INTERNATIONAL EQUITY FUND
A PORTFOLIO OF INTERNATIONAL SERIES, INC.
(FORMERLY, FT SERIES, INC.)
CLASS B SHARES
PROSPECTUS
The Class B Shares of International Equity Fund (the "Fund") offered by this
prospectus represent interests in the Fund, which is a diversified investment
portfolio in International Series, Inc. (formerly, FT Series, Inc.) (the
"Corporation"), an open-end, management investment company (a mutual fund).
The Fund's objective is to obtain a total return on its assets from a
combination of long-term capital growth and income through a diversified
portfolio primarily invested in equity securities of non-U.S. issuers.
THE CLASS B 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 CLASS B SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Class B Shares of the Fund. Keep this prospectus for future
reference.
The Fund has also filed a Combined Statement of Additional Information for Class
A Shares, Class B Shares, and Class C Shares dated September 27, 1994, with the
Securities and Exchange Commission. The information contained in the Combined
Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Combined Statement of Additional
Information free of charge by calling 1-800-235-4669. To obtain other
information or to make inquiries about the Fund, contact the Fund at the address
listed in the back of this prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated September 27, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- --------------------------------------------------------------------------------
GENERAL INFORMATION 2
- --------------------------------------------------------------------------------
LIBERTY FAMILY OF FUNDS 2
- --------------------------------------------------------------------------------
INVESTMENT INFORMATION 3
- --------------------------------------------------------------------------------
Investment Objective 3
Investment Policies 4
Acceptable Investments 4
Equity and Fixed Income Securities 4
Forward Commitments 4
Money Market Instruments 4
Repurchase Agreements 5
Options and Financial Futures Contracts 5
When-Issued and Delayed Delivery Transactions 5
Foreign Currency Transactions 5
Forward Foreign Currency Exchange Contracts 6
Put and Call Options with Respect to
Equity Securities 6
Financial Futures and Options on Financial
Futures 7
Risk Considerations 7
Exchange Rates 8
Foreign Companies 8
U.S. Government Policies 8
Short Sales 8
Risks Associated with Financial Futures
Contracts and Options on Financial
Futures Contracts 9
Investment Limitations 9
NET ASSET VALUE 10
- --------------------------------------------------------------------------------
INVESTING IN CLASS B SHARES 10
- --------------------------------------------------------------------------------
Share Purchases 10
Through a Financial Institution 10
Directly from the Distributor 11
Minimum Investment Required 11
What Shares Cost 11
Conversion of Class B Shares 12
Systematic Investment Program 12
Certificates and Confirmations 12
Dividends 12
Capital Gains 13
Retirement Plans 13
EXCHANGE PRIVILEGE 13
- --------------------------------------------------------------------------------
Requirements for Exchange 13
Tax Consequences 13
Making an Exchange 13
Telephone Instructions 14
REDEEMING CLASS B SHARES 14
- --------------------------------------------------------------------------------
Through a Financial Institution 14
Directly from the Fund 15
By Telephone 15
By Mail 15
Signatures 15
Contingent Deferred Sales Charge 16
Elimination of Contingent Deferred Sales Charge 16
Systematic Withdrawal Program 17
Reinvestment Privilege 17
Accounts with Low Balances 17
INTERNATIONAL SERIES, INC., INFORMATION 18
- --------------------------------------------------------------------------------
Management of the Corporation 18
Board of Directors 18
Officers and Directors 18
Investment Adviser 22
Advisory Fees 22
Adviser's Background 22
Sub-Adviser 23
Sub-Advisory Fees 23
Sub-Adviser's Background 23
Distribution of Class B Shares 24
Distribution and Shareholder Services Plans 24
Other Payments to Financial Institutions 25
Administration of the Fund 25
Administrative Services 25
Custodian 25
Transfer Agent and Dividend Disbursing Agent 26
Legal Counsel 26
Independent Public Accountants 26
Brokerage Transactions 26
Expenses of the Fund and Class B Shares 26
SHAREHOLDER INFORMATION 27
- --------------------------------------------------------------------------------
Voting Rights 27
TAX INFORMATION 27
- --------------------------------------------------------------------------------
Federal Income Tax 27
Pennsylvania Corporate and
Personal Property Taxes 28
PERFORMANCE INFORMATION 28
- --------------------------------------------------------------------------------
OTHER CLASSES OF SHARES 28
- --------------------------------------------------------------------------------
Financial Highlights--Class A Shares 30
Financial Highlights--Class C Shares 31
ADDRESSES Inside Back Cover
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
CLASS B SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)...................... None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)............................................................ None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) (1)...................................... 5.50%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................... None
Exchange Fee..................................................................................... None
ANNUAL CLASS B SHARES OPERATING EXPENSES*
(As a percentage of projected average net assets)
Management Fee (after waiver) (2)................................................................ 0.99%
12b-1 Fee........................................................................................ 0.75%
Total Other Expenses............................................................................. 0.83%
Shareholder Services Fee..................................................................... 0.25%
Total Class B Shares Operating Expenses (3)(4).......................................... 2.57%
</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 1.00%.
(3) Class B Shares convert to Class A Shares (which pay lower ongoing expenses)
approximately eight years after purchase.
(4) Total Class B Shares Operating Expenses are estimated to be 2.58% absent the
anticipated voluntary waiver of a portion of the management fee.
*Total Class B Shares Operating Expenses are estimated based on average expenses
expected to be incurred during the period ending November 30, 1995. 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 HOLDER OF CLASS B SHARES OF THE FUND WILL
BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN CLASS B SHARES" AND
"INTERNATIONAL SERIES, INC., INFORMATION." Wire-transferred redemptions of less
than $5,000 may be subject to additional fees.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales loads permitted under the rules of the National
Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period........................ $82 $123
You would pay the following expenses on the same investment, assuming
no redemption................................................................................. $26 $ 80
</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 THE FUND'S FISCAL YEAR ENDING NOVEMBER
30, 1995.
The information set forth in the foregoing table and example relates only to
Class B Shares of the Fund. The Fund also offers two additional classes of
shares called Class A Shares and Class C Shares. Class B Shares, Class A Shares,
and Class C Shares are subject to certain of the same expenses; however, Class A
Shares are subject to a maximum sales load of 5.50% but are not subject to a
12b-1 fee or a contingent deferred sales charge. Class C Shares are subject to a
12b-1 fee of up to 0.75% and may be subject to a contingent deferred sales
charge of 1.00%, but are not subject to a front-end sales load. See "Other
Classes of Shares."
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Corporation was established as FT International Trust, a Massachusetts
business trust, on March 9, 1984, and reorganized as a corporation under the
laws of the state of Maryland on February 11, 1991. At a special meeting of
shareholders held on March 15, 1994, the shareholders of the Corporation
approved an amendment to the Articles of Incorporation to change the name of the
Corporation to International Series, Inc. The Corporation's address is Liberty
Center, Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779. The
Articles of Incorporation permit the Corporation 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 Board of Directors (the
"Directors") has established three classes of shares known as Class A Shares,
Class B Shares, and Class C Shares. This prospectus relates only to Class B
Shares ("Shares ") of the Corporation's portfolio known as International Equity
Fund.
Shares of the Fund are designed for investors who wish to spread their
investments beyond the United States and who are prepared to accept the
particular risks associated with these investments. It is not intended to
provide a complete investment program for an investor. A minimum initial
investment of $1,500 is required, unless the investment is in a retirement
account, in which case the minimum investment is $50.
Except as otherwise noted in this prospectus, Shares are sold at net asset value
and redeemed at net asset value. However, a contingent deferred sales charge is
imposed on certain Shares of the Fund which are redeemed within six full years
of the date of purchase.
LIBERTY FAMILY OF FUNDS
- --------------------------------------------------------------------------------
This Fund is a member of a family of mutual funds, collectively known as the
Liberty Family of Funds. The other funds in the Liberty Family of Funds are:
.American Leaders Fund, Inc., providing growth of capital and income
through high-quality stocks;
.Capital Growth Fund, providing appreciation of capital primarily through
equity securities;
.Fund for U.S. Government Securities, Inc., providing current income
through long-term U.S. government securities;
.International Income Fund, providing a high level of current income
consistent with prudent investment risk through high-quality debt
securities denominated primarily in foreign currencies;
.Liberty Equity Income Fund, Inc., providing above-average income and
capital appreciation through income-producing equity securities;
.Liberty High Income Bond Fund, Inc., providing high current income
through high-yielding, lower-rated corporate bonds;
.Liberty Municipal Securities Fund, Inc., providing a high level of
current income exempt from federal regular income tax through municipal
bonds;
.Liberty U.S. Government Money Market Trust, providing current income
consistent with stability of principal through high-quality U.S.
government securities;
.Liberty Utility Fund, Inc., providing current income and long-term growth
of income, primarily through electric, gas, and communication utilities;
.Limited Term Fund, providing a high level of current income consistent
with minimum fluctuation in principal value through investment-grade
securities;
.Limited Term Municipal Fund, providing a high level of current income
exempt from federal regular income tax consistent with the preservation
of principal, primarily limited to municipal securities;
.Michigan Intermediate Municipal Trust, providing current income exempt
from federal regular income tax and the personal income taxes imposed by
the state of Michigan and Michigan municipalities, primarily through
Michigan municipal securities;
.Pennsylvania Intermediate Municipal Trust, providing current income
exempt from federal regular income tax and the personal income taxes
imposed by the Commonwealth of Pennsylvania, primarily through
Pennsylvania municipal securities;
.Strategic Income Fund, providing a high level of current income,
primarily through domestic and foreign corporate debt obligations;
.Tax-Free Instruments Trust, providing current income consistent with
stability of principal and exempt from federal income tax through
high-quality, short-term municipal securities; and
World Utility Fund, providing total return through securities issued by
domestic and foreign companies in the utilities industry.
Prospectuses for these funds are available by writing to Federated Securities
Corp.
Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.
The Liberty Family of Funds provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles and by providing the
investment services of proven, professional investment advisers.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The Fund's objective is to obtain a total return on its assets from a
combination of long-term capital growth and income through a diversified
portfolio primarily invested in equity securities of non-U.S. issuers. The
objective is based on the premise that investing in non-U.S. securities provides
three potential benefits over investing solely in U.S. securities:
.the opportunity to invest in non-U.S. companies believed to have superior
growth potential;
.the opportunity to invest in foreign countries with economic policies or
business cycles different from those of the United States; and
.the opportunity to reduce portfolio volatility to the extent that
securities markets inside and outside the United States do not move in
harmony.
While there is no assurance that the Fund will achieve its investment objective,
it endeavors to do so by following the investment policies described in this
prospectus. The investment objective and policies may be changed by the
Directors without shareholder approval. Shareholders will be notified before any
material change in the objective or policies becomes effective.
INVESTMENT POLICIES
ACCEPTABLE INVESTMENTS. The Fund invests primarily in non-U.S. securities. A
substantial portion of these will be equity securities of established companies
in economically developed countries. The Fund will invest at least 65%, and
under normal market conditions substantially all of its total assets, in equity
securities denominated in foreign currencies of issuers located in at least
three countries outside of the United States. The Fund may also purchase
corporate and government fixed income securities denominated in currencies other
than U.S. dollars; enter into forward commitments, repurchase agreements, and
foreign currency transactions; maintain reserves in foreign or U.S. money market
instruments; and purchase options and financial futures contracts.
EQUITY AND FIXED INCOME SECURITIES. At the date of this prospectus, the
Fund has committed its assets primarily to dividend-paying equity
securities of established companies that appear to have growth potential.
However, as a temporary defensive position, the Fund may shift its emphasis
to fixed income securities, warrants, or other obligations of foreign
companies or governments, if they appear to offer potential higher return.
Fixed income securities include preferred stock, convertible securities,
bonds, notes, or other debt securities which are investment grade or
higher.
The high-quality debt securities in which the Fund will invest will possess
a minimum credit rating of A as assigned by Standard & Poor's Ratings Group
("S&P") or A by Moody's Investors Service, Inc. ("Moody's"), or, if
unrated, will be judged by the investment adviser or sub-adviser to the
Fund, to be of comparable quality. Because the average quality of the
Fund's portfolio investments should remain constantly between A and AAA,
the Fund will seek to avoid the adverse consequences that may arise for
some debt securities in difficult economic circumstances. Downgraded
securities will be evaluated on a case-by-case basis by the adviser. The
adviser will determine whether or not the security continues to be an
acceptable investment. If not, the security will be sold.
FORWARD COMMITMENTS. Forward commitments are contracts to purchase
securities for a fixed price at a date beyond customary settlement time.
The Fund may enter into these contracts if liquid securities in amounts
sufficient to meet the purchase price are segregated on the Fund's records
at the trade date and maintained until the transaction has been settled.
Risk is involved if the value of the security declines before settlement.
Although the Fund enters into forward commitments with the intention of
acquiring the security, it may dispose of the commitment prior to
settlement and realize short-term profit or loss.
MONEY MARKET INSTRUMENTS. The Fund may invest in U.S. and foreign
short-term money market instruments, including interest-bearing call
deposits with banks, government obligations,
certificates of deposit, bankers' acceptances, commercial paper, short-term
corporate debt securities, and repurchase agreements. The commercial paper
in which the Fund invests will be rated
A-1 by S&P or P-1 by Moody's. These investments may be used to temporarily
invest cash received from the sale of Fund shares, to establish and
maintain reserves for temporary defensive purposes, or to take advantage of
market opportunities. Investments in the World Bank, Asian Development
Bank, or Inter-American Development Bank are not anticipated.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which
banks, broker/dealers, and other recognized financial institutions sell
securities to the Fund and agree at the time of sale to repurchase them at
a mutually agreed upon time and price. To the extent that the original
seller does not repurchase the securities from the Fund, the Fund could
receive less than the repurchase price on any sale of such securities.
OPTIONS AND FINANCIAL FUTURES CONTRACTS. The Fund may purchase put and
call options, financial futures contracts, and options on financial futures
contracts. In addition, the Fund may write (sell) put and call options with
respect to securities in the Fund's portfolio.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities may vary from the purchase price. 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.
No fees or other expenses, other than normal transaction costs, are incurred.
However, 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 and are
maintained until the transaction is settled.
FOREIGN CURRENCY TRANSACTIONS. The Fund will enter into foreign currency
transactions to obtain the necessary currencies to settle securities
transactions. Currency transactions may be conducted either on a spot or cash
basis at prevailing rates or through forward foreign currency exchange
contracts.
The Fund may also enter into foreign currency transactions to protect Fund
assets against adverse changes in foreign currency exchange rates or exchange
control regulations. Such changes could unfavorably affect the value of Fund
assets which are denominated in foreign currencies, such as foreign securities
or funds deposited in foreign banks, as measured in U.S. dollars. Although
foreign currency exchanges may be used by the Fund to protect against a decline
in the value of one or more currencies, such efforts may also limit any
potential gain that might result from a relative increase in the value of such
currencies and might, in certain cases, result in losses to the Fund.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency
exchange contract ("forward contract") is an obligation to purchase or sell an
amount of a particular currency at a specific price and on a future date agreed
upon by the parties.
Generally, no commission charges or deposits are involved. At the time the Fund
enters into a forward contract, Fund assets with a value equal to the Fund's
obligation under the forward contract are segregated on the Fund's records and
are maintained until the contract has been settled. The Fund will not enter into
a forward contract with a term of more than one year. The Fund will generally
enter into a forward contract to provide the proper currency to settle a
securities transaction at the time the transaction occurs ("trade date"). The
period between the trade date and settlement date will vary between 24 hours and
30 days, depending upon local custom.
The Fund may also protect against the decline of a particular foreign currency
by entering into a forward contract to sell an amount of that currency
approximating the value of all or a portion of the Fund's assets denominated in
that currency ("hedging"). The success of this type of short-term hedging
strategy is highly uncertain due to the difficulties of predicting short-term
currency market movements and of precisely matching forward contract amounts and
the constantly changing value of the securities involved. Although the adviser
will consider the likelihood of changes in currency values when making
investment decisions, the adviser believes that it is important to be able to
enter into forward contracts when it believes the interests of the Fund will be
served. The Fund will not enter into forward contracts for hedging purposes in a
particular currency in an amount in excess of the Fund's assets denominated in
that currency. No more than 30% of the Fund's assets will be committed to
forward contracts for hedging purposes at any time. (This restriction does not
include forward contracts entered into to settle securities transactions.)
PUT AND CALL OPTIONS WITH RESPECT TO EQUITY SECURITIES. The Fund may purchase
put and call options on its portfolio of securities. Put and call options will
be used as a hedge to attempt to protect securities which the Fund holds, or
will be purchasing, against decreases or increases in value. The Fund is also
authorized to write (sell) put and call options on all or any portion of its
portfolio of securities to generate income. The Fund may 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. In the case of put options written
by the Fund, the Corporation's custodian will segregate cash, U.S. Treasury
obligations, or highly liquid debt securities with a value equal to or greater
than the exercise price of the underlying securities.
The Fund is authorized to invest in put and call options that are traded on
securities exchanges. The Fund may also purchase and write over-the-counter
options on portfolio securities in negotiated transactions with the buyers or
writers of the options since options on some of the portfolio securities held by
the Fund are not traded on an exchange. The Fund will purchase and write
over-the-counter options only with investment dealers and other financial
institutions (such as commercial banks or savings and loan associations) deemed
creditworthy by Federated Management and Fiduciary International, Inc., the
Fund's investment adviser and sub-adviser.
Over-the-counter options are two-party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third-party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a
continuous liquid market while over-the-counter options may not. Prior to
exercise or expiration, an option position can only be terminated by entering
into a closing purchase or sale transaction. This requires a secondary market on
an exchange which may or may not exist for any particular call or put option at
any specific time. The absence of a liquid secondary market also may limit the
Fund's ability to dispose of the securities underlying an option. The inability
to close options also could have an adverse impact on the Fund's ability to
effectively hedge its portfolio.
FINANCIAL FUTURES AND OPTIONS ON FINANCIAL FUTURES. The Fund may purchase and
sell financial futures contracts to hedge all or a portion of its portfolio
securities against changes in interest rates or securities prices. Financial
futures contracts on securities call for the delivery of particular securities
at a certain time in the future. The seller of the contract agrees to make
delivery of the type of instrument called for in the contract, and the buyer
agrees to take delivery of the instrument at the specified future time. A
financial futures contract on a securities index does not involve the actual
delivery of securities, but merely requires the payment of a cash settlement
based on changes in the securities index.
The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value resulting from anticipated increases in market
interest rates or broad declines in securities prices. When the Fund writes a
call option on a financial futures contract, it is undertaking the obligation of
selling the financial futures contract at a fixed price at any time during a
specified period if the option is exercised. Conversely, as a purchaser of a put
option on a financial futures contract, the Fund is entitled (but not obligated)
to sell a financial futures contract at the fixed price during the life of the
option.
The Fund may also write put options and purchase call options on financial
futures contracts as a hedge against rising purchase prices of securities
eligible for purchase by the Fund. The Fund will use these transactions to
attempt to protect its ability to purchase securities in the future at price
levels existing at the time it enters into the transactions. When the Fund
writes a put option on a futures contract, it is undertaking to buy a particular
futures contract at a fixed price at any time during a specified period if the
option is exercised. As a purchaser of a call option on a futures contract, the
Fund is entitled (but not obligated) to purchase a futures contract at a fixed
price at any time during the life of the option.
The Fund may not purchase or sell financial futures contracts or options on
financial futures contracts if, immediately thereafter, the sum of the amount of
initial margin deposits on the Fund's existing financial futures positions and
premiums paid for related options would exceed 5% of the fair market value of
the Fund's total assets, after taking into account the unrealized profits and
losses on those contracts it has entered into. When the Fund purchases financial
futures contracts, an amount of cash and cash equivalents, equal to the
underlying commodity value of the financial futures contracts (less any related
margin deposits), will be deposited in a segregated account with the Fund's
custodian to collateralize the position and, thereby, insure that the use of
such financial futures contracts is unleveraged.
RISK CONSIDERATIONS. Investing in non-U.S. securities carries substantial risks
in addition to those associated with domestic investments. In an attempt to
reduce some of these risks, the Fund diversifies its investments broadly among
foreign countries, including both developed and developing countries. At least
three different countries will always be represented. As of November 30, 1993,
the portfolio
contained securities from issuers located primarily in Japan, the United
Kingdom, France, Hong Kong, Switzerland, and Mexico. There are also investments
in several other countries.
The Fund occasionally takes advantage of the unusual opportunities for higher
returns available from investing in developing countries. As discussed in detail
in the Statement of Additional Information, however, these investments carry
considerably more volatility and risk because they are associated with less
mature economies and less stable political systems.
EXCHANGE RATES. Foreign securities are denominated in foreign currencies.
Therefore, the value in U.S. dollars of the Fund's assets and income may be
affected by changes in exchange rates and regulations. Although the Fund
values its assets daily in U.S. dollars, it will not convert its holding of
foreign currencies to U.S. dollars daily. When the Fund converts its
holdings to another currency, it may incur conversion costs. Foreign
exchange dealers realize a profit on the difference between the prices at
which they buy and sell currencies.
FOREIGN COMPANIES. Other differences between investing in foreign and U.S.
companies include:
.less publicly available information about foreign companies;
.the lack of uniform financial accounting standards applicable to foreign
companies;
.less readily available market quotations on foreign companies;
.differences in government regulation and supervision of foreign stock
exchanges, brokers, listed companies, and banks;
.differences in legal systems which may affect the ability to enforce
contractual obligations or obtain court judgments;
.generally lower foreign stock market volume;
.the likelihood that foreign securities may be less liquid or more
volatile;
.foreign brokerage commissions may be higher;
.unreliable mail service between countries; and
.political or financial changes which adversely affect investments in some
countries.
U.S. GOVERNMENT POLICIES. In the past, U.S. government policies have
discouraged or restricted certain investments abroad by investors such as
the Fund. Investors are advised that, when such policies are instituted,
the Fund will abide by them.
SHORT SALES. The Fund intends to sell securities short from time to time,
subject to certain restrictions. A short sale occurs when a borrowed
security is sold in anticipation of a decline in its price. If the decline
occurs, shares equal in number to those sold short can be purchased at the
lower price. If the price increases, the higher price must be paid. The
purchased shares are then returned to the original lender. Risk arises
because no loss limit can be placed on the transaction. When the Fund
enters into a short sale, assets, equal to the market price of the
securities sold short or any lesser price at which the Fund can obtain such
securities, are segregated on the Fund's records and maintained until the
Fund meets its obligations under the short sale.
RISKS ASSOCIATED WITH FINANCIAL FUTURES CONTRACTS
AND OPTIONS ON FINANCIAL FUTURES CONTRACTS
Financial futures contracts and options on financial futures contracts can be
highly volatile and could result in a reduction of the Fund's total return. The
Fund's attempt to use such investment devices for hedging purposes may not be
successful. Successful futures strategies require the ability to predict future
movements in securities prices, interest rates and other economic factors. When
the Fund uses financial futures contracts and options on financial futures
contracts as hedging devices, there is a risk that the prices of the securities
subject to the financial futures contracts and options on financial futures
contracts may not correlate perfectly with the prices of the securities in the
Fund. This may cause the financial futures contract and any related options to
react to market changes differently than the portfolio securities. In addition,
the investment adviser or sub-adviser could be incorrect in its expectations
about the direction or extent of market factors, such as interest rate,
securities price movements, and other economic factors. In these events, the
Fund may lose money on the financial futures contract or the options on
financial futures contracts. It is not certain that a secondary market for
positions in financial futures contracts or for options on financial futures
contracts will exist at all times. Although the investment adviser or
sub-adviser will consider liquidity before entering into financial futures
contracts or options on financial futures contracts transactions, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular financial futures contract or option on a financial futures contract
at any particular time. The Fund's ability to establish and close out financial
futures contracts and options on financial futures contract positions depends on
this secondary market. If the Fund is unable to close out its position due to
disruptions in the market or lack of liquidity, the losses to the Fund could be
significant.
INVESTMENT LIMITATIONS
The Fund will not:
.with respect to 75% of the value of its total assets, invest more than 5%
of the value of its total assets in the securities (other than securities
issued or guaranteed by the government of the United States or its
agencies or instrumentalities) of any one issuer;
.acquire more than 10% of the outstanding voting securities of any one
issuer, or acquire any securities of Fiduciary Trust Company
International or its affiliates;
.sell securities short except under strict limitations;
.borrow money or pledge securities except, under certain circumstances,
the Fund may borrow up to one-third of the value of its total assets and
pledge up to 15% of the value of those assets to secure such borrowings;
or
.permit margin deposits for financial futures contracts held by the Fund,
plus premiums paid by it for open options on financial futures contracts,
to exceed 5% of the fair market value of the Fund's total assets, after
taking into account the unrealized profits and losses on those contracts.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Directors without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
The Fund will not:
.invest more than 5% of its assets in warrants;
.own securities of open-end or closed-end investment companies, except
under certain circumstances and subject to certain limitations not
exceeding 10% of its total assets (The Fund will indirectly bear its
proportionate share of any fees and expenses paid by other investment
companies, in addition to the fees and expenses payable directly by the
Fund.);
.invest more than 5% of its total assets in securities of issuers that
have records of less than three years of continuous operations;
.invest more than 15% of the value of its net assets in illiquid
securities, including securities not determined by the Directors to be
liquid, repurchase agreements with maturities longer than seven days
after notice, and certain over-the-counter options; or
.purchase put options on securities unless the securities or an offsetting
call option is held in the Fund's portfolio.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per Class B Share fluctuates. The net asset value for
Class B Shares is determined by adding the interest of the Class B Shares in the
market value of all securities and other assets of the Fund, subtracting the
interest of the Class B Shares in the liabilities of the Fund and those
attributable to Class B Shares, and dividing the remainder by the total number
of Class B Shares outstanding. The net asset value for Class B Shares may differ
from that of Class A Shares and Class C Shares due to the variance in daily net
income realized by each class. Such variance will reflect only accrued net
income to which the shareholders of a particular class are entitled.
