LIMITED TERM FUND
(A PORTFOLIO OF FIXED INCOME SECURITIES, INC.)
CLASS A SHARES
PROSPECTUS
The Class A 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 Class A Shares. Keep this prospectus for future reference.
The Fund has also filed a Combined Statement of Additional Information for Class
A Shares and Fortress Shares dated January 31, 1995, 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, 1995
TABLE OF CONTENTS
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SUMMARY OF FUND EXPENSES--CLASS A SHARES 1
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FINANCIAL HIGHLIGHTS--CLASS A SHARES 2
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GENERAL INFORMATION 3
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LIBERTY FAMILY OF FUNDS 3
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INVESTMENT INFORMATION 4
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Investment Objective 4
Investment Policies 4
Acceptable Investments 5
Corporate Debt Obligations 6
Floating Rate Corporate Debt Obligations 6
Fixed Rate Corporate Debt Obligations 7
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") 9
Real Estate Mortgage Investment Conduits
("REMICs") 9
Resets of Interest 9
Caps and Floors 10
Bank Instruments 10
Credit Facilities 10
Average Portfolio Duration 10
Credit Enhancement 11
Demand Features 11
Interest Rate Swaps 11
Financial Futures and Options on Futures 11
Risks 12
Repurchase Agreements 12
Restricted and Illiquid Securities 12
Lending of Portfolio Securities 13
When-Issued and Delayed
Delivery Transactions 13
Investment Limitations 13
NET ASSET VALUE 14
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INVESTING IN CLASS A SHARES 14
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Share Purchases 14
Through a Financial Institution 14
By Wire 15
By Mail 15
Minimum Investment Required 15
What Shares Cost 15
Dealer Concession 15
Eliminating the Sales Load 16
Quantity Discounts and
Accumulated Purchases 16
Letter of Intent 16
Reinvestment Privilege 16
Purchases with Proceeds from Redemptions
of Unaffiliated Investment Companies 17
Systematic Investment Program 17
Certificates and Confirmations 17
Dividends and Distributions 17
Retirement Plans 17
EXCHANGE PRIVILEGE 17
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Requirements for Exchange 18
Tax Consequences 18
Making an Exchange 18
Telephone Instructions 18
REDEEMING CLASS A SHARES 19
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Through a Financial Institution 19
Directly by Mail 19
Signatures 20
Receiving Payment 20
By Check 20
By Wire 20
Contingent Deferred Sales Charge 20
Systematic Withdrawal Program 20
Accounts with Low Balances 21
FIXED INCOME SECURITIES, INC. INFORMATION 21
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Management of the Corporation 21
Board of Directors 21
Investment Adviser 21
Advisory Fees 21
Adviser's Background 21
Portfolio Manager's Background 22
Distribution of Investment Shares 22
Distribution and Shareholder Services
Plans 22
Other Payments to Financial Institutions 23
Administration of the Fund 23
Administrative Services 23
Custodian 23
Transfer Agent and Dividend
Disbursing Agent 23
Independent Auditors 23
SHAREHOLDER INFORMATION 24
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Voting Rights 24
TAX INFORMATION 24
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Federal Income Tax 24
Pennsylvania Corporate and
Personal Property Taxes 24
PERFORMANCE INFORMATION 25
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OTHER CLASSES OF SHARES 25
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FINANCIAL HIGHLIGHTS--FORTRESS SHARES 26
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FINANCIAL STATEMENTS 27
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INDEPENDENT AUDITORS' REPORT 40
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ADDRESSES 41
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SUMMARY OF FUND EXPENSES
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<TABLE>
<S> <C> <C>
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).......................................................... 1.00%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price).......................................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable)................................................. 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................. None
Exchange Fee................................................................................... None
ANNUAL CLASS A SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (1).............................................................. 0.31%
12b-1 Fee (after waiver) (2)................................................................... 0.20%
Total Other Expenses........................................................................... 0.59%
Shareholder Services Fee................................................................... 0.25%
Total Class A 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 Class A Shares operating expenses in the table above are based on
expenses expected during the fiscal year ending November 30, 1995. The total
Class A Shares operating expenses were 1.10% for the fiscal year ended
November 30, 1994 and were 1.49% absent the voluntary waivers of a portion
of the management fee and 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 CLASS A SHARES OF THE FUND WILL
BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN CLASS A SHARES" AND "FIXED INCOME
SECURITIES, INC. INFORMATION." Wire-transferred redemptions of less than $5,000
may be subject to additional fees.
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....... $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 Class A Shares of the Fund. The Fund also offers another class of shares
called Fortress Shares. Class A Shares and Fortress 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. See "Other Classes of
Shares."
LIMITED TERM FUND
FINANCIAL HIGHLIGHTS--CLASS A SHARES
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(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 40.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
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1994 1993 1992*
<S> <C> <C> <C>
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NET ASSET VALUE, BEGINNING OF PERIOD $ 10.17 $ 10.00 $ 10.01
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INCOME FROM INVESTMENT OPERATIONS
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Net investment income 0.53 0.63 0.519
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Net realized and unrealized gain (loss) on investments (0.66) 0.19 (0.008)
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Total from investment operations (0.13) 0.82 0.511
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LESS DISTRIBUTIONS
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Dividends to shareholders from net investment income (0.53) (0.63) (0.519)
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Distributions from net realized gains on investment transactions (0.01) -- --
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Distributions in excess of net investment income (c) (0.02) (0.02) (0.002)
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Total distributions (0.56) (0.65) (0.521)
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NET ASSET VALUE, END OF PERIOD $ 9.48 $ 10.17 $ 10.00
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TOTAL RETURN** (1.30%) 8.19% 5.21%
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RATIOS TO AVERAGE NET ASSETS
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Expenses 1.10 (a) 1.01% 0.67%(a)
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Net investment income 5.52 (a) 5.75% 6.17%(a)
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Expense waiver/reimbursement (b) 0.39 (a) 0.49% 1.06%(a)
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SUPPLEMENTAL DATA
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Net assets, end of period (000 omitted) $178,771 $248,876 $57,225
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Portfolio turnover rate 63% 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, the net investment income
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) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(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 for the fiscal year ended November 30, 1994, 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
Strategic Income Fund. With respect to the Fund, the Directors have established
two classes of shares known as Fortress Shares and Class A Shares. This
prospectus relates only to the Class A 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 load and are
redeemed at net asset value. Fund assets may be used in connection with the
distribution of Shares.
LIBERTY FAMILY OF FUNDS
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This Fund is a member of a family of mutual funds, collectively known as the
Liberty Family of Funds. The other funds in the Liberty Family of Funds are the
Class A Shares of:
. American Leaders Fund, Inc., providing growth of capital and income
through high-quality stocks;
. Capital Growth Fund, providing appreciation of capital primarily through
equity securities;
. Fund for U.S. Government Securities, Inc., providing current income
through long-term U.S. government securities;
. International Equity Fund, providing long-term capital growth and income
through international securities;
. International Income Fund, providing a high level of current income
consistent with prudent investment risk through high-quality debt
securities denominated primarily in foreign currencies;
. Liberty Equity Income Fund, Inc., providing above-average income and
capital appreciation through income producing equity securities;
. Liberty High Income Bond Fund, Inc., providing high current income
through high-yielding, lower-rated corporate bonds;
. Liberty Municipal Securities Fund, Inc., providing a high level of
current income exempt from federal regular income tax through municipal
bonds;
. Liberty U.S. Government Money Market Trust, providing current income
consistent with stability of principal through high-quality U.S.
government securities;
. Liberty Utility Fund, Inc., providing current income and long-term growth
of income, primarily through electric, gas, and communications utilities;
. Limited Term Municipal Fund, providing a high level of current income
exempt from federal regular income tax consistent with the preservation
of principal, primarily limited to municipal securities;
. Pennsylvania Municipal Income Fund, providing current income exempt from
federal regular income tax and the personal income taxes imposed by the
Commonwealth of Pennsylvania, primarily through Pennsylvania municipal
securities;
. Strategic Income Fund, providing a high level of current income,
primarily through domestic and foreign corporate debt obligations;
. Tax-Free Instruments Trust, providing current income consistent with
stability of principal and exempt from federal income tax, through
high-quality, short-term municipal securities;
. World Utility Fund, providing total return through securities issued by
domestic and foreign companies in the utilities industries; and
. Michigan Intermediate Municipal Trust, providing current income exempt
from federal regular income tax and the personal income taxes imposed by
the state of Michigan and Michigan municipalities, primarily through
Michigan municipal securities.
Prospectuses for these funds are available by writing to Federated Securities
Corp.
Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.
The Liberty Family of Funds provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles and by providing the
investment services of a proven, professional investment adviser."
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, the Farm
Credit System, including the National Bank for Cooperatives, Farm Credit
Banks, and Banks for Cooperatives, 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 ("NRSRO") rated
Aaa, Aa, A, or Baa by Moody's Investors Service, Inc. ("Moody's"); AAA,
AA, A, or BBB by Standard & Poor's Ratings Group ("S&P"), 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 an
NRSRO, 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 an NRSRO. Such ratings
would include: Prime-1 or Prime-2 by Moody's, A-1 or A-2 by S&P, 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 S&P or Baa by Moody's, or BBB by Fitch. Bonds rated BBB by S&P 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.
The prices of fixed income securities fluctuate inversely to the direction
of interest rates.
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 an NRSRO
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. There is the risk that when lending portfolio
securities, the securities may not be available to the Fund on a timely basis
and the Fund may, therefore, lose the opportunity to sell the securities at a
desirable price. In addition, in the event that a borrower of securities would
file for bankruptcy or become insolvent, disposition of the securities may be
delayed pending court action.
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. The seller's failure to complete the transaction may cause the Fund
to miss a price or yield considered to be advantageous. Settlement dates may be
a month or more after entering into, these transactions, and the market values
of the securities purchased may vary from purchase prices. Accordingly, the Fund
may pay more or less than the market value if the securities on the settlement
date.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter into transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
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 CLASS A 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.
BY WIRE. To purchase by Federal Reserve wire, call the Fund before 1:00 p.m.
(Eastern time) to place an order. The order is considered received immediately.
Payment by federal funds must be received before 3:00 p.m. (Eastern time) that
day. Federal funds should be wired as follows: Federated Services Company, c/o
State Street Bank and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE;
For Credit to: Limited Term Fund Class A Shares; Fund Number (this number can be
found on the account statement or by contacting the Fund); Group Number or Order
Number; Nominee or Institution Name; and ABA Number 011000028.
BY MAIL. To purchase by mail, send a check made payable to Limited Term Fund
Class A Shares to: Federated Services Company, c/o State Street Bank and Trust
Company, P.O. Box 8604, Boston, Massachusetts 02266-8604. Orders by mail are
considered received when payment by check is converted into federal funds. This
is normally the next business day after the check is received.
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.
Under certain circumstances described under "Redeeming Class A Shares,"
shareholders may be charged a contingent deferred sales charge by the
distributor at the time Shares are redeemed.
DEALER CONCESSION. For sales of Shares, broker/dealers will normally receive up
to 100% of the applicable sales load. Any portion of the sales load which is not
paid to a broker/dealer will be retained by the distributor. However, the
distributor may offer to pay dealers up to 100% of the sales load retained by
it. Such payments may take the form of cash or promotional incentives, such as
reimbursement of certain expenses of qualified employees and their spouses to
attend informational meetings about the Fund or other special events at
recreational-type facilities, or items of material value. In some instances,
these incentives will be made available only to dealers whose employees have
sold or may sell significant amounts of Shares. On purchases of $1 million or
more, the investor pays no sales load; however, the distributor will make twelve
monthly payments to the dealer totaling 0.25% of the public offering price over
the first year following the purchase. Such payments are based on the original
purchase price of the Shares outstanding at each month end.
ELIMINATING THE SALES LOAD
The sales load 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.
QUALITY DISCOUNTS AND ACCUMULATED PURCHASE. There is no sales load 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 load.
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 load on the additional purchase.
To receive this sales load 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 load 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 load may be eliminated by signing a
letter of intent to that effect. This letter of intent includes a provision for
a sales load 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 load, 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 load. If the shareholder redeems his Shares, there may be tax
consequences.
PURCHASES WITH PROCEEDS FROM REDEMPTIONS OF UNAFFILIATED INVESTMENT COMPANIES.
Investors may purchase Shares at net asset value, without a sales load, with
proceeds from the redemption of shares of an investment company which were sold
with a sales load or commission and were not distributed by Federated Securities
Corp. The purchase must be made within 60 days of the redemption, and Federated
Securities Corp. must be notified by the investor in writing, or by his
financial institution, at the time the purchase is made.
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.
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, contact Federated Securities Corp. and consult a
tax adviser.
EXCHANGE PRIVILEGE
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Class A shareholders may exchange all or some of their Shares for Class A Shares
of other Funds in the Liberty Family of Funds at net asset value. They may also
exchange into certain other funds for which affiliates of Federated Investors
serve as principal underwriter ("Federated Funds"). Certain Federated Funds are
sold with a sales load different from that of the Fund or with no sales load;
exchanges into these Federated Funds are made at net asset value plus the
difference between the Fund's sales load already paid and any sales load of the
Federated Fund into which the Shares are to be exchanged, if higher. Neither the
Fund nor any of the funds in the Liberty Family of Funds
imposes any additional fees on exchanges. Shareholders in certain other
Federated Funds may exchange their shares in the Federated Funds for Class A
Shares. Participants in a plan under the Liberty Family Retirement Program may
exchange all or some of their shares for Class A Shares of other funds offered
under the plan at net asset value without a contingent deferred sales charge.
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Shares having a net asset value
at least equal to the minimum investment requirements of the fund into which the
exchange is being made. Before the exchange, the shareholder must receive the
prospectus of the fund into which the exchange is being made.
This privilege is available to shareholders resident 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 Class A Shares of the other fund. The exchange
privilege may be modified or terminated at any time. Shareholders will be
notified of the modification or termination of the exchange privilege.
Further information on the exchange privilege and prospectuses for the Liberty
Family of Funds or certain Federated Funds are available by contacting the Fund.
TAX CONSEQUENCES
An exercise of the exchange privilege is treated as a sale for federal income
tax purposes. Depending upon the circumstances, a capital gain or loss may be
realized.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing or by telephone. Written
instructions may require a signature guarantee. Shareholders of the Fund may
have difficulty in making exchanges by telephone through brokers and other
financial institutions during times of drastic economic or market changes. If a
shareholder cannot contact his broker or financial institution by telephone, it
is recommended that an exchange request be made in writing and sent by overnight
mail to Federated Services Company, c/o State Street Bank and Trust Company, 500
Victory Road--2nd Floor, Quincey, Massachusetts 02171.
TELEPHONE INSTRUCTIONS. Telephone instructions made by the investor may be
carried out only if a telephone authorization form completed by the investor is
on file with the transfer agent. If the instructions are given by a broker, a
telephone authorization form completed by the broker must be on file with the
transfer agent. Shares may be exchanged between two funds by telephone only if
the two funds have identical shareholder registrations.
Any Shares held in certificate form cannot be exchanged by telephone, but must
be forwarded to Federated Services Company, c/o State Street Bank and Trust
Company, P.O. Box 8604, Boston, Massachusetts 02266-8604, and deposited to the
shareholder's account before being exchanged. Telephone exchange instructions
are recorded and will be binding upon the shareholder. Such instructions will
be processed by 4:00 p.m. (Eastern time) and must be received by the transfer
agent before that time for Shares to be exchanged the same day. Shareholders
exchanging into a fund will not receive any dividend that is payable to
shareholders of record on that date. This privilege may be modified or
terminated at any time.
If reasonable procedures are not followed by the Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
REDEEMING CLASS A SHARES
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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, P.O. Box 8604, Boston, Massachusetts 02266-8604. 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 who purchase Shares with proceeds of a redemption of shares of a
mutual fund sold with a sales load and not distributed by Federated Securities
Corp. may be charged a contingent deferred sales charge by the Fund's
distributor of .50 of 1% for redemptions made within one year. The contingent
deferred sales charge will be calculated based upon the lesser of the original
purchase price of Shares or the net asset value of the Shares when redeemed.
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 load, it is
not advisable for shareholders to be purchasing Shares while participating in
this program.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $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.
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 CLASS A SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS. _Under a distribution plan adopted
in accordance with Investment Company Act Rule 12b-1 (the "Distribution Plan"),
the Fund will pay to the distributor an amount, computed at an annual rate of
0.50 of 1% of the average daily net asset value of the Shares to finance any
activity which is principally intended to result in the sale of Shares subject
to the Distribution Plan. The distributor may select financial institutions such
as banks, fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales support services as agents for their clients or
customers.
The Distribution Plan is a compensation-type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amount or may earn a profit from future payments made by the Fund
under the Distribution Plan.
In addition, the Corporation has adopted a Shareholder Services Plan (the
"Services Plan") under which it may make payments up to 0.25 of 1% of the
average daily net asset value of the Shares to obtain certain personal services
for shareholders and the maintenance of shareholder accounts ("shareholder
services"). The Corporation has entered into a Shareholder Services Agreement
with Federated Shareholder Services, a subsidiary of Federated Investors, under
which Federated Shareholder Services will either perform shareholder services
directly or will select financial institutions to perform shareholder services.
Financial institutions will receive fees based upon shares owned by their
clients or customers. The schedules of such fees and the basis upon which such
fees will be paid will be determined from time to time by the Corporation and
Federated Shareholder Services.
The Glass-Steagall Act limits the ability of a depository institution (such as
a commercial bank or a savings and loan association) to become an underwriter
or distributor of securities. In the event the Glass-Steagall Act is deemed to
prohibit depository institutions from acting in the capacities described above
or should Congress relax current restrictions on depository institutions, the
Directors will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. The Adviser or its affiliates may
offer to pay a fee from their own assets to financial institutions as financial
assistance for providing substantial marketing, sales, and operational support
to the distributor. The support may include participating in sales, educational
and training seminars at recreational-type facilities, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or operational support furnished by the financial institution.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. _Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all Federated Funds as specified
below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET ASSETS
ADMINISTRATIVE FEE OF THE FEDERATED FUNDS
<C> <S>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN. State Street Bank and Trust Company, ("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.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, Boston, Massachusetts.
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
. the Fund is subject to the Pennsylvania corporate franchise tax; and
. The Fund is not subject to Pennsylvania corporate or personal property
taxes. Fund shares may be subject to personal property taxes imposed by
counties, municipalities, and school districts in Pennsylvania to the
extent that the portfolio securities in the Fund would be subject to
such taxes if owned directly by residents of those jurisdictions.
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 Class A
Shares. Because Fortress Shares are subject to lower 12b-1 expenses, the yield
for Fortress Shares, for the same period, will exceed that of Class A Shares.
Because Class A Shares are not usually subject to a contingent deferred sales
charge, the total return for Class A Shares, for the same period, may exceed
that of Fortress Shares.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund currently offers Fortress Shares and Class A 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 Class A Shares will generally be less than
that of Fortress Shares by the difference between class expenses and
distribution and shareholder service expenses borne by shares of each respective
class.
The stated advisory fee is the same for both classes of shares.
LIMITED TERM FUND
FINANCIAL HIGHLIGHTS--FORTRESS SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 40.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
--------------------
1994 1993*
<S> <C> <C>
- ----------------------------------------------------------------------------------------- --------- ---------
NET ASSET VALUE, BEGINNING OF PERIOD $10.17 $10.24
- -----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------
Net investment income 0.55 0.15
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.67) (0.07)
- ----------------------------------------------------------------------------------------- --------- ---------
Total from investment operations (0.12) 0.08
- ----------------------------------------------------------------------------------------- --------- ---------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.55) (0.15)
- -----------------------------------------------------------------------------------------
Distributions from net realized gains on investment transactions (0.01) --
- -----------------------------------------------------------------------------------------
Distributions in excess of net investment income (c) (0.01) --
- ----------------------------------------------------------------------------------------- --------- ---------
Total distributions (0.57) (0.15)
- ----------------------------------------------------------------------------------------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 9.48 $ 10.17
- ----------------------------------------------------------------------------------------- --------- ---------
TOTAL RETURN** (1.20%) 0.78%
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------
Expenses 0.99 (a) 1.00%(a)
- -----------------------------------------------------------------------------------------
Net investment income 5.67 (a) 7.10%(a)
- -----------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.13 (a) 0.39%(a)
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $13,415 $7,230
- -----------------------------------------------------------------------------------------
Portfolio turnover rate 63% 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) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(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 for the fiscal year ended November 30, 1994, which can be obtained
free of charge.
LIMITED TERM FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------- --------------------------------------------------------------------------------- ---------------
CORPORATE BONDS/ASSET BACKED SECURITIES--69.6%
- ------------------------------------------------------------------------------------------------
AUTOMOTIVE--7.2%
---------------------------------------------------------------------------------
$ 1,917,973 Capital Auto Receivables Asset Trust 1993-1, Class B, 5.85%,
2/17/98 $ 1,861,930
---------------------------------------------------------------------------------
5,000,000 Ford Credit Auto Loan Master Trust 1992-2, Class A, 7.375%, 4/15/99 4,911,200
---------------------------------------------------------------------------------
2,550,000 Navistar Financial Dealer Note 1990, Class A-3, 5.90%*, 1/15/2003 2,584,298
---------------------------------------------------------------------------------
4,437,616 Navistar Financial Owner Trust 1994-B, Class-B, 6.63%, 1/15/2000 4,301,714
---------------------------------------------------------------------------------
90,314 Select Auto Receivables Trust 1991-5, 6.25%, 11/15/96 89,833
--------------------------------------------------------------------------------- ---------------
Total 13,748,975
--------------------------------------------------------------------------------- ---------------
BANKING--23.7%
---------------------------------------------------------------------------------
15,010,000 Chase Manhattan Corp. FRN, 5.25%*, 12/05/2009 14,447,125
---------------------------------------------------------------------------------
5,000,000 Chase Manhattan Credit Card Master Trust 1992-1A, 7.40%,
5/15/2000 4,903,550
---------------------------------------------------------------------------------
3,000,000 Chase Manhattan Credit Card Trust 1991-1, Class A, 8.75%,
8/15/99 3,038,280
---------------------------------------------------------------------------------
5,000,000 Chemical Bank, FRN 5.75%*, 7/29/2003 4,875,000
---------------------------------------------------------------------------------
3,615,000 Citicorp, 6.00%*, 6/29/2005 3,325,800
---------------------------------------------------------------------------------
4,000,000 First USA Credit Card Master Trust 1992-1, Class B, 5.80%, 6/15/98 3,828,720
---------------------------------------------------------------------------------
5,900,000 Societe Generale, 5.13%*, 8/30/2002 5,546,000
---------------------------------------------------------------------------------
6,000,000 Toronto Dominion Bank Sub. Note, 7.88%, 8/15/2004 5,630,100
--------------------------------------------------------------------------------- ---------------
Total 45,594,575
--------------------------------------------------------------------------------- ---------------
CONSUMER PRODUCTS--1.6%
---------------------------------------------------------------------------------
2,000,000 (a)Encyclopedia Britannica, Dom. Funding. Corp. Series 1994-1, 6.76%, 3/15/2002 1,913,750
---------------------------------------------------------------------------------
1,053,663 John Deere Owner Trust 1992-A, Class E, 6.25%*, 12/29/99 1,059,331
--------------------------------------------------------------------------------- ---------------
Total 2,973,081
--------------------------------------------------------------------------------- ---------------
FINANCE--RETAIL--7.7%
---------------------------------------------------------------------------------
$ 5,000,000 Discover Card Trust 1992-B, Class A, 6.80%, 6/16/2000 $ 4,819,700
---------------------------------------------------------------------------------
3,000,000 Discover Card Trust 1991-B, Class B, 8.85%, 7/15/98 3,039,420
---------------------------------------------------------------------------------
7,000,000 Household Private Label Credit Card Trust 1994-1, Class B, 7.55%,
5/20/97 6,956,250
--------------------------------------------------------------------------------- ---------------
Total 14,815,370
--------------------------------------------------------------------------------- ---------------
HOME EQUITY RECEIVABLES--17.1%
---------------------------------------------------------------------------------
859,625 Advanta Home Equity Loan Trust 1991-1, Class A, 9.00%, 2/25/2006 859,359
---------------------------------------------------------------------------------
2,204,168 Advanta Home Equity Loan Trust 1992-4, Class A-2, 7.15%,
12/25/2008 2,131,207
---------------------------------------------------------------------------------
500,000 Capital Home Equity Loan Trust 1991-1 Class B, 5.60%*, 11/14/2011 499,225
---------------------------------------------------------------------------------
4,852,531 (a)Conti Mortgage Home Equity Loan Trust 1993-3, Class A-2, 5.54%,
7/15/2020 4,460,592
---------------------------------------------------------------------------------
2,000,000 (a)Conti Mortgage Home Equity Loan Trust 1994-1, Class A-3, 6.07%, 11/15/2013 1,867,500
---------------------------------------------------------------------------------
4,544,613 (a)Conti Mortgage Home Equity Loan Trust 1994-1, Class A-5, 6.12%,
1/15/2024 4,285,348
---------------------------------------------------------------------------------
771,829 Fleet Finance Home Equity Trust 1991-2, Class A, 6.70%, 10/16/2006 755,404
---------------------------------------------------------------------------------
4,624,180 Merrill Lynch Home Equity Loan Trust 1991-2, Class B, 5.81%*,
10/15/2006 4,656,087
---------------------------------------------------------------------------------
2,623,380 Merrill Lynch Home Equity Loan Trust 1993-1, Class B, 5.94%*,
2/15/2003 2,650,742
---------------------------------------------------------------------------------
21,526 Merrill Lynch Mortgage Investments 1991-A, Class B, 9.25%,
5/15/2011 21,956
---------------------------------------------------------------------------------
1,096,943 TMS Home Equity Loan Trust 1992-A, Class A, 6.95%, 12/15/2007 1,048,283
---------------------------------------------------------------------------------
936,407 TMS Home Equity Loan Trust 1992-B, Class A, 6.90%, 7/15/2007 893,229
---------------------------------------------------------------------------------
5,010,351 TMS Home Equity Loan Trust 1992-D, Class A-3, 7.55%, 1/15/2018 4,823,064
---------------------------------------------------------------------------------
4,213,871 TMS Home Equity Loan Trust 1993-C, Class A-3, 5.75%, 10/15/2022 3,947,891
--------------------------------------------------------------------------------- ---------------
Total 32,899,887
--------------------------------------------------------------------------------- ---------------
INSURANCE--4.0%
---------------------------------------------------------------------------------
$ 8,000,000 USF & G Corp. Note, 8.375%, 6/15/2001 $ 7,770,960
--------------------------------------------------------------------------------- ---------------
LEASING--0.2%
---------------------------------------------------------------------------------
417,068 (a)Concord Leasing Grantor Trust 1992-C, Class A-1, 5.31%, 1/20/99 405,432
--------------------------------------------------------------------------------- ---------------
MANUFACTURED HOUSING RECEIVABLES--2.6%
---------------------------------------------------------------------------------
5,709,908 Cit Group Manufactured Housing PTC 1993-1, Class B, 6.85%,
6/15/2018 5,053,783
--------------------------------------------------------------------------------- ---------------
MARINE RECEIVABLES--2.5%
---------------------------------------------------------------------------------
4,320,054 CBNJ Boat Loan Trust, Series 1994-1, 6.89%, 4/17/2012 4,182,353
---------------------------------------------------------------------------------
677,083 (a)CFC-14 Grantor Trust, Class A, 7.15%, 11/15/2006 660,368
--------------------------------------------------------------------------------- ---------------
Total 4,842,721
--------------------------------------------------------------------------------- ---------------
PUBLISHING--3.0%
---------------------------------------------------------------------------------
6,000,000 News America Holdings, Inc. 7.50%, 3/1/2000 5,650,800
--------------------------------------------------------------------------------- ---------------
TOTAL CORPORATE BONDS/ASSET BACKED SECURITIES
(IDENTIFIED COST, $139,583,793) 133,755,584
--------------------------------------------------------------------------------- ---------------
GOVERNMENT AGENCIES--0.3%
- ------------------------------------------------------------------------------------------------
500,000 Student Loan Marketing Association, FRN, 6.25%*, 5/8/95
(IDENTIFIED COST, $500,000) 501,250
--------------------------------------------------------------------------------- ---------------
MORTGAGE BACKED SECURITIES--16.4%
- ------------------------------------------------------------------------------------------------
GOVERNMENT AGENCY--MORTGAGE BACKED SECURITIES--1.9%
---------------------------------------------------------------------------------
1,291,585 Federal Home Loan Mortgage Corp., Pool 606116 6.46%*, 9/1/2019 1,296,429
---------------------------------------------------------------------------------
1,490,206 Federal Home Loan Mortgage Corp., Pool 785167 7.33%*, 12/1/2018 1,510,890
---------------------------------------------------------------------------------
337,929 Federal Home Loan Mortgage Corp., Series 1132, Glass G, 8.00%,
1/15/2005 339,216
---------------------------------------------------------------------------------
184,453 Federal National Mortgage Association Pool 087462 6.99%*,
11/1/2017 188,599
---------------------------------------------------------------------------------
386,544 Federal National Mortgage Association Pool 112514, 5.65%*,
12/1/2020 395,724
--------------------------------------------------------------------------------- ---------------
Total 3,730,858
--------------------------------------------------------------------------------- ---------------
NON-GOVERNMENT AGENCY--MORTGAGE BACKED SECURITIES--14.5%
---------------------------------------------------------------------------------
$ 3,090,000 Chemical Mortgage Securities, Inc. 1993-1, Class A-4, 7.45%,
7/25/2020 $ 2,823,797
---------------------------------------------------------------------------------
1,275,390 Citicorp Mortgage Securities, Inc., Series 1992-18, Class A-1, 6.01%*,
10/25/2022 1,278,578
---------------------------------------------------------------------------------
10,200,000 Citicorp Mortgage Securities, Inc., Series 1993-12, Class A-2, 6.50%,
6/25/2021 8,492,724
---------------------------------------------------------------------------------
2,589,517 DLJ Mortgage Acceptance Corp., 1993-Q15, Class A-1, 5.61%*,
11/25/2023 2,546,609
---------------------------------------------------------------------------------
6,712,231 GCA REMIC Trust V 1993-5, Class B, 5.27%*, 5/1/2020 6,292,716
---------------------------------------------------------------------------------
1,185,137 GMBS, Inc., 1990-5, Class A, 6.62%*, 12/26/2020 1,155,212
---------------------------------------------------------------------------------
1,935,000 (a)Prudential Home Mortgage 1992-A, Class B1-2, 7.90%, 11/25/2022 1,788,095
---------------------------------------------------------------------------------
3,270,000 RTC 1992-15, Class B-3, 10.00%, 7/25/2027 3,347,139
--------------------------------------------------------------------------------- ---------------
Total 27,724,870
--------------------------------------------------------------------------------- ---------------
TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST, $32,246,535) 31,455,728
--------------------------------------------------------------------------------- ---------------
**REPURCHASE AGREEMENT--3.1%
- ------------------------------------------------------------------------------------------------
6,023,000 J.P. Morgan Securities, Inc., 5.77%, dated 11/30/94, due 12/1/94 6,023,000
--------------------------------------------------------------------------------- ---------------
TOTAL REPURCHASE AGREEMENT (AT AMORTIZED COST) 6,023,000
--------------------------------------------------------------------------------- ---------------
TOTAL INVESTMENTS (IDENTIFIED COST, $178,353,328) $ 171,735,562+
--------------------------------------------------------------------------------- ---------------
</TABLE>
(a) Denotes restricted securities which are subject to resale under Federal
Securities laws.
+ The cost of investments for federal tax purposes amounts to $178,393,664.
The net unrealized depreciation on a federal tax cost basis amounts to
$6,658,102 and is comprised of $266,518 appreciation and $6,924,620
depreciation at November 30, 1994.
* Current rate shown.
** 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 are through participation in a joint
account with other Federated funds.
LIMITED TERM FUND
- --------------------------------------------------------------------------------
Note: The categories of investments are shown as a percentage of net assets
($192,185,862) at November 30, 1994.
The following abbreviations are used in this portfolio:
FRN--Floating Rate Note
PTC--Pass Through Certificate
REMIC--Real Estate Mortgage Investment Conduit
(See Notes which are an integral part of the Financial Statements)
LIMITED TERM FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost; $178,353,328 and tax cost; $178,393,664) $ 171,735,562
- ---------------------------------------------------------------------------------------------------
Cash 2,113
- ---------------------------------------------------------------------------------------------------
Receivable for investments sold 36,775,261
- ---------------------------------------------------------------------------------------------------
Interest receivable 1,786,460
- ---------------------------------------------------------------------------------------------------
Receivable for capital stock sold 184,427
- ---------------------------------------------------------------------------------------------------
Deferred expenses 86,272
- --------------------------------------------------------------------------------------------------- -------------
Total assets 210,570,095
- ---------------------------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------------------------------------------
Payable to affiliate for investments purchased $ 16,024,650
- -------------------------------------------------------------------------------------
Payable for capital stock redeemed 1,937,250
- -------------------------------------------------------------------------------------
Dividends payable 287,078
- -------------------------------------------------------------------------------------
Accrued expenses 135,255
- ------------------------------------------------------------------------------------- ------------
Total liabilities 18,384,233
- --------------------------------------------------------------------------------------------------- -------------
NET ASSETS for 20,263,603 shares of capital stock outstanding $ 192,185,862
- --------------------------------------------------------------------------------------------------- -------------
NET ASSETS CONSIST OF:
- ---------------------------------------------------------------------------------------------------
Paid-in capital $ 209,112,791
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investments (6,617,766)
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (9,647,720)
- ---------------------------------------------------------------------------------------------------
Accumulated distributions in excess of net investment income (661,443)
- --------------------------------------------------------------------------------------------------- -------------
Total Net Assets $ 192,185,862
- --------------------------------------------------------------------------------------------------- -------------
NET ASSET VALUE:
- ---------------------------------------------------------------------------------------------------
Class A Shares ($178,771,160 / 18,849,195 shares of capital stock outstanding) $9.48
- --------------------------------------------------------------------------------------------------- -------------
Fortress Shares ($13,414,702 / 1,414,408 shares of capital stock outstanding) $9.48
- --------------------------------------------------------------------------------------------------- -------------
OFFERING PRICE PER SHARE:
- ---------------------------------------------------------------------------------------------------
Class A Shares (100/99 of $9.48)* $9.58
- --------------------------------------------------------------------------------------------------- -------------
Fortress Shares (100/99 of $9.48)* $9.58
- --------------------------------------------------------------------------------------------------- -------------
REDEMPTION PROCEEDS PER SHARE:
- ---------------------------------------------------------------------------------------------------
Fortress Shares (99/100 of $9.48)** $9.39
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
* See "What Shares Cost" in the prospectus.
** See "Contingent Deferred Sales Charge" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
LIMITED TERM FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------------------------------------
Interest income $ 15,876,379
- --------------------------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------------------------------------
Investment advisory fee $ 959,307
- ------------------------------------------------------------------------------------
Directors' fees 13,149
- ------------------------------------------------------------------------------------
Administrative personnel and services fee 232,679
- ------------------------------------------------------------------------------------
Custodian and portfolio accounting fees 112,744
- ------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 206,297
- ------------------------------------------------------------------------------------
Registration fees 86,966
- ------------------------------------------------------------------------------------
Audting fees 16,364
- ------------------------------------------------------------------------------------
Legal fees 12,915
- ------------------------------------------------------------------------------------
Printing and postage 79,620
- ------------------------------------------------------------------------------------
Distribution services fee--Class A Shares 1,131,333
- ------------------------------------------------------------------------------------
Distribution services fee--Fortress Shares 20,340
- ------------------------------------------------------------------------------------
Insurance premiums 8,616
- ------------------------------------------------------------------------------------
Shareholder services fee--Class A Shares 565,666
- ------------------------------------------------------------------------------------
Shareholder services fee--Fortress Shares 31,469
- ------------------------------------------------------------------------------------
Taxes 15,973
- ------------------------------------------------------------------------------------
Miscellaneous 33,510
- ------------------------------------------------------------------------------------ ------------
Total expenses 3,526,948
- ------------------------------------------------------------------------------------
Deduct--
- ------------------------------------------------------------------------------------
Waiver of investment advisory fee $ 322,154
- ------------------------------------------------------------------------
Waiver of distribution services fee--Class A Shares 581,371 903,525
- ------------------------------------------------------------------------ ---------- ------------
Net expenses 2,623,423
- -------------------------------------------------------------------------------------------------- --------------
Net investment income 13,252,956
- -------------------------------------------------------------------------------------------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- --------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (9,647,720)
- --------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (6,903,560)
- -------------------------------------------------------------------------------------------------- --------------
Net realized and unrealized gain (loss) on investments (16,551,280)
- -------------------------------------------------------------------------------------------------- --------------
Change in net assets resulting from operations $ (3,298,324)
- -------------------------------------------------------------------------------------------------- --------------
</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>
1994 1993
INCREASE (DECREASE) IN NET ASSETS:
- --------------------------------------------------------------------------------
OPERATIONS--
- --------------------------------------------------------------------------------
Net investment income $ 13,252,956 $ 8,178,060
- --------------------------------------------------------------------------------
Net realized gain (loss) on investments ($9,607,384 net loss and
$369,906 net gain as computed for federal tax purposes) (9,647,720) 369,906
- --------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) on investments (6,903,560) 785,383
- -------------------------------------------------------------------------------- --------------- --------------
Change in net assets resulting from operations (3,298,324) 9,333,349
- -------------------------------------------------------------------------------- --------------- --------------
NET EQUALIZATION CREDITS-- 7,025 78,255
- -------------------------------------------------------------------------------- --------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS--
- --------------------------------------------------------------------------------
Dividends to shareholders from net investment income:
- --------------------------------------------------------------------------------
Class A Shares (12,483,582) (8,215,600)
- --------------------------------------------------------------------------------
Fortress Shares (776,400) (36,477)
- --------------------------------------------------------------------------------
Distributions in excess of net investment income
- --------------------------------------------------------------------------------
Class A Shares (97,229) (572,361)
- --------------------------------------------------------------------------------
Fortress Shares (4,798) --
- --------------------------------------------------------------------------------
Distributions to shareholders from net realized gains on investment transactions
- --------------------------------------------------------------------------------
Class A Shares (356,098) --
- --------------------------------------------------------------------------------
Fortress Shares (12,247) --
- -------------------------------------------------------------------------------- --------------- --------------
Change in net assets resulting from distributions
to shareholders (13,730,354) (8,824,438)
- -------------------------------------------------------------------------------- --------------- --------------
CAPITAL STOCK TRANSACTIONS--
- --------------------------------------------------------------------------------
Proceeds from sale of shares 82,920,358 240,663,285
- --------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
dividends declared 9,662,553 6,295,582
- --------------------------------------------------------------------------------
Cost of shares redeemed (139,481,244) (48,664,777)
- -------------------------------------------------------------------------------- --------------- --------------
Change in net assets resulting from capital stock transactions (46,898,333) 198,294,090
- -------------------------------------------------------------------------------- --------------- --------------
Change in net assets (63,919,986) 198,881,256
- --------------------------------------------------------------------------------
NET ASSETS:
- --------------------------------------------------------------------------------
Beginning of period 256,105,848 57,224,592
- -------------------------------------------------------------------------------- --------------- --------------
End of period $ 192,185,862 $ 256,105,848
- -------------------------------------------------------------------------------- --------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
LIMITED TERM FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Fixed Income Securities, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end
management investment company. the corporation consists of five diversified
investment portfolios. The financial statements included herein are only those
of Limited Term Fund (the "Fund"). The financial statements of the other
portfolios 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. The Fund offers two classes; Class A Shares and Fortress Shares.
As of October 17, 1994, Multi-State Municipal Income Fund no longer accepted
purchases. It is anticipated that Multi-State Municipal Income Fund's
liquidation will occur in 1995.
During the fiscal year ended November 30, 1994, the Corporation offered five
portfolios (Limited Term Fund, Limited Term Municipal Fund, Strategic Income
Fund, Limited Maturity Government Fund, and Multi-State Municipal Income Fund).
The Board of Directors approved the liquidation of Limited Maturity Government
Fund, and as of December 23, 1993 was no longer offered.
(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. These
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--U.S. government obligations are generally valued at
the mean between the over-the-counter bid and asked prices as furnished by
an independent pricing service. Corporate bonds (and other fixed-income and
asset backed securities) are valued at the last sale price reported on
national securities exchanges on that day, if available. Otherwise,
corporate bonds (and other fixed-income and asset backed securities) and
short-term obligations are valued at the prices provided by an independent
pricing service. Short-term securities with remaining maturities of sixty
days or less at the time of purchase may be stated 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
collateral to ensure the value of collateral at least equals the principal
amount of the repurchase agreement, including accrued interest.
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 Board of 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. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
as required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its taxable income.
Accordingly, no provisions for federal tax are necessary. At November 30,
1994, the Fund, for federal tax purposes, had a capital loss carryforward
of $9,607,384, which will reduce the Fund's taxable income arising from
future net realized gain on investments, if any, to the extent permitted by
the Code, and thus will reduce the amount of the distributions to
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 2002, ($9,607,384).
E. EQUALIZATION--The Fund follows the accounting practice known as
equalization by which a portion of the proceeds from sales and costs of
redemptions of capital stock equivalent, on a per share basis, to the
amount of undistributed net investment income on the date of the
transaction is credited or charged to undistributed net investment income.
As a result, undistributed net investment income per share is unaffected by
sales or redemptions of capital stock.
F. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date 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.
G. 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 its shares, have been deferred and are being
amortized using the straight-line method not to exceed a period of five
years from the Fund's commencement date.
H. RESTRICTED SECURITIES--Restricted securities are securities that may only
be resold upon registration under Federal securities laws or in
transactions exempt from such registration. In some
cases, the issuer of restricted securities has agreed to register such
securities for resale, at the issuer's expense either upon demand by the
Fund or in connection with another registered offering of the securities.
Many restricted securities may be resold in the secondary market in
transactions exempt from registration.
Such restricted securities may be determined to be liquid under criteria
established by the Board of Directors. The Fund will not incur any
registration costs upon such resales. The Fund's restricted securities are
valued at the price provided by dealers in the secondary market or, if no
market prices are available, at the fair value as determined by the Fund's
pricing committee. Additional information on each restricted security held
at November 30, 1994 is as follows:
<TABLE>
<CAPTION>
ACQUISITION ACQUISITION
SECURITY DATE COST
<S> <C> <C>
Encyclopedia Britannica Dom. Funding Corp. 3/28/94 $ 2,000,000
Conti Mortgage Equity Loan Trust 1993-3, Class A-2 9/29/93 4,852,073
Conti Mortgage Equity Loan Trust 1994-1, Class A-3 2/25/94 1,999,719
Conti Mortgage Equity Loan Trust 1994-1, Class A-5 2/25/94 4,543,638
Concord Leasing Grantor Trust 1992-C, Class A-1 9/8/92 415,124
CFC-14 Grantor Trust, Class A 5/28/92 690,772
Prudential Home Mortgage 1992-A, Class B1-1 11/24/92 1,899,928
</TABLE>
I. RECLASSIFICATIONS--During the year ended November 30, 1994, the Fund
adopted Statement of Position 93-2, Determination, Disclosure, and
Financial Statement Presentation of Income, Capital Gain, and Return of
Capital Distributions by Investment Companies. Accordingly, permanent book
and tax differences have been reclassified to paid-in capital. The Fund
reclassified $19,134 and $18,992 from accumulated net realized gain (loss)
and undistributed net investment income, respectively to paid-in capital in
accordance with SOP 93-2. Net investment income, net realized gains, and
net assets were not affected by this change.
J. OTHER--Investment transactions are accounted for on the trade date.
(3) CAPITAL STOCK
At November 30, 1994, there were 10,000,000,000 shares of $0.001 par value
capital stock authorized for the Corporation. 2,000,000,000 shares have been
designated for the Fund. Of these shares 1,000,000,000 have been designated as
Class A Shares and 1,000,000,000 as Fortress Shares of the Fund. Transactions in
capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1994 1993
------------------------------ ----------------------------
CLASS A SHARES SHARES DOLLARS SHARES DOLLARS
<S> <C> <C> <C> <C>
- --------------------------------------------------- ------------- --------------- ------------ --------------
Shares sold 6,954,884 $ 69,748,905 22,870,569 $ 233,155,755
- ---------------------------------------------------
Shares issued to shareholders
in payment of dividends declared 935,518 9,190,553 621,720 6,275,708
- ---------------------------------------------------
Shares redeemed (13,505,266) (133,005,809) (4,748,516) (48,395,745)
- --------------------------------------------------- ------------- --------------- ------------ --------------
Net change resulting from
Class A Share transactions (5,614,864) ($ 54,066,351) 18,743,773 $ 191,035,718
- --------------------------------------------------- ------------- --------------- ------------ --------------
<CAPTION>
YEAR ENDED NOVEMBER 30,
1994 1993*
--------------------------- ----------------------------
FORTRESS SHARES SHARES DOLLARS SHARES DOLLARS
<S> <C> <C> <C> <C>
- ----------------------------------------------------- ----------- -------------- ------------ --------------
Shares sold 1,322,242 $ 13,171,453 735,070 $ 7,507,530
- -----------------------------------------------------
Shares issued to shareholders
in payment of dividends declared 48,336 472,000 1,947 19,874
- -----------------------------------------------------
Shares redeemed (666,787) (6,475,435) (26,400) (269,032)
- ----------------------------------------------------- ----------- -------------- ------------ --------------
Net change resulting from
Fortress Share transactions 703,791 $ 7,168,018 710,617 $ 7,258,372
- ----------------------------------------------------- ----------- -------------- ------------ --------------
Net change resulting from
Fund Share transactions (4,911,073) ($ 46,898,333) 19,454,390 $ 198,294,090
- ----------------------------------------------------- ----------- -------------- ------------ --------------
</TABLE>
* For the period from August 31, (date of initial public offering) to November
30, 1993.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--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 may voluntarily
choose to waive a portion of its fee. The Adviser can modify or terminate this
voluntary waiver at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
administrative personnel and services. Prior to March 1, 1994, these services
were provided at approximate cost. Effective March 1, 1994, the FAS fee is based
on the level of average aggregate daily net assets of all funds advised by
subsidiaries of Federated Investors for the period. The administrative fee
received during the period of the Administrative Services Agreement shall be at
least $125,000 per portfolio and $30,000 per each additional class of shares.
DISTRIBUTION AND SHAREHOLDER SERVICES FEE--The Fund has adopted a Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the
Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund to finance activities intended to
result in the sale of the Fund's Class A Shares and Fortress Shares. The Plan
provides that the Fund may incur distribution expenses up to .50 and .15,
respectively, of 1% of the average daily net assets of the Class A Shares and
Fortress Shares, respectively, annually, to compensate FSC.
Under the terms of a Shareholder Services Agreement with FSC, the Fund will pay
FSC up to .25 of 1% of average daily net assets of the Fund for the period. This
fee is to obtain certain personal services for shareholders and to maintain
shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("FServ") serves as transfer and dividend disbursing agent for the Fund. The
FServ fee is based on the size, type, and number of accounts and transactions
made by shareholders.
ORGANIZATIONAL EXPENSES--Organizational expenses $66,620 and start-up
administrative service expenses $65,386 were borne initially be FAS. The Fund
has agreed to reimburse the Adviser for the organizational expenses and start-up
administrative expenses during the five year period following December 24, 1991
(date the Fund first became effective). For the year ended November 30, 1994,
the Fund paid $13,324 and $24,425, respectively, pursuant to this agreement.
INTERFUND TRANSACTIONS--During the year ended November 30, 1994, the Fund
engaged in purchase and sale transactions with other affiliated funds at current
value pursuant to Rule 17a-7 amounting to $35,037,659 and $55,313,811,
respectively.
Certain of the Officers and Directors of the Corporation are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended November 30, 1994 were as follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------
PURCHASES $ 145,571,702
- -------------------------------------------------------------------------------------------------- --------------
SALES $ 194,024,945
- -------------------------------------------------------------------------------------------------- --------------
</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, 1994, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the years in the two year period then ended, and the financial
highlights (see pages 2 and 26 of the prospectus). 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, 1994 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, 1994, the results of its operations, the changes in its net
assets, and its financial highlights in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
January 13, 1995
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Limited Term Fund
Class A 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
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 125 Summer Street
Boston, Massachusetts 02110-1617
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
LIMITED TERM FUND
CLASS A SHARES
PROSPECTUS
A Diversified Portfolio of
Fixed Income Securities, Inc.,
an Open-End Management
Investment Company
January 31, 1995
338319106
3070701A-A (1/95)
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.
THE 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 Class A Shares dated January 31, 1995 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, 1995
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES--FORTRESS SHARES 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 6
Floating Rate Corporate Debt Obligations 6
Fixed Rate Corporate Debt Obligations 7
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") 9
Real Estate Mortgage Investment
Conduits ("REMICs") 9
Resets of Interest 9
Caps and Floors 10
Bank Instruments 10
Credit Facilities 10
Average Portfolio Duration 10
Credit Enhancement 11
Demand Features 11
Interest Rate Swaps 11
Financial Futures and Options on Futures 11
Risks 12
Repurchase Agreements 12
Restricted and Illiquid Securities 12
Lending of Portfolio Securities 13
When-Issued and Delayed
Delivery Transactions 13
Investment Limitations 13
NET ASSET VALUE 14
- ------------------------------------------------------
INVESTING IN FORTRESS SHARES 14
- ------------------------------------------------------
Share Purchases 14
Through a Financial Institution 14
By Wire 15
By Mail 15
Minimum Investment Required 15
What Shares Cost 15
Dealer Concession 15
Eliminating the Sales Load 16
Quantity Discounts and
Accumulated Purchases 16
Letter of Intent 16
Reinvestment Privilege 17
Concurrent Purchases 17
Systematic Investment Program 17
Certificates and Confirmations 17
Dividends and Distributions 17
Retirement Plans 18
EXCHANGE PRIVILEGE 18
- ------------------------------------------------------
REDEEMING FORTRESS SHARES 18
- ------------------------------------------------------
Through a Financial Institution 18
Directly by Mail 19
Signatures 19
Receiving Payment 19
By Check 19
By Wire 19
Contingent Deferred Sales Charge 19
Systematic Withdrawal Program 20
Accounts with Low Balances 21
Exchanges for Shares of Other Funds 21
FIXED INCOME SECURITIES, INC. INFORMATION 21
- ------------------------------------------------------
Management of the Corporation 21
Board of Directors 21
Investment Adviser 22
Advisory Fees 22
Adviser's Background 22
Portfolio Manager's Background 22
Other Payments to Financial Institutions 22
Distribution of Fortress Shares 23
Distribution and Shareholder Services
Plans 23
Administration of the Fund 24
Administrative Services 24
Custodian 24
Transfer Agent and Dividend
Disbursing Agent 24
Independent Auditors 24
SHAREHOLDER INFORMATION 24
- ------------------------------------------------------
Voting Rights 24
TAX INFORMATION 25
- ------------------------------------------------------
Federal Income Tax 25
Pennsylvania Corporate and
Personal Property Taxes 25
PERFORMANCE INFORMATION 25
- ------------------------------------------------------
OTHER CLASSES OF SHARES 26
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--CLASS A SHARES 27
- ------------------------------------------------------
FINANCIAL STATEMENTS 29
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 41
- ------------------------------------------------------
ADDRESSES 42
- ------------------------------------------------------
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
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) (1)............................................. 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................. None
Exchange Fee................................................................................... None
ANNUAL FORTRESS SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2).............................................................. 0.31%
12b-1 Fee (after waiver) (3)................................................................... 0.11%
Total Other Expenses........................................................................... 0.58%
Shareholder Services Fee (after waiver) (4)................................................ 0.24%
Total Fortress Shares Operating Expenses (5).......................................... 1.00%
</TABLE>
(1) The contingent deferred sales charge assessed is 1.00% of the lesser of the
original purchase price or the net asset value of Shares redeemed within
four years of their purchase date. For a more complete description see
"Contingent Deferred Sales Charge."
(2) 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%.
(3) The maximum 12b-1 fee is 0.15%.
(4) The maximum shareholder services fee is 0.25%.
(5) The total Fortress Shares operating expenses in the table above are based on
expenses expected during the fiscal year ending November 30, 1995. The total
Fortress Shares operating expenses were 0.99% for the fiscal year ended
November 30, 1994 and were 1.12% 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 "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 5 years 10 years
<S> <C> <C> <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 $65 $131
You would pay the following expenses on the same investment, assuming no
redemption............................................................... $20 $42 $65 $131
</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
Fortress Shares of the Fund. The Fund also offers another class of shares called
Class A Shares. Class A Shares and Fortress Shares are subject to certain of the
same expenses. However, Class A Shares are subject to a 12b-1 fee of up to 0.50%
and may be subject to a contingent deferred sales charge]. See "Other Classes of
Shares."
LIMITED TERM FUND
FINANCIAL HIGHLIGHTS--FORTRESS SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 41.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
--------------------
1994 1993*
<S> <C> <C>
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NET ASSET VALUE, BEGINNING OF PERIOD $10.17 $10.24
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INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------
Net investment income 0.55 0.15
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Net realized and unrealized gain (loss) on investments (0.67) (0.07)
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Total from investment operations (0.12) 0.08
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LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.55) (0.15)
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Distributions from net realized gains on investment transactions (0.01) --
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Distributions in excess of net investment income (c) (0.01) --
- ----------------------------------------------------------------------------------------- --------- ---------
Total distributions (0.57) (0.15)
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NET ASSET VALUE, END OF PERIOD $ 9.48 $ 10.17
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TOTAL RETURN** (1.20%) 0.78%
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RATIOS TO AVERAGE NET ASSETS
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Expenses 0.99 (a) 1.00%(a)
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Net investment income 5.67 (a) 7.10%(a)
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Expense waiver/reimbursement (b) 0.13 (a) 0.39%(a)
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SUPPLEMENTAL DATA
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Net assets, end of period (000 omitted) $13,415 $7,230
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Portfolio turnover rate 63% 38%
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</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) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c)_ Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.]
(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 for the fiscal year ended November 30, 1994, 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 Strategic Income
Fund. With respect to the Fund, the Directors have established two classes of
shares known as Fortress Shares and Class A 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
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Fortress Shares is a member of a family of funds, collectively known as the
Fortress Investment Program. The other funds in the Program are:
.American Leaders Fund, Inc. (Fortress Shares only), providing growth of
capital and income through high-quality stocks;]
.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;
.Liberty Equity Income Fund, Inc. (Fortress Shares only), an equity fund
investing primarily in stocks which have a history of regular dividends;]
.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;
.Ohio Municipal Income Fund (Fortress Shares only), providing current
income exempt from federal regular income tax and Ohio personal income
taxes;
.Strategic Income Fund (Fortress Shares only), providing high current
income through investing in domestic corporate debt obligations, U.S.
government securities, and foreign government and corporate debt
obligations; and
.World Utility Fund (Fortress Shares only), providing total return by
investing primarily in securities issued by domestic and foreign
companies in the utilities industry.]
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, the Farm
Credit System, including the National Bank for Cooperatives, Farm Credit
Banks, and Banks for Cooperatives, 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 ("NRSRO") rated
Aaa, Aa, A, or Baa by Moody's Investors Service, Inc. ("Moody's"); AAA,
AA, A, or BBB by Standard & Poor's Ratings Group ("S&P"), 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 an
NRSRO, 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 an NRSRO. Such ratings
would include: Prime-1 or Prime-2 by Moody's, A-1 or A-2 by S&P, 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 S&P, or Baa by Moody's, or BBB by Fitch. Bonds rated BBB by S&P 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.
The prices of fixed income securities fluctuate inversely to the direction
of interest rates.
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 an NRSRO.
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 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 not to 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. There is the risk that when lending portfolio
securities, the securities may not be available to the Fund on a timely basis
and the Fund may, therefore, lose the opportunity to sell the securities at a
desirable price. In addition, in the event that a borrower of securities would
file for bankruptcy or become insolvent, disposition of the securities may be
delayed pending court action.
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. The seller's failure to complete the transaction may cause the Fund
to miss a price or yield considered to be advantageous. Settlement dates may be
a month or more after entering into, these transactions, and the market values
of the securities purchased may vary from purchase prices. Accordingly, the Fund
may pay more or less than the market value if the securities on the settlement
date. The Fund may dispose of a commitment prior to settlement if the adviser
deems it appropriate to do so. In addition, the Fund may enter into transactions
to sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
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.
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
- --------------------------------------------------------------------------------
The Fund's net asset value per Share fluctuates. The net asset value per Share
is determined by adding the interest of the Shares in the market value of all
securities and other assets of the Fund, subtracting the interest of the Shares
in the liabilities of the Fund and those attributable to the Shares, and
dividing the remainder by the total number of Shares outstanding. The net asset
value of the Shares may be different from that of Class A Shares 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.
The financial institution which maintains investor accounts with the Fund must
do so on a fully disclosed basis unless it accounts for share ownership periods
used in calculating the contingent deferred sales charge (see "Contingent
Deferred Sales Charge). In addition, advance payments made to financial
institutions may be subject to reclaim by the distributor for accounts
transferred to financial institutions which do not maintain investor accounts on
a fully disclosed basis and do not account for share ownership periods (see
"Other Payments to Financial Institutions").
BY WIRE. _To purchase by Federal Reserve wire, call the Fund before 1:00 p.m.
(Eastern time) to place an order. The order is considered received immediately.
Payment by federal funds must be received before 3:00 p.m. (Eastern time) that
day. Federal funds should be wired as follows: Federated Services Company, c/o
State Street Bank and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE;
For Credit to: Limited Term Fund Fortress ]Shares; Fund Number (this number can
be found on the account statement or by contacting the Fund); Group Number or
Order Number; Nominee or Institution Name; and ABA Number 011000028.
BY MAIL. To purchase by mail, send a check made payable to Limited Term Fund
Fortress ]Shares to: Federated Services Company, c/o State Street Bank and Trust
Company, ]P.O. Box 8604, Boston, Massachusetts 02266-8604. Orders by mail are
considered received when payment by check is converted into federal funds. This
is normally the next business day after the check is received.
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 load ]of 1% of the offering price (which is 1.01% of the
net amount invested). There is no sales load ]for purchases of $1 million or
more. In addition, no sales load ]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 LOAD]
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 load ]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
load].
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 load ]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 load ]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 load 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 load ]may be eliminated by signing a
letter of intent to that effect. This letter of intent includes a provision for
a sales load ]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 load], 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 load ]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, contact Federated Securities Corp. and consult a
tax adviser.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Shares may also be exchanged into certain other funds for which affiliates of
Federated Investors serves as the principal underwriter ("Federated Funds").
With the exception of exchanges into other Fortress Funds, such exchanges will
be subject to a contingent deferred sales charge and possibly a sales load.
Shareholders in certain Federated Funds may exchange their shares into the
Federated Funds for Fortress Shares.]
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, c/o State Street Bank and Trust Company, ]P.O. Box 8604,
Boston, Massachusetts 02266-8406. 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 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
"Other Payments to Financial Institutions."
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 load], 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.
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 load]. 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.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. _In addition to periodic payments to
financial institutions under the Distribution and Shareholder Services Plans,
Federated Securities Corp. will pay financial institutions an amount equal to 1%
of the net asset value of Shares purchased by their clients or customers at the
time of purchase (except for participants in the Liberty Family Retirement
Program). Furthermore, the Adviser or its affiliates may offer to pay a fee from
its own assets to financial institutions as financial assistance for providing
substantial marketing, sales, and operational support to the distributor. The
support may include participating in sales, educational and
training seminars at recreational-type facilities, providing sales literature,
and engineering computer software programs that emphasize the attributes of the
Fund. Such assistance will be predicated upon the amount of Shares the financial
institution sells or may sell, and/or upon the type and nature of sales or
marketing support furnished by the financial institution.
DISTRIBUTION OF FORTRESS SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS. _Under a distribution plan adopted
in accordance with Investment Company Act Rule 12b-1 (the "Distribution Plan"),
the Fund will pay to the distributor an amount, computed at an annual rate of
0.15 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 subject
to the Distribution Plan. The distributor may select Financial institutions such
as banks, fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales support services as agents for their clients or
customers.
The Distribution Plan is a compensation-type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amount or may earn a profit from future payments made by the Fund
under the Distribution Plan.
In addition, the Corporation has adopted a Shareholder Services Plan (the
"Services Plan") under which it may make payments up to 0.25 of 1% of the
average daily net asset value of the Shares to obtain certain personal services
for shareholders and the maintenance of shareholder accounts ("shareholder
services"). The Corporation has entered into a Shareholder Services Agreement
with Federated Shareholder Services, a subsidiary of Federated Investors, under
which Federated Shareholder Services will either perform shareholder services
directly or will select financial institutions to perform shareholder services.
Financial institutions will receive fees based upon shares owned by their
clients or customers. The schedules of such fees and the basis upon which such
fees will be paid will be determined from time to time by the Corporation and
Federated Shareholder Services.
The Glass-Steagall Act limits the ability of a depository institution (such as a
commercial bank or a savings and loan association) to become an underwriter or
distributor of securities. In the event the Glass-Steagall Act is deemed to
prohibit depository institutions from acting in the capacities described above
or should Congress relax current restrictions on depository institutions, the
Directors will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. _Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administratative Services provides these at an annual rate which
relates to the average aggregate daily net assets of all funds advised by
subsidiaries of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED FUNDS
<C> <S>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN. State Street Bank and Trust Company ("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.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, Boston, Massachusetts.
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
.the Fund is subject to the Pennsylvania corporate franchise tax; and
.the Fund is not subject to Pennsylvania corporate or personal taxes. Fund
shares may be subject to personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania to the extent that
the portfolio securities in the Fund would be subject to such taxes if
owned directly by residents of those jursidictions.]
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 contingent deferred sales charge 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 it performance to certain indices.
Total return will be calculated separately for Fortress Shares and Class A
Shares. Because Fortress Shares are subject to lower 12b-1 expenses, the yield
for Fortress Shares, for the same period, will exceed that of Class A Shares.
Because Class A Shares are not usually subject to a contingent deferred sales
charge, the total return for Class A Shares, for the same period, may exceed
that of Fortress Shares.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund currently offers Fortress Shares and Class A Shares. The Class A Shares
are sold subject to a front-end sales load ]of up to 1%, but without any
contingent deferred sales charge. Class A Shares are subject to a minimum
initial investment of $5,000.
The amount of dividends payable to Class A Shares will generally be less than
that of Fortress Shares by the difference between class expenses and
distribution and shareholder service expenses borne by shares of each respective
class.
The stated advisory fee is the same for both classes of shares.
LIMITED TERM FUND
FINANCIAL HIGHLIGHTS--CLASS A SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 41.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------------
1994 1993 1992*
<S> <C> <C> <C>
- ------------------------------------------------------------------------------ --------- --------- ---------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.17 $ 10.00 $ 10.01
- ------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------
Net investment income 0.53 0.63 0.519
- ------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.66) 0.19 (0.008)
- ------------------------------------------------------------------------------ --------- --------- ---------
Total from investment operations (0.13) 0.82 0.511
- ------------------------------------------------------------------------------ --------- --------- ---------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.53) (0.63) (0.519)
- ------------------------------------------------------------------------------
Distributions from net realized gains on investment transactions (0.01) -- --
- ------------------------------------------------------------------------------
Distributions in excess of net investment income (c) (0.02) (0.02) (0.002)
- ------------------------------------------------------------------------------ --------- --------- ---------
Total distributions (0.56) (0.65) (0.521)
- ------------------------------------------------------------------------------ --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 9.48 $ 10.17 $ 10.00
- ------------------------------------------------------------------------------ --------- --------- ---------
TOTAL RETURN** (1.30%) 8.19% 5.21%
- ------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------
Expenses 1.10 (a) 1.01% 0.67%(a)
- ------------------------------------------------------------------------------
Net investment income 5.52 (a) 5.75% 6.17%(a)
- ------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.39 (a) 0.49% 1.06%(a)
- ------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $178,771 $248,876 $57,225
- ------------------------------------------------------------------------------
Portfolio turnover rate 63% 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, the ]net investment income 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) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.]
(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 for the fiscal year ended November 30, 1994, which can be obtained
free of charge.
LIMITED TERM FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------- --------------------------------------------------------------------------------- ---------------
CORPORATE BONDS/ASSET BACKED SECURITIES--69.6%
- ------------------------------------------------------------------------------------------------
AUTOMOTIVE--7.2%
---------------------------------------------------------------------------------
$ 1,917,973 Capital Auto Receivables Asset Trust 1993-1, Class B, 5.85%,
2/17/98 $ 1,861,930
---------------------------------------------------------------------------------
5,000,000 Ford Credit Auto Loan Master Trust 1992-2, Class A, 7.375%, 4/15/99 4,911,200
---------------------------------------------------------------------------------
2,550,000 Navistar Financial Dealer Note 1990, Class A-3, 5.90%*, 1/15/2003 2,584,298
---------------------------------------------------------------------------------
4,437,616 Navistar Financial Owner Trust 1994-B, Class-B, 6.63%, 1/15/2000 4,301,714
---------------------------------------------------------------------------------
90,314 Select Auto Receivables Trust 1991-5, 6.25%, 11/15/96 89,833
--------------------------------------------------------------------------------- ---------------
Total 13,748,975
--------------------------------------------------------------------------------- ---------------
BANKING--23.7%
---------------------------------------------------------------------------------
15,010,000 Chase Manhattan Corp., FRN 5.25%*, 12/05/2009 14,447,125
---------------------------------------------------------------------------------
5,000,000 Chase Manhattan Credit Card Master Trust 1992-1A, 7.40%,
5/15/2000 4,903,550
---------------------------------------------------------------------------------
3,000,000 Chase Manhattan Credit Card Trust 1991-1, Class A, 8.75%,
8/15/99 3,038,280
---------------------------------------------------------------------------------
5,000,000 Chemical Bank, FRN 5.75%*, 7/29/2003 4,875,000
---------------------------------------------------------------------------------
3,615,000 Citicorp, 6.00%*, 6/29/2005 3,325,800
---------------------------------------------------------------------------------
4,000,000 First USA Credit Card Master Trust 1992-1, Class B, 5.80%, 6/15/98 3,828,720
---------------------------------------------------------------------------------
5,900,000 Societe Generale, 5.13%*, 8/30/2002 5,546,000
---------------------------------------------------------------------------------
6,000,000 Toronto Dominion Bank Sub. Note, 7.88%, 8/15/2004 5,630,100
--------------------------------------------------------------------------------- ---------------
Total 45,594,575
--------------------------------------------------------------------------------- ---------------
CONSUMER PRODUCTS--1.6%
---------------------------------------------------------------------------------
2,000,000 (a)Encyclopedia Britannica, Dom. Funding. Corp. Series 1994-1, 6.76%, 3/15/2002 1,913,750
---------------------------------------------------------------------------------
1,053,663 John Deere Owner Trust 1992-A, Class E, 6.25%*, 12/29/99 1,059,331
--------------------------------------------------------------------------------- ---------------
Total 2,973,081
--------------------------------------------------------------------------------- ---------------
</TABLE>
LIMITED TERM FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------- --------------------------------------------------------------------------------- ---------------
CORPORATE BONDS/ASSET BACKED SECURITIES--CONTINUED
- ------------------------------------------------------------------------------------------------
FINANCE--RETAIL--7.7%
---------------------------------------------------------------------------------
$ 5,000,000 Discover Card Trust 1992-B, Class A, 6.80%, 6/16/2000 $ 4,819,700
---------------------------------------------------------------------------------
3,000,000 Discover Card Trust 1991-B, Class B, 8.85%, 7/15/98 3,039,420
---------------------------------------------------------------------------------
7,000,000 Household Private Label Credit Card Trust 1994-1, Class B, 7.55%,
5/20/97 6,956,250
--------------------------------------------------------------------------------- ---------------
Total 14,815,370
--------------------------------------------------------------------------------- ---------------
HOME EQUITY RECEIVABLES--17.1%
---------------------------------------------------------------------------------
859,625 Advanta Home Equity Loan Trust 1991-1, Class A, 9.00%, 2/25/2006 859,359
---------------------------------------------------------------------------------
2,204,168 Advanta Home Equity Loan Trust 1992-4, Class A-2, 7.15%,
12/25/2008 2,131,207
---------------------------------------------------------------------------------
500,000 Capital Home Equity Loan Trust 1991-1 Class B, 5.60%*, 11/14/2011 499,225
---------------------------------------------------------------------------------
4,852,531 (a)Conti Mortgage Home Equity Loan Trust 1993-3, Class A-2, 5.54%,
7/15/2020 4,460,592
---------------------------------------------------------------------------------
2,000,000 (a)Conti Mortgage Home Equity Loan Trust 1994-1, Class A-3, 6.07%, 11/15/2013 1,867,500
---------------------------------------------------------------------------------
4,544,613 (a)Conti Mortgage Home Equity Loan Trust 1994-1, Class A-5, 6.12%,
1/15/2024 4,285,348
---------------------------------------------------------------------------------
771,829 Fleet Finance Home Equity Trust 1991-2, Class A, 6.70%, 10/16/2006 755,404
---------------------------------------------------------------------------------
4,624,180 Merrill Lynch Home Equity Loan Trust 1991-2, Class B, 5.81%*,
10/15/2006 4,656,087
---------------------------------------------------------------------------------
2,623,380 Merrill Lynch Home Equity Loan Trust 1993-1, Class B, 5.94%*,
2/15/2003 2,650,742
---------------------------------------------------------------------------------
21,526 Merrill Lynch Mortgage Investments 1991-A, Class B, 9.25%,
5/15/2011 21,956
---------------------------------------------------------------------------------
1,096,943 TMS Home Equity Loan Trust 1992-A, Class A, 6.95%, 12/15/2007 1,048,283
---------------------------------------------------------------------------------
936,407 TMS Home Equity Loan Trust 1992-B, Class A, 6.90%, 7/15/2007 893,229
---------------------------------------------------------------------------------
5,010,351 TMS Home Equity Loan Trust 1992-D, Class A-3, 7.55%, 1/15/2018 4,823,064
---------------------------------------------------------------------------------
4,213,871 TMS Home Equity Loan Trust 1993-C, Class A-3, 5.75%, 10/15/2022 3,947,891
--------------------------------------------------------------------------------- ---------------
Total 32,899,887
--------------------------------------------------------------------------------- ---------------
</TABLE>
LIMITED TERM FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------- --------------------------------------------------------------------------------- ---------------
CORPORATE BONDS/ASSET BACKED SECURITIES--CONTINUED
- ------------------------------------------------------------------------------------------------
INSURANCE--4.0%
---------------------------------------------------------------------------------
$ 8,000,000 USF & G Corp. Note, 8.375%, 6/15/2001 $ 7,770,960
--------------------------------------------------------------------------------- ---------------
LEASING--0.2%
---------------------------------------------------------------------------------
417,068 (a)Concord Leasing Grantor Trust 1992-C, Class A-1, 5.31%, 1/20/99 405,432
--------------------------------------------------------------------------------- ---------------
MANUFACTURED HOUSING RECEIVABLES--2.6%
---------------------------------------------------------------------------------
5,709,908 Cit Group Manufactured Housing PTC 1993-1, Class B, 6.85%,
6/15/2018 5,053,783
--------------------------------------------------------------------------------- ---------------
MARINE RECEIVABLES--2.5%
---------------------------------------------------------------------------------
4,320,054 CBNJ Boat Loan Trust, Series 1994-1, 6.89%, 4/17/2012 4,182,353
---------------------------------------------------------------------------------
677,083 (a)CFC-14 Grantor Trust, Class A, 7.15%, 11/15/2006 660,368
--------------------------------------------------------------------------------- ---------------
Total 4,842,721
--------------------------------------------------------------------------------- ---------------
PUBLISHING--3.0%
---------------------------------------------------------------------------------
6,000,000 News America Holdings, Inc. 7.50%, 3/1/2000 5,650,800
--------------------------------------------------------------------------------- ---------------
TOTAL CORPORATE BONDS/ASSET BACKED SECURITIES
(IDENTIFIED COST, $139,583,793) 133,755,584
--------------------------------------------------------------------------------- ---------------
GOVERNMENT AGENCIES--0.3%
- ------------------------------------------------------------------------------------------------
500,000 Student Loan Marketing Association, FRN, 6.25%*, 5/8/95
(IDENTIFIED COST, $500,000) 501,250
--------------------------------------------------------------------------------- ---------------
MORTGAGE BACKED SECURITIES--16.4%
- ------------------------------------------------------------------------------------------------
GOVERNMENT AGENCY--MORTGAGE BACKED SECURITIES--1.9%
---------------------------------------------------------------------------------
1,291,585 Federal Home Loan Mortgage Corp., Pool 606116, 6.46%*, 9/1/2019 1,296,429
---------------------------------------------------------------------------------
1,490,206 Federal Home Loan Mortgage Corp., Pool 785167, 7.33%*, 12/1/2018 1,510,890
---------------------------------------------------------------------------------
337,929 Federal Home Loan Mortgage Corp., Series 1132, Glass G, 8.00%,
1/15/2005 339,216
---------------------------------------------------------------------------------
184,453 Federal National Mortgage Association Pool 087462, 6.99%*,
11/1/2017 188,599
---------------------------------------------------------------------------------
386,544 Federal National Mortgage Association Pool 112514, 5.65%*,
12/1/2020 395,724
--------------------------------------------------------------------------------- ---------------
Total 3,730,858
--------------------------------------------------------------------------------- ---------------
</TABLE>
LIMITED TERM FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------- --------------------------------------------------------------------------------- ---------------
MORTGAGE BACKED SECURITIES--CONTINUED
- ------------------------------------------------------------------------------------------------
NON-GOVERNMENT AGENCY--MORTGAGE BACKED SECURITIES--14.5%
---------------------------------------------------------------------------------
$ 3,090,000 Chemical Mortgage Securities, Inc. 1993-1, Class A-4, 7.45%,
7/25/2020 $ 2,823,797
---------------------------------------------------------------------------------
1,275,390 Citicorp Mortgage Securities, Inc., Series 1992-18, Class A-1, 6.01%*,
10/25/2022 1,278,578
---------------------------------------------------------------------------------
10,200,000 Citicorp Mortgage Securities, Inc., Series 1993-12, Class A-2, 6.50%,
6/25/2021 8,492,724
---------------------------------------------------------------------------------
2,589,517 DLJ Mortgage Acceptance Corp., 1993-Q15, Class A-1, 5.61%*,
11/25/2023 2,546,609
---------------------------------------------------------------------------------
6,712,231 GCA REMIC Trust V 1993-5, Class B, 5.27%*, 5/1/2020 6,292,716
---------------------------------------------------------------------------------
1,185,137 GMBS, Inc., 1990-5, Class A, 6.62%*, 12/26/2020 1,155,212
---------------------------------------------------------------------------------
1,935,000 (a)Prudential Home Mortgage 1992-A, Class B1-2, 7.90%, 11/25/2022 1,788,095
---------------------------------------------------------------------------------
3,270,000 RTC 1992-15, Class B-3, 10.00%, 7/25/2027 3,347,139
--------------------------------------------------------------------------------- ---------------
Total 27,724,870
--------------------------------------------------------------------------------- ---------------
TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST, $32,246,535) 31,455,728
--------------------------------------------------------------------------------- ---------------
**REPURCHASE AGREEMENT--3.1%
- ------------------------------------------------------------------------------------------------
6,023,000 J.P. Morgan Securities, Inc., 5.77%, dated 11/30/94, due 12/1/94 6,023,000
--------------------------------------------------------------------------------- ---------------
TOTAL REPURCHASE AGREEMENT (AT AMORTIZED COST) 6,023,000
--------------------------------------------------------------------------------- ---------------
TOTAL INVESTMENTS (IDENTIFIED COST, $178,353,328) $ 171,735,562+
--------------------------------------------------------------------------------- ---------------
</TABLE>
(a) Denotes restricted securities which are subject to resale under Federal
Securities laws.
+The cost of investments for federal tax purposes amounts to $178,393,664. The
net unrealized depreciation on a federal tax cost basis amounts to $6,658,102
and is comprised of $266,518 appreciation and $6,924,620 depreciation at
November 30, 1994.
* Current rate shown.
** 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 are through participation in a joint
account with other Federated funds.
LIMITED TERM FUND
- --------------------------------------------------------------------------------
Note: The categories of investments are shown as a percentage of net assets
($192,185,862) at November 30, 1994.
The following abbreviations are used in this portfolio:
FRN--Floating Rate Note
PTC--Pass Through Certificate
REMIC--Real Estate Mortgage Investment Conduit
(See Notes which are an integral part of the Financial Statements)
LIMITED TERM FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost; $178,353,328 and tax cost; $178,393,664) $ 171,735,562
- ---------------------------------------------------------------------------------------------------
Cash 2,113
- ---------------------------------------------------------------------------------------------------
Receivable for investments sold 36,775,261
- ---------------------------------------------------------------------------------------------------
Interest receivable 1,786,460
- ---------------------------------------------------------------------------------------------------
Receivable for capital stock sold 184,427
- ---------------------------------------------------------------------------------------------------
Deferred expenses 86,272
- --------------------------------------------------------------------------------------------------- -------------
Total assets 210,570,095
- ---------------------------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------------------------------------------
Payable to affiliate for investments purchased $ 16,024,650
- -------------------------------------------------------------------------------------
Payable for capital stock redeemed 1,937,250
- -------------------------------------------------------------------------------------
Dividends payable 287,078
- -------------------------------------------------------------------------------------
Accrued expenses 135,255
- ------------------------------------------------------------------------------------- ------------
Total liabilities 18,384,233
- --------------------------------------------------------------------------------------------------- -------------
NET ASSETS for 20,263,603 shares of capital stock outstanding $ 192,185,862
- --------------------------------------------------------------------------------------------------- -------------
NET ASSETS CONSIST OF:
- ---------------------------------------------------------------------------------------------------
Paid-in capital $ 209,112,791
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investments (6,617,766)
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (9,647,720)
- ---------------------------------------------------------------------------------------------------
Accumulated distributions in excess of net investment income (661,443)
- --------------------------------------------------------------------------------------------------- -------------
Total Net Assets $ 192,185,862
- --------------------------------------------------------------------------------------------------- -------------
NET ASSET VALUE:
- ---------------------------------------------------------------------------------------------------
Class A Shares ($178,771,160 / 18,849,195 shares of capital stock outstanding) $9.48
- --------------------------------------------------------------------------------------------------- -------------
Fortress Shares ($13,414,702 / 1,414,408 shares of capital stock outstanding) $9.48
- --------------------------------------------------------------------------------------------------- -------------
OFFERING PRICE PER SHARE:
- ---------------------------------------------------------------------------------------------------
Class A Shares (100/99 of $9.48)* $9.58
- --------------------------------------------------------------------------------------------------- -------------
Fortress Shares (100/99 of $9.48)* $9.58
- --------------------------------------------------------------------------------------------------- -------------
REDEMPTION PROCEEDS PER SHARE:
- ---------------------------------------------------------------------------------------------------
Fortress Shares (99/100 of $9.48)** $9.39
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
* See "What Shares Cost" in the prospectus.
