1933 Act File No. 2-10415
1940 Act File No. 811-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. ..........
Post-Effective Amendment No. 89 .......... X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 30 ......................... X
--
FEDERATED STOCK AND BOND FUND, INC.
(formerly, Stock and Bond Fund, Inc.)
(Exact Name of Registrant as Specified in Charter)
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
John W. McGonigle, Esquire,
Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
X immediately upon filing pursuant to paragraph (b)
on pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a) (i)
-
on pursuant to paragraph (a) (i).
75 days after filing pursuant to paragraph (a)(ii)
on pursuant to paragraph (a)(ii) of Rule 485.
-----------------
If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
-
previously filed post-effective amendment.
Registrant has filed with the Securities and Exchange Commission a
declaration pursuant to Rule 24f-2 under the Investment Company Act of
1940, and:
x filed the Notice required by that Rule on December 15, 1995; or
intends to file the Notice required by that Rule on or about
; or
------------
during the most recent fiscal year did not sell any securities pursuant
to Rule 24f-2 under the Investment Company Act of 1940, and, pursuant to
Rule 24f-2(b)(2), need not file the Notice.
Copies to:
Matthew J. Maloney, Esquire
Dickstein, Shapiro & Morin, L.L.P.
2101 L Street, N.W.
Washington, D.C. 20037
CROSS-REFERENCE SHEET
This Amendment to the Registration Statement of FEDERATED STOCK AND
BOND FUND, INC., consisting of three classes of shares: (1) Class A Shares;
(2) Class B Shares; and Class C Shares and is comprised of the following:
PART A. INFORMATION REQUIRED IN A PROSPECTUS.
Prospectus Heading
(Rule 404(c) Cross Reference)
Item 1. Cover Page...............(1-3) Cover Page.
Item 2. Synopsis.................Not applicable.
Item 3. Condensed Financial
Information.............(1-3) Summary of Fund Expenses; (1)
Financial Highlights-Class A Shares; (3)
Financial Highlights - Class C Shares
Item 4. General Description of
Registrant..............(1-3) General Information; (1-3)
Investment Information; (1-3) Investment
Objectives; (1-3) Investment Policies;
(1-3) Investment Limitations.
Item 5. Management of the Fund...(1-3) Fund Information; (1-3) Management
of the Fund; (1-3) Distribution of
Shares; (1-3) Administration of the
Fund; (1-3) Brokerage Transactions.
Item 6. Capital Stock and Other
Securities..............(1-3) Dividends; (1-3) Capital Gains;
(1-3) Shareholder Information; (1-3)
Voting Rights; (1-3) Tax Information;
(1-3) Federal Income Tax; (1-3) State
and Local Taxes.
Item 7. Purchase of Securities Being
Offered.................How to Purchase Shares; (1) Investing in
Class A Shares; (2) Investing in Class B
Shares; (3) Investing in Class C Shares;
(1-3) Certificates and Confirmations;
(1-3) Net Asset Value; (1-3) Retirement
Plans.
Item 8. Redemption or Repurchase.(1) Redeeming Shares; (1-3) How to
Redeem Shares; (1-3) Telephone
Redemption; (1-3) Redeeming Shares
Through a Financial Institution; (1-3)
Redeeming Shares by Telephone; (1-3)
Redeeming Shares by Mail; (1-3)
Contingent Deferred Sales Charge; (1-3)
Elimination of Contingent Deferred Sales
Charge; (1-3) Systematic Withdrawal
Program; (1-3) Accounts with low
Balances.
Item 9. Pending Legal Proceedings None.
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Item 10. Cover Page............... (1-3) Cover Page.
Item 11. Table of Contents........ (1-3) Table of Contents.
Item 12. General Information and
History.................(1-3) General Information About the
Fund; (1-3) About Federated Investors.
Item 13. Investment Objectives and
Policies................(1-3) Investment Objectives and
Policies; (1-3) Investment Limitations.
Item 14. Management of the Fund...(1-3) Federated Stock and Bond Fund,
Inc. Management.
Item 15. Control Persons and Principal
Holders of Securities...(1-3) Fund Ownership.
Item 16. Investment Advisory and Other
Services................(1-3) Investment Advisory Services; (1-
3) Other Services; (1-3) Shareholder
Services.
Item 17. Brokerage Allocation.....(1-3) Brokerage Transactions.
Item 18. Capital Stock and Other
Securities..............Not Applicable.
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered...........(1-3) Purchasing Shares; (1-3)
Determining Net Asset Value; (1-3)
Redeeming Shares.
Item 20 Tax Status...............(1-3) Tax Status.
Item 21. Underwriters.............Not Applicable.
Item 22. Calculation of Performance
Data....................(1) Total Return; (1) Yield; (1-3)
Performance Comparisons.
Item 23. Financial Statements.....(a) The Fund's financial statements
dated October 31, 1995 are filed in Part
A; b) the Fund's financial statements
dated April 30, 1996 are hereby
incorporated by reference to the
Registrant's Semi-Annual report dated
April 30, 1996 as filed with the
Commission on July 2, 1996 (File No.
811-1) pursuant to Rule 411 under the
Securities Act of 1933.
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
CLASS A SHARES
PROSPECTUS
The Class A Shares of Federated Stock and Bond Fund, Inc. (the "Fund") represent
interests in an open-end, diversified management investment company (a mutual
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.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in the Class A Shares of the Fund. Keep this prospectus for future
reference.
The Fund has also filed a Statement of Additional Information for Class A
Shares, Class B Shares, and Class C Shares dated August 29, 1996, 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 or a paper copy of
this prospectus, if you have received your prospectus electronically, free of
charge by calling
1-800-341-7400. To obtain other information or to make inquiries about the Fund,
contact your financial institution. The Statement of Additional Information,
material incorporated by reference into this document, and other information
regarding the Fund is maintained electronically with the SEC at Internet Web
site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION 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 August 29, 1996
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Summary of Fund Expenses.......................................................1
Financial Highlights...........................................................2
General Information............................................................3
Investment Information.........................................................3
Investment Objective.........................................................3
Investment Policies..........................................................3
Investment Limitations......................................................14
Net Asset Value...............................................................15
How to Purchase Shares........................................................15
Investing in Shares.........................................................15
Reducing or Eliminating the
Sales Charge.............................................................16
Special Purchase Features...................................................18
Exchange Privilege............................................................19
How to Redeem Shares..........................................................20
Special Redemption Features.................................................21
Contingent Deferred Sales Charge............................................22
Elimination of Contingent Deferred
Sales Charge.............................................................22
Account and Share Information.................................................23
Certificates and Confirmations..............................................23
Dividends...................................................................23
Capital Gains...............................................................23
Accounts with Low Balances..................................................23
Fund Information..............................................................24
Management of the Fund......................................................24
Distribution of Shares......................................................26
Administration of the Fund..................................................27
Brokerage Transactions......................................................27
Expenses of the Fund and Shares.............................................27
Shareholder Information.......................................................28
Voting Rights...............................................................28
Tax Information...............................................................29
Federal Income Tax..........................................................29
State and Local Taxes.......................................................29
Performance Information.......................................................29
Other Classes of Shares.......................................................30
Appendix......................................................................30
Financial Statements..........................................................33
Independent Auditors' Report..................................................48
Addresses.....................................................................49
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SUMMARY OF FUND EXPENSES
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)................................. 5.50%
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)......................................................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) (1)............................................................ 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................................ None
Exchange Fee.................................................................................................. None
</TABLE>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<TABLE>
<S> <C> <C>
Management Fee (after waiver)(2).............................................................................. 0.64%
12b-1 Fee (3)................................................................................................. 0.00%
Total Other Expenses.......................................................................................... 0.57%
Shareholder Services Fee.......................................................................... 0.25%
Total Operating Expenses (4)......................................................................... 1.21%
</TABLE>
(1) Shareholders who purchased shares with the proceeds of a redemption of
shares of an unaffiliated investment company purchased and redeemed with a
sales load and not distributed by Federated Securities Corp. may be charged
a contingent deferred sales charge of 0.50 of 1% for redemptions made within
one year of purchase.
(2) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.55% of average daily net assets plus 4.50% of gross income, excluding
capital gains or losses.
(3) Class A Shares has no present intention of paying the 12b-1 fee during the
fiscal year ending October 31, 1996. If Class A Shares were paying or
accruing the 12b-1 fee, Class A Shares would be able to pay up to 0.25% of
its average daily net assets for the 12b-1 fee. See "Fund Information".
(4) The total operating expenses in the table above are based on expenses
expected during the fiscal year ending October 31, 1996. The total operating
expenses were 1.07% for the fiscal year ended October 31, 1995 and would
have been 1.38% absent the voluntary waivers of portions of the management
fee and the shareholder services fee.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF CLASS A SHARES WILL BEAR,
EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS
COSTS AND EXPENSES, SEE "INVESTING IN CLASS A SHARES" AND "FUND INFORMATION."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
<TABLE>
<S> <C> <C> <C> <C>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
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................. $67 $91 $118 $194
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Independent Auditors' Report on page 48. The Fund also
incorporates herein by reference to the Financial Highlights Table and the
financial statements and notes thereto contained in its Semi-Annual Report to
shareholders dated April 30, 1996. This Table should be read in conjunction with
the Semi-Annual Report which may be obtained free of charge from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, YEAR ENDED DECEMBER 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 1994 1993 1992 1991 1990(A) 1989 1988 1987
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.25 $ 16.87 $ 15.91 $ 15.74 $ 13.60 $ 15.11 $ 14.94 $ 14.89 $ 15.34
- -------------------------------
INCOME FROM INVESTMENT
OPERATIONS
- -------------------------------
Net investment income 0.63 0.51 0.55 0.65 0.74 1.37 0.91 0.85 0.81
- -------------------------------
Net realized and unrealized
gain (loss) on investments 2.21 (0.59) 1.58 0.39 2.17 (2.22) 0.91 0.52 (0.24)
- ------------------------------- --------- --------- --------- --------- --------- ----------- --------- --------- ---------
Total from investment
operations 2.84 (0.08) 2.13 1.04 2.91 (0.85) 1.82 1.37 0.57
- ------------------------------- --------- --------- --------- --------- --------- ----------- --------- --------- ---------
LESS DISTRIBUTIONS
- -------------------------------
Distributions from net
investment income (0.62) (0.54) (0.56) (0.68) (0.77) (0.66) (0.94) (0.86) (0.79)
- -------------------------------
Distributions from net
realized gain on investment
transactions (0.09) -- (0.61) (0.19) -- -- (0.71) (0.46) (0.23)
- ------------------------------- --------- --------- --------- --------- --------- ----------- --------- --------- ---------
Total distributions (0.71) (0.54) (1.17) (0.87) (0.77) (0.66) (1.65) (1.32) (1.02)
- ------------------------------- --------- --------- --------- --------- --------- ----------- --------- --------- ---------
NET ASSET VALUE,
END OF PERIOD $ 18.38 $ 16.25 $ 16.87 $ 15.91 $ 15.74 $ 13.60 $ 15.11 $ 14.94 $ 14.89
- ------------------------------- --------- --------- --------- --------- --------- ----------- --------- --------- ---------
TOTAL RETURN (B) 17.99% (0.48)% 14.10% 7.94% 21.78% (5.90)% 12.46% 9.28% 3.58%
- -------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------
Expenses 1.07% 1.06% 1.04% 1.04% 1.01% 1.01%* 1.01% 1.00% 1.00%
- -------------------------------
Net investment income 3.71% 3.23% 3.49% 4.15% 4.91% 5.77%* 5.82% 5.53% 5.07%
- -------------------------------
Expense waiver/reimbursement
(c) 0.31% 0.07% 0.20% 0.21% 0.45% 0.54%* 0.51% 0.39% 0.22%
- -------------------------------
SUPPLEMENTAL DATA
- -------------------------------
Net assets, end of period
(000 omitted) $134,669 $125,382 $124,583 $95,387 $88,534 $79,003 $88,367 $90,504 $92,105
- -------------------------------
Portfolio turnover 68% 45% 51% 43% 72% 49% 26% 131% 110%
- -------------------------------
<CAPTION>
1986 1985
<S> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 15.24 $ 13.60
- -------------------------------
INCOME FROM INVESTMENT
OPERATIONS
- -------------------------------
Net investment income 0.85 0.90
- -------------------------------
Net realized and unrealized
gain (loss) on investments 1.17 2.18
- ------------------------------- --------- ---------
Total from investment
operations 2.02 3.08
- ------------------------------- --------- ---------
LESS DISTRIBUTIONS
- -------------------------------
Distributions from net
investment income (0.86) (0.90)
- -------------------------------
Distributions from net
realized gain on investment
transactions (1.06) (0.54)
- ------------------------------- --------- ---------
Total distributions (1.92) (1.44)
- ------------------------------- --------- ---------
NET ASSET VALUE,
END OF PERIOD $ 15.34 $ 15.24
- ------------------------------- --------- ---------
TOTAL RETURN (B) 13.77% 24.09%
- -------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------
Expenses 1.00% 1.30%
- -------------------------------
Net investment income 5.43% 6.42%
- -------------------------------
Expense waiver/reimbursement
(c) 0.30% 0.27%
- -------------------------------
SUPPLEMENTAL DATA
- -------------------------------
Net assets, end of period
(000 omitted) $75,441 $37,792
- -------------------------------
Portfolio turnover 40% 42%
- -------------------------------
</TABLE>
* Computed on an annualized basis
(a) Reflects operations for the ten month period ended October 31 1990.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
- --------------------------------------------------------------------------------
GENERAL INFORMATION
The Fund was incorporated under the laws of the State of Maryland on October 31,
1934. At a meeting of the Board of Directors ("Directors") held on February 26,
1996, the Directors approved an amendment to the Articles of Incorporation to
change the name of Stock and Bond Fund, Inc. to Federated Stock and Bond Fund,
Inc. The Articles of Incorporation 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. With respect to this
Fund, as of the date of this prospectus, the Directors have established three
classes of shares, known as Class A Shares, Class B Shares, and Class C Shares.
This prospectus relates only to the Class A Shares ("Shares") of the Fund.
Shares of the Fund are 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 $500 is required, unless the investment is in a retirement
account, in which case the minimum investment is $50.
The Fund's current net asset value and offering price may be found in the mutual
funds section of local newspapers under "Federated" and the appropriate class
designation listing.
- --------------------------------------------------------------------------------
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
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 cannot be
changed without approval of shareholders.
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. Unless indicated otherwise, the investment
policies and limitations described below and in the Statement of Additional
Information may be changed by the Directors without shareholder approval.
Shareholders will be notified before any material change becomes effective.
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, foreign securities, American Depository Receipts
("ADRs"), notes, bonds, and discount notes issued or guaranteed by the U.S.
government, its agencies or instrumentalities, municipal securities, mortgage
and asset-backed securities, and zero coupon convertible securities. 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. The bonds in which the Fund invests will generally be rated
investment grade, including repurchase agreements collateralized by investment
grade securities. Investment grade securities are generally described as
securities that are rated in one of the top four rating categories by a
nationally recognized statistical rating organization ("NRSRO"), such as Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group ("S&P"), or
Fitch Investor's Service, Inc. ("Fitch") or that are unrated but determined by
the Fund's investment adviser to be of comparable quality. A description of the
ratings categories is contained in the Appendix to this prospectus. Permitted
investments include:
domestic and foreign common stocks;
convertible securities;
domestic or foreign debt obligations;
obligations of the United States;
notes, bonds, and discount notes of U.S. government agencies or
instrumentalities;
taxable municipal debt obligations (as a matter of operating policy, the
lowest rated municipal debt obligations in which the Fund will invest will be
rated BBB or better by an NRSRO, or which are of comparable quality in the
judgment of the Fund's investment adviser;
asset-backed securities;
commercial paper that matures in 270 days or less and is rated A-1 or A-2 by
S&P, P-1 or P-2 by Moody's, or F-1 or F-2 by Fitch;
time and savings deposits (including certificates of deposit) in commercial
or savings banks whose accounts are insured by the Bank Insurance Fund
("BIF"), or in institutions whose accounts are insured by the Savings
Association Insurance Fund ("SAIF"), including certificates of deposit issued
by, and other time deposits in, foreign branches of BIF-insured banks, which,
if negotiable, mature in six months or less, or if not negotiable, either
mature in ninety days or less, or may be withdrawn upon notice not exceeding
ninety days;
bankers' acceptances issued by a BIF-insured bank, or issued by the bank's
Edge Act subsidiary and guaranteed by the bank, with remaining maturities of
nine months or less. The total acceptances of any bank held by the Fund
cannot exceed 0.25% of such bank's total deposits according to the bank's
last published statement of condition preceding the date of acceptance;
preferred stock and other equity-related securities which generally have
bond-like attributes, including zero coupon and/or convertible securities;
other securities which are deemed by the Fund's investment adviser to be
consistent with the Fund's investment objectives; and
repurchase agreements collateralized by acceptable investments.
DOMESTIC AND FOREIGN
COMMON STOCKS
The common stocks in which the Fund invests are selected by the Fund's
investment adviser ("Adviser") on the basis of traditional research techniques,
including assessment of earnings and dividend growth, prospects and the risk and
volatility of the company's industry. However, other factors, such as product
position, market share, or profitability, will also be considered by the Fund's
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 Fund invests in convertible bonds rated "B" or higher by
S&P, or Moody's at the time of investment, or if unrated, of comparable quality.
If a convertible bond is rated below "B" according to the characteristics set
forth here after the Fund has purchased it, the Fund is not required to drop the
convertible bond from the portfolio, but will consider appropriate action. The
investment characteristics of each convertible security vary widely, which
allows convertible securities to be employed for different investment
objectives.
Convertible bonds and convertible preferred stocks are fixed-income securities
that generally retain the investment characteristics of fixed-income securities
until they have been converted but also react to movements in the underlying
equity securities. The holder is entitled to receive the fixed-income of a bond
or the dividend preference of a preferred stock until the holder elects to
exercise the conversion privilege. Usable bonds are corporate bonds that can be
used in whole or in part, customarily at full face value, in lieu of cash to
purchase the issuer's common stock. When owned as part of a unit along with
warrants, which are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before the
bond's maturity. Convertible securities are senior to equity securities and,
therefore, have a claim to assets of the corporation prior to the holders of
common stock in the case of liquidation. However, convertible securities are
generally subordinated to similar nonconvertible securities of the same company.
The interest income and dividends from convertible bonds and preferred stocks
provide a stable stream of income with generally higher yields than common
stocks, but lower than non-convertible securities of similar quality.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which, in
the opinion of the Adviser the investment characteristics of the underlying
common shares will assist the Fund in achieving its investment objectives.
Otherwise, the Fund will hold or trade the convertible securities. In selecting
convertible securities for the Fund, the Adviser evaluates the investment
characteristics of the convertible security as a fixed-income instrument, and
the investment potential of the underlying equity security for capital
appreciation. In evaluating these matters with respect to a particular
convertible security, the Adviser considers numerous factors, including the
economic and political outlook, the value of the security relative to other
investment alternatives, trends in the determinants of the issuer's profits, and
the issuer's management capability and practices.
DEBT OBLIGATIONS AND
INVESTMENT RISKS
Although the debt obligations in which the Fund will invest primarily are rated
as investment grade by an NRSRO, or of comparable quality in the judgment of the
Fund's Adviser, the Fund may invest in debt obligations that are not investment
grade bonds, but are rated below BBB by an NRSRO (i.e., "junk bonds"). There is
no minimal acceptable rating for a security to be purchased or held in the Fund,
and the Fund may, from time to time, purchase or hold securities in the lowest
rating category. However, under normal circumstances, the Fund will not invest
35% or more of its net assets in non-investment grade securities. Debt
obligations that are not determined to be investment grade are high-yield,
high-risk bonds, typically subject to greater market fluctuations and greater
risk of loss of income and principal due to an issuer's default. To a greater
extent than investment grade bonds, lower rated bonds tend to reflect short-term
corporate, economic, and market
developments, as well as investor perceptions of the issuer's credit quality. In
addition, lower rated bonds may be more difficult to dispose of or to value than
higher rated, lower-yielding bonds. Bonds rated "BBB" by S&P or Fitch, or "Baa"
by Moody's, have speculative characteristics. Changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than higher rated bonds. A description of the
rating categories is contained in the Appendix to this prospectus.
The prices of fixed income securities generally fluctuate inversely to the
direction of interest rates.
REDUCING RISKS OF
LOWER-RATED SECURITIES
The Fund's Adviser believes that the risks of investing in lower-rated
securities can be reduced. The professional portfolio management techniques used
by the Fund to attempt to reduce these risks include:
CREDIT RESEARCH
The Fund's Adviser will perform its own credit analysis in addition to using
nationally recognized statistical rating organizations and other resources,
including discussions with the issuer's management, the judgment of other
investment analysts, and its own informed judgment. The Fund's Adviser's credit
analysis will consider the issuer's financial soundness, its responsiveness to
changes in interest rates and business conditions, and its anticipated cash
flow, interest or dividend coverage and earnings. In evaluating an issuer, the
Fund's Adviser places special emphasis on the estimated current value of the
issuer's assets rather than historical costs.
DIVERSIFICATION
The Fund invests in securities of many different issuers, industries, and
economic sectors to reduce portfolio risk.
ECONOMIC ANALYSIS
The Fund's Adviser will analyze current developments and trends in the economy
and in the financial markets. When investing in lower-rated securities, timing
and selection are critical, and analysis of the business cycle can be important.
U.S. GOVERNMENT OBLIGATIONS
The U.S. government obligations 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 Corporation, Farm Credit System
(including the National Bank for Cooperatives, Farm Credit Banks, and Banks
for Cooperatives), Tennessee Valley Authority, Export-Import Bank of the
United States, Commodity Credit Corporation, Federal Financing Bank, Student
Loan Marketing Association, Federal Home Loan Mortgage Corporation, or
National Credit Union Administration.
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. No
assurances can be given that the U.S. government will provide financial support
to other
agencies or instrumentalities, since it is not obligated to do so. These
agencies and instrumentalities 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.
MUNICIPAL SECURITIES
Municipal securities are generally issued to finance public works such as
airports, bridges, highways, housing, hospitals, mass transportation projects,
schools, streets, and water and sewer works. They are also issued to repay
outstanding obligations, to raise funds for general operating expenses, and to
make loans to other public institutions and facilities. Municipal securities
include industrial development bonds issued by or on behalf of public
authorities to provide financing aid to acquire sites or construct and equip
facilities for privately or publicly owned corporations. The availability of
this financing encourages these corporations to locate within the sponsoring
communities and thereby increases local employment.
ASSET-BACKED SECURITIES
Asset-backed securities are created by the grouping of certain governmental,
government related and private loans, receivables and other lender assets,
including vehicle installment purchase obligations and credit card receivables,
into pools. Interests in these pools are sold as individual securities and are
not backed or guaranteed by the U.S. government and may not be secured. Payments
from the asset pools may be divided into several different tranches of debt
securities, with some tranches entitled to receive regular installments of
principal and interest, other tranches entitled to receive regular installments
of interest, with principal payable at maturity or upon specified call dates,
and other tranches only entitled to receive payments of principal and accrued
interest at maturity or upon specified call dates. Different tranches of
securities will bear different interest rates, which may be fixed or floating.
Because the loans held in the asset pool often may be prepaid without penalty or
premium, asset-backed securities are generally subject to higher prepayment
risks than most other types of debt instruments. Prepayment risks on mortgage
securities tend to increase during periods of declining mortgage interest rates,
because many borrowers refinance their mortgages to take advantage of the more
favorable rates. Depending upon market conditions, the yield that the Fund
receives from the reinvestment of such prepayments, or any scheduled principal
payments, may be lower than the yield on the original mortgage security. As a
consequence, mortgage securities may be a less effective means of "locking in"
interest rates than other types of debt securities having the same stated
maturity and may also have less potential for capital appreciation. For certain
types of asset pools, such as collateralized mortgage obligations, prepayments
may be allocated to one tranch of securities ahead of other tranches, in order
to reduce the risk of prepayment for the other tranches.
Prepayments may result in a capital loss to the Fund to the extent that the
prepaid mortgage securities were purchased at a market premium over their stated
amount. Conversely, the prepayment of mortgage securities purchased at a market
discount from their stated principal amount will accelerate the recognition of
interest income by the Fund, which would be taxed as ordinary income when
distributed to the shareholders.
The credit characteristics of asset-backed securities also differ in a number of
respects from
those of traditional debt securities. The credit quality of most asset-backed
securities depends primarily upon the credit quality of the assets underlying
such securities, how well the entity issuing the securities is insulated from
the credit risk of the originator or any other affiliated entities, and the
amount and quality of any credit enhancement to such securities.
NON-MORTGAGE RELATED
ASSET-BACKED SECURITIES
The Fund may invest in non-mortgage related asset-backed securities including,
but not limited to, interests in pools of receivables, such as credit card and
accounts receivable and motor vehicle and other installment purchase obligations
and leases. These securities may be in the form of pass-through instruments or
asset-backed obligations. The securities, all of which are issued by
non-governmental entities and carry no direct or indirect government guarantee,
are structurally similar to collateralized mortgage obligations and mortgage
pass-through securities, which are described below.
MORTGAGE RELATED ASSET-BACKED SECURITIES
The Fund may also invest in various mortgage related asset-backed securities.
These types of investments may include adjustable rate mortgage securities,
collateralized mortgage obligations, real estate mortgage investment conduits,
or other securities collateralized by or representing an interest in real estate
mortgages (collectively, "mortgage securities"). Many mortgage securities are
issued or guaranteed by government agencies.
ADJUSTABLE RATE MORTGAGE
SECURITIES ("ARMS")
ARMS are pass-through mortgage securities representing interests in adjustable
rather than fixed interest rate mortgages. The ARMS in which the Fund invests
are issued by the Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA"), and the Federal Home Loan Mortgage
Corporation ("FHLMC") and are actively traded. The underlying mortgages which
collateralize ARMS issued by GNMA are fully guaranteed by the Federal Housing
Administration ("FHA") or Veterans Administration ("VA"), while those
collateralizing ARMS issued by FHLMC or FNMA are typically conventional
residential mortgages conforming to strict underwriting size and maturity
constraints.
COLLATERALIZED MORTGAGE
OBLIGATIONS ("CMOS")
CMOs are bonds issued by single-purpose, stand-alone finance subsidiaries or
trusts of financial institutions, government agencies, investment bankers, or
companies related to the construction industry. CMOs purchased by the Fund may
be:
collateralized by pools of mortgages in which each mortgage is guaranteed as
to payment of principal and interest by an agency or instrumentality of the
U.S. government;
collateralized by pools of mortgages in which payment of principal and
interest is guaranteed by the issuer and such guarantee is collateralized by
U.S. government securities; or
securities in which the proceeds of the issuance are invested in mortgage
securities and payment of the principal and interest is supported by the
credit of an agency or instrumentality of the U.S. government.
All CMOs purchased by the Fund are investment grade, as rated by a NRSRO or are
of comparable quality as determined by the Adviser.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS")
REMICs are offerings of multiple class real estate mortgage-backed securities
which qualify and elect treatment as such under provisions of the Internal
Revenue Code (the "Code"). Issuers of REMICs may take several forms, such as
trusts, partnerships, corporations, associations, or segregated pools of
mortgages. Once REMIC status is elected and obtained, the entity is not subject
to federal income taxation. Instead, income is passed through the entity and is
taxed to the person or persons who hold interests in the REMIC. A REMIC interest
must consist of one or more classes of "regular interests," some of which may
offer adjustable rates of interest, and a single class of "residual interests."
To qualify as a REMIC, substantially all the assets of the entity must be in
assets directly or indirectly secured principally by real property.
RESETS OF INTEREST
The interest rates paid on the ARMS, CMOs, and REMICs in which the Fund invests
generally are readjusted at intervals of one year or less to an increment over
some predetermined interest rate index. There are two main categories of
indices: those based on U.S. Treasury securities and those derived from a
calculated measure, such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year and five-year
constant maturity Treasury Note rates, the three-month Treasury Bill rate, the
180-day Treasury Bill rate, rates on longer-term Treasury securities, the
National Median Cost of Funds, the one-month or three-month London Interbank
Offered Rate (LIBOR), the prime rate of a specific bank, or commercial paper
rates. Some indices, such as the one-year constant maturity Treasury Note rate,
closely mirror changes in market interest rate levels. Others tend to lag
changes in market rate levels and tend to be somewhat less volatile.
To the extent that the adjusted interest rate on the mortgage security reflects
current market rates, the market value of an adjustable rate mortgage security
will tend to be less sensitive to interest rate changes than a fixed rate debt
security of the same stated maturity. Hence, adjustable rate mortgage securities
which use indices that lag changes in market rates should experience greater
price volatility than adjustable rate mortgage securities that closely mirror
the market. Certain residual interest tranches of CMOs may have adjustable
interest rates that deviate significantly from prevailing market rates, even
after the interest rate is reset, and are subject to correspondingly increased
price volatility. In the event the Fund purchases such residual interest
mortgage securities, it will factor in the increased interest and price
volatility of such securities when determining its dollar-weighted average
duration.
CAPS AND FLOORS
The underlying mortgages which collateralize the ARMS, CMOs, and REMICs in which
the Fund invests will frequently have caps and floors which limit the maximum
amount by which the loan rate to the residential borrower may change up or down:
(1) per reset or adjustment interval; and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by limiting changes in
the borrower's monthly principal and interest payments rather than limiting
interest rate changes.
These payment caps may result in negative amortization. The value of mortgage
securities in which the Fund invests may be affected if market interest rates
rise or fall faster and farther than the allowable caps or floors on the
underlying residential mortgage loans. Additionally, even though the interest
rates on the
underlying residential mortgages are adjustable, amortization and prepayments
may occur, thereby causing the effective maturities of the mortgage securities
in which the Fund invests to be shorter than the maturities stated in the
underlying mortgages.
BANK INSTRUMENTS
The Fund only invests in bank instruments either issued by an institution having
capital, surplus and undivided profits over $100 million or insured by BIF or
SAIF. Bank instruments may include Eurodollar Certificates of Deposit ("ECDs"),
Yankee Certificates of Deposit ("Yankee CDs") and Eurodollar Time Deposits
("ETDs"). Due to the fact that institutions issuing such instruments are not
necessarily subject to the same regulatory requirements that apply to domestic
banks, such as the reserve requirements, loan limitations, examination,
accounting, auditing, recordkeeping, and the public availability of information,
these investments may present additional risks to investors.
ZERO COUPON CONVERTIBLE SECURITIES
Zero coupon convertible securities are debt securities which are issued at a
discount to their face amount and do not entitle the holder to any periodic
payments of interest prior to maturity. Rather, interest earned on zero coupon
convertible securities accretes at a stated yield until the security reaches its
face amount at maturity. Zero coupon convertible securities are convertible into
a specific number of shares of the issuer's common stock. In addition, zero
coupon convertible securities usually have put features that provide the holder
with the opportunity to sell the bonds back to the issuer at a stated price
before maturity. Generally, the prices of zero coupon convertible securities may
be more sensitive to market interest rate fluctuations than conventional
convertible securities.
Federal income tax law requires the holder of a zero coupon convertible security
to recognize income with respect to the security prior to the receipt of cash
payments. To maintain its qualification as a regulated investment company and
avoid liability of federal income taxes, the Fund will be required to distribute
income accrued with respect to zero coupon convertible securities which it owns,
and may have to sell portfolio securities (perhaps at disadvantageous times) in
order to generate cash to satisfy these distribution requirements.
RESTRICTED AND ILLIQUID SECURITIES
The Fund intends to invest in restricted securities. Restricted securities are
any securities in which the Fund may otherwise invest pursuant to its investment
objective and policies, but which are subject to restriction on resale under
federal securities law. However, the Fund will limit investments in illiquid
securities, including certain restricted securities determined by the Directors
to be illiquid, non-negotiable time deposits, unlisted options, and repurchase
agreements providing for settlement in more than seven days after notice, to 15%
of its net assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under the federal
securities laws, and is generally sold to institutional investors, such as the
Fund, who agree that they are purchasing the paper for investment purposes and
not with a view to public distribution. Any resale by the purchaser must be in
an exempt transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Fund believes that Section 4(2) commercial paper,
and possibly certain other restricted securities which meet the criteria for
liquidity established by the
Directors, are quite liquid. The Fund intends, therefore, to treat the
restricted securities which meet the criteria for liquidity established by the
Directors, including Section 4(2) commercial paper, as determined by the
Adviser, as liquid and not subject to the investment limitations applicable to
illiquid securities.
