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STOCK AND BOND FUND, INC.
PROSPECTUS
The shares offered by this prospectus represent interests in an
open-end, diversified management investment company (a mutual fund)
known as Stock and Bond Fund, Inc. (the "Fund").
The investment objectives of the Fund are to provide relative safety
of capital with the possibility of long-term growth of capital and
income. Consideration is also given to current income. The Fund
pursues these objectives by investing in a professionally managed,
diversified portfolio of common and preferred stocks and other equity
securities, bonds, notes, and short-term obligations.
This prospectus contains the information you should read and know
before you invest in Stock and Bond Fund, Inc. Keep this prospectus
for future reference.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS
OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE
SHARES INVOLVES INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
The Fund has also filed a Statement of Additional Information dated
December 31, 1994, with the Securities and Exchange Commission. The
information contained in the Statement of Additional Information is
incorporated by reference into this prospectus. You may request a copy
of the Statement of Additional Information free of charge by calling
1-800-235-4669. To obtain other information or to make inquiries about
the Fund, contact the Fund at the address listed in the back of this
prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated December 31, 1994
TABLE OF CONTENTS
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<TABLE>
<S> <C>
SUMMARY OF FUND EXPENSES 1
- ---------------------------------------------------
FINANCIAL HIGHLIGHTS 2
- ---------------------------------------------------
GENERAL INFORMATION 3
- ---------------------------------------------------
LIBERTY FAMILY RETIREMENT PROGRAM 3
- ---------------------------------------------------
INVESTMENT INFORMATION 4
- ---------------------------------------------------
Investment Objectives 4
Investment Policies 4
Investment Limitations 7
FUND INFORMATION 8
- ---------------------------------------------------
Management of the Fund 8
Distribution of Fund Shares 9
Administration of the Fund 9
Brokerage Transactions 10
NET ASSET VALUE 10
- ---------------------------------------------------
INVESTING IN THE FUND 11
- ---------------------------------------------------
Share Purchases 11
Minimum Investment Required 11
What Shares Cost 11
Subaccounting Services 12
Certificates and Confirmations 12
Dividends 12
Capital Gains 12
Retirement Plans 12
REDEEMING SHARES 12
- ---------------------------------------------------
Telephone Redemption 13
Written Requests 13
Accounts with Low Balances 14
SHAREHOLDER INFORMATION 14
- ---------------------------------------------------
Voting Rights 14
TAX INFORMATION 14
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Federal Income Tax 14
Pennsylvania Corporate and Personal
Property Taxes 14
PERFORMANCE INFORMATION 15
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FINANCIAL STATEMENTS 16
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INDEPENDENT AUDITORS' REPORT 29
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ADDRESSES 30
- ---------------------------------------------------
</TABLE>
I
SUMMARY OF FUND EXPENSES
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<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)....................... None
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price)............ None
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption
proceeds, as applicable)........................................................................ None
Redemption Fee (as a percentage of amount redeemed, if applicable)................................ None
Exchange Fee...................................................................................... None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver) (1)................................................................. 0.62%
12b-1 Fee......................................................................................... None
Total Other Expenses.............................................................................. 0.43%
Shareholder Services Fee (after waiver) (2)........................................ 0.05%
Total Operating Expenses (3).............................................................. 1.05%
<FN>
(1) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.55% of average daily net assets plus 4.5% of gross income, excluding
capital gains or losses.
(2) The maximum shareholder services fee is 0.25%.
(3) The Total Operating Expenses in the table above are based on expenses
expected during the fiscal year ending October 31, 1995. The Total
Operating Expenses were 1.06% for the fiscal year ended October 31, 1994
and would have been 1.13% absent the voluntary waiver of a portion of the
management fee.
</TABLE>
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the Trust will bear, either
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "Fund Information". Wire-transferred redemptions of less than
$5,000 may be subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of
each time period................................................. $11 $33 $58 $128
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
1
STOCK AND BOND FUND, INC.
FINANCIAL HIGHLIGHTS
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(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 29.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------------
1994 1993 1992 1991 1990*
- --------------------------------------------------------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.87 $ 15.91 $ 15.74 $ 13.60 $ 15.11
- ---------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------------------
Net investment income 0.51 0.55 0.65 0.74 1.37
- ---------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.59) 1.58 0.39 2.17 (2.22)
- --------------------------------------------------------- -------- -------- -------- -------- ---------
Total from investment operations (0.08) 2.13 1.04 2.91 (0.85)
- ---------------------------------------------------------
LESS DISTRIBUTIONS
- ---------------------------------------------------------
Dividends to shareholders from net investment income (0.54) (0.56) (0.68) (0.77) (0.66)
- ---------------------------------------------------------
Distributions to shareholders from net realized gain on
investments -- (0.61) (0.19) -- --
- --------------------------------------------------------- -------- -------- -------- -------- ---------
Total distributions (0.54) (1.17) (0.87) (0.77) (0.66)
- --------------------------------------------------------- -------- -------- -------- -------- ---------
NET ASSET VALUE, END OF PERIOD $ 16.25 $ 16.87 $ 15.91 $ 15.74 $ 13.60
- --------------------------------------------------------- -------- -------- -------- -------- ---------
TOTAL RETURN** (0.48%) 14.10% 7.94% 21.78% (5.90%)
- ---------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------
Expenses 1.06% 1.04% 1.04% 1.01% 1.01%(a)
- ---------------------------------------------------------
Net investment income 3.23% 3.49% 4.15% 4.91% 5.77%(a)
- ---------------------------------------------------------
Expense adjustment (b) 0.07% 0.20% 0.21% 0.45% 0.54%(a)
- ---------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------
Net assets, end of period (000 omitted) $125,382 $124,583 $95,387 $88,534 $79,003
- ---------------------------------------------------------
Portfolio turnover rate*** 45% 51% 43% 72% 49%
- ---------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1989 1988 1987 1986 1985 1984
- --------------------------------------------------------- ---------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.94 $ 14.89 $ 15.34 $ 15.24 $ 13.60 $ 12.82
- ---------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------------------
Net investment income 0.91 0.85 0.81 0.85 0.90 0.91
- ---------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.91 0.52 (0.24) 1.17 2.18 0.77
- --------------------------------------------------------- ---------- ---------- -------- -------- -------- --------
Total from investment operations 1.82 1.37 0.57 2.02 3.08 1.68
- ---------------------------------------------------------
LESS DISTRIBUTIONS
- ---------------------------------------------------------
Dividends to shareholders from net investment income (0.94) (0.86) (0.79) (0.86) (0.90) (0.90)
- ---------------------------------------------------------
Distributions to shareholders from net realized gain on
investments (0.71) (0.46) (0.23) (1.06) (0.54) --
- --------------------------------------------------------- ---------- ---------- -------- -------- -------- --------
Total distributions (1.65) (1.32) (1.02) (1.92) (1.44) (0.90)
- --------------------------------------------------------- ---------- ---------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 15.11 $ 14.94 $ 14.89 $ 15.34 $ 15.24 $ 13.60
- --------------------------------------------------------- ---------- ---------- -------- -------- -------- --------
TOTAL RETURN** 12.46% 9.28% 3.58% 13.77% 24.09% 13.81%
- ---------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------
Expenses 1.01% 1.00% 1.00% 1.00% 1.30% 1.52%
- ---------------------------------------------------------
Net investment income 5.82% 5.53% 5.07% 5.43% 6.42% 7.08%
- ---------------------------------------------------------
Expense adjustment (b) 0.51% 0.39% 0.22% 0.30% 0.27% --
- ---------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------
Net assets, end of period (000 omitted) $88,367 $90,504 $92,105 $75,441 $37,792 $23,167
- ---------------------------------------------------------
Portfolio turnover rate*** 26% 131% 110% 40% 42% 49%
- ---------------------------------------------------------
<FN>
* For the ten months ended October 31, 1990.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
*** Represents portfolio turnover for the entire Fund.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended October 31, 1994, which can be obtained
free of charge.
2
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Fund was incorporated under the laws of the State of Maryland on October 31,
1934. On April 16, 1993, the Fund's Articles of Incorporation were amended by
Shareholders to permit the Fund to offer separate series of shares representing
interests in separate portfolios of securities. The shares in any one portfolio
may be offered in separate classes. During the fiscal year ended October 31,
1994, the Fund offered Class A and Class C Shares. On August 31, 1994, the Fund
was reorganized to terminate the separate classes of shares.
The Fund is designed for institutions, pension plans, and individuals as a
convenient means of accumulating an interest in a professionally managed,
diversified portfolio of common and preferred stocks and other equity
securities, bonds, notes, and short-term obligations. A minimum initial
investment of $25,000 over a 90-day period is required.
Shares are currently sold and redeemed at net asset value without a sales charge
imposed by the Fund.
LIBERTY FAMILY RETIREMENT PROGRAM
- --------------------------------------------------------------------------------
The Fund is a member of the Liberty Family Retirement Program ("Program"), an
integrated program of investment options, plan recordkeeping, and consultation
services for 401(k) and other participant-directed benefit and savings plans.
Under the Program, employers or plan trustees may select a group of investment
options to be offered in a plan which also uses the Program for recordkeeping
and administrative services. Additional fees are charged to participating plans
for these services. Plans with over $1 million invested in funds participating
in the Program may purchase shares without a sales load. As part of the Program,
exchanges may readily be made between investment options selected by the
employer or a plan trustee. The other funds participating in the Program are:
AMERICAN LEADERS FUND, INC., providing growth of capital and income through
high-quality stocks;
CAPITAL GROWTH FUND (CLASS A SHARES AND CLASS C SHARES), providing appreciation
of capital primarily through equity securities;
CAPITAL PRESERVATION FUND, providing high current income and stability of
principal by investing in a portfolio consisting primarily of guaranteed
investment contracts.
STRATEGIC INCOME FUND, providing high current income through a professionally
managed, diversified portfolio investing primarily in domestic corporate debt
obligations, U.S. government securities, and foreign government and corporate
debt obligations.
FUND FOR U.S. GOVERNMENT SECURITIES, INC., providing current income through
long-term U.S. government securities;
INTERNATIONAL EQUITY FUND, providing long-term capital growth and income through
international securities;
3
INTERNATIONAL INCOME FUND, providing a high level of current income consistent
with prudent investment risk through high-quality debt securities denominated
primarily in foreign currencies;
LIBERTY EQUITY INCOME FUND, INC., providing above-average income and capital
appreciation through income-producing equity securities;
LIBERTY HIGH INCOME BOND FUND, INC., providing high current income through
high-yielding, lower-rated, corporate bonds;
LIBERTY UTILITY FUND, INC., providing current income and long-term growth of
income, primarily through electric, gas, and communication utilities; and
PRIME CASH SERIES, providing current income consistent with stability of
principal and liquidity through money market instruments maturing in thirteen
months or less.
Prospectuses for these funds are available by writing to Federated Securities
Corp.
Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES
The investment objectives of the Fund are to provide relative safety of capital
with the possibility of long-term growth of capital and income. Consideration is
also given to current income. The Fund pursues these investment objectives by
investing in a professionally managed, diversified portfolio of common and
preferred stocks and other equity securities, bonds, notes, and short-term
obligations. While there is no assurance that the Fund will achieve its
investment objectives, it endeavors to do so by following the investment
policies described in this prospectus. The investment objectives and the
policies and limitations described below cannot be changed without approval of
shareholders, unless otherwise noted.
INVESTMENT POLICIES
As a matter of investment policy, which may be changed without shareholder
approval, under normal circumstances, the Fund will invest at least 65% of its
total assets in stocks and bonds.
ACCEPTABLE INVESTMENTS. The Fund invests primarily in a diversified portfolio
of common stocks, bonds, convertible securities, and preferred stocks which
provide characteristics of stability and relative safety, and marketable
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities. The Fund anticipates that it will experience characteristics
of stability and relative safety by investing primarily in securities of larger,
well-established companies which have a history of lower volatility in earnings
and price fluctuations.
COMMON STOCKS. The common stocks in which the Fund invests are selected by
the Fund's investment adviser on the basis of traditional research
techniques, including assessment of earnings and dividend growth, prospects
and of the risk and volatility of the company's
4
industry. However, other factors, such as product position, market share, or
profitability, will also be considered by the Fund's investment adviser.
CONVERTIBLE SECURITIES. Convertible securities are fixed income securities
which may be exchanged or converted into a predetermined number of the
issuer's underlying common stock at the option of the holder during a
specified time period. Convertible securities may take the form of
convertible preferred stock, convertible bonds or debentures, units
consisting of "usable" bonds and warrants, or a combination of the features
of several of these securities. The investment characteristics of each
convertible security vary widely, which allows convertible securities to be
employed for different investment objectives. In selecting convertible
securities for the Fund, the Fund's investment adviser evaluates the
investment potential of the underlying security for capital appreciation.
The convertible securities in which the Fund invests will be rated
"investment grade" or of comparable quality at the time of purchase. See
"Investment-Grade Bonds."
INVESTMENT-GRADE BONDS. The bonds in which the Fund invests will be rated
investment grade (i.e., rated Baa or better by Moody's Investors Service, Inc.,
("Moody's"), BBB or better by Standard & Poor's Ratings Group ("S&P"), Fitch
Investors Service, Inc. ("Fitch"), or, if unrated, deemed to be of comparable
quality by the Fund's investment adviser). Bonds rated BBB by S&P or Fitch or
Baa by Moody's have speculative characteristics. Changes in economic conditions
or other circumstances are more likely to lead to weakened capacity to make
principal and interest payments than higher rated bonds. If a security's rating
is reduced below the required minimum after the Fund has purchased it, the Fund
is not required to sell the security but may consider doing so. A description of
the rating categories is contained in the Appendix to the Statement of
Additional Information. (The Fund intends to restrict investments to securities
rated investment grade in the current fiscal year. However, the Fund reserves
the right to, in the future, invest in securities rated below investment grade.
The Fund will notify shareholders of such a change in investment policy prior to
its implementation.)
U.S. GOVERNMENT SECURITIES. The U.S. government securities in which the Fund
invests are either issued or guaranteed by the U.S. government, its agencies or
instrumentalities. These securities include, but are not limited to:
- direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds; and
- notes, bonds, and discount notes of U.S. government agencies or
instrumentalities such as Federal Home Loan Banks, Federal National
Mortgage Association, Government National Mortgage Association, Banks for
Cooperatives (including Central Bank for Cooperatives), Federal Land
Banks, Federal Intermediate Credit Banks, Tennessee Valley Authority,
Export-Import Bank of the United States, Commodity Credit Corporation,
Federal Financing Bank, Student Loan Marketing Association, Federal Home
Loan Mortgage Corporation, or National Credit Union Administration.
The prices of fixed income securities fluctuate inversely to the direction of
interest rates.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government, such as Government National Mortgage Association participation
certificates, are backed by the full faith and credit of the U.S. Treasury.
Others for which no assurances can be given that the U.S. government
5
will provide financial support to the agencies or instrumentalities, since it is
not obligated to do so, are supported by:
- the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
- discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
- the credit of the agency or instrumentality.
FOREIGN ISSUERS. The Fund may invest in the securities of foreign issuers which
are freely traded on United States securities exchanges or in the
over-the-counter market in the form of depositary receipts. The Fund will limit
its investments in non-ADR foreign obligations to less than 5% of its assets.
Securities of a foreign issuer may present greater risks in the form of
nationalization, confiscation, domestic marketability, or other national or
international restrictions. As a matter of practice, the Fund will not invest in
the securities of a foreign issuer if any such risk appears to the investment
adviser to be substantial.
TEMPORARY INVESTMENTS. In such proportions as, in the judgment of its
investment adviser, prevailing market conditions warrant, the Fund may, for
temporary defensive purposes, invest in:
- short-term money market instruments;
- securities issued and/or guaranteed as to payment of principal and
interest by the U.S. government, its agencies or instrumentalities; and
- repurchase agreements.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which
banks, broker/ dealers, and other recognized financial institutions sell
U.S. government securities or other securities to the Fund and agree at the
time of sale to repurchase them at a mutually agreed upon time and price.
The Fund or its custodian will take possession of the securities subject to
repurchase agreements and these securities will be marked to market daily.
To the extent that the original seller does not repurchase the securities
from the Fund, the Fund could receive less than the repurchase price on any
sale of such securities. In the event that such a defaulting seller filed
for bankruptcy or became insolvent, disposition of such securities by the
Fund might be delayed pending court action. The Fund believes that under the
regular procedures normally in effect for custody of the Fund's portfolio
securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions, such as
broker/dealers, which are found by the Fund's adviser to be creditworthy.
RESTRICTED AND ILLIQUID SECURITIES. As a matter of investment policy, which may
be changed without shareholder approval, the Fund may invest up to 10% of its
total assets in restricted securities. This restriction is not applicable to
commercial paper issued under Section 4(2) of the Securities Act of 1933.
Restricted securities are any securities in which the Fund may otherwise invest
pursuant to its investment objectives and policies, but which are subject to
restriction on resale under federal
6
securities law. The Fund will limit investments in illiquid securities,
including certain restricted securities not determined by the Directors to be
liquid, non-negotiable time deposits, and repurchase agreements providing for
settlement in more than seven days after notice, to 15% of its net assets.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or a long-term basis to
broker/dealers, banks, or other institutional borrowers of securities. The Fund
will only enter into loan arrangements with broker/dealers, banks, or other
institutions which the investment adviser has determined are creditworthy under
guidelines established by the Fund's Directors and will receive collateral in
the form of cash or U.S. government securities equal to at least 100% of the
value of the securities loaned.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more/less than the market value of the securities
on the settlement date.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter into transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
INVESTMENT LIMITATIONS
The Fund will not:
- borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for at least
a percentage of its cash value with an agreement to buy it back on a set
date) except, under certain circumstances, the Fund may borrow up to
one-third of the value of its net assets;
- invest more than 5% of its total assets in securities of one issuer
(except U.S. government securities);
- invest in more than 10% of the voting securities of one issuer;
- invest in more than 10% of any class of securities of one issuer;
- invest more than 5% of its total assets in securities of issuers that have
records of less than three years of continuous operations; or
- invest more than 5% of its assets in warrants, except under certain
circumstances.
7
FUND INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS. The Fund is managed by a Board of Directors. The Directors
are responsible for managing the Fund's business affairs and for exercising all
the Fund's powers except those reserved for the shareholders. An Executive
Committee of the Board of Directors handles the Board's responsibilities between
meetings of the Board.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Federated
Management, the Fund's investment adviser, subject to direction by the
Directors. The adviser continually conducts investment research and supervision
for the Fund and is responsible for the purchase or sale of portfolio
instruments, for which it receives an annual fee from the Fund.
ADVISORY FEES. The Fund's adviser receives an annual investment advisory
fee equal to 0.55 of 1% of the Fund's average daily net assets, plus 4.5% of
the Fund's annual gross income, excluding any capital gains or losses. Gross
income includes interest accrued, including discount earned on U.S. Treasury
bills and agency discount notes, interest received or receivable on all
interest-bearing obligations, and dividend income. The adviser may
voluntarily choose to waive a portion of its fee or reimburse the Fund for
certain operating expenses. The adviser can terminate this voluntary waiver
of its advisory fee at any time at its sole discretion. This does not
include reimbursement to the Fund of any expenses incurred by shareholders
who use the transfer agent's subaccounting facilities. The adviser has also
undertaken to reimburse the Fund for operating expenses in excess of
limitations established by certain states.
ADVISER'S BACKGROUND. Federated Management, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) shares of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, Chairman and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J.
Christopher Donahue, who is President and Trustee of Federated Investors.
Federated Management and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services to
a number of investment companies. Total assets under management or
administration by these and other subsidiaries of Federated Investors are
approximately $70 billion. Federated Investors, which was founded in 1956 as
Federated Investors, Inc., develops and manages mutual funds primarily for
the financial services industry. Federated Investors' track record of
competitive performance and its disciplined, risk-averse investment
philosophy serve approximately 3,500 client institutions nationwide. Through
these same client institutions, individual shareholders also have access to
this same level of investment expertise.
Joseph M. Balestrino has been the Fund's co-portfolio manager since October
1, 1994. Mr. Balestrino joined Federated Investors in 1986 and has been an
Assistant Vice President of the Fund's investment adviser since 1991. Mr.
Balestrino served as an Investment Analyst of the
8
investment adviser from 1989 until 1991, and from 1986 until 1989 he acted
as Project Manager in the Product Development Department. Mr. Balestrino is
a Chartered Financial Analyst and received his M.A. in Urban and Regional
Planning from the University of Pittsburgh.
Frederick L. Plautz has been the Fund's co-portfolio manager since December
1, 1994. Mr. Plautz joined Federated Investors in 1990 and has been a Vice
President of the Fund's investment adviser since October, 1994. Prior to
this, Mr. Plautz served as an Assistant Vice President of the investment
adviser. Mr. Plautz was a portfolio manager at Banc One Asset Management
Corp. from 1986 until 1990. Mr. Plautz received his M.S. in Finance from the
University of Wisconsin.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal distributor for shares. Federated
Securities Corp. is located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. It is a Pennsylvania corporation organized on November
14, 1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET ASSETS OF
ADMINISTRATIVE FEE THE FEDERATED FUNDS
- -------------------- ----------------------------------------
<S> <C>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the capacities described above or should
Congress relax current restrictions on depository institutions, the Directors
will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from the interpretations
given to the Glass-Steagall Act and, therefore, banks and financial institutions
may be required to register as dealers pursuant to state laws.
