SPARTAN Trademark CONNECTICUT MUNICIPAL HIGH YIELD PORTFOLIO
A FUND OF FIDELITY COURT STREET TRUST
SPARTAN Trademark CONNECTICUT MUNICIPAL MONEY MARKET PORTFOLIO
A FUND OF FIDELITY COURT STREET TRUST II
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 14, 1994
This Statement is not a prospectus but should be read in conjunction with
the funds' current Prospectus (dated January 14, 1994). Please retain this
document for future reference. The Annual Report for the fiscal year ended
November 30, 1993 is incorporated herein by reference. To obtain an
additional copy of the Prospectus or the Annual Report, please call
Fidelity Distributors Corporation at 1-800-544-8888.
TABLE OF CONTENTS PAGE
Investment Policies and Limitations
Special Factors Affecting Connecticut
Special Factors Affecting Puerto Rico
Portfolio Transactions
Valuation of Portfolio Securities
Performance
Additional Purchase and Redemption Information
Distributions and Taxes
FMR
Trustees and Officers
Management Contracts
Distribution and Service Plans
Interest of FMR Affiliates
Description of the Trusts
Financial Statements
Appendix
INVESTMENT ADVISER
Fidelity Management & Research Company (FMR)
INVESTMENT SUB-ADVISER (MONEY MARKET FUND ONLY)
FMR Texas Inc. (FMR Texas)
DISTRIBUTOR
Fidelity Distributors Corporation (FDC)
TRANSFER AGENT
United Missouri Bank, N.A. (United Missouri) and Fidelity Service Co. (FSC)
CTR-ptB -2 94
INVESTMENT POLICIES AND LIMITATIONS
The following policies and limitations supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of a 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.
Each 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) of the fund.
However, except for the fundamental investment limitations set forth below,
the investment policies and limitations described in this Statement of
Additional Information are not fundamental and may be changed without
shareholder approval.
INVESTMENT LIMITATIONS OF SPARTAN CONNECTICUT MUNICIPAL MONEY MARKET
PORTFOLIO
(MONEY MARKET FUND)
THE FOLLOWING ARE THE MONEY MARKET FUND'S FUNDAMENTAL INVESTMENT
LIMITATIONS SET FORTH IN THEIR ENTIRETY. THE FUND MAY NOT:
(1) issue senior securities, except as permitted under the Investment
Company Act of 1940;
(2) sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short;
(3) purchase securities on margin, except that the fund may obtain such
short-term credits as are necessary for the clearance of transactions;
(4) 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 its total assets (including the amount borrowed) less
liabilities (other than borrowings). Any borrowings that come to exceed
this amount will be reduced within three days (not including Sundays and
holidays) to the extent necessary to comply with the 33 1/3% limitation;
(5) underwrite securities issued by others, except to the extent that the
fund may be considered an underwriter within the meaning of the Securities
Act of 1933 in the disposition of restricted securities;
(6) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities, or municipal securities issued or guaranteed by a U.S.
territory or possession or a state or local government, or a political
subdivision of any of the foregoing) if, as a result, more than 25% of the
fund's total assets would be invested in securities of companies whose
principal business activities are in the same industry;
(7) purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the fund
from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business);
(8) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments; or
(9) lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties, but this
limitation does not apply to purchases of debt securities or to repurchase
agreements.
(10) The fund may, notwithstanding any other fundamental investment policy
or limitation, invest all of its assets in the securities of a single
open-end management investment company with substantially the same
fundamental investment objectives, policies, and limitations as the fund.
THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL, AND MAY BE
CHANGED WITHOUT SHAREHOLDER APPROVAL.
(i) To meet federal tax requirements for qualification as a "regulated
investment company," the fund limits its investments so that at the close
of each quarter of its taxable year: (a) with regard to at least 50% of
total assets, no more than 5% of total assets are invested in the
securities of a single issuer, and (b) no more than 25% of total assets are
invested in the securities of a single issuer. Limitations (a) and (b) do
not apply to "Government securities" as defined for federal tax purposes.
(ii) The fund does not currently intend to sell securities short.
(iii) The fund may borrow money only (a) from a bank or from a registered
investment company or fund for which 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 (4)). The fund will not
purchase any security while borrowings representing more than 5% of its
total assets are outstanding. The fund will not borrow from other funds
advised by FMR or its affiliates if total outstanding borrowings
immediately after such borrowing would exceed 15% of the fund's total
assets.
(iv) The fund does not currently intend to purchase any security if, as
a result, more than 10% of its net assets would be invested in securities
that are deemed to be illiquid because they are subject to legal or
contractual restrictions on resale or because they cannot be sold or
disposed of in the ordinary course of business at approximately the prices
at which they are valued.
(v) The fund does not currently intend to invest more than 25% of its
total assets in industrial revenue bonds related to a single industry.
(vi) The fund does not currently intend to engage in repurchase
agreements or make loans, but this limitation does not apply to purchases
of debt securities.
(vii) The fund does not currently intend to (a) purchase securities of
other investment companies, except in the open market where no commission
except the ordinary broker's commission is paid, or (b) purchase or retain
securities issued by other open-end investment companies. Limitations (a)
and (b) do not apply to securities received as dividends, through offers of
exchange, or as a result of a reorganization, consolidation, or merger.
(viii) The fund does not currently intend to invest all of its assets in
the securities of a single open-end management investment company with
substantially the same fundamental investment objectives, policies, and
limitations as the fund.
For purposes of limitations (6) and (i), FMR identifies the issuer of a
security depending on its terms and conditions. In identifying the issuer,
FMR will consider the entity or entities responsible for payment of
interest and repayment of principal and the source of such payments; the
way in which assets and revenues of an issuing political subdivision are
separated from those of other political entities; and whether a
governmental body is guaranteeing the security.
INVESTMENT LIMITATIONS OF SPARTAN CONNECTICUT MUNICIPAL HIGH YIELD
PORTFOLIO
(HIGH YIELD FUND)
The following are the high yield fund's fundamental investment limitations
set forth in their entirety. The fund may not:
(1) issue bonds or any other class of securities preferred over shares of
the fund in respect of the fund's assets or earnings, provided that
Fidelity Court Street Trust may issue additional series of shares in
accordance with its Declaration of Trust;
(2) sell securities short, unless it owns, or by virtue of ownership of
other securities has the right to obtain, securities equivalent in kind and
amount to the securities sold short, and provided that transactions in
futures contracts are not deemed to constitute short sales;
(3) purchase securities on margin, except that the fund may obtain such
short-term credits as are necessary for the clearance of transactions, and
provided that the fund may make initial and variation margin payments in
connection with transactions in futures contracts and options on futures
contracts;
(4) 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 (less liabilities other
than borrowings). Any borrowings that come to exceed 33 1/3% of the value
of the fund's total assets by reason of a decline in total assets will be
reduced within three days to the extent necessary to comply with the 33
1/3% limitation;
(5) underwrite securities issued by others (except to the extent that the
fund may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities);
(6) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies,
instrumentalities, territories or possessions, or issued or guaranteed by a
state government or political subdivision thereof) if, as a result, more
than 25% of the value of its total assets would be invested in securities
of companies having their principal business activities in the same
industry;
(7) purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the fund
from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business);
(8) purchase or sell physical commodities unless acquired as a result of
ownership of securities (but this shall not prevent the fund from
purchasing or selling futures contracts); or
(9) lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties, but this
limitation does not apply to purchases of debt securities or to repurchase
agreements.
Investment limitation (4) is construed in conformity with the 1940 Act,
and, accordingly, "three days" means three days exclusive of Sundays and
holidays.
The following investment limitations are not fundamental, and may be
changed without shareholder approval.
(i) To meet federal tax requirements for qualification as a "regulated
investment company," the fund limits its investments so that at the close
of each quarter of its taxable year: (a) with regard to at least 50% of
total assets, no more than 5% of total assets are invested in the
securities of a single issuer, and (b) no more than 25% of total assets are
invested in the securities of a single issuer. Limitations (a) and (b) do
not apply to "Government securities" as defined for federal tax purposes.
(ii) The fund does not currently intend to sell securities short.
(iii) The fund may borrow money only (a) from a bank or from a registered
investment company or fund for which 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 (4)). The fund will not
purchase any security while borrowings representing more than 5% of its
total assets are outstanding. The fund will not borrow from other funds
advised by FMR or its affiliates if total outstanding borrowings
immediately after such borrowing would exceed 15% of the fund's total
assets.
(iv) The fund does not currently intend to purchase any security if, as a
result, more than 10% of its net assets would be invested in securities
that are deemed to be illiquid because they are subject to legal or
contractual restrictions on resale or because they cannot be sold or
disposed of in the ordinary course of business at approximately the prices
at which they are valued.
(v) The fund does not currently intend to invest more than 25% of its
total assets in industrial revenue bonds related to a single industry.
(vi) The fund does not currently intend to engage in repurchase agreements
or make loans, but this limitation does not apply to purchases of debt
securities.
(vii) The fund does not currently intend to (a) purchase securities of
other investment companies, except in the open market where no commission
except the ordinary broker's commission is paid, or (b) purchase or retain
securities issued by other open-end investment companies. Limitations (a)
and (b) do not apply to securities received as dividends, through offers of
exchange, or as a result of a reorganization, consolidation, or merger.
For purposes of limitations (6) and (i), FMR identifies the issuer of a
security depending on its terms and conditions. In identifying the issuer,
FMR will consider the entity or entities responsible for payment of
interest and repayment of principal and the source of such payments; the
way in which assets and revenues of an issuing political subdivision are
separated from those of other political entities; and whether a
governmental body is guaranteeing the security.
For the high yield fund's limitations on futures and options transactions,
see the section entitled "Limitations on Futures and Options Transactions"
beginning on page 8.
AFFILIATED BANK TRANSACTIONS. Pursuant to exemptive orders issued by the
Securities and Exchange Commission (SEC), the funds may engage in
transactions with banks that are, or may be considered to be, "affiliated
persons" of the funds under the Investment Company Act of 1940. Such
transactions may be entered into only pursuant to procedures established
and periodically reviewed by the Board of Trustees. These transactions may
include repurchase agreements with custodian banks; purchases, as
principal, of short-term obligations of, and repurchase agreements with,
the 50 largest U.S. banks (measured by deposits); transactions in municipal
securities; and transactions in U.S. government securities with affiliated
banks that are primary dealers in these securities.
QUALITY AND MATURITY (money market fund only). Pursuant to procedures
adopted by the Board of Trustees, the fund may purchase only high-quality
securities that FMR believes present minimal credit risks. To be
considered high-quality, a security must be a rated in accordance
with applicable rules in one of the two highest categories for short-term
securities by at least two nationally recognized rating services (or by
one, if only one rating service has rated the security); or, if unrated,
judged to be of equivalent quality by FMR .
T he fund must limit its investments to securities with remaining
maturities of 397 days or less and must maintain a dollar-weighted average
maturity of 90 days or less.
DELAYED-DELIVERY TRANSACTIONS. Each fund may buy and sell securities on a
delayed-delivery or when-issued basis. These transactions involve a
commitment by a fund to purchase or sell specific securities at a
predetermined price or yield, with payment and delivery taking place after
the customary settlement period for that type of security (and more than
seven days in the future). Typically, no interest accrues to the purchaser
until the security is delivered. The high yield fund may receive fees for
entering into delayed-delivery transactions.
When purchasing securities on a delayed-delivery basis, each fund assumes
the rights and risks of ownership, including the risk of price and yield
fluctuations. Because a fund is not required to pay for securities until
the delivery date, these risks are in addition to the risks associated with
the fund's other investments. If a fund remains substantially fully
invested at a time when delayed-delivery purchases are outstanding, the
delayed-delivery purchases may result in a form of leverage. When
delayed-delivery purchases are outstanding, the fund will set aside
appropriate liquid assets in a segregated custodial account to cover its
purchase obligations. When a fund has sold a security on a delayed-delivery
basis, the fund does not participate in further gains or losses with
respect to the security. If the other party to a delayed-delivery
transaction fails to deliver or pay for the securities, the fund could miss
a favorable price or yield opportunity, or could suffer a loss.
Each fund may renegotiate delayed-delivery transactions after they are
entered into, and may sell underlying securities before they are delivered,
which may result in capital gains or losses.
REFUNDING CONTRACTS. The high yield fund may purchase securities on a
when-issued basis in connection with the refinancing of an issuer's
outstanding indebtedness. Refunding contracts require the issuer to sell
and the fund to buy refunded municipal obligations at a stated price and
yield on a settlement date that may be several months or several years in
the future. The fund generally will not be obligated to pay the full
purchase price if it fails to perform under a refunding contract. Instead,
refunding contracts generally provide for payment of liquidated damages to
the issuer (currently 15-20% of the purchase price). The fund may secure
its obligations under a refunding contract by depositing collateral or a
letter of credit equal to the liquidated damages provisions of the
refunding contract. When required by SEC guidelines, the fund will place
liquid assets in a segregated custodial account equal in amount to its
obligations under refunding contracts.
