LIMITED TERM FUND
(A PORTFOLIO OF FIXED INCOME SECURITIES, INC.)
INVESTMENT SHARES
PROSPECTUS
The Investment Shares offered by this prospectus represent interests in Limited
Term 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
consistent with minimum fluctuation in principal value through the compilation
of a portfolio, the weighted-average duration of which will at all times be
limited to three years or less.
THESE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK AND ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, 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 Investment Shares. Keep this prospectus for future reference.
The Fund has also filed a Combined Statement of Additional Information for
Investment Shares and Fortress Shares dated January 31, 1994, with the
Securities and Exchange Commission. The information contained in the Combined
Statement of Additional Information is incorporated by reference in this
prospectus. You may request a copy of the 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 January 31, 1994
TABLE OF CONTENTS
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SUMMARY OF FUND EXPENSES 1
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FINANCIAL HIGHLIGHTS--INVESTMENT SHARES 2
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GENERAL INFORMATION 3
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INVESTMENT INFORMATION 3
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Investment Objective 3
Investment Policies 3
Acceptable Investments 4
Corporate Debt Obligations 5
Floating Rate Corporate Debt Obligations 5
Fixed Rate Corporate Debt Obligations 5
Variable Rate Demand Notes 6
Asset-Backed Securities 6
Non-Mortgage Related Asset-Backed Securities 7
Mortgage-Related Asset-Backed Securities 7
Adjustable Rate Mortgage Securities ("ARMS") 7
Collateralized Mortgage Obligations ("CMOs") 7
Real Estate Mortgage Investment Conduits
("REMICs") 8
Resets of Interest 8
Caps and Floors 8
Bank Instruments 9
Credit Facilities 9
Average Portfolio Duration 9
Credit Enhancement 9
Demand Features 10
Interest Rate Swaps 10
Financial Futures and Options on Futures 10
Risks 10
Repurchase Agreements 11
Restricted and Illiquid Securities 11
Lending of Portfolio Securities 11
When-Issued and Delayed Delivery Transactions 11
Investment Limitations 12
NET ASSET VALUE 12
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INVESTING IN INVESTMENT SHARES 13
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Share Purchases 13
Through a Financial Institution 13
Directly by Mail 13
Directly by Wire 13
Minimum Investment Required 13
What Shares Cost 13
Dealer Concession 14
Eliminating the Sales Charge 14
Quantity Discounts and Accumulated Purchases 14
Letter of Intent 14
Reinvestment Privilege 15
Systematic Investment Program 15
Exchange Privilege 15
Certificates and Confirmations 15
Dividends and Distributions 15
Retirement Plans 16
REDEEMING INVESTMENT SHARES 16
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Through a Financial Institution 16
Directly by Mail 16
Signatures 17
Receiving Payment 17
By Check 17
By Wire 17
Systematic Withdrawal Program 17
Redemption Before Purchase Instruments Clear 18
Accounts with Low Balances 18
Exchanges for Shares of Other Funds 18
FIXED INCOME SECURITIES, INC. INFORMATION 18
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Management of the Corporation 18
Board of Directors 18
Investment Adviser 18
Advisory Fees 18
Adviser's Background 19
Portfolio Manager's Background 19
Distribution of Investment Shares 19
Distribution Plan 19
Administration of the Fund 20
Administrative Services 20
Shareholder Services Plan 20
Custodian 20
Transfer Agent, and
Dividend Disbursing Agent 20
Legal Counsel 20
Independent Auditors 20
Expenses of the Fund and Investment Shares 21
SHAREHOLDER INFORMATION 21
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Voting Rights 21
TAX INFORMATION 22
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Federal Income Tax 22
Pennsylvania Corporate and Personal Property Taxes 22
PERFORMANCE INFORMATION 22
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OTHER CLASSES OF SHARES 23
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Financial Highlights--Fortress Shares 24
FINANCIAL STATEMENTS 25
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INDEPENDENT AUDITORS' REPORT 38
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ADDRESSES Inside Back Cover
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SUMMARY OF FUND EXPENSES
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<TABLE>
<S> <C> <C>
INVESTMENT SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).................................................................... 1.00%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price).................................................................... None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds, as applicable).................................................. None
Redemption Fee (as a percentage of amount redeemed, if applicable)....................................... None
Exchange Fee............................................................................................. None
ANNUAL INVESTMENT SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (1)........................................................................ 0.10%
12b-1 Fee (after waiver) (2)............................................................................. 0.25%
Total Other Expenses..................................................................................... 0.75%
Shareholder Servicing Fee................................................................. 0.25%
Total Investment Shares Operating Expenses (3).................................................. 1.10%
</TABLE>
(1)The management fee has been reduced to reflect the 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
0.40%.
(2)The maximum 12b-1 fee is 0.50%.
(3)The Total Investment Shares Operating Expenses in the table above are based
on expenses expected during the fiscal year ending November 30, 1994. The
Total Investment Shares Operating Expenses were 1.01% for the fiscal year
ended November 30, 1993, and were 1.50% absent the voluntary waiver of a
portion of the management fee and the voluntary waiver of a portion of the
12b-1 fee.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF INVESTMENT SHARES OF THE FUND
WILL BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN INVESTMENT 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.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
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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. As
noted in the table above, Investment Shares are not subject to a
redemption fee........................................................... $21 $45 $70 $143
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The information set forth in the foregoing table and example relates only to
the Investment Shares of the Fund. The Fund also offers another class of shares
called Fortress Shares. Fortress Shares and Investment Shares are subject to
certain of the same expenses. However, Fortress Shares are subject to a 12b-1
Fee of 0.15% and a contingent deferred sales charge of 1.00%. See "Other Classes
of Shares."
LIMITED TERM FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
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(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
See Independent Auditors' Report on page 38.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
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<CAPTION>
1993 1992*
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NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.01
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INCOME FROM INVESTMENT OPERATIONS
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Net investment income 0.63 0.519
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Net realized and unrealized gain (loss) on investments 0.19 (0.008)
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Total from investment operations 0.82 0.511
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LESS DISTRIBUTIONS
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Dividends from net investment operations (0.63) (0.519)
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Distributions in excess of net investment income (Note 3)(a) (0.02) (0.002)
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Total distributions (0.65) (0.521)
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NET ASSET VALUE, END OF PERIOD $ 10.17 $ 10.00
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TOTAL RETURN** 8.19% 5.21%
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RATIOS TO AVERAGE NET ASSETS
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Expenses 1.01% 0.67%(b)
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Net investment income 5.75% 6.17%(b)
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Expense adjustment (c) 0.49% 1.06%(b)
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SUPPLEMENTAL DATA
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Net assets, end of period (000 omitted)
$248,876
$57,225
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Portfolio turnover rate (d) 38% 60%
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</TABLE>
* Reflects operations from January 13, 1992 (date of initial public investment)
to November 30, 1992. For the period from the start of business, December 5,
1991 to January 12, 1992, net investment income aggregating $0.03 per share
($332) was distributed to the fund's investment adviser.
** Based on net asset value which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Distributions in excess of net investment income for the year ended
November 30, 1993 and the period ended November 30, 1992, were a result of
certain book and tax timing differences. These do not represent a return of
capital for federal tax purposes.
(b) Computed on an annualized basis.
(c) Increase/decrease in above expense/income ratios due to waivers or
reimbursement of expenses. (Note 5)
(d) Represents portfolio turnover rate for the entire Fund.
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report dated November 30, 1993, which can be obtained free of charge.
GENERAL INFORMATION
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Fixed Income Securities, Inc. 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
three separate portfolios: Limited Term Fund, Limited Term Municipal Fund and
Multi-State Municipal Income Fund. With respect to the Fund, the Directors have
established two classes of shares known as Fortress Shares and Investment
Shares. This prospectus relates only to the Investment Shares class of the Fund
("Shares").
The Fund is designed for investors seeking current income through a
professionally managed, diversified portfolio investing primarily in U.S.
government obligations, corporate debt obligations, and asset-backed securities.
A minimum initial investment of $5,000 is required.
Shares are sold at net asset value plus an applicable sales charge and are
redeemed at net asset value. Fund assets may be used in connection with the
distribution of Shares.
INVESTMENT INFORMATION
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INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek a high level of current income
consistent with minimum fluctuation in principal value through the compilation
of a portfolio, the weighted-average duration of which will at all times be
limited to three years or less. This investment objective cannot be changed
without approval of shareholders.
Although certain portfolio instruments held by the Fund are collateralized by
specific assets, the Fund's Shares themselves are not secured. 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 portfolio of
investment grade securities, at least 65% of which is invested in U.S.
government obligations, and corporate debt obligations and asset-backed
securities rated in one of the three highest categories by a nationally
recognized statistical rating organization. The Fund is not required to sell
securities if the 65% investment level changes due to increases or decreases in
the market value of portfolio securities. A description of the rating categories
is contained in the Appendix to the Statement of Additional Information.
The net asset value of the Fund is expected to fluctuate with changes in
interest rates and bond market conditions, although this fluctuation should be
more moderate than that of a fund with a longer average portfolio duration. The
adviser, however, will attempt to minimize principal fluctuation through, among
other things, diversification, careful credit analysis and security selection,
and adjustments of the Fund's average portfolio duration. In periods of rising
interest rates and falling bond prices, the adviser may shorten the Fund's
average duration to minimize the effect of declining bond values on the Fund's
net asset value. Conversely, during times of falling interest rates and rising
prices a longer average duration to three years may be sought. Unless indicated
otherwise, the 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 U.S. government obligations, corporate debt
obligations, and asset-backed securities. The Fund may also invest in derivative
instruments of such securities, including instruments with demand features or
credit enhancement, as well as money market instruments and cash.
The securities in which the Fund invests principally are:
notes, bonds, and discount notes of U.S. government agencies or
instrumentalities, such as Federal Home Loan Banks, Federal National
Mortgage Association, Government National Mortgage Association, 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;
domestic issues of corporate debt obligations having floating or fixed
rates of interest and rated in one of the four highest categories by a
nationally recognized statistical rating organization rated Aaa, Aa, A,
or Baa by Moody's Investors Service, Inc. ("Moody's"); AAA, AA, A, or BBB
by Standard & Poor's Corporation ("Standard & Poor's"), or AAA, AA, A, or
BBB by Fitch Investors Service, Inc. ("Fitch"), or which are of
comparable quality in the judgment of the adviser;
asset-backed securities rated in one of the four highest categories by a
nationally recognized statistical rating organization, or which are of
comparable quality in the judgment of the adviser;
rated commercial paper which matures in 270 days or less so long as at
least two ratings are high quality ratings by nationally recognized
statistical rating organizations. Such ratings would include: Prime-1 or
Prime-2 by Moody's, A-1 or A-2 by Standard & Poor's, or F-1 or F-2 by
Fitch;
time and savings deposits and deposit notes and bankers acceptances
(including certificates of deposit) 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 $100,000,000 in
capital; and
repurchase agreements collateralized by eligible investments.
The Fund will not invest in corporate debt obligations having a rating of less
than BBB by Standard & Poor's or Baa by Moody's, or BBB by Fitch. Bonds rated
BBB by Standard & Poor's or Fitch or Baa by Moody's have speculative
characteristics. Changes in economic conditions or other circumstances are more
likely to lead to weakened capacity to make principal and interest payments than
higher rated bonds. Downgraded securities will be evaluated on a case-by-case
basis by the adviser. The adviser will determine whether or not the security
continues to be an acceptable investment. If not, the security will be sold.
CORPORATE DEBT OBLIGATIONS. The Fund invests in corporate debt
obligations, including corporate bonds, notes, and debentures, which may
have floating or fixed rates of interest.
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.
Some of the floating rate corporate debt obligations in which the Fund may
invest include floating rate corporate debt securities issued by savings
and loans and collateralized by adjustable rate mortgage loans, also known
as collateralized thrift notes. Many of these collateralized thrift notes
have received AAA ratings from recognized rating agencies. Collateralized
thrift notes differ from traditional "pass through" certificates in which
payments made are linked to monthly payments made by individual borrowers
net of any fees paid to the issuer or guarantor of such securities.
Collateralized thrift notes pay a floating interest rate which is tied to a
predetermined index, such as the 180-day Treasury bill rate. Floating rate
corporate debt obligations also include securities issued to fund
commercial real estate construction.
Increasing rate securities, which currently do not make up a significant
share of the market in corporate debt securities, are generally offered at
an initial interest rate which is at or above prevailing market rates.
Interest rates are reset periodically (most commonly every 90 days) at
different levels on a predetermined scale. These levels of interest are
ordinarily set at progressively higher increments over time. Some
increasing rate securities may, by agreement, revert to a fixed rate
status. These securities may also contain features which allow the issuer
the option to convert the increasing rate of interest to a fixed rate under
such terms, conditions, and limitations as are described in each issue's
prospectus.
There are tax uncertainties with respect to whether increasing rate
securities will be treated as having an original issue discount. If it is
determined that the increasing rate securities have original issue
discount, a holder will be required to include as income in each taxable
year, in addition to interest paid on the security for that year, an amount
equal to the sum of the daily portions of original issue discount for each
day during the taxable year that such holder holds the security. There may
also be tax uncertainties with respect to whether an extension of maturity
on an increasing rate note will be treated as a taxable exchange. In the
event it is determined that an extension of maturity is a taxable exchange,
a holder will recognize a taxable gain or loss, which will be a short-term
capital gain or loss if he holds the security as a capital asset, to the
extent that the value of the security with an extended maturity differs
from the adjusted basis of the security deemed exchanged therefor.
FIXED RATE CORPORATE DEBT OBLIGATIONS. The Fund will also invest in fixed
rate securities, including fixed rate securities with short-term
characteristics. Fixed rate securities with short-term characteristics are
long-term debt obligations but are treated in the market as having short
maturities because call features of the securities may make them callable
within a short period of time. A fixed rate security with short-term
characteristics would include a fixed income security priced close to call
or redemption price or a fixed income security approaching maturity, where
the expectation of call or redemption is high.
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.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term
corporate debt instruments that have variable or floating interest rates
and provide the Fund with the right to tender the security for repurchase
at its stated principal amount plus accrued interest. Such securities
typically bear interest at a rate that is intended to cause the securities
to trade at par. The interest rate may float or be adjusted at regular
intervals (ranging from daily to annually), and is normally based on a
published interest rate or interest rate index. Many variable rate demand
notes allow the Fund to demand the repurchase of the security on not more
than seven days prior notice. Other notes only permit the Fund to tender
the security at the time of each interest rate adjustment or at other fixed
intervals. See "Demand Features."
ASSET-BACKED SECURITIES. Asset-backed securities are created by the
grouping of certain governmental, government related and private loans,
receivables and other lender assets into pools. Interests in these pools
are sold as individual securities. Payments from the asset pools may be
divided into several different tranches of debt securities, with some
tranches entitled to receive regular installments of principal and
interest, other tranches entitled to receive regular installments of
interest, with principal payable at maturity or upon specified call dates,
and other tranches only entitled to receive payments of principal and
accrued interest at maturity or upon specified call dates. Different
tranches of securities will bear different interest rates, which may be
fixed or floating.
Because the loans held in the asset pool often may be prepaid without
penalty or premium, asset-backed securities are generally subject to higher
prepayment risks than most other types of debt instruments. Prepayment
risks on mortgage securities tend to increase during periods of declining
mortgage interest rates, because many borrowers refinance their mortgages
to take advantage of the more favorable rates. Depending upon market
conditions, the yield that the Fund receives from the reinvestment of such
prepayments, or any scheduled principal payments, may be lower than the
yield on the original mortgage security. As a consequence, mortgage
securities may be a less effective means of "locking in" interest rates
than other types of debt securities having the same stated maturity and may
also have less potential for capital appreciation. For certain types of
asset pools, such as collateralized mortgage obligations, prepayments may
be allocated to one tranche of securities ahead of other tranches, in order
to reduce the risk of prepayment for the other tranches.
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.
The credit characteristics of asset-backed securities also differ in a
number of respects from those of traditional debt securities. The credit
quality of most asset-backed securities depends primarily upon the credit
quality of the assets underlying such securities, how well the entity
issuing the securities is insulated from the credit risk of the originator
or any other affiliated entities, and the amount and quality of any credit
enhancement to such securities.
NON-MORTGAGE RELATED ASSET-BACKED SECURITIES. The Fund may invest in
non-mortgage related 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 collateralized mortgage obligations
and mortgage pass-through securities, which are described below.
MORTGAGE-RELATED ASSET-BACKED SECURITIES. The Fund may also invest in
various mortgage-related asset-backed securities. These types of
investments may include adjustable rate mortgage securities, collateralized
mortgage obligations, real estate mortgage investment conduits, or other
securities collateralized by or representing an interest in real estate
mortgages (collectively, "mortgage securities"). Many mortgage securities
are issued or guaranteed by government agencies.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through
mortgage securities representing interests in adjustable rather than fixed
interest rate mortgages. The ARMS in which the Fund invests are issued by
the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA"), and the Federal Home Loan Mortgage
Corporation ("FHLMC") and are actively traded. The underlying mortgages
which collateralize ARMS issued by GNMA are fully guaranteed by the Federal
Housing Administration ("FHA") or Veterans Administration ("VA"), while
those collateralizing ARMS issued by FHLMC or FNMA are typically
conventional residential mortgages conforming to strict underwriting size
and maturity constraints.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are bonds issued by
single-purpose, stand-alone finance subsidiaries or trusts of financial
institutions, government agencies, investment bankers, or companies related
to the construction industry. CMOs purchased by the Fund may be:
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;
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
securities in which the proceeds of the issuance are invested in mortgage
securities and payment of the principal and interest is supported by the
credit of an agency or instrumentality of the U.S. government.
All CMOs purchased by the Fund are investment grade, as rated by a
nationally recognized statistical rating organization.
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, 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.
RESETS OF INTEREST. The interest rates paid on the ARMS, CMOs, and REMICs 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. Others tend to lag
changes in market rate levels and tend to be somewhat less volatile.
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. Certain
residual interest tranches of CMOs may have adjustable interest rates that
deviate significantly from prevailing market rates, even after the interest rate
is reset, and are subject to correspondingly increased price volatility. In the
event the Fund purchases such residual interest mortgage securities, it will
factor in the increased interest and price volatility of such securities when
determining its dollar-weighted average duration.
CAPS AND FLOORS. The underlying mortgages which collateralize the ARMS, CMOs,
and REMICs 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.
BANK INSTRUMENTS. The Fund only invests in Bank Instruments either issued by an
institution having capital, surplus and undivided profits over $100 million or
insured by BIF or SAIF. Bank Instruments may include Eurodollar Certificates of
Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs") and Eurodollar
Time Deposits ("ETDs").
CREDIT FACILITIES. Demand notes are borrowing arrangements between a
corporation and an institutional lender (such as the Fund) payable upon demand
by either party. The notice period for demand typically ranges from one to seven
days, and the party may demand full or partial payment.
Revolving credit facilities are borrowing arrangements in which the lender
agrees to make loans up to a maximum amount upon demand by the borrower during a
specified term. As the borrower repays the loan, an amount equal to the
repayment may be borrowed again during the term of the facility. The Fund
generally acquires a participation interest in a revolving credit facility from
a bank or other financial institution. The terms of the participation require
the Fund to make a pro rata share of all loans extended to the borrower and
entitles the Fund to a pro rata share of all payments made by the borrower.
Demand notes and revolving facilities usually provide for floating or variable
rates of interest.
AVERAGE PORTFOLIO DURATION. Although the Fund will not maintain a stable net
asset value, the adviser will seek to limit, to the extent consistent with the
Fund's investment objective of current income, the magnitude of fluctuations in
the Fund's net asset value by limiting the dollar-weighted average duration of
the Fund's portfolio. 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 shorter
durations generally have less volatile prices than securities of comparable
quality with longer durations. The Fund should be expected to maintain a higher
average duration during periods of lower expected market volatility, and a lower
average duration during periods of higher expected market volatility. In any
event, the Fund's dollar-weighted average duration will not exceed 3 years.
CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may have been
credit enhanced by a guaranty, letter of credit or insurance. The Fund typically
evaluates the credit quality and ratings of credit enhanced securities based
upon the financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), rather than the issuer. Generally, the Fund
will not treat credit enhanced securities as having been issued by the credit
enhancer for diversification purposes. However, under certain circumstances
applicable regulations may require the Fund to treat the securities as having
been issued by both the issuer and the credit enhancer. The bankruptcy,
receivership or default of the credit enhancer will adversely affect the quality
and marketability of the underlying security.
DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period following
a demand by the Fund. The demand feature may be issued by the issuer of the
underlying securities, a dealer in the securities or by another third party, and
may not be transferred separately from the underlying security. The Fund uses
these arrangements to provide the Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership or default by the issuer of the demand feature, or a default on the
underlying security or other event that terminates the demand feature before its
exercise, will adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the underlying
security are treated as a form of credit enhancement.
INTEREST RATE SWAPS. The Fund reserves the right to engage in interest rate
swap transactions; however, the Securities and Exchange Commission has
questioned whether the Investment Company Act of 1940 permits open-end
investment companies to engage in these transactions. Therefore, the Fund will
not engage in these transactions until the Securities and Exchange Commission
has determined that these transactions are permitted, and the Fund has included
appropriate disclosure in an amendment to this prospectus and notified
shareholders of its intention to engage in these transactions. An interest rate
swap is an agreement between two parties to exchange interest payment
obligations without an exchange of underlying securities. The Fund intends to
utilize interest rate swaps primarily to acquire floating rates of interest
which may be tied to various indices as described above.
FINANCIAL FUTURES AND OPTIONS ON FUTURES. The Fund may purchase and sell
financial futures contracts to hedge all or a portion of its portfolio against
changes in interest rates. Financial futures contracts call for the delivery of
particular debt instruments at a certain time in the future. The seller of the
contract agrees to make delivery of the type of instrument called for in the
contract and the buyer agrees to take delivery of the instrument at the
specified future time.
The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Fund is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases a
futures contracts, an amount of cash and U.S. Treasury securities, equal to the
underlying commodity value of the futures contracts (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged.
RISKS. When the Fund uses financial futures and options on financial futures as
hedging devices, there is a risk that the prices of the securities subject to
the futures contracts may not correlate perfectly with the prices of the
securities in the Fund's portfolio. This may cause the futures contract and any
related options to react differently than the portfolio securities to market
changes. In addition, the Fund's investment adviser could be incorrect in its
expectations about the direction or extent of market factors such as interest
rate movements. In these events, the Fund may lose money on the futures
contract or option. It is not certain that a secondary market for positions in
futures contracts or for options will exist at all times. Although the
investment adviser will consider liquidity before entering into options
transactions, there is no assurance that a liquid secondary market on an
exchange or otherwise will exist for any particular futures contract or option
at any particular time. The Fund's ability to establish and close out futures
and options positions depends on this secondary market.
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.
RESTRICTED AND ILLIQUID SECURITIES. _The Fund intends to 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.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under federal securities
law and is generally sold to institutional investors, such as the Fund, who
agree that they are purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Fund believes that Section 4(2) commercial paper
and possibly certain other restricted securities which meet the criteria for
liquidity established by the Directors are quite liquid. The Fund intends,
therefore, to treat the restricted securities which meet the criteria for
liquidity established by the Directors, including Section 4(2) commercial paper,
as determined by the Fund's investment adviser, as liquid and not subject to the
investment limitation applicable to illiquid securities. In addition, because
Section 4(2) commercial paper is liquid, the Fund intends to not subject such
paper to the limitation applicable to restricted securities.
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.
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.
INVESTMENT LIMITATIONS
The Fund will not:
borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an arrangement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may borrow up to one-third of the value of its total assets and pledge up
to 10% of the value of those assets to secure such borrowings;
lend any of its assets except portfolio securities up to one-third of the
value of its total assets;
sell securities short except, under strict limitations, it may maintain
open short positions so long as not more than 10% of the value of its net
assets is held as collateral for those positions; nor
with respect to 75% of the value of its total assets, invest more than 5%
in securities of any one issuer other than cash, cash items or securities
issued or guaranteed by the government of the United States, its
agencies, or instrumentalities and repurchase agreements collateralized
by such securities. (For purposes of this Fund, cash items means
instruments issued by a U.S. branch of a domestic bank or savings and
loan having capital surplus and undivided profits in excess of $100
million at the time of investment.)
The above investment limitations cannot be changed without shareholder approval.
The following investment limitation, however, may be changed by the Directors
without shareholder approval. Shareholders will be notified before any material
change in this investment limitation becomes effective.
The Fund will not:
invest more than 5% of the value of its total assets in securities of
issuers that have records of less than three years of continuous
operations including the operation of any predecessor.
NET ASSET VALUE
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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 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 INVESTMENT SHARES
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SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased through an investment dealer who has a sales agreement with the
distributor, Federated Securities Corp., or directly from Federated Securities
Corp. either by mail or wire. The Fund reserves the right to reject any purchase
request.
THROUGH A FINANCIAL INSTITUTION. An investor may call his financial institution
(such as a bank or an investment dealer) to place an order to purchase Shares.
Orders through a financial institution are considered received when the Fund is
notified of the purchase order. Purchase orders through a registered
broker/dealer must be received by the broker before 4:00 p.m. (Eastern time) and
must be transmitted by the broker to the Fund before 5:00 p.m. (Eastern time) in
order for Shares to be purchased at that day's price. Purchase orders through
other financial institutions must be received by the financial institution and
transmitted to the Fund before 4:00 p.m. (Eastern time) in order for Shares to
be purchased at that day's price. It is the financial institution's
responsibility to transmit orders promptly.
DIRECTLY BY MAIL. To purchase Shares by mail directly from Federated Securities
Corp.:
complete and sign the application available from the Fund;
enclose a check made payable to Limited Term Fund Investment Shares; and
send both to the Fund's transfer agent, Federated Services Company,
Federated Investors Tower, Pittsburgh, PA 15222-3779.
Purchases by mail are considered received after payment by check is converted by
Federated Services Company into federal funds. This is generally the next
business day after Federated Services Company receives the check.
DIRECTLY BY WIRE. To purchase Shares directly from Federated Securities Corp.
by Federal Reserve wire, call the Fund. All information needed will be taken
over the telephone, and the order is considered received when Federated Services
Company receives payment by wire.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $5,000, unless the investment is in
an IRA account, which requires a minimum initial investment of $50. Subsequent
investments must be in amounts of at least $100, except for an IRA account,
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. 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.
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; or
using the reinvestment privilege.
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.
To receive this sales charge elimination, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the purchase is made that Shares are already owned or that purchases are
being combined. The Fund will eliminate the sales charge after it confirms the
purchases.
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 1.00% of the
total amount intended to be purchased in escrow (in Shares) until such purchase
is completed.
The 1.00% 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 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.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis. Under this program, funds may be automatically withdrawn
monthly from the shareholder's checking account maintained at an Automated
Clearing House ("ACH") member institution, and invested in Shares at the net
asset value next determined after an order is received by Federated Services
Company plus the 1% sales charge for purchases under $1 million. A shareholder
may apply for participation in this program through Federated Securities Corp.
or his financial institution.
EXCHANGE PRIVILEGE
Shares in certain Federated Funds which are advised by subsidiaries or
affiliates of Federated Investors may 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 $5,000. 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, unless cash payments are requested
by shareholders on the application or by writing to Federated Securities Corp.
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
Federated Securities Corp. and consult a tax adviser.
REDEEMING INVESTMENT SHARES
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The Fund redeems Shares at their net asset value next determined after Federated
Services Company receives the redemption request. Redemptions will be made on
days on which the Fund computes its net asset value. Redemption requests must be
received in proper form and can be made through a financial institution, or
directly from the Fund by written request.
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. If, at
any time, the Fund shall determine it necessary to terminate or modify this
method of redemption, shareholders will be promptly notified.
Before a financial institution may request redemption by telephone on behalf of
a shareholder, an authorization form permitting the Fund to accept redemption
requests by telephone must first be completed. Telephone redemption 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.
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, such as "Directly by Mail," should be considered.
DIRECTLY BY MAIL
Shareholders may also redeem Shares by sending a written request to Federated
Services Company, Federated Investors Tower, Pittsburgh, PA 15222-3779. This
written request must include the shareholder's name, the Fund name and class of
shares, the account number, and the share or dollar amount to be redeemed.
Shares will be redeemed at their net asset value next determined after Federated
Services Company receives the redemption request.
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 firm of the New York, American, Boston, Midwest, or Pacific
Stock Exchange;
a savings bank or savings and loan association whose deposits are insured
by the 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.
RECEIVING PAYMENT
BY CHECK. Normally, a check for the proceeds is mailed within one business
day, but in no event more than seven days, after receipt of a proper
written redemption request provided Federated Services Company has received
payment for shares from the shareholder.
BY WIRE Redemption requests will be wired the following business day.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive monthly or quarterly payments of a
predetermined amount 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; the minimum withdrawal amount
is $100. 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 balance with a
value of at least $10,000 in the Fund (at current offering price).
A shareholder may apply for participation in this program through Federated
Securities Corp. 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.
REDEMPTIONS BEFORE PURCHASE INSTRUMENTS CLEAR
When Shares are purchased by check, or through ACH, the proceeds from the
redemption of those Shares are not available, and the Shares may not be
exchanged, until the Fund or its agents are reasonably certain that the purchase
check has cleared, which could take up to ten calendar days.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $5,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $5,000 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 certain Federated Funds which are advised
by subsidiaries or affiliates of Federated Investors at net asset value (plus a
sales charge, if applicable). Also, Shares may be exchanged for shares of a Fund
in the Fortress Investment Program at net asset value without a sales charge.
This privilege is available to shareholders resident in any state in which the
shares being acquired may be sold.
Shareholders using this privilege must exchange Shares having a net asset value
which at least meets the minimum investment required for the fund into which the
exchange is being made. A shareholder may obtain further information on the
exchange privilege, and may obtain prospectuses for other 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
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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
Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Federated
Advisers, the Fund's investment adviser (the "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 .40 of 1% of the Fund's average daily net assets. Under the
investment advisory contract, which provides for voluntary waivers of
expenses by the Adviser, the Adviser may voluntarily waive some or all of
its fee. The Adviser can terminate this voluntary waiver of some or all of
its advisory fee at any time at its sole discretion. The Adviser has also
undertaken to reimburse the Fund for operating expenses in excess of
limitations established by certain states.
ADVISER'S BACKGROUND. Federated Advisers, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) shares of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, Chairman and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J.
Christopher Donahue, who is President and Trustee of Federated Investors.
Federated Advisers and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services
to a number of investment companies. Total assets under management or
administration by these and other subsidiaries of Federated Investors are
approximately $70 billion. Federated Investors, which was founded in 1956
as Federated Investors, Inc., develops and manages mutual funds primarily
for the financial industry. Federated Investors' track record of
competitive performance and its disciplined, risk averse investment
philosophy serve approximately 3,500 client institutions nationwide.
Through these same client institutions, individual shareholders also have
access to this same level of investment expertise.
PORTFOLIO MANAGER'S BACKGROUND. Deborah A. Cunningham has been the Fund's
portfolio manager since July 1991. Ms. Cunningham joined Federated
Investors in 1981 and has been a Vice President of the Fund's investment
adviser since 1993. Ms. Cunningham served as an Assistant Vice President of
the investment adviser from 1989 until 1992, and from 1986 until 1989 she
acted as an investment analyst. Ms. Cunningham is a Chartered Financial
Analyst and received her M.S.B.A. in Finance from Robert Morris College.
DISTRIBUTION OF INVESTMENT SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan adopted in
accordance with the Investment Company Act Rule 12b-1 (the "Plan"), the Fund
will pay to Federated Securities Corp. an amount computed at an annual rate of
0.25 of 1% of the average daily net asset value of the Shares to finance any
activity which is principally intended to result in the sale of Shares.
Federated Securities Corp. may, from time to time and for such periods as it
deems appropriate, voluntarily reduce its compensation under the Plan to the
extent the expenses attributable to the Shares exceed such lower expense
limitation as the distributor may, by notice to the Fund, voluntarily declare to
be effective.
The distributor may select financial institutions (such as a bank or an
investment dealer) to provide sales support services as agents for their clients
or customers who beneficially own Shares of the Fund.
Financial institutions will receive fees from the distributor based upon Shares
owned by their clients or customers. The schedules of such fees and the basis
upon which such fees will be paid will be determined from time to time by the
distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no payments
to the distributor except as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Fund
under the Plan.
The Glass-Steagall Act limits the ability of a depository institution (such as a
commercial bank or a savings and loan association) to become an underwriter or
distributor of securities. In the event the Glass-Steagall Act is deemed to
prohibit depository institutions from acting in the capacities described above
or should Congress relax current restrictions on depository institutions, the
Directors will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, Inc., which is a
subsidiary of Federated Investors, provides the Fund with the administrative
personnel and services necessary to operate the Fund. Such services include
shareholder servicing and certain legal and accounting services. Federated
Administrative Services, Inc. provides these at approximate cost.
SHAREHOLDER SERVICES PLAN. The Fund has adopted a Shareholder Services Plan
(the "Services Plan") with respect to Shares of the Fund. Under the Services
Plan, financial institutions will enter into shareholder service agreements with
the Fund to provide administrative support services to their customers who from
time to time may be owners of record or beneficial owners of Shares. In return
for providing these support services, a financial institution may receive
payments from the Fund at a rate not exceeding 0.25 of 1% of the average daily
net assets of the Shares beneficially owned by the financial institution's
customers for whom it is holder of record or with whom it has a servicing
relationship. These administrative services may include, but are not limited to,
the provision of personal services and maintenance of shareholder accounts.
CUSTODIAN. State Street Bank and Trust Company, ("State Street Bank") Boston,
Massachusetts, is custodian for the securities and cash of the Fund, transfer
agent for the Shares of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. _Federated Services Company,
Pittsburgh, Pennsylvania, is transfer agent for the 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 INVESTMENT 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.
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 fund or class, only shares of that fund 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 Corporation's or the Fund's operation and for the election of
Directors under certain circumstances.
Directors may be removed by the Directors or by shareholders at a special
meeting. A special meeting of the shareholders shall be called by the Directors
upon the written request of shareholders owning at least 10% of the outstanding
shares of the Corporation.
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 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. From time to time, the
Fund may advertise its performance using certain financial publications and/or
compare its performance to certain indices.
Total return will be calculated separately for Fortress Shares and Investment
Shares. Because Fortress Shares are subject to lower 12b-1 expenses, the yield
for Fortress Shares, for the same period, will exceed that of Investment Shares.
Because Investment Shares are not subject to a contingent deferred sales charge,
the total return for Investment Shares, for the same period, may exceed that of
Fortress Shares.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund currently offers Fortress Shares and Investment Shares. The Fortress
Shares are sold subject to a front-end sales charge of up to 1%, and are subject
to a contingent deferred sales charge. Fortress Shares are subject to a minimum
initial investment of $1,500.
The amount of dividends payable to Investment Shares will generally be less than
that of Fortress Shares by the difference between class expenses borne by shares
of each respective class.
The stated advisory fee is the same for both classes of shares.
LIMITED TERM FUND
FINANCIAL HIGHLIGHTS--FORTRESS SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
See Independent Auditors' Report on page 38.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1993*
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.24
- -----------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------------
Net investment income 0.15
- -----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.07)
- ----------------------------------------------------------------------------------------------- -----------------
Total from investment operations 0.08
- ----------------------------------------------------------------------------------------------- -----------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------------
Dividends from net investment operations (0.15)
- ----------------------------------------------------------------------------------------------- -----------------
NET ASSET VALUE, END OF PERIOD $ 10.17
- ----------------------------------------------------------------------------------------------- -----------------
TOTAL RETURN** 0.78%
- -----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------
Expenses 1.00%(a)
- -----------------------------------------------------------------------------------------------
Net investment income 7.10%(a)
- -----------------------------------------------------------------------------------------------
Expense adjustment (b) 0.39%(a)
- -----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $7,230
- -----------------------------------------------------------------------------------------------
Portfolio turnover rate (c) 38 %
- -----------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from August 31, 1993 (date of initial
public offering) to November 30, 1993.
** Based on net asset value which does not reflect the sales load or contingent
deferred sales charge if applicable.
(a) Computed on an annualized basis.
(b) Increase/decrease in above expense/income ratios due to waivers or
reimbursements of expenses (Note 5).
(c) Represents portfolio turnover rate for the entire Fund.
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report dated November 30, 1993, which can be obtained free of charge.
LIMITED TERM FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C> <C>
- -------------- -------------------------------------------------------------------------------- ---------------
CORPORATE BONDS/ASSET BACKED SECURITIES--78.2%
- ------------------------------------------------------------------------------------------------
AUTOMOTIVES--13.0%
--------------------------------------------------------------------------------
$ 2,500,000 Arvin Industries, Inc. 8.375%, 3/1/97 $ 2,516,425
--------------------------------------------------------------------------------
2,833,205 Capital Auto Receivables Asset Trust 1992-1, Class B, 6.20%,
12/15/97 2,888,339
--------------------------------------------------------------------------------
2,898,366 Capital Auto Receivables Asset Trust 1993-1, Class B, 5.85%,
2/17/98 2,930,740
--------------------------------------------------------------------------------
177,154 Ford Credit 1991-B Grantor Trust, 6.50%, 11/15/96 179,967
--------------------------------------------------------------------------------
500,000 Ford Credit Auto Loan Master Trust 1992-1, 6.875%, 1/15/99 523,540
--------------------------------------------------------------------------------
5,000,000 Ford Credit Auto Loan Master Trust 1992-2, Class A, 7.375%,
4/15/99 5,342,400
--------------------------------------------------------------------------------
161,750 GMAC 1991-B Grantor Trust, 6.75%, 6/15/96 164,859
--------------------------------------------------------------------------------
752,540 Midlantic Auto Grantor Trust 1992-1, Class B, 5.15%, 9/15/97 754,654
--------------------------------------------------------------------------------
2,550,000 *Navistar Financial Dealer Note Trust 1990, Class A-3, 4.09%,
1/25/2003 2,567,544
--------------------------------------------------------------------------------
272,573 Premier Auto Trust 1992-3, Class B, 6.25%, 11/17/97 275,168
--------------------------------------------------------------------------------
4,199,942 Premier Auto Trust 1993-4, Class B, 4.95%, 2/2/99 4,219,220
--------------------------------------------------------------------------------
10,000,000 Premier Auto Trust 1993-6, Class B, 4.875%, 10/31/99 9,940,900
--------------------------------------------------------------------------------
966,746 Select Auto Receivables Trust 1991-5A, 6.25%, 11/15/96 983,423
-------------------------------------------------------------------------------- ---------------
Total 33,287,179
-------------------------------------------------------------------------------- ---------------
BANKING--21.3%
--------------------------------------------------------------------------------
5,000,000 Advanta Credit Card Master Trust 1992-3, Class A-1, 5.95%,
8/31/99 5,098,800
--------------------------------------------------------------------------------
8,000,000 *Bankers Trust New York Corp., 5.38%, 9/24/2002 8,043,600
--------------------------------------------------------------------------------
5,000,000 *Barclays Bank PLC, 4.80%, 6/21/96 5,196,500
--------------------------------------------------------------------------------
11,910,000 *Chase Manhattan Corp., 5.25%, 12/5/2009 11,864,742
--------------------------------------------------------------------------------
3,000,000 Chase Manhattan Credit Card Trust 1991-1 Class A, 8.75%, 8/15/99 3,262,800
--------------------------------------------------------------------------------
$ 10,500,000 Chase Manhattan Credit Card Trust 1992-1 Class A, 7.40%,
5/15/2000 $ 11,136,300
--------------------------------------------------------------------------------
3,450,000 Chemical New York Corp., 0.01%, 2/16/2003 1,818,874
--------------------------------------------------------------------------------
1,000,000 *Citicorp, 6.00%, 6/29/2005 1,005,000
--------------------------------------------------------------------------------
3,000,000 *First Chicago Corp., 4.25%, 7/28/2003 2,978,010
--------------------------------------------------------------------------------
4,000,000 First USA Credit Card Master Trust 1992-1 Class B, 5.80%, 6/15/98 4,060,400
-------------------------------------------------------------------------------- ---------------
Total 54,465,026
-------------------------------------------------------------------------------- ---------------
BASIC INDUSTRY--1.8%
--------------------------------------------------------------------------------
2,500,000 Georgia Pacific Corp., 10.25%, 9/15/2018 2,652,400
--------------------------------------------------------------------------------
2,000,000 Societe Generale, 5.125%, 3/30/2002 2,020,000
-------------------------------------------------------------------------------- ---------------
Total 4,672,400
-------------------------------------------------------------------------------- ---------------
BROADCASTING & CABLE--6.0%
--------------------------------------------------------------------------------
12,500,000 TKR Cable, Inc. Sr. Note, 10.50%, 10/30/2007 15,312,500
-------------------------------------------------------------------------------- ---------------
CONSUMER PRODUCT--5.8%
--------------------------------------------------------------------------------
5,000,000 Black & Decker Corp., 7.50%, 4/1/2003 5,070,050
--------------------------------------------------------------------------------
1,000,000 Black & Decker Corp., 8.375%, 4/1/97 1,011,900
--------------------------------------------------------------------------------
5,200,000 Carpenter Technology Corp., 12.875%, 3/1/2014 5,529,264
--------------------------------------------------------------------------------
3,200,000 Fruit of the Loom, Inc., Sr. Note, 7.875%, 10/15/99 3,256,020
-------------------------------------------------------------------------------- ---------------
Total 14,867,234
-------------------------------------------------------------------------------- ---------------
FINANCE--RETAIL--7.6%
--------------------------------------------------------------------------------
1,500,000 Diamond Funding Corp., 6.35%, 11/20/97 1,526,955
--------------------------------------------------------------------------------
5,000,000 Discover Card Trust 1992-B, Class A, 6.80%, 6/16/2000 5,224,500
--------------------------------------------------------------------------------
3,000,000 Discover Card Trust 1991-B, Class B, 8.85%, 7/15/98 3,255,960
--------------------------------------------------------------------------------
6,000,000 Household Credit Card Trust 1991-1, Class B, 8.125%, 10/15/97 6,401,340
--------------------------------------------------------------------------------
3,000,000 Household Credit Card Trust 1992-1, Class B, 6.25%, 12/15/97 3,060,000
-------------------------------------------------------------------------------- ---------------
Total 19,468,755
-------------------------------------------------------------------------------- ---------------
HOME EQUITY RECEIVABLES--10.1%
--------------------------------------------------------------------------------
$ 3,896,194 Advanta Home Equity Loan Trust 1992-1 Class A, 7.875%,
9/25/2008 $ 4,050,406
--------------------------------------------------------------------------------
1,731,393 Advanta Home Equity Loan Trust 1992-3 Class A, 6.00%, 8/25/2008 1,729,852
--------------------------------------------------------------------------------
248,511 American Financial Home Equity Loan Trust, 8.00%, 7/25/2006 259,523
--------------------------------------------------------------------------------
500,000 *Capital Home Equity Loan Trust 1991-1 Class B, 3.79%, 11/14/2011 500,700
--------------------------------------------------------------------------------
5,923,743 Conti Mortgage Home Equity Loan Trust 1993-3, Class A-2, 5.54%, 7/15/2020 5,923,743
--------------------------------------------------------------------------------
2,731,148 GE Capital Mortgage Services, Inc. 1991-1, Class A, 7.20%,
8/30/2011 2,800,956
--------------------------------------------------------------------------------
2,500,000 GE Capital Mortgage Services, Inc. 1991-1, Class B, 8.70%,
9/15/2011 2,716,625
--------------------------------------------------------------------------------
4,942,941 GE Capital Mortgage Services, Inc. 1993-9, Class A-1, 6.00%,
8/25/2008 4,962,564
--------------------------------------------------------------------------------
373,919 Home Equity Loan REMIC Trust 1992-1, Class A, 5.65%,
11/15/2014 373,145
--------------------------------------------------------------------------------
829,574 TMS Home Equity Loan Trust 1992-A, Class A, 6.95%, 12/15/2007 848,073
--------------------------------------------------------------------------------
337,847 TMS Home Equity Loan Trust 1992-B, Class A, 6.90%, 7/15/2007 343,475
--------------------------------------------------------------------------------
1,276,004 TMS Home Equity Loan Trust 1992-D, Class A-3, 7.55%,
10/15/2018 1,313,710
-------------------------------------------------------------------------------- ---------------
Total 25,822,772
-------------------------------------------------------------------------------- ---------------
LEASING--0.4%
--------------------------------------------------------------------------------
57,127 Comdisco Receivables Trust 1991-A, 7.70%, 5/15/96 57,199
--------------------------------------------------------------------------------
862,612 Concord Leasing Grantor Trust 1992-C, Class A-1, 5.31%, 1/20/99 865,312
-------------------------------------------------------------------------------- ---------------
Total 922,511
-------------------------------------------------------------------------------- ---------------
MANUFACTURED HOUSING RECEIVABLES--6.8%
--------------------------------------------------------------------------------
3,000,000 Cit Group Manufactured Housing PTC 1993-1, Class A-2, 5.75%,
6/15/2018 2,973,540
--------------------------------------------------------------------------------
3,217,147 Cit Group Manufactured Housing PTC 1993-1, Class B, 6.85%,
6/15/2018 3,208,075
--------------------------------------------------------------------------------
$ 2,879,257 Fleetwood Credit Corp. 1992-1, Class A, 7.10%, 2/15/2007 $ 2,966,959
--------------------------------------------------------------------------------
7,746,883 Merrill Lynch Mortgage Investments, Inc., 1991-A, Class B, 9.25%,
5/15/2011 8,258,874
-------------------------------------------------------------------------------- ---------------
Total 17,407,448
-------------------------------------------------------------------------------- ---------------
MARINE RECEIVABLES--0.4%
--------------------------------------------------------------------------------
978,082 CFC-14 Grantor Trust, Class A, 7.15%, 11/15/2006 988,782
-------------------------------------------------------------------------------- ---------------
PRINTING & PUBLISHING--4.2%
--------------------------------------------------------------------------------
1,000,000 Valassis Inserts, Inc., Sr. Note, 8.375%, 3/15/97 1,082,160
--------------------------------------------------------------------------------
9,000,000 Valassis Inserts, Inc., Sr. Note, 8.875%, 3/15/99 9,695,790
-------------------------------------------------------------------------------- ---------------
Total 10,777,950
-------------------------------------------------------------------------------- ---------------
TRADE RECEIVABLES--0.8%
--------------------------------------------------------------------------------
2,000,000 Unisys Receivables Master Trust I, 5.05%, 11/15/96 2,001,420
-------------------------------------------------------------------------------- ---------------
TOTAL CORPORATE BONDS/ASSET BACKED SECURITIES
(IDENTIFIED COST $200,142,519) 199,993,977
-------------------------------------------------------------------------------- ---------------
GOVERNMENT AGENCIES--0.2%
- ------------------------------------------------------------------------------------------------
500,000 *Student Loan Marketing Association, 4.00%, 5/8/95
(IDENTIFIED COST $500,000) 500,000
-------------------------------------------------------------------------------- ---------------
MORTGAGE BACKED SECURITIES--22.2%
- ------------------------------------------------------------------------------------------------
GOVERNMENT AGENCY--MORTGAGE BACKED SECURITIES--0.3%
--------------------------------------------------------------------------------
189,168 *Federal National Mortgage Association Pool 087462, 7.76%,
11/1/2017 196,971
--------------------------------------------------------------------------------
490,250 *Federal National Mortgage Association Pool 112514, 5.87%,
12/1/2020 513,694
-------------------------------------------------------------------------------- ---------------
Total 710,665
-------------------------------------------------------------------------------- ---------------
NON-GOVERNMENT AGENCY--MORTGAGE BACKED SECURITIES--21.9%
--------------------------------------------------------------------------------
2,383,000 Capstead Securities Corp. 1992-10, Class D, 8.25%, 7/25/2023 2,462,068
--------------------------------------------------------------------------------
3,090,000 Chemical Mortgage Securities, Inc. 1993, Class A-4, 7.45%,
2/25/2023 3,171,112
--------------------------------------------------------------------------------
$ 1,598,536 *Citicorp Mortgage Securities 1992-18, Class A-1, 5.21%,
10/25/2022 $ 1,614,521
--------------------------------------------------------------------------------
2,985,808 *DLJ Mortgage Acceptance Corp. 1993-Q15, Class A-1, 4.58%,
11/25/2023 3,079,114
--------------------------------------------------------------------------------
5,000,000 *GCA 1993-3, Class A-1 5.52%, 8/25/2019 5,184,400
--------------------------------------------------------------------------------
6,768,043 *GCA 1993-LB2, Class A-1, 5.58%, 7/25/2023 7,017,648
--------------------------------------------------------------------------------
7,999,519 *GCA Long Beach Mortgage PTC, Class A-2, 6.08%, 7/25/2022 8,274,463
--------------------------------------------------------------------------------
1,584,338 *GMBS 1990-5, Class A, 6.62%, 12/26/2020 1,593,749
--------------------------------------------------------------------------------
6,000,000 Prudential Home Mortgage 1992-5, Class A-6, 7.50%, 4/25/2007 6,040,260
--------------------------------------------------------------------------------
1,935,000 Prudential Home Mortgage 1992-A, Class B1-2, 7.90%,
11/25/2022 1,939,663
--------------------------------------------------------------------------------
1,612,074 Residential Funding Corp. 1993-S18, Class A-2, 7.50%, 5/25/2023 1,647,540
--------------------------------------------------------------------------------
5,000,000 Residential Funding Corp. 1993-S43, Class A-4, 8.00%, 12/25/2022 5,173,500
--------------------------------------------------------------------------------
34,561 RTC 1992-7, Class A-2A, 8.35%, 6/25/2029 34,950
--------------------------------------------------------------------------------
3,270,000 RTC 1992-15, Class B-3, 10.00%, 7/25/2027 3,335,400
--------------------------------------------------------------------------------
2,643,506 Sears Mortgage Securities Corp. 1992-10, Class A-3, 8.00%,
6/25/2020 2,710,096
--------------------------------------------------------------------------------
2,929,211 Zions Home Refinance Loan Trust 1993-1, 5.15%, 9/25/2003 2,902,731
-------------------------------------------------------------------------------- ---------------
Total 56,181,215
-------------------------------------------------------------------------------- ---------------
TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST $56,457,544) 56,891,880
-------------------------------------------------------------------------------- ---------------
REPURCHASE AGREEMENT (A)--2.2%
- ------------------------------------------------------------------------------------------------
$ 5,582,000 Goldman, Sachs & Co., 3.23%, dated 11/30/93 due 12/1/93
(AT AMORTIZED COST) (NOTE 2B) $ 5,582,000
-------------------------------------------------------------------------------- ---------------
TOTAL INVESTMENTS (IDENTIFIED COST $262,682,063) $ 262,967,857\
-------------------------------------------------------------------------------- ---------------
</TABLE>
\ The cost of investments for federal tax purposes amounts to $262,682,063. The
net unrealized appreciation on a federal tax cost basis amounts to $285,794,
and is comprised of $1,773,614appreciation and $1,487,820 depreciation at
November 30, 1993.
* Current rate shown.
(a) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investments in the repurchase agreement is through participation in a joint
account with other Federated funds.
Note: The categories of investments are shown as a percentage of net assets
($256,105,848) at November 30, 1993.
The following abbreviations are used in this portfolio:
PTC--Pass Through Certificate
REMIC--Real Estate Mortgage Investment Conduit
(See Notes which are an integral part of Financial Statements)
LIMITED TERM FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------------------------
Investments in securities, at value (Notes 2A and 2B)
(identified cost and tax cost $262,682,063) $ 262,967,857
- --------------------------------------------------------------------------------------------------
Cash 33,076
- --------------------------------------------------------------------------------------------------
Receivable for capital stock sold 2,650,821
- --------------------------------------------------------------------------------------------------
Interest receivable 2,064,094
- --------------------------------------------------------------------------------------------------
Receivable for investments sold 1,083,241
- --------------------------------------------------------------------------------------------------
Deferred expenses (Note 2H) 47,345
- -------------------------------------------------------------------------------------------------- --------------
Total assets 268,846,434
- --------------------------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------------------------
Payable for investments purchased $ 11,325,409
- -----------------------------------------------------------------------------------
Payable for capital stock redeemed 631,198
- -----------------------------------------------------------------------------------
Dividends payable 367,990
- -----------------------------------------------------------------------------------
Accrued expenses and other liabilities 169,003
- -----------------------------------------------------------------------------------
Payable to Adviser 50,000
- -----------------------------------------------------------------------------------
Payable for shareholder services and distribution fees 196,986
- ----------------------------------------------------------------------------------- -------------
Total liabilities 12,740,586
- -------------------------------------------------------------------------------------------------- --------------
NET ASSETS for 25,174,690 shares of capital stock outstanding $ 256,105,848
- -------------------------------------------------------------------------------------------------- --------------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------------------------
Paid-in capital $ 256,010,982
- --------------------------------------------------------------------------------------------------
Unrealized appreciation of investments 285,794
- --------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments 387,479
- --------------------------------------------------------------------------------------------------
Accumulated distributions in excess of net investment income (Note 3) (578,407)
- -------------------------------------------------------------------------------------------------- --------------
Total $ 256,105,848
- -------------------------------------------------------------------------------------------------- --------------
NET ASSET VALUE
- --------------------------------------------------------------------------------------------------
Investment Shares (net assets of $248,875,891 / 24,464,073 SHARES OUTSTANDING) $10.17
- -------------------------------------------------------------------------------------------------- --------------
Fortess Shares (net assets of $7,229,957 / 710,617 SHARES OUTSTANDING) $10.17
- -------------------------------------------------------------------------------------------------- --------------
OFFERING PRICE PER SHARE:
- --------------------------------------------------------------------------------------------------
Investment Shares (100/99 of $10.17)* $10.27
- -------------------------------------------------------------------------------------------------- --------------
Fortress Shares (100/99 of $10.17)* $10.27
- -------------------------------------------------------------------------------------------------- --------------
REDEMPTION PRICE PER SHARE:
- --------------------------------------------------------------------------------------------------
Fortress Shares (99/100 of $10.17)** $10.07
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
* See "What Shares Cost" on page 14 of the prospectus.
** See "Contingent Deferred Sales Charge" on page 19 of the Fortress Shares
prospectus.
(See Notes which are an integral part of the Financial Statements)
LIMITED TERM FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------------------
Interest income (Note 2C) $ 9,629,910
- ---------------------------------------------------------------------------------------------------
EXPENSES:
- ------------------------------------------------------------------------------------
Investment advisory fee (Note 5) $ 574,312
- ------------------------------------------------------------------------------------
Directors' fee 11,461
- ------------------------------------------------------------------------------------
Administrative personnel and services (Note 5) 308,078
- ------------------------------------------------------------------------------------
Custodian, transfer and dividend disbursing agent fees and expenses 182,801
- ------------------------------------------------------------------------------------
Capital Stock registration costs 129,345
- ------------------------------------------------------------------------------------
Audting fees 18,677
- ------------------------------------------------------------------------------------
Legal fees 6,661
- ------------------------------------------------------------------------------------
Printing and postage 21,209
- ------------------------------------------------------------------------------------
Distribution services fees (Note 5) 715,878
- ------------------------------------------------------------------------------------
Insurance premiums 7,451
- ------------------------------------------------------------------------------------
Shareholder service fees (Note 5) 145,217
- ------------------------------------------------------------------------------------
Taxes 1,208
- ------------------------------------------------------------------------------------
Miscellaneous 23,532
- ------------------------------------------------------------------------------------ -------------
Total expenses 2,145,830
- ------------------------------------------------------------------------------------
Deduct--
- ------------------------------------------------------------------------------------
Waiver of investment advisory fee (Note 5) $ 550,197
- -----------------------------------------------------------------------
Waiver of distribution services fees (Note 5) 143,783 693,980
- ----------------------------------------------------------------------- ----------- -------------
Net expenses 1,451,850
- --------------------------------------------------------------------------------------------------- -------------
Net investment income 8,178,060
- --------------------------------------------------------------------------------------------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis)-- 369,906
- ---------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments 785,383
- --------------------------------------------------------------------------------------------------- -------------
Net realized and unrealized gain (loss) on investments 1,155,289
- --------------------------------------------------------------------------------------------------- -------------
Change in net assets from operations $ 9,333,349
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
LIMITED TERM FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
<S> <C> <C>
1993 1992*
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------------------------------
Net investment income $ 8,178,060 $ 1,358,277
- -------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions ($369,906 and
$17,573 computed for federal income tax purposes) (Note 2D) 369,906 17,573
- -------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) of investments 785,383 (499,589)
- ------------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from operations 9,333,349 876,261
- ------------------------------------------------------------------------------- --------------- ---------------
NET EQUALIZATION CREDITS (NOTE 2E)-- 78,255 74,652
- ------------------------------------------------------------------------------- --------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- -------------------------------------------------------------------------------
Dividends to shareholders from net investment income:
- -------------------------------------------------------------------------------
Investment Shares (8,215,600) (1,432,929)
- -------------------------------------------------------------------------------
Fortress Shares (36,477) --
- -------------------------------------------------------------------------------
Distributions in excess of net investment income
- -------------------------------------------------------------------------------
Investment Shares (572,361) (10,284)
- -------------------------------------------------------------------------------
Fortress Shares -- --
- ------------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from distributions to shareholders (8,824,438) (1,443,213)
- ------------------------------------------------------------------------------- --------------- ---------------
CAPITAL STOCK TRANSACTIONS (NOTE 4)--
- -------------------------------------------------------------------------------
Proceeds from sale of shares 240,663,285 76,137,405
- -------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
dividends declared 6,295,582 1,129,032
- -------------------------------------------------------------------------------
Cost of shares redeemed (48,664,777) (19,649,545)
- ------------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from capital stock transactions 198,294,090 57,616,892
- ------------------------------------------------------------------------------- --------------- ---------------
Change in net assets 198,881,256 57,124,592
- -------------------------------------------------------------------------------
NET ASSETS:
- -------------------------------------------------------------------------------
Beginning of period 57,224,592 100,000
- ------------------------------------------------------------------------------- --------------- ---------------
End of period $ 256,105,848 $ 57,224,592
- ------------------------------------------------------------------------------- --------------- ---------------
</TABLE>
* For the period from December 5, 1991 (start of business) to November 30, 1992.
