10%. In case of
initiation or termination of this contract during any month, the fee
for that month will be reduced proportionately on the basis of the
number of business days during which it is in effect and the fee will
be computed using the average net assets for the business days the
contract was in effect. In addition, the applicability of the 10% fee
reduction will be determined on the basis of average net assets of the
funds advised by FMR over the same period.
For the fiscal years ended December 31 , 1999, 1998, and
1997, the fund paid FMR management fees of $1,956,717, $1,825,623, and
$1,576,362, respectively.
FMR may, from time to time, voluntarily reimburse all or a portion of
the fund's operating expenses (exclusive of interest, taxes, brokerage
commissions, and extraordinary expenses), which is subject to revision
or termination. FMR retains the ability to be repaid for these expense
reimbursements in the amount that expenses fall below the limit prior
to the end of the fiscal year.
Expense reimbursements by FMR will increase the fund's returns, and
repayment of the reimbursement by the fund will lower its returns.
TRANSFER AND SERVICE AGENT AGREEMENTS
The fund has entered into a transfer agent agreement with FSC, an
affiliate of FMR. Under the terms of the agreement, FSC performs
transfer agency, dividend disbursing, and shareholder services for the
fund.
For providing transfer agency services, FSC receives an account fee
and an asset-based fee each paid monthly with respect to each account
in the fund. For retail accounts and certain institutional accounts,
these fees are based on account size and fund type. For certain
institutional retirement accounts, these fees are based on fund type.
For certain other institutional retirement accounts, these fees are
based on account type and fund type. The account fees are subject to
increase based on postage rate changes.
The asset-based fees are subject to adjustment if the year-to-date
total return of the S&P 500 exceeds a positive or negative 15%.
FSC pays out-of-pocket expenses associated with providing transfer
agent services. In addition, FSC bears the expense of typesetting,
printing, and mailing prospectuses, statements of additional
information, and all other reports, notices, and statements to
existing shareholders, with the exception of proxy statements.
The fund has entered into a service agent agreement with FSC. Under
the terms of the agreement, FSC calculates the NAV and dividends for
the fund, maintains the fund's portfolio and general accounting
records, and administers the fund's securities lending program.
For providing pricing and bookkeeping services, FSC receives a monthly
fee based on the fund's average daily net assets throughout the month.
For administering the fund's securities lending program, FSC receives
fees based on the number and duration of individual securities loans.
FMR bears the cost of pricing and bookkeeping services and
administration of the securities lending program under the terms of
its management contract with the fund.
DESCRIPTION OF THE FUND
TRUST ORGANIZATION. Fidelity Exchange Fund is an open-end management
investment company organized as a Massachusetts business trust on
November 1, 1984. Currently, there is one fund in the trust: Fidelity
Exchange Fund. The Trustees are permitted to create additional funds
in the trust.
The assets of the trust received for the issue or sale of shares of
each fund and all income, earnings, profits, and proceeds thereof,
subject to the rights of creditors, are allocated to such fund, and
constitute the underlying assets of such fund. The underlying assets
of each fund in the trust shall be charged with the liabilities and
expenses attributable to such fund. Any general expenses of the trust
shall be allocated between or among any one or more of the funds.
SHAREHOLDER LIABILITY. The fund is an entity commonly known as a
"Massachusetts business trust." Under Massachusetts law, shareholders
of such a trust may, under certain circumstances, be held personally
liable for the obligations of the trust.
The Declaration of Trust provides that the fund shall not have any
claim against shareholders except for the payment of the purchase
price of shares and requires that each agreement, obligation, or
instrument entered into or executed by the fund or the Trustees
relating to the fund shall include a provision limiting the
obligations created thereby to the fund and its assets.
The Declaration of Trust provides for indemnification out of the
fund's property of any shareholder or former shareholder held
personally liable for the obligations of the fund solely by reason of
his or her being or having been a shareholder and not because of his
or her acts or omissions or for some other reason. The Declaration of
Trust also provides that the fund shall, upon request, assume the
defense of any claim made against any shareholder for any act or
obligation of the fund and satisfy any judgment thereon. Thus, the
risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the fund
itself would be unable to meet its obligations. FMR believes that, in
view of the above, the risk of personal liability to shareholders is
remote.