** See "Contingent Deferred Sales Charge" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
LIMITED TERM FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------------------------------------
Interest income $ 15,876,379
- --------------------------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------------------------------------
Investment advisory fee $ 959,307
- ------------------------------------------------------------------------------------
Directors' fees 13,149
- ------------------------------------------------------------------------------------
Administrative personnel and services fee 232,679
- ------------------------------------------------------------------------------------
Custodian and portfolio accounting fees 112,744
- ------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 206,297
- ------------------------------------------------------------------------------------
Registration fees 86,966
- ------------------------------------------------------------------------------------
Audting fees 16,364
- ------------------------------------------------------------------------------------
Legal fees 12,915
- ------------------------------------------------------------------------------------
Printing and postage 79,620
- ------------------------------------------------------------------------------------
Distribution services fee--Class A Shares 1,131,333
- ------------------------------------------------------------------------------------
Distribution services fee--Fortress Shares 20,340
- ------------------------------------------------------------------------------------
Insurance premiums 8,616
- ------------------------------------------------------------------------------------
Shareholder services fee--Class A Shares 565,666
- ------------------------------------------------------------------------------------
Shareholder services fee--Fortress Shares 31,469
- ------------------------------------------------------------------------------------
Taxes 15,973
- ------------------------------------------------------------------------------------
Miscellaneous 33,510
- ------------------------------------------------------------------------------------ ------------
Total expenses 3,526,948
- ------------------------------------------------------------------------------------
Deduct--
- ------------------------------------------------------------------------------------
Waiver of investment advisory fee $ 322,154
- ------------------------------------------------------------------------
Waiver of distribution services fee--Class A Shares 581,371 903,525
- ------------------------------------------------------------------------ ---------- ------------
Net expenses 2,623,423
- -------------------------------------------------------------------------------------------------- --------------
Net investment income 13,252,956
- -------------------------------------------------------------------------------------------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- --------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (9,647,720)
- --------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (6,903,560)
- -------------------------------------------------------------------------------------------------- --------------
Net realized and unrealized gain (loss) on investments (16,551,280)
- -------------------------------------------------------------------------------------------------- --------------
Change in net assets resulting from operations $ (3,298,324)
- -------------------------------------------------------------------------------------------------- --------------
</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>
1994 1993
INCREASE (DECREASE) IN NET ASSETS:
- --------------------------------------------------------------------------------
OPERATIONS--
- --------------------------------------------------------------------------------
Net investment income $ 13,252,956 $ 8,178,060
- --------------------------------------------------------------------------------
Net realized gain (loss) on investments ($9,607,384 net loss and
$369,906 net gain as computed for federal tax purposes) (9,647,720) 369,906
- --------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) on investments (6,903,560) 785,383
- -------------------------------------------------------------------------------- --------------- --------------
Change in net assets resulting from operations (3,298,324) 9,333,349
- -------------------------------------------------------------------------------- --------------- --------------
NET EQUALIZATION CREDITS-- 7,025 78,255
- -------------------------------------------------------------------------------- --------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS--
- --------------------------------------------------------------------------------
Dividends to shareholders from net investment income:
- --------------------------------------------------------------------------------
Class A Shares (12,483,582) (8,215,600)
- --------------------------------------------------------------------------------
Fortress Shares (776,400) (36,477)
- --------------------------------------------------------------------------------
Distributions in excess of net investment income
- --------------------------------------------------------------------------------
Class A Shares (97,229) (572,361)
- --------------------------------------------------------------------------------
Fortress Shares (4,798) --
- --------------------------------------------------------------------------------
Distributions to shareholders from net realized gains on investment transactions
- --------------------------------------------------------------------------------
Class A Shares (356,098) --
- --------------------------------------------------------------------------------
Fortress Shares (12,247) --
- -------------------------------------------------------------------------------- --------------- --------------
Change in net assets resulting from distributions
to shareholders (13,730,354) (8,824,438)
- -------------------------------------------------------------------------------- --------------- --------------
CAPITAL STOCK TRANSACTIONS--
- --------------------------------------------------------------------------------
Proceeds from sale of shares 82,920,358 240,663,285
- --------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
dividends declared 9,662,553 6,295,582
- --------------------------------------------------------------------------------
Cost of shares redeemed (139,481,244) (48,664,777)
- -------------------------------------------------------------------------------- --------------- --------------
Change in net assets resulting from capital stock transactions (46,898,333) 198,294,090
- -------------------------------------------------------------------------------- --------------- --------------
Change in net assets (63,919,986) 198,881,256
- --------------------------------------------------------------------------------
NET ASSETS:
- --------------------------------------------------------------------------------
Beginning of period 256,105,848 57,224,592
- -------------------------------------------------------------------------------- --------------- --------------
End of period $ 192,185,862 $ 256,105,848
- -------------------------------------------------------------------------------- --------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
LIMITED TERM FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Fixed Income Securities, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end
management investment company. The Corporation consists of five diversified
investment portfolios. The financial statements included herein are only those
of Limited Term Fund (the "Fund"). The financial statements of the other
portfolios 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. The Fund offers two classes; Class A Shares and Fortress Shares.
As of October 17, 1994, Multi-State Municipal Income Fund no longer accepted
purchases. It is anticipated that Multi-State Municipal Income Fund's
liquidation will occur in 1995.
During the fiscal year ended November 30, 1994, the Corporation offered five
portfolios (Limited Term Fund, Limited Term Municipal Fund, Strategic Income
Fund, Limited Maturity Government Fund, and Multi-State Municipal Income Fund).
The Board of Directors approved the liquidation of Limited Maturity Government
Fund, and as of December 23, 1994 was no longer offered.
(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. These
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--U.S. government obligations are generally valued at
the mean between the over-the-counter bid and asked prices as furnished by
an independent pricing service. Corporate bonds (and other fixed-income and
asset backed securities) are valued at the last sale price reported on
national securities exchanges on that day, if available. Otherwise,
corporate bonds (and other fixed-income and asset backed securities) and
short-term obligations are valued at the prices provided by an independent
pricing service. Short-term securities with remaining maturities of sixty
days or less at the time of purchase may be stated 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
LIMITED TERM FUND
- --------------------------------------------------------------------------------
collateral to ensure the value of collateral at least equals the principal
amount of the repurchase agreement, including accrued interest.
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 Board of 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. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
as required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its taxable income.
Accordingly, no provisions for federal tax are necessary. At November 30,
1994, the Fund, for federal tax purposes, had a capital loss carryforward
of $9,607,384, which will reduce the Fund's taxable income arising from
future net realized gain on investments, if any, to the extent permitted by
the Code, and thus will reduce the amount of the distributions to
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 2002, ($9,607,384).
E. EQUALIZATION--The Fund follows the accounting practice known as
equalization by which a portion of the proceeds from sales and costs of
redemptions of capital stock equivalent, on a per share basis, to the
amount of undistributed net investment income on the date of the
transaction is credited or charged to undistributed net investment income.
As a result, undistributed net investment income per share is unaffected by
sales or redemptions of capital stock.
F. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date 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.
G. 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 its shares, have been deferred and are being
amortized using the straight-line method not to exceed a period of five
years from the Fund's commencement date.
H. RESTRICTED SECURITIES--Restricted securities are securities that may only
be resold upon registration under Federal securities laws or in
transactions exempt from such registration. In some
LIMITED TERM FUND
- --------------------------------------------------------------------------------
cases, the issuer of restricted securities has agreed to register such
securities for resale, at the issuer's expense either upon demand by the
Fund or in connection with another registered offering of the securities.
Many restricted securities may be resold in the secondary market in
transactions exempt from registration.
Such restricted securities may be determined to be liquid under criteria
established by the Board of Directors. The Fund will not incur any
registration costs upon such resales. The Fund's restricted securities are
valued at the price provided by dealers in the secondary market or, if no
market prices are available, at the fair value as determined by the Fund's
pricing committee. Additional information on each restricted security held
at November 30, 1994 is as follows:
<TABLE>
<CAPTION>
ACQUISITION ACQUISITION
SECURITY DATE COST
<S> <C> <C>
Encyclopedia Britannica Dom. Funding Corp. 3/28/94 $ 2,000,000
Conti Mortgage Home Equity Loan Trust 1993-3, Class A-2 9/29/93 4,852,073
Conti Mortgage Home Equity Loan Trust 1994-1, Class A-3 2/25/94 1,999,719
Conti Mortgage Home Equity Loan Trust 1994-1, Class A-5 2/25/94 4,543,638
Concord Leasing Grantor Trust 1992-C, Class A-1 9/8/92 415,124
CFC-14 Grantor Trust, Class A 5/28/92 690,772
Prudential Home Mortgage 1992-A, Class B1-1 11/24/92 1,899,928
</TABLE>
I. RECLASSIFICATIONS--During the year ended November 30, 1994, the Fund
adopted Statement of Position 93-2, Determination, Disclosure, and
Financial Statement Presentation of Income, Capital Gain, and Return of
Capital Distributions by Investment Companies. Accordingly, permanent book
and tax differences have been reclassified to paid-in capital. The Fund
reclassified $19,134 and $18,992 from accumulated net realized gain (loss)
and undistributed net investment income, respectively to paid-in capital in
accordance with SOP 93-2. Net investment income, net realized gains, and
net assets were not affected by this change.
J. OTHER--Investment transactions are accounted for on the trade date.
(3) CAPITAL STOCK
At November 30, 1994, there were 10,000,000,000 shares of $0.001 par value
capital stock authorized for the Corporation. 2,000,000,000 shares have been
designated for the Fund. Of these shares 1,000,000,000 have been designated as
Class A Shares and 1,000,000,000 as Fortress Shares of the Fund. Transactions in
capital stock were as follows:
LIMITED TERM FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1994 1993
------------------------------ -----------------------------
CLASS A SHARES SHARES DOLLARS SHARES DOLLARS
<S> <C> <C> <C> <C>
- -------------------------------------------------- ------------- --------------- ------------ ---------------
Shares sold 6,954,884 $ 69,748,905 22,870,569 $ 233,155,755
- --------------------------------------------------
Shares issued to shareholders
in payment of dividends declared 935,518 9,190,553 621,720 6,275,708
- --------------------------------------------------
Shares redeemed (13,505,266) (133,005,809) (4,748,516) (48,395,745)
- -------------------------------------------------- ------------- --------------- ------------ ---------------
Net change resulting from
Class A Share transactions (5,614,864) ($ 54,066,351) 18,743,773 $ 191,035,718
- -------------------------------------------------- ------------- --------------- ------------ ---------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1994 1993*
--------------------------- -----------------------------
FORTRESS SHARES SHARES DOLLARS SHARES DOLLARS
<S> <C> <C> <C> <C>
- ----------------------------------------------------- ----------- -------------- ------------ ---------------
Shares sold 1,322,242 $ 13,171,453 735,070 $ 7,507,530
- -----------------------------------------------------
Shares issued to shareholders
in payment of dividends declared 48,336 472,000 1,947 19,874
- -----------------------------------------------------
Shares redeemed (666,787) (6,475,435) (26,400) (269,032)
- ----------------------------------------------------- ----------- -------------- ------------ ---------------
Net change resulting from
Fortress Share transactions 703,791 $ 7,168,018 710,617 $ 7,258,372
- ----------------------------------------------------- ----------- -------------- ------------ ---------------
Net change resulting from
Fund Share transactions (4,911,073) ($ 46,898,333) 19,454,390 $ 198,294,090
- ----------------------------------------------------- ----------- -------------- ------------ ---------------
</TABLE>
* For the period from August 31, (date of initial public offering) to November
30, 1993.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--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 may voluntarily
choose to waive a portion of its fee. The Adviser can modify or terminate this
voluntary waiver at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
administrative personnel and services. Prior to March 1, 1994, these services
were provided at approximate cost. Effective March 1, 1994, the FAS fee is based
on the level of average aggregate daily net assets of all funds advised by
subsidiaries of Federated Investors for the period. The administrative fee
received during the period of the Administrative Services Agreement shall be at
least $125,000 per portfolio and $30,000 per each additional class of shares.
LIMITED TERM FUND
- --------------------------------------------------------------------------------
DISTRIBUTION AND SHAREHOLDER SERVICES FEE--The Fund has adopted a Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the
Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund to finance activities intended to
result in the sale of the Fund's Class A Shares and Fortress Shares. The Plan
provides that the Fund may incur distribution expenses up to .50 and .15,
respectively, of 1% of the average daily net assets of the Class A Shares and
Fortress Shares, respectively, annually, to compensate FSC.
Under the terms of a Shareholder Services Agreement with FSC, the Fund will pay
FSC up to .25 of 1% of average daily net assets of the Fund for the period. This
fee is to obtain certain personal services for shareholders and to maintain
shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("FServ") serves as transfer and dividend disbursing agent for the Fund. The
FServ fee is based on the size, type, and number of accounts and transactions
made by shareholders.
ORGANIZATIONAL EXPENSES--Organizational expenses $66,620 and start-up
administrative service expenses $65,386 were borne initially be FAS. The Fund
has agreed to reimburse the Adviser for the organizational expenses and start-up
administrative expenses during the five year period following December 24, 1991
(date the Fund first became effective). For the year ended November 30, 1994,
the Fund paid $13,324 and $24,425, respectively, pursuant to this agreement.
INTERFUND TRANSACTIONS--During the year ended November 30, 1994, the Fund
engaged in purchase and sale transactions with other affiliated funds at current
value pursuant to Rule 17a-7 amounting to $35,037,659 and $55,313,811,
respectively.
Certain of the Officers and Directors of the Corporation are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended November 30, 1994 were as follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------
PURCHASES $ 145,571,702
- -------------------------------------------------------------------------------------------------- --------------
SALES $ 194,024,945
- -------------------------------------------------------------------------------------------------- --------------
</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, 1994, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the years in the two year period then ended, and the financial
highlights (see pages 2 and 27 of the prospectus) for each of the years in the
three year period then ended. 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, 1994 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, 1994, the results of its operations, the changes in its net
assets, and its financial highlights in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
January 13, 1995
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
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 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, 1995
[LOGO] FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER [RECYCLED GRAPHIC]
PITTSBURGH, PA 15222-3779
338319304
3070701A-FS (1/95)
Limited Term Fund
Class A Shares
Fortress Shares
(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 Class A Shares and Fortress
Shares of Limited Term Fund (the "Fund") dated January 31, 1995.
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, 1995
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of
FEDERATED INVESTORS
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 2
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
The Funds 10
Fund Ownership 10
Officers and Directors
Compensation 11
Director Liability 12
Investment Advisory Services 12
Adviser to the Fund 12
Advisory Fees 12
Administrative Services 12
Transfer Agent and Dividend
Disbursing Agent 12
Purchasing Shares 13
Distribution and Shareholder
Services Plans 13
Purchases by Sales
Representatives, Fund
Directors, and Employees 14
Determining Net Asset Value 14
Determining Market Value of
Securities 14
Exchange Privilege 14
Reduced Sales Load 14
Requirements for Exchange 15
Tax Consequences 15
Making an Exchange 15
Redeeming Shares 15
Redemption in Kind 15
Tax Status 15
The Fund's Tax Status 15
Shareholders' Tax Status 16
Total Return 16
Yield 16
Performance Comparisons 16
Appendix 18
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 ("NRSRO") rated Aaa, Aa, or A
by Moody's Investors Service, Inc. ("Moody's"), AAA, AA, or A by
Standard & Poor's Ratings Group ("S & P"), or AAA, AA, or A by Fitch
Investors Service, Inc. ("Fitch"). The investment portfolio includes the
following securities:
o corporate debt securities rated within the four highest categories
by an NRSRO, including bonds, notes, and indentures;
o asset-backed securities;
o 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
o 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:
Duration = PVCF(1) PVCF2(2) PVCF3(3)
PVCFn(n)
________ +________ +_________ + . . .
. . . . + _________
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:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and
the number of other potential buyers;
o dealer undertakings to make a market in the security; and
o 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.
Privately Issued Mortgage-Related Securities
Privately issued mortgage-related securities generally represent
an ownership interest in federal agency mortgage pass-through
securities such as those issued by Government National Mortgage
Association and non agency mortgage pass-through securities. The
terms and characteristics of the mortgage instruments may vary
among pass-through mortgage loan pools. The market for such
mortgage-related securities has expanded considerably since its
inception. The size of the primary issuance market and the active
participation in the secondary market by securities dealers and
other investors makes both government-related and non government-
related pools highly liquid.
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 rates for the fiscal years ended November 30, 1994 and 1993
were 63% and 38%, respectively.
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:
o 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
o 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
Officers and Directors. Officers and Directors are listed with their
addresses, principal occupations, and present positions, including those
with Federated Advisers, its affiliates, and the "Funds" described in
the Statement of Additional Information.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Chairman and Director
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life
and Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, Vice President of the Company.
Thomas G. Bigley
28th Floor, One Oxford Center
Pittsburgh, PA
Director
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee, or Managing General Partner
of the Funds; formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Director
President, Investment Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors; President, Northgate
Village Development Corporation; Partner or Trustee in private real
estate ventures in Southwest Florida; Director, Trustee, or Managing
General Partner of the Funds; formerly, President, Naples Property
Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Director
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Director,
Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Director
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; Professor of Medicine and Trustee, University of Pittsburgh;
Director of Corporate Health, University of Pittsburgh Medical Center;
Director, Trustee, or Managing General Partner of the Funds.
Richard B. Fisher *
Federated Investors Tower
Pittsburgh, PA
President and Director
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.
Edward L. Flaherty, Jr.@
Two Gateway Center
Pittsburgh, PA
Director
Attorney-at-law; Partner, Henny, Koehuba, Meyer & Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.
Edward C. Gonzales *
Federated Investors Tower
Pittsburgh, PA
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
Peter E. Madden
225 Franklin Street
Boston, MA
Director
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds; formerly,
President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Two Gateway Center, Suite 674
Pittsburgh, PA
Director
Attorney-at-law; Partner, Henny, Koehuba, Meyer & Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Director
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Director
Public relations/marketing consultant; Director, Trustee, or Managing
General Partner of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Vice President
President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and Director,
Federated Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; 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 Company.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.
* This Director is deemed to be an "interested person" as defined
in the Investment Company Act of 1940, as amended.
@ Member of the 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:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Cash Management Trust; Automated Government Money Trust;
California Municipal Cash Trust; Cash Trust Series II; Cash Trust
Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport
Cash Trust; 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 Institutional
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; International Series, Inc.; Investment Series Funds,
Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.;
Liberty U.S. Government Money Market Trust; Liberty Term Trust, Inc. -
1999; Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed Series
Trust; The Medalist Funds: Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income
Trust; Newport Funds; New York Municipal Cash Trust; 111 Corcoran Funds;
Peachtree Funds; The Planters Funds; RIMCO Monument Funds; The Shawmut
Funds; Short-Term Municipal Trust; Star Funds; The Starburst Funds; The
Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst Funds; Targeted
Duration Trust; Tax-Free Instruments Trust; Trademark Funds; Trust for
Financial Institutions; Trust For Government Cash Reserves; Trust for
Short-Term U.S. Government Securities; Trust for U.S. Treasury
Obligations; World Investment Series, Inc.
Fund Ownership
Officers and Directors own less than 1% of the outstanding Fortress
Shares and Class A 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 10, 1995 for Fortress Shares: Merrill Lynch Pierce Fenner
& Smith, Jacksonville, Florida, acting in various capacities for
numerous accounts owned, of record approximately 215,777 shares (16.51%)
and Legg Mason Trust Company, Baltimore, Maryland, acting in various
capacities for numerous accounts owned, of record approximately 78,125
shares (5.98%).
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 10, 1995, for Class A Shares: Merrill Lynch Pierce Fenner
& Smith, Jacksonville, Florida, acting in various capacities for
numerous accounts owned, of record approximately 1,666,674 shares
(9.32%).
Officers and Directors Compensation
NAME , AGGREGATE TOTAL COMPENSATION
PAID
POSITION WITH COMPENSATION FROM TO DIRECTORS FROM
CORPORATION *CORPORATION CORPORATION AND FUND
COMPLEX
John F. Donahue,
Chairman and Director $ -0- $ -0- for the
Corporation and
69 investment
companies
Thomas G. Bigley,
Director $ 131.00 $ 24,991 for the
Corporation and
50 investment
companies
John T. Conroy, Jr.,
Director $ 1,501.75 $ 136,100 for the
Corporation and
65 investment
companies
William J. Copeland,
Director $ 1,501.75 $ 136,100 for the
Corporation and
65 investment
companies
James E. Dowd,
Director $ 1,501.75 $ 136,100 for the
Corporation and
65 investment
companies
Lawrence D. Ellis, M.D.,
Director $ 1,362.50 $ 123,600 for the
Corporation and
65 investment
companies
Richard B. Fisher,
President and Director $ -0- $ -0- for the
Corporation and
9 investment
companies
Edward L. Flaherty, Jr.,
Director $ 1,501.75 $ 136,100 for the
Corporation and
65 investment
companies
Peter E. Madden,
Director $ 1,153.50 $ 104,880 for the
Corporation and
65 investment
companies
Gregor F. Meyer,
Director $ 1,362.50 $ 123,600 for the
Corporation and
65 investment
companies
Wesley W. Posvar,
Director $ 1,362.50 $ 123,600 for the
Corporation and
65 investment
companies
Marjorie P. Smuts,
Director $ 1,362.50 $ 123,600 for the
Corporation and
65 investment
companies
* The aggregate compensation is provided for the Corporation which is
comprised of 4 portfolios.
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. 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. For the fiscal years ended
November 30, 1994, 1993, and for the period from January 13, 1992 (date
of initial public investment) the Fund's Adviser earned $959,307,
$88,068, and $574,212, respectively, of which $322,154, $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.
Administrative Services
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. For the fiscal years ended November 30,
1994, November 30, 1993, and for the period from January 13, 1992 (date
of initial public investment) to November 30, 1992, Federated
Administrative Services, Inc., the Fund's former administrator, earned
$232,679, $308,078, and $92,328, respectively, of which $0, $0, and $0,
respectively, were waived.
Transfer Agent and Dividend Disbursing Agent
Federated Services Company serves as transfer agent and dividend
disbursing agent for the Fund. The fee paid to the transfer agent is
based upon the size, type and number of accounts and transactions made
by shareholders
Federated Services Company also maintains the Fund's accounting records.
The fee paid for this service is based upon the level of the Fund's
average net assets for the period plus out-of-pocket expenses.
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:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o 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
Class A Shares" or "Investing in Fortress Shares."
Distribution and Shareholder Services Plans
These arrangements permit the payment of fees to financial institutions,
the distributor, and Federated Shareholder Services, to stimulate
distribution activities and to cause services to be provided to
shareholders by a representative who has knowledge of the shareholder's
particular circumstances and goals. These activities and services may
include, but are not limited to, marketing efforts; providing office
space, equipment, telephone facilities, and various clerical,
supervisory, computer, and other personnel as necessary or beneficial to
establish and maintain shareholder accounts and records; processing
purchase and redemption transactions and automatic investments of client
account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and
addresses.
By adopting the Distribution Plan, the Board of Directors expects that
the Fund will be able to achieve a more predictable flow of cash for
investment purposes and to meet redemptions. This will facilitate more
efficient portfolio management and assist the Fund in pursuing its
investment objectives. By identifying potential investors whose needs
are served by the Fund's objective, and properly servicing these
accounts, it may be possible to curb sharp fluctuations in rates of
redemptions and sales.
Other benefits, which may be realized under either arrangement, may
include: (1) providing personal services to shareholders; (2) investing
shareholder assets with a minimum of delay and administrative detail;
and (3) enhancing shareholder recordkeeping systems; and (4) responding
promptly to shareholders' requests and inquiries concerning their
accounts.
For the fiscal period ending November 30, 1994, payments in the amount
of $1,131,333 and $20,340 for Class A Shares and Fortress Shares ,
respectively, were made pursuant to the Distribution Plan, of which
$581,371 and $0, respectively, was voluntarily waived. In addition,
for this period, payments in the amount of $565,666 and $31,469,
respectively, were made pursuant to the Shareholder Services 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 load 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:
o as provided by an independent pricing service;
o 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
o 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:
o yield;
o quality;
o coupon rate;
o maturity;
o type of issue;
o trading characteristics; and
o 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, the Liberty Family of Funds, or certain other Funds
for which affiliates of Federated Investors serve as principal
underwriter ("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 Load
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 Class A
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.
Under certain circumstances described under "Redeeming Class A Shares"
in the prospectus, shareholders may be charged a contingent deferred
sales charge for Shares redeemed within certain time periods of the
purchase date. The contingent deferred sales charge will be calculated
based upon the lesser of the original purchase price of the Shares or
the net asset value of the Shares when redeemed.
Certain Fortress Shares redeemed within one to four years of the
purchase date 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. To the extent available, such
securities will be readily marketable.
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:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o derive less than 30% of its gross income from the sale of securities
held less than three months;
o invest in securities within certain statutory limits; and
o 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 returns for Class A Shares for the fiscal year ended
November 30, 1994 and since inception (January 14, 1992) were (2.26%)
and 11.24%, respectively.. The Fund's total returns for Fortress Shares
for the fiscal years ended November 30, 1994 and since inception
(September 1, 1993) were (3.09%) and (2.32%), respectively.
The average annual total return for Class A Shares and Fortress Shares
is the average compounded rate of return for a given period that would
equate a $1,000 initial investment to the ending redeemable value of
that investment. The ending redeemable value is computed by multiplying
the number of shares owned at the end of the period by the offering
price per share at the end of the period. The number of shares owned at
the end of the period is based on the number of shares purchased at the
beginning of the period with $1,000, less any applicable sales load,
adjusted over the period by any additional shares, assuming the monthly
reinvestment of all dividends and distributions.
Yield
The Fund's yield for Class A Shares for the thirty-day period ended
November 30, 1994 was 5.82%. The yield for Fortress Shares was 5.92% for
the same period.
The yield of the Fund for each of Class A Shares and Fortress Shares is
determined by dividing the net investment income per share (as defined
by the Securities and Exchange Commission) earned by Class A 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 Class A 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 Class A Shares and Fortress Shares depends upon such
variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund expenses; and
o 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.
Investors may use financial publications and/or indices to obtain a more
complete view of the Funds' 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
offering price. The financial publications used/or indices which the
Fund uses in advertising may include:
o 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.
o 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.
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.
Appendix
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.
NR--Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard and
Poor's does not rate a particular type of obligation as a matter of
policy.
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 edged." 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.
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.
NR--Indicates that Fitch does not rate the specific issue.
338319106
338319304
3070701B (1/95)
LIMITED TERM MUNICIPAL FUND
(A PORTFOLIO OF FIXED INCOME SECURITIES, INC.)
CLASS A SHARES
(FORMERLY INVESTMENT SHARES)
PROSPECTUS
The Class A 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 Class A Shares. Keep this prospectus for future reference.
The Fund has also filed a Combined Statement of Additional Information for Class
A Shares and Fortress Shares dated January 31, 1995 with the Securities and
Exchange Commission. The information contained in the Combined Statement of
Additional Information is incorporated by reference in this prospectus. You may
request a copy of the Combined Statement of Additional Information free of
charge by calling 1-800-235-4669. To obtain other information or 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, 1995
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--CLASS A SHARES 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
LIBERTY FAMILY OF FUNDS 3
- ------------------------------------------------------
INVESTMENT INFORMATION 4
- ------------------------------------------------------
Investment Objective 4
Investment Policies 4
Investment Risks 13
Investment Limitations 13
NET ASSET VALUE 14
- ------------------------------------------------------
INVESTING IN CLASS A SHARES 14
- ------------------------------------------------------
Share Purchases 14
Minimum Investment Required 15
What Shares Cost 15
Eliminating the Sales Load 16
Systematic Investment Program 17
Certificates and Confirmations 17
Dividends and Distributions 17
EXCHANGE PRIVILEGE 17
- ------------------------------------------------------
Requirements for Exchange 18
Tax Consequences 18
Making an Exchange 18
REDEEMING CLASS A SHARES 19
- ------------------------------------------------------
Through a Financial Institution 19
Directly by Mail 19
Receiving Payment 20
Contingent Deferred Sales Charge 20
Systematic Withdrawal Program 20
Accounts with Low Balances 21
FIXED INCOME SECURITIES, INC. INFORMATION 21
- ------------------------------------------------------
Management of the Corporation 21
Distribution of Class A Shares 22
Administration of the Fund 23
Expenses of the Fund
and Class A Shares 24
SHAREHOLDER INFORMATION 24
- ------------------------------------------------------
Voting Rights 24
TAX INFORMATION 25
- ------------------------------------------------------
Federal Income Tax 25
Pennsylvania Corporate and Personal
Property Taxes 26
Other State and Local Taxes 26
PERFORMANCE INFORMATION 26
- ------------------------------------------------------
OTHER CLASSES OF SHARES 27
- ------------------------------------------------------
Financial Highlights--Fortress Shares 28
FINANCIAL STATEMENTS 29
- ------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 45
- ------------------------------------------------------
ADDRESSES 46
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).......................................................... 1.00%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price).......................................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable)................................................. 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................. None
Exchange Fee................................................................................... None
ANNUAL CLASS A SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (1).............................................................. 0.00%
12b-1 Fee...................................................................................... 0.25%
Total Other Expenses (after expense reimbursement)............................................. 0.85%
Shareholder Services Fee (after waiver) (2)................................................ 0.21%
Total Class A Shares Operating Expenses (3)........................................... 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 maximum shareholder service fee is 0.25%.
(3) The total Class A Shares operating expenses in the table above are based on
expenses expected during the fiscal year ending November 30, 1995. The total
Class A Shares operating expenses were 0.63% for the fiscal year ended
November 30, 1994, and would have been 1.57% 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 Class A Shares of the Fund will
bear, either directly or indirectly. For more complete descriptions of the
various costs and expenses, see "Investing in Class A Shares" and "Fixed Income
Securities, Inc. Information." Wire-transferred redemptions of less than $5,000
may be subject to additional fees.
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
<S> <C> <C> <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....... $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
Class A Shares of the Fund. The Fund also offers another class of shares called
Fortress Shares. Class A Shares and Fortress 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--CLASS A SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 45.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
--------------------
1994 1993*
<S> <C> <C>
- ---------------------------------------------------------------------------------------- --------- ---------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.02 $ 10.00
- ----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------
Net investment income 0.43 0.10
- ----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.53) 0.02
- ---------------------------------------------------------------------------------------- --------- ---------
Total from investment operations (0.10) 0.12
- ----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.43) (0.10)
- ---------------------------------------------------------------------------------------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 9.49 $ 10.02
- ---------------------------------------------------------------------------------------- --------- ---------
TOTAL RETURN** (0.95%) 1.20%
- ----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------
Expenses 0.63% 0.50%(a)
- ----------------------------------------------------------------------------------------
Net investment income 4.33% 4.30%(a)
- ----------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.94% 1.71%(a)
- ----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $32,644 $13,694
- ----------------------------------------------------------------------------------------
Portfolio turnover rate 135% 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) This voluntary expense decrease is reflected in both the expense and net
income ratios shown above.
(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 for the fiscal year ended November 30, 1994, 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
Strategic Income Fund. With respect to the Fund, the Directors have established
two classes of shares known as Fortress Shares and Class A Shares. On May 19,
1994, the Board of Directors approved the reclassification of Investment Shares
as Class A Shares. This prospectus relates only to the Class A 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 load and are
redeemed at net asset value. Fund assets may be used in connection with the
distribution of Shares.
LIBERTY FAMILY OF FUNDS
- --------------------------------------------------------------------------------
This Fund is a member of a family of mutual funds, collectively known as the
Liberty Family of Funds. The other funds in the Liberty Family of Funds are the
Class A Shares of:
. American Leaders Fund, Inc., providing growth of capital and income
through high-quality stocks;
. Capital Growth Fund, providing appreciation of capital primarily through
equity securities;
. Fund for U.S. Government Securities, Inc., providing current income
through long-term U.S. government securities;
. International Equity Fund, providing long-term capital growth and income
through international securities;
. International Income Fund, providing a high level of current income
consistent with prudent investment risk through high-quality debt
securities denominated primarily in foreign currencies;
. Liberty Equity Income Fund, Inc., providing above-average income and
capital appreciation through income producing equity securities;
. Liberty High Income Bond Fund, Inc., providing high current income
through high-yielding, lower-rated corporate bonds;
. Liberty Municipal Securities Fund, Inc., providing a high level of
current income exempt from federal regular income tax through municipal
bonds;
. Liberty U.S. Government Money Market Trust, providing current income
consistent with stability of principal through high-quality U.S.
government securities;
. Liberty Utility Fund, Inc., providing current income and long-term
growth of income, primarily through electric, gas, and communications
utilities;
. Limited Term Fund, providing a high level of current income consistent
with minimum fluctuation in principal through investment grade
securities.
. Michigan Intermediate Municipal Trust, providing current income exempt
from federal regular income tax and the personal income taxes imposed by
the state of Michigan and Michigan municipalities, primarily through
Michigan municipal securities;
. Pennsylvania Municipal Income Fund, providing current income exempt from
federal regular income tax and the personal income taxes imposed by the
Commonwealth of Pennsylvania, primarily through Pennsylvania municipal
securities;
. Strategic Income Fund, providing a high level of current income,
primarily through domestic and foreign corporate debt obligations;
. Tax-Free Instruments Trust, providing current income consistent with
stability of principal and exempt from federal income tax, through
high-quality, short-term municipal securities; and
. World Utility Fund, providing total return through securities issued by
domestic and foreign companies in the utilities industries.
Prospectuses for these funds are available by writing to Federated Securities
Corp.
Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.
The Liberty Family of Funds provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles and by providing the
investment services of a proven, professional investment adviser.
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 prices of fixed income securities fluctuate inversely to the
direction of interest rates. The interest rate on floating rate securities is
subject to adjustment based upon changes in market interest rates or indices,
such as a published interest rate or interest rate 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 Ratings Group
("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 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 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. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. 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.
Accordingly, the Fund may pay more/less than the market value of the securities
on the settlement date.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
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 CLASS A 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--Class A
Shares; and
. send both to the Fund's transfer agent, Federated Services Company, c/o
State Street Bank and Trust Company, P.O. Box 8604, Boston, Massachusetts
02266-8604.
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 load of 1% of the offering price (which is 1.01% of the
net amount invested). There is no sales load for purchases of $1 million or
more. In addition, no sales load 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 load. Any portion of the sales load 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 load 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 load 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. On purchases of $1 million or more, the investor pays no
sales load; however, the distributor will make twelve monthly payments to the
dealer totaling 0.25% of the public offering price over the first year following
the purchase. Such payments are based on the original purchase price of the
Shares outstanding at each month end.
ELIMINATING THE SALES LOAD
The sales load 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 load 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 load.
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 load on the additional purchase.
To receive this sales load 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 load 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 load may be eliminated by signing a
letter of intent to that effect. This letter of intent includes a provision for
a sales load 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 load, 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 load. 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 load. If the shareholder redeems his Shares, there may be tax
consequences.
PURCHASES WITH PROCEEDS FROM REDEMPTIONS OF UNAFFILIATED INVESTMENT COMPANIES.
Investors may purchase Shares at net asset value, without a sales load, with
proceeds from the redemption of shares of an investment company which were sold
with a sales load or commission and were not distributed by Federated Securities
Corp. The purchase must be made within 60 days of the
redemption, and Federated Securities Corp. must be notified by the investor in
writing, or by his financial institution, at the time the purchase is made.
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 load 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 load, 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
- --------------------------------------------------------------------------------
Class A shareholders may exchange all or some of their Shares for Class A
Shares of other funds in the Liberty Family of Funds at net asset value. They
may also exchange into certain other funds for which affiliates of Federated
Investors serve as principal underwriter ("Federated Funds"). Certain Federated
Funds are sold with a sales load different from that of the Fund or with no
sales load; exchanges into these Federated Funds are made at net asset value
plus the difference between the Fund's sales load already paid and any sales
load of the Federated Fund into which the Shares are to be exchanged, if
higher, or at full load if applicable. Neither the Fund nor any of the funds in
the Liberty Family of Funds imposes any additional fees on exchanges.
Shareholders in certain other Federated Funds may exchange their shares in the
Federated Funds for Class A Shares. Participants in a plan under the Liberty
Family Retirement Program may exchange all or some of their shares for Class A
Shares of other funds offered under the plan at net asset value without a
contingent deferred sales charge.
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Shares having a net asset value
at least equal to the minimum investment requirements of the fund into which the
exchange is being made. Before the exchange, the shareholder must receive the
prospectus of the fund into which the exchange is being made.
This privilege is available to shareholders resident 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 Class A Shares of the other fund. The exchange
privilege may be modified or terminated at any time. Shareholders will be
notified of the modification or termination of the exchange privilege.
Further information on the exchange privilege and prospectuses for the Liberty
Family of Funds or certain Federated Funds are available by contacting the Fund.
TAX CONSEQUENCES
An exercise of the exchange privilege is treated as a sale for federal income
tax purposes. Depending upon the circumstances, a capital gain or loss may be
realized.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing or by telephone. Written
instructions may require a signature guarantee. Shareholders of the Fund may
have difficulty in making exchanges by telephone through brokers and other
financial institutions during times of drastic economic or market changes. If a
shareholder cannot contact his broker or financial institution by telephone, it
is recommended that an exchange request be made in writing to Federated Services
Company, c/o State Street Bank and Trust Company, P.O. Box 8604, Boston,
Massachusetts 02266-8604.
TELEPHONE INSTRUCTIONS. Telephone instructions made by the investor may be
carried out only if a telephone authorization form completed by the investor is
on file with the transfer agent. If the instructions are given by a broker, a
telephone authorization form completed by the broker must be on file with the
transfer agent. Shares may be exchanged between two funds by telephone only if
the two funds have identical shareholder registrations.
Any Shares held in certificate form cannot be exchanged by telephone, but must
be forwarded to Federated Services Company, c/o State Street Bank and Trust
Company, P.O. Box 8604, Boston, Massachusetts 02266-8604, and deposited to the
shareholder's account before being exchanged. Telephone exchange instructions
are recorded and will be binding upon the shareholder. Such instructions will
be processed by 4:00 p.m. (Eastern time) and must be received by the transfer
agent before that time for Shares to be exchanged the same day. Shareholders
exchanging into a fund will not receive any dividend that is payable to
shareholders of record on that date. This privilege may be modified or
terminated at any time.
If reasonable procedures are not followed by the Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
REDEEMING CLASS A SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after 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, c/o State Street Bank and Trust Company, P.O. Box 8604,
Boston, Massachusetts 02266-8604. 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 contingent deferred sales charge.
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 who purchase Shares with proceeds of a redemption of shares of a
mutual fund sold with a sales load and not distributed by Federated Securities
Corp. may be charged a contingent deferred sales charge by the Fund's
distributor of .50 of 1% for redemptions made within one year. The contingent
deferred sales charge will be calculated based upon the lesser of the original
purchase price of Shares or the net asset value of the Shares when redeemed.
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 load, it is
not advisable for shareholders to be purchasing Shares while participating in
this program.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $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.
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 and Jonathan C. Conley are
the Fund's co-portfolio managers. Mary Jo Ochson has been the Fund's
co-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.
Jonathan C. Conley has been the Fund's co-portfolio manager since its
inception. 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 CLASS A SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS. _Under a distribution plan
adopted in accordance with Investment Company Act Rule 12b-1 (the
"Distribution Plan"), the Fund will pay to the distributor an amount,
computed at an annual rate of 0.25 of 1% of the average daily net asset
value of Shares to finance any activity which is principally intended to
result in the sale of Shares subject to the Distribution Plan. The
distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers to
provide sales support services as agents for their clients or customers.
The Distribution Plan is a compensation-type plan. As such, the Fund makes
no payments to the distributor except as described above. Therefore, the
Fund does not pay for unreimbursed expenses of the distributor, including
amounts expended by the distributor in excess of amounts received by it
from the Fund, interest, carrying or other financing charges in connection
with excess amounts expended, or the distributor's overhead expenses.
However, the distributor may be able to recover such amount or may earn a
profit from future payments made by the Fund under the Distribution Plan.
In addition, the Fund has adopted a Shareholder Services Plan (the
"Services Plan") under which it may make payments up to 0.25 of 1% of the
average daily net asset value of Shares to obtain certain personal services
for shareholders and the maintenance of shareholder accounts ("shareholder
services"). The Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under
which Federated Shareholder Services will either perform shareholder
services directly or will select financial institutions to perform
shareholder services. Financial institutions will receive fees based upon
shares owned by their clients or customers. The schedules of such fees and
the basis upon which such fees will be paid will be determined from time to
time by the Fund and Federated Shareholder Services.
The Glass-Steagall Act limits the ability of a depository institution (such
as a commercial bank or a savings and loan association) to become an
underwriter or distributor of securities. In the event the Glass-Steagall
Act is deemed to prohibit depository institutions from acting in the
capacities described above or should Congress relax current restrictions on
depository institutions, the Directors will consider appropriate changes in
the services.
State securities laws governing the ability of depository institutions to
act as underwriters or distributors of securities may differ from
interpretations given to the Glass-Steagall Act and, therefore, banks and
financial institutions may be required to register as dealers pursuant to
state law.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. _The Adviser or its affiliates
may offer to pay a fee from their own assets to financial institutions as
financial assistance for providing substantial marketing, sales, and
operational support to the distributor. The support may include
participating in sales, educational and training seminars at
recreational-type facilities, providing sales literature, and engineering
computer software programs that emphasize the attributes of the Fund. Such
assistance will be predicated upon the amount of Shares the financial
institution sells or may sell, and/or upon the type and nature of sales or
operational support furnished by the financial institution.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE FEDERATED FUNDS
<S> <C>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN. State Street Bank and Trust Company ("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.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, Boston, Massachusetts.
EXPENSES OF THE FUND AND CLASS A SHARES
Holders of Shares pay their allocable portion of Fund and Corporation expenses.
The Corporation expenses for which holders of Shares pay their allocable portion
include, but are not limited to: the cost 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
The Fund is not subject to Pennsylvania corporate or personal property taxes.
Fund shares may be subject to personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania to the extent that the
portfolio securities in the Fund would be subject to such taxes if owned
directly by residents of those jurisdictions.
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 Class A
Shares. Because Fortress Shares are subject to lower 12b-1 expenses, the yield
for Fortress Shares, for the same period, will exceed that of Class A Shares.
Because Class A Shares are not currently subject to a contingent deferred sales
charge, the total return for Class A Shares, for the same period, may exceed
that of Fortress Shares.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund currently offers Fortress Shares and Class A Shares. The Fortress
Shares are sold subject to a front-end sales load 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 Class A Shares will generally be less than
that of Fortress Shares by the difference between class expenses and
distribution and shareholder 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 EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 45.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
--------------------
1994 1993*
<S> <C> <C>
- ---------------------------------------------------------------------------------------- --------- ---------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.02 $ 10.00
- ----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------
Net investment income 0.45 0.11
- ----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.53) 0.02
- ---------------------------------------------------------------------------------------- --------- ---------
Total from investment operations (0.08) 0.13
- ----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.45) (0.11)
- ---------------------------------------------------------------------------------------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 9.49 $ 10.02
- ---------------------------------------------------------------------------------------- --------- ---------
TOTAL RETURN** (0.75%) 1.26%
- ----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------
Expenses 0.44% 0.25%(a)
- ----------------------------------------------------------------------------------------
Net investment income 4.57% 4.79%(a)
- ----------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.94% 1.86%(a)
- ----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $12,804 $3,307
- ----------------------------------------------------------------------------------------
Portfolio turnover rate 135% 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) This voluntary expense decrease is reflected in both the expense and net
income ratios shown above.
(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 for the fiscal year ended November 30, 1994, which can be obtained
free of charge.
LIMITED TERM MUNICIPAL FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
<C> <S> <C> <C>
- ------------- ----------------------------------------------------------------------- ---------- -------------
SHORT-TERM MUNICIPAL SECURITIES--3.4%
- --------------------------------------------------------------------------------------
GEORGIA--2.4%
-----------------------------------------------------------------------
$ 1,100,000 Gwinnett County, GA, IDA Daily VRDNs (Volvo of America,Inc.)/(Union
Bank of Switzerland LOC) Subject to AMT P-1 $ 1,100,000
----------------------------------------------------------------------- -------------
MINNESOTA--0.6%
-----------------------------------------------------------------------
250,000 Crystal City, MN, IDA Weekly VRDNs (Crystal Gallery Mall)/(Citibank
N.A. LOC) P-1 250,000
----------------------------------------------------------------------- -------------
TEXAS--0.4%
-----------------------------------------------------------------------
200,000 Harris County, TX, IDC Daily VRDNs (Yokohoma Tire Corp.)/(Industrial
Bank of Japan Ltd. LOC)/(Subject to AMT) A-1 200,000
----------------------------------------------------------------------- -------------
TOTAL SHORT-TERM MUNICIPAL SECURITIES (AT AMORTIZED COST) 1,550,000
----------------------------------------------------------------------- -------------
LONG-TERM MUNICIPAL SECURITIES--98.0%
- --------------------------------------------------------------------------------------
ARIZONA--0.9%
-----------------------------------------------------------------------
400,000 Maricopa County, AZ, IDA, 6.65% Industrial Development Bonds (Citizens
Utilities Company)/(Subject to AMT), Mandatory Tender 4/1/2001 AAA 404,776
----------------------------------------------------------------------- -------------
COLORADO--6.5%
-----------------------------------------------------------------------
500,000 Colorado Student Obligation Bond Authority, 5.20% Student Loan Revenue
Bonds (Series 1994J), 9/1/97 A 491,175
-----------------------------------------------------------------------
1,000,000 Colorado Student Obligation Bond Authority, 5.40% Student Loan Revenue
Bonds (Series 1994J), 9/1/98 A 975,910
-----------------------------------------------------------------------
1,500,000 Denver (City & County), CO, Airport System, 6.00% Sub. Revenue Bonds
(Series 1991 C)/(Toronto-Dominion Bank LOC), Mandatory Tender 4/1/97
(@100) AA 1,500,000
----------------------------------------------------------------------- -------------
Total 2,967,085
----------------------------------------------------------------------- -------------
DISTRICT OF COLUMBIA--2.5%
-----------------------------------------------------------------------
$ 1,100,000 District of Columbia, 6.50% Hospital Revenue Bonds (Medlantic Health
System, Washington Hospital)/(Original Issue Yield: 6.599%), 8/15/96 BBB $ 1,115,818
----------------------------------------------------------------------- -------------
FLORIDA--1.0%
-----------------------------------------------------------------------
275,000 City of Leesburg, FL, 4.60% Hospital Refunding Revenue Bonds (Series
1993B)/(Leesburg Regional Medical Center), 7/1/98 BBB+ 258,869
-----------------------------------------------------------------------
200,000 Jacksonville, FL, Electric Authority, 6.50% Special Obligation Revenue
Bonds (St. Johns River Power Park System), Callable 10/1/99 (@101.5) AA 191,816
----------------------------------------------------------------------- -------------
Total 450,685
----------------------------------------------------------------------- -------------
ILLINOIS--12.5%
-----------------------------------------------------------------------
750,000 Chicago, IL, 7.50% Gas Supply Revenue Bonds (Peoples Gas, Light & Coke
Co.), Callable 3/1/2000 (@102) AA- 781,612
-----------------------------------------------------------------------
500,000 Illinois Development Finance Authority, 5.25% Revenue Bonds (Series
1993C)/(Catholic Charities Housing Development Corp.) /(Archdiocese of
Chicago Guaranty),
1/1/99 NR 476,650
-----------------------------------------------------------------------
245,000 Illinois Development Finance Authority, 7.625% PCR Bonds (Illinois
Power Company)/(FGIC Insured)/(Subject to AMT), Callable 6/1/97 (@103) AAA 251,892
-----------------------------------------------------------------------
365,000 Illinois Educational Facilities Authority, 4.90% Refunding Revenue
Bonds (Illinois Institute of Technology), 12/1/96 BBB 359,700
-----------------------------------------------------------------------
380,000 Illinois Educational Facilities Authority, 5.05% Refunding Revenue
Bonds (Illinois Institute of Technology), 12/1/97 BBB 371,534
-----------------------------------------------------------------------
400,000 Illinois Educational Facilities Authority, 5.25% Refunding Revenue
Bonds (Illinois Institute of Technology), 12/1/98 BBB 389,440
-----------------------------------------------------------------------
$ 250,000 Illinois Health Facilities Authority, 4.95% Refunding Revenue Bonds
(Lutheran Social Services of Illinois),
8/15/96 NR $ 245,615
-----------------------------------------------------------------------
220,000 Illinois Health Facilities Authority, 5.30% Refunding Revenue Bonds
(Lutheran Social Services of Illinois),
8/15/98 NR 210,773
-----------------------------------------------------------------------
600,000 Illinois Health Facilities Authority, 5.75% Revenue Bonds (Mercy
Hospital and Medical Center), 1/1/98 A- 596,706
-----------------------------------------------------------------------
1,000,000 Illinois Health Facilities Authority, 6.15% Revenue Bonds (Trinity
Medical Center)/(Original Issue Yield: 6.25%),
7/1/98 Baa1 999,880
-----------------------------------------------------------------------
1,000,000 Illinois Health Facilities Authority, 6.30% Revenue Bonds (Trinity
Medical Center)/(Original Issue Yield: 6.50%),
7/1/99 Baa1 993,910
----------------------------------------------------------------------- -------------
Total 5,677,712
----------------------------------------------------------------------- -------------
INDIANA--0.5%
-----------------------------------------------------------------------
225,000 Marion County, IN, 6.50% Hospital Authority Refunding Revenue Bonds
(Methodist Hospital), Callable 9/1/99 (@102) AA 217,249
----------------------------------------------------------------------- -------------
IOWA--0.7%
-----------------------------------------------------------------------
325,000 Ottumwa, IA, 4.75% Hospital Facilities Refunding Revenue Bonds (Series
1993)/(Ottumwa Regional Health Center, Inc.), 10/1/97 BBB+ 312,725
----------------------------------------------------------------------- -------------
MASSACHUSETTS--9.9%
-----------------------------------------------------------------------
250,000 Greater New Bedford, MA, Regional Refuse Management District, 4.90%
Landfill GO Bonds (Subject to AMT), 5/1/98 Baa 238,907
-----------------------------------------------------------------------
120,000 Massachusetts Education Loan Authority, 6.40% Revenue Bonds (Series
A)/(AMBAC Insured)/(Subject to AMT),
1/1/99 AAA 122,447
-----------------------------------------------------------------------
$ 515,000 Massachusetts State HEFA, 5.00% Revenue Bonds
(Series B)/(Holyoke Hospital), 7/1/96 Baa1 $ 508,763
-----------------------------------------------------------------------
545,000 Massachusetts State HEFA, 5.25% Revenue Bonds
(Series A)/(Holyoke Hospital), 7/1/97 Baa1 532,154
-----------------------------------------------------------------------
565,000 Massachusetts State HEFA, 5.50% Revenue Bonds
(Series B)/(Holyoke Hospital), 7/1/98 Baa1 545,948
-----------------------------------------------------------------------
605,000 Massachusetts State HEFA, 5.75% Revenue Bonds
(Series B)/(Holyoke Hospital), 7/1/99 Baa1 580,715
-----------------------------------------------------------------------
2,000,000 Massachusetts State IFA, 8.00% Solid Waste Disposal Revenue Bonds
(Series 1994A)/(Sr. Lien--Massachusetts Recycling Association)/(Subject
to AMT), 7/1/99 NR 1,937,500
----------------------------------------------------------------------- -------------
Total 4,466,434
----------------------------------------------------------------------- -------------
MINNESOTA--3.6%
-----------------------------------------------------------------------
1,500,000 Saint Paul, MN, Housing & Redevelopment Authority, 9.75% Hospital
Revenue Bonds (Series B)/(HealthEast
Project), Callable 11/1/97 (@102) BBB- 1,653,750
----------------------------------------------------------------------- -------------
MISSOURI--2.1%
-----------------------------------------------------------------------
1,000,000 Kansas City, MO, IDA, 6.05% PCR Revenue Bonds (General Motors Corp.),
Callable 6/1/99 (@101) BBB+ 945,800
----------------------------------------------------------------------- -------------
NEW JERSEY--0.5%
-----------------------------------------------------------------------
250,000 New Jersey EDA, Natural Gas Facilities, 6.75% Revenue Bonds
(Elizabethtown Gas Company)/(Subject to AMT), Callable 10/1/96 (@102) A3 235,835
----------------------------------------------------------------------- -------------
NEW YORK--2.2%
-----------------------------------------------------------------------
200,000 New York State, Energy Research and Development Authority, 7.375%
Facilities Revenue Bonds (Consolidated Edison Company)/(Subject to
AMT), Callable 7/1/98 (@101) AA+ 199,860
-----------------------------------------------------------------------
350,000 New York, NY, 4.875% UT GO Bonds (Series E), 8/1/99 A- 324,968
-----------------------------------------------------------------------
$ 200,000 New York, NY, 4.875% UT GO Bonds (Series F), 8/1/99 A- $ 185,696
-----------------------------------------------------------------------
300,000 New York, NY, 4.875% UT GO Bonds (Series G), 8/1/99 A- 278,544
----------------------------------------------------------------------- -------------
Total 989,068
----------------------------------------------------------------------- -------------
NORTH CAROLINA--1.8%
-----------------------------------------------------------------------
830,000 North Carolina Eastern Municipal Power Agency, 7.25% Revenue Bonds,
Callable 1/1/97 (@102) A 831,079
----------------------------------------------------------------------- -------------
OHIO--8.5%
-----------------------------------------------------------------------
1,000,000 Bellefontaine, OH, 5.00% Hospital Revenue Bonds (Mary Rutan Health
Association),12/1/97 BBB 964,660
-----------------------------------------------------------------------
1,500,000 Clyde, OH, Temp. Water System, 5.60% Improvement
Revenue Bonds (Series 1994), 5/1/97 MIG1 1,511,700
-----------------------------------------------------------------------
250,000 Marion County, OH, Health Care Facilities, 4.75% Refunding Revenue
Bonds (Series 1993)/(United Church Homes, Inc.), 11/15/96 BBB- 245,243
-----------------------------------------------------------------------
630,000 Marion County, OH, Health Care Facilities, 5.00% Refunding Revenue
Bonds (Series 1993)/(United Church Homes, Inc.), 11/15/97 BBB- 610,653
-----------------------------------------------------------------------
525,000 Youngstown, OH, 5.50% City School District Revenue Anticipation Notes,
6/15/96 NR 525,751
----------------------------------------------------------------------- -------------
Total 3,858,007
----------------------------------------------------------------------- -------------
OKLAHOMA--4.4%
-----------------------------------------------------------------------
2,055,000 Jackson County, OK, Memorial Hospital Authority, 5.875% Hospital
Revenue Bonds (Jackson County Memorial
Hospital), 8/1/97 BBB- 2,004,200
----------------------------------------------------------------------- -------------
PENNSYLVANIA--17.6%
-----------------------------------------------------------------------
500,000 Allegheny County, PA, Residential Finance Authority, 4.875% Single
Family Mortgage Refunding Revenue Bonds (GNMA/FNMA Collateralized),
Callable 11/1/2003 (@102) Aaa 441,455
-----------------------------------------------------------------------
$ 750,000 Beaver County, PA, IDA 7.75% PCR Bonds (Series A)/(Ohio Edison
Project), Callable 9/1/99 (@102) BBB- $ 747,262
-----------------------------------------------------------------------
130,000 Delaware County, PA, 4.80% Hospital Revenue Bonds (Crozer-Chester
Medical Center), 12/15/98 BBB+ 123,089
-----------------------------------------------------------------------
2,000,000 Delaware County, PA, 4.875% Health Care Revenue Bonds (Mercy Health
Corp. of Southeastern, PA), 11/15/97 BBB 1,898,300
-----------------------------------------------------------------------
120,000 Delaware County, PA, 4.90% Hospital Revenue Bonds (Crozer-Chester
Medical Center), 12/15/99 BBB+ 110,370
-----------------------------------------------------------------------
2,000,000 Delaware County, PA, 5.125% Health Care Revenue Bonds (Series
1993B)/(Mercy Health Corp. of Southeastern, PA), 11/15/98 BBB 1,879,420
-----------------------------------------------------------------------
250,000 Franklin, PA, 10.875% Special Obligation Revenue Bonds (Franklin
Regional Medical Center), Callable 10/1/95 (@101.5) BBB 251,788
-----------------------------------------------------------------------
500,000 Northeastern Pennsylvania Hospital & Education Authority, 4.60%
University Revenue Bonds (Series 1993)/(Wilkes University), 10/1/98 BBB 469,930
-----------------------------------------------------------------------
125,000 Philadelphia PA, Hospital & Higher Education Facilities Authority,
6.60% Hospital Revenue Bonds (Series B)/
(Children's Seashore House), 8/15/98 BBB+ 127,196
-----------------------------------------------------------------------
250,000 Pittsburgh, PA, Urban Redevelopment Authority, 5.00% Multifamily
Mortgage Refunding Revenue Bonds (Series 1994)/(Mellon Bank NA,
Pittsburgh LOC), 6/1/97 A-1 245,230
-----------------------------------------------------------------------
675,000 Scranton, PA, Lackawanna Health & Welfare Authority, 5.00% Revenue
Bonds (Allied Services Rehabilitation
Hospital), 7/15/95 NR 667,629
-----------------------------------------------------------------------
455,000 Scranton, PA, Lackawanna Health & Welfare Authority, 5.40% Revenue
Bonds (Allied Services Rehabilitation Hospital), 7/15/96 NR 448,526
-----------------------------------------------------------------------
$ 485,000 Scranton, PA, Lackawanna Health & Welfare Authority, 5.75% Revenue
Bonds (Allied Services Rehabilitation
Hospital), 7/15/97 NR $ 475,620
-----------------------------------------------------------------------
125,000 West Cornwall Township, PA Municipal Authority, 4.75% First Mortgage
Refunding Revenue Bonds (Cornwall Manor), 6/1/98 NR 120,471
----------------------------------------------------------------------- -------------
Total 8,006,286
----------------------------------------------------------------------- -------------
PUERTO RICO--7.7%
-----------------------------------------------------------------------
1,600,000 Puerto Rico, Electric Power Authority, 5.00% Power
Revenue Bonds (Series T), 7/1/97 A- 1,578,944
-----------------------------------------------------------------------
2,000,000 Puerto Rico, 5.00% Municipal Finance Agency Bonds (Series
1994A)/(Original Issue Yield: 5.10%), 7/1/98 A- 1,947,460
----------------------------------------------------------------------- -------------
Total 3,526,404
----------------------------------------------------------------------- -------------
SOUTH DAKOTA--1.6%
-----------------------------------------------------------------------
195,000 South Dakota HEFA, 5.00% Revenue Bonds (Series 1994)/ (Huron Regional
Medical Center), 4/1/96 BBB- 192,931
-----------------------------------------------------------------------
105,000 South Dakota HEFA, 5.40% Revenue Bonds (Series 1994)/ (Huron Regional
Medical Center), 4/1/97 BBB- 102,633
-----------------------------------------------------------------------
215,000 South Dakota HEFA, 5.50% Revenue Bonds (Series 1994)/ (Huron Regional
Medical Center), 4/1/98 BBB- 208,060
-----------------------------------------------------------------------
225,000 South Dakota HEFA, 6.00% Revenue Bonds (Series 1994)/ (Huron Regional
Medical Center), 4/1/99 BBB- 219,625
----------------------------------------------------------------------- -------------
Total 723,249
----------------------------------------------------------------------- -------------
TENNESSEE--3.7%
-----------------------------------------------------------------------
1,500,000 Springfield, TN, Health & Educational Facilities Board, 7.50% Hospital
Revenue Bonds (Jesse Holman Jones
Hospital), 4/1/2000 NR 1,462,635
-----------------------------------------------------------------------
$ 250,000 Tennessee State Volunteer Student Funding Corp., 4.95% Educational Loan
Revenue Bonds (Series B)/(Subject to AMT), 6/1/2000 Aa $ 235,170
----------------------------------------------------------------------- -------------
Total 1,697,805
----------------------------------------------------------------------- -------------
TEXAS--5.5%
-----------------------------------------------------------------------
1,800,000 Brazos River Authority, TX, 8.25% Revenue Bonds (Houston Light & Power
Company), Callable 5/1/98 (@102) A 1,897,344
-----------------------------------------------------------------------
350,000 Brazos River Authority, TX, 9.875% PCR Bonds, (Texas Utilities Electric
Company)/(Subject to AMT), callable
10/1/97 @ 102 BBB 383,733
-----------------------------------------------------------------------
200,000 Orange County, TX, Navigational & Port District IDC, 4.75% Solid Waste
Revenue Bonds (Horsehead Reserve Development Company)/(Long-Term Credit
Bank of Japan Ltd LOC)/(Subject to AMT), Optional Tender 10/1/95 A 199,974
----------------------------------------------------------------------- -------------
Total 2,481,051
----------------------------------------------------------------------- -------------
VIRGINIA--4.3%
-----------------------------------------------------------------------
2,000,000 Virginia State Housing Development Authority Commission, 5.40% Mortgage
Revenue Bonds (Series 1994G-2)/(Subject to AMT), 1/1/98 AA+ 1,967,620
----------------------------------------------------------------------- -------------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST, $46,086,834) 44,532,638
----------------------------------------------------------------------- -------------
TOTAL INVESTMENTS (IDENTIFIED COST, $47,636,834) $ 46,082,638+
----------------------------------------------------------------------- -------------
</TABLE>
+ The cost of investments for federal tax purposes amounts $47,636,834. The net
unrealized depreciation on federal tax cost basis amounts to $1,554,196, and
is comprised of $12,442 appreciation and $1,566,638 depreciation at November
30, 1994.
* Please refer to the Appendix of the Statement of Additional Information for an
explanation of the credit ratings. Current ratings are unaudited.
Note: The categories of investments are shown as a percentage of net assets
($45,447,966) at November 30, 1994.
The following abbreviations are used in this portfolio:
AMBAC--American Municipal Bond Assurance Corporation
AMT--Alternative Minimum Tax
EDA--Economic Development Authority
FGIC--Financial Guaranty Insurance Company
FNMA--Federal National Mortgage Association
GNMA--Government National Mortgage Association
GO--General Obligation
HEFA--Health and Education Facilities Authority
IDA--Industrial Development Authority
IDC--Industrial Development Corporation
IFA--Industrial Finance Authority
LOC--Letter of Credit
PCR--Pollution Control Revenue
UT--UnlimitedTax
VRDNs--Variable Rate Demand Notes
(See Notes which are an integral part of the Financial Statements)
LIMITED TERM MUNICIPAL FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ----------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost and tax cost $47,636,834) $ 46,082,638
- ----------------------------------------------------------------------------------------------------
Cash 40,258
- ----------------------------------------------------------------------------------------------------
Receivable for investments sold 3,081,211
- ----------------------------------------------------------------------------------------------------
Interest receivable 792,561
- ----------------------------------------------------------------------------------------------------
Receivable for capital stock sold 300,613
- ----------------------------------------------------------------------------------------------------
Deferred expenses 58,641
- ---------------------------------------------------------------------------------------------------- ------------
Total assets 50,355,922
- ----------------------------------------------------------------------------------------------------
LIABILITIES:
- ----------------------------------------------------------------------------------------------------
Payable for investments purchased $ 3,008,400
- ---------------------------------------------------------------------------------------
Payable for capital stock redeemed 1,773,451
- ---------------------------------------------------------------------------------------
Dividends payable 66,485
- ---------------------------------------------------------------------------------------
Accrued expenses 59,620
- --------------------------------------------------------------------------------------- -----------
Total liabilities 4,907,956
- ---------------------------------------------------------------------------------------------------- ------------
NET ASSETS for 4,786,660 shares of capital stock outstanding $ 45,447,966
- ---------------------------------------------------------------------------------------------------- ------------
NET ASSETS CONSIST OF:
- ----------------------------------------------------------------------------------------------------
Paid-in capital $ 48,989,248
- ----------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investments (1,554,196)
- ----------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (1,987,086)
- ---------------------------------------------------------------------------------------------------- ------------
Total Net Assets $ 45,447,966
- ---------------------------------------------------------------------------------------------------- ------------
NET ASSET VALUE:
- ----------------------------------------------------------------------------------------------------
Fortress Shares ($12,803,606 / 1,348,521 shares of capital stock outstanding) $9.49
- ---------------------------------------------------------------------------------------------------- ------------
Class A Shares ($32,644,360 / 3,438,139 shares of capital stock outstanding) $9.49
- ---------------------------------------------------------------------------------------------------- ------------
OFFERING PRICE PER SHARE:
- ----------------------------------------------------------------------------------------------------
Fortress Shares (100/99 of $9.49)* $9.59
- ---------------------------------------------------------------------------------------------------- ------------
Class A Shares (100/99 of $9.49)* $9.59
- ---------------------------------------------------------------------------------------------------- ------------
REDEMPTION PROCEEDS PER SHARE:
- ----------------------------------------------------------------------------------------------------
Fortress Shares (99/100 of $9.49)** $9.40
- ---------------------------------------------------------------------------------------------------- ------------
Class A Shares $9.49
- ---------------------------------------------------------------------------------------------------- ------------
</TABLE>
* See "What Shares Cost" in the prospectus.
** See "Redeeming Fortress Shares" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
LIMITED TERM MUNICIPAL FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------------------
Interest income $ 2,209,502
- ---------------------------------------------------------------------------------------------------
EXPENSES:
- -------------------------------------------------------------------------------------
Investment advisory fee $ 177,908
- -------------------------------------------------------------------------------------
Administrative personnel and services fee 90,877
- -------------------------------------------------------------------------------------
Distribution services fee--Fortress Shares 5,776
- -------------------------------------------------------------------------------------
Distribution services fee--Class A Shares 86,419
- -------------------------------------------------------------------------------------
Custodian and portfolio accounting fees 82,376
- -------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 24,462
- -------------------------------------------------------------------------------------
Directors' fee 997
- -------------------------------------------------------------------------------------
Auditing fees 8,129
- -------------------------------------------------------------------------------------
Insurance premiums 6,977
- -------------------------------------------------------------------------------------
Legal fees 2,786
- -------------------------------------------------------------------------------------
Printing and postage 52,512
- -------------------------------------------------------------------------------------
Registration fees 23,562
- -------------------------------------------------------------------------------------
Shareholder services fee--Fortress Shares 24,773
- -------------------------------------------------------------------------------------
Shareholder services fee--Class A Shares 86,419
- -------------------------------------------------------------------------------------
Miscellaneous 4,787
- ------------------------------------------------------------------------------------- ------------
Total expenses 678,760
- -------------------------------------------------------------------------------------
Deduct--
- -------------------------------------------------------------------------------------
Waiver of investment advisory fee $ 177,908
- -------------------------------------------------------------------------
Reimbursement of other operating expenses by Adviser 241,409 419,317
- ------------------------------------------------------------------------- ---------- ------------
Net expenses 259,443
- --------------------------------------------------------------------------------------------------- -------------
Net investment income 1,950,059
- --------------------------------------------------------------------------------------------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (1,987,086)
- ---------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (1,490,568)
- --------------------------------------------------------------------------------------------------- -------------
Net realized and unrealized gain (loss) on investments (3,477,654)
- --------------------------------------------------------------------------------------------------- -------------
Change in net assets resulting from operations ($ 1,527,595)
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
(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,
1994 1993*
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- --------------------------------------------------------------------------------
OPERATIONS--
- --------------------------------------------------------------------------------
Net investment income $ 1,950,059 $ 66,764
- --------------------------------------------------------------------------------
Net realized gain (loss) on investments ($1,987,086 net loss and $0 net loss,
respectively, as computed for federal tax purposes) (1,987,086) --
- --------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on
investments (1,490,568) (63,628)
- -------------------------------------------------------------------------------- -------------- --------------
Change in net assets resulting from operations (1,527,595) 3,136
- -------------------------------------------------------------------------------- -------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS--
- --------------------------------------------------------------------------------
Dividends to shareholders from net investment income:
- --------------------------------------------------------------------------------
Fortress Shares (452,363) (8,993)
- --------------------------------------------------------------------------------
Class A Shares (1,497,696) (57,771)
- -------------------------------------------------------------------------------- -------------- --------------
Change in net assets resulting from distributions to
shareholders (1,950,059) (66,764)
- -------------------------------------------------------------------------------- -------------- --------------
CAPITAL STOCK TRANSACTIONS--
- --------------------------------------------------------------------------------
Proceeds from sale of shares 84,145,643 19,912,662
- --------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
dividends declared 1,275,042 36,661
- --------------------------------------------------------------------------------
Cost of shares redeemed (53,496,962) (2,883,798)
- -------------------------------------------------------------------------------- -------------- --------------
Change in net assets resulting from capital stock transactions 31,923,723 17,065,525
- -------------------------------------------------------------------------------- -------------- --------------
Change in net assets 28,446,069 17,001,897
- --------------------------------------------------------------------------------
NET ASSETS:
- --------------------------------------------------------------------------------
Beginning of period 17,001,897 --
- -------------------------------------------------------------------------------- -------------- --------------
End of period $ 45,447,966 $ 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, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Fixed Income Securities, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end,
management investment company. The Corporation consists of five diversified
investment portfolios. The financial statements included herein are only those
of Limited Term Municipal Fund (the "Fund"). The financial statements of the
other portfolios 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. The Fund offers two classes of shares Fortress Shares, and
Class A Shares.
As of October 17, 1994, Multi-State Municipal Income Fund no longer accepted
purchases. It is anticipated that Multi-State Municipal Income Fund's
liquidation will occur in 1995.
During the fiscal year ended November 30, 1994, the Corporation offered five
portfolios (Limited Term Fund, Limited Term Municipal Fund, Strategic Income
Fund, Limited Maturity Government Fund, and Multi-State Municipal Income Fund ).
The Board of Directors approved the liquidation of Limited Maturity Government
Fund, and as of December 23, 1994 was no longer offered.
(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 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. Short-term securities with remaining
maturities of sixty days or less may be stated at amortized cost, which
approximates value.
B. INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS--Interest income and
expenses are accrued daily. Bond premium and discount, if applicable, are
amortized as required by the Internal Revenue Code, as amended (the
"Code"). Distributions to shareholders are recorded on the ex-dividend
date.
C. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its taxable income.
Accordingly, no provisions for federal tax are necessary. At November 30,
1994, the Fund, for federal tax purposes, had a capital loss carryforward
of $1,987,086, which will reduce the Fund's taxable income arising from
future net realized gain on investments, if any,
to the extent permitted by the Code, and thus will reduce the amount of the
distributions to 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 2002 ($1,987,086).
D. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date 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. 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 its shares, have been deferred and are being
amortized using the straight-line method not to exceed a period of five
years from the Fund's commencement date.
F. OTHER--Investment transactions are accounted for on the trade date.
(3) CAPITAL STOCK
At November 30, 1994, there were 10,000,000,000 shares of $0.001 par value
capital stock authorized for the Corporation. 2,000,000,000 shares have been
designated for the Fund. Of these shares, 1,000,000,000 have been designated as
Fortress Shares of the Fund and 1,000,000,000 have been designated as Class A
Shares of the Fund. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1994 1993*
FORTRESS SHARES SHARES DOLLARS SHARES DOLLARS
- ------------------------------------------------------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares sold 1,295,783 $ 12,793,467 330,714 $ 3,320,324
- -------------------------------------------------------
Shares issued to shareholders in payment of dividends
declared 22,393 218,275 331 3,326
- -------------------------------------------------------
Shares redeemed (299,885) (2,914,764) (815) (8,242)
- ------------------------------------------------------- ------------ ------------- ----------- -------------
Net change resulting from Fortress Shares share
transactions 1,018,291 $ 10,096,978 330,230 $ 3,315,408
- ------------------------------------------------------- ------------ ------------- ----------- -------------
</TABLE>
* For the period from September 1, 1993 (date of initial public offering) to
November 30, 1993.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1994 1993*
CLASS A SHARES SHARES DOLLARS SHARES DOLLARS
- ------------------------------------------------------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares sold 7,174,691 $ 71,352,176 1,649,398 $ 16,592,338
- -------------------------------------------------------
Shares issued to shareholders in payment of dividends
declared 108,095 1,056,767 3,323 33,335
- -------------------------------------------------------
Shares redeemed (5,211,977) (50,582,198) (285,391) (2,875,556)
- ------------------------------------------------------- ------------ ------------- ----------- -------------
Net change resulting from Class A Shares share
transactions 2,070,809 $ 21,826,745 1,367,330 $ 13,750,117
- ------------------------------------------------------- ------------ ------------- ----------- -------------
Net change resulting from capital stock
transactions 3,089,100 $ 31,923,723 1,697,560 $ 17,065,525
- ------------------------------------------------------- ------------ ------------- ----------- -------------
</TABLE>
* For the period from September 1, 1993 (date of initial public offering) to
November 30, 1993.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--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 may voluntarily
choose to waive a portion of its fee and reimburse certain operating expenses of
the Fund. The Adivser can modify or terminate this voluntary waiver and
reimbursement at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with administrative personnel and services. Prior to March 1, 1994, these
services were provided at approximate cost. Effective March 1, 1994, the FAS fee
is based on the level of average aggregate daily net assets of all funds advised
by subsidiaries of Federated Investors for the period. The administrative fee
received during the period of the Administrative Services Agreement shall be at
least $125,000 per portfolio and $30,000 per each additional class of shares.
DISTRIBUTION AND SHAREHOLDER SERVICES FEE--The Fund has adopted a Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the
Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund to finance activities intended to
result in the sale of the Fund's Fortress Shares and Class A Shares. The Plan
provides that the Fund may incur distribution expenses up to .15 and .25,
respectively, of 1% of the average daily net assets of the Fortress Shares and
Class A Shares, respectively, annually, to compensate FSC.
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS a fee of up to .25 of 1% of average net
assets of the Fund for the period. This fee is to obtain certain personal
services for shareholders and to maintain shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("FServ") serves as transfer and dividend disbursing agent for the Fund. The
FServ fee is based on the size, type, and number of accounts and transactions
made by shareholders.
ORGANIZATIONAL EXPENSES--Organizational expenses of $53,065 and start-up
administrative service expenses of $46,733 were borne initially by the Adviser.
The Fund has agreed to reimburse the Adviser for the organizational expenses and
start-up administrative expenses during the five year period following August
31, 1993 (date the Fund's portfolio first became effective). For the year ended
November 30, 1994, the Fund paid $4,113 and $4,750, respectively pursuant to
this agreement.
INTERFUND TRANSACTIONS--During the year ended November 30, 1994, the Fund
engaged in purchase and sale transactions with other affiliated funds at current
value pursuant to Rule 17a-7 under the Act amounting to $58,050,000, and
$87,379,820, respectively.
Certain of the Officers and Directors of the Corporation are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended
November 30, 1994 were as follows:
<TABLE>
<CAPTION>
<S> <C>
PURCHASES $ 88,915,189
- --------------------------------------------------------------------------------------------------- -------------
SALES $ 56,708,555
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
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, 1994, and 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 28 of the prospectus)
for each of the years in the two year period then ended. 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, 1994 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 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
Municipal Fund as of November 30, 1994, the results of its operations, the
changes in its net assets, and its financial highlights in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
January 13, 1995
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Limited Term Municipal Fund
Class A 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
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 125 Summer Street
Boston, Massachusetts 02110-1617
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
LIMITED TERM
MUNICIPAL FUND
CLASS A SHARES
(FORMERLY INVESTMENT SHARES)
PROSPECTUS
A Diversified portfolio of
Fixed Income Securities, Inc.,
an Open-End, Management
Investment Company
January 31, 1995
[LOGO] FEDERATED SECURITIES CORP.
--------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
338319502
3070702A-A (1/95)
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 Class A Shares dated January 31, 1995, 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 Combined 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, 1995
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
Investment Risks 13
Investment Limitations 13
NET ASSET VALUE 14
- ------------------------------------------------------
INVESTING IN FORTRESS SHARES 14
- ------------------------------------------------------
Share Purchases 14
Minimum Investment Required 15
What Shares Cost 15
Eliminating the Sales Load 16
Systematic Investment Program 17
Certificates and Confirmations 17
Dividends and Distributions 17
EXCHANGE PRIVILEGE 18
- ------------------------------------------------------
REDEEMING FORTRESS SHARES 18
- ------------------------------------------------------
Through a Financial Institution 18
Directly by Mail 19
Receiving Payment 19
Contingent Deferred Sales Charge 20
Systematic Withdrawal Program 20
Accounts with Low Balances 21
Exchanges for Shares of Other Funds 21
FIXED INCOME SECURITIES, INC. INFORMATION 22
- ------------------------------------------------------
Management of the Corporation 22
Distribution of Fortress Shares 23
Expenses of the Fund and Fortress
Shares 24
SHAREHOLDER INFORMATION 25
- ------------------------------------------------------
Voting Rights 25
TAX INFORMATION 25
- ------------------------------------------------------
Federal Income Tax 25
Pennsylvania Corporate and
Personal Property Taxes 26
Other State and Local Taxes 26
PERFORMANCE INFORMATION 27
- ------------------------------------------------------
OTHER CLASSES OF SHARES 27
- ------------------------------------------------------
Financial Highlights--Class A Shares 28
FINANCIAL STATEMENTS 29
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 45
- ------------------------------------------------------
ADDRESSES 46
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FORTRESS 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
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) (1)........................................... 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................. None
Exchange Fee................................................................................... None
<CAPTION>
ANNUAL FORTRESS SHARES OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver) (2).............................................................. 0.00%
12b-1 Fee...................................................................................... 0.15%
Total Other Expenses (after expense reimbursement)............................................. 0.85%
Shareholder Services Fee (after waiver) (3)................................................ 0.23%
Total Fortress Shares Operating Expenses (4).......................................... 1.00%
</TABLE>
(1) The Contingent Deferred Sales Charge is 1.00% of the lesser of the original
purchase price or the net asset value of shares redeemed within four years
of their purchase price. 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 maximum shareholder services fee is 0.25%.
(4) The total Fortress Shares operating expenses in the table above are based on
expenses expected during the fiscal year ending November 30, 1995. The total
Fortress Shares operating expenses were 0.44% for the fiscal year ended
November 30, 1994, and would have been 1.38% 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 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 5 years 10 years
<S> <C> <C> <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 $65 $131
You would pay the following expenses on the same investment, assuming no
redemption............................................................... $20 $42 $65 $131
</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
Fortress Shares of the Fund. The Fund also offers another class of shares called
Class A Shares. Fortress Shares and Class A Shares are subject to certain of the
same expenses. However, Class A Shares are subject to a 12b-1 fee of 0.25% and
may be 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 EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 45.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
--------------------
1994 1993*
<S> <C> <C>
- ---------------------------------------------------------------------------------------- --------- ---------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.02 $ 10.00
- ----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------
Net investment income 0.45 0.11
- ----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.53) 0.02
- ---------------------------------------------------------------------------------------- --------- ---------
Total from investment operations (0.08) 0.13
- ----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.45) (0.11)
- ---------------------------------------------------------------------------------------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 9.49 $ 10.02
- ---------------------------------------------------------------------------------------- --------- ---------
TOTAL RETURN** (0.75%) 1.26%
- ----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------
Expenses 0.44% 0.25%(a)
- ----------------------------------------------------------------------------------------
Net investment income 4.57% 4.79%(a)
- ----------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.94% 1.86%(a)
- ----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $12,804 $3,307
- ----------------------------------------------------------------------------------------
Portfolio turnover rate 135% 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) This voluntary expense decrease is reflected in both the expense and net
income ratios shown above.
(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 for the fiscal year ended November 30, 1994, 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 Strategic Income
Fund. With respect to the Fund, the Directors have established two classes of
shares known as Fortress Shares and Class A Shares. On May 19, 1994, the Board
of Directors approved the reclassification of Investment Shares as Class A
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 load 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 "Program"). The other funds in the Program are:
.American Leaders Fund, Inc., providing growth of capital and income
through high-quality stocks;
.California Municipal Income Fund, 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;
.Liberty Equity Income Fund, Inc., providing above average income and
capital appreciation through income producing equity securities;
.Limited Term Fund, 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, 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, providing current income exempt from federal
regular income tax and Ohio personal income taxes.