INVESTING IN CLASS B SHARES
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased through a financial institution which has a sales agreement with
the distributor or directly from the distributor, Federated Securities Corp.,
once an account has been established. In connection with the sale of Shares,
Federated Securities Corp. may, from time to time, offer certain items of
nominal value to any shareholder or investor. The Fund reserves the right to
reject any purchase request.
Orders for $250,000 or more of Class B Shares will normally be invested in Class
A Shares. (See "Other Classes of Shares.")
THROUGH A FINANCIAL INSTITUTION. Investors may call their 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 converted into federal funds. It
is the financial institution's responsibility to transmit orders promptly.
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.
The financial institution which maintains investor accounts with the Fund must
do so on a fully disclosed basis unless it accounts for share ownership periods
used in calculating the contingent deferred sales charge. (See "Contingent
Deferred Sales Charge.") In addition, advance payments made to financial
institutions may be subject to reclaim by the distributor for accounts
transferred to financial institutions which do not maintain investor accounts on
a fully disclosed basis and do not account for share ownership periods. (See
"Other Payments to Financial Institutions.")
DIRECTLY FROM THE DISTRIBUTOR. An investor may place an order to purchase
Shares directly from the distributor once an account has been established. To do
so:
.complete and sign the new account form available from the Fund;
.enclose a check made payable to International Equity Fund--Class B
Shares; and
.mail both to the Fund's transfer agent, Federated Services Company, c/o
State Street Bank and Trust Company, P.O. Box 8604, Boston, MA
02266-8604.
Orders by mail are considered received after payment by check is converted by
the transfer agent's bank, State Street Bank and Trust Company ("State Street
Bank"), into federal funds. This is generally the next business day after State
Street Bank receives the check.
To purchase Shares directly from the distributor by wire once an account has
been established, call the Fund. All information needed will be taken over the
telephone, and the order is considered received when State Street Bank receives
payment by wire. Federal funds should be wired as follows: Federated Services
Company, c/o State Street Bank and Trust Company, Boston, Massachusetts 02105;
Attention: Mutual Fund Servicing Division; For Credit to: International Equity
Fund--Class B Shares; Fund Number (this number can be found on the account
statement or by contacting the Fund); Group Number or Order Number; Nominee or
Institution Name; and ABA Number 011000028. Shares cannot be purchased by wire
on days on which the New York Stock Exchange is closed and on federal holidays
restricting wire transfers.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Class B Shares is $1,500 unless the investment
is in a retirement account, in which case the minimum initial investment is $50.
Subsequent investments must be in amounts of at least $100, except for
retirement accounts, which must be in amounts of at least $50.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received.
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; and (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Under certain circumstances described under "Redeeming Class B Shares,"
shareholders may be charged a contingent deferred sales charge by the
distributor at the time Shares are redeemed.
CONVERSION OF CLASS B SHARES
Class B Shares will automatically convert into Class A Shares on the fifteenth
day of the month, eight years after the purchase date, except as noted below,
and will no longer be subject to a distribution fee. (See "Other Classes of
Shares.") Such conversion will be on the basis of the relative net asset values
per share, without the imposition of any sales load, fee, or other charge. Class
B Shares acquired by exchange from Class B Shares of another fund in the Liberty
Family of Funds 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 availability of the
conversion feature is subject to the granting of an exemptive order by the
Securities and Exchange Commission or the adoption of a rule permitting such
conversion. In the event that the exemptive order or rule ultimately issued by
the Securities and Exchange Commission requires any conditions additional to
those described in this prospectus, shareholders will be notified. 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.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Shares at the net asset value next determined after an order is
received by the Fund. Shareholders may apply for participation in this program
through their financial institution or directly through the Fund.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder. Share certificates are not issued unless requested
in writing to the Fund.
Detailed confirmations of each purchase and redemption are sent to each
shareholder. Annual confirmations are sent to report dividends paid during the
year.
DIVIDENDS
Dividends are declared and paid annually to all shareholders invested in the
Fund on the record date. Dividends are automatically reinvested in additional
Shares on the payment date at the ex-dividend date net asset value, unless
shareholders request cash payments on the new account form or by writing to the
Fund. 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 year's dividend.
CAPITAL GAINS
Capital gains realized by the Fund, if any, will be distributed at least once
every twelve months.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, contact the Fund and consult a tax adviser.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
In order to provide greater flexibility to Fund shareholders whose investment
objectives have changed, Class B shareholders may exchange all or some of their
Shares for Class B Shares of other funds in the Liberty Family of Funds at net
asset value without being assessed a contingent deferred sales charge on the
exchanged Shares. (Not all funds in the Liberty Family of Funds currently offer
Class B Shares. Contact your financial institution regarding the availability of
other Class B Shares in the Liberty Family of Funds.) To the extent that a
shareholder exchanges Shares for Class B Shares in other funds in the Liberty
Family of Funds, the time for which the exchanged-for shares were held will be
added, or tacked, to the time for which the exchanged-from Shares were held for
purposes of satisfying the applicable holding period.
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 into which the exchange is being made.
This privilege is available to shareholders resident in any state in which the
fund shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Shares submitted for exchange are redeemed and
the proceeds invested in Class B Shares of the other fund. The exchange
privilege may be modified or terminated at any time. Shareholders will be
notified of the modification or termination of the exchange privilege.
Further information on the exchange privilege and prospectuses for the Liberty
Family of Funds or certain Federated Funds are available by contacting the Fund.
TAX CONSEQUENCES
An exercise of the exchange privilege is treated as a sale for federal income
tax purposes. Depending on the circumstances, a short-term or long-term capital
gain or loss may be realized.
MAKING AN EXCHANGE
Instructions for exchanges for the Liberty Family of Funds or certain 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 shareholders
cannot contact their broker or financial institution by telephone, it is
recommended that an exchange request be made in writing and sent by overnight
mail to Federated Services Company, c/o State Street Bank and Trust Company,
P.O. Box 8604, Boston, Massachusetts 02266-8604.
TELEPHONE INSTRUCTIONS. Telephone instructions made by the investor may be
carried out only if a telephone authorization form completed by the investor is
on file with the Fund. If the instructions are given by a broker, a telephone
authorization form completed by the broker must be on file with the Fund. Shares
may be exchanged between two funds by telephone only if the two funds have
identical shareholder registrations.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company, c/o State Street Bank and Trust
Company, P.O. Box 8604, Boston, Massachusetts 02266-8604, and deposited to the
shareholder's account before being exchanged. Telephone exchange instructions
may be recorded. 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 not receive any
dividend that is payable to shareholders of record on that date. This privilege
may be modified or terminated at any time. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
REDEEMING CLASS B SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request, less any applicable contingent deferred sales
charge. (See "Contingent Deferred Sales Charge.") Redemptions will be made on
days on which the Fund computes its net asset value. Redemptions can be made
through a financial institution or directly from the Fund. Redemption requests
must be received in proper form.
THROUGH A FINANCIAL INSTITUTION
Shareholders may redeem Shares by calling their financial institution (such as a
bank or an investment dealer) to request the redemption. Shares will be redeemed
at their 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 must be received by the financial
institution and transmitted to the Fund before 4:00 p.m. (Eastern time) in order
for Shares to be redeemed at that day's net asset value. The financial
institution is responsible for promptly submitting redemption requests and
providing proper written redemption instructions to the Fund. The financial
institution may charge customary fees and commissions for this service.
DIRECTLY FROM THE FUND
BY TELEPHONE. Shareholders who have not purchased through a financial
institution may redeem their Shares by telephoning the Fund. The proceeds will
be mailed to the shareholder's address of record or wire transferred to the
shareholder's account at a domestic commercial bank that is a member of the
Federal Reserve System, normally within one business day, but in no event longer
than seven days after the request. The minimum amount for a wire transfer is
$1,000. If at any time the Fund shall determine it necessary to terminate or
modify this method of redemption, shareholders would be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as redeeming by mail, should be considered.
BY MAIL. Any shareholder may redeem Shares by sending a written request to
Federated Services Company, c/o State Street Bank and Trust Company, P.O. Box
8604, Boston, Massachusetts 02266-8604. The written request should include the
shareholder's name, the Fund name and class designation, the account number, and
the Share or dollar amount requested, and should be signed exactly as the Shares
are registered.
If Share certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written request.
Shareholders should call the Fund for assistance in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
.a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
.a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
.a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC; or
.any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
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.
CONTINGENT DEFERRED SALES CHARGE
Shareholders redeeming 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 purchase or the net asset value of the redeemed Shares at
the time of redemption in accordance with the following schedule:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SHARES HELD SALES CHARGE
<S> <C>
One full year or less.............................. 5.50%
Two full years or less............................. 4.75%
Three full years or less........................... 4.00%
Four full years or less............................ 3.00%
Five full years or less............................ 2.00%
Six full years or less............................. 1.00%
Seven years and thereafter......................... 0.00%
</TABLE>
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/or (2) Shares held for more than
six full years 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 six full years from the
date of purchase; and (3) Shares held for six years or less 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 Class B Shares of funds in the
Liberty Family of Funds. (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 the
investor 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 qualified 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. In addition,
to the extent that the distributor does not make advance payments to certain
financial institutions for purchases made by their clients, 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; 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, as
amended, or a retirement plan 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 or by 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 Fund in writing that
said shareholder is entitled to such elimination.
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 Shares. For this reason, payments under this program
should not be considered as yield or income on the shareholder's investment in
Shares. To be eligible to participate in this program, a shareholder must have
an account value of at least $10,000. Shareholders may apply for participation
in this program through their financial institution. A contingent deferred sales
charge will be imposed on Shares redeemed within six full years of their
purchase date. (See "Contingent Deferred Sales Charge.")
REINVESTMENT PRIVILEGE
If Shares have been redeemed, the shareholder has a one-time right, within 120
days, to reinvest the redemption proceeds into Class A Shares at the
next-determined net asset value without a sales load. (See "Other Classes of
Shares.") Federated Securities Corp. must be notified by the shareholder in
writing or by his or her financial institution of the reinvestment in order to
receive this privilege. If the shareholder redeems his or her Shares, there may
be tax consequences.
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 $1,500. This requirement does not apply,
however, if the balance falls below $1,500 because of changes in the Fund's net
asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
INTERNATIONAL SERIES, INC., INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE CORPORATION
BOARD OF DIRECTORS. The Corporation is managed by a Board of Directors. The
Directors are responsible for managing the Corporation's business affairs and
for exercising all the Corporation's powers except those reserved for the
shareholders. An Executive Committee of the Board of Directors handles the
Board's responsibilities between meetings of the Board.
OFFICERS AND DIRECTORS. Officers and Directors are listed with their addresses,
principal occupations, and present positions, including those with Federated
Management, its affiliates, and the "Funds" described in the Statement of
Additional Information.
- --------------------------------------------------------------------------------
John F. Donahue+*
Federated Investors Tower
Pittsburgh, PA
Chairman and Director of the Corporation
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life and Casualty
Company; Chief Executive Officer and Director, Trustee, or Managing General
Partner of the Funds. Mr. Donahue is the father of J. Christopher Donahue, Vice
President of the Corporation.
- --------------------------------------------------------------------------------
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Director of the Corporation
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; President, Northgate Village Development
Corporation; Partner or Trustee in private real estate ventures in Southwest
Florida; Director, Trustee, or Managing General Partner of the Funds; formerly,
President, Naples Property Management, Inc.
- --------------------------------------------------------------------------------
William J. Copeland
One PNC Plaza--23rd Floor
Pittsburgh, PA
Director of the Corporation
Director and Member of the Executive Committee, Michael Baker, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes, Inc.
- --------------------------------------------------------------------------------
James E. Dowd
571 Hayward Mill Road
Concord, MA
Director of the Corporation
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, Trustee,
or Managing General Partner of the Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
- --------------------------------------------------------------------------------
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Director of the Corporation
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals;
Professor of Medicine and Trustee, University of Pittsburgh; Director of
Corporate Health, University of Pittsburgh Medical Center; Director, Trustee, or
Managing General Partner of the Funds.
- --------------------------------------------------------------------------------
Edward L. Flaherty, Jr.+
5916 Penn Mall
Pittsburgh, PA
Director of the Corporation
Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park Restaurants,
Inc., and Statewide Settlement Agency, Inc.; Director, Trustee, or Managing
General Partner of the Funds; formerly, Counsel, Horizon Financial, F.A.,
Western Region.
- --------------------------------------------------------------------------------
Peter E. Madden
225 Franklin Street
Boston, MA
Director of the Corporation
Consultant; State Representative, Commonwealth of Massachusetts; Director,
Trustee, or Managing General Partner of the Funds; formerly, President, State
Street Bank and Trust Company and State Street Boston Corporation and Trustee,
Lahey Clinic Foundation, Inc.
- --------------------------------------------------------------------------------
Gregor F. Meyer
5916 Penn Mall
Pittsburgh, PA
Director of the Corporation
Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, Inc.;
Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or Managing General
Partner of the Funds; formerly, Vice Chairman, Horizon Financial, F.A.
- --------------------------------------------------------------------------------
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Director of the Corporation
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie Endowment
for International Peace, RAND Corporation, Online Computer Library Center, Inc.,
and U.S. Space Foundation; Chairman, Czecho Slovak Management Center; Director,
Trustee, or Managing General Partner of the Funds; President Emeritus,
University of Pittsburgh; formerly, Chairman, National Advisory Council for
Environmental Policy and Technology.
- --------------------------------------------------------------------------------
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Director of the Corporation
Public relations/marketing consultant; Director, Trustee, or Managing General
Partner of the Funds.
- --------------------------------------------------------------------------------
Glen R. Johnson
Federated Investors Tower
Pittsburgh, PA
President of the Corporation
Trustee, Federated Investors; President and/or Trustee of some of the Funds;
staff member, Federated Securities Corp. and Federated Administrative Services.
- --------------------------------------------------------------------------------
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Vice President of the Corporation
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp.; President, Passport Research, Ltd.; Trustee, Federated Administrative
Services, Federated Services Company, and Federated Shareholder Services;
President or Vice President of the Funds; Director, Trustee, or Managing General
Partner of some of the Funds. Mr. Donahue is the son of John F. Donahue,
Chairman and Director of the Corporation.
- --------------------------------------------------------------------------------
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Vice President of the Corporation
Executive Vice President and Trustee, Federated Investors; Director, Federated
Research Corp.; Chairman and Director, Federated Securities Corp.; President or
Vice President of some of the Funds; Director or Trustee of some of the Funds.
- --------------------------------------------------------------------------------
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Vice President and Treasurer of the Corporation
Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; Chairman, Treasurer, and Trustee,
Federated Administrative Services; Trustee or Director of some of the Funds;
Vice President and Treasurer of the Funds.
- --------------------------------------------------------------------------------
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary of the Corporation
Vice President, Secretary, General Counsel, and Trustee, Federated Investors;
Vice President, Secretary, and Trustee, Federated Advisers, Federated
Management, and Federated Research; Vice President and Secretary, Federated
Research Corp. and Passport Research, Ltd.; Trustee, Federated Services Company;
Executive Vice President, Secretary, and Trustee, Federated Administrative
Services; Trustee and Secretary, Federated Shareholder Services; Director and
Executive Vice President, Federated Securities Corp.; Vice President and
Secretary of the Funds.
- --------------------------------------------------------------------------------
*This Director is deemed to be an "interested person" of the Corporation as
defined in the Investment Company Act of 1940, as amended.
+Members of the Corporation's Executive Committee. The Executive Committee of
the Board of Directors handles the responsibilities of the Board of Directors
between meetings of the Board.
Officers and Directors own less than 1% of the Fund's outstanding Shares.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Federated
Management, the Fund's investment adviser (the "Adviser"), subject to direction
by the Directors. The Adviser continually conducts investment research and
supervision for the Fund and is responsible for the purchase or sale of
portfolio instruments, for which it receives an annual fee from the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee
equal to 1.00% of the Fund's average daily net assets. The fee paid by the
Fund, while higher than the advisory fee paid by other mutual funds in
general, is comparable to fees paid by many mutual funds with similar
objectives and policies. The Adviser may voluntarily choose to waive a
portion of its fee. 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. Total assets under management or
administration by these and other subsidiaries of Federated Investors are
approximately $70 billion. Federated Investors, which was founded in 1956
as Federated Investors, Inc., develops and manages mutual funds primarily
for the financial industry. Federated Investors' track
record of competitive performance and its disciplined, risk-averse
investment philosophy serve approximately 3,500 client institutions
nationwide. Through these same client institutions, individual shareholders
also have access to this same level of investment expertise.
Randall S. Bauer is the Fund's portfolio manager. He has contributed toward
the management of the Fund's portfolio of investments since December 1,
1990, when Federated Management became the Fund's sub-adviser, and has
continued in that capacity through March 15, 1994, when, pursuant to
shareholder approval, Federated Management became the Fund's investment
adviser. Mr. Bauer joined Federated Investors in 1989 as an Assistant Vice
President of Federated Management. Mr. Bauer was an Assistant Vice
President of the International Banking Division at Pittsburgh National Bank
from 1982 until 1989. Mr. Bauer is a Chartered Financial Analyst and
received his M.B.A. in Finance from Pennsylvania State University.
SUB-ADVISER. Under the terms of a Sub-Advisory Agreement between Federated
Management and Fiduciary International, Inc., Fiduciary International, Inc.,
will furnish to Federated Management such investment advice, statistical
information, and other factual information as may, from time to time, be
reasonably requested by Federated Management.
SUB-ADVISORY FEES. For its services under the Sub-Advisory Agreement,
Fiduciary International, Inc. ("Fiduciary"), receives an annual fee from
Federated Management equal to .50 of 1% of average daily net assets of the
Fund. The sub-advisory fee is accrued and paid daily. In the event that the
fee due from the Fund to Federated Management is reduced in order to meet
expense limitations imposed on the Fund by state securities laws or
regulations, the sub-advisory fee will be reduced by one-half of said
reduction in the fee due from the Fund to Federated Management.
Notwithstanding any other provision in the Sub-Advisory Agreement,
Fiduciary may, from time to time, and for such periods as it deems
appropriate, reduce its compensation (and, if appropriate, assume expenses
of the Fund) to the extent that the Fund's expenses exceed such lower
expense limitations as Fiduciary may, by notice to the Fund, voluntarily
declare to be effective.
SUB-ADVISER'S BACKGROUND. Fiduciary International, Inc., is a New York
corporation that was organized in 1982 as Fir Tree Advisers, Inc. Fiduciary
International, Inc., is a wholly-owned subsidiary of Fiduciary Investment
Corporation, which, in turn, is a wholly-owned subsidiary of Fiduciary
Trust Company International. Fiduciary Trust Company International has more
than 30 years of experience in managing funds which invest in the
international markets.
Fiduciary International, Inc., is a registered investment adviser under the
Investment Advisers Act of 1940. The Adviser and sub-adviser, their
officers, affiliates, and employees may act as investment managers for
parties other than the Fund, including other investment companies.
Margaret Lindsay has been the Fund's portfolio manager since mid-1992, when
Fiduciary International, Inc., was the Fund's investment adviser. Ms.
Lindsay joined Fiduciary International, Inc., in 1991 as a Vice President.
From 1987 through 1991, Ms. Lindsay worked in international strategy,
analysis, and sales at S.G. Warburg Securities.
DISTRIBUTION OF CLASS B SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
The distributor will pay financial institutions an amount equal to 5.50% of the
net asset value of 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.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS. Under a distribution plan adopted
in accordance with Investment Company Act Rule 12b-1 (the "Distribution Plan"),
the Class B Shares will pay to the distributor an amount, computed at an annual
rate of 0.75 of 1% of the average daily net assets of Class B Shares, to finance
any activity which is principally intended to result in the sale of Shares
subject to the Distribution Plan. The distributor may pay a portion of this
amount to financial institutions that waive all or any portion of the payments
discussed in the preceding paragraph. Because distribution fees to be paid by
the Fund to the distributor may not exceed an annual rate of 0.75 of 1% of the
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 Distribution Plan.
The Distribution Plan is a compensation-type plan. As such, the Fund makes no
payments to the distributor except as described above. Except as set forth in
the next paragraph, 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 the Class B Shares under the Distribution
Plan.
The distributor may sell, assign, or pledge its right to receive Rule 12b-1 fees
and CDSCs to finance payments made to brokers in connection with the sale of
Class B Shares. Fiduciary Trust Company International, parent of the
sub-adviser, or one of its subsidiaries, including the sub-adviser, expects to
participate in this financing program by purchasing 50% of the Rule 12b-1 fees
and CDSCs assigned by the distributor. Actual distribution expenses for Class B
Shares at any given time may exceed the Rule 12b-1 fees and payments received
pursuant to CDSCs. These unrecovered amounts, plus interest thereon, will be
carried forward and paid from future Rule 12b-1 fees and payments received
through CDSCs. If the Distribution Plan were terminated or not continued, the
Fund would not be contractually obligated to pay for any expenses not previously
reimbursed by the Fund or recovered through CDSCs.
In addition, the Fund has adopted a Shareholder Services Plan (the "Services
Plan") under which it may make payments up to 0.25 of 1% of the average daily
net asset value of Class B Shares to obtain certain personal services for
shareholders and for the maintenance of shareholder accounts ("shareholder
services"). The Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
Federated Shareholder Services will either perform shareholder services directly
or will select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon Shares owned by their clients or
customers.
The schedules of such fees and the basis upon which such fees will be paid will
be determined from time to time by the Fund and Federated Shareholder Services.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the capacities described above or should
Congress relax current restrictions on depository institutions, the Directors
will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
The distributor may, from time to time, and for such periods as it deems
appropriate, voluntarily reduce its compensation under the Distribution Plan.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. The distributor may offer to pay a
fee from its own assets to financial institutions as financial assistance for
providing substantial marketing and sales support. The support may include
sponsoring sales, educational and training seminars at recreational-type
facilities, providing sales literature, and engineering computer software
programs that emphasize the attributes of the Fund. Such assistance will be
predicated upon the amount of Shares the financial institution sells or may sell
and/or upon the nature and type of sales or marketing support furnished by the
financial institution. Any payments made by the distributor may be reimbursed by
the Fund's investment adviser or its affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED FUNDS
<C> <S>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN. State Street Bank and Trust Company, Boston, Massachusetts, is
custodian for the securities and cash of the Fund. Foreign instruments purchased
by the Fund are held by foreign banks participating in a network coordinated by
State Street Bank.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, is transfer agent for shares of the Fund and dividend
disbursing agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania, and Dickstein, Shapiro & Morin, L.L.P., Washington,
D.C.
INDEPENDENT PUBLIC ACCOUNTANTS. The independent public accountants for the Fund
are Arthur Andersen LLP, Pittsburgh, Pennsylvania.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser and sub-adviser look for prompt execution of the order
at a favorable price. In working with dealers, the Adviser and sub-adviser will
generally utilize those who are recognized dealers in specific portfolio
instruments, except when a better price and execution of the order can be
obtained elsewhere. In selecting among firms believed to meet this criteria, the
Adviser and sub-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 and sub-adviser make decisions on portfolio
transactions and select brokers and dealers subject to review by the Directors.
EXPENSES OF THE FUND AND CLASS B SHARES
Holders of Shares pay their allocable portion of Fund and Corporation expenses.
The Corporation expenses for which holders of Shares pay their allocable portion
include, but are not limited to: the cost of organizing the Corporation and
continuing its existence; registering the Corporation with federal and state
securities authorities; Directors' fees; auditors' fees; the cost of meetings of
Directors; legal fees of the Corporation; association membership dues; and such
non-recurring and extraordinary items as may arise from time to time.
The Fund expenses for which holders of Shares pay their allocable portion
include, but are not limited to: registering the Fund and Shares of the Fund;
investment advisory services; taxes and commissions; custodian fees; insurance
premiums; auditors' fees; and such non-recurring and extraordinary items as may
arise from time to time.
At present, the only expenses which are allocated specifically to Shares as a
class are expenses under the Fund's Services Plan and Distribution Plan.
However, the Directors reserve the right to allocate certain other expenses to
holders of Shares as they deem appropriate ("Class Expenses"). In any case,
Class Expenses would be limited to: distribution fees; transfer agent fees as
identified by the transfer agent as attributable to holders of Shares; fees
under the Fund's Services Plan; 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 to state securities commissions; expenses related to
administrative personnel and services as required to support holders of Shares;
legal fees relating solely to Shares; and Directors' fees incurred as a result
of issues relating solely to Shares.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share gives the shareholder one vote in Director elections and other
matters submitted to shareholders for vote. All shares of each portfolio or
class in the Corporation have equal voting rights, except that, in matters
affecting only a particular Fund or class, only shares of that particular Fund
or class are entitled to vote.
As a Maryland corporation, the Corporation is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Fund's operation and for the election of Directors under certain
circumstances.
