DG LIMITED TERM GOVERNMENT INCOME FUND
(A PORTFOLIO OF DG INVESTOR SERIES)
PROSPECTUS
The shares of DG Limited Term Government Income Fund (the "Fund") offered by
this prospectus represent interests in a diversified portfolio of DG Investor
Series (the "Trust"), an open-end, management investment company (a mutual
fund).
The investment objective of the Fund is current income. The Fund pursues its
investment objective by investing primarily in government securities to achieve
current income.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF DEPOSIT
GUARANTY NATIONAL BANK OR COMMERCIAL NATIONAL BANK, ARE NOT ENDORSED OR
GUARANTEED BY DEPOSIT GUARANTY NATIONAL BANK OR COMMERCIAL NATIONAL BANK, AND
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES
INVOLVES INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated April 30,
1994, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference in this
prospectus. You may request a copy of the Statement of Additional Information
free of charge, obtain other information, or make inquiries about the Fund by
writing or calling the Fund.
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 April 30, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 4
Average Portfolio Duration 4
Corporate Bonds 4
Mortgage-Backed Securities 4
Collateralized Mortgage Obligations 5
Asset-Backed Securities 5
Bank Instruments 5
Put and Call Options 5
Risks 6
Temporary Investments 6
Repurchase Agreements 6
Lending of Portfolio Securities 6
When-Issued and Delayed
Delivery Transactions 7
Investment Limitations 7
DG INVESTOR SERIES INFORMATION 7
- ------------------------------------------------------
Management of the Trust 7
Board of Trustees 7
Investment Adviser 7
Advisory Fees 8
Adviser's Background 8
Sub-Adviser 8
Sub-Advisory Fees 8
Sub-Adviser's Background 9
Distribution of Fund Shares 9
Distribution Plan 9
Shareholder Servicing Arrangements 10
ADMINISTRATION OF THE FUND 10
- ------------------------------------------------------
Administrative Services 10
Custodian 10
Transfer Agent, Dividend Disbursing
Agent, and Shareholder Servicing Agent 10
Legal Counsel 10
Independent Auditors 10
Brokerage Transactions 10
NET ASSET VALUE 11
- ------------------------------------------------------
INVESTING IN THE FUND 11
- ------------------------------------------------------
Share Purchases 11
Through the Banks 11
Minimum Investment Required 11
What Shares Cost 12
Purchases at Net Asset Value 12
Sales Charge Reallowance 12
Reducing the Sales Charge 12
Quantity Discounts and
Accumulated Purchases 13
Letter of Intent 13
Reinvestment Privilege 13
Concurrent Purchases 13
Systematic Investment Program 14
Certificates and Confirmations 14
Dividends and Distributions 14
Exchanging Securities for Fund Shares 14
EXCHANGE PRIVILEGE 14
- ------------------------------------------------------
DG Investor Series 14
Exchanging Shares 14
REDEEMING SHARES 15
- ------------------------------------------------------
Through the Banks 15
By Telephone 15
By Mail 16
Signatures 16
Systematic Withdrawal Plan 16
Accounts With Low Balances 16
Redemption in Kind 17
SHAREHOLDER INFORMATION 17
- ------------------------------------------------------
Voting Rights 17
Massachusetts Partnership Law 17
EFFECT OF BANKING LAWS 18
- ------------------------------------------------------
TAX INFORMATION 18
- ------------------------------------------------------
Federal Income Tax 18
PERFORMANCE INFORMATION 19
- ------------------------------------------------------
FINANCIAL STATEMENTS 20
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 30
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price).............. 2.00%
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price)... None
Contingent Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, as applicable).................................................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)....................... None
Exchange Fee............................................................................. None
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(1)......................................................... 0.31%
12b-1 Fees(2)............................................................................ 0.00%
Total Other Expenses..................................................................... 0.28%
Total Fund Operating Expenses(3)..................................................... 0.59%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of the
investment advisory fee by the investment adviser. The adviser can terminate
this voluntary waiver at any time at its sole discretion. The maximum management
fee is 0.60%.
(2) As of the date of this prospectus, the Fund is not paying or accruing 12b-1
fees. The Fund will not accrue or pay 12b-1 fees until a separate class of
shares has been created for certain institutional investors. The Fund can pay up
to 0.35% as a 12b-1 fee to the distributor.
(3) The Total Fund Operating Expenses would have been 0.88% absent the voluntary
waiver of the investment advisory fee.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUND WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND
EXPENSES, SEE "DG INVESTOR SERIES INFORMATION" AND "INVESTING IN THE FUND."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ------------------------------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end
of each time period........................................ $ 26 $39 $52 $ 92
</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.
DG LIMITED TERM GOVERNMENT INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 30.
<TABLE>
<CAPTION>
YEAR ENDED
FEBRUARY 28,
------------------
1994 1993*
------ ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.07 $10.00
- --------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------------------
Net investment income 0.52 0.36
- --------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.17) 0.07
- -------------------------------------------------------------------------- ------ ------
Total from investment operations 0.35 0.43
- -------------------------------------------------------------------------- ------ ------
LESS DISTRIBUTIONS
- --------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.52) (0.36)
- --------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment
transactions (0.03) --
- -------------------------------------------------------------------------- ------ ------
Total distributions (0.55) (0.36)
- -------------------------------------------------------------------------- ------ ------
NET ASSET VALUE, END OF PERIOD $9.87 $10.07
- -------------------------------------------------------------------------- ------ ------
TOTAL RETURN** 3.52% 4.43%
- --------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------
Expenses 0.59% 0.50%(a)
- --------------------------------------------------------------------------
Net investment income 5.21% 6.25%(a)
- --------------------------------------------------------------------------
Expense waiver/reimbursement(b) 0.29% 0.42%(a)
- --------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------
Net assets, end of period (000 omitted) $116,660 $99,921
- --------------------------------------------------------------------------
Portfolio turnover rate 76% 18%
- --------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from August 3, 1992 (date of initial
public investment) to February 28, 1993.
** Based on net asset value which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above (Note 5).
Further information about the Fund's performance is contained in the Fund's
Annual Report dated April 30, 1994, which can be obtained free of charge.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated February 7, 1992. The Declaration of Trust permits the Trust to
offer separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes.
Shares of the Fund are designed for retail and trust customers of Deposit
Guaranty National Bank and Commercial National Bank and its affiliates as a
convenient means of participating in a professionally managed, diversified
portfolio consisting primarily of government securities. A minimum initial
investment of $1,000 is required.
Fund shares are sold at net asset value plus an applicable sales charge and are
redeemed at net asset value.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is current income, the weighted-average
duration of which will at all times be limited to between one and six years. The
investment objective cannot be changed without approval of shareholders. While
there is no assurance that the Fund will achieve its investment objective, it
endeavors to do so by following the investment policies described in this
prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in securities
which are guaranteed as to payment of principal and interest by the U.S.
government or U.S. government agencies or instrumentalities. The Fund may also
invest in corporate bonds, asset-backed securities and bank instruments. Under
normal circumstances, the Fund will invest at least 65% of the value of its
total assets in U.S. government securities.
The net asset value of the Fund is expected to fluctuate with changes in
interest rates and bond market conditions, although this fluctuation should be
more moderate than that of a fund with a longer average portfolio maturity. The
adviser, however, will attempt to minimize principal fluctuation through, among
other things, diversification, careful credit analysis and security selection,
and adjustments of the Fund's average portfolio maturity. In periods of rising
interest rates and falling bond prices, the adviser may shorten the Fund's
average duration to minimize the effect of declining bond values on the Fund's
net asset value. Conversely, during times of falling interest rates and rising
prices a longer average maturity to seven years may be sought.
Unless indicated otherwise, the investment policies may be changed by the Board
of Trustees ("Trustees") without the approval of shareholders. Shareholders will
be notified before any material change in these investment policies becomes
effective.
ACCEPTABLE INVESTMENTS. The U.S. government securities in which the Fund will
invest include:
- direct obligations of the U.S. Treasury such as bills, notes, and bonds;
and
- notes, bonds, and discount notes issued by the Federal Home Loan Banks,
Government National Mortgage Association, Federal Farm Credit Banks,
Tennessee Valley Authority, Export-Import Bank of the United States,
Commodity Credit Corporation, Federal Financing Bank, Student Loan
Marketing Association, Federal Home Loan Mortgage Corporation, or
National Credit Union Administration.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government, such as Government National Mortgage Association participation
certificates, are backed by the full faith and credit of the U.S. Treasury. No
assurance can be given that the U.S. government will provide financial support
to other agencies or instrumentalities, since it is not obligated to do so.
These instrumentalities are supported by:
- the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
- discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
- the credit of the agency or instrumentality.
AVERAGE PORTFOLIO DURATION. Although the Fund will not maintain a stable net
asset value, the adviser will seek to limit, to the extent consistent with the
Fund's investment objective of current income, the magnitude of fluctuations in
the Fund's net asset value by limiting the dollar-weighted average duration of
the Fund's portfolio. Although the Fund's dollar-weighted average duration will
not exceed six years, the weighted average maturity of the Fund's portfolio
could be longer than six years. Generally, the duration of a security is shorter
than the maturity of a security. A typical security makes coupon payments prior
to its maturity date and duration takes into account the timing of a security's
cash flow. Duration is a commonly used measure of the potential volatility of
the price of a debt security, or the aggregate market value of a portfolio of
debt securities, prior to maturity. Securities with shorter durations generally
have less volatile prices than securities of comparable quality with longer
durations. The Fund should be expected to maintain a higher average duration
during periods of falling interest rates, and a lower average duration during
periods of rising interest rates.
CORPORATE BONDS. The Fund may invest in issues of corporate debt obligations
which are rated in one of the three highest categories by a nationally
recognized statistical rating organization (rated Aaa, Aa, or A by Moody's
Investors Service, Inc. ("Moody's"); AAA, AA, or A by Standard & Poor's
Corporation ("Standard & Poor's") or by Fitch Investors Service, Inc. ("Fitch"),
or which are of comparable quality in the judgment of the adviser).
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are securities that
directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans on real property. There are currently three basic
types of mortgage-backed securities: (i) those issued or guaranteed by the U.S.
government or one of its agencies or instrumentalities, such as the Government
National Mortgage Association ("Ginnie Mae"), the Federal National Mortgage
Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation
("Freddie Mac"); (ii) those issued by private issuers that represent an interest
in or are collateralized by mortgage-backed securities issued or
guaranteed by the U.S. government or one of its agencies or instrumentalities;
and (iii) those issued by private issuers that represent an interest in or are
collateralized by whole loans or mortgage-backed securities without a government
guarantee but usually having some form of private credit enhancement.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations
("CMOs") are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by Ginnie Mae,
Fannie Mae or Freddie Mac Certificates, but may be collateralized by whole
loans or private pass-through securities.
The Fund will only invest in CMOs which are rated AAA by a nationally
recognized rating agency, and which may be: (a) collateralized by pools of
mortgages in which each mortgage is guaranteed as to payment of principal
and interest by an agency or instrumentality of the U.S. government; (b)
collateralized by pools of mortgages in which payment of principal and
interest is guaranteed by the issuer and such guarantee is collateralized
by U.S. government securities; or (c) securities in which the proceeds of
the issuance are invested in mortgage securities and payment of the
principal and interest are supported by the credit of an agency or
instrumentality of the U.S. government.
ASSET-BACKED SECURITIES. Asset-backed securities have structural characteristics
similar to mortgage-backed securities but have underlying assets that are not
mortgage loans or interests in mortgage loans. The Fund may invest in
asset-backed securities rated A or higher by a nationally recognized rating
agency. The collateral for such securities will consist of motor vehicle
installment purchase obligations and credit card receivables. These securities
may be in the form of pass-through instruments or asset-backed bonds. The
securities are issued by non-governmental entities and carry no direct or
indirect government guarantee.
BANK INSTRUMENTS. The Fund only invests in bank instruments issued by an
institution having capital, surplus and undivided profits over $100 million, or
insured by the Bank Insurance Fund ("BIF") or the Savings Association Insurance
Fund ("SAIF").
PUT AND CALL OPTIONS. The Fund may purchase put options on financial futures
contracts and put options on portfolio securities. Financial futures may include
index futures. These options will be used as a hedge to attempt to protect
securities which the Fund holds against decreases in value. For the immediate
future, the Fund will enter into futures contracts directly only when it desires
to exercise a financial futures put option in its portfolio rather than either
closing out the option or allowing it to expire. The Fund will only purchase
puts on financial futures contracts which are traded on a recognized exchange.
The Fund will generally purchase over-the-counter put options on portfolio
securities in negotiated transactions with the writers of the options on the
portfolio securities held by the Fund which are typically not traded on an
exchange. The Fund purchases options only from investment dealers and other
financial associations (such as commercial banks or savings and loan
institutions) deemed creditworthy by the Fund's adviser.
Over-the-counter put 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.
The Fund may also write call options on all or any portion of its portfolio to
generate income for the Fund. The Fund will write call options on securities
either held in its portfolio or which it has the right to obtain without payment
of further consideration or for which it has segregated cash in the amount of
any additional consideration. The call options which the Fund writes and sells
must be listed on a recognized options exchange. Although the Fund reserves the
right to write covered call options on its entire portfolio, it will not write
such options on more than 25% of its total assets unless a higher limit is
authorized by its Trustees.
The Fund may attempt to hedge the portfolio by entering into financial futures
contracts and to write calls on financial futures contracts. The Fund will
notify shareholders before it begins engaging in these transactions.
RISKS. When the Fund writes a call option, the Fund risks not participating
in any rise in the value of the underlying security. In addition, when the
Fund purchases puts on financial futures contracts to protect against
declines in prices of portfolio securities, there is a risk that the prices
of the securities subject to the futures contracts may not correlate
perfectly with the prices of the securities in the Fund's portfolio. This
may cause the futures contract and its corresponding put to react
differently than the portfolio securities to market changes. In addition,
the Fund's investment adviser could be incorrect in its expectations about
the direction or extent of market factors such as interest rate movements.
In such an event, the Fund may lose the purchase price of the put option.
Finally, it is not certain that a secondary market for options will exist
at all times. Although the investment adviser will consider liquidity
before entering into options transactions, there is no assurance that a
liquid secondary market on an exchange will exist for any particular option
at any particular time. The Fund's ability to establish and close out
option positions depends on this secondary market.
TEMPORARY INVESTMENTS. For defensive purposes only, the Fund may invest
temporarily in cash and cash items during times of unusual market conditions and
to maintain liquidity. Cash items may include short-term obligations such as:
- obligations of the U.S. government or its agencies or instrumentalities;
- repurchase agreements; and
- commercial paper rated A-1 or A-2 by Standard & Poor's, Prime-1 or
Prime-2 by Moody's or F-1 or F-2 by Fitch.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which
banks, broker/ dealers, and other recognized financial institutions sell
U.S. government 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 seller does not repurchase the securities from the Fund, the Fund
could receive less than the repurchase price on any sale of such
securities.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or long-term basis, or both,
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 Trustees, 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 at all times.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase portfolio
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. In when-issued and delayed delivery transactions,
the Fund relies on the seller to complete the transaction. The seller's failure
to complete the transaction may cause the Fund to miss a price or yield
considered to be advantageous.
INVESTMENT LIMITATIONS
The Fund will not:
- borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an arrangement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may, borrow up to one-third of the value of its total assets and pledge
up to 15% of the value of those assets to secure such borrowings.
The above investment limitation cannot be changed without shareholder approval.
The following investment limitation, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any material
change in this investment limitation becomes effective.
The Fund will not:
- invest more than 15% of the value of its net assets in illiquid
securities, including repurchase agreements providing for settlement in
more than seven days after notice, over-the-counter options and certain
restricted securities not determined by the Trustees to be liquid.
DG INVESTOR SERIES INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees are
responsible for managing the Trust's business affairs and for exercising all of
the powers of the Trust except those reserved for the shareholders. The
Executive Committee of the Board of Trustees handles the Trustees'
responsibilities between meetings of the Trustees.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Deposit Guaranty National Bank,
the Fund's investment adviser (the "Adviser"), subject to direction by the
Trustees. The Adviser, in consultation with the sub-adviser, continually
conducts investment research and supervision for the Fund and is responsible for
the purchase and sale of portfolio instruments.
ADVISORY FEES. The Fund's Adviser receives an annual investment advisory
fee equal to .60 of 1% of the Fund's average daily net assets. The
investment advisory contract provides for the voluntary reimbursement of
expenses by the Adviser to the extent any Fund expenses exceed such lower
expense limitation as the Adviser may, by notice to the Fund, voluntarily
declare to be effective. The Adviser can terminate this voluntary
reimbursement of expenses at any time at its sole discretion. The Adviser
has undertaken to reimburse the Fund for operating expenses in excess of
limitations established by certain states.
ADVISER'S BACKGROUND. Deposit Guaranty National Bank, a national banking
association formed in 1925, is a subsidiary of Deposit Guaranty Corp
("DGC"). Through its subsidiaries and affiliates, DGC offers a full range
of financial services to the public including commercial lending,
depository services, cash management, brokerage services, retail banking,
mortgage banking, investment advisory services and trust services.
As of December 31, 1993, the Trust Division of Deposit Guaranty National
Bank had approximately $9 billion under administration, of which it had
investment discretion over $1.4 billion. Deposit Guaranty National Bank has
served as the Trust's investment adviser since May 5, 1992.
As part of their regular banking operations, Deposit Guaranty National Bank
and Commercial National Bank, the Fund's sub-adviser, may make loans to
public companies. Thus, it may be possible, from time to time, for the Fund
to hold or acquire the securities of issuers which are also lending clients
of Deposit Guaranty National Bank or Commercial National Bank. The lending
relationships will not be a factor in the selection of securities.
John Mark McKenzie has been with Deposit Guaranty National Bank for ten
years and is a Vice President and Trust Investment Officer. Previously, Mr.
McKenzie was associated with a Jackson bank as a trust officer. He received
a B.B.A. in Banking and Finance from the University of Mississippi. He is a
member of the Mississippi Chapter of the Memphis Society of Financial
Analysts, and is a member of the Mississippi State and Hinds County Bar
Association. Mr. McKenzie has managed the DG Limited Term Government Income
Fund since August 1, 1992 (the inception of the Fund).
SUB-ADVISER. Under the terms of a sub-advisory agreement between Deposit
Guaranty National Bank and Commercial National Bank (the "Sub-Adviser"), the
Sub-Adviser will furnish to the Adviser such investment advice, statistical and
other factual information as may be requested by Adviser. The portfolio managers
from the Trust Divisions of Deposit Guaranty National Bank and Commercial
National Bank will form an investment committee (the "DG Asset Management
Group") to discuss investment strategies and evaluate securities and the
economic outlook.
SUB-ADVISORY FEES. For its services under the sub-advisory agreement, the
Sub-Adviser receives an annual fee from the Adviser equal to 0.25 of 1% of
the average daily net assets of the Fund. The sub-advisory fee is accrued
daily and paid monthly. In the event that the fee due from the Trust to the
Adviser on behalf of the Fund is reduced in order to meet expense
limitations imposed on the Fund by state securities laws and regulations,
the sub-advisory fee will be reduced by one-half of said reduction in the
fee due from the Trust to the Adviser on behalf of the Fund.
Notwithstanding any other provision in the sub-advisory agreement, the
Sub-Adviser may, from time to time and for such periods as it deems
appropriate, reduce its compensation (and, if appropriate, assume
expenses of the Fund or class of the Fund) to the extent that the Fund's
expenses exceed such lower expense limitation as the Sub-Adviser may, by
notice to the Trust on behalf of the Fund, voluntarily declare to be
effective.
SUB-ADVISER'S BACKGROUND. Commercial National Bank, a national banking
association which received its charter in 1886, is a subsidiary of DGC. As
of December 31, 1993, the Trust Division at Commercial National Bank had
approximately $1.2 billion in trust assets under administration, of which
it had investment discretion over $1.02 billion. Commercial National Bank
has served as sub-adviser to DG Equity Fund, DG Government Income Fund, and
the Fund since July 20, 1992, and DG Municipal Income Fund since December
12, 1992, each a portfolio of the Trust.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal distributor for shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Under a distribution plan adopted in accordance with the
Investment Company Act Rule 12b-1 (the "Plan"), the Fund will pay to the
distributor an amount computed at an annual rate of .35 of 1% of the average
daily net asset value of the Fund to finance any activity which is principally
intended to result in the sale of shares subject to the Plan.
The distributor may from time to time and for such periods as it deems
appropriate, voluntarily reduce its compensation under the Plan to the extent
the expenses attributable to the shares exceed such lower expense limitation as
the distributor may, by notice to the Trust, voluntarily declare to be
effective.
The distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers ("brokers")
to provide distribution and/or administrative services as agents for their
clients or customers. Administrative services may include, but are not limited
to, the following functions: 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;
assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as may reasonably be requested.
The distributor will pay financial institutions a fee based upon shares subject
to the Plan and 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 distributor.
The Fund's Plan is a compensation type plan. As such, the Fund pays the
distributor the fee described above as opposed to reimbursing the distributor
for actual expenses incurred. Therefore, the Fund does not pay for amounts
expended by the distributor in excess of amounts received by it from the Fund,
which may include 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 Fund under the Plan.
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 Trustees 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 laws.
SHAREHOLDER SERVICING ARRANGEMENTS. The distributor may pay financial
institutions a fee with respect to the average net asset value of shares held by
their customers for providing administrative services. This fee, if paid, will
be reimbursed by the Adviser and not the Fund.
ADMINISTRATION OF THE FUND
- --------------------------------------------------------------------------------
ADMINISTRATIVE SERVICES. Federated Administrative Services, which is a
subsidiary of Federated Investors, provides the Fund with the administrative
personnel and services necessary to operate the Fund. Such services include
shareholder servicing and certain legal and accounting services. Federated
Administrative Services provides these at an annual rate as specified below:
<TABLE>
<C> <S>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
- ------------------------ ------------------------------------
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall aggregate at least
$100,000 per Fund. Federated Administrative Services may choose voluntarily to
reimburse a portion of its fee at any time.
CUSTODIAN. State Street Bank and Trust Company ("State Street Bank"), Boston,
Massachusetts, is custodian for the securities and cash of the Fund.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND SHAREHOLDER SERVICING AGENT.
Federated Services Company, Pittsburgh, Pennsylvania, is transfer agent for the
shares of the Fund, dividend disbursing agent for the Fund, and shareholder
servicing agent for the Fund.
LEGAL COUNSEL. Legal counsel for the Fund is provided by Houston, Houston &
Donnelly, Pittsburgh, Pennsylvania and Dickstein, Shapiro & Morin, Washington,
D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are KPMG Peat
Marwick, Pittsburgh, Pennsylvania.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the
Adviser will generally utilize those who are recognized dealers in specific
portfolio instruments, except when a better price and execution of the order can
be obtained elsewhere. In selecting among firms believed to meet these criteria,
the Adviser may give consideration to those firms which have sold or are selling
shares of the Fund and other funds distributed by Federated Securities Corp. The
Adviser makes decisions on portfolio transactions and selects brokers and
dealers subject to review by the Trustees.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per share fluctuates. It is determined by dividing
the sum of the market value of all securities and other assets, less
liabilities, by the number of shares outstanding.
INVESTING IN THE FUND
- --------------------------------------------------------------------------------
SHARE PURCHASES
Fund shares are sold on days on which the New York Stock Exchange and the
Federal Reserve Wire System are open for business. Fund shares may be ordered by
telephone through procedures established with Commercial National Bank, and
Deposit Guaranty National Bank (collectively, the "Banks") in connection with
qualified account relationships. Such procedures may include arrangements under
which certain accounts are swept periodically and amounts exceeding an
agreed-upon minimum are invested automatically in Fund shares. Texas residents
must purchase shares of the Fund through Federated Securities Corp. at
1-800-356-2805. The Fund reserves the right to reject any purchase request.
THROUGH THE BANKS. To place an order to purchase Fund shares, open an account by
calling Deposit Guaranty National Bank at (800)748-8500 or Commercial National
Bank at (800)274-1907. Information needed to establish the account will be taken
over the telephone.
Payment may be made by either check, federal funds or by debiting a customer's
account at the Banks. Purchase orders must be received by 4:00 p.m. (Eastern
time). Payment is required before 4:00 p.m. on the next business day in order to
earn dividends for that day.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $1,000. Subsequent investments may
be in any amounts of $100 or more. The Fund may waive the initial minimum
investment for employees of DGC and its affiliates from time to time.
WHAT SHARES COST
Fund shares are sold at their net asset value next determined after an order is
received, plus a sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS
A PERCENTAGE OF A PERCENTAGE OF
AMOUNT OF TRANSACTION PUBLIC OFFERING PRICE NET AMOUNT INVESTED
- ---------------------------------------------- ---------------------- -------------------
<S> <C> <C>
Less than $100,000............................ 2.00% 2.04%
$100,000 but less than $250,000............... 1.75% 1.78%
$250,000 but less than $500,000............... 1.50% 1.52%
$500,000 but less than $750,000............... 1.25% 1.27%
$750,000 but less than $1 million............. 1.00% 1.01%
$1 million but less than $2 million........... 0.50% 0.50%
$2 million or more............................ 0.25% 0.25%
</TABLE>
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; or (iii) the following
holidays: New Year's Day, Martin Luther King Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day,
Thanksgiving Day and Christmas Day.
PURCHASES AT NET ASSET VALUE. Shares of the Fund may be purchased at net asset
value, without a sales charge by: the Trust Division of Banks for funds which
are held in a fiduciary, agency, custodial or similar capacity; Trustees and
employees of the Fund, the Banks or Federated Securities Corp. or their
affiliates and their spouses and children under 21; or any bank or investment
dealer who has a sales agreement with Federated Securities Corp. with regard to
the Fund.
SALES CHARGE REALLOWANCE. For sales of shares of the Fund, the Banks or any
authorized dealer will normally receive up to 85% of the applicable sales
charge. Any portion of the sales charge which is not paid to the Banks or
authorized dealers will be retained by the distributor. The distributor will,
periodically, uniformly offer to pay cash or promotional incentives in the form
of trips to sales seminars at luxury resorts, tickets or other items to all
dealers selling shares of the Fund. Such payments will be predicated upon the
amount of shares of the Fund that are sold by the dealer.
The sales charge for shares sold other than through the Banks or registered
broker/dealers will be retained by the distributor. The distributor may pay fees
to the Banks out of the sales charge in exchange for sales and/or administrative
services performed on behalf of the Banks' customers in connection with the
initiation of customer accounts and purchases of Fund shares.
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Fund shares through;
- quantity discounts and accumulated purchases;
- signing a 13-month letter of intent;
- using the reinvestment privilege; or
- concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table above,
larger purchases reduce the sales charge paid. The Fund will combine purchases
made on the same day by the investor, his spouse, and his children under age 21
when it calculates the sales charge. In addition, the sales charge, if
applicable, is reduced for purchases made at one time by a trustee or fiduciary
for a single trust estate or a single fiduciary account.
If an additional purchase of Fund shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns shares having a current value at the public offering price of
$90,000 and he purchases $10,000 more at the current public offering price, the
sales charge on the additional purchase according to the schedule now in effect
would be 1.75%, not 2.00%.
To receive the sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by the Banks at the time the purchase
is made that Fund shares are already owned or that purchases are being combined.
The Fund will reduce the sales charge after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $100,000 of
shares in the funds in the Trust over the next 13 months, the sales charge may
be reduced by signing a letter of intent to that effect. This letter includes a
provision for a sales charge adjustment depending on the amount actually
purchased within the 13-month period and a provision for the custodian to hold
2.00% of the total amount intended to be purchased in escrow (in shares) until
such purchase is completed.
The 2.00% held in escrow will be applied to the shareholder's account at the end
of the 13-month period unless the amount specified in the letter of intent is
not purchased. In this event, an appropriate number of escrowed shares may be
redeemed in order to realize the difference in the sales charge.
This letter of intent will not obligate the shareholder to purchase shares, but
if he does, each purchase during the period will be at the sales charge
applicable to the total amount intended to be purchased. This letter may be
dated as of a prior date to include any purchases made within the past 90 days.
REINVESTMENT PRIVILEGE. If shares in the Fund have been redeemed, the
shareholder has a one-time right, within 30 days, to reinvest the redemption
proceeds at the next-determined net asset value without any sales charge.
Federated Securities Corp. must be notified by the shareholder in writing or by
the Banks of the reinvestment in order to eliminate a sales charge. If the
shareholder redeems his shares in the Fund, there may be tax consequences.
CONCURRENT PURCHASES. For purposes of qualifying for a sales charge reduction, a
shareholder has the privilege of combining concurrent purchases of two or more
funds in the Trust, the purchase price of which includes a sales charge. For
example, if a shareholder concurrently invested $30,000 in one of the other
funds in the Trust with a sales charge and $70,000 in this Fund, the sales
charge would be reduced.
To receive this sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by the Banks at the time the
concurrent purchases are made. The Fund will reduce the sales charge after it
confirms the purchases.
SYSTEMATIC INVESTMENT PROGRAM
Once an 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 Fund shares. A shareholder may apply for participation in this
program through the Banks.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder. Share certificates are not issued unless requested
by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during the
month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly. Distribution of any realized long-term
capital gains will be made at least once every twelve months. Dividends are
automatically reinvested in additional shares of the Fund on payment dates at
the ex-dividend date net asset value without a sales charge, unless cash
payments are requested by writing to the Fund or the Banks as appropriate.
EXCHANGING SECURITIES FOR FUND SHARES
Investors may exchange certain securities or a combination of certain securities
and cash for Fund shares. The Fund reserves the right to determine the
acceptability of securities to be exchanged. On the day securities are accepted
by the Fund, they are valued in the same manner as the Fund values its assets.
Investors wishing to exchange securities should first contact the Banks.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
DG INVESTOR SERIES
All shareholders of the Fund are shareholders of DG Investor Series.
Shareholders in the Fund have easy access to the other portfolios of DG Investor
Series.
EXCHANGING SHARES
Shareholders of the Fund may exchange shares of the Fund for shares of the other
funds in DG Investor Series. In addition, shares of the Fund may also be
exchanged for certain other funds distributed by Federated Securities Corp. that
are not advised by the Banks ("Federated Funds"). For further information on the
availability of Federated Funds for exchanges, please call Deposit Guaranty
National Bank at (800) 748-8500 or Commercial National Bank at (800) 274-1907.
Shares of funds with a sales charge may be exchanged at net asset value for
shares of other funds with an equal sales charge or no sales charge. Shares of
the funds with no sales charge acquired by direct purchase or
reinvestment of dividends on such shares may be exchanged for shares of funds
with a sales charge at net asset value plus the applicable sales charge.
When an exchange is made from a fund with a sales charge to a fund with no sales
charge, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus an exchange
of such shares for shares of a fund with a sales charge would be at net asset
value.
Prior to any exchange, the shareholder must receive a copy of the current
prospectus of the fund into which an exchange is to be effected.
The exchange privilege is available to shareholders residing in any state in
which the fund shares being acquired may legally be sold. Upon receipt of proper
instructions and all necessary supporting documents, shares submitted for
exchange will be redeemed at the next-determined net asset value. Written
exchange instruction may require a signature guarantee. Exercise of this
privilege is treated as a sale for federal income tax purposes and, depending on
the circumstances, a short or long-term capital gain or loss may be realized.
The exchange privilege may be terminated at any time. Shareholders will be
notified of the termination of the exchange privilege. A shareholder may obtain
further information on the exchange privilege by calling the Banks.
REDEEMING SHARES
- --------------------------------------------------------------------------------
Shares are redeemed at their net asset value next determined after the Banks
receive the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on Federal holidays when
wire transfers are restricted. Requests for redemption can be made by telephone
or by mail.
THROUGH THE BANKS
BY TELEPHONE. A shareholder who is a customer of one of the Banks may redeem
shares of the Fund by calling Deposit Guaranty National Bank at (800) 748-8500
or Commercial National Bank at (800) 274-1907. For orders received before 4:00
p.m. (Eastern time), proceeds will normally be wired the next day to the
shareholder's account at the Banks or a check will be sent to the address of
record. In no event will proceeds be sent more than seven days after a proper
request for redemption has been received. An authorization form permitting the
Fund to accept telephone requests must first be completed. Authorization forms
and information on this service are available from the Banks. Telephone
redemption instructions may be recorded.
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 should be utilized, such as a written request to Federated
Services Company or the Banks.
If at any time, the Fund shall determine it necessary to terminate or modify
this method of redemption, shareholders would be promptly notified.
If reasonable procedures are not followed by the Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
BY MAIL. Any shareholder may redeem Fund shares by sending a written request to
the Banks. The written request should include the shareholder's name, the Fund
name, 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 Banks 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 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 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 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 Federated Services Company 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 Federated Services Company
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.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount may take
advantage of the Systematic Withdrawal Program. Under this program, Fund shares
are redeemed to provide for periodic withdrawal payments in an amount directed
by the shareholder. Depending upon the amount of the withdrawal payments, and
the amount of dividends paid with respect to Fund shares, redemptions may
reduce, and eventually deplete, the shareholder's investment in the Fund. For
this reason, payments under this program should not be considered as yield or
income on the shareholder's investment in the Fund. To be eligible to
participate in this program, a shareholder must have an account value of at
least $10,000. A shareholder may apply for participation in this program through
the Banks. Due to the fact that shares are sold with a sales charge, it is not
advisable for shareholders to be purchasing shares of the Fund while
participating in this program.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum
value of $1,000 due to shareholder redemptions. This requirement does not apply,
however, if the balance falls below $1,000 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.
REDEMPTION IN KIND
The Fund is obligated to redeem shares solely in cash up to $250,000 or 1% of
the Fund's net asset value, whichever is less, for any one shareholder within a
90-day period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that payments should be in kind. In such case, the Fund will pay all
or a portion of the remainder of the redemption in portfolio instruments, valued
in the same way as the Fund determines net asset value. The portfolio
instruments will be selected in a manner that the Trustees deem fair and
equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders of the Fund for vote. All shares of all
classes of each Fund in the Trust have equal voting rights, except that in
matters affecting only a particular Fund or class, only shareholders of that
Fund or class are entitled to vote. As a Massachusetts business trust, the Trust
is not required to hold annual shareholder meetings. Shareholder approval will
be sought only for certain changes in the Trust or Fund's operation and for the
election of Trustees under certain circumstances. As of April 7, 1994, Deposit
Guaranty National Bank, Jackson, Mississippi, owned approximately 7,464,049
shares (62.64%), and therefore, may, for certain purposes, be deemed to control
the Fund and be able to affect the outcome of certain matters presented for a
vote of shareholders.
Trustees may be removed by the shareholders at a special meeting. A special
meeting of the shareholders for this purpose shall be called by the Trustees
upon the written request of shareholders owning at least 10% of all shares of
the Trust entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation, or instrument the Trust or its Trustees
enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On
request, the Trust will defend any claim made and pay any judgment against a
shareholder for any act or obligation of the Trust. Therefore, financial loss
resulting from liability as a shareholder will occur only if the Trust itself
cannot meet its obligations to indemnify shareholders and pay judgments against
them from its assets.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956 or
any bank or non-bank affiliate thereof from sponsoring, organizing or
controlling a registered, open-end investment company continuously engaged in
the issuance of its shares, and from issuing, underwriting, or distributing
securities in general. Such laws and regulations do not prohibit such a holding
company or bank or non-bank affiliate from acting as investment adviser,
transfer agent or custodian to such an investment company or from purchasing
shares of such a company as agent for and upon the order of their customer. The
Fund's Adviser and Sub-Adviser, Deposit Guaranty National Bank and Commercial
National Bank, respectively, are subject to such banking laws and regulations.
The Banks believe, based on the advice of counsel, that they may perform the
investment advisory services for the Fund contemplated by the advisory agreement
with the Trust and the sub-advisory agreement between the Banks without
violating the Glass-Steagall Act or other applicable banking laws or
regulations. Such counsel has pointed out, however, that changes in either
federal or state statutes and regulations relating to the permissible activities
of banks and their subsidiaries or affiliates, as well as further judicial or
administrative decisions or interpretations of present or future statutes and
regulations, could prevent the Banks from continuing to perform all or a part of
the above services for their customers and/or the Fund. In such event, changes
in the operation of the Fund may occur, including the possible alteration or
termination of any automatic or other Fund share investment and redemption
services then being provided by the Banks, and the Trustees would consider
alternative investment advisers and other means of continuing available
investment services. It is not expected that Fund shareholders would suffer any
adverse financial consequences (if another adviser and/or sub-adviser with
equivalent abilities to Deposit Guaranty National Bank and Commercial National
Bank are found) as a result of any of these occurrences.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies.
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
Trust's other portfolios, if any, will not be combined for tax purposes with
those realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions received. This applies whether dividends
are received in cash or as additional shares. The Fund will provide detailed tax
information for reporting purposes.
Shareholders are urged to consult their own tax advisers regarding the status of
their account under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund advertises its total return and yield.
Total return represents the change over a specified period of time, in the value
of an investment in the Fund 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 the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The performance information reflects the effect of the maximum sales load which,
if excluded, would increase the total return and yield.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
DG LIMITED TERM GOVERNMENT INCOME FUND
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ----------------------------------------------------------------- ------------
<C> <C> <S> <C>
CORPORATE BONDS--16.3%
- -------------------------------------------------------------------------------------
BANKING--1.0%
-----------------------------------------------------------------
$ 1,200,000 Bankers Trust New York Corp., 4.70%, 7/1/96 $ 1,192,164
----------------------------------------------------------------- ------------
BUSINESS EQUIPMENT & SERVICE--1.5%
-----------------------------------------------------------------
1,000,000 International Business Machines Corp., 6.375%, 11/1/97 1,025,250
-----------------------------------------------------------------
723,000 Waste Management Inc., 6.375%, 7/1/97 743,808
----------------------------------------------------------------- ------------
Total 1,769,058
----------------------------------------------------------------- ------------
</TABLE>
<TABLE>
<C> <C> <S> <C>
CAPITAL GOODS--1.3%
-----------------------------------------------------------------
1,500,000 General Electric Capital Corp., 5.25%, 11/15/95 1,514,775
----------------------------------------------------------------- ------------
CONSUMER DURABLES--0.5%
-----------------------------------------------------------------
545,000 Eastman Kodak Co., 9.20%, 1/15/95 566,642
----------------------------------------------------------------- ------------
CONSUMER NON-DURABLES--2.6%
-----------------------------------------------------------------
1,447,000 Kellogg Co., 5.90%, 7/15/97 1,478,096
-----------------------------------------------------------------
723,000 PepsiCo Inc., 5.625%, 7/1/95 730,490
-----------------------------------------------------------------
725,000 Philip Morris Cos. Inc., 7.50%, 3/15/97 768,333
----------------------------------------------------------------- ------------
Total 2,976,919
----------------------------------------------------------------- ------------
FINANCIAL-AUTOMOTIVE--1.1%
-----------------------------------------------------------------
545,000 Ford Motor Credit Co., 8.75%, 1/15/95 563,950
-----------------------------------------------------------------
723,000 Toyota Motor Credit Corp., 5.75%, 6/15/95 735,913
----------------------------------------------------------------- ------------
Total 1,299,863
----------------------------------------------------------------- ------------
FINANCIAL SERVICES--1.6%
-----------------------------------------------------------------
905,000 American General Finance Corp., 7.15%, 5/15/97 952,648
-----------------------------------------------------------------
306,000 ITT Financial Corp., 7.25%, 5/15/97 317,842
-----------------------------------------------------------------
545,000 Merrill Lynch & Co. Inc., 8.50%, 8/15/94 555,409
----------------------------------------------------------------- ------------
Total 1,825,899
----------------------------------------------------------------- ------------
</TABLE>
DG LIMITED TERM GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ----------------------------------------------------------------- ------------
<C> <C> <S> <C>
CORPORATE BONDS--CONTINUED
- -------------------------------------------------------------------------------------
HEALTH CARE--1.1%
-----------------------------------------------------------------
$ 1,250,000 Upjohn Co., 5.875%, 4/15/2000 $ 1,242,750
----------------------------------------------------------------- ------------
OIL--0.6%
-----------------------------------------------------------------
725,000 Shell Oil Co., 6.125%, 11/15/94 731,133
----------------------------------------------------------------- ------------
RETAIL--1.6%
-----------------------------------------------------------------
725,000 Sears Roebuck & Co., 7.00%, 11/1/94 734,715
-----------------------------------------------------------------
1,136,000 Wal-Mart Stores Inc., 5.50%, 9/15/97 1,137,943
----------------------------------------------------------------- ------------
Total 1,872,658
----------------------------------------------------------------- ------------
UTILITIES--3.4%
-----------------------------------------------------------------
1,000,000 GTE California Inc., 6.25%, 1/15/98 1,015,590
-----------------------------------------------------------------
1,000,000 New England Telephone & Telegraph Co., 6.25%, 12/15/97 1,032,580
-----------------------------------------------------------------
1,000,000 Pacific Gas & Electric Co., 5.375%, 8/1/98 978,260
-----------------------------------------------------------------
1,000,000 Southern California Edison Co., 5.60%, 12/15/98 985,610
----------------------------------------------------------------- ------------
Total 4,012,040
----------------------------------------------------------------- ------------
TOTAL CORPORATE BONDS (IDENTIFIED COST, $18,854,993) 19,003,901
----------------------------------------------------------------- ------------
U.S. TREASURY OBLIGATIONS--73.9%
- -------------------------------------------------------------------------------------
U.S. TREASURY NOTES--65.4%
-----------------------------------------------------------------
3,183,000 9.50%, 5/15/94 3,221,769
-----------------------------------------------------------------
2,538,000 9.50%, 10/15/94 2,623,632
-----------------------------------------------------------------
11,000,000 8.00%, 10/15/96 11,811,140
-----------------------------------------------------------------
11,725,000 6.25%, 1/31/97 12,105,946
-----------------------------------------------------------------
4,000,000 6.00%, 12/31/97 4,092,480
-----------------------------------------------------------------
4,000,000 5.75%, 10/31/97 4,061,240
-----------------------------------------------------------------
9,000,000 5.125%, 3/31/98 8,907,120
-----------------------------------------------------------------
1,500,000 4.75%, 9/30/98 1,454,520
-----------------------------------------------------------------
4,000,000 4.25%, 8/31/94 4,007,480
-----------------------------------------------------------------
</TABLE>
DG LIMITED TERM GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ----------------------------------------------------------------- ------------
<C> <C> <S> <C>
U.S. TREASURY OBLIGATIONS--CONTINUED
- -------------------------------------------------------------------------------------
U.S. TREASURY NOTES--CONTINUED
-----------------------------------------------------------------
$ 7,000,000 4.25%, 10/31/94 $ 7,013,090
-----------------------------------------------------------------
5,000,000 4.125%, 6/30/95 4,985,900
-----------------------------------------------------------------
9,000,000 3.875%, 3/31/95 8,969,040
-----------------------------------------------------------------
3,000,000 3.875%, 4/30/95 2,985,930
----------------------------------------------------------------- ------------
Total 76,239,287
----------------------------------------------------------------- ------------
U.S. TREASURY BILLS--8.5%
-----------------------------------------------------------------
10,000,000 4/7/94 9,959,700
----------------------------------------------------------------- ------------
TOTAL U.S. TREASURY OBLIGATIONS (IDENTIFIED COST $87,006,936) 86,198,987
----------------------------------------------------------------- ------------
*REPURCHASE AGREEMENT--8.5%
- -------------------------------------------------------------------------------------
9,910,500 Cantor Fitzgerald Securities, 3.40%, dated 2/28/94, due 3/1/94
(at amortized cost) (Note 2B) 9,910,500
----------------------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST $115,772,429) $115,113,388+
----------------------------------------------------------------- ------------
</TABLE>
* The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
+ The cost for federal tax purposes amounts to $115,772,429. The net unrealized
depreciation of investments on a federal tax basis amounts to $659,041, which
is comprised of $454,172 appreciation and $1,113,213 depreciation at February
28, 1994.
Note: The categories of investments are shown as a percentage of net assets
($116,660,428) at February 28, 1994.