.World Utility Fund, providing total return by investing primarily in
securities issued by domestic and foreign companies in the utilities
industry.
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 prices of fixed income securities fluctuate inversely to the
direction of interest rates. The interest rate on floating rate securities is
subject to adjustment based on a published interest rate or interest rate 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 semi-annual 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 Ratings Group
("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 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. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. 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.
Accordingly, the Fund may pay more/less than the market value of the securities
on the settlement date.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
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 Class A 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.
The financial institution which maintains investor accounts with the Fund must
do so on a fully disclosed basis unless it accounts for share ownership periods
used in calculating the contingent deferred sales charge (see "Contingent
Deferred Sales Charge"). In addition, advance payments made to financial
institutions may be subject to reclaim by the distributor for accounts
transferred to financial institutions which do not maintain investor accounts on
a fully disclosed basis and do not account for share ownership periods (see
"Other Payments to Financial Institutions").
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, c/o
State Street Bank and Trust Company, P.O. Box 8604, Boston, Massachusetts
02266-8604.
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 load of 1% of the offering price (which is 1.01% of the
net amount invested). There is no sales load for purchases of $1 million or
more. In addition, no sales load 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 load. Any portion of the sales load 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 load 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 load 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 LOAD
The sales load 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 load 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 load.
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 load 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 load 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 load 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 load may be eliminated by signing a
letter of intent to that effect. This letter of intent includes a provision for
a sales load 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 load, 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 load. 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 load. If the shareholder redeems his Shares, there may be tax
consequences.
CONCURRENT PURCHASES. For purposes of qualifying for a sales load 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 load. For example, if a shareholder concurrently invested $400,000 in one
of the other Fortress Funds and $600,000 in Shares, the sales load would be
eliminated.
To receive this sales load 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 load
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 load 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 load, 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 may also be exchanged into certain other funds for which affiliates of
Federated Investors serves as the principal underwriter ("Federated Funds").
With the exception of exchanges into other Fortress Funds, such exchanges will
be subject to a contingent deferred sales charge and possibly a sales load.
Shareholders in certain Federated Funds may exchange their shares into the
Federated Funds for Fortress Shares.
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 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 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, c/o State Street Bank and Trust Company, P.O. Box 8604,
Boston, Massachusetts 02266-8604. 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 contingent deferred sales charge.
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 "Other Payments to Financial Institutions."
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 load, 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.
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 load. 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 loads. 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 and Jonathan C. Conley are
the Fund's co-portfolio managers. Mary Jo Ochson has been the Fund's
co-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.
Jonathan C. Conley has been the Fund's co-portfolio manager since its
inception. 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 FORTRESS SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS. Under a distribution plan adopted
in accordance with Investment Company Act Rule 12b-1 (the "Distribution Plan"),
the Fund will pay to the distributor an amount, computed at an annual rate of
0.15 of 1% of the average daily net asset value of Shares to finance any
activity which is principally intended to result in the sale of Shares subject
to the Distribution Plan. The distributor may select financial institutions such
as banks, fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales support services as agents for their clients or
customers.
The Distribution Plan is a compensation-type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amount or may earn a profit from future payments made by the Fund
under the Distribution Plan.
In addition, the Fund has adopted a Shareholder Services Plan (the "Services
Plan") under which it may make payments up to 0.25 of 1% of the average daily
net asset value of Shares to obtain certain personal services for shareholders
and the maintenance of shareholder accounts ("shareholder services"). The Fund
has entered into a Shareholder Services Agreement with Federated Shareholder
Services, a subsidiary of Federated Investors, under which Federated Shareholder
Services will either perform shareholder services directly or will select
financial institutions to perform shareholder services. Financial institutions
will receive fees based upon shares owned by their clients or customers. The
schedules of such fees and the basis upon which such fees will paid will be
determined from time to time by the Fund and Federated Shareholder Services.
The Glass-Steagall Act limits the ability of a depository institution (such as a
commercial bank or a savings and loan association) to become an underwriter or
distributor of securities. In the event the Glass-Steagall Act is deemed to
prohibit depository institutions from acting in the capacities described above
or should Congress relax current restrictions on depository institutions, the
Directors will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. 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. Furthermore, the Adviser or
its affiliates may offer to pay a fee from their own assets to financial
institutions as financial assistance for providing substantial marketing, sales,
and operational support to the distributor. The support may include
participating in sales, educational and training seminars at recreational-type
facilities, providing sales literature, and engineering computer software
programs that emphasize the attributes of the Fund. Such assistance will be
predicated upon the amount of Shares the financial institution sells or may
sell, and/or upon the type and nature of sales or operational support furnished
by the financial institution.
The fees paid to financial institutions by the distributor will be reimbursed by
the Adviser.
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE FEDERATED FUNDS
<S> <C>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN. State Street Bank and Trust Company ("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.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, 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
The Fund is not subject to Pennsylvania corporate or personal property taxes.
Fund shares may be subject to personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania to the extent that the
portfolio securities in the Fund would be subject to such taxes if owned
directly by residents of those jurisdictions.
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 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.
Total return will be calculated separately for Fortress Shares and Class A
Shares. Because Fortress Shares are subject to lower 12b-1 expenses, the yield
for Fortress Shares, for the same period, will exceed that of Class A Shares.
Because Class A Shares are not currently subject to a contingent deferred sales
charge, the total return for Class A Shares, for the same period, may exceed
that of Fortress Shares.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund currently offers Fortress Shares and Class A Shares. The Class A Shares
are sold subject to a front-end sales load of up to 1%, but without any
contingent deferred sales charge. Class A Shares are subject to a minimum
initial investment of $5,000.
The amount of dividends payable to Class A Shares will generally be less than
that of Fortress Shares by the difference between class expenses and
distribution and shareholder service expenses borne by shares of each respective
class.
The stated advisory fee is the same for both classes of shares.
LIMITED TERM MUNICIPAL FUND
FINANCIAL HIGHLIGHTS--CLASS A SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 45.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
--------------------
1994 1993*
<S> <C> <C>
- ---------------------------------------------------------------------------------------- --------- ---------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.02 $ 10.00
- ----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------
Net investment income 0.43 0.10
- ----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.53) 0.02
- ---------------------------------------------------------------------------------------- --------- ---------
Total from investment operations (0.10) 0.12
- ----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.43) (0.10)
- ---------------------------------------------------------------------------------------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 9.49 $ 10.02
- ---------------------------------------------------------------------------------------- --------- ---------
TOTAL RETURN** (0.95%) 1.20%
- ----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------
Expenses 0.63% 0.50%(a)
- ----------------------------------------------------------------------------------------
Net investment income 4.33% 4.30%(a)
- ----------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.94% 1.71%(a)
- ----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $32,644 $13,694
- ----------------------------------------------------------------------------------------
Portfolio turnover rate 135% 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) This voluntary expense decrease is reflected in both the expense and net
income ratios shown above.
(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 for the fiscal year ended November 30, 1994, which can be obtained
free of charge.
LIMITED TERM MUNICIPAL FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
<C> <S> <C> <C>
- ------------- ----------------------------------------------------------------------- ---------- -------------
SHORT-TERM MUNICIPAL SECURITIES--3.4%
- --------------------------------------------------------------------------------------
GEORGIA--2.4%
-----------------------------------------------------------------------
$ 1,100,000 Gwinnett County, GA, IDA Daily VRDNs (Volvo of America, Inc.)/(Union
Bank of Switzerland LOC) Subject to AMT P-1 $ 1,100,000
----------------------------------------------------------------------- -------------
MINNESOTA--0.6%
-----------------------------------------------------------------------
250,000 Crystal City, MN, IDA Weekly VRDNs (Crystal Gallery Mall)/(Citibank
N.A. LOC) P-1 250,000
----------------------------------------------------------------------- -------------
TEXAS--0.4%
-----------------------------------------------------------------------
200,000 Harris County, TX, IDC Daily VRDNs (Yokohoma Tire Corp.)/(Industrial
Bank of Japan Ltd. LOC)/(Subject to AMT) A-1 200,000
----------------------------------------------------------------------- -------------
TOTAL SHORT-TERM MUNICIPAL SECURITIES (AT AMORTIZED COST) 1,550,000
----------------------------------------------------------------------- -------------
LONG-TERM MUNICIPAL SECURITIES--98.0%
- --------------------------------------------------------------------------------------
ARIZONA--0.9%
-----------------------------------------------------------------------
400,000 Maricopa County, AZ, IDA, 6.65% Industrial Development Bonds (Citizens
Utilities Company)/(Subject to AMT), Mandatory Tender 4/1/2001 AAA 404,776
----------------------------------------------------------------------- -------------
COLORADO--6.5%
-----------------------------------------------------------------------
500,000 Colorado Student Obligation Bond Authority, 5.20% Student Loan Revenue
Bonds (Series 1994J), 9/1/97 A 491,175
-----------------------------------------------------------------------
1,000,000 Colorado Student Obligation Bond Authority, 5.40% Student Loan Revenue
Bonds (Series 1994J), 9/1/98 A 975,910
-----------------------------------------------------------------------
1,500,000 Denver (City & County), CO, Airport System, 6.00% Sub. Revenue Bonds
(Series 1991 C)/(Toronto-Dominion Bank LOC), Mandatory Tender 4/1/97
(@100) AA 1,500,000
----------------------------------------------------------------------- -------------
Total 2,967,085
----------------------------------------------------------------------- -------------
</TABLE>
LIMITED TERM MUNICIPAL FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
<C> <S> <C> <C>
- ------------- ----------------------------------------------------------------------- ---------- -------------
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- --------------------------------------------------------------------------------------
DISTRICT OF COLUMBIA--2.5%
-----------------------------------------------------------------------
$ 1,100,000 District of Columbia, 6.50% Hospital Revenue Bonds (Medlantic Health
System, Washington Hospital)/(Original Issue Yield: 6.599%), 8/15/96 BBB $ 1,115,818
----------------------------------------------------------------------- -------------
FLORIDA--1.0%
-----------------------------------------------------------------------
275,000 City of Leesburg, FL, 4.60% Hospital Refunding Revenue Bonds (Series
1993B)/(Leesburg Regional Medical Center), 7/1/98 BBB+ 258,869
-----------------------------------------------------------------------
200,000 Jacksonville, FL, Electric Authority, 6.50% Special
Obligation Revenue Bonds (St. Johns River Power Park
System), Callable 10/1/99 (@101.5) AA 191,816
----------------------------------------------------------------------- -------------
Total 450,685
----------------------------------------------------------------------- -------------
ILLINOIS--12.5%
-----------------------------------------------------------------------
750,000 Chicago, IL, 7.50% Gas Supply Revenue Bonds (Peoples Gas, Light & Coke
Co.), Callable 3/1/2000 (@102) AA- 781,612
-----------------------------------------------------------------------
500,000 Illinois Development Finance Authority, 5.25% Revenue Bonds (Series
1993C)/(Catholic Charities Housing
Development Corp.)/(Archdiocese of Chicago Guaranty),
1/1/99 NR 476,650
-----------------------------------------------------------------------
245,000 Illinois Development Finance Authority, 7.625% PCR Bonds (Illinois
Power Company)/(FGIC Insured)/(Subject to AMT), Callable 6/1/97 (@103) AAA 251,892
-----------------------------------------------------------------------
365,000 Illinois Educational Facilities Authority, 4.90% Refunding Revenue
Bonds (Illinois Institute of Technology), 12/1/96 BBB 359,700
-----------------------------------------------------------------------
380,000 Illinois Educational Facilities Authority, 5.05% Refunding Revenue
Bonds (Illinois Institute of Technology), 12/1/97 BBB 371,534
-----------------------------------------------------------------------
400,000 Illinois Educational Facilities Authority, 5.25% Refunding Revenue
Bonds (Illinois Institute of Technology), 12/1/98 BBB 389,440
-----------------------------------------------------------------------
</TABLE>
LIMITED TERM MUNICIPAL FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
<C> <S> <C> <C>
- ------------- ----------------------------------------------------------------------- ---------- -------------
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- --------------------------------------------------------------------------------------
ILLINOIS--CONTINUED
-----------------------------------------------------------------------
$ 250,000 Illinois Health Facilities Authority, 4.95% Refunding
Revenue Bonds (Lutheran Social Services of Illinois),
8/15/96 NR $ 245,615
-----------------------------------------------------------------------
220,000 Illinois Health Facilities Authority, 5.30% Refunding
Revenue Bonds (Lutheran Social Services of Illinois),
8/15/98 NR 210,773
-----------------------------------------------------------------------
600,000 Illinois Health Facilities Authority, 5.75% Revenue Bonds (Mercy
Hospital and Medical Center), 1/1/98 A- 596,706
-----------------------------------------------------------------------
1,000,000 Illinois Health Facilities Authority, 6.15% Revenue Bonds (Trinity
Medical Center)/(Original Issue Yield: 6.25%),
7/1/98 Baa1 999,880
-----------------------------------------------------------------------
1,000,000 Illinois Health Facilities Authority, 6.30% Revenue Bonds (Trinity
Medical Center)/(Original Issue Yield: 6.50%),
7/1/99 Baa1 993,910
----------------------------------------------------------------------- -------------
Total 5,677,712
----------------------------------------------------------------------- -------------
INDIANA--0.5%
-----------------------------------------------------------------------
225,000 Marion County, IN, 6.50% Hospital Authority Refunding Revenue Bonds
(Methodist Hospital), Callable 9/1/99 (@102) AA 217,249
----------------------------------------------------------------------- -------------
IOWA--0.7%
-----------------------------------------------------------------------
325,000 Ottumwa, IA, 4.75% Hospital Facilities Refunding Revenue Bonds (Series
1993)/(Ottumwa Regional Health Center, Inc.), 10/1/97 BBB+ 312,725
----------------------------------------------------------------------- -------------
MASSACHUSETTS--9.9%
-----------------------------------------------------------------------
250,000 Greater New Bedford, MA, Regional Refuse Management District, 4.90%
Landfill GO Bonds (Subject to AMT), 5/1/98 Baa 238,907
-----------------------------------------------------------------------
120,000 Massachusetts Education Loan Authority, 6.40% Revenue Bonds (Series
A)/(AMBAC Insured)/(Subject to AMT),
1/1/99 AAA 122,447
-----------------------------------------------------------------------
</TABLE>
LIMITED TERM MUNICIPAL FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
<C> <S> <C> <C>
- ------------- ----------------------------------------------------------------------- ---------- -------------
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- --------------------------------------------------------------------------------------
MASSACHUSETTS--CONTINUED
-----------------------------------------------------------------------
$ 515,000 Massachusetts State HEFA, 5.00% Revenue Bonds
(Series B)/(Holyoke Hospital), 7/1/96 Baa1 $ 508,763
-----------------------------------------------------------------------
545,000 Massachusetts State HEFA, 5.25% Revenue Bonds
(Series A)/(Holyoke Hospital), 7/1/97 Baa1 532,154
-----------------------------------------------------------------------
565,000 Massachusetts State HEFA, 5.50% Revenue Bonds
(Series B)/(Holyoke Hospital), 7/1/98 Baa1 545,948
-----------------------------------------------------------------------
605,000 Massachusetts State HEFA, 5.75% Revenue Bonds
(Series B)/(Holyoke Hospital), 7/1/99 Baa1 580,715
-----------------------------------------------------------------------
2,000,000 Massachusetts State IFA, 8.00% Solid Waste Disposal Revenue Bonds
(Series 1994A)/(Sr. Lien--Massachusetts Recycling Association)/(Subject
to AMT), 7/1/99 NR 1,937,500
----------------------------------------------------------------------- -------------
Total 4,466,434
----------------------------------------------------------------------- -------------
MINNESOTA--3.6%
-----------------------------------------------------------------------
1,500,000 Saint Paul, MN, Housing & Redevelopment Authority, 9.75% Hospital
Revenue Bonds (Series B)/(HealthEast
Project), Callable 11/1/97 (@102) BBB- 1,653,750
----------------------------------------------------------------------- -------------
MISSOURI--2.1%
-----------------------------------------------------------------------
1,000,000 Kansas City, MO, IDA, 6.05% PCR Revenue Bonds (General Motors Corp.),
Callable 6/1/99 (@101) BBB+ 945,800
----------------------------------------------------------------------- -------------
NEW JERSEY--0.5%
-----------------------------------------------------------------------
250,000 New Jersey EDA, Natural Gas Facilities, 6.75% Revenue Bonds
(Elizabethtown Gas Company)/(Subject to AMT), Callable 10/1/96 (@102) A3 235,835
----------------------------------------------------------------------- -------------
NEW YORK--2.2%
-----------------------------------------------------------------------
200,000 New York State, Energy Research and Development Authority, 7.375%
Facilities Revenue Bonds (Consolidated Edison Company)/(Subject to
AMT), Callable 7/1/98 (@101) AA+ 199,860
-----------------------------------------------------------------------
350,000 New York, NY, 4.875% UT GO Bonds (Series E), 8/1/99 A- 324,968
-----------------------------------------------------------------------
</TABLE>
LIMITED TERM MUNICIPAL FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
<C> <S> <C> <C>
- ------------- ----------------------------------------------------------------------- ---------- -------------
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- --------------------------------------------------------------------------------------
NEW YORK--CONTINUED
-----------------------------------------------------------------------
$ 200,000 New York, NY, 4.875% UT GO Bonds (Series F), 8/1/99 A- $ 185,696
-----------------------------------------------------------------------
300,000 New York, NY, 4.875% UT GO Bonds (Series G), 8/1/99 A- 278,544
----------------------------------------------------------------------- -------------
Total 989,068
----------------------------------------------------------------------- -------------
NORTH CAROLINA--1.8%
-----------------------------------------------------------------------
830,000 North Carolina Eastern Municipal Power Agency, 7.25% Revenue Bonds,
Callable 1/1/97 (@102) A 831,079
----------------------------------------------------------------------- -------------
OHIO--8.5%
-----------------------------------------------------------------------
1,000,000 Bellefontaine, OH, 5.00% Hospital Revenue Bonds (Mary Rutan Health
Association),12/1/97 BBB 964,660
-----------------------------------------------------------------------
1,500,000 Clyde, OH, Temp. Water System, 5.60% Improvement
Revenue Bonds (Series 1994), 5/1/97 MIG1 1,511,700
-----------------------------------------------------------------------
250,000 Marion County, OH, Health Care Facilities, 4.75% Refunding Revenue
Bonds (Series 1993)/(United Church Homes, Inc.), 11/15/96 BBB- 245,243
-----------------------------------------------------------------------
630,000 Marion County, OH, Health Care Facilities, 5.00% Refunding Revenue
Bonds (Series 1993)/(United Church Homes, Inc.), 11/15/97 BBB- 610,653
-----------------------------------------------------------------------
525,000 Youngstown, OH, 5.50% City School District Revenue Anticipation Notes,
6/15/96 NR 525,751
----------------------------------------------------------------------- -------------
Total 3,858,007
----------------------------------------------------------------------- -------------
OKLAHOMA--4.4%
-----------------------------------------------------------------------
2,055,000 Jackson County, OK, Memorial Hospital Authority, 5.875% Hospital
Revenue Bonds (Jackson County Memorial
Hospital), 8/1/97 BBB- 2,004,200
----------------------------------------------------------------------- -------------
PENNSYLVANIA--17.6%
-----------------------------------------------------------------------
500,000 Allegheny County, PA, Residential Finance Authority, 4.875% Single
Family Mortgage Refunding Revenue Bonds (GNMA/FNMA Collateralized),
Callable 11/1/2003 (@102) Aaa 441,455
-----------------------------------------------------------------------
</TABLE>
LIMITED TERM MUNICIPAL FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
<C> <S> <C> <C>
- ------------- ----------------------------------------------------------------------- ---------- -------------
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- --------------------------------------------------------------------------------------
PENNSYLVANIA--CONTINUED
-----------------------------------------------------------------------
$ 750,000 Beaver County, PA, IDA 7.75% PCR Bonds (Series A)/(Ohio Edison
Project), Callable 9/1/99 (@102) BBB- $ 747,262
-----------------------------------------------------------------------
130,000 Delaware County, PA, 4.80% Hospital Revenue Bonds (Crozer-Chester
Medical Center), 12/15/98 BBB+ 123,089
-----------------------------------------------------------------------
2,000,000 Delaware County, PA, 4.875% Health Care Revenue Bonds (Mercy Health
Corp. of Southeastern, PA), 11/15/97 BBB 1,898,300
-----------------------------------------------------------------------
120,000 Delaware County, PA, 4.90% Hospital Revenue Bonds (Crozer-Chester
Medical Center), 12/15/99 BBB+ 110,370
-----------------------------------------------------------------------
2,000,000 Delaware County, PA, 5.125% Health Care Revenue Bonds (Series
1993B)/(Mercy Health Corp. of Southeastern, PA), 11/15/98 BBB 1,879,420
-----------------------------------------------------------------------
250,000 Franklin, PA, 10.875% Special Obligation Revenue Bonds (Franklin
Regional Medical Center), Callable 10/1/95 (@101.5) BBB 251,788
-----------------------------------------------------------------------
500,000 Northeastern Pennsylvania Hospital & Education Authority, 4.60%
University Revenue Bonds (Series 1993)/(Wilkes University), 10/1/98 BBB 469,930
-----------------------------------------------------------------------
125,000 Philadelphia PA, Hospital & Higher Education Facilities Authority,
6.60% Hospital Revenue Bonds (Series B)/
(Children's Seashore House), 8/15/98 BBB+ 127,196
-----------------------------------------------------------------------
250,000 Pittsburgh, PA, Urban Redevelopment Authority, 5.00% Multifamily
Mortgage Refunding Revenue Bonds (Series 1994)/(Mellon Bank NA,
Pittsburgh LOC), 6/1/97 A1 245,230
-----------------------------------------------------------------------
675,000 Scranton, PA, Lackawanna Health & Welfare Authority, 5.00% Revenue
Bonds (Allied Services Rehabilitation
Hospital), 7/15/95 NR 667,629
-----------------------------------------------------------------------
455,000 Scranton, PA, Lackawanna Health & Welfare Authority, 5.40% Revenue
Bonds (Allied Services Rehabilitation Hospital), 7/15/96 NR 448,526
-----------------------------------------------------------------------
</TABLE>
LIMITED TERM MUNICIPAL FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
<C> <S> <C> <C>
- ------------- ----------------------------------------------------------------------- ---------- -------------
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- --------------------------------------------------------------------------------------
PENNSYLVANIA--CONTINUED
-----------------------------------------------------------------------
$ 485,000 Scranton, PA, Lackawanna Health & Welfare Authority, 5.75% Revenue
Bonds (Allied Services Rehabilitation
Hospital), 7/15/97 NR $ 475,620
-----------------------------------------------------------------------
125,000 West Cornwall Township, PA Municipal Authority, 4.75% First Mortgage
Refunding Revenue Bonds (Cornwall Manor), 6/1/98 NR 120,471
----------------------------------------------------------------------- -------------
Total 8,006,286
----------------------------------------------------------------------- -------------
PUERTO RICO--7.7%
-----------------------------------------------------------------------
1,600,000 Puerto Rico, Electric Power Authority, 5.00% Power
Revenue Bonds (Series T), 7/1/97 A- 1,578,944
-----------------------------------------------------------------------
2,000,000 Puerto Rico, 5.00% Municipal Finance Agency Bonds (Series
1994A)/(Original Issue Yield: 5.10%), 7/1/98 A- 1,947,460
----------------------------------------------------------------------- -------------
Total 3,526,404
----------------------------------------------------------------------- -------------
SOUTH DAKOTA--1.6%
-----------------------------------------------------------------------
195,000 South Dakota HEFA, 5.00% Revenue Bonds (Series 1994)/ (Huron Regional
Medical Center), 4/1/96 BBB- 192,931
-----------------------------------------------------------------------
105,000 South Dakota HEFA, 5.40% Revenue Bonds (Series 1994)/ (Huron Regional
Medical Center), 4/1/97 BBB- 102,633
-----------------------------------------------------------------------
215,000 South Dakota HEFA, 5.50% Revenue Bonds (Series 1994)/ (Huron Regional
Medical Center), 4/1/98 BBB- 208,060
-----------------------------------------------------------------------
225,000 South Dakota HEFA, 6.00% Revenue Bonds (Series 1994)/ (Huron Regional
Medical Center), 4/1/99 BBB- 219,625
----------------------------------------------------------------------- -------------
Total 723,249
----------------------------------------------------------------------- -------------
TENNESSEE--3.7%
-----------------------------------------------------------------------
1,500,000 Springfield, TN, Health & Educational Facilities Board, 7.50% Hospital
Revenue Bonds (Jesse Holman Jones
Hospital), 4/1/2000 NR 1,462,635
-----------------------------------------------------------------------
</TABLE>
LIMITED TERM MUNICIPAL FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
<C> <S> <C> <C>
- ------------- ----------------------------------------------------------------------- ---------- -------------
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- --------------------------------------------------------------------------------------
TENNESSEE--CONTINUED
-----------------------------------------------------------------------
$ 250,000 Tennessee State Volunteer Student Funding Corp., 4.95% Educational Loan
Revenue Bonds (Series B)/(Subject to AMT), 6/1/2000 Aa $ 235,170
----------------------------------------------------------------------- -------------
Total 1,697,805
----------------------------------------------------------------------- -------------
TEXAS--5.5%
-----------------------------------------------------------------------
1,800,000 Brazos River Authority, TX, 8.25% Revenue Bonds (Houston Light & Power
Company), Callable 5/1/98 (@102) A 1,897,344
-----------------------------------------------------------------------
350,000 Brazos River Authority, TX, 9.875% PCR Bonds, (Texas
Utilities Electric Company)/(Subject to AMT), callable
10/1/97 @102 BBB 383,733
-----------------------------------------------------------------------
200,000 Orange County, TX, Navigational & Port District IDC, 4.75% Solid Waste
Revenue Bonds (Horsehead Reserve Development Company)/(Long-Term Credit
Bank of Japan Ltd LOC)/(Subject to AMT), Optional Tender 10/1/95 A 199,974
----------------------------------------------------------------------- -------------
Total 2,481,051
----------------------------------------------------------------------- -------------
VIRGINIA--4.3%
-----------------------------------------------------------------------
2,000,000 Virginia State Housing Development Authority
Commission, 5.40% Mortgage Revenue Bonds (Series 1994G-2)/ (Subject to
AMT), 1/1/98 AA+ 1,967,620
----------------------------------------------------------------------- -------------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST, $46,086,834) 44,532,638
----------------------------------------------------------------------- -------------
TOTAL INVESTMENTS (IDENTIFIED COST, $47,636,834) $ 46,082,638+
----------------------------------------------------------------------- -------------
</TABLE>
LIMITED TERM MUNICIPAL FUND
- --------------------------------------------------------------------------------
+ The cost of investments for federal tax purposes amounts $47,636,834. The net
unrealized depreciation on federal tax cost basis amounts to $1,554,196, and
is comprised of $12,442 appreciation and $1,566,638 depreciation at November
30, 1994.
* Please refer to the Appendix of the Statement of Additional Information for an
explanation of the credit ratings. Current ratings are unaudited.
Note: The categories of investments are shown as a percentage of net assets
($45,447,966) at November 30, 1994.
The following abbreviations are used in this portfolio:
AMBAC--American Municipal Bond Assurance Corporation
AMT--Alternative Minimum Tax
EDA--Economic Development Authority
FGIC--Financial Guaranty Insurance Company
FNMA--Federal National Mortgage Association
GNMA--Government National Mortgage Association
GO--General Obligation
HEFA--Health and Education Facilities Authority
IDA--Industrial Development Authority
IDC--Industrial Development Corporation
IFA--Industrial Finance Authority
LOC--Letter of Credit
PCR--Pollution Control Revenue
UT--UnlimitedTax
VRDNs--Variable Rate Demand Notes
(See Notes which are an integral part of the Financial Statements)
LIMITED TERM MUNICIPAL FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ----------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost and tax cost $47,636,834) $ 46,082,638
- ----------------------------------------------------------------------------------------------------
Cash 40,258
- ----------------------------------------------------------------------------------------------------
Receivable for investments sold 3,081,211
- ----------------------------------------------------------------------------------------------------
Interest receivable 792,561
- ----------------------------------------------------------------------------------------------------
Receivable for capital stock sold 300,613
- ----------------------------------------------------------------------------------------------------
Deferred expenses 58,641
- ---------------------------------------------------------------------------------------------------- ------------
Total assets 50,355,922
- ----------------------------------------------------------------------------------------------------
LIABILITIES:
- ----------------------------------------------------------------------------------------------------
Payable for investments purchased $ 3,008,400
- ---------------------------------------------------------------------------------------
Payable for capital stock redeemed 1,773,451
- ---------------------------------------------------------------------------------------
Dividends payable 66,485
- ---------------------------------------------------------------------------------------
Accrued expenses 59,620
- --------------------------------------------------------------------------------------- -----------
Total liabilities 4,907,956
- ---------------------------------------------------------------------------------------------------- ------------
NET ASSETS for 4,786,660 shares of capital stock outstanding $ 45,447,966
- ---------------------------------------------------------------------------------------------------- ------------
NET ASSETS CONSIST OF:
- ----------------------------------------------------------------------------------------------------
Paid-in capital $ 48,989,248
- ----------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investments (1,554,196)
- ----------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (1,987,086)
- ---------------------------------------------------------------------------------------------------- ------------
Total Net Assets $ 45,447,966
- ---------------------------------------------------------------------------------------------------- ------------
NET ASSET VALUE:
- ----------------------------------------------------------------------------------------------------
Fortress Shares ($12,803,606 / 1,348,521 shares of capital stock outstanding) $9.49
- ---------------------------------------------------------------------------------------------------- ------------
Class A Shares ($32,644,360 / 3,438,139 shares of capital stock outstanding) $9.49
- ---------------------------------------------------------------------------------------------------- ------------
OFFERING PRICE PER SHARE:
- ----------------------------------------------------------------------------------------------------
Fortress Shares (100/99 of $9.49)* $9.59
- ---------------------------------------------------------------------------------------------------- ------------
Class A Shares (100/99 of $9.49)* $9.59
- ---------------------------------------------------------------------------------------------------- ------------
REDEMPTION PROCEEDS PER SHARE:
- ----------------------------------------------------------------------------------------------------
Fortress Shares (99/100 of $9.49)** $9.40
- ---------------------------------------------------------------------------------------------------- ------------
Class A Shares $9.49
- ---------------------------------------------------------------------------------------------------- ------------
</TABLE>
* See "What Shares Cost" in the prospectus.
** See "Redeeming Fortress Shares" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
LIMITED TERM MUNICIPAL FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------------------
Interest income $2,209,502
- ---------------------------------------------------------------------------------------------------
EXPENSES:
- -------------------------------------------------------------------------------------
Investment advisory fee $ 177,908
- -------------------------------------------------------------------------------------
Administrative personnel and services fee 90,877
- -------------------------------------------------------------------------------------
Distribution services fee--Fortress Shares 5,776
- -------------------------------------------------------------------------------------
Distribution services fee--Class A Shares 86,419
- -------------------------------------------------------------------------------------
Custodian and portfolio accounting fees 82,376
- -------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 24,462
- -------------------------------------------------------------------------------------
Directors' fee 997
- -------------------------------------------------------------------------------------
Auditing fees 8,129
- -------------------------------------------------------------------------------------
Insurance premiums 6,977
- -------------------------------------------------------------------------------------
Legal fees 2,786
- -------------------------------------------------------------------------------------
Printing and postage 52,512
- -------------------------------------------------------------------------------------
Registration fees 23,562
- -------------------------------------------------------------------------------------
Shareholder services fee--Fortress Shares 24,773
- -------------------------------------------------------------------------------------
Shareholder services fee--Class A Shares 86,419
- -------------------------------------------------------------------------------------
Miscellaneous 4,787
- ------------------------------------------------------------------------------------- ------------
Total expenses 678,760
- -------------------------------------------------------------------------------------
Deduct--
- -------------------------------------------------------------------------------------
Waiver of investment advisory fee $ 177,908
- -------------------------------------------------------------------------
Reimbursement of other operating expenses by Adviser 241,409 419,317
- ------------------------------------------------------------------------- ---------- ------------
Net expenses 259,443
- --------------------------------------------------------------------------------------------------- -------------
Net investment income 1,950,059
- --------------------------------------------------------------------------------------------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (1,987,086)
- ---------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on
investments (1,490,568)
- --------------------------------------------------------------------------------------------------- -------------
Net realized and unrealized gain (loss) on investments (3,477,654)
- --------------------------------------------------------------------------------------------------- -------------
Change in net assets resulting from operations ($1,527,595)
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
(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,
<S> <C> <C>
1994 1993*
INCREASE (DECREASE) IN NET ASSETS:
- --------------------------------------------------------------------------------
OPERATIONS--
- --------------------------------------------------------------------------------
Net investment income $ 1,950,059 $ 66,764
- --------------------------------------------------------------------------------
Net realized gain (loss) on investments ($1,987,086 net loss and $0 net loss,
respectively, as computed for federal tax purposes) (1,987,086) --
- --------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (1,490,568) (63,628)
- -------------------------------------------------------------------------------- -------------- --------------
Change in net assets resulting from operations (1,527,595) 3,136
- -------------------------------------------------------------------------------- -------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS--
- --------------------------------------------------------------------------------
Dividends to shareholders from net investment income:
- --------------------------------------------------------------------------------
Fortress Shares (452,363) (8,993)
- --------------------------------------------------------------------------------
Class A Shares (1,497,696) (57,771)
- -------------------------------------------------------------------------------- -------------- --------------
Change in net assets resulting from distributions to
shareholders (1,950,059) (66,764)
- -------------------------------------------------------------------------------- -------------- --------------
CAPITAL STOCK TRANSACTIONS--
- --------------------------------------------------------------------------------
Proceeds from sale of shares 84,145,643 19,912,662
- --------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
dividends declared 1,275,042 36,661
- --------------------------------------------------------------------------------
Cost of shares redeemed (53,496,962) (2,883,798)
- -------------------------------------------------------------------------------- -------------- --------------
Change in net assets resulting from capital stock transactions 31,923,723 17,065,525
- -------------------------------------------------------------------------------- -------------- --------------
Change in net assets 28,446,069 17,001,897
- --------------------------------------------------------------------------------
NET ASSETS:
- --------------------------------------------------------------------------------
Beginning of period 17,001,897 --
- -------------------------------------------------------------------------------- -------------- --------------
End of period $ 45,447,966 $ 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, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Fixed Income Securities, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end,
management investment company. The Corporation consists of five diversified
investment portfolios. The financial statements included herein are only those
of Limited Term Municipal Fund (the "Fund"). The financial statements of the
other portfolios 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. The Fund offers two classes of shares Fortress Shares, and
Class A Shares.
As of October 17, 1994, Multi-State Municipal Income Fund no longer accepted
purchases. It is anticipated that Multi-State Municipal Income Fund's
liquidation will occur in 1995.
During the fiscal year ended November 30, 1994, the Corporation offered five
portfolios (Limited Term Fund, Limited Term Municipal Fund, Strategic Income
Fund, Limited Maturity Government Fund, and Multi-State Municipal Income Fund ).
As of December 23, 1994, Limited Maturity Government Fund was no longer offered.
The Board of Directors approved the liquidation of Limited Maturity Government
Fund, and as of December 23, 1994 was no longer offered.
(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 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. Short-term securities with remaining
maturities of sixty days or less may be stated at amortized cost, which
approximates value.
B. INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS--Interest income and
expenses are accrued daily. Bond premium and discount, if applicable, are
amortized as required by the Internal Revenue Code, as amended (the
"Code"). Distributions to shareholders are recorded on the ex-dividend
date.
C. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its taxable income.
Accordingly, no provisions for federal tax are necessary. At November 30,
1994, the Fund, for federal tax purposes, had a capital loss carryforward
of $1,987,086, which will
reduce the Fund's taxable income arising from future net realized gain on
investments, if any, to the extent permitted by the Code, and thus will
reduce the amount of the distributions to 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
2002 ($1,987,086).
D. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date 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. 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 its shares, have been deferred and are being
amortized using the straight-line method not to exceed a period of five
years from the Fund's commencement date.
F. OTHER--Investment transactions are accounted for on the trade date.
(3) CAPITAL STOCK
At November 30, 1994, there were 10,000,000,000 shares of $0.001 par value
capital stock authorized for the Corporation. 2,000,000,000 shares have been
designated for the Fund. Of these shares, 1,000,000,000 have been designated as
Fortress Shares of the Fund and 1,000,000,000 have been designated as Class A
Shares of the Fund. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1994 1993*
FORTRESS SHARES SHARES DOLLARS SHARES DOLLARS
- --------------------------------------------------------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Shares sold 1,295,783 $ 12,793,467 330,714 $ 3,320,324
- ---------------------------------------------------------
Shares issued to shareholders in payment of dividends
declared 22,393 218,275 331 3,326
- ---------------------------------------------------------
Shares redeemed (299,885) (2,914,764) (815) (8,242)
- --------------------------------------------------------- ------------ ------------- ----------- ------------
Net change resulting from Fortress Shares share
transactions 1,018,291 $ 10,096,978 330,230 $ 3,315,408
- --------------------------------------------------------- ------------ ------------- ----------- ------------
</TABLE>
*For the period from September 1, 1993 (date of initial public offering) to
November 30, 1993.
LIMITED TERM MUNICIPAL FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1994 1993*
CLASS A SHARES SHARES DOLLARS SHARES DOLLARS
- ------------------------------------------------------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares sold 7,174,691 $ 71,352,176 1,649,398 $ 16,592,338
- -------------------------------------------------------
Shares issued to shareholders in payment of dividends
declared 108,095 1,056,767 3,323 33,335
- -------------------------------------------------------
Shares redeemed (5,211,977) (50,582,198) (285,391) (2,875,556)
- ------------------------------------------------------- ------------ ------------- ----------- -------------
Net change resulting from Class A Shares share
transactions 2,070,809 $ 21,826,745 1,367,330 $ 13,750,117
- ------------------------------------------------------- ------------ ------------- ----------- -------------
Net change resulting from capital stock
transactions 3,089,100 $ 31,923,723 1,697,560 $ 17,065,525
- ------------------------------------------------------- ------------ ------------- ----------- -------------
</TABLE>
* For the period from September 1, 1993 (date of initial public offering) to
November 30, 1993.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--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 may voluntarily
choose to waive a portion of its fee and reimburse certain operating expenses of
the Fund. The Adviser can modify or terminate this voluntary waiver and
reimbursement at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with
administrative personnel and services. Prior to March 1, 1994, these services
were provided at approximate cost. Effective March 1, 1994, the FAS fee is based
on the level of average aggregate daily net assets of all funds advised by
subsidiaries of Federated Investors for the period. The administrative fee
received during the period of the Administrative Services Agreement shall be at
least $125,000 per portfolio and $30,000 per each additional class of shares.
DISTRIBUTION AND SHAREHOLDER SERVICES FEE--The Fund has adopted a Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the
Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund to finance activities intended to
result in the sale of the Fund's Fortress Shares and Class A Shares. The Plan
provides that the Fund may incur distribution expenses up to .15 and .25,
respectively, of 1% of the average daily net assets of the Fortress Shares and
Class A Shares, respectively, annually, to compensate FSC.
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS a fee of up to .25 of 1% of average net
assets of the Fund for the period. This fee is to obtain certain personal
services for shareholders and to maintain shareholder accounts.
LIMITED TERM MUNICIPAL FUND
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TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("FServ") serves as transfer and dividend disbursing agent for the Fund. The
FServ fee is based on the size, type, and number of accounts and transactions
made by shareholders.
ORGANIZATIONAL EXPENSES--Organizational expenses of $53,065 and start-up
administrative service expenses of $46,733 were borne initially by the Adviser.
The Fund has agreed to reimburse the Adviser for the organizational expenses and
start-up administrative expenses during the five year period following August
31, 1993 (date the Fund's portfolio first became effective). For the year ended
November 30, 1994, the Fund paid $4,113 and $4,750, respectively pursuant to
this agreement.
INTERFUND TRANSACTIONS--During the year ended November 30, 1994, the Fund
engaged in purchase and sale transactions with other affiliated funds at current
value pursuant to Rule 17a-7 under the Act amounting to $58,050,000, and
$87,379,820, respectively.
Certain of the Officers and Directors of the Corporation are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended
November 30, 1994 were as follows:
<TABLE>
<CAPTION>
<S> <C>
PURCHASES $ 88,915,189
- --------------------------------------------------------------------------------------------------- -------------
SALES $ 56,708,555
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
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, 1994, and 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 28 of the prospectus)
for each of the years in the two-year period then ended. 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, 1994 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 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
Municipal Fund as of November 30, 1994, the results of its operations, the
changes in its net assets, and its financial highlights in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
January 13, 1995
ADDRESSES
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<TABLE>
<S> <C> <C>
Limited Term Municipal Fund
Fortress Shares 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
- ---------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 125 Summer Street
Boston, Massachusetts 02110-1617
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
LIMITED TERM
MUNICIPAL FUND
FORTRESS SHARES
PROSPECTUS
A Diversified Portfolio of
Fixed Income Securities, Inc.,
an Open-End, Management
Investment Company
January 31, 1995
[LOGO] FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER [RECYCLED GRAPHIC]
PITTSBURGH, PA 15222-3779
338319403
3070702-FS (1/95)
Limited Term Municipal Fund
(A Portfolio of Fixed Income Securities, Inc.)
Fortress Shares
Class A Shares
Combined Statement of Additional Information
This Combined Statement of Additional Information should be read
with the respective prospectuses of Fortress Shares and Class A
Shares of Limited Term Municipal Fund (the "Fund") January 31,
1995.
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, 1995
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of Federated
Investors
General Information About the
Fund 1
Investment Objective and Policies 1
Types of Investments 1
Participation Interests 1
Municipal Leases 2
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 5
Temporary Investments 5
Portfolio Turnover 6
Investment Limitations 6
Fixed Income Securities, Inc.
Management 8
The Funds 11
Fund Ownership 11
Officers and Directors
Compensation 11
Director Liability 12
Investment Advisory Services 12
Adviser to the Fund 12
Advisory Fees 12
Administrative Services 13
Transfer Agent and Dividend
Disbursing Agent 13
Brokerage Transactions 13
Distribution Plan and
Shareholder Services Plan 14
Purchases by Sales
Representatives, Fund
Directors, and Employees 14
Determining Net Asset Value 14
Determining Market Value of
Securities 14
Exchange Privilege 15
Reduced Sales Load 15
Requirements for Exchange 15
Tax Consequences 15
Making an Exchange 15
Redeeming Shares 15
Redemption in Kind 16
Tax Status 16
The Fund's Tax Status 16
Shareholders' Tax Status 16
Total Return 17
Yield 17
Tax-Equivalent Yield 17
Tax Equivalency Table 17
Performance Comparisons 18
Appendix 20
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.
Shares of the Fund are offered in two classes known as Class A Shares
and Fortress Shares (individually and collectively referred to as
"Shares" as the context may require). On May 19, 1994, the Board of
Directors approved the reclassification of Investment Shares as Class A
Shares. This Combined Statement of Additional Information relates to
both classes of the above mentioned Shares.
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 Ratings
Group ("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:
o general obligation bonds;
o 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;
o industrial development bonds;
o 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");
o municipal notes and tax-exempt commercial paper;
o pre-refunded municipal securities whose timely payment of interest
and principal is ensured by an escrow of U.S. government
obligations;
o auction rate and tender option securities; and
o 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:
o whether the lease can be terminated by the lessee;
o the potential recovery, if any, from a sale of the leased property
upon termination of the lease;
o the lessee's general credit strength (e.g., its debt,
administrative, economic and financial characteristics and
prospects);
o 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
o 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:
Duration = PVCF(1) PVCF2(2) PVCF3(3) PVCFn(n)
________ +________ +________ + . . . . + ________
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 made to secure what is considered to be an
advantageous price or yield for the Fund. 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 on the Fund's records at the trade date. These
assets are marked to market daily and are maintained until the
transaction has been settled. The Fund does not intend to engage in when-
issued and delayed delivery transactions to an extent that would cause
the segregation of more than 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:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and
the number of other potential buyers;
o dealer undertakings to make a market in the security; and
o 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. For the fiscal
years ended November 30, 1994 and 1993, the portfolio turnover rates
were 135% and 0%, respectively.
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.
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.
The Fund will not sell any securities short, 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.
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 are listed with their addresses, present
positions with Fixed Income Securities, Inc., and principal
occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Chairman and Director
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life
and Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, Vice President of the Company.
Thomas G. Bigley
28th Floor, One Oxford Center
Pittsburgh, PA
Director
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee, or Managing General Partner
of the Funds; formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Director
President, Investment Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors; President, Northgate
Village Development Corporation; Partner or Trustee in private real
estate ventures in Southwest Florida; Director, Trustee, or Managing
General Partner of the Funds; formerly, President, Naples Property
Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Director
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Director,
Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Director
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; Professor of Medicine and Trustee, University of Pittsburgh;
Director of Corporate Health, University of Pittsburgh Medical Center;
Director, Trustee, or Managing General Partner of the Funds.
Richard B. Fisher *
Federated Investors Tower
Pittsburgh, PA
President and Director
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.
Edward L. Flaherty, Jr.@
Two Gateway Center - Suite 674
Pittsburgh, PA
Director
Attorney-at-law; Partner, Henny, Koehuba, Meyer & Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.
Peter E. Madden
225 Franklin Street
Boston, MA
Director
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds; formerly,
President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Two Gateway Center - Suite 674
Pittsburgh, PA
Director
Attorney-at-law; Partner, Henny, Koehuba, Meyer & Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Director
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Director
Public relations/marketing consultant; Director, Trustee, or Managing
General Partner of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Vice President
President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and Director,
Federated Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; 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 Company.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.
* This Director is deemed to be an "interested person" as defined
in the Investment Company Act of 1940, as amended.
@ Member of the 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:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Cash Management Trust; Automated Government Money Trust;
California Municipal Cash Trust; Cash Trust Series II; Cash Trust
Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport
Cash Trust; 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 Institutional
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; International Series, Inc.; Investment Series Funds,
Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.;
Liberty U.S. Government Money Market Trust; Liberty Term Trust, Inc. -
1999; Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed Series
Trust; The Medalist Funds; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income
Trust; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; Newpoint Funds; RIMCO Monument Funds; The
Shawmut Funds; Short-Term Municipal Trust; Star Funds; The Starburst
Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; Trademark
Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for
U.S. Treasury Obligations; World Investment Series, Inc.
Fund Ownership
Officers and Directors own less than 1% of the outstanding Class A
Shares and Fortress Shares.
As of January 11, 1995, the following shareholders of record owned 5% or
more of the outstanding Class A Shares of the Fund: Merrill Lynch,
Pierce, Fenner & Smith, Jacksonville, Florida, as record owner holding
Class A Shares for its clients, owned approximately 323,606 shares
(10.90%), and The Ford Meter Box Company Inc., Wabash, Indiana, owned
approximately 310,286 shares (10.44%).
As of January 11, 1995, the following shareholders of record owned 5% or
more of the outstanding Fortress Shares of the Fund: Merrill Lynch,
Pierce, Fenner & Smith, Jacksonville, Florida, as record owner holding
Fortress Shares for its clients, owned approximately 258,312 shares
(17.47%), and Sam Lingard Insurance Trust, Bedford, Texas, owned
approximately 128,601 shares (8.70%).
Officers and Directors Compensation
NAME , AGGREGATE TOTAL COMPENSATION
PAID
POSITION WITH COMPENSATION FROM TO DIRECTORS FROM
CORPORATION *CORPORATION CORPORATION AND FUND
COMPLEX
John F. Donahue,
Chairman and Director $ -0- $ -0- for the
Corporation and
69 investment
companies
Thomas G. Bigley,
Director $ 131.00 $ 24,991 for the
Corporation and
50 investment
companies
John T. Conroy, Jr.,
Director $ 1,501.75 $ 136,100 for the
Corporation and
65 investment
companies
William J. Copeland,
Director $ 1,501.75 $ 136,100 for the
Corporation and
65 investment
companies
James E. Dowd,
Director $ 1,501.75 $ 136,100 for the
Corporation and
65 investment
companies
Lawrence D. Ellis, M.D.,
Director $ 1,362.50 $ 123,600 for the
Corporation and
65 investment
companies
Richard B. Fisher,
President and Director $ -0- $ -0- for the
Corporation and
9 investment
companies
Edward L. Flaherty, Jr.,
Director $ 1,501.75 $ 136,100 for the
Corporation and
65 investment
companies
Peter E. Madden,
Director $ 1,153.50 $ 104,880 for the
Corporation and
65 investment
companies
Gregor F. Meyer,
Director $ 1,362.50 $ 123,600 for the
Corporation and
65 investment
companies
Wesley W. Posvar,
Director $ 1,362.50 $ 123,600 for the
Corporation and
65 investment
companies
Marjorie P. Smuts,
Director $ 1,362.50 $ 123,600 for the
Corporation and
65 investment
companies
* The aggregate compensation is provided for the Corporation which is
comprised of 4 portfolios.
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 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.
Advisory Fees
For its advisory services, the Adviser receives an annual investment
advisory fee as described in the prospectus. During the fiscal years
ended November 30, 1994 and 1993, the Fund's Adviser earned $177,908 and
$6,122, respectively, of which $177,908 and $6,122, respectively, were
voluntarily waived. In addition, the Adviser reimbursed the Fund
$241,409 and $20,000, respectively, 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, 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.
Administrative Services
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. Prior to March 1, 1994, Federated
Administrative Services, Inc., also a subsidiary of Federated Investors,
served as the Fund's administrator. (For purposes of this Statement of
Additional Information, Federated Administrative Services and Federated
Administrative Services, Inc., may hereinafter collectively be referred
to as the "Administrators".) For the fiscal year ended November 30,
1994, the Administrators collectively earned $90,877. For the fiscal
year ended November 30, 1993, Federated Administrative Services, Inc.
earned $950. Dr. Henry J. Gailliot, an officer of Federated Management,
the adviser to the Fund, holds approximately 20% of the outstanding
common stock and serves as a director of Commercial Data Services, Inc.,
a company which provides computer processing services to Federated
Administrative Services, Inc. and Federated Administrative Services.
Transfer Agent and Dividend Disbursing Agent
Federated Services Company serves as transfer agent and dividend
disbursing agent for the Fund. The fee paid to the transfer agent is
based upon the size, type and number of accounts and transactions made
by shareholders.
Federated Services Company also maintains the Fund's accounting records.
The fee paid for this service is based upon the level of the Fund's
average net assets for the period plus out-of-pocket expenses.
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:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o 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 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.
For the fiscal years ended November 30, 1994 and 1993, the Fund paid no
brokerage commissions on brokerage transactions.
Purchasing Shares
Except under certain circumstances described in the prospectus, shares
are sold at their net asset value plus a sales load on days the New York
Stock Exchange is open for business. The procedure for purchasing shares
of the Fund is explained in the respective prospectus under "Investing
in Class A Shares" or "Investing in Fortress Shares."
Distribution Plan and Shareholder Services Plan
These arrangements permit the payment of fees to financial institutions,
the distributor, and Federated Shareholder Services, to stimulate
distribution activities and to cause services to be provided to
shareholders by a representative who has knowledge of the shareholder's
particular circumstances and goals. These activities and services may
include, but are not limited to, marketing efforts; providing office
space, equipment, telephone facilities, and various clerical,
supervisory, computer, and other personnel as necessary or beneficial to
establish and maintain shareholder accounts and records; processing
purchase and redemption transactions and automatic investments of client
account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and
addresses.
By adopting the Distribution Plan, the Board of Trustees expects that
the Fund will be able to achieve a more predictable flow of cash for
investment purposes and to meet redemptions. This will facilitate more
efficient portfolio management and assist the Fund in pursuing its
investment objectives. By identifying potential investors whose needs
are served by the Fund's objectives, and properly servicing these
accounts, it may be possible to curb sharp fluctuations in rates of
redemptions and sales.
Other benefits, which may be realized under either arrangement, may
include: (1) providing personal services to shareholders; (2) investing
shareholder assets with a minimum of delay and administrative detail;
and (3) enhancing shareholder recordkeeping systems; and (4) responding
promptly to shareholders' requests and inquiries concerning their
accounts.
For the fiscal year ended November 30, 1994, payments in the amount of
$5,776 and $86,419 for Fortress Shares and Class A Shares, respectively,
were made pursuant to the Distribution Plan. In addition, for the
fiscal year ended November 30, 1994 , payments in the amount of $24,773
and $86, 419 for Fortress Shares and Class A Shares, respectively, were
made pursuant to the Shareholder Services Plan.
For the period from September 3, 1993, to November 30, 1993, payments in
the amount of $0 and $3,357 for Fortress Shares and Class A Shares,
respectively, were made 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 load. Shares may also be sold without a
sales load 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:
o as provided by an independent pricing service;
o 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
o 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:
o yield;
o quality;
o coupon rate;
o maturity;
o type of issue;
o trading characteristics; and
o 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 load different from that of the Fund's or with no sales load and
which are advised by subsidiaries or affiliates of Federated Investors.
These exchanges are made at net asset value.
Shareholders of certain other funds, including funds that are not
advised by subsidiaries or affiliates of Federated Investors which do
not have a sales load, 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
load.
Reduced Sales Load
If a shareholder making such an exchange qualifies for a reduction or
elimination of the sales load, 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 Class A
Shares" or "Redeeming Fortress Shares." Although the Fund 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. To the extent available, such
securities will be readily marketable.
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:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o 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 average annual total return for Class A Shares for the one
year period ended November 30, 1994, was (1.93%). For the period from
September 1, 1993 (date of initial public investment) to November 30,
1994, the Fund's cumulative total return for Class A Shares was (0.75%).
The average annual total return for Fortress Shares for the one year
period ended November 30, 1994 was (2.66%). For the period from
September 1, 1993 (date of initial public offering) to November 30,
1994, the Fund's cumulative total return for Fortress Shares was
(1.43%).
Cumulative total return of Class A 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.
The average annual total return for the Shares is the average compounded
rate of return for a given period that would equate a $1,000 initial
investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of Shares owned
at the end of the period by the offering price per Share at the end of
the period. The number of Shares owned at the end of the period is based
on the number of Shares purchased at the beginning of the period with
$1,000, adjusted over the period by any additional Shares, assuming the
monthly reinvestment of all dividends and distributions. Any applicable
contingent deferred sales charge is deducted from the ending value of
the investment based on the lesser of the original purchase price or the
net asset value of the Shares redeemed.
Yield
The yield for Class A Shares for the thirty-day period ended November
30, 1994 was 4.90%. The yield for Fortress Shares was 5.05% for the same
period.
The yield of the Fund for each of Class A Shares and Fortress Shares is
determined by dividing the net investment income per share (as defined
by the Securities and Exchange Commission) earned by Class A 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 Class A 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 Class A Shares for the thirty-day period
ended November 30, 1994 was 8.11%. The tax-equivalent yield for
Fortress Shares was 8.36% for the same period.
The tax-equivalent yield of the Fund for each of Class A 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.
Taxable Yield Equivalent for 1995
Federal Income Tax Bracket:
15.00% 28.00% 31.00% 36.00% 39.60%
Joint Return:$1-39,000 $39,001-94,250 $,94,251-143,600
$143,601-256,500 Over $256,500
Single Return: $1-23,350 $23,351-56,550 $56,551-117,950 $117
,951-256,500 Over $256,500
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%
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent.
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 Class A Shares and Fortress Shares depends upon such
variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio
securities;
o changes in the Fund expenses; and
o 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.
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 offering price. The financial publications and/or indices which
the Fund uses in advertising may include:
o 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.
o 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.
o Lehman Brothers Three-Year State General Obligation Bonds is an
index comprised of all state general obligation debt issues with
maturities between two and four years. These bonds are rated A or
better and represent a variety of coupon ranges. Index figures
are total returns calculated for one, three and twelve month
periods as well as year-to-date. Total returns are also
calculated as of the index inception, December 31, 1979.
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 Class A 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.
o Charts and other illustrations that depict the hypothetical growth
of a tax-free investment as compared to a taxable investment.
o Quotations from the Tax Foundation that illustrate the effect of
taxes on income.
Appendix
Standard and Poor's Ratings Group
Municipal Bond Rating Definitions
AAA--Debt rated AAA has the highest rating assigned by S&P. 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.
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 edged." 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.
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. The likelihood that the
ratings of these bonds will fall below investment grade is higher than
for bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified which could assist the obligor in satisfying its debt service
requirement.
B--Bonds are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business
and economic activity throughout the life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires
an advantageous business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C--Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D--Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on
the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest potential
for recovery on these bonds, and "D" represents the lowest potential
for recovery.
NR--Indicates that Fitch does not rate the specific issue.
Standard and Poor's Ratings Group
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 sign (+) 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 broad based 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 ratings.
Standard and Poor's Ratings Group
Commercial Paper Ratings
A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. 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: Leading market positions in well established
industries; High rates of return on funds employed; Conservative
capitalization structure 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.
338319403
338319502
3070702B (1/95)
- --------------------------------------------------------------------------------
STRATEGIC INCOME FUND
(A PORTFOLIO OF FIXED INCOME SECURITIES, INC.)
CLASS A SHARES
PROSPECTUS
The Class A Shares offered by this prospectus represent interests in
Strategic Income Fund (the "Fund"), a diversified investment portfolio
of Fixed Income Securities, Inc. (the "Corporation"), an open-end,
management investment company (a mutual fund).
The investment objective of the Fund is to seek a high level of
current income. The Fund invests in domestic corporate debt
obligations, U.S. government securities, and foreign government and
corporate debt obligations.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS
OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE
SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This prospectus contains the information you should read and know
before you invest in Class A Shares. Keep this prospectus for future
reference.
SPECIAL RISKS
FROM TIME TO TIME, THE FUND'S PORTFOLIO MAY CONSIST PRIMARILY OF
LOWER-RATED CORPORATE DEBT OBLIGATIONS, WHICH ARE COMMONLY REFERRED TO
AS "JUNK BONDS." THESE LOWER-RATED BONDS MAY BE MORE SUSCEPTIBLE TO
REAL OR PERCEIVED ADVERSE ECONOMIC CONDITIONS THAN INVESTMENT GRADE
BONDS. THESE LOWER-RATED BONDS ARE REGARDED AS PREDOMINANTLY
SPECULATIVE WITH REGARD TO EACH ISSUER'S CONTINUING ABILITY TO MAKE
PRINCIPAL AND INTEREST PAYMENTS. IN ADDITION, THE SECONDARY TRADING
MARKET FOR LOWER-RATED BONDS MAY BE LESS LIQUID THAT THE MARKET FOR
INVESTMENT GRADE BONDS. PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS
ASSOCIATED WITH AN INVESTMENT IN CLASS A SHARES.
The Fund's investment adviser will endeavor to limit these risks
through diversifying the portfolio and through careful credit analysis
of individual issuers.
The Fund has filed a Statement of Additional Information for Class A
Shares dated January 31, 1995, 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, 1995
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
SUMMARY OF FUND EXPENSES 1
- ---------------------------------------------------
FINANCIAL HIGHLIGHTS--CLASS A SHARES 2
- ---------------------------------------------------
GENERAL INFORMATION 3
- ---------------------------------------------------
LIBERTY FAMILY OF FUNDS 3
- ---------------------------------------------------
Liberty Family Retirement Program 4
INVESTMENT INFORMATION 5
- ---------------------------------------------------
Investment Objective 5
Investment Policies 5
Investment Limitations 17
NET ASSET VALUE 18
- ---------------------------------------------------
INVESTING IN CLASS A SHARES 18
- ---------------------------------------------------
Share Purchases 18
Minimum Investment Required 19
What Shares Cost 19
Reducing the Sales Load 20
Systematic Investment Program 22
Certificates and Confirmations 22
Dividends and Distributions 22
Retirement Plans 22
EXCHANGE PRIVILEGE 22
- ---------------------------------------------------
Reduced Sales Load 22
Requirements for Exchange 23
Tax Consequences 23
Making an Exchange 23
REDEEMING CLASS A SHARES 24
- ---------------------------------------------------
Through a Financial Institution 24
Directly from the Fund 24
Contingent Deferred Sales Charge 25
Systematic Withdrawal Program 25
Accounts with Low Balances 26
FIXED INCOME SECURITIES, INC.
INFORMATION 26
- ---------------------------------------------------
Management of The Corporation 26
Distribution of Class A Shares 27
Administration of the Fund 27
Expenses of the Fund and Class A
Shares 28
SHAREHOLDER INFORMATION 29
- ---------------------------------------------------
Voting Rights 29
TAX INFORMATION 29
- ---------------------------------------------------
Federal Income Tax 29
Pennsylvania Corporate and Personal
Property Taxes 29
PERFORMANCE INFORMATION 29
- ---------------------------------------------------
OTHER CLASSES OF SHARES 30
- ---------------------------------------------------
Financial Highlights--Class C Shares 31
Financial Highlights--Fortress Shares 32
FINANCIAL STATEMENTS 33
- ---------------------------------------------------
INDEPENDENT AUDITORS' REPORT 48
- ---------------------------------------------------
APPENDIX 49
- ---------------------------------------------------
ADDRESSES 52
- ---------------------------------------------------
</TABLE>
I
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)............................................................. 4.50%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)............................................................. None
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption
proceeds, as applicable)........................................................................ 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)................................ None
Exchange Fee...................................................................................... None
<CAPTION>
ANNUAL CLASS A SHARES OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver) (1)................................................................. 0.00%
12b-1 Fee......................................................................................... None
Total Other Expenses (after expense reimbursement)................................................ 1.35%
Shareholder Services Fee............................................................. 0.25%
Total Class A Shares Operating Expenses (2)............................................... 1.35%
<FN>
(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 0.85%.
(2) The total Class A Shares operating expenses in the table above are based on
expenses expected during the fiscal year ending November 30, 1995. The
total Class A Shares operating expenses were 0.25% for the fiscal year
ended November 30, 1994, and would have been 9.12% absent the voluntary
waiver of the management fee and the voluntary reimbursement of certain
other operating expenses.
</TABLE>
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class A Shares of the Fund will
bear, either directly or indirectly. For more complete descriptions of the
various costs and expenses, see "Investing in Class A Shares" and "Fixed Income
Securities, Inc. Information." Wire-transferred redemptions of less than $5,000
may be subject to additional fees.
<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............................. $58 $86
</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
Class A Shares of the Fund. The Fund also offers two additional classes of
shares called Class C Shares and Fortress Shares. Class A Shares, Class C
Shares, and Fortress Shares, are subject to certain of the same expenses.
However, Fortress Shares are subject to a maximum sales load of 1.00%, a 12b-1
fee of 0.50% and a Contingent Deferred Sales Charge of 1.00%. Class C Shares are
subject to a 12b-1 fee of 0.75% and a Contingent Deferred Sales Charge of 1.00%,
but are not subject to a sales load. See "Other Class of Shares".
1
STRATEGIC INCOME FUND
FINANCIAL HIGHLIGHTS--CLASS A SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Independent Auditors' report on page 48.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1994*
- ---------------------------------------------------------------------- --------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- ----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------
Net investment income 0.45
- ----------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and foreign
currency (0.45)
- ---------------------------------------------------------------------- --------------
Total from investment operations 0.00
- ----------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------
Dividends to shareholders from net investment income (0.45)
- ---------------------------------------------------------------------- --------------
Distributions in excess of net investment income (a) (0.01)
- ---------------------------------------------------------------------- --------------
Total distributions (0.46)
- ---------------------------------------------------------------------- --------------
NET ASSET VALUE, END OF PERIOD $ 9.54
- ---------------------------------------------------------------------- --------------
TOTAL RETURN** 0.05%
- ----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------
Expenses 0.25%(c)
- ----------------------------------------------------------------------
Net investment income 8.38%(c)
- ----------------------------------------------------------------------
Expense waiver/reimbursement (b) 8.87%(c)
- ----------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------
Net assets, end of period (000 omitted) $2,366
- ----------------------------------------------------------------------
Portfolio turnover rate 34%
- ----------------------------------------------------------------------
* For the period from May 3, 1994 (date of initial public investment) to November
30, 1994.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. These distributions do not
represent a return of capital for federal income tax purposes.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Computed on an annualized basis.
</TABLE>
(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 for the fiscal year ended November 30, 1994, which can be obtained
free of charge.
2
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Corporation was incorporated under the laws of the State of Maryland on
October 15, 1991. The Articles of Incorporation permit the Corporation to offer
separate portfolios and classes of shares. As of the date of this Prospectus,
the Board of Directors (the "Directors") has established three separate
portfolios: Strategic Income Fund, Limited Term Fund and Limited Term Municipal
Fund. With respect to the Fund, the Directors have established three classes of
shares known as Class A Shares, Class C Shares and Fortress Shares. This
Prospectus relates only to the Class A Shares of the Fund (the "Shares").
The Fund is designed for investors seeking high current income through a
professionally managed, diversified portfolio investing primarily in domestic
corporate debt obligations, U.S. government securities, and foreign government
and corporate debt obligations. A minimum initial investment of $500 over a
90-day period is required, unless the investment is in a retirement account in
which case the minimum investment is $50.
Shares are sold at net asset value plus an applicable sales load and are
redeemed at net asset value.
LIBERTY FAMILY OF FUNDS
- --------------------------------------------------------------------------------
This Fund is a member of a family of mutual funds, collectively known as the
Liberty Family of Funds. The other funds in the Liberty Family of Funds are:
- American Leaders Fund, Inc., providing growth of capital and income
through high-quality stocks;
- Capital Growth Fund, providing appreciation of capital primarily through
equity securities;
- Fund for U.S. Government Securities Inc., providing current income through
long-term U.S. government securities;
- International Equity Fund, providing long-term capital growth and income
through international securities;
- International Income Fund, providing a high level of current income
consistent with prudent investment risk through high-quality debt
securities denominated primarily in foreign currencies;
- Liberty Equity Income Fund, Inc., providing above-average income and
capital appreciation through income producing equity securities;
- Liberty High Income Bond Fund, Inc., providing high current income through
high-yielding, lower-rated, corporate bonds;
- Liberty Municipal Securities Fund, Inc., providing a high level of current
income exempt from federal regular income tax through municipal bonds;
3
- Liberty U.S. Government Money Market Trust, providing current income
consistent with stability of principal through high quality U.S.
government securities;
- Liberty Utility Fund, Inc., providing current income and long-term growth
of income, primarily through electric, gas and communication utilities;
- Limited Term Fund, providing a high level of current income consistent
with minimum fluctuation in principal value through investment grade
securities;
- Limited Term Municipal Fund, providing a high level of current income
exempt from federal regular income tax consistent with the preservation of
principal, primarily limited to municipal securities;
- Michigan Intermediate Municipal Trust, providing current income exempt
from federal regular income tax and the personal income taxes imposed by
the state of Michigan and Michigan municipalities, primarily through
Michigan municipal securities;
- Pennsylvania Municipal Income Fund, providing current income exempt from
federal regular income tax and the personal income taxes imposed by the
Commonwealth of Pennsylvania, primarily through Pennsylvania municipal
securities;
- Tax-Free Instruments Trust, providing current income consistent with
stability of principal and exempt from federal income tax, through
high-quality, short-term municipal securities; and
- World Utility Fund, providing total return primarily through securities
issued by domestic and foreign companies in the utilities industries.
Prospectuses for these funds are available by writing to Federated Securities
Corp. Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.
The Liberty Family of Funds provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles and by providing the
investment services of a proven, professional investment adviser.
Shareholders of Class A Shares participating in The Liberty Account, are
designated as Liberty Life Members. Liberty Life Members are exempt from sales
loads on future purchases in and exchanges between the Class A Shares of any
Funds in the Liberty Family of Funds, as long as they maintain a $500 balance in
one of the Liberty Funds.
LIBERTY FAMILY RETIREMENT PROGRAM
The Fund is also a member of the Liberty Family Retirement Program (the
"Program"), an integrated program of investment options, plan recordkeeping, and
consultation services for 401(k) and other participant-directed benefit and
savings plans. Under the Program, employers or plan trustees may select a group
of investment options to be offered in a plan which also uses the Program for
recordkeeping and administrative services. Additional fees are charged to
participating plans for these services. As part of the Program, exchanges may
readily be made between investment options selected by the employer or a plan
trustee.
4
The other funds participating in the Liberty Family Retirement Program are:
American Leaders Fund, Inc., Capital Growth Fund, Capital Preservation Fund,
Fund for U.S. Government Securities, Inc., International Equity Fund,
International Income Fund, Liberty Equity Income Fund, Inc., Liberty High Income
Bond Fund, Inc., Liberty Utility Fund, Inc., Prime Cash Series, and Stock and
Bond Fund, Inc.
No sales load is imposed on purchases made by qualified retirement plans with
over $1 million invested in funds available in the Liberty Family Retirement
Program.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek a high level of current income.
The investment objective cannot be changed without approval of shareholders.
While there is no assurance that the Fund will achieve its investment objective,
it endeavors to do so by following the investment policies described in this
prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing in a diversified
portfolio primarily consisting of domestic corporate debt obligations, U.S.
government securities, and foreign government and corporate debt obligations.
Under normal circumstances, the Fund's assets will be invested in each of these
three sectors. However, the Fund may from time to time invest up to 100% of its
total assets in any one sector if, in the judgment of the investment adviser,
the Fund has the opportunity of seeking a high level of current income without
undue risk to principal. Accordingly, the Fund's investments should be
considered speculative. Distributable income will fluctuate as the Fund shifts
assets among the three sectors.
There will be no limit to the weighted average maturity of the portfolio. It
will generally be of longer duration. Duration is a commonly used measure of the
potential volatility of the price of a debt security, or the aggregate market
value of a portfolio of debt securities, prior to maturity. Securities with
longer durations generally have more volatile prices than securities of
comparable quality with shorter durations.
Unless indicated otherwise, the Fund's investment policies may be changed by the
Directors without the approval of shareholders. Shareholders will be notified
before any material change in these investment policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests primarily in a professionally managed,
diversified portfolio consisting of domestic corporate debt obligations, U.S.
government securities, and foreign government and corporate debt obligations.
The Fund also may invest in debt securities issued by domestic and foreign
utilities, as well as money market instruments and other temporary investments.
The securities in which the Fund invests principally are:
- securities issued or guaranteed as to principal and interest by the U.S.
government, its agencies or instrumentalities;
5
- domestic corporate debt obligations, some of which may include equity
features; and
- debt obligations issued by foreign governments and corporations.
The allocation of investments across these three principal types of securities
at any given time is based upon the adviser's estimate of expected performance
and risk of each type of investment. In order to benefit from the typical low
correlation of these three types of securities, the Fund will typically invest a
portion of its assets in each category. However, from time to time, the adviser
may change the allocation based upon its evaluation of the marketplace.
The Fund may invest in debt securities of any maturity. The prices of fixed
income securities fluctuate inversely to the direction of interest rates.
U.S. GOVERNMENT SECURITIES. The U.S. government securities in which the Fund
invests are either issued or guaranteed by the U.S. government, its agencies or
instrumentalities. The U.S. government securities in which the Fund invests
principally are:
- direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes and bonds; and
- obligations of U.S. government agencies or instrumentalities, such as
Federal Home Loan Banks; Federal National Mortgage Association; Government
National Mortgage Association; Farm Credit System, including the National
Bank for Cooperatives, Farm Credit Banks, and Banks for Cooperatives;
Tennessee Valley Authority; Export-Import Bank of the United States;
Commodity Credit Corporation; Federal Financing Bank; Student Loan
Marketing Association; Federal Home Loan Mortgage Corporation; or National
Credit Union Administration.
The government securities in which the Fund may invest are backed in a variety
of ways by the U.S. government or its agencies or instrumentalities. Some of
these securities, such as Government National Mortgage Association ("GNMA")
mortgage-backed securities, are backed by the full faith and credit of the U.S.
government. Other securities, such as obligations of the Federal National
Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation
("FHLMC"), are backed by the credit of the agency or instrumentality issuing the
obligations but not the full faith and credit of the U.S. government. No
assurances can be given that the U.S. government will provide financial support
to these other agencies or instrumentalities, because it is not obligated to do
so.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are securities that
directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans on real property. The mortgage-backed
securities in which the Fund may invest may be issued by an agency of the
U.S. government, typically GNMA, FNMA or FHLMC.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES. Collateralized mortgage obligations ("CMOs") are debt
obligations collateralized by mortgage loans or mortgage pass-through
securities. Typically, CMOs are collateralized by GNMA, FNMA or FHLMC
certificates, but also may be collateralized by whole loans or private
pass-through securities (such collateral being called "Mortgage Assets").
Multiclass pass-through securities are equity interests in a trust composed
of Mortgage Assets. Payments of principal of and interest on the Mortgage
Assets, and any reinvestment income, provide the funds to pay debt service
on the
6
CMOs or make scheduled distributions on the multiclass pass-through
securities. CMOs may be issued by agencies or instrumentalities of the U.S.
government, or by private originators of, or investors in, mortgage loans,
including savings associations, mortgage banks, commercial banks, investment
banks and special purpose subsidiaries of the foregoing. The issuer of a
series of CMOs may elect to be treated as a real estate mortgage investment
conduit, which has certain special tax attributes.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a
specific fixed or floating rate of interest and has a stated maturity or
final distribution date. Principal prepayment on the Mortgage Assets may
cause the CMOs to be retired substantially earlier than their stated
maturities or final distribution dates. Interest is paid or accrues on all
classes of the CMOs on a monthly, quarterly or semi-annual basis. The
principal of and interest on the Mortgage Assets may be allocated among the
several classes of a series of a CMO in innumerable ways. In one structure,
payments of principal, including any principal prepayments, on the Mortgage
Assets are applied to the classes of a CMO in the order of their respective
stated maturities or final distribution dates, so that no payment of
principal will be made on any class of CMOs until all other classes having
an earlier stated maturity or final distribution date have been paid in
full.
CMOs that include a class bearing a floating rate of interest also may
include a class whose yield floats inversely against a specified index rate.
These "inverse floaters" are more volatile than conventional fixed or
floating rate classes of a CMO and the yield thereon, as well as the value
thereof, will fluctuate in inverse proportion to changes in the index on
which interest rate adjustments are based. As a result, the yield on an
inverse floater class of a CMO will generally increase when market yields
(as reflected by the index) decrease and decrease when market yields
increase. The extent of the volatility of inverse floaters depends on the
extent of anticipated changes in market rates of interest. Generally,
inverse floaters provide for interest rate adjustments based upon a multiple
of the specified interest index, which further increases their volatility.
The degree of additional volatility will be directly proportional to the
size of the multiple used in determining interest rate adjustments.
The Fund may also invest in, among others, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other
CMO structures, must be retired by its stated maturity date or final
distribution date but may be retired earlier. PAC Bonds generally require
payments of a specified amount of principal on each payment date. PAC Bonds
are always parallel pay CMOs with the required principal payment on such
securities having the highest priority after interest has been paid to all
classes.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs are offerings
of multiple class real estate mortgage-backed securities which qualify and
elect treatment as such under provisions of the Internal Revenue Code.
Issuers of REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of mortgages. Once REMIC
status is elected and obtained, the entity is not subject to federal income
taxation. Instead,
7
income is passed through the entity and is taxed to the person or persons
who hold interests in the REMIC. A REMIC interest must consist of one or
more classes of "regular interests," some of which may offer adjustable
rates of interest (the type in which the Fund primarily invests), and a
single class of "residual interests." To qualify as a REMIC, substantially
all the assets of the entity must be in assets directly or indirectly
secured principally by real property.
CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES. Mortgage-backed securities
have yield and maturity characteristics corresponding to the underlying
mortgages. Distributions to holders of mortgage-backed securities include
both interest and principal of the underlying mortgages and any prepayments
of principal due to prepayment, refinancing, or foreclosure of the
underlying mortgages. Although maturities of the underlying mortgage loans
may range up to 30 years, amortization and prepayments substantially shorten
the effective maturities of mortgage-backed securities. Due to these
features, mortgage-backed securities are less effective as a means of
"locking in" attractive long-term interest rates than fixed-income
securities which pay only a stated amount of interest until maturity, when
the entire principal amount is returned. This is caused by the need to
reinvest at lower interest rates both distributions of principal generally
and significant prepayments which become more likely as mortgage interest
rates decline. Since comparatively high interest rates cannot be effectively
"locked in," mortgage-backed securities may have less potential for capital
appreciation during periods of declining interest rates than other
non-callable fixed-income government securities of comparable stated
maturities. However, mortgage-backed securities may experience less
pronounced declines in value during periods of rising interest rates.
Prepayments may result in a capital loss to the Fund to the extent that the
prepaid mortgage securities were purchased at a market premium over their
stated amount. Conversely, the prepayment of mortgage securities purchased
at a market discount from their stated principal amount will accelerate the
recognition of interest income by the Fund, which would be taxed as ordinary
income when distributed to the shareholders.
Some of the CMOs purchased by the Fund may represent an interest solely in
the principal repayments or solely in the interest payments on
mortgage-backed securities. Due to the possibility of prepayments on the
underlying mortgages, these securities may be more interest-rate sensitive
than other securities purchased by the Fund. If prevailing interest rates
fall below the level at which the securities were issued, there may be
substantial prepayments on the underlying mortgages, leading to the
relatively early prepayments of principal-only securities and a reduction in
the amount of payments made to holders of interest-only securities. It is
possible that the Fund might not recover its original investment in
interest-only securities if there are substantial prepayments on the
underlying mortgages. Therefore, interest-only securities generally increase
in value as interest rates rise and decrease in value as interest rates
fall, counter to changes in value experienced by most fixed-income
securities. The Fund's adviser intends to use this characteristic of
interest-only securities to reduce the effects of interest rate changes on
the value of the Fund's portfolio, while continuing to pursue current
income.
CORPORATE BONDS AND OTHER FIXED-INCOME OBLIGATIONS. The Fund may invest in both
investment grade and non-investment grade (lower-rated) bonds (which may be
denominated in U.S. dollars or
8
in non-U.S. currencies) and other fixed-income obligations issued by domestic
and foreign corporations and other private issuers. There are no minimum rating
requirements for these investments by the Fund. The Fund's investments may
include U.S. dollar-denominated debt obligations known as "Brady Bonds," which
are issued for the exchange of existing commercial bank loans to foreign
entities for new obligations that are generally collateralized by zero coupon
Treasury securities having the same maturity. From time to time, the Fund's
portfolio may consist primarily of lower-rated (i.e., rated Ba or lower by
Moody's Investors Service, Inc. ("Moody's"), or BB or lower by Standard & Poor's
Ratings Group ("Standard & Poor's") or Fitch Investors Services, Inc. ("Fitch"))
corporate debt obligations, which are commonly referred to as "junk bonds." A
description of the rating categories is contained in the Appendix to this
Prospectus." Certain fixed-income obligations in which the Fund invests may
involve equity characteristics. The Fund may, for example, invest in unit
offerings that combine fixed-income securities and common stock equivalents such
as warrants, rights and options. It is anticipated that the majority of the
value attributable to the unit will relate to its fixed-income component.
FLOATING RATE CORPORATE DEBT OBLIGATIONS. The Fund expects to invest in
floating rate corporate debt obligations, including increasing rate
securities. Floating rate securities are generally offered at an initial
interest rate which is at or above prevailing market rates. The interest
rate paid on these securities is then reset periodically (commonly every 90
days) to an increment over some predetermined interest rate index. Commonly
utilized indices include the three-month Treasury bill rate, the 180-day
Treasury bill rate, the one-month or three-month London Interbank Offered
Rate (LIBOR), the prime rate of a bank, the commercial paper rates, or the
longer-term rates on U.S. Treasury securities.