(See Notes which are an integral part of the Financial Statements)
LIMITED TERM FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Fixed Income Securities, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended, as an open-end, management
investment company. The financial statements included herein present only those
of Limited Term Fund (the "Fund"). The assets of each portfolio are segregated
and a shareholder's interest will be limited to the portfolio in which shares
are held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Bonds and asset backed securities listed on national
securities exchanges are valued at the last reported sale price on that
day. Unlisted securities, listed securities in which there were no sales,
and U.S. government obligations are valued at the mean between bid and
asked prices as furnished by an independent pricing service. Short-term
obligations are ordinarily valued at the mean between bid and asked prices
as furnished by an independent pricing service. However, short-term
obligations with maturities of sixty days or less are valued at amortized
cost, which approximates value.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System or to have segregated within the
custodian bank's vault, all securities held as collateral in support of
repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of
each repurchase agreement's underlying securities to ensure the existence
of a proper level of collateral.
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. Risks may arise from the potential inability of counterparties to
honor the terms of the repurchase agreement. Accordingly, the Fund could receive
less than the repurchase price on the sale of collateral securities.
C. INCOME--Interest income is recorded on the accrual basis. Interest income
includes interest and discount earned (net of premium) on short-term
obligations, and interest earned on all other debt securities including
original issue discount as required by the Internal Revenue Code.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Internal Revenue Code applicable to investment companies and to distribute
to shareholders each year all of its taxable income, including any net
realized
gain on investments. Accordingly, no provision for federal tax is
necessary.
E. EQUALIZATION--The Fund follows the accounting practice known as
equalization by which a portion of the proceeds from sales and costs of
redemption of capital stock equivalent, on a per share basis, to the amount
of undistributed net investment income on the date of transaction is
credited or charged to undistributed net investment income for each class
of shares. As a result, undistributed net investment income per share is
unaffected by sales or redemption of capital stock.
F. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. To the extent the Fund
engages in such transactions, it will do so for the purpose of acquiring
portfolio securities consistent with its investment objective and policies
and not for the purpose of investment leverage. The Fund will record a
when-issued security and the related liability on the trade date. Until the
securities are received and paid for, the Fund will maintain security
positions such that sufficient liquid assets will be available to make
payment for the securities purchased. Securities purchased on a when-issued
or delayed delivery basis are marked to market daily and begin earning
interest on the settlement date.
G. OTHER--Investment transactions are accounted for on the date of the
transaction.
H. DEFERRED EXPENSES--Costs incurred by the Fund in connection with its
initial share registration, other than organization expenses, were deferred
and are being amortized on a straight-line basis through January 1996.
(3) DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly to all shareholders invested in the Fund
on the record date. Distributions of any net realized long-term capital gains
will be made at least once every twelve months. Dividends and distributions are
automatically reinvested on payment dates in additional shares of the Fund
without a sales charge, unless cash payments are requested.
The amounts shown in the financial statements for dividends from net investment
income for the years ended November 30, 1993 and 1992 differ from those
determined for tax purposes because of timing differences in the recognition of
dividends for book and tax purposes. This resulted in distributions to
shareholders in excess of net investment income. These distributions do not
represent a return of capital for federal income tax purposes.
(4) CAPITAL STOCK
At November 30, 1993, the corporation was authorized to issue 10,000,000,000
shares of $0.001 par value stock. Of these shares, 1,000,000,000 have been
designated as Investment Shares of the Fund and 1,000,000,000 as Fortress Shares
of the Fund. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
11/30/93 11/30/92*
<S> <C> <C> <C> <C>
INVESTMENT SHARES SHARES DOLLARS SHARES DOLLARS
- -------------------------------------------------- ------------- --------------- ------------ ---------------
Shares outstanding, beginning of period 5,720,300 $ 57,716,892 10,000 $ 100,000
- --------------------------------------------------
Shares sold 22,870,569 233,155,755 7,552,596 76,137,405
- --------------------------------------------------
Shares issued to shareholders in payment of
dividends declared 621,720 6,275,708 112,280 1,129,032
- --------------------------------------------------
Shares redeemed (4,748,516) (48,395,745) (1,954,576) (19,649,545)
- -------------------------------------------------- ------------- --------------- ------------ ---------------
Shares outstanding, end of period 24,464,073 $ 248,752,610 5,720,300 $ 57,716,892
- -------------------------------------------------- ------------- --------------- ------------ ---------------
<CAPTION>
YEAR ENDED
11/30/93**
<S> <C> <C>
FORTRESS SHARES SHARES DOLLARS
- ---------------------------------------------------------------------------------- ------------ ---------------
Shares outstanding, beginning of period -- $ --
- ----------------------------------------------------------------------------------
Shares sold 735,070 7,507,530
- ----------------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 1,947 19,874
- ----------------------------------------------------------------------------------
Shares redeemed (26,400) (269,032)
- ---------------------------------------------------------------------------------- ------------ ---------------
Shares outstanding, end of period 710,617 $ 7,258,372
- ---------------------------------------------------------------------------------- ------------ ---------------
</TABLE>
* For the period from December 5, 1991 (start of business) to November 30,
1992.
** For the period from August 31, 1993 (date of initial public offering) to
November 30, 1993.
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Federated Advisers, the Fund's investment adviser (the "Adviser") receives for
its services an annual investment advisory fee equal to .40 of 1% of the Fund's
average daily net assets. The Adviser has voluntarily agreed to waive a portion
of its fee. The Adviser can terminate this voluntary waiver at any time at its
sole discretion. For the year ended November 30, 1993 the advisory fee amounted
to $574,312 of which $550,197 was voluntarily waived in accordance with such
undertaking.
Organizational expenses ($63,956) and start-up administrative service expenses
($65,386) were borne initially by Federated Administrative Services, Inc. (the
"Administrator"), administrators to the Fund. The Fund has agreed to reimburse
the Administrator for the organization expenses and start-up expenses initially
borne by the Administrator during the five year period following the date the
Corporation's portfolio first became effective. For the year ended November 30,
1993 the Fund paid $10,661 and $12,715, respectively, for organizational and
start-up administrative service expenses pursuant to this agreement.
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940. The Fund will compensate to Federated
Securities Corp. ("FSC"), the principal distributorfrom assets of the Fund for
fees it paid which relate to the distribution and administration of the Fund's
Investment shares and Fortress shares. The plan provides that the Fund may incur
distribution expenses up to .50 of 1% of the average daily net assets of the
Fund's Investment shares and .15 of 1% of the average daily net assets of the
Fortress shares, annually, to pay commissions, maintenance fees and to
compensate the distributor. During the year ended November 30, 1993 FSC earned
$715,008 in distributions services fees for Investment shares and $870 for
Fortress shares of which $143,783 and $0 were voluntarily waived, respectively.
The Fund has adopted a Shareholder Services Plan (the "Services Plan") with
respect to Investment and Fortress Shares. The Fund will reimburse Federated
Sercurities Corp. ("FSC"), from the net assets of the Fund for fees the Fund
paid which relate to administrative support services. The Services Plan provides
that the Fund may incur shareholder services expenses up to 0.25 of 1% of the
average daily net assets of the Investment and Fortress Shares. For the period
ended November 30, 1993, FSC earned $145,217.
During the year ended November 30, 1993 the Fund engaged in purchase
transactions with other Funds advised by the advisor pursuant to Rule 17a-7 of
the Investment Company Act of 1940, amounting to $5,397,000. These purchases
were conducted on an arms-length basis insofar as they were transacted for cash
considerations only, at independent current market prices and without brokerage
commissions, fees or other remuneration.
Administrative personnel and services were provided at approximate cost by
Federated Administrative Services, Inc. Certain of the Officers and Directors of
Fixed Income Securities, Inc. are Officers and Directors of the above
Corporations.
(6) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended November 30, 1993 were as follows:
<TABLE>
<CAPTION>
<S> <C>
PURCHASES $ 255,844,869
- ------------------------------------------------------------------------------------------------- ---------------
SALES $ 52,789,524
- ------------------------------------------------------------------------------------------------- ---------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Directors of FIXED INCOME SECURITIES INC. and Shareholders of
LIMITED TERM FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Limited Term Fund (a portfolio of Fixed Income
Securities, Inc.) as of November 30, 1993, the related statement of operations
for the year then ended, and the statement of changes in net assets and the
financial highlights (see pages 2 and 24 of the prospectus) for the year ended
November 30, 1993 and for the period from December 5, 1991 (start of business)
to November 30, 1992. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
November 30, 1993 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Limited Term Fund as
of November 30, 1993, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
Boston, Massachusetts
January 14, 1994
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Limited Term Fund
Investment Shares 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 P.O. Box 8604
Trust Company 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
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
LIMITED TERM FUND
INVESTMENT SHARES
PROSPECTUS
A Diversified Portfolio of
Fixed Income Securities, Inc.,
an Open-End, Management
Investment Company
January 31, 1994
3070701A-R (1/94)
LIMITED TERM FUND
(A PORTFOLIO OF FIXED INCOME SECURITIES, INC.)
FORTRESS SHARES
PROSPECTUS
The Fortress Shares offered by this prospectus represent interests in Limited
Term 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
consistent with minimum fluctuation in principal value through the compilation
of a portfolio, the weighted-average duration of which will at all times be
limited to three years or less.
THESE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK AND ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, 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.
The Fund has also filed a Combined Statement of Additional Information for
Fortress Shares and Investment Shares dated January 31, 1994, with the
Securities and Exchange Commission. The information contained in the Combined
Statement of Additional Information is incorporated by reference in this
prospectus. You may request a copy of the 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 January 31, 1994
TABLE OF CONTENTS
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--FORTRESS SHARES 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
FORTRESS INVESTMENT PROGRAM 3
- ------------------------------------------------------
INVESTMENT INFORMATION 4
- ------------------------------------------------------
Investment Objective 4
Investment Policies 4
Acceptable Investments 5
Corporate Debt Obligations 5
Floating Rate Corporate Debt Obligations 6
Fixed Rate Corporate Debt Obligations 6
Variable Rate Demand Notes 7
Asset-Backed Securities 7
Non-Mortgage Related
Asset-Backed Securities 8
Mortgage-Related Asset-Backed Securities 8
Adjustable Rate Mortgage Securities
("ARMS") 8
Collateralized Mortgage Obligations
("CMOs") 8
Real Estate Mortgage Investment Conduits
("REMICs") 9
Resets of Interest 9
Caps and Floors 9
Bank Instruments 10
Credit Facilities 10
Average Portfolio Duration 10
Credit Enhancement 10
Demand Features 11
Interest Rate Swaps 11
Financial Futures and Options on Futures 11
Risks 11
Repurchase Agreements 12
Restricted and Illiquid Securities 12
Lending of Portfolio Securities 12
When-Issued and Delayed
Delivery Transactions 12
Investment Limitations 13
NET ASSET VALUE 13
- ------------------------------------------------------
INVESTING IN FORTRESS SHARES 14
- ------------------------------------------------------
Share Purchases 14
Through a Financial Institution 14
Directly by Mail 14
Directly by Wire 14
Minimum Investment Required 14
What Shares Cost 14
Dealer Concession 15
Eliminating the Sales Charge 15
Quantity Discounts and
Accumulated Purchases 15
Letter of Intent 16
Reinvestment Privilege 16
Concurrent Purchases 16
Systematic Investment Program 16
Certificates and Confirmations 17
Dividends and Distributions 17
Retirement Plans 17
EXCHANGE PRIVILEGE 17
- ------------------------------------------------------
REDEEMING FORTRESS SHARES 17
- ------------------------------------------------------
Through a Financial Institution 17
Directly by Mail 18
Signatures 18
Receiving Payment 19
By Check 19
By Wire 19
Contingent Deferred Sales Charge 19
Systematic Withdrawal Program 20
Redemption Before Purchase
Instruments Clear 20
Accounts with Low Balances 20
Exchanges for Shares of Other Funds 20
FIXED INCOME SECURITIES, INC. INFORMATION 21
- ------------------------------------------------------
Management of the Corporation 21
Board of Directors 21
Investment Adviser 21
Advisory Fees 21
Adviser's Background 21
Portfolio Manager's Background 21
Distribution of Fortress Shares 22
Distribution Plan 22
Administrative Arrangements 22
Administration of the Fund 23
Administrative Services 23
Shareholder Services Plan 23
Custodian
Transfer Agent, and Dividend
Disbursing Agent 23
Legal Counsel 23
Independent Auditors 23
Expenses of the Fund and Fortress Shares 23
SHAREHOLDER INFORMATION 24
- ------------------------------------------------------
Voting Rights 24
TAX INFORMATION 24
- ------------------------------------------------------
Federal Income Tax 24
Pennsylvania Corporate and
Personal Property Taxes 24
PERFORMANCE INFORMATION 25
- ------------------------------------------------------
OTHER CLASSES OF SHARES 25
- ------------------------------------------------------
Financial Highlights--Investment Shares 26
- ------------------------------------------------------
FINANCIAL STATEMENTS 27
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 40
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
FORTRESS SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).......................................................... 1.00%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price).......................................................... None
Deferred Sales Load (as a percentage of original purchase price
or redemption proceeds, as applicable)....................................................... None
Contingent Deferred Sales Charge (as a percentage of the lesser of original purchase price or
redemption proceeds, as applicable) (1)...................................................... 1.00%
Exchange Fee................................................................................... None
ANNUAL FORTRESS SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2).............................................................. 0.10%
12b-1 Fee...................................................................................... 0.15%
Total Other Expenses........................................................................... 0.75%
Shareholder Servicing Fee.................................................................. 0.25%
Total Fortress Shares Operating Expenses (3).......................................... 1.00%
</TABLE>
(1) The contingent deferred sales charge charged is 1.00% of the lesser of the
original purchase price or the net asset value of Fortress Shares redeemed
within four years of their purchase date.
(2) The management fee has been reduced to reflect a portion of the voluntary
waiver of the management fee. The adviser can terminate this voluntary
waiver
at any time at its sole discretion. The maximum management fee is 0.40%.
(3) The Total Fortress Shares Operating Expenses in the table above are based on
expenses expected during the fiscal year ending November 30, 1994. The Total
Fortress Shares Operating Expenses were 1.00% for the fiscal year ended
November 30, 1993, and were 1.39% absent the voluntary waiver of a portion
of the management fee.
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 "FIXED INCOME SECURITIES, INC. INFORMATION" AND
"INVESTING IN FORTRESS SHARES." 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.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (1) 5% annual return and
(2) redemption at the end of each time period................................................ $30 $53
You would pay the following expenses on the same investment, assuming no redemption.......... $20 $42
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The information set forth in the foregoing table and example relates only to
the Fortress Shares of the Fund. The Fund also offers another class of shares
called Investment Shares. Fortress Shares and Investment Shares are subject to
certain of the same expenses. However, Investment Shares are subject to a 12b-1
fee of up to 0.50% but are not subject to a contingent deferred sales charge.
See "Other Classes of Shares."
LIMITED TERM FUND
FINANCIAL HIGHLIGHTS--FORTRESS SHARES
- --------------------------------------------------------------------------------
(FOR A SHAREOUTSTANDING THROUGHOUT THE PERIOD)
See Independent Auditors' Report on page 40.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1993*
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.24
- -----------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------------
Net investment income 0.15
- -----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.07)
- ----------------------------------------------------------------------------------------------- -----------------
Total from investment operations 0.08
- ----------------------------------------------------------------------------------------------- -----------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------------
Dividends from net investment operations (0.15)
- ----------------------------------------------------------------------------------------------- -----------------
NET ASSET VALUE, END OF PERIOD $10.17
- ----------------------------------------------------------------------------------------------- -----------------
TOTAL RETURN** 0.78%
- -----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------
Expenses 1.00%(a)
- -----------------------------------------------------------------------------------------------
Net investment income 7.10%(a)
- -----------------------------------------------------------------------------------------------
Expense adjustment (b) 0.39%(a)
- -----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $7,230
- -----------------------------------------------------------------------------------------------
Portfolio turnover rate (c) 38%
- -----------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from August 31, 1993 (date of initial
public offering) to November 30, 1993.
** Based on net asset value which does not reflect the sales load or
contingent deferred sales charge if applicable.
(a) Computed on an annualized basis.
(b) Increase/decrease in above expense/income ratios due to waivers or
reimbursements of expenses (Note 5).
(c) Represents portfolio turnover rate of the entire Fund.
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report dated November 30, 1993, which can be obtained free of charge.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
Fixed Income Securities, Inc. 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
three separate portfolios: Limited Term Fund, Limited Term Municipal Fund and
Multi-State Municipal Income Fund. With respect to the Fund, the Directors have
established two classes of shares known as Fortress Shares and Investment
Shares. This prospectus relates only to the Fortress Shares class of the Fund
("Shares").
The Fund is designed for investors seeking current income through a
professionally managed, diversified portfolio investing primarily in U.S.
government obligations, corporate debt obligations, and asset-backed securities.
A minimum initial investment of $1,500 is required.
Shares are sold at net asset value plus an applicable sales charge and are
redeemed at net asset value. However, a contingent deferred sales charge is
imposed on certain Shares, other than Shares purchased through reinvestment of
dividends, which are redeemed within one to four years of their purchase dates.
Fund assets may be used in connection with the distribution of Shares.
FORTRESS INVESTMENT PROGRAM
- --------------------------------------------------------------------------------
Fortress Shares is a member of a family of funds, collectively known as the
Fortress Investment Program. The other funds in the Program are:
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 of the fund's prospectus.
The Fortress Investment Program provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles, 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
consistent with minimum fluctuation in principal value through the compilation
of a portfolio, the weighted-average duration of which will at all times be
limited to three years or less. This investment objective cannot be changed
without approval of shareholders.
Although certain portfolio instruments held by the Fund are collateralized by
specific assets, the Fund's Shares themselves are not secured. 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 portfolio of
investment grade securities, at least 65% of which is invested in U.S.
government obligations, and corporate debt obligations and asset-backed
securities rated in one of the three highest categories by a nationally
recognized statistical rating organization. The Fund is not required to sell
securities if the 65% investment level changes due to increases or decreases in
the market value of portfolio securities. A description of the rating categories
is contained in the Appendix to the Statement of Additional Information.
The net asset value of the Fund is expected to fluctuate with changes in
interest rates and bond market conditions, although this fluctuation should be
more moderate than that of a fund with a longer average portfolio duration. The
adviser, however, will attempt to minimize principal fluctuation through, among
other things, diversification, careful credit analysis and security selection,
and adjustments of the Fund's average portfolio duration. In periods of rising
interest rates and falling bond prices, the adviser may shorten the Fund's
average duration to minimize the effect of declining bond values on the Fund's
net asset value. Conversely, during times of falling interest rates and rising
prices a longer average duration to three years may be sought. Unless indicated
otherwise, the 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 U.S. government obligations, corporate debt
obligations, and asset-backed securities. The Fund may also invest in derivative
instruments of such securities, including instruments with demand features or
credit enhancement, as well as money market instruments and cash.
The securities in which the Fund invests principally are:
notes, bonds, and discount notes of U.S. government agencies or
instrumentalities, such as Federal Home Loan Banks, Federal National
Mortgage Association, Government National Mortgage Association, 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;
domestic issues of corporate debt obligations having floating or fixed
rates of interest and rated in one of the four highest categories by a
nationally recognized statistical rating organization rated Aaa, Aa, A,
or Baa by Moody's Investors Service, Inc. ("Moody's"); AAA, AA, A, or BBB
by Standard & Poor's Corporation ("Standard & Poor's"), or AAA, AA, A, or
BBB by Fitch Investors Service, Inc. ("Fitch"), or which are of
comparable quality in the judgment of the adviser;
asset-backed securities rated in one of the four highest categories by a
nationally recognized statistical rating organization, or which are of
comparable quality in the judgment of the adviser;
rated commercial paper which matures in 270 days or less so long as at
least two ratings are high quality ratings by nationally recognized
statistical rating organizations. Such ratings would include: Prime-1 or
Prime-2 by Moody's, A-1 or A-2 by Standard & Poor's, or F-1 or F-2 by
Fitch;
time and savings deposits and deposit notes and bankers acceptances
(including certificates of deposit) 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 $100,000,000 in
capital; and
repurchase agreements collateralized by eligible investments.
The Fund will not invest in corporate debt obligations having a rating of less
than BBB by Standard & Poor's, or Baa by Moody's, or BBB by Fitch. Bonds rated
BBB by Standard & Poor's or Fitch or Baa by Moody's have speculative
characteristics. Changes in economic conditions or other circumstances are more
likely to lead to weakened capacity to make principal and interest payments than
higher rated bonds. Downgraded securities will be evaluated on a case-by-case
basis by the adviser. The adviser will determine whether or not the security
continues to be an acceptable investment. If not, the security will be sold.
CORPORATE DEBT OBLIGATIONS. The Fund invests in corporate debt
obligations, including corporate bonds, notes, and debentures, which may
have floating or fixed rates of interest.
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.
Some of the floating rate corporate debt obligations in which the Fund may
invest include floating rate corporate debt securities issued by savings
and loans and collateralized by adjustable rate mortgage loans, also known
as collateralized thrift notes. Many of these collateralized thrift notes
have received AAA ratings from recognized rating agencies. Collateralized
thrift notes differ from traditional "pass through" certificates in which
payments made are linked to monthly payments made by individual borrowers
net of any fees paid to the issuer or guarantor of such securities.
Collateralized thrift notes pay a floating interest rate which is tied to a
pre-determined index, such as the 180-day Treasury bill rate. Floating rate
corporate debt obligations also include securities issued to fund
commercial real estate construction.
Increasing rate securities, which currently do not make up a significant
share of the market in corporate debt securities, are generally offered at
an initial interest rate which is at or above prevailing market rates.
Interest rates are reset periodically (most commonly every 90 days) at
different levels on a predetermined scale. These levels of interest are
ordinarily set at progressively higher increments over time. Some
increasing rate securities may, by agreement, revert to a fixed rate
status. These securities may also contain features which allow the issuer
the option to convert the increasing rate of interest to a fixed rate under
such terms, conditions, and limitations as are described in each issue's
prospectus.
There are tax uncertainties with respect to whether increasing rate
securities will be treated as having an original issue discount. If it is
determined that the increasing rate securities have original issue
discount, a holder will be required to include as income in each taxable
year, in addition to interest paid on the security for that year, an amount
equal to the sum of the daily portions of original issue discount for each
day during the taxable year that such holder holds the security. There may
also be tax uncertainties with respect to whether an extension of maturity
on an increasing rate note will be treated as a taxable exchange. In the
event it is determined that an extension of maturity is a taxable exchange,
a holder will recognize a taxable gain or loss, which will be a short-term
capital gain or loss if he holds the security as a capital asset, to the
extent that the value of the security with an extended maturity differs
from the adjusted basis of the security deemed exchanged therefor.
FIXED RATE CORPORATE DEBT OBLIGATIONS. The Fund will also invest in fixed
rate securities, including fixed rate securities with short-term
characteristics. Fixed rate securities with short-term characteristics are
long-term debt obligations but are treated in the market as having short
maturities because call features of the securities may make them callable
within a short period of time. A fixed rate security with short-term
characteristics would include a fixed income security
priced close to call or redemption price or a fixed income security
approaching maturity, where the expectation of call or redemption is high.
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.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term
corporate debt instruments that have variable or floating interest rates
and provide the Fund with the right to tender the security for repurchase
at its stated principal amount plus accrued interest. Such securities
typically bear interest at a rate that is intended to cause the securities
to trade at par. The interest rate may float or be adjusted at regular
intervals (ranging from daily to annually), and is normally based on a
published interest rate or interest rate index. Many variable rate demand
notes allow the Fund to demand the repurchase of the security on not more
than seven days prior notice. Other notes only permit the Fund to tender
the security at the time of each interest rate adjustment or at other fixed
intervals. See "Demand Features."
ASSET-BACKED SECURITIES. Asset-backed securities are created by the
grouping of certain governmental, government related and private loans,
receivables and other lender assets into pools. Interests in these pools
are sold as individual securities. Payments from the asset pools may be
divided into several different tranches of debt securities, with some
tranches entitled to receive regular installments of principal and
interest, other tranches entitled to receive regular installments of
interest, with principal payable at maturity or upon specified call dates,
and other tranches only entitled to receive payments of principal and
accrued interest at maturity or upon specified call dates. Different
tranches of securities will bear different interest rates, which may be
fixed or floating.
Because the loans held in the asset pool often may be prepaid without
penalty or premium, asset-backed securities are generally subject to higher
prepayment risks than most other types of debt instruments. Prepayment
risks on mortgage securities tend to increase during periods of declining
mortgage interest rates, because many borrowers refinance their mortgages
to take advantage of the more favorable rates. Depending upon market
conditions, the yield that the Fund receives from the reinvestment of such
prepayments, or any scheduled principal payments, may be lower than the
yield on the original mortgage security. As a consequence, mortgage
securities may be a less effective means of "locking in" interest rates
than other types of debt securities having the same stated maturity and may
also have less potential for capital appreciation. For certain types of
asset pools, such as collateralized mortgage obligations, prepayments may
be allocated to one tranche of securities ahead of other tranches, in order
to reduce the risk of prepayment for the other tranches.
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.
The credit characteristics of asset-backed securities also differ in a
number of respects from those of traditional debt securities. The credit
quality of most asset-backed securities depends primarily upon the credit
quality of the assets underlying such securities, how well the entity
issuing the securities is insulated from the credit risk of the originator
or any other affiliated entities, and the amount and quality of any credit
enhancement to such securities.
NON-MORTGAGE RELATED ASSET-BACKED SECURITIES. The Fund may invest in
non-mortgage related 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 collateralized mortgage obligations
and mortgage pass-through securities, which are described below.
MORTGAGE-RELATED ASSET-BACKED SECURITIES. The Fund may also invest in
various mortgage-related asset-backed securities. These types of
investments may include adjustable rate mortgage securities, collateralized
mortgage obligations, real estate mortgage investment conduits, or other
securities collateralized by or representing an interest in real estate
mortgages (collectively, "mortgage securities"). Many mortgage securities
are issued or guaranteed by government agencies.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through
mortgage securities representing interests in adjustable rather than fixed
interest rate mortgages. The ARMS in which the Fund invests are issued by
the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA"), and the Federal Home Loan Mortgage
Corporation ("FHLMC") and are actively traded. The underlying mortgages
which collateralize ARMS issued by GNMA are fully guaranteed by the Federal
Housing Administration ("FHA") or Veterans Administration ("VA"), while
those collateralizing ARMS issued by FHLMC or FNMA are typically
conventional residential mortgages conforming to strict underwriting size
and maturity constraints.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are bonds issued by
single-purpose, stand-alone finance subsidiaries or trusts of financial
institutions, government agencies, investment bankers, or companies related
to the construction industry. CMOs purchased by the Fund may be:
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;
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
securities in which the proceeds of the issuance are invested in mortgage
securities and payment of the principal and interest is supported by the
credit of an agency or instrumentality of the U.S. government.
All CMOs purchased by the Fund are investment grade, as rated by a
nationally recognized statistical rating organization.
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, 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.
RESETS OF INTEREST. The interest rates paid on the ARMS, CMOs, and REMICs 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. Others tend to lag
changes in market rate levels and tend to be somewhat less volatile.
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. Certain
residual interest tranches of CMOs may have adjustable interest rates that
deviate significantly from prevailing market rates, even after the interest rate
is reset, and are subject to correspondingly increased price volatility. In the
event the Fund purchases such residual interest mortgage securities, it will
factor in the increased interest and price volatility of such securities when
determining its dollar-weighted average duration.
CAPS AND FLOORS. The underlying mortgages which collateralize the ARMS, CMOs,
and REMICs 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.
BANK INSTRUMENTS. The Fund only invests in Bank Instruments either issued by an
institution having capital, surplus and undivided profits over $100 million or
insured by BIF or SAIF. Bank Instruments may include Eurodollar Certificates of
Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs") and Eurodollar
Time Deposits ("ETDs").
CREDIT FACILITIES. Demand notes are borrowing arrangements between a
corporation and an institutional lender (such as the Fund) payable upon demand
by either party. The notice period for demand typically ranges from one to seven
days, and the party may demand full or partial payment.
Revolving credit facilities are borrowing arrangements in which the lender
agrees to make loans up to a maximum amount upon demand by the borrower during a
specified term. As the borrower repays the loan, an amount equal to the
repayment may be borrowed again during the term of the facility. The Fund
generally acquires a participation interest in a revolving credit facility from
a bank or other financial institution. The terms of the participation require
the Fund to make a pro rata share of all loans extended to the borrower and
entitles the Fund to a pro rata share of all payments made by the borrower.
Demand notes and revolving facilities usually provide for floating or variable
rates of interest.
AVERAGE PORTFOLIO DURATION. Although the Fund will not maintain a stable net
asset value, the adviser will seek to limit, to the extent consistent with the
Fund's investment objective of current income, the magnitude of fluctuations in
the Fund's net asset value by limiting the dollar-weighted average duration of
the Fund's portfolio. 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 shorter
durations generally have less volatile prices than securities of comparable
quality with longer durations. The Fund should be expected to maintain a higher
average duration during periods of lower expected market volatility, and a lower
average duration during periods of higher expected market volatility. In any
event, the Fund's dollar-weighted average duration will not exceed 3 years.
CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may have been
credit enhanced by a guaranty, letter of credit or insurance. The Fund typically
evaluates the credit quality and ratings of credit enhanced securities based
upon the financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), rather than the issuer. Generally, the Fund
will not treat credit enhanced securities as having been issued by the credit
enhancer for diversification purposes. However, under certain circumstances
applicable regulations may require the Fund to treat the securities as having
been issued by both the issuer and the credit enhancer. The bankruptcy,
receivership or default of the credit enhancer will adversely affect the quality
and marketability of the underlying security.
DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period following
a demand by the Fund. The demand feature may be issued by the issuer of the
underlying securities, a dealer in the securities or by another third party, and
may not be transferred separately from the underlying security. The Fund uses
these arrangements to provide the Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership or default by the issuer of the demand feature, or a default on the
underlying security or other event that terminates the demand feature before its
exercise, will adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the underlying
security are treated as a form of credit enhancement.
INTEREST RATE SWAPS. The Fund reserves the right to engage in interest rate
swap transactions; however, the Securities and Exchange Commission has
questioned whether the Investment Company Act of 1940 permits open-end
investment companies to engage in these transactions. Therefore, the Fund will
not engage in these transactions until the Securities and Exchange Commission
has determined that these transactions are permitted, and the Fund has included
appropriate disclosure in an amendment to this prospectus and notified
shareholders of its intention to engage in these transactions. An interest rate
swap is an agreement between two parties to exchange interest payment
obligations without an exchange of underlying securities. The Fund intends to
utilize interest rate swaps primarily to acquire floating rates of interest
which may be tied to various indices as described above.
FINANCIAL FUTURES AND OPTIONS ON FUTURES. The Fund may purchase and sell
financial futures contracts to hedge all or a portion of its portfolio against
changes in interest rates. Financial futures contracts call for the delivery of
particular debt instruments at a certain time in the future. The seller of the
contract agrees to make delivery of the type of instrument called for in the
contract and the buyer agrees to take delivery of the instrument at the
specified future time.
The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Fund is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases a
futures contracts, an amount of cash and U.S. Treasury securities, equal to the
underlying commodity value of the futures contracts (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged.
RISKS. When the Fund uses financial futures and options on financial futures
as hedging devices, there is a risk that the prices of the securities subject
to the futures contracts may not correlate perfectly with the prices of the
securities in the Fund's portfolio. This may cause the futures contract and any
related options to react differently than the portfolio securities to market
changes. In addition, the Fund's investment adviser could be incorrect in its
expectations about the direction or extent of market factors such as interest
rate movements. In these events, the Fund may lose money on the futures
contract or option. It is not certain that a secondary market for positions in
futures contracts or for options will exist at all times. Although the
investment adviser will consider liquidity before entering into options
transactions, there is no assurance that a liquid secondary market on an
exchange or otherwise will exist for any particular futures contract or option
at any particular time. The Fund's ability to establish and close out futures
and options positions depends on this secondary market.
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.
RESTRICTED AND ILLIQUID SECURITIES. The Fund intends to 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.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under federal securities
law and is generally sold to institutional investors, such as the Fund, who
agree that they are purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Fund believes that Section 4(2) commercial paper
and possibly certain other restricted securities which meet the criteria for
liquidity established by the Directors are quite liquid. The Fund intends,
therefore, to treat the restricted securities which meet the criteria for
liquidity established by the Directors, including Section 4(2) commercial paper,
as determined by the Fund's investment adviser, as liquid and not subject to the
investment limitation applicable to illiquid securities. In addition, because
Section 4(2) commercial paper is liquid, the Fund intends to not subject such
paper to the limitation applicable to restricted securities.
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.
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.
INVESTMENT LIMITATIONS
The Fund will not:
borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an arrangement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may borrow up to one-third of the value of its total assets and pledge up
to 10% of the value of those assets to secure such borrowings;
lend any of its assets except portfolio securities up to one-third of the
value of its total assets;
sell securities short except, under strict limitations, it may maintain
open short positions so long as not more than 10% of the value of its net
assets is held as collateral for those positions; or
with respect to 75% of the value of its total assets, invest more than 5%
in securities of any one issuer other than cash, cash items or securities
issued or guaranteed by the government of the United States, its
agencies, or instrumentalities and repurchase agreements collateralized
by such securities. (For purposes of this Fund, cash items means
instruments issued by a U.S. branch of a domestic bank or savings and
loan having capital surplus and undivided profits in excess of $100
million at the time of investment.)
The above investment limitations cannot be changed without shareholder approval.
The following investment limitation, however, may be changed by the Directors
without shareholder approval. Shareholders will be notified before any material
change in this investment limitation becomes effective.
The Fund will not:
invest more than 5% of the value of its total assets in securities of
issuers that have records of less than three years of continuous
operations including the operation of any predecessor.
NET ASSET VALUE
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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 Investment 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
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SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased through an investment dealer who has a sales agreement with the
distributor, Federated Securities Corp., or directly from Federated Securities
Corp. either by mail or wire. The Fund reserves the right to reject any purchase
request.
THROUGH A FINANCIAL INSTITUTION. An investor may call his financial institution
(such as a bank or an investment dealer) to place an order to purchase Shares.
Orders through a financial institution are considered received when the Fund is
notified of the purchase order. Purchase orders through a registered
broker/dealer must be received by the broker before 4:00 p.m. (Eastern time) and
must be transmitted by the broker to the Fund before 5:00 p.m. (Eastern time) in
order for Shares to be purchased at that day's price. Purchase orders through
other financial institutions must be received by the financial institution and
transmitted to the Fund before 4:00 p.m. (Eastern time) in order for Shares to
be purchased at that day's price. It is the financial institution's
responsibility to transmit orders promptly.
DIRECTLY BY MAIL. To purchase Shares by mail directly from Federated Securities
Corp.:
complete and sign the application available from the Fund;
enclose a check made payable to Limited Term Fund--Fortress Shares; and
send both to the Fund's transfer agent, Federated Services Company,
Federated Investors Tower, Pittsburgh, PA 15222-3779.
Purchases by mail are considered received after payment by check is converted by
Federated Services Company into federal funds. This is generally the next
business day after Federated Services Company receives the check.
DIRECTLY BY WIRE. To purchase Shares directly from Federated Securities Corp.
by Federal Reserve wire, call the Fund. All information needed will be taken
over the telephone, and the order is considered received when Federated Services
Company receives payment by wire.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $1,500, unless the investment is in
an IRA account, which requires a minimum initial investment of $50. Subsequent
investments must be in amounts of at least $100, except for an IRA account,
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. These institutions,
however, may charge fees for services provided which may relate to ownership of
Fund shares. This prospectus should, therefore, be read together with
any agreement between the customer and the institution with regard to services
provided and the fees charged for these services.
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; and (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Under certain circumstances described under "Redeeming Fortress Shares,"
shareholders may be charged a contingent deferred sales charge by the
distributor at the time Shares are redeemed.
DEALER CONCESSION. For sales of Shares, broker/dealers will normally receive
100% of the applicable sales charge. Any portion of the sales charge which is
not paid to a broker/dealer will be retained by the distributor. However, from
time to time, and at the sole discretion of the distributor, all or part of that
portion may be paid to a dealer. The sales charge for Shares sold other than
through registered broker/dealers will be retained by Federated Securities Corp.
Federated Securities Corp. may pay fees to banks out of the sales charge in
exchange for sales and/or administrative services performed on behalf of the
bank's customers in connection with the initiation of customer accounts and
purchases of Shares.
ELIMINATING THE SALES CHARGE
The sales charge can be eliminated on the purchase of Shares through:
quantity discounts and accumulated purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. There is no sales charge for
purchases of $1 million or more. The Fund will combine purchases made on
the same day by the investor, his spouse, and his children under age 21
when it calculates the sales charge.
If an additional purchase of Shares is made, the Fund will consider the previous
purchases still invested in Shares. For example, if a shareholder already owns
Shares having a current value at the public offering price of $900,000, and he
purchases $100,000 or more at the current public offering price, there will be
no sales charge on the additional purchase. The Fund will also combine purchases
for the purpose of reducing the contingent deferred sales charge imposed on some
Shares redemptions. For example, if a shareholder already owns Shares having a
current value at public offering price of $1 million and purchases an additional
$1 million at the current public offering price, the applicable contingent
deferred sales charge would be reduced to 0.50% of those additional Shares. For
more information on the levels of the contingent deferred sales charge and
holding periods, see the section entitled "Contingent Deferred Sales Charge."
To receive this sales charge elimination, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the purchase is made that Shares are already owned or that purchases are
being combined. The Fund will eliminate the sales charge after it confirms
the purchases.
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 1.00% of the
total amount intended to be purchased in escrow (in Shares) until such purchase
is completed.
The 1.00% 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 the contingent deferred sales charge 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 the purchases.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis. Under this program, funds may be automatically withdrawn
monthly from the shareholder's checking account maintained at an Automated
Clearing House ("ACH") member institution, and invested in Shares at the net
asset value next determined after an order is received by Federated Services
Company, plus the 1.00% sales charge for purchases under $1 million. A
shareholder may apply for participation in this program through 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, unless cash payments are requested by
shareholders on the application or by writing to Federated Securities Corp. 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
Federated Securities Corp. and consult a tax adviser.
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.
REDEEMING FORTRESS SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after Federated
Services Company receives the redemption request less any contingent deferred
sales charge. Redemptions will be made on days on which the Fund computes its
net asset value. Redemption requests must be received in proper form and can be
made through a financial institution, or directly from the Fund by written
request.
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. If, at any time, the Fund shall determine it necessary to
terminate or modify this method of redemption, shareholders will be promptly
notified.
Before a financial institution may request redemption by telephone on behalf of
a shareholder, an authorization form permitting the Fund to accept redemption
requests by telephone must first be completed. Telephone redemption 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.
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, such as "Directly by Mail," should be considered.
DIRECTLY BY MAIL
Shareholders may also redeem Shares by sending a written request to Federated
Services Company, Federated Investors Tower, Pittsburgh, PA 15222-3779. This
written request must include the shareholder's name, the Fund name and class of
shares, the account number, and the share or dollar amount to be redeemed.
Shares will be redeemed at their net asset value next determined after Federated
Services Company receives the redemption request.
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 firm of the New York, American, Boston, Midwest, or Pacific
Stock Exchange;
a savings bank or savings and loan association whose deposits are insured
by the 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.
RECEIVING PAYMENT
BY CHECK. Normally, a check for the proceeds is mailed within one business
day, but in no event more than seven days, after receipt of a proper
written redemption request provided Federated Services Company has received
payment for shares from the shareholder.
BY WIRE. Redemption requests will be wired the following business day.
CONTINGENT DEFERRED SALES CHARGE
Shareholders redeeming Shares from their Fund accounts within certain time
periods of the purchase date of those Shares will be charged a contingent
deferred sales charge by the Fund's distributor of the lesser of the original
price or the net asset value of the Shares redeemed as follows:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
AMOUNT OF PURCHASE SHARES HELD SALES CHARGE
<S> <C> <C>
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%
</TABLE>
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. The contingent deferred sales charge is 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 are not subject to the
contingent deferred sales charge to the extent the distributor does not make
advance payments. In addition, Shares held in the Fund by a financial
institution for its own account which were originally purchased by the financial
institution directly from the Fund's distributor without a sales charge may be
redeemed without a contingent deferred sales charge. For more information, see
"Administrative Arrangements."
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive monthly or quarterly payments of a
predetermined amount 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; the minimum withdrawal amount
is $100. 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 balance with a
value of at least $10,000 in the Fund (at current offering price).
A shareholder may apply for participation in this program through Federated
Securities Corp. 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.
A contingent deferred sales charge is imposed on Shares, other than Shares
purchased through reinvestment of dividends, which are redeemed through this
program within one to four years of their purchase dates.
REDEMPTIONS BEFORE PURCHASE INSTRUMENTS CLEAR
When Shares are purchased by check, or through ACH, the proceeds from the
redemption of those Shares are not available, and the Shares may not be
exchanged, until the Fund or its agents are reasonably certain that the purchase
check has cleared, which could take up to ten calendar days.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $1,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $1,000 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 certain sales charges. This privilege is available to
shareholders resident in any state in which the shares being acquired may be
sold.
Shareholders using this privilege must exchange Shares having a net asset value
which at least meets the minimum investment required for the fund into which the
exchange is being made. A shareholder may obtain further information on the
exchange privilege, and may obtain prospectuses for other Fortress Funds and
Federated Funds by calling Federated Securities Corp. or his financial
institution.
Before making an exchange, a shareholder must receive a prospectus of the fund
for which the exchange is being made.
FIXED INCOME SECURITIES, INC. INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE CORPORATION
BOARD OF DIRECTORS. The Fund is managed by a Board of Directors. The Directors
are responsible for managing the Corporation's business affairs and for
exercising all the Corporation's powers except those reserved for the
shareholders. The Executive Committee of the Board of Directors handles the
Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Federated
Advisers, the Fund's investment adviser (the "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 .40 of 1% of the Fund's average daily net assets. Under the
investment advisory contract, which provides for voluntary waivers of
expenses by the Adviser, the Adviser may voluntarily waive some or all of
its fee. The Adviser can terminate this voluntary waiver of some or all of
its advisory fee at any time at its sole discretion. The Adviser has also
undertaken to reimburse the Fund for operating expenses in excess of
limitations established by certain states.
ADVISER'S BACKGROUND. Federated Advisers, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) shares of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, Chairman and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J.
Christopher Donahue, who is President and Trustee of Federated Investors.
Federated Advisers and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services
to a number of investment companies. Total assets under management or
administration by these and other subsidiaries of Federated Investors are
approximately $70 billion. Federated Investors, which was founded in 1956
as Federated Investors, Inc., develops and manages mutual funds primarily
for the financial industry. Federated Investors' track record of
competitive performance and its disciplined, risk averse investment
philosophy serve approximately 3,500 client institutions nationwide.
Through these same client institutions, individual shareholders also have
access to this same level of investment expertise.
PORTFOLIO MANAGER'S BACKGROUND. Deborah A. Cunningham has been the Fund's
portfolio manager since July 1991. Ms. Cunningham joined Federated
Investors in 1981 and has been a Vice President of the Fund's investment
adviser since 1993. Ms. Cunningham served as an Assistant Vice President of
the investment adviser from 1989 until 1992, and from 1986 until 1989
she acted as an investment analyst. Ms. Cunningham is a Chartered Financial
Analyst and received her M.S.B.A. in Finance from Robert Morris College.
DISTRIBUTION OF FORTRESS SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan adopted in
accordance with the Investment Company Act Rule 12b-1 (the "Plan"), the Fund
will pay to Federated Securities Corp. an amount computed at an annual rate of
0.15 of 1% of the average daily net asset value of the Shares to finance any
activity which is principally intended to result in the sale of Shares.
Federated Securities Corp. may, from time to time and for such periods as it
deems appropriate, voluntarily reduce its compensation under the Plan to the
extent the expenses attributable to the Shares exceed such lower expense
limitation as the distributor may, by notice to the Fund, voluntarily declare to
be effective.
The distributor may select financial institutions (such as a bank or an
investment dealer) to provide sales support services as agents for their clients
or customers who beneficially own Shares of the Fund.
Financial institutions will receive fees from the distributor based upon Shares
owned by their clients or customers. The schedules of such fees and the basis
upon which such fees will be paid will be determined from time to time by the
distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no payments
to the distributor except as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Fund
under the Plan.
ADMINISTRATIVE ARRANGEMENTS. The distributor will pay financial institutions,
for distribution and/ or administrative services, an amount equal to 1% of the
offering price of the Shares acquired by their clients or customers on purchases
up to $1,999,999, 0.50% of the offering price on purchases of $2,000,000 to
$4,999,999, and 0.25% of the offering price on purchases of $5,000,000 or more.
The financial institution may elect to receive amounts less than those stated
which would reduce the stated contingent deferred sales charge and/or the
holding period used to calculate the fee.
The Glass-Steagall Act limits the ability of a depository institution (such as a
commercial bank or a savings and loan association) to become an underwriter or
distributor of securities. In the event the Glass-Steagall Act is deemed to
prohibit depository institutions from acting in the capacities described above
or should Congress relax current restrictions on depository institutions, the
Directors will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, Inc., which is a
subsidiary of Federated Investors, provides the Fund with the administrative
personnel and services necessary to operate the Fund. Such services include
shareholder servicing and certain legal and accounting services. Federated
Administrative Services, Inc. provides these at approximate cost.
SHAREHOLDER SERVICES PLAN. The Fund has adopted a Shareholder Services Plan
(the "Services Plan") with respect to Shares of the Fund. Under the Services
Plan, financial institutions will enter into shareholder service agreements with
the Fund to provide administrative support services to their customers who from
time to time may be owners of record or beneficial owners of Shares. In return
for providing these support services, a financial institution may receive
payments from the Fund at a rate not exceeding 0.25 of 1% of the average daily
net assets of the Shares beneficially owned by the financial institution's
customers for whom it is holder of record or with whom it has a servicing
relationship. These administrative services may include, but are not limited to,
the provision of personal services and maintenance of shareholder accounts.
CUSTODIAN. State Street Bank and Trust Company ("State Street Bank"), 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 the Shares of the Fund, and
dividend disbursing agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania, and Dickstein, Shapiro & Morin, Washington, D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche, Boston, Massachusetts.
EXPENSES OF THE FUND AND FORTRESS SHARES
Holders of Shares pay their allocable portion of Fund and Corporation expenses.
The Corporation expenses for which holders of Shares pay their allocable portion
include, but are not limited to: the cost or organizing the Corporation and
continuing its existence; registering the Corporation with federal and state
securities authorities; Directors' fees; auditors' fees; the cost of meetings of
Directors; legal fees of the Corporation; association membership dues and such
non-recurring and extraordinary items as may arise from time to time.
The Fund expenses for which holders of Shares pay their allocable portion
include, but are not limited to: registering the Fund and Shares of the Fund;
investment advisory services; taxes and commissions; custodian fees; insurance
premiums; auditors' fees; and such non-recurring and extraordinary items as may
arise from time to time.
At present, the only expenses which are allocated specifically to the Shares as
a class are expenses under the Fund's Shareholder Services Plan and
Distribution Plan. However, the Directors reserve the right to allocate certain
other expenses to holders of Shares as it deems appropriate ("Class Expenses").
In any case, Class Expenses would be limited to: distribution fees; transfer
agent fees as identified by the transfer agent as attributable to holders of
Shares; fees under the Fund's Shareholder Services Plan; printing and postage
expenses related to preparing and distributing material such as shareholder
reports, prospectuses and proxies to current shareholders; registration fees
paid to the Securities and Exchange Commission and to state securities
commissions; expenses related to administrative personnel and services as
required to support holders of Shares; legal fees relating solely to Shares;
and Directors' fees incurred as a result of issues relating solely to Shares.
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 fund or class, only shares of that fund 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 Corporation's, or the Fund's operation and for the election of
Directors under certain circumstances.
Directors may be removed by the Directors or by shareholders at a special
meeting. A special meeting of the shareholders shall be called by the Directors
upon the written request of shareholders owning at least 10% of the outstanding
shares of the Corporation.
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 Shares.
Total return represents the change, over a specified period of time, in the
value of an investment in Shares after reinvesting all income and capital gains
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of Shares is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by Shares
over a thirty-day period by the maximum offering price per share of Shares on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
Shares and, therefore, may not correlate to the dividends or other distributions
paid to shareholders.
The performance information reflects the effect of the maximum sales load and
the redemption fee which, if excluded, would increase the total return and
yield.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
Total return will be calculated separately for Fortress Shares and Investment
Shares. Because Fortress Shares are subject to lower 12b-1 expenses, the yield
for Fortress Shares, for the same period, will exceed that of Investment Shares.
Because Investment Shares are not subject to a contingent deferred sales charge,
the total return for Investment Shares, for the same period, may exceed that of
Fortress Shares.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund currently offers Fortress Shares and Investment Shares. The Investment
Shares are sold subject to a front-end sales charge of up to 1%, but without any
contingent deferred sales charge. Investment Shares are subject to a minimum
initial investment of $5,000.
The amount of dividends payable to Investment Shares will generally be less than
that of Fortress Shares by the difference between class expenses borne by shares
of each respective class.
The stated advisory fee is the same for both classes of shares.
LIMITED TERM FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
See Independent Auditors' Report on page 40.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
--------------------
1993 1992*
<S> <C> <C>
- ------------------------------------------------------------------------------------ --------- ---------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.01
- ------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------
Net investment income 0.63 0.519
- ------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.19 (0.008)
- ------------------------------------------------------------------------------------ --------- ---------
Total from investment operations 0.82 0.511
- ------------------------------------------------------------------------------------ --------- ---------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------------------
Dividends from net investment operations (0.63) (0.519)
- ------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 3)(a) (0.02) (0.002)
- ------------------------------------------------------------------------------------ --------- ---------
Total distributions (0.65) (0.521)
- ------------------------------------------------------------------------------------ --------- ---------
NET ASSET VALUE, END OF PERIOD $ 10.17 $ 10.00
- ------------------------------------------------------------------------------------ --------- ---------
TOTAL RETURN** 8.19% 5.21%
- ------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------
Expenses 1.01% 0.67%(b)
- ------------------------------------------------------------------------------------
Net investment income 5.75% 6.17%(b)
- ------------------------------------------------------------------------------------
Expense adjustment (c) 0.49% 1.06%(b)
- ------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $248,876 $57,225
- ------------------------------------------------------------------------------------
Portfolio turnover rate (d) 38% 60%
- ------------------------------------------------------------------------------------
</TABLE>
* Reflects operations from January 13, 1992 (date of initial public
investment)
to November 30, 1992. For the period from the start of business, December 5,
1991 to January 12, 1992, net investment income aggregating $0.03 per share
($332) was distributed to the fund's investment adviser.
** Based on net asset value which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Distributions in excess of net investment income for the year ended
November 30, 1993 and the period ended November 30, 1992, were a result of
certain book and tax timing differences. These do not represent a return of
capital for federal tax purposes.
(b) Computed on an annualized basis.
(c) Increase/decrease in above expense/income ratios due to waivers or
reimbursement of expenses. (Note 5)
(d) Represents portfolio turnover rate for the entire Fund.
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report dated November 30, 1993, which can be obtained free of charge.
