1933 Act File No. 33-43472
1940 Act File No. 811-6447
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
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Pre-Effective Amendment No. ......................
Post-Effective Amendment No. 22 .................... X
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 22 .................................... X
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FIXED INCOME SECURITIES, INC.
(Exact Name of Registrant as Specified in Charter)
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7000
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
John W. McGonigle, Esquire,
Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
_X on January 31, 1998, pursuant to paragraph (b)
_ 60 days after filing pursuant to paragraph (a) (i) on __________, pursuant
to paragraph (a) (i). 75 days after filing pursuant to paragraph (a)(ii) on
_________________ pursuant to paragraph (a)(ii) of Rule 485.
If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
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CROSS-REFERENCE SHEET
This Amendment to the Registration Statement of FIXED INCOME SECURITIES,
INC. (the "Corporation"), which is comprised of three portfolios: (1) Federated
Limited Term Fund, offering two separate classes of shares, (a) Class A Shares
and (b) Class F Shares, (2) Federated Limited Term Municipal Fund, offering two
separate classes of shares, (a) Class A Shares and (b) Class F Shares, and (3)
Federated Strategic Income Fund, offering four separate classes of shares, (a)
Class A Shares, (b) Class B Shares, (c) Class C Shares and (d) Class F Shares,
is comprised of the following:
PART A. INFORMATION REQUIRED IN A PROSPECTUS.
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Prospectus Heading
(Rule 404(c) Cross Reference)
Item 1. Cover Page....................(1-3) Cover Page.
Item 2. Synopsis......................(1-3) Summary of Fund Expenses; (3)
Synopsis.
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Item 3. Condensed Financial
Information...................(1-3) Financial Highlights; (1-3) Performance Information.
Item 4. General Description of
Registrant....................(1-3) General Information; [1,2,3] Investment Information;
(1-3) Investment Objective; (1-3)
Investment Policies; (1-3) Investment Limitations (2) Investment Risks.
Item 5. Management of the Fund........(1-3) Fixed Income Securities, Inc. Information; (1-3) Management of the
Corporation; (1a,2a,3a-c)
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Distribution of Shares; (1b,2b,3d) Distribution of Class F Shares; (1,2,3d)
Distribution Plan and
Shareholder Services; (3a-c) Distribution Plan (Class B Shares and Class C Shares
Only) and Shareholder Services; (1-3) Administration of the Fund.
Item 6. Capital Stock and Other
Securities....................(1-3) Dividends and Distributions; (1-3) Account and Share Information; (1-3)
Voting Rights; (1-3) Tax Information; (1-3) Federal Income Tax; (1-3) State
and Local Taxes.
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Item 7. Purchase of Securities Being
Offered.......................(1-3) Net Asset Value; (1-3) Investing
in the Fund; (1a,2a,3a-c) Class A
Shares; (3a-c) Class B Shares, Class C
Shares; (1-3) Purchasing Shares; (1-3)
Purchasing Shares Through a Financial
Intermediary; (1-3) Purchasing Shares
by Wire; (1-3) Purchasing Shares by
Check; (1b,2b,3d) Reducing or
Eliminating the Sales Charge; (1-3)
Systematic Investment Program; (1-3)
Redeeming and Exchanging Shares; (1-3)
Confirmations and Account Statements;
(1,3) Retirement Plans;(1-3)
Requirements for Exchange.
Item 8. Redemption or Repurchase......(1-3) Redeeming and Exchanging Shares; (1-3) Redeeming or
Exchanging Shares through a Financial
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Intermediary; (1-3) Redeeming or Exchanging Shares by Telephone;
(1-3) Redeeming or Exchanging Shares by Mail; (1-3) Requirements for
Redemption; (1-3) Systematic Withdrawal Program; (1-3)
Accounts With Low Balances; (1b,2b,3) Contingent Deferred Sales Charge;
(1b,2b,3) Eliminating the Contingent Deferred Sales Charge.
Item 9. Pending Legal Proceedings.....None.
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PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION.
Item 10. Cover Page....................(1-3) Cover Page.
Item 11. Table of Contents.............(1-3) Table of Contents.
Item 12. General Information and
History.......................(1-3) General Information About the Fund.
Item 13. Investment Objectives and
Policies......................(1-3) Investment Objective and Policies.
Item 14. Management of the Fund (1-3) Fixed Income Securities, Inc. Management.
Item 15. Control Persons and Principal
Holders of Securities (1-3) Fund Ownership.
Item 16. Investment Advisory and Other
Services......................(1-3) Investment Advisory Services; (1-3) Other Services; (1,2)
Distribution Plan and Shareholder Services Agreement; (3) Distribution Plan
(Class B Shares, Class C Shares, and Class F Shares) and
Shareholder Services Agreement;
Item 17. Brokerage Allocation..........(1-3) Brokerage Transactions.
Item 18. Capital Stock and Other
Securities Not Applicable.
Item 19. Purchase, Redemption and Pricing
of Securities Being Offered...(1-3)
Purchasing Shares; (1-3) Quantity
Discounts and Accumulated Purchases;
(1-3) Concurrent Purchases; (1-3)
Letter of Intent; (1-3) Reinvestment
Privilege; (3) Conversion of Class B
Shares; (1-3) Determining Net Asset
Value; (1-3) Redeeming Shares.
Item 20. Tax Status....................(1-3) Tax Status.
Item 21. Underwriters Not Applicable.
Item 22. Calculation of Performance
Data..........................(1-3) Total Return; (1-3) Yield; (1-3) Performance Comparisons;
(2) Tax-Equivalent Yield.
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Item 23. Financial Statements..........Incorporated by reference to the Registrant's Annual Report to
Shareholders dated November 30, 1997
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(File Nos. 33-43472 and 811-6447).
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FEDERATED 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 Federated
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 Class A Shares. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information for Class A Shares
and Class F Shares dated January 31, 1998, with the Securities and Exchange
Commission ("SEC"). 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 or a paper copy of this
prospectus, if you have received your prospectus electronically, free of charge
by calling 1-800-341-7400. To obtain other information or to make inquiries
about the Fund, contact your financial institution. The Statement of Additional
Information, material incorporated by reference into this document, and other
information regarding the Fund is maintained electronically with the SEC at
Internet Web site (http://www.sec.gov). THESE SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated January 31, 1998
TABLE OF CONTENTS
Summary of Fund Expenses 1
Financial Highlights -- Class A Shares 2
General Information 3
Calling the Fund 3
Investment Information 3
Investment Objective 3
Investment Policies 3
Investment Limitations 11
Net Asset Value 11
Investing in the Fund 11
Purchasing Shares 11
Purchasing Shares Through a
Financial Intermediary 12
Purchasing Shares by Wire 12
Purchasing Shares by Check 12
Systematic Investment Program 12
Retirement Plans 12
Class A Shares 12
Redeeming and Exchanging Shares 13
Redeeming and Exchanging Shares Through a
Financial Intermediary 13
Redeeming and Exchanging Shares
by Telephone 13
Redeeming and Exchanging Shares
by Mail 13
Requirements for Redemption 14
Requirements for Exchange 14
Systematic Withdrawal Program 14
Account and Share Information 14
Confirmations and Account Statements 14
Dividends and Distributions 14
Accounts with Low Balances 14
Fixed Income Securities, Inc. Information 14
Management of the Corporation 14
Portfolio Managers' Background 15
Distribution of Shares 15
Administration of the Fund 16
Shareholder Information 16
Voting Rights 16
Tax Information 16
Federal Income Tax 16
State and Local Taxes 16
Performance Information 17
Other Classes of Shares 17
Appendix 18
SUMMARY OF FUND EXPENSES
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of 1.00% offering
price) Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage
None of offering price) Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, as applicable) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(1) 0.21%
12b-1 Fee (after waiver)(2) 0.20%
Total Other Expenses 0.69%
Shareholder Services Fee 0.25%
Total Operating Expenses(3) 1.10%
(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 12b-1 fee has been reduced to reflect the voluntary waiver of a portion
of the 12b-1 fee. The distributor can terminate this voluntary waiver at any
time at its sole discretion. The maximum 12b-1 fee is 0.50%.
(3) The total operating expenses would have been 1.59% absent the voluntary
waivers of portions of the management fee and 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 the Fund" and "Fixed Income Securities
Inc. Information." Wire-transferred redemptions of less than $5,000 may be
subject to additional fees.
LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return, (2) redemption at the end of each time period, and (3) payment of
the maximum sales charge.
1 Year $ 21
3 Years $ 45
5 Years $ 70
10 Years $143
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS -- CLASS A SHARES The following
table has been audited by Deloitte & Touche LLP, the Fund's independent
auditors. Their report dated January 16, 1998, on the Fund's
financial statements for the year ended November 30, 1997 is included in the
Annual Report, which is incorporated by reference. This table should be read in
conjunction with the Fund's financial statements and notes thereto, which may be
obtained from the Fund.
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
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YEAR ENDED NOVEMBER 30,
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1997 1996 1995 1994 1993 1992(A)
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NET ASSET VALUE, BEGINNING OF PERIOD $ 9.91 $ 9.97 $ 9.48 $10.17 $10.00 $10.01
Income from investment operations
Net investment income 0.59 0.59 0.55 0.53 0.63 0.519
Net realized and unrealized gain (loss) on
investments and foreign currency 0.04 (0.06) 0.49 (0.66) 0.19 (0.008)
Total from investment operations 0.63 0.53 1.04 (0.13) 0.82 0.511
Less distributions
Distributions from net investment income (0.59) (0.59) (0.55) (0.53) (0.63) (0.519)
Distributions in excess of
net investment income(b) -- -- -- (0.02) (0.02) (0.002)
Distributions from net realized
gain on investments -- -- -- (0.01) -- --
Total distributions (0.59) (0.59) (0.55) (0.56) (0.65) (0.521)
NET ASSET VALUE, END OF PERIOD $ 9.95 $ 9.91 $ 9.97 $ 9.48 $10.17 $10.00
Total return(c) 6.52% 5.54% 11.29% (1.30%) 8.19% 5.21%
Ratios to average net assets
Expenses 1.10% 1.10% 1.10% 1.10% 1.01% 0.67%*
Net investment income 5.90% 6.04% 6.13% 5.52% 5.75% 6.17%*
Expense waiver/reimbursement(d) 0.49% 0.56% 0.43% 0.39% 0.49% 1.06%*
Supplemental data
Net assets, end of period (000 omitted) $94,952 $116,174 $138,451 $178,771 $248,876 $57,225
Portfolio turnover 62% 104% 63% 63% 38% 60%
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* Computed on an annualized basis.
(a) Reflects operations for the period 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.
(b) 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.
(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S
ANNUAL REPORT, DATED NOVEMBER 30, 1997 WHICH CAN BE OBTAINED FREE OF CHARGE.
GENERAL INFORMATION
The Corporation was incorporated under the laws of the State of Maryland on
October 15, 1991. Class A Shares of the Fund ("Shares") are designed for
individuals as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio investing primarily in U.S.
government obligations, corporate debt obligations, and asset-backed securities.
The Fund's current net asset value and offering price may be found in the
mutual funds section of local newspapers under "Federated" and the appropriate
class designation listing.
CALLING THE FUND
Call the Fund at 1-800-341-7400.
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
securities, at least 65% of which is invested in U.S. government obligations,
corporate debt obligations, and asset-backed securities all rated in one of the
four 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 this prospectus. The prices of fixed income securities fluctuate
inversely to the direction of interest rates. 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 Board of 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 of
securities including, but not limited to:
* direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes and bonds;
* notes, bonds, and discount notes issued or guaranteed by U.S. government
agencies and instrumentalities supported by the full faith and credit of the
United States;
* notes, bonds, and discount notes of U.S. government agencies or
instrumentalities which receive or have access to federal funding;
* notes, bonds, and discount notes of other U.S. government
instrumentalities supported only by the credit of the instrumentalities;
* foreign and domestic debt obligations having floating or fixed rates of
interest, some of which may include equity features;
* 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;
* convertible securities;
* 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;
* repurchase agreements collateralized by eligible investments; and
* derivative instruments of such securities, including instruments with demand
features or credit enhancement, as well as money market instruments and cash.
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
associations 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 therefore.
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."
CONVERTIBLE SECURITIES
Convertible securities include a spectrum of securities which can be exchanged
for or converted into common stock. Convertible securities may include, but are
not limited to: convertible bonds or debentures; convertible preferred stock;
units consisting of usable bonds and warrants; or securities which cap or
otherwise limit returns to the convertible security holder, such as DECS --
(Dividend Enhanced Convertible Stock, or Debt Exchangeable for Common Stock when
issued as a debt security), LYONS -- (Liquid Yield Option Notes, which are
corporate bonds that are purchased at prices below par with no coupons and are
convertible into stock), PERCS -- (Preferred Equity Redemption Cumulative Stock
(an equity issue that pays a high cash dividend, has a cap price and mandatory
conversion to common stock at maturity), and PRIDES -- (Preferred Redeemable
Increased Dividend Securities (which are essentially the same as DECS; the
difference is little more than who initially underwrites the issue).
Convertible securities are often rated below investment grade or not rated
because they fall below debt obligations and just above common equity in order
of preference or priority on the issuer's balance sheet. Hence, an issuer with
investment grade senior debt may issue convertible securities with ratings less
than investment grade or not rated. Convertible securities rated below
investment grade may be subject to some of the same risks as those inherent in
junk bonds. The Fund limits convertible securities by rating. Please see
"Corporate Debt Obligations."
CORPORATE DEBT OBLIGATIONS
Although the Fund will invest primarily in corporate debt obligations that are
rated as investment grade by an NRSRO, or are determined to be comparable
quality in the judgment of the Adviser, the Fund may invest up to but less than
35% of the value of its total assets in corporate debt obligations that are not
investment grade bonds, but are rated B or better by an NRSRO (i.e., "junk
bonds"). Corporate debt obligations that are not determined to be investment
grade are high-yield, high-risk bonds, typically subject to greater market
fluctuations and greater risk of loss of income and principal due to an issuer's
default. To a greater extent than investment grade bonds, lower rated bonds tend
to reflect short-term corporate, economic, and market developments, as well as
investor perceptions of the issuer's credit quality. In addition, lower rated
bonds may be more difficult to dispose of or to value than higher rated,
lower-yielding bonds. 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. 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. The prices of fixed income securities generally fluctuate inversely
to the direction of interest rates.
AS A PERCENTAGE OF
TOTAL MARKET
VALUE OF SECURITY
HOLDINGS AS OF
CREDIT RATING NOVEMBER 30, 1997
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BBB 21%
BB 10%
B 2%
Total 33%
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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.
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 contract, an amount of cash and readily marketable 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.
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 foreign securities.
Investments in foreign securities, particularly those of non-governmental
issuers, involve considerations which are not ordinarily associated with
investments in domestic issuers. These considerations include the possibility of
expropriation, the unavailability of financial information or the difficulty of
interpreting financial information prepared under foreign accounting standards,
less liquidity and more volatility in foreign securities markets, the impact of
political, social, or diplomatic developments, and the difficulty of assessing
economic trends in foreign countries. It may also be more difficult to enforce
contractual obligations abroad than would be the case in the United States
because of differences in the legal systems. Transaction costs in foreign
securities may be higher. The Adviser will consider these and other factors
before investing in foreign securities and will not make such investments
unless, in its opinion, such investments will meet the Fund's standards and
objectives.
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 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.
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.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies as an
efficient means of carrying out its investment policies. It should be noted that
investment companies incur certain expenses, such as management fees, and,
therefore, any investment by the Fund in shares of other investment companies
may be subject to such duplicate expenses.
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.
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 association 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
The Fund's net asset value ("NAV") per Share fluctuates and is based on the
market value of all securities and other assets of the Fund. The NAV for each
class of Shares may differ 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.
All purchases, redemptions and exchanges are processed at the NAV next
determined after the request in proper form is received by the Fund. The NAV is
determined as of the close of trading on the New York Stock Exchange (normally
4:00 p.m., Eastern time) every day the New York Stock Exchange is open.
INVESTING IN THE FUND
This prospectus offers Class A Shares each with the characteristics described
below.
CLASS A
------------
Minimum and Subsequent $1,500/$100
Investment Amounts
Minimum and Subsequent $250/$100
Investment Amount for Retirement Plans
Maximum Sales Charge 1.00%*
Maximum Contingent Deferred Sales Charge None
Conversion Feature No
* Class A Shares are sold at NAV, plus a sales charge as follows:
SALES CHARGE
AS A PERCENTAGE
------------------------------
PUBLIC NET
OFFERING AMOUNT
AMOUNT OF TRANSACTION PRICE INVESTED
------------------ ---------- ----------
Less than $1 million 1.00% 1.01%
$1 million or greater 0.00% 0.00%
PURCHASING SHARES
Shares of the Fund are sold on days on which the New York Stock Exchange is
open. Shares of the Fund may be purchased as described below, either through a
financial intermediary (such as a bank or broker/dealer) or by sending a wire or
check directly to the Fund. Financial intermediaries may impose different
minimum investment requirements on their customers. An account must be
established with a financial intermediary or by completing, signing, and
returning the new account form available from the Fund before Shares can be
purchased. Shareholders in certain other funds advised and distributed by
affiliates of Federated Investors ("Federated Funds") may exchange their Shares
for Shares of the corresponding class of the Fund. The Fund reserves the right
to reject any purchase or exchange request.
In connection with any sale, Federated Securities Corp. may, from time to time,
offer certain items of nominal value to any shareholder or investor.
PURCHASING SHARES THROUGH A FINANCIAL INTERMEDIARY
Orders placed through a financial intermediary are considered received when the
Fund is notified of the purchase order or when payment is converted into federal
funds. Purchase orders through a 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 intermediaries must be
received by the financial intermediary 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 intermediary's responsibility to transmit orders promptly.
Financial intermediaries may charge fees for their services.
PURCHASING SHARES BY WIRE
Shares may be purchased by Federal Reserve wire by calling 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 Shareholder Services Company, c/o State Street
Bank and Trust Company, Boston, MA 02266-8600; Attention; EDGEWIRE; For Credit
to: (Fund Name) (Fund Class); (Fund Number -- this number can be found on the
account statement or by contacting the Fund); Account Number; Trade Date and
Order Number; Group Number or Dealer Number; Nominee or Institution Name; and
ABA Number 011000028. Shares cannot be purchased by wire on holidays when wire
transfers are restricted.
PURCHASING SHARES BY CHECK
Shares may be purchased by mailing a check made payable to the name of the Fund
(designate class of Shares and account number) to: Federated Shareholder
Services Company, P.O. Box 8600, Boston, MA 02266-8600. Orders by mail are
considered received when payment by check is converted into federal funds
(normally the business day after the check is received).
SYSTEMATIC INVESTMENT PROGRAM
Under this program, funds in a minimum amount of $50 may be automatically
withdrawn periodically from the shareholder's checking account at an Automated
Clearing House ("ACH") member and invested in the Fund. Shareholders should
contact their financial intermediary or the Fund to participate in this program.
RETIREMENT PLANS
Fund Shares can be purchased as an investment for retirement plans or IRA
accounts. For further details, contact the Fund and consult a tax adviser.
CLASS A SHARES
Class A Shares are sold at NAV, plus a sales charge. However:
NO SALES CHARGE IS IMPOSED FOR CLASS A SHARES PURCHASED:
* through financial intermediaries that do not receive sales charge dealer
concessions;
* by Federated Life Members; or
* through "wrap accounts" or similar programs under which clients pay a fee for
services.
IN ADDITION, THE SALES CHARGE CAN BE REDUCED OR ELIMINATED BY:
* purchasing in quantity and accumulating purchases at the levels in the
table under "Investing in the Fund";
* combining concurrent purchases of two or more funds;
* signing a letter of intent to purchase a specific quantity of shares
within 13 months; or
* using the reinvestment privilege.
Consult a financial intermediary or Federated Securities Corp. for details
on these programs. In order to eliminate the sales charge or receive sales
charge reductions, Federated Securities Corp. must be notified by the
shareholder in writing or by a financial intermediary at the time of
purchase.
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, the distributor may
offer to pay dealers up to 100% of the sales charge 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 charge; 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 Shares outstanding at each
month end. 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 establishment of customer
accounts and purchases of Shares.
REDEEMING AND EXCHANGING SHARES
Shares of the Fund may be redeemed for cash or exchanged for Shares of the same
class of other Federated Funds on days on which the Fund computes its NAV.
Shares are redeemed at NAV less any applicable contingent deferred sales charge.
Exchanges are made at NAV. Shareholders who desire to automatically exchange
Shares, of a like class, in a pre-determined amount on a monthly, quarterly, or
annual basis may take advantage of a systematic exchange privilege. Information
on this privilege is available from the Fund or your financial intermediary.
Depending upon the circumstances, a capital gain or loss may be realized when
Shares are redeemed or exchanged.
REDEEMING OR EXCHANGING SHARES THROUGH A FINANCIAL INTERMEDIARY
Shares of the Fund may be redeemed or exchanged by contacting your financial
intermediary before 4:00 p.m. (Eastern time). In order for these transactions to
be processed at that day's NAV, financial intermediaries (other than
broker/dealers) must transmit the request to the Fund before 4:00 p.m. (Eastern
time), while broker/dealers must transmit the request to the Fund before 5:00
p.m. (Eastern time). The financial intermediary is responsible for promptly
submitting transaction requests and providing proper written instructions.
Customary fees and commissions may be charged by the financial intermediary for
this service. Appropriate authorization forms for these transactions must be on
file with the Fund.
REDEEMING OR EXCHANGING SHARES BY TELEPHONE
Shares acquired directly from the Fund may be redeemed in any amount, or
exchanged, by calling 1-800-341-7400. Appropriate authorization forms for these
transactions must be on file with the Fund. Shares held in certificate form must
first be returned to the Fund as described in the instructions under "Redeeming
or Exchanging Shares by Mail." Redemption proceeds will either be mailed in the
form of a check 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. The minimum amount for a wire transfer is $1,000.
Proceeds from redeemed Shares purchased by check or through ACH will not be
wired until that method of payment has cleared.
Telephone instructions will 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
this occurs, "Redeeming or Exchanging Shares By Mail" should be considered. The
telephone transaction privilege may be modified or terminated at any time.
Shareholders would be promptly notified.
REDEEMING OR EXCHANGING SHARES BY MAIL
Shares may be redeemed in any amount, or exchanged, by mailing a written request
to: Federated Shareholder Services Company, Fund Name, Fund Class, P.O. Box
8600, Boston, MA 02266-8600. If share certificates have been issued, they must
accompany the written request. It is recommended that certificates be sent
unendorsed by registered or certified mail.
All written requests should state: Fund Name and the Share Class name; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount of the transaction. An exchange
request should also state the name of the Fund into which the exchange is to be
made. All owners of the account must sign the request exactly as the Shares are
registered. A check for redemption proceeds is normally mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request. Dividends are paid up to and including the day that
a redemption or exchange request is processed.
REQUIREMENTS FOR REDEMPTION
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 their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; a member firm of a domestic stock exchange; 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.
REQUIREMENTS FOR EXCHANGE
Shareholders must exchange Shares having an NAV equal to the minimum investment
requirements of the fund into which the exchange is being made. Contact your
financial intermediary directly or the Fund for free information on and
prospectuses for the Federated Funds into which your Shares may be exchanged.
Before the exchange, the shareholder must receive a prospectus of the fund for
which the exchange is being made.
Upon receipt of proper instructions and required supporting documents, Shares
submitted for exchange are redeemed and proceeds invested in the same class of
shares of the other fund. Signature guarantees will be required to exchange
between fund accounts not having identical shareholder registrations. The
exchange privilege may be modified or terminated at any time. Shareholders will
be notified of the modification or termination of the exchange privilege.
SYSTEMATIC WITHDRAWAL PROGRAM
Under this program, Shares are redeemed to provide for periodic withdrawal
payments in an amount directed by the shareholder of not less than $100. To be
eligible to participate in this program, a shareholder must have an account
value of at least $10,000, other than retirement accounts subject to required
minimum distributions. A shareholder may apply for participation in this program
through his financial intermediary or by calling the Fund.
Because participation in this program may reduce, and eventually deplete the
shareholder's investment in the Fund, payments under this program should not be
considered as yield or income. It is not advisable for shareholders to continue
to purchase Shares subject to a sales charge while participating in this
program.
ACCOUNT AND SHARE INFORMATION
CONFIRMATIONS AND ACCOUNT STATEMENTS
Shareholders will receive detailed confirmations of transactions (except for
systematic program transactions). In addition, shareholders will receive
periodic statements reporting all account activity, including dividends paid.
The Fund will not issue share certificates.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly to all shareholders invested in
the Fund on the record date. Net long-term capital gains realized by the Fund,
if any, will be distributed at least once every twelve months. Dividends and
distributions are automatically reinvested in additional Shares of the Fund on
payment dates at the ex-dividend date without a sales charge, unless
shareholders request cash payments on the new account form or by contacting the
transfer agent.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
close an account by redeeming all Shares and paying the proceeds to the
shareholder if the account balance falls below the applicable minimum investment
amount. Retirement plan accounts and accounts where the balance falls below the
minimum due to NAV changes will not be closed in this manner. Before an account
is closed, the shareholder will be notified and allowed 30 days to purchase
additional Shares to meet the minimum.
FIXED INCOME SECURITIES, INC. INFORMATION
MANAGEMENT OF THE CORPORATION
BOARD OF DIRECTORS
The Corporation 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 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.
Both the Corporation and the Adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Fund and its portfolio
securities. These codes recognize that such persons owe a fiduciary duty to the
Fund's shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Directors, and could
result in severe penalties.
ADVISORY FEES
The Adviser receives an annual investment advisory fee equal to 0.40% 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.
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. The Adviser 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. With over $120 billion invested
across more than 300 funds under management and/or administration by its
subsidiaries, as of December 31, 1997, Federated Investors is one of the largest
mutual fund investment managers in the United States. With more than 2,000
employees, Federated continues to be led by the management who founded the
company in 1955. Federated funds are presently at work in and through
approximately 4,000 financial institutions nationwide. PORTFOLIO MANAGERS'
BACKGROUND
Randall S. Bauer has been the Fund's portfolio manager since October 1995.
Mr. Bauer joined Federated Investors in 1989 and has been a Vice President
of the Fund's investment adviser since January 1994. Prior to this, Mr.
Bauer served as an Assistant Vice President of the Fund's investment
adviser. 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.
Robert K. Kinsey has been the Fund's portfolio manager since July 1997. Mr.
Kinsey joined Federated in 1995 as a Vice President of a Federated advisory
subsidiary. He has been a Vice President of the Fund's adviser since March
1997. From 1992 to 1995, he served as a Portfolio Manager for Harris
Investment Management Co., Inc. Mr. Kinsey received his M.B.A. in Finance
from U.C.L.A.
DISTRIBUTION OF SHARES
Federated Securities Corp. is the principal distributor for Shares of the
Fund. It is a Pennsylvania corporation organized on November 14, 1969, and
is the principal distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Investment Company Act of
1940 (the "Plan"), the distributor may be paid a fee by the Fund in an amount
computed at an annual rate of 0.50% of the average daily net asset value of the
Fund. The distributor may select financial institutions such as banks,
fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales services or distribution-related support
services as agents for their clients or customers. The 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 entered into a Shareholder
Services Agreement with Federated Shareholder Services, a subsidiary of
Federated Investors, under which the Fund may make payments up to 0.25% of the
average daily net asset value of shares to obtain certain personal services for
shareholders and to maintain shareholder accounts. Under the Shareholder
Services Agreement, 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.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS
In addition to payments made pursuant to the Plan and Shareholder Services
Agreement, Federated Securities Corp. and Federated Shareholder Services, from
their own assets, may pay financial institutions supplemental fees for the
performance of substantial sales services, distribution-related support
services, or shareholder services. 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 Adviser or its
affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by affiliates of Federated Investors as
specified below:
MAXIMUM AVERAGE AGGREGATE
FEE DAILY NET ASSETS
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Services Company may choose voluntarily to waive a portion of its fee.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Director elections and
other matters submitted to shareholders for vote. All shares of each portfolio
or class 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.
Directors may be removed by the Directors or by shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the written request of shareholders owning at least 10% of the Fund's
outstanding shares of all series entitled to vote.
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code 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.
STATE AND LOCAL TAXES
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 charge
which, if excluded, would increase the total return and yield.
From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/ or compare the
Fund's performance to certain indices.
Total return will be calculated separately for Class F Shares and Class A
Shares.
OTHER CLASSES OF SHARES
The Fund also offers another class of shares called Class F Shares. The Class F
Shares are sold primarily to customers of financial institutions subject to a
front-end sales charge of up to 1%, a contingent deferred sales charge, and a
minimum initial investment of $1,500, unless the investment is in a retirement
account in which the minimum investment is $250.
Class F Shares and Class A Shares are subject to certain of the same expenses.
Class F Shares are distributed under a 12b-1 Plan and are also subject to a
shareholder services fee.
Expense differences, however, between Class F Shares and Class A Shares may
affect the performance of each class.
To obtain more information and a prospectus for Class F Shares, investors may
call 1-800-341-7400 or contact their financial intermediary.
APPENDIX
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 AND B -- Debt rated BB and B, 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. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
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 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.
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 obligator'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.
NR -- Indicates that Fitch does not rate the specific issue.
NOTES
FEDERATED LIMITED TERM FUND
(A Portfolio of Fixed Income Securities, Inc.)
Class A Shares
PROSPECTUS
JANUARY 31, 1998
A Diversified Portfolio of Fixed Income Securities, Inc. An Open-End
Management Investment Company
FEDERATED LIMITED TERM FUND
CLASS A SHARES
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Advisers
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
CUSTODIAN
State Street Bank and
Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT
AND DIVIDEND
DISBURSING AGENT
Federated Shareholder Services Company
P.O. Box 860
Boston, MA 02266-8600
INDEPENDENT PUBLIC ACCOUNTANTS
Deloitte & Touche LLP 2500 One PPG Place Pittsburgh, PA 15222-5401 Federated
Securities Corp., Distributor 1-800-245-7400 www.federatedinvestors.com
Cusip 338319106 3070701A-A (1/98)
FEDERATED LIMITED TERM FUND
(A Portfolio of Fixed Income Securities, Inc.)
Class F Shares
PROSPECTUS
The Class F Shares offered by this prospectus represent interests in Federated
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 Class F Shares. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information for Class F Shares
and Class A Shares dated January 31, 1998, with the Securities and Exchange
Commission ("SEC"). 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 or a paper copy of this
prospectus, if you have received your prospectus electronically, free of charge
by calling 1-800-341-7400. To obtain other information or to make inquiries
about the Fund, contact your financial institution. The Statement of Additional
Information, material incorporated by reference into this document, and other
information regarding the Fund is maintained electronically with the SEC at
Internet Web site (http://www.sec.gov). THESE SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated January 31, 1998
TABLE OF CONTENTS
Summary of Fund Expenses 1
Financial Highlights -- Class F Shares 2
General Information 3
Calling the Fund 3
Investment Information 3
Investment Objective 3
Investment Policies 3
Investment Limitations 11
Net Asset Value 11
Investing in the Fund 11
Purchasing Shares 11
Purchasing Shares Through
a Financial Intermediary 12
Purchasing Shares by Wire 12
Purchasing Shares by Check 12
Systematic Investment Program 12
Retirement Plans 12
Reducing or Eliminating the Sales Charge 12
Redeeming and Exchanging Shares 13
Redeeming or Exchanging Shares Through
a Financial Institution 13
Redeeming or Exchanging Shares by Telephone 13
Redeeming or Exchanging Shares by Mail 13
Requirements for Redemption 14
Requirements for Exchange 14
Systematic Withdrawal Program 14
Contingent Deferred Sales Charge 14
Account and Share Information 15
Confirmations and Account Statements 15
Dividends and Distributions 15
Accounts with Low Balances 15
Fixed Income Securities, Inc. Information 15
Management of the Corporation 15
Distribution of Class F Shares 16
Administration of the Fund 17
Shareholder Information 17
Voting Rights 17
Tax Information 17
Federal Income Tax 17
State and Local Taxes 17
Performance Information 18
Other Classes of Shares 18
Appendix 19
SUMMARY OF FUND EXPENSES
<TABLE>
<CAPTION>
CLASS F SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of
offering price) 1.00% Maximum Sales Charge Imposed on Reinvested Dividends (as
a percentage of offering None price) 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 OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver)(2) 0.21%
12b-1 Fee (after waiver)(3) 0.13%
Total Other Expenses 0.66%
Shareholder Services Fee (after waiver)(4) 0.22%
Total 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 12b-1 fee has been reduced to reflect the voluntary waiver of a portion
of the 12b-1 fee. The distributor can terminate this voluntary waiver at any
time at its sole discretion. The maximum 12b-1 fee is 0.15%.
(4) The shareholder services fee has been reduced to reflect the voluntary
waiver of a portion of the shareholders services fee. The shareholder
service provider can terminate this voluntary waiver at any time at its sole
discretion. The maximum shareholder services fee is 0.25%.
(5) The total operating expenses would have been 1.24% absent the voluntary
waivers of portions of the management fee, the 12b-1 fee and the shareholder
services fee.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of Class F Shares of the Fund will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Investing in the Fund" and "Fixed Income Securities,
Inc. Information." Wire-transferred redemptions of less than $5,000 may be
subject to additional fees.
LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return, (2) redemption at the end of each time period, and (3) payment of
the maximum sales charge.
1 Year $ 30
3 Years $ 53
5 Years $ 65
10 Years $131
You would pay the following expenses on the same investment,
assuming no redemption.
1 Year $ 20
3 Years $ 42
5 Years $ 65
10 Years $131
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS -- CLASS F SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated January 16, 1998, on the Fund's
financial statements for the year ended November 30, 1997, is included in the
Annual Report, which is incorporated by reference. This table should be read in
conjunction with the Fund's financial statements and notes thereto, which may be
obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1997 1996 1995 1994 1993(A)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.91 $ 9.97 $ 9.48 $10.17 $10.24
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.60 0.66 0.61 0.55 0.15
Net realized and unrealized gain (loss) on investments
and foreign currency 0.04 (0.12) 0.44 (0.67) (0.07)
Total from investment operations 0.64 0.54 1.05 (0.12) 0.08
LESS DISTRIBUTIONS
Distributions from net investment income (0.60) (0.60) (0.56) (0.55) (0.15)
Distributions in excess of net investment income(b) -- -- -- (0.01) --
Distributions from net realized gain on investments -- -- -- (0.01) --
Total distributions (0.60) (0.60) (0.56) (0.57) (0.15)
NET ASSET VALUE, END OF PERIOD $ 9.95 $ 9.91 $ 9.97 $ 9.48 $10.17
TOTAL RETURN(C) 6.63% 5.64% 11.39% (1.20%) 0.78%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.00% 1.00% 1.00% 0.99% 1.00%*
Net investment income 6.00% 6.14% 6.22% 5.67% 7.10%*
Expense waiver/reimbursement(d) 0.24% 0.31% 0.18% 0.13% 0.39%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $8,807 $8,938 $10,183 $13,415 $7,230
Portfolio turnover 62% 104% 63% 63% 38%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from August 31, 1993 (date of initial
public investment) to November 30, 1993.
(b) 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.
(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S
ANNUAL REPORT, DATED NOVEMBER 30, 1997, WHICH CAN BE OBTAINED FREE OF
CHARGE.
GENERAL INFORMATION
The Corporation was incorporated under the laws of the State of Maryland on
October 15, 1991. Class F Shares of the Fund ("Shares") are designed for
individuals as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio investing primarily in U.S.
government obligations, corporate debt obligations, and asset-backed securities.
The Fund's current net asset value and offering price may be found in the
mutual funds section of local newspapers under "Federated" and the appropriate
class designation listing. CALLING THE FUND
Call the Fund at 1-800-341-7400.
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
securities, at least 65% of which is invested in U.S. government obligations,
corporate debt obligations, and asset-backed securities all rated in one of the
four 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 this prospectus.
The prices of fixed income securities fluctuate inversely to the direction of
interest rates. 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 Board of 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 of
securities including, but not limited to:
* direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes and bonds;
* notes, bonds, and discount notes issued or guaranteed by U.S. government
agencies and instrumentalities supported by the full faith and credit of the
United States;
* notes, bonds, and discount notes of U.S. government agencies or
instrumentalities which receive or have access to federal funding;
* notes, bonds, and discount notes of other U.S. government
instrumentalities supported only by the credit of the instrumentalities;
* foreign and domestic debt obligations having floating or fixed rates of
interest, some of which may include equity features;
* 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;
* convertible securities;
* 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;
* repurchase agreements collateralized by eligible investments; and
* derivative instruments of such securities, including instruments with demand
features or credit enhancement, as well as money market instruments and cash.
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
associations 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 therefore.
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."
CONVERTIBLE SECURITIES
Convertible securities include a spectrum of securities which can be exchanged
for or converted into common stock. Convertible securities may include, but are
not limited to: convertible bonds or debentures; convertible preferred stock;
units consisting of usable bonds and warrants; or securities which cap or
otherwise limit returns to the convertible security holder, such as DECS --
(Dividend Enhanced Convertible Stock, or Debt Exchangeable for Common Stock when
issued as a debt security), LYONS -- (Liquid Yield Option Notes, which are
corporate bonds that are purchased at prices below par with no coupons and are
convertible into stock), PERCS -- (Preferred Equity Redemption Cumulative Stock
(an equity issue that pays a high cash dividend, has a cap price and mandatory
conversion to common stock at maturity), and PRIDES -- (Preferred Redeemable
Increased Dividend Securities (which are essentially the same as DECS; the
difference is little more than who initially underwrites the issue).
Convertible securities are often rated below investment grade or not rated
because they fall below debt obligations and just above common equity in order
of preference or priority on the issuer's balance sheet. Hence, an issuer with
investment grade senior debt may issue convertible securities with ratings less
than investment grade or not rated. Convertible securities rated below
investment grade may be subject to some of the same risks as those inherent in
junk bonds. The Fund limits convertible securities by rating. Please see
"Corporate Debt Obligations".
CORPORATE DEBT OBLIGATIONS
Although the Fund will invest primarily in corporate debt obligations that are
rated as investment grade by an NRSRO, or are determined to be comparable
quality in the judgment of the Adviser, the Fund may invest up to but less than
35% of the value of its total assets in corporate debt obligations that are not
investment grade bonds, but are rated B or better by an NRSRO (i.e., "junk
bonds"). Corporate debt obligations that are not determined to be investment
grade are high-yield, high-risk bonds, typically subject to greater market
fluctuations and greater risk of loss of income and principal due to an issuer's
default. To a greater extent than investment grade bonds, lower rated bonds tend
to reflect short-term corporate, economic, and market developments, as well as
investor perceptions of the issuer's credit quality. In addition, lower rated
bonds may be more difficult to dispose of or to value than higher rated,
lower-yielding bonds. 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. 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. The prices of fixed income securities generally fluctuate inversely
to the direction of interest rates.
AS A PERCENTAGE OF
TOTAL MARKET
VALUE OF SECURITY
HOLDINGS AS OF
CREDIT RATING NOVEMBER 30, 1997
BBB 21%
BB 10%
B 2%
Total 33%
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.
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 contract, an amount of cash and readily marketable 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.
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 foreign securities.
Investments in foreign securities, particularly those of non-governmental
issuers, involve considerations which are not ordinarily associated with
investments in domestic issuers. These considerations include the possibility of
expropriation, the unavailability of financial information or the difficulty of
interpreting financial information prepared under foreign accounting standards,
less liquidity and more volatility in foreign securities markets, the impact of
political, social, or diplomatic developments, and the difficulty of assessing
economic trends in foreign countries. It may also be more difficult to enforce
contractual obligations abroad than would be the case in the United States
because of differences in the legal systems. Transaction costs in foreign
securities may be higher. The Adviser will consider these and other factors
before investing in foreign securities and will not make such investments
unless, in its opinion, such investments will meet the Fund's standards and
objectives.
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 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.
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.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies as an
efficient means of carrying out its investment policies. It should be noted that
investment companies incur certain expenses, such as management fees, and,
therefore, any investment by the Fund in shares of other investment companies
may be subject to such duplicate expenses.
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. 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 ("NAV") per Share fluctuates and is based on the
market value of all securities and other assets of the Fund. The NAV for each
class of Shares may differ 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.
All purchases, redemptions and exchanges are processed at the NAV next
determined after the request in proper form is received by the Fund. The NAV is
determined as of the close of trading on the New York Stock Exchange (normally
4:00 p.m., Eastern time) every day the New York Stock Exchange is open.
INVESTING IN THE FUND
This prospectus offers Class F Shares with the characteristics described below.
CLASS F
--------
Minimum and Subsequent Investment Amount $1,500/$100
Minimum and Subsequent Investment Amount for
Retirement Plans $250/$100
Maximum Sales Charge 1.00%*
Maximum Contingent Deferred Sales Charge** 1.00%**
* There is no sales charge for purchases of $1 million or more. In addition, no
sales charge is imposed for Shares purchased through certain entities or
programs. Please see the section entitled "Reducing or Eliminating the Sales
Charge."
** Computed on the lesser of the NAV of the redeemed Shares at the time of
purchase or the NAV of the redeemed Shares at the time of redemption.
The following contingent deferred sales charge schedule applies to Class F
Shares:
CONTINGENT
DEFERRED
AMOUNT OF PURCHASE SHARES HELD SALES CHARGE
-------------------- ---------------- ------------
Up to $1,999,999 Four Years or less 1.00%
$2,000,000 to $4,999,999 Two Years or less .50%
$5,000,000 or more One Year or less .25%
PURCHASING SHARES
Shares of the Fund are sold on days on which the New York Stock Exchange is
open. Shares of the Fund may be purchased as described below, either through a
financial intermediary (such as a bank or broker/dealer) or by sending a wire or
check directly to the Fund. Financial intermediaries may impose different
minimum investment requirements on their customers. An account must be
established with a financial intermediary or by completing, signing, and
returning the new account form available from the Fund before Shares can be
purchased. Shareholders in Class F Shares of certain other funds advised and
distributed by affiliates of Federated Investors ("Federated Funds") may
exchange their Shares for Class F Shares of the Fund. The Fund reserves the
right to reject any purchase or exchange request.
In connection with any sale, Federated Securities Corp. may, from time to time,
offer certain items of nominal value to any shareholder or investor.
PURCHASING SHARES THROUGH A FINANCIAL INTERMEDIARY
Orders placed through a financial intermediary are considered received when the
Fund is notified of the purchase order or when payment is converted into federal
funds. Purchase orders through a 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 intermediaries must be
received by the financial intermediary 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 intermediary's responsibility to transmit orders promptly.
Financial intermediaries may charge fees for their services.
The financial intermediary which maintains investor accounts in Class F Shares
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 intermediaries may be subject to reclaim by the distributor for
accounts transferred to financial intermediaries which do not maintain investor
accounts on a fully disclosed basis and do not account for share ownership
periods.
PURCHASING SHARES BY WIRE
Shares may be purchased by Federal Reserve wire by calling 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 Shareholder Services Company, c/o State Street
Bank and Trust Company, Boston, MA 02266-8600; Attention; EDGEWIRE; For Credit
to: (Fund Name) (Fund Class); (Fund Number -- this number can be found on the
account statement or by contacting the Fund); Account Number; Trade Date and
Order Number; Group Number or Dealer Number; Nominee or Institution Name; and
ABA Number 011000028. Shares cannot be purchased by wire on holidays when wire
transfers are restricted.
PURCHASING SHARES BY CHECK
Shares may be purchased by mailing a check made payable to the name of the Fund
(designate class of Shares and account number) to: Federated Shareholder
Services Company, P.O. Box 8600, Boston, MA 02266-8600. Orders by mail are
considered received when payment by check is converted into federal funds
(normally the business day after the check is received).
SYSTEMATIC INVESTMENT PROGRAM
Under this program, funds in a minimum amount of $50 may be automatically
withdrawn periodically from the shareholder's checking account at an Automated
Clearing House ("ACH") member and invested in the Fund. Shareholders should
contact their financial intermediary or the Fund to participate in this program.
RETIREMENT PLANS
Fund Shares can be purchased as an investment for retirement plans or IRA
accounts. For further details, contact the Fund and consult a tax adviser.
REDUCING OR ELIMINATING THE SALES CHARGE
Class F Shares are sold at NAV, plus a sales charge. However:
NO SALES CHARGE IS IMPOSED FOR CLASS F
SHARES PURCHASED:
* through bank trust departments or investment advisers registered under the
Investment Advisers Act of 1940 purchasing on behalf of their clients;
* by sales representatives, Directors, and employees of the Fund, Federated
Advisers, Federated Securities Corp. or their affiliates and their immediate
family members;
* by any investment dealer who has a sales agreement with Federated Securities
Corp. and their immediate family members, or by any trusts or pension or
profit-sharing plans for these persons or retirement plans where the third
party administrator has entered into certain arrangements with Federated
Securities Corp. or its affiliates.
IN ADDITION, THE SALES CHARGE CAN BE REDUCED OR ELIMINATED BY:
* purchasing in quantity and accumulating purchases;
* combining concurrent purchases of two or more funds;
* signing a letter of intent to purchase a specific quantity of shares
within 13 months; or
* using the reinvestment privilege.
Consult a financial intermediary or Federated Securities Corp. for details on
these programs. In order to eliminate the sales charge or receive sales charge
reductions, Federated Securities Corp. must be notified by the shareholder in
writing or by a financial intermediary at the time of purchase.
DEALER CONCESSION
For sales of Shares, a dealer will normally receive up to 100% of the applicable
sales charge. Any portion of the sales charge which is not paid to a dealer will
be retained by the distributor. However, the distributor may offer to pay
dealers up to 100% of the sales charge retained by it. 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 establishment of customer accounts
and purchases of Shares.
REDEEMING AND EXCHANGING SHARES
Shares of the Fund may be redeemed for cash or exchanged for Class F Shares of
other Federated Funds on days on which the Fund computes its NAV. Shares are
redeemed at NAV less any applicable contingent deferred sales charge. Exchanges
are made at NAV. Shareholders who desire to automatically exchange Shares, of a
like Share class, in a pre-determined amount on a monthly, quarterly, or annual
basis may take advantage of a systematic exchange privilege. Information on this
privilege is available from the Fund or your financial intermediary. Depending
upon the circumstances, a capital gain or loss may be realized when Shares are
redeemed or exchanged.
REDEEMING OR EXCHANGING SHARES THROUGH A FINANCIAL INTERMEDIARY
Shares of the Fund may be redeemed or exchanged by contacting your financial
intermediary before 4:00 p.m. (Eastern time). In order for these transactions to
be processed at that day's NAV, financial intermediaries (other than
broker/dealers) must transmit the request to the Fund before 4:00 p.m. (Eastern
time), while broker/dealers must transmit the request to the Fund before 5:00
p.m. (Eastern time). The financial intermediary is responsible for promptly
submitting transaction requests and providing proper written instructions.
Customary fees and commissions may be charged by the financial intermediary for
this service. Appropriate authorization forms for these transactions must be on
file with the Fund.