FIXED RATE CORPORATE DEBT OBLIGATIONS. The Fund will also invest in fixed
rate securities. Fixed rate securities tend to exhibit more price volatility
during times of rising or falling interest rates than securities with
floating rates of interest. This is because floating rate securities, as
described above, behave like short-term instruments in that the rate of
interest they pay is subject to periodic adjustments based on a designated
interest rate index. Fixed rate securities pay a fixed rate of interest and
are more sensitive to fluctuating interest rates. In periods of rising
interest rates the value of a fixed rate security is likely to fall. Fixed
rate securities with short-term characteristics are not subject to the same
price volatility as fixed rate securities without such characteristics.
Therefore, they behave more like floating rate securities with respect to
price volatility.
PARTICIPATION INTERESTS. The Fund may acquire participation interests in
senior, fully secured floating rate loans that are made primarily to U.S.
companies. The Fund's investments in participation interests are subject to
its limitation on investments in illiquid securities. The Fund may purchase
only those participation interests that mature in one year or less, or, if
maturing in more than one year, have a floating rate that is automatically
adjusted at least once each year according to a specified rate for such
investments, such as a published interest rate or interest rate index.
Participation interests are primarily dependent upon the creditworthiness of
the borrower for payment of interest and principal. Such borrowers may have
difficulty making payments and may have senior securities rated as low as C
by Moody's, or D by Standard
9
& Poor's or Fitch. A description of the rating categories is contained in
the Appendix to this Prospectus.
PREFERRED STOCKS. Preferred stock, unlike common stock, offers a stated
dividend rate payable from the issuer's earnings. Preferred stock dividends
may be cumulative or non-cumulative, participating, or auction rate. If
interest rates rise, the fixed dividend on preferred stocks may be less
attractive, causing the price of preferred stocks to decline. Preferred
stock may have mandatory sinking fund provisions, as well as call/redemption
provisions prior to maturity, a negative feature when interest rates
decline.
CONVERTIBLE SECURITIES. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged
for a prescribed amount of common stock of the same or a different issuer
within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest generally paid
or accrued on debt or the dividend paid on preferred stock until the
convertible security matures or is redeemed, converted or exchanged.
Convertible securities have several unique investment characteristics, such
as (a) higher yields than common stocks, but lower yields than comparable
nonconvertible securities, (b) a lesser degree of fluctuation in value than
the underlying stock since they have fixed income characteristics, and (c)
the potential for capital appreciation if the market price of the underlying
common stock increases.
The Fund has no current intention of converting any convertible securities
it may own into equity securities or holding them as an equity investment
upon conversion. A convertible security might be subject to redemption at
the option of the issuer at a price established in the convertible
security's governing instrument. If a convertible security held by the Fund
is called for redemption, the Fund may be required to permit the issuer to
redeem the security, convert it into the underlying common stock or sell it
to a third party.
NON-GOVERNMENT MORTGAGE-BACKED SECURITIES. Non-government mortgage-backed
securities in which the Fund may invest include:
- privately issued securities which are collateralized by pools of mortgages
in which each mortgage is guaranteed as to payment of principal and
interest by an agency or instrumentality of the U.S. government;
- privately issued securities which are collateralized by pools of mortgages
in which payment of principal and interest is guaranteed by the issuer and
such guarantee is collateralized by U.S. government securities; or
- other privately issued securities in which the proceeds of the issuance
are invested in mortgage-backed securities and payment of the principal
and interest is supported by the credit of an agency or instrumentality of
the U.S. government.
ASSET-BACKED SECURITIES. The Fund may invest in asset-backed securities
including, but not limited to, interests in pools of receivables, such as
credit card and accounts receivable and motor vehicle and other installment
purchase obligations and leases. These securities may be in the form of
pass-through instruments or asset-backed obligations. The securities, all of
which are
10
issued by non-governmental entities and carry no direct or indirect
government guarantee, are structurally similar to CMOs and mortgage
pass-through securities, which are described above. However, non-mortgage
related asset-backed securities present certain risks that are not presented
by mortgage securities, primarily because these securities do not have the
benefit of the same security interest in the related collateral. Credit card
receivables, for example, are generally unsecured, while the trustee of
asset-backed securities backed by automobile receivables may not have a
proper security interest in all of the obligations backing such receivables.
ZERO COUPON, PAY-IN-KIND AND DELAYED INTEREST SECURITIES. The Fund may
invest in zero coupon, pay-in-kind and delayed interest securities issued by
corporations. Corporate zero coupon securities are: (i) notes or debentures
which do not pay current interest and are issued at substantial discounts
from par value, or (ii) notes or debentures that pay no current interest
until a stated date one or more years into the future, after which the
issuer is obligated to pay interest until maturity, usually at a higher rate
than if interest were payable from the date of issuance. Pay-in-kind
securities pay interest through the issuance to holders of additional
securities and delayed interest securities do not pay interest for a
specified period. Because values of securities of this type are subject to
greater fluctuations than are the values of securities that distribute
income regularly, they may be more speculative than such securities.
SPECIAL RISKS. From time to time, the Fund's portfolio may consist
primarily of lower-rated (i.e., rated Ba or lower by Moody's or BB or lower
by Standard & Poor's or Fitch) corporate debt obligations, which are
commonly referred to as "junk bonds." A description of the rating categories
is contained in the Appendix to this Prospectus. Lower-rated securities will
usually offer higher yields than higher-rated securities. However, there is
more risk associated with these investments. (For example, securities rated
in the lowest category have been unable to satisfy their obligations under
the bond indenture.) These lower-rated bonds may be more susceptible to real
or perceived adverse economic conditions than investment grade bonds. These
lower-rated bonds are regarded as predominantly speculative with regard to
each issuer's continuing ability to make principal and interest payments. In
addition, the secondary trading market for lower-rated bonds may be less
liquid than the market for investment grade bonds. As a result of these
factors, lower-rated securities tend to have more price volatility and carry
more risk to principal than higher-rated securities. The Fund's investment
adviser will endeavor to limit these risks through diversifying the
portfolio and through careful credit analysis of individual issuers.
Purchasers should carefully assess the risks associated with an investment
in the Fund.
Many corporate debt obligations, including many lower-rated bonds, permit the
issuers to call the security and thereby redeem their obligations earlier than
the stated maturity dates. Issuers are more likely to call bonds during periods
of declining interest rates. In these cases, if the Fund owns a bond which is
called, the Fund will receive its return of principal earlier than expected and
would likely be required to reinvest the proceeds at lower interest rates, thus
reducing income to the Fund.
11
CORPORATE EQUITY SECURITIES. The Fund may also invest in equity securities,
including common stocks, warrants and rights issued by corporations in any
industry (industrial, financial or utility) which may be denominated in U.S.
dollars or in foreign currencies.
WARRANTS AND RIGHTS. The Fund may invest up to 5% of its total assets in
warrants and rights, including but not limited to warrants or rights (i)
acquired as part of a unit or attached to other securities purchased by the
Fund, or (ii) acquired as part of a distribution from the issuer.
FOREIGN SECURITIES. The Fund may invest in foreign securities, including
foreign securities not publicly traded in the United States. No more than 25% of
the Fund's total assets, at the time of purchase, will be invested in government
securities of any one foreign country. The Fund has no other restriction on the
amount of its assets that may be invested in foreign securities and may purchase
securities issued in any country, developed or undeveloped. There are no minimum
rating requirements for the foreign securities in which the Fund invests.
The percentage of the Fund's assets that will be allocated to foreign securities
will vary depending on the relative yields of foreign and U.S. securities, the
economies of foreign countries, the condition of such countries' financial
markets, the interest rate climate of such countries and the relationship of
such countries' currency to the U.S. dollar. These factors are judged on the
basis of fundamental economic criteria (e.g., relative inflation levels and
trends, growth rate forecasts, balance of payments status, and economic
policies) as well as technical and political data.
RISKS. Investments in foreign securities involve special risks that differ
from those associated with investments in domestic securities. The risks
associated with investments in foreign securities apply to securities issued
by foreign corporations and sovereign governments. These risks relate to
political and economic developments abroad, as well as those that result
from the differences between the regulation of domestic securities and
issuers and foreign securities and issuers. These risks may include, but are
not limited to, expropriation, confiscatory taxation, currency fluctuations,
withholding taxes on interest, limitations on the use or transfer of assets,
political or social instability and adverse diplomatic developments. It may
also be more difficult to enforce contractual obligations or obtain court
judgments abroad than would be the case in the United States because of
differences in the legal systems. If the issuer of the debt or the
governmental authorities that control the repayment of the debt may be
unable or unwilling to repay principal or interest when due in accordance
with the terms of such debt, the Fund may have limited legal recourse in the
event of default. Moreover, individual foreign economies may differ
favorably or unfavorably from the domestic economy in such respects as
growth of gross national product, the rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Additional differences exist between investing in foreign and domestic
securities. Examples of such differences include: less publicly available
information about foreign issuers; credit risks associated with certain
foreign governments; the lack of uniform financial accounting standards
applicable to foreign issuers; less readily available market quotations on
foreign issues; the likelihood that securities of foreign issuers may be
less liquid or more volatile; generally higher foreign brokerage
commissions; and unreliable mail service between countries.
12
To the extent that debt securities purchased by the Fund are denominated in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates will affect the Fund's net asset value; the value of interest earned;
gains and losses realized on the sale of securities; and net investment
income and capital gain, if any, to be distributed to shareholders by the
Fund. If the value of a foreign currency rises against the U.S. dollar, the
value of the Fund's assets denominated in that currency will increase;
correspondingly, if the value of a foreign currency declines against the
U.S. dollar, the value of the Fund's assets denominated in the currency will
decrease.
The risks noted above often are heightened for investments in emerging or
developing countries. Compared to the United States and other developed
countries, emerging or developing countries may have relatively unstable
governments, economies based on only a few industries, and securities
markets that trade a small number of securities. Prices on these exchanges
tend to be volatile and, in the past, securities in these countries have
offered a greater potential for gain (as well as loss) than securities of
companies located in developed countries. Further, investments by foreign
investors are subject to a variety of restrictions in many emerging or
developing countries. These restrictions may take the form of prior
governmental approval, limits on the amount or type of securities held by
foreigners, and limits on the type of companies in which foreigners may
invest. Additional restrictions may be imposed at any time by these and
other countries in which a fund invests. In addition, the repatriation of
both investment income and capital from several foreign countries is
restricted and controlled under certain regulations, including in some cases
the need for certain government consents. Although these restrictions may in
the future make it undesirable to invest in emerging or developing
countries, the Fund's adviser does not believe that any current repatriation
restrictions would affect its decision to invest in such countries.
FOREIGN CURRENCY TRANSACTIONS. The Fund will enter into foreign currency
transactions to obtain the necessary currencies to settle securities
transactions. Currency transactions may be conducted either on a spot or
cash basis at prevailing rates or through forward foreign currency exchange
contracts.
The Fund may also enter into foreign currency transactions to protect Fund
assets against adverse changes in foreign currency exchange rates or
exchange control regulations. Such changes could unfavorably affect the
value of Fund assets which are denominated in foreign currencies, such as
foreign securities or funds deposited in foreign banks, as measured in U.S.
dollars. Although foreign currency transactions may be used by the Fund to
protect against a decline in the value of one or more currencies, such
efforts may also limit any potential gain that might result from a relative
increase in the value of such currencies and might, in certain cases, result
in losses to the Fund.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency
exchange contract (a "forward contract") is an obligation to purchase or
sell an amount of a particular currency at a specific price and on a future
date agreed upon by the parties.
Generally, no commission charges or deposits are involved. At the time the
Fund enters into a forward contract, Fund assets with a value equal to the
Fund's obligation under the forward
13
contract are segregated on the Fund's records and are maintained until the
contract has been settled. The Fund will not enter into a forward contract
with a term of more than six months. The Fund will generally enter into a
forward contract to provide the proper currency to settle a securities
transaction at the time the transaction occurs (the "trade date"). The
period between the trade date and settlement date will vary between 24 hours
and 30 days, depending upon local custom.
The Fund may also protect against the decline of a particular foreign
currency by entering into a forward contract to sell an amount of that
currency approximating the value of all or a portion of the Fund's assets
denominated in that currency ("hedging"). The success of this type of short-
term hedging strategy is highly uncertain due to the difficulties of
predicting short-term currency market movements and of precisely matching
forward contract amounts and the constantly changing value of the securities
involved. Although the adviser will consider the likelihood of changes in
currency values when making investment decisions, the adviser believes that
it is important to be able to enter into forward contracts when it believes
the interests of the Fund will be served.
TEMPORARY INVESTMENTS. The Fund may invest temporarily in debt obligations
maturing in one year or less during times of unusual market conditions for
defensive purposes and to maintain liquidity in anticipation of favorable
investment opportunities. The Fund's temporary investments may include:
- obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities;
- time deposits (including savings deposits and certificates of deposit) and
bankers acceptances in commercial or savings banks whose accounts are
insured by the Bank Insurance Fund ("BIF") or the Savings Association
Insurance Fund ("SAIF"), both of which are administered by the Federal
Deposit Insurance Corporation ("FDIC"), including certificates of deposit
issued by and other time deposits in foreign branches of FDIC insured
banks or who have at least $100 million in capital;
- domestic and foreign issues of commercial paper or other corporate debt
obligations;
- obligations of the types listed above, but not satisfying the standards
set forth above, if they are (a) subject to repurchase agreements or (b)
guaranteed as to principal and interest by a domestic or foreign bank
having total assets in excess of $1 billion, by a corporation whose
commercial paper may be purchased by the Fund, or by a foreign government
having an existing debt security rated at least Baa by Moody's or BBB by
Standard & Poor's or Fitch; and
- other short-term investments of a type which the adviser determines
presents minimal credit risks and which are of "high quality" as
determined by a nationally recognized statistical rating organization, or,
in the case of an instrument that is not rated, of comparable quality in
the judgment of the adviser.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or other securities to the
14
Fund and agree at the time of sale to repurchase them at a mutually agreed upon
time and price. To the extent that the original seller does not repurchase the
securities from the Fund, the Fund could receive less than the repurchase price
on any sale of such securities.
OPTIONS. The Fund may deal in options on foreign currencies, foreign currency
futures, securities, and securities indices, which options may be listed for
trading on a national securities exchange or traded over-the-counter. The Fund
will use options only to manage interest rate and currency risks. The Fund may
write covered call options to generate income. The Fund may write covered call
options and secured put options on up to 25% of its net assets and may purchase
put and call options provided that no more than 5% of the fair market value of
its net assets may be invested in premiums on such options.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying currency, security or other asset at the
exercise price during the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying currency,
security or other asset at the exercise price during the option period. The
writer of a covered call owns assets that are acceptable for escrow and the
writer of a secured put invests an amount not less than the exercise price in
eligible assets to the extent that it is obligated as a writer. If a call
written by the Fund is exercised, the Fund forgoes any possible profit from an
increase in the market price of the underlying asset over the exercise price
plus the premium received. In writing puts, there is a risk that the Fund may be
required to take delivery of the underlying asset at a disadvantageous price.
Over-the-counter options ("OTC options") differ from exchange traded options in
several respects. They are transacted directly with dealers and not with a
clearing corporation, and there is a risk of nonperformance by the dealer as a
result of the insolvency of such dealer or otherwise, in which event the fund
may experience material losses. However, in writing options the premium is paid
in advance by the dealer, OTC options, which may not be continuously liquid, are
available for a greater variety of assets, and a wider range of expiration dates
and exercise prices, than are exchange traded options.
FINANCIAL FUTURES AND OPTIONS ON FINANCIAL FUTURES. The Fund may purchase and
sell financial futures contracts to hedge all or a portion of its portfolio
against changes in interest rates. Financial futures contracts call for the
delivery of particular debt instruments at a certain time in the future. The
seller of the contract agrees to make delivery of the type of instrument called
for in the contract and the buyer agrees to take delivery of the instrument at
the specified future time.
The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Fund is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund
15
purchases a futures contract, an amount of cash and cash equivalents, equal to
the underlying commodity value of the futures contract (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged.
RISKS. When the Fund uses financial futures and options on financial
futures as hedging devices, there is a risk that the prices of the
securities subject to the futures contracts may not correlate perfectly with
the prices of the securities in the Fund's portfolio. This may cause the
futures contracts and any related options to react differently than the
portfolio securities to market changes. In addition, the Fund's investment
adviser could be incorrect in its expectations about the direction or extent
of market factors such as interest rate movements. In these events, the Fund
may lose money on the futures contracts or options. It is not certain that a
secondary market for positions in futures contracts or for options will
exist at all times. Although the investment adviser will consider liquidity
before entering into options transactions, there is no assurance that a
liquid secondary market on an exchange or otherwise will exist for any
particular futures contract or option at any particular time. The Fund's
ability to establish and close out futures and options positions depends on
this secondary market.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other investment companies, but it will not own more than 3%
of the total outstanding voting securities of any such investment company,
invest more than 5% of its total assets in any one investment company, or invest
more than 10% of its total assets in investment companies in general. To the
extent that the Fund invests in securities issued by other investment companies,
the Fund will indirectly bear its proportionate share of any fees and expenses
paid by such companies in addition to the fees and expenses payable directly by
the Fund. The Fund will purchase securities of closed-end investment companies
only in open market transactions involving only customary brokers' commissions.
However, these limitations are not applicable if the securities are acquired in
a merger, consolidation, reorganization or acquisition of Fund assets.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in restricted
securities. Restricted securities are any securities in which the Fund may
otherwise invest pursuant to its investment objective and policies, but which
are subject to restriction on resale under federal securities law. The Fund will
limit investments in illiquid securities, including certain restricted
securities not determined by the Directors to be liquid, non-negotiable time
deposits, and repurchase agreements providing for settlement in more than seven
days after notice, to 15% of the value of its net assets.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. 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.
Accordingly, the Fund may pay more/less than the market value of the securities
on the settlement date.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at
16
current market values and simultaneously acquire other commitments to purchase
similar securities at later dates. The Fund may realize short-term profits or
losses upon the sale of such commitments.
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.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
PORTFOLIO TURNOVER. The Fund may trade or dispose of portfolio securities as
considered necessary to meet its investment objective. During periods of falling
interest rates, the values of outstanding fixed-income securities generally
rise. Conversely, during periods of rising interest rates, the values of such
securities generally decline. The magnitude of these fluctuations will generally
be greater for securities with longer maturities. Because the Fund will actively
use trading to benefit from short-term yield disparities among different issues
of fixed-income securities or otherwise to increase its income, the Fund may be
subject to a greater degree of portfolio turnover than might be expected from
investment companies which invest substantially all of their assets on a
long-term basis. The Fund cannot accurately predict its portfolio turnover rate,
but it is anticipated that its annual turnover rate generally will not exceed
200% (excluding turnover of securities having a maturity of one year or less).
Higher portfolio turnover results in increased Fund expenses, including
brokerage commissions, dealer mark-ups and other transaction costs on the sale
of securities and on the reinvestment in other securities, and results in the
acceleration of realization of capital gains or losses for tax purposes. To the
extent that increased portfolio turnover results in sales of securities held
less than three months, the Fund's ability to qualify as a "regulated investment
company" under the Internal Revenue Code may be affected.
INVESTMENT LIMITATIONS
The Fund will not:
- borrow money directly or through reverse repurchase agreements or pledge
securities except, under certain circumstances, the Fund may borrow up to
one-third of the value of its total assets and pledge up to 15% of the
value of those assets to secure such borrowings;
- lend any of its assets, except portfolio securities up to one-third of the
value of its total assets; or
- underwrite any issue of securities, except as it may be deemed to be an
underwriter under the Securities Act of 1933 in connection with the sale
of restricted securities which the Fund may purchase pursuant to its
investment objective, policies, and limitations.
17
The above investment limitations cannot be changed without shareholder approval.
The following investment limitations, however, may be changed by the Directors
without shareholder approval. Shareholders will be notified before any material
change in these investment limitations becomes effective.
The Fund will not:
- invest more than 10% of the value of its total assets in securities
subject to restrictions on resale under the Securities Act of 1933 except
for certain restricted securities that meet the criteria for liquidity as
established by the Directors; or
- invest more than 15% of the value of its net assets in securities that are
not readily marketable or that are otherwise considered illiquid,
including repurchase agreements providing for settlement in more than
seven days after notice.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per Share fluctuates. The net asset value per Share
is determined by adding the interest of the Shares in the market value of all
securities and other assets of the Fund, subtracting the interest of the Shares
in the liabilities of the Fund and those attributable to the Shares, and
dividing the remainder by the total number of Shares outstanding. The net asset
value of the Shares may be different from that of Class C Shares and Fortress
Shares due to the variance in daily net income realized by each class. Such
variance will reflect only accrued net income to which the shareholders of a
particular class are entitled.
INVESTING IN CLASS A SHARES
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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 a financial institution which has a sales agreement with
the distributor, or directly from the distributor, Federated Securities Corp.,
once an account has been established. In connection with the sale of Shares,
Federated Securities Corp. may from time to time offer certain items of nominal
value to any shareholder or investor. The Fund reserves the right to reject any
purchase request.
Participants in plans under the Liberty Family Retirement Program shall purchase
Shares in accordance with the requirements of their respective plans.
THROUGH A FINANCIAL INSTITUTION. An investor may call his financial institution
(such as a bank or an investment dealer) to place an order to purchase Shares.
Orders through a financial institution are considered received when the Fund is
notified of the purchase order. Purchase orders through a registered
broker/dealer must be received by the broker before 4:00 p.m. (Eastern time) and
must be transmitted by the broker to the Fund before 5:00 p.m. (Eastern time) in
order for Shares to be purchased at that day's price. Purchase orders through
other financial institutions must be received by the financial institution and
transmitted to the Fund before 4:00 p.m. (Eastern time) in order for
18
Shares to be purchased at that day's price. It is the financial institution's
responsibility to transmit orders promptly.
DIRECTLY FROM THE DISTRIBUTOR. An investor may place an order to purchase
Shares directly from the distributor once an account has been established. To do
so:
- complete and sign the new account form available from the Fund;
- enclose a check made payable to Strategic Income Fund--Class A Shares; and
- send both to the Fund's transfer agent, Federated Services Company, c/o
State Street Bank and Trust Company, P.O. Box 8604, Boston, Massachusetts
02266-8604.
To purchase Shares directly from the distributor by wire once an account has
been established, call the Fund. All information needed will be taken over the
telephone, and the order is considered received when State Street Bank receives
payment by wire. Federal funds should be wired as follows: Federated Services
Company, c/o State Street Bank and Trust Company, Boston, Massachusetts 02105;
Attention: Mutual Fund Servicing Division; For Credit to: Strategic Income
Fund--Class A Shares; Title or Name of Account; Wire Order Number and/or Account
Number. Shares cannot be purchased by wire on Columbus Day, Veteran's Day or
Martin Luther King Day.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $500 over a 90-day period, unless
the investment is in a retirement plan, in which case the minimum initial
investment is $50. Subsequent investments must be in amounts of at least $100.
(Other minimum investment requirements may apply to investments through the
Liberty Family Retirement Program.)
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received, plus a sales load as follows:
<TABLE>
<CAPTION>
SALES LOAD AS SALES LOAD AS DEALER CONCESSION AS
A PERCENTAGE OF A PERCENTAGE OF A PERCENTAGE OF
AMOUNT OF TRANSACTION PUBLIC OFFERING PRICE NET AMOUNT INVESTED PUBLIC OFFERING PRICE
- ----------------------------- ------------------------ ------------------------- -------------------------
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than
$250,000 3.75% 3.90% 3.25%
$250,000 but less than
$500,000 2.50% 2.56% 2.25%
$500,000 but less than
$750,000 2.00% 2.04% 1.80%
$1 million or more 0.00% 0.00% 0.25%*
</TABLE>
* SEE SUBSECTION ENTITLED "DEALER CONCESSION" BELOW.
No sales load is imposed for Shares purchased through bank trust departments or
investment advisers registered under the Investment Advisers Act of 1940
purchasing on behalf of their clients, or by insurance companies. These
institutions, however, may charge fees for services provided which may relate to
ownership of Fund shares. This prospectus should, therefore, be read together
with any agreement between the customer and the institution with regard to
services provided and the fees charged for these services.
19
No sales load is imposed on purchases made by qualified retirement plans with
over $1 million invested in funds available in the Liberty Family Retirement
Program.
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; and (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
DEALER CONCESSION. In addition to the dealer concession as noted in the table
above, the distributor will, from time to time, offer to pay dealers up to 100%
of the sales load retained by it. Such payments may take the form of cash or
promotional incentives, such as reimbursement of certain expenses of qualified
employees and their spouses to attend informational meetings about the Fund or
other special events at recreational-type facilities, or items of material
value. In some instances, these incentives will be made available only to
dealers whose employees have sold or may sell a significant amount of Shares. On
purchases of $1 million or more, the investor pays no sales load; however, the
distributor will make twelve monthly payments to the dealer totalling 0.25% of
the public offering price over the first year following the purchase. Such
payments are based on the original purchase price of Shares outstanding at each
month end.
The sales load 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 load in exchange for sales and/or administrative
services performed on behalf of the bank's customers in connection with the
initiation of customer accounts and purchases of Shares.
REDUCING THE SALES LOAD
The sales charge can be reduced on the purchase of Shares through:
- quantity discounts and accumulated purchases;
- signing a 13-month letter of intent;
- using the reinvestment privilege;
- purchases with proceeds from redemptions of unaffiliated mutual fund
shares; or
- concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table above,
larger purchases reduce the sales load paid. The Fund will combine purchases
made on the same day by the investor, his spouse, and his children under age 21
when it calculates the sales load. In addition, the sales load, if applicable,
is reduced for purchases made at one time by a trustee or fiduciary for a single
trust estate or a single fiduciary account.
If an additional purchase of Shares is made, the Fund will consider the previous
purchases still invested in Shares. For example, if a shareholder already owns
Shares having a current value at the public offering price of $90,000, and he
purchases $10,000 or more at the current public offering price,
20
the sales load on the additional purchase according to the schedule now in
effect would be 3.75%, not 4.50%.
To receive this sales load reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the purchase is made that Shares are already owned or that purchases are
being combined. The Fund will eliminate the sales load after it confirms the
purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $100,000 of
shares in the funds in the Liberty Family of Funds over the next 13 months, the
sales load may be reduced by signing a letter of intent to that effect. This
letter of intent includes a provision for a sales load adjustment depending on
the amount actually purchased within the 13-month period and a provision for the
Fund's custodian to hold 4.5% of the total amount intended to be purchased in
escrow (in Shares) until such purchase is completed.
The 4.5% held in escrow will be applied to the shareholder's account at the end
of the 13-month period unless the amount specified in the letter of intent is
not purchased. In this event, an appropriate number of escrowed Shares may be
redeemed in order to realize the difference in the sales load.
This letter of intent will not obligate the shareholder to purchase Shares, but
if he does, each purchase during the period will be at the sales load applicable
to the total amount intended to be purchased. This letter may be dated as of a
prior date to include any purchases made within the past 90 days towards the
dollar fulfillment of the letter of intent. Prior trade prices will not be
adjusted.
REINVESTMENT PRIVILEGE. If Shares have been redeemed, the shareholder has a
one-time right, within 120 days, to reinvest the redemption proceeds at the
next-determined net asset value without any sales load. 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 load. If the shareholder redeems his Shares, there may be tax
consequences.
PURCHASES WITH PROCEEDS FROM REDEMPTIONS OF UNAFFILIATED INVESTMENT
COMPANIES. Investors may purchase Shares at net asset value, without a sales
load, with the proceeds from the redemption of shares of an investment company
which was sold with a sales load or commission and was not distributed by
Federated Securities Corp. The purchase must be made within 60 days of the
redemption, and Federated Securities Corp. must be notified by the investor in
writing, or by his financial institution, at the time the purchase is made.
CONCURRENT PURCHASES. For purposes of qualifying for a sales load reduction, a
shareholder has the privilege of combining concurrent purchases of two or more
funds in the Liberty Family of Funds, the purchase prices of which include a
sales load. For example, if a shareholder concurrently invested $30,000 in one
of the other Liberty Funds with a sales load, and $70,000 in Shares, the sales
load would be reduced.
To receive this sales load reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the concurrent purchases are made. The Fund will reduce the sales load
after it confirms the purchases.
21
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Shares at the net asset value next determined after an order is
received by the transfer agent, plus the applicable sales load. A shareholder
may apply for participation in this program through his financial institution or
directly through the Fund.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder. Share certificates are not issued unless requested
on the application or by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly statements are sent to report dividends paid during the
month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly. Distributions of any net realized
long-term capital gains will be made at least once every twelve months.
Dividends are automatically reinvested in additional Shares on payment dates at
the ex-dividend date net asset value, unless cash payments are requested by
shareholders on the application or by writing to the transfer agent. All
shareholders on the record date are entitled to the dividend.
RETIREMENT PLANS
Shares can be purchased as an investment for retirement plans or for IRA
accounts. For further details, contact the Fund and consult a tax adviser.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Class A shareholders may exchange all or some of their Shares for Class A Shares
of other funds in the Liberty Family of Funds. They may also exchange into
certain other funds for which affiliates of Federated Investors serve as
principal underwriter ("Federated Funds"). Certain Federated Funds are sold with
a sales load different from that of the Fund or with no sales load; exchanges
into these Federated Funds are made at net asset value plus the difference
between the Fund's sales load already paid and any sales load of the Federated
Fund into which the Shares are to be exchanged, if higher, or at full load if
applicable. Neither the Fund nor any of the funds in the Liberty Family of Funds
imposes any additional fees on exchanges. Participants in a plan under the
Liberty Family Retirement Program may exchange all or some of their Shares for
Class A Shares of other funds offered under the plan at net asset value without
a contingent deferred sales charge.
REDUCED SALES LOAD
If a shareholder making such an exchange qualifies for a reduction of the sales
load, Federated Securities Corp. must be notified in writing by the shareholder
or by his financial institution.
22
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Shares having a net asset value
of at least $500. Before the exchange, the shareholder must receive a prospectus
of the fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which the
Shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Shares submitted for exchange are redeemed and
the proceeds invested in shares of the other fund. The exchange privilege may be
terminated at any time. Shareholders will be notified of the modification or
termination of the exchange privilege.
Further information on the exchange privilege and prospectuses for the Liberty
Family of Funds or certain Federated Funds are available by contacting the Fund.
TAX CONSEQUENCES
An exercise of the exchange privilege is treated as a sale for federal income
tax purposes. Depending upon the circumstances, a capital gain or loss may be
realized.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing or by telephone. Written
instructions may require a signature guarantee. Shareholders of the Fund may
have difficulty in making exchanges by telephone through brokers and other
financial institutions during times of drastic economic or market changes. If a
shareholder cannot contact his broker or financial institution by telephone, it
is recommended that an exchange request be made in writing and sent by overnight
mail to Federated Services Company, 500 Victory Road-2nd Floor, Quincy,
Massachusetts 02171.
Instructions for exchanges for the Liberty Family Retirement Program should be
given to the plan administrator.
TELEPHONE INSTRUCTIONS. Telephone instructions made by the investor may be
carried out only if a telephone authorization form completed by the investor is
on file with the transfer agent. If the instructions are given by a broker, a
telephone authorization form completed by the broker must be on file with the
transfer agent. Shares may be exchanged between two funds by telephone only if
the two funds have identical shareholder registrations.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to the transfer agent and deposited to the shareholder's account
before being exchanged. Telephone exchange instructions are recorded and will be
binding upon the shareholder. Such instructions will be processed as of 4:00
p.m. (Eastern time) and must be received by the transfer agent before that time
for Shares to be exchanged the same day. Shareholders exchanging into a new fund
will not receive that fund's dividend that is payable to shareholders of record
on that date. This privilege may be modified or terminated at any time.
Telephone instructions may be recorded. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
23
REDEEMING CLASS A SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after the
transfer agent receives the redemption request. Redemptions will be made on days
on which the Fund computes its net asset value. Redemptions can be made through
a financial institution or directly from the Fund. Redemption requests must be
received in proper form. Redemptions of Shares held through the Liberty Family
Retirement Program will be governed by the requirements of the respective plans.
THROUGH A FINANCIAL INSTITUTION
A shareholder may redeem Shares by calling his financial institution (such as a
bank or an investment dealer) to request the redemption. Shares will be redeemed
at the net asset value next determined after the Fund receives the redemption
request from the financial institution. Redemption requests through a registered
broker/dealer must be received by the broker before 4:00 p.m. (Eastern time) and
must be transmitted by the broker to the Fund before 5:00 p.m. (Eastern time) in
order for Shares to be redeemed at that day's net asset value. Redemption
requests through other financial institutions must be received by the financial
institution and transmitted to the Fund before 4:00 p.m. (Eastern time) in order
for Shares to be redeemed at that day's net asset value. The financial
institution is responsible for promptly submitting redemption requests and
providing proper written redemption instructions to the Fund. The financial
institution may charge customary fees and commissions for this service.
DIRECTLY FROM THE FUND
BY TELEPHONE. Shareholders who have not purchased through a financial
institution may redeem their Shares by telephoning the Fund. The proceeds will
be mailed to the shareholder's address of record or wire transferred to the
shareholder's account at a domestic commercial bank that is a member of the
Federal Reserve System, normally within one business day, but in no event longer
than seven days after the request. The minimum amount for a wire transfer is
$1,000. If at any time the Fund shall determine it necessary to terminate or
modify this method of redemption, shareholders would be promptly notified.
An authorization form permitting the transfer agent to accept telephone requests
must first be completed. Authorization forms and information on this service are
available from Federated Securities Corp.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption should be considered.
Telephone instructions may be recorded. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
BY MAIL. Any shareholder may redeem Shares by sending a written request to the
transfer agent. The written request should include the shareholder's name, the
Fund name and class designation, the account number, and the share or dollar
amount requested, and should be signed exactly as the Shares are registered.
24
If share certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written request.
Shareholders may call the Fund for assistance in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the BIF,
which is administered by the FDIC;
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
- a savings bank or savings and loan association whose deposits are insured
by the SAIF, which is administered by the FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
CONTINGENT DEFERRED SALES CHARGE
Shareholders who purchase Shares with proceeds of a redemption of shares of a
mutual fund sold with a sales load and not distributed by Federated Securities
Corp. may be charged a contingent deferred sales charge by the Fund's
distributor of .50 of 1% for redemptions made within one year. The contingent
deferred sales charge will be calculated based upon the lesser of the original
purchase price of Shares or the net asset value of the Shares when redeemed.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount not less
than $100 may take advantage of the Systematic Withdrawal Program. Under this
program, Shares are redeemed to provide for periodic withdrawal payments in an
amount directed by the shareholder. Depending upon the amount of the withdrawal
payments, the amount of dividends paid and capital gains distributions with
respect to Shares, and the fluctuation of the net asset value of Shares redeemed
under this program, redemptions may reduce, and eventually deplete, the
shareholder's investment in the Fund. For this reason, payments under this
program should not be considered as yield or income on the shareholder's
investment in the Fund. To be eligible to participate in this program, a
shareholder must have an account value of at least $10,000. A shareholder may
apply for participation in this program through his financial institution. Due
to the fact that Shares are sold with a sales load, it is not advisable for
shareholders to be purchasing Shares while participating in this program.
25
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, and pay the proceeds to the shareholder, if the
account balance falls below a required minimum value of $500 due to shareholder
redemptions. This requirement does not apply, however, if the balance falls
below $500 because of changes in the Fund's net asset value. Before Shares are
redeemed to close an account, the shareholder is notified in writing and allowed
30 days to purchase additional Shares to meet the minimum requirement.
FIXED INCOME SECURITIES, INC. INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE CORPORATION
BOARD OF DIRECTORS. The Fund is managed by a Board of Directors. The Directors
are responsible for managing the Corporation's business affairs and for
exercising all the Corporation's powers except those reserved for the
shareholders. The Executive Committee of the Board of Directors handles the
Directors' responsibilities between meetings of the Directors.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Federated
Advisers, the Fund's investment adviser, subject to direction by the Directors.
The adviser continually conducts investment research and supervision for the
Fund and is responsible for the purchase or sale of portfolio instruments, for
which it receives an annual fee from the Fund.
ADVISORY FEES. The Fund's adviser receives an annual investment advisory
fee equal to 0.85 of 1% of the Fund's average daily net assets. The fee paid
by the Fund, while higher than the advisory fee paid by other mutual funds
in general, is comparable to fees paid by many mutual funds with similar
objectives and policies. Under the investment advisory contract, which
provides for voluntary waivers of expenses by the adviser, the adviser may
voluntarily waive some or all of its fee. The adviser can terminate this
voluntary waiver of some or all of its advisory fee at any time at its sole
discretion. The adviser has also undertaken to reimburse the Fund for
operating expenses in excess of limitations established by certain states.
ADVISER'S BACKGROUND. Federated Advisers, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of 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
26
serve approximately 3,500 client institutions nationwide. Through these same
client institutions, individual shareholders also have access to this same
level of investment expertise.
PORTFOLIO MANAGERS' BACKGROUNDS. Randall S. Bauer, Mark E. Durbiano and
Gary J. Madich have been the Fund's portfolio managers since its inception.
Mr. Bauer joined Federated Investors in 1989 and has been a Vice President
of the Fund's adviser since 1994. Mr. Bauer was an Assistant Vice President
of the International Banking Division at Pittsburgh National Bank from 1982
until 1989. Mr. Bauer is a Chartered Financial Analyst and received his
M.B.A. in Finance from Pennsylvania State University. Mr. Durbiano joined
Federated Investors in 1982 and has been a Vice President of the Fund's
adviser since 1988. Mr. Durbiano is a Chartered Financial Analyst and
received his M.B.A. in Finance from the University of Pittsburgh. Mr. Madich
joined Federated Investors in 1984 and has been a Senior Vice President of
the Fund's investment adviser since 1993. Mr. Madich served as a Vice
President of the Fund's investment adviser from 1988 until 1993. Mr. Madich
is a Chartered Financial Analyst and received his M.B.A. in Public Finance
from the University of Pittsburgh.
DISTRIBUTION OF CLASS A SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET ASSETS
ADMINISTRATIVE FEE OF THE FEDERATED FUNDS
-------------------- ------------------------------------
<S> <C>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
SHAREHOLDER SERVICES PLAN. The Fund has adopted a Shareholder Services Plan
(the "Services Plan") under which it may make payments up to 0.25 of 1% of the
average daily net asset value of Shares to obtain certain personal services for
shareholders and the maintenance of shareholder accounts ("shareholder
services"). The Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
Federated Shareholder Services will either perform shareholder services directly
or will select financial
27
institutions to perform shareholder services. Financial institutions will
receive fees based upon Shares owned by their clients or customers. The
schedules of such fees and the basis upon which such fees will be paid will be
determined from time to time by the Fund and Federated Shareholder Services.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to periodic payments to
financial institutions under the Shareholder Services Plan, the distributor may
offer to pay a fee from its own assets to financial institutions as financial
assistance for providing substantial marketing and sales support. The support
may include sponsoring sales, educational and training seminars for their
employees, providing sales literature, and engineering computer software
programs that emphasize the attributes of the Fund. Such assistance will be
predicated upon the amount of Shares the financial institution sells or may
sell, and/or upon the type and nature of sales or operational support furnished
by the financial institution. Any payments made by the distributor may be
reimbursed by the Fund's investment adviser or its affiliates.
CUSTODIAN. State Street Bank and Trust Company, Boston, Massachusetts, is
custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, is transfer agent for shares of the Fund and dividend
disbursing agent for the Fund.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, Boston, Massachusetts.
EXPENSES OF THE FUND AND CLASS A SHARES
Holders of Shares pay their allocable portion of Fund and Corporation expenses.
The Corporation expenses for which holders of Shares pay their allocable portion
include, but are not limited to: the cost or organizing the Corporation and
continuing its existence; registering the Corporation with federal and state
securities authorities; Directors' fees; auditors' fees; the cost of meetings of
Directors; legal fees of the Corporation; association membership dues and such
non-recurring and extraordinary items as may arise from time to time.
The Fund expenses for which holders of Shares pay their allocable portion
include, but are not limited to: registering the Fund and Shares of the Fund;
investment advisory services; taxes and commissions; custodian fees; insurance
premiums; auditors' fees; and such non-recurring and extraordinary items as may
arise from time to time.
At present, the only expenses which are allocated specifically to the shares as
a class are expenses under the Fund's Distribution Plan. However, the Directors
reserve the right to allocate certain other expenses to holders of Shares as it
deems appropriate ("Class Expenses"). In any case, Class Expenses would be
limited to: distribution fees; transfer agent fees as identified by the transfer
agent as attributable to holders of Shares; printing and postage expenses
related to preparing and distributing material such as shareholder reports,
prospectuses and proxies to current shareholders; registration fees paid to the
Securities and Exchange Commission and to state securities commissions; expenses
related to administrative personnel and services as required to support holders
of Shares; legal fees relating solely to Shares; and Directors' fees incurred as
a result of issues relating solely to Shares.
28
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share of the Fund is entitled to one vote in Director elections and other
matters submitted to shareholders for vote. All shares of all classes of each
portfolio in the Corporation have equal voting rights except that in matters
affecting only a particular portfolio or class, only shares of that portfolio or
class are entitled to vote.
As a Maryland corporation, the Corporation is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Fund's operation and for the election of Directors under certain
circumstances.
Directors may be removed by the Board of Directors or by the shareholders at a
special meeting. A special meeting of shareholders shall be called by the
Directors upon the request of shareholders owning at least 10% of the
Corporation's outstanding shares of all series entitled to vote.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional Shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held their Shares. No federal income tax is due on
any distributions earned in an IRA or qualified retirement plan until
distributed, so long as such IRA or qualified retirement plan meets the
applicable requirements of the Internal Revenue Code.
PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES
The Fund is not subject to Pennsylvania corporate or personal property taxes.
Fund shares may be subject to personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania to the extent that the
portfolio securities in the Fund would be subject to such taxes if owned
directly by residents of those jurisdictions.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund advertises the total return and yield for Class A
Shares.
29
Total return represents the change, over a specified period of time, in the
value of an investment in Shares after reinvesting all income and capital gains
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of Shares is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by Shares
over a thirty-day period by the maximum offering price per share of Shares on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
Shares and, therefore, may not correlate to the dividends or other distributions
paid to shareholders.
The performance information reflects the effect of the maximum sales load which,
if excluded, would increase the total return and yield.
Total return and yield will be calculated separately for Class A Shares, Class C
Shares and Fortress Shares. Because Class A Shares are not subject to 12b-1
expenses, the yield for Class A Shares, for the same period, will exceed that of
Class C and Fortress Shares. Because Class C and Fortress Shares are subject to
lower sales loads, the total return for these shares, for the same period, may
exceed that of Class A Shares.
From time to time, the Fund may advertise the performance of Shares using
certain financial publications and/or compare its performance to certain
indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund currently offers Class A Shares, Class C Shares and Fortress Shares.
Class C Shares are sold primarily to customers of financial institutions at net
asset value with no front-end sales load. Class C Shares are distributed
pursuant to a Rule 12b-1 Plan adopted by the Fund whereby the distributor is
paid a fee of up to 0.75 of 1% of the Class C Shares' average daily net assets,
in addition to a shareholder services fee of 0.25 of 1% of the Class C Shares'
average daily net assets. In addition, Class C Shares may be subject to certain
contingent deferred sales charges. Investments in Class C Shares are subject to
a minimum initial investment of $1,500, unless the investment is in a retirement
account, in which case the minimum investment is $50.
Fortress Shares are sold primarily to customers of financial institutions
subject to a front-end sales load of up to 1.00%. Fortress Shares are
distributed pursuant to a Rule 12b-1 Plan adopted by the Fund whereby the
distributor is paid a fee of up to 0.50 of 1% of the Fortress Shares' average
daily net assets, in addition to a shareholder services fee of 0.25 of 1% of the
Fortress Shares' average daily net assets. In addition, Fortress Shares may be
subject to certain contingent deferred sales charges. Investments in Fortress
Shares are subject to a minimum initial investment of $1,500 over a 90-day
period, unless the investment is in a retirement account, in which case the
minimum investment is $50.
The amount of dividends payable to Class A and Fortress Shares will generally
exceed that of Class C Shares by the difference between Class Expenses and
distribution and shareholder service expenses borne by shares of each respective
class.
The stated advisory fee is the same for all three classes of shares.
30
STRATEGIC INCOME FUND
FINANCIAL HIGHLIGHTS--CLASS C SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Independent Auditors' report on page 48.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1994*
- ---------------------------------------------------------------------- --------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- ----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------
Net investment income 0.40
- ----------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and foreign
currency (0.44)
- ---------------------------------------------------------------------- --------------
Total from investment operations (0.04)
- ----------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------
Dividends to shareholders from net investment income (0.40)
- ----------------------------------------------------------------------
Distributions in excess of net investment income (a) (0.02)
- ---------------------------------------------------------------------- --------------
Total distributions (0.42)
- ---------------------------------------------------------------------- --------------
NET ASSET VALUE, END OF PERIOD $ 9.54
- ---------------------------------------------------------------------- --------------
TOTAL RETURN** (0.41%)
- ----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------
Expenses 1.00%(c)
- ----------------------------------------------------------------------
Net investment income 7.99%(c)
- ----------------------------------------------------------------------
Expense waiver/reimbursement (b) 8.87%(c)
- ----------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------
Net assets, end of period (000 omitted) $1,190
- ----------------------------------------------------------------------
Portfolio turnover rate 34%
- ----------------------------------------------------------------------
* For the period from April 29, 1994 (date of initial public investment) to November
30, 1994.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. These distributions do not
represent a return of capital for federal income tax purposes.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Computed on an annualized basis.
</TABLE>
(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 for the fiscal year ended November 30, 1994, which can be obtained
free of charge.
31
STRATEGIC INCOME FUND
FINANCIAL HIGHLIGHTS--FORTRESS SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Independent Auditors' report on page 48.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1994*
- ---------------------------------------------------------------------- --------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- ----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------
Net investment income 0.41
- ----------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and foreign
currency (0.44)
- ---------------------------------------------------------------------- --------------
Total from investment operations (0.03)
- ----------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------
Dividends to shareholders from net investment income (0.41)
- ----------------------------------------------------------------------
Distributions in excess of net investment income (a) (0.02)
- ---------------------------------------------------------------------- --------------
Total distributions (0.43)
- ----------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.54
- ---------------------------------------------------------------------- --------------
TOTAL RETURN** (0.19%)
- ----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------
Expenses 0.75%(c)
- ----------------------------------------------------------------------
Net investment income 8.34%(c)
- ----------------------------------------------------------------------
Expense waiver/reimbursement (b) 8.87%(c)
- ----------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------
Net assets, end of period (000 omitted) $2,326
- ----------------------------------------------------------------------
Portfolio turnover rate 34%
- ----------------------------------------------------------------------
* For the period from May 9, 1994 (date of initial public investment) to November
30, 1994.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. These distributions do not
represent a return of capital for federal income tax purposes.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Computed on an annualized basis.
</TABLE>
(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 for the fiscal year ended November 30, 1994, which can be obtained
free of charge.
32
STRATEGIC INCOME FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------- ------------------------------------------------------------------- ---------
<C> <S> <C>
U.S. CORPORATE BONDS--31.8%
- -----------------------------------------------------------------------------------
BROADCAST RADIO & TV--1.7%
-------------------------------------------------------------------
$ 100,000 SCI Television, Inc., Sr. Secd. Note, 11.00%, 6/30/2005 $ 100,750
------------------------------------------------------------------- ---------
BUSINESS EQUIPMENT & SERVICES--0.8%
-------------------------------------------------------------------
50,000 Bell & Howell Co., Sr. Sub. Note, 10.75%, 10/1/2002 47,250
------------------------------------------------------------------- ---------
CABLE TELEVISION--0.8%
-------------------------------------------------------------------
50,000 Continental Cablevision, Sr. Deb., 9.50%, 8/1/2013 45,000
------------------------------------------------------------------- ---------
CHEMICALS & PLASTICS--3.5%
-------------------------------------------------------------------
50,000 Arcadian Partners L.P., Sr. Note, Series B, 10.75%, 5/1/2005 48,250
-------------------------------------------------------------------
100,000 G-I Holdings, Inc., Sr. Disc. Note, Series B, 0/11.375% Accrual,
10/1/98 60,750
-------------------------------------------------------------------
50,000 LaRoche Industries, Inc., Sr. Sub. Note, 13.00%, 8/15/2004 46,250
-------------------------------------------------------------------
50,000 (a) Polymer Group, Inc., Sr. Note, 12.25%, 7/15/2002 48,750
------------------------------------------------------------------- ---------
Total 204,000
------------------------------------------------------------------- ---------
CLOTHING & TEXTILES--1.5%
-------------------------------------------------------------------
100,000 WestPoint Stevens, Inc., Sr. Sub. Deb., 9.375%, 12/15/2005 88,375
------------------------------------------------------------------- ---------
CONSUMER PRODUCTS--1.4%
-------------------------------------------------------------------
100,000 Playtex Family Products Corp., Sr. Sub. Note, 9.00%, 12/15/2003 85,375
------------------------------------------------------------------- ---------
CONTAINERS & GLASS PRODUCTS--0.9%
-------------------------------------------------------------------
50,000 Owens Illinois, Inc., Sr. Sub. Note, 10.50%, 6/15/2002 50,250
------------------------------------------------------------------- ---------
ECOLOGICAL SERVICES & EQUIPMENT--0.9%
-------------------------------------------------------------------
50,000 Mid-American Waste Systems, Inc., Sr. Sub. Note, 12.25%, 2/15/2003 50,750
------------------------------------------------------------------- ---------
FOOD & DRUG RETAILERS--1.1%
-------------------------------------------------------------------
50,000 Grand Union Co., Sr. Sub. Note, 12.25%, 7/15/2002 19,938
-------------------------------------------------------------------
50,000 Pathmark Stores, Inc., Sr. Sub. Note, 9.625%, 5/1/2003 43,375
------------------------------------------------------------------- ---------
Total 63,313
------------------------------------------------------------------- ---------
</TABLE>
33
STRATEGIC INCOME FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------- ------------------------------------------------------------------- ---------
<C> <S> <C>
U.S. CORPORATE BONDS--CONTINUED
- -----------------------------------------------------------------------------------
FOOD PRODUCTS--3.2%
-------------------------------------------------------------------
$ 100,000 (a) Curtice-Burns Foods, Inc., Sr. Sub. Note, 12.75%, 2/1/2005 $ 100,875
-------------------------------------------------------------------
50,000 Doskocil Cos., Inc., Sr. Sub. Note, 9.75%, 7/15/2000 43,250
-------------------------------------------------------------------
50,000 Specialty Foods Corp., Sr. Sub. Note, 11.25%, 8/15/2003 44,000
------------------------------------------------------------------- ---------
Total 188,125
------------------------------------------------------------------- ---------
FOOD SERVICES--1.6%
-------------------------------------------------------------------
100,000 Flagstar Corp., Sr. Note, 10.875%, 12/1/2002 91,750
------------------------------------------------------------------- ---------
FOREST PRODUCTS--1.6%
-------------------------------------------------------------------
100,000 Stone Container Corp., Sr. Note, 9.875%, 2/1/2001 92,000
------------------------------------------------------------------- ---------
HEALTHCARE--1.7%
-------------------------------------------------------------------
100,000 AmeriSource Corp., Sr. PIK Deb., 11.25%, 7/15/2005 101,500
------------------------------------------------------------------- ---------
HOME PRODUCTS & FURNISHINGS--0.5%
-------------------------------------------------------------------
50,000 American Standard, Inc., Sr. Sub. Disc. Deb., 0/10.50%, 6/1/2005 31,875
------------------------------------------------------------------- ---------
MACHINERY & EQUIPMENT--0.9%
-------------------------------------------------------------------
50,000 (a) Waters Corp., Sr. Sub. Note, 12.75%, 9/30/2004 50,750
------------------------------------------------------------------- ---------
RETAILERS--2.5%
-------------------------------------------------------------------
50,000 Brylane Capital Corp., Sr. Sub. Note, 10.00%, 9/1/2003 49,750
-------------------------------------------------------------------
100,000 (a) ICON Health & Fitness, Inc., Unit, 13.00%, 7/15/2002 98,250
------------------------------------------------------------------- ---------
Total 148,000
------------------------------------------------------------------- ---------
STEEL--3.3%
-------------------------------------------------------------------
100,000 Carbide/Graphite Group, Sr. Note, 11.50%, 9/1/2003 101,500
-------------------------------------------------------------------
50,000 GS Technologies Operating Co., Inc., Sr. Note, 12.00%, 9/1/2004 50,125
-------------------------------------------------------------------
50,000 Northwestern Steel & Wire Co., Sr. Note, 9.50%, 6/15/2001 45,000
------------------------------------------------------------------- ---------
Total 196,625
------------------------------------------------------------------- ---------
</TABLE>
34
STRATEGIC INCOME FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------- ------------------------------------------------------------------- ---------
<C> <S> <C>
U.S. CORPORATE BONDS--CONTINUED
- -----------------------------------------------------------------------------------
SURFACE TRANSPORTATION--2.5%
-------------------------------------------------------------------
$ 100,000 Gearbulk Holding Limited, Sr. Note, 11.25%, 12/1/2004 $ 100,375
-------------------------------------------------------------------
50,000 Trans Ocean Container Corp., Sr. Sub. Note, 12.25%, 7/1/2004 48,250
------------------------------------------------------------------- ---------
Total 148,625
------------------------------------------------------------------- ---------
TECHNOLOGY SERVICES--0.7%
-------------------------------------------------------------------
50,000 Computervision Corp., Sr. Sub. Note, 11.375%, 8/15/99 42,000
------------------------------------------------------------------- ---------
TELECOMMUNICATIONS & CELLULAR--0.7%
-------------------------------------------------------------------
100,000 NEXTEL Communications Inc., Sr. Disc. Note, 0/11.50%, 9/1/2003 43,250
------------------------------------------------------------------- ---------
TOTAL U.S. CORPORATE BONDS (IDENTIFIED COST $1,946,098) 1,869,563
------------------------------------------------------------------- ---------
U.S. GOVERNMENT AGENCY--33.5%
- -----------------------------------------------------------------------------------
348,944 Federal Home Loan Mortgage Corp., Pool C00227, 9.50%, 12/1/2022 359,516
-------------------------------------------------------------------
646,386 Federal Home Loan Mortgage Corp., Pool M80326, 7.50%, 6/1/2001 630,420
-------------------------------------------------------------------
502,276 Government National Mortgage Association, Pool 351468, 7.50%,
3/15/2024 463,028
-------------------------------------------------------------------
524,236 Government National Mortgage Association, Pools 356579, 371837 and
403933, 8.50%, 6/15/2023 - 8/15/2024 514,727
------------------------------------------------------------------- ---------
TOTAL U.S. GOVERNMENT AGENCY (IDENTIFIED COST $2,007,285) 1,967,691
------------------------------------------------------------------- ---------
<CAPTION>
FOREIGN U.S.
CURRENCY DOLLAR
PAR AMOUNT VALUE
- -------------- ---------
-------------------------------------------------------------------
<C> <S> <C>
INTERNATIONAL BONDS--32.1%
- -----------------------------------------------------------------------------------
AUSTRALIAN DOLLAR--2.8%
- -----------------------------------------------------------------------------------
CORPORATE--1.4%
-------------------------------------------------------------------
150,000 News America Holdings, Inc., 8.625%, 2/7/2014 $ 83,577
------------------------------------------------------------------- ---------
STATE/PROVINCIAL--1.4%
-------------------------------------------------------------------
100,000 State Bank of New South Wales, 12.25%, 2/26/2001 82,080
------------------------------------------------------------------- ---------
TOTAL AUSTRALIAN DOLLAR 165,657
------------------------------------------------------------------- ---------
</TABLE>
35
STRATEGIC INCOME FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
FOREIGN U.S.
CURRENCY DOLLAR
PAR AMOUNT VALUE
- -------------- ------------------------------------------------------------------- ---------
<C> <S> <C>
INTERNATIONAL BONDS--CONTINUED
- -----------------------------------------------------------------------------------
BRITISH POUND--5.0%
- -----------------------------------------------------------------------------------
CORPORATE--3.2%
-------------------------------------------------------------------
50,000 Abbey National Treasury, 8.00%, 4/2/2003 $ 72,718
-------------------------------------------------------------------
70,000 Diamler-Benz U.K., 10.75%, 5/17/96 113,828
------------------------------------------------------------------- ---------
Total 186,546
------------------------------------------------------------------- ---------
SOVEREIGN--1.8%
-------------------------------------------------------------------
70,000 Republic of Iceland, 8.75%, 5/12/2003 105,641
------------------------------------------------------------------- ---------
TOTAL BRITISH POUND 292,187
------------------------------------------------------------------- ---------
CANADIAN DOLLAR--2.4%
- -----------------------------------------------------------------------------------
AGENCY--1.2%
-------------------------------------------------------------------
100,000 Ontario Hydro, 9.00%, 6/24/2002 71,094
------------------------------------------------------------------- ---------
CORPORATE--1.2%
-------------------------------------------------------------------
100,000 Sherritt, Inc., 11.00%, 3/31/2004 69,379
------------------------------------------------------------------- ---------
TOTAL CANADIAN DOLLAR 140,473
------------------------------------------------------------------- ---------
DANISH KRONE--3.3%
- -----------------------------------------------------------------------------------
SOVEREIGN--3.3%
-------------------------------------------------------------------
600,000 Denmark, 8.00%, 5/15/2003 93,837
-------------------------------------------------------------------
600,000 Denmark, 9.00%, 11/15/96 100,249
------------------------------------------------------------------- ---------
TOTAL DANISH KRONE 194,086
------------------------------------------------------------------- ---------
DEUTSCHE MARK--2.6%
- -----------------------------------------------------------------------------------
CORPORATE--1.5%
-------------------------------------------------------------------
150,000 Ford Credit Europe, PLC, 6.00%, 3/30/99 90,348
------------------------------------------------------------------- ---------
SOVEREIGN--1.1%
-------------------------------------------------------------------
100,000 Federal Republic of Germany, 8.00%, 7/22/2002 65,487
------------------------------------------------------------------- ---------
TOTAL DEUTSCHE MARK 155,835
------------------------------------------------------------------- ---------
</TABLE>
36
STRATEGIC INCOME FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
FOREIGN U.S.
CURRENCY DOLLAR
PAR AMOUNT VALUE
- -------------- ------------------------------------------------------------------- ---------
<C> <S> <C>
INTERNATIONAL BONDS--CONTINUED
- -----------------------------------------------------------------------------------
FRENCH FRANC--1.2%
- -----------------------------------------------------------------------------------
AGENCY--1.2%
-------------------------------------------------------------------
400,000 KFW International Finance, Inc., 7.00%, 5/12/2000 $ 72,082
------------------------------------------------------------------- ---------
ITALIAN LIRA--1.6%
- -----------------------------------------------------------------------------------
AGENCY--1.6%
-------------------------------------------------------------------
150,000,000 KFW International Finance, 11.625%, 11/27/98 93,854
------------------------------------------------------------------- ---------
JAPANESE YEN--1.9%
- -----------------------------------------------------------------------------------
CORPORATE--1.9%
-------------------------------------------------------------------
10,000,000 Bank of Tokyo Cayman Finance, Perpetual Convertible Subordinated
Note, 4.25% 114,675
------------------------------------------------------------------- ---------
MEXICAN PESO--3.5%
- -----------------------------------------------------------------------------------
SOVEREIGN--3.5%
-------------------------------------------------------------------
7,247,800 Mexican CETES, 0.00%, 3/2/95 203,229
------------------------------------------------------------------- ---------
NEW ZEALAND DOLLAR--2.2%
- -----------------------------------------------------------------------------------
AGENCY--2.2%
-------------------------------------------------------------------
200,000 Electricity Corp. of New Zealand, 10.00%, 10/15/2001 129,211
------------------------------------------------------------------- ---------
U.S. DOLLAR--5.6%
- -----------------------------------------------------------------------------------
AGENCY--1.4%
-------------------------------------------------------------------
100,000 Banco Nacional de Comercio Exterior, 8.00%, 8/5/2003 85,281
------------------------------------------------------------------- ---------
CORPORATE--1.6%
-------------------------------------------------------------------
100,000 Banco de Galicia, Conv. Sub. Note, 7.00%, 8/1/2002 92,500
------------------------------------------------------------------- ---------
SOVEREIGN--2.6%
-------------------------------------------------------------------
100,000 Argentina Bocon, Pre 4 (2) PIK; 4.875%, 9/1/2002+ 66,800
-------------------------------------------------------------------
98,000 Brazil IDU, Deb., 6.0625%, 1/1/2001+ 82,688
------------------------------------------------------------------- ---------
Total 149,488
------------------------------------------------------------------- ---------
TOTAL U.S. DOLLAR 327,269
------------------------------------------------------------------- ---------
TOTAL INTERNATIONAL BONDS (IDENTIFIED COST $1,921,234) 1,888,558
------------------------------------------------------------------- ---------
</TABLE>
37
STRATEGIC INCOME FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------- ------------------------------------------------------------------- ---------
<C> <S> <C>
**REPURCHASE AGREEMENT--3.9%
- -----------------------------------------------------------------------------------
$ 230,000 J.P. Morgan Securities, Inc., 5.77%, dated 11/30/94, due 12/1/94
(at amortized cost) $ 230,000
------------------------------------------------------------------- ---------
TOTAL INVESTMENTS (IDENTIFIED COST $6,104,617) $5,955,812++
------------------------------------------------------------------- ---------
<FN>
(a) Denotes restricted securities which are subject to resale under Federal
Securities laws. These securities have been determined to be liquid under
criteria established by the Board of Directors.
+ Denotes Variable Rate and Floating Rate Obligations for which the current
rate is shown.
++ The cost of investments for federal tax cost basis purposes amounts to
$6,111,894. The net unrealized depreciation on a federal tax amounts to
$156,082 and is comprised of $26,814 appreciation and $182,896 depreciation
at November 30, 1994.
** 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
investment in the repurchase agreement is through participation in a joint
account with other Federated Funds.
</TABLE>
The following abbreviation is used in this portfolio:
PIK--Payment in kind
Note: The categories of investments are shown as a percentage of net assets
($5,881,975) at November 30, 1994.
(See Notes which are an integral part of the Financial Statements)
38
STRATEGIC INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
- --------------------------------------------------------------------------------
Investments in securities at value (identified cost; $6,104,617 and tax cost;
$6,111,894) $ 5,955,812
- --------------------------------------------------------------------------------
Cash denominated in foreign currencies (identified cost; $112,568) 112,476
- --------------------------------------------------------------------------------
Cash 4,973
- --------------------------------------------------------------------------------
Interest receivable 117,341
- --------------------------------------------------------------------------------
Receivable for capital stock sold 47,691
- --------------------------------------------------------------------------------
Receivable for foreign currency sold 10,753
- --------------------------------------------------------------------------------
Receivable from adviser 3,000
- --------------------------------------------------------------------------------
Deferred expenses 7,645
- -------------------------------------------------------------------------------- ------------
Total assets 6,259,691
- --------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
Payable for investments purchased $ 303,547
- ----------------------------------------------------------------------
Dividends payable 25,230
- ----------------------------------------------------------------------
Payable for foreign currency purchased 10,771
- ----------------------------------------------------------------------
Accrued expenses 38,168
- ---------------------------------------------------------------------- ----------
</TABLE>
<TABLE>
<S> <C>
Total liabilities 377,716
- -------------------------------------------------------------------------------- ------------
NET ASSETS for 616,440 shares of capital stock outstanding $ 5,881,975
- -------------------------------------------------------------------------------- ------------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Paid-in capital $ 6,066,375
- --------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investments and translation of
assets and liabilities in foreign currencies (148,970)
- --------------------------------------------------------------------------------
Accumulated distributions in excess of net investment income (14,463)
- --------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments and foreign currency
transactions (20,967)
- -------------------------------------------------------------------------------- ------------
Total Net Assets $ 5,881,975
- -------------------------------------------------------------------------------- ------------
NET ASSET VALUE:
- --------------------------------------------------------------------------------
Class C Shares ($1,189,566 DIVIDED BY 124,641 shares of capital stock
outstanding) $ 9.54
- -------------------------------------------------------------------------------- ------------
Class A Shares ($2,366,182 DIVIDED BY 248,034 shares of capital stock
outstanding) $ 9.54
- -------------------------------------------------------------------------------- ------------
Fortress Shares ($2,326,227 DIVIDED BY 243,765 shares of capital stock
outstanding) $ 9.54
- -------------------------------------------------------------------------------- ------------
OFFERING PRICE PER SHARE:
- --------------------------------------------------------------------------------
Class C Shares $ 9.54
- -------------------------------------------------------------------------------- ------------
Class A Shares (100/95.5 of $9.54)* $ 9.99
- -------------------------------------------------------------------------------- ------------
Fortress Shares (100/99 of $9.54)* $ 9.64
- -------------------------------------------------------------------------------- ------------
REDEMPTION PROCEEDS PER SHARE:
- --------------------------------------------------------------------------------
Class C Shares (99/100 of $9.54)** $ 9.44
- -------------------------------------------------------------------------------- ------------
Class A Shares $ 9.54
- -------------------------------------------------------------------------------- ------------
Fortress Shares (99/100 of $9.54)** $ 9.44
- -------------------------------------------------------------------------------- ------------
</TABLE>
* See "What Shares Cost" in the prospectus.
** See "Contingent Deferred Sales Charge" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
39
STRATEGIC INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1994*
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- -------------------------------------------------------------------------------------
Interest income (net of foreign taxes withheld of $8) $ 156,336
- -------------------------------------------------------------------------------------
EXPENSES:
- -------------------------------------------------------------------------------------
Investment advisory fee $ 15,014
- -----------------------------------------------------------------------
Custodian and portfolio accounting fees 51,019
- -----------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 9,367
- -----------------------------------------------------------------------
Printing and postage 6,003
- -----------------------------------------------------------------------
Legal fees 240
- -----------------------------------------------------------------------
Shareholder services fee--Class A Shares 2,096
- -----------------------------------------------------------------------
Shareholder services fee--Class C Shares 869
- -----------------------------------------------------------------------
Shareholder services fee--Fortress Shares 1,451
- -----------------------------------------------------------------------
Distribution services fee--Class C Shares 2,606
- -----------------------------------------------------------------------
Distribution services fee--Fortress Shares 2,902
- -----------------------------------------------------------------------
Administrative personnel and services fee 61,836
- -----------------------------------------------------------------------
Registration fees 1,858
- -----------------------------------------------------------------------
Taxes 25
- -----------------------------------------------------------------------
Insurance premiums 8,812
- -----------------------------------------------------------------------
Miscellaneous 2,514
- ----------------------------------------------------------------------- ----------
Total expenses 166,612
- -----------------------------------------------------------------------
Deduct--
- -----------------------------------------------------------------------
Waiver of investment advisory fee $ 15,014
- ------------------------------------------------------------
Reimbursement of other operating expenses by Adviser 141,674 156,688
- ------------------------------------------------------------ -------- ----------
Net expenses 9,924
- ------------------------------------------------------------------------------------- -----------
Net investment income 146,412
- ------------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY:
- -------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign currency transactions (identified
cost basis) (27,206)
- -------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments and foreign
currency (148,970)
- ------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain (loss) on investments and foreign currency (176,176)
- ------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $ (29,764)
- ------------------------------------------------------------------------------------- -----------
<FN>
* For the period from April 29, 1994 (date of initial public investment) to
November 30, 1994.
(See Notes which are an integral part of the Financial Statements)
</TABLE>
40
STRATEGIC INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- ---------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30, 1994*
-------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------------------------------------
OPERATIONS--
- -----------------------------------------------------------------------
Net investment income $ 146,412
- -----------------------------------------------------------------------
Net realized gain (loss) on investments and foreign currency
transactions ($13,691 net loss as computed for federal tax purposes) (27,206)
- -----------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments and
translation of assets and liabilities in foreign currencies (148,970)
- ----------------------------------------------------------------------- -------------------
Change in net assets resulting from operations (29,764)
- ----------------------------------------------------------------------- -------------------
DISTRIBUTIONS TO SHAREHOLDERS--
- -----------------------------------------------------------------------
Dividends to shareholders from net investment income:
- -----------------------------------------------------------------------
Class A Shares (67,293)
- -----------------------------------------------------------------------
Fortress Shares (46,354)
- -----------------------------------------------------------------------
Class C Shares (26,526)
- -----------------------------------------------------------------------
Distributions in excess of net investment income:
- -----------------------------------------------------------------------
Class A Shares (5,083)
- -----------------------------------------------------------------------
Fortress Shares (6,411)
- -----------------------------------------------------------------------
Class C Shares (2,969)
- ----------------------------------------------------------------------- -------------------
Change in net assets from distributions to shareholders (154,636)
- ----------------------------------------------------------------------- -------------------
CAPITAL STOCK TRANSACTIONS--
- -----------------------------------------------------------------------
Proceeds from sale of shares 7,743,495
- -----------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
dividends declared 64,166
- -----------------------------------------------------------------------
Cost of shares redeemed (1,741,286)
- ----------------------------------------------------------------------- -------------------
Change in net assets resulting from capital stock transactions 6,066,375
- ----------------------------------------------------------------------- -------------------
Change in net assets 5,881,975
- -----------------------------------------------------------------------
NET ASSETS:
- -----------------------------------------------------------------------
Beginning of period --
- ----------------------------------------------------------------------- -------------------
End of period $ 5,881,975
- ----------------------------------------------------------------------- -------------------
<FN>
* For the period April 29, 1994 (date of initial public investment) to November
30, 1994.
(See Notes which are an integral part of the Financial Statements)
</TABLE>
41
STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Fixed Income Securities Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end,
management investment company. The Corporation consists of five, diversified
investment portfolios. The financial statements included herein are only those
of Strategic Income Fund (the "Fund"). The financial statements of the other
portfolios 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. The Fund offers three classes of shares; Class A Shares, Class C Shares,
and Fortress Shares.
As of October 17, 1994, Multi-State Municipal Income Fund no longer accepted
purchases. It is anticipated that Multi-State Municipal Income Fund's
liquidation will occur in 1995.
During the fiscal year ended November 30, 1994, the Corporation offered five
portfolios (Limited Term Fund, Limited Term Municipal Fund, Strategic Income
Fund, Limited Maturity Government Fund, and Multi-State Municipal Income Fund).
The Board of Directors approved the liquidation of Limited Maturity Government
Fund, and as of December 23, 1994 was no longer offered.
(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. These
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Listed corporate bonds (and other fixed-income and
asset backed securities) are valued at the last sale price reported on
national securities exchanges. Unlisted bonds and securities and short-term
obligations are valued at the prices provided by an independent pricing
service. Short-term securities with remaining maturities of sixty days or
less may be stated 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 collateral to ensure the value of collateral at least equals the
principal amount of the repurchase agreement, including accrued interest.
42
STRATEGIC INCOME FUND
- ---------------------------------------------------------
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 Board of 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. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
as required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its taxable income. Accordingly,
no provisions for federal tax are necessary. However, federal taxes may be
imposed on the Fund upon the disposition of certain investments in Passive
Foreign Investment Companies. Withholding taxes on foreign dividends have
been provided for in accordance with the Fund's understanding of the
applicable country's tax rules and rates. At November 30, 1994, the Fund,
for federal tax purposes, had a capital loss carryforward of $13,691, which
will reduce the Fund's taxable income arising from future net realized gain
on investments, if any, to the extent permitted by the Code, and thus will
reduce the amount of the distributions to 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 2002 ($13,691).
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date 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.
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 its shares, have been deferred and are being
amortized using the straight-line method not to exceed a period of five
years from the Fund's commencement date.
G. FORWARD COMMITMENTS--The Fund may enter into forward commitments for the
delayed delivery of securities or forward foreign currency exchange
contracts which are based upon financial indices at a fixed price or
exchange rate at a future date. Risks may arise upon entering these
contracts from the potential inability of counterparts to meet the terms of
their contracts and from unanticipated movements in security prices or
foreign exchange rates. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying
43
STRATEGIC INCOME FUND
- ---------------------------------------------------------
currency and any gains or losses are recorded for financial statement
purposes as unrealized until the contract settlement date.
At November 30, 1994, the Fund had outstanding forward commitments set out
below.
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS TO IN EXCHANGE APPRECIATION
SETTLEMENT DATE DELIVER/RECEIVE FOR (DEPRECIATION)
- ---------------------------------------------- --------------- ------------- -----------------
<S> <C> <C> <C>
SALES
- ----------------------------------------------
Italian Lira -- 12/01/94 17,437,500 $ 10,771 ($ 18)
- ---------------------------------------------- ---
PURCHASES
- ----------------------------------------------
None
- ----------------------------------------------
Net Unrealized Appreciation (Depreciation)
on Forward Commitments ($ 18)
- ---------------------------------------------- ---
---
</TABLE>
H. FOREIGN CURRENCY TRANSLATION--The accounting records of the Fund are
maintained in U.S. dollars. All assets and liabilities denominated in
foreign currencies ("FC") are translated into U.S. dollars based on the rate
of exchange of such currencies against U.S. dollars on the date of
valuation. Purchases and sales of securities, income and expenses are
translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income and expense amounts
recorded and collected or paid are adjusted when reported by the custodian
bank. The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss
from investments.
Reported net realized foreign exchange gains or losses arise from sales and
maturities of short-term securities, sales of FCs, currency gains or losses
realized between the trade and settlement dates on securities transactions,
the difference between the amounts of dividends, interest, and foreign
withholding taxes recorded on the Fund's books, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in the value of assets and
liabilities other than investments in securities at fiscal year end,
resulting from changes in the exchange rate.
I. RECLASSIFICATION--During the year ended November 30, 1994, the Fund adopted
Statement of Position 93-2, Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain, and Re turn of Capital
Distributions by Investment Companies. Accordingly, permanent book and tax
differences have been reclassified to paid-in capital. The Fund reclassified
$6,239 and $6,239 from accumulated net realized gain (loss) and
undistributed net investment income, respectively to paid-in capital in
accordance with SOP 93-2. Net investment income, net realized gains, and net
assets were not affected by this change.
44
STRATEGIC INCOME FUND
- ---------------------------------------------------------
J. RESTRICTED SECURITIES--Restricted securities are securities that may only be
resold upon registration under Federal securities laws or in transactions
exempt from such registration. In some cases, the issuer of restricted
securities has agreed to register such securities for resale, at the
issuer's expense either upon demand by the Fund or in connection with
another registered offering of the securities. Many restricted securities
may be resold in the secondary market in transactions exempt from
registration.
Such restricted securities may be determined to be liquid under criteria
established by the Board of Directors. The Fund will not incur any
registration costs upon such resales. The Fund's restricted securities are
valued at the price provided by dealers in the secondary market or, if no
market prices are available, at the fair value as determined by the Fund's
pricing committee. Additional information on each restricted security held
at November 30, 1994 is as follows:
<TABLE>
<CAPTION>
ACQUISITION ACQUISITION
SECURITY DATE COST
- ---------------------------------------------------------- ----------- -----------
<S> <C> <C>
Polymer Group, Inc. Sr. Note 8/10/94 $ 100,000
- ----------------------------------------------------------
Curtice-Burns Foods, Inc., Sr. Sub. Note 11/3/94 50,500
- ----------------------------------------------------------
Waters Corp., Sr. Sub. Note 8/18/94 50,000
- ----------------------------------------------------------
ICON Health & Fitness, Inc. 11/14/94 98,771
- ----------------------------------------------------------
</TABLE>
K. OTHER--Investment transactions are accounted for on the trade date.
(3) CAPITAL STOCK
At November 30, 1994, there were 10,000,000,000 shares of $0.001 par value
capital stock authorized for the Corporation. 4,000,000,000 shares have been
designated for the Fund. Of these shares, 1,000,000,000 have been designated as
Class C Shares, 1,000,000,000 as Class A Shares, and 1,000,000,000 as Fortress
Shares. 1,000,000,000 shares have been designated for additional classes not
currently offered. Transactions in Capital Stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30, 1994*
-----------------------------
CLASS C SHARES SHARES DOLLARS
- -------------------------------------------------- ------------ --------------
<S> <C> <C>
Shares sold 124,790 $ 1,226,296
- --------------------------------------------------
Shares issued in payment of dividends declared 1,844 17,926
- --------------------------------------------------
Shares redeemed (1,993) (19,338)
- -------------------------------------------------- ------------ --------------
Net change resulting from Class C share
transactions 124,641 $ 1,224,884
- -------------------------------------------------- ------------ --------------
</TABLE>
45
STRATEGIC INCOME FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1994**
--------------------------
CLASS A SHARES SHARES DOLLARS
- -------------------------------------------------- ----------- ------------
<S> <C> <C>
Shares sold 410,346 $ 4,053,169
- --------------------------------------------------
Shares issued in payment of dividends declared 3,091 30,074
- --------------------------------------------------
Shares redeemed (165,403) (1,633,770)
- -------------------------------------------------- ----------- ------------
Net change resulting from Class A Share
transactions 248,034 $ 2,449,473
- -------------------------------------------------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1994***
--------------------------
FORTRESS SHARES SHARES DOLLARS
- -------------------------------------------------- ----------- ------------
<S> <C> <C>
Shares sold 251,274 $ 2,464,030
- --------------------------------------------------
Shares issued in payment of dividends declared 1,656 16,166
- --------------------------------------------------
Shares redeemed (9,165) (88,178)
- -------------------------------------------------- ----------- ------------
Net change resulting from Fortress share
transactions 243,765 $ 2,392,018
- -------------------------------------------------- ----------- ------------
Net change resulting from Fund share
transactions 616,440 $ 6,066,375
- -------------------------------------------------- ----------- ------------
<FN>
* For the period from April 29, 1994 (date of initial public investment) to
November 30, 1994.
** For the period from May 3, 1994 (date of initial public offering) to
November 30, 1994.
*** For the period from May 9, 1994 (date of initial public offering) to
November 30, 1994.
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Advisers, the Fund's investment adviser (the
"Adviser"), receives for its services an annual investment advisory fee equal to
.85 of 1% of the Fund's average daily net assets. The Adviser may voluntarily
choose to waive a portion of its fee and reimburse certain operating expenses of
the Fund. The Adviser can modify or terminate this voluntary waiver and
reimbursement at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
administrative personnel and services. Prior to March 1, 1994, these services
were provided at approximate cost. Effective March 1, 1994, the FAS fee is based
on the level of average aggregate daily net assets of all funds advised by
subsidiaries of Federated Investors for the period. The administrative fee
received during the period of the Administrative Services Agreement shall be at
least $125,000 per portfolio and $30,000 per each additional class of shares.
DISTRIBUTION AND SHAREHOLDER SERVICES FEE--The Fund has adopted a Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the
Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund to finance activities intended to
result in the sale of the Fund's Class C Shares and Fortress Shares. The Plan
46
STRATEGIC INCOME FUND
- ---------------------------------------------------------
provides that the Fund may incur distribution expenses up to .75 and .50,
respectively, of 1% of the average daily net assets of the Class C Shares and
Fortress Shares, respectively, annually, to compensate FSC.
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS up to .25 of 1% of average net assets
for the Fund for the period. This fee is to obtain certain personal services for
shareholders and to maintain shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT--Federated Services Company ("FServ")
serves as transfer and dividend disbursing agent for the Fund. The FServ fee is
based on the size, type and number of accounts and transactions made by
shareholders.
ORGANIZATIONAL EXPENSES--Organizational expenses $103,446 and start-up
administrative services expenses $46,630 were borne initially by the Adviser.