INVERSE FLOATERS. The high yield fund may invest in inverse floaters,
which are instruments whose interest rates bear an inverse relationship to
the interest rate on another security or the value of an index. Changes in
the interest rate on the other security or index inversely affect the
residual interest rate paid on the inverse floater, with the result that
the inverse floater's price will be considerably more volatile than that of
a fixed-rate bond. For example, a municipal issuer may decide to issue two
variable-rate instruments instead of a single long-term, fixed-rate bond.
The interest rate on one instrument reflects short-term interest rates,
while the interest rate on the other instrument (the inverse floater)
reflects the approximate rate the issuer would have paid on a fixed-rate
bond, multiplied by two, minus the interest rate paid on the short-term
instrument. Depending on market availability, the two portions may be
recombined to form a fixed-rate municipal bond. The market for inverse
floaters is relatively new.
VARIABLE OR FLOATING RATE OBLIGATIONS bear variable or floating interest
rates and carry rights that permit holders to demand payment of the unpaid
principal balance plus accrued interest from the issuers or certain
financial intermediaries. Floating rate instruments have interest rates
that change whenever there is a change in a designated base rate while
variable rate instruments provide for a specified periodic adjustment in
the interest rate. These formulas are designed to result in a market value
for the instrument that approximates its par value.
With respect to the money market fund, a demand instrument with a
conditional demand feature must have received both a short-term and a
long-term high-quality rating or, if unrated, have been determined to be of
comparable quality pursuant to procedures adopted by the Board of Trustees.
A demand instrument with an unconditional demand feature may be acquired
solely in reliance upon a short-term high-quality rating or, if unrated,
upon a finding of comparable short-term quality pursuant to procedures
adopted by the Board of Trustees.
The funds may invest in fixed-rate bonds that are subject to third party
puts and in participation interests in such bonds held in trust or
otherwise. These bonds and participation interests have tender options or
demand features that permit a fund to tender (or put) the bonds to an
institution at periodic intervals and to receive the principal amount
thereof. A fund considers variable rate instruments structured in this way
(Participating VRDOs) to be essentially equivalent to other VRDOs it
purchases. The IRS has not ruled whether the interest on Participating
VRDOs is tax-exempt and, accordingly, a fund intends to purchase these
instruments based on opinions of bond counsel.
The money market fund may invest in variable or floating rate instruments
that ultimately mature in 397 days if the fund acquires a right to sell the
instruments that meets certain requirements set forth in Rule 2a-7.
Variable rate instruments (including instruments subject to a demand
feature) that mature in 397 days or less may be deemed to have maturities
equal to the period remaining until the next readjustment of the interest
rate. Other variable rate instruments with demand features may be deemed to
have a maturity equal to the period remaining until the next adjustment of
the interest rate or the period remaining until the principal amount can be
recovered through demand. A floating rate instrument subject to a demand
feature may be deemed to have a maturity equal to the period remaining
until the principal amount can be recovered through demand.
TENDER OPTION BONDS are created by coupling an intermediate- or long-term,
fixed-rate, tax-exempt bond (generally held pursuant to a custodial
arrangement) with a tender agreement that gives the holder the option to
tender the bond at its face value. As consideration for providing the
tender option, the sponsor (usually a bank, broker-dealer, or other
financial institution) receives periodic fees equal to the difference
between the bond's fixed coupon rate and the rate (determined by a
remarketing or similar agent) that would cause the bond, coupled with the
tender option, to trade at par on the date of such determination. After
payment of the tender option fee, a fund effectively holds a demand
obligation that bears interest at the prevailing short-term tax-exempt
rate. Subject to applicable regulatory requirements, the money market fund
may buy tender option bonds if the agreement gives the fund the right to
tender the bond to its sponsor no less frequently than once every 397 days.
In selecting tender option bonds for the funds, FMR will consider the
creditworthiness of the issuer of the underlying bond, the custodian, and
the third party provider of the tender option. In certain instances, a
sponsor may terminate a tender option if, for example, the issuer of the
underlying bond defaults on interest payments.
ZERO COUPON BONDS do not make regular interest payments. Instead, they are
sold at a deep 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 very volatile when interest rates change. In
calculating its daily dividend, a fund takes into account as income a
portion of the difference between a zero coupon bond's purchase price and
its face value.
STANDBY COMMITMENTS are puts that entitle holders to same-day settlement at
an exercise price equal to the amortized cost of the underlying security
plus accrued interest, if any, at the time of exercise. Each fund may
acquire standby commitments to enhance the liquidity of portfolio
securities, but, in the case of the money market fund, only when the
issuers of the commitments present minimal risk of default.
Ordinarily a fund will not transfer a standby commitment to a third party,
although it could sell the underlying municipal security to a third party
at any time. A fund may purchase standby commitments separate from or in
conjunction with the purchase of securities subject to such commitments. In
the latter case, the fund would pay a higher price for the securities
acquired, thus reducing their yield to maturity. Standby commitments will
not affect the dollar-weighted average maturity of the money market fund,
or the valuation of the securities underlying the commitments.
Issuers or financial intermediaries may obtain letters of credit or other
guarantees to support their ability to buy securities on demand. FMR may
rely upon its evaluation of a bank's credit in determining whether to
support an instrument supported by a letter of credit. In evaluating a
foreign bank's credit, FMR will consider whether adequate public
information about the bank is available and whether the bank may be subject
to unfavorable political or economic developments, currency controls, or
other governmental restrictions that might affect the bank's ability to
honor its credit commitment.
Standby commitments are subject to certain risks, including the ability of
issuers of standby commitments to pay for securities at the time the
commitments are exercised; the fact that standby commitments are not
marketable by the funds; and the possibility that the maturities of the
underlying securities may be different from those of the commitments.
MUNICIPAL LEASE OBLIGATIONS. Each fund may invest a portion of its assets
in municipal leases and participation interests therein. These obligations,
which may take the form of a lease, an installment purchase, or a
conditional sale contract, are issued by state and local governments and
authorities to acquire land and a wide variety of equipment and facilities.
Generally, the funds will not hold such obligations directly as a lessor of
the property, but will purchase a participation interest in a municipal
obligation from a bank or other third party. A participation interest gives
a fund a specified, undivided interest in the obligation in proportion to
its purchased interest in the total amount of the obligation.
Municipal leases frequently have risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set
forth requirements that states or municipalities must meet to incur debt.
These may include voter referenda, interest rate limits, or public sale
requirements. Leases, installment purchases, or conditional sale contracts
(which normally provide for title to the leased asset to pass to the
governmental issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting their constitutional and
statutory requirements for the issuance of debt. Many leases and contracts
include "non-appropriation clauses" providing that the governmental issuer
has no obligation to make future payments under the lease or contract
unless money is appropriated for such purposes by the appropriate
legislative body on a yearly or other periodic basis. Non-appropriation
clauses free the issuer from debt issuance limitations.
FEDERALLY TAXABLE OBLIGATIONS. The funds do not intend to invest in
securities whose interest is federally taxable; however, from time to time,
each fund may invest a portion of its assets on a temporary basis in
fixed-income obligations whose interest is subject to federal income tax.
For example, each fund may invest in obligations whose interest is
federally taxable pending the investment or reinvestment in municipal
securities of proceeds from the sale of its shares or sales of portfolio
securities.
Should a fund invest in federally taxable obligations, it would purchase
securities that in FMR's judgment are of high quality. These would include
obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities; obligations of domestic banks; and repurchase
agreements. The high yield fund's standards for high-quality, taxable
obligations are essentially the same as those described by Moody's
Investors Service, Inc. (Moody's) in rating corporate obligations within
its two highest ratings of Prime-1 and Prime-2, and those described by
Standard & Poor's Corporation (S&P) in rating corporate obligations
within its two highest ratings of A-1 and A-2. The money market fund will
purchase taxable obligations only if they meet its quality requirements.
Proposals to restrict or eliminate the federal income tax exemption for
interest on municipal obligations are introduced before Congress from time
to time. Proposals also may be introduced before the Connecticut
legislature that would affect the state tax treatment of the funds'
distributions. If such proposals were enacted, the availability of
municipal obligations and the value of the funds' holdings would be
affected and the Trustees would reevaluate the funds' investment objectives
and policies.
Each fund anticipates being as fully invested as practicable in municipal
securities; however, there may be occasions when, as a result of maturities
of portfolio securities, sales of fund shares, or in order to meet
redemption requests, a fund may hold cash that is not earning income. In
addition, there may be occasions when, in order to raise cash to meet
redemptions, a fund may be required to sell securities at a loss.
INDEXED SECURITIES. The high yield fund may purchase securities whose
prices are indexed to the prices of other securities, securities indicies,
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.
Indexed securities may have principal payments as well as coupon payments
that depend on the performance of one or more interest rates. Their coupon
rates or principal payments may change by several percentage points for
every 1% interest rate change. One example of indexed securities is
inverse floaters.
The performance of indexed securities depends to a great extent on the
performance of the security or other instrument to which they are indexed,
and may also be influenced by interest rate changes. At the same time,
indexed securities are subject to the credit risks associated with the
issuer of the security, and their values may decline substantially if the
issuer's creditworthiness deteriorates. Indexed securities may be more
volatile than the underlying instruments.
Repurchase Agreements. In a repurchase agreement, a fund purchases a
security and simultaneously commits to resell that security to the seller
at an agreed-upon price on an agreed-upon date within a number of days from
the date of purchase. 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. A repurchase agreement is a taxable
obligation which involves the obligation of the seller to pay the
agreed-upon price, which obligation is in effect secured by the value (at
least equal to the amount of the agreed-upon resale price and marked to
market daily) of the underlying security. Each fund may engage in
repurchase agreements with respect to any security in which it is
authorized to invest even if, with respect to the money market fund, the
underlying security matures in more than 397 days. While it does not
presently appear possible to eliminate all risks from these transactions
(particularly the possibility of a decline in the market value of the
underlying securities, as well as delays and costs to the funds in
connection with bankruptcy proceedings), it is each fund's current policy
to limit repurchase agreement transactions to parties whose
creditworthiness has been reviewed and found satisfactory by FMR.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a fund
sells a portfolio instrument to another party, such as a bank or
broker-dealer, in return for cash and agrees to repurchase the instrument
at a particular price and time. While a reverse repurchase agreement is
outstanding, the fund will maintain appropriate liquid assets in a
segregated custodial account to cover its obligation under the agreement.
The fund will enter into reverse repurchase agreements only with parties
whose creditworthiness has been found satisfactory by FMR. Such
transactions may increase fluctuations in the market value of a fund's
assets and may be viewed as a form of leverage.
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of in
the ordinary course of business at approximately the prices at which they
are valued. Under the supervision of the Board of Trustees, FMR determines
the liquidity of each fund's investments and, through reports from FMR,
the Board monitors investments in illiquid instruments. In determining the
liquidity of the funds' investments, FMR may consider various factors,
including (1) the frequency of trades and quotations, (2) the number of
dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including
any demand or tender features), and (5) the nature of the marketplace for
trades (including the ability to assign or offset the fund's rights and
obligations relating to the investment). Investments currently considered
by the money market fund to be illiquid include restricted securities and
municipal lease obligations determined by FMR to be illiquid. Investments
currently considered by the high yield fund to be illiquid include
over-the-counter options. Also, FMR may determine some restricted
securities and municipal lease obligations to be illiquid. However, with
respect to over-the-counter options the high yield fund writes, all or a
portion of the value of the underlying instrument may be illiquid depending
on the assets held to cover the option and the nature and terms of any
agreement the fund may have to close out the option before expiration. In
the absence of market quotations, illiquid investments for the money market
fund are valued for purposes of monitoring amortized cost valuation and for
the high yield fund priced at fair value as determined in good faith by a
committee appointed by the Board of Trustees. If through a change in
values, net assets, or other circumstances, a fund were in a position where
more than 10% of its net assets were invested in illiquid securities, it
would seek to take appropriate steps to protect liquidity.
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, a fund 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 the fund may be permitted to
sell a security under an effective registration statement. If, during such
a period, adverse market conditions were to develop, a fund might obtain a
less favorable price than prevailed when it decided to seek registration of
the security. However, in general, the money market fund anticipates
holding restricted securities to maturity or selling them in an exempt
transaction.
