THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
FTI EUROPEAN SMALLER COMPANIES FUND
A Portfolio of FTI Funds
TABLE OF CONTENTS
Summary of Fund Goals, Strategies, and Risk
Fees and Expenses of the Fund
Related Performance
Investment Strategy of the Fund
Principal Securities in which the Fund Invests
Principal Investment Risks of the Fund
How to Purchase Shares
How the Fund is Distributed/Sold
Redemptions and Exchanges
Account and Share Information
Management of the Fund
As with all mutual funds, the Securities and Exchange Commission (SEC) has
not approved or disapproved these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
NOT FDIC INSURED
MAY LOSE VALUE
NO BANK GUARANTEE
PROSPECTUS
December 18, 2000
SUMMARY OF THE FUND'S GOAL, STRATEGY AND RISK
MUTUAL FUND:
A registered investment company that offers an affordable, diversified and
professionally managed way for people to invest in the financial marketplace. A
mutual fund pools the money of its shareholders to invest in a "mix" of
securities, called a portfolio, that pursues a specific objective. The money
earned from the portfolio of investments is distributed back to shareholders as
dividends, or, if any securities are sold at a profit, as capital gains.
Shareholders can reinvest their earnings to purchase additional shares of the
fund, or receive their earnings in cash.
GOAL: The Fund's goal is long-term growth of capital. The Fund's investment
goal (or objective) may be changed by the Board of Trustees (Board) without
shareholder approval.
STRATEGY: The Fund seeks to meet its goal by investing at least 65% of its
assets in a diversified portfolio of marketable equity and equity-related
securities of European companies with a market capitalization between $100
million and $5 billion or the equivalent in local currencies at the time of
purchase (smaller European companies). The Fund considers European companies to
be those: (1) organized under the laws of a country in Europe or having a
principal office in a country in Europe; (2) whose securities are listed or
traded principally on a recognized stock exchange or over-the-counter in Europe;
or (3) that derive 50% or more of their total assets, capitalization, gross
revenue or profit from goods produced, services performed or sales made in
Europe. The Fund's Adviser will use a disciplined investment focus, based on
fundamental analysis and valuation, in selecting securities. The Fund's Adviser,
Fiduciary International, Inc., will use a disciplined investment focus, based on
fundamental analysis and valuation, in selecting securities based on their
perceived potential for growth.
The Fund will invest in securities listed or traded on recognized
international markets in the following European countries: Austria, Belgium, the
Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Italy,
Ireland, Luxembourg, the Netherlands, Norway, Poland, Portugal, Spain, Sweden,
Switzerland, Turkey and the United Kingdom.
The benchmark of the Fund is the HSBC Smaller European Index. This index is
composed of about 1,500 companies in Europe which have market capitalizations in
a similar range to that used by the Fund. The composition of the index is
updated quarterly. All of the securities of smaller European companies located
in the above countries in which the Fund will invest are presently included in
the index except the Czech Republic, Hungary and Poland. At the time of
purchase, no single issuer will account for more than 5% of the total portfolio.
RISKS:
In addition to the risks set forth below that are specific to an investment
in the Fund, there are risks common to all mutual funds. For example, the Fund's
share price may decline and an investor could lose money. There is a risk that
you could lose all or a portion of your investment in the Fund. The value of
your investment in the Fund will go up or down with the prices of the securities
in which the Fund invests.
There are also several risks that are specific to an investment in the
Fund. The prices of equity securities change in response to many factors,
including the historical and prospective earnings of the issuer, the value of
its assets, general economic conditions, interest rates, investor perceptions,
and market liquidity.
Foreign securities are primarily denominated in foreign currencies and are
subject to risks in addition to risks normally associated with domestic
securities of the same type. The prices of foreign securities may be further
affected by other factors, including changes in currency exchange rates,
political and social instability, changes in economic conditions or taxation
policies, less stringent regulation of financial and accounting controls, and
less liquid and more volatile securities markets. These factors may affect the
prices of securities issued by smaller European companies located in developing
countries, such as the Czech Republic, Hungary, Turkey and Poland, more than
those in European countries with mature economies.
Due to their relatively high valuations, growth stocks are typically more
volatile than value stocks. For instance, the price of a growth stock may
experience a larger decline on a forecast of lower earnings, a negative
fundamental development or an adverse market development. Further, growth stocks
may not pay dividends or may pay lower dividends than value stocks. This means
they depend more on price changes for returns and may be more adversely affected
in a down market compared to value stocks that pay higher dividends.
Also, there is no assurance that the Fund will achieve its goal. 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 or guaranteed by the U.S.
government, the Federal Deposit Insurance Company, the Federal Reserve Board or
any other government agency. An investment in the Fund does not necessarily
constitute a balanced investment program for any one investor.
FEES AND EXPENSES OF THE FUND
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
SHAREHOLDER FEES
FEES PAID DIRECTLY FROM YOUR INVESTMENT
<TABLE>
<CAPTION>
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
Redemption Fee None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES (BEFORE WAIVERS) 1
EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS (AS A PERCENTAGE OF AVERAGE
NET ASSETS)
Management Fee 1.00%
Distribution (12b-1) Fee 2 0.25%
Other Expenses 4 0.44%
Total Annual Fund Operating Expenses (before waivers) 1.69%
1 Although not contractually obligated to do so, the administrator and
custodian expect to waive certain amounts. These are shown below along with
the net expenses the Fund expects to ACTUALLY PAY for the fiscal year ending
November 30, 2001.
Total Waiver of Fund Expenses 0.57%
Total Actual Annual Operating Expenses (after waivers) 1.37%
2 The Fund has no present intention of paying or accruing Distribution
(12b-1) Fees for the fiscal year ending November 30, 2001.
3 The administrator and custodian expect to voluntarily waive certain other
expenses. The administrator and custodian can terminate this voluntary
waiver at any time. The operating expenses expected to be paid by the Fund
(after the anticipated voluntary waiver) will be 0.37% for the fiscal year
ending November 30, 2001.
</TABLE>
----------------------------------------------------------------------------
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your Shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses are BEFORE WAIVERS as shown in the table
and remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 Year 3 Years
$197 $609
------------------------------------------------------------------------------
RELATED PERFORMANCE
The Fund has not commenced operations as of the date of this prospectus.
Consequently, the Fund has not established its own performance record. However,
the investment policies and investment strategies of the Fund are substantially
similar to those of the European Smaller Companies Fund (the Off-Shore Fund), a
portfolio of a unit trust that is registered and sold outside of the United
States and to those of private portfolios, the FTCI European Smaller Cap
Equities Accounts (the Accounts) all of which are managed by the same FTI
investment team that will manage the Fund. The performance of the Off Shore Fund
and the Accounts may be relevant to investors deciding whether to invest in the
Fund. The performance of the Accounts represents a composite of all accounts
managed using substantially similar investment policies and strategies. It is
calculated in compliance with standards adopted by the Association for
Investment Management and Research. The Off-Shore Fund is denominated in euros,
however, for the purposes of comparison, the performance indicated below is
calculated as though it were denominated in dollars.
OFF-SHORE FUND
Since inception (January 1, 1999)
1 YEAR (ENDED SEPTEMBER 30, 2000) TO SEPTEMBER 30, 2000
--------------------------------- ---------------------
72.48% Cumulative Total Return 46.77%*
THE ACCOUNTS
Since inception (January 1, 1994) 5 Years (Ended
1 YEAR (ENDED SEPTEMBER 30, 2000) TO SEPTEMBER 30, 2000
SEPTEMBER 30, 2000)
77.8% Cumulative Total Return 30.8%* 33.1%*
HSBC SMALLER EUROPEAN INDEX
5 Years (Ended
1 YEAR (ENDED SEPTEMBER 30, 2000) SINCE INCEPTION
SEPTEMBER 30, 2000)
2.93% Cumulative Total Return 9.4% **, 8.12%*** 9.7%*
The performance of the Off-Shore Fund and the Accounts does not indicate
any historical performance of the Fund, nor should this performance be
interpreted as indicative of the future performance of the Fund. Also, the
performance reported for the Off-Shore Fund reflects a relatively short time
period and may not be indicative of long term results.
The performance of these portfolios is net of investment management or
trust fees that, with respect to some of the Accounts, are lower than fees
incurred by the Fund and have positively affected the performance results of the
Accounts. The portfolios are not subject to certain investment limitations,
diversification requirements, and other restrictions imposed by the 1940 Act and
the Internal Revenue Code, which, if applicable, may have adversely affected
their performance results.
* Average Annual Total Return
** Average Annual Total Return from January 1, 1994 through September 30, 2000
*** Average Annual Total Return from January 1, 1999 through September 30,
2000
INVESTMENT STRATEGY OF THE FUND
The Fund's investment adviser, Fiduciary International, Inc., has
identified an "emerging company" phenomenon in Europe, as new securities
listings have increased the depth and breadth of the European equity markets.
Many interesting and well established smaller companies, previously in the
private sector, are now accessible to investors and are still relatively
undiscovered. The euro currency zone created as a result of the European
Monetary Unit (EMU) has also accelerated the move away from top down country
allocation to sector and stock selection as the major factor in identifying
securities that may have above average returns. The Adviser does not intend to
construct a portfolio that is merely representative of the European small cap
asset class, but instead aims to produce a portfolio of securities of
exceptionally dynamic companies operating in sectors which offer attractive
growth potential as a result of secular changes. The Adviser has a team of
research analysts dedicated to the identification of smaller companies which
have, in their opinion, the potential to provide above average performance.
While an aim of the Fund is to seek to outperform the HSBC Smaller European
Index, positions may be taken by the Fund which are not represented in that
index. In such cases, no more than 5% of the assets of the Fund will be invested
in any one market which is not represented in that Index.
PRINCIPAL SECURITIES IN WHICH THE FUND INVESTS
EQUITY SECURITIES
Equity securities represent a share of an issuer's earnings and assets
after the issuer pays its liabilities. The Fund cannot predict the income it
will receive from equity securities because issuers generally have discretion as
to the payment of any dividends or distributions. However, equity securities
offer greater potential for appreciation than many other types of securities
because their value increased directly with the value of the issuer's business.
COMMON STOCKS
Common stocks are the most prevalent type of equity security. Common stocks
receive the issuer's earnings after the issuer pays its creditors and any
preferred stockholders. As a result, changes in an issuer's earnings directly
influence the value of its common stock.
CONVERTIBLE SECURITIES
Convertible securities are fixed income securities that the Fund has the
option to exchange for equity securities at a specified conversion price. The
option allows the Fund to realize additional returns if the market price of the
equity securities exceeds the conversion price. For example, the Fund may hold
fixed income securities that are convertible into shares of common stock at a
conversion price of $10 per share. If the market value of the shares of common
stock reached $12, the Fund could realize an additional $2 per share by
converting its fixed income securities. Convertible securities have lower yields
than comparable fixed income securities. In addition, at the time a convertible
security is issued, the conversion price exceeds the market value of the
underlying equity securities. Thus, convertible securities may provide lower
returns than non-convertible fixed income securities or equity securities
depending upon changes in the price of the underlying equity securities.
However, convertible securities permit the Fund to realize some of the potential
appreciation of the underlying equity securities with less risk of losing the
initial investment.