The Fund has agreed to reimburse the Adviser for the organizational expenses and
start-up administrative expenses during the five year period following April 5,
1994 (date the Fund first became effective). For the period ended November 30,
1994, the Fund paid $4,621 and $2,083, respectively pursuant to this agreement.
Certain of the Officers and Directors of the Corporation are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended November 30, 1994, were as follows:
<TABLE>
<S> <C>
- --------------------------------------------------
PURCHASES $ 6,985,356
- -------------------------------------------------- ------------
SALES $ 1,105,348
- -------------------------------------------------- ------------
</TABLE>
(6) SUBSEQUENT EVENT
On January 17, 1995, The Grand Union Company announced that it would default on
its January 15, 1995, interest payment. The company is currently in negotiations
with bondholders on a restructuring plan. Fund management is unable to predict
the outcome or timing of these Proceedings.
47
INDEPENDENT AUDITORS' REPORT
- ---------------------------------------------------------
To the Board of Directors of FIXED INCOME SECURITIES, INC.
and Shareholders of STRATEGIC INCOME FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Strategic Income Fund (a portfolio of Fixed
Income Securities, Inc.) as of November 30, 1994, and the related statement of
operations, the statement of changes in net assets, and the financial highlights
(see pages 2, 31, and 32 of the prospectus) for the year then ended. 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 securities owned as of November 30, 1994 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 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 Strategic Income
Fund as of November 30, 1994, the results of its operations, the changes in its
net assets, and its financial highlights in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
January 13, 1995
except for Footnote 6,
for which the date is
January 17, 1995.
48
APPENDIX
(UNAUDITED)
- --------------------------------------------------------------------------------
STANDARD AND POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC--Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposures to adverse
conditions.
C--The rating C typically is applied to debt subordinated to senior debt which
is assigned an actual or implied "CCC-" debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
D--Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
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.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged". 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
49
APPENDIX
(UNAUDITED)
- --------------------------------------------------------------------------------
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured.) Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
NR--Not rated by Moody's.
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.
50
APPENDIX
(UNAUDITED)
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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. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D--Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D" represents
the lowest potential for recovery.
NR--Indicates that Fitch does not rate the specific issue.
51
ADDRESSES
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<TABLE>
<S> <C>
Strategic Income Fund
Class A 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
Trust Company P.O. Box 8604
Boston, Massachusetts 02266-8604
- -------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 125 Summer Street
Boston, Massachusetts 02110-1617
- -------------------------------------------------------------------------------------------
</TABLE>
52
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STRATEGIC INCOME FUND
CLASS A SHARES
PROSPECTUS
A Diversified Portfolio of
Fixed Income Securities, Inc.,
an Open-End Management
Investment Company
January 31, 1995
[LOGO] FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
338319700
4031801A-A (1/95) [RECYCLED PAPER LOGO]
Strategic Income Fund
(A Portfolio of Fixed Income Securities, Inc.)
Class A Shares
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus of Class A Shares of Strategic Income Fund (the "Fund")
dated January 31, 1995. 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, 1995
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of Federated
Investors
General Information About the
Fund 1
Investment Objective and Policies 1
Types of Investments and
Investment Techniques 1
Resets of Interest 1
Caps and Floors 1
Brady Bonds 1
Non-Mortgage Related Asset-
Backed Securities 2
Convertible Securities 2
Equity Securities 2
Warrants 2
Futures and Options
Transactions 3
Foreign Currency Transactions 4
Foreign Bank Instruments 6
When-Issued and Delayed
Delivery Transactions 6
Lending of Portfolio Securities 6
Restricted and Illiquid
Securities 7
Repurchase Agreements 7
Reverse Repurchase Agreements 7
Portfolio Turnover 7
Investment Limitations 7
Fixed Income Securities, Inc.
Management 10
The Funds 13
Fund Ownership 13
Officers and Directors
Compensation 13
Director Liability 14
Investment Advisory Services 14
Adviser to the Fund 14
Advisory Fees 14
Shareholder Services Plan 15
Transfer Agent and Dividend
Disbursing Agent 15
Brokerage Transactions 15
Purchasing Shares 16
Conversion to Federal Funds 16
Purchases by Sales
Representatives, Fund
Directors, and Employees 16
Determining Net Asset Value 16
Determining Market Value of
Securities 16
Redeeming Shares 17
Redemption in Kind 17
Tax Status 17
The Fund's Tax Status 17
Foreign Taxes 17
Shareholders' Tax Status 17
Total Return 18
Yield 18
Performance Comparisons 18
General Information About the Fund
The Fund is a portfolio of Fixed Income Securities, Inc. (the
"Corporation"). The Corporation was incorporated under the laws of the
State of Maryland on October 15, 1991.
Investment Objective and Policies
The investment objective of the Fund is to seek a high level of current
income. The investment objective stated above cannot be changed without
approval of shareholders. The investment policies stated below may be
changed by the Board of Directors ("Directors") without shareholder
approval. Shareholders will be notified before any material change in
the investment policies becomes effective.
Types of Investments and Investment Techniques
The Fund pursues its investment objective by investing in a diversified
portfolio primarily consisting of domestic corporate debt obligations,
U.S. government securities, and foreign government and corporate debt
obligations. Under normal circumstances, the Fund's assets will be
invested in each of these three sectors. However, the Fund may from time
to time invest up to 100% of its total assets in any one sector if, in
the judgment of the investment adviser, the Fund has the opportunity of
seeking a high level of current income without undue risk to principal.
Resets of Interest
The interest rates paid on the mortgage-backed securities in which the
Fund invests generally are readjusted at intervals of one year or less
to an increment over some predetermined interest rate index. There are
two main categories of indices: those based on U.S. Treasury securities
and those derived from a calculated measure, such as a cost of funds
index or a moving average of mortgage rates. Commonly utilized indices
include the one-year and five-year constant maturity Treasury note
rates, the three-month Treasury bill rate, the 180-day Treasury bill
rate, rates on longer-term Treasury securities, the National Median Cost
of Funds, the one-month or three-month London Interbank Offered Rate
(LIBOR), the prime rate of a specific bank, or commercial paper rates.
Some indices, such as the one-year constant maturity Treasury note rate,
closely mirror changes in market interest rate levels.
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, Adjustable Rate Mortgages ("ARMs") which use indices that lag
changes in market rates should experience greater price volatility than
adjustable rate mortgage securities that closely mirror the market.
Caps and Floors
The underlying mortgages which collateralize the mortgage-backed
securities in which the Fund invests will frequently have caps and
floors which limit the maximum amount by which the loan rate to the
residential borrower may change up or down: (1) per reset or adjustment
interval, and (2) over the life of the loan. Some residential mortgage
loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative
amortization.
The value of mortgage securities in which the Fund invests may be
affected if market interest rates rise or fall faster and farther than
the allowable caps or floors on the underlying residential mortgage
loans. Additionally, even though the interest rates on the underlying
residential mortgages are adjustable, amortization and prepayments may
occur, thereby causing the effective maturities of the mortgage
securities in which the Fund invests to be shorter than the maturities
stated in the underlying mortgages.
Brady Bonds
The Fund may invest in U.S. dollar-denominated foreign securities
referred to as "Brady Bonds." These are debt obligations of foreign
entities that may be fixed-rate par bonds or floating-rate discount
bonds and are generally collateralized in full as to principal due at
maturity by U.S. Treasury zero coupon obligations that have the same
maturity as the Brady Bonds. However, the Fund may also invest in
uncollateralized Brady Bonds. Brady Bonds are generally viewed as having
three or four valuation components: (i) any collateralized repayment of
principal at final maturity; (ii) the collateralized interest payments;
(iii) the uncollateralized interest payments; and (iv) any
uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute what is referred to as the "residual
risk" of such bonds). In the event of a default with respect to
collateralized Brady Bonds as a result of which the payment obligations
of the issuer are accelerated, the zero coupon U.S. Treasury securities
held as collateral for the payment of principal will not be distributed
to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to
be outstanding, at which time the face amount of the collateral will
equal the principal payments which would have then been due on the Brady
Bonds in the normal course. In addition, in light of the residual risk
of Brady Bonds and, among other factors, the history of defaults with
respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are to be
viewed as speculative.
Non-Mortgage Related Asset-Backed Securities
Non-mortgage related asset-backed securities present certain risks that
are not presented by mortgage-backed securities. Primarily, these
securities do not have the benefit of the same security interest in the
related collateral. Credit card receivables are generally unsecured and
the debtors are entitled to the protection of a number of state and
federal consumer credit laws, many of which give such debtors the right
to set off certain amounts owed on the credit cards, thereby reducing
the balance due. Most issuers of asset-backed securities backed by motor
vehicle installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If the
servicer sells these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders
of the related asset-backed securities. Further, if a vehicle is
registered in one state and is then re-registered because the owner and
the obligor move to another state, such re-registration could defeat the
original security interest in the vehicle in certain cases. In addition,
because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee with the
holders of asset-backed securities backed by automobile receivables may
not have a proper security interest in all of the obligations backing
such receivables. Therefore, there is a possibility that recoveries on
repossessed collateral may not, in some cases, be available to support
payments on these securities.
Convertible Securities
The Fund may invest in convertible securities. Convertible securities
are fixed income securities that may be exchanged or converted into a
predetermined number of shares of the issuer's underlying common stock
at the option of the holder during a specified period. Convertible
securities may take the form of convertible preferred stock, convertible
bonds or debentures, units consisting of "usable" bonds and warrants or
a combination of the features of several of these securities. The
investment characteristics of each convertible security vary widely,
which allows convertible securities to be employed for a variety of
investment strategies.
The Fund will exchange or convert convertible securities into shares of
underlying common stock when, in the opinion of the investment adviser,
the investment characteristics of the underlying common shares will
assist the Fund in achieving its investment objective. The Fund may also
elect to hold or trade convertible shares. In selecting convertible
securities, the Fund's investment adviser evaluates the investment
characteristics of the convertible security as a fixed income
instrument, and the investment potential of the underlying equity
security for capital appreciation. In evaluating these matters with
respect to a particular convertible security, the investment adviser
considers numerous factors, including the economic and political
outlook, the value of the security relative to other investment
alternatives, trends in the determinants of the issuer's profits, and
the issuer's management capability and practices.
Equity Securities
Generally, less than 10% of the value of the Fund's total assets will be
invested in equity securities, including common stocks, warrants or
rights. The Fund may exceed this limitation for temporary defensive
purposes if unusual market conditions occur.
Warrants
The Fund may invest in warrants. Warrants are basically options to
purchase common stock at a specific price (usually at a premium above
the market value of the optioned common stock at issuance) valid for a
specific period of time. Warrants may have a life ranging from less than
one year to twenty years, or they may be perpetual. However, most
warrants have expiration dates after which they are worthless. In
addition, a warrant is worthless if the market price of the common stock
does not exceed the warrant's exercise price during the life of the
warrant. Warrants have no voting rights, pay no dividends, and have no
rights with respect to the assets of the corporation issuing them. The
percentage increase or decrease in the market price of the warrant may
tend to be greater than the percentage increase or decrease in the
market price of the optioned common stock. The Fund will not invest more
than 5% of the value of its total assets in warrants. Warrants acquired
in units or attached to securities may be deemed to be without value for
purposes of this policy.
Futures and Options Transactions
The Fund may attempt to hedge all or a portion of its portfolio by
buying and selling financial futures contracts, buying put options on
portfolio securities and listed put options on futures contracts, and
writing call options on futures contracts. The Fund may also write
covered call options on portfolio securities to attempt to increase its
current income. The Fund currently does not intend to invest more than
5% of its total assets in options transactions.
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).
Purchasing and Writing Over-the-Counter Options
The Fund may purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the buyers or
writers of the options for those options on portfolio securities
held by the Fund and not traded on an exchange. Over-the-counter
options are two party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are
third party contracts with standardized strike prices and
expiration dates and are purchased from a clearing corporation.
Exchange-traded options have a continuous liquid market while over-
the-counter options may not.
Foreign Currency Transactions
The Fund may engage without limitation in foreign currency transactions,
including those described below.
Currency Risks
The exchange rates between the U.S. dollar and foreign currencies
are a function of such factors as supply and demand in the
currency exchange markets, international balances of payments,
governmental intervention, speculation and other economic and
political conditions. Although the Fund values its assets daily in
U.S. dollars, the Fund may not convert its holdings of foreign
currencies to U.S. dollars daily. The Fund may incur conversion
costs when it converts its holdings to another currency. Foreign
exchange dealers may realize a profit on the difference between
the price at which the Fund buys and sells currencies.
The Fund will engage in foreign currency exchange transactions in
connection with its investments in the securities. The Fund will
conduct its foreign currency exchange transactions either on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through forward contracts to purchase
or sell foreign currencies.
Forward Foreign Currency Exchange Contracts
The Fund may enter into forward foreign currency exchange
contracts in order to protect itself against a possible loss
resulting from an adverse change in the relationship between the
U.S. dollar and a foreign currency involved in an underlying
transaction. However, forward foreign currency exchange contracts
may limit potential gains which could result from a positive
change in such currency relationships. The Fund's investment
adviser believes that it is important to have the flexibility to
enter into forward foreign currency exchange contracts whenever it
determines that it is in the Fund's best interest to do so. The
Fund will not speculate in foreign currency exchange.
The Fund will not enter into forward foreign currency exchange
contracts or maintain a net exposure in such contracts when it
would be obligated to deliver an amount of foreign currency in
excess of the value of its portfolio securities or other assets
denominated in that currency or, in the case of a "cross-hedge"
denominated in a currency or currencies that the Fund's investment
adviser believes will tend to be closely correlated with that
currency with regard to price movements. Generally, the Fund will
not enter into a forward foreign currency exchange contract with a
term longer than one year.
Foreign Currency Options
A foreign currency option provides the option buyer with the right
to buy or sell a stated amount of foreign currency at the exercise
price on a specified date or during the option period. The owner
of a call option has the right, but not the obligation, to buy the
currency. Conversely, the owner of a put option has the right, but
not the obligation, to sell the currency.
When the option is exercised, the seller (i.e., writer) of the
option is obligated to fulfill the terms of the sold option.
However, either the seller or the buyer may, in the secondary
market, close its position during the option period at any time
prior to expiration.
A call option on foreign currency generally rises in value if the
underlying currency appreciates in value, and a put option on
foreign currency generally falls in value if the underlying
currency depreciates in value. Although purchasing a foreign
currency option can protect the Fund against an adverse movement
in the value of a foreign currency, the option will not limit the
movement in the value of such currency. For example, if the Fund
was holding securities denominated in a foreign currency that was
appreciating and had purchased a foreign currency put to hedge
against a decline in the value of the currency, the Fund would not
have to exercise their put option. Likewise, if the Fund were to
enter into a contract to purchase a security denominated in
foreign currency and, in conjunction with that purchase, were to
purchase a foreign currency call option to hedge against a rise in
value of the currency, and if the value of the currency instead
depreciated between the date of purchase and the settlement date,
the Fund would not have to exercise its call. Instead, the Fund
could acquire in the spot market the amount of foreign currency
needed for settlement.
Special Risks Associated with Foreign Currency Options
Buyers and sellers of foreign currency options are subject to the
same risks that apply to options generally. In addition, there are
certain additional risks associated with foreign currency options.
The markets in foreign currency options are relatively new, and
the Fund's ability to establish and close out positions on such
options is subject to the maintenance of a liquid secondary
market. Although the Fund will not purchase or write such options
unless and until, in the opinion of the Fund's investment adviser,
the market for them has developed sufficiently to ensure that the
risks in connection with such options are not greater than the
risks in connection with the underlying currency, there can be no
assurance that a liquid secondary market will exist for a
particular option at any specific time. In addition, options on
foreign currencies are affected by all of those factors that
influence foreign exchange rates and investments generally.
Foreign currency options that are considered to be illiquid are
subject to the Fund's 15% limitation on illiquid securities.
The value of a foreign currency option depends upon the value of
the underlying currency relative to the U.S. dollar. As a result,
the price of the option position may vary with changes in the
value of either or both currencies and may have no relationship to
the investment merits of a foreign security. Because foreign
currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in
the use of foreign currency options, investors may be
disadvantaged by having to deal in an odd lot market (generally
consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable
than for round lots.
There is no systematic reporting of last sale information for
foreign currencies or any regulatory requirement that quotations
available through dealers or other market sources be firm or
revised on a timely basis. Available quotation information is
generally representative of very large transactions in the
interbank market and thus may not reflect relatively smaller
transactions (i.e., less than $1 million) where rates may be less
favorable. The interbank market in foreign currencies is a global,
around-the-clock market. To the extent that the U.S. option
markets are closed while the markets for the underlying currencies
remain open, significant price and rate movements may take place
in the underlying markets that cannot be reflected in the options
markets until they reopen.
Foreign Currency Futures Transactions
By using foreign currency futures contracts and options on such
contracts, the Fund may be able to achieve many of the same
objectives as it would through the use of forward foreign currency
exchange contracts. The Fund may be able to achieve these
objectives possibly more effectively and at a lower cost by using
futures transactions instead of forward foreign currency exchange
contracts.
Special Risks Associated with Foreign Currency Futures Contracts and
Related Options
Buyers and sellers of foreign currency futures contracts are
subject to the same risks that apply to the use of futures
generally. In addition, there are risks associated with foreign
currency futures contracts and their use as a hedging device
similar to those associated with options on futures currencies, as
described above.
Options on foreign currency futures contracts may involve certain
additional risks. Trading options on foreign currency futures
contracts is relatively new. The ability to establish and close
out positions on such options is subject to the maintenance of a
liquid secondary market. To reduce this risk, the Fund will not
purchase or write options on foreign currency futures contracts
unless and until, in the opinion of the Fund's investment adviser,
the market for such options has developed sufficiently that the
risks in connection with such options are not greater than the
risks in connection with transactions in the underlying foreign
currency futures contracts. Compared to the purchase or sale of
foreign currency futures contracts, the purchase of call or put
options on futures contracts involves less potential risk to the
Fund because the maximum amount at risk is the premium paid for
the option (plus transaction costs). However, there may be
circumstances when the purchase of a call or put option on a
futures contract would result in a loss, such as when there is no
movement in the price of the underlying currency or futures
contract.
Foreign Bank Instruments
Eurodollar Certificates of Deposit ("ECDs"), Eurodollar Time Deposits
("ETDs"), Yankee Certificates of Deposit ("Yankee CDs"), and Europaper
are subject to somewhat different risks than domestic obligations of
domestic issuers. Examples of these risks include international,
economic and political developments, foreign governmental restrictions
that may adversely affect the payment of principal or interest, foreign
withholdings or other taxes on interest income, difficulties in
obtaining or enforcing a judgment against the issuing bank, and the
possible impact of interruptions of the flow of international currency
transactions. Different risks may also exist for ECDs, ETDs, and Yankee
CDs because the banks issuing these instruments, or their domestic or
foreign branches, are not necessarily subject to the same regulatory
requirements that apply to domestic banks, such as reserve requirements,
loan requirements, loan limitations, examinations, accounting, auditing,
and recording keeping and the public availability of information. These
factors will be carefully considered by the Fund's adviser in selecting
investments for the Fund.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. 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 on the Fund's records at the trade date. These
assets are marked to market daily and are maintained until the
transaction has been settled. The Fund does not intend to engage in
when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
Lending of Portfolio Securities
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities. Loans are
subject to termination at the option of the Fund or the borrower. The
Fund may pay reasonable administrative and custodial fees in connection
with a loan and may pay a negotiated portion of the interest earned on
the cash or equivalent collateral to the borrower or placing broker.
Restricted and Illiquid Securities
The ability of the Directors to determine the liquidity of certain
restricted securities is permitted under the Securities and Exchange
Commission ("SEC") Staff position set forth in the adopting release for
Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is a
non-exclusive safe harbor for certain secondary market transactions
involving securities subject to restrictions on resale under federal
securities laws. The Rule provides an exemption from registration for
resales of otherwise restricted securities to qualified institutional
buyers. The Rule was expected to further enhance the liquidity of the
secondary market for securities eligible for resale under Rule 144A. The
Fund believes that the Staff of the SEC has left the question of
determining the liquidity of all restricted securities to the Directors.
The Directors consider the following criteria in determining the
liquidity of certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and
the number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace
trades.
Repurchase Agreements
The Fund requires its custodian to take possession of the securities
subject to repurchase agreements, and these securities are marked to
market daily. To the extent that the original seller does not repurchase
the securities from the Fund, the Fund could receive less than the
repurchase price on any sale of such securities. In the event that a
defaulting seller files for bankruptcy or becomes insolvent, disposition
of securities by the Fund might be delayed pending court action. The
Fund believes that under the regular procedures normally in effect for
custody of the Fund's portfolio securities subject to repurchase
agreements, a court of competent jurisdiction would rule in favor of the
Fund and allow retention or disposition of such securities. The Fund
will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are
deemed by the Fund's adviser to be creditworthy pursuant to guidelines
established by the Directors.
Reverse Repurchase Agreements
The Fund may also enter into reverse repurchase agreements. A reverse
repurchase transaction is similar to borrowing cash. In a reverse
repurchase agreement the Fund transfers possession of a portfolio
instrument to another person, such as a financial institution, broker,
or dealer, in return for a percentage of the instrument's market value
in cash, and agrees that on a stipulated date in the future, the Fund
will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio
instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not
ensure that the Fund will be able to avoid selling portfolio instruments
at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund,
in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked
to market daily and are maintained until the transaction is settled.
Portfolio Turnover
The Fund will not attempt to set or meet a portfolio turnover rate since
any turnover would be incidental to transactions undertaken in an
attempt to achieve the Fund's investment objective, without regard to
the length of time a particular security may have been held. The adviser
does not anticipate that portfolio turnover will result in adverse tax
consequences. During the period from April 29, 1994 (date of initial
public investment), through November 30, 1994, the Fund's portfolio
turnover rate was 34%.
Investment Limitations
Selling Short and Buying on Margin
The Fund will not sell securities short or purchase securities on
margin, other than in connection with the purchase and sale of
options, financial futures and options on financial futures, but
may obtain such short-term credits as are necessary for clearance
of transactions.
Issuing Senior Securities and Borrowing Money
The Fund will not issue senior securities except as required by
forward commitments to purchase securities or currencies and
except that the Fund may borrow money and engage in reverse
repurchase agreements in amounts up to one-third of the value of
its total assets, including the amounts borrowed. The Fund will
not borrow money or engage in reverse repurchase agreements for
investment leverage, but rather as a temporary, extraordinary, or
emergency measure or to facilitate management of the portfolio by
enabling the Fund to meet redemption requests when the liquidation
of portfolio securities is deemed to be inconvenient or
disadvantageous. The Fund will not purchase any securities while
borrowings in excess of 5% of its total assets are outstanding.
During the period any reverse repurchase agreements are
outstanding, but only to the extent necessary to assure completion
of the reverse repurchase agreements, the Fund will restrict the
purchase of portfolio instruments to money market instruments
maturing on or before the expiration date of the reverse
repurchase agreements.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate any assets
except to secure permitted borrowings. In those cases, it may
pledge assets having a market value not exceeding the lesser of
the dollar amounts borrowed or 15% of the value of total assets at
the time of the borrowing. Margin deposits for the purchase and
sale of options, financial futures contracts and related options
are not deemed to be a pledge.
Diversification of Investments
With respect to securities comprising 75% of the value of its
total assets, the Fund will not purchase securities of any one
issuer (other than cash, cash items or securities issued or
guaranteed by the government of the United States or its agencies
or instrumentalities and repurchase agreements collateralized by
U.S. government securities) if as a result more than 5% of the
value of its total assets would be invested in the securities of
that issuer or the Fund would own more than 10% of the outstanding
voting securities of that issuer.
Investing in Real Estate
The Fund will not buy or sell real estate, including limited
partnership interests in real estate, although it may invest in
securities of companies whose business involves the purchase or
sale of real estate or in securities which are secured by real
estate or interests in real estate.
Investing in Commodities
The Fund will not purchase or sell commodities, except that the
Fund may purchase and sell financial futures contracts and related
options. Further, the Fund may engage in transactions in foreign
currencies and may purchase and sell options on foreign currencies
and indices for hedging purposes.
Underwriting
The Fund will not underwrite any issue of securities, except as it
may be deemed to be an underwriter under the Securities Act of
1933 in connection with the sale of restricted securities which
the Fund may purchase pursuant to its investment objective,
policies, and limitations.
Lending Cash or Securities
The Fund will not lend any of its assets, except portfolio
securities up to one-third of the value of its total assets. This
shall not prevent the Fund from purchasing or holding U.S.
government obligations, money market instruments, variable rate
demand notes, bonds, debentures, notes, certificates of
indebtedness, or other debt securities, entering into repurchase
agreements, or engaging in other transactions where permitted by
the Fund's investment objective, policies and limitations.
Concentration of Investments
The Fund will not invest 25% or more of the value of its total
assets in any one industry or in government securities of any one
foreign country, except it may invest 25% or more of the value of
its total assets in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the
Directors without shareholder approval. Shareholders will be notified
before any material change in these limitations becomes effective.
Investing in Restricted Securities
The Fund will not invest more than 10% of the value of its total
assets in securities subject to restrictions on resale under the
Securities Act of 1933, except for commercial paper issued under
Section 4(2) of the Securities Act of 1933 and certain other
restricted securities which meet the criteria for liquidity as
established by the Directors.
Investing in Illiquid Securities
The Fund will not invest more than 15% of the value of its net
assets in illiquid securities, including repurchase agreements
providing for settlement in more than seven days after notice,
over-the-counter options, certain foreign currency options and
certain securities not determined by the Directors to be liquid.
Investing in New Issuers
The Fund will not invest more than 5% of the value of its total
assets in securities of companies, including their predecessors,
that have been in operation for less than three years. With
respect to asset-backed securities, the Fund will treat the
originator of the asset pool as the company issuing the security
for purposes of determining compliance with this limitation.
Investing in Minerals
The Fund will not purchase or sell oil, gas, or other mineral
exploration or development programs or leases, although it may
purchase the securities of issuers which invest in or sponsor such
programs.
Investing in Warrants
The Fund will not invest more than 5% of its net assets in
warrants, including those acquired in units or attached to other
securities. To comply with certain state restrictions, the Fund
will limit its investments in such warrants not listed on the New
York or American Stock Exchanges to 2% of its net assets. (If
state restrictions change, this latter restriction may be revised
without notice to shareholder.) For purposes of this investment
restriction, warrants will be valued at the lower of cost or
market, except that warrants acquired by the Fund in units with or
attached to securities may be deemed to be without value.
Investing in Securities of Other Investment Companies
The Fund will limit its investments in other investment companies
to no more than 3% of the total outstanding voting securities of
any such investment company, will invest no more than 5% of its
total assets in any one investment company, and will invest no
more than 10% of its total assets in investment companies in
general. These limitations are not applicable if the securities
are acquired as part of a merger, consolidation, reorganization,
or other acquisition.
Dealing in Puts and Calls
The Fund may not write or purchase options, except that the Fund
may write covered call options and secured put options on up to
25% of its net assets and may purchase put and call options,
provided that no more than 5% of the fair market value of its net
assets may be invested in premiums on such options.
Investing in Issuers Whose Securities are Owned by Officers and
Directors of the Corporation
The Fund will not purchase or retain the securities of any issuer
if the officers and Directors of the Corporation or its investment
adviser owning individually more than 1/2 of 1% of the issuer's
securities together own more than 5% of the issuer's securities.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of the investment, a later increase or decrease
in percentage resulting from any change in value or net assets will not
result in a violation of such restriction. For purposes of its policies
and limitations, the Fund considers certificates of deposit and demand
and time deposits issued by a U.S. branch of a domestic bank or savings
association having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items."
The Fund does not expect to borrow money or pledge securities in excess
of 5% of the value of its total assets during the present fiscal year.
Fixed Income Securities, Inc. Management
Officers and Directors are listed with their addresses, present
positions with Fixed Income Securities, Inc., and principal
occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Chairman and Director
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life
and Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, Vice President of the Company.
Thomas G. Bigley
28th Floor, One Oxford Center
Pittsburgh, PA
Director
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee, or Managing General Partner
of the Funds; formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Director
President, Investment Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors; President, Northgate
Village Development Corporation; Partner or Trustee in private real
estate ventures in Southwest Florida; Director, Trustee, or Managing
General Partner of the Funds; formerly, President, Naples Property
Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Director
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Director,
Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Director
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; Professor of Medicine and Trustee, University of Pittsburgh;
Director of Corporate Health, University of Pittsburgh Medical Center;
Director, Trustee, or Managing General Partner of the Funds.
Richard B. Fisher *
Federated Investors Tower
Pittsburgh, PA
President and Director
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.
Edward L. Flaherty, Jr.@
Two Gateway Center - Suite 674
Pittsburgh, PA
Director
Attorney-at-law; Partner, Henny, Koehuba, Meyer & Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.
Peter E. Madden
225 Franklin Street
Boston, MA
Director
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds; formerly,
President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Two Gateway Center - Suite 674
Pittsburgh, PA
Director
Attorney-at-law; Partner, Henny, Koehuba, Meyer & Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Director
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Director
Public relations/marketing consultant; Director, Trustee, or Managing
General Partner of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Vice President
President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and Director,
Federated Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; 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 Company.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.
* This Director is deemed to be an "interested person" as defined
in the Investment Company Act of 1940, as amended.
@ Member of the 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:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Cash Management Trust; Automated Government Money Trust;
California Municipal Cash Trust; Cash Trust Series II; Cash Trust
Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport
Cash Trust; 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 Institutional
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; International Series, Inc.; Investment Series Funds,
Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.;
Liberty U.S. Government Money Market Trust; Liberty Term Trust, Inc. -
1999; Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed Series
Trust; The Medalist Funds; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income
Trust; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; Newpoint Funds; RIMCO Monument Funds; The
Shawmut Funds; Short-Term Municipal Trust; Star Funds; The Starburst
Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; Trademark
Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for
U.S. Treasury Obligations; World Investment Series, Inc.
Fund Ownership
Officers and Directors, as a group, own 3.76% of the Fund's outstanding
Shares as of January 11, 1995.
As of January 11, 1995, Merrill Lynch, Pierce, Fenner & Smith,
Jacksonville, Florida, as record owner holding Class A Shares of the
Fund for its clients, owned approximately 21, 665 shares (8.07%).
As of January 11, 1995, the following shareholders of record owned 5% or
more of the outstanding Class C Shares of the Fund: Joseph J. Dinnigan
and Dorothy F. Dinnigan, Yaphank, New York, owned approximately 6,531
shares (5.19%), and State Street Bank and Trust Company, custodian for
the IRA rollover of Jules Nitzberg, Jenkintown, Pennsylvania, owned
approximately 7,266 shares (5.77%).
As of January 11, 1995, Merrill Lynch, Pierce, Fenner & Smith,
Jacksonville, Florida, as record owner holding Fortress Shares of the
Fund for its clients, owned approximately 111,498 shares (41.54%).
Officers and Directors Compensation
NAME , AGGREGATE TOTAL COMPENSATION
PAID
POSITION WITH COMPENSATION FROM TO DIRECTORS FROM
CORPORATION *CORPORATION CORPORATION AND FUND
COMPLEX
John F. Donahue,
Chairman and Director $ -0- $ -0- for the
Corporation and
69 investment
companies
Thomas G. Bigley,
Director $ 131.00 $ 24,991 for the
Corporation and
50 investment
companies
John T. Conroy, Jr.,
Director $ 1,501.75 $ 136,100 for the
Corporation and
65 investment
companies
William J. Copeland,
Director $ 1,501.75 $ 136,100 for the
Corporation and
65 investment
companies
James E. Dowd,
Director $ 1,501.75 $ 136,100 for the
Corporation and
65 investment
companies
Lawrence D. Ellis, M.D.,
Director $ 1,362.50 $ 123,600 for the
Corporation and
65 investment
companies
Richard B. Fisher,
President and Director $ -0- $ -0- for the
Corporation and
9 investment
companies
Edward L. Flaherty, Jr.,
Director $ 1,501.75 $ 136,100 for the
Corporation and
65 investment
companies
Peter E. Madden,
Director $ 1,153.50 $ 104,880 for the
Corporation and
65 investment
companies
Gregor F. Meyer,
Director $ 1,362.50 $ 123,600 for the
Corporation and
65 investment
companies
Wesley W. Posvar,
Director $ 1,362.50 $ 123,600 for the
Corporation and
65 investment
companies
Marjorie P. Smuts,
Director $ 1,362.50 $ 123,600 for the
Corporation and
65 investment
companies
* The aggregate compensation is provided for the Corporation which is
comprised of 4 portfolios.
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.
Advisory Fees
For its advisory services, Federated Advisers receives an annual
investment advisory fee as described in the prospectus.
During the period from April 29, 1994 (date of initial public
investment), through November 30, 1994, the Adviser earned $15,014, all
of which was voluntarily waived.
State Expense Limitations
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose
shares are registered for sale in those states. If the Fund's
normal operating expenses (including the investment advisory fee,
but not including brokerage commissions, interest, taxes, and
extraordinary expenses) exceed 2-1/2% per year of the first $30
million of average net assets, 2% per year of the next $70 million
of average net assets, and 1-1/2% per year of the remaining
average net assets, the Adviser will reimburse the Fund for its
expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
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.
Administrative Services
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. During the period from April 29, 1994
(date of initial public investment), through November 30, 1994, $61,836
in fees were paid to Federated Administrative Services.
Dr. Henry J. Gailliot, an officer of Federated Advisers, the adviser to
the Fund, holds approximately 20% of the outstanding common stock and
serves as a director of Commercial Data Services, Inc., a company which
provides computer processing services to Federated Administrative
Services.
Shareholder Services Plan
This arrangement permits the payment of fees to Federated Shareholder
Services and, indirectly, to financial institutions to cause services to
be provided to shareholders by a representative who has knowlege of the
shareholder's particular circumstances and goals. These activities and
services may include, but are not limited to, providing office space,
equipment, telephone facilities, and various clerical, supervisory,
computer, and other personnel as necessary or beneficial to establish
and maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries; and assisting clients in
changing dividend options, account designations, and addresses.
During the period from May 3, 1994 (date of initial public investment)
through November 30, 1994, payment in the amount of $2,096 was made
pursuant to the Shareholder Services Plan for Class A Shares.
During the period from April 29, 1994 (date of initial public
investment), through November 30, 1994, payment in the amount of $869
was made pursuant to the Shareholder Services Plan for Class C Shares.
During the period from May 9, 1994 (date of initial public investment),
through November 30, 1994, payment in the amount of $1,451 was made
pursuant to the Shareholder Services Plan for Fortress Shares.
Transfer Agent and Dividend Disbursing Agent
Federated Services Company serves as transfer agent and dividend
disbursing agent for the Fund. The fee paid to the transfer agent is
based upon the size, type and number of accounts and transactions made
by shareholders.
Federated Services Company also maintains the Fund's accounting records.
The fee paid for this service is based upon the level of the Fund's
average net assets for the period plus out-of-pocket expenses.
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:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o 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.
For the fiscal year ended November 30, 1994, the Fund paid no brokerage
commissions on brokerage transactions.
Purchasing Shares
Except under certain circumstances described in the prospectus, Shares
are sold at their net asset value plus a sales load on days the New York
Stock Exchange is open for business. The procedure for purchasing Shares
is explained in the prospectus under "Investing in Class A Shares."
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from
shareholders must be in federal funds or be converted into federal funds
before shareholders begin to earn dividends. State Street Bank and Trust
Company ("State Street Bank") acts as the shareholder's agent in
depositing checks and converting them to federal funds. Orders by mail
are considered received after payment by check is converted by State
Street Bank into federal funds. This is generally the next business day
after State Street Bank receives the check.
Purchases by Sales Representatives, Fund Directors, and Employees
Directors, employees, and sales representatives of the Fund, the
Adviser, and Federated Securities Corp. or their affiliates, or any
investment dealer who has a sales agreement with Federated Securities
Corp., and their spouses and children under 21, may buy Shares at net
asset value without a sales load. Shares may also be sold without a
sales load 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:
o as provided by an independent pricing service;
o 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 less than 60
days at the time of purchase, at amortized cost unless the
Directors determine this is not fair value; or
o 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:
o yield;
o quality;
o coupon rate;
o maturity;
o type of issue;
o trading characteristics; and
o other market data.
Redeeming Shares
The Fund redeems Shares at the next computed net asset value after the
Fund receives the redemption request. Redemption procedures are
explained in the prospectus under "Redeeming Class A Shares." Although
the Fund does not charge for telephone redemptions, it reserves the
right to charge a fee for the cost of wire-transferred redemptions of
less than $5,000.
Redemption in Kind
The Corporation is obligated to redeem Shares solely in cash up to
$250,000 or 1% of the Fund's net asset value, whichever is less, for any
one shareholder within a 90-day period.
Any redemption beyond this amount will also be in cash unless the
Directors determine that payments should be in kind. In such a case, the
Fund will pay all or a portion of the remainder of the redemption in
portfolio instruments, valued in the same way that net asset value is
determined. The portfolio instruments will be selected in a manner that
the Directors deem fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption
is made in kind, shareholders receiving their securities and selling
them before their maturity could receive less than the redemption value
of their securities and could incur certain transaction costs.
Tax Status
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, the Fund
must, among other requirements:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
Foreign Taxes
Investment income on certain foreign securities in which the Fund may
invest may be subject to foreign withholding or other taxes that could
reduce the return on these securities. Tax treaties between the United
States and foreign countries, however, may reduce or eliminate the
amount of foreign taxes to which the Fund would be subject.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional Shares. No portion of any income
dividend paid by the Fund is eligible for the dividends received
deduction available to corporations.
Capital Gains
Shareholders will pay federal tax at capital gains rates on long-
term capital gains distributed to them regardless of how long they
have held the Shares.
Total Return
The Class A Shares' cumulative total return from May 3, 1994 (date of
initial public investment), through
November 30, 1994, was (4.45%). The Class C Shares' cumulative total
return from April 29, 1994 (date of initial public investment), through
November 30, 1994, was (1.46%). The Fortress Shares' cumulative total
return from
May 9, 1994 (date of initial public investment), through November 30,
1994, was (2.22%). Cumulative total return reflects the cumulative
total return reflects the 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 any contingent deferred sales charge. The
Shares' cumulative total return is representative of approximately seven
months of Fund activity since the Shares' date of initial public
investment.
The average annual total return for the Shares is the average compounded
rate of return for a given period that would equate a $1,000 initial
investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of Shares owned
at the end of the period by the offering price per Share at the end of
the period. The number of Shares owned at the end of the period is based
on the number of Shares purchased at the beginning of the period with
$1,000, less any applicable sales load, adjusted over the period by any
additional Shares, assuming the monthly reinvestment of all dividends
and distributions.
Yield
The yield for Class A Shares, Class C Shares and Fortress Shares for the
thirty-day period ended November 30, 1994, was 8.78%, 8.43% and 8.59%,
respectively.
The yield of the Shares is determined by dividing the net investment
income per Share (as defined by the Securities and Exchange Commission)
earned by the Fund over a thirty-day period by the offering price per
Share on the last day of the period. This value is annualized using semi-
annual compounding. This means that the amount of income generated
during the thirty-day period is assumed to be generated each month over
a 12-month period and is reinvested every six months. The yield does not
necessarily reflect income actually earned by the Fund because of
certain adjustments required by the Securities and Exchange Commission
and, therefore, may not correlate to the dividends or other
distributions paid to shareholders. To the extent that financial
institutions and broker/dealers charge fees in connection with services
provided in conjunction with an investment in the Fund, performance will
be reduced for those shareholders paying those fees.
Performance Comparisons
The performance of Shares depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio
securities;
o changes in the Fund expenses; and
o various other factors.
The performance of Shares fluctuates on a daily basis largely because
net earnings and offering price per Share fluctuate daily. Both net
earnings and offering price per Share are factors in the computation of
yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the 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 offering price. The financial publications and/or indices which
the Fund uses in advertising may include:
o Lipper Analytical Services, Inc. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any
change in offering price over a specific period of time. From time
to time, the Fund will quote its Lipper ranking in the "General
Bond Funds" category in advertising and sales literature.
o Lehman Brothers Government/Corporate Bond Index is comprised of
approximately 5,000 issues which include non-convertible bonds
publicly issued by the U.S. government or its agencies; corporate
bonds guaranteed by the U.S. government and quasi-federal
corporations; and publicly issued, fixed rate, non-convertible
domestic bonds of companies in industry, public utilities, and
finance. The average maturity of these bonds approximates nine
years. Tracked by Lehman Brothers, Inc., the index calculates
total returns for one-month, three-month, twelve-month, and ten-
year periods and year-to-date.
o 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 Shares may quote total
returns which are calculated on non-standardized base periods. These
total returns represent the historic change in the value of an
investment in Shares based on monthly reinvestment of dividends over a
specified period of time.
Advertisements may quote performance information which does not reflect
the effect of the sales load.
338319700
4031801B-A (1/95)
- --------------------------------------------------------------------------------
STRATEGIC INCOME FUND
(A PORTFOLIO OF FIXED INCOME SECURITIES, INC.)
CLASS C SHARES
PROSPECTUS
The Class C Shares offered by this prospectus represent interests in
Strategic Income Fund (the "Fund"), a diversified investment portfolio
of Fixed Income Securities, Inc. (the "Corporation"), an open-end,
management investment company (a mutual fund).
The investment objective of the Fund is to seek a high level of
current income. The Fund invests in domestic corporate debt
obligations, U.S. government securities, and foreign government and
corporate debt obligations.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS
OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE
SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This prospectus contains the information you should read and know
before you invest in Class C Shares. Keep this prospectus for future
reference.
SPECIAL RISKS
FROM TIME TO TIME, THE FUND'S PORTFOLIO MAY CONSIST PRIMARILY OF
LOWER-RATED CORPORATE DEBT OBLIGATIONS, WHICH ARE COMMONLY REFERRED TO
AS "JUNK BONDS." THESE LOWER-RATED BONDS MAY BE MORE SUSCEPTIBLE TO
REAL OR PERCEIVED ADVERSE ECONOMIC CONDITIONS THAN INVESTMENT GRADE
BONDS. THESE LOWER-RATED BONDS ARE REGARDED AS PREDOMINANTLY
SPECULATIVE WITH REGARD TO EACH ISSUER'S CONTINUING ABILITY TO MAKE
PRINCIPAL AND INTEREST PAYMENTS. IN ADDITION, THE SECONDARY TRADING
MARKET FOR LOWER-RATED BONDS MAY BE LESS LIQUID THAT THE MARKET FOR
INVESTMENT GRADE BONDS. PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS
ASSOCIATED WITH AN INVESTMENT IN CLASS C SHARES.
The Fund's investment adviser will endeavor to limit these risks
through diversifying the portfolio and through careful credit analysis
of individual issuers.
The Fund has filed a Statement of Additional Information for Class C
Shares dated January 31, 1995, 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, 1995
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
SUMMARY OF FUND EXPENSES 1
- ---------------------------------------------------
FINANCIAL HIGHLIGHTS--CLASS C SHARES 2
- ---------------------------------------------------
GENERAL INFORMATION 3
- ---------------------------------------------------
LIBERTY FAMILY OF FUNDS 3
- ---------------------------------------------------
Liberty Family Retirement Program 4
INVESTMENT INFORMATION 5
- ---------------------------------------------------
Investment Objective 5
Investment Policies 5
Investment Limitations 17
NET ASSET VALUE 18
- ---------------------------------------------------
INVESTING IN CLASS C SHARES 18
- ---------------------------------------------------
Share Purchases 18
Minimum Investment Required 19
What Shares Cost 19
Systematic Investment Program 19
Certificates and Confirmations 19
Dividends and Distributions 19
Retirement Plans 20
EXCHANGE PRIVILEGE 20
- ---------------------------------------------------
Requirements for Exchange 20
Tax Consequences 20
Making an Exchange 20
REDEEMING CLASS C SHARES 21
- ---------------------------------------------------
Through a Financial Institution 21
Directly from The Fund 21
Contingent Deferred Sales Charge 23
Systematic Withdrawal Program 23
Accounts with Low Balances 23
FIXED INCOME SECURITIES, INC.
INFORMATION 24
- ---------------------------------------------------
Management of The Corporation 24
Distribution of Class C Shares 25
Administration of The Fund 26
Expenses of The Fund and Class C
Shares 27
SHAREHOLDER INFORMATION 27
- ---------------------------------------------------
Voting Rights 27
TAX INFORMATION 28
- ---------------------------------------------------
Federal Income Tax 28
Pennsylvania Corporate and Personal
Property Taxes 28
PERFORMANCE INFORMATION 28
- ---------------------------------------------------
OTHER CLASSES OF SHARES 29
- ---------------------------------------------------
Financial Highlights--Fortress Shares 30
Financial Highlights--Class A Shares 31
FINANCIAL STATEMENTS 32
- ---------------------------------------------------
INDEPENDENT AUDITORS' REPORT 47
- ---------------------------------------------------
APPENDIX 48
- ---------------------------------------------------
ADDRESSES 51
- ---------------------------------------------------
</TABLE>
I
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)............................................................. None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)............................................................. None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) (1)................................................ 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)................................ None
Exchange Fee...................................................................................... None
<CAPTION>
ANNUAL CLASS C SHARES OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver) (2)................................................................. 0.00%
12b-1 Fee......................................................................................... 0.75%
Total Other Expenses (after expense reimbursement)................................................ 1.35%
Shareholder Services Fee............................................................. 0.25%
Total Class C Shares Operating Expenses (3)............................................... 2.10%
<FN>
(1) The contingent deferred sales charge is 1.00% of the lesser of the original
purchase price or the net asset value of Shares redeemed within one year of
their purchase date. For a more complete description, see "Contingent
Deferred Sales Charge."
(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 0.85%.
(3) The total Class C Shares operating expenses in the table above are based on
expenses expected during the fiscal year ending November 30, 1995. The
total Class C Shares operating expenses were 1.00% for the fiscal year
ended November 30, 1994, and would have been 9.87% absent the voluntary
waiver of the management fee and the voluntary reimbursement of certain
other operating expenses.
</TABLE>
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class C Shares of the Fund will
bear, either directly or indirectly. For more complete descriptions of the
various costs and expenses, see "Investing in Class C Shares" and "Fixed Income
Securities, Inc. Information." Wire-transferred redemptions of less than $5,000
may be subject to additional fees.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charge permitted under the rules of the National
Association of Securities Dealers, Inc.
<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............................. $32 $66
You would pay the following expenses on the same investment, assuming no redemption.. $21 $66
</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
Class C Shares of the Fund. The Fund also offers two additional classes of
shares called Class A Shares and Fortress Shares. Class A Shares, Class C
Shares, and Fortress Shares are subject to certain of the same expenses.
However, Class A Shares are subject to a maximum sales load of 4.50%, but are
not subject to a 12b-1 fee, however, may be subject to a contingent deferred
sales charge. Fortress Shares are subject to a maximum sales load of 1.00%, a
12b-1 fee of 0.50% and a contingent deferred sales charge of 1.00%. See "Other
Classes of Shares."
1
STRATEGIC INCOME FUND
FINANCIAL HIGHLIGHTS--CLASS C SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Independent Auditors' report on page 47.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1994*
- ---------------------------------------------------------------------- --------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- ----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------
Net investment income 0.40
- ----------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and foreign
currency (0.44)
- ---------------------------------------------------------------------- --------------
Total from investment operations (0.04)
- ----------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------
Dividends to shareholders from net investment income (0.40)
- ----------------------------------------------------------------------
Distributions in excess of net investment income (a) (0.02)
- ---------------------------------------------------------------------- --------------
Total distributions (0.42)
- ---------------------------------------------------------------------- --------------
NET ASSET VALUE, END OF PERIOD $ 9.54
- ---------------------------------------------------------------------- --------------
TOTAL RETURN** (0.41%)
- ----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------
Expenses 1.00%(c)
- ----------------------------------------------------------------------
Net investment income 7.99%(c)
- ----------------------------------------------------------------------
Expense waiver/reimbursement (b) 8.87%(c)
- ----------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------
Net assets, end of period (000 omitted) $1,190
- ----------------------------------------------------------------------
Portfolio turnover rate 34%
- ----------------------------------------------------------------------
* For the period from April 29, 1994 (date of initial public investment) to November
30, 1994.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. These distributions do not
represent a return of capital for federal income tax purposes.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Computed on an annualized basis.
</TABLE>
(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 for the fiscal year ended November 30, 1994, which can be obtained
free of charge.
2
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Corporation was incorporated under the laws of the State of Maryland on
October 15, 1991. The Articles of Incorporation permit the Corporation to offer
separate portfolios and classes of shares. As of the date of this Prospectus,
the Board of Directors (the "Directors") has established three separate
portfolios: Strategic Income Fund, Limited Term Fund and Limited Term Municipal
Fund. With respect to the Fund, the Directors have established three classes of
shares known as Class A Shares, Class C Shares and Fortress Shares. This
Prospectus relates only to the Class C Shares of the Fund (the "Shares").
The Fund is designed for investors seeking high current income through a
professionally managed, diversified portfolio investing primarily in domestic
corporate debt obligations, U.S. government securities, and foreign government
and corporate debt obligations. A minimum initial investment of $1,500, unless
the investment is in a retirement account in which case the minimum investment
is $50.
Shares are sold at net asset value. A contingent deferred sales charge of 1.00%
will be charged on certain Shares redeemed within the first 12 months following
purchase. Fund assets may be used in connection with the distribution of Shares.
LIBERTY FAMILY OF FUNDS
- --------------------------------------------------------------------------------
This Fund is a member of a family of mutual funds, collectively known as the
Liberty Family of Funds. The other funds in the Liberty Family of Funds are:
- American Leaders Fund, Inc., providing growth of capital and income
through high-quality stocks;
- Capital Growth Fund, providing appreciation of capital primarily through
equity securities;
- Fund for U.S. Government Securities, Inc., providing current income
through long-term U.S. government securities.
- International Equity Fund, providing long-term capital growth and income
through international securities;
- International Income Fund, providing a high level of current income
consistent with prudent investment risk through high-quality debt
securities denominated primarily in foreign currencies;
- Liberty Equity Income Fund, Inc., providing above-average income and
capital appreciation through income producing equity securities;
- Liberty High Income Bond Fund, Inc., providing high current income through
high-yielding, lower-rated, corporate bonds;
- Liberty Municipal Securities Fund, Inc., providing a high level of current
income exempt from federal regular income tax through municipal bonds;
3
- Liberty U.S. Government Money Market Trust, providing current income
consistent with stability of principal through high quality U.S.
government securities;
- Liberty Utility Fund, Inc., providing current income and long-term growth
of income, primarily through electric, gas and communication utilities;
- Limited Term Fund, providing a high level of current income consistent
with minimum fluctuation in principal value through investment grade
securities;
- Limited Term Municipal Fund, providing a high level of current income
exempt from federal regular income tax with the preservation of principal,
primarily limited to municipal securities;
- Michigan Intermediate Municipal Trust, providing current income exempt
from federal regular income tax and the personal income taxes imposed by
the state of Michigan and Michigan municipalities, primarily through
Michigan municipal securities;
- Pennsylvania Municipal Income Fund, providing current income exempt from
federal regular income tax and the personal income taxes imposed by the
Commonwealth of Pennsylvania, primarily through Pennsylvania municipal
securities;
- Tax-Free Instruments Trust, providing current income consistent with
stability of principal and exempt from federal income tax, through
high-quality, short-term municipal securities; and
- World Utility Fund, providing total return primarily through securities
issued by domestic and foreign companies in the utilities industries.
Prospectuses for these funds are available by writing to Federated Securities
Corp. Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.
The Liberty Family of Funds provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles and by providing the
investment services of a proven, professional investment adviser.
LIBERTY FAMILY RETIREMENT PROGRAM
The Fund is also a member of the Liberty Family Retirement Program (the
"Program"), an integrated program of investment options, plan recordkeeping, and
consultation services for 401(k) and other participant-directed benefit and
savings plans. Under the Program, employers or plan trustees may select a group
of investment options to be offered in a plan which also uses the Program for
recordkeeping and administrative services. Additional fees are charged to
participating plans for these services. As part of the Program, exchanges may
readily be made between investment options selected by the employer or a plan
trustee.
The other funds participating in the Liberty Family Retirement Program are:
American Leaders Fund, Inc., Capital Growth Fund, Capital Preservation Fund,
Fund for U.S. Government Securities, Inc., International Equity Fund,
International Income Fund, Liberty Equity Income Fund, Inc., Liberty High Income
Bond Fund, Inc., Liberty Utility Fund, Inc., Prime Cash Series, and Stock and
Bond Fund, Inc.
4
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek a high level of current income.
The investment objective cannot be changed without approval of shareholders.
While there is no assurance that the Fund will achieve its investment objective,
it endeavors to do so by following the investment policies described in this
prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing in a diversified
portfolio primarily consisting of domestic corporate debt obligations, U.S.
government securities, and foreign government and corporate debt obligations.
Under normal circumstances, the Fund's assets will be invested in each of these
three sectors. However, the Fund may from time to time invest up to 100% of its
total assets in any one sector if, in the judgment of the investment adviser,
the Fund has the opportunity of seeking a high level of current income without
undue risk to principal. Accordingly, the Fund's investments should be
considered speculative. Distributable income will fluctuate as the Fund shifts
assets among the three sectors.
There will be no limit to the weighted average maturity of the portfolio. It
will generally be of longer duration. Duration is a commonly used measure of the
potential volatility of the price of a debt security, or the aggregate market
value of a portfolio of debt securities, prior to maturity. Securities with
longer durations generally have more volatile prices than securities of
comparable quality with shorter durations.
Unless indicated otherwise, the Fund's investment policies may be changed by the
Directors without the approval of shareholders. Shareholders will be notified
before any material change in these investment policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests primarily in a professionally managed,
diversified portfolio consisting of domestic corporate debt obligations, U.S.
government securities, and foreign government and corporate debt obligations.
The Fund also may invest in debt securities issued by domestic and foreign
utilities, as well as money market instruments and other temporary investments.
The securities in which the Fund invests principally are:
- securities issued or guaranteed as to principal and interest by the U.S.
government, its agencies or instrumentalities;
- domestic corporate debt obligations, some of which may include equity
features; and
- debt obligations issued by foreign governments and corporations.
The allocation of investments across these three principal types of securities
at any given time is based upon the adviser's estimate of expected performance
and risk of each type of investment. In order to benefit from the typical low
correlation of these three types of securities, the Fund will typically invest
5
a portion of its assets in each category. However, from time to time, the
adviser may change the allocation based upon its evaluation of the marketplace.
The Fund may invest in debt securities of any maturity. The prices of fixed
income securities fluctuate inversely to the direction of interest rates.
U.S. GOVERNMENT SECURITIES. The U.S. government securities in which the
Fund invests are either issued or guaranteed by the U.S. government, its
agencies or instrumentalities. The U.S. government securities in which the
Fund invests principally are:
- direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes and bonds; and
- obligations of U.S. government agencies or instrumentalities, such as
Federal Home Loan Banks; Federal National Mortgage Association; Government
National Mortgage Association; Farm Credit System, including the National
Bank for Cooperatives, Farm Credit Banks, and Banks for Cooperatives;
Tennessee Valley Authority; Export-Import Bank of the United States;
Commodity Credit Corporation; Federal Financing Bank; Student Loan
Marketing Association; Federal Home Loan Mortgage Corporation; or National
Credit Union Administration.
The government securities in which the Fund may invest are backed in a variety
of ways by the U.S. government or its agencies or instrumentalities. Some of
these securities, such as Government National Mortgage Association ("GNMA")
mortgage-backed securities, are backed by the full faith and credit of the U.S.
government. Other securities, such as obligations of the Federal National
Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation
("FHLMC"), are backed by the credit of the agency or instrumentality issuing the
obligations but not the full faith and credit of the U.S. government. No
assurances can be given that the U.S. government will provide financial support
to these other agencies or instrumentalities, because it is not obligated to do
so.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are securities that
directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans on real property. The mortgage-backed
securities in which the Fund may invest may be issued by an agency of the
U.S. government, typically GNMA, FNMA or FHLMC.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES. Collateralized mortgage obligations ("CMOs") are debt
obligations collateralized by mortgage loans or mortgage pass-through
securities. Typically, CMOs are collateralized by GNMA, FNMA or FHLMC
certificates, but also may be collateralized by whole loans or private
pass-through securities (such collateral being called "Mortgage Assets").
Multiclass pass-through securities are equity interests in a trust composed
of Mortgage Assets. Payments of principal of and interest on the Mortgage
Assets, and any reinvestment income, provide the funds to pay debt service
on the CMOs or make scheduled distributions on the multiclass pass-through
securities. CMOs may be issued by agencies or instrumentalities of the U.S.
government, or by private originators of, or investors in, mortgage loans,
including savings associations, mortgage banks, commercial banks, investment
banks and special purpose subsidiaries of the foregoing. The issuer of a
series of CMOs may elect to be treated as a real estate mortgage investment
conduit, which has certain special tax attributes.
6
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a
specific fixed or floating rate of interest and has a stated maturity or
final distribution date. Principal prepayment on the Mortgage Assets may
cause the CMOs to be retired substantially earlier than their stated
maturities or final distribution dates. Interest is paid or accrues on all
classes of the CMOs on a monthly, quarterly or semi-annual basis. The
principal of and interest on the Mortgage Assets may be allocated among the
several classes of a series of a CMO in innumerable ways. In one structure,
payments of principal, including any principal prepayments, on the Mortgage
Assets are applied to the classes of a CMO in the order of their respective
stated maturities or final distribution dates, so that no payment of
principal will be made on any class of CMOs until all other classes having
an earlier stated maturity or final distribution date have been paid in
full.
CMOs that include a class bearing a floating rate of interest also may
include a class whose yield floats inversely against a specified index rate.
These "inverse floaters" are more volatile than conventional fixed or
floating rate classes of a CMO and the yield thereon, as well as the value
thereof, will fluctuate in inverse proportion to changes in the index on
which interest rate adjustments are based. As a result, the yield on an
inverse floater class of a CMO will generally increase when market yields
(as reflected by the index) decrease and decrease when market yields
increase. The extent of the volatility of inverse floaters depends on the
extent of anticipated changes in market rates of interest. Generally,
inverse floaters provide for interest rate adjustments based upon a multiple
of the specified interest index, which further increases their volatility.
The degree of additional volatility will be directly proportional to the
size of the multiple used in determining interest rate adjustments.
The Fund may also invest in, among others, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other
CMO structures, must be retired by its stated maturity date or final
distribution date but may be retired earlier. PAC Bonds generally require
payments of a specified amount of principal on each payment date. PAC Bonds
are always parallel pay CMOs with the required principal payment on such
securities having the highest priority after interest has been paid to all
classes.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs are offerings
of multiple class real estate mortgage-backed securities which qualify and
elect treatment as such under provisions of the Internal Revenue Code.
Issuers of REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of mortgages. Once REMIC
status is elected and obtained, the entity is not subject to federal income
taxation. Instead, income is passed through the entity and is taxed to the
person or persons who hold interests in the REMIC. A REMIC interest must
consist of one or more classes of "regular interests," some of which may
offer adjustable rates of interest (the type in which the Fund primarily
invests), and a single class of "residual interests." To qualify as a REMIC,
substantially all the assets of the entity must be in assets directly or
indirectly secured principally by real property.
7
CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES. Mortgage-backed securities
have yield and maturity characteristics corresponding to the underlying
mortgages. Distributions to holders of mortgage-backed securities include
both interest and principal of the underlying mortgages and any prepayments
of principal due to prepayment, refinancing, or foreclosure of the
underlying mortgages. Although maturities of the underlying mortgage loans
may range up to 30 years, amortization and prepayments substantially shorten
the effective maturities of mortgage-backed securities. Due to these
features, mortgage-backed securities are less effective as a means of
"locking in" attractive long-term interest rates than fixed-income
securities which pay only a stated amount of interest until maturity, when
the entire principal amount is returned. This is caused by the need to
reinvest at lower interest rates both distributions of principal generally
and significant prepayments which become more likely as mortgage interest
rates decline. Since comparatively high interest rates cannot be effectively
"locked in," mortgage-backed securities may have less potential for capital
appreciation during periods of declining interest rates than other
non-callable fixed-income government securities of comparable stated
maturities. However, mortgage-backed securities may experience less
pronounced declines in value during periods of rising interest rates.
Prepayments may result in a capital loss to the Fund to the extent that the
prepaid mortgage securities were purchased at a market premium over their
stated amount. Conversely, the prepayment of mortgage securities purchased
at a market discount from their stated principal amount will accelerate the
recognition of interest income by the Fund, which would be taxed as ordinary
income when distributed to the shareholders.
Some of the CMOs purchased by the Fund may represent an interest solely in
the principal repayments or solely in the interest payments on
mortgage-backed securities. Due to the possibility of prepayments on the
underlying mortgages, these securities may be more interest-rate sensitive
than other securities purchased by the Fund. If prevailing interest rates
fall below the level at which the securities were issued, there may be
substantial prepayments on the underlying mortgages, leading to the
relatively early prepayments of principal-only securities and a reduction in
the amount of payments made to holders of interest-only securities. It is
possible that the Fund might not recover its original investment in
interest-only securities if there are substantial prepayments on the
underlying mortgages. Therefore, interest-only securities generally increase
in value as interest rates rise and decrease in value as interest rates
fall, counter to changes in value experienced by most fixed-income
securities. The Fund's adviser intends to use this characteristic of
interest-only securities to reduce the effects of interest rate changes on
the value of the Fund's portfolio, while continuing to pursue current
income.
CORPORATE BONDS AND OTHER FIXED-INCOME OBLIGATIONS. The Fund may invest in both
investment grade and non-investment grade (lower-rated) bonds (which may be
denominated in U.S. dollars or in non-U.S. currencies) and other fixed-income
obligations issued by domestic and foreign corporations and other private
issuers. There are no minimum rating requirements for these investments by the
Fund. The Fund's investments may include U.S. dollar-denominated debt
obligations known as "Brady Bonds," which are issued for the exchange of
existing commercial bank loans to foreign entities for new obligations that are
generally collateralized by zero coupon Treasury securities having the same
maturity. From time to time, the Fund's portfolio may consist primarily of
8
lower-rated (i.e., rated Ba or lower by Moody's Investors Service, Inc.
("Moody's"), or BB or lower by Standard & Poor's Ratings Group ("Standard &
Poor's") or Fitch Investors Service, Inc. ("Fitch")) corporate debt obligations,
which are commonly referred to as "junk bonds." A description of the rating
categories is contained in the Appendix to this Prospectus. Certain fixed-income
obligations in which the Fund invests may involve equity characteristics. The
Fund may, for example, invest in unit offerings that combine fixed-income
securities and common stock equivalents such as warrants, rights and options. It
is anticipated that the majority of the value attributable to the unit will
relate to its fixed-income component.
FLOATING RATE CORPORATE DEBT OBLIGATIONS. The Fund expects to invest in
floating rate corporate debt obligations, including increasing rate
securities. Floating rate securities are generally offered at an initial
interest rate which is at or above prevailing market rates. The interest
rate paid on these securities is then reset periodically (commonly every 90
days) to an increment over some predetermined interest rate index. Commonly
utilized indices include the three-month Treasury bill rate, the 180-day
Treasury bill rate, the one-month or three-month London Interbank Offered
Rate (LIBOR), the prime rate of a bank, the commercial paper rates, or the
longer-term rates on U.S. Treasury securities.
FIXED RATE CORPORATE DEBT OBLIGATIONS. The Fund will also invest in fixed
rate securities. Fixed rate securities tend to exhibit more price volatility
during times of rising or falling interest rates than securities with
floating rates of interest. This is because floating rate securities, as
described above, behave like short-term instruments in that the rate of
interest they pay is subject to periodic adjustments based on a designated
interest rate index. Fixed rate securities pay a fixed rate of interest and
are more sensitive to fluctuating interest rates. In periods of rising
interest rates the value of a fixed rate security is likely to fall. Fixed
rate securities with short-term characteristics are not subject to the same
price volatility as fixed rate securities without such characteristics.
Therefore, they behave more like floating rate securities with respect to
price volatility.
PARTICIPATION INTERESTS. The Fund may acquire participation interests in
senior, fully secured floating rate loans that are made primarily to U.S.
companies. The Fund's investments in participation interests are subject to
its limitation on investments in illiquid securities. The Fund may purchase
only those participation interests that mature in one year or less, or, if
maturing in more than one year, have a floating rate that is automatically
adjusted at least once each year according to a specified rate for such
investments, such as a published interest rate or interest rate index.
Participation interests are primarily dependent upon the creditworthiness of
the borrower for payment of interest and principal. Such borrowers may have
difficulty making payments and may have senior securities rated as low as C
by Moody's, or D by Standard & Poor's or Fitch. A description of the rating
categories is contained in the Appendix to this Prospectus.
PREFERRED STOCKS. Preferred stock, unlike common stock, offers a stated
dividend rate payable from the issuer's earnings. Preferred stock dividends
may be cumulative or non-cumulative, participating, or auction rate. If
interest rates rise, the fixed dividend on preferred stocks may be less
attractive, causing the price of preferred stocks to decline. Preferred
stock may have
9
mandatory sinking fund provisions, as well as call/redemption provisions
prior to maturity, a negative feature when interest rates decline.
CONVERTIBLE SECURITIES. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged
for a prescribed amount of common stock of the same or a different issuer
within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest generally paid
or accrued on debt or the dividend paid on preferred stock until the
convertible security matures or is redeemed, converted or exchanged.
Convertible securities have several unique investment characteristics, such
as (a) higher yields than common stocks, but lower yields than comparable
nonconvertible securities, (b) a lesser degree of fluctuation in value than
the underlying stock since they have fixed income characteristics, and (c)
the potential for capital appreciation if the market price of the underlying
common stock increases.
The Fund has no current intention of converting any convertible securities
it may own into equity securities or holding them as an equity investment
upon conversion. A convertible security might be subject to redemption at
the option of the issuer at a price established in the convertible
security's governing instrument. If a convertible security held by the Fund
is called for redemption, the Fund may be required to permit the issuer to
redeem the security, convert it into the underlying common stock or sell it
to a third party.
NON-GOVERNMENT MORTGAGE-BACKED SECURITIES. Non-government mortgage-backed
securities in which the Fund may invest include:
- privately issued securities which are collateralized by pools of mortgages
in which each mortgage is guaranteed as to payment of principal and
interest by an agency or instrumentality of the U.S. government;
- privately issued securities which are collateralized by pools of mortgages
in which payment of principal and interest is guaranteed by the issuer and
such guarantee is collateralized by U.S. government securities; or
- other privately issued securities in which the proceeds of the issuance
are invested in mortgage-backed securities and payment of the principal
and interest is supported by the credit of an agency or instrumentality of
the U.S. government.
ASSET-BACKED SECURITIES. The Fund may invest in asset-backed securities
including, but not limited to, interests in pools of receivables, such as
credit card and accounts receivable and motor vehicle and other installment
purchase obligations and leases. These securities may be in the form of
pass-through instruments or asset-backed obligations. The securities, all of
which are issued by non-governmental entities and carry no direct or
indirect government guarantee, are structurally similar to CMOs and mortgage
pass-through securities, which are described above. However, non-mortgage
related asset-backed securities present certain risks that are not presented
by mortgage securities, primarily because these securities do not have the
benefit of the same security interest in the related collateral. Credit card
receivables, for example, are generally unsecured, while the trustee of
asset-backed securities backed by automobile
10
receivables may not have a proper security interest in all of the
obligations backing such receivables.
ZERO COUPON, PAY-IN-KIND AND DELAYED INTEREST SECURITIES. The Fund may
invest in zero coupon, pay-in-kind and delayed interest securities issued by
corporations. Corporate zero coupon securities are: (i) notes or debentures
which do not pay current interest and are issued at substantial discounts
from par value, or (ii) notes or debentures that pay no current interest
until a stated date one or more years into the future, after which the
issuer is obligated to pay interest until maturity, usually at a higher rate
than if interest were payable from the date of issuance. Pay-in-kind
securities pay interest through the issuance to holders of additional
securities and delayed interest securities do not pay interest for a
specified period. Because values of securities of this type are subject to
greater fluctuations than are the values of securities that distribute
income regularly, they may be more speculative than such securities.
SPECIAL RISKS. From time to time, the Fund's portfolio may consist
primarily of lower-rated (i.e., rated Ba or lower by Moody's or BB or lower
by Standard & Poor's or Fitch) corporate debt obligations, which are
commonly referred to as "junk bonds." A description of the rating categories
is contained in the Appendix to this Prospectus. Lower-rated securities will
usually offer higher yields than higher-rated securities. However, there is
more risk associated with these investments. (For example, securities rated
in the lowest category have been unable to satisfy their obligations under
the bond indenture.) These lower-rated bonds may be more susceptible to real
or perceived adverse economic conditions than investment grade bonds. These
lower-rated bonds are regarded as predominantly speculative with regard to
each issuer's continuing ability to make principal and interest payments. In
addition, the secondary trading market for lower-rated bonds may be less
liquid than the market for investment grade bonds. As a result of these
factors, lower-rated securities tend to have more price volatility and carry
more risk to principal than higher-rated securities. The Fund's investment
adviser will endeavor to limit these risks through diversifying the
portfolio and through careful credit analysis of individual issuers.
Purchasers should carefully assess the risks associated with an investment
in the Fund.
Many corporate debt obligations, including many lower-rated bonds, permit the
issuers to call the security and thereby redeem their obligations earlier than
the stated maturity dates. Issuers are more likely to call bonds during periods
of declining interest rates. In these cases, if the Fund owns a bond which is
called, the Fund will receive its return of principal earlier than expected and
would likely be required to reinvest the proceeds at lower interest rates, thus
reducing income to the Fund.
CORPORATE EQUITY SECURITIES. The Fund may also invest in equity securities,
including common stocks, warrants and rights issued by corporations in any
industry (industrial, financial or utility) which may be denominated in U.S.
dollars or in foreign currencies.
WARRANTS AND RIGHTS. The Fund may invest up to 5% of its total assets in
warrants and rights, including but not limited to warrants or rights (i)
acquired as part of a unit or attached to other securities purchased by the
Fund, or (ii) acquired as part of a distribution from the issuer.
FOREIGN SECURITIES. The Fund may invest in foreign securities, including
foreign securities not publicly traded in the United States. No more than 25% of
the Fund's total assets, at the time of
11
purchase, will be invested in government securities of any one foreign country.
The Fund has no other restriction on the amount of its assets that may be
invested in foreign securities and may purchase securities issued in any
country, developed or undeveloped. There are no minimum rating requirements for
the foreign securities in which the Fund invests.
The percentage of the Fund's assets that will be allocated to foreign securities
will vary depending on the relative yields of foreign and U.S. securities, the
economies of foreign countries, the condition of such countries' financial
markets, the interest rate climate of such countries and the relationship of
such countries' currency to the U.S. dollar. These factors are judged on the
basis of fundamental economic criteria (e.g., relative inflation levels and
trends, growth rate forecasts, balance of payments status, and economic
policies) as well as technical and political data.
RISKS. Investments in foreign securities involve special risks that differ
from those associated with investments in domestic securities. The risks
associated with investments in foreign securities apply to securities issued
by foreign corporations and sovereign governments. These risks relate to
political and economic developments abroad, as well as those that result
from the differences between the regulation of domestic securities and
issuers and foreign securities and issuers. These risks may include, but are
not limited to, expropriation, confiscatory taxation, currency fluctuations,
withholding taxes on interest, limitations on the use or transfer of assets,
political or social instability and adverse diplomatic developments. It may
also be more difficult to enforce contractual obligations or obtain court
judgments abroad than would be the case in the United States because of
differences in the legal systems. If the issuer of the debt or the
governmental authorities that control the repayment of the debt may be
unable or unwilling to repay principal or interest when due in accordance
with the terms of such debt, the Fund may have limited legal recourse in the
event of default. Moreover, individual foreign economies may differ
favorably or unfavorably from the domestic economy in such respects as
growth of gross national product, the rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Additional differences exist between investing in foreign and domestic
securities. Examples of such differences include: less publicly available
information about foreign issuers; credit risks associated with certain
foreign governments; the lack of uniform financial accounting standards
applicable to foreign issuers; less readily available market quotations on
foreign issues; the likelihood that securities of foreign issuers may be
less liquid or more volatile; generally higher foreign brokerage
commissions; and unreliable mail service between countries.
To the extent that debt securities purchased by the Fund are denominated in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates will affect the Fund's net asset value; the value of interest earned;
gains and losses realized on the sale of securities; and net investment
income and capital gain, if any, to be distributed to shareholders by the
Fund. If the value of a foreign currency rises against the U.S. dollar, the
value of the Fund's assets denominated in that currency will increase;
correspondingly, if the value of a foreign currency declines against the
U.S. dollar, the value of the Fund's assets denominated in the currency will
decrease.
12
The risks noted above often are heightened for investments in emerging or
developing countries. Compared to the United States and other developed
countries, emerging or developing countries may have relatively unstable
governments, economies based on only a few industries, and securities
markets that trade a small number of securities. Prices on these exchanges
tend to be volatile and, in the past, securities in these countries have
offered greater potential for gain (as well as loss) than securities of
companies located in developed countries. Further, investments by foreign
investors are subject to a variety of restrictions in many emerging or
developing countries. These restrictions may take the form of prior
governmental approval, limits on the amount or type of securities held by
foreigners, and limits on the type of companies in which foreigners may
invest. Additional restrictions may be imposed at any time by these and
other countries in which a fund invests. In addition, the repatriation of
both investment income and capital from several foreign countries is
restricted and controlled under certain regulations, including in some cases
the need for certain government consents. Although these restrictions may in
the future make it undesirable to invest in emerging or developing
countries, the Fund's adviser does not believe that any current repatriation
restrictions would affect its decision to invest in such countries.
FOREIGN CURRENCY TRANSACTIONS. The Fund will enter into foreign currency
transactions to obtain the necessary currencies to settle securities
transactions. Currency transactions may be conducted either on a spot or
cash basis at prevailing rates or through forward foreign currency exchange
contracts.
The Fund may also enter into foreign currency transactions to protect Fund
assets against adverse changes in foreign currency exchange rates or
exchange control regulations. Such changes could unfavorably affect the
value of Fund assets which are denominated in foreign currencies, such as
foreign securities or funds deposited in foreign banks, as measured in U.S.
dollars. Although foreign currency transactions may be used by the Fund to
protect against a decline in the value of one or more currencies, such
efforts may also limit any potential gain that might result from a relative
increase in the value of such currencies and might, in certain cases, result
in losses to the Fund.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency
exchange contract (a "forward contract") is an obligation to purchase or
sell an amount of a particular currency at a specific price and on a future
date agreed upon by the parties.
Generally, no commission charges or deposits are involved. At the time the
Fund enters into a forward contract, Fund assets with a value equal to the
Fund's obligation under the forward contract are segregated on the Fund's
records and are maintained until the contract has been settled. The Fund
will not enter into a forward contract with a term of more than six months.
The Fund will generally enter into a forward contract to provide the proper
currency to settle a securities transaction at the time the transaction
occurs (the "trade date"). The period between the trade date and settlement
date will vary between 24 hours and 30 days, depending upon local custom.
The Fund may also protect against the decline of a particular foreign
currency by entering into a forward contract to sell an amount of that
currency approximating the value of all or a portion
13
of the Fund's assets denominated in that currency ("hedging"). The success
of this type of short-term hedging strategy is highly uncertain due to the
difficulties of predicting short-term currency market movements and of
precisely matching forward contract amounts and the constantly changing
value of the securities involved. Although the adviser will consider the
likelihood of changes in currency values when making investment decisions,
the adviser believes that it is important to be able to enter into forward
contracts when it believes the interests of the Fund will be served.
TEMPORARY INVESTMENTS. The Fund may invest temporarily in debt obligations
maturing in one year or less during times of unusual market conditions for
defensive purposes and to maintain liquidity in anticipation of favorable
investment opportunities.
The Fund's temporary investments may include:
- obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities;
- time deposits (including savings deposits and certificates of deposit) and
bankers acceptances in commercial or savings banks whose accounts are
insured by the Bank Insurance Fund ("BIF") or the Savings Association
Insurance Fund ("SAIF"), both of which are administered by the Federal
Deposit Insurance Corporation ("FDIC"), including certificates of deposit
issued by and other time deposits in foreign branches of FDIC insured
banks or who have at least $100 million in capital;
- domestic and foreign issues of commercial paper or other corporate debt
obligations;
- obligations of the types listed above, but not satisfying the standards
set forth above, if they are (a) subject to repurchase agreements or (b)
guaranteed as to principal and interest by a domestic or foreign bank
having total assets in excess of $1 billion, by a corporation whose
commercial paper may be purchased by the Fund, or by a foreign government
having an existing debt security rated at least Baa by Moody's or BBB by
Standard & Poor's or Fitch; and
- other short-term investments of a type which the adviser determines
presents minimal credit risks and which are of "high quality" as
determined by a nationally recognized statistical rating organization, or,
in the case of an instrument that is not rated, of comparable quality in
the judgment of the adviser.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or other securities to the Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price. To the extent that the
original seller does not repurchase the securities from the Fund, the Fund could
receive less than the repurchase price on any sale of such securities.
OPTIONS. The Fund may deal in options on foreign currencies, foreign currency
futures, securities, and securities indices, which options may be listed for
trading on a national securities exchange or traded over-the-counter. The Fund
will use options only to manage interest rate and currency risks. The Fund may
write covered call options to generate income. The Fund may write covered call
options and secured put options on up to 25% of its net assets and may purchase
put and call options
14
provided that no more than 5% of the fair market value of its net assets may be
invested in premiums on such options.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying currency, security or other asset at the
exercise price during the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying currency,
security or other asset at the exercise price during the option period. The
writer of a covered call owns assets that are acceptable for escrow and the
writer of a secured put invests an amount not less than the exercise price in
eligible assets to the extent that it is obligated as a writer. If a call
written by the Fund is exercised, the Fund forgoes any possible profit from an
increase in the market price of the underlying asset over the exercise price
plus the premium received. In writing puts, there is a risk that the Fund may be
required to take delivery of the underlying asset at a disadvantageous price.
Over-the-counter options ("OTC options") differ from exchange traded options in
several respects. They are transacted directly with dealers and not with a
clearing corporation, and there is a risk of nonperformance by the dealer as a
result of the insolvency of such dealer or otherwise, in which event the fund
may experience material losses. However, in writing options the premium is paid
in advance by the dealer, OTC options, which may not be continuously liquid, are
available for a greater variety of assets, and a wider range of expiration dates
and exercise prices, than are exchange traded options.
FINANCIAL FUTURES AND OPTIONS ON FINANCIAL FUTURES. The Fund may purchase and
sell financial futures contracts to hedge all or a portion of its portfolio
against changes in interest rates. Financial futures contracts call for the
delivery of particular debt instruments at a certain time in the future. The
seller of the contract agrees to make delivery of the type of instrument called
for in the contract and the buyer agrees to take delivery of the instrument at
the specified future time.
The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Fund is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases a
futures contract, an amount of cash and cash equivalents, equal to the
underlying commodity value of the futures contract (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged.