LIMITED TERM FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C> <C>
- -------------- -------------------------------------------------------------------------------- ---------------
CORPORATE BONDS/ASSET BACKED SECURITIES--78.2%
- ------------------------------------------------------------------------------------------------
AUTOMOTIVES--13.0%
--------------------------------------------------------------------------------
$ 2,500,000 Arvin Industries, Inc. 8.375%, 3/1/97 $ 2,516,425
--------------------------------------------------------------------------------
2,833,205 Capital Auto Receivables Asset Trust 1992-1, Class B, 6.20%,
12/15/97 2,888,339
--------------------------------------------------------------------------------
2,898,366 Capital Auto Receivables Asset Trust 1993-1, Class B, 5.85%,
2/17/98 2,930,740
--------------------------------------------------------------------------------
177,154 Ford Credit 1991-B Grantor Trust, 6.50%, 11/15/96 179,967
--------------------------------------------------------------------------------
500,000 Ford Credit Auto Loan Master Trust 1992-1, 6.875%, 1/15/99 523,540
--------------------------------------------------------------------------------
5,000,000 Ford Credit Auto Loan Master Trust 1992-2, Class A, 7.375%,
4/15/99 5,342,400
--------------------------------------------------------------------------------
161,750 GMAC 1991-B Grantor Trust, 6.75%, 6/15/96 164,859
--------------------------------------------------------------------------------
752,540 Midlantic Auto Grantor Trust 1992-1, Class B, 5.15%, 9/15/97 754,654
--------------------------------------------------------------------------------
2,550,000 *Navistar Financial Dealer Note Trust 1990, Class A-3, 4.09%,
1/25/2003 2,567,544
--------------------------------------------------------------------------------
272,573 Premier Auto Trust 1992-3, Class B, 6.25%, 11/17/97 275,168
--------------------------------------------------------------------------------
4,199,942 Premier Auto Trust 1993-4, Class B, 4.95%, 2/2/99 4,219,220
--------------------------------------------------------------------------------
10,000,000 Premier Auto Trust 1993-6, Class B, 4.875%, 10/31/99 9,940,900
--------------------------------------------------------------------------------
966,746 Select Auto Receivables Trust 1991-5A, 6.25%, 11/15/96 983,423
-------------------------------------------------------------------------------- ---------------
Total 33,287,179
-------------------------------------------------------------------------------- ---------------
BANKING--21.3%
--------------------------------------------------------------------------------
5,000,000 Advanta Credit Card Master Trust 1992-3, Class A-1, 5.95%,
8/31/99 5,098,800
--------------------------------------------------------------------------------
8,000,000 *Bankers Trust New York Corp., 5.38%, 9/24/2002 8,043,600
--------------------------------------------------------------------------------
5,000,000 *Barclays Bank PLC, 4.80%, 6/21/96 5,196,500
--------------------------------------------------------------------------------
11,910,000 *Chase Manhattan Corp., 5.25%, 12/5/2009 11,864,742
--------------------------------------------------------------------------------
3,000,000 Chase Manhattan Credit Card Trust 1991-1 Class A, 8.75%, 8/15/99 3,262,800
--------------------------------------------------------------------------------
$ 10,500,000 Chase Manhattan Credit Card Trust 1992-1 Class A, 7.40%,
5/15/2000 $ 11,136,300
--------------------------------------------------------------------------------
3,450,000 Chemical New York Corp., 0.01%, 2/16/2003 1,818,874
--------------------------------------------------------------------------------
1,000,000 *Citicorp, 6.00%, 6/29/2005 1,005,000
--------------------------------------------------------------------------------
3,000,000 *First Chicago Corp., 4.25%, 7/28/2003 2,978,010
--------------------------------------------------------------------------------
4,000,000 First USA Credit Card Master Trust 1992-1 Class B, 5.80%, 6/15/98 4,060,400
-------------------------------------------------------------------------------- ---------------
Total 54,465,026
-------------------------------------------------------------------------------- ---------------
BASIC INDUSTRY--1.8%
--------------------------------------------------------------------------------
2,500,000 Georgia Pacific Corp., 10.25%, 9/15/2018 2,652,400
--------------------------------------------------------------------------------
2,000,000 Societe Generale, 5.125%, 3/30/2002 2,020,000
-------------------------------------------------------------------------------- ---------------
Total 4,672,400
-------------------------------------------------------------------------------- ---------------
BROADCASTING & CABLE--6.0%
--------------------------------------------------------------------------------
12,500,000 TKR Cable, Inc. Sr. Note, 10.50%, 10/30/2007 15,312,500
-------------------------------------------------------------------------------- ---------------
CONSUMER PRODUCT--5.8%
--------------------------------------------------------------------------------
5,000,000 Black & Decker Corp., 7.50%, 4/1/2003 5,070,050
--------------------------------------------------------------------------------
1,000,000 Black & Decker Corp., 8.375%, 4/1/97 1,011,900
--------------------------------------------------------------------------------
5,200,000 Carpenter Technology Corp., 12.875%, 3/1/2014 5,529,264
--------------------------------------------------------------------------------
3,200,000 Fruit of the Loom, Inc., Sr. Note, 7.875%, 10/15/99 3,256,020
-------------------------------------------------------------------------------- ---------------
Total 14,867,234
-------------------------------------------------------------------------------- ---------------
FINANCE--RETAIL--7.6%
--------------------------------------------------------------------------------
1,500,000 Diamond Funding Corp., 6.35%, 11/20/97 1,526,955
--------------------------------------------------------------------------------
5,000,000 Discover Card Trust 1992-B, Class A, 6.80%, 6/16/2000 5,224,500
--------------------------------------------------------------------------------
3,000,000 Discover Card Trust 1991-B, Class B, 8.85%, 7/15/98 3,255,960
--------------------------------------------------------------------------------
6,000,000 Household Credit Card Trust 1991-1, Class B, 8.125%, 10/15/97 6,401,340
--------------------------------------------------------------------------------
3,000,000 Household Credit Card Trust 1992-1, Class B, 6.25%, 12/15/97 3,060,000
-------------------------------------------------------------------------------- ---------------
Total 19,468,755
-------------------------------------------------------------------------------- ---------------
HOME EQUITY RECEIVABLES--10.1%
--------------------------------------------------------------------------------
$ 3,896,194 Advanta Home Equity Loan Trust 1992-1 Class A, 7.875%,
9/25/2008 $ 4,050,406
--------------------------------------------------------------------------------
1,731,393 Advanta Home Equity Loan Trust 1992-3 Class A, 6.00%, 8/25/2008 1,729,852
--------------------------------------------------------------------------------
248,511 American Financial Home Equity Loan Trust, 8.00%, 7/25/2006 259,523
--------------------------------------------------------------------------------
500,000 *Capital Home Equity Loan Trust 1991-1 Class B, 3.79%, 11/14/2011 500,700
--------------------------------------------------------------------------------
5,923,743 Conti Mortgage Home Equity Loan Trust 1993-3, Class A-2, 5.54%, 7/15/2020 5,923,743
--------------------------------------------------------------------------------
2,731,148 GE Capital Mortgage Services, Inc. 1991-1, Class A, 7.20%,
8/30/2011 2,800,956
--------------------------------------------------------------------------------
2,500,000 GE Capital Mortgage Services, Inc. 1991-1, Class B, 8.70%,
9/15/2011 2,716,625
--------------------------------------------------------------------------------
4,942,941 GE Capital Mortgage Services, Inc. 1993-9, Class A-1, 6.00%,
8/25/2008 4,962,564
--------------------------------------------------------------------------------
373,919 Home Equity Loan REMIC Trust 1992-1, Class A, 5.65%,
11/15/2014 373,145
--------------------------------------------------------------------------------
829,574 TMS Home Equity Loan Trust 1992-A, Class A, 6.95%, 12/15/2007 848,073
--------------------------------------------------------------------------------
337,847 TMS Home Equity Loan Trust 1992-B, Class A, 6.90%, 7/15/2007 343,475
--------------------------------------------------------------------------------
1,276,004 TMS Home Equity Loan Trust 1992-D, Class A-3, 7.55%,
10/15/2018 1,313,710
-------------------------------------------------------------------------------- ---------------
Total 25,822,772
-------------------------------------------------------------------------------- ---------------
LEASING--0.4%
--------------------------------------------------------------------------------
57,127 Comdisco Receivables Trust 1991-A, 7.70%, 5/15/96 57,199
--------------------------------------------------------------------------------
862,612 Concord Leasing Grantor Trust 1992-C, Class A-1, 5.31%, 1/20/99 865,312
-------------------------------------------------------------------------------- ---------------
Total 922,511
-------------------------------------------------------------------------------- ---------------
MANUFACTURED HOUSING RECEIVABLES--6.8%
--------------------------------------------------------------------------------
3,000,000 Cit Group Manufactured Housing PTC 1993-1, Class A-2, 5.75%,
6/15/2018 2,973,540
--------------------------------------------------------------------------------
3,217,147 Cit Group Manufactured Housing PTC 1993-1, Class B, 6.85%,
6/15/2018 3,208,075
--------------------------------------------------------------------------------
$ 2,879,257 Fleetwood Credit Corp. 1992-1, Class A, 7.10%, 2/15/2007 $ 2,966,959
--------------------------------------------------------------------------------
7,746,883 Merrill Lynch Mortgage Investments, Inc., 1991-A, Class B, 9.25%,
5/15/2011 8,258,874
-------------------------------------------------------------------------------- ---------------
Total 17,407,448
-------------------------------------------------------------------------------- ---------------
MARINE RECEIVABLES--0.4%
--------------------------------------------------------------------------------
978,082 CFC-14 Grantor Trust, Class A, 7.15%, 11/15/2006 988,782
-------------------------------------------------------------------------------- ---------------
PRINTING & PUBLISHING--4.2%
--------------------------------------------------------------------------------
1,000,000 Valassis Inserts, Inc., Sr. Note, 8.375%, 3/15/97 1,082,160
--------------------------------------------------------------------------------
9,000,000 Valassis Inserts, Inc., Sr. Note, 8.875%, 3/15/99 9,695,790
-------------------------------------------------------------------------------- ---------------
Total 10,777,950
-------------------------------------------------------------------------------- ---------------
TRADE RECEIVABLES--0.8%
--------------------------------------------------------------------------------
2,000,000 Unisys Receivables Master Trust I, 5.05%, 11/15/96 2,001,420
-------------------------------------------------------------------------------- ---------------
TOTAL CORPORATE BONDS/ASSET BACKED SECURITIES
(IDENTIFIED COST $200,142,519) 199,993,977
-------------------------------------------------------------------------------- ---------------
GOVERNMENT AGENCIES--0.2%
- ------------------------------------------------------------------------------------------------
500,000 *Student Loan Marketing Association, 4.00%, 5/8/95
(IDENTIFIED COST $500,000) 500,000
-------------------------------------------------------------------------------- ---------------
MORTGAGE BACKED SECURITIES--22.2%
- ------------------------------------------------------------------------------------------------
GOVERNMENT AGENCY--MORTGAGE BACKED SECURITIES--0.3%
--------------------------------------------------------------------------------
189,168 *Federal National Mortgage Association Pool 087462, 7.76%,
11/1/2017 196,971
--------------------------------------------------------------------------------
490,250 *Federal National Mortgage Association Pool 112514, 5.87%,
12/1/2020 513,694
-------------------------------------------------------------------------------- ---------------
Total 710,665
-------------------------------------------------------------------------------- ---------------
NON-GOVERNMENT AGENCY--MORTGAGE BACKED SECURITIES--21.9%
--------------------------------------------------------------------------------
2,383,000 Capstead Securities Corp. 1992-10, Class D, 8.25%, 7/25/2023 2,462,068
--------------------------------------------------------------------------------
3,090,000 Chemical Mortgage Securities, Inc. 1993, Class A-4, 7.45%,
2/25/2023 3,171,112
--------------------------------------------------------------------------------
$ 1,598,536 *Citicorp Mortgage Securities 1992-18, Class A-1, 5.21%,
10/25/2022 $ 1,614,521
--------------------------------------------------------------------------------
2,985,808 *DLJ Mortgage Acceptance Corp. 1993-Q15, Class A-1, 4.58%,
11/25/2023 3,079,114
--------------------------------------------------------------------------------
5,000,000 *GCA 1993-3, Class A-1, 5.52%, 8/25/2019 5,184,400
--------------------------------------------------------------------------------
6,768,043 *GCA 1993-LB2, Class A-1, 5.58%, 7/25/2023 7,017,648
--------------------------------------------------------------------------------
7,999,519 *GCA Long Beach Mortgage PTC, Class A-2, 6.08%, 7/25/2022 8,274,463
--------------------------------------------------------------------------------
1,584,338 *GMBS 1990-5, Class A, 6.62%, 12/26/2020 1,593,749
--------------------------------------------------------------------------------
6,000,000 Prudential Home Mortgage 1992-5, Class A-6, 7.50%, 4/25/2007 6,040,260
--------------------------------------------------------------------------------
1,935,000 Prudential Home Mortgage 1992-A, Class B1-2, 7.90%,
11/25/2022 1,939,663
--------------------------------------------------------------------------------
1,612,074 Residential Funding Corp. 1993-S18, Class A-2, 7.50%, 5/25/2023 1,647,540
--------------------------------------------------------------------------------
5,000,000 Residential Funding Corp. 1993-S43, Class A-4, 8.00%, 12/25/2022 5,173,500
--------------------------------------------------------------------------------
34,561 RTC 1992-7, Class A-2A, 8.35%, 6/25/2029 34,950
--------------------------------------------------------------------------------
3,270,000 RTC 1992-15, Class B-3, 10.00%, 7/25/2027 3,335,400
--------------------------------------------------------------------------------
2,643,506 Sears Mortgage Securities Corp. 1992-10, Class A-3, 8.00%,
6/25/2020 2,710,096
--------------------------------------------------------------------------------
2,929,211 Zions Home Refinance Loan Trust 1993-1, 5.15%, 9/25/2003 2,902,731
-------------------------------------------------------------------------------- ---------------
Total 56,181,215
-------------------------------------------------------------------------------- ---------------
TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST $56,457,544) 56,891,880
-------------------------------------------------------------------------------- ---------------
REPURCHASE AGREEMENT (A)--2.2%
- ------------------------------------------------------------------------------------------------
$ 5,582,000 Goldman, Sachs & Co., 3.23%, dated 11/30/93, due 12/1/93
(AT AMORTIZED COST) (NOTE 2B) $ 5,582,000
-------------------------------------------------------------------------------- ---------------
TOTAL INVESTMENTS (IDENTIFIED COST $262,682,063) $ 262,967,857\
-------------------------------------------------------------------------------- ---------------
</TABLE>
\ The cost of investments for federal tax purposes amounts to $262,682,063.
The
net unrealized appreciation on a federal tax cost basis amounts to $285,794,
and is comprised of $1,773,614 appreciation and $1,487,820 depreciation at
November 30, 1993.
* Current rate shown.
(a) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investments in the repurchase agreement is through participation in a joint
account with other Federated funds.
Note: The categories of investments are shown as a percentage of net assets
($256,105,848) at November 30, 1993.
The following abbreviations are used in this portfolio:
PTC--Pass Through Certificate
REMIC--Real Estate Mortgage Investment Conduit
(See Notes which are an integral part of Financial Statements)
LIMITED TERM FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ------------------------------------------------------------------------------------------------
Investments in securities, at value (Notes 2A and 2B)
(identified cost and tax cost $262,682,063) $ 262,967,857
- ------------------------------------------------------------------------------------------------
Cash 33,076
- ------------------------------------------------------------------------------------------------
Receivable for capital stock sold 2,650,821
- ------------------------------------------------------------------------------------------------
Interest receivable 2,064,094
- ------------------------------------------------------------------------------------------------
Receivable for investments sold 1,083,241
- ------------------------------------------------------------------------------------------------
Deferred expenses (Note 2H) 47,345
- ------------------------------------------------------------------------------------------------ ---------------
Total assets 268,846,434
- ------------------------------------------------------------------------------------------------
LIABILITIES:
- ------------------------------------------------------------------------------------------------
Payable for investments purchased $ 11,325,409
- --------------------------------------------------------------------------------
Payable for capital stock redeemed 631,198
- --------------------------------------------------------------------------------
Dividends payable 367,990
- --------------------------------------------------------------------------------
Payable to Adviser 50,000
- --------------------------------------------------------------------------------
Payable for shareholder services and distribution fees 196,986
- --------------------------------------------------------------------------------
Accrued expenses and other liabilities 169,003
- -------------------------------------------------------------------------------- --------------
Total liabilities 12,740,586
- ------------------------------------------------------------------------------------------------ ---------------
NET ASSETS for 25,174,690 shares of capital stock outstanding $ 256,105,848
- ------------------------------------------------------------------------------------------------ ---------------
NET ASSETS CONSIST OF:
- ------------------------------------------------------------------------------------------------
Paid-in capital $ 256,010,982
- ------------------------------------------------------------------------------------------------
Unrealized appreciation of investments 285,794
- ------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments 387,479
- ------------------------------------------------------------------------------------------------
Accumulated distributions in excess of net investment income (Note 3) (578,407)
- ------------------------------------------------------------------------------------------------ ---------------
Total $ 256,105,848
- ------------------------------------------------------------------------------------------------ ---------------
NET ASSET VALUE
- ------------------------------------------------------------------------------------------------
Investment Shares (net assets of $248,875,891 / 24,464,073 shares outstanding) $10.17
- ------------------------------------------------------------------------------------------------ ---------------
Fortress Shares (net assets of $7,229,957 / 710,617 shares outstanding) $10.17
- ------------------------------------------------------------------------------------------------ ---------------
OFFERING PRICE PER SHARE:
- ------------------------------------------------------------------------------------------------
Investment Shares (100/99 of $10.17)* $10.27
- ------------------------------------------------------------------------------------------------ ---------------
Fortress Shares (100/99 of $10.17)* $10.27
- ------------------------------------------------------------------------------------------------ ---------------
REDEMPTION PRICE PER SHARE:
- ------------------------------------------------------------------------------------------------
Fortress Shares (99/100 of $10.17)** $10.07
- ------------------------------------------------------------------------------------------------ ---------------
</TABLE>
* See "What Shares Cost" on page 15 of the prospectus.
** See "Contingent Deferred Sales Charge" on page 19 of the prospectus.
(See Notes which are an integral part of the Financial Statements)
LIMITED TERM FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------------------
Interest income (Note 2C) $ 9,629,910
- ---------------------------------------------------------------------------------------------------
EXPENSES:
- ------------------------------------------------------------------------------------
Investment advisory fee (Note 5) $ 574,312
- ------------------------------------------------------------------------------------
Directors' fee 11,461
- ------------------------------------------------------------------------------------
Administrative personnel and services (Note 5) 308,078
- ------------------------------------------------------------------------------------
Custodian, transfer and dividend disbursing agent fees and expenses 182,801
- ------------------------------------------------------------------------------------
Capital Stock registration costs 129,345
- ------------------------------------------------------------------------------------
Audting fees 18,677
- ------------------------------------------------------------------------------------
Legal fees 6,661
- ------------------------------------------------------------------------------------
Printing and postage 21,209
- ------------------------------------------------------------------------------------
Distribution services fees (Note 5) 715,878
- ------------------------------------------------------------------------------------
Insurance premiums 7,451
- ------------------------------------------------------------------------------------
Shareholder service fees (Note 5) 145,217
- ------------------------------------------------------------------------------------
Taxes 1,208
- ------------------------------------------------------------------------------------
Miscellaneous 23,532
- ------------------------------------------------------------------------------------ -------------
Total expenses 2,145,830
- ------------------------------------------------------------------------------------
Deduct--
- ------------------------------------------------------------------------------------
Waiver of investment advisory fee (Note 5) $ 550,197
- -----------------------------------------------------------------------
Waiver of distribution services fees (Note 5) 143,783 693,980
- ----------------------------------------------------------------------- ----------- -------------
Net expenses 1,451,850
- --------------------------------------------------------------------------------------------------- -------------
Net investment income 8,178,060
- --------------------------------------------------------------------------------------------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis)-- 369,906
- ---------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments 785,383
- --------------------------------------------------------------------------------------------------- -------------
Net realized and unrealized gain (loss) on investments 1,155,289
- --------------------------------------------------------------------------------------------------- -------------
Change in net assets from operations $ 9,333,349
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
LIMITED TERM FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
<S> <C> <C>
1993 1992*
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------------------------------
Net investment income $ 8,178,060 $ 1,358,277
- -------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions ($369,906 and
17,573 computed for federal income tax purposes) (Note 2D) 369,906 17,573
- -------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) of investments 785,383 (499,589)
- ------------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from operations 9,333,349 876,261
- ------------------------------------------------------------------------------- --------------- ---------------
NET EQUALIZATION CREDITS (NOTE 2E)-- 78,255 74,652
- ------------------------------------------------------------------------------- --------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- -------------------------------------------------------------------------------
Dividends to shareholders from net investment income:
- -------------------------------------------------------------------------------
Investment Shares (8,215,600) (1,432,929)
- -------------------------------------------------------------------------------
Fortress Shares (36,477) --
- -------------------------------------------------------------------------------
Distributions in excess of net investment income:
- -------------------------------------------------------------------------------
Investment Shares (572,361) (10,284)
- -------------------------------------------------------------------------------
Fortress Shares -- --
- ------------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from distributions to shareholders (8,824,438) (1,443,213)
- ------------------------------------------------------------------------------- --------------- ---------------
CAPITAL STOCK TRANSACTIONS (NOTE 4)--
- -------------------------------------------------------------------------------
Proceeds from sale of shares 240,663,285 76,137,405
- -------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
dividends declared 6,295,582 1,129,032
- -------------------------------------------------------------------------------
Cost of shares redeemed (48,664,777) (19,649,545)
- ------------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from capital stock transactions 198,294,090 57,616,892
- ------------------------------------------------------------------------------- --------------- ---------------
Change in net assets 198,881,256 57,124,592
- -------------------------------------------------------------------------------
NET ASSETS:
- -------------------------------------------------------------------------------
Beginning of period 57,224,592 100,000
- ------------------------------------------------------------------------------- --------------- ---------------
End of period $ 256,105,848 $ 57,224,592
- ------------------------------------------------------------------------------- --------------- ---------------
</TABLE>
* For the period from December 5, 1991 (start of business) to November 30, 1992.
(See Notes which are an integral part of the Financial Statements)
LIMITED TERM FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Fixed Income Securities, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended, as an, open-end, management
investment company. The financial statements included herein present only those
of Limited Term Fund (the "Fund"). The assets of each portfolio are segregated
and a shareholder's interest will be limited to the portfolio in which shares
are held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Bonds and asset backed securities listed on national
securities exchanges are valued at the last reported sale price on that
day. Unlisted securities, listed securities in which there were no sales,
and U.S. government obligations are valued at the mean between bid and
asked prices as furnished by an independent pricing service. Short-term
obligations are ordinarily valued at the mean between bid and asked prices
as furnished by an independent pricing service. However, short-term
obligations with maturities of sixty days or less are valued at amortized
cost, which approximates value.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System or to have segregated within the
custodian bank's vault, all securities held as collateral in support of
repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of
each repurchase agreement's underlying securities to ensure the existence
of a proper level of collateral.
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. Risks may arise from the potential inability of counterparties to
honor the terms of the repurchase agreement. Accordingly, the Fund could receive
less than the repurchase price on the sale of collateral securities.
C. INCOME--Interest income is recorded on the accrual basis. Interest income
includes interest and discount earned (net of premium) on short-term
obligations, and interest earned on all other debt securities including
original issue discount as required by the Internal Revenue Code.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Internal Revenue Code applicable to investment companies and to distribute
to shareholders each year all of its taxable income, including any net
realized gain on investments. Accordingly, no provision for federal tax is
necessary.
E. EQUALIZATION--The Fund follows the accounting practice known as
equalization by which a portion of the proceeds from sales and costs of
redemption of capital stock equivalent, on a per share basis, to the amount
of undistributed net investment income on the date of transaction is
credited or charged to undistributed net investment income for each class
of shares. As a result, undistributed net investment income per share is
unaffected by sales or redemption of capital stock.
F. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. To the extent the Fund
engages in such transactions, it will do so for the purpose of acquiring
portfolio securities consistent with its investment objective and policies
and not for the purpose of investment leverage. The Fund will record a
when-issued security and the related liability on the trade date. Until the
securities are received and paid for, the Fund will maintain security
positions such that sufficient liquid assets will be available to make
payment for the securities purchased. Securities purchased on a when-issued
or delayed delivery basis are marked to market daily and begin earning
interest on the settlement date.
G. OTHER--Investment transactions are accounted for on the date of the
transaction.
H. DEFERRED EXPENSES--Costs incurred by the Fund in connection with its
initial share registration, other than organization expenses, were deferred
and are being amortized on a straight-line basis through January 1996.
(3) DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly to all shareholders invested in the Fund
on the record date. Distributions of any net realized long-term capital gains
will be made at least once every twelve months. Dividends and distributions are
automatically reinvested on payment dates in additional shares of the Fund
without a sales charge, unless cash payments are requested.
The amounts shown in the financial statements for dividends from net investment
income for the years ended November 30, 1993 and 1992 differ from those
determined for tax purposes because of certain timing differences in the
recognition of such dividends for book and tax purposes. This resulted in
distributions to shareholders in excess of net investment income. These
distributions do not represent a return of capital for federal income tax
purposes.
(4) CAPITAL STOCK
At November 30, 1993, the Corporation was authorized to issue 10,000,000,000
shares of $0.001 par value stock. Of these shares, 1,000,000,000 have been
designated as Investment Shares of the Fund and 1,000,000,000 as Fortress Shares
of the Fund. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
11/30/93 11/30/92*
<S> <C> <C> <C> <C>
INVESTMENT SHARES SHARES DOLLARS SHARES DOLLARS
- -------------------------------------------------- ------------- --------------- ------------ ---------------
Shares outstanding, beginning of period 5,720,300 $ 57,716,892 10,000 $ 100,000
- --------------------------------------------------
Shares sold 22,870,569 233,155,755 7,552,596 76,137,405
- --------------------------------------------------
Shares issued to shareholders in payment of
dividends declared 621,720 6,275,708 112,280 1,129,032
- --------------------------------------------------
Shares redeemed (4,748,516) (48,395,745) (1,954,576) (19,649,545)
- -------------------------------------------------- ------------- --------------- ------------ ---------------
Shares outstanding, end of period 24,464,073 $ 248,752,610 5,720,300 $ 57,716,892
- -------------------------------------------------- ------------- --------------- ------------ ---------------
<CAPTION>
YEAR ENDED
11/30/93**
FORTRESS SHARES SHARES DOLLARS
- ---------------------------------------------------------------------------------- ------------ ---------------
<S> <C> <C>
Shares outstanding, beginning of period -- $ --
- ----------------------------------------------------------------------------------
Shares sold 735,070 7,507,530
- ----------------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 1,947 19,874
- ----------------------------------------------------------------------------------
Shares redeemed (26,400) (269,032)
- ---------------------------------------------------------------------------------- ------------ ---------------
Shares outstanding, end of period 710,617 $ 7,258,372
- ---------------------------------------------------------------------------------- ------------ ---------------
</TABLE>
* For the period from December 5, 1991 (start of business) to November 30,
1992.
** For the period from August 31, 1993 (date of initial public offering) to
November 30, 1993.
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Federated Advisers, the Fund's investment adviser (the "Adviser") receives for
its services an annual investment advisory fee equal to .40 of 1% of the Fund's
average daily net assets. The Adviser has voluntarily agreed to waive a portion
of its fee. The Adviser can terminate this voluntary waiver at any time at its
sole discretion. For the year ended November 30, 1993 the advisory fee amounted
to $574,312 of which $550,197 was voluntarily waived in accordance with such
undertaking.
Organizational expenses ($63,956) and start-up administrative service expenses
($65,386) were borne initially by Federated Administrative Services, Inc. (the
"Administrator"), administrators to the Fund. The Fund has agreed to reimburse
the Administrator for the organization expenses and start-up expenses initially
borne by the Administrator during the five year period following the date the
Corporation's portfolio first became effective. For the year ended November 30,
1993, the Fund $10,661 paid and $12,715, respectively, for organizational and
start up administrative service expenses pursuant to this agreement.
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940. The Fund will compensate to Federated
Securities Corp. ("FSC"), the principal distributor, from assets of the Fund,
for fees it paid which relate to the distributor an administration of the Funds
Investment Shares and Fortress Shares. The plan provides that the Fund may incur
distribution expenses up to .50 of 1% of the average daily net assets of the
Fund's Investment shares and .15 of 1% of the average daily net assets of the
Fortress Shares, annually, to pay commissions, maintenance fees and to
compensate the distributor. During the year ended November 30, 1993 FSC earned
$715,008 in distributions services fees for Investment shares and $870 for
Fortress Shares of which $143,783 and $0 were voluntarily waived, respectively.
The Fund has adopted a Shareholder Services Plan (the "Services Plan") with
respect to Fortress and Investment Shares. The Fund will reimburse Federated
Securities Corp. ("FSC"), from the net assets of the Fund for fees the Fund paid
which relate to administrative support services. The Services Plan provides that
the Fund may incur shareholder services expenses up to 0.25 of 1% of the average
daily net assets of the Fortress and Investment Shares. For the period ended
November 30, 1993, FSC earned $145,217.
During the year ended November 30, 1993 the Fund engaged in purchase
transactions with other Funds advised by the adviser pursuant to rule 17A-7 of
the Investment Company Act of 1940, amounting to $5,397,000. These purchases
were conducted on an armslength basis insofar as they were transacted for cash
considerations only, at independent current market prices and without brokerage
commissions, fees or other remuneration.
Administrative personnel and services were provided at approximate cost by
Federated Administrative Services, Inc. Certain of the Officers and Directors of
Fixed Income Securities, Inc. are Officers and Directors of the above
Corporations.
(6) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended November 30, 1993 were as follows:
<TABLE>
<CAPTION>
<S> <C>
PURCHASES $ 255,844,869
- ------------------------------------------------------------------------------------------------- ---------------
SALES $ 52,789,524
- ------------------------------------------------------------------------------------------------- ---------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Directors of FIXED INCOME SECURITIES, INC. and Shareholders of
LIMITED TERM FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Limited Term Fund (a portfolio of Fixed Income
Securities, Inc.) as of November 30, 1993, the related statement of operations
for the year then ended, and, the statement of changes in net assets, and the
financial highlights (see pages 2 and 27 of the prospectus) for the year ended
November 30, 1993 and for the period from December 5, 1991 (start of business)
to November 30, 1992. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
November 30, 1993 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Limited Term Fund as
of November 30, 1993, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
Boston, Massachusetts
January 14, 1994
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Limited Term Fund
Fortress Shares 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 P.O. Box 8604
Trust Company Boston, Massachusetts 02266-8604
- ---------------------------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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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
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
LIMITED TERM FUND
FORTRESS SHARES
PROSPECTUS
A Diversified Portfolio of
Fixed Income Securities, Inc.,
an Open-End, Management
Investment Company
January 31, 1994
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
3070701A-FS (1/94)
LIMITED TERM FUND
(A PORTFOLIO OF FIXED INCOME SECURITIES, INC.)
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectuses of Fortress Shares and Investment Shares
of Limited Term Fund (the "Fund") dated January 31, 1994.
This Statement is not a prospectus itself. To receive a copy of the
respective prospectuses, write or call the Fund.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated January 31, 1994
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------------
Types of Investments 1
Non-Mortgage Related Asset-Backed Securities 1
Foreign Bank Instruments 1
Futures and Options Transactions 1
Medium Term Notes and Deposit Notes 3
Average Life 3
Weighted Average Portfolio Duration 3
When-Issued and Delayed Delivery Transactions 4
Lending of Portfolio Securities 4
Restricted and Illiquid Securities 4
Repurchase Agreements 4
Reverse Repurchase Agreements 5
Portfolio Turnover 5
INVESTMENT LIMITATIONS 5
- ---------------------------------------------------------------
FIXED INCOME SECURITIES, INC. MANAGEMENT 7
- ---------------------------------------------------------------
Officers and Directors 7
The Funds 9
Fund Ownership 9
Director Liability 9
INVESTMENT ADVISORY SERVICES 9
- ---------------------------------------------------------------
Adviser to the Fund 9
Advisory Fees 10
SHAREHOLDER SERVICING 10
- ---------------------------------------------------------------
ADMINISTRATIVE SERVICES 10
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 10
- ---------------------------------------------------------------
PURCHASING SHARES 11
- ---------------------------------------------------------------
Distribution Plan 11
Purchases by Sales Representatives,
Fund Directors, and Employees 11
DETERMINING NET ASSET VALUE 11
- ---------------------------------------------------------------
Determining Market Value of Securities 11
EXCHANGE PRIVILEGE 12
- ---------------------------------------------------------------
Reduced Sales Charge 12
Requirements for Exchange 12
Tax Consequences 12
Making an Exchange 12
REDEEMING SHARES 12
- ---------------------------------------------------------------
Redemption in Kind 12
TAX STATUS 13
- ---------------------------------------------------------------
The Fund's Tax Status 13
Shareholders' Tax Status 13
TOTAL RETURN 13
- ---------------------------------------------------------------
YIELD 13
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 14
- ---------------------------------------------------------------
APPENDIX 15
- ---------------------------------------------------------------
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
consistent with minimum fluctuation in principal value through the compilation
of a portfolio, the weighted-average duration of which will at all times be
limited to three years or less. 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
The Fund invests primarily in a portfolio of U.S. government securities and
investment grade corporate bonds and asset-backed securities. At least 65% of
the assets of the Fund shall be invested in securities which are rated in one of
the three highest categories by a nationally recognized statistical rating
organization rated Aaa, Aa, or A by Moody's Investors Service, Inc. ("Moody's"),
AAA, AA, or A by Standard & Poor's Corporation ("Standard & Poor's"), or AAA,
AA, or A by Fitch Investors Service, Inc. ("Fitch"). The investment portfolio
includes the following securities:
corporate debt securities rated within the four highest categories by a
nationally recognized statistical rating organization, including bonds, notes,
and indentures;
asset-backed securities;
U.S. government securities, including U.S. Treasury bills, notes, and bonds, and
securities issued by agencies and instrumentalities of the U.S. government; and
repurchase agreements.
NON-MORTGAGE RELATED ASSET-BACKED SECURITIES
Non-mortgage related asset-backed securities present certain risks that are not
presented by mortgage-backed securities. Primarily, these securities do not have
the benefit of the same security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Most issuers of asset-backed securities backed
by motor vehicle installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If the servicer
sells these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state and is
then registered because the owner and the obligor move to another state, such
re-registration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee with
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is a possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities.
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.
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 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 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 additional consideration).
MEDIUM TERM NOTES AND DEPOSIT NOTES
Medium term notes ("MTNs") and Deposit Notes are similar to Variable Rate Demand
Notes as described in the Prospectus. MTNs and Deposit Notes trade like
commercial paper, but may have maturities from 9 months to ten years.
AVERAGE LIFE
Average life, as applicable to asset-backed securities, is computed by
multiplying each principal repayment by the time of payment (months or years
from the evaluation date), summing these products, and dividing the sum by the
total amount of principal repaid. The weighted-average life is calculated by
multiplying the maturity of each security in a given pool by its remaining
balance, summing the products, and dividing the result by the total remaining
balance.
WEIGHTED AVERAGE PORTFOLIO 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. Duration measures the magnitude of the change in
the price of a debt security relative to a given change in the market rate of
interest. The duration of a debt security depends upon three primary variables:
the security's coupon rate, maturity date and the level of market interest rates
for similar debt securities. Generally, debt securities with lower coupons or
longer maturities will have a longer duration than securities with higher
coupons or shorter maturities.
Duration is calculated by dividing the sum of the time-weighted values of cash
flows of a security or portfolio of securities, including principal and interest
payments, by the sum of the present values of the cash flows. Certain debt
securities, such as asset-backed securities, may be subject to prepayment at
irregular intervals. The duration of these instruments will be calculated based
upon assumptions established by the investment adviser as to the probable amount
and sequence of principal prepayments.
Mathematically, duration is measured as follows:
PVCF1(1) PVCF2(2) PVCF3(3) PVCFn(n)
Duration = + + + . . . .+
-------- -------- -------- --------
PVTCF PVTCF PVTCF PVTCF
where
PVCFt = the present value of the cash flow in period t discounted at the
prevailing yield-to-maturity
t = the period when the cash flow is received
n = remaining number of periods until maturity
PVTCF = total present value of the cash flow from the bond where the
present value is determined using the prevailing yield-to-maturity
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 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 eligible for resale under
Rule 144A 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.
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. The portfolio turnover rate for the fiscal
period ended November 30, 1993 was 38%.
INVESTMENT LIMITATIONS
- --------------------------------------------------------------------------------
BUYING ON MARGIN
The Fund will not purchase any securities on margin, other than in
connection with the purchase and sale of 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 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
10% of the value of total assets at the time of the borrowing. Margin
deposits for the purchase and sale of 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.
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.
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.
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.
SELLING SHORT
The Fund will not sell securities short unless:
during the time the short position is open, it owns an equal amount of the
securities sold or securities readily and freely convertible into or
exchangeable, without payment of additional consideration for securities of
the same issue as, and equal in amount to, the securities sold short; and
not more than 10% of the Fund's net assets (taken at current value) is held
as collateral for such sales at any one time.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets in
any one industry, 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 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 or sponsor such programs.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may not own securities of other investment companies excepts as
part of a merger, consolidation, reorganization, or other acquisition.
DEALING IN PUTS AND CALLS
The Fund will not purchase puts, calls, straddles, spreads, or any
combination of them, if by reason thereof the value of such securities
would exceed 5% of its total assets.
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.
The Fund does not expect to borrow money, pledge securities or invest in stock
of closed-end investment companies during the coming fiscal year.
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 and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be cash items.
FIXED INCOME SECURITIES, INC. MANAGEMENT
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OFFICERS AND DIRECTORS
Officers and Directors are listed with their addresses, principal occupations,
and present positions, including any affiliation with Federated Advisers,
Federated Investors, Federated Securities Corp., Federated Administrative
Services, Inc., and the Funds (as defined below).
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE CORPORATION DURING PAST FIVE YEARS
<S> <C> <C>
John F. Donahue*\ Chairman and Chairman and Trustee, Federated Investors; Chairman and Trustee,
Federated Investors Tower Director Federated Advisers, Federated Management, and Federated Research;
Pittsburgh, PA 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, Jr., Director Senior Vice-President, John R. Wood and Associates, Inc., Realtors;
Wood/IPC Commercial President, Northgate Village Development Corporation and Investment
Department Properties Corporation; General Partner or Trustee in private real
John R. Wood and estate ventures in Southwest Florida; Director, Trustee, or Managing
Associates, Inc., Realtors General Partner of the Funds; Formerly, President, Naples Property
3255 Tamiami Trail North Management, Inc.
Naples, FL
William J. Copeland Director Director and Member of the Executive Committee, Michael Baker, Inc.;
One PNC Plaza-23rd Floor Director, Trustee, or Managing General Partner of the Funds; formerly,
Pittsburgh, PA 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 The Emerging Germany Fund, Inc.; Director,
571 Hayard Mill Road Trustee, or Managing General Partner of the Funds; formerly, Director,
Concord, Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D. Director Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
3471 Fifth Avenue Hospitals; Clinical Professor of Medicine and Trustee, University of
Suite 1111 Pittsburgh; Director, Trustee, or Managing General Partner of the Funds.
Pittsburgh, PA
Richard B. Fisher* President and Executive Vice President and Trustee, Federated Investors; Chairman and
Federated Investors Tower Director Director, Federated Securities Corp.; President or Vice President of the
Pittsburgh, PA Funds; Director or Trustee of some of the Funds.
Edward L. Flaherty, Jr.\ Director Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park
5916 Penn Mall Restaurants, Inc. and Statewide Settlement Agency, Inc.; Director,
Pittsburgh, PA Trustee, or Managing General Partner of the Funds; formerly, Counsel,
Horizon Financial, F.A., Western Region.
Peter E. Madden Director Consultant; State Representative, Commonwealth of Massachusetts;
225 Franklin Street Director, Trustee, or Managing General Partner of of the Funds;
Boston, MA formerly, President, State Street Bank and Trust Company and State
Street Boston Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer Director Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, Inc.;
5916 Penn Mall Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or Managing
Pittsburgh, PA General Partner of the Funds; formerly, Vice Chairman, Horizon
Financial, F.A.
Wesley W. Posvar Director Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
1202 Cathedral of Learning Endowment for International Peace, RAND Corporation, Online Computer
University of Pittsburgh Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Pittsburgh, PA Management Center; Director, Trustee, or Managing General Partner of the
Funds; formerly, President Emeritus, University of Pittsburgh; formerly,
Chairman, National Advisory Council for Environmental Policy and
Technology.
Marjorie P. Smuts Director Public relations/marketing consultant; Director, Trustee, or Managing
4905 Bayard Street General Partner of the Funds.
Pittsburgh, PA
J. Christopher Donahue Vice President President and Trustee, Federated Investors; Trustee, Federated Advisers,
Federated Investors Tower Federated Managment, and Federated Research; President and Director,
Pittsburgh, PA Federated Administrative Services, Inc.; President or Vice President of
the Funds; Director, Trustee, or Managing General Partner of some of the
Funds. Mr. Donahue is the son of John F. Donahue, Chairman and Director
of the Corporation.
Edward C. Gonzales Vice President Vice President, Treasurer and and Treasurer Trustee, Federated
Federated Investors Tower Investors; Vice President and Treasurer, Federated Advisers, Federated
Pittsburgh, PA Management, and Federated Research; Executive Vice President, Treasurer,
and Director, Federated Securities Corp.; Chairman, Treasurer, and
Director, Federated Administrative Services, Inc.; Trustee or Director
of some of the Funds; Vice President and Treasury of the Funds.
John W. McGonigle Vice President Vice President, Secretary, General Counsel, and Trustee, Federated
Federated Investors Tower and Secretary Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Pittsburgh, PA Federated Management, and Federated Research; Executive Vice President,
Secretary, and Director, Federated Administrative Services, Inc.;
Director and Executive Vice President, Federated Securities Corp.; Vice
President and Secretary of the Funds.
John A. Staley, IV Vice President Vice President and Trustee, Federated Investors; Executive Vice
Federated Investors Tower President, Federated Securities Corp.; President and Trustee, Federated
Pittsburgh, PA 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 Compa-
ny and President of its Federated Research Division.
</TABLE>
*This Director is deemed to be an "interested person" of the Fund as
defined in the Investment Company Act of 1940.
\Members of the Fund's Executive Committee. The Executive Committee of the Board
of Directors handles the Directors' responsibilities between meetings of the
Directors.
THE FUNDS
"The Funds," and "Funds" mean the following investment companies: A.T. Ohio
Tax-Free Money Fund; American Leaders Fund, Inc.; Annuity Management Series;
Automated Cash Management Trust; Automated Government Money Trust; BankSouth
Select Funds; The Boulevard Funds; California Municipal Cash Trust; Cash Trust
Series, Inc.; Cash Trust Series II; 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; Insight Institutional Series, Inc.;
Intermediate Municipal Trust; Insurance Management Series; Intermediate
Municipal Trust; Investment Series Funds, Inc.; Investment Series Trust; Liberty
Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.; Liberty Municipal
Securities Fund, Inc.; Liberty Term Trust, Inc.-1999; Liberty U.S. Government
Money Market Trust; Liberty Utility Fund, Inc.; Liquid Cash Trust; Mark Twain
Funds; Money Market Management, Inc.; Money Market Obligations Trust; Money
Market Trust; Municipal Securities Income Trust; New York Municipal Cash Trust;
111 Corcoran Funds; The Planters Funds; Portage Funds; RIMCO Monument Funds; The
Shawmut Funds; Short-Term Municipal Trust; Signet Select Funds; Star Funds; The
Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; Trademark Funds;
Trust for Financial Institutions; Trust for Government Cash Reserves; Trust for
Short-Term U.S. Government Securities; and Trust for U.S. Treasury Obligations.
FUND OWNERSHIP
Officers and Directors own less than 1% of the outstanding Fortress Shares and
Investment Shares.
The following list indicates the beneficial ownership of shareholders who are
the beneficial owners of more than 5% of the outstanding shares as of January 6,
1994, for Fortress Shares: Merrill Lynch Pierce Fenner & Smith, Jacksonville,
Florida, owned approximately 186,531 shares (19.58%).
The following list indicates the beneficial ownership of shareholders who are
the beneficial owners of more than 5% of the oustanding shares as of January 6,
1994, for Investment Shares: Merrill Lynch Pierce Fenner & Smith, Jacksonville,
Florida, owned approximately 2,396,376 shares (9.96%).
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
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ADVISER TO THE FUND
The Fund's investment adviser is Federated Advisers (the "Adviser"). It is a
subsidiary of Federated Investors. All of the voting securities of Federated
Investors are owned by a trust, the trustees of which are John F. Donahue, his
wife, and his son, J. Christopher Donahue. John F. Donahue, Chairman and Trustee
of Federated Advisers, is President 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 Vice
President and Trustee of Federated Investors, 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,
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, the Adviser receives an annual investment advisory
fee as described in the prospectus. During the period from January 13, 1992
(date of initial public investment) to November 30, 1992 and for the period
ended November 30, 1993, the Fund's Adviser earned $88,068 and $574,212,
respectively, of which $0 and $550,197, respectively were voluntarily waived.
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 2.50% per year of the first $30 million of average net assets,
2.0% per year of the next $70 million of average net assets, and 1.50%
per year of the remaining average net assets, the Adviser will reimburse
the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this expense
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be waived by the Adviser will be
limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
SHAREHOLDER SERVICING
- --------------------------------------------------------------------------------
In return for providing shareholder servicing to its customers who from time to
time may be owners of record or beneficial owners of the Fund, 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 Fortress Shares or Investment 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. For the year ended
November 30, 1993, the shareholder servicing fee was $1,208.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, Inc., a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund at approximate cost.
During the period from January 13, 1992 (date of initial public investment) to
November 30, 1992 and for the year ended November 30, 1993, the Fund incurred
costs of $92,328 and $308,078, respectively, for administrative services. John
A. Staley, IV, an officer of the Fund, and Dr. Henry J. Gailliot, an officer of
Federated Advisers, the Adviser to the Fund, each hold approximately 15% and
20%, respectively, of the outstanding common stock and serve as directors of
Commercial Data Services, Inc., a company which provides computer processing
services to Federated Administrative Services, Inc. For the fiscal years ended
November 30, 1993, 1992, and 1991, Federated Administrative Services, Inc. paid
approximately, $164,324, $186,144, and $193,178, respectively, for services
provided by Commercial Data Services, Inc.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally 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 of the Fund is
explained in the prospectus under "Investing in Investment Shares" or "Investing
in Fortress Shares."
DISTRIBUTION PLAN
The Fund has adopted a Plan under Rule 12b-1 which was promulgated by the
Securities and Exchange Commission pursuant to the Investment Company Act of
1940. The Plan provides for payment of fees to Federated Securities Corp. to
finance any activity which is principally intended to result in the sale of the
Fund's shares. Such activities may include the advertising and marketing of
shares; preparing, printing, and distributing prospectuses and sales literature
to prospective shareholders or brokers; and implementing and operating the Plan.
Pursuant to the Plan, Federated Securities Corp. may pay fees to brokers for
distribution services.
The Directors expect that the adoption of the Plan will result in the sale of a
sufficient number of shares so as to allow the Fund to achieve economic
viability. It is also anticipated that an increase in the size of the Fund will
facilitate more efficient portfolio management and assist the Fund in seeking to
achieve its investment objective.
During the period from January 13, 1992 (date of initial public investment) to
November 30, 1992 and for the year ended November 30, 1993, brokers and
administrators (financial institutions) received fees in the amount of $110,084
and $715,878, respectively, and voluntarily waived $0 and $143,783 respectively
pursuant to the distribution plan.
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
remaining maturities of 60 days or less at the time of purchase, at amortized
cost unless the Directors determine this is not fair value; or
at fair value as determined in good faith by the Directors.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider:
yield;
quality;
coupon rate;
maturity;
type of issue;
trading characteristics; and
other market data.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
The SEC has issued an order exempting the Fund from certain provisions of the
Investment Company Act of 1940. As a result, Fund shareholders are allowed to
exchange all or some of their shares for shares in other Fortress Funds or
certain Federated Funds which are sold with a sales charge different from that
of the Fund's or with no sales charge and which are advised by subsidiaries or
affiliates of Federated Investors. These exchanges are made at net asset value
plus the difference between the Fund's sales charge already paid and any sales
charge of the fund into which the shares are to be exchanged, if higher.
Certain other funds, including funds that are not advised by subsidiaries or
affiliates of Federated Investors which do not have a sales charge, to exchange
their shares for Fund shares on a basis other than their current offering price.
These exchanges may be made to the extent that such shares were acquired in a
prior exchange, at net asset value, for shares of a Federated Fund carrying a
sales charge.
REDUCED SALES CHARGE
If a shareholder making such an exchange qualifies for a reduction or
elimination of the sales charge, the shareholder must notify Federated
Securities Corp. or State Street Bank in writing.
REQUIREMENTS FOR EXCHANGE
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. 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 residing in any state in which the
fund 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.
Further information on the exchange privilege and prospectuses for Fortress
Funds or certain Federated Funds are available by calling the Fund.
TAX CONSEQUENCES
Exercise of this exchange privilege is treated as a sale for federal income tax
purposes. Depending upon the circumstances, a short or long-term capital gain or
loss may be realized.
MAKING AN EXCHANGE
Instructions for exchanges for Fortress Funds or certain Federated Funds must be
given in writing by the shareholder. Written instructions may require a
signature guarantee.
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
respective prospectuses under "Redeeming Investment Shares" or "Redeeming
Fortress Shares." Although Federated Services Company 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 Fortress Shares redeemed within one to four years of purchase may be
subject to a contingent deferred sales charge. The amount of the contingent
deferred sales charge is based upon the amount of the administrative fee paid at
the time of purchase by the distributor to the financial institutions for
services rendered, and the length of time the investor remains a holder of
Fortress Shares. Should financial institutions elect to receive an amount less
than the administrative fee that is stated in the Fortress Shares prospectus for
servicing a particular shareholder, the contingent deferred sales charge 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 respective class'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.
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
Fund shares.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's total return for Investment Shares for the fiscal year ended November
30, 1993 was 7.12%. The Fund's cumulative total return for Fortress Shares for
the period from August 31, 1993 (date of initial public offering) to November
30, 1993 was (1.18%).
The average annual total return of Investment Shares for the Fund is the average
compounded rate of return for a given period that would equate a $1,000 initial
investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of shares owned at the
end of the period by the 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
load, adjusted over the period by any additional shares, assuming the monthly
reinvestment of all dividends and distributions.
Cumulative total return reflects Fortress Shares' total performance over a
specific period of time. Fortress Shares' total return is representative of only
three months of activity since the Fortress Shares' date of initial public
investment. This total return assumes and is reduced by the payment of the
maximum sales load and the contingent deferred sales charge.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for Investment Shares for the thirty-day period ended November
30, 1993 was 5.25%. The yield for Fortress Shares was 5.35% for the same period.
The yield of the Fund for each of Investment Shares and Fortress Shares is
determined by dividing the net investment income per share (as defined by the
Securities and Exchange Commission) earned by Investment Shares or Fortress
Shares over a thirty-day period by the maximum offering price per share of the
applicable Shares 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 of Investment Shares or
Fortress Shares does not necessarily reflect income actually earned by the
applicable Shares 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 Investment Shares and Fortress 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 Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per share fluctuate daily. Both net earnings and offering
price per share are factors in the computation of yield and total return.
From time to time, the Fund may advertise the performance of Investment Shares
or Fortress Shares compared to similar funds or portfolios using certain
indices, reporting services and financial publications. These may include the
following:
LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in offering price over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the "short-term
investment grade debt funds" category in advertising and sales literature.
MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
Advertisements and other sales literature for the Fund 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 Investment Shares
or Fortress 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 load or, in the case of Fortress Shares, the contingent
deferred sales charge.
Advertising and sales literature may show the Fund's net asset value history in
relation to certain political and economic events.
From time to time as it deems appropriate, the Fund may advertise its
performance using charts, graphs, and descriptions, compared to federally
insured bank products including certificates of deposit and time deposits and to
money market funds using the Lipper Analytical Services money market instruments
average.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's preformance. 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 used/or indices which the Fund uses in advertising may include:
APPENDIX
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STANDARD AND POOR'S 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.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING
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.
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.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
P-1--Issuers rated PRIME-1 (for related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. PRIME-1 repayment
capacity will normally be evidenced by the following characteristics:
Conservative capitalization structures with moderate reliance on debt and ample
asset protection; Broad margins in earning coverage of fixed financial charges
and high internal cash generation; Well established access to a range of
financial markets and assured sources of alternative liquidity.
P-2--Issuers rated PRIME-2 (for related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S COMMERCIAL PAPER RATINGS
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1."
FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS
FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
3070701B (1/94)
MULTI-STATE MUNICIPAL INCOME FUND
(A PORTFOLIO OF FIXED INCOME SECURITIES, INC.)
PROSPECTUS
The shares of Multi-State Municipal Income Fund (the "Fund") offered by this
prospectus represent interests in a diversified portfolio of securities which is
one of a series of investment portfolios in Fixed Income Securities, Inc. (the
"Corporation"), an open-end management investment company (a mutual fund). The
investment objective of the Fund is to provide a high level of current income
which is exempt from federal regular income tax by investing primarily in a
portfolio of municipal securities.
THESE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK AND ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, 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 the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated January 31,
1994, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference into 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 January 31, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Characteristics 4
Participation Interests 4
Municipal Leases 4
Industrial Development Bonds 5
Inverse Floaters 5
Restricted Securities 6
When-Issued and Delayed
Delivery Transactions 6
Futures Contracts and Options
to Buy or Sell Such Contracts 6
Temporary Investments 6
Municipal Securities 7
Investment Risks 8
Investment Limitations 8
NET ASSET VALUE 9
- ------------------------------------------------------
INVESTING IN THE FUND 9
- ------------------------------------------------------
Share Purchases 9
Through a Financial Institution 9
Directly by Mail 9
Conversion to Federal Funds 9
Directly by Wire 10
Minimum Investment Required 10
What Shares Cost 10
Systematic Investment Program 10
Certificates and Confirmations 10
Dividends and Distributions 10
REDEEMING SHARES 11
- ------------------------------------------------------
Through a Financial Institution 11
Directly by Mail 12
Signatures 12
Receiving Payment 12
Contingent Deferred Sales Charge 12
Elimination of Contingent Deferred
Sales Charge 13
Systematic Withdrawal Program 13
Reinvestment Privilege 14
Redemption Before Purchase
Instruments Clear 14
Accounts with Low Balances 14
Exchanges for Shares of Other Funds 14
FIXED INCOME SECURITIES, INC. INFORMATION 15
- ------------------------------------------------------
Management of Fixed Income
Securities, Inc. 15
Board of Directors 15
Investment Adviser 15
Advisory Fees 15
Adviser's Background 15
Portfolio Manager's Background 16
Distribution of Fund Shares 16
Distribution Plan 16
Administration of the Fund 17
Administrative Services 17
Shareholder Services Plan 17
Custodian 17
Transfer Agent and Dividend
Disbursing Agent 17
Legal Counsel 18
Independent Auditors 18
Expenses of the Fund 18
SHAREHOLDER INFORMATION 18
- ------------------------------------------------------
Voting Rights 18
TAX INFORMATION 18
- ------------------------------------------------------
Federal Income Tax 18
Pennsylvania Corporate and Personal
Property Taxes 20
Other State and Local Taxes 20
PERFORMANCE INFORMATION 20
- ------------------------------------------------------
FINANCIAL STATEMENTS 21
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 35
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
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 the lesser of
original purchase price or redemption proceeds, as applicable)(1)................. 3.00%
Exchange Fee........................................................................ None
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(2).................................................... 0.00%
12b-1 Fee........................................................................... 0.75%
Other Expenses (after expense reimbursement)........................................ 0.75%
Shareholder Servicing Fee....................................................... 0.25%
Total Fund Operating Expenses(3)................................................ 1.50%
</TABLE>
(1) The contingent deferred sales charge is imposed on the lesser of the net
asset value of the redeemed shares at the time of purchase or the net asset
value of the redeemed shares at the time of redemption at the rate of 3% for
shares redeemed within one year from the purchase date, and thereafter at the
rate of 2% for shares redeemed within three years of the purchase date. No
contingent deferred sales charge is imposed on shares redeemed more than three
years from the purchase date.
(2) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time at
its sole discretion. The maximum management fee is 0.40%.
(3) The Total Fund Operating Expenses in the table above are based on expenses
expected during the fiscal year ending November 30, 1994. The Total Fund
Operating Expenses were 0.75% for the fiscal year ended November 30, 1993 and
were 4.63% absent the voluntary waiver of the management fee and the voluntary
reimbursement of certain other operating expenses.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUND WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND
EXPENSES, SEE "INVESTING IN THE FUND" 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.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
- ---------------------------------------------------------------------------------- ------ -------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (1) 5% annual
return and (2) redemption at the end of each time period........................ $ 46 $70
You would pay the following expenses on the same investment, assuming no
redemption...................................................................... $ 15 $47
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
MULTI-STATE MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
See Independent Auditors' Report on page 35.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30, 1993*
-------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- --------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------------------------
Net investment income 0.27
- --------------------------------------------------------------------------------
Net realized and unrealized gain on investments 0.24
----------------
- --------------------------------------------------------------------------------
Total from investment operations 0.51
----------------
- --------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- --------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.27)
- --------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 3) (0.02)
----------------
- --------------------------------------------------------------------------------
Total distributions (0.29)
----------------
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.22
----------------
- --------------------------------------------------------------------------------
TOTAL RETURN** 5.07 %
- --------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Expenses 0.75 %(a)
- --------------------------------------------------------------------------------
Net investment income 5.16 %(a)
- --------------------------------------------------------------------------------
Expenses waiver/reimbursement (b) 3.88 %(a)
- --------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $5,752
- --------------------------------------------------------------------------------
Portfolio turnover rate 2 %
- --------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from June 1, 1993 (date of initial public
investment) to November 30, 1993.
** Based on net asset value which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) Increase/decrease in above expense/income ratios due to waivers or
reimbursements of expenses (Note 5).
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report dated November 30, 1993, which can be obtained free of charge.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
Fixed Income Securities, Inc. was incorporated under the laws of the State of
Maryland on October 15, 1991. The Articles of Incorporation permit the
Corporation to offer separate series of shares of capital stock representing
interests in separate portfolios of securities. The shares in any one portfolio
may be offered in separate classes. With respect to this Fund, as of the date of
this prospectus the Board of Directors ("Directors") have not established any
classes of shares.
Shares of the Fund are designed for customers of financial institutions such as
broker/dealers, banks, fiduciaries, and investment advisers as a convenient
means of accumulating an interest in a professionally managed, diversified
portfolio investing primarily in municipal securities. A minimum initial
investment of $1,500 is required. Subsequent investments must be in amounts of
at least $100.
Except as otherwise noted in this prospectus, shares of the Fund are sold at net
asset value and are redeemed at net asset value. However, a contingent deferred
sales charge is imposed on certain shares of the Fund which are redeemed within
three full years of the date of purchase. Fund assets may be used in connection
with the distribution of shares of the Fund.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide a high level of current
income which is exempt from federal regular income tax (federal regular income
tax does not include the federal alternative minimum tax). Interest income of
the Fund that is exempt from federal income tax retains its tax-free status when
distributed to the Fund's shareholders. 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 limited to municipal securities. Unless indicated otherwise,
the investment policies described below may be changed by the Directors without
shareholder approval. Shareholders will be notified before any material change
in these policies becomes effective.
ACCEPTABLE INVESTMENTS. Municipal securities are debt obligations issued by or
on behalf of states, territories, and possessions of the United States,
including the District of Columbia, and their political subdivisions, agencies
and instrumentalities, the interest from which is exempt from federal regular
income tax.
As a matter of investment policy, which may not be changed without shareholder
approval, under normal circumstances, the Fund will be invested so that at least
80% of the income from investments will be exempt from federal regular income
tax or that at least 80% of its net assets are invested in obligations, the
interest from which is exempt from federal regular income tax. Under normal
circumstances, the Fund, which can be changed without shareholder approval, will
invest at least 65% of its assets in municipal securities issued by more than
two states.
The Fund may also engage in put and call options, futures contracts, and options
on futures contracts for hedging purposes.
CHARACTERISTICS. The municipal securities in which the Fund invests are
rated, at the time of purchase, Baa or better by Moody's Investors Service,
Inc. ("Moody's") or BBB or better by Standard & Poor's Corporation ("S&P")
or Fitch Investors Service ("Fitch"). In certain cases the Fund's adviser
may choose bonds which are unrated if it determines that such bonds are of
comparable quality or have similar characteristics to investment grade
bonds. Bonds rated "BBB" by S&P or "Baa" by Moody's have speculative
characteristics. Changes in economic conditions or other circumstances are
more likely to lead to weakened capacity to make principal and interest
payments than higher rated bonds. If the Fund purchases an investment grade
bond, and the rating of such bond is subsequently downgraded so that the
bond is no longer classified as investment grade, the Fund is not required
to drop the bond from the portfolio, but will consider whether such action
is appropriate. A description of the rating categories is contained in the
Appendix to the Statement of Additional Information.
PARTICIPATION INTERESTS. The Fund may purchase participation interests from
financial institutions such as commercial banks, savings and loan associations
and insurance companies. These participation interests give the Fund an
undivided interest in one or more underlying municipal securities. The financial
institutions from which the Fund purchases participation interests frequently
provide or obtain irrevocable letters of credit or guarantees to attempt to
assure that the participation interests are of high quality. The Directors of
the Fund will evaluate whether participation interests meet the prescribed
quality standards for the Fund.
MUNICIPAL LEASES. Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities and may be considered to be illiquid. They may take the form of a
lease, an installment purchase contract, a conditional sales contract or a
participation certificate of any of the above.
Also included within the general category of municipal securities are certain
lease obligations or installment purchase contract obligations and
participations therein (hereinafter collectively called "lease obligations") of
municipal authorities or entities. Although lease obligations do not constitute
general obligations of the municipality for which the municipality's taxing
power is pledged, a lease obligation is ordinarily backed by the municipality's
covenant to budget for, appropriate and make the payments due under the lease
obligation. Interest on lease obligations is tax-exempt to the same extent as if
the municipality had issued debt obligations to finance the underlying project
or purchase. However, certain lease obligations contain "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. In addition to the "non-appropriation" risk,
these securities represent a relatively new type of financing that has not yet
developed the depth of marketability associated with more conventional bonds and
some lease obligations may be illiquid. Although "non-appropriation" lease
obligations are generally secured by the leased property, disposition of the
property in the event of foreclosure might prove difficult. In addition, the tax
treatment of
such obligations in the event of non-appropriation is unclear. The Fund does not
intend to invest more than 10% of its total assets in lease obligations that
contain "non-appropriation" clauses.
In determining the liquidity of municipal lease securities, the Fund's
investment adviser, under the authority delegated by the Directors, will base
its determination on the following factors:
- whether the lease can be terminated by the lessee;
- the potential recovery, if any, from a sale of the leased property upon
termination of the lease;
- the lessee's general credit strength (e.g., its debt, administrative,
economic and financial characteristics and prospects);
- the likelihood that the lessee will discontinue appropriating funding for
the leased property because the property is no longer deemed essential to
its operations (e.g., the potential for an "event of non-appropriation");
and
- any credit enhancement or legal recourse provided upon an event of
non-appropriation or other termination of the lease.
