STRATEGIC INCOME FUND
(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. PURCHASERS
SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT
IN FORTRESS SHARES.
The Fund's investment adviser will endeavor to limit these risks
through diversifying the portfolio and through careful credit
analysis of individual issuers.
The Fund has filed a Statement of Additional Information for
Fortress Shares dated April 5, 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.
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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 April 5, 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
Non-Government Mortgage-Backed 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
Options
Financial Futures and Options on Financial Futures
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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 FORTRESS SHARES
Share Purchases
Through a Financial Institution
Directly From the Distributor
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
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 and Shareholder Services Plans
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Other Payments to Financial Institutions
Administration of the Fund
Administrative Services
Custodian
Transfer Agent and Dividend Disbursing Agent
Legal Counsel
Independent Auditors
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
APPENDIX
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
Contingent Deferred Sales Charge (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) . . . . . . . . . . . . . . . .
0.54%
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12b-1 Fee 0.50%
Total Other Expenses . . . . . . . . . . . . . . . . . . . . . .
0.81%
Shareholder Servicing Fee . . . . . . . . . . . . . . .
0.25%
Total Fortress Shares Operating Expenses (3) . . . .
1.85%
(1) The contingent deferred sales charge assessed is 1.00%
of the lesser of the original purchase price or the net
asset value of shares redeemed within four years of
their purchase date.
(2) The estimated management fee has been reduced to
reflect the anticipated voluntary waiver of a portion
of the management fee. The adviser can terminate this
voluntary waiver at any time at its sole discretion.
The maximum management fee is 0.85%.
(3) The Total Fortress Shares Operating Expenses are
estimated to be 2.16% absent the anticipated voluntary
waiver of a portion of the management fee.
* 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. . . . . . $39 $78
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You would pay the following
expenses on the same
investment, assuming no
redemption. . . . . . . . . . $29 $68
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 Fortress Shares of the Fund. The Fund also
offers two other classes of shares called Class A Shares and
Class C Shares. Class A Shares, Class C Shares and Fortress
Shares are subject to certain of the same expenses. However,
Class A Shares are subject to a maximum sales load of 4.5%, but
are not subject to a 12b-1 fee or a contingent deferred sales
charge. Class C Shares are subject to a 12b-1 fee of 0.75% and a
contingent deferred sales charge of 1.00%, but are not subject to
a sales load. 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 three classes of shares known as
Fortress Shares, Class A Shares and Class C 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.
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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:
* 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.
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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, 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. Duration is
a commonly used measure of the potential volatility of the price
of a debt security, or the aggregate market value of a portfolio
of debt securities, prior to maturity. Securities with longer
durations generally have more volatile prices than securities of
comparable quality with shorter durations.
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.
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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 agencies or
instrumentalities. Some of these securities, such as Government
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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.
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,
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
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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 decrease
when market yields increase. 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 Fund 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
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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
of 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
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value as interest rates 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 (lower-
rated) bonds (which may be denominated in U.S. dollars or in non-
U.S. currencies) 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. The Fund's investments may include U.S. dollar
denominated debt obligations known as "Brady Bonds", which are
issued for the exchange of existing commercial bank loans to
foreign entities for new obligations that are generally
collateralized by zero coupon Treasury securities having the same
maturity. From time to time, the Fund's portfolio may consist
primarily of lower-rated (i.e., rated Ba or lower by Moody's
Investors Service, Inc. ("Moody's"), or BB or lower by Standard &
Poor's Corporation ("Standard & Poor's) or Fitch Investors
Service, Inc. ("Fitch")) corporate debt obligations, which are
commonly referred to as "junk bonds." A description of the
rating categories is contained in the Appendix to this
Prospectus. 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
predetermined 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
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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 or "D" by Standard & Poor's or Fitch. A
description of the rating categories is contained in the
Appendix to this Prospectus.
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
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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.
NON-GOVERNMENT MORTGAGE-BACKED SECURITIES. Non-government
mortgage-backed securities in which the Fund may invest
include:
* 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.
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.
<PAGE>
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 Appendix to this Prospectus. Lower-rated
securities will usually offer higher yields than higher-
rated securities. However, there is more risk associated
with these investments. (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.
<PAGE>
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.
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 apply to securities issued by foreign
corporations and sovereign governments. These risks 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 and adverse diplomatic developments. It
may also be more difficult to enforce contractual
obligations or obtain court judgments abroad than would be
the case in the United States because of differences in the
legal systems. If the issuer of the debt or the
governmental authorities that control the repayment of the
debt may be unable or unwilling to repay principal or
interest when due in accordance with the terms of such debt,
the Fund may have limited legal recourse in the event of a
<PAGE>
default. 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.
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 risks noted above often are heightened for investments
in emerging or developing countries. Compared to the United
States and other developed countries, emerging or developing
countries may have relatively unstable governments,
economies based on only a few industries, and securities
markets that trade a small number of securities. Prices on
these exchanges tend to be volatile and, in the past,
securities in these countries have offered a greater
potential for gain (as well as loss) than securities of
companies located in developed countries. Further,
investment by foreign investors are subject to a variety of
restrictions in many emerging or developing countries.
These restrictions may take the form of prior governmental
approval, limits on the amount or type of securities held by
foreigners, and limits on the type of companies in which
foreigners may invest. Additional restrictions may be
imposed at any time by these and other countries in which a
fund invests. In addition, the repatriation of both
investment income and capital from several foreign countries
is restricted and controlled under certain regulations,
including in some cases the need for certain government
consents. Although these restrictions may in the future
make it undesirable to invest in emerging or developing
countries, the Fund's adviser does not believe that any
<PAGE>
current repatriation restrictions would affect its decision
to invest in such 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.
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
<PAGE>
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
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.
<PAGE>
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.
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
<PAGE>
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
contract, an amount of cash and cash equivalents, equal to the
underlying commodity value of the futures contract (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 contracts 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 contracts or
options. 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. The Fund will purchase securities of closed-end
investment companies only in open market transactions involving
only customary brokers' commissions. However, these limitations
are not applicable if the securities are acquired in a merger,
consolidation, reorganization or acquisition of Fund assets.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in
<PAGE>
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 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
<PAGE>
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 limitations 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
<PAGE>
Class A Shares and Class C Shares due to the variance in daily
net income realized by each class. Such variance will reflect
only accrued net income to which the shareholders of a particular
class are entitled.
INVESTING IN 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.