TEMPORARY DEFENSIVE INVESTMENTS
The Fund may temporarily depart from its principal investment strategies by
investing its assets in cash and shorter-term debt securities and similar
obligations. It may do this to minimize potential losses and maintain liquidity
to meet shareholder redemptions during adverse market conditions. This may cause
the Fund to give up greater investment returns to attempt to maintain the safety
of principal, that is, the original amount invested by shareholders.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking
short-term profits, securities in its portfolio will be sold whenever the
Adviser believes it is appropriate to do so in light of the Fund's goal, without
regard to the length of time a particular security has been held. The Fund may,
therefore, engage in active and frequent trading of portfolio securities to
achieve its goal. The rate of portfolio turnover for the Fund may exceed that of
certain other mutual funds with the same investment objective. A higher rate of
portfolio turnover involves correspondingly greater transaction expenses that
must be borne directly by the Fund and, thus, indirectly by its shareholders. In
addition, a high rate of portfolio turnover may result in the realization of
larger amounts of capital gains which, when distributed to the Fund's
shareholders, are taxable to them. (Further information is contained in the
Fund's Statement of Additional Information under the sections "Brokerage
Transactions" and "Tax Information.") Nevertheless, transactions for the Fund's
portfolio will be based only upon investment considerations and will not be
limited by any other considerations when the Adviser deems it appropriate to
make changes in the Fund's portfolio. A portfolio turnover rate exceeding 100%
is considered to be high.
PRINCIPAL INVESTMENT RISKS OF THE FUND
RISKS RELATED TO FOREIGN INVESTING
CURRENCY RISKS
o Exchange rates for currencies, including the currency of the European
economic and monetary union (the "euro"), fluctuate daily. The combination
of currency risk and market risk tends to make securities traded in foreign
markets more volatile than securities traded exclusively in the U.S.
RISKS OF FOREIGN INVESTING
o Foreign securities pose additional risks because foreign economic or
political conditions may be less favorable than those of the United States.
Securities in foreign markets may also be subject to taxation policies that
reduce returns for U.S. investors.
o Foreign countries may have restrictions on foreign ownership or may impose
exchange controls, capital flow restrictions or repatriation restrictions
that could adversely affect the liquidity of the Fund's investments.
o Foreign financial markets may have fewer investor protections than U.S.
markets. For instance, there may be less publicly available information
about foreign companies, and the information that is available may be
difficult to obtain or may not be current. In addition, foreign countries
may lack financial controls and reporting standards or regulatory
requirements comparable to those applicable to U.S. companies.
o Due to these risks, foreign securities may be more volatile and less liquid
than similar securities traded in the U.S.
o The Fund may own foreign securities that trade in foreign markets on
days the NYSE is closed. This may cause the value of the Fund's assets to
change on days you cannot purchase, redeem or exchange shares. In computing
its NAV, the Fund values foreign securities on the exchange on which they
are traded at the latest closing price immediately prior to the closing of
the NYSE. Certain foreign currency exchange rates may also be determined at
the latest rate prior to the closing of the NYSE. Foreign securities quoted
in foreign currencies are translated into U.S. dollars at current rates.
Occasionally, events that affect these values and exchange rates may occur
between the times at which they are determined and the closing of the NYSE.
If such events materially affect the value of portfolio securities, these
securities may be valued at their fair value as determined in good faith
pursuant to procedures adopted by the Fund's Board, although the actual
calculation may be done by others. The effect of using fair value pricing
is that the Fund's net asset value will be subject to the judgment of the
Board of Trustees or its designee instead of being determined by the
market.
RISKS RELATED TO EQUITY SECURITIES
STOCK MARKET RISKS
o The value of equity securities in the Fund's portfolio will rise and fall.
These fluctuations could be a sustained trend or a drastic movement, and
the Fund's share price may decline.
SECTOR RISKS
o Companies with similar characteristics may be grouped together in broad
categories called sectors. Sector risk is the possibility that a certain
sector may underperform other sectors or the market as a whole. As the
Adviser allocates more of the Fund's portfolio holdings to a particular
sector, the Fund's performance will be more susceptible to any economic,
business or other developments which generally affect that sector.
LIQUIDITY RISKS
o Trading opportunities are more limited for equity securities that are not
widely held. This may make it more difficult to sell or buy a security at a
favorable price or time. Consequently, the Fund may have to accept a lower
price to sell a security, sell other securities to raise cash or give up an
investment opportunity, any of which could have a negative effect on the
Fund's performance. Infrequent trading of securities may also lead to an
increase in their price volatility.
o Liquidity risk also refers to the possibility that the Fund may not be able
to sell a security or close out a derivative contract when it wants is most
advantageous. If this happens, the Fund will be required to continue to
hold the security or keep the position open, and the Fund could incur
losses.
RISKS RELATED TO INVESTING FOR GROWTH
o Due to their relatively high valuations, growth stocks are typically more
volatile than value stocks. For instance, the price of a growth stock may
experience a larger decline on a forecast of lower earnings, a negative
fundamental development or an adverse market development. Further, growth
stocks may not pay dividends or may pay lower dividends than value stocks.
This means they depend more on price changes for returns and may be more
adversely affected in a down market compared to value stocks that pay
higher dividends.
RISKS RELATED TO COMPANY SIZE
o Generally, the smaller the market capitalization of a company, the fewer
the number of shares traded daily, the less liquid its stock and the more
volatile its price. Market capitalization is determined by multiplying the
number of its outstanding shares by the current market price per share.
o Companies with smaller market capitalizations also tend to have unproven
track records, a limited product or service base and limited access to
capital. These factors also increase risks and make these companies more
likely to fail than companies with larger market capitalization.
RISKS RELATED TO INITIAL PUBLIC OFFERING MARKET
o The Fund may participate in the initial public offering (IPO) market.
Investments by the Fund in IPOs may have a magnified impact on the Fund's
return due to the size of the Fund. As the Fund's assets grow, the impact
of IPO investments will decline, which may reduce the Fund's total return.
HOW TO PURCHASE SHARES
An investor can purchase, redeem or exchange shares, without a sales
charge, on any day the New York Stock Exchange (NYSE) and the Federal Reserve
Wire System are open. Investors who purchase, redeem or exchange shares through
a financial intermediary may be charged a service fee by that financial
intermediary. When the Fund receives your transaction request in proper form (as
described in this prospectus), it is processed at the next calculated NAV,
otherwise known as the Fund's public offering price. NAV is determined at the
end of regular trading (normally 4:00 p.m. Eastern time) each day the NYSE is
open. The Fund generally values securities according to the last sale price in
the market in which they are primarily traded (either a national securities
exchange or the over-the-counter market).
MINIMUM INVESTMENT AMOUNT
The required minimum initial investment for Fund shares is $1,000. There is
no required minimum subsequent investment amount. Minimum investments for
clients of financial intermediaries (such as brokers and dealers) will be
calculated by combining all accounts maintained in an FTI Fund by the
intermediary. This prospectus should be read together with any account agreement
maintained for required minimum investment amounts imposed by Fiduciary Trust
Company International or its affiliates. The required minimum investment amount
may be waived for employees of the Adviser or its affiliates.
Shares of the Fund may be purchased through Fiduciary International, Inc.
or through authorized broker/dealers. The Fund reserves the right to reject any
purchase request. In connection with the sale of shares of the Fund, Edgewood
Services, Inc. may, from time to time, offer certain items of nominal value to
any shareholder or investor.
THROUGH FIDUCIARY INTERNATIONAL, INC.
To place an order to purchase shares of the Fund, an investor (except
residents of Texas) may write or call Fiduciary International, Inc. Purchase
orders must be received by Fiduciary International, Inc. before 3:00 p.m.
(Eastern time) by calling 888-FIDUCIARY (888-343-8242). Payment is normally
required on the next business day. Payment may be made either by mail or by
wire. Texas residents must purchase shares through Edgewood Services, Inc. at
888-898-0600.
BY MAIL
To purchase shares of the Fund by mail, send a check made payable to FTI
Funds (and identify the appropriate Fund) to:
FTI FUNDS
C/O FEDERATED SHAREHOLDER SERVICES COMPANY
P.O. BOX 8609
BOSTON, MA 02266-8609
Orders by mail are considered received after payment by check is converted
into federal funds. This is normally the next business day after the Fund
receives the check.
BY WIRE
To purchase shares of the Fund by wire, call 888-FIDUCIARY (888-343-8242).
Representatives are available from 9:00 a.m. to 5:00 p.m. (Eastern time). Shares
of the Fund cannot be purchased on holidays when wire transfers are restricted.
Fiduciary Trust Company International is on-line with the Federal Reserve Bank
of New York. Accordingly, to purchase shares of the Fund by wire, wire the Fund
as follows:
FIDUCIARY TRUST COMPANY INTERNATIONAL
ABA #026007922
CREDIT: ACCOUNT NUMBER 550000100
FURTHER CREDIT TO: (NAME OF FUND)
RE: (CUSTOMER NAME)
Payment by wire must be received by Fiduciary International, Inc. before
3:00 p.m. (Eastern time) on the next business day after placing the order.
THROUGH AUTHORIZED BROKER/DEALERS
An investor may place an order through authorized brokers and dealers to
purchase shares of the Fund. These brokers and dealers may designate others to
receive purchase orders on the Fund's behalf. Shares will be purchased at the
NAV next calculated after the Fund receives the purchase request. The Fund will
be deemed to have received a purchase order when an authorized broker or its
designee receives the order. The order will be priced at the next calculated NAV
after it is received by the Fund, the broker, or the broker's designee, as
applicable. Purchase requests through authorized brokers and dealers must be
received before 3:00 p.m. (Eastern time) in order for shares to be purchased at
that day's NAV.
THROUGH AN EXCHANGE
A shareholder may exchange shares of one Fund for shares of any of the
other FTI Funds in the Trust by calling 888-FIDUCIARY (888-343-8242) or by
writing to Fiduciary International, Inc. Shares purchased by check are eligible
for exchange after seven days.
RETIREMENT INVESTMENTS
A shareholder may purchase shares of the Fund as retirement investments
(such as qualified plans and IRAs or transfer or rollover of assets). Call your
financial intermediary or 888-FIDUCIARY (888-343-8242) for information on
retirement investments. We suggest that you discuss retirement investments with
your tax adviser. You may be subject to an annual IRA account fee. HOW THE FUND
IS DISTRIBUTED/SOLD
The Fund's Distributor, Edgewood Services, Inc., markets the shares
described in this prospectus to institutions or to individuals, directly or
through investment professionals. When the Distributor receives marketing fees,
it may pay some or all of them to investment professionals. The Distributor and
its affiliates may pay out of their assets other amounts (including items of
material value) to investment professionals for marketing and servicing shares.
The Distributor is a subsidiary of Federated Investors, Inc. (Federated).
RULE 12B-1 PLAN
The Trust has adopted a Rule 12b-1 Plan (Plan), which allows it to pay
marketing fees to the Distributor and investment professionals for the sale,
distribution and customer servicing of the Fund's shares. The Trust has no
present intention to activate the Plan and the Distributor has no present
intention to collect any fees pursuant to the Plan. . If the Trust were to
activate the Plan, it would be permitted to pay up to 0.25% of the average net
assets of the Fund as a distribution fee to the Distributor. Fund expenses will
rise once the Fund begins accruing the 12b-1 fee. Because 12b-1 fees would be
paid out of the Fund's assets on an on-going basis, over time these fees would
increase the cost of your investment and may cost you more than paying other
types of sales charges.
