1933 Act Registration No. 33-43472
1940 Act Registration No. 811-6447
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1993
Pre-Effective Amendment No.
Post-Effective Amendment No. 9 X_
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
Amendment No. 11 X
FIXED INCOME SECURITIES, INC.
(Exact Name of Registrant as Specified in Charter)
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
John W. McGonigle, Esq., Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
Copies to:
Thomas J. Donnelly, Esquire Charles H. Morin, Esquire
Houston, Houston & Donnelly Dickstein, Shapiro & Morin
2510 Centre City Tower 2101 L Street, N.W.
650 Smithfield Street Washington, D.C. 20037
Pittsburgh, Pennsylvania 15222
It is proposed that this filing will become effective (check
appropriate box):
___ Immediately upon filing pursuant to paragraph (b), or
___ on (date) pursuant to paragraph (b), or
X 60 days after filing pursuant paragraph (a), or
___ on (date) pursuant to paragraph (a), of Rule 485.
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Pursuant to the provisions of Rule 24f-2 under the
Investment Company Act of 1940, Registrant hereby elects to
register an indefinite number of shares of each class of its
Strategic Income Fund portfolio: Class A Shares, Fortress
Shares, Class C Shares and Select Shares. Registrant
previously has filed declarations pursuant to Rule 24f-2 with
respect to each class of its currently outstanding portfolios
of shares. Rule 24f-2 Notices with respect to each such class
for the fiscal year ended November 30, 1993 were filed on
January 18, 1994.
CROSS-REFERENCE SHEET
Explanatory Note: The Registrant is a "series" company that
currently has outstanding four portfolios of shares. This
Amendment to the Registration Statement is being filed to
register a fifth portfolio, Strategic Income Fund (the "Fund"),
which has four separate classes of shares: (1) Class A Shares,
(2) Fortress Shares, (3) Class C Shares and (4) Select Shares.
The shares of each class are offered pursuant to a separate
Prospectus and Statement of Additional Information. Therefore,
Part A of this Amendment consists of four separate Prospectuses
and Part B consists of four separate Statements of Additional
Information. As indicated in the Note at the beginning of Part
C of this Registration Statement, Part C has been completed
with respect to all portfolios of the Registrant's shares,
including the Fund.
PART A. INFORMATION REQUIRED IN A PROSPECTUS.
Prospectus Heading
of Each Class
Item 1. Cover Page . . . . . . . . . . . Cover Page
Item 2. Synopsis . . . . . . . . . . . . Summary of Fund
Expenses
Item 3. Condensed Financial Information . Not Applicable
Item 4. General Description of Registrant . General
Information
Item 5. Management of the Fund . . . . . Fixed Income
Securities, Inc.
Information
Item 5A. Management's Discussion of
Fund Performance . . . . . . . . . Not Applicable
Item 6. Capital Stock
and Other Securities . . . . . . General Information;
Shareholder
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Information; Tax
Information; Other
Classes of Shares
Item 7. Purchase of Securities
Being Offered . . . . . . . . . . Net Asset Value;
Investing in
[Class Name] Shares
Item 8. Redemption or Repurchase . . . . Redeeming
[Class Name] Shares
Item 9. Pending Legal Proceedings . . . . None
PART B. INFORMATION REQUIRED IN A
STATEMENT OF ADDITIONAL INFORMATION.
Statement Heading
of Each Class
Item 10. Cover Page . . . . . . . . . . . Cover Page
Item 11. Table of Contents . . . . . . . Table of Contents
Item 12. General Information and History . General
Information
About the Fund
Item 13. Investment Objectives
and Policies . . . . . . . . . . Investment
Objectives and
Policies; Investment
Limitations
Item 14. Management of the Fund . . . . . Fixed Income
Securities, Inc.
Management
Item 15. Control Persons and Principal
Holders of Securities . . . . . Fixed Income
Securities, Inc.
Management
Item 16. Investment Advisory
and Other Services . . . . . . . Investment Advisory
Services; Share-
holder Servicing;
Administrative
Services
Item 17. Brokerage Allocation
and Other Practices . . . . . Brokerage
Transactions
<PAGE>
Item 18. Capital Stock
and Other Securities . . . . . . Not Applicable
Item 19. Purchase, Redemption and Pricing
of Securities Being Offered . . Purchasing Shares;
Determining Net
Asset Value;
Redeeming Shares
Item 20. Tax Status . . . . . . . . . . . Tax Status
Item 21. Underwriters . . . . . . . . . . Not Applicable
Item 22. Calculation of Performance Data . Total Return;
Yield;
Performance
Comparisons
Item 23. Financial Statements . . . . . . Not Applicable
PART C. OTHER INFORMATION.
Information required to be included in Part C is set forth
under the appropriate Item, so numbered, in Part C of this
Registration Statement.
<PAGE>
PART A: THE PROSPECTUSES
STRATEGIC INCOME FUND
(A PORTFOLIO OF FIXED INCOME SECURITIES, INC.)
CLASS A SHARES
PROSPECTUS
The Class A Shares offered by this prospectus represent
interests in Strategic Income Fund (the "Fund"), a diversified
investment portfolio of Fixed Income Securities, Inc. (the
"Corporation"), an open-end, management investment company (a
mutual fund).
The investment objective of the Fund is to seek a high level of
current income. The Fund invests in domestic corporate debt
obligations, U.S. government securities, and foreign government
and corporate debt obligations.
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 GOVERNMENT
AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
<PAGE>
This prospectus contains the information you should read and
know before you invest in Class A Shares. Keep this prospectus
for future reference.
SPECIAL RISKS
From time to time, the Fund's portfolio may consist 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 that 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 Class A Shares.
The Fund has filed a Statement of Additional Information for
Class A Shares dated _____________ ___, 1994, with the
Securities and Exchange Commission. The information contained
in the Statement of Additional Information is incorporated by
reference in this prospectus. You may request a copy of the
Statement of Additional Information free of charge by calling
1-800-235-4669. To obtain other information or to 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 _____________ ___, 1994
TABLE OF CONTENTS
SUMMARY OF FUND EXPENSES
GENERAL INFORMATION
LIBERTY FAMILY OF FUNDS
Liberty Family Retirement Program
INVESTMENT INFORMATION
Investment Objective
Investment Policies
Special Risks
Acceptable Investments
<PAGE>
U.S. Government Securities
Mortgage-Backed Securities
Collateralized Mortgage Obligations and
Multiclass Pass-Through Securities
Real Estate Mortgage Investment Conduits ("REMICs")
Characteristics of Mortgage-Backed Securities
Corporate Bonds and Other Fixed-Income Obligations
Floating Rate Corporate Debt Obligations
Fixed Rate Corporate Debt Obligations
Participation Interests
Preferred Stocks
Convertible Securities
Asset-backed Securities
Zero Coupon, Pay-In-Kind and
Delayed Interest Securities
Special Risks
Corporate Equity Securities
Warrants and Rights
Foreign Securities
Risks
Foreign Currency Transactions
Forward Foreign Currency Exchange Contracts
Temporary Investments
Repurchase Agreements
Dollar Roll Transactions
Options
Financial Futures and Options on Financial Futures
Risks
Investing in Securities of Other Investment Companies
Restricted and Illiquid Securities
When-Issued and Delayed Delivery Transactions
Lending of Portfolio Securities
Portfolio Turnover
Investment Limitations
NET ASSET VALUE
INVESTING IN CLASS A SHARES
Share Purchases
Through a Financial Institution
Directly From the Distributor
Conversion to Federal Funds
Minimum Investment Required
What Shares Cost
Dealer Concession
Reducing the Sales Charge
Quantity Discounts and
Accumulated Purchases
Letter of Intent
Reinvestment Privilege
Purchases with Proceeds from
Redemptions of Unaffiliated Investment Companies
Concurrent Purchases
Systematic Investment Program
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Certificates and Confirmations
Dividends and Distributions
Retirement Plans
EXCHANGE PRIVILEGE
Reduced Sales Charge
Requirements for Exchange
Tax Consequences
Making an Exchange
Telephone Instructions
REDEEMING CLASS A SHARES
Through a Financial Institution
Directly From the Fund
By Telephone
By Mail
Signatures
Contingent Deferred Sales Charge
Systematic Withdrawal Program
Redemption Before Purchase
Instruments Clear
Accounts with Low Balances
FIXED INCOME SECURITIES, INC. INFORMATION
Management of the Corporation
Board of Directors
Investment Adviser
Advisory Fees
Adviser's Background
Portfolio Managers' Background
Distribution of Class A Shares
Other Payments to Financial Institutions
Administration of the Fund
Administrative Services
Shareholder Services Plan
Custodian
Transfer Agent and Dividend Disbursing Agent
Legal Counsel
Independent Auditors
Expenses of the Fund and Class A Shares
SHAREHOLDER INFORMATION
Voting Rights
TAX INFORMATION
Federal Income Tax
Pennsylvania Corporate and
Personal Property Taxes
PERFORMANCE INFORMATION
OTHER CLASSES OF SHARES
ADDRESSES Inside Back Cover
<PAGE>
SUMMARY OF FUND EXPENSES
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) . . . . . . . . . . . . .
4.50%
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) . . (1)
0.00%
Redemption Fee (as a percentage of amount redeemed, if
applicable) None
Exchange Fee None
ANNUAL CLASS A SHARES OPERATING EXPENSES *
(As a percentage of projected average net assets)
Management Fee (after waiver) (2) . . . . . . . . . . . . . . .
____%
12b-1 Fee None
Total Other Expenses (after expense reimbursement) (3) . . . .
____% Shareholder Servicing Fee . . . . . . . . . . . . .
0.25%
Total Class A Shares Operating Expenses . . . . . .
____%
(1) A contingent deferred sales charge of 0.50% applies
only to Shares purchased with the proceeds from
redemptions of unaffiliated mutual fund shares in which
a sales load has been paid and which are redeemed
within one year of purchase. For a more complete
description, see "Redeeming Class A Shares."
(2) The estimated management fee has been reduced to
reflect the anticipated voluntary waiver of the
management fee. The adviser can terminate this
voluntary waiver at any time at its sole discretion.
The maximum management fee is 0.85%.
(3) The Total Class A Shares Operating Expenses are
anticipated to be ____% absent the anticipated
voluntary waiver of the management fee and the
anticipated voluntary reimbursement of certain other
operating expenses.
* Total Class A Shares Operating Expenses are estimated
based on average expenses expected to be incurred
<PAGE>
during the period ending November 30, 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 CLASS A SHARES OF THE FUND WILL BEAR, EITHER DIRECTLY OR
INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS
COSTS AND EXPENSES, SEE "INVESTING IN CLASS A SHARES" AND
"FIXED INCOME SECURITIES, INC. INFORMATION." WIRE-TRANSFERRED
REDEMPTIONS OF LESS THAN $5,000 MAY BE SUBJECT TO ADDITIONAL
FEES.
EXAMPLE
1 year 3 years
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. . . . . .
You would pay the following
expenses on the same
investment, assuming no sales
load when purchasing shares of
the Fund with the proceeds
from the redemption of
unaffiliated mutual fund
shares and the imposition of a
contingent deferred sales
charge under the circumstances
described in footnote (1)
above $___ $___
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 NOVEMBER 30, 1994.
The information set forth in the foregoing table and example
relates only to the Class A Shares of the Fund. The Fund also
offers three other classes of shares called Class C Shares,
Fortress Shares and Select Shares. Class A Shares, Class C
Shares, Fortress Shares and Select Shares are subject to
certain of the same expenses. All four classes of shares are
subject to shareholder services fees of 0.25 of 1%. However,
Fortress Shares are subject to 12b-1 fees of up to 0.50 of 1%,
and Class C and Select Shares are subject to 12b-1 fees of up
to 0.75 of 1%. In addition, Class C and Select Shares are not
<PAGE>
subject to a front-end sales charge, while Fortress Shares are
subject to a front-end sales charge of up to 1.00%. Class C
and Fortress Shares may be subject to a contingent deferred
sales charge of up to 1.00%. See "Other Classes of Shares."
GENERAL INFORMATION
The Corporation was incorporated under the laws of the State of
Maryland on October 15, 1991. The Articles of Incorporation
permit the Corporation to offer separate portfolios and classes
of shares. As of the date of this prospectus, the Board of
Directors (the "Directors") has established five separate
portfolios: Strategic Income Fund, Limited Term Fund, Limited
Term Municipal Fund, Multi-State Municipal Income Fund and
Limited Maturity Government Fund. With respect to the Fund,
the Directors have established four classes of shares known as
Class A Shares, Class C Shares, Fortress Shares and Select
Shares. This prospectus relates only to the Class A Shares of
the Fund (the "Shares").
The Fund is designed for investors seeking high current income
through a professionally managed, diversified portfolio
investing primarily in domestic corporate debt obligations,
U.S. government securities, and foreign government and
corporate debt obligations. A minimum initial investment of
$500 over a 90-day period 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 plus an applicable sales
charge and are redeemed at net asset value. However, a
contingent deferred sales charge is imposed on certain Shares,
other than Shares purchased through reinvestment of dividends,
which are redeemed within four years of their purchase dates.
LIBERTY FAMILY OF FUNDS
This Fund is a member of a family of mutual funds, collectively
known as the Liberty Family of Funds. The other funds in the
Liberty Family of Funds are:
* American Leaders Fund, Inc., providing growth of capital and
income through high-quality stocks;
* Capital Growth Fund, providing appreciation of capital
primarily through equity securities;
* International Equity Fund, providing long-term capital
growth and income through international securities;
* International Income Fund, providing a high level of current
income consistent with prudent investment risk through high-
<PAGE>
quality debt securities denominated primarily in foreign
currencies;
* Liberty Equity Income Fund, Inc., providing above-average
income and capital appreciation through income-producing
equity securities;
* Liberty High Income Bond Fund, Inc., providing high current
income through high-yielding, lower-rated, corporate bonds;
* Liberty Municipal Securities Fund, Inc., providing a high
level of current income exempt from federal regular income
tax through municipal bonds;
* Liberty U.S. Government Money Market Trust, providing
current income consistent with stability of principal
through high quality U.S. government securities;
* Liberty Utility Fund, Inc., providing current income and
long-term growth of income, primarily through electric, gas
and communication utilities;
* Stock and Bond Fund, Inc., providing relative safety of
capital with the possibility of long-term growth of capital
and income through equity securities, convertible
securities, debt securities, and short-term obligations; and
* Tax-Free Instruments Trust, providing current income
consistent with stability of principal and exempt from
federal income tax, through high-quality, short-term
municipal securities;
Prospectuses for these funds are available by writing to
Federated Securities Corp. Each of the funds may also invest
in certain other types of securities as described in each
fund's prospectus.
The Liberty Family of Funds provides flexibility and
diversification for an investor's long-term investment
planning. It enables an investor to meet the challenges of
changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles and
by providing the investment services of a proven, professional
investment adviser.
Shareholders of Class A Shares participating in The Liberty
Account, are designated as Liberty Life Members. Liberty Life
Members are exempt from sales charges on future purchases in
and exchanges between the Class A Shares of any Funds in the
Liberty Family of Funds, as long as they maintain a $500
balance in one of the Liberty Funds.
LIBERTY FAMILY RETIREMENT PROGRAM
<PAGE>
The Fund is also a member of the Liberty Family Retirement
Program, an integrated program of investment options, plan
recordkeeping, and consultation services for 401(k) and other
participant-directed benefit and savings plans. Under the
Program, employers or plan trustees may select a group of
investment options to be offered in a plan which also uses the
Program for recordkeeping and administrative services.
Additional fees are charged to participating plans for these
services. As part of the Program, exchanges may readily be
made between investment options selected by the employer or a
plan trustee.
The other funds participating in the Liberty Family Retirement
Program are: American Leaders Fund, Inc., Capital Growth Fund,
International Equity Fund, International Income Fund, Liberty
Equity Income Fund, Inc., Liberty High Income Bond Fund, Inc.,
Liberty Utility Fund, Inc., Prime Cash Series, and Stock and
Bond Fund, Inc.
No sales charge is imposed on purchases made by qualified
retirement plans with over $l million invested in funds
available in the Liberty Family Retirement Program.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek a high level of
current income. The investment objective cannot be changed
without approval of shareholders. 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.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing in a
diversified portfolio primarily consisting of domestic
corporate debt obligations, U.S. government securities, and
foreign government and corporate debt obligations. Under
normal circumstances, the Fund's assets will be invested in
each of these three sectors. However, the Fund may from time
to time invest up to 100% of its total assets in any one sector
if, in the judgment of the investment adviser, the Fund has the
opportunity of seeking a high level of current income without
undue risk to principal. Accordingly, the Fund's investments
should be considered speculative. Distributable income will
fluctuate as the Fund shifts assets among the three sectors.
There will be no limit to the weighted average maturity of the
portfolio. It will generally be of longer duration.
<PAGE>
Unless indicated otherwise, the Fund's investment policies may
be changed by the Directors without the approval of
shareholders. Shareholders will be notified before any
material change in these investment policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests primarily in a
professionally managed, diversified portfolio consisting of
domestic corporate debt obligations, U.S. government
securities, and foreign government and corporate debt
obligations. The Fund also may invest in debt securities
issued by domestic and foreign utilities, as well as money
market instruments and other temporary investments.
The securities in which the Fund invests principally are:
* securities issued or guaranteed as to principal and
interest by the U.S. government, its agencies or
instrumentalities;
* domestic corporate debt obligations, some of which may
include equity features; and
* debt obligations issued by foreign governments and
corporations.
The allocation of investments across these three principal
types of securities at any given time is based upon the
adviser's estimate of expected performance and risk of each
type of investment. In order to benefit from the typical low
correlation of these three types of securities, the Fund will
typically invest a portion of its assets in each category.
However, from time to time, the adviser may change the
allocation based upon its evaluation of the marketplace.
The Fund may invest in debt securities of any maturity.
U.S. GOVERNMENT SECURITIES. The U.S. government securities in
which the Fund invests are either issued or guaranteed by the
U.S. government, its agencies or instrumentalities. The U.S.
government securities in which the Fund invests principally
are:
* direct obligations of the U.S. Treasury, such as U.S.
Treasury bills, notes and bonds; and
* obligations of U.S. government agencies or
instrumentalities, such as Federal Home Loan Banks,
Federal National Mortgage Association, Government
National Mortgage Association, Banks for Cooperatives
(including Central Bank for Cooperatives), Federal Land
Banks, Federal Intermediate Credit Banks, Federal Farm
Credit Banks, Tennessee Valley Authority, Export-Import
Bank of the United States, Commodity Credit
Corporation, Federal Financing Bank, Student Loan
<PAGE>
Marketing Association, Federal Home Loan Mortgage
Corporation, or National Credit Union Administration.
The government securities in which the Fund may invest are
backed in a variety of ways by the U.S. government or its
agencies or instrumentalities. Some of these securities, such
as Government National Mortgage Association ("GNMA") mortgage-
backed securities, are backed by the full faith and credit of
the U.S. government. Other securities, such as obligations of
the Federal National Mortgage Association ("FNMA") or Federal
Home Loan Mortgage Corporation ("FHLMC"), are backed by the
credit of the agency or instrumentality issuing the obligations
but not the full faith and credit of the U.S. government. No
assurances can be given that the U.S. government will provide
financial support to these other agencies or instrumentalities,
because it is not obligated to do so.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are
securities that directly or indirectly represent a
participation in, or are secured by and payable from,
mortgage loans on real property. The mortgage-backed
securities in which the Fund may invest may be:
* issued by an agency of the U.S. government, typically
GNMA, FNMA or FHLMC;
* privately issued securities which are collateralized by
pools of mortgages in which each mortgage is guaranteed
as to payment of principal and interest by an agency or
instrumentality of the U.S. government;
* privately issued securities which are collateralized by
pools of mortgages in which payment of principal and
interest is guaranteed by the issuer and such guarantee
is collateralized by U.S. government securities; or
* other privately issued securities in which the proceeds
of the issuance are invested in mortgage-backed
securities and payment of the principal and interest is
supported by the credit of an agency or instrumentality
of the U.S. government.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-
THROUGH SECURITIES. Collateralized mortgage obligations
("CMOs") are debt obligations collateralized by mortgage
loans or mortgage pass-through securities. Typically, CMOs
are collateralized by GNMA, FNMA or FHLMC certificates, but
also may be collateralized by whole loans or private pass-
through securities (such collateral being called "Mortgage
Assets"). Multiclass pass-through securities are equity
interests in a trust composed of Mortgage Assets. Payments
of principal of and interest on the Mortgage Assets, and any
reinvestment income, provide the funds to pay debt service
on the CMOs or make scheduled distributions on the
<PAGE>
multiclass pass-through securities. CMOs may be issued by
agencies or instrumentalities of the U.S. government, or by
private originators of, or investors in, mortgage loans,
including savings associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of
the foregoing. The issuer of a series of CMOs may elect to
be treated as a Real Estate Mortgage Investment Conduit (a
"REMIC"), which has certain special tax attributes.
In a CMO, a series of bonds or certificates is issued in
multiple classes. Each class of CMOs, often referred to as
a "tranche," is issued at a specific fixed or floating rate
of interest and has a stated maturity or final distribution
date. Principal prepayment on the Mortgage Assets may cause
the CMOs to be retired substantially earlier than their
stated maturities or final distribution dates. Interest is
paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and
interest on the Mortgage Assets may be allocated among the
several classes of a series of a CMO in innumerable ways.
In one structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to
the classes of a CMO in the order of their respective stated
maturities or final distribution dates, so that no payment
of principal will be made on any class of CMOs until all
other classes having an earlier stated maturity or final
distribution date have been paid in full.
CMOs that include a class bearing a floating rate of
interest also may include a class whose yield floats
inversely against a specified index rate. These "inverse
floaters" are more volatile than conventional fixed or
floating rate classes of a CMO and the yield thereon, as
well as the value thereof, will fluctuate in inverse
proportion to changes in the index on which interest rate
adjustments are based. As a result, the yield on an inverse
floater class of a CMO will generally increase when market
yields (as reflected by the index) decrease and increase
when market yields decrease. The extent of the volatility
of inverse floaters depends on the extent of anticipated
changes in market rates of interest. Generally, inverse
floaters provide for interest rate adjustments based upon a
multiple of the specified interest index, which further
increases their volatility. The degree of additional
volatility will be directly proportional to the size of the
multiple used in determining interest rate adjustments.
The Trust may also invest in, among others, parallel pay
CMOs and Planned Amortization Class CMOs ("PAC Bonds").
Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class.
These simultaneous payments are taken into account in
calculating the stated maturity date or final distribution
date of each class, which, as with other CMO structures,
<PAGE>
must be retired by its stated maturity date or final
distribution date but may be retired earlier. PAC Bonds
generally require payments of a specified amount of
principal on each payment date. PAC Bonds are always
parallel pay CMOs with the required principal payment on
such securities having the highest priority after interest
has been paid to all classes.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs
are offerings of multiple class real estate mortgage-backed
securities which qualify and elect treatment as such under
provisions of the Internal Revenue Code. Issuers of REMICs
may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of
mortgages. Once REMIC status is elected and obtained, the
entity is not subject to federal income taxation. Instead,
income is passed through the entity and is taxed to the
person or persons who hold interests in the REMIC. A REMIC
interest must consist of one or more classes of "regular
interests," some of which may offer adjustable rates of
interest (the type in which the Fund primarily invests), and
a single class of "residual interests." To qualify as a
REMIC, substantially all the assets of the entity must be in
assets directly or indirectly secured principally by real
property.
CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES. Mortgage-
backed securities have yield and maturity characteristics
corresponding to the underlying mortgages. Distributions to
holders of mortgage-backed securities include both interest
and principal of the underlying mortgages and any
prepayments of principal due to prepayment, refinancing, or
foreclosure of the underlying mortgages. Although
maturities of the underlying mortgage loans may range up to
30 years, amortization and prepayments substantially shorten
the effective maturities of mortgage-backed securities. Due
to these features, mortgage-backed securities are less
effective as a means of "locking in" attractive long-term
interest rates than fixed-income securities which pay only a
stated amount of interest until maturity, when the entire
principal amount is returned. This is caused by the need to
reinvest at lower interest rates both distributions of
principal generally and significant prepayments which become
more likely as mortgage interest rates decline. Since
comparatively high interest rates cannot be effectively
"locked in," mortgage-backed securities may have less
potential for capital appreciation during periods of
declining interest rates than other non-callable fixed-
income government securities of comparable stated
maturities. However, mortgage-backed securities may
experience less pronounced declines in value during periods
or rising interest rates.
<PAGE>
Prepayments may result in a capital loss to the Fund to the
extent that the prepaid mortgage securities were purchased
at a market premium over their stated amount. Conversely,
the prepayment of mortgage securities purchased at a market
discount from their stated principal amount will accelerate
the recognition of interest income by the Fund, which would
be taxed as ordinary income when distributed to the
shareholders.
Some of the CMOs purchased by the Fund may represent an
interest solely in the principal repayments or solely in the
interest payments on mortgage-backed securities. Due to the
possibility of prepayments on the underlying mortgages,
these securities may be more interest-rate sensitive than
other securities purchased by the Fund. If prevailing
interest rates fall below the level at which the securities
were issued, there may be substantial prepayments on the
underlying mortgages, leading to the relatively early
prepayments of principal-only securities and a reduction in
the amount of payments made to holders of interest-only
securities. It is possible that the Fund might not recover
its original investment in interest-only securities if there
are substantial prepayments on the underlying mortgages.
Therefore, interest-only securities generally increase in
value as interest rats rise and decrease in value as
interest rates fall, counter to changes in value experienced
by most fixed income securities. The Fund's adviser intends
to use this characteristic of interest-only securities to
reduce the effects of interest rate changes on the value of
the Fund's portfolio, while continuing to pursue current
income.
CORPORATE BONDS AND OTHER FIXED-INCOME OBLIGATIONS. The Fund
may invest in both investment grade and non-investment grade
bonds and other fixed-income obligations issued by domestic and
foreign corporations and other private issuers. There are no
minimum rating requirements for these investments by the Fund.
Certain fixed-income obligations in which the Fund invests may
involve equity characteristics. The Fund may, for example,
invest in unit offerings that combine fixed-income securities
and common stock equivalents such as warrants, rights and
options. It is anticipated that the majority of the value
attributable to the unit will relate to its fixed-income
component.
FLOATING RATE CORPORATE DEBT OBLIGATIONS. The Fund expects
to invest in floating rate corporate debt obligations,
including increasing rate securities. Floating rate
securities are generally offered at an initial interest rate
which is at or above prevailing market rates. The interest
rate paid on these securities is then reset periodically
(commonly every 90 days) to an increment over some
redetermined interest rate index. Commonly utilized indices
include the three-month Treasury bill rate, the 180-day
<PAGE>
Treasury bill rate, the one-month or three-month London
Interbank Offered Rate (LIBOR), the prime rate of a bank,
the commercial paper rates, or the longer-term rates on U.S.
Treasury securities.
FIXED RATE CORPORATE DEBT OBLIGATIONS. The Fund will also
invest in fixed rate securities. Fixed rate securities tend
to exhibit more price volatility during times of rising or
falling interest rates than securities with floating rates
of interest. This is because floating rate securities, as
described above, behave like short-term instruments in that
the rate of interest they pay is subject to periodic
adjustments based on a designated interest rate index.
Fixed rate securities pay a fixed rate of interest and are
more sensitive to fluctuating interest rates. In periods of
rising interest rates the value of a fixed rate security is
likely to fall. Fixed rate securities with short-term
characteristics are not subject to the same price volatility
as fixed rate securities without such characteristics.
Therefore, they behave more like floating rate securities
with respect to price volatility.
PARTICIPATION INTERESTS. The Fund may acquire participation
interests in senior, fully secured floating rate loans that
are made primarily to U.S. companies. The Fund's
investments in participation interests are subject to its
limitation on investments in illiquid securities. The Fund
may purchase only those participation interests that mature
in one year or less, or, if maturing in more than one year,
have a floating rate that is automatically adjusted at least
once each year according to a specified rate for such
investments, such as a percentage of a bank's prime rate.
Participation interests are primarily dependent upon the
creditworthiness of the borrower for payment of interest and
principal. Such borrowers may have difficulty making
payments and may have senior securities rated as low as "C"
by Moody's Investors Service, Inc. ("Moody's"), or "D" by
Standard & Poor's Corporation ("Standard & Poor's") or Fitch
Investors Service, Inc. ("Fitch").
PREFERRED STOCKS. Preferred stock, unlike common stock,
offers a stated dividend rate payable from the issuer's
earnings. Preferred stock dividends may be cumulative or
non-cumulative, participating, or auction rate. If interest
rates rise, the fixed dividend on preferred stocks may be
less attractive, causing the price of preferred stocks to
decline. Preferred stock may have mandatory sinking fund
provisions, as well as call/redemption provisions prior to
maturity, a negative feature when interest rates decline.
CONVERTIBLE SECURITIES. A convertible security is a bond,
debenture, note, preferred stock or other security that may
be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a
<PAGE>
particular period of time at a specified price or formula.
A convertible security entitles the holder to receive
interest generally paid or accrued on debt or the dividend
paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Convertible
securities have several unique investment characteristics,
such as (a) higher yields than common stocks, but lower
yields than comparable nonconvertible securities, (b) a
lesser degree of fluctuation in value than the underlying
stock since they have fixed income characteristics, and (c)
the potential for capital appreciation if the market price
of the underlying common stock increases.
The Fund has no current intention of converting any
convertible securities it may own into equity securities or
holding them as an equity investment upon conversion. A
convertible security might be subject to redemption at the
option of the issuer at a price established in the
convertible security's governing instrument. If a
convertible security held by the Fund is called for
redemption, the Fund may be required to permit the issuer to
redeem the security, convert it into the underlying common
stock or sell it to a third party.
ASSET-BACKED SECURITIES. The Fund may invest in asset-
backed securities including, but not limited to, interests
in pools of receivables, such as credit card and accounts
receivable and motor vehicle and other installment purchase
obligations and leases. These securities may be in the form
of pass-through instruments or asset-backed obligations.
The securities, all of which are issued by non-governmental
entities and carry no direct or indirect government
guarantee, are structurally similar to CMOs and mortgage
pass-through securities, which are described above.
However, non-mortgage related asset-backed securities
present certain risks that are not presented by mortgage
securities, primarily because these securities do not have
the benefit of the same security interest in the related
collateral. Credit card receivables, for example, are
generally unsecured, while the trustee of asset-backed
securities backed by automobile receivables may not have a
proper security interest in all of the obligations backing
such receivables.
ZERO COUPON, PAY-IN-KIND AND DELAYED INTEREST SECURITIES.
The Fund may invest in zero coupon, pay-in-kind and delayed
interest securities issued by corporations. Corporate zero
coupon securities are: (i) notes or debentures which do not
pay current interest and are issued at substantial discounts
from par value, or (ii) notes or debentures that pay no
current interest until a stated date one or more years into
the future, after which the issuer is obligated to pay
interest until maturity, usually at a higher rate than if
interest were payable from the date of issuance. Pay-in-
<PAGE>
kind securities pay interest through the issuance to holders
of additional securities and delayed interest securities do
not pay interest for a specified period. Because values of
securities of this type are subject to greater fluctuations
than are the values of securities that distribute income
regularly, they may be more speculative than such
securities.
SPECIAL RISKS. From time to time, the Fund's portfolio may
consist primarily of lower-rated (i.e., rated Ba or lower by
Moody's or BB or lower by Standard & Poor's or Fitch)
corporate debt obligations, which are commonly referred to
as "junk bonds." A description of the rating categories is
contained in the Statement of Additional Information.
Lower-rated securities will usually offer higher yields than
higher-rated securities. However, there is more risk
associated with these investments. (For example, securities
rated in the lowest category have been unable to satisfy
their obligations under the bond indenture.) 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. As a
result of these factors, lower-rated securities tend to have
more price volatility and carry more risk to principal than
higher-rated securities. 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 the Fund.
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.
CORPORATE EQUITY SECURITIES. The Fund may also invest in
equity securities, including common stocks, warrants and rights
issued by corporations in any industry (industrial, financial
or utility) which may be denominated in U.S. dollars or in
foreign currencies.
WARRANTS AND RIGHTS. The Fund may invest up to 5% of its
total assets in warrants and rights, including but not
limited to warrants or rights (i) acquired as part of a unit
<PAGE>
or attached to other securities purchased by the Fund, or
(ii) acquired as part of a distribution from the issuer.
FOREIGN SECURITIES. The Fund may invest in foreign securities,
including foreign securities not publicly traded in the United
States. No more than 25% of the Fund's total assets, at the
time of purchase, will be invested in government securities of
any one foreign country. The Fund has no other restriction on
the amount of its assets that may be invested in foreign
securities and may purchase securities issued in any country,
developed or undeveloped. There are no minimum rating
requirements for the foreign securities in which the Fund
invests.
The percentage of the Fund's assets that will be allocated to
foreign securities will vary depending on the relative yields
of foreign and U.S. securities, the economies of foreign
countries, the condition of such countries' financial markets,
the interest rate climate of such countries and the
relationship of such countries' currency to the U.S. dollar.
These factors are judged on the basis of fundamental economic
criteria (e.g., relative inflation levels and trends, growth
rate forecasts, balance of payments status, and economic
policies) as well as technical and political data.
RISKS. Investments in foreign securities involve special
risks that differ from those associated with investments in
domestic securities. The risks associated with investments
in foreign securities relate to political and economic
developments abroad, as well as those that result from the
differences between the regulation of domestic securities
and issuers and foreign securities and issuers. These risks
may include, but are not limited to, expropriation,
confiscatory taxation, currency fluctuations, withholding
taxes on interest, limitations on the use or transfer of
assets, political or social instability, ability to obtain
or enforce court judgments abroad and adverse diplomatic
developments. Moreover, individual foreign economies may
differ favorably or unfavorably from the domestic economy in
such respects as growth of gross national product, the rate
of inflation, capital reinvestment, resource self-
sufficiency and balance of payments position.
Additional differences exist between investing in foreign
and domestic securities. Examples of such differences
include: less publicly available information about foreign
issuers; credit risks associated with certain foreign
governments; the lack of uniform financial accounting
standards applicable to foreign issuers; less readily
available market quotations on foreign issues; the
likelihood that securities of foreign issuers may be less
liquid or more volatile; generally higher foreign brokerage
commissions; and unreliable mail service between countries.
<PAGE>
FOREIGN CURRENCY TRANSACTIONS. The Fund will enter into
foreign currency transactions to obtain the necessary
currencies to settle securities transactions. Currency
transactions may be conducted either on a spot or cash basis
at prevailing rates or through forward foreign currency
exchange contracts.
The Fund may also enter into foreign currency transactions
to protect Fund assets against adverse changes in foreign
currency exchange rates or exchange control regulations.
Such changes could unfavorably affect the value of Fund
assets which are denominated in foreign currencies, such as
foreign securities or funds deposited in foreign banks, as
measured in U.S. dollars. Although foreign currency
transactions may be used by the Fund to protect against a
decline in the value of one or more currencies, such efforts
may also limit any potential gain that might result from a
relative increase in the value of such currencies and might,
in certain cases, result in losses to the Fund.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward
foreign currency exchange contract (a "forward contract") is
an obligation to purchase or sell an amount of a particular
currency at a specific price and on a future date agreed
upon by the parties.
Generally, no commission charges or deposits are involved.
At the time the Fund enters into a forward contract, Fund
assets with a value equal to the Fund's obligation under the
forward contract are segregated on the Fund's records and
are maintained until the contract has been settled. The
Fund will not enter into a forward contract with a term of
more than six months. The Fund will generally enter into a
forward contract to provide the proper currency to settle a
securities transaction at the time the transaction occurs
(the "trade date"). The period between the trade date and
settlement date will vary between 24 hours and 30 days,
depending upon local custom.
The Fund may also protect against the decline of a
particular foreign currency by entering into a forward
contract to sell an amount of that currency approximating
the value of all or a portion of the Fund's assets
denominated in that currency ("hedging"). The success of
this type of short-term hedging strategy is highly uncertain
due to the difficulties of predicting short-term currency
market movements and of precisely matching forward contract
amounts and the constantly changing value of the securities
involved. Although the adviser will consider the likelihood
of changes in currency values when making investment
decisions, the adviser believes that it is important to be
able to enter into forward contracts when it believes the
interests of the Fund will be served.
<PAGE>
TEMPORARY INVESTMENTS. The Fund may invest temporarily in debt
obligations maturing in one year or less during times of
unusual market conditions for defensive purposes and to
maintain liquidity in anticipation of favorable investment
opportunities. The Fund's temporary investments may include:
* obligations issued or guaranteed by the U.S. government
or its agencies or instrumentalities;
* time deposits (including savings deposits and
certificates of deposit) and bankers acceptances in
commercial or savings banks whose accounts are insured
by the Bank Insurance Fund ("BIF") or the Savings
Association Insurance Fund ("SAIF"), both of which are
administered by the Federal Deposit Insurance
Corporation ("FDIC"), including certificates of deposit
issued by and other time deposits in foreign branches
of FDIC insured banks or who have at least $100 million
in capital;
* domestic and foreign issues of commercial paper or
other corporate debt obligations;
* obligations of the types listed above, but not
satisfying the standards set forth above, if they are
(a) subject to repurchase agreements or (b) guaranteed
as to principal and interest by a domestic or foreign
bank having total assets in excess of $1 billion, by a
corporation whose commercial paper may be purchased by
the Fund, or by a foreign government having an existing
debt security rated at least Baa by Moody's or BBB by
Standard & Poor's or Fitch; and
* other short-term investments of a type which the
adviser determines presents minimal credit risks and
which are of "high quality" as determined by a
nationally recognized statistical rating organization,
or, in the case of an instrument that is not rated, of
comparable quality in the judgment of the adviser.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements
in which banks, broker/dealers, and other recognized financial
institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price. 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.
DOLLAR ROLL TRANSACTIONS. In order to enhance portfolio
returns and manage prepayment risks, the Fund may engage in
dollar roll transactions with respect to mortgage securities
issued by GNMA, FNMA and FHLMC. In a dollar roll transaction,
the Fund sells a mortgage security to a financial institution,
<PAGE>
such as a bank or broker/dealer, and simultaneously agrees to
repurchase a substantially similar (i.e., same type, coupon,
and maturity) security from the institution at a later date at
an agreed upon price. The mortgage securities that are
repurchased will bear the same interest rate as those sold, but
generally will be collateralized by different pools of
mortgages with different prepayment histories. During the
period between the same and repurchase, the Fund will not be
entitled to receive interest and principal payments on the
securities sold. Proceeds of the sale will be invested in
short-term instruments, and the income from these investments,
together with any additional fee income received on the sale,
will generate income for the Fund exceeding the yield. When
the Fund enters into a dollar roll transaction, liquid assets
of the Fund, in a dollar amount sufficient to make payment for
the obligations to be repurchased, are segregated at the trade
date. These securities are marked to market daily and are
maintained until the transaction is settled.
OPTIONS. The Fund may deal in options on foreign currencies,
foreign currency futures, securities, and securities indices,
which options may be listed for trading on a national
securities exchange or traded over-the-counter. The Fund will
use options only to manage interest rate and currency risks.
The Fund may write covered call options to generate income.
The Fund may write covered call options and secured put options
on up to 25% of its net assets and may purchase put and call
options provided that no more than 5% of the fair market value
of its net assets may be invested in premiums on such options.
A call option gives the purchaser the right to buy, and the
writer the obligation to sell, the underlying currency,
security or other asset at the exercise price during the option
period. A put option gives the purchaser the right to sell,
and the writer the obligation to buy, the underlying currency,
security or other asset at the exercise price during the option
period. The writer of a covered call owns assets that are
acceptable for escrow and the writer of a secured put invests
an amount not less than the exercise price in eligible assets
to the extent that it is obligated as a writer. If a call
written by the Fund is exercised, the Fund forgoes any possible
profit from an increase in the market price of the underlying
asset over the exercise price plus the premium received. In
writing puts, there is a risk that the Fund may be required to
take delivery of the underlying asset at a disadvantageous
price.
Over-the-counter options ("OTC options") differ from exchange
traded options in several respects. They are transacted
directly with dealers and not with a clearing corporation, and
there is a risk of nonperformance by the dealer as a result of
the insolvency of such dealer or otherwise, in which event the
fund may experience material losses. However, in writing
options the premium is paid in advance by the dealer, OTC
<PAGE>
options, which may not be continuously liquid, are available
for a greater variety of assets, and a wider range of
expiration dates and exercise prices, than are exchange traded
options.
FINANCIAL FUTURES AND OPTIONS ON FINANCIAL FUTURES. The Fund
may purchase and sell financial futures contracts to hedge all
or a portion of its portfolio against changes in interest
rates. Financial futures contracts call for the delivery of
particular debt instruments at a certain time in the future.
The seller of the contract agrees to make delivery of the type
of instrument called for in the contract and the buyer agrees
to take delivery of the instrument at the specified future
time.
The Fund may also write call options and purchase put options
on financial futures contracts as a hedge to attempt to protect
securities in its portfolio against decreases in value. When
the Fund writes a call option on a futures contract, it is
undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option
is exercised. Conversely, as purchaser of a put option on a
futures contract, the Fund is entitled (but not obligated) to
sell a futures contract at the fixed price during the life of
the option.
The Fund may not purchase or sell futures contracts or related
options if immediately thereafter the sum of the amount of
margin deposits on the Fund's existing futures positions and
premiums paid for related options would exceed 5% of the market
value of the Fund's total assets. When the Fund purchases a
futures contracts, an amount of cash and cash equivalents,
equal to the underlying commodity value of the futures
contracts (less any related margin deposits), will be deposited
in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and
thereby insure that the use of such futures contract is
unleveraged.
RISKS. When the Fund uses financial futures and options on
financial futures as hedging devices, there is a risk that
the prices of the securities subject to the futures
contracts may not correlate perfectly with the prices of the
securities in the Fund's portfolio. This may cause the
futures contract and any related options to react
differently than the portfolio securities to market changes.
In addition, the Fund's investment adviser could be
incorrect in its expectations about the direction or extent
of market factors such as interest rate movements. In these
events, the Fund may lose money on the futures contract or
option. It is not certain that a secondary market for
positions in futures contracts or for options will exist at
all times. Although the investment adviser will consider
liquidity before entering into options transactions, there
<PAGE>
is no assurance that a liquid secondary market on an
exchange or otherwise will exist for any particular futures
contract or option at any particular time. The Fund's
ability to establish and close out futures and options
positions depends on this secondary market.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The
Fund may invest in the securities of other investment
companies, but it will not own more than 3% of the total
outstanding voting securities of any such investment company,
invest more than 5% of its total assets in any one investment
company, or invest more than 10% of its total assets in
investment companies in general. To the extent that the Fund
invests in securities issued by other investment companies, the
Fund will indirectly bear its proportionate share of any fees
and expenses paid by such companies in addition to the fees and
expenses payable directly by the Fund.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in
restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to
its investment objective and policies, but which are subject to
restriction on resale under federal securities law. The Fund
will limit investments in illiquid securities, including
certain restricted securities not determined by the Directors
to be liquid, non-negotiable time deposits, and repurchase
agreements providing for settlement in more than seven days
after notice, to 15% of the value of its net assets.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may
purchase 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. In when-issued and delayed delivery transactions, the
Fund relies on the seller to complete the transaction. The
seller's failure to complete the transaction may cause the Fund
to miss a price or yield considered to be advantageous.
LENDING OF PORTFOLIO SECURITIES. In order to generate
additional income, the Fund may lend portfolio securities on a
short-term or a long-term basis up to one-third of the value of
its total assets 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 Directors.
In these loan arrangements, the Fund 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. The Fund may trade or dispose of portfolio
securities as considered necessary to meet its investment
objective. During periods of falling interest rates, the
values of outstanding fixed-income securities generally rise.
<PAGE>
Conversely, during periods of rising interest rates, the values
of such securities generally decline. The magnitude of these
fluctuations will generally be greater for securities with
longer maturities. Because the Fund will actively use trading
to benefit from short-term yield disparities among different
issues of fixed-income securities or otherwise to increase its
income, the Fund may be subject to a greater degree of
portfolio turnover than might be expected from investment
companies which invest substantially all of their assets on a
long-term basis. The Fund cannot accurately predict its
portfolio turnover rate, but it is anticipated that its annual
turnover rate generally will not exceed 200% (excluding
turnover of securities having a maturity of one year or less).
Higher portfolio turnover results in increased Fund expenses,
including brokerage commissions, dealer mark-ups and other
transaction costs on the sale of securities and on the
reinvestment in other securities, and results in the
acceleration of realization of capital gains or losses for tax
purposes. To the extent that increased portfolio turnover
results in sales of securities held less than three months, the
Fund's ability to qualify as a "regulated investment company"
under the Internal Revenue Code may be affected.
INVESTMENT LIMITATIONS
The Fund will not:
* borrow money directly or through reverse repurchase
agreements 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 15% of
the value of those assets to secure such borrowings;
* lend any of its assets, except portfolio securities up
to one-third of the value of its total assets; or
* 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 restricted
securities which the Fund may purchase pursuant to its
investment objective, policies, and limitations.
The above investment limitations cannot be changed without
shareholder approval. The following investment limitations,
however, may be changed by the Directors without shareholder
approval. Shareholders will be notified before any material
change in these investment limitation becomes effective.
The Fund will not:
* invest more than 10% of the value of its total assets
in securities subject to restrictions on resale under
the Securities Act of 1933 except for certain
<PAGE>
restricted securities that meet the criteria for
liquidity as established by the Directors; or
* invest more than 15% of the value of its net assets in
securities that are not readily marketable or that are
otherwise considered illiquid, including repurchase
agreements providing for settlement in more than seven
days after notice.
NET ASSET VALUE
The Fund's net asset value per Share fluctuates. The net asset
value per Share is determined by adding the interest of the
Shares in the market value of all securities and other assets
of the Fund, subtracting the interest of the Shares in the
liabilities of the Fund and those attributable to the Shares,
and dividing the remainder by the total number of Shares
outstanding. The net asset value of the Shares may be
different from that of Class C Shares, Fortress Shares and
Select 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 CLASS A 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.
Participants in plans under the Liberty Family Retirement
Program shall purchase Shares in accordance with the
requirements of their respective plans.
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.
<PAGE>
(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 Strategic Income Fund -
- Class A Shares; and
* send both to the Fund's transfer agent, Federated
Services Company, c/o State Street Bank and Trust
Company, P.O. Box 8604, Boston, Massachusetts 02266-
8604.
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: Strategic Income Fund -- Class A Shares; Title or Name of
Account; Wire Order Number and/or Account Number. Shares
cannot be purchased by wire on Columbus Day, Veteran's Day or
Martin Luther King Day.
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 and
Trust Company ("State Street Bank") acts as the shareholder's
agent in depositing checks and converting them to federal
funds. Orders by mail are considered received after payment by
check is converted by State Street Bank into federal funds.
This is generally the next business day after State Street Bank
receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $500 over a 90-day
period, unless the investment is in a retirement plan, in which
case the minimum initial investment is $50. Subsequent
investments must be in amounts of at least $50. (Other minimum
investment requirements may apply to investments through the
Liberty Family Retirement Program.)
WHAT SHARES COST
<PAGE>
Shares are sold at their net asset value next determined after
an order is received, plus a sales charge as follows:
SALES CHARGE AS SALES CHARGE AS
A PERCENTAGE OF A PERCENTAGE OF
AMOUNT OF TRANSACTION PUBLIC OFFERING PRICE NET AMOUNT
INVESTED
Less than $100,000 4.50% 4.71%
$100,000 but less than $250,000 3.75% 3.90%
$250,000 but less than $500,000 2.50% 2.56%
$500,000 but less than $750,000 2.00% 2.04%
$750,000 but less than $1 million 1.00% 1.01%
$1 million or more 0.00% 0.00%
No sales charge is imposed for Shares purchased through bank
trust departments or investment advisers registered under the
Investment Advisers Act of 1940 purchasing on behalf of their
clients, or by insurance companies. These institutions,
however, may charge fees for services provided which may relate
to ownership of Fund shares. This prospectus should,
therefore, be read together with any agreement between the
customer and the institution with regard to services provided
and the fees charged for these services.
No sales charge is imposed on purchases made by qualified
retirement plans with over $1 million invested in funds
available in the Liberty Family Retirement Program.
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; and
(iii) the following holidays: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
Under certain circumstances described under "Redeeming Class A
Shares," shareholders may be charged a contingent deferred
sales charge by the distributor at the time Shares are
redeemed.
DEALER CONCESSION. For sales of Shares, broker/dealers will
normally receive up to 90% of the applicable sales charge. Any
portion of the sales charge which is not paid to a
broker/dealer will be retained by the distributor. However,
the distributor, in its sole discretion, may uniformly offer to
pay all broker/dealers selling Shares additional amounts from
all or a portion of the sales charge which it normally retains
or from any other source available to it. Such additional
payments, if accepted by the broker/dealer, may be in the form
of cash or promotional incentives, and will be predicated upon
the amount of Shares or of the Liberty Family of Funds sold by
<PAGE>
the broker/dealer, or upon the type or amount of shareholder
services and/or marketing support provided.
The sales charge for Shares sold other than through registered
broker/dealers will be retained by Federated Securities Corp.
Federated Securities Corp. may pay fees to banks out of the
sales charge in exchange for sales and/or administrative
services performed on behalf of the bank's customers in
connection with the initiation of customer accounts and
purchases of Shares.
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Shares
through:
* quantity discounts and accumulated purchases;
* signing a 13-month letter of intent;
* using the reinvestment privilege;
* purchases with proceeds from redemptions of
unaffiliated mutual fund shares; or
* concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the
table above, larger purchases reduce the sales charge paid.