9
SHAREHOLDER SERVICES PLAN. The Fund has adopted a Shareholder Services Plan
(the "Services Plan") under which it may make payments up to 0.25 of 1% of the
average daily net asset value of the Fund to obtain certain personal services
for shareholders and the maintenance of shareholder accounts ("shareholder
services"). The Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
Federated Shareholder Services will either perform shareholder services directly
or will select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Fund and Federated Shareholder
Services.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to periodic payments to
financial institutions under the Shareholder Services Plan, certain financial
institutions may be compensated by the adviser or its affiliates for the
continuing investment of customers' assets in certain funds, including the Fund,
advised by those entities. These payments will be made directly by the
distributor or adviser from their assets, and will not be made from the assets
of the Fund or by the assessment of a sales charge on shares.
CUSTODIAN. State Street Bank and Trust Company, P. O. Box 8604, Boston,
Massachusetts 02266-8604, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania 15222-3779, is transfer agent and dividend disbursing
agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly, 2510
Centre City Tower, Pittsburgh, Pennsylvania 15222, and Dickstein, Shapiro &
Morin, L.L.P., 2101 L Street, N.W., Washington, D.C. 20037.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, 125 Summer Street, Boston, Massachusetts 02110-1617.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. 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 Federated Securities Corp. The adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to review by the
Directors.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per share fluctuates. It is determined by dividing
the sum of the market value of all securities and other assets of the Fund, less
liabilities, by the number of shares outstanding.
10
INVESTING IN THE FUND
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased either by wire or mail.
To purchase shares, open an account by calling Federated Securities Corp.
Information needed to establish the account will be taken over the telephone.
The Fund reserves the right to reject any purchase request.
Participants in plans under the Liberty Family Retirement Program shall purchase
shares in accordance with the requirements of their respective plans.
BY WIRE. To purchase shares by Federal Reserve Wire, call the Fund to place an
order. The order is considered received immediately. Payment by federal funds
must be received before 3:00 p.m. (Eastern time) on the next business day
following the order. Federal funds should be wired as follows: Federated
Services Company c/o State Street Bank and Trust Company, Boston, Massachusetts;
Attention: EDGEWIRE; For Credit to: Stock and Bond Fund, Inc.; Fund Number (this
number can be found on the account statement or by contacting the Fund); Group
Number or Order Number; Nominee or Institution Name; and ABA #011000028. Shares
cannot be purchased by wire on Columbus Day, Veterans' Day, or Martin Luther
King Day.
BY MAIL. To purchase shares by mail, send a check made payable to Stock and
Bond Fund, Inc. to: Federated Services Company, P.O. Box 8604, Boston,
Massachusetts 02266-8604. Orders by mail are considered received after payment
by check is converted by the transfer agent's bank, State Street Bank and Trust
Company ("State Street Bank") into federal funds. This is generally the next
business day after State Street Bank receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $25,000 plus any non-affiliated
bank or broker's fee, if applicable. However, an account may be opened with a
smaller amount as long as the $25,000 minimum is reached within 90 days. An
institutional investor's minimum investment will be calculated by combining all
accounts it maintains with the Fund. Accounts established through a non-
affiliated bank or broker may be subject to a smaller minimum investment. (Other
minimum investment requirements may apply to investments through the Liberty
Family Retirement Program.)
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund. Investors who purchase
shares through a non-affiliated bank or broker may be charged an additional
service fee by that bank or broker.
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; and (iii) the
following holidays: New
11
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day.
SUBACCOUNTING SERVICES
Institutions are encouraged to open single master accounts. However, certain
institutions may wish to use the transfer agent's subaccounting system to
minimize their internal recordkeeping requirements. The transfer agent charges a
fee based on the level of subaccounting services rendered. Institutions holding
shares in a fiduciary, agency, custodial, or similar capacity may charge or pass
through subaccounting fees as part of or in addition to normal trust or agency
account fees. They may also charge fees for other services provided which may be
related to the ownership of shares. This prospectus should, therefore, be read
together with any agreement between the customer and the institution with regard
to the services provided, the fees charged for those services, and any
restrictions and limitations imposed.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder. Share certificates are not issued unless requested
by contacting the transfer agent.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Quarterly confirmations are sent to report dividends paid during
that quarter.
DIVIDENDS
Dividends are declared and paid quarterly to all shareholders invested in the
Fund on the record date. Unless shareholders request cash payments by writing to
the Fund, dividends are automatically reinvested in additional shares on payment
dates at the ex-dividend date net asset value without a sales charge. All
shareholders on the record date are entitled to the dividend. If shares are
redeemed or exchanged prior to the record date or purchased after the record
date, those shares are not entitled to that quarter's dividend.
CAPITAL GAINS
Capital gains realized by the Fund, if any, will be distributed at least once
every twelve months.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, contact Federated Securities Corp., and
consult a tax adviser.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at their net asset value next determined after the Fund
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests must be received in
proper form and can be made by telephone request or by written request.
Redemptions of shares held through the Liberty Family Retirement Program will be
governed by the requirements of the respective plans.
12
TELEPHONE REDEMPTION
Shareholders may redeem their shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business day,
but in no event more than seven days, to the shareholder's account at a domestic
commercial bank that is a member of the Federal Reserve System. If at any time,
the Fund shall determine it necessary to terminate or modify this method of
redemption, shareholders would be promptly notified.
An authorization form permitting the transfer agent or the Fund to accept
telephone requests must first be completed. Authorization forms and information
on this service are available from Federated Securities Corp. Telephone
redemption instructions may be recorded. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "Written Requests," should be considered.
WRITTEN REQUESTS
Shares may also be redeemed by sending a written request to the Fund. Call the
Fund for specific instructions before redeeming by letter. The shareholder will
be asked to provide in the request his name, the Fund name, the account number,
and the share or dollar amount requested. If Share certificates have been
issued, they must be properly endorsed and should be sent by registered or
certified mail with the written request.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
- a member of the New York, American, Boston, Midwest or Pacific Stock
Exchanges;
- a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
Normally, a check for the proceeds is mailed within one business day, but in no
event more than seven days, after receipt of a proper written redemption
request.
13
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $250 due to shareholder
redemptions. This requirement does not apply, however, if the balance falls
below $250 because of changes in the Fund's net asset value. Before shares are
redeemed to close an account, the shareholder is notified in writing and allowed
30 days to purchase additional shares to meet the minimum requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share gives the shareholder one vote in Director elections and other
matters submitted to shareholders for vote. All shares of each portfolio or
class in the Fund have equal voting rights, except that only shares of that
particular portfolio or class are entitled to vote in matters affecting that
portfolio or class.
As a Maryland corporation, the Fund is not required to hold annual shareholder
meetings. Shareholder approval will be sought only for certain changes in the
Fund's operation and for the election of Directors under certain circumstances.
Directors may be removed by a majority vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the written request of shareholders owning at least 25% of the Fund's
outstanding shares of all series entitled to vote.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held the shares. No federal income tax is due on any
dividends earned in an IRA or qualified retirement plan until distributed.
PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Fund:
- the Fund is subject to the Pennsylvania corporate franchise tax; and
14
- Fund shares are exempt from personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund advertises the total return and yield for shares.
Total return represents the change, over a specific period of time, in the value
of an investment in shares after reinvesting all income and capital gain
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by shares
over a thirty-day period by the maximum offering price per share of shares on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
shares and, therefore, may not correlate to the dividends or other distributions
paid to shareholders.
The Fund is sold without a sales load or other similar non-recurring charges.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
15
STOCK AND BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- ------------------------------------------------------------------- --------------
<C> <S> <C>
COMMON STOCKS--47.3%
- --------------------------------------------------------------------------------
BASIC INDUSTRY--3.2%
-------------------------------------------------------------------
10,500 Aluminum Co. of America $ 895,125
-------------------------------------------------------------------
22,000 Lubrizol Corp. 709,500
-------------------------------------------------------------------
20,000 Phelps Dodge Corp. 1,227,500
-------------------------------------------------------------------
53,000 Praxair, Inc. 1,225,625
------------------------------------------------------------------- --------------
Total 4,057,750
------------------------------------------------------------------- --------------
CONSUMER DURABLES--3.7%
-------------------------------------------------------------------
10,100 Chrysler Corp. 492,375
-------------------------------------------------------------------
26,000 Eastman Kodak Co. 1,251,250
-------------------------------------------------------------------
22,800 General Motors Corp. 900,600
-------------------------------------------------------------------
66,250 Mattel, Inc. 1,937,812
------------------------------------------------------------------- --------------
Total 4,582,037
------------------------------------------------------------------- --------------
CONSUMER NON-DURABLES--2.4%
-------------------------------------------------------------------
27,000 Philip Morris 1,653,750
-------------------------------------------------------------------
35,000 Reebok International Ltd. 1,395,625
------------------------------------------------------------------- --------------
Total 3,049,375
------------------------------------------------------------------- --------------
CONSUMER SERVICES--4.9%
-------------------------------------------------------------------
52,000 American Stores Co. 1,410,500
-------------------------------------------------------------------
12,000 Dun & Bradstreet Corp. 703,500
-------------------------------------------------------------------
37,700 Sears, Roebuck & Co. 1,866,150
-------------------------------------------------------------------
26,000 Tandy Corp. 1,150,500
-------------------------------------------------------------------
45,000+ Tele-Communiciations, Inc., Class A 1,018,125
------------------------------------------------------------------- --------------
Total 6,148,775
------------------------------------------------------------------- --------------
ENERGY--4.5%
-------------------------------------------------------------------
38,500 Baker Hughes, Inc. 789,250
-------------------------------------------------------------------
36,000 Chevron Corp. 1,620,000
-------------------------------------------------------------------
</TABLE>
16
STOCK AND BOND FUND, INC.
- ---------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- ------------------------------------------------------------------- --------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
- --------------------------------------------------------------------------------
ENERGY--CONTINUED
-------------------------------------------------------------------
14,000 Exxon Corp. $ 880,250
-------------------------------------------------------------------
20,000 Mapco, Inc. 1,092,500
-------------------------------------------------------------------
20,000 Texaco, Inc. 1,307,500
------------------------------------------------------------------- --------------
Total 5,689,500
------------------------------------------------------------------- --------------
FINANCE--8.5%
-------------------------------------------------------------------
30,000 Bank of Boston Corp. 862,500
-------------------------------------------------------------------
32,000 Citicorp 1,528,000
-------------------------------------------------------------------
23,714 Dean Witter, Discover & Co. 915,953
-------------------------------------------------------------------
8,700 Federal National Mortgage Association 661,200
-------------------------------------------------------------------
9,900 First Interstate Bancorp 792,000
-------------------------------------------------------------------
24,322 Mellon Bank Corp. 1,352,911
-------------------------------------------------------------------
14,300 Nationsbank Corp. 707,850
-------------------------------------------------------------------
34,700 PNC Financial Corp. 815,450
-------------------------------------------------------------------
44,000 Ryder Systems, Inc. 1,034,000
-------------------------------------------------------------------
22,000 Transamerica Corp. 1,080,750
-------------------------------------------------------------------
26,866 Travelers, Inc. 933,594
------------------------------------------------------------------- --------------
Total 10,684,208
------------------------------------------------------------------- --------------
HEALTHCARE--4.5%
-------------------------------------------------------------------
25,300 American Home Products Corp. 1,606,550
-------------------------------------------------------------------
24,000 Becton, Dickinson & Co. 1,134,000
-------------------------------------------------------------------
22,500 Bristol-Myers Squibb Co. 1,313,437
-------------------------------------------------------------------
33,000 U.S. Healthcare, Inc. 1,559,250
------------------------------------------------------------------- --------------
Total 5,613,237
------------------------------------------------------------------- --------------
INDUSTRIAL/MANUFACTURING--6.0%
-------------------------------------------------------------------
8,800 Deere & Co. 631,400
-------------------------------------------------------------------
27,000+ FMC Corp. 1,647,000
-------------------------------------------------------------------
19,600 General Electric Co. 957,950
-------------------------------------------------------------------
</TABLE>
17
STOCK AND BOND FUND, INC.