FOREIGN SECURITIES AND
INVESTMENT RISKS
The Fund may invest in ADRs, and may invest more than 10% of its total assets in
foreign securities.
Investments in foreign securities, particularly those of non-governmental
issuers, involve considerations which are not ordinarily associated with
investments in domestic securities. These considerations include the possibility
of expropriation, the unavailability of financial information or the difficulty
of interpreting financial information prepared under foreign accounting
standards, less liquidity and more volatility in foreign securities markets, the
impact of political, social, or diplomatic developments, and the difficulty of
assessing economic trends in foreign countries. It may also be more difficult to
enforce contractual obligations abroad than would be the case in the united
States because of differences in the legal systems. Transaction costs in foreign
securities may be higher. The Adviser will consider these and other factors
before investing in foreign securities and will not make such investments
unless, in its opinion, such investments will meet the Fund's standards and
objectives.
With respect to foreign governmental securities, the Fund reserves the right to
invest up to 25% of its total assets in fixed income securities of foreign
governmental units located within an individual foreign nation and to purchase
or sell various currencies on either a spot or forward basis in connection with
these investments. This would enable the Fund to concentrate its investments in
the securities of a foreign government which would have the effect of magnifying
the investment risks disclosed above. The Adviser will allocate investments
among securities of particular issuers on the basis of its views as to the best
values then currently available in the marketplace. Such values are a function
of yield, maturity, issue classification and quality characteristics, coupled
with expectations regarding the economy, movements in the general level and term
of interest rates, currency values, political developments and variations in the
supply of funds available for investment in the world bond market relative to
the demands placed upon it.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest in the securities of other investment companies, but it will
not own more than 3% of the total outstanding voting stock of any investment
company, invest more than 5% of its total assets in any one investment company,
or invest more than 10% of its total assets in investment companies in general.
The Fund will only invest in other investment companies that are money market
funds having an investment objective and policies similar to its own and
primarily for the purpose of investing short-term cash which has not yet been
invested in other portfolio instruments. In addition to the advisory and other
expenses the Fund bears directly in connection with its own operations, as a
shareholder of another investment company the Fund would bear its pro rata
portion of the other investment company's advisory fees and other expenses. As
such, the Fund's shareholders would indirectly bear the expenses of the other
investment company, some or all of which would be duplicated. The Adviser will
waive its investment advisory fee on assets invested in securities of open-end
investment companies.
TEMPORARY INVESTMENTS
For temporary defensive purposes, the Fund may invest up to 100% of its total
assets in cash and cash items including: 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.
The Fund may also hold the instruments described above in such amounts as
necessary: to provide funds for the settlement of portfolio transactions;
pending investment of cash receipts in the ordinary course of business; and to
meet requests for redemption of Fund shares."
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities.
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete the transaction may cause the Fund to miss a price or yield considered
to be advantageous. Settlement dates may be a month or more after entering into
these transactions, and the market values of the securities purchased may vary
from the purchase prices. Accordingly, the Fund may pay more/less than the
market value of the securities on the settlement date.
The Fund may dispose of a commitment prior to settlement if the Adviser deems it
appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio securities
on a short-term or long-term basis up to one-third of the value of its total
assets to broker/dealers, banks, or other institutional borrowers of securities.
The Fund will only enter into loan arrangements with broker/dealers, banks, or
other institutions which the Adviser has determined are creditworthy under
guidelines established by the Directors 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.
PUT AND CALL OPTIONS
The Fund may purchase put options on financial futures contracts and put options
on portfolio securities. Financial futures may include index futures. These
options will be used as a hedge to attempt to protect securities which the Fund
holds against decreases in value. For the immediate future, the Fund will enter
into futures contracts directly only when it desires to exercise a financial
futures put option in its portfolio rather than either closing out the option or
allowing it to expire. The Fund will only
purchase puts on financial futures contracts which are traded on a nationally
recognized exchange.
The Fund will generally purchase over-the-counter put options on portfolio
securities in negotiated transactions with the writers of the options since
options on the portfolio securities held by the Fund are typically not traded on
an exchange. The Fund purchases options only from investment dealers and other
financial associations (such as commercial banks or savings and loan
institutions) deemed creditworthy by the Adviser.
In general, over-the-counter put options differ from exchange traded put options
in the following respects. Over-the-counter put options are two party contracts
with price and terms negotiated between buyer and seller, and such options are
endorsed and/or guaranteed by third parties (such as a New York Stock Exchange
member). Additionally, over-the-counter strike prices are adjusted to reflect
dividend payments, initial strike prices are generally set at market, and option
premiums (which are all time premiums) are amortized on a straight line basis
over the life of the option. In contrast, exchange traded options are
third-party contracts with standardized strike prices and expiration dates and
are purchased from the Clearing Corporation. Strike prices are not adjusted for
dividends, and options are marked to market, thereby obviating the need to
amortize the time premium. Exchange traded options have a continuous liquid
market while over-the-counter options do not.
The Fund may also write call options on all or any portion of its portfolio in
an effort to generate income for the Fund. The Fund will write call options on
securities either held in its portfolio or which it has the right to obtain
without payment of further consideration or for which it has segregated cash in
the amount of any additional consideration. The call options which the Fund
writes and sells must be listed on a recognized options exchange. Although the
Fund reserves the right to write covered call options on its entire portfolio,
it will not write such options on more than 25% of its total assets unless a
higher limit is authorized by the Directors.
The Fund may attempt to hedge the portfolio by entering into financial futures
contracts and to write calls on financial futures contracts.
RISKS
When the Fund writes a call option, the Fund risks not participating in any rise
in the value of the underlying security. In addition, when the Fund purchases
puts on financial futures contracts to protect against declines in prices of
portfolio securities, there is a risk that the prices of the securities subject
to the futures contracts may not correlate perfectly with the prices of the
securities in the Fund's portfolio of investments. This may cause the futures
contract and its corresponding put to react differently than the portfolio
securities to market changes. In addition, the Adviser could be incorrect in its
expectations about the direction or extent of market factors such as interest
rate movements. In such an event, the Fund may lose the purchase price of the
put option. Finally, it is not certain that a secondary market for options will
exist at all times. Although the Adviser will consider liquidity before entering
into option transactions, there is no assurance that a liquid secondary market
on an exchange will exist for any particular option or at any particular time.
The Fund's ability to establish and close out option positions depends on this
secondary market.
DERIVATIVE CONTRACTS
AND SECURITIES
The term "derivative" has traditionally been applied to certain contracts
(including, futures, forward, option and swap contracts) that "derive" their
value from changes in the value of an underlying security, currency, commodity
or index. Certain types of securities that incorporate the performance
characteristics of these contracts are also referred to as "derivatives." The
term has also been applied to securities "derived" from the cash flows from
underlying securities, mortgages or other obligations.
Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response of
certain derivative contracts and securities to market changes may differ from
traditional investments, such as stocks and bonds, derivatives do not
necessarily present greater market risks than traditional investments. The Fund
will only use derivative contracts for the purposes disclosed in the applicable
prospectus sections above. To the extent that the Fund invests in securities
that could be characterized as derivatives, such as asset-backed securities and
mortgage-backed securities, including ARMS, CMOs, and REMICs, it will only do so
in a manner consistent with its investment objectives, policies and limitations.
INVESTMENT LIMITATIONS
The following investment limitations cannot be changed without shareholder
approval. 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; or invest in more than 10% of any class of securities of one
issuer.
- --------------------------------------------------------------------------------
NET ASSET VALUE
The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by adding the interest of each class of Shares in the market value
of all securities and other assets of the Fund, subtracting the interest of each
class of Shares in the liabilities of the Fund and those attributable to each
class of Shares, and dividing the remainder by the total number of each class of
Shares outstanding. The net asset value for each class of Shares may differ due
to the variance in daily net income realized by each class. Such variance will
reflect only accrued net income to which the shareholders of a particular class
are entitled.
The net asset value is determined as of the close of trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of
the Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no Shares are tendered for redemption and no
orders to purchase Shares are received; and (iii) the following holidays: New
Year's Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day.
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HOW TO PURCHASE SHARES
Shares of the Fund are sold on days on which the New York Stock Exchange is
open. Shares of the Fund may be purchased as described below, either through a
financial institution (such as a bank or broker/dealer which has a sales
agreement with the distributor) or by wire or by check directly to the Fund,
with a minimum initial investment of $500. Additional investments can be made
for as little as $100. The minimum initial and subsequent investment for
retirement plans is only $50. (Financial institutions may impose different
minimum investment requirements on their customers.)
In connection with the sale of Shares, Federated Securities Corp. may, from time
to time, offer certain items of nominal value to any shareholder or investor.
The Fund reserves the right to reject any purchase request. An account must be
established at a financial institution or by completing, signing, and returning
the new account form available from the Fund before Shares can be purchased.
INVESTING IN SHARES
Shares are sold at their net asset value next determined after an order is
received, plus a sales charge as follows:
<TABLE>
<CAPTION>
DEALER
SALES CHARGE SALES CHARGE CONCESSION
AS A AS A AS A
PERCENTAGE PERCENTAGE PERCENTAGE
OF PUBLIC OF NET OF PUBLIC
AMOUNT OF OFFERING AMOUNT OFFERING
TRANSACTION PRICE INVESTED PRICE
<S> <C> <C> <C>
Less than 50,000 5.50% 5.82% 5.00%
$50,000 but less
than $100,000 4.50% 4.71% 4.00%
$100,000 but less
than $250,000 3.75% 3.90% 3.25%
$250,000 but less
than $500,000 2.50% 2.56% 2.25%
$500,000 but less
than $1 million 2.00% 2.04% 1.80%
$1 million or
greater 0.00% 0.00% 0.25%*
</TABLE>
*See sub-section entitled "Dealer Concession."
No sales charge is imposed for Shares purchased through financial intermediaries
that do not receive a reallowance of a sales charge. However, investors who
purchase Shares through a trust department, investment adviser, or other
financial intermediary may be charged a service or other fee by the financial
intermediary. Additionally, no sales charge is imposed on shareholders
designated as Liberty Life Members or on Shares purchased through "wrap
accounts" or similar programs, under which clients pay a fee for services.
DEALER CONCESSION
For sales of Shares, a dealer will normally receive up to 90% of the applicable
sales charge. Any portion of the sales charge which is not paid to a dealer will
be retained by the distributor. However, the distributor may offer to pay
dealers up to 100% of the sales charge retained by it. Such payments may take
the form of cash or promotional incentives, such as reimbursement of certain
expenses of qualified employees and their spouses to attend informational
meetings about the Fund or other special events at recreational-type facilities,
or items of material value. In some instances, these incentives will be made
available only to dealers whose employees have sold or may sell a significant
amount of Shares. On purchases of $1 million or more, the investor pays no sales
charge; however, the distributor will make twelve monthly payments to the dealer
totaling .25% of the public offering price over the first year following the
purchase. Such payments are based on the original purchase price of Shares
outstanding at each month end.
The sales charge for Shares sold other than through registered broker/dealers
will be retained by Federated Securities Corp. Federated Securities Corp. may
pay fees to banks out of the sales charge in exchange for sales and/or
administrative services performed on behalf of the bank's customers in
connection with the initiation of customer accounts and purchases of Shares.
REDUCING OR ELIMINATING THE
SALES CHARGE
The sales charge can be reduced or eliminated on the purchase of Shares through:
quantity discounts and accumulated purchases;
concurrent purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
purchases with proceeds from redemptions of unaffiliated investment
companies.
QUANTITY DISCOUNTS AND
ACCUMULATED PURCHASES
As shown in the table above, larger purchases reduce the sales charge paid. The
Fund will combine purchases of Shares made on the same day by the investor, the
investor's spouse, and the investor's children under age 21 when it calculates
the sales charge. In addition, the sales charge, if applicable, is reduced for
purchases made at one time by a trustee or fiduciary for a single trust estate
or a single fiduciary account.
If an additional purchase of Shares is made, the Fund will consider the previous
purchases still invested in the Fund. For example, if a shareholder already owns
Shares having a current value at the public offering price of $90,000 and he
purchases $10,000 more at the current public offering price, the sales charge on
the additional purchase according to the schedule now in effect would be 3.75%,
not 4.50%.
To receive the sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the purchase is made that Shares are
already owned or that purchases are being combined. The Fund will reduce the
sales charge after it confirms the purchases.
CONCURRENT PURCHASES
For purposes of qualifying for a sales charge reduction, a shareholder has the
privilege of combining concurrent purchases of Class A Shares of two or more
funds for which affiliates of Federated Investors serve as investment adviser or
principal underwriter (the "Federated Funds"), the purchase price of which
includes a sales charge. For example, if a shareholder concurrently invested
$80,000 in the Class A Shares of one of the other Federated Funds with a sales
charge, and $20,000 in the Fund, the sales charge would be reduced.
To receive this sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the concurrent purchases are made. The Fund will reduce the sales charge
after it confirms the purchases.
LETTER OF INTENT
If a shareholder intends to purchase at least $50,000 of Class A Shares of
Federated Funds (excluding money market funds) over the next 13 months, the
sales charge may be reduced by signing a letter of intent to that effect. This
letter of intent includes a provision for a sales charge adjustment depending on
the amount actually purchased within the 13-month period and a provision for the
custodian to hold up to 5.50% of the total amount intended to be purchased in
escrow (in Shares) until such purchase is completed.
The Shares held in escrow in the shareholder's account will be released upon
fulfillment of the letter of intent or the end of the 13-month period, whichever
comes first. If the amount specified in the letter of intent is not purchased,
an appropriate number of escrowed Shares may be redeemed in order to realize the
difference in the sales charge.
While this letter of intent will not obligate the shareholder to purchase
Shares, each purchase during the period will be at the sales charge applicable
to the total amount intended to be purchased. At the time a letter of intent is
established, current balances in accounts in any Class A Shares of Federated
Funds, excluding money market accounts, will be aggregated to provide a purchase
credit towards fulfillment of the letter of intent. Prior trade prices will not
be adjusted.
REINVESTMENT PRIVILEGE
If Shares in the Fund have been redeemed, the shareholder has the privilege
within 120 days, to reinvest the redemption proceeds at the next-determined net
asset value without any sales charge. Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution of the
reinvestment in order to eliminate a sales charge. If the shareholder redeems
his Class A Shares in the Fund, there may be tax consequences.
PURCHASES WITH PROCEEDS FROM REDEMPTIONS OF UNAFFILIATED
INVESTMENT COMPANIES
Investors may purchase Shares at net asset value, without a sales charge, with
the proceeds from the redemption of shares of an unaffiliated investment company
that were purchased or sold with a sales charge or commission and were not
distributed by Federated Securities Corp. The purchase must be made within 60
days of the redemption, and Federated Securities Corp. must be notified by the
investor in writing, or by his financial institution, at the time the purchase
is made. From time to time, the Fund may offer dealers a payment of .50% for
Shares purchased under this program. If Shares are purchased in this manner,
redemptions of those Shares will be subject to a contingent deferred sales
charge
for one year from the date of purchase. Shareholders will be notified prior to
the implementation of any special offering as described above.
PURCHASING SHARES THROUGH A FINANCIAL INSTITUTION
An investor may call his financial institution (such as a bank or an investment
dealer) to place an order to purchase Shares. Orders placed through a financial
institution are considered received when the Fund is notified of the purchase
order or when payment is converted into federal funds. Purchase orders through a
registered broker/dealer must be received by the broker before 4:00 p.m.
(Eastern time) and must be transmitted by the broker to the Fund before 5:00
p.m. (Eastern time) in order for Shares to be purchased at that day's price.
Purchase orders through other financial institutions must be received by the
financial institution and transmitted to the Fund before 4:00 p.m. (Eastern
time) in order for Shares to be purchased at that day's price. It is the
financial institution's responsibility to transmit orders promptly. Financial
institutions may charge additional fees for their services.
PURCHASING SHARES BY WIRE
Once an account has been established, Shares may be purchased by wire by calling
the Fund. All information needed will be taken over the telephone, and the order
is considered received when State Street Bank receives payment by wire. Federal
funds should be wired as follows: Federated Shareholder Services Company, c/o
State Street Bank and Trust Company, Boston, MA; Attention: EDGEWIRE; For Credit
to: (Fund Name) (Fund Class); (Fund Number--this number can be found on the
account statement or by contacting the Fund); Account Number; Trade Date and
Order Number; Group Number or Dealer Number; Nominee or Institution Name; and
ABA Number 011000028. Shares cannot be purchased by wire on holidays when wire
transfers are restricted. Questions on wire purchases should be directed to your
client service representative at the telephone number listed on your account
statement.
PURCHASING SHARES BY CHECK
Once an account has been established, Shares may be purchased by mailing a check
made payable to the name of the Fund (designate class of Shares and account
number) to: Federated Shareholder Services Company, P.O. Box 8600, Boston, MA
02266-8600. Orders by mail are considered received when payment by check is
converted into federal funds (normally the business day after the check is
received).
SPECIAL PURCHASE FEATURES
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account at
an Automated Clearing House ("ACH") member and invested in the Fund at the net
asset value next determined after an order is received by the Fund, plus the
applicable sales charges. Shareholders should contact their financial
institution or the Fund to participate in this program.
RETIREMENT PLANS
Fund Shares can be purchased as an investment for retirement plans or for IRA
accounts. For further details, contact the Fund and consult a tax adviser.
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE
Class A shareholders may exchange all or some of their Shares for Class A Shares
of other Federated Funds at net asset value. Neither the Fund nor any of the
Federated Funds imposes any additional fees on exchanges. Shareholders in
certain other Federated Funds may exchange all or some of their Shares for Class
A Shares.
Please contact your financial institution directly or Federated Securities Corp.
at 1-800-341-7400 for information on and prospectuses for the Federated Funds
into which your Shares may be exchanged free of charge.
Shareholders of Class A Shares who have been designated as Liberty Life Members
are exempt from sales charges on future purchases in and exchanges between the
Class A Shares of any Federated Fund, as long as they maintain a $500 balance in
one of the Federated Funds.
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Shares having a net asset value
equal to the minimum investment requirements of the fund into which the exchange
is being made. Before the exchange, the shareholder must receive a prospectus of
the fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which the
Shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Shares submitted for exchange are redeemed and
proceeds invested in shares of the other fund. The exchange privilege may be
modified or terminated at any time. Shareholders will be notified of the
modification or termination of the exchange privilege.
TAX CONSEQUENCES
An exercise of the exchange privilege is treated as a sale for federal income
tax purposes. Depending upon the circumstances, a capital gain or loss may be
realized.
MAKING AN EXCHANGE
Instructions for exchanging for Federated Funds may be given in writing or by
telephone. Written instructions may require a signature guarantee. Shareholders
of the Fund may have difficulty in making exchanges by telephone through brokers
and other financial institutions during times of drastic economic or market
changes. If a shareholder cannot contact his broker or financial institution by
telephone, it is recommended that an exchange request be made in writing and
sent by overnight mail to: Federated Shareholder Services Company, 1099 Hingham
Street, Rockland, Massachusetts 02370-3317.
TELEPHONE INSTRUCTIONS
Telephone instructions made by the investor may be carried out only if a
telephone authorization form completed by the investor is on file with the Fund.
If the instructions are given by a broker, a telephone authorization form
completed by the broker must be on file with the Fund. If reasonable procedures
are not followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. Shares may be exchanged between two funds by
telephone only if the two funds have identical shareholder registrations.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Shareholder Services Company, P.O. Box 8600, Boston,
Massachusetts 02266-8600 and deposited to the shareholder's account before being
exchanged. Telephone exchange instructions are recorded and will be binding upon
the shareholder. Such instructions will be
processed as of 4:00 p.m. (Eastern time) and must be received by the Fund before
that time for Shares to be exchanged the same day. Shareholders exchanging into
a Fund will begin receiving dividends the following business day. This privilege
may be modified or terminated at any time.
- --------------------------------------------------------------------------------
HOW TO REDEEM SHARES
Shares are redeemed at their net asset value, less any applicable contingent
deferred sales charge, next determined after the Fund receives the redemption
request. Redemptions will be made on days on which the Fund computes its net
asset value. Investors who redeem Shares through a financial intermediary may be
charged a fee by that financial intermediary. Redemption requests must be
received in proper form and can be made as described below.
REDEEMING SHARES THROUGH
A FINANCIAL INSTITUTION
Shares of the Fund may be redeemed by calling your financial institution to
request the redemption. Shares will be redeemed at the net asset value, less any
applicable contingent deferred sales charge next determined after the Fund
receives the redemption request from the financial institution. Redemption
requests through a registered broker/dealer must be received by the broker
before 4:00 p.m. (Eastern time) and must be transmitted by the broker to the
Fund before 5:00 p.m. (Eastern time) in order for Shares to be redeemed at that
day's net asset value. Redemption requests through other financial institutions
(such as banks) must be received by the financial institution and transmitted to
the Fund before 4:00 p.m. (Eastern time) in order for Shares to be redeemed at
that day's net asset value. The financial institution is responsible for
promptly submitting redemption requests and providing proper written redemption
instructions. Customary fees and commissions may be charged by the financial
institution for this service.
REDEEMING SHARES BY TELEPHONE
Shares may be redeemed in any amount by calling the Fund provided the Fund has a
properly completed authorization form. These forms can be obtained from
Federated Securities Corp. Proceeds will be mailed in the form of a check, to
the shareholder's address of record or wire-transfered to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. The minimum amount for a wire transfer is $1,000. Proceeds from redeemed
Shares purchased by check or through ACH will not be wired until that method of
payment has cleared. Proceeds from redemption requests received on holidays when
wire transfers are restricted will be wired the following business day.
Questions about telephone redemptions on days when wire transfers are restricted
should be directed to your client service representative at the telephone number
listed on your account statement.
Telephone instructions will be recorded. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. In the event of drastic economic or market
changes, a shareholder may experience difficulty in redeeming by telephone. If
this occurs, "Redeeming Shares By Mail" should be considered. If at any time the
Fund shall determine it necessary to terminate or modify the telephone
redemption privilege, shareholders would be promptly notified.
REDEEMING SHARES BY MAIL
Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, Fund Name, Fund Class, P.O. Box 8600, Boston, MA
02266-8600. If share certificates have been issued, they should be sent
unendorsed with the written request by registered or certified mail to the
address noted above.
The written request should state: Fund Name and the Share Class name; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount requested. All owners of the account
must sign the request exactly as the Shares are registered. 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. Dividends are
paid up to and including the day that a redemption request is processed.
Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Fund, or a redemption payable other than to
the shareholder of record must have their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; a member firm of a domestic stock exchange; or any other "eligible
guarantor institution," as defined in the Securities Exchange Act of 1934. The
Fund does not accept signatures guaranteed by a notary public.
SPECIAL REDEMPTION FEATURES
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount not less
than $100 may take advantage of the Systematic Withdrawal Program. Under this
program, Shares are redeemed to provide for periodic withdrawal payments in an
amount directed by the shareholder.
Depending upon the amount of the withdrawal payments, the amount of dividends
paid and capital gains distributions with respect to Shares, and the fluctuation
of the net asset value of Shares redeemed under this program, redemptions may
reduce, and eventually
deplete, the shareholder's investment in the Fund. For this reason, payments
under this program should not be considered as yield or income on the
shareholder's investment in the Fund. To be eligible to participate in this
program, a shareholder must have an account value of at least $10,000. A
shareholder may apply for participation in this program through his financial
institution. Due to the fact that Shares are sold with a sales charge, it is not
advisable for shareholders to continue to purchase Shares while participating in
this program.
CONTINGENT DEFERRED SALES CHARGE
Shares purchased under a periodic special offering with the proceeds of a
redemption of shares of an unaffiliated investment company purchased or redeemed
with a sales charge and not distributed by Federated Securities Corp. may be
charged a contingent deferred sales charge of .50% for redemptions made within
one full year of purchase. Any applicable contingent deferred sales charge will
be imposed on the lesser of the net asset value of the redeemed Shares at the
time of purchase or the net asset value of the redeemed Shares at the time of
redemption.
The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. The contingent deferred sales charge will not be imposed with
respect to: (1) Shares acquired through the reinvestment of dividends or
distributions of long-term capital gains; and (2) Shares held for more than one
full year from the date of purchase. Redemptions will be processed in a manner
intended to maximize the amount of redemption which will not be subject to a
contingent deferred sales charge. In computing the amount of the applicable
contingent deferred sales charge, redemptions are deemed to have occurred in the
following order: (1) Shares acquired through the reinvestment of dividends and
long-term capital gains; (2) Shares held for more than one full year from the
date of purchase; (3) Shares held for less than one full year from the date of
purchase on a first-in, first-out basis. A contingent deferred sales charge is
not assessed in connection with an exchange of Fund Shares for Shares of other
Federated Funds in the same class (see "Exchange Privilege"). Any contingent
deferred sales charge imposed at the time the exchanged-for Shares are redeemed
is calculated as if the shareholder had held the Shares from the date on which
he became a shareholder of the exchanged-from Shares. Moreover, the contingent
deferred sales charge will be eliminated with respect to certain redemptions
(see "Elimination of Contingent Deferred Sales Charge").
ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will be eliminated with respect to the
following redemptions: (1) redemptions following the death or disability, as
defined in Section 72(m)(7) of the Internal Revenue Code of 1986, of a
shareholder; (2) redemptions representing minimum required distributions from an
Individual Retirement Account or other retirement plan to a shareholder who has
attained the age of 70-1/2; and (3) involuntary redemptions by the Fund of
Shares in shareholder accounts that do not comply with the minimum balance
requirements. No contingent deferred sales charge will be imposed on redemptions
of Shares held by Directors, employees and sales representatives of the Fund,
the distributor, or affiliates of the Fund or distributor and their immediate
family members; employees of any financial institution that sells Shares of the
Fund pursuant to a sales agreement with the distributor; and spouses and
children under the age of 21 of the aforementioned persons. Finally, no
contingent deferred sales charge will be imposed on the redemption of Shares
originally purchased through a bank trust department, an
investment adviser registered under the Investment Advisers Act of 1940 or
retirement plans where the third party administrator has entered into certain
arrangements with Federated Securities Corp. or its affiliates, or any other
financial institution, to the extent that no payments were advanced for
purchases made through such entities. The Directors reserve the right to
discontinue elimination of the contingent deferred sales charge. Shareholders
will be notified of such elimination. Any Shares purchased prior to the
termination of such waiver would have the contingent deferred sales charge
eliminated as provided in the Fund's prospectus at the time of the purchase of
the Shares. If a shareholder making a redemption qualifies for an elimination of
the contingent deferred sales charge, the shareholder must notify Federated
Securities Corp. or the transfer agent in writing that he is entitled to such
elimination.
- --------------------------------------------------------------------------------
ACCOUNT AND SHARE
INFORMATION
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Shareholder Services Company maintains
a share account for each shareholder. Share certificates are not issued unless
requested in writing to Federated Shareholder Services Company.
Detailed confirmations of each purchase and 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. Dividends and distributions are automatically
reinvested in additional Shares of the Fund on payment dates at the ex-dividend
date net asset value without a sales charge, unless shareholders request cash
payments on the new account form or by writing to the transfer agent. 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
Net long term capital gains realized by the Fund, if any, will be distributed at
least once every twelve months.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, except retirement plans, and pay the proceeds to
the shareholder if the account balance falls below the required minimum value
of $500. This requirement does not apply, however, if the balance falls below
$500 because of changes in the Fund's net asset value. Before Shares are
redeemed to close an account, the shareholder is notified in writing and allowed
30 days to purchase additional Shares to meet the minimum requirement.
- --------------------------------------------------------------------------------
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 Adviser receives an annual investment advisory fee equal to .55% of the
Fund's average daily net assets plus 4.5% of the Fund's annual gross income,
excluding 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. Under the investment advisory contract which provides for the voluntary
waiver and reimbursement of expenses by the Adviser, the Adviser may voluntarily
waive a portion of its fee or reimburse the Fund for certain operating expenses.
The Adviser can terminate this voluntary waiver at any time at its sole
discretion. The Adviser has also undertaken to reimburse the Fund for operating
expenses in
excess of limitations established by certain states.
ADVISER'S BACKGROUND
Federated 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. With over $80 billion invested across more than 250 funds
under management and/or administration by its subsidiaries, as of December 31,
1995, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 1,800 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,000 financial institutions nationwide. More
than 100,000 investment professionals have selected Federated funds for their
clients.
Both the Fund and the Adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Directors and could
result in severe penalties.
PORTFOLIO MANAGERS' BACKGROUND
Christopher H. Wiles has been the Fund's portfolio manager since May 1996 and is
responsible for the overall allocation of the assets between fixed income and
equity. Mr. Wiles also manages the equity portion of the Fund. Mr. Wiles joined
Federated Investors in 1990 and has been a Vice President of the Fund's
investment adviser since 1992. Mr. Wiles served as Assistant Vice President of
the Fund's investment adviser in 1991. Mr. Wiles is a Chartered Financial
Analyst and received his M.B.A. in Finance from Cleveland State University.
Joseph M. Balestrino has been the Fund's co-portfolio manager since May 1996 and
is responsible for the allocation of fixed income assets (between investment
grade and high yield). Mr. Balestrino also manages the investment grade portion
of the Fund. Mr. Balestrino joined Federated Investors in 1986 and has been a
Vice President of the Fund's investment adviser since 1995. Mr. Balestrino
served as an Assistant Vice President of the investment adviser from 1991 to
1995. Mr. Balestrino is a Chartered Financial Analyst and received his Master's
Degree in Urban and Regional Planning from the University of Pittsburgh.
Mark E. Durbiano has been the Fund's sub-portfolio manager since May 1996 and is
responsbile for managing the high yield portion of the Fund. Mr. Durbiano joined
Federated Investors in 1982 and has been a Senior Vice President of the Fund's
investment adviser since January 1996. From 1988 through 1995, Mr. Durbiano was
a Vice President of the Fund's investment adviser. Mr. Durbiano is a Chartered
Financial Analyst
and received his M.B.A. in Finance from the University of Pittsburgh.
Scott B. Schermerhorn has been the Fund's portfolio manager since July 1996. Mr.
Schermerhorn joined Federated Investors in 1996 as a Vice President of the
Fund's investment adviser. From 1990 through 1996, Mr. Schermerhorn was a Senior
Vice President and Senior Investment Officer at J W Seligman & Co., Inc. Mr.
Schermerhorn received his M.B.A. in Finance and International Business from
Seton Hall University.
DISTRIBUTION OF SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
Federated Securities Corp. is located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. It is a Pennsylvania corporation organized on November
14, 1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.
State securities laws may require certain financial institutions such as
depository institutions to register as dealers.
DISTRIBUTION PLAN AND
SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Investment Company Act Rule
12b-1 (the "Distribution Plan"), Class A Shares may pay a fee to the distributor
in an amount computed at an annual rate of .25% of the average daily net assets
of Class A Shares to finance any activity which is principally intended to
result in the sale of Class A Shares subject to the Distribution Plan. The Fund
is not currently making payments for Class A Shares under the Distribution Plan,
nor does it anticipate doing so in the immediate future.
The Distribution Plan is a compensation type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by Class A
Shares under the Plan.
The Fund has entered into a Shareholder Services Agreement with Federated
Shareholder Services, a subsidiary of Federated Investors, under which the Fund
may make payments up to .25% of the average daily net asset value of the Fund on
behalf of Class A Shares, computed at an annual rate, to obtain certain personal
services for shareholders and to provide the maintenance of shareholder accounts
("Shareholder Services"). From time to time and for such periods as deemed
appropriate, the amount stated may be reduced voluntarily. 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
schedule of such fees and the basis upon which such fees will be paid will be
determined from time to time by the Fund and Federated Shareholder Services.
SUPPLEMENTAL PAYMENTS TO
FINANCIAL INSTITUTIONS
Federated Securities Corp. will pay financial institutions, at the time of
purchase of Class A Shares, an amount equal to .50% of the net asset value of
Class A Shares purchased by their clients or customers under certain qualified
retirement plans as approved by Federated Securities
Corp. (Such payments are subject to a reclaim from the financial institution
should the assets leave the program within 12 months after purchase.)
Furthermore, with respect to Class A Shares, in addition to payments made
pursuant to the Shareholder Services Agreement, Federated Securities Corp. and
Federated Shareholder Services, from their own assets, may offer to pay
financial institutions supplemental fees for the performance of substantial
sales services, distribution-related support services, or Shareholder Services.
