-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O9cWizCxDtby2xP3yBFrHsCPlmFOMVjIPjWLpzHwWJm1XEXqpf3tI7Vh6ae2G2ci 2A8hCn6YYjXkgkhU+gfqyQ== 0000354046-98-000013.txt : 19981118 0000354046-98-000013.hdr.sgml : 19981118 ACCESSION NUMBER: 0000354046-98-000013 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981117 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIDELITY CHARLES STREET TRUST CENTRAL INDEX KEY: 0000354046 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-03221 FILM NUMBER: 98754279 BUSINESS ADDRESS: STREET 1: 82 DEVONSHIRE ST CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 2145064081 MAIL ADDRESS: STREET 1: 82 DEVONSHIRE STREET STREET 2: MAIL ZONE ZH-1 CITY: BOSTON STATE: MA ZIP: 02109 FORMER COMPANY: FORMER CONFORMED NAME: FIDELITY U S GOVERNMENT RESERVES FUND DATE OF NAME CHANGE: 19880201 FORMER COMPANY: FORMER CONFORMED NAME: FIDELITY FEDERAL RESERVES DATE OF NAME CHANGE: 19820215 FORMER COMPANY: FORMER CONFORMED NAME: FIDELITY UNITED STATES TREASURY TRUST DATE OF NAME CHANGE: 19811020 N-30D 1 FIDELITY ASSET MANAGER: GROWTH SM ANNUAL REPORT SEPTEMBER 30, 1998 (2_FIDELITY_LOGOS)(registered trademark) CONTENTS PRESIDENT'S MESSAGE 3 Ned Johnson on investing strategies. PERFORMANCE 4 How the fund has done over time. MARKET RECAP 6 An overview of the market's performance and the factors driving it. FUND TALK 7 The manager's review of fund performance, strategy and outlook. INVESTMENT CHANGES 10 A summary of major shifts in the fund's investments over the past six months. INVESTMENTS 11 A complete list of the fund's investments with their market values. FINANCIAL STATEMENTS 44 Statements of assets and liabilities, operations, and changes in net assets, as well as financial highlights. NOTES 48 Notes to the financial statements. REPORT OF INDEPENDENT 53 The auditors' opinion. ACCOUNTANTS DISTRIBUTIONS 54 To reduce expenses and demonstrate respect for our environment, we have initiated a project through which we will begin eliminating duplicate copies of most financial reports and prospectuses to most households, even if they have more than one account in the fund. If additional copies of financial reports, prospectuses or historical account information are needed, please call 1-800-544-6666. THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS. MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK. FOR MORE INFORMATION ON ANY FIDELITY FUND, INCLUDING CHARGES AND EXPENSES, CALL 1-800-544-8888 FOR A FREE PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY. PRESIDENT'S MESSAGE (photo_of_Edward_C_Johnson_3d) DEAR SHAREHOLDER: The stock and bond markets continued to be influenced by competing factors as the third quarter of 1998 ended. On the one hand, low inflation, low unemployment and moderate growth in the U.S. economy provided a foundation for positive returns. But growing concerns about U.S. corporate earnings, combined with fears about the health of the economies and financial markets in Japan, Russia and many emerging markets, led to a continuation of the volatility that has marked most of the year. While it's impossible to predict the future direction of the markets with any degree of certainty, there are certain basic principles that can help investors plan for their future needs. First, investors are encouraged to take a long-term view of their portfolios. If you can afford to leave your money invested through the inevitable up and down cycles of the financial markets, you will greatly reduce your vulnerability to any single decline. We know from experience, for example, that stock prices have gone up over longer periods of time, have significantly outperformed other types of investments and have stayed ahead of inflation. Second, you can further manage your investing risk through diversification. Asset Manager funds are already diversified because they invest in stocks, bonds and short-term and money market instruments, both in the U.S. and overseas. If you have a shorter investment time horizon, you might want to consider moving some of your investment into Asset Manager: Income, which generally has a higher weighting in short-term investments compared with the other Asset Manager funds. Finally, no matter what your time horizon or portfolio diversity, it makes good sense to follow a regular investment plan, investing a certain amount of money in a fund at the same time each month or quarter and periodically reviewing your overall portfolio. By doing so, you won't get caught up in the excitement of a rapidly rising market, nor will you buy all your shares at market highs. While this strategy - known as dollar cost averaging - won't assure a profit or protect you from a loss in a declining market, it should help you lower the average cost of your purchases. If you have questions, please call us at 1-800-544-8888. We are available 24 hours a day, seven days a week to provide you the information you need to make the investments that are right for you. Best regards, Edward C. Johnson 3d PERFORMANCE: THE BOTTOM LINE There are several ways to evaluate a fund's historical performance. You can look at the total percentage change in value, the average annual percentage change or the growth of a hypothetical $10,000 investment. Total return reflects the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains (the profits earned upon the sale of securities that have grown in value). If Fidelity had not reimbursed certain fund expenses, the life of fund total returns would have been lower. CUMULATIVE TOTAL RETURNS PERIODS ENDED SEPTEMBER PAST 1 PAST 5 LIFE OF 30, 1998 YEAR YEARS FUND FIDELITY ASSET 5.33% 81.45% 154.80% MANAGER: GROWTH Fidelity Aggressive 9.98% 105.38% n/a Composite S&P 500 (registered trademark) 9.05% 147.93% 188.48% LB Aggregate Bond 11.51% 41.66% 67.15% LB 3 Month T-Bill 5.50% 29.17% n/a Flexible Portfolio 2.20% 74.61% n/a Funds Average CUMULATIVE TOTAL RETURNS show the fund's performance in percentage terms over a set period - in this case, one year, five years or since the fund started on December 30, 1991. For example, if you had invested $1,000 in a fund that had a 5% return over the past year, the value of your investment would be $1,050. You can compare the fund's returns to the performance of the Fidelity Aggressive Asset Allocation Composite Index, a hypothetical combination of unmanaged indices. The composite index combines the total returns of the Standard & Poor's 500 Index, the Lehman Brothers Aggregate Bond Index and the Lehman Brothers 3 Month Treasury Bill Index weighted according to the fund's neutral mix. To measure how the fund's performance stacked up against its peers, you can compare it to the flexible portfolio funds average, which reflects the performance of mutual funds with similar objectives tracked by Lipper Analytical Services, Inc. The past one year average represents a peer group of 196 mutual funds. The benchmarks listed in the table above include reinvested dividends and capital gains, if any, and exclude the effect of sales charges. AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED SEPTEMBER PAST 1 PAST 5 LIFE OF 30, 1998 YEAR YEARS FUND FIDELITY ASSET 5.33% 12.65% 14.85% MANAGER: GROWTH Fidelity Aggressive 9.98% 15.48% n/a Composite AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and show you what would have happened if the fund had performed at a constant rate each year. $10,000 OVER LIFE OF FUND
Asset Manager: Growth S&P 500 LB Aggregate Bond FID Aggressive Composite 00321 SP001 LB001 F0022 1991/12/31 10000.00 10000.00 10000.00 10000.00 1992/01/31 10367.06 9814.00 9864.00 9832.79 1992/02/29 10585.32 9941.58 9928.12 9928.85 1992/03/31 10436.51 9747.72 9872.52 9786.72 1992/04/30 10466.27 10034.30 9943.60 9994.20 1992/05/31 10684.52 10083.47 10131.53 10082.80 1992/06/30 10565.48 9933.23 10271.35 10030.65 1992/07/31 11001.98 10339.50 10480.89 10375.92 1992/08/31 10823.41 10127.54 10586.74 10268.64 1992/09/30 11071.43 10247.04 10712.72 10394.18 1992/10/31 11279.76 10282.91 10570.25 10371.52 1992/11/30 11686.51 10633.55 10572.36 10594.82 1992/12/31 11907.91 10764.35 10740.46 10733.81 1993/01/31 12079.90 10854.77 10946.68 10863.25 1993/02/28 12231.66 11002.39 11138.24 11025.99 1993/03/31 12707.16 11234.54 11185.02 11189.63 1993/04/30 12747.63 10962.67 11263.32 11041.15 1993/05/31 13010.68 11256.47 11277.96 11230.85 1993/06/30 13202.90 11289.11 11482.09 11328.95 1993/07/31 13445.72 11243.95 11547.54 11321.07 1993/08/31 13992.04 11670.10 11749.62 11677.20 1993/09/30 13931.34 11580.24 11781.35 11634.00 1993/10/31 14366.38 11819.95 11824.94 11804.96 1993/11/30 14244.97 11707.66 11724.43 11694.61 1993/12/31 15041.53 11849.32 11787.74 11802.05 1994/01/31 15622.08 12252.20 11946.87 12113.43 1994/02/28 15157.64 11920.17 11739.00 11822.99 1994/03/31 14387.09 11400.45 11449.04 11410.18 1994/04/30 14365.98 11546.37 11357.45 11479.88 1994/05/31 14482.09 11735.73 11356.32 11600.01 1994/06/30 14049.31 11448.21 11331.33 11409.94 1994/07/31 14397.64 11823.71 11556.82 11717.71 1994/08/31 14904.30 12308.48 11570.69 12032.78 1994/09/30 14682.64 12006.92 11400.60 11792.90 1994/10/31 14724.86 12277.08 11390.34 11965.75 1994/11/30 14302.64 11829.95 11365.28 11677.52 1994/12/31 13930.27 12005.39 11443.70 11814.50 1995/01/31 13583.09 12316.69 11670.29 12082.17 1995/02/28 13810.93 12796.67 11948.04 12468.34 1995/03/31 14093.00 13174.30 12020.93 12734.26 1995/04/30 14483.57 13562.28 12189.22 13031.23 1995/05/31 14841.59 14104.36 12660.94 13531.10 1995/06/30 15156.22 14432.01 12753.37 13770.98 1995/07/31 15785.47 14910.57 12725.31 14055.82 1995/08/31 15872.26 14948.00 12879.29 14131.14 1995/09/30 16143.49 15578.81 13004.21 14562.61 1995/10/31 15948.20 15523.19 13173.27 14599.91 1995/11/30 16338.77 16204.66 13370.87 15087.68 1995/12/31 16709.46 16516.76 13558.06 15345.57 1996/01/31 17260.20 17078.99 13647.54 15717.60 1996/02/29 17238.17 17237.31 13410.08 15718.76 1996/03/31 17271.22 17403.31 13316.21 15779.27 1996/04/30 17568.62 17659.83 13241.64 15903.57 1996/05/31 17766.88 18115.28 13215.15 16166.03 1996/06/30 17843.99 18184.30 13392.24 16271.19 1996/07/31 17392.38 17380.92 13428.39 15819.24 1996/08/31 17513.54 17747.48 13405.57 16029.81 1996/09/30 18240.52 18746.31 13638.82 16698.83 1996/10/31 18769.23 19263.33 13941.60 17112.15 1996/11/30 20002.89 20719.45 14180.01 18045.43 1996/12/31 19648.40 20308.99 14048.13 17761.28 1997/01/31 20465.58 21577.90 14091.68 18555.94 1997/02/28 20693.91 21747.07 14126.91 18672.99 1997/03/31 19684.45 20853.48 13970.10 18088.00 1997/04/30 20489.61 22098.44 14179.65 18916.16 1997/05/31 21739.42 23443.79 14314.36 19772.23 1997/06/30 22388.36 24494.07 14484.70 20454.67 1997/07/31 23902.55 26443.06 14875.79 21737.47 1997/08/31 23133.43 24961.72 14749.34 20843.86 1997/09/30 23998.69 26328.88 14967.63 21724.91 1997/10/31 23505.97 25449.49 15184.66 21300.40 1997/11/30 24251.05 26627.55 15254.51 22019.68 1997/12/31 24847.53 27084.74 15408.58 22344.66 1998/01/31 25035.77 27384.30 15605.81 22594.52 1998/02/28 26461.01 29359.26 15593.33 23734.85 1998/03/31 27213.97 30862.74 15646.35 24611.42 1998/04/30 26689.59 31173.22 15727.71 24822.27 1998/05/31 26850.93 30637.36 15877.12 24588.12 1998/06/30 27536.66 31881.84 16012.08 25344.79 1998/07/31 27119.85 31542.30 16045.70 25174.73 1998/08/31 24134.92 26981.92 16307.25 22735.27 1998/09/30 25277.79 28710.38 16688.84 23893.79 IMATRL PRASUN SHR__CHT 19980930 19981005 150312 R00000000000084
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was invested in Fidelity Asset Manager: Growth Fund on December 31, 1991, shortly after the fund started. As the chart shows, by September 30, 1998, the value of the investment would have grown to $25,278 - a 152.78% increase on the initial investment. For comparison, look at how both the S&P 500 Index, a widely recognized, unmanaged index of common stocks, and the Lehman Brothers Aggregate Bond Index, a market value weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year, did over the same period. With dividends and capital gains, if any, reinvested, the same $10,000 investment in the S&P 500 Index would have grown to $28,710 - a 187.10% increase. If $10,000 was invested in the Lehman Brothers Aggregate Bond Index, it would have grown to $16,689 - a 66.89% increase. You can also look at how the Fidelity Aggressive Asset Allocation Composite Index, did over the same period. The composite index combines the total returns of the S&P 500 Index (+187.10%), the Lehman Brothers Aggregate Bond Index (+66.89%) and the Lehman Brothers 3-month T-Bill Index (+36.09%) according to the fund's neutral mix,* and assumes monthly rebalancing of the mix. With dividends and interest, if any, reinvested, the same $10,000 investment would have grown to $23,894 - a 138.94% increase. (checkmark)UNDERSTANDING PERFORMANCE How a fund did yesterday is no guarantee of how it will do tomorrow. If you sell your shares during a market downturn, you might lose money. But if you can ride out the market's ups and downs, you may have a gain. * CURRENTLY 70% STOCKS, 25% BONDS AND 5% SHORT-TERM/MONEY MARKET INSTRUMENTS EFFECTIVE JANUARY 1, 1997; 65%, 30% AND 5%, RESPECTIVELY, PRIOR TO JANUARY 1, 1997. MARKET RECAP Against a backdrop of financial and economic instability in many of the world's developed and emerging markets on the one hand, and a resilient domestic economy on the other, the U.S. stock and bond markets experienced extreme volatility during the 12-month period that ended September 30, 1998. STOCKS: The 12-month period that drew to a close on September 30, 1998, is one equity investors will remember for years to come. The period began as it ended: with unusually volatile markets. In October 1997, the Dow Jones Industrial Average - an index of 30 blue-chip stocks - tumbled over 550 points in one day on the news of worsening economic conditions in Asia. The Dow rebounded the following day, however, rising 330 points as investors focused on higher-quality stocks with strong liquidity and minimal international exposure. This trend continued in the first and second quarters of 1998, as U.S. economic growth chugged along on the rails of near-record lows for inflation, unemployment and interest rates. Unfortunately, emerging markets - particularly in Russia and Latin America - seemed to catch the so-called "Asian contagion," causing a free-fall in the U.S. stock market. On August 31, the Dow plunged 512.61 points - erasing all previous gains for the year. Appropriately, the Dow closed on September 30 with a 237.90 loss, triggered by investor disappointment over a lower-than-hoped-for reduction in the federal funds rate. For the 12-month period ending September 30, 1998, the Dow eked out a barely positive gain of 0.40%, while the Standard & Poor's 500 Index - a market-capitalization weighted index of 500 widely held U.S. stocks - - returned 9.05%. BONDS: As a safe haven from turbulent stock markets worldwide, bond markets reaped the benefits from the flight to quality by anxious investors during the 12-month period ending September 30, 1998. The Lehman Brothers Aggregate Bond Index - a broad measure of the U.S. taxable investment-grade bond market - returned 11.51% over the past year, over two and one-half times higher than the 4.54% return generated for the six-month period ending March 31, 1998. The buying surge sent Treasury-bond yields - which move in the opposite direction of bond prices - to their lowest level in over three decades, as the yield on the benchmark 30-year bond fell to 4.96%. In spite of the global economic crisis that dominated the period, the U.S. enjoyed low interest rates, low inflation and a stable economy, which aided the performance of corporate bonds. The Lehman Brothers Corporate Bond Index returned 11.07% for the 12-month period. Mortgage-backed bonds also performed well, although lower interest rates resulted in higher refinancing activity. The Lehman Brothers Mortgage Backed Securities Index had a 12-month return of 8.62%. Interest rates fell even lower late in the period, as the Federal Reserve lowered the fed funds rate by 0.25%, the first rate cut in nearly three years. The period's biggest losers were shareholders of emerging-market debt, as the JP Morgan Emerging Markets Bond Index lost 20.89% over the past 12 months. FUND TALK: THE MANAGER'S OVERVIEW An interview with Richard Habermann, Portfolio Manager of Fidelity Asset Manager: Growth (PHOTOGRAPH OF RICHARD HABERMANN) Q. HOW DID THE FUND PERFORM, DICK? A. For the 12-month period that ended September 30, 1998, the fund returned 5.33%. That trailed the 9.98% return of the Fidelity Aggressive Composite Index, but beat the 2.20% return of the flexible portfolio funds average, according to Lipper Analytical Services. The fund's competitive performance relative to its peer group was due in large part to the fund's balanced approach to asset allocation. Many funds within the peer group were fairly aggressive in terms of asset allocation and security exposure - factors that detracted from peer group performance late in the period as equity markets stumbled. In contrast, the fund's bond allocation may have benefited performance relative to its peers. Q. WHAT WAS YOUR STRATEGY IN TERMS OF ASSET ALLOCATION? A. The fund's neutral mix generally calls for 70% to be invested in stocks, 25% in bonds and 5% in short-term/money market instruments. Given the market volatility we witnessed throughout the period, however - particularly during the past six months - the percentage in stocks was scaled back and the fund's exposure to bonds was increased. This decision was made during the summer months based on a belief that global market turmoil could creep into U.S. corporate circles and have a negative impact on earnings growth. In retrospect, this turned out to be a sound strategy. Another adjustment was made during the last month of the period, when the fund's stock exposure was ramped back up based on two factors. First, the International Monetary Fund - which provides financial assistance to countries with struggling economies - devised bailout plans for both Asia and Russia. Second, the U.S. Federal Reserve Board appeared ready to stoke the economy by lowering interest rates, which it eventually did in late September. Whenever investors are given reason to be confident, stocks generally perform well. Overall, I was happy with these allocation shifts. Q. HOW DID THE FUND'S EQUITY SUBPORTFOLIO PERFORM DURING THE PERIOD? A. In terms of the fund's equity positions - which are managed by Brad Lewis - industry selection was positive but individual security selection within those industries hurt performance relative to the Standard & Poor's 500 Index. For instance, the fund was well-represented in the technology sector, but while technology stocks accounted for approximately one-fourth of the S&P 500's gain, the fund's technology positions were largely a drag on performance. Looking back on the period, we simply didn't own enough of the names that did really well. The fund had positions in strong performers such as Microsoft, for example, but not enough to positively influence performance relative to the S&P 500. Some of the individual disappointments included financial-related holdings Chase Manhattan and Lehman Brothers, both of which suffered as global capital market conditions deteriorated toward the end of the period. Additionally, the fund's exposure to pharmaceutical stocks in general was beneficial as interest in defensive areas of the market peaked toward the close of the period. Q. WHICH EQUITY INVESTMENTS BENEFITED THE FUND'S PERFORMANCE? A. Home mortgage financers Fannie Mae and Freddie Mac continued their strong run during the period. Many homeowners took advantage of the lower interest rates prevalent in the U.S. to refinance their mortgages. Both companies benefited from increased refinancing volume, as well as attractive yield spreads between mortgage-related bonds and Treasury bonds. Another strong performer was retail store chain Wal-Mart, which benefited from strong consumer spending. Q. WHAT ABOUT THE BOND PORTION OF THE FUND? A. While turning in positive returns, the fund's fixed-income investments lagged the fixed-income benchmark during the period. There were two primary reasons for this. First, the fund's tactical allocation toward high-yield securities - which are managed by Fred Hoff - benefited performance throughout much of the period but proved a net negative down the stretch as the market corrected. Second, the fund's investment-grade bond exposure - which is overseen by Charlie Morrison - was overweighted in corporate and mortgage-backed bonds, both of which underperformed as a flight to quality caused U.S. Treasuries to outperform all other fixed-income sectors. During the last two months of the period, this flight to quality was spurred primarily by the ongoing troubles in overseas markets. Simultaneously, stock investors became concerned with their risk exposure and many opted for more conservative investments. As a result, U.S. Treasury bonds benefited tremendously. While corporate and mortgage-backed securities performed well over the period, they were unable to keep pace with Treasuries. Q. WHAT WAS YOUR STRATEGY WITH RESPECT TO THE FUND'S SHORT-TERM/MONEY MARKET INVESTMENTS? A. Unlike six months ago, when we were focusing on investments with shorter maturities, the unpredictability of the stock market caused us to take a somewhat longer-term approach. John Todd, who manages the fund's short-term/money market subportfolio, began to look at securities with one-year maturities during the second half of the period. As uncertainty continued to prevail in the financial markets, however, John began to look more closely at the three- to six-month range. Throughout the summer months, it appeared unlikely that the Fed would take action and cut interest rates, yet the market itself had been pricing in a potential rate tightening. On average, the fund's short-term investments were longer in maturity than the three-month Treasury bill benchmark and had more exposure to higher-yielding investments. This helped relative performance during the period. Q. WHAT'S YOUR OUTLOOK GOING FORWARD? A. I think it's important that shareholders of the fund understand that the market is going to go through this sort of volatility every now and then. The returns we've seen over the past year are much closer to the market's historical yearly average than the 20% returns some investors have become accustomed to. Should the Fed lower interest rates again - thus making it easier for corporations to borrow or raise capital - we could see increased growth and better valuations across the board. In terms of equities, we may also begin to see more stocks participate in the market's gains. This would be an attractive development and would play nicely to our stock-picking strengths. THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET AND OTHER CONDITIONS. (CHECKMARK)FUND FACTS GOAL: MAXIMUM TOTAL RETURN OVER THE LONG TERM THROUGH INVESTING IN STOCKS, BONDS AND SHORT-TERM AND MONEY MARKET INSTRUMENTS FUND NUMBER: 321 TRADING SYMBOL: FASGX START DATE: DECEMBER 30, 1991 SIZE: AS OF SEPTEMBER 30, 1998, MORE THAN $4.5 BILLION MANAGER: RICHARD HABERMANN, SINCE 1996; MANAGER, FIDELITY ASSET MANAGER AND FIDELITY ASSET MANAGER: INCOME, SINCE 1996; FIDELITY TREND FUND, 1977-1981; FIDELITY MAGELLAN FUND, 1972-1977; JOINED FIDELITY IN 1968 DICK HABERMANN ON THE CONCERNS POSED BY HEDGE FUNDS: "THERE'S BEEN A LOT OF TALK ABOUT HEDGE FUNDS LATELY, PARTICULARLY WITH THE RECENT NEAR-COLLAPSE OF LONG-TERM CAPITAL MANAGEMENT. NOT ALL INVESTORS MAY BE FAMILIAR WITH HOW THESE TYPES OF FUNDS OPERATE, NOR HOW THEY CAN POTENTIALLY AFFECT OTHER TYPES OF INVESTMENTS SUCH AS MUTUAL FUNDS. "A HEDGE FUND SEEKS TO TAKE ADVANTAGE OF INEFFICIENCIES IN CAPITAL MARKETS. THIS COULD BE IN STOCKS, BONDS, EMERGING-MARKET DEBT OR OTHER INVESTMENTS. HEDGE FUNDS CAN BE HIGHLY LEVERAGED AND TYPICALLY TAKE AMPLE INVESTMENT RISKS. OF COURSE, THE ATTRACTIVENESS TO INVESTORS IS THE POTENTIALLY LUCRATIVE RETURNS THEY CAN PROVIDE. "IN THE CASE OF LONG-TERM CAPITAL, THE FUND HAD RATHER EXTREME LEVERAGE WITHIN ITS BOND ALLOCATION. UNFORTUNATELY, THE MARKET TURMOIL LATE IN THE PERIOD FORCED FIRMS SUCH AS LONG-TERM CAPITAL TO `UNWIND' SOME OF THESE LEVERAGED STRATEGIES BY SELLING LARGE AMOUNTS OF SECURITIES. AFTER REALIZING THAT SUCH A CONTINUING GLUT OF SUPPLY HITTING THE MARKETS WOULD BE PARALYZING, A NUMBER OF ENTITIES COLLABORATED ON A FINANCIAL PLAN TO ASSIST LONG-TERM CAPITAL. "WHAT DOES THIS TYPE OF SITUATION MEAN FOR FUNDS SUCH AS THE ASSET MANAGERS? WELL, IF LONG-TERM CAPITAL HAD UNLEASHED ALL OF ITS BOND HOLDINGS, IT WOULD HAVE PUT INCREDIBLE LIQUIDITY PRESSURE ON SOME OF THE SECTORS IN WHICH WE INVEST. INVESTORS ALSO WOULD HAVE HAD DIFFICULTY DETERMINING WHETHER PRICING WAS FAIR OR NOT. IN ESSENCE, THIS ONE SITUATION COULD HAVE PLUNGED THE U.S. DIRECTLY INTO A CAPITAL MARKETS `FREEZE.' FORTUNATELY, IT DIDN'T COME TO THAT, AND IN THE END, INVESTORS HOPEFULLY BECAME MORE EDUCATED ABOUT THE RISKS THAT HEDGE FUNDS TAKE." INVESTMENT CHANGES
TOP TEN STOCKS AS OF SEPTEMBER 30, 1998 % OF FUND'S % OF FUND'S INVESTMENTS IN THESE INVESTMENTS STOCKS 6 MONTHS AGO BellSouth 4.6 0.5 Corp. Microsoft 3.2 0.5 Corp. AT&T Corp. 2.6 0.2 Wal-Mart 2.3 2.0 Stores, Inc. Guidant Corp. 2.2 0.0 Fannie Mae 2.2 7.1 Chrysler Corp. 2.0 0.0 Heinz (H.J.) 2.0 0.0 Co. Ford Motor 2.0 0.0 Co. Texaco, Inc. 2.0 0.0
TOP TEN MARKET SECTORS (STOCKS ONLY) AS OF SEPTEMBER 30, 1998 % OF FUND'S % OF FUND'S INVESTMENTS IN THESE INVESTMENTS MARKET SECTORS 6 MONTHS AGO Utilities 14.7 8.7 Finance 10.9 18.6 Health 9.0 6.6 Technology 9.0 7.7 Retail & Wholesale 7.0 7.7 Nondurables 4.8 4.8 Durables 4.6 3.6 Energy 2.8 5.0 Media & Leisure 2.8 3.9 Construction & Real 1.8 1.4 Estate
ASSET ALLOCATION (% OF FUND'S INVESTMENTS) AS OF SEPTEMBER 30, 1998* ROW: 1, COL: 1, VALUE: 71.0 ROW: 1, COL: 2, VALUE: 23.0 ROW: 1, COL: 3, VALUE: 6.0 STOCK CLASS 71% BOND CLASS 23% SHORT-TERM CLASS 6% *FOREIGN INVESTMENTS 2% AS OF MARCH 31, 1998** ROW: 1, COL: 1, VALUE: 76.0 ROW: 1, COL: 2, VALUE: 20.0 ROW: 1, COL: 3, VALUE: 4.0 STOCK CLASS 76% BOND CLASS 20% SHORT-TERM CLASS 4% *FOREIGN INVESTMENTS 10% ASSET ALLOCATIONS IN THE PIE CHARTS REFLECT THE CATEGORIZATION OF ASSETS AS DEFINED IN THE FUND'S PROSPECTUS IN EFFECT AS OF THE TIME PERIODS INDICATED ABOVE. FINANCIAL STATEMENT CATEGORIZATIONS CONFORM TO ACCOUNTING STANDARDS AND WILL DIFFER FROM THE PIE CHART. INVESTMENTS SEPTEMBER 30, 1998 SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENT IN SECURITIES COMMON STOCKS - 68.9% SHARES VALUE (NOTE 1) (000S) AEROSPACE & DEFENSE - 0.0% Gulfstream Aerospace 47,600 $ 1,916 Corp. (a) BASIC INDUSTRIES - 0.3% CHEMICALS & PLASTICS - 0.1% Quaker State Corp. 239,900 3,494 PACKAGING & CONTAINERS - 0.2% Owens-Illinois, Inc. (a) 483,400 12,085 TOTAL BASIC INDUSTRIES 15,579 CONSTRUCTION & REAL ESTATE - 1.6% BUILDING MATERIALS - 0.7% Fortune Brands, Inc. 286,200 8,479 Masco Corp. 1,021,800 25,162 33,641 CONSTRUCTION - 0.6% Centex Corp. 145,600 5,023 D.R. Horton, Inc. 208,753 3,340 Fleetwood Enterprises, Inc. 346,400 10,457 Kaufman & Broad Home 339,000 7,945 Corp. U.S. Home Corp. (a) 25,900 761 27,526 ENGINEERING - 0.3% Fluor Corp. 258,700 10,623 TOTAL CONSTRUCTION & REAL 71,790 ESTATE DURABLES - 4.6% AUTOS, TIRES, & ACCESSORIES - 4.2% Chrysler Corp. 1,918,100 91,829 Dana Corp. 358,900 13,391 Ford Motor Co. 1,920,000 90,120 195,340 HOME FURNISHINGS - 0.0% HON Industries, Inc. 6,000 142 TEXTILES & APPAREL - 0.4% Arena Brands Holdings 5,556 139 Corp. Class B COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) DURABLES - CONTINUED TEXTILES & APPAREL - CONTINUED Jones Apparel Group, 142,800 $ 3,275 Inc. (a) VF Corp. 396,500 14,720 18,134 TOTAL DURABLES 213,616 ENERGY - 2.8% ENERGY SERVICES - 0.2% McDermott International, 333,300 8,978 Inc. OIL & GAS - 2.6% Ashland, Inc. 382,500 17,691 British Petroleum Co. PLC 4 0 British Petroleum Co. PLC 27 2 ADR Sun Co., Inc. 305,900 9,789 Texaco, Inc. 1,434,300 89,913 117,395 TOTAL ENERGY 126,373 FINANCE - 10.6% BANKS - 0.3% Chase Manhattan Corp. 288,100 12,460 NationsBank Corp. 41,500 2,220 14,680 CREDIT & OTHER FINANCE - 1.4% Equitable Companies (The), 469,200 19,413 Inc. First Chicago NBD Corp. 680,300 46,601 66,014 FEDERAL SPONSORED CREDIT - 3.2% Fannie Mae 1,588,500 102,061 Freddie Mac 866,400 42,833 144,894 INSURANCE - 4.7% Allmerica Financial Corp. 80,800 4,818 Allstate Corp. 1,872,018 78,040 American General Corp. 240,100 15,336 CIGNA Corp. 962,100 63,619 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) FINANCE - CONTINUED INSURANCE - CONTINUED Lincoln National Corp. 273,100 $ 22,462 MGIC Investment Corp. 332,400 12,257 Nationwide Financial 150,100 6,820 Services, Inc. Class A Provident Companies, Inc. 233,700 7,887 Reliastar Financial Corp. 351 14 Travelers Property Casualty 108,800 3,475 Corp. Class A 214,728 SAVINGS & LOANS - 0.4% Golden West Financial 248,020 20,291 Corp. SECURITIES INDUSTRY - 0.6% Lehman Brothers Holdings, 545,600 15,413 Inc. Morgan Stanley, Dean 320,600 13,806 Witter, Discover & Co. 29,219 TOTAL FINANCE 489,826 HEALTH - 9.0% DRUGS & PHARMACEUTICALS - 5.1% Allergan, Inc. 47,700 2,784 Amgen, Inc. (a) 901,901 68,150 Bristol-Myers Squibb Co. 414,700 43,077 Mylan Laboratories, Inc. 143,200 4,224 Schering-Plough Corp. 605,800 62,738 Warner-Lambert Co. 718,500 54,247 235,220 MEDICAL EQUIPMENT & SUPPLIES - 3.9% Allegiance Corp. 34,240 1,019 Becton, Dickinson & Co. 1,009,200 41,503 Cardinal Health, Inc. 335,300 34,620 Guidant Corp. 1,385,500 102,873 180,015 TOTAL HEALTH 415,235 INDUSTRIAL MACHINERY & EQUIPMENT - 1.7% ELECTRICAL EQUIPMENT - 1.0% Honeywell, Inc. 696,000 44,588 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED INDUSTRIAL MACHINERY & EQUIPMENT - 0.7% Ingersoll-Rand Co. 913,100 $ 34,641 TOTAL INDUSTRIAL MACHINERY & 79,229 EQUIPMENT MEDIA & LEISURE - 1.9% BROADCASTING - 1.2% Loral Orion Network Systems, Inc. warrants 1/15/07: (CV ratio .47) (a) 3,950 34 (CV ratio .6) (a) 1,160 13 Tele-Communications, Inc. 1,432,800 56,058 (TCI Group) Series A (a) 56,105 ENTERTAINMENT - 0.2% Alliance Gaming 2,959 6 Corp. (a)(k) Viacom, Inc. Class B 109,500 6,351 (non-vtg.) (a) 6,357 LODGING & GAMING - 0.0% Aladdin Gaming 36,000 0 Enterprises, Inc. warrants 3/1/10 (a)(f) Fitzgeralds South, Inc. 410 0 warrants 3/15/99 (a)(f) 0 PUBLISHING - 0.5% Gannet Co., Inc. 266,900 14,296 New York Times Co. (The) 342,400 9,416 Class A 23,712 TOTAL MEDIA & LEISURE 86,174 NONDURABLES - 4.8% FOODS - 3.0% Heinz (H.J.) Co. 1,772,100 90,599 Quaker Oats Co. 776,600 45,819 136,418 HOUSEHOLD PRODUCTS - 1.5% Clorox Co. 383,200 31,614 Colgate-Palmolive Co. 573,700 39,298 70,912 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) NONDURABLES - CONTINUED TOBACCO - 0.3% Philip Morris Companies, 256,300 $ 11,806 Inc. TOTAL NONDURABLES 219,136 PRECIOUS METALS - 0.1% Battle Mountain Gold Co. 95,900 581 Homestake Mining Co. 331,900 4,024 4,605 RETAIL & WHOLESALE - 7.0% APPAREL STORES - 0.7% Gap, Inc. 133,350 7,034 Lamonts Apparel, Inc.: Class A warrants 48,477 12 1/31/08 (a) Class A (a) 78,017 49 Class B warrants 15,407 4 1/31/08 (a) Limited, Inc. (The) 767,900 16,846 TJX Companies, Inc. 644,800 11,486 35,431 GENERAL MERCHANDISE STORES - 3.9% Dayton Hudson Corp. 692,800 24,768 Federated Department 373,800 13,597 Stores, Inc. (a) K mart Corp. (a) 960,100 11,461 May Department Stores 443,300 22,830 Co. (The) Wal-Mart Stores, Inc. 1,944,700 106,229 178,885 GROCERY STORES - 0.9% Safeway, Inc. (a) 863,900 40,063 RETAIL & WHOLESALE, MISCELLANEOUS - 1.5% Ebay, Inc. (a) 1,400 63 Lowe's Companies, Inc. 2,003,200 63,727 Office Depot, Inc. (a) 166,850 3,744 Rex Stores Corp. (a) 62,600 665 68,199 TOTAL RETAIL & WHOLESALE 322,578 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) SERVICES - 0.3% LEASING & RENTAL - 0.1% Hertz Corp. Class A 144,000 $ 5,958 PRINTING - 0.2% Donnelley (R.R.) & Sons 277,000 9,747 Co. TOTAL SERVICES 15,705 TECHNOLOGY - 8.9% COMMUNICATIONS EQUIPMENT - 1.5% Cisco Systems, Inc. (a) 143,550 8,873 Globalstar 1,900 48 Telecommunications Ltd. warrants 2/15/04 (a)(f) Lucent Technologies, Inc. 861,420 59,492 68,413 COMPUTER SERVICES & SOFTWARE - 4.4% 24/7 Media, Inc. (a) 2,300 25 American Management 47,700 1,306 Systems, Inc. (a) Compuware Corp. (a) 525,100 30,915 Entrust Technologies, 5,200 77 Inc. (a) Galileo International, Inc. 71,600 2,703 Keane, Inc. (a) 114,500 4,022 Microsoft Corp. (a) 1,354,000 149,025 Novell, Inc. (a) 387,500 4,747 Sabre Group Holdings, Inc. 96,100 2,883 Class A (a) Sterling Software, Inc. (a) 95,400 2,629 Synopsys, Inc. (a) 117,200 3,904 202,236 COMPUTERS & OFFICE EQUIPMENT - 2.0% Dell Computer Corp. (a) 412,800 27,142 Ingram Micro, Inc. Class 230,600 12,352 A (a) Lexmark International 382,000 26,477 Group, Inc. (a) Sun Microsystems, Inc. (a) 477,300 23,776 89,747 PHOTOGRAPHIC EQUIPMENT - 1.0% Eastman Kodak Co. 615,900 47,617 TOTAL TECHNOLOGY 408,013 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) TRANSPORTATION - 1.1% AIR TRANSPORTATION - 1.1% AMR Corp. (a) 887,800 $ 49,217 UTILITIES - 14.2% CELLULAR - 0.0% Century Telephone 37,200 1,758 Enterprises, Inc. McCaw International Ltd. 12,170 61 warrants 4/15/07 (a)(f) 1,819 ELECTRIC UTILITY - 6.7% Baltimore Gas & Electric 239,400 7,990 Co. Consolidated Edison, Inc. 941,000 49,050 DTE Energy Co. 751,600 33,963 Edison International 243,000 6,242 FirstEnergy Corp. 122,800 3,814 FPL Group, Inc. 748,500 52,161 Hawaiian Electric 143,700 5,928 Industries, Inc. Houston Industries, Inc. 1,297,300 40,378 Montana Power Co. 95,900 4,286 PECO Energy Co. 967,500 35,374 Public Service Enterprise 934,700 36,745 Group, Inc. Southern Co. 1,077,700 31,725 307,656 GAS - 0.4% Columbia Energy Group 92,100 5,399 El Paso Energy Corp. 286,300 9,287 Western Resources, Inc. 95,800 3,964 18,650 TELEPHONE SERVICES - 7.1% AT&T Corp. 2,015,700 117,792 BellSouth Corp. 2,791,600 210,053 Pathnet, Inc. warrants 8,200 123 4/15/08 (a)(f) 327,968 TOTAL UTILITIES 656,093 TOTAL COMMON STOCKS 3,175,085 (Cost $2,980,770) NONCONVERTIBLE PREFERRED STOCKS - 2.0% SHARES VALUE (NOTE 1) (000S) CONSTRUCTION & REAL ESTATE - 0.2% REAL ESTATE INVESTMENT TRUSTS - 0.2% California Federal 298,366 $ 7,608 Preferred Capital Corp. $2.28 Crown America Realty Trust 17,430 857 Series A, $5.50 Walden Residential 83,400 1,949 Properties, Inc. $2.30 10,414 FINANCE - 0.3% CREDIT & OTHER FINANCE - 0.1% Fresenius Medical Care 5,340 5,010 Capital Trust II 7.875% INSURANCE - 0.2% American Annuity Group 1,800 1,800 Capital Trust II 8.75% SIG Capital Trust I 9.5% 5,381 5,182 6,982 TOTAL FINANCE 11,992 MEDIA & LEISURE - 0.9% BROADCASTING - 0.7% Adelphia Communications 14,944 1,726 Corp. $13.00 CSC Holdings, Inc. 144,369 15,881 11.125% pay-in-kind Echostar Communications 2,839 2,740 Corp. 12.125% pay-in-kind Granite Broadcasting Corp. 3,114 3,114 12.75% pay-in-kind SFX Broadcasting, Inc. 25,932 3,086 12.625% pay-in-kind Sinclair Capital 11.625% 50,145 5,265 31,812 PUBLISHING - 0.2% PRIMEDIA, Inc.: $9.20 43,811 4,250 Series D, $10.00 41,288 4,088 8,338 TOTAL MEDIA & LEISURE 40,150 RETAIL & WHOLESALE - 0.0% GROCERY STORES - 0.0% Supermarkets General 18,200 378 Holdings Corp. $3.52 pay-in-kind (a) NONCONVERTIBLE PREFERRED STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) TECHNOLOGY - 0.1% COMMUNICATIONS EQUIPMENT - 0.1% Intermedia 2,247 $ 2,472 Communications, Inc. 13.5% pay-in-kind UTILITIES - 0.5% CELLULAR - 0.3% Nextel Communications, 14,912 13,048 Inc. 11.125% pay-in-kind TELEPHONE SERVICES - 0.2% Hyperion 2,935 2,407 Telecommunication, Inc. 12.875% pay-in-kind IXC Communications, Inc. 2,202 2,334 12.5% pay-in-kind NEXTLINK 125,022 6,501 Communications, Inc. 14% pay-in-kind 11,242 TOTAL UTILITIES 24,290 TOTAL NONCONVERTIBLE 89,696 PREFERRED STOCKS (Cost $92,478)
CORPORATE BONDS - 17.0% MOODY'S PRINCIPAL RATINGS AMOUNT (000S) (UNAUDITED) (B) CONVERTIBLE BONDS - 0.2% HEALTH - 0.1% DRUGS & PHARMACEUTICALS - 0.0% Integrated Process B- $ 1,930 1,226 Equipment Corp. 6.25% 9/15/04 (b)(f) MEDICAL FACILITIES MANAGEMENT - 0.1% Tenet Healthcare Corp. 6% B1 2,005 1,679 12/1/05 TOTAL HEALTH 2,905 NONDURABLES - 0.1% FOODS - 0.1% Chiquita Brands B3 3,530 3,248 International, Inc. 7% 3/28/01 RETAIL & WHOLESALE - 0.0% RETAIL & WHOLESALE, MISCELLANEOUS - 0.0% Sports Authority, Inc. (The) B1 2,480 1,854 5.25% 9/15/01 TOTAL CONVERTIBLE BONDS 8,007 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (B) NONCONVERTIBLE BONDS - 16.8% AEROSPACE & DEFENSE - 0.2% DEFENSE ELECTRONICS - 0.1% Raytheon Co.: 5.95% 3/15/01 Baa1 $ 1,700 $ 1,729 6.45% 8/15/02 Baa1 2,030 2,112 3,841 SHIP BUILDING & REPAIR - 0.1% Newport News B1 5,870 6,222 Shipbuilding, Inc. 9.25% 12/1/06 TOTAL AEROSPACE & DEFENSE 10,063 BASIC INDUSTRIES - 0.2% CHEMICALS & PLASTICS - 0.1% Huntsman Corp. 9.5% B2 2,760 2,650 7/1/07 (f) Praxair, Inc. 6.625% A3 1,210 1,266 10/15/07 3,916 PACKAGING & CONTAINERS - 0.1% Owens-Illinois, Inc.: 7.15% 5/15/05 Ba1 2,890 2,890 7.8% 5/15/18 Ba1 1,450 1,382 4,272 TOTAL BASIC INDUSTRIES 8,188 CONSTRUCTION & REAL ESTATE - 0.3% BUILDING MATERIALS - 0.0% American Standard Cos., Ba3 1,460 1,465 Inc. 7.375% 4/14/05 CONSTRUCTION - 0.1% U.S. Home Corp. 8.88% B1 2,220 2,198 8/15/07 REAL ESTATE - 0.1% LNR Property Corp. B1 4,445 4,101 9.375% 3/15/08 REAL ESTATE INVESTMENT TRUSTS - 0.1% CenterPoint Properties Baa2 530 526 Corp. 6.75% 4/1/05 EOP Operating LP: 6.375% 2/15/03 Baa1 1,200 1,199 6.75% 2/15/08 Baa1 570 567 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (B) NONCONVERTIBLE BONDS - CONTINUED CONSTRUCTION & REAL ESTATE - CONTINUED REAL ESTATE INVESTMENT TRUSTS - CONTINUED Weeks Realty LP 6.875% Baa2 $ 1,000 $ 979 3/15/05 3,271 TOTAL CONSTRUCTION & REAL ESTATE 11,035 DURABLES - 0.9% AUTOS, TIRES, & ACCESSORIES - 0.4% Blue Bird Body Co. 10.75% B2 1,730 1,786 11/15/06 Breed Technologies, Inc. B3 5,290 4,364 9.25% 4/15/08 (f) Federal-Mogul Corp. Ba2 8,110 8,118 7.875% 7/1/10 Oshkosh Truck Co. 8.75% B3 3,940 3,743 3/1/08 18,011 CONSUMER DURABLES - 0.1% Corning Consumer B3 5,380 4,331 Products Co. 9.625% 5/1/08 (f) HOME FURNISHINGS - 0.0% Omega Cabinets Ltd. B3 1,730 1,522 10.5% 6/15/07 TEXTILES & APPAREL - 0.4% Levi Strauss & Co. 7% Baa2 3,150 3,074 11/1/06 (f) Nine West Group, Inc. 9% Ba3 1,980 1,703 8/15/07 Unifi, Inc. 6.5% 2/1/08 A3 1,020 1,021 WestPoint Stevens, Inc. Ba3 4,415 4,481 7.875% 6/15/08 Worldtex, Inc. 9.625% B1 6,580 5,856 12/15/07 16,135 TOTAL DURABLES 39,999 ENERGY - 0.3% COAL - 0.1% P&L Coal Holdings Corp. B2 4,200 4,200 9.625% 5/15/08 (f) ENERGY SERVICES - 0.0% Ocean Rig Norway AS B3 2,810 2,129 10.25% 6/1/08 (f) OIL & GAS - 0.2% Chesapeake Energy Corp. B1 1,870 1,636 9.625% 5/1/05 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (B) NONCONVERTIBLE BONDS - CONTINUED ENERGY - CONTINUED OIL & GAS - CONTINUED Occidental Petroleum Corp.: 6.39% 11/9/00 Baa3 $ 500 $ 509 8.5% 11/9/01 Baa2 530 573 10.94% 5/17/00 Baa3 1,200 1,306 Oryx Energy Co.: 8% 10/15/03 Ba1 560 593 8.125% 10/15/05 Ba1 370 384 8.375% 7/15/04 Ba1 1,410 1,509 Petroleum Geo-Services Baa3 1,450 1,399 ASA 7.125% 3/30/28 USX-Marathon Group Baa2 445 462 6.85% 3/1/08 8,371 TOTAL ENERGY 14,700 FINANCE - 2.5% BANKS - 0.8% BankBoston Corp. 6.625% A3 600 618 2/1/04 BankBoston NA (Bearer) A2 500 504 6.375% 3/25/08 BanPonce Corp. 6.665% A3 1,650 1,701 3/5/01 BanPonce Financial Corp. A3 1,000 1,033 7.72% 4/13/00 Barclays Bank PLC yankee A1 3,750 3,817 5.95% 7/15/01 Capital One Bank: 6.375% 2/15/03 Baa3 1,240 1,267 6.42% 11/12/99 Baa3 3,600 3,618 8.125% 3/1/00 Baa3 1,640 1,687 Capital One Financial Ba1 1,700 1,736 Corp. 7.125% 8/1/08 Citicorp 5.625% 2/15/01 Aa3 1,200 1,209 Den Danske Bank AS A1 3,290 3,367 6.375% 6/15/08 (f)(i) Fleet Credit Card LLC A1 900 922 6.45% 10/30/00 Fleet/Norstar Financial A3 930 1,037 Group, Inc. 9.9% 6/15/01 Huntington National Bank A1 5,570 5,654 5.875% 1/15/01 NationsBank NA 5.92% Aa2 2,650 2,704 6/8/01 NB Capital Trust IV 8.25% Aa2 995 1,093 4/15/27 Providian National Bank Baa3 1,020 1,070 6.7% 3/15/03 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (B) NONCONVERTIBLE BONDS - CONTINUED FINANCE - CONTINUED BANKS - CONTINUED Summit Bancorp 8.625% - $ 650 $ 728 12/10/02 Union Planters National A3 1,500 1,558 Bank 6.81% 8/20/01 35,323 CREDIT & OTHER FINANCE - 1.3% Ahmanson Capital Trust I Baa2 1,800 1,976 8.36% 12/1/26 (f) Associates Corp. of North Aa3 1,550 1,598 America 6% 4/15/03 AT&T Capital Corp.: 6.16% 12/3/99 Baa3 1,250 1,265 6.25% 5/15/01 Baa3 3,250 3,301 BankAmerica Capital II 8% Aa2 990 1,070 12/15/26 BanPonce Trust I 8.327% A3 2,850 2,914 2/1/27 BCH Cayman Islands Ltd. A2 440 466 yankee 7.7% 7/15/06 Countrywide Funding A3 1,300 1,349 Corp. 6.45% 2/27/03 ERP Operating LP 6.55% A3 600 609 11/15/01 Farmers Insurance A2 1,100 1,111 Exchange Capital 7.05% 7/15/28 (f) Finova Capital Corp. Baa1 1,000 1,023 6.12% 5/28/02 First Security Capital I A3 850 949 8.41% 12/15/26 Ford Motor Credit Co.: 5.73% 2/23/00 A1 1,500 1,514 6.57% 3/19/01 A1 2,500 2,585 General Electric Capital Aaa 3,000 3,022 Corp. 6.94% 4/13/09 (e) General Motors A3 2,730 2,860 Acceptance Corp. 6.75% 7/10/02 GS Escrow Corp.: 7% 8/1/03 (f) Ba1 860 859 7.125% 8/1/05 (f) Ba1 3,000 2,962 Heller Financial, Inc.: 6.25% 3/1/01 A3 1,650 1,683 7.875% 11/1/99 A3 2,230 2,286 KeyCorp Institutional A1 1,550 1,653 Capital A 7.826% 12/1/26 Macsaver Financial Ba1 4,810 3,583 Services, Inc. 7.6% 8/1/07 Mellon Capital I 7.72% A2 660 699 12/1/26 Money Store, Inc. 7.3% A2 850 907 12/1/02 Nordstrom Credit, Inc. A2 1,200 1,279 7.25% 4/30/02 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (B) NONCONVERTIBLE BONDS - CONTINUED FINANCE - CONTINUED CREDIT & OTHER FINANCE - CONTINUED PNC Funding Corp. A3 $ 5,570 $ 5,916 6.875% 3/1/03 Premier Auto Trust 5.45% P-1 3,100 3,108 6/8/99 Time Warner Telecom B2 1,100 1,100 LLC/Time Warner Telecom, Inc. 9.75% 7/15/08 U.S. Bancorp 8.09% A1 990 1,080 11/15/26 UNICCO Service B3 5,710 5,282 Co./UNICCO Finance Corp. 9.875% 10/15/07 60,009 SAVINGS & LOANS - 0.3% Chevy Chase Savings Bank B1 2,160 2,095 FSB 9.25% 12/1/08 First Nationwide Parent Ba3 5,920 6,836 Holdings Ltd. 12.5% 4/15/03 Great Western Finance A3 1,290 1,401 Trust II 8.206% 2/1/27 Great Western Financial A3 1,000 1,090 Corp. 8.6% 2/1/02 Home Savings of America A3 970 1,007 FSB 6.5% 8/15/04 Long Island Savings Bank FSB: 6.2% 4/2/01 Baa3 1,250 1,262 7% 6/13/02 Baa3 1,210 1,263 14,954 SECURITIES INDUSTRY - 0.1% Amvescap PLC 6.375% A3 1,650 1,696 5/15/03 Morgan Stanley, Dean - 4,600 4,600 Witter, Discover & Co. 5.75% 1/15/99 (i) 6,296 TOTAL FINANCE 116,582 HEALTH - 0.5% MEDICAL EQUIPMENT & SUPPLIES - 0.1% Graham-Field Health Caa1 3,290 1,941 Products, Inc. 9.75% 8/15/07 McKesson Corp. 6.6% A3 1,720 1,750 3/1/00 3,691 MEDICAL FACILITIES MANAGEMENT - 0.4% Fountain View, Inc. 11.25% Caa1 3,180 2,798 4/15/08 (f) Integrated Health Services, B2 3,799 3,609 Inc. 9.25% 1/15/08 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (B) NONCONVERTIBLE BONDS - CONTINUED HEALTH - CONTINUED MEDICAL FACILITIES MANAGEMENT - CONTINUED Magellan Health Services, B3 $ 2,860 $ 2,445 Inc. 9% 2/15/08 (f) Tenet Healthcare Corp.: 8.125% 12/1/08 (f) Ba3 2,080 2,096 8.625% 1/15/07 Ba3 6,090 6,303 17,251 TOTAL HEALTH 20,942 INDUSTRIAL MACHINERY & EQUIPMENT - 0.4% ELECTRICAL EQUIPMENT - 0.0% Motors & Gears, Inc. B3 610 598 10.75% 11/15/06 INDUSTRIAL MACHINERY & EQUIPMENT - 0.2% Bucyrus International, Inc. B1 4,900 3,675 9.75% 9/15/07 Roller Bearing Holding, Inc. - 4,780 2,796 0% 6/15/09 (d)(f) Thermadyne Manufacturing B3 1,330 1,170 LLC 9.875% 6/1/08 Tyco International Group SA yankee: 6.125% 6/15/01 Baa1 2,650 2,706 6.375% 6/15/05 Baa1 1,030 1,086 11,433 POLLUTION CONTROL - 0.2% Allied Waste North B2 3,060 3,305 America, Inc. 10.25% 12/1/06 Envirosource, Inc. 9.75% B3 1,150 1,052 6/15/03 WMX Technologies, Inc.: 6.25% 10/15/00 Baa3 700 713 7.1% 8/1/26 Baa3 1,570 1,686 8.25% 11/15/99 Baa3 440 454 7,210 TOTAL INDUSTRIAL MACHINERY & 19,241 EQUIPMENT MEDIA & LEISURE - 6.1% BROADCASTING - 4.5% ACME Television B3 2,410 1,868 LLC/ACME Financial Corp. 0% 9/30/04 (d) CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (B) NONCONVERTIBLE BONDS - CONTINUED MEDIA & LEISURE - CONTINUED BROADCASTING - CONTINUED Adelphia Communications Corp.: 9.5% 2/15/04 B2 $ 9,038 $ 9,257 pay-in-kind 9.875% 3/1/07 B2 10,210 11,027 Allbritton Communications B3 5,130 5,079 Co. 8.875% 2/1/08 Ascent Entertainment B3 2,920 1,606 Group, Inc. 0% 12/15/04 (d) CBS Radio, Inc. 11.375% - 3,766 4,256 1/15/09 pay-in-kind Century Communications Corp.: 0% 1/15/08 Ba3 23,480 11,094 8.75% 10/1/07 Ba3 1,670 1,754 Chancellor Media Corp. Ba3 4,860 4,884 9% 10/1/08 (f) Classic Communications, Caa1 570 319 Inc. 0% 8/1/08 Unit (d)(f) Clear Channel Baa3 1,350 1,329 Communications, Inc. 6.875% 6/15/18 Comcast UK Cable Partners B2 6,330 5,222 Ltd. 0% 11/15/07 (d) Continental Cablevision, Inc.: 8.3% 5/15/06 Baa3 700 792 8.625% 8/15/03 Baa3 1,480 1,651 9% 9/1/08 Baa3 1,190 1,431 CSC Holdings, Inc.: 9.25% 11/1/05 B1 1,710 1,804 9.875% 5/15/06 B1 3,220 3,429 10.5% 5/15/16 B1 2,630 2,972 Diamond Cable Caa1 2,360 1,888 Communications PLC yankee 0% 12/15/05 (d) Echostar Communications B2 2,084 2,016 Corp. 0% 6/1/04 (d) Echostar Satellite B3 1,380 1,228 Broadcasting Corp. 0% 3/15/04 (d) Falcon Holdings Group LP/Falcon Funding: 0% 4/15/10 (d) B2 13,260 8,984 8.375% 4/15/10 B2 2,980 2,987 Fox/Liberty Networks B1 2,485 1,653 LLC/FLN Finance, Inc. 0% 8/15/07 (d) FrontierVision Holdings Caa1 5,771 4,646 LP/FrontierVision Holdings Capital Corp. 0% 9/15/07 (d) CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (B) NONCONVERTIBLE BONDS - CONTINUED MEDIA & LEISURE - CONTINUED BROADCASTING - CONTINUED FrontierVision Operating B3 $ 8,282 $ 9,069 Partners LP/ FrontierVision Capital Corp. 11% 10/15/06 Granite Broadcasting Corp.: 8.875% 5/15/08 B3 4,100 3,844 9.375% 12/1/05 B3 5,530 5,406 10.375% 5/15/05 B3 2,030 2,060 Hearst-Argyle Television, Baa3 1,060 1,096 Inc. 7.5% 11/15/27 Intermedia Capital Partners B2 1,860 2,065 IV LP / Intermedia Partners IV Capital Corp. 11.25% 8/1/06 International Cabletel, Inc. B3 3,000 2,370 0% 2/1/06 (d) Iridium Operating B3 6,750 5,434 LLC/Iridium Capital Corp. 11.25% 7/15/05 Lenfest Communications, B2 4,280 4,323 Inc. 8.25% 2/15/08 LIN Holdings Corp. 0% B3 9,100 5,949 3/1/08 (d)(f) NTL, Inc.: 0% 4/1/08 (d)(f) B3 12,990 7,826 10% 2/15/07 B3 2,900 2,929 Olympus Communications B1 1,540 1,694 LP/Olympus Capital Corp. 10.625% 11/15/06 Orion Network Systems, Inc.: 0% 1/15/07 (d) B2 2,210 1,381 11.25% 1/15/07 B2 920 851 Pegasus Communications B3 2,070 1,987 Corp. 9.625% 10/15/05 Renaissance Media Group B3 3,980 2,677 LLC/Renaissance 0% 4/15/08 (d)(f) Rogers Cablesystems Ltd. B2 3,400 3,842 yankee 11% 12/1/15 Satelites Mexicanos SA de B3 5,735 3,842 CV 10.125% 11/1/04 (f) Sinclair Broadcast Group, B2 3,650 3,595 Inc. 8.75% 12/15/07 TCI Communications Ba2 7,950 9,461 Financing III 9.65% 3/31/27 TCI Communications, Inc.: 6.46% 3/6/00 Baa3 2,930 2,981 8.75% 8/1/15 Baa3 1,605 2,005 9.25% 4/15/02 Baa3 1,000 1,122 9.8% 2/1/12 Baa3 1,790 2,393 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (B) NONCONVERTIBLE BONDS - CONTINUED MEDIA & LEISURE - CONTINUED BROADCASTING - CONTINUED Telewest PLC: yankee 0% 10/1/07 (d) B1 $ 12,600 $ 10,301 9.625% 10/1/06 B1 980 985 Time Warner, Inc.: 6.875% 6/15/18 Baa3 1,770 1,829 7.75% 6/15/05 Baa3 1,100 1,226 7.95% 2/1/00 Baa3 1,615 1,668 8.18% 8/15/07 Baa3 1,750 2,040 UIH Australia/Pacific, Inc. B2 3,520 1,408 0% 5/15/06 (d) United International B3 9,970 4,736 Holdings, Inc. 0% 2/15/08 (d) 207,571 ENTERTAINMENT - 0.7% AMC Entertainment, Inc. B2 4,970 4,622 9.5% 3/15/09 American Skiing Co. 12% B3 3,470 3,539 7/15/06 Bally Total Fitness Holding B3 3,050 2,852 Corp. 9.875% 10/15/07 Cinemark USA, Inc. 8.5% B2 4,740 4,562 8/1/08 Livent, Inc. 9.375% B1 950 637 10/15/04 Paramount Ba2 600 628 Communications, Inc. 7.5% 1/15/02 Premier Parks, Inc. 0% B3 3,180 1,972 4/1/08 (d) United Artists Theatre Co. Caa1 2,670 2,470 9.75% 4/15/08 Viacom, Inc.: 6.75% 1/15/03 Ba2 1,920 1,971 7.75% 6/1/05 Ba2 5,830 6,296 8% 7/7/06 B1 1,800 1,809 31,358 LODGING & GAMING - 0.5% Aladdin Gaming Caa2 3,600 1,044 Holdings/Aladdin Capital Corp. 0% 3/1/10 (d) Courtyard by Marriott II B- 2,910 3,012 LP/Courtyard II Finance Co. 10.75% 2/1/08 HMH Properties, Inc.: 7.875% 8/1/05 Ba2 2,560 2,566 7.875% 8/1/08 Ba2 11,710 11,564 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (B) NONCONVERTIBLE BONDS - CONTINUED MEDIA & LEISURE - CONTINUED LODGING & GAMING - CONTINUED Signature Resorts, Inc. B3 $ 3,120 $ 2,215 9.75% 10/1/07 Sun International Hotels Ba3 2,220 2,264 Ltd./Sun International North America, Inc. yankee 9% 3/15/07 22,665 PUBLISHING - 0.3% Garden State Newspapers, B1 8,160 7,854 Inc. Series B, 8.75% 10/1/09 News America Holdings, Inc.: 7.7% 10/30/25 Baa3 2,150 2,299 8.5% 2/15/05 Baa3 2,040 2,299 News America, Inc. 7.25% Baa3 1,300 1,332 5/18/18 13,784 RESTAURANTS - 0.1% Host Marriott Travel Plazas, Ba3 5,180 5,284 Inc. 9.5% 5/15/05 NE Restaurant Co., Inc. B3 1,750 1,706 10.75% 7/15/08 (f) 6,990 TOTAL MEDIA & LEISURE 282,368 NONDURABLES - 0.3% FOODS - 0.0% ConAgra, Inc. 7.125% Baa1 1,700 1,835 10/1/26 HOUSEHOLD PRODUCTS - 0.2% Revlon Consumer Products B3 8,790 8,570 Corp. 8.625% 2/1/08 TOBACCO - 0.1% Philip Morris Companies, Inc.: 6.95% 6/1/06 A2 1,510 1,605 7% 7/15/05 A2 1,610 1,721 7.25% 9/15/01 A2 1,700 1,781 5,107 TOTAL NONDURABLES 15,512 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (B) NONCONVERTIBLE BONDS - CONTINUED RETAIL & WHOLESALE - 1.3% APPAREL STORES - 0.2% AnnTaylor, Inc. 8.75% B3 $ 5,690 $ 5,576 6/15/00 Specialty Retailers, Inc. Ba3 1,060 981 8.5% 7/15/05 6,557 GENERAL MERCHANDISE STORES - 0.3% Dayton Hudson Corp.: 6.8% 10/1/01 A3 1,800 1,879 7.5% 7/15/06 A3 2,000 2,242 Federated Department Stores, Inc.: 6.79% 7/15/27 Baa2 1,100 1,162 7% 2/15/28 Baa2 1,360 1,374 8.125% 10/15/02 Baa2 520 568 Kmart Corp.: 7.75% 10/1/12 Ba2 310 313 8.25% 1/1/22 Ba2 2,480 2,449 12.5% 3/1/05 Ba2 4,240 5,215 15,202 GROCERY STORES - 0.6% Ameriserve Food B1 1,390 1,230 Distribution, Inc. 8.875% 10/15/06 Kroger Co. 6% 7/1/00 Baa3 2,400 2,432 Meyer (Fred), Inc. 7.45% Ba2 5,580 5,831 3/1/08 Mrs. Fields Original B2 1,480 1,376 Cookies, Inc. 10.125% 12/1/04 Pathmark Stores, Inc.: 9.625% 5/1/03 Caa1 10,400 9,932 12.625% 6/15/02 Caa2 1,940 1,828 Pueblo Xtra International, Inc.: 9.5% 8/1/03 B3 4,050 3,645 9.5% 8/1/03 B3 1,710 1,539 27,813 RETAIL & WHOLESALE, MISCELLANEOUS - 0.2% Amazon.com, Inc. 0% Caa2 3,440 1,858 5/1/08 (d) Central Tractor Farm & B2 980 951 Country, Inc. 10.625% 4/1/07 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (B) NONCONVERTIBLE BONDS - CONTINUED RETAIL & WHOLESALE - CONTINUED RETAIL & WHOLESALE, MISCELLANEOUS - CONTINUED J Crew Operating Corp. Caa1 $ 2,140 $ 1,712 10.375% 10/15/07 Metals USA, Inc. 8.625% B2 6,430 5,594 2/15/08 10,115 TOTAL RETAIL & WHOLESALE 59,687 SERVICES - 0.4% PRINTING - 0.1% Sullivan Graphics, Inc. Caa1 1,830 1,848 12.75% 8/1/05 SERVICES - 0.3% Borg-Warner Security B3 1,150 1,265 Corp. 9.625% 3/15/07 Iron Mountain, Inc. 8.75% B3 2,590 2,564 9/30/09 La Petite Academy, Inc./La B3 4,530 4,383 Petite Academy Holding Co. 10% 5/15/08 Medaphis Corp. 9.5% B2 7,520 6,618 2/15/05 14,830 TOTAL SERVICES 16,678 TECHNOLOGY - 0.4% COMPUTER SERVICES & SOFTWARE - 0.2% Federal Data Corp. B3 6,800 6,137 10.125% 8/1/05 ICG Services, Inc. 0% - 7,560 3,667 5/1/08 (d) PSINet, Inc. 10% 2/15/05 B3 1,200 1,200 11,004 COMPUTERS & OFFICE EQUIPMENT - 0.1% Comdisco, Inc.: 6.375% 11/30/01 Baa1 1,800 1,848 7.21% 7/2/01 Baa1 1,750 1,834 3,682 ELECTRONIC INSTRUMENTS - 0.1% Telecommunications B3 3,680 3,349 Techniques Co. 9.75% 5/15/08 (f) CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (B) NONCONVERTIBLE BONDS - CONTINUED TECHNOLOGY - CONTINUED ELECTRONICS - 0.0% Fairchild Semiconductor - $ 2,734 $ 2,200 Corp. 11.74% 3/15/08 pay-in-kind (k) TOTAL TECHNOLOGY 20,235 TRANSPORTATION - 0.8% AIR TRANSPORTATION - 0.5% Atlas Air, Inc. 9.25% B3 8,000 7,480 4/15/08 (f) Delta Air Lines, Inc. Baa3 500 533 9.875% 5/15/00 Kitty Hawk, Inc. 9.95% B1 8,040 8,080 11/15/04 US Air, Inc. 9.625% B1 1,960 2,009 2/1/01 US Airways Group, Inc. Ba2 3,340 3,549 10.375% 3/1/13 21,651 RAILROADS - 0.2% Burlington Northern Santa Baa2 1,500 1,697 Fe Corp. 7.29% 6/1/36 Canadian National Baa2 2,500 2,564 Railway Co. 6.9% 7/15/28 CSX Corp. 6.46% Baa2 1,990 2,083 6/22/05 Norfolk Southern Corp. Baa1 2,340 2,580 7.05% 5/1/37 Wisconsin Central Baa2 1,000 1,037 Transportation Corp. 6.625% 4/15/08 9,961 SHIPPING - 0.1% Amer Reefer Co. Ltd. B1 1,270 1,029 10.25% 3/1/08 Cenargo International PLC Ba3 3,190 2,584 9.75% 6/15/08 (f) Holt Group, Inc. 9.75% Caa1 2,890 2,023 1/15/06 (f) 5,636 TOTAL TRANSPORTATION 37,248 UTILITIES - 2.2% CELLULAR - 0.9% AirTouch Communications, Baa2 2,660 2,799 Inc. 6.35% 6/1/05 Cable & Wireless Baa1 1,700 1,738 Communications PLC 6.375% 3/6/03 McCaw International Ltd. Caa1 14,590 6,857 0% 4/15/07 (d) CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (B) NONCONVERTIBLE BONDS - CONTINUED UTILITIES - CONTINUED CELLULAR - CONTINUED Millicom International Caa1 $ 3,890 $ 2,392 Cellular SA 0% 6/1/06 (d) Nextel Communications, Inc.: 0% 9/15/07 (d) B2 1,647 1,046 0% 10/31/07 (d) B2 13,380 8,061 0% 2/15/08 (d) B2 3,870 2,274 Nextel International, Inc. Caa1 8,600 3,440 0% 4/15/08 (d) Pagemart Nationwide, Inc. B3 340 304 0% 2/1/05 (d) PageMart Wireless, Inc. 0% Caa2 2,800 1,498 2/1/08 (d) Rogers Communications, B2 6,560 6,429 Inc. 8.875% 7/15/07 Teligent, Inc.: 0% 3/1/08 (d) Caa1 4,190 1,645 11.5% 12/1/07 Caa1 3,310 2,582 41,065 ELECTRIC UTILITY - 0.2% Avon Energy Partners Holdings: 6.46% 3/4/08 (f) Baa2 1,320 1,353 6.73% 12/11/02 (f) Baa2 1,680 1,752 Hydro-Quebec yankee A2 1,050 1,292 7.4% 3/28/25 (e) Israel Electric Corp. Ltd.: yankee 7.875% A3 660 657 12/15/26 (f) 7.75% 12/15/27 (f) A3 1,605 1,524 Niagara Mohawk Power Ba3 3,490 3,717 Corp. 7.75% 10/1/08 Texas Utilities Co. 6.375% Baa3 660 670 1/1/08 10,965 TELEPHONE SERVICES - 1.1% Dobson Wireline Co. - 7,550 6,569 12.25% 6/15/08 (f) GST Network Funding, Inc. - 3,260 1,565 0% 5/1/08 (d)(f) Hyperion Telecommunications, Inc.: 0% 4/15/03 (d) B3 4,460 3,044 12.25% 9/1/04 B3 4,870 4,773 Level 3 Communications, B3 3,440 3,234 Inc. 9.125% 5/1/08 McLeodUSA, Inc.: 0% 3/1/07 (d) B2 5,530 4,023 9.25% 7/15/07 B2 2,330 2,394 NEXTLINK B3 7,240 7,023 Communications, Inc. 9.625% 10/1/07 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (B) NONCONVERTIBLE BONDS - CONTINUED UTILITIES - CONTINUED TELEPHONE SERVICES - CONTINUED Pathnet, Inc. 12.25% - $ 8,200 $ 6,232 4/15/08 (f) WinStar Communications, - 6,710 4,596 Inc. 11% 3/15/08 (d) WorldCom, Inc.: 7.75% 4/1/07 Baa2 1,940 2,217 8.875% 1/15/06 Baa2 1,180 1,294 9.375% 1/15/04 Baa2 1,394 1,456 48,420 TOTAL UTILITIES 100,450 TOTAL NONCONVERTIBLE BONDS 772,928 TOTAL CORPORATE BONDS 780,935 (Cost $813,146)
U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - 1.1% U.S. GOVERNMENT AGENCY OBLIGATIONS - 0.2% Fannie Mae 7.49% Aaa 2,320 2,653 3/2/05 U.S. Department of Housing and Urban Development government guaranteed participation certificates Series 1996-A: 6.83% 8/1/03 Aaa 4,000 4,319 7.66% 8/1/15 Aaa 1,200 1,381 8,353 U.S. TREASURY OBLIGATIONS - 0.9% U.S. Treasury Bills, yield at 4,500 4,496 date of purchase 4.98% to 4.99% 10/8/98 (h) U.S. Treasury Bonds: 7.125% 2/15/23 Aaa 2,310 2,916 7.625% 2/15/25 Aaa 10,640 14,326 12.75% 11/15/10 Aaa 5,140 7,647 (callable) U.S. Treasury Notes: 5.375% 2/15/01 Aaa 2,600 2,659 5.875% 11/30/01 Aaa 1,495 1,560 6.625% 6/30/01 Aaa 920 973 U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (B) U.S. TREASURY OBLIGATIONS - CONTINUED U.S. Treasury Notes - continued 7% 7/15/06 Aaa $ 5,767 $ 6,719 7.875% 8/15/01 Aaa 810 885 42,181 TOTAL U.S. GOVERNMENT AND 50,534 GOVERNMENT AGENCY OBLIGATIONS (Cost $46,753)
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 2.4% FANNIE MAE - 1.6% 5.5% 6/17/03 to 7/1/03 Aaa 1,222 1,224 6% 4/5/03 to 4/1/28 Aaa 26,925 27,137 6.5% 12/1/12 to 7/1/28 Aaa 12,926 13,179 7% 10/1/28 (g)(l) Aaa 27,594 28,371 7.5% 6/1/27 to 8/1/28 Aaa 4,440 4,580 74,491 FREDDIE MAC - 0.2% 5.5% 5/11/03 Aaa 1,305 1,301 7% 7/1/01 Aaa 312 315 7.5% 5/1/27 to 4/1/28 Aaa 4,490 4,626 6,242 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 0.6% 6% 6/15/08 to 9/15/10 Aaa 1,327 1,352 6.5% 9/15/08 to Aaa 7,114 7,298 5/15/09 7% 1/15/28 to 7/15/28 Aaa 8,048 8,307 7.5% 4/15/23 to Aaa 10,665 11,057 8/15/28 8% 5/15/25 Aaa 489 510 28,524 TOTAL U.S. GOVERNMENT AGENCY - 109,257 MORTGAGE-BACKED SECURITIES (Cost $106,150)
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.0% MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (B) PRIVATE SPONSOR - 0.0% Credit-Based Asset Ba3 $ 1,800 $ 753 Servicing and Securitization LLC Series 1997-2 Class 2-B, 7.2236% 12/29/25 (f)(i) (Cost $957)
ASSET-BACKED SECURITIES - 0.9% Airplanes Pass Through Ba2 7,040 7,286 Trust 10.875% 3/15/19 BankAmerica Aaa 1,510 1,531 Manufacturing Housing Contract 6.2% 4/10/09 Capita Equipment Baa2 1,000 1,018 Receivables Trust 6.48% 10/15/06 Chase Manhattan Auto Aaa 1,820 1,852 Owner Trust 5.85% 5/15/03 Chevy Chase Auto Aaa 959 970 Receivables Trust 5.91% 12/15/04 Contimortgage Home Aaa 1,640 1,647 Equity Loan Trust 6.26% 7/15/12 CPS Auto Grantor Trust: 6.09% 11/15/03 Aaa 1,061 1,065 6.55% 8/15/02 Aaa 757 766 CPS Auto Receivables Trust Aaa 1,803 1,824 6% 8/15/03 CSXT Trade Receivables Aaa 1,780 1,848 Master Trust 6% 7/25/04 Dayton Hudson Credit Aaa 1,640 1,717 Card Master Trust 6.25% 8/25/05 Ford Credit Auto Owner Trust: 6.2% 12/15/02 Baa3 890 906 6.4% 5/15/02 A1 1,060 1,084 6.4% 12/15/02 Baa3 490 492 Green Tree Financial Corp.: 6.5% 6/15/27 Aaa 427 428 6.68% 1/15/29 AAA 2,280 2,346 6.8% 6/15/27 Aaa 750 759 Key Auto Finance Trust A2 1,161 1,167 6.3% 10/15/03 MBNA Master Credit Card Aaa 3,230 3,427 Trust II 6.55% 1/15/07 Olympic Automobile Receivables Trust: 6.4% 9/15/01 Aaa 1,710 1,734 6.7% 3/15/02 Aaa 810 825 ASSET-BACKED SECURITIES - CONTINUED
MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (B) Petroleum Enhanced Trust Baa2 $ 1,082 $ 1,082 Receivables Offering Petroleum Trust 6.125% 2/5/03 (f)(i) Premier Auto Trust: 6% 5/6/00 Aaa 423 424 6.34% 1/6/03 Aaa 2,470 2,532 Prime Credit Card Master Aaa 1,230 1,290 Trust 6.75% 11/15/05 UAF Auto Grantor Trust Aaa 1,847 1,860 6.1% 1/15/03 (f) WFS Financial Owner Trust Aaa 1,520 1,554 6.55% 10/20/04 TOTAL ASSET-BACKED SECURITIES 43,434 (Cost $43,082)
COMMERCIAL MORTGAGE SECURITIES - 1.2% Bankers Trust Remic Trust Ba2 1,248 1,212 1988-1 Series 1998-S1A Class G, 8.6764% 11/28/02 (f)(i) Berkeley Federal Bank & - 1,900 1,482 Trust FSB Series 1994 Class 1-B 7.7518% 8/1/24 (f)(i) BKB Commercial Mortgage BBB 680 695 Trust Series 1997-C1 Class D, 7.83% 2/25/43 (f)(i) CBM Funding Corp. sequential pay Series 1996-1: Class A-3PI, 7.08% AA 990 1,046 11/1/07 Class B, 7.48% 2/1/08 A 770 819 CS First Boston Mortgage Securities Corp.: Series 1997-C2 Class D, Baa2 1,810 1,813 7.27% 1/17/35 Series 1998-C1 Class D, BBB 2,030 2,074 7.17% 1/17/12 Series 1998-FLI Class E, Baa2 2,210 2,184 6.5063% 1/10/13 (f)(i) Deutsche Mortgage & Baa2 1,420 1,477 Asset Receiving Corp. Series 1998-C1 Class D, 7.231% 7/15/12 DLJ Mortgage Acceptance - 1,650 1,715 Corp. Series 1993-MF12 Class B-2, 10.1% 9/18/03 (f) Equitable Life Assurance Society of the United States (The): sequential pay Series Aaa 2,600 2,838 174 Class A1, 7.24% 5/15/06 (f) Series 174 Class B1, Aa2 1,200 1,297 7.33% 5/15/06 (f) Series 1996-1 Class A2 1,000 1,083 C1, 7.52% 5/15/06 (f) First Chicago/Lennar Trust I Series 1997-CHL1: Class D, 8.1319% - 1,100 1,037 4/13/39 (i) Class E, 8.1319% - 1,800 1,471 4/1/39 (i) COMMERCIAL MORTGAGE SECURITIES - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (B) First Union-Lehman Aa2 $ 3,870 $ 4,109 Brothers Commercial Mortgage Trust sequential pay Series 1997-C2 Class B, 6.79% 11/18/29 FMAC Loan Receivables Trust 1998-C: Series 1997-A Class E, - 500 422 8.1059% 4/15/19 (f)(i) Series 1997-B Class E, - 1,050 831 7.8912% 9/15/19 (f)(i) GAFCO Franchisee Loan - 1,650 1,338 Trust Series 1998-1 Class D, 14.5% 6/1/16 (f)(i) General Motors Ba3 750 692 Acceptance Corp. Commercial Mortgage Securities, Inc. Series 1996-C1 Class F, 7.86% 10/15/28 (f) GS Mortgage Securities Corp. II: Series 1997-GL Class Aaa 1,590 1,686 A2-B, 6.86% 7/13/30 Series 1998-GLII: Class D, 7.1905% Baa2 490 498 4/13/31 (f)(i) Class E, 7.1905% Baa3 1,750 1,707 4/13/31 (f)(i) Kidder Peabody Aa2 423 425 Acceptance Corp. I sequential pay Series 1993-M1 Class A-2, 7.15% 4/25/25 LTC Commercial Mortgage Pass Through Certificates: Series 1996-1 Class E, BB- 500 510 9.16% 4/15/28 Series 1998-1 Class A, AAA 1,062 1,073 6.029% 5/30/30 (f) Morgan Stanley Capital I, Inc.: Series 1996-MBL1 Class - 1,711 1,703 E, 8.3667% 5/25/21 (f)(i) Series 1998-CF1: Class D, 7.35% Baa2 1,689 1,706 1/15/12 Class E, 7.35% Baa3 586 560 12/15/12 Series 1998-HF1 Class BBB 1,770 1,866 D, 7.1% 2/15/30 (i) Nomura Asset Securities Baa2 1,420 1,510 Corp. Series 1998-D6 Class A-4, 7.5956% 3/17/28 (i) Nomura Depositor Trust floater Series 1998-ST1A: Class B-2, 9.8906% - 1,100 1,002 1/15/03 (f)(i) Class B2-A, 9.8906% - 300 273 2/15/34 (f)(i) Penn Mutual Life Insurance Co. (The)/Penn Insurance & Annuity Co. Series 1996-PML: Class K, 7.9% - 1,750 1,308 11/15/26 (f) Class L, 7.9% - 1,300 641 11/15/26 (f)
COMMERCIAL MORTGAGE SECURITIES - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (B) Resolution Trust Corp. Ba3 $ 598 $ 496 Series 1991-M2 Class A-3, 7.2498% 9/25/20 (i) Structured Asset Securities Corp.: sequential pay Series AAA 330 332 1996 Class A-2A, 7.75% 2/25/28 Series 1993-C1 Class E, B 1,250 563 6.6% 10/25/24 (f) Series 1995-C1 Class E, BB 1,100 1,072 7.375% 9/25/24 (f) Series 1996-CFL: Class E, 7.75% BB+ 820 841 2/25/28 Class G, 7.75% - 2,000 1,853 2/25/28 (f) Thirteen Affiliates of General Growth Properties, Inc.: sequential pay Series Aaa 1,310 1,378 A-2, 6.602% 12/15/10 (f) Series D-2, 6.992% Baa2 1,410 1,420 12/15/10 (f) Series E-2, 7.224% Baa3 840 824 12/15/10 (f) Wells Fargo Capital Aaa 1,186 1,226 Markets Apartment Financing Trust Series APT Class 1, 6.56% 12/29/05 (f) TOTAL COMMERCIAL MORTGAGE 56,108 SECURITIES (Cost $53,596)
FOREIGN GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - 0.1% Export Development Corp. Aa2 620 636 yankee 8.125% 8/10/99 (j) Israeli State euro 6.375% Aaa 2,410 2,495 12/19/01 (j) Manitoba Province yankee Aa3 3,000 3,037 6.375% 10/15/99 (j) TOTAL FOREIGN GOVERNMENT AND 6,168 GOVERNMENT AGENCY OBLIGATIONS (Cost $5,994) SUPRANATIONAL OBLIGATIONS - 0.0% Inter American Aaa 1,600 1,756 Development Bank yankee 6.29% 7/16/27 (Cost $1,590) BANK NOTES - 0.1% Key Bank NA 5.6175% 5,000 4,995 8/20/99 (i) (Cost $4,993) CERTIFICATES OF DEPOSIT - 0.9% PRINCIPAL VALUE (NOTE 1) AMOUNT (000S) (000S) Abbey National Treasury $ 5,000 $ 5,002 Services PLC euro 5.51% 12/4/98 ABN-AMRO Bank NV 4,000 4,002 yankee euro 5.64% 12/14/98 Bank of Scotland Treasury 5,000 5,004 Services euro 5.64% 12/29/98 Bayerische Hypotheken und 1,800 1,803 Wechsel Bank AG yankee 5.7% 3/30/99 Canadian Imperial Bank of 1,950 1,992 Commerce, New York yankee 6.2% 8/1/00 Deutsche Bank AG yankee 1,000 1,000 5.94% 10/26/98 RaboBank Nederland 5,000 5,017 Coop. Central yankee 5.68% 6/4/99 Societe Generale, France 5,000 5,001 yankee 5.91% 10/15/98 Swiss Bank Corp. yankee 3,600 3,606 5.65% 3/24/99 Toronto-Dominion Bank 5,000 5,017 yankee 5.68% 6/4/99 Westdeutsche Landesbank 5,000 5,007 Girozentrale yankee 5.63% 2/8/99 TOTAL CERTIFICATES OF DEPOSIT 42,451 (Cost $42,347) COMMERCIAL PAPER - 1.1% Citibank Credit Card 1,600 1,597 Master Trust I (Dakota Certificate Program) 5.53% 10/13/98 Commonwealth Bank of 4,600 4,504 Australia yankee 5.35% 3/1/99 Daimler-Benz North 5,000 4,980 America Corp. yankee 5.53% 10/29/98 du Pont (E.I.) de Nemours 1,600 1,594 & Co. 5.53% 10/26/98 Enterprise Funding Corp. 3,300 3,271 5.4% 12/4/98 Fleet Funding Corp. 5.5% 4,800 4,781 10/28/98 General Electric Capital 3,000 2,982 Corp. 5.51% 11/12/98 Generale de Banque SA 5,300 5,191 yankee 5.36% 2/24/99 Kitty Hawk Funding Corp. 2,000 1,994 5.53% 10/23/98 Monsanto Co.: 5.51% 12/1/98 2,000 1,983 5.52% 11/19/98 1,000 993 Morgan (JP) & Co., Inc. 5,300 5,269 5.5% 11/10/98 Southern Co. 5.52% 2,000 1,996 10/15/98 Three Rivers Funding Corp. 2,000 1,983 5.51% 12/1/98 COMMERCIAL PAPER - CONTINUED PRINCIPAL VALUE (NOTE 1) AMOUNT (000S) (000S) Transamerica Finance $ 2,000 $ 1,967 Corp. 5.47% 1/26/99 Triple A One Funding 5,000 4,991 Corp. 5.55% 10/14/98 TOTAL COMMERCIAL PAPER 50,076 (Cost $50,038) MASTER NOTES - 0.1% Goldman Sachs Group 3,000 3,000 L.P. (The) 5.6875% 1/27/99 (i) (Cost $3,000) CASH EQUIVALENTS - 4.2% MATURITY AMOUNT (000S) Investments in $ 127 127 repurchase agreements (U.S. Treasury obligations), in a joint trading account at 5.77%, dated 9/30/98 due 10/1/98 SHARES (000S) Taxable Central Cash 192,458 192,458 Fund (c) TOTAL CASH EQUIVALENTS 192,585 (Cost $192,585) TOTAL INVESTMENT IN $ 4,606,833 SECURITIES - 100% (Cost $4,437,479)
FUTURES CONTRACTS EXPIRATION UNDERLYING UNREALIZED DATE FACE AMOUNT GAIN/LOSS (000S) (000S) PURCHASED 225 S&P 500 Stock Dec. 1998 $ 57,712 $ 1,095 Index Contracts THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL INVESTMENT IN SECURITIES - 1.3%
LEGEND (a) Non-income producing (b) Standard & Poor's credit ratings are used in the absence of a rating by Moody's Investors Service, Inc. (c) At period end, the seven-day yield on the Taxable Central Cash Fund was 5.36%. The yield refers to the income earned by investing in the fund over the seven-day period, expressed as an annual percentage. (d) Debt obligation initially issued in zero coupon form which converts to coupon form at a specified rate and date. (e) Debt obligation initially issued at one coupon which converts to a higher coupon at a specified date. The rate shown is the rate at period end. (f) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $140,932,000 or 3.1% of net assets. (g) Security purchased on a delayed delivery or when-issued basis (see Note 2 of Notes to Financial Statements). (h) Security or a portion of the security was pledged to cover margin requirements for futures contracts. At the period end, the value of securities pledged amounted to $3,497,000. (i) The coupon rate shown on floating or adjustable rate securities represents the rate at period end. (j) For Foreign government obligations not individually rated by S&P or Moody's, the ratings listed are assigned to the securities by FMR, the fund's investment adviser, based principally on S&P and Moody's ratings of the sovereign credit of the issuing government. (k) Restricted securities - Investment in securities not registered under the Securities Act of 1933 (see Note 2 of Notes to Financial Statements).
SECURITY ACQUISTION ACQUISITION DATE COST (000S) Alliance Gaming Corp. 7/28/98 $ 253 Fairchild Semiconductor Corp. 11.74% 3/15/08 pay-in-kind 4/3/97 - $ 2,463 9/15/98
(l) A portion of the security was sold on a delayed delivery or when-issued basis (see Note 2 of Notes to Financial Statements). OTHER INFORMATION The composition of long-term debt holdings as a percentage of total value of investments in securities, is as follows (ratings are unaudited): MOODY'S RATINGS S&P RATINGS Aaa, Aa, A 6.8% AAA, AA, A 6.3% Baa 2.6% BBB 2.9% Ba 3.0% BB 3.3% B 8.0% B 7.8% Caa 1.1% CCC 1.0% For some foreign government obligations, FMR has assigned the ratings for the sovereign credit of the issuing government. The percentage not rated by Moody's or S&P amounted to 1.0%. FMR has determined that unrated debt securities that are lower quality account for 0.2% of the total value of investment in securities. INCOME TAX INFORMATION At September 30, 1998, the aggregate cost of investment securities for income tax purposes was $4,443,127,000. Net unrealized appreciation aggregated $163,706,000, of which $454,870,551 related to appreciated investment securities and $291,164,551 related to depreciated investment securities. The fund hereby designates approximately $408,906,000 as a capital gain dividend for the purpose of the dividend paid deduction. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES AMOUNTS IN THOUSANDS (EXCEPT PER-SHARE AMOUNT) SEPTEMBER 30, 1998 ASSETS INVESTMENT IN SECURITIES, AT VALUE $ 4,606,833 (INCLUDING REPURCHASE AGREEMENTS OF $127) (COST $4,437,479) - SEE ACCOMPANYING SCHEDULE COMMITMENT TO SELL SECURITIES ON $ (20,563) A DELAYED DELIVERY BASIS RECEIVABLE FOR SECURITIES SOLD ON 20,428 (135) A DELAYED DELIVERY BASIS RECEIVABLE FOR INVESTMENTS SOLD, 69,026 REGULAR DELIVERY CASH 1,312 RECEIVABLE FOR FUND SHARES SOLD 4,236 DIVIDENDS RECEIVABLE 5,403 INTEREST RECEIVABLE 18,479 OTHER RECEIVABLES 170 TOTAL ASSETS 4,705,324 LIABILITIES PAYABLE FOR INVESTMENTS 64,910 PURCHASED REGULAR DELIVERY DELAYED DELIVERY 41,990 PAYABLE FOR FUND SHARES 56,515 REDEEMED ACCRUED MANAGEMENT FEE 2,260 PAYABLE FOR DAILY VARIATION ON 1,772 FUTURES CONTRACTS OTHER PAYABLES AND ACCRUED 1,045 EXPENSES TOTAL LIABILITIES 168,492 NET ASSETS $ 4,536,832 NET ASSETS CONSIST OF: PAID IN CAPITAL $ 3,530,451 UNDISTRIBUTED NET INVESTMENT 97,677 INCOME ACCUMULATED UNDISTRIBUTED NET 738,387 REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS NET UNREALIZED APPRECIATION 170,317 (DEPRECIATION) ON INVESTMENTS NET ASSETS, FOR 241,376 SHARES $ 4,536,832 OUTSTANDING NET ASSET VALUE, OFFERING PRICE $18.80 AND REDEMPTION PRICE PER SHARE ($4,536,832 (DIVIDED BY) 241,376 SHARES) STATEMENT OF OPERATIONS
AMOUNTS IN THOUSANDS YEAR ENDED SEPTEMBER 30, 1998 INVESTMENT INCOME $ 61,577 DIVIDENDS INTEREST 98,269 TOTAL INCOME 159,846 EXPENSES MANAGEMENT FEE $ 28,667 TRANSFER AGENT FEES 10,402 ACCOUNTING FEES AND EXPENSES 864 NON-INTERESTED TRUSTEES' COMPENSATION 25 CUSTODIAN FEES AND EXPENSES 144 REGISTRATION FEES 266 AUDIT 105 LEGAL 26 MISCELLANEOUS 19 TOTAL EXPENSES BEFORE REDUCTIONS 40,518 EXPENSE REDUCTIONS (1,600) 38,918 NET INVESTMENT INCOME 120,928 REALIZED AND UNREALIZED GAIN (LOSS) NET REALIZED GAIN (LOSS) ON: INVESTMENT SECURITIES 774,249 FOREIGN CURRENCY TRANSACTIONS 545 FUTURES CONTRACTS (11,189) 763,605 CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON: INVESTMENT SECURITIES (630,324) ASSETS AND LIABILITIES IN FOREIGN CURRENCIES 26 FUTURES CONTRACTS 1,095 DELAYED DELIVERY COMMITMENTS (135) (629,338) NET GAIN (LOSS) 134,267 NET INCREASE (DECREASE) IN NET ASSETS RESULTING $ 255,195 FROM OPERATIONS
STATEMENT OF CHANGES IN NET ASSETS AMOUNTS IN THOUSANDS YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS $ 120,928 $ 88,541 NET INVESTMENT INCOME NET REALIZED GAIN (LOSS) 763,605 424,956 CHANGE IN NET UNREALIZED (629,338) 517,403 APPRECIATION (DEPRECIATION) NET INCREASE (DECREASE) IN 255,195 1,030,900 NET ASSETS RESULTING FROM OPERATIONS DISTRIBUTIONS TO SHAREHOLDERS (90,146) (81,646) FROM NET INVESTMENT INCOME FROM NET REALIZED GAIN (394,442) (203,145) TOTAL DISTRIBUTIONS (484,588) (284,791) SHARE TRANSACTIONS 1,213,472 1,283,870 NET PROCEEDS FROM SALES OF SHARES REINVESTMENT OF DISTRIBUTIONS 481,109 282,710 COST OF SHARES REDEEMED (1,385,838) (953,951) NET INCREASE (DECREASE) IN 308,743 612,629 NET ASSETS RESULTING FROM SHARE TRANSACTIONS TOTAL INCREASE (DECREASE) IN 79,350 1,358,738 NET ASSETS NET ASSETS BEGINNING OF PERIOD 4,457,482 3,098,744 END OF PERIOD (INCLUDING $ 4,536,832 $ 4,457,482 UNDISTRIBUTED NET INVESTMENT INCOME OF $97,677 AND $67,056, RESPECTIVELY) OTHER INFORMATION SHARES SOLD 61,872 72,671 ISSUED IN REINVESTMENT OF 26,595 17,155 DISTRIBUTIONS REDEEMED (70,304) (53,787) NET INCREASE (DECREASE) 18,163 36,039 FINANCIAL HIGHLIGHTS YEARS ENDED SEPTEMBE R 30, 1998 1997 1996 1995 1994 SELECTED PER-SHARE DATA NET ASSET VALUE, $ 19.97 $ 16.56 $ 14.88 $ 13.91 $ 13.77 BEGINNING OF PERIOD INCOME FROM INVESTMENT OPERATIONS NET INVESTMENT .49 B .42 B .47 .26 .13 INCOME NET REALIZED .49 4.49 1.44 1.07 .61 AND UNREALIZED GAIN (LOSS) TOTAL FROM .98 4.91 1.91 1.33 .74 INVESTMENT OPERATIONS LESS DISTRIBUTIONS FROM NET (.40) (.43) (.23) (.27) (.18) INVESTMENT INCOME FROM NET (1.75) (1.07) - - (.37) REALIZED GAIN IN EXCESS OF NET - - - (.09) (.05) REALIZED GAIN TOTAL (2.15) (1.50) (.23) (.36) (.60) DISTRIBUTIONS NET ASSET VALUE, $ 18.80 $ 19.97 $ 16.56 $ 14.88 $ 13.91 END OF PERIOD TOTAL RETURN A 5.33% 31.57% 12.99% 9.95% 5.39% RATIOS AND SUPPLEMENTAL DATA NET ASSETS, END $ 4,537 $ 4,457 $ 3,099 $ 2,850 $ 3,071 OF PERIOD (IN MILLIONS) RATIO OF EXPENSES .84% .87% 1.02% 1.03% 1.15% TO AVERAGE NET ASSETS RATIO OF EXPENSES .80% C .86% C 1.01% C 1.02% C 1.15% TO AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS RATIO OF NET 2.49% 2.36% 2.51% 3.16% 2.64% INVESTMENT INCOME TO AVERAGE NET ASSETS PORTFOLIO TURNOVER 150% 70% 138% 119% 104% RATE A THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 6 OF NOTES TO FINANCIAL STATEMENTS). B NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. C FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES (SEE NOTE 6 OF NOTES TO FINANCIAL STATEMENTS). NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1998 1. SIGNIFICANT ACCOUNTING POLICIES. Fidelity Asset Manager: Growth (the fund) is a fund of Fidelity Charles Street Trust (the trust) and is authorized to issue an unlimited number of shares. The trust is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as an open-end management investment company organized as a Massachusetts business trust. The financial statements have been prepared in conformity with generally accepted accounting principles which require management to make certain estimates and assumptions at the date of the financial statements. The following summarizes the significant accounting policies of the fund: SECURITY VALUATION. Equity securities for which quotations are readily available are valued at the last sale price, or if no sale price, at the closing bid price. Debt securities for which quotations are readily available are valued by a pricing service at their market values as determined by their most recent bid prices in the principal market (sales prices if the principal market is an exchange) in which such securities are normally traded. Securities (including restricted securities) for which market quotations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Board of Trustees. Short-term securities with remaining maturities of sixty days or less for which quotations are not readily available are valued at amortized cost or original cost plus accrued interest, both of which approximate current value. FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange at period end. Purchases and sales of securities, income receipts and expense payments are translated into U.S. dollars at the prevailing exchange rate on the respective dates of the transactions. Net realized gains and losses on foreign currency transactions represent net gains and losses from sales and maturities of foreign currency contracts, disposition of foreign currencies, the difference between the amount of net investment income accrued and the U.S. dollar amount actually received, and gains and losses between trade date and settlement on purchases and sales of securities. The effects of changes in foreign currency exchange rates on investments in securities are included with the net realized and unrealized gain or loss on investment securities. INCOME TAXES. As a qualified regulated investment company under Subchapter M of the Internal Revenue Code, the fund is not subject to income taxes to the extent that it distributes substantially all of its taxable income for its fiscal year. The schedule of investments includes information regarding income taxes under the caption "Income Tax Information." INVESTMENT INCOME. Dividend income is recorded on the ex-dividend date, except certain dividends from foreign securities where the ex-dividend date may have passed, are recorded as soon as the fund is informed of the ex-dividend date. Non-cash dividends 1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED INVESTMENT INCOME - CONTINUED included in dividend income, if any, are recorded at the fair market value of the securities received. Interest income, which includes accretion of original issue discount, is accrued as earned. Investment income is recorded net of foreign taxes withheld where recovery of such taxes is uncertain. EXPENSES. Most expenses of the trust can be directly attributed to a fund. Expenses which cannot be directly attributed are apportioned among the funds in the trust. DEFERRED TRUSTEE COMPENSATION. Under a Deferred Compensation Plan (the Plan) non-interested Trustees must defer receipt of a portion of, and may elect to defer receipt of an additional portion of, their annual compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the fund or are invested in a cross-section of other Fidelity funds. Deferred amounts remain in the fund until distributed in accordance with the Plan. DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences, which may result in distribution reclassifications, are primarily due to differing treatments for paydown gains/losses on certain securities, foreign currency transactions, passive foreign investment companies (PFIC), market discount, partnerships, and losses deferred due to wash sales. The fund also utilized earnings and profits distributed to shareholders on redemption of shares as a part of the dividends paid deduction for income tax purposes. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to paid in capital. Undistributed net investment income and accumulated undistributed net realized gain (loss) on investments and foreign currency transactions may include temporary book and tax basis differences which will reverse in a subsequent period. Any taxable income or gain remaining at fiscal year end is distributed in the following year. SECURITY TRANSACTIONS. Security transactions are accounted for as of trade date. Gains and losses on securities sold are determined on the basis of identified cost. 2. OPERATING POLICIES. FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency contracts to facilitate transactions in foreign-denominated securities. Losses may arise from changes in the value of the foreign currency or if the counterparties do not perform under the contracts' terms. The U.S. dollar value of foreign currency contracts is determined using contractual currency exchange rates established at the time of each trade. JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the Securities and Exchange Commission (the SEC), the fund, along with other affiliated entities of Fidelity Management & Research Company (FMR), may transfer uninvested cash 2. OPERATING POLICIES - CONTINUED JOINT TRADING ACCOUNT - CONTINUED balances into one or more joint trading accounts. These balances are invested in one or more repurchase agreements for U.S. Treasury or Federal Agency obligations. REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency securities are transferred to an account of the fund, or to the Joint Trading Account, at a bank custodian. The securities are marked-to-market daily and maintained at a value at least equal to the principal amount of the repurchase agreement (including accrued interest). FMR, the fund's investment adviser, is responsible for determining that the value of the underlying securities remains in accordance with the market value requirements stated above. TAXABLE CENTRAL CASH FUND. Pursuant to an Exemptive Order issued by the SEC, the fund may invest in the Taxable Central Cash Fund (the Cash Fund) managed by Fidelity Investments Money Management, Inc., an affiliate of FMR. The Cash Fund is an open-end money market fund available only to investment companies and other accounts managed by FMR and its affiliates. The Cash Fund seeks preservation of capital, liquidity, and current income by investing in U.S. Treasury securities and repurchase agreements for these securities. Income distributions from the Cash Fund are declared daily and paid monthly from net interest income. Income distributions earned by the fund are recorded as interest income in the accompanying financial statements. DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell securities on a delayed delivery basis. Payment and delivery may take place a month or more after the date of the transaction. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. The market values of the securities purchased or sold on a delayed delivery basis are identified as such in the fund's schedule of investments. The fund may receive compensation for interest forgone in the purchase of a delayed delivery security. With respect to purchase commitments, the fund identifies securities as segregated in its custodial records with a value at least equal to the amount of the commitment. Losses may arise due to changes in the market value of the underlying securities or if the counterparty does not perform under the contract. FUTURES CONTRACTS. The fund may use futures contracts to manage its exposure to the stock market. Buying futures tends to increase the fund's exposure to the underlying instrument, while selling futures tends to decrease the fund's exposure to the underlying instrument or hedge other fund investments. Futures contracts involve, to varying degrees, risk of loss in excess of the futures variation margin reflected in the Statement of Assets and Liabilities. The underlying face amount at value of any open futures contracts at period end is shown in the 2. OPERATING POLICIES - CONTINUED FUTURES CONTRACTS - CONTINUED schedule of investments under the caption "Futures Contracts." This amount reflects each contract's exposure to the underlying instrument at period end. Losses may arise from changes in the value of the underlying instruments or if the counterparties do not perform under the contracts' terms. Gains (losses) are realized upon the expiration or closing of the futures contracts. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. RESTRICTED SECURITIES. The fund is permitted to invest in securities that are subject to legal or contractual restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are registered. Disposal of these securities may involve time-consuming negotiations and expense, and prompt sale at an acceptable price may be difficult. At the end of the period, restricted securities (excluding 144A issues) amounted to $2,206,000 or 0.0% of net assets. 3. PURCHASES AND SALES OF INVESTMENTS. Purchases and sales of securities, other than short-term securities, aggregated $6,864,874,000 and $6,808,509,000, respectively, of which U.S. government and government agency obligations aggregated $811,971,000 and $800,276,000, respectively. The market value of futures contracts opened and closed during the period amounted to $414,953,000 and $347,147,000, respectively. 4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES. MANAGEMENT FEE. As the fund's investment adviser, FMR receives a monthly fee that is calculated on the basis of a group fee rate plus a fixed individual fund fee rate applied to the average net assets of the fund. The group fee rate is the weighted average of a series of rates and is based on the monthly average net assets of all the mutual funds advised by FMR. The rates ranged from .2500% to .5200% for the period. The annual individual fund fee rate is .30%. In the event that these rates were lower than the contractual rates in effect during the period, FMR voluntarily implemented the above rates, as they resulted in the same or a lower management fee. For the period, the management fee was equivalent to an annual rate of 0.59% of average net assets. TRANSFER AGENT FEES. Fidelity Service Company, Inc. (FSC), an affiliate of FMR, is the fund's transfer, dividend disbursing and shareholder servicing agent. FSC receives account fees and asset-based fees that vary according to account size and type of account. FSC pays for typesetting, printing and mailing of all shareholder reports, except proxy statements. For the period, the transfer agent fees were equivalent to an annual rate of 0.21% of average net assets. 4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED ACCOUNTING FEES. FSC maintains the fund's accounting records and administers the security lending program. The fee is based on the level of average net assets for the month plus out-of-pocket expenses. BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio transactions with brokerage firms which are affiliates of FMR. The commissions paid to these affiliated firms were $791,000 for the period. 5. BANK BORROWINGS. The fund is permitted to have bank borrowings for temporary or emergency purposes to fund shareholder redemptions. The fund has established borrowing arrangements with certain banks. Under the most restrictive arrangement, the fund must pledge to the bank securities having a market value in excess of 220% of the total bank borrowings. The interest rate on the borrowings is the bank's base rate, as revised from time to time. The maximum loan and the average daily loan balance during the period for which the loan was outstanding amounted to $2,478,000. The weighted average interest rate was 5.79%. During the period, the fund paid interest expenses amounting to $400. 6. EXPENSE REDUCTIONS. FMR directed certain portfolio trades to brokers who paid a portion of the fund's expenses. For the period, the fund's expenses were reduced by $1,310,000 under this arrangement. In addition, the fund has entered into arrangements with its custodian and transfer agent whereby credits realized as a result of uninvested cash balances were used to reduce a portion of the fund's expenses. During the period, the fund's custodian and transfer agent fees were reduced by $13,000 and $277,000, respectively, under these arrangements. 7. LITIGATION. The fund is engaged in litigation against the obligor on the inflation adjusted debt of Siderurgica Brasileiras SA, contesting the calculation of the principal adjustment. The probability of success of this litigation cannot be predicted and the amount of recovery cannot be estimated. Any recovery from this litigation would inure to the benefit of the fund. As of period end, the fund no longer holds Siderurgica Brasileiras SA debt securities. REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Fidelity Charles Street Trust and the Shareholders of Fidelity Asset Manager: Growth: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Fidelity Asset Manager: Growth (a fund of Fidelity Charles Street Trust) at September 30, 1998, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fidelity Asset Manager: Growth's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at September 30, 1998 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. /s/PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Boston, Massachusetts November 10, 1998 DISTRIBUTIONS The Board of Trustees of (Fidelity Asset Manager: Growth) voted to pay to shareholders of record at the opening of business on record date, the following distributions derived from capital gains realized from sales of portfolio securities, and dividends derived from net investment income: PAY DATE 12/22/97 RECORD DATE 12/19/97 DIVIDENDS $.40 SHORT-TERM CAPITAL GAINS $.44 LONG-TERM CAPITAL GAINS $1.31 LONG-TERM CAPITAL GAIN BREAKDOWN: 28% rate 58.76% 20% rate 41.24% A total of 3.24% of the dividends distributed during the fiscal year was derived from interest on U.S. Government securities which is generally exempt from state income tax. A total of 25.00% of the dividends distributed during the fiscal year qualifies for the dividends-received deduction for corporate shareholders. The fund will notify shareholders in January 1999 of the applicable percentage for use in preparing 1998 income tax returns. MANAGING YOUR INVESTMENTS Fidelity offers several ways to conveniently manage your personal investments via your telephone or PC. You can access your account information, conduct trades and research your investments 24 hours a day. BY PHONE Fidelity TouchTone Xpress(registered trademark) provides a single toll-free number to access account balances, positions, quotes and trading. It's easy to navigate the service, and on your first call, the system will help you create a personal identification number (PIN) for security. (PHONE_GRAPHIC)TOUCHTONE XPRESS 1-800-544-5555 PRESS 1 For mutual fund and brokerage trading. 2 For quotes.* 3 For account balances and holdings. 4 To review orders and mutual fund activity. 5 To change your PIN. *0 To speak to a Fidelity representative. BY PC Fidelity's Web site on the Internet provides a wide range of information, including daily financial news, fund performance, interactive planning tools and news about Fidelity products and services. (PC_GRAPHIC)FIDELITY'S WEB SITE WWW.FIDELITY.COM If you are not currently on the Internet, call Fidelity at 1-800-544-7272 and we'll send you an America Online CD or disk with up to 50 free hours of Web access. (PC_GRAPHIC) FIDELITY ON-LINE XPRESS+ TM Fidelity On-line Xpress+ software for Windows combines comprehensive portfolio management capabilities, securities trading and access to research and analysis tools . . . all on your desktop. Call Fidelity at 1-800-544-7272 or visit our Web site for more information on how to manage your investments via your PC. * WHEN YOU CALL THE QUOTES LINE, PLEASE REMEMBER THAT A FUND'S YIELD AND RETURN WILL VARY AND, EXCEPT FOR MONEY MARKET FUNDS, SHARE PRICE WILL ALSO VARY. THIS MEANS THAT YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. THERE IS NO ASSURANCE THAT MONEY MARKET FUNDS WILL BE ABLE TO MAINTAIN A STABLE $1 SHARE PRICE; AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT. TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE, REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS, AND THE EFFECTS OF ANY SALES CHARGES. INVESTMENT ADVISER Fidelity Management & Research Company Boston, MA INVESTMENT SUB-ADVISERS Fidelity Management & Research (U.K.) Inc., London, England Fidelity Management & Research (Far East) Inc., Tokyo, Japan OFFICERS Edward C. Johnson 3d, President Robert C. Pozen, Senior Vice President Robert A. Lawrence, Vice President Richard C. Habermann, Vice President Brad Lewis, Vice President Charles S. Morrison, Vice President John Todd, Vice President Eric D. Roiter, Secretary Richard A. Silver, Treasurer John H . Costello, Assistant Treasurer Leonard M. Rush, Assistant Treasurer BOARD OF TRUSTEES Ralph F. Co x * Phyllis Burke Davis * Robert M. Gates * Edward C. Johnson 3d E. Bradley Jones * Donald J. Kirk * Peter S. Lynch Marvin L. Mann * William O. McCoy * Gerald C. McDonough * Robert C. Pozen Thomas R. Williams * * INDEPENDENT TRUSTEES ADVISORY BOARD J. Gary Burkhead GENERAL DISTRIBUTOR Fidelity Distributors Corporation Boston, MA TRANSFER AND SHAREHOLDER SERVICING AGENT Fidelity Service Company, Inc. Boston, MA CUSTODIAN The Chase Manhattan Bank New York, NY FIDELITY'S ASSET ALLOCATION FUNDS Asset Manager SM Asset Manager: Growth SM Asset Manager: Income SM Fidelity Freedom Funds(registered trademark) - Income, 2000, 2010, 2020, 2030 THE FIDELITY TELEPHONE CONNECTION MUTUAL FUND 24-HOUR SERVICE Exchanges/Redemptions 1-800-544-7777 Account Assistance 1-800-544-6666 Product Information 1-800-544-8888 Retirement Accounts 1-800-544-4774 (8 a.m. - 9 p.m.) TDD Service 1-800-544-0118 (for the deaf and hearing impaired) (9 a.m. - 9 p.m. Eastern time) TouchTone Xpress SM (AUTOMATED_GRAPHIC) 1-800-544-5555 (AUTOMATED_GRAPHIC) AUTOMATED LINE FOR QUICKEST SERVICE AMG-ANN-1198 64293 1.537733.101 (FIDELITY LOGO)(REGISTERED TRADEMARK) Corporate Headquarters 82 Devonshire St., Boston, MA 02109 www.fidelity.com FIDELITY ASSET MANAGER: INCOME SM ANNUAL REPORT SEPTEMBER 30, 1998 (2 Fidelity logos) (registered trademark) CONTENTS PRESIDENT'S MESSAGE 3 NED JOHNSON ON INVESTING STRATEGIES. PERFORMANCE 4 HOW THE FUND HAS DONE OVER TIME. MARKET RECAP 6 AN OVERVIEW OF THE MARKET'S PERFORMANCE AND THE FACTORS DRIVING IT. FUND TALK 7 THE MANAGER'S REVIEW OF FUND PERFORMANCE, STRATEGY AND OUTLOOK. INVESTMENT CHANGES 10 A SUMMARY OF MAJOR SHIFTS IN THE FUND'S INVESTMENTS OVER THE PAST SIX MONTHS. INVESTMENTS 11 A COMPLETE LIST OF THE FUND'S INVESTMENTS WITH THEIR MARKET VALUES. FINANCIAL STATEMENTS 33 STATEMENTS OF ASSETS AND LIABILITIES, OPERATIONS, AND CHANGES IN NET ASSETS, AS WELL AS FINANCIAL HIGHLIGHTS. NOTES 37 NOTES TO THE FINANCIAL STATEMENTS. REPORT OF INDEPENDENT 42 THE AUDITORS' OPINION. ACCOUNTANTS DISTRIBUTIONS 43 To reduce expenses and demonstrate respect for our environment, we have initiated a project through which we will begin eliminating duplicate copies of most financial reports and prospectuses to most households, even if they have more than one account in the fund. If additional copies of financial reports, prospectuses or historical account information are needed, please call 1-800-544-6666. THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS. MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK. FOR MORE INFORMATION ON ANY FIDELITY FUND, INCLUDING CHARGES AND EXPENSES, CALL 1-800-544-8888 FOR A FREE PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY. PRESIDENT'S MESSAGE (photo_of_Edward_C_Johnson_3d) DEAR SHAREHOLDER: The stock and bond markets continued to be influenced by competing factors as the third quarter of 1998 ended. On the one hand, low inflation, low unemployment and moderate growth in the U.S. economy provided a foundation for positive returns. But growing concerns about U.S. corporate earnings, combined with fears about the health of the economies and financial markets in Japan, Russia and many emerging markets, led to a continuation of the volatility that has marked most of the year. While it's impossible to predict the future direction of the markets with any degree of certainty, there are certain basic principles that can help investors plan for their future needs. First, investors are encouraged to take a long-term view of their portfolios. If you can afford to leave your money invested through the inevitable up and down cycles of the financial markets, you will greatly reduce your vulnerability to any single decline. We know from experience, for example, that stock prices have gone up over longer periods of time, have significantly outperformed other types of investments and have stayed ahead of inflation. Second, you can further manage your investing risk through diversification. Asset Manager funds are already diversified because they invest in stocks, bonds and short-term and money market instruments, both in the U.S. and overseas. If you have a shorter investment time horizon, you might want to consider moving some of your investment into Asset Manager: Income, which generally has a higher weighting in short-term investments compared with the other Asset Manager funds. Finally, no matter what your time horizon or portfolio diversity, it makes good sense to follow a regular investment plan, investing a certain amount of money in a fund at the same time each month or quarter and periodically reviewing your overall portfolio. By doing so, you won't get caught up in the excitement of a rapidly rising market, nor will you buy all your shares at market highs. While this strategy - known as dollar cost averaging - won't assure a profit or protect you from a loss in a declining market, it should help you lower the average cost of your purchases. If you have questions, please call us at 1-800-544-8888. We are available 24 hours a day, seven days a week to provide you the information you need to make the investments that are right for you. Best regards, Edward C. Johnson 3d PERFORMANCE: THE BOTTOM LINE There are several ways to evaluate a fund's historical performance. You can look at the total percentage change in value, the average annual percentage change or the growth of a hypothetical $10,000 investment. Total return reflects the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains (the profits earned upon the sale of securities that have grown in value). If Fidelity had not reimbursed certain fund expenses, the past five year and life of fund total returns would have been lower. CUMULATIVE TOTAL RETURNS PERIODS ENDED PAST 1 PAST 5 LIFE OF SEPTEMBER 30, 1998 YEAR YEARS FUND FIDELITY ASSET 8.06% 50.35% 73.38% MANAGER: INCOME FIDELITY CONSERVATIVE 9.55% 53.99% N/A COMPOSITE S&P 500 (REGISTERED TRADEMARK) 9.05% 147.93% 181.19% LB AGGREGATE BOND 11.51% 41.66% 54.99% LB 3 MONTH T-BILL 5.50% 29.17% N/A INCOME FUNDS 2.92% 65.66% N/A AVERAGE CUMULATIVE TOTAL RETURNS show the fund's performance in percentage terms over a set period - in this case, one year, five years or since the fund started on October 1, 1992. For example, if you had invested $1,000 in a fund that had a 5% return over the past year, the value of your investment would be $1,050. You can compare the fund's returns to the performance of the Fidelity Conservative Composite Index, a hypothetical combination of unmanaged indices. The composite index combines the total returns of the Standard & Poor's 500 Index, the Lehman Brothers Aggregate Bond Index and the Lehman Brothers 3 Month Treasury Bill Index, weighted according to the fund's neutral mix. To measure how the fund's performance stacked up against its peers, you can compare it to the income funds average, which reflects the performance of mutual funds with similar objectives tracked by Lipper Analytical Services, Inc. The past one year average represents a peer group of 80 mutual funds. The benchmarks listed in the table above include reinvested dividends and capital gains, if any, and exclude the effect of sales charges. AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED PAST 1 PAST 5 LIFE OF SEPTEMBER 30, 1998 YEAR YEARS FUND FIDELITY ASSET 8.06% 8.50% 9.61% MANAGER: INCOME FIDELITY CONSERVATIVE 9.55% 9.02% N/A COMPOSITE AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and show you what would have happened if the fund had performed at a constant rate each year. $10,000 OVER LIFE OF FUND
Asset Manager: Income S&P 500 FID Conserv Composite LB Aggregate Bond 00328 SP001 F0056 LB001 1992/10/31 10000.00 10000.00 10000.00 10000.00 1992/11/30 10131.75 10341.00 10058.70 10002.00 1992/12/31 10335.71 10468.19 10137.21 10161.03 1993/01/31 10601.78 10556.13 10234.73 10356.12 1993/02/28 10775.92 10699.69 10335.59 10537.36 1993/03/31 11012.63 10925.45 10403.50 10581.61 1993/04/30 11095.59 10661.06 10390.02 10655.68 1993/05/31 11157.79 10946.77 10454.60 10669.54 1993/06/30 11282.63 10978.52 10544.51 10862.65 1993/07/31 11376.79 10934.61 10568.86 10924.57 1993/08/31 11628.47 11349.03 10733.74 11115.75 1993/09/30 11660.07 11261.64 10744.26 11145.76 1993/10/31 11818.44 11494.76 10814.63 11187.00 1993/11/30 11744.57 11385.56 10772.19 11091.91 1993/12/31 11926.14 11523.32 10827.23 11151.81 1994/01/31 12131.02 11915.11 10961.16 11302.36 1994/02/28 11915.04 11592.21 10840.81 11105.70 1994/03/31 11687.39 11086.79 10689.04 10831.39 1994/04/30 11698.18 11228.70 10705.13 10744.74 1994/05/31 11731.10 11412.86 10753.94 10743.66 1994/06/30 11665.22 11133.24 10715.66 10720.03 1994/07/31 11819.10 11498.41 10865.25 10933.36 1994/08/31 11940.44 11969.85 10974.39 10946.48 1994/09/30 11829.82 11676.58 10895.26 10785.56 1994/10/31 11863.39 11939.31 10965.43 10775.86 1994/11/30 11774.41 11504.48 10899.32 10752.15 1994/12/31 11763.68 11675.09 10979.99 10826.34 1995/01/31 11831.41 11977.82 11125.48 11040.70 1995/02/28 12046.30 12444.60 11310.15 11303.47 1995/03/31 12171.32 12811.84 11427.24 11372.42 1995/04/30 12330.59 13189.15 11567.79 11531.63 1995/05/31 12627.09 13716.32 11830.48 11977.91 1995/06/30 12752.88 14034.95 11944.07 12065.35 1995/07/31 12959.19 14500.35 12038.69 12038.80 1995/08/31 13074.38 14536.74 12116.36 12184.47 1995/09/30 13247.66 15150.19 12280.54 12302.66 1995/10/31 13270.83 15096.11 12357.37 12462.60 1995/11/30 13503.77 15758.83 12551.07 12649.53 1995/12/31 13726.82 16062.34 12688.84 12826.63 1996/01/31 13880.66 16609.11 12828.08 12911.28 1996/02/29 13785.70 16763.07 12798.43 12686.63 1996/03/31 13773.58 16924.50 12815.21 12597.82 1996/04/30 13785.38 17173.97 12856.13 12527.27 1996/05/31 13833.79 17616.88 12944.55 12502.22 1996/06/30 13942.35 17684.00 13032.02 12669.75 1996/07/31 13846.45 16902.72 12955.05 12703.96 1996/08/31 13881.96 17259.20 13031.59 12682.36 1996/09/30 14211.73 18230.55 13272.88 12903.03 1996/10/31 14517.86 18733.35 13463.56 13189.48 1996/11/30 14937.29 20149.40 13765.93 13415.02 1996/12/31 14799.54 19750.24 13699.20 13290.26 1997/01/31 15016.25 20984.24 13910.53 13331.46 1997/02/28 15080.03 21148.76 13966.00 13364.79 1997/03/31 14810.26 20279.75 13791.31 13216.44 1997/04/30 15080.75 21490.45 14079.69 13414.69 1997/05/31 15416.69 22798.79 14340.39 13542.13 1997/06/30 15649.97 23820.18 14569.69 13703.28 1997/07/31 16144.31 25715.55 15021.41 14073.27 1997/08/31 15948.38 24274.97 14810.00 13953.64 1997/09/30 16223.60 25604.51 15102.26 14160.16 1997/10/31 16249.53 24749.32 15130.35 14365.48 1997/11/30 16434.63 25894.96 15324.75 14431.56 1997/12/31 16635.67 26339.58 15474.53 14577.32 1998/01/31 16785.91 26630.89 15630.08 14763.91 1998/02/28 17073.26 28551.51 15866.63 14752.10 1998/03/31 17252.00 30013.64 16078.48 14802.26 1998/04/30 17223.94 30315.57 16174.34 14879.23 1998/05/31 17348.60 29794.45 16217.39 15020.58 1998/06/30 17557.06 31004.70 16438.99 15148.25 1998/07/31 17487.06 30674.50 16442.93 15180.07 1998/08/31 17108.65 26239.58 16124.17 15427.50 1998/09/30 17530.85 27920.49 16545.04 15788.50 IMATRL PRASUN SHR__CHT 19980930 19981006 112651 R00000000000074
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was invested in Fidelity Asset Manager: Income Fund on October 31, 1992, shortly after the fund started. As the chart shows, by September 30, 1998, the value of the investment would have grown to $17,531 - a 75.31% increase on the initial investment. For comparison, look at how both the Lehman Brothers Aggregate Bond Index, a market value weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year, and the S&P 500 Index, a widely recognized unmanaged index of common stocks, did over the same period. With dividends and capital gains, if any, reinvested, the same $10,000 investment in the Lehman Brothers Aggregate Bond Index would have grown to $15,789 - a 57.89% increase. If $10,000 was invested in the S&P 500 Index, it would have grown to $27,920 - a 179.20% increase. You can also look at how the Fidelity Conservative Composite Index did over the same period. The composite index combines the total returns of the S&P 500 Index (+179.20%), the Lehman Brothers Aggregate Bond Index (+57.89%) and the Lehman Brothers 3 Month T-Bill Index (+32.19%) according to the fund's neutral mix*, and assumes monthly rebalancing of the mix. With dividends and interest, if any, reinvested, the same $10,000 investment would have grown to $16,545 - a 65.45% increase. (checkmark)UNDERSTANDING PERFORMANCE How a fund did yesterday is no guarantee of how it will do tomorrow. If you sell your shares during a market downturn, you might lose money. But if you can ride out the market's ups and downs, you may have a gain. * CURRENTLY 20% STOCKS, 50% BONDS AND 30% SHORT-TERM/MONEY MARKET INSTRUMENTS EFFECTIVE JANUARY 1, 1997; 20%, 30% AND 50%, RESPECTIVELY, PRIOR TO JANUARY 1, 1997. Against a backdrop of financial and economic instability in many of the world's developed and emerging markets on the one hand, and a resilient domestic economy on the other, the U.S. stock and bond markets experienced extreme volatility during the 12-month period that ended September 30, 1998. STOCKS: The 12-month period that drew to a close on September 30, 1998, is one equity investors will remember for years to come. The period began as it ended: with unusually volatile markets. In October 1997, the Dow Jones Industrial Average - an index of 30 blue-chip stocks - tumbled over 550 points in one day on the news of worsening economic conditions in Asia. The Dow rebounded the following day, however, rising 330 points as investors focused on higher-quality stocks with strong liquidity and minimal international exposure. This trend continued in the first and second quarters of 1998, as U.S. economic growth chugged along on the rails of near-record lows for inflation, unemployment and interest rates. Unfortunately, emerging markets - particularly in Russia and Latin America - seemed to catch the so-called "Asian contagion," causing a free-fall in the U.S. stock market. On August 31, the Dow plunged 512.61 points - erasing all previous gains for the year. Appropriately, the Dow closed on September 30 with a 237.90 loss, triggered by investor disappointment over a lower-than-hoped-for reduction in the federal funds rate. For the 12-month period ending September 30, 1998, the Dow eked out a barely positive gain of 0.40%, while the Standard & Poor's 500 Index - a market-capitalization weighted index of 500 widely held U.S. stocks - - returned 9.05%. BONDS: As a safe haven from turbulent stock markets worldwide, bond markets reaped the benefits from the flight to quality by anxious investors during the 12-month period ending September 30, 1998. The Lehman Brothers Aggregate Bond Index - a broad measure of the U.S. taxable investment-grade bond market - returned 11.51% over the past year, over two and one-half times higher than the 4.54% return generated for the six-month period ending March 31, 1998. The buying surge sent Treasury-bond yields - which move in the opposite direction of bond prices - to their lowest level in over three decades, as the yield on the benchmark 30-year bond fell to 4.96%. In spite of the global economic crisis that dominated the period, the U.S. enjoyed low interest rates, low inflation and a stable economy, which aided the performance of corporate bonds. The Lehman Brothers Corporate Bond Index returned 11.07% for the 12-month period. Mortgage-backed bonds also performed well, although lower interest rates resulted in higher refinancing activity. The Lehman Brothers Mortgage Backed Securities Index had a 12-month return of 8.62%. Interest rates fell even lower late in the period, as the Federal Reserve lowered the fed funds rate by 0.25%, the first rate cut in nearly three years. The period's biggest losers were shareholders of emerging-market debt, as the JP Morgan Emerging Markets Bond Index lost 20.89% over the past 12 months. FUND TALK: THE MANAGER'S OVERVIEW (PHOTOGRAPH OF RICHARD HABERMANN) An interview with Richard Habermann, Portfolio Manager of Fidelity Asset Manager: Income Q. HOW DID THE FUND PERFORM, DICK? A. For the 12-month period that ended September 30, 1998, the fund returned 8.06%. That trailed the 9.55% return of the Fidelity Conservative Composite Index, but beat the 2.92% return of the income funds average, according to Lipper Analytical Services. The fund's competitive performance relative to its peer group was due in large part to the fund's balanced approach to asset allocation. Many funds within the peer group were fairly aggressive in terms of asset allocation and security exposure - factors that detracted from peer group performance late in the period as equity markets stumbled. In contrast, the fund's comparatively high bond allocation benefited the fund's performance relative to its peers. Q. WHAT WAS YOUR STRATEGY IN TERMS OF ASSET ALLOCATION? A. Due to its conservative investment mandate, the fund typically invests only about 20% of its assets in stocks. Given the market volatility we've seen during the period, however - particularly during the past six months - this percentage was scaled back and the fund's exposure to bonds was increased. This decision was made during the summer months based on a belief that global market turmoil could creep into U.S. corporate circles and have a negative impact on earnings growth. In retrospect, this turned out to be a sound strategy. Another adjustment was made during the last month of the period, when the fund's stock exposure was ramped back up based on two factors. First, equity valuations generally improved as many markets observed significant declines late in the period. Second, the U.S. Federal Reserve Board appeared ready to stoke the economy by lowering interest rates, which it eventually did in late September. Whenever investors are given reason to be confident, stocks generally perform well. Overall, I was happy with these allocation shifts. Q. HOW DID THE BOND PORTION OF THE FUND FARE DURING THE PERIOD? A. While turning in positive returns, the fund's fixed-income investments - which are overseen by Charlie Morrison - lagged the fixed-income benchmark during the period. This was primarily due to the fund's overweighting in corporate and mortgage-backed bonds, both of which underperformed as a general flight to quality caused U.S. Treasuries to outpace all other fixed-income sectors. During the last two months of the period, this flight to quality was spurred primarily by the ongoing troubles in overseas markets. Simultaneously, stock investors became concerned with their risk exposure and many opted for more conservative investments. As a result, U.S. Treasury bonds benefited tremendously. While corporate and mortgage-backed securities performed well over the period, they were unable to keep pace with Treasuries. Q. WHAT ABOUT THE STOCK PORTION OF THE FUND? A. In terms of the fund's equity positions - which are managed by Brad Lewis - industry selection was positive but individual security selection within those industries hurt performance relative to the Standard & Poor's 500 Index. For instance, the fund was well-represented in the technology sector, but while technology stocks accounted for approximately one-fourth of the S&P 500's gain, they contributed negatively to the fund. Looking back on the period, we simply didn't own enough of the names that did really well. The fund had positions in strong performers such as Microsoft, for example, but not enough to positively influence performance relative to the S&P 500. Some of the individual disappointments included financial-related holdings Chase Manhattan and Lehman Brothers, both of which suffered as global capital market conditions deteriorated toward the end of the period. Additionally, the fund's exposure to pharmaceutical stocks in general was beneficial as interest in defensive areas of the market peaked toward the close of the period. Q. WHICH EQUITY INVESTMENTS BENEFITED THE FUND'S PERFORMANCE? A. Home mortgage financers Fannie Mae and Freddie Mac continued their strong run during the period. Many homeowners took advantage of the lower interest rates prevalent in the U.S. to refinance their mortgages. Both companies benefited from increased refinancing volume, as well as attractive yield spreads between mortgage-related bonds and Treasury bonds. Another strong performer was retail store chain Wal-Mart, which benefited from strong consumer spending. Q. WHAT WAS YOUR STRATEGY WITH RESPECT TO THE FUND'S SHORT-TERM/MONEY MARKET INVESTMENTS? A. Unlike six months ago, when we were focusing on investments with shorter maturities, the unpredictability of the stock market caused us to take a somewhat longer-term approach. John Todd, who manages the fund's short-term/money market subportfolio, began to look at securities with one-year maturities during the second half of the period. As uncertainty continued to prevail in the financial markets, however, John began to look more closely at the three- to six-month range. Throughout the summer months, it appeared unlikely that the Fed would take action and cut interest rates, yet the market itself had been pricing in a potential rate tightening. On average, the fund's short-term investments were longer in maturity than the three-month Treasury bill benchmark and had more exposure to higher-yielding investments. This helped relative performance during the period. Q. WHAT'S YOUR OUTLOOK GOING FORWARD? A. I think it's important that shareholders of the fund understand that the market is going to go through this sort of volatility every now and then. The returns we've seen over the past year are much closer to the market's historical yearly average than the 20% returns some investors have become accustomed to. Should the Fed lower interest rates again - thus making it easier for corporations to borrow or raise capital - we could see increased growth and better valuations across the board. In terms of equities, we may also begin to see more stocks participate in the market's gains. This would be an attractive development and would play nicely to our stock-picking strengths. THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET AND OTHER CONDITIONS. (CHECKMARK)FUND FACTS GOAL: HIGH CURRENT INCOME, AND CAPITAL APPRECIATION WHEN APPROPRIATE FUND NUMBER: 328 TRADING SYMBOL: FASIX START DATE: OCTOBER 1, 1992 SIZE: AS OF SEPTEMBER 30, 1998, MORE THAN $776 MILLION MANAGER: RICHARD HABERMANN, SINCE 1996; MANAGER, FIDELITY ASSET MANAGER AND FIDELITY ASSET MANAGER: GROWTH, SINCE 1996; FIDELITY TREND FUND, 1977-1981; FIDELITY MAGELLAN FUND, 1972-1977; JOINED FIDELITY IN 1968 DICK HABERMANN ON THE CONCERNS POSED BY HEDGE FUNDS: "THERE'S BEEN A LOT OF TALK ABOUT HEDGE FUNDS LATELY, PARTICULARLY WITH THE RECENT NEAR-COLLAPSE OF LONG-TERM CAPITAL MANAGEMENT. NOT ALL INVESTORS MAY BE FAMILIAR WITH HOW THESE TYPES OF FUNDS OPERATE, NOR HOW THEY CAN POTENTIALLY AFFECT OTHER TYPES OF INVESTMENTS SUCH AS MUTUAL FUNDS. "A HEDGE FUND SEEKS TO TAKE ADVANTAGE OF INEFFICIENCIES IN CAPITAL MARKETS. THIS COULD BE IN STOCKS, BONDS, EMERGING-MARKET DEBT OR OTHER INVESTMENTS. HEDGE FUNDS CAN BE HIGHLY LEVERAGED AND TYPICALLY TAKE AMPLE INVESTMENT RISKS. OF COURSE, THE ATTRACTIVENESS TO INVESTORS IS THE POTENTIALLY LUCRATIVE RETURNS THEY CAN PROVIDE. "IN THE CASE OF LONG-TERM CAPITAL, THE FUND HAD RATHER EXTREME LEVERAGE WITHIN ITS BOND ALLOCATION. UNFORTUNATELY, THE MARKET TURMOIL LATE IN THE PERIOD FORCED FIRMS SUCH AS LONG-TERM CAPITAL TO `UNWIND' SOME OF THESE LEVERAGED STRATEGIES BY SELLING LARGE AMOUNTS OF SECURITIES. AFTER REALIZING THAT SUCH A CONTINUING GLUT OF SUPPLY HITTING THE MARKETS WOULD BE PARALYZING, A NUMBER OF ENTITIES COLLABORATED ON A FINANCIAL PLAN TO ASSIST LONG-TERM CAPITAL. "WHAT DOES THIS TYPE OF SITUATION MEAN FOR FUNDS SUCH AS THE ASSET MANAGERS? WELL, IF LONG-TERM CAPITAL HAD UNLEASHED ALL OF ITS BOND HOLDINGS, IT WOULD HAVE PUT INCREDIBLE LIQUIDITY PRESSURE ON SOME OF THE SECTORS IN WHICH WE INVEST. INVESTORS ALSO WOULD HAVE HAD DIFFICULTY DETERMINING WHETHER PRICING WAS FAIR OR NOT. IN ESSENCE, THIS ONE SITUATION COULD HAVE PLUNGED THE U.S. DIRECTLY INTO A CAPITAL MARKETS `FREEZE.' FORTUNATELY, IT DIDN'T COME TO THAT, AND IN THE END, INVESTORS HOPEFULLY BECAME MORE EDUCATED ABOUT THE RISKS HEDGE FUNDS TAKE." INVESTMENT CHANGES
TOP FIVE BOND ISSUERS AS OF SEPTEMBER 30, 1998 (WITH MATURITIES MORE % OF FUND'S % OF FUND'S INVESTMENTS THAN ONE YEAR) INVESTMENTS IN THESE BOND ISSUERS 6 MONTHS AGO FANNIE MAE 12.4 12.8 U.S. TREASURY 5.0 8.1 GOVERNMENT 2.4 0.9 NATIONAL MORTGAGE ASSOCIATION U.S. DEPARTMENT OF 0.8 0.8 HOUSING AND URBAN DEVELOPMENT VIACOM, INC. 0.8 0.3
QUALITY DIVERSIFICATION AS OF SEPTEMBER 30, 1998 (MOODY'S RATINGS) % OF FUND'S % OF FUND'S INVESTMENTS INVESTMENTS 6 MONTHS AGO AAA, AA, A 36.0 38.4 BAA 9.6 7.2 BA AND BELOW 2.1 1.8 NOT RATED 0.0 5.0
TABLE EXCLUDES SHORT-TERM INVESTMENTS. WHERE MOODY'S RATINGS ARE NOT AVAILABLE, WE HAVE USED S&P RATINGS.