INTERFUND BORROWING PROGRAM. The fund has received permission from the SEC
to lend money to and borrow money from other funds advised by FMR or its
affiliates. Interfund loans and borrowings normally will extend overnight,
but can have a maximum duration of seven days. Loans may be called on one
day's notice. The fund will lend through the program only when the returns
are higher than those available at the same time from other short-term
instruments (such as repurchase agreements), and will borrow through the
program only when the costs are equal to or lower than the cost of bank
loans. The 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.
LOWER-RATED MUNICIPAL SECURITIES. The high yield fund may invest a portion
of its assets in lower-rated municipal securities as described in the
Prospectus.
While the market for Connecticut municipals is considered to be adequate,
adverse publicity and changing investor perceptions may affect the ability
of outside pricing services used by the fund to value its portfolio
securities, and the fund's ability to dispose of lower-rated bonds. The
outside pricing services are consistently monitored to assure that
securities are valued by a method that the Board believes accurately
reflects fair value. The impact of changing investor perceptions may be
especially pronounced in markets where municipal securities are thinly
traded.
The fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise 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.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS (high yield fund only).
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
Section 4.5 of regulations 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; 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 Statement of Additional Information may be
changed as regulatory agencies permit.
FUTURES CONTRACTS. When the fund purchases a futures contract, it agrees
to purchase a specified underlying instrument at a specified future date.
When the fund sells a futures contract, it agrees to sell the underlying
instrument at a specified future date. The price at which the purchase and
sale will take place is fixed when the fund enters 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 Bond Buyer Municipal Bond Index. 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 the fund's exposure to positive and
negative price fluctuations in the underlying instrument, much as if it had
purchased the underlying instrument directly. When the 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 the fund's investment limitations. In the event of the
bankruptcy of an FCM that holds margin on behalf of the 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.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the fund
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 fund
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 fund
may terminate its position in a put option it has purchased by allowing it
to expire or by exercising the option. If the option is allowed to expire,
the fund will lose the entire premium it paid. If the fund exercises the
option, it completes the sale of the underlying instrument at the strike
price. The fund 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
paid, 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. When the fund writes a put option, it takes
the opposite side of the transaction from the option's purchaser. In
return for receipt of the premium, the fund 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. When writing an option on a futures
contract the fund will be required to make margin payments to an FCM as
described above for futures contracts. The fund may seek to terminate its
position in a put option it writes 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 the fund has written, however, the
fund must continue to be prepared to pay the strike price while the option
is outstanding, regardless of price changes, and must continue to set aside
assets to cover its position.
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 fund 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.
COMBINED POSITIONS. The fund may purchase and write 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, the fund may purchase a put option and write a call
option on the same underlying instrument, in order to 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, in order 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 the fund's current or
anticipated investments exactly. The fund may invest in options and
futures contracts based on securities with different issuers, maturities,
or other characteristics from the securities in which it 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 the 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. The 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 the 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.
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 for the fund
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 the fund to continue to hold a
position until delivery or expiration regardless of changes in its value.
As a result, the fund's access to other assets held to cover its options or
futures positions could also be impaired.
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 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
fund 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.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The fund will comply
with guidelines established by the Securities and Exchange Commission with
respect to coverage of options and futures strategies by mutual funds, and
if the guidelines so require will set aside appropriate liquid assets in a
segregated custodial account in the amount prescribed. Securities held in
a segregated account cannot be sold while the futures or option strategy is
outstanding, unless they are replaced with other suitable assets. As a
result, there is a possibility that segregation of a large percentage of
the fund's assets could impede portfolio management or the fund's ability
to meet redemption requests or other current obligations.
HEALTH CARE INDUSTRY. The health care industry is subject to regulatory
action by a number of private and governmental agencies, including federal,
state, and local governmental agencies. A major source of revenues for the
health care industry is payments from the Medicare and Medicaid programs.
As a result, the industry is sensitive to legislative changes and
reductions in governmental spending for such programs. Numerous other
factors may affect the industry, such as general and local economic
conditions; demand for services; expenses (including malpractice insurance
premiums); and competition among health care providers. In the future, the
following elements may adversely affect health care facility operations:
adoption of legislation proposing a national health insurance program;
medical and technological advances which dramatically alter the need for
health services or the way in which such services are delivered; and
efforts by employers, insurers, and governmental agencies to reduce the
costs of health insurance and health care services.
HOUSING. Housing revenue bonds are generally issued by a state, county,
city, local housing authority, or other public agency. They are secured by
the revenues derived from mortgages purchased with the proceeds of the bond
issue. It is extremely difficult to predict the supply of available
mortgages to be purchased with the proceeds of an issue or the future cash
flow from the underlying mortgages. Consequently, there are risks that
proceeds will exceed supply, resulting in early retirement of bonds, or
that homeowner repayments will create an irregular cash flow.
Many factors may affect the financing of multi-family housing projects,
including acceptable completion of construction, proper management,
occupancy and rent levels, economic conditions, and changes to current laws
and regulations.
SPECIAL FACTORS AFFECTING CONNECTICUT
The following only highlights some of the more significant financial trends
and problems, and is based on information drawn from official statements
and prospectuses relating to securities offerings of the State of
Connecticut, its agencies and instrumentalities, as available on the date
of this Statement of Additional Information. FMR has not independently
verified any of the information contained in such official statements and
other publicly available documents, but is not aware of any fact which
would render such information inaccurate.
Manufacturing has historically been Connecticut's single most important
economic activity. The State's manufacturing industry is diversified, but
from 1970 to 1992 manufacturing employment declined 30.8%. During this
period, employment in other non-agricultural establishments (including
government) increased 60.8%, particularly in the service, trade, and
finance categories. In 1992, manufacturing accounted for only 20.1% of
total nonagricultural employment in Connecticut. Defense-related business
plays an important role in the Connecticut economy, and economic activity
has been affected by the volume of defense contracts awarded to Connecticut
firms. On a per capita basis, defense awards in Connecticut have
traditionally been among the highest in the nation, but reductions in
defense spending have had a substantial adverse impact on Connecticut's
economy, and the state's largest defense contractors have announced
substantial labor force reductions to occur over the next four years.
The annual average unemployment rate (seasonally adjusted) in Connecticut
decreased from 6.9% in 1982 to a low of 3.0% in 1988, but it reached 7.4%
as of May 1993. Pockets of more significant unemployment and poverty exist
in some of Connecticut's cities and towns, the economic conditions of which
are causing them severe financial problems, resulting in some cases in the
reporting of operating and accumulated deficits. Connecticut is in a
recession the depth and duration of which are uncertain.
While the State's General Fund ended fiscal 1984-85, 1985-86 and 1986-87
with operating surpluses of approximately $365,500,000, $250,100,000 and
$365,200,000, respectively, the State recorded operating deficits in its
General Fund for fiscal 1987-88, 1988-89, 1989-90, and 1990-91 alone of
$115,600,000, $28,000,000, $259,000,000, and $809,000,000, respectively.
In the fall of 1991, the State issued $965,712,000 of Economic Recovery
Notes to help fund its accumulated General Fund deficit. Largely as a
result of the enactment in 1991 of a general income tax on resident and
non-resident individuals, trusts, and estates the State's General Fund
ended fiscal 1991-92 and 1992-93 with an operating surplus of $110,000,000
and $113,500,000, respectively.
The state's two major revenue raising taxes have been the sales and use
taxes and the corporation business tax, each of which is sensitive to
changes in the level of economic activity in the State, but the Connecticut
income tax on individuals, trusts, and estates is expected to supersede
each of them in importance. Motor fuel taxes and other
transportation-related taxes are paid into a Special Transportation Fund
while all other tax revenues are carried in the General Fund.
The repair and maintenance of the State's highways and bridges will require
major expenditures in the near term. The State has adopted legislation
that provides for, among other things, the issuance of special tax
obligation bonds, the proceeds of which will be used to pay for
improvements to the State's transportation system. The bonds are payable
solely from motor vehicle and other transportation-related taxes and fees
deposited in the Special Transportation Fund. However, the amount of
revenues is dependent on the occurrence of future events, including a
possible rise in fuel prices, and may thus differ materially from projected
amounts. The cost of this infrastructure program, to be met from federal,
State and local funds, is currently estimated at $9.5 billion. The State
expects to issue $3.7 billion of special tax obligation bonds over a
ten-year period commenced July 1, 1984 to finance a major portion of the
State's share of such cost.
The State's budget problems led to ratings of its general obligation bonds
being lowered early in 1990, from Aa1 to Aa by Moody's Investors Service,
Inc., and from AA+ to AA by Standard & Poor's Corporation. Because of
concern over Connecticut's lack of a plan to deal with accumulated
projected deficits in its General Fund, on September 13, 1991, Standard
& Poor's further lowered its ratings of the State's general obligation
bonds and certain other obligations that depend in part on the
creditworthiness of the State to AA-. State and regional economic
difficulties, reductions in revenues, and increased expenses could lead to
further fiscal problems for the State and its political subdivisions,
authorities, and agencies. This could result in declines in the value of
their outstanding obligations, increases in their future borrowing costs,
and impairment of their ability to pay debt service on their obligations.
SPECIAL FACTORS AFFECTING PUERTO RICO
The following only highlights some of the more significant financial trends
and problems affecting the Commonwealth of Puerto Rico (the "Commonwealth"
or "Puerto Rico"), and is based on information drawn from official
statements and prospectuses relating to the securities offerings of Puerto
Rico, its agencies and instrumentalities, as available on the date of this
Statement of Additional Information. FMR has not independently verified any
of the information contained in such official statements, prospectuses and
other publicly available documents, but is not aware of any fact which
would render such information materially inaccurate.
The economy of Puerto Rico is closely linked with that of the United
States, and in fiscal 1992 trade with the United States accounted for
approximately 88% of Puerto Rico's exports and approximately 68% of its
imports. In this regard, in fiscal 1992 Puerto Rico experienced a
$2,940,300,000 positive adjusted merchandise trade balance. Since fiscal
1987 personal income, both aggregate and per capita, have increased
consistently each fiscal year. In fiscal 1992 aggregate personal income was
$22.7 billion and personal per capita income was $6,360. Gross domestic
product in fiscal 1989, 1990, 1991 and 1992 was $19,954,000, $21,619,000,
22,857,000, and $23,620,000 respectively. For fiscal 1993, an increase in
gross domestic product of 2.9% over fiscal 1992 is forecasted. However,
actual growth in the Puerto Rico economy will depend on several factors
including the condition of the U.S. economy, the exchange rate for the U.S.
dollar, the price stability of oil imports, and interest rates. Due to
these factors there is no assurance that the economy of Puerto Rico will
continue to grow.
Puerto Rico has made marked improvements in fighting unemployment.
Unemployment is at a low level compared to that of the late 1970s, but it
still remains significantly above the United States average. Despite long
term improvements the unemployment rate rose from 15.2% to 16.5% from
fiscal 1991 to fiscal 1992. At the end of the third quarter of fiscal 1993
the unemployment rate in Puerto Rico stood at 17.3%. There is a possibility
that the unemployment rate will continue to increase.
The economy of Puerto Rico has undergone a transformation in the later half
of this century from one centered around agriculture, to one dominated by
the manufacturing and service industries. Manufacturing is the cornerstone
of Puerto Rico's economy, accounting for $13.2 billion or 38.7% of gross
domestic product in 1992. However, manufacturing has experienced a basic
change over the years as a result of the influx of higher wage, high
technology industries such as the pharmaceutical industry, electronics,
computers, micro-processors, scientific instruments and high technology
machinery. The service sector, which includes wholesale and retail trade,
finance and real estate, ranks second in its contribution to gross domestic
product and is the sector that employs the greatest number of people. In
fiscal 1992, the service sector generated $13.0 billion in gross domestic
product or 38.3% of the total and employed over 449,000 workers providing
46% of total employment. The government sector and tourism also contribute
to the island economy each accounting for $3.7 billion and $1.5 billion in
fiscal 1992, respectively.
Much of the development of the manufacturing sector of the economy of
Puerto Rico is attributable to federal and Commonwealth tax incentives,
most notably section 936 of the Internal Revenue Code of 1986, as amended
("Section 936") and the Commonwealth's Industrial Incentives Program.
Section 936 currently grants U.S. corporations that meet certain criteria
and elect its application a credit against their U.S. corporate income tax
on the portion of the tax attributable to (i) income derived from the
active conduct of a trade or business in Puerto Rico ("active income"), or
from the sale or exchange of substantially all the assets used in the
active conduct of such trade or business, and (ii) qualified possession
source investment income ("passive income"). The Industrial Incentives
Program, through the 1987 Industrial Incentives Act, grants corporations
engaged in certain qualified activities a fixed 90% exemption from
Commonwealth income and property taxes and a 60% exemption from municipal
license taxes.