Directors may be removed by a two-thirds vote of the number of Directors prior
to such removal or by a two-thirds vote of the shareholders at a special
meeting. The Directors shall call a special meeting of shareholders upon the
written request of shareholders owning at least 10% of the Corporation's
outstanding shares entitled to vote.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
However, the Fund may invest in the stock of certain foreign corporations which
would constitute a Passive Foreign Investment Company (PFIC). Federal income
taxes may be imposed on the Fund upon disposition of PFIC investments.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Corporation's other portfolios, if any, will not be combined for tax purposes
with those realized by the Fund.
Investment income received by the Fund from sources within foreign countries may
be subject to foreign taxes withheld at the source. The United States has
entered into tax treaties with many foreign countries that entitle the Fund to
reduced tax rates or exemptions on this income. The effective rate of foreign
tax cannot be predicted since the amount of Fund assets to be invested within
various countries is unknown. However, the Fund intends to operate so as to
qualify for treaty-reduced tax rates where applicable.
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.
If more than 50% of the value of the Fund's assets at the end of the tax year is
represented by stock or securities of foreign corporations, the Fund intends to
qualify for certain Internal Revenue Code stipulations that would allow
shareholders to claim a foreign tax credit or deduction on their U.S. income tax
returns. The Internal Revenue Code, as amended, may limit a shareholder's
ability to claim a foreign tax credit. Furthermore, shareholders who elect to
deduct their portion of the Fund's foreign taxes rather than take the foreign
tax credit must itemize deductions on their income tax returns.
PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Fund:
the Fund is subject to the Pennsylvania corporate franchise tax; and
Fund Shares are exempt from personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund advertises the total return for Class B Shares.
Total return represents the change, over a specific period of time, in the value
of an investment in Class B 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 performance information reflects the effect of non-recurring charges, such
as the contingent deferred sales charge, which, if excluded, would increase the
total return.
Total return will be calculated separately for Class A Shares, Class B Shares,
and Class C Shares. Because Class A Shares are subject to a front-end sales
load, the total return for Class B Shares and Class C Shares, for the same
period, may exceed that of Class A Shares. Depending on the dollar amount
invested and the time period for which any class of shares is held, the total
return for any particular class may exceed that of another.
From time to time, the Fund may advertise the performance of Class B Shares
using certain financial publications and/or compare the performance of Class B
Shares to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
Class A Shares are sold primarily to customers of financial institutions subject
to a front-end sales load of up to 5.50%. Under certain circumstances, investors
may qualify for reduced sales loads on purchases of Class A Shares. Class A
Shares are subject to a Services Plan fee of up to 0.25 of 1% of the Class A
Shares' average daily net assets and are subject to a minimum initial investment
of $500, unless the investment is in a retirement account, in which case the
minimum is $50.
Class C Shares are sold primarily to customers of financial institutions at net
asset value with no initial sales load. Class C Shares are distributed pursuant
to a Distribution Plan adopted by the Fund whereby the distributor is paid a fee
of up to 0.75 of 1%, in addition to a Services Plan fee of up to 0.25 of 1%, of
the Class C Shares' average daily net assets. In addition, Class C Shares may be
subject to certain contingent deferred sales charges. Investments in Class C
Shares are subject to a minimum initial investment of $1,500, unless the
investment is in a retirement account, in which case the minimum investment is
$50.
The amount of dividends payable to Class A Shares will generally exceed that of
Class B Shares and Class C Shares by the difference between Class Expenses and
distribution and shareholder service expenses borne by shares of each respective
class.
The stated advisory fee is the same for all classes of shares.
INTERNATIONAL EQUITY FUND
CLASS A SHARES
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Arthur Andersen LLP, the Fund's
independent public accountants. Their report dated January 21, 1994, is included
in the annual report, which is incorporated by reference. This table should be
read in conjunction with the Fund's financial statements and notes thereto,
which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993 1992 1991 1990 1989 1988 1987 1986 1985
NET ASSET VALUE, BEGINNING
OF PERIOD $ 14.09 $ 14.44 $ 14.28 $ 17.59 $ 17.34 $ 19.99 $ 22.87 $ 14.62 $ 9.50
- --------------------------
INCOME FROM INVESTMENT
OPERATIONS
- --------------------------
Net investment income 0.06 0.10 0.11 0.19 0.18 0.19 0.24 0.04 0.09
- --------------------------
Net realized and
unrealized gain (loss)
on investments 2.53 (0.37) 0.37 (1.16) 1.60 3.27 (0.72) 8.63 5.04
- -------------------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total from investment
operations 2.59 (.27) 0.48 (.97) 1.78 3.46 (0.48) 8.67 5.13
- --------------------------
LESS DISTRIBUTIONS
- --------------------------
Dividends to
shareholders from net
investment income (0.06) (0.08) (0.21) (0.20) (0.23) (0.23) (0.05) (0.08) (0.01)
- --------------------------
Distributions for
shareholders from net
realized gain on
investment transactions -- -- (0.11) (2.14) (1.30) (5.88) (2.35) (0.34) --
- --------------------------
Distributions in excess
of net investment income (0.13)(b)
- -------------------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (0.19) (0.08) (0.32) (2.34) (1.53) (6.11) (2.40) (0.42) (0.01)
- -------------------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF
PERIOD $ 16.49 $ 14.09 $ 14.44 $ 14.28 $ 17.59 $ 17.34 $ 19.99 $ 22.87 $ 14.62
- -------------------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN* 18.52% (1.86%) 3.49% (6.72)% 11.55% 24.33% (2.70%) 60.75% 54.07%
- --------------------------
RATIOS TO AVERAGE NET
ASSETS
- --------------------------
Expenses 1.60% 1.57% 1.52% 1.32% 1.01% 1.00% 1.00% 1.00% 1.00%
- --------------------------
Net investment income 0.13% 0.69% 0.78% 1.39% 1.04% 1.43% 0.93% 0.34% 1.30%
- --------------------------
Expense waiver/
reimbursement(c) 0.01% 0.02% 0.30% 0.25% 0.46% 0.28% 0.17% 0.19% 0.50%
- --------------------------
SUPPLEMENTAL DATA
- --------------------------
Net assets, end of
period
(000 omitted) $192,860 $106,937 $101,980 $82,541 $65,560 $68,922 $85,860 $106,257 $34,209
- --------------------------
Portfolio turnover
rate*** 74% 91% 84% 114% 85% 98% 130% 70% 61%
- --------------------------
<CAPTION>
<S> <C>
1984**
NET ASSET VALUE, BEGINNING
OF PERIOD $ 10.00
- --------------------------
INCOME FROM INVESTMENT
OPERATIONS
- --------------------------
Net investment income 0.02
- --------------------------
Net realized and
unrealized gain (loss)
on investments (0.52)
- -------------------------- -----------
Total from investment
operations (0.50)
- --------------------------
LESS DISTRIBUTIONS
- --------------------------
Dividends to
shareholders from net
investment income --
- --------------------------
Distributions for
shareholders from net
realized gain on
investment transactions --
- --------------------------
Distributions in excess
of net investment income
- -------------------------- -----------
TOTAL DISTRIBUTIONS --
- -------------------------- -----------
NET ASSET VALUE, END OF
PERIOD $ 9.50
- -------------------------- -----------
TOTAL RETURN* (2.86)%
- --------------------------
RATIOS TO AVERAGE NET
ASSETS
- --------------------------
Expenses 0.56%(a)
- --------------------------
Net investment income 2.89%(a)
- --------------------------
Expense waiver/
reimbursement(c) 0.74%(a)
- --------------------------
SUPPLEMENTAL DATA
- --------------------------
Net assets, end of
period
(000 omitted)
- --------------------------
Portfolio turnover
rate*** 6%
- --------------------------
</TABLE>
* Based on net asset value, which does not reflect the sales load or redemption
fee, if applicable.
** Reflects operations from August 17, 1984 to November 30, 1984. For the
period from the start of business, March 12, 1984 to August 16, 1984, net
investment income aggregating $0.274 per share ($27,229) was distributed to
the Fund's former sub-adviser. Such distribution represented substantially
all of the net income of the Fund prior to the initial public offering of
Fund shares which commenced on August 17, 1984.
*** Represents portfolio turnover rate for the entire Fund.
(a) Computed on an annualized basis.
(b) Distributions in excess of net investment income for the year ended
November 30, 1993, were a result of certain book and tax timing
differences. These distributions do not represent a return of capital for
federal income tax purposes.
(c) Increase/decrease in above expense/income ratios due to waivers or
reimbursements of expenses.
Further information about the Fund's performance is contained in the Fund's
annual report dated November 30, 1993, which can be obtained free of charge.
INTERNATIONAL EQUITY FUND
CLASS C SHARES
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by Arthur Andersen LLP, the Fund's
independent public accountants. Their report dated January 21, 1994, on the
Fund's financial statements for the year ended November 30, 1993, and on the
following table for each of the periods presented, is included in the Annual
Report, which is incorporated by reference. This table should be read in
conjunction with the Fund's financial statements and notes thereto, which may be
obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1993**
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.88
- -----------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------------
Net investment income (0.04)
- -----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 1.57
- ----------------------------------------------------------------------------------------------- --------
Total from investment operations 1.53
- -----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income --
- -----------------------------------------------------------------------------------------------
Distributions for shareholders from net realized gain on investment transactions --
- ----------------------------------------------------------------------------------------------- --------
TOTAL DISTRIBUTIONS --
- ----------------------------------------------------------------------------------------------- --------
NET ASSET VALUE, END OF PERIOD $ 16.41
- ----------------------------------------------------------------------------------------------- --------
TOTAL RETURN* 10.28%
- -----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------
Expenses 2.57%(b)
- -----------------------------------------------------------------------------------------------
Net investment income (1.10%)(b)
- -----------------------------------------------------------------------------------------------
Expense waiver/reimbursement(a) .01%(b)
- -----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 2,852
- -----------------------------------------------------------------------------------------------
Portfolio turnover rate*** 74%
- -----------------------------------------------------------------------------------------------
</TABLE>
* Based on net asset value, which does not reflect the sales load or
redemption fee, if applicable.
** Reflects operations for the period from March 31, 1993 (date of initial
public offering) to November 30, 1993.
*** Represents portfolio turnover rate for the entire Fund.
(a) Increase/decrease in above expense/income ratios due to waivers or
reimbursements of expenses.
(b) Computed on an annualized basis.
Further information about the Fund's performance is contained in the Fund's
annual report dated November 30, 1993, which can be obtained free of charge.
ADDRESSES
- --------------------------------------------------------------------------------
International Equity Fund
Class B 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
- ------------------------------------------------------------------------------
Sub-Adviser
Fiduciary International, Inc. Two World Trade Center
New York, New York 10048
- -----------------------------------------------------------------------------
Custodian
State Street Bank and P.O. Box 8604
Trust Company Boston, Massachusetts 02266-8604
- -----------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- -----------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
- -----------------------------------------------------------------------------
Independent Public Accountants
Arthur Andersen, LLP 2100 One PPG Place
Pittsburgh, Pennsylvania 15222
- ------------------------------------------------------------------------------
INTERNATIONAL EQUITY
FUND
CLASS B SHARES
PROSPECTUS
An Open-End, Diversified
Management Investment Company
September 27, 1994
46031P605
1010302A-B (9/94)
INTERNATIONAL EQUITY FUND
A PORTFOLIO OF INTERNATIONAL SERIES, INC.
(FORMERLY, FT SERIES, INC.)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectuses for Class A Shares and Class C Shares of
International Equity Fund (the "Fund") dated March 29, 1994, and for
Class B Shares of the Fund dated September 27, 1994. This Statement is
not a prospectus itself. To receive a copy of any of the prospectuses,
write or call the Fund.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated September 27, 1994
[logo] FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES 1
- ---------------------------------------------------------------
Types of Investments 1
When-Issued and Delayed Delivery Transactions 1
Repurchase Agreements 1
Lending Portfolio Securities 1
Restricted and Illiquid Securities 2
Futures and Options Transactions 2
Futures Contracts 2
Put Options on Futures Contracts 2
Call Options on Futures Contracts 3
"Margin" in Futures Transactions 3
Regulatory Restrictions 4
Purchasing Put Options on Portfolio Securities 4
Writing Covered Call Options on
Portfolio Securities 4
Over-the-Counter Options 4
Warrants 4
Developing/Emerging Markets 4
Portfolio Turnover 5
Investment Limitations 5
THE FUNDS 7
- ---------------------------------------------------------------
Fund Ownership 8
INVESTMENT ADVISORY SERVICES 8
- ---------------------------------------------------------------
Adviser to the Fund 8
Sub-Adviser 8
Advisory Fees 8
Sub-Advisory Fees 9
Other Related Services 9
ADMINISTRATIVE SERVICES 9
- ---------------------------------------------------------------
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT 9
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 9
- ---------------------------------------------------------------
PURCHASING SHARES 10
- ---------------------------------------------------------------
Distribution of Shares 10
Distribution and Shareholder Services Plans 10
Conversion to Federal Funds 11
Purchases by Sales Representatives, Directors
of the Corporation, and Employees 11
DETERMINING NET ASSET VALUE 11
- ---------------------------------------------------------------
Determining Market Value of Securities 11
Trading in Foreign Securities 11
REDEEMING SHARES 11
- ---------------------------------------------------------------
Redemption in Kind 12
TAX STATUS 12
- ---------------------------------------------------------------
The Fund's Tax Status 12
Foreign Taxes 12
Shareholders' Tax Status 12
TOTAL RETURN 12
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 13
- ---------------------------------------------------------------
FINANCIAL STATEMENTS 13
- ---------------------------------------------------------------
APPENDIX 14
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
The Fund is a portfolio in International Series, Inc. (the "Corporation"), which
was established as FT International Trust, a Massachusetts business trust, under
a Declaration of Trust dated March 9, 1984, and reorganized as a corporation
under the laws of the state of Maryland on February 11, 1991. At a special
meeting of shareholders held on March 15, 1994, the shareholders of the
Corporation approved an amendment to the Articles of Incorporation to change the
name of the Corporation from FT Series, Inc., to International Series, Inc.
Shares of the Fund are 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 Combined Statement of Additional
Information relates to all three classes of the above-mentioned Shares.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to obtain a total return on its assets from a
combination of long-term capital growth and income through a diversified
portfolio primarily invested in equity securities of non-U.S. issuers.
TYPES OF INVESTMENTS
The Fund invests in a diversified portfolio composed primarily of non-U.S.
securities. A substantial portion of these instruments will be equity securities
of established companies in economically developed countries. The Fund will
invest at least 65%, and under normal market conditions, substantially all of
its total assets, in equity securities denominated in foreign currencies of
issuers located in at least three countries outside of the United States. The
Fund may also purchase investment grade fixed income securities and foreign
government securities; enter into forward commitments, repurchase agreements,
and foreign currency transactions; and maintain reserves in foreign or U.S.
money market instruments.
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. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the securities
to be purchased are segregated on the Fund's records at the trade date. These
assets are marked to market daily and maintained until the transaction is
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.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily. In
the event that such a defaulting seller filed for bankruptcy or became
insolvent, disposition of such securities by the Fund might be delayed pending
court action. The Fund believes that under the regular procedures normally in
effect for custody of the Fund's portfolio securities subject to repurchase
agreements, a court of competent jurisdiction would rule in favor of the Fund
and allow retention or disposition of such securities. The Fund will only enter
into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Fund's adviser or
sub-adviser to be creditworthy.
LENDING PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend its portfolio
securities to broker/dealers, banks, or other institutional borrowers of
securities. The Fund will only enter into loan arrangements with broker/dealers,
banks, or other institutions which the investment adviser or sub-adviser have
determined are creditworthy under guidelines established by the Corporation's
Board of Directors (the "Directors") and will receive collateral equal to at
least 100% of the value of the securities loaned. The Fund did not lend
portfolio securities during the last fiscal year and has no present intent to do
so in the current fiscal year.
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.
- --------------------------------------------------------------------------------
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Directors to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission Staff
position set forth in the adopting release for Rule 144A under the Securities
Act of 1933 (the "Rule"). The Rule is a non-exclusive, safe-harbor for certain
secondary market transactions involving securities subject to restrictions on
resale under federal securities laws. The Rule provides an exemption from
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the liquidity of
the secondary market for securities eligible for resale under Rule 144A. The
Fund believes that the staff of the Securities and Exchange Commission has left
the question of determining the liquidity of all restricted securities (eligible
for resale under Rule 144A) to the Corporation's Directors. The Directors
consider the following criteria in determining the liquidity of certain
restricted securities:
.the frequency of trades and quotes for the security;
.the number of dealers willing to purchase or sell the security and the number
of other potential buyers;
.dealer undertakings to make a market in the security; and
.the nature of the security and the nature of the marketplace trades.
When the Fund invests in certain restricted securities determined by the
Directors to be liquid, such investments could have the effect of increasing the
level of Fund illiquidity to the extent that the buyers in the secondary market
for such securities (whether in Rule 144A resales or other exempt transactions)
become, for a time, uninterested in purchasing these securities.
FUTURES AND OPTIONS TRANSACTIONS
The Fund may engage in futures and options hedging transactions. In an effort to
reduce fluctuations in the net asset value of Shares of the Fund, 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 will maintain its positions
in securities, option rights, and segregated cash subject to puts and calls
until the options are exercised, closed, or have expired. An option position on
financial futures contracts may be closed out only on the exchange on which the
position was established.
FUTURES CONTRACTS
The Fund may engage in transactions in 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. However, a stock index futures contract is an agreement
pursuant to which two parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at the close of the
last trading day of the contract and the price at which the index contract was
originally written. No physical delivery of the underlying securities in the
index is made.
The purpose of the acquisition or sale of a futures contract by the Fund is to
protect the Fund from fluctuations in the value of its securities caused by
anticipated changes in interest rates or market conditions without necessarily
buying or selling the securities. For example, in the fixed income securities
market, price generally moves inversely to interest rates. 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 anticipated holding period. The Fund would "go long" (i.e., agree to
purchase securities in the future at a predetermined price) to hedge against a
decline in market interest rates.
PUT OPTIONS ON FUTURES CONTRACTS
The Fund may engage in transactions in put options on futures contracts. The
Fund may purchase listed put options on 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 market
factors, such as an anticipated increase in 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 may 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 close out the position. 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 only the premium
paid for the contract will be lost.
When the Fund sells a put on a futures contract, it receives a cash premium
which can be used in whatever way is deemed most advantageous to the Fund. In
exchange for such premium, the Fund grants to the purchaser of the put the right
to receive from the Fund, at the strike price, a short position in such futures
contract, even though the strike price upon exercise of the option is greater
than the value of the futures position received by such holder. If the value of
the underlying futures position is not such that exercise of the option would be
profitable to the option holder, the option will generally expire without being
exercised. The Fund has no obligation to return premiums paid to it whether or
not the option is exercised. It will generally be the policy of the Fund, in
order to avoid the exercise of an option sold by it, to cancel its obligation
under the option by entering into a closing purchase transaction, if available,
unless it is determined to be in the Fund's interest to deliver the underlying
futures position. A closing purchase transaction consists of the purchase by the
Fund of an option having the same term as the option sold by the Fund, and has
the effect of canceling the Fund's position as a seller. The premium which the
Fund will pay in executing a closing purchase transaction may be higher than the
premium received when the option was sold, depending in large part upon the
relative price of the underlying futures position at the time of each
transaction.
CALL OPTIONS ON FUTURES CONTRACTS
The Fund may engage in transactions in call options on 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, for example, 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 or as stock prices fall, 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 future's 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 help substantially to offset the drop in value of the Fund's portfolio
securities. 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 help offset the decrease in value of the hedged
securities.
When the Fund purchases a call on a financial futures contract, it receives in
exchange for the payment of a cash premium the right, but not the obligation, to
enter into the underlying futures contract at a strike price determined at the
time the call was purchased, regardless of the comparative market value of such
futures position at the time the option is exercised. The holder of a call
option has the right to receive a long (or buyer's) position in the underlying
futures contract.
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 (including cash or cash equivalents) 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 the 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 contracts initial margin does not involve a
borrowing 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.
REGULATORY RESTRICTIONS
To the extent required to comply with Commodity Futures Trading Commission
Regulation 4.5 and thereby avoid status as a "commodity pool operator," the Fund
will not enter into a futures contract, or purchase an option thereon, if
immediately thereafter the initial margin deposits for futures contracts held by
it, plus premiums paid by it for open options on futures, would exceed 5% of the
total assets of the Fund. The Fund will not engage in transactions in futures
contracts or options thereon for speculation, but only to attempt to hedge
against changes in market conditions affecting the value of assets which the
Fund holds or intends to purchase. When futures contracts or options thereon are
purchased in order to protect against a price increase on securities or other
assets intended to be purchased later, it is anticipated that at least 75% of
such intended purchases will be completed. When other futures contracts or
options thereon are purchased, the underlying value of such contracts will at
all times not exceed the sum of (1) accrued profit on such contracts held by the
broker; (2) cash or high-quality money market instruments set aside in an
identifiable manner; and (3) cash proceeds from investments due in 30 days or
less.
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 write covered call options to generate income. As a 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).
OVER-THE-COUNTER OPTIONS
The Fund may purchase and write over-the-counter options on portfolio securities
in negotiated transactions with the buyers or writers of the options for those
options on portfolio securities held by the Fund and not traded on an exchange.
Over-the-counter options are two-party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third-party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market while over-the-counter options may not.
WARRANTS
The Fund may invest in warrants. Warrants are basically options to purchase
common stock at a specific price (usually at a premium above the market value of
the optioned common stock at issuance) valid for a specific period of time.
Warrants may have a life ranging from less than a year to twenty years or may be
perpetual. However, most warrants have expiration dates after which they are
worthless. In addition, if the market price of the common stock does not exceed
the warrant's exercise price during the life of the warrant, the warrant will
expire as worthless. Warrants have no voting rights, pay no dividends, and have
no rights with respect to the assets of the corporation issuing them. The
percentage increase or decrease in the market price of the warrant may tend to
be greater than the percentage increase or decrease in the market price of the
optioned common stock.
DEVELOPING/EMERGING MARKETS
The economies of individual emerging countries may differ favorably from the
U.S. economy in such respects as growth of gross domestic product, rate of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency and balance of payments position. Further, the economies of
developing countries generally are heavily dependent on international trade and,
accordingly, have been, and may continue to be, adversely affected by trade
barriers, exchange controls, managed adjustments in relative currency values and
other protectionist measures
- --------------------------------------------------------------------------------
imposed or negotiated by the countries with which they trade. These economies
also have been, and may continue to be, adversely affected by economic
conditions in the countries with which they trade.
Prior governmental approval for foreign investments may be required under
certain circumstances in some emerging countries, and the extent of foreign
investment in certain debt securities and domestic companies may be subject to
limitation in other emerging countries. Foreign ownership limitations also may
be imposed by the charters of individual companies in emerging countries to
prevent, among other concerns, violation of foreign investment limitations.
Repatriation of investment income, capital and the proceeds of sales by foreign
investors may require governmental registration and/or approval in some emerging
countries. The Fund could be adversely affected by delays in, or a refusal to
grant, any required governmental registration or approval for such repatriation.
Any investment subject to such repatriation controls will be considered illiquid
if it appears reasonably likely that this process will take more than seven
days.
With respect to any emerging country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
governmental regulation, social instability or diplomatic developments
(including war) which could affect adversely the economies of such countries or
the value of the Fund's investments in those countries. In addition, it may be
difficult to obtain and enforce a judgment in a court outside of the U.S.
PORTFOLIO TURNOVER
The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. Portfolio securities will be sold when the
Fund's adviser or sub-adviser believes it is appropriate, regardless of how long
those securities have been held. For the fiscal years ended November 30, 1993,
and 1992, the portfolio turnover rates were 74% and 91%,
respectively.
INVESTMENT LIMITATIONS
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of its total assets, the Fund will not
purchase securities of any one issuer (other than securities issued or
guaranteed by the government of the United States or its agencies or
instrumentalities) if as a result more than 5% of the value of its total
assets would be invested in the securities of that issuer. To comply with
certain state restrictions, the Fund will not purchase securities of any
issuer if as a result more than 5% of its total assets would be invested
in securities of that issuer. (If state restrictions change, this latter
restriction may be revised without shareholder approval or notification.)
ACQUIRING SECURITIES
The Fund will not acquire more than 10% of the outstanding voting
securities of any one issuer, or acquire any securities of Fiduciary
Trust Company International or its affiliates.
CONCENTRATION OF INVESTMENTS
The Fund will not invest more than 25% of its total assets in securities
of issuers having their principal business activities in the same
industry.
BORROWING
The Fund will not borrow money except as a temporary measure for
extraordinary or emergency purposes and then only in amounts up to
one-third of the value of its total assets, including the amount
borrowed. This borrowing provision is not for investment leverage but
solely to facilitate management of the portfolio by enabling the Fund to
meet redemption requests when the liquidation of portfolio securities
would be inconvenient or disadvantageous. The Fund will not purchase
securities while outstanding borrowings exceed 5% of the value of its
total assets.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate assets, except when
necessary for permissible borrowings. In those cases, it may pledge
assets having a value of 15% of its assets taken at cost. Neither the
deposit of underlying securities or other assets in escrow in connection
with the writing of put or call options or the purchase of securities on
a when-issued basis, nor margin deposits for the purchase and sale of
financial futures contracts and related options are deemed to be a
pledge.
