FIDELITY ADVISOR ANNUITY FUND
PROSPECTUS
82 DEVONSHIRE STREET
BOSTON, MASSACHUSETTS 02109
JANUARY 2, 1995
F idelity Advisor Annuity Fund (Trust) is an open-end, diversified
management investment company, commonly known as a mutual fund. The Trust
currently consists of six investment portfolios (funds), each with its own
investment objective and investment policies. Fidelity Management &
Research Company (FMR) is each fund's investment advisor. As of the date of
this Prospectus, shares of the Trust may be sold only to certain separate
accounts of Nationwide Life Insurance Company (Separate Account) to serve
as the underlying investment vehicles for variable annuity
policies issued by Nationwide Life Insurance Company.
FIDELITY ADVISOR ANNUITY OVERSEAS FUND
FIDELITY ADVISOR ANNUITY GROWTH OPPORTUNITIES FUND
FIDELITY ADVISOR ANNUITY INCOME & GROWTH FUND
FIDELITY ADVISOR ANNUITY GOVERNMENT INVESTMENT FUND
FIDELITY ADVISOR ANNUITY HIGH YIELD FUND
FIDELITY ADVISOR ANNUITY MONEY MARKET FUND
AN INVESTMENT IN FIDELITY ADVISOR ANNUITY MONEY MARKET FUND IS NEITHER
INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT, AND THERE CAN BE NO
ASSURANCE THAT THE FUND WILL MAINTAIN A STABLE $1.00 SHARE PRICE.
FIDELITY ADVISOR ANNUITY HIGH YIELD FUND INVESTS IN LOWER-QUALITY DEBT
SECURITIES, SOMETIMES CALLED "JUNK BONDS." INVESTORS SHOULD CONSIDER THAT
THESE SECURITIES CARRY GREATER RISKS, SUCH AS THE RISK OF UNTIMELY INTEREST
AND PRINCIPAL PAYMENTS, DEFAULT, AND PRICE VOLATILITY THAN HIGHER-QUALITY
DEBT SECURITIES, AND MAY PRESENT PROBLEMS OF LIQUIDITY AND VALUATION.
Particular funds may not be available in your state due to various
insurance regulations. Please check with Nationwide Life Insurance Company
for available funds. Inclusion of a fund in this Prospectus which is not
available in your state is not to be considered a solicitation. This
Prospectus should be read in conjunction with the prospectus of the
separate account of the specific insurance product which accompanies this
Prospectus.
Please read this Prospectus before investing. It is designed to provide you
with information and help you decide if a fund's goals match your own.
Retain this document for future reference.
A Statement of Additional Information (SAI) dated January 2, 1995 for the
Trust has been filed with the Securities and Exchange Commission (SEC) and
is incorporated herein by reference. The SAI is available free upon request
from Nationwide Life Insurance Company, One Nationwide Plaza, P.O. Box
182610, Columbus, Ohio 43216 or by calling 1-800- 573-5775 .
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
(registered trademark)
TABLE OF CONTENTS Page
Investment Objectives and Policies
Management, Distribution and Service Fees
The Trust and the Fidelity Organization
Performance
Portfolio Transactions
Appendix
INVESTMENT OBJECTIVES
FIDELITY ADVISOR ANNUITY OVERSEAS FUND seeks growth of capital primarily
through investments in foreign securities.
FIDELITY ADVISOR ANNUITY GROWTH OPPORTUNITIES FUND seeks to provide capital
growth by investing primarily in common stocks and securities convertible
into common stocks.
FIDELITY ADVISOR ANNUITY INCOME & GROWTH FUND seeks both income and growth
of capital by investing in a diversified portfolio of equity and
fixed-income securities with income, growth of income and capital
appreciation potential.
FIDELITY ADVISOR ANNUITY HIGH YIELD FUND seeks a combination of a high
level of income and the potential for capital gains by investing in a
diversified portfolio consisting primarily of high-yielding, fixed-income
and zero coupon securities, such as bonds, debentures and notes,
convertible securities and preferred stocks.
FIDELITY ADVISOR ANNUITY GOVERNMENT INVESTMENT FUND seeks a high level of
current income by investing primarily in obligations issued or guaranteed
by the U.S. government or any of its agencies or instrumentalities.
FIDELITY ADVISOR ANNUITY MONEY MARKET FUND seeks to obtain as high a level
of current income as is consistent with preserving capital and providing
liquidity. The fund will invest only in high quality U.S.
dollar-denominated money market securities of domestic and foreign issuers.
The investment objective of each fund is fundamental and can only be
changed by vote of a majority of the outstanding shares of the respective
fund. Except as otherwise noted, the investment limitations and policies of
each fund are not fundamental. Non-fundamental investment limitations and
policies may be changed without shareholder approval.
Risks vary based on the type of fund you choose. As is the case with
any investment in securities, investment in the funds involves certain
risks. A fund may not always achieve its objective, but it will follow the
investment policies described below in "Investment Policies."
INVESTMENT POLICIES
Further information relating to the types of securities in which each fund
may invest and the investment policies of each fund in general are set
forth in the Appendix to this Prospectus and in the Trust's SAI.
EQUITY FUNDS: Equity funds invest in common stock and other equity
securities in search of growth or a combination of growth and income. The
share value of equity funds depends heavily on stock market conditions in
the U.S. and abroad, and can also be affected by changes in interest rates
or other economic conditions. Investments in equity funds are more suitable
for investors who take a long-term approach to investing.
FIDELITY ADVISOR ANNUITY OVERSEAS FUND seeks growth of capital primarily
through investments in foreign securities. The fund defines foreign
securities as securities of issuers whose principal activities are outside
of the United States. Normally, at least 65% of the fund's total assets
will be invested in securities of issuers from at least three different
countries outside of North America (the United States, Canada, Mexico, and
Central America). The fund expects to invest most of its assets in
securities of issuers located in developed countries in these general
geographic areas: The Americas (other than the United States), the Far East
and the Pacific Basin, and Western Europe. In determining whether a
company's or organization's principal activities are in a particular
region, FMR will look at such factors as the location of assets, personnel,
sales, and earnings.
FMR expects that opportunities for capital growth will come most often from
common stock and other equity securities, and therefore, expects that
equity securities will account for the majority of the fund's investments.
However, the fund also may find opportunities for capital growth from debt
securities of any quality or maturity by reason of anticipated changes in
such factors as interest rates, currency relationships, or the credit
standing of individual issuers. The fund will not consider dividend income
as a primary factor in choosing securities, unless FMR believes the income
will contribute to the securities' growth potential.
When allocating the investments of the fund among geographic regions and
individual countries, and among assets denominated in U.S. and foreign
currencies, FMR considers various factors, such as prospects for relative
economic growth among countries, regions or geographic areas; expected
levels of inflation; government policies influencing business conditions;
and the outlook for currency relationships. Although the fund has the
authority under normal conditions to invest up to 35% of its total assets
in the U.S., FMR currently intends to manage the fund to be as fully
invested outside the U.S. as is practicable in light of the fund's cash
flow and cash needs.
Securities in which the fund may invest include common stocks of companies
or closed-end investment companies, securities such as warrants or rights
that are convertible into common stock, preferred stocks, and depositary
receipts for those securities.
The fund may invest in debt securities of any type of issuer, including
governments and governmental entities (including supranational
organizations such as the World Bank) as well as corporations and other
business organizations. The fund has no limitation on the quality of debt
securities in which it may invest. The fund may invest in lower-quality,
high-yielding debt securities (sometimes referred to as "junk bonds"),
although it intends to limit its investments in these securities to 35% of
its assets. See the section entitled "Risks of Lower-Quality Debt
Securities" for more information. FMR may invest a portion of the
fund's assets in high-quality, short-term debt securities, bank deposits
and money market instruments (including repurchase agreements) denominated
in U.S. dollars or foreign currencies. When market conditions warrant, FMR
can make temporary defensive investments without limit in U.S. government
securities or investment-grade obligations of companies incorporated in,
and having principal business activities in, the United States.
The fund may also purchase or engage in indexed securities, illiquid
investments, loans and other direct debt instruments, options and futures
contracts, repurchase agreements and securities loans, restricted
securities, and swap agreements.
CONSIDERATIONS IN INVESTING IN SHARES OF
OVERSEAS FUND:
Investing outside the U.S. involves different opportunities and different
risks from U.S. investments. FMR believes that it may be possible to obtain
significant returns from a portfolio of foreign investments, or a
combination of foreign investments and U.S. investments, and to achieve
increased diversification in comparison to a portfolio invested solely in
U.S. securities. By including international investments in your investment
portfolio, you may gain increased diversification by combining securities
from various countries and geographic areas that offer different investment
opportunities and are affected by different economic trends. At the same
time, these opportunities and trends involve risks that may not be
encountered with U.S. investments.
International investing in general may involve greater risks than U.S.
investments. There is generally less publicly available information about
foreign issuers, and there may be less government regulation and
supervision of foreign stock exchanges, brokers, and listed companies.
There may be difficulty in enforcing legal rights outside the United
States. Foreign companies generally are not subject to uniform accounting,
auditing, and financial reporting standards, practices, and requirements
comparable to those that apply to U.S. companies. Security trading
practices abroad may offer less protection to investors such as the fund.
Settlement of transactions in some foreign markets may be delayed or may be
less frequent than in the U.S., which could affect the liquidity of the
fund. Additionally, in some foreign countries, there is the possibility of
expropriation or confiscatory taxation; limitations on the removal of
securities, property, or other assets of the fund; political or social
instability; or diplomatic developments which could affect U.S. investments
in foreign countries. FMR will take these factors into consideration in
managing the fund's investments.
The fund may invest a portion of its assets in developing countries, or in
countries with new or developing capital markets. The considerations noted
above are generally intensified for these investments. These countries may
have relatively unstable governments, economies based on only a few
industries, and securities markets that trade a small number of securities.
Securities of issuers located in these countries tend to have volatile
prices and may offer significant potential for loss as well as gain. For a
discussion of foreign currencies and currency management strategies, see
the Appendix.
FIDELITY ADVISOR ANNUITY GROWTH OPPORTUNITIES FUND seeks to provide capital
growth by investing primarily in common stocks and securities convertible
into common stocks. Under normal circumstances, at least 65% of the fund's
total assets will be invested in securities of companies that FMR believes
have long-term growth potential. Growth can be considered either
appreciation of the security itself or growth of the company's earnings or
gross sales. Accordingly, these securities will pay little, if any, income,
which will be entirely incidental to the objective of capital growth.
The fund also has the ability to purchase other securities, such as
preferred stock and bonds that may produce capital growth. Securities may
be of all types or quality. The fund may invest in lower-quality, high
yielding debt securities (sometimes referred to as "junk bonds"), although
it intends to limit its investments in these securities to 35% of its
assets. See the section entitled "Risks of Lower-Quality Debt
Securities" for more information.
The fund may purchase foreign investments of all types without limitation
and may enter into foreign forward currency exchange contracts. The fund
may purchase or engage in indexed securities, illiquid investments, loans
and other direct debt instruments, options and futures contracts,
repurchase agreements and securities loans, restricted securities, reverse
repurchase agreements, swap agreements, and warrants.
The fund may make temporary investments without limit in high-quality debt
securities and money market instruments, including commercial paper,
obligations of banks or the U.S. government and repurchase agreements for
defensive purposes when, in FMR's judgment, economic or market conditions
warrant.
FIDELITY ADVISOR ANNUITY INCOME & GROWTH FUND seeks both income and growth
of capital by investing in a diversified portfolio of equity and
fixed-income securities with income, growth of income and capital
appreciation potential.
The fund will invest in equity securities, convertible securities,
preferred and common stocks paying any combination of dividends and capital
gains and in fixed-income securities. The fund also may buy securities that
are not providing dividends but offer prospects for growth of capital or
future income. The proportion of the fund's assets invested in each type of
security will vary from time to time in accordance with FMR's assessment of
economic conditions.
In selecting securities for the fund, FMR will consider such factors as the
company's financial strength, its outlook for increased dividend or
interest payments (defined herein as "growth of income") and capital gains.
In addition, industry factors and overall economic conditions may be
considered. The fund may invest in equity securities of some smaller, more
rapidly growing companies. Investing in smaller, less well-known companies,
especially those that have a narrow product line or are thinly traded,
often involves greater risk than investing in established companies with
proven track records. In selecting fixed-income securities for the fund
(such as bonds, notes, mortgage securities, convertible securities, and
short-term obligations such as bankers' acceptances, certificates of
deposit, and commercial paper), FMR will consider several factors,
including maturity, quality and expected yield.
The fund may invest in lower-quality high-yielding debt securities
(sometimes referred to as "junk bonds"). See the section entitled "Risks of
Lower-Quality Debt Securities" for more information. The fund currently
intends to limit its investments in these securities to 35% of its assets.
The fund also may invest in or engage in foreign investments, currency
contracts, indexed securities, illiquid instruments, loans and other direct
debt instruments, options and futures contracts, repurchase agreements and
securities loans, restricted securities, swap agreements, warrants, and
zero coupon bonds. The fund may, for temporary defensive purposes, invest
without limit in short-term securities.
FIXED-INCOME FUNDS: Fixed income funds invest primarily in debt securities
(e.g., bonds, debentures, notes and similar obligations). The share value
of fixed-income funds tends to vary inversely with changes in prevailing
interest rates. Shorter-term bonds are less sensitive to interest rate
changes, but longer-term bonds generally offer higher yields. It also is
important to note that high-yielding, lower quality bonds involve greater
risks, because there is a greater possibility of a financial reversal
affecting the issuer's ability to pay interest and principal on time. Share
value and yield are not guaranteed and will fluctuate based on credit
quality and changes in interest rates.
FMR will use its extensive research facilities in addition to considering
the ratings of Nationally Recognized Statistical Rating Organizations
(NRSROs) in selecting investments for the funds. Unrated securities are not
necessarily of lower quality than rated securities, but they may not be
attractive to as many buyers. This credit analysis includes consideration
of the economic feasibility of the obligation, the financial condition of
the issuer with respect to liquidity and cash flow, and political
developments that may affect credit quality. Since the risk of default is
higher for lower-quality obligations, FMR's research and analysis are an
integral part of choosing a fund's securities. Through portfolio
diversification and careful credit analysis, FMR can reduce risk, although
there can be no assurance that losses will not occur. FMR also considers
trends in the economy, in geographic areas, in various industries, and in
the financial markets.
FIDELITY ADVISOR ANNUITY HIGH YIELD FUND seeks a combination of a high
level of income and the potential for capital gains by investing in a
diversified portfolio consisting primarily of high-yielding, fixed-income
and zero coupon securities, such as bonds, debentures and notes,
convertible securities and preferred stocks.
The fund normally will invest at least 65% of its total assets in
high-yielding, income producing debt securities and preferred stocks,
including convertible and zero coupon securities. The fund may invest all
or a substantial portion of its assets in lower-quality debt securities
(sometimes referred to as "junk bonds"). Please refer to the section
entitled "Risks of Lower-Quality Debt Securities." In addition, the fund
also may invest in government securities, securities of any state or any of
its respective subdivisions, agencies or instrumentalities and securities
of foreign issuers, including securities of foreign governments. The fund
may invest up to 35% of its assets in equity securities, including common
stocks, warrants and rights.
Debt instruments include securities such as bonds, notes, convertible
bonds, and mortgage-backed or asset-backed securities; commercial paper and
other money market instruments, including repurchase agreements; and loans,
trade claims, and similar instruments representing indebtedness of a
corporate borrower. These instruments may provide for interest payments in
cash or in kind, may pay no interest, or may be in default, and may have
warrants attached or otherwise include rights to purchase common stocks.
The fund may purchase debt instruments in public offerings or through
private placements. The fund has no specific limitations on the maturity or
credit ratings of the debt instruments in which it invests.
The fund may enter into forward foreign currency contracts and may purchase
or engage in foreign investments, indexed securities, illiquid investments,
loans and other direct debt instruments, options and futures contracts,
repurchase agreements and securities loans, restricted securities, reverse
repurchase agreements, and swap agreements.
RISKS OF LOWER-QUALITY DEBT SECURITIES
Lower-quality debt securities usually are defined as securities rated Ba or
lower by Moody's Investors Service, Inc. (Moody's) or BB or lower by
Standard & Poor's Corporation (S&P). Lower-quality debt securities are
considered speculative and involve greater risk of loss than higher quality
debt securities, and are more sensitive to changes in the issuer's capacity
to pay. This is an aggressive approach to income investing.
The 1980s saw a dramatic increase in the use of lower-quality debt
securities to finance highly leveraged corporate acquisitions and
restructurings. Past experience may not provide an accurate indication of
the future performance of lower-quality debt securities, especially during
periods of economic recession. In fact, from 1989 to 1991, the percentage
of lower-quality debt securities that defaulted rose significantly above
prior levels, although the default rate decreased in 1992 and 1993.
Lower-quality debt securities may be thinly traded, which can adversely
affect the prices at which these securities can be sold and can result in
high transaction costs. If market quotations are not available,
lower-quality debt securities will be valued in accordance with standards
set by the Board of Trustees, including the use of outside pricing
services. Judgment plays a greater role in valuing lower-quality debt
securities than securities for which more extensive quotations and
last-sale information are available. Adverse publicity and changing
investor perceptions may affect the ability of outside pricing services to
value lower-quality debt securities and a fund's ability to sell these
securities.
The market prices of lower-quality debt securities may decline
significantly in periods of general economic difficulty, which may follow
periods of rising interest rates. During an economic downturn or a
prolonged period of rising interest rates, the ability of issuers of
lower-quality debt to service their payment obligations, meet projected
goals, or obtain additional financing may be impaired.
The fund may choose, at its own 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 interest of fund shareholders.
The considerations discussed above for lower-quality debt securities also
apply to lower quality, unrated debt instruments of all types, including
loans and other direct indebtedness of businesses with poor credit
standing. Unrated debt instruments are not necessarily of lower quality
than rated securities, but they may not be attractive to as many buyers. A
fund relies more on FMR's credit analysis when investing in debt
instruments that are unrated. Please refer to the Appendix for a discussion
of Moody's and S&P ratings.
FIDELITY ADVISOR ANNUITY GOVERNMENT INVESTMENT FUND seeks a high level of
current income by investing primarily in obligations issued or guaranteed
by the U.S. government or any of its agencies or instrumentalities. Under
normal circumstances, at least 65% of the fund's total assets will be
invested in government securities.
The fund invests primarily in obligations issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities (U.S. government
securities), including U.S. Treasury bonds, notes and bills, Government
National Mortgage Association mortgage-backed pass-through certificates
(Ginnie Maes) and mortgage-backed securities issued by the Federal National
Mortgage Association (Fannie Maes) or the Federal Home Loan Mortgage
Corporation (Freddie Macs). The U.S. government securities the fund invests
in may or may not be fully backed by the U.S. government. The fund may
enter into repurchase agreements involving any securities in which it may
invest and also may enter into reverse repurchase agreements. The fund
considers "government securities" to include U.S. government securities
subject to repurchase agreements. The fund is not restricted as to the
percentage of its assets that may be invested in any one type of U.S.
government security. The fund may for temporary defensive purposes invest
without limit in U.S. government securities having a maturity of 365 days
or less. The fund may invest in delayed delivery transactions, options and
futures contracts, indexed securities, swap agreements and zero coupon
bonds. In seeking current income, the fund also may consider the potential
for capital gain.