RISKS. When the Fund uses financial futures and options on financial
futures as hedging devices, there is a risk that the prices of the
securities subject to the futures contracts may not correlate perfectly with
the prices of the securities in the Fund's portfolio. This may cause the
futures contracts and any related options to react differently than the
portfolio securities to
15
market changes. In addition, the Fund's investment adviser could be
incorrect in its expectations about the direction or extent of market
factors such as interest rate movements. In these events, the Fund may lose
money on the futures contracts or options. It is not certain that a
secondary market for positions in futures contracts or for options will
exist at all times. Although the investment adviser will consider liquidity
before entering into options transactions, there is no assurance that a
liquid secondary market on an exchange or otherwise will exist for any
particular futures contract or option at any particular time. The Fund's
ability to establish and close out futures and options positions depends on
this secondary market.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other investment companies, but it will not own more than 3%
of the total outstanding voting securities of any such investment company,
invest more than 5% of its total assets in any one investment company, or invest
more than 10% of its total assets in investment companies in general. To the
extent that the Fund invests in securities issued by other investment companies,
the Fund will indirectly bear its proportionate share of any fees and expenses
paid by such companies in addition to the fees and expenses payable directly by
the Fund. The Fund will purchase securities of closed-end investment companies
only in open market transactions involving only customary brokers' commissions.
However, these limitations are not applicable if the securities are acquired in
a merger, consolidation, reorganization or acquisition of Fund assets.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in restricted
securities. Restricted securities are any securities in which the Fund may
otherwise invest pursuant to its investment objective and policies, but which
are subject to restriction on resale under federal securities law. The Fund will
limit investments in illiquid securities, including certain restricted
securities not determined by the Directors to be liquid, non-negotiable time
deposits, and repurchase agreements providing for settlement in more than seven
days after notice, to 15% of the value of its net assets.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. 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.
Accordingly, the Fund may pay more/less than the market value of the securities
on the settlement date.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
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
16
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.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
PORTFOLIO TURNOVER. The Fund may trade or dispose of portfolio securities as
considered necessary to meet its investment objective. During periods of falling
interest rates, the values of outstanding fixed-income securities generally
rise. Conversely, during periods of rising interest rates, the values of such
securities generally decline. The magnitude of these fluctuations will generally
be greater for securities with longer maturities. Because the Fund will actively
use trading to benefit from short-term yield disparities among different issues
of fixed-income securities or otherwise to increase its income, the Fund may be
subject to a greater degree of portfolio turnover than might be expected from
investment companies which invest substantially all of their assets on a
long-term basis. The Fund cannot accurately predict its portfolio turnover rate,
but it is anticipated that its annual turnover rate generally will not exceed
200% (excluding turnover of securities having a maturity of one year or less).
Higher portfolio turnover results in increased Fund expenses, including
brokerage commissions, dealer mark-ups and other transaction costs on the sale
of securities and on the reinvestment in other securities, and results in the
acceleration of realization of capital gains or losses for tax purposes. To the
extent that increased portfolio turnover results in sales of securities held
less than three months, the Fund's ability to qualify as a "regulated investment
company" under the Internal Revenue Code may be affected.
INVESTMENT LIMITATIONS
The Fund will not:
- borrow money directly or through reverse repurchase agreements or pledge
securities except, under certain circumstances, the Fund may borrow up to
one-third of the value of its total assets and pledge up to 15% of the
value of those assets to secure such borrowings;
- lend any of its assets, except portfolio securities up to one-third of the
value of its total assets; or
- underwrite any issue of securities, except as it may be deemed to be an
underwriter under the Securities Act of 1933 in connection with the sale
of restricted securities which the Fund may purchase pursuant to its
investment objective, policies, and limitations.
The above investment limitations cannot be changed without shareholder approval.
The following investment limitations, however, may be changed by the Directors
without shareholder approval. Shareholders will be notified before any material
change in these investment limitations becomes effective.
17
The Fund will not:
- invest more than 10% of the value of its total assets in securities
subject to restrictions on resale under the Securities Act of 1933 except
for certain restricted securities that meet the criteria for liquidity as
established by the Directors; or
- invest more than 15% of the value of its net assets in securities that are
not readily marketable or that are otherwise considered illiquid,
including repurchase agreements providing for settlement in more than
seven days after notice.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per Share fluctuates. The net asset value per Share
is determined by adding the interest of the Shares in the market value of all
securities and other assets of the Fund, subtracting the interest of the Shares
in the liabilities of the Fund and those attributable to the Shares, and
dividing the remainder by the total number of Shares outstanding. The net asset
value of the Shares may be different from that of Class A Shares and Fortress
Shares due to the variance in daily net income realized by each class. Such
variance will reflect only accrued net income to which the shareholders of a
particular class are entitled.
INVESTING IN CLASS C SHARES
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased through a financial institution which has a sales agreement with
the distributor, or directly from the distributor, Federated Securities Corp.,
once an account has been established. In connection with the sale of Shares,
Federated Securities Corp. may from time to time offer certain items of nominal
value to any shareholder or investor. The Fund reserves the right to reject any
purchase request.
THROUGH A FINANCIAL INSTITUTION. An investor may call his financial institution
(such as a bank or an investment dealer) to place an order to purchase Shares.
Orders through a financial institution are considered received when the Fund is
notified of the purchase order. Purchase orders through a registered
broker/dealer must be received by the broker before 4:00 p.m. (Eastern time) and
must be transmitted by the broker to the Fund before 5:00 p.m. (Eastern time) in
order for Shares to be purchased at that day's price. Purchase orders through
other financial institutions must be received by the financial institution and
transmitted to the Fund before 4:00 p.m. (Eastern time) in order for Shares to
be purchased at that day's price. It is the financial institution's
responsibility to transmit orders promptly.
DIRECTLY FROM THE DISTRIBUTOR. An investor may place an order to purchase
Shares directly from the distributor once an account has been established. To do
so:
- complete and sign the new account form available from the Fund;
- enclose a check made payable to Strategic Income Fund--Class C Shares; and
18
- send both to the Fund's transfer agent, Federated Services Company, c/o
State Street Bank and Trust Company, P.O. Box 8604, Boston, Massachusetts
02266-8604.
To purchase Shares directly from the distributor by wire once an account has
been established, call the Fund. All information needed will be taken over the
telephone, and the order is considered received when State Street Bank receives
payment by wire. Federal funds should be wired as follows: Federated Services
Company, c/o State Street Bank and Trust Company, Boston, Massachusetts 02105;
Attention: Mutual Fund Servicing Division; For Credit to: Strategic Income
Fund--Class C Shares; Title or Name of Account; Wire Order Number and/or Account
Number. Shares cannot be purchased by wire on Columbus Day, Veteran's Day or
Martin Luther King Day.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $1,500, unless the investment is in
a retirement plan, in which case the minimum initial investment is $50.
Subsequent investments must be in amounts of at least $100, except for
retirement plans, which must be in amounts of at least $50. (Other minimum
investment requirements may apply to investments through the Liberty Family
Retirement Program.)
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. The net asset value is determined at 4:00 p.m. (Eastern time), Monday
through Friday, except on: (i) days on which there are not sufficient changes in
the value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; and (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Shares at the net asset value next determined after an order is
received by the transfer agent. A shareholder may apply for participation in
this program through his financial institution or directly through the Fund.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each
shareholder. Share certificates are not issued unless requested on the
application or by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly statements are sent to report dividends paid during the
month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly. Distributions of any net realized
long-term capital gains will be made at least once every twelve months.
Dividends are automatically reinvested in additional Shares on payment dates at
the ex-dividend date net asset value, unless cash payments are requested
19
by shareholders on the application or by writing to the transfer agent. All
shareholders on the record date are entitled to the dividend.
RETIREMENT PLANS
Shares can be purchased as an investment for retirement plans or for IRA
accounts. For further details, contact the Fund and consult a tax adviser.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
In order to provide greater flexibility to Fund shareholders whose investment
objectives have changed, Class C shareholders may exchange all or some of their
Shares for the Class C Shares in other funds in the Liberty Family of Funds at
net asset value without a contingent deferred sales charge. Participants in a
plan under the Liberty Family Retirement Program may exchange all or some of
their Shares for Class C Shares of other funds offered under the plan at net
asset value without a contingent deferred sales charge. Any contingent deferred
sales charge charged at the time exchanged-for Shares are redeemed is calculated
as if the shareholder had held the Shares from the date on which he became a
shareholder of the exchanged-from Shares. For more information, see "Contingent
Deferred Sales Charge."
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Shares having a net asset value
of at least $1,500. Before the exchange, the shareholder must receive a
prospectus of the fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which the
Shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Shares submitted for exchange are redeemed and
the proceeds invested in shares of the other fund. The exchange privilege may be
terminated at any time. Shareholders will be notified of the modification or
termination of the exchange privilege.
Further information on the exchange privilege and prospectuses for the Liberty
Family of Funds are available by contacting the Fund.
TAX CONSEQUENCES
An exercise of the exchange privilege is treated as a sale for federal income
tax purposes. Depending upon the circumstances, a capital gain or loss may be
realized.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing or by telephone. Written
instructions may require a signature guarantee. Shareholders of the Fund may
have difficulty in making exchanges by telephone through brokers and other
financial institutions during times of drastic economic or market changes. If a
shareholder cannot contact his broker or financial institution by telephone, it
is recommended that an exchange request be made in writing and sent by overnight
mail to Federated Services Company, 500 Victory Road-2nd Floor, Quincy,
Massachusetts 02171.
20
Instructions for exchanges for the Liberty Family Retirement Program should be
given to the plan administrator.
TELEPHONE INSTRUCTIONS. Telephone instructions made by the investor may be
carried out only if a telephone authorization form completed by the investor is
on file with the transfer agent. If the instructions are given by a broker, a
telephone authorization form completed by the broker must be on file with the
transfer agent. Shares may be exchanged between two funds by telephone only if
the two funds have identical shareholder registrations.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to the transfer agent and deposited to the shareholder's account
before being exchanged. Telephone exchange instructions will be binding upon the
shareholder. Such instructions will be processed as of 4:00 p.m. (Eastern time)
and must be received by the transfer agent before that time for shares to be
exchanged the same day. Shareholders exchanging into a new fund will not receive
that fund's dividend which is payable to shareholders of record on that date.
This privilege may be modified or terminated at any time. Telephone instructions
may be recorded. If reasonable procedures are not followed by the Fund, it may
be liable for losses due to unauthorized or fraudulent telephone instructions.
REDEEMING CLASS C SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after the
transfer agent receives the redemption request, less any applicable contingent
deferred sales charge. Redemptions will be made on days on which the Fund
computes its net asset value. Redemptions can be made through a financial
institution or directly from the Fund. Redemption requests must be received in
proper form. Redemptions of Shares held through the Liberty Family Retirement
Program will be governed by the requirements of the respective plans.
THROUGH A FINANCIAL INSTITUTION
A shareholder may redeem Shares by calling his financial institution (such as a
bank or an investment dealer) to request the redemption. Shares will be redeemed
at the net asset value next determined after the Fund receives the redemption
request from the financial institution, less any applicable contingent deferred
sales charge. Redemption requests through a registered broker/dealer must be
received by the broker before 4:00 p.m. (Eastern time) and must be transmitted
by the broker to the Fund before 5:00 p.m. (Eastern time) in order for Shares to
be redeemed at that day's net asset value. Redemption requests through other
financial institutions must be received by the financial institution and
transmitted to the Fund before 4:00 p.m. (Eastern time) in order for Shares to
be redeemed at that day's net asset value. The financial institution is
responsible for promptly submitting redemption requests and providing proper
written redemption instructions to the Fund. The financial institution may
charge customary fees and commissions for this service.
DIRECTLY FROM THE FUND
BY TELEPHONE. Shareholders who have not purchased through a financial
institution may redeem their Shares by telephoning the Fund. The proceeds will
be mailed to the shareholder's address of
21
record or wire transferred to the shareholder's account at a domestic commercial
bank that is a member of the Federal Reserve System, normally within one
business day, but in no event longer than seven days after the request. The
minimum amount for a wire transfer is $1,000. If at any time the Fund shall
determine it necessary to terminate or modify this method of redemption,
shareholders would be promptly notified.
An authorization form permitting the transfer agent to accept telephone requests
must first be completed. Authorization forms and information on this service are
available from Federated Securities Corp.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption should be considered.
Telephone instructions may be recorded. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
BY MAIL. Any shareholder may redeem Shares by sending a written request to the
transfer agent. The written request should include the shareholder's name, the
Fund name and class designation, the account number, and the share or dollar
amount requested, and should be signed exactly as the Shares are registered.
If share certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written request.
Shareholders may call the Fund for assistance in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the BIF,
which is administered by the FDIC;
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
- a savings bank or savings and loan association whose deposits are insured
by the SAIF, which is administered by the FDIC; or
- 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.
22
CONTINGENT DEFERRED SALES CHARGE
Shareholders who purchased Shares will be charged a contingent deferred sales
charge by Federated Securities Corp. of 1.00% for redemptions of those Shares
made within one year from date of purchase. To the extent that a shareholder
exchanges between or among Class C Shares in other funds in the Liberty Family
of Funds, the time for which the exchanged-for-shares were held will be added,
or "tacked," to the time for which the exchanged-from shares were held for
purposes of satisfying the one-year holding period. The contingent deferred
sales charge will be calculated based upon the lesser of the original purchase
price of the Shares or the net asset value of the Shares when redeemed. For
additional information, see "Other Payments to Financial Institutions."
The contingent deferred sales charge will not be imposed on Shares acquired
through the reinvestment of dividends or distributions of long-term capital
gains. Redemptions are deemed to have occurred in the following order: (1)
Shares acquired through the reinvestment of dividends and long-term capital
gains; (2) purchase of Shares occurring more than one year before the date of
redemption; and (3) purchases of Shares within the previous year.
The contingent deferred sales charge will not be imposed when a redemption
results from a return under the following circumstances: (i) a total or partial
distribution from a qualified plan, other than an IRA, Keogh Plan, or a
custodial account, following retirement; (ii) a total or partial distribution
from an IRA, Keogh Plan, or a custodial account after the beneficial owner
attains age 59-1/2; or (iii) from the death or total and permanent disability of
the beneficial owner. The exemption from the contingent deferred sales charge
for qualified plans, an IRA, Keogh Plan, or a custodial account does not extend
to account transfers, rollovers, and other redemptions made for purposes of
reinvestment.
Contingent deferred sales charges are not charged in connection with exchanges
of Shares for Class C Shares in other funds in the Liberty Family of Funds or
the Liberty Family Retirement Program, or in connection with redemptions by the
Fund of accounts with low balances. No contingent deferred sales charge will be
charged for redemption from the Liberty Family Retirement Program.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive monthly or quarterly payments of a
predetermined amount not less than $100 may take advantage of the Systematic
Withdrawal Program. Under this program, Shares are redeemed to provide for
periodic withdrawal payments in an amount directed by the shareholder. Depending
upon the amount of the withdrawal payments, the amount of dividends paid and
capital gains distributions with respect to Shares, and the fluctuation of the
net asset value of Shares redeemed under this program, redemptions may reduce,
and eventually deplete, the shareholder's investment in the Fund. For this
reason, payments under this program should not be considered as yield or income
on the shareholder's investment in the Fund. To be eligible to participate in
this program, a shareholder must have an account value of at least $10,000. A
shareholder may apply for participation in this program through his financial
institution.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, and pay the proceeds to the shareholder, if the
account balance falls below a required
23
minimum value of $1,500 due to shareholder redemptions. This requirement does
not apply, however, if the balance falls below $1,500 because of changes in the
Fund's net asset value. Before Shares are redeemed to close an account, the
shareholder is notified in writing and allowed 30 days to purchase additional
Shares to meet the minimum requirement.
FIXED INCOME SECURITIES, INC. INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE CORPORATION
BOARD OF DIRECTORS. The Fund is managed by a Board of Directors. The Directors
are responsible for managing the Corporation's business affairs and for
exercising all the Corporation's powers except those reserved for the
shareholders. The Executive Committee of the Board of Directors handles the
Directors' responsibilities between meetings of the Directors.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Federated
Advisers, the Fund's investment adviser, subject to direction by the Directors.
The adviser continually conducts investment research and supervision for the
Fund and is responsible for the purchase or sale of portfolio instruments, for
which it receives an annual fee from the Fund.
ADVISORY FEES. The Fund's adviser receives an annual investment advisory
fee equal to 0.85 of 1% of the Fund's average daily net assets. The fee paid
by the Fund, while higher than the advisory fee paid by other mutual funds
in general, is comparable to fees paid by many mutual funds with similar
objectives and policies. Under the investment 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.
24
PORTFOLIO MANAGERS' BACKGROUNDS. Randall S. Bauer, Mark E. Durbiano and
Gary J. Madich have been the Fund's portfolio managers since its inception.
Mr. Bauer joined Federated Investors in 1989 and has been a Vice President
of the Fund's adviser since 1994. Mr. Bauer was an Assistant Vice President
of the International Banking Division at Pittsburgh National Bank from 1982
until 1989. Mr. Bauer is a Chartered Financial Analyst and received his
M.B.A. in Finance from Pennsylvania State University. Mr. Durbiano joined
Federated Investors in 1982 and has been a Vice President of the Fund's
adviser since 1988. Mr. Durbiano is a Chartered Financial Analyst and
received his M.B.A. in Finance from the University of Pittsburgh. Mr. Madich
joined Federated Investors in 1984 and has been a Senior Vice President of
the Fund's investment adviser since 1993. Mr. Madich served as a Vice
President of the Fund's investment adviser from 1988 until 1993. Mr. Madich
is a Chartered Financial Analyst and received his M.B.A. in Public Finance
from the University of Pittsburgh.
DISTRIBUTION OF CLASS C SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS. Under a distribution plan adopted
in accordance with Investment Company Act Rule 12b-1 (the "Distribution Plan"),
the Fund will pay to the distributor an amount, computed at an annual rate of
0.75 of 1% of the average daily net asset value of Shares to finance any
activity which is principally intended to result in the sale of Shares subject
to the Distribution Plan. The distributor may select financial institutions such
as banks, fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales support services as agents for their clients or
customers.
The Distribution Plan is a compensation-type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amount or may earn a profit from future payments made by the Fund
under the Distribution Plan.
In addition, the Fund has adopted a Shareholder Services Plan (the "Services
Plan") under which it may make payments up to 0.25 of 1% of the average daily
net asset value of Shares to obtain certain personal services for shareholders
and the maintenance of shareholder accounts ("shareholder services"). The Fund
has entered into a Shareholder Services Agreement with Federated Shareholder
Services, a subsidiary of Federated Investors, under which Federated Shareholder
Services will either perform shareholder services directly or will select
financial institutions to perform shareholder services. Financial institutions
will receive fees based upon shares owned by their clients or customers. The
schedules of such fees and the basis upon which such fees will be paid will be
determined from time to time by the Fund and Federated Shareholder Services.
25
The Glass-Steagall Act limits the ability of a depository institution (such as a
commercial bank or a savings and loan association) to become an underwriter or
distributor of securities. In the event the Glass-Steagall Act is deemed to
prohibit depository institutions from acting in the capacities described above
or should Congress relax current restrictions on depository institutions, the
Directors will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. Federated Securities Corp. will pay
financial institutions an amount equal to 1% of the net asset value of Shares
purchased by their clients or customers at the time of purchase (except for
participants in the Liberty Family Retirement Program). Financial institutions
may elect to waive the initial payments described above; such waiver will result
in the waiver by the Fund of the otherwise applicable contingent deferred sales
charge.
Furthermore, the distributor may offer to pay a fee from its own assets to
financial institutions as financial assistance for providing substantial
marketing and sales support. The support may include participating in sales,
educational and training seminars at recreational-type facilities, providing
sales literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Fund's investment
adviser or its affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET ASSETS
ADMINISTRATIVE FEE OF THE FEDERATED FUNDS
-------------------- ------------------------------------
<S> <C>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN. State Street Bank and Trust Company, Boston, Massachusetts, is
custodian for the securities and cash of the Fund.
26
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, is transfer agent for shares of the Fund and dividend
disbursing agent for the Fund.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, Boston, Massachusetts.
EXPENSES OF THE FUND AND CLASS C SHARES
Holders of Shares pay their allocable portion of Fund and Corporation expenses.
The Corporation expenses for which holders of Shares pay their allocable portion
include, but are not limited to: the cost or organizing the Corporation and
continuing its existence; registering the Corporation with federal and state
securities authorities; Directors' fees; auditors' fees; the cost of meetings of
Directors; legal fees of the Corporation; association membership dues and such
non-recurring and extraordinary items as may arise from time to time.
The Fund expenses for which holders of Shares pay their allocable portion
include, but are not limited to: registering the Fund and Shares of the Fund;
investment advisory services; taxes and commissions; custodian fees; insurance
premiums; auditors' fees; and such non-recurring and extraordinary items as may
arise from time to time.
At present, the only expenses which are allocated specifically to the Shares as
a class are expenses under the Fund's Shareholder Services Plan and Distribution
Plan. However, the Directors reserve the right to allocate certain other
expenses to holders of Shares as it deems appropriate ("Class Expenses"). In any
case, Class Expenses would be limited to: distribution fees; transfer agent fees
as identified by the transfer agent as attributable to holders of Shares; fees
under the Fund's Shareholder Services Plan; printing and postage expenses
related to preparing and distributing material such as shareholder reports,
prospectuses and proxies to current shareholders; registration fees paid to the
Securities and Exchange Commission and to state securities commissions; expenses
related to administrative personnel and services as required to support holders
of Shares; legal fees relating solely to Shares; and Directors' fees incurred as
a result of issues relating solely to Shares.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share of the Fund is entitled to one vote in Director elections and other
matters submitted to shareholders for vote. All shares of all classes of each
portfolio in the Corporation have equal voting rights except that in matters
affecting only a particular portfolio or class, only shares of that portfolio or
class are entitled to vote.
As a Maryland corporation, the Corporation is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Fund's operation and for the election of Directors under certain
circumstances.
27
Directors may be removed by the Board of Directors or by the shareholders at a
special meeting. A special meeting of shareholders shall be called by the
Directors upon the request of shareholders owning at least 10% of the
Corporation's outstanding shares of all series entitled to vote.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional Shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held their Shares. No federal income tax is due on
any distributions earned in an IRA or qualified retirement plan until
distributed, so long as such IRA or qualified retirement plan meets the
applicable requirements of the Internal Revenue Code.
PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES
The Fund is not subject to Pennsylvania corporate or personal property taxes.
Fund shares may be subject to personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania to the extent that the
portfolio in the Fund would be subject to such taxes if owned directly by
residents of those jurisdictions.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund advertises the total return and yield for Class C
Shares.
Total return represents the change, over a specified period of time, in the
value of an investment in Shares after reinvesting all income and capital gains
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of Shares is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by Shares
over a thirty-day period by the maximum offering price per share of Shares on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
Shares and, therefore, may not correlate to the dividends or other distributions
paid to shareholders.
Total return and yield will be calculated separately for Class A Shares, Class C
Shares and Fortress Shares. Because Class A Shares are not subject to 12b-1
expenses, the yield for Class A Shares, for the same period, may exceed that of
Class C Shares and Fortress Shares. Because Class C and Fortress
28
Shares are subject to lower sales loads, the total return for these shares, for
the same period, may exceed that of Class A Shares.
From time to time, the Fund may advertise the performance of Shares using
certain financial publications and/or compare its performance to certain
indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund currently offers Class A Shares, Class C Shares and Fortress Shares.
Class A Shares are sold primarily to customers of financial institutions subject
to a front-end sales load of up to 4.50%. Class A Shares are subject to a
minimum initial investment of $500, unless the investment is in a retirement
account, in which case the minimum investment is $50.
Fortress Shares are sold primarily to customers of financial institutions
subject to a front-end sales load of up to 1.00%. Fortress Shares are
distributed pursuant to a Rule 12b-1 Plan adopted by the Fund whereby the
distributor is paid a fee of up to 0.50 of 1%, in addition to a shareholder
services fee of 0.25 of 1% of the Fortress Shares' average daily net assets. In
addition, Fortress Shares may be subject to certain contingent deferred sales
charges. Investments in Fortress Shares are subject to a minimum initial
investment of $1,500 over a 90-day period, unless the investment is in a
retirement account, in which case the minimum investment is $50.
The amount of dividends payable to Class A and Fortress Shares will generally
exceed that of Class C Shares by the difference between Class Expenses and
distribution and shareholder service expenses borne by shares of each respective
class.
The stated advisory fee is the same for all three classes of shares.
29
STRATEGIC INCOME FUND
FINANCIAL HIGHLIGHTS--FORTRESS SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Independent Auditors' on page 47.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1994*
- ---------------------------------------------------------------------- --------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- ----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------
Net investment income 0.41
- ----------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and foreign
currency (0.44)
- ---------------------------------------------------------------------- --------------
Total from investment operations (0.03)
- ----------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------
Dividends to shareholders from net investment income (0.41)
- ----------------------------------------------------------------------
Distributions in excess of net investment income (a) (0.02)
- ---------------------------------------------------------------------- --------------
Total distributions (0.43)
- ----------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.54
- ---------------------------------------------------------------------- --------------
TOTAL RETURN** (0.19%)
- ----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------
Expenses 0.75%(c)
- ----------------------------------------------------------------------
Net investment income 8.34%(c)
- ----------------------------------------------------------------------
Expense waiver/reimbursement (b) 8.87%(c)
- ----------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------
Net assets, end of period (000 omitted) $2,326
- ----------------------------------------------------------------------
Portfolio turnover rate 34%
- ----------------------------------------------------------------------
<FN>
* For the period from May 9, 1994 (date of initial public investment) to
November 30, 1994.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Distributions are determined in accordance with income tax regulations,
which may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Computed on an annualized basis.
</TABLE>
(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 for the fiscal year ended November 30, 1994, which can be obtained
free of charge.
30
STRATEGIC INCOME FUND
FINANCIAL HIGHLIGHTS--CLASS A SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Independent Auditors' report on page 47.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1994*
- ---------------------------------------------------------------------- --------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- ----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------
Net investment income 0.45
- ----------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and foreign
currency (0.45)
- ---------------------------------------------------------------------- --------------
Total from investment operations 0.00
- ----------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------
Dividends to shareholders from net investment income (0.45)
- ---------------------------------------------------------------------- --------------
Distributions in excess of net investment income (a) (0.01)
- ---------------------------------------------------------------------- --------------
Total distributions (0.46)
- ---------------------------------------------------------------------- --------------
NET ASSET VALUE, END OF PERIOD $ 9.54
- ---------------------------------------------------------------------- --------------
TOTAL RETURN** 0.05%
- ----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------
Expenses 0.25%(c)
- ----------------------------------------------------------------------
Net investment income 8.38%(c)
- ----------------------------------------------------------------------
Expense waiver/reimbursement (b) 8.87%(c)
- ----------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------
Net assets, end of period (000 omitted) $2,366
- ----------------------------------------------------------------------
Portfolio turnover rate 34%
- ----------------------------------------------------------------------
<FN>
* For the period from May 3, 1994 (date of initial public investment) to
November 30, 1994.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Computed on an annualized basis.
</TABLE>
(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 for the fiscal year ended November 30, 1994, which can be obtained
free of charge.
31
STRATEGIC INCOME FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------- ------------------------------------------------------------------- ---------
<C> <S> <C>
U.S. CORPORATE BONDS--31.8%
- -----------------------------------------------------------------------------------
BROADCAST RADIO & TV--1.7%
-------------------------------------------------------------------
$ 100,000 SCI Television, Inc., Sr. Secd. Note, 11.00%, 6/30/2005 $ 100,750
------------------------------------------------------------------- ---------
BUSINESS EQUIPMENT & SERVICES--0.8%
-------------------------------------------------------------------
50,000 Bell & Howell Co., Sr. Sub. Note, 10.75%, 10/1/2002 47,250
------------------------------------------------------------------- ---------
CABLE TELEVISION--0.8%
-------------------------------------------------------------------
50,000 Continental Cablevision, Sr. Deb., 9.50%, 8/1/2013 45,000
------------------------------------------------------------------- ---------
CHEMICALS & PLASTICS--3.5%
-------------------------------------------------------------------
50,000 Arcadian Partners L.P., Sr. Note, Series B, 10.75%, 5/1/2005 48,250
-------------------------------------------------------------------
100,000 G-I Holdings, Inc., Sr. Disc. Note, Series B, 0/11.375% Accrual,
10/1/98 60,750
-------------------------------------------------------------------
50,000 LaRoche Industries, Inc., Sr. Sub. Note, 13.00%, 8/15/2004 46,250
-------------------------------------------------------------------
50,000 (a) Polymer Group, Inc., Sr. Note, 12.25%, 7/15/2002 48,750
------------------------------------------------------------------- ---------
Total 204,000
------------------------------------------------------------------- ---------
CLOTHING & TEXTILES--1.5%
-------------------------------------------------------------------
100,000 WestPoint Stevens, Inc., Sr. Sub. Deb., 9.375%, 12/15/2005 88,375
------------------------------------------------------------------- ---------
CONSUMER PRODUCTS--1.4%
-------------------------------------------------------------------
100,000 Playtex Family Products Corp., Sr. Sub. Note, 9.00%, 12/15/2003 85,375
------------------------------------------------------------------- ---------
CONTAINERS & GLASS PRODUCTS--0.9%
-------------------------------------------------------------------
50,000 Owens Illinois, Inc., Sr. Sub. Note, 10.50%, 6/15/2002 50,250
------------------------------------------------------------------- ---------
ECOLOGICAL SERVICES & EQUIPMENT--0.9%
-------------------------------------------------------------------
50,000 Mid-American Waste Systems, Inc., Sr. Sub. Note, 12.25%, 2/15/2003 50,750
------------------------------------------------------------------- ---------
FOOD & DRUG RETAILERS--1.1%
-------------------------------------------------------------------
50,000 Grand Union Co., Sr. Sub. Note, 12.25%, 7/15/2002 19,938
-------------------------------------------------------------------
50,000 Pathmark Stores, Inc., Sr. Sub. Note, 9.625%, 5/1/2003 43,375
------------------------------------------------------------------- ---------
Total 63,313
------------------------------------------------------------------- ---------
</TABLE>
32
STRATEGIC INCOME FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------- ------------------------------------------------------------------- ---------
<C> <S> <C>
U.S. CORPORATE BONDS--CONTINUED
- -----------------------------------------------------------------------------------
FOOD PRODUCTS--3.2%
-------------------------------------------------------------------
$ 100,000 (a) Curtice-Burns Foods, Inc., Sr. Sub. Note, 12.75%, 2/1/2005 $ 100,875
-------------------------------------------------------------------
50,000 Doskocil Cos., Inc., Sr. Sub. Note, 9.75%, 7/15/2000 43,250
-------------------------------------------------------------------
50,000 Specialty Foods Corp., Sr. Sub. Note, 11.25%, 8/15/2003 44,000
------------------------------------------------------------------- ---------
Total 188,125
------------------------------------------------------------------- ---------
FOOD SERVICES--1.6%
-------------------------------------------------------------------
100,000 Flagstar Corp., Sr. Note, 10.875%, 12/1/2002 91,750
------------------------------------------------------------------- ---------
FOREST PRODUCTS--1.6%
-------------------------------------------------------------------
100,000 Stone Container Corp., Sr. Note, 9.875%, 2/1/2001 92,000
------------------------------------------------------------------- ---------
HEALTHCARE--1.7%
-------------------------------------------------------------------
100,000 AmeriSource Corp., Sr. PIK Deb., 11.25%, 7/15/2005 101,500
------------------------------------------------------------------- ---------
HOME PRODUCTS & FURNISHINGS--0.5%
-------------------------------------------------------------------
50,000 American Standard, Inc., Sr. Sub. Disc. Deb., 0/10.50%, 6/1/2005 31,875
------------------------------------------------------------------- ---------
MACHINERY & EQUIPMENT--0.9%
-------------------------------------------------------------------
50,000 (a) Waters Corp., Sr. Sub. Note, 12.75%, 9/30/2004 50,750
------------------------------------------------------------------- ---------
RETAILERS--2.5%
-------------------------------------------------------------------
50,000 Brylane Capital Corp., Sr. Sub. Note, 10.00%, 9/1/2003 49,750
-------------------------------------------------------------------
100,000 (a) ICON Health & Fitness, Inc., Unit, 13.00%, 7/15/2002 98,250
------------------------------------------------------------------- ---------
Total 148,000
------------------------------------------------------------------- ---------
STEEL--3.3%
-------------------------------------------------------------------
100,000 Carbide/Graphite Group, Sr. Note, 11.50%, 9/1/2003 101,500
-------------------------------------------------------------------
50,000 GS Technologies Operating Co., Inc., Sr. Note, 12.00%, 9/1/2004 50,125
-------------------------------------------------------------------
50,000 Northwestern Steel & Wire Co., Sr. Note, 9.50%, 6/15/2001 45,000
------------------------------------------------------------------- ---------
Total 196,625
------------------------------------------------------------------- ---------
</TABLE>
33
STRATEGIC INCOME FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------- ------------------------------------------------------------------- ---------
<C> <S> <C>
U.S. CORPORATE BONDS--CONTINUED
- -----------------------------------------------------------------------------------
SURFACE TRANSPORTATION--2.5%
-------------------------------------------------------------------
$ 100,000 Gearbulk Holding Limited, Sr. Note, 11.25%, 12/1/2004 $ 100,375
-------------------------------------------------------------------
50,000 Trans Ocean Container Corp., Sr. Sub. Note, 12.25%, 7/1/2004 48,250
------------------------------------------------------------------- ---------
Total 148,625
------------------------------------------------------------------- ---------
TECHNOLOGY SERVICES--0.7%
-------------------------------------------------------------------
50,000 Computervision Corp., Sr. Sub. Note, 11.375%, 8/15/99 42,000
------------------------------------------------------------------- ---------
TELECOMMUNICATIONS & CELLULAR--0.7%
-------------------------------------------------------------------
100,000 NEXTEL Communications Inc., Sr. Disc. Note, 0/11.50%, 9/1/2003 43,250
------------------------------------------------------------------- ---------
TOTAL U.S. CORPORATE BONDS (IDENTIFIED COST $1,946,098) 1,869,563
------------------------------------------------------------------- ---------
U.S. GOVERNMENT AGENCY--33.5%
- -----------------------------------------------------------------------------------
348,944 Federal Home Loan Mortgage Corp., Pool C00227, 9.50%, 12/1/2022 359,516
-------------------------------------------------------------------
646,386 Federal Home Loan Mortgage Corp., Pool M80326, 7.50%, 6/1/2001 630,420
-------------------------------------------------------------------
502,276 Government National Mortgage Association, Pool 351468, 7.50%,
3/15/2024 463,028
-------------------------------------------------------------------
524,236 Government National Mortgage Association, Pools 356579, 371837 and
403933, 8.50%, 6/15/2023 - 8/15/2024 514,727
------------------------------------------------------------------- ---------
TOTAL U.S. GOVERNMENT AGENCY (IDENTIFIED COST $2,007,285) 1,967,691
------------------------------------------------------------------- ---------
<CAPTION>
FOREIGN U.S.
CURRENCY DOLLAR
PAR AMOUNT VALUE
- -------------- ---------
-------------------------------------------------------------------
<C> <S> <C>
INTERNATIONAL BONDS--32.1%
- -----------------------------------------------------------------------------------
AUSTRALIAN DOLLAR--2.8%
- -----------------------------------------------------------------------------------
CORPORATE--1.4%
-------------------------------------------------------------------
150,000 News America Holdings, Inc., 8.625%, 2/7/2014 $ 83,577
------------------------------------------------------------------- ---------
STATE/PROVINCIAL--1.4%
-------------------------------------------------------------------
100,000 State Bank of New South Wales, 12.25%, 2/26/2001 82,080
------------------------------------------------------------------- ---------
TOTAL AUSTRALIAN DOLLAR 165,657
------------------------------------------------------------------- ---------
</TABLE>
34
STRATEGIC INCOME FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
FOREIGN U.S.
CURRENCY DOLLAR
PAR AMOUNT VALUE
- -------------- ------------------------------------------------------------------- ---------
<C> <S> <C>
INTERNATIONAL BONDS--CONTINUED
- -----------------------------------------------------------------------------------
BRITISH POUND--5.0%
- -----------------------------------------------------------------------------------
CORPORATE--3.2%
-------------------------------------------------------------------
50,000 Abbey National Treasury, 8.00%, 4/2/2003 $ 72,718
-------------------------------------------------------------------
70,000 Diamler-Benz U.K., 10.75%, 5/17/96 113,828
------------------------------------------------------------------- ---------
Total 186,546
------------------------------------------------------------------- ---------
SOVEREIGN--1.8%
-------------------------------------------------------------------
70,000 Republic of Iceland, 8.75%, 5/12/2003 105,641
------------------------------------------------------------------- ---------
TOTAL BRITISH POUND 292,187
------------------------------------------------------------------- ---------
CANADIAN DOLLAR--2.4%
- -----------------------------------------------------------------------------------
AGENCY--1.2%
-------------------------------------------------------------------
100,000 Ontario Hydro, 9.00%, 6/24/2002 71,094
------------------------------------------------------------------- ---------
CORPORATE--1.2%
-------------------------------------------------------------------
100,000 Sherritt, Inc., 11.00%, 3/31/2004 69,379
------------------------------------------------------------------- ---------
TOTAL CANADIAN DOLLAR 140,473
------------------------------------------------------------------- ---------
DANISH KRONE--3.3%
- -----------------------------------------------------------------------------------
SOVEREIGN--3.3%
-------------------------------------------------------------------
600,000 Denmark, 8.00%, 5/15/2003 93,837
-------------------------------------------------------------------
600,000 Denmark, 9.00%, 11/15/96 100,249
------------------------------------------------------------------- ---------
TOTAL DANISH KRONE 194,086
------------------------------------------------------------------- ---------
DEUTSCHE MARK--2.6%
- -----------------------------------------------------------------------------------
CORPORATE--1.5%
-------------------------------------------------------------------
150,000 Ford Credit Europe, PLC, 6.00%, 3/30/99 90,348
------------------------------------------------------------------- ---------
SOVEREIGN--1.1%
-------------------------------------------------------------------
100,000 Federal Republic of Germany, 8.00%, 7/22/2002 65,487
------------------------------------------------------------------- ---------
TOTAL DEUTSCHE MARK 155,835
------------------------------------------------------------------- ---------
</TABLE>
35
STRATEGIC INCOME FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
FOREIGN U.S.
CURRENCY DOLLAR
PAR AMOUNT VALUE
- -------------- ------------------------------------------------------------------- ---------
<C> <S> <C>
INTERNATIONAL BONDS--CONTINUED
- -----------------------------------------------------------------------------------
FRENCH FRANC--1.2%
- -----------------------------------------------------------------------------------
AGENCY--1.2%
-------------------------------------------------------------------
400,000 KFW International Finance, Inc., 7.00%, 5/12/2000 $ 72,082
------------------------------------------------------------------- ---------
ITALIAN LIRA--1.6%
- -----------------------------------------------------------------------------------
AGENCY--1.6%
-------------------------------------------------------------------
150,000,000 KFW International Finance, 11.625%, 11/27/98 93,854
------------------------------------------------------------------- ---------
JAPANESE YEN--1.9%
- -----------------------------------------------------------------------------------
CORPORATE--1.9%
-------------------------------------------------------------------
10,000,000 Bank of Tokyo Cayman Finance, Perpetual Convertible Subordinated
Note, 4.25% 114,675
------------------------------------------------------------------- ---------
MEXICAN PESO--3.5%
- -----------------------------------------------------------------------------------
SOVEREIGN--3.5%
-------------------------------------------------------------------
7,247,800 Mexican CETES, 0.00%, 3/2/95 203,229
------------------------------------------------------------------- ---------
NEW ZEALAND DOLLAR--2.2%
- -----------------------------------------------------------------------------------
AGENCY--2.2%
-------------------------------------------------------------------
200,000 Electricity Corp. of New Zealand, 10.00%, 10/15/2001 129,211
------------------------------------------------------------------- ---------
U.S. DOLLAR--5.6%
- -----------------------------------------------------------------------------------
AGENCY--1.4%
-------------------------------------------------------------------
100,000 Banco Nacional de Comercio Exterior, 8.00%, 8/5/2003 85,281
------------------------------------------------------------------- ---------
CORPORATE--1.6%
-------------------------------------------------------------------
100,000 Banco de Galicia, Conv. Sub. Note, 7.00%, 8/1/2002 92,500
------------------------------------------------------------------- ---------
SOVEREIGN--2.6%
-------------------------------------------------------------------
100,000 Argentina Bocon, Pre 4 (2) PIK; 4.875%, 9/1/2002+ 66,800
-------------------------------------------------------------------
98,000 Brazil IDU, Deb., 6.0625%, 1/1/2001+ 82,688
------------------------------------------------------------------- ---------
Total 149,488
------------------------------------------------------------------- ---------
TOTAL U.S. DOLLAR 327,269
------------------------------------------------------------------- ---------
TOTAL INTERNATIONAL BONDS (IDENTIFIED COST $1,921,234) 1,888,558
------------------------------------------------------------------- ---------
</TABLE>
36
STRATEGIC INCOME FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------- ------------------------------------------------------------------- ---------
<C> <S> <C>
**REPURCHASE AGREEMENT--3.9%
- -----------------------------------------------------------------------------------
$ 230,000 J.P. Morgan Securities, Inc., 5.77%, dated 11/30/94, due 12/1/94
(at amortized cost) $ 230,000
------------------------------------------------------------------- ---------
TOTAL INVESTMENTS (IDENTIFIED COST $6,104,617) $5,955,812++
------------------------------------------------------------------- ---------
<FN>
(a) Denotes restricted securities which are subject to resale under Federal
Securities laws. These securities have been determined to be liquid under
criteria established by the Board of Directors.
+ Denotes Variable Rate and Floating Rate Obligations for which the current
rate is shown.
++ The cost of investments for federal tax purposes amounts to $6,111,894. The
net unrealized depreciation on a federal tax cost basis amounts to $156,082
and is comprised of $26,814 appreciation and $182,896 depreciation at
November 30, 1994.
** 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
investment in the repurchase agreement is through participation in a joint
account with other Federated Funds.
</TABLE>
The following abbreviation is used in this portfolio:
PIK--Payment in kind
Note: The categories of investments are shown as a percentage of net assets
($5,881,975) at November 30, 1994.
(See Notes which are an integral part of the Financial Statements)
37
STRATEGIC INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
- --------------------------------------------------------------------------------
Investments in securities at value (identified cost; $6,104,617 and tax cost;
$6,111,894) $ 5,955,812
- --------------------------------------------------------------------------------
Cash denominated in foreign currencies (identified cost; $112,568) 112,476
- --------------------------------------------------------------------------------
Cash 4,973
- --------------------------------------------------------------------------------
Interest receivable 117,341
- --------------------------------------------------------------------------------
Receivable for capital stock sold 47,691
- --------------------------------------------------------------------------------
Receivable for foreign currency sold 10,753
- --------------------------------------------------------------------------------
Receivable from adviser 3,000
- --------------------------------------------------------------------------------
Deferred expenses 7,645
- -------------------------------------------------------------------------------- ------------
Total assets 6,259,691
- --------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
Payable for investments purchased $ 303,547
- ----------------------------------------------------------------------
Dividends payable 25,230
- ----------------------------------------------------------------------
Payable for foreign currency purchased 10,771
- ----------------------------------------------------------------------
Accrued expenses 38,168
- ---------------------------------------------------------------------- ----------
</TABLE>
<TABLE>
<S> <C>
Total liabilities 377,716
- -------------------------------------------------------------------------------- ------------
NET ASSETS for 616,440 shares of capital stock outstanding $ 5,881,975
- -------------------------------------------------------------------------------- ------------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Paid-in capital $ 6,066,375
- --------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investments and translation of
assets and liabilities in foreign currencies (148,970)
- --------------------------------------------------------------------------------
Accumulated distributions in excess of net investment income (14,463)
- --------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments and foreign currency
transactions (20,967)
- -------------------------------------------------------------------------------- ------------
Total Net Assets $ 5,881,975
- -------------------------------------------------------------------------------- ------------
NET ASSET VALUE:
- --------------------------------------------------------------------------------
Class C Shares ($1,189,566 DIVIDED BY 124,641 shares of capital stock
outstanding) $ 9.54
- -------------------------------------------------------------------------------- ------------
Class A Shares ($2,366,182 DIVIDED BY 248,034 shares of capital stock
outstanding) $ 9.54
- -------------------------------------------------------------------------------- ------------
Fortress Shares ($2,326,227 DIVIDED BY 243,765 shares of capital stock
outstanding) $ 9.54
- -------------------------------------------------------------------------------- ------------
OFFERING PRICE PER SHARE:
- --------------------------------------------------------------------------------
Class C Shares $ 9.54
- -------------------------------------------------------------------------------- ------------
Class A Shares (100/95.5 of $9.54)* $ 9.99
- -------------------------------------------------------------------------------- ------------
Fortress Shares (100/99 of $9.54)* $ 9.64
- -------------------------------------------------------------------------------- ------------
REDEMPTION PROCEEDS PER SHARE:
- --------------------------------------------------------------------------------
Class C Shares (99/100 of $9.54)** $ 9.44
- -------------------------------------------------------------------------------- ------------
Class A Shares $ 9.54
- -------------------------------------------------------------------------------- ------------
Fortress Shares (99/100 of $9.54)** $ 9.44
- -------------------------------------------------------------------------------- ------------
<FN>
* See "What Shares Cost" in the prospectus.
** See "Contingent Deferred Sales Charge" in the prospectus.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
38
STRATEGIC INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1994*
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- -------------------------------------------------------------------------------------
Interest income (net of foreign taxes withheld of $8) $ 156,336
- -------------------------------------------------------------------------------------
EXPENSES:
- -------------------------------------------------------------------------------------
Investment advisory fee $ 15,014
- -----------------------------------------------------------------------
Custodian and portfolio accounting fees 51,019
- -----------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 9,367
- -----------------------------------------------------------------------
Printing and postage 6,003
- -----------------------------------------------------------------------
Legal fees 240
- -----------------------------------------------------------------------
Shareholder services fee--Class A Shares 2,096
- -----------------------------------------------------------------------
Shareholder services fee--Class C Shares 869
- -----------------------------------------------------------------------
Shareholder services fee--Fortress Shares 1,451
- -----------------------------------------------------------------------
Distribution services fee--Class C Shares 2,606
- -----------------------------------------------------------------------
Distribution services fee--Fortress Shares 2,902
- -----------------------------------------------------------------------
Administrative personnel and services fee 61,836
- -----------------------------------------------------------------------
Registration fees 1,858
- -----------------------------------------------------------------------
Taxes 25
- -----------------------------------------------------------------------
Insurance premiums 8,812
- -----------------------------------------------------------------------
Miscellaneous 2,514
- ----------------------------------------------------------------------- ----------
Total expenses 166,612
- ----------------------------------------------------------------------- ----------
Deduct--
- -----------------------------------------------------------------------
Waiver of investment advisory fee $ 15,014
- ------------------------------------------------------------
Reimbursement of other operating expenses by Adviser 141,674 156,688
- ------------------------------------------------------------ -------- ----------
Net expenses 9,924
- ------------------------------------------------------------------------------------- -----------
Net investment income 146,412
- ------------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY:
- -------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign currency transactions (identified
cost basis) (27,206)
- -------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments and foreign
currency (148,970)
- ------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain (loss) on investments and foreign currency (176,176)
- ------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $ (29,764)
- ------------------------------------------------------------------------------------- -----------
<FN>
* For the period from April 29, 1994 (date of initial public investment) to
November 30, 1994.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
39
STRATEGIC INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- ---------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30, 1994*
-------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------------------------------------
OPERATIONS--
- -----------------------------------------------------------------------
Net investment income $ 146,412
- -----------------------------------------------------------------------
Net realized gain (loss) on investment and foreign currency
transactions ($13,691 net loss as computed for federal tax purposes) (27,206)
- -----------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments and
translation of assets and liabilities in foreign currencies (148,970)
- ----------------------------------------------------------------------- -------------------
Change in net assets resulting from operations (29,764)
- ----------------------------------------------------------------------- -------------------
DISTRIBUTIONS TO SHAREHOLDERS--
- -----------------------------------------------------------------------
Dividends to shareholders from net investment income:
- -----------------------------------------------------------------------
Class A Shares (67,293)
- -----------------------------------------------------------------------
Fortress Shares (46,354)
- -----------------------------------------------------------------------
Class C Shares (26,526)
- -----------------------------------------------------------------------
Distributions in excess of net investment income:
- -----------------------------------------------------------------------
Class A Shares (5,083)
- -----------------------------------------------------------------------
Fortress Shares (6,411)
- -----------------------------------------------------------------------
Class C Shares (2,969)
- ----------------------------------------------------------------------- -------------------
Change in net assets from distributions to shareholders (154,636)
- ----------------------------------------------------------------------- -------------------
CAPITAL STOCK TRANSACTIONS--
- -----------------------------------------------------------------------
Proceeds from sale of shares 7,743,495
- -----------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
dividends declared 64,166
- -----------------------------------------------------------------------
Cost of shares redeemed (1,741,286)
- ----------------------------------------------------------------------- -------------------
Change in net assets resulting from capital stock transactions 6,066,375
- ----------------------------------------------------------------------- -------------------
Change in net assets 5,881,975
- -----------------------------------------------------------------------
NET ASSETS:
- -----------------------------------------------------------------------
Beginning of period --
- ----------------------------------------------------------------------- -------------------
End of period $ 5,881,975
- ----------------------------------------------------------------------- -------------------
<FN>
* For the period April 29, 1994 (date of initial public investment) to November
30, 1994.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
40
STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Fixed Income Securities Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end,
management investment company. The Corporation consists of five, diversified
investment portfolios. The financial statements included herein are only those
of Strategic Income Fund (the "Fund"). The financial statements of the other
portfolios 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. The Fund offers three classes of shares; Class A Shares, Class C Shares,
and Fortress Shares.
As of October 17, 1994, Multi-State Municipal Income Fund no longer accepted
purchases. It is anticipated that Multi-State Municipal Income Fund's
liquidation will occur in 1995.
During the fiscal year ended November 30, 1994, the Corporation offered five
portfolios (Limited Term Fund, Limited Term Municipal Fund, Strategic Income
Fund, Limited Maturity Government Fund, and Multi-State Municipal Income Fund).
The Board of Directors approved the liquidation of Limited Maturity Government
Fund, and as of December 23, 1994 was no longer offered.
(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. These
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Listed corporate bonds (and other fixed-income and
asset backed securities) are valued at the last sale price reported on
national securities exchanges. Unlisted bonds and securities and short-term
obligations are valued at the prices provided by an independent pricing
service. Short-term securities with remaining maturities of sixty days or
less may be stated 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 collateral to ensure the value of collateral at least equals the
principal amount of the repurchase agreement, including accrued interest.
41
STRATEGIC INCOME FUND
- --------------------------------------------------------------------------------
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 Board of 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. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
as required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its taxable income. Accordingly,
no provisions for federal tax are necessary. However, federal taxes may be
imposed on the Fund upon the disposition of certain investments in Passive
Foreign Investment Companies. Withholding taxes on foreign dividends have
been provided for in accordance with the Fund's understanding of the
applicable country's tax rules and rates. At November 30, 1994, the Fund,
for federal tax purposes, had a capital loss carryforward of $13,691, which
will reduce the Fund's taxable income arising from future net realized gain
on investments, if any, to the extent permitted by the Code, and thus will
reduce the amount of the distributions to 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 2002 ($13,691).
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date 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.
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 its shares, have been deferred and are being
amortized using the straight-line method not to exceed a period of five
years from the Fund's commencement date.
G. FORWARD COMMITMENTS--The Fund may enter into forward commitments for the
delayed delivery of securities or forward foreign currency exchange
contracts which are based upon financial indices at a fixed price or
exchange rate at a future date. Risks may arise upon entering these
contracts from the potential inability of counterparts to meet the terms of
their contracts and from unanticipated movements in security prices or
foreign exchange rates. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying
42
STRATEGIC INCOME FUND
- --------------------------------------------------------------------------------
currency and any gains or losses are recorded for financial statement
purposes as unrealized until the contract settlement date.
At November 30, 1994, the Fund had outstanding forward commitments set out
below.
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS TO IN EXCHANGE APPRECIATION
SETTLEMENT DATE DELIVER/RECEIVE FOR (DEPRECIATION)
- ---------------------------------------------- --------------- ----------- --------------
<S> <C> <C> <C>
SALES
- ----------------------------------------------
Italian Lira -- 12/01/94 17,437,500 $ 10,771 ($18)
- ---------------------------------------------- ---
PURCHASES
- ----------------------------------------------
None
- ----------------------------------------------
Net Unrealized Appreciation (Depreciation)
on Forward Commitments ($18)
- ---------------------------------------------- ---
---
</TABLE>
H. FOREIGN CURRENCY TRANSLATION--The accounting records of the Fund are
maintained in U.S. dollars. All assets and liabilities denominated in
foreign currencies ("FC") are translated into U.S. dollars based on the rate
of exchange of such currencies against U.S. dollars on the date of
valuation. Purchases and sales of securities, income and expenses are
translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income and expense amounts
recorded and collected or paid are adjusted when reported by the custodian
bank. The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss
from investments.
Reported net realized foreign exchange gains or losses arise from sales and
maturities of short-term securities, sales of FCs, currency gains or losses
realized between the trade and settlement dates on securities transactions,
the difference between the amounts of dividends, interest, and foreign
withholding taxes recorded on the Fund's books, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in the value of assets and
liabilities other than investments in securities at fiscal year end,
resulting from changes in the exchange rate.
I. RECLASSIFICATIONS--During the year ended November 30, 1994, the Fund adopted
Statement of Position 93-2, Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies. Accordingly, permanent book and tax
differences have been reclassified to paid-in capital. The Fund reclassified
$6,239 and $6,239 from accumulated net realized gain (loss) and
undistributed net investment income, respectively to paid-in capital in
accordance with SOP 93-2. Net investment income, net realized gains, and net
assets were not affected by this change.
43
STRATEGIC INCOME FUND
- --------------------------------------------------------------------------------
J. RESTRICTED SECURITIES--Restricted securities are securities that may only be
resold upon registration under Federal securities laws or in transactions
exempt from such registration. In some cases, the issuer of restricted
securities has agreed to register such securities for resale, at the
issuer's expense either upon demand by the Fund or in connection with
another registered offering of the securities. Many restricted securities
may be resold in the secondary market in transactions exempt from
registration.
Such restricted securities may be determined to be liquid under criteria
established by the Board of Directors. The Fund will not incur any
registration costs upon such resales. The Fund's restricted securities are
valued at the price provided by dealers in the secondary market or, if no
market prices are available, at the fair value as determined by the Fund's
pricing committee. Additional information on each restricted security held
at November 30, 1994 is as follows:
<TABLE>
<CAPTION>
ACQUISITION ACQUISITION
SECURITY DATE COST
- ---------------------------------------------------------- ----------- -----------
<S> <C> <C>
Polymer Group, Inc. Sr. Note 8/10/94 $ 100,000
- ----------------------------------------------------------
Curtice-Burns Foods, Inc., Sr. Sub. Note 11/3/94 50,500
- ----------------------------------------------------------
Waters Corp., Sr. Sub. Note 8/18/94 50,000
- ----------------------------------------------------------
ICON Health & Fitness, Inc. 11/14/94 98,771
- ----------------------------------------------------------
</TABLE>
K. OTHER--Investment transactions are accounted for on the trade date.
(3) CAPITAL STOCK
At November 30, 1994, there were 10,000,000,000 shares of $0.001 par value
capital stock authorized for the Corporation. 4,000,000,000 shares have been
designated for the Fund. Of these shares, 1,000,000,000 have been designated as
Class C Shares, 1,000,000,000 as Class A Shares, and 1,000,000,000 as Fortress
Shares. 1,000,000,000 shares have been designated for additional classes not
currently offered. Transactions in Capital Stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30, 1994*
-----------------------------
CLASS C SHARES SHARES DOLLARS
- -------------------------------------------------- ------------ --------------
<S> <C> <C>
Shares sold 124,790 $ 1,226,296
- --------------------------------------------------
Shares issued in payment of dividends declared 1,844 17,926
- --------------------------------------------------
Shares redeemed (1,993) (19,338)
- -------------------------------------------------- ------------ --------------
Net change resulting from Class C share
transactions 124,641 $ 1,224,884
- -------------------------------------------------- ------------ --------------
</TABLE>
44
STRATEGIC INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30, 1994**
--------------------------
CLASS A SHARES SHARES DOLLARS
- -------------------------------------------------- ----------- ------------
<S> <C> <C>
Shares sold 410,346 $ 4,053,169
- --------------------------------------------------
Shares issued in payment of dividends declared 3,091 30,074
- --------------------------------------------------
Shares redeemed (165,403) (1,633,770)
- -------------------------------------------------- ----------- ------------
Net change resulting from Class A Share
transactions 248,034 $ 2,449,473
- -------------------------------------------------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30, 1994***
--------------------------
FORTRESS SHARES SHARES DOLLARS
- -------------------------------------------------- ----------- ------------
<S> <C> <C>
Shares sold 251,274 $ 2,464,030
- --------------------------------------------------
Shares issued in payment of dividends declared 1,656 16,166
- --------------------------------------------------
Shares redeemed (9,165) (88,178)
- -------------------------------------------------- ----------- ------------
Net change resulting from Fortress share
transactions 243,765 $ 2,392,018
- -------------------------------------------------- ----------- ------------
Net change resulting from Fund share
transactions 616,440 $ 6,066,375
- -------------------------------------------------- ----------- ------------
<FN>
* For the period from April 29, 1994 (date of initial public investment) to
November 30, 1994.
** For the period from May 3, 1994 (date of initial public offering) to
November 30, 1994.
*** For the period from May 9, 1994 (date of initial public offering) to
November 30, 1994.
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Advisers, the Fund's investment adviser (the
"Adviser"), receives for its services an annual investment advisory fee equal to
.85 of 1% of the Fund's average daily net assets. The Adviser may voluntarily
choose to waive a portion of its fee and reimburse certain operating expenses of
the Fund. The Adviser can modify or terminate this voluntary waiver and
reimbursement at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
administrative personnel and services. Prior to March 1, 1994, these services
were provided at approximate cost. Effective March 1, 1994, the FAS fee is based
on the level of average aggregate daily net assets of all funds advised by
subsidiaries of Federated Investors for the period. The administrative fee
received during the period of the Administrative Services Agreement shall be at
least $125,000 per portfolio and $30,000 per each additional class of shares.
DISTRIBUTION AND SHAREHOLDER SERVICES FEE--The Fund has adopted a Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the
Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund to finance
45
STRATEGIC INCOME FUND
- --------------------------------------------------------------------------------
activities intended to result in the sale of the Fund's Class C Shares and
Fortress Shares. The Plan provides that the Fund may incur distribution expenses
up to .75 and .50, respectively, of 1% of the average daily net assets of the
Class C Shares and Fortress Shares, respectively, annually, to compensate FSC.
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS up to .25 of 1% of average net assets
for the Fund for the period. This fee is to obtain certain personal services for
shareholders and to maintain shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT--Federated Services Company ("FServ")
serves as transfer and dividend disbursing agent for the Fund. The FServ fee is
based on the size, type and number of accounts and transactions made by
shareholders.
ORGANIZATIONAL EXPENSES--Organizational expenses $103,446 and start-up
administrative services expenses $46,630 were borne initially by the Adviser.
The Fund has agreed to reimburse the Adviser for the organizational expenses and
start-up administrative expenses during the five year period following April 5,
1994 (date the Fund first became effective). For the period ended November 30,
1994, the Fund paid $4,621 and $2,083, respectively pursuant to this agreement.
Certain of the Officers and Directors of the Corporation are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended November 30, 1994, were as follows:
<TABLE>
<S> <C>
- --------------------------------------------------
PURCHASES $ 6,985,356
- -------------------------------------------------- ------------
SALES $ 1,105,348
- -------------------------------------------------- ------------
</TABLE>
(6) SUBSEQUENT EVENT
On January 17, 1995, The Grand Union Company announced that it would default on
its January 15, 1995, interest payment. The company is currently in negotiations
with bondholders on a restructuring plan. Fund management is unable to predict
the outcome or timing of these proceedings.
46
INDEPENDENT AUDITORS' REPORT
- ---------------------------------------------------------
To the Board of Directors of FIXED INCOME SECURITIES, INC.
and Shareholders of STRATEGIC INCOME FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Strategic Income Fund (a portfolio of Fixed
Income Securities, Inc.) as of November 30, 1994, and the related statement of
operations, the statement of changes in net assets, and the financial highlights
(see pages 2, 30, and 31 of the prospectus) for the year then ended. 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 securities owned as of November 30, 1994 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 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 Strategic Income
Fund as of November 30, 1994, the results of its operations, the changes in its
net assets, and its financial highlights in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
January 13, 1995
except for Footnote 6,
for which the date is
January 17, 1995
47
APPENDIX
(UNAUDITED)
- --------------------------------------------------------------------------------
STANDARD AND POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC--Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposures to adverse
conditions.
C--The rating C typically is applied to debt subordinated to senior debt which
is assigned an actual or implied "CCC-" debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
D--Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
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.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged". 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.
48
APPENDIX--CONTINUED
(UNAUDITED)
- --------------------------------------------------------------------------------
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured.) Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
NR--Not rated by Moody's.
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.
49
APPENDIX--CONTINUED
(UNAUDITED)
- --------------------------------------------------------------------------------
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. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D--Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D" represents
the lowest potential for recovery.
NR--Indicates that Fitch does not rate the specific issue.
50
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Strategic Income Fund
Class C 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 Trust Company P.O. Box 8604
Boston, Massachusetts 02266-8604
- -------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 125 Summer Street
Boston, Massachusetts 02110-1617
- -------------------------------------------------------------------------------------------
</TABLE>
51
- --------------------------------------------------------------------------------
STRATEGIC INCOME FUND
CLASS C SHARES
PROSPECTUS
A Diversified Portfolio of
Fixed Income Securities, Inc.,
an Open-End Management
Investment Company
January 31, 1995
[LOGO] FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
338319809
4031801A-C (1/95) [RECYCLED PAPER LOGO]
Strategic Income Fund
(A Portfolio of Fixed Income Securities, Inc.)
Class C Shares
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus of Class C Shares of Strategic Income Fund (the "Fund")
dated January 31, 1995. 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, 1995
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of Federated
Investors
General Information About the
Fund 1
Investment Objective and Policies 1
Types of Investments and
Investment Techniques 1
Resets of Interest 1
Caps and Floors 1
Brady Bonds 1
Non-Mortgage Related Asset-
Backed Securities 2
Convertible Securities 2
Equity Securities 2
Warrants 2
Futures and Options
Transactions 3
Foreign Currency Transactions 4
Foreign Bank Instruments 6
When-Issued and Delayed
Delivery Transactions 6
Lending of Portfolio Securities 6
Restricted and Illiquid
Securities 7
Reverse Repurchase Agreements 7
Portfolio Turnover 7
Investment Limitations 7
Fixed Income Securities, Inc.
Management 10
The Funds 13
Fund Ownership 13
Officers and Directors
Compensation 13
Director Liability 14
Investment Advisory Services 14
Adviser To The Fund 14
Advisory Fees 14
Transfer Agent and Dividend
Disbursing Agent 15
Brokerage Transactions 15
Purchasing Shares 16
Distribution and Shareholder
Services Plans 16
Conversion to Federal Funds. 16
Determining Net Asset Value 16
Determining Market Value of
Securities 16
Redeeming Shares 17
Redemption in Kind 17
Tax Status 17
The Fund's Tax Status 17
Foreign Taxes 17
Shareholders' Tax Status 17
Total Return 18
Yield 18
Performance Comparisons 18
General Information About the Fund
The Fund is a portfolio of Fixed Income Securities, Inc. (the
"Corporation"). The Corporation was incorporated under the laws of the
State of Maryland on October 15, 1991.
Investment Objective and Policies
The investment objective of the Fund is to seek a high level of current
income. The investment objective stated above cannot be changed without
approval of shareholders. The investment policies stated below may be
changed by the Board of Directors ("Directors") without shareholder
approval. Shareholders will be notified before any material change in
the investment policies becomes effective.
Types of Investments and Investment Techniques
The Fund pursues its investment objective by investing in a diversified
portfolio primarily consisting of domestic corporate debt obligations,
U.S. government securities, and foreign government and corporate debt
obligations.
Under normal circumstances, the Fund's assets will be invested in each
of these three sectors. However, the Fund may from time to time invest
up to 100% of its total assets in any one sector if, in the judgment of
the investment adviser, the Fund has the opportunity of seeking a high
level of current income without undue risk to principal.
Resets of Interest
The interest rates paid on the mortgage-backed securities in which the
Fund invests generally are readjusted at intervals of one year or less
to an increment over some predetermined interest rate index. There are
two main categories of indices: those based on U.S. Treasury securities
and those derived from a calculated measure, such as a cost of funds
index or a moving average of mortgage rates. Commonly utilized indices
include the one-year and five-year constant maturity Treasury note
rates, the three-month Treasury bill rate, the 180-day Treasury bill
rate, rates on longer-term Treasury securities, the National Median Cost
of Funds, the one-month or three-month London Interbank Offered Rate
(LIBOR), the prime rate of a specific bank, or commercial paper rates.
Some indices, such as the one-year constant maturity Treasury note rate,
closely mirror changes in market interest rate levels.
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, Adjustable Rate Mortgages ("ARMs") which use indices that lag
changes in market rates should experience greater price volatility than
adjustable rate mortgage securities that closely mirror the market.
Caps and Floors
The underlying mortgages which collateralize the mortgage-backed
securities in which the Fund invests will frequently have caps and
floors which limit the maximum amount by which the loan rate to the
residential borrower may change up or down: (1) per reset or adjustment
interval, and (2) over the life of the loan. Some residential mortgage
loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative
amortization.
The value of mortgage securities in which the Fund invests may be
affected if market interest rates rise or fall faster and farther than
the allowable caps or floors on the underlying residential mortgage
loans. Additionally, even though the interest rates on the underlying
residential mortgages are adjustable, amortization and prepayments may
occur, thereby causing the effective maturities of the mortgage
securities in which the Fund invests to be shorter than the maturities
stated in the underlying mortgages.
Brady Bonds
The Fund may invest in U.S. dollar-denominated foreign securities
referred to as "Brady Bonds." These are debt obligations of foreign
entities that may be fixed-rate par bonds or floating-rate discount
bonds and are generally collateralized in full as to principal due at
maturity by U.S. Treasury zero coupon obligations that have the same
maturity as the Brady Bonds. However, the Fund may also invest in
uncollateralized Brady Bonds. Brady Bonds are generally viewed as having
three or four valuation components: (i) any collateralized repayment of
principal at final maturity; (ii) the collateralized interest payments;
(iii) the uncollateralized interest payments; and (iv) any
uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute what is referred to as the "residual
risk" of such bonds). In the event of a default with respect to
collateralized Brady Bonds as a result of which the payment obligations
of the issuer are accelerated, the zero coupon U.S. Treasury securities
held as collateral for the payment of principal will not be distributed
to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to
be outstanding, at which time the face amount of the collateral will
equal the principal payments which would have then been due on the Brady
Bonds in the normal course. In addition, in light of the residual risk
of Brady Bonds and, among other factors, the history of defaults with
respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are to be
viewed as speculative.
Non-Mortgage Related Asset-Backed Securities
Non-mortgage related asset-backed securities present certain risks that
are not presented by mortgage-backed securities. Primarily, these
securities do not have the benefit of the same security interest in the
related collateral. Credit card receivables are generally unsecured and
the debtors are entitled to the protection of a number of state and
federal consumer credit laws, many of which give such debtors the right
to set off certain amounts owed on the credit cards, thereby reducing
the balance due. Most issuers of asset-backed securities backed by motor
vehicle installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If the
servicer sells these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders
of the related asset-backed securities. Further, if a vehicle is
registered in one state and is then re-registered because the owner and
the obligor move to another state, such re-registration could defeat the
original security interest in the vehicle in certain cases. In addition,
because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee with the
holders of asset-backed securities backed by automobile receivables may
not have a proper security interest in all of the obligations backing
such receivables. Therefore, there is a possibility that recoveries on
repossessed collateral may not, in some cases, be available to support
payments on these securities.
Convertible Securities
The Fund may invest in convertible securities. Convertible securities
are fixed income securities that may be exchanged or converted into a
predetermined number of shares of the issuer's underlying common stock
at the option of the holder during a specified period. Convertible
securities may take the form of convertible preferred stock, convertible
bonds or debentures, units consisting of "usable" bonds and warrants or
a combination of the features of several of these securities. The
investment characteristics of each convertible security vary widely,
which allows convertible securities to be employed for a variety of
investment strategies.
The Fund will exchange or convert convertible securities into shares of
underlying common stock when, in the opinion of the investment adviser,
the investment characteristics of the underlying common shares will
assist the Fund in achieving its investment objective. The Fund may also
elect to hold or trade convertible shares. In selecting convertible
securities, the Fund's investment adviser evaluates the investment
characteristics of the convertible security as a fixed income
instrument, and the investment potential of the underlying equity
security for capital appreciation. In evaluating these matters with
respect to a particular convertible security, the investment adviser
considers numerous factors, including the economic and political
outlook, the value of the security relative to other investment
alternatives, trends in the determinants of the issuer's profits, and
the issuer's management capability and practices.
Equity Securities
Generally, less than 10% of the value of the Fund's total assets will be
invested in equity securities, including common stocks, warrants or
rights. The Fund may exceed this limitation for temporary defensive
purposes if unusual market conditions occur.
Warrants
The Fund may invest in warrants. Warrants are basically options to
purchase common stock at a specific price (usually at a premium above
the market value of the optioned common stock at issuance) valid for a
specific period of time. Warrants may have a life ranging from less than
one year to twenty years, or they may be perpetual. However, most
warrants have expiration dates after which they are worthless. In
addition, a warrant is worthless if the market price of the common stock
does not exceed the warrant's exercise price during the life of the
warrant. Warrants have no voting rights, pay no dividends, and have no
rights with respect to the assets of the corporation issuing them. The
percentage increase or decrease in the market price of the warrant may
tend to be greater than the percentage increase or decrease in the
market price of the optioned common stock. The Fund will not invest more
than 5% of the value of its total assets in warrants. Warrants acquired
in units or attached to securities may be deemed to be without value for
purposes of this policy.
Futures and Options Transactions
The Fund may attempt to hedge all or a portion of its portfolio by
buying and selling financial futures contracts, buying put options on
portfolio securities and listed put options on futures contracts, and
writing call options on futures contracts. The Fund may also write
covered call options on portfolio securities to attempt to increase its
current income. The Fund currently does not intend to invest more than
5% of its total assets in options transactions.
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).
Purchasing and Writing Over-The-Counter Options
The Fund may purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the buyers or
writers of the options for those options on portfolio securities
held by the Fund and not traded on an exchange. Over-the-counter
options are two party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are
third party contracts with standardized strike prices and
expiration dates and are purchased from a clearing corporation.
Exchange-traded options have a continuous liquid market while over-
the-counter options may not.
Foreign Currency Transactions
The Fund may engage without limitation in foreign currency transactions,
including those described below.
Currency Risks
The exchange rates between the U.S. dollar and foreign currencies
are a function of such factors as supply and demand in the
currency exchange markets, international balances of payments,
governmental intervention, speculation and other economic and
political conditions. Although the Fund values its assets daily in
U.S. dollars, the Fund may not convert its holdings of foreign
currencies to U.S. dollars daily. The Fund may incur conversion
costs when it converts its holdings to another currency. Foreign
exchange dealers may realize a profit on the difference between
the price at which the Fund buys and sells currencies.
The Fund will engage in foreign currency exchange transactions in
connection with its investments in the securities. The Fund will
conduct its foreign currency exchange transactions either on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through forward contracts to purchase
or sell foreign currencies.
Forward Foreign Currency Exchange Contracts
The Fund may enter into forward foreign currency exchange
contracts in order to protect itself against a possible loss
resulting from an adverse change in the relationship between the
U.S. dollar and a foreign currency involved in an underlying
transaction. However, forward foreign currency exchange contracts
may limit potential gains which could result from a positive
change in such currency relationships. The Fund's investment
adviser believes that it is important to have the flexibility to
enter into forward foreign currency exchange contracts whenever it
determines that it is in the Fund's best interest to do so. The
Fund will not speculate in foreign currency exchange.
The Fund will not enter into forward foreign currency exchange
contracts or maintain a net exposure in such contracts when it
would be obligated to deliver an amount of foreign currency in
excess of the value of its portfolio securities or other assets
denominated in that currency or, in the case of a "cross-hedge"
denominated in a currency or currencies that the Fund's investment
adviser believes will tend to be closely correlated with that
currency with regard to price movements. Generally, the Fund will
not enter into a forward foreign currency exchange contract with a
term longer than one year.
Foreign Currency Options
A foreign currency option provides the option buyer with the right
to buy or sell a stated amount of foreign currency at the exercise
price on a specified date or during the option period. The owner
of a call option has the right, but not the obligation, to buy the
currency. Conversely, the owner of a put option has the right, but
not the obligation, to sell the currency.
When the option is exercised, the seller (i.e., writer) of the
option is obligated to fulfill the terms of the sold option.
However, either the seller or the buyer may, in the secondary
market, close its position during the option period at any time
prior to expiration.
A call option on foreign currency generally rises in value if the
underlying currency appreciates in value, and a put option on
foreign currency generally falls in value if the underlying
currency depreciates in value. Although purchasing a foreign
currency option can protect the Fund against an adverse movement
in the value of a foreign currency, the option will not limit the
movement in the value of such currency. For example, if the Fund
was holding securities denominated in a foreign currency that was
appreciating and had purchased a foreign currency put to hedge
against a decline in the value of the currency, the Fund would not
have to exercise their put option. Likewise, if the Fund were to
enter into a contract to purchase a security denominated in
foreign currency and, in conjunction with that purchase, were to
purchase a foreign currency call option to hedge against a rise in
value of the currency, and if the value of the currency instead
depreciated between the date of purchase and the settlement date,
the Fund would not have to exercise its call. Instead, the Fund
could acquire in the spot market the amount of foreign currency
needed for settlement.
Special Risks Associated with Foreign Currency Options
Buyers and sellers of foreign currency options are subject to the
same risks that apply to options generally. In addition, there are
certain additional risks associated with foreign currency options.
The markets in foreign currency options are relatively new, and
the Fund's ability to establish and close out positions on such
options is subject to the maintenance of a liquid secondary
market. Although the Fund will not purchase or write such options
unless and until, in the opinion of the Fund's investment adviser,
the market for them has developed sufficiently to ensure that the
risks in connection with such options are not greater than the
risks in connection with the underlying currency, there can be no
assurance that a liquid secondary market will exist for a
particular option at any specific time. In addition, options on
foreign currencies are affected by all of those factors that
influence foreign exchange rates and investments generally.
Foreign currency options that are considered to be illiquid are
subject to the Fund's 15% limitation on illiquid securities.
The value of a foreign currency option depends upon the value of
the underlying currency relative to the U.S. dollar. As a result,
the price of the option position may vary with changes in the
value of either or both currencies and may have no relationship to
the investment merits of a foreign security. Because foreign
currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in
the use of foreign currency options, investors may be
disadvantaged by having to deal in an odd lot market (generally
consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable
than for round lots.
There is no systematic reporting of last sale information for
foreign currencies or any regulatory requirement that quotations
available through dealers or other market sources be firm or
revised on a timely basis. Available quotation information is
generally representative of very large transactions in the
interbank market and thus may not reflect relatively smaller
transactions (i.e., less than $1 million) where rates may be less
favorable. The interbank market in foreign currencies is a global,
around-the-clock market. To the extent that the U.S. option
markets are closed while the markets for the underlying currencies
remain open, significant price and rate movements may take place
in the underlying markets that cannot be reflected in the options
markets until they reopen.
Foreign Currency Futures Transactions
By using foreign currency futures contracts and options on such
contracts, the Fund may be able to achieve many of the same
objectives as it would through the use of forward foreign currency
exchange contracts. The Fund may be able to achieve these
objectives possibly more effectively and at a lower cost by using
futures transactions instead of forward foreign currency exchange
contracts.
Special Risks Associated with Foreign Currency Futures Contracts and
Related Options
Buyers and sellers of foreign currency futures contracts are
subject to the same risks that apply to the use of futures
generally. In addition, there are risks associated with foreign
currency futures contracts and their use as a hedging device
similar to those associated with options on futures currencies, as
described above.
Options on foreign currency futures contracts may involve certain
additional risks. Trading options on foreign currency foreign
currency futures contracts is relatively new. The ability to
establish and close out positions on such options is subject to
the maintenance of a liquid secondary market. To reduce this risk,
the Fund will not purchase or write options on foreign currency
futures contracts unless and until, in the opinion of the Fund's
investment adviser, the market for such options has developed
sufficiently that the risks in connection with such options are
not greater than the risks in connection with transactions in the
underlying foreign currency futures contracts. Compared to the
purchase or sale of foreign currency futures contracts, the
purchase of call or put options on futures contracts involves less
potential risk to the Fund because the maximum amount at risk is
the premium paid for the option (plus transaction costs). However,
there may be circumstances when the purchase of a call or put
option on a futures contract would result in a loss, such as when
there is no movement in the price of the underlying currency or
futures contract.
Foreign Bank Instruments
Eurodollar Certificates of Deposit ("ECDs"), Eurodollar Time Deposits
("ETDs"), Yankee Certificates of Deposit ("Yankee CDs"), and Europaper
are subject to somewhat different risks than domestic obligations of
domestic issuers. Examples of these risks include international,
economic and political developments, foreign governmental restrictions
that may adversely affect the payment of principal or interest, foreign
withholdings or other taxes on interest income, difficulties in
obtaining or enforcing a judgment against the issuing bank, and the
possible impact of interruptions of the flow of international currency
transactions. Different risks may also exist for ECDs, ETDs, and Yankee
CDs because the banks issuing these instruments, or their domestic or
foreign branches, are not necessarily subject to the same regulatory
requirements that apply to domestic banks, such as reserve requirements,
loan requirements, loan limitations, examinations, accounting, auditing,
and recording keeping and the public availability of information. These
factors will be carefully considered by the Fund's adviser in selecting
investments for the Fund.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. 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 on the Fund's records at the trade date. These
assets are marked to market daily and are maintained until the
transaction has been settled. The Fund does not intend to engage in
when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
Lending of Portfolio Securities
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities. Loans are
subject to termination at the option of the Fund or the borrower. The
Fund may pay reasonable administrative and custodial fees in connection
with a loan and may pay a negotiated portion of the interest earned on
the cash or equivalent collateral to the borrower or placing broker.
Restricted and Illiquid Securities
The ability of the Directors to determine the liquidity of certain
restricted securities is permitted under the Securities and Exchange
Commission ("SEC") Staff position set forth in the adopting release for
Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is a
non-exclusive safe harbor for certain secondary market transactions
involving securities subject to restrictions on resale under federal
securities laws. The Rule provides an exemption from registration for
resales of otherwise restricted securities to qualified institutional
buyers. The Rule was expected to further enhance the liquidity of the
secondary market for securities eligible for resale under Rule 144A. The
Fund believes that the Staff of the SEC has left the question of
determining the liquidity of all restricted securities to the Directors.
The Directors consider the following criteria in determining the
liquidity of certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and
the number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace
trades. Repurchase Agreements
The Fund requires its custodian to take possession of the securities
subject to repurchase agreements, and these securities are marked to
market daily. To the extent that the original seller does not repurchase
the securities from the Fund, the Fund could receive less than the
repurchase price on any sale of such securities. In the event that a
defaulting seller files for bankruptcy or becomes insolvent, disposition
of securities by the Fund might be delayed pending court action. The
Fund believes that under the regular procedures normally in effect for
custody of the Fund's portfolio securities subject to repurchase
agreements, a court of competent jurisdiction would rule in favor of the
Fund and allow retention or disposition of such securities. The Fund
will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are
deemed by the Fund's adviser to be creditworthy pursuant to guidelines
established by the Directors.