On August 16, 1993, President Clinton signed a bill amending Section 936.
Under the amendments, U.S. corporations with operations in Puerto Rico can
elect to receive a federal income tax credit equal to: 40% of the credit
currently available, phased in over a five year period, starting at 60% of
the current credit, or a credit based on investment and wages. The
investment and wage credit would equal the sum of (i) 60% of qualified
compensation to employees, (ii) a specified percentage of depreciation
deductions with respect to tangible property located in Puerto Rico, and
(iii) a portion of income taxed paid to Puerto Rico, up to a 9% effective
tax rate, subject to certain requirements. It is not possible to determine
at this time whether the reductions in tax incentives for operations in
Puerto Rico will have a significant impact on the economy of Puerto Rico or
the time period in which such impact would arise.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed on
behalf of each fund by FMR (either directly or through affiliated
sub-advisers) pursuant to authority contained in the management contracts.
FMR is also responsible for the placement of transaction orders for other
investment companies and accounts for which it or its affiliates act as
investment adviser. Securities purchased and sold by the money market fund
generally will be traded on a net basis (i.e., without commission). In
selecting broker-dealers, subject to applicable limitations of the federal
securities laws, FMR will consider 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; and the reasonableness of any commissions.
The funds may execute portfolio transactions with broker-dealers who
provide research and execution services to the funds or other 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; the availability of
securities or the purchasers or sellers of securities; furnishing analyses
and reports concerning issuers, industries, securities, economic factors
and trends, portfolio strategy, and performance of accounts; and effecting
securities transactions and performing functions incidental thereto (such
as clearance and settlement). FMR maintains a listing of broker-dealers
who provide such services on a regular basis. However, as many
transactions on behalf of the money market fund are placed with
broker-dealers (including broker-dealers on the list) without regard to the
furnishing of such services, it is not possible to estimate the proportion
of such transactions directed to such broker-dealers solely because such
services were provided. The selection of such broker-dealers generally is
made by FMR (to the extent possible, consistent with execution
considerations), based upon the quality of research and execution services
provided.
The receipt of research from broker-dealers that execute transactions on
behalf of the funds may be useful to FMR in rendering investment management
services to the funds 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 the funds. The receipt of such research has not reduced FMR's normal
independent research activities; however, it enables FMR to avoid
additional expenses that could be incurred if FMR tried to develop
comparable information through its own efforts.
Subject to applicable limitations of the federal securities laws,
broker-dealers may receive 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 funds 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 the funds and 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.
FMR is authorized to use research services provided by and to place
portfolio transactions with brokerage firms that have provided assistance
in the distribution of shares of the funds or shares of other Fidelity
funds to the extent permitted by law. FMR may use research services
provided by and place agency transactions with Fidelity Brokerage Services,
Inc. (FBSI), a subsidiary of FMR Corp., if the commissions are fair,
reasonable, and comparable to commissions charged by non-affiliated,
qualified brokerage firms for similar services.
Section 11(a) of the Securities Exchange Act of 1934 prohibits members of
national securities exchanges from executing exchange transactions for
accounts which they or their affiliates manage, except in accordance with
regulations of the Securities and Exchange Commission. Pursuant to such
regulations, the Board of Trustees has approved a written agreement that
permits FBSI to effect portfolio transactions on national securities
exchanges and to retain compensation in connection with such transactions.
For the fiscal years ended November 30, 1993, 1992, and 1991, the funds
paid no brokerage commissions.
The Trustees periodically review FMR's performance of its responsibilities
in connection with the placement of portfolio transactions on behalf of
each fund and review the commissions paid by each fund over representative
periods of time to determine if they are reasonable in relation to the
benefits to each fund.
The high yield fund's turnover rates for fiscal 1993 and 1992 were 45% and
11%, respectively.
From time to time the Trustees will review whether the recapture for the
benefit of the funds of some portion of the brokerage commissions or
similar fees paid by the funds on portfolio transactions is legally
permissible and advisable. Each 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 each fund to seek such
recapture.
Although the Trustees and officers of the funds are substantially the same
as those of other funds managed by FMR, investment decisions for each fund
are made independently from those of other funds managed by FMR or 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 accounts.
Simultaneous transactions are inevitable when several funds are managed by
the same investment adviser, particularly when the same security is
suitable for the investment objective of more than one fund.
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 a formula considered by the officers of the funds involved to be
equitable to each fund. In some cases, this system could have a
detrimental effect on the price or value of the security as far as the
funds are concerned. In other cases, however, the ability of the funds to
participate in volume transactions will produce better executions and
prices for the funds. It is the current opinion of the Trustees that the
desirability of retaining FMR as investment adviser to the funds outweighs
any disadvantages that may be said to exist from exposure to simultaneous
transactions.
VALUATION OF PORTFOLIO SECURITIES
High Yield Fund. Valuations of portfolio securities furnished by the
pricing service employed by the fund are based upon a computerized matrix
system or appraisals by the pricing service, in each case in reliance upon
information concerning market transactions and quotations from recognized
municipal securities dealers. The methods used by the pricing service and
the quality of valuations so established are reviewed by officers of the
fund and FSC under the general supervision of the Board of Trustees. There
are a number of pricing services available, and the Trustees, or officers
acting on behalf of the Trustees, on the basis of on-going evaluation of
these services, may use other pricing services or discontinue the use of
any pricing service in whole or in part. Futures contracts and options are
valued on the basis of market quotations if available.
Money Market Fund. The fund values its investments on the basis of
amortized cost. This technique involves valuing an instrument at its cost
as adjusted for amortization of premium or accretion of discount rather
than its value based on current market quotations or appropriate
substitutes which reflect current market conditions. The amortized cost
value of an instrument may be higher or lower than the price the fund would
receive if it sold the instrument.
Valuing the fund's instruments on the basis of amortized cost and use of
the term "money market fund" are permitted by Rule 2a-7 under the
Investment Company Act of 1940. The fund must adhere to certain conditions
under Rule 2a-7.
The Board of Trustees of the trust oversees FMR's adherence to SEC rules
concerning money market funds, and has established procedures designed to
stabilize the fund's NAV at $1.00. At such intervals as they deem
appropriate, the Trustees consider the extent to which NAV calculated by
using market valuations would deviate from $1.00 per share. If the
Trustees believe that a deviation from the fund's amortized cost per share
may result in material dilution or other unfair results to shareholders,
the Trustees have agreed to take such corrective action, if any, as they
deem appropriate to eliminate or reduce, to the extent reasonably
practicable, the dilution or unfair results. Such corrective action could
include selling portfolio instruments prior to maturity to realize capital
gains or losses or to shorten average portfolio maturity; withholding
dividends; redeeming shares in kind; establishing NAV by using available
market quotations; and such other measures as the Trustees may deem
appropriate.
During periods of declining interest rates, the fund's yield based on
amortized cost may be higher than the yield based on market valuations.
Under these circumstances, a shareholder in the fund would be able to
obtain a somewhat higher yield than would result if the fund utilized
market valuations to determine its NAV. The converse would apply in a
period of rising interest rates.
PERFORMANCE
The funds may quote performance in various ways. All performance
information supplied by the funds in advertising is historical and is not
intended to indicate future returns. The high yield fund's share price,
and both of the funds' yields and total returns fluctuate in response to
market conditions and other factors. The value of high yield fund shares
when redeemed may be more or less than their original cost.
YIELD CALCULATIONS. To compute the money market fund's yield for a period,
the net change in value of a hypothetical account containing one share
reflects the value of additional shares purchased with dividends from the
one original share and dividends declared on both the original share and
any additional shares. The net change is then divided by the value of the
account at the beginning of the period to obtain a base period return.
This base period return is annualized to obtain a current annualized yield.
The money market fund also may calculate a compound effective yield by
compounding the base period return over a one-year period. In addition to
the current yield, the money market fund may quote yields in advertising
based on any historical seven-day period. Yields for the money market fund
are calculated on the same basis as other money market funds, as required
by regulation.
For the HIGH YIELD FUND, yields used in advertising are computed by
dividing the fund's interest income for a given 30-day or one-month period,
net of expenses, by the average number of shares entitled to receive
dividends during the period, dividing this figure by the fund's net asset
value per share at the end of the period, and annualizing the result
(assuming compounding of income) in order to arrive at an annual percentage
rate. Yields do not reflect the fund's .50% redemption fee, which applies
to shares held less than 180 days. Income is calculated for purposes of
the high yield fund's yield quotations in accordance with standardized
methods applicable to all stock and bond funds. In general, interest
income is reduced with respect to bonds trading at a premium over their par
value by subtracting a portion of the premium from income on a daily basis,
and is increased with respect to bonds trading at a discount by adding a
portion of the discount to daily income. Capital gains and losses
generally are excluded from the calculation.
Income calculated for the purposes of determining the high yield fund's
yield differs from income as determined for other accounting purposes.
Because of the different accounting methods used, and because of the
compounding of income assumed in yield calculations, the high yield fund's
yield may not equal its distribution rate, the income paid to your account,
or the income reported in the fund's financial statements.
A fund's tax-equivalent yield is the rate an investor would have to earn
from a fully taxable investment after taxes to equal the fund's tax-free
yield. Tax-equivalent yields are calculated by dividing a fund's yield by
the result of one minus a stated federal or combined federal and state tax
rate. (If only a portion of the fund's yield is tax-exempt, only that
portion is adjusted in the calculation.)
The tables below and on page 14 show the effect of a shareholder's tax
status on effective yield under federal and state income tax laws for 1994.
They show the approximate yield a taxable security must provide at various
income brackets to produce after-tax yields equivalent to those of
hypothetical tax-exempt obligations yielding from 2.0% to 8.0% Of course,
no assurance can be given that a fund will achieve any specific tax-exempt
yield. While each fund invests principally in obligations whose interest
is exempt from federal and state income tax, other income received by the
funds may be taxable. The tables do not take into account local taxes, if
any, payable on a fund's distributions.
Use this table to find your approximate effective tax bracket taking into
account federal and state taxes for 1994.
1994 TAX RATES
Federal Income Single Return
Taxable Tax Combined Income Joint Return
Income Bracket Bracket* Combined Income*
Single Return Joint Return
$22,751 - $55,100 N.A. 28% 31.24% N.A.
N.A. $38,001 - $91,850 28% N.A. 30.92%**
$55,101 - 115,000 $91,851 - 140,000 31% 34.11% 34.11%
$115,001 - 250,000 $140,001 - 250,000 36% 38.88% 38.88%
$250,001 and above $250,001 and above 39.6% 42.32% 42.32%
* The Connecticut rates assumed for 1994 are the highest effective marginal
rates applicable for the indicated federal rate bracket. The
table assumes that Connecticut adjusted gross income equals federal taxable
income.
** After the automatic credit.
PLEASE NOTE: The 1994 combined tax brackets are based on the assumption
that 100% of the fund's income is free from federal and state taxes. In
fiscal 1993, 9% of the income from the money market fund and none of the
income from the high yield fund were subject to state taxes.
Having determined your effective tax bracket, use the table below to
determine the tax-equivalent yield for a given tax-free yield.
If your effective combined federal and state personal tax rate in 1994 is:
30.92% 31.24% 34.11% 38.88% 42.32%
<TABLE>
<CAPTION>
<S> <C>
To match these
tax-free yields: Your taxable investment would have to earn the following yield:
</TABLE>
2.0% 2.90% 2.91% 3.04% 3.27% 3.47%
3.0 4.34 4.36 4.55 4.91 5.20
4.0 5.79 5.82 6.07 6.54 6.93
5.0 7.24 7.27 7.59 8.18 8.67
6.0 8.69 8.73 9.11 9.82 10.40
7.0 10.13 10.18 10.62 11.45 12.14
8.0 11.58 11.63 12.14 13.09 13.87
Each fund may invest a portion of its assets in obligations that are
subject to state or federal income taxes. When a fund invests in these
obligations, its tax-equivalent yield will be lower. In the table above,
tax-equivalent yields are calculated assuming investments are 100%
federally and state tax-free.
Yield information may be useful in reviewing the funds' performance and in
providing a basis for comparison with other investment alternatives.
However, the funds' yields fluctuate, unlike investments that pay a fixed
interest rate over a stated period of time. When comparing investment
alternatives, investors should also note the quality and maturity of the
portfolio securities of the respective investment companies they have
chosen to consider.
Investors should recognize that in periods of declining interest rates the
funds' yields will tend to be somewhat higher than prevailing market rates,
and in periods of rising interest rates the funds' yields will tend to be
somewhat lower. Also, when interest rates are falling, the inflow of net
new money to the funds from the continuous sale of their shares will likely
be invested in instruments producing lower yields than the balance of the
funds' holdings, thereby reducing the fund's current yields. In periods of
rising interest rates, the opposite can be expected to occur.