- ---------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- ------------------------------------------------------------------- --------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
- --------------------------------------------------------------------------------
INDUSTRIAL/MANUFACTURING--CONTINUED
-------------------------------------------------------------------
14,000 ITT Corp. $ 1,235,500
-------------------------------------------------------------------
8,200+ Litton Industries, Inc. 301,350
-------------------------------------------------------------------
13,600 Loews Corp. 1,200,200
-------------------------------------------------------------------
31,000 Textron, Inc. 1,581,000
------------------------------------------------------------------- --------------
Total 7,554,400
------------------------------------------------------------------- --------------
TECHNOLOGY--5.6%
-------------------------------------------------------------------
27,000+ Computer Sciences Corp. 1,255,500
-------------------------------------------------------------------
17,000 E Systems, Inc. 705,500
-------------------------------------------------------------------
10,000 General Dynamics Corp. 423,750
-------------------------------------------------------------------
44,000 General Motors Corp., Class E 1,611,500
-------------------------------------------------------------------
25,000 Harris Corp. 1,071,875
-------------------------------------------------------------------
3,000 International Business Machines Corp. 223,500
-------------------------------------------------------------------
26,000 Raytheon Co. 1,657,500
------------------------------------------------------------------- --------------
Total 6,949,125
------------------------------------------------------------------- --------------
UTILITIES--4.0%
-------------------------------------------------------------------
28,900 AT&T Corp. 1,589,500
-------------------------------------------------------------------
18,000 Duke Power Co. 713,250
-------------------------------------------------------------------
40,000 MCI Communications Corp. 920,000
-------------------------------------------------------------------
33,000 NIPSCO Industries, Inc. 919,875
-------------------------------------------------------------------
50,000 Portland General Corp. 868,750
------------------------------------------------------------------- --------------
Total 5,011,375
------------------------------------------------------------------- --------------
TOTAL COMMON STOCK (IDENTIFIED COST, $49,156,457) 59,339,782
------------------------------------------------------------------- --------------
</TABLE>
18
STOCK AND BOND FUND, INC.
- ---------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- ------------------------------------------------------------------- --------------
<C> <S> <C>
PREFERRED STOCKS--2.6%
- --------------------------------------------------------------------------------
CONSUMER DURABLE--1.1%
-------------------------------------------------------------------
14,000 Ford Motor Co., Conv. Pfd., Series A, $4.20 $ 1,354,500
------------------------------------------------------------------- --------------
CONSUMER NON-DURABLE--0.7%
-------------------------------------------------------------------
122,000 RJR Nabisco Holdings Corp., Conv. Pfd., Series C, $.60 838,750
------------------------------------------------------------------- --------------
CONSUMER SERVICES--0.4%
-------------------------------------------------------------------
13,000 Tandy Corp., PERCS, Series C, $2.14 481,000
------------------------------------------------------------------- --------------
UTILITIES--0.4%
-------------------------------------------------------------------
10,000 Nacional Financiera, SNC, PRIDES, $6.79 580,000
------------------------------------------------------------------- --------------
TOTAL PREFERRED STOCKS (IDENTIFIED COST, $2,770,894) 3,254,250
------------------------------------------------------------------- --------------
<CAPTION>
PRINCIPAL
AMOUNT
- -----------
-------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS--2.7%
- --------------------------------------------------------------------------------
ENERGY--0.8%
-------------------------------------------------------------------
$ 1,000,000 Exxon Capital Corp, Deb., 7.875%, 4/15/96 1,015,880
------------------------------------------------------------------- --------------
INDUSTRIAL/MANUFACTURING--0.8%
-------------------------------------------------------------------
1,000,000 General Electric Co., Deb., 7.875%, 5/1/96 1,018,090
------------------------------------------------------------------- --------------
UTILITIES--1.1%
-------------------------------------------------------------------
500,000 Chesapeake & Potomac Telephone Co. of VA, Deb., 7.875%, 1/15/2022 462,070
-------------------------------------------------------------------
1,000,000 Michigan Bell Telephone, Deb., 7.85%, 1/15/2022 928,400
------------------------------------------------------------------- --------------
Total 1,390,470
------------------------------------------------------------------- --------------
TOTAL CORPORATE BONDS (IDENTIFIED COST, $3,479,595) 3,424,440
------------------------------------------------------------------- --------------
GOVERNMENT OBLIGATIONS--44.4%
- --------------------------------------------------------------------------------
GOVERNMENT AGENCIES SECURITIES--1.9%
-------------------------------------------------------------------
500,000 Federal Home Loan Bank, Deb., 5.23%, 1/15/98 498,020
-------------------------------------------------------------------
1,500,000 Federal Home Loan Mortgage Corp., Deb., 5.31%, 3/25/96 1,480,995
-------------------------------------------------------------------
350,000 Federal National Mortgage Association, 5.86%, 6/1/98 330,827
------------------------------------------------------------------- --------------
Total 2,309,842
------------------------------------------------------------------- --------------
</TABLE>
19
STOCK AND BOND FUND, INC.
- ---------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- ----------- -------------------------------------------------------------------
<C> <S> <C>
GOVERNMENT OBLIGATIONS--CONTINUED
- --------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES--5.7%
-------------------------------------------------------------------
$ 769,994 Federal National Mortgage Association Pool #124009 9.00%, 11/1/2021 $ 785,863
-------------------------------------------------------------------
1,454,905 Federal National Mortgage Association Pool #271756 8.50%, 5/1/2022 1,444,429
-------------------------------------------------------------------
1,476,226 Federal National Mortgage Association Pool #C00092 8.00%, 1/1/2022 1,426,374
-------------------------------------------------------------------
39,600 Federal National Mortgage Association Pool #50796 7.50%, 9/1/2023 37,161
-------------------------------------------------------------------
1,011,908 Federal National Mortgage Association Pool #50659 7.00%, 11/1/2007 921,140
-------------------------------------------------------------------
593,247 Government National Mortgage Association Pool #299165, 9.50%,
12/15/2020 620,121
-------------------------------------------------------------------
1,111,324 Government National Mortgage Association Pool #354686, 7.50%,
11/15/2023 1,031,776
-------------------------------------------------------------------
1,014,730 Government National Mortgage Association Pool #385622, 6.50%,
5/15/2024 875,824
------------------------------------------------------------------- --------------
Total 7,142,688
------------------------------------------------------------------- --------------
TREASURY SECURITIES--36.8%
-------------------------------------------------------------------
18,320,000 United States Treasury Bonds, 7.25%-11.625%, 11/15/2004-2/15/2019 19,757,825
-------------------------------------------------------------------
26,530,000 United States Treasury Notes, 3.875%-7.875%, 1/31/95-8/15/2001 26,404,836
------------------------------------------------------------------- --------------
Total 46,162,661
------------------------------------------------------------------- --------------
TOTAL GOVERNMENT OBLIGATIONS (IDENTIFIED COST, $56,691,015) 55,615,191
------------------------------------------------------------------- --------------
</TABLE>
20
STOCK AND BOND FUND, INC.
- ---------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- ----------- -------------------------------------------------------------------
<C> <S> <C>
*REPURCHASE AGREEMENT--2.9%
- --------------------------------------------------------------------------------
3,585,000 J.P. Morgan Securities, Inc., 4.82%, dated 10/31/94, due 11/1/94
(at amortized cost) 3,585,000
------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (IDENTIFIED COST, $115,682,961) $ 125,218,663++
------------------------------------------------------------------- --------------
<FN>
+ Non-income producing
++ The cost of federal income tax purposes amounts to $115,682,961. The net
unrealized appreciation of investments on a federal income tax basis amounts
to $9,535,702, which is comprised of $11,765,241 appreciation and $2,229,539
depreciation at October 31, 1994.
* The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations. The investment in the repurchase agreement is through
participation in a joint account with other Federated funds.
Note: The categories of investments are shown as a percentage of net assets
($125,381,864) at October 31, 1994.
</TABLE>
The following abbreviations are used in this portfolio:
PERCS--Preferred Equity Redeemable Preferred Stock
PRIDES--Preferred Redeemable Increased Dividend Equity Securities
(See Notes which are an integral part of the Financial Statements)
21
STOCK AND BOND FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- -----------------------------------------------------------------------------------
Investments in securities, at value (identified cost and tax cost, $115,682,961) $125,218,663
- -----------------------------------------------------------------------------------
Dividends and interest receivable 1,093,578
- -----------------------------------------------------------------------------------
Receivable for investments sold 457,225
- -----------------------------------------------------------------------------------
Receivable for capital stock sold 144,356
- ----------------------------------------------------------------------------------- ------------
Total assets 126,913,822
- -----------------------------------------------------------------------------------
LIABILITIES:
- -----------------------------------------------------------------------------------
Payable for investments purchased $1,078,415
- ----------------------------------------------------------------------
Payable for capital stock redeemed 426,843
- ----------------------------------------------------------------------
Payable to bank 1,718
- ----------------------------------------------------------------------
Accrued expenses 24,982
- ---------------------------------------------------------------------- ----------
Total liabilities 1,531,958
- ----------------------------------------------------------------------------------- ------------
NET ASSETS for 7,718,077 shares of capital stock outstanding $125,381,864
- ----------------------------------------------------------------------------------- ------------
NET ASSETS CONSIST OF:
- -----------------------------------------------------------------------------------
Paid-in capital $112,589,757
- -----------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments 9,535,702
- -----------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments 700,358
- -----------------------------------------------------------------------------------
Undistributed net investment income 2,556,047
- ----------------------------------------------------------------------------------- ------------
Total $125,381,864
- ----------------------------------------------------------------------------------- ------------
NET ASSET VALUE, Offering Price, and Redemption Proceeds Per Share:
($125,381,864 DIVIDED BY 7,718,077 shares of capital stock
outstanding) $ 16.25
- ----------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
22
STOCK AND BOND FUND, INC.