Reverse Repurchase Agreements
The Fund may also enter into reverse repurchase agreements. A reverse
repurchase transaction is similar to borrowing cash. In a reverse
repurchase agreement the Fund transfers possession of a portfolio
instrument to another person, such as a financial institution, broker,
or dealer, in return for a percentage of the instrument's market value
in cash, and agrees that on a stipulated date in the future, the Fund
will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio
instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not
ensure that the Fund will be able to avoid selling portfolio instruments
at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund,
in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked
to market daily and are maintained until the transaction is settled.
Portfolio Turnover
The Fund will not attempt to set or meet a portfolio turnover rate since
any turnover would be incidental to transactions undertaken in an
attempt to achieve the Fund's investment objective, without regard to
the length of time a particular security may have been held. The adviser
does not anticipate that portfolio turnover will result in adverse tax
consequences. During the period from April 29, 1994 (date of initial
public investment), through November 30, 1994, the Fund's portfolio
turnover rate was 34%.
Investment Limitations
Selling Short and Buying on Margin
The Fund will not sell securities short or purchase securities on
margin, other than in connection with the purchase and sale of
options, financial futures and options on financial futures, but
may obtain such short-term credits as are necessary for clearance
of transactions.
Issuing Senior Securities and Borrowing Money
The Fund will not issue senior securities except as required by
forward commitments to purchase securities or currencies and
except that the Fund may borrow money and engage in reverse
repurchase agreements in amounts up to one-third of the value of
its total assets, including the amounts borrowed. The Fund will
not borrow money or engage in reverse repurchase agreements for
investment leverage, but rather as a temporary, extraordinary, or
emergency measure or to facilitate management of the portfolio by
enabling the Fund to meet redemption requests when the liquidation
of portfolio securities is deemed to be inconvenient or
disadvantageous. The Fund will not purchase any securities while
borrowings in excess of 5% of its total assets are outstanding.
During the period any reverse repurchase agreements are
outstanding, but only to the extent necessary to assure completion
of the reverse repurchase agreements, the Fund will restrict the
purchase of portfolio instruments to money market instruments
maturing on or before the expiration date of the reverse
repurchase agreements.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate any assets
except to secure permitted borrowings. In those cases, it may
pledge assets having a market value not exceeding the lesser of
the dollar amounts borrowed or 15% of the value of total assets at
the time of the borrowing. Margin deposits for the purchase and
sale of options, financial futures contracts and related options
are not deemed to be a pledge.
Diversification of Investments
With respect to securities comprising 75% of the value of its
total assets, the Fund will not purchase securities of any one
issuer (other than cash, cash items or securities issued or
guaranteed by the government of the United States or its agencies
or instrumentalities and repurchase agreements collateralized by
U.S. government securities) if as a result more than 5% of the
value of its total assets would be invested in the securities of
that issuer or the Fund would own more than 10% of the outstanding
voting securities of that issuer.
Investing in Real Estate
The Fund will not buy or sell real estate, including limited
partnership interests in real estate, although it may invest in
securities of companies whose business involves the purchase or
sale of real estate or in securities which are secured by real
estate or interests in real estate.
Investing in Commodities
The Fund will not purchase or sell commodities, except that the
Fund may purchase and sell financial futures contracts and related
options. Further, the Fund may engage in transactions in foreign
currencies and may purchase and sell options on foreign currencies
and indices for hedging purposes.
Underwriting
The Fund will not underwrite any issue of securities, except as it
may be deemed to be an underwriter under the Securities Act of
1933 in connection with the sale of restricted securities which
the Fund may purchase pursuant to its investment objective,
policies, and limitations.
Lending Cash or Securities
The Fund will not lend any of its assets, except portfolio
securities up to one-third of the value of its total assets. This
shall not prevent the Fund from purchasing or holding U.S.
government obligations, money market instruments, variable rate
demand notes, bonds, debentures, notes, certificates of
indebtedness, or other debt securities, entering into repurchase
agreements, or engaging in other transactions where permitted by
the Fund's investment objective, policies and limitations.
Concentration of Investments
The Fund will not invest 25% or more of the value of its total
assets in any one industry or in government securities of any one
foreign country, except it may invest 25% or more of the value of
its total assets in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the
Directors without shareholder approval. Shareholders will be notified
before any material change in these limitations becomes effective.
Investing in Restricted Securities
The Fund will not invest more than 10% of the value of its total
assets in securities subject to restrictions on resale under the
Securities Act of 1933, except for commercial paper issued under
Section 4(2) of the Securities Act of 1933 and certain other
restricted securities which meet the criteria for liquidity as
established by the Directors.
Investing in Illiquid Securities
The Fund will not invest more than 15% of the value of its net
assets in illiquid securities, including repurchase agreements
providing for settlement in more than seven days after notice,
over-the-counter options, certain foreign currency options, and
certain securities not determined by the Directors to be liquid.
Investing in New Issuers
The Fund will not invest more than 5% of the value of its total
assets in securities of companies, including their predecessors,
that have been in operation for less than three years. With
respect to asset-backed securities, the Fund will treat the
originator of the asset pool as the company issuing the security
for purposes of determining compliance with this limitation.
Investing in Minerals
The Fund will not purchase or sell oil, gas, or other mineral
exploration or development programs or leases, although it may
purchase the securities of issuers which invest in or sponsor such
programs.
Investing in Warrants
The Fund will not invest more than 5% of its net assets in
warrants, including those acquired in units or attached to other
securities. To comply with certain state restrictions, the Fund
will limit its investments in such warrants not listed on the New
York or American Stock Exchanges to 2% of its net assets. (If
state restrictions change, this latter restriction may be revised
without notice to shareholder.) For purposes of this investment
restriction, warrants will be valued at the lower of cost or
market, except that warrants acquired by the Fund in units with or
attached to securities may be deemed to be without value.
Investing in Securities of Other Investment Companies
The Fund will limit its investments in other investment companies
to no more than 3% of the total outstanding voting securities of
any such investment company, will invest no more than 5% of its
total assets in any one investment company, and will invest no
more than 10% of its total assets in investment companies in
general. These limitations are not applicable if the securities
are acquired as part of a merger, consolidation, reorganization,
or other acquisition.
Dealing in Puts and Calls
The Fund may not write or purchase options, except that the Fund
may write covered call options and secured put options on up to
25% of its net assets and may purchase put and call options,
provided that no more than 5% of the fair market value of its net
assets may be invested in premiums on such options.
Investing in Issuers Whose Securities are Owned by Officers and
Directors of the Corporation
The Fund will not purchase or retain the securities of any issuer
if the officers and Directors of the Corporation or its investment
adviser owning individually more than 1/2 of 1% of the issuer's
securities together own more than 5% of the issuer's securities.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of the investment, a later increase or decrease
in percentage resulting from any change in value or net assets will not
result in a violation of such restriction. For purposes of its policies
and limitations, the Fund considers certificates of deposit and demand
and time deposits issued by a U.S. branch of a domestic bank or savings
association having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items."
The Fund does not expect to borrow money or pledge securities in excess
of 5% of the value of its total assets during the present fiscal year.
Fixed Income Securities, Inc. Management
Officers and Directors are listed with their addresses, present
positions with Fixed Income Securities, Inc., and principal
occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Chairman and Director
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life
and Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, Vice President of the Company.
Thomas G. Bigley
28th Floor, One Oxford Center
Pittsburgh, PA
Director
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee, or Managing General Partner
of the Funds; formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Director
President, Investment Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors; President, Northgate
Village Development Corporation; Partner or Trustee in private real
estate ventures in Southwest Florida; Director, Trustee, or Managing
General Partner of the Funds; formerly, President, Naples Property
Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Director
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Director,
Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Director
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; Professor of Medicine and Trustee, University of Pittsburgh;
Director of Corporate Health, University of Pittsburgh Medical Center;
Director, Trustee, or Managing General Partner of the Funds.
Richard B. Fisher *
Federated Investors Tower
Pittsburgh, PA
President and Director
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.
Edward L. Flaherty, Jr.@
Two Gateway Center - Suite 674
Pittsburgh, PA
Director
Attorney-at-law; Partner, Henny, Koehuba, Meyer & Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.
Peter E. Madden
225 Franklin Street
Boston, MA
Director
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds; formerly,
President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Two Gateway Center - Suite 674
Pittsburgh, PA
Director
Attorney-at-law; Partner, Henny, Koehuba, Meyer & Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Director
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Director
Public relations/marketing consultant; Director, Trustee, or Managing
General Partner of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Vice President
President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and Director,
Federated Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; 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 Company.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.
* This Director is deemed to be an "interested person" as defined
in the Investment Company Act of 1940, as amended.
@ Member of the 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:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Cash Management Trust; Automated Government Money Trust;
California Municipal Cash Trust; Cash Trust Series II; Cash Trust
Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport
Cash Trust; 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 Institutional
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; International Series, Inc.; Investment Series Funds,
Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.;
Liberty U.S. Government Money Market Trust; Liberty Term Trust, Inc. -
1999; Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed Series
Trust; The Medalist Funds; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income
Trust; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; Newpoint Funds; RIMCO Monument Funds; The
Shawmut Funds; Short-Term Municipal Trust; Star Funds; The Starburst
Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; Trademark
Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for
U.S. Treasury Obligations; World Investment Series, Inc.
Fund Ownership
Officers and Directors own less than 1% of the outstanding Class C
Shares (the"Shares") of the Fund.
As of January 11, 1995, the following shareholders of record owned 5% or
more of the outstanding Class C Shares of the Fund: Joseph J. Dinnigan
and Dorothy F. Dinnigan, Yaphank, New York, owned approximately 6,531
shares (5.19%), and State Street Bank and Trust Company, custodian for
the IRA rollover of Jules Nitzberg, Jenkintown, Pennsylvania, owned
approximately 7,266 shares (5.77%).
As of January 11, 1995, Merrill Lynch, Pierce, Fenner & Smith,
Jacksonville, Florida, as record owner holding Class A Shares of the
Fund for its clients, owned approximately 21, 665 shares (8.07%).
As of January 11, 1995, Merrill Lynch, Pierce, Fenner & Smith,
Jacksonville, Florida, as record owner holding Fortress Shares of the
Fund for its clients, owned approximately 111,498 shares (41.54%).
Officers and Directors Compensation
NAME , AGGREGATE TOTAL COMPENSATION
PAID
POSITION WITH COMPENSATION FROM TO DIRECTORS FROM
CORPORATION *CORPORATION CORPORATION AND FUND
COMPLEX
John F. Donahue,
Chairman and Director $ -0- $ -0- for the
Corporation and
69 investment
companies
Thomas G. Bigley,
Director $ 131.00 $ 24,991 for the
Corporation and
50 investment
companies
John T. Conroy, Jr.,
Director $ 1,501.75 $ 136,100 for the
Corporation and
65 investment
companies
William J. Copeland,
Director $ 1,501.75 $ 136,100 for the
Corporation and
65 investment
companies
James E. Dowd,
Director $ 1,501.75 $ 136,100 for the
Corporation and
65 investment
companies
Lawrence D. Ellis, M.D.,
Director $ 1,362.50 $ 123,600 for the
Corporation and
65 investment
companies
Richard B. Fisher,
President and Director $ -0- $ -0- for the
Corporation and
9 investment
companies
Edward L. Flaherty, Jr.,
Director $ 1,501.75 $ 136,100 for the
Corporation and
65 investment
companies
Peter E. Madden,
Director $ 1,153.50 $ 104,880 for the
Corporation and
65 investment
companies
Gregor F. Meyer,
Director $ 1,362.50 $ 123,600 for the
Corporation and
65 investment
companies
Wesley W. Posvar,
Director $ 1,362.50 $ 123,600 for the
Corporation and
65 investment
companies
Marjorie P. Smuts,
Director $ 1,362.50 $ 123,600 for the
Corporation and
65 investment
companies
* The aggregate compensation is provided for the Corporation which is
comprised of 4 portfolios.
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.
Advisory Fees
For its advisory services, Federated Advisers receives an annual
investment advisory fee as described in the prospectus.
During the period from April 29, 1994 (date of initial public
investment), through November 30, 1994, the Adviser earned $15,014, all
of which was voluntarily waived.
State Expense Limitations
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose
shares are registered for sale in those states. If the Fund's
normal operating expenses (including the investment advisory fee,
but not including brokerage commissions, interest, taxes, and
extraordinary expenses) exceed 2-1/2% per year of the first $30
million of average net assets, 2% per year of the next $70 million
of average net assets, and 1-1/2% per year of the remaining
average net assets, the Adviser will reimburse the Fund for its
expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
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.
Administrative Services
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. During the period from April 29, 1994
(date of initial public investment), through November 30, 1994, $61,836
in fees were paid to Federated Administrative Services.
Dr. Henry J. Gailliot, an officer of Federated Advisers, the adviser to
the Fund, holds approximately 20% of the outstanding common stock and
serves as a director of Commercial Data Services, Inc., a company which
provides computer processing services to Federated Administrative
Services.
Transfer Agent and Dividend Disbursing Agent
Federated Services Company serves as transfer agent and dividend
disbursing agent for the Fund. The fee paid to the transfer agent is
based upon the size, type and number of accounts and transactions made
by shareholders.
Federated Services Company also maintains the Fund's accounting records.
The fee paid for this service is based upon the level of the Fund's
average net assets for the period plus out-of-pocket expenses.
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:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o 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.
For the fiscal year ended November 30, 1994, the Fund paid no brokerage
commissions on brokerage transactions.
Purchasing Shares
Except under certain circumstances described in the prospectus, Shares
are sold at their net asset value on days the New York Stock Exchange is
open for business. The procedure for purchasing Shares is explained in
the prospectus under "Investing in Class C Shares."
Distribution and Shareholder Services Plans
These arrangements permit the payment of fees to financial institutions,
the distributor, and Federated Shareholder Services, to stimulate
distribution activities and to cause services to be provided to
shareholders by a representative who has knowledge of the shareholder's
particular circumstances and goals. These activities and services may
include, but are not limited to, marketing efforts; providing office
space, equipment, telephone facilities, and various clerical,
supervisory, computer, and other personnel as necessary or beneficial to
establish and maintain shareholder accounts and records; processing
purchase and redemption transactions and automatic investments of client
account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and
addresses.
By adopting the Distribution Plan, the Board of Directors expects that
the Fund will be able to achieve a more predictable flow of cash for
investment purposes and to meet redemptions. This will facilitate more
efficient portfolio management and assist the Fund in pursuing its
investment objectives. By identifying potential investors whose needs
are served by the Fund's objectives, and properly servicing these
accounts, it may be possible to curb sharp fluctuations in rates of
redemptions and sales.
Other benefits, which may be realized under either arrangement, may
include: (1) providing personal services to shareholders; (2) investing
shareholder assets with a minimum of delay and administrative detail;
(3) enhancing shareholder recordkeeping systems; and (4) responding
promptly to shareholders' requests and inquiries concerning their
accounts.
During the period from April 29, 1994 (date of initial public
investment), through November 30, 1994, payment in the amount of $2,606
was made pursuant to the Distribution Plan for Class C Shares. In
addition, payment in the amount of $869 was made pursuant to the
Shareholder Services Plan for Class C Shares.
During the period from May 9, 1994 (date of initial public investment),
through November 30, 1994, payment in the amount of $2,902 was made
pursuant to the Distribution Plan for Fortress Shares. In addition,
payment in the amount of $1,451 was made pursuant to the Shareholder
Services Plan for Fortress Shares.
During the period from May 3, 1994 (date of initial public investment)
through November 30, 1994, payment in the amount of $2,096 was made
pursuant to the Shareholder Services Plan for Class A Shares.
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from
shareholders must be in federal funds or be converted into federal funds
before shareholders begin to earn dividends. State Street Bank and Trust
Company ("State Street Bank") acts as the shareholder's agent in
depositing checks and converting them to federal funds. Orders by mail
are considered received after payment by check is converted by State
Street Bank into federal funds. This is generally the next business day
after State Street Bank receives the check.
Determining Net Asset Value
Net asset value generally changes each day. The days on which net asset
value is calculated by the Fund are described in the prospectus.
Determining Market Value of Securities
Market values of the Fund's securities are determined as follows:
o as provided by an independent pricing service;
o 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
o 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:
o yield;
o quality;
o coupon rate;
o maturity;
o type of issue;
o trading characteristics; and
o other market data.
Redeeming Shares
The Fund redeems Shares at the next computed net asset value after the
Fund receives the redemption request. Shareholder redemptions may be
subject to a contingent deferred sales charge. Redemption procedures are
explained in the prospectus under "Redeeming Class C Shares." Although
the Fund does not charge for telephone redemptions, it reserves the
right to charge a fee for the cost of wire-transferred redemptions of
less than $5,000.
Redemption in Kind
The Corporation is obligated to redeem Shares solely in cash up to
$250,000 or 1% of the Fund's net asset value, whichever is less, for any
one shareholder within a 90-day period.
Any redemption beyond this amount will also be in cash unless the
Directors determine that payments should be in kind. In such a case, the
Fund will pay all or a portion of the remainder of the redemption in
portfolio instruments, valued in the same way that net asset value is
determined. The portfolio instruments will be selected in a manner that
the Directors deem fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption
is made in kind, shareholders receiving their securities and selling
them before their maturity could receive less than the redemption value
of their securities and could incur certain transaction costs.
Tax Status
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, the Fund
must, among other requirements:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
Foreign Taxes
Investment income on certain foreign securities in which the Fund may
invest may be subject to foreign withholding or other taxes that could
reduce the return on these securities. Tax treaties between the United
States and foreign countries, however, may reduce or eliminate the
amount of foreign taxes to which the Fund would be subject.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional Shares. No portion of any income
dividend paid by the Fund is eligible for the dividends received
deduction available to corporations.
Capital Gains
Shareholders will pay federal tax at capital gains rates on long-
term capital gains distributed to them regardless of how long they
have held the Shares.
Total Return
The Class C Shares' cumulative total return from April 29, 1994 (date of
initial public investment), through
November 30, 1994, was (1.46%). The Class A Shares' cumulative total
return from May 3, 1994 (date of initial public investment), through
November 30, 1994, was (4.45%). The Fortress Shares' cumulative total
return from May 9, 1994 (date of initial public investment), through
November 30, 1994, was (2.22%). Cumulative total return reflects the
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 any contingent deferred sales charge. The Shares' cumulative total
return is representative of approximately eight months of Fund activity
since the Shares' date of initial public investment.
The average annual total return for the Shares is the average compounded
rate of return for a given period that would equate a $1,000 initial
investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of Shares owned
at the end of the period by the offering price per Share at the end of
the period. The number of Shares owned at the end of the period is based
on the number of Shares purchased at the beginning of the period with
$1,000, adjusted over the period by any additional Shares, assuming the
monthly reinvestment of all dividends and distributions. Any applicable
contingent deferred sales charge is deducted from the ending value of
the investment based on the lesser of the original purchase price or the
net asset value of the Shares redeemed.
Yield
The yield for Class C Shares, Class A Shares and Fortress Shares for the
thirty-day period ended November 30, 1994, was 8.43%, 8.78% and 8.59%,
respectively.
The yield of the Shares is determined by dividing the net investment
income per Share (as defined by the Securities and Exchange Commission)
earned by the Fund over a thirty-day period by the offering price per
Share on the last day of the period. This value is annualized using semi-
annual compounding. This means that the amount of income generated
during the thirty-day period is assumed to be generated each month over
a 12-month period and is reinvested every six months. The yield does not
necessarily reflect income actually earned by the Fund because of
certain adjustments required by the Securities and Exchange Commission
and, therefore, may not correlate to the dividends or other
distributions paid to shareholders. To the extent that financial
institutions and broker/dealers charge fees in connection with services
provided in conjunction with an investment in the Fund, performance will
be reduced for those shareholders paying those fees.
Performance Comparisons
The performance of Shares depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio
securities;
o changes in the Fund expenses; and
o various other factors.
The performance of Shares fluctuates on a daily basis largely because
net earnings and offering price per Share fluctuate daily. Both net
earnings and offering price per Share are factors in the computation of
yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the performance of Shares. When comparing performance,
investors should consider all relevant factors such as the composition
of any index used, prevailing market conditions, portfolio compositions
of other funds, and methods used to value portfolio securities and
compute net asset value. The financial publications and/or indices which
the Fund uses in advertising may include:
o Lipper Analytical Services, Inc. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any
change in offering price over a specific period of time. From time
to time, the Fund will quote its Lipper ranking in the "General
Bond Funds" category in advertising and sales literature.
o Lehman Brothers Government/Corporate Bond Index is comprised of
approximately 5,000 issues which include non-convertible bonds
publicly issued by the U.S. government or its agencies; corporate
bonds guaranteed by the U.S. government and quasi-federal
corporations; and publicly issued, fixed rate, non-convertible
domestic bonds of companies in industry, public utilities, and
finance. The average maturity of these bonds approximates nine
years. Tracked by Lehman Brothers, Inc., the index calculates
total returns for one-month, three-month, twelve-month, and ten-
year periods and year-to-date.
o 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 Shares may quote total
returns which are calculated on non-standardized base periods. These
total returns represent the historic change in the value of an
investment in Shares based on monthly reinvestment of dividends over a
specified period of time.
Advertisements may quote performance information which does not reflect
the effect of the contingent deferred sales charge.
338319809
4031801B-C (1/95)
- --------------------------------------------------------------------------------
STRATEGIC INCOME FUND
(A PORTFOLIO OF FIXED INCOME SECURITIES, INC.)
FORTRESS SHARES
PROSPECTUS
The Fortress Shares offered by this prospectus represent interests in
Strategic Income Fund (the "Fund"), a diversified investment portfolio
of Fixed Income Securities, Inc. (the "Corporation"), an open-end,
management investment company (a mutual fund).
The investment objective of the Fund is to seek a high level of
current income. The Fund invests in domestic corporate debt
obligations, U.S. government securities, and foreign government and
corporate debt obligations.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS
OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE
SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This prospectus contains the information you should read and know
before you invest in Fortress Shares. Keep this prospectus for future
reference.
SPECIAL RISKS
FROM TIME TO TIME, THE FUND'S PORTFOLIO MAY CONSIST PRIMARILY OF
LOWER-RATED CORPORATE DEBT OBLIGATIONS, WHICH ARE COMMONLY REFERRED TO
AS "JUNK BONDS." THESE LOWER-RATED BONDS MAY BE MORE SUSCEPTIBLE TO
REAL OR PERCEIVED ADVERSE ECONOMIC CONDITIONS THAN INVESTMENT GRADE
BONDS. THESE LOWER-RATED BONDS ARE REGARDED AS PREDOMINANTLY
SPECULATIVE WITH REGARD TO EACH ISSUER'S CONTINUING ABILITY TO MAKE
PRINCIPAL AND INTEREST PAYMENTS. IN ADDITION, THE SECONDARY TRADING
MARKET FOR LOWER-RATED BONDS MAY BE LESS LIQUID THAT THE MARKET FOR
INVESTMENT GRADE BONDS. PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS
ASSOCIATED WITH AN INVESTMENT IN FORTRESS SHARES.
The Fund's investment adviser will endeavor to limit these risks
through diversifying the portfolio and through careful credit analysis
of individual issuers.
The Fund has filed a Statement of Additional Information for Fortress
Shares dated January 31, 1995 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, 1995
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
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
Investment Limitations 17
NET ASSET VALUE 17
- ---------------------------------------------------
INVESTING IN FORTRESS SHARES 18
- ---------------------------------------------------
Share Purchases 18
Minimum Investment Required 19
What Shares Cost 19
Eliminating the Sales Load 19
Systematic Investment Program 21
Exchange Privilege 21
Certificates and Confirmations 21
Dividends and Distributions 21
Retirement Plans 21
REDEEMING FORTRESS SHARES 22
- ---------------------------------------------------
Through a Financial Institution 22
Directly From the Fund 22
Contingent Deferred Sales Charge 23
Systematic Withdrawal Program 24
Accounts with Low Balances 24
Exchanges for Shares of Other Funds 25
FIXED INCOME SECURITIES, INC.
INFORMATION 25
- ---------------------------------------------------
Management of the Corporation 25
Distribution of Fortress Shares 26
Administration of the Fund 27
Expenses of the Fund and Fortress
Shares 28
SHAREHOLDER INFORMATION 29
- ---------------------------------------------------
Voting Rights 29
TAX INFORMATION 29
- ---------------------------------------------------
Federal Income Tax 29
Pennsylvania Corporate and Personal
Property Taxes 29
PERFORMANCE INFORMATION 30
- ---------------------------------------------------
OTHER CLASSES OF SHARES 30
- ---------------------------------------------------
Financial Highlights--Class A Shares 31
Financial Highlights--Class C Shares 32
FINANCIAL STATEMENTS 33
- ---------------------------------------------------
INDEPENDENT AUDITORS' REPORT 48
- ---------------------------------------------------
APPENDIX 49
- ---------------------------------------------------
ADDRESSES 52
- ---------------------------------------------------
</TABLE>
I
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FORTRESS 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
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption
proceeds, as applicable) (1).................................................................... 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)................................ None
Exchange Fee...................................................................................... None
<CAPTION>
ANNUAL FORTRESS SHARES OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver) (2)................................................................. 0.00%
12b-1 Fee......................................................................................... 0.50%
Total Other Expenses (after expense reimbursement)................................................ 1.35%
Shareholder Services Fee............................................................. 0.25%
Total Fortress Shares Operating Expenses (3).............................................. 1.85%
<FN>
(1) The contingent deferred sales charge assessed is 1.00% of the lesser of the
original purchase price or the net asset value of shares redeemed within
four years of their purchase price.
(2) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The advisor can terminate this voluntary waiver at any time
at its sole discretion. The maximum management fee is 0.85%.
(3) The total Fortress Shares operating expenses in the table above are based
on expenses expected during the fiscal year ending November 30, 1995. The
total Fortress Shares operating expenses were 0.75% for the fiscal year
ended November 30, 1994, and would have been 9.62% absent the voluntary
waiver of the management fee and the voluntary reimbursement of certain
other operating expenses.
</TABLE>
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 ecomonic 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............................. $39 $78
You would pay the following expenses on the same investment, assuming no redemption.. $29 $68
</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
Fortress Shares of the Fund. The Fund also offers two additional classes of
shares called Class A Shares and Class C Shares. Class A Shares, Class C Shares
and Fortress Shares are subject to certain of the same expenses. However, Class
A Shares are subject to a maximum sales load of 4.50%, but are not subject to a
12b-1 fee, however, may be subject to a contingent deferred sales charge. Class
C Shares are subject to a 12b-1 fee of 0.75% and a contingent deferred sales
charge of 1.00%, but are not subject to a sales load. See "Other Classes of
Shares."
1
STRATEGIC INCOME FUND
FINANCIAL HIGHLIGHTS--FORTRESS SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Independent Auditors' report on page 48.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1994*
- ---------------------------------------------------------------------- --------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- ----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------
Net investment income 0.41
- ----------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and foreign
currency (0.44)
- ---------------------------------------------------------------------- --------------
Total from investment operations (0.03)
- ----------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------
Dividends to shareholders from net investment income (0.41)
- ----------------------------------------------------------------------
Distributions in excess of net investment income (a) (0.02)
- ---------------------------------------------------------------------- --------------
Total distributions (0.43)
- ----------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.54
- ---------------------------------------------------------------------- --------------
TOTAL RETURN** (0.19%)
- ----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------
Expenses 0.75%(c)
- ----------------------------------------------------------------------
Net investment income 8.34%(c)
- ----------------------------------------------------------------------
Expense waiver/reimbursement (b) 8.87%(c)
- ----------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------
Net assets, end of period (000 omitted) $2,326
- ----------------------------------------------------------------------
Portfolio turnover rate 34%
- ----------------------------------------------------------------------
<FN>
* For the period from May 9, 1994 (date of initial public investment) to
November 30, 1994.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Computed on an annualized basis.
</TABLE>
(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 for the fiscal year ended November 30, 1994, which can be obtained
free of charge.
2
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Corporation was incorporated under the laws of the State of Maryland on
October 15, 1991. The Articles of Incorporation permit the Corporation to offer
separate portfolios and classes of shares. As of the date of this Prospectus,
the Board of Directors (the "Directors") has established three separate
portfolios: Strategic Income Fund, Limited Term Fund and Limited Term Municipal
Fund. With respect to the Fund, the Directors have established three classes of
shares known as Fortress Shares, Class A Shares and Class C Shares. This
Prospectus relates only to the Fortress Shares class of the Fund (the "Shares").
The Fund is designed for investors seeking high current income through a
professionally managed, diversified portfolio investing primarily in domestic
corporate debt obligations, U.S. government securities, and foreign government
and corporate debt obligations. A minimum initial investment of $1,500 over a
90-day period is required, unless the investment is in a retirement account in
which case the minimum investment is $50.
Shares are sold at net asset value plus an applicable sales load 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:
- American Leaders Fund, Inc., providing growth of capital and income
through high-quality stocks;
- California Municipal Income Fund, 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;
3
- Government Income Securities, Inc., providing current income through
long-term U.S. government securities;
- Liberty Equity Income Fund, Inc., providing above-average income and
capital appreciation through income producing equity securities;
- Limited Term Fund, providing a high level of current income consistent
with minimum fluctuation in principal value;
- Limited Term Municipal Fund, 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, providing current income exempt from
federal regular income tax, New York personal income taxes, and New York
City income taxes;
- Ohio Municipal Income Fund, providing current income exempt from federal
regular income tax and Ohio personal income taxes; and
- World Utility Fund, providing total return by investing primarily in
securities issued by domestic and foreign companies in the utilities
industry.
Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.
The Fortress Investment Program provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles, and by providing
the investment services of proven, professional investment advisers.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek a high level of current income.
The investment objective cannot be changed without approval of shareholders.
While there is no assurance that the Fund will achieve its investment objective,
it endeavors to do so by following the investment policies described in this
prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing in a diversified
portfolio primarily consisting of domestic corporate debt obligations, U.S.
government securities, and foreign government and corporate debt obligations.
Under normal circumstances, the Fund's assets will be invested in each of these
three sectors. However, the Fund may from time to time invest up to 100% of its
total assets in any one sector if, in the judgment of the investment adviser,
the Fund has the opportunity of seeking a high level of current income without
undue risk to principal. Accordingly, the Fund's investments
4
should be considered speculative. Distributable income will fluctuate as the
Fund shifts assets among the three sectors.
There will be no limit to the weighted average maturity of the portfolio. It
will generally be of longer duration. Duration is a commonly used measure of the
potential volatility of the price of a debt security, or the aggregate market
value of a portfolio of debt securities, prior to maturity. Securities with
longer durations generally have more volatile prices than securities of
comparable quality with shorter durations.
Unless indicated otherwise, the Fund's investment policies may be changed by the
Directors without the approval of shareholders. Shareholders will be notified
before any material change in these investment policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests primarily in a professionally managed,
diversified portfolio consisting of domestic corporate debt obligations, U.S.
government securities, and foreign government and corporate debt obligations.
The Fund also may invest in debt securities issued by domestic and foreign
utilities, as well as money market instruments and other temporary investments.
The securities in which the Fund invests principally are:
- securities issued or guaranteed as to principal and interest by the U.S.
government, its agencies or instrumentalities;
- domestic corporate debt obligations, some of which may include equity
features; and
- debt obligations issued by foreign governments and corporations.
The allocation of investments across these three principal types of securities
at any given time is based upon the adviser's estimate of expected performance
and risk of each type of investment. In order to benefit from the typical low
correlation of these three types of securities, the Fund will typically invest a
portion of its assets in each category. However, from time to time, the adviser
may change the allocation based upon its evaluation of the marketplace.
The Fund may invest in debt securities of any maturity. The prices of fixed
income securities fluctuate inversely to the direction of interest rates.
U.S. GOVERNMENT SECURITIES. The U.S. government securities in which the Fund
invests are either issued or guaranteed by the U.S. government, its agencies or
instrumentalities. The U.S. government securities in which the Fund invests
principally are:
- direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes and bonds; and
- obligations of U.S. government agencies or instrumentalities, such as
Federal Home Loan Banks; Federal National Mortgage Association; Government
National Mortgage Association; Farm Credit System, including the National
Bank for Cooperatives, Farm Credit Banks, and Banks for Cooperatives;
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.
5
The government securities in which the Fund may invest are backed in a variety
of ways by the U.S. government or its agencies or instrumentalities. Some of
these securities, such as Government National Mortgage Association ("GNMA")
mortgage-backed securities, are backed by the full faith and credit of the U.S.
government. Other securities, such as obligations of the Federal National
Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation
("FHLMC"), are backed by the credit of the agency or instrumentality issuing the
obligations but not the full faith and credit of the U.S. government. No
assurances can be given that the U.S. government will provide financial support
to these other agencies or instrumentalities, because it is not obligated to do
so.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are securities that
directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans on real property. The mortgage-backed
securities in which the Fund may invest may be issued by an agency of the
U.S. government, typically GNMA, FNMA or FHLMC.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES. Collateralized mortgage obligations ("CMOs") are debt
obligations collateralized by mortgage loans or mortgage pass-through
securities. Typically, CMOs are collateralized by GNMA, FNMA or FHLMC
certificates, but also may be collateralized by whole loans or private
pass-through securities (such collateral being called "Mortgage Assets").
Multiclass pass-through securities are equity interests in a trust composed
of Mortgage Assets. Payments of principal of and interest on the Mortgage
Assets, and any reinvestment income, provide the funds to pay debt service
on the CMOs or make scheduled distributions on the multiclass pass-through
securities. CMOs may be issued by agencies or instrumentalities of the U.S.
government, or by private originators of, or investors in, mortgage loans,
including savings associations, mortgage banks, commercial banks, investment
banks and special purpose subsidiaries of the foregoing. The issuer of a
series of CMOs may elect to be treated as a real estate mortgage investment
conduit, which has certain special tax attributes.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a
specific fixed or floating rate of interest and has a stated maturity or
final distribution date. Principal prepayment on the Mortgage Assets may
cause the CMOs to be retired substantially earlier than their stated
maturities or final distribution dates. Interest is paid or accrues on all
classes of the CMOs on a monthly, quarterly or semi-annual basis. The
principal of and interest on the Mortgage Assets may be allocated among the
several classes of a series of a CMO in innumerable ways. In one structure,
payments of principal, including any principal prepayments, on the Mortgage
Assets are applied to the classes of a CMO in the order of their respective
stated maturities or final distribution dates, so that no payment of
principal will be made on any class of CMOs until all other classes having
an earlier stated maturity or final distribution date have been paid in
full.
CMOs that include a class bearing a floating rate of interest also may
include a class whose yield floats inversely against a specified index rate.
These "inverse floaters" are more volatile than conventional fixed or
floating rate classes of a CMO and the yield thereon, as well as the value
thereof, will fluctuate in inverse proportion to changes in the index on
which interest rate adjustments are based. As a result, the yield on an
inverse floater class of a CMO will generally
6
increase when market yields (as reflected by the index) decrease and
decrease when market yields increase. The extent of the volatility of
inverse floaters depends on the extent of anticipated changes in market
rates of interest. Generally, inverse floaters provide for interest rate
adjustments based upon a multiple of the specified interest index, which
further increases their volatility. The degree of additional volatility will
be directly proportional to the size of the multiple used in determining
interest rate adjustments.
The Fund may also invest in, among others, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other
CMO structures, must be retired by its stated maturity date or final
distribution date but may be retired earlier. PAC Bonds generally require
payments of a specified amount of principal on each payment date. PAC Bonds
are always parallel pay CMOs with the required principal payment on such
securities having the highest priority after interest has been paid to all
classes.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs are offerings
of multiple class real estate mortgage-backed securities which qualify and
elect treatment as such under provisions of the Internal Revenue Code.
Issuers of REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of mortgages. Once REMIC
status is elected and obtained, the entity is not subject to federal income
taxation. Instead, income is passed through the entity and is taxed to the
person or persons who hold interests in the REMIC. A REMIC interest must
consist of one or more classes of "regular interests," some of which may
offer adjustable rates of interest (the type in which the Fund primarily
invests), and a single class of "residual interests." To qualify as a REMIC,
substantially all the assets of the entity must be in assets directly or
indirectly secured principally by real property.
CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES. Mortgage-backed securities
have yield and maturity characteristics corresponding to the underlying
mortgages. Distributions to holders of mortgage-backed securities include
both interest and principal of the underlying mortgages and any prepayments
of principal due to prepayment, refinancing, or foreclosure of the
underlying mortgages. Although maturities of the underlying mortgage loans
may range up to 30 years, amortization and prepayments substantially shorten
the effective maturities of mortgage-backed securities. Due to these
features, mortgage-backed securities are less effective as a means of
"locking in" attractive long-term interest rates than fixed-income
securities which pay only a stated amount of interest until maturity, when
the entire principal amount is returned. This is caused by the need to
reinvest at lower interest rates both distributions of principal generally
and significant prepayments which become more likely as mortgage interest
rates decline. Since comparatively high interest rates cannot be effectively
"locked in," mortgage-backed securities may have less potential for capital
appreciation during periods of declining interest rates than other
non-callable fixed-income government securities of comparable stated
maturities. However, mortgage-backed securities may experience less
pronounced declines in value during periods of rising interest rates.
7
Prepayments may result in a capital loss to the Fund to the extent that the
prepaid mortgage securities were purchased at a market premium over their
stated amount. Conversely, the prepayment of mortgage securities purchased
at a market discount from their stated principal amount will accelerate the
recognition of interest income by the Fund, which would be taxed as ordinary
income when distributed to the shareholders.
Some of the CMOs purchased by the Fund may represent an interest solely in
the principal repayments or solely in the interest payments on
mortgage-backed securities. Due to the possibility of prepayments on the
underlying mortgages, these securities may be more interest-rate sensitive
than other securities purchased by the Fund. If prevailing interest rates
fall below the level at which the securities were issued, there may be
substantial prepayments on the underlying mortgages, leading to the
relatively early prepayments of principal-only securities and a reduction in
the amount of payments made to holders of interest-only securities. It is
possible that the Fund might not recover its original investment in
interest-only securities if there are substantial prepayments on the
underlying mortgages. Therefore, interest-only securities generally increase
in value as interest rates rise and decrease in value as interest rates
fall, counter to changes in value experienced by most fixed-income
securities. The Fund's adviser intends to use this characteristic of
interest-only securities to reduce the effects of interest rate changes on
the value of the Fund's portfolio, while continuing to pursue current
income.
CORPORATE BONDS AND OTHER FIXED-INCOME OBLIGATIONS. The Fund may invest in both
investment grade and non-investment grade (lower-rated) bonds (which may be
denominated in U.S. dollars or non-U.S. currencies) and other fixed-income
obligations issued by domestic and foreign corporations and other private
issuers. There are no minimum rating requirements for these investments by the
Fund. The Fund's investments may include U.S. dollar-denominated debt
obligations known as "Brady Bonds," which are issued for the exchange of
existing commercial bank loans to foreign entities for new obligations that are
generally collateralized by zero coupon Treasury securities having the same
maturity. From time to time, the Fund's portfolio may consist primarily of
lower-rated (i.e., rated Ba or lower by Moody's Investors Service, Inc.
("Moody's"), or BB or lower by Standard & Poor's Ratings Group ("Standard &
Poor's") or Fitch Investors Service, Inc. ("Fitch")) corporate debt obligations,
which are commonly referred to as "junk bonds." A description of the rating
categories is contained in the Appendix to this Prospectus. Certain fixed-income
obligations in which the Fund invests may involve equity characteristics. The
Fund may, for example, invest in unit offerings that combine fixed-income
securities and common stock equivalents such as warrants, rights and options. It
is anticipated that the majority of the value attributable to the unit will
relate to its fixed-income component.
FLOATING RATE CORPORATE DEBT OBLIGATIONS. The Fund expects to invest in
floating rate corporate debt obligations, including increasing rate
securities. Floating rate securities are generally offered at an initial
interest rate which is at or above prevailing market rates. The interest
rate paid on these securities is then reset periodically (commonly every 90
days) to an increment over some predetermined interest rate index. Commonly
utilized indices include the three-month Treasury bill rate, the 180-day
Treasury bill rate, the one-month or three-month London Interbank Offered
Rate (LIBOR), the prime rate of a bank, the commercial paper rates, or the
longer-term rates on U.S. Treasury securities.
8
FIXED RATE CORPORATE DEBT OBLIGATIONS. The Fund will also invest in fixed
rate securities. Fixed rate securities tend to exhibit more price volatility
during times of rising or falling interest rates than securities with
floating rates of interest. This is because floating rate securities, as
described above, behave like short-term instruments in that the rate of
interest they pay is subject to periodic adjustments based on a designated
interest rate index. Fixed rate securities pay a fixed rate of interest and
are more sensitive to fluctuating interest rates. In periods of rising
interest rates the value of a fixed rate security is likely to fall. Fixed
rate securities with short-term characteristics are not subject to the same
price volatility as fixed rate securities without such characteristics.
Therefore, they behave more like floating rate securities with respect to
price volatility.
PARTICIPATION INTERESTS. The Fund may acquire participation interests in
senior, fully secured floating rate loans that are made primarily to U.S.
companies. The Fund's investments in participation interests are subject to
its limitation on investments in illiquid securities. The Fund may purchase
only those participation interests that mature in one year or less, or, if
maturing in more than one year, have a floating rate that is automatically
adjusted at least once each year according to a specified rate for such
investments, such as a published interest rate or interest rate index.
Participation interests are primarily dependent upon the creditworthiness of
the borrower for payment of interest and principal. Such borrowers may have
difficulty making payments and may have senior securities rated as low as C
by Moody's, or D by Standard & Poor's or Fitch. A description of the rating
categories is contained in the Appendix to this Prospectus.
PREFERRED STOCKS. Preferred stock, unlike common stock, offers a stated
dividend rate payable from the issuer's earnings. Preferred stock dividends
may be cumulative or non-cumulative, participating, or auction rate. If
interest rates rise, the fixed dividend on preferred stocks may be less
attractive, causing the price of preferred stocks to decline. Preferred
stock may have mandatory sinking fund provisions, as well as call/redemption
provisions prior to maturity, a negative feature when interest rates
decline.
CONVERTIBLE SECURITIES. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged
for a prescribed amount of common stock of the same or a different issuer
within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest generally paid
or accrued on debt or the dividend paid on preferred stock until the
convertible security matures or is redeemed, converted or exchanged.
Convertible securities have several unique investment characteristics, such
as (a) higher yields than common stocks, but lower yields than comparable
nonconvertible securities, (b) a lesser degree of fluctuation in value than
the underlying stock since they have fixed income characteristics, and (c)
the potential for capital appreciation if the market price of the underlying
common stock increases.
The Fund has no current intention of converting any convertible securities
it may own into equity securities or holding them as an equity investment
upon conversion. A convertible security might be subject to redemption at
the option of the issuer at a price established in the convertible
security's governing instrument. If a convertible security held by the Fund
is called
9
for redemption, the Fund may be required to permit the issuer to redeem the
security, convert it into the underlying common stock or sell it to a third
party.
NON-GOVERNMENT MORTGAGE-BACKED SECURITIES. Non-government mortgage-backed
securities in which the Fund may invest include:
- privately issued securities which are collateralized by pools of mortgages
in which each mortgage is guaranteed as to payment of principal and
interest by an agency or instrumentality of the U.S. government;
- privately issued securities which are collateralized by pools of mortgages
in which payment of principal and interest is guaranteed by the issuer and
such guarantee is collateralized by U.S. government securities; or
- other privately issued securities in which the proceeds of the issuance
are invested in mortgage-backed securities and payment of the principal
and interest is supported by the credit of an agency or instrumentality of
the U.S. government.
ASSET-BACKED SECURITIES. The Fund may invest in asset-backed securities
including, but not limited to, interests in pools of receivables, such as
credit card and accounts receivable and motor vehicle and other installment
purchase obligations and leases. These securities may be in the form of
pass-through instruments or asset-backed obligations. The securities, all of
which are issued by non-governmental entities and carry no direct or
indirect government guarantee, are structurally similar to CMOs and mortgage
pass-through securities, which are described above. However, non-mortgage
related asset-backed securities present certain risks that are not presented
by mortgage securities, primarily because these securities do not have the
benefit of the same security interest in the related collateral. Credit card
receivables, for example, are generally unsecured, while the trustee of
asset-backed securities backed by automobile receivables may not have a
proper security interest in all of the obligations backing such receivables.
ZERO COUPON, PAY-IN-KIND AND DELAYED INTEREST SECURITIES. The Fund may
invest in zero coupon, pay-in-kind and delayed interest securities issued by
corporations. Corporate zero coupon securities are: (i) notes or debentures
which do not pay current interest and are issued at substantial discounts
from par value, or (ii) notes or debentures that pay no current interest
until a stated date one or more years into the future, after which the
issuer is obligated to pay interest until maturity, usually at a higher rate
than if interest were payable from the date of issuance. Pay-in-kind
securities pay interest through the issuance to holders of additional
securities and delayed interest securities do not pay interest for a
specified period. Because values of securities of this type are subject to
greater fluctuations than are the values of securities that distribute
income regularly, they may be more speculative than such securities.
SPECIAL RISKS. From time to time, the Fund's portfolio may consist
primarily of lower-rated (i.e., rated Ba or lower by Moody's or BB or lower
by Standard & Poor's or Fitch) corporate debt obligations, which are
commonly referred to as "junk bonds." A description of the rating categories
is contained in the Appendix to this Prospectus. Lower-rated securities will
usually offer higher yields than higher-rated securities. However, there is
more risk associated with these
10
investments. (For example, securities rated in the lowest category have been
unable to satisfy their obligations under the bond indenture.) These
lower-rated bonds may be more susceptible to real or perceived adverse
economic conditions than investment grade bonds. These lower-rated bonds are
regarded as predominantly speculative with regard to each issuer's
continuing ability to make principal and interest payments. In addition, the
secondary trading market for lower-rated bonds may be less liquid than the
market for investment grade bonds. As a result of these factors, lowerrated
securities tend to have more price volatility and carry more risk to
principal than higher-rated securities. The Fund's investment adviser will
endeavor to limit these risks through diversifying the portfolio and through
careful credit analysis of individual issuers. Purchasers should carefully
assess the risks associated with an investment in the Fund.
Many corporate debt obligations, including many lower-rated bonds, permit
the issuers to call the security and thereby redeem their obligations
earlier than the stated maturity dates. Issuers are more likely to call
bonds during periods of declining interest rates. In these cases, if the
Fund owns a bond which is called, the Fund will receive its return of
principal earlier than expected and would likely be required to reinvest the
proceeds at lower interest rates, thus reducing income to the Fund.
CORPORATE EQUITY SECURITIES. The Fund may also invest in equity securities,
including common stocks, warrants and rights issued by corporations in any
industry (industrial, financial or utility) which may be denominated in U.S.
dollars or in foreign currencies.
WARRANTS AND RIGHTS. The Fund may invest up to 5% of its total assets in
warrants and rights, including but not limited to warrants or rights (i)
acquired as part of a unit or attached to other securities purchased by the
Fund, or (ii) acquired as part of a distribution from the issuer.
FOREIGN SECURITIES. The Fund may invest in foreign securities, including
foreign securities not publicly traded in the United States. No more than 25% of
the Fund's total assets, at the time of purchase, will be invested in government
securities of any one foreign country. The Fund has no other restriction on the
amount of its assets that may be invested in foreign securities and may purchase
securities issued in any country, developed or undeveloped. There are no minimum
rating requirements for the foreign securities in which the Fund invests.
The percentage of the Fund's assets that will be allocated to foreign securities
will vary depending on the relative yields of foreign and U.S. securities, the
economies of foreign countries, the condition of such countries' financial
markets, the interest rate climate of such countries and the relationship of
such countries' currency to the U.S. dollar. These factors are judged on the
basis of fundamental economic criteria (e.g., relative inflation levels and
trends, growth rate forecasts, balance of payments status, and economic
policies) as well as technical and political data.
RISKS. Investments in foreign securities involve special risks that differ
from those associated with investments in domestic securities. The risks
associated with investments in foreign securities apply to securities issued
by foreign corporations and sovereign governments. These risks relate to
political and economic developments abroad, as well as those that result
from the differences between the regulation of domestic securities and
issuers and foreign securities and issuers. These risks may include, but are
not limited to, expropriation, confiscatory taxation,
11
currency fluctuations, withholding taxes on interest, limitations on the use
or transfer of assets, political or social instability and adverse
diplomatic developments. It may also be more difficult to enforce
contractual obligations or obtain court judgments abroad than would be the
case in the United States because of differences in the legal systems. If
the issuer of the debt or the governmental authorities that control the
repayment of the debt may be unable or unwilling to repay principal or
interest when due in accordance with the terms of such debt, the Fund may
have limited legal recourse in the event of default. Moreover, individual
foreign economies may differ favorably or unfavorably from the domestic
economy in such respects as growth of gross national product, the rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
Additional differences exist between investing in foreign and domestic
securities. Examples of such differences include: less publicly available
information about foreign issuers; credit risks associated with certain
foreign governments; the lack of uniform financial accounting standards
applicable to foreign issuers; less readily available market quotations on
foreign issues; the likelihood that securities of foreign issuers may be
less liquid or more volatile; generally higher foreign brokerage
commissions; and unreliable mail service between countries.
To the extent that debt securities purchased by the Fund are denominated in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates will affect the Fund's net asset value; the value of interest earned;
gains and losses realized on the sale of securities; and net investment
income and capital gain, if any, to be distributed to shareholders by the
Fund. If the value of a foreign currency rises against the U.S. dollar, the
value of the Fund's assets denominated in that currency will increase;
correspondingly, if the value of a foreign currency declines against the
U.S. dollar, the value of the Fund's assets denominated in the currency will
decrease.
The risks noted above often are heightened for investments in emerging or
developing countries. Compared to the United States and other developed
countries, emerging or developing countries may have relatively unstable
governments, economies based on only a few industries, and securities
markets that trade a small number of securities. Prices on these exchanges
tend to be volatile and, in the past, securities in these countries have
offered greater potential for gain (as well as loss) than securities of
companies located in developed countries. Further, investments by foreign
investors are subject to a variety of restrictions in many emerging or
developing countries. These restrictions may take the form of prior
governmental approval, limits on the amount or type of securities held by
foreigners, and limits on the type of companies in which foreigners may
invest. Additional restrictions may be imposed at any time by these and
other countries in which a fund invests. In addition, the repatriation of
both investment income and capital from several foreign countries is
restricted and controlled under certain regulations, including in some cases
the need for certain government consents. Although these restrictions may in
the future make it undesirable to invest in emerging or developing
countries, the Fund's adviser does not believe that any current repatriation
restrictions would affect its decision to invest in such countries.
12
FOREIGN CURRENCY TRANSACTIONS. The Fund will enter into foreign currency
transactions to obtain the necessary currencies to settle securities
transactions. Currency transactions may be conducted either on a spot or
cash basis at prevailing rates or through forward foreign currency exchange
contracts.
The Fund may also enter into foreign currency transactions to protect Fund
assets against adverse changes in foreign currency exchange rates or
exchange control regulations. Such changes could unfavorably affect the
value of Fund assets which are denominated in foreign currencies, such as
foreign securities or funds deposited in foreign banks, as measured in U.S.
dollars. Although foreign currency transactions may be used by the Fund to
protect against a decline in the value of one or more currencies, such
efforts may also limit any potential gain that might result from a relative
increase in the value of such currencies and might, in certain cases, result
in losses to the Fund.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency
exchange contract (a "forward contract") is an obligation to purchase or
sell an amount of a particular currency at a specific price and on a future
date agreed upon by the parties.
Generally, no commission charges or deposits are involved. At the time the
Fund enters into a forward contract, Fund assets with a value equal to the
Fund's obligation under the forward contract are segregated on the Fund's
records and are maintained until the contract has been settled. The Fund
will not enter into a forward contract with a term of more than six months.
The Fund will generally enter into a forward contract to provide the proper
currency to settle a securities transaction at the time the transaction
occurs (the "trade date"). The period between the trade date and settlement
date will vary between 24 hours and 30 days, depending upon local custom.
The Fund may also protect against the decline of a particular foreign
currency by entering into a forward contract to sell an amount of that
currency approximating the value of all or a portion of the Fund's assets
denominated in that currency ("hedging"). The success of this type of short-
term hedging strategy is highly uncertain due to the difficulties of
predicting short-term currency market movements and of precisely matching
forward contract amounts and the constantly changing value of the securities
involved. Although the adviser will consider the likelihood of changes in
currency values when making investment decisions, the adviser believes that
it is important to be able to enter into forward contracts when it believes
the interests of the Fund will be served.
TEMPORARY INVESTMENTS. The Fund may invest temporarily in debt obligations
maturing in one year or less during times of unusual market conditions for
defensive purposes and to maintain liquidity in anticipation of favorable
investment opportunities. The Fund's temporary investments may include:
- obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities;
- time deposits (including savings deposits and certificates of deposit) and
bankers acceptances in commercial or savings banks whose accounts are
insured by the Bank Insurance Fund ("BIF") or the Savings Association
Insurance Fund ("SAIF"), both of which are administered
13
by the Federal Deposit Insurance Corporation ("FDIC"), including
certificates of deposit issued by and other time deposits in foreign
branches of FDIC insured banks or who have at least $100 million in
capital;
- domestic and foreign issues of commercial paper or other corporate debt
obligations;
- obligations of the types listed above, but not satisfying the standards
set forth above, if they are (a) subject to repurchase agreements or (b)
guaranteed as to principal and interest by a domestic or foreign bank
having total assets in excess of $1 billion, by a corporation whose
commercial paper may be purchased by the Fund, or by a foreign government
having an existing debt security rated at least Baa by Moody's or BBB by
Standard & Poor's or Fitch; and
- other short-term investments of a type which the adviser determines
presents minimal credit risks and which are of "high quality" as
determined by a nationally recognized statistical rating organization, or,
in the case of an instrument that is not rated, of comparable quality in
the judgment of the adviser.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or other securities to the Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price. To the extent that the
original seller does not repurchase the securities from the Fund, the Fund could
receive less than the repurchase price on any sale of such securities.
OPTIONS. The Fund may deal in options on foreign currencies, foreign currency
futures, securities, and securities indices, which options may be listed for
trading on a national securities exchange or traded over-the-counter. The Fund
will use options only to manage interest rate and currency risks. The Fund may
write covered call options to generate income. The Fund may write covered call
options and secured put options on up to 25% of its net assets and may purchase
put and call options provided that no more than 5% of the fair market value of
its net assets may be invested in premiums on such options.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying currency, security or other asset at the
exercise price during the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying currency,
security or other asset at the exercise price during the option period. The
writer of a covered call owns assets that are acceptable for escrow and the
writer of a secured put invests an amount not less than the exercise price in
eligible assets to the extent that it is obligated as a writer. If a call
written by the Fund is exercised, the Fund forgoes any possible profit from an
increase in the market price of the underlying asset over the exercise price
plus the premium received. In writing puts, there is a risk that the Fund may be
required to take delivery of the underlying asset at a disadvantageous price.
Over-the-counter options ("OTC options") differ from exchange traded options in
several respects. They are transacted directly with dealers and not with a
clearing corporation, and there is a risk of nonperformance by the dealer as a
result of the insolvency of such dealer or otherwise, in which event the fund
may experience material losses. However, in writing options the premium is paid
in advance by the dealer, OTC options, which may not be continuously liquid, are
available for a greater
14
variety of assets, and a wider range of expiration dates and exercise prices,
than are exchange traded options.
FINANCIAL FUTURES AND OPTIONS ON FINANCIAL FUTURES. The Fund may purchase and
sell financial futures contracts to hedge all or a portion of its portfolio
against changes in interest rates. Financial futures contracts call for the
delivery of particular debt instruments at a certain time in the future. The
seller of the contract agrees to make delivery of the type of instrument called
for in the contract and the buyer agrees to take delivery of the instrument at
the specified future time.
The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Fund is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases a
futures contract, an amount of cash and cash equivalents, equal to the
underlying commodity value of the futures contract (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged.
RISKS. When the Fund uses financial futures and options on financial
futures as hedging devices, there is a risk that the prices of the
securities subject to the futures contracts may not correlate perfectly with
the prices of the securities in the Fund's portfolio. This may cause the
futures contracts and any related options to react differently than the
portfolio securities to market changes. In addition, the Fund's investment
adviser could be incorrect in its expectations about the direction or extent
of market factors such as interest rate movements. In these events, the Fund
may lose money on the futures contracts or options. It is not certain that a
secondary market for positions in futures contracts or for options will
exist at all times. Although the investment adviser will consider liquidity
before entering into options transactions, there is no assurance that a
liquid secondary market on an exchange or otherwise will exist for any
particular futures contract or option at any particular time. The Fund's
ability to establish and close out futures and options positions depends on
this secondary market.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other investment companies, but it will not own more than 3%
of the total outstanding voting securities of any such investment company,
invest more than 5% of its total assets in any one investment company, or invest
more than 10% of its total assets in investment companies in general. To the
extent that the Fund invests in securities issued by other investment companies,
the Fund will indirectly bear its proportionate share of any fees and expenses
paid by such companies in addition to the fees and expenses payable directly by
the Fund. The Fund will purchase securities of closed-end investment companies
only in open market transactions involving only customary brokers'
15
commissions. However, these limitations are not applicable if the securities are
acquired in a merger, consolidation, reorganization or acquisition of Fund
assets.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in restricted
securities. Restricted securities are any securities in which the Fund may
otherwise invest pursuant to its investment objective and policies, but which
are subject to restriction on resale under federal securities law. The Fund will
limit investments in illiquid securities, including certain restricted
securities not determined by the Directors to be liquid, non-negotiable time
deposits, and repurchase agreements providing for settlement in more than seven
days after notice, to 15% of the value of its net assets.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. 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.
Accordingly, the Fund may pay more/less than the market value of the securities
on the settlement date.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
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.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
PORTFOLIO TURNOVER. The Fund may trade or dispose of portfolio securities as
considered necessary to meet its investment objective. During periods of falling
interest rates, the values of outstanding fixed-income securities generally
rise. Conversely, during periods of rising interest rates, the values of such
securities generally decline. The magnitude of these fluctuations will generally
be greater for securities with longer maturities. Because the Fund will actively
use trading to benefit from short-term yield disparities among different issues
of fixed-income securities or otherwise to increase its income, the Fund may be
subject to a greater degree of portfolio turnover than might be expected from
investment companies which invest substantially all of their assets on a
long-term basis. The Fund cannot accurately predict its portfolio turnover rate,
but it is anticipated that its annual turnover rate generally will not exceed
200% (excluding turnover of securities having a maturity of one year or less).
16
Higher portfolio turnover results in increased Fund expenses, including
brokerage commissions, dealer mark-ups and other transaction costs on the sale
of securities and on the reinvestment in other securities, and results in the
acceleration of realization of capital gains or losses for tax purposes. To the
extent that increased portfolio turnover results in sales of securities held
less than three months, the Fund's ability to qualify as a "regulated investment
company" under the Internal Revenue Code may be affected.
INVESTMENT LIMITATIONS
The Fund will not:
- borrow money directly or through reverse repurchase agreements or pledge
securities except, under certain circumstances, the Fund may borrow up to
one-third of the value of its total assets and pledge up to 15% of the
value of those assets to secure such borrowings;
- lend any of its assets, except portfolio securities up to one-third of the
value of its total assets; or
- underwrite any issue of securities, except as it may be deemed to be an
underwriter under the Securities Act of 1933 in connection with the sale
of restricted securities which the Fund may purchase pursuant to its
investment objective, policies, and limitations.
The above investment limitations cannot be changed without shareholder approval.
The following investment limitations, however, may be changed by the Directors
without shareholder approval. Shareholders will be notified before any material
change in these investment limitations becomes effective.
The Fund will not:
- invest more than 10% of the value of its total assets in securities
subject to restrictions on resale under the Securities Act of 1933 except
for certain restricted securities that meet the criteria for liquidity as
established by the Directors; or
- invest more than 15% of the value of its net assets in securities that are
not readily marketable or that are otherwise considered illiquid,
including repurchase agreements providing for settlement in more than
seven days after notice.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per Share fluctuates. The net asset value per Share
is determined by adding the interest of the Shares in the market value of all
securities and other assets of the Fund, subtracting the interest of the Shares
in the liabilities of the Fund and those attributable to the Shares, and
dividing the remainder by the total number of Shares outstanding. The net asset
value of the Shares may be different from that of Class A Shares and Class C
Shares due to the variance in daily net income realized by each class. Such
variance will reflect only accrued net income to which the shareholders of a
particular class are entitled.
17
INVESTING IN FORTRESS SHARES
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased through a financial institution which has a sales agreement with
the distributor, or directly from the distributor, Federated Securities Corp.,
once an account has been established. In connection with the sale of Shares,
Federated Securities Corp. may from time to time offer certain items of nominal
value to any shareholder or investor. The Fund reserves the right to reject any
purchase request.
THROUGH A FINANCIAL INSTITUTION. An investor may call his financial institution
(such as a bank or an investment dealer) to place an order to purchase Shares.
Orders through a financial institution are considered received when the Fund is
notified of the purchase order. Purchase orders through a registered
broker/dealer must be received by the broker before 4:00 p.m. (Eastern time) and
must be transmitted by the broker to the Fund before 5:00 p.m. (Eastern time) in
order for Shares to be purchased at that day's price. Purchase orders through
other financial institutions must be received by the financial institution and
transmitted to the Fund before 4:00 p.m. (Eastern time) in order for Shares to
be purchased at that day's price. It is the financial institution's
responsibility to transmit orders promptly.
The financial institution which maintains investor accounts with the Fund must
do so on a fully disclosed basis unless it accounts for share ownership periods
used in calculating the contingent deferred sales charge (see "Contingent
Deferred Sales Charge"). In addition, advance payments made to financial
institutions may be subject to reclaim by the distributor for accounts
transferred to financial institutions which do not maintain investor accounts on
a fully disclosed basis and do not account for share ownership periods (see
"Other Payments to Financial Institutions").
DIRECTLY FROM THE DISTRIBUTOR. An investor may place an order to purchase
Shares directly from the distributor once an account has been established. To do
so:
- complete and sign the new account form available from the Fund;
- enclose a check made payable to Strategic Income Fund--Fortress Shares;
and
- send both to the Fund's transfer agent, Federated Services Company, c/o
State Street Bank and Trust Company, P.O. Box 8604, Boston, Massachusetts
02266-8604.
To purchase Shares directly from the distributor by wire once an account has
been established, call the Fund. All information needed will be taken over the
telephone, and the order is considered received when State Street Bank receives
payment by wire. Federal funds should be wired as follows: Federated Services
Company, c/o State Street Bank and Trust Company, Boston, Massachusetts 02105;
Attention: Mutual Fund Servicing Division; For Credit to: Strategic Income
Fund--Fortress Shares; Title or Name of Account; Wire Order Number and/or
Account Number. Shares cannot be purchased by wire on Columbus Day, Veteran's
Day or Martin Luther King Day.
18
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $1,500 over a 90-day period, unless
the investment is in a retirement plan, in which case the minimum initial
investment is $50. Subsequent investments must be in amounts of at least $100,
except for retirement plans, which must be in amounts of at least $50.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received, plus a sales load of 1% of the offering price (which is 1.01% of the
net amount invested). There is no sales load for purchases of $1 million or
more. In addition, no sales load is imposed for Shares purchased through bank
trust departments or investment advisers registered under the Investment
Advisers Act of 1940 purchasing on behalf of their clients, or by insurance
companies. These institutions, however, may charge fees for services provided
which may relate to ownership of Fund shares. This prospectus should, therefore,
be read together with any agreement between the customer and the institution
with regard to services provided and the fees charged for these services.
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; and (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Under certain circumstances described under "Redeeming Fortress Shares,"
shareholders may be charged a contingent deferred sales charge by the
distributor at the time Shares are redeemed.
DEALER CONCESSION. For sales of Shares, broker/dealers will normally receive
100% of the applicable sales load. Any portion of the sales load 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 load 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 load 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 LOAD
The sales load 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 load 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 load.
19
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 load on the additional purchase. The Fund will also combine purchases
for the purpose of reducing the contingent deferred sales charge imposed on some
Share redemptions. For example, if a shareholder already owns Shares having a
current value at the public offering price of $1 million and purchases an
additional $1 million at the current public offering price, the applicable
contingent deferred sales charge would be reduced to 0.50% of those additional
Shares. For more information on the levels of contingent deferred sales charges
and holding periods, see the section entitled "Contingent Deferred Sales
Charge."
To receive this sales load 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 load 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 load may be eliminated by signing a
letter of intent to that effect. This letter of intent includes a provision for
a sales load elimination depending on the amount actually purchased within the
13-month period and a provision for the Fund's custodian to hold 1% of the total
amount intended to be purchased in escrow (in Shares) until such purchase is
completed.
The 1% held in escrow will, at the expiration of the 13-month period, be applied
to the payment of the applicable sales load, unless the amount specified in the
letter of intent, which must be $1 million or more of Shares, is purchased. In
this event, all of the escrowed Shares will be deposited into the shareholder's
account.
This letter of intent also includes a provision for reductions in the contingent
deferred sales charge and holding period depending on the amount actually
purchased within the 13-month period. For more information on the various levels
of contingent deferred sales charges and holding periods, see the section
entitled "Contingent Deferred Sales Charge."
This letter of intent will not obligate the shareholder to purchase Shares. This
letter may be dated as of a prior date to include any purchases made within the
past 90 days (purchases within the prior 90 days may be used to fulfill the
requirements of the letter of intent; however, the sales load on such purchases
will not be adjusted to reflect a lower sales load).
REINVESTMENT PRIVILEGE. If Shares have been redeemed, the shareholder has a
one-time right, within 120 days, to reinvest the redemption proceeds at the
next-determined net asset value without any sales load. 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 load. If the shareholder redeems his Shares, there may be tax
consequences.
CONCURRENT PURCHASES. For purposes of qualifying for a sales load 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 load. For example, if a shareholder concurrently
20
invested $400,000 in one of the other Fortress Funds and $600,000 in Shares, the
sales load would be eliminated.
To receive this sales load 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 load
after it confirms the purchases.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Shares at the net asset value next determined after an order is
received by the transfer agent, plus the 1% sales load for purchases under $1
million. A shareholder may apply for participation in this program through his
financial institution or directly through the Fund.
EXCHANGE PRIVILEGE
Shares in other Fortress Funds may be exchanged for Shares at net asset value
without a sales load (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 load, if applicable).
The ability to exchange shares is available to shareholders residing in any
state in which the shares being acquired may be legally sold. Shareholders using
this privilege must exchange shares having a net asset value of at least $1,500.
A shareholder may obtain further information on the exchange privilege by
calling Federated Securities Corp. or his financial institution.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder. Share certificates are not issued unless requested
on the application or by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly statements are sent to report dividends paid during the
month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly. Distributions of any net realized
long-term capital gains will be made at least once every twelve months.
Dividends are automatically reinvested in additional Shares on payment dates at
the ex-dividend date net asset value, unless cash payments are requested by
shareholders on the application or by writing to the transfer agent. All
shareholders on the record date are entitled to the dividend.
RETIREMENT PLANS
Shares can be purchased as an investment for retirement plans or for IRA
accounts. For further details, contact the Fund and consult a tax adviser.
21
REDEEMING FORTRESS SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after the
transfer agent receives the redemption request, less any applicable contingent
deferred sales charge. Redemptions will be made on days on which the Fund
computes its net asset value. Redemptions can be made through a financial
institution or directly from the Fund. Redemption requests must be received in
proper form.
THROUGH A FINANCIAL INSTITUTION
A shareholder may redeem Shares by calling his financial institution (such as a
bank or an investment dealer) to request the redemption. Shares will be redeemed
at the net asset value next determined after the Fund receives the redemption
request from the financial institution, less any applicable contingent deferred
sales charge. Redemption requests through a registered broker/dealer must be
received by the broker before 4:00 p.m. (Eastern time) and must be transmitted
by the broker to the Fund before 5:00 p.m. (Eastern time) in order for Shares to
be redeemed at that day's net asset value. Redemption requests through other
financial institutions must be received by the financial institution and
transmitted to the Fund before 4:00 p.m. (Eastern time) in order for Shares to
be redeemed at that day's net asset value. The financial institution is
responsible for promptly submitting redemption requests and providing proper
written redemption instructions to the Fund. The financial institution may
charge customary fees and commissions for this service.
DIRECTLY FROM THE FUND
BY TELEPHONE. Shareholders who have not purchased through a financial
institution may redeem their Shares by telephoning the Fund. The proceeds will
be mailed to the shareholder's address of record or wire transferred to the
shareholder's account at a domestic commercial bank that is a member of the
Federal Reserve System, normally within one business day, but in no event longer
than seven days after the request. The minimum amount for a wire transfer is
$1,000. If at any time the Fund shall determine it necessary to terminate or
modify this method of redemption, shareholders would be promptly notified.
An authorization form permitting the transfer agent to accept telephone requests
must first be completed. Authorization forms and information on this service are
available from Federated Securities Corp.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption should be considered.
Telephone instructions may be recorded. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
BY MAIL. Any shareholder may redeem Shares by sending a written request to the
transfer agent. The written request should include the shareholder's name, the
Fund name and class designation, the account number, and the share or dollar
amount requested, and should be signed exactly as the Shares are registered.
22
If share certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written request.
Shareholders may call the Fund for assistance in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the BIF,
which is administered by the FDIC;
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
- a savings bank or savings and loan association whose deposits are insured
by the SAIF, which is administered by the FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
CONTINGENT DEFERRED SALES CHARGE
Shareholders redeeming Shares from their Fund accounts within certain time
periods of the purchase date of those Shares will be 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
-------------------------- ------------------ ----------------------
<C> <S> <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
23
will be determined first, with reinvested dividends and long-term capital gains,
and second, on a first-in, first-out basis.
The contingent deferred sales charge will not be imposed when a redemption
results from a return under the following circumstances: (i) a total or partial
distribution from a qualified plan, other than an IRA, Keogh Plan, or a
custodial account, following retirement; (ii) a total or partial distribution
from an IRA, Keogh Plan, or a custodial account after the beneficial owner
attains age 59 1/2; or (iii) from the death or total and permanent disability of
the beneficial owner. The exemption from the contingent deferred sales charge
for qualified plans, an IRA, Keogh Plan, or a custodial account does not extend
to account transfers, rollovers, and other redemptions made for purposes of
reinvestment. Contingent deferred sales charges are not charged in connection
with exchanges of Shares for shares in other Fortress Funds or in connection
with redemptions by the Fund of accounts with low balances. Shares of the Fund
originally purchased through a bank trust department or investment adviser
registered under the Investment Advisers Act of 1940, or by an insurance
company, are not subject to the contingent deferred sales charge to the extent
the distributor does not make advance payments. In addition, Shares held in the
Fund by a financial institution for its own account which were originally
purchased by the financial institution directly from the Fund's distributor
without a sales load may be redeemed without a contingent deferred sales charge.
For more information, see "Other Payments to Financial Institutions."
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount not less
than $100 may take advantage of the Systematic Withdrawal Program. Under this
program, Shares are redeemed to provide for periodic withdrawal payments in an
amount directed by the shareholder. Depending upon the amount of the withdrawal
payments, the amount of dividends paid and capital gains distributions with
respect to Shares, and the fluctuation of the net asset value of Shares redeemed
under this program, redemptions may reduce, and eventually deplete, the
shareholder's investment in the Fund. For this reason, payments under this
program should not be considered as yield or income on the shareholder's
investment in the Fund. To be eligible to participate in this program, a
shareholder must have an account value of at least $10,000.
A shareholder may apply for participation in this program through his financial
institution. Due to the fact that Shares are sold with a sales load, it is not
advisable for shareholders to be purchasing Shares while participating in this
program.
Contingent deferred sales charges are charged for certain Shares, other than
Shares purchased through reinvestment of dividends, which are redeemed through
this program within one to four years of their purchase dates.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, and pay the proceeds to the shareholder, if the
account balance falls below a required minimum value of $1,500 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $1,500 because of changes in the Fund's net asset value.
Before Shares are
24
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 also be exchanged into certain other funds for which affiliates of
Federated Investors serves as the principal underwriter ("Federated Funds").
With the exception of exchanges into other Fortress Funds, such exchanges will
be subject to a contingent deferred sales charge and possibly a sales load.
Shareholders in certain Federated Funds may exchange their shares into the
Federated Funds for Fortress Shares. This privilege is available to shareholders
resident in any state in which the shares being acquired may be sold.
Shareholders using this privilege must exchange Shares having a net asset value
which at least meets the minimum investment required for the fund into which the
exchange is being made. A shareholder may obtain further information on the
exchange privilege, and may obtain prospectuses for other Fortress Funds and
Federated Funds by calling Federated Securities Corp. or his financial
institution.
Before making an exchange, a shareholder must receive a prospectus of the fund
for which the exchange is being made.
FIXED INCOME SECURITIES, INC. INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE CORPORATION
BOARD OF DIRECTORS. The Fund is managed by a Board of Directors. The Directors
are responsible for managing the Corporation's business affairs and for
exercising all the Corporation's powers except those reserved for the
shareholders. The Executive Committee of the Board of Directors handles the
Directors' responsibilities between meetings of the Directors.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Federated
Advisers, the Fund's investment adviser, subject to direction by the Directors.
The adviser continually conducts investment research and supervision for the
Fund and is responsible for the purchase or sale of portfolio instruments, for
which it receives an annual fee from the Fund.
ADVISORY FEES. The Fund's adviser receives an annual investment advisory
fee equal to .85 of 1% of the Fund's average daily net assets. The fee paid
by the Fund, while higher than the advisory fee paid by other mutual funds
in general, is comparable to fees paid by many mutual funds with similar
objectives and policies. Under the investment advisory contract, which
provides for voluntary waivers of expenses by the adviser, the adviser may
voluntarily waive some or all of its fee. The adviser can terminate this
voluntary waiver of some or all of its advisory fee at any time at its sole
discretion. The adviser has also undertaken to reimburse the Fund for
operating expenses in excess of limitations established by certain states.
ADVISER'S BACKGROUND. Federated Advisers, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) shares of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, Chairman and Trustee of
Federated
25
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 MANAGERS' BACKGROUNDS. Randall S. Bauer, Mark E. Durbiano and
Gary J. Madich have been the Fund's portfolio managers since its inception.
Mr. Bauer joined Federated Investors in 1989 and has been a Vice President
of the Fund's adviser since 1994. Mr. Bauer was an Assistant Vice President
of the International Banking Division at Pittsburgh National Bank from 1982
until 1989. Mr. Bauer is a Chartered Financial Analyst and received his
M.B.A. in Finance from Pennsylvania State University. Mr. Durbiano joined
Federated Investors in 1982 and has been a Vice President of the Fund's
adviser since 1988. Mr. Durbiano is a Chartered Financial Analyst and
received his M.B.A. in Finance from the University of Pittsburgh. Mr. Madich
joined Federated Investors in 1984 and has been a Senior Vice President of
the Fund's investment adviser since 1993. Mr. Madich served as a Vice
President of the Fund's investment adviser from 1988 until 1993. Mr. Madich
is a Chartered Financial Analyst and received his M.B.A. in Public Finance
from the University of Pittsburgh.
DISTRIBUTION OF FORTRESS SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS. Under a distribution plan adopted
in accordance with Investment Company Act Rule 12b-1 (the "Distribution Plan"),
the Fund will pay to the distributor an amount, computed at an annual rate of
0.50 of 1% of the average daily net asset value of Shares to finance any
activity which is principally intended to result in the sale of Shares subject
to the Distribution Plan. The distributor may select financial institutions such
as banks, fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales support services as agents for their clients or
customers.
The Distribution Plan is a compensation-type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover
26
such amount or may earn a profit from future payments made by the Fund under the
Distribution Plan.
In addition, the Fund has adopted a Shareholder Services Plan (the "Services
Plan") under which it may make payments up to 0.25 of 1% of the average daily
net asset value of Shares to obtain certain personal services for shareholders
and the maintenance of shareholder accounts ("shareholder services"). The Fund
has entered into a Shareholder Services Agreement with Federated Shareholder
Services, a subsidiary of Federated Investors, under which Federated Shareholder
Services will either perform shareholder services directly or will select
financial institutions to perform shareholder services. Financial institutions
will receive fees based upon shares owned by their clients or customers. The
schedules of such fees and the basis upon which such fees will be paid will be
determined from time to time by the Fund and Federated Shareholder Services.
The Glass-Steagall Act limits the ability of a depository institution (such as a
commercial bank or a savings and loan association) to become an underwriter or
distributor of securities. In the event the Glass-Steagall Act is deemed to
prohibit depository institutions from acting in the capacities described above
or should Congress relax current restrictions on depository institutions, the
Directors will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. Federated Securities Corp. will pay
financial institutions an amount equal to 1% of the net asset value of Shares
purchased by their clients or customers at the time of purchase. Financial
institutions may elect to waive the initial payments described above; such
waiver will result in the waiver by the Fund of the otherwise applicable
contingent deferred sales charge.
Furthermore, the distributor may offer to pay a fee from its own assets to
financial institutions as financial assistance for providing substantial
marketing and sales support. The support may include participating in sales,
educational and training seminars at recreational-type facilities, providing
sales literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Fund's investment
adviser or its affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an
27
annual rate which relates to the average aggregate daily net assets of all funds
advised by subsidiaries of Federated Investors ("Federated Funds") as specified
below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET ASSETS
ADMINISTRATIVE FEE OF THE FEDERATED FUNDS
------------------------- ------------------------------------
<C> <S>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN. State Street Bank and Trust Company, Boston, Massachusetts, is
custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, is transfer agent for shares of the Fund and dividend
disbursing agent for the Fund.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, 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.
28
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share of the Fund is entitled to one vote in Director elections and other
matters submitted to shareholders for vote. All shares of all classes of each
portfolio in the Corporation have equal voting rights except that in matters
affecting only a particular portfolio or class, only shares of that portfolio or
class are entitled to vote.
As a Maryland corporation, the Corporation is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Fund's operation and for the election of Directors under certain
circumstances.
Directors may be removed by the Board of Directors or by the shareholders at a
special meeting. A special meeting of shareholders shall be called by the
Directors upon the request of shareholders owning at least 10% of the
Corporation's outstanding shares of all series entitled to vote.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional Shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held their Shares. No federal income tax is due on
any distributions earned in an IRA or qualified retirement plan until
distributed, so long as such IRA or qualified retirement plan meets the
applicable requirements of the Internal Revenue Code.
PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES
The Fund is not subject to Pennsylvania corporate or personal property taxes.
Fund shares may be subject to personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania to the extent that the
portfolio securities in the Fund would be subject to such taxes if owned
directly by residents of those jurisdictions.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
29
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund advertises the total return and yield for Fortress
Shares.
Total return represents the change, over a specified period of time, in the
value of an investment in Shares after reinvesting all income and capital gains
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of Shares is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by Shares
over a thirty-day period by the maximum offering price per share of Shares on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
Shares and, therefore, may not correlate to the dividends or other distributions
paid to shareholders.
The performance information reflects the effect of the maximum sales load and
the contingent deferred sales charge which, if excluded, would increase the
total return and yield.
Total return and yield will be calculated separately for Class A Shares, Class C
Shares and Fortress Shares. Because Fortress and Class A Shares are subject to
lower 12b-1 expenses, the yield for these shares, for the same period, may
exceed that of Class C Shares. Because Fortress and Class C Shares are subject
to lower sales load, the total return for these shares, for the same period, may
exceed that of Class A Shares.