FIDELITY ADVISOR ANNUITY MONEY MARKET FUND seeks to obtain as high a
level of current income as is consistent with preserving capital and
providing liquidity. FMR will invest the fund's assets in the following
types of high-quality, U.S. dollar-denominated money market securities of
domestic and foreign issuers:
(solid bullet) obligations of financial institutions, such as banks,
savings and loan institutions, insurance companies and mortgage bankers.
These obligations include certificates of deposit, bankers' acceptances and
time deposits.
(solid bullet) obligations of governments and their agencies or
instrumentalities.
(solid bullet) short-term obligations, including high-quality debt
obligations such as commercial paper, notes and bonds deemed to have
remaining maturities of 397 days or less.
(solid bullet) other short-term debt obligations deemed to have
remaining maturities of 397 days or less.
Many of the fund's investments are described in the APPENDIX.
The fund may invest in obligations of U.S. banks, foreign branches of
U.S. banks (Eurodollars), U.S. branches and agencies of foreign banks
(Yankee dollars), and foreign branches of foreign banks. Euro and Yankee
dollar investments involve risks that are different from investments in
securities of U.S. banks. These risks may include future unfavorable
political and economic developments, possible withholding of taxes, seizure
of foreign deposits, currency controls, interest limitations or other
governmental restrictions which might affect payment of principal or
interest. Additionally, there may be less public information available
about foreign banks and their branches. Foreign branches of foreign banks
are not regulated by U.S. banking authorities, and generally are not bound
by accounting, auditing and financial reporting standards comparable to
U.S. banks. Although FMR carefully considers these factors when making
investments, the fund does not limit the amount of its assets which can be
invested in any one type of instrument or in any foreign country.
Investments in MONEY MARKET FUND earn income at current money market
rates. The fund's ability to achieve its investment objective depends on
the quality and maturity of its investments. Although its policies are
designed to help maintain a stable $1.00 share price, all money market
instruments can change in value when interest rates or issuers'
creditworthiness change, or if an issuer or guarantor of a security fails
to pay interest or principal when due. If these changes in value were large
enough, the fund's share price could deviate from $1.00. In general,
securities with longer maturities are more vulnerable to price changes,
although they may provide higher yields.
Money Market Fund will invest more than 25% of its total assets in the
securities of the financial services industry, under normal conditions.
Companies in the financial services industry are subject to various risks
related to that industry, such as government regulation, changes in
interest rates, and exposure on loans, including loans to foreign
borrowers. The fund's performance may be affected by conditions affecting
the financial services industry.
QUALITY. Pursuant to procedures adopted by the Board of Trustees, Money
Market Fund may purchase only high quality securities that FMR believes
present minimal credit risks. To be considered high quality, a security
must be 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.
High quality securities are divided into "first tier" and "second tier"
securities. FIRST TIER SECURITIES are those deemed to be in the highest
rating category (e.g., Standard & Poor's A-1) while SECOND TIER SECURITIES
are those deemed to be in the second highest rating category (e.g.,
Standard & Poor's A-2). If a security is deemed to have received different
ratings by different rating services, at least two rating services must
have assigned the higher rating in order for FMR to determine eligibility
on the basis of that higher rating. Based on procedures adopted by the
Board of Trustees, FMR may determine that an unrated security is of
equivalent quality to a rated first or second tier security.
DIVERSIFICATION. The fund may not invest more than 5% of its total
assets in second tier securities. In addition, the fund may not invest more
than 1% of its total assets or $1 million (whichever is greater) in the
second tier securities of a single issuer.
MATURITY POLICIES. The fund currently intends to limit its investments
to securities deemed to have remaining maturities of 397 days or less and
to maintain a dollar-weighted average maturity of 90 days or less. When
determining the maturity of a security, the fund may look to an interest
rate reset or demand feature.
INVESTMENT LIMITATIONS
Each fund has adopted the following investment limitations designed to
reduce investment risk. The policies and limitations discussed below, and
in the Appendix, are considered at the time of purchase. With the exception
of each fund's borrowing policy, the sale of portfolio securities is not
required in the event of a subsequent change in circumstances.
DIVERSIFICATION: These limitations do not apply to U.S. government
securities.
(small solid bullet) As a non-fundamental policy, Money Market Fund
normally may not invest more than 5% of its total assets in the securities
of any single issuer. Under certain conditions, however, the fund may
invest up to 10% of its total assets in the first tier securities of a
single issuer for up to three business days. As a fundamental policy, the
fund will not purchase a security if, as a result more than 25% of its
total assets would be in a particular industry, except that the fund will
invest more than 25% of its total assets in the financial services
industry, under normal conditions.
(small solid bullet) As fundamental policies, Overseas, Growth
Opportunities, Income & Growth, High Yield and Government Investment Funds
each may not, with respect to 75% of its total assets, purchase a
security if, as a result, more than 5% of its total assets would be
invested in the securities of any issuer or it would hold more than 10% of
the outstanding voting securities of that issuer.
(small solid bullet) Also, as a fundamental policy, Overseas, Growth
Opportunities, Income & Growth, High Yield and Government Investment Funds
each may not purchase the securities of any issuer if, as a result,
more than 25% of its total assets would be invested in the securities of
issuers having their principal business activities in the same industry.
BORROWING: The following limitations are not fundamental.
(small solid bullet) Each fund may borrow money or engage in reverse
repurchase agreements for temporary or emergency purposes , and Money
Market Fund may engage in reverse repurchase agreements for any
purpose , but not in an amount exceeding 25% of a fund's net
assets. Each fund may borrow money only from banks or other funds advised
by FMR and will not purchase securities when borrowing s
(excluding reverse repurchase agreements for Money Market Fund)
exceed 5% of i ts total assets.
LENDING: Percentage limitation is fundamental.
(small solid bullet) Each fund will limit loans in the aggregate to 33 1/3%
of its total assets.
Each fund may borrow money from and lend money to other mutual funds
advised by FMR or its affiliates, subject to certain restrictions (see the
Appendix). If a fund borrows money, its share price may be subject to
greater fluctuation until the borrowing is paid off. To this extent,
purchasing securities when borrowings are outstanding may involve an
element of leverage.
INTERNAL REVENUE SERVICE (IRS) LIMITATIONS. In addition to the above, each
fund also follows certain limitations imposed by the IRS on separate
accounts of insurance companies relating to the tax-deferred status of
variable contracts. More specific information may be contained in the
separate account prospectus.
MANAGEMENT, DISTRIBUTION AND SERVICE FEES
1.MANAGEMENT AND OTHER SERVICES. For managing its investments and business
affairs, each fund pays a monthly fee to FMR.
Each fund pays a monthly fee to FMR based on a basic fee rate, which is the
sum of two components:
1. A group fee rate based on the monthly average net assets of all of the
mutual funds advised by FMR. This rate for equity funds cannot rise above
.52% and it drops as total assets rise. For example, the effective equity
fund group fee rate for October 31, 1994, was .3191 %. The group fee
rate for fixed-income funds cannot rise above .37% and it drops as
total assets rise. For example, the effective fixed-income group fee rate
for October 31, 1994, was .1561 %.
2. An individual fund fee rate, which varies for each fund.
One-twelfth of the annual basic fee rate is applied to each fund's net
assets averaged over the most recent month, giving a dollar amount which is
the management fee for that month. For Money Market Fund, if the fund's
gross yield is 5% or less, the basic fee is the total management fee. An
income-based component is added to the basic fee only when the fund's yield
is greater than 5%. The income-based fee is 6% of that portion of the
fund's yield that represents a gross yield of more than 5% per year. The
maximum income-based component is .24%.
The following are the individual fund fee rates and total management fee
(estimated) for each fund:
TOTAL ESTIMATED
MANAGEMENT FEE
(PERCENT OF AVERAGE NET ASSETS)
INDIVIDUAL BEFORE REIMBURSEMENTS,
FUND FEE IF ANY
EQUITY PORTFOLIOS:
Overseas Fund 0.45% 0.77%(dagger)
Growth Opportunities Fund 0.30% 0.62%
Income & Growth Fund 0.20% 0.52%
FIXED INCOME PORTFOLIOS:
High Yield Fund 0.45% 0.61%
Government Investment Fund 0.30% 0.46%
Money Market Fund 0.03% 0.19%
(dagger) TOTAL FEES ARE HIGHER THAN THOSE CHARGED BY MOST DOMESTIC MUTUAL
FUNDS, BUT NOT NECESSARILY HIGHER THAN THOSE OF A TYPICAL INTERNATIONAL
FUND, DUE TO THE GREATER COMPLEXITY, EXPENSE AND COMMITMENT OF RESOURCES
INVOLVED IN INTERNATIONAL INVESTING.
Total estimated expenses (after any reimbursement) for fiscal year 1995
are as follows: Overseas Fund: 1.10%; Growth Opportunities Fund: 0.79%;
Income & Growth Fund; 0.66%; High Yield Fund; 0.81%; Government Investment
Fund: 1.00%; and Money Market Fund: 0.57%.
FMR may, from time to time, agree to reimburse a fund for management fees
and other expenses (excluding interest, taxes, brokerage commissions, and
extraordinary expenses) above a specified percentage of average net assets.
FMR retains the ability to be repaid by a fund for these expense
reimbursements in the amount that expenses fall below the limit prior to
the end of the fiscal year. Fee reimbursements by FMR will increase a
fund's yield and total return, and repayment by a fund will lower its total
return. FMR has voluntarily agreed to reimburse expenses in excess of 1.50%
of Overseas, Growth Opportunities and Income & Growth Funds' respective
average net assets and reimburse total operating expenses in excess of
1.00% of High Yield, Government Investment and Money Market Funds'
respective average net assets.
FMR has entered into sub-advisory agreements on behalf of certain funds.
Sub-advisors provide research and investment advice and research services
with respect to issuers based outside the United States and FMR may grant
sub-advisors investment management authority to buy and sell securities if
FMR believes it would be beneficial to a fund. Overseas, Income & Growth,
Growth Opportunities and High Yield have entered into sub-advisory
agreements with Fidelity Management & Research (U.K.) Inc. (FMR U.K.), in
London, England, and Fidelity Management & Research (Far East) Inc. (FMR
Far East), in Tokyo, Japan. FMR U.K. focuses primarily on issuers based in
Europe, and FMR Far East focuses primarily on issuers based in Asia and the
Pacific Basin. Under the sub-advisory agreements, FMR, and not the funds,
pays FMR U.K. and FMR Far East fees equal to 110% and 105%, respectively,
of each sub-advisor's costs incurred in connection with providing advice.
For providing investment management services, FMR pays FMR U.K. and FMR Far
East 50% of its monthly management fee with respect to each fund's
assets managed by the sub-advisor on a discretionary basis.
In addition, Overseas has entered into a sub-advisory agreement with
Fidelity International Investment Advisors (FIIA), in Pembroke, Bermuda.
FIIA, in turn, has entered into a sub-advisory agreement with its wholly
owned subsidiary Fidelity International Investment Advisors (U.K.) Limited
(FIIAL U.K.), in Kent, England. Currently, FIIAL U.K. focuses on issuers
based in countries other than the United States, including countries in
Europe, Asia, and the Pacific Basin. Under the sub-advisory agreement, FMR
pays FIIA 30% of its monthly management fee with respect to the average
market value of investments held by the fund for which FIIA has provided
FMR with investment advice. For providing investment management services,
FMR pays FIIA 50% of its monthly management fee with respect to the average
market value of investments held by the fund for which FIIA has managed on
a discretionary basis. FIIA, in turn, pays FIIAL U.K. a fee equal to 110%
of FIIAL U.K.'s costs incurred in connection with providing investment
advice and research services.
On behalf of Money Market Fund, FMR has entered into a sub-advisory
agreement with FMR Texas Inc. (FMR Texas), a Texas corporation with
principal offices at 400 East Las Colinas Boulevard in Irving, Texas.
Pursuant to the sub-advisory agreement, FMR Texas has primary
responsibility for providing investment management services. Under the
sub-advisory agreement, FMR, and not the fund, pays FMR Texas a fee equal
to 50% of the management fee payable to FMR under its management contract
with the fund. (The fees paid to FMR Texas are not reduced by any voluntary
or mandatory management fee waivers or expense reimbursements which may be
in effect from time to time.)
Each fund utilizes Fidelity Investments Institutional Operations Company
(FIIOC), 82 Devonshire Street, Boston, Massachusetts 02109, an affiliate of
FMR, to maintain the master accounts of any participating insurance
companies. Under the transfer agency agreement with FIIOC, each fund pays
fees based on the type, size and number of transactions made by
shareholders of each fund.
Each fund also has an agreement with Fidelity Service Co. (FSC), 82
Devonshire Street, Boston, Massachusetts 02109, an affiliate of FMR, under
which each fund pays FSC to calculate its daily share price and to maintain
the portfolio and general accounting records of each fund and to administer
each fund's securities lending program. The fees for pricing and
bookkeeping services are based on each fund's average net assets, but must
fall within a range of $20,000 to $$750,000 per year for Money Market Fund
and $45,000 to $750,000 per year for Overseas, Growth Opportunities, Income
& Growth, Government Investment, and High Yield Funds, respectively.
Each fund's operating expenses include custodial, legal and accounting
fees, charges to register a Trust or fund with federal and state regulatory
authorities and other miscellaneous expenses.
2.DISTRIBUTION AND SERVICE PLAN. Each fund has adopted a Distribution and
Service Plan (the Plans) pursuant to Rule 12b-1 under the Investment
Company Act of 1940. No separate payments are authorized to be made by the
funds under the Plans. Rather, each Plan recognizes that FMR may use its
management fee or other resources to pay expenses associated with
activities primarily intended to result in the sale of each fund's shares.
Each Plan also provides that FMR may make payments from these sources to
third parties, although the Board has not authorized these payments to
date.
DISTRIBUTIONS AND TAXES
For a discussion of the tax status of your variable contract, refer to your
insurance company's separate account prospectus. It is suggested you keep
all statements you receive to assist in your personal recordkeeping.
It is expected that shares of the funds will be held under the terms of
variable annuity contracts. Under current tax law, dividends or capital
gain distributions from any fund are not currently taxable when left to
accumulate within a variable annuity contract. Distributions from a
variable contract prior to age 59 1/2 may be subject to a 10% penalty tax
in addition to ordinary income tax.
Each fund is treated as a separate entity for federal income tax purposes
and intends to pay out all of its net investment income and net realized
capital gains, if any, each year. Dividends from Money Market Fund are
declared daily and paid monthly. Income & Growth Fund, Government
Investment Fund and High Yield Fund each distributes its dividends
quarterly and Growth Opportunities and Overseas Funds will distribute any
dividends each year. Normally, net realized capital gains, if any, are
distributed each year for the funds. Such income and capital gains are
automatically reinvested in additional shares for the funds.
Each fund (except Money Market) makes dividend and capital gain
distributions on a per-share basis. After every distribution from each of
these funds, the fund's share price drops by the amount of the
distribution. Because dividends and capital gain distributions are
reinvested, the total value of an account will not be affected because,
although the shares will have a lower price, there will be correspondingly
more of them.
THE TRUST AND THE FIDELITY ORGANIZATION
The Trust is an open-end diversified management investment company
organized as a Massachusetts business trust on July 15, 1994. The Trust has
its own Board of Trustees that supervises fund activities and reviews each
fund's contractual arrangements with companies that provide each fund with
services. As a Massachusetts business trust, the Trust is not required to
hold annual shareholder meetings, although special meetings may be called
for a specific fund or the Trust as a whole for purposes such as electing
or removing Trustees, changing fundamental investment policies or
limitations or approving a management contract or plan of distribution.
The number of shares entitled to vote is based on the dollar value of an
insurance company's investment in a fund. An insurance company issuing
a variable contract that participates in the Trust will vote shares in the
separate account as required by law and interpretations thereof, as may be
amended or changed from time to time. In accordance with current law and
interpretations thereof, a participating insurance company is required to
request voting instructions from policyowners and must vote fund shares
held in the separate account in proportion to the voting instructions
received. For a further discussion, please refer to the prospectus of your
insurance company's separate account. There is a remote possibility that
one fund might become liable for any misstatement in the Prospectus about
another fund.
Fidelity Investments is one of the largest investment management
organizations in the U nited States and has its principal business
address at 82 Devonshire Street, Boston, Massachusetts . It includes
a number of different subsidiaries and divisions which provide a
variety of financial services and products. The funds employ various
Fidelity companies to perform activities required for their
operation .
Fidelity Management & Research Company, the funds' manager, is the original
Fidelity company founded in 1946. It provides a number of mutual funds and
other clients with investment research and portfolio management services.
It maintains a large staff of experienced investment personnel and a full
complement of related support facilities. As of October 31, 1994, FMR
advised funds having approximately 21 million shareholder accounts
with a total value of more than $ 250 billion. FMR U.K., FMR Far
East, and FMR Texas are wholly owned subsidiaries of FMR while FIIA is
wholly owned by a subsidiary of FMR, Fidelity International Limited
(FIL) . The sub-advisors provide research, investment advice and
portfolio management services for certain funds advised by FMR with respect
to foreign securities (FMR U.K., FMR Far East, FIIA) and money market
instruments (FMR Texas). Fidelity Distributors Corporation
distributes shares for the Fidelity funds.
FMR Corp. is the ultimate parent company of FMR, FMR Texas, FMR U.K.,
and FMR Far East. Through ownership of voting common stock, members of the
Edward C. Johnson 3d family form a controlling group with respect to FMR
Corp. Changes may occur in the Johnson family group, through death or
disability, which would result in changes in each individual family
members' holding of stock. Such changes could result in one or more family
members becoming holders of over 25% of the stock. FMR Corp. has received
an opinion of counsel that changes in the composition of the Johnson family
group under these circumstances would not result in the termination of the
funds' management or distribution contracts and, accordingly, would not
require a shareholder vote to continue operation under those contracts. The
Johnson family group also owns, directly or indirectly, more than 25% of
the voting common stock of FIL.
Margaret L. Eagle is manager and vice president of Fidelity Advisor
Annuity High Yield Fund. Ms. Eagle also manages Advisor High Yield and
several pension fund accounts. Previously, she managed Spartan High Income,
and High Income (now Capital & Income). She also managed the bond portion
of Puritan. Ms. Eagle joined Fidelity in 1980.
Robert Haber is manager and vice president of Fidelity Advisor
Annuity Income & Growth Fund . Mr. Haber also manages Advisor
Income & Growth, Balanced and co-manages Global Balanced. Previously, he
managed Convertible Securities. Mr. Haber joined Fidelity in 1985.