The Fund will combine purchases made on the same day by the
investor, his spouse, and his children under age 21 when it
calculates the sales charge. In addition, the sales charge, if
applicable, is reduced for purchases made at one time by a
trustee or fiduciary for a single trust estate or a single
fiduciary account.
If an additional purchase of Shares is made, the Fund will
consider the previous purchases still invested in Shares. For
example, if a shareholder already owns Shares having a current
value at the public offering price of $90,000, and he purchases
$10,000 or more at the current public offering price, the sales
charge on the additional purchase according to the schedule now
in effect would be 3.75%, not 4.50%.
To receive this sales charge reduction, Federated Securities
Corp. must be notified by the shareholder in writing or by his
financial institution at the time the purchase is made that
Shares are already owned or that purchases are being combined.
The Fund will eliminate the sales charge after it confirms the
purchases.
LETTER OF INTENT. If a shareholder intends to purchase at
least $100,000 of shares in the funds in the Liberty Family of
Funds over the next 13 months, the sales charge may be reduced
<PAGE>
by signing a letter of intent to that effect. This letter of
intent includes a provision for a sales charge adjustment
depending on the amount actually purchased within the 13-month
period and a provision for the Fund's custodian to hold 4.5% of
the total amount intended to be purchased in escrow (in Shares)
until such purchase is completed.
The 4.5% held in escrow will be applied to the shareholder's
account at the end of the 13-month period unless the amount
specified in the letter of intent is not purchased. In this
event, an appropriate number of escrowed Shares may be redeemed
in order to realize the difference in the sales charge.
This letter of intent will not obligate the shareholder to
purchase Shares, but if he does, each purchase during the
period will be at the sales charge applicable to the total
amount intended to be purchased. This letter may be dated as
of a prior date to include any purchases made within the past
90 days towards the dollar fulfillment of the letter of intent.
Prior trade prices will not be adjusted.
REINVESTMENT PRIVILEGE. If Shares have been redeemed, the
shareholder has a one-time right, within 120 days, to reinvest
the redemption proceeds at the next-determined net asset value
without any sales charge. Federated Securities Corp. must be
notified by the shareholder in writing or by his financial
institution of the reinvestment in order to receive this
elimination of the sales charge. If the shareholder redeems
his Shares, there may be tax consequences.
PURCHASES WITH PROCEEDS FROM REDEMPTIONS OF UNAFFILIATED
INVESTMENT COMPANIES. Investors may purchase Shares at net
asset value, without a sales charge, with the proceeds from the
redemption of shares of an investment company which was sold
with a sales charge or commission and was not distributed by
Federated Securities Corp. (This does not include shares of a
mutual fund which were or would be subject to a contingent
deferred sales charge upon redemption.) The purchase must be
made within 60 days of the redemption, and Federated Securities
Corp. must be notified by the investor in writing, or by his
financial institution, at the time the purchase is made.
Federated Securities Corp. will offer to pay dealers an amount
equal to 0.50 of 1% of the net asset value of Shares purchased
by their clients or customers in this manner.
CONCURRENT PURCHASES. For purposes of qualifying for a sales
charge reduction, a shareholder has the privilege of combining
concurrent purchases of two or more funds in the Liberty Family
of Funds, the purchase prices of which include a sales charge.
For example, if a shareholder concurrently invested $30,000 in
one of the other Liberty Funds with a sales charge, and $70,000
in Shares, the sales charge would be reduced.
<PAGE>
To receive this sales charge reduction, Federated Securities
Corp. must be notified by the shareholder in writing or by his
financial institution at the time the concurrent purchases are
made. The Fund will reduce the sales charge after it confirms
the purchases.
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, plus the applicable
sales charge. 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 application
or by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent
to each shareholder. Monthly statements are sent to report
dividends paid during the month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. 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 of the Fund
on payment dates at net asset value without a sales charge,
unless cash payments are requested by shareholders on the
application or by writing to the transfer agent.
Dividends are declared just prior to determining net asset
value. If an order for shares is placed on the preceding
business day, shares purchased by wire begin earning dividends
on the business day wire payment is received by the transfer
agent. If the order for shares and payment by wire are
received on the same day, shares begin earning dividends on the
next business day. Shares purchased by check begin earning
dividends on the business day after the check is converted,
upon instruction of the transfer agent, into federal funds.
Shares earn dividends through the business day that proper
written redemption instructions are received by the transfer
agent.
RETIREMENT PLANS
<PAGE>
Shares 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
Class A shareholders may exchange all or some of their Shares
for Class A Shares of other funds in the Liberty Family of
Funds. They may also exchange into certain other funds for
which affiliates of Federated Investors serve as principal
underwriter ("Federated Funds"). Certain Federated Funds are
sold with a sales charge different from that of the Fund or
with no sales charge; exchanges into these Federated Funds are
made at net asset value plus the difference between the Fund's
sales charge and contingent deferred sales charge already paid
and any sales charge of the Federated Fund into which the
Shares are to be exchanged, if higher. Neither the Fund nor
any of the funds in the Liberty Family of Funds imposes any
additional fees on exchanges. Participants in a plan under the
Liberty Family Retirement Program may exchange all or some of
their
Shares for Class A Shares of other funds offered under the plan
at net asset value without a contingent deferred sales charge.
REDUCED SALES CHARGE
If a shareholder making such an exchange qualifies for a
reduction of the sales charge, Federated Securities Corp. must
be notified in writing by the shareholder or by his financial
institution.
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Shares having a
net asset value of at least $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 shares of the other fund. The exchange
privilege may be
terminated at any time. Shareholders will be notified of the
modification or termination of the exchange privilege. This
privilege is not available where redeemed Shares are assessed a
contingent deferred sales charge or similar charge.
Further information on the exchange privilege and prospectuses
for the Liberty Family of Funds or certain Federated Funds are
available by contacting the Fund.
<PAGE>
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.
Instructions for exchanges for the Liberty Family Retirement
Program should be given to the plan administrator.
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 are recorded and 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 that 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 CLASS A SHARES
The Fund redeems Shares at their net asset value next
determined after the transfer agent receives the redemption
request, less any applicable contingent deferred sales charge.
Redemptions will be made on days on which the Fund computes its
net asset value. Redemptions can be made through a financial
<PAGE>
institution or directly from the Fund. Redemption requests
must be received in proper form. Redemptions of Shares held
through the Liberty Family Retirement Program will be governed
by the requirements of the respective plans.
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, less any applicable contingent
deferred sales charge. 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 in 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.
<PAGE>
BY MAIL. Any shareholder may redeem Shares by sending a
written request to the transfer agent. 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 may 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 BIF, which is administered by the FDIC;
* a member 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 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.
CONTINGENT DEFERRED SALES CHARGE
Shareholders who purchased Shares with the proceeds of a
redemption of shares of a mutual fund sold with a sales charge
or commission and not distributed by Federated Securities Corp.
will be charged a contingent deferred sales charge by the
Fund's distributor of 0.50 of 1% for redemptions made within
one year of purchase. The contingent deferred sales charge
will be calculated based upon the lesser of the original
purchase
price of the Shares or the net asset value of the Shares when
redeemed.
<PAGE>
The contingent deferred sales charge will not be imposed on
Shares acquired through the reinvestment of dividends or
distributions of long-term capital gains. Redemptions are
deemed to have occurred in the following order: (1) Shares
acquired through the reinvestment of dividends and long-term
capital gains; (2) purchase of Shares occurring more than one
year before the date of redemption; (3) purchases of Shares
within the previous year without the use of redemption proceeds
as described above; and (4) purchases of Shares within the
previous year through the use of redemption proceeds as
described above.
The contingent deferred sales charge will not be imposed when a
redemption results from a return under the following
circumstances: (i) a total or partial distribution from a
qualified plan, other than an IRA, Keogh Plan, or a custodial
account, following retirement; (ii) a total or partial
distribution from an IRA, Keogh Plan, or a custodial account
after the beneficial owner attains age 59-1/2; or (iii) from
the death or total and permanent disability of the beneficial
owner. The exemption from the contingent deferred sales charge
for qualified plans, an IRA, Keogh Plan, or a custodial account
does not extend to account transfers, rollovers, and other
redemptions made for purposes of reinvestment.
Contingent deferred sales charges are not charged in connection
with exchanges of Shares for Class A Shares in other funds in
the Liberty Family of Funds or the Liberty Family Retirement
Program, or in connection with redemptions by the Fund of
accounts with low balances. No contingent deferred sales
charge will be charged for redemption from the Liberty Family
Retirement Program.
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. Due to the fact that Shares are sold with a sales
charge, it is not advisable for shareholders to be purchasing
Shares while participating in this program.
<PAGE>
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When Shares are purchased by check, or through the Automated
Clearing House ("ACH"), the proceeds from the redemption of
those Shares are not available, and the Shares may not be
exchanged, until the Fund or its agents are reasonably certain
that the purchase check has cleared, which could take up to ten
calendar days.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances,
the Fund may redeem Shares in any account, and pay the proceeds
to the shareholder, if the account balance falls below a
required minimum value of $500 due to shareholder redemptions.
This requirement does not apply, however, if the balance falls
below $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.
FIXED INCOME SECURITIES, INC. INFORMATION
MANAGEMENT OF THE CORPORATION
BOARD OF DIRECTORS. The Fund is managed by a Board of
Directors. The Directors are responsible for managing the
Corporation's business affairs and for exercising all the
Corporation's powers except those reserved for the
shareholders. The Executive Committee of the Board of
Directors handles the Directors' responsibilities between
meetings of the Directors.
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 0.85 of 1% of the Fund's
average daily net assets. Under the investment advisory
contract, which provides for voluntary waivers of expenses
by the adviser, the adviser may voluntarily waive some or
all of its fee. The adviser can terminate this voluntary
waiver of some or all of its advisory fee 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.
ADVISER'S BACKGROUND. Federated Advisers, a Delaware
business trust organized on April 11, 1989, is a registered
<PAGE>
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 $76 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.
PORTFOLIO MANAGERS' BACKGROUND. Randall S. Bauer, Mark E.
Durbiano and Gary J. Madich have been the Fund's portfolio
managers since its inception. Mr. Bauer joined Federated
Investors in 1989 and has been a Vice President of the
Fund's adviser since 1994. Mr. Bauer was an Assistant Vice
President of the International Banking Division at
Pittsburgh National Bank from 1982 until 1989. Mr. Bauer is
a Chartered Financial Analyst and received his M.B.A. in
Finance from Pennsylvania State University. Mr. Durbiano
joined Federated Investors in 1982 and has been a Vice
President of the Fund's adviser since 1988. Mr. Durbiano is
a Chartered Financial Analyst and received his M.B.A. in
Finance from the University of Pittsburgh. Mr. Madich
joined Federated Investors in 1984 and has been a Senior
Vice President of the Fund's investment adviser since 1993.
Mr. Madich served as a Vice President of the Fund's
investment adviser from 1988 until 1993. Mr. Madich is a
Chartered Financial Analyst and received his M.B.A. in
Public Finance from the University of Pittsburgh.
DISTRIBUTION OF CLASS A SHARES
Federated Securities Corp. is the principal distributor for
Shares of the Fund. 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.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. Federated Securities
Corp. will pay financial institutions, at the time of purchase,
<PAGE>
an amount equal to 0.50 of 1% of the net asset value of Shares
purchased by their clients or customers under the Liberty
Family Retirement Program or by certain qualified plans as
approved by Federated Securities Corp. (Such payments are
subject to a reclaim from the financial institution should the
assets leave the program within 12 months after purchase.)
These payments will be made directly by the distributor from
its assets, and will not be made from the assets of the Fund or
by the assessment of a sales charge on Shares.
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 Shares of
the Fund. 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 Shares. In return for providing these support services, a
financial institution may receive payments from the Fund at a
rate not exceeding 0.25 of 1% of the average daily net assets
of the 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 provision of personal
services and maintenance of shareholder accounts.
In addition to receiving payments under the Services Plan,
financial institutions may be compensated by the distributor,
who may be reimbursed by the Adviser, or affiliates thereof,
for providing administrative support services to holders of
Shares. These payments will be made directly by the
distributor, and will not be made from the assets of the Fund.
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 the interpretations given to the
<PAGE>
Glass-Steagall Act and, therefore, banks and financial
institutions may be required to register as dealers pursuant to
state laws.
CUSTODIAN. State Street Bank and Trust Company, Boston,
Massachusetts, is custodian for the securities and cash of the
Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated
Services Company, Pittsburgh, Pennsylvania, 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, Pittsburgh, Pennsylvania, and Dickstein, Shapiro &
Morin, Washington, D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund
are Deloitte & Touche, Boston, Massachusetts.
EXPENSES OF THE FUND AND CLASS A SHARES
Holders of Shares pay their allocable portion of Fund and
Corporation expenses.
The Corporation expenses for which holders of Shares pay their
allocable portion include, but are not limited to: the cost or
organizing the Corporation and continuing its existence;
registering the Corporation with federal and state securities
authorities; Directors' fees; auditors' fees; the cost of
meetings of Directors; legal fees of the Corporation;
association membership dues and such non-recurring and
extraordinary items as may arise from time to time.
The Fund expenses for which holders of Shares pay their
allocable portion include, but are not limited to: registering
the Fund and Shares of the Fund; 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 the Shares as a class are expenses under the Fund's
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; printing and postage expenses related to
preparing and distributing material such as shareholder
reports, prospectuses and proxies to current shareholders;
registration fees paid to the Securities and Exchange
Commission and to state securities commissions; expenses
related to administrative personnel and services as required to
<PAGE>
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 of the Fund is entitled to one vote in Director
elections and other matters submitted to shareholders for vote.
All shares of all classes of each portfolio in the Corporation
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 Corporation 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 the Board of Directors or by the
shareholders at a special meeting. A special meeting of
shareholders shall be called by the Directors upon the request
of shareholders owning at least 10% of the Corporation'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 applicable to
regulated investment companies and to receive the special tax
treatment afforded to such companies.
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 their Shares. No federal income tax is due on any
distributions earned in an IRA or qualified retirement plan
until distributed, so long as such IRA or qualified retirement
plan meets the applicable requirements of the Internal Revenue
Code.
PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the
Fund:
<PAGE>
* the Fund is subject to the Pennsylvania corporate
franchise tax; and
* Fund Shares are exempt from 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 the total return and
yield for Class A Shares.
Total return represents the change, over a specified 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.
The performance information reflects the effect of the maximum
sales load and the contingent deferred sales charge which, if
excluded, would increase the total return and yield.
Total return and yield will be calculated separately for Class
A Shares, Class C Shares, Fortress Shares and Select Shares.
Because Class A Shares are not subject to 12b-1 expenses, the
yield for Class A Shares, for the same period, will exceed that
of Class C, Fortress and Select Shares. Because Class C,
Fortress and Select Shares are subject to lower sales charges,
the total return for these shares, for the same period, may
exceed that of Class A Shares.
From time to time, the Fund may advertise the performance of
Shares using certain financial publications and/or compare its
performance to certain indices.
OTHER CLASSES OF SHARES
The Fund currently offers Class A Shares, Class C Shares,
Fortress Shares and Select Shares.
<PAGE>
Class C Shares are sold primarily to customers of financial
institutions at net asset value with no front-end 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 0.75 of 1%, in addition to a shareholder services fee of
0.25 of 1% of the Class C Shares' average daily net assets. In
addition, Class C Shares may be subject to certain contingent
deferred sales charges. Investments in Class C Shares are
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.
Fortress Shares are sold primarily to customers of financial
institutions subject to a front-end sales charge of up to
1.00%. Fortress Shares are distributed pursuant to a Rule 12b-
1 Plan adopted by the Fund whereby the distributor is paid a
fee of up to 0.50 of 1%, in addition to a shareholder services
fee of 0.25 of 1% of the Fortress Shares' average daily net
assets. In addition, Fortress Shares may be subject to certain
contingent deferred sales charges. Investments in Fortress
Shares are subject to a minimum initial investment of $1,500
over a 90-day period, unless the investment is in a retirement
account, in which case the minimum investment is $50.
Select Shares are sold primarily to customers of financial
institutions at net asset value with no front-end sales charge.
Select Shares are distributed pursuant to a Rule 12b-1 Plan
adopted by the Fund whereby the distributor is paid a fee of up
to 0.75 of 1%, in addition to a shareholder service fee of 0.25
of 1% of the Select Shares' average daily net assets.
Investments in Select Shares are 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 and Fortress Shares
will generally exceed that of Class C and Select Shares by the
difference between Class Expenses borne by shares of each
respective class.
The stated advisory fee is the same for all four classes of
shares.
ADDRESSES
Strategic
Income Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Distributor Federated Securities Corp.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Investment Adviser Federated Advisers
<PAGE>
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Custodian State Street Bank and Trust Company
P.O. Box 8604
Boston, Massachusetts 02266-8604
Transfer Agent and
Dividend Disbursing Agent Federated Services Company
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Legal Counsel Houston, Houston & Donnelly
2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
Legal Counsel Dickstein, Shapiro & Morin
2101 L Street, N.W.
Washington, D.C. 20037
Independent Auditors Deloitte & Touche
125 Summer Street
Boston, Massachusetts 02110-1617
STRATEGIC INCOME FUND
CLASS A SHARES
PROSPECTUS
A Diversified Portfolio of
Fixed Income Securities, Inc.,
an Open-End, Management
Investment Company
_________________ ___, 1994
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
<PAGE>
* * * * * *
STRATEGIC INCOME FUND
(A PORTFOLIO OF FIXED INCOME SECURITIES, INC.)
CLASS C SHARES
PROSPECTUS
<PAGE>
The Class C Shares offered by this prospectus represent
interests in Strategic Income Fund (the "Fund"), a diversified
investment portfolio of Fixed Income Securities, Inc. (the
"Corporation"), an open-end, management investment company (a
mutual fund).
The investment objective of the Fund is to seek a high level of
current income. The Fund invests in domestic corporate debt
obligations, U.S. government securities, and foreign government
and corporate debt obligations.
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 GOVERNMENT
AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and
know before you invest in Class C Shares. Keep this prospectus
for future reference.
SPECIAL RISKS
From time to time, the Fund's portfolio may consist 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 that 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 Class C Shares.
The Fund has filed a Statement of Additional Information for
Class C Shares dated _____________ ___, 1994, with the
Securities and Exchange Commission. The information contained
in the Statement of Additional Information is incorporated by
reference in this prospectus. You may request a copy of the
Statement of Additional Information free of charge by calling
1-800-235-4669. To obtain other information or to 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.
<PAGE>
Prospectus dated _____________ ___, 1994
TABLE OF CONTENTS
SUMMARY OF FUND EXPENSES
GENERAL INFORMATION
LIBERTY FAMILY OF FUNDS
Liberty Family Retirement Program
INVESTMENT INFORMATION
Investment Objective
Investment Policies
Special Risks
Acceptable Investments
U.S. Government Securities
Mortgage-Backed Securities
Collateralized Mortgage Obligations and
Multiclass Pass-Through Securities
Real Estate Mortgage Investment Conduits ("REMICs")
Characteristics of Mortgage-Backed Securities
Corporate Bonds and Other Fixed-Income Obligations
Floating Rate Corporate Debt Obligations
Fixed Rate Corporate Debt Obligations
Participation Interests
Preferred Stocks
Convertible Securities
Asset-backed Securities
Zero Coupon, Pay-In-Kind and
Delayed Interest Securities
Special Risks
Corporate Equity Securities
Warrants and Rights
Foreign Securities
Risks
Foreign Currency Transactions
Forward Foreign Currency Exchange Contracts
Temporary Investments
Repurchase Agreements
Dollar Roll Transactions
Options
Financial Futures and Options on Financial Futures
Risks
Investing in Securities of Other Investment Companies
Restricted and Illiquid Securities
When-Issued and Delayed Delivery Transactions
Lending of Portfolio Securities
Portfolio Turnover
Investment Limitations
NET ASSET VALUE
<PAGE>
INVESTING IN CLASS C SHARES
Share Purchases
Through a Financial Institution
Directly From the Distributor
Conversion to Federal Funds
Minimum Investment Required
What Shares Cost
Systematic Investment Program
Certificates and Confirmations
Dividends and Distributions
Retirement Plans
EXCHANGE PRIVILEGE
Requirements for Exchange
Tax Consequences
Making an Exchange
Telephone Instructions
REDEEMING CLASS C SHARES
Through a Financial Institution
Directly From the Fund
By Telephone
By Mail
Signatures
Contingent Deferred Sales Charge
Systematic Withdrawal Program
Redemption Before Purchase
Instruments Clear
Accounts with Low Balances
FIXED INCOME SECURITIES, INC. INFORMATION
Management of the Corporation
Board of Directors
Investment Adviser
Advisory Fees
Adviser's Background
Portfolio Managers' Background
Distribution of Class C Shares
Distribution Plan
Other Payments to Financial Institutions
Administration of the Fund
Administrative Services
Shareholder Services Plan
Custodian
Transfer Agent and Dividend Disbursing Agent
Legal Counsel
Independent Auditors
Expenses of the Fund and Class C Shares
SHAREHOLDER INFORMATION
Voting Rights
TAX INFORMATION
Federal Income Tax
<PAGE>
Pennsylvania Corporate and
Personal Property Taxes
PERFORMANCE INFORMATION
OTHER CLASSES OF SHARES
ADDRESSES Inside Back Cover
SUMMARY OF FUND EXPENSES
CLASS C SHARES
SHAREHOLDER TRANSACTION EXPENSES
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) (1)1.00%
Redemption Fee (as a percentage of amount redeemed, if
applicable) (1) None
Exchange Fee None
ANNUAL CLASS C SHARES OPERATING EXPENSES *
(As a percentage of projected average net assets)
Management Fee (after waiver) (2) . . . . . . . . . . . . . . .
____%
12b-1 Fee (after waiver) (3) . . . . . . . . . . . . . . . . .
0.70%
Total Other Expenses (after expense reimbursement) (4) . . . .
____%
Shareholder Servicing Fee . . . . . . . . . . . . . .
0.25%
Total Class C Shares Operating Expenses . . . . . .
____%
(1) The contingent deferred sales charge is 1.00% of the
lesser of the original purchase price or the net asset
value of Shares redeemed within one year of their
purchase date. For a more complete description, see
"Redeeming Class C Shares."
(2) The estimated management fee has been reduced to
reflect the anticipated voluntary waiver of the
management fee. The adviser can terminate this
<PAGE>
voluntary waiver at any time at its sole discretion.
The maximum management fee is 0.85%.
(3) The maximum 12b-1 fee is 0.75%.
(4) The Total Class C Shares Operating Expenses are
anticipated to be ____% absent the anticipated
voluntary waiver of the management fee and the
anticipated voluntary reimbursement of certain other
operating expenses.
* Total Class C Shares Operating Expenses are estimated
based on average expenses expected to be incurred
during the period ending November 30, 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 CLASS C SHARES OF THE FUND WILL BEAR, EITHER DIRECTLY OR
INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS
COSTS AND EXPENSES, SEE "INVESTING IN CLASS C SHARES" AND
"FIXED INCOME SECURITIES, INC. INFORMATION." WIRE-TRANSFERRED
REDEMPTIONS OF LESS THAN $5,000 MAY BE SUBJECT TO ADDITIONAL
FEES.
EXAMPLE
1 year 3 years
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. . . . . . $___ $___
You would pay the following
expenses on the same
investment, assuming no
redemption. . . . . . . . . . $___ $___
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 NOVEMBER 30, 1994.
The information set forth in the foregoing table and example
relates only to the Class C Shares of the Fund. The Fund also
offers three other classes of shares called Class A Shares,
Fortress Shares and Select Shares. Class A Shares, Class C
<PAGE>
Shares, Fortress Shares and Select Shares are subject to
certain of the same expenses. All four classes of shares are
subject to shareholder services fees of 0.25 of 1%. However,
Class A Shares are not subject to 12b-1 fees, while Fortress
Shares are subject to 12b-1 fees of up to 0.50 of 1%, and
Select Shares are subject to 12b-1 fees of up to 0.75 of 1%.
In addition, Select Shares are not subject to a front-end sales
charge, while Class A Shares are subject to a front-end sales
charge of up to 4.50% and Fortress Shares are subject to a
front-end sales charge of up to 1.00%. Fortress Shares may be
subject to a contingent deferred sales charge of up to 1.00%.
See "Other Classes of Shares."
GENERAL INFORMATION
The Corporation was incorporated under the laws of the State of
Maryland on October 15, 1991. The Articles of Incorporation
permit the Corporation to offer separate portfolios and classes
of shares. As of the date of this prospectus, the Board of
Directors (the "Directors") has established five separate
portfolios: Strategic Income Fund, Limited Term Fund, Limited
Term Municipal Fund, Multi-State Municipal Income Fund and
Limited Maturity Government Fund. With respect to the Fund,
the Directors have established four classes of shares known as
Class A Shares, Class C Shares, Fortress Shares and Select
Shares. This prospectus relates only to the Class C Shares of
the Fund (the "Shares").
The Fund is designed for investors seeking high current income
through a professionally managed, diversified portfolio
investing primarily in domestic corporate debt obligations,
U.S. government securities, and foreign government and
corporate debt obligations. A minimum initial investment of
$1,500, unless the investment is in a retirement account in
which case the minimum investment is $50.
Shares are sold at net asset value. A contingent deferred
sales charge of 1.00% will be charged on certain Shares
redeemed within the first 12 months following purchase. Fund
assets may be used in connection with the distribution of
Shares.
LIBERTY FAMILY OF FUNDS
This Fund is a member of a family of mutual funds, collectively
known as the Liberty Family of Funds. The other funds in the
Liberty Family of Funds are:
* American Leaders Fund, Inc., providing growth of capital and
income through high-quality stocks;
* Capital Growth Fund, providing appreciation of capital
primarily through equity securities;
<PAGE>
* International Equity Fund, providing long-term capital
growth and income through international securities;
* International Income Fund, providing a high level of current
income consistent with prudent investment risk through high-
quality debt securities denominated primarily in foreign
currencies;
* Liberty Equity Income Fund, Inc., providing above-average
income and capital appreciation through income-producing
equity securities;
* Liberty High Income Bond Fund, Inc., providing high current
income through high-yielding, lower-rated, corporate bonds;
* Liberty Municipal Securities Fund, Inc., providing a high
level of current income exempt from federal regular income
tax through municipal bonds;
* Liberty U.S. Government Money Market Trust, providing
current income consistent with stability of principal
through high quality U.S. government securities;
* Liberty Utility Fund, Inc., providing current income and
long-term growth of income, primarily through electric, gas
and communication utilities;
* Stock and Bond Fund, Inc., providing relative safety of
capital with the possibility of long-term growth of capital
and income through equity securities, convertible
securities, debt securities, and short-term obligations; and
* Tax-Free Instruments Trust, providing current income
consistent with stability of principal and exempt from
federal income tax, through high-quality, short-term
municipal securities;
Prospectuses for these funds are available by writing to
Federated Securities Corp. Each of the funds may also invest
in certain other types of securities as described in each
fund's prospectus.
The Liberty Family of Funds provides flexibility and
diversification for an investor's long-term investment
planning. It enables an investor to meet the challenges of
changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles and
by providing the investment services of a proven, professional
investment adviser.
LIBERTY FAMILY RETIREMENT PROGRAM
The Fund is also a member of the Liberty Family Retirement
Program, an integrated program of investment options, plan
<PAGE>
recordkeeping, and consultation services for 401(k) and other
participant-directed benefit and savings plans. Under the
Program, employers or plan trustees may select a group of
investment options to be offered in a plan which also uses the
Program for recordkeeping and administrative services.
Additional fees are charged to participating plans for these
services. As part of the Program, exchanges may readily be
made between investment options selected by the employer or a
plan trustee.
The other funds participating in the Liberty Family Retirement
Program are: American Leaders Fund, Inc., Capital Growth Fund,
International Equity Fund, International Income Fund, Liberty
Equity Income Fund, Inc., Liberty High Income Bond Fund, Inc.,
Liberty Utility Fund, Inc., Prime Cash Series, and Stock and
Bond Fund, Inc. Plans with over $l million invested in funds
available in the Liberty Family Retirement Program may purchase
Class A Shares of the Fund without a sales load.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek a high level of
current income. The investment objective cannot be changed
without approval of shareholders. 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.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing in a
diversified portfolio primarily consisting of domestic
corporate debt obligations, U.S. government securities, and
foreign government and corporate debt obligations. Under
normal circumstances, the Fund's assets will be invested in
each of these three sectors. However, the Fund may from time
to time invest up to 100% of its total assets in any one sector
if, in the judgment of the investment adviser, the Fund has the
opportunity of seeking a high level of current income without
undue risk to principal. Accordingly, the Fund's investments
should be considered speculative. Distributable income will
fluctuate as the Fund shifts assets among the three sectors.
There will be no limit to the weighted average maturity of the
portfolio. It will generally be of longer duration.
Unless indicated otherwise, the Fund's investment policies may
be changed by the Directors without the approval of
shareholders. Shareholders will be notified before any
material change in these investment policies becomes effective.
<PAGE>
ACCEPTABLE INVESTMENTS. The Fund invests primarily in a
professionally managed, diversified portfolio consisting of
domestic corporate debt obligations, U.S. government
securities, and foreign government and corporate debt
obligations. The Fund also may invest in debt securities
issued by domestic and foreign utilities, as well as money
market instruments and other temporary investments.
The securities in which the Fund invests principally are:
* securities issued or guaranteed as to principal and
interest by the U.S. government, its agencies or
instrumentalities;
* domestic corporate debt obligations, some of which may
include equity features; and
* debt obligations issued by foreign governments and
corporations.
The allocation of investments across these three principal
types of securities at any given time is based upon the
adviser's estimate of expected performance and risk of each
type of investment. In order to benefit from the typical low
correlation of these three types of securities, the Fund will
typically invest a portion of its assets in each category.
However, from time to time, the adviser may change the
allocation based upon its evaluation of the marketplace.
The Fund may invest in debt securities of any maturity.
U.S. GOVERNMENT SECURITIES. The U.S. government securities in
which the Fund invests are either issued or guaranteed by the
U.S. government, its agencies or instrumentalities. The U.S.
government securities in which the Fund invests principally
are:
* direct obligations of the U.S. Treasury, such as U.S.
Treasury bills, notes and bonds; and
* obligations of U.S. government agencies or
instrumentalities, such as Federal Home Loan Banks,
Federal National Mortgage Association, Government
National Mortgage Association, Banks for Cooperatives
(including Central Bank for Cooperatives), Federal Land
Banks, Federal Intermediate Credit Banks, Federal Farm
Credit Banks, Tennessee Valley Authority, Export-Import
Bank of the United States, Commodity Credit
Corporation, Federal Financing Bank, Student Loan
Marketing Association, Federal Home Loan Mortgage
Corporation, or National Credit Union Administration.
The government securities in which the Fund may invest are
backed in a variety of ways by the U.S. government or its
<PAGE>
agencies or instrumentalities. Some of these securities, such
as Government National Mortgage Association ("GNMA") mortgage-
backed securities, are backed by the full faith and credit of
the U.S. government. Other securities, such as obligations of
the Federal National Mortgage Association ("FNMA") or Federal
Home Loan Mortgage Corporation ("FHLMC"), are backed by the
credit of the agency or instrumentality issuing the obligations
but not the full faith and credit of the U.S. government. No
assurances can be given that the U.S. government will provide
financial support to these other agencies or instrumentalities,
because it is not obligated to do so.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are
securities that directly or indirectly represent a
participation in, or are secured by and payable from,
mortgage loans on real property. The mortgage-backed
securities in which the Fund may invest may be:
* issued by an agency of the U.S. government, typically
GNMA, FNMA or FHLMC;
* privately issued securities which are collateralized by
pools of mortgages in which each mortgage is guaranteed
as to payment of principal and interest by an agency or
instrumentality of the U.S. government;
* privately issued securities which are collateralized by
pools of mortgages in which payment of principal and
interest is guaranteed by the issuer and such guarantee
is collateralized by U.S. government securities; or
* other privately issued securities in which the proceeds
of the issuance are invested in mortgage-backed
securities and payment of the principal and interest is
supported by the credit of an agency or instrumentality
of the U.S. government.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-
THROUGH SECURITIES. Collateralized mortgage obligations
("CMOs") are debt obligations collateralized by mortgage
loans or mortgage pass-through securities. Typically, CMOs
are collateralized by GNMA, FNMA or FHLMC certificates, but
also may be collateralized by whole loans or private pass-
through securities (such collateral being called "Mortgage
Assets"). Multiclass pass-through securities are equity
interests in a trust composed of Mortgage Assets. Payments
of principal of and interest on the Mortgage Assets, and any
reinvestment income, provide the funds to pay debt service
on the CMOs or make scheduled distributions on the
multiclass pass-through securities. CMOs may be issued by
agencies or instrumentalities of the U.S. government, or by
private originators of, or investors in, mortgage loans,
including savings associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of
<PAGE>
the foregoing. The issuer of a series of CMOs may elect to
be treated as a Real Estate Mortgage Investment Conduit (a
"REMIC"), which has certain special tax attributes.
In a CMO, a series of bonds or certificates is issued in
multiple classes. Each class of CMOs, often referred to as
a "tranche," is issued at a specific fixed or floating rate
of interest and has a stated maturity or final distribution
date. Principal prepayment on the Mortgage Assets may cause
the CMOs to be retired substantially earlier than their
stated maturities or final distribution dates. Interest is
paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and
interest on the Mortgage Assets may be allocated among the
several classes of a series of a CMO in innumerable ways.
In one structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to
the classes of a CMO in the order of their respective stated
maturities or final distribution dates, so that no payment
of principal will be made on any class of CMOs until all
other classes having an earlier stated maturity or final
distribution date have been paid in full.
CMOs that include a class bearing a floating rate of
interest also may include a class whose yield floats
inversely against a specified index rate. These "inverse
floaters" are more volatile than conventional fixed or
floating rate classes of a CMO and the yield thereon, as
well as the value thereof, will fluctuate in inverse
proportion to changes in the index on which interest rate
adjustments are based. As a result, the yield on an inverse
floater class of a CMO will generally increase when market
yields (as reflected by the index) decrease and increase
when market yields decrease. The extent of the volatility
of inverse floaters depends on the extent of anticipated
changes in market rates of interest. Generally, inverse
floaters provide for interest rate adjustments based upon a
multiple of the specified interest index, which further
increases their volatility. The degree of additional
volatility will be directly proportional to the size of the
multiple used in determining interest rate adjustments.
The Trust may also invest in, among others, parallel pay
CMOs and Planned Amortization Class CMOs ("PAC Bonds").
Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class.
These simultaneous payments are taken into account in
calculating the stated maturity date or final distribution
date of each class, which, as with other CMO structures,
must be retired by its stated maturity date or final
distribution date but may be retired earlier. PAC Bonds
generally require payments of a specified amount of
principal on each payment date. PAC Bonds are always
parallel pay CMOs with the required principal payment on
<PAGE>
such securities having the highest priority after interest
has been paid to all classes.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs
are offerings of multiple class real estate mortgage-backed
securities which qualify and elect treatment as such under
provisions of the Internal Revenue Code. Issuers of REMICs
may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of
mortgages. Once REMIC status is elected and obtained, the
entity is not subject to federal income taxation. Instead,
income is passed through the entity and is taxed to the
person or persons who hold interests in the REMIC. A REMIC
interest must consist of one or more classes of "regular
interests," some of which may offer adjustable rates of
interest (the type in which the Fund primarily invests), and
a single class of "residual interests." To qualify as a
REMIC, substantially all the assets of the entity must be in
assets directly or indirectly secured principally by real
property.
CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES. Mortgage-
backed securities have yield and maturity characteristics
corresponding to the underlying mortgages. Distributions to
holders of mortgage-backed securities include both interest
and principal of the underlying mortgages and any
prepayments of principal due to prepayment, refinancing, or
foreclosure of the underlying mortgages. Although
maturities of the underlying mortgage loans may range up to
30 years, amortization and prepayments substantially shorten
the effective maturities of mortgage-backed securities. Due
to these features, mortgage-backed securities are less
effective as a means of "locking in" attractive long-term
interest rates than fixed-income securities which pay only a
stated amount of interest until maturity, when the entire
principal amount is returned. This is caused by the need to
reinvest at lower interest rates both distributions of
principal generally and significant prepayments which become
more likely as mortgage interest rates decline. Since
comparatively high interest rates cannot be effectively
"locked in," mortgage-backed securities may have less
potential for capital appreciation during periods of
declining interest rates than other non-callable fixed-
income government securities of comparable stated
maturities. However, mortgage-backed securities may
experience less pronounced declines in value during periods
or rising interest rates.
Prepayments may result in a capital loss to the Fund to the
extent that the prepaid mortgage securities were purchased
at a market premium over their stated amount. Conversely,
the prepayment of mortgage securities purchased at a market
discount from their stated principal amount will accelerate
the recognition of interest income by the Fund, which would
<PAGE>
be taxed as ordinary income when distributed to the
shareholders.
Some of the CMOs purchased by the Fund may represent an
interest solely in the principal repayments or solely in the
interest payments on mortgage-backed securities. Due to the
possibility of prepayments on the underlying mortgages,
these securities may be more interest-rate sensitive than
other securities purchased by the Fund. If prevailing
interest rates fall below the level at which the securities
were issued, there may be substantial prepayments on the
underlying mortgages, leading to the relatively early
prepayments of principal-only securities and a reduction in
the amount of payments made to holders of interest-only
securities. It is possible that the Fund might not recover
its original investment in interest-only securities if there
are substantial prepayments on the underlying mortgages.
Therefore, interest-only securities generally increase in
value as interest rats rise and decrease in value as
interest rates fall, counter to changes in value experienced
by most fixed income securities. The Fund's adviser intends
to use this characteristic of interest-only securities to
reduce the effects of interest rate changes on the value of
the Fund's portfolio, while continuing to pursue current
income.
CORPORATE BONDS AND OTHER FIXED-INCOME OBLIGATIONS. The Fund
may invest in both investment grade and non-investment grade
bonds and other fixed-income obligations issued by domestic and
foreign corporations and other private issuers. There are no
minimum rating requirements for these investments by the Fund.
Certain fixed-income obligations in which the Fund invests may
involve equity characteristics. The Fund may, for example,
invest in unit offerings that combine fixed-income securities
and common stock equivalents such as warrants, rights and
options. It is anticipated that the majority of the value
attributable to the unit will relate to its fixed-income
component.
FLOATING RATE CORPORATE DEBT OBLIGATIONS. The Fund expects
to invest in floating rate corporate debt obligations,
including increasing rate securities. Floating rate
securities are generally offered at an initial interest rate
which is at or above prevailing market rates. The interest
rate paid on these securities is then reset periodically
(commonly every 90 days) to an increment over some
redetermined interest rate index. Commonly utilized indices
include the three-month Treasury bill rate, the 180-day
Treasury bill rate, the one-month or three-month London
Interbank Offered Rate (LIBOR), the prime rate of a bank,
the commercial paper rates, or the longer-term rates on U.S.
Treasury securities.
<PAGE>
FIXED RATE CORPORATE DEBT OBLIGATIONS. The Fund will also
invest in fixed rate securities. Fixed rate securities tend
to exhibit more price volatility during times of rising or
falling interest rates than securities with floating rates
of interest. This is because floating rate securities, as
described above, behave like short-term instruments in that
the rate of interest they pay is subject to periodic
adjustments based on a designated interest rate index.
Fixed rate securities pay a fixed rate of interest and are
more sensitive to fluctuating interest rates. In periods of
rising interest rates the value of a fixed rate security is
likely to fall. Fixed rate securities with short-term
characteristics are not subject to the same price volatility
as fixed rate securities without such characteristics.
Therefore, they behave more like floating rate securities
with respect to price volatility.
PARTICIPATION INTERESTS. The Fund may acquire participation
interests in senior, fully secured floating rate loans that
are made primarily to U.S. companies. The Fund's
investments in participation interests are subject to its
limitation on investments in illiquid securities. The Fund
may purchase only those participation interests that mature
in one year or less, or, if maturing in more than one year,
have a floating rate that is automatically adjusted at least
once each year according to a specified rate for such
investments, such as a percentage of a bank's prime rate.
Participation interests are primarily dependent upon the
creditworthiness of the borrower for payment of interest and
principal. Such borrowers may have difficulty making
payments and may have senior securities rated as low as "C"
by Moody's Investors Service, Inc. ("Moody's"), or "D" by
Standard & Poor's Corporation ("Standard & Poor's") or Fitch
Investors Service, Inc. ("Fitch").
PREFERRED STOCKS. Preferred stock, unlike common stock,
offers a stated dividend rate payable from the issuer's
earnings. Preferred stock dividends may be cumulative or
non-cumulative, participating, or auction rate. If interest
rates rise, the fixed dividend on preferred stocks may be
less attractive, causing the price of preferred stocks to
decline. Preferred stock may have mandatory sinking fund
provisions, as well as call/redemption provisions prior to
maturity, a negative feature when interest rates decline.
CONVERTIBLE SECURITIES. A convertible security is a bond,
debenture, note, preferred stock or other security that may
be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a
particular period of time at a specified price or formula.
A convertible security entitles the holder to receive
interest generally paid or accrued on debt or the dividend
paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Convertible
<PAGE>
securities have several unique investment characteristics,
such as (a) higher yields than common stocks, but lower
yields than comparable nonconvertible securities, (b) a
lesser degree of fluctuation in value than the underlying
stock since they have fixed income characteristics, and (c)
the potential for capital appreciation if the market price
of the underlying common stock increases.
The Fund has no current intention of converting any
convertible securities it may own into equity securities or
holding them as an equity investment upon conversion. A
convertible security might be subject to redemption at the
option of the issuer at a price established in the
convertible security's governing instrument. If a
convertible security held by the Fund is called for
redemption, the Fund may be required to permit the issuer to
redeem the security, convert it into the underlying common
stock or sell it to a third party.
ASSET-BACKED SECURITIES. The Fund may invest in asset-
backed securities including, but not limited to, interests
in pools of receivables, such as credit card and accounts
receivable and motor vehicle and other installment purchase
obligations and leases. These securities may be in the form
of pass-through instruments or asset-backed obligations.
The securities, all of which are issued by non-governmental
entities and carry no direct or indirect government
guarantee, are structurally similar to CMOs and mortgage
pass-through securities, which are described above.
However, non-mortgage related asset-backed securities
present certain risks that are not presented by mortgage
securities, primarily because these securities do not have
the benefit of the same security interest in the related
collateral. Credit card receivables, for example, are
generally unsecured, while the trustee of asset-backed
securities backed by automobile receivables may not have a
proper security interest in all of the obligations backing
such receivables.
ZERO COUPON, PAY-IN-KIND AND DELAYED INTEREST SECURITIES.
The Fund may invest in zero coupon, pay-in-kind and delayed
interest securities issued by corporations. Corporate zero
coupon securities are: (i) notes or debentures which do not
pay current interest and are issued at substantial discounts
from par value, or (ii) notes or debentures that pay no
current interest until a stated date one or more years into
the future, after which the issuer is obligated to pay
interest until maturity, usually at a higher rate than if
interest were payable from the date of issuance. Pay-in-
kind securities pay interest through the issuance to holders
of additional securities and delayed interest securities do
not pay interest for a specified period. Because values of
securities of this type are subject to greater fluctuations
than are the values of securities that distribute income
<PAGE>
regularly, they may be more speculative than such
securities.
SPECIAL RISKS. From time to time, the Fund's portfolio may
consist primarily of lower-rated (i.e., rated Ba or lower by
Moody's or BB or lower by Standard & Poor's or Fitch)
corporate debt obligations, which are commonly referred to
as "junk bonds." A description of the rating categories is
contained in the Statement of Additional Information.
Lower-rated securities will usually offer higher yields than
higher-rated securities. However, there is more risk
associated with these investments. (For example, securities
rated in the lowest category have been unable to satisfy
their obligations under the bond indenture.) 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. As a
result of these factors, lower-rated securities tend to have
more price volatility and carry more risk to principal than
higher-rated securities. 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 the Fund.
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.
CORPORATE EQUITY SECURITIES. The Fund may also invest in
equity securities, including common stocks, warrants and rights
issued by corporations in any industry (industrial, financial
or utility) which may be denominated in U.S. dollars or in
foreign currencies.
WARRANTS AND RIGHTS. The Fund may invest up to 5% of its
total assets in warrants and rights, including but not
limited to warrants or rights (i) acquired as part of a unit
or attached to other securities purchased by the Fund, or
(ii) acquired as part of a distribution from the issuer.
FOREIGN SECURITIES. The Fund may invest in foreign securities,
including foreign securities not publicly traded in the United
States. No more than 25% of the Fund's total assets, at the
<PAGE>
time of purchase, will be invested in government securities of
any one foreign country. The Fund has no other restriction on
the amount of its assets that may be invested in foreign
securities and may purchase securities issued in any country,
developed or undeveloped. There are no minimum rating
requirements for the foreign securities in which the Fund
invests.
The percentage of the Fund's assets that will be allocated to
foreign securities will vary depending on the relative yields
of foreign and U.S. securities, the economies of foreign
countries, the condition of such countries' financial markets,
the interest rate climate of such countries and the
relationship of such countries' currency to the U.S. dollar.
These factors are judged on the basis of fundamental economic
criteria (e.g., relative inflation levels and trends, growth
rate forecasts, balance of payments status, and economic
policies) as well as technical and political data.
RISKS. Investments in foreign securities involve special
risks that differ from those associated with investments in
domestic securities. The risks associated with investments
in foreign securities relate to political and economic
developments abroad, as well as those that result from the
differences between the regulation of domestic securities
and issuers and foreign securities and issuers. These risks
may include, but are not limited to, expropriation,
confiscatory taxation, currency fluctuations, withholding
taxes on interest, limitations on the use or transfer of
assets, political or social instability, ability to obtain
or enforce court judgments abroad and adverse diplomatic
developments. Moreover, individual foreign economies may
differ favorably or unfavorably from the domestic economy in
such respects as growth of gross national product, the rate
of inflation, capital reinvestment, resource self-
sufficiency and balance of payments position.
Additional differences exist between investing in foreign
and domestic securities. Examples of such differences
include: less publicly available information about foreign
issuers; credit risks associated with certain foreign
governments; the lack of uniform financial accounting
standards applicable to foreign issuers; less readily
available market quotations on foreign issues; the
likelihood that securities of foreign issuers may be less
liquid or more volatile; generally higher foreign brokerage
commissions; and unreliable mail service between countries.
FOREIGN CURRENCY TRANSACTIONS. The Fund will enter into
foreign currency transactions to obtain the necessary
currencies to settle securities transactions. Currency
transactions may be conducted either on a spot or cash basis
at prevailing rates or through forward foreign currency
exchange contracts.
<PAGE>
The Fund may also enter into foreign currency transactions
to protect Fund assets against adverse changes in foreign
currency exchange rates or exchange control regulations.
Such changes could unfavorably affect the value of Fund
assets which are denominated in foreign currencies, such as
foreign securities or funds deposited in foreign banks, as
measured in U.S. dollars. Although foreign currency
transactions may be used by the Fund to protect against a
decline in the value of one or more currencies, such efforts
may also limit any potential gain that might result from a
relative increase in the value of such currencies and might,
in certain cases, result in losses to the Fund.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward
foreign currency exchange contract (a "forward contract") is
an obligation to purchase or sell an amount of a particular
currency at a specific price and on a future date agreed
upon by the parties.
Generally, no commission charges or deposits are involved.
At the time the Fund enters into a forward contract, Fund
assets with a value equal to the Fund's obligation under the
forward contract are segregated on the Fund's records and
are maintained until the contract has been settled. The
Fund will not enter into a forward contract with a term of
more than six months. The Fund will generally enter into a
forward contract to provide the proper currency to settle a
securities transaction at the time the transaction occurs
(the "trade date"). The period between the trade date and
settlement date will vary between 24 hours and 30 days,
depending upon local custom.
The Fund may also protect against the decline of a
particular foreign currency by entering into a forward
contract to sell an amount of that currency approximating
the value of all or a portion of the Fund's assets
denominated in that currency ("hedging"). The success of
this type of short-term hedging strategy is highly uncertain
due to the difficulties of predicting short-term currency
market movements and of precisely matching forward contract
amounts and the constantly changing value of the securities
involved. Although the adviser will consider the likelihood
of changes in currency values when making investment
decisions, the adviser believes that it is important to be
able to enter into forward contracts when it believes the
interests of the Fund will be served.
TEMPORARY INVESTMENTS. The Fund may invest temporarily in debt
obligations maturing in one year or less during times of
unusual market conditions for defensive purposes and to
maintain liquidity in anticipation of favorable investment
opportunities. The Fund's temporary investments may include:
<PAGE>
* obligations issued or guaranteed by the U.S. government
or its agencies or instrumentalities;
* time deposits (including savings deposits and
certificates of deposit) and bankers acceptances in
commercial or savings banks whose accounts are insured
by the Bank Insurance Fund ("BIF") or the Savings
Association Insurance Fund ("SAIF"), both of which are
administered by the Federal Deposit Insurance
Corporation ("FDIC"), including certificates of deposit
issued by and other time deposits in foreign branches
of FDIC insured banks or who have at least $100 million
in capital;
* domestic and foreign issues of commercial paper or
other corporate debt obligations;
* obligations of the types listed above, but not
satisfying the standards set forth above, if they are
(a) subject to repurchase agreements or (b) guaranteed
as to principal and interest by a domestic or foreign
bank having total assets in excess of $1 billion, by a
corporation whose commercial paper may be purchased by
the Fund, or by a foreign government having an existing
debt security rated at least Baa by Moody's or BBB by
Standard & Poor's or Fitch; and
* other short-term investments of a type which the
adviser determines presents minimal credit risks and
which are of "high quality" as determined by a
nationally recognized statistical rating organization,
or, in the case of an instrument that is not rated, of
comparable quality in the judgment of the adviser.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements
in which banks, broker/dealers, and other recognized financial
institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price. 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.
