Liberty High
Income Bond
Fund, Inc.
Select Shares
PROSPECTUS
The Select Shares of Liberty High Income Bond Fund, Inc. (the "Fund") represent
interests in an open-end, diversified management investment company (a mutual
fund) investing in a professionally managed, diversified portfolio limited
primarily to fixed income securities which seek to achieve high current income.
This prospectus contains the information you should read and know before you
invest in Select Shares of the Fund. Keep this prospectus for future reference.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENTAL AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
SPECIAL RISKS
The Fund's portfolio consists primarily of lower-rated corporate debt
obligations, which are commonly referred to as "junk bonds". These lower-rated
bonds may be more susceptible to real or perceived adverse economic conditions
than investment grade bonds. These lower-rated bonds are regarded as
predominantly speculative with regard to each issuer's continuing ability to
make principal and interest payments. In addition, the secondary trading market
for lower-rated bonds may be less liquid than the market for investment grade
bonds. The Fund's investment adviser will endeavor to limit these risks through
diversifying the portfolio and through careful credit analysis of individual
issuers. Purchasers should carefully assess the risks associated with an
investment in this Fund. (See the Sections in this prospectus entitled
"Investment Risks" and "Reducing Risks of Lower-Rated Securities").
The Fund has also filed a Combined Statement of Additional Information for Class
A Shares, Class C Shares and Select Shares dated January 15, 1994, with the
Securities and Exchange Commission. The information contained in the Combined
Statement of Additional Information is incorporated by reference in this
prospectus. You may request a copy of the Combined Statement of Additional
Information free of charge by calling 1-800-235-4669. To obtain other
information or make inquiries about the Fund, contact your financial
institution.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated January 15, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
GENERAL INFORMATION 2
- ------------------------------------------------------
INVESTMENT INFORMATION 2
- ------------------------------------------------------
Investment Objective 2
Investment Policies 2
Acceptable Investments 2
Temporary Investments 3
Lending of Portfolio Securities 3
Portfolio Turnover 3
Investment Risks 3
Reducing Risks of Lower-Rated Securities 5
Credit Research 5
Diversification 5
Economic Analysis 5
Investment Limitations 6
NET ASSET VALUE 6
- ------------------------------------------------------
INVESTING IN SELECT SHARES 7
- ------------------------------------------------------
Share Purchases 7
Through a Financial Institution 7
Directly from the Distributor 7
Minimum Investment Required 7
What Shares Cost 8
Systematic Investment Program 8
Certificates and Confirmations 8
Dividends and Distributions 8
Retirement Plans 8
EXCHANGE PRIVILEGE 9
- ------------------------------------------------------
Requirements for Exchange 9
Tax Consequences 9
Making an Exchange 9
Telephone Instructions 9
REDEEMING SELECT SHARES 10
- ------------------------------------------------------
Through a Financial Institution 10
Directly from the Fund 10
By Telephone 10
By Mail 10
Signatures 11
Systematic Withdrawal Program 11
Accounts with Low Balances 11
FUND INFORMATION 12
- ------------------------------------------------------
Management of the Fund 12
Board of Directors 12
Officers and Directors 12
Investment Adviser 15
Advisory Fees 15
Adviser's Background 15
Distribution of Select Shares 16
Distribution Plan 16
Other Payments to Financial
Institutions 16
Administration of the Fund 17
Administrative Services 17
Shareholder Services Plan 17
Custodian 17
Transfer Agent and Dividend Disbursing
Agent 17
Legal Counsel 17
Independent Public Accountants 17
Expenses of the Fund and Select Shares 17
SHAREHOLDER INFORMATION 18
- ------------------------------------------------------
Voting Rights 18
TAX INFORMATION 18
- ------------------------------------------------------
Federal Income Tax 18
Pennsylvania Corporate and Personal
Property Taxes 19
PERFORMANCE INFORMATION 19
- ------------------------------------------------------
OTHER CLASSES OF SHARES 19
- ------------------------------------------------------
Financial Highlights--Class A Shares 21
Financial Highlights--Class C Shares 23
APPENDIX 24
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SELECT SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)............................... None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)..................................................................... None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds, as applicable)................................................... None
Redemption Fee (as a percentage of amount redeemed, if applicable......................................... None
Exchange Fee.............................................................................................. None
<CAPTION>
ANNUAL SELECT SHARES OPERATING EXPENSES*
(As a percentage of projected average net assets)
<S> <C> <C>
Management Fee (after waiver) (1)......................................................................... 0.71%
12b-1 Fee................................................................................................. 0.75%
Total Other Expenses...................................................................................... 0.55%
Shareholder Servicing Fee.................................................................... 0.25%
Total Select Shares Operating Expenses (2)............................................................ 2.01%
</TABLE>
(1) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of a portion of the management fee. The adviser can
terminate this voluntary waiver at any time at its sole discretion. The
maximum management fee is 0.75%.
(2) Total Select Shares Operating Expenses are estimated to be 2.05% absent the
anticipated voluntary waiver of a portion of the management fee.
* Total Select Shares Operating Expenses are estimated based on average
expenses expected to be incurred during the period ending March 31, 1994.
During the course of this period, expenses may be more or less than the
average amount shown.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF SELECT SHARES OF THE FUND WILL
BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN SELECT SHARES" AND "FUND
INFORMATION." Wire-transferred redemptions of less than $5,000 may be subject to
additional fees.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted under the rules of the National
Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (1) 5% annual return and
(2) redemption at the end of each time period.................................................. $ 20 $ 63
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE FUND'S FISCAL YEAR ENDING MARCH 31,
1994.
The information set forth in the foregoing table and example relates only to
Select Shares of the Fund. The Fund also offers two other classes of shares
called Class A and Class C Shares. Class A, Class C and Select Shares are
subject to certain of the same expenses; however, Class A Shares are subject to
a maximum sales load of 4.50% and may be subject to a redemption fee, but are
not subject to a 12b-1 fee. Class C Shares may be subject to a redemption fee of
1.00%. See "Other Classes of Shares."
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Fund was incorporated under the laws of the State of Maryland on October 14,
1977. The Fund's address is Liberty Center, Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779. The Articles of Incorporation permit the
Fund to offer separate series of shares representing interests in separate
portfolios of securities. The shares in any one portfolio may be offered in
separate classes. With respect to this Fund, as of the date of this prospectus,
the Board of Directors ("Directors") have established three classes of shares,
known as Class A Shares, Class C Shares and Select Shares. This prospectus
relates only to Select Shares ("Shares") of the Fund.
Shares of the Fund are designed primarily for customers of financial
institutions as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio of fixed income securities. A
minimum initial investment of $1,500 is required, unless the investment is in a
retirement account, in which case the minimum investment is $50.
Shares are sold at net asset value. Shares will be redeemed at net asset value
without the imposition of a redemption fee.
The Fund's current net asset value and offering price can be found in the mutual
funds section of local newspapers under "Liberty Family Funds."
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek high current income by investing
primarily in a diversified portfolio of professionally managed fixed income
securities. The fixed income securities in which the Fund intends to invest are
lower-rated corporate debt obligations. Some of these fixed income securities
may involve equity features. Capital growth will be considered, but only when
consistent with the investment objective of high current income. While there is
no assurance that the Fund will achieve its investment objective, it endeavors
to do so by following the investment policies described in this prospectus. The
investment objective and the policies and limitations described below cannot be
changed without approval of shareholders.
INVESTMENT POLICIES
ACCEPTABLE INVESTMENTS. The Fund invests 65% of its assets in lower-rated fixed
income bonds. Under normal circumstances, the Fund will not invest more than 10%
of the value of its total assets in equity securities. The fixed income
securities in which the Fund invests include, but are not limited to:
preferred stocks;
bonds;
debentures;
notes;
equipment lease certificates; and
equipment trust certificates.
The Fund may purchase fixed income securities on a when-issued or delayed
delivery basis.
The securities in which the Fund may invest are generally rated BBB or lower by
Standard & Poor's Corporation ("Standard & Poor's") or Baa or lower by Moody's
Investors Service, Inc. ("Moody's"), or are not rated but are determined by the
Fund's investment adviser to be of comparable quality. Securities which are
rated BBB or lower by Standard & Poor's or Baa or lower by Moody's have
speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to weakened capacity to make principal and
interest payments than highly rated bonds. A description of the rating
categories is contained in the Appendix to this prospectus. There is no lower
limit with respect to rating categories for securities in which the Fund may
invest. See "Investment Risks" below.
TEMPORARY INVESTMENTS. The Fund may invest temporarily in cash and short-term
obligations during times of unusual market conditions for defensive purposes.
Short-term obligations may include:
certificates of deposit;
commercial paper rated A-1 or A-2 by Standard & Poor's, Prime-1 or
Prime-2 by Moody's, or F-1 or F-2 by Fitch Investors Service and variable
rate demand master notes;
short-term notes;
obligations issued or guaranteed as to principal and interest by the U.S.
government or any of its agencies or instrumentalities; and
repurchase agreements (arrangements in which the organization selling the
Fund a fixed income security agrees at the time of sale to repurchase it
at a mutually agreed upon time and price).
As a matter of investment practice, which can be changed without shareholder
approval, the Fund will not invest more than 15% of its net assets in securities
which are illiquid.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or long-term basis to
broker/dealers, banks, or other institutional borrowers of securities. The Fund
will only enter into loan arrangements with broker/dealers, banks, or other
institutions which the investment adviser has determined are creditworthy under
guidelines established by the Board of Directors and will receive collateral in
the form of cash or U.S. government securities equal to at least 100% of the
value of the securities loaned.
PORTFOLIO TURNOVER. Securities in the Fund's portfolio will be sold whenever
the Fund's investment adviser believes it is appropriate to do so in light of
the Fund's investment objective, without regard to the length of time a
particular security may have been held. The adviser to the Fund does not
anticipate that portfolio turnover will result in adverse tax consequences. Any
such trading will increase the Fund's portfolio turnover rate and transaction
costs.
INVESTMENT RISKS
The corporate debt obligations in which the Fund invests are usually not in the
three highest rating categories of the recognized rating agencies (AAA, AA, or A
for Standard & Poor's and Aaa, Aa or A for Moody's) but are in the lower rating
categories or are unrated but are of comparable quality and have speculative
characteristics. Lower-rated or unrated bonds are commonly referred to as "junk
bonds". There is no minimal acceptable rating for a security to be purchased or
held in the Fund's portfolio, and
the Fund may, from time to time, purchase or hold securities rated in the lowest
rating category. A description of the rating categories is contained in the
Appendix to this prospectus.