TOP FIVE STOCKS AS OF SEPTEMBER 30, 1998 % OF FUND'S % OF FUND'S INVESTMENTS INVESTMENTS IN THESE STOCKS 6 MONTHS AGO BellSouth Corp. 1.1 0.1 Warner-Lambert Co. 1.1 0.0 Microsoft Corp. 0.7 0.1 Tele-Communications 0.6 0.0 , Inc. (TCI Group) Series A AT&T Corp. 0.6 0.1
ASSET ALLOCATION AS OF SEPTEMBER 30, 1998* ROW: 1, COL: 1, VALUE: 32.0 ROW: 1, COL: 2, VALUE: 49.0 ROW: 1, COL: 3, VALUE: 19.0 STOCK CLASS 19% BOND CLASS 49% SHORT-TERM CLASS 32% *FOREIGN INVESTMENTS 13% AS OF MARCH 31, 1998 ** ROW: 1, COL: 1, VALUE: 28.0 ROW: 1, COL: 2, VALUE: 50.0 ROW: 1, COL: 3, VALUE: 22.0 STOCK CLASS 22% BOND CLASS 50% SHORT-TERM CLASS 28% **FOREIGN INVESTMENTS 11% ASSET ALLOCATIONS IN THE PIE CHARTS REFLECT THE CATEGORIZATION OF ASSETS AS DEFINED IN THE FUND'S PROSPECTUS IN EFFECT AS OF THE TIME PERIODS INDICATED ABOVE. FINANCIAL STATEMENT CATEGORIZATIONS CONFORM TO ACCOUNTING STANDARDS AND WILL DIFFER FROM THE PIE CHART. INVESTMENTS SEPTEMBER 30, 1998 SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENT IN SECURITIES COMMON STOCKS - 19.1% SHARES VALUE (NOTE 1) AEROSPACE & DEFENSE - 0.0% Gulfstream 1,800 $ 72,450 Aerospace Corp. (a) BASIC INDUSTRIES - 0.1% CHEMICALS & PLASTICS - 0.0% Quaker State 10,100 147,081 Corp. PACKAGING & CONTAINERS - 0.1% Owens-Illinois, 20,100 502,500 Inc. (a) TOTAL BASIC INDUSTRIES 649,581 CONSTRUCTION & REAL ESTATE - 0.4% BUILDING MATERIALS - 0.2% Fortune Brands, 13,800 408,825 Inc. Masco Corp. 40,200 989,925 1,398,750 CONSTRUCTION - 0.1% Centex Corp. 6,000 207,000 D.R. Horton, Inc. 8,548 136,768 Fleetwood 14,102 425,704 Enterprises, Inc. Kaufman & 13,000 304,688 Broad Home Corp. U.S. Home 1,000 29,375 Corp. (a) 1,103,535 ENGINEERING - 0.1% Fluor Corp. 10,500 431,156 TOTAL CONSTRUCTION & 2,933,441 REAL ESTATE DURABLES - 1.1% AUTOS, TIRES, & ACCESSORIES - 1.0% Chrysler Corp. 77,900 3,729,463 Dana Corp. 15,100 563,419 Ford Motor Co. 80,000 3,755,000 8,047,882 HOME FURNISHINGS - 0.0% HON Industries, 200 4,725 Inc. COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) DURABLES - CONTINUED TEXTILES & APPAREL - 0.1% Jones Apparel 5,800 $ 133,038 Group, Inc. (a) VF Corp. 16,500 612,563 745,601 TOTAL DURABLES 8,798,208 ENERGY - 0.7% ENERGY SERVICES - 0.0% McDermott 12,900 347,494 International, Inc. OIL & GAS - 0.7% Ashland, Inc. 17,500 809,375 British Petroleum 1 15 Co. PLC: Ord. ADR 1 87 Sun Co., Inc. 14,700 470,400 Texaco, Inc. 65,700 4,118,569 5,398,446 TOTAL ENERGY 5,745,940 FINANCE - 2.7% BANKS - 0.1% Chase 11,900 514,675 Manhattan Corp. NationsBank 1,700 90,950 Corp. 605,625 CREDIT & OTHER FINANCE - 0.3% Equitable 18,800 777,850 Companies (The), Inc. First Chicago 26,700 1,828,950 NBD Corp. 2,606,800 FEDERAL SPONSORED CREDIT - 0.7% Fannie Mae 61,500 3,951,375 Freddie Mac 33,600 1,661,100 5,612,475 INSURANCE - 1.2% Allmerica 3,300 196,763 Financial Corp. Allstate Corp. 84,016 3,502,417 American 9,900 632,363 General Corp. CIGNA Corp. 43,700 2,889,663 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) FINANCE - CONTINUED INSURANCE - CONTINUED Lincoln National 14,700 $ 1,209,075 Corp. MGIC Investment 12,900 475,688 Corp. Nationwide 6,200 281,713 Financial Services, Inc. Class A Provident 9,800 330,750 Companies, Inc. Reliastar 14 546 Financial Corp. Travelers 4,300 137,331 Property Casualty Corp. Class A 9,656,309 SAVINGS & LOANS - 0.1% Golden West 9,200 752,675 Financial Corp. SECURITIES INDUSTRY - 0.3% Lehman Brothers 21,400 604,550 Holdings, Inc. Morgan Stanley, 12,500 538,281 Dean Witter, Discover & Co. PaineWebber 50,000 1,500,000 Group, Inc. 2,642,831 TOTAL FINANCE 21,876,715 HEALTH - 3.7% DRUGS & PHARMACEUTICALS - 2.7% Allergan, Inc. 52,300 3,053,013 Amgen, Inc. (a) 35,300 2,667,356 Bristol-Myers 16,300 1,693,163 Squibb Co. Mylan 106,800 3,150,600 Laboratories, Inc. Schering-Plough 24,700 2,557,994 Corp. Warner-Lambert 111,500 8,418,250 Co. 21,540,376 MEDICAL EQUIPMENT & SUPPLIES - 1.0% Allegiance Corp. 1,240 36,890 Becton, 49,000 2,015,125 Dickinson & Co. Cardinal Health, 14,700 1,517,775 Inc. Guidant Corp. 54,500 4,046,625 7,616,415 TOTAL HEALTH 29,156,791 INDUSTRIAL MACHINERY & EQUIPMENT - 0.4% ELECTRICAL EQUIPMENT - 0.2% Honeywell, Inc. 29,000 1,857,813 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED INDUSTRIAL MACHINERY & EQUIPMENT - 0.2% Ingersoll-Rand 35,900 $ 1,361,956 Co. TOTAL INDUSTRIAL 3,219,769 MACHINERY & EQUIPMENT MEDIA & LEISURE - 0.8% BROADCASTING - 0.6% Tele-Communicat 125,200 4,898,450 ions, Inc. (TCI Group) Series A (a) ENTERTAINMENT - 0.0% Royal Carribean 2,800 74,375 Cruises Ltd. Viacom, Inc. 4,200 243,600 Class B (non-vtg.) (a) 317,975 PUBLISHING - 0.2% Gannet Co., Inc. 6,100 326,731 New York Times 29,600 814,000 Co. (The) Class A 1,140,731 TOTAL MEDIA & LEISURE 6,357,156 NONDURABLES - 1.1% FOODS - 0.7% Heinz (H.J.) Co. 70,000 3,578,750 Quaker Oats 35,500 2,094,500 Co. 5,673,250 HOUSEHOLD PRODUCTS - 0.4% Clorox Co. 16,800 1,386,000 Colgate-Palmoliv 26,300 1,801,550 e Co. 3,187,550 TOTAL NONDURABLES 8,860,800 PRECIOUS METALS - 0.0% Battle Mountain 4,100 24,856 Gold Co. Homestake 14,300 173,388 Mining Co. 198,244 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) RETAIL & WHOLESALE - 1.8% APPAREL STORES - 0.2% Gap, Inc. 5,550 $ 292,763 Limited, Inc. 32,100 704,194 (The) TJX Companies, 23,600 420,375 Inc. 1,417,332 GENERAL MERCHANDISE STORES - 1.1% Dayton Hudson 27,200 972,400 Corp. Federated 45,100 1,640,513 Department Stores, Inc. (a) K mart Corp. (a) 39,900 476,306 May Department 28,700 1,478,050 Stores Co. (The) Wal-Mart 71,300 3,894,763 Stores, Inc. 8,462,032 GROCERY STORES - 0.2% Safeway, Inc. (a) 36,200 1,678,775 RETAIL & WHOLESALE, MISCELLANEOUS - 0.3% Ebay, Inc. (a) 100 4,506 Lowe's 77,800 2,475,013 Companies, Inc. Office Depot, 6,500 145,844 Inc. (a) Rex Stores 2,400 25,500 Corp. (a) 2,650,863 TOTAL RETAIL & 14,209,002 WHOLESALE SERVICES - 0.1% LEASING & RENTAL - 0.0% Hertz Corp. 6,000 248,250 Class A PRINTING - 0.1% Donnelley (R.R.) 11,100 390,581 & Sons Co. TOTAL SERVICES 638,831 TECHNOLOGY - 2.5% COMMUNICATIONS EQUIPMENT - 0.4% Cisco Systems, 6,450 398,691 Inc. (a) Lucent 38,580 2,664,431 Technologies, Inc. 3,063,122 COMPUTER SERVICES & SOFTWARE - 1.1% 24/7 Media, 100 1,075 Inc. (a) American 2,300 62,963 Management Systems, Inc. (a) COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) TECHNOLOGY - CONTINUED COMPUTER SERVICES & SOFTWARE - CONTINUED Compuware 24,900 $ 1,465,988 Corp. (a) Entrust 200 2,963 Technologies, Inc. (a) Galileo 3,400 128,350 International, Inc. Keane, Inc. (a) 5,500 193,188 Microsoft 53,400 5,877,338 Corp. (a) Novell, Inc. (a) 18,500 226,625 Sabre Group 3,900 117,000 Holdings, Inc. Class A (a) Sterling 4,600 126,788 Software, Inc. (a) Synopsys, 5,500 183,219 Inc. (a) 8,385,497 COMPUTERS & OFFICE EQUIPMENT - 0.9% Apple Computer, 100,000 3,812,500 Inc. (a) Dell Computer 11,200 736,400 Corp. (a) Ingram Micro, 10,900 583,831 Inc. Class A (a) Lexmark 18,000 1,247,625 International Group, Inc. (a) Sun 22,700 1,130,744 Microsystems, Inc. (a) 7,511,100 PHOTOGRAPHIC EQUIPMENT - 0.1% Eastman Kodak 13,800 1,066,913 Co. TOTAL TECHNOLOGY 20,026,632 TRANSPORTATION - 0.3% AIR TRANSPORTATION - 0.3% AMR Corp. (a) 37,400 2,073,363 UTILITIES - 3.4% CELLULAR - 0.0% Century 1,500 70,875 Telephone Enterprises, Inc. ELECTRIC UTILITY - 1.6% Baltimore Gas & 10,600 353,775 Electric Co. Consolidated 37,100 1,933,838 Edison, Inc. DTE Energy Co. 29,400 1,328,513 Edison 10,200 262,013 International FirstEnergy 5,200 161,525 Corp. FPL Group, Inc. 33,900 2,362,406 Hawaiian 6,300 259,875 Electric Industries, Inc. Houston 50,800 1,581,150 Industries, Inc. Montana Power 4,100 183,219 Co. COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) UTILITIES - CONTINUED ELECTRIC UTILITY - CONTINUED PECO Energy 40,500 $ 1,480,781 Co. Public Service 36,300 1,427,044 Enterprise Group, Inc. Southern Co. 45,400 1,336,463 Group 12,670,602 GAS - 0.1% Columbia 4,400 257,950 Energy Group El Paso Energy 13,700 444,394 Corp. Western 4,200 173,775 Resources, Inc. 876,119 TELEPHONE SERVICES - 1.7% AT&T Corp. 80,000 4,675,000 BellSouth Corp. 114,500 8,616,125 13,291,125 TOTAL UTILITIES 26,908,721 TOTAL COMMON STOCKS 151,725,64 (Cost $142,305,843) 4 NONCONVERTIBLE BONDS - 18.5% MOODY'S PRINCIPAL RATINGS AMOUNT (UNAUDITED) (B) AEROSPACE & DEFENSE - 0.4% DEFENSE ELECTRONICS - 0.4% Raytheon Co.: 5.95% Baa1 $ 1,300,000 1,322,269 3/15/01 6.45% Baa1 1,620,000 1,685,092 8/15/02 3,007,361 BASIC INDUSTRIES - 1.2% CHEMICALS & PLASTICS - 0.8% Methanex Corp. A2 900,000 930,312 yankee 8.875% 11/15/01 Praxair, Inc. A3 5,000,000 5,230,100 6.625% 10/15/07 6,160,412 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (UNAUDITED) (B) BASIC INDUSTRIES - CONTINUED PACKAGING & CONTAINERS - 0.4% Owens-Illinois, Inc.: 7.15% Ba1 $ 2,330,000 $ 2,329,765 5/15/05 7.8% Ba1 1,350,000 1,286,257 5/15/18 3,616,022 TOTAL BASIC INDUSTRIES 9,776,434 CONSTRUCTION & REAL ESTATE - 0.4% REAL ESTATE INVESTMENT TRUSTS - 0.4% CenterPoint Baa2 490,000 486,614 Properties Corp. 6.75% 4/1/05 EOP Operating LP: 6.375% Baa1 1,050,000 1,049,349 2/15/03 6.75% Baa1 480,000 477,662 2/15/08 Weeks Realty LP Baa2 900,000 880,650 6.875% 3/15/05 2,894,275 DURABLES - 0.4% TEXTILES & APPAREL - 0.4% Levi Strauss & Baa2 2,440,000 2,380,952 Co. 7% 11/1/06 (e) Unifi, Inc. 6.5% A3 890,000 891,157 2/1/08 3,272,109 ENERGY - 0.4% OIL & GAS - 0.4% Oryx Energy Co.: 8% 10/15/03 Ba1 510,000 540,279 8.125% Ba1 230,000 238,625 10/15/05 8.375% Ba1 450,000 481,581 7/15/04 Petroleum Baa3 1,300,000 1,254,500 Geo-Services ASA 7.125% 3/30/28 USX-Marathon Baa2 300,000 311,295 Group 6.85% 3/1/08 2,826,280 FINANCE - 8.5% BANKS - 3.0% BankBoston A3 500,000 515,385 Corp. 6.625% 2/1/04 BankBoston NA A2 400,000 403,184 (Bearer) 6.375% 3/25/08 BanPonce Corp.: 5.75% A3 460,000 460,474 3/1/99 6.665% A3 1,100,000 1,133,781 3/5/01 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (UNAUDITED) (B) FINANCE - CONTINUED BANKS - CONTINUED BanPonce Financial Corp.: 6.34% A3 $ 310,000 $ 311,252 3/29/99 6.69% A3 1,000,000 1,027,310 9/21/00 6.75% A3 1,660,000 1,719,146 8/9/01 7.65% A3 690,000 714,716 5/3/00 Barclays Bank A1 2,350,000 2,391,760 PLC yankee 5.95% 7/15/01 Capital One Baa3 1,080,000 1,103,350 Bank 6.375% 2/15/03 Capital One Ba1 1,120,000 1,144,024 Financial Corp. 7.125% 8/1/08 Citicorp 5.625% Aa3 800,000 805,760 2/15/01 Den Danske A1 2,190,000 2,241,465 Bank AS 6.375% 6/15/08 (e)(g ) Fleet Credit Card A1 600,000 614,616 LLC 6.45% 10/30/00 Fleet/Norstar A3 630,000 702,803 Financial Group, Inc. 9.9% 6/15/01 Huntington A1 670,000 680,151 National Bank 5.875% 1/15/01 Kansallis-Osake- A3 470,000 473,986 Pankki, New York yankee 9.75% 12/15/98 Marine Midland A3 1,000,000 992,500 Bank NA euro 5.9375% 3/29/99 (g) NationsBank NA Aa2 1,850,000 1,887,594 5.92% 6/8/01 NB Capital Trust Aa3 660,000 724,753 IV 8.25% 4/15/27 Provident Bank, A3 1,560,000 1,579,578 Cincinnati 6.125% 12/15/00 Providian Baa3 950,000 996,788 National Bank 6.7% 3/15/03 Union Planters A3 1,000,000 1,038,870 National Bank 6.81% 8/20/01 23,663,246 CREDIT & OTHER FINANCE - 3.8% Ahmanson Baa2 1,000,000 1,097,840 Capital Trust I 8.36% 12/1/26 (e) Associates Corp. Aa3 1,050,000 1,082,445 of North America 6% 4/15/03 BankAmerica Aa3 860,000 929,161 Capital II 8% 12/15/26 BanPonce Trust I A3 1,550,000 1,584,968 8.327% 2/1/27 BCH Cayman A2 270,000 285,887 Islands Ltd. yankee 7.7% 7/15/06 Countrywide A3 1,200,000 1,245,060 Funding Corp. 6.45% 2/27/03 ERP Operating A3 400,000 405,668 LP 6.55% 11/15/01 Farmers A2 710,000 717,214 Insurance Exchange Capital 7.05% 7/15/28 (e) First Security A3 420,000 468,896 Capital I 8.41% 12/15/26 Ford Motor A1 1,700,000 1,757,766 Credit Co. 6.57% 3/19/01 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (UNAUDITED) (B) FINANCE - CONTINUED CREDIT & OTHER FINANCE - CONTINUED General Electric Aaa $ 1,500,000 $ 1,510,770 Capital Corp. 6.94% 4/13/09 (d) General Motors A3 2,170,000 2,273,075 Acceptance Corp. 6.75% 7/10/02 GS Escrow Corp.: 7% Ba1 550,000 549,230 8/1/03 (e) 7.125% Ba1 1,900,000 1,875,775 8/1/05 (e) Heller Financial, Inc.: 6.25% A3 1,440,000 1,469,030 3/1/01 7.875% A3 1,220,000 1,250,415 11/1/99 KeyCorp A1 900,000 959,733 Institutional Capital A 7.826% 12/1/26 MCN Investment Baa3 730,000 730,358 Corp. 5.84% 2/1/99 Mellon Capital I A2 570,000 603,989 7.72% 12/1/26 Money Store, A2 750,000 800,250 Inc. 7.3% 12/1/02 PNC Funding A3 530,000 562,929 Corp. 6.875% 3/1/03 Premier Auto P-1 7,100,000 7,117,750 Trust 5.45% 6/8/99 U.S. Bancorp A1 860,000 938,613 8.09% 11/15/26 30,216,822 SAVINGS & LOANS - 0.5% Great Western A3 1,030,000 1,118,518 Finance Trust II 8.206% 2/1/27 Home Savings of A3 750,000 778,598 America FSB 6.5% 8/15/04 Long Island Savings Bank FSB: 6.2% 4/2/01 Baa3 700,000 706,727 7% 6/13/02 Baa3 970,000 1,012,350 3,616,193 SECURITIES INDUSTRY - 1.2% Amvescap PLC A3 700,000 719,355 6.375% 5/15/03 Morgan Stanley, A 9,000,000 8,999,370 Dean Witter, Discover & Co. 5.75% 1/15/99 (g) 9,718,725 TOTAL FINANCE 67,214,986 HEALTH - 0.1% MEDICAL EQUIPMENT & SUPPLIES - 0.1% McKesson Corp. A3 1,150,000 1,170,137 6.6% 3/1/00 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (UNAUDITED) (B) INDUSTRIAL MACHINERY & EQUIPMENT - 0.7% INDUSTRIAL MACHINERY & EQUIPMENT - 0.3% Tyco International Group SA yankee: 6.125% Baa1 $ 1,800,000 $ 1,838,034 6/15/01 6.375% Baa1 700,000 737,842 6/15/05 2,575,876 POLLUTION CONTROL - 0.4% WMX Technologies, Inc.: 6.25% Baa3 600,000 610,776 10/15/00 7.1% 8/1/26 Baa3 1,240,000 1,331,698 8.25% Baa3 970,000 999,866 11/15/99 2,942,340 TOTAL INDUSTRIAL MACHINERY & 5,518,216 EQUIPMENT MEDIA & LEISURE - 3.1% BROADCASTING - 1.7% Clear Channel Baa3 900,000 885,834 Communicatio ns, Inc. 6.875% 6/15/18 Continental Cablevision, Inc.: 8.3% Baa3 605,000 684,322 5/15/06 8.625% Baa3 480,000 535,358 8/15/03 9% 9/1/08 Baa3 790,000 950,180 Hearst-Argyle Baa3 650,000 672,113 Television, Inc. 7.5% 11/15/27 TCI Communicatio ns, Inc.: 6.46% Baa3 1,340,000 1,363,289 3/6/00 8.75% Baa3 1,400,000 1,748,992 8/1/15 9.25% Baa3 800,000 897,816 4/15/02 9.8% 2/1/12 Baa3 1,190,000 1,590,685 Time Warner, Inc.: 6.875% Baa3 1,200,000 1,239,984 6/15/18 7.95% Baa3 745,000 769,384 2/1/00 8.18% Baa3 1,445,000 1,684,451 8/15/07 13,022,408 ENTERTAINMENT - 0.9% Paramount Ba2 585,000 612,682 Communicatio ns, Inc. 7.5% 1/15/02 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (UNAUDITED) (B) MEDIA & LEISURE - CONTINUED ENTERTAINMENT - CONTINUED Viacom, Inc.: 6.75% Ba2 $ 1,815,000 $ 1,863,551 1/15/03 7.75% Ba2 4,350,000 4,697,391 6/1/05 7,173,624 PUBLISHING - 0.5% News America Holdings, Inc.: 7.7% Baa3 1,390,000 1,486,466 10/30/25 8.5% Baa3 1,525,000 1,718,660 2/15/05 News America, Baa3 830,000 850,194 Inc. 7.25% 5/18/18 4,055,320 TOTAL MEDIA & LEISURE 24,251,352 NONDURABLES - 0.6% FOODS - 0.1% ConAgra, Inc. Baa1 1,000,000 1,079,520 7.125% 10/1/26 TOBACCO - 0.5% Philip Morris Companies, Inc.: 6.95% A2 1,180,000 1,254,281 6/1/06 7% 7/15/05 A2 1,250,000 1,336,500 7.25% A2 1,200,000 1,256,928 9/15/01 3,847,709 TOTAL NONDURABLES 4,927,229 RETAIL & WHOLESALE - 0.5% GENERAL MERCHANDISE STORES - 0.3% Federated Department Stores, Inc.: 6.79% Baa2 800,000 845,416 7/15/27 7% 2/15/28 Baa2 1,180,000 1,191,977 8.125% Baa2 400,000 436,940 10/15/02 2,474,333 GROCERY STORES - 0.2% Kroger Co. 6% Baa3 1,530,000 1,550,104 7/1/00 TOTAL RETAIL & WHOLESALE 4,024,437 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (UNAUDITED) (B) TECHNOLOGY - 0.2% COMPUTERS & OFFICE EQUIPMENT - 0.2% Comdisco, Inc. Baa1 $ 1,300,000 $ 1,325,298 7.75% 9/1/99 TRANSPORTATION - 0.7% AIR TRANSPORTATION - 0.0% Delta Air Lines, Baa3 500,000 532,810 Inc. 9.875% 5/15/00 RAILROADS - 0.7% Canadian Baa2 950,000 974,377 National Railway Co. 6.9% 7/15/28 CSX Corp. Baa2 1,340,000 1,402,685 6.46% 6/22/05 Norfolk Southern Baa1 1,830,000 2,017,429 Corp. 7.05% 5/1/37 Wisconsin Baa2 900,000 932,949 Central Transportation Corp. 6.625% 4/15/08 5,327,440 TOTAL TRANSPORTATION 5,860,250 UTILITIES - 1.3% CELLULAR - 0.4% AirTouch Baa2 1,790,000 1,883,868 Communicatio ns, Inc. 6.35% 6/1/05 Cable & Baa1 1,480,000 1,513,108 Wireless Communicatio ns PLC 6.375% 3/6/03 3,396,976 ELECTRIC UTILITY - 0.6% Avon Energy Partners Holdings: 6.46% Baa2 1,160,000 1,188,814 3/4/08 (e) 6.73% Baa2 1,340,000 1,397,794 12/11/02 ( e) Israel Electric Corp. Ltd.: 7.75% A3 1,275,000 1,210,676 12/15/27 ( e) yankee A3 660,000 656,713 7.875% 12/15/26 ( e) Texas Utilities Baa3 580,000 588,526 Co. 6.375% 1/1/08 5,042,523 GAS - 0.1% Southwest Gas Baa2 300,000 337,830 Corp. 9.75% 6/15/02 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (UNAUDITED) (B) UTILITIES - CONTINUED TELEPHONE SERVICES - 0.2% WorldCom, Inc.: 8.875% Baa2 $ 793,000 $ 869,889 1/15/06 9.375% Baa2 936,000 977,839 1/15/04 1,847,728 TOTAL UTILITIES 10,625,057 TOTAL NONCONVERTIBLE 146,693,4 BONDS 21 (Cost $143,539,692)
U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - 8.5% U.S. GOVERNMENT AGENCY OBLIGATIONS - 3.5% Fannie Mae: 6% 5/15/08 Aaa 1,900,000 2,048,428 6.97% Aaa 1,200,000 1,320,000 4/8/04 7.49% Aaa 4,080,000 4,665,235 3/2/05 Federal Farm Aaa 2,000,000 2,181,560 Credit Bank 6.47% 6/7/05 Federal Home Loan Bank: 7.36% Aaa 600,000 675,372 7/1/04 7.59% Aaa 680,000 780,830 3/10/05 Freddie Mac Aaa 1,300,000 1,408,056 6.505% 7/1/04 Government Aaa 4,310,000 4,921,934 Loan Trusts (assets of Trust guaranteed by U.S. Government through Agency for International Development) 8.5% 4/1/06 Government Trust Certificates (assets of Trust guaranteed by U.S. Government through Defense Security Assistance Agency): Class 1-C, Aaa 356,961 381,242 9.25% 11/15/01 Class 2-E, Aaa 1,690,118 1,795,582 9.4% 5/15/02 Class T-3, Aaa 68,625 72,811 9.625% 5/15/02 Israel Export Aaa 344,118 358,605 Trust Certificates (assets of Trust guaranteed by U.S. Government through Export-Import Bank) Series 1994-1, 6.88% 1/26/03 Private Export Aaa 819,000 858,017 Funding Corp. secured 6.86% 4/30/04 U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (UNAUDITED) (B) U.S. GOVERNMENT AGENCY OBLIGATIONS - CONTINUED U.S. Department of Housing and Urban Development government guaranteed participation certificates: Series Aaa $ 1,000,000 $ 1,141,050 1995-A, 8.27% 8/1/03 Series 1996-A: 6.92% Aaa 4,010,000 4,398,890 8/1/04 7.63% Aaa 1,000,000 1,149,480 8/1/14 28,157,092 U.S. TREASURY OBLIGATIONS - 5.0% U.S. Treasury Bonds: 7.125% Aaa 2,305,000 2,909,694 2/15/23 7.625% Aaa 13,610,000 18,324,640 2/15/25 8.125% Aaa 1,490,000 2,041,062 8/15/19 13.875% Aaa 7,060,000 11,192,289 5/15/11 (callable) U.S. Treasury Notes: 5.375% Aaa 1,060,000 1,084,020 2/15/01 5.625% Aaa 350,000 354,267 11/30/99 6.625% Aaa 990,000 1,046,618 6/30/01 7% 7/15/06 Aaa 531,000 618,615 7.5% Aaa 1,740,000 1,896,322 11/15/01 39,467,527 TOTAL U.S. GOVERNMENT AND 67,624,61 GOVERNMENT AGENCY 9 OBLIGATIONS (Cost $63,138,390)
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 14.3% FANNIE MAE - 11.4% 6% 12/1/10 to Aaa 30,552,610 30,831,549 4/1/28 6.5% 9/1/25 to Aaa 26,994,784 27,454,237 7/1/28 7% 10/1/28 (f) Aaa 21,066,000 21,658,481 7.5% 10/1/09 Aaa 9,760,438 10,069,273 to 6/1/28 11.5% 11/1/15 Aaa 273,904 307,482 90,321,022 U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (UNAUDITED) (B) FREDDIE MAC - 0.5% 7% 7/1/01 to Aaa $ 318,977 $ 321,943 8/1/01 7.5% 2/1/28 to Aaa 2,880,269 2,967,570 4/1/28 8.5% 4/1/21 to Aaa 96,226 100,611 5/1/22 12% 11/1/19 Aaa 141,861 163,266 3,553,390 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 2.4% 6.5% 11/15/08 Aaa 4,848,632 4,971,303 to 6/15/09 7% 3/15/28 to Aaa 6,048,653 6,243,298 7/15/28 7.5% 2/15/24 Aaa 6,726,928 6,973,104 to 8/15/28 9.5% 8/15/16 Aaa 3,399 3,671 10% 11/15/09 Aaa 379,741 410,758 to 12/15/17 11% 7/15/10 to Aaa 354,001 393,565 12/15/15 11.5% 7/15/15 Aaa 340,815 384,170 to 1/15/16 19,379,869 TOTAL U.S. GOVERNMENT 113,254,2 AGENCY - 81 MORTGAGE-BACKED SECURITIES (Cost $110,078,812)
ASSET-BACKED SECURITIES - 3.7% BankAmerica Aaa 950,000 963,359 Manufacturing Housing Contract 6.2% 4/10/09 Capital Baa2 780,000 794,188 Equipment Receivables Trust 6.48% 10/15/06 Case Equipment Loan Trust: 5.85% Aa2 370,000 370,101 2/15/03 6.15% Aaa 744,415 748,368 9/15/02 Chase Aaa 1,190,000 1,211,194 Manhattan Auto Owner Trust 5.85% 5/15/03 Chevy Chase Aaa 648,429 656,382 Auto Receivables Trust 5.91% 12/15/04 Contimortgage Aaa 1,300,000 1,305,681 Home Equity Loan Trust 6.26% 7/15/12 CPS Auto Grantor Trust: 6.09% Aaa 975,823 979,787 11/15/03 6.55% Aaa 581,960 588,870 8/15/02 CPS Auto Aaa 1,567,729 1,585,366 Receivables Trust 6% 8/15/03 CSXT Trade Aaa 1,200,000 1,246,125 Receivables Master Trust 6% 7/25/04 ASSET-BACKED SECURITIES - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (UNAUDITED) (B) Dayton Hudson Aaa $ 1,290,000 $ 1,350,191 Credit Card Master Trust 6.25% 8/25/05 Ford Credit Auto Owner Trust: 6.2% Baa3 780,000 794,438 12/15/02 6.4% A1 840,000 858,774 5/15/02 6.4% Baa3 450,000 452,250 12/15/02 Green Tree Financial Corp.: 5.8% Aaa 46,712 46,712 2/15/27 6.1% Aaa 465,596 466,467 4/15/27 6.5% Aaa 381,575 382,052 6/15/27 6.68% AAA 1,820,000 1,872,325 1/15/29 6.8% Aaa 650,000 657,917 6/15/27 Key Auto A2 934,329 938,709 Finance Trust 6.3% 10/15/03 KeyCorp Auto A3 39,821 39,831 Grantor Trust 5.8% 7/15/00 MBNA Master Aaa 2,580,000 2,737,741 Credit Card Trust II 6.55% 1/15/07 Olympic Automobile Receivables Trust: 6.4% Aaa 1,140,000 1,156,031 9/15/01 6.7% Aaa 540,000 549,747 3/15/02 Petroleum Baa2 963,817 963,516 Enhanced Trust Receivables Offering Petroleum Trust 6.125% 2/5/03 (e)(g) Premier Auto Trust: 6% 5/6/00 Aaa 366,591 366,932 6.34% Aaa 350,000 358,750 1/6/03 6.35% A3 920,000 926,035 7/6/00 Prime Credit Aaa 950,000 996,009 Card Master Trust 6.75% 11/15/05 Railcar Trust Aaa 33,354 35,573 7.75% 6/1/04 TMS Auto Aaa 127,135 127,731 Grantor Trust 5.9% 9/15/02 UAF Auto Aaa 1,252,260 1,261,261 Grantor Trust 6.1% 1/15/03 (e) Union Federal Baa2 33,503 33,733 Savings Bank Grantor Trust 8.2% 1/10/01 Union Federal Baa2 26,924 27,126 Savings Bank Trust 7.275% 10/10/00 Western Financial Grantor Trust: 5.875% Aaa 475,344 481,732 3/1/02 6.05% Aaa 115,496 116,940 11/1/00 WFS Financial Aaa 1,170,000 1,196,325 Owner Trust 6.55% 10/20/04 TOTAL ASSET-BACKED 29,644,26 SECURITIES 9 (Cost $29,049,896) COMMERCIAL MORTGAGE SECURITIES - 3.9% MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (UNAUDITED) (B) BKB Commercial BBB $ 450,000 $ 459,773 Mortgage Trust Series 1997-C1 Class D, 7.83% 2/25/43 (e)(g ) CBM Funding Corp. sequential pay Series 1996-1: Class A-1, AA 80,321 80,772 7.55% 7/1/99 Class A-2, AA 1,100,000 1,133,000 6.88% 7/1/02 Class A-3PI, AA 870,000 919,209 7.08% 11/1/07 Class B, A 680,000 722,925 7.48% 2/1/08 CS First Boston Mortgage Securities Corp.: Series Baa2 1,450,000 1,452,719 1997-C2 Class D, 7.27% 1/17/35 Series BBB 1,290,000 1,317,816 1998-C1 Class D, 7.17% 1/17/12 Series Baa2 1,400,000 1,383,813 1998-FLI Class E, 6.5063% 1/10/13 (e) (g) Deutsche Baa2 1,320,000 1,372,800 Mortgage & Asset Receiving Corp. Series 1998-C1 Class D, 7.231% 7/15/12 Equitable Life Assurance Society of the United States (The): sequential Aaa 1,600,000 1,746,384 pay Series 174 Class A1, 7.24% 5/15/06 (e) Series 174 Aa2 1,000,000 1,081,190 Class B1, 7.33% 5/15/06 ( e) Series A2 700,000 758,443 1996-1 Class C1, 7.52% 5/15/06 ( e) Federal Deposit Aaa 251,955 251,640 Insurance Corp. Remic Trust sequential pay Series 1994-C1 Class II-A2, 7.85% 9/25/25 First Aa2 3,040,000 3,228,100 Union-Lehman Brothers Commercial Mortgage Trust sequential pay Series 1997-C2 Class B, 6.79% 11/18/29 GS Mortgage Securities Corp. II: Series Aaa 1,230,000 1,304,464 1997-GL Class A2-B, 6.86% 7/13/30 Series 1998-GLII: Class D, Baa2 450,000 457,106 7.1905% 4/13/31 (e)(g) Class E, Baa3 1,420,000 1,384,770 7.1905% 4/13/31 (e)(g) Kidder Peabody Aa2 277,259 278,386 Acceptance Corp. I sequential pay Series 1993-M1 Class A-2, 7.15% 4/25/25 LTC Commercial AAA 972,360 982,453 Mortgage Pass Through Certificates Series 1998-1 Class A, 6.029% 5/30/30 (e) COMMERCIAL MORTGAGE SECURITIES - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (UNAUDITED) (B) Morgan Stanley Capital I, Inc.: Series 1998-CF1: Class D, Baa2 $ 1,064,000 $ 1,074,640 7.35% 1/15/12 Class E, Baa3 371,000 354,305 7.35% 12/15/1 2 Series BBB 1,530,000 1,612,716 1998-HF1 Class D, 7.1% 2/15/30 (g) Nomura Asset Securities Corp.: floater Series - 273,227 273,227 1994-MD-II Class A-6, 9.9213% 7/7/03 (g) Series Baa2 1,320,000 1,403,944 1998-D6 Class A-4, 7.5956% 3/17/28 (g) Resolution Trust Corp.: floater Series AAA 87,809 87,850 1994-C1 Class A-3, 6.2375% 6/25/26 (g) Series 1995-C1: Class A-4B, Aaa 704,730 702,527 6.65% 2/25/27 Class C, A2 1,200,000 1,207,875 6.9% 2/25/27 Structured Asset Securities Corp.: sequential pay AAA 338,039 340,205 Series 1996 Class A-2A, 7.75% 2/25/28 Series BB+ 640,000 656,600 1996-CFL Class E, 7.75% 2/25/28 Thirteen Affiliates of General Growth Properties, Inc.: sequential pay Aaa 1,020,000 1,073,030 Series A-2, 6.602% 12/15/10 ( e) Series D-2, Baa2 1,100,000 1,107,612 6.992% 12/15/10 ( e) Series E-2, Baa3 660,000 647,071 7.224% 12/15/10 ( e) TOTAL COMMERCIAL 30,857,36 MORTGAGE SECURITIES 5 (Cost $30,014,283) FOREIGN GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - 0.6% Export Aa2 410,000 420,258 Development Corp. yankee 8.125% 8/10/99 (h) Israeli State euro Aaa 800,000 828,240 6.375% 12/19/01 (h) Ontario Province Aa3 3,000,000 3,268,650 yankee global 7.75% 6/4/02 (h) TOTAL FOREIGN GOVERNMENT 4,517,148 AND GOVERNMENT AGENCY OBLIGATIONS (Cost $4,327,503) SUPRANATIONAL OBLIGATIONS - 0.2% MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (UNAUDITED) (B) Inter American Aaa $ 1,270,000 $ 1,393,850 Development Bank yankee 6.29% 7/16/27 (Cost $1,262,012) BANK NOTES - 1.1% Key Bank NA 9,000,000 8,991,450 5.6175% 8/20/99 (g) (Cost $8,987,895) CERTIFICATES OF DEPOSIT - 10.7% Abbey National 9,000,000 9,003,460 Treasury Services PLC euro 5.51% 12/4/98 ABN-AMRO 5,000,000 5,002,830 Bank NV yankee euro 5.64% 12/14/98 Bank of Scotland 10,000,000 10,007,136 Treasury Services euro 5.64% 12/29/98 Bayerische 3,700,000 3,707,013 Hypotheken und Wechsel Bank AG yankee 5.7% 3/30/99 Canadian 720,000 735,336 Imperial Bank of Commerce, New York yankee 6.2% 8/1/00 Deutsche Bank 4,000,000 4,000,944 AG yankee 5.94% 10/26/98 First National 10,000,000 10,013,103 Bank of Chicago 5.65% 3/3/99 RaboBank 9,000,000 9,030,601 Nederland Coop. Central yankee 5.68% 6/4/99 Societe 8,000,000 8,000,946 Generale, France yankee 5.91% 10/15/98 Swiss Bank 7,200,000 7,211,385 Corp. yankee 5.65% 3/24/99 Toronto-Dominio 9,000,000 9,030,601 n Bank yankee 5.68% 6/4/99 Westdeutsche 9,000,000 9,012,047 Landesbank Girozentrale yankee 5.63% 2/8/99 TOTAL CERTIFICATES OF 84,755,402 DEPOSIT (Cost $84,611,736) COMMERCIAL PAPER - 12.9% CIESCO L.P. 205,000 204,761 5.51% 10/9/98 Citibank Credit Card Master Trust I (Dakota Certificate Program): 5.5% 5,000,000 4,970,945 11/10/9 8 5.53% 4,600,000 4,591,904 10/13/9 8 Commonwealth 9,000,000 8,812,382 Bank of Australia yankee 5.35% 3/1/99 COMMERCIAL PAPER - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (UNAUDITED) (B) Daimler-Benz $ 10,000,000 $ 9,959,322 North America Corp. yankee 5.53% 10/29/98 Enterprise 2,400,000 2,379,016 Funding Corp. 5.4% 12/4/98 Fleet Funding 5,000,000 4,980,500 Corp. 5.5% 10/28/98 General Electric 10,000,000 9,939,333 Capital Corp. 5.51% 11/12/98 Generale de 3,000,000 2,938,315 Banque SA yankee 5.36% 2/24/99 Lehman Brothers 8,000,000 7,960,182 Holdings, Inc. 5.55% 11/4/98 Monsanto Co.: 5.51% 4,200,000 4,163,278 12/1/98 5.52% 2,000,000 1,985,953 11/19/98 Morgan (JP) & 10,300,000 10,240,146 Co., Inc. 5.5% 11/10/98 Salomon Smith 10,000,000 9,909,700 Barney 5.45% 12/3/98 Three Rivers 5,000,000 4,956,453 Funding Corp. 5.51% 12/1/98 Transamerica 4,000,000 3,934,090 Finance Corp. 5.47% 1/26/99 Triple A One Funding Corp.: 5.55% 500,000 499,052 10/14/98 5.57% 10,000,000 9,968,100 10/23/98 TOTAL COMMERCIAL 102,393,432 PAPER (Cost $102,324,510) MASTER NOTES - 0.9% Goldman Sachs 7,000,000 7,000,000 Group L.P. (The) 5.6875% 1/27/99 (g) (Cost $7,000,000) CASH EQUIVALENTS - 5.6% MATURITY AMOUNT Investments in $ 116,019 116,000 repurchase agreements (U.S. Treasury obligations), in a joint trading account at 5.77%, dated 9/30/98 due 10/1/98 SHARES Taxable Central 44,374,880 44,374,880 Cash Fund (c) TOTAL CASH 44,490,880 EQUIVALENTS (Cost $44,490,880) TOTAL INVESTMENT IN $ 793,341,761 SECURITIES - 100% (Cost $771,131,452) LEGEND (a) Non-income producing (b) Standard & Poor's credit ratings are used in the absence of a rating by Moody's Investors Service, Inc. (c) At period end, the seven-day yield on the Taxable Central Cash Fund was 5.36%. The yield refers to the income earned by investing in the fund over the seven-day period, expressed as an annual percentage. (d) Debt obligation initially issued at one coupon which converts to a higher coupon at a specified date. The rate shown is the rate at period end. (e) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $26,622,895 or 3.4% of net assets. (f) Security purchased on a delayed delivery or when-issued basis (see Note 2 of Notes to Financial Statements). (g) The coupon rate shown on floating or adjustable rate securities represents the rate at period end. (h) For foreign government obligations not individually rated by S&P or Moody's, the ratings listed are assigned to the securities by FMR, the fund's investment adviser, based principally on S&P and Moody's ratings of the sovereign credit of the issuing government. OTHER INFORMATION The composition of long-term debt holdings as a percentage of total value of investments in securities, is as follows (ratings are unaudited): MOODY'S RATINGS S&P RATINGS Aaa, Aa, A 35.2% AAA, AA, A 32.2% Baa 9.2% BBB 11.2% Ba 2.0% BB 2.0% For some foreign government obligations, FMR has assigned the ratings for the sovereign credit of the issuing government. The percentage not rated by Moody's or S&P amounted to 0.0%. Distribution of investments by country of issue, as a percentage of total value of investments in securities, is as follows: United States of America 86.7% United Kingdom 3.2 Germany 2.1 Canada 1.9 Netherlands 1.8 Australia 1.1 France 1.0 Others (individually less than 1%) 2.2 TOTAL 100.0% INCOME TAX INFORMATION At September 30, 1998, the aggregate cost of investment securities for income tax purposes was $771,399,017. Net unrealized appreciation aggregated $21,942,744, of which $34,171,419 related to appreciated investment securities and $12,228,675 related to depreciated investment securities. The fund hereby designates approximately $23,418,000 as a capital gain dividend for the purpose of the dividend paid deduction. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1998 ASSETS INVESTMENT IN SECURITIES, AT VALUE $ 793,341,761 (INCLUDING REPURCHASE AGREEMENTS OF $116,000) (COST $771,131,452) - SEE ACCOMPANYING SCHEDULE CASH 6,931 RECEIVABLE FOR INVESTMENTS SOLD 5,023,975 RECEIVABLE FOR FUND SHARES SOLD 5,986,350 DIVIDENDS RECEIVABLE 182,914 INTEREST RECEIVABLE 6,799,568 OTHER RECEIVABLES 4,580 TOTAL ASSETS 811,346,079 LIABILITIES PAYABLE FOR INVESTMENTS $ 6,034,310 PURCHASED REGULAR DELIVERY DELAYED DELIVERY 21,526,154 PAYABLE FOR FUND SHARES 7,199,144 REDEEMED ACCRUED MANAGEMENT FEE 275,339 OTHER PAYABLES AND ACCRUED 194,963 EXPENSES TOTAL LIABILITIES 35,229,910 NET ASSETS $ 776,116,169 NET ASSETS CONSIST OF: PAID IN CAPITAL $ 703,736,998 UNDISTRIBUTED NET INVESTMENT 2,979,130 INCOME ACCUMULATED UNDISTRIBUTED NET 47,189,732 REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS NET UNREALIZED APPRECIATION 22,210,309 (DEPRECIATION) ON INVESTMENTS AND ASSETS AND LIABILITIES IN FOREIGN CURRENCIES NET ASSETS, FOR 62,322,318 $ 776,116,169 SHARES OUTSTANDING NET ASSET VALUE, OFFERING PRICE $12.45 AND REDEMPTION PRICE PER SHARE ($776,116,169 (DIVIDED BY) 62,322,318 SHARES) STATEMENT OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1998 INVESTMENT INCOME $ 2,083,780 DIVIDENDS INTEREST 35,876,180 TOTAL INCOME 37,959,960 EXPENSES MANAGEMENT FEE $ 3,112,844 TRANSFER AGENT FEES 1,446,968 ACCOUNTING FEES AND EXPENSES 243,745 NON-INTERESTED TRUSTEES' 2,769 COMPENSATION CUSTODIAN FEES AND EXPENSES 55,404 REGISTRATION FEES 105,848 AUDIT 81,941 LEGAL 3,717 INTEREST 1,125 MISCELLANEOUS 3,143 TOTAL EXPENSES BEFORE 5,057,504 REDUCTIONS EXPENSE REDUCTIONS (129,318) 4,928,186 NET INVESTMENT INCOME 33,031,774 REALIZED AND UNREALIZED GAIN (LOSS) NET REALIZED GAIN (LOSS) ON: INVESTMENT SECURITIES 48,797,198 FOREIGN CURRENCY TRANSACTIONS 25,535 FUTURES CONTRACTS (83,229) 48,739,504 CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON: INVESTMENT SECURITIES (26,995,548) ASSETS AND LIABILITIES IN 684 (26,994,864) FOREIGN CURRENCIES NET GAIN (LOSS) 21,744,640 NET INCREASE (DECREASE) IN NET $ 54,776,414 ASSETS RESULTING FROM OPERATIONS STATEMENT OF CHANGES IN NET ASSETS YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS $ 33,031,774 $ 28,700,407 NET INVESTMENT INCOME NET REALIZED GAIN (LOSS) 48,739,504 17,712,684 CHANGE IN NET UNREALIZED (26,994,864) 33,510,799 APPRECIATION (DEPRECIATION) NET INCREASE (DECREASE) IN 54,776,414 79,923,890 NET ASSETS RESULTING FROM OPERATIONS DISTRIBUTIONS TO SHAREHOLDERS (33,064,721) (29,690,585) FROM NET INVESTMENT INCOME FROM NET REALIZED GAIN (15,719,836) (12,650,000) TOTAL DISTRIBUTIONS (48,784,557) (42,340,585) SHARE TRANSACTIONS 467,138,900 256,470,143 NET PROCEEDS FROM SALES OF SHARES REINVESTMENT OF DISTRIBUTIONS 46,026,633 39,646,435 COST OF SHARES REDEEMED (390,443,714) (252,401,457) NET INCREASE (DECREASE) IN 122,721,819 43,715,121 NET ASSETS RESULTING FROM SHARE TRANSACTIONS TOTAL INCREASE (DECREASE) IN 128,713,676 81,298,426 NET ASSETS NET ASSETS BEGINNING OF PERIOD 647,402,493 566,104,067 END OF PERIOD (INCLUDING $ 776,116,169 $ 647,402,493 UNDISTRIBUTED NET INVESTMENT INCOME OF $2,979,130 AND $3,063,493, RESPECTIVELY) OTHER INFORMATION SHARES SOLD 37,636,367 21,571,779 ISSUED IN REINVESTMENT OF 3,745,437 3,364,019 DISTRIBUTIONS REDEEMED (31,421,539) (21,232,901) NET INCREASE (DECREASE) 9,960,265 3,702,897 FINANCIAL HIGHLIGHTS
YEARS ENDED SEPTEMBER 30, 1998 1997 1996 1995 1994 SELECTED PER-SHARE DATA NET ASSET VALUE, $ 12.36 $ 11.63 $ 11.46 $ 10.69 $ 11.07 BEGINNING OF PERIOD INCOME FROM INVESTMENT OPERATIONS NET INVESTMENT .57 B .56 B .61 .56 .45 INCOME NET REALIZED .39 1.02 .20 .68 (.29) AND UNREALIZED GAIN (LOSS) TOTAL FROM .96 1.58 .81 1.24 .16 INVESTMENT OPERATIONS LESS DISTRIBUTIONS FROM NET (.58) (.59) (.64) (.47) (.47) INVESTMENT INCOME FROM NET (.29) (.26) - - (.04) REALIZED GAIN IN EXCESS OF NET - - - - (.03) REALIZED GAIN TOTAL (.87) (.85) (.64) (.47) (.54) DISTRIBUTIONS NET ASSET VALUE, $ 12.45 $ 12.36 $ 11.63 $ 11.46 $ 10.69 END OF PERIOD TOTAL RETURN A 8.06% 14.16% 7.28% 11.99% 1.46% RATIOS AND SUPPLEMENTAL DATA NET ASSETS, END $ 776,116 $ 647,402 $ 566,104 $ 566,079 $ 501,349 OF PERIOD (000 OMITTED) RATIO OF EXPENSES .71% .77% .82% .79% .71% C TO AVERAGE NET ASSETS RATIO OF EXPENSES .69% D .76% D .80% D .79% .71% TO AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS RATIO OF NET 4.62% 4.74% 5.03% 5.15% 4.92% INVESTMENT INCOME TO AVERAGE NET ASSETS PORTFOLIO TURNOVER 156% 112% 148% 157% 83% RATE
A THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 6 OF NOTES TO FINANCIAL STATEMENTS). B NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. C FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE BEEN HIGHER. D FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES (SEE NOTE 6 OF NOTES TO FINANCIAL STATEMENTS). NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1998 1. SIGNIFICANT ACCOUNTING POLICIES. Fidelity Asset Manager: Income (the fund) is a fund of Fidelity Charles Street Trust (the trust) and is authorized to issue an unlimited number of shares. The trust is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company organized as a Massachusetts business trust. The financial statements have been prepared in conformity with generally accepted accounting principles which require management to make certain estimates and assumptions at the date of the financial statements. The following summarizes the significant accounting policies of the fund: SECURITY VALUATION. Debt securities for which quotations are readily available are valued by a pricing service at their market values as determined by their most recent bid prices in the principal market (sales prices if the principal market is an exchange) in which such securities are normally traded. Equity securities for which quotations are readily available are valued at the last sale price, or if no sale price, at the closing bid price. Securities (including restricted securities) for which market quotations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Board of Trustees. Short-term securities with remaining maturities of sixty days or less for which quotations are not readily available are valued at amortized cost or original cost plus accrued interest, both of which approximate current value. FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange at period end. Purchases and sales of securities, income receipts and expense payments are translated into U.S. dollars at the prevailing exchange rate on the respective dates of the transactions. Net realized gains and losses on foreign currency transactions represent net gains and losses from sales and maturities of foreign currency contracts, disposition of foreign currencies, the difference between the amount of net investment income accrued and the U.S. dollar amount actually received, and gains and losses between trade date and settlement on purchases and sales of securities. The effects of changes in foreign currency exchange rates on investments in securities are included with the net realized and unrealized gain or loss on investment securities. INCOME TAXES. As a qualified regulated investment company under Subchapter M of the Internal Revenue Code, the fund is not subject to income taxes to the extent that it distributes substantially all of its taxable income for its fiscal year. The schedule of investments includes information regarding income taxes under the caption "Income Tax Information." 1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED INVESTMENT INCOME. Dividend income is recorded on the ex-dividend date, except certain dividends from foreign securities where the ex-dividend date may have passed, are recorded as soon as the fund is informed of the ex-dividend date. Non-cash dividends included in dividend income, if any, are recorded at the fair market value of the securities received. Interest income, which includes accretion of original issue discount, is accrued as earned. Investment income is recorded net of foreign taxes withheld where recovery of such taxes is uncertain. EXPENSES. Most expenses of the trust can be directly attributed to a fund. Expenses which cannot be directly attributed are apportioned among the funds in the trust. DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences, which may result in distribution reclassifications, are primarily due to differing treatments for paydown gains/losses on certain securities, futures transactions, foreign currency transactions, market discount, partnerships and losses deferred due to wash sales. The fund also utilized earnings and profits distributed to shareholders on redemption of shares as a part of the dividends paid deduction for income tax purposes. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to paid in capital. Undistributed net investment income and accumulated undistributed net realized gain (loss) on investments and foreign currency transactions may include temporary book and tax basis differences which will reverse in a subsequent period. Any taxable income or gain remaining at fiscal year end is distributed in the following year. SECURITY TRANSACTIONS. Security transactions are accounted for as of trade date. Gains and losses on securities sold are determined on the basis of identified cost. 2. OPERATING POLICIES. FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency contracts to facilitate transactions in foreign-denominated securities. Losses may arise from changes in the value of the foreign currency or if the counterparties do not perform under the contracts' terms. The U.S. dollar value of foreign currency contracts is determined using contractual currency exchange rates established at the time of each trade. JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the Securities and Exchange Commission (the SEC), the fund, along with other affiliated entities of Fidelity Management & Research Company (FMR), may transfer uninvested cash balances into one or more joint trading accounts. These balances are invested in one or more repurchase agreements for U.S. Treasury or Federal Agency obligations. 2. OPERATING POLICIES - CONTINUED REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency securities are transferred to an account of the fund, or to the Joint Trading Account, at a bank custodian. The securities are marked-to-market daily and maintained at a value at least equal to the principal amount of the repurchase agreement (including accrued interest). FMR, the fund's investment adviser, is responsible for determining that the value of the underlying securities remains in accordance with the market value requirements stated above. TAXABLE CENTRAL CASH FUND. Pursuant to an Exemptive Order issued by the SEC, the fund may invest in the Taxable Central Cash Fund (the Cash Fund) managed by Fidelity Investments Money Management, Inc., an affiliate of FMR. The Cash Fund is an open-end money market fund available only to investment companies and other accounts managed by FMR and its affiliates. The Cash Fund seeks preservation of capital, liquidity, and current income by investing in U.S. Treasury securities and repurchase agreements for these securities. Income distributions from the Cash Fund are declared daily and paid monthly from net interest income. Income distributions earned by the fund are recorded as interest income in the accompanying financial statements. DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell securities on a delayed delivery basis. Payment and delivery may take place a month or more after the date of the transaction. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. The market values of the securities purchased or sold on a delayed delivery basis are identified as such in the fund's schedule of investments. The fund may receive compensation for interest forgone in the purchase of a delayed delivery security. With respect to purchase commitments, the fund identifies securities as segregated in its custodial records with a value at least equal to the amount of the commitment. Losses may arise due to changes in the market value of the underlying securities or if the counterparty does not perform under the contract. FUTURES CONTRACTS. The fund may use futures contracts to manage its exposure to the stock market. Buying futures tends to increase the fund's exposure to the underlying instrument, while selling futures tends to decrease the fund's exposure to the underlying instrument or hedge other fund investments. Losses may arise from changes in the value of the underlying instruments or if the counterparties do not perform under the contracts' terms. Gains (losses) are realized upon the expiration or closing of the futures contracts. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. RESTRICTED SECURITIES. The fund is permitted to invest in securities that are subject to legal or contractual restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the 2. OPERATING POLICIES - CONTINUED RESTRICTED SECURITIES - CONTINUED securities are registered. Disposal of these securities may involve time-consuming negotiations and expense, and prompt sale at an acceptable price may be difficult. At the end of the period, the fund had no investments in restricted securities (excluding 144A issues). 3. PURCHASES AND SALES OF INVESTMENTS. Purchases and sales of securities, other than short-term securities, aggregated $983,607,207 and $895,280,181, respectively, of which U.S. government and government agency obligations aggregated $539,682,244 and $497,246,493, respectively. The market value of futures contracts opened and closed during the period amounted to $15,194,736 and $15,111,507, respectively. 4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES. MANAGEMENT FEE. As the fund's investment adviser, FMR receives a monthly fee that is calculated on the basis of a group fee rate plus a fixed individual fund fee rate applied to the average net assets of the fund. The group fee rate is the weighted average of a series of rates and is based on the monthly average net assets of all the mutual funds advised by FMR. The rates ranged from .1100% to .3700% for the period. The annual individual fund fee rate is .30%. In the event that these rates were lower than the contractual rates in effect during the period, FMR voluntarily implemented the above rates, as they resulted in the same or a lower management fee. For the period, the management fee was equivalent to an annual rate of .44% of average net assets. TRANSFER AGENT FEES. Fidelity Service Company, Inc. (FSC), an affiliate of FMR, is the fund's transfer, dividend disbursing and shareholder servicing agent. FSC receives account fees and asset-based fees that vary according to account size and type of account. FSC pays for typesetting, printing and mailing of all shareholder reports, except proxy statements. For the period, the transfer agent fees were equivalent to an annual rate of .20% of average net assets. ACCOUNTING FEES. FSC maintains the fund's accounting records. The fee is based on the level of average net assets for the month plus out-of-pocket expenses. BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio transactions with brokerage firms which are affiliates of FMR. The commissions paid to these affiliated firms were $40,394 for the period. 5. BANK BORROWINGS. The fund is permitted to have bank borrowings for temporary or emergency purposes to fund shareholder redemptions. The fund has established borrowing arrangements with certain banks. Under the most restrictive arrangement, the fund 5. BANK BORROWINGS - CONTINUED must pledge to the bank securities having a market value in excess of 220% of the total bank borrowings. The interest rate on the borrowings is the bank's base rate, as revised from time to time. The maximum loan and the average daily loan balance during the period for which the loan was outstanding amounted to $7,000,000. The weighted average interest rate was 5.79%. 6. EXPENSE REDUCTIONS. FMR has directed certain portfolio trades to brokers who paid a portion of the fund's expenses. For the period, the fund's expenses were reduced by $59,522 under this arrangement. In addition, the fund has entered into arrangements with its custodian and transfer agent whereby credits realized as a result of uninvested cash balances were used to reduce a portion of the fund's expenses. During the period, the fund's custodian and transfer agent fees were reduced by $3,790 and $66,006, respectively, under these arrangements. REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Fidelity Charles Street Trust and the Shareholders of Fidelity Asset Manager: Income: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Asset Manager: Income (a fund of Fidelity Charles Street Trust) at September 30, 1998, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fidelity Asset Manager: Income's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at September 30, 1998 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. /s/PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Boston, Massachusetts November 10, 1998 DISTRIBUTIONS The Board of Trustees of Asset Manager: Income voted to pay to shareholders of record at the opening of business on record date, the following distributions derived from capital gains realized from sales of portfolio securities and dividends from net investment income. PAY DATE 12/8/1997 RECORD DATE 12/5/1997 DIVIDENDS $.10 SHORT-TERM CAPITAL GAINS $.11 LONG-TERM CAPITAL GAINS $.18 LONG-TERM CAPITAL GAIN PERCENTAGES: 28% rate 54.16% 20% rate 45.84% A total of 9.91% of the dividends distributed during the fiscal year was derived from interest on U.S. Government securities which is generally exempt from state income tax. A total of 5.63% of the dividends distributed during the fiscal year qualifies for the dividends-received deduction for corporate shareholders. The fund will notify shareholders in January 1999 of the applicable percentage for use in preparing 1998 income tax returns. MANAGING YOUR INVESTMENTS Fidelity offers several ways to conveniently manage your personal investments via your telephone or PC. You can access your account information, conduct trades and research your investments 24 hours a day. BY PHONE Fidelity TouchTone Xpress(registered trademark) provides a single toll-free number to access account balances, positions, quotes and trading. It's easy to navigate the service, and on your first call, the system will help you create a personal identification number (PIN) for security. (PHONE_GRAPHIC)TOUCHTONE XPRESS 1-800-544-5555 PRESS 1 For mutual fund and brokerage trading. 2 For quotes.* 3 For account balances and holdings. 4 To review orders and mutual fund activity. 5 To change your PIN. *0 To speak to a Fidelity representative. BY PC Fidelity's Web site on the Internet provides a wide range of information, including daily financial news, fund performance, interactive planning tools and news about Fidelity products and services. (PC_GRAPHIC)FIDELITY'S WEB SITE WWW.FIDELITY.COM If you are not currently on the Internet, call Fidelity at 1-800-544-7272 and we'll send you an America Online CD or disk with up to 50 free hours of Web access. (PC_GRAPHIC) FIDELITY ON-LINE XPRESS+ TM Fidelity On-line Xpress+ software for Windows combines comprehensive portfolio management capabilities, securities trading and access to research and analysis tools . . . all on your desktop. Call Fidelity at 1-800-544-7272 or visit our Web site for more information on how to manage your investments via your PC. * WHEN YOU CALL THE QUOTES LINE, PLEASE REMEMBER THAT A FUND'S YIELD AND RETURN WILL VARY AND, EXCEPT FOR MONEY MARKET FUNDS, SHARE PRICE WILL ALSO VARY. THIS MEANS THAT YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. THERE IS NO ASSURANCE THAT MONEY MARKET FUNDS WILL BE ABLE TO MAINTAIN A STABLE $1 SHARE PRICE; AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT. TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE, REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS, AND THE EFFECTS OF ANY SALES CHARGES. TO WRITE FIDELITY If more than one address is listed, please locate the address that is closest to you. We'll give your correspondence immediate attention and send you written confirmation upon completion of your request. (LETTER_GRAPHIC)MAKING CHANGES TO YOUR ACCOUNT (such as changing name, address, bank, etc.) Fidelity Investments P.O. Box 770001 Cincinnati, OH 45277-0002 (LETTER_GRAPHIC)FOR NON-RETIREMENT ACCOUNTS BUYING SHARES Fidelity Investments P.O. Box 770001 Cincinnati, OH 45277-0003 OVERNIGHT EXPRESS Fidelity Investments 2300 Litton Lane - KH1A Hebron, KY 41048 SELLING SHARES Fidelity Investments P.O. Box 660602 Dallas, TX 75266-0602 OVERNIGHT EXPRESS Fidelity Investments Attn: Redemptions - CP6I 400 East Las Colinas Blvd. Irving, TX 75309-5517 GENERAL CORRESPONDENCE Fidelity Investments P.O. Box 500 Merrimack, NH 03054-0500 (LETTER_GRAPHIC)FOR RETIREMENT ACCOUNTS BUYING SHARES Fidelity Investments P.O. Box 770001 Cincinnati, OH 45277-0003 SELLING SHARES Fidelity Investments P.O. Box 660602 Dallas, TX 75266-0602 OVERNIGHT EXPRESS Fidelity Investments Attn: Redemptions - CP6R 400 East Las Colinas Blvd. Irving, TX 75309-5517 GENERAL CORRESPONDENCE Fidelity Investments P.O. Box 500 Merrimack, NH 03054-0500 TO VISIT FIDELITY For directions and hours, please call 1-800-544-9797. ARIZONA 7373 N. Scottsdale Road Scottsdale, AZ CALIFORNIA 815 East Birch Street Brea, CA 851 East Hamilton Avenue Campbell, CA 527 North Brand Boulevard Glendale, CA 19100 Von Karman Avenue Irvine, CA 10100 Santa Monica Blvd. Los Angeles, CA 251 University Avenue Palo Alto, CA 1760 Challenge Way Sacramento, CA 7676 Hazard Center Drive San Diego, CA 455 Market Street San Francisco, CA 950 Northgate Drive San Rafael, CA 1400 Civic Drive Walnut Creek, CA 6300 Canoga Avenue Woodland Hills, CA COLORADO 1625 Broadway Denver, CO CONNECTICUT 48 West Putnam Avenue Greenwich, CT 265 Church Street New Haven, CT 300 Atlantic Street Stamford, CT 29 South Main Street West Hartford, CT DELAWARE 222 Delaware Avenue Wilmington, DE FLORIDA 4400 N. Federal Highway Boca Raton, FL 90 Alhambra Plaza Coral Gables, FL 4090 N. Ocean Boulevard Ft. 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Southfield, MI MINNESOTA 7600 France Avenue South Edina, MN MISSOURI 700 West 47th Street Kansas City, MO 8885 Ladue Road Ladue, MO 200 North Broadway St. Louis, MO NEW JERSEY 150 Essex Street Millburn, NJ 56 South Street Morristown, NJ 501 Route 17, South Paramus, NJ NEW YORK 1055 Franklin Avenue Garden City, NY 999 Walt Whitman Road Melville, L.I., NY 1271 Avenue of the Americas New York, NY 71 Broadway New York, NY 350 Park Avenue New York, NY NORTH CAROLINA 4611 Sharon Road Charlotte, NC 2200 West Main Street Durham, NC OHIO 600 Vine Street Cincinnati, OH 28699 Chagrin Boulevard Woodmere Village, OH OREGON 16850 SW 72 Avenue Tigard, OR PENNSYLVANIA 1735 Market Street Philadelphia, PA 439 Fifth Avenue Pittsburgh, PA TENNESSEE 6150 Poplar Road Memphis, TN TEXAS 10000 Research Boulevard Austin, TX 4017 Northwest Parkway Dallas, TX 1155 Dairy Ashford Street Houston, TX 2701 Drexel Drive Houston, TX 400 East Las Colinas Blvd. Irving, TX 14100 San Pedro San Antonio, TX 19740 IH 45 North Spring, TX UTAH 215 South State Street Salt Lake City, UT VIRGINIA 8180 Greensboro Drive McLean, VA WASHINGTON 411 108th Avenue, N.E. Bellevue, WA 511 Pine Street Seattle, WA WASHINGTON, DC 1900 K Street, N.W. Washington, DC WISCONSIN 595 North Barker Road Brookfield, WI INVESTMENT ADVISER Fidelity Management & Research Company Boston, MA INVESTMENT SUB-ADVISERS Fidelity Management & Research (U.K.) Inc., London, England Fidelity Management & Research (Far East) Inc., Tokyo, Japan OFFICERS Edward C. Johnson 3d, President Robert C. Pozen, Senior Vice President Robert A. Lawrence, Vice President Richard C. Habermann, Vice President Brad Lewis, Vice President Charles S. Morrison, Vice President John Todd, Vice President Eric D. Roiter, Secretary Richard A. Silver, Treasurer John H. Costello, Assistant Treasurer Leonard M. Rush, Assistant Treasurer BOARD OF TRUSTEES Ralph F. Cox * Phyllis Burke Davis * Robert M. Gates * Edward C. Johnson 3d E. Bradley Jones * Donald J. Kirk * Peter S. Lynch Marvin L. Mann * William O. McCoy * Gerald C. McDonough * Robert C. Pozen Thomas R. Williams * * INDEPENDENT TRUSTEES ADVISORY BOARD J. Gary Burkhead GENERAL DISTRIBUTOR Fidelity Distributors Corporation Boston, MA TRANSFER AND SHAREHOLDER SERVICING AGENT Fidelity Service Company, Inc. Boston, MA CUSTODIAN The Chase Manhattan Bank New York, NY FIDELITY'S ASSET ALLOCATION FUNDS Asset Manager SM Asset Manager: Growth SM Asset Manager: Income SM Fidelity Freedom Funds(registered trademark) - Income, 2000, 2010, 2020, 2030 THE FIDELITY TELEPHONE CONNECTION MUTUAL FUND 24-HOUR SERVICE Exchanges/Redemptions 1-800-544-7777 Account Assistance 1-800-544-6666 Product Information 1-800-544-8888 Retirement Accounts 1-800-544-4774 (8 a.m. - 9 p.m.) TDD Service 1-800-544-0118 (for the deaf and hearing impaired) (9 a.m. - 9 p.m. Eastern time) TouchTone Xpress(registered trademark)(AUTOMATED GRAPHIC) 1-800-544-5555 (AUTOMATED GRAPHIC)AUTOMATED LINE FOR QUICKEST SERVICE AMI-ANN-1198 64295 1.537737.101 (FIDELITY LOGO GRAPHIC)(REGISTERED TRADEMARK) Corporate Headquarters 82 Devonshire St., Boston, MA 02109 www.fidelity.com FIDELITY ASSET MANAGER SM ANNUAL REPORT SEPTEMBER 30, 1998 (2 fidelity logo graphics)(registered trademark) CONTENTS PRESIDENT'S MESSAGE 3 NED JOHNSON ON INVESTING STRATEGIES. PERFORMANCE 4 HOW THE FUND HAS DONE OVER TIME. MARKET RECAP 6 AN OVERVIEW OF THE MARKET'S PERFORMANCE AND THE FACTORS DRIVING IT. FUND TALK 7 THE MANAGER'S REVIEW OF FUND PERFORMANCE, STRATEGY AND OUTLOOK. INVESTMENT CHANGES 10 A SUMMARY OF MAJOR SHIFTS IN THE FUND'S INVESTMENTS OVER THE PAST SIX MONTHS. INVESTMENTS 11 A COMPLETE LIST OF THE FUND'S INVESTMENTS WITH THEIR MARKET VALUES. FINANCIAL STATEMENTS 47 STATEMENTS OF ASSETS AND LIABILITIES, OPERATIONS, AND CHANGES IN NET ASSETS, AS WELL AS FINANCIAL HIGHLIGHTS. NOTES 51 NOTES TO THE FINANCIAL STATEMENTS. REPORT OF INDEPENDENT 57 THE AUDITORS' OPINION. ACCOUNTANTS DISTRIBUTIONS 58 To reduce expenses and demonstrate respect for our environment, we have initiated a project through which we will begin eliminating duplicate copies of most financial reports and prospectuses to most households, even if they have more than one account in the fund. If additional copies of financial reports, prospectuses or historical account information are needed, please call 1-800-544-6666. THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS. MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK. FOR MORE INFORMATION ON ANY FIDELITY FUND, INCLUDING CHARGES AND EXPENSES, CALL 1-800-544-8888 FOR A FREE PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY. PRESIDENT'S MESSAGE (photo_of_Edward_C_Johnson_3d) DEAR SHAREHOLDER: The stock and bond markets continued to be influenced by competing factors as the third quarter of 1998 ended. On the one hand, low inflation, low unemployment and moderate growth in the U.S. economy provided a foundation for positive returns. But growing concerns about U.S. corporate earnings, combined with fears about the health of the economies and financial markets in Japan, Russia and many emerging markets, led to a continuation of the volatility that has marked most of the year. While it's impossible to predict the future direction of the markets with any degree of certainty, there are certain basic principles that can help investors plan for their future needs. First, investors are encouraged to take a long-term view of their portfolios. If you can afford to leave your money invested through the inevitable up and down cycles of the financial markets, you will greatly reduce your vulnerability to any single decline. We know from experience, for example, that stock prices have gone up over longer periods of time, have significantly outperformed other types of investments and have stayed ahead of inflation. Second, you can further manage your investing risk through diversification. Asset Manager funds are already diversified because they invest in stocks, bonds and short-term and money market instruments, both in the U.S. and overseas. If you have a shorter investment time horizon, you might want to consider moving some of your investment into Asset Manager: Income, which generally has a higher weighting in short-term investments compared with the other Asset Manager funds. Finally, no matter what your time horizon or portfolio diversity, it makes good sense to follow a regular investment plan, investing a certain amount of money in a fund at the same time each month or quarter and periodically reviewing your overall portfolio. By doing so, you won't get caught up in the excitement of a rapidly rising market, nor will you buy all your shares at market highs. While this strategy - known as dollar cost averaging - won't assure a profit or protect you from a loss in a declining market, it should help you lower the average cost of your purchases. If you have questions, please call us at 1-800-544-8888. We are available 24 hours a day, seven days a week to provide you the information you need to make the investments that are right for you. Best regards, Edward C. Johnson 3d PERFORMANCE: THE BOTTOM LINE There are several ways to evaluate a fund's historical performance. You can look at the total percentage change in value, the average annual percentage change or the growth of a hypothetical $10,000 investment. Total return reflects the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains (the profits earned upon the sale of securities that have grown in value). CUMULATIVE TOTAL RETURNS PERIODS ENDED PAST 1 PAST 5 LIFE OF SEPTEMBER 30, YEAR YEARS FUND 1998 FIDELITY 5.34% 65.94% 224.25% ASSET MANAGER FIDELITY ASSET 10.26% 79.01% N/A ALLOC. COMPOSITE S&P 9.05% 147.93% 379.18% 500 (REGISTERED TRADEMARK) LB 11.51% 41.66% N/A AGGREGATE BOND LB 3 5.50% 29.17% N/A MONTH T-BILL FLEXIBLE 2.20% 74.61% N/A PORTFOLIO FUNDS AVERAGE CUMULATIVE TOTAL RETURNS show the fund's performance in percentage terms over a set period - in this case, one year, five years or since the fund started on December 28, 1988. For example, if you had invested $1,000 in a fund that had a 5% return over the past year, the value of your investment would be $1,050. You can compare the fund's returns to the performance of the Fidelity Asset Allocation Composite Index, a hypothetical combination of unmanaged indices. The composite index combines the total returns of the Standard & Poor's 500 Index, the Lehman Brothers Aggregate Bond Index and the Lehman Brothers 3 Month Treasury Bill Index, weighted according to the fund's neutral mix. To measure how the fund's performance stacked up against its peers, you can compare it to the flexible portfolio funds average, which reflects the performance of mutual funds with similar objectives tracked by Lipper Analytical Services, Inc. The past one year average represents a peer group of 196 mutual funds. The benchmarks listed in the table above include reinvested dividends and capital gains, if any, and exclude the effect of sales charges. AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED PAST 1 PAST 5 LIFE OF SEPTEMBER 30, 1998 YEAR YEARS FUND FIDELITY ASSET 5.34% 10.66% 12.81% MANAGER FIDELITY ASSET 10.26% 12.35% N/A ALLOC. COMPOSITE AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and show you what would have happened if the fund had performed at a constant rate each year. $10,000 OVER LIFE OF FUND
Asset Manager S&P 500 FID Composite LB Aggregate Bond 00314 SP001 F0001 LB001 1988/12/31 10000.00 10000.00 10000.00 10000.00 1989/01/31 10378.86 10732.00 10291.00 10144.00 1989/02/28 10219.34 10464.77 10197.15 10070.96 1989/03/31 10309.07 10708.60 10317.27 10114.27 1989/04/30 10578.27 11264.38 10591.40 10325.66 1989/05/31 10887.34 11720.59 10843.16 10597.22 1989/06/30 11006.98 11653.78 11000.71 10919.38 1989/07/31 11326.02 12706.12 11417.74 11151.96 1989/08/31 11355.93 12955.15 11428.48 10986.91 1989/09/30 11355.93 12902.04 11455.90 11042.94 1989/10/31 11405.78 12602.71 11522.01 11314.60 1989/11/30 11485.54 12859.81 11660.61 11422.09 1989/12/31 11527.69 13168.44 11773.72 11452.93 1990/01/31 11158.89 12284.84 11489.86 11316.64 1990/02/28 11243.19 12443.31 11563.62 11352.85 1990/03/31 11359.10 12773.06 11677.41 11360.80 1990/04/30 11169.43 12453.74 11568.93 11256.28 1990/05/31 11759.51 13667.97 12063.04 11589.47 1990/06/30 11854.35 13575.03 12138.55 11776.06 1990/07/31 11843.81 13531.59 12214.42 11938.57 1990/08/31 11443.39 12308.34 11836.99 11778.59 1990/09/30 11211.58 11708.92 11732.94 11876.35 1990/10/31 11243.19 11658.57 11816.72 12027.18 1990/11/30 11780.58 12411.72 12171.45 12285.77 1990/12/31 12147.79 12758.00 12375.20 12477.42 1991/01/31 12795.97 13314.25 12612.31 12632.14 1991/02/28 13354.74 14266.22 12928.50 12739.52 1991/03/31 13578.25 14611.46 13072.01 12827.42 1991/04/30 13790.59 14646.53 13159.33 12965.95 1991/05/31 14137.03 15279.26 13368.30 13041.16 1991/06/30 13835.29 14579.47 13195.05 13034.64 1991/07/31 14204.08 15258.87 13460.27 13215.82 1991/08/31 14528.17 15620.51 13701.07 13501.28 1991/09/30 14550.52 15359.65 13767.80 13775.36 1991/10/31 14662.28 15565.47 13892.40 13928.26 1991/11/30 14405.24 14938.18 13800.43 14056.40 1991/12/31 15019.76 16647.11 14483.69 14473.88 1992/01/31 15236.74 16337.47 14324.82 14277.03 1992/02/29 15526.05 16549.86 14415.92 14369.83 1992/03/31 15526.05 16227.13 14310.83 14289.36 1992/04/30 15743.03 16704.21 14490.29 14392.25 1992/05/31 15899.73 16786.06 14632.19 14664.26 1992/06/30 15899.73 16535.95 14639.36 14866.63 1992/07/31 16225.20 17212.27 15039.10 15169.91 1992/08/31 16152.88 16859.42 14981.08 15323.12 1992/09/30 16273.42 17058.36 15149.80 15505.47 1992/10/31 16249.31 17118.06 15079.20 15299.24 1992/11/30 16610.94 17701.79 15270.71 15302.30 1992/12/31 16934.14 17919.52 15451.18 15545.61 1993/01/31 17225.45 18070.05 15645.18 15844.09 1993/02/28 17402.77 18315.80 15862.99 16121.36 1993/03/31 17975.71 18702.26 16026.45 16189.07 1993/04/30 18052.42 18249.67 15929.04 16302.39 1993/05/31 18435.97 18738.76 16099.89 16323.58 1993/06/30 18668.08 18793.10 16271.19 16619.04 1993/07/31 18951.91 18717.93 16292.28 16713.77 1993/08/31 19493.76 19427.34 16693.27 17006.26 1993/09/30 19481.53 19277.75 16676.91 17052.18 1993/10/31 20054.14 19676.80 16848.35 17115.27 1993/11/30 20015.09 19489.87 16718.78 16969.79 1993/12/31 20877.83 19725.69 16835.95 17061.43 1994/01/31 21555.68 20396.37 17167.48 17291.76 1994/02/28 20877.83 19843.63 16839.86 16990.88 1994/03/31 19867.84 18978.44 16404.98 16571.21 1994/04/30 19854.17 19221.37 16446.23 16438.64 1994/05/31 20018.25 19536.60 16557.01 16436.99 1994/06/30 19577.74 19057.95 16393.43 16400.83 1994/07/31 19962.97 19683.05 16740.57 16727.21 1994/08/31 20430.74 20490.06 17028.41 16747.28 1994/09/30 20182.51 19988.05 16779.05 16501.09 1994/10/31 20279.40 20437.78 16940.26 16486.24 1994/11/30 19974.87 19693.44 16692.49 16449.97 1994/12/31 19499.59 19985.49 16849.63 16563.48 1995/01/31 19344.50 20503.72 17166.04 16891.44 1995/02/28 19640.59 21302.75 17596.46 17293.45 1995/03/31 19953.26 21931.39 17866.53 17398.94 1995/04/30 20364.82 22577.27 18188.34 17642.53 1995/05/31 20847.33 23479.68 18791.94 18325.29 1995/06/30 21133.35 24025.12 19045.37 18459.07 1995/07/31 21718.80 24821.79 19288.08 18418.46 1995/08/31 21861.60 24884.09 19416.00 18641.32 1995/09/30 22219.16 25934.20 19835.62 18822.14 1995/10/31 22147.35 25841.62 19948.68 19066.83 1995/11/30 22563.87 26976.06 20440.58 19352.83 1995/12/31 23039.92 27495.62 20738.15 19623.77 1996/01/31 23534.15 28431.57 21091.65 19753.29 1996/02/29 23417.86 28695.13 21013.65 19409.58 1996/03/31 23419.07 28971.47 21038.24 19273.71 1996/04/30 23623.99 29398.51 21126.64 19165.78 1996/05/31 23872.82 30156.69 21349.66 19127.45 1996/06/30 24006.08 30271.59 21509.31 19383.76 1996/07/31 23548.68 28934.19 21168.86 19436.09 1996/08/31 23696.23 29544.41 21349.30 19403.05 1996/09/30 24523.08 31207.17 21989.95 19740.67 1996/10/31 25147.68 32067.87 22445.85 20178.91 1996/11/30 26337.40 34491.88 23299.15 20523.97 1996/12/31 25972.41 33808.59 23039.08 20333.09 1997/01/31 26760.88 35920.96 23797.99 20396.13 1997/02/28 26981.65 36202.58 23924.36 20447.12 1997/03/31 25961.97 34715.01 23336.66 20220.15 1997/04/30 26852.28 36787.50 24184.71 20523.46 1997/05/31 28171.84 39027.12 25025.61 20718.43 1997/06/30 28891.29 40775.54 25714.32 20964.98 1997/07/31 30541.76 44020.05 27028.71 21531.03 1997/08/31 29724.53 41554.04 26192.17 21348.02 1997/09/30 30689.57 43829.96 27076.55 21663.97 1997/10/31 30302.12 42366.04 26793.06 21978.10 1997/11/30 31077.03 44327.16 27474.00 22079.20 1997/12/31 31757.66 45088.26 27832.67 22302.20 1998/01/31 32017.26 45586.93 28142.45 22587.67 1998/02/28 33436.41 48874.66 29158.68 22569.60 1998/03/31 34150.13 51377.53 29958.64 22646.33 1998/04/30 33888.64 51894.39 30185.13 22764.09 1998/05/31 33540.00 51002.33 30053.98 22980.35 1998/06/30 34328.81 53074.04 30779.48 23175.68 1998/07/31 34434.22 52508.80 30654.98 23224.35 1998/08/31 30990.80 44917.08 28652.90 23602.91 1998/09/30 32328.02 47794.47 29854.03 24155.22 IMATRL PRASUN SHR__CHT 19980930 19981006 111711 R00000000000120
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was invested in Fidelity Asset Manager Fund on December 31, 1988, shortly after the fund started. As the chart shows, by September 30, 1998, the value of the investment would have grown to $32,328 - a 223.28% increase on the initial investment. For comparison, look at how both the S&P 500 Index, a widely recognized unmanaged index of common stocks, and the Lehman Brothers Aggregate Bond Index, a market value weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year, did over the same period. With dividends and capital gains, if any, reinvested, the same $10,000 investment in the S&P 500 Index would have grown to $47,794 - a 377.94% increase. If $10,000 was invested in the Lehman Brothers Aggregate Bond Index, it would have grown to $24,155 - a 141.55% increase. You can also look at how the Fidelity Asset Allocation Composite Index, a hypothetical combination of unmanaged indices, did over the same period. The composite index combines the total returns of the S&P 500 Index (+377.94%), the Lehman Brothers Aggregate Bond Index (+141.55%) and the Lehman Brothers 3 Month T-Bill Index (+70.10%) according to the fund's neutral mix*, and assumes monthly rebalancing of the mix. With dividends and capital gains, if any, reinvested, the same $10,000 investment would have grown to $29,854 - a 198.54% increase. (checkmark)UNDERSTANDING PERFORMANCE How a fund did yesterday is no guarantee of how it will do tomorrow. If you sell your shares during a market downturn, you might lose money. But if you can ride out the market's ups and downs, you may have a gain. * CURRENTLY 50% STOCKS, 40% BONDS AND 10% SHORT-TERM/MONEY MARKET INSTRUMENTS EFFECTIVE JANUARY 1, 1997; 40%, 40% AND 20%, RESPECTIVELY, BETWEEN JUNE 1, 1992 AND DECEMBER 31, 1996; 30%, 40%, AND 30%, RESPECTIVELY, PRIOR TO JUNE 1, 1992. MARKET RECAP Against a backdrop of financial and economic instability in many of the world's developed and emerging markets on the one hand, and a resilient domestic economy on the other, the U.S. stock and bond markets experienced extreme volatility during the 12-month period that ended September 30, 1998. STOCKS: The 12-month period that drew to a close on September 30, 1998, is one equity investors will remember for years to come. The period began as it ended: with unusually volatile markets. In October 1997, the Dow Jones Industrial Average - an index of 30 blue-chip stocks - tumbled over 550 points in one day on the news of worsening economic conditions in Asia. The Dow rebounded the following day, however, rising 330 points as investors focused on higher-quality stocks with strong liquidity and minimal international exposure. This trend continued in the first and second quarters of 1998, as U.S. economic growth chugged along on the rails of near-record lows for inflation, unemployment and interest rates. Unfortunately, emerging markets - particularly in Russia and Latin America - seemed to catch the so-called "Asian contagion," causing a free-fall in the U.S. stock market. On August 31, the Dow plunged 512.61 points - erasing all previous gains for the year. Appropriately, the Dow closed on September 30 with a 237.90 loss, triggered by investor disappointment over a lower-than-hoped-for reduction in the federal funds rate. For the 12-month period ending September 30, 1998, the Dow eked out a barely positive gain of 0.40%, while the Standard & Poor's 500 Index - a market-capitalization weighted index of 500 widely held U.S. stocks - - returned 9.05%. BONDS: As a safe haven from turbulent stock markets worldwide, bond markets reaped the benefits from the flight to quality by anxious investors during the 12-month period ending September 30, 1998. The Lehman Brothers Aggregate Bond Index - a broad measure of the U.S. taxable investment-grade bond market - returned 11.51% over the past year, over two and one-half times higher than the 4.54% return generated for the six-month period ending March 31, 1998. The buying surge sent Treasury-bond yields - which move in the opposite direction of bond prices - to their lowest level in over three decades, as the yield on the benchmark 30-year bond fell to 4.96%. In spite of the global economic crisis that dominated the period, the U.S. enjoyed low interest rates, low inflation and a stable economy, which aided the performance of corporate bonds. The Lehman Brothers Corporate Bond Index returned 11.07% for the 12-month period. Mortgage-backed bonds also performed well, although lower interest rates resulted in higher refinancing activity. The Lehman Brothers Mortgage Backed Securities Index had a 12-month return of 8.62%. Interest rates fell even lower late in the period, as the Federal Reserve lowered the fed funds rate by 0.25%, the first rate cut in nearly three years. The period's biggest losers were shareholders of emerging-market debt, as the JP Morgan Emerging Markets Bond Index lost 20.89% over the past 12 months. FUND TALK: THE MANAGER'S OVERVIEW (PHOTOGRAPH OF RICHARD HABERMANN) An interview with Richard Habermann, Portfolio Manager of Fidelity Asset Manager Q. HOW DID THE FUND PERFORM, DICK? A. For the 12-month period that ended September 30, 1998, the fund returned 5.34%. That trailed the 10.26% return of the Fidelity Asset Allocation Composite Index, but beat the 2.20% return of the flexible portfolio funds average, according to Lipper Analytical Services. The fund's competitive performance relative to its peer group was due in large part to Asset Manager's balanced approach to asset allocation. Many funds within the peer group were fairly aggressive in terms of asset allocation and security exposure - factors that detracted from peer group performance late in the period as equity markets stumbled. In contrast, Asset Manager's comparatively high bond allocation benefited the fund's performance relative to its peers. Q. WHAT WAS YOUR STRATEGY IN TERMS OF ASSET ALLOCATION? A. The fund's neutral mix generally calls for 50% to be invested in stocks, 40% in bonds and 10% in short-term/money market instruments. Given the market volatility we witnessed throughout the period, however - particularly during the past six months - the percentage in stocks was scaled back and the fund's exposure to bonds was increased. This decision was made during the summer months based on a belief that global market turmoil could creep into U.S. corporate circles and have a negative impact on earnings growth. In retrospect, this turned out to be a sound strategy. Another adjustment was made during the last month of the period, when the fund's stock exposure was ramped back up based on two factors. First, equity valuations generally improved as many markets observed significant declines late in the period. Second, the U.S. Federal Reserve Board appeared ready to stoke the economy by lowering interest rates, which it eventually did in late September. Whenever investors are given reason to be confident, stocks generally perform well. Overall, I was happy with these allocation shifts. Q. HOW DID THE FUND'S EQUITY SUBPORTFOLIO PERFORM DURING THE PERIOD? A. In terms of the fund's equity positions - which are managed by Tom Sprague - industry selection was positive but individual security selection within those industries hurt performance relative to the Standard & Poor's 500 Index. For instance, the fund was well-represented in the technology sector, but while technology stocks accounted for approximately one-fourth of the S&P 500's gain, Asset Manager's technology positions were largely a drag on performance. Looking back on the period, we simply didn't own enough of the names that did really well. The fund had positions in strong performers such as Microsoft, for example, but not enough to positively influence performance relative to the S&P 500. Some of the individual disappointments included French telecommunications equipment company Alcatel, as well as multi-franchise business and consumer services company Cendant. Lastly, the fund's exposure to pharmaceutical stocks in general was beneficial as interest in defensive areas of the market peaked towards the end of the period. Q. WHICH EQUITY INVESTMENTS BENEFITED THE FUND'S PERFORMANCE? A. Home mortgage financers Fannie Mae and Freddie Mac continued their strong run during the period. Many homeowners took advantage of the lower interest rates prevalent in the U.S. to refinance their mortgages. Both companies benefited from increased refinancing volume, as well as attractive yield spreads between mortgage-related bonds and Treasury bonds. Another strong performer was retail-store chain Wal-Mart, which benefited from strong consumer spending. Q. WHAT ABOUT THE BOND PORTION OF THE FUND? A. While turning in positive returns, the fund's fixed-income investments lagged the fixed-income benchmark during the period. There were two primary reasons for this. First, the fund's tactical allocation toward high-yield securities - which are managed by Fred Hoff - benefited performance throughout much of the period but proved a net negative down the stretch as the market corrected. Second, the fund's investment-grade bond exposure - which is overseen by Charlie Morrison - was overweighted in corporate and mortgage-backed bonds, both of which underperformed as a flight to quality caused U.S. Treasuries to outperform all other fixed-income sectors. During the last two months of the period, this flight to quality was spurred primarily by the ongoing troubles in overseas markets. Simultaneously, stock investors became concerned with their risk exposure and many opted for more conservative investments. As a result, U.S. Treasury bonds benefited tremendously. While corporate and mortgage-backed securities performed well over the period, they were unable to keep pace with Treasuries. Q. WHAT WAS YOUR STRATEGY WITH RESPECT TO THE FUND'S SHORT-TERM/MONEY MARKET INVESTMENTS? A. Unlike six months ago, when we were focusing on investments with shorter maturities, the unpredictability of the stock market caused us to take a somewhat longer-term approach. John Todd, who manages the fund's short-term/money market subportfolio, began to look at securities with one-year maturities during the second half of the period. As uncertainty continued to prevail in the financial markets, however, John began to look more closely at the three- to six-month range. Throughout the summer months, it appeared unlikely that the Fed would take action and cut interest rates, yet the market itself had been pricing in a potential rate tightening. On average the fund's short-term investments were longer in maturity than the three-month Treasury bill benchmark and had more exposure to higher-yielding investments. This helped relative performance during the period. Q. WHAT'S YOUR OUTLOOK GOING FORWARD? A. I think it's important that shareholders of the fund understand that the market is going to go through this sort of volatility every now and then. The returns we've seen over the past year are much closer to the market's historical yearly average than the 20% returns some investors have become accustomed to. Should the Fed lower interest rates again - thus making it easier for corporations to borrow or raise capital - we could see increased growth and better valuations across the board. In terms of equities, we may also begin to see more stocks participate in the market's gains. This would be an attractive development and would play nicely to our stock-picking strengths. THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET AND OTHER CONDITIONS. (CHECKMARK)FUND FACTS GOAL: HIGH TOTAL RETURN WITH REDUCED RISK OVER THE LONG TERM BY ALLOCATING ASSETS AMONG STOCKS, BONDS AND SHORT-TERM AND MONEY MARKET INSTRUMENTS OF ALL TYPES FUND NUMBER: 314 TRADING SYMBOL: FASMX START DATE: DECEMBER 28, 1988 SIZE: AS OF SEPTEMBER 30, 1998, MORE THAN $11.5 BILLION MANAGER: RICHARD HABERMANN, SINCE 1996; MANAGER, FIDELITY ASSET MANAGER: INCOME AND FIDELITY ASSET MANAGER: GROWTH, SINCE 1996; FIDELITY TREND FUND, 1977-1981; FIDELITY MAGELLAN FUND, 1972-1977; JOINED FIDELITY IN 1968 DICK HABERMANN ON THE CONCERNS POSED BY HEDGE FUNDS: "THERE'S BEEN A LOT OF TALK ABOUT HEDGE FUNDS LATELY, PARTICULARLY WITH THE RECENT NEAR-COLLAPSE OF LONG-TERM CAPITAL MANAGEMENT. NOT ALL INVESTORS MAY BE FAMILIAR WITH HOW THESE TYPES OF FUNDS OPERATE, NOR HOW THEY CAN POTENTIALLY AFFECT OTHER TYPES OF INVESTMENTS SUCH AS MUTUAL FUNDS. "A HEDGE FUND SEEKS TO TAKE ADVANTAGE OF INEFFICIENCIES IN CAPITAL MARKETS. THIS COULD BE IN STOCKS, BONDS, EMERGING-MARKET DEBT OR OTHER INVESTMENTS. HEDGE FUNDS CAN BE HIGHLY LEVERAGED AND TYPICALLY TAKE AMPLE INVESTMENT RISKS. OF COURSE, THE ATTRACTIVENESS TO INVESTORS IS THE POTENTIALLY LUCRATIVE RETURNS THEY CAN PROVIDE. "IN THE CASE OF LONG-TERM CAPITAL, THE FUND HAD RATHER EXTREME LEVERAGE WITHIN ITS BOND ALLOCATION. UNFORTUNATELY, THE MARKET TURMOIL LATE IN THE PERIOD FORCED FIRMS SUCH AS LONG-TERM CAPITAL TO `UNWIND' SOME OF THESE LEVERAGED STRATEGIES BY SELLING LARGE AMOUNTS OF SECURITIES. AFTER REALIZING THAT SUCH A CONTINUING GLUT OF SUPPLY HITTING THE MARKETS WOULD BE PARALYZING, A NUMBER OF ENTITIES COLLABORATED ON A FINANCIAL PLAN TO ASSIST LONG-TERM CAPITAL. "WHAT DOES THIS TYPE OF SITUATION MEAN FOR FUNDS SUCH AS THE ASSET MANAGERS? WELL, IF LONG-TERM CAPITAL HAD UNLEASHED ALL OF ITS BOND HOLDINGS, IT WOULD HAVE PUT INCREDIBLE LIQUIDITY PRESSURE ON SOME OF THE SECTORS IN WHICH WE INVEST. INVESTORS ALSO WOULD HAVE HAD DIFFICULTY DETERMINING WHETHER PRICING WAS FAIR OR NOT. IN ESSENCE, THIS ONE SITUATION COULD HAVE PLUNGED THE U.S. DIRECTLY INTO A CAPITAL MARKETS `FREEZE.' FORTUNATELY, IT DIDN'T COME TO THAT, AND IN THE END, INVESTORS HOPEFULLY BECAME MORE EDUCATED ABOUT THE RISKS HEDGE FUNDS TAKE." INVESTMENT CHANGES
TOP FIVE STOCKS AS OF SEPTEMBER 30, 1998 % OF FUND'S % OF FUND'S INVESTMENTS IN INVESTMENTS THESE STOCKS 6 MONTHS AGO PHILIP MORRIS 1.7 3.1 COMPANIES, INC. MERCK & CO., INC. 1.5 0.2 BRISTOL-MYERS SQUIBB 1.2 0.0 CO. MICROSOFT CORP. 1.0 0.3 GENERAL ELECTRIC CO. 1.0 0.4
TOP FIVE BONDS ISSUERS AS OF SEPTEMBER 30, 1998 (WITH MATURITIES MORE % OF FUND'S % OF FUND'S INVESTMENTS IN THAN ONE YEAR) INVESTMENTS THESE ISSUERS 6 MONTHS AGO FANNIE MAE 5.1 6.2 U.S. TREASURY 2.6 2.7 GOVERNMENT 1.9 0.7 NATIONAL MORTGAGE ASSOCIATION FREDDIE MAC 0.7 0.7 FORD MOTOR CREDIT 0.6 0.6 CO.