REDEMPTIONS AND EXCHANGES
BY TELEPHONE
To redeem or exchange shares of the Fund by telephone, call Fiduciary
International, Inc. at 888-FIDUCIARY (888-343-8242). An authorization form for
telephone transactions must first be completed. If not completed with an
investor's initial application, the forms can be obtained from the Fund. The
Fund reserves the right to reject any exchange request. If you call before 3:00
p.m., you will receive a redemption amount based on the next calculated NAV.
Although Fiduciary International, Inc. 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, or in excess of one per month.
TAX INFORMATION ON REDEMPTIONS AND EXCHANGES: Redemptions and exchanges are
taxable sales. Please consult with your tax adviser regarding your federal,
state, and local tax liability.
THROUGH AUTHORIZED BROKER/DEALERS
Submit your redemption or exchange request to your broker by the end of
regular trading on the NYSE (normally 4:00 p.m. Eastern time). These brokers and
dealers may designate others to receive redemption and exchange requests on the
Fund's behalf. The Fund will be deemed to have received a redemption or an
exchange request when an authorized broker or its designee receives the request.
The redemption amount you receive is based upon the next calculated NAV after it
is received by the Fund, the broker or the broker's designee, as applicable.
BY MAIL
To redeem or exchange shares by mail send a written request to:
FEDERATED SHAREHOLDER SERVICES COMPANY
P.O. BOX 8609
BOSTON, MA 02266-8609
You will receive a redemption amount based on the NAV on the day your
written request is received in proper form.
ALL REQUESTS MUST INCLUDE:
o Fund name, registered account name and number;
o amount to be redeemed or exchanged;
o signatures of all shareholders exactly as registered; and
o if exchanging, the Fund name, registered account name and number into which
you are exchanging.
SIGNATURE GUARANTEES
Signatures must be guaranteed if:
o a redemption is to be sent to an address other than the address of record;
o a redemption is to be sent to an address of record that was changed within
the last 30 days;
o a redemption is payable to someone other than the shareholder(s) of record;
or
o if exchanging (transferring) into another fund with a different shareholder
registration.
Your signature can be guaranteed by any federally insured financial
institution (such as a bank or credit union) or a broker/dealer that is a
domestic stock exchange member, but not by a notary public.
LIMITATIONS ON REDEMPTION PROCEEDS
o Redemption proceeds normally are wired or mailed within one business day
after receiving a request in proper form. However, payment may be delayed
up to seven days:
o to allow your purchase payment to clear;
o during periods of market volatility; or
o when a shareholder's trade activity or amount adversely impacts the Fund's
ability to manage its assets.
REDEMPTION IN KIND
Although the Fund intends to pay redemptions in cash, it reserves the right
to pay the redemption price in whole or in part by a distribution of its
portfolio SECURITIES.
REDEMPTIONS FROM RETIREMENT ACCOUNTS
In the absence of your specific instructions, 10% of the value of your
redemption from a retirement account in the Fund may be withheld for taxes. This
withholding only applies to certain types of retirement accounts.
EXCHANGE PRIVILEGE
Investors may exchange shares of the Fund into shares of another FTI Fund
or certain money market funds for which affiliates or subsidiaries of Federated
serve as investment adviser and/or principal underwriter (Federated Money
Funds). Exchanges are made at NAV and the Fund does not impose additional fees
on exchanges. To do this, an investor must:
o complete an authorization form permitting the Fund to accept telephone
exchange requests;
o meet any minimum initial investment requirements; and
o receive a prospectus. Further information on the exchange privilege and
prospectuses for the Federated Money Funds are available by contacting the
Trust.
An exchange is treated as a redemption and a subsequent purchase and is a
taxable transaction.
The Trust may modify or terminate the exchange privilege at any time. The
Trust's management or Adviser may determine from the amount, frequency and
pattern of exchanges that a shareholder is engaged in excessive trading which is
detrimental to the Fund and other shareholders. If this occurs, the Trust may
terminate the availability of exchanges to that shareholder and may bar that
shareholder from purchasing shares of other FTI Funds.
ADDITIONAL CONDITIONS
TELEPHONE TRANSACTIONS
The Fund will record your telephone instructions. If the Fund does not
follow reasonable procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. The Fund will notify you if it changes
telephone transaction privileges.
ACCOUNT AND SHARE INFORMATION
CONFIRMATION AND ACCOUNT STATEMENTS
You will receive confirmation of purchases, redemptions and exchanges. In
addition, you will receive periodic statements reporting all account activity,
dividends and capital gains paid. The Fund does not issue share certificates.
DIVIDENDS AND CAPITAL GAINS
The Fund declares any dividends daily and pays them annually to
shareholders. If you purchase shares by wire, you begin earning dividends on the
day your wire is received. If you purchase shares by check, you begin earning
dividends on the business day after the Fund receives your check. In either
case, you earn dividends through the day your redemption request is received.
DIVIDEND: In a mutual fund, money paid to shareholders that the fund has
earned as income on its investments.
In addition, the Fund pays any capital gains at least annually. Your
dividends and capital gains distributions will be automatically reinvested in
additional shares without a sales charge, unless you elect cash payments.
If you purchase shares just before the Fund declares a dividend or capital
gain distribution, you will pay the full price for the shares and then receive a
portion of the price back in the form of a taxable distribution, whether or not
you reinvest the distribution in shares. Therefore, you should consider the tax
implications of purchasing shares shortly before the Fund declares a dividend or
capital gain. Contact your investment professional or the Fund for information
concerning when dividends and capital gains will be paid.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances,
non-retirement accounts may be closed if redemptions or exchanges cause the
account balance to fall below the minimum initial investment amount of $1,000.
Before an account is closed, you will be notified and allowed 30 days to
purchase additional shares to meet the minimum.
TAX INFORMATION
The Fund sends an annual statement of your account activity to assist you
in completing your federal, state and local tax returns. Fund distributions of
dividends and capital gains are taxable to you whether paid in cash or
reinvested in the Fund. Dividends are generally taxable as ordinary income;
however, distribution of capital gains are taxable at different rates depending
upon the length of time the Fund has held the securities on which gains have
been realized. A redemption of Fund shares or an exchange of Fund shares for
shares of another FTI Fund or a Federated Money Funds will be treated as a sale
of the Fund's shares and any gain on such redemption or exchange will generally
be taxable.
CAPITAL GAIN: Profits realized on the sale of an investment. In a mutual
fund, profits from the sale of securities in the fund's portfolio are usually
distributed to shareholders annually.
Shareholders are urged to consult their own tax advisers regarding the
status of their accounts under federal, state, local, and foreign tax laws,
including treatment of distributions as income or return on capital.
MANAGEMENT OF THE FUND
The Board of Trustees governs the Trust. The Board selects and oversees the
Adviser, Fiduciary International, Inc. The Adviser manages the Fund's assets,
including buying and selling portfolio securities. The Adviser's address is Two
World Trade Center, New York, New York 10048-0772.
ADVISORY FEES
The Adviser receives an annual investment advisory fee equal to 1.00% of
the Fund's daily net assets. The investment advisory contract provides for the
voluntary waiver of expenses by the Adviser from time to time. The Adviser can
terminate this voluntary waiver of expenses at any time with respect to the Fund
at its sole discretion.
THE INVESTMENT ADVISER'S BACKGROUND
Fiduciary International, Inc. (FII) is a New York corporation that was
organized in 1982 as Fir Tree Advisers, Inc. FII is a wholly-owned subsidiary of
Fiduciary Investment Corporation, which in turn is a wholly-owned subsidiary of
FTCI. FTCI has more than 60 years of investment management experience, including
more than 30 years experience in managing pooled investment vehicles that invest
in the international markets. FTCI is a New York state-chartered bank
specializing in investment management activities. As of December 31, 1999, FTCI
had total assets under management of approximately $50 billion. These assets
included investments managed for individuals and institutional clients,
including employee benefit plans of corporations, public retirement systems,
unions, endowments, foundations and others.
FII is a registered investment adviser under the Investment Advisers Act of
1940. The Adviser and its officers, affiliates and employees may act as
investment managers for parties other than the Trust, including other investment
companies.
The Adviser has five clients that are registered investment companies and
two clients that are collective funds established by limited purpose trust
companies. Assets under management as of December 31, 1999 were approximately
$852 million.
ACQUISITION OF FIDUCIARY TRUST INTERNATIONAL
Franklin Resources, Inc. (operating as Franklin Templeton Investments) of
San Mateo, CA, and Fiduciary Trust Company International of New York announced
on October 25, 2000, that they have signed a definitive agreement under which
Franklin Resources will acquire Fiduciary Trust International in an all-stock
transaction valued at approximately $825 million. Based on current assets, the
combined entity would have more than $280 billion in assets under management
worldwide. Fiduciary Trust Company International is the ultimate parent company
of the FTI Funds' investment adviser, Fiduciary International, Inc.
The transaction, which is subject to shareholder and regulatory approvals
and other customary closing conditions, is expected to be completed in the first
quarter of calendar 2001. It is not expected that the transaction will result in
any immediate change in the manner in which the Fund will be managed. However,
the Fund's Board of Trustees will consider what, if any, action will be
necessary in the future. Shareholders will be informed of any material
developments.
PORTFOLIO MANAGER FOR THE FUND:
MARGARET LINDSAY, Senior Vice President, FTCI, received a B.A. from
Dickinson College in 1973, an M.S. from Drexel University in 1974 and an M.B.A.
from the Wharton School in 1981. She joined Fiduciary in 1991. For the past five
years she has served as the head of the European Small Cap Team and as lead
portfolio manager on the team. Ms. Lindsay is bilingual (German).
FINANCIAL INFORMATION
FINANCIAL HIGHLIGHTS
The Fund's fiscal year end is November 30. As this is the Fund's first
fiscal year, financial information is not yet available.
FTI EUROPEAN SMALLER COMPANIES FUND
A Portfolio of FTI Funds
A Statement of Additional Information (SAI) dated December 18, 2000, includes
additional information about the Fund and is incorporated by reference into
this prospectus. To obtain the SAI and other information without charge, and
make inquiries, call your investment professional or the Fund at
1-800-341-7400.
You can obtain information about the Fund (including the SAI) by writing to
or visiting the SEC's Public Reference Room in Washington, DC. You may also
access Fund information from the EDGAR Database on the SEC's Internet site at
http://www.sec.gov. You can purchase copies of this information by contacting
the SEC by email at [email protected] or by writing to the SEC's Public
Reference Section, Washington, DC 20549-0102. Call 1-202-942-8090 for
information on the Public Reference Room's operations and copying fees.
INVESTMENT COMPANY ACT FILE NO. 811-7369
CUSIP 302927884
25983 (12/00)
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE
AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND
IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
FTI FUNDS
FTI EUROPEAN SMALLER COMPANIES FUND
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 18, 2000
This Statement of Additional Information (SAI) is not a prospectus. Read this
SAI in conjunction with the prospectus for FTI European Smaller Companies Fund
(Fund), dated December 18, 2000. Obtain the prospectus without charge by calling
888-FIDUCIARY (888-343-8242).