REDEEMING OR EXCHANGING SHARES BY TELEPHONE
Shares acquired directly from the Fund may be redeemed in any amount, or
exchanged, by calling 1-800-341-7400. Appropriate authorization forms for these
transactions must be on file with the Fund. Shares held in certificate form must
first be returned to the Fund as described in the instructions under "Redeeming
or Exchanging Shares by Mail." Redemption proceeds will either be mailed in the
form of a check 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. The minimum amount for a wire transfer is $1,000.
Proceeds from redeemed Shares purchased by check or through ACH will not be
wired until that method of payment has cleared.
Telephone instructions will 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
this occurs, "Redeeming or Exchanging Shares by Mail" should be considered. The
telephone transaction privilege may be modified or terminated at any time.
Shareholders would be promptly notified.
REDEEMING OR EXCHANGING SHARES BY MAIL
Shares may be redeemed in any amount, or exchanged, by mailing a written request
to: Federated Shareholder Services Company, Fund Name, Fund Class, P.O. Box
8600, Boston, MA 02266-8600. If share certificates have been issued, they must
accompany the written request. It is recommended that certificates be sent
unendorsed by registered or certified mail.
All written requests should state: Fund Name and the Share Class name; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount of the transaction. An exchange
request should also state the name of the Fund into which the exchange is to be
made. All owners of the account must sign the request exactly as the Shares are
registered. A check for redemption proceeds is normally mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request. Dividends are paid up to and including the day that
a redemption or exchange request is processed.
REQUIREMENTS FOR REDEMPTION
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 their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; a member firm of a domestic stock exchange; 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.
REQUIREMENTS FOR EXCHANGE
Shareholders must exchange Shares having a NAV equal to the minimum investment
requirements of the fund into which the exchange is being made. Contact your
financial intermediary directly or the Fund for free information on and
prospectuses for the Federated Funds into which your Shares may be exchanged.
Before the exchange, the shareholder must receive a prospectus of the fund for
which the exchange is being made.
Upon receipt of proper instructions and required supporting documents, Shares
submitted for exchange are redeemed and proceeds invested in the same class of
shares of the other fund. Signature guarantees will be required to exchange
between fund accounts not having identical shareholder registrations. The
exchange privilege may be modified or terminated at any time. Shareholders will
be notified of the modification or termination of the exchange privilege.
SYSTEMATIC WITHDRAWAL PROGRAM
Under this program, Shares are redeemed to provide for periodic withdrawal
payments in an amount directed by the shareholder of not less than $100. To be
eligible to participate in this program, a shareholder must have an account
value of at least $10,000, other than retirement accounts subject to required
minimum distributions. A shareholder may apply for participation in this program
through his financial intermediary or by calling the Fund.
Because participation in this program may reduce, and eventually deplete, the
shareholder's investment in the Fund, payments under this program should not be
considered as yield or income. It is not advisable for shareholders to continue
to purchase Class F Shares subject to a sales charge while participating in this
program. A contingent deferred sales charge will be imposed on Shares redeemed
through this program within four years of their purchase dates.
CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. Redemptions will be processed in a manner intended to maximize the
amount of redemption which will not be subject to a contingent deferred sales
charge. The contingent deferred sales charge will not be imposed with respect to
Shares acquired through the reinvestment of dividends or distributions of
long-term capital gains. In determining the applicability of the contingent
deferred sales charge, the required holding period for your new Shares received
through an exchange will include the period for which your original Shares were
held.
ELIMINATING THE CONTINGENT DEFERRED SALES CHARGE
Upon written notification to Federated Securities Corp. or the transfer
agent, no contingent deferred sales charge will be imposed on redemptions:
* following the death or disability, as defined in Section 72(m)(7) of the
Internal Revenue Code of 1986, of the last surviving shareholder;
* representing a total or partial distribution from an Individual Retirement
Account, Keogh Plan, or a custodial account to a shareholder who has attained
the age of 701*2;
* representing a total or partial distribution from a qualified plan, other than
an Individual Retirement Account, Keogh Plan, or a custodial account following
retirement;
* which are involuntary redemptions of shareholder accounts that do not
comply with the minimum balance requirements;
* which are reinvested in the Fund under the reinvestment privilege;
* of Shares held by Directors, employees and sales representatives of the Fund,
the distributor, or affiliates of the Fund or distributor, employees of any
financial intermediary that sells Shares of the Fund pursuant to a sales
agreement with the distributor, and their immediate family members to the
extent that no payments were advanced for purchases made by these persons; and
* of Shares originally purchased through a bank trust department, an investment
adviser registered under the Investment Advisers Act of 1940 or retirement
plans where the third party administrator has entered into certain
arrangements with Federated Securities Corp. or its affiliates, or any other
financial intermediary, to the extent that no payments were advanced for
purchases made through such entities.
For more information regarding the contingent deferred sales charge or any of
the above provisions, contact your financial intermediary or the Fund. The Fund
reserves the right to discontinue or modify these provisions.
Shareholders will be notified of such action.
ACCOUNT AND SHARE INFORMATION
CONFIRMATIONS AND ACCOUNT STATEMENTS
Shareholders will receive detailed confirmations of transactions (except for
systematic program transactions). In addition, shareholders will receive
periodic statements reporting all account activity, including dividends paid.
The Fund will not issue share certificates.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly to all shareholders invested in
the Fund on the record date. Net long-term capital gains realized by the Fund,
if any, will be distributed at least once every twelve months. Dividends and
distributions are automatically reinvested in additional Shares of the Fund on
payment dates at the ex-dividend date NAV without a sales charge, unless
shareholders request cash payments on the new account form or by contacting the
transfer agent.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
close an account by redeeming all Shares and paying the proceeds to the
shareholder if the account balance falls below the applicable minimum investment
amount. Retirement plan accounts and accounts where the balance falls below the
minimum due to NAV changes will not be closed in this manner. Before an account
is closed, the shareholder will be notified and allowed 30 days to purchase
additional Shares to meet the minimum.
FIXED INCOME SECURITIES, INC. INFORMATION
MANAGEMENT OF THE CORPORATION
BOARD OF DIRECTORS
The Corporation 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 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.
Both the Corporation and the Adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Fund and its portfolio
securities. These codes recognize that such persons owe a fiduciary duty to the
Fund's shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Directors, and could
result in severe penalties.
ADVISORY FEES
The Adviser receives an annual investment advisory fee equal to 0.40% 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.
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. The Adviser 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. With over $120 billion invested
across more than 300 funds under management and/or administration by its
subsidiaries, as of December 31, 1997, Federated Investors is one of the largest
mutual fund investment managers in the United States. With more than 2,000
employees, Federated continues to be led by the management who founded the
company in 1955. Federated funds are presently at work in and through
approximately 4,000 financial institutions nationwide. Randall S. Bauer has
been the Fund's portfolio manager since October 1995. Mr. Bauer joined Federated
Investors in 1989 and has been a Vice President of the Fund's investment adviser
since January 1994. Prior to this, Mr. Bauer served as an Assistant Vice
President of the Fund's investment adviser. 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.
Robert K. Kinsey has been the Fund's portfolio manager since July 1997. Mr.
Kinsey joined Federated in 1995 as a Vice President of a Federated advisory
subsidiary. He has been a Vice President of the Fund's adviser since March
1997. From 1992 to 1995, he served as a Portfolio Manager for Harris
Investment Management Co., Inc. Mr. Kinsey received his M.B.A. in Finance
from U.C.L.A.
DISTRIBUTION OF CLASS F SHARES
Federated Securities Corp. is the principal distributor for shares of the
Fund. It is a Pennsylvania corporation organized on November 14, 1969, and
is the principal distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Investment Company Act of
1940 (the "Plan"), the distributor may be paid a fee by the Fund in an amount
computed at an annual rate of 0.15% of the average daily net asset value of the
Fund. The distributor may select financial institutions such as banks,
fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales services or distribution-related support
services as agents for their clients or customers.
The 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 entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments up to 0.25% of the average daily net asset value of
shares to obtain certain personal services for shareholders and to maintain
shareholder accounts. Under the Shareholder Services Agreement, 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.
SUPPLEMENTAL 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.
Furthermore, in addition to payments made pursuant to the Plan and Shareholder
Services Agreement, Federated Securities Corp. and Federated Shareholder
Services, from their own assets, may pay financial institutions supplemental
fees for the performance of substantial sales services, distribution-related
support services, or shareholder services. 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 Adviser or its
affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by affiliates of Federated Investors as
specified below:
MAXIMUM AVERAGE AGGREGATE
FEE DAILY NET ASSETS
---------- ----------------------------------
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Services Company may choose voluntarily to waive a portion of its fee.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Director elections and
other matters submitted to shareholders for vote. All shares of each portfolio
or class 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.
Directors may be removed by the Directors or by shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the written request of shareholders owning at least 10% of the Fund's
outstanding shares of all series entitled to vote.
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code 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. STATE AND LOCAL TAXES
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 charge and
the contingent deferred sales charge which, if excluded, would increase the
total return and yield.
From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
Total return will be calculated separately for Class F Shares and Class A
Shares.
OTHER CLASSES OF SHARES
The Fund also offers another class of shares called Class A Shares. Class A
Shares are sold primarily to customers of financial institutions subject to a
front-end sales charge of up to 1%. Class A Shares are subject to a minimum
initial investment of $1,500, unless the investment is in a retirement account
in which the minimum investment is $250.
All classes are subject to certain of the same expenses.
Class A Shares are distributed under a 12b-1 Plan and are also subject to a
shareholder services fee.
Expense differences between Class A Shares and Class F Shares may affect the
performance of each class. To obtain more information and a prospectus for Class
A Shares, investors may call 1-800-341-7400 or contact their financial
intermediary.
APPENDIX
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 AND B -- Debt rated BB and B are 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 lower 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. 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 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. Of ten 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.
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 obligator'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.
NR -- Indicates that Fitch does not rate the specific issue.
[Graphic]
FEDERATED LIMITED TERM FUND
(A Portfolio of Fixed Income Securities, Inc.)
Class F Shares
PROSPECTUS
JANUARY 31, 1998
A Diversified Portfolio of Fixed Income Securities, Inc., an Open-End
Management Investment Company
[Graphic]
FEDERATED LIMITED TERM FUND
CLASS F SHARES
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Advisers
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT
AND DIVIDEND
DISBURSING AGENT
Federated Shareholder Services Company
P.O. Box 860
Boston, MA 02266-8600
INDEPENDENT PUBLIC ACCOUNTANTS
Deloitte & Touche LLP
2500 One PPG Place
Pittsburgh, PA 15222-5401
Federated Securities Corp., Distributor
1-800-341-7400
www.federatedinvestors.com
Cusip 338319304
3070701A-F (1/98)
[Graphic]
FEDERATED LIMITED TERM FUND
CLASS A SHARES
CLASS F SHARES
(A PORTFOLIO OF FIXED INCOME SECURITIES, INC.)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the respective
prospectuses of Class A Shares and Class F Shares of Federated Limited Term Fund
(the "Fund") dated January 31, 1998. This Statement is not a prospectus itself.
You may request a copy of a prospectus or a paper copy of this Statement of
Additional Information, if you have received it electronically, free of charge
by calling 1-800-341-7400.
FEDERATED LIMITED TERM FUND
FEDERATED INVESTORS FUNDS
5800 CORPORATE DRIVE
PITTSBURGH, PENNSYLVANIA 15237-7000
Statement dated January 31, 1998
[Graphic]
Federated Investors
Federated Securities Corp., Distributor
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 338319106
Cusip 338319304
3070701B (1/98)
[Graphic]
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT THE FUND 1 INVESTMENT OBJECTIVE AND POLICIES 1 Types
of Investments 1 Non-Mortgage Related Asset-Backed Securities 1 Foreign Bank
Instruments 2 Futures and Options Transactions 2 Medium Term Notes and Deposit
Notes 3 Average Life 4 Weighted Average Portfolio Duration 4 When-Issued and
Delayed Delivery Transactions 4 Lending of Portfolio Securities 4 Restricted
and Illiquid Securities 5 Repurchase Agreements 5 Reverse Repurchase Agreements
5 Privately Issued Mortgage-Related Securities 5 Currency Risks 6 Forward
Foreign Currency Exchange Contracts 6 Foreign Currency Options 6 Special Risks
Associated with Foreign Currency Options 7 Foreign Currency Futures
Transactions 7 Special Risks Associated with Foreign Currency Futures
Transactions 7 Portfolio Turnover 7 INVESTMENT LIMITATIONS 8 Buying on Margin 8
Issuing Senior Securities and Borrowing Money 8 Pledging Assets 8
Diversification of Investments 8 Investing in Real Estate 8 Investing in
Commodities 8 Underwriting 8 Lending Cash or Securities 8 Selling Short 8
Concentration of Investments 9 Dealing in Puts and Calls 9 FIXED INCOME
SECURITIES, INC. MANAGEMENT 9 Fund Ownership 12 Directors Compensation 13
Director Liability 13 INVESTMENT ADVISORY SERVICES 14 Adviser to the Fund 14
Advisory Fees 14 BROKERAGE TRANSACTIONS 14 OTHER SERVICES 14 Fund
Administration 14 Custodian and Portfolio Recordkeeper 14 Transfer Agent 15
Independent Auditors 15 PURCHASING SHARES 15 Quantity Discounts and Accumulated
Purchases 15 Concurrent Purchases 15 Letter of Intent 15 Reinvestment Privilege
16 Distribution Plan and Shareholder Services Agreement 16 Purchases by Sales
Representatives, Fund Directors, and Employees 16 Determining Net Asset Value
17 Determining Market Value of Securities 17 REDEEMING SHARES 17 Redemption in
Kind 17 Contingent Deferred Sales Charge 18 TAX STATUS 18 The Fund's Tax Status
18 Shareholders' Tax Status 18 TOTAL RETURN 18 YIELD 18 PERFORMANCE COMPARISONS
19 Economic and Market Information 19 ABOUT FEDERATED INVESTORS 20 Mutual Fund
Market 20 Institutional Clients 20 Bank Marketing 20 Broker/Dealers and Bank
Broker/Dealer Subsidiaries 20 FINANCIAL STATEMENTS 21
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. 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: Federated Limited Term Fund, Federated Limited Term Municipal Fund,
and Federated Strategic Income Fund. Effective January 31, 1996, the Fund
changed its name to Federated Limited Term Fund, and Fortress Shares are now
referred to as Class F Shares.
Shares of the Fund are offered in two classes known as Class A Shares and Class
F Shares (individually and collectively referred to as "Shares" as the context
may require). On May 19, 1994, the Directors approved the reclassification of
Investment Shares as Class A Shares. This 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 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:
* corporate debt securities rated within the four highest categories by an
NRSRO, including bonds, notes, and indentures;
* asset-backed securities;
* U.S. government securities, including U.S. Treasury bills, notes, and
bonds, and securities issued by agencies and instrumentalities of the
U.S. government; and
* repurchase agreements.
NON-MORTGAGE RELATED ASSET-BACKED SECURITIES
Non-mortgage related asset-backed securities present certain risks that are not
presented by mortgage-backed securities. Primarily, these securities do not have
the benefit of the same security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Most issuers of asset-backed securities backed
by motor vehicle installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If the servicer
sells these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state and is
then registered because the owner and the obligor move to another state, such
re-registration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee with
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is a possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities.
CONVERTIBLE SECURITIES
DECS, or similar instruments marketed under different names, offer a substantial
dividend advantage with the possibility of unlimited upside potential if the
price of the underlying common stock exceeds a certain level. DECS convert to
common stock at maturity. The amount received is dependent on the price of the
common stock at the time of maturity. DECS contain two call options at different
strike prices. The DECS participate with the common stock up to the first call
price. They are effectively capped at that point unless the common stock rises
above a second price point, at which time they participate with unlimited upside
potential.
PERCS, or similar instruments marketed under different names, offer a
substantial dividend advantage, but capital appreciation potential is limited to
a predetermined level. PERCS are less risky and less volatile than the
underlying common stock because their superior income mitigates declines when
the common stock falls, while the cap price limits gains when the common stock
rises.
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 readily marketable
securities, 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 = PVCF1(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.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Directors to determine the liquidity of certain restricted
securities is permitted under the Securities and Exchange Commission ("SEC")
Staff position set forth in the adopting release for Rule 144A under the
Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive safe harbor for
certain secondary market transactions involving securities subject to
restrictions on resale under federal securities laws. The Rule provides an
exemption from registration for resales of otherwise restricted securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for resale under Rule
144A. The Fund believes that the Staff of the SEC has left the question of
determining the liquidity of all restricted securities eligible for resale under
Rule 144A to the Directors. The Directors consider the following criteria in
determining the liquidity of certain restricted securities:
* the frequency of trades and quotes for the security;
* the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
* dealer undertakings to make a market in the security; and * the nature of
the security and the nature of the marketplace trades.
REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the securities subject to
repurchase agreements, and these securities are marked to market daily. To the
extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that a defaulting seller files for bankruptcy or
becomes insolvent, disposition of securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions such as broker/dealers which are deemed by the Fund's adviser to be
creditworthy pursuant to guidelines established by the Directors.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. A reverse repurchase
transaction is similar to borrowing cash. In a reverse repurchase agreement the
Fund transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future, the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and are maintained until the transaction is settled.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest in the securities of affiliated money market funds as an
efficient means of managing the Fund's uninvested cash.
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
nongovernment-related pools highly liquid.
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.
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, 1997 and 1996, were 62% and 104%, 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.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be deemed
to be an underwriter under the Securities Act of 1933 in connection with the
sale of restricted securities which the Fund may purchase pursuant to its
investment objective, policies and limitations.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities up to
one-third of the value of its total assets. This shall not prevent the Fund from
purchasing or holding U.S. government obligations, money market instruments,
variable rate demand notes, bonds, debentures, notes, certificates of
indebtedness, or other debt securities, entering into repurchase agreements, or
engaging in other transactions where permitted by the Fund's investment
objective, policies and limitations.
SELLING SHORT
The Fund will not sell securities short unless:
* during the time the short position is open, it owns an equal amount of the
securities sold or securities readily and freely convertible into or
exchangeable, without payment of additional consideration for securities of
the same issue as, and equal in amount to, the securities sold short; and
* not more than 10% of the Fund's net assets (taken at current value) is held
as collateral for such sales at any one time.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets in any one
industry, except it may invest 25% or more of the value of its total assets in
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Directors without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
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 did not borrow money or pledge securities in excess of 5% of the value
of its net assets during the past fiscal year and does not expect to do so
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 association 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, birthdates, present
positions with Fixed Income Securities, Inc., and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Director
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp. and Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and Director or Trustee of the
Funds. Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President of the Company.
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Director
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Director, Member
of Executive Committee, University of Pittsburgh; Director or Trustee of the
Funds.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Director
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; Partner or Trustee in private real
estate ventures in Southwest Florida; formerly, President, Naples Property
Management, Inc. and Northgate Village Development Corporation; Director or
Trustee of the Funds.
William J. Copeland
One PNC Plaza --23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Director
Director and Member of the Executive Committee, Michael Baker, Inc.; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.; Director, Ryan
Homes, Inc.; Director or Trustee of the Funds.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or
Trustee of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Director
Professor of Medicine, University of Pittsburgh; Medical Director, University of
Pittsburgh Medical Center -- Downtown; Member, Board of Directors, University of
Pittsburgh Medical Center; formerly, Hematologist, Oncologist, and Internist,
Presbyterian and Montefiore Hospitals; Director or Trustee of the Funds.
Edward L. Flaherty, Jr.@ Miller, Ament, Henny & Kochuba 205 Ross Street
Pittsburgh, PA Birthdate: June 18, 1924
Director
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Director
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street Boston
Corporation; Director or Trustee of the Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Director
President, Law Professor, Duquesne University; Consulting Partner, Mollica &
Murray; Director or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Director
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., National Defense University and U.S. Space Foundation;
President Emeritus, University of Pittsburgh; Founding Chairman, National
Advisory Council for Environmental Policy and Technology, Federal Emergency
Management Advisory Board and Czech Management Center, Prague; Director or
Trustee of the Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Director
Public relations/Marketing/Conference Planning; Director or Trustee of the
Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated
Research Corp. and Federated Global Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated Shareholder Services Company, and
Federated Shareholder Services; Director, Federated Services Company;
President or Executive Vice President of the Funds; Director or Trustee 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
Birthdate: October 22, 1930
Executive Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Shareholder Services Company; Trustee or Director of some of the Funds;
President, Executive Vice President and Treasurer of some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President , Secretary and Treasurer
Executive Vice President, Secretary, and Trustee, Federated Investors; Trustee,
Federated Advisers, Federated Management, and Federated Research; Director,
Federated Research Corp. and Federated Global Research Corp.; Trustee, Federated
Shareholder Services Company; Director, Federated Services Company; President
and Trustee, Federated Shareholder Services; Director, Federated Securities
Corp.; Executive Vice President and Secretary of the Funds; Treasurer of some of
the Funds.
* This Director is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the Board of
Directors handles the responsibilities of the Board between meetings of the
Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Automated Government Money Trust;
Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust Series II;
Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily
Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity
Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S.
Government Securities, Inc.; Federated GNMA Trust; Federated Government
Income Securities, Inc.; Federated Government Trust; Federated High Income
Bond Fund, Inc.; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Insurance Series; Federated Investment
Portfolios; Federated Investment Trust; Federated Master Trust; Federated
Municipal Opportunities Fund, Inc.; Federated Municipal Securities Fund,
Inc.; Federated Municipal Trust; Federated Short-Term Municipal Trust;
Federated Short-Term U.S. Government Trust; Federated Stock and Bond Fund,
Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International
Series, Inc.; Investment Series Funds, Inc.; Investment Series Trust;
Liberty Term Trust, Inc. -- 1999; Liberty U.S. Government Money Market
Trust; Liquid Cash Trust; Managed Series Trust; Money Market Management,
Inc.; Money Market Obligations Trust; Money Market Obligations Trust II;
Money Market Trust; Municipal Securities Income Trust; Newpoint Funds; RIMCO
Monument Funds; Targeted Duration Trust; Tax-Free Instruments Trust; The
Planters Funds; The Virtus Funds; Trust for Financial Institutions; Trust
for Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; Wesmark Funds; WCT Funds;
and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Directors own less than 1% of the Fund's outstanding Class F Shares
and Class A Shares.
As of January 7, 1998, the following shareholders of record owned 5% or more of
the outstanding Class A Shares of the Fund: MLPF&S, for the sole benefit of its
customers, Jacksonville, FL, owned approximately 1,192,539 Shares (12.98%); and
David Lloyd Kreeger Foundation, Washington, DC, owned
approximately 588,476 Shares (6.40%).
As of January 7, 1998, the following shareholders of record owned 5% or more of
the outstanding Class F Shares of the Fund: MLPF&S, for the sole benefit of its
customers, Jacksonville, FL, owned approximately 160,312 Shares (18.13%); and
Legg Mason Trust Company Trustee, Clara M. Cerar Charitable Remainder Unitrust,
Baltimore, MD, owned approximately 78,125 Shares (8.84%). DIRECTORS
COMPENSATION
AGGREGATE
NAME, COMPENSATION TOTAL COMPENSATION PAID
POSITION WITH FROM TO DIRECTORS FROM
CORPORATION CORPORATION#* CORPORATION AND FUND COMPLEX+
John F. Donahue, $0 $0 for the Corporation and
Chairman and Director 56 investment companies
Richard B. Fisher, $0 $0 for the Corporation and
President and Director 6 investment companies
Thomas G. Bigley, $1,327 $111,222 for the Corporation and
Director 56 investment companies
John T. Conroy, Jr., $1,460 $122,362 for the Corporation and
Director 56 investment companies
William J. Copeland, $1,460 $122,362 for the Corporation and
Director 56 investment companies
James E. Dowd, $1,460 $122,362 for the Corporation and
Director 56 investment companies
Lawrence D. Ellis, M.D., $1,327 $111,222 for the Corporation and
Director 56 investment companies
Edward L. Flaherty, Jr., $1,460 $122,362 for the Corporation and
Director 56 investment companies
Peter E. Madden, $1,327 $111,222 for the Corporation and
Director 56 investment companies
John E. Murray, Jr., $1,327 $111,222 for the Corporation and
Director 56 investment companies
Wesley W. Posvar, $1,327 $111,222 for the Corporation and
Director 56 investment companies
Marjorie P. Smuts, $1,327 $111,222 for the Corporation and
Director 56 investment companies
# The aggregate compensation provided is for the Corporation which is comprised
of 3 portfolios.
* Information is furnished for the fiscal year ended November 30, 1997.
+ The information provided is for the last calendar year end.
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,
1997, 1996 and 1995, the Adviser earned advisory fees of $446,254, $515,204, and
$656,470, respectively, of which $214,584, $328,347, and $204,367, respectively,
were voluntarily waived.
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
guidelines established by the Directors. The Adviser may select brokers and
dealers who offer brokerage and research services. These services may be
furnished directly to the Fund or to the Adviser and may include: advice as to
the advisability of investing in securities; security analysis and reports;
economic studies; industry studies; receipt of quotations for portfolio
evaluations; and similar services. Research services provided by brokers and
dealers may be used by the Adviser or its affiliates in advising the Fund 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. 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. For the fiscal years
ended November 30, 1997, 1996, and 1995, the Fund paid no brokerage commissions.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the Adviser, investments of the type the
Fund may make may also be made by those other accounts. When the Fund and one or
more other accounts managed by the Adviser are prepared to invest in, or desire
to dispose of, the same security, available investments or opportunities for
sales will be allocated in a manner believed by the Adviser to be equitable to
each. In some cases, this procedure may adversely affect the price paid or
received by the Fund or the size of the position obtained or disposed of by the
Fund. In other cases, however, it is believed that coordination and the ability
to participate in volume transactions will be to the benefit of the Fund.
OTHER SERVICES
FUND ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in
the prospectuses. From March 1, 1994, to March 1, 1996, Federated
Administrative Services served as the Fund's Administrator. Prior to March
1, 1994, Federated Administrative Services, Inc. served as the Fund's
Administrator. Both former Administrators are subsidiaries of Federated
Investors. For purposes of this Statement of Additional Information,
Federated Services Company, Federated Administrative Services, and Federated
Administrative Services, Inc. may hereinafter collectively be referred to as
the "Administrators." For the fiscal year ended November 30, 1997, 1996, and
1995, the Administrators earned $155,001, $155,001, and $155,000,
respectively.
CUSTODIAN AND PORTFOLIO RECORDKEEPER
State Street Bank and Trust Company, Boston, MA, is custodian for the securities
and cash of the Fund. Federated Services Company, Pittsburgh, PA, provides
certain accounting and recordkeeping services with respect to the Fund's
portfolio investments. 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.
TRANSFER AGENT
Federated Services Company, through it registered transfer agent, Federated
Shareholder Services Company, maintains all necessary shareholder records. For
its services, the transfer agent receives a fee based on the size, type and
number of accounts and transactions made by shareholders.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Deloitte & Touche LLP, Pittsburgh,
Pennsylvania.
PURCHASING SHARES
Except under certain circumstances described in the respective prospectuses,
Shares are sold at their net asset value (plus a sales charge on Class A Shares
and Class F Shares only) on days the New York Stock Exchange is open for
business. The procedure for purchasing Shares is explained in the respective
prospectuses under "Investing in the Fund" and "Purchasing Shares." For further
information on any of the programs listed below please contact your financial
intermediary or Federated Securities Corp.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
As described in the prospectuses, larger purchases of the same Share class
reduce or eliminate the sales charge paid. For example, the Fund will combine
all Class A Shares purchases made on the same day, by the investor, the
investor's spouse, and the investor's children under age 21 when it calculates
the sales charge. This combined purchase option is available within Class F
shares as well. In addition, the sales charge, if applicable, is reduced for
purchases made at one time by a trustee or fiduciary for a single trust estate
or a single fiduciary account.
If an additional purchase into the same Share class is made, the Fund will
consider the previous purchases still invested in the Fund. For example, if a
shareholder already owns Class A Shares having a current value at the public
offering price of $900,000 and he purchases $100,000 more at the current public
offering price, the sales charge on the additional purchase according to the
schedule now in effect would be eliminated.
In addition, the Fund will also combine purchases for the purpose of reducing
the contingent deferred sales charge imposed on Class F Share redemptions. For
example, if a shareholder already owns Class F Shares having 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 Class F Shares.
To receive the sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial intermediary at the
time the purchase is made that Class A Shares or Class F Shares are already
owned or that purchases are being combined. The Fund will reduce or eliminate
the sales charge after it confirms the purchases.
CONCURRENT PURCHASES
Shareholders have the privilege of combining concurrent purchases of the same
Share class of two or more funds in the Federated Complex in calculating the
applicable sales charge.
To receive a sales charge reduction or elimination, Federated Securities Corp.
must be notified by the shareholder in writing or by his financial intermediary
at the time the concurrent purchases are made. The Fund will reduce or eliminate
the sales charge after it confirms the purchases.
LETTER OF INTENT
A Shareholder can sign a letter of intent committing to purchase a certain
amount of the same Share class within a 13 month period in order to combine such
purchases in calculating the applicable sales charge. The Fund's custodian will
hold Shares in escrow equal to the maximum applicable sales charge. If the
shareholder completes the commitment, the escrowed Shares will be released to
their account. If the commitment is not completed within 13 months, the
custodian will redeem an appropriate number of escrowed Shares to pay for the
applicable sales charge.
The letter of intent for Class F Shares 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.
While this letter of intent will not obligate the shareholder to purchase Class
A Shares or Class F Shares, each purchase during the period will be at the sales
charge applicable to the total amount intended to be purchased. At the time a
letter of intent is established, current balances in accounts in any Class A
Shares or Class F Shares of any Federated Funds, excluding money market
accounts, will be aggregated to provide a purchase credit towards fulfillment of
the letter of intent. The letter may be dated as of a prior date to include any
purchase made within the past 90 days. Prior trade prices will not be adjusted.
REINVESTMENT PRIVILEGE
The reinvestment privilege is available for all Shares of the Fund within the
same Share Class.
Class A and Class F shareholders who redeem from the Fund may reinvest the
redemption proceeds back into the same Share class at the next determined net
asset value without any sales charge. The original shares must have been subject
to a sales charge and the reinvestment must be within 120 days.
Similarly, Class F shareholders who redeem may reinvest their redemption
proceeds in the same Share class within 120 days. Shareholders would not be
entitled to a reimbursement of the contingent deferred sales charge if paid at
the time of redemption on any Share class. However, reinvested shares would not
be subject to a contingent deferred sales charge, if otherwise applicable, upon
later redemption.
In addition, if the Shares were reinvested through a financial intermediary, the
financial intermediary would not be entitled to an advanced payment from
Federated Securities Corp. on the reinvested Shares, if otherwise applicable.
Federated Securities Corp. must be notified by the shareholder in writing or by
his financial intermediary of the reinvestment in order to eliminate a sales
charge or a contingent deferred sales charge. If the shareholder redeems Shares
in the Fund, there may be tax consequences.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES AGREEMENT
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 Plan, the Directors expect 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 year ended November 30, 1997, the Fund's Class A Shares and Class
F Shares made payments in the amount of $513,507 and $13,294, respectively,
pursuant to the Plan, of which $308,105 and $1,772, respectively, were
voluntarily waived. In addition, for the fiscal year ended November 30, 1997,
the Fund's Class A Shares and Class F Shares paid shareholder services fees in
the amout of $256,754 and $22,156, respectively, of which $0 and $2,659,
respectively, were voluntarily waived.
PURCHASES BY SALES REPRESENTATIVES, FUND DIRECTORS, AND EMPLOYEES The
following individuals and their immediate family members may buy Class A Shares
and Class F Shares at net asset value without a sales charge:
* Directors, employees, and sales representatives of the Fund, Federated
Advisers, and Federated Securities Corp. and its affiliates;
* Federated Life Members (Class A Shares only); and
* any associated person of an investment dealer who has a sales agreement
with Federated Securities Corp. Shares may also be sold without a sales
charge to trusts, pensions, or profit-sharing plans for these individuals.
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
The Fund's net asset value per Share fluctuates and is based on the market value
of all securities and other assets of the Fund. The net asset value for each
class of Shares may differ due to the variance in daily net income realized by
each class.
Net asset value is not determined on (i) days on which there are not sufficient
changes in the value of the Fund's portfolio securities that its net asset value
might be materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; or (iii) the following
holidays: New Year's Day, Martin Luther King Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's securities are determined as follows:
* as provided by an independent pricing service;
* for short-term obligations, according to the mean bid and asked prices, as
furnished by an independent pricing service, or for short-term obligations
with remaining maturities of 60 days or less at the time of purchase, at
amortized cost unless the Directors determine this is not fair value; or
* at fair value as determined in good faith by the Directors.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider:
* yield;
* quality;
* coupon rate;
* maturity;
* type of issue;
* trading characteristics; and
* other market data.
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
respective prospectuses under "Redeeming and Exchanging Shares." Although the
transfer agent does not charge for telephone redemptions, it reserves the right
to charge a fee for the cost of wire-transferred redemptions of less than
$5,000.
REDEMPTION IN KIND
Although the Fund intends to redeem Shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the Fund's portfolio.
Redemption in kind will be made in conformity with applicable SEC rules, taking
such securities at the same value employed in determining net asset value and
selecting the securities in a manner the Directors determine to be fair and
equitable.
The Corporation has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Corporation is obligated to redeem Shares
for any shareholder in cash up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period. 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. CONTINGENT DEFERRED SALES CHARGE
In computing the amount of the applicable Contingent Deferred Sales Charge,
redemptions are deemed to have occurred in the following order: (1) Shares
acquired through the reinvestment of dividends and long-term capital gains;
and (2) Shares held for more than four full years from the date of purchase
on a first-in, first-out basis.
TAX STATUS
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
* derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
* invest in securities within certain statutory limits; and * distribute to
its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional shares. No portion of any income dividend paid by
the Fund is eligible for the dividends received deduction available to
corporations.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term capital
gains distributed to them regardless of how long they have held the Fund shares.
TOTAL RETURN
The Fund's average annual total returns based on offering price for the
following periods ended November 30, 1997 were:
DATE OF INITIAL
PUBLIC
SHARE CLASS INVESTMENT ONE-YEAR FIVE-YEARS SINCE INCEPTION
Class A 1/13/92 5.46% 5.75% 5.78%
Class F 8/31/93 4.51% N/A 5.14%
The average annual total return for all classes of Shares of the Fund is the
average compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of Shares owned at the
end of the period by the offering price per Share at the end of the period. The
number of Shares owned at the end of the period is based on the number of Shares
purchased at the beginning of the period with $1,000, less any applicable sales
charge, adjusted over the period by any additional Shares, assuming a quarterly
reinvestment of all dividends and distributions. Any applicable contingent
deferred sales charge is deducted from the ending value of the investments based
on the lesser of the original purchase price or the offering price of Shares
redeemed.
YIELD
The Fund's yields for the thirty-day period ended November 30, 1997 were:
SHARE CLASS YIELD
Class A 5.96%
Class F 6.06%
The yield for all classes of Shares of the Fund is determined by dividing the
net investment income per Share (as defined by the Securities and Exchange
Commission) earned by any class of Shares over a thirty-day period by the
maximum offering price per Share of any class of Shares on the last day of the
period. This value is then annualized using semi-annual compounding. This means
that the amount of income generated during the thirty-day period is assumed to
be generated each month over a twelve-month period and is reinvested every six
months. The yield does not necessarily reflect income actually earned by any
class of 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 any
class of Shares, the performance will be reduced for those shareholders
paying those fees.
PERFORMANCE COMPARISONS
The performance of Class A Shares and Class F Shares depends upon such variables
as:
* portfolio quality;
* average portfolio maturity;
* type of instruments in which the portfolio is invested; * changes in
interest rates and market value of portfolio securities; * changes in the
Fund expenses; and * various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per share fluctuate daily. Both net earnings and offering
price per share are factors in the computation of yield and total return.
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:
* Lipper Analytical Services, Inc., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes
the reinvestment of all capital gains distributions and income dividends
and takes into account any change in offering price over a specific period
of time. From time to time, the Fund will quote its Lipper ranking in the
"short-term investment grade debt funds" category in advertising and sales
literature.
* Morningstar, Inc., an independent rating service, is the publisher of the
bi-weekly MUTUAL FUND VALUES. Mutual Fund Values rates more than 1,000
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.
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.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by Fund portfolio managers and their views and analysis on how such
developments could affect the Funds. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute.
ABOUT FEDERATED INVESTORS
Federated Investors is dedicated to meeting investor needs which is reflected in
its investment decision making--structured, straightforward, and consistent.
This has resulted in a history of competitive performance with a range of
competitive investment products that have gained the confidence of thousands of
clients and their customers.
The company's disciplined security selection process is firmly rooted in sound
methodologies backed by fundamental and technical research. Investment decisions
are made and executed by teams of portfolio managers, analysts, and traders
dedicated to specific market sectors. Traders handle trillions of dollars in
annual trading volume. In the corporate bond sector, as of December 31,
1997, Federated Investors managed 12 money market funds and 16 bond funds with
assets approximating $22.5 billion and $5.6 billion, respectively. Federated's
corporate bond decision making--based on intensive, diligent credit analysis--is
backed by over 22 years of experience in the corporate bond sector. In 1972,
Federated introduced one of the first high-yield bond funds in the industry. In
1983, Federated was one of the first fund managers to participate in the
asset-backed securities market, a market totaling more than $200 billion.
In the government sector, as of December 31, 1997, Federated Investors managed 9
mortgage-backed, 6 government/agency and 17 government money market mutual
funds, with assets approximating $5.9 billion, $1.5 billion and $29.7 billion,
respectively. Federated trades approximately $400 million in U.S. government and
mortgage-backed securities daily and places approximately $23 billion in
repurchase agreements each day. Federated introduced the first U.S. government
fund to invest in U.S. government bond securities in 1969. Federated has been a
major force in the short- and intermediate-term government markets since 1982
and currently manages nearly $36 billion in government funds within these
maturity ranges.
J. Thomas Madden, Executive Vice President, oversees Federated Investors' equity
and high yield corporate bond management while William D. Dawson, Executive Vice
President, oversees Federated Investors' domestic fixed income management. Henry
A. Frantzen, Executive Vice President, oversees the management of Federated
Investors' international portfolios.
MUTUAL FUND MARKET
Thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $4.4 trillion to the more than 6,700 funds available.*
Federated Investors, through its subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:
INSTITUTIONAL CLIENTS
Federated Investors meets the needs of more than 4,000 institutional clients
nationwide by managing and servicing separate accounts and mutual funds for a
variety of applications, including defined benefit and defined contribution
programs, cash management, and asset/liability management. Institutional clients
include corporations, pension funds, tax-exempt entities,
foundations/endowments, insurance companies, and investment and financial
advisors. The marketing effort to these institutional clients is headed by John
B. Fisher, President, Institutional Sales Division.
BANK MARKETING
Other institutional clients include close relationships with more than 1,600
banks and trust organizations. Virtually all of the trust divisions of the top
100 bank holding companies use Federated funds in their clients' portfolios. The
marketing effort to trust clients is headed by Timothy C. Pillion, Senior Vice
President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated funds are available to consumers through major brokerage firms
nationwide--we have over 2,200 broker/dealer and bank broker/dealer
relationships across the country--supported by more wholesalers than any other
mutual fund distributor. Federated's service to financial professionals and
institutions has earned it high ratings in several surveys performed by DALBAR,
Inc. DALBAR is recognized as the industry benchmark for service quality
measurement. The marketing effort to these firms is headed by James F. Getz,
President, Federated Securities Corp.
* Source: Investment Company Institute
FINANCIAL STATEMENTS
The Financial Statements for the fiscal year ended November 30, 1997, are
incorporated herein by reference to the Annual Report of the Fund dated November
30, 1997 (File Nos. 33-43472 and 811-6447). A copy of this report may be
obtained without charge by contacting the Fund.
FEDERATED LIMITED TERM MUNICIPAL FUND
(A Portfolio of Fixed Income Securities, Inc.)
Class A Shares
PROSPECTUS
The Class A Shares offered by this prospectus represent interests in Federated
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. 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 FEPOSIT 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 Statement of Additional Information for Class A Shares
and Class F Shares dated January 31, 1998, with the Securities and Exchange
Commission ("SEC"). The information contained in the Statement of Additional
Information is incorporated by reference in this prospectus. You may request a
copy of the Statement of Additional Information or a paper copy of this
prospectus, if you have received your prospectus electronically, free of charge
by calling 1-800-341-7400. To obtain other information or to make inquiries
about the Fund, contact your financial institution. The Statement of Additional
Information, material incorporated by reference into this document, and other
information regarding the Fund is maintained electronically with the SEC at
Internet Web site (http://www.sec.gov). THESE SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated January 31, 1998
TABLE OF CONTENTS
Summary of Fund Expenses 1
Financial Highlights -- Class A Shares 2
General Information 3
Calling the Fund 3
Investment Information 3
Investment Objective 3
Investment Policies 3
Investment Risks 9
Investment Limitations 9
Net Asset Value 9
Investing in the Fund 10
Purchasing Shares 10
Purchasing Shares Through a Financial Intermediary 10
Purchasing Shares by Wire 10
Purchasing Shares by Check 10
Systematic Investment Program 10
Class A Shares 11
Redeeming and Exchanging Shares 11
Redeeming or Exchanging Shares Through
a Financial Intermediary 11
Redeeming or Exchanging Shares by Telephone 11
Redeeming or Exchanging Shares by Mail 12
Requirements for Redemption 12
Requirements for Exchange 12
Systematic Withdrawal Program 12
Account and Share Information 12
Confirmations and Account Statements 12
Dividends and Distributions 12
Accounts with Low Balances 13
Fixed Income Securities, Inc. Information 13
Management of the Corporation 13
Distribution of Shares 14
Administration of the Fund 14
Shareholder Information 15
Voting Rights 15
Tax Information 15
Federal Income Tax 15
State and Local Taxes 15
Performance Information 15
Other Classes of Shares 16
SUMMARY OF FUND EXPENSES
CLASS A SHARES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> Maximum Sales Charge Imposed on Purchases (as a percentage of offering
price) 1.00% Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage of offering None price) Contingent Deferred Sales Charge (as a
percentage of original purchase price or redemption
proceeds, as applicable) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver)(1) 0.00%
12b-1 Fee 0.25%
Total Other Expenses (after expense reimbursement) 0.65%
Shareholder Services Fee 0.25%
Total Operating Expenses(2) 0.90%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time
at its sole discretion. The maximum management fee is 0.40%.
(2) The total operating expenses 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 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 the Fund" and "Fixed Income Securities,
Inc. Information." Wire-transferred redemptions of less than $5,000 may be
subject to additional fees.
LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return, (2) redemption at the end of each time period, and (3) payment of
the maximum sales charge. 1 Year $ 19 3 Years $ 38 5 Years $ 59 10 Years
$120 THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS -- CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated January 16, 1998, on the Fund's
financial statements for the year ended November 30, 1997, is included in the
annual report, which is incorporated by reference. This table should be read in
conjunction with the Fund's financial statements and notes thereto, which may be
obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1997 1996 1995 1994 1993(A)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.76 $ 9.85 $ 9.49 $10.02 $10.00
Net investment income 0.41 0.40 0.46 0.43 0.10
Net realized and unrealized gain (loss) on investments 0.02 (0.08) 0.36 (0.53) 0.02
Total from investment operations 0.43 0.32 0.82 (0.10) 0.12
LESS DISTRIBUTIONS
Distributions from net investment income (0.41) (0.40) (0.46) (0.43) (0.10)
Distributions in excess of net investment income -- (0.01)(b) -- -- --
Total distributions (0.41) (0.41) (0.46) (0.43) (0.10)
NET ASSET VALUE, END OF PERIOD $ 9.78 $ 9.76 $ 9.85 $ 9.49 $10.02
TOTAL RETURN(C) 4.45% 3.34% 8.67% (0.95%) 1.20%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.90% 0.81% 0.68% 0.63% 0.50%*
Net investment income 4.17% 4.14% 4.72% 4.33% 4.30%*
Expense waiver/reimbursement(d) 0.48% 0.54% 1.03% 0.94% 1.71%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $52,921 $73,570 $65,179 $32,644 $13,694
Portfolio turnover 33% 49% 47% 135% 0%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from September 1, 1993 (date of initial
public offering) to November 30, 1993.
(b) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions did not represent a return of capital for federal income tax
purposes.
(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S
ANNUAL REPORT FOR THE FISCAL YEAR DATED NOVEMBER 30, 1997, WHICH CAN BE
OBTAINED FREE OF CHARGE.
GENERAL INFORMATION
The Corporation was incorporated under the laws of the State of Maryland on
October 15, 1991. Class A Shares of the Fund ("Shares") are designed for
individuals as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio, primarily limited to municipal
securities. The Fund's current net asset value and offering price may be
found in the mutual funds section of local newspapers under "Federated" and the
appropriate class designation listing. CALLING THE FUND
Call the Fund at 1-800-341-7400.
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 Board of 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 non-governmental users may, for this purpose, be deemed to be
related to the industry in which such non-governmental 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 non-governmental 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.
AS A PERCENTAGE OF
TOTAL MARKET
VALUE OF SECURITY
HOLDINGS AS OF
CREDIT RATING NOVEMBER 30, 1997
BBB 28.5%
PARTICIPATION INTERESTS
The Fund may purchase participation interests from financial institutions such
as commercial banks, savings 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 securities known as "inverse floaters" which represent
interests in municipal securities. The Fund intends to purchase inverse floaters
to assist in duration management and to seek current income. These obligations
pay interest rates that vary inversely with changes in the interest rates of
specified short-term municipal securities or an index of short-term municipal
securities. The interest rates on inverse floaters will typically decline as
short-term market interest rates increase and increase as short-term market
rates decline. Inverse floaters will generally respond to changes in market
interest rates more rapidly than fixed-rate long-term securities (typically
twice as fast). As a result, the market values of inverse floaters will
generally be more volatile than the market values of fixed-rate municipal
securities. Typically, the portion of the portfolio invested in inverse floaters
will be subject to additional volatility.
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 investing in more than 3% of the voting securities of any
other investment company, 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 unless permitted to do so by action of the SEC. 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.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies as an
efficient means of carrying out its investment policies. It should be noted that
investment companies incur certain expenses, such as management fees, and,
therefore, any investment by the Fund in shares of other investment companies
may be subject to such duplicate expenses.
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.
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.
FINANCIAL FUTURES AND OPTIONS TO BUY OR SELL SUCH CONTRACTS
The Fund may purchase and sell interest rate and index financial futures
contracts and options on those contracts. These financial futures contracts and
options may be used to hedge all or a portion of its portfolio against changes
in the market value of portfolio securities and interest rates, provide
additional liquidity, and accomplish its current strategies in a more
expeditious fashion. 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.
As a matter of investment policy, which may be changed without shareholder
approval, the Fund may not purchase or sell futures contracts or options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions would exceed 5% of the market value of the Fund's
total assets. When the Fund purchases futures contracts or options, an amount of
readily marketable municipal securities, cash, or cash equivalents, equal to the
underlying commodity value of the futures contracts or options (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 or
options.