INDUSTRIAL DEVELOPMENT BONDS. As discussed above, industrial development bonds
are generally issued to provide financing aid to acquire sites or construct and
equip facilities for use by privately or publicly owned corporations. Most state
and local governments have the power to permit the issuance of industrial
development bonds to provide financing for such corporations in order to
encourage the corporations to locate within their communities. Industrial
development bonds do not represent a pledge of credit or create any debt of a
municipality or a public authority, and no taxes may be levied for the payment
of principal or interest on these bonds. The principal and interest is payable
solely out of monies generated by the entities using or purchasing the sites or
facilities. These bonds will be considered municipal securities if the interest
paid on them, in the opinion of bond counsel or in the opinion of the officers
of the Fund and/or the adviser of the Fund, is exempt from federal regular
income tax.
INVERSE FLOATERS. The Fund may invest in various types of derivative municipal
securities whose interest rates bear an inverse relationship to the interest
rate on another security or the value of an index ("inverse floaters"). Because
changes in the interest rate on the other security or index inversely effect the
residual interest paid on the inverse floater, the value of an inverse floater
is generally more volatile than that of a fixed rate bond. Inverse floaters have
interest rate adjustment formulas which generally reduce or, in the extreme,
eliminate the interest paid to the Fund when short-term interest rates rise, and
increase the interest paid to the Fund when short-term interest rates fall.
Inverse floaters have varying degrees of liquidity, and the market for these
securities is new and relatively volatile. These securities tend to underperform
the market for fixed rate bonds in a rising interest rate environment and tend
to fall in value more rapidly, but tend to outperform the market for fixed rate
bonds when interest rates decline and tend to rise in value more rapidly. Shifts
in the relationship between short-term and long-term interest rates may alter
this tendency, however. In return for this volatility, inverse floaters
typically offer the potential for yields exceeding the yields available on fixed
rate bonds with comparable credit quality and maturity. These securities usually
permit the investor to convert the floating rate to a fixed rate (normally
adjusted downward), and this optional conversion feature may provide a partial
hedge against rising interest rates if exercised at an opportune time.
RESTRICTED SECURITIES. The Fund may invest up to 10% of its total assets 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 laws. To the
extent these securities are deemed to be illiquid, the Fund will limit its
purchases, together with other securities considered to be illiquid, to 15% of
its net assets.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase municipal
securities on a when-issued or delayed delivery basis. 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.
FUTURES CONTRACTS AND OPTIONS TO BUY OR SELL SUCH CONTRACTS. The Fund may
utilize bond futures contracts and options to a limited extent. Specifically,
the Fund may enter into futures contracts provided that not more than 5% of its
assets are required as a futures contract deposit; in addition, the Fund may
enter into futures contracts and options transactions only to the extent that
obligations under such contracts or transactions represent not more than 20% of
the Fund's assets.
Futures contracts and options may be used for several reasons: to maintain cash
reserves while remaining fully invested, to facilitate trading, to reduce
transactions costs, or to seek higher investment returns when a futures contract
is priced more attractively than the underlying municipal security or index. The
Fund may not use futures contracts or options transactions to leverage its
assets.
For example, in order to remain fully invested in bonds, while maintaining
liquidity to meet potential shareholder redemptions, the Fund may invest a
portion of its assets in a bond futures contract. Because futures contracts only
require a small initial margin deposit, the Fund would then be able to maintain
a cash reserve to meet potential redemptions, while at the same time remaining
fully invested. Also, because the transactions costs of futures contracts and
options may be lower than the costs of investing in bonds directly, it is
expected that the use of futures contracts and options may reduce the Fund's
total transactions costs.
The primary risks associated with the use of futures contracts and options are:
(i) imperfect correlation between the change in market value of the bonds held
by the Fund and the prices of futures contracts and options; and (ii) possible
lack of a liquid secondary market for a futures contract and the resulting
inability to close a futures position prior to its maturity date. The risk of
imperfect correlation will be minimized by investing only in those contracts
whose price fluctuations are expected to resemble those of the Fund's underlying
securities. The risk that the Fund will be unable to close out a futures
position will be minimized by entering into such transactions on a national
exchange with an active and liquid secondary market. In general, the futures
market is more liquid than the municipal bond market, and so by investing in
futures, liquidity may be improved.
TEMPORARY INVESTMENTS. From time to time, during periods of other than normal
market conditions, the Fund may invest in short-term temporary investments which
may or may not be exempt from federal income tax. These temporary investments
include: tax-exempt variable and floating rate demand notes; tax-free commercial
paper; other temporary municipal securities; obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities; other debt securities;
commercial paper; certificates of deposit of domestic branches of U.S. banks;
and repurchase agreements (arrange-
ments in which the organization selling the Fund a security agrees at the time
of sale to repurchase it at a mutually agreed upon time and price).
There are no rating requirements applicable to temporary investments. However,
the investment adviser will limit temporary investments to those rated within
the investment grade categories described under "Acceptable
Investments-Characteristics (if rated) or those which the investment adviser
judges to have the same characteristics as such investment grade securities (if
unrated).
Although the Fund is permitted to make taxable, temporary investments, there is
no current intention of generating income subject to federal regular income tax.
MUNICIPAL SECURITIES. Municipal securities are generally issued to finance
public works, such as airports, bridges, highways, housing, hospitals, mass
transportation projects, schools, streets, and water and sewer works. They are
also issued to repay outstanding obligations, to raise funds for general
operating expenses, and to make loans to other public institutions and
facilities.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. Interest on and principal of revenue bonds, however, are
payable only from the revenue generated by the facility financed by the bond or
other specified sources of revenue. Revenue bonds do not represent a pledge of
credit or create any debt of or charge against the general revenues of a
municipality or public authority. Industrial development bonds are typically
classified as revenue bonds.
Industrial development bonds are issued by or on behalf of public authorities to
provide financing aid to acquire sites or construct and equip facilities for
privately or publicly owned corporations. The availability of this financing
encourages these corporations to locate within the sponsoring communities and
thereby increases local employment.
Municipal securities may carry fixed, floating or inverse floating rates of
interest. Fixed rate securities bear interest at the same rate from issuance
until maturity. The interest rate on floating rate securities is subject to
adjustment based upon changes in market interest rates or indices, such as a
bank's prime rate or a published market index. The interest rate may be adjusted
at specified intervals or immediately upon any change in the applicable index
rate. The interest rate for most floating rate securities varies directly with
changes in the index rate, so that the market value of the security will
approximate its stated value at the time of each adjustment. However, inverse
floating rate securities have interest rates that vary inversely with changes in
the applicable index rate, such that the security's interest rate rises when
market interest rates fall and falls when market interest rates rise. The market
value of floating rate securities is less sensitive than fixed rate securities
to changes in market interest rates. In contrast, the market value of inverse
floating rate securities is more sensitive to market rate changes than fixed or
floating rate securities. The effect of market rate changes on securities
depends upon a variety of factors, including market expectations as to future
changes in interest rates and, in the case of floating and inverse floating rate
securities, the frequency with which the interest rate is adjusted and the
multiple of the index rate used in making the adjustment.
Most municipal securities pay interest in arrears on a semiannual or more
frequent basis. However, certain securities, typically known as capital
appreciation bonds or zero coupon bonds, do not provide
for any interest payments prior to maturity. Such securities are normally sold
at a discount from their stated value, or provide for periodic increases in
their stated value to reflect a compounded interest rate. The market value of
these securities is also more sensitive to changes in market interest rates than
securities that provide for current interest payments.
The Fund will not generally invest more than 25% of its total assets in any one
industry. Governmental issuers of municipal securities are not considered part
of any "industry." However, municipal securities backed only by the assets and
revenues of nongovernmental users may, for this purpose, be deemed to be related
to the industry in which such nongovernmental users engage, and the 25%
limitation would apply to such obligations. It is nonetheless possible that the
Fund may invest more than 25% of its assets in a broader segment of the
municipal securities market, such as revenue obligations of hospitals and other
health care facilities, housing agency revenue obligations, or airport revenue
obligations. This would be the case only if the Fund determines that the yields
available from obligations in a particular segment of the market justified the
additional risks associated with a large investment in such segment. Although
such obligations could be supported by the credit of governmental users or by
the credit of nongovernmental users engaged in a number of industries, economic,
business, political and other developments generally affecting the revenues of
such users (for example, proposed legislation or pending court decisions
affecting the financing of such projects and market factors affecting the demand
for their services or products) may have a general adverse effect on all
municipal securities in such a market segment. The Fund reserves the right to
invest up to 25% of its assets in industrial development bonds or private
activity bonds or in securities of issuers located in the same state.
INVESTMENT RISKS
Yields on municipal securities depend on a variety of factors, including: the
general conditions of the municipal note market and of the municipal bond
market; the size of the particular offering; the maturity of the obligations;
and the rating of the issue. The ability of the Fund to achieve its investment
objective also depends on the continuing ability of the issuers of municipal
securities and participation interests, or the guarantors of either, to meet
their obligations for the payment of interest and principal when due. Since the
Fund will invest primarily in municipal securities bearing fixed rates of
interest, the net asset value of the Fund's shares will generally vary inversely
with changes in prevailing interest rates.
INVESTMENT LIMITATIONS
The Fund will not borrow money directly or through reverse repurchase agreements
(an arrangement in which the Fund sells a portfolio investment for a percentage
of its cash value with an agreement to buy it back on a set date) or pledge
securities except, under certain circumstances, the Fund may borrow up to
one-third of the value of its total assets and pledge up to 10% of the value of
those assets to secure such borrowings.
The above investment limitation cannot be changed without shareholder approval.
The following limitation, however, may be changed by the Directors without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Fund will not invest more than 5% of its total assets in industrial
development bonds when the payment of principal and interest is the
responsibility of companies (or guarantors, where applicable) with less than
three years of continuous operations, including the operation of any
predecessor.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per share fluctuates. It is determined by dividing
the sum of the market value of all securities and all other assets, less
liabilities, by the number of shares outstanding.
INVESTING IN THE FUND
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased through an investment dealer which has a sales agreement with the
distributor, or directly from the distributor, Federated Securities Corp.,
either by mail or by wire. 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 of
the Fund. 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 BY MAIL. To purchase shares by mail directly from Federated Securities
Corp.:
- complete and sign the new account form available from the Fund;
- enclose a check made payable to Multi-State Municipal Income Fund; and
- send both to the Fund's transfer agent, Federated Services Company,
Federated Investors Tower, Pittsburgh, PA 15222-3779.
Purchases by mail are considered received after payment by check is converted by
Federated Services Company into federal funds. This is generally the next
business day after Federated Services Company receives the check.
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. Federated Services Company acts as the
shareholder's agent in depositing checks and converting them to federal funds.
DIRECTLY BY WIRE. To purchase shares directly from Federated Securities Corp.
by Federal Reserve Wire, call the Fund. All information needed will be taken
over the telephone, and the order is considered received when Federated Services
Company receives payment by wire.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in shares is $1,500. Subsequent investments must
be in amounts of at least $100.
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, Columbus Day, Veteran's Day, Thanksgiving Day and
Christmas Day.
Under certain circumstances, described under "Redeeming Shares," shareholders
may be charged a contingent deferred sales charge by the distributor at the time
shares are redeemed.
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
maintained at an Automated Clearing House ("ACH") member institution, and
invested in shares at the net asset value next determined after an order is
received by Federated Services Company. A shareholder may apply for
participation in this program through 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 and redemption are sent to each
shareholder. Monthly statements are sent to report dividends paid during the
month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. Dividends include substantially
all of the investment income earned by the Fund, less its expenses, other than
distribution fees made pursuant to Rule 12b-1 for the sale of Fund shares, which
fees are charged to the Fund's paid-in capital for tax purposes. Accordingly, a
certain portion of dividend distributions may represent distributions in excess
of net investment income. Distributions of any net realized long-term capital
gains will be made at least once every twelve months. Dividends and
distributions are automatically reinvested on payment dates in additional shares
of the Fund at net asset value unless shareholders request cash payments on the
application or by writing to Federated Securities Corp.
Shares purchased through a financial institution, for which payment by wire is
received by Federated Services Company on the business day following the order,
begin to earn dividends on the day that the wire payment is received. Otherwise,
shares purchased by wire begin to earn dividends on the business day after wire
payment is received by Federated Services Company. Shares purchased by mail, or
through a financial institution, if the financial institution's payment is by
check, begin to earn dividends on the second business day after the check is
received by Federated Services Company.
Shares earn dividends through the business day on which proper written
redemption instructions are received by Federated Services Company.
See the section entitled "Tax Information" in this prospectus for a further
discussion of the effect of the payment of distribution fees made pursuant to
Rule 12b-1.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at their net asset value next determined after Federated
Services Company receives the redemption request, less any applicable contingent
deferred sales charge (see "Contingent Deferred Sales Charge" below).
Redemptions will be made on days on which the Fund computes its net asset value.
Redemption requests must be received in proper form and can be made through a
financial institution or directly from the Fund by written request.
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. If, at any time, the
Fund shall determine it necessary to terminate or modify this method of
redemption, shareholders will be promptly notified.
Before a financial institution may request redemption by telephone on behalf of
a shareholder, an authorization form permitting the Fund to accept redemption
requests by telephone must be completed. Telephone redemption 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. 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, such as "Directly By Mail," should be considered.
DIRECTLY BY MAIL
Shareholders may also redeem shares by sending a written request to Federated
Services Company, Federated Investors Tower, Pittsburgh, PA 15222-3779. This
written request must include the shareholder's name, the Fund name, the account
number, and the share or dollar amount to be redeemed. Shares will be redeemed
at their net asset value next determined after Federated Services Company
receives the redemption request, less any applicable contingent deferred sales
charge (see "Contingent Deferred Sales Charge" below).
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 Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
- a member firm of the New York, American, Boston, Midwest, or Pacific
Stock Exchange;
- a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
RECEIVING PAYMENT. A check for the proceeds is mailed within seven days after
receipt of proper written redemption instructions from a broker or from the
shareholder.
CONTINGENT DEFERRED SALES CHARGE
Shareholders redeeming shares from their Fund accounts within three full years
of the purchase date of those shares will be charged a contingent deferred sales
charge by the Fund's distributor. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the redeemed
shares at the time of purchase or the net asset value of the redeemed shares at
the time of redemption in accordance with the following schedule:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SHARES HELD SALES CHARGE
--------------------------------------------- ---------------------------
<S> <C>
Less than one year........................... 3.00%
More than one year but less than three years... 2.00%
More than three years........................ None
</TABLE>
The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. The contingent deferred sales charge will not be imposed with
respect to: (1) shares acquired through the reinvestment of dividends or
distributions of long-term capital gains; or (2) shares held for more than three
full years from the date of purchase. Redemptions will be processed in a manner
intended to maximize the amount of redemption which will not be subject to a
contingent deferred sales charge. In computing the amount of the applicable
contingent deferred sales charge, redemptions are deemed to have occurred in the
following order: (1) shares acquired through the reinvestment of dividends and
long-term capital gains; (2) shares held for more than three full years from the
date of purchase; (3) shares held for fewer than three years from the date of
purchase on a first-in-first-out basis. A contingent deferred sales charges is
not assessed in connection with an exchange of Fund shares for shares in Florida
Municipal Income Fund, New Jersey Municipal Income Fund, and Texas Municipal
Income Fund, portfolios of Municipal Securities Income Trust (see "Exchanges for
Shares of Other Funds" below). Any contingent deferred sales charge imposed 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. Moreover, the contingent deferred sales charge will be
eliminated with respect to certain redemptions (see "Elimination of Contingent
Deferred Sales Charge" below).
ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will be eliminated with respect to the
following redemptions: (1) redemptions following the death or disability, as
defined in Section 72(m)(7) of the Internal Revenue Code of 1986, of a
shareholder; (2) redemptions in connection with certain distributions from
Individual Retirement Accounts, qualified retirement plans or tax-sheltered
annuities; and (3) involuntary redemptions by the Fund of shares in shareholder
accounts that do not comply with the minimum balance requirement. In addition,
to the extent that the distributor does not advance commissions to certain
financial institutions for purchases made by certain individuals, no contingent
deferred sales charge will be imposed on redemptions of shares held by
Directors, employees and sales representatives of the Fund, the distributor, or
affiliates of the Fund or distributor; employees of any financial institution
that sells shares of the Fund pursuant to a sales agreement with the
distributor; and spouses and children under the age of 21 of the aforementioned
persons. Finally, no contingent deferred sales charge will be imposed on the
redemption of shares originally purchased through a bank trust department or
investment adviser registered under the Investment Advisers Act of 1940, to the
extent that no commission was advanced for purchases made by such entities. The
Directors reserve the right to discontinue the elimination of the contingent
deferred sales charge. Shareholders would be notified of such elimination. Any
shares purchased prior to the termination of such a waiver would have the
contingent deferred sales charge eliminated as provided in the Fund's prospectus
at the time of purchase of such shares. If a shareholder making a redemption
qualifies for an elimination of the contingent deferred sales charge, the
shareholder must notify Federated Securities Corp. or Federated Services Company
in writing that he is entitled to such elimination.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive monthly or quarterly payments of a
predetermined amount 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; the minimum
withdrawal amount is $100. 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 invested at
least $10,000 in the Fund (at current offering price).
A shareholder may apply for participation in this program through Federated
Securities Corp. A contingent deferred sales charge is imposed on shares
redeemed through this program within three full years of their purchase dates.
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
and will be credited for any contingent deferred sales charges previously paid
in connection with the redemption of the shares being repurchased. The
contingent deferred sales charge on redeemed shares will be reimbursed by the
distributor from its own assets. Federated Securities Corp. must be notified by
the shareholder in writing or by his financial institution of the reinvestment
in order to receive this credit for the contingent deferred sales charge. If the
shareholder redeems his shares, there may be tax consequences.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When shares are purchased by check, or through ACH, the proceeds from the
redemption of those shares are not available, and the shares may not be
exchanged, until the Fund or its agents are reasonably certain that the purchase
check has cleared, which could take up to ten calendar days.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below the 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. A contingent deferred sales charge will not be imposed on such
redemptions.
EXCHANGES FOR SHARES OF OTHER FUNDS
In order to provide greater flexibility to Fund shareholders whose investment
objectives have changed, the Fund allows shareholders to exchange some or all of
their Fund shares for shares of Florida Municipal Income Fund, New Jersey
Municipal Income Fund and Texas Municipal Income Fund, portfolios of Municipal
Securities Income Trust, which are also advised by Federated Advisers. Exchanges
are made at net asset value without being assessed a contingent deferred sales
charge on the exchanged shares. To the extent that a shareholder exchanges
shares of the Fund for shares in Florida Municipal Income Fund, New Jersey
Municipal Income Fund or Texas Municipal Income Fund, the
time for which the exchanged-from shares were held will be added, or tacked, to
the time for which the exchanged-from shares were held for purposes of
satisfying the applicable holding period.
Shareholders using this privilege must exchange shares having a net asset value
of at least $1,500. Shareholders who desire to automatically exchange shares of
a predetermined amount on a monthly, quarterly, or annual basis may take
advantage of a systematic exchange privilege. A shareholder may obtain further
information on these exchange privileges by calling Federated Securities Corp.
or his financial institution. See the section entitled "Contingent Deferred
Sales Charge" in this prospectus for more information. Before making an
exchange, a shareholder must receive a prospectus of the fund for which the
exchange is being made.
The ability to exchange shares is available to shareholders residing in any
state in which the shares being acquired may be legally sold. Exercise of this
exchange privilege is treated as a sale for federal income tax purposes.
Depending upon the circumstances, a short or long-term capital gain or loss may
be realized.
FIXED INCOME SECURITIES, INC. INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF FIXED INCOME SECURITIES, INC.
BOARD OF DIRECTORS. Fixed Income Securities, Inc. is managed by a Board of
Directors. The Board of Directors is responsible for managing the business
affairs of Fixed Income Securities, Inc. and for exercising all of the powers of
Fixed Income Securities, Inc. except those reserved for the shareholders. An
Executive Committee of the Board of Directors handles the Board's
responsibilities between meetings of the Board.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Federated
Advisers, the Fund's investment adviser (the "Adviser"), subject to direction by
the Directors. The Adviser continually conducts investment research and
supervision for the Fund and is responsible for the purchase and 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 .40 of 1% of the Fund's average daily net assets. Under the
advisory contract, which provides for the voluntary waiver of the advisory
fee by the Adviser, the Adviser may voluntarily waive some or all of its
fee. The Adviser can terminate this voluntary waiver of expenses 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 $70 billion, including over $8
billion in municipal investments. 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 MANAGER'S BACKGROUND. Jonathan C. Conley has been the Fund's
portfolio manager since June 1993. Mr. Conley joined Federated Investors in
1979 and has been a Vice President of the Fund's investment adviser since
1982. Mr. Conley is a Chartered Financial Analyst and received his M.B.A.
in Finance from the University of Virginia.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal distributor (the "Distributor") for
shares of the Fund. Federated Securities Corp. is located at Federated Investors
Tower, Pittsburgh, Pennsylvania 15222-3779. It is a Pennsylvania corporation
organized on November 14, 1969, and is the principal distributor for a number of
investment companies. Federated Securities Corp. is a subsidiary of Federated
Investors.
DISTRIBUTION PLAN. The Distributor will pay dealers an amount equal to
2.00% of the net asset value of Fund shares purchased by their clients or
customers. These payments will be made directly by the Distributor from its
assets, and will not be made from the assets of the Fund.
Pursuant to the provisions of a distribution plan adopted in accordance
with the Investment Company Act Rule 12b-1 (the "Plan"), the Fund will pay
to the Distributor an amount computed at an annual rate of 0.75 of 1% of
the average daily net asset value of Fund shares to reimburse the
Distributor for advancements paid to dealers and to finance any activity
which is principally intended to result in the sale of shares subject to
the Plan. The Fund will accrue the distribution fee as a liability of the
Fund, and such method of accrual will reduce the Fund's net assets and net
asset value accordingly. See the section entitled "Tax Information" in this
prospectus for a further discussion of the effect of the payment of
distribution fees made pursuant to Rule 12b-1 and the payment of
shareholder services fees to financial institutions for administrative and
support services on distributions (of dividends, etc.) to shareholders.
Because distribution fees to be paid by the Fund to the Distributor may not
exceed an annual rate of 0.75 of 1% of the Fund's average daily net assets,
it will take the Distributor a number of years to recoup the expenses that
it has incurred for its distribution and distribution related services
pursuant to the Plan.
The Distributor may select financial institutions (such as a broker/dealer
or bank) to provide sales support services as agents for their clients or
customers who beneficially own shares of the Fund. After a shareholder has
been invested in the Fund for a period of three years, the Distributor will
pay financial institutions a portion of the above-referenced distribution
fee, in an amount up to 0.25 of 1% of the Fund's average daily net assets
based upon the shares owned by the client for a
period exceeding three years. It is anticipated that the payment to
financial institutions will encourage such financial institutions to remain
knowledgeable about the Fund, encourage further sales of the Fund, and
discourage redemptions for reinvestment in new products or products
compensating the financial institutions at a higher level.
The Fund's Plan is a compensation type plan. As such, the Fund makes no
payments to the Distributor except as described above. Therefore, the Fund
does not pay for unreimbursed expenses of the Distributor, including
amounts expended by the Distributor in excess of amounts received by it
from the Fund, interest, carrying or other financing charges in connection
with excess amounts expended, or the Distributor's overhead expenses.
However, the Distributor may be able to recover such amounts or may earn a
profit from future payments made by the Fund under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a
commercial bank or a 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 administrative capacities described above or should Congress
relax current restrictions on depository institutions, the Directors will
consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to
act as underwriters or distributors of securities may differ from
interpretations given to the Glass-Steagall Act and, therefore, banks and
financial institutions may be required to register as dealers pursuant to
state law.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, Inc., which is
a subsidiary of Federated Investors, provides the Fund with the
administrative personnel and services necessary to operate the Fund. Such
services include shareholder servicing and certain legal and accounting
services. Federated Administrative Services, Inc. provides these at
approximate cost.
SHAREHOLDER SERVICES PLAN. The Fund has adopted a Shareholder Services
Plan (the "Services Plan"). Under the Services Plan, financial institutions
will enter into shareholder service agreements with the Fund to provide
administrative support services to their customers who from time to time
may be owners of record or beneficial owners of Fund shares. These
administrative services may include, but are not limited to, the provision
of personal service and maintenance of shareholder accounts. In return for
providing these support services, a financial institution may receive
payments from the Fund at a rate not exceeding 0.25 of 1% of the average
daily net assets of Fund shares beneficially owned by the financial
institution's customers for whom it is holder of record or with whom it has
a servicing relationship.
CUSTODIAN. State Street Bank and Trust Company ("State Street Bank"),
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 the 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
The Fund pays all of its own expenses and its allocable share of Corporation
expenses. These expenses include, but are not limited to, the costs of:
organizing the Corporation and continuing its existence; Directors' fees;
investment advisory and administrative services; printing prospectuses and other
Fund documents for shareholders; registering the Corporation, the Fund and
shares of the Fund; taxes and commissions; issuing, purchasing, repurchasing,
and redeeming shares; fees for custodian, transfer agent, dividend disbursing
agent, shareholder servicing agents, and registrars; printing, mailing,
auditing, accounting, and legal expenses; reports to shareholders and government
agencies; meetings of Directors and shareholders and proxy solicitations
therefor; insurance premiums; association membership dues; and such nonrecurring
and extraordinary items as may arise.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder 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 fund or class, only shares of that fund 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 Corporation's or the Fund's operation and for the election of
Directors under certain circumstances.
Directors may be removed by the Directors or by shareholders at a special
meeting. A special meeting of the shareholders shall be called by the Directors
upon the written request of shareholders owning at least 10% of the outstanding
shares of the Corporation.
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. The Fund will be
treated as a single, separate entity for federal income tax purposes so that
income (including capital gains) and losses realized by the Corporation's other
portfolios will not be combined for tax purposes with those realized by the
Fund.
Shareholders are not required to pay federal regular income tax on any dividends
received from the Fund that represent net interest on tax-exempt municipal
bonds. However, under the Tax Reform Act
of 1986, dividends representing net interest income earned on some municipal
bonds may be included in calculating the federal individual alternative minimum
tax or the federal alternative minimum tax for corporations.
It is anticipated that each monthly distribution of dividends will exceed the
Fund's net investment income as calculated for financial statement reporting
purposes during the applicable period by an amount substantially equal to the
amount of distribution payments made pursuant to the Plan, and charged to the
Fund's paid-in capital for tax purposes during such period. The Securities and
Exchange Commission requires the Fund to indicate that such excess amount is
being paid to shareholders from the Fund's paid-in capital. However, the Fund
anticipates that the entire monthly distribution (including the excess amount)
will constitute tax-exempt income to the shareholders for Federal income tax
purposes, except for the proportionate part of the distribution that may be
considered taxable income if the Fund earns taxable income during the calendar
year. Therefore, the Fund believes that a shareholder should make no adjustment
to the tax cost basis of his existing shareholdings as a result of the monthly
distribution. The Fund also believes that shareholders reinvesting the monthly
distribution should continue to treat the amount of the entire distribution as
the tax cost basis of the additional shares acquired by reason of such
reinvestment.
The Internal Revenue Service ("IRS") may in the future change the accounting
method which is applied to distribution related expenses incurred under Rule
12b-1 Plans and require the Fund to charge such expenses to the Fund's
investment income. If the IRS adopts such a position, the Fund will change its
method for accounting for these expenses accordingly.
The alternative minimum tax, equal to 28% of alternative minimum taxable income
for individuals and 20% for corporations, applies when it exceeds the regular
tax for the taxable year. Alternative minimum taxable income is equal to the
regular taxable income of the taxpayer increased by certain "tax preference"
items not included in regular taxable income and reduced by only a portion of
the deductions allowed in the calculation of the regular tax.
The Tax Reform Act of 1986 treats interest on certain "private activity" bonds
issued after August 7, 1986, as a tax preference item for both individuals and
corporations. Unlike traditional governmental purpose municipal bonds, which
finance roads, schools, libraries, prisons, and other public facilities, private
activity bonds provide benefits to private parties. The Fund may purchase all
types of municipal bonds, including private activity bonds. Thus, should it
purchase any such bonds, a portion of the Fund's dividends may be treated as a
tax preference item.
In addition, in the case of a corporate shareholder, dividends of the Fund which
represent interest on municipal bonds will become subject to the 20% corporate
alternative minimum tax because the dividends are included in a corporation's
"adjusted current earnings." The corporate alternative minimum tax treats 75% of
the excess of a taxpayer's pre-tax "adjusted current earnings" over the
taxpayer's alternative minimum taxable income as a tax preference item.
"Adjusted current earnings" is based upon the concept of a corporation's
"earnings and profits." Since "earnings and profits" generally includes the full
amount of any Fund dividend, and alternative minimum taxable income does not
include the portion of the Fund's dividend attributable to municipal bonds which
are not private activity bonds, the difference will be included in the
calculation of the corporation's alternative minimum tax.
Dividends of the Fund representing net interest income earned on some temporary
investments and any realized net short-term gains are taxed as ordinary income.
These tax consequences apply whether dividends are received in cash or as
additional shares. Information on the tax status of dividends and distributions
is provided annually.
PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Fund:
- the Fund is subject to Pennsylvania corporate franchise tax; and
- Fund shares are not subject to Pennsylvania personal property taxes.
OTHER STATE AND LOCAL TAXES
Distributions representing net interest received on tax-exempt municipal
securities are not necessarily free from income taxes of any state or local
taxing authority. State laws differ on this issue and shareholders are urged to
consult their own tax advisers.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises the total return, yield, and
tax-equivalent yield for shares. Total return represents the change, over a
specific period of time, in the value of an investment in shares after
reinvesting all income and capital gains distributions. It is calculated by
dividing that change by the initial investment and is expressed as a percentage.
The yield of shares is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by shares
over a thirty-day period by the maximum offering price per share of shares on
the last day of the period. This number is then annualized using semi-annual
compounding. The tax-equivalent yield of shares is calculated similarly to the
yield, but is adjusted to reflect the taxable yield that shares would have had
to earn to equal its actual yield, assuming a specific tax rate. The yield and
the tax-equivalent yield do 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 contingent deferred sales
charge, which, if excluded, would increase the total return, yield, and
tax-equivalent yield.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
MULTI-STATE MUNICIPAL INCOME FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
MOODY'S
PRINCIPAL OR S&P*
AMOUNT (NOTE 7) VALUE
- ---------- --------------------------------------------------------- ------------ ----------
<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITY--4.3%
- ----------------------------------------------------------------------
PUERTO RICO--4.3%
---------------------------------------------------------
$ 250,000 Puerto Rico Commonwealth Government Development, Weekly
VRDNs (Credit Suisse, Zurich and Sumitomo Bank, Ltd.
LOCs) (AT AMORTIZED COST) VMIG1 $ 250,000
--------------------------------------------------------- ----------
LONG-TERM MUNICIPAL SECURITIES--98.2%
- ----------------------------------------------------------------------
CALIFORNIA--5.8%
---------------------------------------------------------
100,000 Los Angeles, CA, 5.90%, Commission Redevelopment Finance
Authority, (Grand Central Square)/(1993 Series A),
12/1/2026 A 97,867
---------------------------------------------------------
</TABLE>
<TABLE>
<C> <S> <C> <C>
250,000 Sequoia, CA 5.375%, Hospital Revenue Bonds, 8/15/2013 A- 236,192
--------------------------------------------------------- ----------
Total 334,059
--------------------------------------------------------- ----------
FLORIDA--13.8%
---------------------------------------------------------
250,000 Alachua County, FL, 6.05%, Health Facility Authority
Refunding Revenue Bonds (Santa Fe Healthcare Facility),
11/15/2016 BBB+ 248,165
---------------------------------------------------------
100,000 City of Leesburg, FL 5.625% Hospital Refunding Revenue
Bonds, (Leesburg Regional Medical Center Project)/(Series
1993B) 7/1/2013 BBB+ 94,856
---------------------------------------------------------
100,000 Jacksonville, FL, Electric Authority, 5.25%, Refunding
Revenue Bonds (Electric System)/(Series 3-A), 10/1/2028 AA 94,289
---------------------------------------------------------
100,000 Jacksonville, FL, Health Facilities Authority, 6.40% IDRB
(National Benevolent Association-Cypress), 12/1/2016 Baa1 101,082
---------------------------------------------------------
100,000 Leesburg, FL 6.125% Hospital Revenue Bonds
(Leesburg Medical Center), 7/1/2018 BBB+ 100,365
---------------------------------------------------------
</TABLE>
MULTI-STATE MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
MOODY'S
PRINCIPAL OR S&P*
AMOUNT (NOTE 7) VALUE
- ---------- --------------------------------------------------------- ------------ ----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- ----------------------------------------------------------------------
FLORIDA--CONTINUED
---------------------------------------------------------
$ 150,000 Palm Beach County, FL, 6.30%, Health Facility Authority
Hospital Revenue Bonds (Good Samaritan Health System, Inc
Project)/(Series 1993), 10/1/2022 A- $ 156,567
--------------------------------------------------------- ----------
Total 795,324
--------------------------------------------------------- ----------
GEORGIA--1.8%
---------------------------------------------------------
100,000 Fulco County, GA, Hospital Revenue Authority, 6.375%
Revenue Anticipation Certificates, (Georgia Baptist
Health Care), 9/1/2022 A 105,031
--------------------------------------------------------- ----------
ILLINOIS--5.7%
---------------------------------------------------------
100,000 Chicago, IL, O'Hare International Airport, 5.60%, Revenue
Bonds, (Series A)/(MBIA Insured), 1/1/2012 AAA 98,925
---------------------------------------------------------
130,000 Illinois Development Finance Authority, 6.10%, Revenue
Bonds (Catholic Charities) 1/1/2020 NR 129,012
---------------------------------------------------------
100,000 Illinois Health Facilities Authority, 6.125% Revenue
Bonds, (Lutheran Social Services of Illinois), 8/15/2010 NR 100,427
--------------------------------------------------------- ----------
Total 328,364
--------------------------------------------------------- ----------
LOUISIANA--8.8%
---------------------------------------------------------
500,000 St. Charles Parish, LA, 6.20% Revenue Bonds (Louisiana
Power & Light Co. Project)/(Series A)/(Subject to AMT),
5/1/2023 BBB+ 507,945
--------------------------------------------------------- ----------
MAINE--2.4%
---------------------------------------------------------
35,000 Maine State Housing Authority, 6.40% Revenue Bonds,
(Series A)/(Subject to AMT), 11/15/2018 AA- 35,787
---------------------------------------------------------
100,000 Bucksport, ME, 6.25% Solid Waste Disposal Revenue Bonds
(Champion International Corp.), 5/1/2010 BBB 101,541
--------------------------------------------------------- ----------
Total 137,328
--------------------------------------------------------- ----------
</TABLE>
MULTI-STATE MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
MOODY'S
PRINCIPAL OR S&P*
AMOUNT (NOTE 7) VALUE
- ---------- --------------------------------------------------------- ------------ ----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- ----------------------------------------------------------------------
MARYLAND--10.7%
---------------------------------------------------------
$ 100,000 City of Gaithersburg, MD, 5.50% Economic Development
Refunding Revenue Bonds, (Asburg Methodist Homes),
1/1/2020 NR $ 92,725
---------------------------------------------------------
100,000 Maryland State Industrial Development Financing
Authority, 6.625% Revenue Bonds, (American Center for
Physics Headquarters Facility), 1/1/2017 BBB 105,397
---------------------------------------------------------
100,000 Maryland State Commission Administration, 5.60%
Multi-Family Housing Revenue Bonds, 5/15/2026 Aa 99,404
---------------------------------------------------------
350,000 Maryland State, 5.50%, Health & Higher Education Facility
Authority Revenue Bonds (Howard County General Hospital),
7/1/2025 AAA 317,076
--------------------------------------------------------- ----------
Total 614,602
--------------------------------------------------------- ----------
MINNESOTA--1.8%
---------------------------------------------------------
100,000 St. Paul, MN Housing & Redevelopment Authority, 6.625%
Hospital Revenue Bonds, (Health East Project)/(Series A),
11/1/2017 BBB- 103,531
--------------------------------------------------------- ----------
NEW HAMPSHIRE--1.8%
---------------------------------------------------------
100,000 New Hampshire State Housing Finance Authority, 6.05%,
Revenue Bonds 7/1/2025 A+ 101,156
--------------------------------------------------------- ----------
NEW JERSEY--2.5%
---------------------------------------------------------
150,000 New Jersey State, 5.50%, Housing & Mortgage Finance
Agency Revenue Bonds, (Home-Buyer Series H)/(MBIA
Insured), 10/1/2026 AAA 146,422
--------------------------------------------------------- ----------
NEW MEXICO--1.8%
---------------------------------------------------------
100,000 Farmington, NM, 5.875% PCR Bonds, (Southern California
Edison Co.)/(MBIA Insured) 6/1/2023 AAA 102,992
--------------------------------------------------------- ----------
</TABLE>
MULTI-STATE MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
MOODY'S
PRINCIPAL OR S&P*
AMOUNT (NOTE 7) VALUE
- ---------- --------------------------------------------------------- ------------ ----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- ----------------------------------------------------------------------
NEW YORK--1.8%
---------------------------------------------------------
$ 100,000 New York State Energy Research & Development Authority,
Revenue Bonds 6.00%, (Consolidated Edison Co.)/(Subject
to AMT), 3/15/2028 AA- $ 101,546
--------------------------------------------------------- ----------
NORTH CAROLINA--1.6%
---------------------------------------------------------
100,000 North Carolina Eastern Municipal Power, NC, 5.00%,
Refunding Revenue Bonds (Series C), 1/1/2021 A- 89,507
--------------------------------------------------------- ----------
OHIO--1.7%
---------------------------------------------------------
100,000 Franklin County, OH, 5.75% Hospital Revenue Bonds,
(Riverside United Methodist Hospital), 5/15/2020 Aa 100,246
--------------------------------------------------------- ----------
PENNSYLVANIA--1.7%
---------------------------------------------------------
100,000 Pennsylvania Housing Finance Agency, 5.60%, SFM Revenue
Bonds (Series 37B), 10/1/2025 AA 96,960
--------------------------------------------------------- ----------
TENNESSEE--3.5%
---------------------------------------------------------
100,000 Memphis-Shelby County, TN, County Airport Authority,
6.20% Revenue Bonds, (Federal Express Co.)/(Subject to
AMT), 7/1/2014 BBB 101,313
---------------------------------------------------------
100,000 Tennessee Housing Development Authority, 5.95% SFM
Revenue Bonds, 7/1/2028 A+ 99,847
--------------------------------------------------------- ----------
Total 201,160
--------------------------------------------------------- ----------
TEXAS--22.5%
---------------------------------------------------------
100,000 Brazos River Authority, TX 6.10% PCR Bonds, (Texas
Utilities Electric Co.)/(FGIC Insured)/(Subject to AMT),
4/1/2028 AAA 104,315
---------------------------------------------------------
100,000 Brazosport, TX, Water Authority, 5.50% Revenue Bonds,
(AMBAC Insured), 9/1/2018 AAA 98,923
---------------------------------------------------------
100,000 Lubbock, TX, Health Facilities Development Corp., 5.50%
Revenue Bonds, (St. Joseph Health System), 7/1/2014 AA 97,352
---------------------------------------------------------
</TABLE>
MULTI-STATE MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
MOODY'S
PRINCIPAL OR S&P*
AMOUNT (NOTE 7) VALUE
- ---------- --------------------------------------------------------- ------------ ----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- ----------------------------------------------------------------------
TEXAS--CONTINUED
---------------------------------------------------------
$ 100,000 Matagorda County, TX, Navigation District, 6.00% PCR
Bonds, Central Power & Light), 7/1/2028 A- $ 101,410
---------------------------------------------------------
100,000 North Central, TX, Health Facilities Development Corp.,
5.80% Revenue Bonds, (Presbyterian Health Care), 6/1/2013 Aa 100,835
---------------------------------------------------------
150,000 North Central, TX, Health Facilities Development Corp.,
5.90% Revenue Bonds (Presbyterian Healthcare), 6/1/2021 Aa 151,872
---------------------------------------------------------
300,000 Sabine River Authority, TX, 5.85%, PCR Bonds (Texas
Utilities Electric Co. Project), 5/1/2022 BBB 295,431
---------------------------------------------------------
150,000 Tarrant County, TX, 5.25% Health Facility Development
Corp. Revenue Bonds (Adventist Health System/Sun Belt,
Inc.), 11/15/2023 BBB 142,203
---------------------------------------------------------
100,000 Tyler, TX, 6.75% Health Facility Development Corp.
Revenue Bonds (East Texas Medical Center Regional
Health), 11/1/2025 Baa 101,220
---------------------------------------------------------
100,000 West Side Calhoun County, TX, Navigation District Solid
Waste Disposal, 6.40% Revenue Bonds, (Union Carbide
Chemical), 5/1/2023 BBB 102,850
--------------------------------------------------------- ----------
Total 1,296,411
--------------------------------------------------------- ----------
UTAH -- 1.8%
---------------------------------------------------------
100,000 Utah State Housing Finance Agency, 6.05% SFM Revenue
Bonds, (Series A), 7/1/2025 Aa 101,238
--------------------------------------------------------- ----------
WASHINGTON--6.7%
---------------------------------------------------------
150,000 Pierce County, WA, 5.80%, EDC Revenue Bonds (Occidental
Petroleum), 9/1/2029 BBB 145,320
---------------------------------------------------------
</TABLE>
MULTI-STATE MUNICIPAL INCOME FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
MOODY'S
PRINCIPAL OR S&P*
AMOUNT (NOTE 7) VALUE
- ---------- --------------------------------------------------------- ------------ ----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- ----------------------------------------------------------------------
WASHINGTON--CONTINUED
---------------------------------------------------------
$ 250,000 Pilchuck Development Public Corp., WA, 6.00% Special
Facility Airport Revenue Bonds, (BF Goodrich
Guarantor)/(TRAMCO, Inc.)/(Subject to AMT), 8/1/2023 BBB $ 240,260
--------------------------------------------------------- ----------
Total 385,580
--------------------------------------------------------- ----------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST, $5,691,362) 5,649,402
--------------------------------------------------------- ----------
TOTAL MUNICIPAL SECURITIES (IDENTIFIED COST, $5,941,362) $5,899,402+
--------------------------------------------------------- ----------
</TABLE>
* See Notes to Portfolio of Investment
+ The cost of investments for federal tax purposes amounts to $5,941,362. The
net unrealized depreciation of investments on a federal tax basis amounts to
$41,960, which is comprised of $34,403 appreciation and $76,363 depreciation
at November 30, 1993.
Note: The categories of investments are shown as a percentage of net assets
($5,751,652) at
November 30, 1993.
The following abbreviations are used in this portfolio:
<TABLE>
<S> <C>
AMBAC -- American Municipal Bond Assurance Corp.
AMT -- Alternative Minimum Tax
EDC -- Economic Department Commission
FGIC -- Financial Guaranty Insurance Company
IDRB -- Industrial Development Revenue Bonds
LOC(s) -- Letter(s) of Credit
MBIA -- Municipal Bond Investors Assurance
PCR -- Pollution Control Revenue
SFM -- Single Family Mortgage
VRDNs -- Variable Rate Demand Notes
</TABLE>
(See Notes which are an integral part of the Financial Statements)
MULTI-STATE MUNICIPAL INCOME FUN
NOTES TO PORTFOLIO OF INVESTMENTS
- -------------------------------------------------------------------------------
The municipal bonds rated by Moody's Investors Services, Inc. ("Moody's") in
which the Fund may invest are Aaa, A, A, and Baa. Municipal bonds rated Aaa are
judged to be of the "best quality." The rating of Aa is assigned to municipal
bonds which are of "high quality by all standards," but as to which margins of
protection or other elements make long-term risks appear somewhat larger than
Aaa-rated municipal bonds. The Aaa and Aa-rated municipal bonds comprise what
are generally known as "high-grade bonds". Municipal bonds which are rated A by
Moody's possess many favorable investment attributes and are considered "upper
medium grade obligations." Factors giving security to principal and interest of
A-rated municipal bonds are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future. Bonds which
are rated Baa are neither highly protected nor poorly secured. The letter
ratings carry numerical modifiers with 1 indicating the higher end of the rating
category, 2 indicating the mid-range and 3 indicating the lower end of the
rating category.
Moody's highest rating for state and municipal short-term securities is
MIG1/VMIG1. Short-term municipal securities rated MIG1/VMIG1 are the best
quality. They have strong protection from established cash flows of funds for
their servicing or have established a broad-based access to the market for
refinancing or both. The VMIG1 rating denotes that the security has a variable
rate and is payable on demand.
The municipal bonds rated by Standard & Poor's Corporation in which the Fund may
invest are AAA, AA, A, and BBB. Municipal bonds rated AAA are "obligations of
the highest quality". The rating of AA is accorded issues with investment
characteristics "only slightly less marked than those of the prime quality
issues." The category of A describes "the third strongest capacity for payment
of debt service." Principal and interest payments on bonds in this category are
regarded as safe. It differs from the two higher ratings because with respect to
general obligation bonds there is some weakness, either in the local economic
base, in debt burden, in the balance between revenues and expenditures, or in
quality of management. Under certain adverse circumstances, any one such
weakness might impair the ability of the issuer to meet debt obligations at some
future date. With respect to revenue bonds, debt service coverage is good, but
not exceptional. Stability of the pledge revenues could show some variations
because of increased competition or economic influences on revenues. Basic
security provisions, while satisfactory, are less stringent. Bonds which are
rated BBB are the lowest investment grade security rating. These ratings may be
modified by the addition of a plus or minus sign to show relative standing with
the major rating categories.
NR indicates the bonds are not currently rated by Moody's or Standard & Poor's.
However, management considers them to be of good quality.
Bonds for which the security depends upon the completion of some act or the
fulfillment of some condition are rated conditionally.
(See Notes to Financial Statements)
MULTI-STATE MUNICIPAL INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------
Investments in securities, at value (Note 2A) (identified and tax cost;
$5,941,362) $5,899,402
- ---------------------------------------------------------------------------------
Cash 6,530
- ---------------------------------------------------------------------------------
Receivable for capital stock 50,339
- ---------------------------------------------------------------------------------
Interest receivable 84,547
- ---------------------------------------------------------------------------------
Deferred expenses (Note 2F) 3,011
- --------------------------------------------------------------------------------- ----------
Total assets 6,043,829
- ---------------------------------------------------------------------------------
LIABILITIES:
- ----------------------------------------------------------------------
Payable for investments purchased $233,129
- ----------------------------------------------------------------------
Dividends payable 21,803
- ----------------------------------------------------------------------
Accrued expenses and other liabilities 37,245
- ---------------------------------------------------------------------- --------
Total liabilities 292,177
- --------------------------------------------------------------------------------- ----------
NET ASSETS for 562,882 shares of capital stock outstanding $5,751,652
- --------------------------------------------------------------------------------- ----------
NET ASSETS CONSIST OF:
- ---------------------------------------------------------------------------------
Paid-in capital $5,794,587
- ---------------------------------------------------------------------------------
Unrealized depreciation on investments (41,960)
- ---------------------------------------------------------------------------------
Accumulated loss on investments (975)
- --------------------------------------------------------------------------------- ----------
Total $5,751,652
- --------------------------------------------------------------------------------- ----------
NET ASSET VALUE and Offering Price per Share
($5,751,652 / 562,882 shares of beneficial interest outstanding) $10.22
- --------------------------------------------------------------------------------- ----------
REDEMPTION PROCEEDS per Share (97/100 of $10.22)* $9.91
- --------------------------------------------------------------------------------- ----------
</TABLE>
* See "Contingent Deferred Sales Charge" on page 12 of the prospectus.
(See Notes which are an integral part of the Financial Statements)
MULTI-STATE MUNICIPAL INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1993*
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- -------------------------------------------------------------------------------------
Interest income (Note 2B) $ 76,407
- -------------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------------
Investment advisory fee (Note 5) $ 5,173
- --------------------------------------------------------------------------
Distribution services fee (Note 5) 9,699
- --------------------------------------------------------------------------
Administration personnel and services (Note 5) 1,899
- --------------------------------------------------------------------------
Custodian, transfer agent and dividend disbursing agent fees 31,273
- --------------------------------------------------------------------------
Legal fees 2,459
- --------------------------------------------------------------------------
Printing and postage 734
- --------------------------------------------------------------------------
Fund share registration costs 335
- --------------------------------------------------------------------------
Insurance premiums 5,044
- --------------------------------------------------------------------------
Shareholder services fee (Note 5) 2,100
- --------------------------------------------------------------------------
Miscellaneous 1,156
- -------------------------------------------------------------------------- -------
Total expenses 59,872
- --------------------------------------------------------------------------
Deduct--
- --------------------------------------------------------------------------
Waiver of investment advisory fee (Note 5) $ 5,173
- ----------------------------------------------------------------
Reimbursement of other expenses by the Adviser (Note 5) 45,000 50,173
- ---------------------------------------------------------------- ------- -------
Net expenses 9,699
- ------------------------------------------------------------------------------------- --------
Net investment income 66,708
- ------------------------------------------------------------------------------------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- -------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (975)
- -------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments (41,960)
- ------------------------------------------------------------------------------------- --------
Net realized and unrealized gain (loss) on investments (42,935)
- ------------------------------------------------------------------------------------- --------
Change in net assets resulting from operations $ 23,773
- ------------------------------------------------------------------------------------- --------
</TABLE>
* For the period from June 1, 1993 (date of initial public investment) to
November 30, 1993.
(See Notes which are an integral part of the Financial Statements)
MULTI-STATE MUNICIPAL INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1993*
-------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ----------------------------------------------------------------------------
OPERATIONS--
- ----------------------------------------------------------------------------
Net investment income $ 66,708
- ----------------------------------------------------------------------------
Net realized gain (loss) on investments (975)
- ----------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments (41,960)
- ---------------------------------------------------------------------------- -------------
Change in net assets resulting from operations 23,773
- ---------------------------------------------------------------------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- ----------------------------------------------------------------------------
Dividends to shareholders from net investment income (66,708)
- ----------------------------------------------------------------------------
Distributions in excess of net investment income (Note 3) (9,699)
- ---------------------------------------------------------------------------- -------------
Change in net assets resulting from distributions to shareholders (76,407)
- ---------------------------------------------------------------------------- -------------
CAPITAL STOCK TRANSACTIONS (NOTE 4)--
- ----------------------------------------------------------------------------
Proceeds from sale of shares 7,974,337
- ----------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of dividends
declared 8,817
- ----------------------------------------------------------------------------
Cost of shares redeemed (2,178,868)
- ---------------------------------------------------------------------------- -------------
Change in net assets resulting from Fund share transactions 5,804,286
- ---------------------------------------------------------------------------- -------------
Change in net assets 5,751,652
- ----------------------------------------------------------------------------
NET ASSETS:
- ----------------------------------------------------------------------------
Beginning of period --
- ---------------------------------------------------------------------------- -------------
End of period $ 5,751,652
- ---------------------------------------------------------------------------- -------------
</TABLE>
* For the period from June 1, 1993 (date of initial public investment) to
November 30, 1993.
(See Notes which are an integral part of the Financial Statements)
MULTI-STATE MUNICIPAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Fixed Income Securities Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. The financial statements included herein are only those of Multi-State
Municipal Income Fund (the "Fund"), a diversified portfolio of the Corporation.
The financial statements of the other portfolios in the Corporation are
presented separately. The assets of each portfolio are segregated and a
shareholder's interests is limited to the portfolio in which shares are held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--Municipal bonds are valued by an independent pricing service
taking into consideration yield, liquidity, risk, credit, quality, coupon maturity, type
of issue and any other factors or market data it deems relevant in determining valuations
for normal institutional size trading units of debt securities. The independent pricing
service does not rely exclusively on quoted prices. The debt securities with remaining
maturities of 60 days or less are stated at amortized cost, which approximates value.
B. INCOME--Interest income is recorded on the accrual basis and includes discount earned
less any premium.
C. FEDERAL TAXES--It is the Fund's policy to continue to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies and distribute to
shareholders each year substantially all of its taxable income, including any net
realized gain on investments. Accordingly, no provision for federal tax is necessary.
Dividends paid by the Fund from net interest earned on tax-exempt municipal bonds are not
includable by shareholders as gross income for federal income tax purposes, because the
Fund intends to meet certain requirements of the Internal Revenue Code applicable to
regulated investment companies which will enable the Fund to pay tax-exempt interest
dividends. The portion of such interest, if any earned on private activity bonds issued
after August 17, 1986, may be considered a tax preference item to shareholders.
At November 30, 1993, the Fund, for federal tax purposes, has a capital loss carryforward
of $975 which will reduce the Fund's taxable income arising from future net realized
gains on investments, if any, to the extent permitted by the code, and thus will reduce
the amount of the distributions to
</TABLE>
MULTI-STATE MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
shareholders which would otherwise be necessary to relieve the Fund of any liability for
federal tax. Pursuant to the code, such capital loss carryforward will expire in 2001.
D. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or
delayed delivery transactions. The Fund will record when-issued securities and maintains
security positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when-issued or delayed delivery
basis are marked to market daily and begin earning interest on the settlement date.
E. OTHER--Investment transactions are accounted for on the date of the transaction.
Dividends to shareholders are recorded on the ex-dividend date.
F. DEFERRED EXPENSES--The costs incurred by the Fund with respect to registration of its
shares in its first fiscal year, excluding the initial expense of registering the shares,
have been deferred and are being amortized using the straight-line method over a period
of five years from the Fund's commencement date.
</TABLE>
(3) DIVIDENDS
The Fund computes its net income daily and, immediately prior to the calculation
of its net asset value at the close of business, declares and records dividends
to shareholders of record with respect to shares for which payment in federal
funds has been received. Payment of dividends is made monthly in cash, or in
additional shares at the net asset value on the payable date. Capital gains
realized by the Fund are distributed at least once every twelve months and are
recorded on the ex-dividend date. Income distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. This difference is primarily due to differing treatments
for Distribution Services Fees which resulted in distributions to shareholders
in excess of net investment income. These distributions did not represent a
return of capital for federal income tax purposes for the year ended November
30, 1993.
(4) CAPITAL STOCK
At November 30, 1993, the Corporation was authorized to issue 10,000,000,000
shares of $0.001 par value stock. Of these shares, 1,000,000,000 have been
designated as shares of the Fund. Transactions were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
11/30/93*
- ------------------------------------------------------------------------------ -----------
<S> <C>
Shares outstanding, beginning of period --
- ------------------------------------------------------------------------------
Shares sold 772,641
- ------------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 851
- ------------------------------------------------------------------------------
Shares redeemed (210,610)
- ------------------------------------------------------------------------------ ----------
Shares outstanding, end of period 562,882
- ------------------------------------------------------------------------------ ----------
</TABLE>
* For the period from June 1, 1993 (date of initial public investment) to
November 30, 1993.
MULTI-STATE MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Federated Advisers, the Fund's investment adviser ("Adviser"), receives for its
services an annual investment advisory fee equal to .40 of 1% of the Fund's
average daily net assets. The Adviser has voluntarily agreed to waive a portion
of its fee. The Adviser can modify or terminate this voluntary waiver at any
time at its sole discretion. For the period from June 1, 1993 (date of initial
public investment) to November 30, 1993, the Adviser earned a fee of $5,173, all
of which was voluntarily waived. In addition, the Adviser voluntarily reimbursed
the Fund for $45,000 of other operating expenses.
Organizational expenses ($34,126) and start-up administrative service expenses
($56,976) will be borne initially by the Adviser. The Fund has agreed to
reimburse the Adviser for the organizational expenses and start-up
administrative expenses initially borne by the Adviser during the five year
period following May 24, 1993 (date the Fund's portfolio first became
effective).
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940. The Fund will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the net assets of the
Fund, for the fees it paid which relate to the distribution and administration
of the Fund's shares. The Plan provides that the Fund will incur distribution
expenses up to .75 of 1% of the average daily net assets value, annually, to pay
commissions, maintenance fees and to compensate FSC. For the period ended
November 30, 1993 FSC earned $9,699.
Administrative personnel and services are provided at approximate cost by
Federated Administrative Services, Inc. ("FAS"). Certain Officers and Directors
of the Corporation are Officers and Directors of the above corporations.
During the period ended November 30, 1993 the Fund engaged in purchase and sale
transactions with other Funds advised by the Adviser pursuant to Rule 17A-7 of
the Investment Company Act of 1940 amounting to $2,150,000 and $1,600,000,
respectively. These purchases and sales were conducted on an arms-length basis
insofar as they were transacted for cash consideration only, at independent
current market prices and without brokerage commission, fee or other
remuneration.
The Fund has adopted a Shareholder Services Plan (the "Services Plan") with
respect to Capital Stock. The Fund will reimburse Federated Securities Corp.
("FSC"), from the net assets of the Fund for fees the Fund paid which relate to
administrative support services of the Capital Stock. The Services Plan provides
that the Fund may incur shareholder services expenses up to 0.25 of 1% of the
average daily net assets of the Capital Stock. For the period ended November 30,
1993, FSC earned $2,100.
MULTI-STATE MUNICIPAL INCOME FUND
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(6) INVESTMENT TRANSACTIONS
Purchases, and sales of investments, excluding short-term securities, for the
period ended November 30, 1993 were as follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
Purchases $5,757,298
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Sales $ 65,000
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</TABLE>
(7) CURRENT CREDIT RATINGS
Current credit ratings and related footnotes are unaudited.