DOLLAR ROLL TRANSACTIONS. In order to enhance portfolio
returns and manage prepayment risks, the Fund may engage in
dollar roll transactions with respect to mortgage securities
issued by GNMA, FNMA and FHLMC. In a dollar roll transaction,
the Fund sells a mortgage security to a financial institution,
such as a bank or broker/dealer, and simultaneously agrees to
repurchase a substantially similar (i.e., same type, coupon,
and maturity) security from the institution at a later date at
an agreed upon price. The mortgage securities that are
repurchased will bear the same interest rate as those sold, but
generally will be collateralized by different pools of
<PAGE>
mortgages with different prepayment histories. During the
period between the same and repurchase, the Fund will not be
entitled to receive interest and principal payments on the
securities sold. Proceeds of the sale will be invested in
short-term instruments, and the income from these investments,
together with any additional fee income received on the sale,
will generate income for the Fund exceeding the yield. When
the Fund enters into a dollar roll transaction, liquid assets
of the Fund, in a dollar amount sufficient to make payment for
the obligations to be repurchased, are segregated at the trade
date. These securities are marked to market daily and are
maintained until the transaction is settled.
OPTIONS. The Fund may deal in options on foreign currencies,
foreign currency futures, securities, and securities indices,
which options may be listed for trading on a national
securities exchange or traded over-the-counter. The Fund will
use options only to manage interest rate and currency risks.
The Fund may write covered call options to generate income.
The Fund may write covered call options and secured put options
on up to 25% of its net assets and may purchase put and call
options provided that no more than 5% of the fair market value
of its net assets may be invested in premiums on such options.
A call option gives the purchaser the right to buy, and the
writer the obligation to sell, the underlying currency,
security or other asset at the exercise price during the option
period. A put option gives the purchaser the right to sell,
and the writer the obligation to buy, the underlying currency,
security or other asset at the exercise price during the option
period. The writer of a covered call owns assets that are
acceptable for escrow and the writer of a secured put invests
an amount not less than the exercise price in eligible assets
to the extent that it is obligated as a writer. If a call
written by the Fund is exercised, the Fund forgoes any possible
profit from an increase in the market price of the underlying
asset over the exercise price plus the premium received. In
writing puts, there is a risk that the Fund may be required to
take delivery of the underlying asset at a disadvantageous
price.
Over-the-counter options ("OTC options") differ from exchange
traded options in several respects. They are transacted
directly with dealers and not with a clearing corporation, and
there is a risk of nonperformance by the dealer as a result of
the insolvency of such dealer or otherwise, in which event the
fund may experience material losses. However, in writing
options the premium is paid in advance by the dealer, OTC
options, which may not be continuously liquid, are available
for a greater variety of assets, and a wider range of
expiration dates and exercise prices, than are exchange traded
options.
<PAGE>
FINANCIAL FUTURES AND OPTIONS ON FINANCIAL FUTURES. The Fund
may purchase and sell financial futures contracts to hedge all
or a portion of its portfolio against changes in interest
rates. Financial futures contracts call for the delivery of
particular debt instruments at a certain time in the future.
The seller of the contract agrees to make delivery of the type
of instrument called for in the contract and the buyer agrees
to take delivery of the instrument at the specified future
time.
The Fund may also write call options and purchase put options
on financial futures contracts as a hedge to attempt to protect
securities in its portfolio against decreases in value. When
the Fund writes a call option on a futures contract, it is
undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option
is exercised. Conversely, as purchaser of a put option on a
futures contract, the Fund is entitled (but not obligated) to
sell a futures contract at the fixed price during the life of
the option.
The Fund may not purchase or sell futures contracts or related
options if immediately thereafter the sum of the amount of
margin deposits on the Fund's existing futures positions and
premiums paid for related options would exceed 5% of the market
value of the Fund's total assets. When the Fund purchases a
futures contracts, an amount of cash and cash equivalents,
equal to the underlying commodity value of the futures
contracts (less any related margin deposits), will be deposited
in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and
thereby insure that the use of such futures contract is
unleveraged.
RISKS. When the Fund uses financial futures and options on
financial futures as hedging devices, there is a risk that
the prices of the securities subject to the futures
contracts may not correlate perfectly with the prices of the
securities in the Fund's portfolio. This may cause the
futures contract and any related options to react
differently than the portfolio securities to market changes.
In addition, the Fund's investment adviser could be
incorrect in its expectations about the direction or extent
of market factors such as interest rate movements. In these
events, the Fund may lose money on the futures contract or
option. It is not certain that a secondary market for
positions in futures contracts or for options will exist at
all times. Although the investment adviser will consider
liquidity before entering into options transactions, there
is no assurance that a liquid secondary market on an
exchange or otherwise will exist for any particular futures
contract or option at any particular time. The Fund's
ability to establish and close out futures and options
positions depends on this secondary market.
<PAGE>
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The
Fund may invest in the securities of other investment
companies, but it will not own more than 3% of the total
outstanding voting securities of any such investment company,
invest more than 5% of its total assets in any one investment
company, or invest more than 10% of its total assets in
investment companies in general. To the extent that the Fund
invests in securities issued by other investment companies, the
Fund will indirectly bear its proportionate share of any fees
and expenses paid by such companies in addition to the fees and
expenses payable directly by the Fund.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in
restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to
its investment objective and policies, but which are subject to
restriction on resale under federal securities law. The Fund
will limit investments in illiquid securities, including
certain restricted securities not determined by the Directors
to be liquid, non-negotiable time deposits, and repurchase
agreements providing for settlement in more than seven days
after notice, to 15% of the value of its net assets.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may
purchase 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. In when-issued and delayed delivery transactions, the
Fund relies on the seller to complete the transaction. The
seller's failure to complete the transaction may cause the Fund
to miss a price or yield considered to be advantageous.
LENDING OF PORTFOLIO SECURITIES. In order to generate
additional income, the Fund may lend portfolio securities on a
short-term or a long-term basis up to one-third of the value of
its total assets 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 Directors.
In these loan arrangements, the Fund 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. The Fund may trade or dispose of portfolio
securities as considered necessary to meet its investment
objective. During periods of falling interest rates, the
values of outstanding fixed-income securities generally rise.
Conversely, during periods of rising interest rates, the values
of such securities generally decline. The magnitude of these
fluctuations will generally be greater for securities with
longer maturities. Because the Fund will actively use trading
to benefit from short-term yield disparities among different
issues of fixed-income securities or otherwise to increase its
<PAGE>
income, the Fund may be subject to a greater degree of
portfolio turnover than might be expected from investment
companies which invest substantially all of their assets on a
long-term basis. The Fund cannot accurately predict its
portfolio turnover rate, but it is anticipated that its annual
turnover rate generally will not exceed 200% (excluding
turnover of securities having a maturity of one year or less).
Higher portfolio turnover results in increased Fund expenses,
including brokerage commissions, dealer mark-ups and other
transaction costs on the sale of securities and on the
reinvestment in other securities, and results in the
acceleration of realization of capital gains or losses for tax
purposes. To the extent that increased portfolio turnover
results in sales of securities held less than three months, the
Fund's ability to qualify as a "regulated investment company"
under the Internal Revenue Code may be affected.
INVESTMENT LIMITATIONS
The Fund will not:
* borrow money directly or through reverse repurchase
agreements 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 15% of
the value of those assets to secure such borrowings;
* lend any of its assets, except portfolio securities up
to one-third of the value of its total assets; or
* 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 restricted
securities which the Fund may purchase pursuant to its
investment objective, policies, and limitations.
The above investment limitations cannot be changed without
shareholder approval. The following investment limitations,
however, may be changed by the Directors without shareholder
approval. Shareholders will be notified before any material
change in these investment limitation becomes effective.
The Fund will not:
* invest more than 10% of the value of its total assets
in securities subject to restrictions on resale under
the Securities Act of 1933 except for certain
restricted securities that meet the criteria for
liquidity as established by the Directors; or
* invest more than 15% of the value of its net assets in
securities that are not readily marketable or that are
otherwise considered illiquid, including repurchase
<PAGE>
agreements providing for settlement in more than seven
days after notice.
NET ASSET VALUE
The Fund's net asset value per Share fluctuates. The net asset
value per Share is determined by adding the interest of the
Shares in the market value of all securities and other assets
of the Fund, subtracting the interest of the Shares in the
liabilities of the Fund and those attributable to the Shares,
and dividing the remainder by the total number of Shares
outstanding. The net asset value of the Shares may be
different from that of Class A Shares, Fortress Shares and
Select 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 CLASS C 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;
<PAGE>
* enclose a check made payable to Strategic Income Fund -
- Class C Shares; and
* send both to the Fund's transfer agent, Federated
Services Company, c/o State Street Bank and Trust
Company, P.O. Box 8604, Boston, Massachusetts 02266-
8604.
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: Strategic Income Fund -- Class C Shares; Title or Name of
Account; Wire Order Number and/or Account Number. Shares
cannot be purchased by wire on Columbus Day, Veteran's Day or
Martin Luther King Day.
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 and
Trust Company ("State Street Bank") acts as the shareholder's
agent in depositing checks and converting them to federal
funds. Orders by mail are considered received after payment by
check is converted by State Street Bank into federal funds.
This is generally the next business day after State Street Bank
receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $1,500, unless the
investment is in a retirement plan, in which case the minimum
initial investment is $50. Subsequent investments must be in
amounts of at least $100, except for retirement plans, which
must be in amounts of at least $50. (Other minimum investment
requirements may apply to investments through the Liberty
Family Retirement Program.)
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; and (iii) the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day.
<PAGE>
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 application
or by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent
to each shareholder. Monthly statements are sent to report
dividends paid during the month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. 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 of the Fund
on payment dates at net asset value without a sales charge,
unless cash payments are requested by shareholders on the
application or by writing to the transfer agent.
Dividends are declared just prior to determining net asset
value. If an order for shares is placed on the preceding
business day, shares purchased by wire begin earning dividends
on the business day wire payment is received by the transfer
agent. If the order for shares and payment by wire are
received on the same day, shares begin earning dividends on the
next business day. Shares purchased by check begin earning
dividends on the business day after the check is converted,
upon instruction of the transfer agent, into federal funds.
Shares earn dividends through the business day that proper
written redemption instructions are received by the transfer
agent.
RETIREMENT PLANS
Shares 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
<PAGE>
In order to provide greater flexibility to Fund shareholders
whose investment objectives have changed, Class C shareholders
may exchange all or some of their Shares for the Class C Shares
in other funds in the Liberty Family of Funds at net asset
value without a contingent deferred sales charge. Participants
in a plan under the Liberty Family Retirement Program may
exchange all or some of their Shares for Class C Shares of
other funds offered under the plan at net asset value without a
contingent deferred sales charge. Any contingent deferred
sales charge charged at the time exchanged-for Shares are
redeemed is calculated as if the shareholder had held the
Shares from the date on which he became a shareholder of the
exchanged-from Shares. For more information, see "Contingent
Deferred Sales Charge."
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 shares of the other fund. The exchange
privilege may be terminated at any time. Shareholders will be
notified of the termination of the exchange privilege.
Further information on the exchange privilege and prospectuses
for the Liberty Family of 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.
<PAGE>
Instructions for exchanges for the Liberty Family Retirement
Program should be given to the plan administrator.
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 CLASS C SHARES
The Fund redeems Shares at their net asset value next
determined after the transfer agent receives the redemption
request, less any applicable contingent deferred sales charge.
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. Redemptions of Shares held
through the Liberty Family Retirement Program will be governed
by the requirements of the respective plans.
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, less any applicable contingent
deferred sales charge. 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
<PAGE>
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 in 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 the transfer agent. 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 may 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:
<PAGE>
* a trust company or commercial bank whose deposits are
insured by the BIF, which is administered by the FDIC;
* a member 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 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.
CONTINGENT DEFERRED SALES CHARGE
Shareholders who purchased Shares will be charged a contingent
deferred sales charge by Federated Securities Corp. of 1.00%
for redemptions of those Shares made within one year from date
of purchase. To the extent that a shareholder exchanges
between or among Class C Shares in other funds in the Liberty
Family of Funds, the time for which the exchanged-for-shares
were held will be added, or "tacked," to the time for which the
exchanged-from shares were held for purposes of satisfying the
one-year holding period. The contingent deferred sales charge
will be calculated based upon the lesser of the original
purchase price of the Shares or the net asset value of the
Shares when redeemed. For additional information, see "Other
Payments to Financial Institutions."
The contingent deferred sales charge will not be imposed on
Shares acquired through the reinvestment of dividends or
distributions of long-term capital gains. Redemptions are
deemed to have occurred in the following order: (1) Shares
acquired through the reinvestment of dividends and long-term
capital gains; (2) purchase of Shares occurring more than one
year before the date of redemption; and (3) purchases of Shares
within the previous year.
The contingent deferred sales charge will not be imposed when a
redemption results from a return under the following
circumstances: (i) a total or partial distribution from a
qualified plan, other than an IRA, Keogh Plan, or a custodial
account, following retirement; (ii) a total or partial
distribution from an IRA, Keogh Plan, or a custodial account
<PAGE>
after the beneficial owner attains age 59-1/2; or (iii) from
the death or total and permanent disability of the beneficial
owner. The exemption from the contingent deferred sales charge
for qualified plans, an IRA, Keogh Plan, or a custodial account
does not extend to account transfers, rollovers, and other
redemptions made for purposes of reinvestment.
Contingent deferred sales charges are not charged in connection
with exchanges of Shares for Class C Shares in other funds in
the Liberty Family of Funds or the Liberty Family Retirement
Program, or in connection with redemptions by the Fund of
accounts with low balances. No contingent deferred sales
charge will be charged for redemption from the Liberty Family
Retirement Program.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive monthly or quarterly
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.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When Shares are purchased by check, or through the Automated
Clearing House ("ACH"), the proceeds from the redemption of
those Shares are not available, and the Shares may not be
exchanged, until the Fund or its agents are reasonably certain
that the purchase check has cleared, which could take up to ten
calendar days.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances,
the Fund may redeem Shares in any account, and pay the proceeds
to the shareholder, if the account balance falls below a
required minimum value of $1,500 due to shareholder
redemptions. 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.
<PAGE>
FIXED INCOME SECURITIES, INC. INFORMATION
MANAGEMENT OF THE CORPORATION
BOARD OF DIRECTORS. The Fund is managed by a Board of
Directors. The Directors are responsible for managing the
Corporation's business affairs and for exercising all the
Corporation's powers except those reserved for the
shareholders. The Executive Committee of the Board of
Directors handles the Directors' responsibilities between
meetings of the Directors.
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 0.85 of 1% of the Fund's
average daily net assets. Under the investment advisory
contract, which provides for voluntary waivers of expenses
by the adviser, the adviser may voluntarily waive some or
all of its fee. The adviser can terminate this voluntary
waiver of some or all of its advisory fee 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.
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 $76 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
<PAGE>
institutions, individual shareholders also have access to
this same level of investment expertise.
PORTFOLIO MANAGERS' BACKGROUND. Randall S. Bauer, Mark E.
Durbiano and Gary J. Madich have been the Fund's portfolio
managers since its inception. Mr. Bauer joined Federated
Investors in 1989 and has been a Vice President of the
Fund's adviser since 1994. Mr. Bauer was an Assistant Vice
President of the International Banking Division at
Pittsburgh National Bank from 1982 until 1989. Mr. Bauer is
a Chartered Financial Analyst and received his M.B.A. in
Finance from Pennsylvania State University. Mr. Durbiano
joined Federated Investors in 1982 and has been a Vice
President of the Fund's adviser since 1988. Mr. Durbiano is
a Chartered Financial Analyst and received his M.B.A. in
Finance from the University of Pittsburgh. Mr. Madich
joined Federated Investors in 1984 and has been a Senior
Vice President of the Fund's investment adviser since 1993.
Mr. Madich served as a Vice President of the Fund's
investment adviser from 1988 until 1993. Mr. Madich is a
Chartered Financial Analyst and received his M.B.A. in
Public Finance from the University of Pittsburgh.
DISTRIBUTION OF CLASS C SHARES
Federated Securities Corp. is the principal distributor for
Shares of the Fund. 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 the Investment
Company Act Rule 12b-1 (the "Plan"), the Fund will pay to
Federated Securities Corp. an amount computed at an annual
rate of up to 0.75 of 1% of the average daily net asset value
of the Shares to finance any activity which is principally
intended to result in the sale of Shares.
Federated Securities Corp. may, from time to time and for such
periods as it deems appropriate, voluntarily reduce its
compensation under the Plan to the extent the expenses
attributable to the Shares exceed such lower expense limitation
as the distributor may, by notice to the Fund, voluntarily
declare to be effective.
The distributor may select financial institutions (such as a
bank or an investment dealer) to provide sales support services
as agents for their clients or customers who beneficially own
Shares of the Fund.
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
<PAGE>
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, 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 Class C Shares
under the Plan.
The Glass-Steagall Act limits the ability of a depository
institution (such as a commercial bank or a savings and loan
association) to become an underwriter or distributor of
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 law.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to
periodic payments to financial institutions under the Plan,
Federated Securities Corp. will pay financial institutions an
amount equal to 1% of the net asset value of Shares purchased
by their clients or customers at the time of purchase (except
for participants in the Liberty Family Retirement Program).
Furthermore, 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 or by the
assessment of a sales charge on Shares. Financial institutions
may elect to waive the initial payment described above; such
waiver will result in the waiver by the Fund of the otherwise
applicable contingent deferred sales charge.
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
<PAGE>
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 Shares of
the Fund. 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 Shares. In return for providing these support services, a
financial institution may receive payments from the Fund at a
rate not exceeding 0.25 of 1% of the average daily net assets
of the 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 provision of personal
services and maintenance of shareholder accounts.
CUSTODIAN. State Street Bank and Trust Company, Boston,
Massachusetts, is custodian for the securities and cash of the
Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated
Services Company, Pittsburgh, Pennsylvania, 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, Pittsburgh, Pennsylvania, and Dickstein, Shapiro &
Morin, Washington, D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund
are Deloitte & Touche, Boston, Massachusetts.
EXPENSES OF THE FUND AND CLASS C SHARES
Holders of Shares pay their allocable portion of Fund and
Corporation expenses.
The Corporation expenses for which holders of Shares pay their
allocable portion include, but are not limited to: the cost or
organizing the Corporation and continuing its existence;
registering the Corporation with federal and state securities
authorities; Directors' fees; auditors' fees; the cost of
meetings of Directors; legal fees of the Corporation;
association membership dues and such non-recurring and
extraordinary items as may arise from time to time.
The Fund expenses for which holders of Shares pay their
allocable portion include, but are not limited to: registering
the Fund and Shares of the Fund; 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.
<PAGE>
At present, the only expenses which are allocated specifically
to the 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 material such as
shareholder reports, prospectuses and proxies to current
shareholders; registration fees paid to the Securities and
Exchange Commission 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 of the Fund is entitled to one vote in Director
elections and other matters submitted to shareholders for vote.
All shares of all classes of each portfolio in the Corporation
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 Corporation 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 the Board of Directors or by the
shareholders at a special meeting. A special meeting of
shareholders shall be called by the Directors upon the request
of shareholders owning at least 10% of the Corporation'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 applicable to
regulated investment companies and to receive the special tax
treatment afforded to such companies.
Unless otherwise exempt, shareholders are required to pay
federal income tax on any dividends and other distributions,
including capital gains distributions, received. This applies
<PAGE>
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 their Shares. No federal income tax is due on any
distributions earned in an IRA or qualified retirement plan
until distributed, so long as such IRA or qualified retirement
plan meets the applicable requirements of the Internal Revenue
Code.
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
* Fund Shares are exempt from 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 the total return and
yield for Class C Shares.
Total return represents the change, over a specified 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 Shares, Class C Shares, Fortress Shares and Select Shares.
Because Class A and Fortress Shares are subject to lower 12b-1
expenses, the yield for these Shares, for the same period, may
exceed that of Class C and Select Shares. Because Class C,
Fortress and Select Shares are subject to lower sales charges,
<PAGE>
the total return for these shares, for the same period, may
exceed that of Class A Shares.
From time to time, the Fund may advertise the performance of
Shares using certain financial publications and/or compare its
performance to certain indices.
OTHER CLASSES OF SHARES
The Fund currently offers Class A Shares, Class C Shares,
Fortress Shares and Select Shares.
Class A Shares are sold primarily to customers of financial
institutions subject to a front-end sales charge of up to 4.50%
and certain contingent deferred sales 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.
Fortress Shares are sold primarily to customers of financial
institutions subject to a front-end sales charge of up to
1.00%. Fortress Shares are distributed pursuant to a Rule 12b-
1 Plan adopted by the Fund whereby the distributor is paid a
fee of up to 0.50 of 1%, in addition to a shareholder service
fee of 0.25 of 1% of the Fortress Shares' average daily net
assets. In addition, Fortress Shares may be subject to certain
contingent deferred sales charges. Investments in Fortress
Shares are subject to a minimum initial investment of $1,500
over a 90-day period, unless the investment is in a retirement
account, in which case the minimum investment is $50.
Select Shares are sold primarily to customers of financial
institutions at net asset value with no front-end sales charge.
Select Shares are distributed pursuant to a Rule 12b-1 Plan
adopted by the Fund whereby the distributor is paid a fee of up
to 0.75 of 1%, in addition to a shareholder service fee of 0.25
of 1% of the Select Shares' average daily net assets.
Investments in Select Shares are 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 and Fortress Shares
will generally exceed that of Class C and Select Shares by the
difference between Class Expenses borne by shares of each
respective class.
The stated advisory fee is the same for all four classes of
shares.
ADDRESSES
Strategic
Income Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
<PAGE>
Distributor Federated Securities Corp.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Investment Adviser Federated Advisers
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Custodian State Street Bank and Trust Company
P.O. Box 8604
Boston, Massachusetts 02266-8604
Transfer Agent and
Dividend Disbursing Agent Federated Services Company
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Legal Counsel Houston, Houston & Donnelly
2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
Legal Counsel Dickstein, Shapiro & Morin
2101 L Street, N.W.
Washington, D.C. 20037
Independent Auditors Deloitte & Touche
125 Summer Street
Boston, Massachusetts 02110-1617
STRATEGIC INCOME FUND
CLASS C SHARES
PROSPECTUS
A Diversified Portfolio of
Fixed Income Securities, Inc.,
an Open-End, Management
Investment Company
_________________ ___, 1994
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
<PAGE>
* * * * * *
STRATEGIC INCOME FUND
<PAGE>
(A PORTFOLIO OF FIXED INCOME SECURITIES, INC.)
FORTRESS SHARES
PROSPECTUS
The Fortress Shares offered by this prospectus represent
interests in Strategic Income Fund (the "Fund"), a diversified
investment portfolio of Fixed Income Securities, Inc. (the
"Corporation"), an open-end, management investment company (a
mutual fund).
The investment objective of the Fund is to seek a high level of
current income. The Fund invests in domestic corporate debt
obligations, U.S. government securities, and foreign government
and corporate debt obligations.
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 GOVERNMENT
AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and
know before you invest in Fortress Shares. Keep this
prospectus for future reference.
SPECIAL RISKS
From time to time, the Fund's portfolio may consist 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 that 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 Fortress Shares.
The Fund has filed a Statement of Additional Information for
Fortress Shares dated _____________ ___, 1994, with the
Securities and Exchange Commission. The information contained
in the Statement of Additional Information is incorporated by
reference in this prospectus. You may request a copy of the
Statement of Additional Information free of charge by calling
1-800-235-4669. To obtain other information or to 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
<PAGE>
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 _____________ ___, 1994
TABLE OF CONTENTS
SUMMARY OF FUND EXPENSES
GENERAL INFORMATION
FORTRESS INVESTMENT PROGRAM
INVESTMENT INFORMATION
Investment Objective
Investment Policies
Special Risks
Acceptable Investments
U.S. Government Securities
Mortgage-Backed Securities
Collateralized Mortgage Obligations and
Multiclass Pass-Through Securities
Real Estate Mortgage Investment Conduits ("REMICs")
Characteristics of Mortgage-Backed Securities
Corporate Bonds and Other Fixed-Income Obligations
Floating Rate Corporate Debt Obligations
Fixed Rate Corporate Debt Obligations
Participation Interests
Preferred Stocks
Convertible Securities
Asset-backed Securities
Zero Coupon, Pay-In-Kind and
Delayed Interest Securities
Special Risks
Corporate Equity Securities
Warrants and Rights
Foreign Securities
Risks
Foreign Currency Transactions
Forward Foreign Currency Exchange Contracts
Temporary Investments
Repurchase Agreements
Dollar Roll Transactions
Options
Financial Futures and Options on Financial Futures
Risks
Investing in Securities of Other Investment Companies
Restricted and Illiquid Securities
When-Issued and Delayed Delivery Transactions
Lending of Portfolio Securities
Portfolio Turnover
<PAGE>
Investment Limitations
NET ASSET VALUE
INVESTING IN FORTRESS SHARES
Share Purchases
Through a Financial Institution
Directly From the Distributor
Conversion to Federal Funds
Minimum Investment Required
What Shares Cost
Dealer Concession
Eliminating the Sales Charge
Quantity Discounts and
Accumulated Purchases
Letter of Intent
Reinvestment Privilege
Concurrent Purchases
Systematic Investment Program
Exchange Privilege
Certificates and Confirmations
Dividends and Distributions
Retirement Plans
REDEEMING FORTRESS SHARES
Through a Financial Institution
Directly From the Fund
By Telephone
By Mail
Signatures
Contingent Deferred Sales Charge
Systematic Withdrawal Program
Redemption Before Purchase
Instruments Clear
Accounts with Low Balances
Exchanges for Shares of Other Funds
FIXED INCOME SECURITIES, INC. INFORMATION
Management of the Corporation
Board of Directors
Investment Adviser
Advisory Fees
Adviser's Background
Portfolio Managers' Background
Distribution of Fortress Shares
Distribution Plan
Administrative Arrangements
Administration of the Fund
Administrative Services
Shareholder Services Plan
Custodian
Transfer Agent and Dividend Disbursing Agent
Legal Counsel
Independent Auditors
<PAGE>
Expenses of the Fund and Fortress Shares
SHAREHOLDER INFORMATION
Voting Rights
TAX INFORMATION
Federal Income Tax
Pennsylvania Corporate and
Personal Property Taxes
PERFORMANCE INFORMATION
OTHER CLASSES OF SHARES
ADDRESSES Inside Back
Cover
SUMMARY OF FUND EXPENSES
FORTRESS SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) . . . . . . . . . . . . .
1.00%
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) (1)1.00%
Redemption Fee (as a percentage of amount redeemed, if
applicable) None
Exchange Fee None
ANNUAL FORTRESS SHARES OPERATING EXPENSES *
(As a percentage of projected average net assets)
Management Fee (after waiver) (2) . . . . . . . . . . . . . . .
____%
12b-1 Fee 0.50%
Other Expenses (after expense reimbursement) (3) . . . . . . .
____%
Shareholder Servicing Fee . . . . . . . . . . . . . .
0.25%
Total Fortress Shares Operating Expenses . . . . .
____%
(1) The contingent deferred sales charge is 1.00% of the
lesser of the original purchase price or the net asset
value of shares redeemed within one to four years of
their purchase dates.
<PAGE>
(2) The estimated management fee has been reduced to
reflect the anticipated voluntary waiver of the
management fee. The adviser can terminate this
voluntary waiver at any time at its sole discretion.
The maximum management fee is 0.85%.
(3) The Total Fortress Shares Operating Expenses are
anticipated to be ____% absent the anticipated
voluntary waiver of the management fee and the
anticipated voluntary reimbursement of certain other
operating expenses.
* Total Fortress Shares Operating Expenses are estimated
based on average expenses expected to be incurred
during the period ending November 30, 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 FORTRESS SHARES OF THE FUND WILL BEAR, EITHER DIRECTLY OR
INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS
COSTS AND EXPENSES, SEE "INVESTING IN FORTRESS SHARES" AND
"FIXED INCOME SECURITIES, INC. 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 charge permitted
under the rules of the National Association of Securities
Dealers, Inc.
EXAMPLE
1 year 3 years
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. . . . . . $___ $___
You would pay the following
expenses on the same
investment, assuming no
redemption. . . . . . . . . . $___ $___
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 NOVEMBER 30, 1994.
<PAGE>
The information set forth in the foregoing table and example
relates only to the Fortress Shares of the Fund. The Fund also
offers three other classes of shares called Class A Shares,
Class C Shares and Select Shares. Class A Shares, Class C
Shares, Fortress Shares and Select Shares are subject to
certain of the same expenses. All four classes of shares are
subject to shareholder services fees of 0.25 of 1%. However,
Class A shares are not subject to 12b-1 fees, while Class C and
Select Shares are subject to 12b-1 fees of up to 0.75 of 1%.
In addition, Class C and Select Shares are not subject to a
front-end sales charge, while Class A Shares are subject to a
front-end sales charge of up to 4.50%. Class C Shares may be
subject to a contingent deferred sales charge of up to 1.00%.
See "Other Classes of Shares."
GENERAL INFORMATION
The Corporation was incorporated under the laws of the State of
Maryland on October 15, 1991. The Articles of Incorporation
permit the Corporation to offer separate portfolios and classes
of shares. As of the date of this prospectus, the Board of
Directors (the "Directors") has established five separate
portfolios: Strategic Income Fund, Limited Term Fund, Limited
Term Municipal Fund, Multi-State Municipal Income Fund and
Limited Maturity Government Fund. With respect to the Fund,
the Directors have established four classes of shares known as
Fortress Shares, Class A Shares, Class C Shares and Select
Shares. This prospectus relates only to the Fortress Shares
class of the Fund (the "Shares").
The Fund is designed for investors seeking high current income
through a professionally managed, diversified portfolio
investing primarily in domestic corporate debt obligations,
U.S. government securities, and foreign government and
corporate debt obligations. A minimum initial investment of
$1,500 over a 90-day period 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 plus an applicable sales
charge and are redeemed at net asset value. However, a
contingent deferred sales charge is imposed on certain Shares,
other than Shares purchased through reinvestment of dividends,
which are redeemed within one to four years of their purchase
dates. Fund assets may be used in connection with the
distribution of Shares.
FORTRESS INVESTMENT PROGRAM
Fortress Shares is a member of a family of funds, collectively
known as the Fortress Investment Program. The other funds in
the Program are:
<PAGE>
* California Municipal Income Fund (Fortress Shares
only), providing current income exempt from federal
regular income tax and California personal income
taxes;
* Fortress Adjustable Rate U.S. Government Fund, Inc.,
providing current income consistent with lower
volatility of principal through a diversified portfolio
of adjustable and floating rate mortgage securities
which are issued or guaranteed by the U.S. government,
its agencies or instrumentalities;
* Fortress Bond Fund, providing current income primarily
through high-quality corporate debt;
* Fortress Municipal Income Fund, Inc., providing a high
level of current income generally exempt from the
federal regular income tax by investing primarily in a
diversified portfolio of municipal bonds;
* Fortress Utility Fund, Inc., providing high current
income and moderate capital appreciation primarily
through equity and debt securities of utility
companies;
* Government Income Securities, Inc., providing current
income through long-term U.S. government securities;
* Limited Term Municipal Fund (Fortress Shares only),
providing a high level of current income which is
exempt from federal regular income tax consistent with
the preservation of capital;
* Money Market Management, Inc., providing current income
consistent with stability of principal through high-
quality money market instruments;
* New York Municipal Income Fund (Fortress Shares only),
providing current income exempt from federal regular
income tax, New York personal income taxes, and New
York City income taxes; and
* Ohio Municipal Income Fund (Fortress Shares only),
providing current income exempt from federal regular
income tax and Ohio personal income taxes.
Each of the funds may also invest in certain other types of
securities as described in each fund's prospectus.
The Fortress Investment Program provides flexibility and
diversification for an investor's long-term investment
planning. It enables an investor to meet the challenges of
changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles,
<PAGE>
and by providing the investment services of proven,
professional investment advisers.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek a high level of
current income. The investment objective cannot be changed
without approval of shareholders. 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.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing in a
diversified portfolio primarily consisting of domestic
corporate debt obligations, U.S. government securities, and
foreign government and corporate debt obligations. Under
normal circumstances, the Fund's assets will be invested in
each of these three sectors. However, the Fund may from time
to time invest up to 100% of its total assets in any one sector
if, in the judgment of the investment adviser, the Fund has the
opportunity of seeking a high level of current income without
undue risk to principal. Accordingly, the Fund's investments
should be considered speculative. Distributable income will
fluctuate as the Fund shifts assets among the three sectors.
There will be no limit to the weighted average maturity of the
portfolio. It will generally be of longer duration.
Unless indicated otherwise, the Fund's investment policies may
be changed by the Directors without the approval of
shareholders. Shareholders will be notified before any
material change in these investment policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests primarily in a
professionally managed, diversified portfolio consisting of
domestic corporate debt obligations, U.S. government
securities, and foreign government and corporate debt
obligations. The Fund also may invest in debt securities
issued by domestic and foreign utilities, as well as money
market instruments and other temporary investments.
The securities in which the Fund invests principally are:
* securities issued or guaranteed as to principal and
interest by the U.S. government, its agencies or
instrumentalities;
* domestic corporate debt obligations, some of which may
include equity features; and
<PAGE>
* debt obligations issued by foreign governments and
corporations.
The allocation of investments across these three principal
types of securities at any given time is based upon the
adviser's estimate of expected performance and risk of each
type of investment. In order to benefit from the typical low
correlation of these three types of securities, the Fund will
typically invest a portion of its assets in each category.
However, from time to time, the adviser may change the
allocation based upon its evaluation of the marketplace.
The Fund may invest in debt securities of any maturity.
U.S. GOVERNMENT SECURITIES. The U.S. government securities in
which the Fund invests are either issued or guaranteed by the
U.S. government, its agencies or instrumentalities. The U.S.
government securities in which the Fund invests principally
are:
* direct obligations of the U.S. Treasury, such as U.S.
Treasury bills, notes and bonds; and
* obligations of U.S. government agencies or
instrumentalities, such as Federal Home Loan Banks,
Federal National Mortgage Association, Government
National Mortgage Association, Banks for Cooperatives
(including Central Bank for Cooperatives), Federal Land
Banks, Federal Intermediate Credit Banks, Federal Farm
Credit Banks, Tennessee Valley Authority, Export-Import
Bank of the United States, Commodity Credit
Corporation, Federal Financing Bank, Student Loan
Marketing Association, Federal Home Loan Mortgage
Corporation, or National Credit Union Administration.
The government securities in which the Fund may invest are
backed in a variety of ways by the U.S. government or its
agencies or instrumentalities. Some of these securities, such
as Government National Mortgage Association ("GNMA") mortgage-
backed securities, are backed by the full faith and credit of
the U.S. government. Other securities, such as obligations of
the Federal National Mortgage Association ("FNMA") or Federal
Home Loan Mortgage Corporation ("FHLMC"), are backed by the
credit of the agency or instrumentality issuing the obligations
but not the full faith and credit of the U.S. government. No
assurances can be given that the U.S. government will provide
financial support to these other agencies or instrumentalities,
because it is not obligated to do so.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are
securities that directly or indirectly represent a
participation in, or are secured by and payable from,
mortgage loans on real property. The mortgage-backed
securities in which the Fund may invest may be:
<PAGE>
* issued by an agency of the U.S. government, typically
GNMA, FNMA or FHLMC;
* privately issued securities which are collateralized by
pools of mortgages in which each mortgage is guaranteed
as to payment of principal and interest by an agency or
instrumentality of the U.S. government;
* privately issued securities which are collateralized by
pools of mortgages in which payment of principal and
interest is guaranteed by the issuer and such guarantee
is collateralized by U.S. government securities; or
* other privately issued securities in which the proceeds
of the issuance are invested in mortgage-backed
securities and payment of the principal and interest is
supported by the credit of an agency or instrumentality
of the U.S. government.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-
THROUGH SECURITIES. Collateralized mortgage obligations
("CMOs") are debt obligations collateralized by mortgage
loans or mortgage pass-through securities. Typically, CMOs
are collateralized by GNMA, FNMA or FHLMC certificates, but
also may be collateralized by whole loans or private pass-
through securities (such collateral being called "Mortgage
Assets"). Multiclass pass-through securities are equity
interests in a trust composed of Mortgage Assets. Payments
of principal of and interest on the Mortgage Assets, and any
reinvestment income, provide the funds to pay debt service
on the CMOs or make scheduled distributions on the
multiclass pass-through securities. CMOs may be issued by
agencies or instrumentalities of the U.S. government, or by
private originators of, or investors in, mortgage loans,
including savings associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of
the foregoing. The issuer of a series of CMOs may elect to
be treated as a Real Estate Mortgage Investment Conduit (a
"REMIC"), which has certain special tax attributes.
In a CMO, a series of bonds or certificates is issued in
multiple classes. Each class of CMOs, often referred to as
a "tranche," is issued at a specific fixed or floating rate
of interest and has a stated maturity or final distribution
date. Principal prepayment on the Mortgage Assets may cause
the CMOs to be retired substantially earlier than their
stated maturities or final distribution dates. Interest is
paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and
interest on the Mortgage Assets may be allocated among the
several classes of a series of a CMO in innumerable ways.
In one structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to
the classes of a CMO in the order of their respective stated
<PAGE>
maturities or final distribution dates, so that no payment
of principal will be made on any class of CMOs until all
other classes having an earlier stated maturity or final
distribution date have been paid in full.
CMOs that include a class bearing a floating rate of
interest also may include a class whose yield floats
inversely against a specified index rate. These "inverse
floaters" are more volatile than conventional fixed or
floating rate classes of a CMO and the yield thereon, as
well as the value thereof, will fluctuate in inverse
proportion to changes in the index on which interest rate
adjustments are based. As a result, the yield on an inverse
floater class of a CMO will generally increase when market
yields (as reflected by the index) decrease and increase
when market yields decrease. The extent of the volatility
of inverse floaters depends on the extent of anticipated
changes in market rates of interest. Generally, inverse
floaters provide for interest rate adjustments based upon a
multiple of the specified interest index, which further
increases their volatility. The degree of additional
volatility will be directly proportional to the size of the
multiple used in determining interest rate adjustments.
The Trust may also invest in, among others, parallel pay
CMOs and Planned Amortization Class CMOs ("PAC Bonds").
Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class.
These simultaneous payments are taken into account in
calculating the stated maturity date or final distribution
date of each class, which, as with other CMO structures,
must be retired by its stated maturity date or final
distribution date but may be retired earlier. PAC Bonds
generally require payments of a specified amount of
principal on each payment date. PAC Bonds are always
parallel pay CMOs with the required principal payment on
such securities having the highest priority after interest
has been paid to all classes.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs
are offerings of multiple class real estate mortgage-backed
securities which qualify and elect treatment as such under
provisions of the Internal Revenue Code. Issuers of REMICs
may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of
mortgages. Once REMIC status is elected and obtained, the
entity is not subject to federal income taxation. Instead,
income is passed through the entity and is taxed to the
person or persons who hold interests in the REMIC. A REMIC
interest must consist of one or more classes of "regular
interests," some of which may offer adjustable rates of
interest (the type in which the Fund primarily invests), and
a single class of "residual interests." To qualify as a
REMIC, substantially all the assets of the entity must be in
<PAGE>
assets directly or indirectly secured principally by real
property.
CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES. Mortgage-
backed securities have yield and maturity characteristics
corresponding to the underlying mortgages. Distributions to
holders of mortgage-backed securities include both interest
and principal of the underlying mortgages and any
prepayments of principal due to prepayment, refinancing, or
foreclosure of the underlying mortgages. Although
maturities of the underlying mortgage loans may range up to
30 years, amortization and prepayments substantially shorten
the effective maturities of mortgage-backed securities. Due
to these features, mortgage-backed securities are less
effective as a means of "locking in" attractive long-term
interest rates than fixed-income securities which pay only a
stated amount of interest until maturity, when the entire
principal amount is returned. This is caused by the need to
reinvest at lower interest rates both distributions of
principal generally and significant prepayments which become
more likely as mortgage interest rates decline. Since
comparatively high interest rates cannot be effectively
"locked in," mortgage-backed securities may have less
potential for capital appreciation during periods of
declining interest rates than other non-callable fixed-
income government securities of comparable stated
maturities. However, mortgage-backed securities may
experience less pronounced declines in value during periods
or rising interest rates.
Prepayments may result in a capital loss to the Fund to the
extent that the prepaid mortgage securities were purchased
at a market premium over their stated amount. Conversely,
the prepayment of mortgage securities purchased at a market
discount from their stated principal amount will accelerate
the recognition of interest income by the Fund, which would
be taxed as ordinary income when distributed to the
shareholders.
Some of the CMOs purchased by the Fund may represent an
interest solely in the principal repayments or solely in the
interest payments on mortgage-backed securities. Due to the
possibility of prepayments on the underlying mortgages,
these securities may be more interest-rate sensitive than
other securities purchased by the Fund. If prevailing
interest rates fall below the level at which the securities
were issued, there may be substantial prepayments on the
underlying mortgages, leading to the relatively early
prepayments of principal-only securities and a reduction in
the amount of payments made to holders of interest-only
securities. It is possible that the Fund might not recover
its original investment in interest-only securities if there
are substantial prepayments on the underlying mortgages.
Therefore, interest-only securities generally increase in
<PAGE>
value as interest rats rise and decrease in value as
interest rates fall, counter to changes in value experienced
by most fixed income securities. The Fund's adviser intends
to use this characteristic of interest-only securities to
reduce the effects of interest rate changes on the value of
the Fund's portfolio, while continuing to pursue current
income.
CORPORATE BONDS AND OTHER FIXED-INCOME OBLIGATIONS. The Fund
may invest in both investment grade and non-investment grade
bonds and other fixed-income obligations issued by domestic and
foreign corporations and other private issuers. There are no
minimum rating requirements for these investments by the Fund.
Certain fixed-income obligations in which the Fund invests may
involve equity characteristics. The Fund may, for example,
invest in unit offerings that combine fixed-income securities
and common stock equivalents such as warrants, rights and
options. It is anticipated that the majority of the value
attributable to the unit will relate to its fixed-income
component.
FLOATING RATE CORPORATE DEBT OBLIGATIONS. The Fund expects
to invest in floating rate corporate debt obligations,
including increasing rate securities. Floating rate
securities are generally offered at an initial interest rate
which is at or above prevailing market rates. The interest
rate paid on these securities is then reset periodically
(commonly every 90 days) to an increment over some
redetermined interest rate index. Commonly utilized indices
include the three-month Treasury bill rate, the 180-day
Treasury bill rate, the one-month or three-month London
Interbank Offered Rate (LIBOR), the prime rate of a bank,
the commercial paper rates, or the longer-term rates on U.S.
Treasury securities.
FIXED RATE CORPORATE DEBT OBLIGATIONS. The Fund will also
invest in fixed rate securities. Fixed rate securities tend
to exhibit more price volatility during times of rising or
falling interest rates than securities with floating rates
of interest. This is because floating rate securities, as
described above, behave like short-term instruments in that
the rate of interest they pay is subject to periodic
adjustments based on a designated interest rate index.
Fixed rate securities pay a fixed rate of interest and are
more sensitive to fluctuating interest rates. In periods of
rising interest rates the value of a fixed rate security is
likely to fall. Fixed rate securities with short-term
characteristics are not subject to the same price volatility
as fixed rate securities without such characteristics.
Therefore, they behave more like floating rate securities
with respect to price volatility.
PARTICIPATION INTERESTS. The Fund may acquire participation
interests in senior, fully secured floating rate loans that
<PAGE>
are made primarily to U.S. companies. The Fund's
investments in participation interests are subject to its
limitation on investments in illiquid securities. The Fund
may purchase only those participation interests that mature
in one year or less, or, if maturing in more than one year,
have a floating rate that is automatically adjusted at least
once each year according to a specified rate for such
investments, such as a percentage of a bank's prime rate.
Participation interests are primarily dependent upon the
creditworthiness of the borrower for payment of interest and
principal. Such borrowers may have difficulty making
payments and may have senior securities rated as low as "C"
by Moody's Investors Service, Inc. ("Moody's"), or "D" by
Standard & Poor's Corporation ("Standard & Poor's") or Fitch
Investors Service, Inc. ("Fitch").
PREFERRED STOCKS. Preferred stock, unlike common stock,
offers a stated dividend rate payable from the issuer's
earnings. Preferred stock dividends may be cumulative or
non-cumulative, participating, or auction rate. If interest
rates rise, the fixed dividend on preferred stocks may be
less attractive, causing the price of preferred stocks to
decline. Preferred stock may have mandatory sinking fund
provisions, as well as call/redemption provisions prior to
maturity, a negative feature when interest rates decline.
CONVERTIBLE SECURITIES. A convertible security is a bond,
debenture, note, preferred stock or other security that may
be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a
particular period of time at a specified price or formula.
A convertible security entitles the holder to receive
interest generally paid or accrued on debt or the dividend
paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Convertible
securities have several unique investment characteristics,
such as (a) higher yields than common stocks, but lower
yields than comparable nonconvertible securities, (b) a
lesser degree of fluctuation in value than the underlying
stock since they have fixed income characteristics, and (c)
the potential for capital appreciation if the market price
of the underlying common stock increases.
The Fund has no current intention of converting any
convertible securities it may own into equity securities or
holding them as an equity investment upon conversion. A
convertible security might be subject to redemption at the
option of the issuer at a price established in the
convertible security's governing instrument. If a
convertible security held by the Fund is called for
redemption, the Fund may be required to permit the issuer to
redeem the security, convert it into the underlying common
stock or sell it to a third party.
<PAGE>
ASSET-BACKED SECURITIES. The Fund may invest in asset-
backed securities including, but not limited to, interests
in pools of receivables, such as credit card and accounts
receivable and motor vehicle and other installment purchase
obligations and leases. These securities may be in the form
of pass-through instruments or asset-backed obligations.
The securities, all of which are issued by non-governmental
entities and carry no direct or indirect government
guarantee, are structurally similar to CMOs and mortgage
pass-through securities, which are described above.
However, non-mortgage related asset-backed securities
present certain risks that are not presented by mortgage
securities, primarily because these securities do not have
the benefit of the same security interest in the related
collateral. Credit card receivables, for example, are
generally unsecured, while the trustee of asset-backed
securities backed by automobile receivables may not have a
proper security interest in all of the obligations backing
such receivables.
ZERO COUPON, PAY-IN-KIND AND DELAYED INTEREST SECURITIES.
The Fund may invest in zero coupon, pay-in-kind and delayed
interest securities issued by corporations. Corporate zero
coupon securities are: (i) notes or debentures which do not
pay current interest and are issued at substantial discounts
from par value, or (ii) notes or debentures that pay no
current interest until a stated date one or more years into
the future, after which the issuer is obligated to pay
interest until maturity, usually at a higher rate than if
interest were payable from the date of issuance. Pay-in-
kind securities pay interest through the issuance to holders
of additional securities and delayed interest securities do
not pay interest for a specified period. Because values of
securities of this type are subject to greater fluctuations
than are the values of securities that distribute income
regularly, they may be more speculative than such
securities.
SPECIAL RISKS. From time to time, the Fund's portfolio may
consist primarily of lower-rated (i.e., rated Ba or lower by
Moody's or BB or lower by Standard & Poor's or Fitch)
corporate debt obligations, which are commonly referred to
as "junk bonds." A description of the rating categories is
contained in the Statement of Additional Information.
Lower-rated securities will usually offer higher yields than
higher-rated securities. However, there is more risk
associated with these investments. (For example, securities
rated in the lowest category have been unable to satisfy
their obligations under the bond indenture.) 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
<PAGE>
secondary trading market for lower-rated bonds may be less
liquid than the market for investment grade bonds. As a
result of these factors, lower-rated securities tend to have
more price volatility and carry more risk to principal than
higher-rated securities. 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 the Fund.
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.
CORPORATE EQUITY SECURITIES. The Fund may also invest in
equity securities, including common stocks, warrants and rights
issued by corporations in any industry (industrial, financial
or utility) which may be denominated in U.S. dollars or in
foreign currencies.
WARRANTS AND RIGHTS. The Fund may invest up to 5% of its
total assets in warrants and rights, including but not
limited to warrants or rights (i) acquired as part of a unit
or attached to other securities purchased by the Fund, or
(ii) acquired as part of a distribution from the issuer.
FOREIGN SECURITIES. The Fund may invest in foreign securities,
including foreign securities not publicly traded in the United
States. No more than 25% of the Fund's total assets, at the
time of purchase, will be invested in government securities of
any one foreign country. The Fund has no other restriction on
the amount of its assets that may be invested in foreign
securities and may purchase securities issued in any country,
developed or undeveloped. There are no minimum rating
requirements for the foreign securities in which the Fund
invests.
The percentage of the Fund's assets that will be allocated to
foreign securities will vary depending on the relative yields
of foreign and U.S. securities, the economies of foreign
countries, the condition of such countries' financial markets,
the interest rate climate of such countries and the
relationship of such countries' currency to the U.S. dollar.
These factors are judged on the basis of fundamental economic
criteria (e.g., relative inflation levels and trends, growth
rate forecasts, balance of payments status, and economic
policies) as well as technical and political data.