(See Notes which are an integral part of the Financial Statements)
DG LIMITED TERM GOVERNMENT INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- -------------------------------------------------------------------------------
Investments in securities, at value (Notes 2A and 2B)
(identified and tax cost $115,772,429) $115,113,388
- -------------------------------------------------------------------------------
Interest receivable 1,514,180
- -------------------------------------------------------------------------------
Receivable for Fund shares sold 400,842
- -------------------------------------------------------------------------------
Deferred expenses (Note 2F) 23,478
- ------------------------------------------------------------------------------- ------------
Total assets 117,051,888
- -------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------
Payable for Fund shares redeemed $349,616
- --------------------------------------------------------------------
Accrued expenses 41,844
- -------------------------------------------------------------------- --------
Total liabilities 391,460
- ------------------------------------------------------------------------------- ------------
NET ASSETS for 11,816,436 shares of beneficial interest outstanding $116,660,428
- ------------------------------------------------------------------------------- ------------
NET ASSETS CONSIST OF:
- -------------------------------------------------------------------------------
Paid-in capital $118,082,656
- -------------------------------------------------------------------------------
Unrealized appreciation (depreciation) of investments (659,041)
- -------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (775,474)
- -------------------------------------------------------------------------------
Undistributed net investment income 12,287
- ------------------------------------------------------------------------------- ------------
Total Net Assets $116,660,428
- ------------------------------------------------------------------------------- ------------
NET ASSET VALUE and Redemption Price Per Share:
($116,660,428 / 11,816,436 shares of beneficial interest outstanding) $9.87
- ------------------------------------------------------------------------------- ------------
COMPUTATION OF OFFERING PRICE:
Offering Price Per Share (100/98 of $9.87)* $10.07
- ------------------------------------------------------------------------------- ------------
</TABLE>
* See "What Shares Cost" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
DG LIMITED TERM GOVERNMENT INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED FEBRUARY 28, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------
Interest income (Note 2C) $ 6,708,951
- ---------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------
Investment advisory fee (Note 5) $ 693,635
- --------------------------------------------------------------------
Administrative personnel and services fees (Note 5) 148,906
- --------------------------------------------------------------------
Trustees' fees 1,551
- --------------------------------------------------------------------
Custodian fees 31,580
- --------------------------------------------------------------------
Recordkeeper fees (Note 5) 57,085
- --------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses (Note 5) 21,313
- --------------------------------------------------------------------
Legal fees 6,237
- --------------------------------------------------------------------
Printing and postage 10,758
- --------------------------------------------------------------------
Auditing fees 10,532
- --------------------------------------------------------------------
Fund share registration fees 31,009
- --------------------------------------------------------------------
Insurance premiums 6,888
- --------------------------------------------------------------------
Miscellaneous 4,026
- -------------------------------------------------------------------- ----------
Total expenses 1,023,520
- --------------------------------------------------------------------
Deduct--Waiver of investment advisory fee (Note 5) 338,182
- -------------------------------------------------------------------- ----------
Net expenses 685,338
- --------------------------------------------------------------------------------- -----------
Net investment income 6,023,613
- --------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis)-- (367,399)
- ---------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (1,681,025)
- --------------------------------------------------------------------------------- -----------
Net realized and unrealized gain (loss) on investments (2,048,424)
- --------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $ 3,975,189
- --------------------------------------------------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
DG LIMITED TERM GOVERNMENT INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
----------------------------
1994 1993*
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------------------------------
OPERATIONS--
- -----------------------------------------------------------------
Net investment income $ 6,023,613 $ 1,996,098
- -----------------------------------------------------------------
Net realized gain (loss) on investment transactions ($347,369 net
gain and $61,130 net loss, respectively as computed for federal
tax purposes) (Note 2D) (367,399) (63,481)
- -----------------------------------------------------------------
Change in unrealized appreciation (depreciation) of investments (1,681,025) 1,021,984
- ----------------------------------------------------------------- ------------ ------------
Change in net assets resulting from operations 3,975,189 2,954,601
- ----------------------------------------------------------------- ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- -----------------------------------------------------------------
Dividends to shareholders from net investment income (6,011,126) (1,996,098)
- -----------------------------------------------------------------
Distributions to shareholders from net realized gains on
investment transactions (344,594) --
- -----------------------------------------------------------------
Distributions in excess of net investment income -- (200)
- ----------------------------------------------------------------- ------------ ------------
Change in net assets from distributions to shareholders (6,355,720) (1,996,298)
- ----------------------------------------------------------------- ------------ ------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)--
- -----------------------------------------------------------------
Proceeds from sale of shares 70,831,278 119,508,508
- -----------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
distributions in Fund shares 2,764,678 236,858
- -----------------------------------------------------------------
Cost of shares redeemed (54,475,647) (20,783,019)
- ----------------------------------------------------------------- ------------ ------------
Change in net assets from Fund share transactions 19,120,309 98,962,347
- ----------------------------------------------------------------- ------------ ------------
Change in net assets 16,739,778 99,920,650
- -----------------------------------------------------------------
NET ASSETS:
- -----------------------------------------------------------------
Beginning of period 99,920,650 --
- ----------------------------------------------------------------- ------------ ------------
End of period (including undistributed net investment income of
$12,287 and $0, respectively) $116,660,428 $ 99,920,650
- ----------------------------------------------------------------- ------------ ------------
</TABLE>
* For the period from August 3, 1992 (date of initial public investment) to
February 28, 1994.
(See Notes which are an integral part of the Financial Statements)
DG LIMITED TERM GOVERNMENT INCOME FUND
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
DG Investor Series (the "Trust") is an open-end, management investment company,
established as a Massachusetts business trust under a Declaration of Trust dated
February 7, 1992. The Trust currently consists of five portfolios. The financial
statements included herein present only those of the DG Limited Term Government
Income Fund (the "Fund"), one of the portfolios of the Trust. The financial
statements of the other portfolios in the Trust are presented separately. The
assets of each portfolio are segregated and a shareholder's interest is limited
to the portfolio in which shares are held. The Declaration of Trust permits the
Trust to offer separate series of shares of beneficial interest representing
interests in separate portfolios of securities.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--U.S. government obligations and corporate bonds are valued at the
mean between the over-the-counter bid and asked prices as furnished by an independent
pricing service. Short-term obligations are valued at the mean between bid and asked
prices as furnished by an independent pricing service; however, such issues with
maturities of sixty days or less are valued at amortized cost, which approximates market
value.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry System or to
have segregated within the custodian bank's vault, all securities held as collateral in
support of repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's underlying securities to ensure the existence of a proper level of
collateral.
The Fund will only enter into repurchase agreements with banks and other recognized
financial institutions, such as broker/dealers, which are deemed by the Trust's adviser
to be creditworthy pursuant to guidelines established by the Board of Trustees
("Trustees"). Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than the
repurchase price on the sale of collateral securities.
</TABLE>
DG LIMITED TERM GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
C. INCOME--Interest income is recorded on the accrual basis. Interest income includes
interest and discount earned (net of premium) on short-term obligations, and interest
earned on all other debt securities including original issue discount as required by the
Internal Revenue Code (the "Code"). Dividends to shareholders and capital gain
distributions, if any, are recorded on the ex-dividend date.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Code
applicable to regulated investment companies and to distribute to shareholders each year
all of its net taxable income, including any net realized gain on investments.
Accordingly, no provision for federal tax is necessary. Net capital losses of $775,898
attributable to security transactions incurred after October 31, 1993, are treated as
arising on March 1, 1994 the first day of the Fund's next taxable year.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or
delayed delivery transactions. To the extent the Fund engages in such transactions, it
will do so for the purpose of acquiring portfolio securities consistent with its
investment objectives and policies and not for the purpose of investment leverage. The
Fund will record a when-issued security and the related liability on the trade date.
Until the securities are received and paid for, the Fund will maintain security positions
such that sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis are marked to
market daily and begin earning interest on the settlement date.
F. DEFERRED EXPENSES--The costs incurred by the Fund with respect to registration of its
shares in its first fiscal year, excluding the initial expense of registering the shares,
have been deferred and are being amortized using the straight-line method over a period
of five years from the Fund's commencement date.
G. OTHER--Investment transactions are accounted for on the date of the transaction.
</TABLE>
(3) DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly to all shareholders invested in the Fund
on the record date. Dividends are paid from the net investment income of the
Fund. Net investment income consists of all interest received by the Fund less
its expenses. Capital gains realized by the Fund, if any, are distributed at
least once every twelve months.
The amounts in the financial statements for net investment income for the period
ended February 28, 1993, differ from those determined for tax purposes because
of certain timing differences. This resulted in distributions to shareholders in
excess of net investment income. These distributions do not represent a return
of capital for federal income tax purposes.
DG LIMITED TERM GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
(4) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
-------------------------
1994 1993*
---------- ----------
<S> <C> <C>
- -------------------------------------------------------------------
Shares outstanding, beginning of period 9,922,767 --
- -------------------------------------------------------------------
Shares sold 7,051,287 11,978,828
- -------------------------------------------------------------------
Shares issued to shareholders in payment of distributions in Fund
shares 276,031 23,577
- -------------------------------------------------------------------
Shares redeemed (5,433,649) (2,079,638)
- ------------------------------------------------------------------- ---------- ----------
Shares outstanding, end of period 11,816,436 9,922,767
- ------------------------------------------------------------------- ---------- ----------
</TABLE>
* For the period from August 3, 1992 (date of initial public investment) to
February 28, 1993.
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Deposit Guaranty National Bank, the Trust's investment adviser (the "Adviser"),
receives for its services an annual investment advisory fee equal to 0.60 of 1%
of the Fund's average daily net assets. The Adviser may voluntarily choose to
waive a portion of its fee or reimburse certain operating expenses of the Fund
in excess of limitations imposed by certain states. Under the terms of a sub-
advisory agreement between the Adviser and the Trust Division of Commercial
National Bank, Commercial National Bank receives an annual fee from the Adviser
equal to 0.25 of 1% of the Fund's average daily net assets. In addition,
Commercial National Bank may voluntarily choose to reduce its compensation. For
the year ended February 28, 1994, Commercial National Bank earned a sub-advisory
fee of $289,015, all of which was voluntarily waived.
Federated Administrative Services ("FAS") provides the Trust certain
administrative personnel and services. The fee is based on the level of average
aggregate net assets of the Trust for the period. FAS may voluntarily choose to
waive a portion of its fee.
Organization expenses of $24,074 were initially borne by FAS. The Fund has
agreed to reimburse FAS for the organization expenses initially borne by FAS
during the five year period following the date the Fund became effective. For
the year ended February 28, 1994, the Fund paid $1,535 pursuant to this
agreement.
Federated Services Company ("FSC") is the Fund's transfer and dividend
disbursing agent. It also provides certain accounting and recordkeeping services
with respect to the Fund's portfolio of investments.
Certain Officers and Trustees of the Trust are Officers and Trustees of FAS and
Federated Services Company.
DG LIMITED TERM GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
(6) INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term investments) for the
year ended February 28, 1994, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
PURCHASES-- $96,799,265
- ------------------------------------------------------------------------------- -----------
SALES-- $78,474,523
- ------------------------------------------------------------------------------- -----------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Trustees and Shareholders
DG INVESTOR SERIES:
We have audited the statement of assets and liabilities, including the portfolio
of investments, of the DG Limited Term Government Income Fund (a portfolio
within DG Investor Series) as of February 28, 1994, and the related statement of
operations for the year then ended, the statements of changes in net assets and
the financial highlights, which is presented on page 2 of this prospectus, for
the year ended February 28, 1994 and the period from August 3, 1992 (date of
initial public investment) to February 28, 1993. These financial statements and
the financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and the financial highlights. Investment securities held in custody
are confirmed to us by the custodian. As to securities purchased and sold but
not received or delivered, we request confirmations from brokers, and where
replies are not received, we carry out other appropriate auditing procedures. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of the
DG Limited Term Government Income Fund at February 28, 1994, and the results of
its operations for the year then ended, the changes in its net assets and
financial highlights for the year ended February 28, 1994 and the period from
August 3, 1992 to February 28, 1993, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK
Pittsburgh, Pennsylvania
April 7, 1994
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
DG Limited Term Government Federated Investors Tower
Income Fund Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Investment Adviser
Deposit Guaranty National Bank P.O. Box 1200
Jackson, Mississippi 39215-1200
- ------------------------------------------------------------------------------------------------
Sub-Adviser
Commercial National Bank P.O. Box 21119
Shreveport, Louisiana 71152
- ------------------------------------------------------------------------------------------------
Custodian
State Street Bank and P.O. Box 1713
Trust Company Boston, Massachusetts 02105
- ------------------------------------------------------------------------------------------------
Transfer Agent, Dividend Disbursing Agent, and
Shareholder Servicing 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 2101 L Street, N.W.
Washington, D.C. 20037
- ------------------------------------------------------------------------------------------------
Independent Auditors
KPMG Peat Marwick One Mellon Bank Center
Pittsburgh, Pennsylvania 15219
- ------------------------------------------------------------------------------------------------
</TABLE>
DG
LIMITED TERM
GOVERNMENT
INCOME FUND
- --------------------------------------------------------------------------------
PROSPECTUS
A Diversified Portfolio of
DG Investor Series,
an Open-End Management
Investment Company
Deposit Guaranty
National Bank
Jackson, MS
Commercial
National Bank
Shreveport, LA
APRIL 30, 1994
- --------------------------------------------------------------------------------
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
2061003A (4/94)
<TABLE>
<C> <S>
THE SHARES OFFERED BY THIS
PROSPECTUS ARE NOT DEPOSITS OR
OBLIGATIONS OF DEPOSIT GUARANTY
FDIC NATIONAL BANK OR COMMERCIAL NATIONAL
BANK, ARE NOT ENDORSED OR GUARANTEED
BY DEPOSIT
</TABLE>
GUARANTY NATIONAL BANK OR COMMERCIAL
NATIONAL BANK, AND ARE NOT INSURED
BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER GOVERNMENT
AGENCY. INVESTMENT IN THESE SHARES
INVOLVES INVESTMENT RISKS INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL.
The shares offered by this prospectus are not deposits or obligations of Deposit
Guaranty National Bank or Commercial National Bank, are not endorsed or
guaranteed by Deposit Guaranty National Bank or Commercial National Bank, and
are not insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other government agency. Investment
in these shares involves investment risks including the possible loss of
principal.
DG LIMITED TERM GOVERNMENT INCOME FUND
(A PORTFOLIO OF DG INVESTOR SERIES)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus for
DG Limited Term Government Income Fund (the "Fund") dated April 30, 1994. This
Statement is not a prospectus itself. To receive a copy of the prospectus, write
or call the Fund.
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
Statement dated April 30, 1994
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------------
Types of Investments 1
Weighted Average Portfolio Duration 1
Mortgage-Backed and
Asset-Backed Securities Risks 1
Option Transactions 2
Repurchase Agreements 2
Reverse Repurchase Agreements 3
When-Issued and Delayed Delivery
Transactions 3
Lending of Portfolio Securities 3
Portfolio Turnover 3
Investment Limitations 3
DG INVESTOR SERIES MANAGEMENT 5
- ---------------------------------------------------------------
Officers and Trustees 5
The Funds 7
Fund Ownership 7
Trustee Liability 8
INVESTMENT ADVISORY SERVICES 8
- ---------------------------------------------------------------
Adviser to the Fund 8
Advisory Fees 8
Sub-Adviser to the Fund 8
Sub-Advisory Fees 8
ADMINISTRATIVE SERVICES 9
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 9
- ---------------------------------------------------------------
PURCHASING SHARES 9
- ---------------------------------------------------------------
Distribution Plan 9
Conversion to Federal Funds 10
DETERMINING NET ASSET VALUE 10
- ---------------------------------------------------------------
Determining Market Value of Securities 10
EXCHANGE PRIVILEGE 10
- ---------------------------------------------------------------
Requirements for Exchange 10
Making an Exchange 10
REDEEMING SHARES 10
- ---------------------------------------------------------------
Redemption in Kind 10
TAX STATUS 11
- ---------------------------------------------------------------
The Fund's Tax Status 11
Shareholders' Tax Status 11
TOTAL RETURN 11
- ---------------------------------------------------------------
YIELD 11
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 12
- ---------------------------------------------------------------
APPENDIX 13
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
The Fund is a portfolio in DG Investor Series (the "Trust") which was
established as a Massachusetts business trust under a Declaration of Trust dated
February 7, 1992.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is current income, the weighted-average duration
of which will at all times be limited to between one and six years. This
investment objective cannot be changed without approval of shareholders.
TYPES OF INVESTMENTS
The Fund invests primarily in a portfolio of government securities and corporate
securities. The investment portfolio includes the following securities:
- - U.S. government securities, including Treasury bills, notes, bonds, and
securities issued by agencies and instrumentalities of the U.S. government;
- - mortgage-backed securities;
- - corporate debt securities rated within the three highest categories by a
nationally recognized statistical rating organization, including bonds, notes,
and debentures;
- - asset-backed securities; and
- - bank instruments.
WEIGHTED AVERAGE PORTFOLIO DURATION
Duration is a commonly used measure of the potential volatility of the price of
a debt security, or the aggregate market value of a portfolio of debt
securities, prior to maturity. Duration measures the magnitude of the change in
the price of a debt security relative to a given change in the market rate of
interest. The duration of a debt security depends upon three primary variables:
the security's coupon rate, maturity date and the level of market interest rates
for similar debt securities. Generally, debt securities with lower coupons or
longer maturities will have a longer duration than securities with higher
coupons or shorter maturities.
Duration is calculated by dividing the sum of the time-weighted values of cash
flows of a security or portfolio of securities, including principal and interest
payments, by the sum of the present values of the cash flows. Certain debt
securities, such as asset-backed securities, may be subject to prepayment at
irregular intervals. The duration of these instruments will be calculated based
upon assumptions established by the investment adviser as to the probable amount
and sequence of principal prepayments.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES RISKS
Mortgage-backed and asset-backed securities generally pay back principal and
interest over the life of the security. At the time the Fund reinvests the
payments and any unscheduled prepayments of principal received, the Fund may
receive a rate of interest which is actually lower than the rate of interest
paid on these securities ("prepayment risks"). Mortgage-backed and asset-backed
securities are subject to higher prepayment risks than most other types of debt
instruments with prepayment risks because the underlying mortgage loans or the
collateral supporting asset-backed securities may be prepaid without penalty or
premium. Prepayment risks on mortgaged-backed securities tend to increase during
periods of declining mortgage interest rates because many borrowers refinance
their mortgages to take advantage of the more favorable rates. Prepayments on
mortgage-backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although asset-backed securities generally are less
likely to experience substantial prepayments than are mortgage-backed
securities, certain of the factors that affect the rate of prepayments on
mortgage-backed securities also affect the rate of prepayments on asset-backed
securities.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of asset-backed securities backed by
motor vehicle installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If the servicer
sells these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state and is
then reregistered because the owner and obligor moves to another state, such
reregistration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
- --------------------------------------------------------------------------------
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities.
OPTION TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of the
Fund, the Fund may attempt to hedge all or a portion of its portfolio through
the purchase of put options on portfolio securities and listed put options on
financial futures contracts for portfolio securities. The Fund may also write
covered call options on its 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 may be closed out only on an exchange which provides a
secondary market for an option of the same series.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts.
These options will be used only to protect portfolio securities against
decreases in value resulting from market factors such as an anticipated
increase in interest rates.
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of instrument called for in
the contract ("going short") and the buyer who agrees to take delivery of
the instrument ("going long") at a certain time in the future. Financial
futures contracts call for the delivery
of particular debt instruments issued or guaranteed by the U.S. Treasury
or by specified agencies or instrumentalities of the U.S. government. If
the Fund could enter into financial futures contracts directly to hedge
its holdings of fixed income securities, it would enter into contracts to
deliver securities at a predetermined price (i.e., "go short") to protect
itself against the possibility that the prices of its fixed
income securities may decline during the Fund's anticipated holding
period.
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. Generally, if the hedged portfolio securities decrease
in value during the term of an option, the related futures contracts will
also decrease in value and the option will increase in value. In such an
event, the Fund will normally close out its option by selling an
identical option. If the hedge is successful, the proceeds received by
the Fund upon the sale of the second option will be large enough to
offset both the premium paid by the Fund for the original option plus the
realized decrease in value of the hedged securities.
Alternately, 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.
Currently, the Fund will only enter into futures contracts in order to
exercise put options in its portfolio. 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.
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
The Fund may also write covered call options to generate income. As
writer of a call option, the Fund has the obligation upon exercise of the
option during the option period to deliver the underlying security upon
payment of the exercise price.
The Fund may only sell listed 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 such additional consideration).
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. To
the extent that the original seller does not repurchase the securities from the
- --------------------------------------------------------------------------------
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody
of the Fund's portfolio securities subject to repurchase agreements, a court of
competent jurisdiction would rule in
favor of the Fund and allow retention or disposition of such securities. The
Fund will only enter into repurchase agreements with banks and other recognized
financial institutions, such as broker/dealers, which are found by the Fund's
adviser to be creditworthy pursuant to guidelines established by the Board of
Trustees ("Trustees").
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.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
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-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The Fund engages in
when-issued and delayed delivery transactions only for the purpose of acquiring
portfolio securities consistent with the Fund's investment objective and
policies, not for investment leverage.
These transactions are made to secure what is considered to be an advantageous
price and 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 at the trade date. These securities are marked to
market daily and maintained until the transaction is settled. The Fund may
engage in these transactions to an extent that would cause the segregation of an
amount up to 20% of the value of it's assets.
During the current year, the Fund does not anticipate investing more than 10% of
its total assets in when-issued and delayed delivery transactions.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of short-term
profits, securities in the portfolio will be sold whenever the investment
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 investment adviser does not anticipate that the Fund's portfolio
turnover rate will exceed 100%. For the year ended February 28, 1994 and for the
period from August 3, 1992 (date of initial public investment) to February 28,
1993, the Fund's portfolio turnover rates were 76% and 18%, respectively.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of securities.
- --------------------------------------------------------------------------------
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money directly or through reverse repurchase agreements in amounts
up to one-third of the value of its total assets including the amount
borrowed. The Fund will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure or to facilitate management of the
portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Fund will not purchase any securities while
borrowings in excess of 5% of the value of its total assets are
outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge or hypothecate any assets, except to
secure permitted borrowings. In those cases, it may pledge assets having
a market value not exceeding the lesser of the dollar amounts borrowed or
15% of the value of total assets of the Fund at the time of the pledge.
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of its assets, the Fund will not
purchase the securities of any issuer
(other than cash, cash items, or securities issued or guaranteed by the
U.S. government, 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. Also, the Fund will not purchase more than 10%
of the outstanding voting securities of any one issuer.
UNDERWRITING
The Fund will not underwrite any issue of securities except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objective, policies, and limitations.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate including limited partnership
interests in real estate, although it may invest in securities secured by
real estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not buy or sell commodities. However, the Fund may purchase
put options on portfolio securities and on financial futures contracts.
In addition, the Fund reserves the right to hedge the portfolio by
entering into financial futures contracts and to sell calls on financial
futures contracts.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except that it may purchase or
hold corporate or government 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 the Trust's Declaration of Trust, or
lend portfolio securities valued at not more than 5% of its total assets
to broker/dealers.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
RESTRICTED SECURITIES
The Fund will not invest more than 5% of the value of its total assets in
securities subject to restrictions on resale under the Securities Act of
1933, except for certain restricted securities which meet criteria for
liquidity as established by the Trustees.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement more than seven days after notice and certain restricted
securities not determined by the Trustees to be liquid.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or its investment adviser owning
individually more than 1/2 of 1% of the issuer's securities together own
more than 5% of the issuer's securities.
- --------------------------------------------------------------------------------
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.
WRITING COVERED PUT AND CALL OPTIONS AND PURCHASING PUT OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them
in deliverable form without further payment or after segregating cash in
the amount of any further payment. When writing put options, the Fund
will segregate cash or U.S. Treasury obligations with a value equal to or
greater than the exercise price of the underlying securities. The Fund
will not purchase put options on securities unless the securities are
held in the Fund's portfolio.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, will not invest more than 5% of its total assets in any one
investment company, or invest more than 10% of its total assets in
investment companies in general. The Fund will purchase securities of
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, or
acquisition of assets. It should be noted that investment companies incur
certain expenses such as management fees, and therefore, any investment
by a Fund in shares of another investment company would be subject to
such duplicate expenses. The Fund will invest in other investment
companies primarily for the purpose of investing its short-term cash on a
temporary basis. The adviser will waive its investment advisory fee on
assets invested in securities of open-end investment companies.
INVESTING IN MINERALS
The Fund will not purchase or sell oil, gas, or other mineral exploration
or development programs, or leases.
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.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items."
DG INVESTOR SERIES MANAGEMENT
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, principal occupations,
and present positions, including any affiliation with Deposit Guaranty National
Bank and Commercial National Bank, Federated Investors, Federated Securities
Corp., and Federated Administrative Services, Federated Services Company and the
Funds (as defined below).
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
John F. Donahue+* Chairman and Trustee Chairman and Trustee, Federated Investors; Chairman and Trustee, Federated
Federated Investors Advisers, Federated Management, and Federated Research; Director, AEtna Life
Tower and Casualty Company; Chief Executive Officer and Director, Trustee, or
Pittsburgh, PA Managing General Partner of the Funds; formerly, Director, The Standard Fire
Insurance Company. Mr. Donahue is the father of J. Christopher Donahue, Vice
President of the Trust.
- --------------------------------------------------------------------------------------------------------------------------------
John T. Conroy, Jr. Trustee President, Investment Properties Corporation; Senior Vice-President, John R.
Wood/IPC Commercial Wood and Associates, Inc., Realtors; President, Northgate Village
Department Development Corporation; General Partner or Trustee in private real estate
John R. Wood and ventures in Southwest Florida; Director, Trustee, or Managing General
Associates, Inc., Realtors Partner of the Funds; formerly, President, Naples Property Management, Inc..
3255 Tamiami Trail North
Naples, FL
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
William J. Copeland Trustee Director and Member of the Executive Committee, Michael Baker, Inc.;
One PNC Plaza Director, Trustee, or Managing General Partner of the Funds; formerly, Vice
23rd Floor Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan
Pittsburgh, PA Homes, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
James E. Dowd Trustee Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
571 Hayward Mill Road Trustee, or Managing General Partner of the Funds; formerly, Director, Blue
Concord, MA Cross of Massachusetts, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
Lawrence D. Ellis, M.D. Trustee Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
3471 Fifth Avenue Hospitals; Clinical Professor of Medicine and Trustee, University of
Suite 1111 Pittsburgh; Director, Trustee, or Managing General Partner of the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
Edward L. Flaherty, Jr.+ Trustee Attorney-at-law; Partner, Meyer and Flaherty; Director Eat 'N Park
5916 Penn Mall Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director, Trustee,
Pittsburgh, PA or Managing General Partner of the Funds; formerly, Counsel, Horizon
Financial, F.A., Western Region.
- --------------------------------------------------------------------------------------------------------------------------------
Edward C. Gonzales* President, Vice President, Treasurer, and Trustee, Federated Investors; Vice President
Federated Investors Treasurer, and Treasurer, Federated Advisers, Federated Management, and Federated
Tower and Trustee Research; Executive Vice President, Treasurer, and Director, Federated
Pittsburgh, PA Securities Corp.; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee of some of the Funds; Vice President and Treasurer of the
Funds.
- --------------------------------------------------------------------------------------------------------------------------------
Peter E. Madden Trustee Consultant; State Representative, Commonwealth of Massachusetts; Director,
225 Franklin Street Trustee, or Managing General Partner of the Funds; formerly, President,
Boston, MA State Street Bank and Trust Company and State Street Boston Corporation and
Trustee, Lahey Clinic Foundation, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
Gregor F. Meyer Trustee Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, Inc.;
5916 Penn Mall Director, Eat 'N Park Restaurants, Inc.; Director, Trustee, or Managing
Pittsburgh, PA General Partner of the Funds; formerly, Vice Chairman, Horizon Financial,
F.A.
- --------------------------------------------------------------------------------------------------------------------------------
Wesley W. Posvar Trustee Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
1202 Cathedral of Endowment for International Peace, RAND Corporation, Online Computer Library
Learning Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak Management
University of Pittsburgh Center; Director, Trustee, or Managing General Partner of the Funds;
Pittsburgh, PA President Emeritus, University of Pittsburgh; formerly, Chairman, National
Advisory Council for Environmental Policy & Technology.
- --------------------------------------------------------------------------------------------------------------------------------
Marjorie P. Smuts Trustee Public relations/marketing consultant; Director, Trustee, or Managing
4905 Bayard Street General Partner of the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
J. Christopher Donahue Vice President President and Trustee, Federated Investors; Trustee, Federated Advisers,
Federated Investors Federated Management, and Federated Research; President and Trustee,
Tower Federated Administrative Services; Trustee, Federated Services Company;
Pittsburgh, PA 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 Trustee of the Trust.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Richard B. Fisher Vice President Executive Vice President and Trustee, Federated Investors; Chairman and
Federated Investors Director, Federated Securities Corp.; President or Vice President of the
Tower Funds; Director or Trustee of some of the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
John W. McGonigle Vice President Vice President, Secretary, General Counsel, and Trustee, Federated
Federated Investors and Secretary Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Tower Federated Management, and Federated Research; Trustee, Federated Services
Pittsburgh, PA Company; Executive Vice President, Secretary, and Trustee, Federated
Administrative Services; Director and Executive Vice President, Federated
Securities Corp.; Vice President and Secretary of the Funds.
- --------------------------------------------------------------------------------------------------------------------------------
Ronald M. Petnuch Vice President Vice President, Federated Administrative Services; Vice President and
Federated Investors and Assistant Assistant Treasurer of some of the Funds; formerly Associate Corporate
Tower Treasurer Counsel of Federated Investors.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
John A. Staley, IV Vice President Vice President and Trustee, Federated Investors; Executive Vice President,
Federated Investors Federated Securities Corp.; President and Trustee, Federated Advisers,
Tower Federated Management, and Federated Research; Vice President of the Funds;
Pittsburgh, PA Director, Trustee, or Managing General Partner of some of the Funds;
formerly, Vice President, The Standard Fire Insurance Company and President
of its Federated Research Division.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* This Trustee is deemed to be an "interested person" of the Trust as defined in
the Investment Company Act of 1940.
+ Member of the Trust's Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
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 Intermediate Government Trust; Federated
Master Trust; Federated Municipal Trust; Federated Short-Intermediate Government
Trust; Federated Short-Term U.S. Government Trust; Federated Stock Trust;
Federated Tax-Free Trust; Federated U.S. Government Bond Fund; First Priority
Funds; Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S. Government
Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.;
Fund for U.S. Government Securities, Inc.; Government Income Securities, Inc.;
High Yield Cash Trust; Insight Institutional Series, Inc.; Insurance Management
Series; Intermediate Municipal Trust; International Series, Inc,; Investment
Series Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.;
Liberty High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.;
Liberty U.S. Government Money Market Trust; Liberty Term Trust, Inc.-1999;
Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Mark Twain
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; Signet Select
Funds; Star Funds; The Starburst Funds; The Starburst Funds II; Stock and Bond
Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
Trademark Funds; Trust for Financial Institutions; Trust For Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
- --------------------------------------------------------------------------------
As of April 7, 1994, the following shareholders of record owned 5% or more of
the outstanding shares of the Fund: Commercial National Bank, Shreveport,
Louisiana, owned approximately 1,968,759 shares (16.52%); and Deposit Guaranty
National Bank, Jackson, Mississippi, owned approximately 1,243,175 shares
(10.43%).
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will only be liable
for their own willful defaults. If reasonable care has been exercised in the
selection of officers, agents, employees, or investment advisers, a Trustee
shall not be liable for any neglect or wrong doing of any such person. However,
they are not protected against any liability to which they would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND
The Fund's investment adviser is Deposit Guaranty National Bank (the "Adviser"),
a subsidiary of Deposit Guaranty Corp.
The Adviser shall not be liable to the Trust, the Fund 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 Trust.
Because of the internal controls maintained by Deposit Guaranty National Bank
and Commercial National Bank, the Fund's sub-adviser, to restrict the flow of
non-public information, Fund investments are typically made without any
knowledge of Deposit Guaranty National Bank's or its affiliates' lending
relationships with an issuer.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus.
For the year ended February 28, 1994 and for the period from August 3, 1992
(date of initial public investment) to February 28, 1993, the Fund's Adviser
earned advisory fees of $693,635 and $191,747, respectively, of which $338,182
and $131,121, respectively, were voluntarily waived.
SUB-ADVISER TO THE FUND
The Fund's sub-adviser is Commercial National Bank (the "Sub-Adviser"), a
subsidiary of Deposit Guaranty Corp.
SUB-ADVISORY FEES
For its sub-advisory services, the Sub-Adviser receives an annual sub-advisory
fee as described in the prospectus.
For the year ended February 28, 1994 and for the period from August 3, 1992
(date of initial public investment,) to February 28, 1993, the Fund's
Sub-Adviser earned sub-advisory fees of $289,015 and $79,895, respectively, all
of which were voluntarily waived.
STATE EXPENSE LIMITATIONS
The Adviser has 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 fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2 1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1 1/2% per
year of the remaining average net assets, the Adviser will reimburse the
Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this expense
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended or
rescinded in the future.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. For the year ended February 28, 1994 and for the period from August
3, 1992 (date of initial public investment) to February 28, 1993, the Fund
incurred costs for administrative services of $148,906 and $44,080,
respectively, of which $0 and $3,347, respectively, were voluntarily waived.
John A. Staley, IV, an officer of the Fund, holds approximately 15% 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. For the fiscal years ended February 28, 1994, 1993, and
1992, Federated Administrative Services paid approximately $159,222, $179,920,
and $202,532, respectively, for services provided by Commercial Data Services,
Inc.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Trustees.
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the Adviser
and may include:
- - advice as to the advisability of investing in securities;
- - security analysis and reports;
- - economic studies;
- - industry studies;
- - receipt of quotations for portfolio evaluations; and
- - similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the Adviser in advising the
Fund and other accounts. To the extent that receipt of these services may
supplant services for which the Adviser or its affiliates might otherwise have
paid, it would tend to reduce their expenses.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Shares of the Fund are sold at their net asset value next determined after an
order is received, plus a sales charge, on days the New York Stock Exchange and
Federal Reserve Wire System are open for business. The procedure for purchasing
shares is explained in the prospectus under "Investing in the Fund."
DISTRIBUTION PLAN
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule 12b-1
which was promulgated by the Securities and Exchange Commission pursuant to the
Investment Company Act of 1940. The Plan provides for payment of fees to
Federated Securities Corp. to finance any activity which is principally intended
to result in the sale of the Fund's shares subject to the Plan. Such activities
may include the advertising and marketing of shares of the Fund; preparing,
printing, and distributing prospectuses and sales literature to prospective
shareholders, brokers, or administrators; and implementing and operating the
Plan. Pursuant to the Plan, Federated Securities Corp. may pay fees to brokers
for distribution and administrative services and to administrators for
administrative services provided to the Fund. The administrative services are
provided by a representative who has knowledge of the shareholder's particular
circumstances and goals, and include, but are not limited to: communicating
account openings; communicating account closings; entering purchase
transactions; entering redemption transactions; providing or arranging to
provide accounting support for all transactions, wiring funds and receiving
funds for purchases and redemptions of Fund shares, confirming and reconciling
all transactions, reviewing the activity in Fund accounts and providing training
and supervision of broker personnel; posting and reinvesting dividends to Fund
accounts or arranging for this service to be performed by the Fund's transfer
agent; and maintaining and distributing current copies of prospectuses and
shareholder reports to the beneficial owners of Fund shares and prospective
shareholders.
- --------------------------------------------------------------------------------
The Trustees expect that the adoption of the Plan will result in the sale of a
sufficient number of shares so as to allow the Fund to achieve economic
viability. It is also anticipated that an increase in the size of the Fund will
facilitate more efficient portfolio management and assist the Fund in seeking to
achieve its investment objective.
For the year ended February 28, 1994 and for the period from August 3, 1992
(date of initial public investment) to February 28, 1993, brokers and
administrators (financial institutions) received no fees pursuant to the Plan.
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. Deposit Guaranty National Bank
and Commercial National Bank (the "Banks") as well as Federated Services Company
act as the shareholder's agent in depositing checks and converting them to
federal funds.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value generally changes each day. The days on which net asset
value is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market value of the Fund's portfolio securities are determined as follows:
- - for equity securities and bonds and other fixed income securities, according
to the last sale price on a national securities exchange, if available;
- - in the absence of recorded sales of equity securities, according to the mean
between the last closing bid and asked prices, and for bonds and other fixed
income securities as determined by an independent pricing service;
- - for unlisted equity securities, the latest bid prices;
- - for short-term obligations, according to the mean between bid and asked prices
as furnished by an independent pricing service or for short-term obligations
with remaining maturities of 60 days or less at the time of purchase, at
amortized cost; or
- - for all other securities, at fair value as determined in good faith by the
Trustees.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
REQUIREMENTS FOR EXCHANGE
Before the exchange, the shareholder must receive a prospectus of the fund for
which the exchange is being made. This privilege is available to shareholders
resident in any state in which the 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 shares of the
other fund.
Further information on the exchange privilege and prospectuses may be obtained
by calling the Fund.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions may
require a signature guarantee.
REDEEMING SHARES
- --------------------------------------------------------------------------------
Shares of the Fund are redeemed at the next computed net asset value after the
Banks receive the redemption request. Redemption procedures are explained in the
prospectus under "Redeeming Shares." Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on federal holidays when
wire transfers are restricted.
Although State Street Bank does not charge for telephone redemptions, it
reserves the right to charge a fee for the cost of wire-transferred redemptions
of less than $5,000.
REDEMPTION IN KIND
Although the Fund intends to redeem shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the Fund's portfolio.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
- --------------------------------------------------------------------------------
The Fund has elected to be governed by Rule 18f-1 of the Investment Company Act
of 1940 under which the Fund is obligated to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period.
TAX STATUS
- --------------------------------------------------------------------------------
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
- - derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
- - 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.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as cash or
additional shares. No portion of any income dividend paid by the Fund is
eligible for the dividends received deduction available to corporations. These
dividends, and any short-term capital gains, are taxable as ordinary income.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's average annual total returns for the fiscal year ended February 28,
1994 and for the period from August 3, 1992 (date of initial public investment)
to February 28, 1994, were 1.41% and 3.75%, respectively.
The average annual total return for the Fund is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of shares owned at the end of the period by
the maximum offering price per share at the end of the period. The number of
shares owned at the end of the period is based on the number of shares purchased
at the beginning of the period with $1,000, less any applicable sales load,
adjusted over the period by any additional shares, assuming the quarterly
reinvestment of all dividends and distributions.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for the thirty-day period ended February 28, 1994 was 3.21%.
The yield for the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the net asset value per share of the Fund on the
last day of the period. This value is then annualized using semi-annual
compounding. This means that the amount of income generated during the
thirty-day period is assumed to be generated each month over a
12-month period and is reinvested every six months. The yield does not
necessarily reflect income actually earned by the Fund because of certain
adjustments required by the Securities and Exchange Commission and, therefore,
may not correlate to the dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the Fund,
performance will be reduced for those shareholders paying those fees.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The Fund's performance depends upon such variables as:
- - portfolio quality;
- - average portfolio maturity;
- - type of instruments in which the portfolio is invested;
- - changes in interest rates and market value of portfolio securities;
- - changes in the Fund's expenses; and
- - various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and net asset value per share fluctuate daily. Both net earnings and net asset
value per share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
- - MERRILL LYNCH 1-3 YEAR TREASURY INDEX is an unmanaged index tracking
short-term U.S. government securities with maturities between 1 and 2.99
years. The index is produced by Merrill Lynch, Pierce, Fenner & Smith, Inc.
- - LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all income dividends and capital gains distributions, if any.
From time to time, the Fund will quote its Lipper ranking in the "Short-term
U.S. government funds" category in advertising and sales literature.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD AND POOR'S CORPORATION CORPORATE BOND RATINGS
AAA--Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
NR--NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS
AAA--Bonds which are rated AAA are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA--Bonds which are rated AA are judged to be of high quality by all standards.
Together with the AAA group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in AAA securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
NR--Not rated by Moody's.
Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from "Aa" through "B" in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
NR--NR indicates that Fitch does not rate the specific issue.
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
STANDARD AND POOR'S CORPORATION COMMERCIAL PAPER RATINGS
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
PRIME-1--Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following characteristics:
- - Leading market positions in well established industries.
- --------------------------------------------------------------------------------
- - High rates of return on funds employed.
- - Conservative capitalization structure with moderate reliance on debt and ample
asset protection.
- - Broad margins in earning coverage of fixed financial charges and high internal
cash generation.
- - Well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2--Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING
FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
2061003B (4/94)
DG LIMITED TERM GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
ANNUAL REPORT FOR FISCAL YEAR ENDED FEBRUARY 28, 1994
INVESTMENT REVIEW
Bond yields rose across the entire maturity spectrum for the six-month
period ended February 28, 1994. The declining market value of bonds
associated with this rate increase was disappointing to bondholders since
bond values had increased in the prior six-month period.
The rate increase was primarily attributed to evidence of a
strengthening economy and the possibility that inflation might accompany
it. A strong fourth quarter Gross Domestic Product report and a tightening
of the Federal Funds rate added to the rate pressure in the short end of
the market and contributed to market forecasts of higher rates in the
future.
For the fiscal year ended February 28, 1994, the Fund's total rate of
return was 3.52% (1.41% taking into account the sales charge) compared to
the Merrill Lynch 1-3 Year Treasury Index total return of 3.44%.* The
Fund's duration and average maturity were reduced during the period. Net
assets increased to over $16.7 million. Treasury securities continue to
hold a majority position in the Fund. Corporate securities may be utilized
more in the future as spreads to treasuries have widened, providing a more
adequate return for the additional risk.
* Performance quoted represents past performance. Investment return and
principal value will fluctuate, so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
PERFORMANCE COMPARISON
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 INVESTMENT
IN DG LIMITED TERM GOVERNMENT INCOME FUND AND MERRILL
LYNCH 1-3 YEAR U.S. TREASURY INDEX+.
Graphic representation A1 omitted. See Appendix.
<TABLE>
<CAPTION>
DG LIMITED MERRILL LYNCH
TERM GOV- 1-3 YEAR U.S.
MEASUREMENT PERIOD ERNMENT IN- TREASURY IN-
(FISCAL YEAR COVERED) COME DEX
<S> <C> <C>
8/1/92 9800 10000
2/28/93 10234 10396
2/28/94 10599 10755
</TABLE>
Past performance is not predictive of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
This annual report incorporates by reference and accompanies the prospectus
dated April 30, 1994.
* Reflects performance of DG Limited Term Government Income Fund from August
1, 1992 through February 28, 1994.
** Represents a hypothetical investment of $10,000 in DG Limited Term
Government Income Fund, after deducting the maximum sales charge of 2.00%
($10,000 investment minus $200 sales charge = $9,800). The Fund's
performance assumes the reinvestment of all dividends and distributions.
The Merrill Lynch 1-3 Year U.S. Treasury Index is adjusted to reflect
reinvestment of dividends on securities in the index.
+ The Merrill Lynch 1-3 Year U.S. Treasury Index is not adjusted to reflect
sales loads, expenses, or other fees that the SEC requires to be reflected
in the Fund's performance.
++ Reflects maximum applicable fees.
FEDERATED SECURITIES CORP.
(LOGO)
- --------------------------------------------------------------------------------
Distributor
2061003ARS (4/94)
DG GOVERNMENT INCOME FUND
(A PORTFOLIO OF DG INVESTOR SERIES)
PROSPECTUS
The shares of DG Government Income Fund (the "Fund") offered by this prospectus
represent interests in a diversified portfolio of DG Investor Series (the
"Trust"), an open-end, management investment company (a mutual fund). The
investment objective of the Fund is current income. The Fund pursues its
investment objective by investing primarily in government securities to achieve
current income.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF DEPOSIT
GUARANTY NATIONAL BANK OR COMMERCIAL NATIONAL BANK, ARE NOT ENDORSED OR
GUARANTEED BY DEPOSIT GUARANTY NATIONAL BANK OR COMMERCIAL NATIONAL BANK, AND
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES
INVOLVES INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated April 30,
1994, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference in this
prospectus. You may request a copy of the Statement of Additional Information
free of charge, obtain other information, or make inquiries about the Fund by
writing or calling the Fund.
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 April 30, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Corporate Bonds 4
Mortgage-Backed Securities 4
Collateralized Mortgage Obligations 4
Asset-Backed Securities 4
Bank Instruments 5
Put and Call Options 5
Risks 5
Temporary Investments 6
Repurchase Agreements 6
Lending of Portfolio Securities 6
When-Issued and Delayed Delivery
Transactions 6
Investment Limitations 6
DG INVESTOR SERIES INFORMATION 7
- ------------------------------------------------------
Management of the Trust 7
Board of Trustees 7
Investment Adviser 7
Advisory Fees 7
Adviser's Background 7
Sub-Adviser 8
Sub-Advisory Fees 8
Sub-Adviser's Background 8
Distribution of Fund Shares 8
Distribution Plan 8
Shareholder Servicing Arrangements 9
ADMINISTRATION OF THE FUND 9
- ------------------------------------------------------
Administrative Services 9
Custodian 10
Transfer Agent, Dividend
Disbursing Agent, and
Shareholder Servicing Agent 10
Legal Counsel 10
Independent Auditors 10
Brokerage Transactions 10
NET ASSET VALUE 10
- ------------------------------------------------------
INVESTING IN THE FUND 11
- ------------------------------------------------------
Share Purchases 11
Through the Banks 11
Minimum Investment Required 11
What Shares Cost 11
Purchases at Net Asset Value 12
Sales Charge Reallowance 12
Reducing the Sales Charge 12
Quantity Discounts and Accumulated
Purchases 12
Letter of Intent 13
Reinvestment Privilege 13
Concurrent Purchases 13
Systematic Investment Program 13
Certificates and Confirmations 13
Dividends and Distributions 13
Exchanging Securities for Fund Shares 14
EXCHANGE PRIVILEGE 14
- ------------------------------------------------------
DG Investor Series 14
Exchanging Shares 14
REDEEMING SHARES 15
- ------------------------------------------------------
Through the Banks 15
By Telephone 15
By Mail 15
Signatures 15
Systematic Withdrawal Program 16
Accounts With Low Balances 16
Redemption in Kind 16
SHAREHOLDER INFORMATION 17
- ------------------------------------------------------
Voting Rights 17
Massachusetts Partnership Law 17
EFFECT OF BANKING LAWS 17
- ------------------------------------------------------
TAX INFORMATION 18
- ------------------------------------------------------
Federal Income Tax 18
PERFORMANCE INFORMATION 18
- ------------------------------------------------------
FINANCIAL STATEMENTS 20
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 30
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)...... 2.00%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)............................................ None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable).......................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)............... None
Exchange Fee..................................................................... None
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(1)................................................. 0.41%
12b-1 Fees(2).................................................................... 0.00%
Total Other Expenses............................................................. 0.29%
Total Fund Operating Expenses(3)............................................ 0.70%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of the
investment advisory fee by the investment adviser. The adviser can terminate
this voluntary waiver at any time at its sole discretion. The maximum management
fee is 0.60%.