The support may include sponsoring sales, educational and training seminars for
their employees, providing sales literature, and engineering computer software
programs that emphasize the attributes of the Fund. Such assistance will be
predicated upon the amount of Shares the financial institution sells or may
sell, and/or upon the type and nature of sales or marketing support furnished by
the financial institution. Any payments made by the distributor may be
reimbursed by the Adviser or its affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by affiliates of Federated Investors as
specified below:
<TABLE>
<CAPTION>
MAXIMUM
ADMINISTRATIVE AVERAGE AGGREGATE
FEE DAILY NET ASSETS
<C> <S>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.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 Services Company may choose voluntarily to waive a portion of its fee.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. 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.
EXPENSES OF THE FUND AND SHARES
Holders of Class A Shares pay their allocable portion of Fund and portfolio
expenses.
The Fund expenses for which holders of Class A Shares pay their allocable
portion include, but are not limited to: the cost of organizing the Fund and
continuing its existence; registering the Fund with federal and state securities
authorities; Directors' fees; auditors' fees; the cost of meetings of Directors;
legal fees of the Fund; association membership dues; and such
non-recurring and extraordinary items as may arise from time to time.
The portfolio expenses for which holders of Class A Shares pay their allocable
portion include, but are not limited to: registering the portfolio and Shares of
the portfolio; investment advisory services; taxes and commissions; custodian
fees; insurance premiums; auditors' fees; and such non-recurring and
extraordinary items as may arise from time to time.
At present, the only expenses which are allocated specifically to Class A Shares
as a class are fees for Shareholder Services. However, the Directors reserve the
right to allocate certain other expenses to holders of Class A Shares as it
deems appropriate ("Class Expenses"). In any case, Class Expenses would be
limited to: distribution fees; transfer agent fees as identified by the transfer
agent as attributable to holders of Class A Shares; printing and postage
expenses related to preparing and distributing materials such as shareholder
reports, prospectuses and proxies to current shareholders; registration fees
paid to the Securities and Exchange Commission and registration fees paid to
state securities commissions; expenses related to administrative personnel and
services as required to support holders of Class A Shares; legal fees relating
solely to Class A Shares; and Directors' fees incurred as a result of issues
relating solely to Class A Shares.
- --------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Director elections and
other matters submitted to shareholders for vote. All shares of each portfolio
or class in the 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 the Directors or by shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the written request of shareholders owning at least 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 of 1986, as amended (the "Code"), applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional Shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held the Shares. No federal income tax is due on any
dividends earned in an IRA or qualified retirement plan until distributed, so
long as such IRA or qualified retirement plan meets the applicable requirements
of the Code.
STATE AND LOCAL TAXES
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 its total return and yield for Class A
Shares.
Total return represents the change, over a specific period of time, in the value
of an investment in Class A Shares after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of Class A Shares is calculated by dividing the net investment income
per share (as defined by the Securities and Exchange Commission) earned by Class
A Shares over a thirty-day period by the maximum offering price per share of
Class A 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 Class A Shares and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
The performance information reflects the effect of non-recurring charges such as
the maximum sales charge and contingent deferred sales charges, which, if
excluded, would increase the total return and yield.
Total return and yield will be calculated separately for Class A Shares, Class B
Shares, and Class C Shares.
From time to time, advertisements for Class A Shares, Class B Shares, and Class
C Shares of the Fund may refer to ratings, rankings, and other information in
certain financial publications and/or compare the performance of Class A Shares,
Class B Shares, and Class C Shares to certain indices.
- --------------------------------------------------------------------------------
OTHER CLASSES OF SHARES
The Fund also offers other classes of shares called Class B Shares and Class C
Shares which are sold primarily to customers of financial institutions, subject
to certain differences.
Class B Shares are sold at net asset value and are subject to a Rule 12b-1 Plan,
a Shareholder Services Agreement, and a minimum initial investment of $1,500,
unless the investment is in a retirement account in which case the minimum
investment is $50. A contingent deferred sales charge is imposed on certain
Shares which are redeemed within six full years of purchase.
Class C Shares are sold at net asset value and are subject to a Rule 12b-1 Plan,
a Shareholder Services Agreement, and a minimum initial investment of $1,500,
unless the investment is in a retirement account in which case the minimum
investment is $50. A contingent deferred sales charge is imposed on assets
redeemed within the first full 12 months following purchase.
Class A Shares, Class B Shares, and Class C Shares are subject to certain of the
same expenses. Expense differences, however, between Class A Shares, Class B
Shares, and Class C Shares may affect the performance of each class.
To obtain more information and a combined prospectus for Class B Shares and
Class C Shares, investors may call 1-800-341-7400 or contact their financial
institution.
- --------------------------------------------------------------------------------
APPENDIX
STANDARD & POOR'S RATINGS GROUP ("S&P") CORPORATE BOND RATING DEFINITIONS
AAA--Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB, B, CCC, CC--Debt rated "BB", "B", "CCC", and "CC" is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposures to adverse
conditions.
CI--The rating "CI" is reversed for income bonds on which no interest is being
paid.
D--Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING DEFINITIONS
AAA--Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or 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 near future.
BAA--Bonds which are rated "Baa" are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
BA--Bonds which are "Ba" are judged to have speculative elements; their future
cannot be considered well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds which are rated "B" generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA--Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA--Bonds which are "Ca" represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated "C" are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
FITCH INVESTORS SERVICE, INC. INVESTMENT GRADE BOND RATING DEFINITIONS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds
rated "AAA." Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments, short-term debt of
these issuers is generally rated "F-1+."
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered 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 economicc conditions and circumstances, however,
are more likely to have adverse impact on these bonds, and therefore impair
timely payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D--Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D" represents
the lowest potential for recovery.
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ------------- --------------------------------------------------------------------------------- --------------
<C> <S> <C>
COMMON STOCKS--41.6%
- ------------------------------------------------------------------------------------------------
CONSUMER DURABLES--2.1%
---------------------------------------------------------------------------------
16,200 Eastman Kodak Co. $ 1,014,525
---------------------------------------------------------------------------------
33,500 Mattel, Inc. 963,125
---------------------------------------------------------------------------------
37,600 Volvo, ADR 855,400
--------------------------------------------------------------------------------- --------------
Total 2,833,050
--------------------------------------------------------------------------------- --------------
CONSUMER NON-DURABLES--3.7%
---------------------------------------------------------------------------------
14,100 Avon Products, Inc. 1,002,863
---------------------------------------------------------------------------------
21,200 IBP, Inc. 1,269,350
---------------------------------------------------------------------------------
19,700 Philip Morris Cos., Inc. 1,664,650
---------------------------------------------------------------------------------
8,100 RJR Nabisco Holdings Corp. 249,075
---------------------------------------------------------------------------------
24,100 Reebok International Ltd. 819,400
--------------------------------------------------------------------------------- --------------
Total 5,005,338
--------------------------------------------------------------------------------- --------------
CONSUMER SERVICES--0.4%
---------------------------------------------------------------------------------
9,800 Gannett Co., Inc. 532,875
--------------------------------------------------------------------------------- --------------
ELECTRONIC TECHNOLOGY--5.4%
---------------------------------------------------------------------------------
14,600 Hewlett-Packard Co. 1,352,325
---------------------------------------------------------------------------------
15,500 Intel Corp. 1,083,062
---------------------------------------------------------------------------------
10,000 International Business Machines Corp. 972,500
---------------------------------------------------------------------------------
15,100 (a)Litton Industries, Inc. 598,338
---------------------------------------------------------------------------------
22,900 Lockheed Martin Corp. 1,560,063
---------------------------------------------------------------------------------
14,800 Raytheon Co. 645,650
---------------------------------------------------------------------------------
25,400 Rockwell International Corp. 1,130,300
--------------------------------------------------------------------------------- --------------
Total 7,342,238
--------------------------------------------------------------------------------- --------------
</TABLE>
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ------------- --------------------------------------------------------------------------------- --------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
- ------------------------------------------------------------------------------------------------
ENERGY MINERALS--2.7%
---------------------------------------------------------------------------------
21,700 Chevron Corp. $ 1,014,475
---------------------------------------------------------------------------------
12,100 Exxon Corp. 924,137
---------------------------------------------------------------------------------
27,600 Occidental Petroleum Corp. 593,400
---------------------------------------------------------------------------------
15,200 Texaco, Inc. 1,035,500
--------------------------------------------------------------------------------- --------------
Total 3,567,512
--------------------------------------------------------------------------------- --------------
FINANCE--8.1%
---------------------------------------------------------------------------------
27,749 Allstate Corp. 1,019,776
---------------------------------------------------------------------------------
14,900 American Express Co. 605,313
---------------------------------------------------------------------------------
20,800 Bank of Boston Corp. 925,600
---------------------------------------------------------------------------------
10,200 CIGNA Corp. 1,011,075
---------------------------------------------------------------------------------
15,000 Chemical Banking Corp. 853,125
---------------------------------------------------------------------------------
22,200 Citicorp 1,440,225
---------------------------------------------------------------------------------
18,714 Dean Witter, Discover & Co. 931,021
---------------------------------------------------------------------------------
8,400 First Interstate Bancorp 1,083,600
---------------------------------------------------------------------------------
26,600 Mellon Bank Corp. 1,333,325
---------------------------------------------------------------------------------
18,000 Providian Corp. 706,500
---------------------------------------------------------------------------------
18,866 Travelers Group, Inc. 952,733
--------------------------------------------------------------------------------- --------------
Total 10,862,293
--------------------------------------------------------------------------------- --------------
HEALTH SERVICES--0.5%
---------------------------------------------------------------------------------
12,800 Smithkline Beecham Corp., ADR 664,000
--------------------------------------------------------------------------------- --------------
HEALTH TECHNOLOGY--3.4%
---------------------------------------------------------------------------------
11,900 American Home Products Corp. 1,054,638
---------------------------------------------------------------------------------
18,900 Becton, Dickinson & Co. 1,228,500
---------------------------------------------------------------------------------
18,800 Bristol-Myers Squibb Co. 1,433,500
---------------------------------------------------------------------------------
</TABLE>
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ------------- --------------------------------------------------------------------------------- --------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
- ------------------------------------------------------------------------------------------------
HEALTH TECHNOLOGY--CONTINUED
---------------------------------------------------------------------------------
16,000 Merck & Co., Inc. $ 920,000
--------------------------------------------------------------------------------- --------------
Total 4,636,638
--------------------------------------------------------------------------------- --------------
INDUSTRIAL SERVICES--0.8%
---------------------------------------------------------------------------------
26,600 Baker Hughes, Inc. 522,025
---------------------------------------------------------------------------------
13,000 (a)Western Atlas, Inc. 570,375
--------------------------------------------------------------------------------- --------------
Total 1,092,400
--------------------------------------------------------------------------------- --------------
NON-ENERGY MINERALS--1.5%
---------------------------------------------------------------------------------
16,400 Aluminum Co. of America 836,400
---------------------------------------------------------------------------------
19,200 Phelps Dodge Corp. 1,216,800
--------------------------------------------------------------------------------- --------------
Total 2,053,200
--------------------------------------------------------------------------------- --------------
PROCESS INDUSTRIES--2.0%
---------------------------------------------------------------------------------
15,800 Du Pont (E.I.) de Nemours & Co. 985,525
---------------------------------------------------------------------------------
12,700 Eastman Chemical Co. 755,650
---------------------------------------------------------------------------------
34,300 Praxair, Inc. 926,100
--------------------------------------------------------------------------------- --------------
Total 2,667,275
--------------------------------------------------------------------------------- --------------
PRODUCER MANUFACTURING--5.0%
---------------------------------------------------------------------------------
17,300 (a)FMC Corp. 1,239,112
---------------------------------------------------------------------------------
21,200 General Electric Co. 1,340,900
---------------------------------------------------------------------------------
7,400 ITT Corp. 906,500
---------------------------------------------------------------------------------
7,900 Loews Corp. 1,158,338
---------------------------------------------------------------------------------
15,400 Philips Electronics N.V., ADR 594,825
---------------------------------------------------------------------------------
22,100 Textron, Inc. 1,519,375
--------------------------------------------------------------------------------- --------------
Total 6,759,050
--------------------------------------------------------------------------------- --------------
RETAIL TRADE--1.3%
---------------------------------------------------------------------------------
24,100 American Stores Co. 719,988
---------------------------------------------------------------------------------
</TABLE>
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ------------- --------------------------------------------------------------------------------- --------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
- ------------------------------------------------------------------------------------------------
RETAIL TRADE--CONTINUED
---------------------------------------------------------------------------------
29,900 Sears, Roebuck & Co. $ 1,016,600
--------------------------------------------------------------------------------- --------------
Total 1,736,588
--------------------------------------------------------------------------------- --------------
TECHNOLOGY SERVICES--1.1%
---------------------------------------------------------------------------------
5,000 (a)DST Systems, Inc. 105,000
---------------------------------------------------------------------------------
28,100 General Motors Corp., Class E 1,324,212
--------------------------------------------------------------------------------- --------------
Total 1,429,212
--------------------------------------------------------------------------------- --------------
TRANSPORTATION--0.4%
---------------------------------------------------------------------------------
8,100 Consolidated Rail Corp. 556,875
--------------------------------------------------------------------------------- --------------
UTILITIES--3.2%
---------------------------------------------------------------------------------
23,500 AT&T Corp. 1,504,000
---------------------------------------------------------------------------------
8,500 CMS Energy Corp. 234,812
---------------------------------------------------------------------------------
13,900 (a)Columbia Gas System, Inc. 535,150
---------------------------------------------------------------------------------
15,700 Enron Corp. 539,687
---------------------------------------------------------------------------------
14,800 FPL Group, Inc. 619,750
---------------------------------------------------------------------------------
36,000 MCI Communications Corp. 897,750
--------------------------------------------------------------------------------- --------------
Total 4,331,149
--------------------------------------------------------------------------------- --------------
TOTAL COMMON STOCKS (IDENTIFIED COST $43,015,880) 56,069,693
--------------------------------------------------------------------------------- --------------
PREFERRED STOCKS--4.3%
- ------------------------------------------------------------------------------------------------
CONSUMER NON-DURABLES--1.0%
---------------------------------------------------------------------------------
203,800 RJR Nabisco Holdings Corp., Conv. Pfd., Series C, $.60 1,273,750
--------------------------------------------------------------------------------- --------------
FINANCE--1.6%
---------------------------------------------------------------------------------
29,000 Merrill Lynch & Co., MTG, Inc., STRYPES, Series MGIC, $3.12 1,562,375
---------------------------------------------------------------------------------
9,700 Sunamerica, Inc., Conv. Pfd., Series E, $3.10 601,400
--------------------------------------------------------------------------------- --------------
Total 2,163,775
--------------------------------------------------------------------------------- --------------
PRODUCER MANUFACTURING--1.7%
---------------------------------------------------------------------------------
168,200 Westinghouse Electric Corp., PEPS, Series C, $1.30 $ 2,350,931
--------------------------------------------------------------------------------- --------------
TOTAL PREFERRED STOCKS (IDENTIFIED COST $6,233,439) 5,788,456
--------------------------------------------------------------------------------- --------------
</TABLE>
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
- ------------- --------------------------------------------------------------------------------- --------------
<C> <S> <C>
CORPORATE BONDS--13.9%
- ------------------------------------------------------------------------------------------------
CONSUMER DURABLES--1.1%
---------------------------------------------------------------------------------
$ 1,000,000 Chrysler Auburn Hills, Deb., 12.00%, 5/1/2020 1,504,770
--------------------------------------------------------------------------------- --------------
CONSUMER NON-DURABLES--0.9%
---------------------------------------------------------------------------------
1,281,000 Philip Morris Cos., Inc., Deb., 6.00%, 7/15/2001 1,244,620
--------------------------------------------------------------------------------- --------------
EDUCATION--0.8%
---------------------------------------------------------------------------------
1,000,000 Harvard University, Deb., 8.125%, 4/15/2007 1,126,680
--------------------------------------------------------------------------------- --------------
ENERGY MINERALS--1.5%
---------------------------------------------------------------------------------
1,000,000 Exxon Capital Corp., Deb., 7.875%, 4/15/1996 1,009,460
---------------------------------------------------------------------------------
1,000,000 Occidental Petroleum Corp., Sr. Note, 11.75%, 3/15/2011 1,070,350
--------------------------------------------------------------------------------- --------------
Total 2,079,810
--------------------------------------------------------------------------------- --------------
FINANCE--5.8%
---------------------------------------------------------------------------------
1,000,000 American General Corp., S.F. Deb., 9.625%, 2/1/2018 1,099,910
---------------------------------------------------------------------------------
1,250,000 CNA Financial Corp., Deb., 7.25%, 11/15/2023 1,187,300
---------------------------------------------------------------------------------
1,300,000 Equitable Cos., Inc., Sr. Note, 9.00%, 12/15/2004 1,488,526
---------------------------------------------------------------------------------
1,000,000 Ford Motor Credit Co., Note, 6.85%, 8/15/2000 1,021,140
---------------------------------------------------------------------------------
1,000,000 Lehman Brothers Holdings, Inc., Note, 5.04%, 12/15/1996 986,090
---------------------------------------------------------------------------------
1,000,000 Norwest Financial, Inc., Note, 6.23%, 9/1/1998 1,006,490
---------------------------------------------------------------------------------
1,000,000 Santander Finance Issuance, Bank Guarantee, 7.875%, 4/15/2005 1,070,110
--------------------------------------------------------------------------------- --------------
Total 7,859,566
--------------------------------------------------------------------------------- --------------
HEALTH SERVICES--0.9%
---------------------------------------------------------------------------------
1,000,000 Columbia/HCA Healthcare Corp., Note, 9.00%, 12/15/2014 1,193,430
--------------------------------------------------------------------------------- --------------
</TABLE>
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------- --------------------------------------------------------------------------------- --------------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
- ------------------------------------------------------------------------------------------------
PRODUCER MANUFACTURING--0.8%
---------------------------------------------------------------------------------
$ 1,000,000 General Electric Co., Deb., 7.875%, 5/1/1996 $ 1,009,700
--------------------------------------------------------------------------------- --------------
RETAIL TRADE--0.8%
---------------------------------------------------------------------------------
1,000,000 Penney (J.C.) Co., Inc., Deb., 9.45%, 7/15/2002 1,125,790
--------------------------------------------------------------------------------- --------------
SOVEREIGN GOVERNMENT--0.5%
---------------------------------------------------------------------------------
500,000 Kingdom of Sweden, Deb., 10.25%, 11/1/2015 652,210
--------------------------------------------------------------------------------- --------------
UTILITIES--0.8%
---------------------------------------------------------------------------------
1,000,000 Michigan Bell Telephone Co., Deb., 7.85%, 1/15/2022 1,108,830
--------------------------------------------------------------------------------- --------------
TOTAL CORPORATE BONDS (IDENTIFIED COST $22,777,371) 18,905,406
--------------------------------------------------------------------------------- --------------
COLLATERALIZED MORTGAGE OBLIGATIONS--0.7%
- ------------------------------------------------------------------------------------------------
1,000,000 Prudential Home Mortgage Security 1993-32, Class A-6, 7.50%,
10/25/2022 996,950
--------------------------------------------------------------------------------- --------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (IDENTIFIED COST $957,500) 996,950
--------------------------------------------------------------------------------- --------------
GOVERNMENT OBLIGATIONS--21.7%
- ------------------------------------------------------------------------------------------------
GOVERNMENT AGENCIES SECURITIES--1.7%
---------------------------------------------------------------------------------
500,000 Federal Home Loan Bank System, Deb., 4.21%, 1/15/1998 472,460
---------------------------------------------------------------------------------
1,500,000 Federal Home Loan Mortgage Corp., Deb., 4.13%, 3/25/1996 1,488,105
---------------------------------------------------------------------------------
350,000 Federal National Mortgage Association, 5.86%, 6/1/1998 347,994
--------------------------------------------------------------------------------- --------------
Total 2,308,559
--------------------------------------------------------------------------------- --------------
MORTGAGE-BACKED SECURITIES--5.8%
---------------------------------------------------------------------------------
1,376,866 Federal Home Loan Mortgage Corp., Pool G50030, 8.50%, 8/1/1996 1,387,606
---------------------------------------------------------------------------------
183,621 Federal Home Loan Mortgage Corp., Pool M10771, 8.50%, 4/1/1996 185,053
---------------------------------------------------------------------------------
178,066 Federal Home Loan Mortgage Corp., Pool M10914, 8.50%, 5/1/1996 179,454
---------------------------------------------------------------------------------
190,312 Federal Home Loan Mortgage Corp., Pool M10975, 8.50%, 5/1/1996 191,796
---------------------------------------------------------------------------------
130,307 Federal Home Loan Mortgage Corp., Pool M11105, 8.50%, 6/1/1996 131,323
---------------------------------------------------------------------------------
100,063 Federal Home Loan Mortgage Corp., Pool M11145, 8.50%, 5/1/1996 100,843
---------------------------------------------------------------------------------
12,791 Federal Home Loan Mortgage Corp., Pool M11179, 8.50%, 6/1/1996 12,891
---------------------------------------------------------------------------------
</TABLE>
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------- --------------------------------------------------------------------------------- --------------
<C> <S> <C>
GOVERNMENT OBLIGATIONS--CONTINUED
- ------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES--CONTINUED
---------------------------------------------------------------------------------
$ 365,551 Federal Home Loan Mortgage Corp., Pool M11243, 8.50%, 7/1/1996 $ 368,403
---------------------------------------------------------------------------------
63,857 Federal Home Loan Mortgage Corp., Pool M11318, 8.50%, 7/1/1996 64,355
---------------------------------------------------------------------------------
7,278 Federal Home Loan Mortgage Corp., Pool M19004, 8.50%, 5/1/1997 7,335
---------------------------------------------------------------------------------
137,079 Federal Home Loan Mortgage Corp., Pool M90043, 8.50%, 4/1/1996 138,148
---------------------------------------------------------------------------------
108,107 Federal Home Loan Mortgage Corp., Pool M90048, 8.50%, 5/1/1996 108,950
---------------------------------------------------------------------------------
647,233 Federal National Mortgage Association, Pool 124009, 9.00%, 11/1/2021 676,352
---------------------------------------------------------------------------------
902,775 Federal National Mortgage Association, Pool 50659, 7.00%, 11/1/2007 895,427
---------------------------------------------------------------------------------
37,065 Federal National Mortgage Association, Pool 50796, 7.50%, 9/1/2023 37,470
---------------------------------------------------------------------------------
433,038 Government National Mortgage Association, Pool 299165, 9.50%,
12/15/2020 462,532
---------------------------------------------------------------------------------
936,003 Government National Mortgage Association, Pool 369457, 8.00%,
9/15/2024 963,484
---------------------------------------------------------------------------------
996,068 Government National Mortgage Association, Pool 385622, 6.50%,
5/15/2024 968,348
---------------------------------------------------------------------------------
861,076 Government National Mortgage Association, Pool 392923, 9.50%,
2/15/2025 919,724
--------------------------------------------------------------------------------- --------------
Total 7,799,494
--------------------------------------------------------------------------------- --------------
TREASURY SECURITIES--14.2%
---------------------------------------------------------------------------------
4,000,000 United States Treasury Bond, 11.625%, 11/15/2004 5,534,080
---------------------------------------------------------------------------------
3,540,000 United States Treasury Bond, 7.25%, 5/15/2016 3,882,884
---------------------------------------------------------------------------------
6,460,000 United States Treasury Bond, 8.875%, 2/15/2019 8,349,550
---------------------------------------------------------------------------------
1,070,000 United States Treasury Bond, 9.375%, 2/15/2006 1,337,532
--------------------------------------------------------------------------------- --------------
Total 19,104,046
--------------------------------------------------------------------------------- --------------
TOTAL GOVERNMENT OBLIGATIONS (IDENTIFIED COST $21,385,708) 29,212,099
--------------------------------------------------------------------------------- --------------
</TABLE>
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------- --------------------------------------------------------------------------------- --------------
<C> <S> <C>
(B) REPURCHASE AGREEMENT--16.3%
- ------------------------------------------------------------------------------------------------
$ 21,975,000 J.P. Morgan Securities, Inc., 5.90%, dated 10/31/1995, due 11/1/1995 (at
amortized cost) $ 21,975,000
--------------------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (IDENTIFIED COST $116,344,898)(C) $ 132,947,604
--------------------------------------------------------------------------------- --------------
</TABLE>
(a) Non-income producing security.
(b) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated Funds.
(c) The cost of investments for federal tax purposes amounts to $116,344,898.
The net unrealized appreciation of investments on a federal tax basis
amounts to $16,602,706 which is comprised of $17,394,200 appreciation and
$791,494 depreciation at October 31, 1995.
Note: The categories of investments are shown as a percentage of net assets
($134,668,796) at October 31, 1995.
The following acronyms are used throughout this portfolio:
ADR--American Depository Receipt
PEPS--Participating Equity Preferred Stock
STRYPES--Structured Yield Product Exchangeable for Stock
(See Notes which are an integral part of the Financial Statements)
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ----------------------------------------------------------------------------------
Investments in repurchase agreement $ 21,975,000
- ----------------------------------------------------------------------------------
Investments in securities 110,972,604
- ---------------------------------------------------------------------------------- -------------
Total investments in securities, at value
(identified and tax cost $116,344,898) $ 132,947,604
- -------------------------------------------------------------------------------------------------
Income receivable 1,089,338
- -------------------------------------------------------------------------------------------------
Receivable for investments sold 1,770,297
- -------------------------------------------------------------------------------------------------
Receivable for shares sold 112,674
- -------------------------------------------------------------------------------------------------
Prepaid expenses 7,392
- ------------------------------------------------------------------------------------------------- --------------
Total assets 135,927,305
- -------------------------------------------------------------------------------------------------
LIABILITIES:
- ----------------------------------------------------------------------------------
Payable for investments purchased 979,154
- ----------------------------------------------------------------------------------
Payable for shares redeemed 109,042
- ----------------------------------------------------------------------------------
Payable to Bank 113,014
- ----------------------------------------------------------------------------------
Accrued expenses 57,299
- ---------------------------------------------------------------------------------- -------------
Total liabilities 1,258,509
- ------------------------------------------------------------------------------------------------- --------------
NET ASSETS for 7,327,906 shares outstanding $ 134,668,796
- ------------------------------------------------------------------------------------------------- --------------
NET ASSETS CONSIST OF:
- -------------------------------------------------------------------------------------------------
Paid in capital $ 106,005,023
- -------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 16,602,706
- -------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments 9,527,064
- -------------------------------------------------------------------------------------------------
Undistributed net investment income 2,534,003
- ------------------------------------------------------------------------------------------------- --------------
Total Net Assets $ 134,668,796
- ------------------------------------------------------------------------------------------------- --------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
$134,668,796 / 7,327,906 shares outstanding $18.38
- ------------------------------------------------------------------------------------------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------------------
Dividends $ 1,580,455
- ---------------------------------------------------------------------------------------------------
Interest 4,530,147
- --------------------------------------------------------------------------------------------------- -------------
Total income 6,110,602
- ---------------------------------------------------------------------------------------------------
EXPENSES:
- -------------------------------------------------------------------------------------
Investment advisory fee $ 979,379
- -------------------------------------------------------------------------------------
Administrative personnel and services fee 125,000
- -------------------------------------------------------------------------------------
Custodian fees 45,676
- -------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 99,653
- -------------------------------------------------------------------------------------
Directors'/Trustees' fees 9,666
- -------------------------------------------------------------------------------------
Auditing fees 16,445
- -------------------------------------------------------------------------------------
Legal fees 12,377
- -------------------------------------------------------------------------------------
Portfolio accounting fees 41,369
- -------------------------------------------------------------------------------------
Shareholder services fee 320,244
- -------------------------------------------------------------------------------------
Share registration costs 23,736
- -------------------------------------------------------------------------------------
Printing and postage 56,085
- -------------------------------------------------------------------------------------
Insurance premiums 3,986
- -------------------------------------------------------------------------------------
Taxes 19,719
- -------------------------------------------------------------------------------------
Miscellaneous 4,364
- ------------------------------------------------------------------------------------- ------------
Total expenses 1,757,699
- -------------------------------------------------------------------------------------
Waivers--
- ------------------------------------------------------------------------
Waiver of investment advisory fee $(215,192)
- ------------------------------------------------------------------------
Waiver of shareholder services fee (178,558)
- ------------------------------------------------------------------------ -----------
Total waivers (393,750)
- ------------------------------------------------------------------------------------- ------------
Net expenses 1,363,949
- --------------------------------------------------------------------------------------------------- -------------
Net investment income 4,746,653
- --------------------------------------------------------------------------------------------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------------------------
Net realized gain on investments 9,527,257
- ---------------------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments 7,067,004
- --------------------------------------------------------------------------------------------------- -------------
Net realized and unrealized gain on investments 16,594,261
- --------------------------------------------------------------------------------------------------- -------------
Change in net assets resulting from operations $ 21,340,914
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------------
1995 1994
- --------------------------------------------------------------------------------- -------------- --------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ---------------------------------------------------------------------------------
OPERATIONS--
- ---------------------------------------------------------------------------------
Net investment income $ 4,746,653 $ 3,988,625
- ---------------------------------------------------------------------------------
Net realized gain (loss) on investments ($9,527,257 and $1,349,184, respectively,
as computed for federal tax purposes) 9,527,257 1,349,184
- ---------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) 7,067,004 (5,913,664)
- --------------------------------------------------------------------------------- -------------- --------------
Change in net assets resulting from operations 21,340,914 (575,855)
- --------------------------------------------------------------------------------- -------------- --------------
NET EQUALIZATION (DEBITS) CREDITS-- (98,118) 26,597
- --------------------------------------------------------------------------------- -------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ---------------------------------------------------------------------------------
Distributions from net investment income:
- ---------------------------------------------------------------------------------
Class A Shares (4,670,579) (4,128,685)
- ---------------------------------------------------------------------------------
Class C Shares -- (13,593)
- ---------------------------------------------------------------------------------
Distributions from net realized gains (700,551) --
- --------------------------------------------------------------------------------- -------------- --------------
Change in net assets resulting from distributions
to shareholders (5,371,130) (4,142,278)
- --------------------------------------------------------------------------------- -------------- --------------
SHARE TRANSACTIONS--
- ---------------------------------------------------------------------------------
Proceeds from sale of shares 28,842,050 38,530,728
- ---------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of distributions
declared 3,810,223 2,833,419
- ---------------------------------------------------------------------------------
Cost of shares redeemed (39,237,007) (35,969,675)
- --------------------------------------------------------------------------------- -------------- --------------
Change in net assets resulting from share transactions (6,584,734) 5,394,472
- --------------------------------------------------------------------------------- -------------- --------------
Change in net assets 9,286,932 702,936
- ---------------------------------------------------------------------------------
NET ASSETS:
- ---------------------------------------------------------------------------------
Beginning of period 125,381,864 124,678,928
- --------------------------------------------------------------------------------- -------------- --------------
End of period (including undistributed net investment income of $2,534,003 and
$2,556,047, respectively) $ 134,668,796 $ 125,381,864
- --------------------------------------------------------------------------------- -------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1995
- --------------------------------------------------------------------------------
(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. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--Short-term securities with remaining maturities of
sixty days or less at the time of purchase may be valued at amortized cost,
which approximates fair market value. All other securities are valued at
prices provided by an independent pricing service.
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 under repurchase
agreement transactions. Additionally, procedures have been established by
the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be paid under the repurchase agreement
transaction.
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 the guidelines and/or
standards reviewed or established by the Directors. Risks may arise from
the potential inability of counterparties to honor the terms of the
repurchase agreement. Accordingly, the Fund could receive less than the
repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
Interest income and expenses are accrued daily. Bond premium and discount,
if applicable, are amortized as required by the Internal Revenue Code, as
amended (the "Code").
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
- --------------------------------------------------------------------------------
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 income. Accordingly, no
provisions for federal tax are necessary.
EQUALIZATION--The Fund follows the accounting practice known as
equalization, in which a portion of the proceeds from sales and costs of
redemptions of fund shares equivalent, on a per share basis, equal to the
amount of undistributed net investment income on the date of the
transaction, is credited or charged to undistributed net investment income.
As a result, undistributed net investment income per share is unaffected by
sales or redemptions of fund shares.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
OTHER--Investment transactions are accounted for on the trade date.