<PAGE>
RISKS. Investments in foreign securities involve special
risks that differ from those associated with investments in
domestic securities. The risks associated with investments
in foreign securities relate to political and economic
developments abroad, as well as those that result from the
differences between the regulation of domestic securities
and issuers and foreign securities and issuers. These risks
may include, but are not limited to, expropriation,
confiscatory taxation, currency fluctuations, withholding
taxes on interest, limitations on the use or transfer of
assets, political or social instability, ability to obtain
or enforce court judgments abroad and adverse diplomatic
developments. Moreover, individual foreign economies may
differ favorably or unfavorably from the domestic economy in
such respects as growth of gross national product, the rate
of inflation, capital reinvestment, resource self-
sufficiency and balance of payments position.
Additional differences exist between investing in foreign
and domestic securities. Examples of such differences
include: less publicly available information about foreign
issuers; credit risks associated with certain foreign
governments; the lack of uniform financial accounting
standards applicable to foreign issuers; less readily
available market quotations on foreign issues; the
likelihood that securities of foreign issuers may be less
liquid or more volatile; generally higher foreign brokerage
commissions; and unreliable mail service between countries.
FOREIGN CURRENCY TRANSACTIONS. The Fund will enter into
foreign currency transactions to obtain the necessary
currencies to settle securities transactions. Currency
transactions may be conducted either on a spot or cash basis
at prevailing rates or through forward foreign currency
exchange contracts.
The Fund may also enter into foreign currency transactions
to protect Fund assets against adverse changes in foreign
currency exchange rates or exchange control regulations.
Such changes could unfavorably affect the value of Fund
assets which are denominated in foreign currencies, such as
foreign securities or funds deposited in foreign banks, as
measured in U.S. dollars. Although foreign currency
transactions may be used by the Fund to protect against a
decline in the value of one or more currencies, such efforts
may also limit any potential gain that might result from a
relative increase in the value of such currencies and might,
in certain cases, result in losses to the Fund.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward
foreign currency exchange contract (a "forward contract") is
an obligation to purchase or sell an amount of a particular
currency at a specific price and on a future date agreed
upon by the parties.
<PAGE>
Generally, no commission charges or deposits are involved.
At the time the Fund enters into a forward contract, Fund
assets with a value equal to the Fund's obligation under the
forward contract are segregated on the Fund's records and
are maintained until the contract has been settled. The
Fund will not enter into a forward contract with a term of
more than six months. The Fund will generally enter into a
forward contract to provide the proper currency to settle a
securities transaction at the time the transaction occurs
(the "trade date"). The period between the trade date and
settlement date will vary between 24 hours and 30 days,
depending upon local custom.
The Fund may also protect against the decline of a
particular foreign currency by entering into a forward
contract to sell an amount of that currency approximating
the value of all or a portion of the Fund's assets
denominated in that currency ("hedging"). The success of
this type of short-term hedging strategy is highly uncertain
due to the difficulties of predicting short-term currency
market movements and of precisely matching forward contract
amounts and the constantly changing value of the securities
involved. Although the adviser will consider the likelihood
of changes in currency values when making investment
decisions, the adviser believes that it is important to be
able to enter into forward contracts when it believes the
interests of the Fund will be served.
TEMPORARY INVESTMENTS. The Fund may invest temporarily in debt
obligations maturing in one year or less during times of
unusual market conditions for defensive purposes and to
maintain liquidity in anticipation of favorable investment
opportunities. The Fund's temporary investments may include:
* obligations issued or guaranteed by the U.S. government
or its agencies or instrumentalities;
* time deposits (including savings deposits and
certificates of deposit) and bankers acceptances in
commercial or savings banks whose accounts are insured
by the Bank Insurance Fund ("BIF") or the Savings
Association Insurance Fund ("SAIF"), both of which are
administered by the Federal Deposit Insurance
Corporation ("FDIC"), including certificates of deposit
issued by and other time deposits in foreign branches
of FDIC insured banks or who have at least $100 million
in capital;
* domestic and foreign issues of commercial paper or
other corporate debt obligations;
* obligations of the types listed above, but not
satisfying the standards set forth above, if they are
(a) subject to repurchase agreements or (b) guaranteed
<PAGE>
as to principal and interest by a domestic or foreign
bank having total assets in excess of $1 billion, by a
corporation whose commercial paper may be purchased by
the Fund, or by a foreign government having an existing
debt security rated at least Baa by Moody's or BBB by
Standard & Poor's or Fitch; and
* other short-term investments of a type which the
adviser determines presents minimal credit risks and
which are of "high quality" as determined by a
nationally recognized statistical rating organization,
or, in the case of an instrument that is not rated, of
comparable quality in the judgment of the adviser.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements
in which banks, broker/dealers, and other recognized financial
institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price. 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.
DOLLAR ROLL TRANSACTIONS. In order to enhance portfolio
returns and manage prepayment risks, the Fund may engage in
dollar roll transactions with respect to mortgage securities
issued by GNMA, FNMA and FHLMC. In a dollar roll transaction,
the Fund sells a mortgage security to a financial institution,
such as a bank or broker/dealer, and simultaneously agrees to
repurchase a substantially similar (i.e., same type, coupon,
and maturity) security from the institution at a later date at
an agreed upon price. The mortgage securities that are
repurchased will bear the same interest rate as those sold, but
generally will be collateralized by different pools of
mortgages with different prepayment histories. During the
period between the same and repurchase, the Fund will not be
entitled to receive interest and principal payments on the
securities sold. Proceeds of the sale will be invested in
short-term instruments, and the income from these investments,
together with any additional fee income received on the sale,
will generate income for the Fund exceeding the yield. When
the Fund enters into a dollar roll transaction, liquid assets
of the Fund, in a dollar amount sufficient to make payment for
the obligations to be repurchased, are segregated at the trade
date. These securities are marked to market daily and are
maintained until the transaction is settled.
OPTIONS. The Fund may deal in options on foreign currencies,
foreign currency futures, securities, and securities indices,
which options may be listed for trading on a national
securities exchange or traded over-the-counter. The Fund will
use options only to manage interest rate and currency risks.
The Fund may write covered call options to generate income.
The Fund may write covered call options and secured put options
<PAGE>
on up to 25% of its net assets and may purchase put and call
options provided that no more than 5% of the fair market value
of its net assets may be invested in premiums on such options.
A call option gives the purchaser the right to buy, and the
writer the obligation to sell, the underlying currency,
security or other asset at the exercise price during the option
period. A put option gives the purchaser the right to sell,
and the writer the obligation to buy, the underlying currency,
security or other asset at the exercise price during the option
period. The writer of a covered call owns assets that are
acceptable for escrow and the writer of a secured put invests
an amount not less than the exercise price in eligible assets
to the extent that it is obligated as a writer. If a call
written by the Fund is exercised, the Fund forgoes any possible
profit from an increase in the market price of the underlying
asset over the exercise price plus the premium received. In
writing puts, there is a risk that the Fund may be required to
take delivery of the underlying asset at a disadvantageous
price.
Over-the-counter options ("OTC options") differ from exchange
traded options in several respects. They are transacted
directly with dealers and not with a clearing corporation, and
there is a risk of nonperformance by the dealer as a result of
the insolvency of such dealer or otherwise, in which event the
fund may experience material losses. However, in writing
options the premium is paid in advance by the dealer, OTC
options, which may not be continuously liquid, are available
for a greater variety of assets, and a wider range of
expiration dates and exercise prices, than are exchange traded
options.
FINANCIAL FUTURES AND OPTIONS ON FINANCIAL FUTURES. The Fund
may purchase and sell financial futures contracts to hedge all
or a portion of its portfolio against changes in interest
rates. Financial futures contracts call for the delivery of
particular debt instruments at a certain time in the future.
The seller of the contract agrees to make delivery of the type
of instrument called for in the contract and the buyer agrees
to take delivery of the instrument at the specified future
time.
The Fund may also write call options and purchase put options
on financial futures contracts as a hedge to attempt to protect
securities in its portfolio against decreases in value. When
the Fund writes a call option on a futures contract, it is
undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option
is exercised. Conversely, as purchaser of a put option on a
futures contract, the Fund is entitled (but not obligated) to
sell a futures contract at the fixed price during the life of
the option.
<PAGE>
The Fund may not purchase or sell futures contracts or related
options if immediately thereafter the sum of the amount of
margin deposits on the Fund's existing futures positions and
premiums paid for related options would exceed 5% of the market
value of the Fund's total assets. When the Fund purchases a
futures contracts, an amount of cash and cash equivalents,
equal to the underlying commodity value of the futures
contracts (less any related margin deposits), will be deposited
in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and
thereby insure that the use of such futures contract is
unleveraged.
RISKS. When the Fund uses financial futures and options on
financial futures as hedging devices, there is a risk that
the prices of the securities subject to the futures
contracts may not correlate perfectly with the prices of the
securities in the Fund's portfolio. This may cause the
futures contract and any related options to react
differently than the portfolio securities to market changes.
In addition, the Fund's investment adviser could be
incorrect in its expectations about the direction or extent
of market factors such as interest rate movements. In these
events, the Fund may lose money on the futures contract or
option. It is not certain that a secondary market for
positions in futures contracts or for options will exist at
all times. Although the investment adviser will consider
liquidity before entering into options transactions, there
is no assurance that a liquid secondary market on an
exchange or otherwise will exist for any particular futures
contract or option at any particular time. The Fund's
ability to establish and close out futures and options
positions depends on this secondary market.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The
Fund may invest in the securities of other investment
companies, but it will not own more than 3% of the total
outstanding voting securities of any such investment company,
invest more than 5% of its total assets in any one investment
company, or invest more than 10% of its total assets in
investment companies in general. To the extent that the Fund
invests in securities issued by other investment companies, the
Fund will indirectly bear its proportionate share of any fees
and expenses paid by such companies in addition to the fees and
expenses payable directly by the Fund.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in
restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to
its investment objective and policies, but which are subject to
restriction on resale under federal securities law. The Fund
will limit investments in illiquid securities, including
certain restricted securities not determined by the Directors
to be liquid, non-negotiable time deposits, and repurchase
<PAGE>
agreements providing for settlement in more than seven days
after notice, to 15% of the value of its net assets.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may
purchase 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. In when-issued and delayed delivery transactions, the
Fund relies on the seller to complete the transaction. The
seller's failure to complete the transaction may cause the Fund
to miss a price or yield considered to be advantageous.
LENDING OF PORTFOLIO SECURITIES. In order to generate
additional income, the Fund may lend portfolio securities on a
short-term or a long-term basis up to one-third of the value of
its total assets 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 Directors.
In these loan arrangements, the Fund 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. The Fund may trade or dispose of portfolio
securities as considered necessary to meet its investment
objective. During periods of falling interest rates, the
values of outstanding fixed-income securities generally rise.
Conversely, during periods of rising interest rates, the values
of such securities generally decline. The magnitude of these
fluctuations will generally be greater for securities with
longer maturities. Because the Fund will actively use trading
to benefit from short-term yield disparities among different
issues of fixed-income securities or otherwise to increase its
income, the Fund may be subject to a greater degree of
portfolio turnover than might be expected from investment
companies which invest substantially all of their assets on a
long-term basis. The Fund cannot accurately predict its
portfolio turnover rate, but it is anticipated that its annual
turnover rate generally will not exceed 200% (excluding
turnover of securities having a maturity of one year or less).
Higher portfolio turnover results in increased Fund expenses,
including brokerage commissions, dealer mark-ups and other
transaction costs on the sale of securities and on the
reinvestment in other securities, and results in the
acceleration of realization of capital gains or losses for tax
purposes. To the extent that increased portfolio turnover
results in sales of securities held less than three months, the
Fund's ability to qualify as a "regulated investment company"
under the Internal Revenue Code may be affected.
INVESTMENT LIMITATIONS
<PAGE>
The Fund will not:
* borrow money directly or through reverse repurchase
agreements 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 15% of
the value of those assets to secure such borrowings;
* lend any of its assets, except portfolio securities up
to one-third of the value of its total assets; or
* 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 restricted
securities which the Fund may purchase pursuant to its
investment objective, policies, and limitations.
The above investment limitations cannot be changed without
shareholder approval. The following investment limitations,
however, may be changed by the Directors without shareholder
approval. Shareholders will be notified before any material
change in these investment limitation becomes effective.
The Fund will not:
* invest more than 10% of the value of its total assets
in securities subject to restrictions on resale under
the Securities Act of 1933 except for certain
restricted securities that meet the criteria for
liquidity as established by the Directors; or
* invest more than 15% of the value of its net assets in
securities that are not readily marketable or that are
otherwise considered illiquid, including repurchase
agreements providing for settlement in more than seven
days after notice.
NET ASSET VALUE
The Fund's net asset value per Share fluctuates. The net asset
value per Share is determined by adding the interest of the
Shares in the market value of all securities and other assets
of the Fund, subtracting the interest of the Shares in the
liabilities of the Fund and those attributable to the Shares,
and dividing the remainder by the total number of Shares
outstanding. The net asset value of the Shares may be
different from that of Class A Shares, Class C Shares and
Select 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.
<PAGE>
INVESTING IN FORTRESS 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 Strategic Income Fund -
- Fortress Shares; and
* send both to the Fund's transfer agent, Federated
Services Company, c/o State Street Bank and Trust
Company, P.O. Box 8604, Boston, Massachusetts 02266-
8604.
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: Strategic Income Fund -- Fortress Shares; Title or Name of
Account; Wire Order Number and/or Account Number. Shares
cannot be purchased by wire on Columbus Day, Veteran's Day or
Martin Luther King Day.
<PAGE>
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 and
Trust Company ("State Street Bank") acts as the shareholder's
agent in depositing checks and converting them to federal
funds. Orders by mail are considered received after payment by
check is converted by State Street Bank into federal funds.
This is generally the next business day after State Street Bank
receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $1,500 over a 90-
day period, unless the investment is in a retirement plan, in
which case the minimum initial investment is $50. Subsequent
investments must be in amounts of at least $100, except for
retirement plans, 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, plus a sales charge of 1% of the offering
price (which is 1.01% of the net amount invested). There is no
sales charge for purchases of $1 million or more. In addition,
no sales charge is imposed for Shares purchased through bank
trust departments or investment advisers registered under the
Investment Advisers Act of 1940 purchasing on behalf of their
clients, or by insurance companies. These institutions,
however, may charge fees for services provided which may relate
to ownership of Fund shares. This prospectus should,
therefore, be read together with any agreement between the
customer and the institution with regard to services provided
and the fees charged for these services.
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; and
(iii) the following holidays: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
Under certain circumstances described under "Redeeming Fortress
Shares," shareholders may be charged a contingent deferred
sales charge by the distributor at the time Shares are
redeemed.
DEALER CONCESSION. For sales of Shares, broker/dealers will
normally receive 100% of the applicable sales charge. Any
portion of the sales charge which is not paid to a
<PAGE>
broker/dealer will be retained by the distributor. However,
from time to time, and at the sole discretion of the
distributor, all or part of that portion may be paid to a
dealer. The sales charge for Shares sold other than through
registered broker/dealers will be retained by Federated
Securities Corp. Federated Securities Corp. may pay fees to
banks out of the sales charge in exchange for sales and/or
administrative services performed on behalf of the bank's
customers in connection with the initiation of customer
accounts and purchases of Shares.
ELIMINATING THE SALES CHARGE
The sales charge can be eliminated on the purchase of Shares
through:
* quantity discounts and accumulated purchases;
* signing a 13-month letter of intent;
* using the reinvestment privilege; or
* concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. There is no
sales charge for purchases of $1 million or more. The Fund
will combine purchases made on the same day by the investor,
his spouse, and his children under age 21 when it calculates
the sales charge.
If an additional purchase of Shares is made, the Fund will
consider the previous purchases still invested in Shares. For
example, if a shareholder already owns Shares having a current
value at the public offering price of $900,000, and he
purchases $100,000 or more at the current public offering
price, there will be no sales charge on the additional
purchase. The Fund will also combine purchases for the purpose
of reducing the contingent deferred sales charge imposed on
some Shares redemptions. For example, if a shareholder already
owns Shares having a current value at public offering price of
$1 million and purchases an additional $1 million at the
current public offering price, the applicable contingent
deferred sales charge would be reduced to 0.50% of those
additional Shares. For more information on the levels of
contingent deferred sales charges and holding periods, see the
section entitled "Contingent Deferred Sales Charge."
To receive this sales charge elimination, Federated Securities
Corp. must be notified by the shareholder in writing or by his
financial institution at the time the purchase is made that
Shares are already owned or that purchases are being combined.
The Fund will eliminate the sales charge after it confirms the
purchases.
<PAGE>
LETTER OF INTENT. If a shareholder intends to purchase at
least $1 million of Shares over the next 13 months, the sales
charge may be eliminated by signing a letter of intent to that
effect. This letter of intent includes a provision for a sales
charge elimination depending on the amount actually purchased
within the 13-month period and a provision for the Fund's
custodian to hold 1% of the total amount intended to be
purchased in escrow (in Shares) until such purchase is
completed.
The 1% held in escrow will, at the expiration of the 13-month
period, be applied to the payment of the applicable sales
charge, unless the amount specified in the letter of intent,
which must be $1 million or more of Shares, is purchased. In
this event, all of the escrowed Shares will be deposited into
the shareholder's account.
This letter of intent also includes a provision for reductions
in the contingent deferred sales charge and holding period
depending on the amount actually purchased within the 13-month
period. For more information on the various levels of
contingent deferred sales charges and holding periods, see the
section entitled "Contingent Deferred Sales Charge."
This letter of intent will not obligate the shareholder to
purchase Shares. This letter may be dated as of a prior date
to include any purchases made within the past 90 days
(purchases within the prior 90 days may be used to fulfill the
requirements of the letter of intent; however, the sales load
on such purchases will not be adjusted to reflect a lower sales
load).
REINVESTMENT PRIVILEGE. If Shares have been redeemed, the
shareholder has a one-time right, within 120 days, to reinvest
the redemption proceeds at the next-determined net asset value
without any sales charge. Federated Securities Corp. must be
notified by the shareholder in writing or by his financial
institution of the reinvestment in order to receive this
elimination of the sales charge. If the shareholder redeems
his Shares, there may be tax consequences.
CONCURRENT PURCHASES. For purposes of qualifying for a sales
charge elimination, a shareholder has the privilege of
combining concurrent purchases of two or more funds in the
Fortress Investment Program, the purchase prices of which
include a sales charge. For example, if a shareholder
concurrently invested $400,000 in one of the other Fortress
Funds and $600,000 in Shares, the sales charge would be
eliminated.
To receive this sales charge elimination, Federated Securities
Corp. must be notified by the shareholder in writing or by his
financial institution at the time the concurrent purchases are
<PAGE>
made. The Fund will eliminate the sales charge after it
confirms the purchases.
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, plus the 1% sales
charge for purchases under $1 million. A shareholder may apply
for participation in this program through his financial
institution or directly through the Fund.
EXCHANGE PRIVILEGE
Shares in other Fortress Funds may be exchanged for Shares at
net asset value without a sales charge (if previously paid) or
a contingent deferred sales charge. Shares in certain
Federated funds which are advised by subsidiaries or affiliates
of Federated Investors may also be exchanged for Shares at net
asset value (plus a sales charge, if applicable).
The ability to exchange shares is available to shareholders
residing in any state in which the shares being acquired may be
legally sold. Shareholders using this privilege must exchange
shares having a net asset value of at least $1,500. A
shareholder may obtain further information on the exchange
privilege by calling Federated Securities Corp. or his
financial institution.
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 application
or by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent
to each shareholder. Monthly statements are sent to report
dividends paid during the month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. 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 of the Fund
on payment dates at net asset value without a sales charge,
unless cash payments are requested by shareholders on the
application or by writing to the transfer agent.
<PAGE>
Dividends are declared just prior to determining net asset
value. If an order for shares is placed on the preceding
business day, shares purchased by wire begin earning dividends
on the business day wire payment is received by the transfer
agent. If the order for shares and payment by wire are
received on the same day, shares begin earning dividends on the
next business day. Shares purchased by check begin earning
dividends on the business day after the check is converted,
upon instruction of the transfer agent, into federal funds.
Shares earn dividends through the business day that proper
written redemption instructions are received by the transfer
agent.
RETIREMENT PLANS
Shares 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.
REDEEMING FORTRESS SHARES
The Fund redeems Shares at their net asset value next
determined after the transfer agent receives the redemption
request, less any applicable contingent deferred sales charge.
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, less any applicable contingent
deferred sales charge. 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
<PAGE>
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 in 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 the transfer agent. 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 may 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 BIF, which is administered by the FDIC;
* a member 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 SAIF, which is administered
by the FDIC; or
<PAGE>
* 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.
CONTINGENT DEFERRED SALES CHARGE
Shareholders redeeming Shares from their Fund accounts within
certain time periods of the purchase date of those Shares will
be charged a contingent deferred sales charge by the Fund's
distributor of the lesser of the original price or the net
asset value of the Shares redeemed as follows:
CONTINGENT DEFERRED
AMOUNT OF PURCHASE SHARES HELD SALES
CHARGE
Up to $1,999,999 less than 4 years 1%
$2,000,000 to $4,999,999 less than 2 years .50%
$5,000,000 to $24,999,999 less than 1 year .25%
$25,000,000 or more N/A None
In instances in which Shares have been acquired in exchange for
shares in other Fortress Funds, (i) the purchase price is the
price of the shares when originally purchased and (ii) the time
period during which the shares are held will run from the date
of the original purchase. The contingent deferred sales charge
will not be imposed on Shares acquired through the reinvestment
of dividends or distributions of long-term capital gains. In
computing the amount of contingent deferred sales charge for
accounts with Shares subject to a single holding period, if
any, redemptions are deemed to have occurred in the following
order: (1) Shares acquired through the reinvestment of
dividends and long-term capital gains; (2) purchase of Shares
occurring prior to the number of years necessary to satisfy the
applicable holding period; and (3) purchases of Shares
occurring within the current holding period. For accounts with
Shares subject to multiple Share holding periods, the
redemption sequence will be determined first, with reinvested
dividends and long-term capital gains, and second, on a first-
in, first-out basis.
The contingent deferred sales charge will not be imposed when a
redemption results from a return under the following
circumstances: (i) a total or partial distribution from a
qualified plan, other than an IRA, Keogh Plan, or a custodial
<PAGE>
account, following retirement; (ii) a total or partial
distribution from an IRA, Keogh Plan, or a custodial account
after the beneficial owner attains age 59-1/2; or (iii) from
the death or total and permanent disability of the beneficial
owner. The exemption from the contingent deferred sales charge
for qualified plans, an IRA, Keogh Plan, or a custodial account
does not extend to account transfers, rollovers, and other
redemptions made for purposes of reinvestment. Contingent
deferred sales charges are not charged in connection with
exchanges of Shares for shares in other Fortress Funds or in
connection with redemptions by the Fund of accounts with low
balances. Shares of the Fund originally purchased through a
bank trust department or investment adviser registered under
the Investment Advisers Act of 1940, or by an insurance
company, are not subject to the contingent deferred sales
charge to the extent the distributor does not make advance
payments. In addition, Shares held in the Fund by a financial
institution for its own account which were originally purchased
by the financial institution directly from the Fund's
distributor without a sales charge may be redeemed without a
contingent deferred sales charge. For more information, see
"Administrative Arrangements."
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. Due to the fact that Shares
are sold with a sales charge, it is not advisable for
shareholders to be purchasing Shares while participating in
this program.
Contingent deferred sales charges are charged for certain
Shares, other than Shares purchased through reinvestment of
dividends, which are redeemed through this program within one
to four years of their purchase dates.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
<PAGE>
When Shares are purchased by check, or through the Automated
Clearing House ("ACH"), the proceeds from the redemption of
those Shares are not available, and the Shares may not be
exchanged, until the Fund or its agents are reasonably certain
that the purchase check has cleared, which could take up to ten
calendar days.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances,
the Fund may redeem Shares in any account, and pay the proceeds
to the shareholder, if the account balance falls below a
required minimum value of $1,500 due to shareholder
redemptions. 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.
EXCHANGES FOR SHARES OF OTHER FUNDS
Shares may be exchanged for shares in other Fortress Funds at
net asset value without a contingent deferred sales charges or
a sales charge. Shares may also be exchanged for shares in
other Federated Funds which are advised by subsidiaries or
affiliates of Federated Investors at net asset value. However,
such exchanges may be subject to a contingent deferred sales
charges and possibly a sales charge. This privilege is
available to shareholders resident in any state in which the
shares being acquired may be sold.
Shareholders using this privilege must exchange Shares having a
net asset value which at least meets the minimum investment
required for the fund into which the exchange is being made. A
shareholder may obtain further information on the exchange
privilege, and may obtain prospectuses for other Fortress Funds
and Federated Funds by calling Federated Securities Corp. or
his financial institution. Before making an exchange, a
shareholder must receive a prospectus of the fund for which the
exchange is being made.
FIXED INCOME SECURITIES, INC. INFORMATION
MANAGEMENT OF THE CORPORATION
BOARD OF DIRECTORS. The Fund is managed by a Board of
Directors. The Directors are responsible for managing the
Corporation's business affairs and for exercising all the
Corporation's powers except those reserved for the
shareholders. The Executive Committee of the Board of
Directors handles the Directors' responsibilities between
meetings of the Directors.
<PAGE>
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 .85 of 1% of the Fund's
average daily net assets. Under the investment advisory
contract, which provides for voluntary waivers of expenses
by the adviser, the adviser may voluntarily waive some or
all of its fee. The adviser can terminate this voluntary
waiver of some or all of its advisory fee 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.
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 $76 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.
PORTFOLIO MANAGERS' BACKGROUND. Randall S. Bauer, Mark E.
Durbiano and Gary J. Madich have been the Fund's portfolio
managers since its inception. Mr. Bauer joined Federated
Investors in 1989 and has been a Vice President of the
Fund's adviser since 1994. Mr. Bauer was an Assistant Vice
President of the International Banking Division at
Pittsburgh National Bank from 1982 until 1989. Mr. Bauer is
a Chartered Financial Analyst and received his M.B.A. in
Finance from Pennsylvania State University. Mr. Durbiano
joined Federated Investors in 1982 and has been a Vice
<PAGE>
President of the Fund's adviser since 1988. Mr. Durbiano is
a Chartered Financial Analyst and received his M.B.A. in
Finance from the University of Pittsburgh. Mr. Madich
joined Federated Investors in 1984 and has been a Senior
Vice President of the Fund's investment adviser since 1993.
Mr. Madich served as a Vice President of the Fund's
investment adviser from 1988 until 1993. Mr. Madich is a
Chartered Financial Analyst and received his M.B.A. in
Public Finance from the University of Pittsburgh.
DISTRIBUTION OF FORTRESS SHARES
Federated Securities Corp. is the principal distributor for
Shares of the Fund. 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 the Investment
Company Act Rule 12b-1 (the "Plan"), the Fund will pay to
Federated Securities Corp. an amount computed at an annual
rate of 0.50 of 1% of the average daily net asset value of the
Shares to finance any activity which is principally intended to
result in the sale of Shares.
Federated Securities Corp. may, from time to time and for such
periods as it deems appropriate, voluntarily reduce its
compensation under the Plan to the extent the expenses
attributable to the Shares exceed such lower expense limitation
as the distributor may, by notice to the Fund, voluntarily
declare to be effective.
The distributor may select financial institutions (such as a
bank or an investment dealer) to provide sales support services
as agents for their clients or customers who beneficially own
Shares of the Fund.
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, 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 Fortress Shares
under the Plan.
<PAGE>
ADMINISTRATIVE ARRANGEMENTS. The distributor will pay
financial institutions, for distribution and/or administrative
services, an amount equal to 1% of the offering price of the
Shares acquired by their clients or customers on purchases up
to $1,999,999, 0.50% of the offering price on purchases of
$2,000,000 to $4,999,999, and 0.25% of the offering price on
purchases of $5,000,000 or more. The financial institution may
elect to receive amounts less than those stated which would
reduce the stated contingent deferred sales charges and/or the
holding period used to calculate the charges.
The Glass-Steagall Act limits the ability of a depository
institution (such as a commercial bank or a savings and loan
association) to become an underwriter or distributor of
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 law.
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 Shares of
the Fund. 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 Shares. In return for providing these support services, a
financial institution may receive payments from the Fund at a
rate not exceeding 0.25 of 1% of the average daily net assets
of the 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 provision of personal
services and maintenance of shareholder accounts.
CUSTODIAN. State Street Bank and Trust Company, Boston,
Massachusetts, is custodian for the securities and cash of the
Fund.
<PAGE>
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated
Services Company, Pittsburgh, Pennsylvania, 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, Pittsburgh, Pennsylvania, and Dickstein, Shapiro &
Morin, Washington, D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund
are Deloitte & Touche, Boston, Massachusetts.
EXPENSES OF THE FUND AND FORTRESS SHARES
Holders of Shares pay their allocable portion of Fund and
Corporation expenses.
The Corporation expenses for which holders of Shares pay their
allocable portion include, but are not limited to: the cost or
organizing the Corporation and continuing its existence;
registering the Corporation with federal and state securities
authorities; Directors' fees; auditors' fees; the cost of
meetings of Directors; legal fees of the Corporation;
association membership dues and such non-recurring and
extraordinary items as may arise from time to time.
The Fund expenses for which holders of Shares pay their
allocable portion include, but are not limited to: registering
the Fund and Shares of the Fund; 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 the 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 material such as
shareholder reports, prospectuses and proxies to current
shareholders; registration fees paid to the Securities and
Exchange Commission 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.
<PAGE>
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of the Fund is entitled to one vote in Director
elections and other matters submitted to shareholders for vote.
All shares of all classes of each portfolio in the Corporation
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 Corporation 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 the Board of Directors or by the
shareholders at a special meeting. A special meeting of
shareholders shall be called by the Directors upon the request
of shareholders owning at least 10% of the Corporation'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 applicable to
regulated investment companies and to receive the special tax
treatment afforded to such companies.
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 their Shares. No federal income tax is due on any
distributions earned in an IRA or qualified retirement plan
until distributed, so long as such IRA or qualified retirement
plan meets the applicable requirements of the Internal Revenue
Code.
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
<PAGE>
* Fund Shares are exempt from 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 the total return and
yield for Fortress Shares.
Total return represents the change, over a specified 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.
The performance information reflects the effect of the maximum
sales load and the redemption fee which, if excluded, would
increase the total return and yield.
Total return and yield will be calculated separately for Class
A Shares, Class C Shares, Fortress Shares and Select Shares.
Because Fortress and Class A Shares are subject to lower 12b-1
expenses, the yield for these shares, for the same period, may
exceed that of Class C and Select Shares. Because Fortress,
Class C and Select Shares are subject to lower sales charges,
the total return for these shares, for the same period, may
exceed that of Class A Shares.
From time to time, the Fund may advertise the performance of
Shares using certain financial publications and/or compare its
performance to certain indices.
OTHER CLASSES OF SHARES
The Fund currently offers Fortress Shares, Class A Shares,
Class C Shares and Select Shares.
Class A Shares are sold primarily to customers of financial
institutions subject to a front-end sales charge of up to 4.50%
<PAGE>
and certain contingent deferred sales 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 up-front 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 0.75 of 1%, in addition to a shareholder services fee of
0.25 of 1% of the Class C Shares' average daily net assets. In
addition, Class C Shares may be subject to certain contingent
deferred sales charges. Investments in Class C Shares are
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.
Select Shares are sold primarily to customers of financial
institutions at net asset value with no up-front sales charge.
Select Shares are distributed pursuant to a Rule 12b-1 Plan
adopted by the Fund whereby the distributor is paid a fee of up
to 0.75 of 1%, in addition to a shareholder service fee of 0.25
of 1% of the Select Shares' average daily net assets.
Investments in Select Shares are 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 and Fortress Shares
will generally exceed that of Class C and Select Shares by the
difference between Class Expenses borne by shares of each
respective class.
The stated advisory fee is the same for all four classes of
shares.
ADDRESSES
Strategic
Income Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Distributor Federated Securities Corp.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Investment Adviser Federated Advisers
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Custodian State Street Bank and Trust Company
P.O. Box 8604
Boston, Massachusetts 02266-8604
<PAGE>
Transfer Agent and
Dividend Disbursing Agent Federated Services Company
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Legal Counsel Houston, Houston & Donnelly
2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
Legal Counsel Dickstein, Shapiro & Morin
2101 L Street, N.W.
Washington, D.C. 20037
Independent Auditors Deloitte & Touche
125 Summer Street
Boston, Massachusetts 02110-1617
STRATEGIC INCOME FUND
FORTRESS SHARES
PROSPECTUS
A Diversified Portfolio of
Fixed Income Securities, Inc.,
an Open-End, Management
Investment Company
_________________ ___, 1994
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
<PAGE>
* * * * * *
STRATEGIC INCOME FUND
(A PORTFOLIO OF FIXED INCOME SECURITIES, INC.)
SELECT SHARES
PROSPECTUS
The Select Shares offered by this prospectus represent
interests in Strategic Income Fund (the "Fund"), a diversified
investment portfolio of Fixed Income Securities, Inc. (the
"Corporation"), an open-end, management investment company (a
mutual fund).
The investment objective of the Fund is to seek a high level of
current income. The Fund invests in domestic corporate debt
<PAGE>
obligations, U.S. government securities, and foreign government
and corporate debt obligations.
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 GOVERNMENT
AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and
know before you invest in Select Shares. Keep this prospectus
for future reference.
SPECIAL RISKS
From time to time, the Fund's portfolio may consist 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 that 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 Select Shares.
The Fund has filed a Statement of Additional Information for
Select Shares dated _____________ ___, 1994, with the
Securities and Exchange Commission. The information contained
in the Statement of Additional Information is incorporated by
reference in this prospectus. You may request a copy of the
Statement of Additional Information free of charge by calling
1-800-235-4669. To obtain other information or to 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 _____________ ___, 1994
TABLE OF CONTENTS
SUMMARY OF FUND EXPENSES
<PAGE>
GENERAL INFORMATION
INVESTMENT INFORMATION
Investment Objective
Investment Policies
Special Risks
Acceptable Investments
U.S. Government Securities
Mortgage-Backed Securities
Collateralized Mortgage Obligations and
Multiclass Pass-Through Securities
Real Estate Mortgage Investment Conduits ("REMICs")
Characteristics of Mortgage-Backed Securities
Corporate Bonds and Other Fixed-Income Obligations
Floating Rate Corporate Debt Obligations
Fixed Rate Corporate Debt Obligations
Participation Interests
Preferred Stocks
Convertible Securities
Asset-backed Securities
Zero Coupon, Pay-In-Kind and
Delayed Interest Securities
Special Risks
Corporate Equity Securities
Warrants and Rights
Foreign Securities
Risks
Foreign Currency Transactions
Forward Foreign Currency Exchange Contracts
Temporary Investments
Repurchase Agreements
Dollar Roll Transactions
Options
Financial Futures and Options on Financial Futures
Risks
Investing in Securities of Other Investment Companies
Restricted and Illiquid Securities
When-Issued and Delayed Delivery Transactions
Lending of Portfolio Securities
Portfolio Turnover
Investment Limitations
NET ASSET VALUE
INVESTING IN SELECT SHARES
Share Purchases
Through a Financial Institution
Directly From the Distributor
Conversion to Federal Funds
Minimum Investment Required
What Shares Cost
Systematic Investment Program
Certificates and Confirmations
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Dividends and Distributions
Retirement Plans
EXCHANGE PRIVILEGE
Requirements for Exchange
Tax Consequences
Making an Exchange
Telephone Instructions
REDEEMING SELECT SHARES
Through a Financial Institution
Directly From the Fund
By Telephone
By Mail
Signatures
Systematic Withdrawal Program
Redemption Before Purchase
Instruments Clear
Accounts with Low Balances
FIXED INCOME SECURITIES, INC. INFORMATION
Management of the Corporation
Board of Directors
Investment Adviser
Advisory Fees
Adviser's Background
Portfolio Managers' Background
Distribution of Select Shares
Distribution Plan
Other Payments to Financial Institutions
Administration of the Fund
Administrative Services
Shareholder Services Plan
Custodian
Transfer Agent and Dividend Disbursing Agent
Legal Counsel
Independent Auditors
Expenses of the Fund and Select Shares
SHAREHOLDER INFORMATION
Voting Rights
TAX INFORMATION
Federal Income Tax
Pennsylvania Corporate and
Personal Property Taxes
PERFORMANCE INFORMATION
OTHER CLASSES OF SHARES
ADDRESSES Inside Back Cover
<PAGE>
SUMMARY OF FUND EXPENSES
SELECT SHARES
SHAREHOLDER TRANSACTION EXPENSES
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
ANNUAL SELECT SHARES OPERATING EXPENSES *
(As a percentage of projected average net assets)
Management Fee (after waiver) (1) . . . . . . . . . . . . . . .
____%
12b-1 Fee 0.75%
Total Other Expenses (after expense reimbursement) (2) . . . .
____%
Shareholder Servicing Fee . . . . . . . . . . . . . .
0.25%
Total Select Shares Operating Expenses . . . . . .
____%
(1) The estimated management fee has been reduced to
reflect the anticipated voluntary waiver of the
management fee. The adviser can terminate this
voluntary waiver at any time at its sole discretion.
The maximum management fee is 0.85%.
(2) The Total Select Shares Operating Expenses are
anticipated to be ____% absent the anticipated
voluntary waiver of the management fee and the
anticipated voluntary reimbursement of certain other
operating expenses.
* Total Select Shares Operating Expenses are estimated
based on average expenses expected to be incurred
during the period ending November 30, 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
<PAGE>
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 "FIXED
INCOME SECURITIES, INC. INFORMATION." WIRE-TRANSFERRED
REDEMPTIONS OF LESS THAN $5,000 MAY BE SUBJECT TO ADDITIONAL
FEES.
EXAMPLE
1 year 3 years
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. . . . . . $___ $___
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 NOVEMBER 30, 1994.
The information set forth in the foregoing table and example
relates only to the Select Shares of the Fund. The Fund also
offers three other classes of shares called Class A Shares,
Class C Shares and Fortress Shares. Select Shares, Class A
Shares, Class C Shares and Fortress Shares are subject to
certain of the same expenses. All four classes of shares are
subject to shareholder services fees of 0.25 of 1%. However,
Class A Shares are not subject to 12b-1 fees, while Class C
Shares are subject to 12b-1 fees of up to 0.75 of 1% and
Fortress Shares are subject to 12b-1 fees of up to 0.50 of 1%.
In addition, Class C Shares are not subject to a front-end
sales charge, while Class A Shares are subject to a front-end
sales charge of up to 4.50% and Fortress Shares are subject to
a front-end sales charge of up to 1.00%. Class C and Fortress
Shares may be subject to a contingent deferred sales charge of
up to 1.00%. See "Other Classes of Shares."
GENERAL INFORMATION
The Corporation was incorporated under the laws of the State of
Maryland on October 15, 1991. The Articles of Incorporation
permit the Corporation to offer separate portfolios and classes
of shares. As of the date of this prospectus, the Board of
Directors (the "Directors") has established five separate
portfolios: Strategic Income Fund, Limited Term Fund, Limited
Term Municipal Fund, Multi-State Municipal Income Fund and
Limited Maturity Government Fund. With respect to the Fund,
the Directors have established four classes of shares known as
<PAGE>
Fortress Shares, Class A Shares, Class C Shares and Select
Shares. This prospectus relates only to the Select Shares
class of the Fund (the "Shares").
The Fund is designed for investors seeking high current income
through a professionally managed, diversified portfolio
investing primarily in domestic corporate debt obligations,
U.S. government securities, and foreign government and
corporate debt obligations. A minimum initial investment of
$1,500, unless the investment is in a retirement account in
which case the minimum investment is $50.
Shares are sold and redeemed at net asset value without a sales
charge or redemption fee imposed by the Fund. Fund assets may
be used in connection with the distribution of Shares.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek a high level of
current income. The investment objective cannot be changed
without approval of shareholders. 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.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing in a
diversified portfolio primarily consisting of domestic
corporate debt obligations, U.S. government securities, and
foreign government and corporate debt obligations. Under
normal circumstances, the Fund's assets will be invested in
each of these three sectors. However, the Fund may from time
to time invest up to 100% of its total assets in any one sector
if, in the judgment of the investment adviser, the Fund has the
opportunity of seeking a high level of current income without
undue risk to principal. Accordingly, the Fund's investments
should be considered speculative. Distributable income will
fluctuate as the Fund shifts assets among the three sectors.
There will be no limit to the weighted average maturity of the
portfolio. It will generally be of longer duration.
Unless indicated otherwise, the Fund's investment policies may
be changed by the Directors without the approval of
shareholders. Shareholders will be notified before any
material change in these investment policies becomes effective.
<PAGE>
ACCEPTABLE INVESTMENTS. The Fund invests primarily in a
professionally managed, diversified portfolio consisting of
domestic corporate debt obligations, U.S. government
securities, and foreign government and corporate debt
obligations. The Fund also may invest in debt securities
issued by domestic and foreign utilities, as well as money
market instruments and other temporary investments.
The securities in which the Fund invests principally are:
* securities issued or guaranteed as to principal and
interest by the U.S. government, its agencies or
instrumentalities;
* domestic corporate debt obligations, some of which may
include equity features; and
* debt obligations issued by foreign governments and
corporations.
The allocation of investments across these three principal
types of securities at any given time is based upon the
adviser's estimate of expected performance and risk of each
type of investment. In order to benefit from the typical low
correlation of these three types of securities, the Fund will
typically invest a portion of its assets in each category.
However, from time to time, the adviser may change the
allocation based upon its evaluation of the marketplace.
The Fund may invest in debt securities of any maturity.
U.S. GOVERNMENT SECURITIES. The U.S. government securities in
which the Fund invests are either issued or guaranteed by the
U.S. government, its agencies or instrumentalities. The U.S.
government securities in which the Fund invests principally
are:
* direct obligations of the U.S. Treasury, such as U.S.
Treasury bills, notes and bonds; and
* obligations of U.S. government agencies or
instrumentalities, such as Federal Home Loan Banks,
Federal National Mortgage Association, Government
National Mortgage Association, Banks for Cooperatives
(including Central Bank for Cooperatives), Federal Land
Banks, Federal Intermediate Credit Banks, Federal Farm
Credit Banks, Tennessee Valley Authority, Export-Import
Bank of the United States, Commodity Credit
Corporation, Federal Financing Bank, Student Loan
Marketing Association, Federal Home Loan Mortgage
Corporation, or National Credit Union Administration.
The government securities in which the Fund may invest are
backed in a variety of ways by the U.S. government or its
<PAGE>
agencies or instrumentalities. Some of these securities, such
as Government National Mortgage Association ("GNMA") mortgage-
backed securities, are backed by the full faith and credit of
the U.S. government. Other securities, such as obligations of
the Federal National Mortgage Association ("FNMA") or Federal
Home Loan Mortgage Corporation ("FHLMC"), are backed by the
credit of the agency or instrumentality issuing the obligations
but not the full faith and credit of the U.S. government. No
assurances can be given that the U.S. government will provide
financial support to these other agencies or instrumentalities,
because it is not obligated to do so.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are
securities that directly or indirectly represent a
participation in, or are secured by and payable from,
mortgage loans on real property. The mortgage-backed
securities in which the Fund may invest may be:
* issued by an agency of the U.S. government, typically
GNMA, FNMA or FHLMC;
* privately issued securities which are collateralized by
pools of mortgages in which each mortgage is guaranteed
as to payment of principal and interest by an agency or
instrumentality of the U.S. government;
* privately issued securities which are collateralized by
pools of mortgages in which payment of principal and
interest is guaranteed by the issuer and such guarantee
is collateralized by U.S. government securities; or
* other privately issued securities in which the proceeds
of the issuance are invested in mortgage-backed
securities and payment of the principal and interest is
supported by the credit of an agency or instrumentality
of the U.S. government.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-
THROUGH SECURITIES. Collateralized mortgage obligations
("CMOs") are debt obligations collateralized by mortgage
loans or mortgage pass-through securities. Typically, CMOs
are collateralized by GNMA, FNMA or FHLMC certificates, but
also may be collateralized by whole loans or private pass-
through securities (such collateral being called "Mortgage
Assets"). Multiclass pass-through securities are equity
interests in a trust composed of Mortgage Assets. Payments
of principal of and interest on the Mortgage Assets, and any
reinvestment income, provide the funds to pay debt service
on the CMOs or make scheduled distributions on the
multiclass pass-through securities. CMOs may be issued by
agencies or instrumentalities of the U.S. government, or by
private originators of, or investors in, mortgage loans,
including savings associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of
<PAGE>
the foregoing. The issuer of a series of CMOs may elect to
be treated as a Real Estate Mortgage Investment Conduit (a
"REMIC"), which has certain special tax attributes.
In a CMO, a series of bonds or certificates is issued in
multiple classes. Each class of CMOs, often referred to as
a "tranche," is issued at a specific fixed or floating rate
of interest and has a stated maturity or final distribution
date. Principal prepayment on the Mortgage Assets may cause
the CMOs to be retired substantially earlier than their
stated maturities or final distribution dates. Interest is
paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and
interest on the Mortgage Assets may be allocated among the
several classes of a series of a CMO in innumerable ways.
In one structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to
the classes of a CMO in the order of their respective stated
maturities or final distribution dates, so that no payment
of principal will be made on any class of CMOs until all
other classes having an earlier stated maturity or final
distribution date have been paid in full.
CMOs that include a class bearing a floating rate of
interest also may include a class whose yield floats
inversely against a specified index rate. These "inverse
floaters" are more volatile than conventional fixed or
floating rate classes of a CMO and the yield thereon, as
well as the value thereof, will fluctuate in inverse
proportion to changes in the index on which interest rate
adjustments are based. As a result, the yield on an inverse
floater class of a CMO will generally increase when market
yields (as reflected by the index) decrease and increase
when market yields decrease. The extent of the volatility
of inverse floaters depends on the extent of anticipated
changes in market rates of interest. Generally, inverse
floaters provide for interest rate adjustments based upon a
multiple of the specified interest index, which further
increases their volatility. The degree of additional
volatility will be directly proportional to the size of the
multiple used in determining interest rate adjustments.
The Trust may also invest in, among others, parallel pay
CMOs and Planned Amortization Class CMOs ("PAC Bonds").
Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class.
These simultaneous payments are taken into account in
calculating the stated maturity date or final distribution
date of each class, which, as with other CMO structures,
must be retired by its stated maturity date or final
distribution date but may be retired earlier. PAC Bonds
generally require payments of a specified amount of
principal on each payment date. PAC Bonds are always
parallel pay CMOs with the required principal payment on
<PAGE>
such securities having the highest priority after interest
has been paid to all classes.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs
are offerings of multiple class real estate mortgage-backed
securities which qualify and elect treatment as such under
provisions of the Internal Revenue Code. Issuers of REMICs
may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of
mortgages. Once REMIC status is elected and obtained, the
entity is not subject to federal income taxation. Instead,
income is passed through the entity and is taxed to the
person or persons who hold interests in the REMIC. A REMIC
interest must consist of one or more classes of "regular
interests," some of which may offer adjustable rates of
interest (the type in which the Fund primarily invests), and
a single class of "residual interests." To qualify as a
REMIC, substantially all the assets of the entity must be in
assets directly or indirectly secured principally by real
property.
CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES. Mortgage-
backed securities have yield and maturity characteristics
corresponding to the underlying mortgages. Distributions to
holders of mortgage-backed securities include both interest
and principal of the underlying mortgages and any
prepayments of principal due to prepayment, refinancing, or
foreclosure of the underlying mortgages. Although
maturities of the underlying mortgage loans may range up to
30 years, amortization and prepayments substantially shorten
the effective maturities of mortgage-backed securities. Due
to these features, mortgage-backed securities are less
effective as a means of "locking in" attractive long-term
interest rates than fixed-income securities which pay only a
stated amount of interest until maturity, when the entire
principal amount is returned. This is caused by the need to
reinvest at lower interest rates both distributions of
principal generally and significant prepayments which become
more likely as mortgage interest rates decline. Since
comparatively high interest rates cannot be effectively
"locked in," mortgage-backed securities may have less
potential for capital appreciation during periods of
declining interest rates than other non-callable fixed-
income government securities of comparable stated
maturities. However, mortgage-backed securities may
experience less pronounced declines in value during periods
or rising interest rates.
Prepayments may result in a capital loss to the Fund to the
extent that the prepaid mortgage securities were purchased
at a market premium over their stated amount. Conversely,
the prepayment of mortgage securities purchased at a market
discount from their stated principal amount will accelerate
the recognition of interest income by the Fund, which would
<PAGE>
be taxed as ordinary income when distributed to the
shareholders.
Some of the CMOs purchased by the Fund may represent an
interest solely in the principal repayments or solely in the
interest payments on mortgage-backed securities. Due to the
possibility of prepayments on the underlying mortgages,
these securities may be more interest-rate sensitive than
other securities purchased by the Fund. If prevailing
interest rates fall below the level at which the securities
were issued, there may be substantial prepayments on the
underlying mortgages, leading to the relatively early
prepayments of principal-only securities and a reduction in
the amount of payments made to holders of interest-only
securities. It is possible that the Fund might not recover
its original investment in interest-only securities if there
are substantial prepayments on the underlying mortgages.
Therefore, interest-only securities generally increase in
value as interest rats rise and decrease in value as
interest rates fall, counter to changes in value experienced
by most fixed income securities. The Fund's adviser intends
to use this characteristic of interest-only securities to
reduce the effects of interest rate changes on the value of
the Fund's portfolio, while continuing to pursue current
income.
CORPORATE BONDS AND OTHER FIXED-INCOME OBLIGATIONS. The Fund
may invest in both investment grade and non-investment grade
bonds and other fixed-income obligations issued by domestic and
foreign corporations and other private issuers. There are no
minimum rating requirements for these investments by the Fund.