- --------------------------------------------------------------------------------
BUYING ON MARGIN
The Fund will not purchase any securities on margin, but may obtain such
short-term credits as are necessary for clearance of transactions, except
that the Fund may make margin payments in connection with its use of
financial futures contracts or related options and transactions.
ISSUING SENIOR SECURITIES
The Fund will not issue senior securities except in connection with
borrowing money directly or through reverse repurchase agreements or as
required by forward commitments to purchase securities or currencies.
UNDERWRITING
The Fund will not underwrite or participate in the marketing of
securities of other issuers, except as it may be deemed to be an
underwriter under federal securities law in connection with the
disposition of its portfolio securities.
INVESTING IN REAL ESTATE
The Fund will not invest in real estate, although it may invest in
securities secured by real estate or interests in real estate or issued
by companies, including real estate investment trusts, which invest in
real estate or interests therein.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities or commodity contracts,
except that the Fund may purchase and sell financial futures contracts
and options on financial futures contracts, provided that the sum of its
initial margin deposits for financial futures contracts held by the Fund,
plus premiums paid by it for open options on financial futures contracts,
may not exceed 5% of the fair market value of the Fund's total assets,
after taking into account the unrealized profits and losses on those
contracts. Further, the Fund may engage in foreign currency transactions
and purchase or sell forward contracts with respect to foreign currencies
and related options.
LENDING CASH OR SECURITIES
The Fund will not lend any assets except portfolio securities. This shall
not prevent the purchase or holding of bonds, debentures, notes,
certificates of indebtedness, or other debt securities of an issuer,
repurchase agreements or other transactions which are permitted by the
Fund's investment objective and policies or its Articles of
Incorporation.
INVESTING IN MINERALS
The Fund will not invest in interests in oil, gas, or other mineral
exploration or development programs, other than debentures or equity
stock interests.
SELLING SHORT
The Fund will not sell securities short unless (1) it owns, or has a
right to acquire, an equal amount of such securities, or (2) it has
segregated an amount of its other assets equal to the lesser of the
market value of the securities sold short or the amount required to
acquire such securities. The segregated amount will not exceed 10% of the
Fund's net assets. While in a short position, the Fund will retain the
securities, rights, or segregated assets.
Except as noted, the above investment limitations cannot be changed without
shareholder approval. The following limitations, however, may be changed by the
Directors without shareholder approval. Except as noted, shareholders will be
notified before any material change in these limitations becomes effective.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for the purpose of
exercising control or management.
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.
- --------------------------------------------------------------------------------
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will not own securities of open-end investment companies, own
more than 3% of the total outstanding voting stock of any closed-end
investment company, invest more than 5% of its total assets in any
closed-end investment company, or invest more than 10% of its total
assets in closed-end investment companies in general. The Fund will
purchase securities of closed-end investment companies only in open-
market transactions involving only customary broker's commissions.
However, these limitations are not applicable if the securities are
acquired in a merger, consolidation, reorganization, or acquisition of
assets. The Fund will indirectly bear its proportionate share of any fees
and expenses paid by other investment companies, in addition to the fees
and expenses payable directly by the Fund.
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, including the operation of any predecessor.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including securities not determined by the Directors
to be liquid, repurchase agreements with maturities longer than seven
days after notice, and certain over-the-counter options.
DEALING IN PUTS AND CALLS
The Fund will not write call options or put options on securities, except
that the Fund may write covered call options and secured put options on
all or any portion of its portfolio, provided the securities are held in
the Fund's portfolio or the Fund is entitled to them in deliverable form
without further payment or the Fund has segregated cash in the amount of
any further payments. The Fund will not purchase put options on
securities unless the securities or an offsetting call option is held in
the Fund's portfolio. The Fund may also purchase, hold or sell (i)
contracts for future delivery of securities or currencies and (ii)
warrants granted by the issuer of the underlying securities. The Fund
will not purchase put or call options on securities or futures contracts
if more than 5% of the value of the Fund's total assets would be invested
in premiums on open option positions.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND
DIRECTORS OF THE CORPORATION
The Fund will not purchase or retain the securities of any issuer if the
officers and Directors of the Corporation or the Fund's investment
adviser or sub-adviser owning individually more than 1/2 of 1% of the
issuer's securities together own more than 5% of the issuer's securities.
ARBITRAGE TRANSACTIONS
To comply with certain state restrictions, the Fund will not enter into
transactions for the purpose of engaging in arbitrage. If state
requirements change, this restriction may be revised without shareholder
notification.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
To comply with registration requirements in certain states, the Fund (1) will
limit short sales of securities of any class of any one issuer to the lesser of
2% of the Fund's net assets or 2% of the securities of that class, (2) will make
short sales only on securities listed on recognized stock exchanges. The latter
restrictions, however, do not apply to short sales of securities the Fund holds
or has a right to acquire without the payment of any further consideration, and
(3) will not invest more than 5% of its total assets in restricted securities.
(If state requirements change, these restrictions may be revised without
shareholder notification.)
The Fund did not borrow money or pledge securities in excess of 5% of the value
of its total assets during the last fiscal year and has no present intent to do
so in the coming fiscal year.
THE FUNDS
- --------------------------------------------------------------------------------
"The Funds" and "Funds" mean the following investment companies: American
Leaders Fund, Inc.; Annuity Management Series; Automated Cash Management Trust;
Automated Government Money Trust; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.;
Federated GNMA Trust; Federated Government
- --------------------------------------------------------------------------------
Trust; Federated Growth Trust; Federated High Yield Trust; Federated Income
Securities Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Intermediate Government Trust; Federated Master
Trust; Federated Municipal Trust; Federated Short-Intermediate Government Trust;
Federated Short-Term U.S. Government Trust; Federated Stock Trust; Federated
Tax-Free Trust; Federated U.S. Government Bond Fund; First Priority Funds; Fixed
Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund, Inc.;
Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S.
Government Securities, Inc.; Government Income Securities, Inc.; High Yield Cash
Trust; Insight Institutional Series, Inc.; Insurance Management Series;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty
Term Trust, Inc.--1999; Liberty U.S. Government Money Market Trust; Liberty
Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Mark Twain Funds;
The Medalist Funds; Money Market Management, Inc.; Money Market Obligations
Trust; Money Market Trust; Municipal Securities Income Trust; New York Municipal
Cash Trust; 111 Corcoran Funds; Peachtree Funds; The Planters Funds; Portage
Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term Municipal Trust; Star
Funds; The Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.;
Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments Trust; Trademark
Funds; Trust for Financial Institutions; Trust for Government Cash Reserves;
Trust for Short-Term U.S. Government Securities; Trust for U.S. Treasury
Obligations; and World Investment Series, Inc.
FUND OWNERSHIP
As of July 9, 1994, the following shareholders of record owned 5% or more of the
outstanding Class A Shares of the Fund: Clooney & Co., New York, New York, owned
approximately 1,673,785 Class A Shares (12.96%); Mertru & Company, Muncie,
Indiana, owned approximately 902,580 Class A Shares (6.99%); and Bozworth
Company, Little Rock, Arkansas, owned approximately 864,220 Class A Shares
(6.69%).
Also as of July 9, 1994, the following shareholder of record owned 5% or more of
the outstanding Class C Shares of the Fund: Merrill Lynch Pierce Fenner & Smith
(as record owner holding Class C Shares for its clients), Jacksonville, Florida,
owned approximately 124,460 Class C Shares (32.16%).
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND
The Fund's investment adviser is Federated Management (the "Adviser"). It is a
subsidiary of Federated Investors. All the voting securities of Federated
Investors are owned by a trust, the trustees of which are John F. Donahue, his
wife, and his son, J. Christopher Donahue.
The Adviser shall not be liable to the Fund, the Corporation, or any shareholder
of the Fund 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
Corporation.
SUB-ADVISER
Fiduciary International, Inc. ("Fiduciary"), is the sub-adviser to the Fund
under the terms of a Sub-Advisory Agreement between Federated Management and
Fiduciary. All of the directors, officers, and employees of the sub-adviser also
serve as directors, officers and employees of Fiduciary Trust Company
International. However, no director, officer, or employee of either the
sub-adviser or Fiduciary Trust Company International serves as a director,
officer, or employee of the Corporation.
Fiduciary Trust Company International was founded in 1931 and is a New York
state-chartered bank. It has focused primarily on the management of the
investments and financial affairs of its customers, and has chosen to minimize
its commercial banking activities. As of December 31, 1993, Fiduciary Trust
Company International had total assets of approximately $335 million, and total
assets under management of over $29 billion, of which in excess of
$10 billion is invested in foreign securities. Fiduciary International, Inc., is
a wholly-owned subsidiary of Fiduciary Investment Corporation, which, in turn,
is a wholly-owned subsidiary of Fiduciary Trust Company International. Fiduciary
Investment Corporation is a corporation organized under Article XII of the New
York Banking Law. Its primary activity is to act as an intermediate parent of
several Fiduciary Trust Company International subsidiaries.
ADVISORY FEES
For its advisory services, Federated Management receives an annual investment
advisory fee as described in the prospectuses. For the fiscal years ended
November 30, 1993, and, prior to the creation of separate classes of shares,
November 30, 1992 and 1991, Fiduciary International, Inc., the Fund's former
investment adviser, earned advisory
- --------------------------------------------------------------------------------
fees of $1,387,617, $1,092,369, and $923,543, respectively, which were reduced
by $16,560, $21,055, and $278,090, respectively, because of the voluntary
undertaking to limit the Fund's expenses.
SUB-ADVISORY FEES
For its sub-advisory services, Fiduciary International, Inc., receives an annual
sub-advisory fee as described in the prospectuses. Federated Management became
the Fund's sub-adviser December 1, 1990, and served in that capacity until March
15, 1994. For the fiscal years ended November 30, 1993, and, prior to the
creation of separate classes of shares, November 30, 1992 and 1991, Federated
Management, in its former capacity as sub-adviser to the Fund, received a gross
fee from Fiduciary International, Inc., the Fund's former investment adviser,
amounting to $693,809, $546,184, and $461,772, respectively.
STATE EXPENSE LIMITATIONS
The Adviser and sub-adviser have undertaken to comply with the expense
limitation established by certain states for investment companies whose
shares are registered for sale in those states. If the Fund's normal
operating expenses (including the investment advisory and sub-advisory
fees, 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 and sub-adviser will reimburse the Fund for their expenses over
the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory and sub-advisory fees paid will be
reduced by the amounts of the excess, subject to an annual adjustment. If
the expense limitation is exceeded, the amounts to be reimbursed by the
Adviser and sub-adviser will be limited, in any single fiscal year, by
the amounts of the investment advisory and sub-advisory fees.
This arrangement is not part of the advisory contract or sub-advisory
agreement and may be amended or rescinded in the future.
OTHER RELATED SERVICES
Affiliates of the Adviser may, from time to time, provide certain electronic
equipment and software to institutional customers in order to facilitate the
purchase of shares of funds offered by Federated Securities Corp.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund and receives an administrative
fee as described in the prospectuses. For the fiscal years ended November 30,
1993, and, prior to the creation of separate classes of shares, November 30,
1992, and 1991, the Fund incurred administrative service fees of $208,142,
$163,855, and $140,238, respectively. Dr. Henry J. Gailliot, an officer of
Federated Management, the Adviser to the Fund, holds approximately 20% of the
outstanding common stock and serves as a director of Commercial Data Services,
Inc., a company which provides computer processing services to Federated
Administrative Services.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
- --------------------------------------------------------------------------------
Federated Services Company serves as transfer agent 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 Services Company also maintains the Fund's accounting records. The fee
is based on the level of the Fund's average net assets for the period plus
out-of-pocket expenses.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
The Adviser and sub-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 sub-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.
- --------------------------------------------------------------------------------
The Adviser and sub-adviser and their affiliates exercise reasonable business
judgment in selecting brokers who offer brokerage and research services to
execute securities transactions. They determine in good faith that commissions
charged by such persons are reasonable in relationship to the value of the
brokerage and research services provided.
Research services provided by brokers may be used by the Adviser, the
sub-adviser, or by affiliates of Federated Investors in advising certain 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.
Investment decisions for the Fund will be made independently from those of any
fiduciary or other accounts that may be managed by Fiduciary Trust Company
International or its subsidiaries. If, however, such accounts and the Fund are
simultaneously engaged in transactions involving the same securities, the
transactions may be combined and allocated to each account. This system may
adversely affect the price the Fund pays or receives, or the size of the
position it obtains.
The Adviser may engage in other non-U.S. transactions that may have adverse
effects on the market for securities in the Fund's portfolio. The Adviser and
sub-adviser are not obligated to obtain any material non-public ("inside")
information about any securities issuer, or to base purchase or sale
recommendations on such information.
For the fiscal years ended November 30, 1993, and, prior to the creation of
separate classes of shares, November 30, 1992, and 1991, the Fund paid
$1,072,963, $848,720, and $584,282, respectively, in brokerage commissions on
brokerage transactions.
As of November 30, 1993, the Fund owned $1,958,000 of securities of Deutsche
Bank, one of its regular broker/dealers that derives more than 15% of gross
revenues from securities-related activities.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Except under certain circumstances described in the respective prospectuses,
Shares are sold at their net asset value (plus a sales load 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
"Investing in Class A Shares," "Investing in Class B Shares," or "Investing in
Class C Shares."
DISTRIBUTION OF SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
For the fiscal years ended November 30, 1993, and, prior to the creation of
separate classes of shares, November 30, 1992, and 1991, the distributor was
paid $114,693, $92,633, and $129,461, respectively. For the same periods, the
distributor retained $13,186, $6,976, and $11,744, respectively, after dealer
concessions.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS
As explained in the respective prospectuses, with respect to the Shares of the
Fund, the Fund has adopted a Shareholder Services Plan, and, with respect to
Class B Shares and Class C Shares, the Fund has adopted a Distribution Plan.
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses.
By adopting the Distribution Plan, the 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 objective. By identifying potential
investors whose needs are served by the Fund's objective, and properly servicing
these accounts, it may be possible to curb sharp fluctuations in rates of
redemptions and sales.
Other benefits, which may be realized under either arrangement, may include: (1)
providing personal services to shareholders; (2) investing shareholder assets
with a minimum of delay and administrative detail; (3) enhancing shareholder
recordkeeping systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.
- --------------------------------------------------------------------------------
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds before shareholders begin to
earn dividends. Federated Services Company acts as the shareholder's agent in
depositing checks and converting them to federal funds.
PURCHASES BY SALES REPRESENTATIVES, DIRECTORS OF THE CORPORATION, AND EMPLOYEES
Directors, employees, and sales representatives of the Fund, Federated
Management, Fiduciary International, Inc., and Federated Securities Corp., or
their affiliates, or any investment dealer who has a sales agreement with
Federated Securities Corp., and their spouses and children under 21, may buy
Shares at net asset value without a sales load and are not subject to a
contingent deferred sales charge (Class B Shares and Class C Shares only) 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 sales charges to trusts or pension or profit-sharing plans
for these persons.
These sales are made with the purchaser's written assurance that the purchase is
for investment purposes and that the securities will not be resold except
through redemption by the Fund.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the respective prospectuses.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the Fund's portfolio securities are determined as
follows:
.according to the last reported sale price on a recognized securities exchange,
if available. (If a security is traded on more than one exchange, the price on
the primary market for that security, as determined by the Adviser or sub-
adviser, is used.);
.according to the last reported bid price, if no sale on the recognized exchange
is reported or if the security is traded over-the-counter;
.at fair value as determined in good faith by the Corporation's Directors; or
.for short-term obligations with remaining maturities of less than 60 days at
the time of purchase, at amortized cost, which approximates value.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may consider: institutional trading in
similar groups of securities; yield; quality; coupon rate; maturity; type of
issue; trading characteristics; and other market data.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset value, the
Fund values foreign securities at the latest closing price on the exchange on
which they are traded immediately prior to the closing of the New York Stock
Exchange. Certain foreign currency exchange rates may also be determined at the
latest rate prior to the closing of the New York Stock Exchange. Foreign
securities quoted in foreign currencies are translated into U.S. dollars at
current rates. Occasionally, events that affect these values and exchange rates
may occur between the times at which they are determined and the closing of the
New York Stock Exchange. If such events materially affect the value of portfolio
securities, these securities may be valued at their fair value as determined in
good faith by the Directors, although the actual calculation may be done by
others.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request. Shareholder redemptions of Class B Shares and
Class C Shares may be subject to a contingent deferred sales charge. Redemption
procedures are explained in the respective prospectuses under "Redeeming Class A
Shares," "Redeeming Class B Shares," and "Redeeming Class C 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.
- --------------------------------------------------------------------------------
Since portfolio securities of the Fund may be traded on foreign exchanges which
trade on Saturdays or on holidays on which the Fund will not make redemptions,
the net asset value of each class of Shares of the Fund may be significantly
affected on days when shareholders do not have an opportunity to redeem their
Shares.
REDEMPTION IN KIND
Although the Corporation 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 Corporation has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Corporation is obligated to redeem Shares
for any one shareholder in cash only up to the lesser of $250,000 or 1% of a
class of Shares' 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:
.derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
.derive less than 30% of its gross income from the sale of securities held less
than three months;
.invest in securities within certain statutory limits; and
.distribute to its shareholders at least 90% of its net income earned during the
year.
However, the Fund may invest in the stock of certain foreign corporations which
would constitute a Passive Foreign Investment Company (PFIC). Federal income
taxes may be imposed on the Fund upon disposition of PFIC investments.
FOREIGN TAXES
Investment income on certain foreign securities in which the Fund may invest may
be subject to foreign withholding or other taxes that could reduce the return on
these securities. Tax treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign taxes to which the Fund
would be subject.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional Shares. The Fund's dividends, and any short-term
capital gains, are taxable as ordinary income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held
the Fund Shares.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's average annual total returns for the fiscal year ended November 30,
1993, and, prior to the creation of separate classes of shares, for the
five-year period ended November 30, 1993, and for the period from August 17,
1984 (effective date of the Fund's registration statement) to November 30, 1993,
were 13.22%, 3.65%, and 14.44%, respectively.
The average annual total return for all classes of Shares of the Fund is the
average compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of Shares owned at the
end of the period by the offering price per Share at the end of the period. The
number of Shares owned at the end of the period is based on the number of Shares
purchased at the beginning of the period with $1,000, less any applicable sales
load, adjusted over the period by any additional Shares, assuming the annual
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.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The Fund's performance of each class of Shares depends upon such variables as:
.portfolio quality;
.average portfolio maturity;
.type of instruments in which the portfolio is invested;
.changes in interest rates on money market instruments;
.changes in the Fund's or a class of Shares' expenses; and
.various other factors.
A class of Shares' 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 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 indices
used, prevailing market conditions, portfolio compositions of other funds, and
methods used to value portfolio securities and compute offering price. The
financial publications and/or indices which the Fund uses in advertising may
include:
.LIPPER ANALYTICAL SERVICES, INC., for example, makes comparative calculations
for one-month, three-month, one-year, and five-year periods which assume the
reinvestment of all capital gains distributions and income dividends.
.EUROPE, AUSTRALIA, AND FAR EAST (EAFE) INDEX is a market capitalization
weighted foreign securities index, which is widely used to measure the
performance of European, Australian, New Zealand and Far Eastern stock markets.
The index covers approximately 1,020 companies drawn from 18 countries in the
above regions. The index values its securities daily in both U.S. dollars and
local currency and calculates total returns monthly. EAFE U.S. dollar total
return is a net dividend figure less Luxembourg withholding tax. The EAFE is
monitored by Capital International, S.A., Geneva, Switzerland.
.STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a composite
index of common stocks in industry, transportation, and financial and public
utility companies, can be used to compare to the total returns of funds whose
portfolios are invested primarily in common stocks. In addition, the Standard &
Poor's index assumes reinvestments of all dividends paid by stocks listed on
its index. Taxes due on any of these distributions are not included, nor are
brokerage or other fees calculated in Standard & Poor's figures.
.MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
Advertisements and sales literature for any class 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 any
class of Shares based on annual reinvestment of dividends over a specified
period of time.
Advertisments may quote performance information which does not reflect the
effect of the sales load or contingent deferred sales charge, as applicable.
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The financial statements for the fiscal year ended November 30, 1993, are
incorporated herein by reference to the Annual Report of the Fund dated November
30, 1993 (File No. 811-3984). Additionally, the financial statements for the
six-month period ended May 31, 1994, are incorporated herein by reference from
the Fund's Semi-Annual Report dated May 31, 1994 (File No. 811-3984). Copies of
the Annual and Semi-Annual Reports may be obtained without charge by contacting
the Fund at the address located on the back cover of the prospectus.
APPENDIX
- --------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATING DEFINITIONS
PRIME-1--Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following characteristics:
.Leading market positions in well-established industries.
.High rates of return on funds employed.
.Conservative capitalization structure with moderate reliance on debt and ample
asset protection.
.Broad margins in earning coverage of fixed financial charges and high internal
cash generation.
.Well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2--Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATING DEFINITIONS
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
MOODY'S INVESTORS SERVICE, INC., LONG-TERM BOND RATING DEFINITIONS
AAA--Bonds which are rated AAA are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA--Bonds which are rated AA are judged to be of high quality by all standards.
Together with the AAA group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in AAA securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in AAA securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
STANDARD AND POOR'S RATINGS GROUP LONG-TERM DEBT RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's Ratings
Group. Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effect of changes in
circumstances and economic conditions than debt in higher rated categories.
46031P605
1010302B (9/94)
INTERNATIONAL INCOME FUND
A PORTFOLIO OF INTERNATIONAL SERIES, INC.
(FORMERLY, FT SERIES, INC.)
CLASS B SHARES
PROSPECTUS
The Class B Shares of International Income Fund (the "Fund") offered by this
prospectus represent interests in the Fund, which is a non-diversified
investment portfolio in International Series, Inc. (formerly, FT Series, Inc.)
(the "Corporation"), an open-end, management investment company (a mutual fund).
The Fund's objective is to seek a high level of current income in U.S. Dollars
consistent with prudent investment risk. The Fund has a secondary objective of
capital appreciation. The Fund will pursue these objectives by investing in
high-quality debt securities denominated primarily in foreign currencies.
THE CLASS B 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 CLASS B SHARES INVOLVES INVESTMENT RISKS
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Class B Shares of the Fund. Keep this prospectus for future reference.
The Fund has also filed a Combined Statement of Additional Information for Class
A Shares, Class B Shares, and Class C Shares dated September 27, 1994, with the
Securities and Exchange Commission. The information contained in the Combined
Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Combined Statement of Additional
Information free of charge by calling 1-800-235-4669. To obtain other
information or to make inquiries about the Fund, contact your financial
institution.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated September 27, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
GENERAL INFORMATION 2
- ------------------------------------------------------
LIBERTY FAMILY OF FUNDS 2
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 4
Acceptable Investments 4
Foreign Government Securities 4
Temporary Investments 5
Repurchase Agreements 5
When-Issued and Delayed Delivery
Transactions 5
Lending of Portfolio Securities 5
Risk Considerations 5
Allocation 5
Duration 6
Foreign Securities 6
U.S. Government Policies 6
Currency Risks 6
Hedging Vehicles and Strategies 7
Hedging Vehicles 7
Forward Foreign Currency Exchange Contracts 7
Options 8
Futures 8
Hedging Strategies 8
Currency Hedging 8
Interest Rate Hedging 9
General 9
Non-Diversification 10
Portfolio Turnover 10
Investment Limitations 10
NET ASSET VALUE 11
- ------------------------------------------------------
INVESTING IN CLASS B SHARES 11
- ------------------------------------------------------
Share Purchases 11
Through a Financial Institution 11
Directly from the Distributor 12
Minimum Investment Required 12
What Shares Cost 12
Conversion of Class B Shares 13
Systematic Investment Program 13
Certificates and Confirmations 13
Dividends 13
Capital Gains 14
Retirement Plans 14
EXCHANGE PRIVILEGE 14
- ------------------------------------------------------
Requirements for Exchange 14
Tax Consequences 14
Making an Exchange 14
Telephone Instructions 15
REDEEMING CLASS B SHARES 15
- ------------------------------------------------------
Through a Financial Institution 15
Directly from the Fund 15
By Telephone 15
By Mail 16
Signatures 16
Contingent Deferred Sales Charge 17
Elimination of Contingent Deferred Sales Charge 17
Systematic Withdrawal Program 18
Reinvestment Privilege 18
Accounts with Low Balances 18
INTERNATIONAL SERIES, INC., INFORMATION 19
- ------------------------------------------------------
Management of the Corporation 19
Board of Directors 19
Officers and Directors 19
Investment Adviser 23
Advisory Fees 23
Adviser's Background 23
Sub-Adviser 24
Sub-Advisory Fees 24
Sub-Adviser's Background 24
Distribution of Class B Shares 25
Distribution and Shareholder Services Plans 25
Other Payments to Financial Institutions 26
Administration of the Fund 26
Administrative Services 26
Custodian 27
Transfer Agent and Dividend Disbursing Agent 27
Legal Counsel 27
Independent Public Accountants 27
Brokerage Transactions 27
Expenses of the Fund and Class B Shares 27
SHAREHOLDER INFORMATION 28
- ------------------------------------------------------
Voting Rights 28
TAX INFORMATION 28
- ------------------------------------------------------
Federal Income Tax 28
Pennsylvania Corporate and
Personal Property Taxes 29
PERFORMANCE INFORMATION 29
- ------------------------------------------------------
OTHER CLASSES OF SHARES 30
- ------------------------------------------------------
Financial Highlights--Class A Shares 31
Financial Highlights--Class C Shares 32
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
CLASS B SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price).............................. None
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price)................... None
Contingent Deferred Sales Charge (as a percentage of original purchase price
or redemption proceeds, as applicable) (1)............................................................. 5.50%
Redemption Fee (as a percentage of amount redeemed, if applicable)....................................... None
Exchange Fee............................................................................................. None
ANNUAL CLASS B SHARES OPERATING EXPENSES*
(As a percentage of projected average net assets)
Management Fee (after waiver)(2)......................................................................... 0.59%
12b-1 Fee................................................................................................ 0.75%
Total Other Expenses..................................................................................... 0.71%
Shareholder Services Fee.................................................................. 0.25%
Total Class B Shares Operating Expenses(3)(4)................................................... 2.05%
</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 0.75%.