December 18, 2000
CONTENTS
Fund Organization Securities in Which the
Fund Invests Investment Risks Investment
Limitations Determining the Market Value of
Securities How the Fund is Sold Redemption
in Kind Massachusetts Law Account and Share
Information Tax Information Fund Management
and Service Providers How the Fund Measures
Performance Investment Ratings Addresses
25984 (12/00)
FUND ORGANIZATION
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The Fund is a diversified portfolio of FTI Funds (Trust). The Trust is
registered as an open-end, management investment company and was established as
a business trust under the laws of the Commonwealth of Massachusetts on October
18, 1995. The Trust may offer separate series of shares representing interests
in separate portfolios of securities. The Fund is a portfolio of the Trust. The
Board of Trustees (Board) has established six additional separate series of the
Trust that are offered pursuant to a separate prospectus. The Fund's investment
adviser is Fiduciary International, Inc. (Adviser).
SECURITIES IN WHICH THE FUND INVEST
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Securities and techniques principally used by the Fund to meet its
respective objective are described in the prospectus. Other securities and
techniques used by the Fund to meet its objective are described below.
EQUITY SECURITIES
Equity securities represent a share of an issuer's earnings and assets,
after the issuer pays its liabilities. The Fund cannot predict the income it
will receive from equity securities because issuers generally have discretion as
to the payment of any dividends or distributions. However, equity securities
offer greater potential for appreciation than many other types of securities
because their value increases directly with the value of the issuer's business.
WARRANTS
Warrants give the Fund the option to buy an issuer's equity securities at a
specified price (the exercise price) at a specified future date (the expiration
date). The Fund may buy the designated securities by paying the exercise price
before the expiration date. Warrants may become worthless if the price of the
stock does not rise above the exercise price by the expiration date. This
increases the market risks of warrants as compared to the underlying security.
Rights are the same as warrants, except companies typically issue rights to
existing stockholders.
PREFERRED STOCKS
Preferred stocks have the right to receive specified dividends or
distributions before the issuer makes payments on its common stock. Some
preferred stocks also participate in dividends and distributions paid on common
stock. Preferred stocks may also permit the issuer to redeem the stock. The Fund
may also treat such redeemable preferred stock as a fixed income security.
REAL ESTATE INVESTMENT TRUSTS (REITS)
REITs are real estate investment trusts that lease, operate and finance
commercial real estate. REITs are exempt from federal corporate income tax if
they limit their operations and distribute most of their income. Such tax
requirements limit a REIT's ability to respond to changes in the commercial real
estate market.
FIXED INCOME SECURITIES
Fixed income securities pay interest, dividends or distributions at a
specified rate. The rate may be a fixed percentage of the principal or adjusted
periodically. In addition, the issuer of a fixed income security must repay the
principal amount of the security, normally within a specified time. Fixed income
securities provide more regular income than equity securities. However, the
returns on fixed income securities are limited and normally do not increase with
the issuer's earnings. This limits the potential appreciation of fixed income
securities as compared to equity securities. A security's yield measures the
annual income earned on a security as a percentage of its price. A security's
yield will increase or decrease depending upon whether it costs less (a
discount) or more (a premium) than the principal amount. If the issuer may
redeem the security before its scheduled maturity, the price and yield on a
discount or premium security may change based upon the probability of an early
redemption. Securities with higher risks generally have higher yields.
CORPORATE DEBT SECURITIES
Corporate debt securities are fixed income securities issued by businesses.
Notes, bonds, debentures and commercial paper (which is discussed more fully
below) are the most prevalent types of corporate debt securities. The Fund may
also purchase interests in bank loans to companies. The credit risks of
corporate debt securities vary widely among issuers. In addition, the credit
risk of an issuer's debt security may vary based on its priority for repayment.
For example, higher ranking (senior) debt securities have a higher priority than
lower ranking (subordinated) securities. This means that the issuer might not
make payments on subordinated securities while continuing to make payments on
senior securities. In addition, in the event of bankruptcy, holders of senior
securities may receive amounts otherwise payable to the holders of subordinated
securities. Some subordinated securities, such as trust preferred and capital
securities notes, also permit the issuer to defer payments under certain
circumstances. For example, insurance companies issue securities known as
surplus notes that permit the insurance company to defer any payment that would
reduce its capital below regulatory requirements.
COMMERCIAL PAPER
Commercial paper is an issuer's obligation with a maturity of less than
nine months. Companies typically issue commercial paper to pay for current
expenditures. Most issuers constantly reissue their commercial paper and use the
proceeds (or bank loans) to repay maturing paper. If the issuer cannot continue
to obtain liquidity in this fashion, its commercial paper may default. The short
maturity of commercial paper reduces both the market and credit risks as
compared to other debt securities of the same issuer.
DEMAND INSTRUMENTS
Demand instruments are corporate debt securities that the issuer must repay
upon demand. Other demand instruments require a third party, such as a dealer or
bank, to repurchase the security for its face value upon demand. The Fund treats
demand instruments as short-term securities, even though their stated maturity
may extend beyond one year.
BANK INSTRUMENTS
Bank instruments are unsecured interest bearing deposits with banks. Bank
instruments include bank accounts, time deposits, certificates of deposit and
banker's acceptances. Yankee instruments are denominated in U.S. dollars and
issued by U.S. branches of foreign banks. Eurodollar instruments are denominated
in U.S. dollars and issued by non-U.S. branches of U.S. or foreign banks.
FOREIGN SECURITIES
DEPOSITARY RECEIPTS
Depositary receipts represent interests in underlying securities issued by
a foreign company. Depositary receipts are not traded in the same market as the
underlying security. The foreign securities underlying American Depositary
Receipts (ADRs) are traded outside the United States. ADRs provide a way to buy
shares of foreign-based companies in the United States rather than in overseas
markets. ADRs are also traded in U.S. dollars, eliminating the need for foreign
exchange transactions. The foreign securities underlying European Depositary
Receipts (EDRs), Global Depositary Receipts (GDRs), and International Depositary
Receipts (IDRs), are traded globally or outside the United States. Depositary
receipts involve many of the same risks of investing directly in foreign
securities, including currency risks and risks of foreign investing.
FOREIGN EXCHANGE CONTRACTS
In order to convert U.S. dollars into the currency needed to buy a foreign
security, or to convert foreign currency received from the sale of a foreign
security into U.S. dollars, the Fund may enter into spot currency trades. In a
spot trade, the Fund agrees to exchange one currency for another at the current
exchange rate. The Fund may also enter into derivative contracts in which a
foreign currency is an underlying asset. The exchange rate for currency
derivative contracts may be higher or lower than the spot exchange rate. Use of
these derivative contracts may increase or decrease the Fund's exposure to
currency risks.
FOREIGN GOVERNMENT SECURITIES
Foreign government securities generally consist of fixed income securities
supported by national, state or provincial governments or similar political
subdivisions. Foreign government securities also include debt obligations of
supranational entities, such as international organizations designed or
supported by governmental entities to promote economic reconstruction or
development, international banking institutions and related government agencies.
Examples of these include, but are not limited to, the International Bank for
Reconstruction and Development (the World Bank), the Asian Development Bank, the
European Investment Bank and the Inter-American Development Bank.
Foreign government securities also include fixed income securities of
quasi-governmental agencies that are either issued by entities owned by a
national, state or equivalent government or are obligations of a political unit
that are not backed by the national government's full faith and credit. Further,
foreign government securities include mortgage-related securities issued or
guaranteed by national, state or provincial governmental instrumentalities,
including quasi-governmental agencies.
DERIVATIVE CONTRACTS
Derivative contracts are financial instruments that require payments based
upon changes in the values of designated (or underlying) securities, currencies,
commodities, financial indices or other assets. Some derivative contracts (such
as futures, forwards and options) require payments relating to a future trade
involving the underlying asset. Other derivative contracts (such as swaps)
require payments relating to the income or returns from the underlying asset.
The other party to a derivative contract is referred to as a counterparty.
Many derivative contracts are traded on securities or commodities
exchanges. In this case, the exchange sets all the terms of the contract except
for the price. Investors make payments due under their contracts through the
exchange. Most exchanges require investors to maintain margin accounts through
their brokers to cover their potential obligations to the exchange. Parties to
the contract make (or collect) daily payments to the margin accounts to reflect
losses (or gains) in the value of their contracts. This protects investors
against potential defaults by the counterparty. Trading contracts on an exchange
also allows investors to close out their contracts by entering into offsetting
contracts.
For example, the Fund could close out an open contract to buy an asset at a
future date by entering into an offsetting contract to sell the same asset on
the same date. If the offsetting sale price is more than the original purchase
price, the Fund realizes a gain; if it is less, the Fund realizes a loss.
Exchanges may limit the amount of open contracts permitted at any one time. Such
limits may prevent the Fund from closing out a position. If this happens, the
Fund will be required to keep the contract open (even if it is losing money on
the contract), and to make any payments required under the contract (even if it
has to sell portfolio securities at unfavorable prices to do so). Inability to
close out a contract could also harm the Fund by preventing it from disposing of
or trading any assets it has been using to secure its obligations under the
contract.
The Fund may also trade derivative contracts over-the-counter (OTC) in
transactions negotiated directly between the Fund and the counterparty. OTC
contracts do not necessarily have standard terms, so they cannot be directly
offset with other OTC contracts. In addition, OTC contracts with more
specialized terms may be more difficult to price than exchange traded contracts.
Depending upon how the Fund uses derivative contracts and the relationships
between the market value of a derivative contract and the underlying asset,
derivative contracts may increase or decrease the Fund's exposure to market and
currency risks, and may also expose the Fund to liquidity and leverage risks.
OTC contracts also expose the Fund to credit risks in the event that a
counterparty defaults on the contract.
The Fund may trade in the following types of derivative contracts:
FUTURES CONTRACTS
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of an underlying asset at a specified price,
date, and time. Entering into a contract to buy an underlying asset is commonly
referred to as buying a contract or holding a long position in the asset.
Entering into a contract to sell an underlying asset is commonly referred to as
selling a contract or holding a short position in the asset. Futures contracts
are considered to be commodity contracts. Futures contracts traded OTC are
frequently referred to as forward contracts.
OPTIONS
Options are rights to buy or sell an underlying asset for a specified price
(the exercise price) during, or at the end of, a specified period. A call option
gives the holder (buyer) the right to buy the underlying asset from the seller
(writer) of the option. A put option gives the holder the right to sell the
underlying asset to the writer of the option. The writer of the option receives
a payment, or premium, from the buyer, which the writer keeps regardless of
whether the buyer uses (or exercises) the option.
To the extent that the Fund utilizes options, it would generally:
o buy call options in anticipation of an increase in the value of the
underlying asset;
o buy put options in anticipation of a decrease in the value of the
underlying asset; and
o buy or write options to close out existing options positions.
The Fund may also write call options to generate income from premiums, and
in anticipation of a decrease or only limited increase in the value of the
underlying asset. 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. The Fund may also write put
options to generate income from premiums, and in anticipation of an increase or
only limited decrease in the value of the underlying asset. In writing puts,
there is a risk that the Fund may be required to take delivery of the underlying
asset when its current market price is lower than the exercise price. When the
Fund writes options on futures contracts, it will be subject to margin
requirements similar to those applied to futures contracts.
HEDGING
Hedging transactions are intended to reduce specific risks. For example, to
protect the Fund against circumstances that would normally cause the Fund's
portfolio securities to decline in value, the Fund may buy or sell a derivative
contract that would normally increase in value under the same circumstances. The
Fund may also attempt to hedge by using combinations of different derivatives
contracts, or derivatives contracts and securities. The Fund's ability to hedge
may be limited by the costs of the derivatives contracts. The Fund may attempt
to lower the cost of hedging by entering into transactions that provide only
limited protection, including transactions that (1) hedge only a portion of its
portfolio, (2) use derivatives contracts that cover a narrow range of
circumstances or (3) involve the sale of derivatives contracts with different
terms. Consequently, hedging transactions will not eliminate risk even if they
work as intended. In addition, hedging strategies are not always successful, and
could result in increased expenses and losses to the Fund.