John R. Hickling is manager of Fidelity Advisor Annuity Overseas
Fund . Mr. Hickling also manages Advisor Overseas, Japan, Overseas, VIP:
Overseas and International Growth & Income. Previously he managed Emerging
Markets, Europe and Pacific Basin. Mr. Hickling joined Fidelity in 1982.
Curtis Hollingsworth is manager and vice president of Fidelity Advisor
Annuity Government Investment Fund. Mr. Hollingsworth also manages
Advisor Government Investment , Fidelity Short-Intermediate
Government, Government Securities, Institutional Short-Intermediate
Government, Spartan Limited Maturity Government Bond, Spartan Long-Term
Government Bond and Spartan Short-Intermediate Government. He joined
Fidelity in 1983.
George A. Vanderheiden is manager and vice president of Fidelity Advisor
Annuity Growth Opportunities Fund. Mr. Vanderheiden also manages
Advisor Growth Opportunities, Destiny I and Destiny II. Mr. Vanderheiden is
a managing director of FMR Corp. Mr. Vanderheiden joined Fidelity in 1971.
VALUATION
The NAV refers to the worth of one share. NAV is computed by adding the
value of each fund's security holdings and other assets, deducting
liabilities and dividing the result by the number of shares outstanding.
NAV normally is calculated as of the close of business of the NYSE
(normally 4:00 p.m. Eastern time). The funds are open for business and NAV
is calculated each day the NYSE is open for trading. Money Market Fund's
securities are valued on the basis of amortized cost. This means of
valuation assumes a steady rate of amortization of any premium or discount
from the date of purchase until maturity instead of looking at actual
changes in market value. Each of the other fund's securities and other
assets are valued primarily on the basis of market quotations furnished by
pricing services, or if quotations are not available or if the values
have been materially affected by events occurring after the closing of a
foreign market, by a method that the Board of Trustees believes
accurately reflects fair value. Foreign securities are valued based on
quotations from the primary market in which they are traded and are
converted from the local currency into U.S. dollars using current exchange
rates.
PURCHASES AND REDEMPTIONS
Investments in each fund may be made only by separate accounts established
and maintained by insurance companies for the purpose of funding variable
insurance contracts. Please refer to the prospectus of your insurance
company's separate account for information on how to invest and redeem from
each fund.
Investments by separate accounts in each fund are expressed in terms of
full and fractional shares of each fund. Each Participating insurance
company receives orders from its variable contract owners to purchase or
redeem shares of the funds each Business Day. That night, all orders
received by that insurance company on that Business Day are aggregated, and
the insurance company places a net purchase or redemption order for shares
of one or more funds the morning of the next Business Day. These orders are
generally executed at the NAV that was next computed at the close of the
previous Business Day in order to provide a match between the variable
contract owners' orders to the insurance companies and the insurance
companies' orders to a fund. In some cases, an insurance company's orders
for fund shares may be executed at the NAV next computed after the order is
actually transmitted to a fund.
The offering of shares of a fund may be suspended for a period of time and
each fund reserves the right to reject any purchase order. Purchase orders
may be refused if, in FMR's opinion, they are of a size that would disrupt
the management of a fund.
Redemption proceeds will normally be wired to the insurance company on the
next business day after receipt of the redemption instructions by a fund
but in no event later than 7 days following receipt of instructions. Each
fund may suspend redemptions or postpone payment dates on days when the
NYSE is closed (other than weekend or holidays), when trading on the
NYSE is restricted, or as permitted by the Securities and Exchange
Commission.
PERFORMANCE
Each fund's performance may be quoted in advertising in terms of yield and
total return if accompanied by performance of your insurance company's
separate account. Performance is based on historical results and not
intended to indicate future performance. For additional performance
information, contact your insurance company for a free annual report.
Money Market Fund's YIELD refers to the income generated by an investment
in the fund over a specified seven day period, expressed as an annual
percentage rate. Its EFFECTIVE YIELD is calculated similarly, but assumes
that the income earned from investments is reinvested. Money Market Fund's
effective yield will tend to be slightly higher than its yield because of
this compounding effect.
YIELD is a way of showing the rate of income a fund earns on its
investments as a percentage of the fund's share price. To calculate yield,
a fund takes the dividend and interest income, if any, it earned from its
portfolio of investments for a specified 30-day period (net of expenses),
divides it by the number of its shares entitled to receive dividends and
expresses the result as an annualized percentage rate based on a
fund's share price at the end of the 30-day period. Yields are calculated
according to accounting methods that are standardized for all stock and
bond funds. Because yield accounting methods differ from the methods used
for other accounting purposes, a fund's yield may not equal its
distribution rate, the income paid to an account or the income reported in
the fund s' financial statements.
TOTAL RETURNS are based on the overall dollar or percentage change in value
of a hypothetical investment in each fund, including changes in share price
(except for Money Market Fund) and assuming each fund's dividends and
capital gain distributions, if any, are reinvested. A CUMULATIVE TOTAL
RETURN reflects a fund's performance over a stated period of time. An
AVERAGE ANNUAL TOTAL RETURN reflects the hypothetical annually compounded
return that would have produced the same cumulative total return if a
fund's performance had been constant over the entire period. Because
average annual returns tend to smooth out variations in a fund's return,
you should recognize that they are not the same as actual year-by-year
results. To illustrate the components of overall performance, a fund may
separate its cumulative and average annual returns into income results and
capital gain or loss.
A fund may quote its ADJUSTED NET ASSET VALUES, including all distributions
paid, and may be averaged over specified periods. A fund may use these
averages to calculate its MOMENTUM INDICATORS, which track changes in
adjusted net asset values over specified periods.
YIELDS AND TOTAL RETURNS QUOTED FOR THE FUNDS INCLUDE THE EFFECT OF
DEDUCTING EACH FUND'S EXPENSES, BUT MAY NOT INCLUDE CHARGES AND EXPENSES
ATTRIBUTABLE TO ANY PARTICULAR INSURANCE PRODUCT. SINCE SHARES OF THE FUNDS
MAY CURRENTLY ONLY BE PURCHASED THROUGH A VARIABLE ANNUITY CONTRACT, YOU
SHOULD CAREFULLY REVIEW THE PROSPECTUS OF THE INSURANCE PRODUCT YOU HAVE
CHOSEN FOR INFORMATION ON RELEVANT CHARGES AND EXPENSES. Excluding these
charges from quotations of each fund's performance has the effect of
increasing the performance quoted. You should bear in mind the effect of
these charges when comparing a fund's performance to that of other mutual
funds.
PORTFOLIO TRANSACTIONS
FMR uses various brokerage firms to carry out a fund's equity security
transactions. Money market obligations and government securities are
generally traded in the over-the-counter market through broker-dealers. A
broker-dealer makes a market for securities by offering to buy at one price
and sell at a slightly higher price. The difference is known as a spread.
Foreign securities are normally traded in foreign markets. In transactions
on foreign stock exchanges, brokers' commissions are generally fixed and
are often higher than in the United States, where commissions are
negotiated. Since FMR, directly or through affiliated sub-advisers, places
a large number of transactions, including those of Fidelity's other funds,
the funds pay lower commissions than those paid by individual investors,
and broker-dealers are willing to work with the funds on a more favorable
spread. Certain funds will pay commissions in connection with transactions
in futures contracts and options.
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) and Fidelity Brokerage Services, Ltd. (FBSL), subsidiaries of
FMR Corp., if commissions are fair, reasonable, and comparable to
commissions charged by non-affiliated, qualified brokerage firms for
similar services.
FMR may also allocate brokerage transactions to a fund's custodian, acting
as a broker-dealer, or other broker-dealers, so long as transaction quality
and commission rates are comparable to those of other qualified
broker-dealers, where the broker-dealer will credit a portion of the
commissions paid toward payment of a fund's expenses. These expenses
currently include transfer agent fees and custodian fees. The custodian may
credit a portion of the commissions paid toward payment of a fund's
custodian charges.
Higher commissions may be paid to those firms that provide research,
valuation and other services to the extent permitted by law. FMR also is
authorized to allocate brokerage transactions to FBSI in order to secure
from FBSI research services produced by third party, independent entities.
FMR may use this research information in managing each fund's assets, as
well as assets of other clients.
When consistent with its investment objective, each fixed-income fund may
engage in short-term trading. Also, a security may be sold and another of
comparable quality simultaneously purchased to take advantage of what FMR
believes to be a temporary disparity in the normal yield relationship of
the two securities.
The frequency of portfolio transactions - the turnover rate - will vary
from year to year depending on market conditions. The annualized
portfolio turnover rates for Overseas, Growth Opportunities, Income &
Growth, High Yield and Government Investment are not expected to exceed
50%, 51%, 204%, 126% and 333%, respectively, in the first fiscal
period. Because a high turnover rate increases transaction costs, FMR
carefully weighs the anticipated benefits of short-term investing against
these consequences.
APPENDIX
The following paragraphs provide a brief description of securities in which
the funds may invest and transactions they may make. The funds are not
limited by this discussion, however, and may purchase other types of
securities and enter into other types of transactions if they are
consistent with a fund's investment objective and policies.
MONEY MARKET refers to the marketplace where short-term, high grade debt
securities are traded and includes U.S. government obligations, commercial
paper, certificates of deposit and bankers' acceptances, time deposits and
short-term corporate obligations. Money market instruments may carry fixed
rates of return or have variable or floating interest rates.
COMMERCIAL PAPER represents short-term obligations issued by banks,
broker-dealers, corporations and other entities for purposes such as
financing their current operations.
CERTIFICATES OF DEPOSIT represent a commercial bank's obligations to repay
funds deposited with it earning specified rates of interest over given
periods.
BANKER'S ACCEPTANCES are obligations of a bank to pay a draft which has
been drawn on it by a customer. These obligations are backed by large banks
and usually backed by goods in international trade.
TIME DEPOSITS are non-negotiable deposits in a banking institution earning
a specified interest rate over a given period of time.
U.S. GOVERNMENT OBLIGATIONS are debt securities issued or guaranteed as to
principal and interest by the U.S. Treasury or by an agency or
instrumentality of the U.S. government. Not all U.S. government obligations
are backed by the full faith and credit of the United States. For example,
securities issued by the Federal Farm Credit Bank or by the Federal
National Mortgage Association are supported by the agency's right to borrow
money from the U.S. Treasury under certain circumstances. Securities issued
by the Federal Home Loan Bank are supported only by the credit of the
agency. There is no guarantee that the government will support these types
of securities, and therefore they involve more risk than other government
obligations.
CORPORATE OBLIGATIONS are bonds and notes issued by corporations and other
business organizations in order to finance their long-term credit needs.
ASSET-BACKED SECURITIES may include pools of mortgages, loans,
receivables or other assets. Payment of principal and interest may be
largely dependent upon the cash flows generated by the asset backing the
securities.
DELAYED-DELIVERY TRANSACTIONS. Securities may be bought and sold on a
when-issued or delayed-delivery basis, with payment and delivery taking
place at a future date. The market value of securities purchased in this
way may change before the delivery date which could increase fluctuations
in a fund's yield. Ordinarily, a fund will not earn interest on securities
purchased until they are delivered.
FOREIGN CURRENCIES. The value of a fund's investments, and the value of
dividends and interest earned by a fund, may be significantly affected by
changes in currency exchange rates. Some foreign currency values may be
volatile, and there is the possibility of governmental controls on currency
exchange or governmental intervention in currency markets, which could
adversely affect the fund. Although FMR may attempt to manage currency
exchange rate risks, there is no assurance that FMR will do so at an
appropriate time or that FMR will be able to predict exchange rates
accurately. For example, if FMR increases a fund's exposure to a foreign
currency, and that currency's value subsequently falls, FMR's currency
management may result in increased losses to the fund. Similarly, if FMR
hedges a fund's exposure to a foreign currency, and that currency's value
rises, the fund will lose the opportunity to participate in the currency's
appreciation.
Money Market Fund may not use investment techniques which are
inconsistent with the fund's goal of maintaining a stable share price.
CURRENCY MANAGEMENT. The relative performance of foreign currencies is an
important factor in a fund's performance. FMR may manage a fund's exposure
to various currencies to take advantage of different yield, risk, and
return characteristics that different currencies can provide for U.S.
investors.
To manage exposure to currency fluctuations, a fund may enter into forward
currency exchange contracts (agreements to exchange one currency for
another at a future date) or currency swap agreements, buy and sell options
and futures contracts relating to foreign currencies, and purchase
securities indexed to foreign currencies. A fund will use currency forward
contracts in the normal course of business to lock in an exchange rate in
connection with purchases and sales of securities denominated in foreign
currencies. Other currency management strategies allow FMR to hedge
portfolio securities, to shift investment exposure from one currency to
another, or to attempt to profit from anticipated declines in the value of
a foreign currency relative to the U.S. dollar. There is no limitation on
the amount of a fund's assets that may be committed to currency management
strategies.
Money Market Fund may not use investment techniques which are
inconsistent with the fund's goal of maintaining a stable share price.
FOREIGN INVESTMENTS involve additional risks. Foreign securities and
securities denominated in or indexed to foreign currencies may be affected
by the strength of foreign currencies relative to the U.S. dollar, or by
political or economic developments in foreign countries. Foreign companies
may not be subject to accounting standards or governmental supervision
comparable to U.S. companies, and there may be less public information
about their operations. Foreign markets may be less liquid or more volatile
than U.S. markets, and may offer less protection to investors such as the
funds. In addition to the political and economic factors that can affect
foreign securities, a governmental issuer may be unwilling to repay
principal and interest when due, and may require that the conditions for
payment be renegotiated. These factors could make foreign investments,
especially those in developing countries more volatile. FMR considers these
factors in making investments for the funds.
The funds may enter into currency forward contracts (agreements to exchange
one currency for another at a future date) to manage currency risks and to
facilitate transactions in foreign securities. Although currency forward
contracts can be used to protect a fund from adverse exchange rate changes,
they involve a risk of loss if FMR fails to predict foreign currency values
correctly.
Money Market Fund may not use investment techniques which are
inconsistent with the fund's goal of maintaining a stable share price.
Pursuant to certain state insurance regulations, each fund may not invest
more than 20% of its assets in any one foreign country. Each fund may have
an additional 15% invested in securities of issuers located in any one (but
only one) of the following countries: Australia, Canada, France, Japan, the
United Kingdom or Germany.
ILLIQUID INVESTMENTS. Overseas and High Yield fund may invest up to
15% , Growth Opportunities, Income & Growth and Government Investment may
invest up to 10% and Money Market will invest less than 10% of its
assets in illiquid investments. Under the supervision of the Board of
Trustees, FMR determines the liquidity of each fund's investments. The
absence of a trading market can make it difficult to ascertain a market
value for illiquid investments. Disposing of illiquid investments may
involve time-consuming negotiation and legal expenses, and it may be
difficult or impossible for a fund to sell them promptly at an acceptable
price.
INDEXED SECURITIES values are linked to currencies, interest rates,
commodities, indices, or other financial indicators. Most indexed
securities are short to intermediate term fixed-income securities whose
values at maturity or interest rates rise or fall according to the change
in one or more specified underlying instruments. Indexed securities may be
positively or negatively indexed (i.e., their value may increase or
decrease if the underlying instrument appreciates), and may have return
characteristics similar to direct investments in the underlying instrument
or to one or more options on the underlying instrument. Indexed securities
may be more volatile than the underlying instrument itself.
Money Market Fund may not use investment techniques which are
inconsistent with the fund's goal of maintaining a stable share price.
INTERFUND BORROWING PROGRAM. Each 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. The funds 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. Growth
Opportunities, Overseas and Income & Growth Funds each will not lend more
than 5% of its assets, High Yield and Government Investment Funds each will
not lend more than 7.5% of its assets and Money Market Fund will not lend
more than 10% of its assets to other funds, and will not borrow through
the program if, after doing so, total outstanding borrowings would exceed
15% of total assets. Loans may be called on one day's notice, and a fund
may have to borrow from a bank at a higher interest rate if an interfund
loan is called or not renewed. Any delay in repayment to a lending fund
could result in a lost investment opportunity or additional borrowing
costs.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS are interests in amounts owed by a
corporate, governmental or other borrower to another party. They may
represent amounts owed to lenders or lending syndicates (loans and loan
participations), to suppliers of goods or services (trade claims or other
receivables), or to other parties. Direct debt instruments involve the risk
of loss in case of default or insolvency of the borrower. Direct debt
instruments may offer less legal protection to a fund in the event
of fraud or misrepresentations. In addition, loan participations involve a
risk of insolvency of the lending bank or other financial intermediary.
Direct debt instruments may also include standby financing commitments that
obligate a fund to supply additional cash to the borrower on demand.
Money Market Fund may not use investment techniques which are
inconsistent with the fund's goal of maintaining a stable share price.
MORTGAGE-BACKED SECURITIES are issued by government entities and
non-government entities such as banks, mortgage lenders, or other financial
institutions.
A mortgage-backed security may be an obligation of the issuer backed by a
mortgage or pool of mortgages or a direct interest in an underlying pool of
mortgages. Some mortgage-backed securities, such as collateralized mortgage
obligations or CMOs, make payments of both principal and interest at a
variety of intervals; others make semiannual interest payments at a
predetermined rate and repay principal at maturity (like a typical bond).
Mortgage-backed securities are based on different types of mortgages
including those on commercial real estate or residential properties. Other
types of mortgage-backed securities will likely be developed in the future,
and each fund may invest in them if FMR determines they are consistent with
a fund's investment objective and policies.
The value of mortgage-backed securities may change due to shifts in the
market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Non-government
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment
risk. Prepayment, which occurs when unscheduled or early payments are made
on the underlying mortgages, may shorten the effective maturities of these
securities and may lower their total returns.
STRIPPED MORTGAGE-BACKED SECURITIES are created when a U.S. government
agency or a financial institution separates the interest and principal
components of a mortgage-backed security and sells them as individual
securities. The holder of the "principal-only" security (PO) receives the
principal payments made by the underlying mortgage-backed security, while
the holder of the "interest-only" security (IO) receives interest payments
from the same underlying security. The prices of stripped mortgage-backed
securities may be particularly affected by changes in interest rates. As
interest rates fall, prepayment rates tend to increase, which tends to
reduce prices of IOs and increase prices of POs. Rising interest rates can
have the opposite effect.
OPTIONS AND FUTURES CONTRACTS are bought and sold to manage a fund's
exposure to changing interest rates, security prices, and currency exchange
rates. Some options and futures strategies, including selling futures,
buying puts, and writing calls, tend to hedge a fund's investment against
price fluctuations. Other strategies, including buying futures, writing
puts, and buying calls, tend to increase market exposure. Options and
futures may be combined with each other or with forward contracts in order
to adjust the risk and return characteristics of the overall strategy. A
fund may invest in options and futures based on any type of security,
index, or currency, including options and futures traded on foreign
exchanges and options not traded on exchanges.
Options and futures can be volatile investments, and involve certain risks.
If FMR applies a hedge at an inappropriate time or judges market conditions
incorrectly, options and futures strategies may lower a fund's return. A
fund could also experience losses if the prices of its options and futures
positions were poorly correlated with its other investments, or if it could
not close out its positions because of an illiquid secondary market.