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- -------------------------------------------------------------------------
Interest $ 3,625,220
- -------------------------------------------------------------------------
Dividends 1,712,412
- ------------------------------------------------------------------------- -----------
Total investment income 5,337,632
- -------------------------------------------------------------------------
EXPENSES:
- -------------------------------------------------------------------------
Investment advisory fee $ 945,715
- ------------------------------------------------------------
Directors' fees 7,994
- ------------------------------------------------------------
Administrative personnel and services fees 207,503
- ------------------------------------------------------------
Custodian and portfolio accounting fees and expenses 83,852
- ------------------------------------------------------------
Capital stock registration fees 42,041
- ------------------------------------------------------------
Auditing fees 19,104
- ------------------------------------------------------------
Legal fees 12,405
- ------------------------------------------------------------
Insurance 7,355
- ------------------------------------------------------------
Printing and postage 25,589
- ------------------------------------------------------------
Transfer agent and dividend disbursing agent fees and
expenses 62,941
- ------------------------------------------------------------
Shareholder services fees 11,298
- ------------------------------------------------------------
Distribution services fees--Class C Shares 3,830
- ------------------------------------------------------------
Taxes 15,511
- ------------------------------------------------------------
Miscellaneous 2,697
- ------------------------------------------------------------ ----------
Total expenses 1,447,835
- ------------------------------------------------------------
Deduct--Waiver of investment advisory fee 98,828
- ------------------------------------------------------------ ----------
Net expenses 1,349,007
- ------------------------------------------------------------------------- -----------
Net investment income 3,988,625
- ------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- -------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) 1,349,184
- -------------------------------------------------------------------------
Net change in unrealized (appreciation) depreciation on investments (5,913,664)
- ------------------------------------------------------------------------- -----------
Net realized and unrealized gain (loss) on investments (4,564,480)
- ------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $ (575,855)
- ------------------------------------------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
23
STOCK AND BOND FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
- ---------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------
1994 1993
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ---------------------------------------------------------------------------
OPERATIONS--
- ---------------------------------------------------------------------------
Net investment income $ 3,988,625 $ 3,867,816
- ---------------------------------------------------------------------------
Net realized gain (loss) on investment transactions ($1,349,184 net gain,
and $648,826 net loss, respectively, as computed for federal tax purposes) 1,349,184 (648,826)
- ---------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) of investments (5,913,664) 11,161,979
- --------------------------------------------------------------------------- ------------- -------------
Change in net assets from operations (575,855) 14,380,969
- --------------------------------------------------------------------------- ------------- -------------
NET EQUALIZATION CREDITS-- 26,597 129,581
- --------------------------------------------------------------------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ---------------------------------------------------------------------------
Dividends to shareholders from net investment income:
- ---------------------------------------------------------------------------
Class A Shares (4,128,685) (3,755,624)
- ---------------------------------------------------------------------------
Class C Shares (13,593) (38)
- ---------------------------------------------------------------------------
Distribution to shareholders from net realized gain on investment
transactions:
- ---------------------------------------------------------------------------
Class A Shares -- (3,675,092)
- --------------------------------------------------------------------------- ------------- -------------
Change in net assets resulting from distributions to shareholders (4,142,278) (7,430,754)
- --------------------------------------------------------------------------- ------------- -------------
CAPITAL STOCK TRANSACTIONS
(EXCLUSIVE OF AMOUNTS ALLOCATED TO NET INVESTMENT INCOME)--
- ---------------------------------------------------------------------------
Net proceeds from sale of shares 38,530,728 38,398,216
- ---------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of dividends
declared 2,833,419 5,226,747
- ---------------------------------------------------------------------------
Cost of shares redeemed (35,969,675) (21,412,900)
- --------------------------------------------------------------------------- ------------- -------------
Change in net assets from capital stock transactions 5,394,472 22,212,063
- --------------------------------------------------------------------------- ------------- -------------
Change in net assets 702,936 29,291,859
- ---------------------------------------------------------------------------
NET ASSETS:
- ---------------------------------------------------------------------------
Beginning of period 124,678,928 95,387,069
- --------------------------------------------------------------------------- ------------- -------------
End of period (including undistributed net investment income of $2,556,047
and $2,683,103 respectively) $ 125,381,864 $ 124,678,928
- --------------------------------------------------------------------------- ------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
24
STOCK AND BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Stock and Bond Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940, as amended (the "Act"), as a diversified, open-end,
no-load, management investment company. Previously, the Fund provided two
classes of shares ("Class A Shares" and "Class C Shares"). On May 19, 1994, the
Board of Directors (the "Directors") authorized the combination of Class C
Shares with Class A Shares, the termination of all contracts entered into by the
Fund on behalf of Class C Shares, and the amendment of the Articles of
Incorporation to reclassify Class A Shares and Class C Shares as unclassified
shares. In connection with these actions, as of August 31, 1994, the "Class C
Shares" were no longer offered.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Listed equity securities, corporate bonds and other
fixed income securities are valued at the last sales price reported on
national securities exchanges. Unlisted securities and bonds are generally
valued at the price provided by an independent pricing service. Short-term
securities with remaining maturities of sixty days or less may be stated at
amortized cost, which approximates value.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian
bank to take possession, to have legally segregated in the Federal Reserve
Book Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by the Fund to
monitor, on a daily basis, the market value of each repurchase agreement's
underlying collateral to ensure that the value of collateral at least equals
the principal amount of the repurchase agreement, including accrued
interest.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to guidelines established
by the Board of Directors. Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly,
the Fund could receive less than the repurchase price on the sale of
collateral securities.
C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income and expenses are accrued
25
STOCK AND BOND FUND, INC.
- --------------------------------------------------------------------------------
daily. Bond premium and discount, if applicable, are amortized as required
by the Internal Revenue Code, as amended (the "Code").
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its taxable income. Accordingly,
no provisions for federal tax are necessary.
E. EQUALIZATION--The Fund follows the accounting practice known as equalization
by which a portion of the proceeds from sales and costs of redemptions of
capital stock equivalent, on a per share basis to the amount of
undistributed and net investment income on the date of the transaction, is
credited or charged to undistributed net investment income. As a result,
undistributed net investment income per share is unaffected by sales or
redemptions of capital stock.
F. OTHER--Investment transactions are accounted for on the trade date.
(3) CAPITAL STOCK
At October 31, 1994, there were 2,000,000,000 shares of $0.001 par value capital
stock authorized. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED 10/31/94 YEAR ENDED 10/31/93
-------------------------- --------------------------
CLASS A SHARES SHARES DOLLARS SHARES DOLLARS
- -------------------------------------------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Shares sold 2,338,641 $ 37,487,658 2,386,696 $ 38,303,285
- --------------------------------------------
Shares issued to shareholders in payment of
dividends declared 174,458 2,825,356 334,836 5,226,710
- --------------------------------------------
Shares redeemed (2,181,393) (34,829,553) (1,331,495) (21,412,848)
- -------------------------------------------- ----------- ------------ ----------- ------------
Net change resulting from Class A share
transactions 331,706 $ 5,483,461 1,390,037 $ 22,117,147
- -------------------------------------------- ----------- ------------ ----------- ------------
</TABLE>
26
STOCK AND BOND FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED 10/31/94 YEAR ENDED 10/31/93**
-------------------------- --------------------------
CLASS C SHARES SHARES DOLLARS SHARES DOLLARS
- -------------------------------------------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Shares sold 64,355 $ 1,043,070 5,711 $ 94,931
- --------------------------------------------
Shares issued to shareholders in payment of
dividends declared 497 8,063 2 37
- --------------------------------------------
Shares redeemed (70,562) (1,140,122) (3) (52)
- -------------------------------------------- ----------- ------------ ----------- ------------
Net change resulting from Class C share
transactions (5,710) ($ 88,989) 5,710 $ 94,916
- -------------------------------------------- ----------- ------------ ----------- ------------
Net change resulting from Fund share
transactions 325,996 5,394,472 1,395,747 $ 22,212,063
- -------------------------------------------- ----------- ------------ ----------- ------------
<FN>
** For the period from April 17, 1993 (date of initial public offering) to
October 31, 1993.
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Management, the Fund's investment adviser
(the "Adviser"), receives for its services an annual investment advisory fee
equal to .55 of 1% of the Fund's average daily net assets, plus 4.5% of the
Fund's gross income, excluding capital gains or losses. The Adviser may
voluntarily choose to waive its fee. The Adviser can modify or terminate this
voluntary waiver at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with administrative personnel and services. The FAS fee is based on the level of
average aggregate daily net assets of all funds advised by subsidiaries of
Federated Investors for the period. The administrative fee received during the
period of the Administrative Services Agreement shall be at least $125,000 per
portfolio and $30,000 per each additional class of shares.
DISTRIBUTION PLAN--The Fund had adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund
compensated Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's Class C Shares. The Plan provided that the Fund may have incurred
distribution expenses up to .75 of 1% of the average daily net assets of the
Class C Shares, annually, to compensate FSC. The Plan was terminated in 1994
(See Note 1).
SHAREHOLDER SERVICES PLAN--Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to .25 of
1% of average daily net assets of the Class A Shares for the period. This fee is
to obtain certain personal services for shareholders and to maintain the
shareholder accounts.
27
STOCK AND BOND FUND, INC.
- --------------------------------------------------------------------------------
TRANSFER AGENT FEES--Federated Services Company ("FServ") serves as transfer and
dividend disbursing agent for the Fund. The FServ fee is based on the size,
type, and number of accounts and transactions made by shareholders.
Certain of the Officers and Directors of the Fund are Officers and Directors or
Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended October 31, 1994 were as follows:
<TABLE>
<S> <C>
PURCHASES $61,390,120
- -------------------------------------------------------------------------------- -----------
SALES $54,623,633
- -------------------------------------------------------------------------------- -----------
</TABLE>
28
INDEPENDENT AUDITORS' REPORT
- ---------------------------------------------------------
To the Board of Directors and Shareholders of
STOCK AND BOND FUND, INC.
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Stock and Bond Fund, Inc., as of October 31,
1994, the related statement of operations for the year then ended, the statement
of changes in net assets for the years ended October 31, 1994 and 1993, and the
financial highlights (see page 2 of the prospectus) for each of the years in the
four year period ended October 31, 1994, the ten month period ended October 31,
1990 and each of the years in the six-year period ended December 31, 1989. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1994 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Stock and Bond Fund,
Inc. as of October 31, 1994, the results of its operations, the changes in its
net assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
December 14, 1994
29
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Stock and Bond Fund, Inc. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -------------------------------------------------------------------------------------------
Investment Adviser
Federated Management Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -------------------------------------------------------------------------------------------
Custodian
State Street Bank and Trust Company P.O. Box 8604
Boston, Massachusetts 02266-8604
- -------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- -------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
- -------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 125 Summer Street
Boston, Massachusetts 02110-1617
- -------------------------------------------------------------------------------------------
</TABLE>
30
- --------------------------------------------------------------------------------
STOCK AND BOND FUND, INC.
PROSPECTUS
An Open-End, Diversified
Management Investment Company
December 31, 1994
[LOGO] FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
86101A104
80112905A-A (12/94) [RECYCLED PAPER SYMBOL]
Stock and Bond Fund, Inc.