(3) CAPITAL STOCK
At October 31, 1995, 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 YEAR ENDED
OCTOBER 31, 1995 OCTOBER 31, 1994
--------------------------- ---------------------------
CLASS A SHARES SHARES DOLLARS SHARES DOLLARS
- ------------------------------------------------------ ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Shares sold 1,746,255 $ 28,842,050 2,338,641 $ 37,487,658
- ------------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 233,136 3,810,223 174,458 2,825,356
- ------------------------------------------------------
Shares redeemed (2,369,562) (39,237,007) (2,181,393) (34,829,553)
- ------------------------------------------------------ ----------- -------------- ----------- --------------
Net change resulting from Class A share
transactions (390,171) $ (6,584,734) 331,706 $ 5,483,461
- ------------------------------------------------------ ----------- -------------- ----------- --------------
</TABLE>
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 1995 OCTOBER 31, 1994
------------------------ ------------------------
CLASS C SHARES SHARES DOLLARS SHARES DOLLARS
- ------------------------------------------------------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Shares sold -- -- 64,355 $ 1,043,070
- -------------------------------------------------------------
Shares issued to shareholders in payment of distributions
declared -- -- 497 8,063
- -------------------------------------------------------------
Shares redeemed -- -- (70,562) (1,140,122)
- ------------------------------------------------------------- --------- ------------- --------- -------------
Net change resulting from Class C share
transactions -- -- (5,710) ($ 88,989)
- ------------------------------------------------------------- --------- ------------- --------- -------------
Net change resulting from fund share
transactions (390,171) $ (6,584,734) 325,996 $ 5,394,472
- ------------------------------------------------------------- --------- ------------- --------- -------------
</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 (a) a maximum of .55 of 1% of the average daily net
assets of the Fund, and (b) 4.5% of the gross income of the Fund, excluding
capital gains or losses.
The Adviser may voluntarily choose to waive any portion of its fee and/or
reimburse certain operating expenses of the Fund. The Adviser can modify or
terminate this voluntary waiver and/or reimbursement at any time at its
sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. This 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.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services
Agreement with Federated Shareholder Services ("FSS"), the Fund will pay
FSS up to .25 of 1% of daily average net assets of the Fund for the period.
This fee is to obtain certain services for shareholders and to maintain
shareholder accounts. FSS may voluntarily choose to waive a portion of its
fee. FSS can modify or terminate this voluntary waiver at any time at its
sole discretion.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated
Services Company ("Fserv") serves as transfer and dividend disbursing agent
for the Fund. The fee is based on the size, type, and number of accounts
and transactions made by shareholders.
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
- --------------------------------------------------------------------------------
PORTFOLIO ACCOUNTING FEES--FServ maintains the Fund's accounting records
for which it receives a fee. The fee is based on the level of the Fund's
average daily net assets for the period, plus out-of-pocket expenses.
GENERAL--Certain of the Officers and Directors of the Corporation are
Officers and Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended October 31, 1995, were as follows:
<TABLE>
<S> <C>
PURCHASES $ 77,996,628
- -------------------------------------------------------------------------------------------------- --------------
SALES $ 105,043,890
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
FEDERATED STOCK AND BOND FUND, INC.:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Federated Stock and Bond Fund, Inc. (formerly,
Stock and Bond Fund, Inc.) as of October 31, 1995, the related statement of
operations for the year then ended, and the statement of changes in net assets
for the years October 31, 1995 and 1994, and the financial highlights (see page
2) for the periods presented. 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 audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
October 31, 1995, by correspondence with the custodian and broker. 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, the financial statements and financial highlights present
fairly, in all material respects, the financial position of Federated Stock and
Bond Fund, Inc. as of October 31, 1995, 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
Pittsburgh, Pennsylvania
December 15, 1995
(Revised June 27, 1996)
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Federated Stock and Bond Fund, Inc.
Class A Shares 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 8600
Boston, Massachusetts 02266-8600
- ---------------------------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Shareholder Services Company P.O. Box 8600
Boston, Massachusetts 02266-8600
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
FEDERATED STOCK AND
BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
CLASS A SHARES
PROSPECTUS
An Open-End, Diversified Management
Investment Company
August 29, 1996
Cusip 313911109
8012905A-A (8/96)
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
PROSPECTUS
The shares of Federated Stock and Bond Fund, Inc. (the "Fund") represent
interests in an open-end, diversified management investment company (a mutual
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.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in the Class A Shares, Class B Shares, and Class C Shares of the Fund.
Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information for Class A
Shares, Class B Shares, and Class C Shares dated August 29, 1996, 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 or a paper copy of
this prospectus, if you have received your prospectus electronically, free of
charge by calling 1-800-341-7400. To obtain other information or to make
inquiries about the Fund, contact your financial institution. The Statement of
Additional Information, material incorporated by reference into this document,
and other information regarding the Fund is maintained electronically with the
SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION 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 August 29, 1996
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Summary of Fund Expenses--
Class A Shares...............................................................1
SUMMARY OF FUND EXPENSES--
CLASS B SHARES...............................................................2
SUMMARY OF FUND EXPENSES--
CLASS C SHARES...............................................................3
FINANCIAL HIGHLIGHTS...........................................................4
GENERAL INFORMATION............................................................5
INVESTMENT INFORMATION.........................................................5
INVESTMENT OBJECTIVE.........................................................5
INVESTMENT POLICIES..........................................................5
INVESTMENT LIMITATIONS......................................................16
NET ASSET VALUE...............................................................17
INVESTING IN THE FUND.........................................................17
CLASS A SHARES..............................................................17
CLASS B SHARES..............................................................17
CLASS C SHARES..............................................................17
HOW TO PURCHASE SHARES........................................................18
INVESTING IN CLASS A SHARES.................................................19
REDUCING OR ELIMINATING THE
SALES CHARGE.............................................................19
INVESTING IN CLASS B SHARES.................................................21
INVESTING IN CLASS C SHARES.................................................21
PURCHASING SHARES THROUGH A
FINANCIAL INSTITUTION....................................................22
PURCHASING SHARES BY WIRE...................................................22
PURCHASING SHARES BY CHECK..................................................22
SPECIAL PURCHASE FEATURES...................................................22
EXCHANGE PRIVILEGE............................................................23
HOW TO REDEEM SHARES..........................................................25
SPECIAL REDEMPTION FEATURES.................................................26
CONTINGENT DEFERRED SALES CHARGE............................................26
CLASS A SHARES..............................................................26
CLASS B SHARES..............................................................26
CLASS C SHARES..............................................................27
CLASS A SHARES, CLASS B SHARES,
AND CLASS C SHARES.......................................................27
ELIMINATION OF CONTINGENT DEFERRED
SALES CHARGE.............................................................27
ACCOUNT AND SHARE INFORMATION.................................................28
CERTIFICATES AND CONFIRMATIONS..............................................28
DIVIDENDS...................................................................28
CAPITAL GAINS...............................................................28
ACCOUNTS WITH LOW BALANCES..................................................28
FUND INFORMATION..............................................................29
MANAGEMENT OF THE FUND......................................................29
DISTRIBUTION OF SHARES......................................................31
ADMINISTRATION OF THE FUND..................................................32
BROKERAGE TRANSACTIONS......................................................33
EXPENSES OF THE FUND AND SHARES.............................................33
SHAREHOLDER INFORMATION.......................................................34
VOTING RIGHTS...............................................................34
TAX INFORMATION...............................................................34
FEDERAL INCOME TAX..........................................................34
STATE AND LOCAL TAXES.......................................................34
PERFORMANCE INFORMATION.......................................................35
APPENDIX......................................................................35
FINANCIAL STATEMENTS..........................................................38
INDEPENDENT AUDITORS' REPORT..................................................53
ADDRESSES.....................................................................54
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
<TABLE>
<S> <C> <C>
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)................................. 5.50%
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)......................................................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable)(1)............................................................. 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................................ None
Exchange Fee.................................................................................................. None
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(2).............................................................................. 0.64%
12b-1 Fee (3)................................................................................................. 0.00%
Total Other Expenses.......................................................................................... 0.57%
Shareholder Services Fee..................................................................0.25%
Total Operating Expenses (4)......................................................................... 1.21%
</TABLE>
(1) Shareholders who purchased shares with the proceeds of a redemption of
shares of an unaffiliated investment company purchased and redeemed with a
sales load and not distributed by Federated Securities Corp. may be charged
a contingent deferred sales charge of 0.50 of 1% for redemptions made within
one year of purchase.
(2) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.55% of average daily net assets plus 4.50% of gross income, excluding
capital gains or losses.
(3) Class A Shares has no present intention of paying the 12b-1 fee during the
fiscal year ending October 31, 1996. If Class A Shares were paying or
accruing the 12b-1 fee, Class A Shares would be able to pay up to 0.25% of
its average daily net assets for the 12b-1 fee. See "Fund Information".
(4) The total operating expenses in the table above are based on expenses
expected during the fiscal year ending October 31, 1996. The total operating
expenses were 1.07% for the fiscal year ended October 31, 1995 and would
have been 1.38% absent the voluntary waivers of portions of the management
fee and the shareholder services fee.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class A Shares will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Investing in Class A Shares" and "Fund Information."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
<TABLE>
<S> <C> <C> <C> <C>
EXAMPLE 1 Year 3 Years 5 Years 10 Years
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................................................................. $67 $91 $118 $194
</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.
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
<TABLE>
<S> <C> <C>
CLASS B SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)................................. None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)......................................................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) (1)............................................................ 5.50%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................................ None
Exchange Fee.................................................................................................. None
ANNUAL OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver) (2)............................................................................. 0.64%
12b-1 Fee..................................................................................................... 0.75%
Total Other Expenses.......................................................................................... 0.57%
Shareholder Services Fee....................................................................... 0.25%
Total Operating Expenses (3)(4)...................................................................... 1.96%
</TABLE>
(1) The contingent deferred sales charge is 5.50% in the first year declining to
1.00% in the sixth year and 0.00% thereafter. (See "Contingent Deferred
Sales Charge").
(2) The estimated management fee has been reduced to reflect the anticipated
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 4.50% of
gross income, excluding capital gains or losses.
(3) Class B Shares convert to Class A Shares (which pay lower ongoing expenses)
approximately eight years after purchase.
(4) The operating expenses are estimated to be 2.08% absent the anticipated
voluntary waiver of a portion of the management fee.
* Total Class B Shares operating expenses in the table above are estimated based
on average expenses expected to be incurred during the period ending October
31, 1996. During the course of this period, expenses may be more or less than
the average amount shown.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class B Shares will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Investing in Class B Shares" and "Fund Information".
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted under the rules of the National
Association of Securities Dealers, Inc.
<TABLE>
<S> <C> <C>
EXAMPLE 1 Year 3 Years
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.......................................................... $77 $105
You would pay the following expenses on the same investment, assuming no redemption................ $20 $62
</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. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR CLASS B SHARES' FISCAL YEAR ENDING
OCTOBER 31, 1996.
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
<TABLE>
<S> <C> <C>
CLASS C SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)................................. None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)......................................................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) (1)............................................................ 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................................ None
Exchange Fee.................................................................................................. None
ANNUAL OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver) (2)............................................................................. 0.64%
12b-1 Fee..................................................................................................... 0.75%
Total Other Expenses.......................................................................................... 0.57%
Shareholder Services Fee....................................................................... 0.25%
Total Operating Expenses (3)......................................................................... 1.96%
</TABLE>
(1) The contingent deferred sales charge assessed is 1.00% of the lesser of the
original purchase price or the net asset value of Shares redeemed within one
year of their purchase date. (See "Contingent Deferred Sales Charge.")
(2) The estimated management fee has been reduced to reflect the anticipated
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 4.50% of
gross income, excluding capital gains or losses.
(3) The operating expenses are estimated to be 2.08% absent the anticipated
voluntary waiver of a portion of the management fee.
* Total operating expenses in the table above are estimated based on average
expenses expected to be incurred during the period ending October 31, 1996.
During the course of this period, expenses may be more or less than the
average amount shown.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class C Shares will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Investing in Class C Shares" and "Fund Information".
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted under the rules of the National
Association of Securities Dealers, Inc.
<TABLE>
<S> <C> <C>
EXAMPLE 1 Year 3 Years
You would pay the following expenses on a $1,000 investment assuming (1) 5% annual return and (2)
redemption at the end of each time period.......................................................... $30 $62
You would pay the following expenses on the same investment, assuming no redemption................ $20 $62
</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. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR CLASS C SHARES' FISCAL YEAR ENDING
OCTOBER 31, 1996.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FEDERATED STOCK AND BOND FUND, INC.
(formerly, Stock and Bond Fund, Inc.)
- --------------------------------------------------------------------------------
(For a share outstanding throughout the period)
Reference is made to the Independent Auditors' Report on page 53. The Fund also
incorporates herein by reference to the Financial Highlights Table and the
financial statements and notes thereto contained in its Semi-Annual Report to
shareholders dated April 30, 1996. This Table should be read in conjunction with
the Semi-Annual Report which may be obtained free of charge from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, YEAR ENDED DECEMBER 31,
1995 1994 1993 1992 1991 1990(A) 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.25 $ 16.87 $ 15.91 $ 15.74 $ 13.60 $ 15.11 $ 14.94 $ 14.89 $ 15.34
- -------------------------------
INCOME FROM INVESTMENT
OPERATIONS
- -------------------------------
Net investment income 0.63 0.51 0.55 0.65 0.74 1.37 0.91 0.85 0.81
- -------------------------------
Net realized and unrealized
gain (loss) on investments 2.21 (0.59) 1.58 0.39 2.17 (2.22) 0.91 0.52 (0.24)
- ------------------------------- --------- --------- --------- --------- --------- ----------- --------- --------- ---------
Total from investment
operations 2.84 (0.08) 2.13 1.04 2.91 (0.85) 1.82 1.37 0.57
- ------------------------------- --------- --------- --------- --------- --------- ----------- --------- --------- ---------
LESS DISTRIBUTIONS
- -------------------------------
Distributions from net
investment income (0.62) (0.54) (0.56) (0.68) (0.77) (0.66) (0.94) (0.86) (0.79)
- -------------------------------
Distributions from net
realized gain on investment
transactions (0.09) -- (0.61) (0.19) -- -- (0.71) (0.46) (0.23)
- ------------------------------- --------- --------- --------- --------- --------- ----------- --------- --------- ---------
Total distributions (0.71) (0.54) (1.17) (0.87) (0.77) (0.66) (1.65) (1.32) (1.02)
- ------------------------------- --------- --------- --------- --------- --------- ----------- --------- --------- ---------
NET ASSET VALUE,
END OF PERIOD $ 18.38 $ 16.25 $ 16.87 $ 15.91 $ 15.74 $ 13.60 $ 15.11 $ 14.94 $ 14.89
- ------------------------------- --------- --------- --------- --------- --------- ----------- --------- --------- ---------
TOTAL RETURN (B) 17.99% (0.48)% 14.10% 7.94% 21.78% (5.90)% 12.46% 9.28% 3.58%
- -------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------
Expenses 1.07% 1.06% 1.04% 1.04% 1.01% 1.01%* 1.01% 1.00% 1.00%
- -------------------------------
Net investment income 3.71% 3.23% 3.49% 4.15% 4.91% 5.77%* 5.82% 5.53% 5.07%
- -------------------------------
Expense waiver/reimbursement
(c) 0.31% 0.07% 0.20% 0.21% 0.45% 0.54%* 0.51% 0.39% 0.22%
- -------------------------------
SUPPLEMENTAL DATA
- -------------------------------
Net assets, end of period
(000 omitted) $134,669 $125,382 $124,583 $95,387 $88,534 $79,003 $88,367 $90,504 $92,105
- -------------------------------
Portfolio turnover 68% 45% 51% 43% 72% 49% 26% 131% 110%
- -------------------------------
<CAPTION>
1986 1985
<S> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 15.24 $ 13.60
- -------------------------------
INCOME FROM INVESTMENT
OPERATIONS
- -------------------------------
Net investment income 0.85 0.90
- -------------------------------
Net realized and unrealized
gain (loss) on investments 1.17 2.18
- ------------------------------- --------- ---------
Total from investment
operations 2.02 3.08
- ------------------------------- --------- ---------
LESS DISTRIBUTIONS
- -------------------------------
Distributions from net
investment income (0.86) (0.90)
- -------------------------------
Distributions from net
realized gain on investment
transactions (1.06) (0.54)
- ------------------------------- --------- ---------
Total distributions (1.92) (1.44)
- ------------------------------- --------- ---------
NET ASSET VALUE,
END OF PERIOD $ 15.34 $ 15.24
- ------------------------------- --------- ---------
TOTAL RETURN (B) 13.77% 24.09%
- -------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------
Expenses 1.00% 1.30%
- -------------------------------
Net investment income 5.43% 6.42%
- -------------------------------
Expense waiver/reimbursement
(c) 0.30% 0.27%
- -------------------------------
SUPPLEMENTAL DATA
- -------------------------------
Net assets, end of period
(000 omitted) $75,441 $37,792
- -------------------------------
Portfolio turnover 40% 42%
- -------------------------------
</TABLE>
* Computed on an annualized basis
(a) Reflects operations for the ten month period ended October 31 1990.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
- -------------------------------------------------------------------------------
GENERAL INFORMATION
The Fund was incorporated under the laws of the State of Maryland on October 31,
1934. At a meeting of the Board of Directors ("Directors") held on February 26,
1996, the Directors approved an amendment to the Articles of Incorporation to
change the name of Stock and Bond Fund, Inc. to Federated Stock and Bond Fund,
Inc. The Articles of Incorporation 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. With respect to this
Fund, as of the date of this prospectus, the Directors have established three
classes of shares, known as Class A Shares, Class B Shares, and Class C Shares
(individually and collectively as the context requires, "Shares").
Shares of the Fund are 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. The minimum initial
investment for Class A Shares is $500. The minimum initial investment for Class
B Shares and Class C Shares is $1,500. However, the minimum initial investment
for a retirement account in any class is $50. Subsequent investments in any
class must be in amounts of at least $100, except for retirement plans which
must be in amounts of at least $50.
The Fund's current net asset value and offering price may be found in the mutual
funds section of local newspapers under "Federated" and the appropriate class
designation listing.
- -------------------------------------------------------------------------------
INVESTMENT INFORMATION
INVESTMENT 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 cannot be
changed without approval of shareholders.
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. Unless indicated otherwise, the investment
policies and limitations described below and the in the Statement of Additional
Information may be changed by the Directors without shareholder approval.
Shareholders will be notified before any material change becomes effective.
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, foreign securities, American Depository Receipts
("ADRs"), notes, bonds, and discount notes issued or guaranteed by the U.S.
government, its agencies or instrumentalities, municipal securities, mortgageand
asset-backed securities, and zero coupon convertible securities. 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. The bonds in which the Fund invests will generally be rated
investment grade, including repurchase agreements collateralized by investment
grade securities. Investment grade securities are generally described as
securities that are rated in one of the top four rating categories by a
nationally recognized statistical rating organization ("NRSRO"), such as Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group ("S&P"), or
Fitch Investor's Service, Inc. ("Fitch") or that are unrated but determined by
the Fund's investment adviser to be of comparable quality. A description of the
ratings categories is contained in the Appendix to this prospectus. Permitted
investments include:
domestic and foreign common stocks;
convertible securities;
domestic or foreign debt obligations;
obligations of the United States;
notes, bonds, and discount notes of U.S. government agencies or
instrumentalities;
taxable municipal debt obligations (as a matter of operating policy, the lowest
rated municipal debt obligations in which the Fund will invest will be rated
BBB or better by an NRSRO, or which are of comparable quality in the judgment
of the Fund's investment adviser);
asset-backed securities;
commercial paper that matures in 270 days or less and is rated A-1 or A-2 by
S&P, P-1 or P-2 by Moody's, or F-1 or F-2 by Fitch;
time and savings deposits (including certificates of deposit) in commercial or
savings banks whose accounts are insured by the Bank Insurance Fund ("BIF"), or
in institutions whose accounts are insured by the Savings Association Insurance
Fund ("SAIF"), including certificates of deposit issued by, and other time
deposits in, foreign branches of BIF-insured banks, which, if negotiable,
mature in six months or less, or if not negotiable, either mature in ninety
days or less, or may be withdrawn upon notice not exceeding ninety days;
bankers' acceptances issued by a BIF-insured bank, or issued by the bank's Edge
Act subsidiary and guaranteed by the bank, with remaining maturities of nine
months or less. The total acceptances of any bank held by the Fund cannot
exceed 0.25% of such bank's total deposits according to the bank's last
published statement of condition preceding the date of acceptance;
preferred stock and other equity-related securities which generally have
bond-like attributes, including zero coupon and/or convertible securities;
other securities which are deemed by the Fund's investment adviser to be
consistent with the Fund's investment objectives; and
repurchase agreements collateralized by acceptable investments.
DOMESTIC AND FOREIGN
COMMON STOCKS
The common stocks in which the Fund invests are selected by the Fund's
investment adviser ("Adviser") on the basis of traditional research techniques,
including assessment of earnings and dividend growth, prospects and the risk and
volatility of the company's industry. However, other factors, such as product
position, market share, or profitability, will also be considered by the Fund's
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 Fund invests in convertible bonds rated "B" or
higher by S&P, or Moody's at the time of investment, or if unrated, of
comparable quality. If a convertible bond is rated below "B" according to the
characteristics set forth here after the Fund has purchased it, the Fund is not
required to drop the convertible bond from the portfolio, but will consider
appropriate action. The investment characteristics of each convertible security
vary widely, which allows convertible securities to be employed for different
investment objectives.
Convertible bonds and convertible preferred stocks are fixed-income securities
that generally retain the investment characteristics of fixed-income securities
until they have been converted but also react to movements in the underlying
equity securities. The holder is entitled to receive the fixed-income of a bond
or the dividend preference of a preferred stock until the holder elects to
exercise the conversion privilege. Usable bonds are corporate bonds that can be
used in whole or in part, customarily at full face value, in lieu of cash to
purchase the issuer's common stock. When owned as part of a unit along with
warrants, which are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before the
bond's maturity. Convertible securities are senior to equity securities and,
therefore, have a claim to assets of the corporation prior to the holders of
common stock in the case of liquidation. However, convertible securities are
generally subordinated to similar nonconvertible securities of the same company.
The interest income and dividends from convertible bonds and preferred stocks
provide a stable stream of income with generally higher yields than common
stocks, but lower than non-convertible securities of similar quality.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which, in
the opinion of the Adviser the investment characteristics of the underlying
common shares will assist the Fund in achieving its investment objectives.
Otherwise, the Fund will hold or trade the convertible securities. In selecting
convertible securities for the Fund, the Adviser evaluates the investment
characteristics of the convertible security as a fixed-income instrument, and
the investment potential of the underlying equity security for capital
appreciation. In evaluating these matters with respect to a particular
convertible security, the Adviser considers numerous factors, including the
economic and political outlook, the value of the security relative to other
investment alternatives, trends in the determinants of the issuer's profits, and
the issuer's management capability and practices.
DEBT OBLIGATIONS AND
INVESTMENT RISKS
Although the debt obligations in which the Fund will invest primarily are rated
as investment grade by an NRSRO, or of comparable quality in the judgment of the
Fund's Adviser, the Fund may invest in debt obligations that are not investment
grade bonds, but are rated below BBB by an NRSRO (i.e., "junk bonds"). There is
no minimal acceptable rating for a security to be purchased or held in the Fund,
and the Fund may, from time to time, purchase or hold securities in the lowest
rating category. However, under normal circumstances, the Fund will not invest
35% or more of its net assets in non-investment grade securities. Debt
obligations that are not determined to be investment grade are high-yield,
high-risk bonds, typically subject to greater market fluctuations and greater
risk of loss of income and principal due to an issuer's
default. To a greater extent than investment grade bonds, lower rated bonds tend
to reflect short-term corporate, economic, and market developments, as well as
investor perceptions of the issuer's credit quality. In addition, lower rated
bonds may be more difficult to dispose of or to value than higher rated,
lower-yielding bonds. Bonds rated "BBB" by S&P or Fitch, or "Baa" by Moody's,
have speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than higher rated bonds. A description of the rating
categories is contained in the Appendix to this prospectus.
The prices of fixed income securities generally fluctuate inversely to the
direction of interest rates.
REDUCING RISKS OF
LOWER-RATED SECURITIES
The Fund's Adviser believes that the risks of investing in lower-rated
securities can be reduced. The professional portfolio management techniques used
by the Fund to attempt to reduce these risks include:
CREDIT RESEARCH
The Fund's Adviser will perform its own credit analysis in addition to using
nationally recognized statistical rating organizations and other resources,
including discussions with the issuer's management, the judgment of other
investment analysts, and its own informed judgment. The Fund's Adviser's credit
analysis will consider the issuer's financial soundness, its responsiveness to
changes in interest rates and business conditions, and its anticipated cash
flow, interest or dividend coverage and earnings. In evaluating an issuer, the
Fund's Adviser places special emphasis on the estimated current value of the
issuer's assets rather than historical costs.
DIVERSIFICATION
The Fund invests in securities of many different issuers, industries, and
economic sectors to reduce portfolio risk.
ECONOMIC ANALYSIS
The Fund's Adviser will analyze current developments and trends in the economy
and in the financial markets. When investing in lower-rated securities, timing
and selection are critical, and analysis of the business cycle can be important.
U.S. GOVERNMENT OBLIGATIONS
The U.S. government obligations 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 Corporation, Farm Credit System
(including the National Bank for Cooperatives, Farm Credit Banks, and Banks for
Cooperatives), Tennessee Valley Authority, Export-Import Bank of the United
States, Commodity Credit Corporation, Federal Financing Bank, Student Loan
Marketing Association, Federal Home Loan Mortgage Corporation, or National
Credit Union Administration.
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. No
assurances can be given that the U.S. government will provide financial support
to other
agencies or instrumentalities, since it is not obligated to do so. These
agencies and instrumentalities 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.
MUNICIPAL SECURITIES
Municipal securities are generally issued to finance public works such as
airports, bridges, highways, housing, hospitals, mass transportation projects,
schools, streets, and water and sewer works. They are also issued to repay
outstanding obligations, to raise funds for general operating expenses, and to
make loans to other public institutions and facilities. Municipal securities
include industrial development bonds issued by or on behalf of public
authorities to provide financing aid to acquire sites or construct and equip
facilities for privately or publicly owned corporations. The availability of
this financing encourages these corporations to locate within the sponsoring
communities and thereby increases local employment.
ASSET-BACKED SECURITIES
Asset-backed securities are created by the grouping of certain governmental,
government related and private loans, receivables and other lender assets,
including vehicle installment purchase obligations and credit card receivables,
into pools. Interests in these pools are sold as individual securities and are
not backed or guaranteed by the U.S. government and may not be secured. Payments
from the asset pools may be divided into several different tranches of debt
securities, with some tranches entitled to receive regular installments of
principal and interest, other tranches entitled to receive regular installments
of interest, with principal payable at maturity or upon specified call dates,
and other tranches only entitled to receive payments of principal and accrued
interest at maturity or upon specified call dates. Different tranches of
securities will bear different interest rates, which may be fixed or floating.
Because the loans held in the asset pool often may be prepaid without penalty or
premium, asset-backed securities are generally subject to higher prepayment
risks than most other types of debt instruments. Prepayment risks on mortgage
securities tend to increase during periods of declining mortgage interest rates,
because many borrowers refinance their mortgages to take advantage of the more
favorable rates. Depending upon market conditions, the yield that the Fund
receives from the reinvestment of such prepayments, or any scheduled principal
payments, may be lower than the yield on the original mortgage security. As a
consequence, mortgage securities may be a less effective means of "locking in"
interest rates than other types of debt securities having the same stated
maturity and may also have less potential for capital appreciation. For certain
types of asset pools, such as collateralized mortgage obligations, prepayments
may be allocated to one tranch of securities ahead of other tranches, in order
to reduce the risk of prepayment for the other tranches.
Prepayments may result in a capital loss to the Fund to the extent that the
prepaid mortgage securities were purchased at a market premium over their stated
amount. Conversely, the prepayment of mortgage securities purchased at a market
discount from their stated principal amount will accelerate the recognition of
interest income by the Fund, which would be taxed as ordinary income when
distributed to the shareholders.
The credit characteristics of asset-backed securities also differ in a number of
respects from
those of traditional debt securities. The credit quality of most asset-backed
securities depends primarily upon the credit quality of the assets underlying
such securities, how well the entity issuing the securities is insulated from
the credit risk of the originator or any other affiliated entities, and the
amount and quality of any credit enhancement to such securities.
NON-MORTGAGE RELATED
ASSET-BACKED SECURITIES
The Fund may invest in non-mortgage related asset-backed securities including,
but not limited to, interests in pools of receivables, such as credit card and
accounts receivable and motor vehicle and other installment purchase obligations
and leases. These securities may be in the form of pass-through instruments or
asset-backed obligations. The securities, all of which are issued by
non-governmental entities and carry no direct or indirect government guarantee,
are structurally similar to collateralized mortgage obligations and mortgage
pass-through securities, which are described below.
MORTGAGE RELATED
ASSET-BACKED SECURITIES
The Fund may also invest in various mortgage related asset-backed securities.
These types of investments may include adjustable rate mortgage securities,
collateralized mortgage obligations, real estate mortgage investment conduits,
or other securities collateralized by or representing an interest in real estate
mortgages (collectively, "mortgage securities"). Many mortgage securities are
issued or guaranteed by government agencies.
ADJUSTABLE RATE MORTGAGE
SECURITIES ("ARMS")
ARMS are pass-through mortgage securities representing interests in adjustable
rather than fixed interest rate mortgages. The ARMS in which the Fund invests
are issued by the Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA"), and the Federal Home Loan Mortgage
Corporation ("FHLMC") and are actively traded. The underlying mortgages which
collateralize ARMS issued by GNMA are fully guaranteed by the Federal Housing
Administration ("FHA") or Veterans Administration ("VA"), while those
collateralizing ARMS issued by FHLMC or FNMA are typically conventional
residential mortgages conforming to strict underwriting size and maturity
constraints.
COLLATERALIZED MORTGAGE
OBLIGATIONS ("CMOS")
CMOs are bonds issued by single-purpose, stand-alone finance subsidiaries or
trusts of financial institutions, government agencies, investment bankers, or
companies related to the construction industry. CMOs purchased by the Fund may
be:
collateralized by pools of mortgages in which each mortgage is guaranteed as to
payment of principal and interest by an agency or instrumentality of the U.S.
government;
collateralized by pools of mortgages in which payment of principal and interest
is guaranteed by the issuer and such guarantee is collateralized by U.S.
government securities; or
securities in which the proceeds of the issuance are invested in mortgage
securities and payment of the principal and interest is supported by the credit
of an agency or instrumentality of the U.S. government.
All CMOs purchased by the Fund are investment grade, as rated by a NRSRO or are
of comparable quality as determined by the Adviser.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS")
REMICs are offerings of multiple class real estate mortgage-backed securities
which qualify and elect treatment as such under provisions of the Internal
Revenue Code (the "Code"). Issuers of REMICs may take several forms, such as
trusts, partnerships, corporations, associations, or segregated pools of
mortgages. Once REMIC status is elected and obtained, the entity is not subject
to federal income taxation. Instead, income is passed through the entity and is
taxed to the person or persons who hold interests in the REMIC. A REMIC interest
must consist of one or more classes of "regular interests," some of which may
offer adjustable rates of interest, and a single class of "residual interests."
To qualify as a REMIC, substantially all the assets of the entity must be in
assets directly or indirectly secured principally by real property.
RESETS OF INTEREST
The interest rates paid on the ARMS, CMOs, and REMICs in which the Fund invests
generally are readjusted at intervals of one year or less to an increment over
some predetermined interest rate index. There are two main categories of
indices: those based on U.S. Treasury securities and those derived from a
calculated measure, such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year and five-year
constant maturity Treasury Note rates, the three-month Treasury Bill rate, the
180-day Treasury Bill rate, rates on longer-term Treasury securities, the
National Median Cost of Funds, the one-month or three-month London Interbank
Offered Rate (LIBOR), the prime rate of a specific bank, or commercial paper
rates. Some indices, such as the one-year constant maturity Treasury Note rate,
closely mirror changes in market interest rate levels. Others tend to lag
changes in market rate levels and tend to be somewhat less volatile.