VOTING RIGHTS. The fund's capital consists of shares of beneficial
interest. As a shareholder, you are entitled to one vote for each
share that you own. The voting rights of shareholders can be changed
only by a shareholder vote. Shares may be voted in the aggregate and
by class.
The shares have no preemptive rights or conversion rights. Shares are
fully paid and nonassessable, except as set forth under the heading
"Shareholder Liability" above.
The fund may be terminated upon the sale of its assets to another
open-end management investment company, or upon liquidation and
distribution of its assets, if approved by a vote of shareholders. In
the event of the dissolution or liquidation of the fund, shareholders
are entitled to receive the underlying assets of the fund available
for distribution.
CUSTODIAN. Brown Brothers Harriman & Co., 40 Water Street, Boston,
Massachusetts, is custodian of the assets of the fund. The custodian
is responsible for the safekeeping of a fund's assets and the
appointment of any subcustodian banks and clearing agencies.
The Bank of New York and The Chase Manhattan Bank, each headquartered
in New York, also may serve as special purpose custodians of certain
assets in connection with repurchase agreement transactions.
FMR, its officers and directors, its affiliated companies, and members
of the Board of Trustees may, from time to time, conduct transactions
with various banks, including banks serving as custodians for certain
funds advised by FMR. The Boston branch of the fund's custodian leases
its office space from an affiliate of FMR at a lease payment which,
when entered into, was consistent with prevailing market rates.
Transactions that have occurred to date include mortgages and personal
and general business loans. In the judgment of FMR, the terms and
conditions of those transactions were not influenced by existing or
potential custodial or other fund relationships.
AUDITOR. PricewaterhouseCoopers LLP, 160 Federal Street, Boston,
Massachusetts, serves as independent accountant for the fund. The
auditor examines financial statements for the fund and provides other
audit, tax, and related services.
FINANCIAL STATEMENTS
The fund's financial statements and financial highlights for the
fiscal year ended December 31, 199 9 , and report of the auditor,
are included in the fund's annual report and are incorporated herein
by reference.
APPENDIX
Fidelity, Fidelity Investments & (Pyramid) Design, Fidelity Focus,
Fidelity Investments and Magellan are registered trademarks of FMR
Corp.
The third party marks appearing above are the marks of their
respective owners.
Fidelity Exchange Fund
PART C. OTHER INFORMATION
Item 23. Exhibits
(a) The Registrant's Restated Declaration of Trust, dated April 18,
1996, is incorporated herein by reference to Exhibit 1 of
Post-Effective Amendment No. 17.
(b) Bylaws of the Trust, as amended and dated May 19, 1994, are
incorporated herein by reference to Exhibit 2(a) of Fidelity Union
Street Trust's (File No. 2-50318) Post-Effective Amendment No. 87.
(c) Not applicable.
(d) Management Contract between Fidelity Exchange Fund and Fidelity
Management & Research Company, dated November 1, 1988, is incorporated
herein by reference to Exhibit 5 of Post-Effective Amendment No. 19.
(e) Not applicable.
(f) (1) The Fee Deferral Plan for Non-Interested Person Directors
and Trustees of the Fidelity Funds, effective as of September 14, 1995
and amended through November 14, 1996, is incorporated herein by
reference to Exhibit 7(b) of Fidelity Aberdeen Street Trust's (File
No. 33-43529) Post-Effective Amendment No. 19.
(g) (1) Custodian Agreement and Appendix C, dated September 1, 1994,
between Brown Brothers Harriman & Company and the Registrant are
incorporated herein by reference to Exhibit 8(a) of Fidelity
Commonwealth Trust's (File No. 2-52322) Post-Effective Amendment No.
56.
(2) Appendix A, dated August 11, 1999, to the Custodian
Agreement, dated September 1, 1994, between Brown Brothers Harriman &
Company and the Registrant is incorporated herein by reference to
Exhibit (g)(6) of Fidelity Advisor Series I's (File No. 2-84776)
Post-Effective Amendment No. 50.
(3) Appendix B, dated September 16, 1999, to the Custodian
Agreement, dated September 1, 1994, between Brown Brothers Harriman &
Company and the Registrant is incorporated herein by reference to
Exhibit (g)(7) of Fidelity Advisor Series I's (File No. 2-84776)
Post-Effective Amendment No. 50.
(4) Addendum, dated October 21, 1996, to the Custodian
Agreement, dated September 1, 1994, between Brown Brothers Harriman &
Company and the Registrant is incorporated herein by reference to
Exhibit (g)(4) of Fidelity Commonwealth Trust's (File No. 2-52322)
Post-Effective Amendment No. 68.