RISKS
When the Fund uses financial futures or options, 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 or option 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 options will exist at all times. Although the investment
adviser will consider liquidity before entering into futures transactions or
options, 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 positions
or options depends on this secondary market.
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 without limitation. 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
The Fund's net asset value ("NAV") per Share fluctuates and is based on the
market value of all securities and other assets of the Fund. The NAV for each
class of Shares may differ 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.
All purchases, redemptions and exchanges are processed at the NAV next
determined after the request in proper form is received by the Fund. The NAV is
determined as of the close of trading on the New York Stock Exchange (normally
4:00 p.m., Eastern time) every day the New York Stock Exchange is open.
INVESTING IN THE FUND
This prospectus offers Class A Shares each with the characteristics described
below.
CLASS A
Minimum and Subsequent
Investment Amounts $1,500/$100
Maximum Sales Charge 1.00%*
Maximum Contingent
Deferred Sales
Charge None
Conversion Feature No
* Class A Shares are sold at NAV, plus a sales charge as follows:
SALES CHARGE
AS A PERCENTAGE OF
PUBLIC NET
OFFERING AMOUNT
AMOUNT OF TRANSACTION PRICE INVESTED
Less than $1 million 1.00% 1.01%
$1 million or greater 0.00% 0.00%
PURCHASING SHARES
Shares of the Fund are sold on days on which the New York Stock Exchange is
open. Shares of the Fund may be purchased as described below, either through a
financial intermediary (such as a bank or broker/dealer) or by sending a wire or
check directly to the Fund. Financial intermediaries may impose different
minimum investment requirements on their customers. An account must be
established with a financial intermediary or by completing, signing, and
returning the new account form available from the Fund before Shares can be
purchased. Shareholders in certain other funds advised and distributed by
affiliates of Federated Investors ("Federated Funds") may exchange their Shares
for Shares of the corresponding class of the Fund. The Fund reserves the right
to reject any purchase or exchange request.
In connection with any sale, Federated Securities Corp. may, from time to time,
offer certain items of nominal value to any shareholder or investor.
PURCHASING SHARES THROUGH A FINANCIAL INTERMEDIARY
Orders placed through a financial intermediary are considered received when the
Fund is notified of the purchase order or when payment is converted into federal
funds. Purchase orders through a 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 intermediaries must be
received by the financial intermediary 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 intermediary's responsibility to transmit orders promptly.
Financial intermediaries may charge fees for their services. PURCHASING
SHARES BY WIRE
Shares may be purchased by Federal Reserve wire by calling 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 Shareholder Services Company, c/o State Street
Bank and Trust Company, Boston, MA 02266-8600; Attention; EDGEWIRE; For Credit
to: (Fund Name) (Fund Class); (Fund Number -- this number can be found on the
account statement or by contacting the Fund); Account Number; Trade Date and
Order Number; Group Number or Dealer Number; Nominee or Institution Name; and
ABA Number 011000028. Shares cannot be purchased by wire on holidays when wire
transfers are restricted.
PURCHASING SHARES BY CHECK
Shares may be purchased by mailing a check made payable to the name of the Fund
(designate class of Shares and account number) to: Federated Shareholder
Services Company, P.O. Box 8600, Boston, MA 02266-8600. Orders by mail are
considered received when payment by check is converted into federal funds
(normally the business day after the check is received).
SYSTEMATIC INVESTMENT PROGRAM
Under this program, funds in a minimum amount of $50 may be automatically
withdrawn periodically from the shareholder's checking account at an Automated
Clearing House ("ACH") member and invested in the Fund. Shareholders should
contact their financial intermediary or the Fund to participate in this program.
CLASS A SHARES
Shares are sold at NAV, plus a sales charge. However:
NO SALES CHARGE IS IMPOSED FOR SHARES PURCHASED:
* through financial intermediaries that do not receive sales charge dealer
concessions;
* by Federated Life Members ; or
* through "wrap accounts" or similar programs under which clients pay a fee for
services.
IN ADDITION, THE SALES CHARGE CAN BE REDUCED OR ELIMINATED BY:
* purchasing in quantity and accumulating purchases at the levels in the
table under "Investing in the Fund";
* combining concurrent purchases of two or more funds;
* signing a letter of intent to purchase a specific quantity of shares
within 13 months; or
* using the reinvestment privilege.
Consult a financial intermediary or Federated Securities Corp. for details
on these programs. In order to eliminate the sales charge or receive sales
charge reductions, Federated Securities Corp. must be notified by the
shareholder in writing or by a financial intermediary at the time of
purchase.
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.
On purchases of $1 million or more, the investor pays no sales charge; 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 Shares outstanding at each
month end. 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 establishment of customer accounts
and purchases of Shares.
REDEEMING AND EXCHANGING SHARES
Shares of the Fund may be redeemed for cash or exchanged for Shares of the same
class of other Federated Funds on days on which the Fund computes its NAV.
Shares are redeemed at NAV less any applicable contingent deferred sales charge.
Exchanges are made at NAV. Shareholders who desire to automatically exchange
Shares, of a like class, in a pre-determined amount on a monthly, quarterly, or
annual basis may take advantage of a systematic exchange privilege. Information
on this privilege is available from the Fund or your financial intermediary.
Depending upon the circumstances, a capital gain or loss may be realized when
Shares are redeemed or exchanged.
REDEEMING OR EXCHANGING SHARES THROUGH A FINANCIAL INTERMEDIARY
Shares of the Fund may be redeemed or exchanged by contacting your financial
intermediary before 4:00 p.m. (Eastern time). In order for these transactions to
be processed at that day's NAV, financial intermediaries (other than
broker/dealers) must transmit the request to the Fund before 4:00 p.m. (Eastern
time), while broker/dealers must transmit the request to the Fund before 5:00
p.m. (Eastern time). The financial intermediary is responsible for promptly
submitting transaction requests and providing proper written instructions.
Customary fees and commissions may be charged by the financial intermediary for
this service. Appropriate authorization forms for these transactions must be on
file with the Fund.
REDEEMING OR EXCHANGING SHARES BY TELEPHONE
Shares acquired directly from the Fund may be redeemed in any amount, or
exchanged, by calling 1-800-341-7400. Appropriate authorization forms for these
transactions must be on file with the Fund. Shares held in certificate form must
first be returned to the Fund as described in the instructions under "Redeeming
or Exchanging Shares by Mail." Redemption proceeds will either be mailed in the
form of a check 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. The minimum amount for a wire transfer is $1,000.
Proceeds from redeemed Shares purchased by check or through ACH will not be
wired until that method of payment has cleared.
Telephone instructions will 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
this occurs, "Redeeming or Exchanging Shares by Mail" should be considered. The
telephone transaction privilege may be modified or terminated at any time.
Shareholders would be promptly notified.
REDEEMING OR EXCHANGING SHARES BY MAIL
Shares may be redeemed in any amount, or exchanged, by mailing a written request
to: Federated Shareholder Services Company, Fund Name, Fund Class, P.O. Box
8600, Boston, MA 02266-8600. If share certificates have been issued, they must
accompany the written request. It is recommended that certificates be sent
unendorsed by registered or certified mail.
All written requests should state: Fund Name and the Share Class name; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount of the transaction. An exchange
request should also state the name of the Fund into which the exchange is to be
made. All owners of the account must sign the request exactly as the Shares are
registered. A check for redemption proceeds is normally mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request. Dividends are paid up to and including the day that
a redemption or exchange request is processed.
REQUIREMENTS FOR REDEMPTION
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 their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; a member firm of a domestic stock exchange; 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.
REQUIREMENTS FOR EXCHANGE
Shareholders must exchange Shares having an NAV equal to the minimum investment
requirements of the fund into which the exchange is being made. Contact your
financial intermediary directly or the Fund for free information on and
prospectuses for the Federated Funds into which your Shares may be exchanged.
Before the exchange, the shareholder must receive a prospectus of the fund for
which the exchange is being made.
Upon receipt of proper instructions and required supporting documents, Shares
submitted for exchange are redeemed and proceeds invested in the same class of
shares of the other fund. Signature guarantees will be required to exchange
between fund accounts not having identical shareholder registrations. The
exchange privilege may be modified or terminated at any time. Shareholders will
be notified of the modification or termination of the exchange privilege.
SYSTEMATIC WITHDRAWAL PROGRAM
Under this program, Shares are redeemed to provide for periodic withdrawal
payments in an amount directed by the shareholder of not less than $100. To be
eligible to participate in this program, a shareholder must have an account
value of at least $10,000, other than retirement accounts subject to required
minimum distributions. A shareholder may apply for participation in this program
through his financial intermediary or by calling the Fund.
Because participation in this program may reduce, and eventually deplete the
shareholder's investment in the Fund, payments under this program should not be
considered as yield or income. It is not advisable for shareholders to continue
to purchase Shares subject to a sales charge while participating in this
program.
ACCOUNT AND SHARE INFORMATION
CONFIRMATIONS AND ACCOUNT STATEMENTS
Shareholders will receive detailed confirmations of transactions (except for
systematic program transactions). In addition, shareholders will receive
periodic statements reporting all account activity, including dividends paid.
The Fund will not issue share certificates.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly to all shareholders invested in
the Fund on the record date. Net long-term capital gains realized by the Fund,
if any, will be distributed at least once every twelve months. Dividends and
distributions are automatically reinvested in additional Shares of the Fund on
payment dates at the ex-dividend date without a sales charge, unless
shareholders request cash payments on the new account form or by contacting the
transfer agent.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
close an account by redeeming all Shares and paying the proceeds to the
shareholder if the account balance falls below the applicable minimum investment
amount. Retirement plan accounts and accounts where the balance falls below the
minimum due to NAV changes will not be closed in this manner. Before an account
is closed, the shareholder will be notified and allowed 30 days to purchase
additional Shares to meet the minimum.
FIXED INCOME SECURITIES, INC. INFORMATION
MANAGEMENT OF THE CORPORATION
BOARD OF DIRECTORS
The Corporation 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 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.
Both the Corporation and the Adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Fund and its portfolio
securities. These codes recognize that such persons owe a fiduciary duty to the
Fund's shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Directors, and could
result in severe penalties.
ADVISORY FEES
The Adviser receives an annual investment advisory fee equal to 0.40% 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. The Adviser 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. With over $120 billion invested
across more than 300 funds under management and/or administration by its
subsidiaries, as of December 31, 1997, Federated Investors is one of the
largest mutual fund investment managers in the United States. With more than
2,000 employees, Federated continues to be led by the management who founded
the company in 1955. Federated funds are presently at work in and through
approximately 4,000 financial institutions nationwide.
Mary Jo Ochson and Jeff A. Kozemchak are the Fund's portfolio managers. Mary
Jo Ochson has been the Fund's portfolio manager since its inception. Ms.
Ochson joined Federated Investors in 1982 and has been a Senior Vice
President of the Fund's investment adviser since January 1996. From 1988
through 1995, Ms. Ochson served as an Vice President of the Fund's
investment adviser. Ms. Ochson is a Chartered Financial Analyst and received
her M.B.A. in Finance from the University of Pittsburgh.
Jeff A. Kozemchak has been the Fund's portfolio manager since January 1997.
Mr. Kozemchak joined Federated Investors in 1987 and has been a Vice
President of the Fund's investment adviser since 1993. Mr. Kozemchak served
as an Assistant Vice President of the investment adviser from 1990 until
1992. Mr. Kozemchak is a Chartered Financial Analyst and received his M.S.
in Industrial Administration from Carnegie Mellon University in 1987.
DISTRIBUTION OF SHARES
Federated Securities Corp. is the principal distributor for shares of the
Fund. It is a Pennsylvania corporation organized on November 14, 1969, and
is the principal distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Investment Company Act of
1940 (the "Plan"), the distributor may be paid a fee by the Fund in an amount
computed at an annual rate of 0.25% of the average daily net assets of the Fund.
The distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers to provide
sales services or distribution-related support services as agents for their
clients or customers. The 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 entered into a Shareholder Services Agreement with Federated
Shareholder Services, a subsidiary of Federated Investors, under which the Fund
may make payments up to 0.25% of the average daily net asset value of shares to
obtain certain personal services for shareholders and to maintain shareholder
accounts. Under the Shareholder Services Agreement, 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.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS
In addition to payments made pursuant to the Plan and Shareholder Services
Agreement, Federated Securities Corp and Federated Shareholder Services, from
their own assets, may pay financial institutions supplemental fees for the
performance of substantial sales services, distribution-related support
services, or shareholder services. 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. Any payments made by the distributor may be reimbursed by the
Adviser or its affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by affiliates of Federated Investors as
specified below:
MAXIMUM AVERAGE AGGREGATE
FEE DAILY NET ASSETS
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Services Company may choose voluntarily to waive a portion of its fee.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Director elections and
other matters submitted to shareholders for vote. All shares of each portfolio
or class 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.
Directors may be removed by the Directors or by shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the written request of shareholders owning at least 10% of the Fund's
outstanding shares of all series entitled to vote.
As of November 7, 1997, MLPF&S, for the sole benefit of its customers,
Jacksonville, FL, owned 30.95% of the voting securities of the Fund's Class A
Shares and 26.85% of the voting securities of the Fund's Class F Shares and,
therefore, may, for certain purposes, be deemed to control the Fund and be able
to affect the outcome of certain matters presented for a vote of shareholders.
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.
STATE AND LOCAL TAXES
Because interest received by the Fund may not be exempt from all state and local
income taxes, shareholders may be required to pay state and local taxes on
dividends received from the Fund. Shareholders are urged to consult their own
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 charge
which, if excluded, would increase the total return, yield and tax-equivalent
yield.
Total return will be calculated separately for Class F Shares and Class A
Shares.
From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/ or compare the
Fund's performance to certain indices.
OTHER CLASSES OF SHARES
The Fund also offers another class of shares called Class F Shares. The Class F
Shares are sold primarily to customers of financial institutions subject to a
contingent deferred sales charge and a minimum initial investment of $1,500.
Class F Shares and Class A Shares are subject to certain of the same expenses.
The amount of dividends payable to Class F Shares will generally exceed that of
Class A 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.
Class F Shares are distributed under a 12b-1 Plan and are also subject to a
shareholder services fee.
Expense differences, however, between Class F Shares and Class A Shares may
affect the performance of each class.
To obtain more information and a prospectus for Class F Shares, investors may
call 1-800-341-7400 or contact their financial intermediary.
[Graphic]Federated Investors
FEDERATED LIMITED TERM MUNICIPAL FUND
(A Portfolio of Fixed Income Securities, Inc.)
Class A Shares
PROSPECTUS
JANUARY 31, 1998
A Diversified Portfolio of Fixed Income
Securities, Inc. An Open-End Management Investment Company
FEDERATED LIMITED TERM MUNICIPAL FUND
CLASS A SHARES
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Advisers
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT
AND DIVIDEND
DISBURSING AGENT
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
INDEPENDENT PUBLIC ACCOUNTANTS Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, PA 15222-5401
Federated Securities Corp., Distributor
1-800-341-7400
www.federatedinvestors.com
Cusip 338319403
3070702A-A (1/98)
[Graphic]
FEDERATED LIMITED TERM MUNICIPAL FUND
(A Portfolio of Fixed Income Securities, Inc.)
Class F Shares
PROSPECTUS
The Class F Shares offered by this prospectus represent interests in Federated
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.
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 Class F Shares. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information for Class F Shares
and Class A Shares dated January 31, 1998, with the Securities and Exchange
Commission ("SEC"). 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 or a paper copy of this
prospectus, if you have received your prospectus electronically, free of charge
by calling 1-800-341-7400. To obtain other information or to make inquiries
about the Fund, contact your financial institution. The Statement of Additional
Information, material incorporated by reference into this document, and other
information regarding the Fund is maintained electronically with the SEC at
Internet Web site (http://www.sec.gov). THESE SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated January 31, 1998
TABLE OF CONTENTS
Summary of Fund Expenses 1
Financial Highlights -- Class F Shares 2
General Information 3
Investment Information 3
Investment Objective 3
Investment Policies 3
Investment Risks 9
Investment Limitations 9
Net Asset Value 9
Investing in the Fund 10
Purchasing Shares 10
Purchasing Shares Through a Financial Intermediary 10
Purchasing Shares by Wire 10
Purchasing Shares by Check 11
Systematic Investment Program 11
Reducing or Eliminating the Sales Charge 11
Redeeming and Exchanging Shares 11
Redeeming or Exchanging Shares Through a Financial Intermediary 11
Redeeming or Exchanging Shares by Telephone 11
Redeeming or Exchanging Shares by Mail 12
Requirements for Redemption 12
Requirements for Exchange 12
Systematic Withdrawal Program 12
Contingent Deferred Sales Charge 12
Account and Share Information 13
Confirmations and Account Statements 13
Dividends and Distributions 13
Accounts with Low Balances 13
Fixed Income Securities, Inc. Information 13
Management of the Corporation 13
Distribution of Class F Shares 14
Administration of the Fund 15
Shareholder Information 15
Voting Rights 15
Tax Information 15
Federal Income Tax 15
State and Local Taxes 16
Performance Information 16
Other Classes of Shares 17
SUMMARY OF FUND EXPENSES
CLASS F SHARES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> Maximum Sales Charge Imposed on Purchases (as a percentage of offering
price) None Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage of offering None price) 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 OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver)(2) 0.00%
12b-1 Fee (after waiver)(3) 0.00%
Total Other Expenses (after expense reimbursement) 0.65%
Shareholder Services Fee 0.25%
Total Operating Expenses(4) 0.65%
</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 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 12b-1 fee has been reduced to reflect the voluntary waiver of the 12b-1
fee. The distributor can terminate the voluntary waiver at any time at its
sole discretion. The maximum 12b-1 fee is 0.15%.
(4) The total operating expenses would have been 1.28% absent the voluntary
waivers of the management fee and the 12b-1 fee and the voluntary
reimbursement of certain other operating expenses.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of Class F Shares of the Fund will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Investing in the Fund" and "Fixed Income Securities,
Inc. Information." Wire-transferred redemptions of less than $5,000 may be
subject to additional fees.
LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
EXAMPLE
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, and (3) payment
of the maximum sales charge.
1 Year $17
3 Years $32
5 Years $36
10 Years $81
You would pay the following expenses on the same investment,
assuming no redemption.
1 Year $ 7
3 Years $21
5 Years $36
10 Years $81
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS -- CLASS F SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated January 16, 1998, on the Fund's
financial statements for the year ended November 30, 1997, is included in the
annual report, which is incorporated by reference. This table should be read in
conjunction with the Fund's financial statements and notes thereto, which may be
obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1997 1996 1995 1994 1993(A)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.76 $ 9.85 $ 9.49 $10.02 $10.00
Net investment income 0.43 0.43 0.47 0.45 0.11
Net realized and unrealized gain(loss) on investment 0.02 (0.08) 0.36 (0.53) 0.02
Total from investment operations 0.45 0.35 0.83 (0.08) 0.13
LESS DISTRIBUTIONS
Distributions from net investment income (0.43) (0.43) (0.47) (0.45) (0.11)
Distributions in excess of net investment income -- (0.01)(b) -- -- --
Total distributions (0.43) (0.44) (0.47) (0.45) (0.11)
NET ASSET VALUE, END OF PERIOD $ 9.78 $ 9.76 $ 9.85 $ 9.49 $10.02
TOTAL RETURN(C) 4.71% 3.60% 8.86% (0.75%) 1.26%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.65% 0.56% 0.49% 0.44% 0.25%*
Net investment income 4.42% 4.40% 4.91% 4.57% 4.79%*
Expense waiver/reimbursement(d) 0.63% 0.69% 1.12% 0.94% 1.86%*
SUPPLEMENTAL DATA
Net asset, end of period (000 omitted) $20,298 $26,300 $26,442 $12,804 $3,307
Portfolio turnover 33% 49% 47% 135% 0%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from September 1, 1993 (date of initial
public offering) to November 30, 1993.
(b) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions did not represent a return of capital for federal income tax
purposes.
(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S
ANNUAL REPORT, DATED NOVEMBER 30, 1997, WHICH CAN BE OBTAINED FREE OF
CHARGE.
GENERAL INFORMATION
The Corporation was incorporated under the laws of the State of Maryland on
October 15, 1991. Class F Shares of the Fund ("Shares") are designed for
individuals as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio, primarily limited to municipal
securities.
The Fund's current net asset value and offering price may be found in the mutual
funds section of local newspapers under "Federated" and the appropriate class
designation listing.
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 Board of 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 non-governmental users may, for this purpose, be deemed to be
related to the industry in which such non-governmental 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 non-governmental 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.
AS A PERCENTAGE OF
TOTAL MARKET
VALUE OF SECURITY
HOLDINGS AS OF
CREDIT RATING NOVEMBER 30, 1997
BBB 28.5%
PARTICIPATION INTERESTS
The Fund may purchase participation interests from financial institutions such
as commercial banks, savings 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 securities known as "inverse floaters" which represent
interests in municipal securities. The Fund intends to purchase inverse floaters
to assist in duration management and to seek current income. These obligations
pay interest rates that vary inversely with changes in the interest rates of
specified short-term municipal securities or an index of short-term municipal
securities. The interest rates on inverse floaters will typically decline as
short-term market interest rates increase and increase as short-term market
rates decline. Inverse floaters will generally respond to changes in market
interest rates more rapidly than fixed-rate long-term securities (typically
twice as fast). As a result, the market values of inverse floaters will
generally be more volatile than the market values of fixed-rate municipal
securities. Typically, the portion of the portfolio invested in inverse floaters
will be subject to additional volatility.
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 investing in more than 3% of the voting securities of any
other investment company, 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 unless permitted to do so by action of the SEC. 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
unless permitted to do so by action of the SEC.
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.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies as an
efficient means of carrying out its investment policies. It should be noted that
investment companies incur certain expenses, such as management fees, and,
therefore, any investment by the Fund in shares of other investment companies
may be subject to such duplicate expenses.
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.
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.
FINANCIAL FUTURES AND OPTIONS TO BUY OR SELL SUCH CONTRACTS
The Fund may purchase and sell interest rate and index financial futures
contracts and options on those contracts. These financial futures contracts and
options may be used to hedge all or a portion of its portfolio against changes
in the market value of portfolio securities and interest rates, provide
additional liquidity, and accomplish its current strategies in a more
expeditious fashion. 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.
As a matter of investment policy, which may be changed without shareholder
approval, the Fund may not purchase or sell futures contracts or options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions would exceed 5% of the market value of the Fund's
total assets. When the Fund purchases futures contracts or options, an amount of
readily marketable municipal securities, cash, or cash equivalents, equal to the
underlying commodity value of the futures contracts or options (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 or
options.
RISKS
When the Fund uses financial futures or options, 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 or option 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 options will exist at all times. Although the investment
adviser will consider liquidity before entering into futures transactions or
options, 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 positions
or options depends on this secondary market.
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 without limitation. 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
The Fund's net asset value ("NAV") per Share fluctuates and is based on the
market value of all securities and other assets of the Fund. The NAV for each
class of Shares may differ 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.
All purchases, redemptions and exchanges are processed at the NAV next
determined after the request in proper form is received by the Fund. The NAV is
determined as of the close of trading on the New York Stock Exchange (normally
4:00 p.m., Eastern time) every day the New York Stock Exchange is open.
INVESTING IN THE FUND
This prospectus offers Class F Shares with the characteristics described below.
CLASS F
Minimum and Subsequent Investment Amount $1500/$100
Maximum Sales Charge None
Maximum Contingent Deferred Sales Charge* 1.00%*
* Computed on the lesser of the NAV of the redeemed Shares at the time of
purchase or the NAV of the redeemed Shares at the time of redemption.
The following contingent deferred sales charge schedule applies to Class F
Shares:
CONTINGENT
DEFERRED
AMOUNT OF PURCHASE SHARES HELD SALES CHARGE
Up to $1,999,999 Four Years or less 1.00%
$2,000,000 to $4,999,999 Two Years or less 0.50%
$5,000,000 or more One Year or less 0.25%
PURCHASING SHARES
Shares of the Fund are sold on days on which the New York Stock Exchange is
open. Shares of the Fund may be purchased as described below, either through a
financial intermediary (such as a bank or broker/dealer) or by sending a wire or
check directly to the Fund. Financial intermediaries may impose different
minimum investment requirements on their customers. An account must be
established with a financial intermediary or by completing, signing, and
returning the new account form available from the Fund before Shares can be
purchased. Shareholders in Class F Shares of certain other funds advised and
distributed by affiliates of Federated Investors ("Federated Funds") may
exchange their Shares for Class F Shares of the Fund. The Fund reserves the
right to reject any purchase or exchange request.
In connection with any sale, Federated Securities Corp. may, from time to time,
offer certain items of nominal value to any shareholder or investor.
PURCHASING SHARES THROUGH A FINANCIAL INTERMEDIARY
Orders placed through a financial intermediary are considered received when the
Fund is notified of the purchase order or when payment is converted into federal
funds. Purchase orders through a 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 intermediaries must be
received by the financial intermediary 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 intermediary's responsibility to transmit orders promptly.
Financial intermediaries may charge fees for their services.
The financial intermediary which maintains investor accounts in Class F Shares
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 intermediaries may be subject to reclaim by the distributor for
accounts transferred to financial intermediaries which do not maintain investor
accounts on a fully disclosed basis and do not account for share ownership
periods.
PURCHASING SHARES BY WIRE
Shares may be purchased by Federal Reserve wire by calling 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 Shareholder Services Company, c/o State Street
Bank and Trust Company, Boston, MA 02266-8600; Attention; EDGEWIRE; For Credit
to: (Fund Name) (Fund Class); (Fund Number -- this number can be found on the
account statement or by contacting the Fund); Account Number; Trade Date and
Order Number; Group Number or Dealer Number; Nominee or Institution Name; and
ABA Number 011000028. Shares cannot be purchased by wire on holidays when wire
transfers are restricted.
PURCHASING SHARES BY CHECK
Shares may be purchased by mailing a check made payable to the name of the Fund
(designate class of Shares and account number) to: Federated Shareholder
Services Company, P.O. Box 8600, Boston, MA 02266-8600. Orders by mail are
considered received when payment by check is converted into federal funds
(normally the business day after the check is received).
SYSTEMATIC INVESTMENT PROGRAM
Under this program, funds in a minimum amount of $50 may be automatically
withdrawn periodically from the shareholder's checking account at an Automated
Clearing House ("ACH") member and invested in the Fund. Shareholders should
contact their financial intermediary or the Fund to participate in this program.
REDUCING OR ELIMINATING THE SALES CHARGE
The Fund's Class F Shares are sold at NAV. However:
SHAREHOLDERS MAY PARTICIPATE IN THE FOLLOWING PROGRAMS WITH RESPECT TO THE
PURCHASE OF OTHER CLASS F SHARES:
* purchasing in quantity and accumulating purchases;
* combining concurrent purchases of two or more funds;
* signing a letter of intent to purchase a specific quantity of shares
within 13 months; or
* using the reinvestment privilege.
Consult a financial intermediary or Federated Securities Corp. for details
on these programs. In order to eliminate the sales charge or receive sales
charge reductions. Federated Securities Corp. must be notified by the
shareholder in writing or by a financial intermediary at the time of
purchase.
REDEEMING AND EXCHANGING SHARES
Shares of the Fund may be redeemed for cash or exchanged for Class F Shares of
other Federated Funds on days on which the Fund computes its NAV. Shares are
redeemed at NAV less any applicable contingent deferred sales charge. Exchanges
are made at NAV. Shareholders who desire to automatically exchange Shares, of a
like Share class, in a pre-determined amount on a monthly, quarterly, or annual
basis may take advantage of a systematic exchange privilege. Information on this
privilege is available from the Fund or your financial intermediary. Depending
upon the circumstances, a capital gain or loss may be realized when Shares are
redeemed or exchanged.
REDEEMING OR EXCHANGING SHARES THROUGH A FINANCIAL INTERMEDIARY
Shares of the Fund may be redeemed or exchanged by contacting your financial
intermediary before 4:00 p.m. (Eastern time). In order for these transactions to
be processed at that day's NAV, financial intermediaries (other than
broker/dealers) must transmit the request to the Fund before 4:00 p.m. (Eastern
time), while broker/dealers must transmit the request to the Fund before 5:00
p.m. (Eastern time). The financial intermediary is responsible for promptly
submitting transaction requests and providing proper written instructions.
Customary fees and commissions may be charged by the financial intermediary for
this service. Appropriate authorization forms for these transactions must be on
file with the Fund.
REDEEMING OR EXCHANGING SHARES BY TELEPHONE
Shares acquired directly from the Fund may be redeemed in any amount, or
exchanged, by calling 1-800-341-7400. Appropriate authorization forms for these
transactions must be on file with the Fund. Shares held in certificate form must
first be returned to the Fund as described in the instructions under "Redeeming
or Exchanging Shares by Mail." Redemption proceeds will either be mailed in the
form of a check 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. The minimum amount for a wire transfer is $1,000.
Proceeds from redeemed Shares purchased by check or through ACH will not be
wired until that method of payment has cleared.
Telephone instructions will 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
this occurs, "Redeeming or Exchanging Shares by Mail" should be considered. The
telephone transaction privilege may be modified or terminated at any time.
Shareholders would be promptly notified.
REDEEMING OR EXCHANGING SHARES BY MAIL
Shares may be redeemed in any amount, or exchanged, by mailing a written request
to: Federated Shareholder Services Company, Fund Name, Fund Class, P.O. Box
8600, Boston, MA 02266-8600. If share certificates have been issued, they must
accompany the written request. It is recommended that certificates be sent
unendorsed by registered or certified mail.
All written requests should state: Fund Name and the Share Class name; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount of the transaction. An exchange
request should also state the name of the Fund into which the exchange is to be
made. All owners of the account must sign the request exactly as the Shares are
registered. A check for redemption proceeds is normally mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request. Dividends are paid up to and including the day that
a redemption or exchange request is processed.
REQUIREMENTS FOR REDEMPTION
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 their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; a member firm of a domestic stock exchange; 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.
REQUIREMENTS FOR EXCHANGE
Shareholders must exchange Shares having a NAV equal to the minimum investment
requirements of the fund into which the exchange is being made. Contact your
financial intermediary directly or the Fund for free information on and
prospectuses for the Federated Funds into which your Shares may be exchanged.
Before the exchange, the shareholder must receive a prospectus of the fund for
which the exchange is being made.
Upon receipt of proper instructions and required supporting documents, Shares
submitted for exchange are redeemed and proceeds invested in the same class of
shares of the other fund. Signature guarantees will be required to exchange
between fund accounts not having identical shareholder registrations. The
exchange privilege may be modified or terminated at any time. Shareholders will
be notified of the modification or termination of the exchange privilege.
SYSTEMATIC WITHDRAWAL PROGRAM
Under this program, Shares are redeemed to provide for periodic withdrawal
payments in an amount directed by the shareholder of not less than $100. To be
eligible to participate in this program, a shareholder must have an account
value of at least $10,000, other than retirement accounts subject to required
minimum distributions. A shareholder may apply for participation in this program
through his financial intermediary or by calling the Fund.
Because participation in this program may reduce, and eventually deplete, the
shareholder's investment in the Fund, payments under this program should not be
considered as yield or income. A contingent deferred sales charge will be
imposed on Shares redeemed through this program within four years of their
purchase dates.
CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. Redemptions will be processed in a manner intended to maximize the
amount of redemption which will not be subject to a contingent deferred sales
charge. The contingent deferred sales charge will not be imposed with respect to
Shares acquired through the reinvestment of dividends or distributions of
long-term capital gains. In determining the applicability of the contingent
deferred sales charge, the required holding period for your new Shares received
through an exchange will include the period for which your original Shares were
held.
ELIMINATING THE CONTINGENT DEFERRED SALES CHARGE
Upon written notification to Federated Securities Corp. or the transfer
agent, no contingent deferred sales charge will be imposed on redemptions:
* following the death or disability, as defined in Section 72(m)(7) of the
Internal Revenue Code of 1986, of the last surviving shareholder;
* representing a total or partial distribution from an Individual Retirement
Account, Keogh Plan, or a custodial account to a shareholder who has attained
the age of 701*2;
* representing a total or partial distribution from a qualified plan, other than
an Individual Retirement Account, Keogh Plan, or a custodial account following
retirement;
* which are involuntary redemptions of shareholder accounts that do not
comply with the minimum balance requirements;
* which are reinvested in the Fund under the reinvestment privilege;
* of Shares held by Directors, employees and sales representatives of the Fund,
the distributor, or affiliates of the Fund or distributor, employees of any
financial intermediary that sells Shares of the Fund pursuant to a sales
agreement with the distributor, and their immediate family members to the
extent that no payments were advanced for purchases made by these persons; and
* of Shares originally purchased through a bank trust department, an investment
adviser registered under the Investment Advisers Act of 1940 or retirement
plans where the third party administrator has entered into certain
arrangements with Federated Securities Corp. or its affiliates, or any other
financial intermediary, to the extent that no payments were advanced for
purchases made through such entities.
For more information regarding the contingent deferred sales charge or any of
the above provisions, contact your financial intermediary or the Fund. The Fund
reserves the right to discontinue or modify these provisions.
Shareholders will be notified of such action.
ACCOUNT AND SHARE INFORMATION
CONFIRMATIONS AND ACCOUNT STATEMENTS
Shareholders will receive detailed confirmations of transactions (except for
systematic program transactions). In addition, shareholders will receive
periodic statements reporting all account activity, including dividends paid.
The Fund will not issue share certificates.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly to all shareholders invested in
the Fund on the record date. Net long-term capital gains realized by the Fund,
if any, will be distributed at least once every twelve months. Dividends and
distributions are automatically reinvested in additional Shares of the Fund on
payment dates at the ex-dividend date NAV without a sales charge, unless
shareholders request cash payments on the new account form or by contacting the
transfer agent.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
close an account by redeeming all Shares and paying the proceeds to the
shareholder if the account balance falls below the applicable minimum investment
amount. Retirement plan accounts and accounts where the balance falls below the
minimum due to NAV changes will not be closed in this manner. Before an account
is closed, the shareholder will be notified and allowed 30 days to purchase
additional Shares to meet the minimum.
FIXED INCOME SECURITIES, INC. INFORMATION
MANAGEMENT OF THE CORPORATION
BOARD OF DIRECTORS
The Corporation 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 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.
Both the Corporation and the Adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Fund and its portfolio
securities. These codes recognize that such persons owe a fiduciary duty to the
Fund's shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Directors, and could
result in severe penalties.
ADVISORY FEES
The Adviser receives an annual investment advisory fee equal to 0.40% 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.
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.
The Adviser 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. With over $120 billion invested across
more than 300 funds under management and/or administration by its
subsidiaries, as of December 31, 1997, Federated Investors is one of the
largest mutual fund investment managers in the United States. With more than
2,000 employees, Federated continues to be led by the management who founded
the company in 1955. Federated funds are presently at work in and through
approximately 4,000 financial institutions nationwide.
Mary Jo Ochson and Jeff A. Kozemchak are the Fund's portfolio managers. Mary
Jo Ochson has been the Fund's portfolio manager since its inception. Ms.
Ochson joined Federated Investors in 1982 and has been a Senior Vice
President of the Fund's investment adviser since January 1996. From 1988
through 1995, Ms. Ochson served as a Vice President of the Fund's investment
adviser. Ms. Ochson is a Chartered Financial Analyst and received her M.B.A.
in Finance from the University of Pittsburgh.
Jeff A. Kozemchak has been the Fund's portfolio manager since January 1997.
Mr. Kozemchak joined Federated Investors in 1987 and has been a Vice
President of the Fund's investment adviser since 1993. Mr. Kozemchak served
as an Assistant Vice President of the investment adviser from 1990 until
1992. Mr. Kozemchak is a Chartered Financial Analyst and received his M.S.
in Industrial Administration from Carnegie Mellon University in 1987.
DISTRIBUTION OF CLASS F SHARES
Federated Securities Corp. is the principal distributor for Shares of the
Fund. It is a Pennsylvania corporation organized on November 14, 1969, and
is the principal distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Investment Company Act of
1940 (the "Plan"), the distributor may be paid a fee by the Fund in an amount
computed at an annual rate of 0.15% of the average daily net asset value of the
Fund The distributor may select financial institutions such as banks,
fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales services and distribution-related support
services as agents for their clients or customers.
The 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 entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors under which
the Fund may make payments up to 0.25% of the average daily net asset value of
shares to obtain certain personal services for shareholders and to maintain
shareholder accounts. Under the Shareholder Services Agreement, 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.
SUPPLEMENTAL 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, in addition to payments made pursuant to the Plan and Shareholder
Services Agreement, Federated Securities Corp. and Federated Shareholder
Services, from their own assets, may pay financial institutions supplemental
fees for the performance of substantial sales services, distribution-related
support services, or shareholder services. 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 Adviser or its
affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by affiliates of Federated Investors as
specified below:
AVERAGE
MAXIMUM AGGREGATE
FEE DAILY NET ASSETS
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Services Company may choose voluntarily to waive a portion of its fee.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Director elections and
other matters submitted to shareholders for vote. All shares of each portfolio
or class 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.
Directors may be removed by the Directors or by shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the written request of shareholders owning at least 10% of the Fund's
outstanding shares of all series entitled to vote.
As of November 7, 1997, MLPF&S, for the sole benefit of its customers,
Jacksonville, FL, owned 30.95% of the voting securities of the Fund's Class A
Shares and 26.85% of the voting securities of the Fund's Class F Shares and,
therefore, may, for certain purposes, be deemed to control the Fund and be able
to affect the outcome of certain matters presented for a vote of shareholders.
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.
STATE AND LOCAL TAXES
Because interest received by the Fund may not be exempt from all state and local
income taxes, shareholders may be required to pay state and local taxes on
dividends received from the Fund. 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 charge and
the contingent deferred sales charge which, if excluded, would increase the
total return, yield and tax-equivalent yield.
From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
Total return will be calculated separately for Class F Shares and Class A
Shares.
OTHER CLASSES OF SHARES
The Fund also offers another class of shares called Class A Shares. The Class A
Shares are sold subject to a front-end sales charge of up to 1%. Class A Shares
are subject to a minimum initial investment of $1,500.
Both classes are subject to certain of the same expenses.
The stated advisory fee is the same for both classes of shares.
Class A Shares are distributed under a 12b-1 Plan and are also subject to a
shareholder services fee.
Expense differences between Class A Shares and Class F Shares may affect the
performance of each class.
To obtain more information and a prospectus for Class A Shares, investors may
call 1-800-341-7400 or contact their financial intermediary.
[Graphic]Federated Investors
FEDERATED LIMITED TERM MUNICIPAL FUND
(A Portfolio of Fixed Income Securities, Inc.)
Class F Shares
PROSPECTUS
JANUARY 31, 1998
A Diversified Portfolio of Fixed Income Securities, Inc. An Open-End
Management Investment Company
FEDERATED LIMITED TERM MUNICIPAL FUND
CLASS F SHARES
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Advisers
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT
AND DIVIDEND
DISBURSING AGENT
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
INDEPENDENT PUBLIC ACCOUNTANTS Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, PA 15222-5401
Federated Securities Corp., Distributor
1-800-341-7400
www.federatedinvestors.com
Cusip 338319502
3070702-F (1/98)
FEDERATED LIMITED TERM MUNICIPAL FUND
(A PORTFOLIO OF FIXED INCOME SECURITIES, INC.)
CLASS A SHARES
CLASS F SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the respective
prospectuses of Class F Shares and Class A Shares of Federated Limited Term
Municipal Fund (the "Fund") January 31, 1998. This Statement is not a prospectus
itself. You may request a copy of a prospectus or a paper copy of this Statement
of Additional Information, if you have received it electronically, free of
charge by calling 1-800-341-7400.
FEDERATED LIMITED TERM MUNICIPAL FUND
FEDERATED INVESTORS FUNDS
5800 CORPORATE DRIVE
PITTSBURGH, PENNSYLVANIA 15237-7000
Statement dated January 31, 1998
[Graphic]
Cusip 338319403
Cusip 338319502
3070702B (1/98)
[Graphic]
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVE AND POLICIES 1
Types of Investments 1
Participation Interests 2
Municipal Leases 2
Capital Appreciation Bonds 2
Insurance 2
Futures and Options Transactions 3
Weighted Average Portfolio Duration 4
When-Issued and Delayed Delivery Transactions 5
Restricted and Illiquid Securities 5
Temporary Investments 5
Portfolio Turnover 6
INVESTMENT LIMITATIONS 6
FIXED INCOME SECURITIES, INC. MANAGEMENT 8
Fund Ownership 11
Directors Compensation 12
Director Liability 12
INVESTMENT ADVISORY SERVICES 12
Adviser to the Fund 12
Advisory Fees 12
BROKERAGE TRANSACTIONS 13
OTHER SERVICES 13
Fund Administration 13
Custodian and Portfolio Recordkeeper 13
Transfer Agent 13
Independent Auditors 13
PURCHASING SHARES 13
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
AGREEMENT 15
Purchases by Sales Representatives,
Fund Directors, and Employees 15
DETERMINING NET ASSET VALUE 15
Determining Market Value of Securities 15
REDEEMING SHARES 16
Redemption in Kind 16
TAX STATUS 16
The Fund's Tax Status 16
Shareholders' Tax Status 17
TOTAL RETURN 17
YIELD 17
TAX-EQUIVALENT YIELD 18
Tax Equivalency Table 18
PERFORMANCE COMPARISONS 19
Economic and Market Information 19
ABOUT FEDERATED INVESTORS 19
Mutual Fund Market 20
Institutional Clients 20
Bank Marketing 20
Broker/Dealers and
Bank Broker/Dealer Subsidiaries 20
FINANCIAL STATEMENTS 20
APPENDIX 21
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. 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: Federated Limited Term Fund, Federated Limited Term Municipal Fund,
and Federated Strategic Income Fund. Effective January 31, 1996, the fund
changed its name to Federated Limited Term Municipal Fund and Fortress Shares
are now referred to as Class F Shares. Shares of the Fund are offered in
two classes known as Class A Shares and Class F Shares (individually and
collectively referred to as "Shares" as the context may require). On May 19,
1994, the Directors approved the reclassification of Investment Shares as Class
A Shares. This 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:
* general obligation bonds;
* municipal leases, installment purchase contracts, conditional sales
contracts or participation certificates of any of the above, issued by
state and municipal authorities where payment is provided by installment
payments for equipment, buildings or other facilities acquired by the state
or municipality;
* industrial development bonds;
* derivative municipal securities whose interest rates bear an inverse
relationship to the interest rate on another security or the value of an
index ("inverse floaters");
* municipal notes and tax-exempt commercial paper;
* pre-refunded municipal securities whose timely payment of interest and
principal is ensured by an escrow of U.S. government obligations;
* auction rate and tender option securities; and * zero coupon and capital
appreciation bonds, which are issued at a
discount from their face value and do not pay interest prior to maturity or
a specified date.
The Fund may also engage in put and call options, futures contracts, and options
on futures contracts for hedging purposes.
PARTICIPATION INTERESTS
The financial institutions from which the Fund purchases participation interests
frequently provide or secure from another financial institution irrevocable
letters of credit or guarantees and give the Fund the right to demand payment of
the principal amounts of the participation interests plus accrued interest on
short notice (usually within seven days).
MUNICIPAL LEASES
The Fund may purchase municipal securities in the form of participation
interests which represent undivided proportional interests in lease payments by
a governmental or non-profit entity. The lease payments and other rights under
the lease provide for and secure the payments on the certificates. Lease
obligations may be limited by municipal charter or the nature of the
appropriation for the lease. In particular, lease obligations may be subject to
periodic appropriation. If the entity does not appropriate funds for the future
lease payments, the entity cannot be compelled to make such payments.
Furthermore, a lease may provide that the certificate trustee cannot accelerate
lease obligations upon default. The trustee would only be able to enforce lease
payments as they became due. In the event of a default or failure of
appropriation, it is unlikely that the trustee would be able to obtain an
acceptable substitute source of payment.
In determining the liquidity of municipal lease securities, the Fund's
investment adviser, under the authority delegated by the Directors, will base
its determination on the following factors:
* whether the lease can be terminated by the lessee;
* the potential recovery, if any, from a sale of the leased property upon
termination of the lease;
* the lessee's general credit strength (e.g., its debt, administrative,
economic and financial characteristics and prospects);
* the likelihood that the lessee will discontinue appropriating funding for
the leased property because the property is no longer deemed essential to
its operations (e.g., the potential for an "event of non-appropriation");
and
* any credit enhancement or legal recourse provided upon an event of
non-appropriation or other termination of the lease.
CAPITAL APPRECIATION BONDS
Zero coupon and capital appreciation securities carry the risk that, unlike
securities that periodically pay interest to maturity, the Fund will realize no
cash until a specified future payment date unless a portion of such securities
is sold and, if the issuer of such securities defaults, the Fund may obtain no
return at all on its investment. In addition, even though such securities do not
pay current interest in cash, the Fund is nonetheless required to accrue income
on such investments and may be required to distribute such amounts at least
annually. Because no cash is received at the time of the accrual, the Fund may
be required to liquidate other portfolio securities to satisfy the Fund's
distribution obligations.
INSURANCE
The Fund may invest in "insured" municipal securities. Insured municipal
securities are those for which scheduled payments of interest and principal are
guaranteed by a private (nongovernmental) insurance company. The insurance only
entitles the Fund to receive the face or par value of the securities held by the
Fund. The insurance does not guarantee the market value of the municipal
securities or the value of the shares of the Fund.
The Fund may utilize new issue or secondary market insurance. A new issue
insurance policy is purchased by a bond issuer who wishes to increase the credit
rating of a security. By paying a premium and meeting the insurer's underwriting
standards, the bond issuer is able to obtain a high credit rating (usually, Aaa
from Moody's or AAA from S&P) for the issued security. Such insurance is likely
to increase the purchase price and resale value of the security. New issue
insurance policies are non-cancellable and continue in force as long as the
bonds are outstanding. A secondary market insurance policy is purchased by an
investor (such as the Fund) subsequent to a bond's original issuance and
generally insures a particular bond for the remainder of its term. The Fund may
purchase bonds which have already been insured under a secondary market
insurance policy by a prior investor, or the Fund may itself purchase such a
policy from insurers for bonds which are currently uninsured.
An insured municipal security acquired by the Fund will typically be covered by
only one of the above types of policies. All of the insurance policies used by
the Fund will be obtained only from insurance companies rated, at the time of
purchase, Aaa by Moody's or AAA by S&P.
FUTURES AND OPTIONS TRANSACTIONS
The Fund may purchase and sell futures contracts and options on futures
contracts on financial instruments. The Fund will engage in futures and related
options transactions only for bona fide hedging or other appropriate risk
management purposes. The Fund may enter into futures contracts provided that not
more than 5% of its assets are required as a futures contract deposit. 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 readily marketable
municipal securities, 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:
* the frequency of trades and quotes for the security;
* the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
* dealer undertakings to make a market in the security; and * the nature of
the security and the nature of the marketplace trades.
The Fund will not invest more than 15% of its net assets in illiquid
obligations, including repurchase agreements providing for settlement in more
than seven days after notice, and certain restricted securities not determined
by the 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.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest in the securities of affiliated money market funds as an
efficient means of managing the Fund's uninvested cash.