To the extent that the adjusted interest rate on the mortgage security reflects
current market rates, the market value of an adjustable rate mortgage security
will tend to be less sensitive to interest rate changes than a fixed rate debt
security of the same stated maturity. Hence, adjustable rate mortgage securities
which use indices that lag changes in market rates should experience greater
price volatility than adjustable rate mortgage securities that closely mirror
the market. Certain residual interest tranches of CMOs may have adjustable
interest rates that deviate significantly from prevailing market rates, even
after the interest rate is reset, and are subject to correspondingly increased
price volatility. In the event the Fund purchases such residual interest
mortgage securities, it will factor in the increased interest and price
volatility of such securities when determining its dollar-weighted average
duration.
CAPS AND FLOORS
The underlying mortgages which collateralize the ARMS, CMOs, and REMICs in which
the Fund invests will frequently have caps and floors which limit the maximum
amount by which the loan rate to the residential borrower may change up or down:
(1) per reset or adjustment interval; and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by limiting changes in
the borrower's monthly principal and interest payments rather than limiting
interest rate changes.
These payment caps may result in negative amortization. The value of mortgage
securities in which the Fund invests may be affected if market interest rates
rise or fall faster and farther than the allowable caps or floors on the
underlying residential mortgage loans. Additionally, even though the interest
rates on the underlying residential mortgages are adjustable, amortization and
prepayments may occur, thereby causing the effective maturities of the mortgage
securities in which the Fund invests to
be shorter than the maturities stated in the underlying mortgages.
BANK INSTRUMENTS
The Fund only invests in bank instruments either issued by an institution having
capital, surplus and undivided profits over $100 million or insured by BIF or
SAIF. Bank instruments may include Eurodollar Certificates of Deposit ("ECDs"),
Yankee Certificates of Deposit ("Yankee CDs") and Eurodollar Time Deposits
("ETDs"). Due to the fact that institutions issuing such instruments are not
necessarily subject to the same regulatory requirements that apply to domestic
banks, such as the reserve requirements, loan limitations, examination,
accounting, auditing, recordkeeping, and the public availability of information,
these investments may present additional risks to investors.
ZERO COUPON CONVERTIBLE SECURITIES
Zero coupon convertible securities are debt securities which are issued at a
discount to their face amount and do not entitle the holder to any periodic
payments of interest prior to maturity. Rather, interest earned on zero coupon
convertible securities accretes at a stated yield until the security reaches its
face amount at maturity. Zero coupon convertible securities are convertible into
a specific number of shares of the issuer's common stock. In addition, zero
coupon convertible securities usually have put features that provide the holder
with the opportunity to sell the bonds back to the issuer at a stated price
before maturity. Generally, the prices of zero coupon convertible securities may
be more sensitive to market interest rate fluctuations than conventional
convertible securities.
Federal income tax law requires the holder of a zero coupon convertible security
to recognize income with respect to the security prior to the receipt of cash
payments. To maintain its qualification as a regulated investment company and
avoid liability of federal income taxes, the Fund will be required to distribute
income accrued with respect to zero coupon convertible securities which it owns,
and may have to sell portfolio securities (perhaps at disadvantageous times) in
order to generate cash to satisfy these distribution requirements.
RESTRICTED AND ILLIQUID SECURITIES
The Fund intends to invest in restricted securities. Restricted securities are
any securities in which the Fund may otherwise invest pursuant to its investment
objective and policies, but which are subject to restriction on resale under
federal securities law. However, the Fund will limit investments in illiquid
securities, including certain restricted securities determined by the Directors
to be illiquid, non-negotiable time deposits, unlisted options, and repurchase
agreements providing for settlement in more than seven days after notice, to 15%
of its net assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under the federal
securities laws, and is generally sold to institutional investors, such as the
Fund, who agree that they are purchasing the paper for investment purposes and
not with a view to public distribution. Any resale by the purchaser must be in
an exempt transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Fund believes that Section 4(2) commercial paper,
and possibly certain other restricted securities which meet the criteria for
liquidity established by the Directors, are quite liquid. The Fund intends,
therefore, to treat the restricted securities which meet the criteria for
liquidity established by the Directors, including Section 4(2) commercial
paper, as determined by the Adviser, as liquid and not subject to the investment
limitations applicable to illiquid securities.
FOREIGN SECURITIES AND
INVESTMENT RISKS
The Fund may invest in ADRs, and may invest more than 10% of its total assets in
foreign securities.
Investments in foreign securities, particularly those of non-governmental
issuers, involve considerations which are not ordinarily associated with
investments in domestic securities. These considerations include the possibility
of expropriation, the unavailability of financial information or the difficulty
of interpreting financial information prepared under foreign accounting
standards, less liquidity and more volatility in foreign securities markets, the
impact of political, social, or diplomatic developments, and the difficulty of
assessing economic trends in foreign countries. It may also be more difficult to
enforce contractual obligations abroad than would be the case in the United
States because of differences in the legal systems. Transaction costs in foreign
securities may be higher. The Adviser will consider these and other factors
before investing in foreign securities and will not make such investments
unless, in its opinion, such investments will meet the Fund's standards and
objectives. This would enable the Fund to concentrate its investments in the
securities of a foreign government which would have the effect of magnifying the
investment risks disclosed above.
With respect to foreign governmental securities, the Fund reserves the right to
invest up to 25% of its total assets in fixed income securities of foreign
governmental units located within an individual foreign nation and to purchase
or sell various currencies on either a spot or forward basis in connection with
these investments. This would enable the Fund to concentrate its investments in
the securities of a foreign government which would have the effect of magnifying
the investment risks disclosed above. The Adviser will allocate investments
among securities of particular issuers on the basis of its views as to the best
values then currently available in the marketplace. Such values are a function
of yield, maturity, issue classification and quality characteristics, coupled
with expectations regarding the economy, movements in the general level and term
of interest rates, currency values, political developments and variations in the
supply of funds available for investment in the world bond market relative to
the demands placed upon it.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest in the securities of other investment companies, but it will
not own more than 3% of the total outstanding voting stock of any investment
company, invest more than 5% of its total assets in any one investment company,
or invest more than 10% of its total assets in investment companies in general.
The Fund will only invest in other investment companies that are money market
funds having an investment objective and policies similar to its own and
primarily for the purpose of investing short-term cash which has not yet been
invested in other portfolio instruments. In addition to the advisory and other
expenses the Fund bears directly in connection with its own operations, as a
shareholder of another investment company the Fund would bear its pro rata
portion of the other investment company's advisory fees and other expenses. As
such, the Fund's shareholders would indirectly bear the expenses of the other
investment company, some or all of which would be duplicated. The Adviser will
waive its investment advisory fee on assets invested in securities of open-end
investment companies.
TEMPORARY INVESTMENTS
For temporary defensive purposes, the Fund may invest up to 100% of its total
assets in cash and cash items including: 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. The Fund may also hold the instruments described above in such
amounts as necessary: to provide funds for the settlement of portfolio
transactions; pending investment of cash receipts in the ordinary course of
business; and to meet requests for redemption of Fund shares.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities of deposit to the Fund and agree at the time of sale to repurchase
them at a mutually agreed upon time and price. To the extent that the original
seller does not repurchase the securities from the Fund, the Fund could receive
less than the repurchase price on any sale of such securities.
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete the transaction may cause the Fund to miss a price or yield considered
to be advantageous. Settlement dates may be a month or more after entering into
these transactions, and the market values of the securities purchased may vary
from the purchase prices. Accordingly, the Fund may pay more/less than the
market value of the securities on the settlement date.
The Fund may dispose of a commitment prior to settlement if the Adviser deems it
appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio securities
on a short-term or long-term basis up to one-third of the value of its total
assets to broker/dealers, banks, or other institutional borrowers of securities.
The Fund will only enter into loan arrangements with broker/dealers, banks, or
other institutions which the Adviser has determined are creditworthy under
guidelines established by the Directors 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.
PUT AND CALL OPTIONS
The Fund may purchase put options on financial futures contracts and put options
on portfolio securities. Financial futures may include index futures. These
options will be used as a hedge to attempt to protect securities which the Fund
holds against decreases in value. For the immediate future, the Fund will enter
into futures contracts directly only when it desires to exercise a financial
futures put option in its portfolio rather than either closing out the option or
allowing it to expire. The Fund will only
purchase puts on financial futures contracts which are traded on a nationally
recognized exchange.
The Fund will generally purchase over-the-counter put options on portfolio
securities in negotiated transactions with the writers of the options since
options on the portfolio securities held by the Fund are typically not traded on
an exchange. The Fund purchases options only from investment dealers and other
financial associations (such as commercial banks or savings and loan
institutions) deemed creditworthy by the Adviser.
In general, over-the-counter put options differ from exchange traded put options
in the following respects. Over-the-counter put options are two party contracts
with price and terms negotiated between buyer and seller, and such options are
endorsed and/or guaranteed by third parties (such as a New York Stock Exchange
member). Additionally, over-the-counter strike prices are adjusted to reflect
dividend payments, initial strike prices are generally set at market, and option
premiums (which are all time premiums) are amortized on a straight line basis
over the life of the option. In contrast, exchange traded options are
third-party contracts with standardized strike prices and expiration dates and
are purchased from the Clearing Corporation. Strike prices are not adjusted for
dividends, and options are marked to market, thereby obviating the need to
amortize the time premium. Exchange traded options have a continuous liquid
market while over-the-counter options do not.
The Fund may also write call options on all or any portion of its portfolio in
an effort to generate income for the Fund. The Fund will write call options on
securities either held in its portfolio or which it has the right to obtain
without payment of further consideration or for which it has segregated cash in
the amount of any additional consideration. The call options which the Fund
writes and sells must be listed on a recognized options exchange. Although the
Fund reserves the right to write covered call options on its entire portfolio,
it will not write such options on more than 25% of its total assets unless a
higher limit is authorized by the Directors.
The Fund may attempt to hedge the portfolio by entering into financial futures
contracts and to write calls on financial futures contracts.
RISKS
When the Fund writes a call option, the Fund risks not participating in any rise
in the value of the underlying security. In addition, when the Fund purchases
puts on financial futures contracts to protect against declines in prices of
portfolio securities, there is a risk that the prices of the securities subject
to the futures contracts may not correlate perfectly with the prices of the
securities in the Fund's portfolio of investments. This may cause the futures
contract and its corresponding put to react differently than the portfolio
securities to market changes. In addition, the Adviser could be incorrect in its
expectations about the direction or extent of market factors such as interest
rate movements. In such an event, the Fund may lose the purchase price of the
put option. Finally, it is not certain that a secondary market for options will
exist at all times. Although the Adviser will consider liquidity before entering
into option transactions, there is no assurance that a liquid secondary market
on an exchange will exist for any particular option or at any particular time.
The Fund's ability to establish and close out option positions depends on this
secondary market.
DERIVATIVE CONTRACTS
AND SECURITIES
The term "derivative" has traditionally been applied to certain contracts
(including, futures, forward, option and swap contracts) that "derive" their
value from changes in the value of an underlying security, currency, commodity
or index. Certain types of securities that incorporate the performance
characteristics of these contracts are also referred to as "derivatives." The
term has also been applied to securities "derived" from the cash flows from
underlying securities, mortgages or other obligations.
Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response of
certain derivative contracts and securities to market changes may differ from
traditional investments, such as stocks and bonds, derivatives do not
necessarily present greater market risks than traditional investments. The Fund
will only use derivative contracts for the purposes disclosed in the applicable
prospectus sections above. To the extent that the Fund invests in securities
that could be characterized as derivatives, such as asset-backed securities and
mortgage-backed securities, including ARMS, CMOs, and REMICs, it will only do so
in a manner consistent with its investment objectives, policies and limitations.
INVESTMENT LIMITATIONS
The following investment limitations cannot be changed without shareholder
approval. 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; or invest in more than 10% of any class of securities of one
issuer.
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NET ASSET VALUE
The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by adding the interest of each class of Shares in the market value
of all securities and other assets of the Fund, subtracting the interest of each
class of Shares in the liabilities of the Fund and those attributable to each
class of Shares, and dividing the remainder by the total number of each class of
Shares outstanding. The net asset value for each class of Shares may differ due
to the variance in daily income realized by each class. Such variance will
reflect only accrued net income to which the shareholders of a particular class
are entitled.
The net asset value is determined as of the close of trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of
the Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no Shares are tendered for redemption and no
orders to purchase shares are received; and (iii) the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day.
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INVESTING IN THE FUND
The Fund offers investors three classes of Shares that carry sales charges and
contingent deferred sales charges in different forms and amounts and which bear
different levels of expenses.
CLASS A SHARES
An investor who purchases Class A Shares pays a maximum sales charge of 5.50% at
the time of purchase. As a result, Class A Shares are not subject to any charges
when they are redeemed (except for special programs offered under "Purchases
with Proceeds From Redemptions of Unaffiliated Investment Companies.") Certain
purchases of Class A Shares qualify for reduced sales charges. See "Reducing the
Sales Charge--Class A Shares." Class A Shares have no conversion feature.
CLASS B SHARES
Class B Shares are sold without an initial sales charge, but are subject to a
contingent deferred sales charge of up to 5.50% if redeemed within six full
years following purchase. Class B Shares also bear a higher 12b-1 fee than Class
A Shares. Class B Shares will automatically convert into Class A Shares, based
on relative net asset value, on or around the fifteenth of the month eight full
years after the purchase date. Class B Shares provide an investor the benefit of
putting all of the investor's dollars to work from the time the investment is
made, but (until conversion) will have a higher expense ratio and pay lower
dividends than Class A Shares due to the higher 12b-1 fee.
CLASS C SHARES
Class C Shares are sold without an initial sales charge, but are subject to a
1.00% contingent deferred sales charge on assets redeemed within the first 12
months following purchase. Class C Shares provide an investor the benefit of
putting all of the investor's dollars to work from the time the investment is
made, but will have a higher expense ratio and pay lower dividends than Class A
Shares due to the higher 12b-1 fee. Class C Shares have no conversion feature.
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HOW TO PURCHASE SHARES
Shares of the Fund are sold on days on which the New York Stock Exchange is
open. Shares of the Fund may be purchased, as described below, either through a
financial institution (such as a bank or broker/dealer which has a sales
agreement with the distributor) or by wire or by check directly to the Fund,
with a minimum initial investment of $500 for Class A Shares and $1,500 for
Class B Shares and Class C Shares. Additional investments can be made for as
little as $100. The minimum initial and subsequent investment for retirement
plans is only $50. (Financial institutions may impose different minimum
investment requirements on their customers).
In connection with any sale, Federated Securities Corp. may, from time to time,
offer certain items of nominal value to any shareholder or investor. The Fund
reserves the right to reject any purchase request. An account must be
established at a financial institution or by completing, signing, and returning
the new account form available from the Fund before Shares can be purchased.
INVESTING IN CLASS A SHARES
Class A Shares are sold at their net asset value next determined after an order
is received, plus a sales charge as follows:
<TABLE>
<CAPTION>
DEALER
SALES CHARGE SALES CHARGE CONCESSION
AS A AS A AS A
PERCENTAGE PERCENTAGE PERCENTAGE
OF PUBLIC OF NET OF PUBLIC
AMOUNT OF OFFERING AMOUNT OFFERING
TRANSACTION PRICE INVESTED PRICE
<S> <C> <C> <C>
Less than $50,000 5.50% 5.82% 5.00%
$50,000 but less
than $100,000 4.50% 4.71% 4.00%
$100,000 but less
than $250,000 3.75% 3.90% 3.25%
$250,000 but less
than $500,000 2.50% 2.56% 2.25%
$500,000 but less
than $1 million 2.00% 2.04% 1.80%
$1 million or
greater 0.00% 0.00% 0.25%*
</TABLE>
*See sub-section entitled "Dealer Concession."
No sales charge is imposed for Class A Shares purchased through financial
intermediaries that do not receive a reallowance of the sales charge. However,
investors who purchase Class A Shares through a trust department, investment
adviser, or other financial intermediary may be charged a service fee or other
fee by the financial intermediary. Additionally, no sales charge is imposed on
shareholders designated as Liberty Life Members or on Class A Shares purchased
through "wrap accounts" or similar programs, under which clients pay a fee for
services.
DEALER CONCESSION
For sales of Class A Shares, a dealer will normally receive up to 90% of the
applicable sales charge. Any portion of the sales charge which is not paid to a
dealer will be retained by the distributor. However, the distributor may offer
to pay dealers up to 100% of the sales charge retained by it. Such payments may
take the form of cash or promotional incentives, such as reimbursement of
certain expenses of qualified
employees and their spouses to attend informational meetings about the Fund or
other special events at recreational-type facilities, or items of material
value. In some instances, these incentives will be made available only to
dealers whose employees have sold or may sell a significant amount of Shares. On
purchases of $1 million or more, the investor pays no sales charge; however, the
distributor will make twelve monthly payments to the dealer totaling 0.25% of
the public offering price over the first year following the purchase. Such
payments are based on the original purchase price of Shares outstanding at each
month end.
The sales charge for Shares sold other than through registered broker/dealers
will be retained by Federated Securities Corp. Federated Securities Corp. may
pay fees to banks out of the sales charge in exchange for sales and/or
administrative services performed on behalf of the bank's customers in
connection with the initiation of customer accounts and purchases of Shares.
REDUCING OR ELIMINATING THE
SALES CHARGE
The sales charge can be reduced or eliminated on the purchase of Class A Shares
through:
quantity discounts and accumulated purchases;
concurrent purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
purchases with proceeds from redemptions of unaffiliated investment companies.
QUANTITY DISCOUNTS AND
ACCUMULATED PURCHASES
As shown in the table above, larger purchases reduce the sales charge paid. The
Fund will combine purchases of Class A Shares made on the same day by the
investor, the investor's spouse, and the investor's children under age 21 when
it calculates the sales charge. In addition, the sales charge, if applicable, is
reduced or eliminated for purchases made at one time by a trustee or fiduciary
for a single trust estate or a single fiduciary account.
If an additional purchase of Class A Shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns Class A Shares having a current value at the public offering price
of $90,000 and he purchases $10,000 more at the current public offering price,
the sales charge on the additional purchase according to the schedule now in
effect would be 3.75%, not 4.50%.
To receive the sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the purchase is made that Class A Shares are already owned or that
purchases are being combined. The Fund will reduce the sales charge after it
confirms the purchases.
CONCURRENT PURCHASES
For purposes of qualifying for a sales charge reduction, a shareholder has the
privilege of combining concurrent purchases of Class A Shares of two or more
funds for which affiliates of Federated Investors serve as investment adviser or
principal underwriter (the "Federated Funds"), the purchase price of which
includes a sales charge. For example, if a shareholder concurrently invested
$80,000 in one of the Class A Shares in the Federated Funds with a sales charge,
and $20,000 in the Class A Shares of this Fund, the sales charge would be
reduced.
To receive this sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the concurrent purchases are made.
The Fund will reduce the sales charge after it confirms the purchases.
LETTER OF INTENT
If a shareholder intends to purchase at least $50,000 of Class A Shares of
Federated Funds (excluding money market funds) over the next 13 months, the
sales charge may be reduced by signing a letter of intent to that effect. This
letter of intent includes a provision for a sales charge adjustment depending on
the amount actually purchased within the 13-month period and a provision for the
custodian to hold up to 5.50% of the total amount intended to be purchased in
escrow (in Shares) until such purchase is completed.
The Shares held in escrow in the shareholder's account will be released upon
fulfillment of the letter of intent or the end of the 13-month period, whichever
comes first. If the amount specified in the letter of intent is not purchased,
an appropriate number of escrowed Shares may be redeemed in order to realize the
difference in the sales charge.
While this letter of intent will not obligate the shareholder to purchase
Shares, each purchase during the period will be at the sales charge applicable
to the total amount intended to be purchased. At the time a letter of intent is
established, current balances in accounts in any Class A Shares of any Federated
Funds, excluding money market accounts, will be aggregated to provide a purchase
credit towards fulfillment of the letter of intent. Prior trade prices will not
be adjusted.
REINVESTMENT PRIVILEGE
If Class A Shares in the Fund have been redeemed, the shareholder has the
privilege, within 120 days, to reinvest the redemption proceeds at the
next-determined net asset value without any sales charge. Federated Securities
Corp. must be notified by the shareholder in writing or by his financial
institution of the reinvestment in order to eliminate a sales charge. If the
shareholder redeems his Class A Shares in the Fund, there may be tax
consequences.
PURCHASES WITH PROCEEDS FROM
REDEMPTIONS OF UNAFFILIATED
INVESTMENT COMPANIES
Investors may purchase Class A Shares at net asset value, without a sales
charge, with the proceeds from the redemption of shares of an unaffiliated
investment company that were purchased or redeemed with a sales charge or
commission and were not distributed by Federated Securities Corp. The purchase
must be made within 60 days of the redemption, and Federated Securities Corp.
must be notified by the investor in writing, or by his financial institution, at
the time the purchase is made. From time to time, the Fund may offer dealers a
payment of .50% for Shares purchased under this program. If Shares are purchased
in this manner, redemptions of these Shares will be subject to a contingent
deferred sales charge for one year from the date of purchase. Shareholders will
be notified prior to the implementation of any special offering as described
above.
INVESTING IN CLASS B SHARES
Class B Shares are sold at their net asset value next determined after an order
is received. While Class B Shares are sold without an initial sales charge,
under certain circumstances described under "Contingent Deferred Sales
Charge--Class B Shares," a contingent deferred sales charge may be applied by
the distributor at the time Class B Shares are redeemed.
CONVERSION OF CLASS B SHARES
Class B Shares will automatically convert into Class A Shares on or around the
fifteenth of the month eight full years after the purchase date, except as noted
below, and will no longer be
subject to a fee under the Fund's Distribution Plan (see "Distribution of
Shares"). Such conversion will be on the basis of the relative net asset values
per Share, without the imposition of any sales charge, fee or other charge.
Class B Shares acquired by exchange from Class B Shares of another Federated
Fund will convert into Class A Shares based on the time of the initial purchase.
For purposes of conversion to Class A Shares, Shares purchased through the
reinvestment of dividends and distributions paid on Class B Shares will be
considered to be held in a separate sub-account. Each time any Class B Shares in
the shareholder's account (other than those in the sub-account) convert to Class
A Shares, an equal pro rata portion of the Class B Shares in the sub-account
will also convert to Class A Shares. The conversion of Class B Shares to Class A
Shares is subject to the continuing availability of a ruling from the Internal
Revenue Service or an opinion of counsel that such conversions will not
constitute taxable events for federal tax purposes. There can be no assurance
that such ruling or opinion will be available, and the conversion of Class B
Shares to Class A Shares will not occur if such ruling or opinion is not
available. In such event, Class B Shares would continue to be subject to higher
expenses than Class A Shares for an indefinite period.
Orders for $250,000 or more of Class B Shares will automatically be invested in
Class A Shares.
INVESTING IN CLASS C SHARES
Class C Shares are sold at net asset value next determined after an order is
received. A contingent deferred sales charge of 1.00% will be charged on assets
redeemed within the first full 12 months following purchase. For a complete
description of this charge see "Contingent Deferred Sales Charge--Class C
Shares."
PURCHASING SHARES THROUGH A FINANCIAL INSTITUTION
An investor may call his financial institution (such as a bank or an investment
dealer) to place an order to purchase Shares. Orders placed through a financial
institution are considered received when the Fund is notified of the purchase
order or when payment is converted into federal funds. Purchase orders through a
registered broker/dealer must be received by the broker before 4:00 p.m.
(Eastern time) and must be transmitted by the broker to the Fund before 5:00
p.m. (Eastern time) in order for Shares to be purchased at that day's price.
Purchase orders through other financial institutions must be received by the
financial institution and transmitted to the Fund before 4:00 p.m. (Eastern
time) in order for Shares to be purchased at that day's price. It is the
financial institution's responsibility to transmit orders promptly. Financial
institutions may charge additional fees for their services.
The financial institution which maintains investor accounts in Class B Shares or
Class C Shares with the Fund must do so on a fully disclosed basis unless it
accounts for share ownership periods used in calculating the contingent deferred
sales charge (see "Contingent Deferred Sales Charge"). In addition, advance
payments made to financial institutions may be subject to reclaim by the
distributor for accounts transferred to financial institutions which do not
maintain investor accounts on a fully disclosed basis and do not account for
share ownership periods.
PURCHASING SHARES BY WIRE
Once an account has been established, Shares may be purchased by Federal Reserve
wire by calling the Fund. All information needed will be taken over the
telephone, and the order is considered received when State Street Bank receives
payment by wire. Federal funds should
be wired as follows: Federated Shareholder Services Company, c/o State Street
Bank and Trust Company, Boston, MA; Attention: EDGEWIRE; For Credit to: (Fund
Name) (Fund Class); Fund Number (this number can be found on the account
statement or by contacting the Fund); Group Number or Order Number; Nominee or
Institution Name; and ABA Number 011000028. Shares cannot be purchased by wire
on holidays when wire transfers are restricted. Questions on wire purchases
should be directed to your client service representative at the telephone number
listed on your account statement.
PURCHASING SHARES BY CHECK
Once an account has been established, Shares may be purchased by mailing a check
made payable to the name of the Fund (designate class of Shares and account
number) to: Federated Shareholder Services Company, P.O. Box 8600, Boston, MA
02266-8600. Orders by mail are considered received when payment by check is
converted into federal funds (normally the business day after the check is
received).
SPECIAL PURCHASE FEATURES
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account at
an Automated Clearing House ("ACH") member and invested in the Fund at the net
asset value next determined after an order is received by the Fund, plus the
sales charge, if applicable. Shareholders should contact their financial
institution or the Fund to participate in this program.
RETIREMENT PLANS
Fund Shares can be purchased as an investment for retirement plans or for IRA
accounts. For further details contact the Fund and consult a tax adviser.
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EXCHANGE PRIVILEGE
CLASS A SHARES
Class A shareholders may exchange all or some of their Shares for Class A Shares
of other Federated Funds at net asset value. Neither the Fund nor any of the
Federated Funds imposes any additional fees on exchanges. Shareholders in
certain other Federated Funds may exchange all or some of their shares for Class
A Shares.
CLASS B SHARES
Class B shareholders may exchange all or some of their Shares for Class B Shares
of other Federated Funds. (Not all Federated Funds currently offer Class B
Shares. Contact your financial institution regarding the availability of Class B
Shares of the Federated Funds). Exchanges are made at net asset value without
being assessed a contingent deferred sales charge on the exchanged Shares. To
the extent that a shareholder exchanges Shares for Class B Shares in other
Federated Funds, the time for which the exchanged-for Shares are to be held will
be added to the time for which exchanged-from Shares were held for purposes of
satisfying the applicable holding period.
CLASS C SHARES
Class C shareholders may exchange all or some of their Shares for Class C Shares
of other Federated Funds at net asset value without a contingent deferred sales
charge. (Not all Federated Funds currently offer Class C Shares. Contact your
financial institution regarding the availability of Class C Shares of the
Federated Funds). To the extent that a shareholder exchanges Shares for Class C
Shares of other Federated Funds, the time for which the exchanged-for Shares are
to be held will be added to the time for which exchanged-from Shares were held
for purposes of satisfying the applicable holding period. For more information,
see "Contingent Deferred Sales Charge."
Please contact your financial institution directly or Federated Securities Corp.
at 1-800-341-7400 for information on and prospectuses for the Federated Funds
into which your Shares may be exchanged free of charge.
Shareholders of Class A Shares who have been designated as Liberty Life Members
are exempt from sales charges on future purchases in and exchanges between the
Class A Shares of any Federated Funds, as long as they maintain a $500 balance
in one of the Federated Funds.
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Shares having a net asset value
equal to the minimum investment requirements of the fund into which the exchange
is being made. Before the exchange, the shareholder must receive a prospectus of
the fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which the
Shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Shares submitted for exchange are redeemed and
proceeds invested in the same class of shares of the other fund. The exchange
privilege may be modified or terminated at any time. Shareholders will be
notified of the modification or termination of the exchange privilege.
TAX CONSEQUENCES
An exercise of the exchange privilege is treated as a sale for federal income
tax purposes. Depending upon the circumstances, a capital gain or loss may be
realized.
MAKING AN EXCHANGE
Instructions for exchanging may be given in writing or by telephone. Written
instructions may require a signature guarantee. Shareholders of the Fund may
have difficulty in making exchanges by telephone through brokers and other
financial institutions during times of drastic economic or market changes. If a
shareholder cannot contact his broker or financial institution by telephone, it
is recommended that an exchange request be made in writing and sent by overnight
mail to: Federated Shareholder Services Company, 1099 Hingham Street, Rockland,
Massachusetts 02370-3317.
TELEPHONE INSTRUCTIONS
Telephone instructions made by the investor may be carried out only if a
telephone authorization form completed by the investor is on file with the Fund.
If the instructions are given by a broker, a telephone authorization form
completed by the broker must be on file with the Fund. If reasonable procedures
are not followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. Shares may be exchanged between two funds by
telephone only if the two funds have identical shareholder registrations.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Shareholder Services Company, P.O. Box 8600, Boston,
Massachusetts 02266-8600 and deposited to the shareholder's account before being
exchanged. Telephone exchange instructions are recorded and will be binding upon
the shareholder. Such instructions will be processed as of 4:00 p.m. (Eastern
time) and must be received by the Fund before that time for Shares to be
exchanged the same day. Shareholders exchanging into a Fund will begin receiving
dividends the following business day. This privilege may be modified or
terminated at any time.
- --------------------------------------------------------------------------------
HOW TO REDEEM SHARES
Shares are redeemed at their net asset value, less any applicable contingent
deferred sales charge, next determined after the Fund receives the redemption
request. Redemptions will be made on days on which the Fund computes its net
asset value. Investors who redeem Class A Shares through a financial
intermediary may be charged a service fee by that financial intermediary.
Redemption requests must be received in proper form and can be made as described
below.
REDEEMING SHARES THROUGH YOUR FINANCIAL INSTITUTION
Shares of the Fund may be redeemed by calling your financial institution to
request the redemption. Shares will be redeemed at the net asset value, less any
applicable contingent deferred sales charge, next determined after the Fund
receives the redemption request from the financial institution. Redemption
requests through a registered broker/dealer must be received by the broker
before 4:00 p.m. (Eastern time) and must be transmitted by the broker to the
Fund before 5:00 p.m. (Eastern time) in order for Shares to be redeemed at that
day's net asset value. Redemption requests through other financial institutions
(such as banks) must be received by the financial institution and transmitted to
the Fund before 4:00 p.m. (Eastern time) in order for Shares to be redeemed at
that day's net asset value. The financial institution is responsible for
promptly submitting redemption requests and providing proper written redemption
instructions. Customary fees and commissions may be charged by the financial
institution for this service.
REDEEMING SHARES BY TELEPHONE
Shares may be redeemed in any amount by calling the Fund provided the Fund has a
properly completed authorization form. These forms can be obtained from
Federated Securities Corp. Proceeds will be mailed in the form of a check, to
the shareholder's address of record or wire-transfered to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. The minimum amount for a wire transfer is $1,000. Proceeds from redeemed
Shares purchased by check or through ACH will not be wired until that method of
payment has cleared. Proceeds from redemption requests received on holidays when
wire transfers are restricted will be wired the following business day.
Questions about telephone redemptions on days when wire transfers are restricted
should be directed to your client service representative at the telephone number
listed on your account statement.
Telephone instructions will be recorded. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. In the event of drastic economic or market
changes, a shareholder may experience difficulty in redeeming by telephone. If
this occurs, "Redeeming Shares By Mail" should be considered. If at any time the
Fund shall determine it necessary to terminate or modify the telephone
redemption privilege, shareholders would be promptly notified.
REDEEMING SHARES BY MAIL
Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, Fund Name, Fund Class, P.O. Box 8600, Boston, MA
02266-8600. If share certificates have been issued, they should be sent
unendorsed with the written request by registered or certified mail to the
address noted above.
The written request should state: Fund Name and the Share Class name; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount requested. All owners of the account
must sign the request exactly as the Shares are registered. Normally, a check
for the proceeds is mailed within one business day, but in no event more than
seven days, after the receipt of a proper written redemption request. Dividends
are paid up to and including the day that a redemption request is processed.
Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Fund or a redemption payable other than to
the shareholder of record must have their signatures guaranteed by a commercial
or savings bank, trust company, or savings association whose deposits are
insured by an organization which is administered by the Federal Deposit
Insurance Corporation; a member firm of a domestic stock exchange; or any other
"eligible guarantor institution," as defined in the Securities Act of 1934. The
Fund does not accept signatures guaranteed by a notary public.
SPECIAL REDEMPTION FEATURES
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount not less
than $100 may take advantage of the Systematic Withdrawal Program. Under this
program, Shares are redeemed to provide for periodic withdrawal payments in an
amount directed by the shareholder.