Statement of Additional Information
This Statement of Additional Information should be read
with the prospectus of Stock and Bond Fund, Inc., (the
"Fund"), dated December 31, 1994. This Statement is not
a prospectus itself. To receive a copy of the
prospectus, write or call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated December 31, 1994
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
General Information About
the Fund 1
Investment Objectives and
Policies 1
Types of Investments 1
Obligations of Foreign
Issuers 1
Temporary Investments 1
When-Issued and Delayed
Delivery Transactions 1
Lending Portfolio
Securities 2
Reverse Repurchase
Agreements 2
Restricted and Illiquid
Securities 2
Portfolio Turnover 2
Investment Limitations 3
Stock and Bond Fund, Inc.
Management 4
The Funds 7
Fund Ownership 8
Investment Advisory
Services 8
Adviser to the Fund 8
Advisory Fees 8
Other Related Services 8
Administrative Services 8
Shareholder Services Plan 9
Brokerage Transactions 9
Purchasing Shares 9
Conversion to Federal
Funds 10
Determining Net Asset Value 10
Determining Market Value
of Securities 10
Redeeming Shares 10
Redemption in Kind 10
Tax Status 10
The Fund's Tax Status 10
Shareholders' Tax Status 11
Total Return 11
Yield 11
Performance Comparisons 11
Duration 12
Appendix 13
General Information About the Fund
Stock and Bond Fund ("the Fund") was incorporated under the
laws of the State of Maryland on October 31, 1934. The name
of the Fund was Boston Foundation Fund Incorporated prior to
January 11, 1985 . On April 16, 1993, the shareholders voted
to permit the Fund to offer separate series and classes of
shares. During the fiscal year ended October 31, 1994, the
Fund offered Class A Shares and Class C Shares. On August
31, 1994, a reorganization of the Fund was completed to
eliminate the separate classes of shares.
Investment Objectives and Policies
The Fund's investment objectives are to provide relative
safety of capital with the possibility of long-term growth
of capital and income. Consideration is also given to
current income. The investment objectives cannot be changed
without approval of shareholders.
As a matter of investment policy, under normal
circumstances, the Fund will invest at least 65% of its
total assets in stocks and bonds.
Types of Investments
The Fund invests primarily in a diversified portfolio of
common and preferred stocks and other equity securities,
bonds, notes, U.S. government securities, repurchase
agreements, short-term obligations and instruments secured
by any of these obligations.
Obligations of Foreign Issuers
Obligations of a foreign issuer may present greater risks
than investments in U.S. securities, including higher
transaction costs as well as the imposition of additional
taxes by foreign governments. In addition, investments in
foreign issuers may include additional risks associated with
less complete financial information about the issuers, less
market liquidity, and political instability. Future
political and economic developments, the possible imposition
of withholding taxes on interest income, the possible
seizure or nationalization of foreign holdings, the possible
establishment of exchange controls, or the adoption of other
governmental restrictions might adversely affect the payment
of principal and interest on obligations of foreign issuers.
As a matter of practice, the Fund will not invest in the
obligations of a foreign issuer if any such risk appears to
the Fund's adviser to be substantial.
Temporary Investments
The Fund may also invest in temporary investments from time
to time for defensive purposes.
Money Market Instruments
The Fund may invest in money market instruments such
as:
oinstruments of domestic and foreign banks and savings
and loans if they have capital, surplus, and undivided
profits of over $100,000,000, or if the principal
amount of the instrument is federally insured; or
ocommercial paper rated A-1 by Standard and Poor's
Ratings Group, Prime-1 by Moody's Investors Service,
Inc., or F-1 by Fitch Investors Service, Inc.
When-Issued and Delayed Delivery Transactions
The Fund engages in when-issued and delayed delivery
transactions only for the purpose of acquiring portfolio
securities consistent with the Fund's objectives and
policies, not for investment leverage. These transactions
are made to secure what is considered to be an advantageous
price or yield for the Fund. No fees or other expenses,
other than normal transaction costs, are incurred. However,
liquid assets of the Fund sufficient to make payment for the
securities to be purchased are segregated on the Fund's
records at the trade date. These assets are marked to
market daily and are maintained until the transaction has
been settled. As a matter of operating policy, which may be
changed without shareholder approval, the Fund does not
intend to engage in when-issued and delayed delivery
transactions to an extent that would cause the segregation
of more than 20% of the total value of its assets.
Lending Portfolio Securities
The collateral received when the Fund lends portfolio
securities must be valued daily and, should the market value
of the loaned securities increase, the borrower must furnish
additional collateral to the Fund. During the time portfolio
securities are on loan, the borrower pays the Fund any
dividends or interest paid on such securities. Loans are
subject to termination at the option of the Fund or the
borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker. The
Fund does not have the right to vote securities on loan, but
would terminate the loan and regain the right to vote if
that were considered important with respect to the
investment.
Reverse Repurchase Agreements
The Fund may also enter into reverse repurchase agreements
under certain circumstances. This transaction is similar to
borrowing cash. In a reverse repurchase agreement, the Fund
transfers possession of a portfolio instrument to another
person, such as a financial institution, broker, or dealer,
in return for a percentage of the instrument's market value
in cash, and agrees that on a stipulated date in the future
the Fund will repurchase the portfolio instrument by
remitting the original consideration plus interest at an
agreed upon rate. The use of reverse repurchase agreements
may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements
does not ensure that the Fund will be able to avoid selling
portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets
of the Fund, in a dollar amount sufficient to make payment
for the obligations to be purchased, are segregated at the
trade date. These securities are marked to market daily and
are maintained until the transaction is settled.
Restricted and Illiquid Securities
The Fund may invest in commercial paper issued in reliance
on the exemption from registration afforded by Section 4(2)
of the Securities Act of 1933. Section 4(2) commercial paper
is restricted as to disposition under federal securities law
and is generally sold to institutional investors, such as
the Fund, who agree that they are purchasing the paper for
investment purposes and not with a view to public
distribution. Any resale by the purchaser must be in an
exempt transaction. Section 4(2) commercial paper is
normally resold to other institutional investors like the
Fund through or with the assistance of the issuer or
investment dealers who make a market in Section 4(2)
commercial paper, thus providing liquidity.
The ability of the Directors 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 Fund believes that the Staff of the SEC has
left the question of determining the liquidity of all
restricted securities to the Directors. The Directors may
consider the following criteria in determining the liquidity
of certain restricted securities:
othe frequency of trades and quotes for the security;
othe number of dealers willing to purchase or sell the
security and the number of other potential buyers;
odealer undertakings to make a market in the security;
and
othe nature of the security and the nature of the
marketplace trades.
Portfolio Turnover
The Fund normally holds or disposes of portfolio securities
in order to work toward its investment objectives.
Securities held by the Fund are selected because they are
considered to represent real value and will be held or
disposed of accordingly. The Fund's investment adviser will
not generally seek profits through short-term trading.
The Fund will not attempt to set or meet a portfolio
turnover rate since any turnover would be incidental to
transactions undertaken in an attempt to achieve the Fund's
investment objectives. For the fiscal years ended October
31, 1994, and 1993, the portfolio turnover rates were 45%
and 51%, respectively.
Investment Limitations
Selling Short and Buying on Margin
The Fund will not sell any securities short or purchase
any securities on margin.
Issuing Senior Securities and Borrowing Money
The Fund will not issue senior securities, except as
permitted by its investment objectives and policies,
and except that the Fund may enter into reverse
repurchase agreements and otherwise borrow up to one-
third of the value of its net assets including the
amount borrowed, as a temporary, extraordinary or
emergency measure or to facilitate management of the
portfolio by enabling the Fund to meet redemption
requests when the liquidation of portfolio instruments
would be inconvenient or disadvantageous. This practice
is not for investment leverage. The Fund will not
purchase any portfolio instruments while any borrowings
(including reverse repurchase agreements) are
outstanding.
Diversification of Investments
The Fund will not invest more than 5% of the value of
its total assets in the securities of any one issuer,
except U.S. government securities; invest in more than
10% of the voting securities of one issuer; or invest
in more than 10% of any class of securities of one
issuer.
Acquiring Securities
The Fund will not invest in securities issued by any
other investment company or investment trust except in
regular open-market transactions or as part of a plan
of merger or consolidation. It will not invest in
securities of a company for the purpose of exercising
control or management.
Investing in New Issuers
The Fund will not invest more than 5% of the value of
its total assets in securities of issuers which have
records of less than three years of continuous
operations.
Investing in Issuers Whose Securities are Owned by
Officers and Directors of the Fund
The Fund will not purchase or retain the securities of
any issuer in which the officers and Directors of the
Fund or its investment adviser own a substantial
financial interest.
Investing in Commodities, Commodity Contracts, or Real
Estate
The Fund will not invest in commodities, commodity
contracts, or real estate.
Underwriting
The Fund will not engage in underwriting or agency
distribution of securities issued by others.
Lending Cash or Securities
The Fund will not lend any assets except portfolio
securities. The purchase of corporate or government
bonds, debentures, notes or other evidences of
indebtedness shall not be considered a loan for
purposes of this limitation.
Concentration of Investments
The Fund will not invest more than 25% of the value of
its total assets in securities of companies in any one
industry.
Investing in Warrants
The Fund will not invest more than 5% of its assets in
warrants, including those acquired in units or attached
to other securities. To comply with certain state
restrictions, the Fund will limit its investment in
such warrants not listed on recognized stock exchanges
to 2% of its total assets. (If state restrictions
change, this latter restriction may be revised without
notice to shareholders.) For purposes of this
investment restriction, warrants acquired by the Fund
in units or attached to securities may be deemed to be
without value.
The above limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed
by the Directors without shareholder approval. Shareholders
will be notified before any material change in these
limitations becomes effective.
Investing in Restricted Securities
The Fund will not invest more than 10% of its total
assets in securities subject to restrictions on resale
under the Securities Act of 1933, except for commercial
paper issued under Section 4(2) of the Securities Act
of 1933 and certain other restricted securities which
meet the criteria for liquidity as established by the
Directors. To comply with certain state restrictions,
the Fund will limit these transactions to 5% of its
total assets. (If state restrictions change, this
latter restriction may be revised without shareholder
approval or notification.)
Investing in Illiquid Securities
The Fund will not invest more than 15% of its net
assets in illiquid securities, including repurchase
agreements providing for settlement more than seven
days after notice and certain restricted securities not
determined by the Directors to be liquid. To comply
with certain state restrictions, the Fund will limit
these transactions to 10% of its net assets. (If state
restrictions change, this latter restriction may be
revised without shareholder approval or notification.)
If a percentage limitation is adhered to at the time of
investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not
result in a violation of such restriction.
The Fund did not borrow money or lend portfolio securities
in excess of 5% of the value of its net assets during the
last fiscal year and has no present intent to do so in the
coming fiscal year.
In addition, to comply with certain state restrictions, the
Fund will not invest in oil, gas, or other mineral leases,
nor will it invest in real estate limited partnerships. If
state restrictions change, these limitations may be revised
without notice to shareholders.