(2) As of the date of this prospectus, the Fund is not paying or accruing 12b-1
fees. The Fund will not accrue or pay 12b-1 fees until a separate class of
shares has been created for certain institutional investors. The Fund can pay up
to 0.35% as a 12b-1 fee to the distributor.
(3) The Total Fund Operating Expenses would have been 0.89% absent the voluntary
waiver of the investment advisory fee.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUND WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND
EXPENSES, SEE "DG INVESTOR SERIES INFORMATION" AND "INVESTING IN THE FUND."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period. .................................. $ 27 $42 $58 $105
</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.
DG GOVERNMENT INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 30.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY
28,
-------------------
1994 1993*
------ ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.25 $10.00
- -----------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------
Net investment income 0.55 0.37
- -----------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.09) 0.25
- ----------------------------------------------------------------------------- ------ ------
Total from investment operations 0.46 0.62
- ----------------------------------------------------------------------------- ------ ------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.55) (0.37)
- -----------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment
transactions (0.25) --
- -----------------------------------------------------------------------------
Distributions to shareholders in excess of net realized gain on investment
transactions(c) (0.01) --
- ----------------------------------------------------------------------------- ------ ------
Total distributions (0.81) (0.37)
- ----------------------------------------------------------------------------- ------ ------
NET ASSET VALUE, END OF PERIOD $9.90 $10.25
- ----------------------------------------------------------------------------- ------ ------
TOTAL RETURN** 4.55% 6.40%
- -----------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------
Expenses 0.70% 0.50%(a)
- -----------------------------------------------------------------------------
Net investment income 5.34% 6.45%(a)
- -----------------------------------------------------------------------------
Expense waiver/reimbursement(b) 0.19% 0.41%(a)
- -----------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------
Net assets, end of period (000 omitted) $118,695 $111,435
- -----------------------------------------------------------------------------
Portfolio turnover rate 49% 78%
- -----------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from August 3, 1992 (date of initial
public investment) to February 28, 1993.
** Based on net asset value which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above (Note 5).
(c) These distributions do not represent a return of capital for federal tax
purposes (Note 3).
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended February 28, 1994, which can be obtained
free of charge.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated February 7, 1992. The Declaration of Trust permits the Trust to
offer separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes.
Shares of the Fund are designed for retail and trust customers of Deposit
Guaranty National Bank and Commercial National Bank and their affiliates as a
convenient means of participating in a professionally managed, diversified
portfolio consisting primarily of government securities. A minimum initial
investment of $1,000 is required.
Fund shares are sold at net asset value plus an applicable sales charge and are
redeemed at net asset value.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is current income. The investment objective
cannot be changed without approval of shareholders. While there is no assurance
that the Fund will achieve its investment objective, it endeavors to do so by
following the investment policies described in this prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in securities
which are guaranteed as to payment of principal and interest by the U.S.
government or U.S. government agencies or instrumentalities. The Fund may also
invest in corporate bonds, asset-backed securities and bank instruments. Under
normal circumstances, the Fund will invest at least 65% of the value of its
total assets in U.S. government securities.
Unless indicated otherwise, the investment policies may be changed by the Board
of Trustees ("Trustees") without the approval of shareholders. Shareholders will
be notified before any material change in these policies becomes effective.
ACCEPTABLE INVESTMENTS. The U.S. government securities in which the Fund will
invest include:
- direct obligations of the U.S. Treasury such as bills, notes, and bonds;
and
- notes, bonds, and discount notes issued by the Federal Home Loan Banks,
Government National Mortgage Association, Federal Farm Credit Banks,
Tennessee Valley Authority, Export-Import Bank of the United States,
Commodity Credit Corporation, Federal Financing Bank, Student Loan
Marketing Association, Federal Home Loan Mortgage Corporation, or
National Credit Union Administration.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government, such as Government National Mortgage Association participation
certificates, are backed by the full faith and credit of the U.S. Treasury. No
assurance can be given that the U.S. government will provide financial
support to other agencies or instrumentalities, since it is not obligated to do
so. These instrumentalities are supported by:
- the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
- discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
- the credit of the agency or instrumentality.
CORPORATE BONDS. The Fund may invest in issues of corporate debt obligations
which are rated in one of the three highest categories by a nationally
recognized statistical rating organization (rated Aaa, Aa, or A by Moody's
Investors Service, Inc. ("Moody's"); AAA, AA, or A by Standard & Poor's
Corporation ("Standard & Poor's") or by Fitch Investors Service, Inc. ("Fitch"),
or which are of comparable quality in the judgment of the adviser).
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are securities that
directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans on real property. There are currently three basic
types of mortgage-backed securities: (i) those issued or guaranteed by the U.S.
government or one of its agencies or instrumentalities, such as the Government
National Mortgage Association ("Ginnie Mae"), the Federal National Mortgage
Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation
("Freddie Mac"); (ii) those issued by private issuers that represent an interest
in or are collateralized by mortgage-backed securities issued or guaranteed by
the U.S. government or one of its agencies or instrumentalities; and (iii) those
issued by private issuers that represent an interest in or are collateralized by
whole loans or mortgage-backed securities without a government guarantee but
usually having some form of private credit enhancement.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations
("CMOs") are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by Ginnie Mae,
Fannie Mae or Freddie Mac Certificates, but may be collateralized by whole
loans or private pass-through securities.
The Fund will only invest in CMOs which are rated AAA by a nationally
recognized rating agency, and which may be: (a) collateralized by pools of
mortgages in which each mortgage is guaranteed as to payment of principal
and interest by an agency or instrumentality of the U.S. government; (b)
collateralized by pools of mortgages in which payment of principal and
interest is guaranteed by the issuer and such guarantee is collateralized
by U.S. government securities; or (c) securities in which the proceeds of
the issuance are invested in mortgage securities and payment of the
principal and interest are supported by the credit of an agency or
instrumentality of the U.S. government.
ASSET-BACKED SECURITIES. Asset-backed securities have structural
characteristics similar to mortgage-backed securities but have underlying assets
that are not mortgage loans or interests in mortgage loans. The Fund may invest
in asset-backed securities rated A or higher by a nationally recognized rating
agency. The collateral for such securities will consist of motor vehicle
installment purchase obligations and credit card receivables. These securities
may be in the form of pass-through instruments or asset-
backed bonds. The securities are issued by non-governmental entities and carry
no direct or indirect government guarantee.
BANK INSTRUMENTS. The Fund only invests in bank instruments issued by an
institution having capital, surplus and undivided profits over $100 million, or
insured by the Bank Insurance Fund ("BIF") or the Savings Association Insurance
Fund ("SAIF").
PUT AND CALL OPTIONS. The Fund may purchase put options on financial futures
contracts and put options on portfolio securities. Financial futures may include
index futures. These options will be used as a hedge to attempt to protect
securities which the Fund holds against decreases in value. For the immediate
future, the Fund will enter into futures contracts directly only when it desires
to exercise a financial futures put option in its portfolio rather than either
closing out the option or allowing it to expire. The Fund will only purchase
puts on financial futures contracts which are traded on a recognized exchange.
The Fund will generally purchase over-the-counter put options on portfolio
securities in negotiated transactions with the writers of the options on the
portfolio securities held by the Fund which are typically not traded on an
exchange. The Fund purchases options only from investment dealers and other
financial associations (such as commercial banks or savings and loan
institutions) deemed creditworthy by the Fund's adviser.
Over-the-counter put 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.
The Fund may also write call options on all or any portion of its portfolio to
generate income for the Fund. The Fund will write call options on securities
either held in its portfolio or which it has the right to obtain without payment
of further consideration or for which it has segregated cash in the amount of
any additional consideration. The call options which the Fund writes and sells
must be listed on a recognized options exchange. Although the Fund reserves the
right to write covered call options on its entire portfolio, it will not write
such options on more than 25% of its total assets unless a higher limit is
authorized by its Trustees.
The Fund may attempt to hedge the portfolio by entering into financial futures
contracts and to write calls on financial futures contracts. The Fund will
notify shareholders before it begins engaging in these transactions.
RISKS. When the Fund writes a call option, the Fund risks not
participating in any rise in the value of the underlying security. In
addition, when the Fund purchases puts on financial futures contracts to
protect against declines in prices of portfolio securities, there is a risk
that the prices of the securities subject to the futures contracts may not
correlate perfectly with the prices of the securities in the Fund's
portfolio. This may cause the futures contract and its corresponding put to
react differently than the portfolio securities to market changes. In
addition, the Fund's investment adviser could be incorrect in its
expectations about the direction or extent of market factors such as
interest rate movements. In such an event, the Fund may lose the purchase
price of the put option. Finally, it is not certain that a secondary market
for options will exist at all times. Although the
investment adviser will consider liquidity before entering into options
transactions, there is no assurance that a liquid secondary market on an
exchange will exist for any particular option at any particular time. The
Fund's ability to establish and close out option positions depends on this
secondary market.
TEMPORARY INVESTMENTS. For defensive purposes only, the Fund may invest
temporarily in cash and cash items during times of unusual market conditions and
to maintain liquidity. Cash items may include short-term obligations such as:
- obligations of the U.S. government or its agencies or instrumentalities;
- repurchase agreements; and
- commercial paper rated A-1 or A-2 by Standard & Poor's, Prime-1 or
Prime-2 by Moody's or F-1 or F-2 by Fitch.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which
banks, broker/dealers, and other recognized financial institutions sell
U.S. government 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 seller does not repurchase the securities from the Fund, the Fund
could receive less than the repurchase price on any sale of such
securities.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or long-term basis, or both,
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 Trustees, 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 at all times.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase portfolio
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. In when-issued and delayed delivery transactions,
the Fund relies on the seller to complete the transaction. The seller's failure
to complete the transaction may cause the Fund to miss a price or yield
considered to be advantageous.
INVESTMENT LIMITATIONS
The Fund will not:
- borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an arrangement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may, borrow up to one-third of the value of its total assets and pledge
up to 15% of the value of those assets to secure such borrowings.
The above investment limitation cannot be changed without shareholder approval.
The following investment limitation, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any material
change in this investment limitation becomes effective.
The Fund will not:
- invest more than 15% of the value of its net assets in illiquid
securities, including repurchase agreements providing for settlement in
more than seven days after notice, over-the-counter options and certain
restricted securities not determined by the Trustees to be liquid.
DG INVESTOR SERIES INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees
are responsible for managing the Trust's business affairs and for exercising all
of the powers of the Trust except those reserved for the shareholders. The
Executive Committee of the Board of Trustees handles the Trustees'
responsibilities between meetings of the Trustees.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Deposit Guaranty National Bank,
the Fund's investment adviser (the "Adviser"), subject to direction by the
Trustees. The Adviser, in consultation with the sub-adviser, continually
conducts investment research and supervision for the Fund and is responsible for
the purchase and sale of portfolio instruments.
ADVISORY FEES. The Fund's Adviser receives an annual investment advisory
fee equal to .60 of 1% of the Fund's average daily net assets. The
investment advisory contract provides for the voluntary reimbursement of
expenses by the Adviser to the extent any Fund expenses exceed such lower
expense limitation as the Adviser may, by notice to the Fund, voluntarily
declare to be effective. The Adviser can terminate this voluntary
reimbursement of expenses at any time at its sole discretion. The Adviser
has undertaken to reimburse the Fund for operating expenses in excess of
limitations established by certain states.
ADVISER'S BACKGROUND. Deposit Guaranty National Bank, a national banking
association formed in 1925, is a subsidiary of Deposit Guaranty Corp
("DGC"). Through its subsidiaries and affiliates, DGC offers a full range
of financial services to the public including commercial lending,
depository services, cash management, brokerage services, retail banking,
mortgage banking, investment advisory services and trust services.
As of December 31, 1993, the Trust Division of Deposit Guaranty National
Bank had approximately $9 billion under administration, of which it had
investment discretion over $1.4 billion. Deposit Guaranty National Bank has
served as the Trust's Adviser since May 5, 1992.
As part of their regular banking operations, Deposit Guaranty National Bank
and Commercial National Bank, the Fund's sub-adviser, may make loans to
public companies. Thus, it may be possible, from time to time, for the Fund
to hold or acquire the securities of issuers which are also lending clients
of Deposit Guaranty National Bank or Commercial National Bank. The lending
relationships will not be a factor in the selection of securities.
John Mark McKenzie has been with Deposit Guaranty National Bank for ten
years and is a Vice President and Trust Investment Officer. Previously, Mr.
McKenzie was associated with a Jackson
bank as a trust officer. He received a B.B.A. in Banking and Finance from
the University of Mississippi. He is a member of the Mississippi Chapter of
the Memphis Society of Financial Analysts, and is a member of the
Mississippi State and Hinds County Bar Association. Mr. McKenzie has
managed the DG Government Income Fund since August 1, 1992 (the inception
of the Fund).
SUB-ADVISER. Under the terms of a sub-advisory agreement between Deposit
Guaranty National Bank and Commercial National Bank (the "Sub-Adviser"), the
Sub-Adviser will furnish to the Adviser such investment advice, statistical and
other factual information as may be requested by Adviser. The portfolio managers
from the Trust Divisions of Deposit Guaranty National Bank and Commercial
National Bank will form an investment committee (the "DG Asset Management
Group") to discuss investment strategies and evaluate securities and the
economic outlook.
SUB-ADVISORY FEES. For its services under the sub-advisory agreement, the
Sub-Adviser receives an annual fee from the Adviser equal to 0.25 of 1% of
the average daily net assets of the Fund. The sub-advisory fee is accrued
daily and paid monthly. In the event that the fee due from the Trust to the
Adviser on behalf of the Fund is reduced in order to meet expense
limitations imposed on the Fund by state securities laws and regulations,
the sub-advisory fee will be reduced by one-half of said reduction in the
fee due from the Trust to the Adviser on behalf of the Fund.
Notwithstanding any other provision in the sub-advisory agreement, the
Sub-Adviser may, from time to time and for such periods as it deems
appropriate, reduce its compensation (and, if appropriate, assume expenses
of the Fund or class of the Fund) to the extent that the Fund's expenses
exceed such lower expense limitation as the Sub-Adviser may, by notice to
the Trust on behalf of the Fund, voluntarily declare to be effective.
SUB-ADVISER'S BACKGROUND. Commercial National Bank, a national banking
association which received its charter in 1886, is a subsidiary of DGC. As
of December 31, 1993, the Trust Division at Commercial National Bank had
approximately $1.2 billion in trust assets under administration, of which
it had investment discretion over $1.02 billion. Commercial National Bank
has served as sub-adviser to DG Equity Fund, DG Limited Term Government
Income Fund, and the Fund since July 20, 1992, and DG Municipal Income Fund
since December 12, 1992, each a portfolio of the Trust.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal distributor for shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Under a distribution plan adopted in accordance with the
Investment Company Act Rule 12b-1 (the "Plan"), the Fund will pay to the
distributor an amount computed at an annual rate of .35 of 1% of the average
daily net asset value of the Fund to finance any activity which is principally
intended to result in the sale of shares subject to the Plan.
The distributor may from time to time and for such periods as it deems
appropriate, voluntarily reduce its compensation under the Plan to the extent
the expenses attributable to the shares exceed such lower expense limitation as
the distributor may, by notice to the Trust, voluntarily declare to be
effective.
The distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers ("brokers")
to provide distribution and/or administrative services as agents for their
clients or customers. Administrative services may include, but are not limited
to, the following functions: 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;
assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as may reasonably be requested.
The distributor will pay financial institutions a fee based upon shares subject
to the Plan and 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 distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no payments
to the distributor except as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Fund
under the Plan.
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 Trustees 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 laws.
SHAREHOLDER SERVICING ARRANGEMENTS. The distributor may pay financial
institutions a fee with respect to the average net asset value of shares held by
their customers for providing administrative services. This fee, if paid, will
be reimbursed by the Adviser and not the Fund.
ADMINISTRATION OF THE FUND
- --------------------------------------------------------------------------------
ADMINISTRATIVE SERVICES. Federated Administrative Services, which is a
subsidiary of Federated Investors, provides the Fund with the administrative
personnel and services necessary to operate the
Fund. Such services include shareholder servicing and certain legal and
accounting services. Federated Administrative Services provides these at an
annual rate as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
- ---------------------
<C> <S>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
on assets in excess of $750
.075 of 1% million
</TABLE>
The administrative fee received during any fiscal year shall aggregate at least
$100,000 per Fund. Federated Administrative Services may choose voluntarily to
reimburse a portion of its fee at any time.
CUSTODIAN. State Street Bank and Trust Company ("State Street Bank"), Boston,
Massachusetts, is custodian for the securities and cash of the Fund.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND SHAREHOLDER SERVICING AGENT.
Federated Services Company, Pittsburgh, Pennsylvania, is transfer agent for the
shares of the Fund, dividend disbursing agent for the Fund, and shareholder
servicing agent for the Fund.
LEGAL COUNSEL. Legal counsel for the Fund is provided by Houston, Houston &
Donnelly, Pittsburgh, Pennsylvania and Dickstein, Shapiro & Morin, Washington,
D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are KPMG Peat
Marwick, Pittsburgh, Pennsylvania.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the Adviser may give consideration to those
firms which have sold or are selling shares of the Fund and other funds
distributed by Federated Securities Corp. The Adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to review by the
Trustees.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per share fluctuates. It is determined by dividing
the sum of the market value of all securities and other assets, less
liabilities, by the number of shares outstanding.
INVESTING IN THE FUND
- --------------------------------------------------------------------------------
SHARE PURCHASES
Fund shares are sold on days on which the New York Stock Exchange and the
Federal Reserve Wire System are open for business. Fund shares may be ordered by
telephone through procedures established with Commercial National Bank and
Deposit Guaranty National Bank (collectively, the "Banks") in connection with
qualified account relationships. Such procedures may include arrangements under
which certain accounts are swept periodically and amounts exceeding an
agreed-upon minimum are invested automatically in Fund shares. Texas residents
must purchase shares of the Fund through Federated Securities Corp. at
1-800-356-2805. The Fund reserves the right to reject any purchase request.
THROUGH THE BANKS. To place an order to purchase Fund shares, open an account
by calling Deposit Guaranty National Bank at (800) 748-8500 or Commercial
National Bank at (800) 274-1907. Information needed to establish the account
will be taken over the telephone.
Payment may be made by either check, federal funds or by debiting a customer's
account at the Banks. Purchase orders must be received by 4:00 p.m. (Eastern
time). Payment is required before 4:00 p.m. on the next business day in order to
earn dividends for that day.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $1,000. Subsequent investments may
be in any amounts of $100 or more. The Fund may waive the initial minimum
investment for employees of DGC and its affiliates from time to time.
WHAT SHARES COST
Fund shares are sold at their net asset value next determined after an order is
received, plus a sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS
A PERCENTAGE OF A PERCENTAGE OF
AMOUNT OF TRANSACTION PUBLIC OFFERING PRICE NET AMOUNT INVESTED
- ---------------------------------------------- ---------------------- -------------------
<S> <C> <C>
Less than $100,000............................ 2.00% 2.04%
$100,000 but less than $250,000............... 1.75% 1.78%
$250,000 but less than $500,000............... 1.50% 1.52%
$500,000 but less than $750,000............... 1.25% 1.27%
$750,000 but less than $1 million............. 1.00% 1.01%
$1 million but less than $2 million........... 0.50% 0.50%
$2 million or more............................ 0.25% 0.25%
</TABLE>
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; or (iii) the following
holidays: New Year's
Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving Day and
Christmas Day.
PURCHASES AT NET ASSET VALUE. Shares of the Fund may be purchased at net asset
value, without a sales charge by: the Trust Division of the Banks for funds
which are held in a fiduciary, agency, custodial, or similar capacity; Trustees
and employees of the Fund, the Banks or Federated Securities Corp. or their
affiliates and their spouses and children under 21; or any bank or investment
dealer who has a sales agreement with Federated Securities Corp. with regard to
the Fund.
SALES CHARGE REALLOWANCE. For sales of shares of the Fund, the Banks or any
authorized dealer will normally receive up to 85% of the applicable sales
charge. Any portion of the sales charge which is not paid to the Banks or
authorized dealers will be retained by the distributor. The distributor will,
periodically, uniformly offer to pay cash or promotional incentives in the form
of trips to sales seminars at luxury resorts, tickets or other items to all
dealers selling shares of the Fund. Such payments will be predicated upon the
amount of shares of the Fund that are sold by the dealer.
The sales charge for shares sold other than through the Banks or registered
broker/dealers will be retained by the distributor. The distributor may pay fees
to the Banks out of the sales charge in exchange for sales and/or administrative
services performed on behalf of the Banks' customers in connection with the
initiation of customer accounts and purchases of Fund shares.
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Fund shares through:
- quantity discounts and accumulated purchases;
- signing a 13-month letter of intent;
- using the reinvestment privilege; or
- concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table above,
larger purchases reduce the sales charge paid. The Fund will combine purchases
made on the same day by the investor, his spouse, and his children under age 21
when it calculates the sales charge. In addition, the sales charge, if
applicable, is reduced for purchases made at one time by a trustee or fiduciary
for a single trust estate or a single fiduciary account.
If an additional purchase of Fund shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns shares having a current value at the public offering price of
$90,000 and he purchases $10,000 more at the current public offering price, the
sales charge on the additional purchase according to the schedule now in effect
would be 1.75%, not 2.00%.
To receive the sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by the Banks at the time the purchase
is made that Fund shares are already owned or that purchases are being combined.
The Fund will reduce the sales charge after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $100,000 of
shares in the funds in the Trust over the next 13 months, the sales charge may
be reduced by signing a letter of intent to that effect. This letter includes a
provision for a sales charge adjustment depending on the amount actually
purchased within the 13-month period and a provision for the custodian to hold
2.00% of the total amount intended to be purchased in escrow (in shares) until
such purchase is completed.
The 2.00% held in escrow will be applied to the shareholder's account at the end
of the 13-month period unless the amount specified in the letter of intent is
not purchased. In this event, an appropriate number of escrowed shares may be
redeemed in order to realize the difference in the sales charge.
This letter of intent will not obligate the shareholder to purchase shares, but
if he does, each purchase during the period will be at the sales charge
applicable to the total amount intended to be purchased. This letter may be
dated as of a prior date to include any purchases made within the past 90 days.
REINVESTMENT PRIVILEGE. If shares in the Fund have been redeemed, the
shareholder has a one-time right, within 30 days, to reinvest the redemption
proceeds at the next-determined net asset value without any sales charge.
Federated Securities Corp. must be notified by the shareholder in writing or by
the Banks of the reinvestment in order to eliminate a sales charge. If the
shareholder redeems his shares in the Fund, there may be tax consequences.
CONCURRENT PURCHASES. For purposes of qualifying for a sales charge reduction,
a shareholder has the privilege of combining concurrent purchases of two or more
funds in the Trust, the purchase price of which includes a sales charge. For
example, if a shareholder concurrently invested $30,000 in one of the other
funds in the Trust with a sales charge and $70,000 in this Fund, the sales
charge would be reduced.
To receive this sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by the Banks at the time the
concurrent purchases are made. The Fund will reduce the sales charge after it
confirms the purchases.
SYSTEMATIC INVESTMENT PROGRAM
Once an 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 Fund shares. A shareholder may apply for participation in this
program through the Banks.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder. Share certificates are not issued unless requested
by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during the
month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly. Distribution of any realized long-term
capital gains will be made at least once every twelve months. Dividends are
automatically reinvested in additional shares of
the Fund on payment dates at the ex-dividend date net asset value without a
sales charge, unless cash payments are requested by writing to the Fund or the
Banks as appropriate.
EXCHANGING SECURITIES FOR FUND SHARES
Investors may exchange certain securities or a combination of certain securities
and cash for Fund shares. The Fund reserves the right to determine the
acceptability of securities to be exchanged. On the day securities are accepted
by the Fund, they are valued in the same manner as the Fund values its assets.
Investors wishing to exchange securities should first contact the Banks.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
DG INVESTOR SERIES
All shareholders of the Fund are shareholders of DG Investor Series.
Shareholders in the Fund have easy access to the other portfolios of DG Investor
Series.
EXCHANGING SHARES
Shareholders of the Fund may exchange shares of the Fund for shares of the other
funds in DG Investor Series. In addition, shares of the Fund may also be
exchanged for certain other funds distributed by Federated Securities Corp. that
are not advised by the Banks ("Federated Funds"). For further information on the
availability of Federated Funds for exchanges, please call Deposit Guaranty
National Bank at (800) 748-8500 or Commercial National Bank at (800) 274-1907.
Shares of funds with a sales charge may be exchanged at net asset value for
shares of other funds with an equal sales charge or no sales charge. Shares of
the funds with no sales charge acquired by direct purchase or reinvestment of
dividends on such shares may be exchanged for shares of funds with a sales
charge at net asset value plus the applicable sales charge.
When an exchange is made from a fund with a sales charge to a fund with no sales
charge, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus an exchange
of such shares for shares of a fund with a sales charge would be at net asset
value.
Prior to any exchange, the shareholder must receive a copy of the current
prospectus of the fund into which an exchange is to be effected.
The exchange privilege is available to shareholders residing in any state in
which the fund shares being acquired may legally be sold. Upon receipt of proper
instructions and all necessary supporting documents, shares submitted for
exchange will be redeemed at the next-determined net asset value. Written
exchange instruction may require a signature guarantee. Exercise of this
privilege is treated as a sale for federal income tax purposes and, depending on
the circumstances, a short or long-term capital gain or loss may be realized.
The exchange privilege may be terminated at any time. Shareholders will be
notified of the termination of the exchange privilege. A shareholder may obtain
further information on the exchange privilege by calling the Banks.
REDEEMING SHARES
- --------------------------------------------------------------------------------
Shares are redeemed at their net asset value next determined after the Banks
receive the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on Federal holidays when
wire transfers are restricted. Requests for redemption can be made by telephone
or by mail.
THROUGH THE BANKS
BY TELEPHONE. A shareholder who is a customer of one of the Banks may redeem
shares of the Fund by calling Deposit Guaranty National Bank at (800) 748-8500
or Commercial National Bank at (800) 274-1907. For orders received before 4:00
p.m. (Eastern time), proceeds will normally be wired the next day to the
shareholder's account at the Banks or a check will be sent to the address of
record. In no event will proceeds be sent more than seven days after a proper
request for redemption has been received. An authorization form permitting the
Fund to accept telephone requests must first be completed. Authorization forms
and information on this service are available from the Banks. Telephone
redemption instructions may be recorded.
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 should be utilized, such as a written request to Federated
Services Company or the Banks.
If at any time, the Fund shall determine it necessary to terminate or modify
this method of redemption, shareholders would be promptly notified.
If reasonable procedures are not followed by the Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
BY MAIL. Any shareholder may redeem Fund shares by sending a written request to
the Banks. The written request should include the shareholder's name, the Fund
name, 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 Banks 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 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 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 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 Federated Services Company 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 Federated Services Company
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.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount may take
advantage of the Systematic Withdrawal Program. Under this program, Fund shares
are redeemed to provide for periodic withdrawal payments in an amount directed
by the shareholder. Depending upon the amount of the withdrawal payments, and
the amount of dividends paid with respect to Fund shares, redemptions may
reduce, and eventually deplete, the shareholder's investment in the Fund. For
this reason, payments under this program should not be considered as yield or
income on the shareholder's investment in the Fund. To be eligible to
participate in this program, a shareholder must have an account value of at
least $10,000. A shareholder may apply for participation in this program through
the Banks. Due to the fact that shares are sold with a sales charge, it is not
advisable for shareholders to be purchasing shares of the Fund while
participating in this program.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $1,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $1,000 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.
REDEMPTION IN KIND
The Fund is obligated to redeem shares solely in cash up to $250,000 or 1% of
the Fund's net asset value, whichever is less, for any one shareholder within a
90-day period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that payments should be in kind. In such case, the Fund will pay all
or a portion of the remainder of the redemption in portfolio instruments, valued
in the same way as the Fund determines net asset value. The portfolio
instruments will be selected in a manner that the Trustees deem fair and
equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders of the Fund for vote. All shares of all
classes of each Fund in the Trust have equal voting rights, except that in
matters affecting only a particular Fund or class, only shareholders of that
Fund or class are entitled to vote. As a Massachusetts business trust, the Trust
is not required to hold annual shareholder meetings. Shareholder approval will
be sought only for certain changes in the Trust or Fund's operation and for the
election of Trustees under certain circumstances. As of April 7, 1994,
Commercial National Bank, Shreveport, Louisiana, owned approximately 3,513,501
shares (25.41%); and Deposit Guaranty National Bank, Jackson, Mississippi, owned
approximately 7,979,279 shares (57.7%), and therefore, may, for certain
purposes, be deemed to control the Fund and be able to affect the outcome of
certain matters presented for a vote of shareholders.
Trustees may be removed by the shareholders at a special meeting. A special
meeting of the shareholders for this purpose shall be called by the Trustees
upon the written request of shareholders owning at least 10% of all shares of
the Trust entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation, or instrument the Trust or its Trustees
enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust itself cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956 or
any bank or non-bank affiliate thereof from sponsoring, organizing or
controlling a registered, open-end investment company continuously engaged in
the issuance of its shares, and from issuing, underwriting, or distributing
securities in general. Such laws and regulations do not prohibit such a holding
company or bank or non-bank affiliate from acting as investment adviser,
transfer agent or custodian to such an investment company or from purchasing
shares of such a company as agent for and upon the order of their customer. The
Fund's Adviser and Sub-Adviser, Deposit Guaranty National Bank and Commercial
National Bank, respectively, are subject to such banking laws and regulations.
The Banks believe, based on the advice of counsel, that they may perform the
investment advisory services for the Fund contemplated by the advisory agreement
with the Trust and the sub-advisory agreement between the Banks without
violating the Glass-Steagall Act or other applicable banking laws or
regulations. Such counsel has pointed out, however, that changes in either
federal or state statutes and regulations relating to the permissible activities
of banks and their subsidiaries or affiliates, as well as further judicial or
administrative decisions or interpretations of present or future statutes and
regulations, could prevent the Banks from continuing to perform all or a part of
the above services for their customers and/or the Fund. In such event, changes
in the operation of the Fund may occur, including the possible alteration or
termination of any automatic or other Fund share investment and redemption
services then being provided by the Banks, and the Trustees would consider
alternative investment advisers and other means of continuing available
investment services. It is not expected that Fund shareholders would suffer any
adverse financial consequences (if another adviser and/or sub-adviser with
equivalent abilities to Deposit Guaranty National Bank and Commercial National
Bank are found) as a result of any of these occurrences.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies.
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
Trust's other portfolios, if any, will not be combined for tax purposes with
those realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions received. This applies whether dividends
are received in cash or as additional shares. The Fund will provide detailed tax
information for reporting purposes.
Shareholders are urged to consult their own tax advisers regarding the status of
their account under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund advertises its total return and yield.
Total return represents the change over a specified period of time, in the value
of an investment in the Fund 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 the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This number is then annualized using
semiannual compounding. The yield does not necessarily reflect income actually
earned by the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The performance information reflects the effect of the maximum sales load which,
if excluded, would increase the total return and yield.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
DG GOVERNMENT INCOME FUND
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ----------------------------------------------------------------- ------------
<C> <C> <S> <C>
CORPORATE BONDS--17.4%
- -------------------------------------------------------------------------------------
BANKING--1.5%
-----------------------------------------------------------------
$ 800,000 Bankers Trust New York, 4.70%, 7/1/96 $ 794,776
-----------------------------------------------------------------
1,000,000 Nationsbank Corp., 5.375%, 4/15/2000 951,970
----------------------------------------------------------------- ------------
Total 1,746,746
----------------------------------------------------------------- ------------
BUSINESS EQUIPMENT & SERVICE--1.3%
-----------------------------------------------------------------
1,500,000 International Business Machines Corp., 6.375%, 11/1/97 1,537,875
----------------------------------------------------------------- ------------
CONSUMER DURABLES--0.4%
-----------------------------------------------------------------
437,000 Eastman Kodak Co., 9.125%, (Callable 3/1/95 @ 100), 3/1/98 455,524
----------------------------------------------------------------- ------------
</TABLE>
<TABLE>
<C> <C> <S> <C>
CONSUMER NON-DURABLES--1.8%
-----------------------------------------------------------------
889,000 Anheuser-Busch Cos., 6.90%, 10/1/2002 897,561
-----------------------------------------------------------------
1,000,000 H.J. Heinz, 6.75%, 10/15/99 1,039,590
-----------------------------------------------------------------
219,000 PepsiCo, Inc., 5.625%, 7/1/95 221,269
----------------------------------------------------------------- ------------
Total 2,158,420
----------------------------------------------------------------- ------------
FINANCIAL SERVICES--1.5%
-----------------------------------------------------------------
437,000 General Motors Acceptance Corp., 9.75%,
(Callable 5/15/96 @ 100), 5/15/99 476,846
-----------------------------------------------------------------
437,000 Merrill Lynch & Co., Inc., 8.50%, 8/15/94 445,347
-----------------------------------------------------------------
437,000 Security Pacific Corp., 8.75%, 9/15/94 445,591
-----------------------------------------------------------------
437,000 TNE Funding, 9.00%, 5/1/95 458,736
----------------------------------------------------------------- ------------
Total 1,826,520
----------------------------------------------------------------- ------------
HEALTH CARE--0.8%
-----------------------------------------------------------------
1,000,000 Upjohn Co., 5.875%, 4/15/2000 994,200
----------------------------------------------------------------- ------------
RAW MATERIALS--1.2%
-----------------------------------------------------------------
889,000 DuPont (E.I.) de Nemours & Co., 6.75%, 10/15/2002 912,470
-----------------------------------------------------------------
437,000 DuPont (E.I.) de Nemours & Co., 9.15%, 4/15/2000 501,847
----------------------------------------------------------------- ------------
Total 1,414,317
----------------------------------------------------------------- ------------
</TABLE>
DG GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ----------------------------------------------------------------- ------------
<C> <C> <S> <C>
CORPORATE BONDS--CONTINUED
- -------------------------------------------------------------------------------------
RETAIL--2.2%
-----------------------------------------------------------------
$ 437,000 Sears, Roebuck & Co., 9.00%, 9/15/96 $ 471,357
-----------------------------------------------------------------
437,000 The Limited, 7.80%, 5/15/2002 473,153
-----------------------------------------------------------------
437,000 Wal-Mart, Inc., 10.875%, (Callable 8/15/95 @ 102.51), 8/15/2000 477,785
-----------------------------------------------------------------
1,200,000 Wal-Mart, Inc., 5.50%, 9/15/97 1,202,052
----------------------------------------------------------------- ------------
Total 2,624,347
----------------------------------------------------------------- ------------
SHELTER--0.4%
-----------------------------------------------------------------
437,000 Kimberly Clark Corp., 9.125%, 6/1/97 483,165
----------------------------------------------------------------- ------------
TECHNOLOGY--0.8%
-----------------------------------------------------------------
437,000 Boeing Co., 8.375%, 3/1/96 463,552
-----------------------------------------------------------------
437,000 Texas Instruments, 9.25%, 6/15/2003 506,920
----------------------------------------------------------------- ------------
Total 970,472
----------------------------------------------------------------- ------------
UTILITIES--5.5%
-----------------------------------------------------------------
1,000,000 Alabama Power Co., 6.75%, (Callable 2/1/98 @ 101.60), 2/1/2003 1,000,410
-----------------------------------------------------------------
437,000 ALLTEL Corp., 10.375%, (Callable 4/1/94 @ 106.50), 4/1/2009 467,341
-----------------------------------------------------------------
1,500,000 GTE California, 6.25%, 1/15/98 1,523,385
-----------------------------------------------------------------
1,500,000 New England Telephone & Telegraph Co., 6.25%, 12/15/97 1,548,870
-----------------------------------------------------------------
1,000,000 Pacific Gas and Electric Co., 6.25%, 3/1/2004 966,050
-----------------------------------------------------------------
1,000,000 Southern California Edison Co., 5.625%, 10/1/2002 948,450
----------------------------------------------------------------- ------------
Total 6,454,506
----------------------------------------------------------------- ------------
TOTAL CORPORATE BONDS, (IDENTIFIED COST, $20,556,022) 20,666,092
----------------------------------------------------------------- ------------
U.S. TREASURY OBLIGATIONS--72.1%
- -------------------------------------------------------------------------------------
U.S. TREASURY BONDS--16.0%
-----------------------------------------------------------------
5,250,000 7.625%, 11/15/2022 5,796,315
-----------------------------------------------------------------
9,000,000 7.125%, 2/15/2023 9,396,540
-----------------------------------------------------------------
4,000,000 6.25%, 8/15/2023 3,784,960
----------------------------------------------------------------- ------------
Total 18,977,815
----------------------------------------------------------------- ------------
</TABLE>
DG GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ----------------------------------------------------------------- ------------
<C> <C> <S> <C>
U.S. TREASURY OBLIGATIONS--CONTINUED
- -------------------------------------------------------------------------------------
U.S. TREASURY NOTES--56.1%
-----------------------------------------------------------------
$ 2,000,000 9.375%, 4/15/96 $ 2,184,360
-----------------------------------------------------------------
5,000,000 8.50%, 11/15/2000 5,714,050
-----------------------------------------------------------------
13,000,000 8.00%, 1/15/97 14,015,560
-----------------------------------------------------------------
8,000,000 6.375%, 8/15/2002 8,122,480
-----------------------------------------------------------------
7,000,000 5.75%, 8/15/2003 6,783,420
-----------------------------------------------------------------
4,000,000 5.00%, 1/31/99 3,897,480
-----------------------------------------------------------------
3,000,000 4.75%, 8/31/98 2,909,970
-----------------------------------------------------------------
10,000,000 4.625%, 12/31/94 10,043,700
-----------------------------------------------------------------
3,000,000 4.25%, 12/31/95 2,980,290
-----------------------------------------------------------------
3,000,000 4.25%, 10/31/94 3,005,610
-----------------------------------------------------------------
7,000,000 4.00%, 1/31/96 6,912,430
----------------------------------------------------------------- ------------
Total 66,569,350
----------------------------------------------------------------- ------------
TOTAL U.S. TREASURY OBLIGATIONS (IDENTIFIED COST, $85,775,731) 85,547,165
----------------------------------------------------------------- ------------
GOVERNMENT AGENCIES--2.1%
- -------------------------------------------------------------------------------------
2,000,000 Federal Farm Credit Bank, 3.64%, 8/1/94 1,997,220
-----------------------------------------------------------------
437,000 Tennessee Valley Authority, 8.25%, 10/1/94 445,801
----------------------------------------------------------------- ------------
TOTAL GOVERNMENT AGENCIES (IDENTIFIED COST, $2,468,780) 2,443,021
----------------------------------------------------------------- ------------
*REPURCHASE AGREEMENT--7.6%
- -------------------------------------------------------------------------------------
9,059,900 Cantor Fitzgerald Securities Corp., 3.40%, dated 2/28/94,
due 3/1/94 (at amortized cost) (Note 2B) 9,059,900
----------------------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST, $117,860,433) $117,716,178+
----------------------------------------------------------------- ------------
</TABLE>
* The repurchase agreement is fully collateralized by U.S. Treasury obligations
based on market prices at the date of the portfolio.
+ The cost of investments for federal tax purposes amounts to $117,860,433. The
net unrealized depreciation of investments on a federal cost basis amounts to
$144,255 which is comprised of $1,192,458 appreciation and $1,336,713
depreciation at February 28, 1994.
Note: The categories of investments are shown as a percentage of net assets
($118,695,123) at February 28, 1994.
(See Notes which are an integral part of the Financial Statements)
DG GOVERNMENT INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- -------------------------------------------------------------------------------
Investments in securities, at value (Notes 2A and 2B)
(identified and tax cost, $117,860,433) $117,716,178
- -------------------------------------------------------------------------------
Interest receivable 1,141,809
- -------------------------------------------------------------------------------
Receivable for Fund shares sold 430,263
- -------------------------------------------------------------------------------
Deferred expenses (Note 2F) 25,773
- ------------------------------------------------------------------------------- ------------
Total assets 119,314,023
- -------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------
Payable for Fund shares redeemed $576,040
- --------------------------------------------------------------------
Accrued expenses 42,860
- -------------------------------------------------------------------- --------
Total liabilities 618,900
- ------------------------------------------------------------------------------- ------------
NET ASSETS for 11,993,971 shares of beneficial interest outstanding $118,695,123
- ------------------------------------------------------------------------------- ------------
NET ASSETS CONSIST OF:
- -------------------------------------------------------------------------------
Paid-in capital $118,896,410
- -------------------------------------------------------------------------------
Unrealized appreciation (depreciation) of investments (144,255)
- -------------------------------------------------------------------------------
Accumulated distributions in excess of realized gain on investments (Note 3) (61,491)
- -------------------------------------------------------------------------------
Undistributed net investment income 4,459
- ------------------------------------------------------------------------------- ------------
Total Net Assets $118,695,123
- ------------------------------------------------------------------------------- ------------
NET ASSET VALUE and Redemption Price Per Share:
($118,695,123 / 11,993,971 shares of beneficial interest outstanding) $9.90
- ------------------------------------------------------------------------------- ------------
Computation of Offering Price:
Offering Price Per Share (100/98 of $9.90)* $10.10
- ------------------------------------------------------------------------------- ------------
</TABLE>
* See "What Shares Cost" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
DG GOVERNMENT INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED FEBRUARY 28, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------
Interest income (Note 2C) $5,799,282
- ---------------------------------------------------------------------------------
EXPENSES:
- ----------------------------------------------------------------------
Investment advisory fee (Note 5) $575,982
- ----------------------------------------------------------------------
Administrative personnel and services fees (Note 5) 123,503
- ----------------------------------------------------------------------
Trustees' fees 2,318
- ----------------------------------------------------------------------
Custodian fees 26,491
- ----------------------------------------------------------------------
Recordkeeper fees (Note 5) 51,582
- ----------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses (Note 5) 22,231
- ----------------------------------------------------------------------
Legal fees 4,094
- ----------------------------------------------------------------------
Printing and postage 6,609
- ----------------------------------------------------------------------
Auditing fees 10,532
- ----------------------------------------------------------------------
Fund share registration fees 26,531
- ----------------------------------------------------------------------
Insurance premiums 6,406
- ----------------------------------------------------------------------
Miscellaneous 4,122
- ---------------------------------------------------------------------- --------
Total expenses 860,401
- ----------------------------------------------------------------------
Deduct--
- ----------------------------------------------------------------------
Waiver of investment advisory fee (Note 5) 184,327
- ---------------------------------------------------------------------- --------
Net expenses 676,074
- --------------------------------------------------------------------------------- ----------
Net investment income 5,123,208
- --------------------------------------------------------------------------------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis)-- 863,884
- ---------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (2,189,669)
- --------------------------------------------------------------------------------- ----------
Net realized and unrealized gain (loss) on investments (1,325,785)
- --------------------------------------------------------------------------------- ----------
Change in net assets resulting from operations $3,797,423
- --------------------------------------------------------------------------------- ----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
DG GOVERNMENT INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
----------------------------
1994 1993*
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------------------------------
OPERATIONS--
- -----------------------------------------------------------------
Net investment income $ 5,123,208 $ 3,053,315
- -----------------------------------------------------------------
Net realized gain (loss) on investment transactions ($924,978 and
$1,460,734 net gain, respectively as computed for federal tax
purposes) (Note 2D) 863,884 1,460,734
- -----------------------------------------------------------------
Change in unrealized appreciation (depreciation) of investments (2,189,669) 2,045,414
- ----------------------------------------------------------------- ------------ ------------
Change in net assets resulting from operations 3,797,423 6,559,463
- ----------------------------------------------------------------- ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- -----------------------------------------------------------------
Dividends to shareholders from net investment income (5,120,294) (3,051,770)
- -----------------------------------------------------------------
Distributions to shareholders from net realized gain on
investment transactions (2,324,618) --
- -----------------------------------------------------------------
Distributions to shareholders in excess of net realized gain on
investment transactions (61,491) --
- ----------------------------------------------------------------- ------------ ------------
Change in net assets from distributions to shareholders (7,506,403) (3,051,770)
- ----------------------------------------------------------------- ------------ ------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)--
- -----------------------------------------------------------------
Proceeds from sale of shares 78,872,953 190,634,746
- -----------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
distributions in Fund shares 3,614,024 333,829
- -----------------------------------------------------------------
Cost of shares redeemed (71,518,109) (83,041,033)
- ----------------------------------------------------------------- ------------ ------------
Change in net assets from Fund share transactions 10,968,868 107,927,542
- ----------------------------------------------------------------- ------------ ------------
Change in net assets 7,259,888 111,435,235
- -----------------------------------------------------------------
NET ASSETS:
- -----------------------------------------------------------------
Beginning of period 111,435,235 --
- ----------------------------------------------------------------- ------------ ------------
End of period (including undistributed net investment income of
$4,459 and $1,545, respectively) $118,695,123 $111,435,235
- ----------------------------------------------------------------- ------------ ------------
</TABLE>
* For the period from August 3, 1992 (date of initial public investment) to
February 28, 1993.