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, 1997
and 1996, the portfolio turnover rates were 33% and 49%, 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 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.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except that it may acquire publicly or
non-publicly issued municipal bonds or temporary investments or enter into
repurchase agreements in accordance with its investment objective, policies, and
limitations.
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 association 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, birthdates, present
positions with Fixed Income Securities, Inc., and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Director
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp. and Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and Director or Trustee of the
Funds. Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President of the Company.
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Director
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Director, Member
of Executive Committee, University of Pittsburgh; Director or Trustee of the
Funds.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Director
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; Partner or Trustee in private real
estate ventures in Southwest Florida; formerly, President, Naples Property
Management, Inc. and Northgate Village Development Corporation; Director or
Trustee of the Funds.
William J. Copeland
One PNC Plaza--23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Director
Director and Member of the Executive Committee, Michael Baker, Inc.; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.; Director, Ryan
Homes, Inc.; Director or Trustee of the Funds.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or
Trustee of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Director
Professor of Medicine, University of Pittsburgh; Medical Director,
University of Pittsburgh Medical Center-- Downtown; Member, Board of
Directors, University of Pittsburgh Medical Center; formerly, Hematologist,
Oncologist, and Internist, Presbyterian and Montefiore Hospitals; Director
or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Director
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Director
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street Boston
Corporation; Director or Trustee of the Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Director
President, Law Professor, Duquesne University; Consulting Partner, Mollica &
Murray; Director or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Director
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., National Defense University and U.S. Space Foundation;
President Emeritus, University of Pittsburgh; Founding Chairman, National
Advisory Council for Environmental Policy and Technology, Federal Emergency
Management Advisory Board and Czech Management Center, Prague; Director or
Trustee of the Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Director
Public relations/Marketing/Conference Planning; Director or Trustee of the
Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated
Research Corp. and Federated Global Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated Shareholder Services Company, and
Federated Shareholder Services; Director, Federated Services Company;
President or Executive Vice President of the Funds; Director or Trustee 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
Birthdate: October 22, 1930
Executive Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Shareholder Services Company; Trustee or Director of some of the Funds;
President, Executive Vice President and Treasurer of some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President , Secretary and Treasurer
Executive Vice President, Secretary, and Trustee, Federated Investors; Trustee,
Federated Advisers, Federated Management, and Federated Research; Director,
Federated Research Corp. and Federated Global Research Corp.; Trustee, Federated
Shareholder Services Company; Director, Federated Services Company; President
and Trustee, Federated Shareholder Services; Director, Federated Securities
Corp.; Executive Vice President and Secretary of the Funds; Treasurer of some of
the Funds.
* This Director is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the Board of
Directors handles the responsibilities of the Board between meetings of the
Board. As used in the table above, "The Funds" and "Funds" mean the
following investment companies: 111 Corcoran Funds; Automated Government Money
Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust Series
II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily
Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity
Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities,
Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Investment Portfolios; Federated Investment Trust; Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond
Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc.--1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; WCT Funds; and World Investment Series,
Inc. FUND OWNERSHIP
Officers and Directors own less than 1% of the outstanding Class A Shares and
Class F Shares.
As of January 7, 1998, the following shareholders of record owned 5% or more of
the Class A Shares of the Fund: MLPF&S, for the sole benefit of its customers,
Jacksonville, FL, owned approximately 1,698,234 shares (30.95%); and Carter
Jones Lumber Co., Kent, OH, owned approximately 449,246 shares (8.19%).
As of January 7, 1998, the following shareholders of record owned more than 5%
of the outstanding Class F Shares of the Fund: MLPF&S, for the sole benefit of
its customers, Jacksonville, FL, owned approximately 545,018 shares (26.85%);
and Wells Fargo Bank as agent for Bryan Turner, Calabasas, CA, owned
approximately 111,375 shares (5.49%). DIRECTORS COMPENSATION <TABLE>
<CAPTION>
AGGREGATE
NAME, COMPENSATION TOTAL COMPENSATION PAID
POSITION WITH FROM TO DIRECTORS FROM
CORPORATION CORPORATION#* CORPORATION AND FUND COMPLEX+
<S> <C> <C>
John F. Donahue, $0 $0 for the Corporation and
Chairman and Director 56 investment companies
Richard B. Fisher, $0 $0 for the Corporation and
President and Director 6 investment companies
Thomas G. Bigley, $1,327 $111,222 for the Corporation and
Director 56 investment companies
John T. Conroy, Jr., $1,460 $122,362 for the Corporation and
Director 56 investment companies
William J. Copeland, $1,460 $122,362 for the Corporation and
Director 56 investment companies
James E. Dowd, $1,460 $122,362 for the Corporation and
Director 56 investment companies
Lawrence D. Ellis, M.D., $1,327 $111,222 for the Corporation and
Director 56 investment companies
Edward L. Flaherty, Jr., $1,460 $122,362 for the Corporation and
Director 56 investment companies
Peter E. Madden, $1,327 $111,222 for the Corporation and
Director 56 investment companies
John E. Murray, Jr., $1,327 $111,222 for the Corporation and
Director 56 investment companies
Wesley W. Posvar, $1,327 $111,222 for the Corporation and
Director 56 investment companies
Marjorie P. Smuts, $1,327 $111,222 for the Corporation and
Director 56 investment companies
</TABLE>
# The aggregate compensation provided is for the Corporation which is comprised
of 3 portfolios.
* Information is furnished for the fiscal year ended November 30, 1997.
+ The information provided is for the last calendar year end.
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,
1997, 1996, and 1995, the Adviser earned advisory fees of $333,392, $381,182,
and $203,057, respectively, of which $333,392, $381,182, and $203,057,
respectively, were voluntarily waived. In addition, for these same periods the
Adviser reimbursed the Fund $67,616, $136,099, and $310,300, respectively, of
other operating 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
guidelines established by the Directors. The Adviser may select brokers and
dealers who offer brokerage and research services. These services may be
furnished directly to the Fund or to the Adviser and may include: advice as to
the advisability of investing in securities; security analysis and reports;
economic studies; industry studies; receipt of quotations for portfolio
evaluations; and similar services. Research services provided by brokers and
dealers may be used by the Adviser or its affiliates in advising the Fund 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. 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. During the fiscal
years ended November 30, 1997, 1996, and 1995, the Fund paid no brokerage
commisions. Although investment decisions for the Fund are made
independently from those of the other accounts managed by the Adviser,
investments of the type the Fund may make may also be made by those other
accounts. When the Fund and one or more other accounts managed by the Adviser
are prepared to invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner believed by
the Adviser to be equitable to each. In some cases, this procedure may adversely
affect the price paid or received by the Fund or the size of the position
obtained or disposed of by the Fund. In other cases, however, it is believed
that coordination and the ability to participate in volume transactions will be
to the benefit of the Fund.
OTHER SERVICES
FUND ADMINISTRATION
Federated Administrative Services Company, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectuses. From March 1, 1994, to March 1, 1996, Federated
Administrative Services served as the Fund's Administrator. Prior to March 1,
1994, Federated Administrative Services, Inc. served as the Fund's
Administrator. Both former Administrators are subsidiaries of Federated
Investors. For purposes of this Statement of Additional Information, Federated
Services Company, Federated Administrative Services, and Federated
Administrative Services, Inc. may hereinafter collectively be referred to as the
"Administrators." For the fiscal year ended November 30, 1997, 1996, and 1995,
the Administrators earned $155,000, $155,001, and $155,000, respectively.
CUSTODIAN AND PORTFOLIO RECORDKEEPER
State Street Bank and Trust Company, Boston, MA, is custodian for the securities
and cash of the Fund. Federated Services Company, Pittsburgh, PA, provides
certain accounting and recordkeeping services with respect to the Fund's
portfolio investments. 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.
TRANSFER AGENT
Federated Services Company, through it registered transfer agent, Federated
Shareholder Services Company, maintains all necessary shareholder records. For
its services, the transfer agent receives a fee based on the size, type and
number of accounts and transactions made by shareholders.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Deloitte & Touche LLP, Pittsburgh,
Pennsylvania.
PURCHASING SHARES
Except under certain circumstances described in the respective prospectuses,
Shares are sold at their net asset value (plus a sales charge on Class A Shares
and Class F Shares only) on days the New York Stock Exchange is open for
business. The procedure for purchasing Shares is explained in the respective
prospectuses under "Investing in the Fund" and "Purchasing Shares." For further
information on any of the programs listed below please contact your financial
intermediary or Federated Securities Corp.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
As described in the prospectuses, larger purchases of the same Share class
reduce or eliminate the sales charge paid. For example, the Fund will combine
all Class A Shares purchases made on the same day, by the investor, the
investor's spouse, and the investor's children under age 21 when it calculates
the sales charge. This combined purchase option is available within Class F
shares as well. In addition, the sales charge, if applicable, is reduced for
purchases made at one time by a trustee or fiduciary for a single trust estate
or a single fiduciary account.
If an additional purchase into the same Share class is made, the Fund will
consider the previous purchases still invested in the Fund. For example, if a
shareholder already owns Class A Shares having a current value at the public
offering price of $900,000 and he purchases $100,000 more at the current public
offering price, the sales charge on the additional purchase according to the
schedule now in effect would be eliminated.
In addition, the Fund will also combine purchases for the purpose of reducing
the contingent deferred sales charge imposed on Class F Share redemptions. For
example, if a shareholder already owns Class F Shares having 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 Class F Shares.
To receive the sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial intermediary at the
time the purchase is made that Class A Shares or Class F Shares are already
owned or that purchases are being combined. The Fund will reduce or eliminate
the sales charge after it confirms the purchases.
CONCURRENT PURCHASES
Shareholders have the privilege of combining concurrent purchases of the same
Share class of two or more funds in the Federated Complex in calculating the
applicable sales charge.
To receive a sales charge reduction or elimination, Federated Securities Corp.
must be notified by the shareholder in writing or by his financial intermediary
at the time the concurrent purchases are made. The Fund will reduce or eliminate
the sales charge after it confirms the purchases.
LETTER OF INTENT
A Shareholder can sign a letter of intent committing to purchase a certain
amount of the same Share class within a 13 month period in order to combine such
purchases in calculating the applicable sales charge. The Fund's custodian will
hold Shares in escrow equal to the maximum applicable sales charge. If the
shareholder completes the commitment, the escrowed Shares will be released to
their account. If the commitment is not completed within 13 months, the
custodian will redeem an appropriate number of escrowed Shares to pay for the
applicable sales charge.
The letter of intent for Class F Shares 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.
While this letter of intent will not obligate the shareholder to purchase Class
A Shares or Class F Shares, each purchase during the period will be at the sales
charge applicable to the total amount intended to be purchased. At the time a
letter of intent is established, current balances in accounts in any Class A
Shares or Class F Shares of any Federated Funds, excluding money market
accounts, will be aggregated to provide a purchase credit towards fulfillment of
the letter of intent. The letter may be dated as of a prior date to include any
purchase made within the past 90 days. Prior trade prices will not be adjusted.
REINVESTMENT PRIVILEGE
The reinvestment privilege is available for all Shares of the Fund within the
same Share Class.
Class A and Class F shareholders who redeem from the Fund may reinvest the
redemption proceeds back into the same Share class at the next determined net
asset value without any sales charge. The original shares must have been subject
to a sales charge and the reinvestment must be within 120 days.
Similarly, Class F shareholders who redeem may reinvest their redemption
proceeds in the same Share class within 120 days. Shareholders would not be
entitled to a reimbursement of the contingent deferred sales charge if paid at
the time of redemption on any Share class. However, reinvested shares would not
be subject to a contingent deferred sales charge, if otherwise applicable, upon
later redemption.
In addition, if the Shares were reinvested through a financial intermediary, the
financial intermediary would not be entitled to an advanced payment from
Federated Securities Corp. on the reinvested Shares, if otherwise applicable.
Federated Securities Corp. must be notified by the shareholder in writing or by
his financial intermediary of the reinvestment in order to eliminate a sales
charge or a contingent deferred sales charge. If the shareholder redeems Shares
in the Fund, there may be tax consequences.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES AGREEMENT
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 Plan, Directors expect 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, 1997, the Fund's Class A Shares and Class
F Shares made payments in the amount of and $148,502 and $35,943, respectively,
pursuant to the Plan, of which $0 and $35,943, respectively, were voluntarily
waived. In addition, for the fiscal year ended November 30, 1997, the Fund's
Class A Shares and Class F Shares paid shareholder services fees in the amount
of $148,502 and $59,905, respectively, none of which were waived. PURCHASES
BY SALES REPRESENTATIVES, FUND DIRECTORS, AND EMPLOYEES The following
individuals and their immediate family members may buy Class A Shares and Class
F Shares at net asset value without a sales charge:
* Directors, employees, and sales representatives of the Fund, Federated
Advisers, and Federated Securities Corp. and its affiliates;
* Federated Life Members (Class A Shares only); and
* any associated person of an investment dealer who has a sales agreement
with Federated Securities Corp. Shares may also be sold without a sales
charge to trusts, pensions, or profit-sharing plans for these individuals.
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
The Fund's net asset value per Share fluctuates and is based on the market value
of all securities and other assets of the Fund. The net asset value for each
class of Shares may differ due to the variance in daily net income realized by
each class.
Net asset value is not determined on (i) days on which there are not sufficient
changes in the value of the Fund's portfolio securities that its net asset value
might be materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; or (iii) the following
holidays: New Year's Day, Martin Luther King Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's securities are determined as follows:
* as provided by an independent pricing service;
* for short-term obligations, according to the mean bid and asked prices, as
furnished by an independent pricing service, or unless the Directors
determine this is not fair value; or
* at fair value as determined in good faith by the Directors.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider:
* yield;
* quality;
* coupon rate;
* maturity;
* type of issue;
* trading characteristics; and
* other market data.
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
respective prospectuses under "Redeeming and Exchanging Shares." Although the
transfer agent does not charge for telephone redemptions, it reserves the right
to charge a fee for the cost of wire-transferred redemptions of less than
$5,000.Certain Class F 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 Class
F Shares. Should financial institutions elect to receive an amount less than the
administrative fee that is stated in the Class F 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 Although the Fund intends to redeem Shares in cash, it
reserves the right under certain circumstances to pay the redemption price in
whole or in part by a distribution of securities from the Fund's portfolio.
Redemption in kind will be made in conformity with applicable SEC rules, taking
such securities at the same value employed in determining net asset value and
selecting the securities in a manner the Directors determine to be fair and
equitable.
The Corporation has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Corporation is obligated to redeem Shares
for any shareholder in cash up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period.
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.
CONTINGENT DEFERRED SALES CHARGE
In computing the amount of the applicable Contingent Deferred Sales Charge,
redemptions are deemed to have occurred in the following order: (1) Shares
acquired through the reinvestment of dividends and long-term capital gains;
and (2) Shares held for more than four full years from the date of purchase
on a first-in, first-out basis.
TAX STATUS
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
* derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
* invest in securities within certain statutory limits; and * distribute to
its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
Shareholders are not required to pay the federal regular income tax on any
dividends received from the Fund that represent net interest on tax-exempt
municipal bonds. However, under the Tax Reform Act of 1986, dividends
representing net interest earned on some municipal bonds may be included in
calculating the federal individual alternative minimum tax or the federal
alternative minimum tax for corporations. In addition, the Tax Reform Act of
1986 treats interest on certain "private activity" bonds issued after August 7,
1986, as a tax preference item for both individuals and corporations. Thus,
should the Fund purchase any such bonds, a portion of the Fund's dividends may
be treated as a tax preference item.
Dividends of the Fund representing net interest income earned on some temporary
investments and any realized net short-term gains are taxed as ordinary income.
These tax consequences apply whether dividends are received in cash or as
additional shares. No portion of any income dividend paid by the Fund is
eligible for the dividends received deduction available to corporations.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term capital
gains distributed to them regardless of how long they have held the Fund shares.
TOTAL RETURN
The Fund's average annual total returns based on offering price for the
following periods ended November 30, 1997 were:
DATE OF INITIAL
PUBLIC
SHARE CLASS INVESTMENT ONE-YEAR SINCE INCEPTION
Class A 9/1/93 3.39% 3.64%
Class F 9/1/93 3.65% 4.11%
The average annual total return for all classes of Shares of the Fund is the
average compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of Shares owned at the
end of the period by the offering price per Share at the end of the period. The
number of Shares owned at the end of the period is based on the number of Shares
purchased at the beginning of the period with $1,000, less any applicable sales
charge, adjusted over the period by any additional Shares, assuming a quarterly
reinvestment of all dividends and distributions. Any applicable contingent
deferred sales charge is deducted from the ending value of the investments based
on the lesser of the original purchase price or the offering price of Shares
redeemed.
YIELD
The Fund's yields for the thirty-day period ended November 30, 1997 were:
SHARE CLASS YIELD
Class A 3.79%
Class F 4.08%
The yield for all classes of Shares of the Fund is determined by dividing the
net investment income per Share (as defined by the Securities and Exchange
Commission) earned by any class of Shares over a thirty-day period by the
maximum offering price per Share of any class of Shares on the last day of the
period. This value is then annualized using semi-annual compounding. This means
that the amount of income generated during the thirty-day period is assumed to
be generated each month over a twelve-month period and is reinvested every six
months. The yield does not necessarily reflect income actually earned by any
class of 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 any class
of Shares, the performance will be reduced for those shareholders paying those
fees. TAX-EQUIVALENT YIELD The Fund's tax-equivalent yields for the
thirty-day period ended November 30, 1997 were:
SHARE CLASS YIELD
Class A 5.26%
Class F 5.67%
The tax-equivalent yield of the Fund is calculated similarly to the yield, but
is adjusted to reflect the taxable yield that the Fund would have had to earn to
equal its actual yield, assuming a 28% tax rate (the maximum effective federal
rate for individuals) and assuming that income is 100% tax-exempt. TAX
EQUIVALENCY TABLE
The Fund may also use a tax equivalency table in advertising and sales
literature. The interest earned by the municipal obligations in the Fund's
portfolio generally remain free from federal regular income tax,* and often is
free from state and local taxes as well. As the table below indicates, a
"tax-free" investment is an attractive choice for investors, particularly in
times of narrow spreads between tax-free and taxable yields.
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1998
MULTISTATE MUNICIPAL FUND
FEDERAL INCOME TAX BRACKET:
<S> <C> <C> <C> <C> <C>
15.00% 28.00% 31.00% 36.00% 39.60%
JOINT $1- $42,351- $102,301- $155,951- OVER
RETURN 42,350 102,300 155,950 278,450 $278,450
SINGLE $1- $25,351- $61,401- $128,101- OVER
RETURN 25,350 61,400 128,100 278,450 $278,450
<CAPTION>
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
<C> <C> <C> <C> <C> <C>
1.00% 1.18% 1.39% 1.45% 1.56% 1.66%
1.50% 1.76% 2.08% 2.17% 2.34% 2.48%
2.00% 2.35% 2.78% 2.90% 3.13% 3.31%
2.50% 2.94% 3.47% 3.62% 3.91% 4.14%
3.00% 3.53% 4.17% 4.35% 4.69% 4.97%
3.50% 4.12% 4.86% 5.07% 5.47% 5.79%
4.00% 4.71% 5.56% 5.80% 6.25% 6.62%
4.50% 5.29% 6.25% 6.52% 7.03% 7.45%
5.00% 5.88% 6.94% 7.25% 7.81% 8.28%
5.50% 6.47% 7.64% 7.97% 8.59% 9.11%
6.00% 7.06% 8.33% 8.70% 9.38% 9.93%
6.50% 7.65% 9.03% 9.42% 10.16% 10.76%
7.00% 8.24% 9.72% 10.14% 10.94% 11.59%
7.50% 8.82% 10.42% 10.87% 11.72% 12.42%
8.00% 9.41% 11.11% 11.59% 12.50% 13.25%
</TABLE>
Note: The maximum marginal tax rate for each bracket was used in calculating
the taxable yield equivalent.
The chart above is for illustrative purposes only. It is not an indicator of
past or future performance of Fund shares.
* Some portion of the Fund's income may be subject to the federal alternative
minimum tax and state and local income taxes.
PERFORMANCE COMPARISONS
The performance of Class A Shares and Class F Shares depends upon such variables
as:
* portfolio quality;
* average portfolio maturity;
* type of instruments in which the portfolio is invested; * changes in
interest rates and market value of portfolio securities; * changes in the
Fund expenses; and * various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per share fluctuate daily. Both net earnings and offering
price per share are factors in the computation of yield and total return.
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:
* Lipper Analytical Services, Inc., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes
the reinvestment of all capital gains distributions and income dividends
and takes into account any change in offering price over a specific period
of time. From time to time, the Fund will quote its Lipper ranking in the
"intermediate" or "short-intermediate municipal bond funds" categories in
advertising and sales literature.
* Morningstar, Inc., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
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.
* 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 Class F Shares based on monthly reinvestment of dividends over a specified
period of time.
Advertisements may quote performance information which does not reflect the
effect of the sales charge or, in the case of Class F Shares, the contingent
deferred sales charge.
* Charts and other illustrations that depict the hypothetical growth of a
tax-free investment as compared to a taxable investment.
* Quotations from the Tax Foundation that illustrate the effect of taxes on
income.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Fund may include discussions of
economic, financial, and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by Fund portfolio managers and their views and analysis on how such
developments could affect the Funds. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute.
ABOUT FEDERATED INVESTORS
Federated Investors is dedicated to meeting investor needs which is reflected in
its investment decision making-structured, straightforward, and consistent. This
has resulted in a history of competitive performance with a range of competitive
investment products that have gained the confidence of thousands of clients and
their customers.
The company's disciplined security selection process is firmly rooted in sound
methodologies backed by fundamental and technical research. Investment decisions
are made and executed by teams of portfolio managers, analysts, and traders
dedicated to specific market sectors. Traders handle trillions of dollars in
annual trading volume.
In the municipal sector, as of December 31, 1997, Federated Investors managed 11
bond funds with approximately $2.1 billion in assets and 22 money market funds
with approximately $10.9 billion in total assets. In 1976, Federated introduced
one of the first municipal bond mutual funds in the industry and is now one of
the largest institutional buyers of municipal securities. The Funds may quote
statistics from organizations including The Tax Foundation and the National
Taxpayers Union regarding the tax obligations of Americans.
J. Thomas Madden, Executive Vice President, oversees Federated Investors' equity
and high yield corporate bond management while William D. Dawson, Executive Vice
President, oversees Federated Investors' domestic fixed income management. Henry
A. Frantzen, Executive Vice President, oversees the management of Federated
Investors' international portfolios.
MUTUAL FUND MARKET
Thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $4.4 trillion to the more than 6,700 funds available.*
Federated Investors, through its subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:
INSTITUTIONAL CLIENTS
Federated Investors meets the needs of more than 4,000 institutional clients
nationwide by managing and servicing separate accounts and mutual funds for a
variety of applications, including defined benefit and defined contribution
programs, cash management, and asset/liability management. Institutional clients
include corporations, pension funds, tax-exempt entities,
foundations/endowments, insurance companies, and investment and financial
advisors. The marketing effort to these institutional clients is headed by John
B. Fisher, President, Institutional Sales Division.
BANK MARKETING
Other institutional clients include close relationships with more than 1,600
banks and trust organizations. Virtually all of the trust divisions of the top
100 bank holding companies use Federated funds in their clients' portfolios. The
marketing effort to trust clients is headed by Timothy C. Pillion, Senior Vice
President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated funds are available to consumers through major brokerage firms
nationwide - we have over 2,200 broker/dealer and bank broker/dealer
relationships across the country - supported by more wholesalers than any other
mutual fund distributor. Federated's service to financial professionals and
institutions has earned it high ratings in several surveys performed by DALBAR,
Inc. DALBAR is recognized as the industry benchmark for service quality
measurement. The marketing effort to these firms is headed by James F. Getz,
President, Federated Securities Corp.
FINANCIAL STATEMENTS
The Financial Statements for the fiscal year ended November 30, 1997, are
incorporated herein by reference to the Annual Report of the Fund dated November
30, 1997 (File Nos. 33-43472 and 811-6447). A copy of this report may be
obtained without charge by contacting the Fund.
*Source: Investment Company Institute
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.
FEDERATED STRATEGIC INCOME FUND
(A Portfolio of Fixed Income Securities, Inc.)
Class A Shares, Class B Shares, Class C Shares
PROSPECTUS
The shares of Federated Strategic Income Fund (the "Fund") offered by this
prospectus represent interests in the Fund, which is a diversified investment
portfolio in Fixed Income Securities, Inc. (the "Corporation"), an open-end,
management investment company (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, Class
B Shares and Class C Shares of the Fund. Keep this prospectus for future
reference. The Fund may invest primarily in lower-rated bonds, commonly referred
to as "junk bonds." Investments of this type are subject to greater risk of loss
of principal and interest than investments in higher rated securities.
Purchasers should carefully assess the risks associated with an investment in
this Fund.
The Fund has also filed a Statement of Additional Information for Class A
Shares, Class B Shares, Class C Shares and Class F Shares dated January 31,
1998, with the Securities and Exchange Commission ("SEC"). 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 or a paper copy of this prospectus, if you have received
your prospectus electronically, free of charge by calling 1-800-341-7400. To
obtain other information or make inquiries about the Fund, contact your
financial institution. The Statement of Additional Information, material
incorporated by reference into this document, and other information regarding
the Fund is maintained electronically with the SEC at Internet Web site
(http://www.sec.gov). THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Prospectus dated
January 31, 1998
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary of Fund Expenses 1
Financial Highlights 2
General Information 5
Calling the Fund 5
Investment Information 5
Investment Objective 5
Investment Policies 5
Investment Limitations 14
Net Asset Value 14
Investing in the Fund 15
Purchasing Shares 15
Purchasing Shares Through a
Financial Intermediary 15
Purchasing Shares by Wire 16
Purchasing Shares by Check 16
Systematic Investment Program 16
Retirement Plans 16
Class A Shares 16
Class B Shares 16
Class C Shares 17
Redeeming and Exchanging Shares 17
Redeeming or Exchanging Shares Through
a Financial Intermediary 17
Redeeming or Exchanging Shares by Telephone 17
Redeeming or Exchanging Shares by Mail 17
Requirements for Redemption 17
Requirements for Exchange 18
Systematic Withdrawal Program 18
Contingent Deferred Sales Charge 18
Account and Share Information 19
Confirmations and Account Statements 19
Dividends and Distributions 19
Accounts with Low Balances 19
Fixed Income Securities, Inc. Information 19
Management of the Corporation 19
Administration of the Fund 22
Shareholder Information 22
Voting Rights 22
Tax Information 22
Federal Income Tax 22
State and Local Taxes 23
Performance Information 23
Other Classes of Shares 23
Appendix 24
</TABLE>
SUMMARY OF FUND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering 4.50% None None
price)
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage
of offering price) None None None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)(1) None 5.50% 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable) None None None
Exchange Fee None None None
</TABLE>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<TABLE>
<S> <C> <C> <C>
Management Fee (after waiver)(2) 0.48% 0.48% 0.48%
12b-1 Fee None 0.75% 0.75%
Total Other Expenses 0.62% 0.62% 0.63%
Shareholder Services Fee 0.25% 0.25% 0.25%
Total Operating Expenses(3) 1.10% 1.85%(4) 1.86%
</TABLE>
(1) For shareholders of Class B, the contingent deferred sales charge is 5.50%
in the first year declining to 1.00% in the sixth year and 0.00% thereafter. For
shareholders of Class C, 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 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 a
portion of the management fee. The adviser can terminate this voluntary waiver
at any time at its sole discretion. The maximum management fee is 0.85%.
(3) The total operating expenses for Class A Shares, Class B Shares and Class C
Shares would have been 1.46%, 2.22% and 2.23% respectively, absent the voluntary
waiver described in note 2 above.
(4) Class B Shares convert to Class A Shares (which pay lower ongoing expenses)
approximately eight years after purchase.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Fund will bear, either directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "Investing in the Fund" and "Fixed Income Securities, Inc. Information."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
LONG-TERM SHAREHOLDERS OF CLASS B AND CLASS C SHARES MAY PAY MORE THAN THE
ECONOMIC EQUIVALENT OF THE MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE
RULES OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
<TABLE>
<CAPTION>
EXAMPLE CLASS A CLASS B CLASS C
<S> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return, (2) redemption at the end of each time period; and (3) payment of
the maximum sales charge.
1 Year $ 56 $ 76 $ 29
3 Years $ 78 $102 $ 58
5 Years $103 $123 $101
10 Years $173 $196 $218
</TABLE>
You would pay the following expenses on the same investment, assuming no
redemption.
<TABLE>
<S> <C> <C> <C>
1 Year $ 56 $ 19 $ 19
3 Years $ 78 $ 58 $ 58
5 Years $103 $100 $101
10 Years $173 $196 $218
</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.
FINANCIAL HIGHLIGHTS -- CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated January 16, 1998, on the Fund's
financial statements for the year ended November 30, 1997, is included in the
Annual Report, which is incorporated by reference. This table should be read in
conjunction with the Fund's Financial Statements and Notes thereto, which may be
obtained from the Fund. <TABLE> <CAPTION>
YEAR ENDED NOVEMBER 30,
1997 1996 1995 1994(A)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.47 $10.14 $ 9.54 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.87(f) 0.91 0.82 0.45
Net realized and unrealized gain (loss) on
investments and foreign currency (0.03) 0.42 0.61 (0.45)
Total from investment operations 0.84 1.33 1.43 0.00
LESS DISTRIBUTIONS
Distributions from net investment income (0.87) (0.89) (0.83) (0.45)
Distributions in excess of net investment income(b) -- (0.03) -- (0.01)
Distributions from net realized gain on investments and
foreign currency transactions (0.03) (0.08) -- --
Total distributions (0.90) (1.00) (0.83) (0.46)
NET ASSET VALUE, END OF PERIOD $10.41 $10.47 $10.14 $ 9.54
TOTAL RETURN(C) 8.33% 13.89% 15.64% 0.05%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.10% 1.05% 0.25% 0.25%*
Net investment income 8.40% 8.54% 8.68% 8.38%*
Expense waiver/reimbursement(d) 0.36% 0.98% 5.69%(e) 8.87%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $58,270 $28,021 $5,089 $2,366
Portfolio turnover 40% 47% 158% 34%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from May 4, 1994 (date of initial public
investment) to November 30, 1994.
(b) 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.
(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(e) The Adviser waived $80,712 of the investment advisory fee and reimbursed
other operating expenses of $221,544, which represents 0.85% and 2.33% of
average net assets, respectively, to comply with certain state expense
limitations. The remainder of the reimbursement was voluntary. This expense
decrease is reflected in both the expense and net investment income ratios shown
above.
(f) Per share information is based on average shares outstanding. FURTHER
INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S ANNUAL
REPORT DATED NOVEMBER 30, 1997, WHICH CAN BE OBTAINED FREE OF CHARGE.
FINANCIAL HIGHLIGHTS -- CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated January 16, 1998, on the Fund's
financial statements for the year ended November 30, 1997, is included in the
Annual Report, which is incorporated by reference. This table should be read in
conjunction with the Fund's Financial Statements and Notes thereto, which may be
obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1997 1996 1995(A)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.47 $10.14 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.79(f) 0.83 0.25
Net realized and unrealized gain (loss) on investments and (0.04) 0.42 0.13
foreign currency
Total from investment operations 0.75 1.25 0.38
LESS DISTRIBUTIONS
Distributions from net investment income (0.79) (0.83) (0.24)
Distributions in excess of net investment income(b) -- (0.01) --
Distributions from net realized gain on investments and foreign
currency transactions (0.03) (0.08) --
Total distributions (0.82) (0.92) (0.24)
NET ASSET VALUE, END OF PERIOD $10.40 $10.47 $10.14
TOTAL RETURN(C) 7.53% 13.03% 5.13%
TO AVERAGE NET ASSETS
Expenses 1.85% 1.80% 1.00%*
Net investment income 7.67% 7.80% 7.95%*
Expense waiver/reimbursement(d) 0.37% 0.98% 5.69%(e)*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $304,746 $120,020 $5,193
Portfolio turnover 40% 47% 158%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from July 27, 1995 (date of initial
public investment) to November 30, 1995.
(b) 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.
(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(e) The Adviser waived $80,712 of the investment advisory fee and reimbursed
other operating expenses of $221,544, which represents 0.85% and 2.33% of
average net assets, respectively, to comply with certain state expense
limitations. The remainder of the reimbursement was voluntary. This expense
decrease is reflected in both the expense and net investment income ratios shown
above.
(f) Per share information is based on average shares outstanding. FURTHER
INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S ANNUAL
REPORT DATED NOVEMBER 30, 1997, WHICH CAN BE OBTAINED FREE OF CHARGE.
FINANCIAL HIGHLIGHTS -- CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated January 16, 1998, on the Fund's
financial statements for the year ended November 30, 1997, is included in the
Annual Report, which is incorporated by reference. This table should be read in
conjunction with the Fund's Financial Statements and Notes thereto, which may be
obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1997 1996 1995 1994(A)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.47 $10.14 $ 9.54 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.79(f) 0.82 0.74 0.40
Net realized and unrealized gain (loss) on investments
and foreign currency (0.03) 0.43 0.61 (0.44)
Total from investment operations 0.76 1.25 1.35 (0.04)
LESS DISTRIBUTIONS
Distributions from net investment income (0.79) (0.80) (0.75) (0.40)
Distributions in excess of net investment income(b) -- (0.04) -- (0.02)
Distributions from net realized gain on investments
and foreign currency transactions (0.03) (0.08) -- --
Total distributions (0.82) (0.92) (0.75) (0.42)
NET ASSET VALUE, END OF PERIOD $10.41 $10.47 $10.14 $ 9.54
TOTAL RETURN(C) 7.53% 13.05% 14.79% (0.41%)
RATIOS TO AVERAGE NET ASSETS
Expenses 1.86% 1.80% 1.00% 1.00%*
Net investment income 7.69% 7.70% 7.93% 7.99%*
Expense waiver/reimbursement(d) 0.37% 0.98% 5.69%(e) 8.87%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $29,267 $10,481 $2,323 $1,190
Portfolio turnover 40% 47% 158% 34%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from May 2, 1994 (date of initial public
investment) to November 30, 1994.
(b) 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.
(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(e) The Adviser waived $80,712 of the investment advisory fee and reimbursed
other operating expenses of $221,544, which represents 0.85% and 2.33% of
average net assets, respectively, to comply with certain state expense
limitations. The remainder of the reimbursement was voluntary. This expense
decrease is reflected in both the expense and net investment income ratios shown
above.
(f) Per share information is based on average shares outstanding. FURTHER
INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S ANNUAL
REPORT DATED NOVEMBER 30, 1997, WHICH CAN BE OBTAINED FREE OF CHARGE.
GENERAL INFORMATION
The Corporation was established under the laws of the State of Maryland on
October 15, 1991. Class A Shares, Class B Shares, and Class C Shares of the Fund
("Shares")are designed for individuals as a convenient means of accumulating an
interest in a professionally managed, diversified portfolio investing primarily
in domestic and corporate debt obligations, U.S. government securities, and
foreign government and corporate debt obligations. The Fund's current net
asset value and offering price may be found in the mutual funds section of local
newspapers under "Federated" and the appropriate class designation listing.
CALLING THE FUND
Call the Fund at 1-800-341-7400.
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 object, 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, with no more than 50% invested in any one sector. 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 Board of 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 may also 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;
* notes, bonds, and discount notes issued or guaranteed by U.S. government
agencies and instrumentalities supported by the full faith and credit of the
United States;
* notes, bonds, and discount notes of U.S. government agencies or
instrumentalities which receive or have access to federal funding; and
* notes, bonds, and discount notes of other U.S. government
instrumentalities supported only by the credit of the instrumentalities.
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 obli-gated 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 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 accrued 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 the 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.
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 payment made to
holders of interest-only securities. It is possible that the Fund might not
recover its original investment in interest-only securities if there are
substantial prepayments on the underlying mortgages. Therefore, interest-only
securities generally increase in value as interest rates rise and decrease in
value as interest rates fall, counter to changes in value experienced by most
fixed-income securities. The Fund's adviser intends to use this characteristic
of interest-only securities to reduce the effects of interest rate changes on
the value of the Fund's portfolio, while continuing to pursue current income.
CORPORATE BONDS AND OTHER FIXED INCOME OBLIGATIONS
The Fund may invest in both investment grade and non-investment grade
(lower-rated) bonds (which may be denominated in U.S. dollars or in non-U.S.
currencies) and other fixed-income obligations issued by domestic and foreign
corporations and other private issuers. There are no minimum rating requirements
for these investments by the Fund. The Fund's investments may include U.S.
dollar-denominated debt obligations known as "Brady Bonds," which are issued for
the exchange of existing commercial bank loans to foreign entities for new
obligations that are generally collateralized by zero coupon Treasury securities
having the same maturity. From time to time, the Fund's portfolio may consist
primarily of lower-rated (i.e., rated Ba or lower by Moody's Investors Service,
Inc. ("Moody's"), or BB or lower by Standard & Poor's 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 mandatory sinking fund
provisions, as well as call/redemption provisions prior to maturity, a negative
feature when interest rates decline.
CONVERTIBLE SECURITIES
Convertible securities include a spectrum of securities which can be exchanged
for or converted into common stock. Convertible securities may include, but are
not limited to: convertible bonds or debentures; convertible preferred stock;
units consisting of usable bonds and warrants; or securities which cap or
otherwise limit returns to the convertible security holder, such as DECS --
(Dividend Enhanced Convertible Stock, or Debt Exchangeable for Common Stock when
issued as a debt security), LYONS -- (Liquid Yield Option Notes, which are
corporate bonds that are purchased at prices below par with no coupons and are
convertible into stock), PERCS -- (Preferred Equity Redemption Cumulative Stock
(an equity issue that pays a high cash dividend, has a cap price and mandatory
conversion to common stock at maturity), and PRIDES -- (Preferred Redeemable
Increased Dividend Securities (which are essentially the same as DECS; the
difference is little more than who initially underwrites the issue).
Convertible securities are often rated below investment grade or not rated
because they fall below debt obligations and just above common equity in order
of preference or priority on the issuer's balance sheet. Hence, an issuer with
investment grade senior debt may issue convertible securities with ratings less
than investment grade or not rated. Convertible securities rated below
investment grade may be subject to some of the same risks as those inherent in
junk bonds. The Fund does not limit convertible securities by rating, and there
is no minimal acceptance rating for a convertible security to be purchased or
held in the Fund. Therefore, the Fund invests in convertible securities
irrespective of their ratings. This could result in the Fund purchasing and
holding, without limit, convertible securities rated below investment grade by
an NRSRO or in the Fund holding such securities where they have acquired a
rating below investment grade after the Fund has purchased it.
The Fund's investments in convertible securities will not be subject to the
quality rating limit on other securities in which the Fund invests.
Please see "Special Risks of Lower-Rated Debt Securities".
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 OF LOWER-RATED DEBT SECURITIES
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.
The Fund may invest in the High-Yield Bond Portfolio, a portfolio of Federated
Core Trust, as an efficient means of investing in high-yield debt obligations.
Federated Core Trust is a registered investment company advised by Federated
Research Corporation, an affiliate of the Fund's adviser. The High-Yield Bond
Portfolio's investment objective is to seek high current income and its primary
investment policy is to invest in lower-rated, high-yield debt securities. The
High-Yield Bond Portfolio currently is not charged an advisory fee and is sold
without any sales charge. The High-Yield Bond Portfolio may incur expenses for
administrative and accounting services. The Fund's adviser anticipates that the
High Yield Bond Portfolio will provide the Fund broad diversity and exposure to
all aspects of the high-yield bond sector of the market while at the same time
providing greater liquidity than if high-yield debt obligations were purchased
separately for the Fund. The Fund will be deemed to own a pro rata portion of
each investment of the High-Yield Bond Portfolio.
AS A PERCENTAGE OF
TOTAL MARKET
VALUE OF SECURITY
HOLDINGS AS OF
CREDIT RATING NOVEMBER 30, 1997
BBB 11.9%
BB 15.3%
B 25.4%
CCC 1.3%
CC 0.1%
Total 54.0%
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 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 OF FOREIGN SECURITIES
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 respect 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 issuers;
the likelihood that securities of foreign issuers may be less liquid or more
volatile; generally high 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 that 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.
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 without
limitation. 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 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 foregoes 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 a 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 readily marketable securities, 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 OF FINANCIAL FUTURES AND OPTIONS
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 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 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 its assets in securities of other investment companies as an
efficient means of carrying out its investment policies. It should be noted that
investment companies incur certain expenses, such as management fees, and,
therefore, any investment by the Fund in shares of other investment companies
may be subject to such duplicate expenses.
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 restrictions 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.
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.
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 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. 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 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 ("NAV") per share fluctuates and is based on the
market value of all securities and other assets of the Fund. The NAV for each
class of Shares may differ 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.
All purchases, redemptions and exchanges are processed at the NAV next
determined after the request in proper form is received by the Fund. The NAV is
determined as of the close of trading on the New York Stock Exchange (normally
4:00 p.m., Eastern time) every day the New York Stock Exchange is open.
INVESTING IN THE FUND
This prospectus offers three classes of Shares each with the characteristics
described below.
CLASS A CLASS B CLASS C
Minimum and Subsequent $1500/$100 $1500/$100 $1500/$100
Investment Amounts
Minimum and Subsequent $250/$100 $250/$100 $250/$100
Investment Amount
for Retirement Plans
Maximum Sales Charge 4.50%* None None
Maximum Contingent None 5.50+ 1.00%#
Deferred Sales Charge**
Conversion Feature No Yes++ No
* Class A Shares are sold at NAV, plus a sales charge as follows:
SALES CHARGE
AS A PERCENTAGE DEALER
CONCESSION AS
PUBLIC NET A PERCENTAGE OF
OFFERING AMOUNT PUBLIC OFFERING
AMOUNT OF TRANSACTION PRICE INVESTED PRICE
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 $1 million 2.00% 2.04% 1.80%
$1 million or 0.00% 0.00% 0.25%
greater
** Computed on the lesser of the NAV of the redeemed Shares at the time of
purchase or the NAV of the redeemed Shares at the time of redemption.
+ The following contingent deferred sales charge schedule applies to Class B
Shares:
YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
First 5.50%
Second 4.75%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and thereafter 0.00%
++ Class B Shares convert to Class A Shares (which pay lower ongoing
expenses) approximately eight years after purchase. See "Conversion of Class
B Shares."
# The contingent deferred sales charge is assessed on Shares redeemed within one
year of their purchase date.
PURCHASING SHARES
Shares of the Fund are sold on days on which the New York Stock Exchange is
open. Shares of the Fund may be purchased as described below, either through a
financial intermediary (such as a bank or broker/dealer) or by sending a wire or
check directly to the Fund. Financial intermediaries may impose different
minimum investment requirements on their customers. An account must be
established with a financial intermediary or by completing, signing, and
returning the new account form available from the Fund before Shares can be
purchased. Shareholders in certain other funds advised and distributed by
affiliates of Federated Investors ("Federated Funds") may exchange their Shares
for Shares of the corresponding class of the Fund. The Fund reserves the right
to reject any purchase or exchange request.
In connection with any sale, Federated Securities Corp. may, from time to time,
offer certain items of nominal value to any shareholder or investor.
PURCHASING SHARES THROUGH A FINANCIAL INTERMEDIARY
Orders placed through a financial intermediary are considered received when the
Fund is notified of the purchase order or when payment is converted into federal
funds. Purchase orders through a 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 intermediaries must be
received by the financial intermediary 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 intermediary's responsibility to transmit orders promptly.
Financial intermediaries may charge fees for their services.
The financial intermediary which maintains investor accounts in Class B Shares
or Class C Shares 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 intermediaries may be subject to reclaim by the
distributor for accounts transferred to financial intermediaries which do not
maintain investor accounts on a fully disclosed basis and do not account for
share ownership periods. PURCHASING SHARES BY WIRE Shares may be
purchased by Federal Reserve wire by calling 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 Shareholder Services Company, c/o State Street Bank and Trust
Company, Boston, MA 02266-8600; Attention; EDGEWIRE; For Credit to: (Fund Name)
(Fund Class); (Fund Number--this number can be found on the account statement or
by contacting the Fund); Account Number; Trade Date and Order Number; Group
Number or Dealer Number; Nominee or Institution Name; and ABA Number 011000028.
Shares cannot be purchased by wire on holidays when wire transfers are
restricted.
PURCHASING SHARES BY CHECK
Shares may be purchased by mailing a check made payable to the name of the Fund
(designate class of Shares and account number) to: Federated Shareholder
Services Company, P.O. Box 8600, Boston, MA 02266-8600. Orders by mail are
considered received when payment by check is converted into federal funds
(normally the business day after the check is received).
SYSTEMATIC INVESTMENT PROGRAM
Under this program, funds in a minimum amount of $50 may be automatically
withdrawn periodically from the shareholder's checking account at an Automated
Clearing House ("ACH") member and invested in the Fund. Shareholders should
contact their financial intermediary or the Fund to participate in this program.
RETIREMENT PLANS
Fund Shares can be purchased as an investment for retirement plans or IRA
accounts. For further details, contact the Fund and consult a tax adviser.
CLASS A SHARES
Class A Shares are sold at NAV, plus a sales charge. However:
NO SALES CHARGE IS IMPOSED FOR CLASS A SHARES PURCHASED:
* through financial intermediaries that do not receive sales charge dealer
concessions;
* by Federated Life Members; or
* through "wrap accounts" or similar programs under which clients pay a fee for
services.
IN ADDITION, THE SALES CHARGE CAN BE REDUCED OR ELIMINATED BY:
* purchasing in quantity and accumulating purchases at the levels in the
table under "Investing in the Fund";
* combining concurrent purchases of two or more funds;
* signing a letter of intent to purchase a specific quantity of shares
within 13 months; or
* using the reinvestment privilege.
Consult a financial intermediary or Federated Securities Corp. for details on
these programs. In order to eliminate the sales charge or receive sales charge
reductions, Federated Securities Corp. must be notified by the shareholder in
writing or by a financial intermediary at the time of purchase.
DEALER CONCESSION
For sales of Class A Shares, a dealer will normally receive up to 90% of the
applicable sales charge. Any portion of the sales charge which is not paid to a
dealer will be retained by the distributor. However, the distributor may offer
to pay dealers up to 100% of the sales charge 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 charge; 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 Shares outstanding at each month end. 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
establishment of customer accounts and purchases of Shares.
CLASS B SHARES
Class B Shares are sold at NAV. Under certain circumstances, a contingent
deferred sales charge will be assessed at the time of a redemption. Orders for
$250,000 or more of Class B Shares will automatically be invested in Class A
Shares.
CONVERSION OF CLASS B SHARES
Class B Shares will automatically convert into Class A Shares after eight full
years from the purchase date. Such conversion will be on the basis of the
relative NAVs per Share, without the imposition of any charges. Class B Shares
acquired by exchange from Class B Shares of another Federated Fund will convert
into Class A Shares based on the time of the initial purchase.