Lower-rated securities will usually offer higher yields than higher-rated
securities. However, there is more risk associated with these investments. This
is because of reduced creditworthiness and increased risk of default.
Lower-rated securities generally tend to reflect short-term corporate and market
developments to a greater extent than higher-rated securities which react
primarily to fluctuations in the general level of interest rates. Short-term
corporate and market developments affecting the prices or liquidity of
lower-rated securities could include adverse news affecting major issuers,
underwriters, or dealers in lower-rated securities. In addition, since there are
fewer investors in lower-rated securities, it may be harder to sell the
securities at an optimum time.
As a result of these factors, lower-rated securities tend to have more price
volatility and carry more risk to principal and income than higher-rated
securities.
An economic downturn may adversely affect the value of some lower-rated bonds.
Such a downturn may especially affect highly leveraged companies or companies in
cyclically sensitive industries, where deterioration in a company's cash flow
may impair its ability to meet its obligation to pay principal and interest to
bondholders in a timely fashion. From time to time, as a result of changing
conditions, issuers of lower-rated bonds may seek or may be required to
restructure the terms and conditions of the securities they have issued. As a
result of these restructurings, holders of lower-rated securities may receive
less principal and interest than they had bargained for at the time such bonds
were purchased.
In the event of a restructuring, the Fund may bear additional legal or
administrative expenses in order to maximize recovery from an issuer.
The secondary trading market for lower-rated bonds is generally less liquid than
the secondary trading market for higher-rated bonds. In 1989, legislation was
enacted that requires federally insured savings and loan associations to divest
their holdings of lower-rated bonds by 1994. The reduction of the number of
institutions empowered to purchase and hold lower-rated bonds could have an
adverse impact on the overall liquidity of the market. Adverse publicity and the
perception of investors relating to issuers, underwriters, dealers or underlying
business conditions, whether or not warranted by fundamental analysis, may also
affect the price or liquidity of lower-rated bonds. On occasion, therefore, it
may become difficult to price or dispose of a particular security in the
portfolio.
The Fund may, from time to time, own zero coupon bonds or pay-in-kind
securities. A zero coupon bond makes no periodic interest payments and the
entire obligation becomes due only upon maturity. Pay-in-kind securities make
periodic payments in the form of additional securities (as opposed to cash). The
price of zero coupon bonds and pay-in-kind securities are generally more
sensitive to fluctuations in interest rates than are conventional bonds.
Additionally, federal tax law requires that interest on zero coupon bonds and
paid-in-kind securities be reported as income to the Fund even though the Fund
received no cash interest until the maturity or payment date of such securities.
Many corporate debt obligations, including many lower-rated bonds, permit the
issuers to call the security and thereby redeem their obligations earlier than
the stated maturity dates. Issuers are more likely to call bonds during periods
of declining interest rates. In these cases, if the Fund owns a bond
which is called, the Fund will receive its return of principal earlier than
expected and would likely be required to reinvest the proceeds at lower interest
rates, thus reducing income to the Fund.
The table below shows the weighted average of the ratings of the bonds in the
Fund's portfolio during the Fund's fiscal year ended March 31, 1993. The credit
ratings categories are those provided by Moody's and Standard and Poor's, which
are both nationally recognized statistical rating organizations. A description
of these ratings can be found in the Appendix to this prospectus. The
percentages in the column titled "Rated" reflect the percentage of bonds in the
portfolio which received a rating from at least one of these organizations. The
percentages in the column titled "Not Rated" reflect the percentage of bonds in
the portfolio which are not rated but which the Fund's investment adviser has
judged to be comparable in quality to the corresponding rated bonds.
<TABLE>
<CAPTION>
As a Percentage of
Credit Rating Total Investments
Category* Rated Not Rated Total
<S> <C> <C> <C>
BBB 0.96% 0.00% 0.96%
BB 13.05 0.13 13.18
B 71.79 4.87 76.66
CCC 7.00 0.92 7.92
CC 1.27 0.00 1.27
D 0.00 0.01 0.01
--------- ----- ---------
94.07% 5.93% 100.00%
--------- ----- ---------
</TABLE>
*May include all degrees of risk within the rating category.
REDUCING RISKS OF LOWER-RATED SECURITIES. The Fund's investment adviser
believes that the risks of investing in lower-rated securities can be reduced.
The professional portfolio management techniques used by the Fund to attempt to
reduce these risks include:
CREDIT RESEARCH. The Fund's investment adviser will perform its own credit
analysis in addition to using recognized rating agencies and other sources,
including discussions with the issuer's management, the judgment of other
investment analysts, and its own informed judgment. The adviser's credit
analysis will consider the issuer's financial soundness, its responsiveness
to changes in interest rates and business conditions, and its anticipated
cash flow, interest, or dividend coverage and earnings. In evaluating an
issuer, the adviser places special emphasis on the estimated current value
of the issuer's assets rather than historical cost.
DIVERSIFICATION. The Fund invests in securities of many different issuers,
industries, and economic sectors to reduce portfolio risk.
ECONOMIC ANALYSIS. The Fund's adviser will analyze current developments
and trends in the economy and in the financial markets. When investing in
lower-rated securities, timing and selection are critical, and analysis of
the business cycle can be important.
INVESTMENT LIMITATIONS
The Fund will not:
invest more than 10% of its net assets in securities subject to
restrictions on resale under federal securities law;
borrow money or pledge securities except, under certain circumstances,
the Fund may borrow up to one-third of the value of its total assets and
pledge up to 10% of the value of those assets to secure such borrowings;
invest more than 5% of its total assets in securities of one issuer
(except cash and cash items, repurchase agreements, and U.S. government
obligations);
make loans, except that it may invest up to 5% of the value of its total
assets in repurchase agreements which mature in more than seven days from
the time they are entered into, and it may lend portfolio securities
where the borrower of the securities provides 100% collateral;
sell securities short except, under strict limitations, the Fund may
maintain open short positions so long as not more than 10% of the value
of its net assets is held as collateral for those positions;
invest more than 5% of its total assets in securities of issuers that
have records of less than three years of continuous operations; or
invest more than 5% of its total assets in foreign securities which are
not publicly traded in the United States.
The above investment limitations cannot be changed without shareholder approval.
The following limitation, however, can be changed by the Directors without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Fund will not:
invest more than 15% of its net assets in illiquid securities, including
restricted securities which the adviser believes cannot be sold within
seven days.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by adding the interest of Select Shares in the market value of all
securities and other assets of the Fund, subtracting the interest of Select
Shares in the liabilities of the Fund and those attributable to Select Shares,
and dividing the remainder by the number of Select Shares outstanding. The net
asset value for Select Shares may differ from that of Class A and Class C Shares
due to the variance in daily net income realized by each class. Such variance
will reflect only accrued net income to which the shareholders of a particular
class are entitled.
INVESTING IN SELECT SHARES
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased through a financial institution which has a sales agreement with
the distributor, or directly from the distributor, Federated Securities Corp.,
once an account has been established. In connection with the sale of Shares,
Federated Securities Corp. may from time to time offer certain items of nominal
value to any shareholder or investor. The Fund reserves the right to reject any
purchase request.
THROUGH A FINANCIAL INSTITUTION. An investor may call his financial institution
(such as a bank or an investment dealer) to place an order to purchase Shares.
Orders through a financial institution are considered received when the Fund is
notified of the purchase order. Purchase orders through a registered
broker/dealer must be received by the broker before 4:00 P.M. (Eastern time) and
must be transmitted by the broker to the Fund before 5:00 P.M. (Eastern time) in
order for Shares to be purchased at that day's price. Purchase orders through
other financial institutions must be received by the financial institution and
transmitted to the Fund before 4:00 P.M. (Eastern time) in order for Shares to
be purchased at that day's price. It is the financial institution's
responsibility to transmit orders promptly.
DIRECTLY FROM THE DISTRIBUTOR. An investor may place an order to purchase
Shares directly from the distributor once an account has been established. To do
so:
complete and sign the new account form available from the Fund;
enclose a check made payable to Liberty High Income Bond Fund,
Inc.--Select Shares; and
mail both to Liberty High Income Bond Fund, Inc., P.O. Box 8604, Boston,
MA 02266-8604.
Orders by mail are considered received after payment by check is converted by
State Street Bank and Trust Company ("State Street Bank") into federal funds.
This is generally the next business day after State Street Bank receives the
check.
To purchase Shares directly from the distributor by wire once an account has
been established, call the Fund. All information needed will be taken over the
telephone, and the order is considered received when State Street Bank receives
payment by wire. Federal funds should be wired as follows: State Street Bank and
Trust Company, Boston, Massachusetts 02105; Attention: Mutual Fund Servicing
Division; For Credit to: Liberty High Income Bond Fund, Inc.--Select Shares;
Title or Name of Account; Wire Order Number and/or Account Number. Shares cannot
be purchased by wire on Columbus Day, Veterans' Day, or Martin Luther King Day.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares of the Fund is $1,500 unless the
investment is in a retirement account, in which case the minimum initial
investment is $50. Subsequent investments must be in amounts of at least $100,
except for retirement accounts, which must be in amounts of at least $50.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. The net asset value is determined at 4:00 p.m. (Eastern time), Monday
through Friday, except on: (i) days on which there are not sufficient changes in
the value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; or (iii) the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Shares at the net asset value next determined after an order is
received by the transfer agent. A shareholder may apply for participation in
this program through his financial institution or directly through the Fund.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder. Share certificates are not issued unless requested
on the applicaiton or by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during that
month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly to all shareholders invested in the Fund
on the record date. Distributions of any net realized long-term capital gains
will be made at least once every twelve months. Dividends and distributions are
automatically reinvested in additional Shares on payment dates at the
ex-dividend date net asset value unless shareholders request cash payments on
the new account form or by writing to the transfer agent. All shareholders on
the record date are entitled to the dividend. If Shares are redeemed or
exchanged prior to the record date or purchased after the record date, those
Shares are not entitled to that month's dividend. Shares purchased through a
financial institution, for which payment by wire is received by the transfer
agent on the business day following the order, begin to earn dividends on the
day the wire payment is received. Otherwise, shares purchased by wire begin to
earn dividends on the business day after wire payment is received by the
transfer agent. Shares purchased by mail, or through a financial institution, if
the financial institution's payment is by check, begin to earn dividends on the
second business day after the check is received by the transfer agent.