Certain fixed-income obligations in which the Fund invests may
involve equity characteristics. The Fund may, for example,
invest in unit offerings that combine fixed-income securities
and common stock equivalents such as warrants, rights and
options. It is anticipated that the majority of the value
attributable to the unit will relate to its fixed-income
component.
FLOATING RATE CORPORATE DEBT OBLIGATIONS. The Fund expects
to invest in floating rate corporate debt obligations,
including increasing rate securities. Floating rate
securities are generally offered at an initial interest rate
which is at or above prevailing market rates. The interest
rate paid on these securities is then reset periodically
(commonly every 90 days) to an increment over some
redetermined interest rate index. Commonly utilized indices
include the three-month Treasury bill rate, the 180-day
Treasury bill rate, the one-month or three-month London
Interbank Offered Rate (LIBOR), the prime rate of a bank,
the commercial paper rates, or the longer-term rates on U.S.
Treasury securities.
<PAGE>
FIXED RATE CORPORATE DEBT OBLIGATIONS. The Fund will also
invest in fixed rate securities. Fixed rate securities tend
to exhibit more price volatility during times of rising or
falling interest rates than securities with floating rates
of interest. This is because floating rate securities, as
described above, behave like short-term instruments in that
the rate of interest they pay is subject to periodic
adjustments based on a designated interest rate index.
Fixed rate securities pay a fixed rate of interest and are
more sensitive to fluctuating interest rates. In periods of
rising interest rates the value of a fixed rate security is
likely to fall. Fixed rate securities with short-term
characteristics are not subject to the same price volatility
as fixed rate securities without such characteristics.
Therefore, they behave more like floating rate securities
with respect to price volatility.
PARTICIPATION INTERESTS. The Fund may acquire participation
interests in senior, fully secured floating rate loans that
are made primarily to U.S. companies. The Fund's
investments in participation interests are subject to its
limitation on investments in illiquid securities. The Fund
may purchase only those participation interests that mature
in one year or less, or, if maturing in more than one year,
have a floating rate that is automatically adjusted at least
once each year according to a specified rate for such
investments, such as a percentage of a bank's prime rate.
Participation interests are primarily dependent upon the
creditworthiness of the borrower for payment of interest and
principal. Such borrowers may have difficulty making
payments and may have senior securities rated as low as "C"
by Moody's Investors Service, Inc. ("Moody's"), or "D" by
Standard & Poor's Corporation ("Standard & Poor's") or Fitch
Investors Service, Inc. ("Fitch").
PREFERRED STOCKS. Preferred stock, unlike common stock,
offers a stated dividend rate payable from the issuer's
earnings. Preferred stock dividends may be cumulative or
non-cumulative, participating, or auction rate. If interest
rates rise, the fixed dividend on preferred stocks may be
less attractive, causing the price of preferred stocks to
decline. Preferred stock may have mandatory sinking fund
provisions, as well as call/redemption provisions prior to
maturity, a negative feature when interest rates decline.
CONVERTIBLE SECURITIES. A convertible security is a bond,
debenture, note, preferred stock or other security that may
be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a
particular period of time at a specified price or formula.
A convertible security entitles the holder to receive
interest generally paid or accrued on debt or the dividend
paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Convertible
<PAGE>
securities have several unique investment characteristics,
such as (a) higher yields than common stocks, but lower
yields than comparable nonconvertible securities, (b) a
lesser degree of fluctuation in value than the underlying
stock since they have fixed income characteristics, and (c)
the potential for capital appreciation if the market price
of the underlying common stock increases.
The Fund has no current intention of converting any
convertible securities it may own into equity securities or
holding them as an equity investment upon conversion. A
convertible security might be subject to redemption at the
option of the issuer at a price established in the
convertible security's governing instrument. If a
convertible security held by the Fund is called for
redemption, the Fund may be required to permit the issuer to
redeem the security, convert it into the underlying common
stock or sell it to a third party.
ASSET-BACKED SECURITIES. The Fund may invest in asset-
backed securities including, but not limited to, interests
in pools of receivables, such as credit card and accounts
receivable and motor vehicle and other installment purchase
obligations and leases. These securities may be in the form
of pass-through instruments or asset-backed obligations.
The securities, all of which are issued by non-governmental
entities and carry no direct or indirect government
guarantee, are structurally similar to CMOs and mortgage
pass-through securities, which are described above.
However, non-mortgage related asset-backed securities
present certain risks that are not presented by mortgage
securities, primarily because these securities do not have
the benefit of the same security interest in the related
collateral. Credit card receivables, for example, are
generally unsecured, while the trustee of asset-backed
securities backed by automobile receivables may not have a
proper security interest in all of the obligations backing
such receivables.
ZERO COUPON, PAY-IN-KIND AND DELAYED INTEREST SECURITIES.
The Fund may invest in zero coupon, pay-in-kind and delayed
interest securities issued by corporations. Corporate zero
coupon securities are: (i) notes or debentures which do not
pay current interest and are issued at substantial discounts
from par value, or (ii) notes or debentures that pay no
current interest until a stated date one or more years into
the future, after which the issuer is obligated to pay
interest until maturity, usually at a higher rate than if
interest were payable from the date of issuance. Pay-in-
kind securities pay interest through the issuance to holders
of additional securities and delayed interest securities do
not pay interest for a specified period. Because values of
securities of this type are subject to greater fluctuations
than are the values of securities that distribute income
<PAGE>
regularly, they may be more speculative than such
securities.
SPECIAL RISKS. From time to time, the Fund's portfolio may
consist primarily of lower-rated (i.e., rated Ba or lower by
Moody's or BB or lower by Standard & Poor's or Fitch)
corporate debt obligations, which are commonly referred to
as "junk bonds." A description of the rating categories is
contained in the Statement of Additional Information.
Lower-rated securities will usually offer higher yields than
higher-rated securities. However, there is more risk
associated with these investments. (For example, securities
rated in the lowest category have been unable to satisfy
their obligations under the bond indenture.) 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. As a
result of these factors, lower-rated securities tend to have
more price volatility and carry more risk to principal than
higher-rated securities. 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 the Fund.
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.
CORPORATE EQUITY SECURITIES. The Fund may also invest in
equity securities, including common stocks, warrants and rights
issued by corporations in any industry (industrial, financial
or utility) which may be denominated in U.S. dollars or in
foreign currencies.
WARRANTS AND RIGHTS. The Fund may invest up to 5% of its
total assets in warrants and rights, including but not
limited to warrants or rights (i) acquired as part of a unit
or attached to other securities purchased by the Fund, or
(ii) acquired as part of a distribution from the issuer.
FOREIGN SECURITIES. The Fund may invest in foreign securities,
including foreign securities not publicly traded in the United
States. No more than 25% of the Fund's total assets, at the
<PAGE>
time of purchase, will be invested in government securities of
any one foreign country. The Fund has no other restriction on
the amount of its assets that may be invested in foreign
securities and may purchase securities issued in any country,
developed or undeveloped. There are no minimum rating
requirements for the foreign securities in which the Fund
invests.
The percentage of the Fund's assets that will be allocated to
foreign securities will vary depending on the relative yields
of foreign and U.S. securities, the economies of foreign
countries, the condition of such countries' financial markets,
the interest rate climate of such countries and the
relationship of such countries' currency to the U.S. dollar.
These factors are judged on the basis of fundamental economic
criteria (e.g., relative inflation levels and trends, growth
rate forecasts, balance of payments status, and economic
policies) as well as technical and political data.
RISKS. Investments in foreign securities involve special
risks that differ from those associated with investments in
domestic securities. The risks associated with investments
in foreign securities relate to political and economic
developments abroad, as well as those that result from the
differences between the regulation of domestic securities
and issuers and foreign securities and issuers. These risks
may include, but are not limited to, expropriation,
confiscatory taxation, currency fluctuations, withholding
taxes on interest, limitations on the use or transfer of
assets, political or social instability, ability to obtain
or enforce court judgments abroad and adverse diplomatic
developments. Moreover, individual foreign economies may
differ favorably or unfavorably from the domestic economy in
such respects as growth of gross national product, the rate
of inflation, capital reinvestment, resource self-
sufficiency and balance of payments position.
Additional differences exist between investing in foreign
and domestic securities. Examples of such differences
include: less publicly available information about foreign
issuers; credit risks associated with certain foreign
governments; the lack of uniform financial accounting
standards applicable to foreign issuers; less readily
available market quotations on foreign issues; the
likelihood that securities of foreign issuers may be less
liquid or more volatile; generally higher foreign brokerage
commissions; and unreliable mail service between countries.
FOREIGN CURRENCY TRANSACTIONS. The Fund will enter into
foreign currency transactions to obtain the necessary
currencies to settle securities transactions. Currency
transactions may be conducted either on a spot or cash basis
at prevailing rates or through forward foreign currency
exchange contracts.
<PAGE>
The Fund may also enter into foreign currency transactions
to protect Fund assets against adverse changes in foreign
currency exchange rates or exchange control regulations.
Such changes could unfavorably affect the value of Fund
assets which are denominated in foreign currencies, such as
foreign securities or funds deposited in foreign banks, as
measured in U.S. dollars. Although foreign currency
transactions may be used by the Fund to protect against a
decline in the value of one or more currencies, such efforts
may also limit any potential gain that might result from a
relative increase in the value of such currencies and might,
in certain cases, result in losses to the Fund.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward
foreign currency exchange contract (a "forward contract") is
an obligation to purchase or sell an amount of a particular
currency at a specific price and on a future date agreed
upon by the parties.
Generally, no commission charges or deposits are involved.
At the time the Fund enters into a forward contract, Fund
assets with a value equal to the Fund's obligation under the
forward contract are segregated on the Fund's records and
are maintained until the contract has been settled. The
Fund will not enter into a forward contract with a term of
more than six months. The Fund will generally enter into a
forward contract to provide the proper currency to settle a
securities transaction at the time the transaction occurs
(the "trade date"). The period between the trade date and
settlement date will vary between 24 hours and 30 days,
depending upon local custom.
The Fund may also protect against the decline of a
particular foreign currency by entering into a forward
contract to sell an amount of that currency approximating
the value of all or a portion of the Fund's assets
denominated in that currency ("hedging"). The success of
this type of short-term hedging strategy is highly uncertain
due to the difficulties of predicting short-term currency
market movements and of precisely matching forward contract
amounts and the constantly changing value of the securities
involved. Although the adviser will consider the likelihood
of changes in currency values when making investment
decisions, the adviser believes that it is important to be
able to enter into forward contracts when it believes the
interests of the Fund will be served.
TEMPORARY INVESTMENTS. The Fund may invest temporarily in debt
obligations maturing in one year or less during times of
unusual market conditions for defensive purposes and to
maintain liquidity in anticipation of favorable investment
opportunities. The Fund's temporary investments may include:
<PAGE>
* obligations issued or guaranteed by the U.S. government
or its agencies or instrumentalities;
* time deposits (including savings deposits and
certificates of deposit) and bankers acceptances in
commercial or savings banks whose accounts are insured
by the Bank Insurance Fund ("BIF") or the Savings
Association Insurance Fund ("SAIF"), both of which are
administered by the Federal Deposit Insurance
Corporation ("FDIC"), including certificates of deposit
issued by and other time deposits in foreign branches
of FDIC insured banks or who have at least $100 million
in capital;
* domestic and foreign issues of commercial paper or
other corporate debt obligations;
* obligations of the types listed above, but not
satisfying the standards set forth above, if they are
(a) subject to repurchase agreements or (b) guaranteed
as to principal and interest by a domestic or foreign
bank having total assets in excess of $1 billion, by a
corporation whose commercial paper may be purchased by
the Fund, or by a foreign government having an existing
debt security rated at least Baa by Moody's or BBB by
Standard & Poor's or Fitch; and
* other short-term investments of a type which the
adviser determines presents minimal credit risks and
which are of "high quality" as determined by a
nationally recognized statistical rating organization,
or, in the case of an instrument that is not rated, of
comparable quality in the judgment of the adviser.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements
in which banks, broker/dealers, and other recognized financial
institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price. 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.
DOLLAR ROLL TRANSACTIONS. In order to enhance portfolio
returns and manage prepayment risks, the Fund may engage in
dollar roll transactions with respect to mortgage securities
issued by GNMA, FNMA and FHLMC. In a dollar roll transaction,
the Fund sells a mortgage security to a financial institution,
such as a bank or broker/dealer, and simultaneously agrees to
repurchase a substantially similar (i.e., same type, coupon,
and maturity) security from the institution at a later date at
an agreed upon price. The mortgage securities that are
repurchased will bear the same interest rate as those sold, but
generally will be collateralized by different pools of
<PAGE>
mortgages with different prepayment histories. During the
period between the same and repurchase, the Fund will not be
entitled to receive interest and principal payments on the
securities sold. Proceeds of the sale will be invested in
short-term instruments, and the income from these investments,
together with any additional fee income received on the sale,
will generate income for the Fund exceeding the yield. When
the Fund enters into a dollar roll transaction, liquid assets
of the Fund, in a dollar amount sufficient to make payment for
the obligations to be repurchased, are segregated at the trade
date. These securities are marked to market daily and are
maintained until the transaction is settled.
OPTIONS. The Fund may deal in options on foreign currencies,
foreign currency futures, securities, and securities indices,
which options may be listed for trading on a national
securities exchange or traded over-the-counter. The Fund will
use options only to manage interest rate and currency risks.
The Fund may write covered call options to generate income.
The Fund may write covered call options and secured put options
on up to 25% of its net assets and may purchase put and call
options provided that no more than 5% of the fair market value
of its net assets may be invested in premiums on such options.
A call option gives the purchaser the right to buy, and the
writer the obligation to sell, the underlying currency,
security or other asset at the exercise price during the option
period. A put option gives the purchaser the right to sell,
and the writer the obligation to buy, the underlying currency,
security or other asset at the exercise price during the option
period. The writer of a covered call owns assets that are
acceptable for escrow and the writer of a secured put invests
an amount not less than the exercise price in eligible assets
to the extent that it is obligated as a writer. If a call
written by the Fund is exercised, the Fund forgoes any possible
profit from an increase in the market price of the underlying
asset over the exercise price plus the premium received. In
writing puts, there is a risk that the Fund may be required to
take delivery of the underlying asset at a disadvantageous
price.
Over-the-counter options ("OTC options") differ from exchange
traded options in several respects. They are transacted
directly with dealers and not with a clearing corporation, and
there is a risk of nonperformance by the dealer as a result of
the insolvency of such dealer or otherwise, in which event the
fund may experience material losses. However, in writing
options the premium is paid in advance by the dealer, OTC
options, which may not be continuously liquid, are available
for a greater variety of assets, and a wider range of
expiration dates and exercise prices, than are exchange traded
options.
<PAGE>
FINANCIAL FUTURES AND OPTIONS ON FINANCIAL FUTURES. The Fund
may purchase and sell financial futures contracts to hedge all
or a portion of its portfolio against changes in interest
rates. Financial futures contracts call for the delivery of
particular debt instruments at a certain time in the future.
The seller of the contract agrees to make delivery of the type
of instrument called for in the contract and the buyer agrees
to take delivery of the instrument at the specified future
time.
The Fund may also write call options and purchase put options
on financial futures contracts as a hedge to attempt to protect
securities in its portfolio against decreases in value. When
the Fund writes a call option on a futures contract, it is
undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option
is exercised. Conversely, as purchaser of a put option on a
futures contract, the Fund is entitled (but not obligated) to
sell a futures contract at the fixed price during the life of
the option.
The Fund may not purchase or sell futures contracts or related
options if immediately thereafter the sum of the amount of
margin deposits on the Fund's existing futures positions and
premiums paid for related options would exceed 5% of the market
value of the Fund's total assets. When the Fund purchases a
futures contracts, an amount of cash and cash equivalents,
equal to the underlying commodity value of the futures
contracts (less any related margin deposits), will be deposited
in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and
thereby insure that the use of such futures contract is
unleveraged.
RISKS. When the Fund uses financial futures and options on
financial futures as hedging devices, there is a risk that
the prices of the securities subject to the futures
contracts may not correlate perfectly with the prices of the
securities in the Fund's portfolio. This may cause the
futures contract and any related options to react
differently than the portfolio securities to market changes.
In addition, the Fund's investment adviser could be
incorrect in its expectations about the direction or extent
of market factors such as interest rate movements. In these
events, the Fund may lose money on the futures contract or
option. It is not certain that a secondary market for
positions in futures contracts or for options will exist at
all times. Although the investment adviser will consider
liquidity before entering into options transactions, there
is no assurance that a liquid secondary market on an
exchange or otherwise will exist for any particular futures
contract or option at any particular time. The Fund's
ability to establish and close out futures and options
positions depends on this secondary market.
<PAGE>
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The
Fund may invest in the securities of other investment
companies, but it will not own more than 3% of the total
outstanding voting securities of any such investment company,
invest more than 5% of its total assets in any one investment
company, or invest more than 10% of its total assets in
investment companies in general. To the extent that the Fund
invests in securities issued by other investment companies, the
Fund will indirectly bear its proportionate share of any fees
and expenses paid by such companies in addition to the fees and
expenses payable directly by the Fund.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in
restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to
its investment objective and policies, but which are subject to
restriction on resale under federal securities law. The Fund
will limit investments in illiquid securities, including
certain restricted securities not determined by the Directors
to be liquid, non-negotiable time deposits, and repurchase
agreements providing for settlement in more than seven days
after notice, to 15% of the value of its net assets.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may
purchase 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. In when-issued and delayed delivery transactions, the
Fund relies on the seller to complete the transaction. The
seller's failure to complete the transaction may cause the Fund
to miss a price or yield considered to be advantageous.
LENDING OF PORTFOLIO SECURITIES. In order to generate
additional income, the Fund may lend portfolio securities on a
short-term or a long-term basis up to one-third of the value of
its total assets 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 Directors.
In these loan arrangements, the Fund 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. The Fund may trade or dispose of portfolio
securities as considered necessary to meet its investment
objective. During periods of falling interest rates, the
values of outstanding fixed-income securities generally rise.
Conversely, during periods of rising interest rates, the values
of such securities generally decline. The magnitude of these
fluctuations will generally be greater for securities with
longer maturities. Because the Fund will actively use trading
to benefit from short-term yield disparities among different
issues of fixed-income securities or otherwise to increase its
<PAGE>
income, the Fund may be subject to a greater degree of
portfolio turnover than might be expected from investment
companies which invest substantially all of their assets on a
long-term basis. The Fund cannot accurately predict its
portfolio turnover rate, but it is anticipated that its annual
turnover rate generally will not exceed 200% (excluding
turnover of securities having a maturity of one year or less).
Higher portfolio turnover results in increased Fund expenses,
including brokerage commissions, dealer mark-ups and other
transaction costs on the sale of securities and on the
reinvestment in other securities, and results in the
acceleration of realization of capital gains or losses for tax
purposes. To the extent that increased portfolio turnover
results in sales of securities held less than three months, the
Fund's ability to qualify as a "regulated investment company"
under the Internal Revenue Code may be affected.
INVESTMENT LIMITATIONS
The Fund will not:
* borrow money directly or through reverse repurchase
agreements 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 15% of
the value of those assets to secure such borrowings;
* lend any of its assets, except portfolio securities up
to one-third of the value of its total assets; or
* 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 restricted
securities which the Fund may purchase pursuant to its
investment objective, policies, and limitations.
The above investment limitations cannot be changed without
shareholder approval. The following investment limitations,
however, may be changed by the Directors without shareholder
approval. Shareholders will be notified before any material
change in these investment limitation becomes effective.
The Fund will not:
* invest more than 10% of the value of its total assets
in securities subject to restrictions on resale under
the Securities Act of 1933 except for certain
restricted securities that meet the criteria for
liquidity as established by the Directors; or
* invest more than 15% of the value of its net assets in
securities that are not readily marketable or that are
otherwise considered illiquid, including repurchase
<PAGE>
agreements providing for settlement in more than seven
days after notice.
NET ASSET VALUE
The Fund's net asset value per Share fluctuates. The net asset
value per Share is determined by adding the interest of the
Shares in the market value of all securities and other assets
of the Fund, subtracting the interest of the Shares in the
liabilities of the Fund and those attributable to the Shares,
and dividing the remainder by the total number of Shares
outstanding. The net asset value of the Shares may be
different from that of Class A Shares, Class C Shares and
Fortress 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;
<PAGE>
* enclose a check made payable to Strategic Income Fund--
Select Shares; and
* send both to the Fund's transfer agent, Federated
Services Company, c/o State Street Bank and Trust
Company, P.O. Box 8604, Boston, Massachusetts 02266-
8604.
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: Strategic Income Fund --Select Shares; Title or Name of
Account; Wire Order Number and/or Account Number. Shares
cannot be purchased by wire on Columbus Day, Veteran's Day or
Martin Luther King Day.
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 and
Trust Company ("State Street Bank") acts as the shareholder's
agent in depositing checks and converting them to federal
funds. Orders by mail are considered received after payment by
check is converted by State Street Bank into federal funds.
This is generally the next business day after State Street Bank
receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $1,500, unless the
investment is in a retirement plan, in which case the minimum
initial investment is $50. Subsequent investments must be in
amounts of at least $100, except for retirement plans, 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; and (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
<PAGE>
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 application
or by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent
to each shareholder. Monthly statements are sent to report
dividends paid during the month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. 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 of the Fund
on payment dates at net asset value without a sales charge,
unless cash payments are requested by shareholders on the
application or by writing to the transfer agent.
Dividends are declared just prior to determining net asset
value. If an order for shares is placed on the preceding
business day, shares purchased by wire begin earning dividends
on the business day wire payment is received by the transfer
agent. If the order for shares and payment by wire are
received on the same day, shares begin earning dividends on the
next business day. Shares purchased by check begin earning
dividends on the business day after the check is converted,
upon instruction of the transfer agent, into federal funds.
Shares earn dividends through the business day that proper
written redemption instructions are received by the transfer
agent.
RETIREMENT PLANS
Shares 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
<PAGE>
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 the Select Shares
in other Federated Funds which are advised by subsidiaries or
affiliates of Federated Investors 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 shares of the other fund. The exchange
privilege may be terminated at any time. Shareholders will be
notified of the 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.
<PAGE>
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
<PAGE>
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 in 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 the transfer agent. 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 may 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 BIF, which is administered by the FDIC;
* a member 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 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.
<PAGE>
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.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive monthly or quarterly
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.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When Shares are purchased by check, or through the Automated
Clearing House ("ACH"), the proceeds from the redemption of
those Shares are not available, and the Shares may not be
exchanged, until the Fund or its agents are reasonably certain
that the purchase check has cleared, which could take up to ten
calendar days.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances,
the Fund may redeem Shares in any account, and pay the proceeds
to the shareholder, if the account balance falls below a
required minimum value of $1,500 due to shareholder
redemptions. 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.
FIXED INCOME SECURITIES, INC. INFORMATION
MANAGEMENT OF THE CORPORATION
BOARD OF DIRECTORS. The Fund is managed by a Board of
Directors. The Directors are responsible for managing the
<PAGE>
Corporation's business affairs and for exercising all the
Corporation's powers except those reserved for the
shareholders. The Executive Committee of the Board of
Directors handles the Directors' responsibilities between
meetings of the Directors.
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 .85 of 1% of the Fund's
average daily net assets. Under the investment advisory
contract, which provides for voluntary waivers of expenses
by the adviser, the adviser may voluntarily waive some or
all of its fee. The adviser can terminate this voluntary
waiver of some or all of its advisory fee 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.
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 $76 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.
PORTFOLIO MANAGERS' BACKGROUND. Randall S. Bauer, Mark E.
Durbiano and Gary J. Madich have been the Fund's portfolio
managers since its inception. Mr. Bauer joined Federated
Investors in 1989 and has been a Vice President of the
<PAGE>
Fund's adviser since 1994. Mr. Bauer was an Assistant Vice
President of the International Banking Division at
Pittsburgh National Bank from 1982 until 1989. Mr. Bauer is
a Chartered Financial Analyst and received his M.B.A. in
Finance from Pennsylvania State University. Mr. Durbiano
joined Federated Investors in 1982 and has been a Vice
President of the Fund's adviser since 1988. Mr. Durbiano is
a Chartered Financial Analyst and received his M.B.A. in
Finance from the University of Pittsburgh. Mr. Madich
joined Federated Investors in 1984 and has been a Senior
Vice President of the Fund's investment adviser since 1993.
Mr. Madich served as a Vice President of the Fund's
investment adviser from 1988 until 1993. Mr. Madich is a
Chartered Financial Analyst and received his M.B.A. in
Public Finance from the University of Pittsburgh.
DISTRIBUTION OF SELECT SHARES
Federated Securities Corp. is the principal distributor for
Shares of the Fund. 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 the Investment
Company Act Rule 12b-1 (the "Plan"), the Fund will pay to
Federated Securities Corp. an amount computed at an annual rate
of 0.75 of 1% of the average daily net asset value of the
Shares to finance any activity which is principally intended to
result in the sale of Shares.
Federated Securities Corp. may, from time to time and for such
periods as it deems appropriate, voluntarily reduce its
compensation under the Plan to the extent the expenses
attributable to the Shares exceed such lower expense limitation
as the distributor may, by notice to the Fund, voluntarily
declare to be effective.
The distributor may select financial institutions (such as a
bank or an investment dealer) to provide sales support services
as agents for their clients or customers who beneficially own
Shares of the Fund.
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
<PAGE>
the distributor, including amounts expended by the distributor
in excess of amounts received by it from the Fund, 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 Select Shares
under the Plan.
The Glass-Steagall Act limits the ability of a depository
institution (such as a commercial bank or a savings and loan
association) to become an underwriter or distributor of
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 law.
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 Shares of
the Fund. 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 Shares. In return for providing these support services, a
financial institution may receive payments from the Fund at a
rate not exceeding 0.25 of 1% of the average daily net assets
of the 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 provision of personal
services and maintenance of shareholder accounts.
<PAGE>
CUSTODIAN. State Street Bank and Trust Company, Boston,
Massachusetts, is custodian for the securities and cash of the
Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated
Services Company, Pittsburgh, Pennsylvania, 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, Pittsburgh, Pennsylvania, and Dickstein, Shapiro &
Morin, Washington, D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund
are Deloitte & Touche, Boston, Massachusetts.
EXPENSES OF THE FUND AND SELECT SHARES
Holders of Shares pay their allocable portion of Fund and
Corporation expenses.
The Corporation expenses for which holders of Shares pay their
allocable portion include, but are not limited to: the cost or
organizing the Corporation and continuing its existence;
registering the Corporation with federal and state securities
authorities; Directors' fees; auditors' fees; the cost of
meetings of Directors; legal fees of the Corporation;
association membership dues and such non-recurring and
extraordinary items as may arise from time to time.
The Fund expenses for which holders of Shares pay their
allocable portion include, but are not limited to: registering
the Fund and Shares of the Fund; 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 the Shares as a class are expenses under the Fund's
Shareholder Services 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 material such as shareholder reports, prospectuses
and proxies to current shareholders; registration fees paid to
the Securities and Exchange Commission 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.
<PAGE>
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of the Fund is entitled to one vote in Director
elections and other matters submitted to shareholders for vote.
All shares of all classes of each portfolio in the Corporation
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 Corporation 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 the Board of Directors or by the
shareholders at a special meeting. A special meeting of
shareholders shall be called by the Directors upon the request
of shareholders owning at least 10% of the Corporation'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 applicable to
regulated investment companies and to receive the special tax
treatment afforded to such companies.
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 their Shares. No federal income tax is due on any
distributions earned in an IRA or qualified retirement plan
until distributed, so long as such IRA or qualified retirement
plan meets the applicable requirements of the Internal Revenue
Code.
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
<PAGE>
* Fund Shares are exempt from 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 the total return and
yield for Select Shares.
Total return represents the change, over a specified 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 Shares, Class C Shares, Fortress Shares and Select Shares.
Because Select and Class C Shares are subject to higher 12b-1
expenses, the yield for these shares, for the same period, may
be lower than that of Class A and Fortress Shares. Because
Select Shares are not subject to sales charges, the total
return for Select Shares, for the same period, may exceed that
of Class A, Class C and Fortress Shares.
From time to time, the Fund may advertise the performance of
Shares using certain financial publications and/or compare its
performance to certain indices.
OTHER CLASSES OF SHARES
The Fund currently offers Select Shares, Class A Shares, Class
C Shares and Fortress Shares.
Class A Shares are sold primarily to customers of financial
institutions subject to a front-end sales charge of up to 4.50%
and certain contingent deferred sales 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.
<PAGE>
Class C Shares are sold primarily to customers of financial
institutions at net asset value with no front-end 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 0.75 of 1%, in addition to a shareholder services fee of
0.25 of 1% of the Class C Shares' average daily net assets. In
addition, Class C Shares may be subject to certain contingent
deferred sales charges. Investments in Class C Shares are
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.
Fortress Shares are sold primarily to customers of financial
institutions subject to a front-end sales charge of up to
1.00%. Fortress Shares are distributed pursuant to a Rule 12b-
1 Plan adopted by the Fund whereby the distributor is paid a
fee of up to 0.50 of 1%, in addition to a shareholder service
fee of 0.25 of 1% of the Fortress Shares' average daily net
assets. In addition, Fortress Shares may be subject to certain
contingent deferred sales charges. Investments in Fortress
Shares are subject to a minimum initial investment of $1,500
over a 90-day period, unless the investment is in a retirement
account, in which case the minimum investment is $50.
The amount of dividends payable to Class A and Fortress Shares
will generally exceed that of Class C and Select Shares by the
difference between Class Expenses borne by shares of each
respective class.
The stated advisory fee is the same for all four classes of
shares.
ADDRESSES
Strategic
Income Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Distributor Federated Securities Corp.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Investment Adviser Federated Advisers
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Custodian State Street Bank and Trust Company
P.O. Box 8604
Boston, Massachusetts 02266-8604
Transfer Agent and
Dividend Disbursing Agent Federated Services Company
Federated Investors Tower
<PAGE>
Pittsburgh, Pennsylvania 15222-3779
Legal Counsel Houston, Houston & Donnelly
2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
Legal Counsel Dickstein, Shapiro & Morin
2101 L Street, N.W.
Washington, D.C. 20037
Independent Auditors Deloitte & Touche
125 Summer Street
Boston, Massachusetts 02110-1617
STRATEGIC INCOME FUND
SELECT SHARES
PROSPECTUS
A Diversified Portfolio of
Fixed Income Securities, Inc.,
an Open-End, Management
Investment Company
_________________ ___, 1994
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
<PAGE>
PART B: STATEMENTS OF ADDITIONAL INFORMATION
STRATEGIC INCOME FUND
(A PORTFOLIO OF INSIGHT INSTITUTIONAL SERIES, INC.)
CLASS A SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with
the prospectus of Class A Shares of Strategic Income Fund (the
"Fund") dated ________________ ___, 1994. This Statement is
not a prospectus itself. To receive a copy of the prospectus,
write or call the Fund.
Federated Investors Tower
<PAGE>
Pittsburgh, Pennsylvania 15222-3779
Statement dated _______________ ___, 1994
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT THE FUND
INVESTMENT OBJECTIVE AND POLICIES
Types of Investments and Investment Techniques
Resets of Interest
Caps and Floors
Non-Mortgage Related Asset-Backed Securities
Convertible Securities
Equity Securities
Warrants
Futures and Options Transactions
Foreign Currency Transactions
Foreign Bank Instruments
When-Issued and Delayed Delivery Transactions
Lending of Portfolio Securities
Restricted and Illiquid Securities
Repurchase Agreements
Reverse Repurchase Agreements
Portfolio Turnover
INVESTMENT LIMITATIONS
FIXED INCOME SECURITIES, INC. MANAGEMENT
Officers and Directors
The Funds
Fund Ownership
Director Liability
INVESTMENT ADVISORY SERVICES
Adviser to the Fund
Advisory Fees
SHAREHOLDER SERVICING
ADMINISTRATIVE SERVICES
BROKERAGE TRANSACTIONS
<PAGE>
PURCHASING SHARES
Purchases by Sales Representatives,
Fund Directors, and Employees
DETERMINING NET ASSET VALUE
Determining Market Value of Securities
REDEEMING SHARES
Redemption in Kind
TAX STATUS
The Fund's Tax Status
Foreign Taxes
Shareholders' Tax Status
TOTAL RETURN
YIELD
PERFORMANCE COMPARISONS
APPENDIX
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of Fixed Income Securities, Inc. (the
"Corporation"). The Corporation was incorporated under the
laws of the State of Maryland on October 15, 1991.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek a high level of
current income. The investment objective stated above cannot
be changed without approval of shareholders. The investment
policies stated below may be changed by the Board of Directors
("Directors") without shareholder approval. Shareholders will
be notified before any material change in the investment
policies becomes effective.
TYPES OF INVESTMENTS AND INVESTMENT TECHNIQUES
The Fund pursues its investment objective by investing in a
diversified portfolio primarily consisting of domestic
corporate debt obligations, U.S. government securities, and
foreign government and corporate debt obligations. Under
normal circumstances, the Fund's assets will be invested in
each of these three sectors. However, the Fund may from time
to time invest up to 100% of its total assets in any one sector
if, in the judgment of the investment adviser, the Fund has the
opportunity of seeking a high level of current income without
undue risk to principal.
<PAGE>
RESETS OF INTEREST
The interest rates paid on the mortgage-backed in which the
Fund invests generally are readjusted at intervals of one year
or less to an increment over some predetermined interest rate
index. There are two main categories of indices: those based
on U.S. Treasury securities and those derived from a calculated
measure, such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year
and five-year constant maturity Treasury Note rates, the three-
month Treasury Bill rate, the 180-day Treasury Bill rate, rates
on longer-term Treasury securities, the National Median Cost of
Funds, the one-month or three-month London Interbank Offered
Rate (LIBOR), the prime rate of a specific bank, or commercial
paper rates. Some indices, such as the one-year constant
maturity Treasury Note rate, closely mirror changes in market
interest rate levels.
To the extent that the adjusted interest rate on the mortgage
security reflects current market rates, the market value of an
adjustable rate mortgage security will tend to be less
sensitive to interest rate changes than a fixed rate debt
security of the same stated maturity. Hence, ARMs which use
indices that lag changes in market rates should experience
greater price volatility than adjustable rate mortgage
securities that closely mirror the market.
CAPS AND FLOORS
The underlying mortgages which collateralize the mortgage-
backed securities in which the Fund invests will frequently
have caps and floors which limit the maximum amount by which
the loan rate to the residential borrower may change up or
down: (1) per reset or adjustment interval, and (2) over the
life of the loan. Some residential mortgage loans restrict
periodic adjustments by limiting changes in the borrower's
monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in
negative amortization.
The value of mortgage securities in which the Fund invests may
be affected if market interest rates rise or fall faster and
farther than the allowable caps or floors on the underlying
residential mortgage loans. Additionally, even though the
interest rates on the underlying residential mortgages are
adjustable, amortization and prepayments may occur, thereby
causing the effective maturities of the mortgage securities in
which the Fund invests to be shorter than the maturities stated
in the underlying mortgages.
NON-MORTGAGE RELATED ASSET-BACKED SECURITIES
Non-mortgage related asset-backed securities present certain
risks that are not presented by mortgage-backed securities.
<PAGE>
Primarily, these securities do not have the benefit of the same
security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right
to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of asset-backed
securities backed by motor vehicle installment purchase
obligations permit the servicer of such receivables to retain
possession of the underlying obligations. If the servicer
sells these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the
holders of the related asset-backed securities. Further, if a
vehicle is registered in one state and is then registered
because the owner and the obligor move to another state, such
re-registration could defeat the original security interest in
the vehicle in certain cases. In addition, because of the
large number of vehicles involved in a typical issuance and
technical requirements under state laws, the trustee with the
holders of asset-backed securities backed by automobile
receivables may not have a proper security interest in all of
the obligations backing such receivables. Therefore, there is
a possibility that recoveries on repossessed collateral may
not, in some cases, be available to support payments on these
securities.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. Convertible
securities are fixed income securities that may be exchanged or
converted into a predetermined number of shares of the issuer's
underlying common stock at the option of the holder during a
specified period. Convertible securities may take the form of
convertible preferred stock, convertible bonds or debentures,
units consisting of "usable" bonds and warrants or a
combination of the features of several of these securities.
The investment characteristics of each convertible security
vary widely, which allows convertible securities to be employed
for a variety of investment strategies.
The Fund will exchange or convert convertible securities into
shares of underlying common stock when, in the opinion of the
investment adviser, the investment characteristics of the
underlying common shares will assist the Fund in achieving its
investment objective. The Fund may also elect to hold or trade
convertible shares. In selecting convertible securities, the
Fund's investment adviser evaluates the investment
characteristics of the convertible security as a fixed income
instrument, and the investment potential of the underlying
equity security for capital appreciation. In evaluating these
matters with respect to a particular convertible security, the
investment adviser considers numerous factors, including the
economic and political outlook, the value of the security
relative to other investment alternatives, trends in the
<PAGE>
determinants of the issuer's profits, and the issuer's
management capability and practices.
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 limitation if unusual conditions suggest
such investments represent a better opportunity to reach the
Fund's investment objective.
WARRANTS
The Fund may invest in warrants. Warrants are basically
options to purchase common stock at a specific price (usually
at a premium above the market value of the optioned common
stock at issuance) valid for a specific period of time.
Warrants may have a life ranging from less than one year to
twenty years, or they may be perpetual. However, most warrants
have expiration dates after which they are worthless. In
addition, a warrant is worthless if the market price of the
common stock does not exceed the warrant's exercise price
during the life of the warrant. Warrants have no voting
rights, pay no dividends, and have no rights with respect to
the assets of the corporation issuing them. The percentage
increase or decrease in the market price of the warrant may
tend to be greater than the percentage increase or decrease in
the market price of the optioned common stock. The Fund will
not invest more than 5% of the value of its total assets in
warrants. Warrants acquired in units or attached to securities
may be deemed to be without value for purposes of this policy.
FUTURES AND OPTIONS TRANSACTIONS
The Fund may attempt to hedge all or a portion of its portfolio
by buying and selling financial futures contracts, buying put
options on portfolio securities and listed put options on
futures contracts, and writing call options on futures
contracts. The Fund may also write covered call options on
portfolio securities to attempt to increase its current income.
The Fund currently does not intend to invest more than 5% of
its total assets in options transactions.
FINANCIAL FUTURES CONTRACTS
A futures contract is a firm commitment by two parties: the
seller who agrees to make delivery of the specific type of
security called for in the contract ("going short") and the
buyer who agrees to take delivery of the security ("going
long") at a certain time in the future. In the fixed income
securities market, price moves inversely to interest rates.
A rise in rates means a drop in price. Conversely, a drop
in rates means a rise in price. In order to hedge its
<PAGE>
holdings of fixed income securities against a rise in market
interest rates, the Fund could enter into contracts to
deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the
prices of its fixed income securities may decline during the
Fund's anticipated holding period. The Fund would agree to
purchase securities in the future at a predetermined price
(i.e., "go long") to hedge against a decline in market
interest rates.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial
futures contracts. Unlike entering directly into a futures
contract, which requires the purchaser to buy a financial
instrument on a set date at a specified price, the purchase
of a put option on a futures contract entitles (but does not
obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price.
The Fund would purchase put options on futures contracts to
protect portfolio securities against decreases in value
resulting from an anticipated increase in market interest
rates. Generally, if the hedged portfolio securities
decrease in value during the term of an option, the related
futures contracts will also decrease in value and the option
will increase in value. In such an event, the Fund will
normally close out its option by selling an identical
option. If the hedge is successful, the proceeds received
by the Fund upon the sale of the second option will be large
enough to offset both the premium paid by the Fund for the
original option plus the decrease in value of the hedged
securities.
Alternatively, the Fund may exercise its put option. To do
so, it would simultaneously enter into a futures contract of
the type underlying the option (for a price less than the
strike price of the option) and exercise the option. The
Fund would then deliver the futures contract in return for
payment of the strike price. If the Fund neither closes out
nor exercises an option, the option will expire on the date
provided in the option contract, and the premium paid for
the contract will be lost.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund
may write listed call options on futures contracts to hedge
its portfolio against an increase in market interest rates.
When the Fund writes a call option on a futures contract, it
is undertaking the obligation of assuming a short futures
position (selling a futures contract) at the fixed strike
price at any time during the life of the option if the
option is exercised. As market interest rates rise, causing
<PAGE>
the prices of futures to go down, the Fund's obligation
under a call option on a future (to sell a futures contract)
costs less to fulfill, causing the value of the Fund's call
option position to increase.
In other words, as the underlying futures price goes down
below the strike price, the buyer of the option has no
reason to exercise the call, so that the Fund keeps the
premium received for the option. This premium can offset
the drop in value of the Fund's fixed income portfolio which
is occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or
exercise of it by the buyer, the Fund may close out the
option by buying an identical option. If the hedge is
successful, the cost of the second option will be less than
the premium received by the Fund for the initial option.
The net premium income of the Fund will then offset the
decrease in value of the hedged securities.
The Fund will not maintain open positions in futures
contracts it has sold or call options it has written on
futures contracts if, in the aggregate, the value of the
open positions (marked to market) exceeds the current market
value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted
for the correlation of volatility between the hedged
securities and the futures contracts. If this limitation is
exceeded at any time, the Fund will take prompt action to
close out a sufficient number of open contracts to bring its
open futures and options positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not
pay or receive money upon the purchase or sale of a futures
contract. Rather, the Fund is required to deposit an amount
of "initial margin" in cash or U.S. Treasury bills with its
custodian (or the broker, if legally permitted). The nature
of initial margin in futures transactions is different from
that of margin in securities transactions in that futures
contract initial margin does not involve the borrowing of
funds by the Fund to finance the transactions. Initial
margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the
official settlement price of the exchange on which it is
traded. Each day the Fund pays or receives cash, called
"variation margin," equal to the daily change in value of
the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or
<PAGE>
loan by the Fund but is instead settlement between the Fund
and the broker of the amount one would owe the other if the
futures contract expired. In computing its daily net asset
value, the Fund will mark-to-market its open futures
positions.
The Fund is also required to deposit and maintain margin
when it writes call options on futures contracts.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put options on portfolio securities to
protect against price movements in particular securities in
its portfolio. A put option gives the Fund, in return for a
premium, the right to sell the underlying security to the
writer (seller) at a specified price during the term of the
option.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may also write covered call options to generate
income. As writer of a call option, the Fund has the
obligation upon exercise of the option during the option
period to deliver the underlying security upon payment of
the exercise price. The Fund may only sell call options
either on securities held in its portfolio or on securities
which it has the right to obtain without payment of further
consideration (or has segregated cash in the amount of any
additional consideration).
PURCHASING AND WRITING OVER-THE-COUNTER OPTIONS
The Fund may purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the
buyers or writers of the options for those options on
portfolio securities held by the Fund and not traded on an
exchange. Over-the-counter options are two party contracts
with price and terms negotiated between buyer and seller.
In contrast, exchange-traded options are third party
contracts with standardized strike prices and expiration
dates and are purchased from a clearing corporation.
Exchange-traded options have a continuous liquid market
while over-the-counter options may not.
FOREIGN CURRENCY TRANSACTIONS
CURRENCY RISKS
To the extent that debt securities purchased by the Fund are
denominated in currencies other than the U.S. dollar,
changes in foreign currency exchange rates will affect the
Fund's net asset value; the value of interest earned; gains
and losses realized on the sale of securities; and net
investment income and capital gain, if any, to be
<PAGE>
distributed to shareholders by the Fund. If the value of a
foreign currency rises against the U.S. dollar, the value of
the Fund's assets denominated in that currency will
increase; correspondingly, if the value of a foreign
currency declines against the U.S. dollar, the value of the
Fund's assets denominated in the currency will decrease.
The exchange rates between the U.S. dollar and foreign
currencies are a function of such factors as supply and
demand in the currency exchange markets, international
balances of payments, governmental intervention, speculation
and other economic and political conditions. Although the
Fund values its assets daily in U.S. dollars, the Fund may
not convert its holdings of foreign currencies to U.S.
dollars daily. The Fund may incur conversion costs when it
converts its holdings to another currency. Foreign exchange
dealers may realize a profit on the difference between the
price at which the Fund buys and sells currencies.
The Fund will engage in foreign currency exchange
transactions in connection with its investments in the
securities. The Fund will conduct its foreign currency
exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange
market, or through forward contracts to purchase or sell
foreign currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange
contracts in order to protect itself against a possible loss
resulting from an adverse change in the relationship between
the U.S. dollar and a foreign currency involved in an
underlying transaction. However, forward foreign currency
exchange contracts may limit potential gains which could
result from a positive change in such currency
relationships. The Fund's investment adviser believes that
it is important to have the flexibility to enter into
forward foreign currency exchange contracts whenever it
determines that it is in the Fund's best interest to do so.
The Fund will not speculate in foreign currency exchange.
The Fund will not enter into forward foreign currency
exchange contracts or maintain a net exposure in such
contracts when it would be obligated to deliver an amount of
foreign currency in excess of the value of its portfolio
securities or other assets denominated in that currency or,
in the case of a "cross-hedge" denominated in a currency or
currencies that the Fund's investment adviser believes will
tend to be closely correlated with that currency with regard
to price movements. Generally, the Fund will not enter into
a forward foreign currency exchange contract with a term
longer than one year.
<PAGE>
FOREIGN CURRENCY OPTIONS
A foreign currency option provides the option buyer with the
right to buy or sell a stated amount of foreign currency at
the exercise price on a specified date or during the option
period. The owner of a call option has the right, but not
the obligation, to buy the currency. Conversely, the owner
of a put option has the right, but not the obligation, to
sell the currency.
When the option is exercised, the seller (i.e., writer) of
the option is obligated to fulfill the terms of the sold
option. However, either the seller or the buyer may, in the
secondary market, close its position during the option
period at any time prior to expiration.
A call option on foreign currency generally rises in value
if the underlying currency appreciates in value, and a put
option on foreign currency generally falls in value if the
underlying currency depreciates in value. Although
purchasing a foreign currency option can protect the Fund
against an adverse movement in the value of a foreign
currency, the option will not limit the movement in the
value of such currency. For example, if the Fund was
holding securities denominated in a foreign currency that
was appreciating and had purchased a foreign currency put to
hedge against a decline in the value of the currency, the
Fund would not have to exercise their put option. Likewise,
if the Fund were to enter into a contract to purchase a
security denominated in foreign currency and, in conjunction
with that purchase, were to purchase a foreign currency call
option to hedge against a rise in value of the currency, and
if the value of the currency instead depreciated between the
date of purchase and the settlement date, the Fund would not
have to exercise its call. Instead, the Fund could acquire
in the spot market the amount of foreign currency needed for
settlement.
SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY OPTIONS
Buyers and sellers of foreign currency options are subject
to the same risks that apply to options generally. In
addition, there are certain additional risks associated with
foreign currency options. The markets in foreign currency
options are relatively new, and the Fund's ability to
establish and close out positions on such options is subject
to the maintenance of a liquid secondary market. Although
the Fund will not purchase or write such options unless and
until, in the opinion of the Fund's investment adviser, the
market for them has developed sufficiently to ensure that
the risks in connection with such options are not greater
than the risks in connection with the underlying currency,
there can be no assurance that a liquid secondary market
will exist for a particular option at any specific time.
<PAGE>
In addition, options on foreign currencies are affected by
all of those factors that influence foreign exchange rates
and investments generally.
The value of a foreign currency option depends upon the
value of the underlying currency relative to the U.S.
dollar. As a result, the price of the option position may
vary with changes in the value of either or both currencies
and may have no relationship to the investment merits of a
foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially
larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by
having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying
foreign currencies at prices that are less favorable than
for round lots.
There is no systematic reporting of last sale information
for foreign currencies or any regulatory requirement that
quotations available through dealers or other market sources
be firm or revised on a timely basis. Available quotation
information is generally representative of very large
transactions in the interbank market and thus may not
reflect relatively smaller transactions (i.e., less than $1
million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock
market. To the extent that the U.S. option markets are
closed while the markets for the underlying currencies
remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in
the options markets until they reopen.
FOREIGN CURRENCY FUTURES TRANSACTIONS
By using foreign currency futures contracts and options on
such contracts, the Fund may be able to achieve many of the
same objectives as it would through the use of forward
foreign currency exchange contracts. The Fund may be able
to achieve these objectives possibly more effectively and at
a lower cost by using futures transactions instead of
forward foreign currency exchange contracts.
SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY FUTURES
CONTRACTS AND RELATED OPTIONS
Buyers and sellers of foreign currency futures contracts are
subject to the same risks that apply to the use of futures
generally. In addition, there are risks assocated with
foreign currency futures contracts and their use as a
hedging device similar to those associated with options on
futures currencies, as described above.
<PAGE>
Options on foreign currency futures contracts may involve
certain additional risks. Trading options on foreign
currency foreign currency futures contracts is relatively
new. The ability to establish and close out positions on
such options is subject to the maintenance of a liquid
secondary market. To reduce this risk, the Fund will not
purchase or write options on foreign currency futures
contracts unless and until, in the opinion of the Fund's
investment adviser, the market for such options has
developed sufficiently that the risks in connection with
such options are not greater than the risks in connection
with transactions in the underlying foreign currency futures
contracts. Compared to the purchase or sale of foreign
currency futures contracts, the purchase of call or put
options on futures contracts involves less potential risk to
the Fund because the maximum amount at risk is the premium
paid for the option (plus transaction costs). However,
there may be circumstances when the purchase of a call or
put option on a futures contract would result in a loss,
such as when there is no movement in the price of the
underlying currency or futures contract.