(3) Class B Shares convert to Class A Shares (which pay lower ongoing expenses)
approximately eight years after purchase.
(4) The Total Class B Shares Operating Expenses are estimated to be 2.21% absent
the anticipated voluntary waiver of a portion of the management fee.
* Total Class B Shares Operating Expenses are estimated based on average
expenses expected to be incurred during the period ending November 30, 1995.
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 OF THE FUND WILL
BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN CLASS B SHARES" AND "INTERNATIONAL
SERIES, INC., INFORMATION." Wire-transferred redemptions of less than $5,000 may
be subject to additional fees.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales loads permitted under the rules of the National
Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period......................... $77 $108
You would pay the following expenses on the same investment,
assuming no redemption......................................................................... $21 $64
</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 THE FUND'S FISCAL YEAR ENDING NOVEMBER
30, 1995.
The information set forth in the foregoing table and example relates only to
Class B Shares of the Fund. The Fund also offers two additional classes of
shares called Class A Shares and Class C Shares. Class B Shares, Class A Shares,
and Class C Shares are subject to certain of the same expenses; however, Class A
Shares are subject to a maximum sales load of 4.50%, and a 12b-1 fee of up to
0.25%, but are not subject to a contingent deferred sales charge. Class C Shares
are subject to a 12b-1 fee of up to 0.75% and may be subject to a contingent
deferred sales charge of 1.00%, but are not subject to a front-end sales load.
See "Other Classes of Shares."
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Corporation was established as FT International Trust, a Massachusetts
business trust, on March 9, 1984, and reorganized as a corporation under the
laws of the state of Maryland on February 11, 1991. At a special meeting of
shareholders held on March 15, 1994, the shareholders of the Corporation
approved an amendment to the Articles of Incorporation to change the name of the
Corporation to International Series, Inc. The Corporation's address is Liberty
Center, Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779. The
Articles of Incorporation permit the Corporation 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 Board of Directors (the
"Directors") has established three classes of shares, known as Class A Shares,
Class B Shares, and Class C Shares. This prospectus relates only to Class B
Shares ("Shares") of the Corporation's portfolio known as International Income
Fund.
Shares of the Fund are designed for investors who wish to spread their
investments beyond the United States and who are prepared to accept the
particular risks associated with these investments. It is not intended to
provide a complete investment program for an investor. A minimum initial
investment of $1,500 is required, unless the investment is in a retirement
account, in which case the minimum investment is $50.
Except as otherwise noted in this prospectus, Shares are sold at net asset value
and redeemed at net asset value. However, a contingent deferred sales charge is
imposed on certain Shares of the Fund which are redeemed within six full years
of the date of purchase.
LIBERTY FAMILY OF FUNDS
- --------------------------------------------------------------------------------
The Fund is a member of a family of mutual funds, collectively known as the
Liberty Family of Funds. The other funds in the Liberty Family of Funds are:
American Leaders Fund, Inc., providing growth of capital and income
through high-quality stocks;
Capital Growth Fund, providing appreciation of capital primarily through
equity securities;
Fund for U.S. Government Securities, Inc., providing current income
through long-term U.S. government securities;
International Equity Fund, providing long-term capital growth and income
through international securities;
Liberty Equity Income Fund, Inc., providing above average income and
capital appreciation through income-producing equity securities;
Liberty High Income Bond Fund, Inc., providing high current income
through high-yielding, lower-rated corporate bonds;
Liberty Municipal Securities Fund, Inc., providing a high level of
current income exempt from federal regular income tax through municipal
bonds;
Liberty U.S. Government Money Market Trust, providing current income
consistent with stability of principal through high-quality U.S.
government securities;
Liberty Utility Fund, Inc. providing current income and long-term growth
of income, primarily through electric, gas, and communication utilities;
Limited Term Fund, providing a high level of current income consistent
with minimum fluctuation in principal value through investment-grade
securities;
Limited Term Municipal Fund, providing a high level of current income
exempt from federal regular income tax consistent with the preservation
of principal, primarily limited to municipal securities;
Michigan Intermediate Municipal Trust, providing current income exempt
from federal regular income tax and the personal income taxes imposed by
the state of Michigan and Michigan municipalities, primarily through
Michigan municipal securities;
Pennsylvania Intermediate Municipal Trust, providing current income
exempt from federal regular income tax and the personal income taxes
imposed by the Commonwealth of Pennsylvania, primarily through
Pennsylvania municipal securities;
Strategic Income Fund, providing a high level of current income,
primarily through domestic and foreign corporate debt obligations;
Tax-Free Instruments Trust, providing current income consistent with
stability of principal and exempt from federal income tax, through
high-quality, short-term municipal securities; and
World Utility Fund, providing total return through securities issued by
domestic and foreign companies in the utilities industry.
Prospectuses for these funds are available by writing to Federated Securities
Corp.
Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.
The Liberty Family of Funds provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles and by providing the
investment services of proven, professional investment advisers.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The Fund's objective is to seek a high level of current income in U.S. Dollars
consistent with prudent investment risk. The Fund has a secondary investment
objective of capital appreciation. The investment objectives cannot be changed
without the approval of the shareholders. The Fund will pursue these objectives
by investing in high-quality debt securities denominated primarily in foreign
currencies.
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. Unless indicated otherwise, the
investment policies of the Fund may be changed by the Directors without
shareholder approval. Shareholders will be notified before any material change
in the policies becomes effective.
INVESTMENT POLICIES
ACCEPTABLE INVESTMENTS. The Fund will invest primarily in high-quality debt
securities denominated in the currencies of the nations that are members of the
Organization for Economic Cooperation and Development. These nations include,
but are not limited to, the following: Australia, Austria, Belgium, Canada,
Denmark, Finland, France, Germany, Greece, Hong Kong, Iceland, Ireland, Italy,
Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden,
Switzerland, the United Kingdom, and the United States. The Fund will invest at
least 65%, and under normal market conditions substantially all of its total
assets in high-quality debt securities denominated in foreign currencies of
issuers located in at least three countries outside of the United States.
Additionally, investments may be made in securities denominated in the European
Currency Unit (the "ECU"), a multinational currency unit which represents
specified amounts of the currencies of certain member states of the European
Economic Community.
The high-quality debt securities in which the Fund will invest will possess a
minimum credit rating of A as assigned by Standard & Poor's Ratings Group
("S&P") or A by Moody's Investors Service, Inc. ("Moody's"), or, if unrated,
will be judged by the adviser or sub-adviser to the Fund, to be of comparable
quality. Because the average quality of the Fund's portfolio investments should
remain constantly between A and AAA, the Fund will seek to avoid the adverse
consequences that may arise for some debt securities in difficult economic
circumstances. Downgraded securities will be evaluated on a case-by-case basis
by the adviser or sub-adviser. The adviser or sub-adviser will determine whether
or not the security continues to be an acceptable investment. If not, the
security will be sold.
The Fund's portfolio of debt securities will be comprised mainly of foreign
government, foreign governmental agency or supranational institution bonds. In
addition, the Fund will also invest in high quality debt securities issued by
corporations in the currencies specified above and subject to the credit
limitations listed above. No more than 25% of the Fund's total assets will be
invested in the securities of issuers located in any one country. The Fund will
also invest in both exchange traded and over-the-counter options, subject to the
limitations outlined in this prospectus.
FOREIGN GOVERNMENT SECURITIES. The foreign government securities in which
the Fund may invest generally consist of obligations supported by national,
state or provincial governments or similar political subdivisions. Foreign
government securities also include debt obligations of supranational
entities, which include international organizations designed or supported
by governmental entities to promote economic reconstruction or development,
international banking institutions and related government agencies.
Examples include the International Bank for Reconstruction and Development
(the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the Inter-American Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies." Debt securities of quasi-governmental
agencies are either debt securities issued by entities which are owned by a
national, state or equivalent government or are obligations of a political
unit that are not backed by the national government's full faith and credit
and general taxing powers. Further, foreign government securities include
mortgage-related securities issued or guaranteed
by national, state or provincial governmental instrumentalities, including
quasi-governmental agencies.
TEMPORARY INVESTMENTS. Up to 10% of the Fund's total assets may be
invested at any one time in cash deposits or in certificates of deposit
issued by banks of high credit quality, or in commercial paper with an
A1/P1 rating assigned by S&P or Moody's, or in repurchase agreements. At
the discretion of the adviser or sub-adviser, these instruments may be
denominated in foreign currencies or U.S. Dollars.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which
banks, broker/dealers, and other recognized financial institutions sell
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 AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more/less than the market value of the securities
on the settlement date.
The Fund may dispose of a commitment prior to settlement if the adviser or
sub-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 its portfolio securities on a short-term or long-term basis up to
one-third 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 Board of
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.
RISK CONSIDERATIONS. Investing in foreign securities carries substantial risks
in addition to those associated with investments in domestic securities. In an
attempt to reduce some of these risks, the Fund will attempt to distribute its
investments broadly among foreign countries. The debt securities of at least
three different foreign countries will always be represented.
ALLOCATION. The allocation of the Fund's assets in a particular market and
currency will be based on a fundamental assessment of the economic strength
of each relevant country combined with considerations of credit quality and
currency and interest rate trends. These factors are reviewed on a regular
basis in order to derive specific interest rate and currency forecasts,
which are quantified in terms of total return. The adviser or sub-adviser
will vary the market and currency
allocation of the Fund seeking to achieve an optimal mix of investments to
achieve the investment objectives of the Fund.
DURATION. Duration measures the magnitude of the change in the price of a
debt security relative to a given change in the market rate of interest.
The duration of a debt security depends primarily upon the security's
coupon rate, maturity date, and level of market interest rates for similar
debt securities. There will be no limit on the duration of any one
individual issue purchased by the Fund, except that the purchase of an
issue that has no final maturity date shall not be permitted. The weighted
average duration of the Fund shall not exceed ten years and shall not be
less than one year, but will normally fall within a range of three to seven
years. The adviser regards that range as being consistent with a prudent
attitude towards risk. Shifts outside this range would be made only under
unusual circumstances.
FOREIGN SECURITIES. Investments in foreign securities involve special
risks that differ from those associated with investments in domestic
securities. The risks associated with investments in foreign securities
relate to political and economic developments abroad, as well as those that
result from the differences between the regulation of domestic securities
and issuers and foreign securities and issuers. These risks may include,
but are not limited to, expropriation, confiscatory taxation, currency
fluctuations, withholding taxes on interest, limitations on the use or
transfer of Fund assets, political or social instability and adverse
diplomatic developments. It may also be more difficult to enforce
contractual obligations or obtain court judgments abroad than would be the
case in the United States because of differences in the legal systems.
Moreover, individual foreign economies may differ favorably or unfavorably
from the domestic economy in such respects as growth of gross national
product, the rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
Additional differences exist between investing in foreign and domestic
securities. Examples of such differences include:
less publicly available information about foreign issuers;
credit risks associated with certain foreign governments;
the lack of uniform financial accounting standards applicable to foreign
issuers;
less readily available market quotations on foreign issues;
the likelihood that securities of foreign issuers may be less liquid or
more volatile;
generally higher foreign brokerage commissions; and
unreliable mail service between countries.
U.S. GOVERNMENT POLICIES. In the past, U.S. government policies have
discouraged or restricted certain investments abroad by investors such as
the Fund. Investors are advised that when such policies are instituted, the
Fund will abide by them.
CURRENCY RISKS. Because the majority of the debt securities purchased by
the Fund are denominated in currencies other than the U.S. Dollar, changes
in foreign currency exchange rates will affect the Fund's net asset value;
the value of interest earned; gains and losses realized on the sale of
securities; and net investment income and capital gain, if any, to be
distributed to shareholders by the Fund. If the value of a foreign currency
rises against the U.S. Dollar, the value of the Fund
assets denominated in that currency will increase; correspondingly, if the
value of a foreign currency declines against the U.S. Dollar, the value of
Fund assets denominated in that currency will decrease. Under the U.S. tax
code, the Fund is required to separately account for the foreign currency
component of gains or losses, which will usually be viewed under the U.S.
tax code as items of ordinary and distributable income or loss, thus
affecting the Fund's distributable income.
The exchange rates between the U.S. Dollar and foreign currencies are a
function of such factors as supply and demand in the currency exchange
markets, international balances of payments, governmental interpretation,
speculation and other economic and political conditions. Although the Fund
values its assets daily in U.S. Dollars, the Fund will not convert its
holdings of foreign currencies to U.S. Dollars daily. When the Fund
converts its holdings to another currency, it may incur conversion costs.
Foreign exchange dealers may realize a profit on the difference between the
price at which they buy and sell currencies.
The Fund will engage in foreign currency exchange transactions in
connection with its investments in foreign securities. The Fund will
conduct its foreign currency exchange transactions either on a spot (i.e.
cash) basis at the spot rate prevailing in the foreign currency exchange
market, or through forward contracts to purchase or sell foreign
currencies.
The adviser or sub-adviser believes that active management of currency
risks through a variety of hedging vehicles and strategies can considerably
limit the risk of capital loss through movements in the foreign exchange
markets, such as those described above. The adviser or sub-adviser will not
engage in hedging for speculative purposes.
HEDGING VEHICLES AND STRATEGIES
HEDGING VEHICLES. The Fund may use the following hedging vehicles in an attempt
to manage currency and interest rate risks:
forward foreign currency exchange contracts;
options contracts; and
futures contracts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the
date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded directly between currency
traders (usually large commercial banks) and their customers. When the Fund
enters into a contract for the purchase or sale of a security denominated
in a foreign currency, it may want to establish the U.S. Dollar cost or
proceeds, as the case may be. By entering into a forward contract in U.S.
Dollars for the purchase or sale of the amount of foreign currency involved
in an underlying security transaction, the Fund is able to protect itself
against a possible loss between trade and settlement dates resulting from
an adverse change in the relationship between the U.S. Dollar and such
foreign currency. However, this tends to limit potential gains which might
result from a positive change in such currency relationships.
There is no limitation as to the percentage of the Fund's assets that may
be committed under forward foreign currency exchange contracts. The Fund
does not enter into such forward contracts or maintain a net exposure in
such contracts where 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" (see "Hedging Strategies" below), denominated in a currency
or currencies that the Fund's adviser or sub-adviser believes will reflect
a high degree of correlation with the currency with regard to price
movements. The Fund generally does not enter into a forward foreign
currency exchange contract with a term longer than one year.
OPTIONS. The Fund may deal in options on foreign currencies, foreign
currency futures, securities, and securities indices, which options may be
listed for trading on a national securities exchange or traded
over-the-counter. The Fund may write covered call options and secured put
options on up to 25% of its net assets and may purchase put and call
options provided that no more than 5% of the fair market value of its net
assets may be invested in premiums on such options.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying currency, security or other asset at the
exercise price during the option period. A put option gives the purchaser
the right to sell, and the writer the obligation to buy, the underlying
currency, security or other asset at the exercise price during the option
period. The writer of a covered call owns assets that are acceptable for
escrow and the writer of a secured put invests an amount not less than the
exercise price in eligible assets to the extent that it is obligated as a
writer. If a call written by the Fund is exercised, the Fund forgoes any
possible profit from an increase in the market price of the underlying
asset over the exercise price plus the premium received. In writing puts,
there is a risk that the Fund may be required to take delivery of the
underlying asset at a disadvantageous price.
Over-the-counter options ("OTC options") differ from exchange traded
options in several respects. They are transacted directly with dealers and
not with a clearing corporation, and there is a risk of non-performance by
the dealer as a result of the insolvency of such dealer or otherwise, in
which event the Fund may experience material losses. However, in writing
options the premium is paid in advance by the dealer. OTC options, which
may not be continuously liquid, are available for a greater variety of
assets, and a wider range of expiration dates and exercise prices, than are
exchange traded options.
FUTURES. Futures contracts are contracts that obligate the long or short
holder to take or make delivery of a specified quantity of an asset, such
as a currency, a security, or the cash value of a securities index at a
specified future date at a specified price. The Fund may engage in futures
transactions, but will not participate in futures contracts if the sum of
its initial margin deposits on open contracts will exceed 5% of the fair
market value of the Fund's net assets.
HEDGING STRATEGIES
CURRENCY HEDGING. When the Fund's adviser or sub-adviser believes that the
currency of a particular foreign country may suffer a substantial decline
against the U.S. Dollar, it may enter into a forward contract to sell an
amount of that foreign currency for a fixed U.S. Dollar amount
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency (i.e., "hedge"). The Fund may, as an
alternative, enter into a forward contract to sell a different foreign
currency for a fixed U.S. Dollar amount where the Fund's investment adviser
believes that the U.S. Dollar value of the currency to be sold pursuant to
the forward contract will fall whenever there is a decline in the U.S.
Dollar value of the currency in which portfolio securities of the Fund are
denominated (i.e., "cross-hedge"). A cross hedge can be achieved not only
by using a "proxy" currency in which Fund securities are denominated, but
also by using the generally higher yielding Canadian Dollar as a "proxy"
currency for the U.S. Dollar. This strategy may be beneficial because the
level of divergence in the exchange rates of the two currencies has
historically tended to be relatively small.
For example, the Fund may invest in securities denominated in a Western
European currency, such as the French Franc, and seek to hedge against the
effect of an increase in the value of the U.S. Dollar against that currency
by entering into a forward foreign currency exchange contract to sell the
lower yielding German Mark, which has historically had price movements that
tend to correlate closely with those of the French Franc, thereby creating
a hedge similar to the simple Dollar/Franc hedge, but at a possibly lower
cost. In addition, the Fund might arrange to sell those Marks against
Canadian Dollars in an effort to minimize hedging costs.
INTEREST RATE HEDGING. The Fund may engage in futures transactions and may
use options in an attempt to hedge against the effects of fluctuations in
interest rates and other market conditions. For example, if the Fund owned
long-term bonds and interest rates were expected to rise, it could sell
futures contracts or the cash value of a securities index. If interest
rates did increase, the value of the bonds in the Fund would decline, but
this decline would be offset in whole or in part by an increase in the
value of the Fund's futures contracts or the cash value of the securities
index.
If, on the other hand, long-term interest rates were expected to decline,
the Fund could hold short-term debt securities and benefit from the income
earned by holding such securities, while at the same time the Fund could
purchase futures contracts on long-term bonds or the cash value of a
securities index. Thus, the Fund could take advantage of the anticipated
rise in the value of long-term bonds without actually buying them. The
futures contracts and short-term debt securities could then be liquidated
and the cash proceeds used to buy long-term bonds.
GENERAL. The Fund might not employ any of the techniques or strategies
described above, and there can be no assurance that any technique or
strategy (or combination thereof) used will succeed. The use of these
techniques and strategies involves certain risks, including:
dependence on the adviser's or sub-adviser's ability to predict movements
in the prices of assets being hedged or movements in interest rates and
currency markets;
imperfect correlation between the hedging instruments and the securities
or currencies being hedged;
the fact that skills needed to use these instruments are different from
those needed to select the Fund's securities;
the possible absence of a liquid secondary market for any particular
instrument at any particular time;
possible impediments to effective portfolio management or the ability to
meet redemption requests or other short-term obligations because of the
percentage of the Fund's assets segregated to cover its obligations; and
the possible need to defer closing out hedged positions to avoid adverse
tax consequences.
New futures contracts, options thereon and other financial products and risk
management techniques continue to be developed. The Fund may use these
investments and techniques to the extent consistent with its investment
objectives and regulatory and federal tax considerations.
NON-DIVERSIFICATION. The Fund is a non-diversified investment portfolio. As
such, there is no limit on the percentage of assets which can be invested in any
single issuer. An investment in the Fund, therefore, will entail greater risk
than would exist in a diversified portfolio of securities because the higher
percentage of investments among fewer issuers may result in greater fluctuation
in the total market value of the Fund's portfolio. Any economic, political, or
regulatory developments affecting the value of the securities in the Fund's
portfolio will have a greater impact on the total value of the portfolio than
would be the case if the portfolio were diversified among more issuers.
The Fund intends to comply with Subchapter M of the Internal Revenue Code. This
undertaking requires that at the end of each quarter of the taxable year, with
regard to at least 50% of the Fund's total assets, no more than 5% of its total
assets are invested in the securities of a single issuer; beyond that, no more
than 25% of its total assets are invested in the securities of a single issuer.
PORTFOLIO TURNOVER. Although the Fund does not intend to invest for the purpose
of seeking short-term profits, securities in its portfolio will be sold whenever
the Fund's adviser or sub-adviser believes it is appropriate to do so in light
of the Fund's investment objective, without regard to the length of time a
particular security may have been held. The Fund's rate of portfolio turnover
may exceed that of certain other mutual funds with the same investment
objective. A higher rate of portfolio turnover involves correspondingly greater
transaction expenses which must be borne directly by the Fund and, thus,
indirectly by its shareholders. In addition, a high rate of portfolio turnover
may result in the realization of larger amounts of capital gains which, when
distributed to the Fund's shareholders, are taxable to them. (Further
information is contained in the Fund's Statement of Additional Information
within the sections "Brokerage Transactions" and "Tax Status"). Nevertheless,
transactions for the Fund's portfolio will be based only upon investment
considerations and will not be limited by any other considerations when the
Fund's investment adviser or sub-adviser deems it appropriate to make changes in
the Fund's portfolio.
INVESTMENT LIMITATIONS
The Fund will not:
borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may borrow up to one-third of the value of its total assets and pledge up
to 15% of the value of those assets to secure such borrowings; or
sell securities short except under strict limitations.
The above investment limitation 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 changes
in these limitations become effective.
The Fund will not:
invest more than 5% of its total assets in securities of issuers that
have records of less than three years of continuous operations; or
invest more than 15% of the value of its net assets in illiquid
securities, including securities not determined by the Directors to be
liquid, repurchase agreements with maturities longer than seven days
after notice and certain OTC options.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per Class B Share fluctuates. The net asset value for
Class B Shares is determined by adding the interest of the Class B Shares in the
market value of all securities and other assets of the Fund, subtracting the
interest of the Class B Shares in the liabilities of the Fund and those
attributable to Class B Shares, and dividing the remainder by the total number
of Class B Shares outstanding. The net asset value for Class B Shares may differ
from that of Class A Shares and Class C Shares due to the variance in daily net
income realized by each class. Such variance will reflect only accrued net
income to which the shareholders of a particular class are entitled.
INVESTING IN CLASS B SHARES
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased through a financial institution which has a sales agreement with
the distributor or directly from the distributor, Federated Securities Corp.,
once an account has been established. In connection with the sale of Shares,
Federated Securities Corp. may from time to time offer certain items of nominal
value to any shareholder or investor. The Fund reserves the right to reject any
purchase request.
Orders for $250,000 or more of Class B Shares will normally be invested in Class
A Shares. (See "Other Classes of Shares.")
THROUGH A FINANCIAL INSTITUTION. Investors may call their 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 converted into federal funds. It
is the financial institution's responsibility to transmit orders promptly.
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.
The financial institution which maintains investor accounts with the Fund must
do so on a fully disclosed basis unless it accounts for share ownership periods
used in calculating the contingent deferred sales charge. (See "Contingent
Deferred Sales Charge.") In addition, advance payments made to financial
institutions may be subject to reclaim by the distributor for accounts
transferred to financial institutions which do not maintain investor accounts on
a fully disclosed basis and do not account for share ownership periods. (See
"Other Payments to Financial Institutions.")
DIRECTLY FROM THE DISTRIBUTOR. An investor may place an order to purchase
Shares directly from the distributor once an account has been established. To do
so:
complete and sign the new account form available from the Fund;
enclose a check made payable to International Income Fund--Class B
Shares; and
mail both to the Fund's transfer agent, Federated Services Company, c/o
State Street Bank and Trust Company, P.O. Box 8604, Boston, MA
02266-8604.
Orders by mail are considered received after payment by check is converted by
the transfer agent's bank, State Street Bank and Trust Company ("State Street
Bank"), into federal funds. This is generally the next business day after State
Street Bank receives the check.
To purchase Shares directly from the distributor by wire once an account has
been established, call the Fund. All information needed will be taken over the
telephone, and the order is considered received when State Street Bank receives
payment by wire. Federal funds should be wired as follows: Federated Services
Company, c/o State Street Bank and Trust Company, Boston, Massachusetts 02105;
Attention: Mutual Fund Servicing Division; For Credit to: International Income
Fund--Class B Shares; Fund Number (this number can be found on the account
statement or by contacting the Fund); Group Number or Order Number; Nominee or
Institution Name; and ABA Number 011000028. Shares cannot be purchased by wire
on days on which the New York Stock Exchange is closed and on federal holidays
restricting wire transfers.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Class B Shares is $1,500 unless the investment
is in a retirement account, in which case the minimum initial investment is $50.