The financial institution which maintains investor accounts with
the Fund must do so on a fully disclosed basis unless it accounts
for share ownership periods used in calculating the contingent
deferred sales charge (see "Contingent Deferred Sales Charge").
In addition, advance payments made to financial institutions may
be subject to reclaim by the distributor for accounts transferred
to financial institutions which do not maintan investor accounts
on a fully disclosed basis and do not account for share ownership
periods (see "Other Payments to Financial Insitutions").
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
<PAGE>
* 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.
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
<PAGE>
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 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 Share redemptions. For
example, if a shareholder already owns Shares having a current
value at the 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.
<PAGE>
The Fund will eliminate the sales charge after it confirms the
purchases.
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
made. The Fund will eliminate the sales charge after it confirms
<PAGE>
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 and paid monthly. Distributions of any
net realized long-term capital gains will be made at least once
every twelve months. Dividends are automatically reinvested in
additional Shares on payment dates at the ex-dividend date net
asset value without a sales charge, unless cash payments are
requested by shareholders on the application or by writing to the
transfer agent. All shareholders on the record date are entitled
to the dividend.
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.
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
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.
<PAGE>
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.
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
<PAGE>
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 or more less than 1 year .25%
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
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
<PAGE>
without a contingent deferred sales charge. For more
information, see "Other Payments to Financial Institutions."
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.
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 charge 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 charge
and possibly a sales charge. This privilege is available to
shareholders resident in any state in which the shares being
<PAGE>
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.
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. The fee paid by the Fund, while
higher than the advisory fee paid by other mutual funds in
general, is comparable to fees paid by many mutual funds
with similar objectives and policies. 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.
<PAGE>
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' BACKGROUNDS. 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 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 AND SHAREHOLDER SERVICES PLANS. Under a
distribution plan adopted in accordance with Investment Company
Act Rule 12b-1 (the "Distribution Plan"), the Fund will pay to
the distributor an amount computed at an annual rate of 0.50 of
1% of the average daily net asset value of Shares to finance any
activity which is principally intended to result in the sale of
Shares subject to the Distribution Plan. The distributor may
select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and
broker/dealers to provide sales support services as agents for
<PAGE>
their clients or customers.
The Distribution 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 the Fund under the
Distribution Plan.
In addition, the Fund has adopted a Shareholder Services Plan
(the "Services Plan") under which it may make payments of up to
0.25 of 1% of the average daily net asset value of Shares to
obtain certain personal services for shareholders and the
maintenance of shareholder accounts ("shareholder services").
The Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated
Investors, under which Federated Shareholder Services will either
perform shareholder services directly or will select financial
institutions to perform shareholder services. Financial
institutions will receive fees 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 Fund and Federated Shareholder Services.
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
Distribution and Shareholder Services Plans, 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.
Federated Securities Corp. will pay financial institutions an
<PAGE>
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).
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., a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal
and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual
rate which relates to the average aggregate daily net assets of
all funds advised by subsidiaries of Federated Investors
("Federated Funds") as specified below:
AVERAGE AGGREGATE DAILY NET ASSETS
MAXIMUM ADMINISTRATIVE FEE OF THE FEDERATED FUNDS
0.15 OF 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750
million
The administrative fee received during any fiscal year shall be
at least $125,000 per portfolio and $30,000 per each additional
class of shares. Federated Administrative Services may choose
voluntarily to waive a portion of its fee.
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 FORTRESS SHARES
Holders of Shares pay their allocable portion of Fund and
Corporation expenses.
The Corporation expenses for which holders of Shares pay their
<PAGE>
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.
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
<PAGE>
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
* 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
<PAGE>
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 and Fortress 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
Shares. Because Fortress and Class C 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 and
Class C Shares.
Class A Shares are sold primarily to customers of financial
institutions subject to a front-end sales charge of up to 4.50%.
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 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.
The amount of dividends payable to Class A and Fortress Shares
will generally exceed that of Class C Shares by the difference
between Class Expenses and distribution and shareholder service
expenses borne by shares of each respective class.
The stated advisory fee is the same for all three classes of
shares.
<PAGE>
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
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
<PAGE>
large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger
than in AAA securities.
A--Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate but elements may be present which suggest
a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba--Bonds which are Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with
respect to principal or interest.
Ca--Bonds which are rated Ca represent obligations which are
speculative in a high degree. such issues are often in default or
have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
FITCH INVESTORS SERVICE, 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
<PAGE>
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.
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
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
<PAGE>
STRATEGIC INCOME FUND
FORTRESS SHARES
PROSPECTUS
A Diversified Portfolio of
Fixed Income Securities, Inc.,
an Open-End, Management
Investment Company
April 5, 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.)
FORTRESS SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of Fortress Shares of Strategic Income Fund (the
"Fund") dated April 5, 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 April 5, 1994
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT THE FUND
INVESTMENT OBJECTIVE AND POLICIES
Types of Investments and Investment Techniques
Resets of Interest
<PAGE>
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 and Shareholder Services Plans
Conversion to Federal Funds
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
<PAGE>
YIELD
PERFORMANCE COMPARISONS
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 securities 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.
<PAGE>
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.
BRADY BONDS
The Fund may invest in U.S. dollar-denominated foreign securities
referred to as "Brady Bonds." These are debt obligations of
foreign entities that may be fixed-rate par bonds or floating-
rate discount bonds and are generally collateralized in full as
to principal due at maturity by U.S. Treasury zero coupon
obligations that have the same maturity as the Brady Bonds.
However, the Fund may also invest in uncollateralized Brady
Bonds. Brady Bonds are generally viewed as having three or four
valuation components: (i) any collateralized repayment of
principal at final maturity; (ii) the collateralized interest
payments; (iii) the uncollateralized interest payments; and (iv)
any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute what is referred to as the
"residual risk" of such bonds). In the event of a default with
respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the zero
coupon U.S. Treasury securities held as collateral for the
payment of principal will not be distributed to investors, nor
will such obligations be sold and the proceeds distributed. The
<PAGE>
collateral will be held by the collateral agent to the scheduled
maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will
equal the principal payments which would have then been due on
the Brady Bonds in the normal course. In addition, in light of
the residual risk of Brady Bonds and, among other factors, the
history of defaults with respect to commercial bank loans by
public and private entities of countries issuing Brady Bonds,
investments in Brady Bonds are to be viewed as speculative.
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 re-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
<PAGE>
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 may exceed this limitation for
temporary defensive purposes if unusual market conditions occur.
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.