HYBRID INSTRUMENTS
Hybrid instruments combine elements of derivative contracts with those of
another security (typically a fixed income security). All or a portion of the
interest or principal payable on a hybrid security is determined by reference to
changes in the price of an underlying asset or by reference to another benchmark
(such as interest rates, currency exchange rates or indices). Hybrid instruments
also include convertible securities with conversion terms related to an
underlying asset or benchmark.
The risks of investing in hybrid instruments reflect a combination of the
risks of investing in securities, options, futures and currencies, and depend
upon the terms of the instrument. Thus, an investment in a hybrid instrument may
entail significant risks in addition to those associated with traditional fixed
income or convertible securities. Hybrid instruments are also potentially more
volatile and carry greater market risks than traditional instruments. Moreover,
depending on the structure of the particular hybrid, it may expose the Fund to
leverage risks or carry liquidity risks.
SWAPS
Swaps are contracts in which two parties agree to pay each other (swap) the
returns derived from underlying assets with differing characteristics. Most
swaps do not involve the delivery of the underlying assets by either party, and
the parties might not own the assets underlying the swap. The payments are
usually made on a net basis so that, on any given day, the Fund would receive
(or pay) only the amount by which its payment under the contract is less than
(or exceeds) the amount of the other party's payment. Swap agreements are
sophisticated instruments that can take many different forms, and are known by a
variety of names including caps, floors, and collars.
Common swap agreements that the Fund may use include:
INTEREST RATE SWAPS
Interest rate swaps are contracts in which one party agrees to make
regular payments equal to a fixed or floating interest rate times a
stated principal amount of fixed income securities, in return for
payments equal to a different fixed or floating rate times the same
principal amount, for a specific period. For example, a $10 million
LIBOR swap would require one party to pay the equivalent of the London
Interbank Offered Rate of interest (which fluctuates) on $10 million
principal amount in exchange for the right to receive the equivalent
of a stated fixed rate of interest on $10 million principal amount.
CURRENCY SWAPS
Currency swaps are contracts which provide for interest payments in
different currencies. The parties might agree to exchange the notional
principal amount as well.
CAPS AND FLOORS
CAPS AND FLOORS ARE CONTRACTS IN WHICH ONE PARTY AGREES TO MAKE
PAYMENTS ONLY IF AN INTEREST RATE OR INDEX GOES ABOVE (CAP) OR BELOW
(FLOOR) A CERTAIN LEVEL IN RETURN FOR A FEE FROM THE OTHER PARTY.
TOTAL RETURN SWAPS
Total return swaps are contracts in which one party agrees to make
payments of the total return from the underlying asset during the
specified period, in return for payments equal to a fixed or floating
rate of interest or the total return from another underlying asset.
SPECIAL TRANSACTIONS
REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which the Fund buys a security
from a dealer or bank and agrees to sell the security back at a mutually agreed
upon time and price. The repurchase price exceeds the sale price, reflecting the
Fund's return on the transaction. This return is unrelated to the interest rate
on the underlying security. The Fund will enter into repurchase agreements only
with banks and other recognized financial institutions, such as securities
dealers, deemed creditworthy by the Adviser. The Fund's custodian or
subcustodian will take possession of the securities subject to repurchase
agreements. The Adviser or subcustodian will monitor the value of the underlying
security each day to ensure that the value of the security always equals or
exceeds the repurchase price. Repurchase agreements are subject to credit risks.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are repurchase agreements in which the Fund
is the seller (rather than the buyer) of the securities, and agrees to
repurchase them at an agreed upon time and price. A reverse repurchase agreement
may be viewed as a type of borrowing by the Fund. Reverse repurchase agreements
are subject to credit risks. In addition, reverse repurchase agreements create
leverage risks because the Fund must repurchase the underlying security at a
higher price, regardless of the market value of the security at the time of
repurchase.
DELAYED DELIVERY TRANSACTIONS
Delayed delivery transactions, including when issued transactions, are
arrangements in which the Fund buys securities for a set price, with payment and
delivery of the securities scheduled for a future time. During the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. The Fund records the transaction when it
agrees to buy the securities and reflects their value in determining the price
of its shares. Settlement dates may be a month or more after entering into these
transactions so that the market values of the securities bought may vary from
the purchase prices. Therefore, delayed delivery transactions create market
risks for the Fund. Delayed delivery transactions also involve credit risks in
the event of a counterparty default.
SECURITIES LENDING
The Fund may lend portfolio securities to borrowers that the Adviser deems
creditworthy. In return, the Fund receives cash or liquid securities from the
borrower as collateral. The borrower must furnish additional collateral if the
market value of the loaned securities increases. Also, the borrower must pay the
Fund the equivalent of any dividends or interest received on the loaned
securities.
The Fund will reinvest cash collateral in securities that qualify as an
acceptable investment for the Fund. However, the Fund must pay interest to the
borrower for the use of cash collateral.
Loans are subject to termination at the option of the Fund or the borrower.
The Fund will not have the right to vote on securities while they are on loan,
but it will terminate a loan in anticipation of any important vote. The Fund may
pay administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash collateral to a securities
lending agent or broker.
Securities lending activities are subject to market risks and credit risks.
ASSET COVERAGE
In order to secure its obligations in connection with derivatives contracts
or special transactions, the Fund will either own the underlying assets, enter
into an offsetting transaction, or set aside readily marketable securities with
a value that equals or exceeds the Fund's obligations. Unless the Fund has other
readily marketable assets to set aside, it cannot trade assets used to secure
such obligations entering into an offsetting derivative contract or terminating
a special transaction. This may cause the Fund to miss favorable trading
opportunities or to realize losses on derivative contracts or special
transactions.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies,
including the securities of affiliated money market funds, as an efficient means
of carrying out its investment policies and managing its uninvested cash. Any
such investment by the Fund may be subject to duplicate expenses. However, the
Adviser believes that the benefits and efficiencies of this approach should
outweigh the potential additional expenses.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Trustees to determine the liquidity of certain
restricted securities is permitted under a 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 the
Rule. The Trust, on behalf of 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) for determination to the Trustees. The
Trustees consider the following criteria in determining the liquidity of certain
restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and the nature of the
security and
o the nature of the marketplace trades.
Notwithstanding the foregoing, securities of foreign issuers which are not
listed on a recognized domestic or foreign exchange or for which a bona fide
market does not exist at the time of purchase or subsequent transaction shall be
treated as illiquid securities by the Trustees.
When the Fund invests in certain restricted securities determined by the
Trustees to be liquid, such investments could have the effect of increasing the
level of Fund illiquidity to the extent that the buyers in the secondary market
for such securities (whether in Rule 144A resales or other exempt transactions)
become, for a time, uninterested in purchasing these securities.
INVESTMENT RISKS
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Principal risks factors associated with an investment in the Fund are described
in the prospectus. While not an exhaustive list, other risk factors include the
following:
INTEREST RATE RISKS
o Prices of fixed income securities rise and fall in response to changes in the
interest rate paid by similar securities. Generally, when interest rates
rise, prices of fixed income securities fall. However, market factors, such
as the demand for particular fixed income securities, may cause the price of
certain fixed income securities to fall while the prices of other securities
rise or remain unchanged. (If the bond were held to maturity, no loss or gain
normally would be realized.)
o Interest rate changes have a greater effect on the price of fixed income
securities with longer durations. Duration measures the price sensitivity of
a fixed income security to changes in interest rates.
CREDIT RISKS
o Credit risk is the possibility that an issuer will default on a security by
failing to pay interest or principal when due. If an issuer defaults, the
Fund will lose money.
o Many fixed income securities receive credit ratings from services such as
Standard & Poor's and Moody's Investor Service. These services assign ratings
to securities by assessing the likelihood of issuer default. Lower credit
ratings correspond to higher credit risk. If a security has not received a
rating, the Fund must rely entirely upon the Adviser's credit assessment.
o Fixed income securities generally compensate for greater credit risk by
paying interest at a higher rate. The difference between the yield of a
security and the yield of a U.S. Treasury security with a comparable maturity
(the spread) measures the additional interest paid for risk. Spreads may
increase generally in response to adverse economic or market conditions. A
security's spread may also increase if the security's rating is lowered or
the security is perceived to have an increased credit risk. An increase in
the spread will cause the price of the security to decline.
o Credit risk includes the possibility that a party to a transaction involving
the Fund will fail to meet its obligations. This could cause the Fund to lose
the benefit of the transaction or prevent the Fund from selling or buying
other securities to implement its investment strategy.
CALL RISKS
o Call risk is the possibility that an issuer may redeem a fixed income
security before maturity (a call) at a price below its current market price.
An increase in the likelihood of a call may reduce the security's price.
o If a fixed income security is called, the Fund may have to reinvest the
proceeds in other fixed income securities with lower interest rates, higher
credit risks, or other less favorable characteristics.
LIQUIDITY RISKS
Trading opportunities are more limited for equity securities and fixed
income securities that are not widely held. They are also more limited for fixed
income securities that have not received any credit ratings or have received
ratings below investment grade. These features may make it more difficult to
sell or buy a security at a favorable price or time. Consequently, the Fund may
have to accept a lower price to sell a security, sell other securities to raise
cash or give up an investment opportunity, any of which could have a negative
effect on the Fund's performance. Infrequent trading of securities may also lead
to an increase in their price volatility.
o Liquidity risk also refers to the possibility that the Fund may not be able
to sell a security or close out a derivative contract when it wants to. If
this happens, the Fund will be required to continue to hold the security or
keep the position open, and the Fund could incur losses.
o OTC derivative contracts generally carry greater liquidity risk than
exchange-traded contracts.
FOREIGN MARKET RISKS
The Fund intends to invest in the securities of issuers domiciled in the
Czech Republic, Hungary, Poland and Turkey ("Eastern European countries").
Investment in the securities of issuers in these countries involves certain
additional risks not involved in investment in securities of issuers in more
developed markets, such as (i) low or non-existent trading volume, resulting in
a lack of liquidity and increased volatility in prices for such securities, as
compared to securities of comparable issuers in mare developed capital markets,
(ii) uncertain national policies and social, political and economic instability
(including the possibility that such countries could revert to a centralist
planned government), increasing the potential for expropriation of assets,
confiscatory taxation, high rates of inflation or unfavorable diplomatic
developments, (iii) possible fluctuations in exchange rates, differing legal
systems and the existence or possible imposition of exchange controls, custodial
restrictions or other foreign or U.S. governmental laws or restrictions
applicable to such investments, (iv) national policies which may limit the
Fund's investment opportunities such as restrictions on investment in issuers or
industries deemed sensitive to national interests, and (v) the lack of developed
legal structures governing private and foreign investment and private property.
Eastern European capital markets are emerging in a dynamic political and
economic environment brought about by the recent events there that have reshaped
political boundaries and traditional ideologies. In such a dynamic environment,
there can be no assurance that the Eastern Europe capital markets will continue
to present viable investment opportunities of the Fund. There can be no
assurance that expropriations of private property will not occur. In such an
event, it is possible that the Fund could lose the entire value of its
investments in the affected Eastern European markets.