Subsequent investments must be in amounts of at least $100, except for
retirement accounts, which must be in amounts of at least $50.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received.
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on:
(i) days on which there are not sufficient changes in the value of the Fund's
portfolio securities that its net asset value might be materially affected; (ii)
days during which no Shares are tendered for redemption and no orders to
purchase Shares are received; and (iii) the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
Under certain circumstances described under "Redeeming Class B Shares,"
shareholders may be charged a contingent deferred sales charge by the
distributor at the time Shares are redeemed.
CONVERSION OF CLASS B SHARES
Class B Shares will automatically convert into Class A Shares on the fifteenth
day of the month, eight years after the purchase date, except as noted below,
and will be subject to a lower distribution fee. (See "Other Classes of
Shares.") Such conversion will be on the basis of the relative net asset values
per share, without the imposition of any sales load, fee, or other charge. Class
B Shares acquired by exchange from Class B Shares of another fund in the Liberty
Family of Funds 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 availability of the
conversion feature is subject to the granting of an exemptive order by the
Securities and Exchange Commission or the adoption of a rule permitting such
conversion. In the event that the exemptive order or rule ultimately issued by
the Securities and Exchange Commission requires any conditions additional to
those described in this prospectus, shareholders will be notified. 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.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Shares at the net asset value next determined after an order is
received by the Fund. Shareholders may apply for participation in this program
through their financial institution or directly through the Fund.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder. Share certificates are not issued unless requested
in writing to the Fund.
Detailed confirmations of each purchase and redemption are sent to each
shareholder. Annual confirmations are sent to report dividends paid during the
year.
DIVIDENDS
Dividends are declared and paid quarterly to all shareholders invested in the
Fund on the record date. Dividends are automatically reinvested in additional
Shares on the payment date at the ex-dividend date net asset value, unless
shareholders request cash payments on the new account form or by writing to the
Fund. All shareholders on the record date are entitled to the dividend. If
Shares are redeemed or exchanged prior to the record date or purchased after the
record date, those Shares are not entitled to that quarter's dividend.
CAPITAL GAINS
Capital gains realized by the Fund, if any, will be distributed at least once
every twelve months.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, contact the Fund and consult a tax adviser.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
In order to provide greater flexibility to Fund shareholders whose investment
objectives have changed, Class B shareholders may exchange all or some of their
Shares for Class B Shares of other funds in the Liberty Family of Funds at net
asset value without being assessed a contingent deferred sales charge on the
exchanged Shares. (Not all funds in the Liberty Family of Funds currently offer
Class B Shares. Contact your financial institution regarding the availability of
other Class B Shares in the Liberty Family of Funds.) To the extent that a
shareholder exchanges Shares for Class B Shares in other funds in the Liberty
Family of Funds, the time for which the exchanged-for shares were held will be
added, or tacked, to the time for which the exchanged-from Shares were held for
purposes of satisfying the applicable holding period.
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 into which the exchange is being made.
This privilege is available to shareholders resident in any state in which the
fund shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Shares submitted for exchange are redeemed and
the proceeds invested in Class B Shares of the other fund. The exchange
privilege may be modified or terminated at any time. Shareholders will be
notified of the modification or termination of the exchange privilege.
Further information on the exchange privilege and prospectuses for the Liberty
Family of Funds or certain Federated Funds are available by contacting the Fund.
TAX CONSEQUENCES
An exercise of the exchange privilege is treated as a sale for federal income
tax purposes. Depending on the circumstances, a short-term or long-term capital
gain or loss may be realized.
MAKING AN EXCHANGE
Instructions for exchanges for the Liberty Family of Funds or certain 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 shareholders cannot contact
their broker or financial institution by telephone, it is recommended that an
exchange request be made in
writing and sent by overnight mail to Federated Services Company, c/o State
Street Bank and Trust Company, P.O. Box 8604, Boston, Massachusetts 02266-8604.
TELEPHONE INSTRUCTIONS. Telephone instructions made by the investor may be
carried out only if a telephone authorization form completed by the investor is
on file with the Fund. If the instructions are given by a broker, a telephone
authorization form completed by the broker must be on file with the Fund. Shares
may be exchanged between two funds by telephone only if the two funds have
identical shareholder registrations.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company, c/o State Street Bank and Trust
Company, P.O. Box 8604, Boston, Massachusetts 02266-8604, and deposited to the
shareholder's account before being exchanged. Telephone exchange instructions
may be recorded. Such instructions will be processed as of 4:00 p.m. (Eastern
time) and must be received by the transfer agent before that time for Shares to
be exchanged the same day. Shareholders exchanging into a fund will not receive
any dividend that is payable to shareholders of record on that date. This
privilege may be modified or terminated at any time. If reasonable procedures
are not followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
REDEEMING CLASS B SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request, less any applicable contingent deferred sales
charge. (See "Contingent Deferred Sales Charge.") Redemptions will be made on
days on which the Fund computes its net asset value. Redemptions can be made
through a financial institution or directly from the Fund. Redemption requests
must be received in proper form.
THROUGH A FINANCIAL INSTITUTION
Shareholders may redeem Shares by calling their financial institution (such as a
bank or an investment dealer) to request the redemption. Shares will be redeemed
at their 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 must be received by the financial
institution and transmitted to the Fund before 4:00 p.m. (Eastern time) in order
for Shares to be redeemed at that day's net asset value. The financial
institution is responsible for promptly submitting redemption requests and
providing proper written redemption instructions to the Fund. The financial
institution may charge customary fees and commissions for this service.
DIRECTLY FROM THE FUND
BY TELEPHONE. Shareholders who have not purchased through a financial
institution may redeem their Shares by telephoning the Fund. The proceeds will
be mailed to the shareholder's address of record or wire transferred to the
shareholder's account at a domestic commercial bank that is a member
of the Federal Reserve System, normally within one business day, but in no event
longer than seven days after the request. The minimum amount for a wire transfer
is $1,000. If at any time the Fund shall determine it necessary to terminate or
modify this method of redemption, shareholders would be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as redeeming by mail, should be considered.
BY MAIL. Any shareholder may redeem Shares by sending a written request to
Federated Services Company, c/o State Street Bank and Trust Company, P.O. Box
8604, Boston, Massachusetts 02266-8604. The written request should include the
shareholder's name, the Fund name and class designation, the account number, and
the Share or dollar amount requested, and should be signed exactly as the Shares
are registered.
If Share certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written request.
Shareholders should call the Fund for assistance in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC; or
any other "eligible guarantor institution," as defined in the Securities
Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
Normally, a check for the proceeds is mailed within one business day, but in no
event more than seven days, after receipt of a proper written redemption
request.
CONTINGENT DEFERRED SALES CHARGE
Shareholders redeeming 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 purchase or the net asset value of the redeemed Shares at
the time of redemption in accordance with the following schedule:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SHARES HELD SALES CHARGE
<S> <C>
One full year or less.............................. 5.50%
Two full years or less............................. 4.75%
Three full years or less........................... 4.00%
Four full years or less............................ 3.00%
Five full years or less............................ 2.00%
Six full years or less............................. 1.00%
Seven years and thereafter......................... 0.00%
</TABLE>
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/or (2) Shares held for more than
six full years 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 six full years from the
date of purchase; and (3) Shares held for six years or less 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 Class B Shares of funds in the
Liberty Family of Funds. (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 the
investor 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 qualified 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. In addition, to the extent that the distributor
does not make advance payments to certain financial institutions for purchases
made by
their clients, 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; 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, as amended, or a retirement plan 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 or by 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 Fund in writing that
said shareholder is entitled to such elimination.
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 Shares. For this reason, payments under this program
should not be considered as yield or income on the shareholder's investment in
Shares. To be eligible to participate in this program, a shareholder must have
an account value of at least $10,000. Shareholders may apply for participation
in this program through their financial institution. A contingent deferred sales
charge will be imposed on Shares redeemed within six full years of their
purchase date. (See "Contingent Deferred Sales Charge.")
REINVESTMENT PRIVILEGE
If Shares have been redeemed, the shareholder has a one-time right, within 120
days, to reinvest the redemption proceeds into Class A Shares at the
next-determined net asset value without a sales load. (See "Other Classes of
Shares.") Federated Securities Corp. must be notified by the shareholder in
writing or by his or her financial institution of the reinvestment in order to
receive this privilege. If the shareholder redeems his or her Shares, there may
be tax consequences.
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
$1,500. This requirement does not apply, however, if the balance falls below
$1,500 because of changes in the Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
INTERNATIONAL SERIES, INC., INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE CORPORATION
BOARD OF DIRECTORS. The Corporation is managed by a Board of Directors. The
Directors are responsible for managing the Corporation's business affairs and
for exercising all the Corporation's powers except those reserved for the
shareholders. An Executive Committee of the Board of Directors handles the
Board's responsibilities between meetings of the Board.
OFFICERS AND DIRECTORS. Officers and Directors are listed with their addresses,
principal occupations, and present positions, including those with Federated
Management, its affiliates, and the "Funds" described in the Statement of
Additional Information.
- --------------------------------------------------------------------------------
John F. Donahue+*
Federated Investors Tower
Pittsburgh, PA
Chairman and Director of the Corporation
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life and Casualty
Company; Chief Executive Officer and Director, Trustee, or Managing General
Partner of the Funds. Mr. Donahue is the father of J. Christopher Donahue, Vice
President of the Corporation.
- --------------------------------------------------------------------------------
John T. Conroy, Jr.
Wood/lPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Director of the Corporation
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; President, Northgate Village Development
Corporation; Partner or Trustee in private real estate ventures in Southwest
Florida; Director, Trustee, or Managing General Partner of the Funds; formerly,
President, Naples Property Management, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
William J. Copeland
One PNC Plaza--23rd Floor
Pittsburgh, PA
Director of the Corporation
Director and Member of the Executive Committee, Michael Baker, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes, Inc.
- --------------------------------------------------------------------------------
James E. Dowd
571 Hayward Mill Road
Concord, MA
Director of the Corporation
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, Trustee,
or Managing General Partner of the Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
- --------------------------------------------------------------------------------
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Director of the Corporation
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals;
Professor of Medicine and Trustee, University of Pittsburgh; Director of
Corporate Health, University of Pittsburgh Medical Center; Director, Trustee, or
Managing General Partner of the Funds.
- --------------------------------------------------------------------------------
Edward L. Flaherty, Jr.+
5916 Penn Mall
Pittsburgh, PA
Director of the Corporation
Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park Restaurants,
Inc., and Statewide Settlement Agency, Inc.; Director, Trustee, or Managing
General Partner of the Funds; formerly, Counsel, Horizon Financial, F.A.,
Western Region.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Peter E. Madden
225 Franklin Street
Boston, MA
Director of the Corporation
Consultant; State Representative, Commonwealth of Massachusetts; Director,
Trustee, or Managing General Partner of the Funds; formerly, President, State
Street Bank and Trust Company and State Street Boston Corporation and Trustee,
Lahey Clinic Foundation, Inc.
- --------------------------------------------------------------------------------
Gregor F. Meyer
5916 Penn Mall
Pittsburgh, PA
Director of the Corporation
Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, Inc.;
Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or Managing General
Partner of the Funds; formerly, Vice Chairman, Horizon Financial, F.A.
- --------------------------------------------------------------------------------
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Director of the Corporation
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie Endowment
for International Peace, RAND Corporation, Online Computer Library Center, Inc.,
and U.S. Space Foundation; Chairman, Czecho Slovak Management Center; Director,
Trustee, or Managing General Partner of the Funds; President Emeritus,
University of Pittsburgh; formerly, Chairman, National Advisory Council for
Environmental Policy and Technology.
- --------------------------------------------------------------------------------
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Director of the Corporation
Public relations/marketing consultant; Director, Trustee, or Managing General
Partner of the Funds.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Glen R. Johnson
Federated Investors Tower
Pittsburgh, PA
President of the Corporation
Trustee, Federated Investors; President and/or Trustee of some of the Funds;
staff member, Federated Securities Corp. and Federated Administrative Services.
- --------------------------------------------------------------------------------
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Vice President of the Corporation
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp.; President, Passport Research, Ltd.; Trustee, Federated Administrative
Services, Federated Services Company, and Federated Shareholder Services;
President or Vice President of the Funds; Director, Trustee, or Managing General
Partner of some of the Funds. Mr. Donahue is the son of John F. Donahue,
Chairman and Director of the Corporation.
- --------------------------------------------------------------------------------
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Vice President of the Corporation
Executive Vice President and Trustee, Federated Investors; Director, Federated
Research Corp.; Chairman and Director, Federated Securities Corp.; President or
Vice President of some of the Funds; Director or Trustee of some of the Funds.
- --------------------------------------------------------------------------------
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Vice President and Treasurer of the Corporation
Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; Chairman, Treasurer, and Trustee,
Federated Administrative Services; Trustee or Director of some of the Funds;
Vice President and Treasurer of the Funds.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary of the Corporation
Vice President, Secretary, General Counsel, and Trustee, Federated Investors;
Vice President, Secretary, and Trustee, Federated Advisers, Federated
Management, and Federated Research; Vice President and Secretary, Federated
Research Corp. and Passport Research, Ltd.; Trustee, Federated Services Company;
Executive Vice President, Secretary, and Trustee, Federated Administrative
Services; Trustee and Secretary, Federated Shareholder Services; Director and
Executive Vice President, Federated Securities Corp.; Vice President and
Secretary of the Funds.
- --------------------------------------------------------------------------------
*This Director is deemed to be an "interested person" of the Corporation as
defined in the Investment Company Act of 1940, as amended.
+Members of the Corporation's Executive Committee. The Executive Committee of
the Board of Directors handles the responsibilities of the Board of Directors
between meetings of the Board.
Officers and Directors own less than 1% of the Fund's outstanding Shares.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Federated
Management, the Fund's investment adviser (the "Adviser"), subject to direction
by the Directors. The Adviser continually conducts investment research and
supervision for the Fund and is responsible for the purchase or sale of
portfolio instruments, for which it receives an annual fee from the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee
equal to 0.75% of the Fund's average daily net assets. The fee paid by the
Fund, while higher than the advisory fee paid by other mutual funds in
general, is comparable to fees paid by many mutual funds with similar
objectives and policies. The Adviser may voluntarily choose to waive a
portion of its fee. 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. Total assets under management or
administration by these and other subsidiaries of Federated Investors are
approximately $70 billion. Federated Investors, which was founded in 1956
as Federated Investors, Inc., develops and manages mutual funds primarily
for the financial industry. Federated Investors' track
record of competitive performance and its disciplined, risk-averse
investment philosophy serve approximately 3,500 client institutions
nationwide. Through these same client institutions, individual shareholders
also have access to this same level of investment expertise.
Randall S. Bauer is the Fund's portfolio manager. He has contributed toward
the management of the Fund's portfolio of investments since its inception
on May 15, 1991, while Federated Management served as the Fund's
sub-adviser, and has continued in that capacity through
March 15, 1994, when, pursuant to shareholder approval, Federated
Management was appointed the Fund's investment adviser. Mr. Bauer joined
Federated Investors in 1989 as an Assistant Vice President of Federated
Management. Mr. Bauer was an Assistant Vice President of the International
Banking Division at Pittsburgh National Bank from 1982 until 1989. Mr.
Bauer is a Chartered Financial Analyst and received his M.B.A. in Finance
from Pennsylvania State University.
SUB-ADVISER. Under the terms of a Sub-Advisory Agreement between Federated
Management and Fiduciary Trust International Limited, Fiduciary Trust
International Limited will furnish to Federated Management such investment
advice, statistical information, and other factual information as may, from time
to time, be reasonably requested by Federated Management.
SUB-ADVISORY FEES. For its services under the Sub-advisory Agreement,
Fiduciary Trust International Limited ("Fiduciary") receives an annual fee
from Federated Management equal to .375 of 1% of average daily net assets
of the Fund. The sub-advisory fee is accrued and paid daily. In the event
that the fee due from the Fund to Federated Management is reduced in order
to meet expense limitations imposed on the Fund by state securities laws or
regulations, the sub-advisory fee will be reduced by one-half of said
reduction in the fee due from the Fund to Federated Management.
Notwithstanding any other provision in the Sub-advisory Agreement,
Fiduciary may, from time to time, and for such periods as it deems
appropriate, reduce its compensation (and, if appropriate, assume expenses
of the Fund) to the extent that the Fund's expenses exceed such lower
expense limitations as Fiduciary may, by notice to the Fund, voluntarily
declare to be effective.
SUB-ADVISER'S BACKGROUND. Fiduciary Trust International Limited
("Fiduciary International") is located at 30 Old Burlington Street, London,
W1X1LB. Fiduciary International, which is an English company formed on May
20, 1985, is registered as an investment adviser with the Securities and
Exchange Commission and is a member of the Investment Management Regulatory
Organization, a United Kingdom self-regulatory organization. Substantially
all of the shares of Fiduciary International are owned by Fiduciary Trust
International (SA), a wholly-owned subsidiary of Fiduciary Trust Company
International. No director, officer or employee of Fiduciary International
or Fiduciary Trust International (SA) serves as a director, officer or
employee of the Corporation.
Fiduciary Trust Company International was founded in 1931 and is a New York
state-chartered bank. It has focused primarily on the management of the
investments and financial affairs of its customers, and has chosen to
minimize its commercial banking activities (i.e., accepting deposits and
making loans). As of December 31, 1993, Fiduciary Trust Company
International had total assets of approximately $335 million, and total
assets under management of over $29 billion.
Fiduciary Trust International (SA) is a Swiss company organized to act as
an intermediate foreign parent for certain of Fiduciary Trust Company
International's foreign subsidiaries.
David Smart has been primarily responsible for management of the Fund's
portfolio since its inception, when Fiduciary International, Inc. was the
Fund's investment adviser. Mr. Smart, a Managing Director of Fiduciary
Trust International Limited, joined its parent in 1988.
DISTRIBUTION OF CLASS B SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
The distributor will pay financial institutions an amount equal to 5.50% of the
net asset value of 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.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS. Under a distribution plan adopted
in accordance with Investment Company Act Rule 12b-1 (the "Distribution Plan"),
the Class B Shares will pay to the distributor an amount, computed at an annual
rate of 0.75 of 1% of the average daily net assets of Class B Shares, to finance
any activity which is principally intended to result in the sale of Shares
subject to the Distribution Plan. The distributor may pay a portion of this
amount to financial institutions that waive all or any portion of the payments
discussed in the preceding paragraph. Because distribution fees to be paid by
the Fund to the distributor may not exceed an annual rate of 0.75 of 1% of the
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 Distribution Plan.
The Distribution Plan is a compensation-type plan. As such, the Fund makes no
payments to the distributor except as described above. Except as set forth in
the next paragraph, 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 the Class B Shares under the Distribution
Plan.
The distributor may sell, assign, or pledge its right to receive Rule 12b-1 fees
and CDSCs to finance payments made to brokers in connection with the sale of
Class B Shares. Fiduciary Trust Company International, parent of the
sub-adviser, or one of its subsidiaries, including the sub-adviser, expects to
participate in this financing program by purchasing 50% of the Rule 12b-1 fees
and CDSCs assigned by the distributor. Actual distribution expenses for Class B
Shares at any given time may exceed the Rule 12b-1 fees and payments received
pursuant to CDSCs. These unrecovered amounts, plus interest thereon, will be
carried forward and paid from future Rule 12b-1 fees and payments received
through CDSCs. If the Distribution Plan were terminated or not continued, the
Fund would not be contractually obligated to pay for any expenses not previously
reimbursed by the Fund or recovered through CDSCs.
In addition, the Fund has adopted a Shareholder Services Plan (the "Services
Plan") under which it may make payments up to 0.25 of 1% of the average daily
net asset value of Class B Shares to obtain
certain personal services for shareholders and the maintenance of shareholder
accounts ("shareholder services"). The Fund has entered into a Shareholder
Services Agreement with Federated Shareholder Services, a subsidiary of
Federated Investors, under which Federated Shareholder Services will either
perform shareholder services directly or will select financial institutions to
perform shareholder services. Financial institutions will receive fees based
upon Shares owned by their clients or customers. The schedules of such fees and
the basis upon which such fees will be paid will be determined from time to time
by the Fund and Federated Shareholder Services.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the administrative capacities described
above or should Congress relax current restrictions on depository institutions,
the Board of Directors will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
The distributor may, from time to time and for such periods as it deems
appropriate, voluntarily reduce its compensation under the Distribution Plan.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. The distributor may offer to pay a
fee from its own assets to financial institutions as financial assistance for
providing substantial marketing and sales support. The support may include
sponsoring sales, educational and training seminars at recreational-type
facilities, providing sales literature, and engineering computer software
programs that emphasize the attributes of the Fund. Such assistance will be
predicated upon the amount of Shares the financial institution sells or may sell
and/or upon the nature and type of sales or marketing support furnished by the
financial institution. Any payments made by the distributor may be reimbursed by
the Fund's investment adviser or its affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED FUNDS
<C> <S>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN. State Street Bank and Trust Company, Boston, Massachusetts, is
custodian for the securities and cash of the Fund. Foreign instruments purchased
by the Fund are held by foreign banks participating in a network coordinated by
State Street Bank.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, is transfer agent for shares of the Fund and dividend
disbursing agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania, and Dickstein, Shapiro & Morin, L.L.P., Washington,
D.C.
INDEPENDENT PUBLIC ACCOUNTANTS. The independent public accountants for the Fund
are Arthur Andersen LLP, Pittsburgh, Pennsylvania.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser and sub-adviser look for prompt execution of the order
at a favorable price. In working with dealers, the Adviser and sub-adviser will
generally utilize those who are recognized dealers in specific portfolio
instruments, except when a better price and execution of the order can be
obtained elsewhere. In selecting among firms believed to meet this criteria, the
Adviser and sub-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 and sub-adviser make decisions on portfolio
transactions and select brokers and dealers subject to review by the Directors.
EXPENSES OF THE FUND AND CLASS B SHARES
Holders of Shares pay their allocable portion of Fund and Corporation expenses.
The Corporation expenses for which holders of Shares pay their allocable portion
include, but are not limited to: the cost of organizing the Corporation and
continuing its existence; registering the Corporation with federal and state
securities authorities; Directors' fees; auditors' fees; the cost of meetings of
Directors; legal fees of the Corporation; association membership dues; and such
non-recurring and extraordinary items as may arise from time to time.
The Fund expenses for which holders of Shares pay their allocable portion
include, but are not limited to: registering the Fund and Shares of the Fund;
investment advisory services; taxes and commissions; custodian fees; insurance
premiums; auditors' fees; and such non-recurring and extraordinary items as may
arise from time to time.
At present, the only expenses which are allocated specifically to Shares as a
class are expenses under the Fund's Services Plan and Distribution Plan.
However, the Directors reserve the right to allocate certain other expenses to
holders of Shares as they deem appropriate ("Class Expenses"). In any case,
Class Expenses would be limited to: distribution fees; transfer agent fees as
identified by the transfer agent as attributable to holders of Shares; fees
under the Fund's Services Plan; 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 to state securities commissions; expenses related to
administrative personnel and services as required to support holders of Shares;
legal fees relating solely to Shares; and Directors' fees incurred as a result
of issues relating solely to Shares.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share gives the shareholder one vote in Director elections and other
matters submitted to shareholders for vote. All shares of each portfolio or
class in the Corporation have equal voting rights, except that, in matters
affecting only a particular Fund or class, only shares of that particular Fund
or class are entitled to vote.
As a Maryland corporation, the Corporation is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Fund's operation and for the election of Directors under certain
circumstances.
Directors may be removed by a two-thirds vote of the number of Directors prior
to such removal or by a two-thirds vote of the shareholders at a special
meeting. The Directors shall call a special meeting of shareholders upon the
written request of shareholders owning at least 10% of the Corporation's
outstanding shares entitled to vote.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Corporation's other portfolios, if any, will not be combined for tax purposes
with those realized by the Fund.
Investment income received by the Fund from sources within foreign countries may
be subject to foreign taxes withheld at the source. The United States has
entered into tax treaties with many foreign countries that entitle the Fund to
reduced tax rates or exemptions on this income. The effective rate of foreign
tax cannot be predicted since the amount of Fund assets to be invested within
various countries is unknown. However, the Fund intends to operate so as to
qualify for treaty-reduced tax rates where applicable.
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 dividend
earned in an IRA or qualified retirement plan until distributed.
If more than 50% of the value of the Fund's assets at the end of the tax year is
represented by stock or securities of foreign corporations, the Fund intends to
qualify for certain Internal Revenue Code stipulations that would allow
shareholders to claim a foreign tax credit or deduction on their U.S. income tax
returns. The Internal Revenue Code, as amended, may limit a shareholder's
ability to claim a foreign tax credit. Furthermore, shareholders who elect to
deduct their portion of the Fund's foreign taxes rather than take the foreign
tax credit must itemize deductions on their income tax returns.
PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Fund:
the Fund is subject to the Pennsylvania corporate franchise tax; and
Fund Shares are exempt from personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its total return and yield for Class B
Shares.
Total return represents the change, over a specific period of time, in the value
of an investment in Class B 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 B Shares is calculated by dividing the net investment income
per Share (as defined by the Securities and Exchange Commission) earned by Class
B Shares over a thirty-day period by the maximum offering price per Share 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 B 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 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. Because Class A Shares may be subject to lower 12b-1
fees, the yield for Class A Shares, for the same period, may exceed that of
Class B Shares and Class C Shares. Because Class A Shares are subject to a
front-end sales load, the total return for Class B Shares and Class C Shares,
for the same period, may exceed that of Class A Shares. Depending on the dollar
amount invested and the time period for which any class of shares is held, the
total return for any particular class may exceed that of another.