(See Notes which are an integral part of the Financial Statements)
DG GOVERNMENT INCOME FUND
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
DG Investor Series (the "Trust") is an open-end, management investment company,
established as a Massachusetts business trust under a Declaration of Trust dated
February 7, 1992. The Trust currently consists of five portfolios. The financial
statements included herein present only those of the DG Government Income Fund
(the "Fund"), one of the portfolios of the Trust. The financial statements of
the other portfolios in the Trust are presented separately. The assets of each
portfolio are segregated and a shareholder's interest is limited to the
portfolio in which shares are held. The Declaration of Trust permits the Trust
to offer separate series of shares of beneficial interest representing interests
in separate portfolios of securities.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--Bonds and other fixed income securities are valued at the last
sale price on a national securities exchange, if available. Otherwise, they are valued on
the basis of prices furnished by independent pricing services. Short-term obligations are
ordinarily valued at the mean between bid and asked prices as furnished by an independent
pricing service. However, short-term obligations with maturities of sixty days or less
are valued at amortized cost, which approximates value. All other securities are
appraised at fair value as determined in good faith by the Board of Trustees.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry System or to
have segregated within the custodian bank's vault, all securities held as collateral in
support of repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's underlying securities to ensure the existence of a proper level of
collateral.
The Fund will only enter into repurchase agreements with banks and other recognized
financial institutions, such as broker/dealers, which are deemed by the Trust's adviser
to be creditworthy pursuant to guidelines established by the Board of Trustees
("Trustees"). Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than the
repurchase price on the sale of collateral securities.
</TABLE>
DG GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
C. INCOME--Interest income is recorded on the accrual basis. Interest income includes
interest and discount earned (net of premium) on short-term obligations, and interest
earned on all other debt securities including original issue discount as required by the
Internal Revenue Code (the "Code"). Dividends to shareholders and capital gain
distributions, if any, are recorded on the ex-dividend date.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Code
applicable to regulated investment companies and to distribute to shareholders each year
all of its net taxable income, including any net realized gain on investments.
Accordingly, no provision for federal tax is necessary. Additionally, net capital losses
of $61,094 attributable to security transactions incurred after October 31, 1993, are
treated as arising on March 1, 1994, the first day of the Fund's next taxable year.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or
delayed delivery transactions. To the extent the Fund engages in such transactions, it
will do so for the purpose of acquiring portfolio securities consistent with its
investment objectives and policies and not for the purpose of investment leverage. The
Fund will record a when-issued security and the related liability on the trade date.
Until the securities are received and paid for, the Fund will maintain security positions
such that sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis are marked to
market daily and begin earning interest on the settlement date.
F. DEFERRED EXPENSES--The costs incurred by the Fund with respect to the registration of its
shares in its first fiscal year, excluding the initial expense of registering the shares,
have been deferred and are being amortized using the straight-line method over a period
of five years from the Fund's commencement date.
G. OTHER--Investment transactions are accounted for on the date of the transaction.
</TABLE>
(3) DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly to all shareholders invested in the Fund
on the record date. Dividends are paid from the net investment income of the
Fund. Net investment income consists of all interest received by the Fund less
its expenses. Capital gains realized by the Fund, if any, are distributed at
least once every twelve months.
The amounts shown in the financial statements for net realized gain on
investment transactions for the fiscal year ended February 28, 1994, differ from
those determined for tax purposes because of certain timing differences. This
resulted in distributions to shareholders in excess of net realized gain on
investment transactions. These distributions do not represent a return of
capital for federal income tax purposes.
DG GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
(4) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
-------------------------
1994 1993*
---------- ----------
<S> <C> <C>
- -------------------------------------------------------------------
Shares outstanding, beginning of period 10,868,075 --
- -------------------------------------------------------------------
Shares sold 7,738,340 19,116,439
- -------------------------------------------------------------------
Shares issued to shareholders in payment of distributions in Fund
shares 355,836 32,772
- -------------------------------------------------------------------
Shares redeemed (6,968,280) (8,281,136)
- ------------------------------------------------------------------- ---------- ----------
Shares outstanding, end of period 11,993,971 10,868,075
- ------------------------------------------------------------------- ---------- ----------
</TABLE>
* For the period from August 3, 1992 (date of initial public investment) to
February 28, 1993.
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Deposit Guaranty National Bank, the Trust's investment adviser (the "Adviser"),
receives for its services an annual investment advisory fee equal to 0.60 of 1%
of the Fund's average daily net assets. The Adviser may voluntarily choose to
waive a portion of its fee or reimburse certain operating expenses of the Fund
in excess of limitations imposed by certain states. Under the terms of a sub-
advisory agreement between the Adviser and the Trust Division of Commercial
National Bank, Commercial National Bank receives an annual fee from the Adviser
equal to 0.25 of 1% of the Fund's average daily net assets. In addition,
Commercial National Bank may voluntarily choose to reduce its compensation. For
the year ended February 28, 1994, Commercial National Bank earned a sub-advisory
fee of $239,992, all of which was voluntarily waived.
Federated Administrative Services ("FAS") provides the Trust certain
administrative personnel and services. The fee is based on the level of average
aggregate net assets of the Trust for the period. FAS may voluntarily choose to
waive a portion of its fee.
Organization expenses of $21,681 were initially borne by FAS. The Fund has
agreed to reimburse FAS for the organization expenses initially borne by FAS
during the five year period following the date the Fund became effective. For
the period ended February 28, 1994, the Fund paid $1,197 pursuant to this
agreement.
Federated Services Company ("FSC") is the Fund's transfer agent and dividend
disbursing agent. It also provides certain accounting and recordkeeping services
with respect to the Fund's portfolio of investments.
Certain Officers and Trustees of the Trust are Officers and Trustees of FAS and
Federated Services Company.
DG GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
(6) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended February 28, 1994, were as follows:
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------
PURCHASES $ 52,464,514
- ------------------------------------------------------------------------------ ------------
SALES $ 44,653,629
- ------------------------------------------------------------------------------ ------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Trustees and Shareholders
DG INVESTOR SERIES:
We have audited the statement of assets and liabilities, including the portfolio
of investments, of the DG Government Income Fund (a portfolio within DG Investor
Series) as of February 28, 1994, and the related statement of operations for the
year then ended, the statements of changes in net assets and the financial
highlights, which is presented on page 2 of this prospectus, for the year ended
February 28, 1994 and period from August 3, 1992 (date of initial public
investment) to February 28, 1993. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and the financial highlights. Investment securities held in custody
are confirmed to us by the custodian. As to securities purchased and sold but
not received or delivered, we request confirmations from brokers, and where
replies are not received, we carry out other appropriate auditing procedures. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of the
DG Government Income Fund at February 28, 1994, and the results of its
operations for the year then ended, the changes in its net assets and the
financial highlights for the year ended February 28, 1994 and the period from
August 3, 1992 to February 28, 1993, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK
Pittsburgh, Pennsylvania
April 7, 1994
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
DG Government Federated Investors Tower
Income Fund Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Investment Adviser
Deposit Guaranty National Bank P.O. Box 1200
Jackson, Mississippi 39215-1200
- ------------------------------------------------------------------------------------------------
Sub-Adviser
Commercial National Bank P.O. Box 21119
Shreveport, Louisiana 71152
- ------------------------------------------------------------------------------------------------
Custodian
State Street Bank and P.O. Box 1713
Trust Company Boston, Massachusetts 02105
- ------------------------------------------------------------------------------------------------
Transfer Agent, Dividend Disbursing Agent, and
Shareholder Servicing 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 2101 L Street, N.W.
Washington, DC 20037
- ------------------------------------------------------------------------------------------------
Independent Auditors
KPMG Peat Marwick One Mellon Bank Center
Pittsburgh, Pennsylvania 15219
- ------------------------------------------------------------------------------------------------
</TABLE>
DG
GOVERNMENT
INCOME FUND
- --------------------------------------------------------------------------------
PROSPECTUS
A Diversified Portfolio of
DG Investor Series,
an Open-End Management
Investment Company
Deposit Guaranty
National Bank
Jackson, MS
Commercial
National Bank
Shreveport, LA
APRIL 30, 1994
- --------------------------------------------------------------------------------
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
2061002A (4/94)
The shares offered by this prospectus are not deposits or obligations of Deposit
Guaranty National Bank or Commercial National Bank, are not endorsed or
guaranteed by Deposit Guaranty National Bank or Commercial National Bank, and
are not insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other government agency. Investment
in these shares involves investment risks including the possible loss of
principal.
DG GOVERNMENT INCOME FUND
(A PORTFOLIO OF DG INVESTOR SERIES)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus for
DG Government Income Fund
(the "Fund") dated April 30, 1994. This Statement is not a prospectus itself. To
receive a copy of the prospectus, write or call the Fund.
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
Statement dated April 30, 1994
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------------
Types of Investments 1
Mortgage-Backed and
Asset-Backed Securities Risks 1
Option Transactions 1
Repurchase Agreements 2
Reverse Repurchase Agreements 2
When-Issued and Delayed Delivery
Transactions 3
Lending of Portfolio Securities 3
Portfolio Turnover 3
Investment Limitations 3
DG INVESTOR SERIES MANAGEMENT 5
- ---------------------------------------------------------------
Officers and Trustees 5
The Funds 7
Fund Ownership 7
Trustee Liability 7
INVESTMENT ADVISORY SERVICES 8
- ---------------------------------------------------------------
Adviser to the Fund 8
Advisory Fees 8
Sub-Adviser to the Fund 8
Sub-Advisory Fees 8
ADMINISTRATIVE SERVICES 8
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 9
- ---------------------------------------------------------------
PURCHASING SHARES 9
- ---------------------------------------------------------------
Distribution Plan 9
Conversion to Federal Funds 10
DETERMINING NET ASSET VALUE 10
- ---------------------------------------------------------------
Determining Market Value of Securities 10
EXCHANGE PRIVILEGE 10
- ---------------------------------------------------------------
Requirements for Exchange 10
Making an Exchange 10
REDEEMING SHARES 10
- ---------------------------------------------------------------
Redemption in Kind 10
TAX STATUS 11
- ---------------------------------------------------------------
The Fund's Tax Status 11
Shareholders' Tax Status 11
TOTAL RETURN 11
- ---------------------------------------------------------------
YIELD 11
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 11
- ---------------------------------------------------------------
APPENDIX 13
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
The Fund is a portfolio in DG Investor Series (the "Trust") which was
established as a Massachusetts business trust under a Declaration of Trust dated
February 7, 1992.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is current income. This investment objective
cannot be changed without approval of shareholders.
TYPES OF INVESTMENTS
The Fund invests primarily in a portfolio of government securities. The
investment portfolio includes the following securities:
- - U.S. government securities, including Treasury bills, notes, bonds, and
securities issued by agencies and instrumentalities of the U.S. government;
- - mortgage-backed securities;
- - corporate debt securities rated within the three highest categories by a
nationally recognized statistical rating organization, including bonds, notes
and debentures;
- - asset-backed securities; and
- - bank instruments.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES RISKS
Mortgage-backed and asset-backed securities generally pay back principal and
interest over the life of the security. At the time the Fund reinvests the
payments and any unscheduled prepayments of principal received, the Fund may
receive a rate of interest which is actually lower than the rate of interest
paid on these securities ("prepayment risks"). Mortgage-backed and asset-backed
securities are subject to higher prepayment risks than most other types of debt
instruments with prepayment risks because the underlying mortgage loans or the
collateral supporting asset-
backed securities may be prepaid without penalty or premium. Prepayment risks on
mortgaged-backed securities tend to increase during periods of declining
mortgage interest rates because many borrowers refinance their mortgages to take
advantage of the more favorable rates. Prepayments on mortgage-backed securities
are also affected by other factors, such as the frequency with which people sell
their homes or elect to make unscheduled payments on their mortgages. Although
asset-backed securities generally are less likely to experience substantial
prepayments than are mortgage-backed securities, certain of the factors that
affect the rate of prepayments on mortgage-backed securities also affect the
rate of prepayments on asset-backed securities.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of asset-backed securities backed by
motor vehicle installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If the servicer
sells these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state and is
then reregistered because the owner and obligor moves to another state, such
reregistration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities.
OPTION TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of the
Fund, the Fund may attempt to hedge all or a portion of its portfolio through
the purchase of put options on portfolio securities and listed put options on
financial futures contracts for portfolio securities. The Fund may also write
covered call options on its 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 may be closed out only on an exchange which provides a
secondary market for an option of the same series.
- --------------------------------------------------------------------------------
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts.
These options will be used only to protect portfolio securities against
decreases in value resulting from market factors such as an anticipated
increase in interest rates.
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of instrument called for in
the contract ("going short") and the buyer who agrees to take delivery of
the instrument ("going long") at a certain time in the future. Financial
futures contracts call for the delivery of particular debt instruments
issued or guaranteed by the U.S. Treasury or by specified agencies or
instrumentalities of the U.S. government. If the Fund could enter into
financial futures contracts directly to hedge its holdings of fixed
income securities, it would enter into contracts to deliver securities at
a predetermined price (i.e., "go short") to protect itself against the
possibility that the prices of its fixed income securities may decline
during the Fund's anticipated holding period.
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. Generally, if
the hedged portfolio securities decrease in value during the term of an
option, the related futures contracts will also decrease in value and the
option will increase in value. In such an event, the Fund will normally
close out its option by selling an identical option. If the hedge is
successful, the proceeds received by the Fund upon the sale of the second
option will be large enough to offset both the premium paid by the Fund
for the original option plus the realized decrease in value of the hedged
securities.
Alternately, 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.
Currently, the Fund will only enter into futures contracts in order to
exercise put options in its portfolio. 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.
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
The Fund may also write covered call options to generate income. As
writer of a call option, the Fund has the obligation upon exercise of the
option during the option period to deliver the underlying security upon
payment of the exercise price.
The Fund may only sell listed 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 such additional consideration).
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. To
the extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are found by the Fund's adviser to
be creditworthy pursuant to guidelines established by the Board of Trustees
("Trustees").
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.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
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-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The Fund engages in
when-issued and delayed delivery transactions only for the purpose of acquiring
portfolio securities consistent with the Fund's investment objective and
policies, not for investment leverage.
These transactions are made to secure what is considered to be an advantageous
price and 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 at the trade date. These securities are marked to
market daily and maintained until the transaction is settled. The Fund may
engage in these transactions to an extent that would cause the segregation of an
amount up to 20% of the value of its total assets.
During the current year, the Fund does not anticipate investing more than 10% of
its total assets in when-issued and delayed delivery transactions.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of short-term
profits, securities in the portfolio will be sold whenever the investment
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 investment adviser does not anticipate that the Fund's portfolio
turnover rate will exceed 100%. For the year ended February 28, 1994 and for the
period from August 3, 1992 (date of initial public investment) to February 28,
1993, the Fund's portfolio turnover rates were 49% and 78%, respectively.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of securities.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money directly or through reverse repurchase agreements in amounts
up to one-third of the value of its total assets including the amount
borrowed. The Fund will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure or to facilitate management of the
portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Fund will not purchase any securities while
borrowings in excess of 5% of the value of its total assets are
outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge or hypothecate any assets, except to
secure permitted borrowings. In those cases, it may pledge assets having
a market value not exceeding the lesser of the dollar amounts borrowed or
15% of the value of total assets of the Fund at the time of the pledge.
- --------------------------------------------------------------------------------
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of its assets, the Fund will not
purchase the securities of any issuer (other than cash, cash items, or
securities issued or guaranteed by the U.S. government, 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. Also,
the Fund will not purchase more than 10% of the outstanding voting
securities of any one issuer.
UNDERWRITING
The Fund will not underwrite any issue of securities except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objective, policies, and limitations.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate including limited partnership
interests in real estate, although it may invest in securities secured by
real estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not buy or sell commodities. However, the Fund may purchase
put options on portfolio securities and on financial futures contracts.
In addition, the Fund reserves the right to hedge the portfolio by
entering into financial futures contracts and to sell calls on financial
futures contracts.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except that it may purchase or
hold corporate or government 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 the Trust's Declaration of Trust, or
lend portfolio securities valued at not more than 5% of its total assets
to broker/dealers.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
RESTRICTED SECURITIES
The Fund will not invest more than 5% of the value of its total assets in
securities subject to restrictions on resale under the Securities Act of
1933, except for certain restricted securities which meet criteria for
liquidity as established by the Trustees.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement more than seven days after notice and certain restricted
securities not determined by the Trustees to be liquid.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or its investment adviser owning
individually more than 1/2 of 1% of the issuer's securities together own
more than 5% of the issuer's securities.
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.
WRITING COVERED PUT AND CALL OPTIONS AND PURCHASING PUT OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them
in deliverable form without further payment or after segregating cash in
the amount of any further payment. When writing put options, the Fund
will segregate cash or U.S. Treasury obligations with a value equal to or
greater than the exercise price of the underlying securities. The Fund
will not purchase put options on securities unless the securities are
held in the Fund's portfolio.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, will not invest more than 5% of its total assets in any
- --------------------------------------------------------------------------------
one investment company, or invest more than 10% of its total assets in
investment companies in general. The Fund will purchase securities of
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, or
acquisition of assets. It should be noted that investment companies incur
certain expenses such as management fees, and therefore, any investment
by a Fund in shares of another investment company would be subject to
such duplicate expenses. The Fund will invest in other investment
companies primarily for the purpose of investing its short-term cash on a
temporary basis. The adviser will waive its investment advisory fee on
assets invested in securities of open-end investment companies.
INVESTING IN MINERALS
The Fund will not purchase or sell oil, gas, or other mineral exploration
or development programs, or leases.
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.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items."
DG INVESTOR SERIES MANAGEMENT
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, principal occupations,
and present positions, including any affiliation with Deposit Guaranty National
Bank and Commercial National Bank, Federated Investors, Federated Securities
Corp., and Federated Administrative Services, Federated Services Company and the
Funds (as defined below).
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
John F. Donahue+* Chairman and Trustee Chairman and Trustee, Federated Investors; Chairman and Trustee, Federated
Federated Investors Advisers, Federated Management, and Federated Research; Director, AEtna Life
Tower and Casualty Company; Chief Executive Officer and Director, Trustee, or
Pittsburgh, PA Managing General Partner of the Funds; formerly, Director, The Standard Fire
Insurance Company. Mr. Donahue is the father of J. Christopher Donahue, Vice
President of the Trust.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
John T. Conroy, Jr. Trustee President, Investment Properties Corporation; Senior Vice-President, John R.
Wood/PC Commercial Wood and Associates, Inc., Realtors; Northgate Village Development
Department Corporation; General Partner President, or Trustee in private real estate
John R. Wood and Associates, ventures in Southwest Florida; Director, Trustee, or Managing General
Inc., Partner of the Funds; formerly, President Naples Property Management, Inc.;.
Realtors
3255 Tamiami Trail North
Naples, FL
- --------------------------------------------------------------------------------------------------------------------------------
William J. Copeland Trustee Director and Member of the Executive Committee, Michael Baker, Inc.;
One PNC Plaza-23rd Floor Director, Trustee, or Managing General Partner of the Funds; formerly, Vice
Pittsburgh, PA Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan
Homes, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
James E. Dowd Trustee Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
571 Hayward Mill Road Trustee, or Managing General Partner of the Funds; formerly, Director, Blue
Concord, MA Cross of Massachusetts, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
Lawrence D. Ellis, M.D. Trustee Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
3471 Fifth Avenue Hospitals; Clinical Professor of Medicine and Trustee, University of
Suite 1111 Pittsburgh; Director, Trustee, or Managing General Partner of the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Edward L. Flaherty, Jr.+ Trustee Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat 'N Park
5916 Penn Mall Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director, Trustee,
Pittsburgh, PA or Managing General Partner of the Funds; formerly, Counsel, Horizon
Financial, F.A., Western Region.
- --------------------------------------------------------------------------------------------------------------------------------
Edward C. Gonzales* President, Vice President, Treasurer, and Trustee, Federated Investors; Vice President
Federated Investors Treasurer, and Treasurer, Federated Advisers, Federated Management, and Federated
Tower and Trustee Research; Executive Vice President, Treasurer, and Director, Federated
Pittsburgh, PA Securities Corp.; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee of some of the Funds; Vice President and Treasurer of the
Funds.
- --------------------------------------------------------------------------------------------------------------------------------
Peter E. Madden Trustee Consultant; State Representative, Commonwealth of Massachusetts; Director,
225 Franklin Street Trustee, or Managing General Partner of the Funds; formerly, President,
Boston, MA State Street Bank and Trust Company and State Street Boston Corporation and
Trustee, Lahey Clinic Foundation, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
Gregor F. Meyer Trustee Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, Inc.;
5916 Penn Mall Director, Eat 'N Park Restaurants, Inc.; Director, Trustee, or Managing
Pittsburgh, PA General Partner of the Funds; formerly, Vice Chairman, Horizon Financial,
F.A.
- --------------------------------------------------------------------------------------------------------------------------------
Wesley W. Posvar Trustee Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
1202 Cathedral of Endowment for International Peace, RAND Corporation, Online Computer Library
Learning Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak Management
University of Pittsburgh Center; Director, Trustee, or Managing General Partner of the Funds;
Pittsburgh, PA President Emeritus, University of Pittsburgh; formerly, Chairman, National
Advisory Council for Environmental Policy & Technology.
- --------------------------------------------------------------------------------------------------------------------------------
Marjorie P. Smuts Trustee Public relations/marketing consultant; Director, Trustee, or Managing
4905 Bayard Street General Partner of the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
J. Christopher Donahue Vice President President and Trustee, Federated Investors; Trustee, Federated Advisers,
Federated Investors Federated Management, and Federated Research; President and Trustee,
Tower Federated Administrative Services; Trustee, Federated Services Company;
Pittsburgh, PA 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 Trustee of the Trust.
- --------------------------------------------------------------------------------------------------------------------------------
Richard B. Fisher Vice President Executive Vice President and Trustee, Federated Investors; Chairman and
Federated Investors Director, Federated Securities Corp.; President or Vice President of the
Tower Funds; Director or Trustee of some of the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
John W. McGonigle Vice President Vice President, Secretary, General Counsel, and Trustee, Federated
Federated Investors and Secretary Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Tower Federated Management, and Federated Research; Trustee, Federated Services
Pittsburgh, PA Company; Executive Vice President, Secretary, and Trustee, Federated
Administrative Services; Director and Executive Vice President, Federated
Securities Corp.; Vice President and Secretary of the Funds.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Ronald M. Petnuch Vice President Vice President, Federated Administrative Services; Vice President and
Federated Investors and Assistant Assistant Treasurer of some of the Funds; formerly Associate Corporate
Tower Treasurer Counsel of Federated Investors.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
John A. Staley, IV Vice President Vice President and Trustee, Federated Investors; Executive Vice President,
Federated Investors Federated Securities Corp.; President and Trustee, Federated Advisers,
Tower Federated Management, and Federated Research; Vice President of the Funds;
Pittsburgh, PA Director, Trustee, or Managing General Partner of some of the Funds;
formerly, Vice President, The Standard Fire Insurance Company and President
of its Federated Research Division.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* This Trustee is deemed to be an "interested person" of the Trust as defined in
the Investment Company Act of 1940.
+ Member of the Trust's Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
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 Intermediate Government Trust; Federated
Master Trust; Federated Municipal Trust; Federated Short-Intermediate Government
Trust; Federated Short-Term U.S. Government Trust; Federated Stock Trust;
Federated Tax-Free Trust; Federated U.S. Government Bond Fund; First Priority
Funds; Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S. Government
Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.;
Fund for U.S. Government Securities, Inc.; Government Income Securities, Inc.;
High Yield Cash Trust; Insight Institutional Series, Inc.; Insurance Management
Series; Intermediate Municipal Trust; International Series, Inc.; Investment
Series Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.;
Liberty High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.;
Liberty U.S. Government Money Market Trust; Liberty Term Trust, Inc.-1999;
Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Mark Twain
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; Signet Select
Funds; Star Funds; The Starburst Funds; The Starburst Funds II; Stock and Bond
Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
Trademark Funds; Trust for Financial Institutions; Trust For Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of April 7, 1994, the following shareholder of record owned 5% or more of the
outstanding shares of the Fund: Deposit Guaranty National Bank, Jackson,
Mississippi, owned approximately 1,678,959 shares (12.14%).
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will only be liable
for their own willful defaults. If reasonable care has been exercised in the
selection of officers, agents, employees, or investment advisers, a Trustee
shall not be liable for any neglect or wrong doing of any such person. However,
they are not protected against any liability to which they would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND
The Fund's investment adviser is Deposit Guaranty National Bank (the "Adviser"),
a subsidiary of Deposit
Guaranty Corp.
The Adviser shall not be liable to the Trust, the Fund 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 Trust.
Because of the internal controls maintained by Deposit Guaranty National Bank
and Commercial National Bank, the Fund's sub-adviser, to restrict the flow of
non-public information, Fund investments are typically made without any
knowledge of Deposit Guaranty National Bank's or its affiliates' lending
relationships with an issuer.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus.
For the year ended February 28, 1994 and for the period from August 3, 1992
(date of initial public investment) to February 28, 1993, the Fund's Adviser
earned $575,982 and $283,853, respectively, of which $184,327 and $186,193,
respectively, were voluntarily waived.
SUB-ADVISER TO THE FUND
The Fund's sub-adviser is Commercial National Bank (the "Sub-Adviser"), a
subsidiary of Deposit Guaranty Corp.
SUB-ADVISORY FEES
For its sub-advisory services, the Sub-Adviser receives an annual sub-advisory
fee as described in the prospectus.
For the year ended February 28, 1994 and for the period from August 3, 1992
(date of initial public investment), to February 28, 1993, the Sub-Adviser
earned sub-advisory fees of $239,992 and $118,272, respectively, all of which
were voluntarily waived.
STATE EXPENSE LIMITATIONS
The Adviser has 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 fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2 1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1 1/2% per
year of the remaining average net assets, the Adviser will reimburse the
Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this expense
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. For the year ended February 28, 1994 and for the period from August
3, 1992 (date of initial public investment) to February 28, 1993, the Fund
incurred administrative services fees of $123,503 and $65,895, respectively, of
which $0 and $9,137, respectively, were voluntarily waived.
John A. Staley, IV, an officer of the Fund, holds approximately 15% 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. For the fiscal years ended February 28, 1994, 1993, and
1992, Federated Administrative Services paid approximately $159,222, $179,920
and $202,532, respectively, for services provided by Commercial Data Services,
Inc.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Trustees.
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the Adviser
and may include:
- - advice as to the advisability of investing in securities;
- - security analysis and reports;
- - economic studies;
- - industry studies;
- - receipt of quotations for portfolio evaluations; and
- - similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the Adviser in advising the
Fund and other accounts. To the extent that receipt of these services may
supplant services for which the Adviser or its affiliates might otherwise have
paid, it would tend to reduce their expenses.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Shares of the Fund are sold at their net asset value next determined after an
order is received, plus a sales charge, on days the New York Stock Exchange and
Federal Reserve Wire System are open for business. The procedure for purchasing
shares is explained in the prospectus under "Investing in the Fund."
DISTRIBUTION PLAN
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule 12b-1
which was promulgated by the Securities and Exchange Commission pursuant to the
Investment Company Act of 1940. The Plan provides for payment of fees to
Federated Securities Corp. to finance any activity which is principally intended
to result in the sale of the Fund's shares subject to the Plan. Such activities
may include the advertising and marketing of shares of the Fund; preparing,
printing, and distributing prospectuses and sales literature to prospective
shareholders, brokers, or administrators; and implementing and operating the
Plan. Pursuant to the Plan, Federated Securities Corp. may pay fees to brokers
for distribution and administrative services and to administrators for
administrative services provided to the Fund. The administrative services are
provided by a representative who has knowledge of the shareholder's particular
circumstances and goals, and include, but are not limited to: communicating
account openings; communicating account closings; entering purchase
transactions; entering redemption transactions; providing or arranging to
provide accounting support for all transactions, wiring funds and receiving
funds for purchases and redemptions of Fund shares, confirming and reconciling
all transactions, reviewing the activity in
Fund accounts and providing training and supervision of broker personnel;
posting and reinvesting dividends to
Fund accounts or arranging for this service to be performed by the Fund's
transfer agent; and maintaining and
distributing current copies of prospectuses and shareholder reports to the
beneficial owners of Fund shares and
prospective shareholders.
The Trustees expect that the adoption of the Plan will result in the sale of a
sufficient number of shares so as to allow the Fund to achieve economic
viability. It is also anticipated that an increase in the size of the Fund will
facilitate more efficient portfolio management and assist the Fund in seeking to
achieve its investment objective.
For the year ended February 28, 1994 and for the period from August 3, 1992
(date of initial public investment), to February 28, 1993, brokers and
administrators (financial institutions) received no fees pursuant to the Plan.
- --------------------------------------------------------------------------------
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. Deposit Guaranty National Bank
and Commercial National Bank (the "Banks") as well as Federated Services Company
act as the shareholder's agent in depositing checks and converting them to
federal funds.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value generally changes each day. The days on which net asset
value is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market value of the Fund's portfolio securities are determined as follows:
- - for equity securities and bonds and other fixed income securities, according
to the last sale price on a national securities exchange, if available;
- - in the absence of recorded sales of equity securities, according to the mean
between the last closing bid and asked prices, and for bonds and other fixed
income securities as determined by an independent pricing service;
- - for unlisted equity securities, the latest bid prices;
- - for short-term obligations, according to the mean between bid and asked prices
as furnished by an independent pricing service or for short-term obligations
with remaining maturities of 60 days or less at the time of purchase, at
amortized cost; or
- - for all other securities, at fair value as determined in good faith by the
Trustees.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
REQUIREMENTS FOR EXCHANGE
Before the exchange, the shareholder must receive a prospectus of the fund for
which the exchange is being made. This privilege is available to shareholders
resident in any state in which the 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 shares of the
other fund.
Further information on the exchange privilege and prospectuses may be obtained
by calling the Fund.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions may
require a signature guarantee.
REDEEMING SHARES
- --------------------------------------------------------------------------------
Shares of the Fund are redeemed at the next computed net asset value after the
Banks receive the redemption request. Redemption procedures are explained in the
prospectus under "Redeeming Shares." Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on federal holidays when
wire transfers are restricted.
Although State Street Bank does not charge for telephone redemptions, it
reserves the right to charge a fee for the cost of wire-transferred redemptions
of less than $5,000.
REDEMPTION IN KIND
Although the Fund intends to redeem shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the Fund's portfolio.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
The Fund has elected to be governed by Rule 18f-1 of the Investment Company Act
of 1940 under which the Fund is obligated to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period.
TAX STATUS
- --------------------------------------------------------------------------------
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
- - derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
- - 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.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as cash or
additional shares. No portion of any income dividend paid by the Fund is
eligible for the dividends received deduction available to corporations. These
dividends, and any short-term capital gains, are taxable as ordinary income.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's average annual total return for the year ended February 28, 1994 and
for the period from August 3, 1992 (date of initial public investment) to
February 28, 1994 were 2.45% and 5.64% respectively. The average annual total
return for the Fund is the average compounded rate of return for a given period
that would equate a $1,000 initial investment to the ending redeemable value of
that investment. The ending redeemable value is computed by multiplying the
number of shares owned at the end of the period by the maximum offering price
per share at the end of the period. The number of shares owned at the end of the
period is based on the number of shares purchased at the beginning of the period
with $1,000, less any applicable sales load, adjusted over the period by any
additional shares, assuming the quarterly reinvestment of all dividends and
distributions.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for the thirty-day period ended February 28, 1994 was 4.36%.
The yield for the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the net asset value per share of the Fund on the
last day of the period. This value is then annualized using semi-annual
compounding. This means that the amount of income generated during the
thirty-day period is assumed to be generated each month over a
12-month period and is reinvested every six months. The yield does not
necessarily reflect income actually earned by the Fund because of certain
adjustments required by the Securities and Exchange Commission and, therefore,
may not correlate to the dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the Fund,
performance will be reduced for those shareholders paying those fees.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The Fund's performance depends upon such variables as:
- - portfolio quality;
- - average portfolio maturity;
- - type of instruments in which the portfolio is invested;
- - changes in interest rates and market value of portfolio securities;
- - changes in the Fund's expenses; and
- - various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and net asset value per share fluctuate daily. Both net earnings and net asset
value per share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
- --------------------------------------------------------------------------------
- - LEHMAN BROTHERS GOVERNMENT/CORPORATE (TOTAL) 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 Shearson Lehman Brothers, Inc., the index calculates total
returns for one month, three month, twelve month, and ten year periods and
year-to-date.
- - LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all income dividends and capital gains distributions, if any.
From time to time, the Fund will quote its Lipper ranking in the "Short-term
U.S. government funds" category in advertising and sales literature.
Advertisements may quote performance information which does not reflect its
effect of the sales load.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD AND POOR'S CORPORATION CORPORATE BOND RATINGS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's
Corporation. 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.
NR--NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS
AAA--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
NR--Not rated by Moody's.
Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
NR--NR indicates that Fitch does not rate the specific issue.
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category.
STANDARD AND POOR'S CORPORATION COMMERCIAL PAPER RATINGS
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
- --------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
PRIME-1--Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
- - Leading market positions in well established industries.
- - High rates of return on funds employed.
- - Conservative capitalization structure with moderate reliance on debt and ample
asset protection.
- - Broad margins in earning coverage of fixed financial charges and high internal
cash generation.
- - Well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2--Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING
FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
2061002B (4/94)
DG GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
ANNUAL REPORT FOR FISCAL YEAR ENDED FEBRUARY 28, 1994
INVESTMENT REVIEW
Bond yields rose across the entire maturity spectrum for the six-month
period ended February 28, 1994. The declining market value of bonds
associated with this rate increase was disappointing to bondholders since
bond values had increased in the prior six-month period.
The rate increase was primarily attributed to evidence of a
strengthening economy and the possibility that inflation might accompany
it. A strong fourth quarter Gross Domestic Product report and a tightening
of the Federal Reserve Funds rate added to the rate pressure in the short
end of the market and contributed to market forecasts of higher rates in
the future.
For the fiscal year ended February 28, 1994 the Fund's total return
was 4.55% (2.45% taking into account the sales load) compared to the Lehman
Brothers Government/Corporate Index return of 5.71%.*+ The net assets of
the Fund increased by 6% during this period. Although the Fund purchased
longer term treasury securities, the additional durations and maturities
associated with these purchases were offset by purchases of shorter term
securities. This barbell strategy is being utilized in anticipation of a
flattening yield curve. Our duration and maturity continues to be shorter
than the benchmark.
* This index is unmanaged.
+ Performance quoted represents past performance. Investment return and
principal value will fluctuate, so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
PERFORMANCE COMPARISON
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 INVESTMENT
IN DG GOVERNMENT INCOME FUND AND LEHMAN BROTHERS
GOVERNMENT/CORPORATE TOTAL INDEX+.
Graphic representation B1 omitted. See Appendix.
<TABLE>
<CAPTION>
DG LIMITED MERRILL LYNCH
TERM GOV- 1-3 YEAR U.S.
MEASUREMENT PERIOD ERNMENT IN- TREASURY IN-
(FISCAL YEAR COVERED) COME DEX
<S> <C> <C>
8/1/92 9800 10000
2/28/93 10427 10674
2/28/94 10905 11285
</TABLE>
Past performance is not predictive of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
This annual report incorporates by reference and accompanies the prospectus
dated April 30, 1994.
* Reflects performance of DG Government Income Fund from August 1, 1992
through February 28, 1994.
** Represents a hypothetical investment of $10,000 in DG Government Income
Fund, after deducting the maximum sales charge of 2.00% ($10,000 investment
minus $200 sales charge = $9,800). The Fund's performance assumes the
reinvestment of all dividends and distributions. The Lehman Brothers
Government/Corporate Total Index is adjusted to reflect reinvestment of
dividends of securities in the index.
+ The Lehman Brothers Government/Corporate Total Index is not adjusted to
reflect sales loads, expenses, or other fees that the SEC requires to be
reflected in the Fund's performance.
++ Reflects maximum applicable fees.
FEDERATED SECURITIES CORP.
(LOGO)
- --------------------------------------------------------------------------------
Distributor
2061002ARS (4/94)
DG EQUITY FUND
(A PORTFOLIO OF DG INVESTOR SERIES)
PROSPECTUS
The shares of DG Equity Fund (the "Fund") offered by this prospectus represent
interests in a diversified portfolio of DG Investor Series (the "Trust"), an
open-end, management investment company (a mutual fund).
The primary investment objective of the Fund is to provide long-term capital
appreciation. Current income is a secondary objective. The Fund pursues its
investment objectives by investing primarily in a professionally managed,
diversified portfolio of equity securities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF DEPOSIT
GUARANTY NATIONAL BANK OR COMMERCIAL NATIONAL BANK, ARE NOT ENDORSED OR
GUARANTEED BY DEPOSIT GUARANTY NATIONAL BANK OR COMMERCIAL NATIONAL BANK, AND
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES
INVOLVES INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated April 30,
1994, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference in this
prospectus. You may request a copy of the Statement of Additional Information
free of charge, obtain other information, or make inquiries about the Fund by
writing or calling the Fund.
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 April 30, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Repurchase Agreements 4
Securities of Foreign Issuers 4
Put and Call Options 4
Futures Contracts and Options on
Futures 5
Risks 5
When-Issued and Delayed Delivery
Transactions 5
Lending of Portfolio Securities 5
Temporary Investments 5
Investment Limitations 6
DG INVESTOR SERIES INFORMATION 6
- ------------------------------------------------------
Management of the Trust 6
Board of Trustees 6
Investment Adviser 6
Advisory Fees 6
Adviser's Background 7
Sub-Adviser 7
Sub-Advisory Fees 7
Sub-Adviser's Background 7
Distribution of Fund Shares 8
Distribution Plan 8
Shareholder Servicing Arrangements 9
ADMINISTRATION OF THE FUND 9
- ------------------------------------------------------
Administrative Services 9
Custodian 9
Transfer Agent, Dividend
Disbursing Agent, and
Shareholder Servicing Agent 9
Legal Counsel 9
Independent Auditors 9
Brokerage Transactions 9
NET ASSET VALUE 10
- ------------------------------------------------------
INVESTING IN THE FUND 10
- ------------------------------------------------------
Share Purchases 10
Through the Banks 10
Minimum Investment Required 10
What Shares Cost 11
Purchases at Net Asset Value 11
Sales Charge Reallowance 11
Reducing the Sales Charge 11
Quantity Discounts and Accumulated
Purchases 12
Letter of Intent 12
Reinvestment Privilege 12
Concurrent Purchases 12
Systematic Investment Program 13
Certificates and Confirmations 13
Dividends and Distributions 13
Exchanging Securities For Fund Shares 13
EXCHANGE PRIVILEGE 13
- ------------------------------------------------------
DG Investor Series 13
Exchanging Shares 13
REDEEMING SHARES 14
- ------------------------------------------------------
Through the Banks 14
By Telephone 14
By Mail 15
Signatures 15
Systematic Withdrawal Program 15
Accounts With Low Balances 15
Redemption in Kind 16
SHAREHOLDER INFORMATION 16
- ------------------------------------------------------
Voting Rights 16
Massachusetts Partnership Law 16
EFFECT OF BANKING LAWS 17
- ------------------------------------------------------
TAX INFORMATION 17
- ------------------------------------------------------
Federal Income Tax 17
PERFORMANCE INFORMATION 18
- ------------------------------------------------------
FINANCIAL STATEMENTS 19
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 30
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)........... 2.00%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)................................................. None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)............................... None
Redemption Fee (as a percentage of amount redeemed, if applicable).................... None
Exchange Fee.......................................................................... None
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(1)...................................................... 0.74%
12b-1 Fees(2)......................................................................... 0.00%
Total Other Expenses.................................................................. 0.22%
Total Fund Operating Expenses(3)................................................. 0.96%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of the
investment advisory fee by the investment adviser. The adviser can terminate
this voluntary waiver at any time at its sole discretion. The maximum management
fee is 0.75%.
(2) As of the date of this prospectus, the Fund is not paying or accruing 12b-1
fees. The Fund will not accrue or pay 12b-1 fees until a separate class of
shares has been created for certain institutional investors. The Fund can pay up
to 0.35% as a 12b-1 fee to the distributor.
(3) The Total Fund Operating Expenses would have been 0.97% absent the voluntary
waiver of the investment advisory fee.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUND WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND
EXPENSES, SEE "DG INVESTOR SERIES INFORMATION" AND "INVESTING IN THE FUND."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period......... $ 30 $50 $72 $135
</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.
DG EQUITY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 30.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY
28,
-------------------
1994 1993*
------ ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.54 $10.00
- ---------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------------------------------
Net investment income 0.14 0.12
- ---------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.38 0.52
- --------------------------------------------------------------------- ------ ------
Total from investment operations 0.52 0.64
- --------------------------------------------------------------------- ------ ------
LESS DISTRIBUTIONS
- ---------------------------------------------------------------------
Dividends to shareholders from net investment income (0.14) (0.10)
- ---------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment
transactions (0.05) --
- --------------------------------------------------------------------- ------ ------
Total distributions (0.19) (0.10)
- --------------------------------------------------------------------- ------ ------
NET ASSET VALUE, END OF PERIOD $10.87 $10.54
- --------------------------------------------------------------------- ------ ------
TOTAL RETURN** 4.99% 6.40%
- ---------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------------
Expenses 0.96% 0.51%(a)
- ---------------------------------------------------------------------
Net investment income 1.38% 2.15%(a)
- ---------------------------------------------------------------------
Expense waiver/reimbursement(b) 0.01% 0.53%(a)
- ---------------------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------------------
Net assets, end of period (000 omitted) $284,203 $181,239
- ---------------------------------------------------------------------
Portfolio turnover rate 7% 28%
- ---------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from August 3, 1992 (date of initial
public investment) to
February 28, 1993.
** Based on net asset value which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above (Note 5).
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended February 28, 1994, which can be obtained
free of charge.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated February 7, 1992. The Declaration of Trust permits the Trust to
offer separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes.
Shares of the Fund are designed for retail and trust customers of Deposit
Guaranty National Bank and Commercial National Bank and their affiliates as a
convenient means of participating in a professionally managed, diversified
portfolio consisting primarily of equity securities. A minimum initial
investment of $1,000 is required.
Fund shares are sold at net asset value plus an applicable sales charge and are
redeemed at net asset value.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES
The primary investment objective of the Fund is to provide long-term capital
appreciation. Current income is a secondary objective. The investment objectives
cannot be changed without approval of shareholders. 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.
INVESTMENT POLICIES
The Fund pursues its investment objectives by investing at least 70% of its
assets in equity securities. The equity securities in which the Fund may invest
include, but are not limited to, large capitalization stocks which, in the
opinion of the Fund's investment adviser, have potential to provide for capital
appreciation and current income. Issuers of large capitalization stocks have
equity market valuation in excess of $1 billion.
Unless indicated otherwise, the investment policies of the Fund may be changed
by the Board of Trustees ("Trustees") without the approval of shareholders.
Shareholders will be notified before any material change in these policies
becomes effective.
ACCEPTABLE INVESTMENTS. Consistent with the above, the Fund invests primarily
in:
- common stock of U.S. companies which are either listed on the New York or
American Stock Exchange or traded in over-the-counter markets, preferred
stock of such companies, warrants, and preferred stock convertible into
common stock of such companies;
- investments in American Depositary Receipts ("ADRs") of foreign companies
traded on the New York Stock Exchange or in the over-the-counter market;
- convertible bonds rated at least BBB by Standard & Poor's Corporation
("S&P") or Fitch Investors Service, Inc., or at least Baa by Moody's
Investors Service, Inc. ("Moody's"), or, if not rated, are determined by
the adviser to be of comparable quality. Bonds rated BBB by S&P or Baa
by Moody's have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to weakened
capacity to make principal and interest payments than higher rated bonds.