INVESTMENT LIMITATIONS
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ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund may borrow money, directly or indirectly, and issue senior
securities to the maximum extent permitted under the Investment Company Act of
1940, as amended, and the rules and regulations promulgated thereunder, as such
statute, rules and regulations are amended from time to time or are interpreted
from time to time by the SEC staff and any exemptive order or similar relief
granted to the Funds (collectively, the "1940 Act Laws, Interpretations and
Exemptions").
LENDING CASH OR SECURITIES
The Fund may not make loans, except to the extent permitted by the 1940 Act
Laws, Interpretations and Exemptions. This restriction does not prevent the fund
from purchasing debt obligations, entering into repurchase agreements, lending
its assets to broker/dealers or institutional investors and investing in loans,
including assignments and participation interests. This restriction will not
prevent the Fund from lending to other FTI funds consistent with any exemptions
the Funds might obtain or as permitted by the 1940 Act Laws, Interpretations and
Exemptions.
INVESTING IN COMMODITIES
The Fund may not purchase or sell physical commodities, provided that the
Fund may purchase securities of companies that deal in commodities.
INVESTING IN REAL ESTATE
The Fund may not purchase or sell real estate, provided that this
restriction does not prevent the Fund from investing in issuers which invest,
deal, or otherwise engage in transactions in real estate or interests therein,
or investing in securities that are secured by real estate or interests therein.
The Fund may exercise its rights under agreements relating to such securities,
including the right to enforce security interests and to hold real estate
acquired by reason of such enforcement until that real estate can be liquidated
in an orderly manner.
DIVERSIFICATION OF INVESTMENTS
The Fund is a "diversified company" within the meaning of the 1940 Act. The
Fund will not purchase the securities of any issuer if, as a result, the Fund
would fail to be a diversified company within the meaning of the 1940 Act Laws,
Interpretations and Exemptions.
CONCENTRATION OF INVESTMENTS
The Fund will not make investments that will result in the concentration
(as that term may be defined or interpreted by the 1940 Act Laws,
Interpretations and Exemptions) of its investments in the securities of issuers
primarily engaged in the same industry. This restriction does not limit the
Fund's investments in (i) obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, or (ii) tax-exempt obligations
issued by governments or political subdivisions of governments. In complying
with this restriction, the Fund will not consider a bank-issued guaranty or
financial guaranty insurance as a separate security.
UNDERWRITING
The Fund may not underwrite the securities of other issuers, except that
the fund may engage in transactions involving the acquisition, disposition or
resale of its portfolio securities, under circumstances where it may be
considered to be an underwriter under the Securities Act of 1933.
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THE ABOVE INVESTMENT LIMITATIONS CANNOT BE CHANGED WITH RESPECT TO THE
FUND WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE FUND'S OUTSTANDING
SHARES. A VOTE OF A MAJORITY OF THE OUTSTANDING VOTING SHARES MEANS THE
AFFIRMATIVE VOTE OF THE LESSER OF (I) 67% OR MORE OF THE FUND'S SHARES PRESENT
AT A MEETING IF THE HOLDERS OF MORE THAN 50% OF THE OUTSTANDING SHARES ARE
PRESENT IN PERSON OR REPRESENTED BY PROXY, OR (II) MORE THAN 50% OF THE FUND'S
OUTSTANDING SHARES.
THE FOLLOWING LIMITATIONS MAY BE CHANGED BY THE TRUSTEES 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
more than seven days after notice; over-the-counter options; and certain
restricted securities not determined by the Trustees to be liquid.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no more
than 3% of the total outstanding voting stock of any investment company, invest
no more than 5% of its total assets in any one investment company, or invest
more than 10% of its total assets in investment companies in general unless
permitted to exceed these limits by action of the SEC. The Fund will purchase
securities of closed-end investment companies only in open market transactions
involving only customary broker's commissions. However, these limitations are
not applicable if the securities are acquired in a merger, consolidation,
reorganization, or acquisition of assets.
Except with respect to the Fund's policy of borrowing money, if a
percentage limitation is adhered to at the time of investment, a later increase
or decrease in percentage resulting from any change in value or net assets will
not result in a violation of such restriction.
As a matter of non-fundamental policy, for the purpose of the
concentration limitation, investments in certain industrial development bonds
funded by activities in a single industry will be deemed to constitute
investments in an industry.
The Fund has no present intention to borrow money or pledge securities in
excess of 5% of the value of its net assets.
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 associations having capital, surplus, and undivided
profits in excess of $100,000,000 at the time of investment to be "cash items."
For purposes of its investment limitation regarding industry concentration,
the Fund classifies companies by industry based on their primary Standard
Industrial Classification (SIC Code) as listed by a company in its filings with
the SEC.
DETERMINING THE MARKET VALUE OF SECURITIES
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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.
Market values of the Fund's portfolio securities are determined as follows:
o for equity securities, according to the last sale price in the market in
which they are primarily traded, if available;
o in the absence of recorded sales for equity securities, according to the
mean between the last closing bid and asked prices;
o for fixed income securities, at the last sale price on a national
securities exchange, if available, otherwise, as determined by an
independent pricing service;
o for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service, except that
short-term obligations with remaining maturities of less than 60 days at
the time of purchase may be valued at amortized cost or at fair market
value as determined in good faith by the Board; and
o for all other securities at fair value as determined in good faith by the
Board.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may consider institutional trading in
similar groups of securities, yield, quality, stability, risk, coupon rate,
maturity, type of issue, trading characteristics, and other market data or
factors. From time to time, when prices cannot be obtained from an independent
pricing service, securities may be valued based on quotes from broker-dealers or
other financial institutions that trade the securities. When market quotations
are not readily available for securities, a pricing committee established by the
Board determines the fair value of the securities, pursuant to procedures
established by the Board.
The Fund values futures contracts and options at their market values
established by the exchanges on which they are traded at the close of trading on
such exchanges. Options traded in the over-the-counter market are valued
according to the mean between the last bid and the last asked price for the
option as provided by an investment dealer or other financial institution that
deals in the option. The Board may determine in good faith that another method
of valuing such investments is necessary to appraise their fair market value.
HOW THE FUND IS SOLD
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Under the Distributor's Contract with the Fund, the Distributor, Edgewood
Services, Inc., located at Federated Investors Tower, 1001 Liberty Avenue,
Pittsburgh, PA 15222-3779, offers shares on a continuous, best-efforts basis.
RULE 12B-1 PLAN
As a compensation type plan, the Fund's Rule 12b-1 Plan is designed to pay
the Distributor (who may then pay investment professionals such as banks,
broker/dealers, trust departments of banks, and registered investment advisers)
for marketing activities (such as advertising, printing and distributing
prospectuses, and providing incentives to investment professionals) to promote
sales of shares so that overall Fund assets are maintained or increased. This
helps the Fund achieve economies of scale, reduce per share expenses, and
provide cash for orderly portfolio management and share redemptions. Also, the
Fund's service providers that receive asset-based fees benefit from stable or
increasing Fund assets.
The Fund may compensate the Distributor more or less than its actual
marketing expenses. In no event will the Fund pays for any expenses of the
Distributor that exceed the maximum Rule 12b-1 Plan fee.
The maximum Rule 12b-1 Plan fee that can be paid in any one year may not be
sufficient to cover the marketing related expenses the Distributor has incurred.
Therefore, it may take the Distributor a number of years to recoup these
expenses.
SHAREHOLDER SERVICES
The Fund may pay Federated Shareholder Services, a subsidiary of Federated
Investors, Inc. (Federated) for providing shareholder services and maintaining
shareholder accounts. Federated Shareholder Services may select others to
perform these services for their customers and may pay them fees.
SUPPLEMENTAL PAYMENTS
Investment professionals (such as broker-dealers or banks) may be paid
fees, in significant amounts, out of the assets of the Distributor and/or
Federated Shareholder Services (these fees do not come out of Fund assets). The
Distributor and/or Federated Shareholder Services may be reimbursed by the
Adviser or its affiliates. Investment professionals receive such fees for
providing distribution-related and/or shareholder services, such as advertising,
providing incentives to their sales personnel, sponsoring other activities
intended to promote sales, and maintaining shareholder accounts. These payments
may be based upon such factors as the number or value of shares the investment
professional sells or may sell; the value of client assets invested; and/or upon
the type and nature of sales or marketing support furnished by the investment
professional.
REDEMPTION IN KIND
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Although the Fund intends to pay redemptions in cash, it reserves the
right, as described below, to pay the redemption price in whole or in part by a
distribution of the Fund's portfolio securities. Because the Fund has elected to
be governed by Rule 18f-1 under the 1940 Act, it is obligated to pay redemptions
to any one shareholder in cash only up to the lesser of $250,000 or 1% of the
net assets of the Fund during any 90-day period. Any redemption payment greater
than this amount will also be in cash unless the Trust's Board determines that
payment should be in kind. In such a case, the Fund will pay all or a portion of
the remainder of the redemption in portfolio securities, valued in the same way
as the Fund determines its NAV. The portfolio securities will be selected in a
manner that the Trust's Board deems fair and equitable and, to the extent
available, such securities will be readily marketable. Redemption in kind is not
as liquid as a cash redemption. If redemption is made in kind, shareholders
receiving the portfolio securities and selling them before their maturity could
receive less than the redemption value of the securities and could incur certain
transaction costs.
MASSACHUSETTS LAW
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Under certain circumstances, shareholders may be held personally liable
under Massachusetts law for obligations of the Trust. To protect its
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations of
the Trust. In the unlikely event a shareholder is held personally liable for the
Trust's obligations, the Trust is required by the Declaration of Trust to use
its property to protect or compensate the shareholder. On request, the Trust
will defend any claim made and pay any judgment against a shareholder for any
act or obligation of the Trust. Therefore, financial loss resulting from
liability as a shareholder will occur only if the Trust itself cannot meet its
obligations to indemnify shareholders and pay judgments against them.
ACCOUNT AND SHARE INFORMATION
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VOTING AND OTHER RIGHTS
A shareholder of the Fund has "dollar-based" voting rights, which means
that a shareholder has one vote for each dollar of net asset value of the shares
of the Fund he or she owns. A fractional dollar of net asset value will entitle
the shareholder to a corresponding fractional vote. The Declaration of Trust
provides that it may not be amended without the consent of a majority of the
voting securities if such amendment would adversely affect the rights of any
shareholder. Each share of the Fund is entitled to participate equally in
dividends and distributions declared by the Board of Trustees and, upon
liquidation of the Fund, to participate proportionately in the net assets of the
Fund remaining after satisfaction of outstanding liabilities of the Fund. Fund
shares have no preemptive or conversion rights and have such exchange rights as
are set forth in the Fund's prospectus.
TAX INFORMATION
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FEDERAL INCOME TAX
The Fund expects to pay no federal income tax because it intends to meet
the requirements of Subchapter M of the Internal Revenue Code (Code) applicable
to regulated investment companies and to receive the special tax treatment
afforded such companies. The Fund will be treated as a single, separate entity
under the Code so that income and capital gains and losses realized by the
Trust's other portfolios will not be taken into account by the Fund for federal
income tax purposes.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
In order to qualify for tax treatment as a regulated investment company
under the Code, the Fund is required, among other things, to derive at least 90%
of its gross income in each taxable year from dividends, interest, certain
payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies and other income
(including but not limited to gains from options, futures or forward contracts
derived with respect to the Fund's business of investing in such stock,
securities or currencies) (the "Income Requirement"). Foreign currency gains
(including gains from options, futures or forward contracts on foreign
currencies) that are not "directly related" to the Fund's principal business
may, under regulations not yet issued, not be qualifying income for purposes of
the Income Requirement.