Stock and Bond Fund, Inc. Management
Officers and Directors are listed with their addresses,
present positions with Stock and Bond Fund, Inc., and
principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
President and Director
Chairman and Trustee, Federated Investors, Federated
Advisers, Federated Management, and Federated Research;
Chairman and Director, Federated Research Corp.; Chairman,
Passport Research, Ltd.; Director, AEtna Life and Casualty
Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the
father of J. Christopher Donahue , Vice President and
Director.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Director
President, Investment Properties Corporation; Senior Vice-
President, John R. Wood and Associates, Inc., Realtors;
President, Northgate Village Development Corporation;
Partner or Trustee in private real estate ventures in
Southwest Florida; Director, Trustee, or Managing General
Partner of the Funds; formerly, President, Naples Property
Management, Inc.
Thomas G. Bigley
28th Floor
One Oxford Center
Pittsburgh, PA 15219
Director
Director, Oberg Manufacturing Co.; Chairman of the Board,
Children's Hospital of Pittsburgh; Director, Trustee or
Managing General Partner of the Funds: formerly, Senior
Partner, Ernst & Young LLP.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Director
Director and Member of the Executive Committee, Michael
Baker, Inc.; Director, Trustee, or Managing General Partner
of the Funds; formerly, Vice Chairman and Director, PNC
Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes,
Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.;
Director, Trustee, or Managing General Partner of the Funds;
formerly, Director, Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Director
Hematologist, Oncologist, and Internist, Presbyterian and
Montefiore Hospitals; Professor of Medicine and Trustee,
University of Pittsburgh; Director of Corporate Health,
University of Pittsburgh Medical Center; Director, Trustee,
or Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
Two Gateway Center - Suite 674
Pittsburgh, PA
Director
Attorney-at-law; Partner, Henny, Koehuba, Meyer and
Flaherty; Director, Eat'N Park Restaurants, Inc., and
Statewide Settlement Agency, Inc.; Director, Trustee, or
Managing General Partner of the Funds; formerly, Counsel,
Horizon Financial, F.A., Western Region.
Peter E. Madden
225 Franklin Street
Boston, MA
Director
Consultant; State Representative, Commonwealth of
Massachusetts; Director, Trustee, or Managing General
Partner of the Funds; formerly, President, State Street Bank
and Trust Company and State Street Boston Corporation and
Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Two Gateway Center - Suite 674
Pittsburgh, PA
Director
Attorney-at-law; Partner, Henny, Koehuba, Meyer and
Flaherty; Chairman, Meritcare, Inc.; Director, Eat'N Park
Restaurants, Inc.; Director, Trustee, or Managing General
Partner of the Funds; formerly, Vice Chairman, Horizon
Financial, F.A.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Director
Professor, Foreign Policy and Management Consultant;
Trustee, Carnegie Endowment for International Peace, RAND
Corporation, Online Computer Library Center, Inc., and U.S.
Space Foundation; Chairman, Czecho Slovak Management Center;
Director, Trustee, or Managing General Partner of the Funds;
President Emeritus, University of Pittsburgh; formerly,
Chairman, National Advisory Council for Environmental Policy
and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Director
Public relations/marketing consultant; Director, Trustee,
or Managing General Partner of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Vice President
Donahue,
Donahue, President and Director of the Company.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Vice President
Executive Vice President and Trustee, Federated Investors;
Director, Federated Research Corp.; Chairman and Director,
Federated Securities Corp.; President or Vice President of
some of the Funds; Director or Trustee of some of the Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors;
Vice President and Treasurer, Federated Advisers, Federated
Management, Federated Research, Federated Research Corp.,
and Passport Research, Ltd.; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.;
Trustee, Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and Trustee,
Federated Administrative Services; Trustee or Director of
some of the Funds; Vice President and Treasurer of the
Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee,
Federated Investors; Vice President, Secretary, and Trustee,
Federated Advisers, Federated Management, and Federated
Research; Vice President and Secretary, Federated Research
Corp. and Passport Research, Ltd.; Trustee, Federated
Services Company; Executive Vice President, Secretary, and
Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice
President and Director, Federated Securities Corp.; Vice
President and Secretary of the Funds.
* This Director is deemed to be an "interested person"
as defined in the Investment Company Act of 1940, as
amended.
@ Member of the Executive Committee. The Executive
Committee of the Board of Directors handles the
responsibilities of the Board of Directors between
meetings of the Board.
The Funds
"The Funds," and "Funds" mean the following investment
companies: American Leaders Fund, Inc.; Annuity Management
Series; Arrow Funds; Automated Cash Management Trust;
Automated Government Money Trust; California Municipal Cash
Trust; Cash Trust Series II; Cash Trust Series, Inc.; DG
Investor Series; Edward D. Jones & Co. Daily Passport Cash
Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.;
Federated GNMA Trust; Federated Government Trust; Federated
Growth Trust; Federated High Yield Trust; Federated Income
Securities Trust; Federated Income Trust; Federated Index
Trust; Federated Institutional Trust; Federated Intermediate
Government Trust; Federated Master Trust; Federated
Municipal Trust; Federated Short-Intermediate Government
Trust; Federated Short-Term U.S. Government Trust;
Federated Stock Trust; Federated Tax-Free Trust; Federated
U.S. Government Bond Fund; First Priority Funds; Fixed
Income Securities, Inc.; Fortress Adjustable Rate U.S.
Government Fund, Inc.; Fortress Municipal Income Fund, Inc.;
Fortress Utility Fund, Inc.; Fund for U.S. Government
Securities, Inc.; Government Income Securities, Inc.; High
Yield Cash Trust; Insight Institutional Series, Inc.;
Insurance Management Series; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.;
Investment Series Trust; Liberty Equity Income Fund, Inc.;
Liberty High Income Bond Fund, Inc.; Liberty Municipal
Securities Fund, Inc.; Liberty U.S. Government Money Market
Trust; Liberty Term Trust, Inc. - 1999; Liberty Utility
Fund, Inc.; Liquid Cash Trust; Managed Series Trust; The
Medalist Funds: Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities
Income Trust; New York Municipal Cash Trust; 111 Corcoran
Funds; Peachtree Funds; The Planters Funds; Portage Funds;
RIMCO Monument Funds; The Shawmut Funds; Short-Term
Municipal Trust; Star Funds; The Starburst Funds; The
Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst
Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
Trademark Funds; Trust for Financial Institutions; Trust For
Government Cash Reserves; Trust for Short-Term U.S.
Government Securities; Trust for U.S. Treasury Obligations;
World Investment Series, Inc.
Fund Ownership
Officers and Directors own less than 1% of the Fund's
outstanding shares.
As of December 12, 1994, the following shareholder of record
owned 5% or more of the outstanding shares of the Fund:
Systematics, Inc., Denver, Colorado, owned approximately
852,699 shares (11.11%).
Investment Advisory Services
Adviser to the Fund
The Fund's investment adviser is Federated Management. It is
a subsidiary of Federated Investors. All the voting
securities of Federated Investors are owned by a trust, the
trustees of which are John F. Donahue, his wife, and his
son, J. Christopher Donahue.
The adviser shall not be liable to the Fund or any
shareholder for any losses that may be sustained in the
purchase, holding, or sale of any security or for anything
done or omitted by it, except acts or omissions involving
willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its
contract with the Fund.
Advisory Fees
For its advisory services, Federated Management receives an
annual investment advisory fee as described in the
prospectus. During the fiscal years ended October 31, 1994,
1993, and 1992, the Fund's adviser earned $945,715,
$834,842 and $726,717, respectively, of which $98,828,
$222,090 and $196,556, respectively, was voluntarily waived
because of undertakings to limit the Fund's expenses. All
advisory fees were computed on the same basis as described
in the prospectus.
State Expense Limitations
The adviser has undertaken to comply with the expense
limitations established by certain states for
investment companies whose shares are registered for
sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but
not including brokerage commissions, interest, taxes
and extraordinary expenses) exceed 2 1/2% per year of
the first $30 million of average net assets, 2% per
year of the next $70 million of average net assets, and
1 1/2% per year of the remaining average net assets,
the adviser will reimburse the Fund for its expenses
over the limitation.
If the Fund's monthly projected operating expenses
exceed this limitation, the investment advisory fee
paid will be reduced by the amount of the excess,
subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by
the adviser will be limited, in any single fiscal year,
by the amount of the investment advisory fee.
This arrangement is not part of the advisory contract
and may be amended or rescinded in the future.
Other Related Services
Affiliates of the adviser may, from time to time, provide
certain electronic equipment and software to institutional
customers in order to facilitate the purchase of shares of
funds offered by Federated Securities Corp.
Administrative Services
Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and
services to the Fund for a fee as described in the
prospectus. Prior to March 1, 1994, Federated
Administrative Services Inc., also a subsidiary of Federated
Investors, served as the Fund's administrator. (For
purposes of this Statement of Additional Information,
Federated Administrative Services and Federated
Administrative Services, Inc., may hereinafter collectively
be referred to as the "Administrators".) For the fiscal year
ended October 31, 1994, the Administrators collectively
earned $207,503. For the fiscal years ended October 31,
1993 and October 31, 1992, Federated Administrative
Services, Inc., earned $291,137 and $229,879, respectively.
Dr. Henry J. Gailliot, an officer of Federated Management,
the adviser to the Fund, holds approximately 20%, of the
outstanding common stock and serves as a director of
Commercial Data Services, Inc., a company which provides
computer processing services to Federated Administrative
Services.
Shareholder Services Plan
This arrangement permits the payment of fees to Federated
Shareholder Services and, indirectly, to financial
institutions to cause services to be provided to
shareholders by a representative who has knowledge of the
shareholder's particular circumstances and goals. These
activities and services may include, but are not limited to,
providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel
as necessary or beneficial to establish and maintain
shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client
account cash balances; answering routine client inquiries;
and assisting clients in changing dividend options, account
designations, and addresses.
For the fiscal period ending October 31, 1994, payments in
the amount of $11,298 were made pursuant to the Shareholder
Services Plan, all of which was paid to financial
institutions.
Transfer Agent and Dividend Disbursing Agent
Federated Services Company serves as transfer agent and
dividend disbursing agent for the Fund. The fee paid to the
transfer agent is based upon the size, type and number of
accounts and transactions made by shareholders.
Federated Services Company also maintains the Fund's
accounting records. The fee paid for this service is based
upon the level of the Fund's average net assets for the
period plus out-of-pocket expenses.
Brokerage Transactions
The adviser may select brokers and dealers who offer
brokerage and research services. These services may be
furnished directly to the Fund or to the adviser and may
include:
oadvice as to the advisability of investing in
securities;
osecurity analysis and reports;
oeconomic studies;
oindustry studies;
oreceipt of quotations for portfolio evaluations; and
osimilar services.
The adviser and its affiliates exercise reasonable business
judgment in selecting brokers who offer brokerage and
research services to execute securities transactions. They
determine in good faith that commissions charged by such
persons are reasonable in relationship to the value of the
brokerage and research services provided.
Research services provided by brokers may be used by the
adviser or by affiliates of Federated Investors in advising
Federated funds and other accounts. To the extent that
receipt of these services may supplant services for which
the adviser or its affiliates might otherwise have paid, it
would tend to reduce their expenses.