<PAGE>
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
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.
<PAGE>
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
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
<PAGE>
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
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.
<PAGE>
FOREIGN CURRENCY TRANSACTIONS
The Fund may engage without limitation in foreign currency
transactions, including those described below.
CURRENCY RISKS
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. Foreign currency options that
are considered to be illiquid are subject to the Fund's 15%
limitation on illiquid securities.
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 associated 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
that portfolio turnover will result in adverse tax consequences.
<PAGE>
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
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
<PAGE>
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 be
changed by the Directors without shareholder approval.
Shareholders will be notified before any material change in these
limitations becomes effective.
<PAGE>
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, certain foreign
currency 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
<PAGE>
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.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND
DIRECTORS OF THE CORPORATION
The Fund will not purchase or retain the securities of any
issuer if the officers and Directors of the Corporation or
its investment adviser owning individually more than 1/2 of
1% of the issuer's securities together own more than 5% of
the issuer's securities.
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,
F e d e r a t e d 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,
R e a l t o r s 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
F e d e r a t e d Investors; Chairman,
Investors Tower Federated Securities
Pittsburgh, PA Corp.; President or Vice
President of the Funds;
Director or Trustee of
some of the Funds.
E d w a r d 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 E n d o w m e n t f o r
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;
F e d e r a t e d 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.
E d w a r d C . Vice President and Vice President, Treasurer
Gonzales Treasurer and Trustee, Federated
F e d e r a t e d 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,
F e d e r a t e d 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.
J o h n A . Vice President Vice President and
Staley, IV Trustee, Federated
F e d e r a t e d 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 Municipal Money Fund; American Leaders Fund, Inc.;
Annuity Management Series; Automated Cash Management Trust;
Automated Government Money Trust; The Boulevard Funds; California
Municipal Cash Trust; Cash Trust Series, Inc.; Cash Trust Series
<PAGE>
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; Managed Series Trust; Mark
Twain Funds; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities
Income Trust; New York Municipal Cash Trust; Peachtree Funds;
Planters Funds; Portage Funds; RIMCO Monument Funds; The Shawmut
Funds; Short-Term Municipal Trust; Signet Select Funds; Star
Funds; The Starburst Funds; The Starburst Funds II; Stock and
Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust;
Tax-Free Instruments Trust; Trademark Funds; Trust for Financial
Institutions; Trust for Government Cash Reserves; Trust for
Short-Term U.S. Government Securities; 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
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
<PAGE>
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
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.
<PAGE>
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 for a fee as described in the prospectus.
John A. Staley, IV, an officer of the Corporation, 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. and Federated Administrative Services.
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;
<PAGE>
* 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 AND SHAREHOLDER SERVICES PLANS
These arrangements permit the payment of fees to financial
institutions, the distributor, and Federated Shareholder
Services, to stimulate distribution activities and to cause
services to be provided to shareholders by a representative who
has knowledge of the shareholder's particular circumstances and
goals. These activities and services may include, but are not
limited to, marketing efforts; providing office space, equipment,
telephone facilities, and various clerical, supervisory,
computer, and other personnel as necessary or beneficial to
establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine
client inquiries; and assisting clients in changing dividend
options, account designations, and addresses.
By adopting the Distribution Plan, the Board of Directors expects
that the Fund will be able to achieve a more predicable flow of
cash for investment purposes and to meet redemptions. This will
facilitate more efficient portfolio management and assist the
Fund in pursuing its investment objectives. By identifying
potential investors whose needs are served by the Fund's
objectives, and properly servicing these accounts, it may be
possible to curb sharp fluctuations in rates of redemptions and
<PAGE>
sales.
Other benefits, which may be realized under either arrangement,
may include: (1) providing personal services to shareholders;
(2) investing shareholder assets with a minimum of delay and
administrative detail; (3) enhancing shareholder recordkeeping
systems; and (4) responding promptly to shareholders' requests
and inquiries concerning their accounts.
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.
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
<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 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.
Certain Shares redeemed within one to four years of purchase may
be subject to a redemption fee. The amount of the redemption fee
is based upon the amount of the administrative fee paid at the
time of purchase by the distributor to the administrator for
services rendered, and the length of time the investor remains a
holder of Shares. Should administrators elect to receive an
administrative fee that is less than that stated in the
prospectus for servicing a particular shareholder, the redemption
fee and/or holding period for that particular shareholder will be
reduced accordingly.
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
<PAGE>
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
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
<PAGE>
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;
* 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
<PAGE>
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:
* 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 "General Bond Funds" 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.
<PAGE>
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
<PAGE>
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 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. PURCHASERS
SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT
IN CLASS A SHARES.
The Fund's investment adviser will endeavor to limit these risks
through diversifying the portfolio and through careful credit
analysis of individual issuers.
The Fund has filed a Statement of Additional Information for
Class A Shares dated April 5, 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 April 5, 1994
<PAGE>
TABLE OF CONTENTS
SUMMARY OF FUND EXPENSES
GENERAL INFORMATION
LIBERTY FAMILY OF FUNDS
Liberty Family Retirement Program
<PAGE>
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
Non-Government Mortgage-Backed 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
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
<PAGE>
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
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
Systematic Withdrawal Program
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' Backgrounds
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
<PAGE>
SHAREHOLDER INFORMATION
Voting Rights
TAX INFORMATION
Federal Income Tax
Pennsylvania Corporate and
Personal Property Taxes
PERFORMANCE INFORMATION
OTHER CLASSES OF SHARES
APPENDIX
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
Contingent Deferred Sales Charge (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 CLASS A SHARES OPERATING EXPENSES *
(As a percentage of projected average net assets)
Management Fee (after waiver) (1) . . . . . . . . . . . . . . . .
0.54%
12b-1 Fee None
Total Other Expenses . . . . . . . . . . . . . . . . . . . . . .
0.81% Shareholder Servicing Fee . . . . . . . . . . . . . .
0.25%
Total Class A Shares Operating Expenses (2) . . . . .
1.35%
(1) The estimated management fee has been reduced to
reflect the anticipated voluntary waiver of a portion
of the management fee. The adviser can terminate this
voluntary waiver at any time at its sole discretion.
<PAGE>
The maximum management fee is 0.85%.
(2) The Total Class A Shares Operating Expenses are
estimated to be 1.66% absent the anticipated voluntary
waiver of a portion of the management fee.
* Total Class A 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.