(5) Fidelity Group Repo Custodian Agreement among The Bank of
New York, J. P. Morgan Securities, Inc., and the Registrant, dated
February 12, 1996, is incorporated herein by reference to Exhibit 8(d)
of Fidelity Institutional Cash Portfolios' (File No. 2-74808)
Post-Effective Amendment No. 31.
(6) Schedule 1 to the Fidelity Group Repo Custodian Agreement
between The Bank of New York and the Registrant, dated February 12,
1996, is incorporated herein by reference to Exhibit 8(e) of Fidelity
Institutional Cash Portfolios' (File No. 2-74808) Post-Effective
Amendment No. 31.
(7) Fidelity Group Repo Custodian Agreement among Chemical
Bank, Greenwich Capital Markets, Inc., and the Registrant, dated
November 13, 1995, is incorporated herein by reference to Exhibit 8(f)
of Fidelity Institutional Cash Portfolios' (File No. 2-74808)
Post-Effective Amendment No. 31.
(8) Schedule 1 to the Fidelity Group Repo Custodian Agreement
between Chemical Bank and the Registrant, dated November 13, 1995, is
incorporated herein by reference to Exhibit 8(g) of Fidelity
Institutional Cash Portfolios' (File No. 2-74808) Post-Effective
Amendment No. 31.
(9) Joint Trading Account Custody Agreement between The Bank
of New York and the Registrant, dated May 11, 1995, is incorporated
herein by reference to Exhibit 8(h) of Fidelity Institutional Cash
Portfolios' (File No. 2-74808) Post-Effective Amendment No. 31.
(10) First Amendment to Joint Trading Account Custody
Agreement between The Bank of New York and the Registrant, dated July
14, 1995, is incorporated herein by reference to Exhibit 8(i) of
Fidelity Institutional Cash Portfolios' (File No. 2-74808)
Post-Effective Amendment No. 31.
(h) Not applicable.
(i) Not applicable.
(j) Consent of PricewaterhouseCoopers LLP, dated February 22, 2000,
is filed herein as Exhibit j(1).
(k) Not applicable.
(l) Not applicable.
(m) Not applicable.
(n) Not applicable.
(o) Not applicable.
Item 24. Trusts Controlled by or under Common Control with this Trust
The Board of Trustees of the Trust is the same as the board of other
Fidelity funds, each of which has Fidelity Management & Research
Company, or an affiliate, as its investment adviser. In addition, the
officers of the Trust are substantially identical to those of the
other Fidelity funds. Nonetheless, the Trust takes the position that
it is not under common control with other Fidelity funds because the
power residing in the respective boards and officers arises as the
result of an official position with the respective trusts.
Item 25. Indemnification
Article XI, Section 2 of the Declaration of Trust sets forth the
reasonable and fair means for determining whether indemnification
shall be provided to any past or present Trustee or officer. It states
that the Trust shall indemnify any present or past trustee or officer
to the fullest extent permitted by law against liability, and all
expenses reasonably incurred by him or her in connection with any
claim, action, suit or proceeding in which he or she is involved by
virtue of his or her service as a trustee or officer and against any
amount incurred in settlement thereof. Indemnification will not be
provided to a person adjudged by a court or other adjudicatory body to
be liable to the Trust or its shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of his
or her duties (collectively, "disabling conduct"), or not to have
acted in good faith in the reasonable belief that his or her action
was in the best interest of the Trust. In the event of a settlement,
no indemnification may be provided unless there has been a
determination, as specified in the Declaration of Trust, that the
officer or trustee did not engage in disabling conduct.
Pursuant to the agreement by which Fidelity Service Company, Inc.
("FSC") is appointed transfer agent, the Trust agrees to indemnify and
hold FSC harmless against any losses, claims, damages, liabilities or
expenses (including reasonable counsel fees and expenses) resulting
from:
(1) any claim, demand, action or suit brought by any person other
than the Trust, including by a shareholder, which names FSC and/or the
Trust as a party and is not based on and does not result from FSC's
willful misfeasance, bad faith or negligence or reckless disregard of
duties, and arises out of or in connection with FSC's performance
under the Transfer Agency Agreement; or
(2) any claim, demand, action or suit (except to the extent
contributed to by FSC's willful misfeasance, bad faith or negligence
or reckless disregard of its duties) which results from the negligence
of the Trust, or from FSC's acting upon any instruction(s) reasonably
believed by it to have been executed or communicated by any person
duly authorized by the Trust, or as a result of FSC's acting in
reliance upon advice reasonably believed by FSC to have been given by
counsel for the Trust, or as a result of FSC's acting in reliance upon
any instrument or stock certificate reasonably believed by it to have
been genuine and signed, countersigned or executed by the proper
person.