INDEPENDENT AUDITORS' REPORT
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To the Board of Directors of FIXED INCOME SECURITIES INC. and Shareholders of
MULTISTATE MUNICIPAL INCOME FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Multi-State Municipal Income Fund (a portfolio
of Fixed Income Securities, Inc.) as of November 30, 1993, and the related
statement of operations, the statement of changes in net assets, and the
financial highlights (see page 2 of the prospectus) for the period from June 1,
1993 (date of initial public investment) to November 30, 1993. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of the securities owned at November 30, 1993 by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Multi-State
Municipal Income Fund as of November 30, 1993, the results of its operations,
the changes in its net assets, and its financial highlights for the period from
June 1, 1993 (date of intial public investment) to November 30, 1993 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
Boston, Massachusetts
January 14, 1994
ADDRESSES
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<TABLE>
<S> <C> <C>
Multi-State Municipal Income Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Investment Adviser
Federated Advisers Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Custodian
State Street Bank and P.O. Box 8604
Trust Company Boston, Massachusetts 02266-8604
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Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
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Legal Counsel
Dickstein, Shapiro & Morin 2101 L Street, N.W.
Washington, D.C. 20037
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Independent Auditors
Deloitte & Touche 125 Summer Street
Boston, Massachusetts 02110-1617
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</TABLE>
MULTI-STATE MUNICIPAL
INCOME FUND
PROSPECTUS
A Diversified Portfolio of
Fixed Income Securities, Inc.
an Open-End, Management
Investment Company
January 31, 1994
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
3032504A (1/94)
MULTI-STATE MUNICIPAL INCOME FUND
(A PORTFOLIO OF FIXED INCOME SECURITIES, INC.)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus of
shares of Multi-State Municipal Income Fund (the "Fund") dated January 31, 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 January 31, 1994
FEDERATED SECURITIES CORP.
(LOGO)
- -------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
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GENERAL INFORMATION ABOUT THE FUND 1
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INVESTMENT OBJECTIVE AND POLICIES 1
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Acceptable Investments 1
When-Issued and Delayed Delivery Transactions 2
Temporary Investments 2
Futures and Options Transactions 2
"Margin" in Futures Transactions 2
Put Options on Financial Futures Contracts 3
Call Options on Financial Futures Contracts 3
Repurchase Agreements 4
Reverse Repurchase Agreements 4
Portfolio Turnover 5
Investment Limitations 5
FIXED INCOME SECURITIES, INC. MANAGEMENT 7
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Officers and Directors 7
The Funds 8
Fund Ownership 9
Director Liability 9
INVESTMENT ADVISORY SERVICES 9
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Adviser to the Fund 9
Advisory Fees 9
ADMINISTRATIVE SERVICES 10
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BROKERAGE TRANSACTIONS 10
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PURCHASING SHARES 10
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Distribution Plan 10
Shareholder Services Plan 11
DETERMINING NET ASSET VALUE 11
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Valuing Municipal Bonds 11
Use of Amortized Cost
REDEEMING SHARES 11
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Redemption in Kind 11
TAX STATUS 11
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The Fund's Tax Status 11
TOTAL RETURN 12
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YIELD 12
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TAX-EQUIVALENT YIELD 12
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Tax-Equivalency Table 12
PERFORMANCE COMPARISONS 13
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APPENDIX 15
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
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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
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The investment objective of the Fund is to provide a high level of current
income which is exempt from federal regular income tax. Interest income of the
Fund that is exempt from federal income tax retains its tax-free status when
distributed to the Fund's shareholders. The investment objective cannot be
changed without approval of shareholders.
ACCEPTABLE INVESTMENTS
The Fund invests in a diversified portfolio primarily limited to municipal
securities.
CHARACTERISTICS
The municipal securities in which the Fund invests have the
characteristics set forth in the prospectus. If ratings made by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation
("S&P") or Fitch's Investors Service ("Fitch's") change because of
changes in those organizations or in their rating systems, the Fund will
try to use comparable ratings as standards in accordance with the
investment policies described in the Fund's prospectus.
TYPES OF ACCEPTABLE INVESTMENTS
Examples of municipal securities include:
- governmental lease certificates of participation issued by state or
municipal authorities where payment is secured by installment payments
for equipment, buildings, or other facilities being leased by the state
or municipality;
- municipal notes and tax-exempt commercial paper;
- serial bonds;
- tax anticipation notes sold to finance working capital needs of
municipalities in anticipation of receiving taxes;
- bond anticipation notes sold in anticipation of the issuance of
long-term bonds;
- pre-refunded municipal bonds whose timely payment of interest and
principal is ensured by an escrow of U.S. government obligations; and
- general obligation bonds.
PARTICIPATION INTERESTS
The financial institutions from which the Fund purchases participation
interests frequently provide or secure from another financial institution
irrevocable letters of credit or guarantees and give the Fund the right
to demand payment of the principal amounts of the participation interests
plus accrued interest on short notice (usually within seven days).
VARIABLE-RATE MUNICIPAL SECURITIES
Some of the municipal securities which the Fund purchases may have
variable interest rates. Variable interest rates are ordinarily stated as
a percentage of the prime rate of a bank or some similar standard, such
as the 91-day U.S. Treasury bill rate. Variable interest rates are
adjusted on a periodic basis, e.g., every 30 days. The Fund will consider
this adjustment period to be the maturity of the security for purposes of
determining the weighted average maturity of the portfolio.
Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital
appreciation or depreciation is less for variable-rate municipal
securities than for fixed-income obligations. Many municipal securities
with variable interest rates purchased by the Fund are subject to
repayment of principal (usually within seven days) on the Fund's demand.
The terms of these variable-rate demand instruments require payment of
principal and accrued interest from the issuer of the municipal
obligations, the issuer of the participation interests, or a guarantor of
either issuer.
Many variable rate municipal securities are subject to repayment of
principal on demand by the Fund (usually in not more than seven days). If
a variable rate municipal security does not have this demand feature, or
the demand feature extends beyond seven days and the Fund's adviser
believes that the security cannot be sold within seven days, the Fund's
adviser may consider the security to be illiquid. However, the Fund's
investment limitations provide that it will not invest more than 15% of
its total net assets in illiquid securities. All variable rate municipal
securities will meet the quality standards for the Fund. The investment
adviser has been instructed by the Fund's Board of Directors
("Directors") to monitor the pricing, quality and liquidity of the
- --------------------------------------------------------------------------------
variable rate municipal securities, including participation interests,
held by the Fund, on the basis of published financial information and
reports of the rating agencies and other analytical services.
MUNICIPAL LEASES
The Fund may purchase municipal securities in the form of participation
interests which represent undivided proportional interests in lease
payments by a governmental or non-profit entity. The lease payments and
other rights under the lease provide for and secure the payments on the
certificates. Lease obligations may be limited by municipal charter or
the nature of the appropriation for the lease. In particular, lease
obligations may be subject to periodic appropriation. If the entity does
not appropriate funds for future lease payments, the entity cannot be
compelled to make such payments. Furthermore, a lease may provide that
the certificate trustee cannot accelerate lease obligations upon default.
The trustee would only be able to enforce lease payments as they became
due. In the event of a default or failure of appropriation, it is
unlikely that the trustee would be able to obtain an acceptable
substitute source of payment.
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, 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 expenses, other than normal transaction costs, are incurred. However,
liquid assets of the Fund sufficient to make payment for the securities to be
purchased are segregated at the trade date. These securities are marked to
market daily and maintained until the transaction is settled. During the current
year, the Fund does not anticipate investing more than 20% of its total assets
in when-issued and delayed delivery transactions.
TEMPORARY INVESTMENTS
The Fund may also invest in temporary investments during times of unusual market
conditions for defensive purposes and to maintain liquidity.
FUTURES AND OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of the
Fund, 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 put options on financial futures contracts for portfolio
securities, and writing call options on futures contracts. The Fund also may
write covered call options on portfolio securities to attempt to increase its
current income.
The Fund will maintain its position in securities, options and segregated cash
subject to puts and calls until the options are exercised, closed, or have
expired. An option position may be closed out over-the-counter or on an exchange
which provides a secondary market for options of the same series.
FUTURES CONTRACTS
The Fund may purchase and sell financial futures contracts to hedge
against the effects of changes in the value of portfolio securities due
to anticipated changes in interest rates and market conditions without
necessarily buying or selling the securities. The Fund will not engage in
futures transactions for speculative purposes.
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.
For example, in the fixed income securities market, prices move inversely
to interest rates. A rise in rates results in a drop in price.
Conversely, a drop in rates results in 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 could agree to
purchase securities in the future at a predetermined price (i.e., "go
long") to hedge against a decline in market interest rates.
"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 initial margin in futures transactions
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.
The Fund will comply with the following restrictions when purchasing and selling
futures contracts. First, the Fund will not participate in futures transactions
if the sum of its initial margin deposits on open contracts will exceed 5% of
the market value of the Fund's total assets, after taking into account the
unrealized profits and losses on those contracts it has entered into. Second,
the Fund will not enter into these contracts for speculative purposes. Third,
since the Fund does not constitute a commodity pool, it will not market itself
as such, or serve as a vehicle for trading in the commodities futures or
commodity options markets. Connected with this, the Fund will disclose to all
prospective investors the limitations on its futures and options transactions,
and make clear that these transactions are entered into only for bona fide
hedging purposes, or other permissible purposes pursuant to regulations
promulgated by the Commodity Futures Trading Commission ("CFTC"). Finally,
because the Fund will submit to the CFTC special calls for information, the Fund
will not register as a commodities pool operator.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts. The
Fund would use these options solely to protect portfolio securities against
decreases in value resulting from market factors such as an anticipated increase
in rates.
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.
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 close out the position.
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
only 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 financial futures contracts or over-the-counter call options on
future 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 decrease, 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 falls 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 substantially offset
the drop in value of the Fund's portfolio securities.
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 substantially offset the realized 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.
RISKS
When the Fund uses futures and options on futures as hedging devices,
there is a risk that the prices of the securities subject to the futures
contracts may not correlate perfectly with the prices of the securities
in the Fund's portfolio. This may cause the futures contract and any
related options to react differently than the portfolio securities to
market changes. In addition, the Fund's adviser could be incorrect in its
expectations about the direction or extent of market factors such as
stock price movements. In these events, the Fund may lose money on the
futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the Fund's
adviser will consider liquidity before entering into these 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. The inability to
close out these positions could have an adverse effect on the Fund's
ability to effectively hedge its portfolio.
To minimize risks, 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 futures contracts, an amount of cash and cash equivalents, equal
to the underlying commodity value of the futures contracts (less any related
margin deposits), will be deposited in a segregated account with the Fund's
custodian (or the broker, if legally permitted) to collateralize the position
and thereby insure that the use of such futures contract is unleveraged. When
the Fund sells futures contracts, it will either own or have the right to
receive the underlying future or security, or will make deposits to
collateralize the position as discussed above.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or
certificates of deposit to the Fund and agree at the time of sale to repurchase
them at a mutually agreed upon time and price within one year from the date of
acquisition. The Fund or its custodian will take possession of the securities
subject to repurchase agreements. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities. In the event that such a
defaulting seller filed for bankruptcy or became insolvent, disposition of such
securities by the Fund might be delayed pending court action. The Fund believes
that under the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or disposition
of such securities. The Fund may only enter into repurchase agreements with
banks and other recognized financial institutions such as broker/dealers which
are found by the Fund's adviser to be creditworthy pursuant to guidelines
established by the Directors.
From time to time, such as when suitable municipal securities are not available,
the Fund may invest a portion of its assets in cash. Any portion of the Fund's
assets maintained in cash will reduce the amount of assets in municipal
securities and thereby reduce the Fund's yield.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. This 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 on the Fund's records at the trade date. These assets are marked
to market daily and are maintained until the transaction is settled.
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER
The Fund may trade or dispose of portfolio securities as considered necessary to
meet its investment objective. It is not anticipated that the portfolio trading
engaged in by the Fund will result in its annual rate of portfolio turnover
exceeding 100%.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of securities. A deposit or payment by
the Fund of initial or variation margin in connection with financial
futures contracts or related options transactions is not considered the
purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities 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 to facilitate management of the
portfolio by enabling the Fund to, for example, meet redemption requests
when 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.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate its assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge, or
hypothecate assets having a market value not exceeding 10% of the value
of its total assets at the time of the pledge. (For purposes of this
limitation, the following are not deemed to be pledges: margin deposits
for the purchase and sale of financial futures contracts and related
options; and segregation of collateral arrangements made in connection
with options activities or the purchase of securities on a when-issued
basis.)
UNDERWRITING
The Fund will not underwrite any issue of securities except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objective, policies, and limitations.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, including limited
partnership interests, although it may invest in municipal bonds secured
by real estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts except that the Fund may purchase and sell
futures contracts and related options.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except that it may acquire
publicly or non-publicly issued municipal bonds or temporary investments
or enter into repurchase agreements in accordance with its investment
objective, policies, and limitations.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities issued by 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 such securities) if as a result
more than 5% of the value of its total assets would be invested in the
securities of that issuer. Also, the Fund will not acquire more than 10%
of the outstanding voting securities of any one issuer.
Under this limitation, each governmental subdivision, including states
and the District of Columbia, territories, possessions of the United
States, or their political subdivisions, agencies, authorities,
instrumentalities, or similar entities, will be considered a separate
issuer if its assets and revenues are separate from those of the
governmental body creating it and the security is backed only by its own
assets and revenues.
Industrial development bonds backed only by the assets and revenues of a
non-governmental user are considered to be issued solely by that user. If
in the case of an industrial development bond or governmental
- --------------------------------------------------------------------------------
issued security, a governmental or other entity guarantees the security,
such guarantee would be considered a separate security issued by the
guarantor as well as the other issuer, subject to limited exclusions
allowed by the Investment Company Act of 1940.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of its total assets in any one
industry. However, investing in U.S. government obligations shall not be
considered investments in any one industry.
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 ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND DIRECTORS OF
THE FUND
The Fund will not purchase or retain the securities of any issuer if the
Officers and Directors of the Fund or its investment adviser, owning
individually more than 1/2 of 1% of the issuers' securities, together own
more than 5% of the issuer's securities.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will not purchase securities of other investment companies
except as part of a merger, consolidation, or other acquisition.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of its net 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 Board of Trustees.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
obligations, including repurchase agreements providing for settlement in
more than seven days after notice, and certain restricted securities not
determined by the Directors to be liquid.
INVESTING IN PUT OPTIONS
The Fund will not purchase put options on securities, unless the
securities are held in the Fund's portfolio and not more than 5% of the
value of the Fund's total assets would be invested in premiums on open
put options.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them
in deliverable form without further payment or after segregating cash in
the amount of any further payment.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
industrial development bonds where the principal and interest are the
responsibility of companies (or guarantors, where applicable) with less
than three years of continuous operations, including the operation of any
predecessor.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, although it may invest in
securities of issuers which invest in or sponsor such programs.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
The Fund does not expect to borrow money or pledge securities in excess of 5% of
the value of its net assets during the coming fiscal year.
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 and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items."
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., and Federated Administrative
Services, Inc.
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE CORPORATION DURING PAST FIVE YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
John F. Donahue+* Chairman Chairman and Trustee, Federated Investors; Chairman and Trustee, Federated
Federated Investors and Director Advisers, Federated Management, and Federated Research; Director, AEtna Life
Tower and Casualty Company; Chief Executive Officer and Director, Trustee, or
Pittsburgh, PA 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.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
John T. Conroy, Jr. Director Senior Vice President, John R. Wood and Associates, Inc., Realtors;
Wood/IPC Commercial President, Investment Properties Corporation and Northgate Village
Development Development Corporation; General Partner or Trustee in private real estate
John R. Wood and ventures in Southwest Florida; Director, Trustee, or Managing General
Associates, Inc., Partner of the Funds; formerly, President, Naples Property Management Inc.
Realtors
3255 Tamiami
Trail North
Naples, FL
- --------------------------------------------------------------------------------------------------------------------------------
William J. Copeland Director Director and Member of, the Executive Committee, Michael Baker, Inc.;
One PNC Plaza- Director, Trustee, or Managing General Partner of the Funds; formerly, Vice
23rd Floor Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan
Pittsburgh, PA Homes, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
James E. Dowd Director Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
571 Hayward Mill Road Trustee, or Managing General Partner of the Funds; formerly, Director, Blue
Concord, MA. Cross of Massachusetts, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
Lawrence D. Ellis, M.D. Director Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
3471 Fifth Avenue Hospitals; Clinical Professor of Medicine and Trustee, University of
Suite 1111 Pittsburgh; Director, Trustee, or Managing General Partner of the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
Richard B. Fisher President Executive Vice President and Trustee, Federated Investors; Chairman and
Federated Investors and Director Director, Federated Securities Corp.; President or Vice President of the
Tower Funds; Director or Trustee of some of the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
Edward L. Flaherty, Jr.+ Director Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park
5916 Penn Mall Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director, Trustee,
Pittsburgh, PA or Managing General Partner of the Funds; formerly, Counsel, Horizon
Financial, F.A., Western Region.
- --------------------------------------------------------------------------------------------------------------------------------
Peter E. Madden Director Consultant; State Representative, Commonwealth of Massachusetts; Director,
225 Franklin Street Trustee, or Managing General Partner of the Funds; formerly, President,
Boston, MA State Street Bank & Trust Company and State Street Boston Corporation and
Trustee, Lahey Clinic Foundation, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
Gregor F. Meyer Director Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, Inc.;
5916 Penn Mall Director, Eat N' Park Restaurants, Inc.; Director, Trustee, or Managing
Pittsburgh, PA General Partner of the Funds; formerly, Vice Chairman, Horizon Financial,
F.A.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE CORPORATION DURING PAST FIVE YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Wesley W. Posvar Director Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
1202 Cathedral of Endowment for International Peace, RAND Corporation, Online Computer Library
Learning Center, Inc., and U.S. Space Foundation, Chairman, Czecho Slovak Management
University of Pittsburgh Center; Director, Trustee, or Managing General Partner of the Funds;
Pittsburgh, PA formerly, President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy & Technology.
- --------------------------------------------------------------------------------------------------------------------------------
Marjorie P. Smuts Director Public relations/marketing consultant; Director, Trustee, or Managing
4905 Bayard Street General Partner of the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
J. Christopher Donahue* Vice President President and Trustee, Federated Investors; Trustee, Federated Advisers,
Federated Investors Federated Management, and Federated Research; President and Trustee,
Tower Federated Administrative Services, Inc.; President or Vice President of the
Pittsburgh, PA Funds; Director, Trustee or Managing General Partner of some of the Funds.
Mr. Donahue is the son of John F. Donahue, Chairman and Director of the
Corporation.
- --------------------------------------------------------------------------------------------------------------------------------
Edward C. Gonzales Vice President Vice President, Treasurer and Trustee, Federated Investors; Vice President
Federated Investors and Treasurer and Treasurer, Federated Advisers, Federated Management, and Federated
Tower Research; Executive Vice President, Treasurer, and Director, Federated
Pittsburgh, PA Securities Corp.; Chairman, Treasurer, and Director, Federated
Administrative Services, Inc.; Trustee, some of the Funds; Vice President
and Treasurer of the Funds.
- --------------------------------------------------------------------------------------------------------------------------------
John W. McGonigle Vice President Vice President, Secretary, General Counsel, and Trustee, Federated
Federated Investors and Secretary Investors; Vice President, Secretary and Trustee, Federated Advisers,
Tower Federated Management, and Federated Research; Executive Vice President,
Pittsburgh, PA Secretary, and Director, Federated Administrative Services, Inc.; Director
and Executive Vice President, Federated Securities Corp.; Vice President and
Secretary of the Funds.
- --------------------------------------------------------------------------------------------------------------------------------
John A. Staley, IV Vice President Vice President and Trustee, Federated Investors; Executive Vice President,
Federated Investors Federated Securities Corp.; President and Trustee, Federated Advisers,
Tower Federated Management, and Federated Research; Vice President of the Funds;
Pittsburgh, PA Director, Trustee, or Managing General Partner of some of the Funds;
formerly Vice President, The Standard Fire Insurance Company and President
of its Federated Research Division.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* This Director is deemed to be an "interested person" of the Corporation as
defined in the Investment Company Act of 1940.
+ Members of the Corporation's Executive Committee. The Executive Committee of
the Board of Directors handles the responsibilities of the Board of Directors
between meetings of the Board.
THE FUNDS
"The Funds" and "Funds" mean the following investment companies: A.T. Ohio
Tax-Free Money Fund; American Leaders Fund, Inc.; Annuity Management Series;
Automated Cash Management Trust; Automated Government Money Trust; BankSouth
Select Funds; The Boulevard Funds; California Municipal Cash Trust; Cash Trust
Series, Inc.; Cash Trust Series II; 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;
8
- --------------------------------------------------------------------------------
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; Insight Institutional Series, Inc.; Insurance Management Series;
Intermediate Municipal Trust; Investment Series Funds, Inc.; Investment Series
Trust; Liberty Equity Income Fund, Inc; Liberty High Income Bond Fund, Inc.;
Liberty Municipal Securities Fund, Inc.; Liberty Term Trust, Inc.--1999; Liberty
U.S. Government Money Market Trust; Liberty Utility Fund, Inc.; Liquid Cash
Trust; Mark Twain Funds; Money Market Management, Inc.; Money Market Obligations
Trust; Money Market Trust; Municipal Securities Income Trust; New York Municipal
Cash Trust; 111 Corcoran Funds; The Planters Funds; Portage Funds; RIMCO
Monument Funds; The Shawmut Funds; Short-Term Municipal Trust; Signet Select
Funds; Star Funds; The Starburst Funds; The Starburst Funds II; Stock and Bond
Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
Trademark Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; and Trust for U.S.
Treasury Obligations.
FUND OWNERSHIP
Officers and Directors own less than 1% of the Fund's outstanding shares.
Merrill Lynch Pierce Fenner & Smith (as record owner holding shares for its
clients), Jacksonville, Florida, owned approximately 464,289 shares (75.72%) of
the Fund as of January 6, 1994.
As of January 6, 1994, the following shareholders of record owned 5% or more of
the outstanding shares of the Fund: E.E. Lampert Sr. Trust, Salisbury, North
Carolina, owned approximately 33,530 shares (5.47%) and Chris A. and Judy B.
Crumley, Virginia Beach, Virginia, owned approximately 47,755 shares (7.79%).
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 Class A (voting) shares of
Federated Investors are owned by a trust, the Trustees of which are John F.
Donahue, his wife, and his son, J. Christopher Donahue. John F. Donahue is
Chairman and Trustee, Federated Advisers; Chairman and Trustee, Federated
Investors; and Chairman and Director of the Corporation. John A. Staley, IV, is
President of Federated Advisers; Vice President and Trustee, Federated
Investors; Executive Vice President, Federated Securities Corp.; and Vice
President of the Corporation. J. Christopher Donahue is Trustee, Federated
Advisers; President and Trustee, Federated Investors; President and Director,
Federated Administrative Services, Inc.; and Vice President of the Corporation.
John W. McGonigle is Trustee, Federated Advisers; Trustee, Vice President,
Secretary, and General Counsel, Federated Investors; Executive Vice President,
Secretary, and Director, Federated Administrative Services, Inc.; Executive Vice
President and Director, Federated Securities Corp.; and Vice President and
Secretary of the Corporation. The Adviser shall not be liable to the
Corporation, the Fund or any shareholder of the Fund 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, the Adviser receives an annual investment advisory
fee as described in the prospectus. During the period from June 9, 1993 (date of
initial public investment) to November 30, 1993, the Fund's Adviser earned
$5,173, all of which was voluntarily waived and also voluntarily reimbursed the
Fund for $45,000 of other operating expenses.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes,
9
- --------------------------------------------------------------------------------
and extraordinary expenses) exceed 2.50% per year of the first $30
million of average net assets, 2.0% per year of the next $70 million of
average net assets, and 1.50% per year of the remaining average net
assets, the adviser will reimburse the Corporation 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 reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee. This arrangement is not part of the advisory contract and
may be amended or rescinded in the future.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, Inc., a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund at approximate cost.
During the period from June 9, 1993 (date of initial public investment) to
November 30, 1993, the Fund incurred costs of $1,899 for administrative
services. John A. Staley, IV, an officer of the Corporation, and Dr. Henry J.
Gailliot, an officer of Federated Advisers, the Adviser to the Fund, hold
approximately 15% and 20%, respectively, of the outstanding common stock and
serve as directors of Commercial Data Services, Inc., a company which provides
computer processing services to Federated Administrative Services, Inc. For the
fiscal years ended November 30, 1993, 1992, and 1991, Federated Administrative
Services, Inc. paid approximately $164,324, $186,144, and $193,178,
respectively, for services provided by Commercial Data Services, Inc.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those which 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 relation 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
- --------------------------------------------------------------------------------
Shares of the Fund 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 the Fund."
DISTRIBUTION PLAN
With respect to the Fund, the Corporation has adopted a Plan pursuant to Rule
12b-1 under the Investment Company Act of 1940. The Plan provides for payment of
fees to Federated Securities Corp. to finance any activity which is principally
intended to result in the sale of the Fund's shares subject to the Plan. Such
activities may include the advertising and marketing of shares; preparing,
printing, and distributing prospectuses and sales literature to prospective
shareholders, brokers, or administrators; and implementing and operating the
Plan. Pursuant to the Plan, the distributor may pay fees to brokers for
distribution services.
The Directors expect that the Plan will result in the sale of a sufficient
number of shares so as to allow the Fund to achieve economic viability. It is
also anticipated that an increase in the size of the Fund will facilitate more
efficient portfolio management and assist the Fund in seeking to achieve its
investment objective.
10
- --------------------------------------------------------------------------------
During the period from June 1, 1993 (date of initial public investment) to
November 30, 1993, brokers and administrators (financial institutions) received
fees in the amount of $9,699, pursuant to the distribution plan.
SHAREHOLDER SERVICES PLAN
From the period from June 1, 1993 (date of initial public investment) to
November 30, 1993, the Fund paid $2,100 to financial institutions as a
shareholder services fee under the Shareholder Services Plan.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value generally changes each day. The days on which net asset value is
calculated for shares are described in the prospectus.
VALUING MUNICIPAL BONDS
The Directors uses an independent pricing service to value municipal bonds. The
independent pricing service takes into consideration yield, stability, risk,
quality, coupon rate, maturity, type of issue, trading characteristics, special
circumstances of a security or trading market, and any other factors or market
data it considers relevant in determining valuations for normal institutional
size trading units of debt securities, and does not rely exclusively on quoted
prices.
USE OF AMORTIZED COST
The Board of Directors has decided that the fair value of debt securities
authorized to be purchased by the Fund with remaining maturities of 60 days or
less at the time of purchase shall be their amortized cost value, unless the
particular circumstances of the security indicate otherwise. Under this method,
portfolio instruments and assets are valued at the acquisition cost as adjusted
for amortization of premium or accumulation of discount rather than at current
market value. The Executive Committee continually assesses this method of
valuation and recommends changes where necessary to assure that the Fund's
portfolio instruments are valued at their fair value as determined in good faith
by the Directors.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at the next computed net asset value after the Fund
receives the redemption request, less any applicable contingent deferred sales
charge. Redemption procedures and redemption fees are explained in the
prospectus under "Redeeming Shares." Although Federated Services Company 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
Although the Fund intends to redeem shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the Fund's portfolio. To the extent available,
such securities will be readily marketable.
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 further cash payments will have a material adverse effect on
remaining shareholders. In such a case, the Corporation 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 transactions 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
11
- --------------------------------------------------------------------------------
- - distribute to its shareholders at least 90% of its net income earned during
the year.
CAPITAL GAINS
Capital gains or losses may be realized by the Fund on the sale of
portfolio securities and as a result of discounts from par value on
securities held to maturity. Sales would generally be made because of:
- the availability of higher relative yields;
- differentials in market values;
- new investment opportunities;
- changes in creditworthiness of an issuer; or
- an attempt to preserve gains or limit losses.
Distributions of long-term capital gains are taxed as such, whether they are
taken in cash or reinvested, and regardless of the length of time that the
shareholder has owned shares. Any loss by a shareholder on shares held for less
than six months and sold after a capital gains distribution will be treated as a
long-term capital loss to the extent of the capital gains distribution.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's cumulative total return for the period between June 1, 1993 (date of
initial public investment) to November 30, 1993 was 2.00%.
Cumulative total return reflects the Fund's total performance over a specific
period of time. The Fund's total return is representative of only five months of
activity since the Fund's date of initial public investment.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for the thirty-day period ended November 30, 1993 was 5.11%.
The yield for the Fund 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 maximum offering price per share of the Fund on
the last day of the period. This value is then annualized using semi-annual
compounding. This means that the amount of income generated during the
thirty-day period is assumed to be generated each month over a twelve-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.
TAX-EQUIVALENT YIELD
- --------------------------------------------------------------------------------
The Fund's tax-equivalent yield for the thirty-day period ended November 30,
1993 was 7.10%.
The tax-equivalent yield of the Fund is calculated similarly to the yield, but
is adjusted to reflect the taxable yield that the Fund would have had to earn to
equal its actual yield, assuming tax rates of 15%, 28%, and 31%, and assuming
that income is 100% tax-exempt.
TAX-EQUIVALENCY TABLE
The Fund may also use a tax-equivalency table in advertising and sales
literature. The interest earned by the municipal obligations in the Fund's
portfolio generally remains free from federal regular income tax, and often is
free
12
- --------------------------------------------------------------------------------
from state and local taxes as well.* As the table below indicates, a "tax-free"
investment is an attractive choice for investors, particularly in times of
narrow spreads between tax-free and taxable yields.
<TABLE>
<S> <C> <C> <C> <C> <C>
TAXABLE YIELD EQUIVALENT FOR 1994
MULTISTATE MUNICIPAL FUND
- -----------------------------------------------------------------------------------------------------------
FEDERAL INCOME TAX BRACKET:
15.00% 28.00% 31.00% 36.00% 39.60%
- -----------------------------------------------------------------------------------------------------------
JOINT RETURN: $1-38,000 $38,001-91,850 $91,851-140,000 $140,001-250,000 OVER $250,000
SINGLE RETURN: $1-22,750 $22,751-55,100 $55,101-115,000 $115,001-250,000 OVER $250,000
- -----------------------------------------------------------------------------------------------------------
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
- -----------------------------------------------------------------------------------------------------------
2.50% 2.94% 3.47% 3.62% 3.91% 4.14%
3.00 3.53 4.17 4.35 4.69 4.97
3.50 4.12 4.86 5.07 5.47 5.79
4.00 4.71 5.56 5.80 6.25 6.62
4.50 5.29 6.25 6.52 7.03 7.45
5.00 5.88 6.94 7.25 7.81 8.28
5.50 6.47 7.64 7.97 8.59 9.11
6.00 7.06 8.33 8.70 9.38 9.93
6.50 7.65 9.03 9.42 10.16 10.76
7.00 8.24 9.72 10.14 10.94 11.59
7.50 8.82 10.42 10.87 11.72 12,42
8.00 9.41 11.11 11.59 12.50 13.25
</TABLE>
Note: The maximum marginal tax rate for each bracket was used in calculating the
taxable yield equivalent.
The above chart is for illustrative purposes only and uses tax brackets that
went into effect beginning January 1, 1993. It is not an indicator of past or
future performance of Fund shares.
* Some portion of the Fund's income may be subject to the federal alternative
minimum tax and state and local regular or alternative minimum taxes.
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's expenses; and
- - various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and net asset value per share fluctuate daily. Both net earnings and net asset
value per share are factors in the computation of yield and total return as
described above.
From time to time the Fund may advertise the performance of shares compared to
similar funds or portfolios using certain indices, reporting services, and
financial publications. These may include the following:
- - LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time.
From time to time, the Fund will quote its Lipper ranking in the "General
Municipal Debt Funds" category in advertising and sales literature.
- - MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. The total returns
represent the historic change in the value of an investment in the Fund based on
monthly reinvestment of dividends over a specified period of time. In addition,
advertisements and sales literature for the Fund may include charts and other
illustrations that depict the hypothetical growth of a tax-free investment as
compared to a taxable investment.
13
- --------------------------------------------------------------------------------
Advertising and sales literature for the Fund may include quotations from the
Tax Foundation that illustrate the effect of taxes on income.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index need,
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:
14
APPENDIX
- --------------------------------------------------------------------------------
STANDARD AND POOR'S CORPORATION MUNICIPAL 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.
NR--Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MOODY'S INVESTORS SERVICE, INC., MUNICIPAL 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.
NR--Not rated by Moody's.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its generic rating category; the modifier 1
indicates that the security ranks in the higher end of its generic ranking
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
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 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.
NR--NR indicates that Fitch does not rate the specific issue. Plus (+) or Minus
(-):
Plus and minus signs are used with a rating symbol to indicate the relative
position of a credit within the rating category. Plus and minus signs, however,
are not used in the AAA category.
15
- --------------------------------------------------------------------------------
STANDARD AND POOR'S MUNICIPAL NOTE RATINGS
SP-1--Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a plus
(+) designation.
SP-2--Satisfactory capacity to pay principal and interest.
MOODY'S INVESTORS SERVICE, INC., SHORT-TERM LOAN RATINGS
MIG1/VMIG1--This designation denotes best quality. There is a present strong
protection by established cash flows, superior liquidity support or demonstrated
broadbased access to the market for refinancing.
MIG2/VMIG2--This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
FITCH INVESTORS SERVICE, INC. SHORT-TERM DEBT RATINGS
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2--Good Credit Quality. Issues carrying this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as the
F-1+ and F-1 categories.
STANDARD AND POOR'S CORPORATION COMMERCIAL PAPER RATINGS
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
P-1--Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. PRIME-1 repayment
capacity will normally be evidenced by the following characteristics:
Conservative capitalization structures with moderate reliance on debt and ample
asset protection; broad margins in earning coverage of fixed financial charges
and high internal cash generation; well established access to a range of
financial markets and assured sources of alternate liquidity.
P-2--Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
3032504B (1/94)
LIMITED TERM MUNICIPAL FUND
(A PORTFOLIO OF FIXED INCOME SECURITIES, INC.)
INVESTMENT SHARES
PROSPECTUS
The Investment Shares offered by this prospectus represent interests in Limited
Term Municipal 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 provide a high level of current
income which is exempt from federal regular income tax (federal regular income
tax does not include the federal alternative minimum tax) consistent with the
preservation of principal. The Fund pursues this objective through the
compilation of a portfolio, the weighted-average duration of which will at all
times be limited to four years or less.
THESE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK AND ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, 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 Investment Shares. Keep this prospectus for future reference.
The Fund has also filed a Combined Statement of Additional Information for
Investment Shares and Fortress Shares dated January 31, 1994 with the Securities
and Exchange Commission. The information contained in the Combined Statement of
Additional Information is incorporated by reference in this prospectus. You may
request a copy of the 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 January 31, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Municipal Securities 4
Characteristics 5
Participation Interests 5
Municipal Leases 5
Industrial Development Bonds 6
Inverse Floaters 6
Municipal Notes 7
Tax-Exempt Commercial Paper 7
Pre-Refunded Municipal Securities 7
Variable and Floating Rate Securities 8
Auction Rate Securities 8
Demand Features 9
Tender Option Bonds 9
Zero Coupon and Capital
Appreciation Bonds 10
Restricted and Illiquid Securities 10
Average Portfolio Duration 10
When-Issued and Delayed
Delivery Transactions 10
Futures Contracts and Options to Buy
or Sell Such Contracts 10
Temporary Investments 11
Investment Risks 11
Investment Limitations 12
NET ASSET VALUE 12
- ------------------------------------------------------
INVESTING IN INVESTMENT SHARES 12
- ------------------------------------------------------
Share Purchases 12
Through a Financial Institution 12
Directly by Mail 13
Conversion to Federal Funds 13
Directly by Wire 13
Minimum Investment Required 13
What Shares Cost 13
Dealer Concession 14
Eliminating the Sales Charge 14
Quantity Discounts and Accumulated
Purchases 14
Letter of Intent 14
Reinvestment Privilege 15
Systematic Investment Program 15
Exchange Privilege 15
Certificates and Confirmations 15
Dividends and Distributions 15
REDEEMING INVESTMENT SHARES 16
- ------------------------------------------------------
Through a Financial Institution 16
Directly by Mail 16
Signatures 17
Receiving Payment 17
By Check 17
By Wire 17
Systematic Withdrawal Program 17
Redemption Before Purchase
Instruments Clear 17
Accounts with Low Balances 18
Exchanges for Shares of Other Funds 18
FIXED INCOME SECURITIES, INC. INFORMATION 18
- ------------------------------------------------------
Management of Fixed Income
Securities, Inc. 18
Board of Directors 18
Investment Adviser 18
Advisory Fees 18
Adviser's Background 19
Portfolio Manager's Background 19
Distribution of Investment Shares 19
Distribution Plan 19
Administration of the Fund 20
Administrative Services 20
Shareholder Services Plan 20
Custodian 20
Transfer Agent, and
Dividend Disbursing Agent 20
Legal Counsel 20
Independent Auditors 20
Expenses of the Fund and
Investment Shares 21
SHAREHOLDER INFORMATION 21
- ------------------------------------------------------
Voting Rights 21
TAX INFORMATION 22
- ------------------------------------------------------
Federal Income Tax 22
Pennsylvania Corporate and Personal
Property Taxes 22
Other State and Local Taxes 23
PERFORMANCE INFORMATION 23
- ------------------------------------------------------
OTHER CLASSES OF SHARES 23
- ------------------------------------------------------
Financial Highlights--Fortress Shares 24
FINANCIAL STATEMENTS 25
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 41
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).................................................................... 1.00%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price).................................................................... None
Deferred Sales Load (as a percentage of original purchase price or
redemption proceeds, as applicable).................................................................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)....................................... None
Exchange Fee............................................................................................. None
ANNUAL INVESTMENT SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (1)........................................................................ 0.00%
12b-1 Fee................................................................................................ 0.25%
Total Other Expenses (after expense reimbursement)....................................................... 0.85%
Shareholder Servicing Fee................................................................. 0.25%
Total Investment Shares Operating Expenses (2).................................................. 1.10%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time
at its sole discretion. The maximum management fee is 0.40%.
(2) The Total Investment Shares Operating Expenses in the table above are based
on expenses expected during the fiscal year ending November 30, 1994. The
Total Investment Shares Operating Expenses were 0.50% for the fiscal year
ended November 30, 1993, and were 2.21% absent the voluntary waiver of the
management fee and the voluntary reimbursement of certain other operating
expenses.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF INVESTMENT SHARES OF THE FUND
WILL BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN INVESTMENT 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.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (1) 5% annual return and
(2) redemption at the end of each time period. As noted in the table above, Investment Shares
are not subject to a redemption fee............................................................ $21 $45
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The information set forth in the foregoing table and example relates only to
the Investment Shares of the Fund. The Fund also offers another class of shares
called Fortress Shares. Fortress Shares and Investment Shares are subject to
certain of the same expenses. However, Fortress Shares are subject to a 12b-1
fee of 0.15% and a contingent deferred sales charge of 1.00%. See "Other Classes
of Shares."
LIMITED TERM MUNICIPAL FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Independent Auditors' Report on page 41.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1993*
<S> <C>
- ----------------------------------------------------------------------------------------------- -----------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- -----------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------------
Net investment income 0.10
- -----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.02
- ----------------------------------------------------------------------------------------------- -----------------
Total from investment operations 0.12
- -----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.10>)
- ----------------------------------------------------------------------------------------------- -----------------
NET ASSET VALUE, END OF PERIOD $ 10.02
- ----------------------------------------------------------------------------------------------- -----------------
TOTAL RETURN** 1.20%
- -----------------------------------------------------------------------------------------------
RATIOS, TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------
Expenses 0.50%(a)
- -----------------------------------------------------------------------------------------------
Net investment income 4.30%(a)
- -----------------------------------------------------------------------------------------------
Expenses waiver/reimbursment (b) 1.71%(a)
- -----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $13,694
- -----------------------------------------------------------------------------------------------
Portfolio turnover rate 0 %
- -----------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from September 1, 1993 (date of initial
public offering) to November 30, 1993.
** Based on net asset value which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) Increase/decrease in above expense/income ratios due to waivers or
reimbursements of expenses (Note 5).
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report dated November 30, 1993, which can be obtained free of charge.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
Fixed Income Securities, Inc. 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
three separate portfolios: Limited Term Fund, Limited Term Municipal Fund and
Multi-State Municipal Income Fund. With respect to the Fund, the Directors have
established two classes of shares known as Fortress Shares and Investment
Shares. This prospectus relates only to the Investment Shares class of the Fund
("Shares").
The Fund is designed for investors seeking current income exempt from federal
regular income tax. A minimum initial investment of $5,000 is required.
Shares are sold at net asset value plus an applicable sales charge and are
redeemed at net asset value. Fund assets may be used in connection with the
distribution of Shares.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
As the name of the Fund implies, the investment objective of the Fund is to
provide a high level of current income which is exempt from federal regular
income tax (federal regular income tax does not include the federal alternative
minimum tax) consistent with the preservation of principal. Interest income of
the Fund that is exempt from federal income tax retains its tax-free status when
distributed to the Fund's shareholders. 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 limited to municipal securities, the weighted-average
duration of which will at all times be limited to four years or less. Unless
indicated otherwise, this and the investment policies described below may be
changed by the Directors without shareholder approval. Shareholders will be
notified before any material change in these policies becomes effective.
ACCEPTABLE INVESTMENTS. Municipal securities are debt obligations issued by or
on behalf of states, territories, and possessions of the United States,
including the District of Columbia, and their political subdivisions, agencies
and instrumentalities, the interest from which is exempt from federal regular
income tax.
As a matter of investment policy, which may not be changed without shareholder
approval, under normal circumstances, the Fund will be invested so that at least
80% of its net assets are invested in obligations, the interest from which is
exempt from federal regular income tax. The Fund, which can be changed without
shareholder approval, may invest up to 25% of its assets in securities of
issuers located in the same state.
The Fund may also transact in put and call options, futures contracts, and
options on futures contracts for hedging purposes.
MUNICIPAL SECURITIES. Municipal securities are generally issued to finance
public works, such as airports, bridges, highways, housing, hospitals, mass
transportation projects, schools, streets, and water and sewer works. They are
also issued to repay outstanding obligations, to raise funds for general
operating expenses, and to make loans to other public institutions and
facilities.
The two principal classifications of municipal securities are "general
obligation" and "revenue" issues. General obligation issues are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. Interest on and principal of revenue issues, however,
are payable only from the revenue generated by the facility financed by the bond
or other specified sources of revenue. Revenue issues do not represent a pledge
of credit or create any debt of or charge against the general revenues of a
municipality or public authority. Industrial development bonds are typically
classified as revenue bonds.
Industrial development bonds are issued by or on behalf of public authorities to
provide financing aid to acquire sites or construct and equip facilities for
privately or publicly owned corporations. The availability of this financing
encourages these corporations to locate within the sponsoring communities and
thereby increases local employment.
Municipal securities may carry fixed, floating or inverse floating rates of
interest. Fixed rate securities bear interest at the same rate from issuance
until maturity. The interest rate on floating rate securities is subject to
adjustment based upon changes in market interest rates or indices, such as a
bank's prime rate or a published market index. The interest rate may be adjusted
at specified intervals or immediately upon any change in the applicable index
rate. The interest rate for most floating rate securities varies directly with
changes in the index rate, so that the market value of the security will
approximate its stated value at the time of each adjustment. However, inverse
floating rate securities have interest rates that vary inversely with changes in
the applicable index rate, such that the security's interest rate rises when
market interest rates fall and falls when market interest rates rise. The market
value of floating rate securities is less sensitive than fixed rate securities
to changes in market interest rates. In contrast, the market value of inverse
floating rate securities is more sensitive to market rate changes than fixed or
floating rate securities. The effect of market rate changes on securities
depends upon a variety of factors, including market expectations as to future
changes in interest rates and, in the case of floating and inverse floating rate
securities, the frequency with which the interest rate is adjusted and the
multiple of the index rate used in making the adjustment.
Most municipal securities pay interest in arrears on a semiannual or more
frequent basis. However, certain securities, typically known as capital
appreciation bonds or zero coupon bonds, do not provide for any interest
payments prior to maturity. Such securities are normally sold at a discount from
their stated value, or provide for periodic increases in their stated value to
reflect a compounded interest rate. The market value of these securities is also
more sensitive to changes in market interest rates than securities that provide
for current interest payments.
The Fund will not generally invest more than 25% of its total assets in any one
industry. Governmental issuers of municipal securities are not considered part
of any "industry." However, municipal securities backed only by the assets and
revenues of nongovernmental users may, for this purpose, be deemed to
be related to the industry in which such nongovernmental users engage, and the
25% limitation would apply to such obligations. It is nonetheless possible that
the Fund may invest more than 25% of its assets in a broader segment of the
municipal securities market, such as industrial development bonds and revenue
obligations of hospitals and other health care facilities, housing agency
revenue obligations, or airport revenue obligations. This would be the case only
if the Fund determines that the yields available from obligations in a
particular segment of the market justified the additional risks associated with
a large investment in such segment. Although such obligations could be supported
by the credit of governmental users or by the credit of nongovernmental users
engaged in a number of industries, economic, business, political and other
developments generally affecting the revenues of such users (for example,
proposed legislation or pending court decisions affecting the financing of such
projects and market factors affecting the demand for their services or products)
may have a general adverse effect on all municipal securities in such a market
segment.
CHARACTERISTICS. The municipal securities in which the Fund invests are
rated, at the time of purchase, Baa or better by Moody's Investors Service,
Inc. ("Moody's") or BBB or better by Standard & Poor's Corporation ("S&P")
or Fitch Investors Service ("Fitch"). In certain cases the Fund's adviser
may choose bonds which are unrated if it determines that such bonds are of
comparable quality or have similar characteristics to investment grade
bonds. Bonds rated "BBB" by S&P or "Baa" by Moody's have speculative
characteristics. Changes in economic conditions or other circumstances are
more likely to lead to weakened capacity to make principal and interest
payments than higher rated bonds. If the Fund purchases an investment grade
bond, and the rating of such bond is subsequently downgraded so that the
bond is no longer classified as investment grade, the Fund is not required
to drop the bond from the portfolio, but will consider whether such action
is appropriate. A description of the rating categories is contained in the
Appendix to the Statement of Additional Information.
PARTICIPATION INTERESTS. The Fund may purchase participation interests
from financial institutions such as commercial banks, savings and loan
associations and insurance companies. These participation interests give
the Fund an undivided interest in one or more underlying municipal
securities. The financial institutions from which the Fund purchases
participation interests frequently provide or obtain irrevocable letters of
credit or guarantees to attempt to assure that the participation interests
are of high quality. The Directors of the Fund will evaluate whether
participation interests meet the prescribed quality standards for the Fund.
MUNICIPAL LEASES. Municipal leases are obligations issued by state and
local governments or authorities to finance the acquisition of equipment
and facilities. They may take the form of a lease, an installment purchase
contract, a conditional sales contract or a participation certificate of
any of the above.
Also included within the general category of municipal securities are
certain lease obligations or installment purchase contract obligations and
participations therein (hereinafter collectively called "lease
obligations") of municipal authorities or entities. Although lease
obligations do not constitute general obligations of the municipality for
which the municipality's taxing power is pledged, a lease obligation is
ordinarily backed by the municipality's covenant to budget for, appropriate
and make the payments due under the lease obligation. Interest on lease
obligations is tax-exempt to the same extent as if the municipality had
issued debt obligations to finance the underlying project or purchase.
However, certain lease obligations contain "non-appropriation" clauses
which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated
for such purpose on a yearly basis. In addition to the "non-appropriation"
risk, these securities represent a relatively new type of financing that
has not yet developed the depth of marketability associated with more
conventional bonds and some lease obligations may be illiquid. Although
"non-appropriation" lease obligations are generally secured by the leased
property, disposition of the property in the event of foreclosure might
prove difficult. In addition, the tax treatment of such obligations in the
event of non-appropriation is unclear particularly if payment of such
obligations is guaranteed by a third party guarantor, such as a municipal
bond insurer (MBIA, AMBAC, etc.).
Some municipal leases may be considered to be illiquid. However, some
municipal leases may contain put provisions which grant the Fund the right
to sell the securities to the issuer at a predetermined price and date.
Such provisions improve the marketability and enhance the liquidity of the
security. The Fund does not intend to invest more than 10% of its total
assets in
non-putable lease obligations including those that contain
"non-appropriation" clauses.
INDUSTRIAL DEVELOPMENT BONDS. As discussed above, industrial development
bonds are generally issued to provide financing aid to acquire sites or
construct and equip facilities for use by privately or publicly owned
corporations. Most state and local governments have the power to permit the
issuance of industrial development bonds to provide financing for such
corporations in order to encourage the corporations to locate within their
communities. Industrial development bonds do not represent a pledge of
credit or create any debt of municipality or a public authority, and no
taxes may be levied for payment of principal or interest on these bonds.
The principal and interest is payable solely out of monies generated by the
entities using or purchasing the sites or facilities. These bonds will be
considered municipal securities if the interest paid on them, in the
opinion of bond counsel or in the opinion of the officers of the Fund
and/or the adviser of the Fund, is exempt from federal regular income tax.
INVERSE FLOATERS. The Fund may invest in various types of derivative
municipal securities whose interest rates bear an inverse relationship to
the interest rate on another security or the value of an index ("inverse
floaters"). Because changes in the interest rate on the other security or
index inversely affect the residual interest paid on the inverse floater,
the value of an inverse floater is generally more volatile than that of a
fixed rate bond. The effective duration of an inverse floating rate
security, in the absence of rate "ceilings" or "floors", is greater than
that of a fixed rate security of equivalent maturity. Inverse floaters have
interest rate adjustment formulas which generally reduce or, in the
extreme, eliminate the interest paid to the Fund when short-term interest
rates rise, and increase the interest paid to the Fund when short-term
interest rates fall. Inverse floaters have varying degrees of liquidity,
and the market for these securities is new and relatively volatile. These
securities tend to underperform the market for fixed rate bonds in a rising
interest rate environment, but tend to outperform the market for fixed rate
bonds when interest rates decline. Shifts in the relationship between
short-term and long-term interest rates may alter this tendency, however.
In return for this volatility, inverse floaters typically offer the
potential for yields exceeding the yields available on fixed rate bonds
with comparable credit quality and stated maturity. These securities
usually permit the investor to convert the floating rate to a fixed rate
(normally adjusted downward), and this optional conversion feature may
provide a partial hedge against rising interest rates if exercised at an
opportune time. The Fund does not intend to invest more than 20% of its
total assets in inverse floaters.
MUNICIPAL NOTES. Municipal securities in the form of notes generally are
used to provide for short-term capital needs, in anticipation of an
issuer's receipt of other revenues or financing, and typically have
maturities of up to three years. Such instruments may include Tax
Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation Notes,and
Tax and Revenue Anticipation Notes. Tax Anticipation Notes are issued to
finance the working capital needs of governments. Generally, they are
issued in anticipation of various tax revenues, such as income, sales,
property, use and business taxes, and are payable from these specific
future taxes. Revenue Anticipation Notes are issued in expectation of
receipt of other kinds of revenue, such as federal revenues available under
Federal Revenue Sharing programs. Bond Anticipation Notes are issued to
provide interim financing until long-term bond financing can be arranged.
In most cases, the long-term bonds then provide the funds needed for
repayment of the notes. Tax and Revenue Anticipation Notes combine the
funding sources of both Tax Anticipation Notes and Revenue Anticipation
Notes. The obligations of an issuer of municipal notes are generally
secured by the anticipated revenues from taxes, grants or bond financing.
An investment in such instruments, however, presents a risk that the
anticipated revenues will not be received or that such revenues will be
insufficient to satisfy the issuer's payment obligations under the notes or
that refinancing will be otherwise unavailable.
TAX-EXEMPT COMMERCIAL PAPER. Issues of commercial paper typically
represent short-term, unsecured, negotiable promissory notes. These
obligations are issued by state and local governments and their agencies to
finance working capital needs of municipalities or to provide interim
construction financing and are paid from general revenues of municipalities
or are refinanced with long-term debt. In most cases, tax-exempt commercial
paper is backed by letters of credit, lending agreements, note repurchase
agreements or other credit facility agreements offered by banks or other
institutions.
PRE-REFUNDED MUNICIPAL SECURITIES. The Fund may invest in pre-refunded
municipal securities. The principal of and interest on pre-refunded
municipal securities are no longer paid from the original revenue source
for the municipal securities. Instead, the source of such payments is
typically an escrow fund consisting of obligations issued or guaranteed by
the U.S. government. The assets in the escrow fund are derived from the
proceeds of refunding bonds issued by the same issuer as the pre-refunded
municipal securities, but usually on more favorable terms. Issuers of
municipal securities use this advance refunding technique to obtain more
favorable terms with respect to municipal securities that are not yet
subject to call or redemption by the issuer. For example, advance refunding
enables an issuer to refinance debt at lower market interest rates,
restructure debt to improve cash flow or eliminate restrictive covenants in
the indenture or other governing instrument for the pre-refunded municipal
securities. However, except for a change in the revenue source from which
principal and interest payments are made, the pre-refunded municipal
securities remain outstanding on their original terms until they mature or
are redeemed by the issuer. The effective maturity of pre-refunded
municipal securities will be the redemption date if the issuer has assumed
an obligation or indicated its intention to redeem such securities on
the redemption date. Pre-refunded municipal securities are usually
purchased at a price which represents a premium over their face value or
their redemption value.
VARIABLE AND FLOATING RATE SECURITIES. The interest rates payable on
certain securities in which the Fund may invest, which will generally be
revenue obligations, are not fixed and may fluctuate based upon changes in
market rates. A variable rate obligation has an interest rate which is
adjusted at predesignated periods. Interest on a floating rate obligation
is adjusted whenever there is a change in the market rate of interest on
which the interest rate payable is based. Variable or floating rate
obligations generally permit the holders of such obligations to demand
payment of principal from the issuer or a third party at any time or at
stated intervals. Variable and floating rate obligations are less effective
than fixed rate instruments at locking in a particular yield. Nevertheless,
such obligations may fluctuate in value in response to interest rate
changes if there is a delay between changes in market interest rates and
the interest reset date for an obligation. The Fund will take demand
features into consideration in determining the average portfolio duration
of the Fund and the effective maturity of individual municipal securities.
In addition, the absence of an unconditional demand feature exercisable
within seven days will, and the failure of the issuer or a third party to
honor its obligations under a demand feature might, require a variable or
floating rate obligation to be treated as illiquid for purposes of the
Fund's 15% limitation on illiquid investments.
AUCTION RATE SECURITIES. The Fund may invest in auction rate municipal
securities and auction rate preferred securities issued by closed-end
investment companies that invest primarily in municipal securities
(collectively, "auction rate securities"). The Fund does not intend to
invest more than 10% of its total assets in auction rate securities.
Provided that the auction mechanism is successful, auction rate securities
usually permit the holder to sell the securities in an auction at par value
at specified intervals. The interest rate or dividend is reset by "Dutch"
auction in which bids are made by broker-dealers and other institutions for
a certain amount of securities at a specified minimum yield. The interest
rate or dividend rate set by the auction is the lowest interest or dividend
rate that covers all securities offered for sale. While this process is
designed to permit auction rate securities to be traded at par value, there
is some risk that an auction will fail due to insufficient demand for the
securities. If so, the securities may become illiquid and subject to the
Fund's 15% limitation on illiquid securities.
Dividends on auction rate preferred securities issued by a closed-end fund
may be designated as exempt from federal income tax to the extent they are
attributable to exempt income earned by the closed-end fund on the
securities in its portfolio and distributed to holders of the preferred
securities, provided that the preferred securities are treated as equity
securities for federal income tax purposes and the closed-end fund complies
with certain tests under the Internal Revenue Code. For purposes of
complying with the 20% limitation on the Fund's investments in taxable
securities, auction rate preferred securities will be treated as taxable
securities unless substantially all of the dividends on such securities is
expected to be exempt from regular federal income taxes.
The Fund's investments in auction rate preferred securities of closed-end
funds are subject to the limitations prescribed by the Investment Company
Act of 1940 and certain state securities regulations. These limitations
include a prohibition against acquiring more than 3% of the voting
securities of any other investment company, and investing more than 5% of
the Fund's assets in securities of any one investment company or more than
10% of its assets in securities of all investment companies. The Fund will
indirectly bear its proportionate share of any management fees paid by
such closed-end funds in addition to the advisory fee payable directly by
the Fund.
DEMAND FEATURES. In order to enhance the liquidity of municipal
securities, the Fund may acquire the right to sell a security to another
party at a guaranteed price and date. Such a right to resell may be
referred to as a "demand feature" or liquidity put, depending on its
characteristics. The aggregate price which the Fund pays for securities
with demand features may be higher than the price which otherwise would be
paid for the securities. Demand features may not be available or may not be
available on satisfactory terms.
Demand features may involve letters of credit issued by domestic or foreign
banks supporting the other party's ability to purchase the security from
the Fund. The right to sell may be exercisable on demand or at specified
intervals, and may form part of a security or be acquired separately by the
Fund. In considering whether a security meets the Fund's quality standards,
the Fund will look to the creditworthiness of the party providing the Fund
with the right to sell as well as the quality of the security itself. The
Fund values municipal securities which are subject to demand features at
fair market value.
TENDER OPTION BONDS. A tender option bond is a municipal security
(generally held pursuant to a custodial arrangement) having a relatively
long maturity and bearing interest at a fixed rate substantially higher
than prevailing short-term tax-exempt rates. The bond is typically issued
in conjunction with the agreement of a third party, such as a bank,
broker-dealer or other financial institution, pursuant to which such
institution grants the security holders the option, at periodic intervals,
to tender their securities to the institution and receive the face value
thereof. As consideration for providing the option, the financial
institution receives periodic fees equal to the difference between the
bond's fixed coupon rate and the rate, as determined by a remarketing or
similar agent at or near the commencement of such period, that would cause
the securities, coupled with the tender option, to trade at par at the date
of such determination. Thus, after payment of this fee, the security holder
effectively holds a demand obligation that bears interest at the prevailing
short-term tax-exempt rate. The tender option will be taken into
consideration in determining the effective maturity of tender option bonds
and the average portfolio duration of the Fund. The liquidity of a tender
option bond is a function of both the credit quality of the bond issuer and
the financial institution providing liquidity. Consequently, tender option
bonds are deemed to be liquid unless, in the opinion of the Investment
Adviser, the credit quality of the bond issuer and the financial
institution is deemed, in light of the Fund's credit quality requirements,
to be inadequate.