- money market instruments;
- fixed rate notes and bonds and adjustable and variable rate notes of
companies whose common stock it may acquire;
- zero coupon convertible securities; and
- obligations, including certificates of deposit and bankers' acceptances,
of banks or savings and loan associations having at least $1 billion in
deposits as of the date of their most recently published financial
statements and which are insured by the Bank Insurance Fund ("BIF") or
the Savings Association Insurance Fund ("SAIF"), both of which are
administered by the Federal Deposit Insurance Corporation ("FDIC"),
including U.S. branches of foreign banks and foreign branches of U.S.
banks.
REPURCHASE AGREEMENTS. Certain securities in which the Fund invests may be
purchased pursuant to repurchase agreements. Repurchase agreements are
arrangements in which banks, broker/dealers, and other recognized financial
institutions sell U.S. government 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 seller does not repurchase the securities from the Fund, the
Fund could receive less than the repurchase price on any sale of such
securities.
SECURITIES OF FOREIGN ISSUERS. The Fund may invest in securities of foreign
issuers traded on the New York or American Stock Exchange or in the
over-the-counter market in the form of depositary receipts. Securities of a
foreign issuer may present greater risks in the form of nationalization,
confiscation, domestic marketability, or other national or international
restrictions. As a matter of practice, the Fund will not invest in the
securities of a foreign issuer if any such risk appears to the investment
adviser to be substantial.
PUT AND CALL OPTIONS. The Fund may purchase put options on its portfolio
securities as a hedge to attempt to protect securities which the Fund holds, or
will be purchasing, against decreases in value. The Fund may also write (sell)
call options on all or any portion of its portfolio to generate income for the
Fund. The Fund will write call options on securities either held in its
portfolio or which it has the right to obtain without payment of further
consideration or for which it has segregated cash or U.S. government securities
in the amount of any additional consideration.
The Fund may purchase and write over-the-counter options on portfolio securities
in negotiated transactions with the buyers or writers of the options when
options on the portfolio securities held by the Fund are not traded on an
exchange. The Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings and loan
associations) deemed creditworthy by the Fund's 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. The Fund will
not buy call options or write put options without further notification to
shareholders.
FUTURES CONTRACTS AND OPTIONS ON FUTURES. The Fund may purchase and sell
financial futures and stock index futures contracts to hedge all or a portion of
its portfolio against changes in the price of its portfolio securities, but will
not engage in futures transactions for speculative purposes.
The Fund may also write call options and purchase put options on financial
futures and stock index futures contracts as a hedge to attempt to protect
securities in its portfolio against decreases in value.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets.
RISKS. When the Fund writes a call option, the Fund risks not
participating in any rise in the value of the underlying security. In
addition, when the Fund uses futures and options on futures as hedging
devices, there is a risk that the prices of the securities subject to the
futures contracts may not correlate perfectly with the prices of the
securities in the Fund's portfolio. This may cause the futures contract and
any related options to react differently than the portfolio securities to
market changes. In addition, the Fund's investment adviser could be
incorrect in its expectations about the direction or extent of market
factors, such as interest rate and stock price movements. In these events,
the Fund may lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or options will exist at all times. Although the investment
adviser will consider liquidity before entering into options transactions,
there is no assurance that a liquid secondary market will exist for any
particular futures contract or option at any particular time. The Fund's
ability to establish and close out futures and options positions depends on
this secondary market.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase portfolio
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. In when-issued and delayed delivery transactions,
the Fund relies on the seller to complete the transaction. The seller's failure
to complete the transaction may cause the Fund to miss a price or yield
considered to be advantageous.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or long-term basis, or both,
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 Trustees, 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 at all times.
TEMPORARY INVESTMENTS. For defensive purposes only, the Fund may also invest
temporarily in cash and cash items during times of unusual market conditions and
to maintain liquidity. Cash items may include short-term obligations such as:
- commercial paper rated A-1 or A-2 by Standard & Poor's Corporation,
Prime-1 or Prime-2 by Moody's Investors Service, Inc., or F-1 or F-2 by
Fitch Investors Service, Inc.;
- obligations of the U.S. government or its agencies or instrumentalities;
and
- repurchase agreements.
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 money and engage in reverse repurchase agreements in amounts
up to one-third of the value of its total assets and pledge up to 15% of
the value of its total assets to secure such borrowings.
The above limitation cannot be changed without shareholder approval. The
following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
The Fund will not:
- invest more than 15% of its net assets in illiquid securities, including
repurchase agreements providing for settlement more than seven days after
notice, over-the-counter options and certain restricted securities not
determined by the Trustees to be liquid; or
- invest more than 5% of the Fund's net assets in warrants; however, no
more than 2% of this 5% may be warrants which are not listed on the New
York or American Stock Exchange.
DG INVESTOR SERIES INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees
are responsible for managing the Trust's business affairs and for exercising all
of the powers of the Trust except those reserved for the shareholders. The
Executive Committee of the Board of Trustees handles the Trustees'
responsibilities between meetings of the Trustees.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Deposit Guaranty National Bank,
the Fund's investment adviser (the "Adviser"), subject to direction by the
Trustees. The Adviser, in consultation with the sub-adviser, continually
conducts investment research and supervision for the Fund and is responsible for
the purchase and sale of portfolio instruments.
ADVISORY FEES. The Fund's Adviser receives an annual investment advisory
fee equal to 0.75 of 1% 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 other mutual funds with
similar objectives and policies. The investment advisory contract provides
for the voluntary reimbursement of expenses by the Adviser to the extent
any Fund expenses exceed such lower expense limitation as the Adviser may,
by notice to the Fund, voluntarily declare to be effective.
The Adviser can terminate this voluntary reimbursement of expenses at any
time at its sole discretion. The Adviser has undertaken to reimburse the
Fund for operating expenses in excess of limitations established by certain
states.
ADVISER'S BACKGROUND. Deposit Guaranty National Bank, a national banking
association formed in 1925, is a subsidiary of Deposit Guaranty Corp
("DGC"). Through its subsidiaries and affiliates, DGC offers a full range
of financial services to the public, including commercial lending,
depository services, cash management, brokerage services, retail banking,
mortgage banking, investment advisory services and trust services.
As of December 31, 1993, the Trust Division of Deposit Guaranty National
Bank had approximately $9 billion under administration, of which it had
investment discretion over $1.4 billion. Deposit Guaranty National Bank has
served as the Trust's investment adviser since May 5, 1992.
As part of their regular banking operations, Deposit Guaranty National Bank
and Commercial National Bank, the Fund's sub-adviser, may make loans to
public companies. Thus, it may be possible, from time to time, for the Fund
to hold or acquire the securities of issuers which are also lending clients
of Deposit Guaranty National Bank or Commercial National Bank. The lending
relationships will not be a factor in the selection of securities.
SUB-ADVISER. Under the terms of a sub-advisory agreement between Deposit
Guaranty National Bank and Commercial National Bank (the "Sub-Adviser"), the
Sub-Adviser will furnish to the Adviser such investment advice, statistical and
other factual information as may be requested by the Adviser. The portfolio
managers from the Trust Divisions of Deposit Guaranty National Bank and
Commercial National Bank (collectively, the "Banks") will form an investment
committee (the "DG Asset Management Group") to discuss investment strategies and
evaluate securities and the economic outlook.
SUB-ADVISORY FEES. For its services under the sub-advisory agreement, the
Sub-Adviser receives an annual fee from the Adviser equal to 0.25 of 1% of
the average daily net assets of the Fund. The sub-advisory fee is accrued
daily and paid monthly. In the event that the fee due from the Trust to the
Adviser on behalf of the Fund is reduced in order to meet expense
limitations imposed on the Fund by state securities laws and regulations,
the sub-advisory fee will be reduced by one-half of said reduction in the
fee due from the Trust to the Adviser on behalf of the Fund.
Notwithstanding any other provision in the sub-advisory agreement, the
Sub-Adviser may, from time to time and for such periods as it deems
appropriate, reduce its compensation (and, if appropriate, assume expenses
of the Fund or class of the Fund) to the extent that the Fund's expenses
exceed such lower expense limitation as the Sub-Adviser may, by notice to
the Trust on behalf of the Fund, voluntarily declare to be effective.
SUB-ADVISER'S BACKGROUND. Commercial National Bank, a national banking
association which received its charter in 1886, is a subsidiary of DGC. As
of December 31, 1993, the Trust Division at Commercial National Bank had
approximately $1.2 billion in trust assets under administration, for which
it had investment discretion over $1.02 billion. Commercial National Bank
has served as sub-adviser to DG Government Income Fund, DG Limited Term
Government Income Fund and the Fund since July 20, 1992, and DG Municipal
Income Fund since December 12, 1992, each a portfolio of the Trust.
Ronald E. Lindquist, Senior Vice President and Trust Investment Officer,
has served as manager of Commercial National Bank's Trust Investment
Department for more than ten years. Mr. Lindquist's primary area of
responsibility is the management of the Equity Fund. He received his B.S.
in Finance from Florida State University and a M.S.M. in Finance from
Florida International University. Mr. Lindquist has managed the DG Equity
Fund since August 1, 1992 (the inception of the Fund).
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal distributor for shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Under a distribution plan adopted in accordance with the
Investment Company Act Rule 12b-1 (the "Plan"), the Fund will pay to the
distributor an amount computed at an annual rate of 0.35 of 1% of the average
daily net asset value of the Fund to finance any activity which is principally
intended to result in the sale of shares subject to the Plan.
The distributor may from time to time and for such periods as it deems
appropriate, voluntarily reduce its compensation under the Plan to the extent
the expenses attributable to the shares exceed such lower expense limitation as
the distributor may, by notice to the Trust, voluntarily declare to be
effective.
The distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers ("brokers")
to provide distribution and/or administrative services as agents for their
clients or customers. Administrative services may include, but are not limited
to, the following functions: 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;
assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as may reasonably be requested.
The distributor will pay financial institutions a fee based upon shares subject
to the Plan and 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 distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no payments
to the distributor except as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Fund
under the Plan.
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 Trustees 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 laws.
SHAREHOLDER SERVICING ARRANGEMENTS. The distributor may pay financial
institutions a fee with respect to the average net asset value of shares held by
their customers for providing administrative services. This fee, if paid, will
be reimbursed by the Adviser and not the Fund.
ADMINISTRATION OF THE FUND
- --------------------------------------------------------------------------------
ADMINISTRATIVE SERVICES. Federated Administrative Services, which is a
subsidiary of Federated Investors, provides the Fund with the administrative
personnel and services necessary to operate the Fund. Such services include
shareholder servicing and certain legal and accounting services. Federated
Administrative Services provides these at an annual rate as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
- ---------------------
<C> <S>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
on assets in excess of $750
.075 of 1% million
</TABLE>
The administrative fee received during any fiscal year shall aggregate at least
$100,000 per Fund. Federated Administrative Services may choose voluntarily to
reimburse a portion of its fee at any time.
CUSTODIAN. State Street Bank and Trust Company ("State Street Bank"), Boston,
Massachusetts, is custodian for the securities and cash of the Fund.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND SHAREHOLDER SERVICING AGENT.
Federated Services Company, Pittsburgh, Pennsylvania, is transfer agent for the
shares of the Fund, dividend disbursing agent for the Fund, and shareholder
servicing agent for the Fund.
LEGAL COUNSEL. Legal counsel for the Fund is provided by Houston, Houston &
Donnelly, Pittsburgh, Pennsylvania, and Dickstein, Shapiro & Morin, Washington,
D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are KPMG Peat
Marwick, Pittsburgh, Pennsylvania.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the Adviser may give consideration to those
firms which have sold or are selling shares of the Fund and other funds
distributed by Federated Securities Corp. The Adviser
makes decisions on portfolio transactions and selects brokers and dealers
subject to review by the Trustees.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per share fluctuates. It is determined by dividing
the sum of the market value of all securities and other assets, less
liabilities, by the number of shares outstanding.
INVESTING IN THE FUND
- --------------------------------------------------------------------------------
SHARE PURCHASES
Fund shares are sold on days on which the New York Stock Exchange and the
Federal Reserve Wire System are open for business. Fund shares may be ordered by
telephone through procedures established with Commercial National Bank and
Deposit Guaranty National Bank (collectively, the "Banks") in connection with
qualified account relationships. Such procedures may include arrangements under
which certain accounts are swept periodically and amounts exceeding an
agreed-upon minimum are invested automatically in Fund shares. Texas residents
must purchase shares of the Fund through Federated Securities Corp. at
1-800-356-2805. The Fund reserves the right to reject any purchase request.
THROUGH THE BANKS. To place an order to purchase Fund shares, open an account
by calling Deposit Guaranty National Bank at (800) 748-8500 or Commercial
National Bank at (800) 274-1907. Information needed to establish the account
will be taken over the telephone.
Payment may be made by either check, federal funds or by debiting a customer's
account at the Banks. Purchase orders must be received by 4:00 p.m. (Eastern
time). Payment is required before 4:00 p.m. (Eastern time) on the next business
day in order to earn dividends for that day.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $1,000. Subsequent investments may
be in any amounts of $100 or more. The Fund may waive the initial minimum
investment for employees of DGC and its affiliates from time to time.
WHAT SHARES COST
Fund shares are sold at their net asset value next determined after an order is
received, plus a sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS
A PERCENTAGE OF A PERCENTAGE OF
AMOUNT OF TRANSACTION PUBLIC OFFERING PRICE NET AMOUNT INVESTED
- ---------------------------------------------- ---------------------- -------------------
<S> <C> <C>
Less than $100,000............................ 2.00% 2.04%
$100,000 but less than $250,000............... 1.75% 1.78%
$250,000 but less than $500,000............... 1.50% 1.52%
$500,000 but less than $750,000............... 1.25% 1.27%
$750,000 but less than $1 million............. 1.00% 1.01%
$1 million but less than $2 million........... 0.50% 0.50%
$2 million or more............................ 0.25% 0.25%
</TABLE>
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; or (iii) the following
holidays: New Year's Day, Martin Luther King Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day,
Thanksgiving Day and Christmas Day.
PURCHASES AT NET ASSET VALUE. Shares of the Fund may be purchased at net asset
value, without a sales charge by: the Trust Division of the Banks for funds
which are held in a fiduciary, agency, custodial or similar capacity; Trustees
and employees of the Fund, the Banks or Federated Securities Corp. or their
affiliates and their spouses and children under 21; or any bank or investment
dealer who has a sales agreement with Federated Securities Corp. with regard to
the Fund.
SALES CHARGE REALLOWANCE. For sales of shares of the Fund, the Banks or any
authorized dealer will normally receive up to 85% of the applicable sales
charge. Any portion of the sales charge which is not paid to the Banks or
authorized dealers will be retained by the distributor. The distributor will,
periodically, uniformly offer to pay cash or promotional incentives in the form
of trips to sales seminars at luxury resorts, tickets or other items, to all
dealers selling shares of the Fund. Such payments will be predicated upon the
amount of shares of the Fund that are sold by the dealer.
The sales charge for shares sold other than through the Banks or registered
broker/dealers will be retained by the distributor. The distributor may pay fees
to the Banks out of the sales charge in exchange for sales and/or administrative
services performed on behalf of the Banks' customers in connection with the
initiation of customer accounts and purchases of Fund shares.
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Fund shares through:
- quantity discounts and accumulated purchases;
- signing a 13-month letter of intent;
- using the reinvestment privilege; or
- concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table above,
larger purchases reduce the sales charge paid. The Fund will combine purchases
made on the same day by the investor, his spouse, and his children under age 21
when it calculates the sales charge. In addition, the sales charge, if
applicable, is reduced for purchases made at one time by a trustee or fiduciary
for a single trust estate or a single fiduciary account.
If an additional purchase of Fund shares is made, the Fund will consider the
previous purchase still invested in the Fund. For example, if a shareholder
already owns shares having a current value at the public offering price of
$90,000 and he purchases $10,000 more at the current public offering price, the
sales charge on the additional purchase according to the schedule now in effect
would be 1.75%, not 2.00%.
To receive the sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by the Banks at the time the purchase
is made that Fund shares are already owned or that purchases are being combined.
The Fund will reduce the sales charge after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $100,000 of
shares in the funds in the Trust over the next 13 months, the sales charge may
be reduced by signing a letter of intent to that effect. This letter includes a
provision for a sales charge adjustment depending on the amount actually
purchased within the 13-month period and a provision for the custodian to hold
2.00% of the total amount intended to be purchased in escrow (in shares) until
such purchase is completed.
The 2.00% held in escrow will be applied to the shareholder's account at the end
of the 13-month period unless the amount specified in the letter of intent is
not purchased. In this event, an appropriate number of escrowed shares may be
redeemed in order to realize the difference in the sales charge.
This letter of intent will not obligate the shareholder to purchase shares, but
if he does, each purchase during the period will be at the sales charge
applicable to the total amount intended to be purchased. This letter may be
dated as of a prior date to include any purchases made within the past 90 days.
REINVESTMENT PRIVILEGE. If shares in the Fund have been redeemed, the
shareholder has a one-time right, within 30 days, to reinvest the redemption
proceeds at the next-determined net asset value without any sales charge.
Federated Securities Corp. must be notified by the shareholder in writing or by
the Banks of the reinvestment in order to eliminate a sales charge. If the
shareholder redeems his shares in the Fund, there may be tax consequences.
CONCURRENT PURCHASES. For purposes of qualifying for a sales charge reduction,
a shareholder has the privilege of combining concurrent purchases of two or more
funds in the Trust, the purchase price of which includes a sales charge. For
example, if a shareholder concurrently invested $30,000 in one of the other
funds in the Trust with a sales charge and $70,000 in this Fund, the sales
charge would be reduced.
To receive this sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by the Banks at the time the
concurrent purchases are made. The Fund will reduce the sales charge after it
confirms the purchases.
SYSTEMATIC INVESTMENT PROGRAM
Once an 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 Fund shares. A shareholder may apply for participation in this
program through the Banks.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder. Share certificates are not issued unless requested
by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Quarterly confirmations are sent to report dividends paid during
the quarter.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared quarterly and paid quarterly. Distribution of any
realized long-term capital gains will be made at least once every twelve months.
Dividends are automatically reinvested in additional shares of the Fund on
payment dates at the ex-dividend date's net asset value without a sales charge,
unless cash payments are requested by writing to the Fund or the Banks, as
appropriate.
EXCHANGING SECURITIES FOR FUND SHARES
Investors may exchange certain securities or a combination of certain securities
and cash for Fund shares. The Fund reserves the right to determine the
acceptability of securities to be exchanged. On the day securities are accepted
by the Fund, they are valued in the same manner as the Fund values its assets.
Investors wishing to exchange securities should first contact the Banks.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
DG INVESTOR SERIES
All shareholders of the Fund are shareholders of DG Investor Series.
Shareholders in the Fund have easy access to the other portfolios of DG Investor
Series.
EXCHANGING SHARES
Shareholders of the Fund may exchange shares of the Fund for shares of the other
funds in DG Investor Series. In addition, shares of the Fund may also be
exchanged for certain other funds distributed by Federated Securities Corp. that
are not advised by the Banks ("Federated Funds"). For further information on the
availability of Federated Funds for exchanges, please call Deposit Guaranty
National Bank at (800) 748-8500 or Commercial National Bank at (800) 274-1907.
Shares of funds with a sales charge may be exchanged at net asset value for
shares of other funds with an equal sales charge or no sales charge. Shares of
the funds with no sales charge acquired by direct purchase or
reinvestment of dividends on such shares may be exchanged for shares of funds
with a sales charge at net asset value plus the applicable sales charge.
When an exchange is made from a fund with a sales charge to a fund with no sales
charge, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus, an exchange
of such shares for shares of a fund with a sales charge would be at net asset
value.
Prior to any exchange, the shareholder must receive a copy of the current
prospectus of the fund into which an exchange is to be effected.
The exchange privilege is available to shareholders residing in any state in
which the fund shares being acquired may legally be sold. Upon receipt of proper
instructions and all necessary supporting documents, shares submitted for
exchange will be redeemed at the next-determined net asset value. Written
exchange instruction may require a signature guarantee. Exercise of this
privilege is treated as a sale for federal income tax purposes and, depending on
the circumstances, a short or long-term capital gain or loss may be realized.
The exchange privilege may be terminated at any time. Shareholders will be
notified of the termination of the exchange privilege. A shareholder may obtain
further information on the exchange privilege by calling the Banks. Telephone
exchange 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.
REDEEMING SHARES
- --------------------------------------------------------------------------------
Shares are redeemed at their net asset value next determined after the Banks
receive the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on Federal holidays when
wire transfers are restricted. Requests for redemption can be made by telephone
or by mail.
THROUGH THE BANKS
BY TELEPHONE. A shareholder who is a customer of one of the Banks may redeem
shares of the Fund by calling Deposit Guaranty National Bank at (800) 748-8500
or Commercial National Bank at (800) 274-1907. For orders received before 4:00
p.m. (Eastern time), proceeds will normally be wired the next day to the
shareholder's account at the Banks or a check will be sent to the address of
record. In no event will proceeds be sent more than seven days after a proper
request for redemption has been received. An authorization form permitting the
Fund to accept telephone requests must first be completed. Authorization forms
and information on this service are available from the Banks. 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 should be utilized, such as a written request to Federated
Services Company or the Banks.
If at any time the Fund shall determine it necessary to terminate or modify this
method of redemption, shareholders would be promptly notified.
BY MAIL. Any shareholder may redeem Fund shares by sending a written request to
the Banks. The written request should include the shareholder's name, the Fund
name, 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 Banks 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 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 BIF,
which is administered by the 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 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 Federated Services Company 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 Federated Services Company
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.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount may take
advantage of the Systematic Withdrawal Program. Under this program, Fund shares
are redeemed to provide for periodic withdrawal payments in an amount directed
by the shareholder. Depending upon the amount of the withdrawal payments and the
amount of dividends paid with respect to Fund shares, redemptions may reduce,
and eventually deplete, the shareholder's investment in the Fund. For this
reason, payments under this program should not be considered as yield or income
on the shareholder's investment in the Fund. To be eligible to participate in
this program, a shareholder must have an account value of at least $10,000. A
shareholder may apply for participation in this program through the Banks. Due
to the fact that shares are sold with a sales charge, it is not advisable for
shareholders to be purchasing shares of the Fund while participating in this
program.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum
value of $1,000 due to shareholder redemptions. This requirement does not apply,
however, if the balance falls below $1,000 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.
REDEMPTION IN KIND
The Fund is obligated to redeem shares solely in cash up to $250,000 or 1% of
the Fund's net asset value, whichever is less, for any one shareholder within a
90-day period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that payments should be in kind. In such case, the Fund will pay all
or a portion of the remainder of the redemption in portfolio instruments, valued
in the same way as the Fund determines net asset value. The portfolio
instruments will be selected in a manner that the Trustees deem fair and
equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders of the Fund for vote. All shares of all
classes of each Fund in the Trust have equal voting rights, except that in
matters affecting only a particular Fund or class, only shareholders of that
Fund or class are entitled to vote. As a Massachusetts business trust, the Trust
is not required to hold annual shareholder meetings. Shareholder approval will
be sought only for certain changes in the Trust or Fund's operation and for the
election of Trustees under certain circumstances. As of April 7, 1994, Deposit
Guaranty National Bank, Jackson, Mississippi, acting in various capacities for
numerous accounts, was the owner of record of 18,623,844.25 shares (71.94%), and
therefore, may, for certain purposes, be deemed to control the Fund and be able
to affect the outcome of certain matters presented for a vote of shareholders.
Trustees may be removed by the shareholders at a special meeting. A special
meeting of the shareholders for this purpose shall be called by the Trustees
upon the written request of shareholders owning at least 10% of all shares of
the Trust entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation, or instrument the Trust or its Trustees
enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust itself cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956 or
any bank or non-bank affiliate thereof from sponsoring, organizing or
controlling a registered, open-end investment company continuously engaged in
the issuance of its shares, and from issuing, underwriting, or distributing
securities in general. Such laws and regulations do not prohibit such a holding
company or bank or non-bank affiliate from acting as investment adviser,
transfer agent or custodian to such an investment company or from purchasing
shares of such a company as agent for and upon the order of their customer. The
Fund's Adviser and Sub-Adviser, Deposit Guaranty National Bank and Commercial
National Bank, respectively, are subject to such banking laws and regulations.
The Banks believe, based on the advice of counsel, that they may perform the
investment advisory services for the Fund contemplated by the advisory agreement
with the Trust and the sub-advisory agreement between the Banks without
violating the Glass-Steagall Act or other applicable banking laws or
regulations. Such counsel has pointed out, however, that changes in either
federal or state statutes and regulations relating to the permissible activities
of banks and their subsidiaries or affiliates, as well as further judicial or
administrative decisions or interpretations of present or future statutes and
regulations, could prevent the Banks from continuing to perform all or a part of
the above services for their customers and/or the Fund. In such event, changes
in the operation of the Fund may occur, including the possible alteration or
termination of any automatic or other Fund share investment and redemption
services then being provided by the Banks, and the Trustees would consider
alternative investment advisers and other means of continuing available
investment services. It is not expected that Fund shareholders would suffer any
adverse financial consequences (if another adviser and/or sub-adviser with
equivalent abilities to Deposit Guaranty National Bank and/or Commercial
National Bank are found) as a result of any of these occurrences.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies.
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
Trust's other portfolios, if any, will not be combined for tax purposes with
those realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions received. This applies whether dividends
are received in cash or as additional shares. The Fund will provide detailed tax
information for reporting purposes.
Shareholders are urged to consult their own tax advisers regarding the status of
their account under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund advertises its total return and yield.
Total return represents the change over a specified period of time in the value
of an investment in the Fund 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 the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The performance information reflects the effect of the maximum sales load which,
if excluded, would increase the total return and yield.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
DG EQUITY FUND
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------------------------------------------------------------ ------------
<C> <C> <S> <C>
COMMON STOCKS--92.3%
- -------------------------------------------------------------------------------------
BUSINESS EQUIPMENT AND SERVICES--10.5%
------------------------------------------------------------------
170,000 Automatic Data Processing, Inc. $ 8,691,250
------------------------------------------------------------------
180,000 Donnelley (R.R.) & Sons Co. 5,580,000
------------------------------------------------------------------
110,000 Dun & Bradstreet Corp. 6,696,250
------------------------------------------------------------------
200,000 Pitney Bowes, Inc. 8,775,000
------------------------------------------------------------------ ------------
Total 29,742,500
------------------------------------------------------------------ ------------
CAPITAL GOODS--9.0%
------------------------------------------------------------------
130,000 Dover Corp. 7,962,500
------------------------------------------------------------------
35,400 Emerson Electric Co. 2,278,875
------------------------------------------------------------------
80,000 General Electric Co. 8,430,000
------------------------------------------------------------------
80,000 PPG Industries, Inc. 6,140,000
------------------------------------------------------------------
16,900 Tyco International, LTD 883,025
------------------------------------------------------------------ ------------
Total 25,694,400
------------------------------------------------------------------ ------------
CONSUMER DURABLES--1.7%
------------------------------------------------------------------
70,000 Whirlpool Corp. 4,742,500
------------------------------------------------------------------ ------------
CONSUMER NON-DURABLES--19.6%
------------------------------------------------------------------
100,000 Coca-Cola Co. 4,262,500
------------------------------------------------------------------
110,000 Heinz (H.J.) Co. 3,588,750
------------------------------------------------------------------
60,000 Eastman Kodak Co. 2,580,000
------------------------------------------------------------------
240,000 International Flavors & Fragrances 8,910,000
------------------------------------------------------------------
185,000 PepsiCo., Inc. 7,238,125
------------------------------------------------------------------
80,000 Philip Morris Cos., Inc. 4,480,000
------------------------------------------------------------------
130,000 Proctor & Gamble Co. 7,458,750
------------------------------------------------------------------
70,000 Quaker Oats 4,445,000
------------------------------------------------------------------
180,000 Sara Lee Corp. 4,027,500
------------------------------------------------------------------
</TABLE>
DG EQUITY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------------------------------------------------------------ ------------
<C> <C> <S> <C>
COMMON STOCKS--CONTINUED
- -------------------------------------------------------------------------------------
CONSUMER NON-DURABLES--CONTINUED
------------------------------------------------------------------
160,000 Sysco Corp. $ 4,340,000
------------------------------------------------------------------
80,000 Tambrands 3,420,000
------------------------------------------------------------------
45,000 Tyson Foods, Inc., Cl. A 967,500
------------------------------------------------------------------ ------------
Total 55,718,125
------------------------------------------------------------------ ------------
CONSUMER SERVICES--4.3%
------------------------------------------------------------------
100,000 Blockbuster Entertainment Corp. 2,637,500
------------------------------------------------------------------
200,000 Disney (Walt) Co. 9,625,000
------------------------------------------------------------------ ------------
Total 12,262,500
------------------------------------------------------------------ ------------
ENERGY--4.4%
------------------------------------------------------------------
60,000 Amoco Corp. 3,135,000
------------------------------------------------------------------
43,000 Anadarko Petroleum Corp. 1,913,500
------------------------------------------------------------------
15,000 Atlantic Richfield Co. 1,511,250
------------------------------------------------------------------
45,000 Chevron Corp. 3,903,750
------------------------------------------------------------------
35,400 Schlumberger, Ltd. 2,013,375
------------------------------------------------------------------ ------------
Total 12,476,875
------------------------------------------------------------------ ------------
FINANCIAL SERVICES--1.1%
------------------------------------------------------------------
70,000 American General Corp. 1,881,250
------------------------------------------------------------------
33,700 Sunamerica, Inc. 1,196,350
------------------------------------------------------------------ ------------
Total 3,077,600
------------------------------------------------------------------ ------------
HEALTH CARE--8.7%
------------------------------------------------------------------
100,000 Abbott Laboratories 2,762,500
------------------------------------------------------------------
19,800 American Home Products Corp. 1,185,525
------------------------------------------------------------------
51,900 Baxter International, Inc. 1,180,725
------------------------------------------------------------------
120,000 Bristol-Myers Squibb Co. 6,630,000
------------------------------------------------------------------
50,000 Eli Lilly & Co. 2,756,250
------------------------------------------------------------------
85,000 Hillenbrand Industry, Inc. 3,516,875
------------------------------------------------------------------
58,800 Merck and Co., Inc. 1,903,650
------------------------------------------------------------------
85,000 Pfizer, Inc. 4,930,000
------------------------------------------------------------------ ------------
Total 24,865,525
------------------------------------------------------------------ ------------
</TABLE>
DG EQUITY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------------------------------------------------------------ ------------
<C> <C> <S> <C>
COMMON STOCKS--CONTINUED
- -------------------------------------------------------------------------------------
MULTI-INDUSTRY--0.7%
------------------------------------------------------------------
20,700 ITT Corp. $ 1,997,550
------------------------------------------------------------------ ------------
RAW MATERIALS--5.3%
------------------------------------------------------------------
12,400 American Cyanamid Company 550,250
------------------------------------------------------------------
95,000 Great Lakes Chemical Corp. 7,433,750
------------------------------------------------------------------
90,000 Lubrizol Corp. 3,386,250
------------------------------------------------------------------
35,000 Morton International Inc. 3,653,125
------------------------------------------------------------------ ------------
Total 15,023,375
------------------------------------------------------------------ ------------
RETAIL--10.4%
------------------------------------------------------------------
175,000 McDonald's Corp. 10,609,375
------------------------------------------------------------------
70,000 Melville Corp. 2,712,500
------------------------------------------------------------------
40,000 Sears, Roebuck & Co. 1,825,000
------------------------------------------------------------------
175,000 Walgreen Company 7,109,375
------------------------------------------------------------------
260,000 Wal-Mart Stores, Inc. 7,377,500
------------------------------------------------------------------ ------------
Total 29,633,750
------------------------------------------------------------------ ------------
TECHNOLOGY--11.3%
------------------------------------------------------------------
30,000 AMP Inc. 1,905,000
------------------------------------------------------------------
85,000 Boeing Co. 3,973,750
------------------------------------------------------------------
85,000 * Compaq Computer Corp. 8,393,750
------------------------------------------------------------------
120,000 * Digital Equipment Corp. 3,495,000
------------------------------------------------------------------
100,000 Hewlett-Packard Co. 9,062,500
------------------------------------------------------------------
40,000 International Business Machines Corp. 2,115,000
------------------------------------------------------------------
50,000 Raytheon Co. 3,100,000
------------------------------------------------------------------ ------------
Total 32,045,000
------------------------------------------------------------------ ------------
</TABLE>
DG EQUITY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR SHARES VALUE
- ----------- ----------------------------------------------------------------- ------------
<C> <C> <S> <C>
UTILITIES--5.3%
-----------------------------------------------------------------
130,000 American Telephone & Telegraph Co. $ 6,825,000
-----------------------------------------------------------------
35,000 BellSouth Corp. 1,951,250
-----------------------------------------------------------------
80,000 Central & Southwest Corp. 2,190,000
-----------------------------------------------------------------
29,000 GTE Corp. 946,125
-----------------------------------------------------------------
31,200 Pacific Telesis Group 1,700,400
-----------------------------------------------------------------
40,000 Southwestern Bell Corp. 1,565,000
----------------------------------------------------------------- ------------
Total 15,177,775
----------------------------------------------------------------- ------------
TOTAL COMMON STOCKS (IDENTIFIED COST $247,783,630) 262,457,475
----------------------------------------------------------------- ------------
**REPURCHASE AGREEMENT--6.7%
- -------------------------------------------------------------------------------------
$18,970,197 Cantor Fitzgerald Securities Corp., 3.40%, dated 2/28/94, due
3/1/94 (at amortized cost) (Note 2B) 18,970,197
----------------------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST, $266,753,827) $281,427,672+
----------------------------------------------------------------- ------------
</TABLE>
* Non-income producing securities.
** The repurchase agreement is fully collateralized by U.S. Treasury obligations
based on market prices at the date of the portfolio.
+ The cost of investments for federal tax purposes amounts to $266,753,827. The
net unrealized appreciation of investments on a federal tax cost basis
amounts to $14,673,845 which is comprised of $28,437,707 appreciation and
$13,763,862 depreciation at February 28, 1994.
Note: The categories of investments are shown as a percentage of net assets
($284,202,520) at February 28, 1994.
(See Notes which are an integral part of the Financial Statements)
DG EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- -------------------------------------------------------------------------------
Investments in securities, at value (Notes 2A and 2B)
(identified and tax cost $266,753,827) $281,427,672
- -------------------------------------------------------------------------------
Receivable for investments sold 2,633,806
- -------------------------------------------------------------------------------
Dividends and interest receivable 760,763
- -------------------------------------------------------------------------------
Receivable for Fund shares sold 391,053
- -------------------------------------------------------------------------------
Deferred expenses (Note 2F) 44,043
- ------------------------------------------------------------------------------- ------------
Total assets 285,257,337
- -------------------------------------------------------------------------------
LIABILITIES:
- -------------------------------------------------------------------------------
Payable for Fund shares redeemed $977,837
- --------------------------------------------------------------------
Accrued expenses 76,980
- -------------------------------------------------------------------- --------
Total liabilities 1,054,817
- ------------------------------------------------------------------------------- ------------
NET ASSETS for 26,134,342 shares of beneficial interest outstanding $284,202,520
- ------------------------------------------------------------------------------- ------------
NET ASSETS CONSIST OF:
- -------------------------------------------------------------------------------
Paid-in capital $267,692,811
- -------------------------------------------------------------------------------
Unrealized appreciation (depreciation) of investments 14,673,845
- -------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments 1,215,396
- -------------------------------------------------------------------------------
Undistributed net investment income 620,468
- ------------------------------------------------------------------------------- ------------
Total Net Assets $284,202,520
- ------------------------------------------------------------------------------- ------------
NET ASSET VALUE and Redemption Price Per Share:
($284,202,520 / 26,134,342 shares of beneficial interest outstanding) $10.87
- ------------------------------------------------------------------------------- ------------
Computation of Offering Price:
Offering Price Per Share (100/98 of $10.87)* $11.09
- ------------------------------------------------------------------------------- ------------
</TABLE>
* See "What Shares Cost" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
DG EQUITY FUND
STATEMENT OF OPERATIONS
YEAR ENDED FEBRUARY 28, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------
Dividends $ 5,146,905
- ---------------------------------------------------------------------------------
Interest 832,571
- --------------------------------------------------------------------------------- -----------
Total investment income (Note 2C) 5,979,476
- ---------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------
Investment advisory fee (Note 5) $1,915,318
- --------------------------------------------------------------------
Administrative personnel and services fees (Note 5) 328,534
- --------------------------------------------------------------------
Trustees' fees 2,475
- --------------------------------------------------------------------
Custodian fees 41,470
- --------------------------------------------------------------------
Recordkeeper fees (Note 5) 69,817
- --------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses (Note 5) 22,533
- --------------------------------------------------------------------
Legal fees 4,169
- --------------------------------------------------------------------
Printing and postage 7,504
- --------------------------------------------------------------------
Auditing fees 10,500
- --------------------------------------------------------------------
Fund share registration fees 65,046
- --------------------------------------------------------------------
Insurance premiums 8,808
- --------------------------------------------------------------------
Miscellaneous 5,634
- -------------------------------------------------------------------- ----------
Total expenses 2,481,808
- --------------------------------------------------------------------
Deduct--Waiver of investment advisory fee (Note 5) 27,126
- -------------------------------------------------------------------- ----------
Net expenses 2,454,682
- --------------------------------------------------------------------------------- -----------
Net investment income 3,524,794
- --------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis)-- 3,099,223
- ---------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments 7,867,219
- --------------------------------------------------------------------------------- -----------
Net realized and unrealized gain (loss) on investments 10,966,442
- --------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $14,491,236
- --------------------------------------------------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
DG EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
-----------------------------
1994 1993*
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ---------------------------------------------------------------
OPERATIONS--
- ---------------------------------------------------------------
Net investment income $ 3,524,794 $ 1,328,736
- ---------------------------------------------------------------
Net realized gain (loss) on investment transactions ($2,837,598
net gain and $239,426 net loss, respectively, as computed for
federal tax purposes) (Note 2D) 3,099,223 (501,050)
- ---------------------------------------------------------------
Change in unrealized appreciation (depreciation) of investments 7,867,219 6,806,626
- --------------------------------------------------------------- ------------ ------------
Change in net assets resulting from operations 14,491,236 7,634,312
- --------------------------------------------------------------- ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- ---------------------------------------------------------------
Dividends to shareholders from net investment income (3,253,053) (980,009)
- ---------------------------------------------------------------
Distributions to shareholders from net realized gain on
investment transactions (1,382,777) --
- --------------------------------------------------------------- ------------ ------------
Change in net assets from distributions to shareholders (4,635,830) (980,009)
- --------------------------------------------------------------- ------------ ------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)--
- ---------------------------------------------------------------
Proceeds from sale of shares 134,529,308 229,543,261
- ---------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
distributions in Fund shares 3,351,297 2,880
- ---------------------------------------------------------------
Cost of shares redeemed (44,772,757) (54,961,178)
- --------------------------------------------------------------- ------------ ------------
Change in net assets from Fund share transactions 93,107,848 174,584,963
- --------------------------------------------------------------- ------------ ------------
Change in net assets 102,963,254 181,239,266
- ---------------------------------------------------------------
NET ASSETS:
- ---------------------------------------------------------------
Beginning of period 181,239,266 --
- --------------------------------------------------------------- ------------ ------------
End of period (including undistributed net investment income of
$620,468 and $348,727, respectively) $284,202,520 $181,239,266
- --------------------------------------------------------------- ------------ ------------
</TABLE>
* For the period from August 3, 1992 (date of initial public investment) to
February 28, 1993.
(See Notes which are an integral part of the Financial Statements)
DG EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
DG Investor Series (the "Trust") is an open-end, management investment company,
established as a Massachusetts business trust under a Declaration of Trust dated
February 7, 1992. The Trust currently consists of five portfolios. The financial
statements included herein present only those of the DG Equity Fund (the
"Fund"), one of the portfolios of the Trust. The financial statements of the
other portfolios in the Trust are presented separately. The assets of each
portfolio are segregated and a shareholder's interest is limited to the
portfolio in which shares are held. The Declaration of Trust permits the Trust
to offer separate series of shares of beneficial interest representing interests
in separate portfolios of securities.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--Listed equity securities are valued at the last sale price
reported on national securities exchanges. Unlisted securities, or listed securities in
which there were no sales, and private placement securities are valued at the mean
between bid and asked prices. Bonds and other fixed income securities are valued at the
last sale price on a national securities exchange, if available. Otherwise, they are
valued on the basis of prices furnished by independent pricing services. Short-term
obligations are ordinarily valued at the mean between bid and asked prices as furnished
by an independent pricing service. However, short-term obligations with maturities of
sixty days or less are valued at amortized cost, which approximates value. All other
securities are appraised at fair value as determined in good faith by the Board of
Trustees.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry System or to
have segregated within the custodian bank's vault, all securities held as collateral in
support of repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's underlying securities to ensure the existence of a proper level of
collateral.
The Fund will only enter into repurchase agreements with banks and other recognized
financial institutions, such as broker/dealers, which are deemed by the Trust's adviser
to be creditworthy pursuant to guidelines established by the Board of Trustees
("Trustees"). Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than the
repurchase price on the sale of collateral securities.
</TABLE>
DG EQUITY FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
C. INCOME--Dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis. Interest income includes interest and discount earned (net of
premium) on short-term obligations, and interest earned on all other debt securities
including original issue discount as required by the Internal Revenue Code (the "Code").
Dividends to Shareholders and capital gain distributions, if any, are recorded on the
ex-dividend date.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Code
applicable to regulated investment companies and to distribute to shareholders each year
all of its net income, including any net realized gain on investments. Accordingly, no
provision for federal tax is necessary.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or
delayed delivery transactions. To the extent the Fund engages in such transactions, it
will do so for the purpose of acquiring portfolio securities consistent with its
investment objectives and policies and not for the purpose of investment leverage. The
Fund will record a when-issued security and the related liability on the trade date.
Until the securities are received and paid for, the Fund will maintain security positions
such that sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis are marked to
market daily and begin earning interest on the settlement date.
F. DEFERRED EXPENSES--The costs incurred by the Fund with respect to registration of its
shares in its first fiscal year, excluding the initial expense of registering the shares,
have been deferred and are being amortized using the straight-line method over a period
of five years from the Fund's commencement date.
G. OTHER--Investment transactions are accounted for on the date of the transaction.
</TABLE>
(3) DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid quarterly to all shareholders invested in the
Fund on the record date. Dividends are paid from the net investment income of
the Fund. Net investment income consists of all dividends or interest received
by the Fund less its expenses. Capital gains realized by the Fund, if any, are
distributed at least once every twelve months.
DG EQUITY FUND
- --------------------------------------------------------------------------------
(4) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
-------------------------
1994 1993*
---------- ----------
<S> <C> <C>
- -------------------------------------------------------------------
Shares outstanding, beginning of period 17,199,369 --
- -------------------------------------------------------------------
Shares sold 12,800,127 22,509,005
- -------------------------------------------------------------------
Shares issued to shareholders in payment of
distributions in Fund shares 315,593 276
- -------------------------------------------------------------------
Shares redeemed (4,180,747) (5,309,912)
- ------------------------------------------------------------------- ---------- ----------
Shares outstanding, end of period 26,134,342 17,199,369
- ------------------------------------------------------------------- ---------- ----------
</TABLE>
* For the period from August 3, 1992 (date of initial public investment) to
February 28, 1993.
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Deposit Guaranty National Bank, the Trust's investment adviser (the "Adviser"),
receives for its services an annual investment advisory fee equal to 0.75 of 1%
of the Fund's average daily net assets. The Adviser may voluntarily choose to
waive a portion of its fee or reimburse certain operating expenses of the Fund
in excess of limitations imposed by certain states. Under the terms of a sub-
advisory agreement between the Adviser and the Trust Division of Commercial
National Bank, Commercial National Bank receives an annual fee from the Adviser,
equal to 0.25 of 1% of the Fund's average daily net assets. In addition,
Commercial National Bank may voluntarily choose to reduce its compensation. For
the year ended February 28, 1994, Commercial National Bank earned a sub-advisory
fee of $638,439, all of which was voluntarily waived.
Federated Administrative Services ("FAS") provides the Trust certain
administrative personnel and services. The fee is based on the level of average
aggregate net assets of the Trust for the period. FAS may voluntarily choose to
waive a portion of its fee.
Organization expenses of $23,061 were initially borne by FAS. The Fund has
agreed to reimburse FAS for the organization expenses initially borne by FAS
during the five year period following the date the Fund became effective. For
the year ended February 28, 1994, the Fund paid $1,242 pursuant to this
agreement.
Federated Services Company ("FSC") is the Fund's transfer agent and dividend
disbursing agent. It also provides certain accounting and recordkeeping services
with respect to the Fund's portfolio of investments.
DG EQUITY FUND
- --------------------------------------------------------------------------------
Certain Officers and Trustees of the Trust are Officers and Trustees of FAS and
Federated Services Company.