Shares earn dividends through the business day that proper written redemption
instructions are received by the transfer agent.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, including prototype retirement plans, contact
the Fund and consult a tax adviser.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
In order to provide greater flexibility to Fund shareholders whose investment
objectives have changed, Select shareholders may exchange all or some of their
Shares for Select Shares of Liberty Municipal Income Fund, Fund for U.S.
Government Securities, and Limited Maturity Government Fund at net asset value.
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Shares having a net asset value
of at least $1,500. Before the exchange, the shareholder must receive a
prospectus of the fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which the
shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Shares submitted for exchange are redeemed and
the proceeds invested in Select Shares of the other fund. The exchange privilege
may be modified or terminated at any time. Shareholders will be notified of the
modification or termination of the exchange privilege.
Further information on the exchange privilege and prospectuses for certain
Federated Funds are available by contacting the Fund.
TAX CONSEQUENCES
An exercise of the exchange privilege is treated as a sale for federal income
tax purposes. Depending upon the circumstances, a capital gain or loss may be
realized.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing or by telephone. Written
instructions may require a signature guarantee. Shareholders of the Fund may
have difficulty in making exchanges by telephone through brokers and other
financial institutions during times of drastic economic or market changes. If a
shareholder cannot contact his broker or financial institution by telephone, it
is recommended that an exchange request be made in writing and sent by overnight
mail to Boston Financial Data Services, Inc., Attention: Federated Division, Two
Heritage Drive, North Quincy, Massachusetts 02171.
TELEPHONE INSTRUCTIONS. Telephone instructions made by the investor may be
carried out only if a telephone authorization form completed by the investor is
on file with the transfer agent. If the instructions are given by a broker, a
telephone authorization form completed by the broker must be on file with the
transfer agent. Shares may be exchanged between two funds by telephone only if
the two funds have identical shareholder registrations.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to the transfer agent and deposited to the shareholder's account
before being exchanged. Telephone exchange instructions will be binding upon the
shareholder. Such instructions will be processed as of 4:00 p.m. (Eastern time)
and must be received by the transfer agent before that time for Shares to be
exchanged the same day. Shareholders exchanging into a new Fund will not receive
that Fund's dividend which is payable to shareholders of record on that date.
This privilege may be modified or terminated at any
time. Telephone instructions may be recorded. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
REDEEMING SELECT SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after the
transfer agent receives the redemption request. Redemptions will be made on days
on which the Fund computes its net asset value. Redemptions can be made through
a financial institution or directly from the Fund. Redemption requests must be
received in proper form.
THROUGH A FINANCIAL INSTITUTION
A shareholder may redeem Shares by calling his financial institution (such as a
bank or an investment dealer) to request the redemption. Shares will be redeemed
at the net asset value next determined after the Fund receives the redemption
request from the financial institution. Redemption requests through a registered
broker/dealer must be received by the broker before 4:00 p.m. (Eastern time) and
must be transmitted by the broker to the Fund before 5:00 p.m. (Eastern time) in
order for Shares to be redeemed at that day's net asset value. Redemption
requests through other financial institutions must be received by the financial
institution and transmitted to the Fund before 4:00 p.m. (Eastern time) in order
for Shares to be redeemed at that day's net asset value. The financial
institution is responsible for promptly submitting redemption requests and
providing proper written redemption instructions to the Fund. The financial
institution may charge customary fees and commissions for this service.
DIRECTLY FROM THE FUND
BY TELEPHONE. Shareholders who have not purchased through a financial
institution may redeem their Shares by telephoning the Fund. The proceeds will
be mailed to the shareholder's address of record or wire transferred to the
shareholder's account at a domestic commercial bank that is a member of the
Federal Reserve System, normally within one business day, but in no event longer
than seven days after the request. The minimum amount for a wire transfer is
$1,000. If at any time the Fund shall determine it necessary to terminate or
modify this method of redemption, shareholders would be promptly notified.
An authorization form permitting the transfer agent to accept telephone requests
must first be completed. Authorization forms and information on this service are
available from Federated Securities Corp.
In the event of drastic economic or market changes, a shareholder may experience
difficulty redeeming by telephone. If such a case should occur, another method
of redemption should be considered. Telephone instructions may be recorded. If
reasonable procedures are not followed by the Fund, it may be liable for losses
due to unauthorized or fraudulent telephone instructions.
BY MAIL. Any shareholder may redeem Shares by sending a written request to
State Street Bank. The written request should include the shareholder's name,
the Fund name and class designation, the account number, and the Share or dollar
amount requested, and should be signed exactly as the Shares are registered.
If Share certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written request.
Shareholders should call the Fund for assistance in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
a member firm of the New York, American, Boston, Midwest, or Pacific
Stock Exchange;
a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC; or
any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
Normally, a check for the proceeds is mailed within one business day, but in no
event more than seven days, after receipt of a proper written redemption
request.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount not less
than $100 may take advantage of the Systematic Withdrawal Program. Under this
program, Shares are redeemed to provide for periodic withdrawal payments in an
amount directed by the shareholder. Depending upon the amount of the withdrawal
payments, the amount of dividends paid and capital gains distributions with
respect to Shares, and the fluctuation of the net asset value of Shares redeemed
under this program, redemptions may reduce, and eventually deplete, the
shareholder's investment in the Fund. For this reason, payments under this
program should not be considered as yield or income on the shareholder's
investment in the Fund. To be eligible to participate in this program, a
shareholder must have an account value of at least $10,000. A shareholder may
apply for participation in this program through his financial institution.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, except retirement plans, and pay the proceeds to
the shareholder if the account balance falls below the required minimum value of
$1,500. This requirement does not apply, however, if the balance falls below
$1,500 because of changes in the Fund's net asset value. Before Shares are
redeemed to close an account, the shareholder is notified in writing and allowed
30 days to purchase additional Shares to meet the minimum requirement.
FUND INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS. The Fund is managed by a Board of Directors. The Directors
are responsible for managing the Fund's business affairs and for exercising all
the Fund's powers except those reserved for the shareholders. An Executive
Committee of the Board of Directors handles the Board's responsibilities between
meetings of the Board.
OFFICERS AND DIRECTORS. Officers and Directors are listed with their addresses,
principal occupations, and present positions, including any affiliation with
Federated Advisers, Federated Investors, Federated Securities Corp., Federated
Administrative Services, Inc., and the Funds (as defined in the Combined
Statement of Additional Information).
<TABLE>
<S> <C> <C>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST FIVE YEARS
John F. Donahue\* Chairman Chairman and Trustee, Federated Investors; Chairman and
Federated Investors Tower and Director Trustee, Federated Advisers, Federated Management, and
Pittsburgh, PA Federated Research; Director, AEtna Life and Casualty
Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds; formerly, Director,
The Standard Fire Insurance Company. Mr. Donahue is the
father of J. Christopher Donahue, Vice President and
Director of the Fund.
John T. Conroy, Jr. Director President, Investment Properties Corporation; Senior
Wood/IPC Commercial Vice-President, John R. Wood and Associates, Inc., Realtors;
Department President, Northgate Village Development Corporation;
John R. Wood and General Partner or Trustee in private real estate ventures
Associates, Inc., in Southwest Florida; Director, Trustee, or Managing General
Realtors Partner of the Funds; formerly, President, Naples Property
3255 Tamiami Trail North Management, Inc.
Naples, FL
William J. Copeland Director Director and Member of the Executive Committee, Michael
One PNC Plaza-- Baker, Inc.; Director, Trustee, or Managing General Partner
23rd Floor of the Funds; formerly, Vice Chairman and Director, PNC
Pittsburgh, PA Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes,
Inc.
J. Christopher Donahue* Vice President President and Trustee, Federated Investors; Trustee,
Federated Investors Tower and Director Federated Advisers, Federated Management, and Federated
Pittsburgh, PA Research; President and Director, Federated Administrative
Services, Inc.; President or Vice President of the Funds;
Director, Trustee, or Managing General Partner of some of
the Funds. Mr. Donahue is the son of John F. Donahue,
Chairman and Director of the Fund.
James E. Dowd Director Attorney-at-law; Director, The Emerging Germany Fund, Inc.;
571 Hayward Mill Road Director, Trustee, or Managing General Partner of the Funds;
Concord, MA formerly, Director, Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D. Director Hematologist, Oncologist, and Internist, Presbyterian and
3471 Fifth Avenue Montefiore Hospitals; Clinical Professor of Medicine and
Suite 1111 Trustee, University of Pittsburgh; Director, Trustee, or
Pittsburgh, PA Managing General Partner of the Funds.
Edward L. Flaherty, Jr.\ Director Attorney-at-law; Partner, Meyer and Flaherty; Director,
5916 Penn Mall Eat'N Park Restaurants, Inc., and Statewide Settlement
Pittsburgh, PA Agency, Inc.; Director, Trustee, or Managing General Partner
of the Funds; formerly, Counsel, Horizon Financial, F.A.,
Western Region.
Peter E. Madden Director Consultant; State Representative, Commonwealth of
225 Franklin Street Massachusetts; Director, Trustee, or Managing General
Boston, MA Partner of the Funds; formerly, President, State Street Bank
and Trust Company and State Street Boston Corporation and
Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer Director Attorney-at-law; Partner, Meyer and Flaherty; Chairman,
5916 Penn Mall Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.;
Pittsburgh, PA Director, Trustee, or Managing General Partner of the Funds;
formerly, Vice Chairman, Horizon Financial, F.A.
Wesley W. Posvar Director Professor, Foreign Policy and Management Consultant;
1202 Cathedral of Trustee, Carnegie Endowment for International Peace, RAND
Learning Corporation, Online Computer Library Center, Inc., and U.S.
University of Pittsburgh Space Foundation; Chairman, Czecho Slovak Management Center;
Pittsburgh, PA Director, Trustee, or Managing General Partner of the Funds;
President Emeritus, University of Pittsburgh; formerly,
Chairman, National Advisory Council for Environmental Policy
and Technology.
Marjorie P. Smuts Director Public relations/marketing consultant; Director, Trustee, or
4905 Bayard Street Managing General Partner of the Funds.
Pittsburgh, PA
Richard B. Fisher Vice President Executive Vice President and Trustee, Federated Investors;
Federated Investors Tower Chairman and Director, Federated Securities Corp.; President
Pittsburgh, PA or Vice President of the Funds; Director or Trustee of some
of the Funds.