<PAGE>
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 $58 $86
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 Class A Shares of the Fund. The Fund also
offers two other classes of shares called Class C Shares and
Fortress Shares. Class A Shares, Class C Shares and Fortress
Shares are subject to certain of the same expenses. However,
Class C Shares are subject to a 12b-1 fee of 0.75% and a
contingent deferred sales charge of 1.00%, but are not subject to
a sales load. Fortress Shares are subject to a maximum sales
load of 1.00%, a 12b-1 fee of 0.50%, and a contingent deferred
sales charge of 1.00%. See "Other Classes of Shares."
GENERAL INFORMATION
The Corporation was incorporated under the laws of the State of
<PAGE>
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 three classes of shares known as Class
A Shares, Class C Shares and Fortress 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.
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;
* Liberty Capital Growth Fund, providing appreciation of
capital primarily through equity securities;
* Fund for U.S. Government Securities, Inc., providing current
income through long-term U.S. government 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-
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
<PAGE>
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
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.
<PAGE>
The other funds participating in the Liberty Family Retirement
Program are: American Leaders Fund, Inc., Liberty 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. Duration is
a commonly used measure of the potential volatility of the price
of a debt security, or the aggregate market value of a portfolio
of debt securities, prior to maturity. Securities with longer
durations generally have more volatile prices than securities of
comparable quality with shorter durations.
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 agencies or
instrumentalities. Some of these securities, such as Government
<PAGE>
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.
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,
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 decrease
when market yields increase. 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 Fund 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
of 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 rates 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 (lower-
rated) bonds (which may be denominated in U.S. dollars or in non-
U.S. currencies) 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. The Fund's investments may include U.S. dollar
denominated debt obligations known as "Brady Bonds", which are
issued for the exchange of existing commercial bank loans to
foreign entities for new obligations that are generally
collateralized by zero coupon Treasury securities having the same
maturity. From time to time, the Fund's portfolio may consist
primarily of lower-rated (i.e., rated Ba or lower by Moody's
Investors Service, Inc. ("Moody's"), or BB or lower by Standard &
Poor's Corporation ("Standard & Poor's) or Fitch Investors
Service, Inc. ("Fitch")) corporate debt obligations, which are
commonly referred to as "junk bonds." A description of the
rating categories is contained in the Appendix to this
Prospectus. 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
predetermined 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
<PAGE>
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 or "D" by Standard & Poor's or Fitch. A
description of the rating categories is contained in the
Appendix to this Prospectus.
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
<PAGE>
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.
NON-GOVERNMENT MORTGAGE-BACKED SECURITIES. Non-government
mortgage-backed securities in which the Fund may invest
include:
* 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.
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.
<PAGE>
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 Appendix to this Prospectus. Lower-rated
securities will usually offer higher yields than higher-
rated securities. However, there is more risk associated
with these investments. (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.
<PAGE>
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.
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 apply to securities issued by foreign
corporations and sovereign governments. These risks 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 and adverse diplomatic developments. It
may also be more difficult to enforce contractual
obligations or obtain court judgments abroad than would be
the case in the United States because of differences in the
legal systems. If the issuer of the debt or the
governmental authorities that control the repayment of the
debt may be unable or unwilling to repay principal or
interest when due in accordance with the terms of such debt,
the Fund may have limited legal recourse in the event of a
<PAGE>
default. 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.
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 risks noted above often are heightened for investments
in emerging or developing countries. Compared to the United
States and other developed countries, emerging or developing
countries may have relatively unstable governments,
economies based on only a few industries, and securities
markets that trade a small number of securities. Prices on
these exchanges tend to be volatile and, in the past,
securities in these countries have offered a greater
potential for gain (as well as loss) than securities of
companies located in developed countries. Further,
investment by foreign investors are subject to a variety of
restrictions in many emerging or developing countries.
These restrictions may take the form of prior governmental
approval, limits on the amount or type of securities held by
foreigners, and limits on the type of companies in which
foreigners may invest. Additional restrictions may be
imposed at any time by these and other countries in which a
fund invests. In addition, the repatriation of both
investment income and capital from several foreign countries
is restricted and controlled under certain regulations,
including in some cases the need for certain government
consents. Although these restrictions may in the future
make it undesirable to invest in emerging or developing
countries, the Fund's adviser does not believe that any
<PAGE>
current repatriation restrictions would affect its decision
to invest in such 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.
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
<PAGE>
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
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.
<PAGE>
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.
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
<PAGE>
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
contract, an amount of cash and cash equivalents, equal to the
underlying commodity value of the futures contract (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 contracts 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 contracts or
options. 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.
The Fund will purchase securities of closed-end investment
companies only in open market transactions involving only
customary brokers' commissions. However, these limitations are
not applicable if the securities are acquired in a merger,
consolidation, reorganization or acquisition of Fund assets.
<PAGE>
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 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
<PAGE>
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 limitations 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
<PAGE>
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 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 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. (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.
<PAGE>
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.
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 $100. (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, 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
<PAGE>
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.
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 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.
<PAGE>
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 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
<PAGE>
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.
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.
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 and paid monthly. Distributions of any
net realized long-term capital gains will be made at least once
every twelve months. Dividends are automatically reinvested in
additional Shares on payment dates at the ex-dividend date net
asset value without a sales charge, unless cash payments are
requested by shareholders on the application or by writing to the
transfer agent. All shareholders on the record date are entitled
to the dividend.
<PAGE>
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
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
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.
Further information on the exchange privilege and prospectuses
for the Liberty Family of Funds or certain Federated Funds are
available by contacting the Fund.
TAX CONSEQUENCES
<PAGE>
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.
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.
<PAGE>
THROUGH A FINANCIAL INSTITUTION
A shareholder may redeem Shares by calling his financial
institution (such as a bank or an investment dealer) to request
the redemption. Shares will be redeemed at the net asset value
next determined after the Fund receives the redemption request
from the financial institution. Redemption requests through a
registered broker/dealer must be received by the broker before
4:00 p.m. (Eastern time) and must be transmitted by the broker to
the Fund before 5:00 p.m. (Eastern time) in order for Shares to
be redeemed at that day's net asset value. Redemption requests
through other financial institutions must be received by the
financial institution and transmitted to the Fund before 4:00
p.m. (Eastern time) in order for Shares to be redeemed at that
day's net asset value. The financial institution is responsible
for promptly submitting redemption requests and providing proper
written redemption instructions to the Fund. The financial
institution may charge customary fees and commissions for this
service.