CLASS C SHARES
Class C Shares are sold at NAV. A contingent deferred sales charge of 1.00% will
be charged on assets redeemed within the first full 12 months following
purchase.
REDEEMING AND EXCHANGING SHARES
Shares of the Fund may be redeemed for cash or exchanged for Shares of the same
class of other Federated Funds on days on which the Fund computes its NAV.
Shares are redeemed at NAV less any applicable contingent deferred sales charge.
Exchanges are made at NAV. Shareholders who desire to automatically exchange
Shares, of a like class, in a pre-determined amount on a monthly, quarterly, or
annual basis may take advantage of a systematic exchange privilege. Information
on this privilege is available from the Fund or your financial intermediary.
Depending upon the circumstances, a capital gain or loss may be realized when
Shares are redeemed or exchanged.
REDEEMING OR EXCHANGING SHARES THROUGH A FINANCIAL INTERMEDIARY
Shares of the Fund may be redeemed or exchanged by contacting your financial
intermediary before 4:00 p.m. (Eastern time). In order for these transactions to
be processed at that day's NAV, financial intermediaries (other than
broker/dealers) must transmit the request to the Fund before 4:00 p.m. (Eastern
time), while broker/dealers must transmit the request to the Fund before 5:00
p.m. (Eastern time). The financial intermediary is responsible for promptly
submitting transaction requests and providing proper written instructions.
Customary fees and commissions may be charged by the financial intermediary for
this service. Appropriate authorization forms for these transactions must be on
file with the Fund.
REDEEMING OR EXCHANGING SHARES BY TELEPHONE
Shares acquired directly from the Fund may be redeemed in any amount, or
exchanged, by calling 1-800-341-7400. Appropriate authorization forms for these
transactions must be on file with the Fund. Shares held in certificate form must
first be returned to the Fund as described in the instructions under "Redeeming
or Exchanging Shares by Mail." Redemption proceeds will either be mailed in the
form of a check 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. The minimum amount for a wire transfer is $1,000.
Proceeds from redeemed Shares purchased by check or through ACH will not be
wired until that method of payment has cleared.
Telephone instructions will 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
this occurs, "Redeeming or Exchanging Shares By Mail" should be considered. The
telephone transaction privilege may be modified or terminated at any time.
Shareholders would be promptly notified.
REDEEMING OR EXCHANGING SHARES BY MAIL
Shares may be redeemed in any amount, or exchanged, by mailing a written request
to: Federated Shareholder Services Company, Fund Name, Fund Class, P.O. Box
8600, Boston, MA 02266-8600. If share certificates have been issued, they must
accompany the written request. It is recommended that certificates be sent
unendorsed by registered or certified mail.
All written requests should state: Fund Name and the Share Class name; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount of the transaction. An exchange
request should also state the name of the Fund into which the exchange is to be
made. All owners of the account must sign the request exactly as the Shares are
registered. A check for redemption proceeds is normally mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request. Dividends are paid up to and including the day that
a redemption or exchange request is processed.
REQUIREMENTS FOR REDEMPTION
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 their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; a member firm of a domestic stock exchange; 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.
REQUIREMENTS FOR EXCHANGE
Shareholders must exchange Shares having an NAV equal to the minimum investment
requirements of the fund into which the exchange is being made. Contact your
financial intermediary directly or the Fund for free information on and
prospectuses for the Federated Funds into which your Shares may be exchanged.
Before the exchange, the shareholder must receive a prospectus of the fund for
which the exchange is being made.
Upon receipt of proper instructions and required supporting documents, Shares
submitted for exchange are redeemed and proceeds invested in the same class of
shares of the other fund. Signature guarantees will be required to exchange
between fund accounts not having identical shareholder registrations. The
exchange privilege may be modified or terminated at any time. Shareholders will
be notified of the modification or termination of the exchange privilege.
SYSTEMATIC WITHDRAWAL PROGRAM
Under this program, Shares are redeemed to provide for periodic withdrawal
payments in an amount directed by the shareholder of not less than $100. To be
eligible to participate in this program, a shareholder must have an account
value of at least $10,000, other than retirement accounts subject to required
minimum distributions. A shareholder may apply for participation in this program
through his financial intermediary or by calling the Fund.
Because participation in this program may reduce, and eventually deplete the
shareholder's investment in the Fund, payments under this program should not be
considered as yield or income. It is not advisable for shareholders to continue
to purchase Class A Shares subject to a sales charge while participating in this
program. A contingent deferred sales charge may be imposed on Class B Shares and
Class C Shares.
CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. Redemptions will be processed in a manner intended to maximize the
amount of redemption which will not be subject to a contingent deferred sales
charge. The contingent deferred sales charge will not be imposed with respect to
Shares acquired through the reinvestment of dividends or distributions of
long-term capital gains. In determining the applicability of the contingent
deferred sales charge, the required holding period for your new Shares received
through an exchange will include the period for which your original Shares were
held.
ELIMINATING THE CONTINGENT DEFERRED SALES CHARGE
Upon written notification to Federated Securities Corp. or the transfer
agent, no contingent deferred sales charge will be imposed on redemptions:
* following the death or disability, as defined in Section 72(m)(7) of the
Internal Revenue Code of 1986, of the last surviving shareholder;
* representing minimum required distributions from an Individual Retirement
Account or other retirement plan to a shareholder who has attained the age of 70
1/2;
* which are involuntary redemptions of shareholder accounts that do not
comply with the minimum balance requirements;
* which are qualifying redemptions of Class B Shares under a Systematic
Withdrawal Program;
* which are reinvested in the Fund under the reinvestment privilege;
* of Shares held by Directors, employees and sales representatives of the Fund,
the distributor, or affiliates of the Fund or distributor, employees of any
financial intermediary that sells Shares of the Fund pursuant to a sales
agreement with the distributor, and their immediate family members to the extent
that no payments were advanced for purchases made by these persons; and
* of Shares originally purchased through a bank trust department, an investment
adviser registered under the Investment Advisers Act of 1940 or retirement plans
where the third party administrator has entered into certain arrangements with
Federated Securities Corp. or its affiliates, or any other financial
intermediary, to the extent that no payments were advanced for purchases made
through such entities.
For more information regarding the elimination of the contingent deferred sales
charge through a Systematic Withdrawal Program, or any of the above provisions,
contact your financial intermediary or the Fund. The Fund reserves the right to
discontinue or modify these provisions. Shareholders will be notified of such
action.
ACCOUNT AND SHARE INFORMATION
CONFIRMATIONS AND ACCOUNT STATEMENTS
Shareholders will receive detailed confirmations of transactions (except for
systematic program transactions). In addition, shareholders will receive
periodic statements reporting all account activity, including dividends paid.
The Fund will not issue share certificates.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly to all shareholders invested in the Fund
on the record date. Net long-term capital gains realized by the Fund, if any,
will be distributed at least once every twelve months. Dividends and
distributions are automatically reinvested in additional Shares of the Fund on
payment dates at the ex-dividend date without a sales charge, unless
shareholders request cash payments on the new account form or by contacting the
transfer agent.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
close an account by redeeming all Shares and paying the proceeds to the
shareholder if the account balance falls below the applicable minimum investment
amount. Retirement plan accounts and accounts where the balance falls below the
minimum due to NAV changes will not be closed in this manner. Before an account
is closed, the shareholder will be notified and allowed 30 days to purchase
additional Shares to meet the minimum.
FIXED INCOME SECURITIES, INC. INFORMATION
MANAGEMENT OF THE CORPORATION
BOARD OF DIRECTORS
The Corporation 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. An
Executive Committee of the 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.
Both the Corporation and the Adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Fund and its portfolio
securities. These codes recognize that such persons owe a fiduciary duty to the
Fund's shareholders and must place the interests of shareholders ahead of
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Directors, and could
result in severe penalties.
ADVISORY FEES
The Adviser receives an annual investment advisory fee equal to 0.85% of the
Fund's average daily net assets. Gross income includes, in general, discounts
earned on U.S. Treasury bills and agency discount notes, interest earned on all
interest-bearing obligations, and dividend income recorded on the ex-dividend
date but does not include capital gains or losses or reduction for expenses. The
Adviser may voluntarily choose to waive a portion of its fee or reimburse the
Funds for certain operating expenses. The Adviser can terminate this voluntary
reimbursement of expenses at any time at its sole discretion.
Under the terms of the sub-advisory agreement between the Adviser and Federated
Global Research Corp., Federated Global Research Corp. will provide the Adviser
such investment advice, statistical and other factual information as may, from
time to time, be reasonably requested by the Adviser. For its services under the
sub-advisory agreement, Federated Global Research Corp. receives an allocable
portion of the Fund's advisory fee. Such allocation is based on the amount of
foreign securities which Federated Global Research Corp. manages for the Fund.
This fee is paid by the Adviser out of its resources and is not an incremental
Fund expense.
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.
SUB-ADVISER'S BACKGROUND
Federated Global Research Corp., incorporated in Delaware on May 12, 1995, is a
registered investment adviser under the Investment Advisers Act of 1940.
The Adviser and sub-adviser are subsidiaries 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 son, J. Christopher Donahue, who is President and
Trustee of Federated Investors. The Adviser, Federated Global Research
Corp., 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. With over $120 billion invested across more than 300 funds under
management and/or administration by its subsidiaries, as of December 31, 1997,
Federated Investors is one of the largest mutual fund investment managers in the
United States. With more than 2,000 employees, Federated continues to be led by
the management who founded the company in 1955. Federated funds are presently at
work in and through approximately 4,000 financial institutions nationwide.
PORTFOLIO MANAGERS' BACKGROUNDS
Joseph M. Balestrino is the portfolio manager for the Fund and performs the
overall allocation of the assets of the Fund among the various asset
categories. He has performed these duties since July 1, 1996. In allocating
the Fund's assets, Mr. Balestrino evaluates the market environment and
economic outlook in each of the Fund's three major sectors. Mr. Balestrino
joined Federated Investors in 1986 and has been a Vice President of the
Fund's investment adviser and Federated Research Corp. since 1995. Mr.
Balestrino served as an Assistant Vice President of the investment adviser
and Federated Research Corp. from 1991 to 1995. Mr. Balestrino is a
Chartered Financial Analyst and received his Master's Degree in Urban and
Regional Planning from the University of Pittsburgh.
The portfolio managers for each of the individual asset categories are as
follows:
Mark E. Durbiano is the co-portfolio manager for the domestic corporate debt
category. He has served in this capacity since the fund's inception. Mr.
Durbiano joined Federated Investors in 1982 and has been a Senior Vice
President of the Fund's investment adviser and Federated Research Corp.
since January 1996. He served as a Vice President of the adviser and
Federated Research Corp. since 1988. Mr. Durbiano is a Chartered Financial
Analyst and received his M.B.A. in Finance from the University of
Pittsburgh.
Kathleen M. Foody-Malus is the portfolio manager for the U.S. government
securities category. Ms. Foody-Malus has served in this capacity since March
1995. Ms. Foody-Malus joined Federated Investors in 1983 and has been a Vice
President of the Fund's investment adviser and Federated Research Corp.
since 1993. Ms. Foody-Malus served as an Assistant Vice President of the
investment adviser and Federated Research Corp. from 1990 until 1992. Ms.
Foody-Malus received her M.B.A. in Accounting/Finance from the University of
Pittsburgh.
Henry A. Frantzen, Drew J. Collins, Robert M. Kowit, and Micheal W. Casey,
Ph.D. are the co-portfolio managers for the foreign government/foreign
corporate debt categories.
Henry A. Frantzen has served in this capacity since November 1995. Mr.
Frantzen joined Federated Investors in 1995 as an Executive Vice President
of Federated Global Research Corp and Federated Research Corp. Mr. Frantzen
served as Chief Investment Officer of international equities at Brown
Brothers Harriman & Co. from 1992 to 1995.
Drew J. Collins has served in this capacity since November 1995. Mr. Collins
joined Federated Investors in 1995 as a Senior Vice President of Federated
Global Research Corp and Federated Research Corp. Mr. Collins served as Vice
President/Portfolio Manager of international equity portfolios at Arnhold
and S. Bleichroeder, Inc. from 1994 to 1995. He served as an Assistant Vice
President/Portfolio Manager for international equities at the College
Retirement Equities Fund from 1986 to 1994. Mr. Collins is a Chartered
Financial Analyst and received his M.B.A. in finance from the Wharton School
of the University of Pennsylvania.
Robert M. Kowit has served in this capacity since November 1995. Mr. Kowit
joined Federated Investors in 1995 as a Vice President of Federated Global
Research Corp and Federated Research Corp. Mr. Kowit served as a Managing
Partner of Copernicus Global Asset Management from January 1995 through
October 1995. From 1990 to 1994, he served as Senior Vice President of
International Fixed Income and Foreign Exchange for John Hancock Advisers.
Mr. Kowit received his M.B.A. from Iona College with a concentration in
finance.
Micheal W. Casey, Ph.D. has been the Fund's portfolio manager since January
1997. Mr. Casey joined Federated Investors in 1996 as an Assistant Vice
President of Federated Global Research Corp and Federated Research Corp. Mr.
Casey served as an International Economist and Portfolio Strategist for
Maria Fiorini Ramirez Inc. from 1990 to 1996. Mr. Casey earned a Ph.D.
concentrating in economics from The New School for Social Research and a
M.Sc. from the London School of Economics.
DISTRIBUTION OF SHARES
Federated Securities Corp. is the principal distributor for shares of the
Fund. Federated Securities Corp. is located at Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779. It is a Pennsylvania corporation
organized on November 14, 1969, and is the principal distributor for a
number of investment companies. Federated Securities Corp. is a subsidiary
of Federated Investors.
The distributor may offer to pay financial institutions an amount up to 1% of
the net asset value of Class C Shares purchased by their clients or customers at
the time of purchase. These payments will be made directly by the distributor
from its assets, and will not be made from assets of the Fund. Financial
institutions may elect to waive the initial payment described above; such waiver
will result in the waiver by the Fund of the otherwise applicable contingent
deferred sales charge.
The distributor will pay dealers an amount equal to 5.50% of the net asset value
of Class B Shares purchased by their clients or customers. These payments will
be made directly by the distributor from its assets, and will not be made from
the assets of the Fund. Dealers may voluntarily waive receipt of all or any
portion of these payments. The distributor may pay a portion of the distribution
fee discussed below to financial institutions that waive all or any portion of
the advance payments.
DISTRIBUTION PLAN (CLASS B SHARES AND CLASS C SHARES ONLY) AND SHAREHOLDER
SERVICES
Under a distribution plan adopted in accordance with Investment Company Act of
1940 (the "Plan"), the distributor may be paid a fee by the Class B Shares and
Class C Shares in an amount computed at an annual rate of 0.75% of the average
daily net assets of each class of Shares. For Class C Shares, the distributor
may select financial institutions such as banks, fiduciaries, custodians for
public funds, investment advisers, and broker/dealers to provide sales services
or distribution-related support services as agents for their clients or
customers. With respect to Class B Shares, because distribution fees to be paid
by the Fund to the distributor may not exceed an annual rate of 0.75% of each
class of shares' average daily net assets, it will take the distributor a number
of years to recoup the expenses it has incurred for its sales services and
distribution-related support services pursuant to the Plan. The Plan is a
compensation type Plan. As such, the Fund makes no payments to the distributor
except as described above. Therefore, the Fund does not pay for unreimbursed
expenses of the distributor, including amounts expended by the distributor in
excess of amounts received by it from the Fund, interest, carrying or other
financing charges in connection with excess amounts expended, or the
distributor's overhead expenses. However, the distributor may be able to recover
such amounts or may earn a profit from future payments made by Shares under the
Plan.
In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments up to 0.25% of the average daily net asset value of
Class A Shares, Class B Shares, and Class C Shares to obtain certain personal
services for shareholders and to maintain shareholder accounts. Under the
Shareholder Services Agreement, 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.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS
Federated Securities Corp. will pay financial institutions, at the time of
purchase of Class A Shares, an amount equal to 0.50% of the net asset value of
Class A Shares purchased by their clients or customers under certain qualified
retirement plans as approved by Federated Securities Corp. (Such payments are
subject to a reclaim from the financial institution should the assets leave the
program within 12 months after purchase.)
Furthermore, with respect to Class A Shares, Class B Shares, and Class C Shares,
in addition to payments made pursuant to the Plan and Shareholder Services
Agreement, Federated Securities Corp. and Federated Shareholder Services, from
their own assets, may pay financial institutions supplemental fees for the
performance of substantial sales services, distribution-related support
services, or shareholder services. 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 may 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 Adviser or its
affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by affiliates of Federated Investors, as
specified below:
MAXIMUM AVERAGE AGGREGATE
FEE DAILY NET ASSETS
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Services Company may choose voluntarily to waive a portion of its fee.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Director elections and
other matters submitted to shareholders for vote. All shares of each portfolio
or class 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. Directors may be removed by the Directors or by
shareholders at a special meeting. A special meeting of shareholders shall be
called by the Directors upon the written request of shareholders owning at least
10% of the Fund's outstanding shares of all series entitled to vote.
As of November 7, 1997, MLPF&S, for the sole benefit of its customers,
Jacksonville, FL, owned 29.46% of the voting securities of the Fund's Class F
Shares and, therefore, may, for certain purposes, be deemed to control the Fund
and be able to affect the outcome of certain matters presented for a vote of
shareholders.
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 the shares. No federal income tax is due on any
dividends earned in an IRA or qualified retirement plan until distributed so
long as such qualified retirement plan meets the applicable requirements of the
Internal Revenue Code.
Distributions from the Fund are based on estimates of book income for the year.
Tax basis income includes gains or losses attributable to currency fluctuation,
whereas book income generally consists solely of the coupon income generated by
the portfolio. Due to differences in the book and tax treatment of fixed income
securities denominated in foreign currencies, it is difficult to project
currency effects on an interim basis. Therefore, to the extent that currency
fluctuations can not be anticipated, a portion of distributions to Shareholders
could later be designated as a return of capital, rather than income, for income
tax purposes, which may be of particular concern to simple trusts.
STATE AND LOCAL TAXES
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
From time to time, the Fund advertises its total return and yield for each class
of shares including Class F Shares.
Total return represents the change, over a specific period of time, in the value
of an investment in each class of 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 each class of shares is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by each class of shares over a thirty-day period by the maximum offering price
per share of each class 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 each class of shares, and therefore, may not correlate
to the dividends or other distributions paid to shareholders.
The performance information reflects the effect of non-recurring charges, such
as the maximum sales charge or contingent deferred sales charges, which, if
excluded, would increase the total return and yield.
Total return and yield will be calculated separately for Class A Shares, Class B
Shares, Class C Shares and Class F Shares.
From time to time, advertisements for Class A Shares, Class B Shares, Class C
Shares, and Class F Shares of the Fund may refer to ratings, rankings, and other
information in certain financial publications and/or compare the performance of
Class A Shares, Class B Shares, Class C Shares, and Class F Shares to certain
indices.
OTHER CLASSES OF SHARES
The Fund also offers another class of shares called Class F Shares. Class F
Shares are sold primarily to customers of financial institutions subject to a
front-end sales charge, a contingent deferred sales charge and a minimum initial
investment of $1,500, unless the investment is in a retirement account in which
the minimum investment is $250. Class A Shares, Class B Shares, Class C
Shares and Class F Shares are subject to certain of the same expenses; however,
the front-end sales charge for Class F Shares is lower than that for Class A
Shares. The amount of dividends payable to Class A and Class F Shares will
generally exceed that of Class B and Class C Shares by the difference between
class expenses and distribution and shareholder service expenses borne by shares
of each respective class.
Class F Shares are distributed under a 12b-1 Plan and are also subject to a
shareholder services fee.
Expense differences, however, between Class A Shares, Class B Shares, Class C
Shares, and Class F Shares may affect the performance of each class.
To obtain more information and a prospectus for Class F Shares, investors may
call 1-800-341-7400 or contact their financial intermediary.
APPENDIX
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 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.
BBB -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligator'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 or 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. [Graphic]
[Graphic]
FEDERATED INVESTORS
FEDERATED STRATEGIC INCOME FUND
(A Portfolio of Fixed Income Securities, Inc.)
Class A Shares, Class B Shares, Class C Shares
PROSPECTUS
JANUARY 31, 1998
A Diversified Portfolio of Fixed Income
Securities, Inc., an Open-End
Management Investment Company
FEDERATED STRATEGIC INCOME FUND
CLASS A SHARES, CLASS B SHARES, CLASS C SHARES
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Advisers
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
SUB-ADVISER
Federated Global
Research Corp.
175 Water Street
New York, NY 10038-4965
CUSTODIAN
State Street Bank and
Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT
AND DIVIDEND
DISBURSING AGENT
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
INDEPENDENT
PUBLIC ACCOUNTANTS
Deloitte & Touche LLP
2500 One PPG Place
Pittsburgh, PA 15222-5401
Federated Securities Corp., Distributor
1-800-341-7400
www.federatedinvestors.com
Cusip 338319700
Cusip 338319866
Cusip 338319809
G01288-01-ABC (1/98)
[Graphic]
FEDERATED STRATEGIC INCOME FUND
(A Portfolio of Fixed Income Securities, Inc.)
Class F Shares
PROSPECTUS
The Class F 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 F Shares. Keep this prospectus for future reference.
The Fund may invest primarily in lower-rated bonds, commonly referred to as
"junk bonds." Investments of this type are subject to greater risk of loss of
principal and interest than investments in higher rated securities. Purchasers
should carefully assess the risks associated with an investment in the Fund.
The Fund has also filed a Statement of Additional Information for Class F Shares
dated January 31, 1998, with the Securities and Exchange Commission ("SEC"). 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 or a paper copy of this prospectus if you have received
your prospectus electronically, free of charge by calling 1-800-341-7400. To
obtain other information or to make inquiries about the Fund, contact your
financial institution. The Statement of Additional Information, material
incorporated by reference into this document, and other information regarding
the Fund is maintained electronically with the SEC at Internet Web site
(http://www.sec.gov). THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Prospectus dated
January 31, 1998
TABLE OF CONTENTS
Summary of Fund Expenses 1
Financial Highlights -- Class F Shares 2
General Information 3
Investment Information 3
Investment Objective 3
Investment Policies 3
Investment Limitations 12
Net Asset Value 12
Investing in the Fund 13
Purchasing Shares 13
Purchasing Shares Through a Financial Intermediary 13
Purchasing Shares by Wire 13
Purchasing Shares by Check 13
Systematic Investment Program 14
Retirement Plans 14
Reducing or Eliminating the Sales Charge 14
Redeeming and Exchanging Shares 14
Redeeming or Exchanging Shares Through
a Financial Intermediary 14
Redeeming or Exchanging Shares by Telephone 15
Redeeming or Exchanging Shares by Mail 15
Systematic Withdrawal Program 15
Contingent Deferred Sales Charge 16
Account and Share Information 16
Confirmations and Account Statements 16
Dividends and Distributions 16
Accounts with Low Balances 16
Fixed Income Securities, Inc. Information 16
Management of the Corporation 16
Portfolio Managers' Backgrounds 17
Distribution of Class F Shares 18
Administration of the Fund 19
Shareholder Information 19
Voting Rights 19
Tax Information 19
Federal Income Tax 19
State and Local Taxes 20
Performance Information 20
Other Classes of Shares 20
Appendix 21
SUMMARY OF FUND EXPENSES
<TABLE>
<CAPTION>
Class F Shares
Shareholder Transaction Expenses
<S> <C> Maximum Sales Charge Imposed on Purchases (as a percentage of offering
price) 1.00% Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage of offering None price) 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 Operating Expenses
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver)(2) 0.48%
12b-1 Fee(3) 0.00%
Total Other Expenses . 0.62%
Shareholder Services Fee .0.25%
Total Operating Expenses(4) 1.10%
</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 0.85%.
(3) Class F Shares has no present intention of paying or accruing the 12b-1 fee
during the fiscal year ending November 30, 1998. If the Class were paying or
accruing the 12b-1 fee, the Class would be able to pay up to 0.50% of its
average daily net assets for the 12b-1 fee. For more information, see
"Distribution of Class F Shares."
(4) The total operating expenses would have been 1.96% absent the voluntary
waiver of a portion of the management fee and payment 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 F Shares of the Fund will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Investing in the Fund" and "Fixed Income Securities,
Inc. Information." Wire-transferred redemptions of less than $5,000 may be
subject to additional fees.
Long-term shareholders may pay more than the economic equivalent of the maximum
front-end sales charges permitted under the rules of the National Association of
Securities Dealers, Inc.
Example
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return, (2) redemption at the end of each time period, and (3) payment of
the maximum sales charge.
1 Year $ 31
3 Years $ 56
5 Years $ 70
10 Years $143
You would pay the following expenses on the same investment, assuming no
redemption.
1 Year $ 21
3 Years $ 45
5 Years $ 70
10 Years $143
The above example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
FINANCIAL HIGHLIGHTS -- CLASS F SHARES
(For a share outstanding throughout each period)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated January 16, 1998, on the Fund's
financial statements for the year ended November 30, 1997, is included in the
Annual Report, which is incorporated by reference. This table should be read in
conjunction with the Fund's Financial Statements and Notes thereto, which may be
obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1997 1996 1995 1994(A)
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.47 $10.14 $ 9.54 $10.00
Income from investment operations
Net investment income 0.87(f) 0.95 0.77 0.41
Net realized and unrealized gain (loss) on investments (0.03) 0.37 0.61 (0.44)
and foreign currency
Total from investment operations 0.84 1.32 1.38 (0.03)
Less distributions
Distributions from net investment income (0.87) (0.91) (0.78) (0.41)
Distributions in excess of net investment income(b) -- -- -- (0.02)
Distributions from net realized gain on investments
and foreign currency transactions (0.03) (0.08) -- --
Total distributions (0.90) (0.99) (0.78) (0.43)
Net asset value, end of period $10.41 $10.47 $10.14 $ 9.54
Total return(c) 8.33% 13.83% 15.07% (0.19%)
Ratios to average net assets
Expenses 1.10% 1.07% 0.75% 0.75%*
Net investment income 8.38% 8.48% 8.19% 8.34%*
Expense waiver/reimbursement(d) 0.86% 1.46% 5.69%(e) 8.87%*
Supplemental data
Net assets, end of period (000 omitted) $29,762 $17,367 $3,691 $2,326
Portfolio turnover 40% 47% 158% 34%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from May 10, 1994 (date of initial public
investment) to November 30, 1994.
(b) 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.
(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(e) The Adviser waived $80,712 of the investment advisory fee and reimbursed
other operating expenses of $221,544, which represents 0.85% and 2.33% of
average net assets, respectively, to comply with certain state expense
limitations. The remainder of the reimbursement was voluntary. This expense
decrease is reflected in both the expense and net investment income ratios shown
above.
(f) Per share information is based on average shares outstanding. Further
information about the Fund's performance is contained in the Fund's annual
report dated November 30, 1997, which can be obtained free of charge.
GENERAL INFORMATION
The Corporation was incorporated under the laws of the State of Maryland on
October 15, 1991. Class F Shares of the Fund ("Shares") are designed for
individuals as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio investing primarily in domestic
corporate debt obligations, U.S. government securities, and foreign government
and corporate debt obligations. The Fund's current net asset value and
offering price may be found in the mutual funds section of local newspapers
under "Federated" and the appropriate class designation listing. CALLING THE
FUND
Call the Fund at 1-800-341-7400.
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, with no more than 50% invested in any one sector. 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
Board of 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;
* notes, bonds, and discount notes issued or guaranteed by U.S. government
agencies and instrumentalities supported by the full faith and credit of the
United States;
* notes, bonds, and discount notes of U.S. government agencies or
instrumentalities which receive or have access to federal funding; and
* notes, bonds, and discount notes of other U.S. government
instrumentalities supported only by the credit of the instrumentalities.
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 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.
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.
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
Convertible securities include a spectrum of securities which can be exchanged
for or converted into common stock. Convertible securities may include, but are
not limited to: convertible bonds or debentures; convertible preferred stock;
units consisting of usable bonds and warrants; or securities which cap or
otherwise limit returns to the convertible security holder, such as DECS --
(Dividend Enhanced Convertible Stock, or Debt Exchangeable for Common Stock when
issued as a debt security), LYONS -- (Liquid Yield Option Notes, which are
corporate bonds that are purchased at prices below par with no coupons and are
convertible into stock), PERCS -- (Preferred Equity Redemption Cumulative Stock
(an equity issue that pays a high cash dividend, has a cap price and mandatory
conversion to common stock at maturity), and PRIDES -- (Preferred Redeemable
Increased Dividend Securities (which are essentially the same as DECS; the
difference is little more than who initially underwrites the issue).
Convertible securities are often rated below investment grade or not rated
because they fall below debt obligations and just above common equity in order
of preference or priority on the issuer's balance sheet. Hence, an issuer with
investment grade senior debt may issue convertible securities with ratings less
than investment grade or not rated. Convertible securities rated below
investment grade may be subject to some of the same risks as those inherent in
junk bonds. The Fund does not limit convertible securities by rating, and there
is no minimal acceptance rating for a convertible security to be purchased or
held in the Fund. Therefore, the Fund invests in convertible securities
irrespective of their ratings. This could result in the Fund purchasing and
holding, without limit, convertible securities rated below investment grade by
an NRSRO or in the Fund holding such securities where they have acquired a
rating below investment grade after the Fund has purchased it.
The Fund's investments in convertible securities will not be subject to the
quality rating limit on other securities in which the Fund invests.
Please see "Special Risks of Lower-Rated Debt Securities".
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 OF LOWER-RATED DEBT
SECURITIES
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. The Fund
may invest in the High-Yield Bond Portfolio, a portfolio of Federated Core
Trust, as an efficient means of investing in high-yield debt obligations.
Federated Core Trust is a registered investment company advised by Federated
Research Corporation, an affiliate of the Fund's adviser. The High-Yield Bond
Portfolio's investment objective is to seek high current income and its primary
investment policy is to invest in lower-rated, high-yield debt securities. The
High-Yield Bond Portfolio currently is not charged an advisory fee and is sold
without any sales charge. The High-Yield Bond Portfolio may incur expenses for
administrative and accounting services. The Fund's adviser anticipates that the
High-Yield Bond Portfolio will provide the Fund broad diversity and exposure to
all aspects of the high-yield bond sector of the market while at the same time
providing greater liquidity than if high-yield debt obligations were purchased
separately for the Fund. The Fund will be deemed to own a pro rata portion of
each investment of the High-Yield Bond Portfolio.
AS A PERCENTAGE OF
TOTAL MARKET
VALUE OF SECURITY
HOLDINGS AS OF
CREDIT RATING NOVEMBER 30, 1997
BBB 11.9%
BB 15.3%
B 25.4%
CCC 1.3%
CC 0.1%
Total 54.0%
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 OF FOREIGN SECURITIES
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.
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 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 without limitation. 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 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 readily marketable securities, 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 OF FINANCIAL FUTURES AND OPTIONS
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 its assets in securities of other investment companies as an
efficient means of carrying out its investment policies. It should be noted that
investment companies incur certain expenses, such as management fees, and,
therefore, any investment by the Fund in shares of other investment companies
may be subject to such duplicate expenses.
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.
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).
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
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 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 ("NAV") per share fluctuates and is based on the
market value of all securities and other assets of the Fund. The NAV for each
class of Shares may differ 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.
All purchases, redemptions and exchanges are processed at the NAV next
determined after the request in proper form is received by the Fund. The NAV is
determined as of the close of trading on the New York Stock Exchange (normally
4:00 p.m., Eastern time) every day the New York Stock Exchange is open.
INVESTING IN THE FUND
This prospectus offers Class F Shares with the characteristics described below.
CLASS F
Minimum and Subsequent Investment Amount $1,500/$100
Minimum and Subsequent Investment Amount for $250/$100
Retirement Plans
Maximum Sales Charge 1.00%*
Maximum Contingent Deferred Sales Charge** 1.00%**
* There is no sales charge for purchases of $1 million or more. In addition, no
sales charge is imposed for Shares purchased through certain entities or
programs. Please see the section entitled "Reducing or Eliminating the Sales
Charge."
** Computed on the lesser of the NAV of the redeemed Shares at the time of
purchase or the NAV of the redeemed Shares at the time of redemption.
The following contingent deferred sales charge schedule applies to Class F
Shares:
CONTINGENT
DEFERRED
AMOUNT OF PURCHASE SHARES HELD SALES CHARGE
Up to $1,999,999 Four Years or less 1.00%
$2,000,000 to $4,999,999 Two Years or less 0.50%
$5,000,000 or more One Year or less 0.25%
PURCHASING SHARES
Shares of the Fund are sold on days on which the New York Stock Exchange is
open. Shares of the Fund may be purchased as described below, either through a
financial intermediary (such as a bank or broker/dealer) or by sending a wire or
check directly to the Fund. Financial intermediaries may impose different
minimum investment requirements on their customers. An account must be
established with a financial intermediary or by completing, signing, and
returning the new account form available from the Fund before Shares can be
purchased. Shareholders in Class F Shares of certain other funds advised and
distributed by affiliates of Federated Investors ("Federated Funds") may
exchange their Shares for Class F Shares of the Fund. The Fund reserves the
right to reject any purchase or exchange request.
In connection with any sale, Federated Securities Corp. may, from time to time,
offer certain items of nominal value to any shareholder or investor.
PURCHASING SHARES THROUGH A FINANCIAL INTERMEDIARY
Orders placed through a financial intermediary are considered received when the
Fund is notified of the purchase order or when payment is converted into federal
funds. Purchase orders through a 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 intermediaries must be
received by the financial intermediary 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 intermediary's responsibility to transmit orders promptly.
Financial intermediaries may charge fees for their services.
The financial intermediary which maintains investor accounts in Class F Shares
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 intermediaries may be subject to reclaim by the distributor for
accounts transferred to financial intermediaries which do not maintain investor
accounts on a fully disclosed basis and do not account for share ownership
periods.
PURCHASING SHARES BY WIRE
Shares may be purchased by Federal Reserve wire by calling 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 Shareholder Services Company, c/o State Street
Bank and Trust Company, Boston, MA 02266-8600; Attention; EDGEWIRE; For Credit
to: (Fund Name) (Fund Class); (Fund Number -- this number can be found on the
account statement or by contacting the Fund); Account Number; Trade Date and
Order Number; Group Number or Dealer Number; Nominee or Institution Name; and
ABA Number 011000028. Shares cannot be purchased by wire on holidays when wire
transfers are restricted.
PURCHASING SHARES BY CHECK
Shares may be purchased by mailing a check made payable to the name of the Fund
(designate class of Shares and account number) to: Federated Shareholder
Services Company, P.O. Box 8600, Boston, MA 02266-8600. Orders by mail are
considered received when payment by check is converted into federal funds
(normally the business day after the check is received).
SYSTEMATIC INVESTMENT PROGRAM
Under this program, funds in a minimum amount of $50 may be automatically
withdrawn periodically from the shareholder's checking account at an Automated
Clearing House ("ACH") member and invested in the Fund. Shareholders should
contact their financial intermediary or the Fund to participate in this program.
RETIREMENT PLANS
Fund Shares can be purchased as an investment for retirement plans or IRA
accounts. For further details, contact the Fund and consult a tax adviser.
REDUCING OR ELIMINATING THE SALES CHARGE
Class F Shares are sold at NAV, plus a sales charge. However:
NO SALES CHARGE IS IMPOSED FOR CLASS F SHARES PURCHASED:
* through bank trust departments or investment advisers registered under the
Investment Advisers Act of 1940 purchasing on behalf of their clients;
* by sales representatives, Directors, and employees of the Fund, Federated
Advisers, Federated Securities Corp. or their affiliates and their immediate
family members;
* by any investment dealer who has a sales agreement with Federated Securities
Corp. and their immediate family members, or by any trusts or pension or
profit-sharing plans for these persons or retirement plans where the third party
administrator has entered into certain arrangements with Federated Securities
Corp. or its affiliates.
IN ADDITION, THE SALES CHARGE CAN BE REDUCED OR ELIMINATED BY:
* purchasing in quantity and accumulating purchases;
* combining concurrent purchases of two or more funds;
* signing a letter of intent to purchase a specific quantity of shares
within 13 months; or
* using the reinvestment privilege.
Consult a financial intermediary or Federated Securities Corp. for details on
these programs. In order to eliminate the sales charge or receive sales charge
reductions, Federated Securities Corp. must be notified by the shareholder in
writing or by a financial intermediary at the time of purchase.
DEALER CONCESSION
For sales of Shares, a dealer will normally receive up to 100% of the applicable
sales charge. Any portion of the sales charge which is not paid to a dealer will
be retained by the distributor. However, the distributor may offer to pay
dealers up to 100% of the sales charge retained by it. 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 establishment of customer accounts
and purchases of Shares.
REDEEMING AND EXCHANGING SHARES
Shares of the Fund may be redeemed for cash or exchanged for Class F Shares of
other Federated Funds on days on which the Fund computes its NAV. Shares are
redeemed at NAV less any applicable contingent deferred sales charge. Exchanges
are made at NAV. Shareholders who desire to automatically exchange Shares, of a
like Share class, in a pre-determined amount on a monthly, quarterly, or annual
basis may take advantage of a systematic exchange privilege. Information on this
privilege is available from the Fund or your financial intermediary. Depending
upon the circumstances, a capital gain or loss may be realized when Shares are
redeemed or exchanged.
REDEEMING OR EXCHANGING SHARES THROUGH A FINANCIAL INTERMEDIARY
Shares of the Fund may be redeemed or exchanged by contacting your financial
intermediary before 4:00 p.m. (Eastern time). In order for these transactions to
be processed at that day's NAV, financial intermediaries (other than
broker/dealers) must transmit the request to the Fund before 4:00 p.m. (Eastern
time), while broker/dealers must transmit the request to the Fund before 5:00
p.m. (Eastern time). The financial intermediary is responsible for promptly
submitting transaction requests and providing proper written instructions.
Customary fees and commissions may be charged by the financial intermediary for
this service. Appropriate authorization forms for these transactions must be on
file with the Fund.
REDEEMING OR EXCHANGING SHARES BY TELEPHONE
Shares acquired directly from the Fund may be redeemed in any amount, or
exchanged, by calling 1-800-341-7400. Appropriate authorization forms for these
transactions must be on file with the Fund. Shares held in certificate form must
first be returned to the Fund as described in the instructions under "Redeeming
or Exchanging Shares by Mail." Redemption proceeds will either be mailed in the
form of a check 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. The minimum amount for a wire transfer is $1,000.
Proceeds from redeemed Shares purchased by check or through ACH will not be
wired until that method of payment has cleared.
Telephone instructions will 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
this occurs, "Redeeming or Exchanging Shares By Mail" should be considered. The
telephone transaction privilege may be modified or terminated at any time.
Shareholders would be promptly notified.
REDEEMING OR EXCHANGING SHARES BY MAIL
Shares may be redeemed in any amount, or exchanged, by mailing a written request
to: Federated Shareholder Services Company, Fund Name, Fund Class, P.O. Box
8600, Boston, MA 02266-8600. If share certificates have been issued, they must
accompany the written request. It is recommended that certificates be sent
unendorsed by registered or certified mail.
All written requests should state: Fund Name and the Share Class name; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount of the transaction. An exchange
request should also state the name of the Fund into which the exchange is to be
made. All owners of the account must sign the request exactly as the Shares are
registered. A check for redemption proceeds is normally mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request. Dividends are paid up to and including the day that
a redemption or exchange request is processed.
REQUIREMENTS FOR REDEMPTION
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 their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; a member firm of a domestic stock exchange; 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.
REQUIREMENTS FOR EXCHANGE
Shareholders must exchange Shares having a NAV equal to the minimum investment
requirements of the fund into which the exchange is being made. Contact your
financial intermediary directly or the Fund for free information on and
prospectuses for the Federated Funds into which your Shares may be exchanged.
Before the exchange, the shareholder must receive a prospectus of the fund for
which the exchange is being made.
Upon receipt of proper instructions and required supporting documents, Shares
submitted for exchange are redeemed and proceeds invested in the same class of
shares of the other fund. Signature guarantees will be required to exchange
between fund accounts not having identical shareholder registrations. The
exchange privilege may be modified or terminated at any time. Shareholders will
be notified of the modification or termination of the exchange privilege.
SYSTEMATIC WITHDRAWAL PROGRAM
Under this program, Shares are redeemed to provide for periodic withdrawal
payments in an amount directed by the shareholder of not less than $100. To be
eligible to participate in this program, a shareholder must have an account
value of at least $10,000, other than retirement accounts subject to required
minimum distributions. A shareholder may apply for participation in this program
through his financial intermediary or by calling the Fund.
Because participation in this program may reduce, and eventually deplete, the
shareholder's investment in the Fund, payments under this program should not be
considered as yield or income. It is not advisable for shareholders to continue
to purchase Class F Shares subject to a sales charge while participating in this
program. A contingent deferred sales charge will be imposed on Shares redeemed
through this program within four years of their purchase dates.
CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. Redemptions will be processed in a manner intended to maximize the
amount of redemption which will not be subject to a contingent deferred sales
charge. The contingent deferred sales charge will not be imposed with respect to
Shares acquired through the reinvestment of dividends or distributions of
long-term capital gains. In determining the applicability of the contingent
deferred sales charge, the required holding period for your new Shares received
through an exchange will include the period for which your original Shares were
held.
ELIMINATING THE CONTINGENT DEFERRED SALES CHARGE
Upon written notification to Federated Securities Corp. or the transfer
agent, no contingent deferred sales charge will be imposed on redemptions:
* following the death or disability, as defined in Section 72(m)(7) of the
Internal Revenue Code of 1986, of the last surviving shareholder;
* representing a total or partial distribution from an Individual Retirement
Account, Keogh Plan, or a custodial account to a shareholder who has attained
the age of 70 1*2;
* representing a total or partial distribution from a qualified plan, other than
an Individual Retirement Account, Keogh Plan, or a custodial account following
retirement;
* which are involuntary redemptions of shareholder accounts that do not
comply with the minimum balance requirements;
* which are reinvested in the Fund under the reinvestment privilege;
* of Shares held by Directors, employees and sales representatives of the Fund,
the distributor, or affiliates of the Fund or distributor, employees of any
financial intermediary that sells Shares of the Fund pursuant to a sales
agreement with the distributor, and their immediate family members to the extent
that no payments were advanced for purchases made by these persons; and
* of Shares originally purchased through a bank trust department, an investment
adviser registered under the Investment Advisers Act of 1940 or retirement plans
where the third party administrator has entered into certain arrangements with
Federated Securities Corp. or its affiliates, or any other financial
intermediary, to the extent that no payments were advanced for purchases made
through such entities.
For more information regarding the contingent deferred sales charge or any of
the above provisions, contact your financial intermediary or the Fund. The Fund
reserves the right to discontinue or modify these provisions.
Shareholders will be notified of such action.
ACCOUNT AND SHARE INFORMATION
CONFIRMATIONS AND ACCOUNT STATEMENTS
Shareholders will receive detailed confirmations of transactions (except for
systematic program transactions). In addition, shareholders will receive
periodic statements reporting all account activity, including dividends paid.
The Fund will not issue share certificates.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly to all shareholders invested in the Fund
on the record date. Net long-term capital gains realized by the Fund, if any,
will be distributed at least once every twelve months. Dividends and
distributions are automatically reinvested in additional Shares of the Fund on
payment dates at the ex-dividend date NAV without a sales charge, unless
shareholders request cash payments on the new account form or by contacting the
transfer agent.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
close an account by redeeming all Shares and paying the proceeds to the
shareholder if the account balance falls below the applicable minimum investment
amount. Retirement plan accounts and accounts where the balance falls below the
minimum due to NAV changes will not be closed in this manner. Before an account
is closed, the shareholder will be notified and allowed 30 days to purchase
additional Shares to meet the minimum.
FIXED INCOME SECURITIES, INC. INFORMATION
MANAGEMENT OF THE CORPORATION
BOARD OF DIRECTORS
The Corporation 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 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.
Both the Corporation and the Adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Fund and its portfolio
securities. These codes recognize that such persons owe a fiduciary duty to the
Fund's shareholders and must place the interests of shareholders ahead of
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Directors, and could
result in severe penalties.
ADVISORY FEES
The Adviser receives an annual investment advisory fee equal to 0.85% 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.
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.
SUB-ADVISER'S BACKGROUND
Federated Global Research Corp., incorporated in Delaware on May 12, 1995, is a
registered investment adviser under the Investment Advisers Act of 1940.
The Adviser and sub-adviser are subsidiaries 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 son, J. Christopher Donahue, who is President and
Trustee of Federated Investors. The Adviser, Federated Global Research
Corp., 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. With over $120 billion invested across more than 300 funds under
management and/or administration by its subsidiaries, as of December 31, 1997,
Federated Investors is one of the largest mutual fund investment managers in the
United States. With more than 2,000 employees, Federated continues to be led by
the management who founded the company in 1955. Federated funds are presently at
work in and through approximately 4,000 financial institutions nationwide.
PORTFOLIO MANAGERS' BACKGROUNDS
Joseph M. Balestrino is the portfolio manager for the Fund and performs the
overall allocation of the assets of the Fund among the various asset
categories. He has performed these duties since July 1, 1996. In allocating
the Fund's assets, Mr. Balestrino evaluates the market environment and
economic outlook in each of the Fund's three major sectors. Mr. Balestrino
joined Federated Investors in 1986 and has been a Vice President of the
Fund's investment adviser and Federated Research Corp. since 1995. Mr.
Balestrino served as an Assistant Vice President of the investment adviser
and Federated Research Corp. from 1991 to 1995. Mr. Balestrino is a
Chartered Financial Analyst and received his Master's Degree in Urban and
Regional Planning from the University of Pittsburgh.
The portfolio managers for each of the individual asset categories are as
follows:
Mark E. Durbiano is the co-portfolio manager for the domestic corporate debt
category. He has served in this capacity since the fund's inception. Mr.
Durbiano joined Federated Investors in 1982 and has been a Senior Vice
President of the Fund's investment adviser and Federated Research Corp.
since January 1996. He served as a Vice President of the adviser and
Federated Research Corp. since 1988. Mr. Durbiano is a Chartered Financial
Analyst and received his M.B.A. in Finance from the University of
Pittsburgh.
Kathleen M. Foody-Malus is the portfolio manager for the U.S. government
securities category. Ms. Foody-Malus has served in this capacity since March
1995. Ms. Foody-Malus joined Federated Investors in 1983 and has been a Vice
President of the Fund's investment adviser and Federated Research Corp.
since 1993. Ms. Foody-Malus served as an Assistant Vice President of the
investment adviser and Federated Research Corp. from 1990 until 1992. Ms.
Foody-Malus received her M.B.A. in Accounting/Finance from the University of
Pittsburgh.
Henry A. Frantzen, Drew J. Collins, Robert M. Kowit, and Micheal W. Casey,
Ph.D. are the co-portfolio managers for the foreign government/foreign
corporate debt categories.
Henry A. Frantzen has served in this capacity since November 20, 1995. Mr.
Frantzen joined Federated Investors in 1995 as an Executive Vice President
of Federated Global Research Corp. and Federated Research Corp. Mr. Frantzen
served as Chief Investment Officer of international equities at Brown
Brothers Harriman & Co. from 1992 to 1995.