TOTAL RETURN CALCULATIONS. Total returns quoted in advertising reflect all
aspects of a fund's returns, including the effect of reinvesting dividends
and capital gain distributions (if any), and any change in the fund's net
asset value per share (NAV) over the period. Average annual total returns
are calculated by determining the growth or decline in value of a
hypothetical historical investment in a 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 total return of 100%
over ten years would produce an average annual total return of 7.18%, which
is the steady annual rate that would equal 100% growth on a compounded
basis in ten years. While average annual total returns are a convenient
means of comparing investment alternatives, investors should realize that a
fund's performance is not constant over time, but changes from year to
year, and that average annual total returns represent averaged figures as
opposed to the actual year-to-year performance of the funds.
In addition to average annual returns, a fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an
investment over a stated period. Average annual and cumulative total
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. Total 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 total return. An example of this type of
illustration is given below. Total returns, yields, and other performance
information may be quoted numerically or in a table, graph, or similar
illustration, and may omit or include the effects of each fund's $5.00
account closeout fee and, with respect to the high yield fund, the .50%
redemption fee, or other charges for special transactions or services.
Omitting fees and charges will cause the funds' total return figures to be
higher.
NET ASSET VALUE (HIGH YIELD FUND ONLY). Charts and graphs using the fund's
net asset values, adjusted net asset values, and benchmark indices 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.
HISTORICAL RESULTS. The following table shows the funds' total returns for
the periods ended November 30, 1993. Figures for both funds include the
effect of the $5.00 account closeout fee and for the high yield fund do not
include the effect of the fund's .50% redemption fee, applicable to shares
held less than 180 days.
Average Annual Total Returns Cumulative Total Returns
One Five Life of One Five Life of
Year Years Fund* Year Years Fund*
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Money Market Fund 2.21% n/a 3.01% 2.21% n/a 8.49%
High Yield Fund 11.81% 9.63% 9.67% 11.81% 58.34% 75.53%
</TABLE>
* The money market fund commenced operations on March 4, 1991 and the high
yield fund commenced operations on October 29, 1987.
The money market fund's 7-day yield as of November 30, 1993 was 1.96%, with
a corresponding tax-equivalent yield of 3.19%. The high yield fund's
30-day yield as of November 30, 1993 was 5.12%, with a corresponding
tax-equivalent yield of 8.38%. Tax-equivalent yields are based on a 1994
combined effective federal and Connecticut state income tax rate of 38.88%,
and reflect that an estimated 10.1% of money market fund's income (and none
of the high yield fund's income) were subject to state taxes on November
30, 1993. If FMR had not reimbursed certain fund expenses during the
periods, total returns would have been lower. These figures do not reflect
the funds' $5 account closeout fees.
The following tables show the income and capital elements of each fund's
total return from their respective commencement of operations to November
30, 1993. The tables compare each fund's return to the record of the
Standard & Poor's 500 Composite Stock Price Index (S&P 500), the
Dow Jones Industrial Average (DJIA), and the cost of living (measured by
the Consumer Price Index, or CPI) over the same period. The S&P 500
and DJIA comparisons are provided to show how each fund's total return
compared to the return of a broad average of common stocks and a narrower
set of stocks of major industrial companies, respectively, over the same
period. Of course, since the funds invest in money market and fixed-income
securities, common stocks represent a different type of investment from the
funds. Common stocks generally offer greater potential growth than the
funds, but generally experience greater price volatility, which means a
greater potential for loss. In addition, common stocks generally provide
lower income than a money market or bond fund investment such as the funds.
The S&P 500 and DJIA are based on the prices of unmanaged groups of
stocks and, unlike the funds' returns, their returns do not include the
effect of paying brokerage commissions or other costs of investing.
MONEY MARKET FUND. During the period March 4, 1991 (commencement of
operations) to November 30, 1993, a hypothetical $10,000 investment in the
money market fund would have grown to $10,849, assuming all distributions
were reinvested. This was a period of fluctuating interest rates and
should not be considered representative of the dividend income or capital
gain or loss that could be realized from an investment in the fund today.
<TABLE>
<CAPTION>
<S> <C> <C>
SPARTAN CONNECTICUT MUNICIPAL MONEY MARKET PORTFOLIO INDICES
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Value of Value of Value of
Initial Reinvested Reinvested Cost
Year Ended $10,000 Dividends Capital Gain Total of
November 30 Investment Distributions Distributions Value S&P DJIA Living**
500
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
1993 $10,000 $ 849 $0 $ 10,849 $ 13,534 $ 13,752 $10,816
1992 10,000 614 0 10,614 12,292 11,986 10,534
1991* 10,000 297 0 10,297 10,373 10,192 10,223
</TABLE>
* From March 4, 1991 (commencement of operations).
** From month-end closest to initial investment date.
Explanatory Notes: With an initial investment of $10,000 made on March 4,
1991, 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 for the period covered (their cash value at the time
they were reinvested), amounted to $10,849. If distributions had not been
reinvested, the amount of distributions earned from the fund over time
would have been smaller, and cash payments (dividends) for the period would
have amounted to $816. The fund did not distribute any capital gains
during the period. If FMR had not reimbursed certain expenses, the fund's
total returns would have been lower. The figures in the table do not
include the effect of the fund's $5 account closeout fee.
HIGH YIELD FUND. During the period October 29, 1987 (commencement of
operations) to November 30, 1993, a hypothetical $10,000 investment in the
fund would have grown to $17,553 assuming all distributions were
reinvested. This was a period of widely fluctuating interest rates and
bond prices, and should not be considered representative of the dividend
income or capital gain or loss that could be realized from an investment in
the fund today.
SPARTAN CONNECTICUT MUNICIPAL HIGH YIELD PORTFOLIO INDICES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Value of Value of Value of
Initial Reinvested Reinvested Cost
Year Ended $10,000 Dividends Capital Gain Total of
November 30 Investment Distributions Distributions Value S&P DJIA Living**
500
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
1993 $ 11,840 $ 5,633 $ 80 $ 17,553 $ 24,229 $ 24,540 $ 12,645
1992 11,220 4,403 76 15,699 22,006 21,389 12,316
1991 10,880 3,355 73 14,308 18,570 18,188 11,951
1990 10,730 2,443 23 13,196 15,430 15,550 11,605
1989 10,730 1,615 0 12,345 15,987 15,815 10,919
1988 10,300 786 0 11,086 12,218 11,907 10,434
1987* 10,030 56 0 10,086 9,907 9,962 10,009
</TABLE>
* From October 29, 1987 (commencement of operations).
** From month-end closest to initial investment date.
Explanatory Notes: With an initial investment of $10,000 made on October
29, 1987, 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 for the period covered (their cash value at the time
they were reinvested), amounted to $15,231. If distributions had not been
reinvested, the amount of distributions earned from the fund over time
would have been smaller, and the cash payments for the period would have
amounted to $4,200 for income dividends and $60 for capital gain
distributions. If FMR had not reimbursed certain fund expenses, the fund's
total returns would have been lower. The figures in the table do not
include the effect of the fund's $5 account closeout fee, or the .50%
redemption fee applicable to shares held less than 180 days.
The funds may compare and contrast in advertising the relative advantages
of investing in a mutual fund versus an individual municipal bond. Unlike
tax-free mutual funds, individual municipal bonds offer a stated rate of
interest and, if held to maturity, repayment of principal. Although some
individual municipal bonds might offer a higher return, they do not offer
the reduced risk of a mutual fund that invests in many different
securities. The initial investment requirements and sales charges of many
tax-free mutual funds are lower than the purchase cost of individual
municipal bonds, which are generally issued in $5,000 denominations and are
subject to direct brokerage costs.
In addition, the high yield fund's performance may be compared in
advertising to the performance of unmanaged indices of municipal bond
prices and yields and to representative individual municipal securities and
unit investment trusts comprised of municipal securities.
A 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. Lipper generally ranks funds on the basis of total return,
assuming reinvestment of distributions, but does not take sales charges or
redemption fees into consideration, and is prepared without regard to tax
consequences. Lipper may also rank funds based on yield. In addition to
the mutual fund rankings, a fund's performance may be compared to mutual
fund performance indices prepared by Lipper.
From time to time, a 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.
Fidelity may provide information designed to help individuals understand
their investment goals and explore various financial strategies. For
example, Fidelity's FundMatchsm Program includes a workbook describing
general principles of investing, such as asset allocation, diversification,
risk tolerance, and goal setting; a questionnaire designed to help create a
personal financial profile; and an action plan offering investment
alternatives. Materials may also include discussions of Fidelity's three
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 indices.
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 total returns in the same method as the funds.
The funds may also compare performance to that of other compilations or
indices that may be developed and made available in the future.
Each fund may compare its performance or the performance of securities in
which it may invest to averages published by IBC USA (Publications), Inc.
of Ashland, Massachusetts. These averages assume reinvestment of
distributions. The IBC/Donoghue's MONEY FUND AVERAGES Trademark /All
Tax-Free, which is reported in the MONEY FUND REPORT Registered Trademark,
covers over 325 tax-free money market funds. The Bond Fund Report AverageS
Trademark/Municipal, which is reported in the BOND FUND REPORT Trademark,
covers over 350 tax-free bond funds. When evaluating comparisons to money
market funds, investors should consider the relevant differences in
investment objectives and policies. Specifically, money market funds
invest in short-term, high-quality instruments and seek to maintain a
stable $1.00 share price. The high yield fund, however, invests in
longer-term instruments and its share price changes daily in response to a
variety of factors.
In advertising materials, Fidelity may reference or discuss its products
and services, which may include: other Fidelity funds; retirement
investing; brokerage products and services; the effects of periodic
investment plans and dollar cost averaging; saving for college; charitable
giving; and the Fidelity credit card. In addition, Fidelity may quote
financial or business publications and periodicals, including model
portfolios or allocations, as they relate to fund management, investment
philosophy, and investment techniques. Fidelity may also reprint, and use
as advertising and sales literature, articles from Fidelity Focus, a
quarterly magazine provided free of charge to Fidelity fund shareholders.
Each fund may present its fund number, Quotron Trademark number, and CUSIP
number, and discuss or quote its current portfolio manager.
The high yield 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 November 30, 1993, FMR advised 41 tax-free funds with a total value
of over $25 billion, and 20 Spartan funds with approximately $20 billion in
assets. According to the Investment Company Institute, over the past eight
years, assets in tax-exempt funds increased from $45 billion in 1984 to
approximately $291 billion at the end of 1992. The funds may reference the
growth and variety of money market mutual funds and the adviser's
innovation and participation in the industry.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each fund is open for business and its net asset value per share (NAV) is
calculated each day the New York Stock Exchange (NYSE) is open for trading.
The NYSE has designated the following holiday closings for 1994:
Washington's Birthday (observed), Good Friday, Memorial Day (observed),
Independence Day (observed), Labor Day, Thanksgiving Day, and Christmas Day
(observed). Although FMR expects the same holiday schedule, with the
addition of New Year's Day, to be observed in the future, the NYSE may
modify its holiday schedule at any time.
FSC normally determines each fund's NAV as of the close 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 SEC. To the
extent that portfolio securities are traded in other markets on days when
the NYSE is closed, a fund's NAV may be affected on days when investors do
not have access to the fund to purchase or redeem shares.
If the Trustees determine that existing conditions make cash payments
undesirable, redemption payments may be made in whole or in part in
securities or other property, valued for this purpose as they are valued in
computing a fund's NAV. Shareholders receiving securities or other
property on redemption may realize a gain or loss for tax purposes, and
will incur any costs of sale, as well as the associated inconveniences.
Pursuant to Rule 11a-3 under the 1940 Act, the funds are required to give
shareholders at least 60 days' notice prior to terminating or modifying the
exchange privilege. Under the Rule, the 60-day notification requirement
may be waived if (i) the only effect of a modification would be to reduce
or eliminate an administrative fee, redemption fee, or deferred sales
charge ordinarily payable at the time of an exchange, or (ii) the fund
suspends the redemption of the shares to be exchanged as permitted under
the 1940 Act or the rules and regulations thereunder, or the fund to be
acquired suspends the sale of its shares because it is unable to invest
amounts effectively in accordance with its investment objective and
policies.
In the Prospectus, each fund has notified shareholders that it reserves the
right at any time, without prior notice, to refuse exchange purchases by
any person or group if, in FMR's judgment, the fund would be unable to
invest effectively in accordance with its investment objective and
policies, or would otherwise potentially be adversely affected.
DISTRIBUTIONS AND TAXES
Distributions. If you request to have distributions mailed to you and the
U.S. Postal Service cannot deliver your checks, or if your checks remain
uncashed for six months, Fidelity may reinvest your distributions at the
then-current NAV. All subsequent distributions will then be reinvested
until you provide Fidelity with alternate instructions.