At the close of each quarter of its taxable year, at least 50% of the value
of the Fund's assets must consist of cash and cash items, U.S. Government
securities, securities of other regulated investment companies, and securities
of other issuers (as to which the Fund has not invested more than 5% of the
value of its total assets in securities of such issuer and as to which the Fund
does not hold more than 10% of the outstanding voting securities of such
issuer), and no more than 25% of the value of its total assets may be invested
in the securities of any one issuer (other than U.S. Government securities and
securities of other regulated investment companies), or in two or more issuers
which the Fund controls and which are engaged in the same or similar trades or
businesses (the "Asset Diversification Test"). For purposes of the Asset
Diversification Test, it is unclear under present law who should be treated as
the issuer of forward foreign currency exchange contracts, of options on foreign
currencies, or of foreign currency futures and related options. It has been
suggested that the issuer in each case may be the foreign central bank or
foreign government backing the particular currency. Consequently, the Fund may
find it necessary to seek a ruling from the Internal Revenue Service on this
issue or to curtail its trading in forward foreign currency exchange contracts
in order to stay within the limits of the Asset Diversification Test.
If for any taxable year the Fund does not qualify as a regulated investment
company, all of its taxable income will be subject to tax at regular corporate
rates without any deduction for distributions to shareholders, and such
distributions will be taxable as ordinary dividends to the extent of the Fund's
current and accumulated earnings and profits. Such distributions will be
eligible for the dividends received deduction in the case of corporate
shareholders.
FUND DISTRIBUTIONS
Under the Code, the Fund is exempt from U.S. federal income tax on its net
investment income and realized capital gains which it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (net investment income, net foreign currency ordinary
gain or loss and the excess of net short-term capital gain over net long-term
capital loss) and its net exempt-interest income (if any) for the year.
Distributions of investment company taxable income will be taxable to
shareholders as ordinary income, regardless of whether such distributions are
paid in cash or are reinvested in shares.
The Fund also intends to distribute to shareholders substantially all of
the excess of its net long-term capital gain over net short-term capital loss as
a capital gain dividend. Capital gain dividends are taxable to shareholders as a
long-term capital gain, regardless of the length of time a shareholder has held
his shares.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to distribute in each calendar year an amount equal to 98% of their
ordinary taxable income for the calendar year plus 98% of their "capital gain
net income" (excess of capital gains over capital losses) for the one-year
period ending on October 31 of such calendar year. The balance of such income
must be distributed during the next calendar year. For the foregoing purposes,
the Fund will be treated as having distributed any amount on which it is subject
to income tax for any taxable year ending in such calendar year.
For purposes of the excise tax, the Fund is required to exclude foreign
currency gains and losses incurred after October 31 of any year in determining
the amount of ordinary taxable income for the current calendar year (and,
instead, to include such gains and losses in determining ordinary taxable income
for the succeeding calendar year). The Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and capital
gain net income prior to the end of each calendar year to avoid liability for
the excise tax.
FOREIGN INVESTMENTS
The Fund's investment income from foreign securities 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. The effective rate of foreign tax cannot be predicted since
the amount of Fund assets to be invested within various countries is uncertain.
However, the Fund intends to operate so as to qualify for treaty-reduced tax
rates when applicable.
FOREIGN FINANCIAL INSTRUMENTS
Gains or losses from certain foreign currency forward contracts will
generally be treated as ordinary income or loss and will increase or decrease
the amount of the Fund's investment company taxable income available to be
distributed to shareholders as ordinary income, rather than increase or decrease
the amount of the Fund's net capital gains. Additionally, if such foreign
currency-related losses exceed other investment company taxable income during a
taxable year, the Fund would not be able to pay any ordinary income dividends,
and any such dividends paid before the losses were realized, but in the same
taxable year, would be recharacterized as a return of capital to shareholders,
thereby reducing the tax basis of Fund shares to an investor.
PFIC INVESTMENTS
The Fund may invest in stocks of foreign companies that are classified
under the Code as passive foreign investment companies ("PFICs"). An "excess
distribution" received with respect to PFIC stock is treated as having been
realized ratably over the period during which the Fund has held the PFIC stock.
The Fund itself will be subject to tax on the portion, if any, of the excess
distribution that is allocated to the Fund's holding period in prior taxable
years (and an interest factor will be added to the tax, as if the tax had
actually been payable in such prior taxable years) even though the Fund
distributes the corresponding income to shareholders. Excess distributions
include any gain from the sale of PFIC stock as well as certain distributions
from a PFIC. All excess distributions are taxable as ordinary income.
The Fund may elect alternative tax treatment with respect to PFIC stock, in
which case the special rules relating to the taxation of excess distributions by
the PFIC would not be applicable. Under one such election (the "QEF Election"),
the Fund generally would be required to include in its gross income its share of
the earnings of a PFIC on a current basis, regardless of whether any
distributions are received from the PFIC. Under another such election (the
"Section 1296 Election"), the Fund would be required to recognize ordinary
income to the extent that the fair market value of the shares of PFIC stock that
it holds at the close of any taxable year exceeds the shares' adjusted basis and
would also recognize ordinary income with respect to dispositions of any shares
of PFIC stock at a gain during a taxable year. If the Fund makes the Section
1296 Election, the Fund will recognize a deductible ordinary loss to the extent
that the adjusted basis of the shares of PFIC stock that the Fund holds at the
end of any taxable year exceeds its fair market value and with respect to
dispositions of any shares of PFIC stock at a loss during a taxable year.
However, the amount of any ordinary loss recognized by the Fund in connection
with a Section 1296 Election for any shares of PFIC stock may not exceed the
amount of ordinary income previously recognized by the Fund by reason of marking
such shares of PFIC stock to market at the end of a taxable year.
Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC stock, as well as subject the Fund
itself to tax on certain income from PFIC stock, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gains, may be increased or decreased substantially
as compared to a fund that did not invest in PFIC stock.
REDEMPTION OR EXCHANGE OF SHARES
Upon a redemption or exchange of shares, a shareholder will recognize a
taxable gain or loss depending upon his or her basis in the shares. Such gain or
loss will generally be treated as capital gain or loss if the shares are capital
assets in the shareholder's hands and will be long-term or short-term, depending
upon the shareholder's holding period for the shares. Except to the extent
otherwise provided in future Treasury regulations, any long-term capital gain
recognized by a non-corporate shareholder will be subject to tax at a maximum
rate of 20%. Any loss recognized by a shareholder on the sale of Fund shares
held six months or less will be treated as a long-term capital loss to the
extent of any distributions of net capital gains received by the shareholder
with respect to such shares.
If a shareholder exercises the exchange privilege within 90 days of
acquiring Fund shares, then any loss such shareholder recognizes on the exchange
will be reduced (or any gain increased) to the extent the sales charge paid upon
the purchase of the Fund shares reduces any charge such shareholder would have
owed upon purchase of the shares of the replacement fund in the absence of the
exchange privilege. Instead, such sales charge will be treated as an amount paid
for the shares of the replacement fund. In addition, any loss recognized on a
sale or exchange will be disallowed to the extent that disposed Fund shares are
replaced with new Fund shares within the 61-day period beginning 30 days before
and ending 30 days after the disposition of the original Fund shares. In such a
case, the basis of the Fund shares acquired will be increased to reflect the
disallowed loss. Shareholders should particularly note that this loss
disallowance rule applies even where Fund shares are automatically replaced
under the dividend reinvestment plan.
FOREIGN INCOME TAXES
If (as anticipated) more than 50% of the value of the Fund's total assets
at the close of any taxable year consists of the stock or securities of foreign
corporations, the Fund intends to elect to "pass through" to the Fund's
shareholders the amount of foreign income taxes paid by the Fund (the "Foreign
Tax Election"). Pursuant to the Foreign Tax Election, shareholders will be
required (i) to include in gross income, even though not actually received,
their respective pro-rata shares of the foreign income taxes paid by the Fund
that are attributable to any distributions they receive; and (ii) either to
deduct their pro-rata share of foreign taxes in computing their taxable income,
or to use their pro share of such taxes (subject to various Code limitations) as
a foreign tax credit against federal income tax (but not both). No deduction for
foreign taxes may be claimed by a non-corporate shareholder who does not itemize
deductions or who is subject to alternative minimum tax.
BACKUP WITHHOLDING
Under certain provisions of the Code, the Fund may be required to withhold
31% of reportable dividends, capital gains distributions and redemption payments
("backup withholding"). Generally, shareholders subject to backup withholding
will be those for whom a certified taxpayer identification number is not on file
with the Trust or who, to the Trust's knowledge, have furnished an incorrect
number, or who have been notified by the Internal Revenue Service that they are
subject to backup withholding. When establishing an account, an investor must
provide his or her taxpayer identification number and certify under penalty of
perjury that such number is correct and that he or she is not otherwise subject
to backup withholding. Corporate shareholders and other shareholders specified
in the Code are exempt from backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be credited against a shareholder's
U.S. federal income tax liability.
MISCELLANEOUS CONSIDERATIONS; EFFECT OF FUTURE LEGISLATION
The foregoing general discussion of federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect at the date
of this SAI. Future legislative or administrative changes or court decisions may
significantly change the conclusions expressed herein, and any such changes or
decisions may have a retroactive effect with respect to the transactions
contemplated herein.
Rules of state and local taxation of dividend and capital gain
distributions from regulated investment companies often differ from the rules
for U.S. federal income taxation described above. Shareholders are urged to
consult their tax advisors as to the consequences of these and other U.S. state
and local tax rules affecting an investment in the Fund.
FUND MANAGEMENT AND SERVICE PROVIDERS
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BOARD OF TRUSTEES
The Board of Trustees is responsible for managing the Trust's business
affairs and for exercising all the Trust's powers except those reserved for the
shareholders. Information about each Board member and officer of the Trust is
provided below and includes each person's: name, address, birth date, present
position(s) held with the Trust, principal occupations for the past five years
and positions held prior to the past five years, and total compensation received
as a Trustee from the Trust for its most recent fiscal year. The Trust is
comprised of seven funds including the Fund.
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NAME
BIRTH DATE
ADDRESS PRINCIPAL OCCUPATIONS AGGREGATE
POSITION WITH TRUST FOR PAST FIVE YEARS COMPENSATION
FROM
TRUST**
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PETER A. ARON Vice President, Lafayette Enterprises, $15,000
-------------------- Inc. (privately owned Investment
Birth Date: May Advisory Company); President, J. Aron
26, 1946 Charitable Foundation, Inc.; Asset
Lafayette Manager and Trustee of certain private
Enterprise, Inc. trusts.
126 East 56th Street
New York, NY 10022
TRUSTEE
-------------------- --------------------------------------- -----------
JOSEPH A. CAJIGAL* Senior Vice President and Management $0
Birth Date: Committee member, Fiduciary Trust
November 15, 1953 Company, International.