FOREIGN BANK INSTRUMENTS
Eurodollar Certificates of Deposit ("ECDs"), Eurodollar Time
Deposits ("ETDs"), Yankee Certificates of Deposit ("Yankee
CDs"), 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
withholdings or other taxes on interest income, difficulties in
obtaining or enforcing a judgment against the issuing bank, and
the possible impact of interruptions of 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 requirements, loan limitations, examinations, accounting,
auditing, and recording keeping and the public availability of
information. These factors will be carefully considered by the
Fund's adviser in selecting investments for the Fund.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are arrangements in which the Fund purchases
securities with payment and delivery scheduled for a future
time. 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, and not for investment leverage.
<PAGE>
These transactions are made to secure what is considered to be
an advantageous price and yield for the Fund. Settlement dates
may be a month or more after entering into these transactions,
and the market values of the securities purchased may vary from
the purchase prices.
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 are maintained until the transaction is settled. The Fund
may engage in these transactions to an extent that would cause
the segregation of an amount up to 20% of the total value of
its assets.
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
equivalent collateral to the borrower or placing broker.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Directors to determine the liquidity of
certain restricted securities is permitted under the Securities
and Exchange Commission ("SEC") Staff position set forth in the
adopting release for Rule 144A under the Securities Act of 1933
(the "Rule"). The Rule is a non-exclusive safe harbor for
certain secondary market transactions involving securities
subject to restrictions on resale under federal securities
laws. The Rule provides an exemption from registration for
resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance
the liquidity of the secondary market for securities eligible
for resale under Rule 144A. The Fund believes that the Staff
of the SEC has left the question of determining the liquidity
of all restricted securities to the Directors. The Directors
consider the following criteria in determining the liquidity of
certain restricted securities:
* the frequency of trades and quotes for the security;
* the number of dealers willing to purchase or sell the
security and the number of other potential buyers;
* dealer undertakings to make a market in the security; and
<PAGE>
* the nature of the security and the nature of the marketplace
trades.
REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the
securities subject to repurchase agreements, and these
securities are 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 a defaulting
seller files for bankruptcy or becomes insolvent, disposition
of 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 and 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 Directors.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. A
reverse repurchase transaction is similar to borrowing cash.
In a reverse repurchase agreement the Fund transfers possession
of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a
percentage of the instrument's market value in cash, and agrees
that on a stipulated date in the future, the Fund will
repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of
reverse repurchase agreements may enable the Fund to avoid
selling portfolio instruments at a time when a sale may be
deemed to be disadvantageous, but the ability to enter into
reverse repurchase agreements does not ensure that the Fund
will be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of
the Fund, in a dollar amount sufficient to make payment for the
obligations to be purchased, are segregated at the trade date.
These securities are marked to market daily and are maintained
until the transaction is settled.
PORTFOLIO TURNOVER
The Fund will not attempt to set or meet a portfolio turnover
rate since any turnover would be incidental to transactions
undertaken in an attempt to achieve the Fund's investment
objective, without regard to the length of time a particular
security may have been held. The adviser does not anticipate
<PAGE>
that portfolio turnover will result in adverse tax
consequences.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell securities short or purchase
securities on margin, other than in connection with the
purchase and sale of options, financial futures and options
on financial futures, but may obtain such short-term credits
as are necessary for clearance of transactions.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except as required
by forward commitments to purchase securities or currencies
and except that the Fund may borrow money and engage in
reverse repurchase agreements in amounts up to one-third of
the value of its total assets, including the amounts
borrowed. The Fund will not borrow money or engage in
reverse repurchase agreements for investment leverage, but
rather as a temporary, extraordinary, or emergency measure
or 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. The Fund will not purchase any securities
while borrowings in excess of 5% of its total assets are
outstanding. During the period any reverse repurchase
agreements are outstanding, but only to the extent necessary
to assure completion of the reverse repurchase agreements,
the Fund will restrict the purchase of portfolio instruments
to money market instruments maturing on or before the
expiration date of the reverse repurchase agreements.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any
assets except to secure permitted borrowings. In those
cases, it may pledge assets having a market value not
exceeding the lesser of the dollar amounts borrowed or 15%
of the value of total assets at the time of the borrowing.
Margin deposits for the purchase and sale of options,
financial futures contracts and related options are not
deemed to be a pledge.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of
its total assets, the Fund will not purchase securities of
any one issuer (other than cash, cash items or securities
issued or guaranteed by the government of the United States
or its agencies or instrumentalities and repurchase
<PAGE>
agreements collateralized by U.S. government securities) if
as a result more than 5% of the value of its total assets
would be invested in the securities of that issuer or the
Fund would own more than 10% of the outstanding voting
securities of that issuer.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, including limited
partnership interests in real estate, although it may invest
in securities of companies whose business involves the
purchase or sale of real estate or in securities which are
secured by real estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, except that
the Fund may purchase and sell financial futures contracts
and related options. Further, the Fund may engage in
transactions in foreign currencies and may purchase and sell
options on foreign currencies and indices for hedging
purposes.
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
restricted securities which the Fund may purchase pursuant
to its investment objective, policies, and limitations.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio
securities up to one-third of the value of its total assets.
This shall not prevent the Fund from purchasing or holding
U.S. government obligations, money market instruments,
variable rate demand notes, bonds, debentures, notes,
certificates of indebtedness, or other debt securities,
entering into repurchase agreements, or engaging in other
transactions where permitted by the Fund's investment
objective, policies and limitations.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its
total assets in any one industry or in government securities
of any one foreign country, except it may invest 25% or more
of the value of its total assets in securities issued or
guaranteed by the U.S. government, its agencies or
instrumentalities.
The above investment limitations cannot be changed without
shareholder approval. The following limitations, however, may
<PAGE>
be changed by the Directors without shareholder approval.
Shareholders will be notified before any material change in
these limitations becomes effective.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its
total assets in securities subject to restrictions on resale
under the Securities Act of 1933, except for commercial
paper issued under Section 4(2) of the Securities Act of
1933 and certain other restricted securities which meet the
criteria for liquidity as established by the Directors.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its
net assets in illiquid securities, including repurchase
agreements providing for settlement in more than seven days
after notice, over-the-counter options, and certain
securities not determined by the Directors to be liquid.
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. With respect to asset-backed securities, the
Fund will treat the originator of the asset pool as the
company issuing the security for purposes of determining
compliance with this limitation.
INVESTING IN MINERALS
The Fund will not purchase or sell oil, gas, or other
mineral exploration or development programs or leases,
although it may purchase the securities of issuers which
invest in or sponsor such programs.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of its net assets in
warrants, including those acquired in units or attached to
other securities. To comply with certain state
restrictions, the Fund will limit its investments in such
warrants not listed on the New York or American Stock
Exchanges to 2% of its net assets. (If state restrictions
change, this latter restriction may be revised without
notice to shareholder.) For purposes of this investment
restriction, warrants will be valued at the lower of cost or
market, except that warrants acquired by the Fund in units
with or attached to securities may be deemed to be without
value.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
<PAGE>
The Fund will limit its investments in other investment
companies to no more than 3% of the total outstanding voting
securities of any such investment company, will invest no
more than 5% of its total assets in any one investment
company, and will invest no more than 10% of its total
assets in investment companies in general. These
limitations are not applicable if the securities are
acquired as part of a merger, consolidation, reorganization,
or other acquisition.
DEALING IN PUTS AND CALLS
The Fund may not write or purchase options, except that the
Fund may write covered call options and secured put options
on up to 25% of its net assets and may purchase put and call
options, provided that no more than 5% of the fair market
value of its net assets may be invested in premiums on such
options.
Except with respect to borrowing money, if a percentage
limitation is adhered to at the time of the 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. For purposes of its policies and limitations, the
Fund considers certificates of deposit and demand and time
deposits issued by a U.S. branch of a domestic bank or savings
association having capital, surplus, and undivided profits in
excess of $100,000,000 at the time of investment to be "cash
items."
The Fund does not expect to borrow money or pledge securities
in excess of 5% of the value of its total assets during the
present fiscal year.
FIXED INCOME SECURITIES, INC. MANAGEMENT
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 Services Company,
Federated Administrative Services, Inc., and the Funds (as
defined below).
Positions with Principal Occupations
Name and Address the Corporation During Past Five Years
<PAGE>
John F. Donahue*+ Chairman and Chairman and Trustee,
Federated Director Federated Investors;
Investors Tower Chairman and Trustee,
Pittsburgh, PA Federated Advisers,
Federated Management, and
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 of the
Corporation.
John T. Conroy, Director President, Investment
Jr., Wood/IPC Properties Corporation;
Commercial Senior Vice-President,
Department John R. Wood and
John R. Wood and Associates, Inc.,
Associates, Inc., Realtors; President,
Realtors Northgate Village
3255 Tamiami Development Corporation
Trail North and Investment Properties
Naples, FL Corporation; General
Partner or Trustee in
private real estate
ventures in Southwest
Florida; Director,
Trustee, or Managing
General Partner of the
Funds; formerly,
President, Naples Property
Management, Inc.
William J. Director Director and Member of the
Copeland Executive Committee,
One PNC Plaza - Michael Baker, Inc.;
23rd Floor Director, Trustee, or
Pittsburgh, PA Managing General Partner
of the Funds; formerly,
Vice Chairman and
Director, PNC Bank, N.A.
and PNC Bank Corp. and
Director, Ryan Homes, Inc.
<PAGE>
James E. Dowd Director Attorney-at-law; Director,
571 Hayward Mill The Emerging Germany Fund,
Road Inc.; Director, Trustee,
Concord, MA or Managing General
Partner of the Funds;
formerly, Director, Blue
Cross of Massachusetts,
Inc.
Lawrence D. Director Hematologist, Oncologist,
Ellis, M.D. and Internist,
3471 Fifth Avenue Presbyterian and
Suite 1111 Montefiore Hospitals;
Pittsburgh, PA Clinical Professor of
Medicine and Trustee,
University of Pittsburgh;
Director, Trustee, or
Managing General Partner
of the Funds.
Richard B. President and Executive Vice President
Fisher* Director and Trustee, Federated
Federated Investors; Chairman,
Investors Tower Federated Securities
Pittsburgh, PA Corp.; President or Vice
President of the Funds;
Director or Trustee of
some of the Funds.
Edward L. Director Attorney-at-law; Partner,
Flaherty, Jr.+ Meyer and Flaherty;
5916 Penn Mall Director, Eat'N Park
Pittsburgh, PA Restaurants, Inc., and
Statewide Settlement
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
225 Franklin Representative,
Street Commonwealth of
Boston, MA Massachusetts; Director,
Trustee, or Managing
General Partner of the
Funds; formerly,
President, State Street
Bank and Trust Company and
State Street Boston
Corporation and Trustee,
Lahey Clinic Foundation,
Inc.
<PAGE>
Gregor F. Meyer Director Attorney-at-law; Partner,
5916 Penn Mall Meyer and Flaherty;
Pittsburgh, PA Chairman, Meritcare, Inc.;
Director, Eat'N Park
Restaurants, Inc.;
Director, Trustee, or
Managing General Partner
of the Funds; formerly,
Vice Chairman, Horizon
Financial, F.A.
Wesley W. Posvar Director Professor, Foreign Policy
1202 Cathedral of and Management Consultant;
Learning Trustee, Carnegie
University of Endowment for
Pittsburgh International Peace, RAND
Pittsburgh, PA Corporation, Online
Computer Library Center,
Inc., and U.S. Space
Foundation; Chairman,
Czecho Slovak Management
Center; 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
4905 Bayard consultant; Director,
Street Trustee, or Managing
Pittsburgh, PA General Partner of the
Funds.
<PAGE>
J. Christopher Vice President President and Trustee,
Donahue Federated Investors;
Federated Trustee, Federated
Investors Tower Advisers, Federated
Pittsburgh, PA Management, and Federated
Research; Trustee,
Federated Services
Company; 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
Corporation.
Edward C. Vice President and Vice President, Treasurer
Gonzales Treasurer and Trustee, Federated
Federated Investors; Vice President
Investors Tower and Treasurer, Federated
Pittsburgh, PA Advisers, 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 President and
Treasurer of the Funds.
<PAGE>
John W. McGonigle Vice President Vice President, Secretary,
Federated and Secretary General Counsel, and
Investors Tower Trustee, Federated
Pittsburgh, PA Investors; Vice President,
Secretary, and Trustee,
Federated Advisers,
Federated Management, and
Federated Research;
Trustee, Federated
Services Company;
Executive Vice President,
Secretary, and Director,
Federated Administrative
Services, Inc.; Director
and Executive Vice
President, Federated
Securities Corp.; Vice
President and Secretary of
the Funds.
John A. Vice President Vice President and
Staley, IV Trustee, Federated
Federated Investors; Executive Vice
Investors Tower President, Federated
Pittsburgh, PA Securities Corp.;
President and 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.
* This Director is deemed to be an "interested person" of the
Fund as defined in the Investment Company Act of 1940.
+ Member of the Corporation's Executive Committee. The
Executive Committee of the Board of Directors handles the
Directors' responsibilities between meetings of the
Directors.
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; BankSouth
Select Funds; The Boulevard Funds; California Municipal Cash
<PAGE>
Trust; Cash Trust Series, Inc.; Cash Trust Series II;
111 Corcoran Funds; 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 Term Trust, Inc.-1999; Liberty
U.S. Government Money Market Trust; 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; The Planters Fund; 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; and Trust for
U.S. Treasury Obligations.
FUND OWNERSHIP
Officers and Directors own less than 1% of the outstanding
Class A Shares (the "Shares") of the Fund.
DIRECTOR LIABILITY
The Corporation's Articles of Incorporation provide that the
Directors will not be liable for errors of judgment or mistakes
of fact or law. However, they are not protected against any
liability to which they would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their
office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
<PAGE>
The Fund's investment adviser is Federated Advisers (the
"Adviser"). It is a subsidiary of Federated Investors. All of
the voting securities 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, Chairman and
Trustee of Federated Advisers, is Chairman and Trustee of
Federated Investors, and Chairman and Director of the Fund.
John A. Staley, IV, President and Trustee of Federated
Advisers, is Vice President and Trustee of Federated Investors,
Executive Vice President of Federated Securities Corp., and
Vice President of the Fund. J. Christopher Donahue, Trustee of
Federated Advisers, is President and Trustee of Federated
Investors, Trustee of Federated Services Company, President and
Director of Federated Administrative Services, Inc. and Vice
President of the Fund. John W. McGonigle, Vice President,
Secretary and Trustee of Federated Advisers, is Trustee, Vice
President, Secretary and General Counsel of Federated
Investors, Trustee of Federated Services Company, Executive
Vice President, Secretary and Director of Federated
Administrative Services, Inc., Executive Vice President and
Director of 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.
STATE EXPENSE LIMITATION
The Adviser has undertaken to comply with the expense
limitation 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 expense 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 waived by the Adviser will be limited, in
<PAGE>
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.
SHAREHOLDER SERVICING
In return for providing shareholder servicing to its customers
who from time to time may be owners of record or beneficial
owners of Shares, a financial institution may receive payments
from the Fund at a rate not exceeding 0.25 of 1% of the average
daily net assets of the 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
services may include, but not are not limited to, the provision
of personal services and maintenance of shareholder accounts.
Federated Securities Corp. may also pay financial institutions
a fee based upon the net asset value of the Shares beneficially
owned by the financial institution's clients or customers.
This fee is in addition to amounts paid under the Shareholder
Services Plan and will be reimbursed by the Adviser.
ADMINISTRATIVE SERVICES
Federated Administrative Services, Inc., a subsidiary of
Federated Investors, provides administrative personnel and
services to the Fund at approximate cost. 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.
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 use 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 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:
<PAGE>
* 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.
PURCHASING SHARES
Except under certain circumstances described in the prospectus,
Shares are sold at their net asset value plus a sales charge on
days the New York Stock Exchange is open for business. The
procedure for purchasing Shares is explained in the prospectus
under "Investing in Class A Shares."
PURCHASES BY SALES REPRESENTATIVES, FUND DIRECTORS, AND
EMPLOYEES
Directors, employees, and sales representatives of the Fund,
the Adviser, 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 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
<PAGE>
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 values of the Fund's securities are determined as
follows:
* as provided by an independent pricing service;
* for short-term obligations, according to the mean bid and
asked prices, as furnished by an independent pricing
service, or for short-term obligations with maturities of
less than 60 days, at amortized cost unless the Directors
determine this is not fair value; or
* at fair value as determined in good faith by the Directors.
Prices provided by independent pricing services may be
determined without relying exclusively on quoted prices.
Pricing services 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
after the Fund receives the redemption request. Shareholder
redemptions may be subject to a contingent deferred sales
charge. Redemption procedures are explained in the prospectus
under "Redeeming Class A Shares." Although the transfer agent
does not charge for telephone redemptions, it reserves the
right to charge a fee for the cost of wire-transferred
redemptions of less than $5,000.
REDEMPTION IN KIND
The Corporation is obligated to redeem Shares solely in cash up
to $250,000 or 1% of the Fund's net asset value, whichever is
less, for any one shareholder within a 90-day period.
<PAGE>
Any redemption beyond this amount will also be in cash unless
the Directors determine that payments should be in kind. In
such a case, the Fund will pay all or a portion of the
remainder of the redemption in portfolio instruments, valued in
the same way that net asset value is determined. The portfolio
instruments will be selected in a manner that the Directors
deem fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If
redemption is made in kind, shareholders receiving their
securities and selling them before their maturity could receive
less than the redemption value of their securities and could
incur certain transaction costs.
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.
FOREIGN TAXES
Investment income on certain foreign securities in which the
Fund may invest may be subject to foreign withholding or other
taxes that could reduce the return on these securities. Tax
treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign taxes to
which the Fund would be subject.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and
capital gains received as cash or additional Shares. No
portion of any income dividend paid by the Fund is eligible for
the dividends received deduction available to corporations.
CAPITAL GAINS
<PAGE>
Shareholders will pay federal tax at capital gains rates on
long-term capital gains distributed to them regardless of
how long they have held the Shares.
TOTAL RETURN
The average annual total return for the Shares 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 offering price 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 charge, adjusted over the
period by any additional Shares, assuming the monthly
reinvestment of all dividends and distributions. Any
applicable contingent deferred sales charge is deducted from
the ending value of the investment based on the lesser of the
original purchase price or the net asset value of the Shares
redeemed.
YIELD
The yield of the Shares is determined by dividing the net
investment income per Share (as defined by the Securities and
Exchange Commission) earned by the Fund over a thirty-day
period by the offering price per Share on the last day of the
period. This value is 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 the Fund, performance will
be reduced for those shareholders paying those fees.
PERFORMANCE COMPARISONS
The performance of Shares depends upon such variables as:
* portfolio quality;
* average portfolio maturity;
* type of instruments in which the portfolio is invested;
<PAGE>
* changes in interest rates and market value of portfolio
securities;
* changes in the Fund expenses; and
* various other factors.
The performance of Shares 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.
Investors may use financial publications and/or indices to
obtain a more complete view of the performance of Shares. When
comparing performance, investors should consider all relevant
factors such as the composition of any index used, prevailing
market conditions, portfolio compositions of other funds, and
methods used to value portfolio securities and compute net
asset value. The financial publications and/or indices which
the Fund uses in advertising may include:
* [LIST RELEVANT INDICES].
* 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 offering price over a specific
period of time. From time to time, the Fund will quote its
Lipper ranking in the "______________________" category in
advertising and sales literature.
Advertisements and other sales literature for the Shares may
quote total returns which are calculated on non-standardized
base periods. These total returns represent the historic
change in the value of an investment in Shares based on monthly
reinvestment of dividends over a specified period of time.
Advertisements may quote performance information which does not
reflect the effect of the sales charge or the contingent
deferred sales charge.
APPENDIX
STANDARD AND POOR'S CORPORATION CORPORATE BOND RATINGS
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.
<PAGE>
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.
<PAGE>
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, INC. LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely
to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong as
bonds rated "AAA." Because bonds rated in the "AAA" and "AA"
categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is
generally rated "F-1+."
A--Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
<PAGE>
BBB--Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds,
and therefore, impair timely payment.
<PAGE>
* * * * * *
STRATEGIC INCOME FUND
(A PORTFOLIO OF INSIGHT INSTITUTIONAL SERIES, INC.)
CLASS C SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with
the prospectus of Class C Shares of Strategic Income Fund (the
"Fund") dated ________________ ___, 1994. This Statement is
not a prospectus itself. To receive a copy of the prospectus,
write or call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated _______________ ___, 1994
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT THE FUND
INVESTMENT OBJECTIVE AND POLICIES
Types of Investments and Investment Techniques
Resets of Interest
Caps and Floors
Non-Mortgage Related Asset-Backed Securities
Convertible Securities
Equity Securities
Warrants
Futures and Options Transactions
Foreign Currency Transactions
<PAGE>
Foreign Bank Instruments
When-Issued and Delayed Delivery Transactions
Lending of Portfolio Securities
Restricted and Illiquid Securities
Repurchase Agreements
Reverse Repurchase Agreements
Portfolio Turnover
INVESTMENT LIMITATIONS
FIXED INCOME SECURITIES, INC. MANAGEMENT
Officers and Directors
The Funds
Fund Ownership
Director Liability
INVESTMENT ADVISORY SERVICES
Adviser to the Fund
Advisory Fees
SHAREHOLDER SERVICING
ADMINISTRATIVE SERVICES
BROKERAGE TRANSACTIONS
PURCHASING SHARES
Distribution Plan
DETERMINING NET ASSET VALUE
Determining Market Value of Securities
REDEEMING SHARES
Redemption in Kind
TAX STATUS
The Fund's Tax Status
Foreign Taxes
Shareholders' Tax Status
TOTAL RETURN
YIELD
PERFORMANCE COMPARISONS
APPENDIX
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of Fixed Income Securities, Inc. (the
"Corporation"). The Corporation was incorporated under the
laws of the State of Maryland on October 15, 1991.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek a high level of
current income. The investment objective stated above cannot
be changed without approval of shareholders. The investment
policies stated below may be changed by the Board of Directors
("Directors") without shareholder approval. Shareholders will
be notified before any material change in the investment
policies becomes effective.
TYPES OF INVESTMENTS AND INVESTMENT TECHNIQUES
The Fund pursues its investment objective by investing in a
diversified portfolio primarily consisting of domestic
corporate debt obligations, U.S. government securities, and
foreign government and corporate debt obligations. Under
normal circumstances, the Fund's assets will be invested in
each of these three sectors. However, the Fund may from time
to time invest up to 100% of its total assets in any one sector
if, in the judgment of the investment adviser, the Fund has the
opportunity of seeking a high level of current income without
undue risk to principal.
RESETS OF INTEREST
The interest rates paid on the mortgage-backed in which the
Fund invests generally are readjusted at intervals of one year
or less to an increment over some predetermined interest rate
index. There are two main categories of indices: those based
on U.S. Treasury securities and those derived from a calculated
measure, such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year
and five-year constant maturity Treasury Note rates, the three-
month Treasury Bill rate, the 180-day Treasury Bill rate, rates
on longer-term Treasury securities, the National Median Cost of
Funds, the one-month or three-month London Interbank Offered
Rate (LIBOR), the prime rate of a specific bank, or commercial
paper rates. Some indices, such as the one-year constant
maturity Treasury Note rate, closely mirror changes in market
interest rate levels.
To the extent that the adjusted interest rate on the mortgage
security reflects current market rates, the market value of an
adjustable rate mortgage security will tend to be less
sensitive to interest rate changes than a fixed rate debt
security of the same stated maturity. Hence, ARMs which use
indices that lag changes in market rates should experience
greater price volatility than adjustable rate mortgage
securities that closely mirror the market.
CAPS AND FLOORS
<PAGE>
The underlying mortgages which collateralize the mortgage-
backed securities in which the Fund invests will frequently
have caps and floors which limit the maximum amount by which
the loan rate to the residential borrower may change up or
down: (1) per reset or adjustment interval, and (2) over the
life of the loan. Some residential mortgage loans restrict
periodic adjustments by limiting changes in the borrower's
monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in
negative amortization.
The value of mortgage securities in which the Fund invests may
be affected if market interest rates rise or fall faster and
farther than the allowable caps or floors on the underlying
residential mortgage loans. Additionally, even though the
interest rates on the underlying residential mortgages are
adjustable, amortization and prepayments may occur, thereby
causing the effective maturities of the mortgage securities in
which the Fund invests to be shorter than the maturities stated
in the underlying mortgages.
NON-MORTGAGE RELATED ASSET-BACKED SECURITIES
Non-mortgage related asset-backed securities present certain
risks that are not presented by mortgage-backed securities.
Primarily, these securities do not have the benefit of the same
security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right
to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of asset-backed
securities backed by motor vehicle installment purchase
obligations permit the servicer of such receivables to retain
possession of the underlying obligations. If the servicer
sells these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the
holders of the related asset-backed securities. Further, if a
vehicle is registered in one state and is then registered
because the owner and the obligor move to another state, such
re-registration could defeat the original security interest in
the vehicle in certain cases. In addition, because of the
large number of vehicles involved in a typical issuance and
technical requirements under state laws, the trustee with the
holders of asset-backed securities backed by automobile
receivables may not have a proper security interest in all of
the obligations backing such receivables. Therefore, there is
a possibility that recoveries on repossessed collateral may
not, in some cases, be available to support payments on these
securities.
CONVERTIBLE SECURITIES
<PAGE>
The Fund may invest in convertible securities. Convertible
securities are fixed income securities that may be exchanged or
converted into a predetermined number of shares of the issuer's
underlying common stock at the option of the holder during a
specified period. Convertible securities may take the form of
convertible preferred stock, convertible bonds or debentures,
units consisting of "usable" bonds and warrants or a
combination of the features of several of these securities.
The investment characteristics of each convertible security
vary widely, which allows convertible securities to be employed
for a variety of investment strategies.
The Fund will exchange or convert convertible securities into
shares of underlying common stock when, in the opinion of the
investment adviser, the investment characteristics of the
underlying common shares will assist the Fund in achieving its
investment objective. The Fund may also elect to hold or trade
convertible shares. In selecting convertible securities, the
Fund's investment adviser evaluates the investment
characteristics of the convertible security as a fixed income
instrument, and the investment potential of the underlying
equity security for capital appreciation. In evaluating these
matters with respect to a particular convertible security, the
investment adviser considers numerous factors, including the
economic and political outlook, the value of the security
relative to other investment alternatives, trends in the
determinants of the issuer's profits, and the issuer's
management capability and practices.
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 limitation if unusual conditions suggest
such investments represent a better opportunity to reach the
Fund's investment objective.
WARRANTS
The Fund may invest in warrants. Warrants are basically
options to purchase common stock at a specific price (usually
at a premium above the market value of the optioned common
stock at issuance) valid for a specific period of time.
Warrants may have a life ranging from less than one year to
twenty years, or they may be perpetual. However, most warrants
have expiration dates after which they are worthless. In
addition, a warrant is worthless if the market price of the
common stock does not exceed the warrant's exercise price
during the life of the warrant. Warrants have no voting
rights, pay no dividends, and have no rights with respect to
the assets of the corporation issuing them. The percentage
increase or decrease in the market price of the warrant may
tend to be greater than the percentage increase or decrease in
<PAGE>
the market price of the optioned common stock. The Fund will
not invest more than 5% of the value of its total assets in
warrants. Warrants acquired in units or attached to securities
may be deemed to be without value for purposes of this policy.
FUTURES AND OPTIONS TRANSACTIONS
The Fund may attempt to hedge all or a portion of its portfolio
by buying and selling financial futures contracts, buying put
options on portfolio securities and listed put options on
futures contracts, and writing call options on futures
contracts. The Fund may also write covered call options on
portfolio securities to attempt to increase its current income.
The Fund currently does not intend to invest more than 5% of
its total assets in options transactions.
FINANCIAL FUTURES CONTRACTS
A futures contract is a firm commitment by two parties: the
seller who agrees to make delivery of the specific type of
security called for in the contract ("going short") and the
buyer who agrees to take delivery of the security ("going
long") at a certain time in the future. In the fixed income
securities market, price moves inversely to interest rates.
A rise in rates means a drop in price. Conversely, a drop
in rates means a rise in price. In order to hedge its
holdings of fixed income securities against a rise in market
interest rates, the Fund could enter into contracts to
deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the
prices of its fixed income securities may decline during the
Fund's anticipated holding period. The Fund would agree to
purchase securities in the future at a predetermined price
(i.e., "go long") to hedge against a decline in market
interest rates.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial
futures contracts. Unlike entering directly into a futures
contract, which requires the purchaser to buy a financial
instrument on a set date at a specified price, the purchase
of a put option on a futures contract entitles (but does not
obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price.
The Fund would purchase put options on futures contracts to
protect portfolio securities against decreases in value
resulting from an anticipated increase in market interest
rates. Generally, if the hedged portfolio securities
decrease in value during the term of an option, the related
futures contracts will also decrease in value and the option
will increase in value. In such an event, the Fund will
normally close out its option by selling an identical
<PAGE>
option. If the hedge is successful, the proceeds received
by the Fund upon the sale of the second option will be large
enough to offset both the premium paid by the Fund for the
original option plus the decrease in value of the hedged
securities.
Alternatively, the Fund may exercise its put option. To do
so, it would simultaneously enter into a futures contract of
the type underlying the option (for a price less than the
strike price of the option) and exercise the option. The
Fund would then deliver the futures contract in return for
payment of the strike price. If the Fund neither closes out
nor exercises an option, the option will expire on the date
provided in the option contract, and the premium paid for
the contract will be lost.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund
may write listed call options on futures contracts to hedge
its portfolio against an increase in market interest rates.
When the Fund writes a call option on a futures contract, it
is undertaking the obligation of assuming a short futures
position (selling a futures contract) at the fixed strike
price at any time during the life of the option if the
option is exercised. As market interest rates rise, causing
the prices of futures to go down, the Fund's obligation
under a call option on a future (to sell a futures contract)
costs less to fulfill, causing the value of the Fund's call
option position to increase.
In other words, as the underlying futures price goes down
below the strike price, the buyer of the option has no
reason to exercise the call, so that the Fund keeps the
premium received for the option. This premium can offset
the drop in value of the Fund's fixed income portfolio which
is occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or
exercise of it by the buyer, the Fund may close out the
option by buying an identical option. If the hedge is
successful, the cost of the second option will be less than
the premium received by the Fund for the initial option.
The net premium income of the Fund will then offset the
decrease in value of the hedged securities.
The Fund will not maintain open positions in futures
contracts it has sold or call options it has written on
futures contracts if, in the aggregate, the value of the
open positions (marked to market) exceeds the current market
value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted
for the correlation of volatility between the hedged
securities and the futures contracts. If this limitation is
<PAGE>
exceeded at any time, the Fund will take prompt action to
close out a sufficient number of open contracts to bring its
open futures and options positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not
pay or receive money upon the purchase or sale of a futures
contract. Rather, the Fund is required to deposit an amount
of "initial margin" in cash or U.S. Treasury bills with its
custodian (or the broker, if legally permitted). The nature
of initial margin in futures transactions is different from
that of margin in securities transactions in that futures
contract initial margin does not involve the borrowing of
funds by the Fund to finance the transactions. Initial
margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the
official settlement price of the exchange on which it is
traded. Each day the Fund pays or receives cash, called
"variation margin," equal to the daily change in value of
the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund
and the broker of the amount one would owe the other if the
futures contract expired. In computing its daily net asset
value, the Fund will mark-to-market its open futures
positions.
The Fund is also required to deposit and maintain margin
when it writes call options on futures contracts.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put options on portfolio securities to
protect against price movements in particular securities in
its portfolio. A put option gives the Fund, in return for a
premium, the right to sell the underlying security to the
writer (seller) at a specified price during the term of the
option.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may also write covered call options to generate
income. As writer of a call option, the Fund has the
obligation upon exercise of the option during the option
period to deliver the underlying security upon payment of
the exercise price. The Fund may only sell call options
either on securities held in its portfolio or on securities
which it has the right to obtain without payment of further
<PAGE>
consideration (or has segregated cash in the amount of any
additional consideration).
PURCHASING AND WRITING OVER-THE-COUNTER OPTIONS
The Fund may purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the
buyers or writers of the options for those options on
portfolio securities held by the Fund and not traded on an
exchange. Over-the-counter options are two party contracts
with price and terms negotiated between buyer and seller.
In contrast, exchange-traded options are third party
contracts with standardized strike prices and expiration
dates and are purchased from a clearing corporation.
Exchange-traded options have a continuous liquid market
while over-the-counter options may not.
FOREIGN CURRENCY TRANSACTIONS
CURRENCY RISKS
To the extent that debt securities purchased by the Fund are
denominated in currencies other than the U.S. dollar,
changes in foreign currency exchange rates will affect the
Fund's net asset value; the value of interest earned; gains
and losses realized on the sale of securities; and net
investment income and capital gain, if any, to be
distributed to shareholders by the Fund. If the value of a
foreign currency rises against the U.S. dollar, the value of
the Fund's assets denominated in that currency will
increase; correspondingly, if the value of a foreign
currency declines against the U.S. dollar, the value of the
Fund's assets denominated in the currency will decrease.
The exchange rates between the U.S. dollar and foreign
currencies are a function of such factors as supply and
demand in the currency exchange markets, international
balances of payments, governmental intervention, speculation
and other economic and political conditions. Although the
Fund values its assets daily in U.S. dollars, the Fund may
not convert its holdings of foreign currencies to U.S.
dollars daily. The Fund may incur conversion costs when it
converts its holdings to another currency. Foreign exchange
dealers may realize a profit on the difference between the
price at which the Fund buys and sells currencies.
The Fund will engage in foreign currency exchange
transactions in connection with its investments in the
securities. The Fund will conduct its foreign currency
exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange
market, or through forward contracts to purchase or sell
foreign currencies.
<PAGE>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange
contracts in order to protect itself against a possible loss
resulting from an adverse change in the relationship between
the U.S. dollar and a foreign currency involved in an
underlying transaction. However, forward foreign currency
exchange contracts may limit potential gains which could
result from a positive change in such currency
relationships. The Fund's investment adviser believes that
it is important to have the flexibility to enter into
forward foreign currency exchange contracts whenever it
determines that it is in the Fund's best interest to do so.
The Fund will not speculate in foreign currency exchange.
The Fund will not enter into forward foreign currency
exchange contracts or maintain a net exposure in such
contracts when it would be obligated to deliver an amount of
foreign currency in excess of the value of its portfolio
securities or other assets denominated in that currency or,
in the case of a "cross-hedge" denominated in a currency or
currencies that the Fund's investment adviser believes will
tend to be closely correlated with that currency with regard
to price movements. Generally, the Fund will not enter into
a forward foreign currency exchange contract with a term
longer than one year.
FOREIGN CURRENCY OPTIONS
A foreign currency option provides the option buyer with the
right to buy or sell a stated amount of foreign currency at
the exercise price on a specified date or during the option
period. The owner of a call option has the right, but not
the obligation, to buy the currency. Conversely, the owner
of a put option has the right, but not the obligation, to
sell the currency.
When the option is exercised, the seller (i.e., writer) of
the option is obligated to fulfill the terms of the sold
option. However, either the seller or the buyer may, in the
secondary market, close its position during the option
period at any time prior to expiration.
A call option on foreign currency generally rises in value
if the underlying currency appreciates in value, and a put
option on foreign currency generally falls in value if the
underlying currency depreciates in value. Although
purchasing a foreign currency option can protect the Fund
against an adverse movement in the value of a foreign
currency, the option will not limit the movement in the
value of such currency. For example, if the Fund was
holding securities denominated in a foreign currency that
was appreciating and had purchased a foreign currency put to
hedge against a decline in the value of the currency, the
<PAGE>
Fund would not have to exercise their put option. Likewise,
if the Fund were to enter into a contract to purchase a
security denominated in foreign currency and, in conjunction
with that purchase, were to purchase a foreign currency call
option to hedge against a rise in value of the currency, and
if the value of the currency instead depreciated between the
date of purchase and the settlement date, the Fund would not
have to exercise its call. Instead, the Fund could acquire
in the spot market the amount of foreign currency needed for
settlement.
SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY OPTIONS
Buyers and sellers of foreign currency options are subject
to the same risks that apply to options generally. In
addition, there are certain additional risks associated with
foreign currency options. The markets in foreign currency
options are relatively new, and the Fund's ability to
establish and close out positions on such options is subject
to the maintenance of a liquid secondary market. Although
the Fund will not purchase or write such options unless and
until, in the opinion of the Fund's investment adviser, the
market for them has developed sufficiently to ensure that
the risks in connection with such options are not greater
than the risks in connection with the underlying currency,
there can be no assurance that a liquid secondary market
will exist for a particular option at any specific time.
In addition, options on foreign currencies are affected by
all of those factors that influence foreign exchange rates
and investments generally.
The value of a foreign currency option depends upon the
value of the underlying currency relative to the U.S.
dollar. As a result, the price of the option position may
vary with changes in the value of either or both currencies
and may have no relationship to the investment merits of a
foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially
larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by
having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying
foreign currencies at prices that are less favorable than
for round lots.
There is no systematic reporting of last sale information
for foreign currencies or any regulatory requirement that
quotations available through dealers or other market sources
be firm or revised on a timely basis. Available quotation
information is generally representative of very large
transactions in the interbank market and thus may not
reflect relatively smaller transactions (i.e., less than $1
million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock
<PAGE>
market. To the extent that the U.S. option markets are
closed while the markets for the underlying currencies
remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in
the options markets until they reopen.
FOREIGN CURRENCY FUTURES TRANSACTIONS
By using foreign currency futures contracts and options on
such contracts, the Fund may be able to achieve many of the
same objectives as it would through the use of forward
foreign currency exchange contracts. The Fund may be able
to achieve these objectives possibly more effectively and at
a lower cost by using futures transactions instead of
forward foreign currency exchange contracts.
SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY FUTURES
CONTRACTS AND RELATED OPTIONS
Buyers and sellers of foreign currency futures contracts are
subject to the same risks that apply to the use of futures
generally. In addition, there are risks assocated with
foreign currency futures contracts and their use as a
hedging device similar to those associated with options on
futures currencies, as described above.
Options on foreign currency futures contracts may involve
certain additional risks. Trading options on foreign
currency foreign currency futures contracts is relatively
new. The ability to establish and close out positions on
such options is subject to the maintenance of a liquid
secondary market. To reduce this risk, the Fund will not
purchase or write options on foreign currency futures
contracts unless and until, in the opinion of the Fund's
investment adviser, the market for such options has
developed sufficiently that the risks in connection with
such options are not greater than the risks in connection
with transactions in the underlying foreign currency futures
contracts. Compared to the purchase or sale of foreign
currency futures contracts, the purchase of call or put
options on futures contracts involves less potential risk to
the Fund because the maximum amount at risk is the premium
paid for the option (plus transaction costs). However,
there may be circumstances when the purchase of a call or
put option on a futures contract would result in a loss,
such as when there is no movement in the price of the
underlying currency or futures contract.
FOREIGN BANK INSTRUMENTS
Eurodollar Certificates of Deposit ("ECDs"), Eurodollar Time
Deposits ("ETDs"), Yankee Certificates of Deposit ("Yankee
CDs"), and Europaper are subject to somewhat different risks
than domestic obligations of domestic issuers. Examples of
<PAGE>
these risks include international, economic and political
developments, foreign governmental restrictions that may
adversely affect the payment of principal or interest, foreign
withholdings or other taxes on interest income, difficulties in
obtaining or enforcing a judgment against the issuing bank, and
the possible impact of interruptions of 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 requirements, loan limitations, examinations, accounting,
auditing, and recording keeping and the public availability of
information. These factors will be carefully considered by the
Fund's adviser in selecting investments for the Fund.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are arrangements in which the Fund purchases
securities with payment and delivery scheduled for a future
time. 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, and not for investment leverage.
These transactions are made to secure what is considered to be
an advantageous price and yield for the Fund. Settlement dates
may be a month or more after entering into these transactions,
and the market values of the securities purchased may vary from
the purchase prices.
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 are maintained until the transaction is settled. The Fund
may engage in these transactions to an extent that would cause
the segregation of an amount up to 20% of the total value of
its assets.
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
equivalent collateral to the borrower or placing broker.
<PAGE>
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Directors to determine the liquidity of
certain restricted securities is permitted under the Securities
and Exchange Commission ("SEC") Staff position set forth in the
adopting release for Rule 144A under the Securities Act of 1933
(the "Rule"). The Rule is a non-exclusive safe harbor for
certain secondary market transactions involving securities
subject to restrictions on resale under federal securities
laws. The Rule provides an exemption from registration for
resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance
the liquidity of the secondary market for securities eligible
for resale under Rule 144A. The Fund believes that the Staff
of the SEC has left the question of determining the liquidity
of all restricted securities to the Directors. The Directors
consider the following criteria in determining the liquidity of
certain restricted securities:
* the frequency of trades and quotes for the security;
* the number of dealers willing to purchase or sell the
security and the number of other potential buyers;
* dealer undertakings to make a market in the security; and
* the nature of the security and the nature of the marketplace
trades.
REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the
securities subject to repurchase agreements, and these
securities are 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 a defaulting
seller files for bankruptcy or becomes insolvent, disposition
of 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 and 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 Directors.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. A
reverse repurchase transaction is similar to borrowing cash.
In a reverse repurchase agreement the Fund transfers possession
<PAGE>
of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a
percentage of the instrument's market value in cash, and agrees
that on a stipulated date in the future, the Fund will
repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of
reverse repurchase agreements may enable the Fund to avoid
selling portfolio instruments at a time when a sale may be
deemed to be disadvantageous, but the ability to enter into
reverse repurchase agreements does not ensure that the Fund
will be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of
the Fund, in a dollar amount sufficient to make payment for the
obligations to be purchased, are segregated at the trade date.
These securities are marked to market daily and are maintained
until the transaction is settled.
PORTFOLIO TURNOVER
The Fund will not attempt to set or meet a portfolio turnover
rate since any turnover would be incidental to transactions
undertaken in an attempt to achieve the Fund's investment
objective, without regard to the length of time a particular
security may have been held. The adviser does not anticipate
that portfolio turnover will result in adverse tax
consequences.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell securities short or purchase
securities on margin, other than in connection with the
purchase and sale of options, financial futures and options
on financial futures, but may obtain such short-term credits
as are necessary for clearance of transactions.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except as required
by forward commitments to purchase securities or currencies
and except that the Fund may borrow money and engage in
reverse repurchase agreements in amounts up to one-third of
the value of its total assets, including the amounts
borrowed. The Fund will not borrow money or engage in
reverse repurchase agreements for investment leverage, but
rather as a temporary, extraordinary, or emergency measure
or 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. The Fund will not purchase any securities
<PAGE>
while borrowings in excess of 5% of its total assets are
outstanding. During the period any reverse repurchase
agreements are outstanding, but only to the extent necessary
to assure completion of the reverse repurchase agreements,
the Fund will restrict the purchase of portfolio instruments
to money market instruments maturing on or before the
expiration date of the reverse repurchase agreements.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any
assets except to secure permitted borrowings. In those
cases, it may pledge assets having a market value not
exceeding the lesser of the dollar amounts borrowed or 15%
of the value of total assets at the time of the borrowing.
Margin deposits for the purchase and sale of options,
financial futures contracts and related options are not
deemed to be a pledge.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of
its total assets, the Fund will not purchase securities of
any one issuer (other than cash, cash items or securities
issued or guaranteed by the government of the United States
or its agencies or instrumentalities and repurchase
agreements collateralized by U.S. government securities) if
as a result more than 5% of the value of its total assets
would be invested in the securities of that issuer or the
Fund would own more than 10% of the outstanding voting
securities of that issuer.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, including limited
partnership interests in real estate, although it may invest
in securities of companies whose business involves the
purchase or sale of real estate or in securities which are
secured by real estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, except that
the Fund may purchase and sell financial futures contracts
and related options. Further, the Fund may engage in
transactions in foreign currencies and may purchase and sell
options on foreign currencies and indices for hedging
purposes.
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
<PAGE>
restricted securities which the Fund may purchase pursuant
to its investment objective, policies, and limitations.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio
securities up to one-third of the value of its total assets.
This shall not prevent the Fund from purchasing or holding
U.S. government obligations, money market instruments,
variable rate demand notes, bonds, debentures, notes,
certificates of indebtedness, or other debt securities,
entering into repurchase agreements, or engaging in other
transactions where permitted by the Fund's investment
objective, policies and limitations.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its
total assets in any one industry or in government securities
of any one foreign country, except it may invest 25% or more
of the value of its total assets in securities issued or
guaranteed by the U.S. government, its agencies or
instrumentalities.
The above investment limitations cannot be changed without
shareholder approval. The following limitations, however, may
be changed by the Directors without shareholder approval.
Shareholders will be notified before any material change in
these limitations becomes effective.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its
total assets in securities subject to restrictions on resale
under the Securities Act of 1933, except for commercial
paper issued under Section 4(2) of the Securities Act of
1933 and certain other restricted securities which meet the
criteria for liquidity as established by the Directors.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its
net assets in illiquid securities, including repurchase
agreements providing for settlement in more than seven days
after notice, over-the-counter options, and certain
securities not determined by the Directors to be liquid.
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. With respect to asset-backed securities, the
Fund will treat the originator of the asset pool as the
<PAGE>
company issuing the security for purposes of determining
compliance with this limitation.
INVESTING IN MINERALS
The Fund will not purchase or sell oil, gas, or other
mineral exploration or development programs or leases,
although it may purchase the securities of issuers which
invest in or sponsor such programs.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of its net assets in
warrants, including those acquired in units or attached to
other securities. To comply with certain state
restrictions, the Fund will limit its investments in such
warrants not listed on the New York or American Stock
Exchanges to 2% of its net assets. (If state restrictions
change, this latter restriction may be revised without
notice to shareholder.) For purposes of this investment
restriction, warrants will be valued at the lower of cost or
market, except that warrants acquired by the Fund in units
with or attached to securities may be deemed to be without
value.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investments in other investment
companies to no more than 3% of the total outstanding voting
securities of any such investment company, will invest no
more than 5% of its total assets in any one investment
company, and will invest no more than 10% of its total
assets in investment companies in general. These
limitations are not applicable if the securities are
acquired as part of a merger, consolidation, reorganization,
or other acquisition.
DEALING IN PUTS AND CALLS
The Fund may not write or purchase options, except that the
Fund may write covered call options and secured put options
on up to 25% of its net assets and may purchase put and call
options, provided that no more than 5% of the fair market
value of its net assets may be invested in premiums on such
options.
Except with respect to borrowing money, if a percentage
limitation is adhered to at the time of the 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. For purposes of its policies and limitations, the
Fund considers certificates of deposit and demand and time
deposits issued by a U.S. branch of a domestic bank or savings
association having capital, surplus, and undivided profits in
<PAGE>
excess of $100,000,000 at the time of investment to be "cash
items."
The Fund does not expect to borrow money or pledge securities
in excess of 5% of the value of its total assets during the
present fiscal year.
FIXED INCOME SECURITIES, INC. MANAGEMENT
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 Services Company,
Federated Administrative Services, Inc., and the Funds (as
defined below).
Positions with Principal Occupations
Name and Address the Corporation During Past Five Years
John F. Donahue*+ Chairman and Chairman and Trustee,
Federated Director Federated Investors;
Investors Tower Chairman and Trustee,
Pittsburgh, PA Federated Advisers,
Federated Management, and
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 of the
Corporation.
<PAGE>
John T. Conroy, Director President, Investment
Jr., Wood/IPC Properties Corporation;
Commercial Senior Vice-President,
Department John R. Wood and
John R. Wood and Associates, Inc.,
Associates, Inc., Realtors; President,
Realtors Northgate Village
3255 Tamiami Development Corporation
Trail North and Investment Properties
Naples, FL Corporation; General
Partner or Trustee in
private real estate
ventures in Southwest
Florida; Director,
Trustee, or Managing
General Partner of the
Funds; formerly,
President, Naples Property
Management, Inc.
William J. Director Director and Member of the
Copeland Executive Committee,
One PNC Plaza - Michael Baker, Inc.;
23rd Floor Director, Trustee, or
Pittsburgh, PA Managing General Partner
of the Funds; formerly,
Vice Chairman and
Director, PNC Bank, N.A.
and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd Director Attorney-at-law; Director,
571 Hayward Mill The Emerging Germany Fund,
Road Inc.; Director, Trustee,
Concord, MA or Managing General
Partner of the Funds;
formerly, Director, Blue
Cross of Massachusetts,
Inc.
Lawrence D. Director Hematologist, Oncologist,
Ellis, M.D. and Internist,
3471 Fifth Avenue Presbyterian and
Suite 1111 Montefiore Hospitals;
Pittsburgh, PA Clinical Professor of
Medicine and Trustee,
University of Pittsburgh;
Director, Trustee, or
Managing General Partner
of the Funds.
<PAGE>
Richard B. President and Executive Vice President
Fisher* Director and Trustee, Federated
Federated Investors; Chairman,
Investors Tower Federated Securities
Pittsburgh, PA Corp.; President or Vice
President of the Funds;
Director or Trustee of
some of the Funds.
Edward L. Director Attorney-at-law; Partner,
Flaherty, Jr.+ Meyer and Flaherty;
5916 Penn Mall Director, Eat'N Park
Pittsburgh, PA Restaurants, Inc., and
Statewide Settlement
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
225 Franklin Representative,
Street Commonwealth of
Boston, MA Massachusetts; Director,
Trustee, or Managing
General 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,
5916 Penn Mall Meyer and Flaherty;
Pittsburgh, PA Chairman, Meritcare, Inc.;
Director, Eat'N Park
Restaurants, Inc.;
Director, Trustee, or
Managing General Partner
of the Funds; formerly,
Vice Chairman, Horizon
Financial, F.A.