Dividends. To the extent that each fund's income is derived from federally
tax-exempt interest, the daily dividends declared by the fund are also
federally tax-exempt. The funds will send each shareholder a notice in
January describing the tax status of dividends and capital gain
distributions (if any) for the prior year.
Shareholders are required to report tax-exempt income on their federal tax
returns. Shareholders who earn other income, such as Social Security
benefits, may be subject to federal income tax on up to one half of such
benefits to the extent that their income, including tax-exempt income,
exceeds certain base amounts.
The funds purchase municipal obligations based on opinions of bond counsel
regarding the federal income tax status of the obligations. These opinions
generally will be based on covenants by the issuers regarding continuing
compliance with federal tax requirements. If the issuer of an obligation
fails to comply with its covenants at any time, interest on the obligation
could become federally taxable retroactive to the date the obligation was
issued.
As a result of the Tax Reform Act of 1986, interest on certain "private
activity" securities (referred to as "qualified bonds" in the Internal
Revenue Code) is subject to the federal alternative minimum tax (AMT),
although the interest continues to be excludable from gross income for
other purposes. Interest from private activity securities will be
considered tax-exempt for purposes of the funds' policies of investing so
that at least 80% of their income is free from federal income tax.
Interest from private activity securities is a tax-preference item for the
purposes of determining whether a taxpayer is subject to the AMT and the
amount of AMT to be paid, if any. Private activity securities issued after
August 7, 1986 to benefit a private or industrial user or to finance a
private facility are affected by this rule.
Corporate investors should note that a tax preference item for purposes of
the corporate AMT is 75% of the amount by which adjusted current earnings
(which includes tax-exempt interest) exceeds alternative minimum taxable
income of the corporation.
If a shareholder receives an exempt-interest dividend and sells shares at a
loss after holding them for a period of six months or less, the loss will
be disallowed to the extent of the amount of the exempt-interest dividend.
Capital Gain Distributions. Long-term capital gains earned by the high
yield fund on the sale of securities and distributed to shareholders are
federally taxable as long-term capital gains, regardless of the length of
time that the shareholders have held their shares. If a shareholder
receives a long-term capital gain distribution on shares of the fund and
such shares are held six months or less and are sold at a loss, the portion
of the loss equal to the amount of the long-term capital gain distribution
will be considered a long-term loss for tax purposes.
A portion of the gain on bonds purchased at a discount after April 30, 1993
and short-term capital gains distributed by the funds are federally taxable
to shareholders as dividends, not as capital gains. Distributions from
short-term capital gains do not qualify for the dividends-received
deduction. Dividend distributions resulting from a recharacterization of
gain from the sale of bonds purchased at a discount after April 30, 1993
are not considered income for purposes of the funds' policy of investing so
that at least 80% of their income is free from federal income tax. The
money market fund may distribute any net realized short-term capital gains
once a year or more often as necessary to maintain its NAV of $1.00 per
share.
Tax Status of the Funds. Each fund has qualified and intends to continue
to qualify each year as a "regulated investment company" for tax purposes
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, each fund intends to distribute substantially all of its net
investment income and net realized capital gains (if any) within each
calendar year as well as on a fiscal year basis. The high yield fund also
intends to comply with other tax rules applicable to regulated investment
companies, including a requirement that capital gains from the sale of
securities held less than three months constitute less than 30% of the
fund's gross income for each fiscal year. Gains from some futures
contracts and options are included in this 30% calculation, which may limit
the high yield fund's investments in such instruments. Fidelity Court
Street Trust and Fidelity Court Street Trust II treat each of their
respective funds as a separate entity for tax purposes.
At November 30, 1993, the money market fund had a capital loss carryforward
of approximately $7,460 of which $40, $2,090, and $5,330 will expire on
November 30, 1999, 2000, and 2001, respectively.
Connecticut Taxes. The Connecticut income tax is imposed at the rate of
4.5% on the Connecticut taxable income of resident and non-resident
individuals, trusts, and estates. Connecticut taxable income is federal
adjusted gross income after certain modifications (Connecticut AGI), less a
personal exemption. The amount of the personal exemption varies depending
on the taxpayer's filing status and is phased out as the amount of
Connecticut AGI increases. For a husband and wife filing a joint return,
the personal exemption is $24,000 but decreases to zero as Connecticut AGI
increases between $48,001 and $71,001. For an individual filing a separate
return, the exemption is $12,000 but decreases to zero as Connecticut AGI
increases between $24,001 and $35,001. A credit is also provided depending
on the taxpayer's filing status and Connecticut AGI. The credit ranges
from 75% to 10% of the Connecticut income tax, decreasing as Connecticut
AGI increases. No credit is available if Connecticut AGI exceeds $96,000
in the case of a husband and wife filing a joint return, or $48,000 in the
case of an individual filing separately. Special exemption and credit
rules apply to an individual filing as a head of household or a surviving
spouse. The personal exemption and credit, where applicable, lower the
effective rate of tax below the flat 4.5% statutory rate.
Dividends paid by the funds that qualify as exempt-interest dividends for
federal income tax purposes are not subject to the Connecticut income tax
to the extent they are derived from obligations issued by or on behalf of
the State of Connecticut, any political subdivision thereof, or any public
instrumentality, state or local authority, district, or similar public
entity created under laws of the State of Connecticut, or derived from
obligations of U.S. possessions and territories - the interest on which
federal law prohibits the states from taxing. Exempt-interest dividends
derived from other sources and any distributions by the funds that are
treated as taxable dividends for federal income tax purposes are includable
in Connecticut AGI for purposes of the Connecticut income tax. Amounts, if
any, treated as capital gains or losses for federal income tax purposes,
such as from capital gain distributions on shares of the high yield fund or
arising upon the sale, redemption, or other disposition of shares of the
fund by a shareholder, are includable in Connecticut AGI for purposes of
the Connecticut income tax to the same extent as they are taxable for
federal income tax purposes, except that, subject to the adoption of
proposed regulations, capital gain dividends would not have to be included
in Connecticut AGI to the extent derived from obligations issued by or on
behalf of the State of Connecticut or any of its political subdivisions.
The net Connecticut minimum tax is imposed for taxable years commencing
after 1992 on taxpayers subject to both the Connecticut income tax and the
federal AMT. The net Connecticut minimum tax is based on what the
taxpayer's federal AMT tax base would be if computed taking certain
Connecticut modifications into account. Included in these modifications,
subject to the adoption of proposed regulations, would be the elimination
of exempt-interest dividends on private activity bonds issued by the State
of Connecticut or any if its political subdivisions, and capital gain
dividends to the extent derived from such obligations.
In addition, the Connecticut corporation business tax is imposed on any
corporation or association carrying on, or having the right to carry on,
business in Connecticut. Distributions from any source that are treated as
federally tax-exempt dividends are includable in gross income for purposes
of the corporation business tax. However, the corporation business tax
allows a deduction for 70% of amounts includable in taxable income
thereunder that are treated as dividends for federal income tax purposes,
such as distributions of taxable net investment income and net short-term
capital gains, but disallows deductions for expenses related to such
amounts.
Other Tax Information. The information above is only a summary of some of
the tax considerations generally affecting the funds and their
shareholders, and no attempt has been made to discuss individual tax
consequences. Investors should consult their tax advisers to determine
whether the funds are suitable to their particular tax situations.
FMR
FMR is a wholly owned subsidiary of FMR Corp., a parent company organized
in 1972. At present, the principal operating activities of FMR Corp. are
those conducted by three of its divisions as follows: FSC, which is the
transfer and shareholder servicing agent for certain of the funds advised
by FMR; Fidelity Investments Institutional Operations Company, which
performs shareholder servicing functions for certain institutional
customers; and Fidelity Investments Retail Marketing Company, which
provides marketing services to various companies within the Fidelity
organization.
Several affiliates of FMR are also engaged in the investment advisory
business. Fidelity Management Trust Company provides trustee, investment
advisory, and administrative services to retirement plans and corporate
employee benefit accounts. Fidelity Management & Research (U.K.) Inc.
(FMR U.K.) and Fidelity Management & Research (Far East) Inc. (FMR Far
East), both wholly owned subsidiaries of FMR formed in 1986, supply
investment research, and may supply portfolio management services, to FMR
in connection with certain funds advised by FMR. Analysts employed by FMR,
FMR U.K., and FMR Far East research and visit thousands of domestic and
foreign companies each year. FMR Texas, a wholly owned subsidiary of FMR
formed in 1989, supplies portfolio management and research services in
connection with certain money market funds advised by FMR.
TRUSTEES AND OFFICERS
The Trustees and executive officers of the trusts are listed below. Except
as indicated, each individual has held the office shown or other offices in
the same company for the last five years. Trustees and officers elected or
appointed to Fidelity Court Street Trust prior to the money market fund's
conversion from a series of Fidelity Court Street Trust to a series of
Fidelity Court Street Trust II served Fidelity Court Street Trust in
identical capacities. All persons named as Trustees also serve in similar
capacities for other funds advised by FMR. Unless otherwise noted, the
business address of each Trustee and officer is 82 Devonshire Street,
Boston, Massachusetts 02109, which is also the address of FMR. Those
Trustees who are "interested persons" (as defined in the Investment Company
Act of 1940) by virtue of their affiliation with either trust or with FMR,
are indicated by an asterisk (*).
*EDWARD C. JOHNSON 3d, 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 FMR Texas
Inc. (1989), Fidelity Management & Research (U.K.) Inc., and Fidelity
Management & Research (Far East) Inc.
*J. GARY BURKHEAD, Trustee and Senior Vice President, is President of FMR;
and President and a Director of FMR Texas Inc. (1989), Fidelity Management
& Research (U.K.) Inc. and Fidelity Management & Research (Far
East) Inc.
RALPH F. COX, (money market fund only) 200 Rivercrest Drive, Fort Worth,
TX, Trustee (1991), is President of Greenhill Petroleum Corporation
(petroleum exploration and production, 1990). Prior to his retirement in
March 1990, Mr. Cox was President and Chief Operating Officer of Union
Pacific Resources Company (exploration and production). He is a Director
of Bonneville Pacific Corporation (independent power, 1989) and CH2M Hill
Companies (engineering). In addition, he served on the Board of Directors
of the Norton Company (manufacturer of industrial devices, 1983-1990) and
continues to serve on the Board of Directors of the Texas State Chamber of
Commerce, and is a member of advisory boards of Texas A&M University
and the University of Texas at Austin.
PHYLLIS BURKE DAVIS, (money market fund only) 340 E. 64th Street #22C, New
York, NY, Trustee (1992). Prior to her retirement in September 1991, Mrs.
Davis was the Senior Vice President of Corporate Affairs of Avon Products,
Inc. She is currently a Director of BellSouth Corporation
(telecommunications), Eaton Corporation (manufacturing, 1991), and the TJX
Companies, Inc. (retail stores, 1990), and previously served as a Director
of Hallmark Cards, Inc. (1985-1991) and Nabisco Brands, Inc. In addition,
she serves as a Director of the New York City Chapter of the National
Multiple Sclerosis Society, and is a member of the Advisory Council of the
International Executive Service Corps. and the President's Advisory Council
of The University of Vermont School of Business Administration (1988).
RICHARD J. FLYNN, 77 Fiske Hill, Sturbridge, MA, Trustee, is a financial
consultant. Prior to September 1986, Mr. Flynn was Vice Chairman and a
Director of the Norton Company (manufacturer of industrial devices). He is
currently a Director of Mechanics Bank and a Trustee of College of the Holy
Cross and Old Sturbridge Village, Inc.
E. BRADLEY JONES, 3881-2 Lander Road, Chagrin Falls, OH, Trustee (1990).
Prior to his retirement in 1984, Mr. Jones was Chairman and Chief Executive
Officer of LTV Steel Company. Prior to May 1990, he was Director of
National City Corporation (a bank holding company) and National City Bank
of Cleveland. He is a Director of TRW Inc. (original equipment and
replacement products), Cleveland-Cliffs Inc. (mining), NACCO Industries,
Inc. (mining and marketing), Consolidated Rail Corporation, Birmingham
Steel Corporation (1988), Hyster-Yale Materials Handling, Inc. (1989), and
RPM, Inc. (manufacturer of chemical products, 1990). In addition, he
serves as a Trustee of First Union Real Estate Investments; Chairman of the
Board of Trustees and a member of the Executive Committee of the Cleveland
Clinic Foundation, a Trustee and a member of the Executive Committee of
University School (Cleveland), and a Trustee of Cleveland Clinic Florida.