(6) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities for the year
ended February 28, 1994 were as follows:
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------
PURCHASES $102,800,017
- ------------------------------------------------------------------------------ ------------
SALES $ 16,662,959
- ------------------------------------------------------------------------------ ------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Trustees and Shareholder
DG INVESTOR SERIES:
We have audited the statement of assets and liabilities, including the portfolio
of investments, of the DG Equity Fund (a portfolio within DG Investor Series) as
of February 28, 1994, and the related statement of operations for the year then
ended, the statements of changes in net assets and financial highlights, which
is presented on page 2 of this prospectus, for the year ended February 28, 1994
and the period from August 3, 1992 (date of initial public investment) to
February 28, 1993. These financial statements and the financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and the financial highlights. Investment securities held in custody
are confirmed to us by the custodian. As to securities purchased and sold but
not received or delivered, we request confirmations from brokers, and where
replies are not received, we carry out other appropriate auditing procedures. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of the
DG Equity Fund at February 28, 1994 and the results of its operations for the
year then ended, the changes in net assets and financial highlights for the year
ended February 28, 1994 and the period from August 3, 1992 to February 28, 1993,
in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK
Pittsburgh, Pennsylvania
April 7, 1994
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
DG Equity Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Investment Adviser
Deposit Guaranty National Bank P.O. Box 1200
Jackson, Mississippi 39215-1200
- ------------------------------------------------------------------------------------------------
Sub-Adviser
Commercial National Bank P.O. Box 21119
Shreveport, Louisiana 71152
- ------------------------------------------------------------------------------------------------
Custodian
State Street Bank and P.O. Box 1713
Trust Company Boston, Massachusetts 02105
- ------------------------------------------------------------------------------------------------
Transfer Agent, Dividend Disbursing Agent, and
Shareholder Servicing 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 2101 L Street, N.W.
Washington, DC 20037
- ------------------------------------------------------------------------------------------------
Independent Auditors
KPMG Peat Marwick One Mellon Bank Center
Pittsburgh, Pennsylvania 15219
- ------------------------------------------------------------------------------------------------
</TABLE>
DG
EQUITY FUND
- --------------------------------------------------------------------------------
PROSPECTUS
A Diversified Portfolio of
DG Investor Series,
an Open-End Management
Investment Company
Deposit Guaranty
National Bank
Jackson, MS
Commercial
National Bank
Shreveport, LA
APRIL 30, 1994
- --------------------------------------------------------------------------------
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
2061001A (4/94)
The shares offered by this prospectus are not deposits or obligations of Deposit
Guaranty National Bank or Commercial National Bank, are not endorsed or
guaranteed by Deposit Guaranty National Bank or Commercial National Bank, and
are not insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other government agency. Investment
in these shares involves investment risks including the possible loss of
principal.
DG EQUITY FUND
(A PORTFOLIO OF DG INVESTOR SERIES)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus for
DG Equity Fund (the "Fund") dated April 30, 1994. This Statement is not a
prospectus itself. To receive a copy of the prospectus, write or call the Fund.
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
Statement dated April 30, 1994
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES 1
- ---------------------------------------------------------------
Types of Investments 1
Futures and Options Transactions 2
Futures Contracts 2
Put Options on Financial Futures Contracts 2
Call Options on Financial Futures Contracts 2
"Margin" in Futures Transactions 3
Purchasing Put Options on Portfolio Securities 3
Writing Covered Call Options on
Portfolio Securities 3
Corporate Debt Securities 3
Repurchase Agreements 3
Reverse Repurchase Agreements 3
When-Issued and Delayed Delivery Transactions 4
Lending of Portfolio Securities 4
Portfolio Turnover 4
Investment Limitations 4
DG INVESTOR SERIES MANAGEMENT 6
- ---------------------------------------------------------------
Officers and Trustees 6
The Funds 8
Fund Ownership 9
Trustee Liability 9
INVESTMENT ADVISORY SERVICES 9
- ---------------------------------------------------------------
Adviser to the Fund 9
Advisory Fees 9
Sub-Adviser to the Fund 9
Sub-Advisory Fees 9
ADMINISTRATIVE SERVICES 9
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 10
- ---------------------------------------------------------------
PURCHASING SHARES 10
- ---------------------------------------------------------------
Distribution Plan 10
Conversion to Federal Funds 11
DETERMINING NET ASSET VALUE 11
- ---------------------------------------------------------------
Determining Market Value of Securities 11
EXCHANGE PRIVILEGE 11
- ---------------------------------------------------------------
Requirements for Exchange 11
Making an Exchange 11
REDEEMING SHARES 11
- ---------------------------------------------------------------
Redemption in Kind 11
TAX STATUS 12
- ---------------------------------------------------------------
The Fund's Tax Status 12
Shareholders' Tax Status 12
TOTAL RETURN 12
- ---------------------------------------------------------------
YIELD 12
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 12
- ---------------------------------------------------------------
APPENDIX 14
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
The Fund is a portfolio in DG Investor Series (the "Trust") which was
established as a Massachusetts business trust under a Declaration of Trust dated
February 7, 1992.
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
The Fund's primary investment objective is to provide long-term capital
appreciation. Current income is a secondary objective. The investment objectives
cannot be changed without approval of shareholders.
TYPES OF INVESTMENTS
The Fund may invest in convertible securities, zero coupon convertible
securities, money market instruments, common stocks, preferred stocks, corporate
bonds, notes, and put options on stocks. The following are also permitted
investments of the Fund:
CONVERTIBLE SECURITIES
Convertible securities are fixed income securities which may be exchanged
or converted into a predetermined number of the issuer's underlying
common stock at the option of the holder during a specified time period.
Convertible securities may take the form of convertible preferred stock,
convertible bonds or debentures, units consisting of "usable" bonds and
warrants, or a combination of the features of several of these
securities. The investment characteristics of each convertible security
vary widely, which allows convertible securities to be employed for
different investment objectives.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in
which, in the investment adviser's opinion, the investment
characteristics of the underlying common shares will assist the Fund in
achieving its investment objectives. Otherwise, the Fund may hold or
trade convertible securities. In selecting convertible securities for the
Fund, the Fund's adviser evaluates the investment characteristics of the
convertible security as a fixed income instrument and the investment
potential of the underlying equity security for capital appreciation. In
evaluating these matters with respect to a particular convertible
security, the Fund's adviser considers numerous factors, including the
economic and political outlook, the value of the security relative to
other investment alternatives, trends in the determinants of the issuer's
profits, and the issuer's management capability and practices.
ZERO COUPON CONVERTIBLE SECURITIES
Zero coupon convertible securities are debt securities which are issued
at a discount to their face amount and do not entitle the holder to any
periodic payments of interest prior to maturity. Rather, interest earned
on zero coupon convertible securities accretes at a stated yield until
the security reaches its face amount at maturity. Zero coupon convertible
securities are convertible into a specific number of shares of the
issuer's common stock. In addition, zero coupon convertible securities
usually have put features that provide the holder with the opportunity to
put the bonds back to the issuer at a stated price before maturity.
Generally, the prices of zero coupon convertible securities may be more
sensitive to market interest rate fluctuations than conventional
convertible securities.
Federal income tax law requires the holder of a zero coupon convertible
security to recognize income with respect to the security prior to the
receipt of cash payments. To maintain its qualification as a regulated
investment company and avoid liability of federal income taxes, the Fund
will be required to distribute income accrued with respect to zero coupon
convertible securities which it owns, and may have to sell portfolio
securities (perhaps at disadvantageous times) in order to generate cash
to satisfy these distribution requirements.
MONEY MARKET INSTRUMENTS
The Fund may invest in money market instruments of domestic and foreign
banks and savings and loans if they have capital, surplus, and undivided
profits of over $100,000,000, or if the principal amount of the
instrument is insured in full by the Bank Insurance Fund or the Savings
Association Insurance Fund, both of which are administered by the Federal
Deposit Insurance Corporation.
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.
FUTURES AND OPTIONS TRANSACTIONS
As a means of reducing 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 and stock index 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 an exchange which provides a secondary market from options of the same
series.
FUTURES CONTRACTS
A futures contract is a firm commitment between 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.
When the Fund purchases futures contracts, an amount of cash and cash
equivalents, equal to the underlying commodity value of the futures contracts
(less any related margin deposits), will be deposited in a segregated account
with the Fund's custodian (or the broker, if legally permitted) to collateralize
the position and thereby insure that the use of such futures contract is
unleveraged.
Financial futures contracts call for the delivery of particular debt instruments
at a certain time in the future. The seller of the contract agrees to make
delivery of the type of instrument called for in the contract and the buyer
agrees to take delivery of the instrument at the specified future time.
Stock index futures contracts are based on indexes that reflect the market value
of common stock of the firms included in the indexes. An 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 differences 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.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts. Unlike
entering directly into a futures contract, which requires the purchaser to buy a
financial instrument on a set date at a specified price, the purchase of a put
option on a futures contract entitles (but does not obligate) its purchaser to
decide on or before a future date whether to assume a short position at the
specified price.
Generally, if the hedged portfolio securities decrease in value during the term
of an option, the related futures contracts will also decrease in value and the
option will increase in value. In such an event, the Fund will normally close
out its option by selling an identical option. If the hedge is successful, the
proceeds received by the Fund upon the sale of the second option will be large
enough to offset both the premium paid by the Fund for the original option plus
the decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option to 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.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write listed call
options on futures contracts to hedge its portfolio. 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 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 futures price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that the
Fund keeps the premium received for the option. This premium can substantially
offset the drop in value of the Fund's fixed income or indexed portfolio which
is occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of it by the
buyer, the Fund may close out the option by buying an identical option. If the
hedge is successful, the cost of the second option will be less than the premium
- --------------------------------------------------------------------------------
received by the Fund for the initial option. The net premium income of the Fund
will then substantially offset the decrease in value of the hedged securities.
The Fund will not maintain open positions in futures contracts it has sold or
call options it has written on futures contracts if, in the aggregate, the value
of the open positions (marked to market) exceeds the current market value of its
securities portfolio plus or minus the unrealized gain or loss on those open
positions, adjusted for the correlation of volatility between the hedged
securities and the futures contracts. If this limitation is exceeded at any
time, the Fund will take prompt action to close out a sufficient number of open
contracts to bring its open futures and options positions within this
limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury bills
with its custodian (or the broker, if legally permitted). The nature of initial
margin in futures transactions is different from that of margin in securities
transactions in that initial margin in futures transactions does not involve the
borrowing of funds by the Fund to finance the transactions. Initial margin is in
the nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official settlement
price of the exchange on which it is traded. Each day the Fund pays or receives
cash, called "variation margin," equal to the daily change in value of the
futures contract. This process is known as "marking to market." Variation margin
does not represent a borrowing or loan by the Fund but is instead settlement
between the Fund and the broker of the amount one would owe the other if the
futures contract expired. In computing its daily net asset value, the Fund will
mark to market its open futures positions.
The Fund is also required to deposit and maintain margin when it writes call
options on futures contracts.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put options on portfolio securities to protect against
price movements in particular securities in its portfolio. A put option gives
the Fund, in return for a premium, the right to sell the underlying security to
the writer (seller) at a specified price during the term of the option.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may also write covered call options to generate income. As writer of a
call option, the Fund has the obligation upon exercise of the option during the
option period to deliver the underlying security upon payment of the exercise
price. The Fund may only sell call options either on securities held in its
portfolio or on securities which it has the right to obtain without payment of
further consideration (or has segregated cash in the amount of any additional
consideration).
CORPORATE DEBT SECURITIES
Corporate debt securities may bear fixed, fixed and contingent, or variable
rates of interest. They may involve equity features such as conversion or
exchange rights, warrants for the acquisition of common stock of the same or
different issuer, participations based on revenues, sales, or profits, or the
purchase of common stock in a unit transaction (where corporate debt securities
and common stock are offered as a unit).
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. To
the extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are found by the Fund's adviser to
be creditworthy pursuant to guidelines established by the Board of Trustees
("Trustees").
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.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
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-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The Fund engages in
when-issued and delayed delivery transactions only for the purpose of acquiring
portfolio securities consistent with the Fund's investment objectives and
policies, not for investment leverage.
These transactions are made to secure what is considered to be an advantageous
price and 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 at the trade date. These securities are marked to
market daily and maintained until the transaction is settled. The Fund may
engage in these transactions to an extent that would cause the segregation of an
amount up to 20% of the total value of the assets.
During the current year, the Fund does not anticipate investing more than 10% of
its total assets in when-issued and delayed delivery transactions.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking
short-term profits, securities in the portfolio will be sold whenever the
investment 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 investment adviser does not anticipate that the
Fund's portfolio turnover rate will exceed 100%. For the year ended February 28,
1994, and for the period from August 3, 1992 (date of initial public investment)
to February 28, 1993, the portfolio turnover rates were 7% and 28%,
respectively.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin, but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of portfolio securities. The deposit or
payment by the Fund of initial or variation margin in connection with
financial futures contracts or related options transactions is not
considered the purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may borrow
money directly or through reverse repurchase agreements as a temporary
measure for extraordinary or emergency purposes and then only in amounts
not in excess of one-third of the value of its total assets; provided
that, while borrowings exceed 5% of the Fund's total assets, any such
borrowings will be repaid before additional investments are made. The
Fund will not borrow money or engage in reverse repurchase agreements for
investment leverage purposes.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase,
25% or more of the value of its total assets would be invested in any one
industry. However, the Fund may at times invest 25% or more of the value
of its total assets in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities.
- --------------------------------------------------------------------------------
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts except that the Fund may purchase and sell
financial futures and stock index futures contracts and related options.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, including limited
partnership interests in real estate, although it may invest in
securities secured by real estate or interests in real estate.
INVESTING TO EXERCISE CONTROL
The Fund will not purchase securities for the purpose of exercising
control over the issuer of securities.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except that it may purchase or
hold corporate or government 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 objectives and policies or the Trust's Declaration of Trust,
or lend portfolio securities valued at not more than 5% of its total
assets to broker/dealers.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objectives, policies, and limitations.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may pledge assets having
a market value not exceeding the lesser of the dollar amounts borrowed or
15% of the value of total assets at the time of the pledge. For purposes
of this limitation, the following are not deemed to be pledges: margin
deposits for the purchase and sale of financial futures contracts and
related options, and segregation or collateral arrangements made in
connection with options activities or the purchase of securities on a
when-issued basis.
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of its assets, the Fund will not
purchase the securities of any issuer (other than cash, cash items, or
securities issued or guaranteed by U.S. government, 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. Also,
the Fund will not purchase more than 10% of the outstanding voting
securities of any one issuer.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material changes
in these limitations become effective.
RESTRICTED SECURITIES
The Fund will not invest more than 5% of the value of its total assets in
securities subject to restrictions on resale under the Securities Act of
1933, except for certain restricted securities which meet the criteria
for liquidity as established by the Trustees.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement more than seven days after notice, over-the-counter options,
and certain restricted securities not determined by the Trustees to be
liquid.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, other mineral
exploration or development programs, or leases, although it may purchase
the publicly traded securities of companies engaging in such activities.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, will not invest more than 5% of its total assets in any one
investment company, or invest more than 10% of its total assets in
investment companies in general. The Fund will purchase securities of
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, or acquisition of assets. It should be noted
that investment companies incur certain expenses, such as management
fees, and, therefore, any investment by a fund in shares of another
investment company would be subject to such duplicate expenses. The Fund
will invest in other investment companies primarily for the purpose of
investing its short-term cash on a temporary basis. The adviser will
waive its investment advisory fee on assets invested in securities of
open-end investment companies.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or its investment adviser owning
individually more than 1/2 of 1% of the issuer's securities together own
more than 5% of the issuer's securities.
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 WARRANTS
The Fund will not invest more than 5% of its net 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 the New York or American Stock
Exchange to 2% of its net 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.
ARBITRAGE TRANSACTIONS
The Fund will not enter into transactions for the purpose of engaging in
arbitrage.
INVESTING IN PUT OPTIONS
The Fund will not purchase put options on securities, unless the
securities are held in the Fund's portfolio and not more than 5% of the
value of the Fund's total assets would be invested in premiums on open
put option positions.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them
in deliverable form without further payment or after segregating cash in
the amount of any further payment.
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.
For the purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S. branch of
a domestic bank or savings and loan having capital, surplus, and undivided
profits in excess of $100,000,000 at the time of investment to be "cash items."
DG INVESTOR SERIES MANAGEMENT
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, principal occupations,
and present positions, including any affiliation with Deposit Guaranty National
Bank and Commercial National Bank, Federated Investors, Federated Securities
Corp., Federated Administrative Services, Federated Services Company and the
Funds (as defined below).
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
John F. Donahue+* Chairman and Trustee Chairman and Trustee, Federated Investors; Chairman and Trustee, Federated
Federated Investors Advisers, Federated Management, and Federated Research; Director, AEtna Life
Tower and Casualty Company; Chief Executive Officer and Director, Trustee, or
Pittsburgh, PA Managing General Partner of the Funds; formerly, Director, The Standard Fire
Insurance Company. Mr. Donahue is the father of J. Christopher Donahue, Vice
President of the Trust.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
John T. Conroy, Jr. Trustee President, Investment Properties Corporation; Senior Vice-President, John R.
Wood/IPC Commercial Wood and Associates, Inc., Realtors; President, Northgate Village
Department Development Corporation; General Partner & Trustee in private real estate
John R. Wood and ventures in Southwest Florida; Director, Trustee, or Managing General
Associates, Inc., Partner of the Funds; formerly, President Naples Property Management, Inc.
Realtors
3255 Tamiami Trail North
Naples, FL
- --------------------------------------------------------------------------------------------------------------------------------
William J. Copeland Trustee Director and Member of the Executive Committee, Michael Baker, Inc.;
One PNC Plaza-23rd Director, Trustee, or Managing General Partner of the Funds; formerly, Vice
Floor Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan
Pittsburgh, PA Homes, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
James E. Dowd Trustee Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
571 Hayward Mill Road Trustee, or Managing General Partner of the Funds; formerly, Director, Blue
Concord, MA Cross of Massachusetts, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
Lawrence D. Ellis, M.D. Trustee Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
3471 Fifth Avenue Hospitals; Clinical Professor of Medicine and Trustee, University of
Suite 1111 Pittsburgh; Director, Trustee, or Managing General Partner of the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
Edward L. Flaherty, Jr.+ Trustee Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat 'N Park
5916 Penn Mall Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director, Trustee,
Pittsburgh, PA or Managing General Partner of the Funds; formerly, Counsel, Horizon
Financial, F.A., Western Region.
- --------------------------------------------------------------------------------------------------------------------------------
Edward C. Gonzales* President, Vice President, Treasurer, and Trustee, Federated Investors; Vice President
Federated Investors Treasurer, and Treasurer, Federated Advisers, Federated Management, and Federated
Tower and Trustee Research; Executive Vice President, Treasurer, and Director, Federated
Pittsburgh, PA Securities Corp.; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee of some of the Funds; Vice President and Treasurer of the
Funds.
- --------------------------------------------------------------------------------------------------------------------------------
Peter E. Madden Trustee Consultant; State Representative, Commonwealth of Massachusetts; Director,
225 Franklin Street Trustee, or Managing General Partner of the Funds; formerly, President,
Boston, MA State Street Bank and Trust Company and State Street Boston Corporation and
Trustee, Lahey Clinic Foundation, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
Gregor F. Meyer Trustee Attorney-at-law; Partner, Meyer and Flaherty; Director, Trustee, or Managing
5916 Penn Mall General Partner of the Funds; Chairman, Meritcare, Inc.; Director, Eat 'N
Pittsburgh, PA Park Restaurants, Inc.; formerly, Vice Chairman, Horizon Financial, F.A.
- --------------------------------------------------------------------------------------------------------------------------------
Wesley W. Posvar Trustee Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
1202 Cathedral of Endowment for International Peace, RAND Corporation, Online Computer Library
Learning Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak Management
University of Pittsburgh Center; Director, Trustee, or Managing General Partner of the Funds;
Pittsburgh, PA President Emeritus, University of Pittsburgh; formerly Chairman, National
Advisory Council for Environmental Policy & Technology.
- --------------------------------------------------------------------------------------------------------------------------------
Marjorie P. Smuts Trustee Public relations/marketing consultant; Director, Trustee, or Managing
4905 Bayard Street General Partner of the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
J. Christopher Donahue* Vice President President and Trustee, Federated Investors; Trustee, Federated Advisers,
Federated Investors Federated Management, and Federated Research; President and Trustee,
Tower Federated Administrative Services; Trustee, Federated Services Company;
Pittsburgh, PA 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 Trustee of the Trust.
- --------------------------------------------------------------------------------------------------------------------------------
Richard B. Fisher Vice President Executive Vice President and Trustee, Federated Investors; Chairman and
Federated Investors Director, Federated Securities Corp.; President or Vice President of the
Tower Funds; Director or Trustee of some of the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
John W. McGonigle Vice President Vice President, Secretary, General Counsel, and Trustee, Federated
Federated Investors and Secretary Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Tower Federated Management, and Federated Research; Trustee, Federated Services
Pittsburgh, PA Company; Executive Vice President, Secretary, and Trustee, Federated
Administrative Services; Director and Executive Vice President, Federated
Securities Corp.; Vice President and Secretary of the Funds.
- --------------------------------------------------------------------------------------------------------------------------------
Ronald M. Petnuch Vice President Vice President, Federated Administrative Services; Vice President and
Federated Investors and Assistant Assistant Treasurer of some of the Funds; formerly, Associate Corporate
Tower Treasurer Counsel of Federated Investors.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
John A. Staley, IV Vice President Vice President and Trustee, Federated Investors; Executive Vice President,
Federated Investors Federated Securities Corp.; President and Trustee, Federated Advisers,
Tower Federated Management, and Federated Research; Vice President of the Funds;
Pittsburgh, PA Director, Trustee, or Managing General Partner of some of the Funds;
formerly, Vice President, The Standard Fire Insurance Company and President
of its Federated Research Division.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* This Trustee is deemed to be an "interested person" of the Trust as defined in
the Investment Company Act of 1940.
+ Member of the Trust's Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
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; Cash Trust Series II; 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 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; 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; Signet Select
Funds; 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
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of April 7, 1994, the following shareholder of record owned 5% or more of the
outstanding shares of the Fund: Commercial National Bank, Shreveport,
Louisianna, owned approximately 5,276,272 shares (20.38%).
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will only be liable
for their own willful defaults. If reasonable care has been exercised in the
selection of officers, agents, employees, or investment advisers, a Trustee
shall not be liable for any neglect or wrong doing of any such person. However,
they are not protected against any liability to which they would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND
The Fund's investment adviser is Deposit Guaranty National Bank (the "Adviser"),
a subsidiary of Deposit Guaranty Corp. The Adviser shall not be liable to the
Trust, the Fund 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 Trust. Because of the internal controls maintained by
Deposit Guaranty National Bank to restrict the flow of non-public information,
Fund investments are typically made without any knowledge of Deposit Guaranty
National Bank's or affiliates' lending relationships with an issuer.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus.
For the year ended February 28, 1994, and for the period from August 3, 1992
(date of initial public investment) to February 28, 1993, the Fund's Adviser
earned $1,915,318, and $463,189, respectively, of which $27,126, and $310,735,
respectively, were voluntarily waived.
SUB-ADVISER TO THE FUND
The Fund's sub-adviser is Commercial National Bank (the "Sub-Adviser"), a
subsidiary of Deposit Guaranty Corp.
SUB-ADVISORY FEES
For its sub-advisory services, the Sub-Adviser receives an annual sub-advisory
fee as described in the prospectus.
For the year ended February 28, 1994, and for the period from August 3, 1992
(date of initial public investment), to February 28, 1993, the Fund's
Sub-Adviser earned sub-advisory fees of $638,439, and $154,396, respectively,
all of which was voluntarily waived.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2 1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1 1/2% per
year of the remaining average net assets, the Adviser will reimburse the
Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this expense
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for the fees set forth in the
prospectus. For the year ended February 28, 1994, and for the period from
- --------------------------------------------------------------------------------
August 3, 1992 (date of initial public investment) to February 28, 1993, the
Fund incurred administrative services fees of $328,534, and $86,303,
respectively, of which $0 and $15,266, respectively, were voluntarily waived.
John A. Staley, IV, an officer of the Fund, holds approximately 15% 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. For the fiscal years ended February 28, 1994, 1993, and
1992, Federated Administrative Services paid approximately $159,222, $179,920,
and $202,532, respectively, for services provided by Commercial Data Services,
Inc.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Trustees.
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the Adviser
and may include:
- - advice as to the advisability of investing in securities;
- - security analysis and reports;
- - economic studies;
- - industry studies;
- - receipt of quotations for portfolio evaluations; and
- - similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the Adviser in advising the
Fund and other accounts. To the extent that receipt of these services may
supplant services for which the Adviser or its affiliates might otherwise have
paid, it would tend to reduce their expenses.
For the year ended February 28, 1994, and for the period from August 3, 1992
(date of initial public investment) to February 28, 1993, the Fund paid total
commissions of $159,709 and $278,238, respectively, on brokerage transactions.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Shares of the Fund are sold at their net asset value next determined after an
order is received, plus a sales charge, on days the New York Stock Exchange and
Federal Reserve Wire System are open for business. The procedure for purchasing
shares is explained in the prospectus under "Investing in the Fund."
DISTRIBUTION PLAN
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule 12b-1
which was promulgated by the Securities and Exchange Commission pursuant to the
Investment Company Act of 1940. The Plan provides for payment of fees to
Federated Securities Corp. to finance any activity which is principally intended
to result in the sale of the Fund's shares subject to the Plan. Such activities
may include the advertising and marketing of shares of the Fund; preparing,
printing, and distributing prospectuses and sales literature to prospective
shareholders, brokers, or administrators; and implementing and operating the
Plan. Pursuant to the Plan, Federated Securities Corp. may pay fees to brokers
for distribution and administrative services and to administrators for
administrative services provided to the Fund. The administrative services are
provided by a representative who has knowledge of the shareholder's particular
circumstances and goals, and include, but are not limited to: communicating
account openings; communicating account closings; entering purchase
transactions; entering redemption transactions; providing or arranging to
provide accounting support for all transactions, wiring funds and receiving
funds for purchases and redemptions of Fund shares, confirming and reconciling
all transactions, reviewing the activity in Fund accounts and providing training
and supervision of broker personnel; posting and reinvesting dividends to Fund
accounts or arranging for this service to be performed by the Fund's transfer
agent; and maintaining and distributing current copies of prospectuses and
shareholder reports to the beneficial owners of Fund shares and prospective
shareholders.
- --------------------------------------------------------------------------------
The Trustees expect that the adoption of the Plan will result in the sale of a
sufficient number of shares so as to allow the Fund to achieve economic
viability. It is also anticipated that an increase in the size of the Fund will
facilitate more efficient portfolio management and assist the Fund in seeking to
achieve its investment objectives.
For the year ended February 28, 1994, and for the period from August 3, 1992
(date of initial public investment) to February 28, 1993, brokers and
administrators (financial institutions) received no fees pursuant to the Plan.
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. Deposit Guaranty National Bank
and Commercial National Bank (the "Banks"), as well as Federated Services
Company, act as the shareholder's agent in depositing checks and converting them
to federal funds.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value generally changes each day. The days on which the net asset
value is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market value of the Fund's portfolio securities are determined as follows:
- - for equity securities and bonds and other fixed income securities, according
to the last sale price on a national securities exchange, if available;
- - in the absence of recorded sales of equity securities, according to the mean
between the last closing bid and asked prices, and for bonds and other fixed
income securities as determined by an independent pricing service;
- - for unlisted equity securities, the latest bid prices;
- - for short-term obligations, according to the mean between bid and asked prices
as furnished by an independent pricing service or for short-term obligations
with remaining maturities of 60 days or less at the time of purchase, at
amortized cost; or
- - for all other securities, at fair value as determined in good faith by the
Trustees.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
REQUIREMENTS FOR EXCHANGE
Before the exchange, the shareholder must receive a prospectus of the fund for
which the exchange is being made. This privilege is available to shareholders
resident in any state in which the 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 shares of the
other fund.
Further information on the exchange privilege and prospectuses may be obtained
by calling the Fund.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions may
require a signature guarantee.
REDEEMING SHARES
- --------------------------------------------------------------------------------
Shares of the Fund are redeemed at the next computed net asset value after the
Banks receive the redemption request. Redemption procedures are explained in the
prospectus under "Redeeming Shares." Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on federal holidays when
wire transfers are restricted.
Although State Street Bank does not charge for telephone redemptions, it
reserves the right to charge a fee for the cost of wire-transferred redemptions
of less than $5,000.
REDEMPTION IN KIND
Although the Fund intends to redeem shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the Fund's portfolio.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
- --------------------------------------------------------------------------------
The Fund has elected to be governed by Rule 18f-1 of the Investment Company Act
of 1940 under which the Fund is obligated to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period.
TAX STATUS
- --------------------------------------------------------------------------------
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
- - derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
- - 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.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as cash or
additional shares. These dividends, and any short-term capital gains, are
taxable as ordinary income.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's average annual total returns for the year ended February 28, 1994,
and for the period from August 3, 1992 (date of initial public investment) to
February 28, 1994, were 2.84% and 5.93%, respectively. The average annual total
return for the Fund is the average compounded rate of return for a given period
that would equate a $1,000 initial investment to the ending redeemable value of
that investment. The ending redeemable value is computed by multiplying the
number of shares owned at the end of the period by the maximum offering price
per share at the end of the period. The number of shares owned at the end of the
period is based on the number of shares purchased at the beginning of the period
with $1,000, less any applicable sales load, adjusted over the period by any
additional shares, assuming the quarterly reinvestment of all dividends and
distributions.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for the thirty-day period ended February 28, 1994, was 1.28%.
The yield for the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the offering price per share of the Fund on the last
day of the period. This value is then annualized using semi-annual compounding.
This means that the amount of income generated during the thirty-day period is
assumed to be generated each month over a 12-month period and is reinvested
every six months. The yield does not necessarily reflect income actually earned
by the Fund because of certain adjustments required by the Securities and
Exchange Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the Fund,
performance will be reduced for those shareholders paying those fees.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The Fund's performance depends upon such variables as:
- - portfolio quality;
- - average portfolio maturity;
- - type of instruments in which the portfolio is invested;
- - changes in interest rates and market value of portfolio securities;
- - changes in the Fund's expenses; and
- - various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per share fluctuate daily. Both net earnings and offering
price per share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index
- --------------------------------------------------------------------------------
used, prevailing market conditions, portfolio compositions of other funds, and
methods used to value portfolio securities and compute offering price. The
financial publications and/or indices which the Fund uses in advertising may
include:
- - LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all income dividends and capital gains distributions, if any.
From time to time, the Fund will quote its Lipper ranking in the "equity,
growth and income" category in advertising and sales literature.
- - DOW JONES INDUSTRIAL AVERAGE ("DJIA") represents share prices of selected
blue-chip industrial corporations as well as public utility and transportation
companies. The DJIA indicates daily changes in the average price of stocks in
any of its categories. It also reports total sales for each group of
industries. Because it represents the top corporations of America, the DJIA's
index movements are leading economic indicators for the stock market as a
whole.
- - 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.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. These total returns
represent the change, over a specified period of time, in the value of an
investment in the Fund based on monthly reinvestment of dividends and other
investments.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD AND POOR'S CORPORATION CORPORATE BOND RATINGS
AAA--Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effect of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
NR--NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS
AAA--Bonds which are rated AAA are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged". Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA--Bonds which are rated AA are judged to be of high quality by all standards.
Together with the AAA group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in AAA securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
BAA--Bonds which are rated BAA are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
NR--Not rated by Moody's.
Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+".
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
- --------------------------------------------------------------------------------
NR--NR indicates that Fitch does not rate the specific issue.
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
STANDARD AND POOR'S CORPORATION COMMERCIAL PAPER RATINGS
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
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; and well-established access
to a range of financial markets and assured sources of alternative liquidity.
PRIME-2--Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
F-1+(Exceptionally Strong Credit Quality)Issues assigned this rating is regarded
as having the strongest degree of assurance for timely payment.
F-1--(Very Strong Credit Quality) Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
(4/94)
DG EQUITY FUND
- --------------------------------------------------------------------------------
ANNUAL REPORT FOR FISCAL YEAR ENDED FEBRUARY 28, 1994
INVESTMENT REVIEW
Seeming to reverse the dominant market trends experienced over the
first six months of the Fund's fiscal year, many of the issues and economic
sectors which had earlier been drubbed regained favor and flourished until
the year's close. While it is not at all unusual for those economic sectors
favored by the Fund's investment style, such as consumer non-durables, high
technology and healthcare, to dominate during any year's last calendar
quarter, the abruptness and magnitude of this market's change of heart was
notable.
We have continued to persist in our on-going efforts to nudge the
Fund's portfolio even more closely to our stated investment profile. This
"paring" and adjustment is an effort to ensure the Fund's full
participation when its investment style--and the issues we would typically
emphasize--once again prevail in the market place.
For the fiscal year ended February 28, 1994, the Fund's total rate of
return was 4.99% based on net asset value (2.84% taking into account the
sales charge).*
* Performance quoted represents past performance. Investment return and
principal value will fluctuate, so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
PERFORMANCE COMPARISON
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 INVESTMENT
IN DG EQUITY FUND AND STANDARD AND POOR'S 500 INDEX.+
Graphic representation "C1" omitted. See Appendix.
<TABLE>
<CAPTION>
MEASUREMENT PERIOD DG EQUITY STANDARD AND
(FISCAL YEAR COVERED) FUND POOR'S 500
<S> <C> <C>
8/1/92 9800 10000
2/28/93 10427 10632
2/28/94 10952 11512
</TABLE>
Past performance is not predictive of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
This annual report incorporates by reference and accompanies the prospectus
dated April 30, 1994.
* Reflects performance of DG Equity Fund from August 1, 1992 through February
28, 1994.
** Represents a hypothetical investment of $10,000 in DG Equity Fund, after
deducting the maximum sales charge of 2.00% ($10,000 investment minus $200
sales charge = $9,800). The Fund's performance assumes the reinvestment of
all dividends and distributions. The Standard and Poor's 500 Index is
adjusted to reflect reinvestment of dividends on securities in the index.
+ The Standard and Poor's 500 Index is not adjusted to reflect sales loads,
expenses, or other fees that the SEC requires to be reflected in the Fund's
performance.
++ Reflects maximum applicable fees.
FEDERATED SECURITIES CORP.
(LOGO)
- --------------------------------------------------------------------------------
Distributor
2061001ARS (4/94)
DG MUNICIPAL INCOME FUND
(A PORTFOLIO OF DG INVESTOR SERIES)
PROSPECTUS
The shares of DG Municipal Income Fund (the "Fund") offered by this prospectus
represent interests in a diversified portfolio of DG Investor Series (the
"Trust"), an open-end, management investment company (a mutual fund).
The investment objective of the Fund is to provide dividend income that is
exempt from federal regular income tax. The Fund pursues its investment
objective by investing in municipal securities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF DEPOSIT
GUARANTY NATIONAL BANK OR COMMERCIAL NATIONAL BANK, ARE NOT ENDORSED OR
GUARANTEED BY DEPOSIT GUARANTY NATIONAL BANK OR COMMERCIAL NATIONAL BANK, AND
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES
INVOLVES INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated April 30,
1994, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information
free of charge, obtain other information, or make inquiries about the Fund by
writing or calling the Fund.
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 April 30, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ---------------------------------------------------------
FINANCIAL HIGHLIGHTS 2
- ---------------------------------------------------------
GENERAL INFORMATION 3
- ---------------------------------------------------------
INVESTMENT INFORMATION 3
- ---------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Characteristics 4
Participation Interests 4
Variable Rate Municipal Securities 4
Municipal Leases 4
When-Issued and Delayed
Delivery Transactions 5
Lending of Portfolio Securities 5
Temporary Investments 5
Other Investment Techniques 5
Municipal Securities 5
Investment Risks 6
Investment Limitations 6
DG INVESTOR SERIES INFORMATION 6
- ---------------------------------------------------------
Management of the Trust 6
Board of Trustees 6
Investment Adviser 7
Advisory Fees 7
Adviser's Background 7
Sub-Adviser 7
Sub-Advisory Fees 7
Sub-Adviser's Background 8
Distribution of Fund Shares 8
Distribution Plan 8
Shareholder Servicing Arrangements 9
ADMINISTRATION OF THE FUND 9
- ---------------------------------------------------------
Administrative Services 9
Custodian 9
Transfer Agent, Dividend
Disbursing Agent, and
Shareholder Servicing Agent 9
Legal Counsel 9
Independent Auditors 10
Brokerage Transactions 10
NET ASSET VALUE 10
- ---------------------------------------------------------
INVESTING IN THE FUND 10
- ---------------------------------------------------------
Share Purchases 10
Through the Banks 10
Minimum Investment Required 11
What Shares Cost 11
Purchases at Net Asset Value 11
Sales Charge Reallowance 11
Reducing the Sales Charge 12
Quantity Discounts and
Accumulated Purchases 12
Letter of Intent 12
Reinvestment Privilege 12
Concurrent Purchases 13
Exchanging Securities for Fund Shares 13
Systematic Investment Program 13
Certificates and Confirmations 13
Dividends and Distributions 13
EXCHANGE PRIVILEGE 13
- ---------------------------------------------------------
DG Investor Series 13
Exchanging Shares 13
REDEEMING SHARES 14
- ---------------------------------------------------------
Through the Banks 14
By Telephone 14
By Mail 15
Signatures 15
Systematic Withdrawal Program 15
Accounts With Low Balances 16
SHAREHOLDER INFORMATION 16
- ---------------------------------------------------------
Voting Rights 16
Massachusetts Partnership Law 16
EFFECT OF BANKING LAWS 17
- ---------------------------------------------------------
TAX INFORMATION 17
- ---------------------------------------------------------
Federal Income Tax 17
Other State and Local Taxes 18
PERFORMANCE INFORMATION 18
- ---------------------------------------------------------
FINANCIAL STATEMENTS 19
- ---------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 31
- ---------------------------------------------------------
ADDRESSES Inside Back Cover
- ---------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)......... 2.00%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)............................................... None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds as applicable).............................. None
Redemption Fee (as a percentage of amount redeemed, if applicable).................. None
Exchange Fee........................................................................ None
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(1).................................................... 0.19%
12b-1 Fees(2)....................................................................... 0.00%
Total Other Expenses................................................................ 0.55%
Total Fund Operating Expenses(3)................................................ 0.74%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of the
investment advisory fee by the investment adviser. The adviser can terminate
this voluntary waiver at any time at its sole discretion. The maximum management
fee is 0.60%.
(2) As of the date of this prospectus, the Fund is not paying or accruing 12b-1
fees. The Fund will not accrue or pay 12b-1 fees until a separate class of
shares has been created for certain institutional investors. The Fund can pay up
to 0.35% as a 12b-1 fee to the distributor.
(3) The Annual Fund Operating Expenses were 0.74% for the fiscal year ended
February 28, 1994. The Annual Fund Operating Expenses in the above table reflect
a reduction in the voluntary waiver of the investment advisory fee and
administrative fee for the fiscal year ending February 28, 1995. The Total Fund
Operating Expenses are anticipated to be 1.15% absent the voluntary waiver of
the investment advisory fee.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUND WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND
EXPENSES, SEE "DG INVESTOR SERIES INFORMATION" AND "INVESTING IN THE FUND."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end
of each time period........................................ $ 27 $ 43 $ 60 $ 110
</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 FEBRUARY
28, 1995.
DG MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 31.
<TABLE>
<CAPTION>
YEAR ENDED
FEBRUARY 28,
-------------------
1994 1993*
------- -------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.51 $10.00
- -----------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------
Net investment income 0.48 0.07
- -----------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.08 0.49
- ----------------------------------------------------------------------------------- ------- -------
Total from investment operations 0.56 0.56
- ----------------------------------------------------------------------------------- ------- -------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.49) (0.05)
- -----------------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment transactions (0.01) --
- ----------------------------------------------------------------------------------- ------- -------
Total Distributions (0.50) (0.05)
- ----------------------------------------------------------------------------------- ------- -------
NET ASSET VALUE, END OF PERIOD $10.57 $10.51
- ----------------------------------------------------------------------------------- ------- -------
TOTAL RETURN** 5.34% 5.65%
- -----------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------
Expenses 0.74% 0.48%(a)
- -----------------------------------------------------------------------------------
Net investment income 4.60% 4.11%(a)
- -----------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.67% 1.02%(a)
- -----------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $34,435 $15,644
- -----------------------------------------------------------------------------------
Portfolio turnover rate 9% 93%
- -----------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from December 21, 1992 (date of initial
public investment) to
February 28, 1993.
** Based on net asset value which does not reflect the sales load or contingent
deferred sales charge, if applicable.
<TABLE>
<C> <S>
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
</TABLE>
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended February 28, 1994, which can be obtained
free of charge.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated February 7, 1992. The Declaration of Trust permits the Trust to
offer separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes.
Shares of the Fund are designed for retail and trust customers of Deposit
Guaranty National Bank and Commercial National Bank and their affiliates as a
convenient means of participating in a professionally managed, diversified
portfolio consisting primarily of government securities. A minimum initial
investment of $1,000 is required.
Fund shares are sold at net asset value plus an applicable sales charge and are
redeemed at net asset value.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide dividend income that is
exempt from federal regular income tax. Interest income of the Fund that is
exempt from federal regular income tax retains its tax-free status when
distributed to the Fund's shareholders. This investment objective cannot be
changed without the approval of the Fund's shareholders. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by following the investment policies described in this prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing in municipal securities.
As a matter of investment policy, which may not be changed without shareholder
approval, under normal circumstances, the Fund will be invested so that at least
80% of the income from investments will be exempt from federal regular income
tax or that at least 80% of its net assets are invested in obligations, the
interest from which is exempt from federal regular income tax.
Unless indicated otherwise, the investment policies of the Fund may be changed
by the Board of Trustees ("Trustees") without the approval of shareholders.
Shareholders will be notified before any material change in these policies
becomes effective.
ACCEPTABLE INVESTMENTS. The municipal securities in which the Fund invests are:
- debt obligations and municipal leases issued by or on behalf of any
state, territory, or possession of the United States, including the
District of Columbia, or any political subdivision of any of them; and
- participation interests, as described below, in any of the above
obligations,
the interest from which is, in the opinion of bond counsel for the issuers or in
the opinion of officers of the Fund and/or the investment adviser to the Fund,
exempt from federal regular income tax.
CHARACTERISTICS. The municipal securities in which the Fund invests are:
- rated "investment grade," i.e., Baa or better by Moody's Investors
Service, Inc. ("Moody's"), or BBB or better by Standard & Poor's
Corporation ("S&P") or Fitch Investors Service, Inc. ("Fitch");
- guaranteed at the time of purchase by the U.S. government, its agencies
or instrumentalities, as to the payment of principal and interest;
- fully collateralized by an escrow of U.S. government or other securities
acceptable to the Fund's investment adviser;
- rated at the time of purchase within Moody's highest short-term municipal
obligation rating (MIG1/VMIG1) or Moody's highest municipal commercial
paper rating (P-1) or S&P's highest short-term municipal commercial paper
rating (SP-1) or Fitch's highest tax-exempt municipal obligation rating
(FIN-1);
- unrated if, at the time of purchase, longer term municipal securities of
the issuer are rated Baa or better by Moody's or BBB or better by S&P or
Fitch (however, investments in unrated securities will not exceed 20% of
the Fund's total assets); or
- determined by the Fund's investment adviser to be equivalent to municipal
securities which are rated Baa or better by Moody's or BBB or better by
S&P or Fitch.
It should be noted that securities rated BBB by S&P or Baa by Moody's are
considered to have speculative characteristics. Changes in economic conditions
or other circumstances are more likely to lead to weakened capacity to make
principal and interest payments than higher rated bonds. A description of the
rating categories is contained in the Appendix to the Statement of Additional
Information.
PARTICIPATION INTERESTS. The Fund may purchase participation interests
from financial institutions such as commercial banks, savings and loan
associations, and insurance companies. These participation interests give
the Fund an undivided interest in municipal securities. The financial
institutions from which the Fund purchases participation interests
frequently provide or secure irrevocable letters of credit or guarantees to
assure that the participation interests are of high quality. The Trustees
will determine that participation interests meet the prescribed quality
standards for the Fund.
VARIABLE RATE MUNICIPAL SECURITIES. The Fund may purchase municipal
securities that have variable interest rates. Variable interest rates are
ordinarily stated as a percentage of a published interest rate, interest
rate index, or some similar standard, such as the 91-day U.S. Treasury bill
rate.
Many variable rate municipal securities are subject to payment of principal
on demand by the Fund, usually in not more than seven days. All variable
rate municipal securities will meet the quality standards for the Fund.