Item 26. Business and Other Connections of Investment Adviser
FIDELITY MANAGEMENT & RESEARCH COMPANY (FMR)
82 Devonshire Street, Boston, MA 02109
FMR serves as investment adviser to a number of other investment
companies. The directors and officers of the Adviser have held, during
the past two fiscal years, the following positions of a substantial
nature.
Edward C. Johnson 3d Chairman of the Board and
Director of FMR; President
and Chief Executive Officer
of FMR Corp.; Chairman of
the Board and Director of
FMR Corp., Fidelity
Investments Money
Management, Inc. (FIMM),
Fidelity Management &
Research (U.K.) Inc. (FMR
U.K.), and Fidelity
Management & Research (Far
East) Inc. (FMR Far East);
Chairman of the Executive
Committee of FMR; Chairman
and Representative Director
of Fidelity Investments
Japan Limited (FIJ);
President and Trustee of
funds advised by FMR.
Robert C. Pozen President and Director of
FMR; Senior Vice President
and Trustee of funds advised
by FMR; President and
Director of FIMM, FMR U.K.,
and FMR Far East; Director
of Strategic Advisers, Inc.;
Previously, General Counsel,
Managing Director, and
Senior Vice President of FMR
Corp.
Peter S. Lynch Vice Chairman of the Board
and Director of FMR.
John Avery Vice President of FMR.
Robert Bertelson Vice President of FMR.
John H. Carlson Vice President of FMR and of
funds advised by FMR.
Robert C. Chow Vice President of FMR.
Dwight D. Churchill Senior Vice President of FMR
and Vice President of Bond
Funds advised by FMR; Vice
President of FIMM.
Laura B. Cronin Vice President of FMR and
Treasurer of FMR, FIMM, FMR
U.K., and FMR Far East.
Barry Coffman Vice President of FMR.
Arieh Coll Vice President of FMR.
Catherine Collins Vice President of FMR.
Frederic G. Corneel Tax Counsel of FMR.
William Danoff Senior Vice President of FMR
and Vice President of funds
advised by FMR.
Scott E. DeSano Vice President of FMR.
Penelope Dobkin Vice President of FMR and of
a fund advised by FMR.
Walter C. Donovan Vice President of FMR.
Bettina Doulton Senior Vice President of FMR
and of funds advised by FMR.
Stephen DuFour Vice President of FMR.
Maria F. Dwyer Vice President of FMR and
Deputy Treasurer of the
Fidelity funds.
Margaret L. Eagle Vice President of FMR and of
a fund advised by FMR.
William R. Ebsworth Vice President of FMR.
David Felman Vice President of FMR.
Richard B. Fentin Senior Vice President of FMR
and Vice President of a fund
advised by FMR.
Karen Firestone Vice President of FMR.
Michael B. Fox Assistant Treasurer of FMR,
FIMM, FMR U.K., and FMR Far
East; Vice President and
Treasurer of FMR Corp. and
Strategic Advisers, Inc.;
Vice President of FMR U.K.,
FMR Far East, and FIMM.
Gregory Fraser Vice President of FMR and of
a fund advised by FMR.
Jay Freedman Assistant Clerk of FMR; Clerk
of FMR Corp., FMR U.K., FMR
Far East, and Strategic
Advisers, Inc.; Secretary of
FIMM; Vice President Deputy
General Counsel FMR Corp.
David L. Glancy Vice President of FMR and of
a fund advised by FMR.
Barry A. Greenfield Vice President of FMR.
Boyce I. Greer Senior Vice President of FMR
and Vice President of Money
Market Funds advised by FMR;
Vice President of FIMM.
Bart A. Grenier Senior Vice President of FMR
and Vice President of
High-Income Funds advised by
FMR.
Robert J. Haber Vice President of FMR.
Richard C. Habermann Senior Vice President of FMR
and Vice President of funds
advised by FMR.