From time to time, the Fund may advertise the performance of Class B Shares
using certain financial publications and/or compare the performance of Class B
Shares to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
Class A Shares are sold primarily to customers of financial institutions subject
to a front-end sales load of up to 4.50% and a Rule 12b-1 fee of up to 0.25 of
1%. Under certain circumstances, investors may qualify for reduced sales loads
on purchases of Class A Shares. Class A Shares are subject to a Services Plan
fee of up to 0.25 of 1% of the Class A Shares' average daily net assets and are
subject to a minimum initial investment of $500, unless the investment is in a
retirement account, in which case the minimum investment is $50.
Class C Shares are sold primarily to customers of financial institutions at net
asset value with no initial sales load. Class C Shares are distributed pursuant
to a Distribution Plan adopted by the Fund whereby the distributor is paid a fee
of up to 0.75 of 1%, in addition to a Services Plan fee of up to 0.25 of 1%, of
the Class C Shares' average daily net assets. In addition, Class C Shares may be
subject to certain contingent deferred sales charges. Investments in Class C
Shares are subject to a minimum initial investment of $1,500, unless the
investment is in a retirement account, in which case the minimum investment is
$50.
The amount of dividends payable to Class A Shares will generally exceed that of
Class B Shares and Class C Shares by the difference between Class Expenses and
distribution and shareholder service expenses borne by shares of each respective
class.
The stated advisory fee is the same for all classes of shares.
INTERNATIONAL INCOME FUND
CLASS A SHARES
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Arthur Andersen LLP, the Fund's
independent public accountants. Their report dated January 21, 1994, on the
Fund's financial statements for the year ended November 30, 1993, and on the
following table for each of the periods presented, is included in the Annual
Report, which is incorporated by reference. This table should be read in
conjunction with the Fund's financial statements and notes thereto, which may be
obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1993 1992 1991**
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.47 $ 10.84 $ 10.00
- ------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------
Net investment income 0.88 0.62 0.25
- ------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 1.40 (0.20) 0.75
- ------------------------------------------------------------------------------------ --------- --------- ---------
Total from investment operations 2.28 0.42 1.00
- ------------------------------------------------------------------------------------ --------- --------- ---------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.75) (0.71) (0.16)
- ------------------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment transactions (0.14) (0.03) --
- ------------------------------------------------------------------------------------
Distributions in excess of net investment income -- (0.05)(b) --
- ------------------------------------------------------------------------------------ --------- --------- ---------
TOTAL DISTRIBUTIONS (0.89) (0.79) (0.16)
- ------------------------------------------------------------------------------------ --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 11.86 $ 10.47 $ 10.84
- ------------------------------------------------------------------------------------ --------- --------- ---------
TOTAL RETURN* 22.95% 3.82% 10.07%
- ------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------
Expenses 1.25% 0.99% 0.32%(a)
- ------------------------------------------------------------------------------------
Net investment income 7.71% 5.83% 7.54%(a)
- ------------------------------------------------------------------------------------
Expense waiver/reimbursements (c) 0.27% 0.62% 1.18%(a)
- ------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) 220,602 86,937 23,465
- ------------------------------------------------------------------------------------
Portfolio turnover rate*** 189% 314% 35%
- ------------------------------------------------------------------------------------
</TABLE>
* Based on net asset value, which does not reflect the sales load or
redemption fee, if applicable.
** Reflects operations for the period June 4, 1991 (date of initial public
investment) to November 30, 1991.
*** Represents portfolio turnover for the entire Fund.
(a) Computed on an annualized basis.
(b) Distributions in excess of net investment income for the year ended
November 30, 1992, were a result of certain book and tax timing
differences. These distributions do not represent a return of capital for
federal income tax purposes.
(c) Increase/decrease in above expense/income ratios due to waivers or
reimbursements of expenses.
Further information about the Fund's performance is contained in the Fund's
annual report dated
November 30, 1993, which can be obtained free of charge.
INTERNATIONAL INCOME FUND
CLASS C SHARES
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Arthur Andersen LLP, the Fund's
independent public accountants. Their report dated January 21, 1994, on the
Fund's financial statements for the year ended November 30, 1993, and on the
following table for each of the periods presented, is included in the Annual
Report, which is incorporated by reference. This table should be read in
conjunction with the Fund's financial statements and notes thereto, which may be
obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1993**
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.23
- -----------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------------
Net investment income 0.41
- -----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 1.58
- ----------------------------------------------------------------------------------------------- --------
Total from investment operations 1.99
- ----------------------------------------------------------------------------------------------- --------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.38)
- ----------------------------------------------------------------------------------------------- --------
TOTAL DISTRIBUTIONS (0.38)
- ----------------------------------------------------------------------------------------------- --------
NET ASSET VALUE, END OF PERIOD (000 OMITTED) $ 11.84
- ----------------------------------------------------------------------------------------------- --------
TOTAL RETURN* 19.67%
- -----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------
Expenses 2.05%(a)
- -----------------------------------------------------------------------------------------------
Net investment income 5.39%(a)
- -----------------------------------------------------------------------------------------------
Expense waiver/reimbursements (b) 0.21%(a)
- -----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) 4,767
- -----------------------------------------------------------------------------------------------
Portfolio turnover rate*** 189%
- -----------------------------------------------------------------------------------------------
</TABLE>
* Based on net asset value, which does not reflect the sales load or
redemption fee, if applicable.
** Reflects operations for the period from March 31, 1993 (date of initial
public offering) to November 30, 1993.
*** Represents portfolio turnover for the entire Fund.
(a) Computed on an annualized basis.
(b) Increase/decrease in above expense/income ratios due to waivers or
reimbursements of expenses.
Further information about the Fund's performance is contained in the Fund's
annual report dated
November 30, 1993, which can be obtained free of charge.
ADDRESSES
- --------------------------------------------------------------------------------
International Income Fund
Class B 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
- -------------------------------------------------------------------------
Sub-adviser
Fiduciary Trust 30 Old Burlington Street
International Limited London W1X1LB
England
- -----------------------------------------------------------------------------
Custodian
State Street Bank P.O. Box 8604
and Trust Company Boston, Massachusetts 02266-8604
- ----------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ----------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ----------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
- ----------------------------------------------------------------------------
Independent Public Accountants
Arthur Andersen LLP 2100 One PPG Place
Pittsburgh, Pennsylvania 15222
- ----------------------------------------------------------------------------
INTERNATIONAL INCOME
FUND
CLASS B SHARES
PROSPECTUS
An Open-End, Diversified
Management Investment Company
September 27, 1994
46031P506
1051602A-B (9/94)
INTERNATIONAL INCOME FUND
A PORTFOLIO OF INTERNATIONAL SERIES, INC.
(FORMERLY, F.T. SERIES, INC.)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectuses for Class A Shares and Class C Shares of
International Income Fund (the "Fund") dated March 29, 1994 and the
Class B Shares of the Fund dated September 27, 1994. This Statement is
not a prospectus itself. To receive a copy of any of the prospectuses,
write or call the Fund.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3776
Statement dated September 27, 1994
[logo] FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES 1
- ---------------------------------------------------------------
Types of Investments and Investment Techniques 1
When-Issued and Delayed Delivery Transactions 5
Repurchase Agreements 6
Reverse Repurchase Agreements 6
Lending Portfolio Securities 6
Restricted and Illiquid Securities 6
Duration 7
Portfolio Turnover 7
Investment Limitations 7
THE FUNDS 9
- ---------------------------------------------------------------
Fund Ownership 10
INVESTMENT ADVISORY SERVICES 10
- ---------------------------------------------------------------
Adviser to the Fund 10
Sub-Adviser 10
Advisory Fees 10
Sub-Advisory Fees 10
Other Related Services 11
ADMINISTRATIVE SERVICES 11
- ---------------------------------------------------------------
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT 11
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 11
- ---------------------------------------------------------------
PURCHASING SHARES 12
- ---------------------------------------------------------------
Distribution of Shares 12
Distribution and Shareholder Services Plans 12
Conversion to Federal Funds 12
Purchases by Sales Representatives,
Directors of the Corporation, and Employees 12
DETERMINING NET ASSET VALUE 13
- ---------------------------------------------------------------
Determining Market Value of Securities 13
Trading in Foreign Securities 13
REDEEMING SHARES 13
- ---------------------------------------------------------------
Redemption in Kind 13
TAX STATUS 14
- ---------------------------------------------------------------
The Fund's Tax Status 14
Foreign Taxes 14
Shareholders' Tax Status 14
TOTAL RETURN 14
- ---------------------------------------------------------------
YIELD 14
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 15
- ---------------------------------------------------------------
FINANCIAL STATEMENTS 15
- ---------------------------------------------------------------
APPENDIX 16
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
The Fund is a portfolio in International Series, Inc. (the "Corporation"), which
was established as FT International Trust, a Massachusetts business trust, under
a Declaration of Trust dated March 9, 1984, and reorganized as a corporation
under the laws of the state of Maryland on February 11, 1991. At a special
meeting of shareholders held on March 15, 1994, the shareholders of the
Corporation approved an amendment to the Articles of Incorporation to change the
name of the Corporation from FT Series, Inc., to International Series, Inc.
Shares of the Fund are 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 Combined Statement of Additional
Information relates to all three classes of the above-mentioned Shares.
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to seek a high level of current income in
U.S. dollars consistent with prudent investment risk. The Fund has a secondary
objective of capital appreciation. The investment objectives of the Fund cannot
be changed without the approval of the shareholders.
TYPES OF INVESTMENTS AND INVESTMENT TECHNIQUES
GENERAL
The Fund will invest primarily in high-quality debt securities
denominated in foreign currencies in accordance with the Fund's
investment objectives and policies. The Fund intends to engage in forward
contracts, futures and options transactions whenever it appears to the
investment adviser or sub-adviser (a) to be advantageous to do so in
pursuing the Fund's investment objectives; (b) to hedge (i.e., protect)
against foreign currency and interest rate risks; and (c) to stabilize
the value of the Fund's assets. The Fund will not engage in such
transactions for speculation. Up to 10% of the Fund's total assets may be
invested at any one time in commercial paper, certificates of deposit or
repurchase agreements. The use of forward contracts, futures and options,
and the attendant benefits and possible risks of such transactions, are
discussed below along with certain other investment information.
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 and sub-adviser believe 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
Fund's investment adviser or sub-adviser believe will tend to be closely
correlated with that 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
fund's investment adviser or sub-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 reopen.
FUTURES CONTRACTS
The Fund may enter into contracts for the future delivery of a financial
instrument such as an amount of foreign currency, a security, or the cash
value of a securities index during a specified future period at a
specified price. This investment technique is designed primarily to hedge
against anticipated future changes in foreign exchange rates, interest
rates or market conditions, all of which might otherwise have an adverse
effect upon the value of securities or other assets which the Fund holds
or intends to purchase. A "sale" of a futures contract means the
undertaking of a contractual obligation to deliver the underlying foreign
currency, security or cash value of a securities index called for by the
contract at a specified price during a specified delivery period. A
"purchase" of a futures contract means the undertaking of a contractual
obligation to acquire the underlying foreign currency, security or cash
value of a securities index at a specified price during a specified
delivery period. At the time of delivery, in the case of fixed income
securities pursuant to the contract, adjustments are made to recognize
differences in value resulting from the delivery of securities with a
different interest rate than the rate specified in the contract. In some
cases, securities called for by a futures contract may not have been
issued at the time the contract was written.
Although some futures contracts by their terms call for the actual
delivery or acquisition of assets, in most cases a party will close out
the contractual commitment before delivery without having to make or take
delivery of the underlying assets by purchasing (or selling, as the case
may be) on a commodities exchange an identical futures contract calling
for delivery in the same month. Such a transaction, if effected through a
member of an exchange, cancels the obligation to make or take delivery of
the underlying assets. All transactions in the futures market are made,
offset or fulfilled through a clearing house associated with the exchange
on which the contracts are traded. Brokerage fees will be incurred by the
Fund when it purchases or sells contracts, and the Fund will be required
to maintain margin deposits. At the time the Fund enters into a futures
contract, it is required to deposit with its custodian, on behalf of the
broker, a specified amount of cash or eligible securities, called
"initial margin." The initial margin required for a futures
- --------------------------------------------------------------------------------
contract is set by the exchange on which the contract is traded.
Subsequent payments, which are called "variation margin," to and from the
broker are made on a daily basis as the market price of the futures
contract fluctuates. The costs incurred in connection with futures
transactions could reduce the Fund's return.
Futures contracts entail risks. If the investment adviser's or
sub-adviser's judgment about the general direction of interest rates,
markets or exchange rates is wrong, the overall performance may be poorer
than if no such contracts had been entered into. An imperfect correlation
may exist between movements in the prices of futures contracts and
portfolio assets being hedged. Further, the market prices of futures
contracts may be affected by certain factors. For example, the normal
relationship between the assets and futures markets could be distorted if
participants in the futures market were to elect to close out their
contracts through offsetting transactions rather than by meeting margin
requirements. Price distortions also could result if investors in futures
contracts were to decide to make or take delivery of underlying assets
rather than engaging in closing transactions because of the resultant
liquidity of the futures market. Further, increased participation by
speculators in the futures market could cause temporary price distortions
because, as perceived by speculators, margin requirements in the futures
market are less onerous than margin requirements in the cash market.
Because of the possibility of price distortions in the futures market and
the imperfect correlation between movements in the prices of securities
or other assets and movements in the prices of futures contracts, a
correct forecast of market trends by the investment adviser still may not
result in a successful hedging transaction. If one of these events were
to occur, the Fund could lose money on the futures contracts as well as
on its portfolio assets.
OPTIONS ON FUTURES CONTRACTS
The Fund may purchase and write call and put options on futures
contracts. An option on a futures contract gives the purchaser the right,
in return for the premium paid, to assume a position in a futures
contract at a specified price at any time during the period of the
option. When the option is exercised, the writer of the option delivers
the futures contract to the holder at the exercise price. With regard to
put and call options on futures contracts written by the Fund, the Fund
would be required to deposit initial and maintenance margin with the
custodian. Options on futures contracts involve risks similar to those
discussed above that relate to transactions in futures contracts.
Furthermore, an option on a futures contract purchased by the Fund may
expire worthless, which would cause the Fund to lose the premium paid for
the option.
FOREIGN CURRENCY FUTURES TRANSACTIONS
By using foreign currency futures contracts and options on such
contracts, the Fund may be able to achieve many of the same objectives as
it would through the use of forward foreign currency exchange contracts.
The Fund may be able to achieve these objectives possibly more
effectively and at a lower cost by using futures transactions instead of
forward foreign currency exchange contracts.
SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY FUTURES CONTRACTS AND
RELATED OPTIONS
Buyers and sellers of foreign currency futures contracts are subject to
the same risks that apply to the use of futures generally. In addition,
there are risks associated with foreign currency futures contracts and
their use as a hedging device similar to those associated with options on
foreign currencies, as described above.
Options on foreign currency futures contracts may involve certain
additional risks. Trading options on foreign currency futures contracts
is relatively new. The ability to establish and close out positions on
such options is subject to the maintenance of a liquid secondary market.
To reduce this risk, the Fund will not purchase or write options on
foreign currency futures contracts unless and until, in the investment
adviser's and the subadviser's opinions, the market for such options has
developed sufficiently that the risks in connection with such options are
not greater than the risks in connection with transactions in the
underlying foreign currency futures contracts. Compared to the purchase
or sale of foreign currency futures contracts, the purchase of call or
put options on futures contracts involves less potential risk to the Fund
because the maximum amount at risk is the premium paid for the option
(plus transaction costs). However, there may be circumstances when the
purchase of a call or put option on a futures contract would result in a
loss, such as when there is no movement in the price of the underlying
currency or futures contract.
OPTIONS ON SECURITIES
The Fund may write (sell) covered call options on securities if it owns
securities that are acceptable for escrow purposes. Additionally, the
Fund may write secured put options on securities. When writing a secured
put option, the Fund will invest an amount not less than the exercise
price of the put option in eligible securities, so long as the Fund is
obligated as a writer of a put option. A call option gives the
- --------------------------------------------------------------------------------
purchaser the right to buy, and the writer the obligation to sell, the
underlying security at the exercise price during the option period. A put
option gives the purchaser the right to sell, and the writer the
obligation to buy, the underlying security at the exercise price during
the option period. The premium received for writing an option will
reflect such factors as the current market price of the underlying
security, the relationship of the exercise price to such market price,
the option period, supply and demand, and interest rates. The exercise
price of an option may be below, equal to or above the current market
value of the underlying security at the time that the option is written.
The Fund may also write or purchase spread options. A spread option is an
option for which the exercise price may be a fixed dollar spread or yield
spread between the security underlying the option and another security
that it does not own but uses as a bench mark.
The purchase of a put option by the owner of the related security
protects the purchaser against any decline in the related security's
price below the exercise price (less the amount paid for the option). The
ability of the Fund to purchase put options allows it to protect capital
gains in an appreciated security without actually requiring the Fund to
sell the appreciated security. On occasion, the Fund would like to
establish a position in a security upon which call options are available.
The purchase of a call option enables the Fund to fix the cost of
acquiring the security, which would be the cost of the call plus the
exercise price of the option. In addition, this method of acquiring
securities provides some protection from an unexpected downturn in the
market. This is because the Fund is at risk only for the amount of the
premium paid for the call option, which it can let lapse, if it so
chooses.
During the option period, the covered call writer gives up the potential
for capital appreciation above the exercise price if the underlying asset
rises in value, and the secured put writer retains the risk of loss if
the underlying asset declines in value. For the covered call writer,
substantial appreciation in the value of the underlying asset would
result in the asset being "called away." For the secured put writer,
substantial depreciation in the value of the underlying asset could
result in the asset being "put to" the writer. If a covered call option
expired unexercised, the writer of the call would realize a gain and the
buyer would realize a loss in the amount of the premium. If the covered
call option writer had to sell the underlying asset because of the
exercise of the call option, it would realize a gain or loss from the
sale of the underlying asset, with the proceeds being increased by the
amount of the premium.
If a secured put option expired unexercised, the writer would realize a
gain and the buyer would realize a loss on the amount of the premium. If
the secured put writer would have to buy the underlying asset because of
the exercise of the put option, the writer would incur an unrealized loss
to the extent that the current market value of the underlying asset is
less than the exercise price of the put option, less the premium
received.
OVER-THE-COUNTER OPTIONS
The Fund may deal in over-the-counter traded options ("OTC options") in
addition to exchange traded options. OTC options differ from exchange
traded options in several respects. First, they are transacted with
dealers rather than a clearing corporation. Second, a risk of
nonperformance by the dealer exists, whether as a result of the
insolvency of the dealer or otherwise, which could cause the Fund to
experience material losses; however, in writing OTC options, the premium
is paid in advance by the dealer. Third, in contrast to exchange traded
options, OTC options are available for a greater variety of securities
and wider range of expiration dates and exercise prices. Because there is
no exchange in the case of OTC options, pricing is normally done with
reference to information from market makers, which is carefully monitored
by the Fund's investment adviser and verified in appropriate cases.
A writer or purchaser of a put or call option can terminate it
voluntarily only by entering into a closing transaction. In the case of
OTC options, there cannot be any assurance that a continuous liquid
secondary market will exist for any particular option at any given time.
As a result, the Fund may be able to realize the value of an OTC option
it has purchased only by exercising it or by entering into a closing sale
transaction with the dealer that issued it. Likewise, in cases where the
Fund writes an OTC option, it generally can close out that option prior
to its expiration only by entering into a closing purchase transaction
with the dealer to whom the Fund wrote the option. If a covered call
option writer is unable to effect a closing transaction, it cannot sell
the underlying asset until the option either expires or is exercised.
Thus, a covered call option writer of an OTC option may not be able to
sell an underlying asset even though it might otherwise be advantageous
to do so. Moreover, a secured put writer of an OTC option may be unable
to sell the assets pledged to secure the put for other investment
purposes so long as it is obligated as a put writer, and a purchaser of
the put or call option might also find it difficult to terminate its
position on a timely basis when no secondary market exists.
- --------------------------------------------------------------------------------
OPTIONS ON SECURITIES INDICES
The Fund also may purchase and write call and put options on securities
indices in order to hedge against market conditions which affect the
values of securities that the Fund owns or intends to purchase. The Fund
will not purchase and write such options for speculation. By writing and
purchasing index options, the Fund may be able to achieve many of the
same objectives as through the purchasing and writing of options on
individual securities. Options on securities indices are similar to
options on individual securities. However, unlike an option on an
individual security, which gives the right to take or make delivery of a
security at a specified price, an option on a securities index gives the
holder upon exercise the right to receive an amount of cash if the
closing level of the securities index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option. Upon exercise of the option, the amount
of cash received by the holder is equal to the difference between the
closing price of the index and the exercise price of the option. In
consideration for the premium received, the writer of the option has an
obligation to make delivery of the amount of cash resulting from the
exercise of the option. Unlike options on individual securities, all
settlements are in cash, and the gain or loss depends upon price
movements in the market generally or in a segment of the market, rather
than upon price movements in individual securities.
The Fund covers call options written on a securities index through the
ownership of securities whose changes in price, in the opinion of the
Fund's investment adviser, are anticipated to be similar to the price
changes of the index, or in such other manner or may be in conformance
with applicable laws, regulations and exchange rules. Any changes in the
prices of the securities owned by the Fund probably will not be perfectly
correlated with the securities index. The Fund will secure put options
written on a securities index by means of segregating liquid high-grade
securities equal to the exercise price, or in such other manner as may be
in conformance with applicable laws, regulations and exchange rules. Upon
writing an option on a securities index, the Fund will be required to
deposit with its custodian and mark-to-market, eligible securities that
are equal in value to at least 100% of the exercise price in the case of
a put or, in the case of a call, the value of the contract. Additionally,
if the Fund writes a call option on a securities index at a time when the
value of the contract is greater than the exercise price, the Fund will
segregate and mark to market, until such time as the option expires or is
closed out, cash or a cash equivalent equal in value to the excess of the
contract value.
In addition, the Fund may purchase and write options on other appropriate
indices, as available
(e.g., foreign currency indices).
Index options involve risks similar to those associated with transactions
in futures contracts, as described above. Also, an option purchased by
the Fund may expire worthless. In such case, the Fund could lose the
premium paid for the option.
REGULATORY RESTRICTIONS
To the extent required to comply with Securities and Exchange Commission
Release No. 10666, when purchasing a futures contract, writing a put
option or entering into a delayed delivery purchase or forward foreign
currency exchange purchase, the Fund will establish and maintain a
segregated account consisting of cash or liquid high-grade securities
equal to the value of such contracts.
To the extent required to comply with Commodity Futures Trading
Commission Regulation 4.5 and thereby avoid status as a "commodity pool
operator", the Fund will not enter into a futures contract, or purchase
an option thereon, if immediately thereafter the initial margin deposits
for futures contracts held by the Fund, plus premiums paid by it for open
options of futures, would exceed 5% of the total assets of the Fund. The
Fund will not engage in transactions in futures contracts or options
thereon for speculation, but only to attempt to hedge against changes in
market conditions affecting the values of assets which the Fund holds or
intends to purchase. When futures contracts or options thereon are
purchased in order to protect against a price increase on securities or
other assets intended to be purchased later, it is anticipated that at
least 75% of such intended purchases will be completed. When other
futures contracts or options thereon are purchased, the underlying value
of such contracts will at all times not exceed the sum of (1) accrued
profit on such contracts held by the broker; (2) cash or high-quality
money market instruments set aside in an identifiable manner; and (3)
cash proceeds from investments due in 30 days or less.
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. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices. No fees or other expenses, other
than normal transaction
- --------------------------------------------------------------------------------
costs, are incurred. However, liquid assets of the Fund sufficient to make
payment for the securities to be purchased are segregated 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.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily. In
the event that such a defaulting seller filed for bankruptcy or became
insolvent, disposition of such securities by the Fund might be delayed pending
court action. The Fund believes that under the regular procedures normally in
effect for custody of the Fund's portfolio securities subject to repurchase
agreements, a court of competent jurisdiction would rule in favor of the Fund
and allow retention or disposition of such securities. The Fund will only enter
into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers which are deemed by the Fund's investment
adviser or sub-adviser to be creditworthy pursuant to guidelines established by
the Corporation's Board of Directors (the "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 on the Fund's records at the trade date. These assets are marked
to market daily and maintained until the transaction is settled.
LENDING PORTFOLIO SECURITIES
The Fund may lend its portfolio securities to broker-dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker-dealers, banks, or other institutions which the
investment adviser or sub-adviser has determined are creditworthy under
guidelines established by the Corporation's Directors and will receive
collateral equal to at least 100% of the value of the securities loaned.
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.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Directors to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission ("SEC") staff
position set forth in the adopting release for Rule 144A under the Securities
Act of 1933 (the "Rule"). The Rule is a non-exclusive, safe-harbor for certain
secondary market transactions involving securities subject to restrictions on
resale under federal securities laws. The Rule provides an exemption from
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the liquidity of
the secondary market for securities eligible for resale under Rule 144A. The
Fund believes that the staff of the SEC has left the question of determining the
liquidity of all restricted securities (eligible for resale under Rule 144A) for
determination of the Corporation's Directors. The Directors consider the
following criteria in determining the liquidity of certain restricted
securities:
the frequency of trades and quotes for the security;
the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
dealers' undertakings to make a market in the security; and
the nature of the security and the nature of the marketplace trades.