DIRECTLY FROM THE FUND
BY TELEPHONE. Shareholders who have not purchased through a
financial institution may redeem their Shares by telephoning the
Fund. The proceeds will be mailed to the shareholder's address
of record or wire transferred to the shareholder's account at a
domestic commercial bank that is a member of the Federal Reserve
System, normally within one business day, but in no event longer
than seven days after the request. The minimum amount for a wire
transfer is $1,000. If at any time the Fund shall determine it
necessary to terminate or modify this method of redemption,
shareholders would be promptly notified.
An authorization form permitting the transfer agent to accept
telephone requests must first be completed. Authorization forms
and information on this service are available from Federated
Securities Corp.
In the event of drastic economic or market changes, a shareholder
may experience difficulty 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.
<PAGE>
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.
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
<PAGE>
not advisable for shareholders to be purchasing Shares while
participating in this program.
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. The fee paid by the Fund, while
higher than the advisory fee paid by other mutual funds in
general, is comparable to fees paid by many mutual funds
with similar objectives and policies. 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
<PAGE>
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' BACKGROUNDS. 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. In addition to
periodic payments to financial institutions under the Shareholder
Services Plan, certain financial institutions may be compensated
by the adviser or its affiliates for the continuing investment of
<PAGE>
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.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services,
Inc., a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal
and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual
rate which relates to the average aggregate daily net assets of
all funds advised by subsidiaries of Federated Investors
("Federated Funds") as specified below:
AVERAGE AGGREGATE DAILY NET ASSETS
MAXIMUM ADMINISTRATIVE FEE OF THE FEDERATED FUNDS
0.15 OF 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750
million
The administrative fee received during any fiscal year shall be
at least $125,000 per portfolio and $30,000 per each additional
class of shares. Federated Administrative Services may choose
voluntarily to waive a portion of its fee.
SHAREHOLDER SERVICES PLAN. The Fund has adopted a Shareholder
Services Plan (the "Services Plan") under which it may make
payments of up to 0.25 of 1% of the average daily net asset value
of Shares to obtain certain personal services for shareholders
and the maintenance of shareholder accounts ("shareholder
services"). The Fund has entered into a Shareholder Services
Agreement with Federated Shareholder Services, a subsidiary of
Federated Investors, under which Federated Shareholder Services
will either perform shareholder services directly or will select
financial institutions to perform shareholder services.
Financial institutions will receive fees 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 Fund and Federated Shareholder Services.
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.
<PAGE>
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 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
<PAGE>
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 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 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 and Fortress 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 and
Fortress Shares. Because Class C and Fortress 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 and
Fortress Shares.
Class C Shares are sold primarily to customers of financial
<PAGE>
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.
The amount of dividends payable to Class A and Fortress Shares
will generally exceed that of Class C Shares by the difference
between Class Expenses and distribution and shareholder service
expenses borne by shares of each respective class.
The stated advisory fee is the same for all three classes of
shares.
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
<PAGE>
category than in higher rated categories.
BB, B, CCC, CC--Debt rated BB, B, CCC and CC is regarded, on
balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of
the obligation. BB indicates the lowest degree of speculation
and CC the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposures to
adverse conditions.
C--The rating C is reserved for income bonds on which no interest
is being paid.
D--Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edge". Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger
than in AAA securities.
A--Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate but elements may be present which suggest
a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba--Bonds which are Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the
<PAGE>
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.
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.
ADDRESSES
Strategic
Income Fund Federated Investors Tower
<PAGE>
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
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
April 5, 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.)
<PAGE>
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 April 5, 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 April 5, 1994
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT THE FUND
INVESTMENT OBJECTIVE AND POLICIES
Types of Investments and Investment Techniques
Resets of Interest
Caps and Floors
Brady Bonds
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
<PAGE>
The Funds
Fund Ownership
Director Liability
INVESTMENT ADVISORY SERVICES
Adviser to the Fund
Advisory Fees
SHAREHOLDER SERVICING
ADMINISTRATIVE SERVICES
Shareholder Services Plan
BROKERAGE TRANSACTIONS
PURCHASING SHARES
Conversion to Federal Funds
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
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
<PAGE>
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 securities 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
<PAGE>
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.
BRADY BONDS
The Fund may invest in U.S. dollar-denominated foreign securities
referred to as "Brady Bonds." These are debt obligations of
foreign entities that may be fixed-rate par bonds or floating-
rate discount bonds and are generally collateralized in full as
to principal due at maturity by U.S. Treasury zero coupon
obligations that have the same maturity as the Brady Bonds.
However, the Fund may also invest in uncollateralized Brady
Bonds. Brady Bonds are generally viewed as having three or four
valuation components: (i) any collateralized repayment of
principal at final maturity; (ii) the collateralized interest
payments; (iii) the uncollateralized interest payments; and (iv)
any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute what is referred to as the
"residual risk" of such bonds). In the event of a default with
respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the zero
coupon U.S. Treasury securities held as collateral for the
payment of principal will not be distributed to investors, nor
will such obligations be sold and the proceeds distributed. The
collateral will be held by the collateral agent to the scheduled
maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will
equal the principal payments which would have then been due on
the Brady Bonds in the normal course. In addition, in light of
the residual risk of Brady Bonds and, among other factors, the
history of defaults with respect to commercial bank loans by
public and private entities of countries issuing Brady Bonds,
investments in Brady Bonds are to be viewed as speculative.
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
<PAGE>
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 re-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
<PAGE>
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 may exceed this limitation for
temporary defensive purposes if unusual market conditions occur.
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
<PAGE>
(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
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
<PAGE>
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
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
<PAGE>
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
The Fund may engage without limitation in foreign currency
transactions, including those described below.
CURRENCY RISKS
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
<PAGE>
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.
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
<PAGE>
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. Foreign currency options that
are considered to be illiquid are subject to the Fund's 15%
limitation on illiquid securities.
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
<PAGE>
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 associated 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
<PAGE>
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 the
segregation of an amount up to 20% of the total value of its
assets.
LENDING OF PORTFOLIO SECURITIES
<PAGE>
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 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
<PAGE>
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
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
<PAGE>
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
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
<PAGE>
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
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, certain foreign
currency options and certain securities not determined by
<PAGE>
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.
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.
<PAGE>
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND
DIRECTORS OF THE CORPORATION
The Fund will not purchase or retain the securities of any
issuer if the officers and Directors of the Corporation or
its investment adviser owning individually more than 1/2 of
1% of the issuer's securities together own more than 5% of
the issuer's securities.