Fred L. Henning Jr. Senior Vice President of FMR;
Senior Vice President of
FIMM; Vice President of
Fixed-Income Funds advised
by FMR.
Bruce T. Herring Vice President of FMR.
Robert F. Hill Vice President of FMR and
Director of Technical
Research.
Frederick Hoff Vice President of FMR.
Abigail P. Johnson Senior Vice President of FMR
and Vice President of funds
advised by FMR; Director of
FMR Corp.; Associate
Director and Senior Vice
President of Equity Funds
advised by FMR.
David B. Jones Vice President of FMR.
Steven Kaye Senior Vice President of FMR
and of a fund advised by FMR.
Francis V. Knox Vice President of FMR;
Compliance Officer of FMR
U.K. and FMR Far East.
Harris Leviton Vice President of FMR.
Bradford E. Lewis Vice President of FMR and of
funds advised by FMR.
Richard R. Mace Jr. Vice President of FMR and of
funds advised by FMR.
Shigeki Makino Vice President of FMR.
Charles A. Mangum Vice President of FMR and of
a fund advised by FMR.
Kevin McCarey Vice President of FMR and of
a fund advised by FMR.
James McDowell Senior Vice President of FMR.
Neal P. Miller Vice President of FMR.
Jacques Perold Vice President of FMR.
Stephen Petersen Senior Vice President of FMR.
Alan Radlo Vice President of FMR.
Eric D. Roiter Vice President, General
Counsel, and Clerk of FMR
and Secretary of funds
advised by FMR.
Lee H. Sandwen Vice President of FMR.
Patricia A. Satterthwaite Vice President of FMR and of
a fund advised by FMR.
Fergus Shiel Vice President of FMR.
Richard A. Silver Vice President of FMR.
Carol A. Smith-Fachetti Vice President of FMR.
Steven J. Snider Vice President of FMR and of
funds advised by FMR.
Thomas T. Soviero Vice President of FMR and of
a fund advised by FMR.
Richard Spillane Senior Vice President of FMR;
Associate Director and
Senior Vice President of
Equity Funds advised by FMR;
Previously, Senior Vice
President and Director of
Operations and Compliance of
FMR U.K.
Thomas M. Sprague Vice President of FMR and of
a fund advised by FMR.
Robert E. Stansky Senior Vice President of FMR
and Vice President of a fund
advised by FMR.
Scott D. Stewart Vice President of FMR.
Beth F. Terrana Senior Vice President of FMR
and Vice President of funds
advised by FMR.
Yoko Tilley Vice President of FMR.
Joel C. Tillinghast Vice President of FMR and of
a fund advised by FMR.
Robert Tuckett Vice President of FMR.
Jennifer Uhrig Vice President of FMR and of
funds advised by FMR.
George A. Vanderheiden Senior Vice President of FMR
and Vice President of funds
advised by FMR; Director of
FMR Corp.
Jason Weiner Vice President of FMR.
Steven S. Wymer Vice President of FMR and of
a fund advised by FMR.
Item 27. Principal Underwriters
(a)-(c) Not applicable.
Item 28. Location of Accounts and Records
All accounts, books, and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules promulgated thereunder are
maintained by Fidelity Management & Research Company, Fidelity Service
Company, Inc. or Fidelity Investments Institutional Operations
Company, Inc., 82 Devonshire Street, Boston, MA 02109, or the fund's
custodian, Brown Brothers Harriman & Co., 40 Water Street, Boston, MA.
Item 29. Management Services
Not applicable.
Item 30. Undertakings
Not applicable.
SIGNATURE
Pursuant to the requirements of the Investment Company Act of 1940,
the Fund has duly caused this registration statement to be signed on
its behalf by the undersigned, duly authorized, in the City of Boston,
and Commonwealth of Massachusetts, on the day of February 24, 2000.
FIDELITY EXCHANGE FUND
By /s/Robert A. Dwight
Robert A. Dwight,
Treasurer
Exhibit j(1)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in Amendment No.
22 to the Registration Statement on Form N-1A of Fidelity Exchange
Fund, of our report dated February 4, 2000 on the financial statements
and financial highlights included in the December 31, 1999 Annual
Report to Shareholders of Fidelity Exchange Fund.
We further consent to the reference to our Firm under the heading
"Auditor" in the Part B of this Amendment.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 22, 2000