A fund will not hedge more than 25% of its total assets by selling
futures, buying puts, and writing calls under normal conditions. In
addition each fund will not buy futures or write puts whose underlying
value exceeds 25% of its total assets, and will not buy calls with a value
exceeding 5% of its total assets.
Money Market Fund may not use investment techniques which are
inconsistent with the fund's goal of maintaining a stable share price.
REAL ESTATE BACKED SECURITIES. Real estate industry companies may include
among others: real estate investment trusts; brokers or real estate
developers; and companies with substantial real estate holdings, such as
paper and lumber producers and hotel and entertainment companies. Companies
engaged in the real estate industry may be subject to certain risks
including: declines in the value of real estate, risks related to general
and local conditions, overbuilding and increased competition, increases in
property taxes and operating expenses, and variations in rental income.
REPURCHASE AGREEMENTS AND SECURITIES LOANS. In a repurchase agreement, a
fund buys a security at one price and simultaneously agrees to sell it back
at a higher price. A fund may also make securities loans to broker-dealers
and institutional investors, including FBSI. In the event of the bankruptcy
of the other party to either a repurchase agreement or a securities loan, a
fund could experience delays in recovering its cash or the securities it
lent. To the extent that, in the meantime, the value of the securities
purchased had decreased or the value of the securities lent had increased,
the fund could experience a loss. A fund (excluding Money Market)
may enter into a foreign repurchase agreement with respect to foreign
securities and repurchase agreements denominated in foreign currencies.
Foreign repurchase agreements may be less well secured than repurchase
agreements in U.S. markets, and may involve greater risk of default. In all
cases, FMR must find the creditworthiness of the other party to the
transaction satisfactory.
RESTRICTED SECURITIES are securities which cannot be sold to the public
without registration under the Securities Act of 1933 (restricted
securities). Unless registered for sale, these securities can only be sold
in privately negotiated transactions or pursuant to an exemption from
registration.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a fund
temporarily transfers possession of a portfolio instrument to another
party, such as a bank or broker-dealer, in return for cash. At the same
time, the fund agrees to repurchase the instrument at an agreed-upon price
and time. The funds expect that they will engage in reverse repurchase
agreements for temporary purposes such as to fund redemptions or
when they are able to invest the cash so acquired at a rate higher than the
cost of the agreement, which would increase the income earned by a fund.
Reverse repurchase agreements may increase the risk of fluctuation in the
market value of a fund's assets or in its yield.
SHORT SALES. A fund may enter into short sales with respect to stocks
underlying its convertible security holdings. These transactions may help
to hedge against the effect of stock price declines, but may result in
losses if a convertible security's price does not track the price of its
underlying equity. Convertible securities hedged with short sales are not
currently expected to exceed 15% of a fund's total assets under
normal conditions.
SWAP AGREEMENTS. As one way of managing exposure to different types
of investments, a fund may enter into interest rate swaps, currency
swaps, and other types of swap agreements such as caps, collars, and
floors. In a typical interest rate swap, one party agrees to make regular
payments equal to a floating interest rate times a "notional principal
amount," in return for payments equal to a fixed rate times the same
amount, for a specified period of time. If a swap agreement provides for
payments in different currencies, the parties might agree to exchange the
notional principal amount as well. Swaps may also depend on other prices or
rates, such as the value of an index or mortgage prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by
the other party. For example, the buyer of an interest rate cap obtains the
right to receive payments to the extent that a specified interest rate
exceeds an agreed-upon level, while the seller of an interest rate floor is
obligated to make payments to the extent that a specified interest rate
falls below an agreed-upon level. An interest rate collar combines elements
of buying a cap and selling a floor.
Swap agreements will tend to shift a fund's investment exposure from one
type of investment to another. For example, if a fund agreed to exchange
payments in dollars for payments in foreign currency, the swap agreement
would tend to decrease the fund's exposure to U.S. interest rates and
increase its exposure to foreign currency and interest rates. Caps and
floors have an effect similar to buying or writing options. Depending on
how they are used, swap agreements may increase or decrease the overall
volatility of a fund's investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically
involve a small investment of cash relative to the magnitude of risks
assumed. As a result, swaps can be highly volatile and may have a
considerable impact on a fund's performance. Swap agreements are subject to
risks related to the counterparty's ability to perform, and may decline in
value if the counterparty's creditworthiness deteriorates. A fund may also
suffer losses if it is unable to terminate outstanding swap agreements or
reduce its exposure through offsetting transactions.
Money Market Fund may not use investment techniques which are
inconsistent with the fund's goal of maintaining a stable share price.
VARIABLE OR FLOATING RATE OBLIGATIONS have interest rates that are
periodically adjusted either at specific intervals or whenever a benchmark
rate changes. Inverse floaters have interest rates that move in the
opposite direction from a benchmark, making the security's market value
more volatile.
Money Market Fund may not use investment techniques which are
inconsistent with the fund's goal of maintaining a stable share price.
WARRANTS entitle the holder to buy equity securities at a specific price
for a specific period of time. Warrants tend to be more volatile than their
underlying securities. Also, the value of the warrant does not necessarily
change with the value of the underlying securities and a warrant ceases to
have value if it is not exercised prior to the expiration date.
ZERO COUPON BONDS do not make 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.
A broker-dealer creates a DERIVATIVE ZERO by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury
Securities), TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury
Receipts) are examples of derivative zeros. Government Investment Fund has
been advised that the staff of the Division of Investment Management of the
SEC does not consider these instruments U.S. government securities as
defined by the 1940 Act. Therefore, Government Investment Fund will not
treat these obligations as U.S. government securities for purposes of its
65% portfolio composition test.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and
principal components of an outstanding U.S. Treasury bond and selling them
as individual securities. These are considered to be government
securities. Bonds issued by the Resolution Funding Corporation
(REFCORP) and the Financing Corporation (FICO) can also be separated in
this fashion. ORIGINAL ISSUE ZEROS are zero coupon securities originally
issued by the U.S. government or a government agency.
DESCRIPTION OF MOODY'S INVESTORS
SERVICE, INC.'S CORPORATE 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 over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments 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 issued so rated
can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through C in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
DESCRIPTION OF STANDARD & POOR'S
CORPORATION'S CORPORATE 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 higher-rated 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- 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 an 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 D may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations, other than those
contained in this Prospectus and in the related Statement of Additional
Information, in connection with the offer contained in this Prospectus. If
given or made, such other information or representations must not be relied
upon as having been authorized by a fund or Fidelity Distributors
Corporation . This Prospectus and the related Statement of Additional
Information does not constitute an offer by a fund or by Fidelity
Distributors Corporation to sell or to buy shares of a fund to any
person to whom it is unlawful to make such offer.
FIDELITY ADVISOR ANNUITY FUND:
Fidelity Advisor Annuity Overseas Fund, Fidelity Advisor Annuity Growth
Opportunities Fund, Fidelity Advisor Annuity Income & Growth Fund, Fidelity
Advisor Annuity Government Investment Fund, Fidelity Advisor Annuity High
Yield Fund and Fidelity Advisor Annuity Money Market Fund (the funds).
STATEMENT OF ADDITIONAL INFORMATION
January 2, 1995
This Statement is not a prospectus but should be read in conjunction
with the current Prospectus (dated January 2, 1995) for Fidelity Advisor
Annuity Fund (the Trust). Please retain this document for future
reference. Additional copies of the Prospectus or Statement of Additional
Information are available upon request from Nationwide Life Insurance
Company, One Nationwide Plaza, P.O. Box 182610, Columbus, Ohio 43216 or by
calling 1-800-573-5775.
TABLE OF CONTENTS PAGE
Investment Policies and Limitations 2
Portfolio Transactions 13
Valuation of Fund Securities 14
Performance 15
General Information 17
Additional Purchase and Redemption Information 18
Taxes 19
FMR 19
Trustees and Officers 20
Management and Other Services 21
Distribution and Service Plans 25
Contracts With Companies Affiliated With FMR 25
Description of the Trust 2 5
A ppendix 26
INVESTMENT ADVISOR
Fidelity Management & Research Company (FMR)
INVESTMENT SUB-ADVISORS
Overseas Fund:
Fidelity Management & Research (U.K.) Inc. (FMR U.K.)
Fidelity Management & Research (Far East) Inc. (FMR Far East)
Fidelity International Investment Advisors (FIIA)
Fidelity International Investment Advisors (U.K.) Limited (FIIAL U.K.)
Money Market Fund
FMR Texas Inc. (FMR Texas)
Growth Opportunities Fund, Income & Growth Fund and High Yield Fund
FMR U.K.
FMR Far East
DISTRIBUTOR
Fidelity Distributors Corporation (FDC)
TRANSFER AGENT
Fidelity Investments Institutional Operations Company (FIIOC)
CUSTODIAN(S)
Money Market Fund: Morgan Guaranty Trust Company of New York;
High Yield and Government Investment Funds: The Bank of New York;
Income & Growth and Overseas Funds: The Chase Manhattan Bank, N.A.; and
Growth Opportunities Fund: Brown Brothers Harriman & Co.
ADV.INS-1194
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 assets, or sets forth a policy regarding
quality standards, such percentage limitation or standard shall be
determined immediately after and as a result of a 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 a fund's investment
policies and limitations.
Each fund's fundamental policies and limitations may not be changed without
approval by a "majority of the outstanding voting securities" (as defined
in the Investment Company Act of 1940) of each 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.
THE FOLLOWING ARE MONEY MARKET FUND'S FUNDAMENTAL INVESTMENT LIMITATIONS
SET FORTH IN THEIR ENTIRETY. THE FUND MAY NOT:
(1) purchase the securities of any issuer (other than obligations issued or
guaranteed as to principal and interest by the United States, its agencies
or instrumentalities) if, as a result, more than 5% of its total assets
would be invested in the securities of such issuer, provided, however, that
with respect to 25% of its total assets, 10% of its assets may be invested
in the securities of any single issuer;
(2) issue senior securities, except as permitted under the Investment
Company Act of 1940;
(3) borrow money, except that the fund may (i) borrow money for temporary
or emergency purposes (not for leveraging or investment) and (ii) engage in
reverse repurchase agreements for any purpose; provided that (i) and (ii)
in combination do not exceed 33 1/3% of the fund's 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;
(4) 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;
(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, more than 25% of the fund's total
assets would be invested in the securities of companies whose principal
business activities are in the same industry, except that the fund will
invest more than 25% of its total assets in the financial services
industry;
(6) 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);
(7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments;
(8) 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; or
(9) invest in companies for the purpose of exercising control or
management.
(10) The fund may, notwithstanding any other other fundamental investment
policy or limitation, invest all of its assets in the securities of a
single open-end management investment company managed by Fidelity
Management & Research Company or an affiliate or successor with
substantially the same fundamental investment objective, policies, and
limitations as the fund.
THE FOLLOWING INVESTMENT LIMITATIONS FOR MONEY MARKET FUND ARE NOT
FUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER NOTIFICATION.
(i) The fund does not currently intend to purchase a security (other than a
security issued or guaranteed by the U.S. government or any of its agencies
or instrumentalities) if, as a result, more than 5% of its total assets
would be invested in the securities of a single issuer; provided that the
fund may invest up to 10% of its total assets in the first tier securities
of a single issuer for up to three business days.
(ii) The fund does not currently intend to sell securities short, unless it
owns or has the right to obtain securities equivalent in kind and amount to
the securities sold short, and provided that transactions in futures
contracts and options are not deemed to constitute selling securities
short.
(iii) The fund does not currently intend to 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 margin payments in
connection with futures contracts and options on futures contracts shall
not constitute purchasing securities on margin.
(iv) The fund may borrow money only (a) from a bank or from a registered
investment company or portfolio for which FMR or an affiliate serves as
investment advisor or (b) by engaging in reverse repurchase agreements with
any party. The fund will not borrow money in excess of 25% of net assets
so long as this limitation is required for certification by certain state
insurance departments. The fund will not purchase any security while
borrowings (excluding reverse repurchase agreements) 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.
(v) 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.
(vi) The fund does not currently intend to purchase or sell futures
contracts or call options. This limitation does not apply to options
attached to, or acquired or traded together with, their underlying
securities, and does not apply to securities that incorporate features
similar to options or futures contracts.
(vii) The fund does not currently intend to lend assets other than
securities to other parties, except by lending money (up to 10% of the
fund's net assets) to a registered investment company or portfolio for
which FMR or an affiliate serves as investment advisor. (This limit does
not apply to purchases of debt securities or to repurchase agreements.)
(viii) 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.
(ix) The fund does not currently intend to invest in oil, gas, or other
mineral exploration or development programs or leases.
(x) The fund does not currently intend to invest in interests in real
estate investment trusts that are not readily marketable, or to invest in
interests in real estate limited partnerships that are not listed on the
New York Stock Exchange or the American Stock Exchange or traded on the
NASDAQ National Market System.
(xi) The fund does not currently intend to invest all of its assets in the
securities of a single open-end management investment company managed by
Fidelity Management & research Company or an affiliate or successor with
substantially the same fundamental investment objective, policies, and
limitations as the fund.
Investments may be made in U.S. dollar-denominated time deposits,
certificates of deposit and bankers' acceptances of U.S. banks and their
branches located outside of the U.S., U.S. branches and agencies of foreign
banks, and foreign branches of foreign banks. The fund may also invest in
U.S. dollar-denominated securities issued or guaranteed by other U.S. or
foreign issuers, including U.S. and foreign corporations or other business
organizations, foreign governments and foreign government agencies or
instrumentalities, and U.S. and foreign financial institutions, including
savings and loan institutions, insurance companies, mortgage bankers and
real estate investment trusts, as well as banks. The fund may purchase
obligations of banks, savings and loan institutions and other financial
institutions whose creditworthiness might not otherwise meet the fund's
standards, provided that (i) the principal amount of the instrument
acquired by the fund is insured in full by the Federal Deposit Insurance
Corporation and (ii) the aggregate investment made in any one such bank or
institution does not exceed $100,000.
The obligations of foreign branches of U.S. banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by federal and state
regulation. Payment of interest and principal upon these obligations may
also be affected by governmental action in the country of domicile of the
branch (generally referred to as sovereign risk). In addition, evidences
of ownership of portfolio securities may be held outside of the U.S. and
the fund may be subject to the risks associated with the holding of such
property overseas. Various provisions of federal law governing the
establishment and operation of domestic branches do not apply to foreign
branches of domestic banks.
Obligations of U.S. branches and agencies of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by federal and state
regulation as well as by governmental action in the country in which the
foreign bank has its head office.
Obligations of foreign issuers also involve certain additional risks.
Foreign issuers may be subject to less governmental regulation and
supervision than U.S. issuers. Foreign issuers also generally are not
bound by uniform accounting, auditing and financial reporting requirements
comparable to those applicable to U.S. issuers.
OVERSEAS, GROWTH OPPORTUNITIES, INCOME & GROWTH, GOVERNMENT INVESTMENT AND
HIGH YIELD FUNDS
THE FOLLOWING ARE OVERSEAS, GROWTH OPPORTUNITIES, INCOME & GROWTH,
GOVERNMENT INVESTMENT AND HIGH YIELD FUNDS' FUNDAMENTAL INVESTMENT
LIMITATIONS. EACH FUND MAY NOT:
(1) with respect to 75% of the fund's total assets, purchase the securities
of any issuer (other than securities issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities) if, as a result,
(a) more than 5% of the fund's total assets would be invested in the
securities of that issuer, or (b) the fund would hold more than 10% of the
outstanding voting securities of that issuer;
(2) issue senior securities, except as permitted under the Investment
Company Act of 1940;
(3) borrow money, except that the fund (i) may borrow money for temporary
or emergency purposes (not for leveraging or investment) or (ii) engage in
reverse repurchase agreements, provided that (i) and (ii) in combination
(borrowings) do not exceed 33 1/3% of its total assets (including the
amount borrowed) 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 net assets will be reduced within three days
(exclusive of Sundays and holidays) to the extent necessary to comply with
the 33 1/3% limitation;
(4) 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;
(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, more than 25% of its total assets would
be invested in the securities of companies whose principal business
activities are in the same industry;
(6) 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);
(7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent
the fund from purchasing or selling options and futures contracts or from
investing in securities or other instruments backed by physical
commodities); or
(8) 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.
(9) Each fund may, notwithstanding any other 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 objective, policies, and limitations as the fund.
THE FOLLOWING INVESTMENT LIMITATIONS FOR OVERSEAS, GROWTH OPPORTUNITIES,
INCOME & GROWTH, GOVERNMENT INVESTMENT AND HIGH YIELD FUNDS ARE NOT
FUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER NOTIFICATION.
(i) Each fund does not currently intend to sell securities short, unless it
owns or has the right to obtain securities equivalent in kind and amount to
the securities sold short, and provided that transactions in futures
contracts and options are not deemed to constitute selling securities
short.
(ii) Each fund does not currently intend to 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 margin payments in
connection with futures contracts and options on futures contracts shall
not constitute purchasing securities on margin.
(iii) Each fund may borrow money only (a) from a bank or from a registered
investment company or portfolio for which FMR or an affiliate serves as
investment advisor or (b) by engaging in reverse repurchase agreements with
any party (reverse repurchase agreements are treated as borrowings for
purposes of fundamental investment limitation (3)). Each fund will not
borrow money in excess of 25% of net assets so long as this limitation is
required for certification by certain state insurance departments. Any
borrowings that come to exceed this amount will be reduced within seven
days (not including Sundays and holidays) to the extent necessary to comply
with the 25% limitation. Each fund will not purchase any security while
borrowings representing more than 5% of its total assets are outstanding.
Each 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) Each fund does not currently intend to purchase any security if, as a
result, more than 10% of Growth Opportunities, Income & Growth and
Government Investment Funds' net assets and 15% of High Yield and Overseas
Funds' 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) Each fund does not currently intend to lend assets other than
securities to other parties, except by: (a) lending money (up to 5% of net
assets for Growth Opportunities, Income & Growth and Overseas Funds and
7.5% for High Yield and Government Investment Funds' net assets) to a
registered investment company or portfolio for which FMR or an affiliate
serves as investment advisor or (b) acquiring loans, loan participations,
or other forms of direct debt instruments and, in connection therewith,
assuming any associated unfunded commitments of the sellers. (This
limitation does not apply to purchases of debt securities or to repurchase
agreements.)
(vi) Each 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.
(vii) Each fund does not currently intend to invest in oil, gas, or other
mineral exploration or development programs or leases.
(viii) Each fund does not currently intend to invest in interests in
real estate investment trusts that are not readily marketable, or to invest
in interests in real estate limited partnerships that are not listed on the
New York Stock Exchange or the American Stock Exchange or traded on the
NASDAQ National Market System.
(ix) Each 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 objective, policies, and
limitations as the fund.
For each fund's limitations on futures and options transactions, see the
section entitled "Limitations on Futures and Options Transactions." For
each fund's limitations on short sales, see the section entitled "Short
Sales."