MUNICIPAL LEASES. Municipal leases are obligations issued by state and
local governments or authorities to finance the acquisition of equipment
and facilities and may be considered to be illiquid. They may take the form
of a lease, an installment purchase contract, or a conditional sales
contract.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase portfolio
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. In when-issued and delayed delivery transactions,
the Fund relies on the seller to complete the transaction. The seller's failure
to complete the transaction may cause the Fund to miss a price or yield
considered to be advantageous.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or long-term basis, or both,
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 Trustees, and will receive collateral in the form of cash or
U.S. government securities equal to at least 100% of the value of the portfolio
securities loaned at all times.
TEMPORARY INVESTMENTS. From time to time, on a temporary basis, or when the
investment adviser determines that market conditions call for a temporary
defensive posture, the Fund may invest in short-term tax-exempt or taxable
temporary investments. These temporary investments include: fixed or variable
rate notes issued by or on behalf of municipal or corporate issuers; obligations
issued or guaranteed by the U.S. government, its agencies or instrumentalities;
other debt securities; securities of other investment companies; commercial
paper; certificates of deposit, demand and time deposits, bankers' acceptances,
deposit notes, and other instruments of domestic and foreign banks and other
deposit institutions ("Bank Instruments"); and repurchase agreements
(arrangements in which the institution selling the Fund a bond or temporary
investment agrees at the time of sale to repurchase it at a mutually agreed upon
time and price). There are no rating requirements applicable to temporary
investments.
Although the Fund is permitted to make taxable, temporary investments, there is
no current intention of generating income subject to federal regular income tax.
OTHER INVESTMENT TECHNIQUES. The Fund may purchase a right to sell a security
held by it back to the issuer or to another party at an agreed upon price at any
time during a stated period or on a certain date. These rights may be referred
to as "liquidity puts" or "standby commitments."
MUNICIPAL SECURITIES
Municipal securities are generally issued to finance public works such as
airports, bridges, highways, housing, hospitals, mass transportation projects,
schools, streets, and water and sewer works. They are also issued to repay
outstanding obligations, to raise funds for general operating expenses, and to
make loans to other public institutions and facilities.
Municipal securities include industrial development bonds issued by or on behalf
of public authorities to provide financing aid to acquire sites or construct and
equip facilities for privately or publicly owned corporations. The availability
of this financing encourages these corporations to locate within the sponsoring
communities and thereby increases local employment.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. Interest on and principal of revenue bonds, however, are
payable only from the revenue generated by the facility financed by the bond or
other specified sources of revenue. Revenue bonds do not represent a pledge of
credit or create any debt of or charge against the general revenues of a
municipality or public authority. Industrial development bonds are typically
classified as revenue bonds.
INVESTMENT RISKS
Yields on municipal securities depend on a variety of factors, including: the
general conditions of the money market and the taxable and municipal bond
markets; the size of the particular offering; the maturity of the obligations;
and the rating of the issue. The ability of the Fund to achieve its investment
objective also depends on the continuing ability of the issuers of municipal
securities and participation interests, or the guarantors of either, to meet
their obligations for the payment of interest and principal when due.
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 money and engage in reverse repurchase agreements in amounts
up to one-third of the value of its total assets and pledge up to 15% of
its total assets to secure such borrowings.
The above investment limitation cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
The Fund will not:
- invest more than 15% of its total assets in securities subject to
restrictions on resale under the Securities Act of 1933, except for
commercial paper issued under Section 4(2) of the Securities Act of 1933
and certain other restricted securities which meet the criteria for
liquidity as established by the Trustees; or
- invest more than 15% of its net assets in illiquid securities, including
repurchase agreements providing for settlement more than seven days after
notice and certain restricted securities not determined by the Trustees
to be liquid.
DG INVESTOR SERIES INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees
are responsible for managing the Trust's business affairs and for exercising all
of the powers of the Trust except those reserved for the shareholders. The
Executive Committee of the Board of Trustees handles the Trustees'
responsibilities between meetings of the Trustees.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Deposit Guaranty National Bank,
the Fund's investment adviser (the "Adviser"), subject to direction by the
Trustees. The Adviser, in consultation with the sub-adviser, continually
conducts investment research and supervision for the Fund and is responsible for
the purchase and sale of portfolio instruments.
ADVISORY FEES. The Fund's Adviser receives an annual investment advisory
fee equal to .60 of 1% of the Fund's average daily net assets. The
investment advisory contract provides for the voluntary waiver of expenses
by the adviser from time to time. The adviser has undertaken to waive up to
the amount of the advisory fee for operating expenses in excess of
limitations established by certain states. The adviser may voluntarily
choose to waive a portion of its fees or reimburse the Fund for certain
other expenses, but reserves the right to terminate such waiver or
reimbursement at any time at its sole discretion.
ADVISER'S BACKGROUND. Deposit Guaranty National Bank, a national banking
association formed in 1925, is a subsidiary of Deposit Guaranty Corp
("DGC"). Through its subsidiaries and affiliates, DGC offers a full range
of financial services to the public including commercial lending,
depository services, cash management, brokerage services, retail banking,
mortgage banking, investment advisory services and trust services. Deposit
Guaranty National Bank has served as the Trust's investment adviser since
May 5, 1992.
As of December 31, 1993, the Trust Division of Deposit Guaranty National
Bank had approximately $9 billion under administration, of which it had
investment discretion over $1.4 billion. Deposit Guaranty National Bank has
served as the Trust's investment adviser since May 5, 1992.
As part of their regular banking operations, Deposit Guaranty National Bank
and Commercial National Bank, the Fund's sub-adviser, may make loans to
public companies. Thus, it may be possible, from time to time, for the Fund
to hold or acquire the securities of issuers which are also lending clients
of Deposit Guaranty National Bank and Commercial National Bank. The lending
relationships will not be a factor in the selection of securities.
William A. Womack is a Vice President and Trust Investment Officer, and has
been with Deposit Guaranty National Bank for ten years. Mr. Womack spent
eight years prior to joining Deposit Guaranty in the investment brokerage
business. A graduate of Louisiana State University, he received a B.S. in
Finance, with a minor in Economics. Mr. Womack is a member of the
Mississippi Chapter of the Memphis Society of Financial Analysts. Mr.
Womack has managed the DG Municipal Income Fund since December 21, 1992
(the inception of the Fund).
SUB-ADVISER. Under the terms of a sub-advisory agreement between Deposit
Guaranty National Bank and Commercial National Bank (the "Sub-Adviser"), the
Sub-Adviser will furnish to the Adviser such investment advice, statistical and
other factual information as may be requested by Adviser. The portfolio managers
from the Trust Divisions of Deposit Guaranty National Bank and Commercial
National Bank will form an investment committee (the "Deposit Guaranty Asset
Management Group") to discuss investment strategies and evaluate securities and
the economic outlook.
SUB-ADVISORY FEES. For its services under the sub-advisory agreement, the
Sub-Adviser receives an annual fee from the Adviser equal to 0.25 of 1% of
the average daily net assets of the Fund. The
sub-advisory fee is accrued daily and paid monthly. In the event that the
fee due from the Trust to the Adviser on behalf of the Fund is reduced in
order to meet expense limitations imposed on the Fund by state securities
laws and regulations, the sub-advisory fee will be reduced by one-half of
said reduction. Notwithstanding any other provision in the sub-advisory
agreement, the Sub-Adviser may, from time to time and for such periods as
it deems appropriate, reduce its compensation (and, if appropriate, assume
expenses of the Fund or class of the Fund) to the extent that the Fund's
expenses exceed such lower expense limitation as the Sub-Adviser may, by
notice to the Trust on behalf of the Fund, voluntarily declare to be
effective.
SUB-ADVISER'S BACKGROUND. Commercial National Bank, a national banking
association which received its charter in 1886, is a subsidiary of DGC. As
of December 31, 1993, the Trust Division at Commercial National Bank had
approximately $1.2 billion in trust assets under administration, of which
it had investment discretion over $1.02 billion. Commercial National Bank
has served as sub-adviser to DG Government Income Fund, DG Limited Term
Government Income Fund, and DG Equity Fund since July 20, 1992, and to the
Fund since December 12, 1992, each a portfolio of the Trust.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal distributor for shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Under a distribution plan adopted in accordance with the
Investment Company Act Rule 12b-1 (the "Plan"), the Fund will pay to the
distributor an amount computed at an annual rate of 0.35 of 1% of the average
daily net asset value of the Fund to finance any activity which is principally
intended to result in the sale of shares subject to the Plan.
The distributor may, from time to time and for such periods as it deems
appropriate, voluntarily reduce its compensation under the Plan to the extent
the expenses attributable to the shares exceed such lower expense limitation as
the distributor may, by notice to the Trust, voluntarily declare to be
effective.
The distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers ("brokers")
to provide distribution and/or administrative services as agents for their
clients or customers. Administrative services may include, but are not limited
to, the following functions: 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;
assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as may reasonably be requested.
The distributor will pay financial institutions a fee based upon shares subject
to the Plan and 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 distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no payments
to the distributor except as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the
distributor, including amounts expended by the distributor in excess of amounts
received by it from the Fund, interest, carrying or other financing charges in
connection with excess amounts expended, or the distributor's overhead expenses.
However, the distributor may be able to recover such amounts or may earn a
profit form future payments made by the Fund under the Plan.
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 Trustees 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 laws.
SHAREHOLDER SERVICING ARRANGEMENTS. The distributor may pay financial
institutions a fee with respect to the average net asset value of shares held by
their customers for providing administrative services. This fee, if paid, will
be reimbursed by the Adviser and not the Fund.
ADMINISTRATION OF THE FUND
- --------------------------------------------------------------------------------
ADMINISTRATIVE SERVICES. Federated Administrative Services, which is a
subsidiary of Federated Investors, provides the Fund with the administrative
personnel and services necessary to operate the Fund. Such services include
shareholder servicing and certain legal and accounting services. Federated
Administrative Services provides these at an annual rate:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
- --------------------- ------------------------------------
<C> <S>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall aggregate at least
$100,000 per Fund. Federated Administrative Services may choose voluntarily to
reimburse a portion of its fee at any time.
CUSTODIAN. State Street Bank and Trust Company ("State Street Bank"), Boston,
Massachusetts, is custodian for the securities and cash of the Fund.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND SHAREHOLDER SERVICING AGENT.
Federated Services Company, Pittsburgh, Pennsylvania, is transfer agent for the
shares of the Fund, dividend disbursing agent for the Fund, and shareholder
servicing agent for the Fund.
LEGAL COUNSEL. Legal counsel for the Fund is provided by Houston, Houston &
Donnelly, Pittsburgh, Pennsylvania and Dickstein, Shapiro & Morin, Washington,
D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are KPMG Peat
Marwick, Pittsburgh, Pennsylvania.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the Adviser may give consideration to those
firms which have sold or are selling shares of the Fund and other funds
distributed by Federated Securities Corp. The Adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to review by the
Trustees.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per share fluctuates. It is determined by dividing
the sum of the market value of all securities and other assets, less
liabilities, by the number of shares outstanding.
INVESTING IN THE FUND
- --------------------------------------------------------------------------------
SHARE PURCHASES
Fund shares are sold on days on which the New York Stock Exchange and the
Federal Reserve Wire System are open for business. Fund shares may be ordered by
telephone through procedures established with Commercial National Bank and
Deposit Guaranty National Bank (collectively, the "Banks") in connection with
qualified account relationships. Such procedures may include arrangements under
which certain accounts are swept periodically and amounts exceeding an
agreed-upon minimum are invested automatically in Fund shares. Texas residents
must purchase shares of the Fund through Federated Securities Corp. at
1-800-356-2805. The Fund reserves the right to reject any purchase request.
THROUGH THE BANKS. To place an order to purchase Fund shares, open an account
by calling Deposit Guaranty National Bank at (800)748-8500 or Commercial
National Bank at (800)274-1907. Information needed to establish the account will
be taken over the telephone.
Payment may be made by either check, federal funds or by debiting a customer's
account at the Banks. Purchase orders must be received by 4:00 p.m. (Eastern
time). Payment is required before 4:00 p.m. (Eastern time) on the next business
day in order to earn dividends for that day. Payment is considered received
after payment by check is converted into federal funds and received by the
Banks, normally the next business day. When payment is made with federal funds,
the payment is considered received when federal funds are received by the Banks
or available in the customer's account.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $1,000. Subsequent investments may
be in any amounts of $100 or more. The Fund may waive the initial minimum
investment for employees of DGC and its affiliates from time to time.
WHAT SHARES COST
Fund shares are sold at their net asset value next determined after an order is
received, plus a sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS
A PERCENTAGE OF A PERCENTAGE OF
AMOUNT OF TRANSACTION PUBLIC OFFERING PRICE NET AMOUNT INVESTED
--------------------------------- ----------------------- --------------------------
<S> <C> <C>
Less than $100,000............... 2.00% 2.04%
$100,000 but less than
$250,000....................... 1.75% 1.78%
$250,000 but less than
$500,000....................... 1.50% 1.52%
$500,000 but less than
$750,000....................... 1.25% 1.27%
$750,000 but less than $ 1
million........................ 1.00% 1.01%
$1 million but less than $2
million........................ 0.50% 0.50%
$2 million or more............... 0.25% 0.25%
</TABLE>
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; or (iii) on the
following federal holidays: New Year's Day, Martin Luther King Day, Presidents'
Day, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day,
Thanksgiving Day and Christmas Day. In addition, the net asset value will not be
calculated on Good Friday.
PURCHASES AT NET ASSET VALUE. Shares of the Fund may be purchased at net asset
value, without a sales charge by: the Trust Division of the Banks for funds
which are held in a fiduciary, agency, custodial, or similar capacity; Trustees
and employees of the Fund, the Banks or Federated Securities Corp. or their
affiliates and their spouses and children under 21; or any bank or investment
dealer who has a sales agreement with Federated Securities Corp. with regard to
the Fund.
SALES CHARGE REALLOWANCE. For sales of shares of the Fund, the Banks or any
authorized dealer will normally receive up to 85% of the applicable sales
charge. Any portion of the sales charge which is not paid to the Banks or
authorized dealers will be retained by the distributor. The distributor will,
periodically, uniformly offer to pay cash or promotional incentives in the form
of trips to sales seminars at luxury resorts, tickets or other items to all
dealers selling shares of the Fund. Such payments will be predicated upon the
amount of shares of the Fund that are sold by the dealer.
The sales charge for shares sold other than through the Banks or registered
broker/dealers will be retained by the distributor. The distributor may pay fees
to the Banks out of the sales charge in
exchange for sales and/or administrative services performed on behalf of the
Banks' customers in connection with the initiation of customer accounts and
purchases of Fund shares.
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Fund shares through:
- quantity discounts and accumulated purchases;
- signing a 13-month letter of intent;
- using the reinvestment privilege; or
- concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table above,
larger purchases reduce the sales charge paid. The Fund will combine purchases
made on the same day by the investor, his spouse, and his children under age 21
when it calculates the sales charge. In addition, the sales charge, if
applicable, is reduced for purchases made at one time by a trustee or fiduciary
for a single trust estate or a single fiduciary account.
If an additional purchase of Fund shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns shares having a current value at the public offering price of
$90,000 and he purchases $10,000 more at the current public offering price, the
sales charge on the additional purchase according to the schedule now in effect
would be 1.75%, not 2.00%.
To receive the sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by the Banks at the time the purchase
is made that Fund shares are already owned or that purchases are being combined.
The Fund will reduce the sales charge after it confirms the purchases. LETTER OF
INTENT. If a shareholder intends to purchase at least $100,000 of shares in the
funds in the Trust over the next 13 months, the sales charge may be reduced by
signing a letter of intent to that effect. This letter includes a provision for
a sales charge adjustment depending on the amount actually purchased within the
13-month period and a provision for the custodian to hold 2.00% of the total
amount intended to be purchased in escrow (in shares) until such purchase is
completed.
The 2.00% held in escrow will be applied to the shareholder's account at the end
of the 13-month period unless the amount specified in the letter of intent is
not purchased. In this event, an appropriate number of escrowed shares may be
redeemed in order to realize the difference in the sales charge.
This letter of intent will not obligate the shareholder to purchase shares, but
if he does, each purchase during the period will be at the sales charge
applicable to the total amount intended to be purchased. This letter may be
dated as of a prior date to include any purchases made within the past 90 days.
REINVESTMENT PRIVILEGE. If shares in the Fund have been redeemed, the
shareholder has a one-time right, within 30 days, to reinvest the redemption
proceeds at the next-determined net asset value without any sales charge.
Federated Securities Corp. must be notified by the shareholder in writing or by
the Banks of the reinvestment in order to eliminate a sales charge. If the
shareholder redeems his shares in the Fund, there may be tax consequences.
CONCURRENT PURCHASES. For purposes of qualifying for a sales charge reduction,
a shareholder has the privilege of combining concurrent purchases of two or more
funds in the Trust, the purchase price of which includes a sales charge. For
example, if a shareholder concurrently invested $30,000 in one of the other
funds in the Trust with a sales charge and $70,000 in this Fund, the sales
charge would be reduced.
To receive this sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by the Banks at the time the
concurrent purchases are made. The Fund will reduce the sales charge after it
confirms the purchases.
EXCHANGING SECURITIES FOR FUND SHARES
Investors may exchange certain securities or a combination of certain securities
and cash for Fund shares. The Fund reserves the right to determine the
acceptability of securities to be exchanged. On the day securities are accepted
by the Fund, they are valued in the same manner as the Fund values its assets.
Investors wishing to exchange securities should first contact the Banks.
SYSTEMATIC INVESTMENT PROGRAM
Once an 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 Fund shares. A shareholder may apply for participation in this
program through the Banks.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder. Share certificates are not issued unless requested
by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during the
month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly. Distribution of any realized long-term
capital gains will be made at least once every twelve months. Dividends are
automatically reinvested in additional shares of the Fund on payment dates at
the ex-dividend date net asset value without a sales charge, unless cash
payments are requested by writing to the Fund or the Banks as appropriate.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
DG INVESTOR SERIES
All shareholders of the Fund are shareholders of DG Investor Series.
Shareholders in the Fund have easy access to the other portfolios of DG Investor
Series.
EXCHANGING SHARES
Shareholders of the Fund may exchange shares of the Fund for shares of the other
Funds in DG Investor Series. In addition, shares of the Fund may also be
exchanged for certain other funds
distributed by Federated Securities Corp. that are not advised by the Banks
("Federated Funds"). For further information on the availability of Federated
Funds for exchanges, please call Deposit Guaranty National Bank at (800)
748-8500 or Commercial National Bank at (800) 274-1907. Shares of funds with a
sales charge may be exchanged at net asset value for shares of other funds with
an equal sales charge or no sales charge. Shares of the funds with no sales
charge acquired by direct purchase or reinvestment of dividends on such shares
may be exchanged for shares of funds with a sales charge at net asset value plus
the applicable sales charge.
When an exchange is made from a fund with a sales charge to a fund with no sales
charge, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus an exchange
of such shares for shares of a fund with an equal sales charge would be at net
asset value.
Prior to any exchange, the shareholder must receive a copy of the current
prospectus of the fund into which an exchange is to be effected.
The exchange privilege is available to shareholders residing in any state in
which the fund shares being acquired may legally be sold. Upon receipt of proper
instructions and all necessary supporting documents, shares submitted for
exchange will be redeemed at the next-determined net asset value. Written
exchange instruction may require a signature guarantee. Exercise of this
privilege is treated as a sale for federal income tax purposes and, depending on
the circumstances, a short or long-term capital gain or loss may be realized.
The exchange privilege may be terminated at any time. Shareholders will be
notified of the termination of the exchange privilege. A shareholder may obtain
further information on the exchange privilege by calling the Banks.
REDEEMING SHARES
- --------------------------------------------------------------------------------
Shares are redeemed at their net asset value next determined after the Banks
receive the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on Federal holidays when
wire transfers are restricted. Requests for redemption can be made by telephone
or by mail.
THROUGH THE BANKS
BY TELEPHONE. A shareholder who is a customer of one of the Banks may redeem
shares of the Fund by calling Deposit Guaranty National Bank at (800) 748-8500
or Commercial National Bank at (800) 274-1907. For orders received before 4:00
p.m. (Eastern time), proceeds will normally be wired the next day to the
shareholder's account at the Banks or a check will be sent to the address of
record. In no event will proceeds be sent more than seven days after a proper
request for redemption has been received. An authorization form permitting the
Fund to accept telephone requests must first be completed. Authorization forms
and information on this service are available from the Banks. Telephone
redemption instructions may be recorded.
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 should be utilized, such as a written request to Federated
Services Company or the Banks.
If at any time, the Fund shall determine it necessary to terminate or modify
this method of redemption, shareholders would be promptly notified.
If reasonable procedures are not followed by the Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
BY MAIL. Any shareholder may redeem Fund shares by sending a written request to
the Banks. The written request should include the shareholder's name, the Fund
name, 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 Banks 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 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, 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, 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 Federated Services Company 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 Federated Services Company
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.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount may take
advantage of the Systematic Withdrawal Program. Under this program, Fund shares
are redeemed to provide for periodic withdrawal payments in an amount directed
by the shareholder. Depending upon the amount of the withdrawal payments, and
the amount of dividends paid with respect to Fund shares, redemptions may
reduce, and eventually deplete, the shareholder's investment in the Fund. For
this reason, payments under this program should not be considered as yield or
income on the shareholder's investment in the Fund. To be eligible to
participate in this program, a shareholder must have an account value of at
least $10,000. A shareholder may apply for participation in this program through
the Banks. Due to the fact that shares are sold with a sales charge, it is not
advisable for shareholders to be purchasing shares of the Fund while
participating in this program.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $1,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $1,000 because of changes in the Fund's net asset value.
Before shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional shares to meet the minimum
requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders of the Fund for vote. All shares of all
classes of each Fund in the Trust have equal voting rights, except that in
matters affecting only a particular Fund or class, only shareholders of that
Fund or class are entitled to vote. As a Massachusetts business trust, the Trust
is not required to hold annual shareholder meetings. Shareholder approval will
be sought only for certain changes in the Trust or Fund's operation and for the
election of Trustees under certain circumstances. As of April 7, 1994, Deposit
Guaranty National Bank, Jackson, Mississippi, owned approximately 2,715,825
shares (81.64%), and therefore, may, for certain purposes, be deemed to control
the Fund and be able to affect the outcome of certain matters presented for a
vote of shareholders.
Trustees may be removed by the shareholders at a special meeting. A special
meeting of the shareholders for this purpose shall be called by the Trustees
upon the written request of shareholders owning at least 10% of all shares of
the Trust entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation, or instrument the Trust or its Trustees
enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust itself cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956 or
any bank or non-bank affiliate thereof from sponsoring, organizing or
controlling a registered, open-end investment company continuously engaged in
the issuance of its shares, and from issuing, underwriting, or distributing
securities in general. Such laws and regulations do not prohibit such a holding
company or bank or non-bank affiliate from acting as investment adviser,
transfer agent or custodian to such an investment company or from purchasing
shares of such a company as agent for and upon the order of their customer. The
Fund's Adviser and Sub-Adviser, Deposit Guaranty National Bank and Commercial
National Bank, respectively, are subject to such banking laws and regulations.
The Banks believe, based on the advice of counsel, that they may perform the
investment advisory services for the Fund contemplated by the advisory agreement
with the Trust and the sub-advisory agreement between the Banks without
violating the Glass-Steagall Act or other applicable banking laws or
regulations. Such counsel has pointed out, however, that changes in either
federal or state statutes and regulations relating to the permissible activities
of banks and their subsidiaries or affiliates, as well as further judicial or
administrative decisions or interpretations of present or future statutes and
regulations, could prevent the Banks from continuing to perform all or a part of
the above services for their customers and/or the Fund. In such event, changes
in the operation of the Fund may occur, including the possible alteration or
termination of any automatic or other Fund share investment and redemption
services then being provided, and the Trustees would consider alternative
investment advisers and other means of continuing available investment services.
It is not expected that Fund shareholders would suffer any adverse financial
consequences (if another adviser and/or sub-adviser with equivalent abilities to
Deposit Guaranty National Bank and Commercial National Bank are found) as a
result of any of these occurrences.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of Subchapter M of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
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
Trust's other funds will not be combined for tax purposes with those realized by
the Fund.
Shareholders are not required to pay the federal regular income tax on any
dividends received from the Fund that represent net interest on tax-exempt
municipal securities. However, under the Tax Reform Act of 1986, dividends
representing net interest earned on certain "private activity" bonds issued
after August 7, 1986, may be included in calculating the federal individual
alternative minimum tax or the federal alternative minimum tax for corporations.
The Fund may purchase all types of municipal bonds, including private activity
bonds.
The alternative minimum tax applies when it exceeds the regular tax for the
taxable year. Alternative minimum taxable income is equal to the regular taxable
income of the taxpayer increased by certain "tax preference" items not included
in regular taxable income and reduced by only a portion of the deductions
allowed in the calculation of the regular tax.
Shareholders should consult with their tax adviser to determine whether they are
subject to the alternative minimum tax or the corporate alternative minimum tax
and, if so, the tax treatment of dividends paid by the Fund.
Dividends of the Fund representing net interest income earned on some temporary
investments and any realized net short-term gains are taxed as ordinary income.
Distributions representing net long-term capital gains realized by the Fund, if
any, will be taxable as long-term capital gains regardless of the length of time
shareholders have held their shares.
These tax consequences apply whether dividends are received in cash or as
additional shares. Information on the tax status of dividends and distributions
is provided annually.
OTHER STATE AND LOCAL TAXES
Distributions representing net interest received on tax-exempt municipal
securities are not necessarily free from income taxes of any state or local
taxing authority. State laws differ on this issue and shareholders are urged to
consult their own tax adviser regarding the status of their accounts under state
and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund advertises its total return, yield, and
tax-equivalent yield.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund 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 the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This number is then annualized using semi-annual
compounding. The tax-equivalent yield of the Fund is calculated similarly to the
yield, but is adjusted to reflect the taxable yield that the Fund would have had
to earn to equal its actual yield, assuming a specific tax rate. The yield and
the tax-equivalent yield do not necessarily reflect income actually earned by
the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The performance information reflects the effect of the maximum sales load which,
if reduced or excluded, would increase the total return, yield, and
tax-equivalent yield.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
DG MUNICIPAL INCOME FUND
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
MOODY'S
PRINCIPAL OR S&P*
AMOUNT (UNAUDITED) VALUE
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--95.2%
- -----------------------------------------------------------------
ALABAMA--1.5%
---------------------------------------------------
$ 500,000 Huntsville, AL, 6.00% GO Bonds, 11/1/2012
(Callable 11/1/2002 @ 102) AA $ 519,934
--------------------------------------------------- -----------
ARIZONA--2.8%
---------------------------------------------------
1,000,000 Phoenix, AZ, 4.90% GO Bonds, 7/1/2008 AA 958,160
--------------------------------------------------- -----------
FLORIDA--8.8%
---------------------------------------------------
1,000,000 Broward County, FL, School District, 5.60% UT
Bonds,
2/15/2007 (Callable 2/15/2003 @ 102) AA 1,029,710
---------------------------------------------------
1,000,000 Jacksonville, FL, Electric Authority, 5.50%
Refunding
Revenue Bonds, 10/1/2013 AA 994,010
---------------------------------------------------
1,000,000 St. Petersburg, FL, Public Utilities, 5.50%,
10/1/2009 AA 1,008,470
--------------------------------------------------- -----------
Total 3,032,190
--------------------------------------------------- -----------
GEORGIA--1.6%
---------------------------------------------------
500,000 Albany, GA, Sewer System, 6.625% Revenue Bonds,
7/1/2017 (Callable 7/1/2002 @ 102) AAA 549,545
--------------------------------------------------- -----------
HAWAII--1.5%
---------------------------------------------------
500,000 State of Hawaii, 5.75% GO Bonds, 1/1/2008 AA 521,830
--------------------------------------------------- -----------
ILLINOIS--4.4%
---------------------------------------------------
500,000 Chicago, IL, Pier and Expo Authority, 6.00% Revenue
Bonds, 6/1/2014, (MBIA Insured) AAA 507,840
---------------------------------------------------
500,000 Du Page County, IL, 5.40% GO Bonds, 1/1/2007 AAA 503,225
---------------------------------------------------
500,000 State of Illinois, 5.875% GO Bonds, 6/1/2011
(Callable 6/1/2002 @ 102) AA 511,745
--------------------------------------------------- -----------
Total 1,522,810
--------------------------------------------------- -----------
</TABLE>
DG MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
MOODY'S
PRINCIPAL OR S&P*
AMOUNT (UNAUDITED) VALUE
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------
INDIANA--1.5%
---------------------------------------------------
$ 500,000 Indianapolis, IN, 6.00% Local Public Improvement,
GO Bonds, 7/1/2010 (Callable 7/1/2003 @ 102) AA $ 514,460
--------------------------------------------------- -----------
KENTUCKY--2.8%
---------------------------------------------------
1,000,000 State of Kentucky, Property & Building Commission,
5.00% (Project No. 55), 9/1/2009 A 953,280
--------------------------------------------------- -----------
LOUISIANA--1.6%
---------------------------------------------------
500,000 Louisiana Public Facilities Authority, 6.05%
Hospital Refunding Revenue Bonds, 12/1/2008, (MBIA
Insured) AAA 538,500
--------------------------------------------------- -----------
MASSACHUSETTS--1.4%
---------------------------------------------------
450,000 State of Massachusetts, 6.00% GO Bonds,
(Consolidated Loan Series A), 6/1/2011, (Capital
Guaranty Insured) AAA 465,718
--------------------------------------------------- -----------
MISSISSIPPI--18.2%
---------------------------------------------------
300,000 Hinds County, MS, 5.40% Hospital Revenue Bonds,
5/1/2006, (AMBAC Insured) NR 306,543
---------------------------------------------------
400,000 Jackson County, MS, 5.60%, GO Bonds, 5/1/2008 A 407,024
---------------------------------------------------
400,000 Jackson County, MS, 5.70%, GO Bonds, 5/1/2009 A 408,124
---------------------------------------------------
1,125,000 Jackson, MS, 5.85% GO Bonds, 5/1/2006
(Callable 5/1/2002 @ 100)/(MBIA Insured) AAA 1,169,302
---------------------------------------------------
500,000 Jackson, MS, Redevelopment Urban Renewal,
5.75%, 7/1/2008 A 510,750
---------------------------------------------------
700,000 Lamar County, MS, Pollution Control Revenue,
4.85%, 12/1/2006, (Callable 12/1/2003 @ Par) AA3 686,245
---------------------------------------------------
1,000,000 Madison County, MS, 5.10% Refunding School
GO Bonds, 6/1/2008, (AMBAC Insured) AAA 978,120
---------------------------------------------------
900,000 Mississippi Hospital Equipment & Facilities, 5.50%,
5/15/2009, (AMBAC Insured) AAA 905,157
---------------------------------------------------
</TABLE>
DG MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
MOODY'S
PRINCIPAL OR S&P*
AMOUNT (UNAUDITED) VALUE
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------
MISSISSIPPI--CONTINUED
---------------------------------------------------
$ 900,000 Mississippi Hospital Equipment & Facilities, 5.55%,
3/1/2014 A $ 880,848
--------------------------------------------------- -----------
Total 6,252,113
--------------------------------------------------- -----------
MISSOURI--1.4%
---------------------------------------------------
500,000 State of Missouri Water Pollution Control,
5.25% GO Bonds, (Series B) 8/1/2008
(Callable 8/1/2008 @ Par) AAA 501,325
--------------------------------------------------- -----------
MONTANA--2.8%
---------------------------------------------------
1,000,000 State of Montana, 4.875% GO Bonds, 8/1/2009 AA 960,660
--------------------------------------------------- -----------
NEVADA--4.3%
---------------------------------------------------
500,000 Las Vegas Valley, NV, 5.75% Water District,
9/1/2008, (MBIA Insured) AAA 514,555
---------------------------------------------------
1,000,000 State of Nevada, 4.90% Municipal Bonds,
(Project R--5)/(Series A), 11/1/2007 AA 958,540
--------------------------------------------------- -----------
Total 1,473,095
--------------------------------------------------- -----------
NEW JERSEY--1.5%
---------------------------------------------------
500,000 State of New Jersey, 5.90% GO Bonds, 2/15/2008 AA+ 530,675
--------------------------------------------------- -----------
NORTH CAROLINA--7.3%
---------------------------------------------------
500,000 North Carolina Eastern Municipal Power, 6.125%
Revenue Bonds (Series A), 1/1/2009 NR 524,885
---------------------------------------------------
1,000,000 North Carolina Eastern Municipal Power, 5.50%
Revenue Bonds, 1/1/2008 A 1,004,490
---------------------------------------------------
1,000,000 North Carolina Municipal Power Agency, 5.75%
#1 Catawba Electric Revenue Bonds, 1/1/2015
(Callable 1/1/2015 @ 100) A 996,300
--------------------------------------------------- -----------
Total 2,525,675
--------------------------------------------------- -----------
</TABLE>
DG MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
MOODY'S
PRINCIPAL OR S&P*
AMOUNT (UNAUDITED) VALUE
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------
NORTH DAKOTA--1.5%
---------------------------------------------------
$ 500,000 North Dakota Building Authority, 6.00% Revenue
Bonds, (Series A), 6/1/2010, (MBIA Insured) AAA $ 526,505
--------------------------------------------------- -----------
OREGON--2.8%
---------------------------------------------------
1,000,000 Portland, OR, 4.90% GO Bonds, 10/1/2007 AAA 970,970
--------------------------------------------------- -----------
PENNSYLVANIA--1.4%
---------------------------------------------------
450,000 State of Pennsylvania, 5.875% GO Bonds, 12/1/2006 AA 476,394
--------------------------------------------------- -----------
RHODE ISLAND--1.5%
---------------------------------------------------
500,000 Providence, RI, 590% GO Bonds, 1/15/2009
(Callable 1/15/2002 @ 102) AA+ 522,120
--------------------------------------------------- -----------
TENNESSEE--2.8%
---------------------------------------------------
1,000,000 Memphis, TN, 4.90% GO Bonds, 8/1/2006
(Callable 8/1/2002 @ 101) AA 976,320
--------------------------------------------------- -----------
TEXAS--10.6%
---------------------------------------------------
500,000 Corpus Christi, TX, 6.00% GO Bonds, (Series 1993),
3/1/2010 (Callable 3/1/2003 @ 100) AAA 518,645
---------------------------------------------------
500,000 El Paso, TX, 5.75% Refunding Bonds, (Series A),
7/1/2007 (Callable 7/1/2007 @ 100) AAA 516,330
---------------------------------------------------
500,000 Harris County, TX, 6.25% Flood Control Bonds,
(Series B), 10/1/2011 (Callable 10/1/2002 @ Par) AA+ 551,000
---------------------------------------------------
1,000,000 Houston, TX, School District, 5.50%, 8/15/2008 AAA 1,014,710
---------------------------------------------------
500,000 Houston, TX, 5.90% Water and Sewer Revenue Bonds,
12/1/2005 (Callable 12/1/2002 @ 102) AAA 533,615
---------------------------------------------------
500,000 San Antonio, TX, 6.00% Electric and Gas Revenue
Bonds, 2/1/2008 (Callable 2/1/2002 @ 101)/
(MBIA Insured) AA 527,880
--------------------------------------------------- -----------
Total 3,662,180
--------------------------------------------------- -----------
</TABLE>
DG MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
MOODY'S
PRINCIPAL OR S&P*
AMOUNT (UNAUDITED) VALUE
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------
VIRGINIA--1.5%
---------------------------------------------------
$ 500,000 State of Virginia, Transportation Board, 6.00%
Revenue Bonds, 4/1/2010 (Callable 4/1/2002 @ 102) AA $ 517,955
--------------------------------------------------- -----------
WASHINGTON--6.6%
---------------------------------------------------
500,000 King County, WA, 6.00% GO Bonds 12/1/2010
(Callable 12/1/2003 @ 100) AA+ 517,485
---------------------------------------------------
500,000 Port of Seattle, WA, 6.25% GO Bonds (Series A),
11/1/2010 (Callable 11/1/2002 @ 102) AA 527,035
---------------------------------------------------
500,000 State of Washington, 6.25% GO Bonds, 9/1/2009
(Callable 9/1/2001 @ 100) AA 528,470
---------------------------------------------------
650,000 Tacoma, WA, 6.25% Electric Revenue Bonds, 1/1/2011
(Callable 1/1/2002 @ 102)/ (AMBAC Insured) AAA 696,306
--------------------------------------------------- -----------
Total 2,269,296
--------------------------------------------------- -----------
WISCONSIN--3.1%
---------------------------------------------------
500,000 Green Bay, WI, 6.00% GO Bonds, 4/1/2010 AA 516,560
---------------------------------------------------
500,000 State of Wisconsin, WI, 6.30% GO Bonds,
(Series A), 5/1/2012 (Callable 5/1/2002 @ Par) AA 553,385
--------------------------------------------------- -----------
Total 1,069,945
--------------------------------------------------- -----------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST, $32,098,022) 32,811,655
--------------------------------------------------- -----------
</TABLE>
DG MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
MOODY'S
OR S&P*
SHARES (UNAUDITED) VALUE
<C> <S> <C> <C>
MUTUAL FUND SHARES--8.2%
- -----------------------------------------------------------------
1,324,258 Dreyfus Tax Exempt Cash Management Fund AAA $ 1,324,258
---------------------------------------------------
1,497,150 Master Reserves Tax Free Fund AAA 1,497,150
--------------------------------------------------- -----------
TOTAL MUTUAL FUND SHARES (AT NET ASSET VALUE) 2,821,408
--------------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST $34,919,430) $35,633,063+
--------------------------------------------------- -----------
</TABLE>
* Please refer to the Appendix of the Statement of Additional Information for an
explanation of the credit ratings.
+ The cost of investments for federal tax purposes amounts to $34,919,430. The
net unrealized appreciation of investments on a federal tax basis amounts to
$713,633 which is comprised of $908,710 appreciation and $195,077,
depreciation at February 28, 1994.
Note: The categories of investments are shown as a percentage of net assets
($34,435,102) at February 28, 1994.
The following abbreviations are used in this portfolio:
<TABLE>
<S> <C>
AMBAC -- American Municipal Bond Assurance Corporation
GO -- General Obligation
MBIA -- Municipal Bond Investors Assurance
UT -- Unlimited Tax
</TABLE>
(See Notes which are an integral part of the Financial Statements)
DG MUNICIPAL INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------
Investments in securities, at value (Note 2A)
(identified and tax cost, $34,919,430) $35,633,063
- ---------------------------------------------------------------------------------
Interest receivable 455,154
- ---------------------------------------------------------------------------------
Receivable for Fund shares sold 391,251
- ---------------------------------------------------------------------------------
Prepaid/deferred expenses (Note 2E) 4,350
- --------------------------------------------------------------------------------- -----------
Total assets 36,483,818
- ---------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------------------------
Payable for investments purchased $1,965,216
- --------------------------------------------------------------------
Payable for Fund shares redeemed 44,850
- --------------------------------------------------------------------
Accrued expenses 38,650
- -------------------------------------------------------------------- ----------
Total liabilities 2,048,716
- --------------------------------------------------------------------------------- -----------
NET ASSETS for 3,257,815 shares of beneficial interest outstanding $34,435,102
- --------------------------------------------------------------------------------- -----------
NET ASSETS CONSISTS OF:
- ---------------------------------------------------------------------------------
Paid-in capital $33,710,694
- ---------------------------------------------------------------------------------
Unrealized appreciation (depreciation) of investments 713,633
- ---------------------------------------------------------------------------------
Undistributed net investment income 10,775
- --------------------------------------------------------------------------------- -----------
Total Net Assets $34,435,102
- --------------------------------------------------------------------------------- -----------
NET ASSET VALUE and Redemption Price Per Share:
($34,435,102 / 3,257,815 shares of beneficial shares outstanding) $10.57
- --------------------------------------------------------------------------------- -----------
Computation of Offering Price:
Offering Price Per Share (100/98 of $10.57)* $10.79
- --------------------------------------------------------------------------------- -----------
</TABLE>
* See "What Shares Cost" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
DG MUNICIPAL INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED FEBRUARY 28, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- -----------------------------------------------------------------------------------
Interest income (Note 2B) $1,374,875
- -----------------------------------------------------------------------------------
EXPENSES:
- -----------------------------------------------------------------------------------
Investment advisory fee (Note 5) $154,612
- -----------------------------------------------------------------------
Administrative personnel and services fees (Note 5) 50,000
- -----------------------------------------------------------------------
Trustees' fees 118
- -----------------------------------------------------------------------
Custodian fees 26,029
- -----------------------------------------------------------------------
Recordkeeper fees (Note 5) 50,091
- -----------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses (Note 5) 22,234
- -----------------------------------------------------------------------
Legal fees 2,694
- -----------------------------------------------------------------------
Printing and postage 14,228
- -----------------------------------------------------------------------
Auditing fees 10,000
- -----------------------------------------------------------------------
Fund share registration fees 23,692
- -----------------------------------------------------------------------
Insurance premiums 5,392
- -----------------------------------------------------------------------
Miscellaneous 3,024
- ----------------------------------------------------------------------- --------
Total expenses 362,114
- -----------------------------------------------------------------------
Deduct--
- ------------------------------------------------------------
Waiver of investment advisory fee (Note 5) $154,612
- ------------------------------------------------------------
Waiver of administrative personnel and services Fees (Note
5) 16,903 171,515
- ------------------------------------------------------------ -------- --------
Net expenses 190,599
- ----------------------------------------------------------------------------------- ----------
Net investment income 1,184,276
- ----------------------------------------------------------------------------------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- -----------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis)-- 20,558
- -----------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments 52,310
- ----------------------------------------------------------------------------------- ----------
Net realized and unrealized gain (loss) on investments 72,868
- ----------------------------------------------------------------------------------- ----------
Change in net assets resulting from operations $1,257,144
- ----------------------------------------------------------------------------------- ----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
DG MUNICIPAL INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
--------------------------
1994 1993*
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------
OPERATIONS--
- ------------------------------------------------------------------
Net investment income $ 1,184,276 $ 93,501
- ------------------------------------------------------------------
Net realized gain (loss) on investment transactions ($20,558 and
$0, net gain respectively, as computed for federal tax purposes)
(Note 2C) 20,558 --
- ------------------------------------------------------------------
Change in unrealized appreciation (depreciation) of investments 52,310 661,323
- ------------------------------------------------------------------ ----------- ----------
Change in net assets resulting from operations 1,257,144 754,824
- ------------------------------------------------------------------ ----------- ----------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- ------------------------------------------------------------------
Dividends to shareholders from net investment income (1,193,319) (73,683 )
- ------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment
transactions (20,558) --
- ------------------------------------------------------------------ ----------- ----------
Change in net assets resulting from distributions to
shareholders (1,213,877) (73,683 )
- ------------------------------------------------------------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)--
- ------------------------------------------------------------------
Proceeds from sale of shares 25,360,605 15,640,615
- ------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
distributions in Fund shares 9,035 --
- ------------------------------------------------------------------
Cost of shares redeemed (6,622,204) (677,357 )
- ------------------------------------------------------------------ ----------- ----------
Change in net assets from Fund share transactions 18,747,436 14,963,258
- ------------------------------------------------------------------ ----------- ----------
Change in net assets 18,790,703 15,644,399
- ------------------------------------------------------------------
NET ASSETS:
- ------------------------------------------------------------------
Beginning of period 15,644,399 --
- ------------------------------------------------------------------ ----------- ----------
End of period (including undistributed net investment income of
$10,775 and $19,818, respectively) $34,435,102 $15,644,399
- ------------------------------------------------------------------ ----------- ----------
</TABLE>
* For the period from December 21, 1992 (date of initial public investment) to
February 28, 1993.
(See Notes which are an integral part of the Financial Statements)
DG MUNICIPAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
DG Investor Series (the "Trust") is an open-end, management investment company,
established as a Massachusetts business trust under a Declaration of Trust dated
February 7, 1992. The Trust currently consists of five portfolios. The financial
statements included herein present only those of the DG Municipal Income Fund
(the "Fund"), one of the portfolios of the Trust. The financial statements of
the other portfolios in the Trust are presented separately. The assets of each
portfolio are segregated and a shareholder's interest is limited to the
portfolio in which shares are held. The Declaration of Trust permits the Trust
to offer separate series of shares of beneficial interest representing interests
in separate portfolios of securities.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--Municipal bonds are valued at fair value. An independent pricing
service values the Fund's municipal bonds taking into consideration yield, stability,
risk, quality, coupon, maturity, type of issue, trading characteristics, special
circumstances of a security or trading market, and any other factors or market data it
deems relevant in determining valuations for normal institutional size trading units of
debt securities and does not rely exclusively on quoted prices. The Executive Committee
continuously reviews these valuation methods to determine that they reflect fair value
and to recommend changes to the Trustees which may be necessary from time to time after
considering relevant factors which may affect the value of portfolio securities. The
Trustees have determined that the fair value of debt securities authorized to be
purchased by the Fund with remaining maturities of 60 days or less shall be their
amortized cost value unless the particular circumstances of the security indicate
otherwise. Investments in other regulated investment companies are valued at net asset
value.