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,
F e d e r a t e d 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,
R e a l t o r s 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
F e d e r a t e d Investors; Chairman,
Investors Tower Federated Securities
Pittsburgh, PA Corp.; President or Vice
President of the Funds;
Director or Trustee of
some of the Funds.
E d w a r d 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 E n d o w m e n t f o r
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;
F e d e r a t e d 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.
E d w a r d C . Vice President and Vice President, Treasurer
Gonzales Treasurer and Trustee, Federated
F e d e r a t e d 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,
F e d e r a t e d 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.
J o h n A . Vice President Vice President and
Staley, IV Trustee, Federated
F e d e r a t e d 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 Municipal Money Fund; American Leaders Fund, Inc.;
Annuity Management Series; Automated Cash Management Trust;
Automated Government Money Trust; The Boulevard Funds; California
Municipal Cash Trust; Cash Trust Series, Inc.; Cash Trust Series
<PAGE>
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; Managed Series Trust; Mark
Twain Funds; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities
Income Trust; New York Municipal Cash Trust; Peachtree Funds;
Planters Funds; Portage Funds; RIMCO Monument Funds; The Shawmut
Funds; Short-Term Municipal Trust; Signet Select Funds; Star
Funds; The Starburst Funds; The Starburst Funds II; Stock and
Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust;
Tax-Free Instruments Trust; Trademark Funds; Trust for Financial
Institutions; Trust for Government Cash Reserves; Trust for
Short-Term U.S. Government Securities; 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
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
<PAGE>
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
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.
<PAGE>
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 for a fee as described in the prospectus.
John A. Staley, IV, an officer of the Corporation, 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. and Federated Administrative Services.
SHAREHOLDER SERVICES PLAN
This arrangement permits the payment of fees to Federated
Shareholder Services and, indirectly to financial institutions to
cause services to be provided to shareholders by a representative
who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are
not limited to, providing office space, equipment, telephone
facilities, and various clerical, supervisory, computer, and
other personnel as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase
and redemption transactions and automatic investments of client
account cash balances; answering routine client inquiries; and
assisting clients in changing dividend options, account
designations, and addresses.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and
sale of portfolio instruments, the Adviser looks for prompt
<PAGE>
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 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."
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
<PAGE>
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.
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. 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.
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.
<PAGE>
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.
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
<PAGE>
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:
* 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 "General Bond Funds" 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.
<PAGE>
<PAGE>
STRATEGIC INCOME FUND
(A PORTFOLIO OF FIXED INCOME SECURITIES, INC.)
CLASS C SHARES
PROSPECTUS
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. PURCHASERS
SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT
IN CLASS C SHARES.
The Fund's investment adviser will endeavor to limit these risks
through diversifying the portfolio and through careful credit
analysis of individual issuers.
The Fund has filed a Statement of Additional Information for
Class C Shares dated April 5, 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
<PAGE>
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 April 5, 1994
<PAGE>
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
Non-Government Mortgage-Backed 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
Options
<PAGE>
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 C SHARES
Share Purchases
Through a Financial Institution
Directly From the Distributor
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
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 and Shareholder Services Plans
<PAGE>
Other Payments to Financial Institutions
Administration of the Fund
Administrative Services
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
Pennsylvania Corporate and
Personal Property Taxes
PERFORMANCE INFORMATION
OTHER CLASSES OF SHARES
APPENDIX
ADDRESSES Inside Back Cover
<PAGE>
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
Contingent Deferred Sales Charge (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 CLASS C SHARES OPERATING EXPENSES *
(As a percentage of projected average net assets)
<PAGE>
Management Fee (after waiver) (2) . . . . . . . . . . . . . . . .
0.54%
12b-1 Fee (after waiver) (3) . . . . . . . . . . . . . . . . . .
0.70%
Total Other Expenses . . . . . . . . . . . . . . . . . . . . . .
0.81%
Shareholder Servicing Fee . . . . . . . . . . . . . . .
0.25%
Total Class C Shares Operating Expenses (4) . . . . .
2.05%
(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 a portion
of the management fee. The adviser can terminate this
voluntary waiver at any time at its sole discretion.
The maximum management fee is 0.85%.
(3) The maximum 12b-1 fee is 0.75%.
(4) The Total Class C Shares Operating Expenses are
estimated to be 2.41% absent the anticipated voluntary
waiver of a portion of the management fee and a portion
of the 12b-1 fee.
* 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.
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.
<PAGE>
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. . . . . . $31 $64
You would pay the following
expenses on the same
investment, assuming no
redemption. . . . . . . . . . $21 $64
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 two other classes of shares called Class A Shares and
Fortress Shares. Class A Shares, Class C Shares and Fortress
Shares Shares are subject to certain of the same expenses.
However, Class A Shares are subject to a maximum sales load of
4.5%, but are not subject to a 12b-1 fee or a contingent deferred
sales charge. Fortress Shares are subject to a maximum sales
load of 1.00%, a 12b-1 fee of 0.50%, and a contingent deferred
sales charge of 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 three classes of shares known as Class
A Shares, Class C Shares and Fortress 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
<PAGE>
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;
* Liberty Capital Growth Fund, providing appreciation of
capital primarily through equity securities;
* Fund for U.S. Government Securities, Inc., providing current
income through long-term U.S. government 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-
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
<PAGE>
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
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., Liberty 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.
<PAGE>
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. Duration is
a commonly used measure of the potential volatility of the price
of a debt security, or the aggregate market value of a portfolio
of debt securities, prior to maturity. Securities with longer
durations generally have more volatile prices than securities of
comparable quality with shorter durations.
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
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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 issued by an
agency of the U.S. government, typically GNMA, FNMA or
FHLMC.
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
<PAGE>
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,
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 decrease
when market yields increase. 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 Fund may also invest in, among others, parallel pay CMOs
and Planned Amortization Class CMOs ("PAC Bonds"). Parallel
<PAGE>
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
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
<PAGE>
maturities. However, mortgage-backed securities may
experience less pronounced declines in value during periods
of 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
value as interest rates 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 (lower-
rated) bonds (which may be denominated in U.S. dollars or in non-
U.S. currencies) 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. The Fund's investments may include U.S. dollar
denominated debt obligations known as "Brady Bonds", which are
issued for the exchange of existing commercial bank loans to
foreign entities for new obligations that are generally
collateralized by zero coupon Treasury securities having the same
maturity. From time to time, the Fund's portfolio may consist
primarily of lower-rated (i.e., rated Ba or lower by Moody's
Investors Service, Inc. ("Moody's"), or BB or lower by Standard &
Poor's Corporation ("Standard & Poor's) or Fitch Investors
Service, Inc. ("Fitch")) corporate debt obligations, which are
commonly referred to as "junk bonds." A description of the
rating categories is contained in the Appendix to this
<PAGE>
Prospectus. 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
predetermined 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
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 or "D" by Standard & Poor's or Fitch. A
<PAGE>
description of the rating categories is contained in the
Appendix to this Prospectus.