Higher yielding, fixed-income securities of the type in which High Yield
Fund invests will at times be purchased at a discount from or a premium
over par value. The total return on such securities includes the potential
for a capital gain or loss. High Yield Fund generally does not intend to
hold securities for the purpose of achieving capital gains, however, unless
current yields on these securities remain attractive. Capital gain or loss
may also be realized upon the sale of portfolio securities.
The U.S. government has from time to time in the past imposed restrictions,
through taxation and otherwise, on foreign investments by U.S. investors
such as the funds. If such restrictions should be reinstituted, it might
become necessary for Overseas Fund to invest all or substantially all of
its assets in U.S. securities. In such event, the Board of Trustees would
reevaluate the fund's investment objective and policies.
In accordance with the funds' fundamental investment policies, there are no
limitations on the percentage of the funds' assets which may be invested in
any one type of instrument. Nor are there limitations (except those
imposed by certain state insurance regulations) on the percentage of the
funds' assets which may be invested in any foreign country. However, in
order to comply with diversification requirements under Section 817(h) of
the Internal Revenue Code of 1986, as amended, in connection with FMR
serving as investment advisor, each fund has agreed to certain
non-fundamental limitations. Please refer to your insurance company's
separate account prospectus for more information.
AFFILIATED BANK TRANSACTIONS. A fund may engage in transactions with
financial institutions that are, or may be considered to be, "affiliated
persons" of the fund under the Investment Company Act of 1940. These
transactions may include repurchase agreements with custodian banks;
short-term obligations of, and repurchase agreements with, the 50 largest
U.S. banks (measured by deposits); municipal securities; U.S. government
securities with affiliated financial institutions that are primary dealers
in these securities; short-term currency transactions; and short-term
borrowings. In accordance with exemptive orders issued by the Securities
and Exchange Commission (SEC), the Board of Trustees has established and
periodically reviews procedures applicable to transactions involving
affiliated financial institutions.
FUNDS' RIGHTS AS A SHAREHOLDER. Each fund does not intend to direct or
administer the day-to-day operations of any company. Each fund, however,
may exercise its rights as a shareholder and may communicate its views on
important matters of policy to management, the Board of Directors, and
shareholders of a company when FMR determines that such matters could have
a significant effect on the value of each fund's investment in the company.
The activities that each fund may engage in, either individually or in
conjunction with others, may include, among others, supporting or opposing
proposed changes in a company's corporate structure or business activities;
seeking changes in a company's directors or management; seeking changes in
a company's direction or policies; seeking the sale or reorganization of
the company or a portion of its assets; or supporting or opposing third
party takeover efforts. This area of corporate activity is increasingly
prone to litigation and it is possible that each fund could be involved in
lawsuits related to such activities. FMR will monitor such activities with
a view to mitigating, to the extent possible, the risk of litigation
against each fund and the risk of actual liability if each fund is involved
in litigation. No guarantee can be made, however, that litigation against
each fund will not be undertaken or liabilities incurred.
Each fund's investments must be consistent with its investment objective
and policies. Accordingly, not all of the security types and investment
techniques discussed below are eligible investments for each of the funds.
ASSET-BACKED SECURITIES may include interests in pools of mortgages, loans,
receivables or other assets. Payment of principal and interest may be
largely dependent upon the cash flows generated by the assets backing the
securities, and, in certain cases, supported by letters of credit, surety
bonds, or other credit enhancements. The value of asset-backed securities
may also be affected by the creditworthiness of the servicing agent for the
pool, the originator of the loans or receivables, or the financial
institution(s) providing the credit support.
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.
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.
Money Market Fund may invest in variable or floating rate instruments that
ultimately mature in more than 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 and U.S. government securities
with a variable rate of interest adjusted no less frequently than 762 days
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.
REPURCHASE AGREEMENTS are transactions in which a fund purchases a security
and simultaneously commits to sell that security back to the original
seller at an agreed upon price. The resale price reflects the purchase
price plus an agreed upon incremental amount which is unrelated to the
coupon rate or maturity of the purchased security. While it does not
presently appear possible to eliminate all risks from these transactions
(particularly the possibility that the value of the underlying security
will be less than the resale price as well as delays and costs to a fund in
connection with bankruptcy proceedings), it is each fund's current policy
to engage in repurchase agreement transactions with parties whose
creditworthiness has been reviewed and found satisfactory by FMR.
Pursuant to an Exemptive Order issued by the SEC, Money Market Fund, along
with other registered investment companies having management contracts with
FMR, may invest in a pool of one or more large overnight repurchase
agreements. The repurchase agreements' underlying securities are U.S.
government securities in which the fund is permitted to invest.
FOREIGN REPURCHASE AGREEMENTS may include agreements to purchase and sell
foreign securities in exchange for fixed U.S. dollar amounts, or in
exchange for specified amounts of foreign currency. Unlike typical U.S.
repurchase agreements, foreign repurchase agreements may not be fully
collateralized at all times. However, pursuant to certain state insurance
regulations, any foreign repurchase agreements a fund enters into will be
secured by collateral consisting of liquid assets having a market value of
not less than 102% of the cash or assets transferred to the other party.
The value of the security purchased by a fund may be more or less than the
price at which the counterparty has agreed to repurchase the security. In
the event of a default by the counterparty, a fund may suffer a loss if the
value of the security purchased is less than the agreed-upon repurchase
price, or if a fund is unable to successfully assert a claim to the
collateral under foreign laws. As a result, foreign repurchase agreements
may involve higher credit risks than repurchase agreements in U.S. markets,
as well as risks associated with currency fluctuations. In addition, as
with other emerging market investments, repurchase agreements with
counterparties located in emerging markets or relating to emerging market
securities may involve issuers or counterparties with lower credit ratings
than typical U.S. repurchase agreements.
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, a fund will maintain appropriate liquid assets in a segregated
custodial account to cover its obligation under the agreement. A fund will
enter into reverse repurchase agreements only with parties whose
creditworthiness has been reviewed and 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.
SECURITIES LENDING. Each fund may lend securities to parties such as
broker-dealers or institutional investors, including Fidelity Brokerage
Services, Inc. (FBSI). FBSI is a member of the New York Stock Exchange
(NYSE) and a subsidiary of FMR Corp.
Securities lending allows a fund to retain ownership of the securities
loaned and, at the same time, to earn additional income. Since there may
be delays in the recovery of loaned securities, or even a loss of rights in
collateral supplied should the borrower fail financially, loans will be
made only to parties deemed by FMR to be of good standing. Furthermore,
they will only be made if, in FMR's judgment, the consideration to be
earned from such loans would justify the risk.
FMR understands that it is the current view of the SEC Staff that a fund
may engage in loan transactions only under the following conditions: (1)
the fund must receive 100% collateral in the form of cash or cash
equivalents (e.g., U.S. Treasury bills or notes) from the borrower; (2) the
borrower must increase the collateral whenever the market value of the
securities loaned (determined on a daily basis) rises above the value of
the collateral; (3) after giving notice, the fund must be able to terminate
the loan at any time; (4) the fund must receive reasonable interest on the
loan or a flat fee from the borrower, as well as amounts equivalent to any
dividends, interest, or other distributions on the securities loaned and to
any increase in market value; (5) the fund may pay only reasonable
custodian fees in connection with the loan; and (6) the Board of Trustees
must be able to vote proxies on the securities loaned, either by
terminating the loan or by entering into an alternative arrangement with
the borrower.
Cash received through loan transactions may be invested in any security in
which the fund is authorized to invest. Investing this cash subjects that
investment, as well as the security loaned, to market forces (i.e., capital
appreciation or depreciation).
DELAYED DELIVERY TRANSACTIONS are transactions that involve a commitment by
fund to purchase or sell specific securities at a predetermined price
and/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. A fund may receive fees for entering into
delayed-delivery transactions.
When purchasing securities on a delayed-delivery basis, a 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
a 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, a 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, that 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, a
fund could miss a favorable price or yield opportunity, or could suffer a
loss. A 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.
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 each fund's 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 each fund's rights and
obligations relating to the investment).
Investments currently considered by Money Market Fund to be illiquid
include repurchase agreements not entitling the holder to payment of
principal and interest within seven days. Also, FMR may determine some
restricted securities and time deposits to be illiquid. Investments
currently considered by each fund other than Money Market Fund to be
illiquid include repurchase agreements not entitling the holder to payment
of principal and interest within seven days, over-the-counter options and
non-government stripped fixed-rate mortgage-backed securities. Also, FMR
may determine some restricted securities, government-stripped fixed-rate
mortgage-backed securities, loans and other direct debt instruments, and
swap agreements to be illiquid. However, with respect to over-the-counter
options a 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 each fund may have to close out
the option before expiration.
In the absence of market quotations, illiquid investments for Money Market
Fund are valued for purposes of monitoring amortized cost valuation at fair
value as determined in good faith by a committee appointed by the Board of
Trustees. For all other funds, illiquid investments are 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 Money
Market, Income & Growth, Growth Opportunities and Government Investment
Funds' net assets and more than 15% of High Yield and Overseas Fund's net
assets were invested in illiquid securities, each fund would seek to take
appropriate steps to protect liquidity. Money Market Fund will invest less
than 10% of its assets in illiquid securities.
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, each 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 each fund may be
permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, each
fund might obtain a less favorable price than prevailed when it decided to
seek registration of the security. However, in general, Money Market Fund
anticipates holding restricted securities to maturity or selling them in an
exempt transaction.
SWAP AGREEMENTS. Swap agreements can be individually negotiated and
structured to include exposure to a variety of different types of
investments or market factors. Depending on their structure, swap
agreements may increase or decrease a fund's exposure to long or short-term
interest rates (in the U.S. or abroad), foreign currency values, mortgage
securities, corporate borrowing rates, or other factors such as security
prices or inflation rates. Swap agreements can take many different forms
and are known by a variety of names. The funds are not limited to any
particular form of swap agreement if FMR determines it is consistent with a
fund's investment objective and policies.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by
the other party. For example, the buyer of an interest rate cap obtains
the right to receive payments to the extent that a specified interest rate
exceeds an agreed-upon level, while the seller of an interest rate floor is
obligated to make payments to the extent that a specified interest rate
falls below an agreed-upon level. An interest rate collar combines
elements of buying a cap and selling a floor.
Swap agreements will tend to shift a fund's investment exposure from one
type of investment to another. For example, if a fund agreed to exchange
payments in dollars for payments in foreign currency, the swap agreements
would tend to decrease the fund's exposure to U.S. interest rates and
increase exposure to foreign currency and interest rates. Caps and floors
have an effect similar to buying or writing options. Depending on how they
are used, swap agreements may increase or decrease the overall volatility
of a fund's investments and its share price and yield.
The most significant factor in the performance of swap agreements is the
change in the specific interest rate, currency, or other factors that
determine the amounts of payments due to and from a fund. If a swap
agreement calls for payments by a fund, it must be prepared to make such
payments when due. In addition, if the counterparty's creditworthiness
declined, the value of a swap agreement would be likely to decline,
potentially resulting in losses. Each fund expects to be able to eliminate
its exposure under swap agreements either by assignment or other
disposition, or by entering into an offsetting swap agreement with the same
party or a similarly creditworthy party.
Each fund will maintain appropriate liquid assets in a segregated custodial
account to cover its current obligations under swap agreements. If a fund
enters into a swap agreement on a net basis, it will segregate assets with
a daily value at least equal to the excess, if any, of its accrued
obligations under the swap agreement over the accrued amount it is entitled
to receive under the agreement. If a fund enters into a swap agreement on
other than a net basis, it will segregate assets with a value equal to the
full amount of its accrued obligations under the agreement.
INDEXED SECURITIES. Each fund may purchase securities whose prices are
indexed to the prices of other securities, securities indices, currencies,
precious metals or other commodities, 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. Gold-indexed securities, for
example, typically provide for a maturity value that depends on the price
of gold, resulting in a security whose price tends to rise and fall
together with gold prices. Currency-indexed securities typically are
short-term to intermediate-term debt securities whose maturity values or
interest rates are determined by reference to the values of one or more
specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed
securities may be positively or negatively indexed; that is, their maturity
value may increase when the specified currency value increases, resulting
in a security that performs similarly to a foreign-denominated instrument,
or their maturity value may decline when foreign currencies increase,
resulting in a security whose price characteristics are similar to a put on
the underlying currency. Currency-indexed securities may also have prices
that depend on the values of a number of different foreign currencies
relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they
are indexed, and may also be influenced by interest rate changes in the
U.S. and abroad. 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.
Recent issuers of indexed securities have included banks, corporations, and
certain U.S. government agencies. FMR will use its judgment in determining
whether indexed securities should be treated as short-term instruments,
bonds, stocks, or as a separate asset class for purposes of a fund's
investment allocations, depending on the individual characteristics of the
securities. Indexed securities may be more volatile than the underlying
instruments.
WARRANTS. (excludes Money Market Fund) Warrants are securities that give a
fund the right to purchase equity securities from the issuer at a specific
price (the strike price) for a limited period of time. The strike price of
warrants typically is much lower than the current market price of the
underlying securities, yet they are subject to similar price fluctuations.
As a result, warrants may be more volatile investments than the underlying
securities and may offer greater potential for capital appreciation as well
as capital loss.
Warrants do not entitle a holder to dividends or voting rights with respect
to the underlying securities and do not represent any rights in the assets
of the issuing company. Also, the value of the warrant does not
necessarily change with the value of the underlying securities and a
warrant ceases to have value if it is not exercised prior to the expiration
date. These factors can make warrants more speculative than other types of
investments.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS. Direct debt instruments are
interests in amounts owed by a corporate, governmental, or other borrower
to lenders or lending syndicates (loans and loan participations), to
suppliers of goods or services (trade claims or other receivables), or to
other parties. Direct debt instruments are subject to a fund's policies
regarding the quality of debt securities.
Purchasers of loans and other forms of direct indebtedness depend primarily
upon the creditworthiness of the borrower for payment of principal and
interest. Direct debt instruments may not be rated by any nationally
recognized rating service. If a fund does not receive scheduled interest or
principal payments on such indebtedness, the fund's share price and yield
could be adversely affected. Loans that are fully secured offer a fund more
protections than an unsecured loan in the event of non-payment of scheduled
interest or principal. However, there is no assurance that the liquidation
of collateral from a secured loan would satisfy the borrower's obligation,
or that the collateral could be liquidated. Indebtedness of borrowers whose
creditworthiness is poor involves substantially greater risks and may be
highly speculative. Borrowers that are in bankruptcy or restructuring may
never pay off their indebtedness, or may pay only a small fraction of the
amount owed. Direct indebtedness of developing countries also involves a
risk that the governmental entities responsible for the repayment of the
debt may be unable, or unwilling, to pay interest and repay principal when
due.
Investments in loans through direct assignment of a financial institution's
interests with respect to a loan may involve additional risks to a fund.
For example, if a loan is foreclosed, the fund could become part owner of
any collateral, and would bear the costs and liabilities associated with
owning and disposing of the collateral. In addition, it is conceivable that
under emerging legal theories of lender liability, the fund could be held
liable as a co-lender. Direct debt instruments may also involve a risk of
insolvency of the lending bank or other intermediary. Direct debt
instruments that are not in the form of securities may offer less legal
protection to a fund in the event of fraud or misrepresentation. In the
absence of definitive regulatory guidance, a fund relies on FMR's research
in an attempt to avoid situations where fraud or misrepresentation could
adversely affect a fund.
A loan is often administered by a bank or other financial institution that
acts as agent for all holders. The agent administers the terms of the loan,
as specified in the loan agreement. Unless, under the terms of the loan or
other indebtedness, a fund has direct recourse against the borrower, it may
have to rely on the agent to apply appropriate credit remedies against a
borrower. If assets held by the agent for the benefit of a fund were
determined to be subject to the claims of the agent's general creditors,
the fund might incur certain costs and delays in realizing payment on the
loan or loan participation and could suffer a loss of principal or
interest.
Direct indebtedness purchased by a fund may include letters of credit,
revolving credit facilities, or other standby financing commitments
obligating the fund to pay additional cash on demand. These commitments may
have the effect of requiring the fund to increase its investment in a
borrower at a time when it would not otherwise have done so, even if the
borrower's condition makes it unlikely that the amount will ever be repaid.
A fund will set aside appropriate liquid assets in a segregated custodial
account to cover its potential obligations under standby financing
commitments.
A fund limits the amount of total assets that it will invest in any one
issuer or in issuers within the same industry (see limitations 1 and 5).
For purposes of these limitations, a fund generally will treat the borrower
as the "issuer" of indebtedness held by the fund. In the case of loan
participations where a bank or other lending institution serves as
financial intermediary between a fund and the borrower, if the
participation does not shift to the fund the direct debtor-creditor
relationship with the borrower, SEC interpretations require the fund, in
appropriate circumstances, to treat both the lending bank or other lending
institution and the borrower as "issuers" for these purposes. Treating a
financial intermediary as an issuer of indebtedness may restrict a fund's
ability to invest in indebtedness related to a single financial
intermediary, or a group of intermediaries engaged in the same industry,
even if the underlying borrowers represent many different companies and
industries.
FOREIGN INVESTMENTS. Foreign investments can involve significant risks in
addition to the risks inherent in U.S. investments. The value of
securities denominated in or indexed to foreign currencies, and of
dividends and interest from such securities, can change significantly when
foreign currencies strengthen or weaken relative to the U.S. dollar.
Foreign securities markets generally have less trading volume and less
liquidity than U.S. markets, and prices on some foreign markets can be
highly volatile. Many foreign countries lack uniform accounting and
disclosure standards comparable to those applicable to U.S. companies, and
it may be more difficult to obtain reliable information regarding an
issuer's financial condition and operations. In addition, the costs of
foreign investing, including withholding taxes, brokerage commissions, and
custodial costs, are generally higher than for U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign security trading practices, including
those involving the release of assets in advance of payment, may involve
increased risks in the event of a failed trade or the insolvency of a
broker-dealer, and may involve substantial delays. It may also be
difficult to enforce legal rights in foreign countries.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments
adverse to the interests of U.S. investors, including the possibility of
expropriation or nationalization of assets, confiscatory taxation,
restrictions on U.S. investment or on the ability to repatriate assets or
convert currency into U.S. dollars, or other government intervention.
There may be a greater possibility of default by foreign governments or
foreign government-sponsored enterprises. Investments in foreign countries
also involve a risk of local political, economic, or social instability,
military action or unrest, or adverse diplomatic developments. There is no
assurance that FMR will be able to anticipate these potential events or
counter their effects.
The considerations noted above generally are intensified for investments in
developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries, and securities
markets that trade a small number of securities.
A fund may invest in foreign securities that impose restrictions on
transfer within the U.S. or to U.S. persons. Although securities subject
to transfer restrictions may be marketable abroad, they may be less liquid
than foreign securities of the same class that are not subject to such
restrictions.
American Depositary Receipts and European Depositary Receipts (ADRs and
EDRs) are certificates evidencing ownership of shares of a foreign-based
issuer held in trust by a bank or similar financial institution. Designed
for use in U.S. and European securities markets, respectively, ADRs and
EDRs are alternatives to the purchase of the underlying securities in their
national markets and currencies.