B. INCOME--Interest income is recorded on the accrual basis. Interest income includes
interest and discount earned (net of premium) on short-term obligations, and interest
earned on all other debt securities including original issue discount as required by the
Internal Revenue Code (the "Code"). Dividends to shareholders and capital gain
distributions, if any, are recorded on the ex-dividend date.
C. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Code
applicable to regulated investment companies and to distribute to shareholders each year
all of its net taxable income, including any net realized gain on investments.
Accordingly, no provision for federal tax is necessary. Dividends paid by the Fund from
net interest earned on tax-exempt municipal bonds are
</TABLE>
DG MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
not includable by shareholders as gross income for federal income tax purposes, because
the Fund intends to meet certain requirements of the Code applicable to regulated
investment companies which will enable the Fund to pay tax-exempt interest dividends.
D. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or
delayed delivery transactions. To the extent the Fund engages in such transactions, it
will do so for the purpose of acquiring portfolio securities consistent with its
investment objective and policies and not for the purpose of investment leverage. The
Fund will record a when-issued security and the related liability on the trade date.
Until the securities are received and paid for, the Fund will maintain security positions
such that sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis are marked to
market daily and begin earning interest on the settlement date.
E. DEFERRED EXPENSES--The costs incurred by the Fund with respect to registration of its
shares in its first fiscal year, excluding the initial expense of registering the shares,
have been deferred and are being amortized using the straight-line method over a period
of five years from the Fund's commencement date.
F. OTHER--Investment transactions are accounted for on the date of the transaction.
</TABLE>
(3) DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly to all shareholders invested in the Fund
on the record date. Dividends are paid from the net investment income of the
Fund. Net investment income consists of all interest received by the Fund less
its expenses. Capital gains realized by the Fund, if any, are distributed at
least once every twelve months.
(4) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
---------------------------
1994 1993*
- ----------------------------------------------------------------- --------- ---------
<S> <C> <C>
Shares outstanding, beginning of period 1,489,056 --
- -----------------------------------------------------------------
Shares sold 2,391,912 1,555,185
- -----------------------------------------------------------------
Shares issued to shareholders in payment of distributions in
Fund shares 844 --
- -----------------------------------------------------------------
Shares redeemed (623,997) (66,129)
- ----------------------------------------------------------------- --------- ---------
Shares outstanding, end of period 3,257,815 1,489,056
- ----------------------------------------------------------------- --------- ---------
</TABLE>
* For the period from December 21, 1992 (date of initial public investment) to
February 28, 1993.
DG MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Deposit Guaranty National Bank, the Trust's investment adviser (the "Adviser"),
receives for its services an annual investment advisory fee equal to 0.60 of 1%
of the Fund's average daily net assets. The Adviser may voluntarily choose to
waive a portion of its fee or reimburse certain operating expenses of the Fund
in excess of limitations imposed by certain states. Under the terms of a sub-
advisory agreement between the Adviser and the Trust Division of Commercial
National Bank, Commercial National Bank receives an annual fee from the Adviser,
equal to 0.25 of 1% of the Fund's average daily net assets. In addition,
Commercial National Bank may voluntarily choose to reduce its compensation. For
the year ended February 28, 1994, Commercial National Bank earned a sub-advisory
fee of $64,421, all of which was voluntarily waived.
Federated Administrative Services ("FAS") provides the Trust certain
administrative personnel and services. The fee is based on the level of average
aggregate net assets of the Trust for the period. FAS may voluntarily choose to
waive a portion of it's fee.
Organization expenses of $25,535 were initially borne by FAS. The Fund has
agreed to reimburse FAS for the organization expenses initially borne by FAS
during the five year period following the date the Fund became effective. For
the year ended February 28, 1994, the Fund paid $966 pursuant to this agreement.
Federated Services Company ("FSC") is the Fund's transfer agent and dividend
disbursing agent. It also provides certain accounting and recordkeeping services
with respect to the Fund's portfolio of investments.
Certain Officers and Trustees of the Trust are Officers and Trustees of FAS and
Federated Services Company.
(6) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended February 28, 1994, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
PURCHASES $19,008,233
- ------------------------------------------------------------------------------- -----------
SALES $ 2,320,440
- ------------------------------------------------------------------------------- -----------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Trustees and Shareholders
DG INVESTOR SERIES:
We have audited the statement of assets and liabilities, including the portfolio
of investments, of the DG Municipal Income Fund (a portfolio within DG Investor
Series) as of February 28, 1994, and the related statement of operations for the
year then ended, the statements of changes in net assets and the financial
highlights, which is presented on page 2 of this prospectus, for the year ended
February 28, 1994, and period from December 21, 1992 (date of initial public
investment) to February 28, 1993. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and the financial highlights. Investment securities held in custody
are confirmed to us by the custodian. As to securities purchased and sold but
not received or delivered, we request confirmations from brokers, and where
replies are not received, we carry out other appropriate auditing procedures. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of the
DG Municipal Income Fund at February 28, 1994 and the results of its operations
for the year ended, the changes in its net assets and financial highlights for
the year ended February 28, 1994, and the period from December 21, 1992 to
February 28, 1993 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK
Pittsburgh, Pennsylvania
April 7, 1994
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
DG Municipal Income Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Investment Adviser
Deposit Guaranty National Bank P.O. Box 1200
Jackson, Mississippi 39215-1200
- ------------------------------------------------------------------------------------------------
Sub-Adviser
Commercial National Bank P.O. Box 21119
Shreveport, Louisiana 71152
- ------------------------------------------------------------------------------------------------
Custodian
State Street Bank and Trust Company P.O. Box 1713
Boston, Massachusetts 02105
- ------------------------------------------------------------------------------------------------
Transfer Agent, Dividend Disbursing Agent,
and Shareholder Servicing 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 2101 L Street, N.W.
Washington, D.C. 20037
- ------------------------------------------------------------------------------------------------
Independent Auditors
KPMG Peat Marwick One Mellon Bank Center
Pittsburgh, Pennsylvania 15219
- ------------------------------------------------------------------------------------------------
</TABLE>
DG
MUNICIPAL
INCOME FUND
- --------------------------------------------------------------------------------
PROSPECTUS
A Diversified Portfolio of
DG Investor Series,
an Open-End Management
Investment Company
Deposit Guaranty
National Bank
Jackson, MS
Commercial
National Bank
Shreveport, LA
APRIL 30, 1994
- --------------------------------------------------------------------------------
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
2112511A (4/94)
The shares offered by this prospectus are not deposits or obligations of Deposit
Guaranty National Bank or Commercial National Bank, are not endorsed or
guaranteed by Deposit Guaranty National Bank or Commercial National Bank, and
are not insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other government agency. Investment
in these shares involves investment risks including the possible loss of
principal.
DG MUNICIPAL INCOME FUND
(A PORTFOLIO OF DG INVESTOR SERIES)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus for
DG Municipal Income Fund (the "Fund") dated April 30, 1994. This Statement is
not a prospectus itself. To receive a copy of the prospectus, write or call the
Fund.
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
Statement dated April 30, 1994
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------------
Types of Investments 1
When-Issued and Delayed
Delivery Transactions 2
Temporary Investments 2
Other Investment Techniques 2
Repurchase Agreements 2
Reverse Repurchase Agreements 3
Portfolio Turnover 3
Investment Limitations 3
DG INVESTOR SERIES MANAGEMENT 5
- ---------------------------------------------------------------
Officers and Trustees 5
The Funds 7
Fund Ownership 7
Trustee Liability 7
INVESTMENT ADVISORY SERVICES 8
- ---------------------------------------------------------------
Adviser to the Fund 8
Advisory Fees 8
Sub-Adviser to the Fund 8
Sub-Advisory Fees 8
ADMINISTRATIVE SERVICES 8
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 9
- ---------------------------------------------------------------
PURCHASING SHARES 9
- ---------------------------------------------------------------
Distribution Plan 9
Conversion to Federal Funds 10
DETERMINING NET ASSET VALUE 10
- ---------------------------------------------------------------
Valuing Municipal Securities 10
EXCHANGE PRIVILEGE 10
- ---------------------------------------------------------------
Requirements for Exchange 10
Making an Exchange 10
REDEEMING SHARES 10
- ---------------------------------------------------------------
Redemption in Kind 10
TAX STATUS 10
- ---------------------------------------------------------------
The Fund's Tax Status 10
TOTAL RETURN 11
- ---------------------------------------------------------------
YIELD 11
- ---------------------------------------------------------------
TAX-EQUIVALENT YIELD 11
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 12
- ---------------------------------------------------------------
APPENDIX 13
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
The Fund is a portfolio in DG Investor Series (the "Trust") which was
established as a Massachusetts business trust under a Declaration of Trust dated
February 7, 1992.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide dividend income that is exempt
from federal regular income tax. The investment objective cannot be changed
without approval of shareholders.
TYPES OF INVESTMENTS
The Fund will invest in a diversified portfolio of municipal securities.
Unless indicated otherwise, the investment policies of the Fund may be changed
by the Board of Trustees ("Trustees") without the approval of shareholders.
Shareholders will be notified before any material change in these policies
becomes effective.
CHARACTERISTICS
The municipal securities in which the Fund invests have the
characteristics set forth in the prospectus. The Fund may use similar
services or ratings other than Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Corporation ("S&P"), or Fitch Investors
Service, Inc. ("Fitch"). If a security's rating is reduced below the
required minimum after the Fund has purchased it, the Fund is not
required to sell the security, but may consider doing so. If ratings made
by Moody's, S&P, or Fitch change because of changes in those
organizations or in their rating systems, the Fund will try to use
comparable ratings as standards in accordance with the investment
policies described in the Fund's prospectus.
PARTICIPATION INTERESTS
The financial institutions from which the Fund purchases participation
interests frequently provide or secure from another financial institution
irrevocable letters of credit or guarantees and give the Fund the right
to demand payment of the principal amounts of the participation
interests, plus accrued interest, on short notice (usually within seven
days). These financial institutions may charge certain fees in connection
with their repurchase commitments, including a fee equal to the excess of
the interest paid on the municipal securities over the negotiated yield
at which the participation interests were purchased by the Fund. By
purchasing participation interests having a seven-day demand feature, the
Fund is buying a security meeting the maturity and quality requirements
of the Fund and also is receiving the tax-free benefits of the underlying
securities.
VARIABLE RATE MUNICIPAL SECURITIES
Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital
appreciation or depreciation is less for variable rate municipal
securities than for fixed income obligations. Many municipal securities
with variable interest rates purchased by the Fund are subject to
repayment of principal (usually within seven days) on the Fund's demand.
The terms of these variable rate demand instruments require payment of
principal and accrued interest from the issuer of the municipal
obligations, the issuer of the participation interests, or a guarantor of
either issuer.
MUNICIPAL LEASES
The Fund may purchase municipal securities in the form of participation
interests that represent an undivided proportional interest in lease
payments by a governmental or non-profit entity. The lease payments and
other rights under the lease provide for and secure payments on the
certificates. Lease obligations may be limited by municipal charter or
the nature of the appropriation for the lease. In particular, lease
obligations may be subject to periodic appropriation. If the entity does
not appropriate funds for future lease payments, the entity cannot be
compelled to make such payments. Furthermore, a lease may provide that
the participants cannot accelerate lease obligations upon default. The
participants would only be able to enforce lease payments as they became
due. In the event of a default or failure of appropriation, unless the
participation interests are credit enhanced, it is unlikely that the
participants would be able to obtain an acceptable substitute source of
payment.
In determining the liquidity of municipal lease securities, the Adviser,
under the authority delegated by the Board of Trustees, will base its
determination on the following factors:
- whether the lease can be terminated by the lessee;
- the potential recovery, if any, from a sale of the leased property upon
termination of the lease;
- --------------------------------------------------------------------------------
- the lessee's general credit strength (e.g., its debt, administrative,
economic and financial characteristics and prospects);
- the likelihood that the lessee will discontinue appropriating funding
for the leased property because the property is no longer deemed
essential to its operations (e.g., the potential for an "event of non-
appropriation");
- any credit enhancement or legal recourse provided upon an event of
non-appropriation or other termination of the lease.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The Fund engages in
when-issued and delayed delivery transactions only for the purpose of acquiring
portfolio securities consistent with the Fund's investment objective and
policies, not for investment leverage.
These transactions are made to secure what is considered to be an advantageous
price and 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 at the trade date. These securities are marked to
market daily and maintained until the transaction is settled.
The Fund may engage in these transactions to an extent that would cause the
segregation of an amount up to 20% of its total assets.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities. Loans are subject
to termination at the option of the Fund or the borrower. The Fund may
pay reasonable administrative and custodial fees in connection with a
loan and may pay a negotiated portion of the interest earned on the cash
or equivalent collateral to the borrower or placing broker.
TEMPORARY INVESTMENTS
The Fund may also invest in temporary investments from time to time for
defensive purposes.
BANK INSTRUMENTS
The Fund only invests in Bank Instruments (as defined in the prospectus)
either issued by an institution having capital, surplus, and undivided
profits over $100 million or insured by the Bank Insurance Fund or the
Savings Association Insurance Fund, both of which are administered by the
Federal Deposit Insurance Corporation.
OTHER INVESTMENT TECHNIQUES
The Fund may acquire securities that are subject to puts and standby commitments
("demand features") to purchase the securities at their principal amount
(usually with accrued interest) within a fixed period (usually seven days)
following a demand by the Fund. The demand feature may be issued by the issuer
of the underlying securities, a dealer in the securities or by another third
party, and may not be transferred separately from the underlying security. The
Fund uses these arrangements to provide the Fund with liquidity and not to
protect against changes in the market value of the underlying securities. The
bankruptcy, receivership or default by the issuer of the demand feature, or a
default on the underlying security or other event that terminates the demand
feature before its exercise, will adversely affect the liquidity of the
underlying security.
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. To
the extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are found by the Fund's adviser to
be creditworthy pursuant to guidelines established by the Trustees.
- --------------------------------------------------------------------------------
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.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
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.
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 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. It is not anticipated that the portfolio trading engaged in
by the Fund will result in its annual rate of portfolio turnover exceeding 100%.
For the year ended February 28, 1994 and for the period from December 21, 1992
(date of initial public investment) to February 28, 1993, the portfolio turnover
rates were 9% and 93%, respectively.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin, but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of portfolio securities.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may borrow
money directly or through reverse repurchase agreements as a temporary
measure for extraordinary or emergency purposes and then only in amounts
not in excess of one-third of the value of its total assets; provided
that, while borrowings exceed 5% of the Fund's total assets, any such
borrowings will be repaid before additional investments are made. The
Fund will not borrow money or engage in reverse repurchase agreements for
investment leverage purposes.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may pledge assets having
a market value not exceeding the lesser of the dollar amounts borrowed or
15% of its total assets at the time of the pledge.
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of its assets, the Fund will not invest more than 5%
of its total assets in any one issuer (except cash and cash items,
repurchase agreements, and U.S. government obligations).
Also, the Fund will not purchase more than 10% of the outstanding voting
securities of any one issuer. For these purposes, the Fund considers
common stock and all preferred stock of an issuer each as a single class,
regardless of priorities, series, designations, or other differences.
Under this limitation, each governmental subdivision, including states
and the District of Columbia, territories and possessions of the United
States or their political subdivisions, agencies, authorities,
instrumentalities, or similar entities, will be considered a separate
issuer if its assets and revenues are separate from those of the
governmental body creating it and the security is backed only by its own
assets and revenues.
Private activity bonds backed only by the assets and revenues of a
non-governmental user are considered to be issued solely by that user.
If, in the case of a private activity bond or government-issued security,
a governmental or other entity guarantees the security, such guarantee
would be considered a separate security issued by the guarantor as well
as the other issuer, subject to limited exclusions allowed by the
Investment Company Act of 1940.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase,
25% or more of its total assets would be invested in any one industry or
in industrial development bonds or other securities, the interest upon
which is paid from revenues of similar type projects.
- --------------------------------------------------------------------------------
The Fund may invest, as temporary investments, 25% or more of its total
assets in cash or cash items, securities issued and/or guaranteed by the
U.S. government, its agencies or instrumentalities, or instruments
secured by these money market instruments, such as repurchase agreements.
The Fund does not intend to purchase securities that would increase the
percentage of its total assets invested in the securities of governmental
subdivisions located in any one state, territory, or U.S. possession to
25% or more. However, the Fund may invest 25% or more of its assets in
tax-exempt project notes guaranteed by the U.S. government, regardless of
the location of the issuing municipality.
If the value of Fund assets invested in the securities of a governmental
subdivision changes because of changing values, the Fund will not be
required to make any reduction in its holdings.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, including limited
partnership interests in real estate, although it may invest in
securities of companies whose business involves the purchase or sale of
real estate or in securities secured by real estate or interests in real
estate.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities up
to one-third of the value of its total assets. This shall not prevent the
Fund from purchasing or holding corporate or government bonds,
debentures, notes, certificates of indebtedness or other debt securities
of an issuer, entering into repurchase agreements, or engaging in other
transactions which are permitted by the Fund's investment objective and
policies or the Trust's Declaration of Trust.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objective, policies, and limitations.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
RESTRICTED SECURITIES
The Fund will not invest more than 5% of its total assets in securities
subject to restrictions on resale under the Securities Act of 1933,
except for commercial paper issued under Section 4(2) of the Securities
Act of 1933 and certain other restricted securities which meet the
criteria for liquidity as established by the Trustees.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
securities, including repurchase agreements providing for settlement more
than seven days after notice and certain restricted securities not
determined by the Trustees to be liquid. To comply with certain state
restrictions, the Fund will limit these transactions to 10% of its net
assets. (If state restrictions change, this latter restriction may be
revised without shareholder approval or notification.)
INVESTING IN MINERALS
The Fund will not purchase or sell oil, gas, other mineral exploration or
development programs, or mineral leases, although it may purchase the
securities of issuers that invest in or sponsor such programs.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, will not invest more than 5% of its total assets in any one
investment company, or invest more than 10% of its total assets in
investment companies in general. The Fund will purchase securities of
other 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, or
acquisition of assets. It should be noted that investment companies incur
certain expenses, such as management fees, and, therefore, any investment
by a fund in shares of another investment company would be subject to
such duplicate expenses. The Fund will invest in other investment
- --------------------------------------------------------------------------------
companies primarily for the purpose of investing its short-term cash on a
temporary basis. The adviser will waive its investment advisory fee on
assets invested in securities of open-end investment companies.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or its investment adviser owning
individually more than 1/2 of 1% of the issuer's securities together own
more than 5% of the issuer's securities.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of its total assets in industrial
development bonds where the payment of principal and interest is the
responsibility of companies, including their predecessors, with less than
three years of operating history.
ARBITRAGE TRANSACTIONS
The Fund will not enter into transactions for the purpose of engaging in
arbitrage.
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 of total or net assets will not result in a violation
of such restriction.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items."
DG INVESTOR SERIES MANAGEMENT
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, principal occupations,
and present positions, including any affiliation with Deposit Guaranty National
Bank and Commercial National Bank, Federated Investors, Federated Securities
Corp., and Federated Administrative Services, Federated Services Company and the
Funds (as defined below).
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
John F. Donahue+* Chairman Chairman and Trustee, Federated Investors; Chairman and
Federated Investors and Trustee Trustee, Federated Advisers, Federated Management, and
Tower Federated Research; Director, AEtna Life and Casualty
Pittsburgh, PA Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds; formerly, Director,
The Standard Fire Insurance Company. Mr. Donahue is the
father of J. Christopher Donahue, Vice President of the
Trust.
- -----------------------------------------------------------------------------------------------------------------
John T. Conroy, Jr. Trustee President, Investment Properties Corporation; Senior Vice
Wood/IPC Commercial President, John R. Wood and Associates, Inc., Realtors;
Department President Northgate Village Development Corporation;
John R. Wood and General Partner or Trustee in private real estate ventures
Associates, Inc., in Southwest Florida; Director, Trustee, or Managing
Realtors General Partner of the Funds; formerly, President Naples
3255 Tamiami Trail, North Property, Management Inc..
Naples, FL
- -----------------------------------------------------------------------------------------------------------------
William J. Copeland Trustee Director and Member of the Executive Committee, Michael
One PNC Plaza-23rd Baker, Inc.; Director, Trustee, or Managing General Partner
Floor of the Funds; formerly, Vice Chairman and Director, PNC
Pittsburgh, PA Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes,
Inc.
- -----------------------------------------------------------------------------------------------------------------
James E. Dowd Trustee Attorney-at-law; Director, The Emerging Germany Fund, Inc.;
571 Hayward Mill Road Director, Trustee, or Managing General Partner of the
Concord, MA Funds; formerly, Director, Blue Cross of Massachusetts,
Inc.
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Lawrence D. Ellis, M.D. Trustee Hematologist, Oncologist, and Internist, Presbyterian and
3471 Fifth Avenue Montefiore Hospitals; Clinical Professor of Medicine and
Suite 1111 Trustee, University of Pittsburgh; Director, Trustee, or
Pittsburgh, PA Managing General Partner of the Funds.
- -----------------------------------------------------------------------------------------------------------------
Edward L. Flaherty, Jr.+ Trustee Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat
5916 Penn Mall 'N Park Restaurants, Inc.; and Statewide Settlement Agency,
Pittsburgh, PA Inc.; Director, Trustee, or Managing General Partner of the
Funds; formerly, Counsel, Horizon Financial, F.A., Western
Region.
- -----------------------------------------------------------------------------------------------------------------
Edward C. Gonzales* President, Vice President, Treasurer and Trustee, Federated Investors;
Federated Investors Treasurer, Vice President and Treasurer, Federated Advisers, Federated
Tower and Trustee Management, and Federated Research; Trustee, Federated
Pittsburgh, PA Services Company; Executive Vice President, Treasurer, and
Director, Federated Securities Corp.; Chairman, Treasurer,
and Trustee, Federated Administrative Services; Trustee of
some of the Funds; Vice President and Treasurer of the
Funds.
- -----------------------------------------------------------------------------------------------------------------
Peter E. Madden Trustee Consultant; State Representative, Commonwealth of
225 Franklin Street Massachusetts; Director, Trustee, or Managing General
Boston, MA 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 Trustee Attorney-at-law; Partner, Meyer and Flaherty; Chairman,
5916 Penn Mall Meritcare, Inc.; Director, Eat 'N Park Restaurants, Inc.;
Pittsburgh, PA Director, Trustee, or Managing General Partner of the
Funds; formerly, Vice Chairman, Horizon Financial, F.A.
- -----------------------------------------------------------------------------------------------------------------
Wesley W. Posvar Trustee Professor, Foreign Policy and Management Consultant;
1202 Cathedral of Trustee, Carnegie Endowment for International Peace, RAND
Learning Corporation, Online Computer Library Center, Inc., and U.S.
University of Pittsburgh Space Foundation; Chairman, Czecho Slovak Management
Pittsburgh, PA Center; Director, Trustee, or Managing General Partner of
the Funds; President Emeritus, University of Pittsburgh;
formerly, Chairman, National Advisory Council for
Environmental Policy & Technology.
- -----------------------------------------------------------------------------------------------------------------
Marjorie P. Smuts Trustee Public relations/marketing consultant; Director, Trustee,
4905 Bayard Street or Managing General Partner of the Funds.
Pittsburgh, PA
- -----------------------------------------------------------------------------------------------------------------
J. Christopher Donahue Vice President President and Trustee, Federated Investors; Trustee,
Federated Investors Federated Advisers, Federated Management, and Federated
Tower Research; Trustee, Federated Services Company; President
Pittsburgh, PA and Trustee, Federated Administrative 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 Trustee of the
Trust.
- -----------------------------------------------------------------------------------------------------------------
Richard B. Fisher Vice President Executive Vice President and Trustee, Federated Investors;
Federated Investors Chairman and Director, Federated Securities Corp.;
Tower President or Vice President of the Funds; Director or
Pittsburgh, PA Trustee of some of the Funds.
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
John W. McGonigle Vice President Vice President, Secretary, General Counsel, and Trustee,
Federated Investors and Secretary Federated Investors; Vice President, Secretary and Trustee,
Tower Federated Advisers, Federated Management, and Federated
Pittsburgh, PA Research; Trustee, Federated Services Company; Executive
Vice President, Secretary, and Trustee, Federated
Administrative Services; Director and Executive Vice
President, Federated Securities Corp.; Vice President and
Secretary of the Funds.
- -----------------------------------------------------------------------------------------------------------------
Ronald M. Petnuch Vice President Vice President, Federated Administrative Services; Vice
Federated Investors and Assistant President and Assistant Treasurer of some of the Funds;
Tower Treasurer formerly, Associate Corporate Counsel of Federated
Pittsburgh, PA Investors.
- -----------------------------------------------------------------------------------------------------------------
John A. Staley, IV Vice President Vice President and Trustee, Federated Investors; Executive
Federated Investors Vice President, Federated Securities Corp.; President and
Tower Trustee, Federated Advisers, Federated Management, and
Pittsburgh, PA Federated Research; Vice President of the Funds; Director,
Trustee, or Managing General Partner of some of the Funds;
formerly, Vice President, The Standard Fire Insurance
Company and President of its Federated Research Division.
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* This Trustee is deemed to be an "interested person" of the Trust as defined in
the Investment Company Act of 1940.
+ Member of the Trust's Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
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 Intermediate Government Trust; Federated
Master Trust; Federated Municipal Trust; Federated Short-Intermediate Government
Trust; Federated Short-Term U.S. Government Trust; Federated Stock Trust;
Federated Tax-Free Trust; Federated U.S. Government Bond Fund; First Priority
Funds; Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S. Government
Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.;
Fund for U.S. Government Securities, Inc.; Government Income Securities, Inc.;
High Yield Cash Trust; Insight Institutional Series, Inc.; Insurance Management
Series; Intermediate Municipal Trust; International Series, Inc.; Investment
Series Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.;
Liberty High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.;
Liberty U.S. Government Money Market Trust; Liberty Term Trust, Inc.-1999;
Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Mark Twain
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; Signet Select
Funds; Star Funds; The Starburst Funds; The Starburst Funds II; Stock and Bond
Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
Trademark Funds; Trust for Financial Institutions; Trust For Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of April 7, 1994, the following shareholder of record owned 5% or more of the
outstanding shares of the Fund:
Deposit Guaranty Trust Division, Jackson, Mississippi, owned approximately
345,104 shares (10.37%).
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will only be liable
for their own willful defaults. If reasonable care has been exercised in the
selection of officers, agents, employees, or investment advisers, a Trustee
- --------------------------------------------------------------------------------
shall not be liable for any neglect or wrong doing of any such person. However,
they are not protected against any liability to which they would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND
The Fund's investment adviser is Deposit Guaranty National Bank (the "Adviser"),
a subsidiary of Deposit Guaranty Corp.
The Adviser shall not be liable to the Trust, the Fund 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 Trust.
Because of the internal controls maintained by Deposit Guaranty National Bank
and Commercial National Bank, the Fund's sub-adviser, to restrict the flow of
non-public information, Fund investments are typically made without any
knowledge of Deposit Guaranty National Bank's or its affiliates' lending
relationships with an issuer.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus. For the year ended February 28, 1994 and for
the period from December 21, 1992 (date of initial public investment) to
February 28, 1993, the Adviser earned advisory fees of $154,612 and $13,652,
respectively, all of which were voluntarily waived.
SUB-ADVISER TO THE FUND
The Fund's sub-adviser is Commercial National Bank (the "Sub-Adviser"), a
subsidiary of Deposit Guaranty Corp.
SUB-ADVISORY FEES
For its sub-advisory services, the Sub-Adviser receives an annual sub-advisory
fee as described in the prospectus. For the year ended February 28, 1994 and for
the period from December 21, 1992 (date of initial public investment) to
February 28, 1993, the Sub-Adviser earned sub-advisory fees of $64,421 and
$5,688, respectively, all of which were voluntarily waived.
STATE EXPENSE LIMITATIONS
The Adviser has 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 fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2 1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1 1/2% per
year of the remaining average net assets, the Adviser will reimburse the
Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this expense
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. For the year ended February 28, 1994 and for the period from
December 21, 1992 (date of initial public investment) to February 28, 1993, the
Fund incurred administrative service fees of $50,000, and $9,452, respectively,
of which $16,903 and $0 were voluntarily waived respectively.
John A. Staley, IV, an officer of the Trust, holds approximately 15% 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. For the fiscal years ended February 28, 1994, 1993, and
1992, Federated Administrative Services paid approximately $159,222, $179,920,
and $202,532, respectively, for services provided by Commercial Data Services,
Inc.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Trustees.
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the Adviser
and may include:
- - advice as to the advisability of investing in securities;
- - security analysis and reports;
- - economic studies;
- - industry studies;
- - receipt of quotations for portfolio evaluations; and
- - similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the Adviser in advising the
Fund and other accounts. To the extent that receipt of these services may
supplant services for which the Adviser or its affiliates might otherwise have
paid, it would tend to reduce their expenses.
Although investment decisions for the Fund are made independently from those of
the other accounts managed by the Adviser, investments of the type the Fund may
make may also be made by those other accounts. When the Fund and one or more
other accounts managed by the Adviser are prepared to invest in, or desire to
dispose of, the same security, available investments or opportunities for sales
will be allocated in a manner believed by the Adviser to be equitable to each.
In some cases, this procedure may adversely affect the price paid or received by
the Fund or the size of the position obtained or disposed of by the Fund. In
other cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Shares of the Fund are sold at their net asset value next determined after an
order is received, plus a sales charge, on days the New York Stock Exchange and
Federal Reserve Wire System are open for business. The procedure for purchasing
shares is explained in the prospectus under 'Investing in the Fund.'
DISTRIBUTION PLAN
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule 12b-1
which was promulgated by the Securities and Exchange Commission pursuant to the
Investment Company Act of 1940. The Plan provides for payment of fees to
Federated Securities Corp. to finance any activity which is principally intended
to result in the sale of the Fund's shares subject to the Plan. Such activities
may include the advertising and marketing of shares of the Fund; preparing,
printing, and distributing prospectuses and sales literature to prospective
shareholders, brokers, or administrators; and implementing and operating the
Plan. Pursuant to the Plan, Federated Securities Corp. may pay fees to brokers
for distribution and administrative services and to administrators for
administrative services provided to the Fund. The administrative services are
provided by a representative who has knowledge of the shareholder's particular
circumstances and goals, and include, but are not limited to: communicating
account openings; communicating account closings; entering purchase
transactions; entering redemption transactions; providing or arranging to
provide accounting support for all transactions; wiring funds and receiving
funds for purchases and redemptions of Fund shares; confirming and reconciling
all transactions; reviewing the activity in Fund accounts; providing training
and supervision of broker personnel; posting and reinvesting dividends to Fund
accounts or arranging for this service to be performed by the Fund's transfer
agent; and maintaining and distributing current copies of prospectuses and
shareholder reports to the beneficial owners of Fund shares and prospective
shareholders.
The Trustees expect that the adoption of the Plan will result in the sale of a
sufficient number of shares so as to allow the Fund to achieve economic
viability. It is also anticipated that an increase in the size of the Fund will
facilitate more efficient portfolio management and assist the Fund in seeking to
achieve its investment objective.
For the year ended February 28, 1994 and for the period from December 21, 1992
(date of initial public investment) to February 28, 1993, brokers and
administrators (financial institutions) received no fees pursuant to the Plan.
- --------------------------------------------------------------------------------
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. Deposit Guaranty National Bank
and Commercial National Bank (the "Banks") as well as Federated Services Company
act as the shareholder's agent in depositing checks and converting them to
federal funds.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value generally changes each day and is based on market value of
the securities and other assets held by the Fund. The days on which the net
asset value is calculated by the Fund are described in the prospectus.
VALUING MUNICIPAL SECURITIES
The Trustees use an independent pricing service to value municipal securities.
The independent pricing service takes into consideration: yield; stability;
risk; quality; coupon rate; maturity; type of issue; trading characteristics;
special circumstances of a security or trading market; and any other factors or
market data it considers relevant in determining valuations for normal
institutional size trading units of debt securities and does not rely
exclusively on quoted prices.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
REQUIREMENTS FOR EXCHANGE
Before the exchange, the shareholder must receive a prospectus of the fund for
which the exchange is being made. This privilege is available to shareholders
resident in any state in which the 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 shares of the
other fund.
Further information on the exchange privilege and prospectuses may be obtained
by calling the Fund.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions may
require a signature guarantee.
REDEEMING SHARES
- --------------------------------------------------------------------------------
Shares of the Fund are redeemed at the next computed net asset value after the
Banks receive the redemption request. Redemption procedures are explained in the
prospectus under 'Redeeming Shares.' Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on federal holidays when
wire transfers are restricted. Although State Street Bank does not charge for
telephone redemptions, it reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $5,000.
REDEMPTION IN KIND
Although the Fund intends to redeem shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the Fund's portfolio.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
The Fund has elected to be governed by Rule 18f-1 of the Investment Company Act
of 1940 under which the Fund is obligated to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period.
TAX STATUS
- --------------------------------------------------------------------------------
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
- - derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
- - 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.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's average annual total returns for the fiscal year ended February 28,
1994, and for the period from December 21, 1992 (date of initial public
investment), to February 28, 1994, were 3.28% and 7.57%, respectively.
The average annual total return for the Fund is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of shares owned at the end of the period by
the maximum offering price per share at the end of the period. The number of
shares owned at the end of the period is based on the number of shares purchased
at the beginning of the period with $1,000, less any applicable sales load,
adjusted over the period by any additional shares, assuming the quarterly
reinvestment of all dividends and distributions.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for the 30-day period ended February 28, 1994 was 4.18%
The yield for the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This value is then annualized using semi-annual
compounding. This means that the amount of income generated during the
thirty-day period is assumed to be generated each month over a 12-month period
and is reinvested every six months. The yield does not necessarily reflect
income actually earned by the Fund because of certain adjustments required by
the Securities and Exchange Commission and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the Fund,
performance will be reduced for those shareholders paying those fees.
TAX-EQUIVALENT YIELD
- --------------------------------------------------------------------------------
The tax-equivalent yield for the thirty-day period ended February 28, 1994 was
6.06%.
The tax-equivalent yield of the Fund is calculated similarly to the yield, but
is adjusted to reflect the taxable yield that the Fund would have had to earn to
equal its actual yield, assuming a 31% tax rate (the maximum effective federal
rate for individuals) and assuming that the income of the Fund is 100%
tax-exempt.
TAX-EQUIVALENCY TABLE
The Fund may also use a tax-equivalency table in advertising and sales
literature. The interest earned by the municipal securities in the Fund's
portfolio generally remains free from federal regular income tax,* and is
often free from state and local taxes as well. As the table below
indicates, a "tax-free" investment is an attractive choice for investors,
particularly in times of narrow spreads between tax-free and taxable
yields.
<TABLE>
<S> <C> <C> <C> <C> <C>
TAXABLE YIELD EQUIVALENT FOR 1994 MUNICIPAL FUND
- ---------------------------------------------------------------------------------------------------------------------
FEDERAL INCOME TAX BRACKET:
15.00% 28.00% 31.00% 36.00% 39.60%
- ---------------------------------------------------------------------------------------------------------------------
JOINT RETURN: $1-38,000 $38,001-91,850 $91,851-140,000 $140,001-250,000 OVER $250,000
SINGLE RETURN: $1-22,750 $22,751-55,100 $55,101-115,000 $115,001-250,000 OVER $250,000
- ---------------------------------------------------------------------------------------------------------------------
TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT
- ---------------------------------------------------------------------------------------------------------------------
2.50% 2.94% 3.47% 3.62% 3.91% 4.14%
3.00% 3.53% 4.17% 4.35% 4.69% 4.97%
3.50% 4.12% 4.86% 5.07% 5.47% 5.79%
4.00% 4.71% 5.56% 5.80% 6.25% 6.62%
4.50% 5.29% 6.25% 6.52% 7.03% 7.45%
5.00% 5.88% 6.94% 7.25% 7.81% 8.28%
5.50% 6.47% 7.64% 7.97% 8.59% 9.11%
6.00% 7.06% 8.33% 8.70% 9.38% 9.93%
6.50% 7.65% 9.03% 9.42% 10.16% 10.76%
</TABLE>
The chart above is for illustrative purposes only. It is not an indicator of
past or future performance of the Fund.
* Some portion of the Fund's income may be subject to the federal alternative
minimum tax and state and local taxes.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The Fund's performance depends upon such variables as:
- - portfolio quality;
- - average portfolio maturity;
- - type of instruments in which the portfolio is invested;
- - changes in interest rates and market value of portfolio securities;
- - changes in the Fund's expenses; and
- - various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and net asset value per share fluctuate daily. Both net earnings and net asset
value per share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
- - LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all income dividends and capital gains distributions, if any,
and takes into account any change in net asset value over a specified period
of time. From time to time, the Fund will quote its Lipper ranking in the
"municipal funds" categories in advertising and sales literature.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. These total returns
represent the change, over a specified period of time, in the value of an
investment in the Fund based on monthly reinvestment of dividends and other
investments.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD AND POOR'S CORPORATION MUNICIPAL BOND RATINGS
AAA--Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
NR--NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
PLUS (+) OR MINUS (-)--The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MOODY'S INVESTORS SERVICE, INC., MUNICIPAL BOND RATINGS
AAA--Bonds which are rated AAA are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA--Bonds which are rated AA are judged to be of high quality by all standards.
Together with the AAA group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in AAA securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
BAA--Bonds which are rated BAA are considered as medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
NR--Not rated by Moody's.
Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from AA through B in its corporate or municipal bond rating
system. The modifier 1 indicates that the security ranks in the higher end of
its generic rating category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be of investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA". Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+."
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds and, therefore, impair timely
payment.
NR--NR indicates that Fitch does not rate the specific issue.
PLUS (+) OR MINUS (-)--Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" or "D" categories.
- --------------------------------------------------------------------------------
STANDARD & POOR'S CORPORATION MUNICIPAL NOTE RATINGS
SP-1--Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a plus
(+) designation.
SP-2--Satisfactory capacity to pay principal and interest.
MOODY'S INVESTORS SERVICE, INC., SHORT-TERM MUNICIPAL OBLIGATIONS RATINGS
MIG1/VMIG1--This designation denotes best quality. There is a present strong
protection by established cash flows, superior liquidity support or demonstrated
broadbased access to the market for refinancing.
MIG2/VMIG2--This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
STANDARD AND POOR'S CORPORATION COMMERCIAL PAPER RATINGS
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
PRIME-1--Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- Broad margins in earning coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured sources
of alternate liquidity.
PRIME-2--Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
FITCH INVESTORS SERVICE, INC., SHORT-TERM DEBT RATINGS
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2--Good Credit Quality. Issues carrying this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as the
F-1+ and F-1 categories.
2112511B (4/94)
DG MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
ANNUAL REPORT FOR FISCAL YEAR ENDED FEBRUARY 28, 1994
INVESTMENT REVIEW
DG Municipal Income Fund (the "Fund") was established in December 1992
to provide investors with the ability to invest in a diversified portfolio
of quality longer term municipal issues. The investment objective of the
Fund is to provide dividend income that is exempt from federal regular
income tax.
Issues purchased by the Fund during the last twelve months consisted
largely of general obligations of states, cities, and counties. The Fund is
managed with a fifteen-year average maturity and will continue to be so
managed until market conditions dictate change. The investment adviser
believes that the value in the market is in higher quality municipal issues
and continues to reflect this strategy in the Fund's portfolio.
The total rate of return (income plus capital appreciation) for the
past twelve months was 5.34% based on net asset value (3.28% taking into
account the sales charge).*
The Fund's 30-day distribution rate as of February 28, 1994 was 4.64%
for shares based on net asset value (and 4.55% taking into account the
sales charge). The Fund's net assets increased from $15.6 million on
February 28, 1993, to $34.4 million as of February 28, 1994.
* Performance quoted represents past performance. Investment return and
principal value will fluctuate, so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
PERFORMANCE COMPARISON
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN
DG MUNICIPAL INCOME FUND AND LEHMAN BROTHERS MUNICIPAL BOND INDEX+.
Graphic representation D1 omitted. See Appendix.
<TABLE>
<CAPTION>
LEHMAN
MEASUREMENT PERIOD DG MUNICIPAL MUNICIPAL
(FISCAL YEAR COVERED) INCOME FUND BOND INDEX
<S> <C> <C>
12/21/92 9800 10000
2/28/93 10354 10482
2/28/94 10907 11063
</TABLE>
Past performance is not predictive of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
This annual report incorporates by reference and accompanies the prospectus
dated April 30, 1994.
* Reflects performance of DG Municipal Income Fund from 12/21/92 through
2/28/94.
** Represents a hypothetical investment of $10,000 in DG Municipal Income Fund,
after deducting the maximum sales charge of 2.00% ($10,000 investment minus
$200 sales charge = $9,800). The Fund's performance assumes the reinvestment
of all dividends and distributions. The Lehman Brothers Municipal Bond Index
is adjusted to reflect reinvestment of dividends on securities in the index.
+ The Lehman Brothers Municipal Bond Index is not adjusted to reflect sales
loads, expenses, or other fees that the SEC requires to be reflected in the
Fund's performance.
++ Reflects maximum applicable fees.
FEDERATED SECURITIES CORP.
(LOGO)
- --------------------------------------------------------------------------------
Distributor
2112511ARS (4/94)
APPENDIX
A 1. The graphic presentation here displayed consists of a boxed legend
in the bottom center indicating the components of the corresponding line
graph. DG Limited Term Government Income Fund (the "Fund") is
represented by a solid line. The Merrill Lynch 1-3 Year U.S. Treasury
Index is represented by a broken line. The line graph is a visual
representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund and Merrill Lynch 1-3 Year U.S. Treasury
Index. The "y" axis reflects the cost of the investment. The "x" axis
reflects computation periods from the Fund's start of business, August 1,
1992, through February 28, 1994. The right margin reflects the ending
value of the hypothetical investment in the Fund as compared to Merrill
Lynch 1-3 Year U.S. Treasury Index; the ending values are $10,599 and
$10,755, respectively. There is also a legend in the upper left quadrant
of the graphic presentation which indicates the Average Annual Total
Return for the period ended February 28, 1994, beginning with the
inception date of the Fund (August 1, 1992), and the one-year period; the
Average Annual Total Returns are 3.75% and 1.41%.
B 1. The graphic presentation here displayed consists of a boxed legend
in the bottom center indicating the components of the corresponding line
graph. DG Government Income Fund (the "Fund") is represented by a solid
line. The Lehman Brothers Government/Corporate Total Index is
represented by a broken line. The line graph is a visual representation
of a comparison of change in value of a hypothetical $10,000 purchase in
the Fund and Lehman Brothers Government/Corporate Total Index. The "y"
axis reflects the cost of the investment. The "x" axis reflects
computation periods from the Fund's start of business, August 1, 1992,
through February 28, 1994. The right margin reflects the ending value of
the hypothetical investment in the Fund as compared to Lehman Brothers
Government/Corporate Total Index; the ending values are $10,905 and
$11,285, respectively. There is also a legend in the upper left quadrant
of the graphic presentation which indicates the Average Annual Total
Return for the period ended February 28, 1994, beginning with the
inception date of the Fund (August 1, 1992), and the one-year period; the
Average Annual Total Returns are 5.64% and 2.45%, respectively.
C 1. The graphic presentation here displayed consists of a boxed legend
in the bottom center indicating the components of the corresponding line
graph. DG Equity Fund (the "Fund") is represented by a solid line. The
Standard and Poor's 500 Index is represented by a broken line. The line
graph is a visual representation of a comparison of change in value of a
hypothetical $10,000 purchase in the Fund and Standard and Poor's 500
Index. The "y" axis reflects the cost of the investment. The "x" axis
reflects computation periods from the Fund's start of business, August 1,
1992 through February 28, 1994. The right margin reflects the ending
value of the hypothetical investment in the Fund as compared to Standard
and Poor's 500 Index; the ending values are $10,952 and $11,512,
respectively. There is also a legend in the upper left quadrant of the
graphic presentation which indicates the Average Annual Total Return for
the period ended February 28, 1994, beginning with the inception date of
Fund (August 1, 1992), and the one-year period; the Average Annual Total
Returns are 5.93% and 2.84%, respectively.
D1. The graphic presentation here displayed consists of a boxed legend
in the bottom center indicating the components of the corresponding line
graph. DG Municipal Income Fund (the "Fund") is represented by a solid
line. The Lehman Brothers Municipal Bond Index is represented by a
broken line. The line graph is a visual representation of a comparison
of change in value of a hypothetical $10,000 purchase in the Fund and
Lehman Brothers Municipal Bond Index. The "y" axis reflects the cost of
the investment. The "x" axis reflects computation periods from the
Fund's start of business, December 21, 1992, through February 28, 1994.
The right margin reflects the ending value of the hypothetical investment
in the Fund as compared to Lehman Brothers Municipal Bond Index; the
ending values are $10,907 and $11,063, respectively. There is also a
legend in the upper left quadrant of the graphic presentation which
indicates the Average Annual Total Return for the period ended February
28, 1994, beginning with the inception date of the Fund (December 21,
1994), and the one-year period; the Average Annual Total Returns are
7.57% and 3.28%, respectively.