DONALD J. KIRK, 680 Steamboat Road, Apartment #1-North, Greenwich, CT,
Trustee, is a Professor at Columbia University Graduate School of Business
and a financial consultant. Prior to 1987, he was Chairman of the
Financial Accounting Standards Board. Mr. Kirk is a Director of General Re
Corporation (reinsurance), and Valuation Research Corp. (appraisals and
valuations, 1993). In addition, he serves as Vice Chairman of the Board of
Directors of the National Arts Stabilization Fund and Vice Chairman of the
Board of the Trustees of the Greenwich Hospital Association (1989).
*PETER S. LYNCH, Trustee (1990) is Vice Chairman of FMR (1992). Prior to
his retirement on May 31, 1990, he was a Director of FMR (1989) 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). He is a Director of
W.R. Grace & Co. (chemicals, 1989) and Morrison Knudsen Corporation
(engineering and construction, 1988). 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
(1990).
GERALD C. McDONOUGH, 135 Aspenwood Drive, Cleveland, OH, Trustee (1989), is
Chairman of G.M. Management Group (strategic advisory services). Prior to
his retirement in July 1988, he was Chairman and Chief Executive Officer of
Leaseway Transportation Corp. (physical distribution services). Mr.
McDonough is a Director of ACME-Cleveland Corp. (metal working,
telecommunications and electronic products), Brush-Wellman Inc. (metal
refining), York International Corp. (air conditioning and refrigeration,
1989), Commercial Intertech Corp. (water treatment equipment, 1992), and
Associated Estates Realty Corporation (a real estate investment trust,
1993).
EDWARD H. MALONE, 5601 Turtle Bay Drive #2104, Naples, FL, Trustee (1988).
Prior to his retirement in 1985, Mr. Malone was Chairman, General Electric
Investment Corporation and a Vice President of General Electric Company.
He is a Director of Allegheny Power Systems, Inc. (electric utility),
General Re Corporation (reinsurance) and Mattel Inc. (toy manufacturer).
He is also a Trustee of Rensselaer Polytechnic Institute and of Corporate
Property Investors and a member of the Advisory Boards of Butler Capital
Corporation Funds and Warburg, Pincus Partnership Funds.
MARVIN L. MANN, (money market fund only) 55 Railroad Avenue, Greenwich, CT,
Trustee (1993) is Chairman of the Board, President, and Chief Executive
Officer of Lexmark International, Inc. (office machines, 1991). 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) and Infomart (marketing services, 1991), a
Trammell Crow Co. In addition, he serves as the Campaign Vice Chairman of
the Tri-State United Way (1993) and is a member of the University of
Alabama President's Cabinet (1990).
THOMAS R. WILLIAMS, 21st Floor, 191 Peachtree Street, N.E., Atlanta, GA,
Trustee (1988), 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 BellSouth Corporation (telecommunications),
ConAgra, Inc. (agricultural products), Fisher Business Systems, Inc.
(computer software, 1988), Georgia Power Company (electric utility), Gerber
Alley & Associates, Inc. (computer software), National Life Insurance
Company of Vermont, American Software, Inc. (1989), and AppleSouth, Inc.
(restaurants, 1992).
GARY L. FRENCH, Treasurer (1991). Prior to becoming Treasurer of the
Fidelity funds, Mr. French was Senior Vice President, Fund Accounting -
Fidelity Accounting & Custody Services Co. (1991); Vice President, Fund
Accounting - Fidelity Accounting & Custody Services Co. (1990); and
Senior Vice President, Chief Financial and Operations Officer - Huntington
Advisers, Inc. (1985-1990).
ARTHUR S. LORING, Secretary, is Senior Vice President and General Counsel
of FMR, Vice President - Legal of FMR Corp., and Vice President and Clerk
of FDC.
THOMAS D. MAHER, Assistant Vice President (1990), is Assistant Vice
President of Fidelity's money market funds and Vice President and Associate
General Counsel of FMR Texas Inc. (1990).
PETER ALLEGRINI, is Vice President of the high yield fund (1990) and other
funds advised by FMR and an employee of FMR.
Under a retirement program that became effective on November 1, 1989,
Trustees, upon reaching age 72, become eligible to participate in a defined
benefit retirement program under which they receive payments during their
lifetime from the fund based on their basic trustee fees and length of
service. Currently, Messrs. Robert L. Johnson, William R. Spaulding,
Bertram H. Witham, and David L. Yunich participate in the program.
As of November 30, 1993, the Trustees and officers of the funds owned, in
the aggregate, less than 1% of each fund's total outstanding shares. Also,
on that date, Mr. Arthur C. Tauck, 6 Bluff Pt., Westport, CT, owned of
record or beneficially approximately 5.15% of the Spartan Connecticut
Municipal Money Market Portfolio.
MANAGEMENT CONTRACTS
Each fund employs FMR to furnish investment advisory and other services.
Under FMR's management contract with each fund, FMR acts as investment
adviser and, subject to the supervision of the Board of Trustees, directs
the investments of each fund in accordance with its investment objective,
policies, and limitations. FMR also provides the funds with all necessary
office facilities and personnel for servicing the funds' investments, and
compensates all officers of the Trust, all Trustees who are "interested
persons" of the Trust or FMR, and all personnel of the Trust 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 funds. These services include providing
facilities for maintaining each fund's organization; supervising relations
with custodians, transfer and pricing agents, accountants, underwriters,
and other persons dealing with the funds; preparing all general shareholder
communications and conducting shareholder relations; maintaining the funds'
records and the registration of the funds' shares under federal and state
law; developing management and shareholder services for the funds; and
furnishing reports, evaluations, and analyses on a variety of subjects to
the Board of Trustees.
FMR is responsible for the payment of all expenses of the funds with
certain exceptions. Specific expenses payable by FMR include, without
limitation, the fees and expenses of registering and qualifying the funds
and their shares for distribution under federal and state securities laws;
expenses of typesetting for printing the Prospectus and Statement of
Additional Information; custodian charges; audit and legal expenses;
insurance expenses; association membership dues; and the expenses of
mailing reports to shareholders, shareholder meetings, and proxy
solicitations. FMR also provides for transfer agent and dividend
disbursing services and portfolio and general accounting record maintenance
through FSC.
FMR pays all other expenses of the funds with the following exceptions:
fees and expenses of all Trustees who are not "interested persons" of the
Trust or FMR (the non-interested Trustees); interest on borrowings; taxes;
brokerage commissions (if any); and nonrecurring expenses as may arise,
including costs of any litigation to which the funds may be a party, and
any obligation they may have to indemnify the officers and Trustees with
respect to litigation.
FMR is the money market fund's manager pursuant to a management contract
dated February 28, 1992. The contract was approved by Fidelity Court
Street Trust as sole shareholder of the fund on February 28, 1992, in
conjunction with an Agreement and Plan of Conversion to convert the fund
from a series of a Massachusetts business trust to a series of a Delaware
trust. The Agreement and Plan of Conversion was approved by public
shareholders of the fund on December 11, 1992. Besides reflecting the
fund's redomiciling, the February 28, 1992 contract is identical to the
fund's prior management contract with FMR, which was approved by FMR as
sole shareholder on March 1, 1991.
FMR is the high yield fund's manager pursuant to a management contract
dated January 1, 1992 which was approved by shareholders on December 11,
1991.
For the services of FMR under these contracts, the funds pay FMR a monthly
management fee at the annual rate of .50% (money market fund) and .55%
(high yield fund), respectively, of average net assets throughout the
month. FMR reduces its fee by an amount equal to the fees and expenses of
the non-interested Trustees.
Prior to January 1, 1992, FMR was the high yield fund's manager pursuant to
a management contract dated March 1, 1989. For the services of FMR under
that contract, the fund paid FMR a monthly management fee composed of two
elements: a group fee rate and an individual fund fee rate. The group fee
rate was based on the average monthly net assets of all the registered
investment companies with which FMR had management contracts and was
calculated on a cumulative basis pursuant to a graduated schedule that
ranged from .37% to .15%. The individual fund fee rate was .25%.
FMR may, from to time, voluntarily reimburse all or a portion of a fund's
operating expenses (excluding interest, taxes, brokerage commissions and
extraordinary expenses). The tables below outline expense limitations (as
a percentage of the funds' average net assets) in effect from either
commencement of operations (money market fund) or for the last three fiscal
years (high yield fund) to November 30, 1993. The tables also show the
amount of management fees incurred under each contract and the amounts
reimbursed by FMR for each fiscal period.
MONEY MARKET FUND:
From To Expense Limitation
September 1, 1993 September 30, 1993 .40%
August 1, 1993 August 31, 1993 .30%
July 1, 1993 July 31, 1993 .25%
June 1, 1993 June 30, 1993 .20%
May 1, 1993 May 31, 1993 .15%
March 1, 1993 April 30, 1993 .10%
September 1, 1992 February 28, 1993 .05%
March 4, 1991 August 31, 1992 0%
Management Fees Amount of
Fiscal Year Before Reimbursement Reimbursements
1993 $641,483 $331,281
1992 $243,088 $233,746
1991 $ 48,500 $ 48,533
HIGH YIELD FUND:
From To Expense Limitation
January 1, 1991 -- .55%
July 1, 1989 March 1, 1990 .65%
Management Fees Amount of
Fiscal Year Before Reimbursement Reimbursements
1993 $2,474,254 $ 0
1992 $2,110,249 $ 11,998
1991 $1,251,310 $ 142,655
To defray shareholder service costs, FMR or its affiliates also collect the
funds' $5.00 exchange fees, $5.00 account closeout fees, $5.00 fees for
wire purchases and redemptions, and the money market fund's $2.00
checkwriting charge. The high yield fund's .50% redemption fee is retained
by the fund. Shareholder transaction fees and charges collected for the
fiscal years ended November 30, 1993, 1992, and 1991 are indicated in the
table below.
MONEY MARKET FUND:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Fiscal Year Exchange Fees Account Closeout Fees Wire Fees Checkwriting Charge
</TABLE>
1993 $2,435 $256 $520 $ 1,684
1992 $2,215 $179 $610 $ 1,544
1991 $ 325 $ 5 $ 55 $ 100
HIGH YIELD FUND:
Fiscal Year Exchange Fees Account Closeout Fees Wire Fees
1993 $6,270 $1,475 $ 890
1992 $8,140 $1,340 $ 2,020
1991 $2,465 $ 460 $ 675
SUB-ADVISER. With respect to the money market fund, FMR has entered into a
sub-advisory agreement with FMR Texas pursuant to which FMR Texas has
primary responsibility for providing portfolio investment management
services to the fund. Under the sub-advisory agreement FMR pays FMR Texas
a fee equal to 50% of the management fee payable to FMR under its current
management contract with the fund. The fees paid to FMR Texas are not
reduced by any voluntary or mandatory expense reimbursements that may be in
effect from time to time. During the fiscal periods ended November 30,
1993, 1992, and 1991 FMR paid FMR Texas fees of $320,741, $121,544 and
$24,250, respectively under the sub-advisory agreement.
DISTRIBUTION AND SERVICE PLANS
Each fund has adopted a distribution and service plan (the Plans) under
Rule 12b-1 of the 1940 Act (the Rule). The Rule provides in substance that
a mutual fund may not engage directly or indirectly in financing any
activity that is primarily intended to result in the sale of shares of the
fund except pursuant to a plan adopted by the fund under the Rule. The
Board of Trustees has adopted the plans to allow the funds and FMR to incur
certain expenses that might be considered to constitute indirect payment by
the funds of distribution expenses. Under the plans, if the payment by a
fund to FMR of management fees should be deemed to be indirect financing by
the fund of the distribution of its shares, such payment is authorized by
the fund's plan.
The plans specifically recognize that FMR, either directly or through FDC,
may use its management fee revenue, past profits or other resources,
without limitation, to pay promotional and administrative expenses in
connection with the offer and sale of the funds' shares. In addition, the
plans provide that FMR may use its resources, including its management fee
revenues, to make payments to third parties that provide assistance in
selling the funds' shares, or to third parties, including banks, that
render shareholder support services. The Trustees have not authorized
third party payments to date.
Each fund's plan has been approved by the Trustees. As required by the
Rule, the Trustees carefully considered all pertinent factors relating to
implementation of the plans prior to their approval, and have determined
that there is a reasonable likelihood that the plans will benefit the funds
and their shareholders. In particular, the Trustees noted that the plans
do not authorize payments by the funds other than those made to FMR under
its management contracts with the funds. To the extent that the plans give
FMR and FDC greater flexibility in connection with the distribution of
shares of the funds, additional sales of the funds' shares may result.