Depending upon the amount of the withdrawal payments, the amount of dividends
paid and capital gains distributions with respect to Shares, and the fluctuation
of the net asset value of Shares redeemed under this program, redemptions may
reduce, and eventually deplete, the shareholder's investment in the
Fund. For this reason, payments under this program should not be considered as
yield or income on the shareholder's investment in the Fund. To be eligible to
participate in this program, a shareholder must have an account value of at
least $10,000. A shareholder may apply for participation in this program through
his financial institution. Due to the fact that Class A Shares are sold with a
sales charge, it is not advisable for shareholders to continue to purchase Class
A Shares while participating in this program. A contingent deferred sales charge
may be imposed on Class B Shares and Class C Shares.
CONTINGENT DEFERRED SALES CHARGE
Shareholders may be subject to a contingent deferred sales charge upon
redemption of their Shares under the following circumstances:
CLASS A SHARES
Class A Shares purchased under a periodic special offering with the proceeds of
a redemption of Shares of an unaffiliated investment company purchased or
redeemed with a sales charge and not distributed by Federated Securities Corp.
may be charged a contingent deferred sales charge of .50% for redemptions made
within one full year of purchase. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the redeemed
Shares at the time of purchase or the net asset value of the redeemed Shares at
the time of redemption.
CLASS B SHARES
Shareholders redeeming Class B Shares from their Fund accounts within six full
years of the purchase date of those Shares will be charged a contingent deferred
sales charge by the Fund's distributor. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the redeemed
Shares at the time of redemption in accordance with the following schedule:
<TABLE>
<CAPTION>
YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
<S> <C>
First 5.50%
Second 4.75%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and thereafter 0.00%
</TABLE>
CLASS C SHARES
Shareholders redeeming Class C Shares from their Fund accounts within one full
year of the purchase date of those Shares will be charged a contingent deferred
sales charge by the Fund's distributor of 1.00%. Any applicable contingent
deferred sales charge will be imposed on the lesser of the net asset value of
the redeemed Shares at the time of purchase or the net asset value of the
redeemed Shares at the time of redemption.
CLASS A SHARES, CLASS B SHARES, AND CLASS C SHARES
The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. The contingent deferred sales charge will not be imposed with
respect to: (1) Shares acquired through the reinvestment of dividends or
distributions of long-term capital gains; and (2) Shares held for more than six
full years from the date of purchase with respect to Class B Shares and one full
year from the date of purchase with respect to Class C Shares and applicable
Class A Shares. Redemptions will be processed in a manner intended to maximize
the amount of redemption which will not be subject to a contingent deferred
sales charge. In computing the amount of the applicable contingent deferred
sales charge, redemptions are deemed to have
occurred in the following order: (1) Shares acquired through the reinvestment of
dividends and long-term capital gains; (2) Shares held for more than six full
years from the date of purchase with respect to Class B Shares and one full year
from the date of purchase with respect to Class C Shares and applicable Class A
Shares; (3) Shares held for fewer than six years with respect to Class B Shares
and for less than one full year from the date of purchase with respect to Class
C Shares and applicable Class A Shares on a first-in, first-out basis. A
contingent deferred sales charge is not assessed in connection with an exchange
of Fund Shares for Shares of other Federated Funds in the same class (see
"Exchange Privilege"). Any contingent deferred sales charge imposed at the time
the exchanged-for Shares are redeemed is calculated as if the shareholder had
held the Shares from the date on which he became a shareholder of the
exchanged-from Shares. Moreover, the contingent deferred sales charge will be
eliminated with respect to certain redemptions (see "Elimination of Contingent
Deferred Sales Charge").
ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will be eliminated with respect to the
following redemptions: (1) redemptions following the death or disability, as
defined in Section 72(m)(7) of the Internal Revenue Code of 1986, of a
shareholder; (2) redemptions representing minimum required distributions from an
Individual Retirement Account or other retirement plan to a shareholder who has
attained the age of 70-1/2; and (3) involuntary redemptions by the Fund of
Shares in shareholder accounts that do not comply with the minimum balance
requirements. No contingent deferred sales charge will be imposed on redemptions
of Shares held by Directors, employees and sales representatives of the Fund,
the distributor, or affiliates of the Fund or distributor, and their immediate
family members; employees of any financial institution that sells Shares of the
Fund pursuant to a sales agreement with the distributor; and spouses and
children under the age of 21 of the aforementioned persons. Finally, no
contingent deferred sales charge will be imposed on the redemption of Shares
originally purchased through a bank trust department, an investment adviser
registered under the Investment Advisers Act of 1940 or retirement plans where
the third party administrator has entered into certain arrangements with
Federated Securities Corp. or its affiliates, or any other financial
institution, to the extent that no payments were advanced for purchases made
through such entities. The Directors reserve the right to discontinue
elimination of the contingent deferred sales charge. Shareholders will be
notified of such elimination. Any Shares purchased prior to the termination of
such waiver would have the contingent deferred sales charge eliminated as
provided in the Fund's prospectus at the time of the purchase of the Shares. If
a shareholder making a redemption qualifies for an elimination of the contingent
deferred sales charge, the shareholder must notify Federated Securities Corp. or
the transfer agent in writing that he is entitled to such elimination.
- --------------------------------------------------------------------------------
ACCOUNT AND SHARE INFORMATION
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Shareholder Services Company maintains
a share account for each shareholder. Share certificates are not issued unless
requested in writing to Federated Shareholder Services Company.
Detailed confirmations of each purchase and 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. Dividends and distributions are automatically
reinvested in additional Shares of the Fund on payment dates at the ex-dividend
date net asset value without a sales charge, unless shareholders request cash
payments on the new account form or by writing to the transfer agent. 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
Net long-term capital gains realized by the Fund, if any, will be distributed at
least once every twelve months.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, except retirement plans, and pay the proceeds to
the shareholder if the account balance falls below the Class A Shares required
minimum value of $500 or the required minimum value of $1,500 for Class B Shares
and Class C Shares. This requirement does not apply, however, if the balance
falls below the required minimum value because of changes in the net asset value
of the respective Share class. 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.
- --------------------------------------------------------------------------------
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 Adviser receives an annual investment advisory fee equal to .55% 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. Under the investment advisory contract which provides for the voluntary
waiver and reimbursement of expenses by the Adviser, 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 reimbursement of expenses at
any time at its sole discretion. The Adviser has also undertaken to reimburse
the Fund for operating expenses in excess of limitations established by certain
states.
ADVISER'S BACKGROUND
Federated 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. With over $80 billion invested across more than 250 funds
under management and/or administration by its subsidiaries, as of December 31,
1995, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 1,800 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,000 financial institutions nationwide. More
than 100,000 investment professionals have selected Federated funds for their
clients.
Both the Fund and the Adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require
preclearance and periodic reporting of personal securities transactions;
prohibit personal transactions in securities being purchased or sold, or being
considered for purchase or sale by the Fund; prohibit purchasing securities in
initial public offerings; and prohibit taking profits on securities held for
less than sixty days. Violations of the codes are subject to review by the
Directors and could result in severe penalties.
PORTFOLIO MANAGERS' BACKGROUND
Christopher H. Wiles has been the Fund's portfolio manager since May 1996 and is
responsible for the overall allocation of the assets between fixed income and
equity. Mr. Wiles also manages the equity portion of the Fund. Mr. Wiles joined
Federated Investors in 1990 and has been a Vice President of the Fund's
investment adviser since 1992. Mr. Wiles served as Assistant Vice President of
the Fund's investment adviser in 1991. Mr. Wiles is a Chartered Financial
Analyst and received his M.B.A. in Finance from Cleveland State University.
Joseph M. Balestrino has been the Fund's co-portfolio manager since May 1996 and
is responsible for managing the allocation of fixed income assets (between
investment grade and high yield). Mr. Balestrino also manages the investment
grade portion of the Fund. Mr. Balestrino joined Federated Investors in 1986 and
has been a Vice President of the Fund's investment adviser since 1995. Mr.
Balestrino served as an Assistant Vice President of the investment adviser from
1991 to 1995. Mr. Balestrino is a Chartered Financial Analyst and received his
Master's Degree in Urban and Regional Planning from the University of
Pittsburgh.
Mark E. Durbiano has been the Fund's sub-portfolio manager since May 1996 and is
responsible for managing the high yield portion of the Fund. Mr. Durbiano joined
Federated Investors in 1982 and has been a Senior Vice President of the Fund's
investment adviser since January 1996. From 1988 through 1995, Mr. Durbiano was
a Vice President of the Fund's investment adviser. Mr. Durbiano is a Chartered
Financial Analyst and received his M.B.A. in Finance from the University of
Pittsburgh.
Scott B. Schermerhorn has been the Fund's portfolio manager since July 1996. Mr.
Schermerhorn joined Federated Investors in 1996 as a Vice President of the
Fund's investment adviser. From 1990 through 1996, Mr. Schermerhorn was a Senior
Vice President and Senior Investment Officer at J W Seligman & Co., Inc. Mr.
Schermerhorn received his M.B.A. in Finance and International Business from
Seton Hall University.
DISTRIBUTION OF SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
Federated Securities Corp. is located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. It is a Pennsylvania corporation organized on November
14, 1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.
State securities laws may require certain financial institutions such as
depository institutions to register as dealers.
The distributor may offer to pay financial institutions an amount up to 1% of
the net asset value of Class C Shares purchased by their clients or customers at
the time of purchase. These payments will be made directly by the distributor
from its assets, and will not be made from assets of the Fund. Financial
institutions may elect to waive the initial payment described above; such waiver
will result in the waiver by the Fund of the otherwise applicable contingent
deferred sales charge.
The distributor will pay dealers an amount equal to 5.50% of the net asset value
of Class B Shares purchased by their clients or customers.
These payments will be made directly by the distributor from its assets, and
will not be made from the assets of the Fund. Dealers may voluntarily waive
receipt of all or any portion of these payments. The distributor may pay a
portion of the distribution fee discussed below to financial institutions that
waive all or any portion of the advance payments.
DISTRIBUTION PLAN AND
SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Investment Company Act Rule
12b-1 (the "Distribution Plan"), Class A Shares, Class B Shares, and Class C
Shares may pay a fee to the distributor in an amount computed at an annual rate
of .25%, .75%, and .75%, respectively, of the average daily net assets of each
class of Shares to finance any activity which is principally intended to result
in the sale of Shares subject to the Distribution Plan. For Class C Shares, the
distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers to provide
sales services or distribution-related support services as agents for their
clients or customers. With respect to Class B Shares, because distribution fees
to be paid by the Fund to the distributor may not exceed an annual rate of .75%
of each class of Shares' average daily net assets, it will take the distributor
a number of years to recoup the expenses it has incurred for its distribution
and distribution-related services pursuant to the Plan. The Fund is not
currently making payments for Class A Shares under the Distribution Plan, nor
does it anticipate doing so in the immediate future.
The Distribution Plan is a compensation type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by Shares
under the Distribution Plan.
In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments up to .25% of the average daily net asset value of
Class A Shares, Class B Shares, and Class C Shares to obtain certain personal
services for shareholders and for the maintenance of shareholder accounts
("Shareholder Services"). Under the Shareholder Services Agreement, Federated
Shareholder Services will either perform Shareholder Services directly or will
select financial institutions to perform Shareholder Services. Financial
institutions will receive fees based upon Shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Fund and Federated Shareholder
Services.
SUPPLEMENTAL PAYMENTS TO
FINANCIAL INSTITUTIONS
Federated Securities Corp. will pay financial institutions, at the time of
purchase of Class A Shares, an amount equal to .50% of the net asset value of
Class A Shares purchased by their clients or customers under certain qualified
retirement plans as approved by Federated Securities Corp. (Such payments are
subject to a reclaim from the financial institution should the assets leave the
program within 12 months after purchase).
Furthermore, with respect to Class A Shares, Class B Shares, and Class C Shares,
in addition to payments made pursuant to the Distribution Plan and Sharesholder
Services Agreement, Federated Securities Corp. and Federated
Shareholder Services, from their own assets, may offer to pay to financial
institutions supplemental fees for the performance of substantial sales
services, distribution-related support services, or Shareholder Services. The
support may include sponsoring sales, educational and training seminars for
their employees, providing sales literature, and engineering computer software
programs that emphasize the attributes of the Fund. Such assistance will be
predicated upon the amount of Shares the financial institution sells or may
sell, and/or upon the type and nature of sales or marketing support furnished by
the financial institution. Any payments made by the distributor may be
reimbursed by the Adviser or its affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all Federated Funds as specified below:
<TABLE>
<CAPTION>
MAXIMUM
ADMINISTRATIVE FEE AVERAGE AGGREGATE DAILY NET ASSETS
<C> <S>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.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 Services Company may choose voluntarily to waive a portion of its fee.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. 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.
EXPENSES OF THE FUND AND SHARES
Holders of Class A Shares, Class B Shares, and Class C Shares pay their
allocable portion of Fund and portfolio expenses.
The Fund expenses for which holders of Class A Shares, Class B Shares, and Class
C Shares pay their allocable portion include, but are not limited to: the cost
of organizing the Fund and continuing its existence; registering the Fund with
federal and state securities authorities; Directors' fees; auditors' fees; the
cost of meetings of Directors; legal fees of the Fund; association membership
dues; and such non-recurring and extraordinary items as may arise from time to
time.
The portfolio expenses for which holders of Class A Shares, Class B Shares, and
Class C Shares pay their allocable portion include, but are not limited to:
registering the portfolio and Shares of the portfolio; investment advisory
services; taxes and commissions; custodian fees; insurance premiums; auditors'
fees; and such non-recurring and extraordinary items as may arise from time to
time.
At present, the only expenses which are allocated specifically to Class A
Shares, Class B Shares, and Class C Shares as classes are expenses under the
Fund's Distribution Plan
and fees for Shareholder Services. However, the Directors reserve the right to
allocate certain other expenses to holders of Class A Shares, Class B Shares,
and Class C Shares as it deems appropriate ("Class Expenses"). In any case,
Class Expenses would be limited to: transfer agent fees as identified by the
transfer agent as attributable to holders of Class A Shares, Class B Shares, and
Class C Shares; printing and postage expenses related to preparing and
distributing materials such as shareholder reports, prospectuses and proxies to
current shareholders; registration fees paid to the Securities and Exchange
Commission and registration fees paid to state securities commissions; expenses
related to administrative personnel and services as required to support holders
of Class A Shares, Class B Shares, and Class C Shares; legal fees relating
solely to Class A Shares, Class B Shares, and Class C Shares and Directors' fees
incurred as a result of issues relating solely to Class A Shares, Class B
Shares, and Class C Shares.
- --------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Director elections and
other matters submitted to shareholders for vote. All Shares of each portfolio
in the Fund have equal voting rights, except that in matters affecting only a
particular portfolio or class, only shares of that portfolio or class are
entitled to vote.
As a Maryland corporation, the 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 Directors or by shareholders at a special meeting. A
special meeting of shareholders shall be called by the Directors upon the
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 of 1986, as amended (the "Code") applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional Shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held their Shares. No federal income tax is due on
any dividends earned in an IRA or qualified retirement plan until distributed,
so long as such IRA or qualified retirement plan meets the applicable
requirements of the Code.
STATE AND LOCAL TAXES
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 its total return and yield for each class
of Shares.
Total return represents the change, over a specified period of time, in the
value of an investment in each class of Shares after reinvesting all income and
capital gains distributions. It is calculated by dividing that change by the
initial investment and is expressed as a percentage.
The yield of each class of Shares is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by each class of Shares over a thirty-day period by the maximum offering price
per share of each class 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 each class of Shares, and, therefore, may not
correlate to the dividends or other distributions paid to shareholders.
The performance information reflects the effect of non-recurring charges such as
the maximum sales charge or contingent deferred sales charge, which, if
excluded, would increase the total return and yield.
Total return and yield will be calculated separately for Class A Shares, Class B
Shares, and Class C Shares.
From time to time, advertisements for Class A Shares, Class B Shares, and Class
C Shares of the Fund may refer to ratings, rankings, and other information in
certain financial publications and/or compare the performance of Class A Shares,
Class B Shares, and Class C Shares to certain indices.
- --------------------------------------------------------------------------------
APPENDIX
STANDARD & POOR'S RATINGS GROUP ("S&P") CORPORATE BOND RATING DEFINITIONS
AAA--Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB, B, CCC, CC--Debt rated "BB", "B", "CCC", and "CC" is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposures to adverse
conditions.
CI--The rating "CI" is reversed for income bonds on which no interest is being
paid.
D--Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING DEFINITIONS
AAA--Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or 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 near future.
BAA--Bonds which are rated "Baa" are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time.
Such bonds lack outstanding investment characteristics and, in fact, have
speculative characteristics as well.
BA--Bonds which are "Ba" are judged to have speculative elements; their future
cannot be considered well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds which are rated "B" generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA--Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA--Bonds which are "Ca" represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated "C" are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
FITCH INVESTORS SERVICE, INC. INVESTMENT GRADE BOND RATING DEFINITIONS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+."
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered 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 economicc conditions and circumstances, however,
are more likely to have adverse impact on these bonds, and therefore impair
timely payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D--Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D" represents
the lowest potential for recovery.
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ------------- --------------------------------------------------------------------------------- --------------
<C> <S> <C>
COMMON STOCKS--41.6%
- ------------------------------------------------------------------------------------------------
CONSUMER DURABLES--2.1%
---------------------------------------------------------------------------------
16,200 Eastman Kodak Co. $ 1,014,525
---------------------------------------------------------------------------------
33,500 Mattel, Inc. 963,125
---------------------------------------------------------------------------------
37,600 Volvo, ADR 855,400
--------------------------------------------------------------------------------- --------------
Total 2,833,050
--------------------------------------------------------------------------------- --------------
CONSUMER NON-DURABLES--3.7%
---------------------------------------------------------------------------------
14,100 Avon Products, Inc. 1,002,863
---------------------------------------------------------------------------------
21,200 IBP, Inc. 1,269,350
---------------------------------------------------------------------------------
19,700 Philip Morris Cos., Inc. 1,664,650
---------------------------------------------------------------------------------
8,100 RJR Nabisco Holdings Corp. 249,075
---------------------------------------------------------------------------------
24,100 Reebok International Ltd. 819,400
--------------------------------------------------------------------------------- --------------
Total 5,005,338
--------------------------------------------------------------------------------- --------------
CONSUMER SERVICES--0.4%
---------------------------------------------------------------------------------
9,800 Gannett Co., Inc. 532,875
--------------------------------------------------------------------------------- --------------
ELECTRONIC TECHNOLOGY--5.4%
---------------------------------------------------------------------------------
14,600 Hewlett-Packard Co. 1,352,325
---------------------------------------------------------------------------------
15,500 Intel Corp. 1,083,062
---------------------------------------------------------------------------------
10,000 International Business Machines Corp. 972,500
---------------------------------------------------------------------------------
15,100 (a)Litton Industries, Inc. 598,338
---------------------------------------------------------------------------------
22,900 Lockheed Martin Corp. 1,560,063
---------------------------------------------------------------------------------
14,800 Raytheon Co. 645,650
---------------------------------------------------------------------------------
25,400 Rockwell International Corp. 1,130,300
--------------------------------------------------------------------------------- --------------
Total 7,342,238
--------------------------------------------------------------------------------- --------------
</TABLE>
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ------------- --------------------------------------------------------------------------------- --------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
- ------------------------------------------------------------------------------------------------
ENERGY MINERALS--2.7%
---------------------------------------------------------------------------------
21,700 Chevron Corp. $ 1,014,475
---------------------------------------------------------------------------------
12,100 Exxon Corp. 924,137
---------------------------------------------------------------------------------
27,600 Occidental Petroleum Corp. 593,400
---------------------------------------------------------------------------------
15,200 Texaco, Inc. 1,035,500
--------------------------------------------------------------------------------- --------------
Total 3,567,512
--------------------------------------------------------------------------------- --------------
FINANCE--8.1%
---------------------------------------------------------------------------------
27,749 Allstate Corp. 1,019,776
---------------------------------------------------------------------------------
14,900 American Express Co. 605,313
---------------------------------------------------------------------------------
20,800 Bank of Boston Corp. 925,600
---------------------------------------------------------------------------------
10,200 CIGNA Corp. 1,011,075
---------------------------------------------------------------------------------
15,000 Chemical Banking Corp. 853,125
---------------------------------------------------------------------------------
22,200 Citicorp 1,440,225
---------------------------------------------------------------------------------
18,714 Dean Witter, Discover & Co. 931,021
---------------------------------------------------------------------------------
8,400 First Interstate Bancorp 1,083,600
---------------------------------------------------------------------------------
26,600 Mellon Bank Corp. 1,333,325
---------------------------------------------------------------------------------
18,000 Providian Corp. 706,500
---------------------------------------------------------------------------------
18,866 Travelers Group, Inc. 952,733
--------------------------------------------------------------------------------- --------------
Total 10,862,293
--------------------------------------------------------------------------------- --------------
HEALTH SERVICES--0.5%
---------------------------------------------------------------------------------
12,800 Smithkline Beecham Corp., ADR 664,000
--------------------------------------------------------------------------------- --------------
HEALTH TECHNOLOGY--3.4%
---------------------------------------------------------------------------------
11,900 American Home Products Corp. 1,054,638
---------------------------------------------------------------------------------
18,900 Becton, Dickinson & Co. 1,228,500
---------------------------------------------------------------------------------
18,800 Bristol-Myers Squibb Co. 1,433,500
---------------------------------------------------------------------------------
</TABLE>
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ------------- --------------------------------------------------------------------------------- --------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
- ------------------------------------------------------------------------------------------------
HEALTH TECHNOLOGY--CONTINUED
---------------------------------------------------------------------------------
16,000 Merck & Co., Inc. $ 920,000
--------------------------------------------------------------------------------- --------------
Total 4,636,638
--------------------------------------------------------------------------------- --------------
INDUSTRIAL SERVICES--0.8%
---------------------------------------------------------------------------------
26,600 Baker Hughes, Inc. 522,025
---------------------------------------------------------------------------------
13,000 (a)Western Atlas, Inc. 570,375
--------------------------------------------------------------------------------- --------------
Total 1,092,400
--------------------------------------------------------------------------------- --------------
NON-ENERGY MINERALS--1.5%
---------------------------------------------------------------------------------
16,400 Aluminum Co. of America 836,400
---------------------------------------------------------------------------------
19,200 Phelps Dodge Corp. 1,216,800
--------------------------------------------------------------------------------- --------------
Total 2,053,200
--------------------------------------------------------------------------------- --------------
PROCESS INDUSTRIES--2.0%
---------------------------------------------------------------------------------
15,800 Du Pont (E.I.) de Nemours & Co. 985,525
---------------------------------------------------------------------------------
12,700 Eastman Chemical Co. 755,650
---------------------------------------------------------------------------------
34,300 Praxair, Inc. 926,100
--------------------------------------------------------------------------------- --------------
Total 2,667,275
--------------------------------------------------------------------------------- --------------
PRODUCER MANUFACTURING--5.0%
---------------------------------------------------------------------------------
17,300 (a)FMC Corp. 1,239,112
---------------------------------------------------------------------------------
21,200 General Electric Co. 1,340,900
---------------------------------------------------------------------------------
7,400 ITT Corp. 906,500
---------------------------------------------------------------------------------
7,900 Loews Corp. 1,158,338
---------------------------------------------------------------------------------
15,400 Philips Electronics N.V., ADR 594,825
---------------------------------------------------------------------------------
22,100 Textron, Inc. 1,519,375
--------------------------------------------------------------------------------- --------------
Total 6,759,050
--------------------------------------------------------------------------------- --------------
RETAIL TRADE--1.3%
---------------------------------------------------------------------------------
24,100 American Stores Co. 719,988
---------------------------------------------------------------------------------
</TABLE>
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ------------- --------------------------------------------------------------------------------- --------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
- ------------------------------------------------------------------------------------------------
RETAIL TRADE--CONTINUED
---------------------------------------------------------------------------------
29,900 Sears, Roebuck & Co. $ 1,016,600
--------------------------------------------------------------------------------- --------------
Total 1,736,588
--------------------------------------------------------------------------------- --------------
TECHNOLOGY SERVICES--1.1%
---------------------------------------------------------------------------------
5,000 (a)DST Systems, Inc. 105,000
---------------------------------------------------------------------------------
28,100 General Motors Corp., Class E 1,324,212
--------------------------------------------------------------------------------- --------------
Total 1,429,212
--------------------------------------------------------------------------------- --------------
TRANSPORTATION--0.4%
---------------------------------------------------------------------------------
8,100 Consolidated Rail Corp. 556,875
--------------------------------------------------------------------------------- --------------
UTILITIES--3.2%
---------------------------------------------------------------------------------
23,500 AT&T Corp. 1,504,000
---------------------------------------------------------------------------------
8,500 CMS Energy Corp. 234,812
---------------------------------------------------------------------------------
13,900 (a)Columbia Gas System, Inc. 535,150
---------------------------------------------------------------------------------
15,700 Enron Corp. 539,687
---------------------------------------------------------------------------------
14,800 FPL Group, Inc. 619,750
---------------------------------------------------------------------------------
36,000 MCI Communications Corp. 897,750
--------------------------------------------------------------------------------- --------------
Total 4,331,149
--------------------------------------------------------------------------------- --------------
TOTAL COMMON STOCKS (IDENTIFIED COST $43,015,880) 56,069,693
--------------------------------------------------------------------------------- --------------
PREFERRED STOCKS--4.3%
- ------------------------------------------------------------------------------------------------
CONSUMER NON-DURABLES--1.0%
---------------------------------------------------------------------------------
203,800 RJR Nabisco Holdings Corp., Conv. Pfd., Series C, $.60 1,273,750
--------------------------------------------------------------------------------- --------------
FINANCE--1.6%
---------------------------------------------------------------------------------
29,000 Merrill Lynch & Co., MTG, Inc., STRYPES, Series MGIC, $3.12 1,562,375
---------------------------------------------------------------------------------
9,700 Sunamerica, Inc., Conv. Pfd., Series E, $3.10 601,400
--------------------------------------------------------------------------------- --------------
Total 2,163,775
--------------------------------------------------------------------------------- --------------
</TABLE>
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
- ------------- --------------------------------------------------------------------------------- --------------
<C> <S> <C>
PREFERRED STOCKS--CONTINUED
- ------------------------------------------------------------------------------------------------
PRODUCER MANUFACTURING--1.7%
---------------------------------------------------------------------------------
168,200 Westinghouse Electric Corp., PEPS, Series C, $1.30 $ 2,350,931
--------------------------------------------------------------------------------- --------------
TOTAL PREFERRED STOCKS (IDENTIFIED COST $6,233,439) 5,788,456
--------------------------------------------------------------------------------- --------------
CORPORATE BONDS--13.9%
- ------------------------------------------------------------------------------------------------
CONSUMER DURABLES--1.1%
---------------------------------------------------------------------------------
$ 1,000,000 Chrysler Auburn Hills, Deb., 12.00%, 5/1/2020 1,504,770
--------------------------------------------------------------------------------- --------------
CONSUMER NON-DURABLES--0.9%
---------------------------------------------------------------------------------
1,281,000 Philip Morris Cos., Inc., Deb., 6.00%, 7/15/2001 1,244,620
--------------------------------------------------------------------------------- --------------
EDUCATION--0.8%
---------------------------------------------------------------------------------
1,000,000 Harvard University, Deb., 8.125%, 4/15/2007 1,126,680
--------------------------------------------------------------------------------- --------------
ENERGY MINERALS--1.5%
---------------------------------------------------------------------------------
1,000,000 Exxon Capital Corp., Deb., 7.875%, 4/15/1996 1,009,460
---------------------------------------------------------------------------------
1,000,000 Occidental Petroleum Corp., Sr. Note, 11.75%, 3/15/2011 1,070,350
--------------------------------------------------------------------------------- --------------
Total 2,079,810
--------------------------------------------------------------------------------- --------------
FINANCE--5.8%
---------------------------------------------------------------------------------
1,000,000 American General Corp., S.F. Deb., 9.625%, 2/1/2018 1,099,910
---------------------------------------------------------------------------------
1,250,000 CNA Financial Corp., Deb., 7.25%, 11/15/2023 1,187,300
---------------------------------------------------------------------------------
1,300,000 Equitable Cos., Inc., Sr. Note, 9.00%, 12/15/2004 1,488,526
---------------------------------------------------------------------------------
1,000,000 Ford Motor Credit Co., Note, 6.85%, 8/15/2000 1,021,140
---------------------------------------------------------------------------------
1,000,000 Lehman Brothers Holdings, Inc., Note, 5.04%, 12/15/1996 986,090
---------------------------------------------------------------------------------
1,000,000 Norwest Financial, Inc., Note, 6.23%, 9/1/1998 1,006,490
---------------------------------------------------------------------------------
1,000,000 Santander Finance Issuance, Bank Guarantee, 7.875%, 4/15/2005 1,070,110
--------------------------------------------------------------------------------- --------------
Total 7,859,566
--------------------------------------------------------------------------------- --------------
HEALTH SERVICES--0.9%
---------------------------------------------------------------------------------
1,000,000 Columbia/HCA Healthcare Corp., Note, 9.00%, 12/15/2014 1,193,430
--------------------------------------------------------------------------------- --------------
</TABLE>
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------- --------------------------------------------------------------------------------- --------------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
- ------------------------------------------------------------------------------------------------
PRODUCER MANUFACTURING--0.8%
---------------------------------------------------------------------------------
$ 1,000,000 General Electric Co., Deb., 7.875%, 5/1/1996 $ 1,009,700
--------------------------------------------------------------------------------- --------------
RETAIL TRADE--0.8%
---------------------------------------------------------------------------------
1,000,000 Penney (J.C.) Co., Inc., Deb., 9.45%, 7/15/2002 1,125,790
--------------------------------------------------------------------------------- --------------
SOVEREIGN GOVERNMENT--0.5%
---------------------------------------------------------------------------------
500,000 Kingdom of Sweden, Deb., 10.25%, 11/1/2015 652,210
--------------------------------------------------------------------------------- --------------
UTILITIES--0.8%
---------------------------------------------------------------------------------
1,000,000 Michigan Bell Telephone Co., Deb., 7.85%, 1/15/2022 1,108,830
--------------------------------------------------------------------------------- --------------
TOTAL CORPORATE BONDS (IDENTIFIED COST $22,777,371) 18,905,406
--------------------------------------------------------------------------------- --------------
COLLATERALIZED MORTGAGE OBLIGATIONS--0.7%
- ------------------------------------------------------------------------------------------------
1,000,000 Prudential Home Mortgage Security 1993-32, Class A-6, 7.50%,
10/25/2022 996,950
--------------------------------------------------------------------------------- --------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (IDENTIFIED COST $957,500) 996,950
--------------------------------------------------------------------------------- --------------
GOVERNMENT OBLIGATIONS--21.7%
- ------------------------------------------------------------------------------------------------
GOVERNMENT AGENCIES SECURITIES--1.7%
---------------------------------------------------------------------------------
500,000 Federal Home Loan Bank System, Deb., 4.21%, 1/15/1998 472,460
---------------------------------------------------------------------------------
1,500,000 Federal Home Loan Mortgage Corp., Deb., 4.13%, 3/25/1996 1,488,105
---------------------------------------------------------------------------------
350,000 Federal National Mortgage Association, 5.86%, 6/1/1998 347,994
--------------------------------------------------------------------------------- --------------
Total 2,308,559
--------------------------------------------------------------------------------- --------------
MORTGAGE-BACKED SECURITIES--5.8%
---------------------------------------------------------------------------------
1,376,866 Federal Home Loan Mortgage Corp., Pool G50030, 8.50%, 8/1/1996 1,387,606
---------------------------------------------------------------------------------
183,621 Federal Home Loan Mortgage Corp., Pool M10771, 8.50%, 4/1/1996 185,053
---------------------------------------------------------------------------------
178,066 Federal Home Loan Mortgage Corp., Pool M10914, 8.50%, 5/1/1996 179,454
---------------------------------------------------------------------------------
190,312 Federal Home Loan Mortgage Corp., Pool M10975, 8.50%, 5/1/1996 191,796
---------------------------------------------------------------------------------
130,307 Federal Home Loan Mortgage Corp., Pool M11105, 8.50%, 6/1/1996 131,323
---------------------------------------------------------------------------------
100,063 Federal Home Loan Mortgage Corp., Pool M11145, 8.50%, 5/1/1996 100,843
---------------------------------------------------------------------------------
12,791 Federal Home Loan Mortgage Corp., Pool M11179, 8.50%, 6/1/1996 12,891
---------------------------------------------------------------------------------
</TABLE>
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------- --------------------------------------------------------------------------------- --------------
<C> <S> <C>
GOVERNMENT OBLIGATIONS--CONTINUED
- ------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES--CONTINUED
---------------------------------------------------------------------------------
$ 365,551 Federal Home Loan Mortgage Corp., Pool M11243, 8.50%, 7/1/1996 $ 368,403
---------------------------------------------------------------------------------
63,857 Federal Home Loan Mortgage Corp., Pool M11318, 8.50%, 7/1/1996 64,355
---------------------------------------------------------------------------------
7,278 Federal Home Loan Mortgage Corp., Pool M19004, 8.50%, 5/1/1997 7,335
---------------------------------------------------------------------------------
137,079 Federal Home Loan Mortgage Corp., Pool M90043, 8.50%, 4/1/1996 138,148
---------------------------------------------------------------------------------
108,107 Federal Home Loan Mortgage Corp., Pool M90048, 8.50%, 5/1/1996 108,950
---------------------------------------------------------------------------------
647,233 Federal National Mortgage Association, Pool 124009, 9.00%, 11/1/2021 676,352
---------------------------------------------------------------------------------
902,775 Federal National Mortgage Association, Pool 50659, 7.00%, 11/1/2007 895,427
---------------------------------------------------------------------------------
37,065 Federal National Mortgage Association, Pool 50796, 7.50%, 9/1/2023 37,470
---------------------------------------------------------------------------------
433,038 Government National Mortgage Association, Pool 299165, 9.50%,
12/15/2020 462,532
---------------------------------------------------------------------------------
936,003 Government National Mortgage Association, Pool 369457, 8.00%,
9/15/2024 963,484
---------------------------------------------------------------------------------
996,068 Government National Mortgage Association, Pool 385622, 6.50%,
5/15/2024 968,348
---------------------------------------------------------------------------------
861,076 Government National Mortgage Association, Pool 392923, 9.50%,
2/15/2025 919,724
--------------------------------------------------------------------------------- --------------
Total 7,799,494
--------------------------------------------------------------------------------- --------------
TREASURY SECURITIES--14.2%
---------------------------------------------------------------------------------
4,000,000 United States Treasury Bond, 11.625%, 11/15/2004 5,534,080
---------------------------------------------------------------------------------
3,540,000 United States Treasury Bond, 7.25%, 5/15/2016 3,882,884
---------------------------------------------------------------------------------
6,460,000 United States Treasury Bond, 8.875%, 2/15/2019 8,349,550
---------------------------------------------------------------------------------
1,070,000 United States Treasury Bond, 9.375%, 2/15/2006 1,337,532
--------------------------------------------------------------------------------- --------------
Total 19,104,046
--------------------------------------------------------------------------------- --------------
TOTAL GOVERNMENT OBLIGATIONS (IDENTIFIED COST $21,385,708) 29,212,099
--------------------------------------------------------------------------------- --------------
</TABLE>
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------- --------------------------------------------------------------------------------- --------------
<C> <S> <C>
(B) REPURCHASE AGREEMENT--16.3%
- ------------------------------------------------------------------------------------------------
$ 21,975,000 J.P. Morgan Securities, Inc., 5.90%, dated 10/31/1995, due 11/1/1995 (at
amortized cost) $ 21,975,000
--------------------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (IDENTIFIED COST $116,344,898)(C) $ 132,947,604
--------------------------------------------------------------------------------- --------------
</TABLE>
(a) Non-income producing security.