FOREIGN CURRENCY TRANSACTIONS. The following information is of particular
importance to Overseas Fund. A fund may conduct foreign currency
transactions on a spot (i.e., cash) basis or by entering into forward
contracts to purchase or sell foreign currencies at a future date and
price. A fund will convert currency on a spot basis from time to time, and
investors should be aware of the costs of currency conversion. Although
foreign exchange dealers generally do not charge a fee for conversion, they
do realize a profit based on the difference between the prices at which
they are buying and selling various currencies. Thus, a dealer may offer to
sell a foreign currency to the fund at one rate, while offering a lesser
rate of exchange should the fund desire to resell that currency to the
dealer. Forward contracts are generally traded in an interbank market
conducted directly between currency traders (usually large commercial
banks) and their customers. The parties to a forward contract may agree to
offset or terminate the contract before its maturity, or may hold the
contract to maturity and complete the contemplated currency exchange.
A fund may use currency forward contracts for any purpose consistent with
its investment objective. The following discussion summarizes the principal
currency management strategies involving forward contracts that could be
used by a fund. A fund may also use swap agreements, indexed securities,
and options and futures contracts relating to foreign currencies for the
same purposes.
When a fund agrees to buy or sell a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security.
By entering into a forward contract for the purchase or sale, for a fixed
amount of U.S. dollars, of the amount of foreign currency involved in the
underlying security transaction, the fund will be able to protect itself
against an adverse change in foreign currency values between the date the
security is purchased or sold and the date on which payment is made or
received. This technique is sometimes referred to as a "settlement hedge"
or "transaction hedge." A fund may also enter into forward contracts to
purchase or sell a foreign currency in anticipation of future purchases or
sales of securities denominated in foreign currency, even if the specific
investments have not yet been selected by FMR.
A fund may also use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. For
example, if a fund owned securities denominated in pounds sterling, it
could enter into a forward contract to sell pounds sterling in return for
U.S. dollars to hedge against possible declines in the pound's value. Such
a hedge, sometimes referred to as a "position hedge," would tend to offset
both positive and negative currency fluctuations, but would not offset
changes in security values caused by other factors. A fund could also hedge
the position by selling another currency expected to perform similarly to
the pound sterling - for example, by entering into a forward contract to
sell Deutschemarks or European Currency Units in return for U.S. dollars.
This type of hedge, sometimes referred to as a "proxy hedge," could offer
advantages in terms of cost, yield, or efficiency, but generally would not
hedge currency exposure as effectively as a simple hedge into U.S. dollars.
Proxy hedges may result in losses if the currency used to hedge does not
perform similarly to the currency in which the hedged securities are
denominated.
A fund may enter into forward contracts to shift its investment exposure
from one currency into another. This may include shifting exposure from
U.S. dollars to a foreign currency, or from one foreign currency to another
foreign currency. For example, if a fund held investments denominated in
Deutschemarks, the fund could enter into forward contracts to sell
Deutschemarks and purchase Swiss Francs. This type of strategy, sometimes
known as a "cross-hedge," will tend to reduce or eliminate exposure to the
currency that is sold, and increase exposure to the currency that is
purchased, much as if the fund had sold a security denominated in one
currency and purchased an equivalent security denominated in another.
Cross-hedges protect against losses resulting from a decline in the hedged
currency, but will cause the fund to assume the risk of fluctuations in the
value of the currency it purchases.
Under certain conditions, SEC guidelines require mutual funds to set aside
appropriate liquid assets in a segregated custodial account to cover
currency forward contracts. As required by SEC guidelines, a fund will
segregate assets to cover currency forward contracts, if any, whose purpose
is essentially speculative. A fund will not segregate assets to cover
forward contracts entered into for hedging purposes, including settlement
hedges, position hedges, and proxy hedges.
Successful use of currency management strategies will depend on FMR's skill
in analyzing and predicting currency values. Currency management
strategies may substantially change a fund's investment exposure to changes
in currency exchange rates, and could result in losses to the fund if
currencies do not perform as FMR anticipates. For example, if a
currency's value rose at a time when FMR had hedged a fund by selling that
currency in exchange for U.S. dollars, the fund would be unable to
participate in the currency's appreciation. If FMR hedges currency
exposure through proxy hedges, a fund could realize currency losses from
the hedge and the security position at the same time if the two currencies
do not move in tandem. Similarly, if FMR increases a fund's exposure to a
foreign currency, and that currency's value declines, the fund will realize
a loss. There is no assurance that FMR's use of currency management
strategies will be advantageous to a fund or that it will hedge at an
appropriate time.
SHORT SALES "AGAINST THE BOX". Money Market Fund may sell securities short
when it owns or has the right to obtain securities equivalent in kind or
amount to the securities sold short. Short sales could be used to protect
the net asset value per share of the fund in anticipation of increased
interest rates, without sacrificing the current yield of the securities
sold short.
SHORT SALES. A fund may enter into short sales with respect to stocks
underlying its convertible security holdings. For example, if FMR
anticipates a decline in the price of the stock underlying a convertible
security it holds, it may sell the stock short. If the stock price
subsequently declines, the proceeds of the short sale could be expected to
offset all or a portion of the effect of the stock's decline on the value
of the convertible security. Each fund currently intends to hedge no more
than 15% of its total assets with short sales on equity securities
underlying its convertible security holdings under normal circumstances.
When a fund enters into a short sale or short sale against the box, it will
be required to set aside securities equivalent in kind and amount to those
sold short (or securities convertible or exchangeable into such securities)
and will be required to continue to hold them while the short sale is
outstanding. Each fund will incur transaction costs, including interest
expense, in connection with opening, maintaining, and closing short sales
and short sales against the box.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS. Each fund (other than
Money Market 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 funds intend to comply with
Section 4.5 of the regulations under the Commodity Exchange Act, which
limits the extent to which a fund can commit assets to initial margin
deposits and option premiums.
In addition, each fund will not: (a) sell futures contracts, purchase put
options, or write call options if, as a result, more than 25% of each
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, each 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 each fund would
exceed 5% of each fund's total assets. These limitations for each fund 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.
FUTURES CONTRACTS. When a fund purchases a futures contract, it agrees to
purchase a specified underlying instrument at a specified future date.
When a 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 a 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 Standard & Poor's Composite Index of 500
Stocks (S&P 500) and the Bond Buyer Index of municipal bonds. Futures can
be held until their delivery dates, or can be closed out before then if a
liquid secondary market is available.
The value of a futures contract tends to increase and decrease in tandem
with the value of its underlying instrument. Therefore, purchasing futures
contracts will tend to increase a fund's exposure to positive and negative
price fluctuations in the underlying instrument, much as if it had
purchased the underlying instrument directly. When a fund sells a futures
contract, by contrast, the value of its futures position will tend to move
in a direction contrary to the market. Selling futures contracts,
therefore, will tend to offset both positive and negative market price
changes, much as if the underlying instrument had been sold.
FUTURES MARGIN PAYMENTS. The purchaser or seller of a futures contract is
not required to deliver or pay for the underlying instrument unless the
contract is held until the delivery date. However, both the purchaser and
seller are required to deposit "initial margin" with a futures broker,
known as a futures commission merchant (FCM), when the contract is entered
into. Initial margin deposits are typically equal to a percentage of the
contract's value. If the value of either party's position declines, that
party will be required to make additional "variation margin" payments to
settle the change in value on a daily basis. The party that has a gain may
be entitled to receive all or a portion of this amount. Initial and
variation margin payments do not constitute purchasing securities on margin
for purposes of a fund's investment limitations. In the event of the
bankruptcy of an FCM that holds margin on behalf of a fund, a 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 a
fund.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, a 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, a 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. A 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,
a fund will lose the entire premium it paid. If a fund exercises the
option, it completes the sale of the underlying instrument at the strike
price. A 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 a 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, a 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 a fund will be required to make margin payments to an FCM as
described above for futures contracts. A 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 a fund has written, however, a 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 a 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. Each 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, each 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 each fund's current or
anticipated investments exactly. Each 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 each fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match each
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. Each 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 each 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 each 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 each fund to continue to hold a
position until delivery or expiration regardless of changes in its value.
As a result, each 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 each
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.
OPTIONS AND FUTURES RELATING TO FOREIGN CURRENCIES. Currency futures
contracts are similar to forward currency exchange contracts, except that
they are traded on exchanges (and have margin requirements) and are
standardized as to contract size and delivery date. Most currency futures
contracts call for payment or delivery in U.S. dollars. The underlying
instrument of a currency option may be a foreign currency, which generally
is purchased or delivered in exchange for U.S. dollars, or may be a futures
contract. The purchaser of a currency call obtains the right to purchase
the underlying currency, and the purchaser of a currency put obtains the
right to sell the underlying currency.
The uses and risks of currency options and futures are similar to options
and futures relating to securities or indices, as discussed above. Each
fund may purchase and sell currency futures and may purchase and write
currency options to increase or decrease its exposure to different foreign
currencies. Each fund may also purchase and write currency options in
conjunction with each other or with currency futures or forward contracts.
Currency futures and options values can be expected to correlate with
exchange rates, but may not reflect other factors that affect the value of
each fund's investments. A currency hedge, for example, should protect a
Yen-denominated security from a decline in the Yen, but will not protect
each fund against a price decline resulting from deterioration in the
issuer's creditworthiness. Because the value of each fund's
foreign-denominated investments changes in response to many factors other
than exchange rates, it may not be possible to match the amount of currency
options and futures to the value of each fund's investments exactly over
time.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. Each fund will comply
with guidelines established by the SEC 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 each fund's assets
could impede portfolio management or each fund's ability to meet redemption
requests or other current obligations.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed
on behalf of a fund by FMR pursuant to authority contained in each
fund's Management Contract. Since FMR has granted investment management
authority to the sub-advisors (see the section entitled "Management
Contracts"), the sub-advisors are authorized to place orders for the
purchase and sale of portfolio securities, and will do so in accordance
with the policies described below. 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 advisor. Money market
securities purchased and sold by a 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; the
reasonableness of any commissions; and arrangements for payment of fund
expenses. FMR may allocate brokerage transactions to broker-dealers who
have entered into arrangements with FMR under which the broker-dealer
allocates a portion of the commissions paid by a fund toward payment of a
fund's expenses, such as transfer agent fees or custodian fees. The
transaction quality must, however, be comparable to those of other
qualified broker-dealers. Generally, commissions for foreign
investments traded will be higher than for U.S. investments and may not
be subject to negotiation.
Each fund may execute portfolio transactions with broker-dealers who
provide research and execution services to a fund 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 a fund's money market securities 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 is generally
made by FMR (to the extent possible consistent with execution
considerations) in accordance with a ranking of broker-dealers determined
periodically by FMR's investment staff based upon the quality of research
and execution services provided.
The receipt of research from broker-dealers that execute transactions on
behalf of a fund may be useful to FMR in rendering investment management
services to a fund or its other clients, and conversely, such research
provided by broker-dealers who have executed transaction orders on
behalf of other FMR clients may be useful to FMR in carrying out its
obligations to a fund. The receipt of such research has not reduced FMR's
normal independent research activities; however, it enables FMR to avoid
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 or execution services. In order to cause a
fund to pay such higher commissions, FMR must determine in good faith that
such commissions are reasonable in relation to the value of the brokerage
and research services provided by such executing broker-dealers viewed in
terms of a particular transaction or FMR's overall responsibilities to a
fund 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 each fund 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) and Fidelity Brokerage Services, Ltd. (FBSL), subsidiaries 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 if certain
requirements are satisfied. Pursuant to such requirements, the Board of
Trustees has authorized FBSI to execute portfolio transactions on national
securities exchanges in accordance with approved procedures and applicable
SEC rules.
The Trustees periodically review FMR's performance of its responsibilities
in connection with the placement of port folio transactions on behalf of
each fund and review the commissions paid by the funds over representative
periods of time to determine if they are reasonable in relation to the
benefits to the funds.
Because a high turnover rate increases brokerage costs, FMR carefully
weighs the added costs of short-term investment against anticipated gain.
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. The funds seek to recapture soliciting
broker-dealer fees on the tender of portfolio securities, but at present no
other recapture arrangements are in effect. The Trustees intend to
continue to review whether recapture opportunities are available and are
legally permissible and, if so, to determine in the exercise of their
business judgment whether it would be advisable for the funds to seek such
recapture.
Although the Trustees and officers of each fund are substantially the same
as those of other funds managed by FMR, investment decisions for the funds
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 and accounts
are managed by the same investment advisor, particularly when the same
security is suitable for the investment objective of more than one fund or
account.
When two or more funds are simultaneously engaged in the purchase or sale
of the same security, the prices and amounts are allocated in accordance
with procedures believed to be appropriate and equitable for each fund. In
some cases this system could have a detrimental effect on the price or
value of the security as far as the 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 advisor to the funds outweighs any disadvantages that may be
said to exist from exposure to simultaneous transactions.
VALUATION OF FUND SECURITIES
MONEY MARKET FUND
Like most money market funds, the fund values its investments on the basis
of amortized cost. This technique involves initially valuing an instrument
at its cost and thereafter assuming a constant amortization to maturity of
any discount or premium, regardless of the market value of the instrument.
The amortized-cost value of an instrument may be higher or lower than the
price the fund would receive if it sold the instrument.
During periods of declining interest rates, the fund's yield based on
amortized cost may be higher than a yield based on market prices and
estimates of market prices. Under these circumstances, a new investor in
the fund would be able to obtain a somewhat higher yield than would result
from investment in a fund solely utilizing market quotations to determine
its NAV, and existing shareholders would receive less investment income.
The converse would apply in a period of rising interest rates.
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 1940 Act). The fund must adhere to
certain conditions under Rule 2a-7.
The Board of Trustees of the fund oversees FMR's adherence to SEC rules
concerning money market funds, and has established procedures designed to
stabilize the fund's NAV calculated on the basis of amortized cost. At
such intervals as they deem appropriate, the Trustees review reports used
to determine whether NAV calculated by using available market quotations
would deviate from $1.00. If such a deviation would result in material
dilution or otherwise would be unfair to shareholders, the Trustees have
agreed to take such corrective action, if any, as they deem necessary and
appropriate. This may 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, or establishing
NAV by using available market quotations.
HIGH YIELD AND GOVERNMENT INVESTMENT FUNDS
Securities and other assets for which market quotations are readily
available are valued at market values determined by their most recent bid
prices (sales prices if the principal market is an exchange) in the
principal market in which such securities normally are traded. Securities
and other assets for which market quotations are not readily available
(including restricted securities, if any) are appraised at their fair value
as determined in good faith under consistently applied procedures under the
general supervision of the Board of Trustees.
Securities may also be valued on the basis of valuations furnished by a
pricing service that uses both dealer-supplied valuations and evaluations
based on expert analysis of market data and other factors if such
valuations are believed to reflect more accurately the fair value of such
securities. Use of a pricing service has been approved by 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
ongoing evaluation of these pricing services, may use other pricing
services or may discontinue the use of any pricing service in whole or in
part.
Securities not valued by the pricing service, and for which quotations are
readily available, are valued at market values determined on the basis of
their latest available bid prices as furnished by recognized dealers in
such securities.
GROWTH OPPORTUNITIES, INCOME & GROWTH AND OVERSEAS FUNDS
Portfolio securities are valued by various methods depending on the primary
market or exchange on which they trade. Most equity securities for which
the primary market is the U.S. are valued at last sale price or, if no sale
has occurred, at the closing bid price. Most equity securities for which
the primary market is outside the U.S. are valued using the official
closing price or the last sale price in the principal market where they are
traded. If the last sale price (on the local exchange) is unavailable, the
last evaluated quote or last bid price is normally used. Short-term
securities are valued either at amortized cost or at original cost plus
accrued interest, both of which approximate current value. Convertible
securities and fixed-income securities are valued primarily by a pricing
service that uses a vendor security valuation matrix which incorporates
both dealer-supplied valuations and electronic data processing techniques.
This twofold approach is believed to more accurately reflect fair value
because it takes into account appropriate factors such as institutional
trading in similar groups of securities, yield, quality, coupon rate,
maturity, type of issue, trading characteristics, and other market data,
without exclusive reliance upon quoted, exchange, or over-the counter
prices. Use of pricing services has been approved by the Board of
Trustees.
Securities and other assets for which there is no readily available market
are valued in good faith by a committee appointed by the Board of Trustees.
The procedures set forth above need not be used to determine the value of
the securities owned by the fund if, in the opinion of a committee
appointed by the Board of Trustees, some other method (e.g., closing
over-the-counter bid prices in the case of debt instruments traded on an
exchange) would more accurately reflect the fair market value of such
securities.
Generally, the valuation of foreign and domestic equity securities, as well
as corporate bonds, U.S. government securities, money market instruments,
and repurchase agreements, is substantially completed each day at the close
of the NYSE. The values of any such securities held by the fund are
determined as of such time for the purpose of computing the fund's net
asset value. Foreign security prices are furnished by independent brokers
or quotation services which express the value of securities in their local
currency. Fidelity Service Co. (FSC) gathers all exchange rates daily at
the close of the NYSE using the last quoted price on the local currency and
then translates the value of foreign securities from their local currency
into U.S. dollars. Any changes in the value of forward contracts due to
exchange rate fluctuations and days to maturity are included in the
calculation of net asset value. If an extraordinary event that is expected
to materially affect the value of a portfolio security occurs after the
close of an exchange on which that security is traded, then the security
will be valued as determined in good faith by a committee appointed by the
Board of Trustees.
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. Each fund's share price (except for
Money Market Fund), yield and total return fluctuate in response to market
conditions and other factors, and the value of fund shares (except for
Money Market Fund) when redeemed may be more or less than their original
cost.
YIELD CALCULATIONS. Yields (except for Money Market Fund) for the funds
are computed by dividing a fund's interest and dividend 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 NAV at the end of the period and annualizing the
result (assuming compounding of income) in order to arrive at an annual
percentage rate. Income is calculated for purposes of yield quotations in
accordance with standardized methods applicable to all stock and bond
funds. Dividends from equity investments are treated as if they were
accrued on a daily basis, solely for the purposes of yield calculations.
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. For a
fund's investments denominated in foreign currencies, income and expenses
are calculated first in their respective currencies, and are then converted
to U.S. dollars, either when they are actually converted or at the end of
the 30-day or one month period, whichever is earlier. Capital gains and
losses generally are excluded from the calculation as are gains and losses
from currency exchange rate fluctuations.
Income calculated for the purpose of determining fund's yield differs from
income as determined for other accounting purposes. Because of the
different accounting methods used, and because of the compounding assumed
in yield calculations, a fund's yield may not equal its distribution rate,
the income paid over the same period or the income reported in the funds'
financial statements.
In calculating yield, a fund may from time to time use a portfolio
security's coupon rate instead of its yield to maturity in order to reflect
the risk premium on that security. This practice will have the effect of
reducing a fund's yield.
To compute 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. 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 fund
may quote yields in advertising based on any historical seven-day
period(s). Yields for the fund are calculated on the same basis as other
money market funds, as required by regulation.