Edward C. Gonzales* Vice President Vice President, Treasurer, and Trustee, Federated In-
Federated Investors Tower and Treasurer vestors; Vice President and Treasurer, Federated Advisers,
Pittsburgh, PA Federated Management, and Federated Research; Executive Vice
President, Treasurer, and Director, Federated Securities
Corp.; Trustee, Federated Services Company; Chairman,
Treasurer, and Director, Federated Administrative Services,
Inc.; Trustee or Director of some of the Funds; Vice Presi-
dent and Treasurer of the Funds.
John W. McGonigle Vice President Vice President, Secretary, General Counsel, and Trustee,
Federated Investors Tower and Secretary Federated Investors; Vice President, Secretary, and Trustee,
Pittsburgh, PA Federated Advisers, Federated Management, and Federated
Research; Executive Vice President, Secretary, and Director,
Federated Administrative Services/Federated Administrative
Services, Inc.; Director and Executive Vice President,
Federated Securities Corp.; Vice President and Secretary of
the Funds.
John A. Staley, IV* Vice President Vice President and Trustee, Federated Investors; Executive
Federated Investors Tower and Director Vice President, Federated Securities Corp.; President and
Pittsburgh, PA Trustee, Federated Advisers, Federated Management, and
Federated Research; Vice President of the Funds; Director,
Trustee, or Managing General Partner of some of the Funds;
formerly, Vice President, The Standard Fire Insurance
Company and President of its Federated Research Division.
</TABLE>
*This Director is deemed to be an "interested person" of the Fund as
defined in the Investment Company Act of 1940.
\Member of the Fund's Executive Committee. The Executive Committee of the Board
of Directors handles the responsibilities of the Board of Directors between
meetings of the Board.
Officers and Directors own less than 1% of the Fund's outstanding Shares.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Federated
Advisers, the Fund's investment adviser, subject to direction by the Directors.
The adviser continually conducts investment research and supervision for the
Fund and is responsible for the purchase or sale of portfolio instruments, for
which it receives an annual fee from the Fund.
ADVISORY FEES. The Fund's adviser receives an annual investment advisory
fee equal to .75 of 1% of the Fund's average daily net assets. The adviser
may voluntarily choose to waive a portion of its fee or reimburse the Fund
for certain operating expenses. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The adviser has also undertaken
to reimburse the Fund for operating expenses in excess of limitations
established by certain states.
The fee paid by the Fund, while higher than the advisory fee paid by other
mutual funds in general, is comparable to fees paid by many mutual funds
with similar objectives and policies.
ADVISER'S BACKGROUND. Federated Advisers, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) shares of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, Chairman and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J.
Christopher Donahue, who is President and Trustee of Federated Investors.
Federated Advisers and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services
to a number of investment companies. Total assets under management or
administration by these and other subsidiaries of Federated Investors are
approximately $70 billion. Federated Investors, which was founded in 1956
as Federated Investors, Inc., develops and manages mutual funds primarily
for the financial industry. Federated Investors' track record
of competitive performance and its disciplined, risk averse investment
philosophy serve approximately 3,500 client institutions nationwide.
Through these same client institutions, individual shareholders also have
access to this same level of investment expertise.
Mark E. Durbiano has been the Fund's portfolio manager since August of
1989. Mr. Durbiano joined Federated Investors in 1982 and has been a Vice
President of the Fund's investment adviser since 1988. Mr. Durbiano is a
Chartered Financial Analyst and received his M.B.A. in Finance from the
University of Pittsburgh.
DISTRIBUTION OF SELECT SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
Federated Securities Corp. is located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. It is a Pennsylvania corporation organized on November
14, 1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan adopted in
accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended
(the "Plan"), Shares will pay an amount computed at an annual rate of .75% of
the average daily net asset value of Shares to finance any activity which is
principally intended to result in the sale of Shares.
The distributor may select financial institutions (such as a broker/dealer or
bank) to provide sales support services as agents for their clients or customers
who beneficially own Shares. Financial institutions will receive fees from the
distributor based upon Shares owned by their clients or customers. The schedules
of such fees and the basis upon which such fees will be paid will be determined
from time to time by the distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no payments
to the distributor except as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Fund, and including
interest, carrying, or other financing charges in connection with excess amounts
expended, or the distributor's overhead expenses. However, the distributor may
be able to recover such amounts or may earn a profit from future payments made
by the Fund under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the capacities described above or should
Congress relax current restrictions on depository institutions, the Directors
will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state laws.
The distributor may, from time to time and for such periods as it deems
appropriate, voluntarily reduce its compensation under the Plan.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. Certain financial institutions may be
compensated by the adviser or its affiliates for the continuing investment of
customers' assets in certain funds, including
the Fund, advised by those entities. These payments will be made directly by the
distributor or adviser from their assets, and will not be made from the assets
of the Fund.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, Inc., which is a
subsidiary of Federated Investors, provides the Fund with the administrative
personnel and services necessary to operate the Fund. Such services include
shareholder servicing and certain legal and accounting services. Federated
Administrative Services, Inc. provides these at approximate cost.
SHAREHOLDER SERVICES PLAN. The Fund has adopted a Shareholder Services Plan
(the "Services Plan") with respect to Class A , Class C and Select Shares. Under
the Services Plan, financial institutions will enter into shareholder service
agreements with the Fund to provide administrative support services to their
customers who from time to time may be owners of record or beneficial owners of
Select Shares. In return for providing these support services, a financial
institution may receive payments from the Fund at a rate not exceeding .25% of
the average daily net assets of the Select Shares beneficially owned by the
financial institution's customers for whom it is holder of record or with whom
it has a servicing relationship. These administrative services may include, but
are not limited to, the following functions: providing office space, equipment,
telephone facilities, and various personnel, including clerical, supervisory,
and computer, as necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption transactions and
automatic investments of client account cash balances; answering routine client
inquiries regarding the Fund; assisting clients in changing dividend options,
account designations and addresses; and providing such other services as the
Fund reasonably requests.
CUSTODIAN. State Street Bank and Trust Company, P.O. Box 8604, Boston,
Massachusetts 02266-8604, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Federated Investors Tower, Pittsburgh, Pennsylvania. 15222-3779, is transfer
agent for Shares of the Fund and dividend disbursing agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly, 2510
Centre City Tower, Pittsburgh, Pennsylvania 15222, and Dickstein, Shapiro &
Morin, 2101 L Street, N.W., Washington, D.C. 20037.
INDEPENDENT PUBLIC ACCOUNTANTS. The independent public accountants for the Fund
are Arthur Andersen & Co., 2100 One PPG Place, Pittsburgh, Pennsylvania 15222.
EXPENSES OF THE FUND AND SELECT SHARES
Holders of Shares pay their allocable portion of Fund and portfolio expenses.
The Fund expenses for which holders of Shares pay their allocable portion
include, but are not limited to: the cost of organizing the Fund and continuing
its existence; registering the Fund with federal and state securities
authorities; Directors fees; auditors' fees; the cost of meetings of Directors;
legal fees of the Fund; association membership dues and such non-recurring and
extraordinary items as may arise from time to time.
The portfolio expenses for which holders of Shares each pay their allocable
portion include, but are not limited to: registering the portfolio and Shares of
the portfolio; investment advisory services; taxes and commissions; custodian
fees; insurance premiums; auditors' fees; and such non-recurring and
extraordinary items as may arise from time to time.
At present, the only expenses which are allocated specifically to Shares as a
class are expenses under the Fund's Shareholder Services Plan and Distribution
Plan. However, the Directors reserve the right to allocate certain other
expenses to holders of Shares as it deems appropriate ("Class Expenses"). In any
case, Class Expenses would be limited to: distribution fees; transfer agent fees
as identified by the transfer agent as attributable to holders of Shares; fees
under the Fund's Shareholder Services Plan; printing and postage expenses
related to preparing and distributing materials such as shareholder reports,
prospectuses and proxies to current shareholders; registration fees paid to the
SEC and to state securities commissions; expenses related to administrative
personnel and services as required to support holders of Shares; legal fees
relating solely to Shares; and Directors' fees incurred as a result of issues
relating solely to Shares.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share gives the shareholder one vote in Director elections and other
matters submitted to shareholder vote. All shares of each portfolio or class in
the Fund have equal voting rights, except that in matters affecting only a
particular portfolio or class, only shares of that portfolio or class are
entitled to vote.
As a Maryland Corporation, the Fund is not required to hold annual shareholder
meetings. Shareholder approval will be sought only for certain changes in the
Fund's operation and for the election of Directors under certain circumstances.
Directors may be removed by a two-thirds vote of the number of Directors prior
to such removal or by a two-thirds vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the written request of shareholders owning at least 10% of the Fund's
outstanding shares of all series entitled to vote.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Fund's other portfolios, if any, will not be combined for tax purposes with
those realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and
distributions are received in cash or as additional Shares. Distributions
representing long-term capital gains, if any, will be taxable to shareholders as
long-term capital gains no matter how long the shareholders have held the
Shares. No federal income tax is due on any dividends earned in an IRA or
qualified retirement plan until distributed.
PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Fund:
the Fund is subject to the Pennsylvania corporate franchise tax; and
Shares are exempt from Pennsylvania personal property taxes imposed by
counties, municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund advertises its total return and yield for Select
Shares.
Total return represents the change, over a specific period of time, in the value
of an investment in Shares after reinvesting all income and capital gains
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of Shares is calculated by dividing the net investment income per
Share (as defined by the Securities and Exchange Commission) earned by Shares
over a thirty-day period by the maximum offering price per share of Shares on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
Shares, and therefore, may not correlate to the dividends or other distributions
paid to shareholders.
Total return and yield will be calculated separately for Class A, Class C and
Select Shares. Because Class C and Select Shares are subject to a Rule 12b-1 fee
and shareholder services fee, the total return and yield for Class A Shares, for
the same period, will exceed that of Select Shares and Class C Shares.
From time to time, the Fund may advertise the performance of Shares using
certain reporting services and/or compare the performance of Shares to certain
indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund does not presently offer Class B Shares. Class A Shares offered by the
Fund, are sold primarily to customers of financial institutions subject to a
front-end sales charge of up to 4.50% and certain redemption charges. Class A
Shares are subject to a minimum initial investment of $500, unless the
investment is in a retirement account, in which case the minimum investment is
$50.