For the fiscal years ended October 31, 1994, 1993, and 1992,
the Fund paid $41,256, $69,262 and $44,963, respectively, in
brokerage commissions on brokerage transactions.
As of October 31, 1994, the Fund owned $883,000 of
securities of Travelers Inc. (Smith Barney) and $893,000 of
securities of Dean Witter, two of its regular brokers that
derive more than 15% of gross revenues from securities-
related activities.
Purchasing Shares
Shares are sold at their net asset value without a sales
charge on days the New York Stock Exchange is open for
business. The procedure for purchasing shares is explained
in the respective prospectus under "Investing in the Fund."
Conversion to Federal Funds
The Fund's transfer agent acts as the shareholder's agent in
depositing checks and converting them to federal funds.
Determining Net Asset Value
Net asset value generally changes each day. The days on
which net asset value is calculated by the Fund are
described in the prospectus.
Determining Market Value of Securities
Market values of the Fund's portfolio securities are
determined as follows:
ofor equity securities, according to the last sale price
on a national securities exchange, if available;
oin the absence of recorded sales for equity securities,
according to the mean between the last closing bid and
asked prices;
ofor bonds and other fixed income securities, at the
last sale price on a national securities exchange if
available, otherwise as determined by an independent
pricing service;
ofor short-term obligations, according to the mean
between the bid and asked prices as furnished by an
independent pricing service; or
ofor all other securities, at fair value as determined
in good faith by the Board of Directors.
Prices provided by independent pricing services may be
determined without relying exclusively on quoted prices and
may reflect institutional trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics and other market data.
Redeeming Shares
The Fund redeems shares at the next computed net asset value
after the Fund receives the redemption request. Redemption
procedures and any fees are explained in the respective
prospectus under "Redeeming Shares." Although the Fund's
transfer agent does not charge for telephone redemptions, it
reserves the right to charge a fee for the cost of wire-
transferred redemptions of less than $5,000.
Redemption in Kind
The Fund is obligated to redeem shares solely in cash up to
$250,000 or 1% of the Fund's net asset value, whichever is
less, for any one shareholder within a 90-day period.
Any redemption beyond this amount will also be in cash
unless the Board of Directors determines that payments
should be in kind. In such a case, the Fund will pay all or
a portion of the remainder of the redemption in portfolio
instruments, valued in the same way that net asset value is
determined. The portfolio instruments will be selected in a
manner that the Board of Directors deems fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If
redemption is made in kind, shareholders receiving their
securities and selling them before their maturity could
receive less than the redemption value of their securities
and could incur transaction costs.
Tax Status
The Fund's Tax Status
The Fund will pay no federal income tax because it expects
to meet the requirements of Subchapter M of the Internal
Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund
must, among other requirements:
oderive at least 90% of its gross income from dividends,
interest, and gains from the sale of securities;
oderive less than 30% of its gross income from the sale
of securities held less than three months;
oinvest in securities within certain statutory limits;
and
odistribute to its shareholders at least 90% of its net
income earned during the year.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends
and capital gains received as cash or additional shares. The
dividends received deduction for corporations will apply to
ordinary income distributions to the extent the distribution
represents amounts that would qualify for the dividends
received deduction to the Fund if the Fund were a regular
corporation and to the extent designated by the Fund as so
qualifying. These dividends and any short-term capital gains
are taxable as ordinary income.
Capital Gains
Long-term capital gains distributed to shareholders
will be treated as long-term capital gains regardless
of how long shareholders have held the shares.
Total Return
The Fund's average annual total returns for the one-year,
five-year, and ten-year periods ended October 31, 1994, were
(0.48%), 7.17% and 10.05%, respectively.
The average annual total return for the Fund is the average
compounded rate of return for a given period that would
equate a $1,000 initial investment to the ending redeemable
value of that investment. The ending redeemable value is
computed by multiplying the number of shares owned at the
end of the period by the maximum offering price per share at
the end of the period. The number of shares owned at the end
of the period is based on the number of shares purchased at
the beginning of the period with $1,000, adjusted over the
period by any additional shares, assuming the quarterly
reinvestment of all dividends and distributions.
Yield
The Fund's SEC yield for the thirty-day period ended October
31, 1994, was 3.98%.
The yield for the Fund is determined by dividing the net
investment income per share (as defined by the Securities
and Exchange Commission) earned by the Fund over a thirty-
day period by the maximum offering price per share of the
Fund on the last day of the period. This value is then
annualized using semi-annual compounding. This means that
the amount of income generated during the thirty-day period
is assumed to be generated each month over a twelve-month
period and is reinvested every six months. The yield does
not necessarily reflect income actually earned by the Fund
because of certain adjustments required by the Securities
and Exchange Commission and, therefore, may not correlate to
the dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers
charge fees in connection with services provided in
conjunction with an investment in the Fund, performance
will be reduced for those shareholders paying those fees.
Performance Comparisons
The Fund's performance depends upon such variables as:
oportfolio quality;
oaverage portfolio maturity;
otype of instruments in which the portfolio is invested;
ochanges in interest rates and market value of portfolio
securities;
ochanges in the Fund's expenses; and
ovarious other factors.
The Fund's performance fluctuates on a daily basis largely
because net earnings and offering price per share fluctuate
daily. Both net earnings and offering price per share are
factors in the computation of yield and total return.
Investors may use financial publications and/or indices to
obtain a more complete view of the Fund's performance. When
comparing performance, investors should consider all
relevant factor such as the composition of any index used,
prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities
and compute offering price. The financial publications
and/or indices which the Fund uses in advertising may
include:
oStandard & Poor's Daily Stock Price Index of 500 Common
Stocks is a composite index of common stocks in industry,
transportation, and financial and public utility
companies, compares total returns of funds whose
portfolios are invested primarily in common stocks. In
addition, Standard and Poor's index assumes reinvestment
of all dividends paid by stocks listed on its index. Taxes
due on any of these distributions are not included nor are
brokerage or other fees calculated in Standard & Poor's
figures.
oSalomon Brothers AAA-AA Corporates calculates total
returns of approximately 775 issues, which include long-
term, high-grade domestic corporate taxable bonds, rated
AAA-AA, with maturities of twelve years or more. It also
includes companies in industry, public utilities, and
finance.
oLipper Analytical Services, Inc., ranks funds in various
categories by making comparative calculations using total
return. Total return assumes the reinvestment of all
capital gains distributions and income dividends and takes
into account any change in net asset value over a specific
period of time. From time to time, the Fund will quote its
Lipper ranking in advertising and sales literature.
oLehman Brothers Government/Corporate (Total) is comprised
of approximately 5,000 issues which include non-
convertible bonds publicly issued by the U.S. government
or its agencies; corporate bonds guaranteed by the U.S.
government and quasi-federal corporations; and publicly
issued, fixed rate, non-convertible domestic bonds of
companies in industry, public utilities, and finance. The
average maturity of these bonds approximates nine years.
Tracked by Lehman Brothers, Inc., the index calculates
total returns for one-month, three-month, twelve-month,
and ten-year periods and year-to-date.
oS&P 500/Lehman Brothers Government/Corporate (Weighted
Index) and the S&P 500/ Lehman Brothers Government
(Weighted Index) combine the components of a stock-
oriented index and a bond-oriented index to obtain results
which can be compared to the performance of a managed
fund. The indices' total returns will be assigned various
weights depending upon the Fund's current asset
allocation.
oMorningstar, 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.
Investors may also consult the fund evaluation consulting
universe listed below. Consulting universes may be composed
of pension, profit-sharing, commingled, endowment/foundation
and mutual funds.
oSEI Balanced Universe is composed of 916 portfolios
managed by 390 managers representing $86 billion in
assets. To be included in the universe, a portfolio must
contain a 5% minimum commitment in both equity and fixed
income securities.
Advertisements and other sales literature for the Fund may
quote total returns which are calculated on non-standardized
base periods. These total returns also represent the
historic change in the value of an investment in the Fund
based on quarterly reinvestment of dividends over a
specified period of time.
Duration
Duration is a commonly used measure of the potential
volatility in the price of a bond, other fixed income
security, or in a portfolio of fixed income securities,
prior to maturity. Volatility is the magnitude of the change
in the price of a bond relative to a given change in the
market rate of interest. A bond's price volatility depends
on three primary variables: the bond's coupon rate; maturity
date; and the level of market yields of similar fixed-income
securities. Generally, bonds with lower coupons or longer
maturities will be more volatile than bonds with higher
coupons or shorter maturities. Duration combines these
variables into a single measure.
Duration is calculated by dividing the sum of the time-
weighted values of the cash flows of a bond or bonds,
including interest and principal payments, by the sum of the
present values of the cash flows.
When the Fund invests in mortgage pass-through securities,
its duration will be calculated in a manner which requires
assumptions to be made regarding future capital prepayments.
A more complete description of this calculation is available
upon request from the Fund.
Appendix
Standard and Poor's Ratings Group Corporate Bond Ratings
AAA--Debt rated AAA has the highest rating assigned by
Standard & Poor's Ratings Group. Capacity to pay interest
and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from the higher rated issues
only in small degree.
A--Debt rated A has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher
rated categories.
NR--NR indicates that no public rating has been requested,
that there is insufficient information on which to base a
rating, or that S&P does not rate a particular type of
obligation as a matter of policy.
Moody's Investors Service, Inc., Corporate Bond Ratings
Aaa--Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edged." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group, they
comprise what are generally known as high-grade bonds. They
are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa
securities.
A--Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and
interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the
future.
Baa--Bonds which are rated Baa are considered as medium
grade obligations, (i.e., they are neither highly protected
nor poorly secured). Interest payments and principal
security appear adequate for the present but certain
protective elements may be lacking or may be
characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and,
in fact, have speculative characteristics as well.
NR--Not rated by Moody's.
Moody's applies numerical modifiers, 1, 2, and 3 in each
generic rating classification from Aa through B in corporate
bond rating system. The modifier 1 indicates that the
security ranks in the higher end of its generic ranking
category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
Fitch Investors Service, Inc., Long-Term Debt Ratings
AAA--Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high
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.
NR--NR indicates that Fitch does not rate the specific
issue.
Plus (+) or Minus (-): Plus and minus signs are used with a
rating symbol to indicate the relative position of a credit
within the rating category. Plus and minus signs, however,
are not used in the AAA category.
Standard and Poor's Ratings Group 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.
Moody's Investors Service, Inc., 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:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
- Broad margins in earning coverage of fixed financial
charges and high internal cash generation.
- Well-established access to a range of financial markets
and assured sources of 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.
Fitch Investors Service, Inc., Short-Term Ratings
F-1+--(Exceptionally Strong Credit Quality). Issues assigned
this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1--(Very Strong Credit Quality). Issues assigned this
rating reflect an assurance of timely payment only slightly
less in degree than issues rated F-1+.
F-2--(Good Credit Quality). Issues carrying this rating have
a satisfactory degree of assurance for timely payment, but
the margin of safety is not as great as the F-1+ and F-1
categories.
86101A104
8012905B (12/94)