(b) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated Funds.
(c) The cost of investments for federal tax purposes amounts to $116,344,898.
The net unrealized appreciation of investments on a federal tax basis
amounts to $16,602,706 which is comprised of $17,394,200 appreciation and
$791,494 depreciation at October 31, 1995.
Note: The categories of investments are shown as a percentage of net assets
($134,668,796) at October 31, 1995.
The following acronyms are used throughout this portfolio:
ADR--American Depository Receipt
PEPS--Participating Equity Preferred Stock
STRYPES--Structured Yield Product Exchangeable for Stock
(See Notes which are an integral part of the Financial Statements)
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ----------------------------------------------------------------------------------
Investments in repurchase agreement $ 21,975,000
- ----------------------------------------------------------------------------------
Investments in securities 110,972,604
- ---------------------------------------------------------------------------------- -------------
Total investments in securities, at value
(identified and tax cost $116,344,898) $ 132,947,604
- -------------------------------------------------------------------------------------------------
Income receivable 1,089,338
- -------------------------------------------------------------------------------------------------
Receivable for investments sold 1,770,297
- -------------------------------------------------------------------------------------------------
Receivable for shares sold 112,674
- -------------------------------------------------------------------------------------------------
Prepaid expenses 7,392
- ------------------------------------------------------------------------------------------------- --------------
Total assets 135,927,305
- -------------------------------------------------------------------------------------------------
LIABILITIES:
- ----------------------------------------------------------------------------------
Payable for investments purchased 979,154
- ----------------------------------------------------------------------------------
Payable for shares redeemed 109,042
- ----------------------------------------------------------------------------------
Payable to Bank 113,014
- ----------------------------------------------------------------------------------
Accrued expenses 57,299
- ---------------------------------------------------------------------------------- -------------
Total liabilities 1,258,509
- ------------------------------------------------------------------------------------------------- --------------
NET ASSETS for 7,327,906 shares outstanding $ 134,668,796
- ------------------------------------------------------------------------------------------------- --------------
NET ASSETS CONSIST OF:
- -------------------------------------------------------------------------------------------------
Paid in capital $ 106,005,023
- -------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 16,602,706
- -------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments 9,527,064
- -------------------------------------------------------------------------------------------------
Undistributed net investment income 2,534,003
- ------------------------------------------------------------------------------------------------- --------------
Total Net Assets $ 134,668,796
- ------------------------------------------------------------------------------------------------- --------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
$134,668,796 / 7,327,906 shares outstanding $18.38
- ------------------------------------------------------------------------------------------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------------------
Dividends $ 1,580,455
- ---------------------------------------------------------------------------------------------------
Interest 4,530,147
- --------------------------------------------------------------------------------------------------- -------------
Total income 6,110,602
- ---------------------------------------------------------------------------------------------------
EXPENSES:
- -------------------------------------------------------------------------------------
Investment advisory fee $ 979,379
- -------------------------------------------------------------------------------------
Administrative personnel and services fee 125,000
- -------------------------------------------------------------------------------------
Custodian fees 45,676
- -------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 99,653
- -------------------------------------------------------------------------------------
Directors'/Trustees' fees 9,666
- -------------------------------------------------------------------------------------
Auditing fees 16,445
- -------------------------------------------------------------------------------------
Legal fees 12,377
- -------------------------------------------------------------------------------------
Portfolio accounting fees 41,369
- -------------------------------------------------------------------------------------
Shareholder services fee 320,244
- -------------------------------------------------------------------------------------
Share registration costs 23,736
- -------------------------------------------------------------------------------------
Printing and postage 56,085
- -------------------------------------------------------------------------------------
Insurance premiums 3,986
- -------------------------------------------------------------------------------------
Taxes 19,719
- -------------------------------------------------------------------------------------
Miscellaneous 4,364
- ------------------------------------------------------------------------------------- ------------
Total expenses 1,757,699
- -------------------------------------------------------------------------------------
Waivers--
- ------------------------------------------------------------------------
Waiver of investment advisory fee $(215,192)
- ------------------------------------------------------------------------
Waiver of shareholder services fee (178,558)
- ------------------------------------------------------------------------ -----------
Total waivers (393,750)
- ------------------------------------------------------------------------------------- ------------
Net expenses 1,363,949
- --------------------------------------------------------------------------------------------------- -------------
Net investment income 4,746,653
- --------------------------------------------------------------------------------------------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------------------------
Net realized gain on investments 9,527,257
- ---------------------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments 7,067,004
- --------------------------------------------------------------------------------------------------- -------------
Net realized and unrealized gain on investments 16,594,261
- --------------------------------------------------------------------------------------------------- -------------
Change in net assets resulting from operations $ 21,340,914
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------------
1995 1994
- --------------------------------------------------------------------------------- -------------- --------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ---------------------------------------------------------------------------------
OPERATIONS--
- ---------------------------------------------------------------------------------
Net investment income $ 4,746,653 $ 3,988,625
- ---------------------------------------------------------------------------------
Net realized gain (loss) on investments ($9,527,257 and $1,349,184, respectively,
as computed for federal tax purposes) 9,527,257 1,349,184
- ---------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) 7,067,004 (5,913,664)
- --------------------------------------------------------------------------------- -------------- --------------
Change in net assets resulting from operations 21,340,914 (575,855)
- --------------------------------------------------------------------------------- -------------- --------------
NET EQUALIZATION (DEBITS) CREDITS-- (98,118) 26,597
- --------------------------------------------------------------------------------- -------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ---------------------------------------------------------------------------------
Distributions from net investment income:
- ---------------------------------------------------------------------------------
Class A Shares (4,670,579) (4,128,685)
- ---------------------------------------------------------------------------------
Class C Shares -- (13,593)
- ---------------------------------------------------------------------------------
Distributions from net realized gains (700,551) --
- --------------------------------------------------------------------------------- -------------- --------------
Change in net assets resulting from distributions
to shareholders (5,371,130) (4,142,278)
- --------------------------------------------------------------------------------- -------------- --------------
SHARE TRANSACTIONS--
- ---------------------------------------------------------------------------------
Proceeds from sale of shares 28,842,050 38,530,728
- ---------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of distributions
declared 3,810,223 2,833,419
- ---------------------------------------------------------------------------------
Cost of shares redeemed (39,237,007) (35,969,675)
- --------------------------------------------------------------------------------- -------------- --------------
Change in net assets resulting from share transactions (6,584,734) 5,394,472
- --------------------------------------------------------------------------------- -------------- --------------
Change in net assets 9,286,932 702,936
- ---------------------------------------------------------------------------------
NET ASSETS:
- ---------------------------------------------------------------------------------
Beginning of period 125,381,864 124,678,928
- --------------------------------------------------------------------------------- -------------- --------------
End of period (including undistributed net investment income of $2,534,003 and
$2,556,047, respectively) $ 134,668,796 $ 125,381,864
- --------------------------------------------------------------------------------- -------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1995
- --------------------------------------------------------------------------------
(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. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--Short-term securities with remaining maturities of
sixty days or less at the time of purchase may be valued at amortized cost,
which approximates fair market value. All other securities are valued at
prices provided by an independent pricing service.
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 under repurchase
agreement transactions. Additionally, procedures have been established by
the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be paid under the repurchase agreement
transaction.
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 the guidelines and/or
standards reviewed or established by the Directors. Risks may arise from
the potential inability of counterparties to honor the terms of the
repurchase agreement. Accordingly, the Fund could receive less than the
repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
Interest income and expenses are accrued daily. Bond premium and discount,
if applicable, are amortized as required by the Internal Revenue Code, as
amended (the "Code").
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
- --------------------------------------------------------------------------------
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 income. Accordingly, no
provisions for federal tax are necessary.
EQUALIZATION--The Fund follows the accounting practice known as
equalization, in which a portion of the proceeds from sales and costs of
redemptions of fund shares equivalent, on a per share basis, equal to the
amount of undistributed net investment income on the date of the
transaction, is credited or charged to undistributed net investment income.
As a result, undistributed net investment income per share is unaffected by
sales or redemptions of fund shares.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
OTHER--Investment transactions are accounted for on the trade date.
(3) CAPITAL STOCK
At October 31, 1995, 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 YEAR ENDED
OCTOBER 31, 1995 OCTOBER 31, 1994
-------------------------- ---------------------------
CLASS A SHARES SHARES DOLLARS SHARES DOLLARS
- ------------------------------------------------------- ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
Shares sold 1,746,255 $ 28,842,050 2,338,641 $ 37,487,658
- -------------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 233,136 3,810,223 174,458 2,825,356
- -------------------------------------------------------
Shares redeemed (2,369,562) (39,237,007) (2,181,393) (34,829,553)
- ------------------------------------------------------- ----------- ------------- ----------- --------------
Net change resulting from Class A share
transactions (390,171) (6,584,734) 331,706 $ 5,483,461
- ------------------------------------------------------- ----------- ------------- ----------- --------------
</TABLE>
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 1995 OCTOBER 31, 1994
------------------------ ------------------------
CLASS C SHARES SHARES DOLLARS SHARES DOLLARS
- ------------------------------------------------------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Shares sold -- -- 64,355 $ 1,043,070
- -------------------------------------------------------------
Shares issued to shareholders in payment of distributions
declared -- -- 497 8,063
- -------------------------------------------------------------
Shares redeemed -- -- (70,562) (1,140,122)
- ------------------------------------------------------------- --------- ------------- --------- -------------
Net change resulting from Class C share
transactions -- -- (5,710) ($ 88,989)
- ------------------------------------------------------------- --------- ------------- --------- -------------
Net change resulting from fund share
transactions (390,171) $ (6,584,734) 325,996 $ 5,394,472
- ------------------------------------------------------------- --------- ------------- --------- -------------
</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 (a) a maximum of .55 of 1% of the average daily net
assets of the Fund, and (b) 4.5% of the gross income of the Fund, excluding
capital gains or losses.
The Adviser may voluntarily choose to waive any portion of its fee and/or
reimburse certain operating expenses of the Fund. The Adviser can modify or
terminate this voluntary waiver and/or reimbursement at any time at its
sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. This 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.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services
Agreement with Federated Shareholder Services ("FSS"), the Fund will pay
FSS up to .25 of 1% of daily average net assets of the Fund for the period.
This fee is to obtain certain services for shareholders and to maintain
shareholder accounts. FSS may voluntarily choose to waive a portion of its
fee. FSS can modify or terminate this voluntary waiver at any time at its
sole discretion.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated
Services Company ("Fserv") serves as transfer and dividend disbursing agent
for the Fund. The fee is based on the size, type, and number of accounts
and transactions made by shareholders.
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
- --------------------------------------------------------------------------------
PORTFOLIO ACCOUNTING FEES--FServ maintains the Fund's accounting records
for which it receives a fee. The fee is based on the level of the Fund's
average daily net assets for the period, plus out-of-pocket expenses.
GENERAL--Certain of the Officers and Directors of the Corporation are
Officers and Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended October 31, 1995, were as follows:
<TABLE>
<S> <C>
PURCHASES $ 77,996,628
- -------------------------------------------------------------------------------------------------- --------------
SALES $ 105,043,890
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
FEDERATED STOCK AND BOND FUND, INC.:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Federated Stock and Bond Fund, Inc. (formerly,
Stock and Bond Fund, Inc.) as of October 31, 1995, the related statement of
operations for the year then ended, and the statement of changes in net assets
for the years October 31, 1995 and 1994, and the financial highlights (see page
4 ) for the periods presented. 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 audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
October 31, 1995, by correspondence with the custodian and broker. 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, the financial statements and financial highlights present
fairly, in all material respects, the financial position of Federated Stock and
Bond Fund, Inc. as of October 31, 1995, 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
Pittsburgh, Pennsylvania
December 15, 1995
(Revised June 27, 1996)
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Federated Stock and Bond Fund, Inc.
Class A Shares Federated Investors Tower
Class B Shares Pittsburgh, Pennsylvania 15222-3779
Class C Shares
- -----------------------------------------------------------------------------------------------------------------------
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 8600
Boston, Massachusetts 02266-8600
- -----------------------------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Shareholder Services Company P.O. Box 8600
Boston, Massachusetts 02266-8600
- -----------------------------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
FEDERATED STOCK AND
BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
CLASS A SHARES,
CLASS B SHARES,
CLASS C SHARES
PROSPECTUS
An Open-End, Diversified Management
Investment Company
August 29, 1996
Cusip 313911109
Cusip 313911208
Cusip 313911307
8012905 (8/96)
FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus for Class A Shares, Class B Shares, and Class C Shares and
the stand-alone prospectus for Class A shares of Federated Stock and
Bond Fund, Inc. (the "Fund"), each dated August 29, 1996. This
Statement is not a prospectus itself. You may request a copy of a
prospectus or a paper copy of this Statement of Additional Information,
if you have received it electronically, free of charge by calling
1-800-341-7400.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated August 29, 1996
FEDERATED INVESTORS
Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Securities Corp. is the distributor
of the Funds and is a subsidiary of
Federated Investors.
Cusip 313911109
Cusip 313911208
Cusip 313911307
8012905B (8/96)
GENERAL INFORMATION ABOUT THE FUND 2
INVESTMENT OBJECTIVES AND POLICIES 2
TYPES OF INVESTMENTS 2
CONVERTIBLE SECURITIES 1
INVESTMENTS IN MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES 1
FUTURES AND OPTIONS TRANSACTIONS 2
INVESTING IN FOREIGN CURRENCIES 3
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS 5
LENDING PORTFOLIO SECURITIES 5
REPURCHASE AGREEMENTS 5
REVERSE REPURCHASE AGREEMENTS 5
PORTFOLIO TURNOVER 5
INVESTMENT LIMITATIONS 6
FEDERATED STOCK AND BOND FUND, INC. MANAGEMENT 7
THE FUNDS 11
FUND OWNERSHIP 11
DIRECTORS COMPENSATION 12
DIRECTOR LIABILITY 12
INVESTMENT ADVISORY SERVICES 13
ADVISER TO THE FUND 13
ADVISORY FEES 13
BROKERAGE TRANSACTIONS 13
OTHER RELATED SERVICES 14
OTHER SERVICES 14
FUND ADMINISTRATION 14
CUSTODIAN AND PORTFOLIO ACCOUNTANT 14
TRANSFER AGENT 14
INDEPENDENT AUDITORS 14
PURCHASING SHARES 14
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES 14
PURCHASES BY SALES REPRESENTATIVES, FUND
DIRECTORS, AND EMPLOYEES 15
EXCHANGING SECURITIES FOR FUND SHARES 15
DETERMINING NET ASSET VALUE 15
DETERMINING MARKET VALUE OF SECURITIES 15
REDEEMING SHARES 16
REDEMPTION IN KIND 16
TAX STATUS 16
THE FUND'S TAX STATUS 16
SHAREHOLDERS' TAX STATUS 16
TOTAL RETURN 17
YIELD 17
PERFORMANCE COMPARISONS 17
ECONOMIC AND MARKET INFORMATION 18
DURATION 18
ABOUT FEDERATED INVESTORS 19
MUTUAL FUND MARKET 19
INSTITUTIONAL CLIENTS 19
TRUST ORGANIZATIONS 19
BROKER/DEALER AND BANK BROKER/DEALER
SUBSIDIARIES 20
GENERAL INFORMATION ABOUT THE FUND
The Fund was incorporated under the laws of the State of Maryland on
October 31, 1934. 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. At a meeting of the Board of
Directors (the `Directors'') held on February 26, 1996, the Directors
approved an amendment to the Articles of Incorporation to change the name
of Stock and Bond Fund, Inc. and to re-establish the Fund's offering of
separate classes of Shares by approving Class B Shares and Class C Shares.
Shares of the Fund are currently offered in three classes known as Class A
Shares, Class B Shares, and Class C Shares (individually and collectively
referred to as `Shares'' as the context may require). This Statement of
Additional Information relates to all classes of Shares of the Fund.
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. Unless
otherwise noted, investment policies and limitations may be changed by the
Directors without shareholder approval. Shareholders will be notified
before any material change occurs.
TYPES OF INVESTMENTS
The Fund invests in a diversified portfolio of domestic and foreign common
and preferred stocks and other equity securities, domestically-issued and
foreign-issued corporate and government debt obligations, mortgage-backed
and asset-backed securities, obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities, taxable municipal debt
obligations and repurchase agreements.
CONVERTIBLE SECURITIES
As with all fixed-income securities, various market forces influence the
market value of convertible securities, including changes in the level of
interest rates. As the level of interest rates increases, the market value
of convertible securities may decline and, conversely, as interest rates
decline, the market value of convertible securities may increase. The
unique investment characteristic of convertible securities, the right to be
exchanged for the issuer's common stock, causes the market value of
convertible securities to increase when the underlying common stock
increases. However, since securities prices fluctuate, there can be no
assurance of capital appreciation, and most convertible securities will not
reflect quite as much capital appreciation as their underlying common
stocks. When the underlying common stock is experiencing a decline, the
value of the convertible security tends to decline to a level approximating
the yield-to-maturity basis of straight nonconvertible debt of similar
quality, often called `investment value,'' and may not experience the same
decline as the underlying common stock.
Many convertible securities sell at a premium over their conversion values
(i.e., the number of shares of common stock to be received upon conversion
multiplied by the current market price of the stock). This premium
represents the price investors are willing to pay for the privilege of
purchasing a fixed-income security with a possibility of capital
appreciation due to the conversion privilege. If this appreciation
potential is not realized, the premium may not be recovered.
INVESTMENTS IN MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
Asset backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the
benefit of the same security interest in the related collateral. Credit
card receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, many
of which give such debtors the right to set off certain amounts owed on the
credit cards, thereby reducing the balance due. Most issuers of asset-
backed securities backed by motor vehicle installment purchase obligations
permit the servicer of such receivables to retain possession of the
underlying obligations. If the servicer sells these obligations to another
party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related asset-backed securities.
Further, if a vehicle is registered in one state and is then re-registered
because the owner and obligor moves to another state, such re-registration
could defeat the original security interest in the vehicle in certain
cases. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee
for the holders of asset-backed securities backed by automobile receivables
may not have a proper security interest in all of the obligations backing
such receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support
payments on these securities.
FUTURES AND OPTIONS TRANSACTIONS
The Fund may attempt to hedge all or a portion of its portfolio by buying
and selling financial futures contracts, buying put options on portfolio
securities and listed put options on futures contracts, and writing call
options on futures contracts. The Fund may also write covered call options
on portfolio securities to attempt to increase its current income. The Fund
currently does not intend to invest more than 5% of its total assets in
options transactions.
FINANCIAL FUTURES CONTRACTS
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in the
contract ("going short") and the buyer who agrees to take delivery of the
security ("going long") at a certain time in the future.
In the fixed income securities market, price generally moves inversely to
interest rates. Thus, a rise in rates generally means a drop in price.
Conversely, a drop in rates generally means a rise in price. In order to
hedge its holdings of fixed income securities against a rise in market
interest rates, the Fund could enter into contracts to deliver securities
at a predetermined price (i.e., "go short") to protect itself against the
possibility that the prices of its fixed income securities may decline
during the Fund 's anticipated holding period. The Fund would "go long"
(agree to purchase securities in the future at a predetermined price) to
hedge against a decline in market interest rates.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified price,
the purchase of a put option on a futures contract entitles (but does not
obligate) its purchaser to decide on or before a future date whether to
assume a short position at the specified price.
The Fund would purchase put options on futures contracts to protect
portfolio securities against decreases in value resulting from an
anticipated increase in market interest rates. Generally, if the hedged
portfolio securities decrease in value during the term of an option, the
related futures contracts will also decrease in value and the option will
increase in value. In such an event, the Fund will normally close out its
option by selling an identical option. If the hedge is successful, the
proceeds received by the Fund upon the sale of the second option will be
large enough to offset both the premium paid by the Fund for the original
option plus the decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option. To do so, it would
simultaneously enter into a futures contract of the type underlying the
option (for a price less than the strike price of the option) and exercise
the option. The Fund would then deliver the futures contract in return for
payment of the strike price. If the Fund neither closes out nor exercises
an option, the option will expire on the date provided in the option
contract, and the premium paid for the contract will be lost.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write listed
call options on futures contracts to hedge its portfolio against an
increase in market interest rates. When the Fund writes a call option on a
futures contract, it is undertaking the obligation of assuming a short
futures position (selling a futures contract) at the fixed strike price at
any time during the life of the option if the option is exercised. As
market interest rates rise, causing the prices of futures to go down, the
Fund's obligation under a call option on a future (to sell a futures
contract) costs less to fulfill, causing the value of the Fund's call
option position to increase.
In other words, as the underlying futures price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that
the Fund keeps the premium received for the option. This premium can offset
the drop in value of the Fund's fixed income portfolio which is occurring
as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of it by
the buyer, the Fund may close out the option by buying an identical option.
If the hedge is successful, the cost of the second option will be less than
the premium received by the Fund for the initial option. The net premium
income of the Fund will then offset the decrease in value of the hedged
securities.
The Fund will not maintain open positions in futures contracts it has sold
or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current
market value of its securities portfolio plus or minus the unrealized gain
or loss on those open positions, adjusted for the correlation of volatility
between the hedged securities and the futures contracts. If this limitation
is exceeded at any time, the Fund will take prompt action to close out a
sufficient number of open contracts to bring its open futures and options
positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury
bills with its custodian (or the broker, if legally permitted). The nature
of initial margin in futures transactions is different from that of margin
in securities transactions in that futures contract initial margin does not
involve the borrowing of funds by the Fund to finance the transactions.
Initial margin is in the nature of a performance bond or good faith deposit
on the contract which is returned to the Fund upon termination of the
futures contract, assuming all contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily change
in value of the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or loan by the
Fund but is instead settlement between the Fund and the broker of the
amount one would owe the other if the futures contract expired. In
computing its daily net asset value, the Fund will mark-to-market its open
futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A put
option gives the Fund, in return for a premium, the right to sell the
underlying security to the writer (seller) at a specified price during the
term of the option.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may also write covered call options to generate income. As writer
of a call option, the Fund has the obligation upon exercise of the option
during the option period to deliver the underlying security upon payment of
the exercise price. The Fund may only sell call options either on
securities held in its portfolio or on securities which it has the right to
obtain without payment of further consideration (or has segregated cash in
the amount of any additional consideration).
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 investment
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.
INVESTING IN FOREIGN CURRENCIES
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange contracts in
order to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and a foreign currency
involved in an underlying transaction. However, forward foreign currency
exchange contracts may limit potential gains which could result from a
positive change in such currency relationships. The Fund's investment
adviser, Federated Management (the "Adviser"), believes that it is
important to have the flexibility to enter into forward foreign currency
exchange contracts whenever it determines that it is in the Fund's best
interest to do so. The Fund will not speculate in foreign currency
exchange.
There is no limitation as to the percentage of the Fund's assets that may
be committed to such contracts.
The Fund does not enter into forward foreign currency exchange contracts or
maintain a net exposure in such contracts when the Fund would be obligated
to deliver an amount of foreign currency in excess of the value of the
Fund's portfolio securities or other assets denominated in that currency
or, in the case of a "cross-hedge" denominated in a currency or currencies
that the Adviser believes will tend to be closely correlated with the
currency with regard to price movements. Generally, the Fund does not enter
into a forward foreign currency exchange contract with a term longer than
one year.
FOREIGN CURRENCY OPTIONS
A foreign currency option provides the option buyer with the right to buy
or sell a stated amount of foreign currency at the exercise price on a
specified date or during the option period. The owner of a call option has
the right, but not the obligation, to buy the currency. Conversely, the
owner of a put option has the right, but not the obligation to sell the
currency.
When the option is exercised, the seller (i.e., writer) of the option is
obligated to fulfill the terms of the sold option. However, either the
seller or the buyer may, in the secondary market, close its position during
the option period at any time prior to expiration. A call option on foreign
currency generally rises in value if the underlying currency appreciates in
value, and a put option on foreign currency generally falls in value if the
underlying currency depreciates in value. Although purchasing a foreign
currency option can protect the Fund against an adverse movement in the
value of a foreign currency, the option will not limit the movement in the
value of such currency. For example, if the Fund were holding securities
denominated in a foreign currency that was appreciating and had purchased a
foreign currency put to hedge against a decline in the value of the
currency, the Fund would not have to exercise its put option. Likewise, if
the Fund were to enter into a contract to purchase a security denominated
in foreign currency and, in conjunction with that purchase, were to
purchase a foreign currency call option to hedge against a rise in value of
the currency, and if the value of the currency instead depreciated between
the date of purchase and the settlement date, the Fund would not have to
exercise its call. Instead, the Fund could acquire, in the spot market, the
amount of foreign currency needed for settlement.
SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY OPTIONS
Buyers and sellers of foreign currency options are subject to the same
risks that apply to options generally.
In addition, there are certain additional risks associated with foreign
currency options. The markets in foreign currency options are relatively
new, and the Fund's ability to establish and close out positions on such
options is subject to the maintenance of a liquid secondary market.
Although the Fund will not purchase or write such options unless and until,
in the opinion of the Adviser, the market for them has developed
sufficiently to ensure that the risks in connection with such options are
not greater than the risks in connection with the underlying currency,
there can be no assurance that a liquid secondary market will exist for a
particular option at any specific time.
In addition, options on foreign currencies are affected by all of those
factors that influence foreign exchange rates and investments generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of
the option position may vary with changes in the value of either or both
currencies and may have no relationship to the investment merits of a
foreign security. Because foreign currency transactions occurring in the
interbank market involve substantially larger amounts than those that may
be involved in the use of foreign currency options, investors may be
disadvantaged by having to deal in an odd lot market (generally consisting
of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively
smaller transactions (i.e. less than $1 million) where rates may be less
favorable. The interbank market in foreign currencies is a global, around-
the-clock market. To the extent that the U.S. option markets are closed
while the markets for the underlying currencies remain open, significant
price and rate movements may take place in the underlying markets that
cannot be reflected in the options markets until they re-open.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. No fees or other expenses, other
than normal transaction costs, are incurred. However, liquid assets of the
Fund sufficient to make payment for the securities to be purchased are
segregated on the Fund's records at the trade date. These assets are marked
to market daily and are maintained until the transaction has been settled.
The Fund does not intend to engage in when-issued and delayed delivery
transactions to an extent that would cause the segregation of more than 20%
of the total value of its assets.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities. Loans are subject
to termination at the option of the Fund or the borrower. The Fund may pay
reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker. 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.
REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the securities
subject to repurchase agreements, and these securities are marked to market
daily. To the extent that the original seller does not repurchase the
securities from the Fund, the Fund could receive less than the repurchase
price on any sale of such securities. In the event that a defaulting seller
files for bankruptcy or becomes insolvent, disposition of securities by the
Fund might be delayed pending court action. The Fund believes that under
the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions, such as
broker/dealers, which are deemed by the Adviser to be creditworthy pursuant
to guidelines established by the Board of Directors.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These
transactions are 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. The securities are marked to
market daily and maintained until the transaction is settled.
PORTFOLIO TURNOVER
The Fund normally holds or disposes of portfolio securities in order to
achieve 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 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, 1995 and 1994, the
portfolio turnover rates were 68% and 45%, 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. ^
SELLING SECURITIES
The Fund may not sell any security or evidence of interest therein
unless it is owned by the Fund and available for delivery.
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. However, with
respect to foreign governmental securities, the Fund reserves the
right to invest up to 25% of its total assets in fixed income
securities of foreign governmental units located within an individual
foreign nation and to purchase or sell various currencies on either a
spot or forward basis in connection with these investments.
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 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 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.)
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 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.
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.
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings and loan having capital, surplus, and
undivided profits in excess of $100,000,000 at the time of investment to be
`cash items.''
Cash items may include short-term obligations such as:
obligations of the U.S. government or its agencies or
instrumentalities; and
repurchase agreements.
FEDERATED STOCK AND BOND FUND, INC. MANAGEMENT
OFFICERS AND DIRECTORS ARE LISTED WITH THEIR ADDRESSES, BIRTHDATES, PRESENT
POSITIONS WITH FEDERATED STOCK AND BOND FUND, INC., AND PRINCIPAL
OCCUPATIONS.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Director and President
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp. and Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and Director or Trustee of the
Funds. Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President of the Company .
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Director
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Trustee,
University of Pittsburgh; Director or Trustee of the Funds.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Director
President, Investment Properties Corporation; Senior Vice-President, John
R. Wood and Associates, Inc., Realtors; Partner or Trustee in private real
estate ventures in Southwest Florida; formerly, President, Northgate
Village Development Corporation and Naples Property Management, Inc.;
Director or Trustee of the Funds.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Director
Director and Member of the Executive Committee, Michael Baker, Inc.;
formerly, Vice Chairman and Director, PNC Bank, N.A. and PNC Bank Corp.;
Director, Ryan Homes, Inc.; Director or Trustee of the Funds.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or
Trustee of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Director
Professor of Medicine, University of Pittsburgh; Medical Director,
University of Pittsburgh Medical Center - Downtown; Member, Board of
Directors, University of Pittsburgh Medical Center; formerly, Hematologist,
Oncologist, and Internist, Presbyterian and Montefiore Hospitals; Director
or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Director
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Director
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street
Boston Corporation; Director or Trustee of the Funds.