Drew J. Collins has served in this capacity since November 20, 1995. Mr.
Collins joined Federated Investors in 1995 as a Senior Vice President of
Federated Global Research Corp. and Federated Research Corp. Mr. Collins
served as Vice President/Portfolio Manager of international equity
portfolios at Arnhold and S. Bleichroeder, Inc. from 1994 to 1995. He served
as an Assistant Vice President/Portfolio Manager for international equities
at the College Retirement Equities Fund from 1986 to 1994. Mr. Collins is a
Chartered Financial Analyst and received his M.B.A. in finance from the
Wharton School of the University of Pennsylvania.
Robert M. Kowit has served in this capacity since November 20, 1995. Mr.
Kowit joined Federated Investors in 1995 as a Vice President of Federated
Global Research Corp. and Federated Research Corp. Mr. Kowit served as a
Managing Partner of Copernicus Global Asset Management from January 1995
through October 1995. From 1990 to 1994, he served as Senior Vice President
of International Fixed Income and Foreign Exchange for John Hancock
Advisers. Mr. Kowit received his M.B.A. from Iona College with a
concentration in finance.
Micheal W. Casey, Ph.D. has been the Fund's portfolio manager since January
1997. Mr. Casey joined Federated Investors in 1996 as an Assistant Vice
President of Federated Global Research Corp and Federated Research Corp. Mr.
Casey served as an International Economist and Portfolio Strategist for
Maria Fiorini Ramirez Inc. from 1990 to 1996. Mr. Casey earned a Ph.D.
concentrating in economics from The New School for Social Research and a
M.Sc. from the London School of Economics.
DISTRIBUTION OF CLASS F SHARES
Federated Securities Corp. is the principal distributor for shares of the
Fund. It is a Pennsylvania corporation organized on November 14, 1969, and
is the principal distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Investment Company Act of
1940 (the "Plan"), the distributor may be paid a fee by the Fund in an amount
computed at an annual rate of 0.50% of the average daily net asset value of the
Fund. The distributor may select financial institutions such as banks,
fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales services and distribution-related support
services as agents for their clients or customers.
The 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 entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors under which
the Fund may make payments up to 0.25% of the average daily net asset value of
shares to obtain certain personal services for shareholders and to maintain
shareholder accounts. Under the Shareholder Services Agreement, 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.
SUPPLEMENTAL 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.
In addition to payments made pursuant to the Plan and Shareholder Services
Agreement, Federated Securities Corp. and Federated Shareholder Services, from
their own assets, may pay financial institutions supplemental fees for the
performance of substantial sales services, distribution-related support
services, or shareholder services. 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 may 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 Adviser or its
affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by affiliates of Federated Investors as
specified below:
AVERAGE
MAXIMUM AGGREGATE
FEE DAILY NET ASSETS
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Services Company may choose voluntarily to waive a portion of its fee.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Director elections and
other matters submitted to shareholders for vote. All shares of each portfolio
or class 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.
Directors may be removed by the 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 Fund's outstanding shares
of all series entitled to vote.
As of November 7, 1997, MLPF&S, for the sole benefit of its customers,
Jacksonville, FL, owned 29.46% of the voting securities of the Fund's Class F
Shares and, therefore, may, for certain purposes, be deemed to control the Fund
and be able to affect the outcome of certain matters presented for a vote of
shareholders.
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.
STATE AND LOCAL TAXES
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 F
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 charge 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 B
Shares, Class C Shares, and Class F Shares.
From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
OTHER CLASSES OF SHARES
The Fund also offers other classes of Shares called Class A Shares, Class B
Shares, and Class C Shares.
Class A Shares are sold primarily to customers of financial institutions subject
to a front-end sales charge of up to 4.50%. Class A Shares are subject to a
minimum initial investment of $1,500, unless the investment is in a retirement
account, in which case the minimum investment is $250.
Class B Shares are sold primarily to customers of financial institutions at net
asset value. A contingent deferred sales charge is imposed on certain Class B
Shares which are redeemed within six full years of purchase. Class B 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 the Class B Shares' average daily net
assets, in addition to a shareholder services fee of 0.25% of the Class B
Shares' average daily net assets. Investments in Class B 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 $250.
Class C Shares are sold primarily to customers of financial institutions at net
asset value with no up-front sales charge. Class C Shares are distributed
pursuant to a Rule 12b-1 Plan adopted by the Fund whereby the distributor is
paid a fee of 0.75% of the Class C Shares' average daily net assets, in addition
to a shareholder services fee of 0.25% 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 $250.
All classes are subject to certain of the same expenses; however, the front-end
sales charge for Class F Shares is lower than that for Class A Shares. The
amount of dividends payable to Class A and Class F Shares will generally exceed
that of Class B and 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 four classes of shares.
Expense differences between Class A Shares, Class B Shares, Class C Shares, and
Class F Shares may affect the performance of each class.
To obtain more information and a combined prospectus for Class A Shares, Class B
Shares, and Class C Shares, investors may call 1-800-341-7400 or contact their
financial intermediary.
APPENDIX
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 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.
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. [Graphic]
FEDERATED STRATEGIC INCOME FUND
(A Portfolio of Fixed Income Securities, Inc.)
Class F Shares
Prospectus
January 31, 1998
A Diversified Portfolio of Fixed Income
Securities, Inc., an Open-End Management
Investment Company
FEDERATED STRATEGIC
INCOME FUND
CLASS F SHARES
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Advisers
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
SUB-ADVISER
Federated Global
Research Corp.
175 Water Street
New York, NY 10038-4965
CUSTODIAN
State Street Bank and
Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT
AND DIVIDEND
DISBURSING AGENT
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
INDEPENDENT
PUBLIC ACCOUNTANTS
Deloitte & Touche LLP
2500 One PPG Place
Pittsburgh, PA 15222-5401
[Graphic]
Federated Securities Corp., Distributor
1-800-341-7400
www.federatedinvestors.com
Cusip 338319882
4031801A-F (1/98)
[Graphic]
FEDERATED STRATEGIC INCOME FUND
(A PORTFOLIO OF FIXED INCOME SECURITIES, INC.)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
CLASS F SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the combined
prospectus for Class A Shares, Class B Shares, and Class C Shares, dated January
31, 1998, and the prospectus for Class F Shares, dated January 31, 1997, of
Federated Strategic Income Fund (the "Fund"). This Statement is not a prospectus
itself. You may request a copy of a prospectus or a paper copy of this charge by
calling 1-800-341-7400.
FEDERATED STRATEGIC INCOME FUND
FEDERATED INVESTORS FUNDS
5800 CORPORATE DRIVE
PITTSBURGH, PENNSYLVANIA 15237-7000
Statement dated January 31, 1998
[Graphic]
Federated Investors
Federated Securities Corp., Distributor
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 338319700 Cusip 338319866 Cusip 338319809 Cusip 338319882 G01288-02 (1/98)
[Graphic]
TABLE OF CONTENTS
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 8
FIXED INCOME SECURITIES, INC. MANAGEMENT 10
Fund Ownership 13
Directors Compensation 14
Director Liability 14
INVESTMENT ADVISORY SERVICES 14
Adviser to the Fund 14
Advisory Fees 14
OTHER SERVICES 15
Fund Administration 15
Custodian and Portfolio Recordkeeper 15
Transfer Agent 15
Independent Auditors 15
PURCHASING SHARES 16
Quantity Discounts and Accumulated Purchases 16
Concurrent Purchases 16
Letter of Intent 16
Reinvestment Privilege 16
Conversion of Class B Shares 17
Distribution of Shares 17
Distribution Plan (Class B Shares, Class C Shares, and Class F Shares)
and Shareholder Services Agreement 17
Conversion to Federal Funds 18
Purchases by Sales Representatives, Fund Directors, and Employees 18
DETERMINING NET ASSET VALUE 18
Determining Market Value of Securities 18
REDEEMING SHARES 19
Redemption in Kind 19
Contingent Deferred Sales Charge 19
TAX STATUS 20
The Fund's Tax Status 20
Foreign Taxes 20
Shareholders' Tax Status 20
TOTAL RETURN 20
YIELD 20
PERFORMANCE COMPARISONS 21
Economic and Market Information 22
ABOUT FEDERATED INVESTORS 22
Mutual Fund Market 22
Institutional Clients 22
Bank Marketing 22
Broker/Dealers and Bank Broker/Dealer Subsidiaries 23
FINANCIAL STATEMENTS 23
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. The Articles of Incorporation permit the Corporation to offer
separate series of shares representing interests in separate portfolios of
securities. As of the date of this prospectus, the Directors have established
three separate portfolios: Federated Strategic Income Fund, Federated Limited
Term Fund, and Federated Limited Term Municipal Fund. Effective January 31,
1996, the Fund Changed its name to Federated Strategic Income Fund and Fortress
Shares are now referred to as Class F Shares.
Shares of the Fund are offered in four classes known as Class A Shares, Class B
Shares, Class C Shares, and Class F Shares (individually and collectively
referred to as "Shares" as the context may require). This Statement of
Additional Information relates to all four of the above-mentioned classes of
Shares. 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 (the "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
DECS, or similar instruments marketed under different names, offer a substantial
dividend advantage with the possibility of unlimited upside potential if the
price of the underlying common stock exceeds a certain level. DECS convert to
common stock at maturity. The amount received is dependent on the price of the
common stock at the time of maturity. DECS contain two call options at different
strike prices. The DECS participate with the common stock up to the first call
price. They are effectively capped at that point unless the common stock rises
above a second price point, at which time they participate with unlimited upside
potential.
PERCS, or similar instruments marketed under different names, offer a
substantial dividend advantage, but capital appreciation potential is limited to
a predetermined level. PERCS are less risky and less volatile than the
underlying common stock because their superior income mitigates declines when
the common stock falls, while the cap price limits gains when the common stock
rises.
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 its net assets
in warrants. No more than 2% of the Fund's net assets, to be included in the
overall 5% limit on investments in warrants, may be warrants which are not
listed on the New York Stock Exchange or the American Stock Exchange. 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 readily marketable
securities, 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:
* the frequency of trades and quotes for the security;
* the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
* dealer undertakings to make a market in the security; and * the nature of
the security and the nature of the marketplace trades.
REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the securities subject to
repurchase agreements, and these securities are marked to market daily. To the
extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that a defaulting seller files for bankruptcy or
becomes insolvent, disposition of securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions such as broker/dealers which are deemed by the Fund's adviser to be
creditworthy pursuant to guidelines established by the Directors.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. A reverse repurchase
transaction is similar to borrowing cash. In a reverse repurchase agreement the
Fund transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future, the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and are maintained until the transaction is settled.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest in the securities of affiliated money market funds as an
efficient means of managing the Fund's uninvested cash.
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. For the fiscal years
ended November 30, 1997 and 1996, the Fund's portfolio turnover rates were 40%
and 47%, respectively. 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 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.
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, birthdates, present
positions with Fixed Income Securities, Inc., and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Director
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp. and Federated Global Research Corp.; Chairman, Passport Research, Ltd.;
Chief Executive Officer and Director or Trustee of the Funds.Mr. Donahue is the
father of J.Christopher Donahue, Executive Vice President of the Company.
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Director
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Director, Member
of Executive Committee, University of Pittsburgh; Director or Trustee of
the Funds.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Director
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; Partner or Trustee in private real
estate ventures in Southwest Florida; formerly, President, Naples Property
Management, Inc. and Northgate Village Development Corporation; Director or
Trustee of the Funds.
William J. Copeland
One PNC Plaza -- 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Director
Director and Member of the Executive Committee, Michael Baker, Inc.; formerly,
Vice Chairman and Director, PNCBank, N.A., and PNC Bank Corp.; Director, Ryan
Homes, Inc.; Director or Trustee of the Funds.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or
Trustee of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Director
Professor of Medicine, University of Pittsburgh; Medical Director, University of
Pittsburgh Medical Center -- Downtown; Member, Board of Directors, University of
Pittsburgh Medical Center; formerly, Hematologist, Oncologist, and Internist,
Presbyterian and Montefiore Hospitals; Director or Trustee of the Funds.
Edward L. Flaherty, Jr.@ Miller, Ament, Henny & Kochuba 205 Ross Street
Pittsburgh, PA Birthdate: June 18, 1924
Director
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Director
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street Boston
Corporation; Director or Trustee of the Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Director
President, Law Professor, Duquesne University; Consulting Partner, Mollica &
Murray; Director or Trustee of theFunds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Director
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., National Defense University and U.S. Space Foundation;
President Emeritus, University of Pittsburgh; Founding Chairman, National
Advisory Council for Environmental Policy and Technology, Federal Emergency
Management Advisory Board and Czech Management Center, Prague; Director or
Trustee of the Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Director
Public relations/Marketing/Conference Planning; Director or Trustee of the
Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services Company, and Federated Shareholder
Services; Director, Federated Services Company; President or Executive Vice
President of the Funds; Director or Trustee 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
Birthdate: October 22, 1930
Executive Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Shareholder Services Company; Trustee or Director of some of the Funds;
President, Executive Vice President and Treasurer of some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President , Secretary and Treasurer
Executive Vice President, Secretary, and Trustee, Federated Investors; Trustee,
Federated Advisers, Federated Management, and Federated Research; Director,
Federated Research Corp. and Federated Global Research Corp.; Trustee, Federated
Shareholder Services Company; Director, Federated Services Company; President
and Trustee, Federated Shareholder Services; Director, Federated Securities
Corp.; Executive Vice President and Secretary of the Funds; Treasurer of some of
the Funds.
* This Director is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the Board of
Directors handles the responsibilities of the Board between meetings of the
Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Arrow Funds; Automated Government
Money Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust
Series II; Cash Trust Series, Inc. ; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity
Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities,
Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Investment Portfolios; Federated Investment Trust; Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond
Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. -- 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; Peachtree Funds; RIMCO Monument Funds; Targeted Duration Trust;
Tax-Free Instruments Trust; The Planters Funds; The Starburst Funds; The
Starburst Funds II; The Virtus Funds; Trust for Financial Institutions; Trust
for Government Cash Reserves; Trust for Short-Term U.S.Government Securities;
Trust for U.S. Treasury Obligations; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Directors as a group own less than 1% of the Fund's outstanding
Class A Shares, Class B Shares, Class C Shares and Class F Shares.
As of January 7, 1998, the following shareholders of record owned 5% or more of
the outstanding Class A Shares of the Fund: TRUCOJO, Trust Company of St.
Joseph, St Joseph, MO, owned approximately 643,834 Shares (9.91%); Dollar
Bank/Federal Savings Bank Collateral Account for the benifit of Stanwix LP,
Pittsburgh, PA, owned approximately 480,639 Shares (7.39%), and BHC Securities
Inc., Trade House Acct., Philadelphia, PA, owned approximately 406,710 Shares
(6.26%).
As of January 7, 1998, no shareholder of record owned 5% or more of the
outstanding Class B Shares of the Fund.
As of January 7, 1998, the following shareholder of record owned 5% or more of
the outstanding Class C Shares of the Fund: MLPF&S, for the sole benefit of its
customers, Jacksonville, FL, owned approximately 694,389 Shares (23.30%).
As of January 7, 1998, the following shareholder of record owned 5% or more of
the outstanding Class F Shares of the Fund: MLPF&S, for the sole benefit of its
customers, Jacksonville, FL, owned approximately 855,236 Shares (29.46%).
DIRECTORS COMPENSATION
AGGREGATE
NAME, COMPENSATION TOTAL COMPENSATION PAID
POSITION WITH FROM TO DIRECTORS FROM
CORPORATION CORPORATION#* CORPORATION AND FUND COMPLEX+
John F. Donahue, $ -0- $0 for the Corporation and
Chairman and Director 56 investment companies
Richard B. Fisher, $ -0- $0 for the Corporation and
President and Director 6 investment companies
Thomas G. Bigley, $1,327 $111,222 for the Corporation and
Director 56 investment companies
John T. Conroy, Jr., $1,460 $122,362 for the Corporation and
Director 56 investment companies
William J. Copeland, $1,460 $122,362 for the Corporation and
Director 56 investment companies
James E. Dowd, $1,460 $122,362 for the Corporation and
Director 56 investment companies
Lawrence D. Ellis, M.D., $1,327 $111,222 for the Corporation and
Director 56 investment companies
Edward L. Flaherty, Jr., $1,460 $122,362 for the Corporation and
Director 56 investment companies
Peter E. Madden, $1,327 $111,222 for the Corporation and
Director 56 investment companies
John E. Murray, Jr., $1,327 $111,222 for the Corporation and
Director 56 investment companies
Wesley W. Posvar, $1,327 $111,222 for the Corporation and
Director 56 investment companies
Marjorie P. Smuts, $1,327 $111,222 for the Corporation and
Director 56 investment companies
# The aggregate compensation provided is for the Corporation which is comprised
of 3 portfolios.
* Information is furnished for the fiscal year ended November 30, 1997.
+ The information provided is for the last calendar year end.
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, the Adviser receives an annual investment advisory
fee as described in the respective prospectuses. For the fiscal years ended
November 30, 1997, 1996 and 1995, the Adviser earned $2,385,950, $629,398, and
$80,713, respectively, of which $1,027,369, $629,398, and $80,713, respectively,
was voluntarily waived. 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 guidelines established
by the Directors. The Adviser may select brokers and dealers who offer brokerage
and research services. These services may be furnished directly to the Fund or
to the Adviser and may include: advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry studies;
receipt of quotations for portfolio evaluations; and similar services. Research
services provided by brokers and dealers may be used by the Adviser or its
affiliates in advising the Fund 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. 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. During the fiscal year ended November 30, 1997, 1996 and 1995 the Fund
paid no brokerage commissions. Although investment decisions for the Fund
are made independently from those of the other accounts managed by the Adviser,
investments of the type the Fund may make may also be made by those other
accounts. When the Fund and one or more other accounts managed by the Adviser
are prepared to invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner believed by
the Adviser to be equitable to each. In some cases, this procedure may adversely
affect the price paid or received by the Fund or the size of the position
obtained or disposed of by the Fund. In other cases, however, it is believed
that coordination and the ability to participate in volume transactions will be
to the benefit of the Fund.
OTHER SERVICES
FUND ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in
the prospectuses. From March 1, 1994 to March 1, 1996, Federated
Administrative Services served as the Fund's Administrator. Prior to March
1, 1994, Federated Administrative Services, Inc. served as the Fund's
Administrator. Both former Administrators are subsidiaries of Federated
Investors. For purposes of this Statement of Additional Information,
Federated Services Company, Federated Administrative Services, and Federated
Administrative Services, Inc. may hereinafter collectively be referred to as
the "Administrators." For the fiscal years ended November 30, 1997, 1996 and
1995, the Administrators earned $214,990, $214,999, and $195,438,
respectively.
CUSTODIAN AND PORTFOLIO RECORDKEEPER
State Street Bank and Trust Company, Boston, MA, is custodian for the securities
and cash of the Fund. Federated Services Company, Pittsburgh, PA, provides
certain accounting and recordkeeping services with respect to the Fund's
portfolio investments. 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.
TRANSFER AGENT
Federated Services Company, through it registered transfer agent, Federated
Shareholder Services Company, maintains all necessary shareholder records. For
its services, the transfer agent receives a fee based on the size, type and
number of accounts and transactions made by shareholders.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Deloitte & Touche LLP, Pittsburgh,
Pennsylvania.
PURCHASING SHARES
Except under certain circumstances described in the respective prospectuses,
Shares are sold at their net asset value (plus a sales charge on Class A Shares
and Class F Shares only) on days the New York Stock Exchange is open for
business. The procedure for purchasing Shares is explained in the respective
prospectuses under "Investing in the Fund" and "Purchasing Shares." For further
information on any of the programs listed below please contact your financial
intermediary or Federated Securities Corp.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
As described in the prospectuses, larger purchases of the same Share class
reduce or eliminate the sales charge paid. For example, the Fund will combine
all Class A Shares purchases made on the same day, by the investor, the
investor's spouse, and the investor's children under age 21 when it calculates
the sales charge. This combined purchase option is available within Class F
shares as well. In addition, the sales charge, if applicable, is reduced for
purchases made at one time by a trustee or fiduciary for a single trust estate
or a single fiduciary account.
If an additional purchase into the same Share class is made, the Fund will
consider the previous purchases still invested in the Fund. For example, if a
shareholder already owns Class A Shares having a current value at the public
offering price of $90,000 and he purchases $10,000 more at the current public
offering price, the sales charge on the additional purchase according to the
schedule now in effect would be 3.75%, not 4.50%.
In addition, the Fund will also combine purchases for the purpose of reducing
the contingent deferred sales charge imposed on Class F Share redemptions. For
example, if a shareholder already owns Class F Shares having 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 Class F Shares.
To receive the sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial intermediary at the
time the purchase is made that Class A Shares or Class F Shares are already
owned or that purchases are being combined. The Fund will reduce or eliminate
the sales charge after it confirms the purchases.
CONCURRENT PURCHASES
Shareholders have the privilege of combining concurrent purchases of the same
Share class of two or more funds in the Federated Complex in calculating the
applicable sales charge.
To receive a sales charge reduction or elimination, Federated Securities Corp.
must be notified by the shareholder in writing or by his financial intermediary
at the time the concurrent purchases are made. The Fund will reduce or eliminate
the sales charge after it confirms the purchases.
LETTER OF INTENT
A Shareholder can sign a letter of intent committing to purchase a certain
amount of the same Share class within a 13month period in order to combine such
purchases in calculating the applicable sales charge. The Fund's custodian will
hold Shares in escrow equal to the maximum applicable sales charge. If the
shareholder completes the commitment, the escrowed Shares will be released to
their account. If the commitment is not completed within 13 months, the
custodian will redeem an appropriate number of escrowed Shares to pay for the
applicable sales charge.
The letter of intent for Class F Shares 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.
While this letter of intent will not obligate the shareholder to purchase Class
A Shares or Class F Shares, each purchase during the period will be at the sales
charge applicable to the total amount intended to be purchased. At the time a
letter of intent is established, current balances in accounts in any Class A
Shares or Class F Shares of any Federated Funds, excluding money market
accounts, will be aggregated to provide a purchase credit towards fulfillment of
the letter of intent. The letter may be dated as of a prior date to include any
purchase made within the past 90days. Prior trade prices will not be adjusted.
REINVESTMENT PRIVILEGE
The reinvestment privilege is available for all Shares of the Fund within the
same Share Class.
Class A and Class F shareholders who redeem from the Fund may reinvest the
redemption proceeds back into the same Share class at the next determined net
asset value without any sales charge. The original shares must have been subject
to a sales charge and the reinvestment must be within 120 days.
Similarly, Class C and Class F shareholders who redeem may reinvest their
redemption proceeds in the same Share class within 120 days. Class B Shares also
may be reinvested within 120 days of redemption, although such reinvestment will
be made into Class A Shares. Shareholders would not be entitled to a
reimbursement of the contingent deferred sales charge if paid at the time of
redemption on any Share class. However, reinvested shares would not be subject
to a contingent deferred sales charge, if otherwise applicable, upon later
redemption.
In addition, if the Shares were reinvested through a financial intermediary, the
financial intermediary would not be entitled to an advanced payment from
Federated Securities Corp. on the reinvested Shares, if otherwise applicable.
Federated Securities Corp. must be notified by the shareholder in writing or by
his financial intermediary of the reinvestment in order to eliminate a sales
charge or a contingent deferred sales charge. If the shareholder redeems Shares
in the Fund, there may be tax consequences.
CONVERSION OF CLASS B SHARES
Class B Shares will automatically convert into Class A Shares on or around the
15th of the month eight full years from the purchase date and will no longer be
subject to a fee under the distribution plan. For purposes of conversion to
Class A Shares, Shares purchased through the reinvestment of dividends and
distributions paid on Class B Shares will be considered to be held in a separate
sub-account. Each time any Class B Shares in the shareholder's account (other
than those in the sub-account) convert to Class A Shares, an equal pro rata
portion of the Class B Shares in the sub-account will also convert to Class A
Shares. The conversion of Class B Shares to Class A Shares is subject to the
continuing availability of a ruling from the Internal Revenue Service or an
opinion of counsel that such conversions will not constitute taxable events for
federal tax purposes. There can be no assurance that such ruling or opinion will
be available, and the conversion of Class B Shares to Class A Shares will not
occur if such a ruling or opinion is not available. In such event, Class B
Shares would continue to be subject to higher expenses than Class A Shares for
an indefinite period.
DISTRIBUTION OF SHARES
Federated Securities Corp. is the principal distributor for Shares of the
Fund.
DISTRIBUTION PLAN (CLASS B SHARES, CLASS C SHARES, AND CLASS F SHARES) AND
SHAREHOLDER SERVICES AGREEMENT
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 Plan, (Class B Shares, Class C Shares and Class F Shares) the
Directors expect 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.
Federated Investors and its subsidiaries may benefit from arrangements where the
Rule 12b-1 Plan fees related to Class B Shares may be paid to third-party
financial providers who have advanced commissions to financial intermediaries.
For the fiscal year ended November 30, 1997, the Fund paid shareholder services
fees in the amount of $101,371 for Class A Shares, none of which were waived.
For the fiscal year ended November 30, 1997, payments in the amount of
$1,496,166 were made pursuant to the Plan for Class B Shares, none of which were
waived. In addition, for the same period, the Fund paid shareholder services
fees in the amount of $498,722 for Class B Shares, none of which were waived.
For the fiscal year ended November 30, 1997, payments in the amount of $126,860
were made pursuant to the Plan for Class C Shares, none of which were waived. In
addition, for the same periods, the Fund paid shareholder services fees in the
amount of $42,286 for Class C Shares, none of which were waived.
For the fiscal year ended November 30, 1997, payments in the amount of $118,741
were made pursuant to the Plan for Class F Shares, all of which were waived. In
addition, for the same periods, the Fund paid shareholder services fees in the
amount of $59,371 for Class F Shares, none of which were waived. 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.
PURCHASES BY SALES REPRESENTATIVES, FUND DIRECTORS, AND EMPLOYEES The
following individuals and their immediate family members may buy Class A Shares
and Class F Shares at net asset value without a sales charge:
* Directors, employees, and sales representatives of the Fund, Federated
Advisers, and Federated Securities Corp. and its affiliates;
* Federated Life Members (Class A Shares only); and
* any associated person of an investment dealer who has a sales agreement
with Federated Securities Corp. Shares may also be sold without a sales
charge to trusts, pensions, or profit-sharing plans for these individuals.
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
The Fund's net asset value per Share fluctuates and is based on the market value
of all securities and other assets of the Fund. The net asset value for each
class of Shares may differ due to the variance in daily net income realized by
each class.
Net asset value is not determined on (i) days on which there are not sufficient
changes in the value of the Fund's portfolio securities that its net asset value
might be materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; or (iii) the following
holidays: New Year's Day, Martin Luther King Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:
* as provided by an independent pricing service; for short-term obligations,
according to the mean bid and asked prices, as furnished by an independent
pricing service, or for short-term obligations with remaining maturities of
less than 60 days at the time of purchase, at amortized cost unless the
Directors determine this is not fair value; or
* at fair value as determined in good faith by the Directors.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider:
* yield;
* quality;
* coupon rate;
* maturity;
* type of issue;
* trading characteristics; and
* other market data.
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
respective prospectuses under "Redeeming and Exchanging Shares." Although the
transfer agent does not charge for telephone redemptions, it reserves the right
to charge a fee for the cost of wire-transferred redemptions of less than
$5,000. REDEMPTION IN KIND
Although the Fund intends to redeem Shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the Fund's portfolio.
Redemption in kind will be made in conformity with applicable SEC rules, taking
such securities at the same value employed in determining net asset value and
selecting the securities in a manner the Directors determine to be fair and
equitable.
The Corporation has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Corporation is obligated to redeem Shares
for any shareholder in cash up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period. 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.
CONTINGENT DEFERRED SALES CHARGE
In computing the amount of the applicable Contingent Deferred Sales Charge,
redemptions are deemed to have occurred in the following order: (1) Shares
acquired through the reinvestment of dividends and long-term capital gains; (2)
Shares held for more than six full years from the date of purchase with respect
to Class B Shares and one full year from the date of purchase with respect to
Class C Shares; (3) Shares held for fewer than six years with respect to Class B
Shares and for less than one full year from the date of purchase with respect to
Class C Shares on a first-in, first-out basis.
ELIMINATION OF THE CONTINGENT DEFERRED SALES CHARGE -- CLASS B SHARES
To qualify for elimination of the contingent deferred sales charge through a
Systematic Withdrawal Program, the redemptions of Class B Shares must be from an
account that is at least 12 months old, has all Fund distributions reinvested in
Fund Shares, and has an account value of at least $10,000 when the Systematic
Withdrawal Program is established. Qualifying redemptions may not exceed 1.00%
monthly of the account value as periodically determined by the Fund. The amounts
that a shareholder may withdraw under a Systematic Withdrawal Program that
qualify for elimination of the Contingent Deferred Sales Charge may not exceed
12% annually with reference initially to the value of the Class B Shares upon
establishment of the Systematic Withdrawal Program and then as calculated at the
annual valuation date. Redemptions on a qualifying Systematic Withdrawal Program
can be made at a rate of 1.00% monthly, 3.00% quarterly, or 6.00% semi-annually
with reference to the applicable account valuation amount. Amounts that exceed
the 12.00% annual limit for redemption, as described, may be subject to the
Contingent Deferred Sales Charge. To the extent that a shareholder exchanges
Shares for Class B Shares of other Federated Funds, the time for which the
exchanged-for Shares are to be held will be added to the time for which
exchanged-from Shares were held for purposes of satisfying the 12-month holding
requirement. However, for purposes of meeting the $10,000 minimum account value
requirement, Class B Share accounts will be not be aggregated. Any Shares
purchased prior to the termination of this program would have the contingent
deferred sales charge eliminated as provided in the Fund's prospectus at the
time of the purchase of the Shares. TAX STATUS
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code, applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
* derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
* invest in securities within certain statutory limits; and * distribute to
its shareholders at least 90% of its net income earned
during the year.
FOREIGN TAXES
Investment income on certain foreign securities in which the Fund may invest may
be subject to foreign withholding or other taxes that could reduce the return on
these securities. Tax treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign taxes to which the Fund
would be subject.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional shares. The Fund's dividends, and any short-term
capital gains, are taxable as ordinary income.
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 returns based on offering price for the
following periods ended November 30, 1997 were:
DATE OF INITIAL
PUBLIC
SHARE CLASS INVESTMENT ONE-YEAR SINCE INCEPTION
Class A 5/3/94 3.49% 9.03%
Class B 7/27/95 1.64% 9.17%
Class C 4/29/94 6.50% 9.61%
Class F 5/9/94 6.18% 9.63%
The average annual total return for all classes of Shares of the Fund is the
average compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of Shares owned at the
end of the period by the offering price per Share at the end of the period. The
number of Shares owned at the end of the period is based on the number of Shares
purchased at the beginning of the period with $1,000, less any applicable sales
charge, adjusted over the period by any additional Shares, assuming a quarterly
reinvestment of all dividends and distributions. Any applicable contingent
deferred sales charge is deducted from the ending value of the investments based
on the lesser of the original purchase price or the offering price of Shares
redeemed.
YIELD
The Fund's yields for the thirty-day period ended November 30, 1997 were:
SHARE CLASS YIELD
Class A 7.90%
Class B 7.50%
Class C 7.50%
Class F 8.19%
The yield for all classes of Shares of the Fund is determined by dividing the
net investment income per Share (as defined by the Securities and Exchange
Commission) earned by any class of Shares over a thirty-day period by the
maximum offering price per Share of any class of Shares on the last day of the
period. This value is then annualized using semi-annual compounding. This means
that the amount of income generated during the thirty-day period is assumed to
be generated each month over a twelve-month period and is reinvested every six
months. The yield does not necessarily reflect income actually earned by any
class of 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 any
class of Shares, the performance will be reduced for those shareholders
paying those fees.
PERFORMANCE COMPARISONS
The performance of each class of Shares depends upon such variables as:
* portfolio quality;
* average portfolio maturity;
* type of instruments in which the portfolio is invested; * changes in
interest rates and market value of portfolio securities; * changes in the
Fund's or a class of Shares' expenses; and * various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and net asset value per Share fluctuate daily. Both net earnings and net asset
value per Share are factors in the computation of yield and total return.
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:
* 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.
* 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.
* Lehman Brothers High Yield Index covers the universe of fixed rate,
publicly issued, noninvestment grade debt registered with the SEC. All
bonds included in the High Yield Index must be dollar-denominated and
nonconvertible and have at least one year remaining to maturity and an
outstanding par value of at least $100 million. Generally securities must
be rated Ba1 or lower by Moodys Investors Service, including defaulted
issues. If no Moodys rating is available, bonds must be rated BB+ or lower
by S&P; and if no S&P rating is available, bonds must be rated below
investment grade by Fitch Investor's Service. A small number of unrated
bonds is included in the index; to be eligible they must have previously
held a high yield rating or have been associated with a high yield issuer,
and must trade accordingly.
* 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 various sales charges on Class A Shares, Class B Shares, Class C
Shares, and Class F Shares.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Fund may include discussions of
economic, financial, and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by Fund portfolio managers and their views and analysis on how such
developments could affect the Funds. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute.
ABOUT FEDERATED INVESTORS
Federated Investors is dedicated to meeting investor needs which is reflected in
its investment decision making --structured, straightforward, and consistent.
This has resulted in a history of competitive performance with a range of
competitive investment products that have gained the confidence of thousands of
clients and their customers.
The company's disciplined security selection process is firmly rooted in sound
methodologies backed by fundamental and technical research. Investment decisions
are made and executed by teams of portfolio managers, analysts, and traders
dedicated to specific market sectors. Traders handle trillions of dollars in
annual trading volume.
In the corporate bond sector, as of December 31, 1997, Federated Investors
managed 12 money market funds and 16 bond funds with assets approximating $22.5
billion and $5.6 billion, respectively. Federated's corporate bond decision
making-based on intensive, diligent credit analysis-is backed by over 22 years
of experience in the corporate bond sector. In 1972, Federated introduced one of
the first high-yield bond funds in the industry. In 1983, Federated was one of
the first fund managers to participate in the asset-backed securities market, a
market totaling more than $200 billion.
In the government sector, as of December 31, 1997, Federated Investors managed 9
mortgage-backed, 6 government/agency and 17 government money market mutual
funds, with assets approximating $5.9 billion, $1.5 billion and $29.7 billion,
respectively. Federated trades approximately $400 million in U.S. government and
mortgage-backed securities daily and places approximately $23 billion in
repurchase agreements each day. Federated introduced the first U.S. government
fund to invest in U.S. government bond securities in 1969. Federated has been a
major force in the short- and intermediate-term government markets since 1982
and currently manages nearly $36billion in government funds within these
maturity ranges.
J. Thomas Madden, Executive Vice President, oversees Federated Investors' equity
and high yield corporate bond management while William D. Dawson, Executive Vice
President, oversees Federated Investors' domestic fixed income management. Henry
A. Frantzen, Executive Vice President, oversees the management of Federated
Investors' international portfolios.
MUTUAL FUND MARKET
Thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $4.4 trillion to the more than 6,700 funds available.*
Federated Investors, through its subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:
INSTITUTIONAL CLIENTS
Federated Investors meets the needs of more than 4,000 institutional clients
nationwide by managing and servicing separate accounts and mutual funds for a
variety of applications, including defined benefit and defined contribution
programs, cash management, and asset/liability management. Institutional clients
include corporations, pension funds, tax-exempt entities,
foundations/endowments, insurance companies, and investment and financial
advisors. The marketing effort to these institutional clients is headed by John
B. Fisher, President, Institutional Sales Division.
BANK MARKETING
Other institutional clients include close relationships with more than 1,600
banks and trust organizations. Virtually all of the trust divisions of the top
100 bank holding companies use Federated funds in their clients' portfolios. The
marketing effort to trust clients is headed by Timothy C. Pillion, Senior Vice
President, Bank Marketing & Sales.
* Source: Investment Company Institute
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated funds are available to consumers through major brokerage firms
nationwide -- we have over 2,200 broker/dealer and bank broker/dealer
relationships across the country -- supported by more wholesalers than any other
mutual fund distributor. Federated's service to financial professionals and
institutions has earned it high ratings in several surveys performed by DALBAR,
Inc. DALBAR is recognized as the industry benchmark for service quality
measurement. The marketing effort to these firms is headed by James F. Getz,
President, Federated Securities Corp.
FINANCIAL STATEMENTS
The Financial Statements for the fiscal year ended November 30, 1997, are
incorporated herein by reference to the Annual Report of the Fund dated November
30, 1997 (File Nos. 33-43472 and 811-6447). A copy of this report may be
obtained without charge by contacting the Fund.
PART C. OTHER INFORMATION.
Item 24. Financial Statements and Exhibits:
(a) Financial Statements: Incorporated by reference to the Registrant's
Annual Report to Shareholders dated November 30, 1997
(File Nos. 33-43472 and 811-6447).
(b) Exhibits:
(1) Conformed copy of Articles of Incorporation of the
Registrant; (1) (i) Conformed copy of Articles
Supplementary (dated April 28, 1993); (12) (ii)
Conformed copy of Articles Supplementary (dated August
6, 1993); (15) (iii) Conformed copy of Articles
Supplementary (dated November 24, 1993); (12) (iv)
Conformed copy of Articles Supplementary (dated February
25, 1994); (12) (v) Conformed copy of Articles
Supplementary (dated June 1, 1994); (12)
(2) Copy of By-Laws of the Registrant; (1)
(3) Not applicable;
(4) Copy of Specimen Certificates for Shares of Capital Stock of the
Registrant;
(i) Federated Limited Term Fund-Class A Shares and
Class F Shares; (18)
(ii) Federated Limited Term Municipal Fund-Class A Shares and
Class F Shares; (18)
(iii) Federated Strategic Income Fund-Class A Shares,
Class B Shares, Class C Shares and Class F Shares; (18)
(5) Conformed copy of Investment Advisory Contract; (7)
(i) Conformed Copy of Exhibit A to Investment Advisory
Contract; (7) (ii) Conformed copy of Exhibit B to
Investment Advisory Contract; (7) (iii) Conformed copy
of Exhibit C to Investment Advisory Contract; (12) (iv)
Conformed Copy of Exhibit D to Investment Advisory
Contract (9)
+ All Exhibits filed electronically.
1. Response is incorporated by reference to Registrant's Initial Registration
Statement on Form N-1A filed October 23, 1991. (File Nos. 33-43472 and
811-6447)
7. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 5 on Form N-1A filed October 21, 1993. (File Nos. 33-43472
and 811-6447)
9. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 7 on Form N-1A filed December 14, 1993. (File Nos. 33-43472
and 811-6447)
12. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 12 on Form N-1A filed July 26, 1994. (File Nos. 33-43472 and
811-6447)
15. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 15 on Form N-1A filed January 27, l995. (File Nos 33-43472
and 811-6447)
18. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 20 on Form N-1A filed January 28, l997. (File Nos 33-43472
and 811-6447)
<PAGE>
(v) Conformed Copy of Exhibit E to Investment Advisory
Contract; (11) (vi) Conformed copy of Sub-Advisory
Agreement; (18)
(6) (i) Conformed copy of Distributor's Contract of
the Registrant through and including
Exhibits A-J; (14)
(ii) Conformed copy of new exhibit J to the
Distributor's Contract of the Registrant; (18) (iii)
Conformed copy of Registrant's
Class B Shares Distributor's Contract; +
(iv) The Registrant hereby incorporates the conformed
copy of the specimen Mutual Funds Sales and Service
Agreement; Mutual Funds Service Agreement and Plan
Trustee/Mutual Funds Service Agreement from Item 24(b)6
of the Cash Trust Series II Registration Statement on
Form N-1A, filed with the Commission on July 24, 1995.
(File Nos. 33- 38550 and 811-6269)
(7) Not applicable;
(8) Conformed copy of Custodian Agreement of the Registrant;
(17) (i) Conformed copy of Domestic Custody Fee
Schedule; (19)
(9) (i) Conformed copy of Agreement for Fund Accounting
Services, Administrative Services, Transfer Agency
Services and Custody Services Procurement; (18) (ii)
Conformed copy of Amended and Restated Shareholder
Services Agreement; + (iii) Conformed copy of Class B
Shares Shareholder Services Agreement; + (iv) Conformed
copy of Class B Shares Principal Shareholder Servicer's
Agreement; + (v) The responses described in Item 24(b)6
are hereby incorporated by reference.
+ All Exhibits filed electronically.
11. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 9 on Form N-1A filed February 3, 1994. (File Nos. 33-43472
and 811-6447)
14. Response is incorporated by reference to Registrant's Post Effective
Amendment No. 13 on Form N-1A filed September, 21, 1994 (File Nos. 33-43472
and 811-6447)
17. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 18 on Form N-1A filed January 26, l996 (File Nos 33-43472 and
811-6447)
18. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 20 on Form N-1A filed January 28, l997. (File Nos 33-43472
and 811-6447)
19. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 21 on Form N-1A filed November 25, l997. (File Nos 33-43472
and 811-6447)
<PAGE>
(vi) On behalf of Federated Strategic Income Fund, the
Registrant hereby incorporates the conformed copy of the
Shareholder Services Sub-Contract between National
Pensions Alliance, Ltd. and Federated Shareholder
Services from Item 24(b)(9)(ii) of the Federated GNMA
Trust Registration Statement on Form N-1A, filed with
the Commission on March 25, 1996. (File Nos. 2-75670 and
811-3375); (vii) On behalf of Federated Strategic Income
Fund, the Registrant hereby incorporates the conformed
copy of the Shareholder Services Sub-Contract between
Fidelity and Federated Shareholder Services from Item
24(b)(9)(iii) of the Federated GNMA Trust Registration
Statement on Form N-1A, filed with the Commission on
March 25, 1996. (File nos. 2-75670 and 811-3375);
(10) Conformed copy of Opinion and Consent of Counsel as to
legality of shares being registered; (15)
(11) Conformed copy of consent of Independent Auditors; +
(12) Not Applicable;
(13) Conformed copy of Initial Capital
Understanding; (2)
(14) Not Applicable;
(15) (i) Conformed copy of Distribution Plan; (6)
(ii) Conformed copies of Exhibits B, C, D, E, F, G, and
H to 12b-1 Plan; (12) (iii) Conformed copy of Exhibit A
to 12b-1 Plan; (14) (iv) Conformed copy of Exhibit I to
the Distribution Plan; (16) (v) The responses described
in Item 24(b)6 are hereby incorporated by reference.
(vi) Conformed copy of Exhibit 1 and Schedule A of
the Distribution Plan for the Registrant's
Class B Shares; +
+ All Exhibits filed electronically.
2. Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed December 19, 1991. (File Nos. 33-43472
and 811-6447)
6. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 4 on Form N-1A filed July 7, 1993. (File Nos. 33-43472 and
811-6447)
12. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 12 on Form N-1A filed July 26, 1994. (File Nos. 33-43472 and
811-6447)
14. Response is incorporated by reference to Registrant's Post Effective
Amendment No. 13 on Form N-1A filed September 21, 1994 (File Nos. 33-43472
and 811-6447)
15. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 15 on Form N-1A filed January 27, l995 (File Nos 33-43472 and
811-6447)
16. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 16 on Form N-1A filed July 11, l995 (File Nos 33-43472 and
811-6447)
<PAGE>
(16) (i) Copy of Schedule for Computation of Fund Performance Data for
Limited Term Municipal Fund; (9)
(ii) Copy of Schedule for Computation of Fund Performance Data for
Strategic Income Fund; (14)
(iii) Copy of Schedule for Computation of Fund Performance Data for
Limited Term Fund; (13)
(17) Copy of Financial Data Schedules; +
(18) The Registrant hereby incorporates the conformed copy
of the specimen Multiple Class Plan from Item 24(b)(18)
of the World Investment Series, Inc. Registration
Statement on Form N-1A, filed with the Commission on
January 26, 1996.
(File Nos. 33-52149 and 811-07141)
(19) Conformed copy of Power of Attorney; (18)
(i) Amendment No. l to Schedule l to Limited
Power of Attorney; (16)
Item 25. Persons Controlled by or Under Common Control with Registrant:
None
Item 26. Number of Holders of Securities:
Number of Record Holders
Title of Class as of January 7, 1998_
Shares of capital stock
($0.001 per Share par value)
Federated Limited Term Fund - Class A Shares 6,498
Federated Limited Term Fund - Class F Shares 495
Federated Limited Term Municipal Fund - Class A Shares 830
Federated Limited Term Municipal Fund - Class F Shares 414
Federated Strategic Income Fund - Class A Shares 2,099
Federated Strategic Income Fund - Class B Shares 13,422
Federated Strategic Income Fund - Class C Shares 1,042
Federated Strategic Income Fund - Class F Shares 963
Item 27. Indemnification: (2)
+ All Exhibits filed electronically.
2. Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed December 19, 1991. (File Nos. 33-43472
and 811-6447)
9. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 7 on Form N-1A filed December 14, 1993. (File Nos. 33-43472
and 811-6447)
13. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 1 on Form N-1A filed June 15, 1992. (File Nos. 33-43472 and
811-6447)
14. Response is incorporated by reference to Registrant's Post Effective
Amendment No. 13 on Form N-1A filed September 21, 1994 (File Nos. 33-43472
and 811-6447)
16. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 16 on Form N-1A filed July 11, l995 (File Nos 33-43472 and
811-6447)
18. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 20 on Form N-1A filed January 28, l997. (File Nos 33-43472
and 811-6447)
<PAGE>
Item 28. Business and Other Connections of Investment Adviser:
(a) For a description of the other business of the investment adviser, see
the section entitled "Fixed Income Securities, Inc. Information -
Management of the Corporation" in Part A. The affiliations with the
Registrant of four of the Trustees and one of the Officers of the
investment adviser are included in Part B of this Registration
Statement "Fixed Income Securities, Inc. Management." The remaining
Trustee of the investment adviser, his position with the investment
adviser, and, in parentheses, his principal occupation is: Mark D.
Olson (Partner, Wilson, Halbrook & Bayard), 107 W. Market Street,
Georgetown, Delaware 19947.
The remaining Officers of the investment adviser are:
Executive Vice Presidents: William D. Dawson, III
Henry A. Frantzen
J. Thomas Madden
Senior Vice Presidents: Peter R. Anderson
Drew J. Collins
Jonathan C. Conley
Deborah A. Cunningham
Mark E. Durbiano
J. Alan Minteer
Susan M. Nason
Mary Jo Ochson
Robert J. Ostrowski
Vice Presidents: J. Scott Albrecht
Joseph M. Balestrino
Randall S. Bauer
David F. Belton
David A. Briggs
Kenneth J. Cody
Alexandre de Bethmann
Michael P. Donnelly
Linda A. Duessel
Donald T. Ellenberger
Kathleen M. Foody-Malus
Thomas M. Franks
Edward C. Gonzales
James E. Grefenstette
Susan R. Hill
Stephen A. Keen
Robert K. Kinsey
Robert M. Kowit
Jeff A. Kozemchak
Steven Lehman
Marian R. Marinack
Sandra L. McInerney
Charles A. Ritter
Scott B. Schermerhorn
Frank Semack
Aash M. Shah
Christopher Smith
William F. Stotz
Tracy P. Stouffer
Edward J. Tiedge
Paige M. Wilhelm
Jolanta M. Wysocka
<PAGE>
Assistant Vice Presidents: Todd A. Abraham
Stefanie L. Bachhuber
Arthur J. Barry
Micheal W. Casey
Robert E. Cauley
Donna M. Fabiano
John T. Gentry
William R. Jamison
Constantine Kartsonsas
Joseph M. Natoli
Keith J. Sabol
Michael W. Sirianni
Gregg S. Tenser
Secretary: Stephen A. Keen
Treasurer: Thomas R. Donahue
Assistant Secretaries: Thomas R. Donahue
Richard B. Fisher
Christine I. McGonigle
Assistant Treasurer: Richard B. Fisher
The business address of each of the Officers of the investment adviser
is Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779.