Class C Shares are sold primarily to customers of financial institutions at net
asset value with no initial sales charge. Class C Shares are distributed
pursuant to a Rule 12b-1 Plan adopted by the Fund whereby the distributor is
paid a fee of up to .75 of 1%, in addition to a shareholder services fee of .25
of 1% of the Class C Shares' average daily net assets. In addition, Class C
Shares may be subject to certain redemption charges. Investments in Class C
Shares subject to a minimum initial investment of $1,500, unless the investment
is in a retirement account, in which case the minimum investment is $50.
The amount of dividends payable to Class A Shares will generally exceed that of
Select and Class C Shares by the difference between Class Expenses borne by
shares of each respective class.
The stated advisory fee is the same for all three classes of shares.
LIBERTY HIGH INCOME BOND FUND, INC.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Arthur Andersen & Co., the Fund's
independent auditors. Their report dated April 30, 1993, on the Fund's financial
statements for the year ended March 31, 1993, and on the following table for the
periods presented, is included in the Fund's annual report, which is
incorporated by reference. This table should be read in conjunction with the
Fund's financial statements and notes thereto, which may be obtained from the
Fund.
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, AUGUST 31,
1993 1992 1991 1990 1989 1988 1987** 1986 1985
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 10.80 $ 8.79 $ 8.96 $ 10.99 $ 11.20 $ 12.53 $ 12.53 $ 12.17 $ 11.35
- -----------------------
INCOME FROM INVESTMENT
OPERATIONS
- -----------------------
Net investment income 1.13 1.23 1.21 1.33 1.40 1.42 0.85 1.53 1.56
- -----------------------
Net realized and
unrealized gain (loss)
on investments 0.41 1.99 (0.14) (1.98) (0.20) (1.31) -- 0.37 0.81
- ----------------------- --------- --------- --------- --------- --------- --------- ----------- --------- ---------
Total from investment
operations 1.54 3.22 1.07 (.65) 1.20 .11 .85 1.90 2.37
- ----------------------- --------- --------- --------- --------- --------- --------- ----------- --------- ---------
LESS DISTRIBUTIONS
- -----------------------
Dividends to
shareholders from net
investment income (1.15) (1.21) (1.24) (1.38) (1.41) (1.44) (0.85) (1.54) (1.55)
- ----------------------- --------- --------- --------- --------- --------- --------- ----------- --------- ---------
TOTAL DISTRIBUTIONS (1.15) (1.21) (1.24) (1.38) (1.41) (1.44) (0.85) (1.54) (1.55)
- ----------------------- --------- --------- --------- --------- --------- --------- ----------- --------- ---------
NET ASSET VALUE, END OF
PERIOD $ 11.19 $ 10.80 $ 8.79 $ 8.96 $ 10.99 $ 11.20 $ 12.53 $ 12.53 $ 12.17
- ----------------------- --------- --------- --------- --------- --------- --------- ----------- --------- ---------
TOTAL RETURN* 15.39% 38.83% 14.20% (6.82)% 11.34% 1.30% 7.09% 16.51% 22.42%
- -----------------------
RATIOS TO AVERAGE NET
ASSETS
- -----------------------
Expenses 1.08% 1.02% 1.03% 1.02% 1.00% 1.05% 1.02%(a) 1.06% 1.14%
- -----------------------
Net investment income 10.44% 12.40% 14.62% 13.01% 12.55% 12.37% 11.72%(a) 12.41% 13.27%
- -----------------------
Expense waiver/
reimbursement (b) 0.08% -- -- -- -- -- -- -- --
- -----------------------
SUPPLEMENTAL DATA
- -----------------------
Net assets, end of
period (000 omiited) $417,015 $351,087 $252,147 $282,149 $379,876 $360,409 $390,160 $352,641 $212,932
- -----------------------
Portfolio turnover
rate (c) 49% 37% 32% 40% 43% 52% 25% 27% 26%
- -----------------------
<CAPTION>
<S> <C> <C>
1984 1983***
<S> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 11.97 $ 11.06
- -----------------------
INCOME FROM INVESTMENT
OPERATIONS
- -----------------------
Net investment income 1.54 1.53
- -----------------------
Net realized and
unrealized gain (loss)
on investments (0.63) 0.93
- ----------------------- --------- -----------
Total from investment
operations 0.91 2.46
- ----------------------- --------- -----------
LESS DISTRIBUTIONS
- -----------------------
Dividends to
shareholders from net
investment income (1.53) (1.55)
- ----------------------- --------- -----------
TOTAL DISTRIBUTIONS (1.53) (1.55)
- ----------------------- --------- -----------
NET ASSET VALUE, END OF
PERIOD $ 11.35 $ 11.97
- ----------------------- --------- -----------
TOTAL RETURN* 8.12% 23.18%
- -----------------------
RATIOS TO AVERAGE NET
ASSETS
- -----------------------
Expenses 1.11% 1.11%
- -----------------------
Net investment income 13.26% 12.68%
- -----------------------
Expense waiver/
reimbursement (b) -- --
- -----------------------
SUPPLEMENTAL DATA
- -----------------------
Net assets, end of
period (000 omiited) $156,168 $112,708
- -----------------------
Portfolio turnover
rate (c) 21% 19%
- -----------------------
</TABLE>
* Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
** For the seven month period ended March 31, 1987.
*** Per share amounts and percentages are not restated for periods prior to the
date of the merger (November 18, 1983) of Federated Income & Private
Placement Fund into Federated High Income Securities, Inc. in order to
maintain the historical base for the value of shares actually outstanding of
the Fund.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expense and net investment
income ratios shown above. (Note 3)
(c) Represents portfolio turnover for the entire Fund.
LIBERTY HIGH INCOME BOND FUND, INC.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST
MARCH 31, 31,
1994** 1993 1992 1991 1990 1989 1988 1987*** 1986
NET ASSET VALUE,
BEGINNING OF PERIOD $ 11.19 $ 10.80 $ 8.79 $ 8.96 $ 10.99 $ 11.20 $ 12.53 $ 12.53 $ 12.17
- ------------------------
INCOME FROM INVESTMENT
OPERATIONS
- ------------------------
Net investment income 0.52 1.13 1.23 1.21 1.33 1.40 1.42 0.85 1.53
- ------------------------
Net realized and
unrealized gain (loss)
on investments (.07) 0.41 1.99 (0.14) (1.98) (0.20) (1.31) -- 0.37
- ------------------------ ----------- --------- --------- --------- --------- --------- --------- ----------- ---------
Total from investment
operations .45 1.54 3.22 1.07 (.65) 1.20 .11 .85 1.90
- ------------------------ ----------- --------- --------- --------- --------- --------- --------- ----------- ---------
LESS DISTRIBUTIONS
- ------------------------
Dividends to
shareholders from net
investment income (0.53) (1.15) (1.21) (1.24) (1.38) (1.41) (1.44) (0.85) (1.54)
- ------------------------ ----------- --------- --------- --------- --------- --------- --------- ----------- ---------
TOTAL DISTRIBUTIONS (0.53) (1.15) (1.21) (1.24) (1.38) (1.41) (1.44) (0.85) (1.54)
- ------------------------ ----------- --------- --------- --------- --------- --------- --------- ----------- ---------
NET ASSET VALUE, END OF
PERIOD $ 11.11 $ 11.19 $ 10.80 $ 8.79 $ 8.96 $ 10.99 $ 11.20 $ 12.53 $ 12.53
- ------------------------ ----------- --------- --------- --------- --------- --------- --------- ----------- ---------
TOTAL RETURN* 4.12% 15.39% 38.83% 14.20% (6.82)% 11.34% 1.30% 7.09% 16.51%
- ------------------------
RATIOS TO AVERAGE NET
ASSETS
- ------------------------
Expenses 1.18%(a) 1.08% 1.02% 1.03% 1.02% 1.00% 1.05% 1.02%(a) 1.06%
- ------------------------
Net investment income 9.26%(a) 10.44% 12.40% 14.62% 13.01% 12.55% 12.37% 11.72%(a) 12.41%
- ------------------------
Expense waiver/
reimbursement (b) 0.06% 0.08% -- -- -- -- -- -- --
- ------------------------
SUPPLEMENTAL DATA
- ------------------------
Net assets, end of
period (000 omiited) $441,528 $417,015 $351,087 $252,147 $282,149 $379,876 $360,409 $390,160 $352,641
- ------------------------
Portfolio turnover
rate (c) 29% 49% 37% 32% 40% 43% 52% 25% 27%
- ------------------------
<CAPTION>
<S> <C>
1985
<S> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 11.35
- ------------------------
INCOME FROM INVESTMENT
OPERATIONS
- ------------------------
Net investment income 1.56
- ------------------------
Net realized and
unrealized gain (loss)
on investments 0.81
- ------------------------ ---------
Total from investment
operations 2.37
- ------------------------ ---------
LESS DISTRIBUTIONS
- ------------------------
Dividends to
shareholders from net
investment income (1.55)
- ------------------------ ---------
TOTAL DISTRIBUTIONS (1.55)
- ------------------------ ---------
NET ASSET VALUE, END OF
PERIOD $ 12.17
- ------------------------ ---------
TOTAL RETURN* 22.42%
- ------------------------
RATIOS TO AVERAGE NET
ASSETS
- ------------------------
Expenses 1.14%
- ------------------------
Net investment income 13.27%
- ------------------------
Expense waiver/
reimbursement (b) --
- ------------------------
SUPPLEMENTAL DATA
- ------------------------
Net assets, end of
period (000 omiited) $212,932
- ------------------------
Portfolio turnover
rate (c) 26%
- ------------------------
</TABLE>
* Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
** For the six months ended September 30, 1993 (unaudited).
*** For the seven month period ended March 31, 1987.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 3).
(c) Represents portfolio turnover for the entire Fund.
LIBERTY HIGH INCOME BOND FUND, INC.
FINANCIAL HIGHLIGHTS
CLASS C SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
PERIOD ENDED
3/31/94**
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.13
- ------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------------------
Net investment income 0.45
- ------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.06)
- ------------------------------------------------------------------------------------------------ ----------------
Total from investment operations 0.39
- ------------------------------------------------------------------------------------------------ ----------------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.41)
- ------------------------------------------------------------------------------------------------ ----------------
NET ASSET VALUE, END OF PERIOD $ 11.11
- ------------------------------------------------------------------------------------------------ ----------------
TOTAL RETURN* 3.02%
- ------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------------------
Expenses 2.01%(a)
- ------------------------------------------------------------------------------------------------
Net investment income 8.82%(a)
- ------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.07%
- ------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 11,588
- ------------------------------------------------------------------------------------------------
Portfolio turnover rate (c) 29 %
- ------------------------------------------------------------------------------------------------
</TABLE>
* Based on net asset value which does not reflect sales load or redemption
fee, if applicable.