Gregor F. Meyer
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: October 6, 1926
Director
Attorney, Member of Miller, Ament, Henny & Kochuba; Chairman, Meritcare,
Inc.; Director, Eat'N Park Restaurants, Inc.; Director or Trustee of the
Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Director
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Director
Professor, International Politics and Management Consultant; Trustee,
Carnegie Endowment for International Peace, RAND Corporation, Online
Computer Library Center, Inc., National Defense University, U.S. Space
Foundation, and Czech Management Center; President Emeritus, University of
Pittsburgh; Founding Chairman, National Advisory Council for Environmental
Policy and Technology, Federal Emergency Management Advisory Board, and
Czech Management Center; Director or Trustee of the Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Director
Public relations/Marketing/Conference Planning, Manchester Craftsmen's
Guild; Restaurant Consultant, Frick Art & History Center; Conference
Coordinator, University of Pittsburgh Art History Department; Director or
Trustee of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated
Research Corp. and Federated Global Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated Shareholder Services Company, and
Federated Shareholder Services; President or Executive Vice President of
the Funds; Director or Trustee of some of the Funds. Mr. Donahue is the son
of John F. Donahue, Director and President of the Company.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research,
Ltd.; Executive Vice President and Director, Federated Securities Corp.;
Trustee, Federated Shareholder Services Company; Trustee or Director of
some of the Funds; President, Executive Vice President and Treasurer of
some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President, Secretary and Treasurer
Executive Vice President, Secretary, and Trustee, Federated Investors;
Trustee, Federated Advisers, Federated Management, and Federated Research;
Director, Federated Research Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services Company; Director, Federated
Services Company; President and Trustee, Federated Shareholder Services;
Director, Federated Securities Corp.; Executive Vice President and
Secretary of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some
of the Funds; Director or Trustee of some 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
As used in the table above, `The Funds'' and ``Funds'' mean the following
investment companies: 111 Corcoran Funds; Annuity Management Series; Arrow
Funds; Automated Government Money Trust; Blanchard Funds; Blanchard
Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc. ;
DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust;
Federated Adjustable Rate U.S. Government Fund, Inc.; Federated American
Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity Funds; Federated
Equity Income Fund, Inc.; Federated Fund for U.S. Government Securities,
Inc.; Federated GNMA Trust; Federated Government Income Securities, Inc.;
Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated
Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Insurance Series; Federated Master Trust; Federated Municipal
Opportunities Fund, Inc.; Federated Municipal Securities Fund, Inc.;
Federated Municipal Trust; Federated Short-Term Municipal Trust; Federated
Short-Term U.S. Government Trust; Federated Stock and Bond Fund, Inc.;
Federated Stock Trust; Federated Tax-Free Trust; Federated Total Return
Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income
Securities, Inc.; Fortress Utility Fund, Inc.; High Yield Cash Trust;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Term Trust, Inc. - 1999;
Liberty U.S. Government Money Market Trust; Liquid Cash Trust; Managed
Series Trust; Money Market Management, Inc.; Money Market Obligations
Trust; Money Market Trust; Municipal Securities Income Trust; Newpoint
Funds; Peachtree Funds; RIMCO Monument Funds; Targeted Duration Trust; Tax-
Free Instruments Trust; The Planters Funds; The Starburst Funds; The
Starburst Funds II; The Virtus Funds; Trust for Financial Institutions;
Trust for Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; and World Investment
Series, Inc.
FUND OWNERSHIP
Officers and Directors own less than 1% of the Fund's outstanding
shares.
As of August 22, 1996, the following shareholder of record owned 5% or more
of the outstanding Class A Shares of the Fund: Alltel Corp Thrift Plan,
NationsBank, Trustee, San Francisco, California, owned approximately
986,984 Shares (12.74%).
DIRECTORS COMPENSATION
AGGREGATE
NAME, COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
CORPORATION CORPORATION *# FROM FUND COMPLEX +
John F. Donahue $ 0 $ 0 for the Fund
Director and President 68 other investment companies in
the Fund Complex
Thomas G. Bigley++ $ 956 $ 20,688 for the Fund
Director 49 other investment companies in
the Fund Complex
John T. Conroy, Jr. $ 1,236 $ 117,202 for the Fund
Director 64 other investment companies in
the Fund Complex
William J. Copeland $ 1,236 $ 117,202 for the Fund and
Director 64 other investment companies in
the Fund Complex
James E. Dowd $ 1,236 $ 117,202 for the Fund and
Director 64 other investment companies in
the Fund Complex
Lawrence D. Ellis, M.D. $ 1,125 $ 106,460 for the Fund
and
Director 64 other investment companies in
the Fund Complex
Edward L. Flaherty, Jr. $ 1,236 $ 117,202 for the Fund
and
Director 64 other investment companies in
the Fund Complex
Peter E. Madden $ 956 $ 90,563 for the Fund and
Director 64 other investment companies in
the Fund Complex
Gregor F. Meyer $ 1,125 $ 106,460 for the Fund and
Director 64 other investment companies in
the Fund Complex
John E. Murray, Jr. $ 674 $ 0 for the Fund and
Director 69 other investment companies in
the Fund Complex
Wesley W. Posvar $ 1,125 $ 106,460 for the Fund and
Director 64 other investment companies in
the Fund Complex
Marjorie P. Smuts $ 1,125 $ 106,460 for the Fund and
Director 64 other investment companies in
the Fund Complex
* Information is furnished for the fiscal year ended October 31, 1995.
# The aggregate compensation is provided for the Corporation which is
comprised of one portfolio.
+ The information is provided for the last calendar year.
++ Mr. Bigley served on 39 investment companies in the Federated Funds
Complex from January 1 through September 30, 1995. On October 1, 1995, he
was appointed a Trustee on 15 additional Federated Funds.
DIRECTOR LIABILITY
The Corporation's Articles of Incorporation provide that the Directors will
not be liable for errors of judgment or mistakes of fact or law. However,
they are not protected against any liability to which they would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties involved in the conduct of their
office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Federated 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, 1995, 1994, and 1993, the Adviser earned $979,379,
$945,715, and $834,842, respectively, of which $215,192, $98,828, and
$222,090, 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.
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: advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry
studies; receipt of quotations for portfolio evaluations; and similar
services. Research services provided by brokers and dealers may be used by
the Adviser or its affiliates in advising the Fund and other accounts. To
the extent that receipt of these services may supplant services for which
the Adviser or its affiliates might otherwise have paid, it would tend to
reduce their expenses. The Adviser and its affiliates exercise reasonable
business judgment in selecting brokers who offer brokerage and research
services to execute securities transactions. They determine in good faith
that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided.
During the fiscal years ended October 31, 1995, 1994, and 1993, the Fund
paid total brokerage commissions of $84,056, $41,256, and $69,262,
respectively.
As of October 31, 1995, the Fund owned $952,733 of securities of Travelers
Inc. (Smith Barney) and $931,021 of securities of Dean Witter, two of its
regular brokers that derive more than 15% of gross revenues from
securities- related activities.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the Adviser, investments of the type
the Fund may make may also be made by those other accounts. When the Fund
and one or more other accounts managed by the Adviser are prepared to
invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner
believed by the Adviser to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund. In other
cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
OTHER 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.
OTHER SERVICES
FUND ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. From March 1, 1994 to March 1, 1996,
Federated Administrative Services served as the Fund's Administrator.
Prior to March 1, 1994, Federated Administrative Services Inc., also a
subsidiary of Federated Investors, served as the Fund's administrator.
(For purposes of this Statement of Additional Information, Federated
Services Company, Federated Administrative Services, and Federated
Administrative Services, Inc., may hereinafter collectively be referred to
as the "Administrators"). For the fiscal year ended October 31, 1995,
Federated Administrative Services earned $125,000. For the fiscal year
ended October 31, 1994, the Administrators collectively earned $207,503.
For the fiscal year ended October 31, 1993, Federated Administrative
Services, Inc. earned $291,137. 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 Services Company.
CUSTODIAN AND PORTFOLIO ACCOUNTANT
State Street Bank and Trust Company (`State Street Bank''), Boston, MA, is
custodian for the securities and cash of the Fund. Federated Services
Company, Pittsburgh, PA, provides certain accounting and recordkeeping
services with respect to the Fund's portfolio investments. The fee paid for
this service is based upon the level of the Fund's average net assets for
the period plus out-of-pocket expenses.
TRANSFER AGENT
Federated Services Company, through its registered transfer agent,
Federated Shareholder Services Company, maintains all necessary shareholder
records. For its services, the transfer agent receives a fee based on the
size, type and number of transactions made by shareholders.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Deloitte & Touche LLP,
Pittsburgh, PA.
PURCHASING SHARES
Shares are sold at their net asset value (plus a sales charge on Class A
Shares only) on days the New York Stock Exchange is open for business. The
procedure for purchasing Shares is explained in the respective prospectuses
under `How to Purchase Shares'' and "Investing in Class A Shares."
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
These arrangements permit the payment of fees to financial institutions,
the distributor, and Federated Shareholder Services, to stimulate
distribution activities and to cause services to be provided to
shareholders by a representative who has knowledge of the shareholder's
particular circumstances and goals. These activities and services may
include, but are not limited to, marketing efforts; providing office space,
equipment, telephone facilities, and various clerical, supervisory,
computer, and other personnel as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries; and assisting clients in
changing dividend options, account designations, and addresses.
By adopting the Distribution Plan, the Directors expect that the Fund will
be able to achieve a more predictable flow of cash for investment purposes
and to meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in pursuing its investment objectives. By
identifying potential investors whose needs are served by the Fund's
objectives, and properly servicing these accounts, it may be possible to
curb sharp fluctuations in rates of redemptions and sales.
Other benefits, which may be realized under either arrangement, may
include: (1) providing personal services to shareholders; (2) investing
shareholder assets with a minimum of delay and administrative detail; (3)
enhancing shareholder recordkeeping systems; and (4) responding promptly to
shareholders' requests and inquiries concerning their accounts.
For the fiscal year ended October 31, 1995, the Fund paid shareholder
services fees in the amount of $320,244 of which $178,558 was waived, all
of which where paid to financial institutions. Class B Shares and Class C
Shares did not exist prior to August 29, 1996.
PURCHASES BY SALES REPRESENTATIVES, FUND DIRECTORS, AND EMPLOYEES
Directors, employees, and sales representatives of the Fund, Federated
Management, and Federated Securities Corp. or their affiliates and their
immediate family members, or any investment dealer who has a sales
agreement with Federated Securities Corp., and their spouses and children
under 21, may buy shares at net asset value without a sales charge and are
not subject to a redemption fee to the extent the financial institution
through which the shares are sold agrees to waive any initial payment to
which it might otherwise be entitled. Shares may also be sold without a
sales charge to trusts or pension or profit-sharing plans for these
persons.
These sales are made with the purchaser's written assurance that the
purchase is for investment purposes and that the securities will not be
resold except through redemption by the Fund.
EXCHANGING SECURITIES FOR FUND SHARES
Investors may exchange qualifying securities they already own for Shares,
or they may exchange a combination of qualifying securities and cash for
Shares. Any qualifying securities to be exchanged must meet the investment
objective and policies of the Fund, must have readily ascertainable market
value, must be liquid, and must not be subject to restrictions on resale.
The Fund will prepare a list of securities which are eligible for
acceptance and furnish this list to brokers upon request. The Fund reserves
the right to reject any security, even though it appears on the list, and
the right to amend the list of acceptable securities at any time without
notice to brokers or investors.
An investment broker acting for an investor should forward the securities
in negotiable form with an authorized letter of transmittal to Federated
Securities Corp. Federated Securities Corp. will determine that transmittal
papers are in good order and forward to the Fund's custodian, State Street
Bank and Trust Company. The Fund will notify the broker of its acceptance
and valuation of the securities within five business days of their receipt
by State Street Bank.
The Fund values such securities in the same manner as the Fund values its
portfolio securities. The basis of the exchange will depend upon the net
asset value of Shares on the day the securities are valued. One Share will
be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be
considered in valuing the securities. All interest, dividends,
subscription, conversion, or other rights attached to the securities become
the property of the Fund, along with the securities.
TAX CONSEQUENCES
Exercise of this exchange privilege is treated as a sale for federal income
tax purposes. Depending upon the cost basis of the securities exchanged for
Shares, a gain or loss may be realized by the investor.
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 respective
prospectuses.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:
o for equity securities, according to the last sale price on a national
securities exchange, if available;
o in the absence of recorded sales for equity securities, according to
the mean between the last closing bid and asked prices;
o for 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;
o for short-term obligations, according to the mean between the bid and
asked prices as furnished by an independent pricing service; or
o for all other securities, at fair value as determined in good faith by
the Directors.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices 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. Shareholder redemptions may be subject to
a contingent deferred sales charge. Redemption procedures are explained in
the respective prospectuses under `How to Redeem Shares'' or "Redeeming
Class A Shares." Although the transfer agent does not charge for telephone
redemptions, it reserves the right to charge a fee for the cost of wire-
transferred redemptions of less than $5,000.
REDEMPTION IN KIND
Although the Fund intends to redeem Shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part
by a distribution of securities from the Fund's portfolio.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in a
manner the Directors determine to be fair and equitable.
The Fund has elected to be governed by Rule 18f-1 of the Investment Company
Act of 1940 under which the Fund is obligated to redeem Shares for any
shareholder in cash up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them
before their maturity could receive less than the redemption value of their
securities and could incur certain transaction costs.
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:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o derive less than 30% of its gross income from the sale of securities
held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional Shares. 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 Class A Shares' average annual total returns for the one-year, five-
year, and ten-year periods ended October 31, 1995, were 17.99%, 11.99% and
9.90%, respectively. Class B Shares and Class C Shares did not exist prior
to August 29, 1996.
Average annual total return for each class of Shares of the Fund is the
average compounded rate of return for a given period that would equate a
$1,000 initial investment to the ending redeemable value of that
investment. The ending redeemable value is computed by multiplying the
number of Shares owned at the end of the period by the 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, less any applicable sales charge,
adjusted over the period by any additional Shares, assuming the quarterly
reinvestment of all dividends and distributions. Any applicable contingent
deferred sales charge is deducted from the ending value of the investment
based on the lesser of the original purchase price or the offering price of
Shares redeemed. Occasionally, total return which does not reflect the
effect of the sales charge, may be quoted in advertising.
YIELD
The Class A Shares' yield for the thirty-day period ended October 31,
1995, was 3.64%. Class B Shares and Class C Shares did not exist prior to
August 29, 1996.
The yield for each class of Shares is determined by dividing the net
investment income per share (as defined by the Securities and Exchange
Commission) earned by each class of Shares over a thirty-day period by the
maximum offering price per share of the respective class 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 a
class of Shares, performance will be reduced for those shareholders paying
those fees.
PERFORMANCE COMPARISONS
The Fund's performance of each class of Shares depends upon such variables
as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's or a class of Shares' expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per Share fluctuate daily. Both net earnings
and offering price per Share are factors in the computation of yield and
total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
offering price. The financial publications and/or indices which the Fund
uses in advertising may include:
STANDARD & POOR'S RATING GROUP DAILY STOCK PRICE INDEX OF 500 COMMON
STOCKS is a composite index of common stocks in industry,
transportation, and financial and public utility companies, and
compares total returns of funds whose portfolios are invested
primarily in common stocks. In addition, the 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 these figures.
SALOMON 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.
LIPPER 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.
LEHMAN 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.
S&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.
MORNINGSTAR, INC., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns. The maximum rating is five stars, and
ratings are effective for two weeks.
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.
SEI 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 all three classes of Shares
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 each class of Shares based on quarterly
reinvestment of dividends over a specified period of time.
From time to time , as it deems appropriate, the Fund may advertise the
performance of a class of Shares, using charts, graphs, and descriptions,
compared to federally insured bank products, including certificates of
deposits and time deposits, and to money market funds using the Lipper
Analytical Services money market instruments average.
Advertisements may quote performance information which does not reflect the
effect of various sales charges on Class A Shares, Class B Shares, and
Class C Shares.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Fund can
compare its performance, or performance for the types of securities in
which it invests, to a variety of other investments, such as bank savings
accounts, certificates of deposit, and Treasury bills.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on
these developments by Fund portfolio managers and their views and analysis
on how such developments could affect the Funds. In addition, advertising
and sales literature may quote statistics and give general information
about the mutual fund industry, including the growth of the industry, from
sources such as the Investment Company Institute.
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.
ABOUT FEDERATED INVESTORS
Federated Investors is dedicated to meeting investor needs which is
reflected in its investment decision making-structured, straightforward,
and consistent. This has resulted in a history of competitive performance
with a range of competitive investment products that have gained the
confidence of thousands of clients and their customers.
The company's disciplined security selection process is firmly rooted in
sound methodologies backed by fundamental and technical research.
Investment decisions are made and executed by teams of portfolio managers,
analysts, and traders dedicated to specific market sectors. These traders
handle trillions of dollars in annual trading volume.
In the equity sector, Federated Investors has more than 25 years'
experience. As of December 31, 1995, Federated managed 22 equity funds
totaling approximately $5.4 billion in assets across growth, value, equity
income, international, index and sector (i.e. utility) styles. Federated's
value-oriented management style combines quantitative and qualitative
analysis and features a structured, computer-assisted composite modeling
system that was developed in the 1970's.
In the corporate bond sector, as of December 31, 1995, Federated Investors
managed 10 money market funds, and 14 bond funds with assets approximating
$11.5 billion, and $2.7 billion, respectively. Federated's corporate bond
decision making--based on intensive, diligent credit analysis--is backed by
over 20 years of experience in the corporate bond sector. In 1972,
Federated introduced one of the first high-yield bond funds in the
industry. In 17 years ending December 1995, Federated's high yield
portfolios experienced a default rate of just 1.86%, versus 3.10% for the
market as a whole. In 1983, Federated was one of the first fund managers to
participate in the asset-backed securities market, a market totaling more
than $200 billion.
J. Thomas Madden, Executive Vice President, oversees Federated's equity and
high yield corporate bond management while William D. Dawson, Executive
Vice President, oversees Federated's domestic fixed income management.
Henry A. Frantzen, Executive Vice President, oversees the management of
Federated's international portfolios.
MUTUAL FUND MARKET
Twenty-seven percent of American households are pursuing their financial
goals through mutual funds. These investors, as well as businesses and
institutions, have entrusted over $3 trillion to the more than 5,500 funds
available.*
Federated Investors, through its subsidiaries, distributes mutual funds for
a variety of investment applications. Specific markets include:
INSTITUTIONAL CLIENTS
Federated Investors meets the needs of more than 4,000 institutional
clients nationwide by managing and servicing separate accounts and mutual
funds for a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt
entities, foundations/endowments, insurance companies, and investment and
financial advisors. The marketing effort to these institutional clients is
headed by John B. Fisher, President, Institutional Sales Division.
TRUST ORGANIZATIONS
Other institutional clients include close relationships with more than
1,500 banks and trust organizations. Virtually all of the trust divisions
of the top 100 bank holding companies use Federated funds in their clients'
portfolios. The marketing effort to trust clients is headed by Mark R.
Gensheimer, Executive Vice President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated funds are available to consumers through major brokerage firms
nationwide--including 200 New York Stock Exchange firms--supported by more
wholesalers than any other mutual fund distributor. Federated's service to
financial professionals and institutions has earned it high rankings in
several DALBAR Surveys. The marketing effort to these firms is headed by
James F. Getz, President, Broker/Dealer Division.
*source: Investment Company Institute
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits:
(a) (a) The Fund's financial statements dated October 31, 1995
are filed in Part A; b) the Fund's financial statements
dated April 30, 1996 are hereby incorporated by reference to
the Registrant's Semi-Annual report dated April 30, 1996 as
filed with the Commission on July 2, 1996
(File No. 811-1) pursuant to Rule 411 under the Securities
Act of 1933.
(b) Exhibits:
(1) Conformed copy of the Charter of the Registrant as
amended (14);
(2) Copies of the By-Laws of the Registrant as amended
(14);
(3) Not applicable;
(4) Copy of Specimen Certificate for Shares of Beneficial
Interest of the Registrant (15);
(5) Conformed copy of the Investment Advisory Contract of
the Registrant (13);
(6) (i) Conformed copy of Distributors Contract (12);
(ii) Conformed copy of Exhibit B to the Distributor's
Contract (15);
(iii) The Registrant hereby incorporates the conformed
copy of the specimen Mutual Funds Sales and Service
Agreement; Mutual Funds Service Agreement; and Plan
Trustee/Mutual Funds Service Agreement from Item 24 (b)
(6) of the Cash Trust Series II Registration Statement
on Form N-1A, filed with the Commission on July 24,
1995. (File Numbers 33-38550 and 811-6269).
(7) Not applicable;
(8) (i) Conformed copy of the Custodian Contract (13);
(9) (i) Conformed copy of Administrative Services Agreement
(13);
(ii) Conformed copy of Shareholder Services Agreement
(13);
(iii) Conformed copy of Transfer Agency and Service
Agreement (13);
(iv) The responses described in Item 24 (b) (6)
are hereby incorporated by reference.
+ All exhibits have been filed electronically.
6. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 69 filed on Form N-1A February 22, 1988. (File Nos. 2-
10415 and 811-1)
12. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 83 filed on Form N-1A December 28, 1993.(File Nos. 2-
10415 and 811-1)
13. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 85 filed on Form N-1A December 29, 1994.(File Nos. 2-
10415 and 811-1)
14. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 87 filed on Form N-1A December 27, 1995. (File Nos. 2-
10415 and 811-1)
15. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 88 filed on Form N-1A July 1, 1996. (File Nos. 2-10415
and 811-1)
(v) The Registrant hereby incorporates the
conformed copy of the Shareholder Services Sub-
Contract between National Pensions Alliance,
Ltd. and Federated Shareholder Servivces from
Item 24(b)(9)(ii) of the Federated GNMA Trust
Registration Statement on Form N-1A, filed with the
Commission on March 25, 1996. (File Nos. 2- 75670
and 811-3375)
(vi) The Registrant hereby incorporates the
conformed copy of the Shareholder Services Sub-
Contract between Fidelity and Federated
Shareholder Services from Item 24(b)(9)(iii) of the
Federated GNMA Trust Registration Statement on Form N-
1A, filed with the Commission on March 25, 1996. (File
Nos. 2-75670 and 811-3375)
(10) Not applicable;
(11) Copy of the Consent of Independent Auditors; +
(12) Not applicable;
(13) Not applicable;
(14) Not applicable;
(15) Conformed copy of Distribution Plan including Exhibit A
(15);
(16) Copy of Schedule for Computation of Fund Performance
Data (7);
(17) Copy of Financial Data Schedule (15);
(18) The Registrant hereby incorporates by reference the
conformed copy of the specimen Multiple Class Plan from
Item 24(b)(18) of the World Investment Series, Inc.
Registration Statement on Form N-1A, filed with the
Commission on January 26, 1996. (File Nos. 33-52149 and
811-07141);
(19) Conformed copy of Power of Attorney (15);
+ All exhibits have been filed electronically.
7. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 49 filed on Form N-1A December 21, 1979. (File Nos.
2-10415 and 811-1)
15. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 88 filed on Form N-1A July 1, 1996. (File Nos. 2-10415
and 811-1)
Item 25. Persons Controlled by or Under Common Control with Registrant:
None
Item 26. Number of Holders of Securities:
Number of Record Holders
Title of Class as of June 5, 1996
Shares of Capital Stock 2,903
($0.001 per share par value)
Item 27. Indemnification (13)
Item 28. Business and Other Connections of Investment Adviser:
For a description of the other business of Federated Management,
the investment adviser, see the section entitled "Fund
Information - Management of the Fund" in Part A. The
affiliations with the Registrant of three of the Trustees and
three of the Officers of the investment adviser and their
business addresses are included in Part B of this Registration
Statement under "Federated Stock and Bond Fund, Inc., Fund
Management.''The remaining Trustee of the investment adviser,
his position with the investment adviser, and, in parentheses,
his principal occupation is: Mark D. Olson (Partner, Wilson,
Halbrook & Bayard), 107 W. Market Street, Georgetown, Delaware
19947.
The remaining Officers of the investment adviser are: William D.
Dawson, III, Henry A. Frantzen, J. Thomas Madden, and Mark L.
Mallon, Executive Vice Presidents; Henry J. Gailliot, Senior Vice
President-Economist; Peter R. Anderson, Drew J. Collins, Jonathan
C. Conley, Mark Durbiano, J. Alan Minteer, and Mary Jo Ochson,
Senior Vice Presidents; J. Scott Albrecht, Joseph M. Balestrino,
Randall S. Bauer, David F. Belton, David A. Briggs, Kenneth J.
Cody, Deborah A. Cunningham, Michael P. Donnelly, Linda A.
Duessel, Kathleen M. Foody-Malus, Thomas M. Franks, Edward C.
Gonzales, Timothy E. Keefe, Stephen A. Keen, Mark S. Kopinski,
Jeff A. Kozemchak, Marian R. Marinack, Susan M. Nason, Robert J.
Ostrowski, Frederick L. Plautz, Jr., Charles A. Ritter, James D.
Roberge, Frank Semack, William F. Stotz, Sandra L. Weber, and
Christopher H. Wiles, Vice Presidents; Thomas R. Donahue,
Treasurer; and Stephen A. Keen, Secretary. The business address
of each of the Officers of the investment adviser is Federated
Investors Tower, Pittsburgh, PA 15222-3779. These individuals
are also officers of a majority of the investment advisers to the
Funds listed in Part B of this Registration Statement.
+ All exhibits have been filed electronically.
13. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 85 filed on Form N-1A December 29, 1994.(File Nos. 2-
10415 and 811-1)
Item 29. Principal Underwriters:
(a) Federated Securities Corp., the Distributor for shares of the
Registrant, also acts as principal underwriter for the following open-end
investment companies: 111 Corcoran Funds; Annuity Management Series; Arrow
Funds; Automated Government Money Trust; BayFunds; Blanchard Funds;
Blanchard Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust
Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash
Trust; Federated Adjustable Rate U.S. Government Fund, Inc.; Federated
American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity Funds;
Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income
Securities, Inc.; Federated Government Trust; Federated High Income Bond
Fund, Inc.; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Insurance Series;Federated Master Trust; Federated
Municipal Opportunities Fund, Inc.; Federated Municipal Securities Fund,
Inc.; Federated Municipal Trust; Federated Short-Term Municipal Trust;
Federated Short-Term U.S. Government Trust; Federated Stock and Bond Fund,
Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income
Securities, Inc.; Fortress Utility Fund, Inc.; High Yield Cash Trust;
Independence One Mutual Funds; Intermediate Municipal Trust; International
Series, Inc.; Investment Series Funds, Inc.; Investment Series Trust;
Liberty U.S. Government Money Market Trust; Liquid Cash Trust; Managed
Series Trust; Marshall Funds, Inc.; Money Market Management, Inc.; Money
Market Obligations Trust; Money Market Trust; Municipal Securities Income
Trust; Newpoint Funds; Peachtree Funds; RIMCO Monument Funds; SouthTrust
Vulcan Funds; Star Funds; Targeted Duration Trust; Tax-Free Instruments
Trust; The Biltmore Funds; The Biltmore Municipal Funds; The Monitor Funds;
The Planters Funds; The Starburst Funds; The Starburst Funds II; The Virtus
Funds; Tower Mutual Funds; Trust for Financial Institutions; Trust for
Government Cash Reserves; Trust for Short-Term U.S. Government Securities;
Trust for U.S. Treasury Obligations; Vision Group of Funds, Inc.; andWorld
Investment Series, Inc.
Federated Securities Corp. also acts as principal underwriter for the
following closed-end investment company: Liberty Term Trust, Inc.- 1999.
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Richard B. Fisher Director, Chairman, Chief Vice President
Federated Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, Asst.
Secretary, and Asst.
Treasurer, Federated
Securities Corp.
Edward C. Gonzales Director, Executive ViceExecutive Vice
Federated Investors Tower President, Federated, President
Pittsburgh, PA 15222-3779 Securities Corp.
John W. McGonigle Director, Federated Executive Vice
Federated Investors Tower Securities Corp. President,
Pittsburgh, PA 15222-3779 Secretary, and
Treasurer
John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark R. Gensheimer Executive Vice President of --
Federated Investors Tower Bank/Trust, Federated
Pittsburgh, PA 15222-3779 Securities Corp.
Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard W. Boyd Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Solon A. Person, IV Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas E. Territ Senior Vice President, --
Federated Investors Tower Federated Securities Corp
Pittsburgh, PA 15222-3779
John B. Bohnet Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Byron F. Bowman Vice President, Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Kevin J. Crenny Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Daniel T. Culbertson Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
G. Michael Cullen Vice President, --
Federated Investors Tower Federated Securites Corp.
Pittsburgh, PA 15222-3779
Laura M. Deger Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Michael D. Fitzgerald Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Craig S. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Scott A. Hutton Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
H. Joeseph Kenedy Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William E. Kugler Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Steven A. La Versa Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Mihm Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael P. O'Brien Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert D. Oehlschlager Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John C. Shelar, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jamie M. Teschner Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Paul A. Uhlman Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael P. Wolff Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Charlene H. Jennings Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
J. Timothy Radcliff Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Denis McAuley Treasurer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas R. Donahue Asstistant Secretary, --
Federated Investors Tower Assistant Treasurer,
Pittsburgh, PA 15222-3779 Federated Securities Corp.
Joseph M. Huber Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David M. Taylor Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(c) Not applicable.
Item 30. Location of Accounts and Records:
All accounts and records required to be maintained by Section
31(a) of the Investment Company Act of 1940 and Rules 31a-1
through 31a-3 promulgated thereunder are maintained at one of the
following locations:
Registrant Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Shareholder Services
Company P.O. Box 8600
(`Transfer Agent, and Dividend Boston, MA 02266-8600
Disbursing Agent `)
Federated Services Company Federated Investors Tower
(`Administrator'') Pittsburgh, PA 15222-3779
Federated Management Federated Investors Tower
(`Adviser'') Pittsburgh, PA 15222-3779
State Street Bank and Trust Company P.O. Box 8600
(`Custodian'') Boston, MA 02266-8600
Item 31. Management Services: Not applicable
Item 32. Undertakings:
Registrant hereby undertakes to comply with the provisions of
Section 16(c) of the 1940 Act with respect to the removal of
Directors and the calling of special shareholder meetings by
shareholders.
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders, upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, FEDERATED STOCK AND BOND
FUND, INC., certifies that it meets all of the requirements for
effectiveness of this Amendment to its Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Pittsburgh and
Commonwealth of Pennsylvania, on the 29th day of August 1996.
FEDERATED STOCK AND BOND FUND, INC.
BY: /s/ J. Crilley Kelly
J. Crilley Kelly, Assistant Secretary
Attorney in Fact for John F. Donahue
August 29, 1996
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to its Registration Statement has been signed below by the
following person in the capacity and on the date indicated:
NAME TITLE DATE
By:/s/ J. Crilley Kelly
J. Crilley Kelly Attorney In Fact August 29, 1996
ASSISTANT SECRETARY For the Persons
Listed Below
NAME TITLE
John F. Donahue* President and Director
(Chief Executive Officer)
John W. McGonigle* Treasurer and Executive
Vice President
(Principal Financial and
Accounting Officer)
Thomas G. Bigley* Director
John T. Conroy, Jr.* Director
William J. Copeland* Director
James E. Dowd* Director
Lawrence D. Ellis, M.D.* Director
Edward L. Flaherty, Jr.* Director
Peter E. Madden* Director
Gregor F. Meyer* Director
John E. Murray, Jr.* Director
Wesley W. Posvar* Director
Marjorie P. Smuts* Director
* By Power of Attorney
Exhibit (11) under N-1A
Exhibit 23 under 601/Reg SK
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and
Shareholders of FEDERATED STOCK AND BOND FUND, INC.:
We consent to the use in Post-Effective Amendment No. 89 to Registration
Statement (No. 2-10415) of Federated Stock and Bond Fund, Inc. (formerly,
Stock and Bond Fund, Inc.) of our report dated December 15, 1995 appearing
in the Prospectuses, which is part of such Registration Statement, and to
the reference to us under the heading `Financial Highlights'' in such
Prospectuses.
/s/DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
August 29, 1996