Yield information may be useful in reviewing a fund's performance and in
providing a basis for comparison with other investment alternatives.
However, yields fluctuate, unlike investments which pay a fixed interest
rate for a stated period of time. When comparing investment alternatives,
investors should also note the quality and maturity of the portfolio
securities of respective investment companies they have chosen to consider.
In addition, investors should refer to the insurance company's separate
account prospectus for information on fees and charges which may not be
reflected in a yield quotation.
Investors should recognize that in periods of declining interest rates a
fund's yield will tend to be somewhat higher than prevailing market rates,
and in periods of rising interest rates a fund's yield will tend to be
somewhat lower. Also, when interest rates are falling, the inflow of net
new money to a fund from the continuous sale of its shares will likely be
invested in instruments producing lower yields than the balance of the
fund's holdings, thereby reduc ing the fund's current yield. In periods
of rising interest rates, the opposite can be expected to occur.
TOTAL RETURN CALCULATIONS. Total returns reflect all aspects of each
fund's return, including the effect of reinvesting dividends and capital
gain distributions, and any change in each fund's NAV over a stated 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
return of 100% over ten years would produce an average annual return of
7.18%, which is the steady annual rate of return that would equal 100%
growth on a compounded basis in ten years. Average annual returns covering
periods of less than one year are calculated by determining a fund's total
return for the period, extending that return for a full year (assuming that
return remains constant over the year), and quoting the result as an annual
return. While average annual 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 returns represent averaged figures as opposed to the actual
year-to-year performance of a fund.
In addition to average annual total returns, the funds 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. Total returns, yields and other
performance information may be quoted numerically or in a table, graph, or
similar illustration.
NET ASSET VALUE. Charts and graphs using a fund's net asset values or an
insurance company's sub-account unit values, adjusted net asset values, and
benchmark indices may be used to exhibit performance. An adjusted NAV
includes any distributions paid by a fund and reflects all elements of its
return. Unless otherwise indicated, a fund's adjusted NAVs (or an
insurance company's sub-account unit values) are not adjusted for sales
charges, if any.
MOVING AVERAGES. A fund may illustrate performance using moving averages.
A long-term moving average is the average of each week's adjusted closing
NAV or an insurance company's sub-account unit value for a specified
period. A short-term moving average is the average of each day's adjusted
closing NAV or an insurance company's sub-account unit value for a
specified period. Moving Average Activity Indicators combine adjusted
closing NAVs from the last business day of each week with moving averages
for a specified period to produce indicators showing when an NAV or
sub-account has crossed, stayed above, or stayed below its moving average.
The funds are only available for purchase through variable annuity or
variable life insurance contracts offering deferral of income taxes on
earnings, which may produce superior after-tax returns over time. For
example, a $1,000 investment earning a taxable return of 10% annually would
have an after-tax value of $1,949 after ten years, assuming tax was
deducted from the return each year at a 31% rate. An equivalent
tax-deferred investment would have an after-tax value of $2,100 after 10
years, assuming tax was deducted at the 31% rate from the deferred earnings
at the end of the ten year period. Individuals holding shares of the funds
through a variable annuity or variable life insurance contract may receive
additional tax benefits from the deferral of income taxes associated with
variable contracts. Individuals should consult their tax advisors to
determine the effect of holding variable contracts on their individual tax
situations.
YIELDS AND TOTAL RETURNS QUOTED FOR A FUND INCLUDE THE EFFECT OF DEDUCTING
THE FUND'S EXPENSES, BUT MAY NOT INCLUDE CHARGES AND EXPENSES ATTRIBUTABLE
TO ANY PARTICULAR INSURANCE PRODUCT. SINCE YOU CAN ONLY PURCHASE SHARES OF
A FUND THROUGH A VARIABLE ANNUITY AND/OR A VARIABLE LIFE INSURANCE
CONTRACT, YOU SHOULD CAREFULLY REVIEW THE PROSPECTUS OF THE INSURANCE
PRODUCT YOU HAVE CHOSEN FOR INFORMATION ON RELEVANT CHARGES AND EXPENSES.
Excluding these charges from quotations of a fund's performance has the
effect of increasing the performance quoted.
GENERAL INFORMATION
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. In addition to the mutual
fund rankings, a fund's performance may be compared to stock, bond, and
money market mutual fund performance indices prepared by Lipper or other
organizations. When comparing these indices, it is important to remember
the risk and return characteristics of each type of investment. For
example, while stock mutual funds may offer higher potential returns, they
also carry the highest degree of share price volatility. Likewise, money
market funds may offer greater stability of principal, but generally do not
offer the higher potential returns from stock mutual funds. High Yield
Fund may compare its performance to the Salomon Brothers High Yield
Composite Index, an index of high-yielding utility and corporate bonds with
a minimum maturity of seven years and with total debt outstanding of at
least $50 million. Issues included in the index are rated Baa or lower by
Moody's Investors Service or BBB or lower by Standard & Poor's Corporation.
Overseas Fund may quote its performance in advertising and other types of
literature as compared to the performance of the Morgan Stanley Capital
International EAFE Index, an unmanaged index of over 820 foreign common
stocks. A fund may also compare its performance against the Consumer Price
Index (CPI) and the funds in Lipper Annuity & Closed-End Survey (LACES).
LACES consists of periodic reports that track the performance of closed-end
mutual funds and variable annuities at the separate account level. A fund
will compare itself only to annuities, not to closed-end funds in LACES.
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, a 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.
A fund may be compared in advertising to Certificates of Deposit (CDs) or
other investments issued by banks or other depository institutions. Mutual
funds differ from bank investments in several respects. For example, a
fund may offer greater liquidity or higher potential returns than CDs, but
a fund does not guarantee your principal or your return, and fund shares
are not FDIC insured.
Your insurance company may provide information designed to help individuals
understand their investment goals and explore various financial strategies.
Such information may include information about current economic, market,
and political conditions; materials that describe general principles of
investing, such as asset allocation, diversification, risk tolerance, and
goal setting; questionnaires designed to help create a personal financial
profile; worksheets used to project savings needs based on assumed rates of
inflation and hypothetical rates of return; and action plans offering
investment alternatives. Materials may also include discussions of
Fidelity's other 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.
A fund 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.
Money Market, High Yield and Government Investment Funds each 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)/taxable money market funds,
which is reported in the MONEY FUND REPORT(registered trademark), covers
money market funds. The Bond Fund Report AverageS(trademark)/taxable bond
funds, which is reported in the BOND FUND REPORT(registered trademark),
covers 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.
Bond funds however, typically invest in longer-term instruments and their
share price changes daily in response to a variety of factors.
Each fund may present its fund number, Quotron(trademark) number, and CUSIP
number, and discuss or quote its current portfolio manager.
VOLATILITY. A fund may quote various measures of volatility and benchmark
correlation in advertising. In addition, a fund may compare these measures
to those of other funds. Measures of volatility seek to compare a fund's
historical share price fluctuations or total returns to those of a
benchmark. Measures of benchmark correlation indicate how valid a
comparative benchmark may be. All measures of volatility and correlation
are calculated using averages of historical data.
MOMENTUM INDICATORS indicate a fund's price movements over specific periods
of time. Each point on the momentum indicator represents a fund's
percentage change in price movements over that period.
The funds may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a
program, a policyowner invests a fixed dollar amount in an insurance
company's sub-account at periodic intervals which in turn invests in a
fund, thereby purchasing fewer units when prices are high and more units
when prices are low. While such a strategy does not assure a profit nor
guard against loss in a declining market, the policyowner's average cost
per unit can be lower than if fixed numbers of units had been purchased at
those intervals. In evaluating such a plan, policyowners should consider
their ability to continue purchasing units through periods of low price
levels.
Each fund has an investment objective similar to an existing Fidelity fund.
Fidelity Advisor Annuity Money Market Fund is most similar to Variable
Insurance Products Fund: Money Market Portfolio; Fidelity Advisor Annuity
High Yield Fund is most similar to Fidelity Advisor High Yield Fund;
Fidelity Advisor Annuity Government Investment Fund is most similar to
Fidelity Advisor Government Investment Fund; Fidelity Advisor Annuity
Overseas Fund is most similar to Fidelity Advisor Overseas Fund; Fidelity
Advisor Annuity Growth Opportunities Fund is most similar to Fidelity
Advisor Growth Opportunities Fund; and Fidelity Advisor Annuity Income &
Growth Fund is most similar to Fidelity Advisor Income & Growth Fund.
Performance will differ between the funds and their corresponding retail
funds due in part to differences in investment policies and the effect of
insurance charges.
TRADITION OF PERFORMANCE
Fidelity's tradition of performance is achieved through:
(medium solid bullet) MONEY MANAGEMENT: a proud tradition of money
management motivated by the expectation of excellence backed by solid
analysis and worldwide resources. Fidelity employs a bottom-up approach to
security selection based upon in-depth analysis of the fundamentals of that
investment opportunity.
(medium solid bullet) INNOVATION: constant attention to the changing needs
of today's investors and vigilance to the opportunities that arise from
changing global markets. Research is central to Fidelity's investment
decision-making process. Fidelity's greatest resource--over 200 skilled
investment professionals--is supported with the most sophisticated
technology available.
Fidelity provides:
(medium solid bullet) Global research resources: an opportunity to
diversify portfolios and share in the growth of markets outside the United
States.
(medium solid bullet) In-house, proprietary bond-rating system, constantly
updated, which provides extremely sensitive credit analysis.
(medium solid bullet) Comprehensive chart room with over 1500 exhibits to
provide sophisticated charting of worldwide economic, financial, and
technical indicators, as well as to provide tracking of over 800 individual
stocks for portfolio managers.
(medium solid bullet) State-of-the-art trading desk, with access to over
200 brokerage houses, providing real-time information to achieve the best
executions and optimize the value of each transaction.
(medium solid bullet) Use of extensive on-line computer-based research
services.
(medium solid bullet) SERVICE: Timely, accurate and complete reporting.
Prompt and expert attention when an investor or an investment professional
needs it.
As of September 30, 1994, FMR advised over $65 billion in money market
fund assets, $165 billion in equity fund assets, and $40 billion in
international fund assets. The funds may reference the growth and
variety of money market mutual funds and the advisor's innovation and
participation in the industry. The equity funds under management figure
represents the largest amount of equity fund assets under management by a
mutual fund investment advisor in the United States, making FMR America's
leading equity (stock) fund manager.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each fund is open for business and its NAV is calculated each day the NYSE
is open for trading. The NYSE has designated the following holiday
closings for 1995: New Year's Day (observed), Washington's Birthday
(observed), Good Friday, Memorial Day (observed), Independence Day, Labor
Day (observed), Thanksgiving Day, and Christmas Day. Although FMR
expects the same holiday schedule 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. In addition, trading in some of a fund's
portfolio securities may not occur on days when the fund is open for
business.
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.
TAXES
For a discussion of tax consequences of variable contracts, please refer to
your insurance company's separate account prospectus.
Variable contracts purchased through insurance company separate accounts
provide for the accumulation of all earnings from interest, dividends, and
capital appreciation without current federal income tax liability to the
owner. Depending on the variable contract, distributions from the contract
may be subject to ordinary income tax and a 10% penalty tax on
distributions before age 59 1/2. Only the portion of a distribution
attributable to income is subject to federal income tax. Investors should
consult with competent tax advisors for a more complete discussion of
possible tax consequences in a particular situation.
Section 817(h) of the Internal Revenue Code provides that the investments
of a separate account underlying a variable insurance contract (or the
investments of a mutual fund, the shares of which are owned by the variable
separate account) must be "adequately diversified" in order for the
contract to be treated as an annuity or life insurance for tax purposes.
The Treasury Department has issued regulations prescribing these
diversification requirements. Each fund intends to comply with these
requirements.
Each fund intends 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, each fund intends to distribute substantially all of its net
investment income and net realized capital gains within each calendar year
as well as on a fiscal year basis. The funds also intend 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 a fund's gross income for each
fiscal year. Gains from some forward currency contracts, futures
contracts, and options are included in this 30% calculation, which may
limit a fund's investments in such instruments. Income and capital gain
distributions are reinvested in additional shares of each fund. This is
done to preserve the tax advantaged status of the variable contracts. Each
fund is treated as a separate entity for tax purposes.
MONEY MARKET FUND. This fund may distribute any net realized short-term
gains once each year, or more frequently if necessary, in order to maintain
the fund's NAV at $1.00 per share and to comply with tax regulations.
HIGH YIELD AND GOVERNMENT INVESTMENT FUNDS. Income from these funds is
primarily derived from interest rather than dividends.
OVERSEAS FUND. Withholding or other taxes that the fund paid to foreign
governments (if any), will reduce the fund's dividends. Foreign tax
withholding from dividends and interest (if any) is typically at a rate
between 10% and 35%. Shareholders will bear the cost of foreign tax
withholding, but generally not be able to claim a foreign tax credit or
deduction for foreign taxes paid by the fund by reason of the tax-deferred
status of investments through separate accounts.
FMR
All of the stock of FMR is owned by FMR Corp., its parent company
organized in 1972. Through ownership of voting common stock and the
execution of a shareholders' voting agreement, Edward C. Johnson 3d,
Johnson family members, and various trusts for the benefit of the Johnson
family form a controlling group with respect to FMR Corp.
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;
FIIOC, which performs shareholder servicing functions for institutional
customers; and funds sold through intermediaries, and Fidelity Investments
Retail Marketing Company, which provides marketing services to various
companies within the Fidelity organization.
Fidelity investment personnel may invest in securities for their own
account pursuant to a code of ethics that sets forth all employees'
fiduciary responsibilities regarding the funds, establishes procedures for
personal investing and restricts certain transactions. For example, all
personal trades in most securities require pre-clearance, and participation
in initial public offerings is prohibited. In addition, restrictions on
the timing of personal investing relative to trades by Fidelity funds and
on short-term trading have been adopted.
TRUSTEES AND OFFICERS
The Trust's Trustees and executive officers 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. All persons named as Trustees
and officers 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 the Trust or 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, 200 Rivercrest Drive, Fort Worth, TX, Trustee (1991), is a
consultant to Western Mining Corporation (1994). Prior to February 1994, he
was President of Greenhill Petroleum Corporation (petroleum exploration and
production, 1990). Until March 1990, Mr. Cox was President and Chief
Operating Officer of Union Pacific Resources Company (exploration and
production). He is a Director of Sanifill Corporation (non-hazardous
waste, 1993) 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, P.O. Box 264, Bridgehampton, 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 is a member of the President's
Advisory Council of The University of Vermont School of Business
Administration.
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, 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 Trustees of the Greenwich Hospital Association.
*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). 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. 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). In
addition, he serves as a Trustee of Corporate Property Investors, the EPS
Foundation at Trinity College, the Naples Philharmonic Center for the Arts,
and Rensselaer Polytechnic Institute, and he is a member of the Advisory
Boards of Butler Capital Corporation Funds and Warburg, Pincus Partnership
Funds.
MARVIN L. MANN, 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, 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), 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).
JOHN H. COSTELLO, Assistant Treasurer, is an employee of FMR.
LEONARD M. RUSH, Assistant Treasurer (1994), is an employee of FMR
(1994). Prior to becoming Assistant Treasurer of the Fidelity funds, Mr.
Rush was Chief Compliance Officer of FMR Corp. (1993-1994); Chief Financial
Officer of Fidelity Brokerage Services, Inc. (1990-1993); and Vice
President, Assistant Controller, and Director of the Accounting Department
- - First Boston Corp. (1986-1990).
ARTHUR S. LORING, Secretary, is Senior Vice President (1993) and General
Counsel of FMR, Vice President-Legal of FMR Corp., and Vice President and
Clerk of FDC.
WILLIAM J. HAYES, Vice President (1994), is Vice President of Fidelity's
equity funds; Senior Vice President of FMR; and Managing Director of FMR
Corp.
ROBERT A. LAWRENCE, Vice President (1994), is Vice President of
Fidelity's high income funds and Senior Vice President of FMR (1993).
Prior to joining FMR, Mr. Lawrence was Managing Director of the High Yield
Department for Citicorp (1984-1991).
THOMAS J. STEFFANCI, Vice President (1994), is Vice President of
Fidelity's fixed-income funds and Senior Vice President of FMR (1993).
Prior to joining FMR, Mr. Steffanci was Senior Managing Director of CMB
Investment Counselors (1984-1990).
FRED L. HENNING, JR., Vice President (1994), is Vice President of
Fidelity's money market funds and Senior Vice President of FMR Texas
Inc.
ROBERT H. MORRISON, Manager of Security Transactions of Fidelity's equity
funds, is Vice President of FMR.
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). Prior to 1990, Mr. Maher was an
employee of FMR and Assistant Secretary of all the Fidelity funds
(1985-1989).
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. William R. Spaulding, Bertram H. Witham, and
David L. Yunich participate in the program.
MANAGEMENT AND OTHER SERVICES
Each fund employs FMR to furnish it with investment advisory and other
services. Under FMR's Management Contract with each fund, FMR acts as
investment advisor 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 each
fund with all necessary office facilities and personnel for servicing each
fund's investments, and compensates all officers of the Trust, all Trustees
who are "interested persons" of the Trust or of 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 each fund. 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 each fund,
preparing all general shareholder communications and conducting shareholder
relations, maintaining each fund's records and the registration of each
fund's shares under federal and state law, developing management and
shareholder services for each fund and furnishing reports, evaluations and
analyses on a variety of subjects to the Trust's Board of Trustees.
In addition to the management fee payable to FMR and the fees payable to
FSC and FIIOC, each fund pays all its expenses, without limitation, that
are not assumed by those parties. Each fund pays for typesetting, printing
and mailing its Prospectuses, Statements of Additional Information, reports
and proxy material to existing shareholders, legal expenses and the fees of
the custodian, auditor and non-interested Trustees. Other charges paid by
each fund include interest, taxes, brokerage commissions, each fund's
proportionate share of insurance premiums and Investment Company Institute
dues, and the costs of registering shares under federal and state
securities laws. Each fund is also liable for such nonrecurring expenses
as may arise, including costs of litigation to which each fund may be a
party and any obligation they may have to indemnify the officers and
Trustees of the Trust with respect to litigation.
MONEY MARKET FUND. FMR is the fund's manager pursuant to a Management
Contract dated November 18, 1994, and approved by the fund's sole
shareholder November 21, 1994 . For the services of FMR under the
contract, the fund pays FMR a monthly management fee calculated by adding a
basic fee, which consists of a group fee rate and an individual fund fee
rate (.03% of the fund's average net assets), to an income-based component
of 6% of the fund's gross income in excess of a 5% yield, and multiplying
the result by the fund's average net assets. A discussion of the group fee
rate is below.
GOVERNMENT INVESTMENT AND HIGH YIELD FUNDS. FMR is Government Investment
and High Yield Funds' manager pursuant to Management Contracts each dated
November 18, 1994, and approved by each fund's sole shareholder November
21, 1994 . For the services of FMR under each Contract, each fund pays
FMR a monthly management fee composed of the sum of two elements: a group
fee rate and an individual fund fee rate.