These individuals are also officers of a majority of the investment
advisers to the Funds listed in Part B of this Registration Statement.
Item 29. Principal Underwriters:
(a) Federated Securities Corp. the Distributor for shares of the
Registrant, acts as principal underwriter for the following open-end investment
companies, including the Registrant:
111 Corcoran Funds; Automated Government Money Trust; Blanchard Funds; Blanchard
Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG
Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated
Adjustable Rate U.S. Government Fund, Inc.; Federated American Leaders Fund,
Inc.; Federated ARMs Fund; Federated Equity Funds; Federated Equity Income Fund,
Inc.; Federated Fund for U.S. Government Securities, Inc.; Federated GNMA Trust;
Federated Government Income Securities, Inc.; Federated Government Trust;
Federated High Income Bond Fund, Inc.; Federated High Yield Trust; Federated
Income Securities Trust; Federated Income Trust; Federated Index Trust;
Federated Institutional Trust; Federated Insurance Series; Federated Investment
Portfolios; Federated Investment Trust; Federated Master Trust; Federated
Municipal Opportunities Fund, Inc.; Federated Municipal Securities Fund, Inc.;
Federated Municipal Trust; Federated Short-Term Municipal Trust; Federated
Short-Term U.S. Government Trust; Federated Stock and Bond Fund, Inc.; Federated
Stock Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.;
Federated U.S. Government Bond Fund; Federated U.S. Government Securities Fund:
1-3 Years; Federated U.S. Government Securities Fund: 2-5 Years; Federated U.S.
Government Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First
Priority Funds; Fixed Income Securities, Inc.; High Yield Cash Trust;
Independence One Mutual Funds; Intermediate Municipal Trust; International
Series, Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty
U.S. Government Money Market Trust; Liquid Cash Trust; Managed Series Trust;
Marshall Funds, Inc.; Money Market Management, Inc.; Money Market Obligations
Trust; Money Market Obligations Trust II; Money Market Trust; Municipal
Securities Income Trust; Newpoint Funds; Peachtree Funds; RIMCO Monument Funds;
SouthTrust Vulcan Funds; Star Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; The Planters Funds; The Virtus Funds; The Wachovia Funds; The
Wachovia Municipal Funds; Tower Mutual Funds; Trust for Financial Institutions;
Trust for Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; Vision Group of Funds, Inc.;
and World Investment Series, Inc.
Federated Securities Corp. also acts as principal underwriter for the following
closed-end investment company: Liberty Term Trust, Inc.- 1999.
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Distributor With Registrant
Richard B. Fisher Director, Chairman, Chief President
Federated Investors Tower Executive Officer, Chief and Director
Pittsburgh, PA 15222-3779 Operating Officer, Asst.
Secretary and Asst.
Treasurer, Federated
Securities Corp.
Edward C. Gonzales Director, Executive Vice Executive Vice
Federated Investors Tower President, Federated, President
Pittsburgh, PA 15222-3779 Securities Corp.
Thomas R. Donahue Director, Assistant Secretary
Federated Investors Tower and Assistant Treasurer
Pittsburgh, PA 15222-3779 Federated Securities Corp
James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David M. Taylor Executive Vice President --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard W. Boyd Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Laura M. Deger Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
<PAGE>
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Distributor With Registrant
Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Solon A. Person, IV Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas E. Territ Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Teresa M. Antoszyk Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John B. Bohnet Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Byron F. Bowman Vice President, Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Leonard Corton, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Kevin J. Crenny Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Distributor With Registrant
Daniel T. Culbertson Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
G. Michael Cullen Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William C. Doyle Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John K. Goettlicher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Craig S. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Bruce E. Hastings Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Beth A. Hetzel Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James E. Hickey Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Brian G. Kelly Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
H. Joseph Kennedy Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Distributor With Registrant
Richard C. Mihm Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas A. Peters III Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard A. Recker Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
George D. Riedel Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John Rogers Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Brian S. Ronayne Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas S. Schinabeck Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Edward L. Smith Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John A. Staley Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Distributor With Registrant
Richard Suder Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Paul A. Uhlman Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Miles J. Wallace Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John F. Wallin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Edward J. Wojnarowski Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael P. Wolff Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Edward R. Bozek Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Terri E. Bush Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Charlene H. Jennings Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Denis McAuley Treasurer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Leslie K. Platt Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
<PAGE>
Item 30. Location of Accounts and Records:
All accounts and records required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 through 31a-3 promulgated
thereunder are maintained at one of the following locations:
Registrant Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Shareholder Services Company P.O. Box 8600
"Transfer Agent, Dividend Boston, MA 02266-8600
Disbursing Agent and Portfolio
Recordkeeper"
Federated Services Company Federated Investors Tower
"Administrator" Pittsburgh, PA 15222-3779
Federated Advisers Federated Investors Tower
"Adviser" Pittsburgh, PA 15222-3779
Federated Global Research Corp. 175 Water Street
"Sub-Adviser" New York, NY 10038-4965
State Street Bank and Trust Company P.O. Box 8600
"Custodian" Boston, Massachusetts 02266-8600
Item 31. Management Services: Not applicable.
Item 32. Undertakings: (2)
Registrant hereby undertakes to comply with the provisions of
Section 16(c) of the 1940 Act with respect to the removal of
Directors and the calling of special shareholder meetings by
shareholders.
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrant's latest annual
report to shareholders, upon request and without charge.
2. Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed December 19, 1991. (File No. 33-43472
and 811-6447)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, FIXED INCOME SECURITIES, INC.,
certifies that it meets all of the requirements for effectiveness of this
amendment to its Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Pittsburgh and Commonwealth of Pennsylvania, on the
28th day of January 1998.
FIXED INCOME SECURITIES, INC.
BY: /s/ J. Crilley Kelly
J. Crilley Kelly, Assistant Secretary
Attorney in Fact for John F. Donahue
January 28, 1998
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to its Registration Statement has been signed below by the following person in
the capacity and on the date indicated:
NAME TITLE DATE
By: /s/ J. Crilley Kelly
J. Crilley Kelly Attorney In Fact January 28, 1998
ASSISTANT SECRETARY For the Persons
Listed Below
NAME TITLE
John F. Donahue* Chairman and Director
(Chief Executive Officer)
Richard B. Fisher* President and Director
Edward C. Gonzales* Executive Vice President
John W. McGonigle* Treasurer, Executive
Vice President and
Secretary
(Principal Financial and
Accounting Officer)
Thomas G. Bigley* Director
John T. Conroy, Jr.* Director
William J. Copeland* Director
James E. Dowd* Director
Lawrence D. Ellis, M.D.* Director
Edward L. Flaherty, Jr.* Director
Peter E. Madden* Director
John E. Murray, Jr.* Director
Wesley W. Posvar* Director
Marjorie P. Smuts* Director
* By Power of Attorney
Exhibit 6(iii) under Form N-1A
Exhibit 1 under Item 601/Reg. S-K
DISTRIBUTOR'S CONTRACT
AGREEMENT made this 24th day of October, 1997, by and between those
Investment Companies on behalf of the Portfolios and Classes of Shares
listed on Schedule A to Exhibit 1, as may be amended from time to time,
having their principal place of business at Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779, and who have approved this form of
Agreement, and FEDERATED SECURITIES CORP. ("FSC"), a Pennsylvania
Corporation. Each of the Exhibits hereto is incorporated herein in its
entirety and made a part hereof. In the event of any inconsistency between
the terms of this Agreement and the terms of any applicable Exhibit, the
terms of the applicable Exhibit shall govern.
In consideration of the mutual covenants hereinafter contained, it is
hereby agreed by and between the parties hereto as follows:
1. Each of the Investment Companies hereby appoint FSC as agent to sell and
distribute shares of the Investment Companies which may be offered in
one or more series (the "Funds") consisting of one or more classes (the
"Classes") of shares (the "Shares"), as described and set forth on one
or more exhibits to this Agreement, at the current offering price
thereof as described and set forth in the current Prospectuses of the
Funds. FSC hereby accepts such appointment and agrees to provide such
other services for the Investment Companies, if any, and accept such
compensation from the Investment Companies, if any, as set forth in the
applicable exhibits to this Agreement.
2. The sale of any Shares may be suspended without prior notice whenever in
the judgment of the applicable Investment Company it is in its best
interest to do so.
3. Neither FSC nor any other person is authorized by the Investment
Companies to give any information or to make any representation
relative to any Shares other than those contained in the Registration
Statement, Prospectuses, or Statements of Additional Information
("SAIs") filed with the Securities and Exchange Commission, as the
same may be amended from time to time, or in any supplemental
information to said Prospectuses or SAIs approved by the Investment
Companies. FSC agrees that any other information or representations
other than those specified above which it or any dealer or other
person who purchases Shares through FSC may make in connection with
the offer or sale of Shares, shall be made entirely without liability
on the part of the Investment Companies. No person or dealer, other
than FSC, is authorized to act as agent for the Investment Companies
for any purpose. FSC agrees that in offering or selling Shares as
agent of the Investment Companies, it will, in all respects, duly
conform to all applicable state and federal laws and the rules and
regulations of the National Association of Securities Dealers, Inc.,
including its Rules of Fair Practice. FSC will submit to the
Investment Companies copies of all sales literature before using the
same and will not use such sales literature if disapproved by the
Investment Companies.
4. This Agreement is effective with respect to each Class as of the date
of execution of the applicable exhibit and shall continue in effect
with respect to each Class presently set forth on an exhibit and any
subsequent Classes added pursuant to an exhibit during the initial
term of this Agreement for one year from the date set forth above, and
thereafter for successive periods of one year if such continuance is
approved at least annually by the Trustees/Directors of the Investment
Companies including a majority of the members of the Board of
Trustees/Directors of the Investment Companies who are not interested
persons of the Investment Companies and have no direct or indirect
financial interest in the operation of any Distribution Plan relating
to the Investment Companies or in any related documents to such Plan
("Disinterested Trustees/Directors") cast in person at a meeting
called for that purpose. If a Class is added after the first annual
approval by the Trustees/Directors as described above, this Agreement
will be effective as to that Class upon execution of the applicable
exhibit and will continue in effect until the next annual approval of
this Agreement by the Trustees/Directors and thereafter for successive
periods of one year, subject to approval as described above.
5. This Agreement may be terminated with regard to a particular Fund or
Class at any time, without the payment of any penalty, by the vote of a
majority of the Disinterested Trustees/Directors or by a majority of the
outstanding voting securities of the particular Fund or Class on not
more than sixty (60) days' written notice to any other party to this
Agreement.
6. This Agreement may not be assigned by FSC and shall automatically
terminate in the event of an assignment by FSC as defined in the
Investment Company Act of 1940, as amended, provided, however, that FSC
may employ such other person, persons, corporation or corporations as it
shall determine in order to assist it in carrying out its duties under
this Agreement.
7. FSC shall not be liable to the Investment Companies 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
by this Agreement.
8. This Agreement may be amended at any time by mutual agreement in writing
of all the parties hereto, provided that such amendment is approved by
the Trustees/Directors of the Investment Companies including a majority
of the Disinterested Trustees/Directors of the Investment Companies cast
in person at a meeting called for that purpose.
9. This Agreement shall be construed in accordance with and governed by the
laws of the Commonwealth of Pennsylvania.
10. (a) Subject to the conditions set forth below, the Investment
Companies agree to indemnify and hold harmless FSC and each person, if
any, who controls FSC within the meaning of Section 15 of the
Securities Act of 1933 and Section 20 of the Securities Act of 1934,
as amended, against any and all loss, liability, claim, damage and
expense whatsoever (including but not limited to any and all expenses
whatsoever reasonably incurred in investigating, preparing or
defending against any litigation, commenced or threatened, or any
claim whatsoever) arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement, any Prospectuses or SAIs (as from time to time
amended and supplemented) or the omission or alleged omission
therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading, unless such
statement or omission was made in reliance upon and in conformity with
written information furnished to the Investment Companies about FSC by
or on behalf of FSC expressly for use in the Registration Statement,
any Prospectuses and SAIs or any amendment or supplement thereof.
If any action is brought against FSC or any controlling person
thereof with respect to which indemnity may be sought against any
Investment Company pursuant to the foregoing paragraph, FSC shall
promptly notify the Investment Company in writing of the
institution of such action and the Investment Company shall assume
the defense of such action, including the employment of counsel
selected by the Investment Company and payment of expenses. FSC or
any such controlling person thereof shall have the right to employ
separate counsel in any such case, but the fees and expenses of
such counsel shall be at the expense of FSC or such controlling
person unless the employment of such counsel shall have been
authorized in writing by the Investment Company in connection with
the defense of such action or the Investment Company shall not
have employed counsel to have charge of the defense of such
action, in any of which events such fees and expenses shall be
borne by the Investment Company. Anything in this paragraph to the
contrary notwithstanding, the Investment Companies shall not be
liable for any settlement of any such claim of action effected
without their written consent. The Investment Companies agree
promptly to notify FSC of the commencement of any litigation or
proceedings against the Investment Companies or any of their
officers or Trustees/Directors or controlling persons in
connection with the issue and sale of Shares or in connection with
the Registration Statement, Prospectuses, or SAIs.
(b) FSC agrees to indemnify and hold harmless the Investment
Companies, each of its Trustees/Directors, each of its officers
who have signed the Registration Statement and each other person,
if any, who controls the Investment Companies within the meaning
of Section 15 of the Securities Act of 1933, but only with
respect to statements or omissions, if any, made in the
Registration Statement or any Prospectus, SAI, or any amendment
or supplement thereof in reliance upon, and in conformity with,
information furnished to the Investment Companies about FSC by or
on behalf of FSC expressly for use in the Registration Statement
or any Prospectus, SAI, or any amendment or supplement thereof.
In case any action shall be brought against any Investment
Company or any other person so indemnified based on the
Registration Statement or any Prospectus, SAI, or any amendment
or supplement thereof, and with respect to which indemnity may be
sought against FSC, FSC shall have the rights and duties given to
the Investment Companies, and the Investment Companies and each
other person so indemnified shall have the rights and duties
given to FSC by the provisions of subsection (a) above.
(c) Nothing herein contained shall be deemed to protect any person
against liability to the Investment Companies or their
shareholders to which such person would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence in
the performance of the duties of such person or by reason of the
reckless disregard by such person of the obligations and duties of
such person under this Agreement.
(d) Insofar as indemnification for liabilities may be permitted
pursuant to Section 17 of the Investment Company Act of 1940, as
amended, for Trustees/Directors, officers, FSC and controlling
persons of the Investment Companies by the Trustees/Directors
pursuant to this Agreement, the Investment Companies are aware of
the position of the Securities and Exchange Commission as set
forth in the Investment Company Act Release No. IC-11330.
Therefore, the Investment Companies undertakes that in addition
to complying with the applicable provisions of this Agreement, in
the absence of a final decision on the merits by a court or other
body before which the proceeding was brought, that an
indemnification payment will not be made unless in the absence of
such a decision, a reasonable determination based upon factual
review has been made (i) by a majority vote of a quorum of
non-party Disinterested Trustees/Directors, or (ii) by
independent legal counsel in a written opinion that the
indemnitee was not liable for an act of willful misfeasance, bad
faith, gross negligence or reckless disregard of duties. The
Investment Companies further undertakes that advancement of
expenses incurred in the defense of a proceeding (upon
undertaking for repayment unless it is ultimately determined that
indemnification is appropriate) against an officer,
Trustees/Directors, FSC or controlling person of the Investment
Companies will not be made absent the fulfillment of at least one
of the following conditions: (i) the indemnitee provides security
for his undertaking; (ii) the Investment Companies is insured
against losses arising by reason of any lawful advances; or (iii)
a majority of a quorum of non-party Disinterested
Trustees/Directors or independent legal counsel in a written
opinion makes a factual determination that there is reason to
believe the indemnitee will be entitled to indemnification.
Error! Reference source not found.=*trust "11.FSC is hereby expressly put on
notice of the limitation of liability as set forth in the Declaration of Trust
and agrees that the obligations assumed by the Trust pursuant to this Agreement
shall be limited "
11. If at any time the Shares of any Fund are offered in two or more
Classes, FSC agrees to adopt compliance standards as to when a class of
shares may be sold to particular investors.
12. This Agreement will become binding on the parties hereto upon the
execution of the attached exhibits to the Agreement.
<PAGE>
Exhibit 1
to the
Distributor's Contract
The following provisions are hereby incorporated and made part of the
Distributor's Contract (the "Distributor's Contract") dated October 24, 1997,
between the Investment Companies and Federated Securities Corp. as principal
distributor (the "Principal Distributor") with respect to the Class B Shares of
the portfolios (the "Funds") set forth on the attached Schedule A. References
herein to this Distributor's Contract refer to the Distributor's Contract as
supplemented hereby and made applicable hereby to the Class B Shares of the
Funds. In the event of any inconsistency between the terms of this Exhibit and
the terms of the Distributor's Contract, the terms of this Exhibit will govern.
Once effective in respect of the Class of Shares of any Fund set forth above,
the Distributors Contract as amended by this Exhibit shall be effective in
respect of all shares of such class outstanding whether issued prior to or after
such effectiveness.
1. The Investment Companies hereby appoints the Principal Distributor to
engage in activities principally intended to result in the sale of Class B
Shares ("Class B Shares") of each Fund. Pursuant to this appointment, the
Principal Distributor is authorized to select a group of financial
institutions ("Financial Institutions") to sell Class B Shares of a Fund
at the current offering price thereof as described and set forth in the
respective prospectuses of the Fund.
2. (a) In consideration of the Principal Distributor's services under this
Distributor's Contract in respect of each Fund the Investment Companies
on behalf of the Fund agree: (I) to pay the Principal Distributor or at
its direction its "Allocable Portion" (as hereinafter defined) of a fee
(the "Distribution Fee") equal to 0.75 of 1% per annum of the average
daily net asset value of the Class B Shares of the Fund outstanding
from time to time, and (II) to withhold from redemption proceeds in
respect of Class B Shares of the Fund such Principal Distributor's
Allocable Portion of the Contingent Deferred Sales Charges ("CDSCs")
payable in respect of such redemption as provided in the Prospectus for
the Fund and to pay the same over to such Principal Distributor or at
its direction at the time the redemption proceeds in respect of such
redemption are payable to the holder of the Class B Shares redeemed.
(b)The Principal Distributor will be deemed to have performed all
services required to be performed in order to be entitled to receive
its Allocable Portion of the Distribution Fee payable in respect of the
Class B Shares of a Fund upon the settlement of each sale of a
"Commission Share" (as defined in the Allocation Schedule attached
hereto as Schedule B) of the Fund taken into account in determining
such Principal Distributor's Allocable Portion of such Distribution
Fees.
(c)Notwithstanding anything to the contrary set forth in this Exhibit,
the Distributor's Contract or (to the extent waiver thereof is
permitted thereby) applicable law, the Investment Companies' obligation
to pay the Principal Distributor's Allocable Portion of the
Distribution Fees payable in respect of the Class B Shares of a Fund
shall not be terminated or modified for any reason (including a
termination of this Distributor's Contract as it relates to Class B
Shares of a Fund) except to the extent required by a change in the
Investment Company Act of 1940 (the "Act") or the Conduct Rules of the
National Association of Securities Dealers, Inc., in either case
enacted or promulgated after May 1, 1997, or in connection with a
"Complete Termination" (as hereinafter defined) of the Distribution
Plan in respect of the Class B Shares of a Fund.
(d)The Investment Companies will not take any action to waive or change
any CDSC in respect of the Class B Shares of a Fund, except as provided
in the Investment Companies' prospectus or statement of additional
information as in effect as of the date hereof without the consent of
the Principal Distributor and the permitted assigns of all or any
portion of its right to its Allocable Portion of the CDSCs.
(e)Notwithstanding anything to the contrary set forth in this Exhibit,
the Distributor's Contract, or (to the extent waiver thereof is
permitted thereby) applicable law, neither the termination of the
Principal Distributor's role as principal distributor of the Class B
Shares of a Fund, nor the termination of this Distributor's Contract
nor the termination of the Distribution Plan will terminate such
Principal Distributor's right to its Allocable Portion of the CDSCs in
respect of the Class B Shares of a Fund.
(f)Notwithstanding anything to the contrary in this Exhibit, the
Distributor's Contract, or (to the extent waiver thereof is permitted
thereby) applicable law, the Principal Distributor may assign, sell or
pledge (collectively, a "Transfer") its rights to its Allocable Portion
of the Distribution Fees and CDSCs earned by it (but not its
obligations to the Investment Companies under this Distributor's
Contract) in respect of the Class B Shares of a Fund to raise funds to
make the expenditures related to the distribution of Class B Shares of
the Fund and in connection therewith upon receipt of notice of such
Transfer, the Investment Companies shall pay, or cause to be paid to
the assignee, purchaser or pledgee (collectively with their subsequent
transferees, "Transferees") such portion of the Principal Distributor's
Allocable Portion of the Distribution Fees and CDSCs in respect of the
Class B Shares of the Fund so Transferred. Except as provided in (c)
above and notwithstanding anything to the contrary set forth elsewhere
in this Exhibit, the Distributor's Contract, or (to the extent waiver
thereof is permitted thereby) applicable law, to the extent the
Principal Distributor has Transferred its rights thereto to raise funds
as aforesaid, the Investment Companies' obligation to pay to the
Principal Distributor's Transferees the Principal Distributor's
Allocable Portion of the Distribution Fees payable in respect of the
Class B Shares of each Fund shall be absolute and unconditional and
shall not be subject to dispute, offset, counterclaim or any defense
whatsoever, including without limitation, any of the foregoing based on
the insolvency or bankruptcy of the Principal Distributor (it being
understood that such provision is not a waiver of the Investment
Companies' right to pursue such Principal Distributor and enforce such
claims against the assets of such Principal Distributor other than the
Distributor's right to the Distribution Fees, CDSCs and servicing fees,
in respect of the Class B Shares of any Fund which have been so
transferred in connection with such Transfer). The Fund agrees that
each such Transferee is a third party beneficiary of the provisions of
this clause (f) but only insofar as those provisions relate to
Distribution Fees and CDSCs transferred to such Transferee.
(g)For purposes of this Distributor's Contract, the term Allocable
Portion of Distribution Fees payable in respect of the Class B Shares
of any Fund shall mean the portion of such Distribution Fees allocated
to such Principal Distributor in accordance with the Allocation
Schedule attached hereto as Schedule B.
(h)For purposes of this Distributor's Contract, the term "Complete
Termination" of the Plan in respect of any Fund means a termination of
the Plan involving the complete cessation of the payment of
Distribution Fees in respect of all Class B Shares of such Fund, and
the termination of the distribution plans and the complete cessation of
the payment of distribution fees pursuant to every other Distribution
Plan pursuant to rule 12b-1 of the Investment Companies in respect of
such Fund and any successor Fund or any Fund acquiring a substantial
portion of the assets of such Fund and for every future class of shares
which has substantially similar characteristics to the Class B Shares
of such Fund including the manner of payment and amount of sales
charge, contingent deferred sales charge or other similar charges borne
directly or indirectly by the holders of such shares.
3. The Principal Distributor may enter into separate written agreements with
various firms to provide certain of the services set forth in Paragraph 1
herein. The Principal Distributor, in its sole discretion, may pay
Financial Institutions a lump sum fee on the settlement date for the sale
of each Class B Share of the Fund to their clients or customers for
distribution of such share. The schedules of fees to be paid such firms or
Financial Institutions and the basis upon which such fees will be paid
shall be determined from time to time by the Principal Distributor in its
sole discretion.
4. The Principal Distributor will prepare reports to the Board of
Trustees/Directors of the Investment Companies on a quarterly basis
showing amounts expended hereunder including amounts paid to Financial
Institutions and the purpose for such expenditures.
In consideration of the mutual covenants set forth in the Distributor's
Contract between the Investment Companies and the Principal Distributor, the
Principal Distributor and the Investment Companies hereby execute and deliver
this Exhibit with respect to the Class B Shares of the Fund.
<PAGE>
Witness the due execution hereof this 24th day of October, 1997.
ATTEST: INVESTMENT COMPANIES (listed on Schedule A)
By: /s/ S. Elliott Cohan By: /s/ John W. McGonigle
Title: Assistant Secretary` Title: Executive Vice President
ATTEST: FEDERATED SECURITIES CORP.
By: /s/ Leslie K. Platt By: /s/ Byron F. Bowman
Title: Assistant Secretary Title: Vice President
<PAGE>
Schedule A
Date: 10/24/97 DISTRIBUTOR'S CONTRACT
Federated American Leaders Fund, Inc.
Class B Shares
Federated Equity Funds
Federated Aggressive Growth Fund
Class B Shares
Federated Growth Strategies Fund
Class B Shares
Federated Small Cap Strategies Fund
Class B Shares
Federated Capital Appreciation Fund
Class B Shares
Federated Equity Income Fund, Inc.
Class B Shares
Federated Fund for U.S. Government Securities, Inc.
Class B Shares
Federated Government Income Securities, Inc.
Class B Shares
Federated High Income Bond Fund, Inc.
Class B Shares
Federated Municipal Opportunities Fund, Inc.
Class B Shares
Federated Municipal Securities Fund, Inc.
Class B Shares
Federated Stock and Bond Fund, Inc.
Class B Shares
Federated Utility Fund, Inc.
Class B Shares
Fixed Income Securities, Inc.
Federated Strategic Income Fund
Class B Shares
International Series, Inc.
Federated International Equity Fund
Class B Shares
Federated International Income Fund
Class B Shares
<PAGE>
Investment Series Funds, Inc.
Federated Bond Fund
Class B Shares
Liberty U.S. Government Money Market Trust
Class B Shares
Municipal Securities Income Trust
Federated Pennsylvania Municipal Income Fund
Class B Shares
World Investment Series, Inc.
Federated World Utility Fund
Class B Shares
Federated Asia Pacific Growth Fund
Class B Shares
Federated Emerging Markets Fund
Class B Shares
Federated European Growth Fund
Class B Shares
Federated International Small Company Fund
Class B Shares
Federated Latin American Growth Fund
Class B Shares
Federated International High Income Fund
Class B Shares
Federated International Growth Fund
Class B Shares
The following Funds were added as of December 1, 1997:
Municipal Securities Income Trust
Federated California Municipal Income Fund
Class B Shares
World Investment Series, Inc.
Federated Global Equity Income Fund
Class B shares
Exhibit 9(ii) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
Amended and Restated
SHAREHOLDER SERVICES AGREEMENT
THIS AGREEMENT, amended and restated as of the first day of September,
1995, (originally made and enterered into as of the first day of March, 1994),
by and between those investment companies listed on Exhibit 1, as may be amended
from time to time, having their principal office and place of business at
Federated Investors Tower, Pittsburgh, PA 15222-3779 and who have approved this
form of Agreement (individually referred to herein as a "Fund" and collectively
as "Funds") and Federated Shareholder Services, a Delaware business trust,
having its principal office and place of business at Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779 ("FSS").
1. The Funds hereby appoint FSS to render or cause to be rendered personal
services to shareholders of the Funds and/or the maintenance of accounts
of shareholders of the Funds ("Services"). In addition to providing
Services directly to shareholders of the Funds, FSS is hereby appointed
the Funds' agent to select, negotiate and subcontract for the performance
of Services. FSS hereby accepts such appointments. FSS agrees to provide
or cause to be provided Services which, in its best judgment (subject to
supervision and control of the Funds' Boards of Trustees or Directors, as
applicable), are necessary or desirable for shareholders of the Funds. FSS
further agrees to provide the Funds, upon request, a written description
of the Services which FSS is providing hereunder.
2. During the term of this Agreement, each Fund will pay FSS and FSS agrees
to accept as full compensation for its services rendered hereunder a fee
at an annual rate, calculated daily and payable monthly, up to 0.25% of 1%
of average net assets of each Fund.
For the payment period in which this Agreement becomes effective or
terminates with respect to any Fund, there shall be an appropriate
proration of the monthly fee on the basis of the number of days that this
Agreement is in effect with respect to such Fund during the month.
3. This Agreement shall continue in effect for one year from the date of its
execution, and thereafter for successive periods of one year only if the
form of this Agreement is approved at least annually by the Board of each
Fund, including a majority of the members of the Board of the Fund who are
not interested persons of the Fund ("Independent Board Members") cast in
person at a meeting called for that purpose.
4. Notwithstanding paragraph 3, this Agreement may be terminated as follows:
(a) at any time, without the payment of any penalty, by the vote of a
majority of the Independent Board Members of any Fund or by a vote of
a majority of the outstanding voting securities of any Fund as
defined in the Investment Company Act of 1940 on sixty (60) days'
written notice to the parties to this Agreement;
(b) automatically in the event of the Agreement's assignment as defined in
the Investment Company Act of 1940; and
(c) by any party to the Agreement without cause by giving the other party at
least sixty (60) days' written notice of its intention to terminate.
5. FSS agrees to obtain any taxpayer identification number certification from
each shareholder of the Funds to which it provides Services that is
required under Section 3406 of the Internal Revenue Code, and any
applicable Treasury regulations, and to provide each Fund or its designee
with timely written notice of any failure to obtain such taxpayer
identification number certification in order to enable the implementation
of any required backup withholding.
6. FSS shall not be liable for any error of judgment or mistake of law or for
any loss suffered by any Fund in connection with the matters to which this
Agreement relates, except a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or
from reckless disregard by it of its obligations and duties under this
Agreement. FSS shall be entitled to rely on and may act upon advice of
counsel (who may be counsel for such Fund) on all matters, and shall be
without liability for any action reasonably taken or omitted pursuant to
such advice. Any person, even though also an officer, trustee, partner,
employee or agent of FSS, who may be or become a member of such Fund's
Board, officer, employee or agent of any Fund, shall be deemed, when
rendering services to such Fund or acting on any business of such Fund
(other than services or business in connection with the duties of FSS
hereunder) to be rendering such services to or acting solely for such Fund
and not as an officer, trustee, partner, employee or agent or one under the
control or direction of FSS even though paid by FSS.
This Section 6 shall survive termination of this Agreement.
7. No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the
party against which an enforcement of the change, waiver, discharge or
termination is sought.
8. FSS is expressly put on notice of the limitation of liability as set forth
in the Declaration of Trust of each Fund that is a Massachusetts business
trust and agrees that the obligations assumed by each such Fund pursuant
to this Agreement shall be limited in any case to such Fund and its assets
and that FSS shall not seek satisfaction of any such obligations from the
shareholders of such Fund, the Trustees, Officers, Employees or Agents of
such Fund, or any of them.
9. The execution and delivery of this Agreement have been authorized by the
Trustees of FSS and signed by an authorized officer of FSS, acting as
such, and neither such authorization by such Trustees nor such execution
and delivery by such officer shall be deemed to have been made by any of
them individually or to impose any liability on any of them personally,
and the obligations of this Agreement are not binding upon any of the
Trustees or shareholders of FSS, but bind only the trust property of FSS
as provided in the Declaration of Trust of FSS.
10. Notices of any kind to be given hereunder shall be in writing (including
facsimile communication) and shall be duly given if delivered to any Fund
and to such Fund at the following address: Federated Investors Tower,
Pittsburgh, PA 15222-3779, Attention: President and if delivered to FSS at
Federated Investors Tower, Pittsburgh, PA 15222-3779, Attention:
President.
11. This Agreement constitutes the entire agreement between the parties hereto
and supersedes any prior agreement with respect to the subject hereof
whether oral or written. If any provision of this Agreement shall be held
or made invalid by a court or regulatory agency decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected thereby.
Subject to the provisions of Sections 3 and 4, hereof, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto
and their respective successors and shall be governed by Pennsylvania law;
provided, however, that nothing herein shall be construed in a manner
inconsistent with the Investment Company Act of 1940 or any rule or
regulation promulgated by the Securities and Exchange Commission
thereunder.
12. This Agreement may be executed by different parties on separate
counterparts, each of which, when so executed and delivered, shall be an
original, and all such counterparts shall together constitute one and the
same instrument.
13. This Agreement shall not be assigned by any party without the prior
written consent of FSS in the case of assignment by any Fund, or of the
Funds in the case of assignment by FSS, except that any party may assign
to a successor all of or a substantial portion of its business to a party
controlling, controlled by, or under common control with such party.
Nothing in this Section 14 shall prevent FSS from delegating its
responsibilities to another entity to the extent provided herein.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
Investment Companies (listed on Exhibit
1)
Attest: /s/John W. McGonigle By: /s/ John F. Donahue
John W. McGonigle John F. Donahue
Secretary Chairman
Federated Shareholder Services
Attest: /s/ Joseph M Huber By: /s/ John W. McGonigle
Secretary President
<PAGE>
Exhibit 1
to the
Amended and Restated Shareholder Services Agreement
Automated Government Money Trust
Cash Trust Series, Inc.:
Government Cash Series
Municipal Cash Series
Prime Cash Series
Treasury Cash Series
Federated Adjustable Rate U.S. Government Fund, Inc.
Federated American Leaders Fund, Inc.
Class A Shares
Class C Shares
Class F Shares
Federated ARMs Fund
Institutional Service Shares
Institutional Shares
Federated Core Trust:
High Yield Bond Portfolio
Federated Equity Funds:
Federated Aggressive Growth Fund
Class A Shares
Class C Shares
Federated Capital Appreciation Fund
Class A Shares
Class C Shares
Federated Growth Strategies Fund
Class A Shares
Class C Shares
Federated Small Cap Strategies Fund
Class A Shares
Class C Shares
Federated Equity Income Fund, Inc.
Class A Shares
Class C Shares
Class F Shares
Federated Fund for U.S. Government Securities, Inc.
Class A Shares
Class C Shares
Federated GNMA Trust
Institutional Service Shares
Institutional Shares
Federated Government Income Securities, Inc.
Class A Shares
Class C Shares
Class F Shares
Federated Government Trust"
Automated Government Cash Reserves
Automated Treasury Cash Reserves
U.S. Treasury Cash Reserves
Institutional Service Shares
Institutional Shares
Federated High Income Bond Fund, Inc.
Class A Shares
Class C Shares
Federated High Yield Trust
Federated Income Securities Trust:
Federated Short-Term Income Fund
Institutional Service Shares
Institutional Shares
Federated Intermediate Income Fund
Institutional Service Shares
Institutional Shares
Federated Income Trust
Institutional Service Shares
Institutional Shares
Federated Index Trust:
Federated Max-Cap Fund
Class C Shares
Institutional Service Shares
Institutional Shares
Federated Mid-Cap Fund
Federated Mini-Cap Fund
Class C Shares
Institutional Shares
Federated Institutional Trust:
Federated Institutional Short-Term Government Fund
Federated Investment Trust:
Federated Bond Index Fund
Institutional Shares
Institutional Service Shares
Federated Master Trust
Federated Municipal Opportunities Fund, Inc.
Class A Shares
Class C Shares
Class F Shares
Federated Municipal Securities Fund, Inc.
Class A Shares
Class C Shares
Federated Municipal Trust:
Alabama Municipal Cash Trust
California Municipal Cash Trust
Institutional Service Shares
Institutional Shares
Connecticut Municipal Cash Trust
Institutional Service Shares
Florida Municipal Cash Trust
Cash II Shares
Institutional Shares
Georgia Municipal Cash Trust
Maryland Municipal Cash Trust
Massachusetts Municipal Cash Trust
Institutional Service Shares
Boston 1784 Funds Shares
Michigan Municipal Cash Trust
Institutional Service Shares
Institutional Shares
Minnesota Municipal Cash Trust
Cash Series Shares
Institutional Shares
New Jersey Municipal Cash Trust
Institutional Service Shares
Institutional Shares
New York Municipal Cash Trust
Cash II Shares
Institutional Service Shares
North Carolina Municipal Cash Trust
Ohio Municipal Cash Trust
Cash II Shares
Institutional Shares
Institutional Service Shares
Pennsylvania Municipal Cash Trust
Cash Series Shares
Institutional Service Shares
Institutional Shares
Tennessee Municipal Cash Trust
Institutional Shares
Institutional Service Shares
Virginia Municipal Cash Trust
Institutional Service Shares
Institutional Shares
Federated Short-Term Municipal Trust
Institutional Service Shares
Institutional Shares
Federated Short-Term U.S. Government Trust
Federated Stock and Bond Fund, Inc.
Class A Shares
Class C Shares
Federated Stock Trust
Federated Tax-Free Trust
Federated U.S. Government Bond Fund
Federated U.S. Government Securities Fund: 1-3 Years
Institutional Service Shares
Institutional Shares
Federated U.S. Government Securities Fund: 2-5 Years
Institutional Service Shares
Institutional Shares
Federated U. S. Government Securities Fund: 5-10 Years
Institutional Service Shares
Institutional Shares
Fixed Income Securities, Inc.:
Federated Limited Term Fund
Class A Shares
Class F Shares
Federated Limited Term Municipal Fund
Class A Shares
Class F Shares
<PAGE>
Federated Strategic Income Fund
Class A Shares
Class C Shares
Class F Shares
Federated Total Return Series, Inc.:
Federated Limited Duration Government Fund
Institutional Shares
Institutional Service Shares
Federated Total Return Bond Fund
Institutional Shares
Institutional Service Shares
Federated Total Return Government Fund
Institutional Shares
Institutional Service Shares
Federated Total Return Limited Duration Fund
Institutional Shares
Institutional Service Shares
Federated Utility Fund, Inc.
Class A Shares
Class C Shares
Class F Shares
Intermediate Municipal Trust:
Federated Intermediate Municipal Trust
Federated Pennsylvania Intermediate Municipal Trust
International Series, Inc.:
Federated International Equity Fund
Class A Shares
Class C Shares
Federated International Income Fund
Class A Shares
Class C Shares
Investment Series Funds, Inc.:
Federated Bond Fund
Class A Shares
Class C Shares
Class F Shares
Edward D. Jones & Co. Daily Passport Cash Trust
Liberty Term Trust, Inc. -- 1999
Liberty U.S. Government Money Market Trust
Class A Shares
Liquid Cash Trust
Managed Series Trust:
Federated Aggressive Growth Fund
Institutional Shares
Select Shares
Federated Managed Growth and Income Fund
Institutional Shares
Select Shares
Federated Managed Growth Fund
Institutional Shares
Select Shares
<PAGE>
Federated Managed Income Fund
Institutional Shares
Select Shares
Money Market Management, Inc.
Money Market Obligations Trust:
Automated Cash Management Trust
Cash II Shares
Institutional Shares
Government Obligations Fund
Institutional Shares
Institutional Service Shares
Government Obligations Tax-Managed Fund
Institutional Shares
Institutional Service Shares
Prime Obligations Fund
Institutional Shares
Institutional Service Shares
Tax-Free Obligations Fund
Institutional Shares
Institutional Service Shares
Treasury Obligations Fund
Institutional Capital Shares
Institutional Shares
Institutional Service Shares
Money Market Obligations Trust II:
Municipal Obligations Fund
Institutional Capital Shares
Institutional Service Shares
Institutional Shares
Prime Cash Obligations Fund
Institutional Capital Shares
Institutional Service Shares
Institutional Shares
Prime Value Obligations Fund
Institutional Capital Shares
Institutional Service Shares
Institutional Shares
Money Market Trust
Municipal Securities Income Trust:
Federated California Municipal Income Fund
Class F Shares
Federated Michigan IntermediateMunicipal Trust
Federated New York Municipal Income Fund
Class F Shares
Federated Ohio Municipal Income Fund
Class F Shares
Federated Pennsylvania Municipal Income Fund
Class A Shares
<PAGE>
Tax-Free Instruments Trust
Institutional Service Shares
Investment Shares
Trust for Government Cash Reserves
Trust for Short-Term U.S. Government Securities
Trust for U.S. Treasury Obligations
World Investment Series, Inc.:
Federated Asia Pacific Growth Fund
Class A Shares
Class C Shares
Federated Emerging Markets Fund
Class A Shares
Class C Shares
Federated European Growth Fund
Class A Shares
Class C Shares
Federated Global Equity Income Fund
Class A Shares
Class C Shares
Federated International Growth Fund
Class A Shares
Class C Shares
Federated International High Income Fund
Class A Shares
Class C Shares
Federated International Small Company Fund
Class A Shares
Class C Shares
Federated Latin American Growth Fund
Class A Shares
Class C Shares
Federated World Utility Fund
Class A Shares
Class C Shares
Class F Shares
Exhibit 9(iii) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
SHAREHOLDER SERVICES AGREEMENT
THIS AGREEMENT, is made as of the 24th day of October, 1997, by and between
those Investment Companies on behalf of the Portfolios (individually referred to
herein as a "Fund" and collectively as "Funds") and Classes of Shares
("Classes") listed on Schedule A to Exhibit 1, as it may be amended from time to
time, having their principal office and place of business at Federated Investors
Tower, Pittsburgh, PA 15222-3779 and who have approved this form of Agreement
and Federated Securities Corp.("FSC"), a Pennsylvania Corporation, having its
principal office and place of business at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779 and Federated Shareholder Services, a Delaware business
trust, having its principal office and place of business at Federated Investors
Tower, Pittsburgh, Pennsylvania 15222-3779 ("FSS"). Each of the Exhibits hereto
is incorporated herein in its entirety and made a part hereof. In the event of
any inconsistency between the terms of this Agreement and the terms of any
applicable Exhibit, the terms of the applicable Exhibit shall govern.
1. FSC as Principal Servicer (Principal Servicer") hereby contracts with FSS
to render or cause to be rendered personal services to shareholders and/or
the maintenance of accounts of shareholders of each Class of the Funds to
which this Agreement is made applicable by an Exhibit hereto ("Services").
In addition to providing Services directly to shareholders of the Funds,
FSS is hereby appointed the Investment Companies' agent to select,
negotiate and subcontract for the performance of Services. FSS hereby
accepts such appointment. FSS agrees to provide or cause to be provided
Services which, in its best judgment (subject to supervision and control of
the Investment Companies' Boards of Trustees or Directors, as applicable),
are necessary or desirable for shareholders of the Funds. FSS further
agrees to provide the Investment Companies, upon request, a written
description of the Services which FSS is providing hereunder. The
Investment Companies, on behalf of the Funds and each Class subject hereto
consents to the appointment of FSS to act in its capacity as described
herein and agrees to look solely to FSS for performance of the Services.
2. The term of the undertaking of FSS to render services hereunder in respect
of any Class of any Fund and the manner and amount of compensation to be
paid in respect thereof shall be specified in respect of each Class of the
Funds to which this Agreement is made applicable by an Exhibit hereto. FSS
agrees to look solely to the Principal Servicer for its compensation
hereunder.
3. This Agreement shall become effective in respect of any Class of Shares of
a Fund upon execution of an Exhibit relating to such Class of the Fund.
Once effective in respect of any Class of shares, this Agreement shall
continue in effect for one year from the date of its execution, and
thereafter for successive periods of one year only if the form of this
Agreement is approved at least annually by the Board of each Investment
Company, including a majority of the members of the Board of the
Investment Company who are not interested persons of the Investment
Company ("Independent Board Members") cast in person at a meeting called
for that purpose.
4. Notwithstanding paragraph 3, this Agreement may be terminated as follows:
(a) By any Investment Company as to any Fund at any time, without the
payment of any penalty, by the vote of a majority of the Independent
Board Members of any Investment Company or by a vote of a majority of
the outstanding voting securities of any Fund as defined in the
Investment Company Act of 1940 on sixty (60) days' written notice to
the parties to this Agreement;
(b) automatically in the event of the Agreement's assignment as defined in
the Investment Company Act of 1940; and
5. FSS agrees to obtain any taxpayer identification number certification from
each shareholder of the Funds to which it provides Services that is
required under Section 3406 of the Internal Revenue Code, and any
applicable Treasury regulations, and to provide each Investment Company or
its designee with timely written notice of any failure to obtain such
taxpayer identification number certification in order to enable the
implementation of any required backup withholding.
6. FSS shall not be liable for any error of judgment or mistake of law or for
any loss suffered by any Investment Company in connection with the matters
to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance
of its duties or from reckless disregard by it of its obligations and
duties under this Agreement. FSS shall be entitled to rely on and may act
upon advice of counsel (who may be counsel for such Investment Company) on
all matters, and shall be without liability for any action reasonably taken
or omitted pursuant to such advice. Any person, even though also an
officer, trustee, partner, employee or agent of FSS, who may be or become a
member of such Investment Company's Board, officer, employee or agent of
any Investment Company, shall be deemed, when rendering services to such
Investment Company or acting on any business of such Investment Company
(other than services or business in connection with the duties of FSS
hereunder) to be rendering such services to or acting solely for such
Investment Company and not as an officer, trustee, partner, employee or
agent or one under the control or direction of FSS even though paid by FSS.
This Section 6 shall survive termination of this Agreement.
7. No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the
party against which an enforcement of the change, waiver, discharge or
termination is sought.
8. FSS is expressly put on notice of the limitation of liability as set forth
in the Declaration of Trust of each Investment Company that is a
Massachusetts business trust and agrees that the obligations assumed by
each such Investment Company pursuant to this Agreement shall be limited
in any case to such Investment Company and its assets and that FSS shall
not seek satisfaction of any such obligations from the shareholders of
such Investment Company, the Trustees, Officers, Employees or Agents of
such Investment Company, or any of them.
9. The execution and delivery of this Agreement have been authorized by the
Trustees of FSS and signed by an authorized officer of FSS, acting as
such, and neither such authorization by such Trustees nor such execution
and delivery by such officer shall be deemed to have been made by any of
them individually or to impose any liability on any of them personally,
and the obligations of this Agreement are not binding upon any of the
Trustees or shareholders of FSS, but bind only the trust property of FSS
as provided in the Declaration of Trust of FSS.
<PAGE>
10. Notices of any kind to be given hereunder shall be in writing (including
facsimile communication) and shall be duly given if delivered to any
Investment Company at the following address: Federated Investors Tower,
Pittsburgh, PA 15222-3779, Attention: President and if delivered to FSS at
Federated Investors Tower, Pittsburgh, PA 15222-3779, Attention:
President.
11. This Agreement constitutes the entire agreement between the parties hereto
and supersedes any prior agreement with respect to the subject hereof
whether oral or written. If any provision of this Agreement shall be held
or made invalid by a court or regulatory agency decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected thereby.
Subject to the provisions of Sections 3 and 4, hereof, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto
and their respective successors and shall be governed by Pennsylvania law;
provided, however, that nothing herein shall be construed in a manner
inconsistent with the Investment Company Act of 1940 or any rule or
regulation promulgated by the Securities and Exchange Commission
thereunder.