** For the period from May 11, 1993 (date of initial public investment) to
September 30, 1993 (unaudited).
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 3).
(c) Represents portfolio turnover for the entire Fund.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD & POOR'S CORPORATE BOND RATINGS DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC--Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposures to adverse
conditions.
C--The rating C is reserved for income bonds on which no interest is being paid.
D--Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA--Bonds which are Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
FITCH INVESTORS SERVICE COMMERCIAL PAPER RATINGS
FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
Liberty High
Income Bond
Fund, Inc.
Select Shares
PROSPECTUS
JANUARY 15, 1994
Established 1977
An Open-End, Diversified
Management Investment Company
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------
Distributor
8062805A-SEL (1/94)
LIBERTY HIGH INCOME BOND FUND, INC.
CLASS A SHARES
CLASS C SHARES
SELECT SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectuses of Class A and Class C Shares of Liberty
High Income Bond Fund, Inc. (the "Fund") dated May 5, 1993, and Select
Shares of the Fund dated January 15, 1994. This Statement is not a
prospectus itself. To receive a copy of the prospectus for any class,
write or call the Fund.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated January 15, 1994
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------------
Types of Investments 1
When-Issued and Delayed Delivery
Transactions 1
Temporary Investments 2
Lending of Portfolio Securities 2
Portfolio Turnover 2
Investment Limitations 2
THE FUNDS 5
- ---------------------------------------------------------------
Fund Ownership 5
INVESTMENT ADVISORY SERVICES 5
- ---------------------------------------------------------------
Adviser to the Fund 5
Advisory Fees 6
ADMINISTRATIVE ARRANGEMENTS 6
- ---------------------------------------------------------------
ADMINISTRATIVE SERVICES 6
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 6
- ---------------------------------------------------------------
PURCHASING SHARES 7
- ---------------------------------------------------------------
Distribution of Shares 7
Distribution Plan
(Class C and Select Shares Only) 7
Conversion to Federal Funds 7
Purchases by Sales Representatives,
Fund Directors, and Employees 8
DETERMINING NET ASSET VALUE 8
- ---------------------------------------------------------------
Determining Market Value of Securities 8
REDEEMING SHARES 8
- ---------------------------------------------------------------
TAX STATUS 8
- ---------------------------------------------------------------
The Fund's Tax Status 8
Shareholders' Tax Status 8
TOTAL RETURN 9
- ---------------------------------------------------------------
YIELD 9
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 9
- ---------------------------------------------------------------
FINANCIAL STATEMENTS 10
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
The Fund was incorporated under the laws of the State of Maryland on October 14,
1977. On April 29, 1993, the shareholders of the Fund voted to permit the Fund
to offer separate series and classes of shares.
Shares of the Fund are offered in three classes known as Class A, Class C and
Select Shares (individually and collectively referred to as "Shares" as the
context may require). The Fund does not presently offer Class B Shares. This
combined statement of additional information relates to each of the classes of
the above mentioned Shares.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to seek high current income by investing
primarily in a diversified portfolio of professionally managed fixed income
securities. Some of these fixed income securities may involve equity features.
Capital growth will be considered, but only when consistent with the investment
objective of high current income. The investment objective cannot be changed
without approval of shareholders.
TYPES OF INVESTMENTS
The Fund invests in lower-rated fixed income bonds which may include:
preferred stocks;
bonds;
debentures;
notes;
equipment lease certificates; and
equipment trust certificates.
CORPORATE DEBT SECURITIES
Corporate debt securities may bear fixed, fixed and contingent, or
variable rates of interest. They may involve equity features such as
conversion or exchange rights, warrants for the acquisition of common
stock of the same or a different issuer, participations based on
revenues, sales or profits, or the purchase of common stock in a unit
transaction (where corporate debt securities and common stock are offered
as a unit). Equipment lease or trust certificates are secured obligations
issued in serial form, usually sold by transportation companies such as
railroads or airlines, to finance equipment purchases. The certificate
holders own a share of the equipment, which can be resold if the issuer
of the certificate defaults. The Fund does not currently intend to invest
more than 5% of its assets in equipment lease certificates.
EQUITY SECURITIES
Generally, less than 10% of the value of the Fund's total assets will be
invested in equity securities, including common stocks, warrants, or
rights. The Fund's investment adviser may choose to exceed this 10%
limitation if unusual market conditions suggest such investments
represent a better opportunity to reach the Fund's investment objective.
RESTRICTED SECURITIES
The Fund expects that any restricted securities would be acquired either
from institutional investors who originally acquired the securities in
private placements or directly from the issuers of the securities in
private placements. Restricted securities are generally subject to legal
or contractual delays on resale.
Restricted securities and securities that are not readily marketable may
sell at a discount from the price they would bring if freely marketable.
The Fund may invest up to 10% of its net assets in these securities.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase fixed income securities on a when-issued or delayed
delivery basis. These transactions are arrangements in which the Fund purchases
securities with payment and delivery scheduled for a future time. Settlement
dates may be a month or more after entering into these transactions, and the
market values of the securities purchas ed may vary from the purchase prices.
These transactions are made to secure what is considered to be an advantageous
price and yield for the Fund. The Fund engages in when-issued and delayed
delivery transactions only for the purpose of acquiring portfolio securities
consistent with the Fund's investment objective and policies, not for investment
leverage.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the securities
to be purchased are segregated at the trade date. These securities are marked to
market daily and maintained until the transaction is settled. In when-issued and
delayed delivery transactions, the Fund relies on the seller to complete the
transaction. The seller's failure to deliver the securities may cause the Fund
to miss a price or yield considered to be advantageous.
TEMPORARY INVESTMENTS
The Fund may also invest in temporary investments from time to time for
defensive purposes.
CERTIFICATES OF DEPOSIT
The Fund may invest in certificates of deposit of domestic and foreign
banks and savings and loans if they have capital, surplus, and undivided
profits of over $100,000,000, or if the principal amount of the
instrument is insured by the Federal Deposit Insurance Corporation. These
instruments may include Eurodollar Certificates of Deposit issued by
foreign branches of U.S. or foreign banks, Eurodollar Time Deposits which
are U.S. dollar-denominated deposits in foreign branches of U.S. or
foreign banks, Canadian Time Deposits which are U.S. dollar-denominated
deposits issued by branches of major Canadian banks located in the United
States, and Yankee Certificates of Deposit which are U.S.
dollar-denominated certificates of deposit issued by U.S. branches of
foreign banks and held in the United States.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers,
and other recognized financial institutions sell U.S. government
securities or certificates of deposit to the Fund and agree at the time
of sale to repurchase them at a mutually agreed upon time and price. The
Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market
daily. To the extent that the original seller does not repurchase the
securities from the Fund, the Fund could receive less than the repurchase
price on any sale of such securities. In the event that such a defaulting
seller filed for bankruptcy or became insolvent, disposition of such
securities by the Fund might be delayed pending court action. The Fund
believes that under the regular procedures normally in effect for custody
of the Fund's portfolio securities subject to repurchase agreements, a
court of competent jurisdiction would rule in favor of the Fund and allow
retention or disposition of such securities. The Fund will only enter
into repurchase agreements with banks or other recognized financial
institutions such as broker/dealers which are deemed by the Fund's
adviser to be creditworthy, pursuant to guidelines established by the
Board of Directors.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or cash equivalent collateral to the borrower or
placing broker. The Fund does not have the right to vote securities on loan, but
would terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
PORTFOLIO TURNOVER
The Fund does not intend to engage in substantial short-term trading, it may
from time to time sell portfolio securities without regard to the time they have
been held (i) to take advantage or short-term differentials in yields or in
market value, (ii) to take advantage of new investment opportunities, (iii)
because of changes in creditworthiness or (iv) in an attempt to preserve gains
or limit losses. Similarly, efforts to minimize any perceived risk in an
individual portfolio security may result in greater portfolio turnover than
would otherwise be the case in a portfolio of high rated securities. A high
portfolio turnover will result in increased transaction costs to the Fund. The
Fund will not attempt to achieve or be limited by a predetermined rate of
portfolio turnover since turnover is incidental to transactions undertaken with
a view to achieving the Fund's investment objective. For the fiscal years ended
March 31, 1993, 1992, and 1991, the portfolio turnover rates were 49%, 37%, and
32%, respectively.
INVESTMENT LIMITATIONS
BUYING ON MARGIN
The Fund will not purchase any securities on margin but may obtain such
short-term credits as may be necessary for the clearance of transactions.
BORROWING MONEY
The Fund will not borrow money except as a temporary measure for
extraordinary or emergency purposes and then only from banks and only in
amounts not in excess of 5% of the value of its net assets, taken at the
lower of cost or market.
In addition, to meet redemption requests without immediately selling
portfolio securities, the Fund may borrow up to one-third of the value of
its total assets (including the amount borrowed) less its liabilities
(not including borrowings, but including the current fair market value of
any securities carried in open short positions). This practice is not for
investment leverage but solely to facilitate management of the portfolio
by enabling the Fund to meet redemption requests when the liquidation of
portfolio securities is deemed to be inconvenient or disadvantageous.
If, due to market fluctuations or other reasons, the value of the Fund's
assets falls below 300% of its borrowings, it will reduce its borrowings
within three business days.
No more than 10% of the value of the Fund's total assets at the time of
providing such security may be used to secure borrowings.
INVESTING IN FOREIGN SECURITIES
The Fund may invest indirectly in the securities of foreign issuers,
which may include Eurodollar Certificates of Deposits issued by foreign
branches of U.S. or foreign banks, Eurodollar Time Deposits which are
U.S. dollar-denominated deposits in foreign branches of U.S. or foreign
banks, Canadian Time Deposits which are U.S. dollar-denominated deposits
issued by branches of major Canadian banks located in the United States,
and Yankee Certificates of Deposit which are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks and held
in the United States.
INVESTMENT RISKS
ECDs, ETDs, Yankee CDs, Canadian Commercial Paper and Europaper are
subject to somewhat different risks than domestic obligations of domestic
issuers. Examples of these risks include international, economic, and
political developments, foreign governmental restrictions that may
adversely affect the payment of principal or interest, foreign
withholding or other taxes on interest income, difficulties in obtaining
or enforcing a judgment against the issuing bank, and the possible impact
of interruptions in the flow of international currency transactions.