<PAGE>
Wesley W. Posvar Director Professor, Foreign Policy
1202 Cathedral of and Management Consultant;
Learning Trustee, Carnegie
University of Endowment for
Pittsburgh International Peace, RAND
Pittsburgh, PA Corporation, Online
Computer Library Center,
Inc., and U.S. Space
Foundation; Chairman,
Czecho Slovak Management
Center; 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
4905 Bayard consultant; Director,
Street Trustee, or Managing
Pittsburgh, PA General Partner of the
Funds.
J. Christopher Vice President President and Trustee,
Donahue Federated Investors;
Federated Trustee, Federated
Investors Tower Advisers, Federated
Pittsburgh, PA Management, and Federated
Research; Trustee,
Federated Services
Company; 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
Corporation.
<PAGE>
Edward C. Vice President and Vice President, Treasurer
Gonzales Treasurer and Trustee, Federated
Federated Investors; Vice President
Investors Tower and Treasurer, Federated
Pittsburgh, PA Advisers, 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 President and
Treasurer of the Funds.
John W. McGonigle Vice President Vice President, Secretary,
Federated and Secretary General Counsel, and
Investors Tower Trustee, Federated
Pittsburgh, PA Investors; Vice President,
Secretary, and Trustee,
Federated Advisers,
Federated Management, and
Federated Research;
Trustee, Federated
Services Company;
Executive Vice President,
Secretary, and Director,
Federated Administrative
Services, Inc.; Director
and Executive Vice
President, Federated
Securities Corp.; Vice
President and Secretary of
the Funds.
<PAGE>
John A. Vice President Vice President and
Staley, IV Trustee, Federated
Federated Investors; Executive Vice
Investors Tower President, Federated
Pittsburgh, PA Securities Corp.;
President and 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.
* This Director is deemed to be an "interested person" of the
Fund as defined in the Investment Company Act of 1940.
+ Member of the Corporation's Executive Committee. The
Executive Committee of the Board of Directors handles the
Directors' responsibilities between meetings of the
Directors.
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; BankSouth
Select Funds; The Boulevard Funds; California Municipal Cash
Trust; Cash Trust Series, Inc.; Cash Trust Series II;
111 Corcoran Funds; 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 Term Trust, Inc.-1999; Liberty
<PAGE>
U.S. Government Money Market Trust; 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; The Planters Fund; 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; and Trust for
U.S. Treasury Obligations.
FUND OWNERSHIP
Officers and Directors own less than 1% of the outstanding
Class C Shares (the "Shares") of the Fund.
DIRECTOR LIABILITY
The Corporation's Articles of Incorporation provide that the
Directors will not be liable for errors of judgment or mistakes
of fact or law. However, they are not protected against any
liability to which they would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their
office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Federated Advisers (the
"Adviser"). It is a subsidiary of Federated Investors. All of
the voting securities 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, Chairman and
Trustee of Federated Advisers, is Chairman and Trustee of
Federated Investors, and Chairman and Director of the Fund.
John A. Staley, IV, President and Trustee of Federated
Advisers, is Vice President and Trustee of Federated Investors,
Executive Vice President of Federated Securities Corp., and
Vice President of the Fund. J. Christopher Donahue, Trustee of
Federated Advisers, is President and Trustee of Federated
Investors, Trustee of Federated Services Company, President and
Director of Federated Administrative Services, Inc. and Vice
President of the Fund. John W. McGonigle, Vice President,
Secretary and Trustee of Federated Advisers, is Trustee, Vice
President, Secretary and General Counsel of Federated
Investors, Trustee of Federated Services Company, Executive
Vice President, Secretary and Director of Federated
Administrative Services, Inc., Executive Vice President and
Director of Federated Securities Corp., and Vice President and
<PAGE>
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.
STATE EXPENSE LIMITATION
The Adviser has undertaken to comply with the expense
limitation 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 expense 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 waived 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.
SHAREHOLDER SERVICING
In return for providing shareholder servicing to its customers
who from time to time may be owners of record or beneficial
owners of Shares, a financial institution may receive payments
from the Fund at a rate not exceeding 0.25 of 1% of the average
daily net assets of the 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
services may include, but not are not limited to, the provision
of personal services and maintenance of shareholder accounts.
Federated Securities Corp. may also pay financial institutions
a fee based upon the net asset value of the Shares beneficially
owned by the financial institution's clients or customers.
<PAGE>
This fee is in addition to amounts paid under the Shareholder
Services Plan and will be reimbursed by the Adviser.
ADMINISTRATIVE SERVICES
Federated Administrative Services, Inc., a subsidiary of
Federated Investors, provides administrative personnel and
services to the Fund at approximate cost. 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.
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 use 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 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
<PAGE>
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.
PURCHASING SHARES
Except under certain circumstances described in the prospectus,
Shares are sold at their net asset value on days the New York
Stock Exchange is open for business. The procedure for
purchasing Shares is explained in the prospectus under
"Investing in Class C Shares."
DISTRIBUTION PLAN
The Fund has adopted a Plan under Rule 12b-1 which was
promulgated by the Securities and Exchange Commission pursuant
to the Investment Company Act of 1940. The Plan provides for
payment of fees to Federated Securities Corp. to finance any
activity which is principally intended to result in the sale of
Shares. Such activities may include the advertising and
marketing of Shares; preparing, printing, and distributing
prospectuses and sales literature to prospective shareholders
or brokers; and implementing and operating the Plan. Pursuant
to the Plan, Federated Securities Corp. may pay fees to brokers
for distribution services.
The Directors expect 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.
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 values of the Fund's securities are determined as
follows:
* as provided by an independent pricing service;
* for short-term obligations, according to the mean bid and
asked prices, as furnished by an independent pricing
service, or for short-term obligations with maturities of
less than 60 days, at amortized cost unless the Directors
determine this is not fair value; or
<PAGE>
* at fair value as determined in good faith by the Directors.
Prices provided by independent pricing services may be
determined without relying exclusively on quoted prices.
Pricing services 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
after the Fund receives the redemption request. Shareholder
redemptions may be subject to a contingent deferred sales
charge. Redemption procedures are explained in the prospectus
under "Redeeming Class C Shares." Although the transfer agent
does not charge for telephone redemptions, it reserves the
right to charge a fee for the cost of wire-transferred
redemptions of less than $5,000.
REDEMPTION IN KIND
The Corporation is obligated to redeem Shares solely in cash up
to $250,000 or 1% of the Fund's net asset value, whichever is
less, for any one shareholder within a 90-day period.
Any redemption beyond this amount will also be in cash unless
the Directors determine that payments should be in kind. In
such a case, the Fund will pay all or a portion of the
remainder of the redemption in portfolio instruments, valued in
the same way that net asset value is determined. The portfolio
instruments will be selected in a manner that the Directors
deem fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If
redemption is made in kind, shareholders receiving their
securities and selling them before their maturity could receive
less than the redemption value of their securities and could
incur certain transaction costs.
TAX STATUS
<PAGE>
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.
FOREIGN TAXES
Investment income on certain foreign securities in which the
Fund may invest may be subject to foreign withholding or other
taxes that could reduce the return on these securities. Tax
treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign taxes to
which the Fund would be subject.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and
capital gains received as cash or additional Shares. No
portion of any income dividend paid by the Fund is eligible for
the dividends received deduction available to corporations.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on
long-term capital gains distributed to them regardless of
how long they have held the Shares.
TOTAL RETURN
The average annual total return for the Shares 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 offering price 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, adjusted over the period by any additional Shares,
<PAGE>
assuming the monthly reinvestment of all dividends and
distributions. Any applicable contingent deferred sales charge
is deducted from the ending value of the investment based on
the lesser of the original purchase price or the net asset
value of the Shares redeemed.
YIELD
The yield of the Shares is determined by dividing the net
investment income per Share (as defined by the Securities and
Exchange Commission) earned by the Fund over a thirty-day
period by the offering price per Share on the last day of the
period. This value is 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 the Fund, performance will
be reduced for those shareholders paying those fees.
PERFORMANCE COMPARISONS
The performance 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 expenses; and
* various other factors.
The performance of Shares 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.
Investors may use financial publications and/or indices to
obtain a more complete view of the performance of Shares. When
comparing performance, investors should consider all relevant
factors such as the composition of any index used, prevailing
market conditions, portfolio compositions of other funds, and
<PAGE>
methods used to value portfolio securities and compute net
asset value. The financial publications and/or indices which
the Fund uses in advertising may include:
* [LIST RELEVANT INDICES].
* 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 offering price over a specific
period of time. From time to time, the Fund will quote its
Lipper ranking in the "______________________" category in
advertising and sales literature.
Advertisements and other sales literature for the Shares may
quote total returns which are calculated on non-standardized
base periods. These total returns represent the historic
change in the value of an investment in Shares based on monthly
reinvestment of dividends over a specified period of time.
Advertisements may quote performance information which does not
reflect the effect of the contingent deferred sales charge.
APPENDIX
STANDARD AND POOR'S CORPORATION CORPORATE BOND RATINGS
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
<PAGE>
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
<PAGE>
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, INC. LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely
to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong as
bonds rated "AAA." Because bonds rated in the "AAA" and "AA"
categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is
generally rated "F-1+."
A--Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds,
and therefore, impair timely payment.
<PAGE>
* * * * * *
STRATEGIC INCOME FUND
(A PORTFOLIO OF INSIGHT INSTITUTIONAL SERIES, INC.)
FORTRESS SHARES
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
This Statement of Additional Information should be read with
the prospectus of Fortress Shares of Strategic Income Fund (the
"Fund") dated ________________ ___, 1994. This Statement is
not a prospectus itself. To receive a copy of the prospectus,
write or call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated _______________ ___, 1994
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT THE FUND
INVESTMENT OBJECTIVE AND POLICIES
Types of Investments and Investment Techniques
Resets of Interest
Caps and Floors
Non-Mortgage Related Asset-Backed Securities
Convertible Securities
Equity Securities
Warrants
Futures and Options Transactions
Foreign Currency Transactions
Foreign Bank Instruments
When-Issued and Delayed Delivery Transactions
Lending of Portfolio Securities
Restricted and Illiquid Securities
Repurchase Agreements
Reverse Repurchase Agreements
Portfolio Turnover
INVESTMENT LIMITATIONS
FIXED INCOME SECURITIES, INC. MANAGEMENT
Officers and Directors
The Funds
Fund Ownership
Director Liability
INVESTMENT ADVISORY SERVICES
Adviser to the Fund
Advisory Fees
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SHAREHOLDER SERVICING
ADMINISTRATIVE SERVICES
BROKERAGE TRANSACTIONS
PURCHASING SHARES
Distribution Plan
Purchases by Sales Representatives,
Fund Directors, and Employees
DETERMINING NET ASSET VALUE
Determining Market Value of Securities
REDEEMING SHARES
Redemption in Kind
TAX STATUS
The Fund's Tax Status
Foreign Taxes
Shareholders' Tax Status
TOTAL RETURN
YIELD
PERFORMANCE COMPARISONS
APPENDIX
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of Fixed Income Securities, Inc. (the
"Corporation"). The Corporation was incorporated under the
laws of the State of Maryland on October 15, 1991.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek a high level of
current income. The investment objective stated above cannot
be changed without approval of shareholders. The investment
policies stated below may be changed by the Board of Directors
("Directors") without shareholder approval. Shareholders will
be notified before any material change in the investment
policies becomes effective.
TYPES OF INVESTMENTS AND INVESTMENT TECHNIQUES
The Fund pursues its investment objective by investing in a
diversified portfolio primarily consisting of domestic
corporate debt obligations, U.S. government securities, and
foreign government and corporate debt obligations. Under
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normal circumstances, the Fund's assets will be invested in
each of these three sectors. However, the Fund may from time
to time invest up to 100% of its total assets in any one sector
if, in the judgment of the investment adviser, the Fund has the
opportunity of seeking a high level of current income without
undue risk to principal.
RESETS OF INTEREST
The interest rates paid on the mortgage-backed in which the
Fund invests generally are readjusted at intervals of one year
or less to an increment over some predetermined interest rate
index. There are two main categories of indices: those based
on U.S. Treasury securities and those derived from a calculated
measure, such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year
and five-year constant maturity Treasury Note rates, the three-
month Treasury Bill rate, the 180-day Treasury Bill rate, rates
on longer-term Treasury securities, the National Median Cost of
Funds, the one-month or three-month London Interbank Offered
Rate (LIBOR), the prime rate of a specific bank, or commercial
paper rates. Some indices, such as the one-year constant
maturity Treasury Note rate, closely mirror changes in market
interest rate levels.
To the extent that the adjusted interest rate on the mortgage
security reflects current market rates, the market value of an
adjustable rate mortgage security will tend to be less
sensitive to interest rate changes than a fixed rate debt
security of the same stated maturity. Hence, ARMs which use
indices that lag changes in market rates should experience
greater price volatility than adjustable rate mortgage
securities that closely mirror the market.
CAPS AND FLOORS
The underlying mortgages which collateralize the mortgage-
backed securities in which the Fund invests will frequently
have caps and floors which limit the maximum amount by which
the loan rate to the residential borrower may change up or
down: (1) per reset or adjustment interval, and (2) over the
life of the loan. Some residential mortgage loans restrict
periodic adjustments by limiting changes in the borrower's
monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in
negative amortization.
The value of mortgage securities in which the Fund invests may
be affected if market interest rates rise or fall faster and
farther than the allowable caps or floors on the underlying
residential mortgage loans. Additionally, even though the
interest rates on the underlying residential mortgages are
adjustable, amortization and prepayments may occur, thereby
causing the effective maturities of the mortgage securities in
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which the Fund invests to be shorter than the maturities stated
in the underlying mortgages.
NON-MORTGAGE RELATED ASSET-BACKED SECURITIES
Non-mortgage related asset-backed securities present certain
risks that are not presented by mortgage-backed securities.
Primarily, these securities do not have the benefit of the same
security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right
to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of asset-backed
securities backed by motor vehicle installment purchase
obligations permit the servicer of such receivables to retain
possession of the underlying obligations. If the servicer
sells these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the
holders of the related asset-backed securities. Further, if a
vehicle is registered in one state and is then registered
because the owner and the obligor move to another state, such
re-registration could defeat the original security interest in
the vehicle in certain cases. In addition, because of the
large number of vehicles involved in a typical issuance and
technical requirements under state laws, the trustee with the
holders of asset-backed securities backed by automobile
receivables may not have a proper security interest in all of
the obligations backing such receivables. Therefore, there is
a possibility that recoveries on repossessed collateral may
not, in some cases, be available to support payments on these
securities.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. Convertible
securities are fixed income securities that may be exchanged or
converted into a predetermined number of shares of the issuer's
underlying common stock at the option of the holder during a
specified period. Convertible securities may take the form of
convertible preferred stock, convertible bonds or debentures,
units consisting of "usable" bonds and warrants or a
combination of the features of several of these securities.
The investment characteristics of each convertible security
vary widely, which allows convertible securities to be employed
for a variety of investment strategies.
The Fund will exchange or convert convertible securities into
shares of underlying common stock when, in the opinion of the
investment adviser, the investment characteristics of the
underlying common shares will assist the Fund in achieving its
investment objective. The Fund may also elect to hold or trade
convertible shares. In selecting convertible securities, the
Fund's investment adviser evaluates the investment
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characteristics of the convertible security as a fixed income
instrument, and the investment potential of the underlying
equity security for capital appreciation. In evaluating these
matters with respect to a particular convertible security, the
investment adviser considers numerous factors, including the
economic and political outlook, the value of the security
relative to other investment alternatives, trends in the
determinants of the issuer's profits, and the issuer's
management capability and practices.
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 limitation if unusual conditions suggest
such investments represent a better opportunity to reach the
Fund's investment objective.
WARRANTS
The Fund may invest in warrants. Warrants are basically
options to purchase common stock at a specific price (usually
at a premium above the market value of the optioned common
stock at issuance) valid for a specific period of time.
Warrants may have a life ranging from less than one year to
twenty years, or they may be perpetual. However, most warrants
have expiration dates after which they are worthless. In
addition, a warrant is worthless if the market price of the
common stock does not exceed the warrant's exercise price
during the life of the warrant. Warrants have no voting
rights, pay no dividends, and have no rights with respect to
the assets of the corporation issuing them. The percentage
increase or decrease in the market price of the warrant may
tend to be greater than the percentage increase or decrease in
the market price of the optioned common stock. The Fund will
not invest more than 5% of the value of its total assets in
warrants. Warrants acquired in units or attached to securities
may be deemed to be without value for purposes of this policy.
FUTURES AND OPTIONS TRANSACTIONS
The Fund may attempt to hedge all or a portion of its portfolio
by buying and selling financial futures contracts, buying put
options on portfolio securities and listed put options on
futures contracts, and writing call options on futures
contracts. The Fund may also write covered call options on
portfolio securities to attempt to increase its current income.
The Fund currently does not intend to invest more than 5% of
its total assets in options transactions.
FINANCIAL FUTURES CONTRACTS
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A futures contract is a firm commitment by two parties: the
seller who agrees to make delivery of the specific type of
security called for in the contract ("going short") and the
buyer who agrees to take delivery of the security ("going
long") at a certain time in the future. In the fixed income
securities market, price moves inversely to interest rates.
A rise in rates means a drop in price. Conversely, a drop
in rates means a rise in price. In order to hedge its
holdings of fixed income securities against a rise in market
interest rates, the Fund could enter into contracts to
deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the
prices of its fixed income securities may decline during the
Fund's anticipated holding period. The Fund would agree to
purchase securities in the future at a predetermined price
(i.e., "go long") to hedge against a decline in market
interest rates.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial
futures contracts. Unlike entering directly into a futures
contract, which requires the purchaser to buy a financial
instrument on a set date at a specified price, the purchase
of a put option on a futures contract entitles (but does not
obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price.
The Fund would purchase put options on futures contracts to
protect portfolio securities against decreases in value
resulting from an anticipated increase in market interest
rates. Generally, if the hedged portfolio securities
decrease in value during the term of an option, the related
futures contracts will also decrease in value and the option
will increase in value. In such an event, the Fund will
normally close out its option by selling an identical
option. If the hedge is successful, the proceeds received
by the Fund upon the sale of the second option will be large
enough to offset both the premium paid by the Fund for the
original option plus the decrease in value of the hedged
securities.
Alternatively, the Fund may exercise its put option. To do
so, it would simultaneously enter into a futures contract of
the type underlying the option (for a price less than the
strike price of the option) and exercise the option. The
Fund would then deliver the futures contract in return for
payment of the strike price. If the Fund neither closes out
nor exercises an option, the option will expire on the date
provided in the option contract, and the premium paid for
the contract will be lost.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
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In addition to purchasing put options on futures, the Fund
may write listed call options on futures contracts to hedge
its portfolio against an increase in market interest rates.
When the Fund writes a call option on a futures contract, it
is undertaking the obligation of assuming a short futures
position (selling a futures contract) at the fixed strike
price at any time during the life of the option if the
option is exercised. As market interest rates rise, causing
the prices of futures to go down, the Fund's obligation
under a call option on a future (to sell a futures contract)
costs less to fulfill, causing the value of the Fund's call
option position to increase.
In other words, as the underlying futures price goes down
below the strike price, the buyer of the option has no
reason to exercise the call, so that the Fund keeps the
premium received for the option. This premium can offset
the drop in value of the Fund's fixed income portfolio which
is occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or
exercise of it by the buyer, the Fund may close out the
option by buying an identical option. If the hedge is
successful, the cost of the second option will be less than
the premium received by the Fund for the initial option.
The net premium income of the Fund will then offset the
decrease in value of the hedged securities.
The Fund will not maintain open positions in futures
contracts it has sold or call options it has written on
futures contracts if, in the aggregate, the value of the
open positions (marked to market) exceeds the current market
value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted
for the correlation of volatility between the hedged
securities and the futures contracts. If this limitation is
exceeded at any time, the Fund will take prompt action to
close out a sufficient number of open contracts to bring its
open futures and options positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not
pay or receive money upon the purchase or sale of a futures
contract. Rather, the Fund is required to deposit an amount
of "initial margin" in cash or U.S. Treasury bills with its
custodian (or the broker, if legally permitted). The nature
of initial margin in futures transactions is different from
that of margin in securities transactions in that futures
contract initial margin does not involve the borrowing of
funds by the Fund to finance the transactions. Initial
margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Fund upon
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termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the
official settlement price of the exchange on which it is
traded. Each day the Fund pays or receives cash, called
"variation margin," equal to the daily change in value of
the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund
and the broker of the amount one would owe the other if the
futures contract expired. In computing its daily net asset
value, the Fund will mark-to-market its open futures
positions.
The Fund is also required to deposit and maintain margin
when it writes call options on futures contracts.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put options on portfolio securities to
protect against price movements in particular securities in
its portfolio. A put option gives the Fund, in return for a
premium, the right to sell the underlying security to the
writer (seller) at a specified price during the term of the
option.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may also write covered call options to generate
income. As writer of a call option, the Fund has the
obligation upon exercise of the option during the option
period to deliver the underlying security upon payment of
the exercise price. The Fund may only sell call options
either on securities held in its portfolio or on securities
which it has the right to obtain without payment of further
consideration (or has segregated cash in the amount of any
additional consideration).
PURCHASING AND WRITING OVER-THE-COUNTER OPTIONS
The Fund may purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the
buyers or writers of the options for those options on
portfolio securities held by the Fund and not traded on an
exchange. Over-the-counter options are two party contracts
with price and terms negotiated between buyer and seller.
In contrast, exchange-traded options are third party
contracts with standardized strike prices and expiration
dates and are purchased from a clearing corporation.
Exchange-traded options have a continuous liquid market
while over-the-counter options may not.
FOREIGN CURRENCY TRANSACTIONS
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CURRENCY RISKS
To the extent that debt securities purchased by the Fund are
denominated in currencies other than the U.S. dollar,
changes in foreign currency exchange rates will affect the
Fund's net asset value; the value of interest earned; gains
and losses realized on the sale of securities; and net
investment income and capital gain, if any, to be
distributed to shareholders by the Fund. If the value of a
foreign currency rises against the U.S. dollar, the value of
the Fund's assets denominated in that currency will
increase; correspondingly, if the value of a foreign
currency declines against the U.S. dollar, the value of the
Fund's assets denominated in the currency will decrease.
The exchange rates between the U.S. dollar and foreign
currencies are a function of such factors as supply and
demand in the currency exchange markets, international
balances of payments, governmental intervention, speculation
and other economic and political conditions. Although the
Fund values its assets daily in U.S. dollars, the Fund may
not convert its holdings of foreign currencies to U.S.
dollars daily. The Fund may incur conversion costs when it
converts its holdings to another currency. Foreign exchange
dealers may realize a profit on the difference between the
price at which the Fund buys and sells currencies.
The Fund will engage in foreign currency exchange
transactions in connection with its investments in the
securities. The Fund will conduct its foreign currency
exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange
market, or through forward contracts to purchase or sell
foreign currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange
contracts in order to protect itself against a possible loss
resulting from an adverse change in the relationship between
the U.S. dollar and a foreign currency involved in an
underlying transaction. However, forward foreign currency
exchange contracts may limit potential gains which could
result from a positive change in such currency
relationships. The Fund's investment adviser believes that
it is important to have the flexibility to enter into
forward foreign currency exchange contracts whenever it
determines that it is in the Fund's best interest to do so.
The Fund will not speculate in foreign currency exchange.
The Fund will not enter into forward foreign currency
exchange contracts or maintain a net exposure in such
contracts when it would be obligated to deliver an amount of
foreign currency in excess of the value of its portfolio
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securities or other assets denominated in that currency or,
in the case of a "cross-hedge" denominated in a currency or
currencies that the Fund's investment adviser believes will
tend to be closely correlated with that currency with regard
to price movements. Generally, the Fund will not enter into
a forward foreign currency exchange contract with a term
longer than one year.
FOREIGN CURRENCY OPTIONS
A foreign currency option provides the option buyer with the
right to buy or sell a stated amount of foreign currency at
the exercise price on a specified date or during the option
period. The owner of a call option has the right, but not
the obligation, to buy the currency. Conversely, the owner
of a put option has the right, but not the obligation, to
sell the currency.
When the option is exercised, the seller (i.e., writer) of
the option is obligated to fulfill the terms of the sold
option. However, either the seller or the buyer may, in the
secondary market, close its position during the option
period at any time prior to expiration.
A call option on foreign currency generally rises in value
if the underlying currency appreciates in value, and a put
option on foreign currency generally falls in value if the
underlying currency depreciates in value. Although
purchasing a foreign currency option can protect the Fund
against an adverse movement in the value of a foreign
currency, the option will not limit the movement in the
value of such currency. For example, if the Fund was
holding securities denominated in a foreign currency that
was appreciating and had purchased a foreign currency put to
hedge against a decline in the value of the currency, the
Fund would not have to exercise their put option. Likewise,
if the Fund were to enter into a contract to purchase a
security denominated in foreign currency and, in conjunction
with that purchase, were to purchase a foreign currency call
option to hedge against a rise in value of the currency, and
if the value of the currency instead depreciated between the
date of purchase and the settlement date, the Fund would not
have to exercise its call. Instead, the Fund could acquire
in the spot market the amount of foreign currency needed for
settlement.
SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY OPTIONS
Buyers and sellers of foreign currency options are subject
to the same risks that apply to options generally. In
addition, there are certain additional risks associated with
foreign currency options. The markets in foreign currency
options are relatively new, and the Fund's ability to
establish and close out positions on such options is subject
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to the maintenance of a liquid secondary market. Although
the Fund will not purchase or write such options unless and
until, in the opinion of the Fund's investment adviser, the
market for them has developed sufficiently to ensure that
the risks in connection with such options are not greater
than the risks in connection with the underlying currency,
there can be no assurance that a liquid secondary market
will exist for a particular option at any specific time.
In addition, options on foreign currencies are affected by
all of those factors that influence foreign exchange rates
and investments generally.
The value of a foreign currency option depends upon the
value of the underlying currency relative to the U.S.
dollar. As a result, the price of the option position may
vary with changes in the value of either or both currencies
and may have no relationship to the investment merits of a
foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially
larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by
having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying
foreign currencies at prices that are less favorable than
for round lots.
There is no systematic reporting of last sale information
for foreign currencies or any regulatory requirement that
quotations available through dealers or other market sources
be firm or revised on a timely basis. Available quotation
information is generally representative of very large
transactions in the interbank market and thus may not
reflect relatively smaller transactions (i.e., less than $1
million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock
market. To the extent that the U.S. option markets are
closed while the markets for the underlying currencies
remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in
the options markets until they reopen.
FOREIGN CURRENCY FUTURES TRANSACTIONS
By using foreign currency futures contracts and options on
such contracts, the Fund may be able to achieve many of the
same objectives as it would through the use of forward
foreign currency exchange contracts. The Fund may be able
to achieve these objectives possibly more effectively and at
a lower cost by using futures transactions instead of
forward foreign currency exchange contracts.
SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY FUTURES
CONTRACTS AND RELATED OPTIONS
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Buyers and sellers of foreign currency futures contracts are
subject to the same risks that apply to the use of futures
generally. In addition, there are risks assocated with
foreign currency futures contracts and their use as a
hedging device similar to those associated with options on
futures currencies, as described above.
Options on foreign currency futures contracts may involve
certain additional risks. Trading options on foreign
currency foreign currency futures contracts is relatively
new. The ability to establish and close out positions on
such options is subject to the maintenance of a liquid
secondary market. To reduce this risk, the Fund will not
purchase or write options on foreign currency futures
contracts unless and until, in the opinion of the Fund's
investment adviser, the market for such options has
developed sufficiently that the risks in connection with
such options are not greater than the risks in connection
with transactions in the underlying foreign currency futures
contracts. Compared to the purchase or sale of foreign
currency futures contracts, the purchase of call or put
options on futures contracts involves less potential risk to
the Fund because the maximum amount at risk is the premium
paid for the option (plus transaction costs). However,
there may be circumstances when the purchase of a call or
put option on a futures contract would result in a loss,
such as when there is no movement in the price of the
underlying currency or futures contract.
FOREIGN BANK INSTRUMENTS
Eurodollar Certificates of Deposit ("ECDs"), Eurodollar Time
Deposits ("ETDs"), Yankee Certificates of Deposit ("Yankee
CDs"), 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
withholdings or other taxes on interest income, difficulties in
obtaining or enforcing a judgment against the issuing bank, and
the possible impact of interruptions of 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 requirements, loan limitations, examinations, accounting,
auditing, and recording keeping and the public availability of
information. These factors will be carefully considered by the
Fund's adviser in selecting investments for the Fund.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
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These transactions are arrangements in which the Fund purchases
securities with payment and delivery scheduled for a future
time. 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, and not for investment leverage.
These transactions are made to secure what is considered to be
an advantageous price and yield for the Fund. Settlement dates
may be a month or more after entering into these transactions,
and the market values of the securities purchased may vary from
the purchase prices.
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 are maintained until the transaction is settled. The Fund
may engage in these transactions to an extent that would cause
the segregation of an amount up to 20% of the total value of
its assets.
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
equivalent collateral to the borrower or placing broker.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Directors to determine the liquidity of
certain restricted securities is permitted under the Securities
and Exchange Commission ("SEC") Staff position set forth in the
adopting release for Rule 144A under the Securities Act of 1933
(the "Rule"). The Rule is a non-exclusive safe harbor for
certain secondary market transactions involving securities
subject to restrictions on resale under federal securities
laws. The Rule provides an exemption from registration for
resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance
the liquidity of the secondary market for securities eligible
for resale under Rule 144A. The Fund believes that the Staff
of the SEC has left the question of determining the liquidity
of all restricted securities to the Directors. The Directors
consider the following criteria in determining the liquidity of
certain restricted securities:
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* the frequency of trades and quotes for the security;
* the number of dealers willing to purchase or sell the
security and the number of other potential buyers;
* dealer undertakings to make a market in the security; and
* the nature of the security and the nature of the marketplace
trades.
REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the
securities subject to repurchase agreements, and these
securities are 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 a defaulting
seller files for bankruptcy or becomes insolvent, disposition
of 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 and 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 Directors.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. A
reverse repurchase transaction is similar to borrowing cash.
In a reverse repurchase agreement the Fund transfers possession
of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a
percentage of the instrument's market value in cash, and agrees
that on a stipulated date in the future, the Fund will
repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of
reverse repurchase agreements may enable the Fund to avoid
selling portfolio instruments at a time when a sale may be
deemed to be disadvantageous, but the ability to enter into
reverse repurchase agreements does not ensure that the Fund
will be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of
the Fund, in a dollar amount sufficient to make payment for the
obligations to be purchased, are segregated at the trade date.
These securities are marked to market daily and are maintained
until the transaction is settled.
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PORTFOLIO TURNOVER
The Fund will not attempt to set or meet a portfolio turnover
rate since any turnover would be incidental to transactions
undertaken in an attempt to achieve the Fund's investment
objective, without regard to the length of time a particular
security may have been held. The adviser does not anticipate
that portfolio turnover will result in adverse tax
consequences.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell securities short or purchase
securities on margin, other than in connection with the
purchase and sale of options, financial futures and options
on financial futures, but may obtain such short-term credits
as are necessary for clearance of transactions.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except as required
by forward commitments to purchase securities or currencies
and except that the Fund may borrow money and engage in
reverse repurchase agreements in amounts up to one-third of
the value of its total assets, including the amounts
borrowed. The Fund will not borrow money or engage in
reverse repurchase agreements for investment leverage, but
rather as a temporary, extraordinary, or emergency measure
or 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. The Fund will not purchase any securities
while borrowings in excess of 5% of its total assets are
outstanding. During the period any reverse repurchase
agreements are outstanding, but only to the extent necessary
to assure completion of the reverse repurchase agreements,
the Fund will restrict the purchase of portfolio instruments
to money market instruments maturing on or before the
expiration date of the reverse repurchase agreements.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any
assets except to secure permitted borrowings. In those
cases, it may pledge assets having a market value not
exceeding the lesser of the dollar amounts borrowed or 15%
of the value of total assets at the time of the borrowing.
Margin deposits for the purchase and sale of options,
financial futures contracts and related options are not
deemed to be a pledge.
<PAGE>
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of
its total assets, the Fund will not purchase securities of
any one issuer (other than cash, cash items or securities
issued or guaranteed by the government of the United States
or its agencies or instrumentalities and repurchase
agreements collateralized by U.S. government securities) if
as a result more than 5% of the value of its total assets
would be invested in the securities of that issuer or the
Fund would own more than 10% of the outstanding voting
securities of that issuer.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, including limited
partnership interests in real estate, although it may invest
in securities of companies whose business involves the
purchase or sale of real estate or in securities which are
secured by real estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, except that
the Fund may purchase and sell financial futures contracts
and related options. Further, the Fund may engage in
transactions in foreign currencies and may purchase and sell
options on foreign currencies and indices for hedging
purposes.
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
restricted securities which the Fund may purchase pursuant
to its investment objective, policies, and limitations.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio
securities up to one-third of the value of its total assets.
This shall not prevent the Fund from purchasing or holding
U.S. government obligations, money market instruments,
variable rate demand notes, bonds, debentures, notes,
certificates of indebtedness, or other debt securities,
entering into repurchase agreements, or engaging in other
transactions where permitted by the Fund's investment
objective, policies and limitations.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its
total assets in any one industry or in government securities
<PAGE>
of any one foreign country, except it may invest 25% or more
of the value of its total assets in securities issued or
guaranteed by the U.S. government, its agencies or
instrumentalities.
The above investment limitations cannot be changed without
shareholder approval. The following limitations, however, may
be changed by the Directors without shareholder approval.
Shareholders will be notified before any material change in
these limitations becomes effective.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its
total assets in securities subject to restrictions on resale
under the Securities Act of 1933, except for commercial
paper issued under Section 4(2) of the Securities Act of
1933 and certain other restricted securities which meet the
criteria for liquidity as established by the Directors.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its
net assets in illiquid securities, including repurchase
agreements providing for settlement in more than seven days
after notice, over-the-counter options, and certain
securities not determined by the Directors to be liquid.
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. With respect to asset-backed securities, the
Fund will treat the originator of the asset pool as the
company issuing the security for purposes of determining
compliance with this limitation.
INVESTING IN MINERALS
The Fund will not purchase or sell oil, gas, or other
mineral exploration or development programs or leases,
although it may purchase the securities of issuers which
invest in or sponsor such programs.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of its net assets in
warrants, including those acquired in units or attached to
other securities. To comply with certain state
restrictions, the Fund will limit its investments in such
warrants not listed on the New York or American Stock
Exchanges to 2% of its net assets. (If state restrictions
change, this latter restriction may be revised without
<PAGE>
notice to shareholder.) For purposes of this investment
restriction, warrants will be valued at the lower of cost or
market, except that warrants acquired by the Fund in units
with or attached to securities may be deemed to be without
value.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investments in other investment
companies to no more than 3% of the total outstanding voting
securities of any such investment company, will invest no
more than 5% of its total assets in any one investment
company, and will invest no more than 10% of its total
assets in investment companies in general. These
limitations are not applicable if the securities are
acquired as part of a merger, consolidation, reorganization,
or other acquisition.
DEALING IN PUTS AND CALLS
The Fund may not write or purchase options, except that the
Fund may write covered call options and secured put options
on up to 25% of its net assets and may purchase put and call
options, provided that no more than 5% of the fair market
value of its net assets may be invested in premiums on such
options.
Except with respect to borrowing money, if a percentage
limitation is adhered to at the time of the 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. For purposes of its policies and limitations, the
Fund considers certificates of deposit and demand and time
deposits issued by a U.S. branch of a domestic bank or savings
association having capital, surplus, and undivided profits in
excess of $100,000,000 at the time of investment to be "cash
items."
The Fund does not expect to borrow money or pledge securities
in excess of 5% of the value of its total assets during the
present fiscal year.
FIXED INCOME SECURITIES, INC. MANAGEMENT
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 Services Company,
Federated Administrative Services, Inc., and the Funds (as
defined below).
<PAGE>
Positions with Principal Occupations
Name and Address the Corporation During Past Five Years
John F. Donahue*+ Chairman and Chairman and Trustee,
Federated Director Federated Investors;
Investors Tower Chairman and Trustee,
Pittsburgh, PA Federated Advisers,
Federated Management, and
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 of the
Corporation.
John T. Conroy, Director President, Investment
Jr., Wood/IPC Properties Corporation;
Commercial Senior Vice-President,
Department John R. Wood and
John R. Wood and Associates, Inc.,
Associates, Inc., Realtors; President,
Realtors Northgate Village
3255 Tamiami Development Corporation
Trail North and Investment Properties
Naples, FL Corporation; General
Partner or Trustee in
private real estate
ventures in Southwest
Florida; Director,
Trustee, or Managing
General Partner of the
Funds; formerly,
President, Naples Property
Management, Inc.
William J. Director Director and Member of the
Copeland Executive Committee,
One PNC Plaza - Michael Baker, Inc.;
23rd Floor Director, Trustee, or
Pittsburgh, PA Managing General Partner
of the Funds; formerly,
Vice Chairman and
Director, PNC Bank, N.A.
and PNC Bank Corp. and
Director, Ryan Homes, Inc.
<PAGE>
James E. Dowd Director Attorney-at-law; Director,
571 Hayward Mill The Emerging Germany Fund,
Road Inc.; Director, Trustee,
Concord, MA or Managing General
Partner of the Funds;
formerly, Director, Blue
Cross of Massachusetts,
Inc.
Lawrence D. Director Hematologist, Oncologist,
Ellis, M.D. and Internist,
3471 Fifth Avenue Presbyterian and
Suite 1111 Montefiore Hospitals;
Pittsburgh, PA Clinical Professor of
Medicine and Trustee,
University of Pittsburgh;
Director, Trustee, or
Managing General Partner
of the Funds.
Richard B. President and Executive Vice President
Fisher* Director and Trustee, Federated
Federated Investors; Chairman,
Investors Tower Federated Securities
Pittsburgh, PA Corp.; President or Vice
President of the Funds;
Director or Trustee of
some of the Funds.
Edward L. Director Attorney-at-law; Partner,
Flaherty, Jr.+ Meyer and Flaherty;
5916 Penn Mall Director, Eat'N Park
Pittsburgh, PA Restaurants, Inc., and
Statewide Settlement
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
225 Franklin Representative,
Street Commonwealth of
Boston, MA Massachusetts; Director,
Trustee, or Managing
General Partner of the
Funds; formerly,
President, State Street
Bank and Trust Company and
State Street Boston
Corporation and Trustee,
Lahey Clinic Foundation,
Inc.
<PAGE>
Gregor F. Meyer Director Attorney-at-law; Partner,
5916 Penn Mall Meyer and Flaherty;
Pittsburgh, PA Chairman, Meritcare, Inc.;
Director, Eat'N Park
Restaurants, Inc.;
Director, Trustee, or
Managing General Partner
of the Funds; formerly,
Vice Chairman, Horizon
Financial, F.A.
Wesley W. Posvar Director Professor, Foreign Policy
1202 Cathedral of and Management Consultant;
Learning Trustee, Carnegie
University of Endowment for
Pittsburgh International Peace, RAND
Pittsburgh, PA Corporation, Online
Computer Library Center,
Inc., and U.S. Space
Foundation; Chairman,
Czecho Slovak Management
Center; 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
4905 Bayard consultant; Director,
Street Trustee, or Managing
Pittsburgh, PA General Partner of the
Funds.
<PAGE>
J. Christopher Vice President President and Trustee,
Donahue Federated Investors;
Federated Trustee, Federated
Investors Tower Advisers, Federated
Pittsburgh, PA Management, and Federated
Research; Trustee,
Federated Services
Company; 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
Corporation.
Edward C. Vice President and Vice President, Treasurer
Gonzales Treasurer and Trustee, Federated
Federated Investors; Vice President
Investors Tower and Treasurer, Federated
Pittsburgh, PA Advisers, 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 President and
Treasurer of the Funds.
<PAGE>
John W. McGonigle Vice President Vice President, Secretary,
Federated and Secretary General Counsel, and
Investors Tower Trustee, Federated
Pittsburgh, PA Investors; Vice President,
Secretary, and Trustee,
Federated Advisers,
Federated Management, and
Federated Research;
Trustee, Federated
Services Company;
Executive Vice President,
Secretary, and Director,
Federated Administrative
Services, Inc.; Director
and Executive Vice
President, Federated
Securities Corp.; Vice
President and Secretary of
the Funds.
John A. Vice President Vice President and
Staley, IV Trustee, Federated
Federated Investors; Executive Vice
Investors Tower President, Federated
Pittsburgh, PA Securities Corp.;
President and 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.
* This Director is deemed to be an "interested person" of the
Fund as defined in the Investment Company Act of 1940.
+ Member of the Corporation's Executive Committee. The
Executive Committee of the Board of Directors handles the
Directors' responsibilities between meetings of the
Directors.
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; BankSouth
Select Funds; The Boulevard Funds; California Municipal Cash
<PAGE>
Trust; Cash Trust Series, Inc.; Cash Trust Series II;
111 Corcoran Funds; 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 Term Trust, Inc.-1999; Liberty
U.S. Government Money Market Trust; 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; The Planters Fund; 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; and Trust for
U.S. Treasury Obligations.
FUND OWNERSHIP
Officers and Directors own less than 1% of the outstanding
Fortress Shares (the "Shares") of the Fund.
DIRECTOR LIABILITY
The Corporation's Articles of Incorporation provide that the
Directors will not be liable for errors of judgment or mistakes
of fact or law. However, they are not protected against any
liability to which they would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their
office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
<PAGE>
The Fund's investment adviser is Federated Advisers (the
"Adviser"). It is a subsidiary of Federated Investors. All of
the voting securities 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, Chairman and
Trustee of Federated Advisers, is Chairman and Trustee of
Federated Investors, and Chairman and Director of the Fund.
John A. Staley, IV, President and Trustee of Federated
Advisers, is Vice President and Trustee of Federated Investors,
Executive Vice President of Federated Securities Corp., and
Vice President of the Fund. J. Christopher Donahue, Trustee of
Federated Advisers, is President and Trustee of Federated
Investors, Trustee of Federated Services Company, President and
Director of Federated Administrative Services, Inc. and Vice
President of the Fund. John W. McGonigle, Vice President,
Secretary and Trustee of Federated Advisers, is Trustee, Vice
President, Secretary and General Counsel of Federated
Investors, Trustee of Federated Services Company, Executive
Vice President, Secretary and Director of Federated
Administrative Services, Inc., Executive Vice President and
Director of 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.
STATE EXPENSE LIMITATION
The Adviser has undertaken to comply with the expense
limitation 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 expense 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 waived by the Adviser will be limited, in
<PAGE>
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.
SHAREHOLDER SERVICING
In return for providing shareholder servicing to its customers
who from time to time may be owners of record or beneficial
owners of Shares, a financial institution may receive payments
from the Fund at a rate not exceeding 0.25 of 1% of the average
daily net assets of the 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
services may include, but not are not limited to, the provision
of personal services and maintenance of shareholder accounts.
Federated Securities Corp. may also pay financial institutions
a fee based upon the net asset value of the Shares beneficially
owned by the financial institution's clients or customers.
This fee is in addition to amounts paid under the Shareholder
Services Plan and will be reimbursed by the Adviser.
ADMINISTRATIVE SERVICES
Federated Administrative Services, Inc., a subsidiary of
Federated Investors, provides administrative personnel and
services to the Fund at approximate cost. 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.
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 use 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 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:
<PAGE>
* 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.
PURCHASING SHARES
Except under certain circumstances described in the prospectus,
Shares are sold at their net asset value plus a sales charge on
days the New York Stock Exchange is open for business. The
procedure for purchasing Shares is explained in the prospectus
under "Investing in Fortress Shares."
DISTRIBUTION PLAN
The Fund has adopted a Plan under Rule 12b-1 which was
promulgated by the Securities and Exchange Commission pursuant
to the Investment Company Act of 1940. The Plan provides for
payment of fees to Federated Securities Corp. to finance any
activity which is principally intended to result in the sale of
Shares. Such activities may include the advertising and
marketing of Shares; preparing, printing, and distributing
prospectuses and sales literature to prospective shareholders
or brokers; and implementing and operating the Plan. Pursuant
to the Plan, Federated Securities Corp. may pay fees to brokers
for distribution services.
The Directors expect 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
<PAGE>
efficient portfolio management and assist the Fund in seeking
to achieve its investment objective.
PURCHASES BY SALES REPRESENTATIVES, FUND DIRECTORS, AND
EMPLOYEES
Directors, employees, and sales representatives of the Fund,
the Adviser, 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 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 values of the Fund's securities are determined as
follows:
* as provided by an independent pricing service;
* for short-term obligations, according to the mean bid and
asked prices, as furnished by an independent pricing
service, or for short-term obligations with maturities of
less than 60 days, at amortized cost unless the Directors
determine this is not fair value; or
* at fair value as determined in good faith by the Directors.
Prices provided by independent pricing services may be
determined without relying exclusively on quoted prices.
Pricing services may consider:
* yield;
* quality;
* coupon rate;
* maturity;
* type of issue;
<PAGE>
* trading characteristics; and
* other market data.
REDEEMING SHARES
The Fund redeems Shares at the next computed net asset value
after the Fund receives the redemption request. Shareholder
redemptions may be subject to a contingent deferred sales
charge. Redemption procedures are explained in the prospectus
under "Redeeming Fortress Shares." Although the transfer agent
does not charge for telephone redemptions, it reserves the
right to charge a fee for the cost of wire-transferred
redemptions of less than $5,000.
REDEMPTION IN KIND
The Corporation is obligated to redeem Shares solely in cash up
to $250,000 or 1% of the Fund's net asset value, whichever is
less, for any one shareholder within a 90-day period.
Any redemption beyond this amount will also be in cash unless
the Directors determine that payments should be in kind. In
such a case, the Fund will pay all or a portion of the
remainder of the redemption in portfolio instruments, valued in
the same way that net asset value is determined. The portfolio
instruments will be selected in a manner that the Directors
deem fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If
redemption is made in kind, shareholders receiving their
securities and selling them before their maturity could receive
less than the redemption value of their securities and could
incur certain transaction costs.
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;
<PAGE>
* invest in securities within certain statutory limits; and
* distribute to its shareholders at least 90% of its net
income earned during the year.
FOREIGN TAXES
Investment income on certain foreign securities in which the
Fund may invest may be subject to foreign withholding or other
taxes that could reduce the return on these securities. Tax
treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign taxes to
which the Fund would be subject.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and
capital gains received as cash or additional Shares. No
portion of any income dividend paid by the Fund is eligible for
the dividends received deduction available to corporations.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on
long-term capital gains distributed to them regardless of
how long they have held the Shares.
TOTAL RETURN
The average annual total return for the Shares 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 offering price 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 charge, adjusted over the
period by any additional Shares, assuming the monthly
reinvestment of all dividends and distributions. Any
applicable contingent deferred sales charge is deducted from
the ending value of the investment based on the lesser of the
original purchase price or the net asset value of the Shares
redeemed.
YIELD
The yield of the Shares is determined by dividing the net
investment income per Share (as defined by the Securities and
Exchange Commission) earned by the Fund over a thirty-day
period by the offering price per Share on the last day of the
period. This value is annualized using semi-annual
<PAGE>
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 the Fund, performance will
be reduced for those shareholders paying those fees.
PERFORMANCE COMPARISONS
The performance 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 expenses; and
* various other factors.
The performance of Shares 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.
Investors may use financial publications and/or indices to
obtain a more complete view of the performance of Shares. When
comparing performance, investors should consider all relevant
factors such as the composition of any index used, prevailing
market conditions, portfolio compositions of other funds, and
methods used to value portfolio securities and compute net
asset value. The financial publications and/or indices which
the Fund uses in advertising may include:
* [LIST RELEVANT INDICES].
* 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 offering price over a specific
period of time. From time to time, the Fund will quote its
Lipper ranking in the "______________________" category in
advertising and sales literature.
<PAGE>
Advertisements and other sales literature for the Shares may
quote total returns which are calculated on non-standardized
base periods. These total returns represent the historic
change in the value of an investment in Shares based on monthly
reinvestment of dividends over a specified period of time.
Advertisements may quote performance information which does not
reflect the effect of the sales charge or the contingent
deferred sales charge.
APPENDIX
STANDARD AND POOR'S CORPORATION CORPORATE BOND RATINGS
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
<PAGE>
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.
<PAGE>
FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely
to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong as
bonds rated "AAA." Because bonds rated in the "AAA" and "AA"
categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is
generally rated "F-1+."
A--Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds,
and therefore, impair timely payment.
<PAGE>
* * * * * *
STRATEGIC INCOME FUND
(A PORTFOLIO OF INSIGHT INSTITUTIONAL SERIES, INC.)