Although the Fund intends to invest in tender option bonds the interest on
which will, in the opinion of bond counsel for the issuer or counsel
selected by the Investment Adviser, be exempt from regular federal income
tax, there is a risk that the Fund will not be considered the owner of such
tender option bonds and thus will not be entitled to treat such interest as
exempt from such tax. In addition, tender offer bonds may be considered to
be securities of an unregistered investment company for purposes of the
limitations imposed by the Investment Company Act of 1940 on the Fund's
investments in investment company securities. Accordingly, the Fund will
comply with the following percentage limitations on investments in tender
option bonds. The Fund will not acquire more than 3% of the voting
securities of the issuer of the tender option bonds, invest more than 5%
of its assets in any one issue if tender option bonds or invest more than
10% of its assets in tender option bonds in the aggregate.
ZERO COUPON AND CAPITAL APPRECIATION BONDS. The Fund may invest in zero
coupon and capital appreciation bonds, which are debt securities issued or
sold at a discount from their face value and which do not entitle the
holder to any periodic payment of interest prior to maturity or a specified
redemption date (or cash payment date). The amount of the discount varies
depending on the time remaining until maturity or cash payment date,
prevailing interest rates, the liquidity of the security and the perceived
credit quality of the issuer. These securities also may take the form of
debt securities that have been stripped of their unmatured interest
coupons, the coupons themselves or receipts or certificates representing
interest in such stripped debt obligations or coupons. Discount with
respect to stripped tax-exempt securities or their coupons may be taxable.
The market prices of capital appreciation bonds generally are more volatile
than the market prices of interest bearing securities and are likely to
respond to a greater degree to changes in interest rates than interest
bearing securities having similar maturities and credit quality.
RESTRICTED AND ILLIQUID SECURITIES. The Fund intends to 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.
AVERAGE PORTFOLIO DURATION. Although the Fund will not maintain a stable net
asset value, the adviser will seek to limit, to the extent consistent with the
Fund's investment objective of current income, the magnitude of fluctuations in
the Fund's net asset value by limiting the dollar-weighted average duration of
the Fund's portfolio. 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 shorter
durations generally have less volatile prices than securities of comparable
quality with longer durations. The Fund should be expected to maintain a higher
average duration during periods of lower expected market volatility, and a lower
average duration during periods of higher expected market volatility. In any
event, the Fund's dollar-weighted average duration will not exceed four years.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase municipal
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.
FUTURES CONTRACTS AND OPTIONS TO BUY OR SELL SUCH CONTRACTS. The Fund may
utilize bond futures contracts and options to a limited extent. Specifically,
the Fund may enter into futures contracts provided that not more than 5% of its
assets are required as a futures contract deposit; in addition, the
Fund may enter into futures contracts and options transactions only to the
extent that obligations under such contracts or transactions represent not more
than 20% of the Fund's assets.
Futures contracts and options may be used for several reasons: to maintain cash
reserves while remaining fully invested, to facilitate trading, to reduce
transactions costs, or to seek higher investment returns when a futures contract
is priced more attractively than the underlying municipal security or index. The
Fund may not use futures contracts or options transactions to leverage its
assets.
For example, in order to remain fully invested in bonds, while maintaining
liquidity to meet potential shareholder redemptions, the Fund may invest a
portion of its assets in a bond futures contract. Because futures contracts only
require a small initial margin deposit, the Fund would then be able to maintain
a cash reserve to meet potential redemptions, while at the same time remaining
fully invested. Also, because the transactions costs of futures contracts and
options may be lower than the costs of investing in bonds directly, it is
expected that the use of futures contracts and options may reduce the Fund's
total transactions costs.
The primary risks associated with the use of futures contracts and options are:
(i) imperfect correlation between the change in market value of the bonds held
by the Fund and the prices of futures contracts and options; and (ii) possible
lack of a liquid secondary market for a futures contract and the resulting
inability to close a futures position prior to its maturity date. The risk of
imperfect correlation will be minimized by investing only in those contracts
whose price fluctuations are expected to resemble those of the Fund's underlying
securities. The risk that the Fund will be unable to close out a futures
position will be minimized by entering into such transactions on a national
exchange with an active and liquid secondary market. Much depends on the ability
of the portfolio manager to predict market conditions based upon certain
economic analysis and factors. In general, the futures market is more liquid
than the municipal bond market, and so by investing in futures, liquidity may be
improved.
TEMPORARY INVESTMENTS. From time to time, during periods of other than normal
market conditions, the Fund may invest in short-term temporary investments which
may or may not be exempt from federal income tax. These temporary investments
include: obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities; other debt securities; commercial paper; certificates of
deposit of domestic branches of U.S. banks; and repurchase agreements
(arrangements in which the organization selling the Fund a security agrees at
the time of sale to repurchase it at a mutually agreed upon time and price).
There are no rating requirements applicable to temporary investments. However,
the investment adviser will limit temporary investments to those rated within
the investment grade categories described under "Acceptable
Investments--Characteristics" (if rated) or those which the investment adviser
judges to have the same characteristics as such investment grade securities (if
unrated).
Although the Fund is permitted to make taxable, temporary investments, there is
no current intention of generating income subject to federal regular income tax.
INVESTMENT RISKS
Yields on municipal securities depend on a variety of factors, including: the
general conditions of the municipal note market and of the municipal bond
market; the size of the particular offering; the maturity of the obligations;
and the rating of the issue. The ability of the Fund to achieve its investment
objective also depends on the continuing ability of the issuers of municipal
securities and participation interests, or the guarantors of either, to meet
their obligations for the payment of interest and principal when due. Since the
Fund will invest primarily in municipal securities bearing fixed rates of
interest, the net asset value of the Shares will generally vary inversely with
changes in prevailing interest rates.
INVESTMENT LIMITATIONS
The Fund will not borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio investment for a percentage of
its cash value with an agreement to buy it back on a set date) or pledge
securities except, under certain circumstances, the Fund may borrow up to
one-third of the value of its total assets and pledge up to 10% of the value of
those assets to secure such borrowings.
The above investment limitation cannot be changed without shareholder approval.
The following limitation, however, may be changed by the Directors without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Fund will not:
invest more than 5% of the value of its total assets in industrial
development bonds where the principal and interest are the responsibility
of companies (or guarantors, where applicable) with less than three years
of continuous operations, including the operation of any predecessor.
NET ASSET VALUE
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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 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 INVESTMENT SHARES
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SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased through an investment dealer who has a sales agreement with the
distributor, Federated Securities Corp., or directly from Federated Securities
Corp. either by mail or wire. The Fund reserves the right to reject any purchase
request.
THROUGH A FINANCIAL INSTITUTION. An investor may call his financial institution
(such as a bank or an investment dealer) to place an order to purchase Shares.
Orders through a financial institution are considered received when the Fund is
notified of the purchase order. Purchase orders through a registered
broker/dealer must be received by the broker before 4:00 p.m. (Eastern time) and
must be transmitted by the broker to the Fund before 5:00 p.m. (Eastern time)
in order for Shares to be purchased at that day's price. Purchase orders
through other financial institutions must be received by the financial
institution and transmitted to the Fund before 4:00 p.m. (Eastern time) in
order for Shares to be purchased at that day's price. It is the financial
institution's responsibility to transmit orders promptly.
DIRECTLY BY MAIL. To purchase Shares by mail directly from Federated Securities
Corp.:
complete and sign the application available from the Fund;
enclose a check made payable to Limited Term Municipal Fund--Investment
Shares; and
send both to the Fund's transfer agent, Federated Services Company,
Federated Investors Tower, Pittsburgh, PA 15222-3779.
Purchases by mail are considered received after payment by check is converted by
Federated Services Company into federal funds. This is generally the next
business day after Federated Services Company receives the check.
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. Federated Services Company acts as the
shareholder's agent in depositing checks and converting them to federal funds.
DIRECTLY BY WIRE. To purchase Shares directly from Federated Securities Corp.
by Federal Reserve wire, call the Fund. All information needed will be taken
over the telephone, and the order is considered received when Federated Services
Company receives payment by wire.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $5,000. Subsequent investments must
be in amounts of at least $100.
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. 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 shares.
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.
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; or
using the reinvestment privilege.
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.
To receive this sales charge elimination, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the purchase is made that Shares are already owned or that purchases are
being combined. The Fund will eliminate the sales charge after it confirms the
purchases.
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 1.00% of the
total amount intended to be purchased in escrow (in Shares) until such purchase
is completed.
The 1.00% 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 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.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis. Under this program, funds may be automatically withdrawn
monthly from the shareholder's checking account maintained at an Automated
Clearing House ("ACH") member institution, and invested in Shares at the net
asset value next determined after an order is received by Federated Services
Company, plus the 1.00% sales charge for purchases under $1 million. A
shareholder may apply for participation in this program through Federated
Securities Corp. or his financial institution.
EXCHANGE PRIVILEGE
Shares in certain Federated Funds which are advised by subsidiaries or
affiliates of Federated Investors may 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 $5,000. A shareholder may obtain
further information on the exchange privilege by calling Federated Securities
Corp. or his financial institution.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder. Share certificates are not issued unless requested
on the application or by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly statements are sent to report dividends paid during the
month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. Distributions of any net realized
long-term capital gains will be made at least once every twelve months.
Dividends and distributions are automatically reinvested in additional Shares on
payment dates at net asset value without a sales charge, unless cash payments
are requested by shareholders on the application or by writing to Federated
Securities Corp.
Shares purchased through a financial institution, for which payment by wire is
received by Federated Services Company on the business day following the order,
begin to earn dividends on the day the wire payment is received. Otherwise,
Shares purchased by wire begin to earn dividends on the business day after wire
payment is received by Federated Services Company. Shares purchased by mail, or
through a financial institution, if the financial institution's payment is by
check, begin to earn dividends on the second business day after the check is
received by Federated Services Company.
Shares earn dividends through the business day that proper written redemption
instructions are received by Federated Services Company.
REDEEMING INVESTMENT SHARES
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The Fund redeems Shares at their net asset value next determined after Federated
Services Company receives the redemption request. Redemptions will be made on
days on which the Fund computes its net asset value. Redemption requests must be
received in proper form and can be made through a financial institution, or
directly from the Fund by written request.
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. If at
any time the Fund shall determine it necessary to terminate or modify this
method of redemption, shareholders will be promptly notified.
Before a financial institution may request redemption by telephone on behalf of
a shareholder, an authorization form permitting the Fund to accept redemption
requests by telephone must first be completed. Telephone redemption 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.
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, such as "Directly by Mail," should be considered.
DIRECTLY BY MAIL
Shareholders may also redeem Shares by sending a written request to Federated
Services Company, Federated Investors Tower, Pittsburgh, PA 15222-3779. This
written request must include the shareholder's name, the Fund name and class of
shares, the account number, and the share or dollar amount to be redeemed.
Shares will be redeemed at their net asset value next determined after Federated
Services Company receives the redemption request, less any applicable redemption
fee.
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 Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
a member firm of the New York, American, Boston, Midwest, or Pacific
Stock Exchange;
a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC; or
any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
RECEIVING PAYMENT
BY CHECK. Normally, a check for the proceeds is mailed within one business
day, but in no event more than seven days, after receipt of a proper
written redemption request provided Federated Services Company has received
payment for shares from the shareholder.
BY WIRE. Redemption requests will be wired the following business day.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive monthly or quarterly payments of a
predetermined amount 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; the minimum withdrawal amount
is $100. 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 balance with a
value of at least $10,000 in the Fund (at current offering price).
A shareholder may apply for participation in this program through Federated
Securities Corp. 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.
REDEMPTIONS BEFORE PURCHASE INSTRUMENTS CLEAR
When Shares are purchased by check, or through ACH, the proceeds from the
redemption of those Shares are not available, and the Shares may not be
exchanged, until the Fund or its agents are reasonably certain that the purchase
check has cleared, which could take up to ten calendar days.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $5,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $5,000 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 certain Federated Funds which are advised
by subsidiaries or affiliates of Federated Investors at net asset value (plus a
sales charge, if applicable). Also, Shares may be exchanged for shares of a fund
in the Fortress Investment Program at net asset value without a sales charge.
This privilege is available to shareholders resident in any state in which the
shares being acquired may be sold.
Shareholders using this privilege must exchange Shares having a net asset value
which at least meets the minimum investment required for the fund into which the
exchange is being made. A shareholder may obtain further information on the
exchange privilege, and may obtain prospectuses for other 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.
Exercise of the exchange privilege is treated as a sale for federal income tax
purposes. Depending on the circumstances, a short or long-term capital gain or
loss may be realized.
FIXED INCOME SECURITIES, INC. INFORMATION
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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
Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Federated
Advisers, the Fund's investment adviser (the "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 0.40 of 1% of the Fund's average daily net assets. Under the
investment advisory contract, which provides for voluntary waivers of
expenses by the Adviser, the Adviser may voluntarily waive some or all of
its fee. The Adviser can terminate this voluntary waiver of some or all of
its advisory fee at any time at its sole discretion. The Adviser has also
undertaken to reimburse the Fund for operating expenses in excess of
limitations established by certain states.
ADVISER'S BACKGROUND. Federated Advisers, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) shares of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, Chairman and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J.
Christopher Donahue, who is President and Trustee of Federated Investors.
Federated Advisers and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services
to a number of investment companies. Total assets under management or
administration by these and other subsidiaries of Federated Investors are
approximately $70 billion. Federated Investors, which was founded in 1956
as Federated Investors, Inc., develops and manages mutual funds primarily
for the financial industry. Federated Investors' track record of
competitive performance and its disciplined, risk averse investment
philosophy serve approximately 3,500 client institutions nationwide.
Through these same client institutions, individual shareholders also have
access to this same level of investment expertise.
PORTFOLIO MANAGER'S BACKGROUND. Mary Jo Ochson has been the Fund's
portfolio manager since its inception. Ms. Ochson joined Federated
Investors in 1982 and has been a Vice President of the Fund's investment
adviser since 1988. Ms. Ochson served as an Assistant Vice President of the
investment adviser from 1984 until 1988. Ms. Ochson is a Chartered
Financial Analyst and received her M.B.A. in Finance from the University of
Pittsburgh.
DISTRIBUTION OF INVESTMENT SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan
adopted in accordance with the Investment Company Act Rule 12b-1 (the
"Plan"), the Fund will pay to Federated Securities Corp. an amount computed
at an annual rate of 0.25 of 1% of the average daily net asset value of the
Shares to finance any activity which is principally intended to result in
the sale of Shares.
Federated Securities Corp. may, from time to time and for such periods as
it deems appropriate, voluntarily reduce its compensation under the Plan to
the extent the expenses attributable to the Shares exceed such lower
expense limitation as the distributor may, by notice to the Fund,
voluntarily declare to be effective.
The distributor may select financial institutions (such as a bank or an
investment dealer) to provide sales support services as agents for their
clients or customers who beneficially own Shares of the Fund.
Financial institutions will receive fees from the distributor based upon
Shares owned by their clients or customers. The schedules of such fees and
the basis upon which such fees will be paid will be determined from time to
time by the distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund
does not pay for unreimbursed expenses of the distributor, including
amounts expended by the distributor in excess of amounts received by it
from the Fund, interest, carrying or other financing charges in connection
with excess amounts expended, or the distributor's overhead expenses.
However, the distributor may be able to recover such amounts or may earn a
profit from future payments made by the Fund under the Plan.
The Glass-Steagall Act limits the ability of a depository institution (such
as a commercial bank or a savings and loan association) to become an
underwriter or distributor of securities. In the event the Glass-Steagall
Act is deemed to prohibit depository institutions from acting in the
capacities described above or should Congress relax current restrictions on
depository institutions, the Directors will consider appropriate changes in
the services.
State securities laws governing the ability of depository institutions to
act as underwriters or distributors of securities may differ from
interpretations given to the Glass-Steagall Act and, therefore, banks and
financial institutions may be required to register as dealers pursuant to
state law.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, Inc., which is
a subsidiary of Federated Investors, provides the Fund with the
administrative personnel and services necessary to operate the Fund. Such
services include shareholder servicing and certain legal and accounting
services. Federated Administrative Services, Inc. provides these at
approximate cost.
SHAREHOLDER SERVICES PLAN. The Fund has adopted a Shareholder Services
Plan (the "Services Plan") with respect to Shares of the Fund. Under the
Services Plan, financial institutions will enter into shareholder service
agreements with the Fund to provide administrative support services to
their customers who from time to time may be owners of record or beneficial
owners of Shares. In return for providing these support services, a
financial institution may receive payments from the Fund at a rate not
exceeding 0.25 of 1% of the average daily net assets of the Shares
beneficially owned by the financial institution's customers for whom it is
holder of record or with whom it has a servicing relationship. These
administrative services may include, but not are not limited to, the
provision of personal services and maintenance of shareholder accounts.
CUSTODIAN State Street Bank and Trust Company ("State Street Bank"),
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 the 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 INVESTMENT 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 of 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 fund or class, only shares of that fund 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 Corporation's, or the Fund's operation and for the election of
Directors under certain circumstances.
Directors may be removed by the Directors or by shareholders at a special
meeting. A special meeting of the shareholders shall be called by the Directors
upon the written request of shareholders owning at least 10% of the outstanding
shares of the Corporation.
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. Shareholders are
not required to pay the federal regular income tax on any dividends received
from the Fund that represent net interest on tax-exempt municipal bonds.
However, under the Tax Reform Act of 1986, dividends representing net interest
earned on some municipal bonds may be included in calculating the federal
individual alternative minimum tax or the federal alternative minimum tax for
corporations.
The alternative minimum tax, equal to 28% of alternative minimum taxable income
for individuals and 20% for corporations, applies when it exceeds the regular
tax for the taxable year. Alternative minimum taxable income is equal to the
regular taxable income of the taxpayer increased by certain "tax preference"
items not included in regular taxable income and reduced by only a portion of
the deductions allowed in the calculation of the regular tax.
The Tax Reform Act of 1986 treats interest on certain "private activity" bonds
issued after August 7, 1986, as a tax preference item for both individuals and
corporations. Unlike traditional governmental purpose municipal bonds, which
finance roads, schools, libraries, prisons and other public facilities, private
activity bonds provide benefits to private parties. The Fund may purchase all
types of municipal bonds, including private activity bonds. Thus, should it
purchase any such bonds, a portion of the Fund's dividends may be treated as a
tax preference item.
In addition, in the case of a corporate shareholder, dividends of the Fund which
represent interest on municipal bonds may be subject to the 20% corporate
alternative minimum tax because the dividends are included in a corporation's
"adjusted current earnings." The corporate alternate minimum tax treats 75% of
the excess of a taxpayer's pre-tax "adjusted current earnings" over the
taxpayer's alternative minimum taxable income as a tax preference item.
"Adjusted current earnings" is based upon the concept of a corporation's
"earnings and profits." Since "earnings and profits" generally includes the full
amount of any Fund dividend, and alternative minimum taxable income does not
include the portion of the Fund's dividend attributable to municipal bonds which
are not private activity bonds, the difference will be included in the
calculations of the corporation's alternative minimum tax.
Dividends of the Fund representing net interest income earned on some temporary
investments and any realized net short-term gains are taxed as ordinary income.
These tax consequences apply whether dividends are received in cash or as
additional Shares. Information on the tax status of dividends and distributions
is provided annually.
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 not subject to Pennsylvania personal property taxes.
OTHER STATE AND LOCAL TAXES
Distributions representing net interest received on tax-exempt municipal
securities are not necessarily free from income taxes of any state or local
taxing authority. State laws differ on this issue and 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, yield and
tax-equivalent yield for 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 tax-equivalent yield of Shares is calculated similarly to the
yield, but is adjusted to reflect the taxable yield that Shares would have had
to earn to equal the actual yield, assuming a specific tax rate. The yield and
tax-equivalent yield do 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, yield and tax-equivalent yield.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
Total return will be calculated separately for Fortress Shares and Investment
Shares. Because Fortress Shares are subject to lower 12b-1 expenses, the yield
for Fortress Shares, for the same period, will exceed that of Investment Shares.
Because Investment Shares are not subject to a contingent deferred sales charge,
the total return for Investment Shares, for the same period, may exceed that of
Fortress Shares.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund currently offers Fortress Shares and Investment Shares. The Fortress
Shares are sold subject to a front-end sales charge of up to 1%, and are subject
to a contingent deferred sales charge. Fortress Shares are subject to a minimum
initial investment of $1,500.
The amount of dividends payable to Investment Shares will generally be less than
that of Fortress Shares by the difference between class expenses borne by shares
of each respective class.
The stated advisory fee is the same for both classes of shares.
LIMITED TERM MUNICIPAL FUND
FINANCIAL HIGHLIGHTS--FORTRESS SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Independent Auditors' Report on page 41.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1993*
<S> <C>
- ----------------------------------------------------------------------------------------------- -----------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- -----------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------------
Net investment income 0.11
- -----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.02
- ----------------------------------------------------------------------------------------------- -----------------
Total from investment operations 0.13
- -----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------------
Dividends to shareholders from net investment operations (0.11)
- ----------------------------------------------------------------------------------------------- -----------------
NET ASSET VALUE, END OF PERIOD $ 10.02
- ----------------------------------------------------------------------------------------------- -----------------
TOTAL RETURN** 1.26%
- -----------------------------------------------------------------------------------------------
RATIOS, TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------
Expenses 0.25%(a)
- -----------------------------------------------------------------------------------------------
Net investment income 4.79%(a)
- -----------------------------------------------------------------------------------------------
Expenses waiver/reimbursment (b) 1.86%(a)
- -----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $3,307
- -----------------------------------------------------------------------------------------------
Portfolio turnover rate 0 %
- -----------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from September 1, 1993 (date of initial
public offering) to November 30, 1993.
** Based on net asset value which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) Increase/decrease in above expense/income ratios due to waivers or
reimbursements of expenses (Note 5).
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report dated November 30, 1993, which can be obtained free of charge.
LIMITED TERM MUNICIPAL FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
MOODY'S
PRINCIPAL OR S&P*
AMOUNT (NOTE 7) VALUE
<S> <C> <C> <C>
- ------------- --------------------------------------------------------------------- ----------- --------------
SHORT-TERM MUNICIPAL SECURITIES--16.8%
- ------------------------------------------------------------------------------------
$ 500,000 Kentucky State Pollution Abatement & Water Residential
Finance Authority, Daily VRDNs, (Toyota Motors Co.)/
(Subject to AMT) AAA $ 500,000
---------------------------------------------------------------------
100,000 Kentucky State Pollution Abatement & Water Residential
Finance Authority, Daily VRDNs, (Toyota Motors Co.)/
(Subject to AMT) AAA 100,000
---------------------------------------------------------------------
900,000 Kentucky State Pollution Abatement & Water Residential
Finance Authority, Daily VRDNs, (Toyota Motors Co.)/
(Subject to AMT) AAA 900,000
---------------------------------------------------------------------
300,000 Peninsula Port Authority of Virginia, Daily VRDNs, (Kinyo Virginia,
Inc.)/(Industrial Bank of Japan, LTD LOC)/
(Subject to AMT) Aa2 300,000
---------------------------------------------------------------------
400,000 Peninsula Port Authority of Virginia, Daily VRDNs, (Kinyo Virginia,
Inc.)/(Industrial Bank of Japan, LTD LOC)/
(Subject to AMT) Aa2 400,000
---------------------------------------------------------------------
200,000 Peninsula Port Authority of Virginia, Daily VRDNs, (Kinyo Virginia,
Inc.)/(Industrial Bank of Japan, LTD LOC)/
(Subject to AMT) Aa2 200,000
---------------------------------------------------------------------
250,000 Crystal City, MN, IDA Weekly VRDNs, (Crystal Gallery Mall)/(Citibank,
NA LOC) A-1 250,000
---------------------------------------------------------------------
200,000 Government Development of Puerto Rico, Weekly VRDNs, (Credit Suisse,
Zurich and Sumitomo Bank, Ltd. LOCs) A-1+ 200,000
--------------------------------------------------------------------- --------------
TOTAL SHORT-TERM MUNICIPAL SECURITIES
(AT AMORTIZED COST) 2,850,000
--------------------------------------------------------------------- --------------
LONG-TERM MUNICIPAL SECURITIES--95.0%
- ------------------------------------------------------------------------------------
ARIZONA--2.6%
---------------------------------------------------------------------
$ 400,000 Maricopa County, AZ, IDA 6.65% (Citizens Utilities Co.)/ (Subject to
AMT), Mandatory Tender 4/1/2001 AAA $ 445,684
--------------------------------------------------------------------- --------------
CALIFORNIA--2.0%
---------------------------------------------------------------------
300,000 Long Beach, CA, 7.00% Harbour Revenue Bonds (Series A)/
(Subject to AMT), 5/15/99 AA- 333,099
--------------------------------------------------------------------- --------------
FLORIDA--2.9%
---------------------------------------------------------------------
275,000 City of Leesburg, FL, 4.60% Hospital Revenue Refunding Bonds (Series
1993B)/(Leesburg Regional Medical Center Project), 7/1/98 BBB+ 270,463
---------------------------------------------------------------------
200,000 Jacksonville, FL, Electric Authority 6.50% Revenue Special
Obligations Bonds (St. Johns Revenue Power Pk System), 10/1/2014
(callable 10/1/99 @ 101.5) AA 214,522
--------------------------------------------------------------------- --------------
Total 484,985
--------------------------------------------------------------------- --------------
ILLINOIS--15.3%
---------------------------------------------------------------------
220,000 Chicago, IL, O'Hare International Airport, 8.00% General Airport
Revenue Bonds (Series A), 1/1/2008
(callable 11/1/97 @ 102) A+ 246,521
---------------------------------------------------------------------
500,000 Illinois Development Financial Authority, 5.25% Revenue Bonds (Series
1993C)/(Catholic Charities Housing Development Corp.
Project)/(Archdiocese of Chicago, Guaranty),
1/1/99 NR 495,895
---------------------------------------------------------------------
245,000 Illinois Development Finance Authority, 7.625% Pollution Control
Revenue Bonds (Illinois Power Co.)/(FGIC Insured), 12/1/2016
(callable 6/1/97 @ 103) AAA 276,529
---------------------------------------------------------------------
250,000 Illinois Health Facilities Authority, 4.95% Revenue
Refunding Bonds (Lutheran Social Services of Illinois),
8/15/96 BBB 251,250
---------------------------------------------------------------------
$ 220,000 Illinois Health Facilities Authority, 5.30% Revenue
Refunding Bonds (Lutheran Social Services of Illinois),
8/15/98 BBB $ 219,474
---------------------------------------------------------------------
600,000 Illinois Health Facilities Authority, 5.75% Revenue Bonds (Mercy
Hospital & Medical Center), 1/1/98 A 613,074
---------------------------------------------------------------------
500,000 Illinois Housing Development Authority, 5.00% Residential Mortgage
Revenue Bonds (Series 1993A)/(Subject to AMT), 2/1/2021 (callable
2/1/2004 @ 102) A 501,320
--------------------------------------------------------------------- --------------
Total 2,604,063
--------------------------------------------------------------------- --------------
INDIANA--1.4%
---------------------------------------------------------------------
225,000 Marion County, IN, Hospital Authority, 6.50% Revenue
Refunding Bonds (Methodist Hospital of Indiana),
9/1/2008 (callable 9/1/99 @ 102) AA 240,964
--------------------------------------------------------------------- --------------
IOWA--1.9%
---------------------------------------------------------------------
325,000 City of Ottumwa, IA, 4.375% Hospital Facilities Revenue Refunding &
Insp. Bonds (Series 1993)/(Ottumwa Regional Health Center, Inc.),
10/1/97 BBB+ 324,561
--------------------------------------------------------------------- --------------
MASSACHUSETTS--6.0%
---------------------------------------------------------------------
250,000 Greater New Bedford Regional Refuse Management District, MA, 4.90% GO
Landfill Bonds (Subject to AMT), 5/1/98 Baa 248,902
---------------------------------------------------------------------
250,000 Massachusetts Education Loan Authority, 6.40% Revenue Bonds (Issue
E)/(Series A)/(AMBAC Insured), 1/1/99 AAA 263,698
---------------------------------------------------------------------
475,000 Massachusetts State College Building, 7.25% Revenue Bonds
(Commonwealth of Massachusetts Guaranty) (Series A),
5/1/2016 (callable 5/1/96 @ 102) A+ 513,926
--------------------------------------------------------------------- --------------
Total 1,026,526
--------------------------------------------------------------------- --------------
MICHIGAN--1.4%
---------------------------------------------------------------------
$ 235,000 Michigan State Strategic Fund, 6.625% Pollution Control Bonds (Series
1987)/(General Motors Corp.), 3/1/2007
(callable 3/1/95 @ 102) BBB+ $ 244,400
--------------------------------------------------------------------- --------------
MINNESOTA--10.3%
---------------------------------------------------------------------
1,500,000 St. Paul, MN, Housing & Redevelopment Authority, 9.75% Hospital
Revenue Bonds (Series B)/(Healtheast Project),
11/1/2017 (callable 3/1/95 @ 102) BBB- 1,743,270
--------------------------------------------------------------------- --------------
NEW JERSEY--1.6%
---------------------------------------------------------------------
250,000 New Jersey Economic Development Authority, 6.75%
Natural Gas Facilities Revenue Bonds (Elizabethtown Gas Co. Project),
10/1/2021 (callable 10/1/96 @ 102) A3 268,580
--------------------------------------------------------------------- --------------
NEW YORK--4.9%
---------------------------------------------------------------------
300,000 New York State Energy Research & Development Authority, 7.75%
Pollution Control Revenue Bonds (Consolidated
Edison Co. Project)/(Subject to AMT), 1/1/2024
(callable 11/1/98 @ 101.5) AA- 337,242
---------------------------------------------------------------------
200,000 New York State Energy Research & Development Authority, 7.375%
Pollution Control Revenue Bonds (Consolidated Edison Co. Project),
7/1/2024 (callable 7/1/98 @ 101) BBB 223,268
---------------------------------------------------------------------
250,000 New York State Energy Research & Development Authority, 8.875%
Pollution Control Revenue Bonds (Niagra Mohawk Power Corp.),
11/1/2025 (callable 11/1/95 @ 102) BBB 277,760
--------------------------------------------------------------------- --------------
Total 838,270
--------------------------------------------------------------------- --------------
NORTH CAROLINA--6.8%
---------------------------------------------------------------------
730,000 North Carolina Eastern Municipal Power, 7.25% Revenue Refunding
Bonds, 1/1/2021 (callable 1/1/97 @ 102) A 795,277
---------------------------------------------------------------------
$ 195,000 North Carolina Eastern Municipal Power Agency, 6.00% Revenue Bonds
(Series B), 1/1/2020 (callable 10/1/97 @ 102) A $ 196,464
---------------------------------------------------------------------
145,000 Wake County, NC, 6.50% Hospital Revenue Bonds (MBIA Insured),
10/1/2018 AAA 158,948
--------------------------------------------------------------------- --------------
Total 1,150,689
--------------------------------------------------------------------- --------------
OHIO--3.5%
---------------------------------------------------------------------
250,000 Cuyahoga County, OH, 6.00% Hospital Revenue Bonds (Metrohealth System
Project)/(MBIA Insured), 2/15/2019 (callable 2/15/98 @ 102) AAA 257,135
---------------------------------------------------------------------
300,000 Ohio State Water Development Authority, 7.25% Pollution Control
Finance Authority (Philip Morris Co.), 12/1/2008 (callable 12/1/97 @
103) A 336,945
--------------------------------------------------------------------- --------------
Total 594,080
--------------------------------------------------------------------- --------------
PENNSYLVANIA--14.8%
---------------------------------------------------------------------
500,000 Allegheny County, PA, Residential Finance Authority Mortgage, 4.875%
Revenue Refunding Bonds (Single Family-- GNMA/FNMA), 11/1/2014
(callable 11/1/2003 @ 102) AAA 497,060
---------------------------------------------------------------------
750,000 Beaver County, PA, IDA 7.75% Pollution Control Revenue Bonds (Series
A)/(Ohio Edison Project), 9/1/2024 (callable 9/1/99 @ 102) BBB- 838,320
---------------------------------------------------------------------
300,000 Butler County, PA, IDA 4.50% Health Center Revenue
Refunding Bonds (Pittsburgh Lifetime Care Community)/ (Sherwood Oaks
Project)/(North Hills Passavant Hospital), 6/1/98 A 298,152
---------------------------------------------------------------------
130,000 Delaware County, PA, 4.80% Authority Hospital Revenue Bonds
(Crozer--Chester Medical Center), 12/15/98 A 130,399
---------------------------------------------------------------------
$ 120,000 Delaware County, PA, 4.90% Authority Hospital Revenue Bonds
(Crozer--Chester Medical Center), 12/15/99 A $ 120,246
---------------------------------------------------------------------
250,000 Franklin, PA, 10.875% Special Obligation Revenue Bonds (Franklin
Regional Medical Center), 10/1/2013
(callable 10/1/94 @ 101.5) BBB 254,840
---------------------------------------------------------------------
250,000 Hampden, PA, IDA 4.50% PA Partnership Holdings (LLC Project)/(K-Mart
Corp.), 11/15/98 A3 249,113
---------------------------------------------------------------------
125,000 Philadelphia PA, Hospital & Higher Education Facilities
Authority 6.60% Hospital Revenue Bonds (Series B)/
(Children's Seashore House), 8/15/98 BBB+ 133,470
--------------------------------------------------------------------- --------------
Total 2,521,600
--------------------------------------------------------------------- --------------
TENNESSEE--2.9%
---------------------------------------------------------------------
250,000 Volunteer State Student Funding Corp., TN, 4.50%
Educational Loan Revenue Bonds (Senior Series B)/
(Subject to AMT), 12/1/97 Aa 249,095
---------------------------------------------------------------------
250,000 Volunteer State Student Funding Corp., TN, 4.95%
Educational Loan Revenue Bonds (Series B)/
(Subject to AMT), 6/1/2000 Aa 249,722
--------------------------------------------------------------------- --------------
Total 498,817
--------------------------------------------------------------------- --------------
TEXAS--12.5%
---------------------------------------------------------------------
250,000 Brazos River Authority, TX, 8.25% Pollution Control
Revenue Bonds (Texas Utilities Electric Co. Project)/
(FGIC Insured)/(Subject to AMT), 12/1/2016
(callable 12/1/96 @ 102) AAA 281,182
---------------------------------------------------------------------
350,000 Brazos River Authority, TX, 9.875% Pollution Control
Revenue Bonds (Texas Utilities Electric Co. Project)/
(FGIC Insured)/(Subject to AMT), 10/1/2017
(callable 10/1/97 @ 102) AAA 416,126
---------------------------------------------------------------------
$ 250,000 Central Texas Higher Education Authority, 4.65% Student Loan Revenue
Refunding Bonds (Series 1993), 12/1/99 Aaa $ 249,220
---------------------------------------------------------------------
250,000 Central Texas Higher Education Authority, 4.35% Income Revenue Bonds
(Senior Series C), 12/1/98 Aaa 249,663
---------------------------------------------------------------------
225,000 Harris County, TX, 7.00% Toll Road Multi-mode Revenue Bonds (Series
Lien-A), 8/15/99 (callable 2/15/97 @ 103) BBB+ 244,694
---------------------------------------------------------------------
450,000 Lower Neches Valley Authority, TX, 6.85% Revenue
Refunding Bonds (Mobile Oil Refining Corp. Project),
5/1/2012 (callable 5/1/97 @ 102) AA 492,682
---------------------------------------------------------------------
200,000 Orange County, TX, Nav. & Port. District, Industrial Development
Corp., 4.75% Solid Waste Revenue Bonds (Horsehead Residential
Develoment Co. Project)/(Long-Term Credit Bank of Japan LOC),
Optional Tender 10/1/95 A 200,000
--------------------------------------------------------------------- --------------
Total 2,133,567
--------------------------------------------------------------------- --------------
UTAH--2.6%
---------------------------------------------------------------------
200,000 Intermountain Power Agency, UT, 7.875% Special
Obligations Crossover Revenue Refunding Bonds,
7/1/2014 (callable 7/1/96 @ 102) AA- 219,804
---------------------------------------------------------------------
200,000 Intermountain Power Agency, UT, 7.50% Power Supply Revenue Bonds,
7/1/2016 (callable 7/1/96 @ 102) AA 217,686
--------------------------------------------------------------------- --------------
Total 437,490
--------------------------------------------------------------------- --------------
WASHINGTON--1.6%
---------------------------------------------------------------------
$ 250,000 Seattle, WA, Metropolitan Municipality, 6.875% Limited Sales Tax GO
Bonds, 1/1/2020 (callable 1/1/97 @ 102) Aa $ 269,317
--------------------------------------------------------------------- --------------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST, $16,223,590) 16,159,962
--------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (IDENTIFIED COST, $19,073,590) $ 19,009,962\
--------------------------------------------------------------------- --------------
</TABLE>
\ The cost of investment for federal tax purposes amounts $19,073,590. The net
unrealized depreciation on federal tax cost basis amounts to $63,628, and is
comprised of $23,158 appreciation and $86,786 depreciation at November 30,
1993.
* See Notes to Portfolio of Investments on Page 33.
Note: The categories of investments are shown as a percentage of net assets
($17,001,897) at November 30, 1993.
The following abbreviations are used in this portfolio:
AMBAC--American Municipal Bond
Assurance Corporation
AMT--Alternative Minimum Tax
FGIC--Financial Guaranty Insurance Company
GO--General Obligation
IDA--Industrial Development Authority
LOC--Letter(s) of Credit
MBIA--Municipal Bond Investors Assurance
VRDN--Variable Rate Demand Note
(See Notes which are an integral part of the Financial Statements)
LIMITED TERM MUNICIPAL FUND
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
The municipal bonds rated by Moody's Investors Services, Inc. ("Moody's") in
which the Fund may invest are Aaa, A, A, and Baa. Municipal bonds rated Aaa are
judged to be of the "best quality." The rating of Aa is assigned to municipal
bonds which are of "high quality by all standards," but as to which margins of
protection or other elements make long-term risks appear somewhat larger than
Aaa-rated municipal bonds. The Aaa and Aa-rated municipal bonds comprise what
are generally known as "high-grade bonds". Municipal bonds which are rated A by
Moody's possess many favorable investment attributes and are considered "upper
medium grade obligations." Factors giving security to principal and interest of
A-rated municipal bonds are considered adequate, but elements may be present
which suggest a susceptibility to impairment of sometime in the future. Bonds
which are rated Baa are neither highly protected nor poorly secured. The letter
ratings carry numerical modifiers with 1 indicating the higher end of the rating
category, 2 indicating the mid-range and 3 indicating the lower end of the
rating category.
Moody's highest rating for state and municipal short-term securities is
MIG1/VMIG1. Short-term municipal securities rated MIG1/VMIG1 are the best
quality. They have strong protection from established cash flows of funds for
their servicing or have established a broad-based access to the market for
refinancing or both. The VMIG1 rating denotes that the security has a variable
rate and is payable on demand.
The municipal bonds rated by Standard & Poor's Corporation in which the Fund may
invest are AAA, AA, A, and BBB. Municipal bonds rated AAA are "obligations of
the highest quality." The rating of AA is accorded issues with investment
characteristics "only slightly less marked than those of the prime quality
issues." The category of A describes "the third strongest capacity for payment
of debt service." Principal and interest payments on bonds in this category are
regarded as safe. It differs from the two higher ratings because with respect to
general obligation bonds there is some weakness, either in the local economic
base, in debt burden, in the balance between revenues and expenditures, or in
quality of management. Under certain adverse circumstances, any one such
weakness might impair the ability of the issuer to meet debt obligations at some
future date. With respect to revenue bonds, debt service coverage is good, but
not exceptional. Stability of the pledge revenues could show some variations
because of increased competition or economic influences on revenues. Basic
security provisions, while satisfactory, are less stringent. Bonds which are
rated BBB are the lowest investment grade security rting. These ratings may be
modified by the addition of a plus or minus sign to show relative standing with
the major rating categories.
NR indicates the bonds are not currently rated by Moody's or Standard & Poor's.
However, management considers them to be of good quality.
Bonds for which the security depends upon the completion of some act or the
fulfillment of some condition are rated conditionally.
(See Notes which are an integral part of the Financial Statements)
LIMITED TERM MUNICIPAL FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------------------------
Investments in securities, at value (Note 2A)
(identified and tax cost; $19,073,590) $ 19,009,962
- --------------------------------------------------------------------------------------------------
Cash 23,972
- --------------------------------------------------------------------------------------------------
Receivable for capital stock sold 817,572
- --------------------------------------------------------------------------------------------------
Interest receivable 239,481
- --------------------------------------------------------------------------------------------------
Deferred expenses (Note 2E) 7,246
- -------------------------------------------------------------------------------------------------- -------------
Total assets 20,098,233
- --------------------------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------------------------
Payable for investments purchased $ 3,041,151
- -------------------------------------------------------------------------------------
Dividends payable 19,074
- -------------------------------------------------------------------------------------
Payable for capital stock redeemed 5,008
- -------------------------------------------------------------------------------------
Accrued expenses and other liabilities 31,103
- ------------------------------------------------------------------------------------- -----------
Total liabilities 3,096,336
- -------------------------------------------------------------------------------------------------- -------------
NET ASSETS for 1,697,560 shares of capital stock outstanding $ 17,001,897
- -------------------------------------------------------------------------------------------------- -------------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------------------------
Paid-in capital $ 17,065,525
- --------------------------------------------------------------------------------------------------
Unrealized depreciation on investments (63,628)
- -------------------------------------------------------------------------------------------------- -------------
Total $ 17,001,897
- -------------------------------------------------------------------------------------------------- -------------
NET ASSET VALUE:
Fortress Shares (net assets of $3,307,456 / 330,230 SHARES OF CAPITAL STOCK OUTSTANDING) $10.02
- -------------------------------------------------------------------------------------------------- -------------
Investment Shares (net assets of $13,694,441 / 1,367,330 shares of capital stock outstanding) $10.02
- -------------------------------------------------------------------------------------------------- -------------
COMPUTATION OF OFFERING PRICE:
Fortress Shares Offering Price Per Share (100/99 of $10.02)* $10.12
- -------------------------------------------------------------------------------------------------- -------------
Investment Shares Offering Price Per Share (100/99 of $10.02)* $10.12
- -------------------------------------------------------------------------------------------------- -------------
COMPUTATION OF REDEMPTION PRICE:
Fortress Shares Redemption Price Per Share (99/100 of $10.02)** $9.92
- -------------------------------------------------------------------------------------------------- -------------
Investment Shares Redemption Price Per Share (100/100 of $10.02) $10.02
- -------------------------------------------------------------------------------------------------- -------------
</TABLE>
* See "What Shares Cost" on page 13 of the prospectus.
** See "Contingent Deferred Sales Charge" on page 19 of the Fortress Shares
prospectus.
(See Notes which are an integral part of the Financial Statements)
LIMITED TERM MUNICIPAL FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1993*
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ----------------------------------------------------------------------------------------------------
Interest income (Note 2B) $ 73,947
- ----------------------------------------------------------------------------------------------------
EXPENSES:
- ----------------------------------------------------------------------------------------------------
Investment advisory fee (Note 5) $ 6,122
- -----------------------------------------------------------------------------------------
Distribution services fee (Note 5) 3,639
- -----------------------------------------------------------------------------------------
Custodian, transfer agent and dividend disbursing agent fees 16,039
- -----------------------------------------------------------------------------------------
Legal fees 945
- -----------------------------------------------------------------------------------------
Administrative personnel and services (Note 5) 950
- -----------------------------------------------------------------------------------------
Printing and postage 862
- -----------------------------------------------------------------------------------------
Registration fees 362
- -----------------------------------------------------------------------------------------
Shareholder service fee (Note 5) 3,826
- -----------------------------------------------------------------------------------------
Miscellaneous 842
- ----------------------------------------------------------------------------------------- ---------
Total expenses 33,587
- -----------------------------------------------------------------------------------------
Deduct--
- -----------------------------------------------------------------------------------------
Waiver of investment advisory fee (Note 5) $ 6,122
- ------------------------------------------------------------------------------
Waiver of distribution services fee (Note 5) 282
- ------------------------------------------------------------------------------
Reimbursement of other operating expenses (Note 5) 20,000 26,404
- ------------------------------------------------------------------------------ --------- ---------
Net expenses 7,183
- ---------------------------------------------------------------------------------------------------- ----------
Net investment income 66,764
- ---------------------------------------------------------------------------------------------------- ----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ----------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments (63,628)
- ---------------------------------------------------------------------------------------------------- ----------
Change in net assets resulting from operations $ 3,136
- ---------------------------------------------------------------------------------------------------- ----------
</TABLE>
* For the period from September 1, 1993 (date of initial public offering) to
November 30, 1993.
(See Notes which are an integral part of the Financial Statements)
LIMITED TERM MUNICIPAL FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER
30, 1993*
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------------------------------------
OPERATIONS--
- ------------------------------------------------------------------------------------------------
Net investment income $ 66,764
- ------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments (63,628)
- ------------------------------------------------------------------------------------------------ ----------------
Change in net assets resulting from operations 3,136
- ------------------------------------------------------------------------------------------------ ----------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- ------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income:
- ------------------------------------------------------------------------------------------------
Fortress Shares (8,993)
- ------------------------------------------------------------------------------------------------
Investment Shares (57,771)
- ------------------------------------------------------------------------------------------------ ----------------
Change in net assets resulting from distributions to shareholders (66,764)
- ------------------------------------------------------------------------------------------------ ----------------
CAPITAL STOCK TRANSACTIONS (NOTE 4)--
- ------------------------------------------------------------------------------------------------
Proceeds from sale of shares 19,912,662
- ------------------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of dividends declared 36,661
- ------------------------------------------------------------------------------------------------
Cost of shares redeemed (2,883,798)
- ------------------------------------------------------------------------------------------------ ----------------
Change in net assets resulting from Fund share transactions 17,065,525
- ------------------------------------------------------------------------------------------------ ----------------
Change in net assets 17,001,897
- ------------------------------------------------------------------------------------------------
NET ASSETS:
- ------------------------------------------------------------------------------------------------
Beginning of period --
- ------------------------------------------------------------------------------------------------ ----------------
End of period $ 17,001,897
- ------------------------------------------------------------------------------------------------ ----------------
</TABLE>
* For the period from September 1, 1993 (date of initial public offering) to
November 30, 1993.
(See Notes which are an integral part of the Financial Statements)
LIMITED TERM MUNICIPAL FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Fixed Income Securities, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. The financial statements included herein are only those of Limited Term
Municipal Fund (the "Fund"), a diversified portfolio of the Corporation. The
financial statements of the other portfolios in the Corporation are presented
separately. The assets of each portfolio are segregated and a shareholder's
interest is limited to the portfolio in which shares are held.
Limited Term Municipal Fund provides two classes of shares ("Fortress Shares"
and "Investment Shares"). Investment Shares are identical in all respects to
Fortress Shares except that Investment Shares pays Federated Securities Corp.
(the "distributor") a fee at an annual rate up to 0.25 of 1% of the average
aggregate daily net asset value of Investment Shares and Fortress Shares pays
Federated Securities Corp. a fee at annual rate up to 0.15 of 1% of the average
aggregate daily net asset value of Fortress Shares, to finance any activity
which is principally intended to result in the sale of Investment and Fortress
Shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Municipal bonds are valued at fair value. An
independent pricing service values the Fund's municipal bonds taking into
consideration yield, stability, risk, quality, coupon, maturity, type of
issue, trading characteristics, special circumstances of a security or
trading market, and any other factors or market data it deems relevant in
determining valuations for normal institutional size trading units of debt
securities and does not rely exclusively on quoted prices. The Directors
have determined that the fair value of debt securities authorized to be
purchased by the Fund with remaining maturities of 60 days or less shall be
their amortized cost value unless the particular circumstances of the
security indicate otherwise.
B. INCOME--Interest income is recorded on the accrual basis. Interest income
includes interest earned net of premium, and original issue discount as
required by the Internal Revenue Code.
C. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Internal Revenue Code available to investment companies and distribute to
shareholders each year all of its taxable income, including any net
realized gain on investments. Accordingly, no provision for federal tax is
necessary. Dividends paid by the Fund from net interest earned on
tax-exempt municipal bonds are not includable by shareholders as gross
income for federal income tax purposes, because the Fund intends to meet
certain requirements of the Internal Revenue Code applicable to regulated
investment companies which will enable the Fund to pay tax-exempt interest
dividends. Dividends paid by the Fund from net interest earned on
tax-exempt municipal bonds are not includable by shareholders as gross
income for federal income tax purposes, because the Fund intends to meet
certain requirements of the Internal Revenue Code applicable to regulated
investment companies which will enable the Fund to pay tax-exempt
dividends. The portion of such interest, if any, earned on private activity
bonds issued after August 7, 1986, may be considered a tax preference item
for shareholders.
D. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. To the extent the Fund
engages in such transactions, it will do so for the purpose of acquiring
portfolio securities consistent with its investment objective and policies
and not for the purpose of investment leverage. The Fund will record a
when-issued security and the related liability on the trade date. Until the
securities are received and paid for, the Fund will maintain security
positions such that sufficient liquid assets will be available to make
payment for the securities purchased. Securities purchased on a when-issued
or delayed delivery basis are marked to market daily and begin earning
interest on the settlement date.
E. DEFERRED EXPENSES--The costs incurred by the Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering the shares, have been deferred and are being
amortized using the straight-line method over a period of five years from
the Fund's commencement date.
F. OTHER--Investment transactions are accounted for on the date of the
transaction. Dividends to shareholders are recorded on the ex-dividend
date.
(3) DIVIDENDS
Dividends from net investment income are declared and paid monthly.
Distributions of any net realized capital gains will be made at least once every
twelve months. Dividends and capital gain distributions, if any, are recorded on
the ex-dividend date.
(4) CAPITAL STOCK
At November 30, 1993, the Corporation was authorized to issue 10,000,000,000
shares of $0.001 par value capital stock. Of these shares, 1,000,000,000 have
been designated as Investment Shares of the Fund and 1,000,000,000 as Fortress
Shares of the Fund. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
11/30/93*
<S> <C> <C>
FORTRESS SHARES SHARES AMOUNT
- ------------------------------------------------------------------------------------ ----------- --------------
Shares outstanding, beginning of period -- $ --
- ------------------------------------------------------------------------------------
Shares sold 330,714 3,320,324
- ------------------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 331 3,326
- ------------------------------------------------------------------------------------
Shares redeemed (815) (8,242)
- ------------------------------------------------------------------------------------ ----------- --------------
Shares outstanding, end of period 330,230 $ 3,315,408
- ------------------------------------------------------------------------------------ ----------- --------------
<CAPTION>
YEAR ENDED
11/30/93*
INVESTMENT SHARES SHARES AMOUNT
- ------------------------------------------------------------------------------------ ----------- --------------
<S> <C> <C>
Shares outstanding, beginning of period -- --
- ------------------------------------------------------------------------------------
Shares sold 1,649,398 $ 16,592,338
- ------------------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 3,323 33,335
- ------------------------------------------------------------------------------------
Shares redeemed (285,391) (2,875,556)
- ------------------------------------------------------------------------------------ ----------- --------------
Shares outstanding, end of period 1,367,330 $ 13,750,117
- ------------------------------------------------------------------------------------ ----------- --------------
</TABLE>
* For the period from September 1, 1993 (date of initial public offering) to
November 30, 1993.
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Federated Advisers, the Fund's investment adviser ("Adviser"), receives for its
services an annual investment advisory fee equal to .40 of 1% of the Fund's
average daily net assets. The Adviser has voluntarily agreed to waive a portion
of its fee. The Adviser can modify or terminate this voluntary waiver at any
time at its sole discretion. For the period ended November 30, 1993, the
investment advisory fee amounted to $6,122, all of which was voluntarily waived.
In addition, the Adviser reimbursed the Fund $20,000 of other operating
expenses.
Organizational expenses ($49,356) and start-up administrative service expenses
($57,000) were borne initially by the Adviser. The Fund has agreed to reimburse
the Adviser for the organizational expenses and start-up administrative expenses
initially borne by the Adviser during the five year period following August 31,
1993 (date the Fund's portfolio first became effective).
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940. The Fund will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the net assets of the
Fund, for the fees it paid which relate to the distribution and administration
of the Fund's Fortress and Investment Shares. The Plan provides that the Fund
will incur distribution expenses up to 0.15 of 1% and 0.25 of 1% of the average
daily net assets of the Fortress and Investment Shares, respectively, annually,
to pay commissions, maintenance fees and to compensate FSC. For the period ended
November 30, 1993, FSC earned $3,357 in distribution services fees for
Investment Shares and $282 for Fortress Shares, of which $0 and $282 were
voluntarily waived, respectively.
The Fund has adopted a Shareholder Services Plan (the "Services Plan") with
respect to Fortress and Investment Shares. The Fund will reimburse Federated
Securities Corp. ("FSC"), from the net assets of the Fund for fees the Fund paid
which relate to administrative support services of the Fortress and Investment
Shares. The Services Plan provides that the Fund may incur shareholder services
expenses up to 0.25 of 1% of the average daily net assets of the Fortress and
Investment Shares. For the period ended November 30, 1993, FSC earned $3,826.
During the period ended November 30, 1993, the Fund engaged in purchase and sale
transactions with the other Funds advised by the Adviser pursuant to Rule 17A-7
of the Investment Company Act of 1940 amounting to $7,000,000 and $5,200,000,
respectively. These purchases and sales were transacted for cash consideration
only, at independent current market prices and without brokerage commission, fee
or other remuneration.
Administrative personnel and services are provided at approximate cost by
Federated Administrative Services, Inc. Certain Officers and Directors of the
Corporation are Officers and Directors of the above corporations.
(6) INVESTMENT TRANSACTIONS
Purchases, and sales and maturities of investments excluding short-term
securities, for the period ended November 30, 1993 were as follows:
<TABLE>
<CAPTION>
<S> <C>
PURCHASES $ 16,243,345
- -------------------------------------------------------------------------------------------------- --------------
SALES $ 0
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
(7) CURRENT CREDIT RATINGS
Current credit ratings and related footnotes are unaudited.
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Directors of FIXED INCOME SECURITIES, INC.
and Shareholders of LIMITED TERM MUNICIPAL FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Limited Term Municipal Fund (a portfolio of
Fixed Income Securities, Inc.) as of November 30, 1993, and the related
statement of operations, the statement of changes in net assets, and the
financial highlights (see pages 2 and 24 of the prospectus) for the period from
September 1, 1993 (date of initial public offering) to November 30, 1993. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of the securities owned at November 30, 1993 by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Limited Term
Municipal Fund as of November 30, 1993, the results of its operations, the
changes in its net assets, and its financial highlights for the period from
September 1, 1993 (date of initial public offering) to November 30, 1993, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
Boston, Massachusetts
January 14, 1994
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Limited Term Municipal Fund
Investment Shares 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 P.O. Box 8604
Trust Company 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
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
LIMITED TERM
MUNICIPAL FUND
INVESTMENT SHARES
PROSPECTUS
A Diversified Portfolio of
Fixed Income Securities, Inc.,
an Open-End, Management
Investment Company
January 31, 1994
3070702A-R (1/94)
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
LIMITED TERM MUNICIPAL FUND
(A PORTFOLIO OF FIXED INCOME SECURITIES, INC.)
FORTRESS SHARES
PROSPECTUS
The Fortress Shares offered by this prospectus represent interests in Limited
Term Municipal 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 provide a high level of current
income which is exempt from federal regular income tax (federal regular income
tax does not include the federal alternative minimum tax) consistent with the
preservation of principal. The Fund pursues this objective through the
compilation of a portfolio, the weighted-average duration of which will at all
times be limited to four years or less.
THESE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK AND ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, 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.