Additionally, certain shareholder support services may be provided more
effectively under the plan by local entities with whom shareholders have
other relationships. The high yield fund's plan was approved by the fund's
shareholders at their meeting on November 16, 1988. The money market
fund's plan was approved by Fidelity Court Street Trust on February 28,
1992 as the-then sole shareholder of the fund, pursuant to an Agreement and
Plan of Conversion approved by public shareholders of the fund on December
11, 1991.
The Glass-Steagall Act generally prohibits federally and state chartered or
supervised banks from engaging in the business of underwriting, selling, or
distributing securities. Although the scope of this prohibition under the
Glass-Steagall Act has not been clearly defined by the courts or
appropriate regulatory agencies, FDC believes that the Glass-Steagall Act
should not preclude a bank from performing shareholder support services or
servicing and recordkeeping functions. FDC intends to engage banks only to
perform such functions. However, changes in federal or state statutes and
regulations pertaining to the permissible activities of banks and their
affiliates or subsidiaries, as well as further judicial or administrative
decisions or interpretations, could prevent a bank from continuing to
perform all or a part of the contemplated services. If a bank were
prohibited from so acting, the Trustees would consider what actions, if
any, would be necessary to continue to provide efficient and effective
shareholder services. In such event, changes in the operation of the funds
might occur, including possible termination of any automatic investment or
redemption or other services then provided by the bank. It is not expected
that shareholders would suffer any adverse financial consequences as a
result of any of these occurrences. The funds may execute portfolio
transactions with and purchase securities issued by depository institutions
that receive payments under the plans. No preference will be shown in the
selection of investments for the instruments of such depository
institutions. In addition, state securities laws on this issue may differ
from the interpretations of federal law expressed herein, and banks and
other financial institutions may be required to register as dealers
pursuant to state law.
INTEREST OF FMR AFFILIATES
United Missouri is each fund's custodian and transfer agent. United
Missouri has entered into sub-contracts with FSC, an affiliate of FMR,
under the terms of which FSC performs the processing activities associated
with providing transfer agent and shareholder servicing functions for each
fund. United Missouri has additional sub-contracts with FSC, pursuant to
which FSC performs the calculations necessary to determine each fund's net
asset value per share and dividends and maintains the funds' accounting
records. United Missouri is entitled to reimbursement for fees paid to FSC
from FMR, which must bear these costs pursuant to its management contract
with each fund.
Prior to January 1, 1992 (in accordance with the terms of the high yield
fund's March 1, 1989 contract with FMR) the high yield fund reimbursed its
custodian and transfer agent (Shawmut Bank, N.A. from commencement of
operations to November 7, 1991, and, subsequently, United Missouri) for
fees paid to FSC for transfer agent and pricing and bookkeeping services.
The fees paid by the high yield fund's custodian bank to FSC for the fiscal
years ended November 30, 1992, and 1991 are indicated in the table below.
Fiscal Year Transfer Agent Fees Pricing and Bookkeeping Fees
1992 $ 15,595 $ 14,703
1991 $228,464 $140,129
Each fund has a distribution agreement with FDC, a Massachusetts
corporation organized on July 18, 1960. FDC is a broker-dealer registered
under the Securities Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc. The distribution agreement calls
for FDC to use all reasonable efforts, consistent with its other business,
to secure purchasers for shares of each fund, which are continuously
offered at net asset value. Promotional and administrative expenses in
connection with the offer and sale of shares are paid by FMR.
DESCRIPTION OF THE TRUSTS
TRUSTS' ORGANIZATION. Fidelity Court Street Trust (the Massachusetts
Trust) is an open-end management investment company originally organized as
a Massachusetts business trust on April 21, 1977. On August 1, 1987, the
Massachusetts Trust's name was changed from Fidelity High Yield Municipals
to Fidelity Court Street Trust. Currently, there are four funds of the
Massachusetts Trust: Spartan Connecticut Municipal High Yield Portfolio,
Fidelity High Yield Tax-Free Portfolio, Spartan Florida Municipal Income
Portfolio, and Spartan New Jersey Municipal High Yield Portfolio. The
Massachusetts Trust's Declaration of Trust permits the Trustees to create
additional funds.
Fidelity Court Street Trust II (the Delaware Trust) is an open-end
management investment company organized as a Delaware Business trust on
June 20, 1991. Currently, there are four funds of the Delaware Trust:
Fidelity Connecticut Municipal Money Market Portfolio, Spartan Connecticut
Municipal Money Market Portfolio, Spartan Florida Municipal Money Market
Portfolio, and Fidelity New Jersey Tax-Free Money Market Portfolio.
Fidelity Court Street Trust II entered into an agreement to acquire all of
the assets of Spartan Connecticut Municipal Money Market Portfolio, a
series of the Massachusetts Trust on February 28, 1992. The Delaware
Trust's Trust Instrument permits the Trustees to create additional funds.
In the event that FMR ceases to be the investment adviser to a trust or any
of its funds, the right of the trust or the fund to use the identifying
names "Fidelity" and "Spartan" may be withdrawn. There is a remote
possibility that one fund might become liable for any misstatement in its
prospectus or statement of additional information about another fund.
The assets of each trust received for the issue or sale of shares of each
of its funds and all income, earnings, profits and proceeds thereof,
subject only to the rights of creditors, are especially allocated to such
fund, and constitute the underlying assets of such fund. The underlying
assets of each fund are segregated on the books of account, and are to be
charged with the liabilities with respect to such fund and with a share of
the general expenses of their respective trusts. Expenses with respect to
the trusts are to be allocated in proportion to the asset value of their
respective funds, except where allocations of direct expense can otherwise
be fairly made. The officers of the trusts, subject to the general
supervision of the Board of Trustees, have the power to determine which
expenses are allocable to a given fund, or which are general or allocable
to all of the funds of a certain trust. In the event of the dissolution or
liquidation of a trust, shareholders of each fund of that trust are
entitled to receive as a class the underlying assets of such fund available
for distribution.
SHAREHOLDER AND TRUSTEE LIABILITY - MASSACHUSETTS TRUST. The Massachusetts
Trust is an entity of the type commonly known as "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 Massachusetts Trust
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 Massachusetts Trust or its
Trustees shall include a provision limiting the obligations created thereby
to the Massachusetts Trust and its assets. The Declaration of Trust
provides for indemnification out of each fund's property of any
shareholders held personally liable for the obligations of the fund. The
Declaration of Trust also provides that each 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.
The Declaration of Trust further provides that the Trustees, if they have
exercised reasonable care, will not be liable for any neglect or
wrongdoing, but nothing in the Declaration of Trust protects Trustees
against any liability to which they would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of their office.
SHAREHOLDER AND TRUSTEE LIABILITY - DELAWARE TRUST. The Delaware Trust is
a business trust organized under Delaware law. Delaware law provides that
shareholders shall be entitled to the same limitations of personal
liability extended to stockholders of private corporations for profit. The
courts of some states, however, may decline to apply Delaware law on this
point. The Trust Instrument contains an express disclaimer of shareholder
liability for the debts, liabilities, obligations, and expenses of the
Delaware Trust and requires that a disclaimer be given in each contract
entered into or executed by the Delaware Trust or its Trustees. The Trust
Instrument provides for indemnification out of each fund's property of any
shareholder or former shareholder held personally liable for the
obligations of the fund. The Trust Instrument also provides that each 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
Delaware law does not apply, no contractual limitation of liability was in
effect, and the fund is unable to meet its obligations. FMR believes that,
in view of the above, the risk of personal liability to shareholders is
extremely remote.
The Trust Instrument further provides that the Trustees shall not be
personally liable to any person other than the Delaware Trust or its
shareholders; moreover, the Trustees shall not be liable for any conduct
whatsoever, provided that the Trustees are not protected against any
liability to which they would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of their office.
VOTING RIGHTS - BOTH TRUSTS. Each fund's capital consists of shares of
beneficial interest. The shares have no preemptive or conversion rights;
voting and dividend rights, the right of redemption, and the privilege of
exchange are described in the Prospectus. Shares are fully paid and
nonassessable, except as set forth under the respective "Shareholder and
Trustee Liability" headings on page 24. Shareholders representing 10% or
more of a trust or one of its funds may, as set forth in the Declaration of
Trust or Trust Instrument, call meetings of the trust or fund for any
purpose related to the trust or fund, as the case may be, including, in the
case of a meeting of an entire trust, the purpose of voting on removal of
one or more Trustees.
A trust or any fund may be terminated upon the sale of its assets to (or,
in the case of the Delaware Trust and its funds, merger with) another
open-end management investment company or series thereof, or upon
liquidation and distribution of its assets. Generally such terminations
must be approved by vote of the holders of a majority of the outstanding
shares of the trust or the fund, however, the Trustees of the Delaware
Trust may, without prior shareholder approval, change the form of the
organization of the Delaware Trust by merger, consolidation, or
incorporation. If not so terminated or reorganized, the trusts and their
funds will continue indefinitely.
Under the Trust Instrument, the Trustees may, without shareholder vote,
cause the Delaware Trust to merge or consolidate into one or more trusts,
partnerships, or corporations, so long as the surviving entity is an
open-end management investment company that will succeed to or assume the
Delaware Trust registration statement, or cause the Delaware Trust to be
incorporated under Delaware law. The Delaware Trust may also invest all of
its assets in another investment company.
CUSTODIAN. United Missouri Bank, N.A., 1010 Grand Avenue, Kansas City,
Missouri, is custodian of the assets of the funds. The custodian is
responsible for the safekeeping of the funds' assets and the appointment of
subcustodian banks and clearing agencies. The custodian takes no part in
determining the investment policies of the funds or in deciding which
securities are purchased or sold by the funds. The funds may, however,
invest in obligations of the custodian and may purchase securities from or
sell securities to the custodian.
FMR, its officers and directors, its affiliated companies, and the trusts'
Trustees may from time to time have transactions with various banks,
including banks serving as custodians for certain of the funds advised by
FMR. 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. Coopers & Lybrand, One Post Office Square, Boston,
Massachusetts (high yield fund) and 1999 Bryan Street, Dallas, Texas (money
market fund) serves as the trusts' independent accountant. The auditor
examines financial statements for the funds and provides other audit, tax,
and related services.
FINANCIAL STATEMENTS
The funds' Annual Report for the fiscal year ended November 30, 1993 is a
separate report supplied with this Statement of Additional Information and
is incorporated herein by reference.
APPENDIX
The descriptions that follow are examples of eligible ratings for the
funds. A fund may, however, consider the ratings for other types of
investments and the ratings assigned by other rating organizations when
determining the eligibility of a particular investment.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S RATINGS OF STATE AND
MUNICIPAL NOTES:
Moody's ratings for state and municipal and other short-term obligations
will be designated Moody's Investment Grade (MIG, or VMIG for variable rate
obligations). This distinction is in recognition of the difference between
short-term credit risk and long-term credit risk. Factors affecting the
liquidity of the borrower and short-term cyclical elements are critical in
short-term ratings, while other factors of major importance in bond risk,
long-term secular trends for example, may be less important in the short
run. Symbols used will be as follows:
MIG-1/VMIG-1 - This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support, or
demonstrated broad-based access to the market for refinancing.
MIG-2/VMIG-2 - This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
MIG-3/VMIG-3 - This designation denotes favorable quality, with all
security elements accounted for, but there is lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may
be narrow and market access for refinancing is likely to be less well
established.
MIG-4/VMIG-4 - This designation denotes adequate quality protection
commonly regarded as required of an investment security is present and,
although not distinctly or predominantly speculative, there is specific
risk.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS OF STATE AND
MUNICIPAL NOTES:
SP-1 - Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
SP-2 - Satisfactory capacity to pay principal and interest.
SP-3 - Speculative capacity to pay principal and interest.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S MUNICIPAL BOND RATINGS:
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A - Bonds rated A possess many favorable investment attributes and are to
be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the
future.
BAA - Bonds rated Baa are considered as medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA - Bonds rated Ba are judged to have speculative elements. Their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times in the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of a desirable investment.
Assurance of interest and principal payments of or maintenance of other
terms of the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked
short-comings.
C - Bonds rated C are the lowest-rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Those bonds in the Aa, A, Baa, Ba, and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols
Aa1, A1, Baa1, Ba1, and B1.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S MUNICIPAL BOND RATINGS:
AAA - Debt rated AAA has the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal
is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated debt issues only in small
degree.
A - Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher-rated
categories.
BB - Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
B - Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual
or implied BB or BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial, or economic conditions, it is
not likely to have the capacity to pay interest and repay principal.
CC - Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C - The rating C is typically applied to debt subordinated to senior debt
which is assigned on actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed but
debt service payments are continued.
CI - The rating CI is reserved for income bonds on which no interest is
being paid.
D - Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The D rating
will also be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
The ratings from AA to CCC may be modified by the addition of a plus or
minus to show relative standing within the major rating categories.