Different risks may also exist for ECDs, ETDs, and Yankee CDs because the
banks issuing these instruments, or their domestic or foreign branches,
are not necessarily subject to the same regulatory requirements that
apply to domestic banks, such as reserve requirements, loan limitations,
examinations, accounting, auditing, and recordkeeping, and the public
availability of information. These factors will be carefully considered
by the Fund's adviser in selecting investments for the Fund.
DIVERSIFICATION OF INVESTMENTS
The Fund will not invest more than 5% of its total assets in the
securities of any one issuer (except cash and cash instruments,
securities issued or guaranteed by the U.S. government, its agencies, or
instrumentalities, or instruments secured by these money market
instruments, such as repurchase agreements).
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
securities of companies, including their predecessors, that have been in
operation for less than three years.
INVESTING IN FOREIGN SECURITIES
The Fund will not invest more than 5% of the value of its total assets in
foreign securities which are not publicly traded in the United States.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objective, policies, and limitations.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, although it may invest in
marketable securities secured by real estate or interests in real estate,
and it may invest in the marketable securities of companies investing or
dealing in real estate.
INVESTING IN COMMODITIES OR MINERALS
The Fund will not purchase or sell commodities or commodity contracts or
oil, gas, or other mineral exploration or development programs. However,
it may invest in the marketable securities of companies investing in or
sponsoring such programs.
ISSUING SENIOR SECURITIES
The Fund will not issue senior securities.
MAKING LOANS
The Fund will not make loans, except through the purchase or holding of
securities in accordance with its investment objective, policies, and
limitations and through repurchase agreements.
The Fund may invest up to 5% of its total assets in repurchase agreements
which mature more than seven days from the time they are entered into.
The Fund may lend portfolio securities if the borrower provides 100% cash
collateral in the form of cash or U.S. government securities. This
collateral must be valued daily and should the market value of the loaned
securities increase, the borrower must furnish additional collateral. The
Fund retains the right to any dividends, interest, or other distribution
paid on the securities and any increase in their market value. Loans will
be subject to termination at the option of the Fund or the borrower.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS OF THE FUND
The Fund will not purchase or retain the securities of any issuer if the
officers and Directors of the Fund or its investment adviser owning
individually more than 1/2 of 1% of the issuer's securities together own
more than 5% of the issuer's securities. This limitation does not apply
to the Fund's securities.
PURCHASING RESTRICTED SECURITIES
The Fund will not invest more than 10% of its net assets in securities
subject to restrictions on resale under federal securities laws.
DEALING IN PUTS AND CALLS
The Fund will not write, purchase, or sell puts, calls, or any
combination thereof.
PURCHASING SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will not purchase securities of other investment companies,
except purchases in the open market involving only customary brokerage
commissions and as a result of which not more than 5% of the value of its
total assets would be invested in such securities, or except as part of a
merger, consolidation, or other acquisition.
SELLING SHORT
The Fund will not make short sales of securities or maintain short
positions, unless:
during the time the short position is open, it owns an equal amount of
the securities sold or securities readily and freely convertible into or
exchangeable, without payment of additional consideration, for
securities of the same issue as, and equal in amount to, the securities
sold short; and
not more than 10% of the Fund's net assets (taken at current value) is
held as collateral for such sales at any one time.
ACQUIRING SECURITIES
The Fund will not purchase securities of a company for the purpose of
exercising control or management. However, the Fund may invest in up to
10% of the voting securities of any one issuer and may exercise its
voting powers consistent with the best interests of the Fund. From time
to time, the Fund, together with other investment companies advised by
subsidiaries or affiliates of Federated Investors, may together buy and
hold substantial amounts of a company's voting stock. All such stock may
be voted together.
In some such cases, the Fund and the other investment companies might
collectively be considered to be in control of the company in which they
have invested.
In some cases, Directors, agents, employees, officers, or others
affiliated with or acting for the Fund, its adviser, or affiliated
companies might possibly become directors of companies in which the Fund
holds stock.
CONCENTRATION OF INVESTMENTS
The Fund will not invest more than 25% of the value of its total assets
in one industry. However, for temporary defensive purposes, the Fund may
at times invest more than that percentage in:
cash and cash items;
securities issued or guaranteed by the U.S. government, its agencies, or
instrumentalities; or
instruments secured by these money market instruments, such as
repurchase agreements.
The above investment limitations cannot be changed without shareholders
approval. The following limitation, however, may be changed by the Directors
without shareholder approval. Shareholders will be notified before any material
change in this limitation becomes effective.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
securities, including restricted securities which the adviser believes
cannot be sold within seven days.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
The Fund did not make loans, borrow money, or sell securities short in excess of
5% of the value of its net assets during the last fiscal year and has no present
intent to do so in the current fiscal year.
In order to comply with certain state restrictions, the Fund will not invest in
warrants, nor will it invest in real estate limited partnerships or oil, gas or
other mineral leases.
THE FUNDS
- --------------------------------------------------------------------------------
"The Funds" and "Funds" mean the following investment companies: A. T. Ohio
Tax-Free Money Fund; American Leaders Fund, Inc.; Annuity Management Series;
Automated Cash Management Trust; Automated Government Money Trust; The Boulevard
Funds; California Municipal Cash Trust; Cash Trust Series II; Cash Trust Series,
Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; FT
Series, Inc.; Federated ARMs Fund; Federated Exchange Fund, Ltd.; Federated GNMA
Trust; Federated Government Trust; Federated Growth Trust; Federated High Yield
Trust; Federated Income Securities Trust; Federated Income Trust; Federated
Index Trust; Federated Intermediate Government Trust; Federated Master Trust;
Federated Municipal Trust; Federated Short-Intermediate Government Trust;
Federated Short-Term U.S. Government Trust; Federated Stock Trust; Federated
Tax-Free Trust; Federated U.S. Government Bond Fund; First Priority Funds; Fixed
Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund, Inc.;
Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S.
Government Securities, Inc.; Government Income Securities, Inc.; High Yield Cash
Trust; Insurance Management Series; Intermediate Municipal Trust; Investment
Series Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.;
Liberty High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.;
Liberty U.S. Government Money Market Trust; Liberty Term Trust, Inc.--1999;
Liberty Utility Fund, Inc.; Liquid Cash Trust; Mark Twain Funds; Money Market
Management, Inc.; Money Market Obligations Trust; Money Market Trust; Municipal
Securities Income Trust; New York Municipal Cash Trust; 111 Corcoran Funds; The
Planters Funds; Portage Funds; RIMCO Monument Funds; The Shawmut Funds;
Short-Term Municipal Trust; Signet Select Funds; Star Funds; The Starburst
Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; Trademark Funds; Trust for
Financial Institutions; Trust For Government Cash Reserves; Trust for Short-Term
U.S. Government Securities; Trust for U.S. Treasury Obligations.
FUND OWNERSHIP
Merrill Lynch Pierce Fenner & Smith (as record owner holding Class A shares for
its clients), Jacksonville, Florida, owned approximately 4,118,956 shares (10%)
of the Fund as of January 6, 1994.
Merrill Lynch Pierce Fenner & Smith (as record owner holding Class C shares for
its clients), Jacksonville, Florida, owned approximately 624,353 shares (37%) of
the Fund as of January 6, 1994.
As of January 6, 1994, there were no shareholders of record who owned 5% or more
of the outstanding Select Shares of the Fund.
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND
The Fund's investment adviser is Federated Advisers. It is a subsidiary of
Federated Investors. All the Class A (voting) shares of Federated Investors are
owned by a trust, the trustees of which are John F. Donahue, his wife, and his
son, J. Christopher Donahue. John F. Donahue is Chairman and Trustee of
Federated Advisers, Chairman and Trustee , Federated Investors, and Chairman and
Director of the Fund. John A. Staley, IV, is President and Trustee of Federated
Advisers, Vice President and Trustee, Federated Investors, Executive Vice
President, Federated Securities Corp., and Vice President of the Fund. J.
Christopher Donahue, is Trustee, Federated Advisers, President and Trustee,
Federated Investors, President and Director, Federated Administrative Services,
Inc., and Vice President and Director of the Fund. John W. McGonigle is Vice
President, Secretary and Trustee of Federated Advisers,
Trustee, Vice President, Secretary and General Counsel, Federated Investors,
Executive Vice President, Secretary and Director, Federated Administrative
Services, Inc., Executive Vice President and Director, Federated Securities
Corp., and Vice President and Secretary of the Fund.
The adviser shall not be liable to the Fund or any shareholder for any losses
that may be sustained in the purchase, holding or sale of any security or for
anything done or omitted by it except acts or omissions involving willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
imposed upon it by its contract with the Fund.
ADVISORY FEES
For its advisory services, Federated Advisers receives an annual investment
advisory fee as described in the prospectus. During the fiscal years ended March
31, 1993, 1992, and 1991, prior to the creation of separate classes of shares,
the Fund's adviser earned $3,166,235, $2,958,432, and $2,758,158, respectively,
which was reduced by $307,320, $1,084,523, and $1,348,200, respectively, because
of undertakings to limit the Fund's expenses.
STATE EXPENSE LIMITATIONS
The adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1-1/2% per
year of the remaining average net assets, the adviser will reimburse the
Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
ADMINISTRATIVE ARRANGEMENTS
- --------------------------------------------------------------------------------
For the fiscal years ended March 31, 1993, 1992, and 1991, the distributor paid
$589,900, $487,269, and $427,890, respectively, to brokers and dealers for
distribution and administrative services and to administrators for
administrative services. The administrative services include, but are not
limited to, providing office space, equipment, telephone facilities, and various
personnel, including clerical, supervisory, and computer, as is necessary or
beneficial to establish and maintain shareholders' accounts and records, process
purchase and redemption transactions, process automatic investments of client
account cash balances, answer routine client inquiries regarding the Fund,
assist clients in changing dividend options, account designations, and
addresses, and providing such other services as the Fund may reasonably request.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, Inc., a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund at approximate cost.