The Fund has also filed a Combined Statement of Additional Information for
Fortress Shares and Investment Shares dated January 31, 1994, with the
Securities and Exchange Commission. The information contained in the Combined
Statement of Additional Information is incorporated by reference into 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 January 31, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--FORTRESS SHARES 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
FORTRESS INVESTMENT PROGRAM 3
- ------------------------------------------------------
INVESTMENT INFORMATION 4
- ------------------------------------------------------
Investment Objective 4
Investment Policies 4
Acceptable Investments 4
Municipal Securities 5
Characteristics 6
Participation Interests 6
Municipal Leases 6
Industrial Development Bonds 7
Inverse Floaters 7
Municipal Notes 8
Tax-Exempt Commercial Paper 8
Pre-Refunded Municipal Securities 8
Variable and Floating Rate Securities 9
Auction Rate Securities 9
Demand Features 10
Tender Option Bonds 10
Zero Coupon and Capital Appreciation Bonds 11
Restricted and Illiquid Securities 11
Average Portfolio Duration 11
When-Issued and Delayed Delivery Transactions 11
Futures Contracts and Options to
Buy or Sell Such Contracts 11
Temporary Investments 12
Investment Risks 12
Investment Limitations 13
NET ASSET VALUE 13
- ------------------------------------------------------
INVESTING IN FORTRESS SHARES 13
- ------------------------------------------------------
Share Purchases 13
Through a Financial Institution 13
Directly by Mail 14
Conversion to Federal Funds 14
Directly by Wire 14
Minimum Investment Required 14
What Shares Cost 14
Dealer Concession 15
Eliminating the Sales Charge 15
Quantity Discounts and Accumulated Purchases 15
Letter of Intent 15
Reinvestment Privilege 16
Concurrent Purchases 16
Systematic Investment Program 16
Certificates and Confirmations 17
Dividends and Distributions 17
EXCHANGE PRIVILEGE 17
- ------------------------------------------------------
REDEEMING FORTRESS SHARES 17
- ------------------------------------------------------
Through a Financial Institution 17
Directly by Mail 18
Signatures 18
Receiving Payment 19
By Check 19
By Wire 19
Contingent Deferred Sales Charge 19
Systematic Withdrawal Program 19
Redemption Before Purchase Instruments Clear 20
Accounts with Low Balances 20
Exchanges for Shares of Other Funds 20
FIXED INCOME SECURITIES, INC. INFORMATION 21
- ------------------------------------------------------
Management of the Corporation 21
Board of Directors 21
Investment Adviser 21
Advisory Fees 21
Adviser's Background 21
Portfolio Manager's Background 21
Distribution of Fortress Shares 22
Distribution Plan 22
Administrative Arrangements 22
Administration of the Fund 23
Administrative Services 23
Shareholder Services Plan 23
Custodian 23
Transfer Agent, and
Dividend Disbursing Agent 23
Legal Counsel 23
Independent Auditors 23
Expenses of the Fund and Fortress Shares 23
SHAREHOLDER INFORMATION 24
- ------------------------------------------------------
Voting Rights 24
TAX INFORMATION 24
- ------------------------------------------------------
Federal Income Tax 24
Pennsylvania Corporate and Personal Property Taxes 25
Other State and Local Taxes 25
PERFORMANCE INFORMATION 25
- ------------------------------------------------------
OTHER CLASSES OF SHARES 26
- ------------------------------------------------------
Financial Highlights--Investment Shares 27
FINANCIAL STATEMENTS 28
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 44
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
FORTRESS SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)............................................................ 1.00%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)............................................................ None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds, as applicable).......................................... None
Contingent Deferred Sales Charge (as a percentage of the lesser of original
purchase price or redemption proceeds, as applicable) (1)...................................... 1.00%
Exchange Fee..................................................................................... None
ANNUAL FORTRESS SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2)................................................................ 0.00%
12b-1 Fee........................................................................................ 0.15%
Total Other Expenses (after expense reimbursement)............................................... 0.85%
Shareholder Servicing Fee.................................................................... 0.25%
Total Fortress Shares Operating Expenses (3)............................................ 1.00%
</TABLE>
(1) The contingent deferred sales charge charged is 1.00% of the lesser of the
original purchase price or the net asset value of Fortress Shares redeemed
within four years of their purchase date. For a more complete description
see "Redeeming Fortress Shares."
(2) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time
at its sole discretion. The maximum management fee is 0.40%.
(3) The Total Fortress Shares Operating Expenses in the table above are based
on expenses expected during the fiscal year ending November 30, 1994. The
Total Fortress Shares Operating Expenses were 0.25% for the fiscal year
ended November 30, 1993, and were 2.11% absent the voluntary waivers of the
management fee and 12b-1 fee and the voluntary reimbursement of certain
other operating expenses.
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.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (1) 5% annual return and
(2) redemption at the end of each time period.................................................. $30 $53
You would pay the following expenses on the same investment,
assuming no redemption......................................................................... $20 $42
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The information set forth in the foregoing table and example relates only to
the Fortress Shares of the Fund. The Fund also offers another class of shares
called Investment Shares. Fortress Shares and Investment Shares are subject to
certain of the same expenses. However, Investment Shares are subject to a 12b-1
fee of 0.25% but are not subject to a contingent deferred sales charge. See
"Other Classes of Shares."
LIMITED TERM MUNICIPAL FUND
FINANCIAL HIGHLIGHTS--FORTRESS SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Independent Auditors' Report on page 44.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1993*
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- -----------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------------
Net investment income 0.11
- -----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.02
- ----------------------------------------------------------------------------------------------- --------------
Total from investment operations 0.13
- -----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------------
Dividends to shareholders from net investment operations (0.11)
- ----------------------------------------------------------------------------------------------- -------------
NET ASSET VALUE, END OF PERIOD $ 10.02
- ----------------------------------------------------------------------------------------------- -------------
TOTAL RETURN** 1.26%
- -----------------------------------------------------------------------------------------------
RATIOS, TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------
Expenses 0.25%(a)
- -----------------------------------------------------------------------------------------------
Net investment income 4.79%(a)
- -----------------------------------------------------------------------------------------------
Expenses waiver/reimbursment (b) 1.86%(a)
- -----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $3,307
- -----------------------------------------------------------------------------------------------
Portfolio turnover rate 0 %
- -----------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from September 1, 1993 (date of initial
public offering) to November 30, 1993.
** Based on net asset value which does not reflect the sales load or contingent
deferred sales charge if applicable.
(a) Computed on an annualized basis.
(b) Increase/decrease in above expense/income ratios due to waivers or
reimbursements of expenses (Note 5).
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report dated November 30, 1993, which can be obtained free of charge.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
Fixed Income Securities, Inc. 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
three separate portfolios: Limited Term Fund, Limited Term Municipal Fund and
Multi-State Municipal Income Fund. With respect to the Fund, the Directors have
established two classes of shares known as Fortress Shares and Investment
Shares. This prospectus relates only to the Fortress Shares class of the Fund
("Shares").
The Fund is designed for investors seeking current income exempt from federal
regular income tax. A minimum initial investment of $1,500 is required.
Shares are sold at net asset value plus an applicable sales charge and are
redeemed at net asset value. However, a contingent deferred sales charge is
imposed on certain Shares, other than Shares purchased through reinvestment of
dividends, which are redeemed within one to four years of their purchase dates.
Fund assets may be used in connection with the distribution of Shares.
FORTRESS INVESTMENT PROGRAM
- --------------------------------------------------------------------------------
Fortress Shares is a member of a family of funds, collectively known as the
Fortress Investment Program. The other funds in the Program are:
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 Fund (Fortress Shares only), providing a high level of
current income consistent with minimum fluctuation in principal value;
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 of the fund's prospectus.
The Fortress Investment Program provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles, and by providing
the investment services of proven, professional investment advisers.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
As the name of the Fund implies, the investment objective of the Fund is to
provide a high level of current income which is exempt from federal regular
income tax (federal regular income tax does not include the federal alternative
minimum tax) consistent with the preservation of principal. Interest income of
the Fund that is exempt from federal income tax retains its tax-free status when
distributed to the Fund's shareholders. 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 limited to municipal securities, the weighted-average
duration of which will at all times be limited to four years or less. Unless
indicated otherwise, this and the investment policies described below may be
changed by the Directors without shareholder approval. Shareholders will be
notified before any material change in these policies becomes effective.
ACCEPTABLE INVESTMENTS. Municipal securities are debt obligations issued by or
on behalf of states, territories, and possessions of the United States,
including the District of Columbia, and their political subdivisions, agencies
and instrumentalities, the interest from which is exempt from federal regular
income tax.
As a matter of investment policy, which may not be changed without shareholder
approval, under normal circumstances, the Fund will be invested so that at least
80% of its net assets are invested in obligations, the interest from which is
exempt from federal regular income tax. The Fund, which can be changed without
shareholder approval, may invest up to 25% of its assets in securities of
issuers located in the same state.
The Fund may also transact in put and call options, futures contracts, and
options on futures contracts for hedging purposes.
MUNICIPAL SECURITIES. Municipal securities are generally issued to finance
public works, such as airports, bridges, highways, housing, hospitals, mass
transportation projects, schools, streets, and water and sewer works. They are
also issued to repay outstanding obligations, to raise funds for general
operating expenses, and to make loans to other public institutions and
facilities.
The two principal classifications of municipal securities are "general
obligation" and "revenue" issues. General obligation issues are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. Interest on and principal of revenue issues, however,
are payable only from the revenue generated by the facility financed by the bond
or other specified sources of revenue. Revenue issues do not represent a pledge
of credit or create any debt of or charge against the general revenues of a
municipality or public authority. Industrial development bonds are typically
classified as revenue bonds.
Industrial development bonds are issued by or on behalf of public authorities to
provide financing aid to acquire sites or construct and equip facilities for
privately or publicly owned corporations. The availability of this financing
encourages these corporations to locate within the sponsoring communities and
thereby increases local employment.
Municipal securities may carry fixed, floating or inverse floating rates of
interest. Fixed rate securities bear interest at the same rate from issuance
until maturity. The interest rate on floating rate securities is subject to
adjustment based upon changes in market interest rates or indices, such as a
bank's prime rate or a published market index. The interest rate may be adjusted
at specified intervals or immediately upon any change in the applicable index
rate. The interest rate for most floating rate securities varies directly with
changes in the index rate, so that the market value of the security will
approximate its stated value at the time of each adjustment. However, inverse
floating rate securities have interest rates that vary inversely with changes in
the applicable index rate, such that the security's interest rate rises when
market interest rates fall and falls when market interest rates rise. The market
value of floating rate securities is less sensitive than fixed rate securities
to changes in market interest rates. In contrast, the market value of inverse
floating rate securities is more sensitive to market rate changes than fixed or
floating rate securities. The effect of market rate changes on securities
depends upon a variety of factors, including market expectations as to future
changes in interest rates and, in the case of floating and inverse floating rate
securities, the frequency with which the interest rate is adjusted and the
multiple of the index rate used in making the adjustment.
Most municipal securities pay interest in arrears on a semiannual or more
frequent basis. However, certain securities, typically known as capital
appreciation bonds or zero coupon bonds, do not provide for any interest
payments prior to maturity. Such securities are normally sold at a discount from
their stated value, or provide for periodic increases in their stated value to
reflect a compounded interest rate. The market value of these securities is also
more sensitive to changes in market interest rates than securities that provide
for current interest payments.
The Fund will not generally invest more than 25% of its total assets in any one
industry. Governmental issuers of municipal securities are not considered part
of any "industry." However, municipal securities backed only by the assets and
revenues of nongovernmental users may, for this purpose, be deemed to be related
to the industry in which such nongovernmental users engage, and the 25%
limitation would apply to such obligations. It is nonetheless possible that the
Fund may invest more than 25% of its assets in a broader segment of the
municipal securities market, such as industrial development bonds and revenue
obligations of hospitals and other health care facilities, housing agency
revenue obligations, or airport revenue obligations. This would be the case
only if the Fund determines that the yields available from obligations in a
particular segment of the market justified the additional risks associated
with a large investment in such segment. Although such obligations could be
supported by the credit of governmental users or by the credit of
nongovernmental users engaged in a number of industries, economic, business,
political and other developments generally affecting the revenues of such users
(for example, proposed legislation or pending court decisions affecting the
financing of such projects and market factors affecting the demand for their
services or products) may have a general adverse effect on all municipal
securities in such a market segment.
CHARACTERISTICS. The municipal securities in which the Fund invests are
rated, at the time of purchase, Baa or better by Moody's Investors Service,
Inc. ("Moody's") or BBB or better by Standard & Poor's Corporation ("S&P")
or Fitch Investors Service ("Fitch"). In certain cases the Fund's adviser
may choose bonds which are unrated if it determines that such bonds are of
comparable quality or have similar characteristics to investment grade
bonds. Bonds rated "BBB" by S&P or "Baa" by Moody's have speculative
characteristics. Changes in economic conditions or other circumstances are
more likely to lead to weakened capacity to make principal and interest
payments than higher rated bonds. If the Fund purchases an investment grade
bond, and the rating of such bond is subsequently downgraded so that the
bond is no longer classified as investment grade, the Fund is not required
to drop the bond from the portfolio, but will consider whether such action
is appropriate. A description of the rating categories is contained in the
Appendix to the Statement of Additional Information.
PARTICIPATION INTERESTS. The Fund may purchase participation interests
from financial institutions such as commercial banks, savings and loan
associations and insurance companies. These participation interests give
the Fund an undivided interest in one or more underlying municipal
securities. The financial institutions from which the Fund purchases
participation interests frequently provide or obtain irrevocable letters of
credit or guarantees to attempt to assure that the participation interests
are of high quality. The Directors of the Fund will evaluate whether
participation interests meet the prescribed quality standards for the Fund.
MUNICIPAL LEASES. Municipal leases are obligations issued by state and
local governments or authorities to finance the acquisition of equipment
and facilities. They may take the form of a lease, an installment purchase
contract, a conditional sales contract or a participation certificate of
any of the above.
Also included within the general category of municipal securities are
certain lease obligations or installment purchase contract obligations and
participations therein (hereinafter collectively called "lease
obligations") of municipal authorities or entities. Although lease
obligations do not constitute general obligations of the municipality for
which the municipality's taxing power is pledged, a lease obligation is
ordinarily backed by the municipality's covenant to budget for, appropriate
and make the payments due under the lease obligation. Interest on lease
obligations is tax-exempt to the same extent as if the municipality had
issued debt obligations to finance the underlying project or purchase.
However, certain lease obligations contain "non-appropriation" clauses
which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated
for such purpose on a yearly basis. In addition to the "non-appropriation"
risk, these securities represent a relatively new type of financing that
has not yet developed the depth of marketability associated with more
conventional bonds and some lease obligations may be illiquid. Although
"non-appropriation" lease obligations are generally secured by the leased
property, disposition of the property in the event of foreclosure might
prove difficult. In addition, the tax treatment of such obligations in the
event of non-appropriation is unclear particularly if payment of such
obligations is guaranteed by a third party guarantor, such as a municipal
bond insurer (MBIA, AMBAC, etc.).
Some municipal leases may be considered to be illiquid. However, some
municipal leases may contain put provisions which grant the Fund the right
to sell the securities to the issuer at a predetermined price and date.
Such provisions improve the marketability and enhance the liquidity of the
security. The Fund does not intend to invest more than 10% of its total
assets in non-puttable lease obligations including those that contain
"non-appropriation" clauses.
INDUSTRIAL DEVELOPMENT BONDS. As discussed above, industrial development
bonds are generally issued to provide financing aid to acquire sites or
construct and equip facilities for use by privately or publicly owned
corporations. Most state and local governments have the power to permit the
issuance of industrial development bonds to provide financing for such
corporations in order to encourage the corporations to locate within their
communities. Industrial development bonds do not represent a pledge of
credit or create any debt of municipality or a public authority, and no
taxes may be levied for payment of principal or interest on these bonds.
The principal and interest is payable solely out of monies generated by the
entities using or purchasing the sites or facilities. These bonds will be
considered municipal securities if the interest paid on them, in the
opinion of bond counsel or in the opinion of the officers of the Fund
and/or the adviser of the Fund, is exempt from federal regular income tax.
INVERSE FLOATERS. The Fund may invest in various types of derivative
municipal securities whose interest rates bear an inverse relationship to
the interest rate on another security or the value of an index ("inverse
floaters"). Because changes in the interest rate on the other security or
index inversely affect the residual interest paid on the inverse floater,
the value of an inverse floater is generally more volatile than that of a
fixed rate bond. The effective duration of an inverse floating rate
security, in the absence of rate "ceilings" or "floors", is greater than
that of a fixed rate security of equivalent maturity. Inverse floaters have
interest rate adjustment formulas which generally reduce or, in the
extreme, eliminate the interest paid to the Fund when short-term interest
rates rise, and increase the interest paid to the Fund when short-term
interest rates fall. Inverse floaters have varying degrees of liquidity,
and the market for these securities is new and relatively volatile. These
securities tend to underperform the market for fixed rate bonds in a rising
interest rate environment, but tend to outperform the market for fixed rate
bonds when interest rates decline. Shifts in the relationship between
short-term and long-term interest rates may alter this tendency, however.
In return for this volatility, inverse floaters typically offer the
potential for yields exceeding the yields available on fixed rate bonds
with comparable credit quality and stated maturity. These securities
usually permit the investor to convert the floating rate to a fixed rate
(normally adjusted downward), and this optional conversion feature may
provide a partial hedge against rising interest rates if exercised at an
opportune time. The Fund does not intend to invest more than 20% of its
total assets in inverse floaters.
MUNICIPAL NOTES. Municipal securities in the form of notes generally are
used to provide for short-term capital needs, in anticipation of an
issuer's receipt of other revenues or financing, and typically have
maturities of up to three years. Such instruments may include Tax
Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation Notes,
and Tax and Revenue Anticipation Notes. Tax Anticipation Notes are issued
to finance the working capital needs of governments. Generally, they are
issued in anticipation of various tax revenues, such as income, sales,
property, use and business taxes, and are payable from these specific
future taxes. Revenue Anticipation Notes are issued in expectation of
receipt of other kinds of revenue, such as federal revenues available under
Federal Revenue Sharing programs. Bond Anticipation Notes are issued to
provide interim financing until long-term bond financing can be arranged.
In most cases, the long-term bonds then provide the funds needed for
repayment of the notes. Tax and Revenue Anticipation Notes combine the
funding sources of both Tax Anticipation Notes and Revenue Anticipation
Notes. The obligations of an issuer of municipal notes are generally
secured by the anticipated revenues from taxes, grants or bond financing.
An investment in such instruments, however, presents a risk that the
anticipated revenues will not be received or that such revenues will be
insufficient to satisfy the issuer's payment obligations under the notes or
that refinancing will be otherwise unavailable.
TAX-EXEMPT COMMERCIAL PAPER. Issues of commercial paper typically
represent short-term, unsecured, negotiable promissory notes. These
obligations are issued by state and local governments and their agencies to
finance working capital needs of municipalities or to provide interim
construction financing and are paid from general revenues of municipalities
or are refinanced with long-term debt. In most cases, tax-exempt commercial
paper is backed by letters of credit, lending agreements, note repurchase
agreements or other credit facility agreements offered by banks or other
institutions.
PRE-REFUNDED MUNICIPAL SECURITIES. The Fund may invest in pre-refunded
municipal securities. The principal of and interest on pre-refunded
municipal securities are no longer paid from the original revenue source
for the municipal securities. Instead, the source of such payments is
typically an escrow fund consisting of obligations issued or guaranteed by
the U.S. government. The assets in the escrow fund are derived from the
proceeds of refunding bonds issued by the same issuer as the pre-refunded
municipal securities, but usually on more favorable terms. Issuers of
municipal securities use this advance refunding technique to obtain more
favorable terms with respect to municipal securities that are not yet
subject to call or redemption by the issuer. For example, advance refunding
enables an issuer to refinance debt at lower market interest rates,
restructure debt to improve cash flow or eliminate restrictive covenants in
the indenture or other governing instrument for the pre-refunded municipal
securities. However, except for a change in the revenue source from which
principal and interest payments are made, the pre-refunded municipal
securities remain outstanding on their original terms until they mature or
are redeemed by the issuer. The effective maturity of pre-refunded
municipal securities will be the redemption date if the issuer has assumed
an obligation or indicated its intention to redeem such securities on
the redemption date. Pre-refunded municipal securities are usually
purchased at a price which represents a premium over their face value or
their redemption value.
VARIABLE AND FLOATING RATE SECURITIES. The interest rates payable on
certain securities in which the Fund may invest, which will generally be
revenue obligations, are not fixed and may fluctuate based upon changes in
market rates. A variable rate obligation has an interest rate which is
adjusted at predesignated periods. Interest on a floating rate obligation
is adjusted whenever there is a change in the market rate of interest on
which the interest rate payable is based. Variable or floating rate
obligations generally permit the holders of such obligations to demand
payment of principal from the issuer or a third party at any time or at
stated intervals. Variable and floating rate obligations are less effective
than fixed rate instruments at locking in a particular yield. Nevertheless,
such obligations may fluctuate in value in response to interest rate
changes if there is a delay between changes in market interest rates and
the interest reset date for an obligation. The Fund will take demand
features into consideration in determining the average portfolio duration
of the Fund and the effective maturity of individual municipal securities.
In addition, the absence of an unconditional demand feature exercisable
within seven days will, and the failure of the issuer or a third party to
honor its obligations under a demand feature might, require a variable or
floating rate obligation to be treated as illiquid for purposes of the
Fund's 15% limitation on illiquid investments.
AUCTION RATE SECURITIES. The Fund may invest in auction rate municipal
securities and auction rate preferred securities issued by closed-end
investment companies that invest primarily in municipal securities
(collectively, "auction rate securities"). The Fund does not intend to
invest more than 10% of its total assets in auction rate securities.
Provided that the auction mechanism is successful, auction rate securities
usually permit the holder to sell the securities in an auction at par value
at specified intervals. The interest rate or dividend is reset by "Dutch"
auction in which bids are made by broker-dealers and other institutions for
a certain amount of securities at a specified minimum yield. The interest
rate or dividend rate set by the auction is the lowest interest or dividend
rate that covers all securities offered for sale. While this process is
designed to permit auction rate securities to be traded at par value, there
is some risk that an auction will fail due to insufficient demand for the
securities. If so, the securities may become illiquid and subject to the
Fund's 15% limitation on illiquid securities.
Dividends on auction rate preferred securities issued by a closed-end fund
may be designated as exempt from federal income tax to the extent they are
attributable to exempt income earned by the closed-end fund on the
securities in its portfolio and distributed to holders of the preferred
securities, provided that the preferred securities are treated as equity
securities for federal income tax purposes and the closed-end fund complies
with certain tests under the Internal Revenue Code. For purposes of
complying with the 20% limitation on the Fund's investments in taxable
securities, auction rate preferred securities will be treated as taxable
securities unless substantially all of the dividends on such securities are
expected to be exempt from regular federal income taxes.
The Fund's investments in auction rate preferred securities of closed-end
funds are subject to the limitations prescribed by the Investment Company
Act of 1940 and certain state securities regulations. These limitations
include a prohibition against acquiring more than 3% of the voting
securities of any other investment company, and investing more than 5% of
the Fund's assets in securities of any one investment company or more than
10% of its assets in securities of all investment companies. The Fund will
indirectly bear its proportionate share of any management fees paid by such
closed-end funds in addition to the advisory fee payable directly by the
Fund.
DEMAND FEATURES. In order to enhance the liquidity of municipal
securities, the Fund may acquire the right to sell a security to another
party at a guaranteed price and date. Such a right to resell may be
referred to as a "demand feature" or liquidity put, depending on its
characteristics. The aggregate price which the Fund pays for securities
with demand features may be higher than the price which otherwise would be
paid for the securities. Demand features may not be available or may not be
available on satisfactory terms.
Demand features may involve letters of credit issued by domestic or foreign
banks supporting the other party's ability to purchase the security from
the Fund. The right to sell may be exercisable on demand or at specified
intervals, and may form part of a security or be acquired separately by the
Fund. In considering whether a security meets the Fund's quality standards,
the Fund will look to the creditworthiness of the party providing the Fund
with the right to sell as well as the quality of the security itself. The
Fund values municipal securities which are subject to demand features at
fair market value.
TENDER OPTION BONDS. A tender option bond is a municipal security
(generally held pursuant to a custodial arrangement) having a relatively
long maturity and bearing interest at a fixed rate substantially higher
than prevailing short-term tax-exempt rates. The bond is typically issued
in conjunction with the agreement of a third party, such as a bank,
broker-dealer or other financial institution, pursuant to which such
institution grants the security holders the option, at periodic intervals,
to tender their securities to the institution and receive the face value
thereof. As consideration for providing the option, the financial
institution receives periodic fees equal to the difference between the
bond's fixed coupon rate and the rate, as determined by a remarketing or
similar agent at or near the commencement of such period, that would cause
the securities, coupled with the tender option, to trade at par at the date
of such determination. Thus, after payment of this fee, the security holder
effectively holds a demand obligation that bears interest at the prevailing
short-term tax-exempt rate. The tender option will be taken into
consideration in determining the effective maturity of tender option bonds
and the average portfolio duration of the Fund. The liquidity of a tender
option bond is a function of both the credit quality of the bond issuer and
the financial institution providing liquidity. Consequently, tender option
bonds are deemed to be liquid unless, in the opinion of the Investment
Adviser, the credit quality of the bond issuer and the financial
institution is deemed, in light of the Fund's credit quality requirements,
to be inadequate.
Although the Fund intends to invest in tender option bonds the interest on
which will, in the opinion of bond counsel for the issuer or counsel
selected by the Investment Adviser, be exempt from regular federal income
tax, there is a risk that the Fund will not be considered the owner of such
tender option bonds and thus will not be entitled to treat such interest as
exempt from such tax. In addition, tender offer bonds may be considered to
be securities of an unregistered investment company for purposes of the
limitations imposed by the Investment Company Act of 1940 on the Fund's
investments in investment company securities. Accordingly, the Fund will
comply with the following percentage limitations on investments in tender
option bonds. The Fund will not acquire more than 3% of the voting
securities of the issuer of the tender option bonds, invest more than 5%
of its assets in any one issue of tender option bonds or invest more than
10% of its assets in tender option bonds in the aggregate.
ZERO COUPON AND CAPITAL APPRECIATION BONDS. The Fund may invest in zero
coupon and capital appreciation bonds, which are debt securities issued or
sold at a discount from their face value and which do not entitle the
holder to any periodic payment of interest prior to maturity or a specified
redemption date (or cash payment date). The amount of the discount varies
depending on the time remaining until maturity or cash payment date,
prevailing interest rates, the liquidity of the security and the perceived
credit quality of the issuer. These securities also may take the form of
debt securities that have been stripped of their unmatured interest
coupons, the coupons themselves or receipts or certificates representing
interest in such stripped debt obligations or coupons. Discount with
respect to stripped tax-exempt securities or their coupons may be taxable.
The market prices of capital appreciation bonds generally are more volatile
than the market prices of interest bearing securities and are likely to
respond to a greater degree to changes in interest rates than interest
bearing securities having similar maturities and credit quality.
RESTRICTED AND ILLIQUID SECURITIES. The Fund intends to 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.
AVERAGE PORTFOLIO DURATION. Although the Fund will not maintain a stable net
asset value, the adviser will seek to limit, to the extent consistent with the
Fund's investment objective of current income, the magnitude of fluctuations in
the Fund's net asset value by limiting the dollar-weighted average duration of
the Fund's portfolio. 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 shorter
durations generally have less volatile prices than securities of comparable
quality with longer durations. The Fund should be expected to maintain a higher
average duration during periods of lower expected market volatility, and a lower
average duration during periods of higher expected market volatility. In any
event, the Fund's dollar-weighted average duration will not exceed four years.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase municipal
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.
FUTURES CONTRACTS AND OPTIONS TO BUY OR SELL SUCH CONTRACTS. The Fund may
utilize bond futures contracts and options to a limited extent. Specifically,
the Fund may enter into futures contracts provided that not more than 5% of its
assets are required as a futures contract deposit; in addition, the
Fund may enter into futures contracts and options transactions only to the
extent that obligations under such contracts or transactions represent not more
than 20% of the Fund's assets.
Futures contracts and options may be used for several reasons: to maintain cash
reserves while remaining fully invested, to facilitate trading, to reduce
transactions costs, or to seek higher investment returns when a futures contract
is priced more attractively than the underlying municipal security or index. The
Fund may not use futures contracts or options transactions to leverage its
assets.
For example, in order to remain fully invested in bonds, while maintaining
liquidity to meet potential shareholder redemptions, the Fund may invest a
portion of its assets in a bond futures contract. Because futures contracts only
require a small initial margin deposit, the Fund would then be able to maintain
a cash reserve to meet potential redemptions, while at the same time remaining
fully invested. Also, because the transactions costs of futures contracts and
options may be lower than the costs of investing in bonds directly, it is
expected that the use of futures contracts and options may reduce the Fund's
total transactions costs.
The primary risks associated with the use of futures contracts and options are:
(i) imperfect correlation between the change in market value of the bonds held
by the Fund and the prices of futures contracts and options; and (ii) possible
lack of liquid secondary market for a futures contract and the resulting
inability to close a futures position prior to its maturity date. The risk of
imperfect correlation will be minimized by investing only in those contracts
whose price fluctuations are expected to resemble those of the Fund's underlying
securities. The risk that the Fund will be unable to close out a futures
position will be minimized by entering into such transactions on a national
exchange with an active and liquid secondary market. Much depends on the ability
of the portfolio manager to predict market conditions based upon certain
economic analysis and factors. In general, the futures market is more liquid
than the municipal bond market, and so by investing in futures, liquidity may be
improved.
TEMPORARY INVESTMENTS. From time to time, during periods of other than normal
market conditions, the Fund may invest in short-term temporary investments which
may or may not be exempt from federal income tax. These temporary investments
include: obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities; other debt securities; commercial paper; certificates of
deposit of domestic branches of U.S. banks; and repurchase agreements
(arrangements in which the organization selling the Fund a security agrees at
the time of sale to repurchase it at a mutually agreed upon time and price).
There are no rating requirements applicable to temporary investments. However,
the investment adviser will limit temporary investments to those rated within
the investment grade categories described under "Acceptable Investments --
Characteristics" (if rated) or those which the investment adviser judges to have
the same characteristics as such investment grade securities (if unrated).
Although the Fund is permitted to make taxable, temporary investments, there is
no current intention of generating income subject to federal regular income tax.
INVESTMENT RISKS
Yields on municipal securities depend on a variety of factors, including: the
general conditions of the municipal note market and of the municipal bond
market; the size of the particular offering; the maturity of the obligations;
and the rating of the issue. The ability of the Fund to achieve its investment
objective also depends on the continuing ability of the issuers of municipal
securities and participation interests, or the guarantors of either, to meet
their obligations for the payment of interest and principal when due. Since the
Fund will invest primarily in municipal securities bearing fixed rates of
interest, the net asset value of the Shares will generally vary inversely with
changes in prevailing interest rates.
INVESTMENT LIMITATIONS
The Fund will not borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio investment for a percentage of
its cash value with an agreement to buy it back on a set date) or pledge
securities except, under certain circumstances, the Fund may borrow up to
one-third of the value of its total assets and pledge up to 10% of the value of
those assets to secure such borrowings.
The above investment limitation cannot be changed without shareholder approval.
The following limitation, however, may be changed by the Directors without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Fund will not:
invest more than 5% of the value of its total assets in industrial
development bonds where the principal and interest are the responsibility
of companies (or guarantors, where applicable) with less than three years
of continuous operations, including the operation of any predecessor.
NET ASSET VALUE
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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 Investment 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
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SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased through an investment dealer who has a sales agreement with the
distributor, Federated Securities Corp., or directly from Federated Securities
Corp. either by mail or wire. The Fund reserves the right to reject any purchase
request.
THROUGH A FINANCIAL INSTITUTION. An investor may call his financial institution
(such as a bank or an investment dealer) to place an order to purchase Shares.
Orders through a financial institution are considered received when the Fund is
notified of the purchase order. Purchase orders through a registered
broker/dealer must be received by the broker before 4:00 p.m. (Eastern time) and
must be transmitted by the broker to the Fund before 5:00 p.m. (Eastern time)
in order for Shares to be purchased at that day's price. Purchase orders
through other financial institutions must be received by the financial
institution and transmitted to the Fund before 4:00 p.m. (Eastern time) in
order for Shares to be purchased at that day's price. It is the financial
institution's responsibility to transmit orders promptly.
DIRECTLY BY MAIL. To purchase Shares by mail directly from Federated Securities
Corp.:
complete and sign the application available from the Fund;
enclose a check made payable to Limited Term Municipal Fund--Fortress
Shares; and
send both to the Fund's transfer agent, Federated Services Company,
Federated Investors Tower, Pittsburgh, PA 15222-3779.
Purchases by mail are considered received after payment by check is converted by
Federated Services Company into federal funds. This is generally the next
business day after Federated Services Company receives the check.
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. Federated Services Company acts as the
shareholder's agent in depositing checks and converting them to federal funds.
DIRECTLY BY WIRE. To purchase Shares directly from Federated Securities Corp.
by Federal Reserve wire, call the Fund. All information needed will be taken
over the telephone, and the order is considered received when Federated Services
Company receives payment by wire.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $1,500. Subsequent investments must
be in amounts of at least $100.
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. These institutions,
however, may charge fees for services provided which may relate to ownership of
Fund shares. This prospectus should, therefore, be read together with any
agreement between the customer and the institution with regard to services
provided and the fees charged for these services.
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; and (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Under certain circumstances described under "Redeeming Fortress Shares,"
shareholders may be charged a contingent deferred sales charge by the
distributor at the time Shares are redeemed.
DEALER CONCESSION. For sales of Shares, broker/dealers will normally receive
100% of the applicable sales charge. Any portion of the sales charge which is
not paid to a broker/dealer will be retained by the distributor. However, from
time to time, and at the sole discretion of the distributor, all or part of that
portion may be paid to a dealer. The sales charge for Shares sold other than
through registered broker/dealers will be retained by Federated Securities Corp.
Federated Securities Corp. may pay fees to banks out of the sales charge in
exchange for sales and/or administrative services performed on behalf of the
bank's customers in connection with the initiation of customer accounts and
purchases of Shares.
ELIMINATING THE SALES CHARGE
The sales charge can be eliminated on the purchase of Shares through:
quantity discounts and accumulated purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. There is no sales charge for
purchases of $1 million or more. The Fund will combine purchases made on the
same day by the investor, his spouse, and his children under age 21 when it
calculates the sales charge.
If an additional purchase of Shares is made, the Fund will consider the previous
purchases still invested in Shares. For example, if a shareholder already owns
Shares having a current value at the public offering price of $900,000, and he
purchases $100,000 or more at the current public offering price, there will be
no sales charge on the additional purchase. The Fund will also combine purchases
for the purpose of reducing the contingent deferred sales charge imposed on some
Shares redemptions. For example, if a shareholder already owns Shares having a
current value at public offering price of $1 million and purchases an additional
$1 million at the current public offering price, the applicable contingent
deferred sales charge would be reduced to 0.50% of those additional Shares. For
more information on the levels of the contingent deferred sales charge and
holding periods, see the section entitled "Contingent Deferred Sales Charge."
To receive this sales charge elimination, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the purchase is made that Shares are already owned or that purchases are
being combined. The Fund will eliminate the sales charge after it confirms the
purchases.
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 1.00% of the
total amount intended to be purchased in escrow (in Shares) until such purchase
is completed.
The 1.00% 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 the contingent deferred sales charge 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 the purchases.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis. Under this program, funds may be automatically withdrawn
monthly from the shareholder's checking account maintained at an Automated
Clearing House ("ACH") member institution, and invested in Shares at the net
asset value next determined after an order is received by Federated Services
Company, plus the 1.00% sales charge for purchases under $1 million. A
shareholder may apply for participation in this program through Federated
Securities Corp. or his financial institution.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder. Share certificates are not issued unless requested
on the application or by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly statements are sent to report dividends paid during the
month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. Distributions of any net realized
long-term capital gains will be made at least once every twelve months.
Dividends and distributions are automatically reinvested in additional Shares on
payment dates at net asset value without a sales charge, unless cash payments
are requested by shareholders on the application or by writing to Federated
Securities Corp.
Shares purchased through a financial institution, for which payment by wire is
received by Federated Services Company on the business day following the order,
begin to earn dividends on the day the wire payment is received. Otherwise,
Shares purchased by wire begin to earn dividends on the business day after wire
payment is received by Federated Services Company. Shares purchased by mail, or
through a financial institution, if the financial institution's payment is by
check, begin to earn dividends on the second business day after the check is
received by Federated Services Company.
Shares earn dividends through the business day that proper written redemption
instructions are received by Federated Services Company.
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.
REDEEMING FORTRESS SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after Federated
Services Company 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. Redemption requests must be received in proper
form and can be made through a financial institution, or directly from the Fund
by written request.
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 redemption fee.
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. If at any time the Fund shall determine it
necessary to terminate or modify this method of redemption, shareholders will be
promptly notified.
Before a financial institution may request redemption by telephone on behalf of
a shareholder, an authorization form permitting the Fund to accept redemption
requests by telephone must first be completed. Telephone redemption 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.
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, such as "Directly by Mail," should be considered.
DIRECTLY BY MAIL
Shareholders may also redeem Shares by sending a written request to Federated
Services Company, Federated Investors Tower, Pittsburgh, PA 15222-3779. This
written request must include the shareholder's name, the Fund name and class of
shares, the account number, and the share or dollar amount to be redeemed.
Shares will be redeemed at their net asset value next determined after Federated
Services Company receives the redemption request, less any applicable redemption
fee.
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 Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
a member firm of the New York, American, Boston, Midwest, or Pacific
Stock Exchange;
a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC; or
any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
RECEIVING PAYMENT
BY CHECK. Normally, a check for the proceeds is mailed within one business
day, but in no event more than seven days, after receipt of a proper
written redemption request provided Federated Services Company has received
payment for shares from the shareholder.
BY WIRE. Redemption requests will be wired the following business day.
CONTINGENT DEFERRED SALES CHARGE
Shareholders redeeming Shares from their Fund accounts within certain time
periods of the purchase date of those Shares will be charged a contingent
deferred sales charge by the Fund's distributor of the lesser of the original
price or the net asset value of the Shares redeemed as follows:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
AMOUNT OF PURCHASE SHARES HELD SALES CHARGE
<S> <C> <C>
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%
</TABLE>
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 based upon from the death or total and permanent
disability of the beneficial owner. The contingent deferred sales charge is 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 are not subject to the contingent deferred sales charge to the extent the
distributor does not make advance payments. In addition, Shares held in the Fund
by a financial institution for its own account which were originally purchased
by the financial institution directly from the Fund's distributor without a
sales charge may be redeemed without a contingent deferred sales charge. For
more information, see "Administrative Arrangements."
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive monthly or quarterly payments of a
predetermined amount 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; the minimum
withdrawal amount is $100. 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 balance with a
value of at least $10,000 in the Fund (at current offering price).
A shareholder may apply for participation in this program through Federated
Securities Corp. 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.
A contingent deferred sales charge is imposed on Shares, other than Shares
purchased through reinvestment of dividends, which are redeemed through this
program within one to four years of their purchase dates.
REDEMPTIONS BEFORE PURCHASE INSTRUMENTS CLEAR
When Shares are purchased by check, or through ACH, the proceeds from the
redemption of those Shares are not available, and the Shares may not be
exchanged, until the Fund or its agents are reasonably certain that the purchase
check has cleared, which could take up to ten calendar days.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $1,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $1,000 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 certain sales charges. This privilege is available to
shareholders resident in any state in which the shares being acquired may be
sold.
Shareholders using this privilege must exchange Shares having a net asset value
which at least meets the minimum investment required for the fund into which the
exchange is being made. A shareholder may obtain further information on the
exchange privilege, and may obtain prospectuses for other Fortress Funds and
Federated Funds by calling Federated Securities Corp. or his financial
institution. Before making an exchange, a shareholder must receive a prospectus
of the fund for which the exchange is being made.
Exercise of the exchange privilege is treated as a sale for federal income tax
purposes. Depending on the circumstances, a short or long-term capital gain or
loss may be realized.
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
Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Federated
Advisers, the Fund's investment adviser (the "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 0.40 of 1% of the Fund's average daily net assets. Under the
investment advisory contract, which provides for voluntary waivers of
expenses by the Adviser, the Adviser may voluntarily waive some or all of
its fee. The Adviser can terminate this voluntary waiver of some or all of
its advisory fee at any time at its sole discretion. The Adviser has also
undertaken to reimburse the Fund for operating expenses in excess of
limitations established by certain states.
ADVISER'S BACKGROUND. Federated Advisers, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) shares of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, Chairman and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J.
Christopher Donahue, who is President and Trustee of Federated Investors.
Federated Advisers and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services
to a number of investment companies. Total assets under management or
administration by these and other subsidiaries of Federated Investors are
approximately $70 billion. Federated Investors, which was founded in 1956
as Federated Investors, Inc., develops and manages mutual funds primarily
for the financial industry. Federated Investors' track record of
competitive performance and its disciplined, risk averse investment
philosophy serve approximately 3,500 client institutions nationwide.
Through these same client institutions, individual shareholders also have
access to this same level of investment expertise.
PORTFOLIO MANAGER'S BACKGROUND. Mary Jo Ochson has been the Fund's
portfolio manager since its inception. Ms. Ochson joined Federated
Investors in 1982 and has been a Vice President of the Fund's investment
adviser since 1988. Ms. Ochson served as an Assistant Vice President of the
investment adviser from 1984 until 1988. Ms. Ochson is a Chartered
Financial Analyst and received her M.B.A. in Finance from the University of
Pittsburgh.
DISTRIBUTION OF FORTRESS SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan adopted in
accordance with the Investment Company Act Rule 12b-1 (the "Plan"), the Fund
will pay to Federated Securities Corp. an amount computed at an annual rate of
0.15 of 1% of the average daily net asset value of the Shares to finance any
activity which is principally intended to result in the sale of Shares.
Federated Securities Corp. may, from time to time and for such periods as it
deems appropriate, voluntarily reduce its compensation under the Plan to the
extent the expenses attributable to the Shares exceed such lower expense
limitation as the distributor may, by notice to the Fund, voluntarily declare to
be effective.
The distributor may select financial institutions (such as a bank or an
investment dealer) to provide sales support services as agents for their clients
or customers who beneficially own Shares of the Fund.
Financial institutions will receive fees from the distributor based upon Shares
owned by their clients or customers. The schedules of such fees and the basis
upon which such fees will be paid will be determined from time to time by the
distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no payments
to the distributor except as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Fund
under the Plan.
ADMINISTRATIVE ARRANGEMENTS. The distributor will pay financial institutions,
for distribution and/ or administrative services, an amount equal to 1% of the
offering price of the Shares acquired by their clients or customers on purchases
up to $1,999,999, 0.50% of the offering price on purchases of $2,000,000 to
$4,999,999, and 0.25% of the offering price on purchases of $5,000,000 or more.
The financial institution may elect to receive amounts less than those stated
which would reduce the stated contingent deferred sales charge and/or the
holding period used to calculate the fee.
The fees paid to financial institutions by the distributor will be reimbursed by
the Adviser.
The Glass-Steagall Act limits the ability of a depository institution (such as a
commercial bank or a savings and loan association) to become an underwriter or
distributor of securities. In the event the Glass-Steagall Act is deemed to
prohibit depository institutions from acting in the capacities described above
or should Congress relax current restrictions on depository institutions, the
Directors will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, Inc., which is a
subsidiary of Federated Investors, provides the Fund with the administrative
personnel and services necessary to operate the Fund. Such services include
shareholder servicing and certain legal and accounting services. Federated
Administrative Services, Inc. provides these at approximate cost.
SHAREHOLDER SERVICES PLAN. The Fund has adopted a Shareholder Services Plan
(the "Services Plan") with respect to Shares of the Fund. Under the Services
Plan, financial institutions will enter into shareholder service agreements with
the Fund to provide administrative support services to their customers who from
time to time may be owners of record or beneficial owners of Shares. In return
for providing these support services, a financial institution may receive
payments from the Fund at a rate not exceeding 0.25 of 1% of the average daily
net assets of the Shares beneficially owned by the financial institution's
customers for whom it is holder of record or with whom it has a servicing
relationship. These administrative services may include, but not are not limited
to, the provision of personal services and maintenance of shareholder accounts.
CUSTODIAN. State Street Bank and Trust Company ("State Street Bank"), 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 the Shares of the Fund, and
dividend disbursing agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania, and Dickstein, Shapiro & Morin, Washington, D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche, Boston, Massachusetts.
EXPENSES OF THE FUND AND FORTRESS SHARES
Holders of Shares pay their allocable portion of Fund and Corporation expenses.
The Corporation expenses for which holders of Shares pay their allocable portion
include, but are not limited to: the cost or organizing the Corporation and
continuing its existence; registering the Corporation with federal and state
securities authorities; Directors' fees; auditors' fees; the cost of meetings of
Directors; legal fees of the Corporation; association membership dues and such
non-recurring and extraordinary items as may arise from time to time.
The Fund expenses for which holders of Shares pay their allocable portion
include, but are not limited to: registering the Fund and Shares of the Fund;
investment advisory services; taxes and commissions; custodian fees; insurance
premiums; auditors' fees; and such non-recurring and extraordinary items as may
arise from time to time.
At present, the only expenses which are allocated specifically to the Shares as
a class are expenses under the Fund's Shareholder Services Plan and Distribution
Plan. However, the Directors reserve the right to allocate certain other
expenses to holders of Shares as it deems appropriate ("Class Expenses"). In any
case, Class Expenses would be limited to: distribution fees; transfer agent fees
as identified by the transfer agent as attributable to holders of Shares; fees
under the Fund's Shareholder Services Plan; printing and postage expenses
related to preparing and distributing material such as shareholder reports,
prospectuses and proxies to current shareholders; registration fees paid to the
Securities and Exchange Commission and to state securities commissions;
expenses related to administrative personnel and services as required to
support holders of Shares; legal fees relating solely to Shares; and Directors'
fees incurred as a result of issues relating solely to Shares.
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 fund or class, only shares of that fund 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 Corporation's, or the Fund's operation and for the election of
Directors under certain circumstances.
Directors may be removed by the Directors or by shareholders at a special
meeting. A special meeting of the shareholders shall be called by the Directors
upon the written request of shareholders owning at least 10% of the outstanding
shares of the Corporation.
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. Shareholders are
not required to pay the federal regular income tax on any dividends received
from the Fund that represent net interest on tax-exempt municipal bonds.
However, under the Tax Reform Act of 1986, dividends representing net interest
earned on some municipal bonds may be included in calculating the federal
individual alternative minimum tax or the federal alternative minimum tax for
corporations.
The alternative minimum tax, equal to 28% of alternative minimum taxable income
for individuals and 20% for corporations, applies when it exceeds the regular
tax for the taxable year. Alternative minimum taxable income is equal to the
regular taxable income of the taxpayer increased by certain "tax preference"
items not included in regular taxable income and reduced by only a portion of
the deductions allowed in the calculation of the regular tax.
The Tax Reform Act of 1986 treats interest on certain "private activity" bonds
issued after August 7, 1986, as a tax preference item for both individuals and
corporations. Unlike traditional governmental purpose municipal bonds, which
finance roads, schools, libraries, prisons and other public facilities, private
activity bonds provide benefits to private parties. The Fund may purchase all
types of municipal bonds, including private activity bonds. Thus, should it
purchase any such bonds, a portion of the Fund's dividends may be treated as a
tax preference item.
In addition, in the case of a corporate shareholder, dividends of the Fund which
represent interest on municipal bonds may be subject to the 20% corporate
alternative minimum tax because the dividends are included in a corporation's
"adjusted current earnings." The corporate alternate minimum tax treats 75% of
the excess of a taxpayer's pre-tax "adjusted current earnings" over the
taxpayer's alternative minimum taxable income as a tax preference item.
"Adjusted current earnings" is based upon the concept of a corporation's
"earnings and profits." Since "earnings and profits" generally includes the full
amount of any Fund dividend, and alternative minimum taxable income does not
include the portion of the Fund's dividend attributable to municipal bonds which
are not private activity bonds, the difference will be included in the
calculations of the corporation's alternative minimum tax.
Dividends of the Fund representing net interest income earned on some temporary
investments and any realized net short-term gains are taxed as ordinary income.
These tax consequences apply whether dividends are received in cash or as
additional Shares. Information on the tax status of dividends and distributions
is provided annually.
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 not subject to Pennsylvania personal property taxes.
OTHER STATE AND LOCAL TAXES
Distributions representing net interest received on tax-exempt municipal
securities are not necessarily free from income taxes of any state or local
taxing authority. State laws differ on this issue and 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, yield and
tax-equivalent yield for 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 tax-equivalent yield of Shares is calculated similarly to the
yield, but is adjusted to reflect the taxable yield that Shares would have had
to earn to equal the actual yield, assuming a specific tax rate. The yield and
tax-equivalent yield do 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, yield
and tax-equivalent yield.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
Total return will be calculated separately for Fortress Shares and Investment
Shares. Because Fortress Shares are subject to lower 12b-1 expenses, the yield
for Fortress Shares, for the same period, will exceed that of Investment Shares.
Because Investment Shares are not subject to a contingent deferred sales charge,
the total return for Investment Shares, for the same period, may exceed that of
Fortress Shares.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund currently offers Fortress Shares and Investment Shares. The Investment
Shares are sold subject to a front-end sales charge of up to 1%, but without any
contingent deferred sales charge. Investment Shares are subject to a minimum
initial investment of $5,000.
The amount of dividends payable to Investment Shares will generally be less than
that of Fortress Shares by the difference between class expenses borne by shares
of each respective class.
The stated advisory fee is the same for both classes of shares.
LIMITED TERM MUNICIPAL FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Independent Auditors' Report on page 44.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1993*
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- -----------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------------
Net investment income 0.10
- -----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.02
- ----------------------------------------------------------------------------------------------- -----------------
Total from investment operations 0.12
- -----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.10)
- ----------------------------------------------------------------------------------------------- -----------------
NET ASSET VALUE, END OF PERIOD $ 10.02
- ----------------------------------------------------------------------------------------------- -----------------
TOTAL RETURN** 1.20%
- -----------------------------------------------------------------------------------------------
RATIOS, TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------
Expenses 0.50%(a)
- -----------------------------------------------------------------------------------------------
Net investment income 4.30%(a)
- -----------------------------------------------------------------------------------------------
Expenses waiver/reimbursment (b) 1.71%(a)
- -----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $13,694
- -----------------------------------------------------------------------------------------------
Portfolio turnover rate 0 %
- -----------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from September 1, 1993 (date of initial
public offering) to November 30, 1993.
** Based on net asset value which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) Increase/decrease in above expense/income ratios due to waivers or
reimbursements of expenses (Note 5).
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report dated November 30, 1993, which can be obtained free of charge.
LIMITED TERM MUNICIPAL FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
MOODY'S
PRINCIPAL OR S&P*
AMOUNT (NOTE 7) VALUE
<S> <C> <C> <C>
- ------------- --------------------------------------------------------------------- ----------- --------------
SHORT-TERM MUNICIPAL SECURITIES--16.8%
- ------------------------------------------------------------------------------------
$ 500,000 Kentucky State Pollution Abatement & Water Residential
Finance Authority, Daily VRDNs, (Toyota Motors Co.)/
(Subject to AMT) AAA $ 500,000
---------------------------------------------------------------------
100,000 Kentucky State Pollution Abatement & Water Residential
Finance Authority, Daily VRDNs, (Toyota Motors Co.)/
(Subject to AMT) AAA 100,000
---------------------------------------------------------------------
900,000 Kentucky State Pollution Abatement & Water Residential
Finance Authority, Daily VRDNs, (Toyota Motors Co.)/
(Subject to AMT) AAA 900,000
---------------------------------------------------------------------
300,000 Peninsula Port Authority of Virginia, Daily VRDNs, (Kinyo Virginia,
Inc.)/(Industrial Bank of Japan, LTD LOC)/(Subject to AMT) Aa2 300,000
---------------------------------------------------------------------
400,000 Peninsula Port Authority of Virginia, Daily VRDNs, (Kinyo Virginia,
Inc.)/(Industrial Bank of Japan, LTD LOC)/(Subject to AMT) Aa2 400,000
---------------------------------------------------------------------
200,000 Peninsula Port Authority of Virginia, Daily VRDNs, (Kinyo Virginia,
Inc.)/(Industrial Bank of Japan, LTD LOC)/(Subject to AMT) Aa2 200,000
---------------------------------------------------------------------
250,000 Crystal City, MN, IDA Weekly VRDNs, (Crystal Gallery Mall)/(Citibank,
NA LOC) A-1 250,000
---------------------------------------------------------------------
200,000 Government Development of Puerto Rico, Weekly VRDNs, (Credit Suisse,
Zurich) and (Sumitomo Bank, Ltd. LOCs) A-1+ 200,000
--------------------------------------------------------------------- --------------
TOTAL SHORT-TERM MUNICIPAL SECURITIES
(AT AMORTIZED COST) 2,850,000
--------------------------------------------------------------------- --------------
LONG-TERM MUNICIPAL SECURITIES--95.0%
- ------------------------------------------------------------------------------------
ARIZONA--2.6%
---------------------------------------------------------------------
$ 400,000 Maricopa County, AZ, IDA 6.65% (Citizens Utilities Co.)/ (Subject to
AMT), Mandatory Tender 4/1/2001 AAA $ 445,684
--------------------------------------------------------------------- --------------
CALIFORNIA--2.0%
---------------------------------------------------------------------
300,000 Long Beach, CA, 7.00% Harbour Revenue Bonds (Series A)/ (Subject to
AMT), 5/15/99 AA- 333,099
--------------------------------------------------------------------- --------------
FLORIDA--2.9%
---------------------------------------------------------------------
275,000 City of Leesburg, FL, 4.60% Hospital Revenue Refunding Bonds (Series
1993B)/(Leesburg Regional Medical Center Project), 7/1/98 BBB+ 270,463
---------------------------------------------------------------------
200,000 Jacksonville, FL, Electric Authority 6.50% Revenue Special
Obligations Bonds (St. Johns Revenue Power Pk System), 10/1/2014
(callable 10/1/99 @ 101.5) AA 214,522
--------------------------------------------------------------------- --------------
Total 484,985
--------------------------------------------------------------------- --------------
ILLINOIS--15.3%
---------------------------------------------------------------------
220,000 Chicago, IL, O'Hare International Airport, 8.00% General Airport
Revenue Bonds (Series A), 1/1/2008
(callable 11/1/97 @ 102) A+ 246,521
---------------------------------------------------------------------
500,000 Illinois Development Financial Authority, 5.25% Revenue Bonds (Series
1993C)/(Catholic Charities Housing Development Corp.