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.
NON-GOVERNMENT MORTGAGE-BACKED SECURITIES. Non-government
mortgage-backed securities in which the Fund may invest
include:
* 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
<PAGE>
* 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.
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 Appendix to this Prospectus. Lower-rated
securities will usually offer higher yields than higher-
rated securities. However, there is more risk associated
with these investments. (For example, securities rated in
the lowest category have been unable to satisfy their
<PAGE>
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 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
<PAGE>
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 apply to securities issued by foreign
corporations and sovereign governments. These risks 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 and adverse diplomatic developments. It
may also be more difficult to enforce contractual
obligations or obtain court judgments abroad than would be
the case in the United States because of differences in the
legal systems. If the issuer of the debt or the
governmental authorities that control the repayment of the
debt may be unable or unwilling to repay principal or
interest when due in accordance with the terms of such debt,
the Fund may have limited legal recourse in the event of a
default. 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.
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
<PAGE>
Fund's assets denominated in the currency will decrease.
The risks noted above often are heightened for investments
in emerging or developing countries. Compared to the United
States and other developed countries, emerging or developing
countries may have relatively unstable governments,
economies based on only a few industries, and securities
markets that trade a small number of securities. Prices on
these exchanges tend to be volatile and, in the past,
securities in these countries have offered a greater
potential for gain (as well as loss) than securities of
companies located in developed countries. Further,
investment by foreign investors are subject to a variety of
restrictions in many emerging or developing countries.
These restrictions may take the form of prior governmental
approval, limits on the amount or type of securities held by
foreigners, and limits on the type of companies in which
foreigners may invest. Additional restrictions may be
imposed at any time by these and other countries in which a
fund invests. In addition, the repatriation of both
investment income and capital from several foreign countries
is restricted and controlled under certain regulations,
including in some cases the need for certain government
consents. Although these restrictions may in the future
make it undesirable to invest in emerging or developing
countries, the Fund's adviser does not believe that any
current repatriation restrictions would affect its decision
to invest in such 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.
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
<PAGE>
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.
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
contract, an amount of cash and cash equivalents, equal to the
underlying commodity value of the futures contract (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 contracts 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 contracts or
options. It is not certain that a secondary market for
positions in futures contracts or for options will exist at
<PAGE>
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. The Fund will purchase securities of closed-end
investment companies only in open market transactions involving
only customary brokers' commissions. However, these limitations
are not applicable if the securities are acquired in a merger,
consolidation, reorganization or acquisition of Fund assets.
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
<PAGE>
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
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 limitations becomes effective.
<PAGE>
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 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 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
<PAGE>
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 -
- 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.
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 and paid monthly. Distributions of any
net realized long-term capital gains will be made at least once
every twelve months. Dividends are automatically reinvested in
additional Shares on payment dates at the ex-dividend date net
asset value without a sales charge, unless cash payments are
requested by shareholders on the application or by writing to the
transfer agent. All shareholders on the record date are entitled
to the dividend.
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
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
<PAGE>
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.
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
<PAGE>
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 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
<PAGE>
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
* 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
<PAGE>
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
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
<PAGE>
of a predetermined amount not less than $100 may take advantage
of the Systematic Withdrawal Program. Under this program, Shares
are redeemed to provide for periodic withdrawal payments in an
amount directed by the shareholder. Depending upon the amount of
the withdrawal payments, the amount of dividends paid and capital
gains distributions with respect to Shares, and the fluctuation
of the net asset value of Shares redeemed under this program,
redemptions may reduce, and eventually deplete, the shareholder's
investment in the Fund. For this reason, payments under this
program should not be considered as yield or income on the
shareholder's investment in the Fund. To be eligible to
participate in this program, a shareholder must have an account
value of at least $10,000. A shareholder may apply for
participation in this program through his financial institution.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances,
the Fund may redeem Shares in any account, 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 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. The fee paid by the Fund, while
higher than the advisory fee paid by other mutual funds in
general, is comparable to fees paid by many mutual funds
with similar objectives and policies. Under the investment
<PAGE>
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' BACKGROUNDS. 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.
<PAGE>
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 AND SHAREHOLDER SERVICES PLANS. Under a
distribution plan adopted in accordance with Investment Company
Act Rule 12b-1 (the "Distribution Plan"), the Fund will pay to
the distributor an amount computed at an annual rate of 0.75 of
1% of the average daily net asset value of Shares to finance any
activity which is principally intended to result in the sale of
Shares subject to the Distribution Plan. The distributor may
select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and
broker/dealers to provide sales support services as agents for
their clients or customers.
The Distribution 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 the Fund under the
Distribution Plan.
In addition, the Fund has adopted a Shareholder Services Plan
(the "Services Plan") under which it may make payments of up to
0.25 of 1% of the average daily net asset value of Shares to
obtain certain personal services for shareholders and the
maintenance of shareholder accounts ("shareholder services").
The Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated
Investors, under which Federated Shareholder Services will either
perform shareholder services directly or will select financial
institutions to perform shareholder services. Financial
institutions will receive fees 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 Fund and Federated Shareholder Services.
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.
<PAGE>
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
Distribution and Shareholder Services Plans, 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.
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).
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., a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal
and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual
rate which relates to the average aggregate daily net assets of
all funds advised by subsidiaries of Federated Investors
("Federated Funds") as specified below:
AVERAGE AGGREGATE DAILY NET ASSETS
MAXIMUM ADMINISTRATIVE FEE OF THE FEDERATED FUNDS
0.15 OF 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750
million
The administrative fee received during any fiscal year shall be
at least $125,000 per portfolio and $30,000 per each additional
class of shares. Federated Administrative Services may choose
voluntarily to waive a portion of its fee.
<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 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.
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
* Fund Shares are exempt from personal property taxes
imposed by counties, municipalities, and school
<PAGE>
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 and Fortress 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 and Fortress 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 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%.