SELECT SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with
the prospectus of Select Shares of Strategic Income Fund (the
"Fund") dated ________________ ___, 1994. This Statement is
not a prospectus itself. To receive a copy of the prospectus,
write or call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated _______________ ___, 1994
<PAGE>
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT THE FUND
INVESTMENT OBJECTIVE AND POLICIES
Types of Investments and Investment Techniques
Resets of Interest
Caps and Floors
Non-Mortgage Related Asset-Backed Securities
Convertible Securities
Equity Securities
Warrants
Futures and Options Transactions
Foreign Currency Transactions
Foreign Bank Instruments
When-Issued and Delayed Delivery Transactions
Lending of Portfolio Securities
Restricted and Illiquid Securities
Repurchase Agreements
Reverse Repurchase Agreements
Portfolio Turnover
INVESTMENT LIMITATIONS
FIXED INCOME SECURITIES, INC. MANAGEMENT
Officers and Directors
The Funds
Fund Ownership
Director Liability
INVESTMENT ADVISORY SERVICES
Adviser to the Fund
Advisory Fees
SHAREHOLDER SERVICING
ADMINISTRATIVE SERVICES
BROKERAGE TRANSACTIONS
PURCHASING SHARES
Distribution Plan
DETERMINING NET ASSET VALUE
Determining Market Value of Securities
REDEEMING SHARES
Redemption in Kind
<PAGE>
TAX STATUS
The Fund's Tax Status
Foreign Taxes
Shareholders' Tax Status
TOTAL RETURN
YIELD
PERFORMANCE COMPARISONS
APPENDIX
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of Fixed Income Securities, Inc. (the
"Corporation"). The Corporation was incorporated under the
laws of the State of Maryland on October 15, 1991.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek a high level of
current income. The investment objective stated above cannot
be changed without approval of shareholders. The investment
policies stated below may be changed by the Board of Directors
("Directors") without shareholder approval. Shareholders will
be notified before any material change in the investment
policies becomes effective.
TYPES OF INVESTMENTS AND INVESTMENT TECHNIQUES
The Fund pursues its investment objective by investing in a
diversified portfolio primarily consisting of domestic
corporate debt obligations, U.S. government securities, and
foreign government and corporate debt obligations. Under
normal circumstances, the Fund's assets will be invested in
each of these three sectors. However, the Fund may from time
to time invest up to 100% of its total assets in any one sector
if, in the judgment of the investment adviser, the Fund has the
opportunity of seeking a high level of current income without
undue risk to principal.
RESETS OF INTEREST
The interest rates paid on the mortgage-backed in which the
Fund invests generally are readjusted at intervals of one year
or less to an increment over some predetermined interest rate
index. There are two main categories of indices: those based
on U.S. Treasury securities and those derived from a calculated
measure, such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year
and five-year constant maturity Treasury Note rates, the three-
<PAGE>
month Treasury Bill rate, the 180-day Treasury Bill rate, rates
on longer-term Treasury securities, the National Median Cost of
Funds, the one-month or three-month London Interbank Offered
Rate (LIBOR), the prime rate of a specific bank, or commercial
paper rates. Some indices, such as the one-year constant
maturity Treasury Note rate, closely mirror changes in market
interest rate levels.
To the extent that the adjusted interest rate on the mortgage
security reflects current market rates, the market value of an
adjustable rate mortgage security will tend to be less
sensitive to interest rate changes than a fixed rate debt
security of the same stated maturity. Hence, ARMs which use
indices that lag changes in market rates should experience
greater price volatility than adjustable rate mortgage
securities that closely mirror the market.
CAPS AND FLOORS
The underlying mortgages which collateralize the mortgage-
backed securities in which the Fund invests will frequently
have caps and floors which limit the maximum amount by which
the loan rate to the residential borrower may change up or
down: (1) per reset or adjustment interval, and (2) over the
life of the loan. Some residential mortgage loans restrict
periodic adjustments by limiting changes in the borrower's
monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in
negative amortization.
The value of mortgage securities in which the Fund invests may
be affected if market interest rates rise or fall faster and
farther than the allowable caps or floors on the underlying
residential mortgage loans. Additionally, even though the
interest rates on the underlying residential mortgages are
adjustable, amortization and prepayments may occur, thereby
causing the effective maturities of the mortgage securities in
which the Fund invests to be shorter than the maturities stated
in the underlying mortgages.
NON-MORTGAGE RELATED ASSET-BACKED SECURITIES
Non-mortgage related asset-backed securities present certain
risks that are not presented by mortgage-backed securities.
Primarily, these securities do not have the benefit of the same
security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right
to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of asset-backed
securities backed by motor vehicle installment purchase
obligations permit the servicer of such receivables to retain
possession of the underlying obligations. If the servicer
<PAGE>
sells these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the
holders of the related asset-backed securities. Further, if a
vehicle is registered in one state and is then registered
because the owner and the obligor move to another state, such
re-registration could defeat the original security interest in
the vehicle in certain cases. In addition, because of the
large number of vehicles involved in a typical issuance and
technical requirements under state laws, the trustee with the
holders of asset-backed securities backed by automobile
receivables may not have a proper security interest in all of
the obligations backing such receivables. Therefore, there is
a possibility that recoveries on repossessed collateral may
not, in some cases, be available to support payments on these
securities.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. Convertible
securities are fixed income securities that may be exchanged or
converted into a predetermined number of shares of the issuer's
underlying common stock at the option of the holder during a
specified period. Convertible securities may take the form of
convertible preferred stock, convertible bonds or debentures,
units consisting of "usable" bonds and warrants or a
combination of the features of several of these securities.
The investment characteristics of each convertible security
vary widely, which allows convertible securities to be employed
for a variety of investment strategies.
The Fund will exchange or convert convertible securities into
shares of underlying common stock when, in the opinion of the
investment adviser, the investment characteristics of the
underlying common shares will assist the Fund in achieving its
investment objective. The Fund may also elect to hold or trade
convertible shares. In selecting convertible securities, the
Fund's investment adviser evaluates the investment
characteristics of the convertible security as a fixed income
instrument, and the investment potential of the underlying
equity security for capital appreciation. In evaluating these
matters with respect to a particular convertible security, the
investment adviser considers numerous factors, including the
economic and political outlook, the value of the security
relative to other investment alternatives, trends in the
determinants of the issuer's profits, and the issuer's
management capability and practices.
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 limitation if unusual conditions suggest
<PAGE>
such investments represent a better opportunity to reach the
Fund's investment objective.
WARRANTS
The Fund may invest in warrants. Warrants are basically
options to purchase common stock at a specific price (usually
at a premium above the market value of the optioned common
stock at issuance) valid for a specific period of time.
Warrants may have a life ranging from less than one year to
twenty years, or they may be perpetual. However, most warrants
have expiration dates after which they are worthless. In
addition, a warrant is worthless if the market price of the
common stock does not exceed the warrant's exercise price
during the life of the warrant. Warrants have no voting
rights, pay no dividends, and have no rights with respect to
the assets of the corporation issuing them. The percentage
increase or decrease in the market price of the warrant may
tend to be greater than the percentage increase or decrease in
the market price of the optioned common stock. The Fund will
not invest more than 5% of the value of its total assets in
warrants. Warrants acquired in units or attached to securities
may be deemed to be without value for purposes of this policy.
FUTURES AND OPTIONS TRANSACTIONS
The Fund may attempt to hedge all or a portion of its portfolio
by buying and selling financial futures contracts, buying put
options on portfolio securities and listed put options on
futures contracts, and writing call options on futures
contracts. The Fund may also write covered call options on
portfolio securities to attempt to increase its current income.
The Fund currently does not intend to invest more than 5% of
its total assets in options transactions.
FINANCIAL FUTURES CONTRACTS
A futures contract is a firm commitment by two parties: the
seller who agrees to make delivery of the specific type of
security called for in the contract ("going short") and the
buyer who agrees to take delivery of the security ("going
long") at a certain time in the future. In the fixed income
securities market, price moves inversely to interest rates.
A rise in rates means a drop in price. Conversely, a drop
in rates means a rise in price. In order to hedge its
holdings of fixed income securities against a rise in market
interest rates, the Fund could enter into contracts to
deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the
prices of its fixed income securities may decline during the
Fund's anticipated holding period. The Fund would agree to
purchase securities in the future at a predetermined price
(i.e., "go long") to hedge against a decline in market
interest rates.
<PAGE>
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial
futures contracts. Unlike entering directly into a futures
contract, which requires the purchaser to buy a financial
instrument on a set date at a specified price, the purchase
of a put option on a futures contract entitles (but does not
obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price.
The Fund would purchase put options on futures contracts to
protect portfolio securities against decreases in value
resulting from an anticipated increase in market interest
rates. Generally, if the hedged portfolio securities
decrease in value during the term of an option, the related
futures contracts will also decrease in value and the option
will increase in value. In such an event, the Fund will
normally close out its option by selling an identical
option. If the hedge is successful, the proceeds received
by the Fund upon the sale of the second option will be large
enough to offset both the premium paid by the Fund for the
original option plus the decrease in value of the hedged
securities.
Alternatively, the Fund may exercise its put option. To do
so, it would simultaneously enter into a futures contract of
the type underlying the option (for a price less than the
strike price of the option) and exercise the option. The
Fund would then deliver the futures contract in return for
payment of the strike price. If the Fund neither closes out
nor exercises an option, the option will expire on the date
provided in the option contract, and the premium paid for
the contract will be lost.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund
may write listed call options on futures contracts to hedge
its portfolio against an increase in market interest rates.
When the Fund writes a call option on a futures contract, it
is undertaking the obligation of assuming a short futures
position (selling a futures contract) at the fixed strike
price at any time during the life of the option if the
option is exercised. As market interest rates rise, causing
the prices of futures to go down, the Fund's obligation
under a call option on a future (to sell a futures contract)
costs less to fulfill, causing the value of the Fund's call
option position to increase.
In other words, as the underlying futures price goes down
below the strike price, the buyer of the option has no
reason to exercise the call, so that the Fund keeps the
premium received for the option. This premium can offset
<PAGE>
the drop in value of the Fund's fixed income portfolio which
is occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or
exercise of it by the buyer, the Fund may close out the
option by buying an identical option. If the hedge is
successful, the cost of the second option will be less than
the premium received by the Fund for the initial option.
The net premium income of the Fund will then offset the
decrease in value of the hedged securities.
The Fund will not maintain open positions in futures
contracts it has sold or call options it has written on
futures contracts if, in the aggregate, the value of the
open positions (marked to market) exceeds the current market
value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted
for the correlation of volatility between the hedged
securities and the futures contracts. If this limitation is
exceeded at any time, the Fund will take prompt action to
close out a sufficient number of open contracts to bring its
open futures and options positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not
pay or receive money upon the purchase or sale of a futures
contract. Rather, the Fund is required to deposit an amount
of "initial margin" in cash or U.S. Treasury bills with its
custodian (or the broker, if legally permitted). The nature
of initial margin in futures transactions is different from
that of margin in securities transactions in that futures
contract initial margin does not involve the borrowing of
funds by the Fund to finance the transactions. Initial
margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the
official settlement price of the exchange on which it is
traded. Each day the Fund pays or receives cash, called
"variation margin," equal to the daily change in value of
the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund
and the broker of the amount one would owe the other if the
futures contract expired. In computing its daily net asset
value, the Fund will mark-to-market its open futures
positions.
The Fund is also required to deposit and maintain margin
when it writes call options on futures contracts.
<PAGE>
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put options on portfolio securities to
protect against price movements in particular securities in
its portfolio. A put option gives the Fund, in return for a
premium, the right to sell the underlying security to the
writer (seller) at a specified price during the term of the
option.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may also write covered call options to generate
income. As writer of a call option, the Fund has the
obligation upon exercise of the option during the option
period to deliver the underlying security upon payment of
the exercise price. The Fund may only sell call options
either on securities held in its portfolio or on securities
which it has the right to obtain without payment of further
consideration (or has segregated cash in the amount of any
additional consideration).
PURCHASING AND WRITING OVER-THE-COUNTER OPTIONS
The Fund may purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the
buyers or writers of the options for those options on
portfolio securities held by the Fund and not traded on an
exchange. Over-the-counter options are two party contracts
with price and terms negotiated between buyer and seller.
In contrast, exchange-traded options are third party
contracts with standardized strike prices and expiration
dates and are purchased from a clearing corporation.
Exchange-traded options have a continuous liquid market
while over-the-counter options may not.
FOREIGN CURRENCY TRANSACTIONS
CURRENCY RISKS
To the extent that debt securities purchased by the Fund are
denominated in currencies other than the U.S. dollar,
changes in foreign currency exchange rates will affect the
Fund's net asset value; the value of interest earned; gains
and losses realized on the sale of securities; and net
investment income and capital gain, if any, to be
distributed to shareholders by the Fund. If the value of a
foreign currency rises against the U.S. dollar, the value of
the Fund's assets denominated in that currency will
increase; correspondingly, if the value of a foreign
currency declines against the U.S. dollar, the value of the
Fund's assets denominated in the currency will decrease.
The exchange rates between the U.S. dollar and foreign
currencies are a function of such factors as supply and
<PAGE>
demand in the currency exchange markets, international
balances of payments, governmental intervention, speculation
and other economic and political conditions. Although the
Fund values its assets daily in U.S. dollars, the Fund may
not convert its holdings of foreign currencies to U.S.
dollars daily. The Fund may incur conversion costs when it
converts its holdings to another currency. Foreign exchange
dealers may realize a profit on the difference between the
price at which the Fund buys and sells currencies.
The Fund will engage in foreign currency exchange
transactions in connection with its investments in the
securities. The Fund will conduct its foreign currency
exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange
market, or through forward contracts to purchase or sell
foreign currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange
contracts in order to protect itself against a possible loss
resulting from an adverse change in the relationship between
the U.S. dollar and a foreign currency involved in an
underlying transaction. However, forward foreign currency
exchange contracts may limit potential gains which could
result from a positive change in such currency
relationships. The Fund's investment adviser believes that
it is important to have the flexibility to enter into
forward foreign currency exchange contracts whenever it
determines that it is in the Fund's best interest to do so.
The Fund will not speculate in foreign currency exchange.
The Fund will not enter into forward foreign currency
exchange contracts or maintain a net exposure in such
contracts when it would be obligated to deliver an amount of
foreign currency in excess of the value of its portfolio
securities or other assets denominated in that currency or,
in the case of a "cross-hedge" denominated in a currency or
currencies that the Fund's investment adviser believes will
tend to be closely correlated with that currency with regard
to price movements. Generally, the Fund will not enter into
a forward foreign currency exchange contract with a term
longer than one year.
FOREIGN CURRENCY OPTIONS
A foreign currency option provides the option buyer with the
right to buy or sell a stated amount of foreign currency at
the exercise price on a specified date or during the option
period. The owner of a call option has the right, but not
the obligation, to buy the currency. Conversely, the owner
of a put option has the right, but not the obligation, to
sell the currency.
<PAGE>
When the option is exercised, the seller (i.e., writer) of
the option is obligated to fulfill the terms of the sold
option. However, either the seller or the buyer may, in the
secondary market, close its position during the option
period at any time prior to expiration.
A call option on foreign currency generally rises in value
if the underlying currency appreciates in value, and a put
option on foreign currency generally falls in value if the
underlying currency depreciates in value. Although
purchasing a foreign currency option can protect the Fund
against an adverse movement in the value of a foreign
currency, the option will not limit the movement in the
value of such currency. For example, if the Fund was
holding securities denominated in a foreign currency that
was appreciating and had purchased a foreign currency put to
hedge against a decline in the value of the currency, the
Fund would not have to exercise their put option. Likewise,
if the Fund were to enter into a contract to purchase a
security denominated in foreign currency and, in conjunction
with that purchase, were to purchase a foreign currency call
option to hedge against a rise in value of the currency, and
if the value of the currency instead depreciated between the
date of purchase and the settlement date, the Fund would not
have to exercise its call. Instead, the Fund could acquire
in the spot market the amount of foreign currency needed for
settlement.
SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY OPTIONS
Buyers and sellers of foreign currency options are subject
to the same risks that apply to options generally. In
addition, there are certain additional risks associated with
foreign currency options. The markets in foreign currency
options are relatively new, and the Fund's ability to
establish and close out positions on such options is subject
to the maintenance of a liquid secondary market. Although
the Fund will not purchase or write such options unless and
until, in the opinion of the Fund's investment adviser, the
market for them has developed sufficiently to ensure that
the risks in connection with such options are not greater
than the risks in connection with the underlying currency,
there can be no assurance that a liquid secondary market
will exist for a particular option at any specific time.
In addition, options on foreign currencies are affected by
all of those factors that influence foreign exchange rates
and investments generally.
The value of a foreign currency option depends upon the
value of the underlying currency relative to the U.S.
dollar. As a result, the price of the option position may
vary with changes in the value of either or both currencies
and may have no relationship to the investment merits of a
foreign security. Because foreign currency transactions
<PAGE>
occurring in the interbank market involve substantially
larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by
having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying
foreign currencies at prices that are less favorable than
for round lots.
There is no systematic reporting of last sale information
for foreign currencies or any regulatory requirement that
quotations available through dealers or other market sources
be firm or revised on a timely basis. Available quotation
information is generally representative of very large
transactions in the interbank market and thus may not
reflect relatively smaller transactions (i.e., less than $1
million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock
market. To the extent that the U.S. option markets are
closed while the markets for the underlying currencies
remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in
the options markets until they reopen.
FOREIGN CURRENCY FUTURES TRANSACTIONS
By using foreign currency futures contracts and options on
such contracts, the Fund may be able to achieve many of the
same objectives as it would through the use of forward
foreign currency exchange contracts. The Fund may be able
to achieve these objectives possibly more effectively and at
a lower cost by using futures transactions instead of
forward foreign currency exchange contracts.
SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY FUTURES
CONTRACTS AND RELATED OPTIONS
Buyers and sellers of foreign currency futures contracts are
subject to the same risks that apply to the use of futures
generally. In addition, there are risks assocated with
foreign currency futures contracts and their use as a
hedging device similar to those associated with options on
futures currencies, as described above.
Options on foreign currency futures contracts may involve
certain additional risks. Trading options on foreign
currency foreign currency futures contracts is relatively
new. The ability to establish and close out positions on
such options is subject to the maintenance of a liquid
secondary market. To reduce this risk, the Fund will not
purchase or write options on foreign currency futures
contracts unless and until, in the opinion of the Fund's
investment adviser, the market for such options has
developed sufficiently that the risks in connection with
such options are not greater than the risks in connection
<PAGE>
with transactions in the underlying foreign currency futures
contracts. Compared to the purchase or sale of foreign
currency futures contracts, the purchase of call or put
options on futures contracts involves less potential risk to
the Fund because the maximum amount at risk is the premium
paid for the option (plus transaction costs). However,
there may be circumstances when the purchase of a call or
put option on a futures contract would result in a loss,
such as when there is no movement in the price of the
underlying currency or futures contract.
FOREIGN BANK INSTRUMENTS
Eurodollar Certificates of Deposit ("ECDs"), Eurodollar Time
Deposits ("ETDs"), Yankee Certificates of Deposit ("Yankee
CDs"), 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
withholdings or other taxes on interest income, difficulties in
obtaining or enforcing a judgment against the issuing bank, and
the possible impact of interruptions of 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 requirements, loan limitations, examinations, accounting,
auditing, and recording keeping and the public availability of
information. These factors will be carefully considered by the
Fund's adviser in selecting investments for the Fund.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are arrangements in which the Fund purchases
securities with payment and delivery scheduled for a future
time. 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, and not for investment leverage.
These transactions are made to secure what is considered to be
an advantageous price and yield for the Fund. Settlement dates
may be a month or more after entering into these transactions,
and the market values of the securities purchased may vary from
the purchase prices.
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 are maintained until the transaction is settled. The Fund
may engage in these transactions to an extent that would cause
<PAGE>
the segregation of an amount up to 20% of the total value of
its assets.
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
equivalent collateral to the borrower or placing broker.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Directors to determine the liquidity of
certain restricted securities is permitted under the Securities
and Exchange Commission ("SEC") Staff position set forth in the
adopting release for Rule 144A under the Securities Act of 1933
(the "Rule"). The Rule is a non-exclusive safe harbor for
certain secondary market transactions involving securities
subject to restrictions on resale under federal securities
laws. The Rule provides an exemption from registration for
resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance
the liquidity of the secondary market for securities eligible
for resale under Rule 144A. The Fund believes that the Staff
of the SEC has left the question of determining the liquidity
of all restricted securities to the Directors. The Directors
consider the following criteria in determining the liquidity of
certain restricted securities:
* the frequency of trades and quotes for the security;
* the number of dealers willing to purchase or sell the
security and the number of other potential buyers;
* dealer undertakings to make a market in the security; and
* the nature of the security and the nature of the marketplace
trades.
REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the
securities subject to repurchase agreements, and these
securities are 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 a defaulting
<PAGE>
seller files for bankruptcy or becomes insolvent, disposition
of 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 and 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 Directors.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. A
reverse repurchase transaction is similar to borrowing cash.
In a reverse repurchase agreement the Fund transfers possession
of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a
percentage of the instrument's market value in cash, and agrees
that on a stipulated date in the future, the Fund will
repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of
reverse repurchase agreements may enable the Fund to avoid
selling portfolio instruments at a time when a sale may be
deemed to be disadvantageous, but the ability to enter into
reverse repurchase agreements does not ensure that the Fund
will be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of
the Fund, in a dollar amount sufficient to make payment for the
obligations to be purchased, are segregated at the trade date.
These securities are marked to market daily and are maintained
until the transaction is settled.
PORTFOLIO TURNOVER
The Fund will not attempt to set or meet a portfolio turnover
rate since any turnover would be incidental to transactions
undertaken in an attempt to achieve the Fund's investment
objective, without regard to the length of time a particular
security may have been held. The adviser does not anticipate
that portfolio turnover will result in adverse tax
consequences.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell securities short or purchase
securities on margin, other than in connection with the
purchase and sale of options, financial futures and options
<PAGE>
on financial futures, but may obtain such short-term credits
as are necessary for clearance of transactions.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except as required
by forward commitments to purchase securities or currencies
and except that the Fund may borrow money and engage in
reverse repurchase agreements in amounts up to one-third of
the value of its total assets, including the amounts
borrowed. The Fund will not borrow money or engage in
reverse repurchase agreements for investment leverage, but
rather as a temporary, extraordinary, or emergency measure
or 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. The Fund will not purchase any securities
while borrowings in excess of 5% of its total assets are
outstanding. During the period any reverse repurchase
agreements are outstanding, but only to the extent necessary
to assure completion of the reverse repurchase agreements,
the Fund will restrict the purchase of portfolio instruments
to money market instruments maturing on or before the
expiration date of the reverse repurchase agreements.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any
assets except to secure permitted borrowings. In those
cases, it may pledge assets having a market value not
exceeding the lesser of the dollar amounts borrowed or 15%
of the value of total assets at the time of the borrowing.
Margin deposits for the purchase and sale of options,
financial futures contracts and related options are not
deemed to be a pledge.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of
its total assets, the Fund will not purchase securities of
any one issuer (other than cash, cash items or securities
issued or guaranteed by the government of the United States
or its agencies or instrumentalities and repurchase
agreements collateralized by U.S. government securities) if
as a result more than 5% of the value of its total assets
would be invested in the securities of that issuer or the
Fund would own more than 10% of the outstanding voting
securities of that issuer.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, including limited
partnership interests in real estate, although it may invest
in securities of companies whose business involves the
<PAGE>
purchase or sale of real estate or in securities which are
secured by real estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, except that
the Fund may purchase and sell financial futures contracts
and related options. Further, the Fund may engage in
transactions in foreign currencies and may purchase and sell
options on foreign currencies and indices for hedging
purposes.
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
restricted securities which the Fund may purchase pursuant
to its investment objective, policies, and limitations.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio
securities up to one-third of the value of its total assets.
This shall not prevent the Fund from purchasing or holding
U.S. government obligations, money market instruments,
variable rate demand notes, bonds, debentures, notes,
certificates of indebtedness, or other debt securities,
entering into repurchase agreements, or engaging in other
transactions where permitted by the Fund's investment
objective, policies and limitations.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its
total assets in any one industry or in government securities
of any one foreign country, except it may invest 25% or more
of the value of its total assets in securities issued or
guaranteed by the U.S. government, its agencies or
instrumentalities.
The above investment limitations cannot be changed without
shareholder approval. The following limitations, however, may
be changed by the Directors without shareholder approval.
Shareholders will be notified before any material change in
these limitations becomes effective.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its
total assets in securities subject to restrictions on resale
under the Securities Act of 1933, except for commercial
paper issued under Section 4(2) of the Securities Act of
<PAGE>
1933 and certain other restricted securities which meet the
criteria for liquidity as established by the Directors.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its
net assets in illiquid securities, including repurchase
agreements providing for settlement in more than seven days
after notice, over-the-counter options, and certain
securities not determined by the Directors to be liquid.
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. With respect to asset-backed securities, the
Fund will treat the originator of the asset pool as the
company issuing the security for purposes of determining
compliance with this limitation.
INVESTING IN MINERALS
The Fund will not purchase or sell oil, gas, or other
mineral exploration or development programs or leases,
although it may purchase the securities of issuers which
invest in or sponsor such programs.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of its net assets in
warrants, including those acquired in units or attached to
other securities. To comply with certain state
restrictions, the Fund will limit its investments in such
warrants not listed on the New York or American Stock
Exchanges to 2% of its net assets. (If state restrictions
change, this latter restriction may be revised without
notice to shareholder.) For purposes of this investment
restriction, warrants will be valued at the lower of cost or
market, except that warrants acquired by the Fund in units
with or attached to securities may be deemed to be without
value.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investments in other investment
companies to no more than 3% of the total outstanding voting
securities of any such investment company, will invest no
more than 5% of its total assets in any one investment
company, and will invest no more than 10% of its total
assets in investment companies in general. These
limitations are not applicable if the securities are
acquired as part of a merger, consolidation, reorganization,
or other acquisition.
<PAGE>
DEALING IN PUTS AND CALLS
The Fund may not write or purchase options, except that the
Fund may write covered call options and secured put options
on up to 25% of its net assets and may purchase put and call
options, provided that no more than 5% of the fair market
value of its net assets may be invested in premiums on such
options.
Except with respect to borrowing money, if a percentage
limitation is adhered to at the time of the 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. For purposes of its policies and limitations, the
Fund considers certificates of deposit and demand and time
deposits issued by a U.S. branch of a domestic bank or savings
association having capital, surplus, and undivided profits in
excess of $100,000,000 at the time of investment to be "cash
items."
The Fund does not expect to borrow money or pledge securities
in excess of 5% of the value of its total assets during the
present fiscal year.
FIXED INCOME SECURITIES, INC. MANAGEMENT
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 Services Company,
Federated Administrative Services, Inc., and the Funds (as
defined below).
Positions with Principal Occupations
Name and Address the Corporation During Past Five Years
<PAGE>
John F. Donahue*+ Chairman and Chairman and Trustee,
Federated Director Federated Investors;
Investors Tower Chairman and Trustee,
Pittsburgh, PA Federated Advisers,
Federated Management, and
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 of the
Corporation.
John T. Conroy, Director President, Investment
Jr., Wood/IPC Properties Corporation;
Commercial Senior Vice-President,
Department John R. Wood and
John R. Wood and Associates, Inc.,
Associates, Inc., Realtors; President,
Realtors Northgate Village
3255 Tamiami Development Corporation
Trail North and Investment Properties
Naples, FL Corporation; General
Partner or Trustee in
private real estate
ventures in Southwest
Florida; Director,
Trustee, or Managing
General Partner of the
Funds; formerly,
President, Naples Property
Management, Inc.
William J. Director Director and Member of the
Copeland Executive Committee,
One PNC Plaza - Michael Baker, Inc.;
23rd Floor Director, Trustee, or
Pittsburgh, PA Managing General Partner
of the Funds; formerly,
Vice Chairman and
Director, PNC Bank, N.A.
and PNC Bank Corp. and
Director, Ryan Homes, Inc.
<PAGE>
James E. Dowd Director Attorney-at-law; Director,
571 Hayward Mill The Emerging Germany Fund,
Road Inc.; Director, Trustee,
Concord, MA or Managing General
Partner of the Funds;
formerly, Director, Blue
Cross of Massachusetts,
Inc.
Lawrence D. Director Hematologist, Oncologist,
Ellis, M.D. and Internist,
3471 Fifth Avenue Presbyterian and
Suite 1111 Montefiore Hospitals;
Pittsburgh, PA Clinical Professor of
Medicine and Trustee,
University of Pittsburgh;
Director, Trustee, or
Managing General Partner
of the Funds.
Richard B. President and Executive Vice President
Fisher* Director and Trustee, Federated
Federated Investors; Chairman,
Investors Tower Federated Securities
Pittsburgh, PA Corp.; President or Vice
President of the Funds;
Director or Trustee of
some of the Funds.
Edward L. Director Attorney-at-law; Partner,
Flaherty, Jr.+ Meyer and Flaherty;
5916 Penn Mall Director, Eat'N Park
Pittsburgh, PA Restaurants, Inc., and
Statewide Settlement
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
225 Franklin Representative,
Street Commonwealth of
Boston, MA Massachusetts; Director,
Trustee, or Managing
General Partner of the
Funds; formerly,
President, State Street
Bank and Trust Company and
State Street Boston
Corporation and Trustee,
Lahey Clinic Foundation,
Inc.
<PAGE>
Gregor F. Meyer Director Attorney-at-law; Partner,
5916 Penn Mall Meyer and Flaherty;
Pittsburgh, PA Chairman, Meritcare, Inc.;
Director, Eat'N Park
Restaurants, Inc.;
Director, Trustee, or
Managing General Partner
of the Funds; formerly,
Vice Chairman, Horizon
Financial, F.A.
Wesley W. Posvar Director Professor, Foreign Policy
1202 Cathedral of and Management Consultant;
Learning Trustee, Carnegie
University of Endowment for
Pittsburgh International Peace, RAND
Pittsburgh, PA Corporation, Online
Computer Library Center,
Inc., and U.S. Space
Foundation; Chairman,
Czecho Slovak Management
Center; 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
4905 Bayard consultant; Director,
Street Trustee, or Managing
Pittsburgh, PA General Partner of the
Funds.
<PAGE>
J. Christopher Vice President President and Trustee,
Donahue Federated Investors;
Federated Trustee, Federated
Investors Tower Advisers, Federated
Pittsburgh, PA Management, and Federated
Research; Trustee,
Federated Services
Company; 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
Corporation.
Edward C. Vice President and Vice President, Treasurer
Gonzales Treasurer and Trustee, Federated
Federated Investors; Vice President
Investors Tower and Treasurer, Federated
Pittsburgh, PA Advisers, 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 President and
Treasurer of the Funds.
<PAGE>
John W. McGonigle Vice President Vice President, Secretary,
Federated and Secretary General Counsel, and
Investors Tower Trustee, Federated
Pittsburgh, PA Investors; Vice President,
Secretary, and Trustee,
Federated Advisers,
Federated Management, and
Federated Research;
Trustee, Federated
Services Company;
Executive Vice President,
Secretary, and Director,
Federated Administrative
Services, Inc.; Director
and Executive Vice
President, Federated
Securities Corp.; Vice
President and Secretary of
the Funds.
John A. Vice President Vice President and
Staley, IV Trustee, Federated
Federated Investors; Executive Vice
Investors Tower President, Federated
Pittsburgh, PA Securities Corp.;
President and 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.
* This Director is deemed to be an "interested person" of the
Fund as defined in the Investment Company Act of 1940.
+ Member of the Corporation's Executive Committee. The
Executive Committee of the Board of Directors handles the
Directors' responsibilities between meetings of the
Directors.
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; BankSouth
Select Funds; The Boulevard Funds; California Municipal Cash
<PAGE>
Trust; Cash Trust Series, Inc.; Cash Trust Series II;
111 Corcoran Funds; 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 Term Trust, Inc.-1999; Liberty
U.S. Government Money Market Trust; 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; The Planters Fund; 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; and Trust for
U.S. Treasury Obligations.
FUND OWNERSHIP
Officers and Directors own less than 1% of the outstanding
Select Shares (the "Shares") of the Fund.
DIRECTOR LIABILITY
The Corporation's Articles of Incorporation provide that the
Directors will not be liable for errors of judgment or mistakes
of fact or law. However, they are not protected against any
liability to which they would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their
office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
<PAGE>
The Fund's investment adviser is Federated Advisers (the
"Adviser"). It is a subsidiary of Federated Investors. All of
the voting securities 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, Chairman and
Trustee of Federated Advisers, is Chairman and Trustee of
Federated Investors, and Chairman and Director of the Fund.
John A. Staley, IV, President and Trustee of Federated
Advisers, is Vice President and Trustee of Federated Investors,
Executive Vice President of Federated Securities Corp., and
Vice President of the Fund. J. Christopher Donahue, Trustee of
Federated Advisers, is President and Trustee of Federated
Investors, Trustee of Federated Services Company, President and
Director of Federated Administrative Services, Inc. and Vice
President of the Fund. John W. McGonigle, Vice President,
Secretary and Trustee of Federated Advisers, is Trustee, Vice
President, Secretary and General Counsel of Federated
Investors, Trustee of Federated Services Company, Executive
Vice President, Secretary and Director of Federated
Administrative Services, Inc., Executive Vice President and
Director of 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.
STATE EXPENSE LIMITATION
The Adviser has undertaken to comply with the expense
limitation 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 expense 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 waived by the Adviser will be limited, in
<PAGE>
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.
SHAREHOLDER SERVICING
In return for providing shareholder servicing to its customers
who from time to time may be owners of record or beneficial
owners of Shares, a financial institution may receive payments
from the Fund at a rate not exceeding 0.25 of 1% of the average
daily net assets of the 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
services may include, but not are not limited to, the provision
of personal services and maintenance of shareholder accounts.
Federated Securities Corp. may also pay financial institutions
a fee based upon the net asset value of the Shares beneficially
owned by the financial institution's clients or customers.
This fee is in addition to amounts paid under the Shareholder
Services Plan and will be reimbursed by the Adviser.
ADMINISTRATIVE SERVICES
Federated Administrative Services, Inc., a subsidiary of
Federated Investors, provides administrative personnel and
services to the Fund at approximate cost. 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.
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 use 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 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:
<PAGE>
* 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.
PURCHASING SHARES
Except under certain circumstances described in the prospectus,
Shares are sold at their net asset value on days the New York
Stock Exchange is open for business. The procedure for
purchasing Shares is explained in the prospectus under
"Investing in Select Shares."
DISTRIBUTION PLAN
The Fund has adopted a Plan under Rule 12b-1 which was
promulgated by the Securities and Exchange Commission pursuant
to the Investment Company Act of 1940. The Plan provides for
payment of fees to Federated Securities Corp. to finance any
activity which is principally intended to result in the sale of
Shares. Such activities may include the advertising and
marketing of Shares; preparing, printing, and distributing
prospectuses and sales literature to prospective shareholders
or brokers; and implementing and operating the Plan. Pursuant
to the Plan, Federated Securities Corp. may pay fees to brokers
for distribution services.
The Directors expect 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
<PAGE>
efficient portfolio management and assist the Fund in seeking
to achieve its investment objective.
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 values of the Fund's securities are determined as
follows:
* as provided by an independent pricing service;
* for short-term obligations, according to the mean bid and
asked prices, as furnished by an independent pricing
service, or for short-term obligations with maturities of
less than 60 days, at amortized cost unless the Directors
determine this is not fair value; or
* at fair value as determined in good faith by the Directors.
Prices provided by independent pricing services may be
determined without relying exclusively on quoted prices.
Pricing services 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
after the Fund receives the redemption request. Redemption
procedures are explained in the prospectus under "Redeeming
Select Shares." Although the transfer agent does not charge
for telephone redemptions, it reserves the right to charge a
fee for the cost of wire-transferred redemptions of less than
$5,000.
<PAGE>
REDEMPTION IN KIND
The Corporation is obligated to redeem Shares solely in cash up
to $250,000 or 1% of the Fund's net asset value, whichever is
less, for any one shareholder within a 90-day period.
Any redemption beyond this amount will also be in cash unless
the Directors determine that payments should be in kind. In
such a case, the Fund will pay all or a portion of the
remainder of the redemption in portfolio instruments, valued in
the same way that net asset value is determined. The portfolio
instruments will be selected in a manner that the Directors
deem fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If
redemption is made in kind, shareholders receiving their
securities and selling them before their maturity could receive
less than the redemption value of their securities and could
incur certain transaction costs.
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.
FOREIGN TAXES
Investment income on certain foreign securities in which the
Fund may invest may be subject to foreign withholding or other
taxes that could reduce the return on these securities. Tax
treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign taxes to
which the Fund would be subject.
SHAREHOLDERS' TAX STATUS
<PAGE>
Shareholders are subject to federal income tax on dividends and
capital gains received as cash or additional Shares. No
portion of any income dividend paid by the Fund is eligible for
the dividends received deduction available to corporations.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on
long-term capital gains distributed to them regardless of
how long they have held the Shares.
TOTAL RETURN
The average annual total return for the Shares 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 offering price 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, adjusted over the period by any additional Shares,
assuming the monthly reinvestment of all dividends and
distributions.
YIELD
The yield of the Shares is determined by dividing the net
investment income per Share (as defined by the Securities and
Exchange Commission) earned by the Fund over a thirty-day
period by the offering price per Share on the last day of the
period. This value is 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 the Fund, performance will
be reduced for those shareholders paying those fees.
PERFORMANCE COMPARISONS
The performance of Shares depends upon such variables as:
* portfolio quality;
* average portfolio maturity;
<PAGE>
* type of instruments in which the portfolio is invested;
* changes in interest rates and market value of portfolio
securities;
* changes in the Fund expenses; and
* various other factors.
The performance of Shares 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.
Investors may use financial publications and/or indices to
obtain a more complete view of the performance of Shares. When
comparing performance, investors should consider all relevant
factors such as the composition of any index used, prevailing
market conditions, portfolio compositions of other funds, and
methods used to value portfolio securities and compute net
asset value. The financial publications and/or indices which
the Fund uses in advertising may include:
* [LIST RELEVANT INDICES].
* 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 offering price over a specific
period of time. From time to time, the Fund will quote its
Lipper ranking in the "______________________" category in
advertising and sales literature.
Advertisements and other sales literature for the Shares may
quote total returns which are calculated on non-standardized
base periods. These total returns represent the historic
change in the value of an investment in Shares based on monthly
reinvestment of dividends over a specified period of time.
APPENDIX
STANDARD AND POOR'S CORPORATION CORPORATE BOND RATINGS
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.
<PAGE>
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.
<PAGE>
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, INC. LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely
to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong as
bonds rated "AAA." Because bonds rated in the "AAA" and "AA"
categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is
generally rated "F-1+."
A--Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
<PAGE>
BBB--Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds,
and therefore, impair timely payment.
<PAGE>
PART C: OTHER INFORMATION
Note: This Part C has been completed with respect to all
portfolios of the Registrant.
Item 24. Financial Statements and Exhibits:
(a) Financial Statements: None.
(b) Exhibits:
* (1) Copy of Articles of Incorporation;
* (i) Copy of Amendment No. 1 to Articles of
Incorporation (dated March 1, 1993);
* (2) Copy of By-Laws;
(3) Not applicable;
(4) Copy of Specimen Certificate for Shares of
Capital Stock;
* (i) Limited Term Fund - Fortress Shares;
* (ii) Limited Term Municipal Fund - Fortress
Shares;
* (iii) Limited Term Municipal Fund - Investment
Shares;
* (iv) Multi-State Municipal Income Fund;
* (v) Limited Maturity Government Fund -
Select Shares;
* (vi) Limited Term Fund - Investment Shares;
(5) Copy of Investment Advisory Contract;
* (i) Conformed Copy of Investment Advisory
Contract;
* (ii) Conformed Copy of Exhibit B to
Investment Advisory Contract;
* (iii) Form of Exhibit C to Investment Advisory
Contract;
* (iv) Conformed Copy of Exhibit A to
Investment Advisory Contract;
* (v) Conformed Copy of Exhibit D to
Investment Advisory Contract;
* (6) Copy of Distributor's Contract;
* (i) Copy of Amendment to Distributor's
Contract;
* (ii) Copy of Administrative Agreement;
(7) Not applicable;
* (8) Copy of Custodian Agreement;
* (9) Conformed Copy of Transfer Agency and Service
Agreement;
<PAGE>
* (10) Copy of Opinion and Consent of Counsel as to
legality of shares being registered;
* (11) Not applicable;
(12) Not applicable;
* (13) Copy of Initial Capital Understanding;
(14) Form of Retirement Plan;
* (15) (i) Form of Distribution Plan;
* (ii) Copy of 12b-1 Agreement;
* (iii) Copy of Shareholder Services Plan;
* (vi) Copy of Shareholder Services Agreement;
* (v) Conformed Copy of Distribution Plan;
* (vi) Conformed Copy of Shareholder Services
Plan;
(16) Not applicable;
* (17) Powers of Attorney;
____________________
* Previously filed.
Item 25. Persons Controlled by or Under Common Control with
Registrant:
None
Item 26. Number of Holders of Securities:
Number of
Record Holders
Title of Class as of January 6, 1994
Shares of capital stock,
($0.001 per Share par value)
Limited Maturity Government Fund -- Select Shares 7
Limited Term Fund -- Fortress Shares
295
Limited Term Fund -- Investment Shares
11,466
Limited Term Municipal Fund -- Fortress Shares 97
Limited Term Municipal Fund -- Investment Shares 426
Multi-State Municipal Income Fund
44
Item 27. Indemnification:
Response is incorporated by reference to Registrant's
Pre-Effective Amendment No. 1 to Form N-1A filed
December 19, 1991. (File No. 33-43472)
<PAGE>
Item 28. Business and Other Connections of Investment
Adviser:
(a) For a description of the other business of the
Adviser, see the section entitled "Fixed Income
Securities, Inc. Information -- Management of the
Corporation" in Part A. The affiliations with the
Registrant of four of the Trustees and one of the
Officers of the investment adviser are included in
each Statement of Additional Information included
in Part B of this Registration Statement under
"Fixed Income Securities, Inc. Management --
Officers and Directors." The remaining Trustee of
the investment adviser and his principal
occupation is: Mark D. Olson, Partner, Wilson,
Halbrook & Bayard, 107 W. Market Street,
Georgetown, Delaware 19947.
The remaining Officers of the investment adviser
are: Mark L. Mallon, Executive Vice President;
Henry J. Gailliot, Senior Vice President-
Economist; Peter R. Anderson, William D.
Dawson, III, J. Thomas Madden, Gary J. Madich and
J. Alan Minteer, Senior Vice Presidents;
Jonathan C. Conley, Deborah A. Cunningham, Mark E.
Durbiano, Roger A. Early, Kathleen M. Foody-Malus,
David C. Francis, Thomas M. Franks, Edward C.
Gonzales, Jeff A. Kozemchak, John W. McGonigle,
Gregory M. Melvin, Susan M. Nason, Mary Jo Ochson,
Robert J. Ostrowski, Charles A. Ritter, and
Christopher J. Wiles, Vice Presidents; Edward C.
Gonzales, Treasurer, and John W. McGonigle,
Secretary. The business address of each of the
Officers of the investment adviser is Federated
Investors Tower, Pittsburgh, PA 15222-3779. These
individuals are also officers of a majority of the
investment advisers to the Funds listed in Part B
of this Registration Statement under "Fixed Income
Securities, Inc. Management -- The Funds."
Item 29. Principal Underwriters:
(a) Federated Securities Corp., the Distributor for
shares of the Registrant, also acts as principal
underwriter for the following open-end investment
companies: A.T. Ohio Tax-Free Money Fund;
American Leaders Fund, Inc.; Annuity Management
Series; Automated Cash Management Trust; Automated
Government Money Trust; BankSouth Select Funds;
BayFunds; The Biltmore Funds; The Biltmore
Municipal Funds; The Boulevard Funds; California
Municipal Cash Trust; Cambridge Series Trust; Cash
Trust Series, Inc.; Cash Trust Series II; DG
Investor Series; Edward D. Jones & Co. Daily
<PAGE>
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; Financial Reserves Fund;
First Priority Funds; First Union Funds; Fortress
Adjustable Rate U.S. Government Fund, Inc.;
Fortress Municipal Income Fund, Inc.; Fortress
Utility Fund, Inc.; Fountain Square Funds; Fund
for U.S. Government Securities, Inc.; Government
Income Securities, Inc.; High Yield Cash Trust;
Independence One Mutual Funds; Insight
Institutional Series, Inc.; 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 Utility
Fund, Inc.; Liquid Cash Trust; Mark Twain Funds;
Marshall Funds, Inc.; Money Market Management,
Inc.; Money Market Obligations Trust; Money Market
Trust; The Monitor Funds; 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;
SouthTrust Vulcan Funds; Star Funds; The Starburst
Funds; The Starburst Funds II; Stock and Bond
Fund, Inc.; Sunburst Funds; Targeted Duration
Trust; Tax-Free Instruments Trust; Tower Mutual
Funds; 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; Vision
Fiduciary Funds, Inc.; and Vision Group of Funds,
Inc.
Federated Securities Corp. also acts as principal
underwriter for the following closed-end
investment company: Liberty Term Trust,
Inc.--1999.
<PAGE>
(b)
(1) (2) (3)
Positions and
Name and Principal Positions and Offices Offices With
Business Address With Underwriter Registrant
Richard B. Fisher Director, Chairman, President
Federated Investors Chief Executive and Director
Tower Officer, Chief
Pittsburgh, PA Operating Officer, and
15222-3779 Asst. Treasurer,
Federated Securities
Corp.
Edward C. Gonzales Director, Executive Vice President
Federated Investors Vice President, and and Treasurer
Tower Treasurer, Federated
Pittsburgh, PA Securities Corp.
15222-3779
John W. McGonigle Director, Executive Vice President
Federated Investors Vice President, and and Secretary
Tower Assistant Secretary,
Pittsburgh, PA Federated Securities
15222-3779 Corp.
John A. Staley, IV Executive Vice Vice President
Federated Investors President and Assistant
Tower Secretary, Federated
Pittsburgh, PA Securities Corp.
15222-3779
John B. Fisher President-Institutional --
Federated Investors Sales, Federated
Tower Securities Corp.
Pittsburgh, PA
15222-3779
James F. Getz President- --
Federated Investors Broker/Dealer,
Tower Federated Securities
Pittsburgh, PA Corp.
15222-3779
Mark R. Gensheimer Executive Vice --
Federated Investors President of
Tower Bank/Trust, Federated
Pittsburgh, PA Securities Corp.
15222-3779
<PAGE>
James S. Hamilton Senior Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
James R. Ball Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
Mark W. Bloss Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
Richard W. Boyd Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
Mary J. Combs Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
Laura M. Deger Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
Jill Ehrenfeld Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
Theodore Fadool, Jr. Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
Bryant R. Fisher Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
<PAGE>
Christopher T. Fives Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
Joseph D. Gibbons Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
James M. Heaton Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
William E. Kugler Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
Dennis M. Laffey Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
J. Michael Miller Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
R. Jeffery Niss Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
Keith Nixon Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
Michael P. O'Brien Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
<PAGE>
Solon A. Person, IV Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
Robert F. Phillips Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
Timothy C. Pillion Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
Eugene B. Reed Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
Paul V. Riordan Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
Charles A. Robison Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
David W. Spears Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
Brian L. Sullivan Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
Thomas E. Territ Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
<PAGE>
Richard B. Watts Vice President, --
Federated Investors Federated Securities
Tower Corp.
Pittsburgh, PA
15222-3779
R. Edmond Connell, Jr. Assistant Vice --
Federated Investors President, Federated
Tower Securities Corp.
Pittsburgh, PA
15222-3779
Philip C. Hetzel Assistant Vice --
Federated Investors President, Federated
Tower Securities Corp.
Pittsburgh, PA
15222-3779
H. Joseph Kennedy Assistant Vice --
Federated Investors President, Federated
Tower Securities Corp.
Pittsburgh, PA
15222-3779
Sharon M. Morgan Assistant Vice --
Federated Investors President, Federated
Tower Securities Corp.
Pittsburgh, PA
15222-3779
S. Elliott Cohan Secretary, Federated Assistant
Federated Investors Securities Corp. Secretary
Tower
Pittsburgh, PA
15222-3779
(c) Not applicable.
Item 30. Location of Accounts and Records:
Response is incorporated by reference to Registrant's
Pre-Effective Amendment No. 1 to Form N-1A filed
December 19, 1991. (File No. 33-43472)
Item 31. Management Services:
Not Applicable
Item 32. Undertakings:
Registrant hereby undertakes to comply with the
provisions of Section 16(c) of the 1940 Act with
respect to the removal of Directors and the calling of
special shareholder meetings by shareholders.
<PAGE>
Registrant hereby undertakes to file a post-effective
amendment on behalf of Strategic Income Fund, using
financial statements which need not be certified,
within four to six months from the effective date of
Post-Effective Amendment No. 9 to Registrant's 1933 Act
Registration Statement.
Registrant hereby undertakes to furnish each person to
whom a prospectus is delivered with a copy of the
Registrant's latest annual report to shareholders, upon
request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of
1933 and the Investment Company Act of 1940, the Registrant has
duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Pittsburgh and Commonwealth of
Pennsylvania, on the 1st day of February, 1994.
FIXED INCOME SECURITIES, INC.
By: /s/ Charles H. Field
Charles H. Field
Attorney in Fact for
John F. Donahue, Chairman and Director
Pursuant to the requirements of the Securities Act of
1933, this Registration Statement has been signed by the
following persons in the capacities and on the date indicated:
NAME TITLE DATE
By: /s/ Charles H. Field
Charles H. Field Attorney In February 1, 1994
Fact
for the
Persons
Listed Below
NAME TITLE
John F. Donahue* Chairman and Director
(Chief Executive Officer)
Richard B. Fisher* President and Director
<PAGE>
Edward C. Gonzales* Vice President and
Treasurer (Principal
Financial and Accounting
Officer)
John T. Conroy, Jr.* Director
William J. Copeland* Director
James E. Dowd* Director
Lawrence D. Ellis, M.D.* Director
Edward L. Flaherty, Jr.* Director
Peter E. Madden* Director
Gregor F. Meyer* Director
Wesley W. Posvar* Director
Marjorie P. Smuts* Director
_________________________
* By Power of Attorney
<PAGE>