Fiduciary Trust
Company
International
Two World Trade
Center
New York, NY 10048
TRUSTEE
-------------------- --------------------------------------- -----------
JAMES C. GOODFELLOW* President, Fiduciary International, $0
Birth date: April Inc., Director and Executive Vice
6, 1945 President, Fiduciary Trust Company
Fiduciary Trust International
Company
International
Two World Trade
Center
New York, NY 10048
TRUSTEE
-------------------- --------------------------------------- -----------
BURTON J. GREENWALD Managing Director, B.J. Greenwald $18,000
Birth Date: Associates, Management Consultants to
December 6, 1929 the Financial Services Industry;
2009 Spruce Street Director and Trustee, Fiduciary
Philadelphia, PA Emerging Markets Bond Fund PLC;
19103 Director and Trustee, Fiduciary
TRUSTEE International Ireland Limited.
-------------------- --------------------------------------- -----------
KEVIN J. O'DONNELL Director/Shareholder, Herold & Haines $15,000
Birth Date: PA (a law firm) (June 2000 to
September 1, 1948 present); previously, Partner, Pitney
Park Avenue at Hardin Kipp & Szuch LLP (a law firm)
Morris County (prior to June 2000).
200 Campus Drive
Florham Park, NJ
07932
TRUSTEE
--------------------- ------------------------------------------------------
-------------------- Senior Vice President and Director of $0
PETER J. GERMAIN Proprietary Funds Services, Federated
Birth Date: Services Company; formerly, Senior
September 3, 1959 Corporate Counsel, Federated Services
Federated Investors Company.
Tower
1001 Liberty Avenue
Pittsburgh, PA
PRESIDENT AND
TREASURER
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JEFFREY W. STERLING Vice President and Assistant Treasurer $0
Birth Date: of certain funds distributed by
February 5, 1947 Edgewood Services, Inc. or its
Federated Investors affiliates.
Tower
1001 Liberty Avenue
Pittsburgh, PA
VICE PRESIDENT AND
ASSISTANT TREASURER
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GAIL C. JONES Corporate Counsel and Vice President,
Birth Date: October Federated Services Company. $0
26, 1953
Federated Investors Towers
1001 Liberty Avenue
Pittsburgh, PA
SECRETARY
* AN ASTERISK DENOTES A TRUSTEE WHO IS DEEMED TO BE AN INTERESTED PERSON AS
DEFINED IN THE1940 ACT.
** THE FUND HAS NOT COMPLETED ITS FIRST FULL FISCAL YEAR. THE AGGREGATE
COMPENSATION DISCLOSED IN THIS TABLE IS BASED ON ESTIMATES OF FEES TO BE
PAID BY THE TRUST IN THE FISCAL YEAR ENDING NOVEMBER 30, 2001.
INVESTMENT ADVISER
The Fund's Adviser is Fiduciary International, Inc. (the "Adviser" or
"Fiduciary"). The Adviser conducts investment research and makes investment
decisions for the Fund.
Under its contract with the Trust, the Adviser shall not be liable to the
Trust, the Fund, or any Fund 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 Trust. Because of the internal controls maintained by the Adviser's
affiliates to restrict the flow of non-public information, Fund investments are
typically made without any knowledge by the Adviser of its affiliates' lending
relationships with an issuer.
CODE OF ETHICS RESTRICTIONS ON PERSONAL TRADING
As required by SEC rules, the Fund, its Adviser, and its Distributor have
adopted codes of ethics under Rule 17j-1 of the Investment Company Act of 1940.
These codes govern securities trading activities of investment personnel, Fund
Trustees, and certain other employees. Although they do permit these people to
trade in securities, including those that the Fund could buy, they also contain
significant safeguards designed to protect the Fund and its shareholders from
abuses in this area, such as requirements to obtain prior approval for, and to
report, particular transactions.
The Adviser receives an annual investment advisory fee equal to 1.00% of
the Fund's daily net assets.
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. 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 may select brokers and dealers
based on whether they also offer research services (as described below). In
selecting among firms believed to meet these criteria, the Adviser may give
consideration to those firms which have sold or are selling Shares of the Fund
and other funds distributed by the Distributor and its affiliates. The Adviser
makes decisions on portfolio transactions and selects brokers and dealers
subject to review by the Trust's Board.
RESEARCH SERVICES
Research services 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. To the
extent that receipt of these services may replace 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 those 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.
Investment decisions for the Fund are made independently from those of
other accounts managed by the Adviser. When the Fund and one or more of those
accounts invests in, or disposes of, the same security, available investments or
opportunities for sales will be allocated among the Fund and the account(s) in a
manner believed by the Adviser to be equitable. While the coordination and
ability to participate in volume transactions may benefit the Fund, it is
possible that this procedure could adversely impact the price paid or received
and/or the position obtained or disposed of by the Fund.
ADMINISTRATOR
Federated Administrative Services, a subsidiary of Federated, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Administrative
Services provides these at the following annual rate of the average aggregate
daily net assets of all FTI Funds as specified below:
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE FTI FUNDS
0.150 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.100 of 1% on the next $250 million
0.075 of 1% on assets in excess of
$750 million
The administrative fee received during any fiscal year shall be at least
$75,000 per portfolio. Federated Services Company may voluntarily waive a
portion of its fee and may reimburse the Fund for expenses.
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CUSTODIAN
Fiduciary Trust Company International, the parent of the Adviser, Two World
Trade Center, New York, New York 10048-0772, is custodian for the securities and
cash of the Fund. Foreign instruments purchased by the Fund are held by foreign
banks participating in a network coordinated by Fiduciary Trust Company
International.
The Fund pays the custodian fees for each securities transaction and an
annual fee based on a percentage of the Fund's assets.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND PORTFOLIO ACCOUNTANT
Federated Services Company, through its registered transfer agent subsidiary,
Federated Shareholder Services Company, maintains all necessary shareholder
records. The Fund pays the transfer agent a fee based on the size, type and
number of accounts and transactions made by shareholders.
INDEPENDENT AUDITORS
Ernst & Young LLP, Boston, Massachusetts, is the independent auditor for
the Fund.
HOW THE FUND MEASURES PERFORMANCE
The Fund may advertise share performance by using the SEC standard method
for calculating performance applicable to all mutual funds. The SEC also permits
this standard performance information to be accompanied by non-standard
performance information.
Unless otherwise stated, any quoted share performance reflects the effect
of non-recurring charges, such as maximum sales charges, which, if excluded,
would increase the total return and yield. Performance depends upon such
variables as: portfolio quality; average portfolio maturity; type and value of
portfolio securities; changes in interest rates; changes or differences in the
Fund's expenses; and various other factors.
Performance fluctuates on a daily basis largely because net earnings
fluctuate daily. Both net earnings and offering price per share are factors in
the computation of yield and total return.
TOTAL RETURN
Total return represents the change (expressed as a percentage) in the value
of Shares over a specific period of time, and includes the investment of income
and capital gains distributions.
The average annual total return for Shares is the average compounded rate
of return for a given period that would equate a $1,000 initial investment to
the ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of Shares owned at the end of the period by
the NAV per Share at the end of the period. The number of Shares owned at the
end of the period is based on the number of Shares purchased at the beginning of
the period with $1,000, less any applicable sales charge, adjusted over the
period by any additional Shares, assuming the annual reinvestment of all
dividends and distributions.
When Shares of a Fund are in existence for less than a year, the Fund may
advertise cumulative total return for that specific period of time, rather than
annualizing the total return.
YIELD
The yield of Shares is calculated by dividing: (i) the net investment
income per Share earned by the Shares over a 30-day period; by (ii) the maximum
offering price per Share on the last day of the period. This number is then
annualized using semi-annual compounding. This means that the amount of income
generated during the 30-day period is assumed to be generated each month over a
12-month period and is reinvested every six months. The yield does not
necessarily reflect income actually earned by Shares because of certain
adjustments required by the SEC and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
To the extent investment professionals and broker/dealers charge fees in
connection with services provided in conjunction with an investment in Shares,
the Share performance is lower for shareholders paying those fees.
PERFORMANCE COMPARISONS
o Advertising and sales literature may include: references to ratings,
rankings, and financial publications and/or performance comparisons of
Shares to certain indices;
o charts, graphs and illustrations using the Fund's returns, or returns in
general, that demonstrate investment concepts such as tax-deferred
compounding, dollar-cost averaging and systematic investment;
o discussions of economic, financial and political developments and their
impact on the securities market, including the portfolio manager's views on
how such developments could impact the Fund; and
o information about the mutual fund industry from sources such as the
Investment Company Institute.
The Fund may compare its performance, or performance for the types of
securities in which it invests, to a variety of other investments, including
federally insured bank products such as bank savings accounts, certificates of
deposit, and Treasury bills.
The Fund may quote information from reliable sources regarding individual
countries and regions, world stock exchanges, and economic and demographic
statistics.
You may use financial publications and/or indices to obtain a more complete
view of Share performance. When comparing performance, you should consider all
relevant factors such as the composition of the index used, prevailing market
conditions, portfolio compositions of other funds, and methods used to value
portfolio securities and compute offering price. The financial publications
and/or indices which the Fund uses in advertising may include:
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes
the reinvestment of all capital gains distributions and income dividends
and takes into account any change in offering price over a specific period
of time. From time to time, the Fund may quote its Lipper ranking in
advertising and sales literature.
o MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly MUTUAL FUND VALUES. MUTUAL FUND VALUES rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for
two weeks.
o HSBC SMALLER EUROPEAN INDEX is composed of about 1,500 companies in Europe
which have market capitalizations in a similar range to that used by the
Fund. The composition of the index is updated quarterly.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
To the best knowledge of the Trust, the Trustees and officers of the Trust
as a group own less than 1% of the outstanding shares of the Fund.
Federated Services Company provided the initial capitalization of the Fund
and, accordingly, as of the date of this Statement of Additional Information,
owned more than 25% of the issued and outstanding Shares of the Fund and
therefore could be deemed to "control" the Fund as that term is defined in the
Investment Company Act of 1940. It is anticipated that after commencement of the
public offering of the Fund's Shares, Federated Services Company will cease to
control the Fund for the purposes of the 1940 Act.
INVESTMENT RATINGS
STANDARD AND POOR'S ("S&P") LONG-TERM DEBT 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.
BB--Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B--Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC--Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC--The rating CC typically is applied to debt subordinated to senior debt
that is assigned an actual or implied CCC debt rating.
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.
MOODY'S INVESTORS SERVICE LONG-TERM BOND RATING DEFINITIONS
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.
Fitch IBCA, Inc. Long-Term Debt Rating Definitions
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 imminent default in payment of interest or principal.
MOODY'S INVESTORS SERVICE COMMERCIAL PAPER RATINGS
PRIME-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:
o Leading market positions in well-established industries;
o High rates of return on funds employed;
o Conservative capitalization structure with moderate reliance on debt and
ample asset protection;
o Broad margins in earning coverage of fixed financial charges and high
internal cash generation; and
o Well-established access to a range of financial markets and assured sources
of alternate liquidity.
PRIME-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.
STANDARD AND POOR'S COMMERCIAL PAPER RATINGS
A-1--This designation 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.
FITCH IBCA, INC. COMMERCIAL PAPER RATING DEFINITIONS
FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded
as having the strongest degree of assurance for timely payment.
FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance
of timely payment only slightly less in degree than the strongest issues.
ADDRESSES
FTI EUROPEAN SMALLER COMPANIES FUND
A Portfolio of FTI Funds
FTI Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Edgewood Services, Inc.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Fiduciary International, Inc.
Two World Trade Center
New York, New York 10048-0772
CUSTODIAN
Fiduciary Trust Company International
Two World Trade Center
New York, New York 10048-0772
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company
P.O. Box 8600
Boston, MA 02266-8600
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116-5072