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
<PAGE>
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 Shares by the difference
between Class Expenses and distribution and shareholder service
expenses borne by shares of each respective class.
The stated advisory fee is the same for all three classes of
shares.
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
<PAGE>
repayment of principal is in arrears.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edge". Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger
than in AAA securities.
A--Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate but elements may be present which suggest
a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba--Bonds which are Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with
respect to principal or interest.
Ca--Bonds which are rated Ca represent obligations which are
<PAGE>
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.
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
<PAGE>
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
April 5, 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
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 April 5, 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
<PAGE>
Statement dated April 5, 1994
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT THE FUND
INVESTMENT OBJECTIVE AND POLICIES
Types of Investments and Investment Techniques
Resets of Interest
Caps and Floors
Brady Bonds
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
<PAGE>
Distribution and Shareholder Services Plans
Conversion to Federal Funds
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 securities 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.
BRADY BONDS
The Fund may invest in U.S. dollar-denominated foreign securities
referred to as "Brady Bonds." These are debt obligations of
foreign entities that may be fixed-rate par bonds or floating-
<PAGE>
rate discount bonds and are generally collateralized in full as
to principal due at maturity by U.S. Treasury zero coupon
obligations that have the same maturity as the Brady Bonds.
However, the Fund may also invest in uncollateralized Brady
Bonds. Brady Bonds are generally viewed as having three or four
valuation components: (i) any collateralized repayment of
principal at final maturity; (ii) the collateralized interest
payments; (iii) the uncollateralized interest payments; and (iv)
any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute what is referred to as the
"residual risk" of such bonds). In the event of a default with
respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the zero
coupon U.S. Treasury securities held as collateral for the
payment of principal will not be distributed to investors, nor
will such obligations be sold and the proceeds distributed. The
collateral will be held by the collateral agent to the scheduled
maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will
equal the principal payments which would have then been due on
the Brady Bonds in the normal course. In addition, in light of
the residual risk of Brady Bonds and, among other factors, the
history of defaults with respect to commercial bank loans by
public and private entities of countries issuing Brady Bonds,
investments in Brady Bonds are to be viewed as speculative.
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 re-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.
<PAGE>
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 may exceed this limitation for
temporary defensive purposes if unusual market conditions occur.
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.
<PAGE>
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
consideration (or has segregated cash in the amount of any
<PAGE>
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
The Fund may engage without limitation in foreign currency
transactions, including those described below.
CURRENCY RISKS
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
<PAGE>
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
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.
<PAGE>
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. Foreign currency options that
are considered to be illiquid are subject to the Fund's 15%
limitation on illiquid securities.
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
<PAGE>
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 associated 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
<PAGE>
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.
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
<PAGE>
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 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.
<PAGE>
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
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%
<PAGE>
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
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.
<PAGE>
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, certain foreign
currency 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
<PAGE>
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.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND
DIRECTORS OF THE CORPORATION
The Fund will not purchase or retain the securities of any
issuer if the officers and Directors of the Corporation or
its investment adviser owning individually more than 1/2 of
1% of the issuer's securities together own more than 5% of
the issuer's securities.
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
<PAGE>
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,
F e d e r a t e d 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,
R e a l t o r s 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.
<PAGE>
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.
Richard B. President and Executive Vice President
Fisher* Director and Trustee, Federated
F e d e r a t e d Investors; Chairman,
Investors Tower Federated Securities
Pittsburgh, PA Corp.; President or Vice
President of the Funds;
Director or Trustee of
some of the Funds.
E d w a r d 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.
<PAGE>
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.
Wesley W. Posvar Director Professor, Foreign Policy
1202 Cathedral of and Management Consultant;
Learning Trustee, Carnegie
University of E n d o w m e n t f o r
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;
F e d e r a t e d 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.
E d w a r d C . Vice President and Vice President, Treasurer
Gonzales Treasurer and Trustee, Federated
F e d e r a t e d 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,
F e d e r a t e d 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.
J o h n A . Vice President Vice President and
Staley, IV Trustee, Federated
F e d e r a t e d 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 Municipal Money Fund; American Leaders Fund, Inc.;
Annuity Management Series; Automated Cash Management Trust;
Automated Government Money Trust; The Boulevard Funds; California
Municipal Cash Trust; Cash Trust Series, Inc.; Cash Trust Series
<PAGE>
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; Managed Series Trust; Mark
Twain Funds; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities
Income Trust; New York Municipal Cash Trust; Peachtree Funds;
Planters Funds; Portage Funds; RIMCO Monument Funds; The Shawmut
Funds; Short-Term Municipal Trust; Signet Select Funds; Star
Funds; The Starburst Funds; The Starburst Funds II; Stock and
Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust;
Tax-Free Instruments Trust; Trademark Funds; Trust for Financial
Institutions; Trust for Government Cash Reserves; Trust for
Short-Term U.S. Government Securities; 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
<PAGE>
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
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.
<PAGE>
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 for a fee as described in the prospectus.
John A. Staley, IV, an officer of the Corporation, 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. and Federated Administrative Services.
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;
<PAGE>
* 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 Class C Shares."
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS
These arrangements permit the payment of fees to financial
institutions, the distributor, and Federated Shareholder
Services, to stimulate distribution activities and to cause
services to be provided to shareholders by a representative who
has knowledge of the shareholder's particular circumstances and
goals. These activities and services may include, but are not
limited to, marketing efforts; providing office space, equipment,
telephone facilities, and various clerical, supervisory,
computer, and other personnel as necessary or beneficial to
establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine
client inquiries; and assisting clients in changing dividend
options, account designations, and addresses.
By adopting the Distribution Plan, the Board of Directors expects
that the Fund will be able to achieve a more predicable flow of
cash for investment purposes and to meet redemptions. This will
facilitate more efficient portfolio management and assist the
Fund in pursuing its investment objectives. By identifying
potential investors whose needs are served by the Fund's
objectives, and properly servicing these accounts, it may be
possible to curb sharp fluctuations in rates of redemptions and
<PAGE>
sales.
Other benefits, which may be realized under either arrangement,
may include: (1) providing personal services to shareholders;
(2) investing shareholder assets with a minimum of delay and
administrative detail; (3) enhancing shareholder recordkeeping
systems; and (4) responding promptly to shareholders' requests
and inquiries concerning their accounts.
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.
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;
<PAGE>
* 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
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, 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
<PAGE>
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:
* 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 "General Bond Funds" 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
<PAGE>
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.
<PAGE>