12. This Agreement may be executed by different parties on separate
counterparts, each of which, when so executed and delivered, shall be an
original, and all such counterparts shall together constitute one and the
same instrument.
13. This Agreement shall not be assigned by any party without the prior
written consent of the parties hereto. Nothing in this Section 13 shall
prevent FSS from delegating its responsibilities to another entity to the
extent provided herein.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
Investment Companies (listed on Schedule
A)
Attest: /s/ S. Elliott Cohan By: /s/ John W. McGonigle
Title: Assistant Secretary Title: Executive Vice President
Federated Shareholder Services
Attest:/s/ Leslie K. Platt By: /s/ Byron F. Bowman
Title: Assistant Secretary Title: Vice President
Federated Securities Corp.
Attest: /s/ Leslie K. Platt By: /s/ Byron F. Bowman
Title: Assistant Secretary Title: Vice President
<PAGE>
EXHIBIT 1
TO SHAREHOLDER SERVICES AGREEMENT
FOR CLASS B SHARES OF
THE INVESTMENT COMPANIES
1. The Shareholder Services Agreement for Shares of the Investment
Companies on behalf of the portfolios (individually referred to as a "Fund" and
collectively as "Funds") and the classes of shares ("Classes") listed on the
attached Schedule A dated October 24, 1997 among Federated Securities Corp.
("Principal Servicer"), Federated Shareholder Services ("Class Servicer") and
the Investment Companies is hereby made applicable on the terms set forth herein
to the Class B Shares of the above-referenced Funds. In the event of any
inconsistency between the terms of this Exhibit and the Shareholder Services
Agreement, the terms of this Exhibit shall govern.
2. In connection with the Services to be rendered to holders of Class B
Shares of each Fund, the Principal Servicer and Class Servicer agree that the
Principal Servicer shall retain and compensate the Class Servicer for its
Services in respect of the Class B Shares of the Fund on one of the following
alternative basis as the Principal Servicer shall elect:
ALTERNATIVE A3: The Principal Servicer shall pay the Class Servicer
a dollar amount as set forth on Schedule A per Class B Commission Share
(as defined in the Principal Shareholder Servicer's Agreement) of the
Fund. Class Servicer agrees that upon receipt of such payment (which shall
be deemed to be full and adequate consideration for an irrevocable service
commitment (the "Irrevocable Service Commitment") of Class Servicer
hereunder), Class Servicer shall be unconditionally bound and obligated to
either: (1) provide the Services in respect of such Commission Share and
all other Shares derived therefrom via reinvestment of dividends, free
exchanges or otherwise for so long as the same is outstanding or (2) in
the event the Class Servicer for the Class B Shares is terminated by the
Investment Company, to arrange for a replacement Class Servicer
satisfactory to the Investment Company to perform such services, at no
additional cost to the Fund.
ALTERNATIVE B4: If Alternative A is not elected, the Principal
Servicer shall pay the Class Servicer twenty five basis points (0.25%) per
annum on the average daily net asset value of each Class B Share of the
Fund monthly in arrears. The Class Servicer agrees that such payment is
full and adequate consideration for the Services to be rendered by it to
the holder of such Class B Share.
3. In the event pursuant to paragraph 2 above, Alternative A has been
elected and the Class Servicer is terminated as Class Servicer for the Class B
Shares of the Fund, the Class Servicer agrees to pay to any successor Class
Servicer for the Class B Shares of the Fund any portion of the excess, if any,
of (A) the Servicing Fees received by it hereunder in respect of Class B Shares
of the Fund plus interest thereon at the percent as set forth on Schedule A per
annum minus (B) the costs it incurred hereunder in respect of the Class B Shares
of the Fund prior to such termination.
IN WITNESS WHEREOF, the parties hereto have caused this instrument
to be executed by their officers designated below as of the day and year first
above written.
Attest: FEDERATED SECURITIES CORP.
By: /s/ Leslie K. Platt By: /s/ Byron F. Bowman
Title: Assistant Secretary Title: Vice President
Attest: FEDERATED SHAREHOLDER SERVICES
By:/s/ Leslie K. Platt By: /s/ Byron F. Bowman
Title: Assistant Secretary Title: Vice President
Attest: INVESTMENT COMPANIES
(listed on Schedule A)
By: /s/ S. Elliott Cohan By: /s/ John W. McGonigle
Title: Assistant Secretary Title: Executive Vice President
<PAGE>
Schedule A
Date: 10/24/97 SHAREHOLDER SERVICES AGREEMENT
Federated American Leaders Fund, Inc.
Class B Shares
Federated Equity Funds
Federated Aggressive Growth Fund
Class B Shares
Federated Growth Strategies Fund
Class B Shares
Federated Small Cap Strategies Fund
Class B Shares
Federated Capital Appreciation Fund
Class B Shares
Federated Equity Income Fund, Inc.
Class B Shares
Federated Fund for U.S. Government Securities, Inc.
Class B Shares
Federated Government Income Securities, Inc.
Class B Shares
Federated High Income Bond Fund, Inc.
Class B Shares
Federated Municipal Opportunities Fund, Inc.
Class B Shares
Federated Municipal Securities Fund, Inc.
Class B Shares
Federated Stock and Bond Fund, Inc.
Class B Shares
Federated Utility Fund, Inc.
Class B Shares
Fixed Income Securities, Inc.
Federated Strategic Income Fund
Class B Shares
International Series, Inc.
Federated International Equity Fund
Class B Shares
Federated International Income Fund
Class B Shares
<PAGE>
Investment Series Funds, Inc.
Federated Bond Fund
Class B Shares
Liberty U.S. Government Money Market Trust
Class B Shares
Municipal Securities Income Trust
Federated Pennsylvania Municipal Income Fund
Class B Shares
World Investment Series, Inc.
Federated World Utility Fund
Class B Shares
Federated Asia Pacific Growth Fund
Class B Shares
Federated Emerging Markets Fund
Class B Shares
Federated European Growth Fund
Class B Shares
Federated International Small Company Fund
Class B Shares
Federated Latin American Growth Fund
Class B Shares
Federated International High Income Fund
Class B Shares
Federated International Growth Fund
Class B Shares
The following Funds were added as of December 1, 1997:
Municipal Securities Income Trust
Federated California Municipal Income Fund
Class B Shares
World Investment Series, Inc.
Federated Global Equity Income Fund
Class B Shares
Exhibit 9(iv) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
PRINCIPAL SHAREHOLDER SERVICER'S AGREEMENT
THIS AGREEMENT, is made as of the 24th day of October, 1997, by and between
those Investment Companies on behalf of the Portfolios (individually referred to
herein as a "Fund" and collectively as "Funds") and Classes of Shares
("Classes") listed on Schedule A to Exhibit 1, as may be amended from time to
time, having their principal office and place of business at Federated Investors
Tower, Pittsburgh, Pennsylvania 15222-3779, and who have approved this form of
Agreement and Federated Securities Corp. as the principal shareholder servicer
(the "Principal Servicer"). Each of the Exhibits hereto is incorporated herein
in its entirety and made a part hereof. In the event of any inconsistency
between the terms of this Agreement and the terms of any applicable Exhibit, the
terms of the applicable Exhibit shall govern.
In consideration of the mutual covenants hereinafter contained it is hereby
agreed by and between the parties hereto as follows.
1. The Investment Companies hereby appoint the Principal Servicer as their
agent to select, negotiate and contract for the performance of and arrange
for the rendition of personal services to shareholders and/or the
maintenance of accounts of shareholders of each Class of the Funds as to
which this Agreement is made applicable (The Principal Servicer's duties
hereunder are referred to as "Services"). The Principal Servicer hereby
accepts such appointment and agrees to perform or cause to be performed the
Services in respect of the Classes of the Funds to which this Agreement has
been made applicable by an Exhibit. The Principal Servicer agrees to cause
to be provided shareholder services which, in its best judgment (subject to
supervision and control of the Investment Companies' Boards of Trustees or
Directors, as applicable), are necessary or desirable for shareholders of
the Funds. The Principal Servicer further agrees to provide the Investment
Companies, upon request, a written description of the shareholder services
for which the Principal Servicer is arranging hereunder.
2. During the term of this Agreement, each Investment Company will pay the
Principal Servicer and the Principal Servicer agrees to accept as full
compensation for its services rendered hereunder a fee as set forth on the
Exhibit applicable to the Class of each Fund subject to this Agreement.
For the payment period in which this Agreement becomes effective or
terminates with respect to any Class of a Fund, there shall be an
appropriate proration of the monthly fee on the basis of the number of
days that this Agreement is in effect with respect to such Class of the
Fund during the month.
3. This Agreement is effective with respect to each Class of a Fund as of the
date of execution of the applicable Exhibit and shall continue in effect
for one year from the date of its execution, and thereafter for successive
periods of one year only if the form of this Agreement is approved at
least annually by the Board of each Investment Company, including a
majority of the members of the Board of the Investment Company who are not
interested persons of the Investment Company ("Independent Board Members")
cast in person at a meeting called for that purpose.
4. Notwithstanding paragraph 3, this Agreement may be terminated with regard to
a particular Class of a Fund as follows:
(a) at any time, without the payment of any penalty, by the vote of a
majority of the Independent Board Members of any Investment Company
or by a vote of a majority of the outstanding voting securities of
any Fund as defined in the Investment Company Act of 1940 on sixty
(60) days' written notice to the parties to this Agreement;
(b) automatically in the event of the Agreement's assignment as defined in
the Investment Company Act of 1940; and
5. The Principal Servicer agrees to arrange to obtain any taxpayer
identification number certification from each shareholder of the Funds to
which it provides Services that is required under Section 3406 of the
Internal Revenue Code, and any applicable Treasury regulations, and to
provide each Fund or its designee with timely written notice of any
failure to obtain such taxpayer identification number certification in
order to enable the implementation of any required backup withholding.
6. The Principal Servicer shall not be liable for any error of judgment or
mistake of law or for any loss suffered by any Investment Company in
connection with the matters to which this Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of
its obligations and duties under this Agreement. the Principal Servicer
shall be entitled to rely on and may act upon advice of counsel (who may be
counsel for such Investment Company) on all matters, and shall be without
liability for any action reasonably taken or omitted pursuant to such
advice. Any person, even though also an officer, trustee, partner, employee
or agent of the Principal Servicer, who may be or become a member of such
Investment Company's Board, officer, employee or agent of any Fund, shall
be deemed, when rendering services to such Fund or acting on any business
of such Fund (other than services or business in connection with the duties
of the Principal Servicer hereunder) to be rendering such services to or
acting solely for such Fund and not as an officer, trustee, partner,
employee or agent or one under the control or direction of the Principal
Servicer even though paid by the Principal Servicer.
This Section 6 shall survive termination of this Agreement.
7. No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the
party against which an enforcement of the change, waiver, discharge or
termination is sought.
8. The Principal Servicer is expressly put on notice of the limitation of
liability as set forth in the Declaration of Trust of each Investment
Company that is a Massachusetts business trust and agrees that the
obligations assumed by each such Investment Company pursuant to this
Agreement shall be limited in any case to such Investment Company and its
assets and that the Principal Servicer shall not seek satisfaction of any
such obligations from the shareholders of such Investment Company, the
Trustees, Officers, Employees or Agents of such Investment Company, or any
of them.
9. The execution and delivery of this Agreement have been authorized by the
Directors of the Principal Servicer and signed by an authorized officer of
the Principal Servicer, acting as such, and neither such authorization by
such Directors nor such execution and delivery by such officer shall be
deemed to have been made by any of them individually or to impose any
liability on any of them personally, and the obligations of this Agreement
are not binding upon any of the Directors or shareholders of the Principal
Servicer, but bind only the property of the Principal Servicer as provided
in the Articles of Incorporation of the Principal Servicer.
10. Notices of any kind to be given hereunder shall be in writing (including
facsimile communication) and shall be duly given if delivered to any
Investment Company at the following address: Federated Investors Tower,
Pittsburgh, PA 15222-3779, Attention: President and if delivered to the
Principal Servicer at Federated Investors Tower, Pittsburgh, PA
15222-3779, Attention:
President.
11. This Agreement constitutes the entire agreement between the parties hereto
and supersedes any prior agreement with respect to the subject hereof
whether oral or written. If any provision of this Agreement shall be held
or made invalid by a court or regulatory agency decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected thereby.
Subject to the provisions of Sections 3 and 4, hereof, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto
and their respective successors and shall be governed by Pennsylvania law;
provided, however, that nothing herein shall be construed in a manner
inconsistent with the Investment Company Act of 1940 or any rule or
regulation promulgated by the Securities and Exchange Commission
thereunder.
12. This Agreement may be executed by different parties on separate
counterparts, each of which, when so executed and delivered, shall be an
original, and all such counterparts shall together constitute one and the
same instrument.
13. This Agreement shall not be assigned by any party without the prior
written consent of the Principal Servicer in the case of assignment by any
Investment Company, or of the Investment Companies in the case of
assignment by the Principal Servicer, except that any party may assign to
a successor all of or a substantial portion of its business to a party
controlling, controlled by, or under common control with such party.
Nothing in this Section 13 shall prevent the Principal Servicer from
delegating its responsibilities to another entity to the extent provided
herein.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
Investment Companies (listed on Schedule
A)
Attest: /s/ S. Elliott Cohan By: /s/ John W. McGonigle
Title: Assistant Secretary Title: Executive Vice President
Federated Securities Corp.
Attest: /s/ Leslie K. Platt By: /s/ Byron F. Bowman
Title: Assistant Secretary Title: Vice President
<PAGE>
Exhibit 1
to the
Principal Shareholder Servicer's Agreement
Related to Class B Shares of
the Funds
The following provisions are hereby incorporated and made part of the
Principal Shareholder Servicer's Agreement (the "Principal Shareholder
Servicer's Agreement") as of the 24th day of October, 1997, by and between those
Investment Companies on behalf of the Portfolios (individually referred to
herein as a "Fund" and collectively as "Funds") and Classes of Shares
("Classes") listed on Schedule A to Exhibit 1, as may be amended from time to
time, having their principal office and place of business at Federated Investors
Tower, Pittsburgh, Pennsylvania 15222-3779, and who have approved this form of
Agreement and Federated Securities Corp. as the principal shareholder servicer
(the "Principal Servicer"). Each of the Exhibits hereto is incorporated herein
in its entirety and made a part hereof. In the event of any inconsistency
between the terms of this Exhibit and the terms of the Principal Shareholder
Servicer's Agreement, the terms of this Exhibit shall govern.
1. Each Investment Company hereby appoints the Principal Servicer to arrange
for the rendition of the shareholder services in respect of Class B Shares
("Class B Shares") of each Fund. Pursuant to this appointment, the
Principal Servicer is authorized to select various companies including but
not limited to Federated Shareholder Services ("Companies or a Company ")
to provide such services.
2. (a) In consideration of the Principal Servicer's Services under this
Agreement in respect of the Class B Shares each Fund agrees to pay the
Principal Servicer or at its direction its "Allocable Portion" (as
hereinafter defined) of a fee (the "Servicing Fee") equal to 0.25 of 1%
per annum of the average daily net asset value of the Class B Shares of
the Fund outstanding from time to time, provided however, that in the
event the Fund operates as a fund of funds (a "FOF Fund") by investing
the proceeds of the issuance of its Class B Shares in Class A Shares of
another fund (the "Other Fund") and the Principal Shareholder Servicer
receives a servicing fee in respect of the Class A Shares of the Other
Fund so acquired by the FOF Fund, the Servicing Fee payable in respect
of such Class B Shares of the FOF Fund will be reduced by the amount of
the servicing fee actually received by the Principal Shareholder
Servicer or its assign from the Other Fund in respect of the Class A
Shares of the Other Fund acquired with the proceeds of such Class B
Shares of the FOF Fund.
(b)(i) The Principal Servicer will be deemed to have fully earned its
Allocable Portion (computed as of any date) of the Servicing Fee
payable in respect of the Class B Shares of a Fund (and to have
satisfied its obligation to arrange for shareholder services in respect
of such Class B Shares) on the date it has arranged for shareholder
services to be performed by Federated Shareholder Services by payment
of the lump sum contemplated by Alternative A to Exhibit 1 to the
Shareholder Services Agreement among the Principal Servicer, Federated
Shareholder Services and the Fund dated as of the date hereof (the
"Shareholder Services Agreement") to Federated Shareholder Services
(whose obligations are fully supported by its parent company) in
respect of each "Commission Share" (as defined in the Allocation
Schedule attached hereto in Schedule B) of the Fund, taken into account
in determining such Principal Servicer's Allocable Portion of such
Servicing Fees as of such date. The Principal Servicer shall not be
deemed to have any other duties in respect of the Shares and its
Allocable Portion of the Servicing Fees to which the preceding sentence
applies and such arrangements shall be deemed a separate and distinct
contractual arrangement from that described in clause (ii).
(ii) The Principal Servicer will be deemed to have fully earned any
Servicing Fees not included in its Allocable Portion (i.e., those
attributable to Shares in respect of which Alternative A under Exhibit
1 to the Shareholder Services Agreement is not applicable) as such
services are performed in respect of such Shares.
(c)Notwithstanding anything to the contrary set forth in this Exhibit,
the Principal Shareholder Agreement, or (to the extent waiver thereof
is permitted thereby) applicable law, each Investment Company's
obligation to pay the Principal Servicer's Allocable Portion of the
Servicing Fees payable in respect of the Class B Shares of a Fund shall
not be terminated or modified for any reason (including a termination
of this Principal Shareholder Servicer's Agreement as it relates to the
Fund) except to the extent required by a change in the Investment
Company Act of 1940 (the "Act") or the Conduct Rules of the National
Association of Securities Dealers, Inc., in either case enacted or
promulgated after May 1, 1997, or in connection with a "Complete
Termination" (as hereinafter defined) in respect of the Class B Shares
of such Fund.
(d)Notwithstanding anything to the contrary in this Exhibit, the
Principal Shareholder Agreement, or (to the extent waiver thereof is
permitted thereby) applicable law, the Principal Servicer may assign,
sell or pledge (collectively, "Transfer") its rights to its Allocable
Portion of the Servicing Fees (but not its obligations to the
Investment Companies under this Principal Shareholder Servicer's
Agreement) in respect of the Class B Shares of a Fund to raise funds to
make the expenditures related to the Services and in connection
therewith upon receipt of notice of such Transfer, the Investment
Company shall pay to the assignee, purchaser or pledgee (collectively
with their subsequent transferees, "Transferees") such portion of the
Principal Servicer's Allocable Portion of the Servicing Fees in respect
of the Class B Shares of the Fund so Transferred. Except as provided in
(c) above and notwithstanding anything to the contrary set forth
elsewhere in this Exhibit, the Principal Shareholder Agreement, or (to
the extent waiver thereof is permitted thereby) applicable law, to the
extent the Principal Servicer has Transferred its rights thereto to
raise funds as aforesaid, the Investment Companies' obligation to pay
to the Principal Servicer's Transferees the Principal Servicer's
Allocable Portion of the Servicing Fees payable in respect of the Class
B Shares of each Fund shall be absolute and unconditional and shall not
be subject to dispute, offset, counterclaim or any defense whatsoever,
including without limitation, any of the foregoing based on the
insolvency or bankruptcy of the Principal Servicer, Federated
Shareholder Services (or its parent) or the failure of Federated
Shareholder Services (or its parent) to perform its Irrevocable Service
Commitment (it being understood that such provision is not a waiver of
the Investment Companies' right to pursue such Principal Servicer and
enforce such claims against the assets of such Principal Servicer other
than the Principal Servicer's right to the Distribution Fees, Servicing
Fees and CDSCs in respect of the Class B Shares of the Fund which have
been so transferred in connection with such Transfer). The Fund agrees
that each such Transferee is a third party beneficiary of the
provisions of this clause (d) but only insofar as those provisions
relate to Servicing Fees transferred to such Transferee.
(e)For purposes of this Principal Shareholder Servicer's Agreement, the
term Allocable Portion of Servicing Fees payable in respect of the
Class B Shares of any Fund shall mean the portion of such Servicing
Fees allocated to such Principal Servicer in accordance with the
Allocation Schedule attached hereto as Schedule B.
(f)For purposes of this Principal Shareholder Servicer's Contract, the
term "Complete Termination" of shareholder servicing arrangements in
respect of Class B Shares of a Fund means a termination of shareholder
servicing arrangements involving the complete cessation of payments of
Servicing Fees in respect of all Class B Shares, and the complete
cessation of payments of servicing fees for every existing and future
class of shares of the Fund and any successor Fund or any Fund
acquiring a substantial portion of the assets of the Fund ,which has
substantially similar characteristics to the Class B Shares taking into
account the manner and amount of sales charge, servicing fee,
contingent deferred sales charge or other similar charge borne directly
or indirectly by the holders of such shares.
3. The Principal Servicer may enter into separate written agreements with
Companies to provide the services set forth in Paragraph 1 herein. The
schedules of fees to be paid such Companies and the basis upon which such
fees will be paid shall be determined from time to time by the Principal
Servicer in its sole discretion.
4. The Principal Servicer will prepare reports to the Board of
Trustees/Directors of the Investment Companies on a quarterly basis
showing amounts expended hereunder including amounts paid to Companies and
the purpose for such expenditures.
In consideration of the mutual covenants set forth in the Principal
Shareholder Servicer's Contract, the Principal Servicer and the Investment
Companies hereby execute and deliver this Exhibit with respect to the Class B
Shares of each Fund.
<PAGE>
Witness the due execution hereof this 24th day of October, 1997.
ATTEST: INVESTMENT COMPANIES (listed on Schedule A)
By: /s/ S. Elliott Cohan By: /s/ John W. McGonigle
Title: Assistant Secretary Title: Executive Vice President
ATTEST: FEDERATED SECURITIES CORP.
By: /s/ Leslie K. Platt By: /s/ Byron F. Bowman
Title: Assistant Secretary Title: Vice President
<PAGE>
Schedule A
Date: 10/24/97 PRINCIPAL SHAREHOLDER SERVICER'S AGREEMENT
Federated American Leaders Fund, Inc.
Class B Shares
Federated Equity Funds
Federated Aggressive Growth Fund
Class B Shares
Federated Growth Strategies Fund
Class B Shares
Federated Small Cap Strategies Fund
Class B Shares
Federated Capital Appreciation Fund
Class B Shares
Federated Equity Income Fund, Inc.
Class B Shares
Federated Fund for U.S. Government Securities, Inc.
Class B Shares
Federated Government Income Securities, Inc.
Class B Shares
Federated High Income Bond Fund, Inc.
Class B Shares
Federated Municipal Opportunities Fund, Inc.
Class B Shares
Federated Municipal Securities Fund, Inc.
Class B Shares
Federated Stock and Bond Fund, Inc.
Class B Shares
Federated Utility Fund, Inc.
Class B Shares
Fixed Income Securities, Inc.
Federated Strategic Income Fund
Class B Shares
International Series, Inc.
Federated International Equity Fund
Class B Shares
Federated International Income Fund
Class B Shares
<PAGE>
Investment Series Funds, Inc.
Federated Bond Fund
Class B Shares
Liberty U.S. Government Money Market Trust
Class B Shares
Municipal Securities Income Trust
Federated Pennsylvania Municipal Income Fund
Class B Shares
World Investment Series, Inc.
Federated World Utility Fund
Class B Shares
Federated Asia Pacific Growth Fund
Class B Shares
Federated Emerging Markets Fund
Class B Shares
Federated European Growth Fund
Class B Shares
Federated International Small Company Fund
Class B Shares
Federated Latin American Growth Fund
Class B Shares
Federated International High Income Fund
Class B Shares
Federated International Growth Fund
Class B Shares
The following Funds were added as of December 1, 1997:
Municipal Securities Income Trust
Federated California Municipal Income Fund
Class B Shares
World Investment Series, Inc.
Federated Global Equity Income Fund
Class B Shares
Exhibit 11 under Form N-1A
Exhibit 23 under Item 601/Reg. S-K
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Shareholders of FIXED INCOME SECURITIES, INC.:
We consent to the incorporation by reference in Post-Effective Amendment No. 22
to Registration Statement (No. 33-43472) of Fixed Income Securities, Inc.
(comprising the following portfolios: Federated Limited Term Fund, Federated
Limited Term Municipal Fund and Federated Strategic Income Fund) of our reports
dated January 16, 1998, appearing in the Annual Reports for the year ended
November 30, 1997, and to the references to us under the heading "Financial
Highlights" in such prospectuses, which are part of such Registration Statement.
By: DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
January 23, 1998
Exhibit 15(vi) under Form N-1A
Exhibit 1 under Item 601/Reg. S-K
Exhibit 1
Amendment to the
Distribution Plan for
the Investment Companies
Class B Shares
1. This amendment to the Distribution Plan, ("Plan") is adopted by the
Board of Trustees/Directors of the Investment Companies with respect to the
Class of Shares of the portfolios ("Funds") of the Investment Companies set
forth on the attached Schedule A as to which the Plan has been adopted. This
Exhibit is hereby incorporated into the Plan in its entirety and made a part
thereof. In the event of any inconsistency between the terms of this Exhibit and
the terms of the Plan, the terms of this Exhibit shall govern. References herein
to the Plan shall mean the Plan as amended by this Exhibit. The terms of the
Plan as amended when effective in respect of the Class of Shares set forth above
shall apply to all amounts payable to the Principal Distributor in respect of
such Class of Shares whether arising out of sales of such Class of Shares before
or after such effective date.
2. In compensation for the services provided pursuant to this Plan, the
Investment Companies on behalf of the Fund shall pay the Principal Distributor
its "Allocable Portion" (as defined in its Distributor's Contract as it relates
to the Class B Shares of the Fund) of a fee (the "Distribution Fee") computed at
the annual rate of 0.75 of 1% per annum on the average daily aggregate net asset
value of the Class B Shares of those Funds listed on Schedule A outstanding,
which fee shall be paid monthly in arrears.
3. The Distributor's Contract in respect of the Class B Shares of each
Fund set forth above shall provide that: (I) the Principal Distributor in
respect of such Distributor's Contract will be deemed to have performed all
services required to be performed in order to be entitled to receive its
Allocable Portion of the Distribution Fees payable in respect of the Class B
Shares of such Fund upon the settlement date of each sale of a "Commission
Share" (as defined below) of such Fund taken into account in determining such
Principal Distributor's Allocable Portion of such Distribution Fees; (II) the
Investment Companies' obligation to pay such Principal Distributor its Allocable
Portion of the Distribution Fees payable in respect of the Class B Shares of
such Fund shall not be terminated or modified for any reason (including a
termination of the Distributor's Contract between such Principal Distributor and
such Fund) except to the extent required by a change in the Act or the Conduct
Rules of the National Association of Securities Dealers, Inc., in each case
enacted or promulgated after May 1, 1997, or in connection with a "Complete
Termination" (as hereinafter defined) of this Plan in respect of the Class B
Shares of such Fund; (III) the Investment Companies will not take any action to
waive or change any CDSC in respect of the Class B Shares of such Fund, except
as provided in the Funds' prospectus or statement of additional information
without the consent of the Principal Distributor and its assigns; (IV) neither
the termination of such Principal Distributor's role as Principal Distributor of
the Class B Shares of such Fund, nor the termination of such Distributor's
Contract nor the termination of this Plan will terminate such Principal
Distributor's right to its Allocable Portion of the CDSCs; and (V) such
Principal Distributor may assign, sell or pledge (collectively, "Transfer") its
rights to its Allocable Portion of the Distribution Fees and CDSCs (but not such
Principal Distributor's obligations to the Investment Companies under the
Distributor's Contract) to raise funds to make the expenditures related to the
distribution of Class B Shares of such Fund and in connection therewith, upon
receipt of notice of such Transfer, the Investment Companies shall pay to the
assignee, purchaser or pledgee (collectively with their subsequent transferees,
"Transferees") or third party beneficiaries such portion of the Principal
Distributor's Allocable Portion of the Distribution Fees or CDSCs in respect of
the Class B Shares of such Fund so sold or pledged and except as provided in
(II) above and notwithstanding anything of the contrary set forth in this
Exhibit or the Plan or in the Distributor's Contract, to the extent the
Principal Distributor has Transferred its right thereto as aforesaid, the
Investment Companies' obligation to pay to the Principal Distributor's
Transferee such Principal Distributor's Allocable Portion of the Distribution
Fees and CDSCs payable in respect of the Class B Shares of such Fund shall be
absolute and unconditional and shall not be subject to dispute, offset,
counterclaim or any defense whatsoever, including without limitation, any of the
foregoing based on the insolvency or bankruptcy of the Principal Distributor (it
being understood that such provision is not a waiver of the Investment
Companies' right to pursue such Principal Distributor and enforce such claims
against the assets of such Principal Distributor other than its right to the
Distribution Fees, CDSCs and servicing fees, in respect of the Class B Shares of
any Fund transferred in connection with such Transfer. For purposes of this
Plan, the term Allocable Portion of Distribution Fees or CDSCs payable in
respect of the Class B Shares of any Fund as applied to any Principal
Distributor shall mean the portion of such Distribution Fees or CDSCs payable in
respect of such Fund allocated to such Principal Underwriter in accordance with
the Allocation Schedule (as defined in the Distributor's Contract as it relates
to the Class B Shares of the Fund)). For purposes of this Plan, the term
"Complete Termination" of this Plan in respect of any Fund means a termination
of this Plan involving the complete cessation of the payment of Distribution
Fees in respect of all Class B Shares of such Fund, and the termination of the
distribution plans and the complete cessation of the payment of distribution
fees pursuant to every other Distribution Plan pursuant to rule 12b-1 of the
Investment Companies in respect of such Fund and any successor Fund or any Fund
acquiring a substantial portion of the assets of such Fund and for every future
class of shares which has substantially similar characteristics to the Class B
Shares of such Fund taking into account the manner of payment and amount of
sales charge, contingent deferred sales charge or other similar charges borne
directly or indirectly by the holders of such shares.
Witness the due execution hereof this execution date.
Investment Companies (listed on Schedule A)
By: /s/ John W. McGonigle
Title: Executive Vice President
Date: October 24,1997
<PAGE>
Schedule A
Date: 10/24/97 DISTRIBUTION PLAN
Federated American Leaders Fund, Inc.
Class B Shares
Federated Equity Funds
Federated Aggressive Growth Fund
Class B Shares
Federated Growth Strategies Fund
Class B Shares
Federated Small Cap Strategies Fund
Class B Shares
Federated Capital Appreciation Fund
Class B Shares
Federated Equity Income Fund, Inc.
Class B Shares
Federated Fund for U.S. Government Securities, Inc.
Class B Shares
Federated Government Income Securities, Inc.
Class B Shares
Federated High Income Bond Fund, Inc.
Class B Shares
Federated Municipal Opportunities Fund, Inc.
Class B Shares
Federated Municipal Securities Fund, Inc.
Class B Shares
Federated Stock and Bond Fund, Inc.
Class B Shares
Federated Utility Fund, Inc.
Class B Shares
Fixed Income Securities, Inc.
Federated Strategic Income Fund
Class B Shares
International Series, Inc.
Federated International Equity Fund
Class B Shares
Federated International Income Fund
Class B Shares
<PAGE>
Investment Series Funds, Inc.
Federated Bond Fund
Class B Shares
Liberty U.S. Government Money Market Trust
Class B Shares
Municipal Securities Income Trust
Federated Pennsylvania Municipal Income Fund
Class B Shares
World Investment Series, Inc.
Federated World Utility Fund
Class B Shares
Federated Asia Pacific Growth Fund
Class B Shares
Federated Emerging Markets Fund
Class B Shares
Federated European Growth Fund
Class B Shares
Federated International Small Company Fund
Class B Shares
Federated Latin American Growth Fund
Class B Shares
Federated International High Income Fund
Class B Shares
Federated International Growth Fund
Class B Shares
The following Funds were added as of December 1, 1997:
Municipal Securities Income Trust
Federated California Municipal Income Fund
Class B Shares
World Investment Series, Inc.
Federated Global Equity Income Fund
Class B Shares
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> Fixed Income Securities, Inc.
Federated Limited Term Fund
Class A Shares
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-30-1997
<PERIOD-END> Nov-30-1997
<INVESTMENTS-AT-COST> 102,602,256
<INVESTMENTS-AT-VALUE> 103,196,532
<RECEIVABLES> 3,963,750
<ASSETS-OTHER> 20,923
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 107,181,205
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,422,570
<TOTAL-LIABILITIES> 3,422,570
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 113,367,331
<SHARES-COMMON-STOCK> 9,543,712
<SHARES-COMMON-PRIOR> 11,724,886
<ACCUMULATED-NII-CURRENT> 254,764
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (10,476,823)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 613,363
<NET-ASSETS> 94,952,068
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,827,019
<OTHER-INCOME> 0
<EXPENSES-NET> 1,221,783
<NET-INVESTMENT-INCOME> 6,605,236
<REALIZED-GAINS-CURRENT> 890,943
<APPREC-INCREASE-CURRENT> (522,183)
<NET-CHANGE-FROM-OPS> 6,973,996
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 6,096,126
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,650,436
<NUMBER-OF-SHARES-REDEEMED>7,225,178
<SHARES-REINVESTED> 393,568
<NET-CHANGE-IN-ASSETS> (21,354,062)
<ACCUMULATED-NII-PRIOR> 53,308
<ACCUMULATED-GAINS-PRIOR> (11,141,846)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR>0
<GROSS-ADVISORY-FEES> 446,254
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,748,903
<AVERAGE-NET-ASSETS> 111,546,376
<PER-SHARE-NAV-BEGIN> 9.910
<PER-SHARE-NII> 0.590
<PER-SHARE-GAIN-APPREC> 0.040
<PER-SHARE-DIVIDEND> 0.590
<PER-SHARE-DISTRIBUTIONS> 0.000
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<PER-SHARE-NAV-END> 9.950
<EXPENSE-RATIO> 1.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> Fixed Income Securities, Inc.
Federated Limited Term Fund
Class F Shares
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-30-1997
<PERIOD-END> Nov-30-1997
<INVESTMENTS-AT-COST> 102,602,256
<INVESTMENTS-AT-VALUE> 103,196,532
<RECEIVABLES> 3,963,750
<ASSETS-OTHER> 20,923
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 107,181,205
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,422,570
<TOTAL-LIABILITIES> 3,422,570
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 113,367,331
<SHARES-COMMON-STOCK> 885,164
<SHARES-COMMON-PRIOR> 902,100
<ACCUMULATED-NII-CURRENT> 254,764
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (10,476,823)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 613,363
<NET-ASSETS> 8,806,567
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,827,019
<OTHER-INCOME> 0
<EXPENSES-NET> 1,221,783
<NET-INVESTMENT-INCOME> 6,605,236
<REALIZED-GAINS-CURRENT> 890,943
<APPREC-INCREASE-CURRENT> (522,183)
<NET-CHANGE-FROM-OPS> 6,973,996
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 533,574
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 206,849
<NUMBER-OF-SHARES-REDEEMED>254,941
<SHARES-REINVESTED> 31,156
<NET-CHANGE-IN-ASSETS> (21,354,062)
<ACCUMULATED-NII-PRIOR> 53,308
<ACCUMULATED-GAINS-PRIOR> (11,141,846)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR>0
<GROSS-ADVISORY-FEES> 446,254
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,748,903
<AVERAGE-NET-ASSETS> 111,546,376
<PER-SHARE-NAV-BEGIN> 9.910
<PER-SHARE-NII> 0.600
<PER-SHARE-GAIN-APPREC> 0.040
<PER-SHARE-DIVIDEND> 0.600
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 9.950
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 031
<NAME> Fixed Income Securities, Inc.
Federated Limited Term Municipal
Fund
Class A Shares
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-30-1997
<PERIOD-END> Nov-30-1997
<INVESTMENTS-AT-COST> 72,039,393
<INVESTMENTS-AT-VALUE> 71,883,646
<RECEIVABLES> 1,335,722
<ASSETS-OTHER> 157,335
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 73,376,703
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 156,980
<TOTAL-LIABILITIES> 156,980
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 75,790,018
<SHARES-COMMON-STOCK> 5,408,602
<SHARES-COMMON-PRIOR> 7,534,098
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (53,333)
<ACCUMULATED-NET-GAINS> (2,361,215)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (155,747)
<NET-ASSETS> 52,921,442
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,224,553
<OTHER-INCOME> 0
<EXPENSES-NET> 685,908
<NET-INVESTMENT-INCOME> 3,538,645
<REALIZED-GAINS-CURRENT> 39,808
<APPREC-INCREASE-CURRENT> (13,463)
<NET-CHANGE-FROM-OPS> 3,564,990
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,474,571
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,570,072
<NUMBER-OF-SHARES-REDEEMED>6,867,445
<SHARES-REINVESTED> 171,877
<NET-CHANGE-IN-ASSETS> (26,650,665)
<ACCUMULATED-NII-PRIOR> (53,333)
<ACCUMULATED-GAINS-PRIOR> (2,671,023)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR>0
<GROSS-ADVISORY-FEES> 333,392
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,122,859
<AVERAGE-NET-ASSETS> 81,880,889
<PER-SHARE-NAV-BEGIN> 9.760
<PER-SHARE-NII> 0.410
<PER-SHARE-GAIN-APPREC> 0.020
<PER-SHARE-DIVIDEND> 0.410
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 9.780
<EXPENSE-RATIO> 0.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 032
<NAME> Fixed Income Securities, Inc.
Federated Limited Term Municipal
Fund
Class F Shares
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-30-1997
<PERIOD-END> Nov-30-1997
<INVESTMENTS-AT-COST> 72,039,393
<INVESTMENTS-AT-VALUE> 71,883,646
<RECEIVABLES> 1,335,722
<ASSETS-OTHER> 157,335
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 73,376,703
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 156,980
<TOTAL-LIABILITIES> 156,980
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 75,790,018
<SHARES-COMMON-STOCK> 2,074,562
<SHARES-COMMON-PRIOR> 2,693,304
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (53,333)
<ACCUMULATED-NET-GAINS> (2,361,215)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (155,747)
<NET-ASSETS> 20,298,281
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,224,553
<OTHER-INCOME> 0
<EXPENSES-NET> 685,908
<NET-INVESTMENT-INCOME> 3,538,645
<REALIZED-GAINS-CURRENT> 39,808
<APPREC-INCREASE-CURRENT> (13,463)
<NET-CHANGE-FROM-OPS> 3,564,990
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,064,074
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 413,737
<NUMBER-OF-SHARES-REDEEMED>1,104,776
<SHARES-REINVESTED> 72,297
<NET-CHANGE-IN-ASSETS> (26,650,665)
<ACCUMULATED-NII-PRIOR> (53,333)
<ACCUMULATED-GAINS-PRIOR> (2,671,023)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR>0
<GROSS-ADVISORY-FEES> 333,392
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,122,859
<AVERAGE-NET-ASSETS> 81,880,889
<PER-SHARE-NAV-BEGIN> 9.760
<PER-SHARE-NII> 0.430
<PER-SHARE-GAIN-APPREC> 0.020
<PER-SHARE-DIVIDEND> 0.430
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 9.780
<EXPENSE-RATIO> 0.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 051
<NAME> Fixed Income Securities, Inc.
Federated Strategic Income Fund
Class A Shares
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-30-1997
<PERIOD-END> Nov-30-1997
<INVESTMENTS-AT-COST> 421,079,630
<INVESTMENTS-AT-VALUE> 423,348,297
<RECEIVABLES> 17,351,905
<ASSETS-OTHER> 240,566
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 440,940,768
<PAYABLE-FOR-SECURITIES> 9,821,586
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,073,919
<TOTAL-LIABILITIES> 18,895,505
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,821,586
<SHARES-COMMON-STOCK> 5,598,970
<SHARES-COMMON-PRIOR> 2,677,159
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (522,240)
<ACCUMULATED-NET-GAINS> 2,068,045
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,205,083
<NET-ASSETS> 58,269,827
<DIVIDEND-INCOME> 324,888
<INTEREST-INCOME> 26,387,655
<OTHER-INCOME> 0
<EXPENSES-NET> 4,723,076
<NET-INVESTMENT-INCOME> 21,989,467
<REALIZED-GAINS-CURRENT> 1,227,157
<APPREC-INCREASE-CURRENT> (2,824,267)
<NET-CHANGE-FROM-OPS> 20,392,357
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,371,345
<DISTRIBUTIONS-OF-GAINS> 80,861
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,554,270
<NUMBER-OF-SHARES-REDEEMED>793,629
<SHARES-REINVESTED> 161,170
<NET-CHANGE-IN-ASSETS> 246,157,386
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 704,568
<OVERDISTRIB-NII-PRIOR> (80,746)
<OVERDIST-NET-GAINS-PRIOR>0
<GROSS-ADVISORY-FEES> 2,385,950
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,869,186
<AVERAGE-NET-ASSETS> 282,845,561
<PER-SHARE-NAV-BEGIN> 10.470
<PER-SHARE-NII> 0.870
<PER-SHARE-GAIN-APPREC> (0.030)
<PER-SHARE-DIVIDEND> 0.870
<PER-SHARE-DISTRIBUTIONS> 0.030
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.410
<EXPENSE-RATIO> 1.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 052
<NAME> Fixed Income Securities, Inc.
Federated Strategic Income Fund
Class B Shares
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-30-1997
<PERIOD-END> Nov-30-1997
<INVESTMENTS-AT-COST> 421,079,630
<INVESTMENTS-AT-VALUE> 423,348,297
<RECEIVABLES> 17,351,905
<ASSETS-OTHER> 240,566
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 440,940,768
<PAYABLE-FOR-SECURITIES> 9,821,586
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,073,919
<TOTAL-LIABILITIES> 18,895,505
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,821,586
<SHARES-COMMON-STOCK> 29,288,655
<SHARES-COMMON-PRIOR> 11,465,981
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (522,240)
<ACCUMULATED-NET-GAINS> 2,068,045
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,205,083
<NET-ASSETS> 304,746,056
<DIVIDEND-INCOME> 324,888
<INTEREST-INCOME> 26,387,655
<OTHER-INCOME> 0
<EXPENSES-NET> 4,723,076
<NET-INVESTMENT-INCOME> 21,989,467
<REALIZED-GAINS-CURRENT> 1,227,157
<APPREC-INCREASE-CURRENT> (2,824,267)
<NET-CHANGE-FROM-OPS> 20,392,357
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 15,066,810
<DISTRIBUTIONS-OF-GAINS> 345,467
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 19,240,645
<NUMBER-OF-SHARES-REDEEMED>2,103,020
<SHARES-REINVESTED> 685,049
<NET-CHANGE-IN-ASSETS> 246,157,386
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 704,568
<OVERDISTRIB-NII-PRIOR> (80,746)
<OVERDIST-NET-GAINS-PRIOR>0
<GROSS-ADVISORY-FEES> 2,385,950
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,869,186
<AVERAGE-NET-ASSETS> 282,845,561
<PER-SHARE-NAV-BEGIN> 10.470
<PER-SHARE-NII> 0.790
<PER-SHARE-GAIN-APPREC> (0.040)
<PER-SHARE-DIVIDEND> 0.790
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.030
<PER-SHARE-NAV-END> 10.400
<EXPENSE-RATIO> 1.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 053
<NAME> Fixed Income Securities, Inc.
Federated Strategic Income Fund
Class C Shares
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-30-1997
<PERIOD-END> Nov-30-1997
<INVESTMENTS-AT-COST> 421,079,630
<INVESTMENTS-AT-VALUE> 423,348,297
<RECEIVABLES> 17,351,905
<ASSETS-OTHER> 240,566
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 440,940,768
<PAYABLE-FOR-SECURITIES> 9,821,586
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,073,919
<TOTAL-LIABILITIES> 18,895,505
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,821,586
<SHARES-COMMON-STOCK> 2,812,473
<SHARES-COMMON-PRIOR> 1,000,967
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (522,240)
<ACCUMULATED-NET-GAINS> 2,068,045
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,205,083
<NET-ASSETS> 29,266,921
<DIVIDEND-INCOME> 324,888
<INTEREST-INCOME> 26,387,655
<OTHER-INCOME> 0
<EXPENSES-NET> 4,723,076
<NET-INVESTMENT-INCOME> 21,989,467
<REALIZED-GAINS-CURRENT> 1,227,157
<APPREC-INCREASE-CURRENT> (2,824,267)
<NET-CHANGE-FROM-OPS> 20,392,357
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,268,365
<DISTRIBUTIONS-OF-GAINS> 31,072
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,113,138
<NUMBER-OF-SHARES-REDEEMED>371,891
<SHARES-REINVESTED> 70,259
<NET-CHANGE-IN-ASSETS> 246,157,386
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 704,568
<OVERDISTRIB-NII-PRIOR> (80,746)
<OVERDIST-NET-GAINS-PRIOR>0
<GROSS-ADVISORY-FEES> 2,385,950
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,869,186
<AVERAGE-NET-ASSETS> 282,845,561
<PER-SHARE-NAV-BEGIN> 10.470
<PER-SHARE-NII> 0.790
<PER-SHARE-GAIN-APPREC> (0.030)
<PER-SHARE-DIVIDEND> 0.790
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.030
<PER-SHARE-NAV-END> 10.410
<EXPENSE-RATIO> 1.86
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 054
<NAME> Fixed Income Securities, Inc.
Federated Strategic Income Fund
Class F Shares
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-30-1997
<PERIOD-END> Nov-30-1997
<INVESTMENTS-AT-COST> 421,079,630
<INVESTMENTS-AT-VALUE> 423,348,297
<RECEIVABLES> 17,351,905
<ASSETS-OTHER> 240,566
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 440,940,768
<PAYABLE-FOR-SECURITIES> 9,821,586
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,073,919
<TOTAL-LIABILITIES> 18,895,505
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,821,586
<SHARES-COMMON-STOCK> 2,859,934
<SHARES-COMMON-PRIOR> 1,658,618
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (522,240)
<ACCUMULATED-NET-GAINS> 2,068,045
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,205,083
<NET-ASSETS> 29,762,459
<DIVIDEND-INCOME> 324,888
<INTEREST-INCOME> 26,387,655
<OTHER-INCOME> 0
<EXPENSES-NET> 4,723,076
<NET-INVESTMENT-INCOME> 21,989,467
<REALIZED-GAINS-CURRENT> 1,227,157
<APPREC-INCREASE-CURRENT> (2,824,267)
<NET-CHANGE-FROM-OPS> 20,392,357
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,059,642
<DISTRIBUTIONS-OF-GAINS> 51,079
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,408,149
<NUMBER-OF-SHARES-REDEEMED>291,731
<SHARES-REINVESTED> 84,898
<NET-CHANGE-IN-ASSETS> 246,157,386
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 704,568
<OVERDISTRIB-NII-PRIOR> (80,746)
<OVERDIST-NET-GAINS-PRIOR>0
<GROSS-ADVISORY-FEES> 2,385,950
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,869,186
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<PER-SHARE-NAV-BEGIN> 10.470
<PER-SHARE-NII> 0.870
<PER-SHARE-GAIN-APPREC> (0.030)
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<PER-SHARE-NAV-END> 10.410
<EXPENSE-RATIO> 1.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