THE GROUP FEE RATE. The group fee rate for Money Market, Government
Investment and High Yield Funds is based on the monthly average net assets
of all of the registered investment companies with which FMR has management
contracts and is calculated on a cumulative basis pursuant to the graduated
fee rate schedule shown on the left of the chart below. On the right, the
effective fee rate schedule shows the results of cumulatively applying the
annualized rates at varying asset levels. For example, the effective
annual fee rate at $270 billion of group net assets--their approximate
level for the month of October 1994 was .1561%, which is the weighted
average of the respective fee rates for each level of group net assets up
to that level.
GROUP FEE RATE EFFECTIVE ANNUAL
SCHEDULE FEE RATES
Rate Group Effective
Asset Levels Net Annual
Assets Fee Rate
0 - $ 3 billion .3700% $ 25 billion .2664%
3 - 6 .3400 50 .2188
6 - 9 .3100 75 .1986
9 - 12 .2800 100 .1869
12 - 15 .2500 125 .1793
15 - 18 .2200 150 .1736
18 - 21 .2000 175 .1690
21 - 24 .1900 200 .1652
24 - 30 .1800 225 .1618
30 - 36 .1750 250 .1587
36 - 42 .1700 275 .1560
42 - 48 .1650 300 .1536
48 - 66 .1600 325 .1514
66 - 84 .1550 350 .1494
84 - 120 .1500 375 .1476
120 - 156 .1450 400 .1459
156 - 192 .1400
192 - 228 .1350
228 - 264 .1300
264 - 300 .1275
300 - 336 .1250
336 - 372 .1225
Over - 372 .1200
The individual fund fee rate for Money Market Fund is .03%. Based on the
average net assets of funds advised by FMR for October 1994, the basic fee
rate would have been calculated as follows:
Group Fee Rate Individual Fund Fee Rate Basic Fee Rate
.1561% + .03% = .1861%
If the fund's monthly gross yield is 5% or less, the total management fee
is the sum of the group fee and the individual fund fee. If the fund's
monthly gross yield is greater than 5%, the management fee that FMR
receives includes an income-based component. The income-based component
equals 6% of that portion of the fund's gross income that represents a
gross yield of more than 5% per year. The maximum income-based component
is .24% (annualized) of average net assets, at a fund gross yield of 9% or
more. Gross income for this purpose, includes interest accrued and/or
discount earned (including both original issue discount and market
discount) on portfolio obligations, less amortization of premium. Realized
and unrealized gains and losses, if any, are not included in gross income.
One twelfth (1/12) of the basic fee plus the income-based component is
applied to the fund's average net assets for the current month, giving a
dollar amount which is the fee for that month.
The individual fund fee rate for Government Investment Fund is .30%. Based
on the average net assets of funds advised by FMR for October 1994, the
basic fee rate would have been calculated as follows:
Group Fee Rate Individual Fund Fee Rate Management Fee Rate
.1561% + .30% = .4561%
The individual fund fee rate for High Yield Fund is .45%. Based on the
average net assets of funds advised by FMR for September 1994, the basic
fee rate would be calculated as follows:
Group Fee Rate Individual Fund Fee Rate Management Fee Rate
.1561% + .45% = .6061%
One twelfth (1/12) of this annual management fee rate is then applied to
each fund's average net assets for the current month, giving a dollar
amount which is the fee for that month.
INCOME & GROWTH, GROWTH OPPORTUNITIES AND OVERSEAS FUNDS. FMR is each
fund's manager pursuant to Management Contracts each dated November 18,
1994, and approved by each fund's sole shareholder November 21, 1994.
For the services of FMR under the Contracts, each fund pays FMR a monthly
management fee composed of the sum of two elements: a group fee rate and an
individual fund fee rate.
THE GROUP FEE RATE. Each fund's group fee rate is based on the monthly
average net assets of all of the registered investment companies with which
FMR has management contracts and is calculated on a cumulative basis
pursuant to the graduated fee rate schedule shown on the left of the chart
below. On the right, the effective fee rate schedule shows the results of
cumulatively applying the annualized rates at varying asset levels. For
example, the effective annual fee rate at $270 billion of group net
assets--their approximate level for the month of October 1994 was .3191%,
which is the weighted average of the respective fee rates for each level of
group net assets up to that level.
GROUP FEE RATE EFFECTIVE ANNUAL
SCHEDULE* FEE RATES
Rate Group Effective
Asset Levels Net Annual
Assets Fee Rate
0 - $ 3 billion .520% $ 0.5 billion .5200%
3 - 6 .490 25 .4238
6 - 9 .460 50 .3823
9 - 12 .430 75 .3626
12 - 15 .400 100 .3512
15 - 18 .385 125 .3430
18 - 21 .370 150 .3371
21 - 24 .360 175 .3325
24 - 30 .350 200 .3284
30 - 36 .345 225 .3249
36 - 42 .340 250 .3219
42 - 48 .335 275 .3190
48 - 66 .325 300 .3163
66 - 84 .320 325 .3137
84 - 102 .315 350 .3113
102 - 138 .310 375 .3090
138 - 174 .305 400 .3067
174 - 210 .300
210 - 246 .295
246 - 282 .290
282 318 .285
318 354 .280
354 390 .275
Over 390 .270
Based on the average net assets of the funds advised by FMR for October
1994, the annual management fee rate would have been calculated as follows:
The individual fund fee rate for Income & Growth Fund is .20%.
Group Fee Rate Individual Fund Fee Rate Management Fee Rate
.3191% + .20% = .5191%
The individual fund fee rate for Growth Opportunities Fund is .30%.
Group Fee Rate Individual Fund Fee Rate Management Fee Rate
.3191% + .30% = .6191%
The individual fund fee rate for Overseas Fund is .45%.
Group Fee Rate Individual Fund Fee Rate Management Fee Rate
.3191% + .45% = .7691%
One twelfth (1/12) of this annual management fee rate is then applied to
each fund's average net assets for the current month, giving a dollar
amount which is the fee for that month.
FMR may, from time to time, agree to voluntarily reimburse each fund for
expenses above a specified percentage of average net assets. FMR retains
the ability to be repaid for these expense reimbursements in the amount
that expenses fall below the limit prior to the end of the fiscal year.
Fee reimbursements by FMR will increase a fund's yield and total return,
and repayment by a fund will lower its yield and total return.
FMR has voluntarily agreed to reimburse each fund if, and to the extent
that, the fund's aggregate operating expenses (including the management
fee, but generally excluding interest, taxes, brokerage commissions, and
extraor dinary expenses) exceed an annual rate of 1.00% of Money Market,
Government Investment and High Yield Funds' average net assets, and
1.50% of Income & Growth, Growth Opportunities and Overseas Funds'
average net assets for any fiscal year, or for a portion of such year if
FMR's agreement is terminated or revised.
SUB-ADVISORS. On behalf of HIGH YIELD, GROWTH OPPORTUNITIES AND INCOME &
GROWTH FUNDS, FMR has entered into sub-advisory agreements with FMR U.K.
and FMR Far East. On behalf of OVERSEAS FUND, FMR has entered into
sub-advisory agreements with FMR U.K., FMR Far East, and FIIA. FIIA, in
turn, has entered into a sub-advisory agreement with FIIAL U.K. Pursuant
to the sub-advisory agreements, FMR may receive investment advice and
research services outside the United States from the sub-advisors and may
also grant the sub-advisors investment management authority as well as the
authority to buy and sell securities if FMR believes it would be beneficial
to a fund.
Currently, FMR U.K., FMR Far East, FIIA and FIIAL U.K. each focus on
issuers in countries other than the United States such as those in Europe,
Asia, and the Pacific Basin.
FMR U.K. and FMR Far East are wholly owned subsidiaries of FMR. FIIA is a
wholly owned subsidiary of Fidelity International Limited (FIL), a Bermuda
company formed in 1968 which primarily provides investment advisory
services to non-U.S. investment companies and institutional investors
investing in securities throughout the world. Edward C. Johnson 3d, Johnson
family members, and various trusts for the benefit of the Johnson family
owns, directly or indirectly, more than 25% of the voting common stock of
FIL. FIIA was organized in Bermuda in 1983. FIIAL U.K. was organized in the
United Kingdom in 1984, and is a wholly owned subsidiary of Fidelity
International Management Holdings Limited, an indirect wholly owned
subsidiary of FIL.
Under the sub-advisory agreements FMR pays the fees of FMR U.K., FMR Far
East, and FIIA. FIIA, in turn, pays the fees of FIIAL U.K. For providing
non-discretionary investment advice and research services, the sub-advisors
are compensated as follows:
(small solid bullet) FMR pays FMR U.K. and FMR Far East fees equal to 110%
and 105%, respectively, of FMR U.K.'s and FMR Far East's costs incurred in
connection with providing investment advice and research services.
(small solid bullet) FMR pays FIIA a fee equal to 30% of FMR's monthly
management fee with respect to the average net assets held by a fund for
which the sub-advisor has provided FMR with investment advice and research
services.
(small solid bullet) FIIA pays FIIAL U.K. a fee equal to 110% of FIIAL
U.K.'s costs incurred in connection with providing investment advice and
research services.
For providing discretionary investment management and executing portfolio
transactions, the sub-advisors are compensated as follows:
(small solid bullet) FMR pays FMR U.K., FMR Far East, and FIIA a fee equal
to 50% of its monthly management fee with respect to a fund's average net
assets managed by the sub-advisor on a discretionary basis.
(small solid bullet) FIIA pays FIIAL U.K. a fee equal to 110% of FIIAL
U.K.'s costs incurred in connection with providing discretionary investment
management services.
FMR entered into the sub-advisory agreements described above with respect
to each fund on November 18, 1994.
FMR entered into a sub-advisory agreement with FMR Texas Inc. (FMR Texas),
dated November 18, 1994 , pursuant to which FMR Texas has primary
responsibility for providing investment management services to the MONEY
MARKET FUND.
FMR Texas, a wholly owned subsidiary of FMR was formed in 1989 and
registered under the Investment Advisers Act of 1940 on June 9, 1989 to
provide investment management services to money market mutual funds; to
advise FMR generally with respect to money market instruments; and to
manage or provide advice with respect to cash flow management.
The sub-advisory agreement provides that FMR and not the fund, will pay
fees to FMR Texas 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 fee waivers or expense
reimbursements that may be in effect from time to time.
DISTRIBUTION AND SERVICE PLANS
Each fund has adopted a distribution and service plan (the Plans) under
Rule 12b-1 under the Investment Company Act of 1940 (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 Trust's Board of Trustees has adopted the Plans
to allow each of these 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 a fund of the
distribution of its shares, such payment is authorized by the Plans.
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 shares of the funds. 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 shares of the funds or to third parties including banks, that
render shareholder support services. However, no such payments to third
parties are currently contemplated.
Each fund's Plan has been approved by the Trustees. As required by the
Rule, the Trustees carefully considered all pertinent factors relating to
the implementation of each Plan prior to its approval, and have determined
that there is a reasonable likelihood that the Plan will benefit the
respective fund and its shareholders. In particular, the Trustees noted
that the Plan does not authorize payments by the fund other than those made
to FMR under the Management Contract with each fund. To the extent that a
Plan gives FMR and FDC greater flexibility in connection with the
distribution of shares of a fund, additional sales of the fund's shares may
result. Additionally, certain shareholder support services may be provided
more effectively under a Plan by local entities with whom shareholders have
other relationships.
CONTRACTS WITH COMPANIES AFFILIATED WITH FMR
Each fund has an agreement with FSC, an affiliate of FMR Corp., under which
FSC determines the NAV per share and dividends of each fund and maintains
the portfolio and general accounting records of each fund. The fee rates
in effect are based on each fund's average net assets as follows: for
Money Market Fund, .0175% for the first $500 million of average net
assets and .0075% for average net assets in excess of $500 million. The
fee is limited to a minimum of $20,000 and a maximum of $750,000 per year;
for High Yield and Government Investment Funds, .04% for the first $500
million of average net assets and .02% for average net assets in excess of
$500 million. For Income & Growth, Growth Opportunities and Overseas
Funds, .06% for the first $500 million of average net assets and .03% for
average net assets in excess of $500 million. The fee for High Yield,
Government Investment, Income & Growth, Growth Opportunities and Overseas
Funds is limited to a minimum of $45,000 and a maximum of $750,000 per
year.
Each fund utilizes FIIOC, an affiliate of FMR Corp., to maintain the master
accounts of the participating insurance companies. Under the contract,
each fund pays a fee of $95 per shareholder account per year and a fee of
$20 for each monetary transaction. In addition to providing transfer agent
and shareholder servicing functions, FIIOC pays all transfer agent
out-of-pocket expenses and also pays for typesetting, printing and mailing
Prospectuses, Statements of Additional Information, reports, notices and
statements to shareholders allocable to the master account of participating
insurance companies.
Each fund has a Distribution Agreement with FDC, a Massachusetts
corporation organized July 18, 1960. FDC is a broker-dealer registered
under the Securities Exchange Act of 1934 and 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 the funds which are continuously offered
at net asset value. Promotional and administrative expenses, in connection
with the offer and sale of shares, are paid for by FMR.
DESCRIPTION OF THE TRUST
TRUST ORGANIZATION. Money Market Fund, High Yield Fund, Income & Growth
Fund, Growth Opportunities Fund, Government Investment Fund and Overseas
Fund are funds of Fidelity Advisor Annuity Fund, an open-end management
investment company, organized July 15, 1994. The Declaration of Trust
permits the Trustees to create additional funds.
Investments in the Trust may be made only by the separate accounts of
insurance companies for the purpose of funding variable annuity and
variable life insurance contracts issued by insurance companies.
In the event that FMR ceases to be the investment advisor to the Trust or a
fund, the right of the Trust or fund to use the identifying name "Fidelity"
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 the Trust received for the issue or sale of shares 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 liabilities of the Trust. Expenses with respect to the Trust are to
be allocated in proportion to the asset value of the funds, except where
allocations of direct expense can otherwise be fairly made. The officers of
the Trust, 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 the Trust. In the
event of the dissolution or liquidation of the Trust, shareholders of each
fund are entitled to receive as a class the underlying assets of such fund
available for distribution.
SHAREHOLDER AND TRUSTEE LIABILITY. The 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 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
Trust or its Trustees shall include a provision limiting the obligations
created thereby to the Trust and its assets. The Declaration of Trust
provides for indemnification out of each fund's property of any shareholder
held personally liable for the obligations of the fund. The Declaration of
Trust also provides that its funds 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.
VOTING RIGHTS. Each fund's capital consists of shares of beneficial
interest. The shares have no preemptive or conversion rights; the 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 heading "Shareholder and Trustee Liability"
above. Shareholders representing 10% or more of the Trust or fund may, as
set forth in the Declaration of Trust, 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 the entire Trust, the purpose of
voting on removal of one or more Trustees. The Trust or fund may be
terminated upon the sale of its assets to another open-end management
investment company, or upon liquidation and distribution of its assets, if
approved by vote of the holders of a majority of the outstanding shares of
the Trust or the fund. If not so terminated, the Trust or fund will
continue indefinitely.
CUSTODIAN. Morgan Guaranty Trust Company of New York, 60 Wall Street, New
York, New York is custodian of Money Market Fund's assets; The Bank of New
York, 110 Washington Street, New York New York, is custodian of High Yield
and Government Investment Funds' assets; The Chase Manhattan Bank, N.A.,
1211 Avenue of the Americas, New York, New York 10036, is custodian of
Income & Growth and Overseas Funds' assets; and Brown Brothers Harriman &
Co., 40 Water Street, Boston, Massachusetts, is custodian of Growth
Opportunities Fund's assets. The custodians take no part in determining
the investment policies of the funds or in deciding which securities are
purchased or sold by the funds. The funds, however, may invest in
obligations of the custodians and may purchase or sell securities from or
to the custodians. Investors should understand that the expense ratio for
Overseas Fund may be higher than that of investment companies which invest
exclusively in domestic securities since the cost of maintaining the
custody of foreign securities is higher.
FMR, its officers and directors and its affiliated companies from time to
time have transactions with various banks, including the custodian banks
for certain of the funds advised by FMR. The Boston branch of Brown
Brothers Harriman & Co. leases its office space from an affiliate of FMR at
a lease payment which, when entered into, was consistent with prevailing
market rates. Other 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. Price Waterhouse LLP , 160 Federal Street, Boston,
Massachusetts, serves as the Trust's independent accountant. The auditor
examines financial statements for the funds and provides other audit, tax,
and related services.
APPENDIX
The DOLLAR-WEIGHTED AVERAGE MATURITY of a fund's fixed-income holdings is
derived by multiplying the value of each fixed-income investment held by a
fund by the number of days remaining to its maturity, adding these
calculations, and then dividing the total by the value the fund's
fixed-income holdings. An obligation's maturity is typically determined on
a stated final maturity basis, although there are some exceptions to this
rule.
For example, if it is probable that the issuer of an instrument will take
advantage of a maturity-shortening device, such as a call, refunding, or
redemption provision, the date on which the instrument will probably be
called, refunded, or redeemed may be considered to be its maturity date.
Also, the maturities of mortgage-backed securities and some asset-backed
securities. such as collateralized mortgage obligations, are determined on
a weighted average life basis, which is the average time for principal to
be repaid. For a mortgage security, this average time is calculated by
assuming a constant prepayment rate for the life of the mortgage. The
weighted average life of these securities is likely to be substantially
shorter than their stated final maturity.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S COMMERCIAL PAPER RATINGS:
PRIME-1 (or related institutions) have a superior capacity for repayment of
short-term
promissory obligations. Prime-1 repayment capacity will normally be
evidenced by the following characteristics:
- - Leading market positions in well established industries.
- - High rates of return on funds employed.
- - Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
- - Broad margins in earnings coverage of fixed financial charges with high
internal cash generation.
- - Well established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2 (or related supporting institution) have a strong capacity for
repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S COMMERCIAL PAPER RATINGS:
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+)
sign designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated A-1.
DESCRIPTION OF FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS:
FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded
as having the strongest degree of assurance for timely payment.
FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance
of timely payment only slightly less in degree than the strongest issues.
DESCRIPTION OF FITCH INVESTORS SERVICE, INC. CORPORATE BOND RATINGS:
AAA--rated bonds are considered to be investment grade and of the highest
quality. The obligor has an extraordinary ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA--rated bonds are considered to be investment grade and of high quality.
The obligor's ability to pay interest and repay principal, while very
strong, is somewhat less than for AAA rated securities or more subject to
possible change over the term of the issue.
DESCRIPTION OF DUFF & PHELPS INC. COMMERCIAL PAPER RATINGS:
DUFF 1--Very high certainty of timely payment. Liquidity factors are
excellent and supported by strong fundamental protection factors. Risk
factors are minor.
DUFF 2--Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing internal funds needs may enlarge
total financing requirements, access to capital markets is good. Risk
factors are small.
DESCRIPTION OF DUFF & PHELPS INC. CORPORATE BOND RATINGS:
DUFF 1--Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
DUFF 2,3,4--High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic
conditions.