- --------------------------------------------------------------------------------
Notwithstanding the foregoing, securities of foreign issuers which are not
listed on a recognized domestic or foreign exchange or for which a bona fide
market does not exist at the time of purchase or subsequent transaction shall be
treated as illiquid securities by the Directors.
When the Fund invests in certain restricted securities determined by the
Directors to be liquid, such investments could have the effect of increasing the
level of Fund illiquidity to the extent that the buyers in the secondary market
for such securities (whether in Rule 144A resales or other exempt transactions)
become, for a time, uninterested in purchasing these securities.
DURATION
Duration is a measure of a debt security's price sensitivity expressed in years
and is a measure of the interest rate risk of a debt security, taking into
consideration that there may be cash flows before the maturity date and that the
cash flows must be considered in terms of their present value. Duration is
similar to, but more precise than, average life. It is a measure of the number
of years until the average dollar--in present value terms--is received from
coupon and principal payments. As such, it is one measure of systematic risk.
Average life, on the other hand, is a measure of the time to receive a dollar of
principal--it takes into consideration neither interest payments nor present
value. Duration is computed by multiplying each principal and interest payment
by its present value, summing these products, and dividing the sum by the full
price of the debt security. When a Fund invests in mortgage pass-through
securities, its duration will be calculated in a manner which requires
assumptions to be made regarding future principal prepayments. A more complete
description of this calculation is available upon request from the Fund.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking
short-term profits, securities in its portfolio will be sold whenever the Fund's
investment adviser or sub-adviser believes it is appropriate to do so in light
of the Fund's investment objectives, without regard to the length of time a
particular security may have been held. The adviser and sub-adviser to the Fund
do not anticipate that portfolio turnover will result in adverse tax
consequences. For the fiscal years ended November 30, 1993 and 1992, the
portfolio turnover rates were 189% and 314%, respectively.
INVESTMENT LIMITATIONS
ACQUIRING SECURITIES
The Fund will not acquire any securities of Fiduciary Trust Company
International or its affiliates.
CONCENTRATION OF INVESTMENTS
The Fund will not invest more than 25% of its total assets in securities
of any one government or supranational issuer.
BORROWING
The Fund will not borrow money except from banks or through reverse
repurchase agreements as a temporary measure for extraordinary or
emergency purposes and then only in amounts up to one-third of the value
of its total assets, including the amount borrowed, but entering into
futures contracts shall not be considered borrowing. This borrowing
provision is not for investment leverage but solely to facilitate
management of the portfolio by enabling the Fund to meet redemption
requests when the liquidation of portfolio securities would be
inconvenient or disadvantageous. The Fund will not purchase securities
while outstanding borrowings exceed 5% of the value of its total assets.
PLEDGING SECURITIES
The Fund will not mortgage, pledge, or hypothecate securities, except
when necessary for permissible borrowings. In those cases, it may pledge
assets having a value of 15% of its assets taken at cost. To comply with
certain state restrictions, the Fund will limit these transactions to 10%
of its net assets at market. If state restrictions change, this latter
restriction may be revised without shareholder approval or notification.
For purposes of the limitation, (a) the deposit of assets in escrow in
connection with the writing of covered call and secured put options and
(b) collateral arrangements with respect to (i) the purchase and sale of
options and (ii) initial or variation margins for futures contracts, will
not be deemed to be pledges of the Fund's assets.
- --------------------------------------------------------------------------------
BUYING ON MARGIN
The Fund will not purchase any securities on margin but may obtain such
short-term credits as may be necessary for clearance of purchases and
sales of securities, and except that the Fund may make margin deposits or
payments in connection with its use of options, futures contracts and
options on futures contracts.
ISSUING SENIOR SECURITIES
The Fund will not issue senior securities except in connection with
borrowing money directly or through reverse repurchase agreements or as
required by forward commitments to purchase securities or currencies.
UNDERWRITING
The Fund will not underwrite or participate in the marketing of
securities of other issuers, except as it may be deemed to be an
underwriter under federal securities law in connection with the
disposition of its portfolio securities.
INVESTING IN REAL ESTATE
The Fund will not invest in real estate, including limited partnership
interests, although it may invest in securities secured by real estate or
interests in real estate or issued by companies, including real estate
investment trusts, which invest in real estate or interests therein.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities or commodity contracts,
except that the Fund may purchase or sell futures contracts and options
thereon, provided that the sum of its initial margin deposits on open
contracts will not exceed 5% of the fair market value of the Fund's net
assets. Further, the Fund may engage in transactions in foreign
currencies and may purchase and sell options on foreign currencies and
indices for hedging purposes.
LENDING CASH OR SECURITIES
The Fund will not lend any assets except portfolio securities. This shall
not prevent the purchase or holding of bonds, debentures, notes,
certificates of indebtedness, or other debt securities of an issuer,
repurchase agreements or other transactions which are permitted by the
Fund's investment objective and policies or its Articles of
Incorporation.
INVESTING IN MINERALS
The Fund will not invest in interests in oil, gas, or other mineral
exploration or development programs or leases.
DEALING IN PUTS AND CALLS
The Fund may not write or purchase options, except that the Fund may
write covered call options and secured put options on up to 25% of its
net assets and may purchase put and call options, provided that no more
than 5% of its net assets may be invested in premiums of such options.
SELLING SHORT
The Fund will not sell securities short unless (1) it owns, or has a
right to acquire, an equal amount of such securities, or (2) it has
segregated an amount of its other assets equal to the lesser of the
market value of the securities sold short or the amount required to
acquire such securities. The segregated amount will not exceed 10% of the
Fund's net assets. While in a short position, the Fund will retain the
securities, rights, or segregated assets.
Except as noted, the above investment limitations cannot be changed without
shareholder approval. The following limitations, however, may be changed by the
Directors without shareholder approval. Except as noted, shareholders will be
notified before any material change in these limitations becomes effective.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for the purpose of
exercising control or management.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will not own securities of open-end investment companies, own
more than 3% of the total outstanding voting stock of any closed-end
investment company, invest more than 5% of its total assets in any
closed-end investment company, or invest more than 10% of its total
assets in closed-end investment companies in general. The Fund will
purchase securities of closed-end investment companies only in open-
- --------------------------------------------------------------------------------
market transactions involving only customary broker's commissions.
However, these limitations are not applicable if the securities are
acquired in a merger, consolidation, reorganization, or acquisition of
assets. The Fund will indirectly bear its proportionate share of any fees
and expenses paid by other investment companies in addition to the fees
and expenses payable directly by the Fund.
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, including the operation of any predecessor.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including securities not determined by the Directors
to be liquid, repurchase agreements with maturities longer than seven
days after notice, and certain over-the-counter options.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND
DIRECTORS OF THE CORPORATION
The Fund will not purchase or retain the securities of any issuer if the
officers and directors of the Corporation or the Fund's investment
adviser or sub-adviser owning individually more than -1/2 of 1% of the
issuer's securities together own more than 5% of the issuer's securities.
ARBITRAGE TRANSACTIONS
To comply with certain state restrictions, the Fund will not enter into
transactions for the purpose of engaging in arbitrage. If state
requirements change, this restriction may be revised without shareholder
notification.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
To comply with registration requirements in certain states, the Fund (1) will
limit short sales of securities of any class of any one issuer to the lesser of
2% of the Fund's net assets or 2% of the securities of that class, and (2) will
make short sales only on securities listed on recognized stock exchanges. The
latter restrictions, however, do not apply to short sales of securities the Fund
holds or has a right to acquire without the payment of any further
consideration. If state requirements change, these restrictions may be revised
without shareholder notification.
The Fund did not borrow money, invest in reverse repurchase agreements, pledge
securities in excess of 5% of the value of its total assets or sell securities
short in an amount exceeding 5% of its net assets, during the past year and does
not anticipate doing so during the current fiscal year.
THE FUNDS
- --------------------------------------------------------------------------------
The "Funds" and "Funds" mean the following investment companies: American
Leaders Fund, Inc.; Annuity Management Series; Automated Cash Management Trust;
Automated Government Money Trust; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.;
Federated GNMA Trust; Federated Government Trust; Federated Growth Trust;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated
Intermediate Government Trust; Federated Master Trust; Federated Municipal
Trust; Federated Short-Intermediate Government Trust; Federated Short-Term U.S.
Government Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated
U.S. Government Bond Fund; First Priority Funds; Fixed Income Securities, Inc.;
Fortress Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income
Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government Securities,
Inc.; Government Income Securities, Inc.; High Yield Cash Trust; Insight
Institutional Series, Inc.; Insurance Management Series; Intermediate Municipal
Trust; International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund,
Inc.; Liberty Municipal Securities Fund, Inc.; Liberty Term Trust, Inc.--1999;
Liberty U.S. Government Money Market Trust; Liberty Utility Fund, Inc.; Liquid
Cash Trust; Managed Series Trust; Mark Twain Funds; The Medalist Funds; Money
Market Management, Inc.; Money Market Obligations Trust; Money Market Trust;
Municipal Securities Income Trust; New York Municipal Cash Trust; 111 Corcoran
Funds; Peachtree Funds; The Planters Funds; Portage Funds; RIMCO Monument Funds;
The Shawmut Funds; Short-Term Municipal Trust; Star Funds; The Starburst Funds;
The Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst Funds; Targeted
Duration Trust; Tax-Free Instruments Trust; Trademark Funds; Trust
- --------------------------------------------------------------------------------
for Financial Institutions; Trust for Government Cash Reserves; Trust for
Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations; and
World Investment Series, Inc.
FUND OWNERSHIP
As of July 9, 1994, the following shareholders of record owned 5% or more of the
outstanding Class A Shares of the Fund: Clooney & Co., New York, New York, owned
approximately 2,564,700 Class A Shares (11.07%); JATO/ National City Bank of
Minneapolis, Minneapolis, Minnesota, owned approximately 2,294,751 Class A
Shares (9.90%); Charles Schwab & Co. Inc., San Francisco, California, owned
approximately 2,243,461 Class A Shares (9.68%); and Mertru and Company, Muncie,
Indiana, owned approximately 1,478,041 Class A Shares (6.38%).
Also as of July 9, 1994, the following shareholder of record owned 5% or more of
the outstanding Class C Shares of the Fund: Merrill Lynch Pierce Fenner & Smith
(as record owner holding Class C Shares for its clients), Jacksonville, Florida,
owned approximately 243,339 Class C Shares (29.55%)
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND
The Fund's investment adviser is Federated Management (the "Adviser"). It is a
subsidiary of Federated Investors. All of the voting securities of Federated
Investors are owned by a trust, the trustees of which are John F. Donahue, his
wife, and his son, J. Christopher Donahue.
The Adviser shall not be liable to the Fund, the Corporation, or any shareholder
of the Fund 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
Corporation.
SUB-ADVISER
Fiduciary Trust International Limited ("Fiduciary International"), is the
sub-adviser to the Fund under the terms of a Sub-Advisory Agreement between
Federated Management and Fiduciary International. Fiduciary International is
located at 30 Old Burlington Street, London W1X1LB. Fiduciary International,
which is an English company formed on May 20, 1985, is registered as an
investment adviser with the Securities and Exchange Commission and is a member
of the Investment Management Regulatory Organization, a United Kingdom
self-regulatory organization. Substantially all of the shares of Fiduciary
International are owned by Fiduciary Trust International (SA), a wholly-owned
subsidiary of Fiduciary Trust Company International. No director, officer or
employee of Fiduciary International or Fiduciary Trust International (SA) serves
as director, officer or employee of the Corporation.
Fiduciary Trust Company International was founded in 1931 and is a New York
state-chartered bank. It has focused primarily on the management of the
investments and financial affairs of its customers, and has chosen to minimize
its commercial banking activities (i.e., accepting deposits and making loans).
As of December 31, 1993, Fiduciary Trust Company International had total assets
in excess of $335 million, and total assets under management of over $29
billion. Fiduciary Trust International (SA) is a Swiss company organized to act
as an intermediate foreign parent for certain of Fiduciary Trust Company
International's foreign subsidiaries.
ADVISORY FEES
For its advisory services, Federated Management receives an annual investment
advisory fee as described in the prospectuses. For the fiscal years ended
November 30, 1993, and, prior to the creation of separate classes of shares,
November 30, 1992, and for the period from June 4, 1991 (date of initial public
investment) to November 30, 1991, Fiduciary International, Inc. the Fund's
former investment adviser earned $986,055, $528,035, and $32,066, respectively,
which were reduced by $271,710, $433,317 and $332,066, respectively, because of
the voluntary undertaking to limit the Fund's expenses.
SUB-ADVISORY FEES
For its sub-advisory services, Fiduciary Trust International Limited receives an
annual sub-advisory fee as described in the prospectuses. Federated Management
became the Fund's sub-adviser December 1, 1990, and served in that capacity
until March 15, 1994. For the fiscal years ended November 30, 1993, and, prior
to the creation of separate classes of shares, November 30, 1992, and for the
period from June 4, 1991 (date of initial public investment) to November 30,
1991, Federated Management, in its former capacity as sub-adviser to the Fund,
received a gross fee from Fiduciary International, Inc., the Fund's former
investment adviser, amounting to $493,028, $264,018 and $16,033, respectively,
which were reduced by $135,855, $216,659 and $8,017, respectively.
- --------------------------------------------------------------------------------
STATE EXPENSE LIMITATION
The Adviser and sub-adviser have undertaken to comply with the expense
limitation established by certain states for investment companies whose
shares are registered for sale in those states. If the Fund's normal
operating expenses (including the investment advisory and sub-advisory
fees, 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 and sub-adviser will reimburse the Fund for their expenses over
the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory and sub-advisory fees paid will be
reduced by the amount of the excess, subject to an annual adjustment. If
the expense limitation is exceeded, the amounts to be reimbursed by the
Adviser and sub-adviser will be limited, in any single fiscal year, by
the amount of the investment advisory and sub-advisory fee.
This arrangement is not part of the investment advisory contract or
sub-advisory agreement, and may be amended or rescinded in the future.
OTHER RELATED SERVICES
Affiliates of the Adviser may, from time to time, provide certain electronic
equipment and software to institutional customers in order to facilitate the
purchase of shares of funds offered by Federated Securities Corp.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund and receives an administrative
fee as described in the prospectuses. For the fiscal years ended November 30,
1993, and, prior to the creation of separate classes of shares, November 30,
1992, and for the period from June 4, 1991 (date of initial public investment)
to November 30, 1991, the Fund incurred administrative service fees of $197,211,
$105,607 and $6,412, respectively, none of which were voluntarily waived. Dr.
Henry J. Gailliot, an officer of Federated Management, the Adviser to the Fund,
holds approximately 20% of the outstanding common stock and serves as a director
of Commercial Data Services, Inc., a company which provides computer processing
services to Federated Administrative Services.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
- --------------------------------------------------------------------------------
Federated Services Company serves as transfer agent 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 Services Company also maintains the Fund's accounting records. The fee
is based on the level of the Fund's average net assets for the period plus
out-of-pocket expenses.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
The Adviser and sub-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 sub-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.
The Adviser and sub-adviser and their affiliates exercise reasonable business
judgment in selecting brokers who offer brokerage and research services to
execute securities transactions. They determine in good faith that commissions
charged by such persons are reasonable in relationship to the value of the
brokerage and research services provided.
Research services provided by brokers may be used by the Adviser, the
sub-Adviser, or by affiliates of Federated Investors in advising certain 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.
Investment decisions for the Fund will be made independently from those of any
fiduciary or other accounts that may be managed by Fiduciary Trust Company
International or its subsidiaries. If, however, such accounts and the
- --------------------------------------------------------------------------------
Fund are simultaneously engaged in transactions involving the same securities,
the transactions may be combined and allocated to each account. This system may
adversely affect the price the Fund pays or receives, or the size of the
position it obtains.
The Adviser may engage in other non-U.S. transactions that may have adverse
effects on the market for securities in the Fund's portfolio. The Adviser and
sub-adviser are not obligated to obtain any material non-public ("inside")
information about any securities issuer, or to base purchase or sale
recommendations on such information.
For the fiscal years ended November 30, 1993, and, prior to the creation of
separate classes of shares, November 30, 1992, and for the period from June 4,
1991 (date of initial public investment) to November 30, 1991, the Fund paid
total brokerage commissions of $0, $0, and $0, respectively.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Except under certain circumstances described in the respective prospectuses,
Shares are sold at their net asset value (plus a sales load 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
"Investing in Class A Shares," "Investing in Class B Shares," or "Investing in
Class C Shares."
DISTRIBUTION OF SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
For the fiscal years ended November 30, 1993, and, prior to the creation of
separate classes of shares, November 30, 1992, and for the period from June 14,
1991 (date of initial public investment) to November 30, 1991, the distributor
was paid $197,776, $246,266, and $142,428, respectively. For the same periods,
the distributor retained $21,516, $65 and $0, respectively, after dealer
concessions.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities 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 objective. By identifying potential
investors whose needs are served by the Fund's objective, and properly servicing
these accounts, it may be possible to curb sharp fluctuations in rates of
redemptions and sales.
Other benefits, which may be realized under either arrangement, may include: (1)
providing personal services to shareholders; (2) investing shareholder assets
with a minimum of delay and administrative detail; (3) enhancing shareholder
recordkeeping systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds before shareholders begin to
earn dividends. Federated Services Company acts as the shareholder's agent in
depositing checks and converting them to federal funds.
PURCHASES BY SALES REPRESENTATIVES, DIRECTORS OF THE CORPORATION, AND EMPLOYEES
Directors, employees, and sales representatives of the Fund, Federated
Management, Fiduciary Trust International Limited, and Federated Securities
Corp., or their affiliates, or any investment dealer who has a sales agreement
with Federated Securities Corp., and their spouses and children under 21, may
buy Shares at net asset value without a load and are not subject to a contingent
deferred sales charge (Class B Shares and Class C Shares only) 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 sales charges to trusts or pension or profit-sharing plans for these
persons.
- --------------------------------------------------------------------------------
These sales are made with the purchaser's written assurance that the purchase is
for investment purposes and that the securities will not be resold except
through redemption by the Fund.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the respective prospectuses.
DETERMINING MARKET VALUE OF SECURITIES
Market or appraised values of the Fund's portfolio securities are determined as
follows:
.according to the prices provided by an independent pricing service, if
available, or at fair value as determined in good faith by the Corporation's
Directors; or
.for short-term obligations with remaining maturities of less than 60 days at
the time of purchase, at amortized cost, unless the Directors determine that
particular circumstances of the security indicate otherwise.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may consider: institutional trading in
similar groups of securities; yield; quality; coupon rate; maturity; type of
issue; trading characteristics; and other market data.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset value, the
Fund values foreign securities at the latest closing price on the exchange on
which they are traded immediately prior to the closing of the New York Stock
Exchange. Certain foreign currency exchange rates may also be determined at the
latest rate prior to the closing of the New York Stock Exchange. Foreign
securities quoted in foreign currencies are translated into U.S. dollars at
current rates. Occasionally, events that affect these values and exchange rates
may occur between the times at which they are determined and the closing of the
New York Stock Exchange. If such events materially affect the value of portfolio
securities, these securities may be valued at their fair value as determined in
good faith by the Directors, although the actual calculation may be done by
others.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request. Shareholder redemptions of Class B Shares and
Class C Shares may be subject to a contingent deferred sales charge. Redemption
procedures are explained in the respective prospectuses under "Redeeming Class A
Shares," "Redeeming Class B Shares," or "Redeeming Class C 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.
Since portfolio securities of the Fund may be traded on foreign exchanges which
trade on Saturdays or on holidays on which the Fund will not make redemptions,
the net asset value of each class of Shares of the Fund may be significantly
affected on days when shareholders do not have an opportunity to redeem their
Shares.
REDEMPTION IN KIND
Although the Corporation intends to redeem Shares in cash, it reserves the right
under certain circumstances to pay the redemption price, in whole or in part, by
a distribution of securities from the Fund's portfolio.
Redemption in kind will be made in conformity with applicable SEC rules, taking
such securities at the same value employed in determining net asset value and
selecting the securities in a manner the Directors determine to be fair and
equitable.
The Corporation has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Corporation is obligated to redeem Shares
for any one shareholder in cash only up to the lesser of $250,000 or 1% of a
class of Shares' net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
is 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:
.derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
.derive less than 30% of its gross income from the sale of securities held less
than three months;
.invest in securities within certain statutory limits; and
.distribute to its shareholders at least 90% of its net income earned during the
year.
FOREIGN TAXES
Investment income on certain foreign securities in which the Fund may invest may
be subject to foreign withholding or other taxes that could reduce the return on
these securities. Tax treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign taxes to which the Fund
would be subject.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional Shares. The Fund's dividends, and any short-term
capital gains, are taxable as ordinary income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held
the Fund Shares.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Class A Shares' average annual total return for the fiscal year ended
November 30, 1993, and, prior to the creation of separate classes of shares, for
the period from June 4, 1991 (effective date of the Fund's registration
statement) to November 30, 1993, were 17.46% and 12.66%, respectively.
The Class C Shares' cumulative total return from March 31, 1993 to November 30,
1993 was 18.66%. Cumulative total return reflects the Class C Shares' total
performance over a specific period of time. This total return assumes and is
reduced by the payment of the maximum sales load. The Class C Shares' total
return is representative of only eight months of investment activity since the
Class C Shares' effective date.
The average annual total return for all classes of Shares of the Fund is the
average compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of Shares owned at the
end of the period by the offering price per Share at the end of the period. The
number of Shares owned at the end of the period is based on the number of Shares
purchased at the beginning of the period with $1,000, less any applicable sales
load, 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.
YIELD
- --------------------------------------------------------------------------------
The yield for Class A Shares for the thirty-day period ended November 30, 1993,
was 5.33%. The yield for Class C Shares for the thirty-day period ended November
30, 1993, was 4.85%.
The yield for all classes of Shares of the Fund is determined by dividing the
net investment income per Share (as defined by the Securities and Exchange
Commission) earned by any class of Shares over a thirty-day period by the
maximum offering price per Share of any class of Shares on the last day of the
period. This value is then annualized using semi-annual compounding. This means
that the amount of income generated during the thirty-day period is assumed to
be generated each month over a 12-month period and is reinvested every six
months. The yield does not necessarily reflect income actually earned by any
class of Shares because of certain adjustments required by the SEC and,
therefore, may not correlate to the dividends or other distributions paid to
shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in any class
of Shares, the performance will be reduced for those shareholders paying those
fees.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The Fund's performance of each class of Shares depends upon such variables as:
.portfolio quality;
.average portfolio maturity;
.type of instruments in which the portfolio is invested;
.changes in interest rates on money market instruments;
.changes in the Fund's or a class of Shares' expenses; and
.various other factors.
A class of Shares' performance fluctuates on a daily basis largely because net
earnings and offering price per Share fluctuate daily. Both net earning and
offering price per Share are factors in the computation of yield and total
return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
.LIPPER ANALYTICAL SERVICES, INC., for example, makes comparative calculations
for one-month, three-month, one-year, and five-year periods which assume the
reinvestment of all capital gains distributions and income dividends;
.SALOMON BROTHERS HIGH GRADE BOND INDEX; SALOMON BROTHERS WORLD GOVERNMENT BOND
INDEX; and J.P. MORGAN GOVERNMENT BOND INDEX.
.MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
.LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX is comprised of approximately
5,000 issues which include non-convertible bonds publicly issued by the U.S.
government or its agencies; corporate bonds guaranteed by the U.S. government
and quasi-federal corporations; and publicly issued, fixed rate,
non-convertible domestic bonds of companies in industry, public utilities, and
finance. The average maturity of these bonds approximates nine years. Tracked
by Lehman Brothers, Inc., the index calculates total returns for one-month,
three-month, twelve-month, and ten-year periods and year-to-date.
Advertisements and sales literature for any class 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 any
class of Shares based on quarterly reinvestment of dividends over a specified
period of time.
Advertisements may quote performance information which does not reflect the
effect of the sales load or contingent deferred sales charge, as applicable.
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The financial statements for the fiscal year ended November 30, 1993, are
incorporated herein by reference to the Annual Report of the Fund dated November
30, 1993 (File No. 811-3984). Additionally, the financial statements for the
six-month period ended May 31, 1994, are incorporated herein by reference from
the Fund's Semi-Annual Report dated May 31, 1994 (File No. 811-3984). Copies of
the Annual and Semi-Annual Reports may be obtained without charge by contacting
the Fund at the address located on the back cover of the prospectus.
APPENDIX
- --------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATING DEFINITIONS
PRIME-1--Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following characteristics:
.Leading market positions in well-established industries.
.High rates of return on funds employed.
.Conservative capitalization structure with moderate reliance on debt and ample
asset protection.
.Broad margins in earning coverage of fixed financial charges and high internal
cash generation.
.Well-established access to a range of financial markets and assured sources of
alternate liquidity.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATING DEFINITIONS
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
MOODY'S INVESTORS SERVICE, INC., LONG-TERM BOND RATING DEFINITIONS
AAA--Bonds which are rated AAA are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA--Bonds which are rated AA are judged to be of high quality by all standards.
Together with the AAA group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in AAA securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in AAA securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
STANDARD AND POOR'S RATINGS GROUP LONG-TERM DEBT RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's Ratings
Group. Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
46031P506
1051602B (9/94)