TOP FIVE MARKET SECTORS AS OF SEPTEMBER 30, 1998 % OF FUND'S % OF FUND'S INVESTMENTS IN INVESTMENTS THESE MARKET SECTORS 6 MONTHS AGO FINANCE 13.3 18.5 TECHNOLOGY 10.0 6.2 HEALTH 8.9 5.2 MEDIA & LEISURE 8.2 7.2 UTILITIES 5.6 8.4
ASSET ALLOCATION AS OF SEPTEMBER 30, 1998 * ROW: 1, COL: 1, VALUE: 49.0 ROW: 1, COL: 2, VALUE: 38.0 ROW: 1, COL: 3, VALUE: 13.0 STOCK CLASS 49% BOND CLASS 38% SHORT-TERM CLASS 13% *FOREIGN INVESTMENTS 6% AS OF MARCH 31, 1998 ** ROW: 1, COL: 1, VALUE: 57.0 ROW: 1, COL: 2, VALUE: 34.0 ROW: 1, COL: 3, VALUE: 9.0 STOCK CLASS 57% BOND CLASS 34% SHORT-TERM CLASS 9% **FOREIGN INVESTMENTS 9% ASSET ALLOCATIONS IN THE PIE CHARTS REFLECT THE CATEGORIZATION OF ASSETS AS DEFINED IN THE FUND'S PROSPECTUS IN EFFECT AS OF THE TIME PERIODS INDICATED ABOVE. FINANCIAL STATEMENT CATEGORIZATIONS CONFORM TO ACCOUNTING STANDARDS AND WILL DIFFER FROM THE PIE CHART. INVESTMENTS SEPTEMBER 30, 1998 Showing Percentage of Total Value of Investment in Securities COMMON STOCKS - 47.6% SHARES VALUE (NOTE 1) (000S) AEROSPACE & DEFENSE - 1.2% AEROSPACE & DEFENSE - 0.8% AlliedSignal, Inc. 581,480 $ 20,570 Gulfstream 939,700 37,823 Aerospace Corp. (a) Sundstrand Corp. 658,400 30,533 88,926 DEFENSE ELECTRONICS - 0.2% Raytheon Co.: Class A 324,299 16,803 Class B 117,800 6,354 23,157 SHIP BUILDING & REPAIR - 0.2% General Dynamics 506,100 25,400 Corp. TOTAL AEROSPACE & DEFENSE 137,483 BASIC INDUSTRIES - 1.0% CHEMICALS & PLASTICS - 0.3% Cytec Industries, 103,800 1,855 Inc. (a) du Pont (E.I.) de 134,800 7,566 Nemours & Co. Great Lakes 510,300 19,838 Chemical Corp. 29,259 METALS & MINING - 0.2% Aluminum Co. of 400,000 28,400 America PACKAGING & CONTAINERS - 0.4% Owens-Illinois, 2,029,300 50,733 Inc. (a) PAPER & FOREST PRODUCTS - 0.1% Stone Container 982,700 8,476 Corp. (a) TOTAL BASIC INDUSTRIES 116,868 CONSTRUCTION & REAL ESTATE - 0.2% BUILDING MATERIALS - 0.1% Masco Corp. 703,600 17,326 REAL ESTATE INVESTMENT TRUSTS - 0.1% Starwood Hotels & 365,000 11,133 Resorts Trust TOTAL CONSTRUCTION & REAL 28,459 ESTATE COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) DURABLES - 0.7% AUTOS, TIRES, & ACCESSORIES - 0.2% Federal-Mogul Corp. 418,300 $ 19,556 CONSUMER ELECTRONICS - 0.1% Black & Decker 293,100 12,200 Corp. HOME FURNISHINGS - 0.4% Leggett & Platt, Inc. 2,171,400 45,057 TEXTILES & APPAREL - 0.0% Arena Brands 130,444 3,261 Holdings Corp. Class B TOTAL DURABLES 80,074 ENERGY - 2.5% ENERGY SERVICES - 0.3% Halliburton Co. 1,134,500 32,404 OIL & GAS - 2.2% Anadarko Petroleum 333,400 13,107 Corp. British Petroleum Co. 417,678 36,442 PLC ADR Coastal Corp. (The) 1,078,600 36,403 Occidental Petroleum 647,100 13,913 Corp. Royal Dutch 457,100 21,769 Petroleum Co. (NY Registry Gilder 1.25) Texaco, Inc. 406,300 25,470 Tosco Corp. 1,068,000 22,962 Total SA: Class B 79,703 10,008 sponsored ADR 506,572 31,819 USX-Marathon 928,700 32,911 Group Valero Energy Co. 772,400 15,351 260,155 TOTAL ENERGY 292,559 FINANCE - 6.9% BANKS - 1.7% Bank of New York 1,778,400 48,684 Co., Inc. Citicorp 668,200 62,101 NationsBank Corp. 874,800 46,802 Norwest Corp. 700,000 25,069 U.S. Bancorp 410,100 14,584 197,240 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) FINANCE - CONTINUED CREDIT & OTHER FINANCE - 1.5% American Express 284,200 $ 22,061 Co. Associates First 479,000 31,255 Capital Corp. Fleet Financial 1,069,734 78,559 Group, Inc. Household 1,080,700 40,526 International, Inc. Providian Financial 100,000 8,481 Corp. 180,882 FEDERAL SPONSORED CREDIT - 1.3% Fannie Mae 1,767,300 113,549 Freddie Mac 852,200 42,131 155,680 INSURANCE - 2.0% AFLAC, Inc. 1,070,200 30,568 Allstate Corp. 406,326 16,939 AMBAC, Inc. 1,272,200 61,066 American 309,938 23,865 International Group, Inc. MBIA, Inc. 463,900 24,906 MGIC Investment 180,000 6,638 Corp. Progressive Corp. 120,000 13,530 Travelers Property 370,000 11,817 Casualty Corp. Class A UNUM Corp. 868,000 43,129 232,458 SAVINGS & LOANS - 0.4% Ahmanson (H.F.) & 796,000 44,178 Co. TOTAL FINANCE 810,438 HEALTH - 8.5% DRUGS & PHARMACEUTICALS - 5.1% American Home 1,083,400 56,743 Products Corp. Amgen, Inc. (a) 100,000 7,556 Bristol-Myers Squibb 1,344,100 139,618 Co. Lilly (Eli) & Co. 500,000 39,156 Merck & Co., Inc. 1,345,200 174,287 Pfizer, Inc. 391,000 41,422 Schering-Plough 990,200 102,548 Corp. Warner-Lambert Co. 525,100 39,645 600,975 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) HEALTH - CONTINUED MEDICAL EQUIPMENT & SUPPLIES - 2.4% Bergen Brunswig 744,800 $ 37,659 Corp. Class A Biomet, Inc. 908,700 31,521 Cardinal Health, Inc. 380,100 39,245 Guidant Corp. 100,000 7,425 Johnson & Johnson 513,100 40,150 McKesson Corp. 410,300 37,594 Medtronic, Inc. 242,600 14,040 Omnicare, Inc. 1,522,300 53,661 Sofamor/Danek 286,700 25,516 Group, Inc. (a) 286,811 MEDICAL FACILITIES MANAGEMENT - 1.0% Health Management 1,551,900 28,322 Associates, Inc. Class A (a) HEALTHSOUTH 1,808,600 19,103 Corp. (a) Humana, Inc. (a) 1,273,900 20,860 Lincare Holdings, 430,000 16,663 Inc. (a) Tenet Healthcare 1,072,800 30,843 Corp. (a) 115,791 TOTAL HEALTH 1,003,577 INDUSTRIAL MACHINERY & EQUIPMENT - 3.1% ELECTRICAL EQUIPMENT - 1.2% Alcatel Alsthom 107,400 9,125 Compagnie Generale d'Electricite SA Alcatel Alsthom 507,000 8,619 Compagnie Generale d'Electricite SA sponsored ADR Emerson Electric Co. 140,000 8,715 General Electric Co. 1,456,300 115,867 142,326 INDUSTRIAL MACHINERY & EQUIPMENT - 1.2% Case Corp. 463,800 10,088 Ingersoll-Rand Co. 472,000 17,907 Tyco International 2,010,200 111,064 Ltd. 139,059 POLLUTION CONTROL - 0.7% Waste Management, 1,800,345 86,529 Inc. TOTAL INDUSTRIAL MACHINERY 367,914 & EQUIPMENT COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) MEDIA & LEISURE - 2.2% BROADCASTING - 0.7% CBS Corp. 760,800 $ 18,449 Clear Channel 539,400 25,622 Communications, Inc. (a) Loral Orion Network Systems, Inc. warrants 1/15/07: (CV ratio .47) (a) 8,520 72 (CV ratio .6) (a) 2,550 28 MediaOne Group, 458,000 20,352 Inc. (a) Time Warner, Inc. 269,347 23,585 88,108 ENTERTAINMENT - 0.3% Alliance Gaming 11,764 24 Corp. (a)(k) Carnival Corp. 870,800 27,702 Premier Parks, 352,000 6,160 Inc. (a) 33,886 LODGING & GAMING - 0.2% Aladdin Gaming 67,100 1 Enterprises, Inc. warrants 3/1/10 (a)(f) Fitzgeralds South, 1,640 0 Inc. warrants 3/15/99 (a)(f) Harrah's 1,330,300 17,710 Entertainment, Inc. (a) 17,711 PUBLISHING - 0.1% Gannet Co., Inc. 200,000 10,713 RESTAURANTS - 0.9% Darden Restaurants, 1,844,900 29,518 Inc. Marriott 843,700 20,143 International, Inc. Class A McDonald's Corp. 730,400 43,596 Papa John's 306,500 10,115 International, Inc. (a) 103,372 TOTAL MEDIA & LEISURE 253,790 NONDURABLES - 4.3% BEVERAGES - 0.5% PepsiCo, Inc. 1,914,800 56,367 FOODS - 1.0% Heinz (H.J.) Co. 120,000 6,135 Hershey Foods Corp. 268,600 18,382 Quaker Oats Co. 575,000 33,925 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) NONDURABLES - CONTINUED FOODS - CONTINUED Ralston Purina Co. 555,700 $ 16,254 Sara Lee Corp. 798,000 43,092 117,788 HOUSEHOLD PRODUCTS - 1.2% Avon Products, Inc. 497,400 13,958 Clorox Co. 268,600 22,160 Gillette Co. 1,138,400 43,544 Procter & Gamble 868,400 61,602 Co. 141,264 TOBACCO - 1.6% Philip Morris 4,252,200 195,867 Companies, Inc. TOTAL NONDURABLES 511,286 RETAIL & WHOLESALE - 3.5% APPAREL STORES - 0.2% Lamonts Apparel, Inc.: Class A warrants 401,276 100 1/31/08 (a) Class A (a)(l) 645,784 404 Class B warrants 127,531 32 1/31/08 (a) Payless ShoeSource, 471,100 19,492 Inc. (a) 20,028 DRUG STORES - 0.8% CVS Corp. 748,400 32,789 Rite Aid Corp. 1,475,800 52,391 Walgreen Co. 100,000 4,406 89,586 GENERAL MERCHANDISE STORES - 1.1% Consolidated Stores 893,350 17,532 Corp. (a) Costco Companies, 380,000 18,003 Inc. (a) Federated 448,600 16,318 Department Stores, Inc. (a) Saks Holdings, 1,216,675 27,299 Inc. (a) Wal-Mart Stores, Inc. 849,300 46,393 125,545 GROCERY STORES - 0.9% Albertson's, Inc. 330,000 17,861 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) RETAIL & WHOLESALE - CONTINUED GROCERY STORES - CONTINUED Meyer (Fred), Inc. (a) 413,000 $ 16,055 Safeway, Inc. (a) 1,649,400 76,491 110,407 RETAIL & WHOLESALE, MISCELLANEOUS - 0.5% Bed Bath & Beyond, 570,000 13,324 Inc. (a) Circuit City Stores, 755,000 25,151 Inc. - Circuit City Group Home Depot, Inc. 696,600 27,516 65,991 TOTAL RETAIL & WHOLESALE 411,557 SERVICES - 0.9% ADVERTISING - 0.3% Interpublic Group of 448,400 24,186 Companies, Inc. Omnicom Group, 303,000 13,635 Inc. 37,821 EDUCATIONAL SERVICES - 0.2% Apollo Group, Inc. 617,100 17,202 Class A (a) SERVICES - 0.4% AccuStaff, Inc. (a) 911,500 13,274 Cendant Corp. (a) 1,483,322 17,244 Computer Horizons 782,000 19,501 Corp. (a) 50,019 TOTAL SERVICES 105,042 TECHNOLOGY - 9.5% COMMUNICATIONS EQUIPMENT - 0.7% Aspect 878,100 21,074 Telecommunication s Corp. (a) Cisco Systems, 864,300 53,425 Inc. (a) Globalstar 4,540 114 Telecommunication s Ltd. warrants 2/15/04 (a)(f) Lucent Technologies, 80,000 5,525 Inc. 80,138 COMPUTER SERVICES & SOFTWARE - 3.2% America Online, Inc. 373,800 41,585 Automatic Data 288,800 21,588 Processing, Inc. BMC Software, Inc. 385,400 23,148 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) TECHNOLOGY - CONTINUED COMPUTER SERVICES & SOFTWARE - CONTINUED Ciber, Inc. (a) 700,000 $ 14,131 CompUSA, Inc. (a) 767,600 13,289 Compuware 676,000 39,800 Corp. (a) Equifax, Inc. 751,100 26,805 IMS Health, Inc. 332,400 20,588 Keane, Inc. (a) 415,100 14,580 Microsoft Corp. (a) 1,095,800 120,606 Shared Medical 384,300 20,440 Systems Corp. SunGard Data 542,900 17,101 Systems, Inc. (a) 373,661 COMPUTERS & OFFICE EQUIPMENT - 2.8% Comdisco, Inc. 3,324,700 45,299 Compaq Computer 850,000 26,881 Corp. Comverse 308,200 12,598 Technology, Inc. (a) EMC Corp. (a) 665,400 38,053 Fore Systems, Inc. (a) 2,478,900 41,212 International Business 555,200 71,066 Machines Corp. Pitney Bowes, Inc. 1,178,400 64,296 Symbol Technologies, 593,500 30,454 Inc. 329,859 ELECTRONIC INSTRUMENTS - 0.3% Applied Materials, 267,100 6,744 Inc. (a) KLA-Tencor Corp. (a) 320,000 7,960 Novellus Systems, 230,600 6,053 Inc. (a) Perkin-Elmer Corp. 79,500 5,461 Varian Associates, 400,000 14,100 Inc. 40,318 ELECTRONICS - 2.5% Altera Corp. (a) 685,200 24,068 Analog Devices, 1,183,500 19,010 Inc. (a) Intel Corp. 1,230,200 105,490 Linear Technology 587,000 29,350 Corp. Maxim Integrated 365,200 10,180 Products, Inc. (a) Micron Technology, 1,438,300 43,778 Inc. (a) Sanmina Corp. (a) 736,500 20,714 Solectron Corp. (a) 258,100 12,389 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) TECHNOLOGY - CONTINUED ELECTRONICS - CONTINUED Vitesse 907,900 $ 21,449 Semiconductor Corp. (a) Xilinx, Inc. (a) 100,000 3,500 289,928 TOTAL TECHNOLOGY 1,113,904 TRANSPORTATION - 0.0% TRUCKING & FREIGHT - 0.0% CNF Transportation, 115,200 3,355 Inc. UTILITIES - 3.1% CELLULAR - 0.2% McCaw International 22,840 114 Ltd. warrants 4/15/07 (a)(f) Metrocall, Inc. (a) 3,300 16 SK Telecom Ltd. 24 11 Vodafone Group PLC 167,200 18,852 sponsored ADR 18,993 ELECTRIC UTILITY - 0.1% PG&E Corp. 562,700 17,971 TELEPHONE SERVICES - 2.8% AT&T Corp. 1,489,500 87,043 Bell Atlantic Corp. 250,000 12,109 Global TeleSystems 440,000 14,850 Group, Inc. (a) MCI WorldCom, 2,355,786 115,139 Inc. (a) Pathnet, Inc. 13,610 204 warrants 4/15/08 (a)(f) Qwest 887,848 27,801 Communications International, Inc. (a) SBC 798,980 35,505 Communications, Inc. Telebras sponsored 456,100 32,127 ADR (a) WinStar 200,000 4,750 Communications, Inc. (a) 329,528 TOTAL UTILITIES 366,492 TOTAL COMMON STOCKS 5,602,798 (Cost $5,232,990)
NONCONVERTIBLE PREFERRED STOCKS - 1.3% SHARES VALUE (NOTE 1) (000S) CONSTRUCTION & REAL ESTATE - 0.2% REAL ESTATE INVESTMENT TRUSTS - 0.2% California Federal Preferred Capital Corp. $2.28 621,326 $ 15,844 Crown America Realty Trust Series A, $5.50 37,592 1,849 Walden Residential Properties, Inc. $2.30 141,900 3,317 21,010 FINANCE - 0.1% CREDIT & OTHER FINANCE - 0.0% Fresenius Medical Care Capital Trust II 7.875% 3,769 3,536 INSURANCE - 0.1% American Annuity Group Capital Trust II 8.75% 4,320 4,320 SIG Capital Trust I 9.5% 4,358 4,196 8,516 TOTAL FINANCE 12,052 MEDIA & LEISURE - 0.6% BROADCASTING - 0.5% Adelphia Communications Corp. $13.00 31,848 3,678 CSC Holdings, Inc. 11.125% pay-in-kind 235,464 25,901 Echostar Communications Corp. 12.125% pay-in-kind 5,895 5,689 Granite Broadcasting Corp. 12.75% pay-in-kind 6,626 6,626 SFX Broadcasting, Inc. 12.625% pay-in-kind 39,011 4,642 Sinclair Capital 11.625% 82,440 8,656 55,192 PUBLISHING - 0.1% PRIMEDIA, Inc.: $9.20 68,349 6,630 Series D, $10.00 91,921 9,100 15,730 TOTAL MEDIA & LEISURE 70,922 RETAIL & WHOLESALE - 0.0% GROCERY STORES - 0.0% Supermarkets General Holdings Corp. $3.52 pay-in-kind (a) 70,123 1,455 NONCONVERTIBLE PREFERRED STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) TECHNOLOGY - 0.0% COMMUNICATIONS EQUIPMENT - 0.0% Intermedia Communications, Inc. 13.5% pay-in-kind 4,737 $ 5,211 UTILITIES - 0.4% CELLULAR - 0.2% Nextel Communications, Inc. 11.125% pay-in-kind 22,031 19,277 TELEPHONE SERVICES - 0.2% Hyperion Telecommunication, Inc. 12.875% pay-in-kind 6,051 4,962 IXC Communications, Inc. 12.5% pay-in-kind 4,687 4,968 NEXTLINK Communications, Inc. 14% pay-in-kind 219,257 11,401 21,331 TOTAL UTILITIES 40,608 TOTAL NONCONVERTIBLE PREFERRED STOCKS 151,258 (Cost $153,760)
CORPORATE BONDS - 20.9% MOODY'S RATINGS PRINCIPAL (UNAUDITED) (B) AMOUNT (000S) CONVERTIBLE BONDS - 0.1% HEALTH - 0.0% DRUGS & PHARMACEUTICALS - 0.0% Integrated Process Equipment Corp. 6.25% B- $ 3,770 2,394 9/15/04 (f) MEDICAL FACILITIES MANAGEMENT - 0.0% Tenet Healthcare Corp. 6% 12/1/05 B1 3,420 2,864 TOTAL HEALTH 5,258 NONDURABLES - 0.1% FOODS - 0.1% Chiquita Brands International, Inc. 7% 3/28/01 B3 5,910 5,437 RETAIL & WHOLESALE - 0.0% RETAIL & WHOLESALE, MISCELLANEOUS - 0.0% Sports Authority, Inc. (The) 5.25% 9/15/01 B1 4,740 3,543 TOTAL CONVERTIBLE BONDS 14,238 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED) (B) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - 20.8% AEROSPACE & DEFENSE - 0.3% DEFENSE ELECTRONICS - 0.2% Raytheon Co.: 5.95% 3/15/01 Baa1 $ 12,560 $ 12,775 6.45% 8/15/02 Baa1 16,920 17,600 30,375 SHIP BUILDING & REPAIR - 0.1% Newport News Shipbuilding, Inc. 9.25% B1 9,330 9,890 12/1/06 TOTAL AEROSPACE & DEFENSE 40,265 BASIC INDUSTRIES - 0.4% CHEMICALS & PLASTICS - 0.1% Huntsman Corp. 9.5% 7/1/07 (f) B2 5,980 5,741 Praxair, Inc. 6.625% 10/15/07 A3 10,000 10,460 16,201 PACKAGING & CONTAINERS - 0.3% Owens-Illinois, Inc.: 7.15% 5/15/05 Ba1 22,680 22,678 7.8% 5/15/18 Ba1 12,000 11,433 34,111 TOTAL BASIC INDUSTRIES 50,312 CONSTRUCTION & REAL ESTATE - 0.4% BUILDING MATERIALS - 0.0% American Standard Cos., Inc. Ba3 2,450 2,459 7.375% 4/14/05 CONSTRUCTION - 0.1% U.S. Home Corp. 8.88% 8/15/07 B1 4,610 4,564 REAL ESTATE - 0.1% LNR Property Corp. 9.375% 3/15/08 B1 7,380 6,808 REAL ESTATE INVESTMENT TRUSTS - 0.2% CenterPoint Properties Corp. 6.75% 4/1/05 Baa2 4,360 4,330 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED) (B) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED CONSTRUCTION & REAL ESTATE - CONTINUED REAL ESTATE INVESTMENT TRUSTS - CONTINUED EOP Operating LP: 6.375% 2/15/03 Baa1 $ 10,000 $ 9,994 6.75% 2/15/08 Baa1 4,520 4,498 Weeks Realty LP 6.875% 3/15/05 Baa2 8,200 8,024 26,846 TOTAL CONSTRUCTION & REAL ESTATE 40,677 DURABLES - 0.8% AUTOS, TIRES, & ACCESSORIES - 0.2% Blue Bird Body Co. 10.75% 11/15/06 B2 3,580 3,696 Breed Technologies, Inc. 9.25% 4/15/08 (f) B3 8,695 7,173 Federal-Mogul Corp. 7.875% 7/1/10 Ba2 13,570 13,583 Oshkosh Truck Co. 8.75% 3/1/08 B3 5,610 5,330 29,782 CONSUMER DURABLES - 0.1% Corning Consumer Products Co. 9.625% B3 9,000 7,245 5/1/08 (f) HOME FURNISHINGS - 0.0% Omega Cabinets Ltd. 10.5% 6/15/07 B3 3,620 3,186 TEXTILES & APPAREL - 0.5% Levi Strauss & Co. 7% 11/1/06 (f) Baa2 31,050 30,299 Nine West Group, Inc. 9% 8/15/07 Ba3 3,640 3,130 Unifi, Inc. 6.5% 2/1/08 A3 8,120 8,131 WestPoint Stevens, Inc. 7.875% 6/15/08 Ba3 7,430 7,541 Worldtex, Inc. 9.625% 12/15/07 B1 9,220 8,206 57,307 TOTAL DURABLES 97,520 ENERGY - 0.5% COAL - 0.1% P&L Coal Holdings Corp. 9.625% 5/15/08 (f) B2 7,100 7,100 ENERGY SERVICES - 0.0% Ocean Rig Norway AS 10.25% 6/1/08 (f) B3 4,750 3,598 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED) (B) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED ENERGY - CONTINUED OIL & GAS - 0.4% Chesapeake Energy Corp. 9.625% 5/1/05 B1 $ 3,130 $ 2,739 Occidental Petroleum Corp.: 6.39% 11/9/00 Baa3 3,000 3,056 8.5% 11/9/01 Baa2 4,370 4,725 Oryx Energy Co.: 8% 10/15/03 Ba1 4,620 4,894 8.125% 10/15/05 Ba1 2,470 2,563 8.375% 7/15/04 Ba1 4,700 5,030 Petroleum Geo-Services ASA 7.125% 3/30/28 Baa3 11,650 11,242 Union Oil Co. of California 7.67% 4/19/02 Baa2 9,660 10,287 USX-Marathon Group 6.85% 3/1/08 Baa2 3,050 3,165 47,701 TOTAL ENERGY 58,399 FINANCE - 6.3% BANKS - 1.8% BankBoston Corp. 6.625% 2/1/04 A3 4,570 4,711 BankBoston NA (Bearer) 6.375% 3/25/08 A2 3,400 3,427 BanPonce Corp. 6.665% 3/5/01 A3 13,900 14,327 BanPonce Financial Corp. 7.72% 4/13/00 A3 7,000 7,229 Barclays Bank PLC yankee 5.95% 7/15/01 A1 24,650 25,088 Capital One Bank: 6.375% 2/15/03 Baa3 9,860 10,073 6.42% 11/12/99 Baa3 14,000 14,070 7.35% 6/20/00 Baa3 3,925 4,017 8.125% 3/1/00 Baa3 8,575 8,822 Capital One Financial Corp. 7.125% 8/1/08 Ba1 11,450 11,696 Citicorp 5.625% 2/15/01 Aa3 8,100 8,158 Den Danske Bank AS 6.375% 6/15/08 (f)(i) A1 22,050 22,568 Fleet Credit Card LLC 6.45% 10/30/00 A1 6,100 6,249 Fleet/Norstar Financial Group, Inc. 9.9% A3 6,400 7,140 6/15/01 Huntington National Bank 5.875% 1/15/01 A1 6,820 6,923 NationsBank NA 5.92% 6/8/01 Aa2 18,250 18,621 NB Capital Trust IV 8.25% 4/15/27 Aa2 6,625 7,275 Providian National Bank 6.7% 3/15/03 Baa3 8,450 8,866 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED) (B) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED FINANCE - CONTINUED BANKS - CONTINUED Summit Bancorp 8.625% 12/10/02 BBB+ $ 5,500 $ 6,163 Union Planters National Bank 6.81% 8/20/01 A3 10,000 10,389 205,812 CREDIT & OTHER FINANCE - 3.7% Ahmanson Capital Trust I 8.36% 12/1/26 (f) Baa2 13,000 14,272 Associates Corp. of North America 6% 4/15/03 Aa3 10,650 10,979 AT&T Capital Corp.: 6.16% 12/3/99 Baa3 9,000 9,111 6.25% 5/15/01 Baa3 14,800 15,034 6.41% 8/13/99 Baa3 24,000 24,202 BankAmerica Capital II 8% 12/15/26 Aa2 8,200 8,859 BanPonce Trust I 8.327% 2/1/27 A3 20,520 20,983 BCH Cayman Islands Ltd. yankee 7.7% 7/15/06 A2 1,280 1,355 Countrywide Funding Corp. 6.45% 2/27/03 A3 10,900 11,309 ERP Operating LP 6.55% 11/15/01 A3 3,900 3,955 Farmers Insurance Exchange Capital 7.05% A2 7,240 7,314 7/15/28 (f) Finova Capital Corp. 6.12% 5/28/02 Baa1 7,000 7,164 First Security Capital I 8.41% 12/15/26 A3 5,290 5,906 Ford Motor Credit Co.: global 7% 9/25/01 A1 19,000 19,879 5.73% 2/23/00 A1 11,500 11,606 5.83% 2/28/00 A1 22,550 22,790 6.2% 3/12/01 A1 10,000 10,254 6.57% 3/19/01 A1 11,300 11,684 General Electric Capital Corp. 6.94% Aaa 22,500 22,662 4/13/09 (e) General Motors Acceptance Corp. 6.75% A3 22,160 23,213 7/10/02 GS Escrow Corp.: 7% 8/1/03 (f) Ba1 5,700 5,692 7.125% 8/1/05 (f) Ba1 20,250 19,992 Heller Financial, Inc.: 6.25% 3/1/01 A3 13,690 13,966 7.875% 11/1/99 A3 15,530 15,917 KeyCorp Institutional Capital A 7.826% A1 11,420 12,178 12/1/26 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED) (B) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED FINANCE - CONTINUED CREDIT & OTHER FINANCE - CONTINUED Macsaver Financial Services, Inc. 7.6% 8/1/07 Ba1 $ 8,000 $ 5,960 Mellon Capital I 7.72% 12/1/26 A2 5,470 5,796 Money Store, Inc. 7.3% 12/1/02 A2 8,750 9,336 Morgan Guaranty Trust Co., NY 5.5438% - 29,000 28,986 9/27/99 (i) Nordstrom Credit, Inc. 7.25% 4/30/02 A2 10,500 11,195 Premier Auto Trust 5.45% 6/8/99 - 29,000 29,073 Time Warner Telecom LLC/Time Warner Telecom, B2 1,830 1,830 Inc. 9.75% 7/15/08 U.S. Bancorp 8.09% 11/15/26 A1 8,200 8,950 UNICCO Service Co./UNICCO Finance Corp. B3 6,510 6,022 9.875% 10/15/07 437,424 SAVINGS & LOANS - 0.5% Chevy Chase Savings Bank FSB 9.25% 12/1/08 B1 4,910 4,763 First Nationwide Parent Holdings Ltd. 12.5% Ba3 8,210 9,480 4/15/03 Great Western Finance Trust II 8.206% 2/1/27 A3 12,350 13,411 Great Western Financial Corp. 8.6% 2/1/02 A3 7,000 7,632 Home Savings of America FSB 6.5% 8/15/04 A3 8,080 8,388 Long Island Savings Bank FSB: 6.2% 4/2/01 Baa3 10,550 10,651 7% 6/13/02 Baa3 9,680 10,103 64,428 SECURITIES INDUSTRY - 0.3% Amvescap PLC 6.375% 5/15/03 A3 6,150 6,320 Morgan Stanley, Dean Witter, Discover & Co. - 25,400 25,398 5.75% 1/15/99 (i) 31,718 TOTAL FINANCE 739,382 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED) (B) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED HEALTH - 0.4% MEDICAL EQUIPMENT & SUPPLIES - 0.2% Graham-Field Health Products, Inc. 9.75% Caa1 $ 6,340 $ 3,741 8/15/07 McKesson Corp. 6.6% 3/1/00 A3 13,610 13,848 17,589 MEDICAL FACILITIES MANAGEMENT - 0.2% Fountain View, Inc. 11.25% 4/15/08 (f) Caa1 5,260 4,629 Integrated Health Services, Inc. 9.25% 1/15/08 B2 6,480 6,156 Magellan Health Services, Inc. 9% 2/15/08 (f) B3 3,550 3,035 Tenet Healthcare Corp.: 8.125% 12/1/08 (f) Ba3 3,480 3,506 8.625% 1/15/07 Ba3 9,690 10,029 27,355 TOTAL HEALTH 44,944 INDUSTRIAL MACHINERY & EQUIPMENT - 0.6% ELECTRICAL EQUIPMENT - 0.0% Motors & Gears, Inc. 10.75% 11/15/06 B3 1,170 1,147 INDUSTRIAL MACHINERY & EQUIPMENT - 0.4% Bucyrus International, Inc. 9.75% 9/15/07 B1 9,950 7,463 Roller Bearing Holding, Inc. 0% 6/15/09 (d)(f) - 9,790 5,727 Thermadyne Manufacturing LLC 9.875% 6/1/08 B3 2,270 1,998 Tyco International Group SA yankee: 6.125% 6/15/01 Baa1 18,270 18,656 6.375% 6/15/05 Baa1 7,690 8,106 41,950 POLLUTION CONTROL - 0.2% Envirosource, Inc. 9.75% 6/15/03 B3 2,400 2,196 WMX Technologies, Inc.: 6.25% 10/15/00 Baa3 5,750 5,853 7.1% 8/1/26 Baa3 13,025 13,988 8.25% 11/15/99 Baa3 3,675 3,788 25,825 TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 68,922 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED) (B) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED MEDIA & LEISURE - 5.4% BROADCASTING - 3.7% ACME Television LLC/ACME Financial Corp. 0% B3 $ 4,730 $ 3,666 9/30/04 (d) Adelphia Communications Corp.: 9.5% 2/15/04 pay-in-kind B2 17,344 17,763 9.875% 3/1/07 B2 8,990 9,709 Allbritton Communications Co. 8.875% 2/1/08 B3 4,000 3,960 Ascent Entertainment Group, Inc. 0% B3 5,500 3,025 12/15/04 (d) CBS Radio, Inc. 11.375% 1/15/09 pay-in-kind - 8,094 9,146 Century Communications Corp.: 0% 1/15/08 Ba3 29,330 13,858 8.75% 10/1/07 Ba3 3,230 3,392 Chancellor Media Corp. 9% 10/1/08 (f) Ba3 8,140 8,181 Classic Communications, Inc. 0% 8/1/08 Caa1 940 526 Unit (d)(f) Clear Channel Communications, Inc. 6.875% Baa3 9,100 8,957 6/15/18 Comcast UK Cable Partners Ltd. 0% B2 9,190 7,582 11/15/07 (d) Continental Cablevision, Inc.: 8.3% 5/15/06 Baa3 4,125 4,666 8.625% 8/15/03 Baa3 8,070 9,001 9% 9/1/08 Baa3 8,500 10,223 CSC Holdings, Inc.: 9.25% 11/1/05 B1 4,110 4,336 9.875% 5/15/06 B1 4,825 5,139 10.5% 5/15/16 B1 5,120 5,786 Diamond Cable Communications PLC yankee 0% Caa1 3,935 3,148 12/15/05 (d) Echostar Communications Corp. 0% 6/1/04 (d) B2 3,830 3,706 Echostar Satellite Broadcasting Corp. 0% B3 3,180 2,830 3/15/04 (d) Falcon Holdings Group LP/Falcon Funding: 0% 4/15/10 (d) B2 21,990 14,898 8.375% 4/15/10 B2 4,950 4,962 Fox/Liberty Networks LLC/FLN Finance, Inc. 0% B1 4,895 3,255 8/15/07 (d) CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED) (B) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED MEDIA & LEISURE - CONTINUED BROADCASTING - CONTINUED FrontierVision Holdings LP/FrontierVision Caa1 $ 10,470 $ 8,428 Holdings Capital Corp. 0% 9/15/07 (d) FrontierVision Operating Partners LP/ B3 13,060 14,301 FrontierVision Capital Corp. 11% 10/15/06 Granite Broadcasting Corp.: 8.875% 5/15/08 B3 6,840 6,413 9.375% 12/1/05 B3 8,290 8,103 10.375% 5/15/05 B3 2,450 2,487 Hearst-Argyle Television, Inc. 7.5% 11/15/27 Baa3 10,820 11,188 Intermedia Capital Partners IV LP / Intermedia B2 4,150 4,607 Partners IV Capital Corp. 11.25% 8/1/06 International Cabletel, Inc. 0% 2/1/06 (d) B3 5,560 4,392 Iridium Operating LLC/Iridium Capital Corp. B3 11,360 9,145 11.25% 7/15/05 Lenfest Communications, Inc. 8.25% 2/15/08 B2 2,430 2,454 LIN Holdings Corp. 0% 3/1/08 (d)(f) B3 930 608 NTL, Inc.: 0% 4/1/08 (d)(f) B3 22,350 13,466 10% 2/15/07 B3 6,340 6,403 Olympus Communications LP/Olympus Capital B1 3,530 3,883 Corp. 10.625% 11/15/06 Orion Network Systems, Inc.: 0% 1/15/07 (d) B2 4,800 3,000 11.25% 1/15/07 B2 2,020 1,869 Pegasus Communications Corp. 9.625% B3 3,610 3,466 10/15/05 Renaissance Media Group LLC/Renaissance 0% B3 6,655 4,475 4/15/08 (d)(f) Rogers Cablesystems Ltd. yankee 11% 12/1/15 B2 5,370 6,068 Satelites Mexicanos SA de CV 10.125% B3 9,030 6,050 11/1/04 (f) Sinclair Broadcast Group, Inc. 8.75% 12/15/07 B2 6,050 5,959 TCI Communications Financing III 9.65% Ba2 13,740 16,351 3/31/27 TCI Communications, Inc.: 6.375% 5/1/03 Baa3 1,235 1,291 8.25% 1/15/03 Baa3 430 478 8.75% 8/1/15 Baa3 13,230 16,528 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED) (B) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED MEDIA & LEISURE - CONTINUED BROADCASTING - CONTINUED TCI Communications, Inc.: - continued 9.25% 4/15/02 Baa3 $ 8,500 $ 9,539 9.8% 2/1/12 Baa3 12,130 16,214 Telewest PLC: yankee 0% 10/1/07 (d) B1 23,800 19,457 9.625% 10/1/06 B1 1,660 1,668 Time Warner, Inc.: 6.875% 6/15/18 Baa3 12,180 12,586 7.75% 6/15/05 Baa3 10,350 11,539 7.95% 2/1/00 Baa3 12,800 13,219 8.18% 8/15/07 Baa3 14,375 16,757 UIH Australia/Pacific, Inc. 0% 5/15/06 (d) B2 5,930 2,372 United International Holdings, Inc. 0% B3 15,380 7,306 2/15/08 (d) 433,785 ENTERTAINMENT - 0.8% AMC Entertainment, Inc. 9.5% 3/15/09 B2 9,235 8,589 American Skiing Co. 12% 7/15/06 B3 8,130 8,293 Bally Total Fitness Holding Corp. 9.875% B3 5,450 5,096 10/15/07 Cinemark USA, Inc. 8.5% 8/1/08 B2 9,030 8,691 Livent, Inc. 9.375% 10/15/04 B1 1,220 817 Paramount Communications, Inc. 7.5% 1/15/02 Ba2 3,885 4,069 Premier Parks, Inc. 0% 4/1/08 (d) B3 5,340 3,311 United Artists Theatre Co. 9.75% 4/15/08 Caa1 4,430 4,098 Viacom, Inc.: 6.75% 1/15/03 Ba2 17,450 17,917 7.75% 6/1/05 Ba2 32,750 35,365 8% 7/7/06 B1 2,970 2,985 99,231 LODGING & GAMING - 0.3% Aladdin Gaming Holdings/Aladdin Capital Caa2 6,710 1,946 Corp. 0% 3/1/10 (d) Courtyard by Marriott II LP/Courtyard II Finance B- 3,800 3,933 Co. 10.75% 2/1/08 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED) (B) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED MEDIA & LEISURE - CONTINUED LODGING & GAMING - CONTINUED HMH Properties, Inc.: 7.875% 8/1/05 Ba2 $ 4,300 $ 4,311 7.875% 8/1/08 Ba2 19,650 19,404 Signature Resorts, Inc. 9.75% 10/1/07 B3 5,160 3,664 Sun International Hotels Ltd./Sun International Ba3 3,120 3,182 North America, Inc. yankee 9% 3/15/07 36,440 PUBLISHING - 0.5% Garden State Newspapers, Inc. Series B, 8.75% B1 16,077 15,474 10/1/09 News America Holdings, Inc.: 7.7% 10/30/25 Baa3 14,260 15,250 8.5% 2/15/05 Baa3 13,525 15,243 News America, Inc. 7.25% 5/18/18 Baa3 8,460 8,666 54,633 RESTAURANTS - 0.1% Host Marriott Travel Plazas, Inc. 9.5% 5/15/05 Ba3 10,180 10,384 NE Restaurant Co., Inc. 10.75% 7/15/08 (f) B3 2,880 2,808 13,192 TOTAL MEDIA & LEISURE 637,281 NONDURABLES - 0.6% FOODS - 0.1% ConAgra, Inc. 7.125% 10/1/26 Baa1 13,500 14,574 HOUSEHOLD PRODUCTS - 0.1% Revlon Consumer Products Corp. 8.625% B3 13,880 13,533 2/1/08 TOBACCO - 0.4% Philip Morris Companies, Inc.: 6.95% 6/1/06 A2 12,680 13,478 7% 7/15/05 A2 13,480 14,413 7.25% 9/15/01 A2 13,780 14,434 42,325 TOTAL NONDURABLES 70,432 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED) (B) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED RETAIL & WHOLESALE - 1.3% APPAREL STORES - 0.1% AnnTaylor, Inc. 8.75% 6/15/00 B3 $ 8,270 $ 8,105 Specialty Retailers, Inc. 8.5% 7/15/05 Ba3 2,280 2,109 10,214 GENERAL MERCHANDISE STORES - 0.5% Dayton Hudson Corp.: 6.8% 10/1/01 A3 9,500 9,915 7.5% 7/15/06 A3 9,000 10,087 Federated Department Stores, Inc.: 6.79% 7/15/27 Baa2 8,750 9,247 7% 2/15/28 Baa2 10,800 10,910 8.125% 10/15/02 Baa2 6,340 6,925 K mart Corp.: 7.75% 10/1/12 Ba2 670 677 8.25% 1/1/22 Ba2 5,420 5,352 12.5% 3/1/05 Ba2 7,160 8,807 61,920 GROCERY STORES - 0.5% Ameriserve Food Distribution, Inc. 8.875% B1 2,870 2,540 10/15/06 Kroger Co. 6% 7/1/00 Baa3 15,800 16,008 Meyer (Fred), Inc. 7.45% 3/1/08 Ba2 9,320 9,739 Mrs. Fields Original Cookies, Inc. 10.125% B2 2,870 2,669 12/1/04 Pathmark Stores, Inc.: 9.625% 5/1/03 Caa1 18,870 18,021 12.625% 6/15/02 Caa2 3,530 3,327 Pueblo Xtra International, Inc.: 9.5% 8/1/03 B3 7,410 6,669 9.5% 8/1/03 B3 2,300 2,070 61,043 RETAIL & WHOLESALE, MISCELLANEOUS - 0.2% Amazon.com, Inc. 0% 5/1/08 (d) Caa2 5,730 3,094 Central Tractor Farm & Country, Inc. 10.625% B2 1,820 1,765 4/1/07 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED) (B) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED RETAIL & WHOLESALE - CONTINUED RETAIL & WHOLESALE, MISCELLANEOUS - CONTINUED J Crew Operating Corp. 10.375% 10/15/07 Caa1 $ 4,900 $ 3,920 Metals USA, Inc. 8.625% 2/15/08 B2 7,760 6,751 15,530 TOTAL RETAIL & WHOLESALE 148,707 SERVICES - 0.2% PRINTING - 0.0% Sullivan Graphics, Inc. 12.75% 8/1/05 Caa1 4,180 4,222 SERVICES - 0.2% Borg-Warner Security Corp. 9.625% 3/15/07 B3 2,750 3,025 Iron Mountain, Inc. 8.75% 9/30/09 B3 3,655 3,618 La Petite Academy, Inc./La Petite Academy B3 7,560 7,314 Holding Co. 10% 5/15/08 Medaphis Corp. 9.5% 2/15/05 B2 8,450 7,436 21,393 TOTAL SERVICES 25,615 TECHNOLOGY - 0.5% COMPUTER SERVICES & SOFTWARE - 0.2% Federal Data Corp. 10.125% 8/1/05 B3 10,250 9,251 ICG Services, Inc. 0% 5/1/08 (d) - 12,630 6,126 PSINet, Inc. 10% 2/15/05 B3 1,990 1,990 17,367 COMPUTERS & OFFICE EQUIPMENT - 0.2% Comdisco, Inc.: 6.375% 11/30/01 Baa1 13,775 14,146 7.21% 7/2/01 Baa1 12,000 12,575 26,721 ELECTRONIC INSTRUMENTS - 0.1% Telecommunications Techniques Co. 9.75% B3 6,230 5,669 5/15/08 (f) CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED) (B) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED TECHNOLOGY - CONTINUED ELECTRONICS - 0.0% Fairchild Semiconductor Corp. 11.74% 3/15/08 - $ 6,074 $ 4,888 pay-in-kind (k) TOTAL TECHNOLOGY 54,645 TRANSPORTATION - 1.0% AIR TRANSPORTATION - 0.4% Atlas Air, Inc. 9.25% 4/15/08 (f) B3 13,265 12,403 Delta Air Lines, Inc. 9.875% 5/15/00 Baa3 6,000 6,394 Kitty Hawk, Inc. 9.95% 11/15/04 B1 13,128 13,194 US Air, Inc. 9.625% 2/1/01 B1 3,960 4,059 US Airways Group, Inc. 10.375% 3/1/13 Ba2 7,185 7,634 43,684 RAILROADS - 0.5% Burlington Northern Santa Fe Corp. 7.29% Baa2 10,500 11,879 6/1/36 Canadian National Railway Co. 6.9% 7/15/28 Baa2 9,010 9,241 CSX Corp. 6.46% 6/22/05 Baa2 13,650 14,289 Norfolk Southern Corp. 7.05% 5/1/37 Baa1 21,900 24,143 Wisconsin Central Transportation Corp. 6.625% Baa2 4,870 5,048 4/15/08 64,600 SHIPPING - 0.1% Amer Reefer Co. Ltd. 10.25% 3/1/08 B1 2,200 1,782 Cenargo International PLC 9.75% 6/15/08 (f) Ba3 5,360 4,342 Holt Group, Inc. 9.75% 1/15/06 (f) Caa1 4,970 3,479 9,603 TOTAL TRANSPORTATION 117,887 UTILITIES - 2.1% CELLULAR - 0.8% AirTouch Communications, Inc. 6.35% 6/1/05 Baa2 18,260 19,218 Cable & Wireless Communications PLC 6.375% Baa1 14,020 14,334 3/6/03 McCaw International Ltd. 0% 4/15/07 (d) Caa1 26,890 12,638 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED) (B) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED UTILITIES - CONTINUED CELLULAR - CONTINUED Millicom International Cellular SA 0% Caa1 $ 6,510 $ 4,004 6/1/06 (d) Nextel Communications, Inc.: 0% 9/15/07 (d) B2 3,156 2,004 0% 10/31/07 (d) B2 26,320 15,858 0% 2/15/08 (d) B2 6,125 3,598 Nextel International, Inc. 0% 4/15/08 (d) Caa1 14,540 5,816 Pagemart Nationwide, Inc. 0% 2/1/05 (d) B3 630 564 PageMart Wireless, Inc. 0% 2/1/08 (d) Caa2 5,120 2,739 Rogers Communications, Inc. 8.875% 7/15/07 B2 9,980 9,780 Teligent, Inc.: 0% 3/1/08 (d) Caa1 7,010 2,751 11.5% 12/1/07 Caa1 5,500 4,290 97,594 ELECTRIC UTILITY - 0.5% Avon Energy Partners Holdings: 6.46% 3/4/08 (f) Baa2 10,920 11,191 6.73% 12/11/02 (f) Baa2 13,550 14,134 Israel Electric Corp. Ltd.: yankee 7.875% 12/15/26 (f) A3 6,380 6,348 7.75% 12/15/27 (f) A3 12,960 12,306 Niagara Mohawk Power Corp. 7.75% 10/1/08 Ba3 5,830 6,209 Texas Utilities Co. 6.375% 1/1/08 Baa3 5,470 5,550 55,738 TELEPHONE SERVICES - 0.8% Dobson Wireline Co. 12.25% 6/15/08 (f) - 12,690 11,040 GST Network Funding, Inc. 0% 5/1/08 (d)(f) - 5,450 2,616 Hyperion Telecommunications, Inc.: 0% 4/15/03 (d) B3 7,380 5,037 12.25% 9/1/04 B3 8,130 7,967 Level 3 Communications, Inc. 9.125% 5/1/08 B3 5,710 5,367 McLeodUSA, Inc.: 0% 3/1/07 (d) B2 6,005 4,369 9.25% 7/15/07 B2 2,000 2,055 NEXTLINK Communications, Inc. 9.625% B3 10,240 9,933 10/1/07 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED) (B) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED UTILITIES - CONTINUED TELEPHONE SERVICES - CONTINUED Pathnet, Inc. 12.25% 4/15/08 (f) - $ 13,610 $ 10,344 WinStar Communications, Inc. 11% - 11,160 7,645 3/15/08 (d) WorldCom, Inc.: 7.75% 4/1/07 Baa2 3,890 4,444 8.875% 1/15/06 Baa2 9,729 10,672 9.375% 1/15/04 Baa2 10,620 11,095 92,584 TOTAL UTILITIES 245,916 TOTAL NONCONVERTIBLE BONDS 2,440,904 TOTAL CORPORATE BONDS 2,455,142 (Cost $2,474,187)
U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - 3.4% U.S. GOVERNMENT AGENCY OBLIGATIONS - 0.8% Fannie Mae: 5.75% 6/15/05 Aaa 3,555 3,740 6% 5/15/08 Aaa 2,840 3,062 7.49% 3/2/05 Aaa 4,725 5,403 Federal Home Loan Bank: 7.7% 9/20/04 Aaa 2,360 2,708 8.09% 12/28/04 Aaa 11,000 12,911 Financing Corp. 0% 4/5/02 Aaa 2,276 1,945 Financing Corp. Coupon Strip: 0% 5/11/02 Aaa 2,275 1,929 0% 8/8/05 Aaa 5,482 3,953 0% 11/30/05 Aaa 1,666 1,182 Freddie Mac 7.35% 3/22/05 Aaa 5,000 5,684 U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED) (B) AMOUNT (000S) (000S) U.S. GOVERNMENT AGENCY OBLIGATIONS - CONTINUED U.S. Department of Housing and Urban Development government guaranteed participation certificates Series 1996-A: 6.73% 8/1/02 Aaa $ 22,400 $ 23,738 6.83% 8/1/03 Aaa 11,700 12,634 7.57% 8/1/13 Aaa 10,090 11,564 90,453 U.S. TREASURY OBLIGATIONS - 2.6% U.S. Treasury Bills, yield at date of purchase 10,975 10,966 4.97% to 4.98% 10/8/98 (h) U.S. Treasury Bonds: 6.5% 11/15/26 Aaa 7,140 8,519 7.125% 2/15/23 Aaa 1,738 2,194 7.625% 2/15/25 Aaa 112,455 151,411 8.875% 2/15/19 Aaa 1,360 1,987 10.75% 5/15/03 Aaa 13,750 17,351 10.75% 8/15/05 Aaa 5,080 6,938 11.75% 2/15/10 (callable) Aaa 21,750 30,243 12.75% 11/15/10 (callable) Aaa 17,680 26,302 U.S. Treasury Notes: 5.375% 2/15/01 Aaa 5,400 5,522 5.5% 5/31/03 Aaa 3,100 3,252 5.625% 11/30/99 Aaa 24,473 24,771 5.875% 2/15/00 Aaa 1,885 1,919 6.625% 6/30/01 Aaa 6,600 6,977 7% 7/15/06 Aaa 6,340 7,386 7.875% 11/15/04 Aaa 3,500 4,143 309,881 TOTAL U.S. GOVERNMENT AND 400,334 GOVERNMENT AGENCY OBLIGATIONS (Cost $372,533)
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 7.5% MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED) (B) AMOUNT (000S) (000S) FANNIE MAE - 5.0% 5.5% 6/17/03 to 9/1/13 Aaa $ 19,229 $ 19,218 6% 4/5/03 to 4/1/28 Aaa 207,530 209,296 6.5% 1/1/13 to 7/1/28 Aaa 158,464 161,330 7% 10/1/28 (g)(m) Aaa 133,962 137,730 7.5% 8/1/24 to 7/1/28 Aaa 61,940 63,899 591,473 FREDDIE MAC - 0.6% 5.5% 5/11/03 Aaa 10,398 10,365 6% 10/1/23 to 9/1/25 Aaa 11,998 12,028 7% 1/22/01 to 8/1/01 Aaa 3,446 3,475 7.5% 6/1/25 to 4/1/28 Aaa 48,832 50,313 8.5% 2/1/19 to 8/1/22 Aaa 273 285 76,466 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 1.9% 6% 10/15/08 to 12/15/10 Aaa 27,976 28,493 6.5% 12/15/07 to 8/15/09 Aaa 55,242 56,660 7% 2/15/28 to 7/15/28 Aaa 57,407 59,254 7.5% 3/15/22 to 8/15/28 Aaa 68,547 71,072 8% 4/15/24 to 12/15/25 Aaa 4,411 4,596 220,075 TOTAL U.S. GOVERNMENT AGENCY - 888,014 MORTGAGE-BACKED SECURITIES (Cost $858,134)
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.0% PRIVATE SPONSOR - 0.0% Credit-Based Asset Servicing and Securitization Ba3 3,400 1,422 LLC Series 1997-2 Class 2-B, 7.2236% 12/29/25 (f)(i) (Cost $1,807)
ASSET-BACKED SECURITIES - 2.6% MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED) (B) AMOUNT (000S) (000S) Airplanes Pass Through Trust 10.875% Ba2 $ 14,820 $ 15,339 3/15/19 BankAmerica Manufacturing Housing Contract Aaa 9,930 10,070 6.2% 4/10/09 Capita Equipment Receivables Trust 6.48% Baa2 8,150 8,298 10/15/06 Chase Manhattan Auto Owner Trust 5.85% Aaa 12,180 12,397 5/15/03 Chevy Chase Auto Receivables Trust 5.91% Aaa 6,597 6,678 12/15/04 Contimortgage Home Equity Loan Trust 6.26% Aaa 13,310 13,368 7/15/12 CPS Auto Grantor Trust: 6.09% 11/15/03 Aaa 8,707 8,742 6.55% 8/15/02 Aaa 5,965 6,036 CPS Auto Receivables Trust 6% 8/15/03 Aaa 14,889 15,056 CSXT Trade Receivables Master Trust 6% Aaa 12,240 12,710 7/25/04 Dayton Hudson Credit Card Master Trust 6.25% Aaa 13,300 13,921 8/25/05 Ford Credit Auto Owner Trust: 6.2% 12/15/02 Baa3 7,380 7,517 6.4% 5/15/02 A1 10,051 10,276 6.4% 12/15/02 Baa3 4,070 4,090 Green Tree Financial Corp.: 6.5% 6/15/27 Aaa 3,531 3,535 6.68% 1/15/29 AAA 18,680 19,217 6.8% 6/15/27 Aaa 6,500 6,579 Key Auto Finance Trust 6.3% 10/15/03 A2 9,352 9,396 MBNA Master Credit Card Trust II 6.55% Aaa 26,970 28,619 1/15/07 Olympic Automobile Receivables Trust: 6.4% 9/15/01 Aaa 13,560 13,751 6.7% 3/15/02 Aaa 6,680 6,801 Petroleum Enhanced Trust Receivables Offering Baa2 8,996 8,993 Petroleum Trust 6.125% 2/5/03 (f)(i) Premier Auto Trust: 6% 5/6/00 Aaa 3,517 3,520 6.34% 1/6/03 Aaa 20,000 20,500 ASSET-BACKED SECURITIES - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED) (B) AMOUNT (000S) (000S) Prime Credit Card Master Trust 6.75% 11/15/05 Aaa $ 14,250 $ 14,940 UAF Auto Grantor Trust 6.1% 1/15/03 (f) Aaa 12,685 12,776 WFS Financial Owner Trust 6.55% 10/20/04 Aaa 11,150 11,401 TOTAL ASSET-BACKED SECURITIES 304,526 (Cost $297,934)
COMMERCIAL MORTGAGE SECURITIES - 2.9% MOODY'S RATINGS (UNAUDITED) (B) Atherton Franchisee Loan Funding LLP Series BB 2,047 1,658 1998-A Class E, 8.25% 5/15/20 (f) Bankers Trust Remic Trust 1988-1 Series Ba2 3,301 3,205 1998-S1A Class G, 8.6764% 11/28/02 (f)(i) Bardell Associates Note Trust 12.5%, - 16,577 17,613 11/1/08 (k) Berkeley Federal Bank & Trust FSB Series 1994 - 2,280 1,778 Class 1-B 7.7518% 8/1/24 (f)(i) BKB Commercial Mortgage Trust Series 1997-C1 BBB 5,378 5,495 Class D, 7.83% 2/25/43 (f)(i) CBM Funding Corp. sequential pay Series 1996-1: Class A-3PI, 7.08% 11/1/07 AA 8,220 8,685 Class B, 7.48% 2/1/08 A 6,410 6,815 CS First Boston Mortgage Securities Corp.: Series 1997-C2 Class D, 7.27% 1/17/35 Baa2 14,700 14,728 Series 1998-C1 Class D, 7.17% 1/17/12 BBB 13,430 13,720 Series 1998-FLI Class E, 6.5063% Baa2 14,600 14,431 1/10/13 (f)(i) Deutsche Mortgage & Asset Receiving Corp. Baa2 11,800 12,272 Series 1998-C1 Class D, 7.231% 7/15/12 Equitable Life Assurance Society of the United States (The): sequential pay Series 174 Class A1, 7.24% Aaa 16,800 18,337 5/15/06 (f) Series 174: Class B1, 7.33% 5/15/06 (f) Aa2 10,400 11,244 Class D1, 7.77% 5/15/06 (f) Baa2 6,800 7,180 Series 1996-1 Class C1, 7.52% 5/15/06 (f) A2 8,000 8,668 COMMERCIAL MORTGAGE SECURITIES - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED) (B) AMOUNT (000S) (000S) First Chicago/Lennar Trust I Series 1997-CHL1: Class D, 8.1319% 4/13/39 (i) - $ 2,000 $ 1,885 Class E, 8.1319% 4/1/39 (i) - 3,800 3,105 First Union-Lehman Brothers Commercial Aa2 31,350 33,290 Mortgage Trust sequential pay Series 1997-C2 Class B, 6.79% 11/18/29 FMAC Loan Receivables Trust 1998-C: Series 1997-A Class E, 8.1059% - 1,471 1,242 4/15/19 (f)(i) Series 1997-B Class E, 7.8912% - 2,307 1,827 9/15/19 (f)(i) GAFCO Franchisee Loan Trust Series 1998-1 - 4,600 3,729 Class D, 14.5% 6/1/16 (f)(i) General Motors Acceptance Corp. Commercial Ba3 1,250 1,154 Mortgage Securities, Inc. Series 1996-C1 Class F, 7.86% 10/15/28 (f) GS Mortgage Securities Corp. II: Series 1997-GL Class A2-B, 6.86% 7/13/30 Aaa 13,230 14,031 Series 1998-GLII: Class D, 7.1905% 4/13/31 (f)(i) Baa2 4,120 4,185 Class E, 7.1905% 4/13/31 (f)(i) Baa3 13,588 13,251 Kidder Peabody Acceptance Corp. I Aa2 3,320 3,334 sequential pay Series 1993-M1 Class A-2, 7.15% 4/25/25 LTC Commercial Mortgage Pass Through AAA 8,771 8,862 Certificates Series 1998-1 Class A, 6.029% 5/30/30 (f) Morgan Stanley Capital I, Inc.: Series 1998-CF1: Class D, 7.35% 1/15/12 Baa2 11,142 11,253 Class E, 7.35% 12/15/12 Baa3 3,848 3,675 Series 1998-HF1 Class D, 7.1% 2/15/30 (i) BBB 14,900 15,706 Nomura Asset Securities Corp. Series 1998-D6 Baa2 11,800 12,550 Class A-4, 7.5956% 3/17/28 (i) Nomura Depositor Trust floater Series 1998-ST1A: Class B-2, 9.8906% 1/15/03 (f)(i) - 2,975 2,711 Class B2-A, 9.8906% 2/15/34 (f)(i) - 500 456 COMMERCIAL MORTGAGE SECURITIES - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED) (B) AMOUNT (000S) (000S) Penn Mutual Life Insurance Co. (The)/Penn Insurance & Annuity Co. Series 1996-PML: Class K, 7.9% 11/15/26 (f) - $ 750 $ 561 Class L, 7.9% 11/15/26 (f) - 600 296 Resolution Trust Corp.: floater Series 1991-M2 Class A1, 6.7373% Ba3 345 293 9/25/20 (i) Series 1991-M2 Class A-3, 7.2498% Ba3 1,623 1,347 9/25/20 (i) Structured Asset Securities Corp.: sequential pay Series 1996 Class A-2A, AAA 2,629 2,646 7.75% 2/25/28 Series 1995-C1 Class E, 7.375% 9/25/24 (f) BB 2,390 2,329 Series 1996-CFL: Class E, 7.75% 2/25/28 BB+ 6,820 6,997 Class G, 7.75% 2/25/28 (f) - 3,700 3,427 Class H, 7.75% 2/25/28 (f) - 1,000 806 Thirteen Affiliates of General Growth Properties, Inc.: sequential pay Series A-2, 6.602% Aaa 10,590 11,141 12/15/10 (f) Series D-2, 6.992% 12/15/10 (f) Baa2 11,380 11,459 Series E-2, 7.224% 12/15/10 (f) Baa3 6,760 6,628 Wells Fargo Capital Markets Apartment Aaa 8,767 9,066 Financing Trust Series APT Class 1, 6.56% 12/29/05 (f) TOTAL COMMERCIAL MORTGAGE SECURITIES 339,071 (Cost $328,872)
FOREIGN GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - 0.2% MOODY'S RATINGS (UNAUDITED) (B) Export Development Corp. yankee 8.125% Aa2 4,880 5,002 8/10/99 (j) Israeli State euro 6.375% 12/19/01 (j) Aaa 13,265 13,733 Newfoundland Province yankee 11.625% Baa1 5,750 8,192 10/15/07 (j) TOTAL FOREIGN GOVERNMENT AND 26,927 GOVERNMENT AGENCY OBLIGATIONS (Cost $25,664)
SUPRANATIONAL OBLIGATIONS - 0.1% MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED) (B) AMOUNT (000S) (000S) Inter American Development Bank yankee 6.29% Aaa $ 13,000 $ 14,268 7/16/27 (Cost $12,918) BANK NOTES - 0.2% Key Bank NA 5.6175% 8/20/99 (i) 25,000 24,976 (Cost $24,966) CERTIFICATES OF DEPOSIT - 2.3% Abbey National Treasury Services PLC euro 5.51% 27,000 27,010 12/4/98 ABN-AMRO Bank NV yankee euro 5.64% 12/14/98 28,000 28,016 Bank of Scotland Treasury Services euro 5.64% 12,000 12,009 12/29/98 Bayerische Hypotheken-und Wechselbank AG yankee 10,100 10,119 5.7% 3/30/99 Bayerische Landesbank Girozentrale yankee 5.33% 27,000 27,012 2/26/99 Canadian Imperial Bank of Commerce, New York 16,760 17,117 yankee 6.2% 8/1/00 Deutsche Bank AG yankee: 5.19% 12/1/98 5,000 4,999 5.94% 10/26/98 10,000 10,002 First National Bank of Chicago 5.65% 3/3/99 25,000 25,033 RaboBank Nederland Coop. Central yankee 5.68% 25,000 25,085 6/4/99 Societe Generale, France yankee 5.91% 10/15/98 21,600 21,603 Swiss Bank Corp. yankee 5.65% 3/24/99 20,000 20,032 Toronto-Dominion Bank yankee 5.68% 6/4/99 25,000 25,085 Westdeutsche Landesbank Girozentrale yankee 5.63% 19,000 19,025 2/8/99 TOTAL CERTIFICATES OF DEPOSIT 272,147 (Cost $271,440)
COMMERCIAL PAPER - 1.8% Citibank Credit Card Master Trust I (Dakota Certificate Program): 5.5% 11/10/98 6,000 5,965 5.53% 10/13/98 7,600 7,587 COMMERCIAL PAPER - CONTINUED PRINCIPAL VALUE (NOTE 1) AMOUNT (000S) (000S) Commonwealth Bank of Australia yankee 5.35% $ 25,000 $ 24,479 3/1/99 Daimler-Benz North America Corp. yankee 5.53% 8,000 7,967 10/29/98 Enterprise Funding Corp. 5.4% 12/4/98 13,000 12,886 General Electric Capital Corp. 5.51% 11/12/98 19,000 18,885 Generale de Banque SA yankee 5.36% 2/24/99 22,400 21,939 Kitty Hawk Funding Corp. 5.53% 10/23/98 19,000 18,939 Monsanto Co.: 5.51% 12/1/98 7,800 7,732 5.52% 11/3/98 7,000 6,966 5.52% 11/19/98 5,600 5,561 Salomon Smith Barney 5.45% 12/3/98 25,000 24,774 Three Rivers Funding Corp. 5.51% 12/1/98 9,113 9,034 Transamerica Finance Corp. 5.47% 1/26/99 12,000 11,802 Triple A One Funding Corp.: 5.55% 10/14/98 9,500 9,482 5.57% 10/23/98 19,000 18,939 TOTAL COMMERCIAL PAPER 212,937 (Cost $212,765)
MASTER NOTES - 0.2% Goldman Sachs Group L.P. (The) 5.6875% 1/27/99 (i) 18,000 18,000 (Cost $18,000)
CASH EQUIVALENTS - 9.0% MATURITY AMOUNT (000S) Investments in repurchase agreements (U.S. Treasury obligations), in a joint trading account at: 5%, dated 9/30/98 due 10/1/98 $ 2,731 2,731 5.77%, dated 9/30/98 due 10/1/98 6,129 6,128 SHARES (000S) Taxable Central Cash Fund (c) 1,051,993 1,051,993 TOTAL CASH EQUIVALENTS 1,060,852 (Cost $1,060,852) TOTAL INVESTMENT IN SECURITIES - 100% $ 11,772,672 (Cost $11,346,822)
FUTURES CONTRACTS EXPIRATION UNDERLYING UNREALIZED DATE FACE AMOUNT GAIN (LOSS) (000S) (000S) PURCHASED 568 S&P 500 Stock Index Contracts Dec. 1998 $ 145,692 $ 2,768 THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL INVESTMENT IN SECURITIES - 1.2%
LEGEND (a) Non-income producing (b) Standard & Poor's credit ratings are used in the absence of a rating by Moody's Investors Service, Inc. (c) At period end, the seven-day yield on the Taxable Central Cash Fund was 5.36%. The yield refers to the income earned by investing in the fund over the seven-day period, expressed as an annual percentage. (d) Debt obligation initially issued in zero coupon form which converts to coupon form at a specified rate and date. (e) Debt obligation initially issued at one coupon which converts to a higher coupon at a specified date. The rate shown is the rate at period end. (f) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $459,021,000 or 4.0% of net assets. (g) Security purchased on a delayed delivery or when-issued basis (see Note 2 of Notes to Financial Statements). (h) Security or a portion of the security was pledged to cover margin requirements for futures contracts. At the period end, the value of securities pledged amounted to $8,566,000. (i) The coupon rate shown on floating or adjustable rate securities represents the rate at period end. (j) For Foreign government obligations not individually rated by S&P or Moody's, the ratings listed are assigned to the securities by FMR, the fund's investment adviser, based principally on S&P and Moody's ratings of the sovereign credit of the issuing government. (k) Restricted securities - Investment in securities not registered under the Securities Act of 1933 (see Note 2 of Notes to Financial Statements). SECURITY ACQUISTION DATE ACQUISITION COST (000S) Alliance Gaming Corp. 7/28/98 $ 1,006 Bardell Associates Note Trust 12.5%, 11/1/08 4/19/94 $ 16,845 Fairchild Semi- 4/3/97 - 9/15/98 $ 5,472 conductor Corp. 11.74% 3/15/08 pay-in-kind (l) Affiliated company (see Note 8 of Notes to Financial Statements). (m) A portion of the security was sold on a delayed delivery or when-issued basis (see Note 2 of Notes to Financial Statements). OTHER INFORMATION The composition of long-term debt holdings as a percentage of total value of investments in securities, is as follows (ratings are unaudited): MOODY'S RATINGS S&P RATINGS Aaa, Aa, A 19.4% AAA, AA, A 18.4% Baa 7.5% BBB 7.8% Ba 2.9% BB 3.1% B 5.0% B 4.9% Caa 0.8% CCC 0.8% For some foreign government obligations, FMR has assigned the ratings for the sovereign credit of the issuing government. The percentage not rated by Moody's or S&P amounted to 0.8%. FMR has determined that unrated debt securities that are lower quality account for 0.1% of the total value of investment in securities. INCOME TAX INFORMATION At September 30, 1998, the aggregate cost of investment securities for income tax purposes was $11,419,188,000. Net unrealized appreciation aggregated $353,484,000, of which $1,056,555,000 related to appreciated investment securities and $703,071,000 related to depreciated investment securities. The fund hereby designates approximately $725,618,000 as a capital gain dividend for the purpose of the dividend paid deduction. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES AMOUNTS IN THOUSANDS (EXCEPT PER-SHARE AMOUNT) ASSETS INVESTMENT IN SECURITIES, AT VALUE $ 11,772,672 (INCLUDING REPURCHASE AGREEMENTS OF $8,859) (COST $11,346,822) - SEE ACCOMPANYING SCHEDULE COMMITMENT TO SELL SECURITIES ON $ (55,519) A DELAYED DELIVERY BASIS RECEIVABLE FOR SECURITIES SOLD ON 55,156 (363) A DELAYED DELIVERY BASIS RECEIVABLE FOR INVESTMENTS SOLD, 175,248 REGULAR DELIVERY CASH 878 RECEIVABLE FOR FUND SHARES SOLD 8,442 DIVIDENDS RECEIVABLE 8,951 INTEREST RECEIVABLE 65,740 OTHER RECEIVABLES 750 TOTAL ASSETS 12,032,318 LIABILITIES PAYABLE FOR INVESTMENTS 155,314 PURCHASED REGULAR DELIVERY DELAYED DELIVERY 196,586 PAYABLE FOR FUND SHARES 77,428 REDEEMED ACCRUED MANAGEMENT FEE 5,241 PAYABLE FOR DAILY VARIATION ON 4,473 FUTURES CONTRACTS OTHER PAYABLES AND ACCRUED 2,341 EXPENSES COLLATERAL ON SECURITIES LOANED, 15,040 AT VALUE TOTAL LIABILITIES 456,423 NET ASSETS $ 11,575,895 NET ASSETS CONSIST OF: PAID IN CAPITAL $ 8,966,390 UNDISTRIBUTED NET INVESTMENT 18,489 INCOME ACCUMULATED UNDISTRIBUTED NET 2,162,562 REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS NET UNREALIZED APPRECIATION 428,454 (DEPRECIATION) ON INVESTMENTS AND ASSETS AND LIABILITIES IN FOREIGN CURRENCIES NET ASSETS, FOR 634,669 SHARES $ 11,575,895 OUTSTANDING NET ASSET VALUE, OFFERING PRICE $18.24 AND REDEMPTION PRICE PER SHARE ($11,575,895 (DIVIDED BY) 634,669 SHARES) STATEMENT OF OPERATIONS AMOUNTS IN THOUSANDS YEAR ENDED SEPTEMBER 30, 1998 INVESTMENT INCOME $ 102,092 DIVIDENDS INTEREST (INCLUDING INCOME ON 382,908 SECURITIES LOANED OF $956) TOTAL INCOME 485,000 EXPENSES MANAGEMENT FEE $ 66,671 TRANSFER AGENT FEES 25,098 ACCOUNTING AND SECURITY LENDING 989 FEES NON-INTERESTED TRUSTEES' 70 COMPENSATION CUSTODIAN FEES AND EXPENSES 369 REGISTRATION FEES 146 AUDIT 224 LEGAL 70 INTEREST 3 MISCELLANEOUS 60 TOTAL EXPENSES BEFORE 93,700 REDUCTIONS EXPENSE REDUCTIONS (2,346) 91,354 NET INVESTMENT INCOME 393,646 REALIZED AND UNREALIZED GAIN (LOSS) NET REALIZED GAIN (LOSS) ON: INVESTMENT SECURITIES 2,250,398 FOREIGN CURRENCY TRANSACTIONS 876 FUTURES CONTRACTS (28,646) 2,222,628 CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON: INVESTMENT SECURITIES (1,969,086) ASSETS AND LIABILITIES IN 87 FOREIGN CURRENCIES FUTURES CONTRACTS 2,768 DELAYED DELIVERY (363) (1,966,594) COMMITMENTS NET GAIN (LOSS) 256,034 NET INCREASE (DECREASE) IN NET $ 649,680 ASSETS RESULTING FROM OPERATIONS STATEMENT OF CHANGES IN NET ASSETS AMOUNTS IN THOUSANDS YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS $ 393,646 $ 377,233 NET INVESTMENT INCOME NET REALIZED GAIN (LOSS) 2,222,628 749,581 CHANGE IN NET UNREALIZED (1,966,594) 1,371,526 APPRECIATION (DEPRECIATION) NET INCREASE (DECREASE) IN 649,680 2,498,340 NET ASSETS RESULTING FROM OPERATIONS DISTRIBUTIONS TO SHAREHOLDERS (405,621) (418,976) FROM NET INVESTMENT INCOME FROM NET REALIZED GAIN (679,853) (468,542) TOTAL DISTRIBUTIONS (1,085,474) (887,518) SHARE TRANSACTIONS 2,109,183 2,000,175 NET PROCEEDS FROM SALES OF SHARES REINVESTMENT OF DISTRIBUTIONS 1,066,099 871,972 COST OF SHARES REDEEMED (3,029,481) (3,290,756) NET INCREASE (DECREASE) IN 145,801 (418,609) NET ASSETS RESULTING FROM SHARE TRANSACTIONS TOTAL INCREASE (DECREASE) IN (289,993) 1,192,213 NET ASSETS NET ASSETS BEGINNING OF PERIOD 11,865,888 10,673,675 END OF PERIOD (INCLUDING $ 11,575,895 $ 11,865,888 UNDISTRIBUTED NET INVESTMENT INCOME OF $18,489 AND $21,392, RESPECTIVELY) OTHER INFORMATION SHARES SOLD 110,919 114,774 ISSUED IN REINVESTMENT OF 58,413 51,553 DISTRIBUTIONS REDEEMED (158,815) (189,437) NET INCREASE (DECREASE) 10,517 (23,110) FINANCIAL HIGHLIGHTS YEARS ENDED SEPTEMB ER 30, 1998 1997 1996 1995 1994 SELECTED PER-SHARE DATA NET ASSET VALUE, $ 19.01 $ 16.49 $ 15.47 $ 14.58 $ 14.97 BEGINNING OF PERIOD INCOME FROM INVESTMENT OPERATIONS NET INVESTMENT .61 B .59 B .62 .49 .34 INCOME NET REALIZED .37 3.35 .96 .93 .21 AND UNREALIZED GAIN (LOSS) TOTAL FROM .98 3.94 1.58 1.42 .55 INVESTMENT OPERATIONS LESS DISTRIBUTIONS FROM NET (.64) (.67) (.56) (.44) (.44) INVESTMENT INCOME FROM NET (1.11) (.75) - - (.45) REALIZED GAIN IN EXCESS OF NET - - - (.09) (.05) REALIZED GAIN TOTAL (1.75) (1.42) (.56) (.53) (.94) DISTRIBUTIONS NET ASSET VALUE, $ 18.24 $ 19.01 $ 16.49 $ 15.47 $ 14.58 END OF PERIOD TOTAL RETURN A 5.34% 25.15% 10.37% 10.09% 3.60% RATIOS AND SUPPLEMENTAL DATA NET ASSETS, END $ 11,576 $ 11,866 $ 10,674 $ 11,084 $ 11,792 OF PERIOD (IN MILLIONS) RATIO OF EXPENSES .76% .79% .95% .97% 1.04% TO AVERAGE NET ASSETS RATIO OF EXPENSES .74% C .78% C .93% C .97% 1.04% TO AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS RATIO OF NET 3.19% 3.39% 3.64% 4.27% 3.63% INVESTMENT INCOME TO AVERAGE NET ASSETS PORTFOLIO TURNOVER 136% 79% 131% 137% 109% RATE A THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 7 OF NOTES TO FINANCIAL STATEMENTS). B NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. C FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES (SEE NOTE 7 OF NOTES TO FINANCIAL STATEMENTS). NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1998 1. SIGNIFICANT ACCOUNTING POLICIES. Fidelity Asset Manager (the fund) is a fund of Fidelity Charles Street Trust (the trust) and is authorized to issue an unlimited number of shares. The trust is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as an open-end management investment company organized as a Massachusetts business trust. The financial statements have been prepared in conformity with generally accepted accounting principles which require management to make certain estimates and assumptions at the date of the financial statements. The following summarizes the significant accounting policies of the fund: SECURITY VALUATION. Equity securities for which quotations are readily available are valued at last sale price, or if no sale price, at the closing bid price. Debt securities for which quotations are readily available are valued by a pricing service at their market values as determined by their most recent bid prices in the principal market (sales prices if the principal market is an exchange) in which such securities are normally traded. Securities (including restricted securities) for which market quotations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Board of Trustees. Short-term securities with remaining maturities of sixty days or less for which quotations are not readily available are valued at amortized cost or original cost plus accrued interest, both of which approximate current value. FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange at period end. Purchases and sales of securities, income receipts and expense payments are translated into U.S. dollars at the prevailing exchange rate on the respective dates of the transactions. Net realized gains and losses on foreign currency transactions represent net gains and losses from sales and maturities of foreign currency contracts, disposition of foreign currencies, the difference between the amount of net investment income accrued and the U.S. dollar amount actually received, and gains and losses between trade date and settlement on purchases and sales of securities. The effects of changes in foreign currency exchange rates on investments in securities are included with the net realized and unrealized gain or loss on investment securities. INCOME TAXES. As a qualified regulated investment company under Subchapter M of the Internal Revenue Code, the fund is not subject to income taxes to the extent that it distributes substantially all of its taxable income for its fiscal year. The schedule of investments includes information regarding income taxes under the caption "Income Tax Information." INVESTMENT INCOME. Dividend income is recorded on the ex-dividend date, except certain dividends from foreign securities where the ex-dividend date 1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED INVESTMENT INCOME - CONTINUED may have passed, are recorded as soon as the fund is informed of the ex-dividend date. Non-cash dividends included in dividend income, if any, are recorded at the fair market value of the securities received. Interest income, which includes accretion of original interest income, is accrued as earned. Investment income is recorded net of foreign taxes withheld where recovery of such taxes is uncertain. EXPENSES. Most expenses of the trust can be directly attributed to a fund. Expenses which cannot be directly attributed are apportioned among the funds in the trust. DEFERRED TRUSTEE COMPENSATION. Under a Deferred Compensation Plan (the Plan) non-interested Trustees must defer receipt of a portion of, and may elect to defer receipt of an additional portion of, their annual compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the fund or are invested in a cross-section of other Fidelity funds. Deferred amounts remain in the fund until distributed in accordance with the Plan. DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences, which may result in distribution reclassifications, are primarily due to differing treatments for paydown gains/losses on certain securities, foreign currency transactions, passive foreign investment companies (PFIC), market discount, partnerships, and losses deferred due to wash sales and futures. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to paid in capital. Undistributed net investment income and accumulated undistributed net realized gain (loss) on investments and foreign currency transactions may include temporary book and tax basis differences which will reverse in a subsequent period. Any taxable income or gain remaining at fiscal year end is distributed in the following year. SECURITY TRANSACTIONS. Security transactions are accounted for as of trade date. Gains and losses on securities sold are determined on the basis of identified cost. 2. OPERATING POLICIES. FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency contracts to facilitate transactions in foreign-denominated securities. Losses may arise from changes in the value of the foreign currency or if the counterparties do not perform under the contracts' terms. The U.S. dollar value of foreign currency contracts is determined using contractual currency exchange rates established at the time of each trade. 2. OPERATING POLICIES - CONTINUED JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the Securities and Exchange Commission (the SEC), the fund, along with other affiliated entities of Fidelity Management & Research Company (FMR), may transfer uninvested cash balances into one or more joint trading accounts. These balances are invested in one or more repurchase agreements for U.S. Treasury or Federal Agency obligations. REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency securities are transferred to an account of the fund, or to the Joint Trading Account, at a bank custodian. The securities are marked-to-market daily and maintained at a value at least equal to the principal amount of the repurchase agreement (including accrued interest). FMR, the fund's investment adviser, is responsible for determining that the value of the underlying securities remains in accordance with the market value requirements stated above. TAXABLE CENTRAL CASH FUND. Pursuant to an Exemptive Order issued by the SEC, the fund may invest in the Taxable Central Cash Fund (the Cash Fund) managed by Fidelity Investments Money Management, Inc., an affiliate of FMR. The Cash Fund is an open-end money market fund available only to investment companies and other accounts managed by FMR and its affiliates. The Cash Fund seeks preservation of capital, liquidity, and current income by investing in U.S. Treasury securities and repurchase agreements for these securities. Income distributions from the Cash Fund are declared daily and paid monthly from net interest income. Income distributions earned by the fund are recorded as interest income in the accompanying financial statements. DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell securities on a delayed delivery basis. Payment and delivery may take place a month or more after the date of the transaction. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. The market values of the securities purchased or sold on a delayed delivery basis are identified as such in the fund's schedule of investments. The fund may receive compensation for interest forgone in the purchase of a delayed delivery security. With respect to purchase commitments, the fund identifies securities as segregated in its custodial records with a value at least equal to the amount of the commitment. Losses may arise due to changes in the market value of the underlying securities or if the counterparty does not perform under the contract. FUTURES CONTRACTS. The fund may use futures contracts to manage its exposure to the stock market. Buying futures tends to increase the fund's exposure to the underlying instrument, while selling futures tends to decrease the fund's exposure to the underlying instrument or hedge other fund investments. Futures contracts involve, to varying degrees, risk of loss in excess of the futures variation 2. OPERATING POLICIES - CONTINUED FUTURES CONTRACTS - CONTINUED margin reflected in the Statement of Assets and Liabilities. The underlying face amount at value of any open futures contracts at period end is shown in the schedule of investments under the caption "Futures Contracts." This amount reflects each contract's exposure to the underlying instrument at period end. Losses may arise from changes in the value of the underlying instruments or if the counterparties do not perform under the contracts' terms. Gains (losses) are realized upon the expiration or closing of the futures contracts. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. RESTRICTED SECURITIES. The fund is permitted to invest in securities that are subject to legal or contractual restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are registered. Disposal of these securities may involve time-consuming negotiations and expense, and prompt sale at an acceptable price may be difficult. At the end of the period, restricted securities (excluding 144A issues) amounted to $22,525,000 or 0.2% of net assets. 3. PURCHASES AND SALES OF INVESTMENTS. Purchases and sales of securities, other than short-term securities, aggregated $15,314,639,000 and $15,923,932,000, respectively, of which U.S. government and government agency obligations aggregated $5,308,461,000 and $5,297,346,000, respectively. The market value of futures contracts opened and closed during the period amounted to $518,110,000 and $346,540,000, respectively. 4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES. MANAGEMENT FEE. As the fund's investment adviser, FMR receives a monthly fee that is calculated on the basis of a group fee rate plus a fixed individual fund fee rate applied to the average net assets of the fund. The group fee rate is the weighted average of a series of rates and is based on the monthly average net assets of all the mutual funds advised by FMR. The rates ranged from .2500% to .5200% for the period. The annual individual fund fee rate is .25%. In the event that these rates were lower than the contractual rates in effect during the period, FMR voluntarily implemented the above rates, as they resulted in the same or a lower management fee. For the period, the management fee was equivalent to an annual rate of 0.54% of average net assets. TRANSFER AGENT FEES. Fidelity Service Company, Inc. (FSC), an affiliate of FMR, is the fund's transfer, dividend disbursing and shareholder servicing agent. FSC receives account fees and asset-based fees that vary according to account size and type of account. FSC pays for typesetting, printing and mailing 4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED TRANSFER AGENT FEES - CONTINUED of all shareholder reports, except proxy statements. For the period, the transfer agent fees were equivalent to an annual rate of 0.20% of average net assets. ACCOUNTING AND SECURITY LENDING FEES. FSC maintains the fund's accounting records and administers the security lending program. The security lending fee is based on the number and duration of lending transactions. The accounting fee is based on the level of average net assets for the month plus out-of-pocket expenses. BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio transactions with brokerage firms which are affiliates of FMR. The commissions paid to these affiliated firms were $1,582,000 for the period. 5. BANK BORROWINGS. The fund is permitted to have bank borrowings for temporary or emergency purposes to fund shareholder redemptions. The fund has established borrowing arrangements with certain banks. Under the most restrictive arrangement, the fund must pledge to the bank securities having a market value in excess of 220% of the total bank borrowings. The interest rate on the borrowings is the bank's base rate, as revised from time to time. The maximum loan and the average daily loan balance during the period for which the loan was outstanding amounted to $17,946,000. The weighted average interest rate was 5.79%. 6. SECURITY LENDING. The fund loaned securities to certain brokers who paid the fund negotiated lenders' fees. These fees are included in interest income. The fund receives U.S. Treasury obligations and/or cash as collateral against the loaned securities, in an amount at least equal to 102% of the market value of the loaned securities at the inception of each loan. This collateral must be maintained at not less than 100% of the market value of the loaned securities during the period of the loan. At period end, the value of the securities loaned and the value of collateral amounted to $13,960,000 and $15,040,000, respectively. 7. EXPENSE REDUCTIONS. FMR directed certain portfolio trades to brokers who paid a portion of the fund's expenses. For the period, the fund's expenses were reduced by $1,479,000 under this arrangement. In addition, the fund has entered into arrangements with its custodian and transfer agent whereby credits realized as a result of uninvested cash balances were used to reduce a portion of the fund's expenses. During the period, the fund's custodian and transfer agent fees were reduced by $134,000 and $733,000, respectively, under these arrangements. 8. TRANSACTIONS WITH AFFILIATED COMPANIES. An affiliated company is a company in which the fund has ownership of at least 5% of the voting securities. Transactions during the period with companies which are or were affiliates are as follows: SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES PURCHASE SALES DIVIDEND VALUE AFFILIATE COST COST INCOME (000S) Lamonts Apparel, Inc. $ - $ - $ - $ 404 TOTALS $ - $ - $ - $ 404 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Fidelity Charles Street Trust and the Shareholders of Fidelity Asset Manager: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Fidelity Asset Manager (a fund of Fidelity Charles Street Trust) at September 30, 1998, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fidelity Asset Manager's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at September 30, 1998 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. /s/PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Boston, Massachusetts November 10, 1998 DISTRIBUTIONS The Board of Trustees of (Fidelity Asset Manager) voted to pay to shareholders of record at the opening of business on record date, the following distributions derived from capital gains realized from sales of portfolio securities, and dividends derived from net investment income: PAY DATE 12/22/97 RECORD DATE 12/19/97 DIVIDENDS $.19 SHORT-TERM CAPITAL GAINS $.39 LONG-TERM CAPITAL GAINS $.72 LONG-TERM CAPITAL GAIN BREAKDOWN: 28% rate 59.72% 20% rate 40.28% A total of 6.40% of the dividends distributed during the fiscal year was derived from interest on U.S. Government securities which is generally exempt from state income tax. A total of 16.15% of the dividends distributed during the fiscal year qualifies for the dividends-received deduction for corporate shareholders. The fund will notify shareholders in January 1999 of the applicable percentage for use in preparing 1998 income tax returns. MANAGING YOUR INVESTMENTS Fidelity offers several ways to conveniently manage your personal investments via your telephone or PC. You can access your account information, conduct trades and research your investments 24 hours a day. BY PHONE Fidelity TouchTone Xpress(registered trademark) provides a single toll-free number to access account balances, positions, quotes and trading. It's easy to navigate the service, and on your first call, the system will help you create a personal identification number (PIN) for security. (PHONE_GRAPHIC)TOUCHTONE XPRESS 1-800-544-5555 PRESS 1 For mutual fund and brokerage trading. 2 For quotes.* 3 For account balances and holdings. 4 To review orders and mutual fund activity. 5 To change your PIN. *0 To speak to a Fidelity representative. BY PC Fidelity's Web site on the Internet provides a wide range of information, including daily financial news, fund performance, interactive planning tools and news about Fidelity products and services. (PC_GRAPHIC)FIDELITY'S WEB SITE WWW.FIDELITY.COM If you are not currently on the Internet, call Fidelity at 1-800-544-7272 and we'll send you an America Online CD or disk with up to 50 free hours of Web access. (PC_GRAPHIC) FIDELITY ON-LINE XPRESS+TM Fidelity On-line Xpress+ software for Windows combines comprehensive portfolio management capabilities, securities trading and access to research and analysis tools . . . all on your desktop. Call Fidelity at 1-800-544-7272 or visit our Web site for more information on how to manage your investments via your PC. * WHEN YOU CALL THE QUOTES LINE, PLEASE REMEMBER THAT A FUND'S YIELD AND RETURN WILL VARY AND, EXCEPT FOR MONEY MARKET FUNDS, SHARE PRICE WILL ALSO VARY. THIS MEANS THAT YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. THERE IS NO ASSURANCE THAT MONEY MARKET FUNDS WILL BE ABLE TO MAINTAIN A STABLE $1 SHARE PRICE; AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT. TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE, REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS, AND THE EFFECTS OF ANY SALES CHARGES. TO VISIT FIDELITY For directions and hours, please call 1-800-544-9797. ARIZONA 7373 N. Scottsdale Road Scottsdale, AZ CALIFORNIA 815 East Birch Street Brea, CA 851 East Hamilton Avenue Campbell, CA 527 North Brand Boulevard Glendale, CA 19100 Von Karman Avenue Irvine, CA 10100 Santa Monica Blvd. Los Angeles, CA 251 University Avenue Palo Alto, CA 1760 Challenge Way Sacramento, CA 7676 Hazard Center Drive San Diego, CA 455 Market Street San Francisco, CA 950 Northgate Drive San Rafael, CA 1400 Civic Drive Walnut Creek, CA 6300 Canoga Avenue Woodland Hills, CA COLORADO 1625 Broadway Denver, CO CONNECTICUT 48 West Putnam Avenue Greenwich, CT 265 Church Street New Haven, CT 300 Atlantic Street Stamford, CT 29 South Main Street West Hartford, CT DELAWARE 222 Delaware Avenue Wilmington, DE FLORIDA 4400 N. Federal Highway Boca Raton, FL 90 Alhambra Plaza Coral Gables, FL 4090 N. Ocean Boulevard Ft. Lauderdale, FL 1907 West State Road 434 Longwood, FL 8880 Tamiami Trail, North Naples, FL 2401 PGA Boulevard Palm Beach Gardens, FL 8065 Beneva Road Sarasota, FL 1502 N. Westshore Blvd. Tampa, FL GEORGIA 3445 Peachtree Road, N.E. Atlanta, GA 1000 Abernathy Road Atlanta, GA HAWAII 700 Bishop Street Honolulu, HI ILLINOIS One North Franklin Street Chicago, IL 1415 West 22nd Street Oak Brook, IL 1700 East Golf Road Schaumburg, IL 3232 Lake Avenue Wilmette, IL INDIANA 4729 East 82nd Street Indianapolis, IN MAINE 3 Canal Plaza Portland, ME MARYLAND 7401 Wisconsin Avenue Bethesda, MD 1 West Pennsylvania Ave. Towson, MD MASSACHUSETTS 470 Boylston Street Boston, MA 155 Congress Street Boston, MA 25 State Street Boston, MA 300 Granite Street Braintree, MA 44 Mall Road Burlington, MA 416 Belmont Street Worcester, MA MICHIGAN 280 North Woodward Ave. Birmingham, MI 29155 Northwestern Hwy. Southfield, MI MINNESOTA 7600 France Avenue South Edina, MN MISSOURI 700 West 47th Street Kansas City, MO 8885 Ladue Road Ladue, MO 200 North Broadway St. Louis, MO NEW JERSEY 150 Essex Street Millburn, NJ 56 South Street Morristown, NJ 501 Route 17, South Paramus, NJ NEW YORK 1055 Franklin Avenue Garden City, NY 999 Walt Whitman Road Melville, L.I., NY 1271 Avenue of the Americas New York, NY 71 Broadway New York, NY 350 Park Avenue New York, NY NORTH CAROLINA 4611 Sharon Road Charlotte, NC 2200 West Main Street Durham, NC OHIO 600 Vine Street Cincinnati, OH 28699 Chagrin Boulevard Woodmere Village, OH OREGON 16850 SW 72 Avenue Tigard, OR PENNSYLVANIA 1735 Market Street Philadelphia, PA 439 Fifth Avenue Pittsburgh, PA TENNESSEE 6150 Poplar Road Memphis, TN TEXAS 10000 Research Boulevard Austin, TX 4017 Northwest Parkway Dallas, TX 1155 Dairy Ashford Street Houston, TX 2701 Drexel Drive Houston, TX 400 East Las Colinas Blvd. Irving, TX 14100 San Pedro San Antonio, TX 19740 IH 45 North Spring, TX UTAH 215 South State Street Salt Lake City, UT VIRGINIA 8180 Greensboro Drive McLean, VA WASHINGTON 411 108th Avenue, N.E. Bellevue, WA 511 Pine Street Seattle, WA WASHINGTON, DC 1900 K Street, N.W. Washington, DC WISCONSIN 595 North Barker Road Brookfield, WI TO WRITE FIDELITY If more than one address is listed, please locate the address that is closest to you. We'll give your correspondence immediate attention and send you written confirmation upon completion of your request. (LETTER_GRAPHIC)MAKING CHANGES TO YOUR ACCOUNT (such as changing name, address, bank, etc.) Fidelity Investments P.O. Box 770001 Cincinnati, OH 45277-0002 (LETTER_GRAPHIC)FOR NON-RETIREMENT ACCOUNTS BUYING SHARES Fidelity Investments P.O. Box 770001 Cincinnati, OH 45277-0003 OVERNIGHT EXPRESS Fidelity Investments 2300 Litton Lane - KH1A Hebron, KY 41048 SELLING SHARES Fidelity Investments P.O. Box 660602 Dallas, TX 75266-0602 OVERNIGHT EXPRESS Fidelity Investments Attn: Redemptions - CP6I 400 East Las Colinas Blvd. Irving, TX 75309-5517 GENERAL CORRESPONDENCE Fidelity Investments P.O. Box 500 Merrimack, NH 03054-0500 (LETTER_GRAPHIC)FOR RETIREMENT ACCOUNTS BUYING SHARES Fidelity Investments P.O. Box 770001 Cincinnati, OH 45277-0003 SELLING SHARES Fidelity Investments P.O. Box 660602 Dallas, TX 75266-0602 OVERNIGHT EXPRESS Fidelity Investments Attn: Redemptions - CP6R 400 East Las Colinas Blvd. Irving, TX 75309-5517 GENERAL CORRESPONDENCE Fidelity Investments P.O. Box 500 Merrimack, NH 03054-0500 INVESTMENT ADVISER Fidelity Management & Research Company Boston, MA INVESTMENT SUB-ADVISERS Fidelity Management & Research (U.K.) Inc., London, England Fidelity Management & Research (Far East) Inc., Tokyo, Japan OFFICERS Edward C. Johnson 3d, President Robert C. Pozen, Senior Vice President Robert A. Lawrence, Vice President Richard C. Habermann, Vice President Thomas Sprague, Vice President Charles S. Morrison, Vice President John Todd, Vice President Eric D. Roiter, Secretary Richard A. Silver, Treasurer John H. Costello, Assistant Treasurer Leonard M. Rush, Assistant Treasurer BOARD OF TRUSTEES Ralph F. Cox * Phyllis Burke Davis * Robert M. Gates * Edward C. Johnson 3d E. Bradley Jones * Donald J. Kirk * Peter S. Lynch Marvin L. Mann * William O. McCoy * Gerald C. McDonough * Robert C. Pozen Thomas R. Williams * ADVISORY BOARD J. Gary Burkhead * INDEPENDENT TRUSTEES GENERAL DISTRIBUTOR Fidelity Distributors Corporation Boston, MA TRANSFER AND SHAREHOLDER SERVICING AGENT Fidelity Service Company, Inc. Boston, MA CUSTODIAN The Chase Manhattan Bank New York, NY FIDELITY'S ASSET ALLOCATION FUNDS Asset Manager SM Asset Manager: Growth SM Asset Manager: Income SM Fidelity Freedom Funds(registered trademark)- Income, 2000, 2010, 2020, 2030 THE FIDELITY TELEPHONE CONNECTION MUTUAL FUND 24-HOUR SERVICE Exchanges/Redemptions 1-800-544-7777 Account Assistance 1-800-544-6666 Product Information 1-800-544-8888 Retirement Accounts 1-800-544-4774 (8 a.m. - 9 p.m.) TDD Service 1-800-544-0118 for the deaf and hearing impaired (9 a.m. - 9 p.m. Eastern time) (registered trademark) TouchTone Xpress(registered trademark)(AUTOMATED GRAPHIC) 1-800-544-5555 (AUTOMATED GRAPHIC)AUTOMATED LINE FOR QUICKEST SERVICE FAA-ANN-1198 64296 1.537740.101 (FIDELITY LOGO GRAPHIC)(REGISTERED TRADEMARK) Corporate Headquarters 82 Devonshire St., Boston, MA 02109 www.fidelity.com FIDELITY SHORT-INTERMEDIATE GOVERNMENT FUND ANNUAL REPORT SEPTEMBER 30, 1998 (2 Fidelity Logo Graphics)(registered trademark) CONTENTS PRESIDENT'S MESSAGE 3 NED JOHNSON ON INVESTING STRATEGIES. PERFORMANCE 4 HOW THE FUND HAS DONE OVER TIME. FUND TALK 7 THE MANAGER'S REVIEW OF FUND PERFORMANCE, STRATEGY AND OUTLOOK. INVESTMENT CHANGES 10 A SUMMARY OF MAJOR SHIFTS IN THE FUND'S INVESTMENTS OVER THE PAST SIX MONTHS. INVESTMENTS 11 A COMPLETE LIST OF THE FUND'S INVESTMENTS WITH THEIR MARKET VALUES. FINANCIAL STATEMENTS 14 STATEMENTS OF ASSETS AND LIABILITIES, OPERATIONS, AND CHANGES IN NET ASSETS, AS WELL AS FINANCIAL HIGHLIGHTS. NOTES 18 NOTES TO THE FINANCIAL STATEMENTS. REPORT OF INDEPENDENT 21 THE AUDITORS' OPINION. ACCOUNTANTS DISTRIBUTIONS 22 To reduce expenses and demonstrate respect for our environment, we have initiated a project through which we will begin eliminating duplicate copies of most financial reports and prospectuses to most households, even if they have more than one account in the fund. If additional copies of financial reports, prospectuses or historical account information are needed, please call 1-800-544-6666. THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS. MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK. FOR MORE INFORMATION ON ANY FIDELITY FUND, INCLUDING CHARGES AND EXPENSES, CALL 1-800-544-8888 FOR A FREE PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY. PRESIDENT'S MESSAGE (PHOTO_OF_EDWARD_C_JOHNSON_3D) 0DEAR SHAREHOLDER: The stock and bond markets continued to be influenced by competing factors as the third quarter of 1998 ended. On the one hand, low inflation, low unemployment and moderate growth in the U.S. economy provided a foundation for positive returns. But growing concerns about U.S. corporate earnings, combined with fears about the health of the economies and financial markets in Japan, Russia and many emerging markets, led to a continuation of the volatility that has marked most of the year. While it's impossible to predict the future direction of the markets with any degree of certainty, there are certain basic principles that can help investors plan for their future needs. The longer your investment time frame, the less likely it is that you will be affected by short-term market volatility. A 10-year investment horizon appropriate for saving for a college education, for example, enables you to weather market cycles in a long-term fund, which may have a higher risk potential, but also has a higher potential rate of return. An intermediate-length fund could make sense if your investment horizon is two to four years, while a short-term bond fund could be the right choice if you need your money in one or two years. If your time horizon is less than a year, you might want to consider moving some of your bond investment into a money market fund. These funds seek income and a stable share price by investing in high-quality, short-term investments. Of course, it's important to remember that there is no assurance that a money market fund will achieve its goal of maintaining a stable net asset value of $1.00 per share, and that these types of funds are neither insured nor guaranteed by any agency of the U.S. government. Finally, no matter what your time horizon or portfolio diversity, it makes good sense to follow a regular investment plan, investing a certain amount of money in a fund at the same time each month or quarter and periodically reviewing your overall portfolio. By doing so, you won't get caught up in the excitement of a rapidly rising market, nor will you buy all your shares at market highs. While this strategy - known as dollar cost averaging - won't assure a profit or protect you from a loss in a declining market, it should help you lower the average cost of your purchases. If you have questions, please call us at 1-800-544-8888. We are available 24 hours a day, seven days a week to provide you the information you need to make the investments that are right for you. Best regards, Edward C. Johnson 3d PERFORMANCE: THE BOTTOM LINE There are several ways to evaluate a fund's historical performance. You can look at the total percentage change in value, the average annual percentage change or the growth of a hypothetical $10,000 investment. Total return reflects the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains (the profits earned upon the sale of securities that have grown in value). You can also look at the fund's income, as reflected in the fund's yield, to measure performance. If Fidelity had not reimbursed certain fund expenses, life of fund total returns and dividends would have been lower. CUMULATIVE TOTAL RETURNS PERIODS ENDED SEPTEMBER PAST 1 PAST 5 LIFE OF 30, 1998 YEAR YEARS FUND FIDELITY 7.82% 30.12% 48.67% SHORT-INTERMEDIATE GOVERNMENT LB 1-5 YEAR US 9.12% 34.72% N/A GOVERNMENT BOND SB TREAS/AGENCY 9.12% 34.59% N/A 1-5 YEAR SHORT-INTERMEDIATE 8.25% 29.67% N/A US GOVERNMENT FUNDS AVERAGE CUMULATIVE TOTAL RETURNS show the fund's performance in percentage terms over a set period - in this case, one year, five years or since the fund started on September 13, 1991. For example, if you had invested $1,000 in a fund that had a 5% return over the past year, the value of your investment would be $1,050. You can compare the fund's returns to the performance of the Lehman Brothers 1-5 Year U.S. Government Bond Index - a market value weighted performance benchmark for government fixed-rate debt issues with maturities between one and five years and the Salomon Brothers Treasury/Agency 1-5 year Index - a market value weighted index of U.S. Treasury and U.S. government agency securities with fixed-rate coupons and weighted average lives between one and five years. To measure how the fund's performance stacked up against its peers, you can compare it to the short-intermediate U.S. government funds average, which reflects the performance of mutual funds with similar objectives tracked by Lipper Analytical Services, Inc. The past one year average represents a peer group of 101 mutual funds. These benchmarks reflect reinvestment of dividends and capital gains, if any, and exclude the effect of sales charges. AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED PAST 1 PAST 5 LIFE OF SEPTEMBER 30, 1998 YEAR YEARS FUND FIDELITY 7.82% 5.41% 5.78% SHORT-INTERMEDIAT E GOVERNMENT LB 1-5 YEAR US 9.12% 6.14% N/A GOVERNMENT BOND SB TREAS/AGENCY 1-5 9.12% 6.12% N/A YEAR SHORT-INTERMEDIAT 8.25% 5.31% N/A E US GOVERNMENT FUNDS AVERAGE AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and show you what would have happened if the fund had performed at a constant rate each year. (Note: Lipper calculates average annual total returns by annualizing each fund's total return, then taking an arithmetic average. This may produce a slightly different figure than that obtained by averaging the cumulative total returns and annualizing the result.) $10,000 OVER LIFE OF FUND Short-Intermediate Govt. LB 1-5 Year U.S. Govt 00464 LB069 1991/09/30 10000.00 10000.00 1991/10/31 10124.47 10116.21 1991/11/30 10206.40 10230.40 1991/12/31 10363.10 10424.16 1992/01/31 10270.73 10373.36 1992/02/29 10301.41 10400.56 1992/03/31 10286.46 10376.96 1992/04/30 10374.47 10477.88 1992/05/31 10511.20 10606.46 1992/06/30 10602.19 10742.90 1992/07/31 10620.67 10908.11 1992/08/31 10766.62 11016.23 1992/09/30 10813.25 11147.05 1992/10/31 10714.24 11038.93 1992/11/30 10721.93 11002.29 1992/12/31 10851.32 11123.90 1993/01/31 11000.33 11297.65 1993/02/28 11099.58 11429.82 1993/03/31 11141.22 11469.61 1993/04/30 11190.03 11555.70 1993/05/31 11192.99 11518.61 1993/06/30 11276.42 11640.89 1993/07/31 11314.31 11662.02 1993/08/31 11364.67 11800.04 1993/09/30 11382.56 11838.47 1993/10/31 11391.68 11867.25 1993/11/30 11374.03 11842.07 1993/12/31 11424.48 11889.05 1994/01/31 11516.80 11986.60 1994/02/28 11419.40 11867.25 1994/03/31 11219.00 11751.26 1994/04/30 11165.11 11683.38 1994/05/31 11169.90 11695.74 1994/06/30 11175.51 11713.50 1994/07/31 11292.35 11842.07 1994/08/31 11315.67 11878.93 1994/09/30 11247.75 11815.55 1994/10/31 11255.23 11830.38 1994/11/30 11211.34 11771.26 1994/12/31 11267.16 11797.11 1995/01/31 11430.33 11976.26 1995/02/28 11611.08 12179.01 1995/03/31 11673.28 12246.67 1995/04/30 11797.39 12372.55 1995/05/31 12051.10 12655.77 1995/06/30 12114.07 12729.50 1995/07/31 12143.32 12758.95 1995/08/31 12210.19 12847.06 1995/09/30 12277.38 12918.99 1995/10/31 12383.41 13042.84 1995/11/30 12503.72 13178.16 1995/12/31 12603.00 13290.78 1996/01/31 12715.55 13409.91 1996/02/29 12636.33 13319.32 1996/03/31 12585.83 13279.31 1996/04/30 12564.15 13268.52 1996/05/31 12563.92 13277.51 1996/06/30 12650.02 13392.38 1996/07/31 12698.67 13440.48 1996/08/31 12733.63 13474.42 1996/09/30 12851.01 13620.75 1996/10/31 13025.35 13807.54 1996/11/30 13146.05 13936.34 1996/12/31 13114.89 13902.18 1997/01/31 13166.72 13965.11 1997/02/28 13200.86 13991.64 1997/03/31 13142.47 13949.60 1997/04/30 13254.65 14083.80 1997/05/31 13341.05 14185.40 1997/06/30 13439.43 14294.87 1997/07/31 13624.99 14500.54 1997/08/31 13622.68 14483.91 1997/09/30 13737.33 14615.63 1997/10/31 13851.70 14752.29 1997/11/30 13885.72 14781.29 1997/12/31 13981.27 14891.21 1998/01/31 14136.15 15062.04 1998/02/28 14137.61 15059.34 1998/03/31 14176.84 15110.82 1998/04/30 14226.61 15183.42 1998/05/31 14298.73 15274.23 1998/06/30 14360.91 15361.00 1998/07/31 14425.64 15427.08 1998/08/31 14596.14 15663.77 1998/09/30 14811.37 15948.57 IMATRL PRASUN SHR__CHT 19980930 19981007 121754 R00000000000087 $10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was invested in Fidelity Short-Intermediate Government Fund on September 30, 1991, shortly after the fund started. As the chart shows, by September 30, 1998 the value of the investment would have grown to $14,811 - a 48.11% increase on the initial investment. For comparison, look at how the Lehman Brothers 1-5 Year U.S. Government Bond Index did over the same period. With dividends and capital gains, if any, reinvested, the same $10,000 investment would have grown to $15,949 - a 59.49% increase. Going forward, the fund will compare its performance to that of the Lehman Brothers 1-5 Year U.S. Government Bond index rather than the Salomon Brothers Treasury/Agency 1-5 Year Index. The indexes include the same type of bonds, and their performance is not materially different. The fund is changing to the Lehman Brothers index mainly because Lehman Brothers indexes are used by most other Fidelity bond funds. For comparison, both indexes are shown on page 4. (checkmark)UNDERSTANDING PERFORMANCE HOW A FUND DID YESTERDAY IS NO GUARANTEE OF HOW IT WILL DO TOMORROW. BOND PRICES, FOR EXAMPLE, GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. IN TURN, THE SHARE PRICE, RETURN AND YIELD OF A FUND THAT INVESTS IN BONDS WILL VARY. THAT MEANS IF YOU SELL YOUR SHARES DURING A MARKET DOWNTURN, YOU MIGHT LOSE MONEY. BUT IF YOU CAN RIDE OUT THE MARKET'S UPS AND DOWNS, YOU MAY HAVE A GAIN. TOTAL RETURN COMPONENTS YEARS ENDED SEPTEM BER 30, 1998 1997 1996 1995 1994 DIVIDEND 6.22% 6.36% 6.46% 7.00% 5.55% RETURNS CAPITAL 1.60% 0.54% -1.79% 2.15% -6.73% RETURNS TOTAL RETURNS 7.82% 6.90% 4.67% 9.15% -1.18% TOTAL RETURN COMPONENTS include both dividend returns and capital returns. A dividend return reflects the actual dividends paid by the fund. A capital return reflects both the amount paid by the fund to shareholders as capital gain distributions and changes in the fund's share price. Both returns assume the dividends or capital gains, if any, paid by the fund are reinvested. DIVIDENDS AND YIELD PERIODS ENDED PAST 1 PAST 6 PAST 1 SEPTEMBER 30, MONTH MONTHS YEAR 1998 DIVIDENDS PER 4.91(CENTS) 29.35(CENTS) 56.04(CENTS) SHARE ANNUALIZED 6.31% 6.23% 5.96% DIVIDEND RATE 30-DAY 4.90% - - ANNUALIZED YIELD DIVIDENDS per share show the income paid by the fund for a set period. If you annualize this number, based on an average share price of $9.46 over the past one month, $9.40 over the past six months and $9.40 over the past one year, you can compare the fund's income over these three periods. The 30-day annualized YIELD is a standard formula for all funds based on the yields of the bonds in the fund, averaged over the past 30 days. This figure shows you the yield characteristics of the fund's investments at the end of the period. It also helps you compare funds from different companies on an equal basis. FUND TALK: THE MANAGER'S OVERVIEW MARKET RECAP As a safe haven from turbulent stock markets worldwide, bond markets reaped the benefits from the flight to quality by anxious investors during the 12-month period ending September 30, 1998. The Lehman Brothers Aggregate Bond Index - a broad measure of the U.S. taxable investment-grade bond market - returned 11.51% over the past year, two and one-half times higher than the 4.54% return generated for the six-month period ending March 31, 1998. The buying surge sent Treasury-bond yields - which move in the opposite direction of bond prices - to their lowest level in over three decades, as the yield on the benchmark 30-year bond fell to 4.96%. In spite of the global economic crisis that dominated the period, the U.S. enjoyed low interest rates, low inflation and a stable economy, which aided the performance of corporate bonds. The Lehman Brothers Corporate Bond Index returned 11.07% for the 12-month period. Mortgage-backed bonds also performed well, although lower interest rates resulted in higher refinancing activity. The Lehman Brothers Mortgage Backed Securities Index had a 12-month return of 8.62%. Interest rates fell even lower late in the period, as the Federal Reserve lowered the fed funds rate by 0.25%, the first rate cut in nearly three years. The period's biggest losers were shareholders of emerging-market debt, as the JP Morgan Emerging Markets Bond Index lost 20.89% over the past 12 months. (PHOTOGRAPH OF CURT HOLLINGSWORTH) An interview with Curt Hollingsworth, Portfolio Manager of Fidelity Short-Intermediate Government Fund Q. HOW DID THE FUND PERFORM, CURT? A. For the 12-month period that ended September 30, 1998, the fund provided a total return of 7.82%. To get a sense of how the fund did relative to its competitors, the short-intermediate U.S. government funds average returned 8.25% for the same 12-month period, according to Lipper Analytical Services. Additionally, the Lehman Brothers 1-5 Year U.S. Government Bond Index - which tracks the types of securities in which the fund invests - returned 9.12% for the same one-year period. Q. ALTHOUGH THE FUND POSTED DECENT GAINS, IT LAGGED BOTH ITS PEERS AND THE LEHMAN BROTHERS 1-5 YEAR U.S. GOVERNMENT BOND INDEX DURING THE PAST YEAR. WHAT EXPLAINS THAT UNDERPERFORMANCE? A. The fund had more mortgage-backed and agency securities and fewer Treasury securities than the index and many of its peers. While their relatively high yields gave the fund an advantage over the index and its peers during much of the past year, agency and mortgage securities significantly lagged Treasuries during the final two months of the period. Amid warnings about corporate profit shortfalls, some poor economic data and a general aversion to risk, investors increasingly shunned U.S. and foreign stocks, as well as many types of bonds, in favor of the relative safety of Treasuries. In addition to the growing demand, there was also a diminished supply of Treasuries as the U.S. government curtailed its borrowing needs in the wake of a Federal budget surplus. The net result of this much stronger demand and somewhat weaker supply was a healthy Treasury rally in August and September. While agency and mortgage security prices also moved higher during the late summer, their gains were rather small in comparison to Treasuries. Q. GIVEN THAT MOST TYPES OF BONDS TEND TO PERFORM WELL WHEN INTEREST RATES FALL, WHY WEREN'T INVESTORS AS ENTHUSIASTIC ABOUT AGENCY AND MORTGAGE SECURITIES AS THEY WERE ABOUT TREASURIES? A. Although they carry the implicit, or indirect, backing of the U.S. government, agency securities are not perceived to be as safe as Treasuries - which are backed by the full faith and credit of the U.S. government. In times of uncertainty, Treasuries - more than agency securities - tend to be the safe haven of choice for many investors. Mortgage securities, on the other hand, were beset by prepayments. As homeowners refinanced their mortgages to take advantage of falling interest rates, their loans were prepaid and many mortgage securities made up of those loans were retired before their maturity. That often forced mortgage security holders to forfeit their high-yielding securities and reinvest the proceeds at lower interest rates. Q. DID YOU ALTER THE WAY IN WHICH THE FUND'S INVESTMENTS WERE ALLOCATED AMONG TREASURY, AGENCY AND MORTGAGE SECURITIES? A. Yes, I made some modifications. When several of the fund's mortgage securities were prepaid, I reinvested most of the proceeds in agency securities. It's my view that mortgage prepayment activity will continue to be strong and ultimately could hamstring the mortgage market's performance. In comparison, I felt that agencies offered more attractive value. I also sold some of the fund's holdings in Treasury securities in order to add more agency securities. Here's why: During the past several months the spread - or difference in yield - between Treasury and agency securities widened to nearly 0.50%, the widest level in about five years. That widening spread signifies that investors were demanding more compensation for accepting the slightly higher risk of buying agency securities versus Treasuries. In my view, that spread is particularly wide when viewed on a historical basis. In anticipation of the spread narrowing to a more historical norm and agencies outpacing Treasuries as a result, I added to the fund's agency holdings. Q. WHICH AGENCY SECURITIES DID YOU CHOOSE? A. I continued to favor non-callable securities - those that can't be redeemed by their issuers before maturity. Some agency securities can be "called" - or redeemed - by their issuers as a way to reduce their debt costs. Because they can't be redeemed prior to maturity, non-callable securities tend to perform better than their callable counterparts when interest rates fall and generally keep pace with callable bonds when interest rates rise. Q. WHAT'S YOUR OUTLOOK? A. In light of a slowing global economy, it appears that the Federal Reserve is poised to lower interest rates further. Given that, I believe that mortgage securities will continue to be challenged by relatively high prepayment activity. As long as that's the case, I probably will continue to place more emphasis on Treasury and agency securities. THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET AND OTHER CONDITIONS. (CHECKMARK)FUND FACTS GOAL: high current income with preservation of capital FUND NUMBER: 464 TRADING SYMBOL: FLMGX START DATE: September 13, 1991 SIZE: as of September 30, 1998, more than $133 million MANAGER: Curt Hollingsworth, since 1991; manager, various Fidelity and Spartan government and mortgage funds; joined Fidelity in 1983 CURT HOLLINGSWORTH ON THE LEHMAN BROTHERS 1-5 YEAR U.S. GOVERNMENT BOND INDEX AND ITS ROLE IN MANAGING THE FUND: "The Lehman Brothers 1-5 Year U.S. Government Bond Index plays a very important role in managing the fund. It's the fund's benchmark and includes most of the universe of investment-grade bonds with maturities between one and five years. I use the index as a starting point for my investment decisions, managing the fund to be generally as sensitive to changes in interest rates as the index. In addition, I refer to the index when deciding how to allocate assets among different maturities and sectors - such as Treasury and agency securities - - based on my view of the relative value of each maturity or sector." NOTE TO SHAREHOLDERS: Effective the close of business on June 26, 1998, Fidelity Short-Intermediate Government Fund shares are no longer available to new accounts. Shareholders of the fund on that date may continue to purchase shares in accounts existing on that date. On October 19, 1998, after the end of the period, the Board of Trustees of Fidelity Short-Intermediate Government Fund voted to present a proposal to shareholders to merge Fidelity Short-Intermediate Government Fund into Fidelity Intermediate Government Income Fund. A shareholder meeting is scheduled to be held on April 14, 1999. On or about February 16, 1999, shareholders will be sent proxy materials asking them to vote on this and any other proposals. INVESTMENT CHANGES
COUPON DISTRIBUTION AS OF SEPTEMBER 30, 1998 % OF FUND'S % OF FUND'S INVESTMENTS INVESTMENTS 6 MONTHS AGO LESS THAN 5% 0.0 8.0 5 - 5.99% 10.2 22.2 6 - 6.99% 18.0 21.0 7 - 7.99% 18.1 6.9 8 - 8.99% 12.3 11.2 9 - 9.99% 17.6 15.3 10 - 10.99% 7.3 9.1 11 - 11.99% 3.7 4.5 12% AND OVER 8.9 0.4
COUPON DISTRIBUTION SHOWS THE RANGE OF STATED RATES ON THE FUND'S INVESTMENTS, EXCLUDING SHORT-TERM INVESTMENTS. AVERAGE YEARS TO MATURITY AS OF SEPTEMBER 30, 1998 6 MONTHS AGO YEARS 3.4 3.4 AVERAGE YEARS TO MATURITY IS BASED ON THE AVERAGE TIME UNTIL PRINCIPAL PAYMENTS ARE EXPECTED FROM EACH OF THE FUND'S BONDS, WEIGHTED BY DOLLAR AMOUNT. DURATION AS OF SEPTEMBER 30, 1998 6 MONTHS AGO YEARS 2.3 2.2 DURATION SHOWS HOW MUCH A BOND FUND'S PRICE FLUCTUATES WITH CHANGES IN COMPARABLE INTEREST RATES. IF RATES RISE 1%, FOR EXAMPLE, A FUND WITH A FIVE-YEAR DURATION IS LIKELY TO LOSE ABOUT 5% OF ITS VALUE. OTHER FACTORS CAN INFLUENCE A BOND FUND'S PERFORMANCE AND SHARE PRICE. ACCORDINGLY, A BOND FUND'S ACTUAL PERFORMANCE MAY DIFFER FROM THIS EXAMPLE. ASSET ALLOCATION (% OF FUND'S INVESTMENTS) AS OF SEPTEMBER 30, 1998 ROW: 1, COL: 1, VALUE: 15.0 ROW: 1, COL: 2, VALUE: 16.8 ROW: 1, COL: 3, VALUE: 64.3 ROW: 1, COL: 4, VALUE: 3.9 MORTGAGE-BACKED SECURITIES 15.0% U.S. TREASURY OBLIGATIONS 16.8% U.S. GOVERNMENT AGENCY OBLIGATIONS 64.3% SHORT-TERM INVESTMENTS 3.9% AS OF MARCH 31, 1998 ROW: 1, COL: 1, VALUE: 18.0 ROW: 1, COL: 2, VALUE: 45.8 ROW: 1, COL: 3, VALUE: 34.3 ROW: 1, COL: 4, VALUE: 1.9 MORTGAGE-BACKED SECURITIES 18.5% U.S. TREASURY OBLIGATIONS 45.8% U.S. GOVERNMENT AGENCY OBLIGATIONS 34.3% SHORT-TERM INVESTMENTS 1.4% INVESTMENTS SEPTEMBER 30, 1998 SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENT IN SECURITIES U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - - 81.1% PRINCIPAL VALUE AMOUNT (NOTE 1) U.S. GOVERNMENT AGENCY OBLIGATIONS - 64.3% Fannie Mae: 5.75% $ 3,000,000 $ 3,129,360 4/15/03 6.74% 380,000 416,871 5/13/04 8.25% 10,000,000 10,723,400 12/18/00 12% 10,000,000 11,442,200 11/13/00 Farm Credit 4,000,000 4,793,760 Systems Financial Assistance Corp. 9.375% 7/21/03 Federal 350,000 373,517 Agricultural Mortgage Corp. 6.92% 2/10/02 Government Trust Certificates (assets of Trust guaranteed by U.S. Government through Defense Security Assistance Agency): Class 1-C, 8,825,964 9,426,306 9.25% 11/15/01 Class 2-E, 3,585,314 3,809,037 9.4% 5/15/02 Class T-3, 3,955,274 4,196,545 9.625% 5/15/02 Guaranteed Export Trust Certificates (assets of Trust guaranteed by U.S. Government through Export-Import Bank): Series 3,840,000 3,975,821 1995-A, 6.28% 6/15/04 Series 1,615,078 1,745,415 1994-A, 7.12% 4/15/06 Series 1994-F, 4,940,777 5,334,853 8.187% 12/15/04 Guaranteed 2,083,333 2,141,458 Trade Trust Certificates (assets of Trust guaranteed by U.S. Government through Export-Import Bank) Series 1997-A, 6.104% 7/15/03 Israel Export 1,800,000 1,875,780 Trust Certificates (assets of Trust guaranteed by U.S. Government through Export-Import Bank) Series 1994-1, 6.88% 1/26/03 Overseas Private 1,122,400 1,168,070 Investment Corp. U.S. Government guaranteed participation certificate Series 1994-195, 6.08% 8/15/04 (callable) Private Export Funding Corp.: secured 5.65% 1,215,000 1,236,955 3/15/03 5.82% 3,500,000 3,636,185 6/15/03 (a) State of Israel (guaranteed by U.S. Government through Agency for International Development): 5.25% 1,000,000 1,008,420 9/15/00 6.05% 5,780,000 5,909,530 8/15/00 6.625% 7,000,000 7,564,060 8/15/03 U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - - CONTINUED PRINCIPAL VALUE AMOUNT (NOTE 1) U.S. GOVERNMENT AGENCY OBLIGATIONS - CONTINUED U.S. Department $ 230,000 $ 236,348 of Housing and Urban Development government guaranteed participation certificates Series 1996-A, 6.59% 8/1/00 84,143,891 U.S. TREASURY OBLIGATIONS - 16.8% U.S. Treasury 20,200,000 22,081,024 Notes 7.875% 8/15/01 TOTAL U.S. 106,224, GOVERNMENT AND 915 GOVERNMENT AGENCY OBLIGATIONS (Cost $104,312,652) U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 15.0% FREDDIE MAC - 3.2% 5.5% 12/1/02 4,258,135 4,244,680 to 7/1/03 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - - 11.8% 8.5% 1/15/17 51,984 55,363 to 7/15/17 9.5% 4/15/16 659,103 711,824 to 11/15/20 10% 11/15/09 2,712,127 2,938,004 to 11/15/20 10.5% 2/15/14 5,731,204 6,293,860 to 8/15/19 10.75% 178,569 195,265 12/15/09 11% 11/15/09 1,991,280 2,209,561 to 6/15/19 11.5% 3/15/10 2,300,564 2,586,889 to 7/15/19 12% 3/20/14 to 270,308 307,145 2/15/16 12.5% 39,115 44,766 12/15/10 13% 9/15/14 34,479 39,962 15,382,639 TOTAL U.S. 19,627,3 GOVERNMENT AGENCY 19 - - MORTGAGE-BACKED SECURITIES (Cost $19,585,958) CASH EQUIVALENTS - 3.9% MATURITY VALUE AMOUNT (NOTE 1) Investments in $ 5,074,813 $ 5,074,000 repurchase agreements (U.S. Treasury obligations), in a joint trading account at 5.77%, dated 9/30/98 due 10/1/98 (Cost $5,074,000) TOTAL INVESTMENT IN $ 130,926,2 SECURITIES - 100% 34 (Cost $128,972,610) LEGEND (a) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $3,636,185 or 2.7% of net assets. INCOME TAX INFORMATION At September 30, 1998, the aggregate cost of investment securities for income tax purposes was $128,972,610. Net unrealized appreciation aggregated $1,953,624, of which $2,220,303 related to appreciated investment securities and $266,679 related to depreciated investment securities. At September 30, 1998, the fund had a capital loss carryforward of approximately $10,705,000 of which $40,000, $1,404,000, $5,655,000, $2,404,000, and $1,202,000 will expire on September 30, 2001, 2002, 2003, 2004, and 2005, respectively. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1998 ASSETS INVESTMENT IN $ 130,926,234 SECURITIES, AT VALUE (INCLUDING REPURCHASE AGREEMENTS OF $5,074,000) (COST $128,972,61 0) - SEE ACCOMPANYING SCHEDULE CASH 59 RECEIVABLE FOR 275,599 FUND SHARES SOLD INTEREST 2,194,159 RECEIVABLE TOTAL ASSETS 133,396,051 LIABILITIES PAYABLE FOR FUND $ 84,438 SHARES REDEEMED DISTRIBUTIONS 115,986 PAYABLE ACCRUED 47,533 MANAGEMENT FEE OTHER PAYABLES 39,373 AND ACCRUED EXPENSES TOTAL LIABILITIES 287,330 NET ASSETS $ 133,108,721 NET ASSETS CONSIST OF: PAID IN CAPITAL $ 141,232,703 UNDISTRIBUTED NET 627,332 INVESTMENT INCOME ACCUMULATED (10,704,938) UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS NET UNREALIZED 1,953,624 APPRECIATION (DEPRECIATION) ON INVESTMENTS NET ASSETS, FOR $ 133,108,721 13,978,785 SHARES OUTSTANDING NET ASSET VALUE, $9.52 OFFERING PRICE AND REDEMPTION PRICE PER SHARE ($133,108,72 1 (DIVIDED BY) 13,978,785 SHARES) STATEMENT OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1998 INVESTMENT $ 8,918,030 INCOME INTEREST (INCLUDING INCOME ON SECURITIES LOANED OF $785) EXPENSES MANAGEMENT FEE $ 549,634 TRANSFER AGENT 277,563 FEES ACCOUNTING FEES 61,038 AND EXPENSES NON-INTERESTED 1,214 TRUSTEES' COMPENSATION CUSTODIAN FEES 23,854 AND EXPENSES REGISTRATION FEES 25,533 AUDIT 38,164 LEGAL 5,252 MISCELLANEOUS 657 TOTAL EXPENSES 982,909 NET INVESTMENT 7,935,121 INCOME REALIZED AND 649,418 UNREALIZED GAIN (LOSS) NET REALIZED GAIN (LOSS) ON INVESTMENT SECURITIES CHANGE IN NET 1,028,320 UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENT SECURITIES NET GAIN (LOSS) 1,677,738 NET INCREASE $ 9,612,859 (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS STATEMENT OF CHANGES IN NET ASSETS YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS $ 7,935,121 $ 7,884,065 NET INVESTMENT INCOME NET REALIZED 649,418 178,902 GAIN (LOSS) CHANGE IN NET 1,028,320 135,665 UNREALIZED APPRECIATION (DEPRECIATION) NET INCREASE 9,612,859 8,198,632 (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS DISTRIBUTIONS TO (7,535,429) (7,517,929) SHAREHOLDERS FROM NET INVESTMENT INCOME SHARE 54,016,902 51,261,094 TRANSACTIONS NET PROCEEDS FROM SALES OF SHARES REINVESTMENT 6,398,701 5,978,419 OF DISTRIBUTIONS COST OF SHARES (49,522,626) (60,826,140) REDEEMED NET INCREASE 10,892,977 (3,586,627) (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS TOTAL 12,970,407 (2,905,924) INCREASE (DECREASE) IN NET ASSETS NET ASSETS BEGINNING OF 120,138,314 123,044,238 PERIOD END OF PERIOD $ 133,108,721 $ 120,138,314 (INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME AND DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME OF $627,332 AND $97,053, RESPECTIVELY) OTHER INFORMATION SHARES SOLD 5,742,399 5,495,549 ISSUED IN 679,888 639,858 REINVESTMENT OF DISTRIBUTIONS REDEEMED (5,264,176) (6,514,225) NET INCREASE 1,158,111 (378,818) (DECREASE) FINANCIAL HIGHLIGHTS
YEARS ENDED SEPTEMBER 30, 1998 1997 1996 1995 1994 SELECTED PER-SHARE DATA NET ASSET VALUE, $ 9.370 $ 9.320 $ 9.490 $ 9.290 $ 9.960 BEGINNING OF PERIOD INCOME FROM .591 A .603 A .599 .648 .533 INVESTMENT OPERATIONS NET INVESTMENT INCOME NET REALIZED .119 .022 (.167) .174 (.648) AND UNREALIZED GAIN (LOSS) TOTAL FROM .710 .625 .432 .822 (.115) INVESTMENT OPERATIONS LESS DISTRIBUTIONS FROM NET (.560) (.575) (.602) (.622) (.555) INVESTMENT INCOME NET ASSET VALUE, $ 9.520 $ 9.370 $ 9.320 $ 9.490 $ 9.290 END OF PERIOD TOTAL RETURN 7.82% 6.90% 4.67% 9.15% (1.18)% RATIOS AND SUPPLEMENTAL DATA NET ASSETS, END $ 133,109 $ 120,138 $ 123,044 $ 140,471 $ 132,466 OF PERIOD (000 OMITTED) RATIO OF EXPENSES .78% .81% .79% .82% .95% TO AVERAGE NET ASSETS RATIO OF NET 6.29% 6.45% 6.54% 6.67% 6.80% INVESTMENT INCOME TO AVERAGE NET ASSETS PORTFOLIO TURNOVER 253% 126% 188% 266% 184% RATE
A NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. NOTES TO FINANCIAL STATEMENTS For the period ended September 30, 1998 1. SIGNIFICANT ACCOUNTING POLICIES. Fidelity Short-Intermediate Government Fund (the fund) is a fund of Fidelity Charles Street Trust (the trust) and is authorized to issue an unlimited number of shares. The trust is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as an open-end management investment company organized as a Massachusetts business trust. The financial statements have been prepared in conformity with generally accepted accounting principles which require management to make certain estimates and assumptions at the date of the financial statements. The following summarizes the significant accounting policies of the fund: SECURITY VALUATION. Securities are valued based upon a computerized matrix system and/or appraisals by a pricing service, both of which consider market transactions and dealer-supplied valuations. Securities for which quotations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Board of Trustees. Short-term securities with remaining maturities of sixty days or less for which quotations are not readily available are valued at amortized cost or original cost plus accrued interest, both of which approximate current value. INCOME TAXES. As a qualified regulated investment company under Subchapter M of the Internal Revenue Code, the fund is not subject to income taxes to the extent that it distributes substantially all of its taxable income for its fiscal year. The schedule of investments includes information regarding income taxes under the caption "Income Tax Information." INVESTMENT INCOME. Interest income, which includes accretion of original issue discount, is accrued as earned. EXPENSES. Most expenses of the trust can be directly attributed to a fund. Expenses which cannot be directly attributed are apportioned among the funds in the trust. DISTRIBUTIONS TO SHAREHOLDERS. Distributions are declared daily and paid monthly from net investment income. Distributions from realized gains, if any, are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences, which may result in distribution reclassifications, are primarily due to differing treatments for paydown gains/losses on certain securities, market discount, capital loss carryforwards and losses deferred due to wash sales. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to paid in capital. Undistributed net investment income and accumulated undistributed net realized gain (loss) on investments may include temporary book and tax basis differences that will reverse in a subsequent period. Any taxable income or gain remaining at fiscal year end is distributed in the following year. 1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED SECURITY TRANSACTIONS. Security transactions are accounted for as of trade date. Gains and losses on securities sold are determined on the basis of identified cost. 2. OPERATING POLICIES. JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the Securities and Exchange Commission the fund, along with other affiliated entities of Fidelity Management & Research Company (FMR), may transfer uninvested cash balances into one or more joint trading accounts. These balances are invested in one or more repurchase agreements for U.S. Treasury or Federal Agency obligations. REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency securities are transferred to an account of the fund, or to the Joint Trading Account, at a bank custodian. The securities are marked-to-market daily and maintained at a value at least equal to the principal amount of the repurchase agreement (including accrued interest). FMR, the fund's investment adviser, is responsible for determining that the value of the underlying securities remains in accordance with the market value requirements stated above. 3. PURCHASES AND SALES OF INVESTMENTS. Purchases and sales of long-term U.S. government and government agency obligations aggregated $314,117,122 and $306,609,748, respectively. 4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES. MANAGEMENT FEE. As the fund's investment adviser, FMR receives a monthly fee that is calculated on the basis of a group fee rate plus a fixed individual fund fee rate applied to the average net assets of the fund. The group fee rate is the weighted average of a series of rates and is based on the monthly average net assets of all the mutual funds advised by FMR. The rates ranged from .1100% to .3700% for the period. The annual individual fund fee rate is .30%. In the event that these rates were lower than the contractual rates in effect during the period, FMR voluntarily implemented the above rates, as they resulted in the same or a lower management fee. For the period, the management fee was equivalent to an annual rate of .44% of average net assets. TRANSFER AGENT FEES. Fidelity Service Company, Inc. (FSC), an affiliate of FMR, is the fund's transfer, dividend disbursing and shareholder servicing agent. FSC receives account fees and asset-based fees that vary according to account size and type of account. FSC pays for typesetting, printing and mailing of all shareholder reports, except proxy statements. For the period, the transfer agent fees were equivalent to an annual rate of .22% of average net assets. ACCOUNTING FEES. FSC maintains the fund's accounting records. The fee is based on the level of average net assets for the month plus out-of-pocket expenses. 5. SECURITY LENDING. The fund loaned securities to certain brokers who paid the fund negotiated lenders' fees. These fees are included in interest income. The fund receives U.S. Treasury obligations and/or cash as collateral against the loaned securities, in an amount at least equal to 102% of the market value of the loaned securities at the inception of each loan. This collateral must be maintained at not less than 100% of the market value of the loaned securities during the period of the loan. At period end, there were no loans outstanding. 6. PROPOSED REORGANIZATION. The Board of Trustees of Fidelity Short-Intermediate Government Fund has approved an Agreement and Plan of Reorganization ("Agreement") between the fund and Fidelity Intermediate Government Income Fund ("Reorganization"). The Agreement provides for the transfer of all of the assets of the fund to Fidelity Intermediate Government Income Fund in exchange solely for the number of shares of Fidelity Intermediate Government Income Fund having the same aggregate net asset value as the outstanding shares of the fund as of the close of business of the New York Stock Exchange on the day that the Reorganization is effective and the assumption by Fidelity Intermediate Government Income Fund of all of the liabilities of the fund. The Reorganization can be consummated only if, among other things, it is approved by the vote of a majority (as defined by the 1940 Act) of outstanding voting securities of the fund. A Special Meeting of Shareholders ("Meeting") of the fund will be held on April, 14, 1999 to vote on the Agreement. A detailed description of the proposed transaction and voting information will be sent to shareholders of the fund in February 1999. If the Agreement is approved at the Meeting, the Reorganization is expected to become effective on or about April 29, 1999. Effective June 26, 1998 the fund's shares are no longer available for purchase or exchange to new accounts of the fund pending the proposed Reorganization. REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Fidelity Charles Street Trust and the Shareholders of Fidelity Short-Intermediate Government Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Fidelity Short-Intermediate Government Fund (a fund of Fidelity Charles Street Trust) at September 30, 1998, the results of its operations, the changes in its net assets and the financial highlights for the periods indicated in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fidelity Short-Intermediate Government Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at September 30, 1998 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. /s/PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Boston, Massachusetts November 6, 1998 DISTRIBUTIONS A total of 25.09% of the dividends distributed during the fiscal year was derived from interest on U.S. Government securities which is generally exempt from state income tax. The fund will notify shareholders in January 1999 of the applicable percentage for use in preparing 1998 income tax returns. MANAGING YOUR INVESTMENTS Fidelity offers several ways to conveniently manage your personal investments via your telephone or PC. You can access your account information, conduct trades and research your investments 24 hours a day. BY PHONE Fidelity TouchTone Xpress(registered trademark) provides a single toll-free number to access account balances, positions, quotes and trading. It's easy to navigate the service, and on your first call, the system will help you create a personal identification number (PIN) for security. (PHONE_GRAPHIC)TOUCHTONE XPRESS 1-800-544-5555 PRESS 1 For mutual fund and brokerage trading. 2 For quotes.* 3 For account balances and holdings. 4 To review orders and mutual fund activity. 5 To change your PIN. *0 To speak to a Fidelity representative. BY PC Fidelity's Web site on the Internet provides a wide range of information, including daily financial news, fund performance, interactive planning tools and news about Fidelity products and services. (PC_GRAPHIC)FIDELITY'S WEB SITE WWW.FIDELITY.COM If you are not currently on the Internet, call Fidelity at 1-800-544-7272 and we'll send you an America Online CD or disk with up to 50 free hours of Web access. (PC_GRAPHIC) FIDELITY ON-LINE XPRESS+TM Fidelity On-line Xpress+ software for Windows combines comprehensive portfolio management capabilities, securities trading and access to research and analysis tools . . . all on your desktop. Call Fidelity at 1-800-544-7272 or visit our Web site for more information on how to manage your investments via your PC. * WHEN YOU CALL THE QUOTES LINE, PLEASE REMEMBER THAT A FUND'S YIELD AND RETURN WILL VARY AND, EXCEPT FOR MONEY MARKET FUNDS, SHARE PRICE WILL ALSO VARY. THIS MEANS THAT YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. THERE IS NO ASSURANCE THAT MONEY MARKET FUNDS WILL BE ABLE TO MAINTAIN A STABLE $1 SHARE PRICE; AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT. TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE, REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS, AND THE EFFECTS OF ANY SALES CHARGES. INVESTMENT ADVISER Fidelity Management & Research Company Boston, MA OFFICERS Edward C. Johnson 3d, President Robert C. Pozen, Senior Vice President Dwight D. Churchill, Vice President Fred L. Henning, Jr., Vice President Curtis Hollingsworth, Vice President Stanley N. Griffith, Assistant Vice President Eric D. Roiter, Secretary Richard A. Silver, Treasurer John H. Costello, Assistant Treasurer Leonard M. Rush, Assistant Treasurer Thomas J. Simpson, Assistant Treasurer BOARD OF TRUSTEES Ralph F. Cox * Phyllis Burke Davis * Robert M. Gates * Edward C. Johnson 3d E. Bradley Jones * Donald J. Kirk * Peter S. Lynch Marvin L. Mann * William O. McCoy * Gerald C. McDonough * Robert C. Pozen Thomas R. Williams * ADVISORY BOARD J. Gary Burkhead GENERAL DISTRIBUTOR Fidelity Distributors Corporation Boston, MA TRANSFER AND SHAREHOLDER SERVICING AGENT Fidelity Service Company, Inc. Boston, MA * INDEPENDENT TRUSTEES CUSTODIAN The Bank of New York New York, NY FIDELITY'S TAXABLE BOND FUNDS Capital & Income Ginnie Mae Government Income High Income Intermediate Bond Intermediate Government Income International Bond Investment Grade Bond New Markets Income Short-Intermediate Government Short-Term Bond Spartan(registered trademark) Ginnie Mae Spartan Government Income Spartan Investment Grade Bond Spartan Short-Intermediate Government Spartan Short-Term Strategic Income Bond Target Timeline SM 1999, 2001, & 2003 THE FIDELITY TELEPHONE CONNECTION MUTUAL FUND 24-HOUR SERVICE Exchanges/Redemptions 1-800-544-7777 Account Assistance 1-800-544-6666 Product Information 1-800-544-8888 Retirement Accounts 1-800-544-4774 (8 a.m. - 9 p.m.) TDD Service 1-800-544-0118 for the deaf and hearing impaired (9 a.m. - 9 p.m. Eastern time) (registered trademark) TouchTone Xpress (registered trademark)(AUTOMATED GRAPHIC) 1-800-544-4774 (AUTOMATED GRAPHIC) AUTOMATED LINE FOR QUICKEST SERVICE FSG-ANN-1198 64332 1.537608.101 (Fidelity Logo Graphic)(registered trademark) Corporate Headquarters 82 Devonshire St., Boston, MA 02109 www.fidelity.com SPARTAN(REGISTERED TRADEMARK) INVESTMENT GRADE BOND FUND ANNUAL REPORT SEPTEMBER 30, 1998 (2 Fidelity Logo Graphics)(registered trademark) CONTENTS PRESIDENT'S MESSAGE 3 NED JOHNSON ON INVESTING STRATEGIES. PERFORMANCE 4 HOW THE FUND HAS DONE OVER TIME. FUND TALK 7 THE MANAGER'S REVIEW OF FUND PERFORMANCE, STRATEGY AND OUTLOOK. INVESTMENT CHANGES 10 A SUMMARY OF MAJOR SHIFTS IN THE FUND'S INVESTMENTS OVER THE PAST SIX MONTHS. INVESTMENTS 11 A COMPLETE LIST OF THE FUND'S INVESTMENTS WITH THEIR MARKET VALUES. FINANCIAL STATEMENTS 23 STATEMENTS OF ASSETS AND LIABILITIES, OPERATIONS, AND CHANGES IN NET ASSETS, AS WELL AS FINANCIAL HIGHLIGHTS. NOTES 27 NOTES TO THE FINANCIAL STATEMENTS. REPORT OF INDEPENDENT 30 THE AUDITORS' OPINION. ACCOUNTANTS DISTRIBUTIONS 31 To reduce expenses and demonstrate respect for our environment, we have initiated a project through which we will begin eliminating duplicate copies of most financial reports and prospectuses to most households, even if they have more than one account in the fund. If additional copies of financial reports, prospectuses or historical account information are needed, please call 1-800-544-6666. THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS. MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK. FOR MORE INFORMATION ON ANY FIDELITY FUND, INCLUDING CHARGES AND EXPENSES, CALL 1-800-544-8888 FOR A FREE PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY. PRESIDENT'S MESSAGE (PHOTO_OF_EDWARD_C_JOHNSON_3D) DEAR SHAREHOLDER: The stock and bond markets continued to be influenced by competing factors as the third quarter of 1998 ended. On the one hand, low inflation, low unemployment and moderate growth in the U.S. economy provided a foundation for positive returns. But growing concerns about U.S. corporate earnings, combined with fears about the health of the economies and financial markets in Japan, Russia and many emerging markets, led to a continuation of the volatility that has marked most of the year. While it's impossible to predict the future direction of the markets with any degree of certainty, there are certain basic principles that can help investors plan for their future needs. The longer your investment time frame, the less likely it is that you will be affected by short-term market volatility. A 10-year investment horizon appropriate for saving for a college education, for example, enables you to weather market cycles in a long-term fund, which may have a higher risk potential, but also has a higher potential rate of return. An intermediate-length fund could make sense if your investment horizon is two to four years, while a short-term bond fund could be the right choice if you need your money in one or two years. If your time horizon is less than a year, you might want to consider moving some of your bond investment into a money market fund. These funds seek income and a stable share price by investing in high-quality, short-term investments. Of course, it's important to remember that there is no assurance that a money market fund will achieve its goal of maintaining a stable net asset value of $1.00 per share, and that these types of funds are neither insured nor guaranteed by any agency of the U.S. government. Finally, no matter what your time horizon or portfolio diversity, it makes good sense to follow a regular investment plan, investing a certain amount of money in a fund at the same time each month or quarter and periodically reviewing your overall portfolio. By doing so, you won't get caught up in the excitement of a rapidly rising market, nor will you buy all your shares at market highs. While this strategy - known as dollar cost averaging - won't assure a profit or protect you from a loss in a declining market, it should help you lower the average cost of your purchases. If you have questions, please call us at 1-800-544-8888. We are available 24 hours a day, seven days a week to provide you the information you need to make the investments that are right for you. Best regards, Edward C. Johnson 3d PERFORMANCE: THE BOTTOM LINE There are several ways to evaluate a fund's historical performance. You can look at the total percentage change in value, the average annual percentage change or the growth of a hypothetical $10,000 investment. Total return reflects the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains (the profits earned upon the sale of securities that have grown in value). You can also look at the fund's income, as reflected in the fund's yield, to measure performance. If Fidelity had not reimbursed certain fund expenses, the total returns and dividends would have been lower. CUMULATIVE TOTAL RETURNS PERIODS ENDED PAST 1 PAST 5 LIFE OF SEPTEMBER 30, YEAR YEARS FUND 1998 SPARTAN INV. 10.95% 35.94% 60.64% GRADE BOND LB AGGREGATE 11.51% 41.66% 54.99% BOND INTERMEDIATE 10.02% 35.84% N/A INVESTMENT GRADE DEBT FUNDS AVERAGE CUMULATIVE TOTAL RETURNS show the fund's performance in percentage terms over a set period - in this case, one year, five years or since the fund started on October 1, 1992. For example, if you had invested $1,000 in a fund that had a 5% return over the past year, the value of your investment would be $1,050. You can compare the fund's returns to the performance of the Lehman Brothers Aggregate Bond Index - a market value weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed and mortgage-backed securities, with maturities of at least one year. To measure how the fund's performance stacked up against its peers, you can compare it to the intermediate investment grade debt funds average, which reflects the performance of mutual funds with similar objectives tracked by Lipper Analytical Services, Inc. The past one year average represents a peer group of 218 mutual funds. These benchmarks include reinvested dividends and capital gains, if any, and exclude the effect of sales charges. AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED PAST 1 PAST 5 LIFE OF SEPTEMBER 30, YEAR YEARS FUND 1998 SPARTAN INV. 10.95% 6.33% 8.22% GRADE BOND LB AGGREGATE 11.51% 7.21% 7.58% BOND INTERMEDIATE 10.02% 6.31% N/A INVESTMENT GRADE DEBT FUNDS AVERAGE AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and show you what would have happened if the fund had performed at a constant rate each year. (Note: Lipper calculates average annual total returns by annualizing each fund's total return, then taking an arithmetic average. This may produce a slightly different figure than that obtained by averaging the cumulative total returns and annualizing the result.) $10,000 OVER LIFE OF FUND Spartan Inv. Grade Bond LB Aggregate Bond 00448 LB001 1992/10/01 10000.00 10000.00 1992/10/31 9812.23 9816.93 1992/11/30 9910.58 9818.90 1992/12/31 10141.51 9975.02 1993/01/31 10397.72 10166.54 1993/02/28 10729.65 10344.45 1993/03/31 10789.98 10387.90 1993/04/30 10830.04 10460.61 1993/05/31 10871.84 10474.21 1993/06/30 11226.71 10663.80 1993/07/31 11392.79 10724.58 1993/08/31 11782.44 10912.26 1993/09/30 11816.73 10941.72 1993/10/31 11913.99 10982.21 1993/11/30 11705.42 10888.86 1993/12/31 11740.02 10947.66 1994/01/31 11984.80 11095.45 1994/02/28 11571.41 10902.39 1994/03/31 11183.62 10633.10 1994/04/30 11070.36 10548.04 1994/05/31 11000.02 10546.98 1994/06/30 10994.05 10523.78 1994/07/31 11184.69 10733.20 1994/08/31 11183.61 10746.08 1994/09/30 11019.13 10588.11 1994/10/31 10995.76 10578.59 1994/11/30 11028.07 10555.31 1994/12/31 11132.78 10628.14 1995/01/31 11333.41 10838.58 1995/02/28 11549.35 11096.54 1995/03/31 11689.77 11164.23 1995/04/30 11838.95 11320.53 1995/05/31 12332.88 11758.63 1995/06/30 12424.27 11844.47 1995/07/31 12383.63 11818.41 1995/08/31 12539.11 11961.42 1995/09/30 12665.77 12077.44 1995/10/31 12831.52 12234.45 1995/11/30 13022.66 12417.96 1995/12/31 13204.49 12591.82 1996/01/31 13294.65 12674.92 1996/02/29 13063.03 12454.38 1996/03/31 12964.75 12367.20 1996/04/30 12876.88 12297.94 1996/05/31 12843.90 12273.35 1996/06/30 13004.84 12437.81 1996/07/31 13036.96 12471.39 1996/08/31 13015.72 12450.19 1996/09/30 13230.84 12666.82 1996/10/31 13515.06 12948.03 1996/11/30 13731.49 13169.44 1996/12/31 13616.13 13046.96 1997/01/31 13661.24 13087.41 1997/02/28 13686.05 13120.13 1997/03/31 13530.63 12974.49 1997/04/30 13741.70 13169.11 1997/05/31 13859.90 13294.22 1997/06/30 14016.97 13452.42 1997/07/31 14397.86 13815.63 1997/08/31 14277.92 13698.20 1997/09/30 14478.69 13900.93 1997/10/31 14669.01 14102.50 1997/11/30 14716.41 14167.37 1997/12/31 14880.02 14310.46 1998/01/31 15070.31 14493.63 1998/02/28 15082.54 14482.04 1998/03/31 15146.56 14531.28 1998/04/30 15223.90 14606.84 1998/05/31 15376.86 14745.60 1998/06/30 15483.26 14870.94 1998/07/31 15517.96 14902.17 1998/08/31 15686.01 15145.08 1998/09/30 16063.60 15499.47 IMATRL PRASUN SHR__CHT 19980930 19981006 115405 R00000000000075 $10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was invested in Spartan Investment Grade Bond Fund on October 1, 1992, when the fund started. As the chart shows, by September 30, 1998, the value of the investment would have grown to $16,064 - a 60.64% increase on the initial investment. For comparison, look at how the Lehman Brothers Aggregate Bond Index did over the same period. With dividends and capital gains, if any, reinvested, the same $10,000 would have grown to $15,499 - a 54.99% increase. (checkmark)UNDERSTANDING PERFORMANCE HOW A FUND DID YESTERDAY IS NO GUARANTEE OF HOW IT WILL DO TOMORROW. BOND PRICES, FOR EXAMPLE, GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. IN TURN, THE SHARE PRICE, RETURN AND YIELD OF A FUND THAT INVESTS IN BONDS WILL VARY. THAT MEANS IF YOU SELL YOUR SHARES DURING A MARKET DOWNTURN, YOU MIGHT LOSE MONEY. BUT IF YOU CAN RIDE OUT THE MARKET'S UPS AND DOWNS, YOU MAY HAVE A GAIN. TOTAL RETURN COMPONENTS YEARS ENDED SEPTEM BER 30, 1998 1997 1996 1995 1994 DIVIDEND 6.56% 6.72% 6.33% 7.65% 6.24% RETURNS CAPITAL 4.39% 2.71% -1.87% 7.29% -12.99% RETURNS TOTAL RETURNS 10.95% 9.43% 4.46% 14.94% -6.75% TOTAL RETURN COMPONENTS include both dividend returns and capital returns. A dividend return reflects the actual dividends paid by the fund. A capital return reflects both the amount paid by the fund to shareholders as capital gain distributions and changes in the fund's share price. Both returns assume the dividends or capital gains, if any, paid by the fund are reinvested. DIVIDENDS AND YIELD PERIODS ENDED PAST 1 PAST 6 PAST 1 SEPTEMBER 30, MONTH MONTHS YEAR 1998 DIVIDENDS PER 5.28(CENTS) 31.92(CENTS) 63.72(CENTS) SHARE ANNUALIZED 6.07% 6.08% 6.12% DIVIDEND RATE 30-DAY 5.69% - - ANNUALIZED YIELD DIVIDENDS per share show the income paid by the fund for a set period. If you annualize this number, based on an average share price of $10.58 over the past one month, $10.47 over the past six months and $10.42 over the past one year, you can compare the fund's income over these three periods. The 30-day annualized YIELD is a standard formula for all funds based on the yields of the bonds in the fund, averaged over the past 30 days. This figure shows you the yield characteristics of the fund's investments at the end of the period. It also helps you compare funds from different companies on an equal basis. If Fidelity had not reimbursed certain fund expenses during the periods shown, the yield would have been 5.50%. FUND TALK: THE MANAGER'S OVERVIEW MARKET RECAP As a safe haven from turbulent stock markets worldwide, bond markets reaped the benefits from the flight to quality by anxious investors during the 12-month period ending September 30, 1998. The Lehman Brothers Aggregate Bond Index - a broad measure of the U.S. taxable investment-grade bond market - returned 11.51% over the past year, two and one-half times higher than the 4.54% return generated for the six-month period ending March 31, 1998. The buying surge sent Treasury-bond yields - which move in the opposite direction of bond prices - to their lowest level in over three decades, as the yield on the benchmark 30-year bond fell to 4.96%. In spite of the global economic crisis that dominated the period, the U.S. enjoyed low interest rates, low inflation and a stable economy, which aided the performance of corporate bonds. The Lehman Brothers Corporate Bond Index returned 11.07% for the 12-month period. Mortgage-backed bonds also performed well, although lower interest rates resulted in higher refinancing activity. The Lehman Brothers Mortgage Backed Securities Index had a 12-month return of 8.62%. Interest rates fell even lower late in the period, as the Federal Reserve lowered the fed funds rate by 0.25%, the first rate cut in nearly three years. The period's biggest losers were shareholders of emerging-market debt, as the JP Morgan Emerging Markets Bond Index lost 20.89% over the past 12 months. (PHOTOGRAPH OF KEVIN GRANT) An interview with Kevin Grant, Portfolio Manager of Spartan Investment Grade Bond Fund Q. HOW DID THE FUND PERFORM, KEVIN? A. For the 12-month period that ended September 30, 1998, the fund had a total return of 10.95%. In comparison, the fund outpaced the intermediate investment grade debt funds average tracked by Lipper Analytical Services, which returned 10.02%. The fund lagged the Lehman Brothers Aggregate Bond Index, which returned 11.51% during the same period. Q. WHAT FACTORS CONTRIBUTED TO THE FUND'S UNDERPERFORMANCE OF THE LEHMAN BROTHERS INDEX? A. Historically, the fund is overweighted in corporate bonds as well as mortgage-backed and asset-backed securities relative to Treasury bonds. The Lehman Brothers Aggregate Bond Index tends to have over 20% of its assets in short- and intermediate-maturity Treasuries. For many years, we've been able to replace the short-term Treasuries that the fund would ordinarily hold with short-term, high-grade corporate bonds. Over the long haul, the yield advantage of the short-term corporate bonds helps generate better total return than the government bonds. However, in the environment we experienced in August and September, the markets cared only about government-guaranteed bonds and Treasuries benefited from a massive flight to quality. While this situation was good for Treasury bonds, it caused the fund to underperform the Lehman Brothers Aggregate Bond Index because the rally was for the most part limited to Treasuries. Q. WHAT OTHER FACTORS INFLUENCED THE FUND'S PERFORMANCE? A. During the past few months of the period, we witnessed an extreme demand for safety that we haven't seen since 1987. At the end of the period, the Federal Reserve Board cut the federal funds rate - the interest rate charged by Federal Reserve district banks to banks needing overnight loans - to 5.25%, yet the yield on the two-year Treasury dropped to 4.25%, while their prices went up. This yield spread between the federal funds rate and two-year Treasuries indicated that the bond market believes the Federal Reserve would cut rates further. During the past few months, we've seen the price of two-year Treasuries rise by two percentage points, while prices on many corporate bonds, regardless of credit quality, have barely budged. This is a very unusual event. Assuming we don't have defaults on investment-grade corporate bonds, their yield advantage over government securities could produce an attractive return advantage. Q. WHAT WAS YOUR STRATEGY DURING THE PERIOD? A. For most of the year, I felt the mortgage securities market was expensive relative to Treasuries and I kept the fund's positions close to the index. As it turns out, we experienced a massive re-pricing of these securities and the mortgage market was much cheaper as the period drew to a close. In fact, over the past eight to 10 years, mortgage rates have ranged anywhere from 80 to 130 basis points (.80 to 1.30 percentage points) higher than the 10-year Treasury bond. At the end of the period, the yield spread between Ginnie Mae mortgage bonds and the 10-year Treasury was over 200 points. As a result, I increased the fund's position in mortgage-backed bonds to take advantage of the interest-rate advantage over Treasuries. Additionally, the fund held approximately 32% of its assets in corporate bonds during the period. This sector contributed to performance until we had the massive flight to quality - and to Treasuries - at the end of the summer. The fund's overweighted position in corporate bonds relative to the index hurt performance. Q. WHAT'S YOUR OUTLOOK? A. I think we need to take a cautious view. A number of market and economic indicators point to the possibility of a recession in the U.S. next year. As a result, I have positioned the fund relatively defensively. However, I will continue to look closely at mortgage-backed securities and may look to add to the fund's positions. Corporate bonds also will continue to be a focus for the fund, but over the short term I may not add to existing holdings. I see more value in the mortgage market, particularly in those bonds with high-quality Aaa ratings. While there is prepayment or refinancing risk with mortgages, at these interest rate levels we are better compensated for prepayment risk than at any time in recent years. THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET AND OTHER CONDITIONS. (CHECKMARK)FUND FACTS GOAL: high current income FUND NUMBER: 448 TRADING SYMBOL: FSIBX START DATE: October 1, 1992 SIZE: as of September 30, 1998 more than $1.2 billion MANAGER: Kevin Grant, since 1997; also manager of several Fidelity investment-grade taxable bond funds; joined Fidelity in 1993 KEVIN GRANT ON THE FUND'S BENCHMARK, THE LEHMAN BROTHERS AGGREGATE BOND INDEX, AND ITS ROLE IN THE MANAGEMENT OF THE FUND: "The Lehman Brothers Aggregate Bond Index - a market value weighted benchmark of investment-grade fixed-rate debt issues with maturities of at least one year - plays a very important role in the management of the fund. It's the fund's benchmark index and includes most of the universe of investment-grade bonds with maturities of one year or more. I use the index as a guideline for the structure of the overall bond market, managing the fund to be generally as sensitive to changes in interest rates as the index. In addition, I refer to the index when deciding how to allocate assets among different maturities and market sectors - such as corporate, mortgage or government securities - based on my view of the relative value of each maturity or sector." INVESTMENT CHANGES
QUALITY DIVERSIFICATION AS OF SEPTEMBER 30, 1998 (MOODY'S RATINGS) % OF FUND'S % OF FUND'S INVESTMENTS INVESTMENTS 6 MONTHS AGO AAA 56.5 46.9 AA 3.8 4.2 A 6.9 6.9 BAA 18.9 14.5 BA AND BELOW 2.9 3.0
TABLE EXCLUDES SHORT-TERM INVESTMENTS. WHERE MOODY'S RATINGS ARE NOT AVAILABLE, WE HAVE USED S&P RATINGS. SECURITIES RATED AS BA OR BELOW WERE RATED INVESTMENT GRADE BY OTHER NATIONALLY RECOGNIZED RATING AGENCIES OR ASSIGNED AN INVESTMENT GRADE RATING AT THE TIME OF ACQUISITION BY FIDELITY. AVERAGE YEARS TO MATURITY AS OF SEPTEMBER 30, 1998 6 MONTHS AGO YEARS 7.8 7.5 AVERAGE YEARS TO MATURITY IS BASED ON THE AVERAGE TIME UNTIL PRINCIPAL PAYMENTS ARE EXPECTED FROM EACH OF THE FUND'S BONDS, WEIGHTED BY DOLLAR AMOUNT. DURATION AS OF SEPTEMBER 30, 1998 6 MONTHS AGO YEARS 4.2 4.5 DURATION SHOWS HOW MUCH A BOND FUND'S PRICE FLUCTUATES WITH CHANGES IN COMPARABLE INTEREST RATES. IF RATES RISE 1%, FOR EXAMPLE, A FUND WITH A FIVE-YEAR DURATION IS LIKELY TO LOSE ABOUT 5% OF ITS VALUE. OTHER FACTORS CAN INFLUENCE A BOND FUND'S PERFORMANCE AND SHARE PRICE. ACCORDINGLY, A BOND FUND'S ACTUAL PERFORMANCE MAY DIFFER FROM THIS EXAMPLE. ASSET ALLOCATION (% OF FUND'S INVESTMENTS) AS OF SEPTEMBER 30,1998 * ROW: 1, COL: 1, VALUE: 11.0 ROW: 1, COL: 2, VALUE: 3.4 ROW: 1, COL: 3, VALUE: 31.8 ROW: 1, COL: 4, VALUE: 21.1 ROW: 1, COL: 5, VALUE: 32.7 CORPORATE BONDS 32.7% U.S. GOVERNMENT AND AGENCY OBLIGATIONS 21.1% U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES 31.8% OTHER 3.4% SHORT-TERM INVESTMENTS 11.0% * FOREIGN INVESTMENTS 6.7% AS OF MARCH 31, 1998 ** ROW: 1, COL: 1, VALUE: 24.5 ROW: 1, COL: 2, VALUE: 3.2 ROW: 1, COL: 3, VALUE: 30.0 ROW: 1, COL: 4, VALUE: 12.2 ROW: 1, COL: 5, VALUE: 30.1 CORPORATE BONDS 30.1% U.S. GOVERNMENT AND AGENCY OBLIGATIONS 12.2% U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES 30.0% OTHER 3.2% SHORT-TERM INVESTMENTS 24.5% ** FOREIGN INVESTMENTS 17.4% INVESTMENTS SEPTEMBER 30, 1998 SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENT IN SECURITIES
NONCONVERTIBLE BONDS - 29.4% MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (D) AEROSPACE & DEFENSE - 0.4% DEFENSE ELECTRONICS - 0.4% Raytheon Co. Baa1 $ 5,000 $ 5,201 6.45% 8/15/02 BASIC INDUSTRIES - 0.6% PACKAGING & CONTAINERS - 0.6% Owens-Illinois, Inc.: 7.15% Ba1 2,600 2,600 5/15/05 7.35% Ba1 2,450 2,453 5/15/08 7.8% Ba1 3,000 2,858 5/15/18 7,911 CONSTRUCTION & REAL ESTATE - 1.5% REAL ESTATE INVESTMENT TRUSTS - 1.5% CenterPoint Baa2 1,100 1,092 Properties Corp. 6.75% 4/1/05 EOP Operating LP: 6.625% Baa1 8,010 8,006 2/15/05 6.75% Baa1 2,270 2,259 2/15/08 7.25% Baa1 8,000 7,549 2/15/18 18,906 DURABLES - 1.0% TEXTILES & APPAREL - 1.0% Levi Strauss & Baa2 8,550 8,343 Co. 7% 11/1/06 (b) Unifi, Inc. 6.5% A3 5,000 5,007 2/1/08 13,350 ENERGY - 1.3% OIL & GAS - 1.3% Oryx Energy Co.: 8.125% Ba1 6,500 6,744 10/15/05 8.375% Ba1 5,000 5,351 7/15/04 Petroleum Baa3 3,670 3,542 Geo-Services ASA 7.125% 3/30/28 USX-Marathon Baa2 670 695 Group 6.85% 3/1/08 16,332 FINANCE - 10.9% BANKS - 4.5% ABN-Amro Bank Aa3 1,750 1,821 NV, Chicago 6.625% 10/31/01 BankAmerica Aa3 500 583 Corp. 10% 2/1/03 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (D) FINANCE - CONTINUED BANKS - CONTINUED BankBoston NA A2 $ 10,800 $ 10,886 (Bearer) 6.375% 3/25/08 BanPonce Corp.: 5.75% A3 690 691 3/1/99 6.378% A3 770 773 4/8/99 Barclays Bank PLC yankee: 5.875% A1 4,500 4,541 7/15/00 5.95% A1 5,400 5,496 7/15/01 Capital One Bank: 6.375% Baa3 2,400 2,452 2/15/03 6.42% Baa3 4,000 4,020 11/12/99 Capital One Ba1 2,900 2,962 Financial Corp. 7.125% 8/1/08 Central Fidelity A1 1,000 1,104 Banks, Inc. 8.15% 11/15/02 Fleet/Norstar A3 250 277 Financial Group, Inc. 9% 12/1/01 Kansallis-Osake- A3 430 492 Pankki, New York 10% 5/1/02 MBNA Corp.: 6.34% Baa2 800 819 6/2/03 6.875% Baa2 3,600 3,790 11/15/02 NB Capital Trust Aa3 3,980 4,370 IV 8.25% 4/15/27 Provident Bank, A3 210 213 Cincinnati 6.125% 12/15/00 Providian Baa3 7,750 7,824 National Bank 6.25% 5/7/01 Summit Bancorp BBB 1,000 1,121 8.625% 12/10/02 Union Planters Baa2 1,200 1,240 Corp. 6.75% 11/1/05 Union Planters A3 1,000 1,039 National Bank 6.81% 8/20/01 56,514 CREDIT & OTHER FINANCE - 5.4% Associates Corp. of North America: 6% 4/15/03 Aa3 2,400 2,474 6% 7/15/05 Aa3 10,000 10,311 AT&T Capital Corp.: 6.16% Baa3 750 759 12/3/99 6.41% Baa3 2,000 2,017 8/13/99 Bank of New A1 3,000 3,269 York, Inc. Capital I 7.97% 12/31/26 BankBoston A2 1,750 1,736 Capital Trust II 7.75% 12/15/26 BanPonce Trust I A3 1,960 2,004 8.327% 2/1/27 BCH Cayman A2 180 191 Islands Ltd. yankee 7.7% 7/15/06 Chase Capital I Aa3 10,570 10,815 7.67% 12/1/26 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (D) FINANCE - CONTINUED CREDIT & OTHER FINANCE - CONTINUED ERP Operating A3 $ 1,000 $ 1,014 LP 6.55% 11/15/01 First Security A3 5,420 6,051 Capital I 8.41% 12/15/26 First Union BBB+ 2,000 2,171 Institutional Capital I 8.04% 12/1/26 Fleet Mortgage A2 250 253 Group, Inc. 6.5% 9/15/99 General Electric Aaa 1,750 1,763 Capital Corp. 6.94% 4/13/09 (a) GS Escrow Ba1 5,300 5,232 Corp. 7.125% 8/1/05 (b) Household A2 8,000 8,124 Finance Corp. 6% 5/8/00 KeyCorp A1 1,100 1,173 Institutional Capital A 7.826% 12/1/26 MCN Investment Baa3 800 814 Corp. 6.03% 2/1/01 Morgan (J.P.) Aa3 4,620 4,795 Capital Trust II 7.95% 2/1/27 PNC Institutional A2 2,000 2,186 Capital Trust 8.315% 5/15/27 (b) Spieker Baa2 1,650 1,672 Properties LP 6.9% 1/15/04 68,824 INSURANCE - 0.4% Executive Risk Baa3 2,750 2,767 Capital Trust 8.675% 2/1/27 Protective Life A3 400 454 Corp. 7.95% 7/1/04 SunAmerica, Inc. Baa1 1,500 1,514 6.2% 10/31/99 4,735 SAVINGS & LOANS - 0.5% Great Western A3 4,000 4,344 Finance Trust II 8.206% 2/1/27 Long Island Baa3 1,550 1,565 Savings Bank FSB 6.2% 4/2/01 5,909 SECURITIES INDUSTRY - 0.1% Amvescap PLC A3 1,500 1,541 6.375% 5/15/03 TOTAL FINANCE 137,523 INDUSTRIAL MACHINERY & EQUIPMENT - 1.2% INDUSTRIAL MACHINERY & EQUIPMENT - 0.7% Tyco Baa1 8,000 8,169 International Group SA yankee 6.125% 6/15/01 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (D) INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED POLLUTION CONTROL - 0.5% WMX Technologies, Inc.: 6.25% Baa3 $ 2,200 $ 2,208 4/1/99 7.1% 8/1/26 Baa3 4,000 4,296 6,504 TOTAL INDUSTRIAL MACHINERY & 14,673 EQUIPMENT MEDIA & LEISURE - 4.3% BROADCASTING - 2.7% Clear Channel Communicatio ns, Inc.: 6.875% Baa3 5,000 4,921 6/15/18 7.25% Baa3 2,500 2,540 10/15/27 Continental Cablevision, Inc.: 8.3% Baa3 735 831 5/15/06 9% 9/1/08 Baa3 1,710 2,057 Cox Baa2 2,560 2,699 Communicatio ns, Inc. 6.4% 8/1/08 TCI Communicatio ns, Inc.: 6.375% Baa3 350 366 5/1/03 6.875% Baa3 1,240 1,344 2/15/06 8.25% Baa3 120 133 1/15/03 8.75% Baa3 7,000 8,745 8/1/15 9.8% 2/1/12 Baa3 3,150 4,211 Time Warner, Inc.: 6.875% Baa3 2,020 2,087 6/15/18 9.125% Baa3 3,000 3,767 1/15/13 33,701 ENTERTAINMENT - 0.7% Viacom, Inc. Ba2 7,950 8,585 7.75% 6/1/05 PUBLISHING - 0.9% News America Baa3 6,000 6,631 Holdings, Inc. 8% 10/17/16 News America, Baa3 1,400 1,440 Inc. 6.625% 1/9/08 Time Warner Entertainment Co. LP: 8.375% Baa2 1,750 2,106 3/15/23 8.875% Baa2 750 935 10/1/12 10.15% Baa2 500 676 5/1/12 11,788 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (D) MEDIA & LEISURE - CONTINUED RESTAURANTS - 0.0% Darden Baa1 $ 500 $ 492 Restaurants, Inc. 6.375% 2/1/06 TOTAL MEDIA & LEISURE 54,566 NONDURABLES - 0.7% FOODS - 0.2% ConAgra, Inc. Baa1 2,040 2,202 7.125% 10/1/26 TOBACCO - 0.5% Philip Morris Companies, Inc.: 6.95% A2 4,000 4,252 6/1/06 7% 7/15/05 A2 2,000 2,138 6,390 TOTAL NONDURABLES 8,592 RETAIL & WHOLESALE - 1.1% GENERAL MERCHANDISE STORES - 0.6% Dayton Hudson A3 1,000 1,045 Corp. 6.4% 2/15/03 Federated Department Stores, Inc.: 6.79% Baa2 2,000 2,114 7/15/27 8.5% Baa2 4,000 4,494 6/15/03 7,653 GROCERY STORES - 0.5% American Stores Baa2 2,000 2,264 Co. 7.5% 5/1/37 Kroger Co. 6% Baa3 3,470 3,516 7/1/00 5,780 TOTAL RETAIL & WHOLESALE 13,433 TECHNOLOGY - 0.5% COMPUTERS & OFFICE EQUIPMENT - 0.5% Comdisco, Inc. Baa1 6,000 6,161 6.375% 11/30/01 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (D) TRANSPORTATION - 1.1% AIR TRANSPORTATION - 0.3% Delta Air Lines, Baa1 $ 2,479 $ 2,739 Inc. equipment trust certificate 8.54% 1/2/07 United Air Lines, Baa3 1,000 1,378 Inc. 10.25% 7/15/21 4,117 RAILROADS - 0.8% Burlington Northern Santa Fe Corp.: 6.53% Baa2 5,000 5,246 7/15/37 6.875% Baa2 2,000 2,083 12/1/27 Norfolk Southern Baa1 2,510 2,767 Corp. 7.05% 5/1/37 10,096 TOTAL TRANSPORTATION 14,213 UTILITIES - 4.8% CELLULAR - 1.1% 360 Degrees Communicatio ns Co.: 7.125% Baa1 279 298 3/1/03 7.5% 3/1/06 Baa1 2,150 2,411 AirTouch Baa2 7,000 7,367 Communicatio ns, Inc. 6.35% 6/1/05 Cable & Baa1 4,330 4,427 Wireless Communicatio ns PLC 6.375% 3/6/03 14,503 ELECTRIC UTILITY - 2.0% Avon Energy Partners Holdings: 6.46% Baa2 3,200 3,279 3/4/08 (b) 7.05% Baa2 6,000 6,436 12/11/07 ( b) British Columbia Aa2 410 435 Hydro & Power Authority yankee 12.5% 1/15/14 DR Investments Baa1 2,000 2,104 yankee 7.1% 5/15/02 (b) Hydro-Quebec A2 250 298 yankee 8% 2/1/13 Israel Electric Corp. Ltd.: yankee 7.25% A3 1,000 1,021 12/15/06 ( b) 7.75% A3 5,195 4,933 12/15/27 ( b) Philadelphia Electric Co. 1st & ref. mtg.: 7.75% Baa1 1,000 1,037 5/1/23 8.25% Baa1 100 105 9/1/22 8.625% Baa1 300 316 6/1/22 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (D) UTILITIES - CONTINUED ELECTRIC UTILITY - CONTINUED Texas Utilities Baa3 $ 5,265 $ 5,342 Co. 6.375% 1/1/08 25,306 GAS - 0.3% Mitchell Energy Baa3 2,520 2,562 & Development Corp. 8% 7/15/99 Panhandle A3 1,000 1,035 Eastern Corp. 8.625% 12/1/99 3,597 TELEPHONE SERVICES - 1.4% GTE Corp. Baa1 1,000 1,068 7.83% 5/1/23 WorldCom, Inc.: 6.4% Baa2 12,370 13,053 8/15/05 9.375% Baa2 3,486 3,642 1/15/04 17,763 TOTAL UTILITIES 61,169 TOTAL NONCONVERTIBLE 372,030 BONDS (Cost $361,729)
U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - 21.1% U.S. GOVERNMENT AGENCY OBLIGATIONS - 2.3% Fannie Mae Aaa 1,800 1,894 5.75% 6/15/05 Federal Home Loan Bank: 7.31% Aaa 5,000 5,598 6/16/04 7.36% Aaa 7,900 8,892 7/1/04 7.87% Aaa 1,700 1,968 10/20/04 Financing Corp. Aaa 5,606 4,335 Coupon Strip 0% 3/26/04 Freddie Mac Aaa 4,350 5,113 8.115% 1/31/05 U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (D) U.S. GOVERNMENT AGENCY OBLIGATIONS - CONTINUED Guaranteed Aaa $ 16 $ 17 Export Trust Certificates (assets of Trust guaranteed by U.S. Government through Export-Import Bank) Series 1994-C, 6.61% 9/15/99 U.S. Department Aaa 1,000 1,163 of Housing and Urban Development government guaranteed participation certificates Series 1995-A, 8.24% 8/1/04 TOTAL U.S. GOVERNMENT AGENCY 28,980 OBLIGATIONS U.S. TREASURY OBLIGATIONS - 18.8% U.S. Treasury Aaa 16,300 21,946 Bond 7.625% 2/15/25 U.S. Treasury Notes: 5.875% Aaa 530 540 2/15/00 5.875% Aaa 30,500 31,825 11/30/01 6.375% Aaa 15,400 16,247 9/30/01 7% 7/15/06 Aaa 144,020 167,783 TOTAL U.S. TREASURY OBLIGATIONS 238,341 TOTAL U.S. GOVERNMENT AND 267,321 GOVERNMENT AGENCY OBLIGATIONS (Cost $252,653)
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 31.8% FANNIE MAE - 30.0% 5.5% 1/1/09 to Aaa 14,416 14,358 4/1/11 6% 2/1/13 to Aaa 89,480 90,348 11/1/25 6.5% 12/16/03 Aaa 211,528 215,091 to 10/1/28 7% 10/1/28 (e) Aaa 41,375 42,539 7.5% 10/1/28 Aaa 15,000 15,478 8% 10/1/28 Aaa 652 677 9.5% 4/1/17 to Aaa 1,017 1,097 12/1/18 TOTAL FANNIE MAE 379,588 FREDDIE MAC - 0.0% 7% 6/1/01 to Aaa 496 501 7/1/01 U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (D) GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 1.8% 6% 10/15/08 to Aaa $ 3,492 $ 3,557 5/15/09 7.5% 1/15/26 Aaa 17,511 18,159 to 8/15/28 9.5% 7/15/16 Aaa 617 666 to 3/15/22 TOTAL GOVERNMENT NATIONAL 22,382 MORTGAGE ASSOCIATION TOTAL U.S. GOVERNMENT 402,471 AGENCY - MORTGAGE-BACKED SECURITIES (Cost $393,864)
ASSET-BACKED SECURITIES - 3.3% Arcadia Aaa 14,000 14,298 Automobile Receivables Trust 6.5% 6/17/02 Capita Baa2 1,760 1,792 Equipment Receivables Trust 6.48% 10/15/06 Chevy Chase Aaa 1,475 1,494 Auto Receivables Trust 5.91% 12/15/04 Contimortgage Aaa 5,000 5,022 Home Equity Loan Trust 6.26% 7/15/12 Ford Credit Auto Owner Trust: 6.2% Baa3 1,790 1,823 12/15/02 6.4% A1 1,730 1,769 5/15/02 6.4% Baa3 1,020 1,025 12/15/02 Ford Credit Aaa 192 193 Grantor Trust 5.9% 10/15/00 Green Tree Aaa 579 580 Financial Corp. 6.1% 4/15/27 Key Auto Finance Trust: 6.3% A2 2,041 2,051 10/15/03 6.65% Baa3 599 605 10/15/03 MBNA Master Aaa 5,000 5,306 Credit Card Trust II 6.55% 1/15/07 PNC Student Aaa 5,700 5,799 Loan Trust I 6.314% 1/25/01 Premier Auto Aaa 415 415 Trust 6% 5/6/00 TOTAL ASSET-BACKED 42,172 SECURITIES (Cost $41,238) COMMERCIAL MORTGAGE SECURITIES - 1.6% MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (D) CS First Boston Mortgage Securities Corp.: Series 1998 Baa2 $ 5,260 $ 5,199 FLI Class E, 6.5063% 1/10/13 (b) (c) Series Baa2 2,200 2,204 1997-C2 Class D, 7.27% 1/17/35 Equitable Life Assurance Society of the United States (The): Series 174 Aa2 1,000 1,081 Class B1, 7.33% 5/15/06 (b) Series 1996-1 A2 1,000 1,083 Class C1, 7.52% 5/15/06 (b) GS Mortgage Baa3 2,000 1,950 Securities Corp. II Series 1998-GLII Class E, 7.1905% 4/13/31 (b)(c ) Morgan Stanley Capital I, Inc. Series 1998-CF1: Class D, Baa2 3,125 3,156 7.35% 1/15/12 Class E, Baa3 1,074 1,026 7.35% 12/15/12 Structured Asset AAA 947 953 Securities Corp. sequential pay Series 1996 Class A-2A, 7.75% 2/25/28 Thirteen Aaa 3,000 3,156 Affiliates of General Growth Properties, Inc. sequential pay Series A-2, 6.602% 12/15/10 (b) Wells Fargo Aaa 576 595 Capital Markets Apartment Financing Trust 6.56%, 12/29/05 (b) TOTAL COMMERCIAL 20,403 MORTGAGE SECURITIES (Cost $19,964) FOREIGN GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - 1.1% Manitoba A1 6,300 6,684 Province yankee 6.875% 9/15/02 New Brunswick A1 500 563 Province yankee 7.625% 2/15/13 Ontario Province Aa3 2,000 2,204 7%, 8/4/05 Quebec Province A2 4,000 4,381 7% 1/30/07 Saskatchewan A2 300 391 Province yankee 8.5% 7/15/22 TOTAL FOREIGN GOVERNMENT 14,223 AND GOVERNMENT AGENCY OBLIGATIONS (Cost $13,481) SUPRANATIONAL OBLIGATIONS - 0.4% Inter American Aaa 5,000 5,488 Development Bank yankee 6.29% 7/16/27 (Cost $4,969) CERTIFICATES OF DEPOSIT - 2.2% MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (D) Canadian Aa3 $ 2,500 $ 2,553 Imperial Bank of Commerce, New York yankee 6.2% 8/1/00 Sumitomo Bank - 25,000 25,005 Ltd. Japan yankee 6.04% 10/19/98 TOTAL CERTIFICATES OF DEPOSIT 27,558 (Cost $27,504) CASH EQUIVALENTS - 9.1% MATURITY AMOUNT (000S) Investments in $ 114,689 114,671 repurchase agreements (U.S. Treasury obligations), in a joint trading account at 5.77%, dated 9/30/98 due 10/1/98 (Cost $114,671) TOTAL INVESTMENT IN $ 1,266,337 SECURITIES - 100% (Cost $1,230,073) LEGEND (a) Debt obligation initially issued at one coupon which converts to a higher coupon at a specified date. The rate shown is the rate at period end. (b) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $46,598,000 or 3.8% of net assets. (c) The coupon rate shown on floating or adjustable rate securities represents the rate at period end. The due dates on these types of securities reflects the next interest rate reset date or, when applicable, the final maturity date. (d) Standard & Poor's credit ratings are used in the absence of a rating by Moody's Investors Service, Inc. (e) Security purchased on a delayed delivery or when-issued basis (see Note 2 of Notes to Financial Statements). OTHER INFORMATION The composition of long-term debt holdings as a percentage of total value of investments in securities, is as follows (ratings are unaudited): MOODY'S RATINGS S&P RATINGS Aaa, Aa, A 67.1% AAA, AA, A 67.4% Baa 18.6% BBB 17.4% Ba 2.9% BB 3.0% INCOME TAX INFORMATION At September 30, 1998, the aggregate cost of investment securities for income tax purposes was $1,230,127,000. Net unrealized appreciation aggregated $36,211,000, of which $37,961,000 related to appreciated investment securities and $1,750,000 related to depreciated investment securities. The fund hereby designates approximately $1,100,000 as a capital gain dividend for the purpose of the dividend paid deduction. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES AMOUNTS IN THOUSANDS (EXCEPT PER-SHARE AMOUNT) SEPTEMB ER 30, 1998 ASSETS INVESTMENT IN $ 1,266,337 SECURITIES, AT VALUE (INCLUDING REPURCHASE AGREEMENTS OF $114,671) (COST $1,230,073) - - SEE ACCOMPANYING SCHEDULE RECEIVABLE FOR 15,413 INVESTMENTS SOLD RECEIVABLE FOR 2,010 FUND SHARES SOLD INTEREST 12,446 RECEIVABLE TOTAL ASSETS 1,296,206 LIABILITIES PAYABLE FOR $ 15,493 INVESTMENTS PURCHASED REGULAR DELIVERY DELAYED 58,303 DELIVERY PAYABLE FOR FUND 930 SHARES REDEEMED DISTRIBUTIONS 814 PAYABLE ACCRUED 374 MANAGEMENT FEE OTHER PAYABLES 1 AND ACCRUED EXPENSES TOTAL LIABILITIES 75,915 NET ASSETS $ 1,220,291 NET ASSETS CONSIST OF: PAID IN CAPITAL $ 1,180,848 DISTRIBUTIONS IN (14) EXCESS OF NET INVESTMENT INCOME ACCUMULATED 3,193 UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS NET UNREALIZED 36,264 APPRECIATION (DEPRECIATION) ON INVESTMENTS NET ASSETS, FOR $ 1,220,291 114,029 SHARES OUTSTANDING NET ASSET VALUE, $10.70 OFFERING PRICE AND REDEMPTION PRICE PER SHARE ($1,220,291 (DIVIDED BY) 114,029 SHARES) STATEMENT OF OPERATIONS AMOUNTS IN THOUSANDS YEAR ENDED SEPTEMBER 30, 1998 INVESTMENT $ 53,196 INCOME INTEREST EXPENSES MANAGEMENT FEE $ 5,189 NON-INTERESTED 3 TRUSTEES' COMPENSATION TOTAL EXPENSES 5,192 BEFORE REDUCTIONS EXPENSE (2,086) 3,106 REDUCTIONS NET INVESTMENT 50,090 INCOME REALIZED AND 11,120 UNREALIZED GAIN (LOSS) NET REALIZED GAIN (LOSS) ON INVESTMENT SECURITIES CHANGE IN NET 28,204 UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENT SECURITIES NET GAIN (LOSS) 39,324 NET INCREASE $ 89,414 (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS STATEMENT OF CHANGES IN NET ASSETS AMOUNTS IN YEAR ENDED YEAR ENDED THOUSANDS SEPTEMBER 30, SEPTEMBER 30, 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS $ 50,090 $ 25,682 NET INVESTMENT INCOME NET REALIZED 11,120 488 GAIN (LOSS) CHANGE IN NET 28,204 11,421 UNREALIZED APPRECIATION (DEPRECIATION) NET INCREASE 89,414 37,591 (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS DISTRIBUTIONS TO (50,184) (25,740) SHAREHOLDERS FROM NET INVESTMENT INCOME SHARE 918,877 359,111 TRANSACTIONS NET PROCEEDS FROM SALES OF SHARES REINVESTMENT 43,355 21,867 OF DISTRIBUTIONS COST OF SHARES (331,925) (185,908) REDEEMED NET INCREASE 630,307 195,070 (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS TOTAL 669,537 206,921 INCREASE (DECREASE) IN NET ASSETS NET ASSETS BEGINNING OF 550,754 343,833 PERIOD END OF PERIOD $ 1,220,291 $ 550,754 (INCLUDING DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME OF $14 AND $201, RESPECTIVELY) OTHER INFORMATION SHARES SOLD 87,981 35,505 ISSUED IN 4,148 2,161 REINVESTMENT OF DISTRIBUTIONS REDEEMED (31,812) (18,407) NET INCREASE 60,317 19,259 (DECREASE) FINANCIAL HIGHLIGHTS YEARS ENDED SEPTEMB ER 30, 1998 1997 1996 1995 1994 SELECTED PER-SHARE DATA NET ASSET VALUE, $ 10.250 $ 9.980 $ 10.170 $ 9.510 $ 10.940 BEGINNING OF PERIOD INCOME FROM .634B .640 B .655 .693 .668 INVESTMENT OPERATIONS NET INVESTMENT INCOME NET REALIZED .453 .273 (.211) .673 (1.384) AND UNREALIZED GAIN (LOSS) TOTAL FROM 1.087 .913 .444 1.366 (.716) INVESTMENT OPERATIONS LESS DISTRIBUTIONS FROM NET (.637) (.643) (.634) (.686) (.704) INVESTMENT INCOME IN EXCESS OF NET - - - (.020) (.010) REALIZED GAIN TOTAL (.637) (.643) (.634) (.706) (.714) DISTRIBUTIONS NET ASSET VALUE, $ 10.700 $ 10.250 $ 9.980 $ 10.170 $ 9.510 END OF PERIOD TOTAL RETURN A 10.95% 9.43% 4.46% 14.94% (6.75)% RATIOS AND SUPPLEMENTAL DATA NET ASSETS, END $ 1,220 $ 551 $ 344 $ 148 $ 106 OF PERIOD (IN MILLIONS) RATIO OF EXPENSES .38% C .48% C .65% .65% .65% TO AVERAGE NET ASSETS RATIO OF NET 6.11% 6.36% 6.35% 6.92% 6.90% INVESTMENT INCOME TO AVERAGE NET ASSETS PORTFOLIO TURNOVER 222% 194% 169% 147% 44% RATE A THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). B NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. C FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). NOTES TO FINANCIAL STATEMENTS For the period ended September 30, 1998 1. SIGNIFICANT ACCOUNTING POLICIES. Spartan Investment Grade Bond Fund (the fund) is a fund of Fidelity Charles Street Trust (the trust) and is authorized to issue an unlimited number of shares. The trust is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as an open-end management investment company organized as a Massachusetts business trust. The financial statements have been prepared in conformity with generally accepted accounting principles which require management to make certain estimates and assumptions at the date of the financial statements. The following summarizes the significant accounting policies of the fund: SECURITY VALUATION. Securities are valued based upon a computerized matrix system and/or appraisals by a pricing service, both of which consider market transactions and dealer-supplied valuations. Securities (including restricted securities) for which market quotations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Board of Trustees. Short-term securities with remaining maturities of sixty days or less for which quotations are not readily available are valued at amortized cost or original cost plus accrued interest, both of which approximate current value. INCOME TAXES. As a qualified regulated investment company under Subchapter M of the Internal Revenue Code, the fund is not subject to income taxes to the extent that it distributes substantially all of its taxable income for its fiscal year. The schedule of investments includes information regarding income taxes under the caption "Income Tax Information." INVESTMENT INCOME. Interest income, which includes accretion of original issue discount, is accrued as earned. EXPENSES. Most expenses of the trust can be directly attributed to a fund. Expenses which cannot be directly attributed are apportioned among the funds in the trust. DISTRIBUTIONS TO SHAREHOLDERS. Distributions are declared daily and paid monthly from net investment income. Distributions from realized gains, if any, are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences, which may result in distribution reclassifications, are primarily due to differing treatments for paydown gains/losses on certain securities, market discount, capital loss carryforwards and losses deferred due to wash sales, futures and excise tax regulations. The fund also utilized earnings and profits distributed to shareholders on redemption of shares as a part of the dividends paid deduction for income tax purposes. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to paid in capital. Distributions in excess of net investment income and accumulated undistributed net realized gain (loss) on investments may include temporary book and tax basis differences that will reverse in a subsequent period. Any taxable income or gain remaining at fiscal year end is distributed in the following year. 1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED SECURITY TRANSACTIONS. Security transactions are accounted for as of trade date. Gains and losses on securities sold are determined on the basis of identified cost. 2. OPERATING POLICIES. JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the Securities and Exchange Commission (the SEC), the fund, along with other affiliated entities of Fidelity Management & Research Company (FMR), may transfer uninvested cash balances into one or more joint trading accounts. These balances are invested in one or more repurchase agreements for U.S. Treasury or Federal Agency obligations. REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency securities are transferred to an account of the fund, or to the Joint Trading Account, at a bank custodian. The securities are marked-to-market daily and maintained at a value at least equal to the principal amount of the repurchase agreement (including accrued interest). FMR, the fund's investment adviser, is responsible for determining that the value of the underlying securities remains in accordance with the market value requirements stated above. INTERFUND LENDING PROGRAM. Pursuant to an Exemptive Order issued by the SEC, the fund, along with other registered investment companies having management contracts with FMR, may participate in an interfund lending program. This program provides an alternative credit facility allowing the fund to borrow from, or lend money to, other participating funds. DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell securities on a delayed delivery basis. Payment and delivery may take place a month or more after the date of the transaction. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. The market values of the securities purchased or sold on a delayed delivery basis are identified as such in the fund's schedule of investments. The fund may receive compensation for interest forgone in the purchase of a delayed delivery security. With respect to purchase commitments, the fund identifies securities as segregated in its custodial records with a value at least equal to the amount of the commitment. Losses may arise due to changes in the market value of the underlying securities or if the counterparty does not perform under the contract. RESTRICTED SECURITIES. The fund is permitted to invest in securities that are subject to legal or contractual restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are registered. Disposal of these securities may involve time-consuming negotiations and expense, and prompt sale at an acceptable price may be difficult. At the end of the period, the fund had no investments in restricted securities (excluding 144A issues). 3. PURCHASES AND SALES OF INVESTMENTS. Purchases and sales of securities, other than short-term securities, aggregated $2,276,450,000 and $1,680,571,000, respectively, of which U.S. government and government agency obligations aggregated $1,778,752,000 and $1,416,157,000, respectively 4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES. MANAGEMENT FEE. As the fund's investment adviser, FMR pays all expenses, except the compensation of the non-interested Trustees and certain exceptions such as interest, taxes, brokerage commissions and extraordinary expenses. FMR receives a fee that is computed daily at an annual rate of .60% of the fund's average net assets. On June 27, 1998 FMR reduced the management fee rate for Spartan Investment Grade Bond Fund from .65% to .60%. FMR also bears the cost of providing shareholder services to the fund. To offset the cost of providing these services, FMR or its affiliates collect certain transaction fees from the fund's shareholders which amounted to $12,000 for the period. Effective June 27, 1998 these transaction fees were eliminated. 