For the fiscal years ended March 31, 1993, 1992, and 1991, prior to the creation
of separate classes of shares, the Fund incurred administrative service fees of
$354,965, $383,010, and $363,923, respectively. John A. Staley, IV, an officer
of the Fund, and Dr. Henry J. Gailliot, an officer of Federated Advisers, the
adviser to the Fund, each hold approximately 15% and 20%, respectively, of the
outstanding common stock and serve as directors of Commercial Data Services,
Inc., a company which provides computer processing services to Federated
Administrative Services, Inc. For the fiscal years ended March 31, 1993, 1992,
and 1991, Federated Administrative Services, Inc. paid approximately $178,232,
$203,888, and $166,897, respectively, for services provided by Commercial Data
Services, Inc.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Board of Directors.
The adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the adviser
and may include:
advice as to the advisability of investing in securities;
security analysis and reports;
economic studies;
industry studies;
receipt of quotations for portfolio evaluations; and
similar services.
The adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the adviser or by
affiliates of Federated Investors in advising Federated Funds and other
accounts. To the extent that receipt of these services may supplant services for
which the adviser or its affiliates might otherwise have paid, it would tend to
reduce their expenses.
During the fiscal years ended March 31, 1993, 1992, and 1991, prior to the
creation of separate classes of shares, the Fund paid total commissions of
$27,625, $28,482, and $56,748, respectively.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Except under certain circumstances described in the prospectus, Shares are sold
at their net asset value (plus a sales charge on Class A Shares only) on days
the New York Stock Exchange is open for business. The procedure for purchasing
Shares is explained in the respective prospectus under "Investing in Class A
Shares", "Investing in Class C Shares" and "Investing in Select Shares."
DISTRIBUTION OF SHARES
Federated Securities Corp. is the principal distributor for Shares. For the
fiscal years ended March 31, 1993, 1992, and 1991, the distributor was paid
$1,771,847, $879,247, and $400,789, respectively. During the same periods, the
distributor retained $271,723, $179,626, and $46,790, respectively, after dealer
concessions.
DISTRIBUTION PLAN (CLASS C AND SELECT SHARES ONLY)
With respect to the Class C and Select Shares of the Fund, the Fund has adopted
a Plan pursuant to Rule 12b-1 which was promulgated by the Securities and
Exchange Commission under the Investment Company Act of 1940, as amended. The
Plan provides for payment of fees to Federated Securities Corp. to finance any
activity which is primarily intended to result in the sale of Class C and Select
Shares. Such activities may include the advertising and marketing of Shares;
preparing, printing, and distributing prospectuses and sales literature to
prospective shareholders, brokers, or administrators; and implementing and
operating the Plan. Pursuant to the Plan, the distributor may pay fees to
brokers for distribution and administrative services and to administrators for
administrative services as to Shares. The administrative services are provided
by a representative who has knowledge of the shareholder's particular
circumstances and goals, and include, but are not limited to: communicating
account openings; communicating account closings; entering purchase
transactions; entering redemption transactions; providing or arranging to
provide accounting support for all transactions, wiring funds and receiving
funds for Share purchases and redemptions, confirming and reconciling all
transactions; reviewing the activity in Fund accounts, and providing training
and supervision of broker personnel; posting and reinvesting dividends to Fund
accounts or arranging for the service to be performed by the Fund's transfer
agent; and maintaining and distributing current copies of prospectuses and
shareholder reports to the beneficial owners of Shares and prospective
shareholders.
The Board of Directors expects that the adoption of the Plan will result in the
sale of a sufficient number of Shares so as to allow the Fund to achieve
economic viability. It is also anticipated that an increase in the size of the
Fund will facilitate more efficient portfolio management and assist the Fund in
seeking to achieve its investment objective.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds before shareholders begin to
earn dividends. State Street Bank acts as the shareholder's agent in depositing
checks and converting them to federal funds.
PURCHASES BY SALES REPRESENTATIVES, FUND DIRECTORS, AND EMPLOYEES
Directors, employees, and sales representatives of the Fund, Federated Advisers,
and Federated Securities Corp. or their affiliates, or any investment dealer who
has a sales agreement with Federated Securities Corp., and their spouses and
children under 21, may buy Class A Shares at net asset value without a sales
charge. Shares may also be sold without a sales charge to trusts or pension or
profit sharing plans for these persons.
These sales are made with the purchaser's written assurance that the purchase is
for investment purposes and that the securities will not be resold except
through redemption by the Fund.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund
are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market value of the Fund's portfolio securities are determined as follows:
according to the last sale price on a national securities exchange, if
available;
for most short-term obligations, according to the average of the last offer to
buy and the last offer to sell the security, as provided by independent pricing
services; or
for short-term obligations according to the prices as furnished by an
independent pricing service or at fair value as determined in good faith by the
Board of Directors.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may consider yield, quality, coupon
rate, maturity, type of issue, trading characteristics, and other market data.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value, less any
applicable redemption fee after the Fund receives the redemption request.
Shareholder redemptions may be subject to a redemption fee. Redemption
procedures are explained in the respective prospectuses under "Redeeming Class A
Shares", "Redeeming Class C Shares" or "Redeeming Select Shares." Although State
Street Bank does not charge for telephone redemptions, it reserves the right to
charge a fee for the cost for the wire-transferred redemptions of less than
$5,000.
TAX STATUS
- --------------------------------------------------------------------------------
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
derive at least 90% of its gross income from dividends, interest, and gains from
the sale of securities;
derive less than 30% of its gross income from the sale of securities held less
than three months;
invest in securities within certain statutory limits; and
distribute to its shareholders at least 90% of its net income earned during the
year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional Shares. The Fund's dividends, and any short-term
capital gains, are taxable as ordinary income.
CAPITAL GAINS
Capital gains or losses may be realized on the sale of portfolio
securities and as a result of discounts from par value on securities held
to maturity. Sales would generally be made because of:
the availability of higher relative yields;
differentials in market values;
new investment opportunities;
changes in creditworthiness of an issuer; or
an attempt to preserve gains or limit losses.
Distributions of long-term capital gains are taxed as such, whether they
are taken in cash or reinvested, and regardless of the length of time the
shareholder has owned the Shares. Any loss by a shareholder on Shares
held for less than six months and sold after a capital gains distribution
will be treated as a long-term capital loss to the extent of the capital
gains distribution.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's average annual total returns for the one-year, five-year, and
ten-year periods ended March 31, 1993, prior to the creation of separate classes
of shares, were 10.19%, 12.63%, and 11.94%, respectively.
The average annual total return for each of the classes of Shares of the Fund is
the average compounded rate of return for a given period that would equate a
$1,000 initial investment to the ending redeemable value of that investment. The
ending redeemable value is computed by multiplying the number of Shares owned at
the end of the period by the net asset value per Share at the end of the period.
The number of Shares owned at the end of the period is based on the number of
Shares purchased at the beginning of the period with $1,000, less any applicable
sales load on Class A Shares only, adjusted over the period by any additional
Shares, assuming the monthly reinvestment of all dividends and distributions.
Any applicable redemption fee is deducted from the ending value of the
investment based on the lesser of the original purchase price or the net asset
value of Shares redeemed.
YIELD
- --------------------------------------------------------------------------------
Prior to the creation of separate classes of shares, the Fund's yield for the
thirty-day period ended March 31, 1993 was 8.49%.
The yield for each class of Shares of the Fund is determined by dividing the net
investment income per share (as defined by the Securities and Exchange
Commission) earned by any class of Shares over a thirty-day period by the
maximum offering price per share of the respective class on the last day of the
period. This value is then annualized using semi-annual compounding. This means
that the amount of income generated during the thirty-day period is assumed to
be generated each month over a 12-month period and is reinvested every six
months. The yield does not necessarily reflect income actually earned by the
Fund because of certain adjustments required by the Securities and Exchange
Commission and therefore, may not correlate to the dividends or other
distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in any class
of Shares, the performance will be reduced for those shareholders paying those
fees.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The Fund's performance for each of the classes of Shares depends upon such
variables as:
portfolio quality;
average portfolio maturity;
type of instruments in which the portfolio is invested;
changes in interest rates and market value of portfolio securities;
changes in the Fund's or any class of Shares' expenses; and
various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per Share fluctuate daily. Both net earnings and offering
price per Share are factors in the computation of yield and total return.
From time to time, the Fund may advertise the performance of each of the classes
of Shares compared to similar funds or portfolios using certain indices,
reporting services and financial publications. These may include the following:
LIPPER ANALYTICAL SERVICES, INC.--ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the high current yield
funds category in advertising and sales literature.
MORNINGSTAR, INC.,--an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000 listed
mutual funds of all types, according to their risk adjusted returns. The maximum
rating is five stars and ratings are effective for two weeks.
SHEARSON LEHMAN GOVERNMENT/CORPORATE (TOTAL)--index is comprised of
approximately 5,000 issues which include: non-convertible bonds publicly issued
by the U.S. government or its agencies; corporate bonds guaranteed by the U.S.
government and quasi federal corporations; and publicly issued, fixed-rate,
non-convertible domestic bonds of companies in industry, public utilities, and
finance. The average maturity of these bonds approximates nine years. Tracked by
Shearson Lehman Brothers, Inc., the index calculates total returns for one
month, three month, twelve month, and ten year periods and year-to-date.
SHEARSON LEHMAN GOVERNMENT/CORPORATE (LONG-TERM)--index is composed of the same
types of issues as defined above. However, the average maturity of the bonds
included on this index approximates 22 years.
Investors may use such indices or reporting services in addition to any class of
Shares' prospectus to obtain a more complete view of the Shares' performance
before investing. Of course, when comparing the performance of any class of
Shares to any index, conditions such as composition of the index and prevailing
market conditions should be considered in assessing the significance of such
comparisons. When comparing funds using reporting services, or total return and
yield, investors should take into consideration any relevant differences in
funds such as permitted portfolio compositions and methods used to value
portfolio securities and compute offering price.
Advertisements and sales literature for any class of Shares may quote total
returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in any
class of Shares based on monthly reinvestment of dividends over a specified
period of time.
From time to time as it deems appropriate, the Fund may advertise the
performance of any class of Shares using charts, graphs and descriptions,
compared to federally insured bank products including certificates of deposit
and time deposits and to money market funds using the Lipper Analytical Services
money market instruments average.
Advertisements may quote performance information which does not reflect the
effect of the sales charge on Class A Shares.
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The financial statements for the fiscal year ended March 31, 1993, are
incorporated herein by reference to the Annual Report of the Fund dated March
31, 1993 and the Semi-Annual Report dated September 30, 1993
(File No. 2-60103). A copy of the report may be obtained without charge by
contacting the Fund.
8062805B (1/94)