Project)/(Archdiocese of Chicago, Guaranty),
1/1/99 NR 495,895
---------------------------------------------------------------------
245,000 Illinois Development Finance Authority, 7.625% Pollution Control
Revenue Bonds (Illinois Power Co.)/(FGIC Insured), 12/1/2016
(callable 6/1/97 @ 103) AAA 276,529
---------------------------------------------------------------------
250,000 Illinois Health Facilities Authority, 4.95% Revenue
Refunding Bonds (Lutheran Social Services of Illinois),
8/15/96 BBB 251,250
---------------------------------------------------------------------
$ 220,000 Illinois Health Facilities Authority, 5.30% Revenue
Refunding Bonds (Lutheran Social Services of Illinois),
8/15/98 BBB $ 219,474
---------------------------------------------------------------------
600,000 Illinois Health Facilities Authority, 5.75% Revenue Bonds (Mercy
Hospital & Medical Center), 1/1/98 A 613,074
---------------------------------------------------------------------
500,000 Illinois Housing Development Authority, 5.00% Residential Mortgage
Revenue Bonds (Series 1993A)/(Subject to AMT), 2/1/2021 (callable
2/1/2004 @ 102) A 501,320
--------------------------------------------------------------------- --------------
Total 2,604,063
--------------------------------------------------------------------- --------------
INDIANA--1.4%
---------------------------------------------------------------------
225,000 Marion County, IN, Hospital Authority, 6.50% Revenue
Refunding Bonds (Methodist Hospital of Indiana),
9/1/2008 (callable 9/1/99 @ 102) AA 240,964
--------------------------------------------------------------------- --------------
IOWA--1.9%
---------------------------------------------------------------------
325,000 City of Ottumwa, IA, 4.375% Hospital Facilities Revenue Refunding &
Insp. Bonds (Series 1993)/(Ottumwa Regional Health Center, Inc.),
10/1/97 BBB+ 324,561
--------------------------------------------------------------------- --------------
MASSACHUSETTS--6.0%
---------------------------------------------------------------------
250,000 Greater New Bedford Regional Refuse Management District, MA, 4.90% GO
Landfill Bonds (Subject to AMT), 5/1/98 Baa 248,902
---------------------------------------------------------------------
250,000 Massachusetts Education Loan Authority, 6.40% Revenue Bonds (Issue
E)/(Series A)/(AMBAC Insured), 1/1/99 AAA 263,698
---------------------------------------------------------------------
475,000 Massachusetts State College Building, 7.25% Revenue Bonds
(Commonwealth of Massachusetts Guaranty) (Series A),
5/1/2016 (callable 5/1/96 @ 102) A+ 513,926
--------------------------------------------------------------------- --------------
Total 1,026,526
--------------------------------------------------------------------- --------------
MICHIGAN--1.4%
---------------------------------------------------------------------
$ 235,000 Michigan State Strategic Fund, 6.625% Pollution Control Bonds (Series
1987)/(General Motors Corp.), 3/1/2007
(callable 3/1/95 @ 102) BBB+ $ 244,400
--------------------------------------------------------------------- --------------
MINNESOTA--10.3%
---------------------------------------------------------------------
1,500,000 St. Paul, MN, Housing & Redevelopment Authority, 9.75% Hospital
Revenue Bonds (Series B)/(Healtheast Project),
11/1/2017 (callable 3/1/95 @ 102) BBB- 1,743,270
--------------------------------------------------------------------- --------------
NEW JERSEY--1.6%
---------------------------------------------------------------------
250,000 New Jersey Economic Development Authority, 6.75%
Natural Gas Facilities Revenue Bonds (Elizabethtown Gas Co. Project),
10/1/2021 (callable 10/1/96 @ 102) A3 268,580
--------------------------------------------------------------------- --------------
NEW YORK--4.9%
---------------------------------------------------------------------
300,000 New York State Energy Research & Development Authority, 7.75%
Pollution Control Revenue Bonds (Consolidated
Edison Co. Project)/(Subject to AMT), 1/1/2024
(callable 11/1/98 @ 101.5) AA- 337,242
---------------------------------------------------------------------
200,000 New York State Energy Research & Development Authority, 7.375%
Pollution Control Revenue Bonds (Consolidated Edison Co. Project),
7/1/2024 (callable 7/1/98 @ 101) BBB 223,268
---------------------------------------------------------------------
250,000 New York State Energy Research & Development Authority, 8.875%
Pollution Control Revenue Bonds (Niagra Mohawk Power Corp.),
11/1/2025 (callable 11/1/95 @ 102) BBB 277,760
--------------------------------------------------------------------- --------------
Total 838,270
--------------------------------------------------------------------- --------------
NORTH CAROLINA--6.8%
---------------------------------------------------------------------
730,000 North Carolina Eastern Municipal Power, 7.25% Revenue Refunding
Bonds, 1/1/2021 (callable 1/1/97 @ 102) A 795,277
---------------------------------------------------------------------
195,000 North Carolina Eastern Municipal Power Agency, 6.00% Revenue Bonds
(Series B), 1/1/2020 (callable 10/1/97 @ 102) A 196,464
---------------------------------------------------------------------
$ 145,000 Wake County, NC, 6.50% Hospital Revenue Bonds (MBIA Insured),
10/1/2018 AAA $ 158,948
--------------------------------------------------------------------- --------------
Total 1,150,689
--------------------------------------------------------------------- --------------
OHIO--3.5%
---------------------------------------------------------------------
250,000 Cuyahoga County, OH, 6.00% Hospital Revenue Bonds (Metrohealth System
Project)/(MBIA Insured), 2/15/2019 (callable 2/15/98 @ 102) AAA 257,135
---------------------------------------------------------------------
300,000 Ohio State Water Development Authority, 7.25% Pollution Control
Finance Authority (Philip Morris Co.), 12/1/2008 (callable 12/1/97 @
103) A 336,945
--------------------------------------------------------------------- --------------
Total 594,080
--------------------------------------------------------------------- --------------
PENNSYLVANIA--14.8%
---------------------------------------------------------------------
500,000 Allegheny County, PA, Residential Finance Authority Mortgage, 4.875%
Revenue Refunding Bonds (Single Family-- GNMA/FNMA), 11/1/2014
(callable 11/1/2003 @ 102) AAA 497,060
---------------------------------------------------------------------
750,000 Beaver County, PA, IDA 7.75% Pollution Control Revenue Bonds (Series
A)/(Ohio Edison Project), 9/1/2024 (callable 9/1/99 @ 102) BBB- 838,320
---------------------------------------------------------------------
300,000 Butler County, PA, IDA 4.50% Health Center Revenue
Refunding Bonds (Pittsburgh Lifetime Care Community)/ (Sherwood Oaks
Project)/(North Hills Passavant Hospital), 6/1/98 A 298,152
---------------------------------------------------------------------
130,000 Delaware County, PA, 4.80% Authority Hospital Revenue Bonds
(Crozer--Chester Medical Center), 12/15/98 A 130,399
---------------------------------------------------------------------
120,000 Delaware County, PA, 4.90% Authority Hospital Revenue Bonds
(Crozer--Chester Medical Center), 12/15/99 A 120,246
---------------------------------------------------------------------
250,000 Franklin, PA, 10.875% Special Obligation Revenue Bonds (Franklin
Regional Medical Center), 10/1/2013
(callable 10/1/94 @ 101.5) BBB 254,840
---------------------------------------------------------------------
$ 250,000 Hampden, PA, IDA 4.50% PA Partnership Holdings (LLC Project)/(K-Mart
Corp.), 11/15/98 A3 $ 249,113
---------------------------------------------------------------------
125,000 Philadelphia PA, Hospital & Higher Education Facilities
Authority 6.60% Hospital Revenue Bonds (Series B)/
(Children's Seashore House), 8/15/98 BBB+ 133,470
--------------------------------------------------------------------- --------------
Total 2,521,600
--------------------------------------------------------------------- --------------
TENNESSEE--2.9%
---------------------------------------------------------------------
250,000 Volunteer State Student Funding Corp., TN, 4.50%
Educational Loan Revenue Bonds (Senior Series B)/
(Subject to AMT), 12/1/97 Aa 249,095
---------------------------------------------------------------------
250,000 Volunteer State Student Funding Corp., TN, 4.95%
Educational Loan Revenue Bonds (Series B)/
(Subject to AMT), 6/1/2000 Aa 249,722
--------------------------------------------------------------------- --------------
Total 498,817
--------------------------------------------------------------------- --------------
TEXAS--12.5%
---------------------------------------------------------------------
250,000 Brazos River Authority, TX, 8.25% Pollution Control
Revenue Bonds (Texas Utilities Electric Co. Project)/
(FGIC Insured)/(Subject to AMT), 12/1/2016
(callable 12/1/96 @ 102) AAA 281,182
---------------------------------------------------------------------
350,000 Brazos River Authority, TX, 9.875% Pollution Control
Revenue Bonds (Texas Utilities Electric Co. Project)/(FGIC
Insured)/(Subject to AMT), 10/1/2017
(callable 10/1/97 @ 102) AAA 416,126
---------------------------------------------------------------------
250,000 Central Texas Higher Education Authority, 4.65% Student Loan Revenue
Refunding Bonds (Series 1993), 12/1/99 Aaa 249,220
---------------------------------------------------------------------
250,000 Central Texas Higher Education Authority, 4.35% Income Revenue Bonds
(Senior Series C), 12/1/98 Aaa 249,663
---------------------------------------------------------------------
225,000 Harris County, TX, 7.00% Toll Road Multi-mode Revenue Bonds (Series
Lien-A), 8/15/99 (callable 2/15/97 @ 103) BBB+ 244,694
---------------------------------------------------------------------
$ 450,000 Lower Neches Valley Authority, TX, 6.85% Revenue
Refunding Bonds (Mobile Oil Refining Corp. Project),
5/1/2012 (callable 5/1/97 @ 102) AA $ 492,682
---------------------------------------------------------------------
200,000 Orange County, TX, Nav. & Port. District, Industrial Development
Corp., 4.75% Solid Waste Revenue Bonds (Horsehead Residential
Develoment Co. Project)/(Long-Term Credit Bank of Japan LOC),
Optional Tender 10/1/95 A 200,000
--------------------------------------------------------------------- --------------
Total 2,133,567
--------------------------------------------------------------------- --------------
UTAH--2.6%
---------------------------------------------------------------------
200,000 Intermountain Power Agency, UT, 7.875% Special
Obligations Crossover Revenue Refunding Bonds,
7/1/2014 (callable 7/1/96 @ 102) AA- 219,804
---------------------------------------------------------------------
200,000 Intermountain Power Agency, UT, 7.50% Power Supply Revenue Bonds,
7/1/2016 (callable 7/1/96 @ 102) AA 217,686
--------------------------------------------------------------------- --------------
Total 437,490
--------------------------------------------------------------------- --------------
WASHINGTON--1.6%
---------------------------------------------------------------------
250,000 Seattle, WA, Metropolitan Municipality, 6.875% Limited Sales Tax GO
Bonds, 1/1/2020 (callable 1/1/97 @ 102) Aa 269,317
--------------------------------------------------------------------- --------------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST, $16,223,590) 16,159,962
--------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (IDENTIFIED COST, $19,073,590) $ 19,009,962\
--------------------------------------------------------------------- --------------
</TABLE>
\ The cost of investment for federal tax purposes amounts $19,073,590. The net
unrealized depreciation on federal tax cost basis amounts to $63,628, and is
comprised of $23,158 appreciation and $86,786 depreciation at November 30,
1993.
* See Notes to Portfolio of Investments on Page 36.
Note: The categories of investments are shown as a percentage of net assets
($17,001,897) at November 30, 1993.
(See Notes which an integral part of the Financial Statements)
The following abbreviations are used in this portfolio:
AMBAC--American Municipal Bond
Assurance Corporation
AMT--Alternative Minimum Tax
FGIC--Financial Guaranty Insurance Company
GO--General Obligation
IDA--Industrial Development Authority
LOC--Letter(s) of Credit
MBIA--Municipal Bond Investors Assurance
VRDN--Variable Rate Demand Note
(See Notes which are an integral part of the Financial Statements)
LIMITED TERM MUNICIPAL FUND
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
The municipal bonds rated by Moody's Investors Services, Inc. ("Moody's") in
which the Fund may invest are Aaa, Aa, A, and Baa. Municipal bonds rated Aaa are
judged to be of the "best quality." The rating of Aa is assigned to municipal
bonds which are of "high quality by all standards," but as to which margins of
protection or other elements make long-term risks appear somewhat larger than
Aaa-rated municipal bonds. The Aaa and Aa-rated municipal bonds comprise what
are generally known as "high-grade bonds". Municipal bonds which are rated A by
Moody's possess many favorable investment attributes and are considered "upper
medium grade obligations." Factors giving security to principal and interest of
A-rated municipal bonds are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future. Bonds which
are rated Baa are neither highly protected nor poorly secured. The letter
ratings carry numerical modifiers with 1 indicating the higher end of the rating
category, 2 indicating the mid-range and 3 indicating the lower end of the
rating category.
Moody's highest rating for state and municipal short-term securities is
MIG1/VMIG1. Short-term municipal securities rated MIG1/VMIG1 are the best
quality. They have strong protection from established cash flows of funds for
their servicing or have established a broad-based access to the market for
refinancing or both. The VMIG1 rating denotes that the securitiy has a variable
rate and is payable on demand.
The municipal bonds rated by Standard & Poor's Corporation in which the Fund may
invest are AAA, AA, A, and BBB. Municipal bonds rated AAA are "obligations of
the highest quality". The rating of AA is accorded issues with investment
characteristics "only slightly less marked than those of the prime quality
issues." The category of A describes "the third strongest capacity for payment
of debt service." Principal and interest payments on bonds in this category are
regarded as safe. It differs from the two higher ratings because with respect to
general obligation bonds there is some weakness, either in the local economic
base, in debt burden, in the balance of managment. Under certain adverse
circumstances, any one such weakness might impair the ability of the issuer to
meet debt obligations at some future date. With respect to revenue bonds, debt
service coverage is good, but not exceptional. Stability of the pledge revenues
could show some variations because of increased competition or economic
influences on revenues. Basic security provisions, while satisfactory, are less
stringent. Bonds which are rated BBB are the lowest investment grade security
rating. These ratings may be modified by the addition of a plus or minus sign to
show relative standing with the major rating categories.
NR indicates the bonds are not currenlty rated by Moody's or Standard & Poor's.
However, management considers them to be of good quality.
Bonds for which the security depends upon the completion of some act or the
fulfillment of some condition are rated conditionally.
(See Notes which are an integral part of the Financial Statements)
LIMITED TERM MUNICIPAL FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------------------------
Investments in securities, at value (Note 2A)
(identified and tax cost; $19,073,590) $ 19,009,962
- --------------------------------------------------------------------------------------------------
Cash 23,972
- --------------------------------------------------------------------------------------------------
Receivable for capital stock sold 817,572
- --------------------------------------------------------------------------------------------------
Interest receivable 239,481
- --------------------------------------------------------------------------------------------------
Deferred expenses (Note 2E) 7,246
- -------------------------------------------------------------------------------------------------- -------------
Total assets 20,098,233
- --------------------------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------------------------
Payable for investments purchased $ 3,041,151
- -------------------------------------------------------------------------------------
Dividends payable 19,074
- -------------------------------------------------------------------------------------
Payable for capital stock redeemed 5,008
- -------------------------------------------------------------------------------------
Accrued expenses and other liabilities 31,103
- ------------------------------------------------------------------------------------- -----------
Total liabilities 3,096,336
- -------------------------------------------------------------------------------------------------- -------------
NET ASSETS for 1,697,560 shares of capital stock $ 17,001,897
- -------------------------------------------------------------------------------------------------- -------------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------------------------
Paid-in capital $ 17,065,525
- --------------------------------------------------------------------------------------------------
Unrealized depreciation on investments (63,628)
- -------------------------------------------------------------------------------------------------- -------------
Total $ 17,001,897
- -------------------------------------------------------------------------------------------------- -------------
NET ASSET VALUE:
Fortress Shares (net assets of $3,307,456 / 330,230 SHARES OF CAPTIAL STOCK) $10.02
- -------------------------------------------------------------------------------------------------- -------------
Investment Shares (net assets of $13,694,441 / 1,367,330 shares of capital stock) $10.02
- -------------------------------------------------------------------------------------------------- -------------
COMPUTATION OF OFFERING PRICE:
Fortress Shares Offering Price Per Share (100/99 of $10.02)* $10.12
- -------------------------------------------------------------------------------------------------- -------------
Investment Shares Offering Price Per Share (100/99 of $10.02)* $10.12
- -------------------------------------------------------------------------------------------------- -------------
COMPUTATION OF REDEMPTION PRICE:
Fortress Shares Redemption Price Per Share (99/100 of $10.02)** $9.92
- -------------------------------------------------------------------------------------------------- -------------
Investment Shares Redemption Price Per Share (100/100 of $10.02) $10.02
- -------------------------------------------------------------------------------------------------- -------------
</TABLE>
* See "What Shares Cost" on page 14 of the prospectus.
**See "Contingent Deferred Sales Charge" on page 19 of Fortress Shares the
prospectus.
(See Notes which are an integral part of the Financial Statements)
LIMITED TERM MUNICIPAL FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1993*
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ----------------------------------------------------------------------------------------------------
Interest income (Note 2B) $ 73,947
- ----------------------------------------------------------------------------------------------------
EXPENSES:
- -----------------------------------------------------------------------------------------
Investment advisory fee (Note 5) $ 6,122
- -----------------------------------------------------------------------------------------
Distribution services fee (Note 5) 3,639
- -----------------------------------------------------------------------------------------
Custodian, transfer agent and dividend disbursing agent fees 16,039
- -----------------------------------------------------------------------------------------
Legal fees 945
- -----------------------------------------------------------------------------------------
Administrative personnel and services (Note 5) 950
- -----------------------------------------------------------------------------------------
Printing and postage 862
- -----------------------------------------------------------------------------------------
Registration fees 362
- -----------------------------------------------------------------------------------------
Shareholder service fee (Note 5) 3,826
- -----------------------------------------------------------------------------------------
Miscellaneous 842
- ----------------------------------------------------------------------------------------- ---------
Total expenses 33,587
- -----------------------------------------------------------------------------------------
Deduct--
- ------------------------------------------------------------------------------
Waiver of investment advisory fee (Note 5) $ 6,122
- ------------------------------------------------------------------------------
Waiver of distribution services fee (Note 5) 282
- ------------------------------------------------------------------------------
Reimbursement of other operating expenses (Note 5) 20,000 26,404
- ------------------------------------------------------------------------------ --------- ---------
Net expenses 7,183
- ---------------------------------------------------------------------------------------------------- ----------
Net investment income 66,764
- ---------------------------------------------------------------------------------------------------- ----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ----------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments (63,628)
- ---------------------------------------------------------------------------------------------------- ----------
Change in net assets resulting from operations $ 3,136
- ---------------------------------------------------------------------------------------------------- ----------
</TABLE>
*For the period from September 1, 1993 (date of initial public offering) to
November 30, 1993.
(See Notes which are an integral part of the Financial Statements)
LIMITED TERM MUNICIPAL FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1993*
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------------------------------------------------------------
OPERATIONS--
- -----------------------------------------------------------------------------------------------
Net investment income $ 66,764
- -----------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments (63,628)
- ----------------------------------------------------------------------------------------------- -----------------
Change in net assets resulting from operations 3,136
- ----------------------------------------------------------------------------------------------- -----------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- -----------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income:
- -----------------------------------------------------------------------------------------------
Fortress Shares (8,993)
- -----------------------------------------------------------------------------------------------
Investment Shares (57,771)
- ----------------------------------------------------------------------------------------------- -----------------
Change in net assets resulting from distributions to shareholders (66,764)
- ----------------------------------------------------------------------------------------------- -----------------
CAPITAL STOCK TRANSACTIONS (NOTE 4)--
- -----------------------------------------------------------------------------------------------
Proceeds from sale of shares 19,912,662
- -----------------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of dividends declared 36,661
- -----------------------------------------------------------------------------------------------
Cost of shares redeemed (2,883,798)
- ----------------------------------------------------------------------------------------------- -----------------
Change in net assets resulting from Fund share transactions 17,065,525
- ----------------------------------------------------------------------------------------------- -----------------
Change in net assets 17,001,897
- -----------------------------------------------------------------------------------------------
NET ASSETS:
- -----------------------------------------------------------------------------------------------
Beginning of period --
- ----------------------------------------------------------------------------------------------- -----------------
End of period $ 17,001,897
- ----------------------------------------------------------------------------------------------- -----------------
</TABLE>
* For the period from September 1, 1993 (date of initial public offering) to
November 30, 1993.
(See Notes which are an integral part of the Financial Statements)
LIMITED TERM MUNICIPAL FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Fixed Income Securities, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. The financial statements included herein are only those of Limited Term
Municipal Fund (the "Fund"), a diversified portfolio of the Corporation. The
financial statements of the other portfolios in the Corporation are presented
separately. The assets of each portfolio are segregated and a shareholder's
interest is limited to the portfolio in which shares are held.
Limited Term Municipal Fund provides two classes of shares ("Fortress Shares"
and "Investment Shares"). Investment Shares are identical in all respects to
Fortress Shares except that Investment Shares pays Federated Securities Corp.
(the "distributor") a fee at an annual rate up to 0.25 of 1% of the average
aggregate daily net asset value of Investment Shares and Fortress Shares pays
Federated Securities Corp. a fee at an annual rate up to 0.15 of 1% of the
average aggregate daily net asset value of Fortress Shares, to finance any
activity which is principally intended to result in the sale of Investment and
Fortress Shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Municipal bonds are valued at fair value. An
independent pricing service values the Fund's municipal bonds taking into
consideration yield, stability, risk, quality, coupon, maturity, type of
issue, trading characteristics, special circumstances of a security or
trading market, and any other factors or market data it deems relevant in
determining valuations for normal institutional size trading units of debt
securities and does not rely exclusively on quoted prices. The Directors
have determined that the fair value of debt securities authorized to be
purchased by the Fund with remaining maturities of 60 days or less shall be
their amortized cost value unless the particular circumstances of the
security indicate otherwise.
B. INCOME--Interest income is recorded on the accrual basis. Interest income
includes interest earned net of premium, and original issue discount as
required by the Internal Revenue Code.
C. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Internal Revenue Code available to investment companies and distribute to
shareholders each year all of its taxable income, including any net
realized gain on investments. Accordingly, no provision for federal tax is
necessary. Dividends paid by the Fund from net interest earned on
tax-exempt municipal bonds are not includable by shareholders as gross
income for federal income tax purposes, because the Fund intends to meet
certain requirements of the Internal Revenue Code applicable to regulated
investment companies which will enable the Fund to pay tax-exempt interest
dividends. Dividends paid by the Fund from net interest earned on
tax-exempt municipal bonds are not includable by shareholders as gross
income for federal income tax purposes, because the Fund intends to meet
certain requirements of the Internal Revenue Code applicable to regulated
investment companies which will enable the Fund to pay tax-exempt
dividends. The portion of such interest, if any, earned on private activity
bonds issued after August 7, 1986, may be considered a tax preference item
for shareholders.
D. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. To the extent the Fund
engages in such transactions, it will do so for the purpose of acquiring
portfolio securities consistent with its investment objective and policies
and not for the purpose of investment leverage. The Fund will record a
when-issued security and the related liability on the trade date. Until the
securities are received and paid for, the Fund will maintain security
positions such that sufficient liquid assets will be available to make
payment for the securities purchased. Securities purchased on a when-issued
or delayed delivery basis are marked to market daily and begin earning
interest on the settlement date.
E. DEFERRED EXPENSES--The costs incurred by the Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering the shares, have been deferred and are being
amortized using the straight-line method over a period of five years from
the Fund's commencement date.
F. OTHER--Investment transactions are accounted for on the date of the
transaction. Dividends to shareholders are recorded on the ex-dividend
date.
(3) DIVIDENDS
Dividends from net investment income are declared and paid monthly.
Distributions of any net realized capital gains will be made at least once every
twelve months. Dividends and capital gain distributions, if any, are recorded on
the ex-dividend date.
(4) CAPITAL STOCK
At November 30, 1993, the Corporation was authorized to issue 10,000,000,000
shares of $0.001 par value capital stock. Of these shares, 1,000,000,000 have
been designated as Investment Shares of the Fund and 1,000,000,000 as Fortress
Shares of the Fund. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
11/30/93*
<S> <C> <C>
FORTRESS SHARES SHARES AMOUNT
<CAPTION>
- ------------------------------------------------------------------------------------ ----------- --------------
<S> <C> <C>
Shares outstanding, beginning of period -- $ --
- ------------------------------------------------------------------------------------
Shares sold 330,714 3,320,324
- ------------------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 331 3,326
- ------------------------------------------------------------------------------------
Shares redeemed (815) (8,242)
- ------------------------------------------------------------------------------------ ----------- --------------
Shares outstanding, end of period 330,230 $ 3,315,408
- ------------------------------------------------------------------------------------ ----------- --------------
<CAPTION>
YEAR ENDED
11/30/93*
INVESTMENT SHARES SHARES AMOUNT
- ------------------------------------------------------------------------------------ ----------- --------------
<S> <C> <C>
Shares outstanding, beginning of period -- $ --
- ------------------------------------------------------------------------------------
Shares sold 1,649,398 16,592,338
- ------------------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 3,323 33,335
- ------------------------------------------------------------------------------------
Shares redeemed (285,391) (2,875,556)
- ------------------------------------------------------------------------------------ ----------- --------------
Shares outstanding, end of period 1,367,330 $ 13,750,117
- ------------------------------------------------------------------------------------ ----------- --------------
</TABLE>
* For the period from September 1, 1993 (date of initial public offering) to
November 30, 1993.
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Federated Advisers, the Fund's investment adviser ("Adviser"), receives for its
services an annual investment advisory fee equal to .40 of 1% of the Fund's
average daily net assets. The Adviser has voluntarily agreed to waive a portion
of its fee. The Adviser can modify or terminate this voluntary waiver at any
time at its sole discretion. For the period ended November 30, 1993, the
investment advisory fee amounted to $6,122, all of which was voluntarily waived.
In addition, the Adviser reimbursed the Fund $20,000 of other operating
expenses.
Organizational expenses ($49,536) and start-up administrative service expenses
($57,000) were borne initially by the Adviser. The Fund has agreed to reimburse
the Adviser for the organizational expenses and start-up administrative expenses
initially borne by the Adviser during the five year period following August 31,
1993 (date the Fund's portfolio first became effective).
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940. The Fund will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the net assets of the
Fund, for the fees it paid which relate to the distribution and administration
of the Fund's Fortress and Investment Shares. The Plan provides that the Fund
will incur distribution expenses up to 0.15 of 1% and 0.25 of 1% of the average
daily net assets of the Fortress and Investment Shares, respectively, annually,
to pay commissions, maintenance fees and to compensate FSC. For the period ended
November 30, 1993, FSC earned $3,357 in distribution services fees for
Investment Shares and $282 for Fortress Shares, of which $0 and $282 were
voluntarily waived, respectively.
The Fund has adopted a Shareholder Services Plan (the "Services Plan") with
respect to Fortress and Investment Shares. The Fund will reimburse Federated
Securities Corp. ("FSC"), from the net assets of the Fund for fees the Fund paid
which relate to administrative support services of the Fortress and Investment
Shares. The Services Plan provides that the Fund may incur shareholder services
expenses up to 0.25 of 1% of the average daily net assets of the Fortress and
Investment Shares. For the period ended November 30, 1993, FSC earned $3,826.
Administrative personnel and services are provided at approximate cost by
Federated Administrative Services, Inc. Certain Officers and Directors of the
Corporation are Officers and Directors of the above corporations.
During the period ended November 30, 1993, the Fund engaged in purchase and sale
transactions with the other Funds advised by the Adviser pursuant to Rule 17A-7
of the Investment Company Act of 1940 amounting to $7,000,000 and $5,200,000,
respectively. These purchases and sales were transacted for cash consideration
only, at independent current market prices and without brokerage commission, fee
or other remuneration.
(6) INVESTMENT TRANSACTIONS
Purchases, and sales and maturities of investments excluding short-term
securities, for the period ended November 30, 1993 were as follows:
<TABLE>
<CAPTION>
<S> <C>
PURCHASES $ 16,243,345
- -------------------------------------------------------------------------------------------------- --------------
SALES $ 0
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
(7) CURRENT CREDIT RATINGS
Current credit ratings and related footnotes are unaudited.
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Directors of FIXED INCOME SECURITIES, INC.
and Shareholders of LIMITED TERM MUNICIPAL FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Limited Term Municipal Fund (a portfolio of
Fixed Income Securities, Inc.) as of November 30, 1993, and the related
statement of operations, the statement of changes in net assets, and the
financial highlights (see pages 2 and 27 of the prospectus) for the period from
September 1, 1993 (date of initial public offering) to November 30, 1993. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of the securities owned at November 30, 1993 by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Limited Term
Municipal Fund as of November 30, 1993, the results of its operations, the
changes in its net assets, and its financial highlights for the period from
September 1, 1993 (date of initial public offering) to November 30, 1993, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
Boston, Massachusetts
January 14, 1994
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Limited Term Municipal Fund
Fortress Shares 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 P.O. Box 8604
Trust Company 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
- ---------------------------------------------------------------------------------------------------------------------
LIMITED TERM
MUNICIPAL FUND
FORTRESS SHARES
PROSPECTUS
A Diversified Portfolio of
Fixed Income Securities, Inc.,
an Open-End, Management
Investment Company
January 31, 1994
3070702A-FS (1/94)
FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
LIMITED TERM MUNICIPAL FUND
(A PORTFOLIO OF FIXED INCOME SECURITIES, INC.)
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectuses of Fortress Shares and Investment Shares
of Limited Term Municipal Fund (the "Fund") January 31, 1994.
This Statement is not a prospectus itself. To receive a copy of the
respective prospectuses, write or call the Fund.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated January 31, 1994
FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------------
Types of Investments 1
Participation Interests 1
Municipal Leases 1
Zero Coupon and Capital Appreciation Bonds 2
Insurance 2
Futures and Options Transactions 2
Weighted Average Portfolio Duration 4
When-Issued and Delayed
Delivery Transactions 4
Restricted and Illiquid Securities 4
Temporary Investments 5
Portfolio Turnover 6
INVESTMENT LIMITATIONS 6
- ---------------------------------------------------------------
FIXED INCOME SECURITIES, INC. MANAGEMENT 7
- ---------------------------------------------------------------
Officers and Directors 7
The Funds 9
Fund Ownership 9
Director Liability 10
INVESTMENT ADVISORY SERVICES 10
- ---------------------------------------------------------------
Adviser to the Fund 10
Advisory Fees 10
SHAREHOLDER SERVICING 11
- ---------------------------------------------------------------
ADMINISTRATIVE SERVICES 11
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 11
- ---------------------------------------------------------------
PURCHASING SHARES 11
- ---------------------------------------------------------------
Distribution Plan 11
Purchases by Sales Representatives,
Fund Directors, and Employees 12
DETERMINING NET ASSET VALUE 12
- ---------------------------------------------------------------
Determining Market Value of Securities 12
EXCHANGE PRIVILEGE 12
- ---------------------------------------------------------------
Reduced Sales Charge 12
Requirements for Exchange 12
Tax Consequences 13
Making an Exchange 13
REDEEMING SHARES 13
- ---------------------------------------------------------------
Redemption in Kind 13
TAX STATUS 13
- ---------------------------------------------------------------
The Fund's Tax Status 13
Shareholders' Tax Status 13
TOTAL RETURN 14
- ---------------------------------------------------------------
YIELD 14
- ---------------------------------------------------------------
TAX-EQUIVALENT YIELD 14
- ---------------------------------------------------------------
Tax Equivalency Table 14
PERFORMANCE COMPARISONS 15
- ---------------------------------------------------------------
APPENDIX 17
- ---------------------------------------------------------------
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 provide a high level of current
income which is exempt from federal regular income tax (federal regular income
tax does not include the federal alternative minimum tax) consistent with
minimum fluctuation in principal value. The Fund pursues this objective through
the compilation of a portfolio, the weighted-average duration of which will at
all times be limited to four years or less. The investment objective and policy
stated above cannot be changed without approval of shareholders. Unless
indicated otherwise, 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
The Fund pursues its investment objective by investing in a diversified
portfolio primarily limited to municipal securities. As a matter of investment
policy, which may not be changed without shareholder approval, under normal
circumstances, the Fund will be invested so that at least 80% of the income from
investments will be exempt from federal regular income tax or that at least 80%
of its net assets are invested in obligations, the interest from which is exempt
from federal regular income tax. The municipal securities in which the Fund
invests are rated, at the time of purchase, Baa or better by Moody's Investors
Service, Inc. ("Moody's") or BBB or better by Standard & Poor's Corporation
("S&P") or Fitch Investors Service ("Fitch"). In certain cases the Fund's
adviser may choose bonds which are unrated if it determines that such bonds are
of comparable quality or have similar characteristics to investment grade bonds.
The following are examples of the types of municipal securities in which the
Fund invests:
general obligation bonds;
municipal leases, installment purchase contracts, conditional sales contracts or
participation certificates of any of the above, issued by state and municipal
authorities where payment is provided by installment payments for equipment,
buildings or other facilities acquired by the state or municipality;
industrial development bonds;
derivative municipal securities whose interest rates bear an inverse
relationship to the interest rate on another security or the value of an index
("inverse floaters");
municipal notes and tax-exempt commercial paper;
pre-refunded municipal securities whose timely payment of interest and principal
is ensured by an escrow of U.S. government obligations;
auction rate and tender option securities; and
zero coupon and capital appreciation bonds, which are issued at a discount from
their face value and do not pay interest prior to maturity or a specified date.
The Fund may also engage in put and call options, futures contracts, and options
on futures contracts for hedging purposes.
PARTICIPATION INTERESTS
The financial institutions from which the Fund purchases participation interests
frequently provide or secure from another financial institution irrevocable
letters of credit or guarantees and give the Fund the right to demand payment of
the principal amounts of the participation interests plus accrued interest on
short notice (usually within seven days).
MUNICIPAL LEASES
The Fund may purchase municipal securities in the form of participation
interests which represent undivided proportional interests in lease payments by
a governmental or non-profit entity. The lease payments and other rights under
the lease provide for and secure the payments on the certificates. Lease
obligations may be limited by municipal charter or the nature of the
appropriation for the lease. In particular, lease obligations may be subject to
periodic appropriation. If the entity does not appropriate funds for the future
lease payments, the entity cannot be compelled to make such payments.
Furthermore, a lease may provide that the certificate trustee cannot accelerate
lease obligations upon default. The trustee would only be able to enforce lease
payments as they became due. In the event of a default or failure of
appropriation, it is unlikely that the trustee would be able to obtain an
acceptable substitute source of payment.
In determining the liquidity of municipal lease securities, the Fund's
investment adviser, under the authority delegated by the Directors, will base
its determination on the following factors:
whether the lease can be terminated by the lessee;
the potential recovery, if any, from a sale of the leased property upon
termination of the lease;
the lessee's general credit strength (e.g., its debt, administrative, economic
and financial characteristics and prospects);
the likelihood that the lessee will discontinue appropriating funding for the
leased property because the property is no longer deemed essential to its
operations (e.g., the potential for an "event of non-appropriation"); and
any credit enhancement or legal recourse provided upon an event of
non-appropriation or other termination of the lease.
CAPITAL APPRECIATION BONDS
Zero coupon and capital appreciation securities carry the risk that, unlike
securities that periodically pay interest to maturity, the Fund will realize no
cash until a specified future payment date unless a portion of such securities
is sold and, if the issuer of such securities defaults, the Fund may obtain no
return at all on its investment. In addition, even though such securities do not
pay current interest in cash, the Fund is nonetheless required to accrue income
on such investments and may be required to distribute such amounts at least
annually. Because no cash is received at the time of the accrual, the Fund may
be required to liquidate other portfolio securities to satisfy the Fund's
distribution obligations.
INSURANCE
The Fund may invest in "insured" municipal securities. Insured municipal
securities are those for which scheduled payments of interest and principal are
guaranteed by a private (nongovernmental) insurance company. The insurance only
entitles the Fund to receive the face or par value of the securities held by the
Fund. The insurance does not guarantee the market value of the municipal
securities or the value of the shares of the Fund.
The Fund may utilize new issue or secondary market insurance. A new issue
insurance policy is purchased by a bond issuer who wishes to increase the credit
rating of a security. By paying a premium and meeting the insurer's underwriting
standards, the bond issuer is able to obtain a high credit rating (usually, Aaa
from Moody's or AAA from S&P) for the issued security. Such insurance is likely
to increase the purchase price and resale value of the security. New issue
insurance policies are non-cancellable and continue in force as long as the
bonds are outstanding. A secondary market insurance policy is purchased by an
investor (such as the Fund) subsequent to a bond's original issuance and
generally insures a particular bond for the remainder of its term. The Fund may
purchase bonds which have already been insured under a secondary market
insurance policy by a prior investor, or the Fund may itself purchase such a
policy from insurers for bonds which are currently uninsured.
An insured municipal security acquired by the Fund will typically be covered by
only one of the above types of policies. All of the insurance policies used by
the Fund will be obtained only from insurance companies rated, at the time of
purchase, Aaa by Moody's or AAA by S&P.
FUTURES AND OPTIONS TRANSACTIONS
The Fund may purchase and sell futures contracts and options on futures
contracts on financial instruments. The Fund will engage in futures and related
options transactions only for bona fide hedging or other appropriate risk
management purposes. The Fund may enter into futures contracts provided that not
more than 5% of its assets are required as a futures contract deposit; in
addition, the Fund may enter into futures contracts and options transactions
only to the extent that obligations under such contracts or transactions
represent not more than 20% of the Fund's assets. All futures contracts entered
into by the Fund are traded on U.S. exchanges or boards of trade that are
licensed and regulated by the Commodity Futures Trading Commission. For example,
the Fund may enter into transactions in futures and related options on U.S.
government securities or on the Bond Buyer Municipal Bond Index, a
price-weighted measure of the market value of 40 large, recently issued
tax-exempt securities.
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.
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.
Perfect correlation between the Fund's futures and options positions and
portfolio positions may be difficult to achieve because no futures
contracts based on individual municipal securities are currently
available. The only futures contracts available to hedge the Fund's
portfolio are various futures on U.S. government securities and a
municipal bond index.
"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.
WEIGHTED AVERAGE PORTFOLIO 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. Duration measures the magnitude of the change in
the price of a debt security relative to a given change in the market rate of
interest. The duration of a debt security depends upon three primary variables:
the security's coupon rate, maturity or redemption date and the level of market
interest rates for similar debt securities. Generally, debt securities with
lower coupons or longer maturities will have a longer duration than securities
with higher coupons or shorter maturities.
Duration is calculated by dividing the sum of the time-weighted values of cash
flows of a security or portfolio of securities, including principal and interest
payments, by the sum of the present values of the cash flows. Certain debt
securities, such as asset-backed securities, may be subject to prepayment at
irregular intervals. The duration of these instruments will be calculated based
upon assumptions established by the investment adviser as to the probable amount
and sequence of principal prepayments.
Mathematically, duration is measured as follows:
PVCF1(1) PVCF2(2) PVCF3(3) PVCFn(n)
Duration = -------- + -------- + -------- + . . . .+ ---------
PVTCF PVTCF PVTCF PVTCF
where
PVCFt = the present value of the cash flow in period t discounted at the
prevailing yield-to-maturity
t = the period when the cash flow is received
n = remaining number of periods until maturity
PVTCF = total present value of the cash flow from the bond where the
present value is determined using the prevailing yield-to-maturity
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.
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 eligible for resale under
Rule 144A 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.
The Fund will not invest more than 15% of its net assets in illiquid
obligations, including repurchase agreements providing for settlement in more
than seven days after notice, and certain restricted securities not determined
by the Board of Directors to be liquid, including certain municipal leases and
inverse floaters.
TEMPORARY INVESTMENTS
From time to time, during periods of other than normal market conditions, the
Fund may invest in short-term temporary investments which may or may not be
exempt from federal income tax. These temporary investments include: obligations
issued or guaranteed by the U.S. government, its agencies or instrumentalities;
other debt securities; commercial paper; certificates of deposit of domestic
branches of U.S. banks; and repurchase agreements.
U.S. GOVERNMENT SECURITIES
The Fund may invest in obligations issued or guaranteed by the U.S.
government and its agencies, authorities or instrumentalities. Some U.S.
government securities, such as Treasury bills, notes and bonds, which
differ only in their interest rates, maturities and times of issuance,
are supported by the full faith and credit of the United States of
America. Others, such as obligations issued or guaranteed by U.S.
government agencies, authorities or instrumentalities, are supported
either by (a) the full faith and credit of the U.S. government (such as
securities of the Small Business Administration), (b) the right of the
issuer to borrow from the Treasury (such as securities of Federal Home
Loan Banks), (c) the discretionary authority of the U.S. government to
purchase the agency's obligations (such as securities of the Federal
National Mortgage Association), or (d) only the credit of the issuer
(such as securities of the Financing Corporation). The U.S. government is
under no legal obligation to purchase the obligations of its agencies,
authorities and instrumentalities. Securities guaranteed as to principal
and interest by the U.S. government and its agencies, authorities or
instrumentalities are deemed to include (i) securities for which the
payment of principal and interest is based by a guaranty of the U.S.
government or its agencies, authorities or instrumentalities, and (ii)
participations in loans made to foreign governments or their agencies
that are so guaranteed. The secondary market for certain of these
participations is limited. Such participations may therefore be regarded
as illiquid.
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. It is not anticipated that the portfolio
trading engaged in by the Fund will result in its annual rate of portfolio
turnover exceeding 100%.
INVESTMENT LIMITATIONS
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BUYING ON MARGIN
The Fund will not purchase any securities on margin, other than in
connection with the purchase and sale of 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 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.
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
10% of the value of total assets at the time of the borrowing. Margin
deposits for the purchase and sale of 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 municipal 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 to the
extent that obligations under such contracts or transactions represent
not more than 20% of the Fund's total assets.
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.
CONCENTRATION OF INVESTMENTS
The Fund will not generally invest 25% or more of the value of its total
assets in any one industry. Governmental issuers of municipal securities
are not considered part of any "industry." The Fund may invest more than
25% of the value of its total assets in a broader segment of the
municipal securities market, such as revenue obligations of hospitals and
other health care facilities, housing agency revenue obligations, or
airport revenue obligations. In addition, for temporary defensive
purposes, the Fund 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.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
obligations, including repurchase agreements providing for settlement in
more than seven days after notice, and certain restricted securities.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
industrial development bonds where the principal and interest are the
responsibility of companies (or guarantors, where applicable) with less
than three years of continuous operations, including the operations of
any predecessor.
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 or sponsor such programs.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may not own securities of other investment companies except as
part of a merger, consolidation, reorganization, or other acquisition,
and except that, subject to the limitations of the Investment Company Act
of 1940, the Fund may invest up to 10% of the value of its total assets
in auction rate preferred securities issued by closed-end investment
companies that invest primarily in municipal 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.
The Fund does not expect to borrow money or pledge securities during the coming
fiscal year.
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 and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items".
FIXED INCOME SECURITIES, INC. MANAGEMENT
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OFFICERS AND DIRECTORS
Officers and Directors are listed with their addresses, principal occupations,
and present positions, including any affiliation with Federated Advisers,
Federated Investors, Federated Securities Corp., Federated Administrative
Services, Inc., and the Funds (as defined below).
</TABLE>
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATION
NAME AND ADDRESS THE CORPORATION DURING PAST FIVE YEARS
<S> <C> <C>
John F. Donahue\* Chairman and Chairman and Trustee, Federated Investors; Chairman and Trustee,
Federated Investors Tower Director Federated Advisers, Federated Management, and Federated Research;
Pittsburgh, PA 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, Jr., Director Senior Vice-President, John R. Wood and Associates, Inc., Realtors;
Wood/IPC Commercial President, Northgate Village Development Corporation and Investment
Department Properties Corporation; General Partner or Trustee in private real
John R. Wood and estate ventures in Southwest Florida; Director, Trustee, or Managing
Associates, Inc., Realtors General Partner of the Funds; Formerly, President, Naples Property
3255 Tamiami Trail North Management, Inc.
Naples, FL
William J. Copeland Director Director and Member of the Executive Committee, Michael Baker, Inc.;
One PNC Plaza-23rd Floor Director, Trustee, or Managing General Partner of the Funds; formerly,
Pittsburgh, PA 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, The Emerging Germany Fund, Inc.; Director,
571 Hayward Mill Road Trustee, or Managing General Partner of the Funds; formerly, Director,
Concord, MA Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D. Director Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
3471 Fifth Avenue Hospitals; Clinical Professor of Medicine and Trustee, University of
Suite 1111 Pittsburgh; Director, Trustee, or Managing General Partner of the Funds.
Pittsburgh, PA
Richard B. Fisher* President and Executive Vice President and Trustee, Federated Investors; Chairman,
Federated Investors Tower Director Federated Securities Corp.; President or Vice President of the Funds;
Pittsburgh, PA Director or Trustee of some of the Funds.
Edward L. Flaherty, Jr.\ Director Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park
5916 Penn Mall Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director,
Pittsburgh, PA Trustee, or Managing General Partner of the Funds; formerly, Counsel,
Horizon Financial, F.A., Western Region.
Peter E. Madden Director Consultant; State Representative, Commonwealth of Massachusetts;
225 Franklin Street Director, Trustee, or Managing General Partner of the Funds; formerly,
Boston, MA President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer Director Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, Inc.;
5916 Penn Mall Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or Managing
Pittsburgh, PA General Partner of the Funds; formerly, Vice Chairman, Horizon
Financial, F.A.
Wesley W. Posvar Director Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
1202 Cathedral of Learning Endowment for International Peace, RAND Corporation, Online Computer
University of Pittsburgh Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Pittsburgh, PA Management Center; Director, Trustee, or Managing General Partner of the
Funds; formerly, President Emeritus, University of Pittsburgh; formerly,
Chairman, National Advisory Council for Environmental Policy and
Technology.
Marjorie P. Smuts Director Public relations/marketing consultant; Director, Trustee, or Managing
4905 Bayard Street General Partner of the Funds.
Pittsburgh, PA
J. Christopher Donahue Vice President President and Trustee, Federated Investors; Trustee, Federated Advisers,
Federated Investors Tower Federated Management, and Federated Research; President and Director,
Pittsburgh, PA Federated Administrative Services, Inc.; President or Vice President of
the Funds; Director, Trustee, or Managing General Partner of some of the
Funds. Mr. Donahue is the son of John F. Donahue, Chairman and Director
of the Corporation.
Edward C. Gonzales Vice President Vice President, Treasurer and Trustee, Federated Investors; Vice
Federated Investors Tower and Treasurer President and Treasurer, Federated Advisers, Federated Management, and
Pittsburgh, PA Federated Research; Executive Vice President, Treasurer, and Director,
Federated Securities Corp.; Chairman, Treasurer, and Director, Federated
Administrative Services, Inc.; Trustee or Director of some of the Funds;
Vice President and Treasurer of the Funds.
John W. McGonigle Vice President Vice President, Secretary, General Counsel, and Trustee, Federated
Federated Investors Tower and Secretary Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Pittsburgh, PA Federated Management, and Federated Research; Executive Vice President,
Secretary, and Director, Federated Administrative Services, Inc.;
Director and Executive Vice President, Federated Securities Corp.; Vice
President and Secretary of the Funds.
John A. Staley, IV Vice President Vice President and Trustee, Federated Investors; Executive Vice
Federated Investors Tower President, Federated Securities Corp.; President and Trustee, Federated
Pittsburgh, PA 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 Compa-
ny and President of its Federated Research Division.
</TABLE>
*This Director is deemed to be an "interested person" of the Fund as
defined in the Investment Company Act of 1940.
\Members of the Fund's Executive Committee. The Executive Committee of the Board
of Directors handles the Directors' responsibilities between meetings of the
Directors.
THE FUNDS
"The Funds," and "Funds" mean the following investment companies: A.T. Ohio
Tax-Free Money Fund; American Leaders Fund, Inc.; Annuity Management Series;
Automated Cash Management Trust; Automated Government Money Trust; BankSouth
Select Funds; The Boulevard Funds; California Municipal Cash Trust; Cash Trust
Series, Inc.; Cash Trust Series II; 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; Insight Institutional Series, Inc.;
Intermediate Municipal Trust; Insurance Management Series; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty
Term Trust, Inc.-1999; Liberty U.S. Government Money Market Trust; Liberty
Utility Fund, Inc.; Liquid Cash Trust; Mark Twain Funds; Money Market
Management, Inc.; Money Market Obligations Trust; Money Market Trust; Municipal
Securities Income Trust; New York Municipal Cash Trust; 111 Corcoran Funds; The
Planters Fund; Portage Funds; RIMCO Monument Funds; The Shawmut Funds; Short-
Term Municipal Trust; Signet Select Funds; Star Funds; The Starburst Funds; The
Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst Funds; Targeted Duration
Trust; Tax-Free Instruments Trust; Trademark Funds; Trust for Financial
Institutions; Trust for Government Cash Reserves; Trust for Short-Term U.S.
Government Securities; and Trust for U.S. Treasury Obligations.
FUND OWNERSHIP
Officers and Directors own less than 1% of the outstanding Investment Shares and
Fortress Shares.
Merrill Lunch Pierce Fenner & Smith (as record owner holding Fortress Shares for
its clients), Jacksonville, Florida, owned approximately 179,802 Fortress Shares
(36.97%) of the Fund as of January 6, 1994.
As of January 6, 1994, the following shareholders of record owned 5% or more of
the outstanding Fortress Shares of the Fund: James R. and Faith K. Mallory, Fort
Worth, Texas, owned approximately 37,764 shares (7.77%) and Wachovia Securities,
Inc., Winston-Salem, North Carolina, owned approximately 24,753 shares (5.09%).
The following list indicates the beneficial ownership of shareholders who are
the beneficial owners of more than 5% of the outstanding shares as of January 6,
1994, for Investment Shares: Merrill Lynch Pierce Fenner & Smith, Jacksonville,
Florida, owned approximately 430,573 shares (19.39%); EBAA Iron, Inc., Eastland,
Texas, owned approximately 129,740 shares (5.84%); and The Ford Meter Box
Company, Inc., Wabash, Indiana, owned approximately 297,029 shares (13.37%).
DIRECTOR LIABILITY
The Corporation's Articles of Incorporation provide that the Directors will not
be liable for errors of judgment or mistakes of fact or law. However, they are
not protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND
The Fund's investment adviser is Federated Advisers (the "Adviser"). It is a
subsidiary of Federated Investors. All of the voting securities of Federated
Investors are owned by a trust, the trustees of which are John F. Donahue, his
wife, and his son, J. Christopher Donahue. John F. Donahue, Chairman and Trustee
of Federated Advisers, is President 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 Vice
President and Trustee of Federated Investors, 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,
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, the Adviser receives an annual investment advisory
fee as described in the prospectus. During the period from September 3, 1993
(date of initial public investment) to November 30, 1993, the Fund's Adviser
earned $6,122 all of which was voluntarily waived. In addition, the Adviser
reimbursed the Fund $20,000 of other operating expenses.
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 2.50% per year of the first $30 million of average net assets,
2.0% per year of the next $70 million of average net assets, and 1.50%
per year of the remaining average net assets, the Adviser will reimburse
the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this expense
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be waived by the Adviser will be
limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
SHAREHOLDER SERVICING
- --------------------------------------------------------------------------------
In return for providing shareholder servicing to its customers who from time to
time may be owners of record or beneficial owners of the Fund, 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 Fortress Shares or Investment 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. For the period ended
November 30, 1993, the shareholder servicing fee was $3,826.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, Inc., a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund at approximate cost.
During the period from September 3, 1993 (date of initial public investment) to
November 30, 1993, the Fund incurred costs of $950 for administrative services.
John A. Staley, IV, an officer of the Fund, and Dr. Henry J. Gailliot, an
officer of Federated Advisers, the Adviser to the Fund, each hold approximately
15% and 20%, respectively, of the outstanding common stock and serve as
directors of Commercial Data Services, Inc., a company which provides computer
processing services to Federated Administrative Services, Inc. For the fiscal
years ended November 30, 1993, 1992, and 1991, Federated Administrative
Services, Inc. paid approximately, $164,324, $186,144, and $193,178,
respectively, for services provided by Commercial Data Services, Inc.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally 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 of the Fund is
explained in the prospectus under "Investing in Investment Shares" or "Investing
in Fortress Shares."
DISTRIBUTION PLAN
The Fund has adopted a Plan under Rule 12b-1 which was promulgated by the
Securities and Exchange Commission pursuant to the Investment Company Act of
1940. The Plan provides for payment of fees to Federated Securities Corp. to
finance any activity which is principally intended to result in the sale of the
Fund's shares. Such activities may include the advertising and marketing of
shares; preparing, printing, and distributing prospectuses and sales literature
to prospective shareholders or brokers; and implementing and operating the Plan.
Pursuant to the Plan, Federated Securities Corp. may pay fees to brokers for
distribution services.
The Directors expect that the adoption of the Plan will result in the sale of a
sufficient number of shares so as to allow the Fund to achieve economic
viability. It is also anticipated that an increase in the size of the Fund will
facilitate more efficient portfolio management and assist the Fund in seeking to
achieve its investment objective.
During the period from September 3, 1993 (date of initial public investment) to
November 30, 1993, brokers and administrators (financial institutions) received
fees in the amount of $3,357, pursuant to the distribution plan.
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 unless the Directors determine
this is not fair value; or
at fair value as determined in good faith by the Directors.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider:
yield;
quality;
coupon rate;
maturity;
type of issue;
trading characteristics; and
other market data.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Fund shareholders may exchange all or some of their shares for shares in other
Fortress Funds or certain Federated Funds which are sold with a sales charge
different from that of the Fund's or with no sales charge and which are advised
by subsidiaries or affiliates of Federated Investors. These exchanges are made
at net asset value plus the difference between the Fund's sales charge already
paid and any sales charge of the fund into which the shares are to be exchanged,
if higher.
Shareholders of certain other funds, including funds that are not advised by
subsidiaries or affiliates of Federated Investors which do not have a sales
charge, may exchange their shares for Fund shares on a basis other than their
current offering price. These exchanges may be made to the extent that such
shares were acquired in a prior exchange, at net asset value, for shares of a
Federated Fund carrying a sales charge.
REDUCED SALES CHARGE
If a shareholder making such an exchange qualifies for a reduction or
elimination of the sales charge, the shareholder must notify Federated
Securities Corp. or State Street Bank in writing.
REQUIREMENTS FOR EXCHANGE
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. 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 residing in any state in which the
fund 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.
Further information on the exchange privilege and prospectuses for Fortress
Funds or certain Federated Funds are available by calling the Fund.
TAX CONSEQUENCES
Exercise of this exchange privilege is treated as a sale for federal income tax
purposes. Depending upon the circumstances, a short or long-term capital gain or
loss may be realized.
MAKING AN EXCHANGE
Instructions for exchanges for Fortress Funds or certain Federated Funds must be
given in writing by the shareholder. Written instructions may require a
signature guarantee.
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
respective prospectuses under "Redeeming Investment Shares" or "Redeeming
Fortress Shares." Although Federated Services Company 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 Fortress Shares redeemed within one to four years of purchase may be
subject to a contingent deferred sales charge. The amount of the contingent
deferred sales charge is based upon the amount of the administrative fee paid at
the time of purchase by the distributor to the financial institutions for
services rendered, and the length of time the investor remains a holder of
Fortress Shares. Should financial institutions elect to receive an amount less
than the administrative fee that is stated in the Fortress Shares prospectus for
servicing a particular shareholder, the contingent deferred sales charge 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 respective class'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.
SHAREHOLDERS' TAX STATUS
Shareholders are not required to pay the federal regular income tax on any
dividends received from the Fund that represent net interest on tax-exempt
municipal bonds. However, under the Tax Reform Act of 1986, dividends
representing net interest earned on some municipal bonds may be included in
calculating the federal individual alternative minimum tax or the federal
alternative minimum tax for corporations. In addition, the Tax Reform Act of
1986 treats interest on certain "private activity" bonds issued after August 7,
1986, as a tax preference item for both individuals and corporations. Thus,
should the Fund purchase any such bonds, a portion of the Fund's dividends may
be treated as a tax preference item.
Dividends of the Fund representing net interest income earned on some temporary
investments and any realized net short-term gains are taxed as ordinary income.
These tax consequences apply whether dividends are received in cash or as
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
Fund shares.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's cumulative total return for Investment Shares for the period from
September 1, 1993 (date of initial public investment) to November 30, 1993 was
0.20%. The cumulative total return for Fortress Shares for the period from
September 1, 1993 (date of initial public offering) to November 30, 1993 was
(0.74)%.
Cumulative total return of Investment Shares or Fortress Shares reflects the
applicable Shares' total performance over a specific period of time. This total
return assumes and is reduced by the payment of the maximum sales load and, in
the case of Fortress Shares, the contingent deferred sales charge.
YIELD
- --------------------------------------------------------------------------------
The yield for Investment Shares for the thirty-day period ended November 30,
1993 was 4.45%. The yield for Fortress Shares was 4.70% for the same period.
The yield of the Fund for each of Investment Shares and Fortress Shares is
determined by dividing the net investment income per share (as defined by the
Securities and Exchange Commission) earned by Investment Shares or Fortress
Shares over a thirty-day period by the maximum offering price per share of the
applicable Shares 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 of Investment Shares or
Fortress Shares does not necessarily reflect income actually earned by the
applicable Shares 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.
TAX-EQUIVALENT YIELD
- --------------------------------------------------------------------------------
The tax-equivalent yield for Investment Shares for the thirty-day period ended
November 30, 1993 was 6.18%. The tax-equivalent yield for Fortress Shares was
6.53% for the same period.
The tax-equivalent yield of the Fund for each of Investment Shares and Fortress
Shares is calculated similarly to the yield, but is adjusted to reflect the
taxable yield that the applicable Shares would have to earn to equal their
actual yield, assuming tax rates of 15%, 28%, 31%, 36% and 39.6%, and assuming
that income is 100% tax-exempt.
TAX EQUIVALENCY TABLE
The Fund may also use a tax equivalency table in advertising and sales
literature. The interest earned by the municipal obligations in the Fund's
portfolio generally remain free from federal regular income tax,* and often is
free from state and local taxes as well. As the table below indicates, a
"tax-free" investment is an attractive choice for investors, particularly in
times of narrow spreads between tax-free and taxable yields.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
FEDERAL INCOME TAX BRACKET:
15.00% 28.00% 31.00% 36.00% 39.60%
- ------------------------------------------------------------------------------------------------------------
JOINT RETURN: $1-38,000 $38,001-91,850 $91,851-140,000 $140,001-250,000 OVER $250,000
SINGLE RETURN:
$1-22,750 $22,751-55,100 $55,101-115,000 $115,001-250,000 OVER $250,000
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
2.50% 2.94% 3.47% 3.62% 3.91% 4.14%
3.00% 3.53% 4.17% 4.35% 4.69% 4.97%
3.50% 4.12% 4.86% 5.07% 5.47% 5.79%
4.00% 4.71% 5.56% 5.80% 6.25% 6.62%
4.50% 5.29% 6.25% 6.52% 7.03% 7.45%
5.00% 5.88% 6.94% 7.25% 7.81% 8.28%
5.50% 6.47% 7.64% 7.97% 8.59% 9.11%
NOTE: THE MAXIMUM MARGINAL TAX RATE FOR EACH BRACKET WAS USED IN CALCULATING THE TAXABLE YIELD EQUIVALENT.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The chart above is for illustrative purposes only. It is not an indicator of
past or future performance of the Fund.
*Some portion of the Fund's income may be subject to the federal alternative
minimum tax and state and local taxes.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The performance of Investment Shares and Fortress 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 Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per share fluctuate daily. Both net earnings and offering
price per share are factors in the computation of yield and total return.
From time to time, the Fund may advertise the performance of Investment Shares
or Fortress Shares compared to similar funds or portfolios using certain
indices, reporting services and financial publications. These may include the
following:
LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in offering price over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the "intermediate" or
"short-intermediate municipal bond funds" categories in advertising and sales
literature.
MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. These total returns
represent the historic changes in the value of an investment in Investment
Shares or Fortress 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 load or, in the case of Fortress Shares, the contingent
deferred sales charge.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. 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:
Charts and other illustrations that depict the hypothetical growth of a tax-free
investment as compared to a taxable investment.
Quotations from the Tax Foundation that illustrate the effect of taxes on
income.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD AND POOR'S CORPORATION
MUNICIPAL BOND RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
MOODY'S INVESTORS SERVICE, INC.
MUNICIPAL 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.
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.
STANDARD AND POOR'S CORPORATION
MUNICIPAL NOTE RATINGS
SP-1--Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a (+)
designation.
SP-2--Satisfactory capacity to pay principal and interest.
MOODY'S INVESTORS SERVICE, INC.
SHORT-TERM LOAN RATINGS
MIG1/VMIG1--This designation denotes best quality. There is a present strong
protection by established cash flows, superior liquidity support or demonstrated
broadbased access to the market for refinancing.
MIG2/VMIG2--This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
FITCH INVESTORS SERVICE, INC.
SHORT-TERM DEBT RATINGS
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2--Good Credit Quality. Issues carrying this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as the
F-1+ and F-1 categories.
STANDARD AND POOR'S
COMMERCIAL PAPER RATINGS
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1."
MOODY'S INVESTORS SERVICE, INC.
COMMERCIAL PAPER RATINGS
P-1--Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. PRIME-1 repayment
capacity will normally be evidenced by the following characteristics:
Conservative capitalization structures with moderate reliance on debt and ample
asset protection; Broad margins in earning coverage of fixed financial charges
and high internal cash generation; Well established access to a range of
financial markets and assured sources of alternative liquidity.
P-2--Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
FITCH INVESTORS SERVICE, INC.
COMMERCIAL PAPER RATINGS
FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
3070702B (1/94)