From time to time, the Fund may advertise the performance of Shares using
certain financial publications and/or compare its performance to certain
indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund currently offers Fortress Shares, Class A Shares and Class C Shares.
Class A Shares are sold primarily to customers of financial institutions subject
to a front-end sales load of up to 4.50%. Class A Shares are subject to a
minimum initial investment of $500, unless the investment is in a retirement
account, in which case the minimum investment is $50.
Class C Shares are sold primarily to customers of financial institutions at net
asset value with no up-front sales load. Class C Shares are distributed pursuant
to a Rule 12b-1 Plan adopted by the Fund whereby the distributor is paid a fee
of 0.75 of 1% of the Class C Shares' average daily net assets, in addition to a
shareholder services fee of 0.25 of 1% of the Class C Shares' average daily net
assets. In addition, Class C Shares may be subject to certain contingent
deferred sales charges. Investments in Class C Shares are subject to a minimum
initial investment of $1,500, unless the investment is in a retirement account,
in which case the minimum investment is $50.
The amount of dividends payable to Class A and Fortress Shares will generally
exceed that of Class C Shares by the difference between Class Expenses and
distribution and shareholder service expenses borne by shares of each respective
class.
The stated advisory fee is the same for all three classes of shares.
30
STRATEGIC INCOME FUND
FINANCIAL HIGHLIGHTS--CLASS A SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Independent Auditors' report on page 48.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1994*
- ---------------------------------------------------------------------- --------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- ----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------
Net investment income 0.45
- ----------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and foreign
currency (0.45)
- ---------------------------------------------------------------------- --------------
Total from investment operations 0.00
- ----------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------
Dividends to shareholders from net investment income (0.45)
- ---------------------------------------------------------------------- --------------
Distributions in excess of net investment income (a) (0.01)
- ---------------------------------------------------------------------- --------------
Total distributions (0.46)
- ---------------------------------------------------------------------- --------------
NET ASSET VALUE, END OF PERIOD $ 9.54
- ---------------------------------------------------------------------- --------------
TOTAL RETURN** 0.05%
- ----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------
Expenses 0.25%(c)
- ----------------------------------------------------------------------
Net investment income 8.38%(c)
- ----------------------------------------------------------------------
Expense waiver/reimbursement (b) 8.87%(c)
- ----------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------
Net assets, end of period (000 omitted) $2,366
- ----------------------------------------------------------------------
Portfolio turnover rate 34%
- ----------------------------------------------------------------------
<FN>
* For the period from May 3, 1994 (date of initial public investment) to
November 30, 1994.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Computed on an annualized basis.
</TABLE>
(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 for the fiscal year ended November 30, 1994, which can be obtained
free of charge.
31
STRATEGIC INCOME FUND
FINANCIAL HIGHLIGHTS--CLASS C SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Independent Auditors' report on page 48.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1994*
- ---------------------------------------------------------------------- --------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- ----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------
Net investment income 0.40
- ----------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and foreign
currency (0.44)
- ---------------------------------------------------------------------- --------------
Total from investment operations (0.04)
- ----------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------
Dividends to shareholders from net investment income (0.40)
- ----------------------------------------------------------------------
Distributions in excess of net investment income (a) (0.02)
- ---------------------------------------------------------------------- --------------
Total distributions (0.42)
- ---------------------------------------------------------------------- --------------
NET ASSET VALUE, END OF PERIOD $ 9.54
- ---------------------------------------------------------------------- --------------
TOTAL RETURN** (0.41%)
- ----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------
Expenses 1.00%(c)
- ----------------------------------------------------------------------
Net investment income 7.99%(c)
- ----------------------------------------------------------------------
Expense waiver/reimbursement (b) 8.87%(c)
- ----------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------
Net assets, end of period (000 omitted) $1,190
- ----------------------------------------------------------------------
Portfolio turnover rate 34%
- ----------------------------------------------------------------------
<FN>
* For the period from April 29, 1994 (date of initial public investment) to
November 30, 1994.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Computed on an annualized basis.
</TABLE>
(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 for the fiscal year ended November 30, 1994, which can be obtained
free of charge.
32
STRATEGIC INCOME FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------- -------------------------------------------------------------------------- ----------
<C> <S> <C>
U.S. CORPORATE BONDS--31.8%
- --------------------------------------------------------------------------------------------
BROADCAST RADIO & TV--1.7%
--------------------------------------------------------------------------
$ 100,000 SCI Television, Inc., Sr. Secd. Note, 11.00%, 6/30/2005 $ 100,750
-------------------------------------------------------------------------- ----------
BUSINESS EQUIPMENT & SERVICES--0.8%
--------------------------------------------------------------------------
50,000 Bell & Howell Co., Sr. Sub. Note, 10.75%, 10/1/2002 47,250
-------------------------------------------------------------------------- ----------
CABLE TELEVISION--0.8%
--------------------------------------------------------------------------
50,000 Continental Cablevision, Sr. Deb., 9.50%, 8/1/2013 45,000
-------------------------------------------------------------------------- ----------
CHEMICALS & PLASTICS--3.5%
--------------------------------------------------------------------------
50,000 Arcadian Partners L.P., Sr. Note, Series B, 10.75%, 5/1/2005 48,250
--------------------------------------------------------------------------
100,000 G-I Holdings, Inc., Sr. Disc. Note, Series B, 0/11.375% Accrual, 10/1/98 60,750
--------------------------------------------------------------------------
50,000 LaRoche Industries, Inc., Sr. Sub. Note, 13.00%, 8/15/2004 46,250
--------------------------------------------------------------------------
50,000(a) Polymer Group, Inc., Sr. Note, 12.25%, 7/15/2002 48,750
-------------------------------------------------------------------------- ----------
Total 204,000
-------------------------------------------------------------------------- ----------
CLOTHING & TEXTILES--1.5%
--------------------------------------------------------------------------
100,000 WestPoint Stevens, Inc., Sr. Sub. Deb., 9.375%, 12/15/2005 88,375
-------------------------------------------------------------------------- ----------
CONSUMER PRODUCTS--1.4%
--------------------------------------------------------------------------
100,000 Playtex Family Products Corp., Sr. Sub. Note, 9.00%, 12/15/2003 85,375
-------------------------------------------------------------------------- ----------
CONTAINERS & GLASS PRODUCTS--0.9%
--------------------------------------------------------------------------
50,000 Owens Illinois, Inc., Sr. Sub. Note, 10.50%, 6/15/2002 50,250
-------------------------------------------------------------------------- ----------
ECOLOGICAL SERVICES & EQUIPMENT--0.9%
--------------------------------------------------------------------------
50,000 Mid-American Waste Systems, Inc., Sr. Sub. Note, 12.25%, 2/15/2003 50,750
-------------------------------------------------------------------------- ----------
FOOD & DRUG RETAILERS--1.1%
--------------------------------------------------------------------------
50,000 Grand Union Co., Sr. Sub. Note, 12.25%, 7/15/2002 19,938
--------------------------------------------------------------------------
50,000 Pathmark Stores, Inc., Sr. Sub. Note, 9.625%, 5/1/2003 43,375
-------------------------------------------------------------------------- ----------
Total 63,313
-------------------------------------------------------------------------- ----------
</TABLE>
33
STRATEGIC INCOME FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------- -------------------------------------------------------------------------- ----------
<C> <S> <C>
U.S. CORPORATE BONDS--CONTINUED
- --------------------------------------------------------------------------------------------
FOOD PRODUCTS--3.2%
--------------------------------------------------------------------------
$ 100,000(a) Curtice-Burns Foods, Inc., Sr. Sub. Note, 12.75%, 2/1/2005 $ 100,875
--------------------------------------------------------------------------
50,000 Doskocil Cos., Inc., Sr. Sub. Note, 9.75%, 7/15/2000 43,250
--------------------------------------------------------------------------
50,000 Specialty Foods Corp., Sr. Sub. Note, 11.25%, 8/15/2003 44,000
-------------------------------------------------------------------------- ----------
Total 188,125
-------------------------------------------------------------------------- ----------
FOOD SERVICES--1.6%
--------------------------------------------------------------------------
100,000 Flagstar Corp., Sr. Note, 10.875%, 12/1/2002 91,750
-------------------------------------------------------------------------- ----------
FOREST PRODUCTS--1.6%
--------------------------------------------------------------------------
100,000 Stone Container Corp., Sr. Note, 9.875%, 2/1/2001 92,000
-------------------------------------------------------------------------- ----------
HEALTHCARE--1.7%
--------------------------------------------------------------------------
100,000 AmeriSource Corp., Sr. PIK Deb., 11.25%, 7/15/2005 101,500
-------------------------------------------------------------------------- ----------
HOME PRODUCTS & FURNISHINGS--0.5%
--------------------------------------------------------------------------
50,000 American Standard, Inc., Sr. Sub. Disc. Deb., 0/10.50%, 6/1/2005 31,875
-------------------------------------------------------------------------- ----------
MACHINERY & EQUIPMENT--0.9%
--------------------------------------------------------------------------
50,000(a) Waters Corp., Sr. Sub. Note, 12.75%, 9/30/2004 50,750
-------------------------------------------------------------------------- ----------
RETAILERS--2.5%
--------------------------------------------------------------------------
50,000 Brylane Capital Corp., Sr. Sub. Note, 10.00%, 9/1/2003 49,750
--------------------------------------------------------------------------
100,000(a) ICON Health & Fitness, Inc., Unit, 13.00%, 7/15/2002 98,250
-------------------------------------------------------------------------- ----------
Total 148,000
-------------------------------------------------------------------------- ----------
STEEL--3.3%
--------------------------------------------------------------------------
100,000 Carbide/Graphite Group, Sr. Note, 11.50%, 9/1/2003 101,500
--------------------------------------------------------------------------
50,000 GS Technologies Operating Co., Inc., Sr. Note, 12.00%, 9/1/2004 50,125
--------------------------------------------------------------------------
50,000 Northwestern Steel & Wire Co., Sr. Note, 9.50%, 6/15/2001 45,000
-------------------------------------------------------------------------- ----------
Total 196,625
-------------------------------------------------------------------------- ----------
</TABLE>
34
STRATEGIC INCOME FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------- -------------------------------------------------------------------------- ----------
<C> <S> <C>
U.S. CORPORATE BONDS--CONTINUED
- --------------------------------------------------------------------------------------------
SURFACE TRANSPORTATION--2.5%
--------------------------------------------------------------------------
$ 100,000 Gearbulk Holding Limited, Sr. Note, 11.25%, 12/1/2004 $ 100,375
--------------------------------------------------------------------------
50,000 Trans Ocean Container Corp., Sr. Sub. Note, 12.25%, 7/1/2004 48,250
-------------------------------------------------------------------------- ----------
Total 148,625
-------------------------------------------------------------------------- ----------
TECHNOLOGY SERVICES--0.7%
--------------------------------------------------------------------------
50,000 Computervision Corp., Sr. Sub. Note, 11.375%, 8/15/99 42,000
-------------------------------------------------------------------------- ----------
TELECOMMUNICATIONS & CELLULAR--0.7%
--------------------------------------------------------------------------
100,000 NEXTEL Communications Inc., Sr. Disc. Note, 0/11.50%, 9/1/2003 43,250
-------------------------------------------------------------------------- ----------
TOTAL U.S. CORPORATE BONDS (IDENTIFIED COST $1,946,098) 1,869,563
-------------------------------------------------------------------------- ----------
U.S. GOVERNMENT AGENCY--33.5%
- --------------------------------------------------------------------------------------------
348,944 Federal Home Loan Mortgage Corp., Pool C00227, 9.50%, 12/1/2022 359,516
--------------------------------------------------------------------------
646,386 Federal Home Loan Mortgage Corp., Pool M80326, 7.50%, 6/1/2001 630,420
--------------------------------------------------------------------------
502,276 Government National Mortgage Association, Pool 351468, 7.50%, 3/15/2024 463,028
--------------------------------------------------------------------------
524,236 Government National Mortgage Association, Pools 356579, 371837 and 403933,
8.50%, 6/15/2023 - 8/15/2024 514,727
-------------------------------------------------------------------------- ----------
TOTAL U.S. GOVERNMENT AGENCY (IDENTIFIED COST $2,007,285) 1,967,691
-------------------------------------------------------------------------- ----------
<CAPTION>
FOREIGN U.S.
CURRENCY DOLLAR
PAR AMOUNT VALUE
- -------------- ----------
--------------------------------------------------------------------------
<C> <S> <C>
INTERNATIONAL BONDS--32.1%
- --------------------------------------------------------------------------------------------
AUSTRALIAN DOLLAR--2.8%
- --------------------------------------------------------------------------------------------
CORPORATE--1.4%
--------------------------------------------------------------------------
150,000 News America Holdings, Inc., 8.625%, 2/7/2014 $ 83,577
-------------------------------------------------------------------------- ----------
STATE/PROVINCIAL--1.4%
--------------------------------------------------------------------------
100,000 State Bank of New South Wales, 12.25%, 2/26/2001 82,080
-------------------------------------------------------------------------- ----------
TOTAL AUSTRALIAN DOLLAR 165,657
-------------------------------------------------------------------------- ----------
</TABLE>
35
STRATEGIC INCOME FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
FOREIGN U.S.
CURRENCY DOLLAR
PAR AMOUNT VALUE
- -------------- -------------------------------------------------------------------------- ----------
<C> <S> <C>
INTERNATIONAL BONDS--CONTINUED
- --------------------------------------------------------------------------------------------
BRITISH POUND--5.0%
- --------------------------------------------------------------------------------------------
CORPORATE--3.2%
--------------------------------------------------------------------------
50,000 Abbey National Treasury, 8.00%, 4/2/2003 $ 72,718
--------------------------------------------------------------------------
70,000 Diamler-Benz U.K., 10.75%, 5/17/96 113,828
-------------------------------------------------------------------------- ----------
Total 186,546
-------------------------------------------------------------------------- ----------
SOVEREIGN--1.8%
--------------------------------------------------------------------------
70,000 Republic of Iceland, 8.75%, 5/12/2003 105,641
-------------------------------------------------------------------------- ----------
TOTAL BRITISH POUND 292,187
-------------------------------------------------------------------------- ----------
CANADIAN DOLLAR--2.4%
- --------------------------------------------------------------------------------------------
AGENCY--1.2%
--------------------------------------------------------------------------
100,000 Ontario Hydro, 9.00%, 6/24/2002 71,094
-------------------------------------------------------------------------- ----------
CORPORATE--1.2%
--------------------------------------------------------------------------
100,000 Sherritt, Inc., 11.00%, 3/31/2004 69,379
-------------------------------------------------------------------------- ----------
TOTAL CANADIAN DOLLAR 140,473
-------------------------------------------------------------------------- ----------
DANISH KRONE--3.3%
- --------------------------------------------------------------------------------------------
SOVEREIGN--3.3%
--------------------------------------------------------------------------
600,000 Denmark, 8.00%, 5/15/2003 93,837
--------------------------------------------------------------------------
600,000 Denmark, 9.00%, 11/15/96 100,249
-------------------------------------------------------------------------- ----------
TOTAL DANISH KRONE 194,086
-------------------------------------------------------------------------- ----------
DEUTSCHE MARK--2.6%
- --------------------------------------------------------------------------------------------
CORPORATE--1.5%
--------------------------------------------------------------------------
150,000 Ford Credit Europe, PLC, 6.00%, 3/30/99 90,348
-------------------------------------------------------------------------- ----------
SOVEREIGN--1.1%
--------------------------------------------------------------------------
100,000 Federal Republic of Germany, 8.00%, 7/22/2002 65,487
-------------------------------------------------------------------------- ----------
TOTAL DEUTSCHE MARK 155,835
-------------------------------------------------------------------------- ----------
</TABLE>
36
STRATEGIC INCOME FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
FOREIGN U.S.
CURRENCY DOLLAR
PAR AMOUNT VALUE
- -------------- -------------------------------------------------------------------------- ----------
<C> <S> <C>
INTERNATIONAL BONDS--CONTINUED
- --------------------------------------------------------------------------------------------
FRENCH FRANC--1.2%
- --------------------------------------------------------------------------------------------
AGENCY--1.2%
--------------------------------------------------------------------------
400,000 KFW International Finance, Inc., 7.00%, 5/12/2000 $ 72,082
-------------------------------------------------------------------------- ----------
ITALIAN LIRA--1.6%
- --------------------------------------------------------------------------------------------
AGENCY--1.6%
--------------------------------------------------------------------------
150,000,000 KFW International Finance, 11.625%, 11/27/98 93,854
-------------------------------------------------------------------------- ----------
JAPANESE YEN--1.9%
- --------------------------------------------------------------------------------------------
CORPORATE--1.9%
--------------------------------------------------------------------------
10,000,000 Bank of Tokyo Cayman Finance, Perpetual Convertible Subordinated Note,
4.25% 114,675
-------------------------------------------------------------------------- ----------
MEXICAN PESO--3.5%
- --------------------------------------------------------------------------------------------
SOVEREIGN--3.5%
--------------------------------------------------------------------------
7,247,800 Mexican CETES, 0.00%, 3/2/95 203,229
-------------------------------------------------------------------------- ----------
NEW ZEALAND DOLLAR--2.2%
- --------------------------------------------------------------------------------------------
AGENCY--2.2%
--------------------------------------------------------------------------
200,000 Electricity Corp. of New Zealand, 10.00%, 10/15/2001 129,211
-------------------------------------------------------------------------- ----------
U.S. DOLLAR--5.6%
- --------------------------------------------------------------------------------------------
AGENCY--1.4%
--------------------------------------------------------------------------
100,000 Banco Nacional de Comercio Exterior, 8.00%, 8/5/2003 85,281
-------------------------------------------------------------------------- ----------
CORPORATE--1.6%
--------------------------------------------------------------------------
100,000 Banco de Galicia, Conv. Sub. Note, 7.00%, 8/1/2002 92,500
-------------------------------------------------------------------------- ----------
SOVEREIGN--2.6%
--------------------------------------------------------------------------
100,000 Argentina Bocon, Pre 4 (2) PIK; 4.875%, 9/1/2002+ 66,800
--------------------------------------------------------------------------
98,000 Brazil IDU, Deb., 6.0625%, 1/1/2001+ 82,688
-------------------------------------------------------------------------- ----------
Total 149,488
-------------------------------------------------------------------------- ----------
TOTAL U.S. DOLLAR 327,269
-------------------------------------------------------------------------- ----------
TOTAL INTERNATIONAL BONDS (IDENTIFIED COST $1,921,234) 1,888,558
-------------------------------------------------------------------------- ----------
</TABLE>
37
STRATEGIC INCOME FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------- -------------------------------------------------------------------------- ----------
<C> <S> <C>
**REPURCHASE AGREEMENT--3.9%
- --------------------------------------------------------------------------------------------
$ 230,000 J.P. Morgan Securities, Inc., 5.77%, dated 11/30/94, due 12/1/94 (at
amortized cost) $ 230,000
-------------------------------------------------------------------------- ----------
TOTAL INVESTMENTS (IDENTIFIED COST $6,104,617) $5,955,812++
-------------------------------------------------------------------------- ----------
<FN>
(a) Denotes restricted securities which are subject to resale under Federal
Securities laws. These securities have been determined to be liquid under
criteria established by the Board of Directors.
+ Denotes Variable Rate and Floating Rate Obligations for which the current
rate is shown.
++ The cost of investments for federal tax purposes amounts to $6,111,894.
The net unrealized depreciation on a federal tax amounts to $156,082 and is
comprised of $26,814 appreciation and $182,896 depreciation at November 30,
1994.
** 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 investment in the repurchase agreement is through
participation in a joint account with other Federated Funds.
</TABLE>
The following abbreviation is used in this portfolio:
PIK--Payment in kind
Note: The categories of investments are shown as a percentage of net assets
($5,881,975) at November 30, 1994.
(See Notes which are an integral part of the Financial Statements)
38
STRATEGIC INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
- --------------------------------------------------------------------------------
Investments in securities, at value (identified cost; $6,104,617 and tax cost;
$6,111,894) $5,955,812
- --------------------------------------------------------------------------------
Cash denominated in foreign currencies (identified cost; $112,568) 112,476
- --------------------------------------------------------------------------------
Cash 4,973
- --------------------------------------------------------------------------------
Interest receivable 117,341
- --------------------------------------------------------------------------------
Receivable for capital stock sold 47,691
- --------------------------------------------------------------------------------
Receivable for foreign currency sold 10,753
- --------------------------------------------------------------------------------
Receivable from adviser 3,000
- --------------------------------------------------------------------------------
Deferred expenses 7,645
- -------------------------------------------------------------------------------- ----------
Total assets 6,259,691
- --------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
Payable for investments purchased $303,547
- ---------------------------------------------------------------------
Dividends payable 25,230
- ---------------------------------------------------------------------
Payable for foreign currency purchased 10,771
- ---------------------------------------------------------------------
Accrued expenses 38,168
- --------------------------------------------------------------------- --------
</TABLE>
<TABLE>
<S> <C>
Total liabilities 377,716
- -------------------------------------------------------------------------------- ----------
NET ASSETS for 616,440 shares of capital stock outstanding $5,881,975
- -------------------------------------------------------------------------------- ----------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Paid-in capital $6,066,375
- --------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investments and translation of
assets and liabilities in foreign currencies (148,970)
- --------------------------------------------------------------------------------
Accumulated distributions in excess of net investment income (14,463)
- --------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments and foreign currency
transactions (20,967)
- -------------------------------------------------------------------------------- ----------
Total Net Assets $5,881,975
- -------------------------------------------------------------------------------- ----------
NET ASSET VALUE:
- --------------------------------------------------------------------------------
Class C Shares ($1,189,566 DIVIDED BY 124,641 shares of capital stock
outstanding) $ 9.54
- -------------------------------------------------------------------------------- ----------
Class A Shares ($2,366,182 DIVIDED BY 248,034 shares of capital stock
outstanding) $ 9.54
- -------------------------------------------------------------------------------- ----------
Fortress Shares ($2,326,227 DIVIDED BY 243,765 shares of capital stock
outstanding) $ 9.54
- -------------------------------------------------------------------------------- ----------
OFFERING PRICE PER SHARE:
- --------------------------------------------------------------------------------
Class C Shares $ 9.54
- -------------------------------------------------------------------------------- ----------
Class A Shares (100/95.5 of $9.54)* $ 9.99
- -------------------------------------------------------------------------------- ----------
Fortress Shares (100/99 of $9.54)* $ 9.64
- -------------------------------------------------------------------------------- ----------
REDEMPTION PROCEEDS PER SHARE:
- --------------------------------------------------------------------------------
Class C Shares (99/100 of $9.54)** $ 9.44
- -------------------------------------------------------------------------------- ----------
Class A Shares $ 9.54
- -------------------------------------------------------------------------------- ----------
Fortress Shares (99/100 of $9.54)** $ 9.44
- -------------------------------------------------------------------------------- ----------
<FN>
* See "What Shares Cost" in the prospectus.
** See "Contingent Deferred Sales Charge" in the prospectus.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
39
STRATEGIC INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1994*
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ----------------------------------------------------------------------------------
Interest income (net of foreign taxes withheld of $8) $ 156,336
- ----------------------------------------------------------------------------------
EXPENSES:
- ----------------------------------------------------------------------------------
Investment advisory fee $ 15,014
- -----------------------------------------------------------------------
Custodian and portfolio accounting fees 51,019
- -----------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 9,367
- -----------------------------------------------------------------------
Printing and postage 6,003
- -----------------------------------------------------------------------
Legal fees 240
- -----------------------------------------------------------------------
Shareholder services fee--Class A Shares 2,096
- -----------------------------------------------------------------------
Shareholder services fee--Class C Shares 869
- -----------------------------------------------------------------------
Shareholder services fee--Fortress Shares 1,451
- -----------------------------------------------------------------------
Distribution services fee--Class C Shares 2,606
- -----------------------------------------------------------------------
Distribution services fee--Fortress Shares 2,902
- -----------------------------------------------------------------------
Administrative personnel and services fee 61,836
- -----------------------------------------------------------------------
Registration fees 1,858
- -----------------------------------------------------------------------
Taxes 25
- -----------------------------------------------------------------------
Insurance premiums 8,812
- -----------------------------------------------------------------------
Miscellaneous 2,514
- ----------------------------------------------------------------------- --------
Total expenses 166,612
- -----------------------------------------------------------------------
Deduct--
- -----------------------------------------------------------------------
Waiver of investment advisory fee $ 15,014
- ------------------------------------------------------------
Reimbursement of other operating expenses by Adviser 141,674 156,688
- ------------------------------------------------------------ -------- --------
Net expenses 9,924
- ---------------------------------------------------------------------------------- ---------
Net investment income 146,412
- ---------------------------------------------------------------------------------- ---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY:
- ----------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign currency transactions
(identified cost basis) (27,206)
- ----------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments and foreign
currency (148,970)
- ---------------------------------------------------------------------------------- ---------
Net realized and unrealized gain (loss) on investments and foreign currency (176,176)
- ---------------------------------------------------------------------------------- ---------
Change in net assets resulting from operations $ (29,764)
- ---------------------------------------------------------------------------------- ---------
<FN>
* For the period from April 29, 1994 (date of initial public investment) to
November 30, 1994.
(See Notes which are an integral part of the Financial Statements)
</TABLE>
40
STRATEGIC INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- ---------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30, 1994*
---------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------------------------------------------
OPERATIONS--
- ------------------------------------------------------------------------------------------------------
Net investment income $ 146,412
- ------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment and foreign currency transactions ($13,691 net loss as computed
for federal tax purposes) (27,206)
- ------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments and translation of assets and
liabilities in foreign currencies (148,970)
- ------------------------------------------------------------------------------------------------------ -----------
Change in net assets resulting from operations (29,764)
- ------------------------------------------------------------------------------------------------------ -----------
DISTRIBUTIONS TO SHAREHOLDERS--
- ------------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income:
- ------------------------------------------------------------------------------------------------------
Class A Shares (67,293)
- ------------------------------------------------------------------------------------------------------
Fortress Shares (46,354)
- ------------------------------------------------------------------------------------------------------
Class C Shares (26,526)
- ------------------------------------------------------------------------------------------------------
Distributions in excess of net investment income:
- ------------------------------------------------------------------------------------------------------
Class A Shares (5,083)
- ------------------------------------------------------------------------------------------------------
Fortress Shares (6,411)
- ------------------------------------------------------------------------------------------------------
Class C Shares (2,969)
- ------------------------------------------------------------------------------------------------------ -----------
Change in net assets from distributions to shareholders (154,636)
- ------------------------------------------------------------------------------------------------------ -----------
CAPITAL STOCK TRANSACTIONS--
- ------------------------------------------------------------------------------------------------------
Proceeds from sale of shares 7,743,495
- ------------------------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of dividends declared 64,166
- ------------------------------------------------------------------------------------------------------
Cost of shares redeemed (1,741,286)
- ------------------------------------------------------------------------------------------------------ -----------
Change in net assets resulting from capital stock transactions 6,066,375
- ------------------------------------------------------------------------------------------------------ -----------
Change in net assets 5,881,975
- ------------------------------------------------------------------------------------------------------
NET ASSETS:
- ------------------------------------------------------------------------------------------------------
Beginning of period --
- ------------------------------------------------------------------------------------------------------ -----------
End of period $ 5,881,975
- ------------------------------------------------------------------------------------------------------ -----------
<FN>
* For the period April 29, 1994 (date of initial public investment) to November
30, 1994.
(See Notes which are an integral part of the Financial Statements)
</TABLE>
41
STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Fixed Income Securities Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end,
management investment company. The Corporation consists of five, diversified
investment portfolios. The financial statements included herein are only those
of Strategic Income Fund (the "Fund"). The financial statements of the other
portfolios 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. The Fund offers three classes of shares; Class A Shares, Class C Shares,
and Fortress Shares.
As of October 17, 1994, Multi-State Municipal Income Fund no longer accepted
purchases. It is anticipated that Multi-State Municipal Income Fund's
liquidation will occur in 1995.
During the fiscal year ended November 30, 1994, the Corporation offered five
portfolios (Limited Term Fund, Limited Term Municipal Fund, Strategic Income
Fund, Limited Maturity Government Fund, and Multi-State Municipal Income Fund).
The Board of Directors approved the liquidation of Limited Maturity Government
Fund, and as of December 23, 1994 was no longer offered.
(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. These
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Listed corporate bonds (and other fixed-income and
asset backed securities) are valued at the last sale price reported on
national securities exchanges. Unlisted bonds and securities and short-term
obligations are valued at the prices provided by an independent pricing
service. Short-term securities with remaining maturities of sixty days or
less may be stated 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 collateral to ensure the value of collateral at least equals the
principal amount of the repurchase agreement, including accrued interest.
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
42
STRATEGIC INCOME FUND
- --------------------------------------------------------------------------------
pursuant to guidelines established by the Board of 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. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
as required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its taxable income. Accordingly,
no provisions for federal tax are necessary. However, federal taxes may be
imposed on the Fund upon the disposition of certain investments in Passive
Foreign Investment Companies. Withholding taxes on foreign dividends have
been provided for in accordance with the Fund's understanding of the
applicable country's tax rules and rates. At November 30, 1994, the Fund,
for federal tax purposes, had a capital loss carryforward of $13,691, which
will reduce the Fund's taxable income arising from future net realized gain
on investments, if any, to the extent permitted by the Code, and thus will
reduce the amount of the distributions to 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 2002 ($13,691).
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date 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.
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 its shares, have been deferred and are being
amortized using the straight-line method not to exceed a period of five
years from the Fund's commencement date.
G. FORWARD COMMITMENTS--The Fund may enter into forward commitments for the
delayed delivery of securities or forward foreign currency exchange
contracts which are based upon financial indices at a fixed price or
exchange rate at a future date. Risks may arise upon entering these
contracts from the potential inability of counterparts to meet the terms of
their contracts and from unanticipated movements in security prices or
foreign exchange rates. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains
or losses are recorded for financial statement purposes as unrealized until
the contract settlement date.
43
STRATEGIC INCOME FUND
- --------------------------------------------------------------------------------
At November 30, 1994, the Fund had outstanding forward commitments set out
below.
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS TO IN EXCHANGE APPRECIATION
SETTLEMENT DATE DELIVER/RECEIVE FOR (DEPRECIATION)
- ---------------------------------------------- --------------- ----------- --------------
<S> <C> <C> <C>
SALES
- ----------------------------------------------
Italian Lira -- 12/01/94 17,437,500 $10,771 ($18)
- ---------------------------------------------- ---
PURCHASES
- ----------------------------------------------
None
- ----------------------------------------------
Net Unrealized Appreciation (Depreciation)
on Forward Commitments ($18)
- ---------------------------------------------- ---
---
</TABLE>
H. FOREIGN CURRENCY TRANSLATION--The accounting records of the fund are
maintained in U.S. dollars. All assets and liabilities denominated in
foreign currencies ("FC") are translated into U.S. dollars based on the rate
of exchange of such currencies against U.S. dollars on the date of
valuation. Purchases and sales of securities, income and expenses are
translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income and expense amounts
recorded and collected or paid are adjusted when reported by the custodian
bank. The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss
from investments.
Reported net realized foreign exchange gains or losses arise from sales and
maturities of short-term securities, sales of FCs, currency gains or losses
realized between the trade and settlement dates on securities transactions,
the difference between the amounts of dividends, interest, and foreign
withholding taxes recorded on the Fund's books, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in the value of assets and
liabilities other than investments in securities at fiscal year end,
resulting from changes in the exchange rate.
I. RECLASSIFICATIONS--During the year ended November 30, 1994, the Fund adopted
Statement of Position 93-2, Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies. Accordingly, permanent book and tax
differences have been reclassified to paid-in capital. The Fund reclassified
$6,239 and $6,239 from accumulated net realized gain (loss) and
undistributed net investment income, respectively to paid-in capital in
accordance with SOP 93-2. Net investment income, net realized gains, and net
assets were not affected by this change.
J. RESTRICTED SECURITIES--Restricted securities are securities that may only be
resold upon registration under Federal securities laws or in transactions
exempt from such registration. In some cases, the issuer of restricted
securities has agreed to register such securities for resale, at
44
STRATEGIC INCOME FUND
- --------------------------------------------------------------------------------
the issuer's expense either upon demand by the Fund or in connection with
another registered offering of the securities. Many restricted securities
may be resold in the secondary market in transactions exempt from
registration.
Such restricted securities may be determined to be liquid under criteria
established by the Board of Directors. The Fund will not incur any
registration costs upon such resales. The Fund's restricted securities are
valued at the price provided by dealers in the secondary market or, if no
market prices are available, at the fair value as determined by the Fund's
pricing committee. Additional information on each restricted security held
at November 30, 1994 is as follows:
<TABLE>
<CAPTION>
ACQUISITION ACQUISITION
SECURITY DATE COST
- ---------------------------------------------------------- ----------- -----------
<S> <C> <C>
Polymer Group, Inc. Sr. Note 8/10/94 $ 100,000
- ----------------------------------------------------------
Curtice-Burns Foods, Inc., Sr. Sub. Note 11/3/94 50,500
- ----------------------------------------------------------
Waters Corp., Sr. Sub. Note 8/18/94 50,000
- ----------------------------------------------------------
ICON Health & Fitness, Inc. 11/14/94 98,771
- ----------------------------------------------------------
</TABLE>
K. OTHER--Investment transactions are accounted for on the trade date.
(3) CAPITAL STOCK
At November 30, 1994, there were 10,000,000,000 shares of $0.001 par value
capital stock authorized for the Corporation. $4,000,000,000 shares have been
designated for the Fund. Of these shares, 1,000,000,000 have been designated as
Class C Shares, 1,000,000,000 as Class A Shares, and 1,000,000,000 as Fortress
Shares. 1,000,000,000 shares have been designated for additional classes not
currently offered. Transactions in Capital Stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
30, 1994*
----------------------
CLASS C SHARES SHARES DOLLARS
- -------------------------------------------------- -------- -----------
<S> <C> <C>
Shares sold 124,790 $ 1,226,296
- --------------------------------------------------
Shares issued in payment of dividends declared 1,844 17,926
- --------------------------------------------------
Shares redeemed (1,993) (19,338)
- -------------------------------------------------- -------- -----------
Net change resulting from Class C share
transactions 124,641 $ 1,224,884
- -------------------------------------------------- -------- -----------
</TABLE>
45
STRATEGIC INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
30, 1994**
----------------------
CLASS A SHARES SHARES DOLLARS
- -------------------------------------------------- -------- -----------
<S> <C> <C>
Shares sold 410,346 $ 4,053,169
- --------------------------------------------------
Shares issued in payment of dividends declared 3,091 30,074
- --------------------------------------------------
Shares redeemed (165,403) (1,633,770)
- -------------------------------------------------- -------- -----------
Net change resulting from Class A Share
transactions 248,034 $ 2,449,473
- -------------------------------------------------- -------- -----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
30, 1994***
----------------------
FORTRESS SHARES SHARES DOLLARS
- -------------------------------------------------- -------- -----------
<S> <C> <C>
Shares sold 251,274 $ 2,464,030
- --------------------------------------------------
Shares issued in payment of dividends declared 1,656 16,166
- --------------------------------------------------
Shares redeemed (9,165) (88,178)
- -------------------------------------------------- -------- -----------
Net change resulting from Fortress share
transactions 243,765 $ 2,392,018
- -------------------------------------------------- -------- -----------
Net change resulting from Fund share
transactions 616,440 $ 6,066,375
- -------------------------------------------------- -------- -----------
<FN>
* For the period from April 29, 1994 (date of initial public investment) to
November 30, 1994.
** For the period from May 3, 1994 (date of initial public offering) to
November 30, 1994.
*** For the period from May 9, 1994 (date of initial public offering) to
November 30, 1994.
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Advisers, the Fund's investment adviser (the
"Adviser"), receives for its services an annual investment advisory fee equal to
.85 of 1% of the Fund's average daily net assets. The Adviser may voluntarily
choose to waive a portion of its fee and reimburse certain operating expenses of
the Fund. The Adviser can modify or terminate this voluntary waiver and
reimbursement at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
administrative personnel and services. Prior to March 1, 1994, these services
were provided at approximate cost. Effective March 1, 1994, the FAS fee is based
on the level of average aggregate daily net assets of all funds advised by
subsidiaries of Federated Investors for the period. The administrative fee
received during the period of the Administrative Services Agreement shall be at
least $125,000 per portfolio and $30,000 per each additional class of shares.
DISTRIBUTION AND SHAREHOLDER SERVICES FEE--The Fund has adopted a Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the
Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund to finance
46
STRATEGIC INCOME FUND
- --------------------------------------------------------------------------------
activities intended to result in the sale of the Fund's Class C Shares and
Fortress Shares. The Plan provides that the Fund may incur distribution expenses
up to .75 and .50, respectively, of 1% of the average daily net assets of the
Class C Shares and Fortress Shares, respectively, annually, to compensate FSC.
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS up to .25 of 1% of average net assets
for the Fund for the period. This fee is to obtain certain personal services for
shareholders and to maintain shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT--Federated Services Company ("FServ")
serves as transfer and dividend disbursing agent for the Fund. The FServ fee is
based on the size, type and number of accounts and transactions made by
shareholders.
ORGANIZATIONAL EXPENSES--Organizational expenses $103,446 and start-up
administrative services expenses $46,630 were borne initially by the Adviser.
The Fund has agreed to reimburse the Adviser for the organizational expenses and
start-up administrative expenses during the five year period following April 5,
1994 (date the Fund first became effective). For the period ended November 30,
1994, the Fund paid $4,621 and $2,083, respectively pursuant to this agreement.
Certain of the Officers and Directors of the Corporation are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended November 30, 1994, were as follows:
<TABLE>
<S> <C>
- --------------------------------------------------
PURCHASES $6,985,356
- -------------------------------------------------- ----------
SALES $1,105,348
- -------------------------------------------------- ----------
</TABLE>
(6) SUBSEQUENT EVENT
On January 17, 1995, The Grand Union Company announced that it would default on
its January 15, 1995, interest payment. The company is currently in negotiations
with bondholders on a restructuring plan. Fund management is unable to predict
the outcome or timing of these proceedings.
47
INDEPENDENT AUDITORS' REPORT
- ---------------------------------------------------------
To the Board of Directors of FIXED INCOME SECURITIES, INC.
and Shareholders of STRATEGIC INCOME FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Strategic Income Fund (a portfolio of Fixed
Income Securities, Inc.) as of November 30, 1994, and the related statement of
operations, the statement of changes in net assets, and the financial highlights
(see pages 2, 31 and 32 of the prospectus) for the year then ended. 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 securities owned as of November 30, 1994 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 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 Strategic Income
Fund as of November 30, 1994, the results of its operations, the changes in its
net assets, and its financial highlights in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
January 13, 1995
except for footnote 6,
for which the date is
January 17, 1995
48
APPENDIX
(UNAUDITED)
- --------------------------------------------------------------------------------
STANDARD AND POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC--Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposures to adverse
conditions.
C--The rating C typically is applied to debt subordinated to senior debt which
is assigned an actual or implied "CCC-" debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
D--Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
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.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged". 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
49
APPENDIX--CONTINUED
(UNAUDITED)
- --------------------------------------------------------------------------------
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured.) Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
NR--Not rated by Moody's.
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.
50
APPENDIX--CONTINUED
(UNAUDITED)
- --------------------------------------------------------------------------------
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. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D--Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D" represents
the lowest potential for recovery.
NR--Indicates that Fitch does not rate the specific issue.
51
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Strategic Income 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 Trust Company P.O. Box 8604
Boston, Massachusetts 02266-8604
- -------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 125 Summer Street
Boston, Massachusetts 02110-1617
- -------------------------------------------------------------------------------------------
</TABLE>
52
- --------------------------------------------------------------------------------
STRATEGIC INCOME FUND
FORTRESS SHARES
PROSPECTUS
A Diversified Portfolio of
Fixed Income Securities, Inc.,
an Open-End Management
Investment Company
January 31, 1995
[LOGO] FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
338319882
4031801A-FS (1/95) RECYCLED PAPER [LOGO]
Strategic Income Fund
(A Portfolio of Fixed Income Securities, Inc.)
Fortress Shares
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus of Fortress Shares of Strategic Income Fund (the
"Fund") dated January 31, 1995. 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, 1995
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of Federated
Investors
General Information About the
Fund 1
Investment Objective and Policies 1
Types of Investments and
Investment Techniques 1
Resets of Interest 1
Caps and Floors 1
Brady Bonds 1
Non-Mortgage Related Asset-
Backed Securities 2
Convertible Securities 2
Equity Securities 2
Warrants 2
Futures and Options
Transactions 3
Foreign Bank Instruments 6
When-Issued and Delayed
Delivery Transactions 6
Lending of Portfolio Securities 6
Restricted and Illiquid
Securities 7
Repurchase Agreements 7
Reverse Repurchase Agreements 7
Portfolio Turnover 7
Investment Limitations 7
Fixed Income Securities, Inc.
Management 10
The Funds 13
Fund Ownership 13
Officers and Directors
Compensation 13
Director Liability 14
Investment Advisory Services 14
Adviser to the Fund 14
Advisory Fees 14
Transfer Agent and Dividend
Disbursing Agent 15
Brokerage Transactions 15
Purchasing Shares 16
Distribution and Shareholder
Services Plans 16
Conversion to Federal Funds 16
Purchases by Sales
Representatives, Fund
Directors, and Employees 16
Determining Net Asset Value 16
Determining Market Value of
Securities 17
Redeeming Shares 17
Redemption in Kind 17
Tax Status 17
The Fund's Tax Status 17
Foreign Taxes 18
Shareholders' Tax Status 18
Total Return 18
Yield 18
Performance Comparisons 18
General Information About the Fund
The Fund is a portfolio of Fixed Income Securities, Inc. (the
"Corporation"). The Corporation was incorporated under the laws of the
State of Maryland on October 15, 1991.
Investment Objective and Policies
The investment objective of the Fund is to seek a high level of current
income. The investment objective stated above cannot be changed without
approval of shareholders. The investment policies stated below may be
changed by the Board of Directors ("Directors") without shareholder
approval. Shareholders will be notified before any material change in
the investment policies becomes effective.
Types of Investments and Investment Techniques
The Fund pursues its investment objective by investing in a diversified
portfolio primarily consisting of domestic corporate debt obligations,
U.S. government securities, and foreign government and corporate debt
obligations. Under normal circumstances, the Fund's assets will be
invested in each of these three sectors. However, the Fund may from time
to time invest up to 100% of its total assets in any one sector if, in
the judgment of the investment adviser, the Fund has the opportunity of
seeking a high level of current income without undue risk to principal.
Resets of Interest
The interest rates paid on the mortgage-backed securities in which the
Fund invests generally are readjusted at intervals of one year or less
to an increment over some predetermined interest rate index. There are
two main categories of indices: those based on U.S. Treasury securities
and those derived from a calculated measure, such as a cost of funds
index or a moving average of mortgage rates. Commonly utilized indices
include the one-year and five-year constant maturity Treasury note
rates, the three-month Treasury bill rate, the 180-day Treasury bill
rate, rates on longer-term Treasury securities, the National Median Cost
of Funds, the one-month or three-month London Interbank Offered Rate
(LIBOR), the prime rate of a specific bank, or commercial paper rates.
Some indices, such as the one-year constant maturity Treasury Note rate,
closely mirror changes in market interest rate levels.
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, Adjustable Rate Mortgages ("ARMs") which use indices that lag
changes in market rates should experience greater price volatility than
adjustable rate mortgage securities that closely mirror the market.
Caps and Floors
The underlying mortgages which collateralize the mortgage-backed
securities in which the Fund invests will frequently have caps and
floors which limit the maximum amount by which the loan rate to the
residential borrower may change up or down: (1) per reset or adjustment
interval, and (2) over the life of the loan. Some residential mortgage
loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative
amortization.
The value of mortgage securities in which the Fund invests may be
affected if market interest rates rise or fall faster and farther than
the allowable caps or floors on the underlying residential mortgage
loans. Additionally, even though the interest rates on the underlying
residential mortgages are adjustable, amortization and prepayments may
occur, thereby causing the effective maturities of the mortgage
securities in which the Fund invests to be shorter than the maturities
stated in the underlying mortgages.
Brady Bonds
The Fund may invest in U.S. dollar-denominated foreign securities
referred to as "Brady Bonds." These are debt obligations of foreign
entities that may be fixed-rate par bonds or floating-rate discount
bonds and are generally collateralized in full as to principal due at
maturity by U.S. Treasury zero coupon obligations that have the same
maturity as the Brady Bonds. However, the Fund may also invest in
uncollateralized Brady Bonds. Brady Bonds are generally viewed as having
three or four valuation components: (i) any collateralized repayment of
principal at final maturity; (ii) the collateralized interest payments;
(iii) the uncollateralized interest payments; and (iv) any
uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute what is referred to as the "residual
risk" of such bonds). In the event of a default with respect to
collateralized Brady Bonds as a result of which the payment obligations
of the issuer are accelerated, the zero coupon U.S. Treasury securities
held as collateral for the payment of principal will not be distributed
to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to
be outstanding, at which time the face amount of the collateral will
equal the principal payments which would have then been due on the Brady
Bonds in the normal course. In addition, in light of the residual risk
of Brady Bonds and, among other factors, the history of defaults with
respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are to be
viewed as speculative.
Non-Mortgage Related Asset-Backed Securities
Non-mortgage related asset-backed securities present certain risks that
are not presented by mortgage-backed securities. Primarily, these
securities do not have the benefit of the same security interest in the
related collateral. Credit card receivables are generally unsecured and
the debtors are entitled to the protection of a number of state and
federal consumer credit laws, many of which give such debtors the right
to set off certain amounts owed on the credit cards, thereby reducing
the balance due. Most issuers of asset-backed securities backed by motor
vehicle installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If the
servicer sells these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders
of the related asset-backed securities. Further, if a vehicle is
registered in one state and is then re-registered because the owner and
the obligor move to another state, such re-registration could defeat the
original security interest in the vehicle in certain cases. In addition,
because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee with the
holders of asset-backed securities backed by automobile receivables may
not have a proper security interest in all of the obligations backing
such receivables. Therefore, there is a possibility that recoveries on
repossessed collateral may not, in some cases, be available to support
payments on these securities.
Convertible Securities
The Fund may invest in convertible securities. Convertible securities
are fixed income securities that may be exchanged or converted into a
predetermined number of shares of the issuer's underlying common stock
at the option of the holder during a specified period. Convertible
securities may take the form of convertible preferred stock, convertible
bonds or debentures, units consisting of "usable" bonds and warrants or
a combination of the features of several of these securities. The
investment characteristics of each convertible security vary widely,
which allows convertible securities to be employed for a variety of
investment strategies.
The Fund will exchange or convert convertible securities into shares of
underlying common stock when, in the opinion of the investment adviser,
the investment characteristics of the underlying common shares will
assist the Fund in achieving its investment objective. The Fund may also
elect to hold or trade convertible shares. In selecting convertible
securities, the Fund's investment adviser evaluates the investment
characteristics of the convertible security as a fixed income
instrument, and the investment potential of the underlying equity
security for capital appreciation. In evaluating these matters with
respect to a particular convertible security, the investment adviser
considers numerous factors, including the economic and political
outlook, the value of the security relative to other investment
alternatives, trends in the determinants of the issuer's profits, and
the issuer's management capability and practices.
Equity Securities
Generally, less than 10% of the value of the Fund's total assets will be
invested in equity securities, including common stocks, warrants or
rights. The Fund may exceed this limitation for temporary defensive
purposes if unusual market conditions occur.
Warrants
The Fund may invest in warrants. Warrants are basically options to
purchase common stock at a specific price (usually at a premium above
the market value of the optioned common stock at issuance) valid for a
specific period of time. Warrants may have a life ranging from less than
one year to twenty years, or they may be perpetual. However, most
warrants have expiration dates after which they are worthless. In
addition, a warrant is worthless if the market price of the common stock
does not exceed the warrant's exercise price during the life of the
warrant. Warrants have no voting rights, pay no dividends, and have no
rights with respect to the assets of the corporation issuing them. The
percentage increase or decrease in the market price of the warrant may
tend to be greater than the percentage increase or decrease in the
market price of the optioned common stock. The Fund will not invest more
than 5% of the value of its total assets in warrants. Warrants acquired
in units or attached to securities may be deemed to be without value for
purposes of this policy.
Futures and Options Transactions
The Fund may attempt to hedge all or a portion of its portfolio by
buying and selling financial futures contracts, buying put options on
portfolio securities and listed put options on futures contracts, and
writing call options on futures contracts. The Fund may also write
covered call options on portfolio securities to attempt to increase its
current income. The Fund currently does not intend to invest more than
5% of its total assets in options transactions.
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).
Purchasing and Writing Over-the-Counter Options
The Fund may purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the buyers or
writers of the options for those options on portfolio securities
held by the Fund and not traded on an exchange. Over-the-counter
options are two party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are
third party contracts with standardized strike prices and
expiration dates and are purchased from a clearing corporation.
Exchange-traded options have a continuous liquid market while over-
the-counter options may not.
Foreign Currency Transactions
The Fund may engage without limitation in foreign currency
transactions, including those described below.
Currency Risks
The exchange rates between the U.S. dollar and foreign currencies
are a function of such factors as supply and demand in the
currency exchange markets, international balances of payments,
governmental intervention, speculation and other economic and
political conditions. Although the Fund values its assets daily in
U.S. dollars, the Fund may not convert its holdings of foreign
currencies to U.S. dollars daily. The Fund may incur conversion
costs when it converts its holdings to another currency. Foreign
exchange dealers may realize a profit on the difference between
the price at which the Fund buys and sells currencies.
The Fund will engage in foreign currency exchange transactions in
connection with its investments in the securities. The Fund will
conduct its foreign currency exchange transactions either on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through forward contracts to purchase
or sell foreign currencies.
Forward Foreign Currency Exchange Contracts
The Fund may enter into forward foreign currency exchange
contracts in order to protect itself against a possible loss
resulting from an adverse change in the relationship between the
U.S. dollar and a foreign currency involved in an underlying
transaction. However, forward foreign currency exchange contracts
may limit potential gains which could result from a positive
change in such currency relationships. The Fund's investment
adviser believes that it is important to have the flexibility to
enter into forward foreign currency exchange contracts whenever it
determines that it is in the Fund's best interest to do so. The
Fund will not speculate in foreign currency exchange.
The Fund will not enter into forward foreign currency exchange
contracts or maintain a net exposure in such contracts when it
would be obligated to deliver an amount of foreign currency in
excess of the value of its portfolio securities or other assets
denominated in that currency or, in the case of a "cross-hedge"
denominated in a currency or currencies that the Fund's investment
adviser believes will tend to be closely correlated with that
currency with regard to price movements. Generally, the Fund will
not enter into a forward foreign currency exchange contract with a
term longer than one year.
Foreign Currency Options
A foreign currency option provides the option buyer with the right
to buy or sell a stated amount of foreign currency at the exercise
price on a specified date or during the option period. The owner
of a call option has the right, but not the obligation, to buy the
currency. Conversely, the owner of a put option has the right, but
not the obligation, to sell the currency.
When the option is exercised, the seller (i.e., writer) of the
option is obligated to fulfill the terms of the sold option.
However, either the seller or the buyer may, in the secondary
market, close its position during the option period at any time
prior to expiration.
A call option on foreign currency generally rises in value if the
underlying currency appreciates in value, and a put option on
foreign currency generally falls in value if the underlying
currency depreciates in value. Although purchasing a foreign
currency option can protect the Fund against an adverse movement
in the value of a foreign currency, the option will not limit the
movement in the value of such currency. For example, if the Fund
was holding securities denominated in a foreign currency that was
appreciating and had purchased a foreign currency put to hedge
against a decline in the value of the currency, the Fund would not
have to exercise their put option. Likewise, if the Fund were to
enter into a contract to purchase a security denominated in
foreign currency and, in conjunction with that purchase, were to
purchase a foreign currency call option to hedge against a rise in
value of the currency, and if the value of the currency instead
depreciated between the date of purchase and the settlement date,
the Fund would not have to exercise its call. Instead, the Fund
could acquire in the spot market the amount of foreign currency
needed for settlement.
Special Risks Associated with Foreign Currency Options
Buyers and sellers of foreign currency options are subject to the
same risks that apply to options generally. In addition, there are
certain additional risks associated with foreign currency options.
The markets in foreign currency options are relatively new, and
the Fund's ability to establish and close out positions on such
options is subject to the maintenance of a liquid secondary
market. Although the Fund will not purchase or write such options
unless and until, in the opinion of the Fund's investment adviser,
the market for them has developed sufficiently to ensure that the
risks in connection with such options are not greater than the
risks in connection with the underlying currency, there can be no
assurance that a liquid secondary market will exist for a
particular option at any specific time. In addition, options on
foreign currencies are affected by all of those factors that
influence foreign exchange rates and investments generally.
Foreign currency options that are considered to be illiquid are
subject to the Fund's 15% limitation on illiquid securities.
The value of a foreign currency option depends upon the value of
the underlying currency relative to the U.S. dollar. As a result,
the price of the option position may vary with changes in the
value of either or both currencies and may have no relationship to
the investment merits of a foreign security. Because foreign
currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in
the use of foreign currency options, investors may be
disadvantaged by having to deal in an odd lot market (generally
consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable
than for round lots.
There is no systematic reporting of last sale information for
foreign currencies or any regulatory requirement that quotations
available through dealers or other market sources be firm or
revised on a timely basis. Available quotation information is
generally representative of very large transactions in the
interbank market and thus may not reflect relatively smaller
transactions (i.e., less than $1 million) where rates may be less
favorable. The interbank market in foreign currencies is a global,
around-the-clock market. To the extent that the U.S. option
markets are closed while the markets for the underlying currencies
remain open, significant price and rate movements may take place
in the underlying markets that cannot be reflected in the options
markets until they reopen.
Foreign Currency Futures Transactions
By using foreign currency futures contracts and options on such
contracts, the Fund may be able to achieve many of the same
objectives as it would through the use of forward foreign currency
exchange contracts. The Fund may be able to achieve these
objectives possibly more effectively and at a lower cost by using
futures transactions instead of forward foreign currency exchange
contracts.
Special Risks Associated with Foreign Currency Futures Contracts and
Related Options
Buyers and sellers of foreign currency futures contracts are
subject to the same risks that apply to the use of futures
generally. In addition, there are risks associated with foreign
currency futures contracts and their use as a hedging device
similar to those associated with options on futures currencies, as
described above.
Options on foreign currency futures contracts may involve certain
additional risks. Trading options on foreign currency foreign
currency futures contracts is relatively new. The ability to
establish and close out positions on such options is subject to
the maintenance of a liquid secondary market. To reduce this risk,
the Fund will not purchase or write options on foreign currency
futures contracts unless and until, in the opinion of the Fund's
investment adviser, the market for such options has developed
sufficiently that the risks in connection with such options are
not greater than the risks in connection with transactions in the
underlying foreign currency futures contracts. Compared to the
purchase or sale of foreign currency futures contracts, the
purchase of call or put options on futures contracts involves less
potential risk to the Fund because the maximum amount at risk is
the premium paid for the option (plus transaction costs). However,
there may be circumstances when the purchase of a call or put
option on a futures contract would result in a loss, such as when
there is no movement in the price of the underlying currency or
futures contract.
Foreign Bank Instruments
Eurodollar Certificates of Deposit ("ECDs"), Eurodollar Time Deposits
("ETDs"), Yankee Certificates of Deposit ("Yankee CDs"), and Europaper
are subject to somewhat different risks than domestic obligations of
domestic issuers. Examples of these risks include international,
economic and political developments, foreign governmental restrictions
that may adversely affect the payment of principal or interest, foreign
withholdings or other taxes on interest income, difficulties in
obtaining or enforcing a judgment against the issuing bank, and the
possible impact of interruptions of the flow of international currency
transactions. Different risks may also exist for ECDs, ETDs, and Yankee
CDs because the banks issuing these instruments, or their domestic or
foreign branches, are not necessarily subject to the same regulatory
requirements that apply to domestic banks, such as reserve requirements,
loan requirements, loan limitations, examinations, accounting, auditing,
and recording keeping and the public availability of information. These
factors will be carefully considered by the Fund's adviser in selecting
investments for the Fund.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. 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 on the Fund's records at the trade date. These
assets are marked to market daily and are maintained until the
transaction has been settled. The Fund does not intend to engage in
when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
Lending of Portfolio Securities
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities. Loans are
subject to termination at the option of the Fund or the borrower. The
Fund may pay reasonable administrative and custodial fees in connection
with a loan and may pay a negotiated portion of the interest earned on
the cash or equivalent collateral to the borrower or placing broker.
Restricted and Illiquid Securities
The ability of the Directors to determine the liquidity of certain
restricted securities is permitted under the Securities and Exchange
Commission ("SEC") Staff position set forth in the adopting release for
Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is a
non-exclusive safe harbor for certain secondary market transactions
involving securities subject to restrictions on resale under federal
securities laws. The Rule provides an exemption from registration for
resales of otherwise restricted securities to qualified institutional
buyers. The Rule was expected to further enhance the liquidity of the
secondary market for securities eligible for resale under Rule 144A. The
Fund believes that the Staff of the SEC has left the question of
determining the liquidity of all restricted securities to the Directors.
The Directors consider the following criteria in determining the
liquidity of certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and
the number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace
trades.
Repurchase Agreements
The Fund requires its custodian to take possession of the securities
subject to repurchase agreements, and these securities are marked to
market daily. To the extent that the original seller does not repurchase
the securities from the Fund, the Fund could receive less than the
repurchase price on any sale of such securities. In the event that a
defaulting seller files for bankruptcy or becomes insolvent, disposition
of securities by the Fund might be delayed pending court action. The
Fund believes that under the regular procedures normally in effect for
custody of the Fund's portfolio securities subject to repurchase
agreements, a court of competent jurisdiction would rule in favor of the
Fund and allow retention or disposition of such securities. The Fund
will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are
deemed by the Fund's adviser to be creditworthy pursuant to guidelines
established by the Directors.
Reverse Repurchase Agreements
The Fund may also enter into reverse repurchase agreements. A reverse
repurchase transaction is similar to borrowing cash. In a reverse
repurchase agreement the Fund transfers possession of a portfolio
instrument to another person, such as a financial institution, broker,
or dealer, in return for a percentage of the instrument's market value
in cash, and agrees that on a stipulated date in the future, the Fund
will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio
instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not
ensure that the Fund will be able to avoid selling portfolio instruments
at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund,
in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked
to market daily and are maintained until the transaction is settled.
Portfolio Turnover
The Fund will not attempt to set or meet a portfolio turnover rate since
any turnover would be incidental to transactions undertaken in an
attempt to achieve the Fund's investment objective, without regard to
the length of time a particular security may have been held. The adviser
does not anticipate that portfolio turnover will result in adverse tax
consequences. During the period from April 29, 1994 (date of initial
public investment), through November 30, 1994, the Fund's portfolio
turnover rate was 34%.
Investment Limitations
Selling Short and Buying on Margin
The Fund will not sell securities short or purchase securities on
margin, other than in connection with the purchase and sale of
options, financial futures and options on financial futures, but
may obtain such short-term credits as are necessary for clearance
of transactions.
Issuing Senior Securities and Borrowing Money
The Fund will not issue senior securities except as required by
forward commitments to purchase securities or currencies and
except that the Fund may borrow money and engage in reverse
repurchase agreements in amounts up to one-third of the value of
its total assets, including the amounts borrowed. The Fund will
not borrow money or engage in reverse repurchase agreements for
investment leverage, but rather as a temporary, extraordinary, or
emergency measure or to facilitate management of the portfolio by
enabling the Fund to meet redemption requests when the liquidation
of portfolio securities is deemed to be inconvenient or
disadvantageous. The Fund will not purchase any securities while
borrowings in excess of 5% of its total assets are outstanding.
During the period any reverse repurchase agreements are
outstanding, but only to the extent necessary to assure completion
of the reverse repurchase agreements, the Fund will restrict the
purchase of portfolio instruments to money market instruments
maturing on or before the expiration date of the reverse
repurchase agreements.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate any assets
except to secure permitted borrowings. In those cases, it may
pledge assets having a market value not exceeding the lesser of
the dollar amounts borrowed or 15% of the value of total assets at
the time of the borrowing. Margin deposits for the purchase and
sale of options, financial futures contracts and related options
are not deemed to be a pledge.
Diversification of Investments
With respect to securities comprising 75% of the value of its
total assets, the Fund will not purchase securities of any one
issuer (other than cash, cash items or securities issued or
guaranteed by the government of the United States or its agencies
or instrumentalities and repurchase agreements collateralized by
U.S. government securities) if as a result more than 5% of the
value of its total assets would be invested in the securities of
that issuer or the Fund would own more than 10% of the outstanding
voting securities of that issuer.
Investing in Real Estate
The Fund will not buy or sell real estate, including limited
partnership interests in real estate, although it may invest in
securities of companies whose business involves the purchase or
sale of real estate or in securities which are secured by real
estate or interests in real estate.
Investing in Commodities
The Fund will not purchase or sell commodities, except that the
Fund may purchase and sell financial futures contracts and related
options. Further, the Fund may engage in transactions in foreign
currencies and may purchase and sell options on foreign currencies
and indices for hedging purposes.
Underwriting
The Fund will not underwrite any issue of securities, except as it
may be deemed to be an underwriter under the Securities Act of
1933 in connection with the sale of restricted securities which
the Fund may purchase pursuant to its investment objective,
policies, and limitations.
Lending Cash or Securities
The Fund will not lend any of its assets, except portfolio
securities up to one-third of the value of its total assets. This
shall not prevent the Fund from purchasing or holding U.S.
government obligations, money market instruments, variable rate
demand notes, bonds, debentures, notes, certificates of
indebtedness, or other debt securities, entering into repurchase
agreements, or engaging in other transactions where permitted by
the Fund's investment objective, policies and limitations.
Concentration of Investments
The Fund will not invest 25% or more of the value of its total
assets in any one industry or in government securities of any one
foreign country, except it may invest 25% or more of the value of
its total assets in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the
Directors without shareholder approval. Shareholders will be notified
before any material change in these limitations becomes effective.
Investing in Restricted Securities
The Fund will not invest more than 10% of the value of its total
assets in securities subject to restrictions on resale under the
Securities Act of 1933, except for commercial paper issued under
Section 4(2) of the Securities Act of 1933 and certain other
restricted securities which meet the criteria for liquidity as
established by the Directors.
Investing in Illiquid Securities
The Fund will not invest more than 15% of the value of its net
assets in illiquid securities, including repurchase agreements
providing for settlement in more than seven days after notice,
over-the-counter options, certain foreign currency options, and
certain securities not determined by the Directors to be liquid.
Investing in New Issuers
The Fund will not invest more than 5% of the value of its total
assets in securities of companies, including their predecessors,
that have been in operation for less than three years. With
respect to asset-backed securities, the Fund will treat the
originator of the asset pool as the company issuing the security
for purposes of determining compliance with this limitation.
Investing in Minerals
The Fund will not purchase or sell oil, gas, or other mineral
exploration or development programs or leases, although it may
purchase the securities of issuers which invest in or sponsor such
programs.
Investing in Warrants
The Fund will not invest more than 5% of its net assets in
warrants, including those acquired in units or attached to other
securities. To comply with certain state restrictions, the Fund
will limit its investments in such warrants not listed on the New
York or American Stock Exchanges to 2% of its net assets. (If
state restrictions change, this latter restriction may be revised
without notice to shareholder.) For purposes of this investment
restriction, warrants will be valued at the lower of cost or
market, except that warrants acquired by the Fund in units with or
attached to securities may be deemed to be without value.
Investing in Securities of Other Investment Companies
The Fund will limit its investments in other investment companies
to no more than 3% of the total outstanding voting securities of
any such investment company, will invest no more than 5% of its
total assets in any one investment company, and will invest no
more than 10% of its total assets in investment companies in
general. These limitations are not applicable if the securities
are acquired as part of a merger, consolidation, reorganization,
or other acquisition.
Dealing in Puts and Calls
The Fund may not write or purchase options, except that the Fund
may write covered call options and secured put options on up to
25% of its net assets and may purchase put and call options,
provided that no more than 5% of the fair market value of its net
assets may be invested in premiums on such options.
Investing in Issuers Whose Securities are Owned by Officers and
Directors of the Corporation
The Fund will not purchase or retain the securities of any issuer
if the officers and Directors of the Corporation or its investment
adviser owning individually more than 1/2 of 1% of the issuer's
securities together own more than 5% of the issuer's securities.
Except with respect to borrowing money, if a percentage limitation
is adhered to at the time of the investment, a later increase or
decrease in percentage resulting from any change in value or net
assets will not result in a violation of such restriction. For
purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a
U.S. branch of a domestic bank or savings association having
capital, surplus, and undivided profits in excess of $100,000,000
at the time of investment to be "cash items."
The Fund does not expect to borrow money or pledge securities in
excess of 5% of the value of its total assets during the present
fiscal year.
Fixed Income Securities, Inc. Management
Officers and Directors are listed with their addresses, present
positions with Fixed Income Securities, Inc., and principal
occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Chairman and Director
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life
and Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, Vice President of the Company.
Thomas G. Bigley
28th Floor, One Oxford Center
Pittsburgh, PA
Director
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee, or Managing General Partner
of the Funds; formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Director
President, Investment Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors; President, Northgate
Village Development Corporation; Partner or Trustee in private real
estate ventures in Southwest Florida; Director, Trustee, or Managing
General Partner of the Funds; formerly, President, Naples Property
Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Director
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Director,
Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Director
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; Professor of Medicine and Trustee, University of Pittsburgh;
Director of Corporate Health, University of Pittsburgh Medical Center;
Director, Trustee, or Managing General Partner of the Funds.
Richard B. Fisher *
Federated Investors Tower
Pittsburgh, PA
President and Director
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.
Edward L. Flaherty, Jr.@
Two Gateway Center - Suite 674
Pittsburgh, PA
Director
Attorney-at-law; Partner, Henny, Koehuba, Meyer & Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.
Peter E. Madden
225 Franklin Street
Boston, MA
Director
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds; formerly,
President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Two Gateway Center - Suite 674
Pittsburgh, PA
Director
Attorney-at-law; Partner, Henny, Koehuba, Meyer & Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Director
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Director
Public relations/marketing consultant; Director, Trustee, or Managing
General Partner of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Vice President
President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and Director,
Federated Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; 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 Company.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.
* This Director is deemed to be an "interested person" as defined
in the Investment Company Act of 1940, as amended.
@ Member of the 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:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Cash Management Trust; Automated Government Money Trust;
California Municipal Cash Trust; Cash Trust Series II; Cash Trust
Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport
Cash Trust; 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 Institutional
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; International Series, Inc.; Investment Series Funds,
Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.;
Liberty U.S. Government Money Market Trust; Liberty Term Trust, Inc. -
1999; Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed Series
Trust; The Medalist Funds; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income
Trust; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; Newpoint Funds; RIMCO Monument Funds; The
Shawmut Funds; Short-Term Municipal Trust; Star Funds; The Starburst
Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; Trademark
Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for
U.S. Treasury Obligations; World Investment Series, Inc.
Fund Ownership
Officers and Directors own less than 1% of the outstanding Fortress
Shares (the "Shares") of the Fund.
As of January 11, 1995, Merrill Lynch, Pierce, Fenner & Smith,
Jacksonville, Florida, as record owner holding Fortress Shares of the
Fund for its clients, owned approximately 111,498 shares (41.54%).
As of January 11, 1995, Merrill Lynch, Pierce, Fenner & Smith,
Jacksonville, Florida, as record owner holding Class A Shares of the
Fund for its clients, owned approximately 21, 665 shares (8.07%).
As of January 11, 1995, the following shareholders of record owned 5% or
more of the outstanding Class C Shares of the Fund: Joseph J. Dinnigan
and Dorothy F. Dinnigan, Yaphank, New York, owned approximately 6,531
shares (5.19%), and State Street Bank and Trust Company, custodian for
the IRA rollover of Jules Nitzberg, Jenkintown, Pennsylvania, owned
approximately 7,266 shares (5.77%).
Officers and Directors Compensation
NAME , AGGREGATE TOTAL COMPENSATION
PAID
POSITION WITH COMPENSATION FROM TO DIRECTORS FROM
CORPORATION *CORPORATION CORPORATION AND FUND
COMPLEX
John F. Donahue,
Chairman and Director $ -0- $ -0- for the
Corporation and
69 investment
companies
Thomas G. Bigley,
Director $ 131.00 $ 24,991 for the
Corporation and
50 investment
companies
John T. Conroy, Jr.,
Director $ 1,501.75 $ 136,100 for the
Corporation and
65 investment
companies
William J. Copeland,
Director $ 1,501.75 $ 136,100 for the
Corporation and
65 investment
companies
James E. Dowd,
Director $ 1,501.75 $ 136,100 for the
Corporation and
65 investment
companies
Lawrence D. Ellis, M.D.,
Director $ 1,362.50 $ 123,600 for the
Corporation and
65 investment
companies
Richard B. Fisher,
President and Director $ -0- $ -0- for the
Corporation and
9 investment
companies
Edward L. Flaherty, Jr.,
Director $ 1,501.75 $ 136,100 for the
Corporation and
65 investment
companies
Peter E. Madden,
Director $ 1,153.50 $ 104,880 for the
Corporation and
65 investment
companies
Gregor F. Meyer,
Director $ 1,362.50 $ 123,600 for the
Corporation and
65 investment
companies
Wesley W. Posvar,
Director $ 1,362.50 $ 123,600 for the
Corporation and
65 investment
companies
Marjorie P. Smuts,
Director $ 1,362.50 $ 123,600 for the
Corporation and
65 investment
companies
* The aggregate compensation is provided for the Corporation which is
comprised of 4 portfolios.
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.
Advisory Fees
For its advisory services, Federated Advisers receives an annual
investment advisory fee as described in the prospectus.
During the period from April 29, 1994 (date of initial public
investment), through November 30, 1994, the Adviser earned $15,014, all
of which was voluntarily waived.
State Expense Limitations
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose
shares are registered for sale in those states. If the Fund's
normal operating expenses (including the investment advisory fee,
but not including brokerage commissions, interest, taxes, and
extraordinary expenses) exceed 2-1/2% per year of the first $30
million of average net assets, 2% per year of the next $70 million
of average net assets, and 1-1/2% per year of the remaining
average net assets, the Adviser will reimburse the Fund for its
expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
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.
Administrative Services
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. During the period from April 29, 1994
(date of initial public investment), through November 30, 1994, $61,836
in fees were paid to Federated Administrative Services.
Dr. Henry J. Gailliot, an officer of Federated Advisers, the adviser to
the Fund, holds approximately 20% of the outstanding common stock and
serves as a director of Commercial Data Services, Inc., a company which
provides computer processing services to Federated Administrative
Services.
Transfer Agent and Dividend Disbursing Agent
Federated Services Company serves as transfer agent and dividend
disbursing agent for the Fund. The fee paid to the transfer agent is
based upon the size, type and number of accounts and transactions made
by shareholders.
Federated Services Company also maintains the Fund's accounting records.
The fee paid for this service is based upon the level of the Fund's
average net assets for the period plus out-of-pocket expenses.
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:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o 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.
For the fiscal year ended November 30, 1994, the Fund paid no brokerage
commissions on brokerage transactions.
Purchasing Shares
Except under certain circumstances described in the prospectus, Shares
are sold at their net asset value plus a sales load on days the New York
Stock Exchange is open for business. The procedure for purchasing Shares
is explained in the prospectus under "Investing in Fortress Shares."
Distribution and Shareholder Services Plans
These arrangements permit the payment of fees to financial institutions,
the distributor, and Federated Shareholder Services, to stimulate
distribution activities and to cause services to be provided to
shareholders by a representative who has knowledge of the shareholder's
particular circumstances and goals. These activities and services may
include, but are not limited to, marketing efforts; providing office
space, equipment, telephone facilities, and various clerical,
supervisory, computer, and other personnel as necessary or beneficial to
establish and maintain shareholder accounts and records; processing
purchase and redemption transactions and automatic investments of client
account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and
addresses.
By adopting the Distribution Plan, the Board of Directors expects that
the Fund will be able to achieve a more predictable flow of cash for
investment purposes and to meet redemptions. This will facilitate more
efficient portfolio management and assist the Fund in pursuing its
investment objectives. By identifying potential investors whose needs
are served by the Fund's objectives, and properly servicing these
accounts, it may be possible to curb sharp fluctuations in rates of
redemptions and sales.
Other benefits, which may be realized under either arrangement, may
include: (1) providing personal services to shareholders; (2) investing
shareholder assets with a minimum of delay and administrative detail;
(3) enhancing shareholder recordkeeping systems; and (4) responding
promptly to shareholders' requests and inquiries concerning their
accounts.
During the period from May 9, 1994 (date of initial public investment),
through November 30, 1994, payment in the amount of $2,902 was made
pursuant to the Distribution Plan for Fortress Shares. In addition,
payment in the amount of $1,451 was made pursuant to the Shareholder
Services Plan for Fortress Shares.
During the period from April 29, 1994 (date of initial public
investment), through November 30, 1994, payment in the amount of $2,606
was made pursuant to the Distribution Plan for Class C Shares. In
addition, payment in the amount of $869 was made pursuant to the
Shareholder Services Plan for Class C Shares.
During the period from May 3, 1994 (date of initial public investment)
through November 30, 1994, payment in the amount of $2,096 was made
pursuant to the Shareholder Services Plan for Class A Shares.
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from
shareholders must be in federal funds or be converted into federal funds
before shareholders begin to earn dividends. State Street Bank and Trust
Company ("State Street Bank") acts as the shareholder's agent in
depositing checks and converting them to federal funds. Orders by mail
are considered received after payment by check is converted by State
Street Bank into federal funds. This is generally the next business day
after State Street Bank receives the check.
Purchases by Sales Representatives, Fund Directors, and Employees
Directors, employees, and sales representatives of the Fund, the
Adviser, and Federated Securities Corp. or their affiliates, or any
investment dealer who has a sales agreement with Federated Securities
Corp., and their spouses and children under 21, may buy Shares at net
asset value without a sales load. Shares may also be sold without a
sales load 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:
o as provided by an independent pricing service;
o 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
o 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:
o yield;
o quality;
o coupon rate;
o maturity;
o type of issue;
o trading characteristics; and
o other market data.
Redeeming Shares
The Fund redeems Shares at the next computed net asset value after the
Fund receives the redemption request. Shareholder redemptions may be
subject to a contingent deferred sales charge. Redemption procedures are
explained in the prospectus under "Redeeming Fortress Shares." Although
the Fund does not charge for telephone redemptions, it reserves the
right to charge a fee for the cost of wire-transferred redemptions of
less than $5,000.
Certain Shares redeemed within one to four years of purchase may be
subject to a 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 administrator for services rendered, and the length of time the
investor remains a holder of Shares. Should administrators elect to
receive an administrative fee that is less than that stated in the
prospectus for servicing a particular shareholder, the 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 Fund's net asset value, whichever is less, for any
one shareholder within a 90-day period.
Any redemption beyond this amount will also be in cash unless the
Directors determine that payments should be in kind. In such a case, the
Fund will pay all or a portion of the remainder of the redemption in
portfolio instruments, valued in the same way that net asset value is
determined. The portfolio instruments will be selected in a manner that
the Directors deem fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption
is made in kind, shareholders receiving their securities and selling
them before their maturity could receive less than the redemption value
of their securities and could incur certain transaction costs.
Tax Status
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, the Fund
must, among other requirements:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
Foreign Taxes
Investment income on certain foreign securities in which the Fund may
invest may be subject to foreign withholding or other taxes that could
reduce the return on these securities. Tax treaties between the United
States and foreign countries, however, may reduce or eliminate the
amount of foreign taxes to which the Fund would be subject.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional Shares. No portion of any income
dividend paid by the Fund is eligible for the dividends received
deduction available to corporations.
Capital Gains
Shareholders will pay federal tax at capital gains rates on long-
term capital gains distributed to them regardless of how long they
have held the Shares.
Total Return
The Fortress Shares' cumulative total return from May 9, 1994 (date of
initial public investment), through November 30, 1994, was (2.22%). The
Class C Shares' cumulative total return from April 29, 1994 (date of
initial public investment), through November 30, 1994, was (1.46%). The
Class A Shares' cumulative total return from May 3, 1994 (date of
initial public investment), through November 30, 1994, was (4.45%).
Cumulative total return reflects the 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 any contingent deferred sales
charge. The Shares' cumulative total return is representative of
approximately seven months of Fund activity since the Shares' date of
initial public investment.
The average annual total return for the Shares is the average compounded
rate of return for a given period that would equate a $1,000 initial
investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of Shares owned
at the end of the period by the offering price per Share at the end of
the period. The number of Shares owned at the end of the period is based
on the number of Shares purchased at the beginning of the period with
$1,000, less any applicable sales load, adjusted over the period by any
additional Shares, assuming the monthly reinvestment of all dividends
and distributions. Any applicable contingent deferred sales charge is
deducted from the ending value of the investment based on the lesser of
the original purchase price or the net asset value of the Shares
redeemed.
Yield
The yield for Fortress Shares, Class A Shares and Class C Shares for the
thirty-day period ended November 30, 1994, was 8.59%, 8.78% and 8.43%,
respectively.
The yield of the Shares is determined by dividing the net investment
income per Share (as defined by the Securities and Exchange Commission)
earned by the Fund over a thirty-day period by the offering price per
Share on the last day of the period. This value is annualized using semi-
annual compounding. This means that the amount of income generated
during the thirty-day period is assumed to be generated each month over
a 12-month period and is reinvested every six months. The yield does not
necessarily reflect income actually earned by the Fund because of
certain adjustments required by the Securities and Exchange Commission
and, therefore, may not correlate to the dividends or other
distributions paid to shareholders. To the extent that financial
institutions and broker/dealers charge fees in connection with services
provided in conjunction with an investment in the Fund, performance will
be reduced for those shareholders paying those fees.
Performance Comparisons
The performance of Shares depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio
securities;
o changes in the Fund expenses; and
o various other factors.
The performance of Shares fluctuates on a daily basis largely because
net earnings and offering price per Share fluctuate daily. Both net
earnings and offering price per Share are factors in the computation of
yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the performance of Shares. When comparing performance,
investors should consider all relevant factors such as the composition
of any index used, prevailing market conditions, portfolio compositions
of other funds, and methods used to value portfolio securities and
compute net asset value. The financial publications and/or indices which
the Fund uses in advertising may include:
o Lipper Analytical Services, Inc. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any
change in offering price over a specific period of time. From time
to time, the Fund will quote its Lipper ranking in the "General
Bond Funds" category in advertising and sales literature.
o Lehman Brothers Government/Corporate Bond Index is comprised of
approximately 5,000 issues which include non-convertible bonds
publicly issued by the U.S. government or its agencies; corporate
bonds guaranteed by the U.S. government and quasi-federal
corporations; and publicly issued, fixed rate, non-convertible
domestic bonds of companies in industry, public utilities, and
finance. The average maturity of these bonds approximates nine
years. Tracked by Lehman Brothers, Inc., the index calculates
total returns for one-month, three-month, twelve-month, and ten-
year periods and year-to-date.
o 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 Shares may quote total
returns which are calculated on non-standardized base periods. These
total returns represent the historic change in the value of an
investment in Shares based on monthly reinvestment of dividends over a
specified period of time.
Advertisements may quote performance information which does not reflect
the effect of the sales load or the contingent deferred sales charge.
338319882
4031801B-FS (1/95)