5. EXPENSE REDUCTIONS. FMR voluntarily agreed to reimburse the fund's operating expenses (excluding interest, taxes, brokerage commissions and extraordinary expenses) above an annual rate of .38% of average net assets. For the period, the reimbursement reduced the expenses by $2,075,000. Effective January 1, 1999, the fund's expense limitation will be changed from .38% to .50% of average net assets. In addition, FMR has entered into arrangements on behalf of the fund with the fund's custodian and transfer agent whereby credits realized as a result of uninvested cash balances were used to reduce a portion of the fund's expenses. During the period, the fund's expenses were reduced by $11,000 under these arrangements. REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Fidelity Charles Street Trust and the Shareholders of Spartan Investment Grade Bond Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Spartan Investment Grade Bond Fund (a fund of Fidelity Charles Street Trust) at September 30, 1998, the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Spartan Investment Grade Bond Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at September 30, 1998 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. /s/PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Boston, Massachusetts November 6, 1998 DISTRIBUTIONS A total of 18.35% of the dividends distributed during the fiscal year was derived from interest on U.S. Government securities which is generally exempt from state income tax. The fund will notify shareholders in January 1999 of the applicable percentage for use in preparing 1998 income tax returns. INVESTMENT ADVISER Fidelity Management & Research Company Boston, MA INVESTMENT SUB-ADVISERS Fidelity Management & Research (U.K.) Inc., London, England Fidelity Management & Research (Far East) Inc., Tokyo, Japan OFFICERS Edward C. Johnson 3d, President Robert C. Pozen, Senior Vice President Fred L. Henning, Jr., Vice President Dwight D. Churchill, Vice President Kevin E. Grant, Vice President Stanley N. Griffith, Assistant Vice President Eric D. Roiter, Secretary Richard A. Silver, Treasurer John H. Costello, Assistant Treasurer Leonard M. Rush, Assistant Treasurer Thomas J. Simpson, Assistant Treasurer BOARD OF TRUSTEES Ralph F. Cox * Phyllis Burke Davis * Robert M. Gates * Edward C. Johnson 3d E. Bradley Jones * Donald J. Kirk * Peter S. Lynch Marvin L. Mann * William O. McCoy * Gerald C. McDonough * Robert C. Pozen Thomas R. Williams * ADVISORY BOARD J. Gary Burkhead GENERAL DISTRIBUTOR Fidelity Distributors Corporation Boston, MA * INDEPENDENT TRUSTEES TRANSFER AND SHAREHOLDER SERVICING AGENT Fidelity Service Company, Inc. Boston, MA CUSTODIAN The Bank of New York New York, NY FIDELITY'S TAXABLE BOND FUNDS Capital & Income Ginnie Mae Government Income High Income Intermediate Bond Intermediate Government Income International Bond Investment Grade Bond New Markets Income Short-Intermediate Government Short-Term Bond Spartan(registered trademark) Ginnie Mae Spartan Government Income Spartan Investment Grade Bond Spartan Short-Intermediate Government Spartan Short-Term Bond Strategic Income Target Timeline SM 1999, 2001 & 2003 THE FIDELITY TELEPHONE CONNECTION MUTUAL FUND 24-HOUR SERVICE Exchanges/Redemptions 1-800-544-7777 Account Assistance 1-800-544-6666 Product Information 1-800-544-8888 Retirement Accounts 1-800-544-4774 (8 a.m. - 9 p.m.) TDD Service 1-800-544-0118 for the deaf and hearing impaired (9 a.m. - 9 p.m. Eastern time) TouchTone Xpress(registered trademark)(AUTOMATED GRAPHIC) 1-800-544-5555 (AUTOMATED GRAPHIC) AUTOMATED LINE FOR QUICKEST SERVICE SIG-ANN-1198 64333 1.703372.101 (FIDELITY LOGO GRAPHIC)(REGISTERED TRADEMARK) Corporate Headquarters 82 Devonshire St., Boston, MA 02109 www.fidelity.com SPARTAN(REGISTERED TRADEMARK) SHORT-TERM BOND FUND ANNUAL REPORT SEPTEMBER 30, 1998 (2 FIDELITY LOGO GRAPHICS)(REGISTERED TRADEMARK) CONTENTS PRESIDENT'S MESSAGE 3 NED JOHNSON ON INVESTING STRATEGIES. PERFORMANCE 4 HOW THE FUND HAS DONE OVER TIME. FUND TALK 7 THE MANAGER'S REVIEW OF FUND PERFORMANCE, STRATEGY AND OUTLOOK. INVESTMENT CHANGES 10 A SUMMARY OF MAJOR SHIFTS IN THE FUND'S INVESTMENTS OVER THE PAST SIX MONTHS. INVESTMENTS 11 A COMPLETE LIST OF THE FUND'S INVESTMENTS WITH THEIR MARKET VALUES. FINANCIAL STATEMENTS 23 STATEMENTS OF ASSETS AND LIABILITIES, OPERATIONS, AND CHANGES IN NET ASSETS, AS WELL AS FINANCIAL HIGHLIGHTS. NOTES 27 NOTES TO THE FINANCIAL STATEMENTS. REPORT OF INDEPENDENT 30 THE AUDITORS' OPINION. ACCOUNTANTS DISTRIBUTIONS 31 To reduce expenses and demonstrate respect for our environment, we have initiated a project through which we will begin eliminating duplicate copies of most financial reports and prospectuses to most households, even if they have more than one account in the fund. If additional copies of financial reports, prospectuses or historical account information are needed, please call 1-800-544-6666. THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS. MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK. FOR MORE INFORMATION ON ANY FIDELITY FUND, INCLUDING CHARGES AND EXPENSES, CALL 1-800-544-8888 FOR A FREE PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY. PRESIDENT'S MESSAGE (PHOTO_OF_EDWARD_C_JOHNSON_3D) DEAR SHAREHOLDER: The stock and bond markets continued to be influenced by competing factors as the third quarter of 1998 ended. On the one hand, low inflation, low unemployment and moderate growth in the U.S. economy provided a foundation for positive returns. But growing concerns about U.S. corporate earnings, combined with fears about the health of the economies and financial markets in Japan, Russia and many emerging markets, led to a continuation of the volatility that has marked most of the year. While it's impossible to predict the future direction of the markets with any degree of certainty, there are certain basic principles that can help investors plan for their future needs. The longer your investment time frame, the less likely it is that you will be affected by short-term market volatility. A 10-year investment horizon appropriate for saving for a college education, for example, enables you to weather market cycles in a long-term fund, which may have a higher risk potential, but also has a higher potential rate of return. An intermediate-length fund could make sense if your investment horizon is two to four years, while a short-term bond fund could be the right choice if you need your money in one or two years. If your time horizon is less than a year, you might want to consider moving some of your bond investment into a money market fund. These funds seek income and a stable share price by investing in high-quality, short-term investments. Of course, it's important to remember that there is no assurance that a money market fund will achieve its goal of maintaining a stable net asset value of $1.00 per share, and that these types of funds are neither insured nor guaranteed by any agency of the U.S. government. Finally, no matter what your time horizon or portfolio diversity, it makes good sense to follow a regular investment plan, investing a certain amount of money in a fund at the same time each month or quarter and periodically reviewing your overall portfolio. By doing so, you won't get caught up in the excitement of a rapidly rising market, nor will you buy all your shares at market highs. While this strategy - known as dollar cost averaging - won't assure a profit or protect you from a loss in a declining market, it should help you lower the average cost of your purchases. If you have questions, please call us at 1-800-544-8888. We are available 24 hours a day, seven days a week to provide you the information you need to make the investments that are right for you. Best regards, Edward C. Johnson 3d PERFORMANCE: THE BOTTOM LINE There are several ways to evaluate a fund's historical performance. You can look at the total percentage change in value, the average annual percentage change or the growth of a hypothetical $10,000 investment. Total return reflects the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains (the profits earned upon the sale of securities that have grown in value). You can also look at the fund's income, as reflected in the fund's yield, to measure performance. If Fidelity had not reimbursed certain fund expenses, the total returns and dividends would have been lower. CUMULATIVE TOTAL RETURNS PERIODS ENDED PAST 1 PAST 5 LIFE OF SEPTEMBER 30, YEAR YEARS FUND 1998 SPARTAN 7.33% 25.98% 35.67% SHORT-TERM BOND LB 1-3 YEAR 7.87% 33.67% N/A GOVT/CORP SHORT 6.68% 30.31% N/A INVESTMENT GRADE DEBT FUNDS AVERAGE CUMULATIVE TOTAL RETURNS show the fund's performance in percentage terms over a set period - in this case, one year, five years or since the fund started on October 1, 1992. For example, if you had invested $1,000 in a fund that had a 5% return over the past year, the value of your investment would be $1,050. You can compare the fund's returns to the performance of the Lehman Brothers 1-3 Year Government/Corporate Bond Index - a market value weighted performance benchmark for government and corporate fixed-rate debt issues, with maturities between one and three years. To measure how the fund's performance stacked up against its peers, you can compare it to the short investment grade debt funds average, which reflects the performance of mutual funds with similar objectives tracked by Lipper Analytical Services, Inc. The past one year average represents a peer group of 100 mutual funds. These benchmarks include reinvested dividends and capital gains, if any, and exclude the effect of sales charges. AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED PAST 1 PAST 5 LIFE OF SEPTEMBER 30, YEAR YEARS FUND 1998 SPARTAN 7.33% 4.73% 5.22% SHORT-TERM BOND LB 1-3 YEAR 7.87% 5.98% N/A GOVT/CORP SHORT 6.68% 5.43% N/A INVESTMENT GRADE DEBT FUNDS AVERAGE AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and show you what would have happened if the fund had performed at a constant rate each year. (Note: Lipper calculates average annual total returns by annualizing each fund's total return, then taking an arithmetic average. This may produce a slightly different figure than that obtained by averaging the cumulative total returns and annualizing the result.) $10,000 OVER LIFE OF FUND Spartan Short-Term Bond LB 1-3 Year Govt/Corp 00449 LB013 1992/10/31 10000.00 10000.00 1992/11/30 10007.37 9985.91 1992/12/31 10100.06 10080.21 1993/01/31 10245.37 10187.78 1993/02/28 10362.03 10270.90 1993/03/31 10428.83 10304.27 1993/04/30 10491.81 10368.93 1993/05/31 10517.30 10345.31 1993/06/30 10633.77 10423.65 1993/07/31 10696.60 10447.49 1993/08/31 10801.74 10534.96 1993/09/30 10840.89 10568.95 1993/10/31 10900.33 10593.61 1993/11/30 10925.24 10596.72 1993/12/31 11009.87 10639.63 1994/01/31 11082.02 10707.40 1994/02/28 11001.58 10642.53 1994/03/31 10793.58 10587.81 1994/04/30 10672.90 10547.60 1994/05/31 10776.08 10561.90 1994/06/30 10637.30 10589.67 1994/07/31 10716.07 10686.05 1994/08/31 10772.43 10722.12 1994/09/30 10806.21 10698.28 1994/10/31 10793.34 10722.74 1994/11/30 10802.42 10677.76 1994/12/31 10500.90 10698.07 1995/01/31 10584.46 10845.03 1995/02/28 10686.93 10995.09 1995/03/31 10746.59 11057.48 1995/04/30 10852.82 11157.58 1995/05/31 11033.96 11350.76 1995/06/30 11103.44 11412.52 1995/07/31 11148.58 11458.12 1995/08/31 11219.00 11527.56 1995/09/30 11275.92 11584.55 1995/10/31 11374.74 11680.73 1995/11/30 11469.71 11781.25 1995/12/31 11545.13 11870.58 1996/01/31 11645.60 11972.14 1996/02/29 11604.18 11926.54 1996/03/31 11580.33 11917.84 1996/04/30 11593.17 11929.86 1996/05/31 11620.33 11957.43 1996/06/30 11710.28 12044.89 1996/07/31 11749.76 12091.74 1996/08/31 11789.36 12136.30 1996/09/30 11892.38 12247.39 1996/10/31 12024.38 12385.64 1996/11/30 12114.43 12478.50 1996/12/31 12126.29 12480.57 1997/01/31 12176.93 12540.88 1997/02/28 12207.78 12571.97 1997/03/31 12207.08 12562.23 1997/04/30 12299.58 12665.24 1997/05/31 12380.91 12753.75 1997/06/30 12475.64 12842.46 1997/07/31 12614.79 12985.06 1997/08/31 12629.16 12997.28 1997/09/30 12724.82 13097.39 1997/10/31 12809.73 13191.70 1997/11/30 12835.18 13224.86 1997/12/31 12919.79 13312.12 1998/01/31 13047.83 13440.63 1998/02/28 13069.40 13454.10 1998/03/31 13125.91 13506.54 1998/04/30 13181.18 13573.49 1998/05/31 13265.46 13647.27 1998/06/30 13333.78 13717.74 1998/07/31 13389.09 13781.58 1998/08/31 13501.85 13940.14 1998/09/30 13657.74 14127.72 IMATRL PRASUN SHR__CHT 19980930 19981006 115635 R00000000000074 $10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was invested in Spartan Short-Term Bond Fund on October 31, 1992, shortly after the fund started. As the chart shows, by September 30, 1998, the value of the investment would have grown to $13,658 - a 36.58% increase on the initial investment. For comparison, look at how the Lehman Brothers 1-3 Year Government/Corporate Bond Index did over the same period. With dividends and capital gains, if any, reinvested, the same $10,000 would have grown to $14,128 - a 41.28% increase. (CHECKMARK)UNDERSTANDING PERFORMANCE HOW A FUND DID YESTERDAY IS NO GUARANTEE OF HOW IT WILL DO TOMORROW. BOND PRICES, FOR EXAMPLE, GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. IN TURN, THE SHARE PRICE, RETURN AND YIELD OF A FUND THAT INVESTS IN BONDS WILL VARY. THAT MEANS IF YOU SELL YOUR SHARES DURING A MARKET DOWNTURN, YOU MIGHT LOSE MONEY. BUT IF YOU CAN RIDE OUT THE MARKET'S UPS AND DOWNS, YOU MAY HAVE A GAIN. TOTAL RETURN COMPONENTS YEARS ENDED SEPTEM BER 30, 1998 1997 1996 1995 1994 DIVIDEND 6.56% 6.67% 6.67% 6.49% 6.20% RETURNS CAPITAL 0.77% 0.33% -1.20% -2.14% -6.52% RETURNS TOTAL RETURNS 7.33% 7.00% 5.47% 4.35% -0.32% TOTAL RETURN COMPONENTS include both dividend returns and capital returns. A dividend return reflects the actual dividends paid by the fund. A capital return reflects both the amount paid by the fund to shareholders as capital gain distributions and changes in the fund's share price. Both returns assume the dividends or capital gains, if any, paid by the fund are reinvested. DIVIDENDS AND YIELD PERIODS ENDED PAST 1 PAST 6 PAST 1 SEPTEMBER 30, MONTH MONTHS YEAR 1998 DIVIDENDS PER 4.46(CENTS) 28.05(CENTS) 57.21(CENTS) SHARE ANNUALIZED 5.97% 6.18% 6.32% DIVIDEND RATE 30-DAY 5.42% - - ANNUALIZED YIELD DIVIDENDS per share show the income paid by the fund for a set period. If you annualize this number, based on an average share price of $9.09 over the past one month, $9.05 over the past six months and $9.05 over the past one year, you can compare the fund's income over these three periods. The 30-day annualized YIELD is a standard formula for all funds based on the yields of the bonds in the fund, averaged over the past 30 days. This figure shows you the yield characteristics of the fund's investments at the end of the period. It also helps you compare funds from different companies on an equal basis. If Fidelity had not reimbursed certain fund expenses during the periods shown, the yield would have been 5.17%. FUND TALK: THE MANAGER'S OVERVIEW MARKET RECAP As a safe haven from turbulent stock markets worldwide, bond markets reaped the benefits from the flight to quality by anxious investors during the 12-month period ending September 30, 1998. The Lehman Brothers Aggregate Bond Index - a broad measure of the U.S. taxable investment-grade bond market - returned 11.51% over the past year, two and one-half times higher than the 4.54% return generated for the six-month period ending March 31, 1998. The buying surge sent Treasury-bond yields - which move in the opposite direction of bond prices - to their lowest level in over three decades, as the yield on the benchmark 30-year bond fell to 4.96%. In spite of the global economic crisis that dominated the period, the U.S. enjoyed low interest rates, low inflation and a stable economy, which aided the performance of corporate bonds. The Lehman Brothers Corporate Bond Index returned 11.07% for the 12-month period. Mortgage-backed bonds also performed well, although lower interest rates resulted in higher refinancing activity. The Lehman Brothers Mortgage Backed Securities Index had a 12-month return of 8.62%. Interest rates fell even lower late in the period, as the Federal Reserve lowered the fed funds rate by 0.25%, the first rate cut in nearly three years. The period's biggest losers were shareholders of emerging-market debt, as the JP Morgan Emerging Markets Bond Index lost 20.89% over the past 12 months. (PHOTOGRAPH OF ANDREW DUDLEY) An interview with Andrew Dudley, Portfolio Manager of Spartan Short-Term Bond Fund Q. HOW DID THE FUND PERFORM, ANDY ? A. For the 12 months that ended September 30, 1998, the fund had a total return of 7.33%. That outperformed the 6.68% return of the short investment grade debt funds average tracked by Lipper Analytical Services. For the same period, the Lehman Brothers 1-3 Year Government/Corporate Bond Index returned 7.87%. Q. WHAT FACTORS CONTRIBUTED TO FUND'S PERFORMANCE? WHY DID THE FUND UNDERPERFORM THE LEHMAN BROTHERS INDEX? A. While the performance of the Treasury market was solid due to a flight to quality from stocks and riskier bond investments, the broader bond market was stricken by growing concerns of economic slowdown and a subsequent extremely negative supply/demand environment. Essentially, rumors began that a number of highly leveraged hedge funds were already, or were going to be, forced sellers of certain bonds. This potential deluge of supply created a huge dislocation in bond markets - creating a collapse in liquidity in both corporate and mortgage-backed securities - pushing the yield spreads relative to Treasuries to much wider levels. In the pursuit of high current income, the fund has historically taken on a higher level of exposure to the non-Treasury sectors than the Lehman Brothers 1-3 Year Government/Corporate Index. Since the fund was underweighted in government securities relative to the index, the extreme flight to quality into Treasuries caused the fund to underperform the Lehman Brothers index. The recent performance of much of the short-term bond fund universe - as represented by the Lipper peer group - suggests that many managers faced similar issues. Q. HOW WERE THE FUND'S ASSETS ALLOCATED? A. Corporate bonds and asset-backed securities - which are bonds backed by a pool of loans such as credit cards - accounted for approximately 65% of the fund's assets during the period. Within these holdings, asset-backed securities accounted for about 18% of the fund, and performed better on average than their corporate counterparts. Most of the fund's holdings in asset-backed securities were rated Aaa, the highest quality, and thus suffered to a lesser extent. By comparison, as I've already mentioned, corporate bonds suffered more severely relative to Treasuries. However, there were some bright spots within our corporate holdings that outperformed the general corporate market: namely, our cable, telecommunications, and media exposure. Mortgage-backed securities accounted for roughly 15% of the fund's allocation. Similar to corporate bonds, mortgage-backed securities were hurt relative to U.S. government bonds during the extreme flight to quality along with the increasing fear of a new refinancing and prepayment wave. Q. WHAT OTHER SECTORS CONTRIBUTED TO PERFORMANCE? A. The remaining assets in the fund - around 20% - were in U.S. government and agency obligations during the period. U.S. Treasuries and agency bonds performed the best of all the bond sectors. Unfortunately, the fund suffered relative to the index due to its underweighted position in this sector. Q. THE GLOBAL FLIGHT TO QUALITY INTO U.S. TREASURIES HAS BEEN THE BIG STORY OVER THE PAST FEW MONTHS. DO YOU SEE THIS TREND CONTINUING? A. There is very little official data on how much leveraged debt remains in the system. Consequently, it's impossible to tell how many troubled hedge funds are still out there. On the global front, while we can use our research resources to make an educated assessment about which countries would be next to face credit concerns, political uncertainties often make this assessment murky. As a result, over the short-term, it is difficult to determine how long this trend will continue. What we do know is that much of the liquidation activity has taken place at severely distressed levels, on some occasions pushing the yield spread for even strong credits back to very wide levels. Over the long term, investors should begin to see a focus less on liquidity and more on relative value. Until that time, though, the non-Treasury markets may continue to have a tough time. Q. WHAT'S YOUR OUTLOOK? A. Within the corporate bond sector, I think the best issues may be the less-cyclical, domestically focused businesses that have improving credit profiles. I believe the market will continue to focus on high-quality, non-cyclical corporate debt in the face of global market turmoil. The commodity-related industries like energy, precious metals and paper most likely will continue to suffer in this volatile environment. Over the longer term, solid companies in the media, telecommunications and domestic regional-banking sectors could be rewarded for improving business and credit fundamentals. As a result, corporate bonds in these sectors should remain defensive positions. Within the mortgage-backed sector there are also opportunities. As a result of the volatility, there are segments of the mortgage-backed securities market that look attractive. I remain comfortable with our current holdings and feel that there will be more opportunities over time. In the short term, volatility may continue; but over the longer term, the non-Treasury sectors should stabilize to the fund's benefit. THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET AND OTHER CONDITIONS. (CHECKMARK)FUND FACTS GOAL: HIGH CURRENT INCOME WITH PRESERVATION OF CAPITAL FUND NUMBER: 449 TRADING SYMBOL: FTBDX START DATE: OCTOBER 1, 1992 SIZE: AS OF SEPTEMBER 30, 1998, MORE THAN $357 MILLION MANAGER: ANDREW DUDLEY, SINCE 1997; MANAGER, FIDELITY ADVISOR SHORT-FIXED INCOME FUND, SINCE 1997; JOINED FIDELITY IN 1996 ANDREW DUDLEY ON THE FUND'S BENCHMARK INDEX - THE LEHMAN BROTHERS 1-3 YEAR GOVERNMENT/CORPORATE BOND INDEX - AND ITS ROLE IN THE MANAGEMENT OF THE FUND: "THE LEHMAN BROTHERS 1-3 YEAR GOVERNMENT/CORPORATE BOND INDEX PLAYS AN IMPORTANT ROLE IN THE MANAGEMENT OF THE FUND. IT'S THE FUND'S BENCHMARK INDEX AND INCLUDES MOST OF THE UNIVERSE OF INVESTMENT-GRADE BONDS WITH MATURITIES BETWEEN ONE AND THREE YEARS. I USE THE INDEX AS A GUIDELINE ABOUT THE STRUCTURE OF THE OVERALL BOND MARKET, MANAGING THE FUND TO BE GENERALLY AS SENSITIVE TO CHANGES IN INTEREST RATES AS THE INDEX. IN ADDITION, I REFER TO THE INDEX WHEN DECIDING HOW TO ALLOCATE ASSETS AMONG DIFFERENT MATURITIES AND MARKET SECTORS - SUCH AS CORPORATE OR GOVERNMENT SECURITIES - BASED ON MY VIEW OF THE RELATIVE VALUE OF EACH MATURITY OR SECTOR." (SOLID BULLET) EFFECTIVE THE CLOSE OF BUSINESS ON JUNE 26, 1998, THE SPARTAN SHORT-TERM BOND FUND'S SHARES ARE NO LONGER AVAILABLE TO NEW ACCOUNTS. SHAREHOLDERS OF THE FUND ON THAT DATE MAY CONTINUE TO PURCHASE SHARES IN ACCOUNTS EXISTING ON THAT DATE. INVESTMENT CHANGES
QUALITY DIVERSIFICATION AS OF SEPTEMBER 30, 1998 (MOODY'S RATINGS) % OF FUND'S % OF FUND'S INVESTMENTS INVESTMENTS 6 MONTHS AGO AAA 41.4 43.3 AA 7.8 7.5 A 14.3 13.9 BAA 27.3 23.9 BA AND BELOW 3.8 7.1 NOT RATED 0.9 1.3
TABLE EXCLUDES SHORT-TERM INVESTMENTS. WHERE MOODY'S RATINGS ARE NOT AVAILABLE, WE HAVE USED S&P RATINGS. SECURITIES RATED AS BA OR BELOW WERE RATED INVESTMENT GRADE BY OTHER NATIONALLY RECOGNIZED RATING AGENCIES OR ASSIGNED AN INVESTMENT GRADE RATING AT THE TIME OF ACQUISITION BY FIDELITY. AVERAGE YEARS TO MATURITY AS OF SEPTEMBER 30, 1998 6 MONTHS AGO YEARS 2.4 2.3 AVERAGE YEARS TO MATURITY IS BASED ON THE AVERAGE TIME UNTIL PRINCIPAL PAYMENTS ARE EXPECTED FROM EACH OF THE FUND'S BONDS, WEIGHTED BY DOLLAR AMOUNT. DURATION AS OF SEPTEMBER 30, 1998 6 MONTHS AGO YEARS 1.7 1.8 DURATION SHOWS HOW MUCH A BOND FUND'S PRICE FLUCTUATES WITH CHANGES IN COMPARABLE INTEREST RATES. IF RATES RISE 1%, FOR EXAMPLE, A FUND WITH A FIVE-YEAR DURATION IS LIKELY TO LOSE ABOUT 5% OF ITS VALUE. OTHER FACTORS CAN INFLUENCE A BOND FUND'S PERFORMANCE AND SHARE PRICE. ACCORDINGLY, A BOND FUND'S ACTUAL PERFORMANCE MAY DIFFER FROM THIS EXAMPLE. ASSET ALLOCATION (% OF FUND'S INVESTMENTS) AS OF SEPTEMBER 30, 1998 * ROW: 1, COL: 2, VALUE: 24.2 ROW: 1, COL: 3, VALUE: 8.699999999999999 ROW: 1, COL: 4, VALUE: 3.3 ROW: 1, COL: 5, VALUE: 4.5 CORPORATE BONDS 59.3% U.S. GOVERNMENT AND AGENCY OBLIGATIONS 24.2% CMOS AND OTHER MORTGAGE-RELATED SECURITIES 8.7% OTHER 3.3% SHORT-TERM INVESTMENTS 4.5% * FOREIGN INVESTMENTS 6.7% AS OF MARCH 31, 1998 ** CORPORATE BONDS 61.4% ROW: 1, COL: 1, VALUE: 59.3 ROW: 1, COL: 1, VALUE: 61.4 ROW: 1, COL: 2, VALUE: 26.3 ROW: 1, COL: 3, VALUE: 5.7 ROW: 1, COL: 4, VALUE: 3.6 ROW: 1, COL: 5, VALUE: 3.0 U.S. GOVERNMENT AND AGENCY OBLIGATIONS 26.3% CMOS AND OTHER MORTGAGE-RELATED SECURITIES 5.7% OTHER 3.6% SHORT-TERM INVESTMENTS 3.0% ** FOREIGN INVESTMENTS 5.8% INVESTMENTS SEPTEMBER 30, 1998 SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENT IN SECURITIES
NONCONVERTIBLE BONDS - 42.4% MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (D) BASIC INDUSTRIES - 1.4% CHEMICALS & PLASTICS - 1.0% Methanex Corp. A2 $ 3,500 $ 3,618 yankee 8.875% 11/15/01 PACKAGING & CONTAINERS - 0.4% Owens-Illinois, Inc. Ba1 1,390 1,390 7.15% 5/15/05 TOTAL BASIC INDUSTRIES 5,008 CONSTRUCTION & REAL ESTATE - 1.8% REAL ESTATE INVESTMENT TRUSTS - 1.8% Camden Property Baa2 2,825 2,844 Trust 6.625% 2/15/01 CenterPoint Baa2 430 427 Properties Corp. 6.75% 4/1/05 EOP Operating LP: 6.375% 2/15/03 Baa1 1,250 1,249 6.376% 2/15/02 Baa1 900 904 Weeks Realty LP Baa2 1,100 1,076 6.875% 3/15/05 6,500 ENERGY - 0.6% OIL & GAS - 0.6% Occidental Petroleum Corp.: 6.09% 11/29/99 Baa3 580 586 8.5% 11/9/01 Baa2 800 865 Oryx Energy Co.: 8.125% Ba1 220 228 10/15/05 8.375% 7/15/04 Ba1 400 428 2,107 FINANCE - 18.3% BANKS - 7.2% Banc One Corp. Aa3 1,250 1,275 6.7% 3/24/00 Banco Latinoamericano Exportaciones SA euro: 6.45% Baa2 930 947 9/13/99 (a) 6.9% 12/4/99 (a) Baa2 550 553 BanPonce Corp. A3 1,290 1,313 6.488% 3/3/00 BanPonce Financial Corp.: 6.88% 6/16/00 A3 510 524 7.65% 5/3/00 A3 1,550 1,606 Barclays Bank PLC A1 2,500 2,523 yankee 5.875% 7/15/00 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (D) FINANCE - CONTINUED BANKS - CONTINUED Capital One Bank: 5.95% 2/15/01 Baa3 $ 2,000 $ 1,990 6.42% 11/12/99 Baa3 2,200 2,211 7.35% 6/20/00 Baa3 2,400 2,456 First USA Bank 6.5% Aa2 1,700 1,728 12/23/99 KeyCorp. 7.45% A1 1,100 1,137 4/5/00 NationsBank Corp. Aa2 3,000 3,036 5.75% 3/15/01 Popular, Inc. 6.4% A3 1,410 1,425 8/25/00 Providian National Bank: 6.25% 5/7/01 Baa3 1,300 1,312 6.7% 3/15/03 Baa3 1,800 1,889 25,925 CREDIT & OTHER FINANCE - 9.8% Abbey National PLC Aa3 2,400 2,536 6.69% 10/17/05 Aristar, Inc. 6% A3 3,200 3,237 8/1/01 AT&T Capital Corp.: 6.16% 12/3/99 Baa3 1,940 1,964 6.25% 5/15/01 Baa3 2,500 2,540 Chrysler Financial A2 1,720 1,745 Corp. 6.375% 1/28/00 Edison Mission Baa1 1,667 1,741 Energy Funding Corp. 6.77% 9/15/03 (a) ERP Operating LP A3 350 355 6.55% 11/15/01 Finova Capital Corp. Baa1 580 589 6.27% 9/29/00 General Electric Aaa 5,000 5,124 Capital Corp. 6.01% 4/30/01 General Motors Acceptance Corp.: 5.85% 4/20/00 A2 4,480 4,535 9% 10/15/02 A2 3,000 3,387 GS Escrow Corp. Ba1 2,400 2,386 6.75% 8/1/01 (a) Heller Financial, Inc. A3 1,500 1,530 6.25% 3/1/01 MCN Investment Baa3 1,450 1,451 Corp. 5.84% 2/1/99 Money Store, Inc. A2 650 694 7.3% 12/1/02 North American Baa2 750 750 Mortgage Co. 5.8% 11/2/98 Salton Sea Funding Baa3 654 660 Corp. 7.02% 5/30/00 35,224 SAVINGS & LOANS - 1.0% Great Western A3 1,025 1,041 Financial Corp. 6.375% 7/1/00 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (D) FINANCE - CONTINUED SAVINGS & LOANS - CONTINUED Long Island Savings Bank FSB: 6.2% 4/2/01 Baa3 $ 1,650 $ 1,666 7% 6/13/02 Baa3 970 1,012 3,719 SECURITIES INDUSTRY - 0.3% Amvescap PLC A3 1,100 1,130 6.375% 5/15/03 TOTAL FINANCE 65,998 INDUSTRIAL MACHINERY & EQUIPMENT - 0.9% INDUSTRIAL MACHINERY & EQUIPMENT - 0.7% Tyco International Baa1 2,250 2,298 Group SA yankee 6.125% 6/15/01 POLLUTION CONTROL - 0.2% WMX Technologies, Baa3 750 763 Inc. 6.25% 10/15/00 TOTAL INDUSTRIAL MACHINERY & 3,061 EQUIPMENT MEDIA & LEISURE - 5.9% BROADCASTING - 3.3% Continental Cablevision, Inc.: 8.3% 5/15/06 Baa3 320 362 8.5% 9/15/01 Baa3 2,104 2,273 TCI Communications, Inc.: 6.375% 5/1/03 Baa3 630 659 6.375% 9/15/99 Baa3 3,075 3,100 8.25% 1/15/03 Baa3 220 245 9% 1/2/02 Ba1 730 808 Time Warner, Inc. Baa3 4,330 4,472 7.95% 2/1/00 11,919 ENTERTAINMENT - 2.1% Paramount Ba2 992 1,039 Communications, Inc. 7.5% 1/15/02 Viacom, Inc.: 6.75% 1/15/03 Ba2 4,455 4,574 7.75% 6/1/05 Ba2 1,950 2,106 7,719 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (D) MEDIA & LEISURE - CONTINUED PUBLISHING - 0.5% News America Baa3 $ 1,440 $ 1,623 Holdings, Inc. 8.5% 2/15/05 TOTAL MEDIA & LEISURE 21,261 NONDURABLES - 1.7% FOODS - 0.6% Dole Food, Inc. Baa2 2,290 2,308 6.75% 7/15/00 TOBACCO - 1.1% Philip Morris Companies, Inc.: 7.125% 12/1/99 A2 2,300 2,341 7.25% 9/15/01 A2 1,400 1,466 3,807 TOTAL NONDURABLES 6,115 RETAIL & WHOLESALE - 1.6% GENERAL MERCHANDISE STORES - 1.6% Dayton Hudson Corp.: 6.8% 10/1/01 A3 1,600 1,670 9.75% 7/1/02 A3 930 1,070 10% 12/1/00 A3 1,133 1,244 Federated Baa2 1,595 1,742 Department Stores, Inc. 8.125% 10/15/02 5,726 TECHNOLOGY - 3.3% COMPUTER SERVICES & SOFTWARE - 0.2% Computer Associates Baa1 700 705 International, Inc. 6.25% 4/15/03 COMPUTERS & OFFICE EQUIPMENT - 3.1% Comdisco, Inc.: 5.86% 4/7/00 Baa1 3,900 3,939 6.1% 6/5/01 Baa1 2,580 2,631 6.55% 2/4/00 Baa1 4,500 4,581 11,151 TOTAL TECHNOLOGY 11,856 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (D) TRANSPORTATION - 2.0% AIR TRANSPORTATION - 0.1% Delta Air Lines, Inc. Baa3 $ 475 $ 506 9.875% 5/15/00 RAILROADS - 1.9% CSX Corp.: 7.05% 5/1/02 Baa2 1,250 1,313 9.5% 8/1/00 Baa2 2,500 2,675 Norfolk Southern Corp.: 6.7% 5/1/00 Baa1 2,000 2,042 6.95% 5/1/02 Baa1 800 843 6,873 TOTAL TRANSPORTATION 7,379 UTILITIES - 4.9% ELECTRIC UTILITY - 2.0% Avon Energy Baa2 1,000 1,043 Partners Holdings 6.73% 12/11/02 (a) Indiana Michigan Baa1 2,000 2,034 Power Co. 6.4% 3/1/00 Niagara Mohawk Ba1 700 719 Power Corp. 6.875% 3/1/01 Ohio Edison Co. Baa2 900 950 7.375% 9/15/02 Philadelphia Electric Co.: 5.625% 11/1/01 Baa1 840 846 6.5% 5/1/03 Baa1 700 731 Texas Utilities Electric Baa1 1,000 1,021 Co. 7.375% 11/1/99 7,344 GAS - 1.6% Arkla, Inc. 8.875% Baa1 5,500 5,641 7/15/99 TELEPHONE SERVICES - 1.3% WorldCom, Inc.: 6.125% 8/15/01 Baa2 2,865 2,931 8.875% 1/15/06 Baa2 627 688 9.375% 1/15/04 Baa2 1,176 1,228 4,847 TOTAL UTILITIES 17,832 TOTAL NONCONVERTIBLE BONDS 152,843 (Cost $151,216)
U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - 17.3% MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (D) U.S. GOVERNMENT AGENCY OBLIGATIONS - 2.4% Federal Home Loan Aaa $ 5,000 $ 5,064 Bank 5.83% 12/24/99 Government Trust Aaa 312 331 Certificates (assets of Trust guaranteed by U.S. Government through Defense Security Assistance Agency) Class T-3, 9.625% 5/15/02 Guaranteed Export Trust Certificates (assets of Trust guaranteed by U.S. Government through Export-Import Bank): Series 1995-A, Aaa 1,412 1,462 6.28% 6/15/04 Series 1994-C, Aaa 120 121 6.61% 9/15/99 Israel Export Trust Aaa 577 601 Certificates (assets of Trust guaranteed by U.S. Government through Export-Import Bank) Series 1994-1, 6.88% 1/26/03 Private Export Aaa 993 1,040 Funding Corp. secured 6.86% 4/30/04 TOTAL U.S. GOVERNMENT AGENCY 8,619 OBLIGATIONS U.S. TREASURY OBLIGATIONS - 14.9% U.S. Treasury Notes: 5.375% 2/15/01 Aaa 2,475 2,531 5.625% Aaa 8,275 8,376 11/30/99 5.75% 10/31/00 Aaa 700 719 5.875% 2/15/00 Aaa 965 982 5.875% 7/31/99 Aaa 710 717 6.25% 2/28/02 Aaa 3,495 3,703 6.375% 7/15/99 Aaa 26,475 26,822 6.875% 3/31/00 Aaa 9,604 9,934 TOTAL U.S. TREASURY OBLIGATIONS 53,784 TOTAL U.S. GOVERNMENT AND 62,403 GOVERNMENT AGENCY OBLIGATIONS (Cost $61,768)
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 6.9% MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (D) FANNIE MAE - 3.3% 6.5% 12/1/12 to Aaa $ 5,423 $ 5,537 1/1/13 7% 10/1/28 (b) Aaa 5,500 5,655 11.5% 11/1/15 Aaa 454 509 TOTAL FANNIE MAE 11,701 FREDDIE MAC - 0.3% 7% 8/1/99 to Aaa 1,064 1,072 7/1/01 12% 11/1/19 Aaa 112 129 TOTAL FREDDIE MAC 1,201 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 3.3% 7.5% 1/15/26 to Aaa 6,014 6,234 8/15/28 9.5% 5/15/16 to Aaa 1,587 1,714 11/15/20 11% 2/15/10 to Aaa 2,049 2,267 9/15/19 11.5% 5/15/13 to Aaa 711 797 7/15/15 12% 2/15/16 Aaa 611 696 TOTAL GOVERNMENT NATIONAL 11,708 MORTGAGE ASSOCIATION TOTAL U.S. GOVERNMENT AGENCY 24,610 - - MORTGAGE-BACKED SECURITIES (Cost $24,542)
ASSET-BACKED SECURITIES - 16.9% Arcadia Automobile Aaa 1,500 1,515 Receivables Trust 5.67% 1/15/04 Boatmens Auto Trust A2 610 612 6.35% 10/15/01 Capita Equipment Receivables Trust: 6.45% 8/15/02 Aa3 1,700 1,747 6.57% 3/15/01 Aa3 810 823 Case Equipment Loan Trust: 5.85% 2/15/03 Aa2 690 690 6.15% 9/15/02 Aaa 1,844 1,854 6.45% 11/10/02 Aaa 1,330 1,361 Caterpillar Financial A3 336 337 Asset Trust 6.55% 5/25/02 ASSET-BACKED SECURITIES - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (D) Chase Manhattan Aaa $ 1,900 $ 1,932 Marine Owner Trust 6.25% 4/16/07 Chevy Chase Auto Receivables Trust: 5.97% 10/20/04 Aaa 1,729 1,753 6.2% 3/20/04 Aaa 803 813 Citibank Credit Card Aaa 1,300 1,322 Master Trust I 5.75% 1/15/03 Contimortgage Home Equity Loan Trust: 6.26% 7/15/12 Aaa 2,450 2,461 6.3% 7/15/12 Aaa 1,100 1,115 CPS Auto Grantor Trust: 6.09% 11/15/03 Aaa 1,042 1,046 6.7% 2/15/02 Aaa 314 318 CPS Auto Aaa 2,719 2,749 Receivables Trust 6% 8/15/03 CS First Boston Aaa 1,700 1,739 Mortgage Securities Corp. 7% 3/15/27 Discover Card A2 4,920 4,922 Master Trust I 6.0006% 7/18/05 (c) Fidelity Funding Auto Aaa 350 356 Trust 6.99% 11/15/02 (a) Ford Credit Auto A2 1,800 1,809 Owner Trust 6.15% 9/15/02 Ford Credit Grantor Aaa 989 991 Trust 5.9% 10/15/00 General Motors Aaa 417 418 Acceptance Corp. Grantor Trust 7.15% 3/15/00 Green Tree Financial Corp.: 5.5% 1/31/00 Aaa 57 57 5.8% 2/15/27 Aaa 77 77 6.1% 4/15/27 Aaa 847 849 6.45% 5/15/27 Aaa 618 620 6.5% 6/15/27 Aaa 439 439 Key Auto Finance Baa3 281 284 Trust 6.65% 10/15/03 KeyCorp Auto A3 43 43 Grantor Trust 5.8% 7/15/00 Norwest Automobile A2 1,130 1,150 Trust 6.3% 5/15/03 Olympic Automobile Receivables Trust: 6.125% Aaa 587 597 11/15/04 6.4% 9/15/01 Aaa 1,280 1,298 Onyx Acceptance Grantor Trust: 5.95% 7/15/04 Aaa 2,155 2,179 6.2% 6/15/03 Aaa 1,307 1,321 Petroleum Enhanced Baa2 1,549 1,548 Trust Receivables Offering Petroleum Trust 6.125% 2/5/03 (a)(c) Premier Auto Trust: 5.7% 10/6/02 Aaa 3,800 3,850 ASSET-BACKED SECURITIES - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (D) Premier Auto Trust: - continued 5.82% 12/6/02 Aaa $ 3,000 $ 3,071 6% 5/6/00 Aaa 428 428 6.35% 7/6/00 A3 1,690 1,701 Reliance Auto Aaa 398 399 Receivables Corp., Inc. 6.1% 7/15/02 (a) Sears Credit Account Aaa 1,800 1,842 Master Trust II 6.2% 2/16/06 TMS Auto Grantor Aaa 211 212 Trust 5.9% 9/15/02 Tranex Auto Aaa 864 877 Receivables Owner Trust 6.334% 8/15/03 (a) UACSC 1995-B Baa2 166 167 Grantor Trust 7.075% 7/10/02 UFSB Grantor Trust: Baa2 92 92 7.275% 10/10/00 8.2% 1/10/01 Baa2 101 102 Western Financial Aaa 789 800 Grantor Trust 5.875% 3/1/02 WFS Financial Owner Trust: 6.9% 12/20/03 Aaa 1,630 1,687 7.05% 11/20/03 Aaa 2,510 2,597 TOTAL ASSET-BACKED SECURITIES 60,970 (Cost $60,228) COLLATERALIZED MORTGAGE OBLIGATIONS - 1.7% PRIVATE SPONSOR - 1.0% GE Capital Aaa 722 730 Mortgage Services, Inc. planned amortization class Series 1994-2 Class A-4, 6% 1/25/09 Residential Funding Aa1 2,900 2,936 Mortgage Securities I, Inc. planned amortization class Series 1994-S12 Class A-2, 6.5% 4/25/09 TOTAL PRIVATE SPONSOR 3,666 U.S. GOVERNMENT AGENCY - 0.7% Fannie Mae ACES Aaa 2,474 2,532 REMIC sequential pay Series 1995-M1 Class A, 6.65% 7/25/10 TOTAL COLLATERALIZED 6,198 MORTGAGE OBLIGATIONS (Cost $6,118) COMMERCIAL MORTGAGE SECURITIES - 7.0% MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (D) Allied Capital Aaa $ 1,417 $ 1,424 Commercial Mortgage Trust sequential pay Series 1998-1 Class A, 6.31% 1/25/28 (a) Bankers Trust Remic Baa2 2,270 2,258 Trust 1988-1 floater Series 1998-S1A Class D, 6.4984% 11/28/02 (a)(c) BKB Commercial AA 506 504 Mortgage Trust Series 1997-C1 Class B, 7.218% 2/25/43 (a)(c) CBM Funding Corp.: sequential pay AA 870 896 Series 1996-1 Class A-2, 6.88% 7/1/02 sequential pay AA 63 63 Series 1996-1 Class A1, 7.55% 7/1/99 CS First Boston Mortgage Securities Corp.: Series 1998 FLI Baa2 2,800 2,768 Class E, 6.5063% 1/10/13 (a)(c) sequential pay - 2,362 2,365 Series 1997-SPICE Class A, 6.653% 8/20/36 (a) DLJ Commercial A2 1,090 1,089 Mortgage Corp. floater Series 1998-STFA Class A-3, 6.32% 1/8/11 (a)(c) Equitable Life Assurance Society of the United States (The): floater Series 174 Baa2 1,000 982 Class D-2, 6.7063% 5/15/03 (a)(c) sequential pay Aaa 1,000 1,091 Series 174 Class A1, 7.24% 5/15/06 (a) Federal Deposit Insurance Corp. Remic Trust: sequential pay Aaa 1,299 1,298 Series 1996-C1 Class 1A, 6.75% 7/25/26 sequential pay Aaa 585 584 Series 1994-C1 Class II-A2, 7.85% 9/25/25 FMAC Loan Aaa 550 558 Receivables Trust 1998-C sequential pay Series 1998-C Class A1 Notes, 5.99% 9/15/20 (a) Franchise Loan Trust Aaa 1,682 1,709 1998-1 sequential pay Series 1998-I Class A1 Notes, 6.24% 7/15/20 (a) Kidder Peabody Aa2 312 313 Acceptance Corp. I sequential pay Series 1993-M1 Class A-2, 7.15% 4/25/25 Nomura Asset - 892 892 Securities Corp. floater Series 1994-MD-II Class A-6, 9.9213% 7/7/03 (c) COMMERCIAL MORTGAGE SECURITIES - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS AMOUNT (000S) (000S) (UNAUDITED) (D) Nomura Depositor Baa2 $ 2,210 $ 2,200 Trust floater Series 1998-ST1A Class A-4, 6.5406% 2/15/34 (a)(c) Resolution Trust Corp.: floater Series AAA 268 268 1994-C1 Class A-3, 6.2375% 6/25/26 (c) sequential pay Aaa 1,432 1,430 Series 1995 C-1 Class A2C, 6.9% 2/25/27 Structured Asset Securities Corp.: floater Series A3 2,227 2,226 1998-C2A Class C, 6.0238% 1/25/13 (a)(c) Series 1996-C3 AAA 361 359 Class A, 6.75% 6/25/30 (a)(c) TOTAL COMMERCIAL MORTGAGE 25,277 SECURITIES (Cost $25,286) FOREIGN GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS (E) - 0.8% Ontario Province: 5.75% 11/7/00 Aa3 1,010 1,025 euro: global 6.125% Aa3 1,000 1,021 6/28/00 8.5% 2/28/01 Aa3 800 861 TOTAL FOREIGN GOVERNMENT 2,907 AND GOVERNMENT AGENCY OBLIGATIONS (Cost $2,869) SUPRANATIONAL OBLIGATIONS - 1.6% African Development Bank: 7.75% 12/15/01 Aa1 1,670 1,789 9.3% 7/1/00 Aa1 3,540 3,774 TOTAL SUPRANATIONAL OBLIGATIONS 5,563 (Cost $5,563) CERTIFICATES OF DEPOSIT - 0.9% Canadian Imperial Bank of Commerce, Aa3 3,100 3,166 New York yankee 6.2% 8/1/00 (Cost $3,107) CASH EQUIVALENTS - 4.5% MATURITY VALUE (NOTE 1) AMOUNT (000'S) (000S) Investments in $ 16,340 $ 16,337 repurchase agreements (U.S. Treasury obligations), in a joint trading account at 5.77%, dated 9/30/98 due 10/1/98 (Cost $16,337) TOTAL INVESTMENT IN $ 360,274 SECURITIES - 100% (Cost $357,034) SECURITY TYPE ABBREVIATIONS ACES - Automatic Common Exchange Securities LEGEND (a) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $29,383,000 or 8.2% of net assets. (b) Security purchased on a delayed delivery or when-issued basis (see Note 2 of Notes to Financial Statements). (c) The coupon rate shown on floating or adjustable rate securities represents the rate at period end. The due dates on these types of securities reflects the next interest rate reset date or, when applicable, the final maturity date. (d) Standard & Poor's credit ratings are used in the absence of a rating by Moody's Investors Service, Inc. (e) Foreign government obligations not individually rated by S&P or Moody's, the ratings listed are assigned to securities by FMR, the fund's investment adviser, based principally on S&P and Moody's ratings of the sovereign credit of the issuing government. OTHER INFORMATION The composition of long-term debt holdings as a percentage of total value of investments in securities, is as follows (ratings are unaudited): MOODY'S RATINGS S&P RATINGS Aaa, Aa, A 62.9% AAA, AA, A 58.2% Baa 27.3% BBB 28.4% Ba 3.8% BB 3.4% For some foreign government obligations, FMR has assigned the ratings for the sovereign credit of the issuing government. The percentage not rated by Moody's or S&P amounted to 0.9%. INCOME TAX INFORMATION At September 30, 1998, the aggregate cost of investment securities for income tax purposes was $357,035,000. Net unrealized appreciation aggregated $3,239,000, of which $3,979,000 related to appreciated investment securities and $740,000 related to depreciated investment securities. At September 30, 1998, the fund had a capital loss carryforward of approximately $81,724,000 of which $39,973,000, $35,409,000, $4,138,000, and $2,204,000 will expire on September 30, 2003, 2004, 2005, and 2006, respectively. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES AMOUNTS IN (EXCEPT PER-SHARE THOUSANDS AMOUNT) SEPTEMBER 30, 1998 ASSETS INVESTMENT IN $ 360,274 SECURITIES, AT VALUE (INCLUDING REPURCHASE AGREEMENTS OF $16,337) (COST $357,034) - SEE ACCOMPANYING SCHEDULE RECEIVABLE FOR 735 INVESTMENTS SOLD RECEIVABLE FOR 294 FUND SHARES SOLD INTEREST 3,841 RECEIVABLE TOTAL ASSETS 365,144 LIABILITIES PAYABLE FOR $ 736 INVESTMENTS PURCHASED REGULAR DELIVERY DELAYED 5,615 DELIVERY PAYABLE FOR FUND 500 SHARES REDEEMED DISTRIBUTIONS 294 PAYABLE ACCRUED 112 MANAGEMENT FEE OTHER PAYABLES 4 AND ACCRUED EXPENSES TOTAL LIABILITIES 7,261 NET ASSETS $ 357,883 NET ASSETS CONSIST OF: PAID IN CAPITAL $ 437,742 DISTRIBUTIONS IN (1,312) EXCESS OF NET INVESTMENT INCOME ACCUMULATED (81,787) UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS NET UNREALIZED 3,240 APPRECIATION (DEPRECIATION) ON INVESTMENTS NET ASSETS, FOR $ 357,883 39,220 SHARES OUTSTANDING NET ASSET VALUE, $9.12 OFFERING PRICE AND REDEMPTION PRICE PER SHARE ($357,882.57 1 (DIVIDED BY) 39,220.016 SHARES) STATEMENT OF OPERATIONS AMOUNTS IN THOUSANDS YEAR ENDED SEPTEMBER 30, 1998 INVESTMENT $ 21,442 INCOME INTEREST EXPENSES MANAGEMENT FEE $ 2,055 NON-INTERESTED 1 TRUSTEES' COMPENSATION TOTAL EXPENSES 2,056 BEFORE REDUCTIONS EXPENSE (862) 1,194 REDUCTIONS NET INVESTMENT 20,248 INCOME REALIZED AND (167) UNREALIZED GAIN (LOSS) NET REALIZED GAIN (LOSS) ON INVESTMENT SECURITIES CHANGE IN NET 2,855 UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENT SECURITIES NET GAIN (LOSS) 2,688 NET INCREASE $ 22,936 (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS STATEMENT OF CHANGES IN NET ASSETS AMOUNTS IN YEAR ENDED THOUSANDS SEPTEMBER 30, 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS $ 20,248 $ 19,923 NET INVESTMENT INCOME NET REALIZED (167) (2,472) GAIN (LOSS) CHANGE IN NET 2,855 3,201 UNREALIZED APPRECIATION (DEPRECIATION) NET INCREASE 22,936 20,652 (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS DISTRIBUTIONS TO (19,966) (19,752) SHAREHOLDERS FROM NET INVESTMENT INCOME SHARE 203,528 115,689 TRANSACTIONS NET PROCEEDS FROM SALES OF SHARES REINVESTMENT 16,900 16,035 OF DISTRIBUTIONS COST OF SHARES (152,987) (188,730) REDEEMED NET INCREASE 67,441 (57,006) (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS TOTAL 70,411 (56,106) INCREASE (DECREASE) IN NET ASSETS NET ASSETS BEGINNING OF 287,472 343,578 PERIOD END OF PERIOD $ 357,883 $ 287,472 (INCLUDING DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME OF $1,312 AND $1,512, RESPECTIVELY) OTHER INFORMATION SHARES SOLD 22,486 12,804 ISSUED IN 1,867 1,775 REINVESTMENT OF DISTRIBUTIONS REDEEMED (16,902) (20,894) NET INCREASE 7,451 (6,315) (DECREASE) FINANCIAL HIGHLIGHTS YEARS ENDED SEPTEMBER 30, 1998 1997 1996 1995 1994 SELECTED PER-SHARE DATA NET ASSET VALUE, $ 9.050 $ 9.020 $ 9.130 $ 9.330 $ 9.990 BEGINNING OF PERIOD INCOME FROM .579 B .588 B .598 .584 .574 INVESTMENT OPERATIONS NET INVESTMENT INCOME NET REALIZED .063 .025 (.112) (.199) (.604) AND UNREALIZED GAIN (LOSS) TOTAL FROM .642 .613 .486 .385 (.030) INVESTMENT OPERATIONS LESS DISTRIBUTIONS FROM NET (.572) (.583) (.596) (.443) (.477) INVESTMENT INCOME IN EXCESS OF NET - - - - (.033) INVESTMENT INCOME IN EXCESS OF NET - - - - (.010) REALIZED GAIN RETURN OF - - - (.142) (.110) CAPITAL TOTAL (.572) (.583) (.596) (.585) (.630) DISTRIBUTIONS NET ASSET VALUE, $ 9.12 $ 9.050 $ 9.020 $ 9.130 $ 9.330 END OF PERIOD TOTAL RETURN A 7.33% 7.00% 5.47% 4.35% (.32)% RATIOS AND SUPPLEMENTAL DATA NET ASSETS, END $ 358 $ 287 $ 344 $ 522 $ 798 OF PERIOD (IN MILLIONS) RATIO OF EXPENSES .38% C .50% C .65% .65% .54% C TO AVERAGE NET ASSETS RATIO OF EXPENSES .38% .50% .64% D .65% .54% TO AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS RATIO OF NET 6.40% 6.50% 6.52% 6.45% 6.42% INVESTMENT INCOME TO AVERAGE NET ASSETS PORTFOLIO TURNOVER 117% 105% 134% 159% 97% RATE A THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). B NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. C FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). D FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES. NOTES TO FINANCIAL STATEMENTS For the period ended September 30, 1998 1. SIGNIFICANT ACCOUNTING POLICIES. Spartan Short-Term Bond Fund (the fund) is a fund of Fidelity Charles Street Trust (the trust) and is authorized to issue an unlimited number of shares. The trust is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as an open-end management investment company organized as a Massachusetts business trust. The financial statements have been prepared in conformity with generally accepted accounting principles which require management to make certain estimates and assumptions at the date of the financial statements. The following summarizes the significant accounting policies of the fund: SECURITY VALUATION. Securities are valued based upon a computerized matrix system and/or appraisals by a pricing service, both of which consider market transactions and dealer-supplied valuations. Securities (including restricted securities) for which market quotations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Board of Trustees. Short-term securities with remaining maturities of sixty days or less for which quotations are not readily available are valued at amortized cost or original cost plus accrued interest, both of which approximate current value. INCOME TAXES. As a qualified regulated investment company under Subchapter M of the Internal Revenue Code, the fund is not subject to income taxes to the extent that it distributes substantially all of its taxable income for its fiscal year. The schedule of investments includes information regarding income taxes under the caption "Income Tax Information." INVESTMENT INCOME. Interest income, which includes accretion of original issue discount, is accrued as earned. EXPENSES. Most expenses of the trust can be directly attributed to a fund. Expenses which cannot be directly attributed are apportioned among the funds in the trust. DISTRIBUTIONS TO SHAREHOLDERS. Distributions are declared daily and paid monthly from net investment income. Distributions from realized gains, if any, are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences, which may result in distribution reclassifications, are primarily due to differing treatments for paydown gains/losses on certain securities, market discount, capital loss carryforwards and losses deferred due to wash sales and excise tax regulations. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to paid in capital. Distributions in excess of net investment income and accumulated undistributed net realized gain (loss) on investments may include temporary book and tax basis differences that will reverse in a subsequent period. Any taxable income or gain remaining at fiscal year end is distributed in the following year. 1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED SECURITY TRANSACTIONS. Security transactions are accounted for as of trade date. Gains and losses on securities sold are determined on the basis of identified cost. 2. OPERATING POLICIES. JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the Securities and Exchange Commission the fund, along with other affiliated entities of Fidelity Management & Research Company (FMR), may transfer uninvested cash balances into one or more joint trading accounts. These balances are invested in one or more repurchase agreements for U.S. Treasury or Federal Agency obligations. REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency securities are transferred to an account of the fund, or to the Joint Trading Account, at a bank custodian. The securities are marked-to-market daily and maintained at a value at least equal to the principal amount of the repurchase agreement (including accrued interest). FMR, the fund's investment adviser, is responsible for determining that the value of the underlying securities remains in accordance with the market value requirements stated above. DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell securities on a delayed delivery basis. Payment and delivery may take place a month or more after the date of the transaction. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. The market values of the securities purchased or sold on a delayed delivery basis are identified as such in the fund's schedule of investments. The fund may receive compensation for interest forgone in the purchase of a delayed delivery security. With respect to purchase commitments, the fund identifies securities as segregated in its custodial records with a value at least equal to the amount of the commitment. Losses may arise due to changes in the market value of the underlying securities or if the counterparty does not perform under the contract. RESTRICTED SECURITIES. The fund is permitted to invest in securities that are subject to legal or contractual restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are registered. Disposal of these securities may involve time-consuming negotiations and expense, and prompt sale at an acceptable price may be difficult. At the end of the period, the fund had no investments in restricted securities (excluding 144A issues). 3. PURCHASES AND SALES OF INVESTMENTS. Purchases and sales of securities, other than short-term securities, aggregated $416,192,000 and $354,639,000, respectively, of which U.S. government and government agency obligations aggregated $225,247,000 and $209,735,000, respectively. 4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES. MANAGEMENT FEE. As the fund's investment adviser, FMR pays all expenses, except the compensation of the non-interested Trustees and certain exceptions such as interest, taxes, brokerage commissions and extraordinary expenses. FMR receives a fee that is computed daily at an annual rate of .65% of the fund's average net assets. FMR also bears the cost of providing shareholder services to the fund. To offset the cost of providing these services, FMR or its affiliates collect certain transaction fees from the fund's shareholders which amounted to $5,000 for the period. Effective June 27, 1998 these transaction fees were eliminated. 5. EXPENSE REDUCTIONS. FMR voluntarily agreed to reimburse the fund's operating expenses (excluding interest, taxes, brokerage commissions and extraordinary expenses) above an annual rate of .38% of average net assets through December 31, 1998. For the period, the reimbursement reduced the expenses by $854,000. In addition, FMR has entered into arrangements on behalf of the fund with the fund's custodian and transfer agent whereby credits realized as a result of uninvested cash balances were used to reduce a portion of the fund's expenses. During the period, the fund's expenses were reduced by $8,000 under these arrangements. REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Fidelity Charles Street Trust and the Shareholders of Spartan Short-Term Bond Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Spartan Short-Term Bond Fund (a fund of Fidelity Charles Street Trust) at September 30, 1998, the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Spartan Short-Term Bond Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at September 30, 1998 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. /s/PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Boston, Massachusetts November 6, 1998 DISTRIBUTIONS A total of 17.42% of the dividends distributed during the fiscal year was derived from interest on U.S. Government securities which is generally exempt from state income tax. The fund will notify shareholders in January 1999 of the applicable percentage for use in preparing 1998 income tax returns. INVESTMENT ADVISER Fidelity Management & Research Company Boston, MA INVESTMENT SUB-ADVISERS Fidelity Management & Research (U.K.) Inc., London, England Fidelity Management & Research (Far East) Inc., Tokyo, Japan OFFICERS Edward C. Johnson 3d, President Robert C. Pozen, Senior Vice President Fred L. Henning, Jr., Vice President Dwight D. Churchill, Vice President Andrew J. Dudley, Vice President Stanley N. Griffith, Assistant Vice President Eric D. Roiter, Secretary Richard A. Silver, Treasurer John H. Costello, Assistant Treasurer Leonard M. Rush, Assistant Treasurer Thomas J. Simpson, Assistant Treasurer BOARD OF TRUSTEES Ralph F. Cox * Phyllis Burke Davis * Robert M. Gates * Edward C. Johnson 3d E. Bradley Jones * Donald J. Kirk * Peter S. Lynch Marvin L. Mann * William O. McCoy * Gerald C. McDonough * Robert C. Pozen Thomas R. Williams * ADVISORY BOARD J. Gary Burkhead GENERAL DISTRIBUTOR Fidelity Distributors Corporation Boston, MA * INDEPENDENT TRUSTEES TRANSFER AND SHAREHOLDER SERVICING AGENT Fidelity Service Company, Inc. Boston, MA CUSTODIAN The Bank of New York New York, NY FIDELITY'S TAXABLE BOND FUNDS Capital & Income Ginnie Mae Government Income High Income Intermediate Bond Intermediate Government Income International Bond Investment Grade Bond New Markets Income Short-Intermediate Government Short-Term Bond Spartan(registered trademark) Ginnie Mae Spartan Government Income Spartan Investment Grade Bond Spartan Short-Intermediate Government Spartan Short-Term Bond Strategic Income Target Timeline SM 1999, 2001 & 2003 THE FIDELITY TELEPHONE CONNECTION MUTUAL FUND 24-HOUR SERVICE Exchanges/Redemptions 1-800-544-7777 Account Assistance 1-800-544-6666 Product Information 1-800-544-8888 Retirement Accounts 1-800-544-4774 (8 a.m. - 9 p.m.) TDD Service 1-800-544-0118 for the deaf and hearing impaired (9 a.m. - 9 p.m. Eastern time) TouchTone Xpress(registered trademark)(AUTOMATED GRAPHIC) 1-800-544-5555 (AUTOMATED GRAPHIC) AUTOMATED LINE FOR QUICKEST SERVICE SST-ANN-1198 64442 1.537457.101 (FIDELITY LOGO GRAPHIC)(REGISTERED TRADEMARK) Corporate Headquarters 82 Devonshire St., Boston, MA 02109 www.fidelity.com -----END PRIVACY-ENHANCED MESSAGE-----